[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 1997 Edition]
[From the U.S. Government Printing Office]


          26



          Internal Revenue



[[Page i]]

          PART 1 (Sec. 1.1401 TO END)

          Revised as of April 1, 1997
          CONTAINING
          A CODIFICATION OF DOCUMENTS OF GENERAL APPLICABILITY
          AND FUTURE EFFECT

          AS OF APRIL 1, 1997
          With Ancillaries
          Published by
          the Office of the Federal Register
          National Archives and Records
          Administration
          as a Special Edition of
          the Federal Register



[[Page ii]]

                                      




                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 1997



               For sale by U.S. Government Printing Office
 Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328



[[Page iii]]




                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 26:
    Chapter I--Internal Revenue Service, Department of the 
        Treasury (Continued)..................................       3
  Finding Aids:
    Table of CFR Titles and Chapters..........................     949
    Alphabetical List of Agencies Appearing in the CFR........     965
    Table of OMB Control Numbers..............................     975
    List of CFR Sections Affected.............................     991

[[Page iv]]



      



                                                                                                                
                                  ----------------------------------------------------------                    

  Cite this Code:  CFR                                                         
                                                                                                                
  To cite the regulations in this volume use title, part                       
  and section number. Thus, 26 CFR 1.1401-1 refers to                         
  title 26, part 1, section 1401-1.                                           
                                  ----------------------------------------------------------                    
                                                                                                                


[[Page v]]

                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, April 1, 1997), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
exercised by the user in determining the actual effective date. In 
instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 1986, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, or 1973-1985, published in seven separate volumes. For 
the period beginning January 1, 1986, a ``List of CFR Sections 
Affected'' is published at the end of each CFR volume.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Statutory 
Authorities and Agency Rules (Table I), and Acts Requiring Publication 
in the Federal Register (Table II). A list of CFR titles, chapters, and 
parts and an alphabetical list of agencies publishing in the CFR are 
also included in this volume.
    An index to the text of ``Title 3--The President'' is carried within 
that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

REPUBLICATION OF MATERIAL

    There are no restrictions on the republication of material appearing 
in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
    For inquiries concerning CFR reference assistance, call 202-523-5227 
or write to the Director, Office of the Federal Register, National 
Archives and Records Administration, Washington, DC 20408.
SALES

    The Government Printing Office (GPO) processes all sales and 
distribution of the CFR. For payment by credit card, call 202-512-1800, 
M-F, 8 a.m. to 4 p.m. e.s.t. or fax your order to 202-512-2233, 24 hours 
a day. For payment by check, write to the Superintendent of Documents, 
Attn: New Orders, P.O. Box 371954, Pittsburgh, PA 15250-7954. For GPO 
Customer Service call 202-512-1803.

                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

April 1, 1997.



[[Page vii]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of nineteen volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
1997. The first twelve volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Secs. 1.0-1-1.60; 
Secs. 1.61-1.169; Secs. 1.170-1.300; Secs. 1.301-1.400; Secs. 1.401-
1.440; Secs. 1.441-1.500; Secs. 1.501-1.640; Secs. 1.641-1.850; 
Secs. 1.851-1.907; Secs. 1.908-1.1000; Secs. 1.1001-1.1400 and 
Sec. 1.1401 to end. The thirteenth volume containing parts 2-29, 
includes the remainder of subchapter A and all of Subchapter B--Estate 
and Gift Taxes. The last six volumes contain parts 30-39 (Subchapter C--
Employment Taxes and Collection of Income Tax at Source); parts 40-49; 
parts 50-299 (Subchapter D--Miscellaneous Excise Taxes); parts 300-499 
(Subchapter F--Procedure and Administration); parts 500-599 (Subchapter 
G--Regulations under Tax Conventions); and part 600 to end (Subchapter 
H--Internal Revenue Practice).

    The OMB control numbers for Title 26 appear in Sec. 602.101 of this 
chapter. For the convenience of the user, Sec. 602.101 appears in the 
Finding Aids section of the volumes containing parts 1 to 599.

    For this volume, Tracey L. Thompson was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of 
Frances D. McDonald, assisted by Alomha S. Morris.

[[Page viii]]



 
[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




             (This book contains part 1, Sec. 1.1401 to End)

  --------------------------------------------------------------------
                                                                    Part
Chapter i--Internal Revenue Service, Department of the 
  Treasury (Continued)......................................           1

[[Page 3]]



CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (Continued)




                      (Part 1, Sec. 1.1401 to End)

  --------------------------------------------------------------------

  Editorial Note: IRS published a document at 45 FR 6088, January 25, 
1980, deleting statutory sections from their regulations. In Chapter I 
cross references to the deleted material have been changed to the 
corresponding sections of the IRS Code of 1954 or to the appropriate 
regulations sections. When either such change produced a redundancy, the 
cross reference has been deleted. For further explanation, see 45 FR 
20795, March 31, 1980.

                  SUBCHAPTER A--INCOME TAX (CONTINUED)
Part                                                                Page
1               Income taxes (continued)....................           4

  Supplementary Publications: Internal Revenue Service Looseleaf 
Regulations System.
  Additional supplementary publications are issued covering Alcohol and 
Tobacco Tax Regulations, and Regulations Under Tax Conventions.

[[Page 4]]

                   PART 1--INCOME TAXES (Continued)

                 Normal Taxes and Surtaxes (Continued)

                      TAX ON SELF-EMPLOYMENT INCOME

      Sec.

                              1.1401-1  Tax on self-employment income.
                              1.1402(a)-1  Definition of net earnings 
                              from self-employment.
                              1.1402(a)-2  Computation of net earnings 
                              from self-employment.
                              1.1402(a)-3  Special rules for computing 
                              net earnings from self-employment.
                              1.1402(a)-4  Rentals from real estate.
                              1.1402(a)-5  Dividends and interest.
                              1.1402(a)-6  Gain or loss from disposition 
                              of property.
                              1.1402(a)-7  Net operating loss deduction.
                              1.1402(a)-8  Community income.
                              1.1402(a)-9  Puerto Rico.
                              1.1402(a)-10  Personal exemption 
                              deduction.
                              1.1402(a)-11  Ministers and members of 
                              religious orders.
                              1.1402(a)-12  Possession of the United 
                              States.
                              1.1402(a)-13  Income from agricultural 
                              activity.
                              1.1402(a)-14  Options available to farmers 
                              in computing net earnings from self-
                              employment for taxable years ending after 
                              1954 and before December 31, 1956.
                              1.1402(a)-15  Options available to farmers 
                              in computing net earnings from self-
                              employment for taxable years ending on or 
                              after December 31, 1956.
                              1.1402(a)-16  Exercise of option.
                              1.1402(a)-17  Retirement payments to 
                              retired partners.
                              1.1402(b)-1  Self-employment income.
                              1.1402(c)-1  Trade or business.
                              1.1402(c)-2  Public office.
                              1.1402(c)-3  Employees.
                              1.1402(c)-4  Individuals under Railroad 
                              Retirement System.
                              1.1402(c)-5  Ministers and members of 
                              religious orders.
                              1.1402(c)-6  Members of certain 
                              professions.
                              1.1402(c)-7  Members of religious groups 
                              opposed to insurance.
                              1.1402(d)-1  Employee and wages.
                              1.1402(e)-1A  Application of regulations 
                              under section 1402(e).
                              1.1402(e)-2A  Ministers, members of 
                              religious orders and Christian Science 
                              practitioners; application for exemption 
                              from self-employment tax.
                              1.1402(e)-3A  Time limitation for filing 
                              application for exemption.
                              1.1402(e)-4A  Period for which exemption 
                              is effective.
                              1.1402(e)-5A  Applications for exemption 
                              from self-employment taxes filed after 
                              December 31, 1986, by ministers, certain 
                              members of religious orders, and Christian 
                              Science practitioners.
                              1.1402(e)(1)-1  Election by ministers, 
                              members of religious orders, and Christian 
                              Science practitioners for self-employment 
                              coverage.
                              1.1402(e)(2)-1  Time limitation for filing 
                              waiver certificate.
                              1.1402(e)(3)-1  Effective date of waiver 
                              certificate.
                              1.1402(e)(4)-1  Treatment of certain 
                              remuneration paid in 1955 and 1956 as 
                              wages.
                              1.1402(e)(5)-1  Optional provision for 
                              certain certificates filed before April 
                              15, 1962.
                              1.1402(e)(5)-2  Optional provisions for 
                              certain certificates filed on or before 
                              April 17, 1967.
                              1.1402(e)(6)-1  Certificates filed by 
                              fiduciaries or survivors on or before 
                              April 15, 1962.
                              1.1402(f)-1  Computation of partner's net 
                              earnings from self-employment for taxable 
                              year which ends as result of his death.
                              1.1402(g)-1  Treatment of certain 
                              remuneration erroneously reported as net 
                              earnings from self-employment.
                              1.1402(h)-1  Members of certain religious 
                              groups opposed to insurance.

[[Page 5]]

                              1.1403-1  Cross references.

Withholding of Tax on Nonresident Aliens and Foreign Corporations and 
                        Tax-Free Covenant Bonds

               NONRESIDENT ALIENS AND FOREIGN CORPORATIONS

                              1.1441-1  Requirement for withholding of 
                              tax on nonresident aliens, foreign 
                              partnerships, and foreign corporations.
                              1.1441-2  Income subject to withholding.
                              1.1441-3  Exceptions and rules of special 
                              application.
                              1.1441-4  Exemptions from withholding.
                              1.1441-4T  Exemption from withholding 
                              (temporary).
                              1.1441-5  Claiming to be a person not 
                              subject to withholding.
                              1.1441-6  Withholding pursuant to the 
                              application of a tax treaty which confers 
                              a reduced rate of, or an exemption from, 
                              United States income tax.
                              1.1441-7  General provisions relating to 
                              withholding agents.
                              1.1441-8T  Foreign government exemption 
                              from withholding (temporary).
                              1.1442-1  Withholding of tax on foreign 
                              corporations.
                              1.1442-2  Exemption from withholding of 
                              tax on foreign corporations.
                              1.1443-1  Foreign tax-exempt 
                              organizations.
                              1.1445-1  Withholding on dispositions of 
                              U.S. real property interests by foreign 
                              persons: In general.
                              1.1445-2  Situations in which withholding 
                              is not required under section 1445(a).
                              1.1445-3  Adjustments to amount required 
                              to be withheld pursuant to withholding 
                              certificate.
                              1.1445-4  Liability of agents.
                              1.1445-5  Special rules concerning 
                              distributions and other transactions by 
                              corporations, partnerships, trusts, and 
                              estates.
                              1.1445-6  Adjustments pursuant to withhold 
                              certificate of amount required to be 
                              withheld under section 1445(e).
                              1.1445-7  Treatment of foreign corporation 
                              that has made an election under section 
                              897(i) to be treated as a domestic 
                              corporation.
                              1.1445-8  Special rules regarding publicly 
                              traded partnerships, publicly traded 
                              trusts and real estate investment trusts 
                              (REITs).
                              1.1445-9T  Special rule for section 1034 
                              nonrecognition (temporary).
                              1.1445-10T  Special rule for Foreign 
                              governments (temporary).
                              1.1445-11T  Special rules requiring 
                              withholding under Sec.  1.1445-5 
                              (temporary).

                         TAX-FREE COVENANT BONDS

                              1.1451-1  Tax-free covenant bonds issued 
                              before January 1, 1934.
                              1.1451-2  Exemptions from withholding 
                              under section 1451.

                  APPLICATION OF WITHHOLDING PROVISIONS

                              1.1461-1  Ownership certificates for bond 
                              interest.
                              1.1461-2  Return of tax withheld.
                              1.1461-3  Payment of withheld tax.
                              1.1461-4  Adjustments for overwithholding 
                              of tax.
                              1.1462-1  Withheld tax as credit to 
                              recipient of income.
                              1.1463-1  Tax paid by recipient of income.
                              1.1464-1  Refunds or credits.

   Rules Applicable to Recovery of Excessive Profits on Government 
                               Contracts

          RECOVERY OF EXCESSIVE PROFITS ON GOVERNMENT CONTRACTS

                              1.1471-1  Recovery of excessive profits on 
                              government contracts.

[[Page 6]]

      MITIGATION OF EFFECT OF RENEGOTIATION OF GOVERNMENT CONTRACTS

                              1.1481-1  [Reserved]

                 Tax on Transfers To Avoid Income Tax

                              1.1491-1  Imposition of tax.
                              1.1492-1  Nontaxable transfers.
                              1.1493-1  Definition of foreign trust.
                              1.1494-1  Returns; payment and collection 
                              of tax.
                              1.1494-2  Effective date.

                         Consolidated Returns

                       RETURNS AND PAYMENT OF TAX

                     Consolidated Return Regulations

                              1.1502-0  Effective dates.
                              1.1502-1  Definitions.

                       Consolidated Tax Liability

                              1.1502-2  Computation of tax liability.
                              1.1502-3  Consolidated investment credit.
                              1.1502-4  Consolidated foreign tax credit.
                              1.1502-5  Estimated tax.
                              1.1502-6  Liability for tax.
                              1.1502-9  Application of overall foreign 
                              loss recapture rules to corporations 
                              filing consolidated returns.

               Computation of Consolidated Taxable Income

                              1.1502-11  Consolidated taxable income.

                 Computation of Separate Taxable Income

                              1.1502-12  Separate taxable income.
                              1.1502-13  Intercompany transactions.
                              1.1502-15T  SRLY limitation on built-in 
                              losses (temporary).
                              1.1502-16  Mine exploration expenditures.
                              1.1502-17  Methods of accounting.
                              1.1502-18  Inventory adjustment.
                              1.1502-19  Excess loss accounts.
                              1.1502-20  Disposition or deconsolidation 
                              of subsidiary stock.

                    Computation of Consolidated Items

                              1.1502-21T  Net operating losses 
                              (temporary).
                              1.1502-22T  Consolidated capital gain and 
                              loss (temporary).
                              1.1502-23T  Consolidated net section 1231 
                              gain or loss (temporary).
                              1.1502-24  Consolidated charitable 
                              contributions deduction.
                              1.1502-26  Consolidated dividends received 
                              deduction.
                              1.1502-27  Consolidated section 247 
                              deduction.

         Basis, Stock Ownership, and Earnings and Profits Rules

                              1.1502-30  Stock basis after certain 
                              triangular reorganizations.
                              1.1502-31  Stock basis after a group 
                              structure change.
                              1.1502-32  Investment adjustments.
                              1.1502-33  Earnings and profits.
                              1.1502-34  Special aggregate stock 
                              ownership rules.

                       Special Taxes and Taxpayers

                              1.1502-42  Mutual savings banks, etc.
                              1.1502-43  Consolidated accumulated 
                              earnings tax.

[[Page 7]]

                              1.1502-44  Percentage depletion for 
                              independent producers and royalty owners.
                              1.1502-47  Consolidated returns by life-
                              nonlife groups.

                Administrative Provisions and Other Rules

                              1.1502-75  Filing of consolidated returns.
                              1.1502-76  Taxable year of members of 
                              group.
                              1.1502-77  Common parent agent for 
                              subsidiaries.
                              1.1502-77T  Alternative agents of the 
                              group (temporary).
                              1.1502-78  Tentative carryback 
                              adjustments.
                              1.1502-79  Separate return years.
                              1.1502-80  Applicability of other 
                              provisions of law.
                              1.1502-81T  Alaska Native Corporations.
                              1.1502-90T  Table of contents (temporary).
                              1.1502-91T  Application of section 382 
                              with respect to a consolidated group 
                              (temporary).
                              1.1502-92T  Ownership change of a loss 
                              group or a loss subgroup (temporary).
                              1.1502-93T  Consolidated section 382 
                              limitation (or subgroup section 382 
                              limitation) (temporary).
                              1.1502-94T  Coordination with section 382 
                              and the regulations thereunder when a 
                              corporation becomes a member of a 
                              consolidated group (temporary).
                              1.1502-95T  Rules on ceasing to be a 
                              member of a consolidated group (or loss 
                              subgroup) (temporary).
                              1.1502-96T  Miscellaneous rules 
                              (temporary).
                              1.1502-97T  Special rules under section 
                              382 for members under the jurisdiction of 
                              a court in a title 11 or similar case 
                              (temporary). [Reserved]
                              1.1502-98T  Coordination with section 383 
                              (temporary).
                              1.1502-99T  Effective dates (temporary).
                              1.1502-100  Corporations exempt from tax.
                              1.1503-1  Computation and payment of tax.
                              1.1503-2  Dual consolidated loss.
                              1.1504-0  Outline of provisions.
                              1.1504-1  Definitions.
                              1.1504-2--1.1504-3  [Reserved]
                              1.1504-4  Treatment of warrants, options, 
                              convertible obligations, and other similar 
                              interests.

     Regulations Applicable to Taxable Years Before January 1, 1997

                              1.1502-15A  Limitations on the allowance 
                              of built-in deductions for consolidated 
                              return years beginning before January 1, 
                              1997.
                              1.1502-21A  Consolidated net operating 
                              loss deduction generally applicable for 
                              consolidated return years beginning before 
                              January 1, 1997.
                              1.1502-22A  Consolidated net capital gain 
                              or loss generally applicable for 
                              consolidated return years beginning before 
                              January 1, 1997.
                              1.1502-23A  Consolidated net section 1231 
                              gain or loss generally applicable for 
                              consolidated return years beginning before 
                              January 1, 1997.
                              1.1502-41A  Determination of consolidated 
                              net long-term capital gain and 
                              consolidated net short-term capial loss 
                              generally applicable for consolidated 
                              return years beginning before January 1, 
                              1997.
                              1.1502-79A  Separate return years 
                              generally applicable for consolidated 
                              return years beginning before January 1, 
                              1997.

  DUAL CONSOLIDATED LOSSES INCURRED IN TAXABLE YEARS BEGINNING BEFORE 
                             OCTOBER 1, 1992

                              1.1503-2A  Dual consolidated loss.

                              RELATED RULES

                              1.1551-1  Disallowance of surtax exemption 
                              and accumulated earnings credit.
                              1.1552-1  Earnings and profits.

[[Page 8]]

                    Certain Controlled Corporartions

                              1.1561-0  Effective date.
                              1.1561-1  Limitations on certain multiple 
                              tax benefits in the case of certain 
                              controlled corporations.
                              1.1561-2  Determination of amount of tax 
                              benefits.
                              1.1561-3  Apportionment of surtax 
                              exemption.
                              1.1562-0  Effective date.
                              1.1562-1  Privilege of controlled group to 
                              elect multiple surtax exemptions.
                              1.1562-2  Termination of election.
                              1.1562-3  Consents to election and 
                              termination.
                              1.1562-4  Election after termination.
                              1.1562-5  Continuing and successor 
                              controlled groups.
                              1.1562-6  Election for short taxable 
                              years.
                              1.1562-7  Extension of statutory periods 
                              of limitation.
                              1.1563-1  Definition of controlled group 
                              of corporations and component members.
                              1.1563-2  Excluded stock.
                              1.1563-3  Rules for determining stock 
                              ownership.
                              1.1563-4  Franchised corporations.
                              1.1564-1  Limitations on additional 
                              benefits for members of controlled groups.

                     Procedure and Administration

                         INFORMATION AND RETURNS

                           returns and records

                Records, Statements, and Special Returns

                              1.6001-1  Records.
                              1.6001-2  Returns.

                        Tax Returns or Statements

                              1.6011-1  General requirement of return, 
                              statement, or list.
                              1.6011-2  Returns, etc., of DISC's and 
                              former DISC's.
                              1.6011-3  Requirement of statement from 
                              payees of certain gambling winnings.
                              1.6012-1  Individuals required to make 
                              returns of income.
                              1.6012-2  Corporations required to make 
                              returns of income.
                              1.6012-3  Returns by fiduciaries.
                              1.6012-4  Miscellaneous returns.
                              1.6012-5  Composite return in lieu of 
                              specified form.
                              1.6012-6  Returns by political 
                              organizations.
                              1.6012-7T  Telephone return filing using 
                              voice signature (temporary).
                              1.6013-1  Joint returns.
                              1.6013-2  Joint return after filing 
                              separate return.
                              1.6013-3  Treatment of joint return after 
                              death of either spouse.
                              1.6013-4  Applicable rules.
                              1.6013-5  Spouse relieved of liability in 
                              certain cases.
                              1.6013-6  Election to treat nonresident 
                              alien individual as resident of the United 
                              States.
                              1.6013-7  Joint return for year in which 
                              nonresident alien becomes resident of the 
                              United States.
                              1.6014-1  Tax not computed by taxpayer for 
                              taxable years beginning before January 1, 
                              1970.
                              1.6014-2  Tax not computed by taxpayer for 
                              taxable years beginning after December 31, 
                              1969.
                              1.6015(a)-1  Declaration of estimated 
                              income tax by individuals.
                              1.6015(b)-1  Joint declaration by husband 
                              and wife.
                              1.6015(c)-1  Definition of estimated tax.
                              1.6015(d)-1  Contents of declaration of 
                              estimated tax.

[[Page 9]]

                              1.6015(e)-1  Amendment of declaration.
                              1.6015(f)-1  Return as declaration or 
                              amendment.
                              1.6015(g)-1  Short taxable years of 
                              individuals.
                              1.6015(h)-1  Estates and trusts.
                              1.6015(i)-1  Nonresident alien 
                              individuals.
                              1.6015(j)-1  Applicability.
                              1.6016-1  Declarations of estimated income 
                              tax by corporations.
                              1.6016-2  Contents of declaration of 
                              estimated tax.
                              1.6016-3  Amendment of declaration.
                              1.6016-4  Short taxable year.
                              1.6017-1  Self-employment tax returns.

                           Information Returns

                              1.6031-1  Return of partnership income.
                              1.6031(b)-1T  Statements to partners 
                              (temporary).
                              1.6031(b)-2T  REMIC reporting requirements 
                              (temporary). [Reserved]
                              1.6031(c)-1T  Nominee reporting of 
                              partnership information (temporary).
                              1.6031(c)-2T  Nominee reporting of REMIC 
                              information (temporary). [Reserved]
                              1.6032-1  Returns of banks with respect to 
                              common trust funds.
                              1.6033-1  Returns by exempt organizations; 
                              taxable years beginning before January 1, 
                              1970.
                              1.6033-2  Returns by exempt organizations 
                              (taxable years beginning after December 
                              31, 1969) and returns by certain nonexempt 
                              organizations (taxable years beginning 
                              after December 31, 1980).
                              1.6033-3  Additional provisions relating 
                              to private foundations.
                              1.6034-1  Information returns required of 
                              trusts described in section 4947(a)(2) or 
                              claiming charitable or other deductions 
                              under section 642(c).
                              1.6035-1  Returns of U.S. officers, 
                              directors and 10-percent shareholders of 
                              foreign personal holding companies for 
                              taxable years beginning after September 3, 
                              1982.
                              1.6035-2  Returns of U.S. officers and 
                              directors of foreign personal holding 
                              companies for taxable years beginning 
                              before September 4, 1982.
                              1.6035-3  Returns of 50-percent U.S. 
                              shareholders of foreign personal holding 
                              companies for taxable years beginning 
                              before September 4, 1982.
                              1.6036-1  Notice of qualification as 
                              executor or receiver.
                              1.6037-1  Return of electing small 
                              business corporation.
                              1.6038-1  Information returns required of 
                              domestic corporations with respect to 
                              annual accounting periods of certain 
                              foreign corporations beginning before 
                              January 1, 1963.
                              1.6038-2  Information returns required of 
                              United States persons with respect to 
                              annual accounting periods of certain 
                              foreign corporations beginning after 
                              December 31, 1962.
                              1.6038A-0  Table of contents.
                              1.6038A-1  General requirements and 
                              definitions.
                              1.6038A-2  Requirement of return.
                              1.6038A-3  Record maintenance.
                              1.6038A-4  Monetary penalty.
                              1.6038A-5  Authorization of agent.
                              1.6038A-6  Failure to furnish information.
                              1.6038A-7  Noncompliance.
                              1.6038B-1T  Reporting of transactions 
                              described in section 367 (temporary).
                              1.6039-1  Information returns required of 
                              corporations with respect to certain stock 
                              option transactions occurring on or after 
                              January 1, 1964.
                              1.6039-2  Statements to persons with 
                              respect to whom information is furnished.
                              1.6041-1  Return of information as to 
                              payments of $600 or more.
                              1.6041-2  Return of information as to 
                              payments to employees.
                              1.6041-3  Payments for which no return of 
                              information is required under section 
                              6041.
                              1.6041-4  Returns of information as to 
                              foreign items.

[[Page 10]]

                              1.6041-5  Information as to actual owner.
                              1.6041-6  Returns made on Forms 1096 and 
                              1099 under section 6041; contents and time 
                              and place for filing.
                              1.6041-7  Permission to submit information 
                              required by Form 1099 or W-2 on magnetic 
                              tape.
                              1.6042-1  Return of information as to 
                              dividends paid in calendar years before 
                              1963.
                              1.6042-2  Returns of information as to 
                              dividends paid in calendar years after 
                              1962.
                              1.6042-3  Dividends subject to reporting.
                              1.6042-4  Statements to recipients of 
                              dividend payments.
                              1.6043-1  Return regarding corporate 
                              dissolution or liquidation.
                              1.6043-2  Return of information respecting 
                              distributions in liquidation.
                              1.6043-3  Return regarding liquidation, 
                              dissolution, termination, or substantial 
                              contraction of organizations exempt from 
                              taxation under section 501(a).
                              1.6044-1  Returns of information as to 
                              patronage dividends with respect to 
                              patronage occurring in taxable years 
                              beginning before 1963.
                              1.6044-2  Returns of information as to 
                              payments of patronage dividends with 
                              respect to patronage occurring in taxable 
                              years beginning after 1962.
                              1.6044-3  Amounts subject to reporting.
                              1.6044-4  Exemption for certain consumer 
                              cooperatives.
                              1.6044-5  Statements to recipients of 
                              patronage dividends.
                              1.6045-1  Returns of information of 
                              brokers and barter exchanges.
                              1.6045-1T  Returns of information of 
                              brokers and barter exchanges (temporary).
                              1.6045-2  Furnishing statement required 
                              with respect to certain substitute 
                              payments.
                              1.6045-2T  Furnishing statement required 
                              with respect to certain substitute 
                              payments (temporary).
                              1.6045-4  Information reporting on real 
                              estate transactions with dates of closing 
                              on or after January 1, 1991.
                              1.6046-1  Returns as to organization or 
                              reorganization of foreign corporations and 
                              as to acquisitions of their stock, on or 
                              after January 1, 1963.
                              1.6046-2  Returns as to foreign 
                              corporations which are created or 
                              organized, or reorganized, on or after 
                              September 15, 1960, and before January 1, 
                              1963.
                              1.6046-3  Returns as to formation or 
                              reorganization of foreign corporations 
                              prior to September 15, 1960.
                              1.6047-1  Information to be furnished with 
                              regard to employee retirement plan 
                              covering an owner-employee.
                              1.6049-1  Returns of information as to 
                              interest paid in calendar years before 
                              1983 and original issue discount 
                              includible in gross income for calendar 
                              years before 1983.
                              1.6049-2  Interest and original issue 
                              discount subject to reporting in calendar 
                              years before 1983.
                              1.6049-3  Statements to recipients of 
                              interest payments and holders of 
                              obligations to which there is attributed 
                              original issue discount in calendar years 
                              before 1983.
                              1.6049-4  Return of information as to 
                              interest paid and original issue discount 
                              includible in gross income after December 
                              31, 1982.
                              1.6049-5  Interest and original issue 
                              discount subject to reporting after 
                              December 31, 1982.
                              1.6049-5T  Reporting by brokers of 
                              interest and original issue discount on 
                              and after January 1, 1986 (temporary).
                              1.6049-6  Statements to recipients of 
                              interest payments and holders of 
                              obligations for attributed original issue 
                              discount.
                              1.6049-7  Returns of information with 
                              respect to REMIC regular interests and 
                              collateralized debt obligations.
                              1.6049-7T  Market discount fraction 
                              reported with other financial information 
                              with respect to REMICs and collateralized 
                              debt obligations (temporary).
                              1.6049-8  Interest and original issue 
                              discount paid to residents of Canada.
                              1.6050A-1  Reporting requirements of 
                              certain fishing boat operators.
                              1.6050B-1  Information returns by person 
                              making unemployment compensation payments.

[[Page 11]]

                              1.6050D-1  Information returns relating to 
                              energy grants and financing.
                              1.6050E-1  Reporting of State and local 
                              income tax refunds.
                              1.6050H-0  Table of contents.
                              1.6050H-1  Information reporting of 
                              mortgage interest received in a trade or 
                              business from an individual.
                              1.6050H-1T  Information reporting of 
                              mortgage interest received in a trade or 
                              business from individuals after 1985 and 
                              before 1988 (temporary).
                              1.6050H-2  Time, form, and manner of 
                              reporting interest received on qualified 
                              mortgage.
                              1.6050I-0  Table of contents.
                              1.6050I-1  Returns relating to cash in 
                              excess of $10,000 received in a trade or 
                              business.
                              1.6050I-2  Returns relating to cash in 
                              excess of $10,000 received as bail by 
                              court clerks.
                              1.6050J-1T  Questions and answers 
                              concerning information returns relating to 
                              foreclosures and abandonments of security 
                              (temporary).
                              1.6050K-1  Returns relating to sales or 
                              exchanges of certain partnership 
                              interests.
                              1.6050L-1  Information return by donees 
                              relating to certain dispositions of 
                              donated property.
                              1.6050M-1  Information returns relating to 
                              persons receiving contracts from certain 
                              Federal executive agencies.
                              1.6050N-1  Statements to recipients of 
                              royalties.
                              1.6050P-0  Table of contents.
                              1.6050P-0T  Table of contents (temporary).
                              1.6050P-1  Information reporting for 
                              discharges of indebtedness by certain 
                              financial entities.
                              1.6050P-1T  Information reporting for 
                              discharges of indebtedness by certain 
                              financial entities (temporary).
                              1.6052-1  Information returns regarding 
                              payment of wages in the form of group-term 
                              life insurance.
                              1.6052-2  Statements to be furnished 
                              employees with respect to wages paid in 
                              the form of group-term life insurance.
                              1.6060-1  Reporting requirements for 
                              income tax return preparers.

          Signing and Verifying of Returns and Other Documents

                              1.6061-1  Signing of returns and other 
                              documents by individuals.
                              1.6061-2T  Signing of returns by voice 
                              signature (temporary).
                              1.6062-1  Signing of returns, statements, 
                              and other documents made by corporations.
                              1.6063-1  Signing of returns, statements, 
                              and other documents made by partnerships.
                              1.6065-1  Verification of returns.
                              1.6065-2T  Verification of returns by 
                              voice signature (temporary).

               Time for Filing Returns and Other Documents

                              1.6071-1  Time for filing returns and 
                              other documents.
                              1.6072-1  Time for filing returns of 
                              individuals, estates, and trusts.
                              1.6072-2  Time for filing returns of 
                              corporations.
                              1.6072-3  Income tax due dates postponed 
                              in case of China Trade Act corporations.
                              1.6072-4  Time for filing other returns of 
                              income.
                              1.6073-1  Time and place for filing 
                              declarations of estimated income tax by 
                              individuals.
                              1.6073-2  Fiscal years.
                              1.6073-3  Short taxable years.
                              1.6073-4  Extension of time for filing 
                              declarations by individuals.
                              1.6074-1  Time and place for filing 
                              declarations of estimated income tax by 
                              corporations.
                              1.6074-2  Time for filing declarations by 
                              corporations in case of a short taxable 
                              year.

[[Page 12]]

                              1.6074-3  Extension of time for filing 
                              declarations by corporations.

                  Extension of Time for Filing Returns

                              1.6081-1  Extension of time for filing 
                              returns.
                              1.6081-1T  Extension of time to file 
                              return in case of taxpayers with mixed 
                              straddles (temporary).
                              1.6081-2  Automatic extension of time to 
                              file partnership return of income.
                              1.6081-3  Automatic extension of time for 
                              filing corporation income tax returns.
                              1.6081-4  Automatic extension of time for 
                              filing individual income tax returns.
                              1.6081-5  Extensions of time in the case 
                              of certain partnerships, corporations and 
                              U.S. citizens and residents.
                              1.6081-6  Automatic extension of time to 
                              file trust income tax return.
                              1.6081-7  Automatic extension of time to 
                              file Real Estate Mortgage Investment 
                              Conduit (REMIC) income tax return.

               Place for Filing Returns or Other Documents

                              1.6091-1  Place for filing returns or 
                              other documents.
                              1.6091-2  Place for filing income tax 
                              returns.
                              1.6091-3  Income tax returns required to 
                              be filed with Director of International 
                              Operations.
                              1.6091-4  Exceptional cases.

                        Miscellaneous Provisions

                              1.6102-1  Computations on returns or other 
                              documents.
                              1.6107-1  Income tax return preparer must 
                              furnish copy of return to taxpayer and 
                              must retain a copy or record.
                              1.6109-1  Identifying numbers.
                              1.6109-2  Furnishing identifying number of 
                              income tax return preparer.
                              1.6115-1  Disclosure requirements for quid 
                              pro quo contributions.

                      TIME AND PLACE FOR PAYING TAX

                  Place and Due Date for Payment of Tax

                              1.6151-1  Time and place for paying tax 
                              shown on returns.
                              1.6152-1  Installment payments.
                              1.6153-1  Payment of estimated tax by 
                              individuals.
                              1.6153-2  Fiscal years.
                              1.6153-3  Short taxable years.
                              1.6153-4  Extension of time for paying the 
                              estimated tax.
                              1.6154-1  Payment of estimated tax by 
                              corporations.
                              1.6154-2  Short taxable years.
                              1.6154-3  Extension of time for paying 
                              estimated tax.
                              1.6154-4  Use of Government depositaries.
                              1.6154-5  Definition of estimated tax.

                     Extensions of Time for Payment

                              1.6161-1  Extension of time for paying tax 
                              or deficiency.
                              1.6162-1  Extension of time for payment of 
                              tax on gain attributable to liquidation of 
                              personal holding companies.
                              1.6164-1  Extensions of time for payment 
                              of taxes by corporations expecting 
                              carrybacks.
                              1.6164-2  Amount of tax the time for 
                              payment of which may be extended.
                              1.6164-3  Computation of the amount of 
                              reduction of the tax previously 
                              determined.
                              1.6164-4  Payment of remainder of tax 
                              where extension relates to only part of 
                              the tax.
                              1.6164-5  Period of extension.
                              1.6164-6  Revised statements.
                              1.6164-7  Termination by district 
                              director.

[[Page 13]]

                              1.6164-8  Payments on termination.
                              1.6164-9  Cross references.
                              1.6165-1  Bonds where time to pay the tax 
                              or deficiency has been extended.

                               COLLECTION

                           General Provisions

                              1.6302-1  Use of Government depositaries 
                              in connection with corporation income and 
                              estimated income taxes and certain taxes 
                              of tax-exempt organizations.
                              1.6302-1T  Use of Government depositaries 
                              in connection with corporation income and 
                              estimated income taxes and certain taxes 
                              of tax-exempt organizations--deposits 
                              required to be made by electronic funds 
                              transfer after December 31, 1994 
                              (temporary).
                              1.6302-2  Use of Government depositaries 
                              for payment of tax withheld on nonresident 
                              aliens and foreign corporations.
                              1.6302-2T  Use of Government depositaries 
                              for payment of tax withheld on nonresident 
                              aliens and foreign corporations--deposits 
                              required to be made by electronic funds 
                              transfer after December 31, 1994 
                              (temporary).
                              1.6302-3  Use of Government depositaries 
                              in connection with estimated taxes of 
                              certain trusts.
                              1.6302-3T  Use of Government depositaries 
                              in connection with estimated taxes of 
                              certain trusts--deposits required to be 
                              made by electronic funds transfer after 
                              December 31, 1994 (temporary).
                              1.6302-4T  Use of financial institutions 
                              in connection with individual income taxes 
                              (temporary).
                              1.6361-1  Collection and administration of 
                              qualified State individual income taxes.

                    ABATEMENTS, CREDITS, AND REFUNDS

                              1.6411-1  Tentative carryback adjustments.
                              1.6411-2  Computation of tentative 
                              carryback adjustment.
                              1.6411-3  Allowance of adjustments.
                              1.6411-4  Consolidated groups.
                              1.6414-1  Credit or refund of tax withheld 
                              on nonresident aliens and foreign 
                              corporations.
                              1.6425-1  Adjustment of overpayment of 
                              estimated income tax by corporation.
                              1.6425-2  Computation of adjustment of 
                              overpayment of estimated tax.
                              1.6425-3  Allowance of adjustments.

   ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE PENALTIES

                              1.6654-1  Addition to the tax in the case 
                              of an individual.
                              1.6654-2  Exceptions to imposition of the 
                              addition to the tax in the case of 
                              individuals.
                              1.6654-3  Short taxable years of 
                              individuals.
                              1.6654-4  Waiver of penalty for 
                              underpayment of 1971 estimated tax by an 
                              individual.
                              1.6654-5  Applicability.
                              1.6655-1  Addition to the tax in the case 
                              of a corporation.
                              1.6655-2  Exceptions to imposition of the 
                              addition to the tax in the case of 
                              corporations.
                              1.6655-2T  Safe harbor for certain 
                              installments of tax due before July 1, 
                              1987 (temporary).
                              1.6655-3  Short taxable years in the case 
                              of corporations.
                              1.6655-5  Addition to tax on account of 
                              excessive adjustment under section 6425.
                              1.6655-7  Special rules for estimating the 
                              corporate alternative minimum tax book 
                              income adjustment under the annualization 
                              exception.
                              1.6655(e)-1  Time and manner for making 
                              election under the Omnibus Budget 
                              Reconciliation Act of 1993.

[[Page 14]]

                              1.6661-1  Addition to tax in the case of a 
                              substantial understatement of tax 
                              liability.
                              1.6661-2  Computation of penalty; meaning 
                              of terms.
                              1.6661-3  Substantial authority.
                              1.6661-4  Disclosure of certain 
                              information.
                              1.6661-5  Items relating to tax shelters.
                              1.6661-6  Waiver of penalty.
                              1.6662-0  Table of contents.
                              1.6662-1  Overview of the accuracy-related 
                              penalty.
                              1.6662-2  Accuracy-related penalty.
                              1.6662-3  Negligence or disregard of rules 
                              or regulations.
                              1.6662-4  Substantial understatement of 
                              income tax.
                              1.6662-5  Substantial and gross valuation 
                              misstatements under chapter 1.
                              1.6662-5T  Substantial and gross valuation 
                              misstatements under chapter 1 (temporary).
                              1.6662-6  Transactions between persons 
                              described in section 482 and net section 
                              482 transfer price adjustments.
                              1.6662-7  Omnibus Budget Reconciliation 
                              Act of 1993 changes to the accuracy-
                              related penalty.
                              1.6664-0  Table of contents.
                              1.6664-1  Accuracy-related and fraud 
                              penalties; definitions and special rules.
                              1.6664-2  Underpayment.
                              1.6664-3  Ordering rules for determining 
                              the total amount of penalties imposed.
                              1.6664-4  Reasonable cause and good faith 
                              exception to section 6662 penalties.
                              1.6664-4T  Reasonable cause and good faith 
                              exception to section 6662 penalties.
                              1.6694-0  Table of contents.
                              1.6694-1  Section 6694 penalties 
                              applicable to income tax return preparer.
                              1.6694-2  Penalty for understatement due 
                              to an unrealistic position.
                              1.6694-3  Penalty for understatement due 
                              to willful, reckless, or intentional 
                              conduct.
                              1.6694-4  Extension of period of 
                              collection where preparer pays 15 percent 
                              of a penalty for understatement of 
                              taxpayer's liability and certain other 
                              procedural matters.
                              1.6695-1  Other assessable penalties with 
                              respect to the preparation of income tax 
                              returns for other persons.
                              1.6696-1  Claims for credit or refund by 
                              income tax return preparers.
                              1.6709-1T  Penalties with respect to 
                              mortgage credit certificates (temporary).

                 JEOPARDY, BANKRUPTCY, AND RECEIVERSHIPS

                              1.6851-1  Termination assessments of 
                              income tax.
                              1.6851-2  Certificates of compliance with 
                              income tax laws by departing aliens.
                              1.6851-3  Furnishing of bond to insure 
                              payment; cross reference.

                              THE TAX COURT

 Declaratory Judgements Relating to Qualification of Certain Retirement 
                                  Plans

                              1.7476-1  Interested parties.
                              1.7476-2  Notice to interested parties.
                              1.7476-3  Notice of determination.
                              1.7519-0T  Table of contents (temporary).
                              1.7519-1T  Required payments for entitles 
                              electing not to have required year 
                              (temporary).
                              1.7519-2T  Required payments--procedures 
                              and administration (temporary).
                              1.7519-3T  Effective date (temporary).

                      General Actuarial Valuations

                              1.7520-1  Valuation of annuities, unitrust 
                              interests, interests for life or terms of 
                              years, and remainder or reversionary 
                              interests.
                              1.7520-2  Valuation of charitable 
                              interests.
                              1.7520-3  Limitation on the application of 
                              section 7520.

[[Page 15]]

                              1.7520-4  Transitional rules.
                              1.7701(l)-1  Conduit financing 
                              arrangements.
                              1.7703-1  Determination of marital status.
                              1.7704-1  Publicly traded partnerships.
                              1.7704-2  Transition provisions.
                              1.7872-1--1.7872-4  [Reserved]
                              1.7872-5T  Exempted loans (temporary).

                      PUBLIC LAW 74, 84TH CONGRESS

                              1.9000-1  Statutory provisions.
                              1.9000-2  Effect of repeal in general.
                              1.9000-3  Requirement of statement showing 
                              increase in tax liability.
                              1.9000-4  Form and content of statement.
                              1.9000-5  Effect of filing statement.
                              1.9000-6  Provisions for the waiver of 
                              interest.
                              1.9000-7  Provisions for estimated tax.
                              1.9000-8  Extension of time for making 
                              certain payments.

             RETIREMENT-STRAIGHT LINE ADJUSTMENT ACT OF 1958

                              1.9001  Statutory provisions; Retirement-
                              Straight Line Adjustment Act of 1958.
                              1.9001-1  Change from retirement to 
                              straight-line method of computing 
                              depreciation.
                              1.9001-2  Basis adjustments for taxable 
                              years beginning on or after 1956 
                              adjustment date.
                              1.9001-3  Basis adjustments for taxable 
                              years between changeover date and 1956 
                              adjustment date.
                              1.9001-4  Adjustments required in 
                              computing excess-profits credit.

              DEALER RESERVE INCOME ADJUSTMENT ACT OF 1960

                              1.9002  Statutory provisions; Dealer 
                              Reserve Income Adjustment Act of 1960 (74 
                              Stat. 124).
                              1.9002-1  Purpose, applicability, and 
                              definitions.
                              1.9002-2  Election to have the provisions 
                              of section 481 of the Internal Revenue 
                              Code of 1954 apply.
                              1.9002-3  Election to have the provisions 
                              of section 481 of the Internal Revenue 
                              Code of 1954 not apply.
                              1.9002-4  Election to pay net increase in 
                              tax in installments.
                              1.9002-5  Special rules relating to 
                              interest.
                              1.9002-6  Acquiring corporation.
                              1.9002-7  Statute of limitations.
                              1.9002-8  Manner of exercising elections.

             PUBLIC DEBT AND TAX RATE EXTENSION ACT OF 1960

                              1.9003  Statutory provisions; section 4 of 
                              the Act of September 14, 1960 (Pub. L. 86-
                              781, 74 Stat. 1017).
                              1.9003-1  Election to have the provisions 
                              of section 613(c)(2) and (4) of the 1954 
                              Code, as amended, apply for past years.
                              1.9003-2  Effect of election.
                              1.9003-3  Statutes of limitation.
                              1.9003-4  Manner of exercising election.
                              1.9003-5  Terms; applicability of other 
                              laws.

CERTAIN BRICK AND TILE CLAY, FIRE CLAY, AND SHALE; REGULATIONS UNDER THE 
                        ACT OF SEPTEMBER 26, 1961

                              1.9004  Statutory provisions; the Act of 
                              September 26, 1961 (Pub. L. 87-312, 75 
                              Stat. 674).

[[Page 16]]

                              1.9004-1  Election relating to the 
                              determination of gross income from the 
                              property for taxable years beginning prior 
                              to 1961 in the case of certain clays and 
                              shale.
                              1.9004-2  Effect of election.
                              1.9004-3  Statutes of limitation.
                              1.9004-4  Manner of exercising election.
                              1.9004-5  Terms; applicability of other 
                              laws.

 QUARTZITE AND CLAY USED IN PRODUCTION OF REFRACTORY PRODUCTS; ELECTION 
                         FOR PRIOR TAXABLE YEARS

                              1.9005  Statutory provisions; section 2 of 
                              the Act of September 26, 1961 (Pub. L. 87-
                              321, 75 Stat. 683).
                              1.9005-1  Election relating to the 
                              determination of gross income from the 
                              property for taxable years beginning prior 
                              to 1961 in the case of clay and quartzite 
                              used in making refractory products.
                              1.9005-2  Effect of election.
                              1.9005-3  Statutes of limitation.
                              1.9005-4  Manner of exercising election.
                              1.9005-5  Terms; applicability of other 
                              laws.

                         Tax Reform Act of 1969

                              1.9006  Statutory provisions; Tax Reform 
                              Act of 1969.
                              1.9006-1  Interest and penalties in case 
                              of certain taxable years.

                        MISCELLANEOUS PROVISIONS

                              1.9101-1  Permission to submit information 
                              required by certain returns and statements 
                              on magnetic tape.
                              1.9200-1  Deduction for motor carrier 
                              operating authority.
                              1.9200-2  Manner of taking deduction.

  Authority: 26 U.S.C. 7805, unless otherwise noted.
  Section 1.1402 (e)-5T also is issued under 26 U.S.C. 1402(e)(1) and 
(2).
  Section 1.1441-3 also issued under 26 U.S.C. 7701(l).
  Section 1.1441-4 (b)(1)(ii) also issued under 26 U.S.C. 1441(c)(4).
  Section 1.1441-4T also issued under 26 U.S.C. 1441(c)(4).
  Section 1.1441-5 also issued under 26 U.S.C. 7701(b)(11).
  Section 1.1441-7 also issued under 26 U.S.C. 7701(l).
  Section 1.1445-5 also issued under 26 U.S.C. 1445(e)(6).
  Section 1.1445-8 also issued under 26 U.S.C. 1445(e)(6).
  Section 1.1502-0 also issued under 26 U.S.C. 1502.
  Section 1.1502-1 also issued under 26 U.S.C. 1502.
  Section 1.1502-2 also issued under 26 U.S.C. 1502.
  Section 1.1502-11 also issued under 26 U.S.C. 1502.
  Section 1.1502-13 also issued under 26 U.S.C. 1502.
  Section 1.1502-15T also issued under 26 U.S.C. 1502.
  Section 1.1502-17 also issued under 26 U.S.C. 446 and 1502.
  Section 1.1502-18 also issued under 26 U.S.C. 1502.
  Section 1.1502-19 also issued under 26 U.S.C. 301, 1502, and 1503.
  Section 1.1502-20 also issued under 26 U.S.C. 337(d) and 1502.
  Section 1.1502-21 also issued under 26 U.S.C. 1502 and 6402(i).
  Section 1.1502-21T also issued under 26 U.S.C. 1502.
  Section 1.1502-22T also issued under 26 U.S.C. 1502.
  Section 1.1502-23T also issued under 26 U.S.C. 1502.
  Section 1.1502-26 also issued under 26 U.S.C. 1502.
  Section 1.1502-30 also issued under 26 U.S.C. 1502.
  Section 1.1502-31 also issued under 26 U.S.C. 1502.
  Section 1.1502-32 also issued under 26 U.S.C. 301, 1502, and 1503.
  Section 1.1502-33 also issued under 26 U.S.C. 1502.
  Section 1.1502-75 also issued under 26 U.S.C. 1502.
  Section 1.1502-76 also issued under 26 U.S.C. 1502.
  Section 1.1502-77(e) also issued under 26 U.S.C. 1502 and 6402(i).
  Section 1.1502-78(b) also issued under 26 U.S.C. 1502, 6402(i), and 
6411(c).
  Section 1.1502-79 also issued under 26 U.S.C. 1502.

[[Page 17]]

  Section 1.1502-80 also issued under 26 U.S.C. 1502.
  Section 1.1502-81T also issued under 26 U.S.C. 1502.
  Section 1.1502-91T also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
  Section 1.1502-92T also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
  Section 1.1502-93T also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
  Section 1.1502-94T also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
  Section 1.1502-95T also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
  Section 1.1502-96T also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
  Section 1.1502-98T also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
  Section 1.1502-99T also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
  Section 1.1503-2T also issued under 26 U.S.C. 1503(d).
  Section 1.1504-4 also issued under 26 U.S.C. 1504(a)(5).
  Section 1.1502-15A also issued under 26 U.S.C. 1502.
  Section 1.1502-21A also issued under 26 U.S.C. 1502.
  Section 1.1502-22A also issued under 26 U.S.C. 1502.
  Section 1.1502-23A also issued under 26 U.S.C. 1502.
  Section 1.1502-41A also issued under 26 U.S.C. 1502.
  Section 1.1502-79A also issued under 26 U.S.C. 1502.
  Section 1.6013-6 also issued under 26 U.S.C. 7701(b)(11).
  Sections 1.6035-1 through 1.6035-3 also issued under 26 U.S.C. 6035 
(a), (d), and (e).
  Section 1.6038A-1 also issued under 26 U.S.C. 6038A.
  Section 1.6038A-2 also issued under 26 U.S.C. 6038A.
  Section 1.6038A-3 also issued under 26 U.S.C. 6038A and 7701(l).
  Section 1.6038A-4 also issued under 26 U.S.C. 6038A.
  Section 1.6038A-5 also issued under 26 U.S.C. 6038A.
  Section 1.6038A-6 also issued under 26 U.S.C. 6038A.
  Section 1.6038A-7 also issued under 26 U.S.C. 6038A.
  Section 1.6038B-1T also issued under 26 U.S.C 6038B.
  Section 1.6041-3 also issued under 26 U.S.C. 62 and 6041(a).
  Section 1.6045-1 also issued under 26 U.S.C. 6045.
  Section 1.6045-2 also issued under 26 U.S.C. 6045.
  Section 1.6045-4 also issued under 26 U.S.C. 6045.
  Section 1.6049-4 also issued under 26 U.S.C. 6049(a), (b), (c), and 
(d).
  Section 1.6049-5 also issued under 26 U.S.C. 6049(a), (b), (c), and 
(d).
  Section 1.6049-5T also issued under 26 U.S.C. 6049.
  Section 1.6049-6 also issued under 6049(a), (b), and (d).
  Section 1.6049-7 also issued under 26 U.S.C. 860G(e), 1275(c) and 26 
U.S.C. 6049(d)(7)(D).
  Section 1.6050E-1 also issued under 26 U.S.C. 6050E.
  Section 1.6050H-1 also issued under 26 U.S.C. 6050H.
  Section 1.6050H-1T also issued under 26 U.S.C. 6050H.
  Section 1.6050H-2 also issued under 26 U.S.C. 6050H.
  Section 1.6050I-1 also issued under 26 U.S.C. 6050I.
  Section 1.6050I-2 also issued under 26 U.S.C. 6050I.
  Section 1.6050K-1 also issued under 26 U.S.C. 6050K.
  Section 1.6050M-1 also issued under 26 U.S.C. 6050M.
  Section 1.6050P-1 also issued under 26 U.S.C. 6050P.
  Section 1.6061-2T also issued under 26 U.S.C. 6061.
  Section 1.6065-2T also issued under 26 U.S.C. 6065.
  Section 1.6081-2 also issued under 26 U.S.C. 6081(a).
  Section 1.6081-4 also issued under 26 U.S.C. 6081(a).
  Section 1.6081-6 also issued under 26 U.S.C. 6081(a).
  Section 1.6081-7 also issued under 26 U.S.C. 6081(a).
  Section 1.6302-1(a) also issued under 26 U.S.C 6302(c).
  Sections 1.6302-1T, 1.6302-2T and 1.6302-3T also issued under 26 
U.S.C. 6302(h).
  Section 1.6302-4T also issued under 26 U.S.C. 6302(a) and (c).
  Section 1.6411-4 also issued under 26 U.S.C. 6402(i) and 6411(c).
  Section 1.6662-6 also issued under 26 U.S.C. 6662.
  Section 1.6695-1 also issued under 26 U.S.C. 6695(b).
  Section 1.6851-2 also issued under 26 U.S.C 6851(d).
  Section 1.7520-1 also issued under 26 U.S.C. 7520(c)(2).
  Section 1.7520-2 also issued under 26 U.S.C. 7520(c)(2).
  Section 1.7520-3 also issued under 26 U.S.C. 7520(c)(2).
  Section 1.7520-4 also issued under 26 U.S.C. 7520(c)(2).
  Section 1.7701(l)-1 also issued under 26 U.S.C. 7701(l).
  Section 1.7872-5T also issued under 26 U.S.C. 7872.

[[Page 19]]



TAX ON SELF-EMPLOYMENT INCOME--Table of Contents




    Source: Sections 1.1401-1 to 1.1403-1 contained in T.D. 6691, 28 FR 
12796, Dec. 3, 1963, unless otherwise noted.



Sec. 1.1401-1   Tax on self-employment income.

    (a) There is imposed, in addition to other taxes, a tax upon the 
self-employment income of every individual at the rates prescribed in 
section 1401(a) (old-age, survivors, and disability insurance) and (b) 
(hospital insurance). (See subparagraphs (1) and (2) of paragraph (b) of 
this section.) This tax shall be levied, assessed, and collected as part 
of the income tax imposed by subtitle A of the Code and, except as 
otherwise expressly provided, will be included with the tax imposed by 
section 1 or 3 in computing any deficiency or overpayment and in 
computing the interest and additions to any deficiency, overpayment, or 
tax. Since the tax on self-employment income is part of the income tax, 
it is subject to the jurisdiction of the Tax Court of the United States 
to the same extent and in the same manner as the other taxes under 
subtitle A of the Code. Furthermore, with respect to taxable years 
beginning after December 31, 1966, this tax must be taken into account 
in computing any estimate of the taxes required to be declared under 
section 6015.
    (b) The rates of tax on self-employment income are as follows:
    (1) For old-age, survivors, and disability insurance:

                                                                        
                         Taxable year                           Percent 
                                                                        
Beginning before January 1, 1957.............................          3
Beginning after December 31, 1956 and before January 1, 1959.      3.375
Beginning after December 31, 1958 and before January 1, 1960.       3.75
Beginning after December 31, 1959 and before January 1, 1962.        4.5
Beginning after December 31, 1961 and before January 1, 1963.        4.7
Beginning after December 31, 1962 and before January 1, 1966.        5.4
Beginning after December 31, 1965 and before January 1, 1967.        5.8
Beginning after December 31, 1966 and before January 1, 1968.        5.9
Beginning after December 31, 1967 and before January 1, 1969.        5.8
Beginning after December 31, 1968 and before January 1, 1971.        6.3
Beginning after December 31, 1970 and before January 1, 1973.        6.9
Beginning after December 31, 1972............................        7.0
                                                                        

    (2) For hospital insurance:

                                                                        
                         Taxable year                           Percent 
                                                                        
Beginning after December 31, 1965 and before January 1, 1967.       0.35
Beginning after December 31, 1966 and before January 1, 1968.        .50
Beginning after December 31, 1967 and before January 1, 1973.        .60
Beginning after December 31, 1972 and before January 1, 1974.        1.0
Beginning after December 31, 1973 and before January 1, 1978.        .90
Beginning after December 31, 1977 and before January 1, 1981.       1.10
Beginning after December 31, 1980 and before January 1, 1986.       1.35
Beginning after December 31, 1985............................       1.50
                                                                        

    (c) In general, self-employment income consists of the net earnings 
derived by an individual (other than a nonresident alien) from a trade 
or business carried on by him as sole proprietor or by a partnership of 
which he is a member, including the net earnings of certain employees as 
set forth in Sec. 1.1402(c)-3, and of crew leaders, as defined in 
section 3121(o) (see such section and the regulations thereunder in part 
31 of this chapter (Employment Tax Regulations)). See, however, the 
exclusions, exceptions, and limitations set forth in Secs. 1.1402(a)-1 
through 1.1402(h)-1.

[T.D. 6993, 34 FR 828, Jan. 18, 1969, as amended by T.D. 7333, 39 FR 
44445, Dec. 24, 1974]



Sec. 1.1402(a)-1   Definition of net earnings from self-employment.

    (a) Subject to the special rules set forth in Secs. 1.1402(a)-3 to 
1.1402(a)-17, inclusive, and to the exclusions set forth in 
Secs. 1.1402(c)-2 to 1.1402(c)-7, inclusive, the term ``net earnings 
from self-employment'' means:
    (1) The gross income derived by an individual from any trade or 
business carried on by such individual, less the deductions allowed by 
chapter 1 of the Code which are attributable to such trade or business, 
plus
    (2) His distributive share (whether or not distributed), as 
determined under section 704, of the income (or minus the loss), 
described in section 702(a)(9) and as computed under section 703, from 
any trade or business carried on by any partnership of which he is a 
member.

[[Page 20]]

    (b) Gross income derived by an individual from a trade or business 
includes payments received by him from a partnership of which he is a 
member for services rendered to the partnership or for the use of 
capital by the partnership, to the extent the payments are determined 
without regard to the income of the partnership. However, such payments 
received from a partnership not engaged in a trade or business within 
the meaning of section 1402(c) and Sec. 1.1402(c)-1 do not constitute 
gross income derived by an individual from a trade or business. See 
section 707(c) and the regulations thereunder, relating to guaranteed 
payments to a member of a partnership for services or the use of 
capital. See also section 706(a) and the regulations thereunder, 
relating to the taxable year of the partner in which such guaranteed 
payments are to be included in computing taxable income.
    (c) Gross income derived by an individual from a trade or business 
includes gross income received (in the case of an individual reporting 
income on the cash receipts and disbursements method) or accrued (in the 
case of an individual reporting income on the accrual method) in the 
taxable year from a trade or business even though such income may be 
attributable in whole or in part to services rendered or other acts 
performed in a prior taxable year as to which the individual was not 
subject to the tax on self-employment income.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR 
44445, Dec. 24, 1974]



Sec. 1.1402(a)-2   Computation of net earnings from self-employment.

    (a) General rule. In general, the gross income and deductions of an 
individual attributable to a trade or business (including a trade or 
business conducted by an employee referred to in paragraphs (b), (c), 
(d), or (e) of Sec. 1.1402(c)-3), for the purpose of ascertaining his 
net earnings from self-employment, are to be determined by reference to 
the provisions of law and regulations applicable with respect to the 
taxes imposed by sections 1 and 3. Thus, if an individual uses the 
accrual method of accounting in computing taxable income from a trade or 
business for the purpose of the tax imposed by section 1 or 3, he must 
use the same method in determining net earnings from self-employment. 
Likewise, if a taxpayer engaged in a trade or business of selling 
property on the installment plan elects, under the provisions of section 
453, to use the installment method in computing income for purposes of 
the tax under section 1 or 3, he must use the same method in determining 
net earnings from self-employment. Income which is excludable from gross 
income under any provision of subtitle A of the Internal Revenue Code is 
not taken into account in determining net earnings from self-employment 
except as otherwise provided in Sec. 1.1402(a)-9, relating to certain 
residents of Puerto Rico, in Sec. 1.1402(a)-11, relating to ministers or 
members of religious orders, and in Sec. 1.1402(a)-12, relating to the 
term ``possession of the United States'' as used for purposes of the tax 
on self-employment income. Thus, in the case of a citizen of the United 
States conducting, in a foreign country, a trade or business in which 
both personal services and capital are material income-producing 
factors, any part of the income therefrom which is excluded from gross 
income as earned income under the provisions of section 911 and the 
regulations thereunder is not taken into account in determining net 
earnings from self-employment.
    (b) Trade or business carried on. The trade or business must be 
carried on by the individual, either personally or through agents or 
employees. Accordingly, income derived from a trade or business carried 
on by an estate or trust is not included in determining the net earnings 
from self-employment of the individual beneficiaries of such estate or 
trust.
    (c) Aggregate net earnings. Where an individual is engaged in more 
than one trade or business within the meaning of section 1402(c) and 
Sec. 1.1402(c)-1, his net earnings from self-employment consist of the 
aggregate of the net income and losses (computed subject to the special 
rules provided in Secs. 1.1402(a)-1 to 1.1402(a)-17 inclusive) of all 
such trades or businesses carried on by him. Thus, a loss sustained in 
one trade or business carried on by an individual will operate to offset 
the income

[[Page 21]]

derived by him from another trade or business.
    (d) Partnerships. The net earnings from self-employment of an 
individual include, in addition to the earnings from a trade or business 
carried on by him, his distributive share of the income or loss, 
described in section 702(a)(9), from any trade or business carried on by 
each partnership of which he is a member. An individual's distributive 
share of such income or loss of a partnership shall be determined as 
provided in section 704, subject to the special rules set forth in 
section 1402(a) and in Secs. 1.1402(a)-1 to 1.1402(a)-17, inclusive, and 
to the exclusions provided in section 1402(c) and Secs. 1.1402(c)-2 to 
1.1402(c)-7, inclusive. For provisions relating to the computation of 
the taxable income of a partnership, see section 703.
    (e) Different taxable years. If the taxable year of a partner 
differs from that of the partnership, the partner shall include, in 
computing net earnings from self-employment, his distributive share of 
the income or loss, described in section 702(a)(9), of the partnership 
for its taxable year ending with or within the taxable year of the 
partner. For the special rule in case of the termination of a partner's 
taxable year as result of death, see Secs. 1.1402(f) and 1.1402(f)-1.
    (f) Meaning of partnerships. For the purpose of determining net 
earnings from self-employment, a partnership is one which is recognized 
as such for income tax purposes. For income tax purposes, the term 
``partnership'' includes not only a partnership as known at common law, 
but, also a syndicate, group, pool, joint venture, or other 
unincorporated organization which carries on any trade or business, 
financial operation, or venture, and which is not, within the meaning of 
the Code, a trust, estate, or a corporation. An organization described 
in the preceding sentence shall be treated as a partnership for purposes 
of the tax on self-employment income even though such organization has 
elected, pursuant to section 1361 and the regulations thereunder, to be 
taxed as a domestic corporation.
    (g) Nature of partnership interest. The net earnings from self-
employment of a partner include his distributive share of the income or 
loss, described in section 702(a)(9), of the partnership of which he is 
a member, irrespective of the nature of his membership. Thus, in 
determining his net earnings from self-employment, a limited or inactive 
partner includes his distributive share of such partnership income or 
loss. In the case of a partner who is a member of a partnership with 
respect to which an election has been made pursuant to section 1361 and 
the regulations thereunder to be taxed as a domestic corporation, net 
earnings from self-employment include his distributive share of the 
income or loss, described in section 702(a)(9), from the trade or 
business carried on by the partnership computed without regard to the 
fact that the partnership has elected to be taxed as a domestic 
corporation.
    (h) Proprietorship taxed as domestic corporation. A proprietor of an 
unincorporated business enterprise with respect to which an election has 
been made pursuant to section 1361 and the regulations thereunder to be 
taxed as a domestic corporation shall compute his net earnings from 
self-employment without regard to the fact that such election has been 
made.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR 
44445, Dec. 24, 1974]



Sec. 1.1402(a)-3   Special rules for computing net earnings from self-employment.

    For the purpose of computing net earnings from self-employment, the 
gross income derived by an individual from a trade or business carried 
on by him, the allowable deductions attributable to such trade or 
business, and the individual's distributive share of the income or loss, 
described in section 702(a)(9), from any trade or business carrier on by 
a partnership of which he is a member shall be computed in accordance 
with the special rules set forth in Secs. 1.1402(a)-4 to 1.1402(a)-17, 
inclusive.

[T.D. 7333, 39 FR 44445, Dec. 24, 1974]



Sec. 1.1402(a)-4   Rentals from real estate.

    (a) In general. Rentals from real estate and from personal property 
leased with the real estate (including such

[[Page 22]]

rentals paid in crop shares) and the deductions attributable thereto, 
unless such rentals are received by an individual in the course of a 
trade or business as a real-estate dealer, are excluded. Whether or not 
an individual is engaged in the trade or business of a real-estate 
dealer is determined by the application of the principles followed in 
respect of the taxes imposed by sections 1 and 3. In general, an 
individual who is engaged in the business of selling real estate to 
customers with a view to the gains and profits that may be derived from 
such sales is a real-estate dealer. On the other hand, an individual who 
merely holds real estate for investment or speculation and receives 
rentals therefrom is not considered a real-estate dealer. Where a real-
estate dealer holds real estate for investment or speculation in 
addition to real estate held for sale to customers in the ordinary 
course of his trade or business as a real-estate dealer, only the 
rentals from the real estate held for sale to customers in the ordinary 
course of his trade or business as a real-estate dealer, and the 
deductions attributable thereto, are included in determining net 
earnings from self-employment; the rentals from the real estate held for 
investment or speculation, and the deductions attributable thereto, are 
excluded. Rentals paid in crop shares include income derived by an owner 
or lessee of land under an agreement entered into with another person 
pursuant to which such other person undertakes to produce a crop or 
livestock on such land and pursuant to which (1) the crop or livestock, 
or the proceeds thereof, are to be divided between such owner or lessee 
and such other person, and (2) the share of the owner or lessee depends 
on the amount of the crop or livestock produced. See, however, paragraph 
(b) of this section.
    (b) Special rule for ``includible farm rental income''--(1) In 
general. Notwithstanding the rules set forth in paragraph (a) of this 
section, there shall be included in determining net earnings from self-
employment for taxable years ending after 1955 any income derived by an 
owner or tenant of land, if the following requirements are met with 
respect to such income:
    (i) The income is derived under an arrangement between the owner or 
tenant of land and another person which provides that such other person 
shall produce agricultural or horticultural commodities on such land, 
and that there shall be material participation by the owner or tenant in 
the production or the management of the production of such agricultural 
or horticultural commodities; and
    (ii) There is material participation by the owner or tenant with 
respect to any such agricultural or horticultural commodity.

Income so derived shall be referred to in this section as ``includible 
farm rental income''.
    (2) Requirement that income be derived under an arrangement. In 
order for rental income received by an owner or tenant of land to be 
treated as includible farm rental income, such income must be derived 
pursuant to a share-farming or other rental arrangement which 
contemplates material participation by the owner or tenant in the 
production or management of production of agricultural or horticultural 
commodities.
    (3) Nature of arrangement. (i) The arrangement between the owner or 
tenant and the person referred to in subparagraph (1) of this paragraph 
may be either oral or written. The arrangement must impose upon such 
other person the obligation to produce one or more agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on the land of the owner or tenant. In 
addition, it must be within the contemplation of the parties that the 
owner or tenant will participate in the production or the management of 
the production of the agricultural or horticultural commodities required 
to be produced by the other person under such arrangement to an extent 
which is material with respect either to the production or to the 
management of production of such commodities or is material with respect 
to the production and management of production when the total required 
participation in connection with both is considered.
    (ii) The term ``production'', wherever used in this paragraph, 
refers to the

[[Page 23]]

physical work performed and the expenses incurred in producing a 
commodity. It includes such activities as the actual work of planting, 
cultivating, and harvesting crops, and the furnishing of machinery, 
implements, seed, and livestock. An arrangement will be treated as 
contemplating that the owner or tenant will materially participate in 
the ``production'' of the commodities required to be produced by the 
other person under the arrangement if under the arrangement it is 
understood that the owner or tenant is to engage to a material degree in 
the physical work related to the production of such commodities. The 
mere undertaking to furnish machinery, implements, and livestock and to 
incur expenses is not, in and of itself, sufficient. Such factors may be 
significant, however, in cases where the degree of physical work 
intended of the owner or tenant is not material. For example, if under 
the arrangement it is understood that the owner or tenant is to engage 
periodically in physical work to a degree which is not material in and 
of itself and, in addition, to furnish a substantial portion of the 
machinery, implements, and livestock to be used in the production of the 
commodities or to furnish or advance funds or assume financial 
responsibility for a substantial part of the expense involved in the 
production of the commodities, the arrangement will be treated as 
contemplating material participation of the owner or tenant in the 
production of such commodities.
    (iii) The term ``management of the production'', wherever used in 
this paragraph, refers to services performed in making managerial 
decisions relating to the production, such as when to plant, cultivate, 
dust, spray, or harvest the crop, and includes advising and consulting, 
making inspections, and making decisions as to matters such as rotation 
of crops, the type of crops to be grown, the type of livestock to be 
raised, and the type of machinery and implements to be furnished. An 
arrangement will be treated as contemplating that the owner or tenant is 
to participate materially in the ``management of the production'' of the 
commodities required to be produced by the other person under the 
arrangement if the owner or tenant is to engage to a material degree in 
the management decisions related to the production of such commodities. 
The services which are considered of particular importance in making 
such management decisions are those services performed in making 
inspections of the production activities and in advising and consulting 
with such person as to the production of the commodities. Thus, if under 
the arrangement it is understood that the owner or tenant is to advise 
or consult periodically with the other person as to the production of 
the commodities required to be produced by such person under the 
arrangement and to inspect periodically the production activities on the 
land, a strong inference will be drawn that the arrangement contemplates 
participation by the owner or tenant in the management of the production 
of such commodities. The mere undertaking to select the crops or 
livestock to be produced or the type of machinery and implements to be 
furnished or to make decisions as to the rotation of crops generally is 
not, in and of itself, sufficient. Such factors may be significant, 
however, in making the overall determination of whether the arrangement 
contemplates that the owner or tenant is to participate materially in 
the management of the production of the commodities. Thus, if in 
addition to the understanding that the owner or tenant is to advise or 
consult periodically with the other person as to the production of the 
commodities and to inspect periodically the production activities on the 
land, it is also understood that the owner is to select the type of 
crops and livestock to be produced and the type of machinery and 
implements to be furnished and to make decisions as to the rotation of 
crops, the arrangement will be treated as contemplating material 
participation of the owner or tenant in the management of production of 
such commodities.
    (4) Actual participation. In order for the rental income received by 
the owner or tenant of land to be treated as includible farm rental 
income, not only must it be derived pursuant to the arrangement 
described in subparagraph (1) of this paragraph, but also the

[[Page 24]]

owner or tenant must actually participate to a material degree in the 
production or in the management of the production of any of the 
commodities required to be produced under the arrangement, or he must 
actually participate in both the production and the management of the 
production to an extent that his participation in the one when combined 
with his participation in the other will be considered participation to 
a material degree. If the owner or tenant shows that he periodically 
advises or consults with the other person, who under the arrangement 
produces the agricultural or horticultural commodities, as to the 
production of any of these commodities and also shows that he 
periodically inspects the production activities on the land, he will 
have presented strong evidence of the existence of the degree of 
participation contemplated by section 1402(a)(1). If, in addition to the 
foregoing, the owner or tenant shows that he furnishes a substantial 
portion of the machinery, implements, and livestock used in the 
production of the commodities or that he furnishes or advances funds, or 
assumes financial responsibility, for a substantial part of the expense 
involved in the production of the commodities, he will have established 
the existence of the degree of participation contemplated by section 
1402(a)(1) and this paragraph.
    (5) Employees or agents. An agreement entered into by an employee or 
agent of an owner or tenant and another person is considered to be an 
arrangement entered into by the owner or tenant for purposes of 
satisfying the requirement set forth in paragraph (b)(2) that the income 
must be derived under an arrangement between the owner or tenant and 
another person. For purposes of determining whether the arrangement 
satisfies the requirement set forth in paragraph (b)(3) that the parties 
contemplate that the owner or tenant will materially participate in the 
production or management of production of a commodity, services which 
will be performed by an employee or agent of the owner or tenant are not 
considered to be services which the arrangement contemplates will be 
performed by the owner or tenant. Services actually performed by such 
employee or agent are not considered services performed by the owner or 
tenant in determining the extent to which the owner or tenant has 
participated in the production or management of production of a 
commodity. For taxable years beginning before January 1, 1974, 
contemplated or actual services of an agent or an employee of the owner 
or tenant are deemed to be contemplated or actual services of the owner 
or tenant under paragraphs (b)(3) and (b)(4) of this section.
    (6) Examples. Application of the rules prescribed in this paragraph 
may be illustrated by the following examples:

    Example (1). After the death of her husband, Mrs. A rents her farm, 
together with its machinery and equipment, to B for one-half of the 
proceeds from the commodities produced on such farm by B. It is agreed 
that B will live in the tenant house on the farm and be responsible for 
the over-all operation of the farm, such as planting, cultivating, and 
harvesting the field crops, caring for the orchard and harvesting the 
fruit and caring for the livestock and poultry. It also is agreed that 
Mrs. A will continue to live in the farm residence and help B operate 
the farm. Under the agreement it is contemplated that Mrs. A will 
regularly operate and clean the cream separator and feed the poultry 
flock and collect the eggs. When possible she will assist B in such work 
as spraying the fruit trees, penning livestock, culling the poultry, and 
controlling weeds. She will also assist in preparing the meals when B 
engages seasonal workers. The agreement between Mrs. A and B clearly 
provides that she will materially participate in the over-all production 
operations to be conducted on her farm by B. In actual practice, Mrs. A 
performs such regular and intermittent services. The regularly performed 
services are material to the production of an agricultural commodity, 
and the intermittent services performed are material to the production 
operations to which they relate. The furnishing of a substantial portion 
of the farm machinery and equipment also adds support to a conclusion 
that Mrs. A has materially participated. Accordingly, the rental income 
Mrs. A receives from her farm should be included in net earnings from 
self-employment.
    Example (2). D agrees to produce a crop on C's cotton farm under an 
arrangement providing that C and D will each receive one-half of the 
proceeds from such production. C agrees to furnish all the necessary 
equipment, and it is understood that he is to advise D when to plant the 
cotton and when it needs to be chopped, plowed, sprayed, and picked. It 
is also understood that during the

[[Page 25]]

growing season C is to inspect the crop every few days to determine 
whether D is properly taking care of the crop. Under the arrangement, D 
is required to furnish all labor needed to grow and harvest the crop. C, 
in fact, renders such advice, makes such inspections, and furnishes such 
equipment. C's contemplated participation in management decisions is 
considered material with respect to the management of the cotton 
production operation. C's actual participation pursuant to the 
arrangement is also considered to be material with respect to the 
management of the production of cotton. Accordingly, the income C 
receives from his cotton farm is to be included in computing his net 
earnings from self-employment.
    Example (3). E owns a grain farm and turns its operation over to his 
son, F. By the oral rental arrangement between E and F, the latter 
agrees to produce crops of grain on the farm, and E agrees that he will 
be available for consultation and advice and will inspect and help to 
harvest the crops. E furnishes most of the equipment, including a 
tractor, a combine, plows, wagons, drills, and harrows; he continues to 
live on the farm and does some of the work such as repairing barns and 
farm machinery, going to town for supplies, cutting weeds, etc.; he 
regularly inspects the crops during the growing season; and he helps F 
to harvest the crops. Although the final decisions are made by F, he 
frequently consults with his father regarding the production of the 
crops. An evaluation of all of E's actual activities indicates that they 
are sufficiently substantial and regular to support a conclusion that he 
is materially participating in the crop production operations and the 
management thereof. If it can be shown that the degree of E's actual 
participation was contemplated by the arrangement, E's income from the 
grain farm will be included in computing net earnings from self-
employment.
    Example (4). G owns a fully-equipped farm which he rents to H under 
an arrangement which contemplates that G shall materially participate in 
the management of the production of crops raised on the farm pursuant to 
the arrangement. G lives in town about 5 miles from the farm. About 
twice a month he visits the farm and looks over the buildings and 
equipment. G may occasionally, in an emergency, discuss with H some 
phase of a crop production activity. In effect, H has complete charge of 
the management of farming operations regardless of the understanding 
between him and G. Although G pays one-half of the cost of the seed and 
fertilizer and is charged for the cost of materials purchased by H to 
make all necessary repairs, G's activities do not constitute material 
participation in the crop production activities. Accordingly, G's income 
from the crops is not included in computing net earnings from self-
employment.
    Example (5).  I owned a farm several miles from the town in which he 
lived. He rented the farm to J under an arrangement which contemplated 
I's material participation in the management of production of wheat. I 
furnished one-half of the seed and fertilizer and all the farm equipment 
and livestock. He employed K to perform all the services in advising, 
consulting, and inspecting contemplated by the arrangement. I is not 
materially participating in the management of production of wheat by J. 
The work done by I's employee, K, is not attributable to I in 
determining the extent of I's participation. I's rental income from the 
arrangement is, therefore, not to be included in computing his net 
earnings from self-employment. For taxable years beginning before 
January 1, 1974, however, I's rental income would be includible in those 
earnings.
    Example (6).  L, a calendar-year taxpayer, appointed M as his agent 
to rent his fully equipped farm for 1974. M entered into a rental 
arrangement with N under which M was to direct the planting of crops, 
inspect them weekly during the growing season, and consult with N on any 
problems that might arise in connection with irrigation, etc., while N 
furnished all the labor needed to grow and harvest the crops. M did in 
fact fulfill its responsibilities under the arrangement. Although the 
arrangement entered into by M and N is considered to have been made by 
L, M's services are not attributable to L, and L's furnishing of a fully 
equipped farm is insufficient by itself to constitute material 
participation in the production of the crops. Accordingly, L's rental 
income from the arrangement is not included in his net earnings from 
self-employment for that year. For taxable years beginning before 
January 1, 1974, however, L's rental income would be includible in those 
earnings.

    (c) Rentals from living quarters--(1) No services rendered for 
occupants. Payments for the use or occupancy of entire private 
residences or living quarters in duplex or multiple-housing units are 
generally rentals from real estate. Except in the case of real-estate 
dealers, such payments are excluded in determining net earnings from 
self-employment even though such payments are in part attributable to 
personal property furnished under the lease.
    (2) Services rendered for occupants. Payments for the use or 
occupancy of rooms or other space where services are also rendered to 
the occupant, such as for the use or occupancy of rooms or other 
quarters in hotels, boarding houses, or apartment houses furnishing 
hotel services, or in tourist camps or tourist homes, or payments for 
the use

[[Page 26]]

or occupancy of space in parking lots, warehouses, or storage garages, 
do not constitute rentals from real estate; consequently, such payments 
are included in determining net earnings from self-employment. 
Generally, services are considered rendered to the occupant if they are 
primarily for his convenience and are other than those usually or 
customarily rendered in connection with the rental of rooms or other 
space for occupancy only. The supplying of maid service, for example, 
constitutes such service; whereas the furnishing of heat and light, the 
cleaning of public entrances, exits, stairways and lobbies, the 
collection of trash, and so forth, are not considered as services 
rendered to the occupant.
    (3) Example. The application of this paragraph may be illustrated by 
the following example:

    Example. A, an individual, owns a building containing four 
apartments. During the taxable year, he receives $1,400 from apartments 
numbered 1 and 2, which are rented without services rendered to the 
occupants, and $3,600 from apartments numbered 3 and 4, which are rented 
with services rendered to the occupants. His fixed expenses for the four 
apartments aggregate $1,200 during the taxable year. In addition, he has 
$500 of expenses attributable to the services rendered to the occupants 
of apartments 3 and 4. In determining his net earnings from self-
employment, A includes the $3,600 received from apartments 3 and 4, and 
the expenses of $1,100 ($500 plus one-half of $1,200) attributable 
thereto. The rentals and expenses attributable to apartments 1 and 2 are 
excluded. Therefore, A has $2,500 of net earnings from self-employment 
for the taxable year from the building.

    (d) Treatment of business income which includes rentals from real 
estate. Except in the case of a real-estate dealer, where an individual 
or a partnership is engaged in a trade or business the income of which 
is classifiable in part as rentals from real estate, only that portion 
of such income which is not classifiable as rentals from real estate, 
and the expenses attributable to such portion, are included in 
determining net earnings from self-employment.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7710, 45 FR 
50739, July 31, 1980]



Sec. 1.1402(a)-5   Dividends and interest.

    (a) All dividends on shares of stock are excluded unless they are 
received by an individual in the course of his trade or business as a 
dealer in stocks or securities.
    (b) Interest on any bond, debenture, note, or certificate, or other 
evidence of indebtedness, issued with interest coupons or in registered 
form by any corporation (including one issued by a government or 
political subdivision thereof) is excluded unless such interest is 
received in the course of a trade or business as a dealer in stocks or 
securities. However, interest with respect to which a credit against tax 
is allowable as provided in section 35, that is, interest on certain 
obligations of the United States and its instrumentalities, is not 
included in net earnings from self-employment even though received in 
the course of a trade or business as a dealer in stocks or securities. 
Only interest on bonds, debentures, notes, or certificates, or other 
evidence of indebtedness, issued with interest coupons or in registered 
form by a corporation, is excluded in the case of all persons other than 
dealers in stocks or securities; other interest received in the course 
of any trade or business (such as interest received by a pawnbroker on 
his loans or interest received by a merchant on his accounts or notes 
receivable) is not excluded.
    (c) Dividends and interest of the character excludable under 
paragraphs (a) and (b) of this section received by an individual on 
stocks or securities held for speculation or investment are excluded 
whether or not the individual is a dealer in stocks or securities.
    (d) A dealer in stocks or securities is a merchant of stocks or 
securities with an established place of business, regularly engaged in 
the business of purchasing stocks or securities and reselling them to 
customers; that is, he is one who as a merchant buys stocks or 
securities and sells them to customers with a view to the gains and 
profits that may be derived therefrom. Persons who buy and sell or hold 
stocks or securities for investment or speculation, irrespective of 
whether such buying or selling constitutes the carrying on of a trade or 
business, are not dealers in stocks or securities.

[[Page 27]]



Sec. 1.1402(a)-6   Gain or loss from disposition of property.

    (a) There is excluded any gain or loss: (1) Which is considered as 
gain or loss from the sale or exchange of a capital asset; (2) from the 
cutting of timber or the disposal of timber, coal, or iron ore, even 
though held primarily for sale to customers, if section 631 is 
applicable to such gain or loss; and (3) from the sale, exchange, 
involuntary conversion, or other disposition of property if such 
property is neither (i) stock in trade or other property of a kind which 
would properly be includible in inventory if on hand at the close of the 
taxable year, nor (ii) property held primarily for sale to customers in 
the ordinary course of a trade or business. For the purpose of the 
special rule in subparagraph (3) of this paragraph, it is immaterial 
whether a gain or loss is treated as a capital gain or loss or as an 
ordinary gain or loss for purposes other than determining net earnings 
from self-employment. For instance, where the character of a loss is 
governed by the provisions of section 1231, such loss is excluded in 
determining net earnings from self-employment even though such loss is 
treated under section 1231 as an ordinary loss. For the purposes of this 
special rule, the term ``involuntary conversion'' means a compulsory or 
involuntary conversion of property into other property or money as a 
result of its destruction in whole or in part, theft or seizure, or an 
exercise of the power of requisition or condemnation or the threat or 
imminence thereof; and the term ``other dispostion'' includes the 
destruction or loss, in whole or in part, of property by fire, storm, 
shipwreck, or other casualty, or by theft, even though there is no 
conversion of such property into other property or money.
    (b) The application of this section may be illustrated by the 
following example:

    Example. During the taxable year 1954, A, who owns a grocery store, 
realized a net profit of $1,500 from the sale of groceries and a gain of 
$350 from the sale of a refrigerator case. During the same year, he 
sustained a loss of $2,000 as a result of damage by fire to the store 
building. In computing taxable income, all of these items are taken into 
account. In determining net earnings from self-employment, however, only 
the $1,500 of profit derived from the sale of groceries is included. The 
$350 gain and the $2,000 loss are excluded.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6841, 30 FR 
9309, July 27, 1965]



Sec. 1.1402(a)-7   Net operating loss deduction.

    The deduction provided by section 172, relating to net operating 
losses sustained in years other than the taxable year, is excluded.



Sec. 1.1402(a)-8   Community income.

    (a) In case of an individual. If any of the income derived by an 
individual from a trade or business (other than a trade or business 
carried on by a partnership) is community income under community 
property laws applicable to such income, all of the gross income, and 
the deductions attributable to such income, shall be treated as the 
gross income and deductions of the husband unless the wife exercises 
substantially all of the management and control of such trade or 
business, in which case all of such gross income and deductions shall be 
treated as the gross income and deductions of the wife. For the purpose 
of this special rule, the term ``management and control'' means 
management and control in fact, not the management and control imputed 
to the husband under the community property laws. For example, a wife 
who operates a beauty parlor without any appreciable collaboration on 
the part of her husband will be considered as having substantially all 
of the management and control of such business despite the provision of 
any community property law vesting in the husband the right of 
management and control of community property; and the income and 
deductions attributable to the operation of such beauty parlor will be 
considered the income and deductions of the wife.
    (b) In case of a partnership. Even though a portion of a partner's 
distributive share of the income or loss, described in section 
702(a)(9), from a trade or business carried on by a partnership is 
community income or loss under the community property laws applicable to 
such share, all of such distributive share shall be included in

[[Page 28]]

computing the net earnings from self-employment of such partner; no part 
of such share shall be taken into account in computing the net earnings 
from self-employment of the spouse of such partner. In any case in which 
both spouses are members of the same partnership, the distributive share 
of the income or loss of each spouse is included in computing the net 
earnings from self-employment of that spouse.



Sec. 1.1402(a)-9   Puerto Rico.

    (a) Residents. A resident of Puerto Rico, whether or not a bona fide 
resident thereof during the entire taxable year, and whether or not an 
alien, a citizen of the United States, or a citizen of Puerto Rico, 
shall compute his net earnings from self-employment in the same manner 
as would a citizen of the United States residing in the United States. 
See paragraph (d) of Sec. 1.1402(b)-1 for regulations relating to 
nonresident aliens. For the purpose of the tax on self-employment 
income, the gross income of such a resident of Puerto Rico also includes 
income from Puerto Rican sources. Thus, under this special rule, income 
from Puerto Rican sources will be included in determining net earnings 
from self-employment of a resident of Puerto Rico engaged in the active 
conduct of a trade or business in Puerto Rico despite the fact that, 
under section 933, such income may not be taken into account for 
purposes of the tax under section 1 or 3.
    (b) Nonresidents. A citizen of Puerto Rico who is also a citizen of 
the United States and who is not a resident of Puerto Rico will compute 
his net earnings from self-employment in the same manner and subject to 
the same provisions of law and regulations as other citizens of the 
United States.



Sec. 1.1402(a)-10   Personal exemption deduction.

    The deduction provided by section 151, relating to personal 
exemptions, is excluded.



Sec. 1.1402(a)-11   Ministers and members of religious orders.

    (a) In general. For each taxable year ending after 1954 in which a 
minister or member of a religious order is engaged in a trade or 
business, within the meaning of section 1402(c) and Sec. 1.1402(c)-5, 
with respect to service performed in the exercise of his ministry or in 
the exercise of duties required by such order, net earnings from self-
employment from such trade or business include the gross income derived 
during the taxable year from any such service, less the deductions 
attributable to such gross income. For each taxable year ending on or 
after December 31, 1957, such minister or member of a religious order 
shall compute his net earnings from self-employment derived from the 
performance of such service without regard to the exclusions from gross 
income provided by section 107 (relating to rental value of parsonages) 
and section 119 (relating to meals and lodging furnished for the 
convenience of the employer). Thus, a minister who is subject to self-
employment tax with respect to his services as a minister will include 
in the computation of his net earnings from self-employment for a 
taxable year ending on or after December 31, 1957, the rental value of a 
home furnished to him as remuneration for services performed in the 
exercise of his ministry or the rental allowance paid to him as 
remuneration for such services irrespective of whether such rental value 
or rental allowance is excluded from gross income by section 107. 
Similarly, the value of any meals or lodging furnished to a minister or 
to a member of a religious order in connection with service performed in 
the exercise of his ministry or as a member of such order will be 
included in the computation of his net earnings from self-employment for 
a taxable year ending on or after December 31, 1957, notwithstanding the 
exclusion of such value from gross income by section 119.
    (b) In employ of American employer. If a minister or member of a 
religious order engaged in a trade or business described in section 
1402(c) and Sec. 1.1402(c)-5 is a citizen of the United States and 
performs service, in his capacity as a minister or member of a religious 
order, as an employee of an American employer, as defined in section 
3121(h) and the regulations thereunder in Part 31 of this chapter 
(Employment Tax Regulations), his net earnings from self-employment 
derived from such service shall be computed as provided

[[Page 29]]

in paragraph (a) of this section but without regard to the exclusions 
from gross income provided in section 911, relating to earned income 
from sources without the United States, and section 931, relating to 
income from sources within possessions of the United States. Thus, even 
though all the income of the minister or member for service of the 
character to which this paragraph is applicable was derived from sources 
without the United States, or from sources within possessions of the 
United States, and therefore may be excluded from gross income, such 
income is included in computing net earnings from self-employment.
    (c) Minister in a foreign country whose congregation is composed 
predominantly of citizens of the United States--(1) Taxable years ending 
after 1956. For any taxable year ending after 1956, a minister of a 
church, who is engaged in a trade or business within the meaning of 
section 1402(c) and Sec. 1.1402(c)-5, is a citizen of the United States, 
is performing service in the exercise of his ministry in a foreign 
country, and has a congregation composed predominantly of United States 
citizens, shall compute his net earnings from self-employment derived 
from his services as a minister for such taxable year without regard to 
the exclusion from gross income provided in section 911, relating to 
earned income from sources without the United States. For taxable years 
ending on or after December 31, 1957, such minister shall also disregard 
sections 107 and 119 in the computation of his net earnings from self-
employment. (See paragraph (a) of this section.) For purposes of section 
1402(a)(8) and this paragraph a ``congregation composed predominantly of 
citizens of the United States'' means a congregation the majority of 
which throughout the greater portion of its minister's taxable year were 
United States citizens.
    (2) Election for taxable years ending after 1954 and before 1957. 
(i) A minister described in subparagraph (1) of this paragraph who, for 
a taxable year ending after 1954 and before 1957, had income from 
service described in such subparagraph which would have been included in 
computing net earnings from self-employment if such income had been 
derived in a taxable year ending after 1956 by an individual who had 
filed a waiver certificate under section 1402(e), may elect to have 
section 1402(a)(8) and subparagraph (1) of this paragraph apply to his 
income from such service for his taxable years ending after 1954 and 
before 1957. If such minister filed a waiver certificate prior to August 
1, 1956, in accordance with Sec. 1.1402(e)(1)-1, or he files such a 
waiver certificate on or before the due date of his return (including 
any extensions thereof) for his last taxable year ending before 1957, he 
must make such election on or before the due date of his return 
(including any extensions thereof) for such taxable year or before April 
16, 1957, whichever is the later. If the waiver certificate is not so 
filed, the minister must make his election on or before the due date of 
the return (including any extensions thereof) for his first taxable year 
ending after 1956. Notwithstanding the expiration of the period 
prescribed by section 1402(e)(2) for filing such waiver, the minister 
may file a waiver certificate at the time he makes the election. In no 
event shall an election be valid unless the minister files prior to or 
at the time of the election a waiver certificate in accordance with 
Sec. 1.1402(e)(1)-1.
    (ii) The election shall be made by filing with the district director 
of internal revenue with whom the waiver certificate, Form 2031, is 
filed a written statement indicating that, by reason of the Social 
Security Amendments of 1956, the minister desires to have the Federal 
old-age, survivors, and disability insurance system established by title 
II of the Social Security Act extended to his services performed in a 
foreign country as a minister of a congregation composed predominantly 
of United States citizens beginning with the first taxable year ending 
after 1954 and prior to 1957 for which he had income from such services. 
The statement shall be dated and signed by the minister and shall 
clearly state that it is an election for retroactive self-employment tax 
coverage under the Self-Employment Contributions Act of 1954. In 
addition, the statement shall include the following information:
    (a) The name and address of the minister.

[[Page 30]]

    (b) His social security account number, if he has one.
    (c) That he is a duly ordained, commissioned, or licensed minister 
of a church.
    (d) That he is a citizen of the United States.
    (e) That he is performing services in the exercise of his ministry 
in a foreign country.
    (f) That his congregation is composed predominantly of citizens of 
the United States.
    (g)(1) That he has filed a waiver certificate and, if so, where and 
under what circumstances the certificate was filed and the taxable year 
for which it is effective; or (2) that he is filing a waiver certificate 
with his election for retroactive coverage and, if so, the taxable year 
for which it is effective.
    (h) That he has or has not filed income tax returns for his taxable 
years ending after 1954 and before 1957. If he has filed such returns, 
he shall state the years for which they were filed and indicate the 
district director of internal revenue with whom they were filed.
    (iii) Notwithstanding section 1402(e)(3), a waiver certificate filed 
pursuant to Sec. 1.1402(e)(1)-1 by a minister making an election under 
this paragraph shall be effective (regardless of when such certificate 
is filed) for such minister's first taxable year ending after 1954 in 
which he had income from service described in subparagraph (1) of this 
paragraph or for the taxable year of the minister prescribed by section 
1402(e)(3), if such taxable year is earlier, and for all succeeding 
taxable years.
    (iv) No interest or penalty shall be assessed or collected for 
failure to file a return within the time prescribed by law if such 
failure arises solely by reason of an election made by a minister 
pursuant to this paragraph or for any underpayment of self-employment 
income tax arising solely by reason of such election, for the period 
ending with the date such minister makes an election pursuant to this 
paragraph.
    (d) Treatment of certain remuneration paid in 1955 and 1956 as 
wages. For treatment of remuneration paid to an individual for service 
described in section 3121(b)(8)(A) which was erroneously treated by the 
organization employing him as employment with-in the meaning of chapter 
21 of the Internal Revenue Code, see Sec. 1.1402(e)(4)-1.



Sec. 1.1402(a)-12   Possession of the United States.

    For purposes of the tax on self-employment income, the term 
``possession of the United States,'' as used in section 931 (relating to 
income from sources within possessions of the United States) and section 
932 (relating to citizens of possessions of the United States) shall be 
deemed not to include the Virgin Islands, Guam, or American Samoa. The 
provisions of section 1402(a)(9) and of this section insofar as they 
involve nonapplication of sections 931 and 932 to Guam or American 
Samoa, shall apply only in the case of taxable years beginning after 
1960. For definition of the term ``United States'' and for other 
geographical definitions relating to the Continental Shelf see section 
638 and Sec. 1.638-1.

[T.D. 7277, 38 FR 12742, May 15, 1973]



Sec. 1.1402(a)-13   Income from agricultural activity.

    (a) Agricultural trade or business. (1) An agricultural trade or 
business is one in which, if the trade or business were carried on 
exclusively by employees, the major portion of the services would 
constitute agricultural labor as defined in section 3121(g) and the 
regulations thereunder in part 31 of this chapter (Employment Tax 
Regulations). In case the services are in part agricultural and in part 
nonagricultural, the time devoted to the performance of each type of 
service is the test to be used to determine whether the major portion of 
the services would constitute agricultural labor. If more than half of 
the time spent in performing all the services is spent in performing 
services which would constitute agricultural labor under section 
3121(g), the trade or business is agricultural. If only half, or less, 
of the time spent in performing all the services is spent in performing 
services which would constitute agricultural labor under section 
3121(g), the trade or business is not agricultural. In every case the 
time spent in performing the services will be computed by adding the 
time spent in the trade or business during the taxable year by

[[Page 31]]

every individual (including the individual carrying on such trade or 
business and the members of his family) in performing such services. The 
operation of this special rule is not affected by section 3121(c), 
relating to the included-excluded rule for determining employment.
    (2) The rules prescribed in subparagraph (1) of this paragraph have 
no application where the nonagricultural services are performed in 
connection with an enterprise which constitutes a trade or business 
separate and distinct from the trade or business conducted as an 
agricultural enterprise. Thus, the operation of a roadside automobile 
service station on farm premises constitutes a trade or business 
separate and distinct from the agricultural enterprise, and the gross 
income derived from such service station, less the deductions 
attributable thereto, is to be taken into account in determining net 
earnings from self-employment.
    (b) Farm operator's income for taxable years ending before 1955. 
Income derived in a taxable year ending before 1955 from any 
agricultural trade or business (see paragraph (a) of this section), and 
all deductions attributable to such income, are excluded in computing 
net earnings from self-employment.
    (c) Farm operator's income for taxable years ending after 1954. 
Income derived in a taxable year ending after 1954 from an agricultural 
trade or business (see paragraph (a) of this section) is includible in 
computing net earnings from self-employment. Income derived from an 
agricultural trade or business includes income derived by an individual 
under an agreement entered into by such individual with another person 
pursuant to which such individual undertakes to produce agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on land owned or leased by such other 
person and pursuant to which the agricultural or horticultural 
commodities produced by such individual, or the proceeds therefrom, are 
to be divided between such individual and such other person, and the 
amount of such individual's share depends on the amount of the 
agricultural or horticultural commodities produced. However, except as 
provided in paragraph (d) of this section, relating to arrangements 
involving material participation, the income derived under such an 
agreement by the owner or lessee of the land is not includible in 
computing net earnings from self-employment. See Sec. 1.1402(a)-4. For 
options relating to the computation of net earnings from self-
employment, see Secs. 1.1402(a)-14 and 1.1402(a)-15.
    (d) Includible farm rental income for taxable years ending after 
1955. For taxable years ending after 1955, income derived from an 
agricultural trade or business (see paragraph (a) of this section) 
includes also income derived by the owner or tenant of land under an 
arrangement between such owner or tenant and another person, if such 
arrangement provides that such other person shall produce agricultural 
or horticultural commodities (including livestock, bees, poultry, and 
fur-bearing animals and wildlife) on such land, and that there shall be 
material participation by the owner or tenant in the production or the 
management of the production of such agricultural or horticultural 
commodities, and if there is material participation by the owner or 
tenant with respect to any such agricultural or horticultural commodity. 
See paragraph (b) of Sec. 1.1402(a)-4. For options relating to the 
computation of net earnings from self-employment, see Secs. 1.1402(a)-14 
and 1.1402(a)-15.
    (e) Income from service performed after 1956 as a crew leader. 
Income derived by a crew leader (see section 3121(o) and the regulations 
thereunder in Part 31 of this chapter (Employment Tax Regulations)) from 
service performed after 1956 in furnishing individuals to perform 
agricultural labor for another person and from service performed after 
1956 in agricultural labor as a member of the crew is considered to be 
income derived from a trade or business for purposes of Sec. 1.1402(c)-
1. Whether such trade or business is an agricultural trade or business 
shall be determined by applying the rules set forth in this section.

[[Page 32]]



Sec. 1.1402(a)-14   Options available to farmers in computing net earnings from self-employment for taxable years ending after 1954 and before December 31, 
          1956.

    (a) Computation of net earnings. In the case of any trade or 
business which is carried on by an individual who reports his income on 
the cash receipts and disbursements method, and in which, if it were 
carried on exclusively by employees, the major portion of the services 
would constitute agricultural labor as defined in section 3121(g) (see 
paragraph (a) of Sec. 1.1402(a)-13), net earnings from self-employment 
may, for a taxable year ending after 1954, at the option of the 
taxpayer, be computed as follows:
    (1) Gross income $1,800 or less. If the gross income, computed as 
provided in paragraph (b) of this section, from such trade or business 
is $1,800 or less, the taxpayer may, at his option, treat as net 
earnings from self-employment from such trade or business an amount 
equal to 50 percent of such gross income. If the taxpayer so elects, the 
amount equal to 50 percent of such gross income shall be used in 
computing his self-employment income in lieu of his actual net earnings 
from such trade or business, if any.
    (2) Gross income in excess of $1,800. If the gross income, computed 
as provided in paragraph (b) of this section, from such trade or 
business is more than $1,800, and the actual net earnings from self-
employment from such trade or business are less than $900, the taxpayer 
may, at his option, treat $900 as net earnings from self-employment. If 
the taxpayer so elects, $900 shall be used in computing his self-
employment income in lieu of his actual net earnings from such trade or 
business, if any. However, if the taxpayer's actual net earnings from 
such trade or business, as computed in accordance with Secs. 1.1402(a)-1 
through 1.1402(a)-3 are $900 or more, such actual net earnings shall be 
used in computing his self-employment income.
    (b) Computation of gross income. For purposes of paragraph (a) of 
this section, gross income shall consist of the gross receipts from such 
trade or business reduced by the cost or other basis of property which 
was purchased and sold in carrying on such trade or business, adjusted 
(after such reduction) in accordance with the provisions of 
Sec. 1.1402(a)-3, relating to income and deductions not included in 
computing net earnings from self-employment.
    (c) Two or more agricultural activities. If an individual is engaged 
in more than one agricultural trade or business within the meaning of 
paragraph (a) of Sec. 1.1402(a)-13 (for example, the business of 
ordinary farming and the business of cotton ginning), the gross income 
derived from each agricultural trade or business shall be aggregated for 
purposes of the optional method provided in paragraph (a) of this 
section for computing net earnings from self-employment.
    (d) Examples. Application of the regulations prescribed in 
paragraphs (a) and (b) of this section may be illustrated by the 
following examples:

    Example (1). F, a farmer, uses the cash receipts and disbursements 
method of accounting in making his income tax returns. F's books and 
records show that during the calendar year 1955 he received $1,200 from 
the sale of produce raised on the farm, $200 from the sale of livestock 
raised on the farm and not held for breeding or dairy purposes, and $600 
from the sale of a tractor. The income from the sale of the tractor is 
of a type which is excluded from net earnings from self-employment by 
section 1402(a). F's actual net earnings from self-employment, computed 
in accordance with the provisions of Secs. 1.1402(a)-1 through 
1.1402(a)-3, are $450. F may report $450 as his net earnings from self-
employment or he may elect to report $700 (one-half of $1,400).
    Example (2). C, a cattleman, uses the cash receipts and 
disbursements method of accounting in making his income tax returns. C 
had actual net earnings from self-employment, computed in accordance 
with the provisions of Secs. 1.1402(a)-1 through 1.1402(a)-3, of $725. 
His gross receipts were $1,000 from the sale of produce raised on the 
farm and $1,200 from the sale of feeder cattle, which C bought for $500. 
The income from the sale of the feeder cattle is of a type which is 
included in computing net earnings from self-employment. Therefore, C 
may report $725 as his net earnings from self-employment or he may elect 
to report $850, one-half of $1,700 ($2,200 minus $500).
    Example (3). R, a rancher, has gross income of $3,000 from the 
operation of his ranch, computed as provided in paragraph (b) of this 
section. His actual net earnings from self-employment from farming 
activities are less

[[Page 33]]

than $900. R, nevertheless, may elect to report $900 as net earnings 
from self-employment from such trade or business. If R had actual net 
earnings from self-employment from his farming activities in the amount 
of $900 or more, he would be required to report such amount in computing 
his self-employment income.

    (e) Members of farm partnerships. The optional method provided by 
paragraph (a) of this section for computing net earnings from self-
employment is not available to a member of a partnership with respect to 
his distributive share of the income or loss from any trade or business 
carried on by any partnership of which he is a member.



Sec. 1.1402(a)-15   Options available to farmers in computing net earnings from self-employment for taxable years ending on or after December 31, 1956.

    (a) Computation of net earnings. In the case of any trade or 
business which is carried on by an individual or by a partnership and in 
which, if such trade or business were carried on exclusively by 
employees, the major portion of the services would constitute 
agricultural labor as defined in section 3121(g) (see paragraph (a) of 
Sec. 1.1402(a)-13), net earnings from self-employment may, for a taxable 
year ending on or after December 31, 1956, at the option of the 
taxpayer, be computed as follows:
    (1) In case of an individual--(i) Gross income of less than 
specified amount. If the gross income, computed as provided in paragraph 
(b) of this section, from such trade or business is $2,400 or less 
($1,800 or less for a taxable year ending on or after December 31, 1956, 
and beginning before January 1, 1966), the taxpayer may, at his option, 
treat as net earnings from self-employment from such trade or business 
an amount equal to 66\2/3\ percent of such gross income. If the taxpayer 
so elects, the amount equal to 66\2/3\ percent of such gross income 
shall be used in computing his self-employment income in lieu of his 
actual net earnings from such trade or business, if any.
    (ii) Gross income in excess of specified amount. If the gross 
income, computed as provided in paragraph (b) of this section, from such 
trade or business is more than $2,400 ($1,800 for a taxable year ending 
on or after December 31, 1956, and beginning before January 1, 1966), 
and the net earnings from self-employment from such trade or business 
(computed without regard to this section) are less than $1,600 ($1,200 
for a taxable year ending on or after December 31, 1956, and beginning 
before January 1, 1966), the taxpayer may, at his option, treat $1,600 
($1,200 for a taxable year ending on or after December 31, 1956, and 
beginning before January 1, 1966) as net earnings from self-employment. 
If the taxpayer so elects, $1,600 ($1,200 for a taxable year ending on 
or after December 31, 1956, and beginning before January 1, 1966) shall 
be used in computing his self-employment income in lieu of his actual 
net earnings from such trade or business, if any. However, if the 
taxpayer's actual net earnings from such trade or business, as computed 
in accordance with the applicable provisions of Secs. 1.1402(a)-1 to 
1.1402(a)-13, inclusive, are $1,600 or more ($1,200 or more for a 
taxable year ending on or after December 31, 1956, and beginning before 
January 1, 1966) such actual net earnings shall be used in computing his 
self-employment income.
    (2) In case of a member of a partnership--(i) Distributive share of 
gross income of less than specified amount. If a taxpayer's distributive 
share of the gross income of a partnership (as such gross income is 
computed under the provisions of paragraph (b) of this section) derived 
from such trade or business (after such gross income has been reduced by 
the sum of all payments to which section 707(c) applies) is $2,400 or 
less ($1,800 or less for a taxable year ending on or after December 31, 
1956, and beginning before January 1, 1966), the taxpayer may, at his 
option, treat as his distributive share of income described in section 
702(a)(9) derived from such trade or business an amount equal to 66\2/3\ 
percent of his distributive share of such gross income (after such gross 
income has been reduced by the sum of all payments to which section 
707(c) applies). If the taxpayer so elects, the amount equal to 66\2/3\ 
percent of his distributive share of such gross income shall be used by 
him in the computation of his net earnings from self-employment in lieu 
of the actual amount

[[Page 34]]

of his distributive share of income described in section 702(a)(9) from 
such trade or business, if any.
    (ii) Distributive share of gross income in excess of specified 
amount. If a taxpayer's distributive share of the gross income of the 
partnership (as such gross income is computed under the provisions of 
paragraph (b) of this section) derived from such trade or business 
(after such gross income has been reduced by the sum of all payments to 
which section 707(c) applies) is more than $2,400 ($1,800 for a taxable 
year ending on or after December 31, 1956, and beginning before January 
1, 1966) and the actual amount of his distributive share (whether or not 
distributed) of income described in section 702(a)(9) derived from such 
trade or business (computed without regard to this section) is less than 
$1,600 ($1,200 for a taxable year ending on or after December 31, 1956, 
and beginning before January 1, 1966), the taxpayer may, at his option, 
treat $1,600 ($1,200 for a taxable year ending on or after December 31, 
1956, and beginning before January 1, 1966) as his distributive share of 
income described in section 702(a)(9) derived from such trade or 
business. If the taxpayer so elects, $1,600 ($1,200 for a taxable year 
ending on or after December 31, 1956, and beginning before January 1, 
1966) shall be used by him in the computation of his net earnings from 
self-employment in lieu of the actual amount of his distributive share 
of income described in section 702(a)(9) from such trade or business, if 
any. However, if the actual amount of the taxpayer's distributive share 
of income described in section 702(a)(9) from such trade or business, as 
computed in accordance with the applicable provisions of 
Secs. 1.1402(a)-1 to 1.1402(a)-13, inclusive, is $1,600 or more ($1,200 
or more for a taxable year ending on or after December 31, 1956, and 
beginning before January 1, 1966), such actual amount of the taxpayer's 
distributive share shall be used in computing his net earnings from 
self-employment.
    (iii) Cross reference. For a special rule in the case of certain 
deceased partners, see paragraph (c) of Sec. 1.1402(f)-1.
    (b) Computation of gross income. For purposes of this section gross 
income has the following meanings:
    (1) In the case of any such trade or business in which the income is 
computed under a cash receipts and disbursements method, the gross 
receipts from such trade or business reduced by the cost or other basis 
of property which was purchased and sold in carrying on such trade or 
business (see paragraphs (a) and (c), other than paragraph (a)(5), of 
Sec. 1.61-4), adjusted (after such reduction) in accordance with the 
applicable provisions of Secs. 1.1402(a)-3 to 1.1402(a)-13, inclusive.
    (2) In the case of any such trade or business in which the income is 
computed under an accrual method (see paragraphs (b) and (c), other than 
paragraph (b)(5), of Sec. 1.61-4), the gross income from such trade or 
business, adjusted in accordance with the applicable provisions of 
Secs. 1.1402(a)-3 to 1.1402(a)-13, inclusive.
    (c) Two or more agricultural activities. If an individual (including 
a member of a partnership) derives gross income (as defined in paragraph 
(b) of this section) from more than one agricultural trade or business, 
such gross income (including his distributive share of the gross income 
of any partnership derived from any such trade or business) shall be 
deemed to have been derived from one trade or business. Thus, such an 
individual shall aggregate his gross income derived from each 
agricultural trade or business carried on by him (which includes, under 
paragraph (b) of Sec. 1.1402(a)-1, any guaranteed payment, within the 
meaning of section 707(c), received by him from a farm partnership of 
which he is a member) and his distributive share of partnership gross 
income (after such gross income has been reduced by any guaranteed 
payment within the meaning of section 707(c)) derived from each farm 
partnership of which he is a member. Such gross income is the amount to 
be considered for purposes of the optional method provided in this 
section for computing net earnings from self-employment. If the 
aggregate gross income of an individual includes income derived from an 
agricultural trade or business carried on by him and a distributive 
share of partnership income derived from an agricultural trade or 
business carried on by a partnership of which he is a member, such 
aggregate

[[Page 35]]

gross income shall be treated as income derived from a single trade or 
business carried on by him, and such individual shall apply the optional 
method applicable to individuals set forth in paragraph (a)(1) of this 
section for purposes of computing his net earnings from self-employment.
    (d) Examples. The application of this section may be illustrated by 
the following examples:

    Example (1). F is engaged in the business of farming and computes 
his income under the cash receipts and disbursements method. He files 
his income tax returns on the basis of the calendar year. During the 
year 1966, F's gross income from the business of farming (computed in 
accordance with paragraph (b) (1) of this section) is $2,325. His actual 
net earnings from self-employment derived from such business are $1,250. 
As his net earnings from self-employment, F may report $1,250 or, by the 
optional computation method, he may report $1,550 (66\2/3\ percent of 
$2,325).
    Example (2). G is engaged in the business of farming and computes 
his income under the accrual method. His income tax returns are filed on 
the calendar year basis. For the year 1966, G's gross income from the 
operation of his farm (computed in accordance with paragraph (b)(2) of 
this section) is $2,800. He has actual net earnings from self-employment 
derived from such farm in the amount of $1,250. As his net earnings from 
self-employment derived from his farm, G may report his actual net 
earnings of $1,250, or by the optional method he may report $1,600. If 
G's actual net earnings from self-employment from his farming activities 
for 1966 were in an amount of $1,600 or more, he would be required to 
report such amount in computing his self-employment income.
    Example (3). M, who files his income tax returns on a calendar year 
basis, is one of the three partners of the XYZ Company, a partnership, 
engaged in the business of farming. The taxable year of the partnership 
is the calendar year, and its income is computed under the cash receipts 
and disbursements method. For M's services in connection with the 
planting, cultivating, and harvesting of the crops during the year 1966 
the partnership agrees to pay him $500, the full amount of which is 
determined without regard to the income of the partnership and 
constitutes a guaranteed payment within the meaning of section 707(c). 
This guaranteed payment to M is the only such payment made during such 
year. The gross income derived from the business for the year 1966 
computed in accordance with paragraph (b)(1) of this section and after 
being reduced by the guaranteed payment of $500 made to M, is $3,000. 
One-third of the $3,000 ($1,000), is M's distributive share of such 
gross income. Under paragraph (c) of this section, the guaranteed 
payment ($500) received by M and his distributive share of the 
partnership gross income ($1,000) are deemed to have been derived from 
one trade or business, and such amounts must be aggregated for purposes 
of the optional method of computing net earnings from self-employment. 
Since M's combined gross income from his two agricultural businesses 
($1,000 and $500) is not more than $2,400 and since such income is 
deemed to be derived from one trade or business, M's net earnings from 
self-employment derived from such farming business may, at his option, 
be deemed to be $1,000 (66\2/3\ percent of $1,500).
    Example (4). A is one of the two partners of the AB partnership 
which is engaged in the business of farming. The taxable year of the 
partnership is the calendar year and its income is computed under the 
accrual method. A files his income tax returns on the calendar year 
basis. The partnership agreement provides for an equal sharing in the 
profits and losses of the partnership by the two partners. A is an 
experienced farmer and for his services as manager of the partnership's 
farm activities during the year 1966 he receives $6,000 which amount 
constitutes a guaranteed payment within the meaning of section 707(c). 
The gross income of the partnership derived from such business for the 
year 1966, computed in accordance with paragraph (b)(2) of this section 
and after being reduced by the guaranteed payment made to A, is $9,600. 
A's distributive share of such gross income is $4,800 and his 
distributive share of income described in section 702(a)(9) derived from 
the partnership's business is $1,900. Under paragraph (c) of this 
section, the guaranteed payment received by A and his distributive share 
of the partnership gross income are deemed to have been derived from one 
trade or business, and such amounts must be aggregated for purposes of 
the optional method of computing his net earnings from self-employment. 
Since the aggregate of A's guaranteed payment ($6,000) and his 
distributive share of partnership gross income ($4,800) is more than 
$2,400 and since the aggregate of A's guaranteed payment ($6,000) and 
his distributive share ($1,900) of partnership income described in 
section 702(a)(9) is not less than $1,600, the optional method of 
computing net earnings from self-employment is not available to A.
    Example (5). F is a member of the EFG partnership which is engaged 
in the business of farming. F files his income tax returns on the 
calendar year basis. The taxable year of the partnership is the calendar 
year, and its income is computed under a cash receipts and disbursements 
method. Under the partnership agreement the partners are to share 
equally the profits or losses of the business. The gross income derived 
from the partnership business for the year 1966, computed in

[[Page 36]]

accordance with paragraph (b)(1) of this section is $7,500. F's share of 
such gross income is $2,500. Due to drought and an epidemic among the 
livestock, the partnership sustains a net loss of $7,800 for the year 
1966 of which loss F's share is $2,600. Since F's distributive share of 
gross income derived from such business is in excess of $2,400 and since 
F does not receive income described in section 702(a)(9) of $1,600 or 
more from such business, he may, at his option, be deemed to have 
received $1,600 as his distributive share of income described in section 
702(a)(9) from such business.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6993, 34 FR 
828, Jan. 18, 1969]



Sec. 1.1402(a)-16   Exercise of option.

    A taxpayer shall, for each taxable year with respect to which he is 
eligible to use the optional method described in Sec. 1.1402(a)-14 or 
Sec. 1.1402(a)-15, make a determination as to whether his net earnings 
from self-employment are to be computed in accordance with such method. 
If the taxpayer elects the optional method for a taxable year, he shall 
signify such election by computing net earnings from self-employment 
under the optional method as set forth in Schedule F (Form 1040) of the 
income tax return filed by the taxpayer for such taxable year. If the 
optional method is not elected at the time of the filing of the return 
for a taxable year with respect to which the taxpayer is eligible to 
elect such optional method, such method may be elected on an amended 
return (or on such other form as may be prescribed for such use) filed 
within the period prescribed by section 6501 and the regulations 
thereunder for the assessment of the tax for such taxable year. If the 
optional method is elected on a return for a taxable year, the taxpayer 
may revoke such election by filing an amended return (or such other form 
as may be prescribed for such use) for the taxable year within the 
period prescribed by section 6501 and the regulations thereunder for the 
assessment of the tax for such taxable year. If the taxpayer is deceased 
or unable to make an election, the person designated in section 6012(b) 
and the regulations thereunder may, within the period prescribed in this 
section elect the optional method for any taxable year with respect to 
which the taxpayer is eligible to use the optional method and revoke an 
election previously made by or for the taxpayer.



Sec. 1.1402(a)-17   Retirement payments to retired partners.

    (a) In general. There shall be excluded, in computing net earnings 
from self-employment for taxable years ending on or after December 31, 
1967, certain payments made on a periodic basis by a partnership, 
pursuant to a written plan of the partnership, to a retired partner on 
account of his retirement. The exclusion applies only if the payments 
are made pursuant to a plan which meets the requirements prescribed in 
paragraph (b) of this section, and, in addition, the conditions set 
forth in paragraph (c) of this section are met.
    (b) Retirement plan of partnership. (1) To meet the requirements of 
section 1402(a)(10), the written plan of the partnership must set forth 
the terms and conditions of the program or system established by the 
partnership for the purpose of making payments to retired partners on 
account of their retirement. To qualify as payments on account of 
retirement, the payments must constitute bona fide retirement income. 
Thus, payments of benefits not customarily included in a pension or 
retirement plan such as layoff benefits are not payments on account of 
retirement. Eligibility for retirement generally is established on the 
basis of age, physical condition, or a combination of age or physical 
condition and years of service. Generally, retirement benefits are 
measured by, and based on, such factors as years of service and 
compensation received. In determining whether the plan of the 
partnership provides for payments on account of retirement, factors, 
formulas, etc., reflected in public, and in broad based private, pension 
or retirement plans in prescribing eligibility requirements and in 
computing benefits may be taken into account.
    (2) The plan of the partnership must provide for payments on account 
of retirement:
    (i) To partners generally or to a class or classes of partners,
    (ii) On a periodic basis, and

[[Page 37]]

    (iii) Which continue at least until the partner's death.

For purposes of subdivision (i) of this subparagraph, a class of 
partners may, in an appropriate case, contain only one member. Payments 
are made on a periodic basis if made at regularly recurring intervals 
(usually monthly) not exceeding one year.
    (c) Conditions relating to exclusion--(1) In general. A payment made 
pursuant to a written plan of a partnership which meets the requirements 
of paragraph (b) of this section shall be excluded, in computing net 
earnings from self-employment, only if:
    (i) The retired partner to whom the payment is made rendered no 
service with respect to any trade or business carried on by the 
partnership (or its successors) during the taxable year of the 
partnership (or its successors), which ends within or with the taxable 
year of the retired partner and in which the payment was received by 
him;
    (ii) No obligation (whether certain in amount or contingent on a 
subsequent event) exists (as of the close of the partnership's taxable 
year referred to in subdivision (i) of this subparagraph) from the other 
partners to the retired partner except with respect to retirement 
payments under the plan or rights such as benefits payable on account of 
sickness, accident, hospitalization, medical expenses, or death; and
    (iii) The retired partner's share (if any) of the capital of the 
partnership has been paid to him in full before the close of the 
partnership's taxable year referred to in subdivision (i) of this 
subparagraph.

By application of the conditions set forth in this subparagraph, either 
all payments on account of retirement received by a retired partner 
during the taxable year of the partnership ending within or with his 
taxable year are excluded or none of the payments are excluded. 
Subdivision (ii) of this subparagraph has application only to 
obligations from other partners in their capacity as partners as 
distinguished from an obligation which arose and exists from a 
transaction unrelated to the partnership or to a trade or business 
carried on by the partnership. The effect of the conditions set forth in 
subdivisions (ii) and (iii) of this subparagraph is that the exclusion 
may apply with respect to payments received by a retired partner during 
the taxable year of the partnership ending within or with his taxable 
year only if at the close of the partnership's taxable year the retired 
partner had no financial interest in the partnership except for the 
right to retirement payments.
    (2) Examples. The application of subparagraph (1) of this paragraph 
may be illustrated by the following examples. Each example assumes that 
the partnership plan pursuant to which the payments are made meets the 
requirements of paragraph (b) of this section.

    Example (1). A, who files his income tax returns on a calendar year 
basis, is a partner in the ABC partnership. The taxable year of the 
partnership is the period July 1 to June 30, inclusive. A retired from 
the partnership on January 1, 1973, and receives monthly payments on 
account of his retirement. As of June 30, 1973, no obligation existed 
from the other partners to A (except with respect to retirement payments 
under the plan) and A's share of the capital of the partnership had been 
paid to him in full. The monthly retirement payments received by A from 
the partnership in his taxable year ending on December 31, 1973, are not 
excluded from net earnings from self-employment since A rendered service 
to the partnership during a portion of the partnership's taxable year 
(July 1, 1972, through June 30, 1973) which ends within A's taxable year 
ending on December 31, 1973.
    Example (2). D, a partner in the DEF partnership, retired from the 
partnership as of the close of December 31, 1972. The taxable year of 
both D and the partnership is the calendar year. During the 
partnership's taxable year ending December 31, 1973, D rendered no 
service with respect to any trade or business carried on by the 
partnership. On or before December 31, 1973, all obligations (other than 
with respect to retirement payments under the plan) from the other 
partners to D have been liquidated, and D's share of the capital of the 
partnership has been paid to him. Retirement payments received by D 
pursuant to the partnership's plan in his taxable year ending December 
31, 1973, are excluded in determining his net earnings from self-
employment (if any) for that taxable year.
    Example (3). Assume the same facts as in example (2) except that as 
of the close of December 31, 1973, D has a right to a fixed percentage 
of any amounts collected by the partnership after that date which are 
attributable to services rendered by him prior to

[[Page 38]]

his retirement for clients of the partnership. The monthly payments 
received by D in his taxable year ending December 31, 1973, are not 
excluded from net earnings from self-employment since as of the close of 
the partnership's taxable year which ends with D's taxable year, an 
obligation (other than an obligation with respect to retirement 
payments) exists from the other partners to D.

[T.D. 7333, 39 FR 44446, Dec. 24, 1974]



Sec. 1.1402(b)-1   Self-employment income.

    (a) In general. Except for the exclusions in paragraphs (b) and (c) 
of this section and the exception in paragraph (d) of this section, the 
term ``self-employment income'' means the net earnings from self-
employment derived by an individual during a taxable year.
    (b) Maximum self-employment income--(1) General rule. Subject to the 
special rules described in subparagraph (2) of this paragraph, the 
maximum self-employment income of an individual for a taxable year 
(whether a period of 12 months or less) is:
    (i) For any taxable year beginning in a calendar year after 1974, an 
amount equal to the contribution and benefit base (as determined under 
section 230 of the Social Security Act) which is effective for such 
calendar year; and
    (ii) For any taxable year:
Ending before 1955................................................$3,600
Ending after 1954 and before 1959..................................4,200
Ending after 1958 and before 1966..................................4,800
Ending after 1965 and before 1968..................................6,600
Ending after 1967 and beginning before 1972........................7,800
Beginning after 1971 and before 1973...............................9,000
Beginning after 1972 and before 1974..............................10,800
Beginning after 1973 and before 1975..............................13,200
    (2) Special rules. (i) If an individual is paid wages as defined in 
subparagraph (3) of this paragraph in a taxable year, the maximum self-
employment income for such taxable year is computed as provided in 
subdivision (ii) or (iii) of this subparagraph.
    (ii) If an individual is paid wages as defined in subparagraph (3) 
(i) or (ii) of this paragraph in a taxable year, the maximum self-
employment income of such individual for such taxable year is the excess 
of the amounts indicated in subparagraph (1) of this paragraph over the 
amount of the wages, as defined in subparagraph (3) (i) and (ii) of this 
paragraph, paid to him during the taxable year. For example, if for his 
taxable year beginning in 1974, an individual has $15,000 of net 
earnings from self-employment and during such taxable year is paid 
$1,000 of wages as defined in section 3121(a) (see subparagraph (3)(i) 
of this paragraph), he has $12,200 ($13,200 -$1,000) of self-employment 
income for the taxable year.
    (iii) For taxable years ending on or after December 31, 1968, wages, 
as defined in subparagraph (3)(iii) of this paragraph, are taken into 
account in determining the maximum self-employment income of an 
individual for purposes of the tax imposed under section 1401(b) 
(hospital insurance), but not for purposes of the tax imposed under 
section 1401(a) (old-age survivors, and disability insurance). If an 
individual is paid wages as defined in subparagraph (3)(iii) of this 
paragraph in a taxable year, his maximum self-employment income for such 
taxable year for purposes of the tax imposed under section 1401(a) is 
computed under subparagraph (1) of this paragraph or subdivision (ii) of 
this subparagraph (whichever is applicable), and his maximum self-
employment income for such taxable year for purposes of the tax imposed 
under section 1401(b) is the excess of his section 1401(a) maximum self-
employment income over the amount of wages, as defined in subparagraph 
(3)(iii) of this paragraph, paid to him during the taxable year. For 
purposes of this subdivision, wages as defined in subparagraph (3)(iii) 
of this paragraph are deemed paid to an individual in the period with 
respect to which the payment is made, that is, the period in which the 
compensation was earned or deemed earned within the meaning of section 
3231(e). For an explanation of the term ``compensation'' and for 
provisions relating to when compensation is earned, see the regulations 
under section 3231(e) in part 31 of this chapter (Employment Tax 
Regulations). The application of the rules set forth in this subdivision 
may be illustrated by the following example:

    Example. M, a calendar-year taxpayer, has $15,000 of net earnings 
from self-employment for 1974 and during the taxable year is paid $1,000 
of wages as defined in section 3121(a) (see subparagraph (3)(i) of this 
paragraph) and $1,600 of compensation subject to tax under section 3201 
(see subparagraph (3)(iii) of this paragraph). Of the $1,600 of taxable

[[Page 39]]

compensation, $1,200 represents compensation for services rendered in 
1974 and the balance ($400) represents compensation which pursuant to 
the provisions of section 3231(e) is earned or deemed earned in 1973. 
M's maximum self-employment income for 1974 for purposes of the tax 
imposed under section 1401(a), computed as provided in subdivision (ii) 
of this subparagraph, is $12,200 ($13,200-$1,000), and for purposes of 
the tax imposed under section 1401(b) is $11,000 ($12,200-$1,200). 
However, M may recompute his maximum self-employment income for 1973 for 
purposes of the tax imposed under section 1401(b) by taking into account 
the $400 of compensation which is deemed paid in 1973.

    (3) Meaning of term ``wages''. For the purpose of the computation 
described in subparagraph (2) of this paragraph, the term ``wages'' 
includes:
    (i) Wages as defined in section 3121(a);
    (ii) Such remuneration paid to an employee for services covered by:
    (a) An agreement entered into pursuant to section 218 of the Social 
Security Act (42 U.S.C. 418), which section provides for extension of 
the Federal old-age, survivors and disability insurance system to State 
and local government employees under voluntary agreements between the 
States and the Secretary of Health, Education, and Welfare (Federal 
Security Administrator before April 11, 1953), or
    (b) An agreement entered into pursuant to the provisions of section 
3121(1), relating to coverage of citizens of the United States who are 
employees of foreign subsidiaries of domestic corporations,

as would be wages under section 3121(a) if such services constituted 
employment under section 3121(b). For an explanation of the term 
``wages'', see the regulations under section 3121(a) in part 31 of this 
chapter (Employment Tax Regulations); and
    (iii) Compensation, as defined in section 3231(e), which is subject 
to the employee tax imposed by section 3201 or the employee 
representative tax imposed by section 3211.
    (c) Minimum net earnings from self-employment. Self-employment 
income does not include the net earnings from self-employment of an 
individual when the amount of such earnings for the taxable year is less 
than $400. Thus, an individual having only $300 of net earnings from 
self-employment for the taxable year would not have any self-employment 
income. However, an individual having net earnings from self-employment 
of $400 or more for the taxable year may, by application of paragraph 
(b)(2) of this section, have less than $400 of self-employment income 
for purposes of the tax imposed under section 1401(a) and the tax 
imposed under section 1401(b) or may have self-employment income of $400 
or more for purposes of the tax imposed under section 1401(a) and of 
less than $400 for purposes of the tax imposed under section 1401(b). 
This could occur in a case in which the amount of the individual's net 
earnings from self-employment is $400 or more for a taxable year and the 
amount of such net earnings from self-employment plus the amount of 
wages, as defined in paragraph (b)(3) of this section, paid to him 
during the taxable year exceed the maximum self-employment income, as 
set forth in paragraph (b)(1) of this section, for the taxable year. 
However, the result occurs only if such maximum self-employment income 
exceeds the amount of such wages. The application of this paragraph may 
be illustrated by the following example:

    Example. For 1974 M, a calendar-year taxpayer, has net earnings from 
self-employment of $2,000 and wages (as defined in paragraph (b)(3) (i) 
and (ii) of this section) of $12,500. Since M's net earnings from self-
employment plus his wages exceed the maximum self-employment income for 
1974 ($13,200), his self-employment income for 1974 is $700 
($13,200-$12,500). If M also had wages, as defined in paragraph 
(b)(3)(iii) of this section, of $200, his self-employment income would 
be $700 for purposes of the tax imposed under section 1401(a) and $500 
($13,200-$12,700 ($12,500+$200)) for purposes of the tax imposed under 
section 1401(b).

For provisions relating to when wages as defined in paragraph 
(b)(3)(iii) of this section are treated as paid, see paragraph 
(b)(2)(iii) of this section.
    (d) Nonresident aliens. A nonresident alien individual never has 
self-employment income. While a nonresident alien individual who derives 
income from a trade or business carried on within the United States, 
Puerto Rico, the Virgin Islands, Guam, or American

[[Page 40]]

Samoa (whether by agents or employees, or by a partnership of which he 
is a member) may be subject to the applicable income tax provisions on 
such income, such nonresident alien individual will not be subject to 
the tax on self-employment income, since any net earnings which he may 
have from self-employment do not constitute self-employment income. For 
the purpose of the tax on self-employment income, an individual who is 
not a citizen of the United States but who is a resident of the 
Commonwealth of Puerto Rico, the Virgin Islands, or, for taxable years 
beginning after 1960, of Guam or American Samoa is not considered to be 
a nonresident alien individual.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR 
44447, Dec. 24, 1974]



Sec. 1.1402(c)-1   Trade or business.

    In order for an individual to have net earnings from self-
employment, he must carry on a trade or business, either as an 
individual or as a member of a partnership. Except for the exclusions 
discussed in Secs. 1.1402(c)-2 to 1.1402(c)-7, inclusive, the term 
``trade or business'', for the purpose of the tax on self-employment 
income, shall have the same meaning as when used in section 162. An 
individual engaged in one of the excluded activities specified in such 
sections of the regulations may also be engaged in carrying on 
activities which constitute a trade or business for purposes of the tax 
on self-employment income. Whether or not he is also engaged in carrying 
on a trade or business will be dependent upon all of the facts and 
circumstances in the particular case. An individual who is a crew 
leader, as defined in section 3121(o) (see such section and the 
regulations thereunder in part 31 of this chapter (Employment Tax 
Regulations)), is considered to be engaged in carrying on a trade or 
business with respect to services performed by him after 1956 in 
furnishing individuals to perform agricultural labor for another person 
or services performed by him after 1956 as a member of the crew.

[T.D. 6978, 33 FR 15937, Oct. 30, 1968]



Sec. 1.1402(c)-2   Public office.

    (a) In general--(1) General rule. Except as otherwise provided in 
subparagraph (2) of this paragraph, the performance of the functions of 
a public office does not constitute a trade or business.
    (2) Fee basis public officials--(i) In general. If an individual 
receives fees after 1967 for the performance of the functions of a 
public office of a State or a political subdivision thereof for which he 
is compensated solely on a fee basis, and if the service performed in 
such office is eligible for (but is not made the subject of) an 
agreement between the State and the Secretary of Health, Education, and 
Welfare pursuant to section 218 of the Social Security Act to extend 
social security coverage thereto, the service for which such fees are 
received constitutes a trade or business within the meaning of section 
1402(c) and Sec. 1.1402(c)-1. If an individual performs service for a 
State or a political subdivision thereof in any period in more than one 
position, each position is treated separately for purposes of the 
preceding sentence. See also paragraph (f) of Sec. 1.1402(c)-3 relating 
to the performance of service by an individual as an employee of a State 
or a political subdivision thereof in a position compensated solely on a 
fee basis.
    (ii) Election with respect to fees received in 1968. (A) Any 
individual who in 1968 receives fees for service performed by him with 
respect to the functions of a public office of a State or a political 
subdivision thereof in any period in which the functions are performed 
in a position compensated solely on a fee basis may elect, if the 
performance of the service for which such fees are received constitutes 
a trade or business pursuant to the provisions of subdivision (i) of 
this subparagraph, to have such performance of service treated as 
excluded from the term ``trade or business'' for the purpose of the tax 
on self-employment income, pursuant to the provisions of section 
122(c)(2) of the Social Security Amendments of 1967 (as quoted in 
Sec. 1.1402(c)). Such election shall not be limited to service to which 
the fees received in 1968 are attributable but must also be applicable 
to service (if any) in subsequent years which, except for the election, 
would constitute a trade or business pursuant

[[Page 41]]

to the provisions of subdivision (i) of this subparagraph. An election 
made pursuant to the provisions of this subparagraph is irrevocable.
    (B) The election referred to in subdivision (ii)(A) of this 
subparagraph shall be made by filing a certificate of election of 
exemption (Form 4415) on or before the due date of the income tax return 
(see section 6072), including any extension thereof (see section 6081), 
for the taxable year of the individual making the election which begins 
in 1968. The certificate of election of exemption shall be filed with an 
internal revenue office in accordance with the instructions on the 
certificate.
    (b) Meaning of public office. The term ``public office'' includes 
any elective or appointive office of the United States or any possession 
thereof, of the District of Columbia, of a State or its political 
subdivisions, or a wholly-owned instrumentality of any one or more of 
the foregoing. For example, the President, the Vice President, a 
governor, a mayor, the Secretary of State, a member of Congress, a State 
representative, a county commissioner, a judge, a justice of the peace, 
a county or city attorney, a marshal, a sheriff, a constable, a 
registrar of deeds, or a notary public performs the functions of a 
public office. (However, the service of a notary public could not be 
made the subject of a section 218 agreement under the Social Security 
Act because notaries are not ``employees'' within the meaning of that 
section. Accordingly, such service does not constitute a trade or 
business.)

[T.D. 7333, 39 FR 44448, Dec. 24, 1974, as amended by T.D. 7372, 40 FR 
30945, July 24, 1975]



Sec. 1.1402(c)-3   Employees.

    (a) General rule. Generally, the performance of service by an 
individual as an employee, as defined in the Federal Insurance 
Contributions Act (Chapter 21 of the Internal Revenue Code) does not 
constitute a trade or business within the meaning of section 1402(c) and 
Sec. 1.1402(c)-1. However, in six cases set forth in paragraphs (b) to 
(g), inclusive, of this section, the performance of service by an 
individual is considered to constitute a trade or business within the 
meaning of section 1402(c) and Sec. 1.1402(c)-1. (As to when an 
individual is an employee, see section 3121 (d) and (o) and section 3506 
and the regulations under those sections in part 31 of this chapter 
(Employment Tax Regulations).)
    (b) Newspaper vendors. Service performed by an individual who has 
attained the age of 18 constitutes a trade or business for purposes of 
the tax on self-employment income within the meaning of section 1402(c) 
and Sec. 1.1402(c)-1 if performed in, and at the time of, the sale of 
newspapers or magazines to ultimate consumers, under an arrangement 
under which the newspapers or magazines are to be sold by him at a fixed 
price, his compensation being based on the retention of the excess of 
such price over the amount at which the newspapers or magazines are 
charged to him, whether or not he is guaranteed a minimum amount of 
compensation for such service, or is entitled to be credited with the 
unsold newspapers or magazines turned back.
    (c) Sharecroppers. Service performed by an individual under an 
arrangement with the owner or tenant of land pursuant to which:
    (1) Such individual undertakes to produce agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on such land,
    (2) The agricultural or horticultural commodities produced by such 
individual, or the proceeds therefrom, are to be divided between such 
individual and such owner or tenant, and
    (3) The amount of such individual's share depends on the amount of 
the agricultural or horticultural commodities produced, constitutes a 
trade or business within the meaning of section 1402(c) and 
Sec. 1.1402(c)-1.
    (d) Employees of foreign government, instrumentality wholly owned by 
foreign government, or international organization. Service performed in 
the United States, as defined in section 3121(e)(2) (see such section 
and the regulations thereunder in part 31 of this chapter (Employment 
Tax Regulations)), by an individual who is a citizen of the United 
States constitutes a trade or business within the meaning of section 
1402(c) and Sec. 1.1402(c)-1 if such service is

[[Page 42]]

excepted from employment, for purposes of the Federal Insurance 
Contributions Act (chapter 21 of the Code), by:
    (1) Section 3121(b)(11), relating to service in the employ of a 
foreign government (for regulations under section 3121(b)(11), see 
Sec. 31.3121(b)(11)-1 of this chapter);
    (2) Section 3121(b)(12), relating to service in the employ of an 
instrumentality wholly owned by a foreign government (for regulations 
under section 3121(b)(12), see Sec. 31.3121(b)(12)-1 of this chapter); 
or
    (3) Section 3121(b)(15), relating to service in the employ of an 
international organization (for regulations under section 3121(b)(15), 
see Sec. 31.3121(b)(15)-1 of this chapter).

This paragraph is applicable to service performed in any taxable year 
ending on or after December 31, 1960, except that it does not apply to 
service performed before 1961 in Guam or American Samoa.
    (e) Ministers and members of religious orders--(1) Taxable years 
ending before 1968. Service described in section 1402(c)(4) performed by 
an individual during taxable years ending before 1968 for which a 
certificate filed pursuant to section 1402(e) is in effect constitutes a 
trade or business within the meaning of section 1402(c) and 
Sec. 1.1402(c)-1. See also Sec. 1.1402(c)-5.
    (2) Taxable years ending after 1967. Service described in section 
1402(c)(4) performed by an individual during taxable years ending after 
1967 constitutes a trade or business within the meaning of section 
1402(c) and Sec. 1.1402(c)-1 unless an exemption under section 1402(e) 
(see Secs. 1.1402(e)-1A through 1.1402(e)-4A) is effective with respect 
to such individual for the taxable year during which the service is 
performed. See also Sec. 1.1402(c)-5.
    (f) State and local government employees compensated on fee basis--
(1) In general. (i) Section 1402(c)(2)(E) and this paragraph are 
applicable only with respect to fees received by an individual after 
1967 for service performed by him as an employee of a State or a 
political subdivision thereof in a position compensated solely on a fee 
basis. If an individual performs service for a State or a political 
subdivision thereof in more than one position, each position is treated 
separately for purposes of determining whether the service performed in 
such position is performed by an employee and whether compensation for 
service performed in the position is solely on a fee basis.
    (ii) If an individual receives fees after 1967 for service performed 
by him as an employee of a State or a political subdivision thereof in a 
position compensated solely on a fee basis, the service for which such 
fees are received constitutes a trade or business within the meaning of 
section 1402(c) and Sec. 1.1402(c)-1 except that if service performed in 
such position is covered under an agreement entered into by the State 
and the Secretary of Health, Education, and Welfare pursuant to section 
218 of the Social Security Act at the time a fee is received, the 
service to which such fee relates does not constitute a trade or 
business. See also paragraph (a) of Sec. 1.1402(c)-2, relating, in part, 
to the performance of the functions of a public office of a State or a 
political subdivision thereof by an individual.
    (2) Election with respect to fees received in 1968. (i) Any 
individual who in 1968 receives fees for service as an employee of a 
State or a political subdivision thereof in a position compensated 
solely on a fee basis may elect, if the performance of the service for 
which such fees are received constitutes a trade or business pursuant to 
the provisions of subparagraph (1) of this paragraph, to have such 
performance of service treated as excluded from the term ``trade or 
business'' for the purpose of the tax on self-employment income, 
pursuant to the provisions of section 122(c)(2) of the Social Security 
Amendments of 1967 (as quoted in Sec. 1.1402(c)). Such election shall 
not be limited to service to which the fees received in 1968 are 
attributable but must also be applicable to service (if any) in 
subsequent years which, except for the election, would constitute a 
trade or business pursuant to the provisions of subparagraph (1) of this 
paragraph. An election made pursuant to the provisions of this 
subparagraph is irrevocable.
    (ii) The election referred to in subdivision (i) of this 
subparagraph shall

[[Page 43]]

be made by filing a certificate of election of exemption (Form 4415) on 
or before the due date of the income tax return (see section 6072), 
including any extension thereof (see section 6081), for the taxable year 
of the individual making the election which begins in 1968. The 
certificate of election of exemption shall be filed with an internal 
revenue office in accordance with the instructions on the certificate.
    (g) Individuals engaged in fishing. For taxable years ending after 
December 31, 1954, service performed by an individual on a boat engaged 
in catching fish or other forms of aquatic animal life (hereinafter 
``fish'') constitutes a trade or business within the meaning of section 
1402(c) and Sec. 1.1402(c)-1 if the service is excepted from the 
definition of employment by section 3121(b)(20) and Sec. 31.3121(b)(20)-
1(a). However, the preceding sentence does not apply to services 
performed after December 31, 1954, and before October 4, 1976, on a boat 
engaged in catching fish if the owner or operator of the boat treated 
the individual as an employee in the manner described in 
Sec. 31.3121(b)(20)-1(b).

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15937, Oct. 30, 1968; T.D. 7333, 39 FR 44448, Dec. 24, 1974; T.D. 7691, 
45 FR 24129, Apr. 9, 1980; T.D. 7716, 45 FR 57123, Aug. 27, 1980]



Sec. 1.1402(c)-4   Individuals under Railroad Retirement System.

    The performance of service by an individual as an employee or 
employee representative as defined in section 3231(b) and (c), 
respectively (see Secs. 31.3231(b)-1 and 31.3231(c)-1 of Part 31 of this 
chapter (Employment Tax Regulations)), that is, an individual covered 
under the railroad retirement system, does not constitute a trade or 
business.



Sec. 1.1402(c)-5   Ministers and members of religious orders.

    (a) In general--(1) Taxable years ending before 1968. For taxable 
years ending before 1955, a duly ordained, commissioned, or licensed 
minister of a church or a member of a religious order is not engaged in 
carrying on a trade or business with respect to service performed by him 
in the exercise of his ministry or in the exercise of duties required by 
such order. However, for taxable years ending after 1954 and before 
1968, any individual who is a duly ordained, commissioned, or licensed 
minister of a church or a member of a religious order (other than a 
member of a religious order who has taken a vow of poverty as a member 
of such order) may elect, as provided in Sec. 1.1402(e)(1)-1, to have 
the Federal old-age, survivors, and disability insurance system 
established by title II of the Social Security Act extended to service 
performed by him in his capacity as such a minister or member. If such a 
minister or a member of a religious order makes an election pursuant to 
Sec. 1.1402(e)(1)-1 he is, with respect to service performed by him in 
such capacity, engaged in carrying on a trade or business for each 
taxable year to which the election is effective. An election by a 
minister or member of a religious order has no application to service 
performed by such minister or member which is not in the exercise of his 
ministry or in the exercise of duties required by such order.
    (2) Taxable years ending after 1967. For any taxable year ending 
after 1967, a duly ordained, commissioned, or licensed minister of a 
church or a member of a religious order (other than a member of a 
religious order who has taken a vow of poverty as a member of such 
order) is engaged in carrying on a trade or business with respect to 
service performed by him in the exercise of his ministry or in the 
exercise of duties required by such order unless an exemption under 
section 1402(e) (see Secs. 1.1402(e)-1A through 1.1402(e)-4A) is 
effective with respect to such individual for the taxable year during 
which the service is performed. An exemption which is effective with 
respect to a minister or a member of a religious order has no 
application to service performed by such minister or member which is not 
in the exercise of his ministry or in the exercise of duties required by 
such order.
    (b) Service by a minister in the exercise of his ministry. (1)(i) A 
certificate of election filed by a duly ordained, commissioned, or 
licensed minister of a church under the provisions of Sec. 1.1402(e)(1)-
1 has application only to service performed by him in the exercise of 
his ministry.

[[Page 44]]

    (ii) An exemption under section 1402(e) (see Secs. 1.1402(e)-1A 
through 1.1402(e)-4A) which is effective with respect to a duly 
ordained, commissioned, or licensed minister of a church has application 
only to service performed by him in the exercise of his ministry.
    (2) Except as provided in paragraph (c)(3) of this section, service 
performed by a minister in the exercise of his ministry includes the 
ministration of sacerdotal functions and the conduct of religious 
worship, and the control, conduct, and maintenance of religious 
organizations (including the religious boards, societies, and other 
integral agencies of such organizations), under the authority of a 
religious body constituting a church or church denomination. The 
following rules are applicable in determining whether services performed 
by a minister are performed in the exercise of his ministry:
    (i) Whether service performed by a minister constitutes the conduct 
of religious worship or the ministration of sacerdotal functions depends 
on the tenets and practices of the particular religious body 
constituting his church or church denomination.
    (ii) Service performed by a minister in the control, conduct, and 
maintenance of a religious organization relates to directing, managing, 
or promoting the activities of such organization. Any religious 
organization is deemed to be under the authority of a religious body 
constituting a church or church denomination if it is organized and 
dedicated to carrying out the tenets and principles of a faith in 
accordance with either the requirements or sanctions governing the 
creation of institutions of the faith. The term ``religious 
organization'' has the same meaning and application as is given to the 
term for income tax purposes.
    (iii) If a minister is performing service in the conduct of 
religious worship or the ministration of sacerdotal functions, such 
service is in the exercise of his ministry whether or not it is 
performed for a religious organization. The application of this rule may 
be illustrated by the following example:

    Example. M, a duly ordained minister, is engaged to perform service 
as chaplain at N University. M devotes his entire time to performing his 
duties as chaplain which include the conduct of religious worship, 
offering spiritual counsel to the university students, and teaching a 
class in religion. M is performing service in the exercise of his 
ministry.

    (iv) If a minister is performing service for an organization which 
is operated as an integral agency of a religious organization under the 
authority of a religious body constituting a church or church 
denomination, all service performed by the minister in the conduct of 
religious worship, in the ministration of sacerdotal functions, or in 
the control, conduct, and maintenance of such organization (see 
subparagraph (2)(ii) of this paragraph) is in the exercise of his 
ministry. The application of this rule may be illustrated by the 
following example:

    Example. M, a duly ordained minister, is engaged by the N Religious 
Board to serve as director of one of its departments. He performs no 
other service. The N Religious Board is an integral agency of O, a 
religious organization operating under the authority of a religious body 
constituting a church denomination. M is performing service in the 
exercise of his ministry.

    (v) If a minister, pursuant to an assignment or designation by a 
religious body constituting his church, performs service for an 
organization which is neither a religious organization nor operated as 
an integral agency of a religious organization, all service performed by 
him, even though such service may not involve the conduct of religious 
worship or the ministration of sacerdotal functions, is in the exercise 
of his ministry. The application of this rule may be illustrated by the 
following example:

    Example. M, a duly ordained minister, is assigned by X, the 
religious body constituting his church, to perform advisory service to Y 
Company in connection with the publication of a book dealing with the 
history of M's church denomination. Y is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M performs no other service for X or Y. M is performing 
service in the exercise of his ministry.

    (c) Service by a minister not in the exercise of his ministry. 
(1)(i) A certificate filed by a duly ordained, commissioned, or licensed 
minister of a church under the provisions of Sec. 1.1402(e)(1)-1 has no

[[Page 45]]

application to service performed by him which is not in the exercise of 
his ministry.
    (ii) An exemption under section 1402(e) (see Secs. 1.1402(e)-1A 
through 1.1402(e)-4A) which is effective with respect to a duly 
ordained, commissioned, or licensed minister of a church has no 
application to service performed by him which is not in the exercise of 
his ministry.
    (2) If a minister is performing service for an organization which is 
neither a religious organization nor operated as an integral agency of a 
religious organization and the service is not performed pursuant to an 
assignment or designation by his ecclesiastical superiors, then only the 
service performed by him in the conduct of religious worship or the 
ministration of sacerdotal functions is in the exercise of his ministry. 
See, however, subparagraph (3) of this paragraph. The application of the 
rule in this subparagraph may be illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by N University to 
teach history and mathematics. He performs no other service for N 
although from time to time he performs marriages and conducts funerals 
for relatives and friends. N University is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M is not performing the service for N pursuant to an 
assignment or designation by his ecclesiastical superiors. The service 
performed by M for N University is not in the exercise of his ministry. 
However, service performed by M in performing marriages and conducting 
funerals is in the exercise of his ministry.

    (3) Service performed by a duly ordained, commissioned, or licensed 
minister of a church as an employee of the United States, or a State, 
Territory, or possession of the United States, or the District of 
Columbia, or a foreign government, or a political subdivision of any of 
the foregoing, is not considered to be in the exercise of his ministry 
for purposes of the tax on self-employment income, even though such 
service may involve the ministration of sacerdotal functions or the 
conduct of religious worship. Thus, for example, service performed by an 
individual as a chaplain in the Armed Forces of the United States is 
considered to be performed by a commissioned officer in his capacity as 
such, and not by a minister in the exercise of his ministry. Similarly, 
service performed by an employee of a State as a chaplain in a State 
prison is considered to be performed by a civil servant of the State and 
not by a minister in the exercise of his ministry.
    (d) Service in the exercise of duties required by a religious 
order--(1) Certificate of election. A certificate of election filed by a 
member of a religious order (other than a member of a religious order 
who has taken a vow of poverty as a member of such order) under the 
provisions of Sec. 1.1402(e)(1)-1 has application to all duties required 
of him by such order.
    (2) Exemption. An exemption under section 1402(e) (see 
Secs. 1.1402(e)-1A through 1.1402(e)-4A) which is effective with respect 
to a member of a religious order (other than a member of a religious 
order who has taken a vow of poverty as a member of such order) has 
application only to the duties required of him by such order.
    (3) Service. For purposes of subparagraphs (1) and (2) of this 
paragraph, the nature or extent of the duties required of the member by 
the order is immaterial so long as it is a service which he is directed 
or required to perform by his ecclesiastical superiors.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15937, Oct. 30, 1968]



Sec. 1.1402(c)-6   Members of certain professions.

    (a) Periods of exclusion--(1) Taxable years ending before 1955. For 
taxable years ending before 1955, an individual is not engaged in 
carrying on a trade or business with respect to the performance of 
service in the exercise of his profession as a physician, lawyer, 
dentist, osteopath, veterinarian, chiropractor, naturopath, optometrist, 
Christian Science practitioner, architect, certified public accountant, 
accountant registered or licensed as an accountant under State or 
municipal law, full-time practicing public accountant, funeral director, 
or professional engineer.
    (2) Taxable years ending in 1955. Except as provided in paragraph 
(b) of this section, for a taxable year ending in 1955 an individual is 
not engaged in

[[Page 46]]

carrying on a trade or business with respect to the performance of 
service in the exercise of his profession as a physician, lawyer, 
dentist, osteopath, veterinarian, chiropractor, naturopath, optometrist, 
or Christian Science practitioner.
    (3) Taxable years ending after 1955--(i) Doctors of medicine. For 
taxable years ending after 1955 and before December 31, 1965, and 
individual is not engaged in carrying on a trade or business with 
respect to the performance of service in the exercise of his profession 
as a doctor of medicine. For taxable years ending after December 30, 
1965, an individual is engaged in carrying on a trade or business with 
respect to the performance of service in the exercise of his profession 
as a doctor of medicine.
    (ii) Christian Science practitioners. Except as provided in 
paragraph (b)(1) of this section, for taxable years ending after 1955 
and before 1968, an individual is not engaged in carrying on a trade or 
business with respect to the performance of service in the exercise of 
his profession as a Christian Science practitioner. For provisions 
relating to the performance of service in taxable years ending after 
1967 by an individual in the exercise of his profession as a Christian 
Science practitioner, see paragraph (b)(2) of this section.
    (b) Christian Science practitioner--(1) Certain taxable years ending 
before 1968; election. For taxable years ending after 1954 and before 
1968, a Christian Science practitioner may elect, as provided in 
Sec. 1.1402(e)(1)-1, to have the Federal old-age, survivors, and 
disability insurance system established by title II of the Social 
Security Act extended to service performed by him in the exercise of his 
profession as a Christian Science practitioner. If an election is made 
pursuant to Sec. 1.1402(e)(1)-1, the Christian Science practitioner is, 
with respect to the performance of service in the exercise of such 
profession, engaged in carrying on a trade or business for each taxable 
year for which the election is effective. An election by a Christian 
Science practitioner has no application to service performed by him 
which is not in the exercise of his profession as a Christian Science 
practitioner.
    (2) Taxable years ending after 1967; exemption. For a taxable year 
ending after 1967, a Christian Science practitioner is, with respect to 
the performance of service in the exercise of his profession as a 
Christian Science practitioner, engaged in carrying on a trade or 
business unless an exemption under section 1402(e) (see Secs. 1.1402(e)-
1A through 1.1402(e)-4A) is effective with respect to him for the 
taxable year during which the service is performed. An exemption which 
is effective with respect to a Christian Science practitioner has no 
application to service performed by him which is not in the exercise of 
his profession as a Christian Science practitioner.
    (c) Meaning of terms. The designations in this section are to be 
given their commonly accepted meanings. For taxable years ending after 
1955, an individual who is a doctor of osteopathy, and who is not a 
doctor of medicine within the commonly accepted meaning of that term, is 
deemed, for purposes of this section, not to be engaged in carrying on a 
trade or business in the exercise of the profession of doctor of 
medicine.
    (d) Legal requirements. The exclusions specified in paragraph (a) of 
this section apply only if the individuals meet the legal requirements, 
if any, for practicing their professions in the place where they perform 
the service.
    (e) Partnerships. In the case of a partnership engaged in the 
practice of any of the designated excluded professions, the partnership 
shall not be considered as carrying on a trade or business for the 
purpose of the tax on self-employment income, and none of the 
distributive shares of the income or loss, described in section 
702(a)(9), of such partnership shall be included in computing net 
earnings from self-employment of any member of the partnership. On the 
other hand, where a partnership is engaged in a trade or business not 
within any of the designated excluded professions, each partner must 
include his distributive share of the income or loss, described in 
section 702(a)(9), of such partnership in computing his net earnings 
from self-employment, irrespective of whether such partner is engaged in 
the practice of one or more of such professions and

[[Page 47]]

contributes his professional services to the partnership.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15938, Oct. 30, 1968]



Sec. 1.1402(c)-7   Members of religious groups opposed to insurance.

    The performance of service by an individual:
    (a) Who is a member of a recognized religious sect or division 
thereof, and
    (b) Who is an adherent of established tenets or teachings of such 
sect or division by reason of which he is conscientiously opposed to 
acceptance of the benefits of any private or public insurance which 
makes payments in the event of death, disability, old age, or retirement 
or makes payments toward the cost of, or provides services for, medical 
care (including the benefits of any insurance system established by the 
Social Security Act),

during any taxable year for which he is granted a tax exemption, 
pursuant to section 1402(h), does not constitute a trade or business 
within the meaning of section 1402(c) and Sec. 1.1402(c)-1. See also 
Secs. 1.1402(h) and 1.1402(h)-1.

[T.D. 6993, 34 FR 830, Jan. 18, 1969]



Sec. 1.1402(d)-1   Employee and wages.

    For the purpose of the tax on self-employment income, the term 
``employee'' and the term ``wages'' shall have the same meaning as when 
used in the Federal Insurance Contributions Act. For an explanation of 
these terms, see Subpart B of Part 31 of this chapter (Employment Tax 
Regulations).



Sec. 1.1402(e)-1A  Application of regulations under section 1402(e).

    The regulations in Secs. 1.1402(e)-2A through 1.1402(e)-4A relate to 
section 1402(e) as amended by section 115(b)(2) of the Social Security 
Amendments of 1967 (81 Stat. 839) and apply to taxable years ending 
after 1967. Section 1.1402(e)-5A reflects changes made by section 
1704(a) of the Tax Reform Act of 1986 (100 Stat. 2085, 2779) and applies 
to applications for exemption under section 1402(e) filed after December 
31, 1986. For regulations under section 1402(e) (as in effect prior to 
amendment by the Social Security Amendments of 1967) applicable to 
taxable years ending before 1968, see Secs. 1.1402(e)(1)-1 through 
1.1402(e)(6)-1.

[T.D. 8221, 53 FR 33461, Aug. 31, 1988]



Sec. 1.1402(e)-2A   Ministers, members of religious orders and Christian Science practitioners; application for exemption from self-employment tax.

    (a) In general. (1) Subject to the limitations set forth in 
subparagraphs (2) and (3) of this paragraph, any individual who is (i) a 
duly ordained, commissioned, or licensed minister of a church or a 
member of a religious order (other than a member of a religious order 
who has taken a vow of poverty as a member of such order) or (ii) a 
Christian Science practitioner may request an exemption from the tax on 
self-employment income (see section 1401 and Sec. 1.1401-1) with respect 
to services performed by him in his capacity as a minister or member, or 
as a Christian Science practitioner, as the case may be. Such a request 
shall be made by filing an application for exemption on Form 4361 in the 
manner provided in paragraph (b) of this section and within the time 
specified in Sec. 1.1402(e)-3A. For provisions relating to the taxable 
year or years for which an exemption from the tax on self-employment 
income with respect to service performed by a minister or member or a 
Christian Science practitioner in his capacity as such is effective, see 
Sec. 1.1402(e)-4A. For additional provisions applicable to services 
performed by individuals referred to in this subparagraph, see paragraph 
(e) of Sec. 1.1402(c)-3 and Sec. 1.1402(c)-5 relating to ministers and 
members of religious orders, and paragraphs (a)(3)(ii) and (b) of 
Sec. 1.1402(c)-6 relating to Christian Science practitioners.
    (2) The application for exemption shall contain, or there shall be 
filed with such application, a statement to the effect that the 
individual making application for exemption is conscientiously opposed 
to, or because of religious principles is opposed to, the acceptance 
(with respect to services performed by him in his capacity as a 
minister, member, or Christian Science practitioner) of any public 
insurance which makes payments in the event of death, disability, old 
age, or retirement

[[Page 48]]

or makes payments toward the cost of, or provides services for, medical 
care (including the benefits of any insurance system established by the 
Social Security Act). Thus, ministers, members of religious orders, and 
Christian Science practitioners requesting exemption from social 
security coverage must meet either of two alternative tests: (1) A 
religious principles test which refers to the institutional principles 
and discipline of the particular religious denomination to which he 
belongs, or (2) a conscientious opposition test which refers to the 
opposition because of religious considerations of individual ministers, 
members of religious orders, and Christian Science practitioners (rather 
than opposition based upon the general conscience of any such individual 
or individuals). The term ``public insurance'', as used in section 
1402(e) and this paragraph, refers to governmental, as distinguished 
from private, insurance and does not include insurance carried with a 
commercial insurance carrier. To be eligible to file an application for 
exemption on Form 4361, a minister, member, or Christian Science 
practitioners need not be opposed to the acceptance of all public 
insurance making payments of this specified type; he must, however, be 
opposed on religious grounds to the acceptance of any such payment 
which, in whole or in part, is based on, or measured by earnings from, 
services performed by in his capacity as a minister or member (see 
Sec. 1.1402(c)-5) or in his capacity as a Christian Science practitioner 
(see paragraph (b)(2) of Sec. 1.1402(c)-6). For example, a minister 
performing service in the exercise of his ministry may be eligible to 
file an application for exemption on Form 4361 even though he is not 
opposed to the acceptance of benefits under the Social Security Act with 
respect to service performed by him which is not in the exercise of his 
ministry.
    (3) An exemption from the tax imposed on self-employment income with 
respect to service performed by a minister, member, or Christian Science 
practitioner in his capacity as such may not be granted to a minister, 
member, or practitioner who (in accordance with the provisions of 
section 1402(e) as in effect prior to amendment by section 115(b)(2) of 
the Social Security Amendments of 1967 (81 Stat. 839)) filed a valid 
waiver certificate on Form 2031 electing to have the Federal old-age, 
survivors, and disability insurance system establish by title II of the 
Social Security Act extended to service performed by him in the exercise 
of his ministry or in the exercise of duties required by the order of 
which he is a member, or in the exercise of his profession as a 
Christian Science practitioner. For provisions relating to waiver 
certificates on Form 2031, see Secs. 1.1402(e)(1)-1 through 
1.1402(e)(6)-1.
    (b) Application for exemption. An application for exemption on Form 
4361 shall be filed in triplicate with the internal revenue officer or 
the internal revenue office, as the case may be, designated in the 
instructions relating to the application for exemption. The application 
for exemption must be filed within the time prescribed in 
Sec. 1.1402(e)-3A. If the last original Federal income tax return of an 
individual to whom paragraph (a) of this section applies which was filed 
before the expiration of such time limitation for filing an application 
for exemption shows no liability for tax on self-employment income, such 
return will be treated as an application for exemption, provided that 
before February 28, 1975 such individual also files a properly executed 
Form 4361.
    (c) Approval of application for exemption. The filing of an 
application for exemption on Form 4361 by a minister, a member of a 
religious order, or a Christian Science practitioner does not constitute 
an exemption from the tax on self-employment income with respect to 
services performed by him in his capacity as a minister, member, or 
practitioner. The exemption is granted only if the application is 
approved by an appropriate internal revenue officer. See Sec. 1.1402(e)-
4A relating to the period for which an exemption is effective.

[T.D. 7333, 39 FR 44448, Dec. 24, 1974; 39 FR 45216, Dec. 31, 1974]



Sec. 1.1402(e)-3A   Time limitation for filing application for exemption.

    (a) General rule. (1) Any individual referred to in paragraph (a) of 
Sec. 1.1402(e)-2A who desires an exemption from the

[[Page 49]]

tax on self-employment income with respect to service performed by him 
in his capacity as a minister or member of a religious order or as a 
Christian Science practitioner must file the application for exemption 
(Form 4361) prescribed by Sec. 1.1402(e)-2A on or before whichever of 
the following dates is later:
    (i) The due date of the income tax return (see section 6072), 
including any extension thereof (see section 6081), for his second 
taxable year ending after 1967, or
    (ii) The due date of the income tax return, including any extension 
thereof, for his second taxable year beginning after 1953 for which he 
has net earnings from self-employment of $400 or more, any part of 
which:
    (a) In the case of a duly ordained, commissioned, or licensed 
minister of a church, consists of remuneration for service performed in 
the exercise of his ministry,
    (b) In the case of a member of a religious order who has not taken a 
vow of poverty as a member of such order, consists of remuneration for 
service performed in the exercise of duties required by such order, or
    (c) In the case of a Christian Science practitioner, consists of 
remuneration for service performed in the exercise of his profession as 
a Christian Science practitioner.

See paragraph (c) of this section for provisions relating to the 
computation of net earnings from self-employment.
    (2) If a minister, a member of a religious order, or a Christian 
Science practitioner derives gross income in a taxable year both from 
service performed in such capacity and from the conduct of another trade 
or business, and the deductions allowed by Chapter 1 of the Internal 
Revenue Code which are attributable to the gross income derived from 
service performed in such capacity equal or exceed the gross income 
derived from service performed in such capacity, no part of the net 
earnings from self-employment (computed as prescribed in paragraph (c) 
of this section) for the taxable year shall be considered as derived 
from service performed in such capacity.
    (3) The application of the rules set forth in subparagraphs (1) and 
(2) of this paragraph may be illustrated by the following examples:

    Example (1). M, who makes his income tax returns on a calendar year 
basis, was ordained as a minister in January 1960. During each of two or 
more taxable years ending before 1968 M has net earnings from self-
employment in excess of $400 some part of which is from service 
performed in the exercise of his ministry. M has not filed an effective 
waiver certificate on Form 2031 (see paragraph (a)(3) of Sec. 1.1402(e)-
2A). If M desires an exemption from the tax on self-employment income 
with respect to service performed in the exercise of his ministry, he 
must file an application for exemption on or before the due date of his 
income tax return for 1969 (his second taxable year ending after 1967), 
or any extension thereof.
    Example (2). M, who makes his income tax returns on a calendar year 
basis, was ordained as a minister in January 1966. M has net earnings of 
$350 for the taxable year 1966 and has net earnings in excess of $400 
for each of his taxable years 1967 and 1968 (some part or all of which 
is derived from service performed in the exercise of his ministry). M 
has not filed an effective waiver certificate on Form 2031 (see 
paragraph (a)(3) of Sec. 1.1402(e)-2A). If M desires an exemption from 
the tax on self-employment income with respect to service performed in 
the exercise of his ministry, he must file an application for exemption 
on or before the due date of his income tax return for 1969 (his second 
taxable year ending after 1967), or any extension thereof.
    Example (3). Assume the same facts as in example (2) except that M 
has net earnings in excess of $400 for each of his taxable years 1967 
and 1969 (but less than $400 in 1968). The application for exemption 
must be filed on or before the due date of his income tax return for 
1969, or any extension thereof.
    Example (4). M was ordained as a minister in May 1973. During each 
of the taxable years 1973 and 1975, M, who makes his income tax returns 
on a calendar year basis, derives net earnings in excess of $400 from 
his activities as a minister. M has net earnings of $350 for the taxable 
year 1974, $200 of which is derived from service performed by him in the 
exercise of his ministry. If M desires an exemption from the tax on 
self-employment income with respect to service performed in the exercise 
of his ministry, he must file an application for exemption on or before 
the due date of his income tax return for 1975, or any extension 
thereof.
    Example (5). M, who was ordained a minister in January 1973, is 
employed as a toolmaker by the XYZ Corporation for the taxable years 
1973 and 1974 and also engages in activities as a minister on weekends. 
M makes his income tax returns on the basis of a calendar year. During 
each of the taxable

[[Page 50]]

years 1973 and 1974 M receives wages of $14,000 from the XYZ Corporation 
and derives net earnings of $400 from his activities as a minister. If M 
desires an exemption from the tax on self-employment income with respect 
to service performed in the exercise of his ministry, he must file an 
application for exemption on or before the due date of his income tax 
return for 1974, or any extension thereof. It should be noted that 
although by reason of section 1402(b)(1) (G) and (H) no part of the $400 
represents ``self-employment income'', nevertheless the entire $400 
constitutes ``net earnings from self-employment'' for purposes of 
fulfilling the requirements of section 1402(e)(2).
    Example (6). M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in March 1973. During 1973 he receives 
$410 for service performed in the exercise of his ministry. In addition 
to his ministerial services, M is engaged during the year 1973 in a 
mercantile venture from which he derives net earnings from self-
employment in the amount of $4,000. The expenses incurred by him in 
connection with his ministerial services during 1973 and which are 
allowable deductions under Chapter 1 of the Internal Revenue Code amount 
to $410. During 1974 and 1975, M has net earnings from self-employment 
in amounts of $4,600 and $4,800, respectively, and some part of each of 
these amounts is from the exercise of his ministry. The deductions 
allowed in each of the years 1974 and 1975 by Chapter 1 which are 
attributable to the gross income derived by M from the exercise of his 
ministry in each of such years, respectively, do not equal or exceed 
such gross income in such year. If M desires an exemption from the tax 
on self-employment income with respect to service performed in the 
exercise of his ministry, he must file an application for exemption on 
or before the due date of his income tax return for 1975, or an 
extension thereof.

    (b) Effect of death. The right of an individual to file an 
application for exemption shall cease upon his death. Thus, the 
surviving spouse, administrator, or executor of a decedent shall not be 
permitted to file an application for exemption for such decedent.
    (c) Computation of net earnings--(1) Taxable years ending before 
1968. For purposes of this section net earnings from self-employment for 
taxable years ending before 1968 shall be determined without regard to 
the fact that, without an election under section 1402(e) (as in effect 
prior to amendment by section 115(b)(2) of the Social Security 
Amendments of 1967, see Sec. 1.1402(e)-1A), the performance of services 
by a duly ordained, commissioned, or licensed minister of a church in 
the exercise of his ministry, or by a member of a religious order in the 
exercise of duties required by such order, or the performance of service 
by an individual in the exercise of his profession as a Christian 
Science practitioner, does not constitute a trade or business for 
purposes of the tax on self-employment income.
    (2) Taxable years ending after 1967. For purposes of this section 
and Sec. 1.1402(e)-4A net earnings from self-employment for taxable 
years ending after 1967 shall be determined without regard to section 
1402(c) (4) and (5). See Sec. 1.1402(c)-3(e)(2) and Sec. 1.1402(c)-5 
relating to ministers and members of religious orders, and paragraphs 
(a)(3)(ii) and (b) of Sec. 1.1402(c)-6 relating to Christian Science 
practitioners.

[T.D. 7333, 39 FR 44449, Dec. 24, 1974]



Sec. 1.1402(e)-4A   Period for which exemption is effective.

    (a) In general. If an application for exemption on Form 4361:
    (1) Is filed by a minister, a member of a religious order, or a 
Christian Science practitioner eligible to file such an application (see 
particularly paragraph (a) (2) and (3) of Sec. 1.1402(e)-2A), and
    (2) Is approved (see paragraph (c) of Sec. 1.1402(e)-2A),

the exemption from the tax on self-employment income shall be effective 
for the first taxable year ending after 1967 for which such minister, 
member, or practitioner has net earnings from self-employment of $400 or 
more any part of which was derived from the performance of service in 
his capacity as a minister, member, or practitioner, and for all 
succeeding taxable years. See, however, paragraphs (b)(1)(ii) and (d)(2) 
of Sec. 1.1402(c)-5 relating to ministers and members of religious 
orders and paragraph (b)(2) of Sec. 1.1402(c)-6 relating to Christian 
Science practitioners.
    (b) Exemption irrevocable. An exemption granted to a minister, a 
member of a religious order, or a Christian Science practitioner 
pursuant to the provisions of section 1402(e) is irrevocable.

[T.D. 7333, 39 FR 44450, Dec. 24, 1974]

[[Page 51]]



Sec. 1.1402(e)-5A  Applications for exemption from self-employment taxes filed after December 31, 1986, by ministers, certain members of religious orders, and 
          Christian Science practitioners.

    (a) In general. (1) Except as provided in paragraph (a)(2) of this 
section, this section applies to any individual who is a duly ordained, 
commissioned, or licensed minister of a church, member of a religious 
order (other than a member of a religious order who has taken a vow of 
poverty as a member of such order), or a Christian Science practitioner 
who files an application after December 31, 1986, for exemption from the 
tax on self-employment income (see section 1401 and 1.1401-1) with 
respect to services performed by him or her in his or her capacity as a 
minister, member, or practitioner pursuant to Secs. 1.1402(e)-2A through 
1.1402(e)-4A. This section does not apply to applications for exemption 
under section 1402(e) that are filed before January 1, 1987.
    (2) Application of this section to Christian Science practitioners. 
Paragraph (b) of this section does not apply to Christian Science 
practitioners. Thus, Christian Science practitioners filing applications 
for exemption from self-employment taxes under section 1402(e) should 
follow the procedures set forth in Secs. 1.1402(e)-2A through 1.1402(e)-
4A, and are not required to include the statement described in paragraph 
(b)(1)(ii) of this section. However, see paragraph (c) of this section 
for verification procedures with respect to applications for exemption 
from self-employment taxes filed after December 31, 1986, by Christian 
Science practitioners.
    (b) Church or order must be informed--(1) In general. Any 
individual, other than a Christian Science practitioner, who files an 
application for exemption from the tax on self-employment income under 
section 1402(e) after December 31, 1986:
    (i) Shall file such application in accordance with the procedures 
set forth in Secs. 1.1402(e)-2A through 1.1402(e)-4A, and
    (ii) Shall include with such application a statement to the effect 
that the individual making application for exemption has informed the 
ordaining, commissioning, or licensing body of the church or order that 
he or she is opposed to the acceptance (for services performed as a 
minister or member of a religious order not under a vow of poverty) of 
any public insurance that makes payments in the event of death, 
disability, old age, or retirement, or that makes payments toward the 
cost of, or provides services for, medical care (including the benefits 
of any insurance system established by the Social Security Act).
    (2) Statement to be filed with form. If the form provided by the 
Service for applying for exemption under 1402(e) does not contain the 
statement set forth in paragraph (b)(1)(ii) of this section, any 
individual required to include this statement with his or her 
application under this paragraph (b) shall file such statement with the 
individual's application at the time and place prescribed for filing 
such application under Secs. 1.1402(e)-2A and 1.1402(e)-3A. The 
statement shall contain the information set forth in paragraph 
(b)(1)(ii) of this section and shall be signed by such individual under 
penalties of perjury.
    (c) Verification of application--(1) In general. The Service will 
approve an application for an exemption filed by an individual to whom 
this section applies only after verifying that the individual applying 
for the exemption is aware of the grounds on which the individual may 
receive an exemption under section 1402(e) (See Sec. 1.1402(e)-2A) and 
that the individual seeks exemption on such grounds in accordance with 
the procedures set forth in paragraph (c)(2) of this section.
    (2) Verification procedure. Upon receipt of an application for 
exemption from self-employment taxes under section 1402(e) and this 
section, the Service will mail to the applicant a statement that 
describes the grounds on which an individual may receive an exemption 
under section 1402(e). The individual filing the application shall 
certify that he or she has read the statement and that he or she seeks 
exemption from self-employment taxes on the grounds listed in the 
statement. The certification shall be made by signing a copy of the 
statement under penalties of perjury and mailing the

[[Page 52]]

signed copy to the Service Center from which the statement was issued 
not later than 90 days after the date on which the statement was mailed 
to the individual. If the signed copy of the statement is not mailed to 
the Service Center within 90 days of the date on which the statement was 
mailed to the individual, that individual's exemption will not be 
effective until the date that the signed copy of the statement is 
received at the Service Center.

[T.D. 8136, 52 FR 12162, Apr. 15, 1987, redesignated and amended at T.D. 
8221, 53 FR 33461, Aug. 31, 1988]



Sec. 1.1402(e)(1)-1  Election by ministers, members of religious orders, and Christian Science practitioners for self-employment coverage.

    (a) In general. Any individual who is (1) a duly ordained, 
commissioned, or licensed minister of a church or a member of a 
religious order (other than a member of a religious order who has taken 
a vow of poverty as a member of such order) or (2) a Christian Science 
practitioner may elect to have the Federal old-age, survivors, and 
disability insurance system established by title II of the Social 
Security Act extended to service performed by him in the exercise of his 
ministry or in the exercise of duties required by such order, or in the 
exercise of his profession as a Christian Science practitioner, as the 
case may be. Such an election shall be made by filing a certificate on 
Form 2031 in the manner provided in paragraph (b) of this section and 
within the time specified in Sec. 1.1402(e)(2)-1. If a minister or 
member to whom this section has application, or a Christian Science 
practitioner, makes an election by filing Form 2031 such individual 
shall, for each taxable year for which the election is effective (see 
Sec. 1.1402(e)(3)-1), be considered as carrying on a trade or business 
with respect to the performance of service in his capacity as a minister 
or member, or as a Christian Science practitioner, as the case may be.
    (b) Waiver certificate. The certificate on Form 2031 shall be filed 
in triplicate with the district director of internal revenue for the 
internal revenue district in which is located the legal residence or 
principal place of business of the individual who executes the 
certificate. If such individual has no legal residence or principal 
place of business in any internal revenue district, the certificate 
shall be filed with the Director of International Operations, Internal 
Revenue Service, Washington, DC 20225, or at such other address as is 
designated in the instructions relating to the certificate. The 
certificate must be filed within the time prescribed in 
Sec. 1.1402(e)(2)-1. If an individual to whom paragraph (a) of this 
section has application submits to a district director of internal 
revenue a dated and signed statement indicating that he desires to have 
the Federal old-age, survivors, and disability insurance system 
established by title II of the Social Security Act extended to his 
services, such statement will be treated as a waiver certificate, if 
filed within the time specified in Sec. 1.1402(e)(2)-1, provided that 
without unnecessary delay such statement is supplemented by a properly 
executed Form 2031. An application for a social security account number 
filed on Form SS-5 or the filing of an income tax return showing an 
amount representing self-employment income or self-employment tax shall 
not be construed to constitute an election referred to in 
Sec. 1.1402(e)(1)-1.



Sec. 1.1402(e)(2)-1   Time limitation for filing waiver certificate.

    (a) General rule. (1) Any individual referred to in 
Sec. 1.1402(e)(1)-1 who desires to have the Federal old-age, survivors, 
and disability insurance system established by title II of the Social 
Security Act extended to his services must file the waiver certificate 
(Form 2031) prescribed by Sec. 1.1402(e)(1)-1 on or before whichever of 
the following dates is later:
    (i) The due date of the income tax return (see section 6072), 
including any extension thereof (see section 6081), for his second 
taxable year ending after 1963; or
    (ii) The due date of the income tax return, including any extension 
thereof, for his second taxable year ending after 1954 for which he has 
net earnings from self-employment (computed as prescribed in paragraph 
(c) of this section) of $400 or more, any part of which:

[[Page 53]]

    (a) In the case of a duly ordained, commissioned, or licensed 
minister of a church, consists of remuneration for service performed in 
the exercise of his ministry,
    (b) In the case of a member of a religious order who has not taken a 
vow of poverty as a member of such order, consists of remuneration for 
service performed in the exercise of duties required by such order, or
    (c) In the case of a Christian Science practitioner, consists of 
remuneration for service performed in the exercise of his profession as 
a Chrsitian Science practitioner.
    (2) If a minister, a member of a religious order, or a Christian 
Science practitioner derives gross income in a taxable year both from 
service performed in such capacity and from the conduct of another trade 
or business, and the deductions allowed by chapter 1 of the Internal 
Revenue Code which are attributable to the gross income derived from 
service performed in such capacity equal or exceed the gross income 
derived from service performed in such capacity, no part of the net 
earnings from self-employment (computed as prescribed in paragraph (c) 
of this section) for the taxable year shall be considered as derived 
from service performed in such capacity.
    (3) The application of the rules set forth in subparagraphs (1) and 
(2) of this paragraph may be illustrated by the following examples:

    Example (1). M was ordained as a minister in May 1963. During each 
of the taxable years 1963 and 1966, M, who makes his income tax returns 
on a calendar year basis, derives net earnings in excess of $400 from 
his activities as a minister. M has net earnings of $350 for each of the 
taxable years 1964 and 1965, $200 of which is derived from service 
performed by him as a minister. If M wishes to have the Federal old-age, 
survivors, and disability insurance system established by title II of 
the Social Security Act extended to his service as a minister, he must 
file the waiver certificate on or before the due date of his income tax 
return for 1966, or any extension thereof.
    Example (2). M, who was ordained a minister in January 1965, is 
employed as a toolmaker by the XYZ Corporation for the taxable years 
1965 and 1966 and also engages in activities as a minister on weekends. 
M makes his income tax return on the basis of a calendar year. During 
each of the taxable years 1965 and 1966, M receives wages of $4,800 from 
the XYZ Corporation and derives $400 (all of which constitutes net 
earnings from self-employment computed as prescribed in paragraph (c) of 
this section) from his activities as a minister. In such case if M 
wishes to have the Federal old-age, survivors, and disability insurance 
system established by title II of the Social Security Act extended to 
his services as a minister, he must file the waiver certificate on or 
before the due date of his income tax return for 1966, or any extension 
thereof. A waiver certificate filed after such date will be invalid. It 
should be noted that although by reason of section 1402(b)(1)(C) no part 
of the $400 for the taxable year 1965 represents ``self-employment 
income'', nevertheless the entire $400 constitutes ``net earnings from 
self-employment'' for purposes of fulfilling the requirements of section 
1402(e)(2).
    Example (3). M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in June 1964. During 1964 he receives 
$410 for services performed in the exercise of his ministry. In addition 
to his ministerial services, M is engaged during the year 1964 in a 
mercantile venture from which he derives net earnings from self-
employment in the amount of $1,000. The expenses incurred by him in 
connection with his ministerial services during 1964 and which are 
allowable deductions under Chapter 1 of the Internal Revenue Code amount 
to $410. During 1965 and 1966, M has net earnings from self-employment 
in amounts of $1,200 and $1,500, respectively, and some part of each of 
these amounts is from the exercise of his ministry. The deductions 
allowed in each of the years 1965 and 1966 by Chapter 1 which are 
attributable to the gross income derived by M from the exercise of his 
ministry in each of such years, respectively, do not equal or exceed 
such gross income in such year. If M wishes to have the Federal old-age, 
survivors, and disability insurance system established by Title II of 
the Social Security Act extended to his service as a minister, he must 
file a waiver certificate on or before the due date of his income tax 
return (including any extension thereof) for 1966.
    Example (4). M, a licensed minister who makes his income tax returns 
on the basis of a calendar year, derived net earnings of $400 or more 
from the exercise of his ministry for two or more of the taxable years 
1955 to 1965, inclusive. In such case, if M wishes to have the Federal 
old-age, survivors, and disability insurance system established by Title 
II of the Social Security Act extended to his services as a minister, he 
must file the waiver certificate on or before the due date (April 15, 
1966) prescribed for filing his income tax return for 1965, or any 
extension thereof. A waiver certificate filed after such date will be 
invalid.


[[Page 54]]


    (b) Effect of death. Except as provided in Secs. 1.1402(e)(5)-1, 
1.1402(e) (5)-2, and 1.1402(e)(6)-1, the right of an individual to file 
a waiver certificate shall cease from his death. Thus, except as 
provided in such sections, the surviving spouse, administrator, or 
executor of a decedent shall not be permitted to file a waiver 
certificate for such decedent.
    (c) Computation of net earnings without regard to election. For the 
purpose of this section net earnings from self-employment shall be 
determined without regard to the fact that, without an election under 
section 1402(e), the performance of services by a duly ordained, 
commissioned, or licensed minister of a church in the exercise of his 
ministry, or by a member of a religious order in the exercise of duties 
required by such order, or the performance of service by an individual 
in the exercise of his profession as a Christian Science practitioner, 
does not constitute a trade or business for purposes of the tax on self-
employment income.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15938, Oct. 30, 1968]



Sec. 1.1402(e)(3)-1   Effective date of waiver certificate.

    (a) Filed before August 31, 1957--(1) In general. A certificate on 
Form 2031 filed by an individual before August 31, 1957, in accordance 
with the provisions of section 1402(e) in effect at the time the 
certificate is filed, shall be effective for the first taxable year with 
respect to which it is filed, and all subsequent taxable years. In order 
for a certificate filed by an individual before August 31, 1957, to be 
effective under section 1402(e), the certificate must be made effective 
for either the first or second taxable year ending after 1954 in which 
the individual has net earnings from self-employment of $400 or more 
(determined as provided in paragraph (c) of Sec. 1.1402(e)(2)-1) some 
part of which is derived from service of the character with respect to 
which an election may be made. However, a certificate on Form 2031, 
filed before August 31, 1957, even though filed within the time 
specified in paragraph (a)(1)(ii) of Sec. 1.1402(e)(2)-1, may not be 
effective, except as provided in subparagraph (2) of this paragraph, for 
any taxable year with respect to which the due date for filing the 
individual's income tax return (including any extension thereof) has 
expired at the time such certificate is filed. Further, a certificate on 
Form 2031 may not be effective for any taxable year ending before 1955. 
In order for a certificate filed before August 31, 1957, except for the 
filing of a supplemental certificate, to be effective for the first or 
second taxable year ending after 1954 in which the individual has net 
earnings from self-employment (determined as provided in paragraph (c) 
of Sec. 1.1402(e)(2)-1) some part of which is derived from service of 
the character with respect to which an election may be made, the 
certificate on Form 2031 must be filed on or before the due date for 
filing the income tax return of the individual for such first or second 
taxable year, respectively, or any extension thereof.
    (2) Supplemental certificates--(i) Filed before due date of 1958 
return. If under subparagraph (1) of this paragraph the certificate is 
effective only for the individual's third or fourth taxable year ending 
after 1954 and all succeeding taxable years, the individual may make 
such a certificate effective for his first taxable year ending after 
1955 and all succeeding taxable years by filing a supplemental 
certificate on Form 2031. To be valid the supplemental certificate must 
be filed after August 30, 1957, and on or before the due date of the 
return (including any extension thereof) for his second taxable year 
ending after 1956 and must be otherwise in accordance with 
Sec. 1.1402(e)(1)-1.

    Example. M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in 1956, and his net earnings from 
service performed in the exercise of his ministry during such year were 
$400 or more. M had no net earnings from the exercise of his ministry 
during 1957. On July 15, 1957, M filed a waiver certificate and 
indicated thereon that it was to become effective for the taxable year 
1958. At the time of filing, the certificate was effective for 1958 and 
all succeeding taxable years. Since the certificate was not filed on or 
before April 15, 1957 (the due date of M's income tax return for the 
taxable year 1956), and since there was no extension of time for filing 
his 1956 income tax return, the certificate was not, at the time of 
filing, effective for the taxable year 1956. M files a supplemental 
certificate on April 15, 1958. By the filing of the supplemental 
certificate, the certificate filed by M

[[Page 55]]

on July 15, 1957, was made effective for the year 1956 and all 
succeeding taxable years.

    (ii) Filed after September 13, 1960, and on or before April 16, 
1962. If under subparagraph (1) of this paragraph the certificate is 
effective only for the individual's first taxable year ending after 1956 
and all succeeding taxable years, the individual may make such 
certificate effective for his first taxable year ending after 1955 and 
all succeeding taxable years by:
    (a) Filing a supplemental certificate on Form 2031 after September 
13, 1960, and before April 17, 1962;
    (b) Paying on or before April 16, 1962, the tax under section 1401 
in respect of all the individual's self-employment income (except for 
underpayments of tax attributable to errors made in good faith) for his 
first taxable year ending after 1955; and
    (c) By repaying on or before April 16, 1962, the amount of any 
refund (including any interest paid under section 6611) that has been 
made of any such tax which (but for section 1402(e)(3)(B)) is an 
overpayment.

Any payment or repayment described in section 1402(e)(3)(B) and in this 
subparagraph shall not constitute an overpayment within the meaning of 
section 6401 which relates to amounts treated as overpayments. See 
section 6401 and the regulations thereunder in part 301 of this chapter 
(Regulations on Procedure and Administration).

    Example. M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in 1956, and his net earnings from 
service performed in the exercise of his ministry during each of the 
years 1956 and 1957 were $400 or more. On July 15, 1957, M filed a 
waiver certificate which became effective, at the time of filing, for 
1957 and all succeeding taxable years. Since the certificate was not 
filed on or before April 15, 1957 (the due date of M's income tax return 
for the taxable year 1956), and since there was no extension of time for 
filing his 1956 income tax return, the certificate was not, at the time 
of filing, effective for the taxable year 1956. M files a supplemental 
certificate on April 17, 1961. If, in addition to the filing of the 
supplemental certificate, M pays on or before April 16, 1962, the self-
employment tax in respect of all his self-employment income (except for 
underpayments of tax attributable to errors made in good faith) for his 
taxable year 1956, and repays, on or before April 16, 1962, the amount 
of any refund (including any interest paid under section 6611) that has 
been made of any such tax which (but for section 1402(e)(3)(B)) is an 
overpayment, the certificate filed by M on July 15, 1957, becomes 
effective for the year 1956 and all succeeding taxable years.

    (b) Filed after August 30, 1957, and before the due date of the 1958 
return. A certificate on Form 2031 filed by an individual after August 
30, 1957, but on or before the due date of the return (including any 
extension thereof) for his second taxable year ending after 1956, in 
accordance with the provisions of section 1402(e) in effect at the time 
the certificate is filed, shall be effective for his first taxable year 
ending after 1955, and all subsequent taxable years.
    (c) Filed after due date of 1958 return--(1) In general. Except as 
otherwise provided in Sec. 1.1402(e)(5)-1 (applicable to certificates 
filed within the period September 14, 1960, to April 16, 1962, 
inclusive) and in subparagraphs (2) and (3) of this paragraph, a 
certificate on Form 2031 filed by an individual in accordance with the 
provisions of Secs. 1.1402(e)(1)-1 and 1.1402(e)(2)-1, inclusive, after 
the due date of the return (including any extension thereof) for his 
second taxable year ending after 1956 shall be effective for the taxable 
year immediately preceding the earliest taxable year for which, at the 
time the certificate is filed, the period for filing a return (including 
any extension thereof) has not expired, and for all succeeding taxable 
years.

    Example. M, a duly ordained minister of a church, makes his income 
tax returns on the basis of a calendar year. M has not been granted an 
extension of time for filing any return. On April 15, 1963, the due date 
of his income tax return for 1962, M files a waiver certificate pursuant 
to Sec. 1.1402(e)(1)-1 and within the time limitation set forth in 
Sec. 1.1402(e)(2)-1. On April 15, 1963, the year 1962 is the earliest 
taxable year for which the period for filing a return has not expired. 
Consequently, M's certificate is effective for 1961 and all succeeding 
taxable years. M must report and pay any self-employment tax due for 
1961 and 1962. (The tax, if any, for 1962 is due on April 15, 1963.) 
Inasmuch as the due date of the tax for 1961 is April 16, 1962, M must 
pay interest on any tax due for 1961. For provisions relating to such 
interest, see Sec. 301.6601-1 of Part 301 of this chapter (Regulations 
on Procedure and Administration).

    (2) Filed after October 13, 1964, and on or before the due date of 
return for second

[[Page 56]]

taxable year ending after 1962. A certificate on Form 2031 filed by an 
individual in accordance with the provisions of Secs. 1.1402(e)(1)-1 and 
1.1402(e)(2)-1, inclusive, after October 13, 1964, and on or before the 
due date of the return (including any extension thereof) for his second 
taxable year ending after 1962 (April 15, 1965, in the case of a 
calendar year taxpayer who has not been granted an extension of time for 
filing his income tax return for 1964) shall be effective for his first 
taxable year ending after 1961 and all succeeding taxable years.

    Example. M, a duly ordained minister of a church, makes his income 
tax returns on the basis of a calendar year. M has not been granted an 
extension of time for filing any return. On April 15, 1965, the due date 
of his income tax return for 1964, M files a waiver certificate pursuant 
to Sec. 1.1402(e)(1)-1 and within the time limitation set forth in 
Sec. 1.1402(e)(2)-1. M's certificate is effective for 1962 and all 
succeeding taxable years, and he must report and pay any self-employment 
tax due for 1962, 1963, and 1964. (The tax, if any, for 1964 is due on 
April 15, 1965.) Inasmuch as the due dates of the tax for 1962 and 1963 
are April 15, 1963, and April 15, 1964, respectively, M must pay 
interest on any tax due for 1962 or 1963. For provisions relating to 
such interest, see Sec. 301.6601-1 of Part 301 of this chapter 
(Regulations on Procedure and Administration).

    (3) Filed after July 30, 1965, and on or before the due date of 
return for second taxable year ending after 1963. A certificate on Form 
2031 filed by an individual in accordance with the provisions of 
Secs. 1.1402(e)(1)-1 and 1.1402(e)(2)-1, inclusive, after July 30, 1965, 
and on or before the due date of the return (including any extension 
thereof) for his second taxable year ending after 1963 (Apr. 15, 1966, 
in the case of a calendar year taxpayer who has not been granted an 
extension of time for filing his income tax return for 1965) shall be 
effective for his first taxable year ending after 1962 and all 
succeeding taxable years.

    Example. M, a duly ordained minister of a church, makes his income 
tax returns on the basis of a calendar year. M has not been granted an 
extension of time for filing any return. On April 15, 1966, the due date 
of his income tax return for 1965, M files a waiver certificate pursuant 
to Sec. 1.1402(e)(1)-1 and within the time limitation set forth in 
Sec. 1.1402(e)(2)-1. M's certificate is effective for 1963 and all 
succeeding taxable years, and he must report and pay any self-employment 
tax due for 1963, 1964, and 1965. (The tax, if any, for 1965 is due on 
April 15, 1966.) Inasmuch as the due dates of the tax for 1963 and 1964 
are April 15, 1964, and April 15, 1965, respectively, M must pay 
interest on any tax due for 1963 or 1964. For provisions relating to 
such interest, see Sec. 301.6601-1 of Part 301 of this chapter 
(Regulations on Procedure and Administration).

    (d) Election irrevocable. An election which has become effective 
pursuant to this section is irrevocable. A certificate may not be 
withdrawn after June 30, 1961.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15939, Oct. 30, 1968]



Sec. 1.1402(e)(4)-1   Treatment of certain remuneration paid in 1955 and 1956 as wages.

    If in 1955 or 1956 an individual was paid remuneration for service 
described in section 3121(b)(8)(A) which was erroneously treated by the 
organization employing him (under a certificate filed by such 
organization pursuant to section 3121(k) or the corresponding section of 
prior law) as employment, within the meaning of the Federal Insurance 
Contributions Act (Chapter 21 of the Internal Revenue Code), and if on 
or before August 30, 1957, the taxes imposed by sections 3101 and 3111 
were paid (in good faith and upon the assumption that the insurance 
system established by title II of the Social Security Act had been 
extended to such service) with respect to any part of the remuneration 
paid to such individual for such service, then the remuneration with 
respect to which such taxes were paid, and with respect to which no 
credit or refund of such taxes (other than a credit or refund which 
would be allowable if such service had constituted employment) has been 
obtained either by the employer or the employee on or before August 30, 
1957, shall be deemed, for purposes of the Self-Employment Contributions 
Act of 1954 and the Federal Insurance Contributions Act, to constitute 
remuneration paid for employment and not net earnings from self-
employment. For regulations relating to section 3121(b)(8)(A) and (k), 
see Secs. 31.3121(b)(8)-1 and 31.3121(k)-1 of subpart B of part 31

[[Page 57]]

of this chapter (Employment Tax Regulations).



Sec. 1.1402(e)(5)-1   Optional provision for certain certificates filed before April 15, 1962.

    (a) Certificates. (1) The optional provision contained in section 
1402(e)(5)(A) may be applied to a certificate on Form 2031 filed within 
the period September 14, 1960, to April 16, 1962, inclusive, in the case 
of a duly ordained, commissioned, or licensed minister of a church, a 
member of a religious order (other than a member of a religious order 
who has taken a vow of poverty as a member of such order), or a 
Christian Science practitioner, who has derived net earnings, in any 
taxable year ending after 1954 and before 1960, from the performance of 
service in the exercise of his ministry, in the exercise of duties 
required by his religious order, or in the exercise of his profession as 
a Christian Science practitioner, respectively, and who has reported 
such earnings as self-employment income on a return filed before 
September 14, 1960, and on or before the date prescribed for filing such 
return (including any extension thereof). The certificate may be filed 
by such minister, member of a religious order, or Christian Science 
practitioner or by a fiduciary acting for such individual or his estate, 
or by his survivor within the meaning of section 205(c)(1)(C) of the 
Social Security Act, and it must be filed after September 13, 1960, and 
on or before April 16, 1962. Subject to the conditions stated in 
subparagraph (2) of this paragraph, such certificate may be effective at 
the election of the person filing it, for the first taxable year ending 
after 1954 and before 1960 for which a return, as described in the first 
sentence of this subparagraph, was filed, and for all succeeding taxable 
years, rather than for the period prescribed in Sec. 1.1402(e)(3)-1. The 
election for retroactive application of the certificate may be made by 
indicating on the certificate the first taxable year for which it is to 
be effective and that such year is the first taxable year ending after 
1954 and before 1960 for which the minister, member of a religious 
order, or Christian Science practitioner filed an income tax return on 
which he reported net earnings for such year from the exercise of his 
ministry, the exercise of duties required by his religious order, or the 
exercise of his profession as a Christian Science practitioner, as the 
case may be, and by fulfilling the conditions prescribed in subparagraph 
(2) of this paragraph.
    (2) A certificate to which subparagraph (1) of this paragraph 
relates may be effective for a taxable year prior to the taxable year 
immediately preceding the earliest taxable year for which, at the time 
the certificate is filed, the period for filing a return (including any 
extension thereof) has not expired, only if the following conditions are 
met:
    (i) The tax under section 1401 is paid on or before April 16, 1962, 
in respect of all self-employment income (whether or not derived from 
the performance of service by the individual in the exercise of his 
ministry, in the exercise of duties required by his religious order, or 
in the exercise of his profession as a Christian Science practitioner, 
as the case may be) for the first taxable year ending after 1954 and 
before 1960 for which such individual has filed a return, as described 
in subparagraph (1) of this paragraph, and for each succeeding taxable 
year ending before 1960; and
    (ii) In any case where refund has been made of any such tax which 
(but for section 1402(e)(5)) is an overpayment, the amount refunded 
(including any interest paid under section 6611) is repaid on or before 
April 16, 1962. For regulations under section 6611 (relating to interest 
on overpayments), see Sec. 301.6611-1 of part 301 of this chapter 
(Regulations on Procedure and Administration).
    (b) Supplemental certificates. (1) Subject to the conditions stated 
in subparagraph (2) of this paragraph, a certificate on Form 2031 filed 
on or before September 13, 1960, by a minister, member of a religious 
order, or a Christian Science practitioner described in paragraph (a)(1) 
of this section and which (but for section 1402(e)(5)(B)) is ineffective 
for the first taxable year ending after 1954 and before 1959 for which 
such a return as described in paragraph (a)(1) of this section was filed 
by such individual, shall be effective for such first taxable year and 
for all succeeding taxable years, provided

[[Page 58]]

a supplemental certificate is filed by such individual or by a fiduciary 
acting for him or his estate, or by his survivor (within the meaning of 
section 205(c)(1)(C) of the Social Security Act), after September 13, 
1960 and on or before April 16, 1962.
    (2) The filing of a supplemental certificate pursuant to 
subparagraph (1) of this paragraph will give retroactive effect to a 
certificate to which such subparagraph applies only if the following 
conditions are met:
    (i) The tax under section 1401 is paid on or before April 16, 1962, 
in respect of all self-employment income (whether or not attributable to 
earnings as a minister, member of a religious order, or Christian 
Science practitioner) for the first taxable year for which the 
certificate is retroactively effective and for each subsequent year 
ending before 1959; and
    (ii) In any case where refund has been made of any such tax which 
(but for section 1402(d)(5)) is an overpayment, the amount refunded 
(including any interest paid under section 6611) is repaid on or before 
April 16, 1962.
    (c) Underpayment of tax. For purposes of this section, any 
underpayment of the tax which is attributable to an error made in good 
faith will not invalidate an election which is otherwise valid.
    (d) Nonapplicability of section 6401. Any payment or repayment 
described in paragraph (a)(2) or paragraph (b)(2) of this section shall 
not constitute an overpayment within the meaning of section 6401 which 
relates to amounts treated as overpayments. For the provisions of 
section 6401 and the regulations thereunder, see section 6401 and 
Sec. 301.6401-1 of part 301 of this chapter (Regulations on Procedure 
and Administration).



Sec. 1.1402(e)(5)-2   Optional provisions for certain certificates filed on or before April 17, 1967.

    (a) In general--(1) General rule. Section 1402(e)(5), as amended by 
the Social Security Amendments of 1965, applies only in the case of a 
duly ordained, commissioned, or licensed minister of a church, a member 
of a religious order (other than a member of a religious order who has 
taken a vow of poverty as a member of such order), or a Christian 
Science practitioner, who has derived net earnings in any taxable year 
ending after 1954 from the performance of service in the exercise of his 
ministry, in the exercise of duties required by his religious order, or 
in the exercise of his profession as a Christian Science practitioner, 
respectively, and who has reported such earnings as self-employment 
income on a return filed on or before the date prescribed for filing 
such return (including any extension thereof).
    (2) Supplemental certificate. Subject to the conditions stated in 
subparagraph (4) of this paragraph, a certificate on Form 2031 filed on 
or before April 15, 1966, by a minister, member of a religious order, or 
a Christian Science practitioner described in subparagraph (1) of this 
paragraph and which (but for section 1402(e)(5)(A)) is ineffective for 
the first taxable year ending after 1954 for which a return described in 
subparagraph (1) of this paragraph was filed by such individual, shall 
be effective for such first taxable year and for all succeeding taxable 
years, provided a supplemental certificate is filed by such individual 
or by a fiduciary acting for him or his estate, or by his survivor 
(within the meaning of section 205(c)(1)(C) of the Social Security Act), 
after July 30, 1965 (the date of enactment of the Social Security 
Amendments of 1965), and on or before April 17, 1967.
    (3) Certificate filed by survivor. A survivor (within the meaning of 
section 205(c)(1)(C) of the Social Security Act) of an individual who:
    (i) Died on or before April 15, 1966,
    (ii) Was a minister, member of a religious order, or a Christian 
Science practitioner described in subparagraph (1) of this paragraph,
    (iii) Has filed a return as described in subparagraph (1) of this 
paragraph for a taxable year ending after 1954, and
    (iv) Had not filed a valid waiver certificate on Form 2031,

may file a certificate on Form 2031 on behalf of such individual. The 
certificate must be filed after July 30, 1965 (the date of enactment of 
the Social Security Amendments of 1965), and on or before April 17, 
1967. Subject to the conditions stated in subparagraph (4) of

[[Page 59]]

this paragraph, such certificate shall be effective for the first 
taxable year ending after 1954 for which a return, as described in 
subparagraph (1) of this paragraph, was filed by such individual and for 
all succeeding taxable years.
    (4) Applicable conditions. A supplemental certificate referred to in 
subparagraph (2) of this paragraph and a certificate referred to in 
subparagraph (3) of this paragraph shall be effective only if the 
following conditions are met:
    (i) The tax under section 1401 is paid on or before April 17, 1967, 
in respect of all self-employment income (whether or not attributable to 
earnings as a minister, member of a religious order, or Christian 
Science practitioner) for the first taxable year ending after 1954 for 
which the individual (by or in respect of whom the supplemental 
certificate or certificate is filed) has filed a return, as described in 
paragraph (1) of this paragraph, and for each succeeding taxable year 
ending before January 1, 1966; and
    (ii) In any case where refund has been made of any such tax which 
(but for section 1402(e)(5)) is an overpayment, the amount refunded 
(including any interest paid under section 6611) is repaid on or before 
April 17, 1967. For regulations under section 6611 (relating to interest 
on overpayments), see Sec. 301.6611-1 of part 301 of this chapter 
(Regulations on Procedure and Administration).
    (b) Underpayment of tax. For purposes of this section, any 
underpayment of the tax which is attributable to an error made in good 
faith will not invalidate an election which is otherwise valid.
    (c) Nonapplicability of section 6401. Any payment or repayment 
described in paragraph (a)(4) of this section shall not constitute an 
overpayment within the meaning of section 6401 which relates to amounts 
treated as overpayments. For the provisions of section 6401 and the 
regulations thereunder, see section 6401 and Sec. 301.6401-1 of part 301 
of this chapter (Regulations on Procedure and Administration).
    (d) Applicability of Secs. 1.1402(e) (5)-1 and 1.1402(e)(6)-1. The 
provisions of section 1402(e) (5) and (6) (in effect prior to July 30, 
1965, the date of enactment of the Social Security Amendments of 1965) 
and Secs. 1.1402(e) (5)-1 and 1.1402(e)(6)-1 shall apply with respect to 
any certificate filed pursuant to such sections if a supplemental 
certificate is not filed with respect to such certificate as provided in 
this section.

[T.D. 6978, 33 FR 15939, Oct. 30, 1968]



Sec. 1.1402(e)(6)-1   Certificates filed by fiduciaries or survivors on or before April 15, 1962.

    In any case in which an individual whose death has occurred after 
September 12, 1960, and before April 16, 1962, derived earnings from the 
performance of services as a duly ordained, commissioned, or licensed 
minister of a church in the exercise of his ministry, as a member of a 
religious order (other than a member of a religious order who has taken 
a vow of poverty as a member of such order) in the exercise of duties 
required by such order, or in the exercise of his profession as a 
Christian Science practitioner, a waiver certificate on Form 2031 may be 
filed after June 30, 1961 (the date of enactment of the Social Security 
Amendments of 1961), and on or before April 16, 1962, by a fiduciary 
acting for such individual's estate or by such individual's survivor 
within the meaning of section 205(c)(1)(C) of the Social Security Act. 
Such certificates shall be effective for the period prescribed in 
section 1402(e)(3)(A) (see Sec. 1.1402(e)(3)-1(c)) as if filed by the 
individual on the date of his death.



Sec. 1.1402(f)-1   Computation of partner's net earnings from self-employment for taxable year which ends as result of his death.

    (a) Taxable years ending after August 28, 1958--(1) In general. The 
rules for the computation of a partner's net earnings from self-
employment are set forth in paragraphs (d) to (g), inclusive, of 
Sec. 1.1402(a)-2. In addition to the net earnings from self-employment 
computed under such rules for the last taxable year of a deceased 
partner, if a partner's taxable year ends after August 28, 1958, solely 
because of death, and on a day other than the last day of the 
partnership's taxable year, the deceased partner's net earnings from 
self-

[[Page 60]]

employment for such year shall also include so much of the deceased 
partner's distributive share of partnership ordinary income or loss (see 
subparagraph (3) of this paragraph) for the taxable year of the 
partnership in which his death occurs as is attributable to an interest 
in the partnership prior to the month following the month of his death.
    (2) Computation. (i) The deceased partner's distributive share of 
partnership ordinary income or loss for the partnership taxable year in 
which he died shall be determined by applying the rules contained in 
paragraphs (d) to (g), inclusive, of Sec. 1.1402(a)-2, except that 
paragraph (e) shall not apply.
    (ii) The portion of such distributive share to be included under 
this section in the deceased partner's net earnings from self-employment 
for his last taxable year shall be determined by treating the ordinary 
income or loss constituting such distributive share as having been 
realized or sustained ratably over the period of the partnership taxable 
year during which the deceased partner had an interest in the 
partnership and during which his estate, or any other person succeeding 
by reason of his death to rights with respect to his partnership 
interest, held such interest in the partnership or held a right with 
respect to such interest. The amount to be included under this section 
in the deceased partner's net earnings from self-employment for his last 
taxable year will, therefore, be determined by multiplying the deceased 
partner's distributive share of partnership ordinary income or loss for 
the partnership taxable year in which he died, as determined under 
subdivision (i) of this subparagraph, by a fraction, the denominator of 
which is the number of calendar months in the partnership taxable year 
over which the ordinary income or loss constituting the deceased 
partner's distributive share of partnership income or loss for such year 
is treated as having been realized or sustained under the preceding 
sentence and the numerator of which is the number of calendar months in 
such partnership taxable year that precede the month following the month 
of his death.
    (3) Definition of ``deceased partner's distributive share''. For the 
purpose of this section, the term ``deceased partner's distributive 
share'' includes the distributive share of his estate or of any other 
person succeeding, by reason of his death, to rights with respect to his 
partnership interest. It does not include any share attributable to a 
partnership interest which was not held by the deceased partner at the 
time of his death. Thus, if a deceased partner's estate should acquire 
an interest in a partnership additional to the interest to which it 
succeeded upon the death of the deceased partner, the amount of the 
distributive share attributable to such additional interest acquired by 
the estate would not be included in computing the ``deceased partner's 
distributive share'' of the partnership's ordinary income or loss for 
the partnership taxable year.
    (4) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example (1). B, an individual who files his income tax returns on 
the calendar year basis, is a member of the ABC partnership, the taxable 
year of which ends on June 30. B dies on October 17, 1958, and his 
estate succeeds to his partnership interest and continues as a partner 
in its own right under local law until June 30, 1959. B's distributive 
share of the partnership's ordinary income, as determined under 
paragraphs (d) to (g), inclusive, of Sec. 1.1402(a)-2, for the taxable 
year of the partnership ended June 30, 1958 is $2,400. His distributive 
share, including the share of his estate, of such partnership's ordinary 
income, as determined under paragraphs (d) to (g), inclusive, of 
Sec. 1.1402(a)-2 (with the exception of paragraph (e)), for the taxable 
year of the partnership ended June 30, 1959 is $4,500. The portion of 
such $4,500 attributable to an interest in the partnership prior to the 
month following the month in which he died is $4,500 x 4/12 (4 being the 
number of months in the partnership taxable year in which B died which 
precede the month following the month of his death and 12 being the 
number of months in such partnership taxable year in which B and his 
estate had an interest in the partnership) or $1,500. The amount to be 
included in the deceased partner's net earnings from self-employment for 
his last taxable year is $3,900 ($2,400 plus $1,500).
    Example (2). If in the preceding example B's estate is entitled to 
only $1,000, the amount of B's distributive share of partnership 
ordinary income for the period July 1, 1958 through October 17, 1958, 
such $1,000 is considered to have been realized ratably over

[[Page 61]]

the period preceding B's death and will be included in B's net earnings 
from self-employment for his last taxable year.
    Example (3). X, who reports his income on a calendar year basis, is 
a member of a partnership which also reports its income on a calendar 
year basis. X dies on June 30, 1959, and his estate succeeds to his 
partnership interest and continues as a partner in its own right under 
local law. On September 15, 1959, X's estate sells the partnership 
interest to which it succeeded on the death of X. X's distributive share 
of partnership income for 1959 is $5,500. $600 of such amount is X's 
share of the gain from the sale of a capital asset which occurs on May 
1, 1959, and $400 of such amount is the estate's share of the gain from 
the sale of a capital asset which occurs on July 15, 1959. The remainder 
of such amount is income from services rendered. X's distributive share 
of partnership ordinary income for 1959, as determined under paragraphs 
(d) to (g), inclusive, of Sec. 1.1402(a)-2 (with the exception of 
paragraph (e)), is $4,500 ($5,500 minus $1,000). The portion of such 
share attributable to an interest in the partnership prior to the month 
following the month of his death is $4,500 x 6/8.5 (6 being the number 
of months in the partnership taxable year in which X died as precede the 
month following the month of his death and 8.5 being the number of 
months in such partnership taxable year in which X and his estate had an 
interest in the partnership) or $3,176.47.

    (b) Options available to farmers--(1) Special rule. In determining 
whether the optional method available to a member of a farm partnership 
in computing his net earnings from self-employment may be applied, and 
in applying such method, it is necessary to determine the partner's 
distributive share of partnership gross income and the partner's 
distributive share of income described in section 702(a)(9). See section 
1402(a) and Sec. 1.1402(a)-15. If section 1402(f) and this section 
apply, or may be made applicable under section 403(b)(2) of the Social 
Security Amendments of 1958 and paragraph (c) of this section, for the 
last taxable year of a deceased partner, such partner's distributive 
share of income described in section 702(a)(9) for his last taxable year 
shall be determined by including therein any amount which is included 
under section 1402(f) and this section in his net earnings from self-
employment for such taxable year. Such a partner's distributive share of 
partnership gross income for his last taxable year shall be determined 
by including therein so much of the deceased partner's distributive 
share (see paragraph (a)(3) of this section) of partnership gross 
income, as defined in section 1402(a) and paragraph (b) of 
Sec. 1.1402(a)-15, for the partnership taxable year in which he died as 
is attributable to an interest in the partnership prior to the month 
following the month of his death. Such allocation shall be made in the 
same manner as is prescribed in paragraph (a)(2) of this section for 
determining the portion of a deceased partner's distributive share of 
partnership ordinary income or loss to be included under section 1402(f) 
and this section in his net earnings from self-employment for his last 
taxable year.
    (2) Examples. The principles set forth in this paragraph may be 
illustrated by the following examples:

    Example (1). X, an individual who files his income tax returns on a 
calendar year basis, is a member of the XYZ farm partnership, the 
taxable year of which ends on March 31. X dies on May 31, 1967, and his 
estate succeeds to his partnership interest and continues as a partner 
in its own right under local law until March 31, 1968. X's distributive 
share of the partnership's ordinary income, determined under paragraphs 
(d) to (g), inclusive, of Sec. 1.1402(a)-2, for the taxable year of the 
partnership ended March 31, 1967, is $1,600. His distributive share, 
including the share of his estate, of such partnership's ordinary loss 
as determined under paragraphs (d) to (g), inclusive, of Sec. 1.1402(a)-
2 (with the exception of paragraph (e)), for the taxable year of the 
partnership ended March 31, 1968, is $1,200. The portion of such $1,200 
attributable to an interest in the partnership prior to the month 
following the month in which he died is $1,200 x 2/12 (2 being the 
number of months in the partnership taxable year in which X died which 
precede the month following the month of his death and 12 being the 
number of months in such partnership taxable year in which X and his 
estate had an interest in the partnership) or $200. X is also a member 
of the ABX farm partnership, the taxable year of which ends on May 31. 
His distributive share of the partnership loss described in section 
702(a)(9) for the partnership taxable year ending May 31, 1967, is $300. 
Section 1402(f) and this section do not apply with respect to such $300 
since X's last taxable year ends, as a result of his death, with the 
taxable year of the ABX partnership. Under this paragraph the $200 loss 
must be included in determining X's distributive share of XYZ 
partnership income described in section 702(a)(9) for the purpose of 
applying the optional method available to farmers

[[Page 62]]

for computing net earnings from self-employment. Further, the resulting 
$1,400 of income must be aggregated, pursuant to paragraph (c) of 
Sec. 1.1402(a)-15, with the $300 loss, X's distributive share of ABX 
partnership loss described in section 702(a)(9), for purposes of 
applying such option. The representative of X's estate may exercise the 
option described in paragraph (a)(2)(ii) of Sec. 1.1402(a)-15, provided 
the portion of X's distributive share of XYZ partnership gross income 
for the taxable year ended March 31, 1968, attributable to an interest 
in the partnership prior to the month following the month in which he 
died (the allocation being made in the manner prescribed for allocating 
his $1,200 distributive share of XYZ partnership loss for such year), 
when aggregated with his distributive share of XYZ partnership gross 
income for the partnership taxable year ended March 31, 1967, and with 
his distributive share of ABX partnership gross income for the 
partnership taxable year ended May 31, 1967, results in X having more 
than $2,400 of gross income from the trade or business of farming. If 
such aggregate amount of gross income is not more than $2,400, the 
option described in paragraph (a)(2)(i) of Sec. 1.1402(a)-15, is 
available.
    Example (2). A, a sole proprietor engaged in the business of 
farming, files his income tax returns on a calendar year basis. A is 
also a member of a partnership engaged in an agricultural activity. The 
partnership files its returns on the basis of a fiscal year ending March 
31. A dies June 29, 1967. A's gross income from farming as a sole 
proprietor for the 6-month period comprising his taxable year which ends 
because of death is $1,600 and his actual net earnings from self-
employment based thereon are $400. As of March 31, 1967, A's 
distributive share of the gross income of the farm partnership is $2,200 
and his distributive share of income described in section 702(a)(9) 
based thereon is $1,000. The amount of A's distributive share of the 
partnership's ordinary income for its taxable year ended March 31, 1968, 
which may be included in his net earnings from self-employment under 
section 1402(f) and paragraph (a) of this section is $300. The amount of 
the deceased partner's distributive share of partnership gross income 
attributable to an interest in the partnership prior to the month 
following the month of his death as is determined, pursuant to 
subparagraph (1) of this paragraph, under paragraph (a) of this section 
is $2,000. An aggregation of the above figures produces a gross income 
from farming of $5,800 and actual net earnings from self-employment of 
$1,700. Under these circumstances none of the options provided by 
section 1402(a) may be used. If the actual net earnings from self-
employment had been less than $1,600, the option described in paragraph 
(a)(2)(ii) of Sec. 1.1402(a)-15 would have been available.

    (c) Taxable years ending after 1955 and on or before August 28, 
1958--(1) Requirement of election. If a partner's taxable year ended, as 
a result of his death, after 1955 and on or before August 28, 1958, the 
rules set forth in paragraph (a) of this section may be made applicable 
in computing the deceased partner's net earnings from self-employment 
for his last taxable year provided that:
    (i) Before January 1, 1960, there is filed, by the person designated 
in section 6012(b)(1) and paragraph (b)(1) of Sec. 1.6012-3, a return 
(or amended return) of the tax imposed by chapter 2 for the taxable year 
ending as a result of death, and
    (ii) Such return, if filed solely for the purpose of reporting net 
earnings from self-employment resulting from the enactment of section 
1402(f), is accompanied by the amount of tax attributable to such net 
earnings.
    (2) Administrative rule of special application. Notwithstanding the 
provisions of sections 6601, 6651, and 6653 (see such sections and the 
regulations thereunder) no interest or penalty shall be assessed or 
collected on the amount of any self-employment tax due solely by reason 
of the operation of section 1402(f) in the case of an individual who 
died after 1955 and before August 29, 1958.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6993, 34 FR 
830, Jan. 18, 1969]



Sec. 1.1402(g)-1   Treatment of certain remuneration erroneously reported as net earnings from self-employment.

    (a) General rule. If an amount is erroneously paid as self-
employment tax, for any taxable year ending after 1954 and before 1962, 
with respect to remuneration for service (other than service described 
in section 3121(b)(8)(A)) performed in the employ of an organization 
described in section 501(c)(3) and exempt from income tax under section 
501(a), and if such remuneration is reported as self-employment income 
on a return filed on or before the due date prescribed for filing such 
return (including any extension thereof), the individual who paid such 
amount (or a fiduciary acting for such individual or his estate, or his 
survivor (within the

[[Page 63]]

meaning of section 205(c)(1)(C) of the Social Security Act)), may 
request that such remuneration be deemed to constitute net earnings from 
self-employment. If such request is filed during the period September 
14, 1960, to April 16, 1962, inclusive, and on or after the date on 
which the organization which paid such remuneration to such individual 
for services performed in its employ has filed, pursuant to section 
3121(k), a certificate waiving exemption from taxes under the Federal 
Insurance Contributions Act, and if no credit or refund of any portion 
of the amount erroneously paid for such taxable year as self-employment 
tax (other than a credit or refund which would be allowable if such tax 
were applicable with respect to such remuneration) has been obtained 
before the date on which such request is filed or, if obtained, the 
amount credited or refunded (including any interest under section 6611) 
is repaid on or before such date, then, for purposes of the Self-
Employment Contributions Act of 1954 and the Federal Insurance 
Contributions Act, any amount of such remuneration which is paid to such 
individual before the calendar quarter in which such request is filed 
(or before the succeeding quarter if such certificate first becomes 
effective with respect to services performed by such individual in such 
succeeding quarter) and with respect to which no tax (other than an 
amount erroneously paid as tax) has been paid under the Federal 
Insurance Contributions Act, shall be deemed to constitute net earnings 
from self-employment and not remuneration for employment. If the 
certificate filed by such organization pursuant to section 3121(k) is 
not effective with respect to services performed by such individual on 
or before the first day of the calendar quarter in which the request is 
filed, then, for purposes of section 3121(b)(8)(B) (ii) and (iii), such 
individual shall be deemed to have become an employee of such 
organization (or to have become a member of a group, described in 
section 3121(k)(1)(E), of employees of such organization) on the first 
day of the succeeding quarter.
    (b) Request for validation. (1) No particular form is prescribed for 
making a request under paragraph (a) of this section. The request should 
be in writing, should be signed and dated by the person making the 
request, and should indicate clearly that it is a request that, pursuant 
to section 1402(g) of the Code, remuneration for service described in 
section 3121(b)(8) (other than service described in section 
3121(b)(8)(A)) erroneously reported as self-employment income for one or 
more specified years be deemed to constitute net earnings from self-
employment and not remuneration for employment. In addition, the 
following information shall be shown in connection with the request:
    (i) The name, address, and social security account number of the 
individual with respect to whose remuneration the request is made.
    (ii) The taxable year or years (ending after 1954 and before 1962) 
to which the request relates.
    (iii) A statement that the remuneration was erroneously reported as 
self- employment income on the individual's return for each year 
specified and that the return was filed on or before its due date 
(including any extension thereof).
    (iv) Location of the office of the district director with whom each 
return was filed.
    (v) A statement that no portion of the amount erroneously paid by 
the individual as self-employment tax with respect to the remuneration 
has been credited or refunded (other than a credit or refund which would 
have been allowable if the tax had been applicable with respect to the 
remuneration); or, if a credit or refund of any portion of such amount 
has been obtained, a statement identifying the credit or refund and 
showing how and when the amount credited or refunded, together with any 
interest received in connection therewith, was repaid.
    (vi) The name and address of the organization which paid the 
remuneration to the individual.
    (vii) The date on which the organization filed a waiver certificate 
on Form SS-15, and the location of the office of the district director 
with whom it was filed.
    (viii) The date on which the certificate became effective with 
respect to services performed by the individual.
    (ix) If the request is made by a person other than the individual to 
whom the

[[Page 64]]

remuneration was paid, the name and address of that person and evidence 
which shows the authority of such person to make the request.
    (2) The request should be filed with the district director of 
internal revenue with whom the latest of the returns specified in the 
request pursuant to subparagraph (1)(iii) of this paragraph was filed.
    (c) Cross references. For regulations relating to section 3121 
(b)(8) and (k), see Secs. 31.3121(b)(8)-2 and 31.3121(k)-1 of subpart B 
of part 31 of this chapter (Employment Tax Regulations). For regulations 
relating to exemption from income tax of an organization described in 
section 501(c)(3), see Sec. 1.501(c)(3)-1.



Sec. 1.1402(h)-1   Members of certain religious groups opposed to insurance.

    (a) In general. An individual--(1) Who is a member of a recognized 
religious sect or division thereof and,
    (2) Who is an adherent of established tenets or teachings of such 
sect or division and by reason thereof is conscientiously opposed to 
acceptance of the benefits of any private or public insurance which 
makes payments in the event of death, disability, old age, or retirement 
or makes payments toward the cost of, or provides services for, medical 
care (including the benefits of any insurance system established by the 
Social Security Act),

may file an application for exemption from the tax under section 1401. 
The form of insurance to which section 1402(h) and this section refer 
does not include liability insurance of a kind that provides only for 
the protection of other persons, or property of other persons, who may 
be injured or damaged by or on property belonging to, or by an action 
of, an individual who otherwise meets the requirements of this section. 
An application for exemption under section 1402(h) and this section 
shall be made in the manner provided in paragraph (b) of this section 
and within the time specified in paragraph (c) of this section. For 
provisions relating to the filing of an application for exemption by a 
fiduciary or survivor, see paragraph (d) of this section.
    (b) Application for exemption. The application for exemption shall 
be filed on Form 4029 in duplicate with the internal revenue official or 
office designated on the form. The filing of a return by a member of a 
religious group opposed to insurance showing no self-employment income 
or self-employment tax shall not be construed as an application for 
exemption referred to in paragraph (a) of this section.
    (c) Time limitation for filing application for exemption--(1) 
Taxable years ending before December 31, 1967. A member of a religious 
group opposed to insurance within the meaning of paragraph (a) of this 
section:
    (i) Who has self-employment income (determined without regard to 
subsections (c)(6) and (h) of section 1402 and this section) for one or 
more taxable years ending before December 31, 1967, and
    (ii) Who desires to be exempt from the payment of the self-
employment tax under section 1401,

must file the application for exemption on or before December 31, 1968.
    (2) Taxable year ending on or after December 31, 1967--(i) General 
rule. Except as provided in subdivision (ii) of this subparagraph, a 
member of a religious group opposed to insurance within the meaning of 
paragraph (a) of this section:
    (a) Who has no self-employment income (determined without regard to 
subsections (c)(6) and (h) of section 1402 and this section) for any 
taxable year ending before December 31, 1967, and
    (b) Who desires to be exempt from the payment of the self-employment 
tax under section 1401 for any taxable year ending on or after December 
31, 1967,

must file the application for exemption on or before the due date of the 
income tax return (see section 6072), including any extension thereof 
(see section 6081), for the first taxable year ending on or after 
December 31, 1967, for which he has self-employment income (determined 
without regard to subsections (c)(6) and (h) of section 1402 and this 
section.
    (ii) Exception to general rule. If an individual to whom subdivision 
(i) of this subparagraph applies:
    (a) Is notified in writing by a district director of internal 
revenue or the Director of International Operations that

[[Page 65]]

he has not filed the application for exemption on or before the date 
specified in such subdivision (i), and
    (b) Files the application for exemption on or before the last day of 
the third calendar month following the calendar month in which he is so 
notified,

such application shall be considered a timely filed application for 
exemption.
    (d) Application by fiduciary or survivor. If an individual who was a 
member of a religious group opposed to insurance dies before the 
expiration of the time prescribed in section 1402(h)(2) and paragraph 
(c) of this section during which an application could have been filed by 
him, an application for exemption with respect to such deceased 
individual may be filed by a fiduciary acting for such individual's 
estate or by such individual's survivor within the meaning of section 
205(c)(1)(C) of the Social Security Act. An application for exemption 
with respect to a deceased individual executed by a fiduciary or 
survivor may be approved only if it could have been approved if the 
individual were not deceased and had filed the application on the date 
the application was filed by the fiduciary or executor.
    (e) Approval of application for exemption--(1) In general. The 
filing of an application for exemption on Form 4029 by a member of a 
religious group opposed to insurance does not constitute an exemption 
from the payment of the tax on self-employment income. An individual who 
files such an application is exempt from the payment of the tax only if 
the application is approved by the official with whom the application is 
required to be filed (see paragraph (b) of this section).
    (2) Conditions relating to approval or disapproval of application. 
An application for exemption on Form 4029 will not be approved unless 
the Secretary of Health, Education, and Welfare finds with respect to 
the religious sect or division thereof of which the individual filing 
the application is a member:
    (i) That the sect or division thereof has the established tenets or 
teachings by reason of which the individual applicant is conscientiously 
opposed to the benefits of insurance of the type referred to in section 
1402(h) (see paragraph (a) of this section),
    (ii) That it is the practice, and has been for a period of time 
which the Secretary of Health, Education, and Welfare deems to be 
substantial, for members of such sect or division thereof to make 
provisions for their dependent members which, in the judgment of such 
Secretary, is reasonable in view of the general level of living of the 
members of the sect or division thereof; and
    (iii) That the sect or division thereof has been in existence 
continuously since December 31, 1950.

In addition, an application for exemption on Form 4029 will not be 
approved if any benefit or other payment under title II of title XVIII 
of the Social Security Act became payable (or, but for section 203, 
relating to reduction of insurance benefits, or 222(b), relating to 
reduction of insurance benefits on account of refusal to accept 
rehabilitation services, of the Social Security Act would have been 
payable) at or before the time of the filing of the application for 
exemption. Any determination required to be made pursuant to the 
preceding sentence will be made by the Secretary of Health, Education, 
and Welfare.
    (f) Period for which exemption is effective--(1) General rule. An 
application for exemption shall be in effect (if approved as provided in 
paragraph (e) of this section) for all taxable years beginning after 
December 31, 1950, except as otherwise provided in subparagraph (2) of 
this paragraph.
    (2) Exceptions. An application for exemption referred to in 
subparagraph (1) of this paragraph shall not be effective for any 
taxable year which:
    (i) Begins (a) before the taxable year in which the individual 
filing the application first met the requirements of subparagraphs (1) 
and (2) of paragraph (a) of this section, or (b) before the time as of 
which the Secretary of Health, Education, and Welfare finds that the 
sect or division thereof of which the individual is a member met the 
requirements of subparagraphs (C) and (D) of section 1402(h)(1) (see 
subdivisions (i) and (ii) of paragraph (e)(2) of this section), or
    (ii) Ends (a) after the time at which the individual filing the 
application ceases to meet the requirements of subparagraphs (1) and (2) 
of paragraph (a)

[[Page 66]]

of this section, or (b) after the time as of which the Secretary of 
Health, Education, and Welfare finds that the sect or division thereof 
of which the individual is a member ceases to meet the requirements of 
subparagraphs (C) and (D) of section 1402(h)(1) (see subdivisions (i) 
and (ii) of paragraph (e)(2) of this section).
    (g) Refund or credit. An application for exemption on Form 4029 
filed on or before December 31, 1968 (if approved as provided in 
paragraph (e) of this section), shall constitute a claim for refund or 
credit of any tax on self-employment income under section 1401 (or under 
section 480 of the Internal Revenue Code of 1939) paid or incurred in 
respect of any taxable year beginning after December 31, 1950, and 
ending before December 31, 1967, for which an exemption is granted. 
Refund or credit of any tax referred to in the preceding sentence may be 
made, pursuant to the provisions of section 501(c) of the Social 
Security Amendments of 1967 (81 Stat. 933), notwithstanding that the 
refund or credit would otherwise be prevented by operation of any law or 
rule of law. No interest shall be allowed or paid in respect of any 
refund or credit made or allowed in connection with a claim for refund 
or credit made on Form 4029.

[T.D. 6993, 34 FR 831, Jan. 18, 1969]



Sec. 1.1403-1   Cross references.

    For provisions relating to the requirement for filing returns with 
respect to net earnings from self-employment, see Sec. 1.6017-1. For 
provisions relating to declarations of estimated tax on self-employment 
income, see Secs. 1.6015(a) to 1.6015(j)-1, inclusive. For other 
administrative provisions relating to the tax on self-employment income, 
see the applicable sections of the regulations in this part 
(Sec. 1.6001-1 et seq.) and the applicable sections of the regulations 
in part 301 of this chapter (Regulations on Procedure and 
Administration).

[T.D. 7427, 41 FR 34026, Aug. 12, 1976]



 Withholding of Tax on Nonresident Aliens and Foreign Corporations and 
                         Tax-Free Covenant Bonds

               NONRESIDENT ALIENS AND FOREIGN CORPORATIONS



Sec. 1.1441-1   Requirement for withholding of tax on nonresident aliens, foreign partnerships, and foreign corporations.

    Except as otherwise provided in Secs. 1.1441-3, 1.1441-4, and 
1.1441-6, to the extent that the items specified in Sec. 1.1441-2 
constitute gross income from sources within the United States, 
withholding of a tax of 30 percent is required in the case of items of 
income specified in paragraphs (a) and (b) of Sec. 1.1441-2 when such 
income is paid to a nonresident alien individual, a foreign partnership, 
or a foreign corporation, except that with respect to payments made 
after March 4, 1964, withholding of a tax of 14 percent is required in 
the case of items of income specified in paragraph (c) of Sec. 1.1441-2. 
The rate of 30 percent or 14 percent shall be reduced as may be provided 
by a treaty with any country. See Secs. 1.894-1 and 1.1441-6 relating to 
income affected by treaty. For purposes of this section, the term 
``nonresident alien individual'' includes an alien resident of Puerto 
Rico. In the case of payments occurring after October 31, 1972, the term 
``foreign corporation'' does not include a corporation created or 
organized in Guam or under the law of Guam. The rules of chapter 3 of 
the Code and Secs. 1.1441-1 through 1.1441-6 and Secs. 1.1461-1 through 
1.1464-1 apply to a nonresident alien individual even though the 
individual has an election in effect under section 6013 (g) or (h) of 
the Code.

[T.D. 7385, 40 FR 50263, Oct. 29, 1975, as amended by T.D. 7670, 45 FR 
6932, Jan. 31, 1980]



Sec. 1.1441-2   Income subject to withholding.

    (a) Fixed or determinable annual or periodical income. (1) The gross 
amount of

[[Page 67]]

fixed or determinable annual or periodical income is subject to 
withholding. Section 1441(b) specifically includes in such income 
interest, dividends, rent, salaries, wages, premiums, annuities, 
compensations, remunerations, and emoluments; but other kinds of income 
are included, as, for instance, royalties. For purposes of the preceding 
sentence, the term ``interest'' includes interest on certain deferred 
payments, as provided in section 483 and the regulations thereunder. The 
term ``fixed or determinable annual or periodical'' income is merely 
descriptive of the character of a class of income. If an item of income 
falls within the class of income contemplated by the statute, it is 
immaterial whether payment of that item is made in a series of repeated 
payments or in a single lump sum. Thus, $5,000 in royalty income would 
come within the meaning of the term, whether paid in 10 payments of $500 
each or in one payment of $5,000.
    (2) Income is fixed when it is to be paid in amounts definitely 
predetermined. Income is determinable whenever there is a basis of 
calculation by which the amount to be paid may be ascertained. The 
income need not be paid annually if it is paid periodically; that is to 
say, from time to time, whether or not at regular intervals. The fact 
that a payment is not made annually or periodically does not, however, 
necessarily prevent its being fixed or determinable annual or periodical 
income. That the length of time during which the payments are to be made 
may be increased or diminished in accordance with someone's will or with 
the happening of an event does not make the payments any the less 
determinable or periodical. A salesman working by the month for a 
commission on sales which is paid or credited monthly receives 
determinable periodical income. The share of the fixed or determinable 
annual or periodical income of an estate or trust from sources within 
the United States which is required to be distributed currently, or 
which has been paid or credited during the taxable year, to a 
nonresident alien beneficiary of such estate or trust constitutes fixed 
or determinable annual or periodical income. Such items as taxes, 
interest on mortgages, or premiums on insurance paid to or for the 
account of a nonresident alien landlord by a tenant, pursuant to the 
terms of the lease, constitute fixed or determinable annual or 
periodical income.
    (3) Income derived from the sale in the United States of property, 
whether real or personal, is not fixed or determinable annual or 
periodical income.
    (b) Other income subject to withholding--(1) Payments in taxable 
years of recipients beginning before January 1, 1967. For payments made 
in taxable years of recipients beginning before January 1, 1967, 
withholding at 30 percent is also required on the gross amount of the 
items described in section 402(a)(2), relating to treatment of total 
distributions from certain employees' trusts; in sections 631 (b) and 
(c), relating to treatment of gain on disposal of timber, coal, or 
domestic iron ore with a retained economic interest; in section 1235, 
relating to treatment of gain on sale or exchange of patents; and, after 
September 2, 1958, in section 403(a)(2), relating to treatment of 
payments under certain employee annuities, each of which items is 
considered to be gain from the sale or exchange of a capital asset.
    (2) Payments in taxable years of recipients beginning after December 
31, 1966. For payments made in taxable years of recipients beginning 
after December 31, 1966, withholding at 30 percent is also required on 
the gross amount of the following items:
    (i) Gains described in section 402(a)(2), relating to the treatment 
of total distributions from certain employees' trusts; section 
403(a)(2), relating to treatment of payments under certain employee 
annuities; and section 631 (b) or (c), relating to treatment of gain on 
disposal of timber, coal, or domestic iron ore with a retained economic 
interest;
    (ii) [Reserved]
    (iii) Gains subject to the 30-percent tax under section 871(a)(1)(D) 
or section 881(a)(4), relating to contingent payments received from the 
sale or exchange after October 4, 1966, of patents, copyrights, and 
similar intangible property; and
    (iv) Gains on transfers described in section 1235, relating to 
treatment of

[[Page 68]]

gain on sale or exchange of patents, if the transfers are made on or 
before October 4, 1966.
    (c) Amounts received by participants in certain exchange or training 
programs--(1) Scholarship or fellowship grants. Withholding of tax shall 
be at the rate of 14 percent (rather than 30 percent) on that portion of 
a scholarship or fellowship grant paid after March 4, 1964, to a 
nonresident alien individual who is temporarily present in the United 
States as a nonimmigrant under subparagraph (F) or (J) of section 
101(a)(15) of the Immigration and Nationality Act, as amended (8 U.S.C. 
1101(a)(15)(F) or (J)), which is not excludible from such nonresident 
alien's gross income under section 117(a)(1) and paragraph (a) of 
Sec. 1.117-1 because it exceeds the limitations set forth in section 
117(b)(2)(B) and paragraph (b)(2) of Sec. 1.117-2. Thus, if a 
nonresident alien scientist who was admitted to the United States under 
subparagraph (J) of section 101(a)(15) of the Immigration and 
Nationality Act, as amended, to engage in post-doctoral scientific 
studies received a fellowship grant from a grantor specified in section 
117(b)(2)(A) which exceeded the $300-per-month-for-36- months limitation 
determined under paragraph (b) (2) and (3) of Sec. 1.117-2, a tax at the 
rate of 14 percent rather than 30 percent must be withheld from the 
amount of the grant includible in the scientist's gross income.
    (2) Expenses for travel, research, etc. Withholding shall also be at 
the rate of 14 percent on amounts paid after March 4, 1964, to 
nonresident alien individuals described in subparagraph (1) of this 
paragraph to cover expenses for travel, research, clerical help, or 
equipment which are incident to a scholarship or fellowship grant to 
which section 117(a)(1) applies, but only to the extent that such 
amounts are not excludible from gross income under paragraph (b)(1) of 
Sec. 1.117-1 because they pertain to a portion of a scholarship or 
fellowship grant which is not excludible, or because the amount received 
is not specifically designated to cover such expenses under paragraph 
(b)(2)(i) of Sec. 1.117-1.
    (3) Exchange visitors. A nonresident alien individual who is 
temporarily present in the United States as a nonimmigrant under 
subparagraph (J) of section 101(a)(15) of the Immigration and 
Nationality Act, as amended, includes a nonresident alien individual 
admitted to the United States as an ``exchange visitor'' under section 
201 of the U.S. Information and Educational Exchange Act of 1948, as 
amended (22 U.S.C. 1446), which section was repealed by section 111 of 
the Mutual Educational and Cultural Exchange Act of 1961 (Pub. L. 87-
256, 75 Stat. 538).

(Approved by the Office of Management and Budget under control number 
1545-0795)

(Sec. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80 
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C. 
7805) of the Internal Revenue Code of 1954)

[T.D. 6500, 25 FR 12073, Nov. 26, 1960, as amended by T.D. 6908, 31 FR 
16770, Dec. 31, 1966; T.D. 7977, 49 FR 36831, Sept. 20, 1984]



Sec. 1.1441-3   Exceptions and rules of special application.

    (a) Income from sources without the United States. To the extent 
that items of income constitute gross income from sources without the 
United States, they are not subject to withholding under Sec. 1.1441-1. 
For rules governing the determination of the sources of income, see part 
I (section 861 and following), subchapter N, chapter 1 of the Code, and 
the regulations thereunder.
    (b) Corporate distributions--(1) Nontaxable portion. The tax shall 
be withheld at the source under Sec. 1.1441-1 on the gross amount of any 
distribution made by a corporation other than:
    (i) A nontaxable distribution payable in stock or stock rights, and
    (ii) A distribution which is treated as a distribution in part or 
full payment in exchange for stock.

This rule shall apply without regard to any claim that all or a portion 
of the distribution is not taxable under section 871 or 881. The tax 
shall be withheld on the gross amount of the distribution even though 
the payee may be entitled to the benefits of section 116, relating to 
partial exclusion of dividends received by individuals. Appropriate 
adjustment, if any, will be made upon the payee's filing of a claim for 
refund, together with appropriate supporting evidence, in accordance 
with paragraph (h) of this section.

[[Page 69]]

    (2) Dividends paid by a foreign corporation--(i) Payments in taxable 
years of recipients beginning before January 1, 1967. In the case of 
dividends paid in taxable years of recipients beginning before January 
1, 1967, no withholding under Sec. 1.1441-1 is required in the case of 
dividends paid by a foreign corporation unless (a) the corporation is 
engaged in trade or business within the United States and (b) more than 
85 percent of the gross income of the corporation for the 3-year period 
ending with the close of its taxable year preceding the declaration of 
the dividends (or for such part of such period as the corporation has 
been in existence) was derived from sources within the United States as 
determined under the provisions of Part I (section 861 and following), 
Subchapter N, Chapter 1 of the Code, and the regulations thereunder.
    (ii) Payments in taxable years of recipients beginning after 
December 31, 1966. In the case of dividends paid in taxable years of 
recipients beginning after December 31, 1966, all dividends paid by a 
foreign corporation which are treated as income from sources within the 
United States are subject to withholding under Sec. 1.1441-1.
    (3) Dividends paid to shareholder whose status is not definite. When 
a payer corporation or any other person, including a nominee, having the 
control, receipt, custody, disposal, or payment of dividends has no 
definite knowledge of the status of a shareholder, the tax shall be 
withheld under Sec. 1.1441-1 if the shareholder's address is outside the 
United States. If the shareholder's address is within the United States, 
it may be assumed for the purpose of withholding on dividends that, in 
the case of an individual, the shareholder is a citizen or resident of 
the United States; and, in the case of a partnership or corporation, the 
shareholder is a domestic partnership or a domestic corporation, as the 
case may be. Unless the facts and circumstances indicate clearly that 
the shareholder is a nonresident alien individual, foreign partnership, 
or foreign corporation, an address in care of another person in the 
United States does not of itself warrant treating the shareholder as a 
person who is subject to withholding upon dividends under Sec. 1.1441-1. 
If a shareholder changes his address from a place outside the United 
States to a place within the United States, the tax shall be withheld on 
dividends unless (i) proof is furnished showing that, in the case of an 
individual, he is a citizen or resident of the United States or, in the 
case of a partnership or corporation, it is a domestic partnership or 
corporation, or (ii) the withholding agent is otherwise satisfied that 
the shareholder is not a person who is subject to withholding under 
Sec. 1.1441-1. For general provisions for claiming to be a person not 
subject to withholding under Sec. 1.1441-1, see Sec. 1.1441-5.
    (c) Interest--(1) Government obligations. Withholding is required 
under Sec. 1.1441-1 in the case of interest paid on obligations issued 
on or after March 1, 1941, by the United States or any agency or 
instrumentality thereof. See section 103 and the regulations thereunder, 
relating to the taxation of such interest, and Sec. 1.1461-1, relating 
to ownership certificates.
    (2) Assumed obligations. If, in connection with the sale of a 
corporation's property, payment of the bonds or other obligations of the 
corporation is assumed by the assignee, the assignee, whether an 
individual, partnership, or corporation, shall deduct and withhold such 
taxes under Sec. 1.1441-1 as would be required to be withheld by the 
assignor had no such sale or transfer been made.
    (3) Defaulted interest coupons. The tax shall be withheld at the 
source under Sec. 1.1441-1 on the gross amount of interest without 
regard to whether or not the payment constitutes a return of capital or 
the payment of income within the meaning of section 61. Thus, for 
example, the tax shall be withheld in accordance with Sec. 1.1441-1 from 
defaulted interest payments upon bonds which were purchased flat at 
quotations representing the price of both the bonds and the defaulted 
matured interest coupons. Appropriate adjustments, if any, will be made 
upon the payee's filing of a claim for refund, together with appropriate 
supporting evidence, in accordance with paragraph (h) of this section.
    (4) Unknown owner. Withholding is required under Sec. 1.1441-1 in 
the case of interest upon all bonds or securities the owners of which 
are not known to

[[Page 70]]

the withholding agent unless such bonds or securities were issued by a 
corporation before January 1, 1934, contain a tax-free covenant, and do 
not have a maturity date which was extended on or after that date. For 
withholding under section 1451 in the case of unknown owners, see 
paragraph (a)(2) of Sec. 1.1451-1.
    (5) Tax-free covenant bonds--(i) Issued on or after January 1, 1934. 
Withholding is required under Sec. 1.1441-1 in the case of interest upon 
bonds or other corporate obligations issued on or after January 1, 1934, 
and containing a tax-free covenant.
    (ii) Issued before January 1, 1934. Withholding is not required 
under Sec. 1.1441-1 in the case of interest upon bonds or other 
corporate obligations issued before January 1, 1934, containing a tax-
free covenant, and not having a maturity date which was extended on or 
after that date. A domestic or resident fiduciary is required, however, 
to withhold tax under Sec. 1.1441-1 in the case of so much of such 
interest as is properly allocable under section 652 or 662 to a 
nonresident alien beneficiary. See paragraph (f) of this section and of 
Sec. 1.1451-1. For general rules respecting the withholding of tax under 
section 1451 in the case of such interest, see Sec. 1.1451-1.
    (iii) Extended maturity date. Withholding is required under 
Sec. 1.1441-1 in the case of interest upon bonds or other corporate 
obligations issued before January 1, 1934, and containing a tax-free 
covenant, if the maturity date of the bonds or obligations has been 
extended on or after that date. See paragraph (c) of Sec. 1.1451-1.
    (iv) Special rate of 27\1/2\ percent. The rate of tax to be withheld 
at the source under Sec. 1.1441-1 shall not exceed 27\1/2\ percent in 
the case of interest on bonds, mortgages, or deeds of trust, or other 
similar obligations of a corporation if:
    (a) The liability assumed by the debtor exceeds 27\1/2\ percent of 
the interest, and
    (b) The interest would be subject to withholding under the 
provisions of subsections (a), (b), and (c) of section 1451 except for 
the fact that the maturity date of the obligations has been extended on 
or after January 1, 1934. See paragraph (c) of Sec. 1.1451-1.
    (d) Special rules applicable to certain income--(1) Determination of 
amount to be withheld. If in the case of amounts described in paragraph 
(b) of Sec. 1.1441-2, other than amounts described in subparagraph 
(2)(ii) of such paragraph, the withholding agent does not know the 
amount of recognized gain, he is required to deduct and withhold such 
amount under Sec. 1.1441-1 as may be necessary to assure that the tax 
withheld will not be less than 30 percent of the recognized gain. For 
this purpose, the recognized gain shall be determined without regard to 
the deduction allowed by section 1202 with respect to capital gains. The 
amount so withheld shall not exceed 30 percent of the amount payable by 
reason of the transaction giving rise to the recognized gain, except 
that the amount payable may be determined by excluding the net 
unrealized appreciation described in section 402(a)(2). Appropriate 
adjustment, if any, will be made by the payee's filing of a claim for 
refund, together with appropriate supporting evidence, in accordance 
with paragraph (h) of this section.
    (2) Statement showing recognized gain. The withholding agent may, 
unless he has reason to believe to the contrary, rely on the statement 
of the person entitled to the gain described in subparagraph (1) of this 
paragraph as to the amount of gain which is recognized on the 
transaction involved and subject to withholding under Sec. 1.1441-1. 
This statement shall be filed with the withholding agent in duplicate. 
It shall show the computation of the amount of gain subject to 
withholding, shall be dated, shall be signed by the person entitled to 
the income, shall contain the taxpayer's identifying number, if any, and 
shall contain, or be verified by, a written declaration that it is made 
under the penalties of perjury. No particular form is prescribed for 
this statement. The duplicate copy of each statement filed during any 
calendar year pursuant to this subparagraph shall be forwarded by the 
withholding agent with, and attached to, the Form 1042S required by 
paragraph (c) of Sec. 1.1461-2 with respect to such gain for such 
calendar year.

[[Page 71]]

    (e) Personal exemption--(1) The taxation of nonresident alien 
individuals is provided for in part II (section 871 and following), 
subchapter N, chapter 1 of the Code. Section 874(a) makes the filing of 
a return a prerequisite to the allowance of deductions, including 
deductions of personal exemptions. Except in the circumstances described 
in subparagraph (2) of this paragraph, personal exemptions do not serve 
to reduce the amount of tax to be withheld under Sec. 1.1441-1.
    (2) In the determination of the tax to be withheld at the source 
under Sec. 1.1441-1 from remuneration paid for labor or personal 
services performed within the United States by a nonresident alien 
individual, the benefit of the deduction for personal exemptions 
provided in section 151, to the extent allowable under section 873(b)(3) 
and the regulations thereunder, shall be allowed, prorated upon a daily 
basis for the period during which labor or personal services are 
performed within the United States by the alien individual. The benefit 
of the deduction for such personal exemptions shall also be allowed in 
the determination of the tax of 14 percent to be withheld at the source 
under Sec. 1.1441-1 and paragraph (c) of Sec. 1.1441-2 from amounts paid 
after March 4, 1964, to nonresident alien individuals who are 
temporarily present in the United States as nonimmigrants under 
subparagraph (F) or (J) of the Immigration and Nationality Act, as 
amended, and such personal exemptions shall be prorated upon a daily 
basis for the period during which the described nonresident alien 
student or scholar receives the payments. The proration is on a basis of 
$1.70 per day for each exemption to which the nonresident alien 
individual is entitled. Thus, if A, a married nonresident alien 
individual without dependents is paid remuneration subject to 
withholding under Sec. 1.1441-1 for performing personal services during 
a stay of 100 days in the United States, the amount of $170 will be 
allocated as the portion of the deduction to be allowed against the 
remuneration for personal services performed within the United States 
during that period; and withholding at 30 percent shall be applied 
against the balance, if any, of the remuneration. If, for example, the 
total remuneration paid to A for that period is $2,000, a total tax in 
the amount of $549 [($2,000-$170) x 0.30] is required to be withheld 
under Sec. 1.1441-1. However, if A is a resident of Canada or Mexico, 
and his spouse has no gross income from sources within the United 
States, which is subject to income tax under chapter 1 of the Code, and 
is not the dependent of another taxpayer subject to such tax, an amount 
of $340 will be allocated as the portion of the deduction to be allowed 
against the remuneration for personal services performed within the 
United States. Thus, in such case, a total tax in the amount of $498 
[($2,000-$340) x 0.30] is required to be withheld under Sec. 1.1441-1. 
As to what constitutes remuneration for labor or personal services 
performed within the United States see section 861(a)(3) and the 
regulations thereunder.
    (f) Partnerships and fiduciaries. Domestic partnerships are required 
to withhold the tax at source under Sec. 1.1441.1 on items of income 
described in paragraphs (a) and (b) of Sec. 1.1441-2 that are included 
in the distributive share (including amounts that are not actually 
distributed) of a member of such partnership who is a nonresident alien 
individual, nonresident alien or foreign fiduciary of a trust or estate, 
foreign partnership, or foreign corporation. Resident or domestic 
fiduciaries of trusts and estates are required to withhold the tax at 
source under Sec. 1.1441-1 on all items of income described in 
paragraphs (a) and (b) of Sec. 1.1441-2 that constitute gross income 
from sources within the United States (including amounts that are not 
actually distributed) of beneficiaries who are nonresident alien 
individuals, foreign partnerships, or foreign corporations. Because the 
gross income allocable to a partner and the income includable in the 
gross income of the beneficiary cannot be determined until the end of a 
taxable year of the partnership, trust, or estate, the partnership and 
the fiduciary of a trust or estate shall withhold under this section on 
all distributions to such partners and beneficiaries during the taxable 
years to the extent such distributions include items of income described 
in paragraphs (a) and (b) of Sec. 1.1441-2. If

[[Page 72]]

the tax on actual distributions exceeds the tax on amounts includable in 
the gross income of the partner or beneficiary, the partner or 
beneficiary may file a claim for refund together with appropriate 
supporting evidence in accordance with paragraph (h) of this section. If 
a partnership or a fiduciary withholds under this section on a 
distributive partnership share or distributable net income of a trust or 
estate before the income is actually distributed to a partner or 
beneficiary, then withholding is not required when such income is 
subsequently distributed. Income described in paragraphs (a) and (b) of 
Sec. 1.1441-2 that is paid to a foreign partnership or to a nonresident 
alien or foreign fiduciary is subject to withholding under Sec. 1.1441-1 
even though the members of the partnership or the beneficiaries of the 
trust or estate are individuals who are citizens or residents of the 
United States or are domestic corporations.
    (g) Trust income taxable to grantor. The income of a trust created 
by a nonresident alien individual and taxable to the grantor under the 
provisions of subpart E, part I, subchapter J, chapter 1 of the Code, is 
subject to withholding under Sec. 1.1441-1, even though the fiduciary or 
beneficiaries of the trust are citizens or residents of the United 
States and regardless of whether the beneficiaries are exempt from 
income tax.
    (h) Claims for refund. A claim for refund referred to in paragraph 
(b) (1), (c) (3), (d) (1), or (f) of this section shall be made in 
accordance with the provisions of Secs. 301.6402-2 and 301.6402-3 of 
this chapter (Regulations on Procedure and Administration).
    (i) Rents paid to foreign tax-exempt organizations. For the rule for 
withholding on rents paid to foreign tax- exempt organizations, see 
Sec. 1.1443-1.
    (j) Conduit financing arrangements--(1) Duty to withhold. A financed 
entity or other person required to withhold tax under section 1441 with 
respect to a financing arrangement that is a conduit financing 
arrangement within the meaning of Sec. 1.881-3(a)(2)(iv) shall be 
required to withhold under section 1441 as if the district director had 
determined, pursuant to Sec. 1.881-3(a)(3), that all conduit entities 
that are parties to the conduit financing arrangement should be 
disregarded. The amount of tax required to be withheld shall be 
determined under Sec. 1.881-3(d). The withholding agent may withhold tax 
at a reduced rate if the financing entity establishes that it is 
entitled to the benefit of a treaty that provides a reduced rate of tax 
on a payment of the type deemed to have been paid to the financing 
entity. Section 1.881-3(a)(3)(ii)(E) shall not apply for purposes of 
determining whether any person is required to deduct and withhold tax 
pursuant to this paragraph (j), or whether any party to a financing 
arrangement is liable for failure to withhold or entitled to a refund of 
tax under sections 1441 or 1461 to 1464 (except to the extent the amount 
withheld exceeds the tax liability determined under Sec. 1.881-3(d)). 
See Sec. 1.1441-7(d) relating to withholding tax liability of the 
withholding agent in conduit financing arrangements subject to 
Sec. 1.881-3.
    (2) Effective date. This paragraph (j) is effective for payments 
made by financed entities on or after September 11, 1995. This paragraph 
shall not apply to interest payments covered by section 127(g)(3) of the 
Tax Reform Act of 1984, and to interest payments with respect to other 
debt obligations issued prior to October 15, 1984 (whether or not such 
debt was issued by a Netherlands Antilles corporation).

(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80 
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C. 
7805) of the Internal Revenue Code of 1954)

[T.D. 6500, 25 FR 12074, Nov. 26, 1960, as amended by T.D. 6908, 31 FR 
16771, Dec. 31, 1966; T.D. 7378, 40 FR 45436, Oct. 2, 1975; T.D. 7977, 
49 FR 36831, Sept. 20, 1984; T.D. 8611, 60 FR 41014, Aug. 11, 1995]



Sec. 1.1441-4   Exemptions from withholding.

    (a) Income connected with a U.S. business--(1) In general. No 
withholding is required under Sec. 1.1441-1 in the case of any item of 
income if such income is effectively connected with the conduct of a 
trade or business within the United States by the person entitled to 
such income and is includible in the person's gross income under section 
871(b)(2), section 842, or section 882(a)(2)

[[Page 73]]

for the taxable year and if the person has filed the statement 
prescribed by paragraph (a)(2) of this section. This paragraph (a)(1) 
shall apply to income for services performed by a foreign partnership or 
a foreign corporation (other than a foreign corporation which has income 
to which section 543(a)(7) applies for the taxable year) but shall not 
apply to compensation for personal services performed by an individual. 
In determining whether services are performed by a foreign corporation 
or by an individual, see Revenue Ruling 74-330, 1974-2 C.B. 278, and 
Revenue Ruling 74-331, 1974-2 C.B. 282. For rules with respect to 
compensation for personal services performed by an individual, see 
paragraph (b) of this section. In determining whether an item of income 
from sources within the United States is, or is deemed to be, 
effectively connected with the conduct of a trade or business within the 
United States by the person entitled to the income, see section 
864(c)(2), section 871(d), and sections 882 (d) and (e), and the 
regulations thereunder.
    (2) Statement claiming exemption. In order for the exemption 
provided by paragraph (a)(1) of this section to apply for any taxable 
year, the person entitled to the income must file with the withholding 
agent a statement in duplicate that the income described in the 
statement is, or is expected to be, effectively connected with the 
conduct of a trade or business within the United States and that such 
income is includible in his gross income for the taxable year. This 
statement shall show (i) the name and address of the withholding agent 
and of the person entitled to the income, (ii) the taxpayer's 
identifying number, (iii) the nature of the item or items of income with 
respect to which the statement is filed, (iv) the trade or business with 
which such income is, or is expected to be, effectively connected, and 
(v) the taxable year in respect of which the statement is made. This 
statement shall be filed with the withholding agent for each taxable 
year of the person entitled to the income, and before payment of the 
income in respect of which it applies. Any statement so filed shall be 
effective only with respect to the item or items of income specified 
therein and shall constitute authorization to the withholding agent to 
pay such income during the taxable year without deduction of the tax at 
source under Sec. 1.1441-1. The statement shall be amended by the person 
entitled to the income if subsequent circumstances arising during the 
taxable year indicate that the income is not, or is not expected to be, 
effectively connected with the conduct of a trade or business within the 
United States. Any statement required by this subparagraph may be made 
on a properly executed Form 4224, which shall be filed in duplicate with 
the withholding agent. The duplicate copy of each statement or form 
filed during any calendar year pursuant to this subparagraph shall be 
forwarded by the withholding agent with, and attached to, any Form 1042S 
required by paragraph (c) of Sec. 1.1461-2 with respect to such income 
for such calendar year.
    (b) Compensation for personal services of an individual--(1) 
Exemption from withholding. Withholding is not required under 
Sec. 1.1441-1 from salaries, wages, remuneration, or any other 
compensation for personal services of a nonresident alien individual if 
such compensation is effectively connected with the conduct of a trade 
or business within the United States and--
    (i) Such compensation is subject to withholding under section 3402, 
relating to withholding of tax at source on wages, and the regulations 
thereunder.
    (ii) [Reserved] For guidance, see Sec. 1.1441-4T(b)(1)(ii).
    (iii) Such compensation is for services performed by a nonresident 
alien individual who is a resident of Canada or Mexico and who enters 
and leaves the United States at frequent intervals.
    (iv) Such compensation is, or will be, exempt from the income tax 
imposed by chapter 1 of the Code by reason of a provision of the 
Internal Revenue Code or a tax treaty to which the United States is a 
party or
    (v) Such compensation is paid after January 3, 1979 as a commission 
or rebate paid by a ship supplier to a nonresident alien individual, who 
is employed by a nonresident alien individual, foreign partnership, or 
foreign corporation in the operation of a ship or

[[Page 74]]

ships of foreign registry, for placing orders for supplies to be used in 
the operation of such ship or ships with the supplier. See section 
162(c) and the regulations thereunder for denial of deductions for 
illegal bribes, kickbacks, and other payments.
    (2) Manner of obtaining withholding exemption under tax treaty--(i) 
In general. In order to obtain the exemption from withholding by reason 
of a tax treaty, provided by paragraph (b)(1)(iv) of this section, a 
nonresident alien individual must submit a statement (described in 
paragraph (b)(2)(ii) of this section) to each withholding agent from 
whom amounts are to be received. A separate statement must be filed for 
each taxable year of the alien individual. If the withholding agent is 
satisfied that an exemption from withholding is warranted (see paragraph 
(b)(2)(iii) of this section), the statement shall be accepted in the 
manner set forth in paragraph (b)(2)(iv) of this section. The exemption 
from withholding becomes effective for payments made at least ten days 
after a copy of the accepted statement is forwarded to the Director of 
the Foreign Operations District.
    (ii) Statement claiming withholding exemption. The statement 
claiming an exemption from withholding shall be made on Form 8233. Form 
8233 may be used for claiming exemption from withholding under tax 
treaties to which the United States is a party or with respect to the 
personal exemption amount described in Sec. 1.1441-3(e)(2). Form 8233 
shall be dated, signed by the person claiming the exemption from 
withholding, and verified by a declaration that the statements are made 
under the penalties of perjury. Form 8233 shall contain--
    (A) The individual's name, address, United States taxpayer 
identification number, and United States visa number, if any,
    (B) The country that issued the individual's passport and the number 
of such passport, or the individual's permanent address if a citizen of 
Canada or Mexico.
    (C) The taxable year for which the statement is to apply, the 
compensation to which it relates, and the amount (or estimated amount if 
exact amount not known) of such compensation,
    (D) A statement that the individual is not a citizen or resident of 
the United States,
    (E) The number of personal exemptions claimed by the individual,
    (F) A statement as to whether the compensation to be paid to him or 
her during the taxable year is or will be exempt from income tax and the 
reason why the compensation is exempt,
    (G) If the compensation is exempt from withholding by reason of an 
income tax treaty to which the United States is a party, the tax treaty 
and provision under which the exemption from withholding is claimed and 
the country of which the individual is a resident, and
    (H) Sufficient facts to justify the claim in exemption from 
withholding.
    (iii) Review by withholding agent. The exemption from withholding 
provided by paragraph (b)(1)(iv) of this section shall not apply unless 
the withholding agent accepts (in the manner provided in paragraph 
(b)(2)(iv) of this section) the statement on Form 8233 supplied by the 
nonresident alien individual. Before accepting the statement the 
withholding agent must examine the statement. If the withholding agent 
knows or has reason to know that any of the facts or assertions on Form 
8233 may be false or that the eligibility of the individual's 
compensation for the exemption cannot be readily determined, the 
withholding agent may not accept the statement on Form 8233 and is 
required to withhold under this section. If the withholding agent 
accepts the statement and subsequently finds that any of the facts or 
assertions contained on Form 8233 may be false or that the eligibility 
of the individual's compensation for the exemption can no longer be 
readily determined, then the withholding agent shall promptly so notify 
the Director of the Foreign Operations District by letter, and the 
withholding agent is not relieved of liability to withhold on any 
amounts still to be paid. If the withholding agent is notified by the 
Foreign Operations District that the eligibility of the individual's 
compensation for the exemption is in doubt or that such compensation is 
not

[[Page 75]]

eligible for the exemption, the withholding agent is required to 
withhold under this section. The rules of this paragraph are illustrated 
by the following examples.

    Example 1. C, a nonresident alien individual, submits Form 8233 to 
W, a withholding agent. The statement on Form 8233 does not include all 
the information required by paragraph (b)(2)(ii) of this section. 
Therefore, W has reason to know that he or she cannot readily determine 
whether C's compensation for personal services is eligible for an 
exemption from withholding and, therefore, W must withhold.
    Example 2. D, a nonresident alien, is performing services for W, a 
withholding agent. W has accepted a statement on Form 8233 submitted by 
D, according to the provisions of this section. W receives notice from 
the Internal Revenue Service that the eligibility of D's compensation 
for a withholding exemption is in doubt. Therefore, W has reason to know 
that the eligibility of the compensation for a withholding exemption 
cannot be readily determined, as of the date W receives the 
notification, and W must withhold tax under section 1441 on amounts paid 
after receipt of the notification.
    Example 3. E, a nonresident alien individual, submits Form 8233 to 
W, a withholding agent for whom E is to perform personal services. The 
statement contains all the information requested on Form 8233. E claims 
an exemption from withholding based on a personal exemption amount 
computed on the number of days E will perform personal services for W in 
the United States. If W does not know or have reason to know that any 
statement on the Form 8233 is false or that the eligibility of E's 
compensation for the withholding exemption cannot be readily determined, 
W can accept the statement on Form 8233 and exempt from withholding the 
appropriate amount of E's income.

    (iv) Acceptance by withholding agent. If after the review described 
in paragraph (b)(2)(iii) of this section the withholding agent is 
satisfied that an exemption from withholding is warranted, the 
withholding agent may accept the statement by making a certification, 
verified by a declaration
that it is made under the penalties of perjury, on Form 8233. The 
certification shall be--
    (A) That the withholding agent has examined the statement,
    (B) That the withholding agent is satisfied that an exemption from 
withholding is warranted, and
    (C) That the withholding agent does not know or have reason to know 
that the individual's compensation is not entitled to the exemption or 
that the eligibility of the individual's compensation for the exemption 
cannot be readily determined.
The exemption from withholding becomes effective for payments made at 
least ten days after a copy of the accepted statement is mailed in a 
proper manner by the withholding agent to the Director of the Foreign 
Operations District, pursuant to paragraph (b)(2)(v) of this section.
    (v) Copies of Form 8233. The withholding agent shall forward one 
copy of each Form 8233 that is accepted by him or her to the Director of 
the Foreign Operations District, Internal Revenue Service, Washington, 
DC 20225, within five days of his or her acceptance. The Director of the 
Foreign Operations District may review the forms so submitted. The 
withholding agent shall retain a copy of Form 8233.
    (3) Withholding agreements. Compensation for personal services of a 
nonresident alien individual who is engaged during the taxable year in 
the conduct of a trade or business within the United States may be 
wholly or partially exempted from the withholding required by 
Sec. 1.1441-1 if an agreement is reached between the Director of the 
Foreign Operations District and the alien individual with respect to the 
amount of withholding required. Such agreement shall be available in the 
circumstances and in the manner set forth by the Internal Revenue 
Service, and shall be effective for payments covered by the agreement 
that are made after the agreement is executed by all parties. The alien 
individual must agree to timely file an income tax return for the 
current taxable year.
    (4) Final payment exemption--(i) General rule. Compensation for 
independent personal services of a nonresident alien individual who is 
engaged during the taxable year in the conduct of a trade or business 
within the United States may be wholly or partially exempted from the 
withholding required by Sec. 1.1441-1 from the final payment of 
compensation for independent personal services. This exemption does not 
apply to wages. This exemption from withholding is available only once 
during an alien individual's taxable year

[[Page 76]]

and is obtained by the alien individual presenting to the withholding 
agent a letter in duplicate from a district director stating the amount 
of compensation subject to the exemption and the amount that would 
otherwise be withheld from such final payment under section 1441 that 
shall be paid to the alien individual due to the exemption. The alien 
individual shall attach a copy of the letter to his or her income tax 
return for the taxable year for which the exemption is effective.
    (ii) Final payment of compensation for personal services. For 
purposes of this paragraph, final payment of compensation for personal 
services means the last payment of compensation, other than wages, for 
personal services rendered within the United States that the individual 
expects to receive from any withholding agent during the taxable year.
    (iii) Manner of applying for final payment exemption. In order to 
obtain the final payment exemption provided by paragraph (b)(4)(i) of 
this section, the nonresident alien individual (or his or her agent) 
must file the forms and provide the information required by the district 
director. Ordinary and necessary business expenses may be taken into 
account if substantiated to the satisfaction of the district director. 
The alien individual must submit a statement, signed by him or her and 
verified by a declaration that it is made under the penalties of 
perjury, that all the information provided is true and that to his or 
her knowledge no relevant information has been omitted. The information 
required to be submitted includes, but is not limited to--
    (A) A statement by each withholding agent from whom amounts of gross 
income effectively connected with the conduct of a trade or business 
within the United States have been received by the alien individual 
during the taxable year, of the amount of such income paid and the 
amount of tax withheld, signed and verified by a declaration that it is 
made under penalties of perjury;
    (B) A statement by the withholding agent from whom the final payment 
of compensation for personal services will be received, of the amount of 
such final payment and the amount which would be withheld under 
Sec. 1.1441-1 if a final payment exemption under paragraph (b)(4)(i) of 
this section is not granted, signed and verified by a declaration that 
it is made under penalties of perjury;
    (C) A statement by the individual that he or she does not intend to 
receive any other amounts of gross income effectively connected with the 
conduct of a trade or business within the United States during the 
current taxable year;
    (D) The amount of tax which has been withheld (or paid) under any 
other provision of the Code or regulations with respect to any income 
effectively connected with the conduct of a trade or business within the 
United States during the current taxable year;
    (E) The amount of any outstanding tax liabilities (and interest and 
penalties relating thereto) from the current taxable year or prior 
taxable periods; and
    (F) The provision of any income tax treaty under which a partial or 
complete exemption from withholding may be claimed, the country of the 
individual's residence, and a statement of sufficient facts to justify 
an exemption pursuant to such treaty.
    (iv) Letter to withholding agent. If the district director is 
satisfied that the information provided under paragraph (b)(4)(iii) of 
this section is sufficient, the district director will, after 
coordination with the Director of the Foreign Operations District, 
ascertain the amount of the alien individual's tentative income tax for 
the taxable year with respect to gross income that is effectively 
connected with the conduct of a trade or business within the United 
States. After the tentative tax has been ascertained, the district 
director will provide the alien individual with a letter to the 
withholding agent stating the amount of the final payment of 
compensation for personal services that is exempt from withholding, and 
the amount that would otherwise be withheld under section 1441 that 
shall be paid to the alien individual due to the exemption. The amount 
of compensation for personal services exempt from withholding under this 
paragraph (b)(4) shall not exceed $5,000.


[[Page 77]]


    Example 1. On July 15, 1983, B, a non-resident alien individual, 
appears before a district director with the information required by 
paragraph (b)(4)(iii) of this section. B has received personal service 
income in 1983 from which $3,000 has been withheld under section 1441. 
On August 1, 1983, B will receive $5,000 in personal service income from 
W. B does not intend to receive any other income subject to U.S. tax 
during 1983. Taking into account B's substantiated deductible business 
expenses, the district director computes the tentative tax liability on 
B's income effectively connected with the conduct of a trade or business 
in the United States during 1983 (including the $5,000 payment to be 
made on August 1, 1983) to be $3,300. B does not owe U.S. tax for any 
other taxable periods. The amount of B's final payment exemption is 
determined as follows:
    (1) The amount of total withholding is $4,500 ($3,000 previously 
withheld plus $1,500, 30% of the $5,000 final payment);
    (2) The amount of tentative excess withholding is $1,200 (total 
withholding of $4,500 minus B's tentative tax liability of $3,300); and
    (3) To allow B to receive $1,200 of the amount which would otherwise 
have been withheld from the final payment, the district director allows 
a withholding exemption for $4,000 of B's final payment. W must withhold 
$300 from the final payment.
    Example 2. The facts are the same as in Example 1 except B will 
receive a final payment of compensation on August 1, 1983, in the amount 
of $10,000 and B's tentative tax liability is $3,900. The amount of B's 
final payment exemption is determined as follows:
    (1) The amount of total withholding is $6,000 ($3,000 previously 
withheld plus $3,000, 30% of the $10,000 final payment);
    (2) The amount of tentative excess withholding is $2,100 (total 
withholding of $6,000 minus B's tentative tax liability of $3,900); and
    (3) To allow B to receive $2,100 of the amount which would otherwise 
be withheld from the final payment, $7,000 of the final payment would 
have to be exempt from withholding; however, as no more than $5,000 of 
the final payment can be exempt from withholding under this paragraph 
(b)(4), the district director allows a withholding exemption for $5,000 
of B's final payment. B must file a claim for refund at the end of the 
taxable year to obtain a refund of $600. W must withhold $1,500 from the 
final payment.

    (5) Requirement of return. The tentative tax determined by the 
district director under paragraph (b)(4)(iv) of this section or by the 
Director of the Foreign Operations District under the withholding 
agreement procedure of paragraph (b)(3) of this section shall not 
constitute a final determination of the income tax liability of the 
nonresident alien individual, nor shall such determination constitute a 
tax return of the nonresident alien individual for any taxable period. 
An alien individual who applies for or obtains an exemption from 
withholding under the procedures of paragraphs (b) (2), (3), or (4) of 
this section is not relieved of the obligation to file a return of 
income under section 6012.
    (c) Dividends paid by China Trade Act corporations. Withholding is 
not required under Sec. 1.1441-1 upon dividends distributed by a 
corporation organized under the China Trade Act of 1922 (15 U.S.C., 
chapter 4) to or for the benefit of a resident of Formosa or Hong Kong 
and which are exempt from taxation by section 943.
    (d) Inhabitants of the Virgin Islands--(1) Allowance of exemption. 
This paragraph shall not apply after June 22, 1981. No withholding is 
required under Sec. 1.1441-1 upon any item of income paid to any person 
who at the time of payment reasonably expects to satisfy his income tax 
obligations with respect to that item under section 28(a) of the Revised 
Organic Act of the Virgin Islands. That section provides that all 
persons whose permanent residence is in the Virgin Islands ``shall 
satisfy their income tax obligations under applicable taxing statutes of 
the United States by paying their tax on income derived from all sources 
both within and outside the Virgin Islands into the Treasury of the 
Virgin Islands.'' For the purpose of this paragraph, the term ``person'' 
shall include an individual, partnership, and corporation.
    (2) Claiming exemption. To avoid withholding of tax at source under 
Sec. 1.1441-1, the payee of the income shall notify the withholding 
agent by letter in duplicate that he expects to satisfy his income tax 
obligations under section 28(a) of the Revised Organic Act of the Virgin 
Islands with respect to all income to be paid to him by the withholding 
agent during the current calendar year. This letter of notification 
shall constitute authorization to the payer of the income to pay income 
to the payee during that year without deduction of the tax at source 
under Sec. 1.1441-1.

[[Page 78]]

    (3) Disposition of letter. The duplicate copy of each letter of 
notification filed pursuant to subparagraph (2) of this paragraph shall 
be forwarded with a letter of transmittal to the Director of 
International Operations, Internal Revenue Service, Washington, DC 
20225.
    (e) Per diem of certain alien trainees. Effective with respect to 
payments made on and after July 18, 1956, withholding is not required 
under section 1441(a) or Sec. 1.1441-1 in the case of amounts of per 
diem for subsistence paid by the United States Government (directly or 
by contract) to any nonresident alien individual who is engaged in any 
program of training in the United States under the Mutual Security Act 
of 1954, as amended (22 U.S.C. chapter 24). This rule shall apply even 
though such amounts are subject to tax under section 871.
    (f) Exemption of certain foreign partnerships and foreign 
corporations--(1) In general. No withholding is required under 
Sec. 1.1441-1 upon any item of income paid to a foreign partnership, or 
foreign corporation, engaged in trade or business in the United States 
at any time during the taxable year, if it is established to the 
satisfaction of the district director in whose district the related 
books and records are kept that the requirements of section 1441(a), or 
1442(a), and Sec. 1.1441-1 impose an undue administrative burden for 
such taxable year and that the collection of the tax imposed by section 
871(a) or section 881 on the members of such partnership, or by section 
881 on such corporation, as the case may be, will not be jeopardized by 
the exemption from withholding. As a general rule, the requirements of 
section 1441(a), or 1442(a), and Sec. 1.1441-1 will be considered to 
impose an undue administrative burden only in a case where (i) the 
person entitled to the income, such as a foreign insurance company, 
receives from the withholding agent income on securities issued by a 
single corporation, some of which is, and some of which is not, 
effectively connected with the conduct of a trade or business within the 
United States and (ii) the criteria for determining the effective 
connection are unduly difficult to apply because of the circumstances 
under which such securities are held. Thus, for example, if a foreign 
corporation carrying on a life insurance business in the United States 
finds that, because of the requirements of State law which cause its 
U.S. reserves to fluctuate frequently, it is unduly difficult with 
respect to any class of income to identify the income which is, and the 
income which is not, effectively connected with its conduct of business 
in the United States during the taxable year, the corporation will be 
considered to have satisfied the requirements of subdivision (ii) of 
this subparagraph. No exemption from withholding shall be granted under 
this paragraph unless the person entitled to the income complies with 
such other requirements as may be imposed by the district director and 
unless the district director is satisfied that the collection of the tax 
on the income involved will not be jeopardized by the exemption from 
withholding.
    (2) Claiming exemption--(i) Statement required. In order for the 
exemption provided by paragraph (f)(1) of this section to apply for any 
taxable year the foreign partnership or the foreign corporation must 
file with the district director in whose district the related books and 
records are kept a statement indicating the reasons why specific classes 
of income should be exempted from the withholding requirements of 
Sec. 1.1441-1 for such year. This statement shall show the name and 
address of the withholding agent and of the person entitled to the 
income, the taxpayer's identifying number, the class or classes of 
income to be exempted from withholding, the trade or business with which 
such income is in part effectively connected, the taxable year during 
which such exemption is to apply, and, in such form and to such extent 
as shall satisfy the district director, the identity of the securities 
or other underlying property involved.
    (ii) Notification of determination. The district director shall 
notify the partnership or corporation by letter in duplicate of his or 
her determination in respect of the application for exemption. If the 
exemption from withholding is granted, the duplicate copy of the notice 
from the district director shall be filed with the withholding

[[Page 79]]

agent and shall constitute authorization to pay the specified class or 
classes of income during the specified taxable year without deduction of 
the tax at source under Sec. 1.1441-1.
    (iii) Bond requirement. The district director may, as a condition 
precedent to the allowance of the exemption from withholding for the 
taxable year, require a bond in such sum as the Commissioner may 
prescribe, conditioned upon the payment of the tax on the income 
involved and such further conditions as the district director may 
require. This bond shall be executed by the foreign partnership or 
foreign corporation and shall conform to the requirements of 
Sec. 301.7101-1 as to form of bond and surety required. No bond shall be 
required pursuant to this subparagraph from a foreign corporation which 
is required to file a declaration of estimated income tax under section 
6016 for the taxable year in respect of which the exemption from 
withholding applies.
    (g) Annuities received under qualified plans. Withholding is not 
required under Sec. 1.1441-1 in the case of any amount received as an 
annuity if such amount is exempt under section 871(f) and the 
regulations thereunder from the tax imposed by section 871(a). In order 
for the exemption provided by this paragraph to apply for any taxable 
year in those cases where the withholding agent is not the employer by 
whom the annuity plan or qualified trust under or from which such 
annuity is paid was established, the person entitled to the annuity must 
file with the withholding agent a statement in duplicate setting forth 
his or her name, address, and taxpayer identifying number, if any, and 
certifying that he or she is not a citizen or resident of the United 
States and that the annuity in respect of which the statement is filed 
is excluded from gross income by reason of section 871(f). This 
statement shall be dated, shall identify the taxable year to which it 
relates, shall be signed by the person entitled to the annuity, and 
shall contain, or be verified by, a written declaration that it is made 
under the penalties of perjury. No particular form is prescribed for the 
statement. The duplicate copy of each statement filed during any 
calendar year pursuant to this paragraph shall be forwarded by the 
withholding agent with, and attached to, the Form 1042S required by 
paragraph (c) of Sec. 1.1461-2 with respect to such annuity for such 
calendar year.
    (h) Interest on bonds sold between interest dates. Except as 
provided by paragraph (b)(2)(ii) of Sec. 1.1441-2, the tax is not 
required to be withheld under Sec. 1.1441-1 on accrued interest paid by 
the buyer in connection with the sale of bonds between interest dates, 
even though the interest is subject to tax under section 871 or section 
881. The exemption from withholding granted by this paragraph is not a 
determination that the accrued interest is not fixed or determinable 
annual or periodical income.
    (i) Income of foreign central bank of issue or Bank for 
International Settlements. (1) Section 895 provides for the exclusion 
from gross income of certain income derived by a foreign central bank of 
issue, or by the Bank for International Settlements, from obligations of 
the United States or of any agency or instrumentality thereof or from 
bank deposits. In the absence of knowledge that a foreign central bank 
of issue, or the Bank for International Settlements, is operating 
without the scope of the exclusion granted by section 895, the 
withholding agent is not required to withhold under Sec. 1.1441-1 upon 
income derived by such bank from obligations of the United States or of 
any agency or instrumentality thereof, or upon interest derived from 
deposits with persons carrying on the banking business, if the 
withholding agent receives from the bank a statement certifying that the 
bank--
    (i) Is a foreign central bank of issue, or the Bank for 
International Settlements, as the case may be,
    (ii) Is the owner of the obligations of the United States or of any 
agency or instrumentality thereof, or the owner of such bank deposits, 
as the case may be, and
    (iii) Does not, and will not, hold such obligations or such bank 
deposits for, or use them in connection with, the conduct of a 
commercial banking function or other commercial activity.
    (2) A copy of the statement filed pursuant to paragraph (i)(1) of 
this section

[[Page 80]]

shall be forwarded by the withholding agent with, and attached to, the 
Form 1042S required by paragraph (c) of Sec. 1.1461-2 with respect to 
payments of income made on such obligations or bank deposits during the 
calendar year.


(Approved by the Office of Management and Budget under control number 
1545-0795)

(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80 
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C. 
7805), Internal Revenue Code of 1954; secs. 1441, 1442, and 7805, 
Internal Revenue Code (80 Stat. 1553, 26 U.S.C. 1441; 80 Stat. 1558, 26 
U.S.C. 1442; 68A Stat. 917, 26 U.S.C. 7805))

[T.D. 6500, 25 FR 12075, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.1441-4, see the List of Sections Affected in the Finding Aids 
section of this volume.



Sec. 1.1441-4T   Exemption from withholding (temporary).

    (a) [Reserved]
    (b) Compensation for personal services of an individual--(1) 
Exemption from withholding.
    (i) [Reserved]
    (ii) Withholding is not required under Sec. 1.1441-1 from salaries, 
wages, remuneration, or any other compensation for personal services of 
a nonresident alien individual if such compensation is effectively 
connected with the conduct of a trade or business within the United 
States and such compensation would be subject to withholding under 
section 3402 but for the provisions of section 3401(a) (other than 
paragraph (a)(6) thereof) and the regulations under that section, 
provided that an election of no withholding under section 3405 (a)(2) or 
(b)(3) is not in effect.
    (b) (1)(iii)-(5) [Reserved]
    (c)-(i) [Reserved]

[T.D. 8288, 55 FR 3716, Feb. 5, 1990]



Sec. 1.1441-5  Claiming to be a person not subject to withholding.

    (a) Individuals. For purposes of chapter 3 of the Code, an 
individual's written statement that he or she is a citizen or resident 
of the United States may be relied upon by the payer of the income as 
proof that such individual is a citizen or resident of the United 
States. This statement shall be furnished to the withholding agent in 
duplicate. An alien may claim residence in the United States by filing 
Form 1078 with the withholding agent in duplicate in lieu of the above 
statement.
    (b) Partnerships and corporations. For purposes of chapter 3 of the 
Code a written statement from a partnership or corporation claiming that 
it is not a foreign partnership or foreign corporation may be relied 
upon by the withholding agent as proof that such partnership or 
corporation is domestic. This statement shall be furnished to the 
withholding agent in duplicate. It shall contain the address of the 
taxpayer's office or place of business in the United States and shall be 
signed by a member of the partnership or by an officer of the 
corporation. The official title of the corporate officer shall also be 
given.
    (c) Disposition of statement and form. The duplicate copy of each 
statement and form filed pursuant to this section shall be forwarded 
with a letter of transmittal to Internal Revenue Service Center, 
Philadelphia, PA 19255. The original statement shall be retained by the 
withholding agent.
    (d) Definitions. For determining whether an alien individual is a 
resident of the United States see Secs. 301.7701(b)-1 through 
301.7701(b)-9 of this chapter. An individual with respect to whom an 
election to be treated as a resident under section 6013(g) is in effect 
is not, in accordance with Sec. 1.1441-1, a resident for purposes of 
this section. For definition of the terms ``foreign partnership'' and 
``foreign corporation'' see section 7701(a) (4) and (5) and 
Sec. 301.7701-5 of this chapter. For definition of the term ``United 
States'' and for other geographical definitions relating to the 
Continental Shelf see section 638 and Sec. 1.638-1.

(Approved by the Office of Management and Budget under control number 
1545-0795)

(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80 
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C. 
7805) of the Internal Revenue Code of 1954)

[T.D. 6500, 25 FR 12076, Nov. 26, 1960, as amended by T.D. 6908, 31 FR 
16773, Dec. 31, 1966; T.D. 7277, 38 FR 12742, May 15, 1973; T.D. 7842, 
47 FR 49842, Nov. 3, 1982; T.D. 7977, 49 FR 36834, Sept. 20, 1984; T.D. 
8160, 52 FR 33933, Sept. 9, 1987; T.D. 8411, 57 FR 15241, Apr. 27, 1992]

[[Page 81]]



Sec. 1.1441-6   Withholding pursuant to the application of a tax treaty which confers a reduced rate of, or an exemption from, United States income tax.

    (a) In general. The rate of 30 percent or 14 percent shall be 
reduced as may be provided by a treaty with any country. In case of 
payments of any of the items specified in Sec. 1.1441-2 (other than 
dividends) made on or before December 31, 1971, and in the case of 
payments of dividends made at any time, the withholding agent shall 
determine the applicable rate pursuant to the appropriate tax treaty and 
the regulations issued thereunder. In case of payments on or after 
January 1, 1972, of any of the items specified in Sec. 1.1441-2 (other 
than dividends), the requirements of paragraphs (b) and (c) of this 
section shall apply in lieu of the ownership certificate or the 
exemption (or reduced rate) certificate (or corresponding letter) 
required by the regulations under the various income tax conventions in 
effect to which the United States is a party.
    (b) Coupon bond interest. To secure the reduced rate of, or 
exemption from, U.S. income tax at source in the case of coupon bond 
interest, the recipient shall, if entitled to such treatment pursuant to 
a tax convention, for each issue of bonds file Form 1001 (Ownership, 
Exemption, or Reduced Rate Certificate) with the withholding agent when 
presenting the interest coupons for payment. This form shall be 
completed and signed by either the owner of the interest, his trustee, 
or his agent, and shall include such information as is required by the 
form and accompanying instructions. The form shall contain a statement 
that the owner of the income is entitled to a reduced rate of, or an 
exemption from, tax pursuant to a tax convention. The Form 1001 shall be 
retained by the withholding agent for at least 4 years after the close 
of the calendar year in which the interest is paid.
    (c) Income other than coupon bond interest or dividends. (1) To 
secure the reduced rate of, or exemption from, U.S. income tax at source 
in case of items of income specified in Sec. 1.1441-2 other than coupon 
bond interest and dividends, the recipient shall, if entitled to such 
treatment pursuant to a tax convention, file Form 1001 (Ownership, 
Exemption, or Reduced Rate Certificate) with the withholding agent. This 
form shall be completed and signed by either the owner of the income, 
his trustee, or his agent, and shall include such information as is 
required by the form and accompanying instructions. A separate Form 1001 
shall be used for each type of income. For this purpose, all income from 
a trust, estate, or investment account shall be considered as a single 
type of income. Each form shall also contain a statement that the owner 
of the income is entitled to a reduced rate of, or exemption from, tax 
pursuant to a tax convention. If, after filing such form, the owner 
ceases to be eligible for the benefits of the tax convention for such 
income, he shall promptly notify the withholding agent by letter. Form 
1001 shall not be used to secure a reduced rate of, or exemption from, 
withholding on independent personal services income. See Sec. 1.1441-
4(b)(2).
    (2) Form 1001 shall be effective for the successive 3-calendar-year 
period during which the income to which the form applies is paid. Each 
such form filed with any withholding agent shall be filed as soon as 
practicable. Once a form has been filed for a type of income (other than 
coupon bond interest) with respect to such a 3-year period, no 
additional Form 1001 for such income need be filed with respect to such 
period unless the Commissioner of Internal Revenue notifies the 
withholding agent that the taxpayer shall file another form. If any 
change occurs in the ownership of income subject to a Form 1001 recorded 
on the books of the withholding agent, the Form 1001 shall no longer be 
effective. The Form 1001 shall be retained by the withholding agent for 
at least 4 years after the end of the last calendar year in which income 
subject to the form is paid.
    (3) Form 1001 need not be filed with respect to payments (other than 
payments of coupon bond interest) made prior to December 31, 1974, if an 
exemption (or reduced rate) certificate (or corresponding letter) 
required by the regulations under the applicable income tax convention 
has been filed with respect to such payments prior to December 31, 1971.

[[Page 82]]

    (d) Section 6013(g) election. A nonresident alien individual with 
respect to whom a section 6013(g) election to be treated as a resident 
is in effect may not, in accordance with Sec. 1.6013-6(a)(2)(v), claim a 
reduced rate of, or exemption from, United States income tax under an 
income tax treaty.

(Approved by the Office of Management and Budget under control number 
1545-0795)

(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80 
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C. 
7805) of the Internal Revenue Code of 1954)

[T.D. 7157, 36 FR 25227, Dec. 30, 1971, as amended by T.D. 7842, 47 FR 
49842, Nov. 3, 1982; T.D. 7977, 49 FR 36834, Sept. 20, 1984]



Sec. 1.1441-7  General provisions relating to withholding agents.

    (a) Withholding agent defined--(1) In general. For purposes of 
Chapter 3 of the Code, the term ``withholding agent'' means any person 
who pays or causes to be paid an item of income specified in 
Sec. 1.1441-2 to (or to the agent of) a nonresident alien individual, a 
foreign partnership, a nonresident alien or foreign fiduciary of a trust 
or estate, or a foreign corporation, and who is required to withhold tax 
under sections 1441, 1442, 1443, or 1451 from such item of income. Any 
person who meets the definition of a withholding agent is required to 
file the returns prescribed by Sec. 1.1461-1. For example, an employer 
(as defined in Sec. 31.3401(d)-1 of this chapter), to the extent the 
employer pays remuneration for services performed by a nonresident alien 
individual in the United States and such remuneration is excepted from 
the term ``wages'' under Sec. 31.3401(a)(6)-(1) (c) or (e) of this 
chapter, must file a return as required by Sec. 1.1461-2(c)(1).
    (2) United States obligations. If the United States is a withholding 
agent for an item of interest, including original issue discount, on 
obligations of the United States or of any agency or instrumentality 
thereof, the withholding obligation of the United States shall be 
assumed and discharged by:
    (i) The Commissioner of the Public Debt, for interest paid by checks 
issued through the Bureau of the Public Debt.
    (ii) The Treasurer of the United States, for interest paid by him or 
her, whether by check or otherwise,
    (iii) Each Federal Reserve Bank, for interest paid by it, whether by 
check or otherwise, or
    (iv) Such other person as may be designated by the Commissioner.
    (b) Person designated to act for withholding agent--(1) Notice of 
duly authorized agent. A withholding agent (including a state or 
possession of the United States or any agency or instrumentality 
thereof) that appoints a duly authorized agent to act on its behalf 
under the withholding provisions of chapter 3 of the Code is required to 
file a notice of such appointment with the Director of the Foreign 
Operations District, Internal Revenue Service, Washington, DC 20225. 
Such notice must be filed before the first payment with respect to which 
the authorized agent acts as such.
    (2) In general--liability of withholding agent. If a duly authorized 
agent has become insolvent or for any other reason fails to make payment 
of money deposited with it by the withholding agent to pay tax required 
to be withheld under Chapter 3 of the Code, or of money withheld under 
such chapter, the withholding agent is not discharged of its liability 
under such chapter since the authorized agent is merely the agent of the 
withholding agent.
    (3) Tax-free covenant bonds--liability of withholding agent. If the 
duly authorized agent designated by a withholding agent to act for it 
has not withheld any tax from the income nor received any funds from the 
withholding agent to pay the tax which the withholding agent assumed in 
connection with its tax-free covenant bonds, then that authorized agent 
cannot be held liable for the tax assumed by the withholding agent 
merely by reason of the appointment as duly authorized agent. The 
withholding agent remains liable under chapter 3 of the Code since the 
duly authorized agent is merely the agent of the withholding agent.
    (c) Payments other than money. In any case where income is payable 
in any medium other than money the withholding agent shall not release 
the property so received until the property has been converted into 
funds sufficient to enable the withholding agent to pay over in money 
the tax required

[[Page 83]]

to be withheld under chapter 3 of the Code with respect to such income.
    (d) Conduit financing arrangements--(1) Liability of withholding 
agent. Subject to paragraph (d)(2) of this section, any person that is 
required to deduct and withhold tax under Sec. 1.1441-3(j) is made 
liable for that tax by section 1461. A person that is required to deduct 
and withhold tax but fails to do so is liable for the payment of the tax 
and any applicable penalties and interest.
    (2) Exception for withholding agents that do not know of conduit 
financing arrangement--(i) In general. A withholding agent will not be 
liable under paragraph (d)(1) of this section for failing to deduct and 
withhold with respect to a conduit financing arrangement unless the 
person knows or has reason to know that the financing arrangement is a 
conduit financing arrangement. This standard shall be satisfied if the 
withholding agent knows or has reason to know of facts sufficient to 
establish that the financing arrangement is a conduit financing 
arrangement, including facts sufficient to establish that the 
participation of the intermediate entity in the financing arrangement is 
pursuant to a tax avoidance plan. A withholding agent that knows only of 
the financing transactions that comprise the financing arrangement will 
not be considered to know or have reason to know of facts sufficient to 
establish that the financing arrangement is a conduit financing 
arrangement.
    (ii) Examples. The following examples illustrate the operation of 
paragraph (d)(2) of this section.

    Example 1. (i) DS is a U.S. subsidiary of FP, a corporation 
organized in Country N, a country that does not have an income tax 
treaty with the United States. FS is a special purpose subsidiary of FP 
that is incorporated in Country T, a country that has an income tax 
treaty with the United States that prohibits the imposition of 
withholding tax on payments of interest. FS is capitalized with 
$10,000,000 in debt from BK, a Country N bank, and $1,000,000 in capital 
from FS.
    (ii) On May 1, 1995, C, a U.S. person, purchases an automobile from 
DS in return for an installment note. On July 1, 1995, DS sells a number 
of installment notes, including C's, to FS in exchange for $10,000,000. 
DS continues to service the installment notes for FS and C is not 
notified of the sale of its obligation and continues to make payments to 
DS. But for the withholding tax on payments of interest by DS to BK, DS 
would have borrowed directly from BK, pledging the installment notes as 
collateral.
    (iii) The C installment note is a financing transaction, whether 
held by DS or by FS, and the FS note held by BK also is a financing 
transaction. After FS purchases the installment note, and during the 
time the installment note is held by FS, the transactions constitute a 
financing arrangement, within the meaning of Sec. 1.881-3(a)(2)(i). BK 
is the financing entity, FS is the intermediate entity, and C is the 
financed entity. Because the participation of FS in the financing 
arrangement reduces the tax imposed by section 881 and because there was 
a tax avoidance plan, FS is a conduit entity.
    (iv) Because C does not know or have reason to know of the tax 
avoidance plan (and by extension that the financing arrangement is a 
conduit financing arrangement), C is not required to withhold tax under 
section 1441. However, DS, who knows that FS's participation in the 
financing arrangement is pursuant to a tax avoidance plan and is a 
withholding agent for purposes of section 1441, is not relieved of its 
withholding responsibilities.
    Example 2. Assume the same facts as in Example, 1 except that C 
receives a new payment booklet on which DS is described as ``agent''. 
Although C may deduce that its installment note has been sold, without 
more C has no reason to know of the existence of a financing 
arrangement. Accordingly, C is not liable for failure to withhold, 
although DS still is not relieved of its withholding responsibilities.
    Example 3. (i) DC is a U.S. corporation that is in the process of 
negotiating a loan of $10,000,000 from BK1, a bank located in Country N, 
a country that does not have an income tax treaty with the United 
States. Before the loan agreement is signed, DC's tax lawyers point out 
that interest on the loan would not be subject to withholding tax if the 
loan were made by BK2, a subsidiary of BK1 that is incorporated in 
Country T, a country that has an income tax treaty with the United 
States that prohibits the imposition of withholding tax on payments of 
interest. BK1 makes a loan to BK2 to enable BK2 to make the loan to DC. 
Without the loan from BK1 to BK2, BK2 would not have been able to make 
the loan to DC.
    (ii) The loan from BK1 to BK2 and the loan from BK2 to DC are both 
financing transactions and together constitute a financing arrangement 
within the meaning of Sec. 1.881-3(a)(2)(i). BK1 is the financing 
entity, BK2 is the intermediate entity, and DC is the financed entity. 
Because the participation of BK2 in the financing arrangement reduces 
the tax imposed by section 881 and because there is a tax avoidance 
plan, BK2 is a conduit entity.

[[Page 84]]

    (iii) Because DC is a party to the tax avoidance plan (and 
accordingly knows of its existence), DC must withhold tax under section 
1441. If DC does not withhold tax on its payment of interest, BK2, a 
party to the plan and a withholding agent for purposes of section 1441, 
must withhold tax as required by section 1441.
    Example 4. (i) DC is a U.S. corporation that has a long-standing 
banking relationship with BK2, a U.S. subsidiary of BK1, a bank 
incorporated in Country N, a country that does not have an income tax 
treaty with the United States. DC has borrowed amounts of as much as 
$75,000,000 from BK2 in the past. On January 1, 1995, DC asks to borrow 
$50,000,000 from BK2. BK2 does not have the funds available to make a 
loan of that size. BK2 considers asking BK1 to enter into a loan with DC 
but rejects this possibility because of the additional withholding tax 
that would be incurred. Accordingly, BK2 borrows the necessary amount 
from BK1 with the intention of on-lending to DC. BK1 does not make the 
loan directly to DC because of the withholding tax that would apply to 
payments of interest from DC to BK1. DC does not negotiate with BK1 and 
has no reason to know that BK1 was the source of the loan.
    (ii) The loan from BK2 to DC and the loan from BK1 to BK2 are both 
financing transactions and together constitute a financing arrangement 
within the meaning of Sec. 1.881-3(a)(2)(i). BK1 is the financing 
entity, BK2 is the intermediate entity, and DC is the financed entity. 
The participation of BK2 in the financing arrangement reduces the tax 
imposed by section 881. Because the participation of BK2 in the 
financing arrangement reduces the tax imposed by section 881 and because 
there was a tax avoidance plan, BK2 is a conduit entity.
    (iii) Because DC does not know or have reason to know of the tax 
avoidance plan (and by extension that the financing arrangement is a 
conduit financing arrangement), DC is not required to withhold tax under 
section 1441. However, BK2, who is also a withholding agent under 
section 1441 and who knows that the financing arrangement is a conduit 
financing arrangement, is not relieved of its withholding 
responsibilities.
    (3) Effective date. This paragraph (d) is effective for payments 
made by financed entities on or after September 11, 1995. This paragraph 
shall not apply to interest payments covered by section 127(g)(3) of the 
Tax Reform Act of 1984, and to interest payments with respect to other 
debt obligations issued prior to October 15, 1984 (whether or not such 
debt was issued by a Netherlands Antilles corporation).

(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80 
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C. 
7805) of the Internal Revenue Code of 1954)

[T.D. 7977, 49 FR 36834, Sept. 20, 1984, as amended by T.D. 8611, 60 FR 
41014, Aug. 11, 1995; 60 FR 55312, Oct. 31, 1995]



Sec. 1.1441-8T  Foreign government exemption from withholding (temporary).

    (a) Foreign governments. Under section 892, certain specific types 
of income received by foreign governments are excluded from gross income 
and are exempt from taxation, unless derived from the conduct of a 
commercial activity or received from or by a controlled commercial 
entity. Accordingly, withholding is not required under Sec. 1.1441.1 
with regard to any item of income which is exempt from taxation under 
section 892.
    (b) Statement claiming exemption. To avoid withholding of tax at 
source under Sec. 1.1441-1, a foreign government which is entitled to 
the income must file with each withholding agent from whom amounts of 
income are to be received, a statement under penalties of perjury (in 
duplicate) indicating the extent to which such income described in the 
statement is exempt from taxation under section 892. This statement 
should contain (i) the name and address of the foreign government 
entitled to the income, (ii) the items of income and their amount with 
respect to which the statement is filed, (iii) an explanation indicating 
why the specific items of income are exempt from taxation under section 
892, and (iv) the taxable year during which such exemption is to apply. 
This statement shall be filed with the withholding agent for each 
taxable year the foreign government is entitled to the income, and 
before payment of the income in respect of which it applies. Any 
statement so filed shall be effective only with respect to the item or 
items of income specified therein and only with respect to the types of 
income specified in Sec. 1.892-3T(a)(1) (i), (ii) or (iii). The 
statement shall constitute authorization to the withholding agent to pay 
such income during the taxable year

[[Page 85]]

without deduction of the tax at source under Sec. 1.1441-1. Any 
statement required by this subparagraph may be made on a form prescribed 
by the Internal Revenue Service.

[T.D. 8211, 53 FR 24066, June 27, 1988, as amended at T.D. 8211, 53 FR 
27595, July 21, 1988]



Sec. 1.1442-1   Withholding of tax on foreign corporations.

    For regulations respecting the withholding of tax at source under 
section 1442 in the case of foreign corporations, see Secs. 1.1441-1 and 
1.1451-1.

[T.D. 6908, 31 FR 16773, Dec. 31, 1966]



Sec. 1.1442-2   Exemption from withholding of tax on foreign corporations.

    For regulations exempting certain foreign corporations from the 
withholding requirements of section 1442 in a case where an undue 
administrative burden is imposed, see paragraph (f) of Sec. 1.1441-4.

[T.D. 6908, 31 FR 16773, Dec. 31, 1966]



Sec. 1.1443-1   Foreign tax-exempt organizations.

    (a) Income subject to section 511--(1) Taxable years beginning after 
December 31, 1966, and before January 1, 1970. In the case of a foreign 
tax-exempt organization which is subject to the tax imposed by section 
511, any rents paid to such organization in a taxable year beginning 
after December 31, 1966, and before January 1, 1970, which are 
includible under section 512 in determining its unrelated business 
taxable income, shall not be subject to withholding under Sec. 1.1441-1. 
See paragraph (a)(2) of Sec. 1.1441-4 for rules for claiming the 
exemption from withholding in the case of such rents.
    (2) Taxable years beginning after December 31, 1969. In the case of 
a foreign tax-exempt organization which is subject to the tax imposed by 
section 511, any income received by such organization in a taxable year 
beginning after December 31, 1969, which is includible under section 512 
in determining its unrelated business taxable income, shall be subject 
to withholding under Sec. 1.1441-1 unless such income is, or may be 
expected to be, effectively connected with the conduct of a trade or 
business within the United States. See paragraph (a)(2) of Sec. 1.1441-4 
for rules for claiming the exemption from withholding in the case of 
such income.
    (b) Income subject to section 4948-- (1) In general--(i) Application 
of withholding provisions. Except as provided in subdivision (ii) of 
this subparagraph, in the case of a foreign private foundation which is 
subject to the tax imposed by section 4948(a) and the regulations 
thereunder, the withholding provisions of chapter 3 of the Code and the 
regulations thereunder shall apply with respect to the gross investment 
income (as defined in section 4940(c)(2)) of such foundation from 
sources within the United States (within the meaning of section 861 and 
the regulations thereunder) as if the excise tax imposed by section 
4948(a) were a tax imposed by chapter 3 of the Code, except that the 
deduction and withholding shall be at the rate of 4 percent. The 
withholding requirements imposed by this paragraph are in addition to 
the requirements otherwise applicable to a withholding agent, such as 
the depositary requirements of section 6302 and the regulations 
thereunder. Similarly, the requirements of this paragraph do not obviate 
a private foundation's obligation to file any return required by law 
with respect to such an organization, such as the form the foundation is 
required to file under section 6033 for the taxable year.
    (ii) Special rule with respect to certain tax treaties. Whenever 
there exists a tax treaty between the United States and a foreign 
country, and a foreign private foundation which is subject to the tax 
imposed by section 4948(a) and the regulations thereunder is a resident 
of such country or is otherwise entitled to the benefits of such treaty 
(whether or not such benefits are available to all residents), if the 
treaty provides that any item or items (or all items with respect to an 
organization exempt from income taxation) of gross investment income 
(within the meaning of section 4940(c)(2)) shall be exempt from income 
tax, the withholding provisions of chapter 3 of the Code and the 
regulations thereunder shall not apply to such item or items.
    (2) Return on Form 1042. Every withholding agent required to deduct 
and

[[Page 86]]

withhold any amount by virtue of the provisions of this paragraph shall 
make a return of the amount required to be deducted and withheld by 
completing and filing a Form 1042 with the Internal Revenue Service in 
accordance with the instructions accompanying that form and submitting 
the balance due (if any). In addition, in any case in which any amount 
is so withheld, the withholding agent shall prepare and submit to the 
foreign private foundation one of the copies of the Form 1042S showing 
the tax withheld under this paragraph in addition to any tax otherwise 
shown on such form.
    (3) Claims for refund and credits. Claims for refund of or credit 
for amounts overpaid shall be made on a Form 843 or 1042 or other 
appropriate form, which shall be filed with the Mid-Atlantic Service 
Center on or after January 1, 1973. Claims filed prior to January 1, 
1973, shall be filed with the Director of International Operations. In 
determining whether a claim for refund is appropriate and, if 
appropriate, who should make the claim, the provisions of section 1464 
and the regulations thereunder shall apply.
    (4) Identification of foreign private foundations; general rule. (i) 
Except as provided in subparagraph (6) of this paragraph, where a 
foreign organization does not have a ruling or determination letter that 
it is an organization described in section 509(a) (1), (2), (3), or (4), 
any person required under section 1443(b) and this paragraph to deduct 
and withhold any tax imposed by section 4948(a) on such foreign 
organization (if it were a private foundation) shall not be liable for 
such tax if prior to the day on which the person deposits or pays to the 
Internal Revenue Service any amount required to be withheld, such person 
has made a good faith determination that the foreign organization is an 
organization described in section 509(a) (1), (2), (3), or (4). For 
purposes of this subdivision, such a ``good faith determination'' 
ordinarily will be considered as made where the determination is based 
on an affidavit of the foreign organization or an opinion of counsel (of 
the withholding agent or the foreign organization) that the foreign 
organization is an organization described in section 509(a) (1), (2), 
(3), or (4). Such an affidavit or opinion must set forth sufficient 
facts concerning the operations and support of the foreign organization 
for the Internal Revenue Service to determine that such organization 
would be likely to qualify as an organization described in section 
509(a) (1), (2), (3), or (4).
    (ii) For special transitional rules relating to the identification 
of foreign private foundations, see subparagraph (5) of this paragraph.
    (iii) Nothing in this paragraph relieves any foreign private 
foundation of the liability for the tax (including interest and 
penalties) imposed by section 4948(a).
    (5) Special transitional rules relating to identification of foreign 
private foundations. (i) Any person required under section 1443(b) and 
this paragraph to deduct and withhold any tax imposed by section 4948(a) 
on any foreign organization for any period after December 31, 1969, and 
before the 90th day after publication of final regulations under section 
508 in the Federal Register shall not be liable for such tax if such 
person receives a certified statement from the foreign organization 
prior to the day on which the person deposits or pays to the Internal 
Revenue Service any amount required to be withheld stating that either:
    (a) Such foreign organization has properly filed the notice 
described in section 508(b) and the regulations thereunder and has not 
been notified by the Commissioner or his delegate by the 30th day after 
the day on which the notice is filed that such notice has failed to 
establish that such foreign organization is not a private foundation, or
    (b) The presumption contained in section 508(b) does not apply to 
such foreign organization by reason of section 508(c) and the 
regulations thereunder.
    (ii) If a certified statement described in subdivision (i) of this 
subparagraph is not received prior to the day on which a deposit or 
payment of any amount withheld in accordance with the provisions of this 
paragraph must be made by any person required to deduct and withhold any 
tax imposed by section 4948(a) with respect to any foreign organization, 
except as provided in subparagraph (4) of this paragraph

[[Page 87]]

such person shall be liable for all such tax imposed (including interest 
and penalties) for the period being returned by such person on Form 
1042, to the extent that such person incurs liability to the foreign 
organization for gross investment income, as defined in section 
4940(c)(2).
    (iii) Any foreign organization to which section 508 by reason of 
section 4948(b) does not apply because such organization has received 
substantially all of its support (other than gross investment income, as 
defined in section 4940(c)(2)) from sources outside the United States 
may nevertheless receive the benefits of subdivision (i) of this 
subparagraph by following the procedure set forth in such subdivision.
    (6) Effect of notice by Internal Revenue Service concerning 
organization's statement. Subparagraphs (4) and (5) of this paragraph 
shall have no effect with respect to a withholding agent as to a 
particular foreign organization on or after the earlier (i) the date on 
which such agent acquires knowledge that the Internal Revenue Service 
has given notice to such foreign organization that its notice or 
statement has failed to establish that it is not a private foundation, 
(ii) the date on which the Internal Revenue Service makes notice to the 
public that such foreign organization has failed to establish that it is 
not a private foundation, or (iii) the date on which the Internal 
Revenue Service makes notice to the public that such foreign 
organization is a private foundation.

[T.D. 7229, 37 FR 28157, Dec. 21, 1972, as amended by T.D. 7247, 38 FR 
767, Jan. 4, 1973]



Sec. 1.1445-1  Withholding on dispositions of U.S. real property interests by foreign persons: In general.

    (a) Purpose and scope of regulations. These regulations set forth 
rules relating to the withholding requirements of section 1445. In 
general, section 1445(a) provides that any person who acquires a U.S. 
real property interest from a foreign person must withhold a tax of 10 
percent from the amount realized by the transferor foreign person (or a 
lesser amount established by agreement with the Internal Revenue 
Service). Section 1445(e) provides special rules requiring withholding 
on distributions and certain other transactions by corporations, 
partnerships, trusts, and estates. This Sec. 1.1445-1 provides general 
rules concerning the withholding requirement of sections 1445(a), as 
well as definitions applicable under both section 1445(a) and 1445(e). 
Section 1.1445-2 provides for various situations in which withholding is 
not required under section 1445(a). Section 1.1445-3 provides for 
adjustments to the amount required to be withheld by transferees under 
section 1445(a). Section 1.1445-4 prescribes the duties of agents in 
transactions subject to withholding under either section 1445(a) or 
1445(e). Section 1.1445-5 provides rules concerning the withholding 
required under section 1445(e), while Sec. 1.1445-6 provides for 
adjustments to the amount required to be withheld under section 1445(e). 
Finally, Sec. 1.1445-7 provides rules concerning the treatment of a 
foreign corporation that has made an election under section 897(i) to be 
treated as a domestic corporation.
    (b) Duty to withhold--(1) In general. Transferees of U.S. real 
property interests are required to deduct and withhold a tax equal to 10 
percent of the amount realized by the transferor, if the transferor is a 
foreign person and the disposition takes place on or after January 1, 
1985. Neither the transferee's duty to withhold nor the amount required 
to be withheld is affected by the amount of cash to be paid by the 
transferee. Amounts withheld must be reported and paid over in 
accordance with the requirements of paragraph (c) of this section. 
Failures to withhold and pay over are subject to the liabilities set 
forth in paragraph (e) of this section. If two or more persons are joint 
transferees of a U.S. real property interest, each such person is 
subject to the obligation to withhold. That obligation is fulfilled with 
respect to each such person if any one of them withholds and pays over 
the required amount in accordance with the rules of this section. If the 
amount realized (as defined in paragraph (g)(5) of this section) by the 
transferor is zero, then no withholding is required. For example, if a 
real property interest is transferred as a gift (i.e, the recipient does 
not assume any liabilities or furnish

[[Page 88]]

any other consideration to the transferor) then no withholding is 
required. Withholding is not required with respect to dispositions that 
takes place before January 1, 1985, even if the first payment of 
consideration is made after December 31, 1984.
    (2) U.S. real property interest owned jointly by foreign and non-
foreign transferors. The amount subject to withholding under paragraph 
(b)(1) of this section with respect to the transfer of a U.S. real 
property interest owned by one or more foreign persons (as defined in 
Sec. 1.897-1(k)) and one or more non-foreign persons shall be determined 
by allocating the amount realized from the transfer between (or among) 
such transferors based upon the capital contribution of each transferor 
with respect to the property and by aggregating the amounts allocated to 
any foreign person (or persons). For this purpose, a husband and wife 
will each be deemed to have contributed 50 percent of the aggregate 
capital contributed by such husband and wife. See Sec. 1.1445-
1(f)(3)(iv) with respect to the crediting of the amount withheld between 
or among joint foreign transferors.
    (3) Options to acquire a U.S. real property interest--(i) No 
withholding on grant of option. No withholding is required under section 
1445 with respect to any amount realized by the grantor on the grant of 
an option to acquire a U.S. real property interest.
    (ii) No withholding upon lapse of option. No withholding is required 
under section 1445 with respect to any amount realized by the grantor 
upon the lapse of an option to acquire a U.S. real property interest.
    (iii) Withholding required upon the sale or exchange of option. A 
transferee of an option to acquire a U.S. real property interest must 
deduct and withhold a tax equal to 10 percent of the amount realized by 
the transferor upon the disposition. This Sec. 1.1445-1(b)(3)(iii) does 
not apply to require withholding upon the initial grant of an option.
    (iv) Withholding required on exercise of option. If the holder 
exercises an option to purchase a U.S. real property interest, the 
amount paid for the option shall be considered an amount realized by the 
grantor/transferor upon the transfer of the property with respect to 
which the option was granted, and shall thus be subject to withholding 
on the day that such underlying property is transferred. The preceding 
sentence applies regardless of whether or not the terms of the option 
specifically provide that the option price is applied to the purchase 
price.
    (4) Exceptions and modifications. The duty to withhold under section 
1445(a) is subject to the exceptions and modifications contained in 
Secs. 1.1445-2 and 1.1445-3. Generally, Sec. 1.1445-2 provides rules for 
determining that withholding is not required because either the 
transferor is not a foreign person or the interest transferred is not a 
U.S. real property interest. In addition, Sec. 1.1445-2 provides 
exceptions to the withholding requirement, including a rule that exempts 
from withholding any person who acquires a U.S. real property interest 
for use as a residence for a contract price of $300,000 or less. If 
withholding is required under section 1445(a), Sec. 1.1445-3 allows the 
amount withheld to be modified pursuant to a withholding certificate 
issued by the Internal Revenue Service. If a transferee cannot withhold 
the full amount required because the first payment of consideration for 
the transfer does not involve sufficient cash (or other liquid assets 
convertible into cash, such as foreign currency), then a withholding 
certificate must be obtained pursuant to Sec. 1.1445-3.
    (c) Reporting and paying over of withheld amounts--(1) In general. A 
transferee must report and pay over any tax withheld by the 20th day 
after the date of the transfer. Forms 8288 and 8288-A are used for this 
purpose, and must be filed with the Internal Revenue Service Center, 
Philadelphia, PA, 19255. Pursuant to section 7502 and regulations 
thereunder, the timely mailing of Forms 8288 and 8228-A will be treated 
as their timely filing. Form 8288-A will be stamped by the IRS to show 
receipt, and a stamped copy will be mailed by the IRS to the transferor 
(at the address reported on the form) for the transferor's use. See 
Secs. 1.1445-1(f) and 1.1445-3(f).
    (2) Pending application for withholding certificate--(i) In general. 
(A) Delayed reporting and payment with respect to application submitted 
by transferee. If an

[[Page 89]]

application for a withholding certificate with respect to a transfer of 
a U.S. real property interest is submitted to the Internal Revenue 
Service by the transferee on the day of or at any time prior to the 
transfer, the transferee must withhold 10 percent of the amount realized 
as required by paragraph (b) of this section. However, the amount 
withheld, or a lesser amount as determined by the Service, need not be 
reported and paid over to the Service until the 20th day following the 
Service's final determination with respect to the application for a 
withholding certificate. For this purpose, the Service's final 
determination occurs on the day when the withholding certificate is 
mailed to the transferee by the Service or when a notification denying 
the request for a withholding certificate is mailed to the transferee by 
the Service. An application is submitted to the Service on the day it is 
actually received by the Service at the address provided in Sec. 1.1445-
1(g)(10) or, under the rules of section 7502, on the day it is mailed to 
the Service at the address provided in Sec. 1.1445-1(g)(10).
    (B) Delayed reporting and payment with respect to application 
submitted by transferor. If an application for a withholding certificate 
with respect to a transfer of a U.S. real property interest is submitted 
to the Internal Revenue Service by the Transferor on the day of or any 
time prior to the transfer, such transferor must provide notice to the 
transferee prior to the transfer. No particular form is required but the 
notice must set forth the name, address, and taxpayer identification 
number, if any, of the transferor, a brief description of the property 
which is the subject of the application, and the date the application 
was submitted to the Service. The transferee must withhold 10 percent of 
the amount realized as required in paragraph (b) of this section but 
need not report or pay over to the Service such amount (or a lesser 
amount as determined by the Service) until the 20th day following the 
Service's final determination with respect to the application. The 
Service will send a copy of the withholding certificate or copy of the 
notification denying the request for a withholding certificate to the 
transferee. For this purpose, the Service's final determination will be 
deemed to occur on the day when the copy of the withholding certificate 
or the copy of the notification denying the request for a withholding 
certificate is mailed by the Service to the transferee (or transferees). 
An application is submitted to the Service on the day it is actually 
received by the Service at the address provided in Sec. 1.1445-1(g)(10) 
or, under the rules of Sec. 7502, on the day it is mailed to the Service 
at the address provided in Sec. 1.1445-1(g)(10).
    (ii) Anti-abuse rule--(A) In general.  A transferee that in reliance 
upon the rules of this paragraph (c)(2) fails to report and pay over 
amounts withheld by the 20th day following the date of the transfer, 
shall be subject to the payment of interest and penalties if the 
relevant application for a withholding certificate (or an amendment to 
the application for a withholding certificate) was submitted for a 
principal purpose of delaying the transferee's payment to the IRS of the 
amount withheld. Interest and penalties shall be assessed on the amount 
that is ultimately paid over (or collected pursuant to the agreement) 
with respect to the period between the 20th day after the date of the 
transfer and the date on which payment is made (or collected).
    (B) Presumption. A principal purpose of delaying payment of the 
amount withheld shall be presumed if--
    (1) The transferee applies for a withholding certificate pursuant to 
Sec. 1.1445-3(c) based on a determination of the transferor's maximum 
tax liability, and
    (2) Such liability is ultimately determined to be equal to 90 
percent or more of the amount that was otherwise required to be withheld 
and paid over. However, the presumption created by the previous sentence 
may be rebutted by evidence establishing that delaying payment of the 
amount withheld was not a principal purpose of the transaction.
    (d) Contents of Forms 8288 and 8288-A--(1) Transactions subject to 
section 1445(a). Any person that is required to file Forms 8288 and 
8288-A pursuant to section 1445(a) and the rules of this section must 
set forth thereon the following information:

[[Page 90]]

    (i) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of any entity) of 
the transferee(s) filing the return;
    (ii) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of any entity) of 
the transferor(s);
    (iii) A brief description of the U.S. real property interest 
transferred, including its location and the nature of any substantial 
improvements in the case of real property, and the class or type and 
amount of interests transferred in the case of interests in a 
corporation that constitute U.S. real property interests;
    (iv) The date of the transfer;
    (v) The amount realized by the transferor, as defined in paragraph 
(g)(5) of this section;
    (vi) The amount withheld by the transferee and whether withholding 
is at the statutory or reduced rate; and
    (vii) Such other information as the Commissioner may require.
    For purposes of paragraph (d)(1) (i) and (ii), mailing addresses may 
be provided in addition to, but not in lieu of, home addresses or office 
addresses.
    (2) Transactions subject to section 1445(e). Any person that is 
required to file Forms 8288 and 8288-A pursuant to the rules of 
Sec. 1.1445-5 must set forth thereon the following information:
    (i) The name, identifying number (if any), and office address of the 
entity or fiduciary filing the return;
    (ii) The amount withheld by the entity or fiduciary;
    (iii) The date of the transfer;
    (iv) In the case of a transaction subject to withholding pursuant to 
section 1445(e)(1) and Sec. 1.1445-5(c):
    (A) A brief description of the U.S. real property interest 
transferred, as described in paragraph (d)(1)(iii) of this section;
    (B) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of an entity) of 
each holder of an interest in the entity that is a foreign person; and
    (C) Each such interest-holder's pro rata share of the amount 
withheld;
    (v) In the case of a distribution subject to withholding pursuant to 
section 1445(e)(2) and Sec. 1.1445-5(d):
    (A) A brief description of the U.S. real property interest 
transferred, as described in paragraph (d)(1)(iii) of this section; and
    (B) The amount of gain recognized upon the distribution by the 
corporation.
    (vi) In the case of a distribution subject to withholding pursuant 
to section 1445(e)(3) and Sec. 1.1445-5(e):
    (A) A brief description of the property distributed by the 
corporation;
    (B) The name, identifying number (if any), and home address (in case 
of an individual) or office address (in the case of an entity) of each 
holder of an interest in the entity that is a foreign person;
    (C) The amount realized upon the distribution by each such foreign 
interest holder; and
    (D) Each foreign interest-holder's pro rata share of the amount 
withheld; and
    (vii) Such other information as the Commissioner may require.
    (e) Liability of transferee upon failure to withhold--(1) In 
general. Every person required to deduct and withhold tax under section 
1445 is made liable for that tax by section 1461. Therefore, a person 
that is required to deduct and withhold tax but fails to do so may be 
held liable for the payment of the tax and any applicable penalties and 
interest.
    (2) Transferor's liability not otherwise satisfied--(i) Tax and 
penalties. Except as provided in paragraph (e)(3) of this section, if a 
transferee is required to deduct and withhold tax under section 1445 but 
fails to do so, then the tax shall be assessed against and collected 
from that transferee. Such person may also be subject to any of the 
civil and criminal penalties that apply. Corporate officers or other 
responsible persons may be subject to a civil penalty under section 6672 
equal to the amount that should have been withheld and paid over.
    (ii) Interest. If a transferee is required to deduct and withhold 
tax under section 1445 but fails to do so, then such transferee shall be 
liable for the payment of interest pursuant to section

[[Page 91]]

6601 and the regulations thereunder. Interest shall be payable with 
respect to the period between--
    (A) The last date on which the tax imposed under section 1445 was 
required to be paid over by the transferee, and
    (B) The date on which such tax is actually paid. Interest shall be 
payable with respect to the entire amount that is required to be 
deducted and withheld. However, if the Service issues a withholding 
certificate providing for withholding of a reduced amount, then, for the 
period after the issuance of the certificate, interest shall be payable 
with respect to that reduced amount.
    (3) Transferor's liability otherwise satisfied--(i) Tax and 
penalties. If a transferee is required to deduct and withhold tax under 
section 1445 but fails to do so, and the transferor's tax liability with 
respect to the transfer was satisfied (or was established to be zero) 
by--
    (A) The transferor's filing of an income tax return (and payment of 
any tax due) with respect to the transfer, or
    (B) The issuance of a withholding certificate by the Internal 
Revenue Service establishing that the transferor's maximum tax liability 
is zero,

then the tax required to be withheld under section 1445 shall not be 
collected from the transferee. Such transferee's liability for tax, and 
the requirement that such person file Forms 8288 and 8288-A, shall be 
deemed to have been satisfied as of the date on which the transferor's 
income tax return was filed or the withholding certificate was issued. 
No penalty shall be imposed on or collected from such person for failure 
to return or pay the tax, unless such failure was fraudulent and for the 
purpose of evading payment. A transferee that seeks to avoid liability 
for tax and penalties pursuant to the rule of paragraph (e)(3)(i) must 
provide sufficient information for the Service to determine whether the 
transferor's tax liability was satisfied (or was established to be 
zero).
    (ii) Interest. If a transferee is required to deduct and withhold 
tax under section 1445 but fails to do so, then such person shall be 
liable for the payment of interest under section 6601 and regulations 
thereunder. Such transferee's liability for the payment of interest 
shall not be excused by reason of the deemed satisfaction, pursuant to 
subdivision (i) of this paragraph (e)(3), of the transferee's liability 
under section 1445, because the deemed satisfaction of that liability is 
the equivalent of the late payment of a liability, on which interest 
must be paid. Interest shall be payable with respect to the period 
between--
    (A) The last date on which the tax imposed under section 1445 was 
required to be paid over, and
    (B) The date (established from information supplied to the Service 
by the transferee) on which any tax due is paid with respect to the 
transferor's relevant income tax return, or the date the withholding 
certificate is issued establishing that the transferor's maximum tax 
liability is zero.

Interest shall be payable with respect to the entire amount that is 
required to be deducted and withheld. However, if the Service issues a 
withholding certificate providing for withholding of a reduced amount, 
then for the period after the issuance of the certificate interest shall 
be payable with respect to that reduced amount.
    (4) Coordination with entity with holding rules. For purposes of 
section 1445(e) and Secs. 1.1445-5, 1.1445-6, 1.1445-7, and 1.1445-8T, 
the rules of this paragraph (e) shall be applied by--
    (i) Substituting the words ``person required to withhold'' for the 
word ``transferee'' each place it appears in this paragraph (e), and
    (ii) Substituting the words ``person subject to withholding'' for 
the word ``transferor'' each place it appears in this paragraph (e).
    (f) Effect of withholding on transferor--(1) In general. The 
withholding of tax under section 1445(a) does not excuse a foreign 
person that disposes of a U.S. real property interest from filing a U.S. 
tax return with respect to the income arising from the disposition. Form 
1040NR, 1041, or 1120F, as appropriate, must be filed, and any tax due 
must be paid, by the filing deadline generally applicable to such 
person. (The return may be filed by such later date as is provided in an 
extension granted by the Internal Revenue Service.) Any tax withheld 
under section

[[Page 92]]

1445(a) shall be credited against the amount of income tax as computed 
in such return.
    (2) Manner of obtaining credit or refund. A stamped copy of Form 
8288-A will be provided to the transferor by the Service (under 
paragraph (c) of this section), and must be attached to the transferor's 
return to establish the amount withheld that is available as a credit. 
If the amount withheld under section 1445(a) constitutes less than the 
full amount of the transferor's U.S. tax liability for that taxable 
year, then a payment of estimated tax may be required to be made 
pursuant to section 6154 or 6654 prior to the filing of the income tax 
return for that year. Alternatively, if the amount withheld under 
section 1445(a) exceeds the transferor's maximum tax liability with 
respect to the disposition (as determined by the IRS), then the 
transferor may seek an early refund of the excess pursuant to 
Sec. 1.1445-3(g), or a normal refund upon the filing of a tax return.
    (3) Special rules--(i) Failure to receive Form 8288-A. If a stamped 
copy of Form 8288-A has not been provided to the transferor by the 
Service, the transferor may establish the amount of tax withheld by the 
transferee by attaching to its return substantial evidence (e.g., 
closing documents) of such amount. Such a transferor must attach to its 
return a statement which supplies all of the information required by 
Sec. 1.1445-1(d) (except such information that was not obtained after a 
diligent effort).
    (ii) U.S. persons subjected to withholding. If a transferee 
withholds tax under section 1445(a) with respect to a person who is not 
a foreign person, such person may credit the amount of any tax withheld 
against his income tax liability in accordance with the provisions of 
this Sec. 1.1145-1(f) or apply for an early refund under Sec. 1.1445-
3(g).
    (iii) Refund in case of installment sale. A transferor that takes 
gain into account in accordance with the provisions of section 453 shall 
not be entitled to a refund of the amount withheld, unless a withholding 
certificate providing for such a refund is obtained from the Internal 
Revenue Service pursuant to the provisions of Sec. 1.1445-3.
    (iv) Joint foreign transferors. If two or more foreign persons 
jointly transfer a U.S. real property interest, each transferor shall be 
credited with such portion of the amount withheld as such transferors 
mutually agree. Such transferors must request that the transferee 
reflect the agreed-upon crediting of the amount withheld on the Forms 
8288-A filed by the transferee. If the foreign transferors fail to 
request that the transferee reflect the agreed-upon crediting of the 
amount withheld by the 10th day after the date of transfer, the 
transferee must credit the amount withheld equally between (or among) 
the foreign transferors. In such case, the transferee is indemnified 
pursuant to section 1461 against any claim by a transferor objecting to 
the resulting division of credits. For rules regarding the amount 
realized allocated to joint foreign and non-foreign transferors, see 
Sec. 1.1445-1(b)(2).
    (g) Definitions--(1) In general. Unless otherwise specified, the 
definitions of terms provided in Sec. 1.897-1 shall apply for purposes 
of this section and Secs. 1.1445-2 through 1.1445-7. For purposes of 
section 1445 and the regulations thereunder, definitions of other 
relevant terms are provided in this paragraph (g). In addition, the term 
``residence'' is defined in 1.1445-2(d)(1), the terms ``transferor's 
agent'' and ``transferee's agent'' are defined in 1.1445-4(f), and the 
term ``relevant taxpayer'' is defined in 1.1445-6(a)(2).
    (2) Transfer. The term ``transfer'' means any transaction that would 
constitute a disposition for any purpose, of the Internal Revenue Code 
and regulations thereunder. For purposes of Secs. 1.1445-5 and 1.1445-6, 
the term includes distribution to shareholders of a corporation, 
partners of a partnership and beneficiaries of a trust or estate.
    (3) Transferor. The term ``transferor'' means any person, foreign or 
domestic, that disposes of a U.S. real property interest by sale, 
exchange, gift, or any other transfer. The term ``U.S. real property 
interest'' is defined in Sec. 1.897-1(c).
    (4) Transferee. The term ``transferee'' means any person, foreign or 
domestic, that acquires a U.S. real property interest by purchase, 
exchange, gift, or any other transfer.

[[Page 93]]

    (5) Amount realized. The amount realized by the transferor for the 
transfer of a U.S. real property interest is the sum of.
    (i) The cash paid, or to be paid.
    (ii) The fair market value of other property transferred, or to be 
transferred, and
    (iii) The outstanding amount of any liability assumed by the 
transferee or to which the U.S. real property interest is subject 
immediately before and after the transfer.
The term ``cash paid or to be paid'' does not include stated or unstated 
interest or original issue discount (as determined under the rules of 
sections 1271 through 1275).
    (6) Contract price. The contract price of a U.S. real property 
interest is the sum that is agreed to by the transferee and transferor 
as the total amount of consideration to be paid for the property. That 
amount will generally be equal to the amount realized by the transferor, 
as defined in paragraph (b)(5) of this section.
    (7) Fair market value. The fair market value of property means the 
price at which the property would change hands between an unrelated 
willing buyer and willing seller, neither being under any compulsion to 
buy or to sell and both having reasonable knowledge of all relevant 
facts.
    (8) Date of transfer. The date of transfer of a U.S. real property 
interest is the first date on which consideration is paid (or a 
liability assumed) by the transferee. However, for purposes of section 
1445(e) (2), (3), and (4) and Secs. 1.1445-5(c)(1)(iii) and 1.1445-
5(c)(3) only, the date of transfer is the date of the distribution that 
gives rise to the obligation to withhold. For purposes of this paragraph 
(g)(8), the payment of consideration does not include the payment, prior 
to the passage of legal or equitable title (other than pursuant to an 
initial contract for purchase), of earnest money, a good-faith deposit, 
or any similar sum that is primarily intended to bind the transferee or 
transferor to the entering or performance of a contract. Such a payment 
will not constitute a payment of consideration solely because it may 
ultimately be applied against the amount owed to the transferor by the 
transferee. Such a payment is presumed to be earnest money, a good faith 
deposit, or a similar sum if it is subject to forfeiture in the event of 
a failure to enter into a contract or a breach of contract. However, a 
payment that is not forefeitable may nevertheless be found to constitute 
earnest money, a good faith deposit, or a similar sum.
    (9) Identifying number. Pursuant to Sec. 1.897-1(p), an individual's 
identifying number is the social security number (or the identification 
numbers assigned by the Internal Revenue Service). The identifying 
number of any other person is its United States employer identification 
number.
    (10) Address of the Assistant Commissioner International. Any 
written communication directed to the Assistant Commissioner 
(International) is to be addressed as follows: Director, Philadelphia 
Service Center; 11601 Roosevelt Blvd.; Philadelphia, PA 19255; ATTN: 
Drop Point 543X.

[T.D. 8113, 51 FR 46629, Dec. 24, 1986; 52 FR 3796, 3916, Feb. 6, 1987, 
as amended by T.D. 8647, 60 FR 66076, Dec. 21, 1995]



Sec. 1.1445-2  Situations in which withholding is not required under section 1445(a).

    (a) Purpose and scope of section. This section provides rules 
concerning various situations in which withhold is not required under 
section 1445(a). In general, a transferee has a duty to withhold under 
section 1445(a) only if both of the following are true:
    (1) The transferor is a foreign person; and
    (2) The transferee is acquiring a U.S. real property interest.

Thus, paragraphs (b) and (c) of this section provide rules under which a 
transferee of property can ascertain that he has no duty to withhold 
because one or the other of the two key elements is missing. Under 
paragraph (b), a transferee may determine that no withholding is 
required because the transferor is not a foreign person. Under paragraph 
(c), a transferee may determine that no withholding is required because 
the property acquired is not a U.S. real property interest. Finally, 
paragraph (d) of this section provides rules concerning exceptions to 
the withholding requirement.

[[Page 94]]

    (b) Transferor not a foreign person-- (1) In general. No withholding 
is required under section 1445 if the transferor of a U.S. real property 
interest is not a foreign person. Therefore, paragraph (b)(2) of this 
section provides rules pursuant to which the transferor can provide a 
certification of non-foreign status to inform the transferee that 
withholding is not required. A transferee that obtains such a 
certification must retain that document for five years, as provided in 
paragraph (b)(3) of this section. Except to the extent provided in 
paragraph (b)(4) of this section, the obtaining of this certification 
excuses the transferee from any liability otherwise imposed by section 
1445 and Sec. 1.1445-1(e). However, section 1445 and the rules of this 
section do not impose any obligation upon a transferee to obtain a 
certification from the transferor, thus, a transferee may instead rely 
upon other means to ascertain the non-foreign status of the transferor. 
If, however, the transferee relies upon other means and the transferor 
was, in fact, a foreign person, then the transferee is subject to the 
liability imposed by section 1445 and Sec. 1.1445-1(e).

A transferee is in no event required to rely upon other means to 
ascertain the non-foreign status of the transferor and may demand a 
certification of non-foreign status. If the certification is not 
provided, the transferee may withhold tax under section 1445 and will be 
considered, for purposes of sections 1461 through 1463, to have been 
required to withhold such tax.

    (2) Transferor's certification of non-foreign status--(i) In 
general. A transferee of a U.S. real property interest is not required 
to withhold under section 1445(a) if, prior to or at the time of the 
transfer, the transferor furnishes to the transferee a certification 
that--
    (A) States that the transferor is not a foreign person.
    (B) Sets forth the transferor's name, identifying number and home 
address (in the case of an individual) or office address (in the case of 
an entity), and
    (C) Is signed under penalties of perjury.

In general, a foreign person is a nonresident alien individual, foreign 
corporation, foreign partnership, foreign trust, or foreign estate, but 
not a resident alien individual. In this regard, see Sec. 1.897-1(k). 
However, a foreign corporation that has made a valid election under 
section 897(i) is generally not treated as a foreign person for purposes 
of section 1445. In this regard, see Sec. 1.1445-7. Pursuant to 
Sec. 1.897-1(p), an individual's identifying number is the individual's 
Social Security number and any other person's identifying number is its 
U.S. employer identification number. A certification pursuant to this 
paragraph (b) must be vertified as true and signed under penalties of 
perjury by a responsible officer in the case of a corporation, by a 
general partner in the case of a partnership, and by a trustee, 
executor, or equivalent fiduciary in the case of a trust or estate. No 
particular form is needed for a certification pursuant to this paragraph 
(b), nor is any particular language required, so long as the document 
meets the requirements of this paragraph (b)(2)(i). Samples of 
acceptable certifications are provided in paragraph(b)(2)(iii) of this 
section.
    (ii) Foreign corporation that ``has made election under section 
897(i). A foreign corporation that has made a valid election under 
section 897(i) to be treated as a domestic corporation for purposes of 
section 897 may provide a certification of non-foreign status pursuant 
to this paragraph (b)(2). However, an electing foreign corporation must 
attach to such certification a copy of the acknowledgment of the 
election provided to the corporation by the Internal Revenue Service 
pursuant to Sec. 1.897-3(d)(4).

An acknowledgment is valid for this purpose only if it states that the 
information required by Sec. 1.897-3 has been determined to be complete.
    (iii) Sample certifications--(A) Individual transferor.

    ``Section 1445 of the Internal Revenue Code provides that a 
transferee (buyer) of a U.S. real property interest must withhold tax if 
the transferor (seller) is a foreign person. To inform the transferee 
(buyer) that withholding of tax is not required upon my disposition of a 
U.S. real property interest, I, [name of transferor], hereby certify the 
following:
    1. I am not a nonresident alien for purposes of U.S. income 
taxation;
    2. My U.S. taxpayer identifying number [Social Security number] is 
________; and
    3. My home address is:

[[Page 95]]

_______________________________________________________________________

_______________________________________________________________________

    I understand that this certification may be disclosed to the 
Internal Revenue Service by the transferee and that any false statement 
I have made here could be punished by fine, imprisonment, or both.
    Under penalties of perjury I declare that I have examined this 
certification and to the best of my knowledge and belief it is true, 
correct, and complete. [Signature and Date]''

    (B) Entity transferor.

    ``Section 1445 of the Internal Revenue Code provides that a 
transferee of a U.S. real property interest must withhold tax if the 
transferor is a foreign person. To inform the transferee that 
withholding of tax is not required upon the disposition of a U.S. real 
property interest by [name of transferor], the undersigned hereby 
certifies the following on behalf of [name of transferor]:
    1. [Name of transferor] is not a foreign corporation, foreign 
partnership, foreign trust, or foreign estate (as those terms are 
defined in the Internal Revenue Code and Income Tax Regulations]:
    2. [Name of transferor]'s U.S. employer identification number is 
________, and
    3. [Name of transferor]'s office address is
_______________________________________________________________________

    [Name of transferor] understands that this certification may be 
disclosed to the Internal Revenue Service by transferee and that any 
false statement contained herein could be punished by fine, imprisonment 
or both.
    Under penalties of perjury I declare that I have examined this 
certification and to the best of my knowledge and belief it is true, 
correct and complete, and I further declare that I have authority to 
sign this document on behalf of [name of transferor].

[Signature and date]

[Title ________]

    (3) Transferee must retain certification. If a transferee obtains a 
transferor's certification pursuant to the rules of this paragraph (b), 
then the transferee must retain that certification until the end of the 
fifth taxable year following the taxable year in which the transfer 
takes place. The transferee must retain the certification, and make it 
avaliable to the Internal Revenue Service when requested in accordance 
with the requirements of section 6001 and regulations thereunder.
    (4) Reliance upon certification not permitted--(i) In general. A 
transferee may not rely upon a transferor's certification pursuant to 
this paragraph (b) under the circumstances set forth in either 
subdivision (ii) or (iii) of this paragraph (b)(4). In either of those 
circumstances, a transferee's withholding obligation shall apply as if a 
certification had never been obtained, and the transferee is fully 
liable pursuant to section 1445 and Sec. 1.1445-1(e) for any failure to 
withhold.
    (ii) Failure to attach IRS acknowledgment of election. A transferee 
that knows that the transferor is a foreign corporation may not rely 
upon a certification of non-foreign status provided by the corporation 
on the basis of election under section 897(i), unless there is attached 
to the certification a copy of the acknowledgment by the Internal 
Revenue Service of the corporation's election, as required by paragraph 
(b)(2)(ii) of this section.
    (iii) Knowledge of falsity. A transferee is not entitled to rely 
upon a transferor's certification if prior to or at the time of the 
transfer the transferee either--
    (A) Has actual knowledge that the transferor's certification is 
false; or
    (B) Receives a notice that the certification is false from a 
transferor's or transferee's agent, pursuant to Sec. 1.1445-4.
    (iv) Belated notice of false certification. If after the date of the 
transfer a transferee receives a notice that a certification is false, 
then that transferee is entitled to rely upon the certification only 
with respect to consideration that was paid prior to receipt for the 
notice. Such a transferee is required to withhold a full 10 percent of 
the amount realized from the consideration that remains to be paid to 
the transferor if possible. Thus, if 10 percent or more of the amount 
reailzed remains to be paid to the transferor then the transferee is 
required to withhold and pay over the full 10 percent. The transferee 
must do so by withholding and paying over the entire amount of each 
successive payment of consideration to the transferor until the full 10 
percent of the amount realized has been withheld and paid over. Amounts 
so withheld must be reported and paid over by the 20th day following the 
date on which each such payment of consideration is made. A transferee 
that is subject to the rules of this paragraph (b)(4)(iv) may not obtain 
a withholding certificate pursuant

[[Page 96]]

to Sec. 1.1445-3, but must instead withhold and pay over the amounts 
required by this paragraph.
    (c) Transferred property not a U.S. real property interest--(1) In 
general. No withholding is required under section 1445 if the transferee 
acquires only property that is not a U.S. real property interest. As 
defined in section 897(c) and Sec. 1.897-1(c), a U.S. real property 
interest includes certain interests in U.S. corporations, as well as 
direct interests in real property and certain associated personal 
property. This paragraph (c) provides rules pursuant to which a person 
acquiring an interest in a U.S. corporation may determine that 
withholding is not required because that interest is not a U.S. real 
property interest. To determine whether an interest in tangible property 
constitutes a U.S. real property interest the acquisition of which would 
be subject to withholding, see Sec. 1.897-1 (b) and (c).
    (2) Interests in publicly traded entities. No withholding is 
required under section 1445(a) upon the acquisition of an interest in a 
domestic corporation if any class of stock of the corporation is 
regularly traded on an established securities market.

This exemption shall apply if the disposition is incident to an initial 
public offering of stock pursuant to a registration statement filed with 
the Securities and Exchange Commission. Similarly, no withholding is 
required under section 1445(a) upon the acquisition of an interest in a 
publicly traded partnership or trust. However, the rule of this 
paragraph (c)(2) shall not apply to the acquisition, from a single 
transferor in a single (or related transferors (as defined in 
Sec. 1.897-1(i)) transaction (or related transactions), of an interest 
described in Sec. 1.897-1(c)(2)(iii)(B) (relating to substantial amounts 
of non-publicly traded interests in publicly traded corporations) or to 
similar interests in publicly traded partnerships or trusts. The person 
making an acquisition described in the preceding sentence must otherwise 
determine whether withholding is required, pursuant to section 1445 and 
the regulations thereunder. Transactions shall be deemed to be related 
if they are undertaken within 90 days of one another or if it can 
otherwise be shown that they were undertaken in pursuance of a 
prearranged plan.
    (3) Transferee receives statement that interest in corporation is 
not a U.S. real property interest--(i) In general. No withholding is 
required under section 1445(a) upon the acquisition of an interest in a 
domestic corporation, if the tranferor provides the transferee with a 
copy of a statement, issued by the corporation pursuant to Sec. 1.897-
2(h), certifying that the interest is not a U.S. real property interest. 
In general, a corporation may issue such a statement only if the 
corporation was not a U.S. real property holding corporation at any time 
during the previous five years (or the period in which the interest was 
held by its present holder, if shorter) or if interests in the 
corporation ceased to be United States real property interests under 
section 897(c)(1)(B). (A corporation may not provide such a statement 
based on its determination that the interest in question is an interest 
solely as a creditor). See Sec. 1.897-2 (f) and (h). The corporation may 
provide such a statement directly to the transferee at the transferor's 
request. The transferor must request such a statement prior to the 
transfer, and shall, to the extent possible, specify the anticipated 
date of the transfer. A corporation's statement may be relied upon for 
purposes of this paragraph (c)(3) only if the statement is dated not 
more than 30 days prior to the date of the transfer. A transferee may 
also rely upon a corporation's statement that is voluntarily provided by 
the corporation in response to a request from the transferee, if that 
statement otherwise complies with the requirements of this paragraph 
(c)(3) and Sec. 1.897-2(h).
    (ii) Reliance on statement not permitted. A transferee is not 
entitled to rely upon a statement that a corporation is not a U.S. real 
property holding corporation if, prior to or at the time of the 
transfer, the transferee either--
    (A) Has actual knowledge that the statement is false, or
    (B) Receives a notice that the statement is false from a 
transferor's or transferee's agent, pursuant to Sec. 1.1445-4.

Such a transferee's withholding obligations shall apply as if a 
statement had

[[Page 97]]

never been given, and such a transferee may be held fully liable 
pursuant to Sec. 1.1445-1(e) for any failure to withhold.
    (iii) Belated notice of false statement. If after the date of the 
transfer, a transferee receives notice that a statement provided under 
Sec. 1.1445-2(c)(3)(i) (that an interest in a corporation is not a U.S. 
real property interest) is false, then such transferee may rely on the 
statement only with respect to consideration that was paid prior to the 
receipt of the notice.

Such a transferee is required to withhold a full 10 percent of the 
amount realized from the consideration that remains to be paid to the 
transferor, if possible. Thus, if 10 percent or more of the amount 
realized remains to be paid to the transferor, then the transferee is 
required to withhold and pay over the full 10 percent. The transferee 
must do so by withholding and paying over the entire amount of each 
successive payment of consideration to the transferor, until the full 10 
percent of the amount realized has been withheld and paid over. Amounts 
so withheld must be reported and paid over by the 20th day following the 
date on which each such payment of consideration is made. A transferee 
that is subject to the rules of this Sec. 1.1445-2(c)(3)(iii) may not 
obtain a withholding certificate pursuant to Sec. 1.1445-3, but must 
instead withhold and pay over the amounts required by this paragraph.
    (d) Exceptions to requirement of withholding--(1) Purchase of 
residence for $300,000 or less. No withholding is required under section 
1445(a) if one or more individual transferees acquire a U.S. real 
property interest for use as a residence and the amount realized on the 
transaction is $300,000 or less. For purposes of this section, a U.S. 
real property interest is acquired for use as a residence if on the date 
of the transfer the transferee (or transferees) has definite plans to 
reside at the property for at least 50 percent of the number of days 
that the property is used by any person during each of the first two 12-
month periods following the date of the transfer. The number of days 
that the property will be vacant is not taken into account in 
determining the number of days such property is used by any person. A 
transferee shall be considered to reside at a property on any day on 
which a member of the transferee's family, as defined in section 
267(c)(4), resides at the property. No form or other document need be 
filed with the Internal Revenue Service to establish a transferee's 
entitlement to rely upon the exception provided by this paragraph 
(d)(1). A transferee who fails to withhold in reliance upon this 
exception, but who does not in fact reside at the property for the 
minimum number of days set forth above, shall be liable for the failure 
to withhold (if the transferor was a foreign person and did not pay the 
full U.S. tax due on any gain recognized upon the transfer). However, if 
the transferee establishes that the failure to reside the minimum number 
of days was caused by a change in circumstances that could not 
reasonably have been anticipated at the time of the transfer, then the 
transferee shall not be liable for the failure to withhold.

The exception provided by paragraph (d)(1) does not apply in any case 
where the transferee is other than an individual even if the property is 
acquired for or on behalf of an individual who will use the property as 
a residence. However, this exception applies regardless of the 
organizational structure of the transferor (i.e., regardless of whether 
the transferor is an individual, partnership, trust, corporation, etc.).
    (2) Coordination with nonrecognition provisions--(i) In general. A 
transferee shall not be required to withhold under section 1445(a) with 
respect to the transfer of a U.S. real property interest if--
    (A) The transferor notifies the transferee, in the manner described 
in paragraph (d)(2)(iii) of this section, that by reason of the 
operation of a nonrecognition provision of the Internal Revenue Code or 
the provisions of any United States treaty the transferor is not 
required to recognize any gain or loss with respect to the transfer, and
    (B) By the 20th day after the date of the transfer the transferee 
provides a copy of the transferor's notice to the Assistant Commissioner 
(International), at the address provided in Sec. 1.1445-1(g)(10), 
together with a cover letter setting forth the name, identifying number 
(if any), and home address

[[Page 98]]

(in the case of an individual) or office address (in the case of an 
entity) of the transferee providing the notice to the Service. The rule 
of this paragraph (d)(2)(i) is subject to the exceptions set forth in 
paragraph (d)(2)(ii). For purposes of this paragraph (d)(2) a 
nonrecognition provision is any provision of the Internal Revenue Code 
for not recognizing gain or loss.
    (ii) Exceptions. A transferee may not rely upon the rule of 
paragraph (d)(2)(i) of this section, and must therefore withhold under 
section 1445(a) with respect to the transfer of a U.S. real property 
interest, if either:
    (A) The transferor qualifies for nonrecognition treatment with 
respect to part, but not all, of the gain realized by the transferor 
upon the transfer, or
    (B) The transferee knows or has reason to know that the transferor 
is not entitled to the nonrecognition treatment claimed by the 
transferor.

In either of the above circumstances the transferee or transferor may 
request a withholding certificate from the Internal Revenue Service 
pursuant to the rules of Sec. 1.1445-3.
    (3) Special procedural rules applicable to foreclosures--(i) Amount 
to be withheld--(A) foreclosures. A transferee that acquires a U.S. real 
property interest pursuant to a repossession or foreclosure on such 
property under a mortgage, security agreement, deed of trust or other 
instrument securing a debt must withhold tax under section 1445(a) equal 
to 10 percent of the amount realized on such sale. Such amount must be 
reported and paid over to the Service under the general rules of 
Sec. 1.1445-1. However, if the transferee complies with the notice 
requirements of Sec. 1.1445-2(d)(3) (ii) and (iii), such transferee may 
report and pay over to the Service on or before the 20th day following 
the final determination by a court or trustee with jurisdiction over the 
foreclosure action, the lesser of:
    (1) The amount otherwise required to be withheld under section 
1445(a), or
    (2) The ``alternative amount'' as defined in the succeeding 
sentence. The alternative amount is the entire amount, if any, 
determined by a court or trustee with jurisdiction over the matter, that 
accrues to the debtor/transferor out of the amount realized from the 
foreclosure sale. The amount of any mortgage, lien, or other security 
agreement secured by the property, that is terminated, assumed by 
another person, or otherwise extinguished (as to the debtor/transferor) 
shall not be treated as an amount that accrues to the debtor/transferor 
for purposes of this Sec. 1.1445-2(d)(3)(i)(A). If the alternative 
amount is zero, no withholding is required. Any difference between the 
amount withheld at the time of the foreclosure sale and the amount to be 
reported and paid over to the Service must be transferred to the court 
or trustee with jurisdiction over the foreclosure action. Amounts 
withheld, if any, are to be reported and paid to the Service by using 
Forms 8288 and 8288-A in conformity with Sec. 1.1445-1(d).
    (B) Deeds in lieu of foreclosures. A transferee of a U.S. real 
property interest pursuant to a deed in lieu of foreclosure must 
withhold tax equal to 10 percent of the amount realized by the debtor/
transferor on the transfer. However, no withholding is required if:
    (1) The transferee is the only person with a security interest in 
the property,
    (2) No cash or other property (other than incidental fees incurred 
with respect to the transfer) is paid, directly or indirectly, to any 
person with respect to the transfer, and
    (3) The notice requirement of Sec. 1.1445-2(d)(3) are satisfied.
The amount withheld, if any, must be reported and paid over to the 
Service not later than the 20th day following the date of transfer. In a 
case where withholding would otherwise be required, a withholding 
certificate may be requested in accordance with Sec. 1.1445-3.
    (ii) Notice to the court or trustee in a foreclosure action--(A) 
Notice on day of purchase. A transferee in a foreclosure sale that 
chooses to use the special rules applicable to foreclosures must provide 
notice to the court or trustee with jurisdiction over the foreclosure 
action on the day the property is transferred with respect to such 
transferee's withholding obligation. No particular form is necessary but 
the notice must set forth the transferee's name, home address in the 
case of an individual, office address in the case of an entity, a

[[Page 99]]

brief description of the property, the date of the transfer, the amount 
realized on the sale of the foreclosed property and the amount withheld 
under section 1445(a).
    (B) Notice whether amount withheld or alternative amount is reported 
and paid over to the Service. A purchaser/transferee in a foreclosure 
that chooses to use the special rules applicable to foreclosures must 
provide notice to the court or trustee with jurisdiction over the 
foreclosure action regarding whether the amount withheld or the 
alternative amount will be (or has been) reported and paid over to the 
Service. The notice should set forth all the information required by the 
preceding paragraph (d)(3)(ii)(A), the amount withheld or alternative 
amount that will be (or has been) reported and paid over to the Service, 
and the amount that will be (or has been) paid over to the court or 
trustee.
    (iii) Notice to the Service--(A) General rule. A transferee that in 
reliance upon the rules of this paragraph (d)(3) withholds an 
alternative amount (or does not withhold because the alternative amount 
is zero) must, on or before the 20th day following the final 
determination by a court or trustee in a foreclosure action or on or 
before the 20th day following the date of the transfer with respect to a 
transfer pursuant to a deed in lieu of foreclosure, provide notice 
thereof to the Assistant Commissioner (International) at the address 
provided in Sec. 1.1445-1(g)(10). (The filing of such a notice shall not 
relieve a creditor of any obligation it may have to file a notice 
pursuant to section 6050J and the regulations thereunder.) No particular 
form is required but the following information must be set forth in 
paragraphs labelled to correspond with the numbers set forth below.
    (1) A statement that the notice constitutes a notice of foreclosure 
action or transfer pursuant to a deed in lieu of foreclosure under 
Sec. 1.1445-2(d)(3).
    (2) The name, identifying number (if any) and home address (in the 
case of an individual) or office address (in the case of an entity) of 
the purchaser/transferee.
    (3) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of an entity) of 
the debor/transferor.
    (4) In a foreclosure action, the date of the final determination by 
a court or trustee regarding the distribution of the amount realized 
from the foreclosure sale. In a transfer pursuant to a deed in lieu of 
foreclosure, the date the property is transferred to the purchaser/
transferee.
    (5) A brief description of the property.
    (6) The amount realized from the foreclosure sale or with respect to 
the transfer pursuant to a deed in lieu of foreclosure.
    (7) The alternative amount.
    (B) Special rule for lenders required to file Form 1099-A where the 
alternative amount is zero. A person required under section 6050J to 
file Form 1099-A does not have to comply with the notice requirement of 
Sec. 1.1445-2(d)(3)(iii)(A) if the alternative amount is zero. In such 
case, the filing of the Form 1099-A will be deemed to satisfy the notice 
requirments of Sec. 1.1445-2(d)(3)(iii)(A).
    (iv) Requirements not applicable. A transferee is not required to 
withhold tax or provide notice pursuant to the rules of this paragraph 
(d)(3) if no substantive withholding liability applies to the transfer 
of the property by the debtor/transferor. For example, if the debtor/
transferor provides the transferee with a certification of non-foreign 
status pursuant to paragraph (b) of this section, then no substantive 
withholding liability would exist with respect to the acquisition of the 
property from the debtor transferor. In such a case, no withholding of 
tax or notice to the Internal Revenue Service is required of the 
transferee with respect to the repossession or foreclosure.
    (v) Anti-abuse rule. If a U.S. real property interest is transferred 
in foreclosure or pursuant to a deed in lieu of foreclosure for a 
principal purpose of avoiding the requirements of section 1445(a), then 
the provisions of this paragraph (d)(3) shall not apply to the transfer 
and the transferee shall be fully liable for any failure to withhold 
with respect to the transfer. A principal purpose to avoid section 
1445(a) will be presumed (subject to rebuttal

[[Page 100]]

on the basis of all relevant facts and circumstances) if:
    (A) The transferee acquires property in which it, or a related 
party, has a security interest;
    (B) The security interest did not arise in connection with the 
debtor/transferor's or a related party's or predecessor in interest's 
acquisition, improvement, or maintenance of the property; and
    (C) The total amount of all debts secured by the property exceeds 90 
percent of the fair market value of the property.
    (4) Installment payments. A transferee of a U.S. real property 
interest is not required to withhold under section 1445 when making 
installment payments on an obligation arising out of a dispositions that 
took place before January 1, 1985. With respect to disposition that take 
place after December 31, 1984, the transferee shall be required to 
satisfy its entire withholding obligation within the time specified in 
Sec. 1.1445-1(c) regardless of the amount actually paid by the 
transferee. Thereafter, no withholding is required upon further 
installment payments on an obligation arising out of the transfer. A 
transferee that is unable to satisfy its entire withholding obligation 
within the time specified in Sec. 1.1445-1(c) may request a withholding 
certificate pursuant to Sec. 1.1445-3.
    (5) Acquisitions by governmental bodies. No withholding of tax is 
required under section 1445 with respect to any acquisition of property 
by the United States, a state or possession of the United States, a 
political subdivision thereof, or the District of Columbia.
    (6) [Reserved]
    (7) Withholding certificate obtained by transferee or transferor. No 
withholding is required under section 1445(a) if the transferee is 
provided with a withholding cerfiticate that so specifies. Either the 
transferor or the transferee may seek a withholding certificate from the 
Internal Revenue Service, pursuant to the provisions of Sec. 1.1445-3.
    (8) Amount realized by transferor is zero. If the amount realized by 
transferor on a transfer of a U.S. real property interest is zero, no 
withholding is required.

[T.D. 8113, 51 FR 46633, Dec. 24, 1986; 52 FR 3917, Feb. 6, 1987; as 
amended at T.D. 8198, 53 FR 16230, May 5, 1988]



Sec. 1.1445-3  Adjustments to amount required to be withheld pursuant to withholding certificate.

    (a) In general. Withholding under section 1445(a) may be reduced or 
eliminated pursuant to a withholding certificate issued by the Internal 
Revenue Service in accordance with the rules of this section. A 
withholding certificate may be issued by the Service in cases where 
reduced withholding is appropriate (see paragraph (c) of this section), 
where the transferor is exempt from U.S. tax (see paragraph (d) of this 
section), or where an agreement for the payment of tax is entered into 
with the Service (see paragraph (e) of this section). A withholding 
certificate that is obtained prior to a transfer notifies the transferee 
that no withholding is required. A withholding certificate that is 
obtained after a transfer has been made may authorize a normal refund or 
an early refund pursuant to paragraph (g) of this section. Either a 
transferee or transferor may apply for a withholding certificate. The 
Internal Revenue Service will act upon an application for a withholding 
certificate not later than the 90th day after it is received. Solely for 
this purpose (i.e., determining the day upon which the 90-day period 
commences), an application is received by the Service on the date that 
all information necessary for the Service to make a determination is 
provided by the applicant. (For rules regarding whether an application 
for a withholding certificate has been timely submitted, see Sec. 1.445-
1(c)(2).) The Service may deny a request for a withholding certificate 
where, after due notice, an applicant fails to provide information 
necessary for the Service to make a determination. The Service will act 
upon an application for an early refund not later than the 90th day 
after it is received. An application for an early refund must either (1) 
include a copy of a withholding certificate issued by the Service with 
respect to the transaction or, (2) be combined with an application for a 
withholding certificate. Where an

[[Page 101]]

application for an early refund is combined with an application for a 
withholding certificate, the Service will act upon both applications not 
later than the 90th day after receipt. In the case of an application for 
a certificate based on non-conforming secuirty under paragraph (e)(3)(v) 
of this section, and in unusually complicated cases, the Service may be 
unable to provide a final withholding certificate by the 90th day. In 
such a case the Service will notify the applicant, by the 45th day after 
receipt of the application, that additional processing time will be 
necessary. The Service's notice may request additional information or 
explanation concerning particular aspects of the application, and will 
provide a target date for final action (contingent upon the 
application's timely submission of any requested information). A 
withholding certificate issued pursuant to the provisions of this 
section serves to fulfill the requirements of section 1445(b)(4) 
concerning qualifying statements, section 1445(c)(1) concerning the 
transferor's maximum tax liability, or section 1445(c)(2) concerning the 
Secretary's authority to prescribe reduced withholding.
    (b) Applications for withholding certificates--(1) In general. An 
application for a withholding certificate must be submitted to the 
Assistant Commissioner (International), at the address provided in 
Sec. 1.1445-1(g)(10). An application for a withholding certificate must 
be signed by a responsible officer in the case of a corporation, by a 
general partner in the case of a partnership, by a trustee, executor, or 
equivalent fiduciary in the case of a trust or estate, and in the case 
of an individual by the individual himself. A duly authorized agent may 
sign the application but the application must contain a valid power of 
attorney authorizing the agent to sign the application on behalf of the 
applicant. The person signing the application must verify under 
penalties of perjury that all representations made in connection with 
the application are true, correct, and complete to his knowledge and 
belief. No particular form is required for an application, but the 
application must set forth the information described in paragraphs (b), 
(2), (3), and (4) of this section.
    (2) Parties to the transaction. The application must set forth the 
name, address, and identifying number (if any) of the person submitting 
the application (specifying whether that person is the transferee or 
transferor), and the name, address, and identifying number (if any) of 
other parties to the transaction (specifying whether each such party is 
a transferee or transferor). The applicant must determine if an 
identifying number exists for each party concerned and if none exists 
for a particular party the application must so state. The address 
provided in the case of an individual must be that individual's home 
address, and the address provided in the case of an entity must be that 
entity's office address. A mailing address may be provided in addition 
to, but not in lieu of, a home address or office address.
    (3) Real property interest to be transferred. The application must 
set forth information concerning the U.S. real property interest with 
respect to which the withholding certificate is sought, including the 
type of interest, the contract price, and, in the case of an interest in 
real property, its location and general description, or in the case of 
an interest in a U.S. real property holding corporation, the class or 
type and amount of the interest.
    (4) Basis for certificate--(i) Reduced withholding. If a withholding 
certificate is sought on the basis of a claim that reduced withholding 
in appropriate, the application must include:
    (A) A calculation of the maximum tax that may be imposed on the 
disposition in accordance with paragraph (c)(2) of this section. Such 
calculation must be accompanied by a copy of the relevant contract and 
depreciation schedules or other evidence that confirms the contract 
price and adjusted basis of the property. If no depreciation schedules 
are provided, the application must state the nature of the use of the 
property and why depreciation was not allowable. Evidence that supports 
any claimed adjustment to the maximum tax on the disposition must also 
be provided;
    (B) A calculation of the transferor's unsatisfied withholding 
liability, or evidence supporting the claim that no such liability 
exists, in accordance

[[Page 102]]

with paragraph (c)(3) of this section; and
    (C) In the case of a request for a special reduction of withholding 
pursuant to paragraph (c)(4) of this section, a statement of law and 
facts in support of the request.
    (ii) Exemption. If a withholding certificate is sought on the basis 
of the transferor's exemption from U.S. tax, the application must set 
forth a brief statement of the law and facts that support the claimed 
exemption. In this regard, see paragraph (d) of this section.
    (iii) Agreement. If a withholding certificate is sought on the basis 
of an agreement for the payment of tax, the application must include a 
signed copy of the agreement proposed by the applicant and a copy of the 
security instrument (if any) proposed by the applicant. In this regard, 
see paragraph (e) of this section.
    (c) Adjustment of amount required to be withheld--(1) In general. 
The Internal Revenue Service may issue a withholding certificate that 
excuses withholding or that permits the transferee to withhold an 
adjusted amount reflecting the transferor's maximum tax liability. The 
transferor's maximum tax liability is the sum of--
    (i) The maximum amount which could be imposed as tax under section 
871 or 882 upon the transferor's disposition of the subject real 
property interest, as determined under paragraph (c)(2) of this section, 
and
    (ii) The transferor's unsatisfied withholding liability with respect 
to the subject real property interest, as determined under paragraph 
(c)(3) of this section.

In addition, the Internal Revenue Service may issue a withholding 
certificate that permits the transferee to withhold a reduced amount if 
the Service determines pursuant to paragraph (c)(4) of this section that 
reduced withholding will not jeopardize the collection of tax.
    (2) Maximum tax imposed on disposition. The first element of the 
transferor's maximum tax liability is the maximum amount which the 
transferor could be required to pay as tax upon the disposition of the 
subject real property interest. In the case of an individual transferor 
that amount will generally be the contract price of the property minus 
its adjusted basis, multiplied by the maximum individual income tax rate 
applicable to long term capital gain. In the case of a corporate 
transferor, that amount will generally be the contract price of the 
property minus its adjusted basis, multiplied by the maximum corporate 
income tax rate applicable to long term capital gain. However, that 
amount must be adjusted to take into account the following:
    (i) Any reduction of tax to which the transferor is entitled under 
the provisions of a U.S. income tax treaty;
    (ii) The effect of any nonrecognition provision that is applicable 
to the transaction;
    (iii) Any losses realized and recognized upon the previous 
disposition of U.S. real property interests during the taxable year;
    (iv) Any amount that is required to be treated as ordinary income; 
and
    (v) Any other factor that may increase or reduce the tax upon the 
disposition.
    (3) Transferor's unsatisfied withholding liability--(i) In general. 
The second element of the transferor's maximum tax liability is the 
transferor's unsatisfied withholding liability. That liability is the 
amount of any tax that the transferor was required to but did not 
withhold and pay over under section 1445 upon the acquisition of the 
subject U.S. real property interest or a predecessor interest. The 
transferor's unsatisfied withholding liability is included in the 
calculation of maximum tax liability so that such prior withholding 
liability can be satisfied by the transferee's withholding upon the 
current transfer. Alternatively, the transferor's unsatisfied 
withholding liability may be disregarded for purposes of calculating the 
maximum tax liability, if either--
    (A) Such prior withholding liability is fully satisfied by a payment 
that is made with the application submitted pursuant to this section; or
    (B) An agreement is entered into for the payment of that liability 
pursuant to the rules of paragraph (e) of this section.


[[Page 103]]


Because section 1445 only requires withholding after December 31, 1984, 
no transferor's unsatisfied withholding liability can exist unless the 
transferor acquired the subject or predecessor real property interest 
after that date. For purposes of this paragraph (c), a predecessor 
interest is one that was exchanged for the subject U.S. real property 
interest in a transaction in which the transferor was not required to 
recognize the full amount of the gain or loss realized upon the 
transfer.
    (ii) Evidence that no unsatisfied withholding liability exists. For 
purposes of paragraph (b)(4)(i)(B) of this section (concerning 
information that must be submitted with an application for a withholding 
certificate), evidence that the transferor has no unsatisfied 
withholding liability includes any one of the following documents:
    (A) Evidence that the transferor acquired the subject or predecessor 
real property interest prior to January 1, 1985;
    (B) A copy of the Form 8288 that was filed by the transferor, and 
proof of payment of the amount shown due thereon, with respect to the 
transferor's acquisition of the subject or predecessor real property 
interest;
    (C) A copy of a withholding certificate with respect to the 
transferor's acquisition of the subject or predecessor real property 
interest, plus a copy of Form 8288 and proof of payment with respect to 
any withholding required under that certificate;
    (D) A copy of the non-foreign certification furnished by the person 
from whom the subject or predecessor U.S. real property interest was 
acquired, executed at the time of that acquisition;
    (E) Evidence that the transferor purchased the subject or 
predecessor real property for $300,000 or less, and a statement signed 
by the transferor under penalties of perjury, that the transferor 
purchased the property for use as a residence within the meaning of 
Sec. 1.1445-2(d)(1);
    (F) Evidence that the person from whom the transferor acquired the 
subject or predecessor U.S. real property interest fully paid any tax 
imposed on that transaction pursuant to section 897.
    (G) A copy of a notice of nonrecognition treatment provided to the 
transferor pursuant to Sec. 1.1445-2(d)(2) by person from whom the 
transferor acquired the subject or predecessor U.S. real property 
interest; and
    (H) A statement, signed by the transferor under penalties of 
perjury, setting forth the facts and circumstances that supported the 
transferor's conclusion that no withholding was required under section 
1445(a) with respect to the transferor's acquisition of the subject or 
predecessor real property interest.
    (4) Special reduction of amount required to be withheld. The 
Internal Revenue Service may, in its discretion, issue a withholding 
certificate that permits the transferee to withhold a reduced amount 
based upon a determination that reduced withholding will not jeopardize 
the collection of tax. A transferor that requests a withholding 
certificate pursuant to this paragraph (c)(4) is required pursuant to 
paragraph (b)(4)(i)(C) of this section to submit a statement of law and 
facts in support of the request. That statement must explain why the 
transferor is unable to enter into an agreement for the payment of tax 
pursuant to paragraph (e) of this section.
    (d) Transferor's exemption from U.S. tax--(1) In general. The 
Internal Revenue Service will issue a withholding certificate that 
excuses all withholding by a transferee if it is established that:
    (i) The transferor's gain from the disposition of the subject U.S. 
real property interest will be exempt from U.S. tax, and
    (ii) The transferor has no unsatisfied withholding liability.

For the available exemptions, see paragraph (d)(2) of this section. The 
transferor's unsatisfied withholding liability shall be determined in 
accordance with the provisions of paragraph (c)(3) of this section. A 
transferor that is entitled to a reduction of (rather than an exemption 
from) U.S. tax may obtain a withholding certificate to that effect 
pursuant to the provisions of paragraph (c) of this section.
    (2) Available exemptions. A transferor's gain from the disposition 
of a U.S. real property interest may be exempt from U.S. tax because 
either:

[[Page 104]]

    (i) The transferor is an integral part or controlled entity of a 
foreign government and the disposition of the subject property is not a 
commercial activity, as determined pursuant to section 892 and the 
regulations thereunder; or
    (ii) The transferor is entitled to the benefits of an income tax 
treaty that provides for such an exemption (subject to the limitations 
imposed by section 1125(c) of Pub. L. 96-499, which, in general, 
overrides such benefits as of January 1, 1985).
    (e) Agreement for the payment of tax--(1) In general. The Internal 
Revenue Service will issue a withholding certificate that excuses 
withholding or that permits a transferee to withhold a reduced amount, 
if either the transferee or the transferor enters into an agreement for 
the payment of tax pursuant to the provisions of this paragraph (e). An 
agreement for the payment of tax is a contract between the Service and 
any other person that consists of two necessary elements. Those elements 
are--
    (i) A contract between the Service and the other person, setting 
forth in detail the rights and obligations of each; and
    (ii) A security instrument or other form of security acceptable to 
the Director, Foreign Operations District.
    (2) Contents of agreement--(i) In general. An agreement for the 
payment of tax must cover an amount described in subdivision (ii) or 
(iii) of this paragraph (e)(2). The agreement may either provide 
adequate security for the payment of the chosen amount in accordance 
with paragraph (e)(3) of this section, or provide for the payment of 
that amount through a combination of security and withholding of tax by 
the transferee.
    (ii) Tax that would otherwise be withheld. An agreement for the 
payment of tax may cover the amount of tax that would otherwise be 
required to be withheld pursuant to section 1445(a). In addition to the 
amount computed pursuant to section 1445(a), the applicant must agree to 
pay interest upon that amount, at the rate established under section 
6621, with respect to the period between the date on which the tax 
imposed by section 1445(a) would otherwise be due (i.e., the 20th day 
after the date of transfer) and the date on which the transferor's 
payment of tax with respect to the disposition will be due under the 
agreement. The amount of interest agreed upon must be paid by the 
applicant regardless of whether or not the Service is required to draw 
upon any security provided pursuant to the agreement. The interest may 
be paid either with the return or by the Service drawing upon the 
security.
    (iii) Maximum tax liability. An agreement for the payment of tax may 
cover the transferor's maximum tax liability, determined in accordance 
with paragraph (c) of this section. The agreement must also provide for 
the payment of an additional amount equal to 25 percent of the amount 
determined under paragraph (c) of this section. This additional amount 
secures the interest and penalties that would accrue between the date of 
a failure to file a return and pay tax with respect to the disposition, 
and the date on which the Service collects upon that liability pursuant 
to the agreement. Such additional amount will only be collected if the 
Service finds it necessary to draw upon any security provided due to the 
transferor's failure to file a return and pay tax with respect to the 
relevant disposition.
    (3) Major types of security--(i) In general. The following are the 
major types of security acceptable to the Service. Further details with 
respect to the terms and conditions of each type may be specified by 
Revenue Procedure.
    (ii) Bond with surety or guarantor. The Service may accept as 
security with respect to a transferor's tax liability a bond that is 
executed with a satisfactory surety or guarantor. Only the following 
persons may act as surety or guarantor for this purpose
    (A) A surety company holding a certificate of authority from the 
Secretary as an acceptable surety on Federal bonds, as listed in 
Treasury Department Circular No. 570, published annually in the Federal 
Register on the first working day of July;
    (B) A person that is engaged within or without the United States in 
the conduct of a banking, financing, or similar business under the 
principles of Sec. 1.864-4(c)(5), and that is subject to

[[Page 105]]

U.S. or foreign local or national regulation of such business, if that 
person is otherwise acceptable to the Service; and
    (C) A person that is engaged within or without the United States in 
the conduct of an insurance business that is subject to U.S. or foreign 
local or national regulation, if that person is otherwise acceptable to 
the Service.
    (iii) Bond with collateral. The Service may accept as security with 
respect to a transferor's tax liability a bond that is secured by 
acceptable collateral. All collateral must be deposited with a 
responsible financial institution acting as escrow agent, or, in the 
Service's discretion, with the Service. Only the following types of 
collateral are acceptable:
    (A) Bonds, notes, or other public debt obligations of the United 
States, in accordance with the rules of 31 CFR part 225; and
    (B) A certified cashier's, or treasurer's check, drawn on an entity 
acceptable to the Service that is engaged within or without the United 
States in the conduct of a banking, financing, or similar business under 
the principles of Sec. 1.864-4(c)(5) and that is subject to U.S. or 
foreign local or national regulation of such business.
    (iv) Letter of credit. The Service may accept as security with 
respect to a transferor's tax liability an irrevocable letter of credit. 
The Service may accept a letter of credit issued by an entity acceptable 
to the Service that is engaged within or without the United States in 
the conduct of a banking, financing, or similar business under the 
principles of Sec. 1.864-4(c)(5) and that is subject to U.S. or foreign 
local or national regulation of such business. However, the Director 
will accept a letter of credit from an entity that is not engaged in 
trade or business in the United States only if such letter may be drawn 
on an advising bank within the United States.
    (v) Guarantees and other non-conforming security--(A) Guarantee. The 
Service may in its discretion accept as security with respect to a 
transferor's tax liability the applicant's guarantee that it will pay 
such liability. The Service will in general accept such a guarantee only 
from a corporation, foreign or domestic, any class of stock of which is 
regularly traded on an established securities market on the date of the 
transfer.
    (B) Other forms of security. The Service may in unusual 
circumstances and at its discretion accept any form of security that if 
finds to be adequate. An application for a withholding certificate that 
proposes a form of security that does not conform with any of the 
preferred types set forth in paragraph (e)(3) (ii) through (iv) of this 
section or any relevant Revenue Procedure must include:
    (1) A detailed statement of the facts and circumstances supporting 
the use of the proposed form of security, and
    (2) A memorandum of law concerning the validity and enforceability 
of the proposed form of security.
    (4) Terms of security instrument. Any security instrument that is 
furnished pursuant to this section must provide that--
    (i) The amount of each deposit of estimated tax that will be 
required with respect to the gain realized on the subject disposition 
may be collected by levy upon the security as of the date following the 
date on which each such deposit is due (unless such deposit is timely 
made);
    (ii) The entire amount of the liability may be collected by levy 
upon the security at any time during the nine months following the date 
on which the payment of tax with respect to the subject disposition is 
due, subject to release of the security upon the full payment of the tax 
and any interest and penalties due. If the transferor requests an 
extension of time to file a return with respect to the disposition, then 
the Director may require that the term of the security instrument be 
extended until the date that is nine months after the filing deadline as 
extended.
    (f) Amendments to application for withholding certificate--(1) In 
general. An applicant for a withholding certificate may amend an 
otherwise complete application by submitting an amending statement to 
the Assistant Commissioner (International), at the address provided in 
Sec. 1.1445-1(g)(10). The amending statement shall provide the 
information required by Sec. 1.1445-3(f)(3) and

[[Page 106]]

must be signed and accompanied by a penalties of perjury statement in 
accordance with Sec. 1.1445-3(b)(1).
    (2) Extension of time for the Service to process reqests for 
withholding certificates--(i) In general. If an amending statement is 
submitted, the time in which the Internal Revenue Service must act upon 
the amended application shall be extended by 30 days.
    (ii) Substantial amendments. If an amending statement is submitted 
and the Service finds that the statement substantially amends the facts 
of the underlying application or substantially alters the terms of the 
withholding certificate as requested in the initial application, the 
time within which the Service must act upon the amended application 
shall be extended by 60 days. The applicant shall be so notified.
    (iii) Amending statement received after the requested withholding 
certificate has been signed by the Assistant Commissioner 
(International). If an amending statement is received after the 
withholding certificate, drafted in response to the underlying 
application, has been signed by the Assistant Commissioner 
(International) or his delegate and prior to the day such certificate is 
mailed to the applicant, the time in which the Service must act upon the 
amended application shall be extended by 90 days. The applicant will be 
so notified.
    (3) Information required to be submitted. No particular form is 
required for an amending statement but the statement must provide the 
following information:
    (i) Identification of applicant. The amending statement must set 
forth the name, address and identifying number (if any) of the person 
submitting the amending statement (specifying whether that person is the 
transferee or transferor).
    (ii) Date of underlying application. The amending statement must set 
forth the date of the underlying application for a withholding 
certificate.
    (iii) Real property interest to be (or that has been) transferred. 
The amending statement must set forth a brief description of the real 
property interest with respect to which the underlying application for a 
withholding certificate was submitted.
    (iv) Amending information. The amending statement must fully set 
forth the basis for the amendment including any modification of the 
facts supporting the application for a withholding certificate and any 
change sought in the terms of the withholding certificate.
    (g) Early refund of overwithheld amounts. If a transferor receives a 
withholding certificate pursuant to this section, and an amount greater 
than that specified in the certificate was withheld by the transferee, 
then pursuant to the rules of this paragraph (g) the transferor may 
apply for a refund (without interest) of the excess amount prior to the 
date on which the transferor's tax return is due (without extensions). 
(Any interest payable on refunds issued after the filing of a tax return 
shall be determined in accordance with the provisions of section 6611 
and regulations thereunder.) An application for an early refund must be 
addressed to the Assistant Commissioner (International), at the address 
provided in Sec. 1.1445-1(g)(10). No particular form is required for the 
application, but the following information must be set forth in separate 
paragraphs numbered to correspond with the number given below:
    (1) Name, address, and identifying number (if any) of the transferor 
seeking the refund;
    (2) Amount required to be withheld pursuant to the withholding 
certificate issued by Internal Revenue Service;
    (3) Amount withheld by the transferee (attach a copy of Form 8288-A 
stamped by IRS pursuant to Sec. 1.1445-1(c));
    (4) Amount to be refunded to the transferor. An application for an 
early refund cannot be processed unless the required copy of Form 8288-A 
(or substantial evidence of the amount withheld in the case of a failure 
to receive Form 8288-A as provided in Sec. 1.1445-1(f)(3)) is attached 
to the application. If an application for a withholding certificate 
based upon the transferor's maximum tax liability is submitted after the 
transfer takes place, then that application may be combined with an 
application for an early refund. The

[[Page 107]]

Service will act upon a claim for refund within the time limits set 
forth in paragraph (a) of this section.

[T.D. 8113, 51 FR 46637, Dec. 24, 1986; 52 FR 3796, Feb. 6, 1987]



Sec. 1.1445-4  Liability of agents.

    (a) Duty to provide notice of false certification or statement to 
transferee. A transferee's or transferor's agent must provide notice to 
the transferee if either--
    (1) The transferee is furnished with a non-U.S. real property 
interest statement pursuant to Sec. 1.1445-2(c)(3) and the agent knows 
that the statement is false; or
    (2) The transferee is furnished with a non-foreign certification 
pursuant to Sec. 1.1445-2(b)(2) and either (i) the agent knows that the 
certification is false, or (ii) the agent represents a transferor that 
is a foreign corporation. An agent that represents a transferor that is 
a foreign corporation is not required to provide notice to the 
transferee if the foreign corporation provided a non-foreign 
certification to the transferee prior to such agent's employment and the 
agent does not know that the corporation did so.
    (b) Duty to provide notice of false certification or statement to 
entity or fiduciary. A transferee's or transferor's agent must provide 
notice to an entity or fiduciary that plans to carry out a transaction 
described in section 1445(e) (1), (2), (3), or (4) if either--
    (1) The entity or fiduciary is furnished with a non-U.S. real 
property interest statement pursuant to Sec. 1.1445-5(b)(4)(iii) and the 
agent knows that such statement is false; or
    (2) The entity or fiduciary is furnished with a non-foreign 
certification pursuant to Sec. 1.1445-5(b)(3) (ii) and either (i) the 
agent knows that such certification is false, or (ii) the agent 
represents a foreign corporation that made such a certification.
    (c) Procedural requirements--(1) Notice to transferee, entity, or 
fiduciary. An agent who is required by this section to provide notice 
must do so in writing as soon as possible after learning of the false 
certification or statement, but not later than the date of the transfer 
(prior to the transferee's payment of consideration). If an agent first 
learns of a false certification or statement after the date of the 
transfer, notice must be given by the third day following that 
discovery. The notice must state that the certification or statement is 
false and may not be relied upon. The notice must also explain the 
possible consequences to the recipient of a failure to withhold. The 
notice need not disclose the information on which the agent's statement 
is based. The following is an example of an acceptable notice.``This is 
to notify you that you may be required to withhold tax in connection 
with (describe transaction). You have been provided with a certification 
of non-foreign status (or a non-U.S. real property interest statement) 
in connection with that transaction. I have learned that that document 
is false. Therefore, you may not rely upon it as a basis for failing to 
withhold under section 1445 of the Internal Revenue Code. Section 1445 
provides that any person who acquires a U.S. real property interest from 
a foreign person must withhold a tax equal to 10 percent of the total 
purchase price. (The term `U.S. real property interest' includes real 
property, stock in U.S. corporations whose assets are primarily real 
property, and some personal property associated with realty.) Any person 
who is required to withhold but fails to do so can be held liable for 
the tax. Thus, if you do not withhold the 10 percent tax from the total 
that you pay on this transaction you could be required to pay the tax 
yourself, if what you are acquiring is a U.S. real property interest and 
the transferor is a foreign person. Tax that is withheld must be 
promptly paid over to the IRS using Form 8288. For further information 
see sections 897 and 1445 of the Internal Revenue Code and the related 
regulations.''
    (2) Notice to be filed with IRS. An agent who is required by 
paragraph (a) or (b) of this section to provide notice to a transferee, 
entity, or fiduciary must furnish a copy of that notice to the Internal 
Revenue Service by the date on which the notice is required to be given 
to the transferee, entity, or fiduciary. The copy of the notice must be 
delivered to the Assistant Commissioner (International) at the address 
provided in Sec. 1.1445-1(g)(10) and must be

[[Page 108]]

accompanied by a cover letter stating that the copy is being filed 
pursuant to the requirements of this Sec. 1.1445-4(c)(2).
    (d) Effect on recipient. A transferee, entity, or fiduciary that 
receives a notice pursuant to this section prior to the date of the 
transfer from any agent of the transferor or transferee may not rely 
upon the subject certification or statement for purposes of excusing 
withholding pursuant to Sec. 1.1445-2 or Sec. 1.1445-5. Therefore, the 
recipient of a notice may be held liable for any failure to deduct and 
withhold tax under section 1445 as if such certification or statement 
had never been given. For special rules concerning the effect of the 
receipt of a notice after the date of the transfer, see Secs. 1.1445-
2(b)(4)(iv) and 1.1445-5 (c), (d) and (e).
    (e) Failure to provide notice. Any agent who is required to provide 
notice but who fails to do so in the manner required by paragraph (a) or 
(b) of this section shall be held liable for the tax that the recipient 
of the notice would have been required to withhold under section 1445 if 
such notice had been given. However, an agent's liability under this 
paragraph (e) is limited to the amount of compensation that that agent 
derives from the transaction. In addition, an agent who assists in the 
preparation of, or fails to disclose knowledge of, a false certification 
or statement may be liable for civil or criminal penalties.
    (f) Definition of transferor's or transferee's agent--(1) In 
general. For purposes of this section, the terms ``transferor's agent'' 
and ``transferee's agent'' means any person who represents the 
transferor or transferee (respectively)--
    (i) In any negotiation with another person (or another person's 
agent) relating to the transaction; or
    (ii) In settling the transaction.
    (2) Transactions subject to section 1445(e). In the case of 
transactions subject section 1445(e), the following definitions apply.
    (i) The term ``transferor's agent'' means any person that represents 
or advises an entity or fiduciary with respect to the planning, 
arrangement, or consummation by the entity of a transaction described in 
section 1445(e) (1), (2), (3), or (4).
    (ii) The term ``transferee's agent'' means any person that 
represents or advises the holder of an interest in an entity with 
respect to the planning, arrangement or consummation by the entity of a 
transaction described in section 1445(e) (1), (2), (3), or (4).
    (3) Exclusion of settlement officers and clerical personnel. For 
purposes of this section, a person shall not be treated as a 
transferor's agent or transferee's agent with respect to any transaction 
solely because such person performs one or more of the following 
activities.
    (i) The receipt and disbursement of any portion of the consideration 
for the transaction;
    (ii) The recording of any document in connection with the 
transaction;
    (iii) Typing, copying, and other clerical tasks;
    (iv) The obtaining of title insurance reports and reports concerning 
the condition of the real property that is the subject of the 
transaction; or
    (v) The transmission or delivery of documents between the parties.
    (4) Exclusion for governing body of a condominium association and 
the board of directors of a cooperative housing corporation. The members 
of a board, committee or other governing body of a condominium 
association and the board of directors and officers of a cooperative 
housing corporation will not be deemed agents of the transferor or 
transferee if such individuals function exclusively in their capacity as 
representatives of such association or corporation with respect to the 
transaction. In addition, the managing agent of a cooperative housing 
corporation or condominium association will not be deemed to be an agent 
of the transferee or transferor if such person functions exclusively in 
its capacity as a managing agent. If a person's activities include 
advising the transferee or transferor with respect to the transfer, this 
exclusion shall not apply.

[T.D. 8113, 51 FR 46641, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987]



Sec. 1.1445-5  Special rules concerning distributions and other transactions by corporations, partnerships, trusts, and estates.

    (a) Purpose and scope. This section provides special rules 
concerning the

[[Page 109]]

withholding that is required under section 1445(e) upon distributions 
and other transactions involving domestic or foreign corporations, 
partnerships, trusts, and estates. Paragraph (b) of this section 
provides rules that apply generally to the various withholding 
requirements set forth in this section. Under section 1445(e)(1) and 
paragraph (c) of this section, a domestic partnership or the fiduciary 
of a domestic trust or estate is required to withhold tax upon the 
entity's disposition of a U.S. real property interest if any foreign 
persons are partners or beneficiaries of the entity. Paragraph (d) 
provides rules concerning the requirement of section 1445(e)(2) that a 
foreign corporation withhold tax upon its distribution of a U.S. real 
property interest to its interest-holders. Finally, under section 
1445(e)(3) and paragraph (e) of this section a domestic U.S. real 
property holding corporation is required to withhold tax upon certain 
distributions to interest-holders that are foreign persons. Paragraphs 
(f) and (g) of this section are reserved to provide rules concerning 
transactions involving interests in partnerships, trusts, and estates 
that will be subject to withholding pursuant to sections 1445(e) (4) and 
(5).
    (b) Rules of general application--(1) Double withholding not 
required. If tax is required to be withheld with respect to a transfer 
of property in accordance with the rules of this section, then no 
additional tax is required to be withheld by the transferee of the 
property with respect to that transfer pursuant to the general rules of 
section 1445(a) and Sec. 1.1445-1. If tax is required to be withheld 
under section 1441 or 1442 with respect to a transfer of property, 
withholding shall not be required under section 1445 or Sec. 1.1445-5. 
If a transfer of a U.S. real property interest described in section 
1445(e) is exempt from withholding under the rules of this section, then 
no withholding is required under the general rules of section 1445(a) 
and Sec. 1.1445-1.
    (2) Coordination with nonrecognition provisions--(i) In general. 
Withholding shall not be required under the rules of this section with 
respect to a transfer described in section 1445(e) of a U.S. real 
property interest if--
    (A) By reason of the operation of a nonrecognition provision of the 
Internal Revenue Code or the provisions of any treaty of the United 
States no gain or loss is required to be recognized by the foreign 
person with respect to which withholding would otherwise be required; 
and
    (B) The entity or fiduciary that is otherwise required to withhold 
complies with the notice requirements of paragraph (b)(2)(ii) of this 
section. The entity or fiduciary must determine whether gain or loss is 
required to be recognized pursuant to the rules of section 897 and the 
applicable nonrecognition provisions of the Internal Revenue Code. An 
entity or fiduciary may obtain a withholding certificate from the 
Internal Revenue Service that confirms the applicability of a 
nonrecognition provision, but is not required to do so. For purposes of 
this paragraph (b)(2), a nonrecognition provision is any provision of 
the Internal Revenue Code for not recognizing gain or loss. If 
nonrecognition treatment is available only with respect to part of the 
gain realized on a transfer, the exemption from withholding provided by 
this paragraph (b)(2) shall not apply. In such cases a withholding 
certificate may be sought pursuant to the provisions of Sec. 1.1445-6.
    (ii) Notice of nonrecognition transfer. An entity or fiduciary that 
fails to withhold tax with respect to a transfer in reliance upon the 
rules of this paragraph (b)(2) must by the 20th day after the date of 
the transfer deliver a notice thereof to the Assistant Commissioner, 
(International), at the address provided in Sec. 1.1445-1(g)(10). No 
particular form is required for a notice of transfer, but the following 
information must be set forth in paragraphs labelled to correspond with 
the letter set forth below:
    (A) A statement that the document submitted constitutes a notice of 
a nonrecognition transfer pursuant to the requirements of Sec. 1.1445-
5(b)(2)(ii);
    (B) The name, office address, and identifying number (if any) of the 
entity of fiduciary submitting the notice;
    (C) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of an entity) of 
each foreign person with respect to which withholding would otherwise be 
required;

[[Page 110]]

    (D) A brief description of the transfer; and
    (E) A brief statement of the law and facts supporting the claim that 
recognition of gain or loss is not required with respect to the 
transfer.
    (3) Interest-holder not a foreign person--(i) In general. Pursuant 
to the provisions of paragraphs (c) and (e) of this section, an entity 
or fiduciary is required to withhold with respect to certain transfers 
of property if a holder of an interest in the entity is a foreign 
person. For purposes of determining whether a holder of an interest is a 
foreign person, and entity or fiduciary may rely upon a certification of 
nonforeign status provided by that person in accordance with paragraph 
(b)(3)(ii) of this section. Except to the extent provided in paragraph 
(b)(3)(iii) of this section, such a certification excuses the entity or 
fiduciary from any liability otherwise imposed pursuant to section 
1445(e) and regulations thereunder. However, no obligation is imposed 
upon an entity or fiduciary to obtain certifications from interest-
holders; an entity or fiduciary may instead rely upon other means to 
ascertain the nonforeign status of an interest-holder. If the entity or 
fiduciary does rely upon other means but the interest-holder proves, in 
fact, to be a foreign person, then the entity or fiduciary is subject to 
any liability imposed pursuant to section 1445 and regulations 
thereunder.

An entity or fiduciary is not required to rely upon other means to 
ascertain the non-foreign status of an interest-holder and may demand a 
certification of non-foreign status. If the certification is not 
provided, the entity or fiduciary may withhold tax under section 1445 
and will be considered, for purposes of sections 1461 through 1463, to 
have been required to withhold such tax.
    (ii) Interest-holder's certification of non-foreign status--(A) In 
general. For purposes of this section, an entity or fiduciary may treat 
any holder of an interest in the entity as a U.S. person if that 
interest-holder furnishes to the entity or fiduciary a certification 
stating that the interest-holder is not a foreign person, in accordance 
with the provisions of paragraph (b)(3)(ii)(B) of this section. In 
general, a foreign person is a nonresident alien individual, foreign 
corporation, foreign partnership, foreign trust, or foreign estate, but 
not a resident alien individual. In this regard, see Sec. 1.897-1(k).
    (B) Procedural rules. An interest-holder's certification of non-
foreign status must--
    (1) State that the interest-holder is not a foreign person;
    (2) Set forth the interest-holder's name, identifying number, home 
address (in the case of an individual), or office address (in the case 
of an entity), and place of incorporation (in the case of a 
corporation); and
    (3) Be signed under penalties of perjury.
Pursuant to Sec. 1.897-1(p), an individual's identifying number is the 
individual's Social Security number and any other person's identifying 
number is its U.S. employer identification number. The certification 
must be signed by a responsible officer in the case of a corporation, by 
a general partner in the case of a partnership, and by a trustee, 
executor, or equivalent fiduciary in the case of a trust or estate. No 
particular form is needed for a certification pursuant to this paragraph 
(b)(3)(ii)(B), nor is any particular language required, so long as the 
document meets the requirements of this paragraph. Samples of acceptable 
certifications are provided in paragraph (b)(3)(ii)(D) of this section. 
An entity may rely upon a certification pursuant to this paragraph 
(b)(3)(ii)(B) for a period of two calendar years following the close of 
the calendar year in which the certification was given.
If an interest holder becomes a foreign person within the period 
described in the preceding sentence, the interest-holder must notify the 
entity prior to any further dispositions or distributions and upon 
receipt of such notice (or any other notification of the foreign status 
of the interest-holder) the entity may no longer rely upon the prior 
certification. An entity that obtains and relies upon a certification 
must retain that certification with its books and records for a period 
of three calendar years following the close of the last calendar year in 
which the entity relied upon the certification.

[[Page 111]]

    (C) Foreign corporation that has made an election under section 
897(i). A foreign corporation that has made a valid election under 
section 897(i) to be treated as a domestic corporation for purposes of 
section 897 may provide a certification of non-foreign status pursuant 
to this paragraph (b)(3)(ii). However, an electing foreign corporation 
must attach to such certification a copy of the acknowledgment of the 
election provided to the corporation by the Internal Revenue Service 
pursuant to Sec. 1.897-3(d)(4).

An acknowledgment is valid for this purpose only if it states that the 
information required by Sec. 1.897-3 has been determined to be complete.
    (D) Sample certifications--(1) Individual interest-holder.

    ``Under section 1445(e) of the Internal Revenue Code, a corporation, 
partnership, trust or estate must withhold tax with respect to certain 
transfers of property if a holder of an interest in the entity is a 
foreign person. To inform (name of entity) that no withholding is 
required with respect to my interest in it, I, (name of interest-
holder), hereby certify the following:

    1. I am not a nonresident alien for purposes of U.S. income 
taxation;
    2. My U.S. taxpayer identifying number (Social Security number) is 
________; and
    3. My home address is
--------------__________________________________________________________
--------------__________________________________________________________
I agree to inform [name of entity] promptly if I become a nonresident 
alien at any time during the three years immediately following the date 
of this notice.
    I understand that this certification may be disclosed to the 
Internal Revenue Service by (name of entity) and that any false 
statement I have made here could be punished by fine, imprisonment, or 
both.
    Under penalties of perjury I declare that I have examined this 
certification and to the best of my knowledge and belief it is true, 
correct, and complete.

    [Signature and date]''

    (2) Entity interest-holder. ``Under section 1445(e) of the Internal 
Revenue Code, a corporation, partnership, trust, or estate must withhold 
tax with respect to certain transfers of property if a holder of an 
interest in the entity is a foreign person. To inform [name of entity] 
that no withholding is required with respect to [name of interest-
holder]'s interest in it, the undersigned hereby certifies the following 
on behalf of [name of interest-holder]:
    1. [Name of interest-holder] is not a foreign corporation, foreign 
partnership, foreign trust, or foreign estate (as those terms are 
defined in the Internal Revenue Code and Income Tax Regulations);
    2. [Name of interest-holder]'s U.S. employer identification number 
is ________; and
    3. [Name of interest-holder]'s office address is
--------------__________________________________________________________
and place of incorporation (if applicable) is
--------------__________________________________________________________
    [Name of interest holder] agrees to inform [name of entity] if it 
becomes a foreign person at any time during the three year period 
immediately following the date of this notice.
    [Name of interest-holder] understands that this certification may be 
disclosed to the Internal Revenue Service by [name of entity] and that 
any false statement contained herein could be punished by fine, 
imprisonment, or both.
    Under penalties of perjury I declare that I have examined this 
certification and to the best of my knowledge and belief it is true, 
correct, and complete, and I further declare that I have authority to 
sign this document on behalf of [name of interest-holder].

[Signature and date]

[Title     ]''

    (iii) Reliance upon certification not permitted. An entity or 
fiduciary may not rely upon an interest-holder's certification of non-
foreign status if, prior to or at the time of the transfer with respect 
to which withholding would be required, the entity or fiduciary either--
    (A) Has actual knowledge that the certification is false;
    (B) Has received a notice that the certification is false from a 
transferor's or transferee's agent, pursuant to Sec. 1.1445-4; or
    (C) Has received from a corporation that it knows to be a foreign 
corporation a certification that does not have attached to it a copy of 
the IRS acknowledgment of the corporation's election under section 
897(i), as required by paragraph (b)(3)(ii)(C) of this section. Such an 
entity's or fiduciary's withholding obligations shall apply as if a 
statement had never been given, and such an entity or fiduciary may be 
held fully liable pursuant to Sec. 1.1445-1(e) for any failure to 
withhold. For special rules concerning an entity's belated receipt of a 
notice concerning a false certification, see paragraphs (c)(2)(ii) and 
(e)(2)(iii) of this section.

[[Page 112]]

    (4) Property transferred not a U.S. real property interest--(i) In 
general. Pursuant to the provisions of paragraphs (c) and (d) of this 
section, an entity or fiduciary is required to withhold with respect to 
certain transfers of property, if the property transferred is a U.S. 
real property interest. (In addition, taxable distributions of U.S. real 
property interests by domestic or foreign partnerships, trusts, and 
estates will be subject to withholding pursuant to section 1445(e)(4) 
and paragraph (f) of this section after publication of a Treasury 
decision under sections 897 (e)(2) and (g). As defined in section 897(c) 
and Sec. 1.897-1(c), a U.S. real property interest includes certain 
interests in U.S. corporations, as well as direct interests in real 
property and certain associated personal property. This paragraph (b)(4) 
provides rules pursuant to which an entity (or fiduciary thereof) that 
transfers an interest in a U.S. corporation may determine that 
withholding is not required because the interest transferred is not a 
U.S. real property interest. To determine whether an interest in 
tangible property constitutes a U.S. real property interest the transfer 
of which would be subject to withholding, see Sec. 1.897-1 (b) and (c).
    (ii) Interests in publicly traded entities. Withholding is not 
required under paragraph (c) or (d) of this section upon an entity's 
transfer of an interest in a domestic corporation if any class of stock 
of the corporation is regularly traded on an established securities 
market. This exemption shall apply to a disposition incident to an 
initial public offering of stock pursuant to a registration statement 
filed with the Securities and Exchange Commission.

Similarly, no withholding is required under paragraph (c) or (d) of this 
section upon an entity's transfer of an interest in a publicly traded 
partnership or trust. However, the rule of this paragraph (b)(4)(ii) 
shall not apply to the transfer, to a single transferee (or related 
transferees as defined in Sec. 1.897-1(i)) in a single transaction (or 
related transactions), of an interest described in Sec. 1.897-
1(c)(2)(iii)(B) (relating to substantial amounts of non-publicly traded 
interests in publicly traded corporations) or of similar interests in 
publicly traded partnerships or trusts. The entity making a transfer 
described in the preceding sentence must otherwise determine whether 
withholding is required, pursuant to section 1445(e) and the regulations 
thereunder. Transactions shall be deemed to be related if they are 
undertaken within 90 days of one another or if it can otherwise be shown 
that they were undertaken in pursuance of a prearranged plan.
    (iii) Corporation's statement that interest is not a U.S. real 
property interest. (A) In general. No withholding is required under 
paragraph (c) or (d) of this section upon an entity's transfer of an 
interest in a domestic corporation if, prior to the transfer, the entity 
or fiduciary obtains a statement, issued by the corporation pursuant to 
Sec. 1.897-2(h), certifying that the interest is not a U.S. real 
property interest. In general, a corporation may issue such a statement 
only if the corporation was not a U.S. real property holding corporation 
at any time during the previous five years (or the period in which the 
interest was held by its present holder, if shorter) or if interests in 
the corporation ceased to be United States real property interests under 
section 897(c)(1)(B). (A corporation may not provide such a statement 
based on its determination that the interest in question is an interest 
solely as a creditor.) See Sec. 1.897-2 (f) and (h). A corporation's 
statement may be relied upon for purposes of this paragraph (b)(4)(iii) 
only if the statement is dated not more than 30 days prior to the date 
of the transfer.
    (B) Reliance on statement not permitted. An entity or fiduciary is 
not entitled to rely upon a statement that an interest in a corporation 
is not a U.S. real property interest, if, prior to or at the time of the 
transfer, the entity or fiduciary either--
    (1) Has actual knowledge that the statement is false, or
    (2) Receives a notice that the statement is false from a 
transferor's or transferee's agent, pursuant to Sec. 1.1445-4.

Such an entity's or fiduciary's withholding obligations shall apply as 
if a statement had never been given, and such an entity or fiduciary may 
be held fully liable pursuant to Sec. 1.1445-1(e) for any failure to 
withhold. For special

[[Page 113]]

rules concerning an entity's belated receipt of a notice concerning a 
false statement, see paragraphs (c)(2)(iii) and (d)(2)(i) of this 
section.
    (5) Reporting and paying over of withheld amounts--(i) In General. 
An entity or fiduciary must report and pay over to the Internal Revenue 
Service any tax withheld pursuant to section 1445(e) and this section by 
the 20th day after the date of the transfer (as defined in Sec. 1.1445-
1(g)(8). Forms 8288 and 8288-A are used for this purpose and must be 
filed with the Internal Revenue Service Center, Philadephia, PA 19255. 
The contents of Forms 8288 and 8288-A are described in Sec. 1.1445-1(d). 
Pursuant to section 7502 and regulations thereunder, the timely mailing 
of Forms 8288 and 8288-A by U.S. mail will be treated as their timely 
filing. Form 8288-A will be stamped by the Internal Revenue Service to 
show receipt, and a stamped copy will be mailed by the Service to the 
interest-holder, at the address shown on the form, for the interest-
holder's use. See paragraph (b)(7) of this section. If an application 
for a withholding certificate with respect to a transfer of a U.S. real 
property interest was submitted to the Internal Revenue Service on the 
day of or at any time prior to the transfer, the entity or fiduciary 
must withold the amount required under section 1445(e) and the rules of 
this section. However, the amount withheld, or a lesser amount as 
determined by the Service, need not be reported and paid over to the 
Service until the 20th day following the Service's final determination. 
For this purpose, the Service's final determination occurs on the day 
when the withholding certificate is mailed to the applicant by the 
Service or when a notification denying the request for a withholding 
certificate is mailed to the applicant by the Service. An application is 
submitted to the Service on the day it is actually received by the 
Service at the address provided in Sec. 1.1445-1(g)(10) or, under the 
rules of section 7502, on the day it is mailed to the Service at the 
address provided in Sec. 1.1445-1(g)(10). For rules concerning the 
issuance of withholding certificates, see Sec. 1.1445-6.
    (ii) Anti-abuse rule. An entity or fiduciary that in reliance upon 
the rules of this paragraph (b)(5)(ii) fails to report and pay over 
amounts withheld by the 20th day following the date of the transfer, 
shall be subject to the payment of interest and penalties if the 
relevant application for a withholding certificate (or an amendment of 
the application for a withholding certificate) was submitted for a 
principle purpose of delaying the payment to the IRS of the amount 
withheld. Interest and penalties shall be assessed on the amount that is 
ultimately paid over, with respect to the period between the 20th day 
after the date of the transfer and the date on which payment is made.
    (6) Liability upon failure to withhold. For rules regarding 
liability upon failure to withhold under section 1445(e) and this 
Sec. 1.1445-5, see Sec. 1.1445-1(e).
    (7) Effect of withholding by entity or fiduciary upon interest 
holder. The withholding of tax under section 1445(e) does not excuse a 
foreign person that is subject to U.S. tax by reason of the operation of 
section 897 from filing a U.S. tax return. Thus, Form 1040NR. 1041. or 
1120F, as appropriate must be filed and any tax due must be paid, by the 
filing date otherwise applicable to such person (or any extension 
thereof). The tax withheld with respect to the foreign person under 
section 1445(e) (as shown on Form 8288-A) shall be credited against the 
amount of income tax as computed in such return, but only if the stamped 
copy of Form 8288-A provided to the entity or fiduciary (under paragraph 
(b)(5) of this section) is attached to the return or substantial 
evidence of the amount of tax withheld is attached to the return in 
accordance with the succeeding sentence. If a stamped copy of Form 8288-
A has not been provided to the interest-holder by the Service, the 
interest-holder may establish the amount of tax withheld by the entity 
or fiduciary by attaching to its return substantial evidence of such 
amount. Such an interestholder must attach to its return a statement 
which supplies all of the information required by Sec. 1.1445-1(d) (2) 
(expect such information that was not obtained by a diligent effort.) If 
the amount withheld under section 1445(e) constitutes less than the full 
amount of the foreign person's U.S. tax liability for that taxable year, 
then a payment of estimated tax may be required to be made pursuant

[[Page 114]]

to section 6154 or 6654 prior to the filing of the income tax return for 
the year. Alternatively, if the amount withheld under section 1445(e) 
exceeds the foreign person's maximum tax liability with respect to the 
transaction (as reflected  in a withholding certificate issued by the 
Internal Revenue Service pursuant to Sec. 1.1445-6), then the foreign 
person may seek an early refund of the excess pursuant to Sec. 1.1445-
6(g). A foreign person that takes gain into account in accordance with 
the provisions of section 453 shall not be entitled to a refund to the 
amount withheld, unless a withholding certificate providing for such a 
refund is obtained pursuant to Sec. 1.1445-6. If an entity or fiduciary 
withholds tax under section 1445(e) with respect to a beneficial owner 
of an interest who is not a foreign person, such beneficial owner may 
credit the amount of any tax withheld against his income tax liability 
in accordance with the provisions of this Sec. 1.1445-5(b)(7) or apply 
for an early refund under Sec. 1.1445-6(g).
    (8) Effective dates--(i) Partnership, trust, and estate dispositions 
of U.S. real property interests. The provisions of section 1445(e)(1) 
and paragraph (c) of this section, requiring withholding upon certain 
dispositions of U.S. real property interests by domestic partnerships, 
trusts, and estates, shall apply to any disposition on or after January 
1, 1985.
    (ii) Certain distributions by foreign corporations.  The provisions 
of section 1445(e)(2) and paragraph (d) of this section, requiring 
withholding upon distributions of U.S. real property interests by 
foreign corporations shall apply to distributions made on or after 
January 1, 1985.
    (iii) Distributions by certain domestic corporations to foreign 
shareholders. The provisions of section 1445(e)(3) and paragraph (e) of 
this section, requiring withholding upon distributions by U.S. real 
property holding corporations to foreign shareholders, shall apply to 
distributions made on or after January 1. 1985.
    (iv) Taxable distributions by domestic or foreign partnerships, 
trusts, and estates. The provisions of section 1445(e)(4), requiring 
withholding upon certain taxable distributions by domestic or foreign 
partnerships, trusts, and estates, shall apply to distributions made on 
or after the effective date of a Treasury decision under section 897 
(e)(2)(B)(ii) and (g).
    (v) [Reserved]
    (vi) Tiered Partnerships. No withholding is required upon the 
disposition of a U.S. real property interest by a partnership which is 
directly owned, in whole or in part, by another domestic partnership 
(but only to the extent that the amount realized is attributable to the 
partnership interest of that other partnership) until the effective date 
of a Treasury Decision published under section 1445(e) providing rules 
governing this matter.
    (c) Dispositions of U.S. real property interests by domestic 
partnerships, trusts, and estates--(1) Withholding required--(i) In 
general. If a domestic partnership, trust, or estate disposes of a U.S. 
real property interest and any partner, beneficiary, or owner of the 
entity is a foreign person, then the partnership or the trustee, 
executor, or equivalent fiduciary of the trust or estate must withhold 
tax with respect to each such foreign person in accordance with the 
provisions of subdivision (ii), (iii), or (iv), of this paragraph (c)(1) 
(as applicable). The withholding obligation imposed by this paragraph 
(c) applies to the fiduciary of a trust even if the grantor of the trust 
or another person is treated as the owner of the trust or any portion 
thereof for purposes of the Internal Revenue Code. Thus, the withholding 
obligation imposed by this paragraph (c) applies to the trustee of a 
land trust or similar arrangement, even if such a trustee is not 
ordinarily treated under the applicable provisions of local law as a 
true fiduciary.
    (ii) Disposition by partnership. A partnership must withhold a tax 
equal to 35 percent (or the highest rate specified in section 
1445(e)(1)) of each foreign partner's distributive share of the gain 
realized by the partnership upon the disposition of each U.S. real 
property interest. Such distributive share of the gain must be 
determined pursuant to the principles of section 704 and the regulations 
thereunder. For the rules applicable to partnerships, interests in which 
are regularly traded on an established securities market, see 
Sec. 1.1445-8.

[[Page 115]]

    (iii) Disposition by trust or estate.--(A) In general. A trustee, 
fiduciary, executor or equivalent fiduciary (hereafter collectively 
referred to as the fiduciary) of a trust or estate having one or more 
foreign beneficiaries must withhold tax in accordance with the rules of 
this Sec. 1.1445-5(c)(1)(iii). Such a fiduciary must establish a U.S. 
real property interest account and must enter in such account all gains 
and losses realized during the taxable year of the trust or estate from 
dispositions of U.S. real property interests. The fiduciary must 
withhold 35 percent (or the highest rate specified in section 
1445(e)(1)) of any distribution to a foreign beneficiary that is 
attributable to the balance in the U.S. real property interest account 
on the day of the distribution. A distribution from a trust or estate to 
a beneficiary (domestic or foreign) shall, solely for purposes of 
section 1445(e)(1), be deemed to be attributable first to any balance in 
the U.S. real property interest account and then to other amounts. 
However, a distribution that occurs prior to the transfer of a U.S. real 
property interest in a taxable year or at any other time when the amount 
contained in the U.S. real property interest account is zero, is not 
subject to withholding under this Sec. 1.1445-5(c)(1)(iii). The U.S. 
real property interest account is reduced by the amount distributed to 
all beneficiaries (domestic and foreign) attributable to such account 
during the taxable year of the trust or estate. Any ending balance of 
the U.S. real property interest account not distributed by the close of 
the taxable year of the trust or estate is cancelled and is not carried 
over (or carried back) to any other year. Thus, the beginning balance of 
such account in any taxable year of the trust or estate is always zero. 
For rules applicable to grantor trusts see Sec. 1.1445-5(c)(1)(iv). For 
rules applicable to trusts, interests in which are regularly traded on 
an established securities market and real estate investment trusts, see 
Sec. 1.1445-8.
    (B) Example. The following example illustrates the rules of 
paragraph (c)(1)(iii)(A) of this section.

    On January 1, 1994, A establishes a domestic trust (which has as its 
taxable year, the calendar year) for the benefit of B, a nonresident 
alien, and C, a U.S. citizen. The trust is not a trust subject to 
sections 671 through 679. Under the terms of the trust, the trustee, T, 
is given discretion to distribute income and corpus of the trust to 
provide for the reasonable needs of B and C. During the trust's 1994 tax 
year, T disposes of three parcels of vacant land located in the United 
States. The following chart illustrates the computation of the amount 
subject to withholding under section 1445 with respect to distributions 
made by T to B and C during 1994.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                             U.S. real  
                                                                             Gains or      Distributions   Distributions   Section 1445      property   
                   Date                              Parcel sold              (loss)           to C        to B (before     withholding      interest   
                                                                             realized                      withholding)      35% rate         account   
--------------------------------------------------------------------------------------------------------------------------------------------------------
 1/01/94..................................  ............................  ..............  ..............  ..............  ..............             -0-
 3/01/94..................................  Parcel 1....................        140,000   ..............  ..............  ..............         140,000
 3/05/94..................................  ............................  ..............           5,000          10,000           3,500         125,000
 3/15/94..................................  ............................  ..............          10,000           5,000           1,750         110,000
 5/01/94..................................  Parcel 2....................        300,000   ..............  ..............  ..............         410,000
 5/15/94..................................  Parcel 3....................        (50,000)  ..............  ..............  ..............         360,000
12/01/94..................................  ............................  ..............         170,000         170,000          59,500          20,000
 1/01/95..................................  ............................  ..............  ..............  ..............  ..............             -0-
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (iv) Disposition by grantor trust. The trustee or equivalent 
fiduciary of a trust that is subject to the provisions of subpart E of 
part 1 of subchapter J (sections 671 through 679) must withhold a tax 
equal to 35 percent (or the highest rate specified in section 
1445(e)(1)) of the gain realized from each disposition of a U.S. real 
property interest to the extent such gain is allocable to a portion of 
the trust treated as owned by a foreign person under subpart E of part 1 
of subchapter J.
    (2) Withholding not required under paragraph (c)--(i) [Reserved]
    (ii) Interest-holder not a foreign person--(A) In general. A 
domestic partnership, trust, or estate that disposes of a U.S. real 
property interest shall not be required to withhold with respect to

[[Page 116]]

any partner or beneficiary that it determines, pursuant to the rules of 
paragraph (b)(3) of this section, not to be a foreign person.
    (B) Belated notice of false certification. If after the date of the 
transfer a partnership or fiduciary learns that a partner's or 
beneficiary's certification of non-foreign status is false, then that 
partnership or fiduciary shall be required to withhold, with respect to 
the foreign partner or beneficiary that gave the false certification, 
the lessor of--
    (1) The amount otherwise required to be withheld under the rules of 
this paragraph (c), or
    (2) An amount equal to that partner's or beneficiary's remaining 
interests in the income or assets of the partnership, trust, or estate. 
Amounts so withheld must be reported and paid over by the 60th day 
following the date on which the partnership or fiduciary learns that the 
certification is false. For rules concerning the notifications of false 
certifications that may be required to be given to partnerships and 
fiduciaries, see Sec. 1.1445-4(b).
    (iii) Property disposed of not a U.S. real property interest--(A) In 
general. No withholding is required under this paragraph (c) if a 
domestic partnership, trust, or estate that disposes of property 
determines pursuant to the rules of paragraph (b)(4) of this section 
that the property disposed of is not a U.S. real property interest.
    (B) Belated notice of false statement. If after the date of the 
transfer a partnership or fiduciary learns that a corporation's 
statement (that an interest in the corporation is not a U.S. real 
property interest) is false, then that partnership or fiduciary shall be 
required to withhold, with respect to each foreign partner or 
beneficiary, the lesser of--
    (1) The amount otherwise required to be withheld under the rules of 
this paragraph (c), or
    (2) An amount equal to that partner's or beneficiary's remaining 
interests in the income or assets of the parnership, trust, or estate.

Amounts so withheld must be reported and paid over by the 60th day 
following the date on which the partnership or fiduciary learns that the 
statement is false. For rules concerning the notifications of false 
statements that may be required to be given to partnerships or 
fiduciaries, see Sec. 1.1445-4(b).
    (iv) Withholding certificate. No withholding is required under this 
paragraph (c) with respect to the transfer of a U.S. real property 
interest if the Internal Revenue Service issues a withholding 
certificate that so provides. For rules concerning the issuance of 
withholding certificates, see Sec. 1.1445-6.
    (v) Nonrecognition transactions. For special rules concerning 
transactions entitled to nonrecognition of gain or loss, see paragraph 
(b)(2) of this section.
    (3) Large partnerships or trusts--(i) In general. If a partnership 
or trust has more than 100 partners or beneficiaries, then the 
partnership or fiduciary of the trust may elect to withhold in 
accordance with the provisions of this Sec. 1.1445-5(c)(3) in lieu of 
withholding in the manner required by Sec. 1.1445-5(c)(1). However, the 
rules of this Sec. 1.1445-5(c)(3) shall not apply to any partnership or 
trust interests in which are regularly traded on an established 
securities market except as described in Sec. 1.1445-8(c)(1). The rules 
of this Sec. 1.1445-5(c)(3) shall not apply to any real estate 
investment trust. See Sec. 1445-8.
    (ii) Amount to be withheld. A partnership or trust electing to 
withhold under this Sec. 1.1445-5(c)(3) shall withhold from each 
distribution to a foreign person an amount equal to 35 percent (or the 
highest rate specified in section 1445(e)(1)) of the amount attributable 
to section 1445(e)(1) transfers.
    (iii) Amounts attributable to section 1445(e)(1) transfers. A 
distribution is attributable to section 1445(e)(1) transfers to the 
extent of the partner's or beneficiary's proportionate share of the 
current balance of the entity's section 1445(e)(1) account. A 
distribution from a partnership or trust that has made an election under 
this Sec. 1.1445-5(c)(3) shall be deemed first to be attributable to a 
section 1445(e)(1) transfer to the extent of the balance in the section 
1445(e)(1) account. An entity's section 1445(e)(1) account shall be 
equal to--
    (A) The total amount of net gain realized by the entity upon all 
transfers of U.S. real property interests carried out by the entity 
after the date of its

[[Page 117]]

election under this Sec. 1.1445-5(c)(3); minus
    (B) The total amount of all distributions by the entity to domestic 
and foreign distributees from such account.
    (iv) Special rules for entities that make recurring sales of growing 
crops and timber. An entity that makes an election under Sec. 1.1445-
5(c)(3) and that makes recurring sales of growing crops and timber may 
further elect to determine the amount subject to withholding under the 
rules of this Sec. 1.1445-5(c)(3)(iv). Such an entity must withhold from 
each distribution to a foreign partner or beneficiary an amount equal to 
10 percent of such partner's or beneficiary's proportionate share of the 
current balance of the entity's gross section 1445(e)(1) account. An 
entity's gross section 1445(e)(1) account equals--
    (A) The total amount realized by the entity upon all transfers of 
U.S. real property interests carried out by the entity after the date of 
its election under this Sec. 1.1445-5(c)(3)(iv); minus
    (B) The total amount of all distributions to domestic and foreign 
distributees from such account.

An entity that elects to compute the amount subject to withholding under 
this Sec. 1.1445-5(c)(3)(iv), shall make such election in accordance 
with Sec. 1.1445-5(c)(3)(vi) and shall be subject to the provisions 
otherwise applicable under Sec. 1.1445-5(c)(3).
    (v) Procedural rules.  An election under paragraph (c)(3) may be 
made by filing a notice thereof with the Assistant Commissioner 
(International), at the address provided in Sec. 1.1445-1(g)(10). The 
notice must be submitted by a general partner (in the case of a 
partnership) or the trustee or equivalent fiduciary (in the case of a 
trust). The notice must set forth the name, office address, and 
identifying number of the partnership or fiduciary making the election, 
and, in the case of a partnership, must include the name, office 
address, and identifying number of the general partner submitting the 
election. An election under this paragraph (c)(3) may be revoked only 
with the consent of the Internal Revenue Service. Consent of the Service 
may be requested by filing an application to revoke the election with 
the Assistant Commissioner (International) at the address stated above. 
This application must include all information provided to the Service 
with the election notice and must provide an explanation of the reasons 
for revoking the election. The application to revoke an election must 
also specify the amount remaining to be distributed in the section 
1445(e)(1) account or the gross section 1445(e)(1) account.

An entity that ceases to qualify under section 1.1445-5(c)(3) because 
such entity does not have more than 100 partners or beneficiaries may 
revoke its election only with the consent of the Internal Revenue 
Service.
    (d) Distributions of U.S. real property interests by foreign 
corporations--(1) In general. A foreign corporation that distributes a 
U.S. real property interest must deduct and withhold a tax equal to 35 
percent (or the rate specified in section 1445(e)(2)) of the amount of 
gain recognized by the corporation on the distribution. The amount of 
gain required to be recognized by the corporation must be determined 
pursuant to the rules of section 897 and any other applicable section. 
For special rules concerning the applicability of a nonrecognition 
provision to a distribution, see paragraph (b)(2) of this section. The 
withholding liability imposed by this paragraph (d) applies to the same 
taxpayer that owes the related substantive income tax liability pursuant 
to the operation of section 897. Only one such liability will be 
assessed and collected from a foreign corporation, but separate 
penalties for failures to comply with the two requirements will be 
asserted.
    (2) Withholding not required--(i) Property distributed not a U.S. 
real property interest--(A) In general. No withholding is required under 
this paragraph (d) if a foreign corporation that distributes property 
determines pursuant to the rules of paragraph (b)(3) of this section 
that the property distributed is not a U.S. real property interest.
    (B) Belated notice of false statement. If after the date of a 
distribution described in paragraph (d)(1) of this section a foreign 
corporation learns that another corporation's statement (that an 
interest in that other corporation is not a U.S. real property interest) 
is false, then the foreign corporation may not rely upon that statement 
for any

[[Page 118]]

purpose. Such a foreign corporation's withholding obligations under this 
paragraph (d) shall apply if a statement had never been given, and such 
a corporation may be held fully liable pursuant to Sec. 1.1445-5(b)(5) 
for any failure to withhold. Amounts withheld pursuant to the rule of 
this paragraph (d)(2)(i)(B) must be reported and paid over by the 60th 
day following the date on which the foreign corporation learns that the 
statement is false. No penalties or interest will be assessed for 
failures to withhold prior to that date. For rules concerning the 
notifications of false statements that may be required to be given to 
foreign corporations, see Sec. 1.1445-4(b).
    (ii) Withholding certificate. No withholding is required under this 
paragraph (d) with respect to a foreign corporation's distribution of a 
U.S. real property interest if the distributing corporation obtains a 
withholding certificate from the Internal Revenue Service that so 
provides. For rules concerning the issuance of withholding certificates, 
see Sec. 1.1445-6.
    (e) Distributions to foreign persons by U.S. real property holding 
corporations--(1) In general. A domestic corporation that distributes 
any property to a foreign person that holds an interest in the 
corporation must deduct and withhold a tax equal to 10 percent of the 
fair market value of the property distributed to the foreign person, 
if--
    (i) The foreign person's interest in the corporation constitutes a 
U.S. real property interest under the provisions of section 897 and 
regulations thereunder; and
    (ii) The property is distributed either--
    (A) In redemption of stock under section 302; or
    (B) In liquidation of the corporation pursuant to the provisions of 
part II of subchapter C (sections 331 through 341). For the treatment of 
a domestic corporation's transfer of a U.S. real property interest to a 
foreign interest-holder in a distribution to which section 301 applies, 
see sections 897(f), 1441, and 1442.
    (2) Withholding not required--(i) Foreign person's interest not a 
U.S. real property interest. Withholding is required under this 
paragraph (e) only with respect to distributions to foreign persons 
holding interests in the corporation that constitute U.S. real property 
interests. In general, a foreign person's interest in a domestic 
corporation constitutes a U.S. real property interest if the corporation 
was a U.S real property holding corporation at any time during the 
shorter of (A) the period in which the foreign person held the interest 
or (B) the previous five years (but not earlier than June 19, 1980). See 
section 897(c) and Secs. 1.897-1(c) and 1.897-2 (b) and (h). However, an 
interest in such a corporation ceases to be a U.S. real property 
interest after all of the U.S. real property interests held by the 
corporation itself are disposed of in transactions on which gain or loss 
is recognized. See section 897(c)(1)(B) and Sec. 1.897-2(f)(2). Thus, if 
a U.S. real property holding corporation in the process of liquidation 
does not elect section 337 nonrecognition treatment upon its sale of all 
U.S. real property interests held by the corporation, and recognizes 
gain or loss upon such sales, interests in that corporation cease to be 
U.S. real property interests. Therefore, no withholding would be 
required with respect to that corporation's subsequent liquidating 
distribution to a foreign shareholder of property other than a U.S. real 
property interest.
    (ii) Nonrecognition transactions. For special rules concerning the 
applicability of a nonrecognition provision to a distribution described 
in paragraph (e)(1) of this section, see paragraph (b)(2) of this 
section.
    (iii) Interest-holder not a foreign person--(A) In general. A 
domestic corporation shall not be required to withhold under this 
paragraph (e) with respect to a distribution of property to any 
distributee that it determines, pursuant to the rules of paragraph 
(b)(3) of this section, not to be a foreign person.
    (B) Belated notice of false certification. If after the date of a 
distribution described in paragraph (e)(1) of this section a domestic 
corporation learns that an interest-holder's certification of non-
foreign status is false, then the corporation may rely upon that 
certification only if the person providing the false certification holds 
(or held) less than 10 percent of the value of the outstanding stock of 
the corporation. With

[[Page 119]]

respect to less than 10 percent interest-holders, no withholding is 
required under this paragraph (e) upon receipt of a belated notice of 
false certification. With respect to 10 percent or greater interest-
holders, the corporation's withholding obligations under this paragraph 
(e) shall apply as if a certification had never been given, and such a 
corporation may be held fully liable pursuant to Sec. 1.1445-5(b)(6) for 
any failure to withhold as of the date specified in this Sec. 1.1445-
5(e)(2)(iii)(B). Amounts withheld pursuant to the rule of this paragraph 
(e)(2)(iii)(B) must be reported and paid over by the 60th day following 
the date on which the corporation learns that the certification is 
false. No penalties or interest for failures to withhold will be 
assessed prior to that date. For rules concerning the notifications of 
false certifications that may be required to be given to U.S. real 
property holding corporations, see Sec. 1.1445-4(b).
    (iv) Withholding certificate. No withholding, or reduced 
withholding, is required under this paragraph (e) with respect to a 
domestic corporation's distribution of property if the distributing 
corporation obtains a withholding certificate from the Internal Revenue 
Service that so provides. For rules concerning the issuance of 
withholding certificates, see Sec. 1.1445-6.
    (f) Taxable distributions by domestic or foreign partnerships, 
trusts, or estates. [Reserved]
    (g) Dispositions of interests in partnerships, trusts, and estates. 
[Reserved]

[T.D. 8113, 51 FR 46642, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987, 
as amended at T.D. 8198, 53 FR 16230, May 5, 1988; T.D. 8321, 55 FR 
50553, Dec. 7, 1990; T.D. 8647, 60 FR 66076, Dec. 21, 1995; 61 FR 7157, 
Feb. 26, 1996]



Sec. 1.1445-6  Adjustments pursuant to withhold certificate of amount required to be withheld under section 1445(e).

    (a) Withholding certificate for purposes of section 1445(e)--(1) In 
general. Pursuant to the provisions of Sec. 1.1445-5 (c)(2)(iv), 
(d)(2)(ii), and (e)(2)(iv), withholding under section 1445(e) may be 
reduced or eliminated pursuant to a withholding certificate issued by 
the Internal Revenue Service in accordance with the rules of this 
Sec. 1.1445-6. A withholding certificate may be issued in cases where 
adjusted withholding is appropriate (e.g., because of the applicability 
of a nonrecognition provision--see paragraph (c) of this section), where 
the relevant taxpayers are exempt from U.S. tax (see paragraph (d) of 
this section), or where an agreement for the payment of tax is entered 
into with the Service (see paragraph (e) of this section). A withholding 
certificate that is obtained prior to a transfer allows the entity or 
fiduciary to withhold a reduced amount or excuses withholding entirely. 
A withholding certificate that is obtained after a transfer has been 
made may authorize a normal refund or an early refund pursuant to 
paragraph (g) of this section. The Internal Revenue Service will act 
upon an application for a withholding certificate not later than the 
90th day after it is received. (The Service may deny a request for a 
withholding certificate where, after due notice, an applicant fails to 
provide the information necessary to make a determination.) Solely for 
this purpose (i.e., determining the day upon which the 90 day period 
commences), an application is received by the Service on the date when 
all information necessary for the Service to make a determination is 
provided by the applicant. (For rules regarding whether an application 
has been timely submitted, see Sec. 1.1445-5(b)(5)). The Internal 
Revenue Service will act upon an application for an early refund not 
later than the 90th day after it is received. An application for an 
early refund must either (i) include a copy of a withholding certificate 
issued by the Service with respect to the transaction, or (ii) be 
combined with an application for a withholding certificate. Where an 
application for an early refund is combined with an application for a 
withholding certificate, the Service will act upon both applications not 
later than the 90th day after receipt. Either an entity, a fiduciary, or 
a relevant taxpayer (as defined in paragraph (a)(2) of this section) may 
apply for a withholding certificate. An entity or fiduciary may apply 
for a withholding certificate with respect to all or less than all 
relevant taxpayers. For special rules concerning the issuance of a 
withholding certificate to a

[[Page 120]]

foreign corporation that has made an election under section 897(i), see 
Sec. 1.1445-7(d).
    (2) Relevant taxpayer. For purposes of this section, the term 
``relevant taxpayer'' means any foreign person that will bear 
substantive income tax liability by reason of the operation of section 
897 with respect to a transaction upon which withholding is required 
under section 1445(e).
    (b) Applications for withholding certificates--(1) In general. An 
application for a withholding certificate pursuant to this Sec. 1.1445-6 
must be submitted in the manner provided in Sec. 1.1445--3 (b). However, 
in lieu of the information required to be submitted pursuant to 
Sec. 1.1445-3(b)(4), the applicant must provide the information required 
by paragraph (b)(2) of this section. In addition, the information 
required by paragraph (b)(3) of this section must be submitted with the 
application.
    (2) Basis for certificate--(i) Adjusted withholding. If a 
withholding certificate is sought on the basis of a claim that adjusted 
withholding is appropriate, the application must include a calculation, 
in accordance with paragraph (c) of this section, of the maximum tax 
that may be imposed on each relevant taxpayer with respect to which 
adjusted withholding is sought. The application must also include all 
evidence necessary to substantiate the claimed calculation, such as 
records of adjustments to basis or appraisals of fair market value.
    (ii) Exemption. If a withholding certificate is sought on the basis 
of a relevant taxpayer's exemption from U.S. tax, the application must 
set forth a brief statement of the law and facts that support the 
claimed exemption. See paragraph (d) of this section.
    (iii) Agreement. If a withholding certificate is sought on the basis 
of an agreement for the payment of tax, the application must include a 
copy of the agreement proposed by the applicant and a copy of the 
security instrument (if any) proposed by the applicant. In this regard, 
see paragraph (e) of this section.
    (3) Relevant taxpayers. An application for withholding certificate 
pursuant to this section must set forth the name, identifying number (if 
any) and home address (in the case of an individual) or office address 
(in the case of an entity) of each relevant taxpayer with respect to 
which adjusted withholding is sought.
    (c) Adjustment of amount required to be withheld. The Internal 
Revenue Service may issue a withhold certificate that excuses 
withholding or that permits an entity or fiduciary to withhold an 
adjusted amount reflecting the relevant taxpayers' maximum tax 
liability. A relevant taxpayer's maximum tax liability is the maximum 
amount which that taxpayer could be required to pay as tax by reason of 
the transaction upon which withholding is required. In the case of an 
individual taxpayer that amount will generally be the gain realized by 
the individual, multiplied by the maximum individual income tax rate 
applicable to long term capital gain. In the case of a corporate 
taxpayer, that amount will generally be the gain realized by the 
corporation, multiplied by the maximum corporate income tax rate 
applicable to long term capital gain. However, that amount must be 
adjusted to take into account the following:
    (1) Any reduction of tax to which the relevant taxpayer is entitled 
under the provisions of a U.S. income tax treaty;
    (2) The effect of any nonrecognition provision that is applicable to 
the transaction;
    (3) Any losses previously realized and recognized by the relevant 
taxpayer during the taxable year by reason of the operation of section 
897;
    (4) Any amount realized upon the subject transfer by the relevant 
taxpayer that is required to be treated as ordinary income under any 
provision of the Code; and
    (5) Any other factor that may increase or reduce the tax upon the 
transaction.
    (d) Relevant taxpayer's exemption from U.S. tax--(1) In general. The 
Internal Revenue Service will issue a withholding certificate that 
excuses withholding by an entity or fiduciary if it is established that 
a relevant taxpayer's income from the transaction will be exempt from 
U.S. tax. For the available exemptions, see paragraph (d)(2) of this 
section. If a relevant taxpayer is entitled to a reduction of (rather 
than an

[[Page 121]]

exemption from) U.S. tax, then the entity or fiduciary may obtain a 
withholding certificate to that effect pursuant to the provisions of 
paragraph (c) of this section.
    (2) Available exemptions. A relevant taxpayer's income from a 
transaction with respect to which withholding is required under section 
1445(e) may be exempt from U.S. tax because either:
    (i) The relevant taxpayer is an integral part or controlled entity 
of a foreign government and the subject income is exempt from U.S. tax 
pursuant to section 892 and the regulations thereunder; or
    (ii) The relevant taxpayer is entitled to the benefits of an income 
tax treaty that provides for such an exemption (subject to the 
limitations imposed by section 1125(c) of Pub. L. 96-499, which, in 
general overrides such benefits as of January 1, 1985).
    (e) Agreement for the payment of tax--(1) In general. The Internal 
Revenue Service will issue a withholding certificate that excuses 
withholding or that permits an entity or fiduciary to withhold a reduced 
amount, if the entity, fiduciary, or a relevant taxpayer enters into an 
agreement for the payment of tax pursuant to the provisions of this 
paragraph (e). An agreement for the payment of tax is a contract between 
the Service and the entity, fiduciary, or relevant taxpayer that 
consists of two necessary elements. Those elements are--
    (i) A contract between the Service and the other person, setting 
forth in detail the rights and obligations of each; and
    (ii) A security instrument or other form of security acceptable to 
the Assistant Commissioner (International).
    (2) Contents of agreement--(i) In general. An agreement for the 
payment of tax must cover an amount described in subdivision (ii) or 
(iii) of this paragraph (e)(2). The agreement may either provide 
adequate security for the payment of the chosen amount with respect to 
the relevant taxpayer in accordance with paragraph (e)(3) of this 
section or provide for the payment of that amount through a combination 
of security and withholding of tax by the entity or fiduciary.
    (ii) Tax that would otherwise be withheld. An agreement for the 
payment of tax may cover the amount of tax that would otherwise be 
required to be withheld with respect to the relevant taxpayer pursuant 
to section 1445(e). In addition to the amount computed pursuant to 
section 1445(e), the applicant must agree to pay interest upon that 
amount, at the rate established under section 6621, with respect to the 
period between the date on which withholding tax under section 1445(e) 
would otherwise be due and the date on which the relevant taxpayer's 
payment of tax with respect to the disposition will be due. The amount 
of interest agreed upon must be paid by the applicant regardless of 
whether or not the Service is required to draw upon any security 
provided pursuant to the agreement. The interest may be paid either with 
the return or by the Service drawing upon the security.
    (iii) Maximum tax liability. An agreement for the payment of tax may 
cover the relevant taxpayer's maximum tax liability, determined in 
accordance with paragraph (c) of this section. The agreement must also 
provide for the payment of an additional amount equal to 25 percent of 
the amount determined under paragraph (c) of this section. This 
additional amount secures the interest and penalties that would accrue 
between the date of the relevant taxpayer's failure to file a return and 
pay tax with respect to the disposition, and the date of which the 
Service collects upon that liability pursuant to the agreement.
    (iv) Allocation of payment. An agreement for the payment of tax 
pursuant to this section must set forth an allocation of the payment 
provided for by the agreement among the relevant taxpayers with respect 
to which the withholding certificate is sought. In the case of an 
agreement that covers an amount described in subdivision (ii) of this 
paragraph (e)(2), such allocation must be based upon the amount that 
would otherwise be required to be withheld with respect to each relevant 
taxpayer. In the case of an agreement that covers an amount described in 
subdivision (iii) of this paragraph (e)(2), such

[[Page 122]]

allocation must be based upon each relevant taxpayer's maximum tax 
liability.
    (3) Major types of security. The major types of security that are 
acceptable to the Internal Revenue Service for purposes of this section 
are described in Sec. 1.1445-3(e)(3).
    (4) Terms of security instrument. Any security instrument that is 
furnished pursuant to this section must contain the terms described in 
Sec. 1.1445-3(e)(4).
    (f) Amendments to application for withholding certificates--(1) In 
general. An applicant for a withholding certificate may amend an 
otherwise complete application by submitting an amending statement to 
the Assistant Commissioner (International) at the address provided in 
Sec. 1.1445-1(g)(10). The amending statement shall provide the 
information required by Sec. 1.1445-6(f)(3) and must be signed and 
accompanied by a penalties of perjury statement in accordance with 
Sec. 1.1445-6(b).
    (2) Extension of time for the Service to process requests for 
withholding certificates--(i) In general. If an amending statement is 
submitted, the time in which the Internal Revenue Service must act upon 
the amended application shall be extended by 30 days.
    (ii) Substantial amendments. If an amending statement is submitted 
and the Service finds that the statement substantially amends to the 
facts of the underlying application or substantially alters the terms of 
the withholding certificate as requested in the initial application, the 
time within which the Service must act upon the amended application 
shall be extended by 60 days. The applicant shall be so notified.
    (iii) Amending statement received after the requested withholding 
certificate has been signed by the Assistant Commissioner 
(International). If an amending statement is received after the 
withholding certificate, drafted in response to the underlying 
application, has been signed by the Assistant Commissioner 
(International) or his delegate and prior to the day such certificate is 
mailed to the applicant, the time in which the Service must act upon the 
amended application shall be extended by 90 days.
    (3) Information required to be submitted. No particular form is 
required for an amending statement but the statement must provide the 
following information:
    (i) Identification of applicant. The amending statement must set 
forth the name, address, and identifying number (if any) of the person 
submitting the amending statement.
    (ii) Date of application. The amending statement must set forth the 
date of the underlying application for a withholding certificate.
    (iii) Real property interest to be (or that has been) transferred. 
The amending statement must set forth a brief description of the real 
property interest with respect to which the underlying application for a 
withholding certificate was submitted.
    (iv) Amending information. The amending statement must fully set 
forth the basis for the amendment including any modification of the 
facts supporting the application for a withholding certificate and any 
change sought in the terms of the withholding certificate.
    (g) Early refund of overwithheld amounts. If the Internal Revenue 
Service issues a withholding certificate pursuant to this section, and 
an amount greater than that specified in the certificate was withheld by 
the entity or fiduciary, then pursuant to the rules of this paragraph 
(g) a relevant taxpayer may apply for an early refund of a proportionate 
share of the excess amount (without interest) prior to the date on which 
the relevant taxpayer's return is due (without extensions). An 
application for an early refund must be addressed to the Assistant 
Commissioner (International), at the address provided in Sec. 1.1445-
1(g)(10). No particular form is required for the application, but the 
following information must be set forth in separate paragraphs numbered 
to correspond with the numbers given below:
    (1) Name, address, and identifying number (if any) of the relevant 
taxpayer seeking the refund;
    (2) Amount required to be withheld pursuant to withholding 
certificate;
    (3) Amount withheld by entity or fiduciary (attach a copy of Form 
8288-A stamped by IRS pursuant to Sec. 1.1445-5(b)(4) or provide 
substantial evidence of the amount withheld in the case of a

[[Page 123]]

failure to receive Form 8288-A, as provided in Sec. 1.1445-5(b)(7)); and
    (4) Amount to be refunded to the relevant taxpayer.

An application for an early refund cannot be processed unless the 
required copy of Form 8288-A or substantial evidence of the amount 
withheld in the case of a failure to receive Form 8288-A (as provided in 
Sec. 1.1445-5(b)(7)) is attached to the application. If an application 
for a withholding certificate is submitted after the transfer takes 
place, then that application may be combined with an application for an 
early refund. The Service will act upon a claim for refund within the 
time limits set forth in Sec. 1.1445-6(a)(1).

[T.D. 8113, 51 FR 46648, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987]



Sec. 1.1445-7  Treatment of foreign corporation that has made an election under section 897(i) to be treated as a domestic corporation.

    (a) In general. Pursuant to section 897(i) a foreign corporation may 
elect to be treated as a domestic corporation for purposes of sections 
897 and 6039C. A foreign corporation that has made such an election 
shall also be treated as a domestic corporation for purposes of the 
withholding required under section 1445, in accordance with the 
provisions of this section.
    (b) Withholding under section 1445(a)--(1) Dispositions by 
corporation. A foreign corporation that has made an election under 
section 897(i) may provide a transferee with a certification of non-
foreign status in connection with the corporation's disposition of a 
U.S. real property interest. However, in accordance with the provisions 
of Secs. 1.1445-2(b)(2)(ii) and 1.1445-5(b)(3)(ii)(C), such an electing 
foreign corporation must attach to such certification a copy of the 
acknowledgment of the election provided to the corporation by the 
Internal Revenue Service pursuant to Sec. 1.897-3(d)(4) which states 
that the information required by Sec. 1.897-3 has been determined to be 
complete.
    (2) Dispositions of interests in corporation. Dispositions of 
interests in electing foreign corporations shall be subject to the 
withholding requirements of section 1445(a) and the rules of 
Secs. 1.1445-1 through 1.1445-4. Therefore, if a foreign person disposes 
of an interest in such a corporation, and that interest is a U.S. real 
property interest under the provisions of section 897 and regulations 
thereunder, then the transferee is required to withhold under section 
1445(a).
    (c) Withholding under section 1445(e). Because a foreign corporation 
that has made an election under section 897(i) is treated as a domestic 
corporation for purposes of determining withholding obligations under 
section 1445, such a corporation is not subject to the requirement of 
section 1445(e)(2) that a foreign corporation withhold at the corporate 
capital gain rate from the gain recognized upon the distribution of a 
U.S. real property interest. Such a corporation is subject to the 
provisions of section 1445(e)(3). Thus, if interests in an electing 
corporation constitute U.S. real property interests, then the 
corporation is required to withhold with respect to the non-dividend 
distribution of any property to an interest-holder that is a foreign 
person. See Sec. 1.1445-5(e). Dividend distributions (distributions that 
are described in section 301) shall be treated as provided in sections 
897(f), 1441 and 1442. In addition, if interests in an electing foreign 
corporation do not constitute U.S. real property interests, then 
distributions by such corporation shall be treated as provided in 
sections 897(f) (if applicable), 1441 and 1442.

(Approved by the Office of Management and Budget under control number 
545-0902)

[T.D. 8113, 51 FR 46650, Dec. 24, 1986; 52 FR 3796, Feb. 6, 1987]



Sec. 1.1445-8  Special rules regarding publicly traded partnerships, publicly traded trusts and real estate investment trusts (REITs).

    (a) Entities to which this section applies. The rules of this 
section apply to--
    (1) Any partnership or trust, interests in which are regularly 
traded on an established securities market (regardless of the number of 
its partners or beneficiaries), and
    (2) Any REIT (regardless of the form of its organization).

For purposes of paragraph (a)(1) of this section, the rules of section 
1445 (e)(1) and this section shall not apply to a

[[Page 124]]

publicly traded partnership (as defined in section 7704) which is 
treated as a corporation under section 7704(a), or to those entities 
that are classified as ``associations'' and taxed as corporations. See 
Sec. 301.7701-2.
    (b) Obligation to withhold--(1) In general. An entity described in 
paragraph (a) of this section is not required to withhold under the 
provisions of Sec. 1.1445-5(c), which states the withholding 
requirements of domestic partnerships, trusts and estates upon the 
disposition of U.S. real property interests. Except as otherwise 
provided in this paragraph (b), an entity described in paragraph (a) of 
this section shall be liable to withhold tax upon the distribution of 
any amount attributable to the disposition of a U.S. real property 
interest, with respect to each holder of an interest in the entity that 
is a foreign person. The amount to be withhold is described in paragraph 
(c) of this section.
    (2) Publicly traded partnerships. Publicly traded partnerships which 
comply with the withholding procedures under section 1446 will be deemed 
to have satisfied their withholding obligations under this paragraph 
(b).
    (3) Special rule for certain distributions to nominees. In the case 
of a person that--
    (i) Is a nominee (as defined in paragraph (d) of this section),
    (ii) Receives a distribution attributable to the disposition of a 
U.S. real property interest directly from an entity described in 
paragraph (a) of this section or indirectly from such entity through a 
nominee,
    (iii) Receives the distribution for payment to any foreign person, 
or the account of any foreign person, and
    (iv) Receives a qualified notice pursuant to paragraph (f) of this 
section,

then the obligation to withhold in accordance with the general rules of 
section 1445(e)(1) and this paragraph (b) shall be imposed solely on 
that person to the extent of the amount specified by the qualified 
notice. A person obligated to withhold by reason of this paragraph 
(b)(3) is referred to as a withholding agent.
    (4) Person designated to act for withholding agent. The rules stated 
in Sec. 1.1441-7(b) (1) and (2) regarding a person designated to act for 
a withholding agent shall apply for purposes of this section.
    (5) Effect of withholding exemption granted under Sec. 1.1441-4(f). 
A letter issued by a district director under the provisions of 
Sec. 1.1441-4(f), which exempts a person from withholding under section 
1441 or section 1442, shall also exempt that person from withholding 
under this paragraph (b), if--
    (i) The letter identifies another person as the withholding agent 
for purposes of section 1441 or 1442, and
    (ii) Such other person enters into a written agreement, with the 
district director who issued the letter, to be the withholding agent for 
purposes of this paragraph (b).

The exemption granted, and the corresponding withholding obligation 
imposed, by this paragraph (b)(5) shall apply with respect to the first 
distribution made after execution of the agreement described in the 
preceding sentence and shall continue to apply to all distributions made 
during the period in which the exemption granted under Sec. 1.1441-4(f) 
is in effect.
    (6) Payment other than in money. The rule stated in Sec. 1.1441-7(c) 
regarding payment other than in money shall apply for purposes of this 
section.
    (c) Amount to be withheld--(1) Distribution from a publicly traded 
partnership or publicly traded trust. The amount to be withheld under 
this section with respect to a distribution by a publicly traded 
partnership or publicly traded trust shall be computed in the manner 
described in Sec. 1.1445-5(c)(3) (ii) and (iii), subject to the rules of 
this section.
    (2) REITs--(i) In general. The amount to be withheld with respect to 
a distribution by a REIT, under this section shall be equal to 35 
percent (or the highest rate specified in section 1445(e)(1)) of the 
amount described in paragraph (c)(2)(ii) of this section.
    (ii) Amount subject to withholding--(A) In general. Except as 
otherwise provided in paragraph (c)(2)(ii)(C) of this section, the 
amount subject to withholding is the amount of any distribution, 
determined with respect to each share or certificate of beneficial 
interest, designated by a REIT as a capital

[[Page 125]]

gain dividend, multiplied by the number of shares or certificates of 
beneficial interest owned by the foreign person. Solely for purposes of 
this paragraph, the largest amount of any distribution occurring after 
March 7, 1991 that could be designated as a capital gain dividend under 
section 857(b)(3)(C) shall be deemed to have been designated by a REIT 
as a capital gain dividend regardless of the amount actually designated.
    (B) Distribution attributable to net short-term capital gain from 
the disposition of a U.S. real property interest. [Reserved]
    (C) Designation of prior distribution as capital gain dividend. If a 
REIT makes an actual designation of a prior distribution, in whole or in 
part, as a capital gain dividend, such prior distribution shall not be 
subject to withholding under this section. Rather, a REIT must 
characterize and treat as a capital gain dividend distribution (solely 
for purposes of section 1445(e)(1)) each distribution, determined with 
respect to each share or certificate of beneficial interest, made on the 
day of, or any time subsequent to, such designation as a capital gain 
dividend until such characterized amounts equal the amount of the prior 
distribution designated as a capital gain dividend. The provisions of 
this paragraph shall not be applicable in any taxable year in which the 
REIT adopts a formal or informal resolution or plan of complete 
liquidation.
    (iii) Example. The following example illustrates the rules of 
paragraph (c)(2)(ii)(C) of this section.

    In the first quarter of 1988, XYZ REIT makes a dividend distribution 
of $2X. In the second quarter of 1988, XYZ sells real property, 
recognizing a long term capital gain of $15X, and makes a dividend 
distribution of $5X. In the third quarter of 1988, XYZ makes a 
distribution of $3X. In the fourth quarter of 1988, XYZ sells real 
property recognizing a long term capital loss of $2X. Within 30 days 
after the close of the taxable year, XYZ designates a capital gain 
dividend for the year of $13X. It subsequently makes a fourth quarter 
distribution of $7X. Since XYZ has made an actual designation of prior 
distributions during the taxable year as capital gain dividends, 
withholding on those prior distributions will not be required. However, 
the REIT must characterize, solely for purposes of section 1445(e)(1), a 
total amount of $13X of dividend distributions as capital gain 
dividends. Therefore, the fourth quarter dividend distribution of $7X 
must be characterized as a capital gain dividend subject to withholding 
under this section. In addition, XYZ will be required to characterize an 
additional $6X of subsequent dividend distributions as capital gain 
dividends.

    (d) Definition of nominee. For purposes of this section, the term 
``nominee'' means a domestic person that holds an interest in an entity 
described in paragraph (a) of this section on behalf of another domestic 
or foreign person.
    (e) Determination of non-foreign status by withholding agent. A 
withholding agent may rely on a certificate of non-foreign status 
pursuant to Sec. 1.1445-2(b) or on the statements and address provided 
to it on Form W-9 or a form that is substantailly similar to such form, 
to determine whether an interest holder is a domestic person. Reliance 
on these documents will excuse the withholding agent from liability 
imposed under section 1445(e)(1) in the absence of actual knowledge that 
the interest holder is a foreign person. A withholding agent may also 
employ other means to determine the status of an interest holder, but, 
if the agent relies on such other means and the interest holder proves, 
in fact, to be a foreign person, then the withholding agent is subject 
to any liability imposed pursuant to section 1445 and the regulations 
thereunder for failure to withhold.
    (f) Qualified notice. A qualified notice for purposes of paragraph 
(b)(3)(iv) of this section is a notice given by a partnership, trust or 
REIT regarding a distribution that is attributable to the disposition of 
a U.S. real property interest in accordance with the notice requirements 
with respect to dividends described in 17 CFR 240.10b-17(b) (1) or (3) 
issued pursuant to the Securities Exchange Act of 1934, 15 U.S.C. 78a et 
seq. In the case of a REIT, a qualified notice is only a notice of a 
distribution, all or any portion of which the REIT actually designates, 
or characterizes in accordance with paragraph (c)(2)(ii)(C) of this 
section, as a capital gain dividend in accordance with 17 CFR 240.10b-
17(b) (1) or (3), with respect to each share or certificate of 
beneficial interest. A deemed designation

[[Page 126]]

under paragraph (c)(2)(ii)(A) of this section may not be the subject of 
a qualified notice under this paragraph (f). A person described in 
paragraph (b)(3) of this section shall be treated as receiving a 
qualified notice at the time such notice is published in accordance wtih 
17 CFR 240.10b-17(b) (1) or (3).
    (g) Reporting and paying over withheld amounts. With respect to an 
amount withheld under this section, a withholding agent is not required 
to conform to the requirements of Sec. 1.1445-5(b)(5) but is required to 
report and pay over to the Internal Revenue Service any amount required 
to be withheld pursuant to the rules and procedures of section 1461, the 
regulations thereunder and Sec. 1.6302-2. Forms 1042 and 1042S are to be 
used for this purpose.
    (h) Early refund procedure not available. The early refund procedure 
set forth in Sec. 1.1445-6(g) shall not apply to amounts withheld under 
the rules of this section. For adjustment of over-withheld amounts, see 
Sec. 1.1461.4.
    (i) Liability upon failure to withhold. For rules regarding 
liability upon failure to withhold under Sec. 1445(e) and this section, 
see Sec. 1.1445-1(e).

[T.D. 8321, 55 FR 50553, Dec. 7, 1990; 56 FR 4542, Feb. 5, 1991, as 
amended by T.D. 8647, 60 FR 66077, Dec. 21, 1995]



Sec. 1.1445-9T  Special rule for section 1034 nonrecognition (temporary).

    (a) Purpose and scope. This section provides a temporary regulation 
that, if and when adopted as a final regulation, will add a new 
paragraph (d)(2)(iii) to Sec. 1.1445-2. Paragraph (b) of this section 
would then appear as paragraph (d)(2)(iii) of Sec. 1.1445-2.
    (b) No particular form is required for a transferor's notice to a 
transferee that the transferor is not required to recognize gain or loss 
with respect to a transfer. The notice must be verified as true and 
signed under penalties of perjury by a responsible officer in the case 
of a corporation, by a general partner in the case of a partnership, and 
by a trustee or equivalent fiduciary in the case of a trust or estate. 
The following information must be set forth in paragraphs labeled to 
correspond with the designation set forth below:
    (1) A statement that the document submitted constitutes a notice of 
a nonrecognition transfer pursuant to the requirements of Sec. 1.1445-
2(d)(2);
    (2) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of an entity) of 
the transferor submitting the notice;
    (3) A statement that the transferor is not required to recognize any 
gain or loss with respect to the transfer;
    (4) A brief description of the transfer;
    (5) A brief summary of the law and facts supporting the claim that 
recognition of gain or loss is not required with respect to the 
transfer; and
    (6) If the transferor claims nonrecognition on the sale or exchange 
of a principal residence under section 1034(a) and another principal 
residence in the United States has not been purchased as of the date of 
sale of the principal residence, either (i) a copy of an executed 
binding contract for purchase by the transferor of a further principal 
residence in the United States with a purchase price exceeding the 
adjusted sales price of the old principal residence or (ii) an affidavit 
by the transferor signed under penalties of perjury stating that the 
transferor intends to complete purchase of another principal residence 
within the United States with a purchase price exceeding the adjusted 
sales price of the old principal residence by April 15 of the year 
following the taxable year of the sale of the principal residence, and 
that the transferor is expected to continue to be employed or stationed 
in the United States for a period of two years from the sale of the 
principal residence. If the transferor's adjusted sales price of the old 
principal residence exceeds the transferor's cost of purchasing another 
principal residence in the United States, withholding shall be required 
at the rate of ten percent on the portion of the gross amount realized 
on the sale or exchange of the principal residence equal to such excess.
    (c) Effective Date. The rules of this section are effective with 
respect to sale of a principal residence after August 3, 1988.

[T.D. 8198, 53 FR 16230, May 5, 1988]

[[Page 127]]



Sec. 1.1445-10T  Special rule for Foreign governments (temporary).

    (a) This section provides a temporary regulation that, if and when 
adopted as a final regulation will add a new paragraph (d)(6) to 
Sec. 1.1445-2. Paragraph (b) of this section would then appear as 
paragraph (d)(6) of Sec. 1.1445-2.
    (b) Foreign government--(1) As transferor. A foreign government is 
subject to U.S. taxation under section 897 on the disposition of a U.S. 
real property interest except to the extent specifically otherwise 
provided in the regulations issued under section 892. A foreign 
government that disposes of a U.S. real property interest that is not 
subject to taxation as specifically provided by the regulations under 
section 892 may present a notice of nonrecognition treatment pursuant to 
paragraph (d)(2) of this section that specifically cites the provision 
of such regulation, and thereby avoids withholding by the transferee of 
the property. A foreign government that disposes of a U.S. real property 
interest or the transferee of the property may obtain a withholding 
certificate from the Internal Revenue Service that confirms the 
applicability of section 892, but neither is required to do so. Rules 
concerning the issuance of withholding certificates are provided in 
Sec. 1.1445-3.
    (2) As transferee. A foreign government or international 
organization that acquires a U.S. real property interest is fully 
subject to section 1445 and the regulations thereunder. Therefore, such 
an entity is required to withhold tax upon the acquisition of a U.S. 
real property interest from a foreign person.
    (c) Effective date. The rules of this section shall be effective for 
transfers, exchanges, distributions and other dispositions occuring on 
or after June 6, 1988.

[T.D. 8198, 53 FR 16230, May 5, 1988]



Sec. 1.1445-11T  Special rules requiring withholding under Sec. 1.1445-5 (temporary).

    (a) Purpose and scope. This section provides temporary regulations 
that, if and when adopted as a final regulation will add certain new 
paragraphs within Sec. 1.1445-5 (b) and (c). The paragraphs of this 
section would then appear as set forth below. Paragraph (b) of this 
section would then appear as paragraph (b)(8)(v) of Sec. 1.1445-5. 
Paragraph (c) of this section would then appear as paragraph (c)(2)(i) 
of Sec. 1.1445-5. Paragraph (d) of this section would then appear as 
paragraph (g) of Sec. 1.1445-5.
    (b) Dispositions of interests in partnerships, trusts, and estates. 
The provisions of section 1445(e)(5), requiring withholding upon certain 
dispositions of interests in partnerships, trusts, and estates, that own 
directly or indirectly a U.S. real property interest shall apply to 
dispositions on or after the effective date of a later Treasury decision 
under section 897(g) of the Code except in the case of dispositions of 
interests in partnerships in which fifty percent of the value of the 
gross assets consist of U.S. real property interests and ninety percent 
or more of the value of the gross assets consist of U.S. real property 
interests plus any cash or cash equivalents. The provisions of section 
1445(e)(5), shall apply, however, to dispositions after June 6, 1988, of 
interests in partnerships in which fifty percent or more of the value of 
the gross assets consist of U.S. real property interests, and ninety 
percent or more of the value of the gross assets consist of U.S. real 
property interests plus any cash or cash equivalents. See paragraph (d) 
of this section.
    (c) Transactions covered elsewhere. No withholding is required under 
this paragraph (c) with respect to the distribution of a U.S. real 
property interest by a partnership, trust, or estate. Such distributions 
shall be subject to withholding under section 1445(e)(4) and paragraph 
(f) of this Sec. 1.1445-5 on the effective date of a later Treasury 
decision published under section 897(g) of the Code. No withholding is 
required at this time for distributions described in the preceding 
sentence. See paragraph (b)(8)(iv) of this Sec. 1.1445-5. No withholding 
is required under this paragraph with respect to the disposition of an 
interest in a trust, estate, or partnership except in the case of a 
partnership in which fifty percent or more of the value of the gross 
assets consist of U.S. real property interests, and ninety percent or 
more of the value of the gross assets consist of U.S. real property 
interests plus any cash or

[[Page 128]]

cash equivalents. See paragraph (b)(8)(v) of Sec. 1.1445-5. Withholding 
shall be required as provided in section 1445(e)(5) and paragraph (g) of 
this section with respect to the disposition after June 6, 1988, of an 
interest in a partnership in which fifty percent or more of the value of 
the gross assets consist of U.S. real property interests, and ninety 
percent or more of the value of the gross assets consist of U.S. real 
property interests plus any cash or cash equivalents.
    (d) Dispositions of interests in partnerships, trusts or estates--
(1) Withholding required on disposition of certain partnership 
interests. Withholding is required under section 1445(e)(5) and this 
paragraph with respect to the disposition by a foreign partner of an 
interest in a domestic or foreign partnership in which fifty percent or 
more of the value of the gross assets consist of U.S. real property 
interests, and ninety percent or more of the value of the gross assets 
consist of U.S. real property interests plus any cash or cash 
equivalents. For purposes of this paragraph cash equivalents mean any 
asset readily convertible into cash (whether or not denominated in U.S. 
dollars), including, but not limited to, bank accounts, certificates of 
deposit, money market accounts, commercial paper, U.S. and foreign 
treasury obligations and bonds, corporate obligations and bonds, 
precious metals or commodities, and publicly traded instruments. The 
taxpayer on filing an income tax return for the year of the disposition 
may demonstrate the extent to which the gain on the disposition of the 
interest is not attributable to U.S. real property interests. A taxpayer 
is also permitted by Sec. 1.1445-3 to apply for a withholding 
certificate in instances where reduced withholding is approporiate.
    (2) Withholding not required--(i) Transferee receives statement that 
interest in partnership is not described in paragraph (d)(1). No 
withholding is required under paragraph (d)(1) of this section upon the 
disposition of a partnership interest otherwise described in that 
paragraph if the transferee is provided a statement, issued by the 
partnership and signed by a general partner under penalties of perjury 
no earlier than 30 days before the transfer, certifying that fifty 
percent or more of the value of the gross assets does not consist of 
U.S. real property interests, or that ninety percent or more of the 
value of the gross assets of the partnership does not consist of U.S. 
real property interests plus cash or cash equivalents.
    (ii) Reliance on statement not permitted. A transferee is not 
entitled to rely upon a statement described in paragraph (d)(2)(i) of 
this section if, prior to or at the time of the transfer, the transferee 
either--
    (A) Has actual knowledge that the statement is false, or
    (B) Receives a notice, pursuant to Sec. 1.1445-4.

Such a transferee's withholding obligations shall apply as if the 
statement had never been given, and such a transferee may be held fully 
liable pursuant to Sec. 1.1445-1(e) for any failure to withhold.
    (iii) Belated notice of false statement. If, after the date of the 
transfer, a transferee receives notice that a statement provided under 
paragraph (d)(2)(i) of this section is false, then such transferee may 
rely on the statement only with respect to consideration that was paid 
prior to the receipt of the notice. Such a transferee is required to 
withhold a full 10 percent of the amount realized from the consideration 
that remains to be paid to the transferor. Thus, if 10 percent or more 
of the amount realized remains to be paid to the transferor, then the 
transferee is required to withhold and pay over the full 10 percent. The 
transferee must do so by withholding and paying over the entire amount 
of each successive payment of consideration to the transferor, until the 
full 10 percent of the amount realized has been withheld and paid over. 
Amounts so withheld must be reported and paid over by the 20th day 
following the date on which each such payment of consideration is made. 
A transferee that is subject to the rules of this Sec. 1.1445-
10T(d)(2)(iii) may not obtain a withholding certificate pursuant to 
Sec. 1.1445-3, but must instead withhold and pay over the amounts 
required by this paragraph.

[[Page 129]]

    (e) Effective date. The rules of this section are effective for 
transactions after June 6, 1988.

[T.D. 8198, 53 FR 16231, May 5, 1988]

                         TAX-FREE COVENANT BONDS



Sec. 1.1451-1   Tax-free covenant bonds issued before January 1, 1934.

    (a) Rates of withholding--(1) Rate of 2 percent. Withholding of a 
tax equal to 2 percent is required in the case of interest upon bonds or 
other corporate obligations containing a tax-free covenant and issued 
before January 1, 1934, paid to an individual, a fiduciary, or a 
partnership, whether resident or nonresident, or to a nonresident 
foreign corporation, regardless of whether the liability assumed by the 
obligor is less than, equal to, or greater than 2 percent.
    (2) Rate of 30 percent. Notwithstanding subparagraph (1) of this 
paragraph, if the liability assumed by the obligor does not exceed 2 
percent of the interest, withholding is required at the rate of 30 
percent in the case of payments to a nonresident alien individual, a 
nonresident partnership composed in whole or in part of nonresident 
aliens, a nonresident foreign corporation, or an owner who is unknown to 
the withholding agent.
    (3) Obligations of resident payers. The rates of withholding 
specified in subparagraphs (1) and (2) of this paragraph are applicable 
to interest on such tax-free covenant bonds issued by a domestic 
corporation or by a resident foreign corporation.
    (4) Obligations of nonresident payers. A nonresident foreign 
corporation having a fiscal or paying agent in the United States is 
required to withhold a tax of 2 percent in the case of interest upon its 
tax-free covenant bonds issued before January 1, 1934, which is paid to 
an individual or fiduciary who is a citizen or resident of the United 
States, to a partnership any member of which is a citizen or resident, 
or to an unknown owner.
    (5) Interest from sources without the United States. Withholding is 
not required under section 1451 in the case of interest upon bonds or 
other corporate obligations issued before January 1, 1934, and 
containing a tax-free covenant if the interest is not to be treated as 
income from sources within the United States and the payments are made 
to a nonresident alien, a partnership composed wholly of nonresident 
aliens, or a nonresident foreign corporation.
    (6) Tax treaties. The rates of tax to be withheld in accordance with 
this paragraph shall be reduced as may be provided by treaty with any 
country. See section 894 and Sec. 1.1441-6 relating to income subject to 
a reduced rate of, or an exemption from, income tax pursuant to an 
income tax convention.
    (b) Date of issue. The withholding provisions of section 1451 are 
applicable only to bonds, mortgages, or deeds of trust, or other similar 
obligations of a corporation which were issued before January 1, 1934, 
and which contain a tax-free covenant. For the purpose of section 1451, 
bonds, mortgages, or deeds of trust, or other similar obligations of a 
corporation, are issued when delivered. If a broker or other person acts 
as selling agent of the obligor, the obligation is issued when delivered 
by the agent to the purchaser. If a broker or other person purchases the 
obligation outright for the purpose of holding or reselling it, the 
obligation is issued when delivered to such broker or other person.
    (c) Extended maturity date. In cases where on or after January 1, 
1934, the maturity date of bonds or other obligations of a corporation 
is extended, the bonds or other obligations shall be considered to have 
been issued on or after January 1, 1934. The interest on such 
obligations is not subject to the withholding provisions of section 1451 
but falls within the class of interest described in section 1441. See 
paragraph (c)(5)(iii) of Sec. 1.1441-3.
    (d) Covenant in trust deed. Bonds issued under a trust deed 
containing a tax-free covenant are treated as if they contain such a 
covenant. If neither the bonds nor the trust deeds given by the obligor 
to secure them contained a tax-free covenant, but the original trust 
deeds were modified before January 1, 1934, by supplemental agreements 
containing a tax-free covenant executed by the obligor corporation and 
the trustee, the bonds issued before January 1, 1934, are subject to the 
provisions of

[[Page 130]]

section 1451, provided appropriate authority existed for the 
modification of the trust deeds in this manner. The authority must have 
been contained in the original trust deeds or actually secured from the 
bondholders.
    (e) Notation showing date of issue. In order that the date of issue 
of bonds, mortgages, deeds of trust, or other similar corporate 
obligations containing a tax-free covenant may be readily determined by 
the owner for the purpose of preparing the ownership certificates 
required by Sec. 1.1461-1, the issuing or debtor corporation shall 
indicate the date of issue by an appropriate notation, or use the phrase 
``issued on or after January 1, 1934,'' on each such obligation or in a 
statement accompanying the delivery of the obligation.
    (f) Effect of withholding on income taxes of bondholder and issuing 
corporation--(1) Federal tax. In the case of corporate bonds or other 
corporate obligations issued before January 1, 1934, and containing a 
tax-free covenant, the corporation paying a Federal tax, or any part of 
it, for someone else pursuant to its agreement is not entitled to deduct 
such payment from its gross income on any ground; nor shall the tax so 
paid be included in the gross income of the bondholder. The amount of 
the tax so paid may, nevertheless, be claimed by the bondholder in 
accordance with paragraph (a) of Sec. 1.1462-1 as a credit against the 
total amount of income tax due. See also section 32. The tax so paid by 
the corporation upon tax-free covenant bond interest payable to a 
domestic or resident fiduciary and allocable to any nonresident alien 
beneficiary under section 652 or 662 is allowable, pro rata, as a credit 
against:
    (i) The tax required to be withheld by the fiduciary in accordance 
with paragraph (f) of Sec. 1.1441-3 from the income of the beneficiary, 
and
    (ii) The total income tax computed in the return of the beneficiary, 
as indicated in paragraph (a) of Sec. 1.1462-1.
    (2) State taxes. In the case of corporate bonds or other obligations 
containing an appropriate tax-free covenant, the corporation paying for 
someone else, pursuant to its agreement, a State tax or any tax other 
than a Federal tax may deduct such payment as interest paid on 
indebtedness.
    (g) Alien resident of Puerto Rico. For purposes of this section the 
term ``nonresident alien individual'' includes an alien resident of 
Puerto Rico.
    (h) Other rules for withholding of tax under section 1451. The rules 
for withholding stated in paragraphs (c) (2) and (3), (f), and (g) of 
Sec. 1.1441-3 shall also apply for purposes of withholding the tax under 
this section.

[T.D. 6500, 25 FR 12076, Nov. 26, 1960, as amended by T.D. 7157, 36 FR 
25228, Dec. 30, 1971]



Sec. 1.1451-2   Exemptions from withholding under section 1451.

    (a) Claiming personal exemptions. Withholding under Sec. 1.1451-1 
from interest on bonds or other obligations of corporations issued 
before January 1, 1934, and containing a tax-free covenant shall not be 
required if there is filed with the withholding agent when presenting 
coupons for payment, or not later than February 1 of the following year, 
an ownership certificate on Form 1000 stating:
    (1) In the case of a citizen or resident of the United States, that 
his taxable income does not exceed his deductions for personal 
exemptions allowed under section 151; or
    (2) In the case of an estate or trust the fiduciary of which is a 
citizen or resident of the United States, that its taxable income does 
not exceed the deduction for the personal exemption allowed under 
section 642(b).
    (b) Claiming residence in United States. To claim residence in the 
United States for purposes of section 1451, see Sec. 1.1441-5.
    (c) Other exemptions. The exemptions allowed by paragraphs (d) and 
(h) of Sec. 1.1441-4 shall also apply for purposes of section 1451.

[T.D. 6500, 25 FR 12077, Nov. 26, 1960, as amended by T.D. 6908, 31 FR 
16774, Dec. 31, 1966]

                  APPLICATION OF WITHHOLDING PROVISIONS



Sec. 1.1461-1   Ownership certificates for bond interest.

    (a) Tax-free covenant bond interest of citizens and residents of the 
United

[[Page 131]]

States. Citizens, resident individuals, fiduciaries, and partnerships, 
and nonresident partnerships all of the members of which are citizens or 
residents, owning bonds, mortgages, or deeds of trust, or other similar 
obligations issued by a domestic corporation, a resident foreign 
corporation, or a nonresident foreign corporation having a fiscal or 
paying agent in the United States, shall, when presenting interest 
coupons for payment, file ownership certificates for each issue of such 
obligations issued before January 1, 1934, and containing a tax-free 
covenant. This rule shall apply without regard to the amount of the 
interest coupons.
    (b) Nonresident aliens and foreign corporations. (1) Nonresident 
alien individuals, foreign partnerships, foreign corporations, and 
unknown owners, owning bonds, mortgages, or deeds of trust, or other 
similar obligations of a corporation, shall, when presenting interest 
coupons for payment, file ownership certificates for each issue of all 
such obligations whether or not the obligation contains a tax-free 
covenant. This rule shall apply without regard to the amount of the 
interest coupons and without regard to the date on which the obligations 
were issued.
    (2) Ownership certificates shall also be filed in the case of 
interest paid on obligations of the United States or of any agency or 
instrumentality thereof, irrespective of the date on which the 
obligations are issued or of the amount of the interest, if the 
obligations are owned by a nonresident alien individual, foreign 
partnership, foreign corporation, or an unknown owner.
    (3) Notwithstanding subparagraphs (1) and (2) of this paragraph, 
ownership certificates are not required to be filed by:
    (i) A nonresident alien individual, foreign partnership, or foreign 
corporation, engaged in a trade or business in the United States during 
the taxable year, if the interest is effectively connected with the 
conduct of a trade or business within the United States by such person 
and is exempted from withholding under section 1441 or section 1442 by 
reason of paragraph (a) of Sec. 1.1441-4,
    (ii) A nonresident alien individual, a foreign corporation, or a 
foreign partnership composed wholly of nonresident alien individuals and 
foreign corporations, if the interest is treated under section 861(a)(1) 
and the regulations thereunder as income not from sources within the 
United States, or
    (iii) A foreign partnership or foreign corporation engaged in trade 
or business in the United States during the taxable year, with respect 
to interest which is exempted from withholding under section 1441 or 
1442 by reason of paragraph (f) of Sec. 1.1441-4.
    (4) See Sec. 1.1441-6 in case of coupon bond interest which is 
subject to a reduced rate of, or an exemption from, tax pursuant to a 
tax convention.
    (c) Overdue coupon bonds. In the case of interest payments on 
overdue coupon bonds, the interest coupons of which have been exhausted, 
ownership certificates are required to be filed when collecting the 
interest in the same manner as if interest coupons were presented for 
collection.
    (d) Information shown on ownership certificate. The ownership 
certificate shall include such information as is required by the form 
and accompanying instructions. This paragraph shall apply to all special 
variations of Form 1001 referred to in paragraph (i) of this section.
    (e) Ownership certificates not required. Ownership certificates are 
not required to be filed in the case of interest payments on:
    (1) Obligations of a State, Territory, or possession of the United 
States, or any political subdivision of any of the foregoing, or of the 
District of Columbia;
    (2) Bonds, mortgages, or deeds of trust, or other similar 
obligations issued by an individual or a partnership; and
    (3) Obligations owned by a domestic corporation or foreign 
government.
    (f) Interest coupons unaccompanied by ownership certificates. (1) 
When interest coupons detached from corporate bonds, or from obligations 
of the United States or of any agency or instrumentality thereof, are 
received unaccompanied by ownership certificates, the first bank to 
which the coupons are presented for payment shall require of the payee a 
statement showing the name and address of the person from

[[Page 132]]

whom the coupons were received by the payee and alleging that the owner 
of the bonds is unknown to the payee. This rule shall not apply if the 
owner of the bonds is known to the bank and the bank is satisfied that 
the owner is a person who is not required to file an ownership 
certificate.
    (2) The bank shall also require the payee to prepare an ownership 
certificate on Form 1001, which shall be modified by crossing out 
``owner,'' inserting ``payee,'' stamping or writing across the face of 
the certificate ``Statement furnished,'' and adding the name of the 
bank.
    (3) The statement furnished pursuant to this paragraph shall be 
forwarded to the Internal Revenue Service Center, Philadelphia, PA 19255 
with the annual return on Form 1042.
    (g) Noncoupon bonds--(1) General rule. Ownership certificates on 
Form 1000 or, in case of payments made on or before December 31, 1971, 
on Form 1001, are required in connection with interest payments on 
noncoupon bonds as in the case of coupon bonds. If an ownership 
certificate is not furnished by the owner of a noncoupon bond, the 
certificate shall be prepared by the withholding agent but is not 
required to be signed by the owner.
    (2) Application of tax treaties. Ownership certificates are not 
required when claiming the benefit of an exemption from tax, or reduced 
rate of tax, granted by an applicable tax convention in respect of 
interest payments on noncoupon bonds. Regulations under the various 
income tax conventions require, in lieu of an ownership certificate, the 
use of an exemption (or reduced rate) certificate (or corresponding 
letter) in the case of such interest payments. These regulations are 
effective with respect to payments made prior to December 31, 1974, if 
such certificate was filed with respect to such income prior to December 
31, 1971. Such a certificate may not be prepared by the withholding 
agent but must be signed by the owner of the interest, or by his trustee 
or agent in accordance with the applicable tax treaty regulation. See 
Sec. 1.1441-6 for requirements with respect to payments to which such 
certificates do not apply.
    (h) Form of ownership certificate for citizens and residents. Form 
1000 shall be used in preparing ownership certificates of individuals or 
fiduciaries who are citizens or residents of the United States, of 
resident partnerships, and of nonresident partnerships all of the 
members of which are citizens or residents. If the obligations are 
issued by a nonresident foreign corporation having a fiscal or paying 
agent in the United States, Form 1000 shall be modified to show the name 
and address of the fiscal agent or the paying agent in addition to the 
name and address of the debtor corporation. Duplicate copies of Form 
1000 are not required.
    (i) Form of ownership certificate for nonresident aliens and foreign 
corporations. Form 1001 shall be used in preparing ownership 
certificates of nonresident alien individuals, foreign partnerships, 
foreign corporations, and unknown owners. For payments of interest made 
prior to December 31, 1971, a special variation of Form 1001 (designated 
by a letter or letters following the number 1001) shall be used, 
however, in preparing ownership certificates of persons claiming the 
benefit of an exemption from tax, or reduced rate of tax, granted by an 
applicable income tax convention in respect of interest payments on 
coupon bonds. See the applicable tax treaty regulation and paragraph (d) 
of this section. Form 1001, and the special variations of such form, for 
payments of interest made before December 31, 1971, shall be filed in 
duplicate. Form 1001, for payments of interest made on or after January 
1, 1972, shall be retained by the withholding agent for at least 4 years 
after the interest is paid.
    (j) Ownership certificates in the case of fiduciaries and joint 
owners. (1) Fiduciaries having the control and custody of more than one 
estate or trust, the assets of which include bonds of corporations and 
other securities, shall execute a certificate of ownership for each 
estate or trust even though the bonds are of the same issue. The 
ownership certificate shall show both the name of the estate or trust 
and the name and address of the fiduciary.
    (2) Separate ownership certificates shall be executed in behalf of 
each person owning bonds jointly with another.

[[Page 133]]

    (k) Inconsistent regulations. All regulations inconsistent with the 
provisions of this section shall be deemed to have been modified 
accordingly.

(Approved by the Office of Management and Budget under control number 
1545-0795)

(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80 
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C. 
7805) of the Internal Revenue Code of 1954)

[T.D. 6500, 25 FR 12077, Nov. 26, 1960, as amended by T.D. 6908, 31 FR 
16774, Dec. 31, 1966; T.D. 7157, 36 FR 25228, Dec. 30, 1971; T.D. 7977, 
49 FR 36835, Sept. 20, 1984]



Sec. 1.1461-2  Return of tax withheld.

    (a) Effective date. This section shall apply only with respect to 
payments of income occurring after December 31, 1966.
    (b) Form 1042--(1) Filing requirement. Every withholding agent shall 
make on or before March 15 an annual return on Form 1042 of the tax 
required to be withheld under chapter 3 of the Code during the preceding 
calendar year. Form 1042 is required to be made in respect of a calendar 
year, even though no tax was required to be withheld under such chapter 
during such year, if the withholding agent is required by paragraph 
(c)(1) of this section to make an information return on Form 1042S with 
respect to any payments made during such year. Form 1042 shall be filed 
with the Internal Revenue Service Center, Philadelphia, PA. 19255. The 
return shall be prepared in duplicate and shall include such information 
as is required by the form and accompanying instructions. If an 
adjustment is required on Form 1042 because of repayments of withheld 
tax pursuant to paragraph (a)(1) of Sec. 1.1461-4, only the aggregate 
amount of such adjustment shall be shown thereon and no itemized 
explanation of such aggregate amount shall be required to accompany such 
form. See paragraph (b) of Sec. 1.1461-4. If, pursuant to paragraph 
(a)(2) of Sec. 1.1461-3, any additional amount of tax is required to be 
paid to the Internal Revenue Service Center, Philadelphia, PA. for the 
preceding calendar year when filing Form 1042, no itemized explanation 
of such additional payment of tax shall be required to accompany such 
form. The duplicate copy of Form 1042 shall be retained by the 
withholding agent.
    (2) Summary of accompanying forms. Form 1042 shall be accompanied by 
the original copies of all Forms 1042S which were prepared by the 
withholding agent during the previous calendar year, including such 
forms upon which income exempt from withholding of tax is reported. The 
forms so forwarded with Form 1042 are not required to be listed thereon; 
but they shall be summarized on Form 1042 in the manner prescribed 
thereon and in the instructions applicable thereto. The exemption and 
reduced rate certificates, such as Form 1001A-D or Form 1001A-J, 
referred to in paragraph (g)(2) of Sec. 1.1461-1 are not required to 
accompany, or to be summarized on, Form 1042.
    (c) Form 1042S--(1) Filing requirement. Every withholding agent 
shall make on or before March 15 an annual information return on Form 
1042S of all items of income specified in Sec. 1.1441-2 paid during the 
previous calendar year to nonresident alien individuals, foreign 
partnerships, nonresident alien or foreign fiduciaries of a trust or 
estate, or foreign corporations if such items consist of--
    (i) Amounts upon which tax would have been required to be withheld 
under chapter 3 of the Code,
    (ii) Amounts upon which tax would have been required to be withheld 
under such chapter but for an exclusion from gross income applicable 
under any income tax treaty to which the United States is a party,
    (iii) Amounts upon which tax would have been required to be withheld 
under such chapter but for the provisions of any specific complete or 
partial exemption from withholding applicable under the authority of any 
regulation under this title or any ruling or procedure of the 
Commissioner, or
    (iv) Amounts in respect of which tax withheld under such chapter 
has, pursuant to such authority, been released or refunded to the payee 
by the withholding agent.

All amounts shall be shown in U.S. currency. Notwithstanding 
subdivisions (i) through (iv) of this subparagraph (1), income paid to 
nonresident alien individual, foreign partnerships, nonresident alien or 
foreign fiduciaries of

[[Page 134]]

a trust or estate, or foreign corporations and required to be shown on 
Form W-2, or in the case of income paid prior to January 1, 1972, on 
Form 1001 (or on any special variation of Form 1001 referred to in 
paragraph (i) of Sec. 1.1461-1, or the substitute thereof) is not 
required to be shown on Form 1042S. However, a return under this 
subparagraph is required on Form 1042S (rather than on Form W-2) in 
respect of amounts which otherwise would be required to be shown on Form 
W-2 solely by reason of Sec. 1.6041-2 (relating to return of information 
as to payments to employees) or Sec. 1.6052-1 (relating to information 
regarding payment of wages in the form of group-term life insurance). 
The original Form 1042S shall accompany Form 1042 and shall be filed 
with the Internal Revenue Service Center, Philadelphia, PA 19255.
    (2) Information to be furnished. (i) Form 1042S shall include such 
information as is required by the form and accompanying instructions.
    (ii) If a Form 1042S is prepared in respect of an item of income 
upon which tax has not been withheld under chapter 3 of the Code, a 
brief statment as to the authority for such failure to withhold shall be 
made upon the form itself. If necessary, however, a separate statement 
as to such authority may be attached to the original copy of the Form 
1042S.
    (iii) If a Form 1042S is prepared in respect of compensation from 
which the personal exemption is deducted in accordance with paragraph 
(e) of Sec. 1.1441-3, the amount of the compensation allocable to labor 
or personal services performed within the United States, together with 
the amount of the deduction for the prorated personal exemption, shall 
be shown on a separate statement attached to the original copy of that 
form.
    (iv) If any certificate, statement, letter, or form relating to an 
exemption (as described in Sec. 1.1441-4) is filed with or presented to 
a withholding agent, such certificate, statement, letter, or form shall 
be attached to each Form 1042S relating to the income subject to the 
exemption.
    (3) Manner of preparing Form 1042S. (i) Form 1042S shall be prepared 
with respect to all payments of any item of income made during the 
calendar year to the same payee in the manner prescribed by the form and 
accompanying instructions. Payment of an item of income to a nominee or 
representative for the benefit of other persons in respect of whom Form 
1042S are required may not be shown on a single Forms 1042S but must be 
identified with the ultimate recipients of the income if such 
information is known to the payer of the income.
    (ii) The duplicate copy of Form 1042S shall be furnished to the 
payee indicated thereon, and a copy shall be retained by the withholding 
agent.
    (4) Alternative methods. To the extent that the withholding agent's 
system of record keeping makes impractical the use of Form 1042S in the 
manner prescribed by paragraph (c)(3) of this section, he may devise and 
submit for the prior annual approval of the Commissioner a variation of 
Form 1042S which will include the information required by paragraph 
(c)(2) of this section and which will substantially comply with the 
requirements of paragraph (c)(3) of this section. Request for such 
approval shall be sent to: Internal Revenue Service, Attn: Substitute 
Forms Program, 1111 Constitution Avenue, NW., Washington, DC 20224 and 
shall be accompanied by an explanation as to why such variation is 
necessary.
    (d) Information to be furnished by Commissioner. If a foreign 
country has entered into an income tax treaty with the United States 
which provides for the mutual exchange of information, the Commissioner 
shall, as soon as practicable after the close of a calendar year during 
which the treaty is in effect, transmit to the appropriate authority 
designated in the treaty with that country the information contained in 
Forms 1042S showing a payee with an address in the country. This 
information is not to be furnished to any such foreign country, however, 
if the Commissioner ascertains through appropriate channels that the 
information is not required by that country.
    (e) Penalties. For penalties and additions to the tax attaching upon 
failure to comply with this section, see sections 6651, 6656, 6676, and 
7203.
    (f) Special items. The tax withheld in accordance with paragraphs 
(b)(1),

[[Page 135]]

(c)(3), and (d)(1) of Sec. 1.1441-3 shall be returned and paid in 
accordance with this section even though the items involved may not 
constitute gross income in whole or in part. For such purpose, a 
reference in this section to an item or amount of income shall, where 
appropriate, be deemed to refer also to the items specified in such 
paragraphs or the amount thereof.
    (g) Inconsistent regulations. All regulations inconsistent with the 
provisions of this section shall be deemed to have been modified 
accordingly.

(Approved by the Office of Management and Budget under control number 
1545-0795)

(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80 
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C. 
7805) of the Internal Revenue Code of 1954)

[T.D. 6500, 25 FR 12078, Nov. 26, 1960, as amended by T.D. 6922, 32 FR 
8711, June 17, 1967; T.D. 7157, 36 FR 25228, Dec. 30, 1971; T.D. 7977, 
49 FR 36835, Sept. 20, 1984]



Sec. 1.1461-3   Payment of withheld tax.

    (a) Payments of tax--(1) Quarterly payments--(i) Years prior to 
1973. Every withholding agent who, pursuant to chapter 3 of the Code, 
withholds tax during any calendar quarter beginning after December 31, 
1966, and ending on or before December 31, 1972, shall, to the extent 
such amounts have not been deposited pursuant to Sec. 1.6302-2 with a 
Federal Reserve bank or an authorized commercial bank, pay such withheld 
tax to the Internal Revenue Service Center, Philadelphia, PA 19255, on 
or before the last day of the first calendar month following the close 
of the calendar quarter. Any amounts required to be paid to the Director 
pursuant to this subdivision shall be made with quarterly transmittal 
Form 4277, even though the withholding agent has made no deposits 
pursuant to paragraph (a)(2) of Sec. 1.6302-2 and has no validated 
depositary receipts to accompany that transmittal form.
    (ii) 1973 and subsequent years. Payments are not required to be made 
for calendar quarters ending after December 31, 1972.
    (2) Payment of balance of tax with Form 1042. If for any reason the 
total amount of tax required to be returned for any calendar year 
pursuant to paragraph (b) of Sec. 1.1461-2 has not been deposited 
pursuant to Sec. 1.6302-2 (or, for years prior to 1973 deposited 
pursuant to Sec. 1.6302-2 or paid pursuant to subparagraph (1) of this 
paragraph), the withholding agent shall pay the balance of tax due for 
such year to the Internal Revenue Service Center, Philadelphia, PA 
19255, when filing Form 1042 for such year.
    (b) Penalties for failure to pay tax. For penalties and additions to 
the tax for failure to pay the tax required to be withheld under chapter 
3 of the Code, see sections 6653 and 7202.
    (c) Deposits of tax. For provisions relating to the use of Federal 
Reserve banks or authorized financial institutions for the deposit of 
tax required to be withheld under chapter 3 of the Code, see 
Sec. 1.6302-2.

(Approved by the Office of Management and Budget under control number 
1545-0257)

[T.D. 6922, 32 FR 8712, June 17, 1967, as amended by T.D. 7243, 38 FR 
21, Jan. 3, 1973; T.D. 7953, 49 FR 19644, May 9, 1984; T.D. 7977, 49 FR 
36836, Sept. 20, 1984]



Sec. 1.1461-4  Adjustments for overwithholding of tax.

    (a) Repayment of erroneously withheld tax after payment of tax by 
withholding agent--(1) Repayment of tax to payee. If, in any payment 
period (as defined in paragraph (c) of this section) occurring in a 
calendar year, a withholding agent (i) withholds from amounts paid to 
any person more than the correct amount of tax required to be withheld 
under chapter 3 of the Code and (ii) makes a deposit of the amount of 
such overwithholding as provided in Sec. 1.6302-2 (or, for years prior 
to 1973, makes a payment or deposit of the amount of such 
overwithholding as provided in Sec. 1.1461-3 or Sec. 1.6302-2), the 
withholding agent may repay such amount, at any time before filing Form 
1042 for such calendar year, to the person from whose income such amount 
was withheld.
    (2) Reimbursement of payee. If the withholding agent does not repay 
the amount of the overwithholding pursuant to subparagraph (1) of this 
paragraph, the withholding agent may reimburse the person entitled to 
such amount by applying the amount of the overwithholding against any 
tax which otherwise would be required under

[[Page 136]]

chapter 3 of the Code to be withheld from income paid by the withholding 
agent to such person before filing Form 1042 for the calendar year in 
which such overwithholding occurred. For purposes of making a return on 
Form 1042 and for purposes of making a payment or deposit of the amount 
withheld, the reduced amount so withheld shall be considered the amount 
required to be withheld from such income under chapter 3 of the Code.
    (b) Adjustment of tax payments or deposits. If, pursuant to 
paragraph (a)(1) of this section, a withholding agent repays a person 
the amount of tax overwithheld from such person under Chapter 3 of the 
Code during any payment period of the calendar year, the withholding 
agent may reduce, by the amount so overwithheld, the amount of any 
deposit of tax required by paragraph (a) of Sec. 1.6302-2 (or, for years 
prior to 1973, the amount of any payment or deposit of tax required by 
Sec. 1.1461-3 or paragraph (a) of Sec. 1.6302-2) to be made by the 
withholding agent for any subsequent payment period occurring before the 
end of the calendar year following the calendar year of overwithholding. 
The reduction of a payment or deposit of tax for a payment period 
occurring in the calendar year following the calendar year of 
overwithholding shall be made only if the withholding agent files, on 
his Form 1042 for the calendar year of overwithholding, a claim for 
credit in accordance with paragraph (b) of Sec. 1.6414-1. The 
application of this paragraph may be illustrated by the following 
examples:

    Example (1). (a) A is a nonresident alien individual who is a 
resident of the United Kingdom. In December 1973, a domestic corporation 
M pays a dividend of $100 to A, at which time M Corporation withholds 
$30 and remits the balance of $70 to A. On February 16, 1974, A advises 
M Corporation that, pursuant to the income tax convention with the 
United Kingdom, only $15 tax should have been withheld from the $100 
dividend and requests repayment of the $15 which was erroneously 
withheld. Although M Corporation has already deposited the $30 which was 
withheld, as permitted by paragraph (a)(1)(iv) of Sec. 1.6302-2, such 
corporation repays A in the amount of $15.
    (b) During 1973 M Corporation makes no other payments upon which tax 
is required to be withheld under Chapter 3 of the Code; accordingly, its 
return on Form 1042 for such year, which is filed on March 15, 1974, 
shows total tax withheld of $30, which is reduced by an adjustment of 
$15 for the amount repaid to A, an adjusted total tax withheld of $15, 
and $30 previously paid for such year. Pursuant to paragraph (b) of 
Sec. 1.6414-1, M Corporation claims credit for the overpayment of $15 
shown on the Form 1042 for 1973. Accordingly, it is permitted to reduce 
by $15 any deposit required by Sec. 1.6302-2 to be made of tax withheld 
during 1974. The Form 1042S required to be filed by M Corporation with 
respect to the dividend of $100 paid to A in 1973 is required to show 
tax withheld of $30 and tax released of $15. The Form 1042S (or 
authorized substitute) is required to accompany the Form 1042 for 1973 
which is filed on March 15, 1974. No additional explanation is required 
to be filed with the Form 1042 for 1973 in support of the $15 adjustment 
claimed thereon.
    (c) During 1974 M Corporation is required to withhold under chapter 
3 of the Code $200, all of such amount being withheld in June of that 
year. Pursuant to Sec. 1.6302-2, M Corporation deposits on July 15, 
1974, the amount of $185, that is, $200 less the $15 for which credit is 
claimed on the Form 1042 for 1973. On March 17, 1975, M Corporation 
files its return on Form 1042 for 1974, which shows total tax withheld 
of $200, $185 previously deposited by M Corporation, and $15 allowable 
credit.
    Example (2). The facts are the same as in example (1) except that 
paragraph (c) of such example does not apply and that M Corporation is 
required to deposit on a quarter-monthly basis the tax withheld under 
chapter 3 of the Code. M Corporation withholds tax of $100 between 
February 22, and February 28, 1974, and complies with the quarter-
monthly deposit requirement of paragraph (a)(1)(ii) of Sec. 1.6302-2 by 
depositing $75 [(100 x 90 percent) less $15] of the withheld tax by 
March 5, 1974 (3 banking days after February 28, 1974) and by depositing 
$10 [($100-$15) less $75] by March 20, 1974 (3 banking days after March 
15, 1974).

    (c) Definition--(1) 1973 and subsequent years. For purposes of this 
section, for calendar years beginning on or after January 1, 1973, the 
term payment period means a calendar month or a quarter-monthly period 
(as the case may be) in such a calendar year with respect to which the 
withholding agent is required by paragraph (a)(1) of Sec. 1.6302-2 to 
make a deposit of tax withheld under Chapter 3 of the Code.
    (2) Years prior to 1973. For the purposes of this section, for 
calendar years ending on or before December 31, 1972, the term payment 
period means (i)(a) a calendar month or (b) a semimonthly

[[Page 137]]

period (as the case may be) in such a calendar year with respect to 
which the withholding agent is required by paragraph (a)(2) of 
Sec. 1.6302-2 to make a deposit of tax withheld under Chapter 3 of the 
Code, or (ii) a calendar quarter in such a calendar year with respect to 
which he is required by paragraph (a)(1) of Sec. 1.1461-3 to make a 
payment of such tax.

[T.D. 6922, 32 FR 8712, June 17, 1967, as amended by T.D. 7243, 38 FR 
22, Jan. 3, 1973]



Sec. 1.1462-1   Withheld tax as credit to recipient of income.

    (a) Return of income from which tax was withheld. The entire amount 
of the income from which the tax is required to be withheld shall be 
included in gross income in the return required to be made by the 
recipient of the income, without deduction for the amount required to be 
withheld, but the tax so withheld shall be allowed as a credit against 
the total income tax computed in the taxpayer's return.
    (b) Amounts paid to fiduciaries. Tax withheld at the source under 
chapter 3 of the Code upon income paid to any fiduciary is deemed to 
have been paid by the taxpayer ultimately liable for the tax upon such 
income. Thus, for example, if any taxpayer is subject to the taxes 
imposed by section 1, 2, 3, or 11 upon any portion of the income of a 
nonresident alien estate or trust, the part of any tax withheld at the 
source which is properly allocable to the income so taxed to such 
taxpayer shall be credited against the amount of the income tax computed 
upon the taxpayer's return, and any excess shall be credited against any 
income, war profits, or excess profits tax, or installment thereof, then 
due from the taxpayer, and any balance shall be refunded.

(Approved by the Office of Management and Budget under control number 
1545-0795)

(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80 
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C. 
7805) of the Internal Revenue Code of 1954)

[T.D. 6500, 25 FR 12080, Nov. 26, 1960, as amended by T.D. 7977, 49 FR 
36836, Sept. 20, 1984]



Sec. 1.1463-1   Tax paid by recipient of income.

    If the tax required to be withheld under chapter 3 of the Code is 
paid by the recipient of the income or by the withholding agent, it 
shall not be recollected from the other, regardless of the original 
liability therefor; and, in such event, no penalty will be asserted 
against either person for failure to return or pay the tax where no 
fraud or purpose to evade payment is involved.

[T.D. 6500, 25 FR 12081, Nov. 26, 1960]



Sec. 1.1464-1   Refunds or credits.

    (a) In general. The refund or credit under chapter 65 of the Code of 
an overpayment of tax which has actually been withheld at the source 
under chapter 3 of the Code shall be made to the taxpayer from whose 
income the amount of such tax was in fact withheld. To the extent that 
the overpayment under chapter 3 was not in fact withheld at the source, 
but was paid, by the withholding agent the refund or credit under 
chapter 65 of the overpayment shall be made to the withholding agent. 
Thus, where a debtor corporation assumes liability pursuant to its tax-
free covenant for the tax required to be withheld under chapter 3 upon 
interest and pays the tax in behalf of its bondholder, and it can be 
shown that the bondholder is not in fact liable for any tax, the 
overpayment of tax shall be credited or refunded to the withholding 
agent in accordance with chapter 65 since the tax was not actually 
deducted and withheld from the interest paid to the bondholder. In 
further illustration, where a withholding agent who is required by 
chapter 3 to withhold $300 tax from rents paid to a nonresident alien 
individual mistakenly withholds $320 and mistakenly pays $350 as 
internal revenue tax, the amount of $30 shall be credited or refunded to 
the withholding agent in accordance with chapter 65 and the amount of 
$20 shall be credited or refunded in accordance with such chapter to the 
person from whose income such amount has been withheld.
    (b) Tax repaid to payee. For purposes of this section and 
Sec. 1.6414-1, any amount of tax withheld under chapter 3

[[Page 138]]

of the Code, which, pursuant to paragraph (a)(1) of Sec. 1.1461-4, is 
repaid by the withholding agent to the person from whose income such 
amount was erroneously withheld shall be considered as tax which, within 
the meaning of sections 1464 and 6414, was not actually withheld by the 
withholding agent.

[T.D. 6922, 32 FR 8713, June 17, 1967]



    Rules Applicable to Recovery of Excessive Profits on Government 
                                Contracts

          RECOVERY OF EXCESSIVE PROFITS ON GOVERNMENT CONTRACTS



Sec. 1.1471-1   Recovery of excessive profits on government contracts.

    The inclusion of the statutory provisions of section 1471 in this 
part does not supersede the provisions of 26 CFR (1939) part 17 
(Treasury Decision 4906) and 26 CFR (1939) part 16 (Treasury Decision 
4909) as made applicable to section 1471 by Treasury Decision 6091 (19 
FR 5167, C.B. 1954-2, 47).

[T.D. 6500, 25 FR 12081, Nov. 26, 1960]

    Editorial Note: For the convenience of the user, the text of parts 
16 and 17 (not entirely superseded) of 26 CFR (1939) referred to above 
is set forth below:

         Part 16--Excess Profits on Army Contracts for Aircraft

  Regulations Under Section 14 of the Act of April 3, 1939, and Other 
                               Provisions

    Authority: Sections 16.1 to 16.18 issued under 52 Stat. 467; 26 
U.S.C. 3791. Interpret or apply sec. 3, 48 Stat. 505, as amended, sec. 
14, 53 Stat. 560; 34 U.S.C. 496, 10 U.S.C. 311, 312.

    Source: Sections 16.1 to 16.18 contained in T.D. 4909, 4 FR 2733, 
July 1, 1939, except as otherwise noted.

    Sec. 16.1 Definitions. As used in the regulations in this part the 
term:
    (a) ``Act'' means the act of April 3, 1939 (53 Stat. 560; 10 U.S.C. 
311, 312, 34 U.S.C. 496), together with the applicable provisions of 
section 3 of the act of March 27, 1934, 48 Stat. 505; 34 U.S.C. 496, as 
amended by the act of June 25, 1936, 49 Stat. 1926; 34 U.S.C., Sup. IV, 
496, and as further amended by the act of April 3, 1939 (53 Stat. 560; 
34 U.S.C. 496).
    (b) ``Person'' includes an individual, a corporation, a partnership, 
a trust or estate, a joint-stock company, an association, or a 
syndicate, group, pool, joint venture or other unincorporated 
organization or group, through or by means of which any business, 
financial operation or venture is carried on.
    (c) ``Contract'' means an agreement made by authority of the 
Secretary of the Army for the construction or manufacture of any 
complete aircraft or any portion thereof for the Army.
    (d) ``Contractor'' means a person entering into a direct contract 
with the Secretary of the Army or his duly authorized representative.
    (e) ``Subcontract'' means an agreement entered into by one person 
with another person for the construction or manufacture of any complete 
aircraft or any portion thereof for the Army, the prime contract for 
such aircraft or portion thereof having been entered into between a 
contractor and the Secretary of the Army or his duly authorized 
representative.
    (f) ``Subcontractor'' means any person other than a contractor 
entering into a subcontract.
    (g) ``Contracting party'' means a contractor or subcontractor as the 
case may be.
    (h) ``Contract price'' or ``total contract price'' means the amount 
or total amount to be received under a contract or subcontract as the 
case may be.
    (i) ``Income-taxable year'' means the calendar year, the fiscal year 
ending during such calendar year, or the fractional part of such 
calendar or fiscal year, upon the basis of which the contracting party's 
net income is computed and for which its income tax returns are made for 
Federal income tax purposes.
    Sec. 16.2 Contracts and subcontracts under which excess profit 
liability may be incurred. Except as otherwise provided with respect to 
contracts or subcontracts for certain scientific equipment (see 
Sec. 16.3), every contract awarded for an amount exceeding $10,000 and 
entered into after the enactment of the act of April 3, 1939 for the 
construction or manufacture of any complete aircraft or any portion 
thereof for the Army, is subject to the provisions of the act relating 
to excess profit liability. Any subcontract made with respect to such a 
contract and involving an amount in excess of $10,000 is also within the 
scope of the act. If a contracting party places orders with another 
party, aggregating an amount in excess of $10,000, for articles or 
materials which constitute a part of the cost of performing the contract 
or subcontract, the placing of such orders shall constitute a 
subcontract within the scope of the act, unless it is clearly shown that 
each of the orders involving $10,000 or less is a bona fide separate and 
distinct subcontract and not a subdivision made for the purpose of 
evading the provisions of the act.

[[Page 139]]

    Sec. 16.3 Contracts or subcontracts for scientific equipment. No 
excess profit liability is incurred upon a contract or subcontract 
entered into after the enactment of the act of April 3, 1939, if at the 
time or prior to the time such contract or subcontract is made it is 
designated by the Secretary of the Army as being exempt under the 
provisions of the act pertaining to scientific equipment used for 
communication, target detection, navigation, and fire control.
    Sec. 16.4 Completion of contract defined. The date of delivery of 
the aircraft or portion thereof covered by the contract or subcontract 
shall be considered the date of completion of the contract or 
subcontract unless otherwise determined jointly by the Secretary of the 
Army and the Secretary of the Treasury or their duly authorized 
representatives. Except as otherwise provided in the preceding sentence, 
the replacement of defective parts or delivered articles or the 
performance of other guarantee work in respect of such articles will not 
operate to extend the date of completion. As to the treatment of the 
cost of such work as a cost of performing a contract or subcontract, see 
Sec. 16.8(h). As to a refund in case of adjustment due to any 
subsequently incurred additional costs, see Sec. 16.18. If a contract or 
subcontract is at any time cancelled or terminated, it is completed at 
the time of the cancellation or termination.
    Sec. 16.5 Manner of determining liability. (a) The first step in the 
determination of the excess profit to be paid to the United States by a 
contracting party with respect to contracts and subcontracts completed 
within an income-taxable year is to ascertain the total contract prices 
of all contracts and subcontracts completed by the contracting party 
within the income-taxable year. As to total contract prices, see 
Sec. 16.7.
    (b) The second step is to ascertain the cost of performing such 
contracts and subcontracts and to deduct such cost from the total 
contract prices of such contracts and subcontracts as computed in the 
first step. See Sec. 16.8. The amount remaining after such subtraction 
is the amount of net profit or net loss upon the contracts and 
subcontracts completed within the income-taxable year.
    (c) The third step, in case there is a net profit upon such 
contracts and subcontracts, is to subtract from the amount of such net 
profit as computed in the second step the sum of:
    (1) An amount equal to 12 percent of the total contract prices of 
the contracts and subcontracts completed within the income- taxable 
year;
    (2) The amount of any net loss allowable as a credit in determining 
the excess profit for the income-taxable year (see Sec. 16.9); and
    (3) The amount of any deficiency in profit allowable as a credit in 
determining the excess profit for the income-taxable year (see 
Sec. 16.9). The amount remaining after such subtraction is the amount of 
excess profit for the income-taxable year.
    (d) The fourth step is to ascertain the amount of credit allowed for 
Federal income taxes paid or remaining to be paid upon the amount of 
such excess profit (see Sec. 16.10) and then subtract from the amount of 
such excess profit the amount of credit for Federal income taxes. The 
amount remaining after this subtraction is the amount of excess profit 
to be paid to the United States by the contracting party for the income-
taxable year.

[T.D. 4909, 4 FR 2733, July 1, 1939, as amended by T.D. 6511, 25 FR 
12442, Dec. 6, 1960]

    Sec. 16.6 Computation of excess profit liability. The application of 
the provisions of Sec. 16.5 may be illustrated by the following example:
    Example. On September 1, 1939, the B Corporation, which keeps its 
books and makes its Federal income tax returns on a calendar year basis, 
entered into a contract for the construction of Army aircraft coming 
within the scope of the act, the total contract price of which was 
$200,000. On March 10, 1940, the corporation entered into another such 
contract, the total contract price of which was $40,000. Both contracts 
were completed within the calendar year 1940, the first at a cost of 
$155,000 and the second at a cost of $45,000. During the year 1940, the 
B Corporation also completed at a deficiency in profit of $2,000 a 
contract entered into after April 3, 1939, for the construction of naval 
aircraft coming within the scope of 10 U.S.C. 2382 (formerly section 3 
of the Act of March 27, 1934 (48 Stat. 505)). For the year 1939, the B 
Corporation sustained a net loss of $1,500 and a deficiency in profit of 
$1,000 on all contracts and subcontracts entered into after April 3, 
1939, for Army aircraft coming within the scope of the act and completed 
within the calendar year 1939. For the year 1939, the B Corporation also 
sustained a net loss of $1,000 on a contract, entered into after April 
3, 1939, and completed within the calendar year 1939, for naval aircraft 
coming within the scope of 10 U.S.C. 2382 (formerly section 3 of the Act 
of March 27, 1934 (48 Stat. 505)). For purposes of the Federal income 
tax, the net income of the B Corporation for the year 1940, on which the 
tax was paid, amounted to $96,000, which included the total net profit 
of $40,000 upon the two contracts entered into on September 1, 1939, and 
March 10, 1940. The excess profit liability is $4,332, computed as 
follows:

Total contract prices:                                                  
  Contract No. 1................................    $200,000            
  Contract No. 2................................      40,000            
                                                 -------------          
                                                                $240,000
Less: Cost of performing contracts:                                     
  Contract No. 1................................     155,000            
  Contract No. 2................................      45,000            
                                                 ============           

[[Page 140]]

                                                                        
                                                                $200,000
                                                             -----------
Net profit on contracts.....................................     $40,000
Less:                                                                   
  12 percent of total contract prices (12                               
   percent of $240,000).........................     $28,800            
  Deficiency in profit (in naval aircraft                               
   contracts) in 1940...........................       2,000            
  Net loss (in Army aircraft contracts) from                            
   1939.........................................       1,500            
                                                                        
  Net loss (in naval aircraft contracts) from                           
   1939.........................................       1,000            
  Deficiency in profit (in Army aircraft                                
   contracts) from 1939.........................       1,000  ..........
                                                             -----------
                                                                        
Excess profit for year 1940.................................       5,700
Less: Credit for Federal income taxes (Federal income tax on            
 $5,700 at rates for 1940)..................................       1,368
                                                                  34,300
                                                 -------------          
Amount of excess profit payable to the United States........       4,332
                                                                        

[T.D. 4909, 4 FR 2733, July 1, 1939, as amended by T.D. 6511, 25 FR 
12442, Dec. 6, 1960]

    Sec. 16.7 Total contract price. The total contract price of a 
particular contract or subcontract (see Sec. 16.1) may be received in 
money or its equivalent. If something other than money is received, only 
the fair market value of the thing received, at the date of receipt, is 
to be included in determining the amount received. Bonuses earned for 
bettering performance and penalties incurred for failure to meet the 
contract guarantees are to be regarded as adjustments of the original 
contract price. Trade or other discounts granted by a contracting party 
in respect of a contract or subcontract performed by such party are also 
to be deducted in determining the true total contract price of such 
contract or subcontract.
    Sec. 16.8 Cost of performing a contract or subcontract.--(a) General 
rule. The cost of performing a particular contract or subcontract shall 
be the sum of (1) the direct costs, including therein expenditures for 
materials, direct labor and direct expenses, incurred by the contracting 
party in performing the contract or subcontract; and (2) the proper 
proportion of any indirect costs (including therein a reasonable 
proportion of management expenses) incident to and necessary for the 
performance of the contract or subcontract.
    (b) Elements of cost. No definitions of the elements of cost may be 
stated which are of invariable application to all contractors and 
subcontractors. In general, the elements of cost may be defined for 
purposes of the act as follows:
    (1) Manufacturing cost, which is the sum of factory cost (see 
paragraph (c) of this section) and other manufacturing cost (see 
paragraph (d) of this section);
    (2) Miscellaneous direct expenses (see paragraph (e) of this 
section);
    (3) General expenses, which are the sum of indirect engineering 
expenses, usually termed ``engineering overhead'' (see paragraph (f) of 
this section) and expenses of distribution, servicing and administration 
(see paragraph (g) of this section); and
    (4) Guarantee expenses (see paragraph (h) of this section).
    (c) Factory cost. Factory cost is the sum of the following:
    (1) Direct materials. Materials, such as those purchased for stock 
and subsequently issued for contract operations and those acquired under 
subcontracts, which become a component part of the finished product or 
which are used directly in fabricating, converting or processing such 
materials or parts.
    (2) Direct productive labor. Productive labor, usually termed ``shop 
labor,'' which is performed on and is properly chargeable directly to 
the article manufactured or constructed pursuant to the contract or 
subcontract, but which ordinarily does not include direct engineering 
labor (see subparagraph (3) of this paragraph).
    (3) Direct engineering labor. The compensation of professional 
engineers and other technicists (including reasonable advisory fees), 
and of draftsmen, properly chargeable directly to the cost of the 
contract or subcontract.
    (4) Miscellaneous direct factory charges. Items which are properly 
chargeable directly to the factory cost of performing the contract or 
subcontract but which do not come within the classifications in 
subparagraphs (1), (2), and (3) of this paragraph, as for example, 
royalties which the contracting party pays to another party and which 
are properly chargeable to the cost of performing the contract or 
subcontract (but see paragraph (d) of this section).
    (5) Indirect factory expenses. Items, usually termed ``factory 
overhead,'' which are not directly chargeable to the factory cost of 
performing the contract or subcontract but which are properly incident 
to and necessary for the performance of the contract or subcontract and 
consist of the following:
    (i) Labor. Amounts expended for factory labor, such as supervision 
and inspection, clerical labor, timekeeping, packing and shipping, 
stores supply, services of tool crib attendants, and services in the 
factory employment bureau, which are not chargeable directly to 
productive labor of the contract or subcontract.
    (ii) Materials and supplies. The cost of materials and supplies for 
general use in the factory in current operations, such as shop fuel, 
lubricants, heat-treating, plating, cleaning and anodizing supplies, 
nondurable tools and gauges, stationery (such as time tickets and other 
forms), and boxing and wrapping materials.
    (iii) Service expenses. Factory expenses of a general nature, such 
as those for power, heat

[[Page 141]]

and light (whether purchased or produced), ventilation and air-
conditioning and operation and maintenance of general plant assets and 
facilities.
    (iv) Fixed charges and obsolescence. Recurring charges with respect 
to property used for manufacturing purposes of the contract or 
subcontract, such as premiums for fire and elevator insurance, property 
taxes, rentals and allowances for depreciation of such property, 
including maintenance and depreciation of reasonable stand-by equipment; 
and depreciation and obsolescence of special equipment and facilities 
necessarily acquired primarily for the performance of the contract or 
subcontract. In making allowances for depreciation, consideration shall 
be given to the number and length of shifts.
    (v) Miscellaneous indirect factory expenses. Miscellaneous factory 
expenses not directly chargeable to the factory cost of performing the 
contract or subcontract, such as purchasing expenses; ordinary and 
necessary expenses of rearranging facilities within a department or 
plant; employees' welfare expenses; premiums or dues on compensation 
insurance; employers' payments to unemployment, old age and social 
security Federal and State funds not including payments deducted from or 
chargeable to employees or officers; pensions and retirement payments to 
factory employees; factory accident compensation (as to self-insurance, 
see paragraph (g) of this section); but not including any amounts which 
are not incident to services, operations, plant, equipment or facilities 
involved in the performance of the contract or subcontract.
    (d) Other manufacturing cost. Other manufacturing cost as used in 
paragraph (b) of this section includes items of manufacturing costs 
which are not properly or satisfactorily chargeable to factory costs 
(see paragraph (c) of this section) but which upon a complete showing of 
all pertinent facts are properly to be included as a cost of performing 
the contract or subcontract, as for instance, payments of royalties and 
amortization of the cost of designs purchased and patent rights over 
their useful life; and ``deferred'' or ``unliquidated'' experimental and 
development charges. For example, in case experimental and development 
costs have been properly deferred or capitalized and are amortized in 
accordance with a reasonably consistent plan, a proper portion of the 
current charge, determined by a ratable allocation which is reasonable 
in consideration of the pertinent facts, may be treated as a cost of 
performing the contract or subcontract. In the case of general 
experimental and development expenses which may be charged off 
currently, a reasonable portion thereof may be allocated to the cost of 
performing the contract or subcontract. If a special experimental or 
development project is carried on in pursuance of a contract, or in 
anticipation of a contract which is later entered into, and the expense 
is not treated as a part of general experimental and development 
expenses or is not otherwise allowed as a cost of performing the 
contract, there clearly appearing no reasonable prospect of an 
additional contract for the type of article involved, the entire cost of 
such project may be allowed as a part of the cost of performing the 
contract.
    (e) Miscellaneous direct expenses. Miscellaneous direct expenses as 
used in paragraph (b) of this section include:
    (1) Cost of installation and construction. Cost of installation and 
construction includes the cost of materials, labor and expenses 
necessary for the erection and installation prior to the completion of 
the contract and after the delivery of the product or material 
manufactured or constructed pursuant to the contract or subcontract.
    (2) Sundry direct expenses. Items of expense which are properly 
chargeable directly to the cost of performing a contract or subcontract 
and which do not constitute guarantee expenses (see paragraph (h) of 
this section) or direct costs classified as factory cost or other 
manufacturing cost (see paragraphs (c) and (d) of this section), such as 
premiums on performance or other bonds required under the contract or 
subcontract; State sales taxes imposed on the contracting party; freight 
on outgoing shipments; fees paid for wind tunnel and model basin tests; 
demonstration and test expenses; crash insurance premiums; traveling 
expenses. In order for any such item to be allowed as a charge directly 
to the cost of performing a contract or subcontract, (i) a detailed 
record shall be kept by the contracting party of all items of a similar 
character, and (ii) no item of a similar character which is properly a 
direct charge to other work shall be allowed as a part of any indirect 
expenses in determining the proper proportion thereof chargeable to the 
cost of performing the contract or subcontract. As to allowable indirect 
expenses, see paragraphs (c)(5), (f), (g) and (j) of this section.
    (f) Indirect engineering expenses. Indirect engineering expenses, 
usually termed ``engineering overhead,'' which are treated in this 
section as a part of general expenses in determining the cost of 
performing a contract or subcontract (see paragraph (b) of this 
section), comprise the general engineering expenses which are incident 
to and necessary for the performance of the contract or subcontract, 
such as the following:
    (1) Labor. Reasonable fees of engineers employed in a general 
consulting capacity, and compensation of employees for personal services 
to the engineering department, such as supervision, which is properly 
chargeable to the contract or subcontract, but which is not chargeable 
as direct engineering labor (see paragraph (c)(3) of this section).

[[Page 142]]

    (2) Material. Supplies for the engineering department, such as paper 
and ink for drafting and similar supplies.
    (3) Miscellaneous expenses. Expenses of the engineering department, 
such as (i) maintenance and repair of engineering equipment, and (ii) 
services purchased outside of the engineering department for blue 
printing, drawing, computing, and like purposes.
    (g) Expenses of distribution, servicing and administration. Expenses 
of distribution, servicing and administration, which are treated in this 
section as a part of general expenses in determining the cost of 
performing a contract or subcontract (see paragraph (b) of this 
section), comprehend the expenses incident to and necessary for the 
performance of the contract or subcontract, which are incurred in 
connection with the distribution and general servicing of the 
contracting party's products and the general administration of the 
business, such as:
    (1) Compensation for personal services of employees. The salaries of 
the corporate and general executive officers and the salaries and wages 
of administrative clerical employees and of the office services 
employees such as telephone operators, janitors, cleaners, watchmen and 
office equipment repairmen.
    (2) Bidding and general selling expenses. Bidding and general 
selling expenses which by reference to all the pertinent facts and 
circumstances reasonably constitute a part of the cost of performing a 
contract or subcontract. The treatment of bidding and general selling 
expenses as a part of general expenses in accordance with this paragraph 
is in lieu of any direct charges which otherwise might be made for such 
expenses. The term ``bidding expenses'' as used in this section includes 
all expenses in connection with preparing and submitting bids.
    (3) General servicing expenses. Expenses which by reference to all 
the pertinent facts and circumstances reasonably constitute a part of 
the cost of performing a contract or subcontract and which are incident 
to delivered or installed articles and are due to ordinary adjustments 
or minor defects; but including no items which are treated as a part of 
guarantee expenses (see paragraph (h) of this section) or as a part of 
direct costs, such as direct materials, direct labor, and other direct 
expense.
    (4) Other expenses. Miscellaneous office and administrative 
expenses, such as stationery and office supplies; postage; repair and 
depreciation of office equipment; contributions to local charitable or 
community organizations to the extent constituting ordinary and 
necessary business expenses; employees' welfare expenses; premiums and 
dues on compensation insurance; employers' payments to unemployment, old 
age and social security Federal and State funds not including payments 
deducted from or chargeable to employees or officers; pensions and 
retirement payments to administrative office employees and accident 
compensation to office employees (as to self-insurance, see subdivision 
(i) of this subparagraph.
    (i) Subject to the exception stated in this subdivision, in cases 
where a contracting party assumes its own insurable risks (usually 
termed ``self-insurance''), losses and payments will be allowed in the 
cost of performing a contract or subcontract only to the extent of the 
actual losses suffered or payments incurred during, and in the course 
of, the performance of the contract or subcontract and properly 
chargeable to such contract or subcontract. If however, a contracting 
party assumes its own insurable risks (a) for compensation paid to 
employees for injuries received in the performance of their duties, or 
(b) for unemployment risks in States where insurance is required, there 
may be allowed as a part of the cost of performing a contract or 
subcontract a reasonable portion of the charges set up for purposes of 
self-insurance under a system of accounting regularly employed by the 
contracting party, as determined by the Commissioner of Internal 
Revenue, at rates not exceeding the lawful or approved rates of 
insurance companies for such insurance, reduced by amounts representing 
the acquisition cost in such companies, provided the contracting party 
adopts and consistently follows this method with respect to self-
insurance in connection with all contracts and subcontracts subsequently 
performed by him.
    (ii) Allowances for interest on invested capital are not allowable 
as costs of performing a contract or subcontract.
    (iii) Among the items which shall not be included as a part of the 
cost of performing a contract or subcontract or considered in 
determining such cost, are the following: Entertainment expenses; dues 
and memberships other than of regular trade associations; donations 
except as otherwise provided above; losses on other contracts; profits 
or losses from sales or exchanges of capital assets; extraordinary 
expenses due to strikes or lockouts; fines and penalties; amortization 
of unrealized appreciation of values of assets; expenses, maintenance 
and depreciation of excess facilities (including idle land and building, 
idle parts of a building, and excess machinery and equipment) vacated or 
abandoned, or not adaptable for future use in performing contracts or 
subcontracts; increases in reserve accounts for contingencies, repairs, 
compensation insurance (except as above provided with respect to self-
insurance) and guarantee work; Federal and State income and excess-
profits taxes and surtaxes; cash discount earned up to one percent of 
the amount of the purchase, except that all discounts on subcontracts 
subject to the act will be considered; interest incurred or earned; bond 
discount or finance charges;

[[Page 143]]

premiums for life insurance on the lives of officers; legal and 
accounting fees in connection with reorganizations, security issues, 
capital stock issues and the prosecution of claims against the United 
State (including income tax matters); taxes and expenses on issues and 
transfers of capital stock; losses on investments; bad debts; and 
expenses of collection and exchange.
    (iv) In order that the cost of performing a contract or subcontract 
may be accounted for clearly, the amount of any excess profits repayable 
to the United States pursuant to the act should not be charged to or 
included in such cost.
    (h) Guarantee expenses. Guarantee expenses include the various items 
of factory cost, other manufacturing cost, cost of installation and 
construction, indirect engineering expenses and other general expenses 
(see paragraphs (c) to (g), of this section) which are incurred after 
delivery or installation of the article manufactured or constructed 
pursuant to the particular contract or subcontract and which are 
incident to the correction of defects or deficiencies which the 
contracting party is required to make under the guarantee provisions of 
the particular contract or subcontract. If the total amount of such 
guarantee expenses is not ascertainable at the time of filing the report 
required to be filed with the district director of internal revenue (see 
Sec. 16.15) and the contracting party includes any estimated amount of 
such expenses as part of the claimed total cost of performing the 
contract or subcontract, such estimated amount shall be separately shown 
on the report and the reasons for claiming such estimated amount shall 
accompany the report; but only the amount of guarantee expenses actually 
incurred will be allowed. If the amount of guarantee expenses actually 
incurred is greater than the amount (if any) claimed on the report and 
the contracting party has made an overpayment of excess profit, a refund 
of the overpayment shall be made in accordance with the provisions of 
Sec. 16.18. If the amount of guarantee expenses actually incurred is 
less than the amount claimed on the report and an additional amount of 
excess profit is determined to be due, the additional amount of excess 
profit shall be assessed and paid in accordance with the provisions of 
Sec. 16.18.
    (i) Unreasonable compensation. (1) The salaries and compensation for 
services which are treated as a part of the cost of performing a 
contract or subcontract include reasonable payments for salaries, 
bonuses, or other compensation for services. As a general rule, bonuses 
paid to employees (and not to officers) in pursuance of a regularly 
established incentive bonus system may be allowed as a part of the cost 
of performing a contract or subcontract.
    (2) The test of allowability is whether the aggregate compensation 
paid to each individual is for services actually rendered incident to, 
and necessary for, the performance of the contract or subcontract, and 
is reasonable. Excessive or unreasonable payments, whether in cash, 
stock or other property ostensibly as compensation for services shall 
not be included in the cost of performing a contract or subcontract.
    (j) Allocation of indirect costs. No general rule applicable to all 
cases may be stated for ascertaining the proper proportion of the 
indirect costs to be allocated to the cost of performing a particular 
contract or subcontract. Such proper proportion depends upon all the 
facts and circumstances relating to the performance of the particular 
contract or subcontract. Subject to a requirement that all items which 
have no relation to the performance of the contract or subcontract shall 
be eliminated from the amount to be allocated, the following methods of 
allocation are outlined as acceptable in a majority of cases:
    (1) Factory indirect expenses. The allowable indirect factory 
expenses (see paragraph (c)(5) of this section) shall ordinarily be 
allocated or ``distributed'' to the cost of the contract or subcontract 
on the basis of the proportion which the direct productive labor (see 
paragraph (c)(2) of this section) attributable to the contract or 
subcontract bears to the total direct productive labor of the production 
department or particular section thereof during the period within which 
the contract or subcontract is performed, except that if the indirect 
factory expenses are incurred in different amounts and in different 
proportions by the various producing departments consideration shall be 
given to such circumstances to the extent necessary to make a fair and 
reasonable determination of the true profit and excess profit.
    (2) Engineering indirect expenses. The allowable indirect 
engineering expenses (see paragraph (f) of this section) shall 
ordinarily be allocated or ``distributed'' to the cost of the contract 
or subcontract on the basis of the proportion which the direct 
engineering labor attributable to the contract or subcontract (see 
paragraph (c)(3) of this section) bears to the total direct engineering 
labor of the engineering department or particular section thereof during 
the period within which the contract or subcontract is performed. If the 
expenses of the engineering department are not sufficient in amount to 
require the maintenance of separate accounts, the engineering indirect 
costs may be included in the indirect factory expenses (see paragraph 
(c)(5) of this section) and allocated or distributed to the cost of 
performing the contract or subcontract as a part of such expenses, 
provided the proportion so allocated or distributed is proper under the 
facts and circumstances relating to the performance of the particular 
contract or subcontract.

[[Page 144]]

    (3) Administrative expenses (or ``overhead''). The allowable 
expenses of administration (see paragraph (g) of this section) or other 
general expenses except indirect engineering expenses, bidding and 
general selling expenses, and general servicing expenses shall 
ordinarily be allocated or distributed to the cost of performing a 
contract or subcontract on the basis of the proportion which the sum of 
the manufacturing cost (see paragraph (b) of this section) and the cost 
of installation and construction (see paragraph (e) of this section) 
attributable to the particular contract or subcontract bears to the sum 
of the total manufacturing cost and the total cost of installation and 
construction during the period within which the contract or subcontract 
is performed.
    (4) Bidding, general selling, and general servicing expenses. The 
allowable bidding and general selling expenses and general servicing 
expenses (see paragraph (g) (2) and (3) of this section) shall 
ordinarily be allocated or distributed to the cost of performing a 
contract or subcontract on the basis of:
    (i) The proportion which the contract price of the particular 
contract or subcontract bears to the total sales made(including 
contracts or subcontracts completed) during the period within which the 
particular contract or subcontracts is performed, or
    (ii) The proportion which the sum of the manufacturing cost (see 
paragraph (b) of this section) and the cost of installation and 
construction (see paragraph (e) of this section) attributable to the 
particular contract or subcontract bears to the sum of the total 
manufacturing cost and the total cost of installation and construction 
during the period within which the contract or subcontract is performed,

except that special consideration shall be given to the relation which 
certain classes of such expenses bear to the various classes of articles 
produced by the contracting party in each case in which such 
consideration is necessary in order to make a fair and reasonable 
determination of the true profit and excess profit. See Sec. 16.13.
    Sec. 16.9 Credit for net loss or for deficiency in profit in 
computing excess profit. (a) The term ``net loss'' as used in the act 
and as applied to contracts and subcontracts for aircraft or portions 
thereof coming within the regulations prescribed under the act or under 
10 U.S.C. 2382 (formerly section 3 of the Act of March 27, 1934 (48 
Stat. 505)) means the amount by which the total cost of performing all 
such contracts and subcontracts for aircraft entered into after April 3, 
1939, and completed by a particular contracting party within the income-
taxable year exceeds the total contract prices of such contracts and 
subcontracts. As to the meaning of income-taxable year, see Sec. 16.1.
    (b) The term ``deficiency in profit'', as used in the act and as 
applied to contracts and subcontracts for aircraft or portions thereof 
coming within the regulations prescribed under the act or under 10 
U.S.C. 2882 (formerly section 3 of the Act of March 27, 1934 (48 Stat. 
505)), means the amount by which 12 percent of the total contract prices 
of all such contracts and subcontracts for aircraft entered into after 
April 3, 1939, and completed by a particular contracting party within 
the income-taxable year exceeds the net profit upon all such contracts 
and subcontracts.
    (c) A net loss or a deficiency in profit sustained by a contracting 
party for an income-taxable year is allowable as a credit in computing 
the contracting party's excess profit on contracts and subcontracts for 
aircraft coming within the regulations prescribed under the act or under 
10 U.S.C. 2382 (formerly section 3 of the Act of March 27, 1934 (48 
Stat. 505)) and completed during the four next succeeding income-taxable 
years. Credit for such a net loss or deficiency in profit may be claimed 
in the contracting party's annual report of profit filed with the 
district director of internal revenue (see Sec. 16.15), but it shall be 
supported by separate schedules for each contract or subcontract 
involved showing total contract prices, costs of performance and 
pertinent facts relative thereto, together with a summarized computation 
of the net loss or deficiency in profit. The net loss or deficiency in 
profit claimed is subject to verification and adjustment. As to 
preservation of books and records, see Sec. 16.13.
    (d) Net loss or deficiency in profit sustained on contracts and 
subcontracts completed within one income-taxable year may not be 
considered in computing net loss or deficiency in profit sustained on 
contracts and subcontracts completed within another income-taxable year.
    (e) The provisions of this section may be illustrated by the 
following example:
    Example. For the calendar year 1939, the A Corporation, which keeps 
its books and makes its Federal income tax returns on a calendar year 
basis, sustained a net loss of $30,000 on the contracts and subcontracts 
for Army aircraft and portions thereof coming within the scope of the 
act and completed within that year. During the year 1939, the A 
Corporation also completed contracts for naval aircraft coming within 
the scope of 10 U.S.C. 2382 (formerly section 3 of the Act of March 27, 
1934 (48 Stat. 505)) at a deficiency in profit of $10,000. In 1940, the 
A Corporation completed similar contracts for Army aircraft totaling 
$175,000 at a cost of $155,000, whereby the A Corporation realized a net 
profit of $20,000 but sustained a deficiency in profit of $1,000 (i.e., 
12 percent of $175,000, or $21,000, less $20,000. During the year 1940, 
the A Corporation also completed contracts for naval aircraft coming 
within the scope of 10

[[Page 145]]

U.S.C. 2382 (formerly section 3 of the Act of March 27, 1934 (48 Stat. 
505)) at a net loss of $2,000. In 1941, the A Corporation completed 
contracts for Army aircraft coming within the scope of the act totaling 
$400,000 at a cost of $300,000, or at a net profit of $100,000. After 
deducting from the net profit of $100,000 for the year 1941 the amount 
of $48,000 (i.e., 12 percent of the total contract price of $400,000), 
there remains $52,000 in excess profit on the contracts completed in the 
year 1941. The A Corporation may deduct from such $52,000, in 
determining the amount of excess profit it must pay for the year 1941 
with respect to the contracts completed in such year, the net loss of 
$30,000 and the deficiency in profit of $10,000 sustained in 1939 on 
Army and naval aircraft contracts, respectively, and the net loss of 
$2,000 and the deficiency in profit of $1,000 sustained in 1940 on naval 
and Army aircraft contracts, respectively.

[T.D. 4909, 4 FR 2733, July 1, 1939, as amended by T.D. 6511, 25 FR 
12442, Dec. 6, 1960]

    Sec. 16.10 Credit for Federal income taxes. For the purpose of 
computing the amount of excess profit to be paid to the United States, a 
credit is allowable against the excess profit for the amount of Federal 
income taxes paid or remaining to be paid on the amount of such excess 
profit. The ``Federal income taxes'' in respect of which this credit is 
allowable include the income taxes imposed by Titles I and IA of the 
Revenue Act of 1938, and Chapter 1 and Subchapter A of Chapter 2 of the 
Internal Revenue Code, and the excess-profits taxes imposed by section 
602 of the Revenue Act of 1938 and Subchapter B of Chapter 2 of the 
Internal Revenue Code. This credit is allowable for these taxes only to 
the extent that it is affirmatively shown that they have been finally 
determined and paid or remain to be paid and that they were imposed upon 
the excess profit against which the credit is to be made. In case such a 
credit has been allowed and the amount of Federal income taxes imposed 
upon the excess profit is redetermined, the credit previously allowed 
shall be adjusted accordingly.
    Sec. 16.11 Failure of contractor to require agreement by 
subcontractor. (a) Every contract or subcontract coming within the scope 
of the act and the regulations in this part is required by the act to 
contain, among other things, an agreement by the contracting party to 
make no subcontract unless the subcontractor agrees:
    (1) To make a report, as described in the act, under oath to the 
Secretary of War upon the completion of the subcontract;
    (2) To pay into the Treasury excess profit, as determined by the 
Treasury Department, in the manner and amounts specified in the act;
    (3) To make no subdivision of the subcontract for the same article 
or articles for the purpose of evading the provisions of the act;
    (4) That the manufacturing spaces and books of its own plant, 
affiliates, and subdivisions shall at all times be subject to inspection 
and audit as provided in the act.
    (b) If a contracting party enters into a subcontract with a 
subcontractor who fails to make such agreement, such contracting party 
shall, in addition to its liability for excess profit determined on 
contracts or subcontracts performed by it, be liable for any excess 
profit determined to be due the United States on the subcontract entered 
into with such subcontractor. In such event, however, the excess profit 
to be paid to the United States in respect of the subcontract entered 
into with such subcontractor shall be determined separately from any 
contracts or subcontracts performed by the contracting party entering 
into the subcontract with such subcontractor.
     Sec. 16.12 Evasion of excess profit. Section 3 of the act of March 
27, 1934, as amended, provides that the contracting party shall agree to 
make no subdivisions of any contract or subcontract for the same article 
or articles for the purpose of evading the provisions of the act. If any 
such subdivision or subcontract is made it shall constitute a violation 
of the agreement provided for in the act, and the cost of completing a 
contract or subcontract by a contracting party which violates such 
agreement shall be determined in a manner necessary clearly to reflect 
the true excess profit of such contracting party.
    Sec. 16.13 Books of account and records. (a) It is recognized that 
no uniform method of accounting can be prescribed for all contracting 
parties subject to the provisions of the act. Each contracting party is 
required by law to make a report of its true profits and excess profit. 
Such party must, therefore, maintain such accounting records as will 
enable it to do so. See Sec. 16.8. Among the essentials are the 
following:
    (1) The profit or loss upon a particular contract or subcontract 
shall be accounted for and fully explained in the books of account 
separately on each contract or subcontract.
    (2) Any cost accounting methods, however standard they may be and 
regardless of long continued practice, shall be controlled by, and be in 
accord with, the objectives and purposes of the act and of any 
regulations prescribed thereunder.
    (3) The accounts shall clearly disclose the nature and amount of the 
different items of cost of performing a contract or subcontract.
    (b) In cases where it has been the custom priorly to use so-called 
``normal'' rates of overhead expense or administrative expenses, or 
``standard'' or ``normal'' prices of material or labor charges, no 
objection will be made to the use temporarily during the period of 
performing the contract or subcontract of such methods in charging the

[[Page 146]]

contract or subcontract, if the method of accounting employed is such as 
clearly to reflect, in the final determination upon the books of 
account, the actual profit derived from the performance of the contract 
or subcontract and if the necessary adjusting entries are entered upon 
the books and they explain in full detail the revisions necessary to 
accord with the facts. As to the elements of cost, see Sec. 16.8.
    (c) All books, records, and original evidences of costs (including, 
among other things, production orders, bills or schedules of materials, 
purchase requisitions, purchase orders, vouchers, requisitions for 
materials, standing expense orders, inventories, labor time cards, pay 
rolls, cost distribution sheets) pertinent to the determination of the 
true profit, excess profit, deficiency in profit or net loss from the 
performance of a contract or subcontract shall be kept at all times 
available for inspection by internal- revenue officers, and shall be 
carefully preserved and retained so long as the contents thereof may 
become material in the administration of the act. This provision is not 
confined to books, records, and original evidences pertaining to items 
which may be considered to be a part of the cost of performing a 
contract or subcontract. It is applicable to all books, records, and 
original evidences of costs of each plant, branch or department involved 
in the performance of a contract or subcontract or in the allocation or 
distribution of costs to the contract or subcontract.
    Sec. 16.14 Report to Secretary of the Army. (a) Upon the completion 
of a contract or subcontract coming within the scope of the act and the 
regulations in this part, the contracting party is required to make a 
report, under oath, to the Secretary of the Army. As to the date of 
completion of a contract or subcontract, see Sec. 16.4. Such report 
shall be in the form prescribed by the Secretary of the Army and shall 
state the total contract price, the cost of performing the contract, the 
net income from such contract, and the per centum such income bears to 
the contract price. The contracting party shall also include as a part 
of such report a statement showing:
    (1) The manner in which the indirect costs were determined and 
allocated to the cost of performing the contract or subcontract (see 
Sec. 16.8);
    (2) The name and address of every subcontractor with whom a 
subcontract was made, the object of such subcontract, the date when 
completed and the amount thereof; and
    (3) The name and address of each affiliate or other organization, 
trade or business owned or controlled directly or indirectly by the same 
interests as those who so own or control the contracting party, together 
with a statement showing in detail all transactions which were made with 
such affiliate or other organization, trade or business and are 
pertinent to the determination of the excess profit.
    (b) A copy of the report required to be made to the Secretary of the 
Army is required to be transmitted by the contracting party to the 
Secretary of the Treasury. Such copy shall not be transmitted directly 
to the Secretary of the Treasury but shall be filed as a part of the 
annual report. See Sec. 16.15.
    Sec. 16.15 Annual reports for income-taxable years--(a) General 
requirements. Every contracting party completing a contract or 
subcontract within the contracting party's income-taxable year ending 
after April 3, 1939 shall file with the district director of internal 
revenue for the internal revenue district in which the contracting 
party's Federal income tax returns are required to be filed an annual 
report on the prescribed form of the profit and excess profit on all 
contracts and subcontracts coming within the scope of the act and the 
regulations in this part and completed within the particular income-
taxable year. There shall be included as a part of such a report a 
statement, preferably in columnar form, showing separately for each such 
contract or subcontract completed by the contracting party within the 
income-taxable year the total contract price, the cost of performing the 
contract or subcontract and the resulting profit or loss on each 
contract or subcontract together with a summary statement showing in 
detail the computation of the net profit or net loss upon all contracts 
and subcontracts completed within the income-taxable year and the amount 
of the excess profit, if any, for the income-taxable year covered by the 
report. A copy of the report made to the Secretary of the Army (see 
Sec. 16.14) with respect to each contract or subcontract covered in the 
annual report, shall be filed as a part of such annual report. In case 
the income-taxable year of the contracting party is a period of less 
than twelve months (see Sec. 16.1), the report required by this section 
shall be made for such period and not for a full year.
    (b) Time for filing annual reports. Annual reports of contracts and 
subcontracts coming within the scope of the act and the regulations in 
this part completed by a contracting party within an income-taxable year 
must be filed on or before the 15th day of the ninth month following the 
close of the contracting party's income-taxable year. It is important 
that the contracting party render on or before the due date an annual 
report as nearly complete and final as it is possible for the 
contracting party to prepare. An extension of time granted the 
contracting party for filing its Federal income tax return does not 
serve to extend the time for filing the annual report required by this 
section. Authority consistent with authorizations for granting 
extensions of time for filing Federal income

[[Page 147]]

tax returns is hereby delegated to the various collectors of internal 
revenue for granting extensions of time for filing the reports required 
by this section. Application for extensions of time for filing such 
reports should be addressed to the district director of internal revenue 
for the district in which the contracting party files its Federal income 
tax returns and must contain a full recital of the causes for the delay.
    Sec. 16.16 Payment of excess profit liability. The amount of the 
excess profit liability to be paid to the United States shall be paid on 
or before the due date for filing the report with the district director 
of internal revenue. See Sec. 16.15. At the option of the contracting 
party, the amount of the excess profit liability may be paid in four 
equal installments instead of in a single payment, in which case the 
first installment is to be paid on or before the date prescribed for the 
payment of the excess profit as a single payment, the second installment 
on or before the 15th day of the third month, the third installment on 
or before the 15th day of the sixth month, and the fourth installment on 
or before the 15th day of the ninth month, after such date.
    Sec. 16.17 Liability of surety. The surety under contracts entered 
into with the Secretary of the Army for the construction or manufacture 
of any complete aircraft or any portion thereof for the Army shall not 
be liable for payment of excess profit due the United States in respect 
of such contracts.
    Sec. 16.18 Determination of liability for excess profit, interest 
and penalties; assessment, collection, payment, refunds. (a) The duty of 
determining the correct amount of excess profit liability on contracts 
and subcontracts coming within the scope of the act and the regulations 
in this part is upon the Commissioner of Internal Revenue. Under section 
3(b) of the act of March 27, 1934, as last amended, all provisions of 
law (including the provisions of law relating to interest, penalties and 
refunds) applicable with respect to the taxes imposed by Title I of the 
Revenue Act of 1934 and not inconsistent with section 3 of the act of 
March 27, 1934, as last amended, are applicable with respect to the 
assessment, collection, or payment of excess profits on contracts and 
subcontracts coming within the scope of the act and the regulations in 
this part and to refunds of overpayments of profits into the Treasury 
under the act. Claims by a contracting party for the refund of an amount 
of excess profit, interest, penalties, and additions to such excess 
profit shall conform to the general requirements prescribed with respect 
to claims for refund of overpayments of taxes imposed by Title I of the 
Revenue Act of 1934 and, if filed on account of any additional costs 
incurred pursuant to guarantee provisions in a contract, shall be 
supplemented by a statement under oath showing the amount and nature of 
such costs and all facts pertinent thereto.
    (b) Administrative procedure for the determination, assessment and 
collection of excess profit liability under the act and the regulations 
in this part and the examination of reports and claims in connection 
therewith will be prescribed from time to time by the Commissioner of 
Internal Revenue.

                Part 17--Excess Profits on Navy Contracts

     Regulations for Income-Taxable Years Ending After April 3, 1939

    Authority: Sections 17.1 to 17.19 issued under 52 Stat. 467; 26 
U.S.C. 3791. Interpret or apply sec. 3, 48 Stat. 505, as amended, 53 
Stat. 112; 34 U.S.C. 496, 26 U.S.C. 650, 651.

    Source: Sections 17.1 to 17.19 contained in T.D. 4906, 4 FR 2492, 
June 27, 1939, except as otherwise noted.

    Sec. 17.1 Definitions. As used in the regulations in this part the 
term:
    (a) Act means the act of March 27, 1934 (48 Stat. 505; 34 U.S.C. 
496), as originally enacted, as amended by the act of June 25, 1936 (49 
Stat. 1926; 34 U.S.C. 496), and as further amended by the act of April 
3, 1939 (53 Stat. 560; 34 U.S.C. 496).
    (b) Person includes an individual, a corporation, a partnership, a 
trust or estate, a joint-stock company, an association, or a syndicate, 
group, pool, joint venture or other unincorporated organization or 
group, through or by means of which any business, financial operation or 
venture is carried on.
    (c) Contract means an agreement made by authority of the Secretary 
of the Navy for the construction or manufacture of any complete naval 
vessel or aircraft or any portion thereof.
    (d) Contractor means a person entering into a direct contract with 
the Secretary of the Navy or his duly authorized representative.
    (e) Subcontract means an agreement entered into by one person with 
another person for the construction or manufacture of a complete naval 
vessel or aircraft or any portion thereof, the prime contract for such 
vessel or aircraft or portion thereof having been entered into between a 
contractor and the Secretary of the Navy or his duly authorized 
representative.
    (f) Subcontractor means any person other than a contractor entering 
into a subcontract.
    (g) Contracting party means a contractor or subcontractor as the 
case may be.
    (h) Contract price or contract price means the amount or total 
amount to be received under a contract or subcontract as the case may 
be.
    (i) Income-taxable year means the calendar year, the fiscal year 
ending during such calendar year or the fractional part of such calendar 
or fiscal year, upon the basis of which

[[Page 148]]

the contracting party's net income is computed and for which its income 
tax returns are made for Federal income tax purposes.
    Sec. 17.2 Scope of this part. The regulations in this part deal with 
liability for excess profit on contracts and subcontracts for the 
construction or manufacture of any complete naval vessel or aircraft or 
any portion thereof completed within income-taxable years ending after 
April 3, 1939. As to the date of the completion of a contract or 
subcontract, see Sec. 17.5.
    Sec. 17.3 Contracts and subcontracts under which excess profit 
liability may be incurred. Except as otherwise provided with respect to 
contracts or subcontracts for certain scientific equipment (see 
Sec. 17.4), every contract awarded for an amount exceeding $10,000 and 
entered into after the enactment of the act of March 27, 1934 for the 
construction or manufacture of any complete naval vessel or aircraft, or 
any portion thereof, is subject to the provisions of the act relating to 
excess profit liability. Any subcontract made with respect to such a 
contract and involving an amount in excess of $10,000 is also within the 
scope of the act. If a contracting party places orders with another 
party, aggregating an amount in excess of $10,000, for articles or 
materials which constitute a part of the cost of performing the contract 
or subcontract, the placing of such orders shall constitute a 
subcontract within the scope of the act, unless it is clearly shown that 
each of the orders involving $10,000 or less is a bona fide separate and 
distinct subcontract and not a subdivision made for the purpose of 
evading the provisions of the act.
    Sec. 17.4 Contracts or subcontracts for scientific equipment. No 
excess profit liability is incurred upon a contract or subcontract 
entered into after the amendment of section 3(b) of the act of June 25, 
1936, if at the time or prior to the time such contract or subcontract 
is made it is designated by the Secretary of the Navy as being exempt 
under the provisions of the act pertaining to scientific equipment used 
for communication, target detection, navigation, or fire control. The 
exemption of contracts or subcontracts for scientific equipment does not 
extend to any contract or subcontract entered into prior to the 
enactment of such amendment of section 3(b) of the act.
    Sec. 17.5 Completion of contract defined. The date of delivery of 
the vessel, aircraft or portion thereof covered by the contract or 
subcontract shall be considered the date of completion of the contract 
or subcontract unless otherwise determined jointly by the Secretary of 
the Navy and the Secretary of the Treasury or their duly authorized 
representatives. Except as otherwise provided in the preceding sentence, 
the replacement of defective parts of delivered articles or the 
performance of other guarantee work in respect to such articles will not 
operate to extend the date of completion. As to the treatment of the 
cost of such work as a cost of performing a contract or subcontract, see 
Sec. 17.9(h). As to a refund in case of adjustment due to any 
subsequently incurred additional costs, see Sec. 17.19. If a contract or 
subcontract is at any time cancelled or terminated, it is completed at 
the time of the cancellation or termination.
    Sec. 17.6 Manner of determining liability with respect to contracts 
or subcontracts for complete naval vessles or portions thereof. If in an 
income-taxable year ending after April 3, 1939 a contracting party 
completes one or more contracts or subcontracts coming within the scope 
of the act and entered into for the construction or manufacture of any 
complete naval vessel or any portion thereof, the amount of excess 
profit to be paid to the United States with respect to all such 
contracts and subcontracts completed within the income-taxable year 
shall be computed as follows:
    (a) The first step is to ascertain the total contract prices of all 
such contracts and subcontracts completed by the contracting party 
within the income-taxable year. As to total contract prices, see 
Secs. 17.1 and 17.8.
    (b) The second step is to ascertain the cost of performing such 
contracts and subcontracts (see Sec. 17.9) and to deduct such cost from 
the total contract prices of such contracts and subcontracts as computed 
in the first step.

The amount remaining after such subtraction is the amount of net profit 
or net loss upon such contracts and subcontracts completed within the 
income-taxable year.
    (c) The third step, in case there is a new profit upon such 
contracts and subcontracts, is to subtract from the amount of such net 
profit as computed in the second step the sum of:
    (1) An amount equal to 10 percent of the total contract prices of 
such contracts and subcontracts completed within the income- taxable 
year; and
    (2) The amount of any net loss which was sustained in the preceding 
income-taxable year with respect to contracts or subcontracts entered 
into for the construction or manufacture of any complete naval vessel or 
any portion thereof, and which is allowable as a credit in determining 
the excess profit for the income-taxable year with respect to contracts 
and subcontracts entered into for the construction or manufacture of any 
complete naval vessel or any portion thereof (see Sec. 17.10(a)).

The amount remaining after such subtraction is the amount of excess 
profit for the income-taxable year with respect to contracts and 
subcontracts entered into for the construction or manufacture of any 
complete naval vessel or any portion thereof.

[[Page 149]]

    (d) The fourth step is to ascertain the amount of credit allowed for 
Federal income taxes paid or remaining to be paid upon the amount of 
such excess profit as computed in the third step (see Sec. 17.11) and 
then subtract from the amount of such excess profit the amount of credit 
for Federal income taxes. The amount remaining after this subtraction is 
the amount of excess profit to be paid to the United States by the 
contracting party for the income-taxable year with respect to contracts 
and subcontracts entered into for the construction or manufacture of any 
complete naval vessel or any portion thereof and completed within the 
income- taxable year.
    (e) The application of the provisions of this section of the 
regulations may be illustrated by the following example:
    Example: On September 1, 1939 the A Corporation, which keeps its 
books and makes its Federal income tax returns on a calendar year basis, 
entered into a contract with the Secretary of the Navy for the 
construction of portions of a naval vessel coming within the scope of 
the act, the total contract price of which $200,000. On March 10, 1940 
the A Corporation entered into another such contract, the total contract 
price of which was $40,000. Both contracts were completed within the 
calendar year 1940, the first at a cost of $155,000 and the second at a 
cost of $45,000. During the year 1940 the A Corporation also completed 
at a loss of $10,000 two contracts entered into for the construction or 
manufacture of naval aircraft coming within the scope of the act. For 
the year 1939 the A Corporation sustained a net loss of $2,500 on all 
contracts and subcontracts for any complete naval vessel or any portion 
thereof coming within the scope of the act and completed within the 
calendar year 1939. For the year 1939 the A Corporation also sustained a 
net loss of $1,800 on all other contracts and subcontracts coming within 
the scope of the act which were completed within the calendar year 1939. 
For purposes of Federal income tax, the net income of the A Corporation 
for the year 1940 amounted to $96,000, which amount included the net 
profit of $40,000 upon the contracts entered into on September 1, 1939 
and March 10, 1940. For the year 1940 the A Corporation paid Federal 
income taxes amounting to $19,200. The excess profit liability of the A 
Corporation for 1940 is payable with respect to the contracts for 
portions of a naval vessel which were completed in 1940. The loss of 
$10,000 on other contracts completed in 1940 and the net loss of $1,800 
for 1939 on contracts and subcontracts for naval aircraft do not enter 
into the computation of such liability. Accordingly, the excess profit 
liability of the A Corporation for 1940 is $10,800 computed as follows:

Total contract prices:                                                  
  Contract No. 1................................    $200,000            
  Contract No. 2................................      40,000            
                                                 ------------           
                                                                $240,000
  Less cost of performing contracts:                                    
  Contract No. 1................................     155,000            
  Contract No. 2................................      45,000            
                                                 ------------           
                                                                 200,000
                                                             -----------
    Net profit on contracts.................................      40,000
                                                                        
Less:                                                                   
  10 percent of total contract prices (10                               
   percent of $240,000).........................      24,000            
  Net loss from 1939............................       2,500            
                                                 ------------           
                                                                  26,500
                                                             -----------
      Excess profit for year 1940...........................      13,500
  Less credit for Federal income taxes (Federal income tax              
   on $13,500 at rates for 1940)............................       2,700
                                                 -------------          
    Amount of excess profit payable to the United States....      10,800
                                                                        

    Sec. 17.7 Manner of determining liability with respect to contracts 
or subcontracts for complete naval aircraft or portions thereof. If in 
an income-taxable year ending after April 3, 1939 a contracting party 
completes one or more contracts or subcontracts coming within the scope 
of the act and entered into for the construction or manufacture of any 
complete naval aircraft or any portion thereof, the amount of excess 
profit to be paid to the United States with respect to all such 
contracts and subcontracts completed within the income-taxable year 
shall be computed as follows:
    (a) The first step is to ascertain the total contract prices of all 
such contracts and subcontracts completed by the contracting party 
within the income-taxable year. As to total contract prices, see 
Sec. Sec. 17.1 and 17.8.
    (b) The second step is to ascertain the cost of performing such 
contracts and subcontracts (see Sec. 17.9) and to deduct such cost from 
the total contract prices of such contracts and subcontracts as computed 
in the first step.

The amount remaining after such subtraction is the amount of net profit 
or net loss upon such contracts and subcontracts completed within the 
income-taxable year.
    (c) The third step, in case there is a net profit upon such 
contracts and subcontracts, is to subtract from the amount of such net 
profit as computed in the second step the sum of:
    (1) An amount equal to 12 percent of the total contract prices of 
such contracts and subcontracts completed within the income- taxable 
year;

[[Page 150]]

    (2) The amount of any net loss which was sustained in the same or a 
prior income- taxable year with respect to contracts or subcontracts for 
the construction or manufacture of any complete aircraft or any portion 
thereof, and which is allowable as a credit in determining the excess 
profit for the income-taxable year with respect to contracts and 
subcontracts entered into for the construction or manufacture of 
complete aircraft or any portion thereof (see Sec. 17.10(b)); and
    (3) The amount of any deficiency in profit which was sustained in 
the same or a prior income-taxable year with respect to contracts or 
subcontracts for the construction or manufacture of any complete 
aircraft or any portion thereof, and which is allowable as a credit in 
determining the excess profit for the income-taxable year with respect 
to contracts and subcontracts entered into for the construction or 
manufacture of complete aircraft or any portion thereof (see 
Sec. 17.10(c)).

 The amount remaining after such subtraction is the amount of excess 
profit for the income-taxable year with respect to contracts and 
subcontracts entered into for the construction or manufacture of 
complete naval aircraft or any portion thereof.
    (d) The fourth step is to ascertain the amount of credit allowed for 
Federal income taxes paid or remaining to be paid upon the amount of 
such excess profit as computed in the third step (see Sec. 17.11) and 
then subtract from the amount of such excess profit the amount of credit 
for Federal income taxes. The amount remaining after this subtraction is 
the amount of excess profit to be paid to the United States by the 
contracting party for the income-taxable year with respect to contracts 
and subcontracts entered into for the construction or manufacture of 
complete naval aircraft or any portion thereof and completed within the 
income-taxable year.
    (e) The application of the provisions of this section of the 
regulations may be illustrated by the following example:
    Example. On September 1, 1939, the B Corporation, which keeps its 
books and makes its Federal income tax returns on a calendar year basis, 
entered into a contract with the Secretary of the Navy for the 
construction of naval aircraft coming within the scope of the act, the 
total contract price of which was $200,000. On March 10, 1940, the B 
Corporation entered into another such contract, the total contract price 
of which was $40,000. Both contracts were completed within the calendar 
year 1940, the first at a cost of $155,000 and the second at a cost of 
$45,000. During the year 1940, the B Corporation also completed at a 
deficiency in profit of $2,000 a contract entered into for the 
construction of Army aircraft coming within the scope of the act. During 
the year 1940, the B Corporation also completed at a loss of $10,000 two 
contracts entered into for the construction or manufacture of portions 
of a naval vessel coming within the scope of the act. For the year 1939, 
the B Corporation sustained a net loss of $2,500 and a deficiency in 
profit of $1,000 on all contracts and subcontracts for naval aircraft 
coming within the scope of the act and completed within the calendar 
year 1939. For the year 1939, the B Corporation also sustained a net 
loss of $1,800 on a contract for the construction of Army aircraft 
coming within the scope of the act which was completed within the 
calendar year 1939. For the purposes of the Federal income tax, the net 
income of the B Corporation for the year 1940, on which the tax was 
paid, amounted to $96,000, which included the net profit of $40,000 upon 
the contracts entered into on September 1, 1939, and March 10, 1940. The 
excess profit liability of the B Corporation for 1940 is payable with 
respect to the contracts for naval aircraft which were completed in 
1940. The loss of $10,000 on the contracts for portions of a naval 
vessel completed in 1940 does not enter into the computation of such 
liability. Accordingly, the excess profit liability of the B Corporation 
for 1940 is $2,964 computed as follows:

Total contract prices:                                                  
  Contract No. 1................................    $200,000            
  Contract No. 2................................      40,000            
                                                 ------------           
                                                                $240,000
Less: Cost of performing contracts:                                     
  Contract No. 1................................     155,000            
  Contract No. 2................................      45,000            
                                                 ------------           
                                                                 200,000
                                                             -----------
Net profit on contracts.....................................      40,000
                                                                        
Less:                                                                   
  12 percent of total contract prices (12                               
   percent of $240,000).........................      28,800            
  Deficiency in profit (in Army aircraft                                
   contracts) in 1940...........................       2,000            
  Net loss (in naval aircraft contracts) from                           
   1939.........................................       2,500            
  Net loss (in Army aircraft contracts) from                            
   1939.........................................       1,800            
  Deficiency in profit (in naval aircraft                               
   contracts) from 1939.........................       1,000            
                                                 ------------           
                                                                  36,100
                                                             -----------
                                                                        
Excess profit for year 1940.................................       3,900
                                                                        
Less: Credit for Federal income taxes (Federal income tax on            
 $3,900 at rates for 1940)..................................         936
                                                 -------------          
Amount of excess profit payable to the United States........       2,964
                                                                        

[T.D. 4906, 4 FR 2492, June 27, 1939, as amended by T.D. 6512, 25 FR 
12443, Dec. 6, 1960]

    Sec. 17.8 Total contract price. The total contract price of a 
particular contract or subcontract (see Sec. 17.1) may be received in 
money or its equivalent. If something other than money is received, only 
the fair market

[[Page 151]]

value of the thing received, at the date of receipt, is to be included 
in determining the amount received. Bonuses earned for bettering 
performance and penalties incurred for failure to meet the contract 
guarantees are to be regarded as adjustments of the original contract 
price. Trade or other discounts granted by a contracting party in 
respect of a contract or subcontract performed by such party are also to 
be deducted in determining the true total contract price of such 
contract or subcontract.
    Sec. 17.9 Cost of performing a contract or subcontract--(a) General 
rule. The cost of performing a particular contract or subcontract shall 
be the sum of (1) the direct costs, including therein expenditures for 
materials, direct labor and direct expenses, incurred by the contracting 
party in performing the contract or subcontract; and (2) the proper 
proportion of any indirect costs (including therein a reasonable 
proportion of management expenses) incident to and necessary for the 
performance of the contract or subcontract.
    (b) Elements of cost. No definitions of the elements of cost may be 
stated which are of invariable application to all contractors and 
subcontractors. In general, the elements of cost may be defined for 
purposes of the act as follows:
    (1) Manufacturing cost, which is the sum of factory cost (see 
paragraph (c) of this section) and other manufacturing cost (see 
paragraph (d) of this section);
    (2) Miscellaneous direct expenses (see paragraph (e) of this 
section);
    (3) General expenses, which are the sum of indirect engineering 
expenses, usually termed ``engineering overhead'' (see paragraph (f) of 
this section) and expenses of distribution, servicing and administration 
(see paragraph (g) of this section); and
    (4) Guarantee expenses (see paragraph (h) of this section).
    (c) Factory cost. Factory cost is the sum of the following:
    (1) Direct materials. Materials, such as those purchased for stock 
and subsequently issued for contract operations and those acquired under 
subcontracts, which become a component part of the finished product or 
which are used directly in fabricating, converting or processing such 
materials or parts.
    (2) Direct productive labor. Productive labor, usually termed ``shop 
labor,'' which is performed on and is properly chargeable directly to 
the article manufactured or constructed pursuant to the contract or 
subcontract, but which ordinarily does not include direct engineering 
labor (see subparagraph (3) of this paragraph).
    (3) Direct engineering labor. The compensation of professional 
engineers and other technicists (including reasonable advisory fees), 
and of draftsmen, properly chargeable directly to the cost of the 
contract or subcontract.
    (4) Miscellaneous direct factory charges. Items which are properly 
chargeable directly to the factory cost of performing the contract or 
subcontract but which do not come within the classifications in 
subparagraphs (1), (2), and (3) of this paragraph, as for example, 
royalties which the contracting party pays to another party and which 
are properly chargeable to the cost of performing the contract or 
subcontract (but see paragraph (d) of this section).
    (5) Indirect factory expenses. Items, usually termed ``factory 
overhead,'' which are not directly chargeable to the factory cost of 
performing the contract or subcontract but which are properly incident 
to and necessary for the performance of the contract or subcontract and 
consist of the following:
    (i) Labor. Amounts expended for factory labor, such as supervision 
and inspection, clerical labor, timekeeping, packing and shipping, 
stores supply, services of tool crib attendants, and services in the 
factory employment bureau, which are not chargeable directly to 
productive labor of the contract or subcontract.
    (ii) Materials and supplies. The cost of materials and supplies for 
general use in the factory in current operations, such as shop fuel, 
lubricants, heat-treating, plating, cleaning and anodizing supplies, 
nondurable tools and gauges, stationery (such as time tickets and other 
forms), and boxing and wrapping materials.
    (iii) Service expenses. Factory expenses of a general nature, such 
as those for power, heat and light (whether purchased or produced), 
ventilation and air conditioning and operation and maintenance of 
general plant assets and facilities.
    (iv) Fixed charges and obsolescence. Recurring charges with respect 
to property used for manufacturing purposes of the contract or 
subcontract, such as premiums for fire and elevator insurance, property 
taxes, rentals and allowances for depreciation of such property, 
including maintenance and depreciation of reasonable standby equipment; 
and depreciation and obsolescence of special equipment and facilities 
necessarily acquired primarily for the performance of the contract or 
subcontract. In making allowances for depreciation, consideration shall 
be given to the number and length of shifts.
    (v) Miscellaneous indirect factory expenses. Miscellaneous factory 
expenses not directly chargeable to the factory cost of performing the 
contract or subcontract, such as purchasing expenses; ordinary and 
necessary expenses of rearranging facilities within a department or 
plant; employees' welfare expenses; premiums or dues on compensation 
insurance; employers' payments to unemployment, old age and social 
security, Federal and State funds not including payments

[[Page 152]]

deducted from or chargeable to employees or officers; pensions and 
retirement payments to factory employees; factory accident compensation 
(as to self-insurance, see paragraph (g) of this section); but not 
including any amounts which are not incident to services, operations, 
plant, equipment or facilities involved in the performance of the 
contract or subcontract.
    (d) Other manufacturing cost. Other manufacturing cost as used in 
paragraph (b) of this section includes items of manufacturing costs 
which are not properly or satisfactorily chargeable to factory costs 
(see paragraph (c) of this section) but which upon a complete showing of 
all pertinent facts are properly to be included as a cost of performing 
the contract or subcontract, as for instance, payments of royalties and 
amortization of the cost of designs purchased and patent rights over 
their useful life; and ``deferred'' or ``unliquidated'' experimental and 
development charges. For example, in case experimental and development 
costs have been properly deferred or capitalized and are amortized in 
accordance with a reasonably consistent plan, a proper portion of the 
current charge, determined by a ratable allocation which is reasonable 
in consideration of the pertinent facts, may be treated as a cost of 
performing the contract or subcontract. In the case of general 
experimental and development expenses which may be charged off 
currently, a reasonable portion thereof may be allocated to the cost of 
performing the contract or subcontract. If a special experimental or 
development project is carried on in pursuance of a contract, or in 
anticipation of a contract which is later entered into, and the expense 
is not treated as a part of general experimental and development 
expenses or is not otherwise allowed as a cost of performing the 
contract, there clearly appearing no reasonable prospect of an 
additional contract for the type of article involved, the entire cost of 
such project may be allowed as a part of the cost of performing the 
contract.
    (e) Miscellaneous direct expenses. Miscellaneous direct expenses as 
used in paragraph (b) of this section include:
    (1) Cost of installation and construction. Cost of installation and 
construction includes the cost of materials, labor and expenses 
necessary for the erection and installation prior to the completion of 
the contract and after the delivery of the product or material 
manufactured or constructed pursuant to the contract or subcontract.
    (2) Sundry direct expenses. Items of expense which are properly 
chargeable directly to the cost of performing a contract or subcontract 
and which do not constitute guarantee expenses (see paragraph (h) of 
this section) or direct costs classified as factory cost or other 
manufacturing cost (see paragraphs (c) and (d) of this section), such as 
premiums on performance or other bonds required under the contract or 
subcontract; State sales taxes imposed on the contracting party; freight 
on outgoing shipments; fees paid for wind tunnel and model basin tests; 
demonstration and test expenses; crash insurance premiums; traveling 
expenses. In order for any such item to be allowed as a charge directly 
to the cost of performing a contract or subcontract, (i) a detailed 
record shall be kept by the contracting party of all items of a similar 
character, and (ii) no item of a similar character which is properly a 
direct charge to other work shall be allowed as a part of any indirect 
expenses in determining the proper proportion thereof chargeable to the 
cost of performing the contract or subcontract. As to allowable indirect 
expenses, see paragraphs (c)(5), (f), (g), and (j) of this section.
    (f) Indirect engineering expenses. Indirect engineering expenses, 
usually termed ``engineering overhead,'' which are treated in this 
section as a part of general expenses in determining the cost of 
performing a contract or subcontract (see paragraph (b) of this 
section), comprise the general engineering expenses which are incident 
to and necessary for the performance of the contract or subcontract, 
such as the following:
    (1) Labor. Reasonable fees of engineers employed in a general 
consulting capacity, and compensation of employees for personal services 
to the engineering department, such as supervision, which is properly 
chargeable to the contract or subcontract, but which is not chargeable 
as direct engineering labor (see paragraph (c)(3) of this section).
    (2) Material. Supplies for the engineering department, such as paper 
and ink for drafting and similar supplies.
    (3) Miscellaneous expenses. Expenses of the engineering department, 
such as (i) maintenance and repair of engineering equipment, and (ii) 
services purchased outside of the engineering department for blue- 
printing, drawing, computing, and like purposes.
    (g) Expenses of distribution, servicing and administration. Expenses 
of distribution, servicing and administration, which are treated in this 
section as a part of general expenses in determining the cost of 
performing a contract or subcontract (see paragraph (b) of this 
section), comprehend the expenses incident to and necessary for the 
performance of the contract or subcontract, which are incurred in 
connection with the distribution and general servicing of the 
contracting party's products and the general administration of the 
business, such as:
    (1) Compensation for personal services of employees. The salaries of 
the corporate and general executive officers and the salaries and wages 
of administrative clerical employees and of the office services 
employees such as telephone operators, janitors, cleaners, watchmen and 
office equipment repairmen.

[[Page 153]]

    (2) Bidding and general selling expenses. Bidding and general 
selling expenses which by reference to all the pertinent facts and 
circumstances reasonably constitute a part of the cost of performing a 
contract or subcontract. The treatment of bidding and general selling 
expenses as a part of general expenses in accordance with this paragraph 
is in lieu of any direct charges which otherwise might be made for such 
expenses. The term ``bidding expenses'' as used in this section includes 
all expenses in connection with preparing and submitting bids.
    (3) General servicing expenses. Expenses which by reference to all 
the pertinent facts and circumstances reasonably constitute a part of 
the cost of performing a contract or subcontract and which are incident 
to delivered or installed articles and are due to ordinary adjustments 
or minor defects; but including no items which are treated as a part of 
guarantee expenses (see paragraph (h) of this section) or as a part of 
direct costs, such as direct materials, direct labor, and other direct 
expense.
    (4) Other expenses. Miscellaneous office and administrative 
expenses, such as stationery and office supplies; postage; repair and 
depreciation of office equipment; contributions to local charitable or 
community organizations to the extent constituting ordinary and 
necessary business expenses; employees' welfare expenses; premiums and 
dues on compensation insurance; employers' payments to unemployment, old 
age and social security Federal and State funds not including payments 
deducted from or chargeable to employees or officers; pensions and 
retirement payments to administrative office employees and accident 
compensation to office employees (as to self-insurance, see subdivision 
(i) of this subparagraph).
    (i) Subject to the exception stated in this subdivision, in cases 
where a contracting party assumes its own insurable risks (usually 
termed ``self-insurance''), losses and payments will be allowed in the 
cost of performing a contract or subcontract only to the extent of the 
actual losses suffered or payments incurred during, and in the course 
of, the performance of the contract or subcontract and properly 
chargeable to such contract or subcontract. If, however, a contracting 
party assumes its own insurable risks (a) for compensation paid to 
employees for injuries received in the performance of their duties, or 
(b) for unemployment risks in States where insurance is required, there 
may be allowed as a part of the cost of performing a contract or 
subcontract a reasonable portion of the charges set up for purposes of 
self-insurance under a system of accounting regularly employed by the 
contracting party, as determined by the Commissioner of Internal 
Revenue, at rates not exceeding the lawful or approved rates of 
insurance companies for such insurance, reduced by amounts representing 
the acquisition cost in such companies, provided the contracting party 
adopts and consistently follows this method with respect to self-
insurance in connection with all contracts and subcontracts subsequently 
performed by him.
    (ii) Allowances for interest on invested capital are not allowable 
as costs of performing a contract or subcontract.
    (iii) Among the items which shall not be included as a part of the 
cost of performing a contract or subcontract or considered in 
determining such cost, are the following: Entertainment expenses; dues 
and memberships other than of regular trade associations; donations 
except as otherwise provided above; losses on other contracts; profits 
or losses from sales or exchanges of capital assets; extraordinary 
expenses due to strikes or lockouts; fines and penalties; amortization 
of unrealized appreciation of values of assets; expenses, maintenance 
and depreciation of excess facilities (including idle land and building, 
idle parts of a building, and excess machinery and equipment) vacated or 
abandoned, or not adaptable for future use in performing contracts or 
subcontracts; increases in reserve accounts for contingencies, repairs, 
compensation insurance (except as above provided with respect to self-
insurance) and guarantee work; Federal and State income and excess-
profits taxes and surtaxes; cash discount earned up to one percent of 
the amount of the purchase, except that all discounts on subcontracts 
subject to the act will be considered; interest incurred or earned; bond 
discount or finance charges; premiums for life insurance on the lives of 
officers; legal and accounting fees in connection with reorganizations, 
security issues, capital stock issues and the prosecution of claims 
against the United States (including income tax matters); taxes and 
expenses on issues and transfers of capital stock; losses on 
investments; bad debts; and expenses of collection and exchange.
    (iv) In order that the cost of performing a contract or subcontract 
may be accounted for clearly, the amount of any excess profits repayable 
to the United States pursuant to the act should not be charged to or 
included in such cost.
    (h) Guarantee expenses. Guarantee expenses include the various items 
of factory, cost, other manufacturing cost, cost of installation and 
construction, indirect engineering expenses and other general expenses 
(see paragraphs (c) to (g) of this section) which are incurred after 
delivery or installation of the article manufactured or constructed 
pursuant to the particular contract or subcontract and which are 
incident to the correction of defects or deficiencies which the 
contracting party is required to make under the guarantee provisions of 
the particular contract or subcontract. If the total amount

[[Page 154]]

of such guarantee expenses is not ascertainable at the time of filing 
the report required to be filed with the district director of internal 
revenue (see Sec. 17.16) and the contracting party includes any 
estimated amount of such expenses as part of the claimed total cost of 
performing the contract or subcontract, such estimated amount shall be 
separately shown on the report and the reasons for claiming such 
estimated amount shall accompany the report; but only the amount of 
guarantee expenses actually incurred will be allowed. If the amount of 
guarantee expenses actually incurred is greater than the amount (if any) 
claimed on the report and the contracting party has made an overpayment 
of excess profit, a refund of the overpayment shall be made, in 
accordance with the provisions of Sec. 17.19. If the amount of guarantee 
expenses actually incurred is less than the amount claimed on the report 
and an additional amount of excess profit is determined to be due, the 
additional amount of excess profit shall be assessed and paid in 
accordance with the provisions of Sec. 17.19.
    (i) Unreasonable compensation. (1) The salaries and compensation for 
services which are treated as a part of the cost of performing a 
contract or subcontract include reasonable payments for salaries, 
bonuses, or other compensation for services. As a general rule, bonuses 
paid to employees (and not to officers) in pursuance of a regularly 
established incentive bonus system may be allowed as a part of the cost 
of performing a contract or subcontract.
    (2) The test of allowability is whether the aggregate compensation 
paid to each individual is for services actually rendered incident to, 
and necessary for, the performance of the contract or subcontract, and 
is reasonable. Excessive or unreasonable payments whether in cash, stock 
or other property ostensibly as compensation for services shall not be 
included in the cost of performing a contract or subcontract.
    (j) Allocation of indirect costs. No general rule applicable to all 
cases may be stated for ascertaining the proper proportion of the 
indirect costs to be allocated to the cost of performing a particular 
contract or subcontract. Such proper proportion depends upon all the 
facts and circumstances relating to the performance of the particular 
contract or subcontract. Subject to a requirement that all items which 
have no relation to the performance of the contract or subcontract shall 
be eliminated from the amount to be allocated, the following methods of 
allocation are outlined as acceptable in a majority of cases:
    (1) Factory indirect expenses. The allowable indirect factory 
expenses (see paragraph (c)(5) of this section) shall ordinarily be 
allocated or ``distributed'' to the cost of the contract or subcontract 
on the basis of the proportion which the direct productive labor (see 
paragraph (c)(2) of this section) attributable to the contract or 
subcontract bears to the total direct productive labor of the production 
department or particular section thereof during the period within which 
the contract or subcontract is performed, except that if the indirect 
factory expenses are incurred in different amounts and in different 
proportions by the various producing departments consideration shall be 
given to such circumstances to the extent necessary to make a fair and 
reasonable determination of the true profit and excess profit.
    (2) Engineering indirect expenses. The allowable indirect 
engineering expenses (see paragraph (f) of this section) shall 
ordinarily be allocated or ``distributed'' to the cost of the contract 
or subcontract on the basis of the proportion which the direct 
engineering labor attributable to the contract or subcontract (see 
paragraph (c)(3) of this section) bears to the total direct engineering 
labor of the engineering department or particular section thereof during 
the period within which the contract or subcontract is performed. If the 
expenses of the engineering department are not sufficient in amount to 
require the maintenance of separate accounts, the engineering indirect 
costs may be included in the indirect factory expenses (see paragraph 
(c)(5) of this section) and allocated or distributed to the cost of 
performing the contract or subcontract as a part of such expenses, 
provided the proportion so allocated or distributed is proper under the 
facts and circumstances relating to the performance of the particular 
contract or subcontract.
    (3) Administrative expenses (or ``overhead''). The allowable 
expenses of administration (see paragraph (g) of this section) or other 
general expenses except indirect engineering expenses, bidding and 
general selling expenses, and general servicing expenses shall 
ordinarily be allocated or distributed to the cost of performing a 
contract or subcontract on the basis of the proportion which the sum of 
the manufacturing cost (see paragraph (b) of this section) and the cost 
of installation and construction (see paragraph (e) of this section) 
attributable to the particular contract or subcontract bears to the sum 
of the total manufacturing cost and the total cost of installation and 
construction during the period within which the contract or subcontract 
is performed.
    (4) Bidding, general selling, and general servicing expenses. The 
allowable bidding and general selling expenses and general servicing 
expenses (see paragraph (g) (2) and (3) of this section) shall 
ordinarily be allocated or distributed to the cost of performing a 
contract or subcontract on the basis of:
    (i) The proportion which the contract price of the particular 
contract or subcontract bears to the total sales made (including 
contracts or subcontracts completed) during the

[[Page 155]]

period within which the particular contract or subcontract is performed, 
or
    (ii) The proportion which the sum of the manufacturing cost (see 
paragraph (b) of this section) and the cost of installation and 
construction (see paragraph (e) of this section) attributable to the 
particular contract or subcontract bears to the sum of the total 
manufacturing cost and the total cost of installation and construction 
during the period within which the contract or subcontract is performed.

except that special consideration shall be given to the relation which 
certain classes of such expenses bear to the various classes of article 
produced by the contracting party in each case in which such 
consideration is necessary in order to make a fair and reasonable 
determination of the true profit and excess profit. See Sec. 17.14.
    Sec. 17.10 Credits for net loss and deficiency in profit in 
computing excess profit--(a) Net loss on contracts and subcontracts for 
naval vessels or portions thereof. In the case of contracts or 
subcontracts for the construction or manufacture of any complete naval 
vessel or any portion thereof coming within the scope of the act which 
are completed within an income-taxable year ending after April 3, 1939, 
the term ``net loss'' as used in the act and in this part means the 
amount by which the total costs of performing all such contracts and 
subcontracts completed within such income-taxable year exceeds the total 
contract prices of such contracts and subcontracts. Such net loss 
sustained by a contracting party for an income-taxable year ending after 
April 3, 1939, is allowable as a credit in computing the contracting 
party's excess profit on contracts and subcontracts for the construction 
or manufacture of any complete naval vessel or any portion thereof which 
are completed within the next succeeding income-taxable year.
    (b) Net loss on contracts and subcontracts for aircraft or portions 
thereof. In the case of contracts or subcontracts for the construction 
or manufacture of any complete aircraft or any portion thereof coming 
within the scope of the act, which are completed within an income-
taxable year ending after April 3, 1939, the term ``net loss'' as used 
in the act and in these regulations means the amount by which the total 
costs of performing all such contracts and subcontracts completed within 
such income-taxable year exceeds the total contract prices of such 
contracts and subcontracts. Such net loss sustained by a contracting 
party for an income-taxable year ending after April 3, 1939, is 
allowable as a credit in computing the contracting party's excess profit 
on contracts and subcontracts for the construction or manufacture of any 
complete aircraft or any portion thereof which are completed within the 
four next succeeding income-taxable years.
    (c) Deficiency in profit. The term ``deficiency in profit'' as used 
in the act and in this part relates to contracts and subcontracts coming 
within the scope of the act which are for the construction or 
manufacture of any complete aircraft or any portion thereof and are 
completed within an income-taxable year ending after April 3, 1939. As 
so used, the term ``deficiency in profit'' means the amount by which 12 
percent of the total contract prices of such contracts and subcontracts 
which are completed by a particular contracting party within the income-
taxable year exceeds the net profit upon such contracts and 
subcontracts. A deficiency in profit sustained by a contracting party 
with respect to such contracts and subcontracts for the construction or 
manufacture of complete aircraft or any portion thereof and completed 
within any income-taxable year ending after April 3, 1939, is allowable 
as a credit in computing the contracting party's excess profit on 
contracts and subcontracts for the construction or manufacture of 
complete aircraft or any portion thereof which are completed within the 
same or the four next succeeding income-taxable years.
    (d) Claim for credit. Credit for a deficiency in profit or a net 
loss may be claimed in the contracting party's annual report of profit 
filed with the district director of internal revenue (see Sec. 17.16), 
but it shall be supported by separate schedules for each contract or 
subcontract involved showing total contract prices, costs of performance 
and pertinent facts relative thereto, together with a summarized 
computation of the deficiency in profit or net loss. The deficiency in 
profit or net loss claimed is subject to verification and adjustment. As 
to preservation of books and records, see Sec. 17.14. A deficiency in 
profit or net loss sustained on contracts and subcontracts completed 
within one income-taxable year may not be considered in computing a net 
loss or deficiency in profit sustained on contracts and subcontracts 
completed within another income- taxable year.
    (e) Examples. The provisions of this section of the regulations may 
be illustrated by the following examples:
    Example (1) For the calendar year 1939 the A Corporation, which 
keeps its books and makes its Federal income tax returns on a calendar 
year basis, sustained a net loss of $50,000 upon all contracts and 
subcontracts coming within the scope of the act which were entered into 
for the construction or manufacture of any complete naval vessel or any 
portion thereof and were completed within the calendar year 1939. For 
the calendar year 1940 the A Corporation had a net profit of $30,000 
upon all such contracts and subcontracts completed within the year 1940. 
It also had a net profit of $10,000 upon other contracts completed 
within that year all

[[Page 156]]

such contracts being for naval aircraft coming within the scope of the 
act. For the calendar year 1941 the corporation had a net profit of 
$25,000 upon contracts completed within that year. The net loss of 
$50,000 sustained in 1939 may be taken as a credit against the net 
profit of $30,000 realized in 1940 upon the contracts for the 
construction or manufacture of complete naval vessels or portions 
thereof completed within that year; but the excess of $20,000 ($50,000 
minus $30,000) may not be taken as a credit in computing the excess 
profit realized upon the other contracts completed in 1940 at a net 
profit of $10,000 or as a credit in computing the excess profit upon the 
contracts completed within the year 1941 at a net profit of $25,000.
    Example (2). For the calendar year 1939, the B Corporation, which 
keeps its books and makes its Federal income tax returns on a calendar 
year basis, sustained a net loss of $10,000 and a deficiency in profit 
of $35,000 upon all contracts and subcontracts for naval aircraft and 
portions thereof coming within the scope of the act and completed within 
that year. During the year 1939, the B Corporation also completed 
contracts for Army aircraft coming within the scope of the Act at a net 
profit which was $15,000 in excess of 12 percent of the total contract 
prices of such contracts. On all contracts and subcontracts for naval 
aircraft coming within the scope of the act and completed within the 
calendar year 1940, the B Corporation realized a net profit which was 
$25,000 in excess of 12 percent of the total contract prices of such 
contracts and subcontracts while sustaining a deficiency in profit of 
$10,000 on like contracts and subcontracts for Army aircraft. On all 
contracts and subcontracts for naval aircraft coming within the scope of 
the act and completed within the calendar year 1941, the B Corporation 
realized a net profit which was $20,000 in excess of 12 percent of the 
total contract prices of such contracts. The net loss of $10,000 and 
deficiency in profit of $35,000 (or a total of $45,000) sustained in 
1939 with respect to contracts and subcontracts for naval aircraft 
completed within that year may be taken as a credit to the extent of 
$15,000 in computing the excess profit on the contracts and subcontracts 
for Army aircraft completed in 1939. The remainder of such net loss and 
such deficiency in profit ($45,000 minus $15,000, or $30,000) may be 
combined with the deficiency in profit of $10,000 sustained in 1940 on 
contracts for Army aircraft and taken as a credit to the extent of 
$25,000 in computing the excess profit on the contracts and subcontracts 
for aircraft completed during 1940. The sum of such net loss and such 
deficiency in profit then remaining ($40,000 minus $25,000, or $15,000) 
may be taken as a credit in computing the excess profit realized on the 
contracts and subcontracts for aircraft completed in the year 1941.

[T.D. 4906, 4 FR 2492, June 27, 1939, as amended by T.D. 6512, 25 FR 
12444, Dec. 6, 1960]

    Sec. 17.11 Credit for Federal income taxes. For the purpose of 
computing the amount of excess profit to be paid to the United States, a 
credit is allowable against the excess profit for the amount of Federal 
income taxes paid or remaining to be paid on the amount of such excess 
profit. The ``Federal income taxes'' in respect of which this credit is 
allowable include the income taxes imposed by Titles I and IA of the 
Revenue Act of 1938, and Chapter 1 and Subchapter A of Chapter 2 of the 
Internal Revenue Code, and the excess-profits taxes imposed by section 
602 of the Revenue Act of 1938, and Subchapter B of Chapter 2 of the 
Internal Revenue Code. This credit is allowable for these taxes only to 
the extent that it is affirmatively shown that they have been finally 
determined and paid or remain to be paid and that they were imposed upon 
the excess profit against which the credit is to be made. In case such a 
credit has been allowed and the amount of Federal income taxes imposed 
upon the excess profit is redetermined, the credit previously allowed 
shall be accordingly adjusted.
    Sec. 17.12 Failure of contractor to require agreement by 
subcontractor. (a) Every contract or subcontract coming within the scope 
of the act is required by the act to contain, among other things, an 
agreement by the contracting party to make no subcontract unless the 
subcontractor agrees:
    (1) To make a report, as described in the act, under oath to the 
Secretary of the Navy upon the completion of the subcontract;
    (2) To pay into the Treasury excess profit, as determined by the 
Treasury Department, in the manner and amounts specified in the act;
    (3) To make no subdivision of the subcontract for the same article 
or articles for the purpose of evading the provisions of the act;
    (4) That the manufacturing spaces and books of its own plant, 
affiliates, and subdivisions shall at all times be subject to inspection 
and audit as provided in the act.
    (b) If a contracting party enters into a subcontract with a 
subcontractor who fails to make such agreement, such contracting party 
shall, in addition to its liability for excess profit determined on 
contracts or subcontracts performed by it, be liable for any excess 
profit determined to be due the United States on the subcontract entered 
into with such subcontractor. In such event, however, the excess profit 
to be paid to the United States in respect of the subcontract entered 
into with such subcontractor shall be determined separately from any 
contracts or subcontracts performed by the contracting

[[Page 157]]

party entering into the subcontract with such subcontractor.
    Sec. 17.13 Evasion of excess profit. Section 3 of the act provides 
that the contracting party shall agree to make no subdivisions of any 
contract or subcontract for the same article or articles for the purpose 
of evading the provisions of the act. If any such subdivision or 
subcontract is made it shall constitute a violation of the agreement 
provided for in the act, and the cost of completing a contract or 
subcontract by a contracting party which violates such agreement shall 
be determined in a manner necessary clearly to reflect the true excess 
profit of such contracting party.
    Sec. 17.14 Books of account and records. (a) It is recognized that 
no uniform method of accounting can be prescribed for all contracting 
parties subject to the provisions of the act. Each contracting party is 
required by law to make a report of its true profit and excess profit. 
Such party must, therefore, maintain such accounting records as will 
enable it to do so. See Sec. 17.9. Among the essentials are the 
following:
    (1) The profit or loss upon a particular contract or subcontract 
shall be accounted for and fully explained in the books of account 
separately on each contract or subcontract.
    (2) Any cost accounting methods, however standard they may be and 
regardless of long continued practice, shall be controlled by, and be in 
accord with, the objectives and purposes of the act and of any 
regulations prescribed thereunder.
    (3) The accounts shall clearly disclose the nature and amount of the 
different items of cost of performing a contract or subcontract.
    (b) In cases where it has been the custom priorly to use so-called 
``normal'' rates of overhead expense or administrative expenses, or 
``standard'' or ``normal'' prices of material or labor charges, no 
objection will be made to the use temporarily during the period of 
performing the contract or subcontract of such methods in charging the 
contract or subcontract, if the method of accounting employed is such as 
clearly to reflect, in the final determination upon the books of 
account, the actual profit derived from the performance of the contract 
or subcontract and if the necessary adjusting entries are entered upon 
the books and they explain in full detail the revisions necessary to 
accord with the facts. As to the elements of cost, see Sec. 17.9.
    (c) All books, records, and original evidences of costs (including, 
for example, production orders, bills or schedules of materials, 
purchase requisitions, purchase orders, vouchers, requisitions for 
materials, standing expense orders, inventories, labor time cards, 
payrolls, cost distribution sheets) pertinent to the determination of 
the true profit, excess profit, deficiency in profit, or net loss from 
the performance of a contract or subcontract shall be kept at all times 
available for inspection by internal revenue officers, and shall be 
carefully preserved and retained so long as the contents thereof may 
become material in the administration of the act. This provision is not 
confined to books, records and original evidences pertaining to items 
which may be considered to be a part of the cost of performing a 
contract or subcontract. It is applicable to all books, records and 
original evidences of costs of each plant, branch or department involved 
in the performance of a contract or subcontract or in the distribution 
of costs to the contract or subcontract.
    Sec. 17.15 Report to Secretary of the Navy. (a) Upon the completion 
of a contract or a subcontract coming within the scope of the act and 
this part, the contracting party is required to make a report, under 
oath, to the Secretary of the Navy. As to the date of completion of a 
contract or subcontract, see Sec. 17.5. The act requires that such 
report shall be in the form prescribed by the Secretary of the Navy and 
shall state the total contract price, the cost of performing the 
contract, the net income from such contract, and the per centum such 
income bears to the contract price. The contracting party shall also 
include as a part of such report a statement showing:
    (1) The manner in which the indirect costs were determined and 
allocated to the cost of performing the contract or subcontract (see 
Sec. 17.9);
    (2) The name and address of every subcontractor with whom a 
subcontract was made, the object of such subcontract, the date when 
completed and the amount thereof; and
    (3) The name and address of each affiliate or other organization, 
trade or business owned or controlled directly or indirectly by the same 
interests as those who so own or control the contracting party, together 
with a statement showing in detail all transactions which were made with 
such affiliate or other organization, trade or business and are 
pertinent to the determination of the excess profit.
    (b) A copy of the report required to be made to the Secretary of the 
Navy is required to be transmitted by the contracting party to the 
Secretary of the Treasury. Such copy shall not be transmitted directly 
to the Secretary of the Treasury but shall be filed as a part of the 
annual report. See Sec. 17.16.
    Sec. 17.16 Annual reports for income-taxable years--(a) General 
requirements. Every contracting party completing a contract or 
subcontract within the contracting party's income-taxable year ending 
after April 3, 1939 shall file, with the district director of internal 
revenue for the internal revenue district in which the contracting 
party's Federal income tax return is required to be filed, annual 
reports on the prescribed forms of the

[[Page 158]]

profit and excess profit on all contracts and subcontracts coming within 
the scope of the act. If any contracts or subcontracts so completed by 
the contracting party were entered into for the construction or 
manufacture of any complete naval vessel or any portion thereof, the 
profit and excess profit on all such contracts and subcontracts 
completed within the income-taxable year ending after April 3, 1939 
shall be computed in accordance with the provisions of Sec. 17.6. If any 
contracts or subcontracts so completed by the contracting party were 
entered into for the construction or manufacture of any complete naval 
aircraft or any portion thereof, the profit and excess profit on all 
such contracts and subcontracts completed within the income-taxable year 
ending after April 3, 1939 shall be computed in accordance with the 
provisions of Sec. 17.7. There shall be included as a part of the annual 
report a statement, preferably in columnar form, showing separately for 
each contract or subcontract completed by the contracting party within 
the income-taxable year and covered by the report, the total contract 
price, the cost of performing the contract or subcontract and resulting 
profit or loss on each contract or subcontract together with a summary 
statement showing in detail the computation of the net profit or net 
loss upon each group of contracts and subcontracts covered by the report 
and the amount of the excess profit, if any, with respect to each group 
of contracts and subcontracts covered by the report. A copy of the 
report made to the Secretary of the Navy (see Sec. 17.15) with respect 
to each contract or subcontract covered in the annual report, shall be 
filed as a part of such annual report. In case the income-taxable year 
of the contracting party is a period of less than twelve months (see 
Sec. 17.1), the reports required by this section shall be made for such 
period and not for a full year.
    (b) Time for filing annual reports. Annual reports of contracts and 
subcontracts completed by a contracting party within an income-taxable 
year ending after April 3, 1939 shall be filed on or before the 15th day 
of the ninth month following the close of the contracting party's 
income-taxable year. It is important that the contracting party render 
on or before the due date annual reports as nearly complete and final as 
it is possible for the contracting party to prepare. An extension of 
time granted the contracting party for filing its Federal income tax 
return does not serve to extend the time for filing the annual reports 
required by this section. Authority consistent with authorizations for 
granting extensions of time for filing Federal income tax returns is 
hereby delegated to the various district directors of internal revenue 
for granting extensions of time for filing the reports required by this 
section. Application for extensions of time for filing such reports 
should be addressed to the district director of internal revenue for the 
district in which the contracting party files its Federal income tax 
returns and must contain a full recital of the causes for the delay.
    Sec. 17.17 Payment of excess profit liability. The amount of the 
excess profit liability to be paid to the United States shall be paid on 
or before the due date for filing the report with the district director 
of internal revenue. See Sec. 17.16. At the option of the contracting 
party, the amount of the excess profit liability may be paid in four 
equal installments instead of in a single payment, in which case the 
first installment is to be paid on or before the date prescribed for the 
payment of the excess profit as a single payment, the second installment 
on or before the 15th day of the third month, the third installment on 
or before the 15th day of the sixth month, and the fourth installment on 
or before the 15th day of the ninth month, after such date.
    Sec. 17.18 Liability of surety. The surety under contracts entered 
into after the amendment of section 3(b) of the act of June 25, 1936 
shall not be liable for payment of excess profit due the United States 
in respect of such contracts.
    Sec. 17.19 Determination of liability for excess profit, interest 
and penalties; assessment, collection, payment, refunds. (a) The duty of 
determining the correct amount of excess profit liability on contracts 
and subcontracts coming within the scope of the act is upon the 
Commissioner of Internal Revenue. Under section 3(b) of the act, as 
amended, and section 651 of the Internal Revenue Code, all provisions of 
law (including the provisions of law relating to interest, penalties and 
refunds) applicable with respect to the taxes imposed by Title I of the 
Revenue Act of 1934 and not inconsistent with section 3 of the act are 
applicable with respect to the assessment, collection, or payment of 
excess profits on contracts and subcontracts coming within the scope of 
the act and to refunds of overpayments of profits into the Treasury 
under the act. Claims by a contracting party for the refund of an amount 
of excess profit, interest, penalties, and additions to such excess 
profit shall conform to the general requirements prescribed with respect 
to claims for refund of overpayments of taxes imposed by Title I of the 
Revenue Act of 1934 and, if filed on account of any additional costs 
incurred pursuant to guarantee provisions in a contract, shall be 
supplemented by a statement under oath showing the amount and nature of 
such costs and all facts pertinent thereto.
    (b) Administrative procedure for the determination, assessment and 
collection of excess profit liability under section 3 of the act, 
sections 650 and 651 of the Internal Revenue Code, and this part, and 
the examination of reports and claims in connection therewith will be 
prescribed from time to time by the Commissioner of Internal Revenue.


[[Page 159]]



      MITIGATION OF EFFECT OF RENEGOTIATION OF GOVERNMENT CONTRACTS

Sec. 1.1481-1  [Reserved]



Tax on Transfers To Avoid Income Tax--Table of Contents






Sec. 1.1491-1   Imposition of tax.

    Section 1491 imposes an excise tax upon transfers of stock or 
securities by a citizen or resident of the United States, or by a 
domestic corporation or partnership, or by a trust which is not a 
foreign trust, to a foreign corporation as paid-in surplus or as a 
contribution to capital, or to a foreign trust, or to a foreign 
partnership. The tax is in an amount equal to 27\1/2\ percent of the 
excess of (a) the value of the stock or securities so transferred over 
(b) its adjusted basis, as provided in section 1011, for determining 
gain in the hands of the transferor.

[T.D. 6500, 25 FR 12082, Nov. 26, 1960]



Sec. 1.1492-1   Nontaxable transfers.

    (a) The tax imposed by section 1491 does not apply:
    (1) If the transferee is an organization (other than an organization 
described in section 401(a) exempt from income tax under the provisions 
of sections 501 to 504, inclusive; or
    (2) If before the transfer it has been established to the 
satisfaction of the Commissioner that the transfer is not in pursuance 
of a plan having as one of its principal purposes the avoidance of 
Federal income taxes.
    (b) Whether a transfer of stock or securities is in pursuance of a 
plan having as one of its principal purposes the avoidance of Federal 
income taxes is a question to be determined from the facts and 
circumstances of each particular case. In any such case where a 
transferor desires to establish that the transfer is not in pursuance of 
such a plan, a statement of the facts relating to the plan under which 
the transfer is to be made or was made, together with a copy of the plan 
if in writing, shall be forwarded to the Commissioner of Internal 
Revenue, Washington, DC 20225, for a ruling. This statement shall 
contain, or be verified by, a written declaration that it is made under 
the penalties of perjury. A letter notifying the transferor of the 
Commissioner's determination will be mailed to the transferor.

[T.D. 6500, 25 FR 12082, Nov. 26, 1960]



Sec. 1.1493-1   Definition of foreign trust.

    For taxable years beginning before January 1, 1967, a trust is to be 
considered a ``foreign trust'' within the meaning of chapter 5 of the 
Code, if, assuming a subsequent sale by the trustee, outside the United 
States and for cash, of the property transferred to the trust, the 
profit, if any, from such sale (being income from sources without the 
United States under the provisions of part I (section 861 and 
following), subchapter N, chapter 1 of the Code), would not be included 
in the gross income of the trust under subtitle A of the Code. For 
taxable years beginning after December 31, 1966, the term ``foreign 
trust,'' as used in chapter 5 of the Code, shall have the meaning 
prescribed by section 7701(a)(31).

[T.D. 7332, 39 FR 44230, Dec. 23, 1974]



Sec. 1.1494-1   Returns; payment and collection of tax.

    (a) Returns and payment. Every person making a transfer described in 
section 1491 shall make a return to the district director on the day on 
which the transfer is made and, unless the transfer is nontaxable under 
section 1492, pay the tax due on such transfer. This return, which shall 
contain, or be verified by, a written declaration that it is made under 
the penalties of perjury, shall be made on Form 926 and shall be filed 
with the district director to whom the transferor's return of income is 
required to be made. The return shall set forth in detail the following 
information:
    (1) Name and address of transferor, and place of organization or 
creation, if a corporation, partnership, or trust.
    (2) Name and address of transferee, place of organization or 
creation, and whether the transferee is a foreign corporation, a foreign 
trust, or a foreign partnership. If the transferee is a foreign trust or 
a foreign partnership, the name and address of the fiduciary and each 
beneficiary, in the case of a trust,

[[Page 160]]

or of each partner, in the case of a partnership, must be shown.
    (3) Description and amount of stock or securities transferred, the 
date of transfer, and a complete statement showing all the facts 
relating to the transfer, accompanied by a copy of the plan under which 
the transfer was made.
    (4) The fair market value of the stock or securities transferred as 
of the date of transfer, and the adjusted basis provided in section 1011 
for determining gain in the hands of the transferor.
    (5) Whether the transfer was made in pursuance of a plan submitted 
to and approved by the Commissioner as not having as one of its 
principal purposes the avoidance of Federal income taxes. If the plan 
has been so approved, a copy of the Commissioner's letter approving the 
plan shall accompany the return.
    (6) Such other information as may be required by the return form.
    (b) Certificate. (1) If the transferee of the stock or securities, 
the transfer of which is reported in the return, is a foreign 
organization meeting the tests of exemption from income tax provided in 
part I (section 501 and following), subchapter F, chapter 1 of the Code, 
and the transferor on that account claims that no liability for tax is 
imposed by section 1491, such transferor must file with Form 926 a 
certificate establishing the exemption of the transferee under such part 
I. This certificate, which shall contain, or be verified by, a written 
declaration that it is made under the penalties of perjury, shall 
contain complete information showing the character of the transferee, 
the purpose for which it was organized, its actual activities, the 
source of its income and the disposition of such income, whether or not 
any of its income is credited to surplus or may inure to the benefit of 
any private shareholder or individual, and in general all facts relating 
to its operations which affect its right to exemption. To such 
certificate shall be attached a copy of the charter or articles of 
incorporation, the by-laws of the organization, and the latest financial 
statement showing the assets, liabilities, receipts, and disbursements 
of the organization.
    (2) If the transferee is a foreign organization which has been held 
to be exempt from income tax under such part I (or corresponding 
provisions of prior law), a copy of the Commissioner's letter so holding 
shall be filed with Form 926 in lieu of the above certificate and 
attachments.
    (c) Assessment and collection. The determination, assessment, and 
collection of the tax and the examination of returns and claims filed 
pursuant to chapter 5 of the Code will be made under such procedure as 
may be prescribed from time to time by the Commissioner.

[T.D. 6500, 25 FR 12082, Nov. 26, 1960]



Sec. 1.1494-2   Effective date.

    Chapter 5 (section 1491 and following) of the Internal Revenue Code 
of 1954 and the regulations prescribed thereunder apply with respect to 
transfers occurring after December 31, 1954. (See section 
7851(a)(1)(B).) Chapter 7 (section 1250 and following) of the Internal 
Revenue Code of 1939 and the regulations applicable thereto apply with 
respect to transfers occurring prior to January 1, 1955.

[T.D. 6500, 25 FR 12083, Nov. 26, 1960]



                          Consolidated Returns

                       RETURNS AND PAYMENT OF TAX

                     Consolidated Return Regulations



Sec. 1.1502-0  Effective dates.

    (a) The regulations under section 1502 are applicable to taxable 
years beginning after December 31, 1965, except as otherwise provided 
therein.
    (b) The provisions of Secs. 1.1502-0A through 1.1502-3A, 1.1502-10A 
through 1.1502-19A, and 1.1502-30A through 1.1502-51A (as contained in 
the 26 CFR part 1 edition revised April 1, 1996) are applicable to 
taxable years beginning before January 1, 1966.

[T.D. 8677, 61 FR 33325, June 27, 1996]



Sec. 1.1502-1   Definitions.

    (a) Group. The term group means an affiliated group of corporations 
as defined in section 1504. See Sec. 1.1502-75(d) as to when a group 
remains in existence. Except as the context otherwise

[[Page 161]]

requires, references to a group are references to a consolidated group 
(as defined in paragraph (h) of this section).
    (b) Member. The term member means a corporation (including the 
common parent) that is included in the group, or as the context may 
require, a corporation that is included in a subgroup.
    (c) Subsidiary. The term subsidiary means a corporation other than 
the common parent which is a member of such group.
    (d) Consolidated return year. The term consolidated return year 
means a taxable year for which a consolidated return is filed or 
required to be filed by such group.
    (e) Separate return year. The term separate return year means a 
taxable year of a corporation for which it files a separate return or 
for which it joins in the filing of a consolidated return by another 
group.
    (f) Separate return limitation year--(1) In general. Except as 
provided in paragraphs (f)(2) and (3) of this section, the term separate 
return limitation year (or SRLY) means any separate return year of a 
member or of a predecessor of a member.
    (2) Exceptions. The term separate return limitation year (or SRLY) 
does not include:
    (i) A separate return year of the corporation which is the common 
parent for the consolidated return year to which the tax attribute is to 
be carried (except as provided in Sec. 1.1502- 75(d)(2)(ii) and 
subparagraph (3) of this paragraph),
    (ii) A separate return year of any corporation which was a member of 
the group for each day of such year, or
    (iii) A separate return year of a predecessor of any member if such 
predecessor was a member of the group for each day of such year,

Provided that an election under section 1562(a) (relating to the 
privilege to elect multiple surtax exemptions) was never effective (or 
is no longer effective as a result of a termination of such election) 
for such year. An election under section 1562(a) which is effective for 
a taxable year beginning in 1963 and ending in 1964 shall be 
disregarded.
    (3) Reverse acquisitions. In the event of an acquisition to which 
Sec. 1.1502-75(d)(3) applies, all taxable years of the first corporation 
and of each of its subsidiaries ending on or before the date of the 
acquisition shall be treated as separate return limitation years, and 
the separate return years (if any) of the second corporation and each of 
its subsidiaries shall not be treated as separate return limitation 
years (unless they were so treated immediately before the acquisition). 
For example, if corporation P merges into corporation T, and the persons 
who were stockholders of P immediately before the merger, as a result of 
owning the stock of P, own more than 50 percent of the fair market value 
of the outstanding stock of T, then a loss incurred before the merger by 
T (even though it is the common parent), or by a subsidiary of T, is 
treated as having been incurred in a separate return limitation year. 
Conversely, a loss incurred before the merger by P, or by a subsidiary 
of P in a separate return year during all of which such subsidiary was a 
member of the group of which P was the common parent and for which 
section 1562 was not effective, is treated as having been incurred in a 
year which is not a separate return limitation year.
    (4) Predecessors and successors. The term predecessor means a 
transferor or distributor of assets to a member (the successor) in a 
transaction--
    (i) To which section 381(a) applies; or
    (ii) That occurs on or after January 1, 1997, in which the 
successor's basis for the assets is determined, directly or indirectly, 
in whole or in part, by reference to the basis of the assets of the 
transferor or distributor, but only if the amount by which basis differs 
from value, in the aggregate, is material. In the case of such a 
transaction, only one member may be considered a predecessor to or a 
successor of one other member.
    (g) Consolidated return change of ownership--(1) In general. A 
consolidated return change of ownership occurs during any taxable year 
(referred to in this subparagraph as the ``year of change'') of the 
corporation which is the common parent for the taxable year to which the 
tax attribute is to be carried, if, at the end of the year of change:

[[Page 162]]

    (i) Any one or more of the persons described in section 382(a)(2) 
own a percentage of the fair market value of the outstanding stock of 
such corporation which is more than 50 percentage points greater than 
such person or persons owned at:
    (a) The beginning of such taxable year, or
    (b) The beginning of the preceding taxable year, and
    (ii) The increase in percentage points at the end of such year is 
attributable to:
    (a) A purchase (within the meaning of section 382(a)(4)) by such 
person or persons of such stock, the stock of another corporation owning 
stock in such corporation, or an interest in a partnership or trust 
owning stock in such corporation, or
    (b) A decrease in the amount of such stock outstanding or the amount 
of stock outstanding of another corporation owning stock in such 
corporation, except a decrease resulting from a redemption to pay death 
taxes to which section 303 applies.

For purposes of subdivision (i) (a) and (b) of this subparagraph, the 
beginning of the taxable years specified therein shall be the beginning 
of such taxable years or October 1, 1965, whichever occurs later.
    (2) Operating rules. For purposes of this paragraph:
    (i) The term stock means all shares except nonvoting stock which is 
limited and preferred as to dividends, and
    (ii) Section 318 (relating to constructive ownership of stock) shall 
apply in determining the ownership of stock, except that section 318(a) 
(2)(C) and (3)(C) shall be applied without regard to the 50-percent 
limitation contained therein.
    (3) Old members. The term old members of a group means:
    (i) Those corporations which were members of such group immediately 
preceding the first day of the taxable year in which the consolidated 
return change of ownership occurs, or
    (ii) If the group was not in existence prior to the taxable year in 
which the consolidated return change of ownership occurs, the 
corporation which is the common parent for the taxable year to which the 
tax attribute is to be carried.
    (4) Reverse acquisitions. If there has been a consolidated return 
change of ownership of a corporation under subparagraph (1) of this 
paragraph and the stock or assets of such corporation are subsequently 
acquired by another corporation in an acquisition to which Sec. 1.1502-
75(d)(3) applies so that the group of which the former corporation is 
the common parent is treated as continuing in existence, then the ``old 
members'', as defined in subparagraph (3) of this paragraph, of such 
group immediately before the acquisition shall continue to be treated as 
``old members'' immediately after the acquisition. For example, assume 
that corporations P and S comprise group PS, and PS undergoes a 
consolidated return change of ownership. Subsequently, the stock of P, 
the common parent, is acquired by corporation T, the common parent of 
group TU, in an acquisition to which section 368(a)(1)(B) and 
Sec. 1.1502-75(d)(3) apply. The PS group is treated as continuing in 
existence with T as the common parent. P and S continue to be treated as 
old members, as defined in subparagraph (3) of this paragraph.
    (h) Consolidated group. The term ``consolidated group'' means a 
group filing (or required to file) consolidated returns for the tax 
year.
    (i)  [Reserved]
    (j) Affiliated. Corporations are affiliated if they are members of a 
group with each other.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7246, 38 FR 
758, Jan. 4, 1973; T.D. 8294, 55 FR 9434, Mar. 14, 1990; T.D. 8319, 55 
FR 49038, Nov. 26, 1990; T.D. 8560, 59 FR 41675, Aug. 15, 1994; T.D. 
8677, 61 FR 33325, June 27, 1996]

                       Consolidated Tax Liability



Sec. 1.1502-2   Computation of tax liability.

    The tax liability of a group for a consolidated return year shall be 
determined by adding together:

    (a) The tax imposed by section 11 on the consolidated taxable income 
for such year (see Sec. 1.1502-11 for the computation of consolidated 
taxable income);

[[Page 163]]

    (b) The tax imposed by section 541 on the consolidated undistributed 
personal holding company income;
    (c) If paragraph (b) of this section does not apply, the aggregate 
of the taxes imposed by section 541 on the separate undistributed 
personal holding company income of the members which are personal 
holding companies;
    (d) If paragraph (b) of this section does not apply, the tax imposed 
by section 531 on the consolidated accumulated taxable income (see 
Sec. 1.1502-43);
    (e) The tax imposed by section 594(a) in lieu of the taxes imposed 
by section 11 or 1201 on the taxable income of a life insurance 
department of the common parent of a group which is a mutual savings 
bank;
    (f) The tax imposed by section 802(a) on consolidated life insurance 
company taxable income;
    (g) The tax imposed by section 831(a) on the consolidated insurance 
company taxable income of the members which are subject to such tax;
    (h) The tax imposed by section 1201, instead of the taxes computed 
under paragraphs (a) and (g) of this section, computed by reference to 
the net capital gain of the group (see Sec. 1.1502-22T) (or, for 
consolidated return years to which Sec. 1.1502-22T does not apply, 
computed by reference to the excess of the consolidated net long-term 
capital gain over the consolidated net short-term capital loss (see 
Sec. 1.1502-41A for the determination of the consolidated net long-term 
capital gain and the consolidated net short-term capital loss));
    (i) [Reserved]
    (j) The tax imposed by section 1333 on war loss recoveries; and

by allowing as a credit against such taxes the investment credit under 
section 38 (see Sec. 1.1502-3), and the foreign tax credit under section 
33 (see Sec. 1.1502-4). For purposes of this section, the surtax 
exemption of the group for a consolidated return year is $25,000, or if 
a lesser amount is allowed under section 1561, such lesser amount. See 
Sec. 1.1561-2(a)(2). For increase in tax due to the application of 
section 47, see Sec. 1.1502-3(f). For amount of tax surcharge, see 
section 51 and Sec. 1.1502-7.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7093, 36 FR 
4871, Mar. 13, 1971; T.D. 7937, 49 FR 3462, Jan. 27, 1984; T.D. 8677, 61 
FR 33326, June 27, 1996]



Sec. 1.1502-3   Consolidated investment credit.

    (a) Determination of amount of consolidated credit--(1) In general. 
The credit allowed by section 38 for a consolidated return year of a 
group shall be equal to the consolidated credit earned. The consolidated 
credit earned is equal to the aggregate of the credit earned (as 
determined under subparagraph (2) of this paragraph) by all members of 
the group for the consolidated return year.
    (2) Determination of credit earned. The credit earned of a member is 
an amount equal to 7 percent of such member's qualified investment 
(determined under section 46(c)). For purposes of computing a member's 
qualified investment, the basis of property shall not include any gain 
or loss realized with respect to such property by another member in an 
intercompany transaction (as defined in Sec. 1.1502-13(b)), whether or 
not such gain or loss is deferred. Thus, if section 38 property acquired 
in an intercompany transaction has a basis of $100 to the purchasing 
member, and if the selling member has a $20 gain with respect to such 
property, the basis of such property for purposes of computing the 
purchaser's qualified investment is only $80. Such $80 basis shall also 
be used for purposes of applying section 47 to such property. See 
paragraph (f) of this section.
    (3) Consolidated limitation based on amount of tax. (i) 
Notwithstanding the amount of the consolidated credit earned for the 
taxable year, the consolidated credit allowed by section 38 to the group 
for the consolidated return year is limited to:
    (a) So much of the consolidated liability for tax as does not exceed 
$25,000, plus
    (b) For taxable years ending on or before March 9, 1967, 25 percent 
of the consolidated liability for tax in excess of $25,000, or

[[Page 164]]

    (c) For taxable years ending after March 9, 1967, 50 percent of the 
consolidated liability for tax in excess of $25,000.

The $25,000 amount referred to in the preceding sentence shall be 
reduced by any part of such $25,000 amount apportioned under Sec. 1.46-1 
to component members of the controlled group (as defined in section 
46(a)(5)) which do not join in the filing of the consolidated return. 
For further rules for computing the limitation based on amount of tax 
with respect to the suspension period (as defined in section 48(j)), see 
section 46(a)(2). The amount determined under this subparagraph is 
referred to in this section as the ``consolidated limitation based on 
amount of tax.''
    (ii) If an organization to which section 593 applies or a 
cooperative organization described in section 1381(a) joins in the 
filing of the consolidated return, the $25,000 amount referred to in 
subdivision (i) of this subparagraph (reduced as provided in such 
subdivision) shall be apportioned equally among the members of the group 
filing the consolidated return. The amount so apportioned equally to any 
such organization shall then be decreased in accordance with the 
provisions of section 46(d). Finally, the sum of all such equal portions 
(as decreased under section 46(d)) of each member of the group shall be 
substituted for the $25,000 amount referred to in subdivision (i) of 
this subparagraph.
    (4) Consolidated liability for tax. For purposes of subparagraph (3) 
of this paragraph, the consolidated liability for tax shall be the 
income tax imposed for the taxable year upon the group by chapter 1 of 
the Code, reduced by the consolidated foreign tax credit allowable under 
Sec. 1.1502-4. The tax imposed by section 56 (relating to minimum tax 
for tax preferences), section 531 (relating to accumulated earnings 
tax), section 541 (relating to personal holding company tax), and any 
additional tax imposed by section 1351(d)(1) (relating to recoveries of 
foreign expropriation losses), shall not be considered tax imposed by 
chapter 1 of the Code. In addition, any increase in tax resulting from 
the application of section 47 (relating to certain dispositions, etc., 
of section 38 property) shall not be treated as tax imposed by chapter 1 
for purposes of computing the consolidated liability for tax.
    (b) Carryback and carryover of unused credits--(1) Allowance of 
unused credit as consolidated carryback or carryover. A group shall be 
allowed to add to the amount allowable as a credit under paragraph 
(a)(1) of this section for any consolidated return year an amount equal 
to the aggregate of the consolidated investment credit carryovers and 
carrybacks to such year. The consolidated investment credit carryovers 
and carrybacks to the taxable year shall consist of any consolidated 
unused credits of the group, plus any unused credits of members of the 
group arising in separate return years of such members, which may be 
carried over or back to the taxable year under the principles of section 
46(b). However, such consolidated carryovers and carrybacks shall not 
include any consolidated unused credits apportioned to a corporation for 
a separate return year pursuant to paragraph (c) of Sec. 1.1502-79 and 
shall be subject to the limitations contained in paragraphs (c) and (e) 
of this section. A consolidated unused credit for any consolidated 
return year is the excess of the consolidated credit earned over the 
consolidated limitation based on amount of tax for such year.
    (2) Absorption rules. For purposes of determining the amount, if 
any, of an unused credit (whether consolidated or separate) which can be 
carried to a taxable year (consolidated or separate), the amount of such 
unused credit which is absorbed in a prior consolidated return year 
under section 46(b) shall be determined by:
    (i) Applying all unused credits which can be carried to such prior 
year in the order of the taxable years in which such unused credits 
arose, beginning with the taxable year which ends earliest, and
    (ii) Applying all such unused credits which can be carried to such 
prior year from taxable years ending on the same date on a pro rata 
basis.
    (c) Limitation on investment credit carryovers and carrybacks from 
separate return limitation years--(1) General rule. In the case of an 
unused credit of a

[[Page 165]]

member of the group arising in a separate return limitation year (as 
defined in paragraph (f) of Sec. 1.1502-1) of such member (and in a 
separate return limitation year of any predecessor of such member), the 
amount which may be included under paragraph (b) of this section 
(computed without regard to the limitation contained in paragraph (e) of 
this section) shall not exceed the amount determined under subparagraph 
(2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph with respect to a member of the group 
is the excess, if any, of:
    (i) The limitation based on amount of tax of the group, minus such 
limitation recomputed by excluding the items of income, deduction, and 
foreign tax credit of such member, over
    (ii) The sum of (a) the investment credit earned by such member for 
such consolidated return year, and (b) the unused credits attributable 
to such member which may be carried to such consolidated return year 
arising in unused credit years ending prior to the particular separate 
return limitation year.
    (d) Examples. The provisions of paragraphs (a), (b), and (c) of this 
section may be illustrated by the following examples:

    Example (1). Corporation P is incorporated on January 1, 1966. On 
that same day P incorporates corporation S, a wholly owned subsidiary. P 
and S file consolidated returns for calendar years 1966 and 1967. P's 
and S's credit earned, the consolidated credit earned, and the 
consolidated limitation based on amount of tax for 1966 and 1967 are as 
follows:

------------------------------------------------------------------------
                                                            Consolidated
                                              Consolidated   limitation 
                                    Credit       credit       based on  
                                    earned       earned       amount of 
                                                                 tax    
------------------------------------------------------------------------
1966:                                                                   
  P.............................     $60,000                            
  S.............................      30,000      $90,000      $100,000 
1967:                                                                   
  P.............................      40,000                            
  S.............................      25,000       65,000        50,000 
------------------------------------------------------------------------

    (i) P's and S's credit earned for 1966 are aggregated and the 
group's consolidated credit earned, $90,000, is allowable in full to the 
group as a credit under section 38 for 1966 since such amount is less 
than the consolidated limitation based on amount of tax for 1966, 
$100,000.
    (ii) Since the consolidated limitation based on amount of tax for 
1967 is $50,000, only $50,000 of the $65,000 consolidated credit earned 
for such year is allowable to the group under section 38 as a credit for 
1967. The consolidated unused credit for 1967 of $15,000 ($65,000 less 
$50,000) is a consolidated investment credit carryback and carryover to 
the years prescribed in section 46(b). In this case the consolidated 
unused credit is a consolidated investment credit carryback to 1966 
(since P and S were not in existence in 1964 and 1965) and a 
consolidated investment credit carryover to 1968 and subsequent years. 
The portion of the consolidated unused credit for 1967 which is 
allowable as a credit for 1966 is $10,000. This amount shall be added to 
the amount allowable as a credit to the group for 1966. The balance of 
the consolidated unused credit for 1967 to be carried to 1968 is $5,000. 
These amounts are computed as follows:

Consolidated carryback to 1966..............................    $15,000 
    1966 consolidated limitation based on tax...   $100,000             
  Less: Consolidated credit earned                                      
   for 1966.........................     $90,000                        
    Consolidated unused credits                                         
     attributable to years preceding                                    
     1967...........................           0      90,000            
                                     ------------------------           
  Limit on amount of 1967                                               
   consolidated unused credit which                                     
   may be added as a credit for 1966  ..........  ..........      10,000
                                                                        
                                                             -----------
  Balance of 1967 consolidated unused credit to be carried              
 to 1968                                                           5,000
                                                                        

    Example (2) (i) Assume the same facts as in example (1), except that 
all the stock of corporation T, also a calendar year taxpayer, is 
acquired by P on January 1, 1968, and that P, S, and T file a 
consolidated return for 1968. In 1966 T had an unused credit of $10,000 
which has not been absorbed and is available as an investment credit 
carryover to 1968. Such carryover is from a separate return limitation 
year. P's and S's credit earned for 1968 is $10,000 each and T's credit 
earned is $8,000; the consolidated credit earned is therefore $28,000. 
The group's consolidated limitation based on amount of tax for 1968 is 
$50,000. Such limitation recomputed by excluding the items of income, 
deduction, and foreign tax credit of T is $30,000. Thus, the amount 
determined under paragraph (c)(2)(i) of this section is $20,000 ($50,000 
minus $30,000). Accordingly, the limitation on the carryover of T's 
unused credit is $12,000, the excess of $20,000 over $8,000 (the sum of 
T's credit earned for the taxable year and any

[[Page 166]]

carryovers from prior unused credit years (none in this case)). 
Therefore T's $10,000 unused credit from 1966 may be carried over to the 
consolidated return year without limitation.
    (ii) The group's consolidated credit earned for 1968, $28,000, is 
allowable in full as a credit under section 38 since such amount is less 
than the consolidated limitation based on amount of tax, $50,000.
    (iii) The group's consolidated investment credit carryover to 1968 
is $15,000, consisting of the consolidated unused credits of the group 
($5,000), plus T's separate return year unused credit ($10,000). The 
entire $15,000 consolidated carryover shall be added to the amount 
allowable to the group as a credit under section 38 for 1968, since such 
amount is less than $22,000 (the excess of the consolidated limitation 
based on tax, $50,000, over the sum of the consolidated credit earned 
for 1968, $28,000, and unused credits arising in prior unused credit 
years, zero).
    Example (3). Assume the same facts as in example (2), except that 
the amount determined under paragraph (c)(2)(i) of this section is 
$12,000. Therefore, the limitation on the carryover of T's unused credit 
is $4,000. Accordingly, the consolidated investment credit carryover is 
only $9,000 since the amount of T's separate return year unused credit 
which may be added to the group's $5,000 consolidated unused credit is 
$4,000. These amounts are computed as follows:

T's carryover to 1968.........................................  $10,000 
  Consolidated limitation based on amount of tax                        
   minus recomputed limitation......................  $12,000           
Less: T's credit earned for 1968..........    $8,000                    
  Unused credits attributable to T arising                              
   in unused credit years preceding 1966..         0     8,000          
                                                                        
                                           --------------------         
  Limit on amount of 1966 unused credit of T which may be               
 added to consolidated investment credit carryover                 4,000
                                                                        
                                           -----------                  
  Balance of 1966 unused credit of T to be carried to 1969              
 (subject to the limitation contained in paragraph (c) of this          
 section)                                                          6,000
                                                                        

    (e) Limitation on investment credit carryovers where there has been 
a consolidated return change of ownership-- (1) General rule. If a 
consolidated return change of ownership (as defined in paragraph (g) of 
Sec. 1.1502-1) occurs during the taxable year or an earlier taxable 
year, the amount which may be included under paragraph (b) of this 
section in the consolidated investment credit carryovers to the taxable 
year with respect to the aggregate unused credits attributable to old 
members of the group (as defined in paragraph (g)(3) of Sec. 1.1502-1) 
arising in taxable years (consolidated or separate) ending on the same 
day and before the taxable year in which the consolidated return change 
of ownership occurred shall not exceed the amount determined under 
subparagraph (2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph shall be the excess of the 
consolidated limitation based on the amount of tax for the taxable year, 
recomputed by including only the items of income, deduction, and foreign 
tax credit of the old members, over the sum of:
    (i) The aggregate investment credits earned by the old members for 
the taxable year, and
    (ii) The aggregate unused investment credits attributable to the old 
members which may be carried to the taxable year arising in unused 
credit years ending prior to the particular unused credit year or years.
    (f) Early dispositions, etc., of section 38 property--(1) 
Dispositions of section 38 property during and after consolidated return 
year. If property is subject to section 47(a) (1) or (2) with respect to 
a member during a consolidated return year, any increase in tax shall be 
added to the tax liability of the group under Sec. 1.1502-2 (regardless 
of whether the property was placed in service in a consolidated or 
separate return year). Also, if property is subject to section 47(a) (1) 
or (2) with respect to a corporation during a taxable year for which 
such corporation files on a separate return basis, any increase in tax 
shall be added to the tax liability of such corporation (regardless of 
whether such property was placed in service in a consolidated or 
separate return year).
    (2) Exception for transfer to another member. (i) Except as provided 
in subdivisions (ii) and (iii) of this subparagraph, a transfer of 
section 38 property from one member of the group to another member of 
such group during a consolidated return year shall not be treated as a 
disposition or cessation within the meaning of section 47(a)(1). If such 
section 38 property is disposed of, or otherwise ceases to be section 38 
property or becomes public utility property with respect to the 
transferee,

[[Page 167]]

before the close of the estimated useful life which was taken into 
account in computing qualified investment, then section 47(a) (1) or (2) 
shall apply to the transferee with respect to such property (determined 
by taking into account the period of use, qualified investment, other 
dispositions, etc., of the transferor). Any increase in tax due to the 
application of section 47(a) (1) or (2) shall be added to the tax 
liability of such transferee (or the tax liability of a group, if the 
transferee joins in the filing of a consolidated return).
    (ii) Except as provided in subdivision (iii) of this subparagraph, 
if section 38 property is disposed of during a consolidated return year 
by one member of the group to another member of such group which is an 
organization to which section 593 applies or a cooperative organization 
described in section 1381(a), the tax under chapter 1 of the Code for 
such consolidated return year shall be increased by an amount equal to 
the aggregate decrease in the credits allowed under section 38 for all 
prior taxable years which would result solely from treating such 
property, for purposes of determining qualified investment, as placed in 
service by such organization to which section 593 applies or such 
cooperative organization described in section 1381(a), as the case may 
be, but with due regard to the use of the property before such transfer.
    (iii) Section 47(a)(1) shall apply to a transfer of section 38 
property by a corporation during a consolidated return year if such 
corporation is liquidated in a transaction to which section 334(b)(2) 
applies.
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). P, S, and T file a consolidated return for calendar 
year 1967. In such year S places in service section 38 property having 
an estimated useful life of more than 8 years. In 1968, P, S, and T file 
a consolidated return and in such year S sells such property to T. Such 
sale will not cause section 47(a)(1) to apply.
    Example (2). Assume the same facts as in example (1), except that P, 
S, and T filed separate returns for 1967. The sale from S to T will not 
cause section 47(a)(1) to apply.
    Example (3). Assume the same facts as in example (1), except that P, 
S, and T continue to file consolidated returns through 1971 and in such 
year T disposes of the property to individual A. Section 47(a)(1) will 
apply to the group and any increase in tax shall be added to the tax 
liability of the group. For the purposes of determining the actual 
period of use by T, such period shall include S's period of use.
    Example (4). Assume the same facts as in example (3), except that T 
files a separate return in 1971. Again, the actual periods of use by S 
and T will be combined in applying section 47. If the disposition 
results in an increase in tax under section 47(a)(1), such additional 
tax shall be added to the separate tax liability of T.
    Example (5). Assume the same facts as in example (1), except that in 
1969, P sells all the stock of T to a third party. Such sale will not 
cause section 47(a)(1) to apply.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7246, 38 FR 
758, Jan. 4, 1973; T.D. 8597, 60 FR 36679, July 18, 1995]



Sec. 1.1502-4   Consolidated foreign tax credit.

    (a) In general. The credit under section 901 for taxes paid or 
accrued to any foreign country or possession of the United States shall 
be allowed to the group only if the common parent corporation chooses to 
use such credit in the computation of the tax liability of the group for 
the consolidated return year. If this choice is made, no deduction may 
be taken on the consolidated return for such taxes paid or accrued by 
any member of the group. See section 275(a)(4).
    (b) Limitation effective under section 904(a) for the group--(1) 
Common parent's limitation effective for group. The determination of 
whether the overall limitation or the per-country limitation applies for 
a consolidated return year shall be made by reference to the limitation 
effective with respect to the common parent corporation for such year. 
If the limitation effective with respect to a member for its immediately 
preceding separate return year differs from the limitation effective 
with respect to the common parent corporation for the consolidated 
return year, then such member shall, if the overall limitation is 
effective with respect to the common parent, be deemed to have made an 
election to use such overall limitation, or, if the per-country 
limitation is effective with respect to the common parent, be deemed to 
have revoked its election to use the

[[Page 168]]

overall limitation. Consent of the Secretary or his delegate (if 
otherwise required) is hereby given to such member for such election or 
revocation. Any such election or revocation shall apply only 
prospectively beginning with such consolidated return year.
    (2) Limitation effective for subsequent years. The limitation 
effective with respect to a member for the last year for which it joins 
in the filing of a consolidated return with a group shall remain in 
effect for a subsequent separate return year and may be changed by such 
corporation for such subsequent year only in accordance with the 
provisions of section 904(b) (and this paragraph if it joins in the 
filing of a consolidated return with another group). Any retroactive 
change in the limitation by the common parent corporation for such 
member's last consolidated return year shall change the election 
effective with respect to such member for such last period. Thus, if the 
common parent (P) elects the overall limitation with respect to calendar 
year 1966, such election would be effective with respect to its 
subsidiary S for 1966. If S leaves the group at the beginning of 
calendar year 1967, such election shall be effective for 1967 with 
respect to S (unless S revokes such election for 1967 or a subsequent 
year in accordance with section 904(b), or this paragraph if it joins in 
the filing of a consolidated return with another group). However, if P 
retroactively changes back to the per-country limitation with respect to 
1966, such limitation would be effective with respect to S for 1966 and 
subsequent years (unless S elects the overall limitation for any such 
subsequent year).
    (c) Computation of consolidated foreign tax credit. The foreign tax 
credit for the consolidated return year shall be determined on a 
consolidated basis under the principles of sections 901 through 905 and 
section 960. For example, if the per-country limitations applies to the 
consolidated return year, taxes paid or accrued for such year (including 
those deemed paid or accrued under sections 902 and 960(a) and paragraph 
(e) of this section) to each foreign country or possession by the 
members of the group shall be aggregated. If the overall limitation 
applies, taxes paid or accrued for such year (including those deemed 
paid or accrued) to all foreign countries and possessions by members of 
the group shall be aggregated. If the overall limitation applies and a 
member of the group qualifies as a Western Hemisphere trade corporation, 
see section 1503(b).
    (d) Computation of limitation on credit. For purposes of computing 
the group's applicable limitation under section 904(a), the following 
rules shall apply:
    (1) Computation of taxable income from foreign sources. The 
numerator of the applicable limiting fraction under section 904(a) shall 
be an amount (not in excess of the amount determined under subparagraph 
(2) of this paragraph) equal to the aggregate of the separate taxable 
incomes of the members from sources within each foreign country or 
possession of the United States (if the per-country limitation is 
applicable), or from sources without the United States (if the overall 
limitation is applicable), determined under Sec. 1.1502-12, adjusted for 
the following items taken into account in the computation of 
consolidated taxable income:
    (i) The portion of the consolidated net operating loss deduction, 
the consolidated charitable contributions deduction, the consolidated 
dividends received deduction, and the consolidated section 922 
deduction, attributable to such foreign source income;
    (ii) Any such foreign source capital gain net income (net capital 
gain for taxable years beginning before January 1, 1977) (determined 
without regard to any net capital loss carryover or carryback);
    (iii) Any such foreign source net capital loss and section 1231 net 
loss, reduced by the portion of the consolidated net capital loss 
attributable to such foreign source loss; and
    (iv) The portion of any consolidated net capital loss carryover or 
carryback attributable to such foreign source income which is absorbed 
in the taxable year.
    (2) Computation of entire taxable income. The denominator of the 
applicable limiting fraction under section 904(a) (that is, the entire 
taxable income of the group) shall be the consolidated taxable income of 
the group computed in accordance with Sec. 1.1502-11.

[[Page 169]]

    (3) Computation of tax against which credit is taken. The tax 
against which the limiting fraction under section 904(a) is applied 
shall be the consolidated tax liability of the group determined under 
Sec. 1.1502-2, but without regard to paragraphs (b), (c), (d), and (j) 
thereof, and without regard to any credit against such liability.
    (e) Carryover and carryback of unused foreign tax--(1) Allowance of 
unused foreign tax as consolidated carryover or carryback. The aggregate 
of the consolidated unused foreign tax carryovers and carrybacks to the 
taxable year, to the extent absorbed for such year under the principles 
of section 904(d), shall be deemed to be paid or accrued to a foreign 
country or possession for such year. The consolidated unused foreign tax 
carryovers and carrybacks to the taxable year shall consist of any 
consolidated unused foreign tax, plus any unused foreign tax of members 
for separate return years of such members, which may be carried over or 
back to the taxable year under the principles of section 904 (d) and 
(e). However, such consolidated carryovers and carrybacks shall not 
include any consolidated unused foreign taxes apportioned to a 
corporation for a separate return year pursuant to Sec. 1.1502-79(d) and 
shall be subject to the limitations contained in paragraphs (f) and (g) 
of this section. A consolidated unused foreign tax is the excess of the 
foreign taxes paid or accrued by the group (or deemed paid or accrued by 
the group, other than by reason of section 904(d) over the applicable 
limitation for the consolidated return year.
    (2) Absorption rules. For purposes of determining the amount, if 
any, of an unused foreign tax (consolidated or separate) which can be 
carried to a taxable year (consolidated or separate), the amount of such 
unused tax which is absorbed in a prior consolidated return year under 
section 904(d) shall be determined by:
    (i) Applying all unused foreign taxes which can be carried to such 
prior year in the order of the taxable years in which such unused taxes 
arose, beginning with the taxable year which ends earliest, and
    (ii) Applying all such unused taxes which can be carried to such 
prior year from taxable years ending on the same date on a pro rata 
basis.
    (f) Limitation on unused foreign tax carryover or carryback from 
separate return limitation years--(1) General rule. In the case of an 
unused foreign tax of a member of the group arising in a separate return 
limitation year (as defined in paragraph (f) of Sec. 1.1502-1) of such 
member, the amount which may be included under paragraph (e) of this 
section (computed without regard to the limitation contained in 
paragraph (g) of this section) shall not exceed the amount determined 
under subparagraph (2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph with respect to a member of the group 
is the excess, if any, of:
    (i) The section 904(a) limitation of the group, minus such 
limitation recomputed by excluding the items of income and deduction of 
such member, over
    (ii) The sum of (a) the foreign taxes paid (or deemed paid, other 
than by reason of section 904(d)) by such member for the consolidated 
return year, and (b) the unused foreign tax attributable to such member 
which may be carried to such consolidated return year arising in taxable 
years ending prior to the particular separate return limitation year.
    (g) Limitation on unused foreign tax carryover where there has been 
a consolidated return change of ownership--(1) General rule. If a 
consolidated return change of ownership (as defined in paragraph (g) of 
Sec. 1.1502-1) occurs during the taxable year or an earlier taxable 
year, the amount which may be included under paragraph (e) of this 
section in the consolidated unused foreign tax carryovers to the taxable 
year with respect to the aggregate unused credits attributable to the 
old members of the group (as defined in paragraph (g)(3) of Sec. 1.1502-
1) arising in taxable years (consolidated or separate) ending on the 
same day and before the taxable year in which the consolidated return 
change of ownership occurred shall not exceed the amount determined 
under subparagraph (2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1)

[[Page 170]]

of this paragraph shall be the excess of the section 904(a) limitation 
of the group for the taxable year, recomputed by including only the 
items of income and deduction of the old members of the group, over the 
sum of:
    (i) The aggregate foreign taxes paid (or deemed paid, other than by 
reason of section 904(d)) by the old members for the taxable year, and
    (ii) The aggregate unused foreign tax attributable to the old 
members which can be carried to the taxable year arising in taxable 
years ending prior to the particular unused foreign tax year or years.
    (h) Amount of credit with respect to interest income. If any member 
of the group has interest income described in section 904(f)(2) (for a 
year for which it filed on a consolidated or separate basis), the 
group's foreign tax credit with respect to such interest shall be 
computed separately in accordance with the principles of section 904(f) 
and this section.
    (i) [Reserved]
    (j) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example (1). Domestic corporation P is incorporated on January 1, 
1966. On that same day it also incorporates domestic corporations S and 
T, wholly owned subsidiaries. P, S, and T file consolidated returns for 
1966 and 1967 on the basis of a calendar year. T engages in business 
solely in country A. S transacts business solely in countries A and B. P 
does business solely in the United States. During 1966 T sold an item of 
inventory to P at a profit of $2,000. Under Sec. 1.1502-13 (as contained 
in the 26 CFR part 1 edition revised as of April 1, 1995) such profit is 
deferred and none of the circumstances of restoration contained in 
paragraph (d), (e), or (f) of Sec. 1.1502-13 have occurred as of the 
close of 1966. The taxable income for 1966 from foreign and United 
States sources, and the foreign taxes paid on such foreign income are as 
follows:

----------------------------------------------------------------------------------------------------------------
                                                                     Country A           Country B              
                                                        U.S.   ----------------------------------------   Total 
                     Corporation                       taxable   Taxable   Foreign   Taxable   Foreign   taxable
                                                       income    income   tax paid   income   tax paid   income 
----------------------------------------------------------------------------------------------------------------
P...................................................   $40,000  ........  ........  ........  ........   $40,000
T...................................................  ........   $20,000   $12,000  ........  ........    20,000
S...................................................  ........    10,000     6,000   $10,000    $3,000    20,000
                                                                                                       ---------
                                                                                                         $80,000
----------------------------------------------------------------------------------------------------------------

Such taxable income was computed by taking into account the rules 
provided in Sec. 1.1502-12. Thus, the $2,000 deferred profit is not 
included in T's taxable income for 1966 (but will be included for the 
taxable year for which one of the events specified in paragraph (d), 
(e), or (f) of Sec. 1.1502-13 occurs). The consolidated taxable income 
of the group (computed in accordance with Sec. 1.1502-11) is $80,000. 
The consolidated tax liability against which the credit may be taken 
(computed in accordance with paragraph (d)(3) of this section) is 
$31,900.
    (i) Assuming P chooses to use the foreign taxes paid as a credit and 
the group is subject to the per-country limitation, the group may take 
as a credit against the consolidated tax liability $11,962.50 of the 
amount paid to country A, plus the $3,000 paid to country B. Such 
amounts are computed as follows: The aggregate taxes paid to country A 
of $18,000 is limited to $11,962.50 ($31,900 times $30,000/$80,000). The 
unused foreign tax with respect to country A is $6,037.50 ($18,000 less 
$11,962.50), and is a consolidated unused foreign tax which shall be 
carried to the years prescribed by section 904(d). A credit of $3,000 is 
available with respect to the taxes paid to country B since such amount 
is less than the limitation of $3,987.50 ($31,900 times $10,000/
$80,000).
    (ii) Assuming the overall limitation is in effect for the taxable 
year, the group may take $15,950 as a credit, computed as follows: The 
aggregate taxes paid to all foreign countries of $21,000 is limited to 
$15,950 ($31,900 times $40,000/$80,000). The unused foreign tax is 
$5,050 ($21,000 less $15,950), and is a consolidated unused foreign tax 
which shall be carried to the years prescribed by section 904(d).
    Example (2). Assume the same facts as in example (1), except that T 
has a $10,000 long-term capital gain (derived from a sale to a nonmember 
in country A) and P has a $10,000 long-term capital loss (derived from a 
sale to a nonmember in the United States). Notwithstanding that the 
consolidated net capital gain (capital gain net income for taxable years 
beginning after December 31, 1976) of the group is zero, T's capital 
gain shall be reflected in full in the computation of taxable income 
from foreign sources.

[[Page 171]]

    Example (3). Assume the same facts as in example (1), except that 
the group had a consolidated section 172 deduction of $8,000 which is 
attributable to a net operating loss sustained by T. The $8,000 
consolidated net operating loss deduction is offset against T's income 
from country A, thus reducing T's taxable income from country A to 
$12,000.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980; T.D. 8597, 60 FR 36679, July 18, 1995]



Sec. 1.1502-5  Estimated tax.

    (a) General rule--(1) Consolidated estimated tax. If a group files a 
consolidated return for two consecutive taxable years, it must make 
payments of estimated tax on a consolidated basis for each subsequent 
taxable year, until such time as separate returns are properly filed. 
Until such time, the group is treated as a single corporation for 
purposes of section 6154 (relating to payment of estimated tax by 
corporations). If separate returns are filed by the members for a 
taxable year, the amount of any estimated tax payments made with respect 
to a consolidated payment of estimated tax for such year shall be 
credited against the separate tax liabilities of the members in any 
manner designated by the common parent which is satisfactory to the 
Commissioner. The consolidated payments of estimated tax shall be 
deposited with the authorized commercial dispositary or Federal Reserve 
Bank with which the common parent deposits its estimated tax payments. A 
statement should be attached to the payment setting forth the name, 
address, employer identification number, and internal revenue service 
center of each member.
    (2) First two consolidated return years. For the first 2 years for 
which a group files a consolidated return, it may make payments of 
estimated tax on either a consolidated or separate basis. If a 
consolidated return is filed for such year, the amount of any estimated 
tax payments made for such year by any member shall be credited against 
the tax liability of the group.
    (3) Effective date. This section applies to taxable years for which 
the due date (without extensions) for filing returns is after August 6, 
1979. For prior taxable years see 26 CFR 1.1502-5 (Revised as of April 
1, 1978).
    (b) Addition to tax for failure to pay estimated tax under section 
6655--(1) Consolidated return filed. For the first two taxable years for 
which a group files a consolidated return, the group may compute the 
amount of the penalty (if any) under section 6655 on a consolidated 
basis or separate member basis, regardless of the method of payment. 
Thereafter, for a taxable year for which the group files a consolidated 
return, the group must compute the penalty on a consolidated basis.
    (2) Computation of penalty on consolidated basis. (i) This paragraph 
(b)(2) gives the rules for computing the penalty under section 6655 on a 
consolidated basis.
    (ii) The tax and facts shown on the return for the preceding taxable 
year referred to in section 6655(d) (1) and (2) are, if a consolidated 
return was filed for that preceding year, such items shown on the 
consolidated return for that preceding year or, if one was not filed for 
that preceding year, the aggregate taxes and the facts shown on the 
separate returns of the common parent and any other corporation that was 
a member of the same affiliated group as the common parent for that 
preceding year.
    (iii) If estimated tax was not paid on a consolidated basis, then 
the amount of the group's payments of estimated tax for the taxable year 
is the aggregate of the payments made by all members for the year.
    (iv) Section 6655(d)(1) applies only if the common parent's 
consolidated return, or each member's separate return, for the preceding 
taxable year (as the case may be) was a taxable year of 12 months.
    (3) Computation of penalty on separate member basis. To compute any 
penalty under section 6655 on a separate member basis, for purposes of 
section 6655(b)(1), the ``tax shown on the return for the taxable year'' 
is the portion of the tax shown on the consolidated return allocable to 
the member under paragraph (b)(5) of this section. If the member was 
included in the consolidated return filed by the group for the preceding 
taxable year then:
    (i) For purposes of section 6655(d)(1), the ``tax shown on the 
return'' for any member shall be the portion of the tax

[[Page 172]]

shown on the consolidated return for the preceding year allocable to the 
member under paragraph (b)(5) of this section.
    (ii) For purposes of section 6655(d)(2), the ``facts shown on the 
return'' shall be the facts shown on the consolidated return for the 
preceding year and the tax computed under that section shall be 
allocated under the rules of paragraph (b)(5) of this section.
    (4) Consolidated payments if separate returns filed. If the group 
does not file a consolidated return for the taxable year, but makes 
payments of estimated tax on a consolidated basis, for purposes of 
section 6655(b)(2), the ``amount, if any of the installment paid'' by 
any member is an amount apportioned to the member in a manner designated 
by the common parent that is satisfactory to the Commissioner. If the 
member was included in the consolidated return filed by the group for 
the preceding taxable year, the amount of a member's penalty under 
section 6655 is computed on the separate member basis described in 
paragraph (b)(3) (i) and (ii) of this section.
    (5) Rules for allocation of consolidated tax liability. For purposes 
of subparagraphs (1) and (2) of this paragraph, the tax shown on a 
consolidated return shall be allocated to the members of the group under 
the method which the group has elected pursuant to section 1552 and 
Sec. 1.1502(d)(2).
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example (1). Corporations P and S-1 file a consolidated return for 
the first time for calendar year 1978. P and S-1 also file consolidated 
returns for 1979 and 1980. For 1978 and 1979, P and S-1 may make 
payments of estimated tax on either a separate or consolidated basis. 
For 1980, however, the group must pay its estimated tax on a 
consolidated basis. In determining whether P and S-1 come within the 
exception provided in section 6655(d)(1) for 1980, the ``tax shown on 
the return'' is the tax shown on the consolidated return for 1979.
    Example (2). Assume the same facts as in example (1). Assume further 
that corporation S-2 was a member of the group during 1979, and joins in 
the filing of the consolidated return for such year but ceases to be a 
member of the group on September 15, 1980. In determining whether the 
group (which no longer includes S-2) comes within the exception provided 
in section 6655(d)(1) for 1980, the ``tax shown on the return'' is the 
tax shown on the consolidated return for 1979.
    Example (3). Assume the same facts as in example (1). Assume further 
that corporation S-2 becomes a member of the group on July 1, 1980, and 
joins in the filing of the consolidated return for 1968. In determining 
whether the group (which now includes S-2) comes within the exception 
provided in section 6655(d)(1) for 1980, the ``tax shown on the return'' 
is the tax shown on the consolidated return for 1979. Any tax of S-2 for 
any separate return year is not included as a part of the ``tax shown on 
the return'' for purposes of applying section 6655(d)(1).
    Example (4). Corporations X and Y filed consolidated returns for the 
calendar years 1977 and 1978 and separate returns for 1979. In 
determining whether X and Y comes within the exception provided in 
section 6655(d)(1) for 1979, the ``tax shown on the return'' is the 
amount of tax shown on the consolidated return for 1978 allocable to X 
and Y in accordance with paragraph (b)(5) of this section.

    (d) Cross reference. For provisions relating to quick refunds of 
corporate estimated tax payments, see Sec. 1.1502-78, and Secs. 1.6425-1 
through 1.6425-3.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7059, 35 FR 
14549, Sept. 17, 1970; T.D. 7637, 44 FR 46840, Aug. 9, 1979]



Sec. 1.1502-6   Liability for tax.

    (a) Several liability of members of group. Except as provided in 
paragraph (b) of this section, the common parent corporation and each 
subsidiary which was a member of the group during any part of the 
consolidated return year shall be severally liable for the tax for such 
year computed in accordance with the regulations under section 1502 
prescribed on or before the due date (not including extensions of time) 
for the filing of the consolidated return for such year.
    (b) Liability of subsidiary after withdrawal. If a subsidiary has 
ceased to be a member of the group and in such cessation resulted from a 
bona fide sale or exchange of its stock for fair value and occurred 
prior to the date upon which any deficiency is assessed, the district 
director may, if he believes that the assessment or collection of the 
balance of the deficiency will not be jeopardized, make assessment and 
collection of such deficiency from such former subsidiary in an amount 
not exceeding the portion of such deficiency which the

[[Page 173]]

district director may determine to be allocable to it. If the district 
director makes assessment and collection of any part of a deficiency 
from such former subsidiary, then for purposes of any credit or refund 
of the amount collected from such former subsidiary the agency of the 
common parent under the provisions of Sec. 1.1502-77 shall not apply.
    (c) Effect of intercompany agreements. No agreement entered into by 
one or more members of the group with any other member of such group or 
with any other person shall in any case have the effect of reducing the 
liability prescribed under this section.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966]



Sec. 1.1502-9  Application of overall foreign loss recapture rules to corporations filing consolidated returns.

    (a) In general. An affiliated group of corporations filing a 
consolidated return sustains an overall foreign loss (a consolidated 
overall foreign loss) in any taxable year in which its gross income from 
sources without the United States subject to a separate limitation (as 
defined in Sec. 1.904(f)-1(c)(2)) is exceeded by the sum of the 
deductions properly allocated and apportioned thereto. However, for 
taxable years prior to 1983, affiliated groups may have determined their 
overall foreign losses for income subject to the passive interest 
limitation, DISC dividend limitation, and general limitation on a 
combined basis in accordance with the rules in Sec. 1.904(f)-1(c)(1). 
The rules contained in Secs. 1.904(f)-1 through 1.904(f)-6 are 
applicable to affiliated groups filing consolidated returns. This 
section provides special rules for applying those sections to such 
groups. Paragraph (b) provides rules for additions and subtractions of a 
portion of overall foreign losses to and from consolidated overall 
foreign loss accounts. Paragraph (c) requires that separate notional 
overall foreign loss accounts be kept for each member of the group that 
contributes to a consolidated overall foreign loss account and provides 
for allocation of a portion of the group's overall foreign loss account 
to a member when the member leaves the group prior to recapture of the 
entire amount of the loss account. These rules are similar to the rules 
provided in Sec. 1.1502-21T(b)(2) (or Sec. 1.1502-79A, as appropriate) 
concerning the apportionment of consolidated net operating losses to a 
member who leaves the group. However, the rules differ somewhat because 
the absorption rule of Sec. 1.1502-21T(b)(1) (or Sec. 1.1502-79A, as 
appropriate) is applied year-by-year, consistently with the sequence 
rules of section 172(b), and recapture of overall foreign losses is 
based on overall foreign loss accounts that may consist of losses in 
more than one year. Paragraph (d) provides rules for recapture of 
amounts in consolidated overall foreign loss accounts. Paragraph (e) 
provides special rules pertaining to section 904(f)(3) dispositions 
between members of a group. Paragraphs (b), (c), and (e) also contain 
special rules that apply to overall foreign losses that arise in 
separate return limitation years; the principles therein also apply to 
overall foreign losses when there has been a consolidated return change 
of ownership (as defined in Sec. 1.1502-1(g)).
    (b) Consolidated overall foreign loss accounts. Any group that 
sustains an overall foreign loss (or acquires a member with a balance in 
an overall foreign loss account) must establish a consolidated overall 
foreign loss account for such loss, and amounts shall be added to and 
subtracted from such account as provided in Secs. 1.904(f)-1 through 
1.904(f)-6 and this section.
    (1) Additions to the consolidated overall foreign loss accounts--(i) 
Consolidated overall foreign losses. Any consolidated overall foreign 
loss shall be added to the applicable consolidated overall foreign loss 
account for such separate limitation, to the extent that the overall 
foreign loss has reduced United States source income, in accordance with 
the rules of Secs. 1.904(f)-1 and 1.904(f)-3.
    (ii) Overall foreign losses from separate return years. If a 
corporation joins in the filing of a consolidated return in a taxable 
year in which such corporation has a balance in an overall foreign loss 
account from a prior separate return year that is not a separate return 
limitation year, such balance shall be added to the applicable 
consolidated overall foreign loss account in such year and treated as a 
consolidated

[[Page 174]]

overall foreign loss incurred in the previous year (and shall therefore 
be subject to recapture, in accordance with paragraph (d) of this 
section, beginning in the same year in which it is added to the 
consolidated overall foreign loss account).
    (iii) Overall foreign losses from separate return limitation years. 
If a corporation joins in the filing of a consolidated return in a 
taxable year in which such corporation has a balance in an overall 
foreign loss account from a prior separate return limitation year, such 
balance shall be added to the applicable consolidated overall foreign 
loss account in such consolidated return year to the extent of the 
lesser of the balance in the overall foreign loss account from the 
separate return limitation year or 50 percent (or such larger percentage 
as the taxpayer may elect) of the difference between the consolidated 
foreign source taxable income subject to the same separate limitation 
(computed in accordance with Secs. 1.904(f)-2(b) and 1.1502-4(d)(1)) 
minus such consolidated foreign source taxable income recomputed by 
excluding the items of income and deduction of such corporation (but not 
less than zero). The amount added to a consolidated overall foreign loss 
account in any taxable year under this paragraph (b)(1)(iii) shall be 
treated as a consolidated overall foreign loss in the previous year (and 
shall therefore be subject to recapture, in accordance with paragraph 
(d) of this section, beginning in the same year in which it is added to 
the consolidated overall foreign loss account).
    (iv) Overall foreign losses that are part of a net operating loss or 
net capital loss carried over from a separate return limitation year. 
Overall foreign losses that are part of a net operating loss or net 
capital loss carryover from a separate return limitation year of a 
member that is absorbed in a consolidated return year shall be treated 
as though they were added to an overall foreign loss account in a 
separate return limitation year of such member and will be subject to 
the limitation on recapture of SRLY losses contained in paragraph 
(b)(1)(iii) of this section. See paragraph (c)(2) of this section for 
rules regarding the addition of such losses to the applicable overall 
foreign loss account of such member.
    (2) Reductions of the consolidated overall foreign loss accounts--
(i) Amounts allocated to members leaving the group. When a member leaves 
the group, each applicable consolidated overall foreign loss account 
shall be reduced by the amount allocated from such account to such 
member in accordance with paragraph (c)(3)(i) of this section.
    (ii) Amounts recaptured. A consolidated overall foreign loss account 
shall be reduced by the amount of any overall foreign loss under the 
same separate limitation that is recaptured from consolidated income in 
accordance with Sec. 1.904(f)-2.
    (c) Allocation of overall foreign losses among members of an 
affiliated group--(1) Notional overall foreign loss accounts. Separate 
notional overall foreign loss accounts shall be established for each 
member of a group that contributes to a consolidated overall foreign 
loss account. Additions to and reductions of such notional accounts 
shall be made when additions or reductions are made to consolidated 
overall foreign loss accounts in accordance with paragraph (b) of this 
section and Sec. 1.904(f)-1.
    (i) Additions to notional accounts--(A) Consolidated overall foreign 
losses. When a consolidated overall foreign loss is added to a 
consolidated overall foreign loss account, each member shall add its pro 
rata share of the amount of such loss to the member's notional overall 
foreign loss account. A member's pro rata share of a consolidated 
overall foreign loss for any taxable year is determined by multiplying 
the consolidated loss by a fraction.The numerator of this fraction is 
the amount by which the member's separate gross income for the taxable 
year from sources without the United States subject to the applicable 
separate limitation is exceeded by the sum of the deductions properly 
allocated and apportioned thereto (including such member's share of any 
consolidated net operating loss deduction and consolidated net capital 
loss carryovers and carrybacks to the taxable year), for each member 
with such deductions in excess of such income. The denominator of this 
fraction is the sum of the numerators of this fraction for all such 
members of the group.

[[Page 175]]

    (B) Overall foreign losses from separate return years and separate 
return limitation years. When an amount from a member's overall foreign 
loss account from a separate return year or separate return limitation 
year is added to a consolidated overall foreign loss account in 
accordance with paragraph (b)(1) (ii) or (iii) of this section, such 
amount shall also be added to that member's notional overall foreign 
loss account for such separate limitation.
    (ii) Reductions of notional accounts. When a consolidated overall 
foreign loss account is reduced by recapture, in accordance with 
paragraph (b)(2)(ii) of this section, each member of the group shall 
reduce its notional overall foreign loss account for that separate 
limitation by its pro rata share of the amount by which the consolidated 
overall foreign loss account is reduced. A member's pro rata share of 
the amount by which a consolidated overall foreign loss account is 
reduced and determined by multiplying the amount recaptured by a 
fraction, the numerator of which is the amount in such member's notional 
account under such separate limitation, and the denominator of which is 
the amount in the consolidated overall foreign loss account under such 
separate limitation before reduction for the amount recaptured for that 
taxable year.
    (2) Overall foreign losses that are part of a net operating loss or 
net capital loss from a separate return limitation year. An overall 
foreign loss that is part of a net operating loss or net capital loss 
carryover from a separate return limitation year of a member that is 
absorbed in a consolidated return year shall be treated as an overall 
foreign loss of such member (rather than the group) and shall be added 
to such member's separate overall foreign loss account to the extent it 
reduces United States source income, in accordance with Sec. 1.904(f)-
1(d)(5). Such overall foreign losses shall be added to the appropriate 
consolidated overall foreign loss account in later years in accordance 
with paragraph (b)(1)(iii) of this section.
    (3) Allocation of a portion of overall foreign loss accounts to a 
member leaving the group--(i) Consolidated overall foreign losses. When 
a corporation ceases to be a member of an affiliated group filing 
consolidated returns, a portion of the balance in each applicable 
consolidated overall foreign loss account shall be allocated to such 
corporation. The amount allocated to such corporation shall be equal to 
the amount, if any, in such member's notional overall foreign loss 
account under the same separate limitation.
    (ii) Overall foreign losses from separate return limitation years. 
When a corporation ceases to be a member of an affiliated group filing 
consolidated returns, it shall take with it the remaining portion of 
each separate overall foreign loss account for overall foreign losses 
from separate return limitation years (including amounts added to such 
accounts under paragraph (c)(2) of this section).
    (d) Recapture of consolidated overall foreign losses. The amount in 
any consolidated overall foreign loss account shall be recaptured under 
Secs. 1.904(f)-1 through 1.904(f)-6 by recharacterizing consolidated 
foreign source taxable income subject to the separate limitation under 
which the loss arose as United States source taxable income. For 
purposes of recapture, consolidated foreign source taxable income 
subject to the separate limitation under which the loss arose shall be 
determined in accordance with Secs. 1.904(f)-2 and 1.1502-4. Amounts in 
a member's excess loss account that are included in income under 
Sec. 1.1502-19 shall be subject to recapture to the extent that they are 
included in consolidated foreign source taxable income subject to the 
separate limitation under which the loss arose.
    (e) Dispositions of property between members of the same affiliated 
group during a consolidated return year--(1) In general. Except as 
provided in paragraph (2) with respect to overall foreign losses of a 
selling member from a separate return limitation year, the rules of 
Sec. 1.1502-13 with respect to intercompany transactions will apply to 
dispositions of property to which section 904(f)(3)(A) applies.
    (2) Recapture of overall foreign loss from a separate return 
limitation year. Paragraph (1) will not apply and gain will be 
recognized to the extent that the selling member has a balance in its 
overall foreign loss account from a separate return limitation year 
unless the

[[Page 176]]

selling member adds the entire amount of its overall foreign loss 
account from separate return limitation years to the applicable 
consolidated overall foreign loss account and treats such amount as an 
overall foreign loss incurred in the previous year. Such loss shall be 
subject to recapture, in accordance with paragraph (d) of Sec. 1.1502-9, 
beginning in the same year in which it is added to the consolidated 
overall foreign loss account.
    (f) Illustrations. The provisions of this section are illustrated by 
the following examples. All foreign source income or loss in these 
examples is subject to the general limitation.

    Example (1). A, B, and C are the members of an affiliated group of 
corporations (as defined in section 1504), and all use the calendar year 
as their taxable year. For 1983, A, B, and C file a consolidated return. 
ABC has United States source income of $1,000 and foreign source losses 
(overall foreign loss) of $400. In accordance with paragraph (b)(1)(i) 
of this section, ABC adds $400 to its consolidated overall foreign loss 
account at the end of 1983. For 1983, the separate foreign source 
taxable income (or loss) of A is $400, of B is ($200), and of C is 
($600). Under paragraph (c)(1) of this section, B and C must establish 
separate notional overall foreign loss accounts. Under paragraph 
(c)(1)(i)(A) of this section, the amount added to each notional account 
is the pro rata share of the consolidated overall foreign loss of each 
member contributing to such loss. The pro rata share is determined by 
multiplying the consolidated loss by the member's proportionate share of 
the total foreign source losses of all members having such losses. B's 
foreign source loss if $200 and C's foreign source loss is $600, 
totaling $800. B must add $400x200/800, or $100, to its notional overall 
foreign loss account. C must add $400x600/800, or $300, to its notional 
overall foreign loss account.
    Example (2). The facts are the same as in example (1). In 1984, ABC 
has consolidated foreign source taxable income of $200. Under paragraph 
(d) of this section and Sec. 1.904(f)-2, ABC is required to recapture 
$100 of the amount in its consolidated overall foreign loss account, 
which reduces that account by $100 under paragraph (b)(2)(ii) of this 
section. In accordance with paragraph (c)(1)(ii) of this section, B 
reduces its notional account by $100x100/400, or $25, and C reduces it 
notional account by $100x300/400, or $75. At the end of 1984 ABC has 
$300 in its consolidated overall foreign loss account, B has $75 in its 
notional account, and C has $225 in its notional account.
    Example (3). D and E are members of an affiliated group and file 
separate returns using the calendar year as their taxable year for 1980. 
In 1980, D has an overall foreign loss of $200, which it adds to its 
overall foreign loss account, and E has no overall foreign losses. For 
1981, D and E file a consolidated return, and DE must establish a 
consolidated overall foreign loss account, to which D's overall foreign 
loss from 1980 is added under paragraph (b)(1)(ii) of this section. D 
also adds the same amount $200 to its notional account under paragraph 
(c)(1)(i)(B) of this section. In 1981, DE has consolidated foreign 
source taxable income of $300. Since the amount added to the 
consolidated overall foreign loss account in 1981 is treated as a 
consolidated overall foreign loss from 1980, DE must recapture $150 in 
1981 under paragraph (d) of this section and Sec. 1.904(f)-2. DE's 
consolidated overall foreign loss account is reduced by $150 under 
paragraph (b)(2)(ii) of this section, and D's notional account is 
reduced by $150 under paragraph (c)(1)(ii) of this section, leaving 
balances of $50 in each of those accounts at the end of 1981.
    Example (4). F and G are not members of an affiliated group in 1980, 
and G has an overall foreign loss of $200, which it adds to its overall 
foreign loss account. F has no overall foreign loss. On January 1, 1981, 
F acquires G, and FG files a consolidated return for the calendar year 
1981. In 1981, F has no foreign source taxable income or loss, and G has 
$100 of foreign source taxable income. FG's consolidated foreign source 
taxable income, $100, minus such income without G's items of income and 
deduction, $0, is $100. Therefore 50% of that amount, $50, of G's 
overall foreign loss from its 1980 separate return limitation year is 
added to FG's consolidated overall foreign loss account under paragraph 
(b)(1)(iii) of this section, and the same amount is added to G's 
notional account under paragraph (c)(1)(i)(B) of this section. In 
accordance with paragraph (d) of this section and Sec. 1.904(f)-2, FG 
must recapture the $50 balance in its consolidated overall foreign loss 
account in 1981 because the amount added from G's separate return 
limitation year is treated as a 1980 consolidated overall foreign loss. 
At the end of 1981, FG has a balance of $0 in its consolidated overall 
foreign loss account, G has $0 in its notional account, and G also has 
$150 remaining from its 1980 overall foreign loss that has not yet been 
added to the consolidated overall foreign loss account.
    On January 1, 1982, F sells G and G leaves the affiliated group. 
Under paragraph (c)(3)(i) of this section, G takes with it the balance 
in its overall foreign loss account from 1980 (its prior separate return 
limitation year) that has not been added to the consolidated account. G 
has $150 of overall foreign loss in its overall foreign loss account. 
Because the amount in the consolidated overall foreign loss account is 
zero, no amount from that account is allocated to G.

[[Page 177]]

    Example (5). (i) In 1982 corporation H has United States source 
income of $300 and foreign source losses of $500, resulting in a net 
operating loss of $200 and a balance in H's overall foreign loss account 
at the end of 1982 of $300.
    (ii) On January 1, 1983, H is acquired by J, and for the calendar 
year 1983 JH files a consolidated return. JH has consolidated taxable 
income of $700 in 1983, including a consolidated net operating loss 
deduction of $100. This net operating loss deduction is $100 of H's $200 
net operating loss from 1982 (a separate return limitation year), which 
is limited by Sec. 1.1502-21A(c). For 1983, H has separate taxable 
income of $100, comprised of $100 of United States source taxable income 
and zero foreign source taxable income, and J has separate taxable 
income of $700, comprised of $700 of United States source taxable income 
and zero foreign source taxable income. Under paragraph (c)(2) of this 
section, H adds $100 to its separate overall foreign loss account, since 
that amount of its net operating loss has reduced United States source 
income. H has $400 in its separate overall foreign loss account at the 
end of 1983, none of which has been added to a consolidated overall 
foreign loss account.
    (iii) In 1984, H has separate taxable income of $400, comprised of 
$100 of United States source taxable income and $300 of foreign source 
taxable income. J has separate taxable income of $900, comprised of $700 
of United States source taxable income and $200 of foreign source 
taxable income. JH has consolidated taxable income of $1200, which 
includes $100 of consolidated net operating loss deduction from H's 1982 
net operating loss. Since this net operating loss deduction is allocated 
to foreign source income, it does not reduce United States source income 
and will not be added to an overall foreign loss account. Under 
paragraph (b)(1)(iii) of this section, $100, from H's overall foreign 
loss is added to the consolidated overall foreign loss account computed 
as follows:

Consolidated foreign source taxable income.................         $400
Consolidated foreign source taxable income recomputed by                
 excluding H's foreign source income and deduction.........         -200
                                                            ------------
    $200...................................................             
   x  50%..................................................         $100
Amount from H's separate return limitation year overall                 
 foreign loss account added to the consolidated overall                 
 foreign loss account......................................         $100
                                                                        

This amount is subject to recapture beginning in the same taxable year, 
as it is treated as a consolidated overall foreign loss incurred in a 
previous year. Therefore, under paragraph (d) of this section and 
Sec. 1.904(f)-2 JH also recaptures this $100, reducing the consolidated 
overall foreign loss account to $0. H has $300 remaining in its separate 
overall foreign loss account at the end of 1984.
    (iv) In 1985, H has separate taxable income of $400, comprised of 
$100 of United States source taxable income and $300 of foreign source 
taxable income. J has separate taxable income of $300 comprised of $600 
of United States source taxable income and $300 of foreign source 
losses. JH has consolidated taxable income of $700, all of which is 
United States source. Under paragraph (b)(1)(iii) of this section an 
additional $150 from H's separate overall foreign loss is added to the 
consolidated overall foreign loss account, computed as follows:

Consolidated foreign source taxable income.................           $0
Consolidated foreign source taxable income recomputed by                
 excluding H's foreign source income and deductions........       -(300)
                                                            ------------
    300....................................................             
   x  50%..................................................         $150
Amount from H's separate return limitation year overall                 
 foreign loss account added to the consolidated overall                 
 foreign loss account......................................         $150
                                                                        

Thus, an additional $150 of H's separate overall foreign loss is added 
to the consolidated overall foreign loss account, and, under paragraph 
(c)(1)(i)(B) of this section, the same amount is added to J's notional 
account. While this amount is subject to recapture beginning in the same 
taxable year, JH has no consolidated foreign source taxable income in 
1985, so no overall foreign loss is recaptured. H has a remaining 
balance of $150 in its separate return limitation year overall foreign 
loss account and HJ has $150 in its consolidated overall foreign loss 
account.
    Example (6). A, B, and C are members of an affiliated group of 
corporations (as defined in section 1504), and all use the calendar year 
as their taxable year. For 1986, A, B, and C file a consolidated return. 
A has an overall foreign loss account which arose in a separate return 
limitation year. The amount in the overall foreign loss account is 
$2,000. A makes a disposition of all its assets to B on January 1, 1986. 
The gain on the transfer is $1,500, all of which would be recognized 
under section 904(f)(3). However, if A adds the total amount of its 
overall foreign loss from separate return limitation years to ABC's 
consolidated overall foreign loss account, no gain will be recognized on 
the transfer until the intercompany gain is taken into account

[[Page 178]]

under Sec. 1.1502-13. In the interim, any foreign source gain of the 
purchasing member (or any other member of the consolidated group) may be 
used to recapture on a consolidated basis the amount in ABC's 
consolidated overall foreign loss account.

[T.D. 8153, 52 FR 32005, Aug. 25, 1987; 52 FR 43434, Nov. 12, 1987, as 
amended by T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8677, 61 FR 
33323, June 27, 1996]

               Computation of Consolidated Taxable Income



Sec. 1.1502-11   Consolidated taxable income.

    (a) In general. The consolidated taxable income for a consolidated 
return year shall be determined by taking into account:
    (1) The separate taxable income of each member of the group (see 
Sec. 1.1502-12 for the computation of separate taxable income);
    (2) Any consolidated net operating loss deduction (see 
Sec. Sec. 1.1502-21T (or 1.1502-21A, as appropriate) for the computation 
of the consolidated net operating loss deduction);
    (3) Any consolidated capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) (see Sec. Sec. 1.1502-
22T (or 1.1502-22A, as appropriate) for the computation of the 
consolidated capital gain net income (net capital gain for taxable years 
beginning before January 1, 1977));
    (4) Any consolidated section 1231 net loss (see Sec. Sec. 1.1502-23T 
(or 1.1502-23A, as appropriate) for the computation of the consolidated 
section 1231 net loss);
    (5) Any consolidated charitable contributions deduction (see 
Sec. 1.1502-24 for the computation of the consolidated charitable 
contributions deduction);
    (6) Any consolidated section 922 deduction (see Sec. 1.1502-25 for 
the computation of the consolidated section 922 deduction);
    (7) Any consolidated dividends received deduction (see Sec. 1.1502-
26 for the computation of the consolidated dividends received 
deduction); and
    (8) Any consolidated section 247 deduction (see Sec. 1.1502-27 for 
the computation of the consolidated section 247 deduction).
    (b) Elimination of circular stock basis adjustments--(1) In general. 
If one member (P) disposes of the stock of another member (S), this 
paragraph (b) limits the use of S's deductions and losses in the year of 
disposition and the carryback of items to prior years. The purpose of 
the limitation is to prevent P's income or gain from the disposition of 
S's stock from increasing the absorption of S's deductions and losses, 
because the increased absorption would reduce P's basis (or increase its 
excess loss account) in S's stock under Sec. 1.1502-32 and, in turn, 
increase P's income or gain. See paragraph (b)(3) of this section for 
the application of these principles to P's deduction or loss from the 
disposition of S's stock, and paragraph (b)(4) of this section for the 
application of these principles to multiple stock dispositions. See 
Sec. 1.1502-19(c) for the definition of disposition.
    (2) Limitation on deductions and losses--(i) Determination of amount 
of limitation. If P disposes of one or more shares of S's stock, the 
extent to which S's deductions and losses for the tax year of the 
disposition (and its deductions and losses carried over from prior 
years) may offset income and gain is subject to limitation. The amount 
of S's deductions and losses that may offset income and gain is 
determined by tentatively computing taxable income (or loss) for the 
year of disposition (and any prior years to which the deductions or 
losses may be carried) without taking into account P's income and gain 
from the disposition.
    (ii) Application of limitation. S's deductions and losses offset 
income and gain only to the extent of the amount determined under 
paragraph (b)(2)(i) of this section. To the extent S's deductions and 
losses in the year of disposition cannot offset income or gain because 
of the limitation under this paragraph (b), the items are carried to 
other years under the applicable provisions of the Internal Revenue Code 
and regulations as if they were the only items incurred by S in the year 
of disposition. For example, to the extent S incurs an operating loss in 
the year of disposition that is limited, the loss is treated as a 
separate net operating loss attributable to S arising in that year. The 
tentative computation does not affect the manner in which S's unlimited 
deductions and losses are absorbed or the manner in which deductions and

[[Page 179]]

losses of other members are absorbed. (If the amount of S's unlimited 
deductions and losses actually absorbed is less than the amount absorbed 
in the tentative computation, P's stock basis adjustments under 
Sec. 1.1502-32 reflect only the amounts actually absorbed.)
    (iii) Examples. For purposes of the examples in this paragraph (b), 
unless otherwise stated, P owns all of the only class of S's stock for 
the entire year, S owns no stock of lower-tier members, the tax year of 
all persons is the calendar year, all persons use the accrual method of 
accounting, the facts set forth the only corporate activity, all 
transactions are between unrelated persons, and tax liabilities are 
disregarded. The principles of this paragraph (b)(2) are illustrated by 
the following examples.

    Example 1. Limitation on losses with respect to stock gain. (a) P 
has a $500 basis in S's stock. For Year 1, P has ordinary income of $30 
(determined without taking P's gain or loss from the disposition of S's 
stock into account) and S has an $80 ordinary loss. P sells S's stock 
for $520 at the close of Year 1.
    (b) To determine the amount of the limitation on S's loss under 
paragraph (b)(2)(i) of this section, and the effect under Sec. 1.1502-
32(b) of the absorption of S's loss on P's basis in S's stock, P's gain 
or loss from the disposition of S's stock is not taken into account. The 
group is tentatively treated as having a consolidated net operating loss 
of $50 (P's $30 of income minus S's $80 loss). Thus, $50 of S's loss is 
limited under this paragraph (b).
    (c) Because $30 of S's loss is absorbed in the determination of 
consolidated taxable income under paragraph (b)(2)(ii) of this section, 
P's basis in S's stock is reduced under Sec. 1.1502-32(b) from $500 to 
$470 immediately before the disposition. Consequently, P recognizes a 
$50 gain from the sale of S's stock and the group has consolidated 
taxable income of $50 for Year 1 (P's $30 of ordinary income and $50 
gain from the sale of S's stock, less the $30 of S's loss). In addition, 
S's limited loss of $50 is treated as a separate net operating loss 
attributable to S and, because S ceases to be a member, the loss is 
apportioned to S under Sec. 1.1502-21T (or Sec. 1.1502-79A, as 
appropriate) and carried to its first separate return year.
    Example 2. Carrybacks and carryovers. (a) For Year 1, the P group 
has consolidated taxable income of $30, and a consolidated net capital 
loss of $100 ($50 attributable to P and $50 to S). At the beginning of 
Year 2, P has a $300 basis in S's stock. For Year 2, P has ordinary 
income of $30, and a $20 capital gain (determined without taking the 
$100 consolidated net capital loss carryover or P's gain or loss from 
the disposition of S's stock into account), and S has a $100 ordinary 
loss. P sells S's stock for $280 at the close of Year 2.
    (b) To determine the amount of the limitation under paragraph 
(b)(2)(i) of this section on S's losses, and the effect of the 
absorption of S's losses on P's basis in S's stock under Sec. 1.1502-
32(b), P's gain or loss from the disposition of S's stock is not taken 
into account. For Year 2, the P group is tentatively treated as having a 
$70 consolidated net operating loss (S's $100 ordinary loss, less P's 
$30 of ordinary income). The P group is also treated as having no 
consolidated net capital gain in Year 2, because P's $20 capital gain is 
reduced by $20 of the consolidated net capital loss carryover from Year 
1 under section 1212(a) (the absorption of which is attributed equally 
to P and S). In addition, of the $70 consolidated net operating loss, 
$30 is carried back to Year 1 and offsets P's ordinary income in that 
year, and $40 is carried forward. Consequently, $40 of S's operating 
loss from Year 2, and $40 of the consolidated net capital loss carryover 
from Year 1 attributable to S, are limited under this paragraph (b).
    (c) Under paragraph (b)(2)(ii) of this section, the limitation under 
this paragraph (b) does not affect the absorption of any deductions and 
losses attributable to P, $60 of S's operating loss from Year 2, and $10 
of the consolidated net capital loss from Year 1 attributable to S. 
Consequently, P's basis in S's stock is reduced under Sec. 1.1502-32(b) 
by $70, from $300 to $230, and P recognizes a $50 gain from the sale of 
S's stock in Year 2. Thus, the P group is treated as having a $20 
unlimited net operating loss that is carried back to Year 1:


Ordinary income:                                                        
  P...........................................................      $30 
  S (excluding the $40 limited loss)..........................      (60)
                                                               ---------
    Sub Total.................................................     $(30)
Consolidated net capital gain:                                          
  P ($20 + $50 from S stock - $50 from Year 1)................      $20 
  S (-$10 from Year 1)........................................      (10)
                                                               ---------
    Sub Total.................................................      $10 
Consolidated taxable income...................................     $(20)
                                                                        


    (d) Under paragraph (b)(2)(ii) of this section, S's $40 ordinary 
loss from Year 2 that is limited under this paragraph (b) is treated as 
a separate net operating loss arising in Year 2. Similarly, $40 of the 
consolidated net capital loss from Year 1 attributable to S is treated 
as a separate net capital loss carried over from Year 1. Because S 
ceases to be a member, the $40 net operating loss from Year 2 and the 
$40 consolidated net capital loss from Year 1 are allocated to S under

[[Page 180]]

Sec. Sec. 1.1502-21T and 1.1502-22T, respectively (or Sec. 1.1502-79A, 
as appropriate) and are carried to S's first separate return year.
    Example 3. Allocation of basis adjustments. (a) For Year 1, the P 
group has consolidated taxable income of $100. At the beginning of Year 
2, P has a $40 basis in each of the 10 shares of S's stock. For Year 2, 
P has an $80 ordinary loss (determined without taking into account P's 
gain or loss from the disposition of S's stock) and S has an $80 
ordinary loss. P sells 2 shares of S's stock for $85 each at the close 
of Year 2.
    (b) Under paragraph (b)(2)(i) of this section, the amount of the 
limitation on S's loss is determined by tentatively treating the P group 
as having a $160 consolidated net operating loss for Year 2. Of this 
amount, $100 is carried back under section 172 and absorbed in Year 1 
($50 attributable to S and $50 attributable to P). Consequently, $30 of 
S's loss is limited under this paragraph (b).
    (c) Under paragraph (b)(2)(ii) of this section, the limitation under 
this paragraph (b) does not affect the absorption of P's $80 ordinary 
loss or $50 of S's ordinary loss. Consequently, P's basis in each share 
of S's stock is reduced from $40 to $35 under Sec. 1.1502-32(b), and P 
recognizes a $100 gain from the sale of the 2 shares. Thus, the P group 
is treated as having a $30 unlimited net operating loss:


Ordinary loss:                                                          
  P...........................................................    $ (80)
  S (excluding the $30 limited loss)..........................      (50)
                                                               ---------
    Sub Total.................................................    $(130)
Consolidated net capital gain:                                          
  P...........................................................     $100 
  S...........................................................        0 
                                                               ---------
    Sub Total.................................................     $100 
Unlimited consolidated net operating loss.....................     $(30)
                                                                        


    (d) A portion of the $130 of unlimited operating losses for Year 2 
is fully absorbed in that year, and a portion is carried back to Year 1. 
Thus, $61.50 of P's $80 loss ($100 multiplied by $80/$130) and $38.50 of 
S's $50 unlimited loss ($100 multiplied by $50/$130) are absorbed in 
Year 2. P's remaining $18.50 of loss and S's remaining $11.50 of loss 
are not subject to limitation and are carried back and absorbed in Year 
1.
    (e) Under paragraph (b)(2)(ii) of this section, S's $30 of loss 
limited under this paragraph (b) is treated as a separate net operating 
loss.
    (3) Loss dispositions--(i) General rule. The principles of paragraph 
(b)(2) of this section apply to the extent necessary to carry out the 
purposes of paragraph (b)(1) of this section if P recognizes a deduction 
or loss from the disposition of S's stock.
    (ii) Example. The principles of this paragraph (b)(3) are 
illustrated by the following example.
    Example. (a) P has a $400 basis in S's stock. For Year 1, P has a 
capital gain of $100 (determined without taking P's gain or loss from 
the disposition of S's stock into account) and S has both a $60 capital 
loss and a $200 ordinary loss. P sells S's stock for $140 at the close 
of Year 1.
    (b) Under paragraph (b)(3) of this section, the amount of S's 
ordinary and capital losses that may offset income and gain is 
determined by tentatively computing the group's consolidated net 
operating loss and consolidated net capital loss without taking into 
account P's loss from the disposition of S's stock. The limitation is 
necessary to prevent P's loss from the disposition of S's stock from 
affecting the absorption of S's losses and thereby the adjustments to 
P's basis in S's stock under Sec. 1.1502-32(b) (which would, in turn, 
affect P's loss).
    (c) Under the principles of paragraph (b)(2)(i) of this section, the 
amount of the limitation on S's loss is determined by tentatively 
treating the P group as having a $40 consolidated net capital gain and a 
$200 ordinary loss, which results in a $160 consolidated net operating 
loss for Year 1, all of which is attributable to S. Thus, $160 of S's 
ordinary loss is limited under this paragraph (b). See also Sec. 1.1502-
20 for rules applicable to losses from the sale of stock of 
subsidiaries.

    (4) Multiple dispositions--(i) Stock of a member. To the extent 
income, gain, deduction, or loss from a prior disposition of S's stock 
is deferred under any rule of law, the limitation under paragraph (b)(2) 
of this section is determined by treating the year the deferred amount 
is taken into account as the year of the disposition.
    (ii) Stock of different members. If S is a higher-tier corporation 
with respect to another member (T), and all of T's items of income, 
gain, deduction, and loss (including the absorption of T's deduction or 
loss) would be fully reflected in P's basis in S's stock under 
Sec. 1.1502-32, the limitation under paragraph (b)(2)(i) of this section 
with respect to T's deductions and losses is determined without taking 
into account any income, gain, deduction, or loss from the disposition 
of the stock of S or T (or of the stock of members owned

[[Page 181]]

in the chain connecting S and T). However, this paragraph (b) does not 
otherwise limit the absorption of one member's deduction or loss with 
respect to the disposition of another member's stock.
    (iii) Examples. The principles of this paragraph (b)(4) are 
illustrated by the following examples.

    Example 1. Chain of subsidiaries. (a) P owns all of S's stock with a 
$500 basis, and S owns all of T's stock with a $500 basis. For Year 1, P 
has ordinary income of $30, S has no income or loss, and T has an $80 
ordinary loss. P sells S's stock for $520 at the close of Year 1.
    (b) Under paragraph (b)(4) of this section, to determine the amount 
of the limitation under paragraph (b) of this section on T's loss, and 
the effect of the absorption of T's loss on P's basis in S's stock under 
Sec. 1.1502-32(b), P's gain or loss from the disposition of S's stock is 
not taken into account. The group is tentatively treated as having a 
consolidated net operating loss of $50 (P's $30 of income minus T's $80 
loss). Because only $30 of T's loss offsets income or gain, P's basis in 
S's stock is reduced under Sec. 1.1502-32(b) from $500 to $470 
immediately before the disposition of S's stock. Thus, P takes into 
account a $50 gain from the sale of S's stock.
    (c) The facts are the same as in paragraph (a) of this Example 1, 
except that S has a $10 excess loss account in T's stock (rather than a 
$500 basis). Under paragraph (b)(4) of this section, neither P's gain or 
loss from the disposition of S's stock nor S's gain or loss from the 
disposition of T's stock (under Sec. 1.1502-19) are taken into account 
for purposes of the tentative computations and the effect of any 
absorption under Sec. 1.1502-32(b) on P's basis in S's stock and S's 
excess loss account in T's stock. The group is tentatively treated as 
having a consolidated net operating loss of $50 (P's $30 of income minus 
T's $80 loss), and only $30 of T's loss may offset the group's income or 
gain. Under Sec. 1.1502-32(b), the absorption of $30 of T's loss 
increases S's excess loss account in T's stock to $40 and, under 
Sec. 1.1502-19, the excess loss account is taken into account. Moreover, 
under Sec. 1.1502-32(b), P's basis in S's stock is increased immediately 
before the sale by $10 (S's $40 gain under Sec. 1.1502-19(b) minus T's 
$30 loss absorbed and tiered up under Sec. 1.1502-32(b)), from $500 to 
$510. Thus, P takes into account a $10 gain from the sale of S's stock, 
and S takes into account a $40 gain from its excess loss account in T's 
stock.
    Example 2. Brother-sister subsidiaries. (a) P owns all of the stock 
of S1 and S2, each with a $50 basis. For Year 1, the group has a $100 
consolidated net operating loss ($50 of which is attributable to S1, and 
$50 to S2) determined without taking gain or loss from the disposition 
of member stock into account. At the close of Year 1, P sells the stock 
of S1 and S2 for $100 each.
    (b) Paragraph (b)(4) of this section does not limit the loss of S1 
or S2 with respect to the disposition of stock of the other. 
Consequently, each subsidiary's loss may offset P's gain from the 
disposition of the stock of the other subsidiary. Because this 
absorption results in a $50 reduction in P's basis in the stock of each 
subsidiary under Sec. 1.1502-32(b), P's aggregate gain from the stock 
dispositions is increased from $100 to $200, $100 of which is offset by 
the losses of the subsidiaries.

    (5) Effective date. This paragraph (b) applies to stock dispositions 
occurring in consolidated return years beginning on or after January 1, 
1995. For prior years, see Sec. 1.1502-11(b) as contained in the 26 CFR 
part 1 edition revised as of April 1, 1994.
    (c) Disallowance of loss attributable to pre-1966 distributions. No 
loss shall be allowed upon the sale or other disposition of stock, 
bonds, or other obligations of a member or former member to the extent 
that such loss is attributable to a distribution made in an affiliated 
year beginning before January 1, 1966, out of earnings and profits 
accumulated before the distributing corporation became a member.

[T.D. 7246, 38 FR 759, Jan. 4, 1973, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980; T.D. 8560, 59 FR 41675, Aug. 15, 1994; T.D. 8677, 
61 FR 33323, 33326, June 27, 1996; T.D. 8560, 62 FR 12097, Mar. 14, 
1997]

                  Computation of Separate Taxable Income



Sec. 1.1502-12   Separate taxable income.

    The separate taxable income of a member (including a case in which 
deductions exceed gross income) is computed in accordance with the 
provisions of the Code covering the determination of taxable income of 
separate corporations, subject to the following modifications:
    (a) Transactions between members and transactions with respect to 
stock, bonds, or other obligations of members shall be reflected 
according to the provisions of Sec. 1.1502-13;
    (b) Any deduction which is disallowed under Sec. Sec. 1.1502-15A or 
1.1502-15T shall be taken into account as provided in those sections;

[[Page 182]]

    (c) The limitation on deductions provided in section 615(c) or 
section 617(h) shall be taken into account as provided in Sec. 1.1502-
16;
    (d) The method of accounting under which such computation is made 
and the adjustments to be made because of any change in method of 
accounting shall be determined under Sec. 1.1502-17;
    (e) Inventory adjustments shall be made as provided in Sec. 1.1502-
18;
    (f) Any amount included in income under Sec. 1.1502-19 shall be 
taken into account;
    (g) In the computation of the deduction under section 167, property 
shall not lose its character as new property as a result of a transfer 
from one member to another member during a consolidated return year if:
    (1) The transfer occurs on or before January 4, 1973, or
    (2) The transfer occurs after January 4, 1973, and the transfer is 
an intercompany transaction as defined in Sec. 1.1502-13 or the basis of 
the property in the hands of the transferee is determined (in whole or 
in part) by reference to its basis in the hands of the transferor;
    (h) No net operating loss deduction shall be taken into account;
    (i) [Reserved]
    (j) No capital gains or losses shall be taken into account;
    (k) No gains and losses subject to section 1231 shall be taken into 
account;
    (l) No deduction under section 170 with respect to charitable 
contributions shall be taken into account;
    (m) No deduction under section 922 (relating to the deduction for 
Western Hemisphere trade corporations) shall be taken into account;
    (n) No deductions under section 243(a)(1), 244(a), 245, or 247 
(relating to deductions with respect to dividends received and dividends 
paid) shall be taken into account;
    (o) Basis shall be determined under Secs. 1.1502-31 and 1.1502-32, 
and earnings and profits shall be determined under Sec. 1.1502-33; and
    (p) The limitation on deductions provided in section 613A shall be 
taken into account for each member's oil and gas properties as provided 
in Sec. 1.1502-44.
    (q) A thrift institution's deduction under section 593(b)(2) 
(relating to the addition to the reserve for bad debts of a thrift 
institution under the percentage of taxable income method) shall be 
determined under Sec. 1.1502-42.
    (r) For rules relating to loss disallowance or basis reduction on 
the disposition or deconsolidation of stock of a subsidiary, see 
Secs. 1.337(d)-1, 1.337(d)-2 and Sec. 1.1502-20.

(Secs. 1502 and 7805 of the Internal Revenue Code of 1954 (68A Stat. 
637; 917; 26 U.S.C. 1502, 7805))

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7191, 37 FR 
12949, June 30, 1972; T.D. 7246, 38 FR 760, Jan. 4, 1973; T.D. 7725, 45 
FR 65561, Oct. 3, 1980; T.D. 7876, 48 FR 11258, Mar. 17, 1983; T.D. 
8294, 55 FR 9434, Mar. 14, 1990; T.D. 8319, 55 FR 49038, Nov. 26, 1990; 
T.D. 8364, 56 FR 47401, Sept. 19, 1991; T.D. 8597, 60 FR 36679, July 18, 
1995; T.D. 8677, 61 FR 33323, June 27, 1996]



Sec. 1.1502-13  Intercompany transactions.

    (a) In general--(1) Purpose. This section provides rules for taking 
into account items of income, gain, deduction, and loss of members from 
intercompany transactions. The purpose of this section is to provide 
rules to clearly reflect the taxable income (and tax liability) of the 
group as a whole by preventing intercompany transactions from creating, 
accelerating, avoiding, or deferring consolidated taxable income (or 
consolidated tax liability).
    (2) Separate entity and single entity treatment. Under this section, 
the selling member (S) and the buying member (B) are treated as separate 
entities for some purposes but as divisions of a single corporation for 
other purposes. The amount and location of S's intercompany items and 
B's corresponding items are determined on a separate entity basis 
(separate entity treatment). For example, S determines its gain or loss 
from a sale of property to B on a separate entity basis, and B has a 
cost basis in the property. The timing, and the character, source, and 
other attributes of the intercompany items and corresponding items, 
although initially determined on a separate entity basis, are 
redetermined under this section to produce the effect of transactions 
between divisions of a single corporation (single entity treatment). For 
example, if S sells land to B at a gain and B sells the land to a 
nonmember, S does not take its gain into account until B's sale to the 
nonmember.

[[Page 183]]

    (3) Timing rules as a method of accounting--(i) In general. The 
timing rules of this section are a method of accounting for intercompany 
transactions, to be applied by each member in addition to the member's 
other methods of accounting. See Sec. 1.1502-17. To the extent the 
timing rules of this section are inconsistent with a member's otherwise 
applicable methods of accounting, the timing rules of this section 
control. For example, if S sells property to B in exchange for B's note, 
the timing rules of this section apply instead of the installment sale 
rules of section 453. S's or B's application of the timing rules of this 
section to an intercompany transaction clearly reflects income only if 
the effect of that transaction as a whole (including, for example, 
related costs and expenses) on consolidated taxable income is clearly 
reflected.
    (ii) Automatic consent for joining and departing members--(A) 
Consent granted. Section 446(e) consent is granted under this section to 
the extent a change in method of accounting is necessary solely by 
reason of the timing rules of this section--
    (1) For each member, with respect to its intercompany transactions, 
in the first consolidated return year which follows a separate return 
year and in which the member engages in an intercompany transaction; and
    (2) For each former member, with respect to its transactions with 
members that would otherwise be intercompany transactions if the former 
member were still a member, in the first separate return year in which 
the former member engages in such a transaction.
    (B) Cut-off basis. Any change in method of accounting described in 
paragraph (a)(3)(ii)(A) of this section is to be effected on a cut-off 
basis for transactions entered into on or after the first day of the 
year for which consent is granted under paragraph (a)(3)(ii)(A) of this 
section.
    (4) Other law. The rules of this section apply in addition to other 
applicable law (including nonstatutory authorities). For example, this 
section applies in addition to sections 267(f) (additional rules for 
certain losses), 269 (acquisitions to evade or avoid income tax), and 
482 (allocations among commonly controlled taxpayers). Thus, an item 
taken into account under this section can be deferred, disallowed, or 
eliminated under other applicable law, for example, section 1091 (losses 
from wash sales).
    (5) References. References in other sections to this section 
include, as appropriate, references to prior law. For effective dates 
and prior law see paragraph (l) of this section.
    (6) Overview--(i) In general. The principal rules of this section 
that implement single entity treatment are the matching rule and the 
acceleration rule of paragraphs (c) and (d) of this section. Under the 
matching rule, S and B are generally treated as divisions of a single 
corporation for purposes of taking into account their items from 
intercompany transactions. The acceleration rule provides additional 
rules for taking the items into account if the effect of treating S and 
B as divisions cannot be achieved (for example, if S or B becomes a 
nonmember). Paragraph (b) of this section provides definitions. 
Paragraph (e) of this section provides simplifying rules for certain 
transactions. Paragraphs (f) and (g) of this section provide additional 
rules for stock and obligations of members. Paragraphs (h) and (j) of 
this section provide anti-avoidance rules and miscellaneous operating 
rules.
    (ii) Table of examples. Set forth below is a table of the examples 
contained in this section.

                Matching rule. (Sec. 1.1502-13(c)(7)(ii))

    Example 1. Intercompany sale of land.
    Example 2. Dealer activities.
    Example 3. Intercompany section 351 transfer.
    Example 4. Depreciable property.
    Example 5. Intercompany sale followed by installment sale.
    Example 6. Intercompany sale of installment obligation.
    Example 7. Performance of services.
    Example 8. Rental of property.
    Example 9. Intercompany sale of a partnership interest.
    Example 10. Net operating losses subject to section 382 or the SRLY 
rules.
    Example 11. Section 475.
    Example 12. Section 1092.
    Example 13. Manufacturer incentive payments.
    Example 14. Source of income under section 863.
    Example 15. Section 1248.

[[Page 184]]

                Acceleration rule. (Sec. 1.1502-13(d)(3))

    Example 1. Becoming a nonmember--timing.
    Example 2. Becoming a nonmember--attributes.
    Example 3. Selling member's disposition of installment note.
    Example 4. Cancellation of debt and attribute reduction under 
section 108(b).
    Example 5. Section 481.

         Simplifying rules--inventory. (Sec. 1.1502-13(e)(1)(v))

    Example 1. Increment averaging method.
    Example 2. Increment valuation method.
    Example 3. Other reasonable inventory methods.

                Stock of members. (Sec. 1.1502-13(f)(7))

    Example 1. Dividend exclusion and property distribution.
    Example 2. Excess loss accounts.
    Example 3. Intercompany reorganization.
    Example 4. Stock redemptions and distributions.
    Example 5. Intercompany stock sale followed by section 332 
liquidation.
    Example 6. Intercompany stock sale followed by section 355 
distribution.

             Obligations of members. (Sec. 1.1502-13(g)(5))

    Example 1. Interest on intercompany debt.
    Example 2. Intercompany debt becomes nonintercompany debt.
    Example 3. Loss or bad debt deduction with respect to intercompany 
debt.
    Example 4. Nonintercompany debt becomes intercompany debt.
    Example 5. Notional principal contracts.

              Anti-avoidance rules. (Sec. 1.1502-13(h)(2))

    Example 1. Sale of a partnership interest.
    Example 2. Transitory status as an intercompany obligation.
    Example 3. Corporate mixing bowl.
    Example 4. Partnership mixing bowl.
    Example 5. Sale and leaseback.

          Miscellaneous operating rules. (Sec. 1.1502-13(j)(9))

    Example 1. Intercompany sale followed by section 351 transfer to 
member.
    Example 2. Intercompany sale of member stock followed by 
recapitalization.
    Example 3. Back-to-back intercompany transactions--matching.
    Example 4. Back-to-back intercompany transactions--acceleration.
    Example 5. Successor group.
    Example 6. Liquidation--80% distributee.
    Example 7. Liquidation--no 80% distributee.

    (b) Definitions. For purposes of this section--
    (1) Intercompany transactions--(i) In general. An intercompany 
transaction is a transaction between corporations that are members of 
the same consolidated group immediately after the transaction. S is the 
member transferring property or providing services, and B is the member 
receiving the property or services. Intercompany transactions include--
    (A) S's sale of property (or other transfer, such as an exchange or 
contribution) to B, whether or not gain or loss is recognized;
    (B) S's performance of services for B, and B's payment or accrual of 
its expenditure for S's performance;
    (C) S's licensing of technology, rental of property, or loan of 
money to B, and B's payment or accrual of its expenditure; and
    (D) S's distribution to B with respect to S stock.
    (ii) Time of transaction. If a transaction occurs in part while S 
and B are members and in part while they are not members, the 
transaction is treated as occurring when performance by either S or B 
takes place, or when payment for performance would be taken into account 
under the rules of this section if it were an intercompany transaction, 
whichever is earliest. Appropriate adjustments must be made in such 
cases by, for example, dividing the transaction into two separate 
transactions reflecting the extent to which S or B has performed.
    (iii) Separate transactions. Except as otherwise provided in this 
section, each transaction is analyzed separately. For example, if S 
simultaneously sells two properties to B, one at a gain and the other at 
a loss, each property is treated as sold in a separate transaction. 
Thus, the gain and loss cannot be offset or netted against each other 
for purposes of this section. Similarly, each payment or accrual of 
interest on a loan is a separate transaction. In addition, an accrual of 
premium is treated as a separate transaction, or as an offset to 
interest that is not a separate transaction, to the extent required 
under separate entity treatment. If two members exchange property, each 
member is S with respect to the property it transfers and B with respect 
to the property it receives. If two members

[[Page 185]]

enter into a notional principal contract, each payment under the 
contract is a separate transaction and the member making the payment is 
B with respect to that payment and the member receiving the payment is 
S. See paragraph (j)(4) of this section for rules aggregating certain 
transactions.
    (2) Intercompany items--(i) In general. S's income, gain, deduction, 
and loss from an intercompany transaction are its intercompany items. 
For example, S's gain from the sale of property to B is intercompany 
gain. An item is an intercompany item whether it is directly or 
indirectly from an intercompany transaction.
    (ii) Related costs or expenses. S's costs or expenses related to an 
intercompany transaction are included in determining its intercompany 
items. For example, if S sells inventory to B, S's direct and indirect 
costs properly includible under section 263A are included in determining 
its intercompany income. Similarly, related costs or expenses that are 
not capitalized under S's separate entity method of accounting are 
included in determining its intercompany items. For example, deductions 
for employee wages, in addition to other related costs, are included in 
determining S's intercompany items from performing services for B, and 
depreciation deductions are included in determining S's intercompany 
items from renting property to B.
    (iii) Amounts not yet recognized or incurred. S's intercompany items 
include amounts from an intercompany transaction that are not yet taken 
into account under its separate entity method of accounting. For 
example, if S is a cash method taxpayer, S's intercompany income might 
be taken into account under this section even if the cash is not yet 
received. Similarly, an amount reflected in basis (or an amount 
equivalent to basis) under S's separate entity method of accounting that 
is a substitute for income, gain, deduction or loss from an intercompany 
transaction is an intercompany item.
    (3) Corresponding items--(i) In general. B's income, gain, 
deduction, and loss from an intercompany transaction, or from property 
acquired in an intercompany transaction, are its corresponding items. 
For example, if B pays rent to S, B's deduction for the rent is a 
corresponding deduction. If B buys property from S and sells it to a 
nonmember, B's gain or loss from the sale to the nonmember is a 
corresponding gain or loss; alternatively, if B recovers the cost of the 
property through depreciation, B's depreciation deductions are 
corresponding deductions. An item is a corresponding item whether it is 
directly or indirectly from an intercompany transaction (or from 
property acquired in an intercompany transaction).
    (ii) Disallowed or eliminated amounts. B's corresponding items 
include amounts that are permanently disallowed or permanently 
eliminated, whether directly or indirectly. Thus, corresponding items 
include amounts disallowed under section 265 (expenses relating to tax-
exempt income), and amounts not recognized under section 311(a) 
(nonrecognition of loss on distributions), section 332 (nonrecognition 
on liquidating distributions), or section 355(c) (certain distributions 
of stock of a subsidiary). On the other hand, an amount is not 
permanently disallowed or permanently eliminated (and therefore is not a 
corresponding item) to the extent it is not recognized in a transaction 
in which B receives a successor asset within the meaning of paragraph 
(j)(1) of this section. For example, B's corresponding items do not 
include amounts not recognized from a transaction with a nonmember to 
which section 1031 applies or from another transaction in which B 
receives exchanged basis property.
    (4) Recomputed corresponding items. The recomputed corresponding 
item is the corresponding item that B would take into account if S and B 
were divisions of a single corporation and the intercompany transaction 
were between those divisions. For example, if S sells property with a 
$70 basis to B for $100, and B later sells the property to a nonmember 
for $90, B's corresponding item is its $10 loss, and the recomputed 
corresponding item is $20 of gain (determined by comparing the $90 sales 
price with the $70 basis the property would have if S and B were 
divisions of a single corporation). Although neither S nor B actually 
takes

[[Page 186]]

the recomputed corresponding item into account, it is computed as if B 
did take it into account (based on reasonable and consistently applied 
assumptions, including any provision of the Internal Revenue Code or 
regulations that would affect its timing or attributes).
    (5) Treatment as a separate entity. Treatment as a separate entity 
means treatment without application of the rules of this section, but 
with the application of the other consolidated return regulations. For 
example, if S sells the stock of another member to B, S's gain or loss 
on a separate entity basis is determined with the application of 
Sec. 1.1502-80(b) (non-applicability of section 304), but without 
redetermination under paragraph (c) or (d) of this section.
    (6) Attributes. The attributes of an intercompany item or 
corresponding item are all of the item's characteristics, except amount, 
location, and timing, necessary to determine the item's effect on 
taxable income (and tax liability). For example, attributes include 
character, source, treatment as excluded from gross income or as a 
noncapital, nondeductible amount, and treatment as built-in gain or loss 
under section 382(h) or 384. In contrast, the characteristics of 
property, such as a member's holding period, or the fact that property 
is included in inventory, are not attributes of an item, but these 
characteristics might affect the determination of the attributes of 
items from the property.
    (c) Matching rule. For each consolidated return year, B's 
corresponding items and S's intercompany items are taken into account 
under the following rules:
    (1) Attributes and holding periods--(i) Attributes. The separate 
entity attributes of S's intercompany items and B's corresponding items 
are redetermined to the extent necessary to produce the same effect on 
consolidated taxable income (and consolidated tax liability) as if S and 
B were divisions of a single corporation, and the intercompany 
transaction were a transaction between divisions. Thus, the activities 
of both S and B might affect the attributes of both intercompany items 
and corresponding items. For example, if S holds property for sale to 
unrelated customers in the ordinary course of its trade or business, S 
sells the property to B at a gain and B sells the property to an 
unrelated person at a further gain, S's intercompany gain and B's 
corresponding gain might be ordinary because of S's activities with 
respect to the property. Similar principles apply if S performs 
services, rents property, or engages in any other intercompany 
transaction.
    (ii) Holding periods. The holding period of property transferred in 
an intercompany transaction is the aggregate of the holding periods of S 
and B. However, if the basis of the property is determined by reference 
to the basis of other property, the property's holding period is 
determined by reference to the holding period of the other property. For 
example, if S distributes stock to B in a transaction to which section 
355 applies, B's holding period in the distributed stock is determined 
by reference to B's holding period in the stock of S.
    (2) Timing--(i) B's items. B takes its corresponding items into 
account under its accounting method, but the redetermination of the 
attributes of a corresponding item might affect its timing. For example, 
if B's sale of property acquired from S is treated as a dealer 
disposition because of S's activities, section 453(b) prevents any 
corresponding income of B from being taken into account under the 
installment method.
    (ii) S's items. S takes its intercompany item into account to 
reflect the difference for the year between B's corresponding item taken 
into account and the recomputed corresponding item.
    (3) Divisions of a single corporation. As divisions of a single 
corporation, S and B are treated as engaging in their actual transaction 
and owning any actual property involved in the transaction (rather than 
treating the transaction as not occurring). For example, S's sale of 
land held for investment to B for cash is not disregarded, but is 
treated as an exchange of land for cash between divisions (and B 
therefore succeeds to S's basis in the property). Similarly, S's 
issuance of its own stock to B in exchange for property is not

[[Page 187]]

disregarded, B is treated as owning the stock it receives in the 
exchange, and section 1032 does not apply to B on its subsequent sale of 
the S stock. Although treated as divisions, S and B nevertheless are 
treated as:
    (i) Operating separate trades or businesses. See, e.g., Sec. 1.446-
1(d) (accounting methods for a taxpayer engaged in more than one 
business).
    (ii) Having any special status that they have under the Internal 
Revenue Code or regulations. For example, a bank defined in section 581, 
a domestic building and loan association defined in section 7701(a)(19), 
and an insurance company to which section 801 or 831 applies are treated 
as divisions having separate special status. On the other hand, the fact 
that a member holds property for sale to customers in the ordinary 
course of its trade or business is not a special status.
    (4) Conflict or allocation of attributes. This paragraph (c)(4) 
provides special rules for redetermining and allocating attributes under 
paragraph (c)(1)(i) of this section.
    (i) Offsetting amounts--(A) In general. To the extent B's 
corresponding item offsets S's intercompany item in amount, the 
attributes of B's corresponding item, determined based on both S's and 
B's activities, control the attributes of S's offsetting intercompany 
item. For example, if S sells depreciable property to B at a gain and B 
depreciates the property, the attributes of B's depreciation deduction 
(ordinary deduction) control the attributes of S's offsetting 
intercompany gain. Accordingly, S's gain is ordinary.
    (B) B controls unreasonable. To the extent the results under 
paragraph (c)(4)(i)(A) are inconsistent with treating S and B as 
divisions of a single corporation, the attributes of the offsetting 
items must be redetermined in a manner consistent with treating S and B 
as divisions of a single corporation. To the extent, however, that B's 
corresponding item on a separate entity basis is excluded from gross 
income, is a noncapital, nondeductible amount, or is otherwise 
permanently disallowed or eliminated, the attributes of B's 
corresponding item always control the attributes of S's offsetting 
intercompany item.
    (ii) Allocation. To the extent S's intercompany item and B's 
corresponding item do not offset in amount, the attributes redetermined 
under paragraph (c)(1)(i) of this section must be allocated to S's 
intercompany item and B's corresponding item by using a method that is 
reasonable in light of all the facts and circumstances, including the 
purposes of this section and any other rule affected by the attributes 
of S's intercompany item and B's corresponding item. A method of 
allocation or redetermination is unreasonable if it is not used 
consistently by all members of the group from year to year.
    (5) Special status. Notwithstanding the general rule of paragraph 
(c)(1)(i) of this section, to the extent an item's attributes determined 
under this section are permitted or not permitted to a member under the 
Internal Revenue Code or regulations by reason of the member's special 
status, the attributes required under the Internal Revenue Code or 
regulations apply to that member's items (but not the other member). For 
example, if S is a bank to which section 582(c) applies, and sells debt 
securities at a gain to B, a nonbank, the character of S's intercompany 
gain is ordinary as required under section 582(c), but the character of 
B's corresponding item as capital or ordinary is determined under 
paragraph (c)(1)(i) of this section without the application of section 
582(c). For other special status issues, see, for example, sections 
595(b) (foreclosure on property securing loans), 818(b) (life insurance 
company treatment of capital gains and losses), and 1503(c) (limitation 
on absorption of certain losses).
    (6) Treatment of intercompany items if corresponding items are 
excluded or nondeductible--(i) In general. Under paragraph (c)(1)(i) of 
this section, S's intercompany item might be redetermined to be excluded 
from gross income or treated as a noncapital, nondeductible amount. For 
example, S's intercompany loss from the sale of property to B is treated 
as a noncapital, nondeductible amount if B distributes the property to a 
nonmember shareholder at no further gain or loss (because, if S and B 
were divisions of a single corporation, the loss would not have been

[[Page 188]]

recognized under section 311(a)). Paragraph (c)(6)(ii) of this section, 
however, provides limitations on the application of this rule to 
intercompany income or gain. See also Secs. 1.1502-32 and 1.1502-33 
(adjustments to S's stock basis and earnings and profits to reflect 
amounts so treated).
    (ii) Limitation on treatment of intercompany items as excluded from 
gross income. Notwithstanding the general rule of paragraph (c)(1)(i) of 
this section, S's intercompany income or gain is redetermined to be 
excluded from gross income only to the extent one of the following 
applies:
    (A) Disallowed amounts. B's corresponding item is a deduction or 
loss and, in the taxable year the item is taken into account under this 
section, it is permanently and explicitly disallowed under another 
provision of the Internal Revenue Code or regulations. For example, 
deductions that are disallowed under section 265 are permanently and 
explicitly disallowed. An amount is not permanently and explicitly 
disallowed, for example, to the extent that--
    (1) The Internal Revenue Code or regulations provide that the amount 
is not recognized (for example, a loss that is realized but not 
recognized under section 332 or section 355(c) is not permanently and 
explicitly disallowed, notwithstanding that it is a corresponding item 
within the meaning of paragraph (b)(3)(ii) of this section (certain 
disallowed or eliminated amounts));
    (2) A related amount might be taken into account by B with respect 
to successor property, such as under section 280B (demolition costs 
recoverable as capitalized amounts);
    (3) A related amount might be taken into account by another 
taxpayer, such as under section 267(d) (disallowed loss under section 
267(a) might result in nonrecognition of gain for a related person);
    (4) A related amount might be taken into account as a deduction or 
loss, including as a carryforward to a later year, under any provision 
of the Internal Revenue Code or regulations (whether or not the 
carryforward expires in a later year); or
    (5) The amount is reflected in the computation of any credit against 
(or other reduction of) Federal income tax (whether allowed for the 
taxable year or carried forward to a later year).
    (B) Section 311. The corresponding item is a loss that is realized, 
but not recognized under section 311(a) on a distribution to a nonmember 
(even though the loss is not a permanently and explicitly disallowed 
amount within the meaning of paragraph (c)(6)(ii)(A) of this section).
    (C) Other amounts. The Commissioner determines that treating S's 
intercompany item as excluded from gross income is consistent with the 
purposes of this section and other applicable provisions of the Internal 
Revenue Code and regulations.
    (7) Examples--(i) In general. For purposes of the examples in this 
section, unless otherwise stated, P is the common parent of the P 
consolidated group, P owns all of the only class of stock of 
subsidiaries S and B, X is a person unrelated to any member of the P 
group, the taxable year of all persons is the calendar year, all persons 
use the accrual method of accounting, tax liabilities are disregarded, 
the facts set forth the only corporate activity, no member has any 
special status, and the transaction is not otherwise subject to 
recharacterization. If a member acts as both a selling member and a 
buying member (e.g., with respect to different aspects of a single 
transaction, or with respect to related transactions), the member is 
referred to as M, M1, or M2 (rather than as S or B).
    (ii) Matching rule. The matching rule of this paragraph (c) is 
illustrated by the following examples.

    Example 1. Intercompany sale of land followed by sale to a 
nonmember. (a) Facts. S holds land for investment with a basis of $70. S 
has held the land for more than one year. On January 1 of Year 1, S 
sells the land to B for $100. B also holds the land for investment. On 
July 1 of Year 3, B sells the land to X for $110.
    (b) Definitions. Under paragraph (b)(1) of this section, S's sale of 
the land to B is an intercompany transaction, S is the selling member, 
and B is the buying member. Under paragraphs (b)(2) and (3) of this 
section, S's $30 gain from the sale to B is its intercompany item, and 
B's $10 gain from the sale to X is its corresponding item.

[[Page 189]]

    (c) Attributes. Under the matching rule of paragraph (c) of this 
section, S's $30 intercompany gain and B's $10 corresponding gain are 
taken into account to produce the same effect on consolidated taxable 
income (and consolidated tax liability) as if S and B were divisions of 
a single corporation. In addition, the holding periods of S and B for 
the land are aggregated. Thus, the group's entire $40 of gain is long-
term capital gain. Because both S's intercompany item and B's 
corresponding item on a separate entity basis are long-term capital 
gain, the attributes are not redetermined under paragraph (c)(1)(i) of 
this section.
    (d) Timing. For each consolidated return year, S takes its 
intercompany item into account under the matching rule to reflect the 
difference for the year between B's corresponding item taken into 
account and the recomputed corresponding item. If S and B were divisions 
of a single corporation and the intercompany sale were a transfer 
between the divisions, B would succeed to S's $70 basis in the land and 
would have a $40 gain from the sale to X in Year 3, instead of a $10 
gain. Consequently, S takes no gain into account in Years 1 and 2, and 
takes the entire $30 gain into account in Year 3, to reflect the $30 
difference in that year between the $10 gain B takes into account and 
the $40 recomputed gain (the recomputed corresponding item). Under 
Secs. 1.1502-32 and 1.1502-33, P's basis in its S stock and the earnings 
and profits of S and P do not reflect S's $30 gain until the gain is 
taken into account in Year 3. (Under paragraph (a)(3) of this section, 
the results would be the same if S sold the land to B in an installment 
sale to which section 453 would otherwise apply, because S must take its 
intercompany gain into account under this section.)
    (e) Intercompany loss followed by sale to a nonmember at a gain. The 
facts are the same as in paragraph (a) of this Example 1, except that 
S's basis in the land is $130 (rather than $70). The attributes and 
timing of S's intercompany loss and B's corresponding gain are 
determined under the matching rule in the manner provided in paragraphs 
(c) and (d) of this Example 1. If S and B were divisions of a single 
corporation and the intercompany sale were a transfer between the 
divisions, B would succeed to S's $130 basis in the land and would have 
a $20 loss from the sale to X instead of a $10 gain. Thus, S takes its 
entire $30 loss into account in Year 3 to reflect the $30 difference 
between B's $10 gain taken into account and the $20 recomputed loss. 
(The results are the same under section 267(f).) S's $30 loss is long-
term capital loss, and B's $10 gain is long-term capital gain.
    (f) Intercompany gain followed by sale to a nonmember at a loss. The 
facts are the same as in paragraph (a) of this Example 1, except that B 
sells the land to X for $90 (rather than $110). The attributes and 
timing of S's intercompany gain and B's corresponding loss are 
determined under the matching rule. If S and B were divisions of a 
single corporation and the intercompany sale were a transfer between the 
divisions, B would succeed to S's $70 basis in the land and would have a 
$20 gain from the sale to X instead of a $10 loss. Thus, S takes its 
entire $30 gain into account in Year 3 to reflect the $30 difference 
between B's $10 loss taken into account and the $20 recomputed gain. S's 
$30 gain is long-term capital gain, and B's $10 loss is long-term 
capital loss.
    (g) Intercompany gain followed by distribution to a nonmember at a 
loss. The facts are the same as in paragraph (a) of this Example 1, 
except that B distributes the land to X, a minority shareholder of B, 
and at the time of the distribution the land has a fair market value of 
$90. The attributes and timing of S's intercompany gain and B's 
corresponding loss are determined under the matching rule. Under section 
311(a), B does not recognize its $10 loss on the distribution to X. If S 
and B were divisions of a single corporation and the intercompany sale 
were a transfer between divisions, B would succeed to S's $70 basis in 
the land and would have a $20 gain from the distribution to X instead of 
an unrecognized $10 loss. Under paragraph (b)(3)(ii) of this section, 
B's loss that is not recognized under section 311(a) is a corresponding 
item. Thus, S takes its $30 gain into account under the matching rule in 
Year 3 to reflect the difference between B's $10 corresponding 
unrecognized loss and the $20 recomputed gain. B's $10 corresponding 
loss offsets $10 of S's intercompany gain and, under paragraph (c)(4)(i) 
of this section, the attributes of B's corresponding item control the 
attributes of S's intercompany item. Paragraph (c)(6) of this section 
does not prevent the redetermination of S's intercompany item as 
excluded from gross income. (See paragraph (c)(6)(ii)(B) of this 
section). Thus, $10 of S's $30 gain is redetermined to be excluded from 
gross income.
    (h) Intercompany sale followed by section 1031 exchange with 
nonmember. The facts are the same as in paragraph (a) of this Example 1, 
except that, instead of selling the land to X, B exchanges the land for 
land owned by X in a transaction to which section 1031 applies. There is 
no difference in Year 3 between B's $0 corresponding item taken into 
account and the $0 recomputed corresponding item. Thus, none of S's 
intercompany gain is taken into account under the matching rule as a 
result of the section 1031 exchange. Instead, B's gain is preserved in 
the land received from X and, under the successor asset rule of 
paragraph (j)(1) of this section, S's intercompany gain is taken into 
account by reference to the replacement property. (If B takes gain into 
account as a result of boot received in the exchange, S's intercompany 
gain is taken into account under the matching rule

[[Page 190]]

to the extent the boot causes a difference between B's gain taken into 
account and the recomputed gain.)
    (i) Intercompany sale followed by section 351 transfer to nonmember. 
The facts are the same as in paragraph (a) of this Example 1, except 
that, instead of selling the land to X, B transfers the land to X in a 
transaction to which section 351(a) applies and X remains a nonmember. 
There is no difference in Year 3 between B's $0 corresponding item taken 
into account and the $0 recomputed corresponding item. Thus, none of S's 
intercompany gain is taken into account under the matching rule as a 
result of the section 351(a) transfer. However, S's entire gain is taken 
into account in Year 3 under the acceleration rule of paragraph (d) of 
this section (because X, a nonmember, reflects B's $100 cost basis in 
the land under section 362).
    Example 2. Dealer activities. (a) Facts. S holds land for investment 
with a basis of $70. On January 1 of Year 1, S sells the land to B for 
$100. B develops the land as residential real estate, and sells 
developed lots to customers during Year 3 for an aggregate amount of 
$110.
    (b) Attributes. S and B are treated under the matching rule as 
divisions of a single corporation for purposes of determining the 
attributes of S's intercompany item and B's corresponding item. Thus, 
although S held the land for investment, whether the gain is treated as 
from the sale of property described in section 1221(1) is based on the 
activities of both S and B. If, based on both S's and B's activities, 
the land is described in section 1221(1), both S's gain and B's gain are 
ordinary income.
    Example 3. Intercompany section 351 transfer. (a) Facts. S holds 
land with a $70 basis and a $100 fair market value for sale to customers 
in the ordinary course of business. On January 1 of Year 1, S transfers 
the land to B in exchange for all of the stock of B in a transaction to 
which section 351 applies. S has no gain or loss under section 351(a), 
and its basis in the B stock is $70 under section 358. Under section 
362, B's basis in the land is $70. B holds the land for investment. On 
July 1 of Year 3, B sells the land to X for $100. Assume that if S and B 
were divisions of a single corporation, B's gain from the sale would be 
ordinary income because of S's activities.
    (b) Timing and attributes. Under paragraph (b)(1) of this section, 
S's transfer to B is an intercompany transaction. Under paragraph (c)(3) 
of this section, S is treated as transferring the land in exchange for 
B's stock even though, as divisions, S could not own stock of B. S has 
no intercompany item, but B's $30 gain from its sale of the land to X is 
a corresponding item because the land was acquired in an intercompany 
transaction. B's $30 gain is ordinary income that is taken into account 
under B's method of accounting.
    (c) Intercompany section 351 transfer with boot. The facts are the 
same as in paragraph (a) of this Example 3, except that S receives $10 
cash in addition to the B stock in the transfer. S recognizes $10 of 
gain under section 351(b), and its basis in the B stock is $70 under 
section 358. Under section 362, B's basis in the land is $80. S takes 
its $10 intercompany gain into account in Year 3 to reflect the $10 
difference between B's $20 corresponding gain taken into account and the 
$30 recomputed gain. Both S's $10 gain and B's $20 gain are ordinary 
income.
    (d) Partial disposition. The facts are the same as in paragraph (c) 
of this Example 3, except B sells only a one- half, undivided interest 
in the land to X for $50. The timing and attributes are determined in 
the manner provided in paragraph (b) of this Example 3, except that S 
takes only $5 of its gain into account in Year 3 to reflect the $5 
difference between B's $10 gain taken into account and the $15 
recomputed gain.
    Example 4. Depreciable property. (a) Facts. On January 1 of Year 1, 
S buys 10-year recovery property for $100 and depreciates it under the 
straight-line method. On January 1 of Year 3, S sells the property to B 
for $130. Under section 168(i)(7), B is treated as S for purposes of 
section 168 to the extent B's $130 basis does not exceed S's adjusted 
basis at the time of the sale. B's additional basis is treated as new 
10-year recovery property for which B elects the straight-line method of 
recovery. (To simplify the example, the half-year convention is 
disregarded.)
    (b) Depreciation through Year 3; intercompany gain. S claims $10 of 
depreciation for each of Years 1 and 2 and has an $80 basis at the time 
of the sale to B. Thus, S has a $50 intercompany gain from its sale to 
B. For Year 3, B has $10 of depreciation with respect to $80 of its 
basis (the portion of its $130 basis not exceeding S's adjusted basis). 
In addition, B has $5 of depreciation with respect to the $50 of its 
additional basis that exceeds S's adjusted basis.
    (c) Timing. S's $50 gain is taken into account to reflect the 
difference for each consolidated return year between B's depreciation 
taken into account with respect to the property and the recomputed 
depreciation. For Year 3, B takes $15 of depreciation into account. If 
the intercompany transaction were a transfer between divisions of a 
single corporation, B would succeed to S's adjusted basis in the 
property and take into account only $10 of depreciation for Year 3. 
Thus, S takes $5 of gain into account in Year 3. In each subsequent year 
that B takes into account $15 of depreciation with respect to the 
property, S takes into account $5 of gain.
    (d) Attributes. Under paragraph (c)(1)(i) of this section, the 
attributes of S's gain and B's depreciation must be redetermined to the 
extent necessary to produce the same effect on consolidated taxable 
income as if the

[[Page 191]]

intercompany transaction were between divisions of a single corporation 
(the group must have a net depreciation deduction of $10). In each year, 
$5 of B's corresponding depreciation deduction offsets S's $5 
intercompany gain taken into account and, under paragraph (c)(4)(i) of 
this section, the attributes of B's corresponding item control the 
attributes of S's intercompany item. Accordingly, S's intercompany gain 
that is taken into account as a result of B's depreciation deduction is 
ordinary income.
    (e) Sale of property to a nonmember. The facts are the same as in 
paragraph (a) of this Example 4, except that B sells the property to X 
on January 1 of Year 5 for $110. As set forth in paragraphs (c) and (d) 
of this Example 4, B has $15 of depreciation with respect to the 
property in each of Years 3 and 4, causing S to take $5 of intercompany 
gain into account in each year as ordinary income. The $40 balance of 
S's intercompany gain is taken into account in Year 5 as a result of B's 
sale to X, to reflect the $40 difference between B's $10 gain taken into 
account and the $50 of recomputed gain ($110 of sale proceeds minus the 
$60 basis B would have if the intercompany sale were a transfer between 
divisions of a single corporation). Treating S and B as divisions of a 
single corporation, $40 of the gain is section 1245 gain and $10 is 
section 1231 gain. On a separate entity basis, S would have more than 
$10 treated as section 1231 gain, and B would have no amount treated as 
section 1231 gain. Under paragraph (c)(4)(ii) of this section, all $10 
of the section 1231 gain is allocated to S. S's remaining $30 of gain, 
and all of B's $10 gain, is treated as section 1245 gain.
    Example 5. Intercompany sale followed by installment sale. (a) 
Facts. S holds land for investment with a basis of $70x. On January 1 of 
Year 1, S sells the land to B for $100x. B also holds the land for 
investment. On July 1 of Year 3, B sells the land to X in exchange for 
X's $110x note. The note bears a market rate of interest in excess of 
the applicable Federal rate, and provides for principal payments of $55x 
in Year 4 and $55x in Year 5. The interest charge under section 453A(c) 
applies to X's note.
    (b) Timing and attributes. S takes its $30x gain into account to 
reflect the difference in each consolidated return year between B's gain 
taken into account for the year and the recomputed gain. Under section 
453, B takes into account $5x of gain in Year 4 and $5x of gain in Year 
5. Thus, S takes into account $15x of gain in Year 4 and $15x of gain in 
Year 5 to reflect the $15x difference in each of those years between B's 
$5x gain taken into account and the $20x recomputed gain. Both S's $30x 
gain and B's $10x gain are subject to the section 453A(c) interest 
charge beginning in Year 3.
    (c) Election out under section 453(d). If, under the facts in 
paragraph (a) of this Example 5, the P group wishes to elect not to 
apply section 453 with respect to S's gain, an election under section 
453(d) must be made for Year 3 with respect to B's gain. This election 
will cause B's $10x gain to be taken into account in Year 3. Under the 
matching rule, this will result in S's $30x gain being taken into 
account in Year 3. (An election by the P group solely with respect to 
S's gain has no effect because the gain from S's sale to B is taken into 
account under the matching rule, and therefore must reflect the 
difference between B's gain taken into account and the recomputed gain.)
    (d) Sale to a nonmember at a loss, but overall gain. The facts are 
the same as in paragraph (a) of this Example 5, except that B sells the 
land to X in exchange for X's $90x note (rather than $110x note). If S 
and B were divisions of a single corporation, B would succeed to S's 
basis in the land, and the sale to X would be eligible for installment 
reporting under section 453, because it resulted in an overall gain. 
However, because only gains may be reported on the installment method, 
B's $10x corresponding loss is taken into account in Year 3. Under 
paragraph (b)(4) of this section the recomputed corresponding item is 
$20x gain that would be taken into account under the installment method, 
$0 in Year 3 and $10x in each of Years 4 and 5. Thus, in Year 3 S takes 
$10x of gain into account to reflect the difference between B's $10x 
loss taken into account and the $0 recomputed gain for Year 3. Under 
paragraph (c)(4)(i) of this section, B's $10x corresponding loss offsets 
$10x of S's intercompany gain, and B's attributes control. S takes $10x 
of gain into account in each of Years 4 and 5 to reflect the difference 
in those years between B's $0 gain taken into account and the $10x 
recomputed gain that would be taken into account under the installment 
method. Only the $20x of S's gain taken into account in Years 4 and 5 is 
subject to the interest charge under section 453A(c) beginning in Year 
3. (If P elects under section 453(d) for Year 3 not to apply section 453 
with respect to the gain, all of S's $30x gain will be taken into 
account in Year 3 to reflect the difference between B's $10x loss taken 
into account and the $20x recomputed gain.)
    (e) Intercompany loss, installment gain. The facts are the same as 
in paragraph (a) of this Example 5, except that S has a $130x (rather 
than $70x) basis in the land. Under paragraph (c)(1)(i) of this section, 
the separate entity attributes of S's and B's items from the 
intercompany transaction must be redetermined to produce the same effect 
on consolidated taxable income (and tax liability) as if the transaction 
had been a transfer between divisions. If S and B were divisions of a 
single corporation, B would succeed to S's basis in the land and the 
group would have $20x loss from the sale to X, installment reporting 
would be unavailable, and the interest

[[Page 192]]

charge under section 453A(c) would not apply. Accordingly, B's gain from 
the transaction is not eligible for installment treatment under section 
453. B takes its $10x gain into account in Year 3, and S takes its $30x 
of loss into account in Year 3 to reflect the difference between B's 
$10x gain and the $20x recomputed loss.
    (f) Recapture income. The facts are the same as in paragraph (a) of 
this Example 5, except that S bought depreciable property (rather than 
land) for $100x, claimed depreciation deductions, and reduced the 
property's basis to $70x before Year 1. (To simplify the example, B's 
depreciation is disregarded.) If the intercompany sale of property had 
been a transfer between divisions of a single corporation, $30x of the 
$40x gain from the sale to X would be section 1245 gain (which is 
ineligible for installment reporting) and $10x would be section 1231 
gain (which is eligible for installment reporting). On a separate entity 
basis, S would have $30x of section 1245 gain and B would have $10x of 
section 1231 gain. Accordingly, the attributes are not redetermined 
under paragraph (c)(1)(i) of this section. All of B's $10x gain is 
eligible for installment reporting and is taken into account $5x each in 
Years 4 and 5 (and is subject to the interest charge under section 
453A(c)). S's $30x gain is taken into account in Year 3 to reflect the 
difference between B's $0 gain taken into account and the $30x of 
recomputed gain. (If S had bought the depreciable property for $110x and 
its recomputed basis under section 1245 had been $110x (rather than 
$100x), B's $10x gain and S's $30x gain would both be recapture income 
ineligible for installment reporting.)
    Example 6. Intercompany sale of installment obligation. (a) Facts. S 
holds land for investment with a basis of $70x. On January 1 of Year 1, 
S sells the land to X in exchange for X's $100x note, and S reports its 
gain on the installment method under section 453. X's note bears 
interest at a market rate of interest in excess of the applicable 
Federal rate, and provides for principal payments of $50x in Year 5 and 
$50x in Year 6. Section 453A applies to X's note. On July 1 of Year 3, S 
sells X's note to B for $100x, resulting in $30x gain from S's prior 
sale of the land to X under section 453B(a).
    (b) Timing and attributes. S's sale of X's note to B is an 
intercompany transaction, and S's $30x gain is intercompany gain. S 
takes $15x of the gain into account in each of Years 5 and 6 to reflect 
the $15x difference in each year between B's $0 gain taken into account 
and the $15x recomputed gain. S's gain continues to be treated as its 
gain from the sale to X, and the deferred tax liability remains subject 
to the interest charge under section 453A(c).
    (c) Worthlessness. The facts are the same as in paragraph (a) of 
this Example 6, except that X's note becomes worthless on December 1 of 
Year 3 and B has a $100x short-term capital loss under section 165(g) on 
a separate entity basis. Under paragraph (c)(1)(ii) of this section, B's 
holding period for X's note is aggregated with S's holding period. Thus, 
B's loss is a long- term capital loss. S takes its $30x gain into 
account in Year 3 to reflect the $30x difference between B's $100x loss 
taken into account and the $70x recomputed loss. Under paragraph 
(c)(1)(i) of this section, S's gain is long-term capital gain.
    (d) Pledge. The facts are the same as in paragraph (a) of this 
Example 6, except that, on December 1 of Year 3, B borrows $100x from an 
unrelated bank and secures the indebtedness with X's note. X's note 
remains subject to section 453A(d) following the sale to B. Under 
section 453A(d), B's $100x of proceeds from the secured indebtedness is 
treated as an amount received on December 1 of Year 3 by B on X's note. 
Thus, S takes its entire $30x gain into account in Year 3.
    Example 7. Performance of services. (a) Facts. S is a driller of 
water wells. B operates a ranch in a remote location, and B's taxable 
income from the ranch is not subject to section 447. B's ranch requires 
water to maintain its cattle. During Year 1, S drills an artesian well 
on B's ranch in exchange for $100 from B, and S incurs $80 of expenses 
(e.g., for employees and equipment). B capitalizes its $100 cost for the 
well under section 263, and takes into account $10 of cost recovery 
deductions in each of Years 2 through 11. Under its separate entity 
method of accounting, S would take its income and expenses into account 
in Year 1. If S and B were divisions of a single corporation, the costs 
incurred in drilling the well would be capitalized.
    (b) Definitions. Under paragraph (b)(1) of this section, the service 
transaction is an intercompany transaction, S is the selling member, and 
B is the buying member. Under paragraph (b)(2)(ii) of this section, S's 
$100 of income and $80 of related expenses are both included in 
determining its intercompany income of $20.
    (c) Timing and attributes. S's $20 of intercompany income is taken 
into account under the matching rule to reflect the $20 difference 
between B's corresponding items taken into account (based on its $100 
cost basis in the well) and the recomputed corresponding items (based on 
the $80 basis that B would have if S and B were divisions of a single 
corporation and B's basis were determined by reference to S's $80 of 
expenses). In Year 1, S takes into account $80 of its income and the $80 
of expenses. In each of Years 2 through 11, S takes $2 of its $20 
intercompany income into account to reflect the annual $2 difference 
between B's $10 of cost recovery deductions taken into account and the 
$8 of recomputed cost recovery deductions. S's $100 income and $80 
expenses, and B's cost recovery deductions, are ordinary

[[Page 193]]

items (because S's and B's items would be ordinary on a separate entity 
basis, the attributes are not redetermined under paragraph (c)(1)(i) of 
this section). If S's offsetting $80 of income and expense would not be 
taken into account in the same year under its separate entity method of 
accounting, they nevertheless must be taken into account under this 
section in a manner that clearly reflects consolidated taxable income. 
See paragraph (a)(3)(i) of this section.
    (d) Sale of capitalized services. The facts are the same as in 
paragraph (a) of this Example 7, except that B sells the ranch before 
Year 11 and recognizes gain attributable to the well. To the extent of 
S's income taken into account as a result of B's cost recovery 
deductions, as well as S's offsetting $80 of income and expense, the 
timing and attributes are determined in the manner provided in paragraph 
(c) of this Example 7. The attributes of the remainder of S's $20 of 
income and B's gain from the sale are redetermined to produce the same 
effect on consolidated taxable income as if S and B were divisions of a 
single corporation. Accordingly, S's remaining intercompany income is 
treated as recapture income or section 1231 gain, even though it is from 
S's performance of services.
    Example 8. Rental of property. B operates a ranch that requires 
grazing land for its cattle. S owns undeveloped land adjoining B's 
ranch. On January 1 of Year 1, S leases grazing rights to B for Year 1. 
B's $100 rent expense is deductible for Year 1 under its separate entity 
accounting method. Under paragraph (b)(1) of this section, the rental 
transaction is an intercompany transaction, S is the selling member, and 
B is the buying member. S takes its $100 of income into account in Year 
1 to reflect the $100 difference between B's rental deduction taken into 
account and the $0 recomputed rental deduction. S's income and B's 
deduction are ordinary items (because S's intercompany item and B's 
corresponding item would both be ordinary on a separate entity basis, 
the attributes are not redetermined under paragraph (c)(1)(i) of this 
section).
    Example 9. Intercompany sale of a partnership interest. (a) Facts. S 
owns a 20% interest in the capital and profits of a general partnership. 
The partnership holds land for investment with a basis equal to its 
value, and operates depreciable assets which have value in excess of 
basis. S's basis in its partnership interest equals its share of the 
adjusted basis of the partnership's land and depreciable assets. The 
partnership has an election under section 754 in effect. On January 1 of 
Year 1, S sells its partnership interest to B at a gain. During Years 1 
through 10, the partnership depreciates the operating assets, and B's 
depreciation deductions from the partnership reflect the increase in the 
basis of the depreciable assets under section 743(b).
    (b) Timing and attributes. S's gain is taken into account during 
Years 1 through 10 to reflect the difference in each year between B's 
depreciation deductions from the partnership taken into account and the 
recomputed depreciation deductions from the partnership. Under 
paragraphs (c)(1)(i) and (c)(4)(i) of this section, S's gain taken into 
account is ordinary income. (The acceleration rule does not apply to S's 
gain as a result of the section 743(b) adjustment, because the 
adjustment is solely with respect to B and therefore no nonmember 
reflects any part of the intercompany transaction.)
    (c) Partnership sale of assets. The facts are the same as in 
paragraph (a) of this Example 9, and the partnership sells some of its 
depreciable assets to X at a gain on December 31 of Year 4. In addition 
to the intercompany gain taken into account as a result of the 
partnership's depreciation, S takes intercompany gain into account in 
Year 4 to reflect the difference between B's partnership items taken 
into account from the sale (which reflect the basis increase under 
section 743(b)) and the recomputed partnership items. The attributes of 
S's additional gain are redetermined to produce the same effect on 
consolidated taxable income as if S and B were divisions of a single 
corporation (recapture income or section 1231 gain).
    (d) B's sale of partnership interest. The facts are the same as in 
paragraph (a) of this Example 9, and on December 31 of Year 4, B sells 
its partnership interest to X at no gain or loss. In addition to the 
intercompany gain taken into account as a result of the partnership's 
depreciation, the remaining balance of S's intercompany gain is taken 
into account in Year 4 to reflect the difference between B's $0 gain 
taken into account from the sale of the partnership interest and the 
recomputed gain. The character of S's remaining intercompany item and 
B's corresponding item are determined on a separate entity basis under 
section 751, and then redetermined to the extent necessary to produce 
the same effect as treating the intercompany transaction as occurring 
between divisions of a single corporation.
    (e) No section 754 election. The facts are the same as in paragraph 
(d) of this Example 9, except that the partnership does not have a 
section 754 election in effect, and B recognizes a capital loss from its 
sale of the partnership interest to X on December 31 of Year 4. Because 
there is no difference between B's depreciation deductions from the 
partnership taken into account and the recomputed depreciation 
deductions, S does not take any of its gain into account during Years 1 
through 4 as a result of B's partnership's items. Instead, S's entire 
intercompany gain is taken into account in Year 4 to reflect the 
difference between B's loss taken into account from the sale to X and 
the recomputed gain or loss.

[[Page 194]]

    Example 10. Net operating losses subject to section 382 or the SRLY 
rules. (a) Facts. On January 1 of Year 1, P buys all of S's stock. S has 
net operating loss carryovers from prior years. P's acquisition results 
in an ownership change under section 382 with respect to S's loss 
carryovers, and S has a net unrealized built-in gain (within the meaning 
of section 382(h)(3)). S owns nondepreciable property with a $70 basis 
and $100 value. On July 1 of Year 3, S sells the property to B for $100, 
and its $30 gain is recognized built-in gain (within the meaning of 
section 382(h)(2)) on a separate entity basis. On December 1 of Year 5, 
B sells the property to X for $90.
    (b) Timing and attributes. S's $30 gain is taken into account in 
Year 5 to reflect the $30 difference between B's $10 loss taken into 
account and the recomputed $20 gain. S and B are treated as divisions of 
a single corporation for purposes of applying section 382 in connection 
with the intercompany transaction. Under a single entity analysis, the 
single corporation has losses subject to limitation under section 382, 
and this limitation may be increased under section 382(h) if the single 
corporation has recognized built-in gain with respect to those losses. 
B's $10 corresponding loss offsets $10 of S's intercompany gain, and 
thus, under paragraph (c)(4)(i) of this section, $10 of S's intercompany 
gain is redetermined not to be recognized built-in gain. S's remaining 
$20 intercompany gain continues to be treated as recognized built-in 
gain.
    (c) B's recognized built-in gain. The facts are the same as in 
paragraph (a) of this Example 10, except that the property declines in 
value after S becomes a member of the P group, S sells the property to B 
for its $70 basis, and B sells the property to X for $90 during Year 5. 
Treating S and B as divisions of a single corporation, S's sale to B 
does not cause the property to cease to be built-in gain property. Thus, 
B's $20 gain from its sale to X is recognized built-in gain that 
increases the section 382 limitation applicable to S's losses.
    (d) SRLY limitation. The facts are the same as in paragraph (a) of 
this Example 10, except that S's net operating loss carryovers are 
subject to the separate return limitation year (SRLY) rules. See 
Sec. 1.1502-21T(c). The application of the SRLY rules depends on S's 
status as a separate corporation having losses from separate return 
limitation years. Under paragraph (c)(5), the attribute of S's 
intercompany item as it relates to S's SRLY limitation is not 
redetermined, because the SRLY limitation depends on S's special status. 
Accordingly, S's $30 intercompany gain is included in determining its 
SRLY limitation for Year 5.
    Example 11. Section 475. (a) Facts. S, a dealer in securities within 
the meaning of section 475(c), owns a security with a basis of $70. The 
security is held for sale to customers and is not identified under 
section 475(b) as within an exception to marking to market. On July 1 of 
Year 1, S sells the security to B for $100. B is not a dealer and holds 
the security for investment. On December 31 of Year 1, the fair market 
value of the security is $100. On July 1 of Year 2, B sells the security 
to X for $110.
    (b) Attributes. Under section 475, a dealer in securities can treat 
a security as within an exception to marking to market under section 
475(b) only if it timely identifies the security as so described. Under 
the matching rule, attributes must be redetermined by treating S and B 
as divisions of a single corporation. As a result of S's activities, the 
single corporation is treated as a dealer with respect to securities, 
and B must continue to mark to market the security acquired from S. 
Thus, B's corresponding items and the recomputed corresponding items are 
determined by continuing to treat the security as not within an 
exception to marking to market. Under section 475(d)(3), it is possible 
for the character of S's intercompany items to differ from the character 
of B's corresponding items.
    (c) Timing and character. S has a $30 gain when it disposes of the 
security by selling it to B. This gain is intercompany gain that is 
taken into account in Year 1 to reflect the $30 difference between B's 
$0 gain taken into account from marking the security to market under 
section 475 and the recomputed $30 gain that would be taken into 
account. The character of S's gain and B's gain are redetermined as if 
the security were transferred between divisions. Accordingly, S's gain 
is ordinary income under section 475(d)(3)(A)(i), but under section 
475(d)(3)(B)(ii) B's $10 gain from its sale to X is capital gain that is 
taken into account in Year 2.
    (d) Nondealer to dealer. The facts are the same as in paragraph (a) 
of this Example 11, except that S is not a dealer and holds the security 
for investment with a $70 basis, B is a dealer to which section 475 
applies and, immediately after acquiring the security from S for $100, B 
holds the security for sale to customers in the ordinary course of its 
trade or business. Because S is not a dealer and held the security for 
investment, the security is treated as properly identified as held for 
investment under section 475(b)(1) until it is sold to B. Under section 
475(b)(3), the security thereafter ceases to be described in section 
475(b)(1) because B holds the security for sale to customers. The mark-
to-market requirement applies only to changes in the value of the 
security after B's acquisition. B's mark-to-market gain taken into 
account and the recomputed mark-to-market gain are both determined based 
on changes from the $100 value of the security at the time of B's 
acquisition. There is no difference between B's $0 mark-to-market gain 
taken into account in Year 1 and the $0 recomputed

[[Page 195]]

mark-to-market gain. Therefore, none of S's gain is taken into account 
in Year 1 as a result of B's marking the security to market in Year 1. 
In Year 2, B has a $10 gain when it disposes of the security by selling 
it to X, but would have had a $40 gain if S and B were divisions of a 
single corporation. Thus, S takes its $30 gain into account in Year 2 
under the matching rule. Under section 475(d)(3), S's gain is capital 
gain even though B's subsequent gain or loss from marking to market or 
disposing of the security is ordinary gain or loss. If B disposes of the 
security at a $10 loss in Year 2, S's gain taken into account in Year 2 
is still capital because on a single entity basis section 475(d)(3) 
would provide for $30 of capital gain and $10 of ordinary loss. Because 
the attributes are not redetermined under paragraph (c)(1)(i) of this 
section, paragraph (c)(4)(i) of this section does not apply. 
Furthermore, if B held the security for investment, and so identified 
the security under section 475(b)(1), the security would continue to be 
excepted from marking to market.
    Example 12. Section 1092. (a) Facts. On July 1 of Year 1, S enters 
into offsetting long and short positions with respect to actively traded 
personal property. The positions are not section 1256 contracts, and 
they are the only positions taken into account for purposes of applying 
section 1092. On August 1 of Year 1, S sells the long position to B at 
an $11 loss, and there is $11 of unrealized gain in the offsetting short 
position. On December 1 of Year 1, B sells the long position to X at no 
gain or loss. On December 31 of Year 1, there is still $11 of unrealized 
gain in the short position. On February 1 of Year 2, S closes the short 
position at an $11 gain.
    (b) Timing and attributes. If the sale from S to B were a transfer 
between divisions of a single corporation, the $11 loss on the sale to X 
would have been deferred under section 1092(a)(1)(A). Accordingly, there 
is no difference in Year 1 between B's corresponding item of $0 and the 
recomputed corresponding item of $0. S takes its $11 loss into account 
in Year 2 to reflect the difference between B's corresponding item of $0 
taken into account in Year 2 and the recomputed loss of $11 that would 
have been taken into account in Year 2 under section 1092(a)(1)(B) if S 
and B had been divisions of a single corporation. (The results are the 
same under section 267(f)).
    Example 13. Manufacturer incentive payments. (a) Facts. B is a 
manufacturer that sells its products to independent dealers for resale. 
S is a credit company that offers financing, including financing to 
customers of the dealers. S also purchases the product from the dealers 
for lease to customers of the dealers. During Year 1, B initiates a 
program of incentive payments to the dealers' customers. Under B's 
program, S buys a product from an independent dealer for $100 and leases 
it to a nonmember. S pays $90 to the dealer for the product, and assigns 
to the dealer its $10 incentive payment from B. Under their separate 
entity accounting methods, B would deduct the $10 incentive payment in 
Year 1 and S would take a $90 basis in the product. Assume that if S and 
B were divisions of a single corporation, the $10 payment would not be 
deductible and the basis of the property would be $100.
    (b) Timing and attributes. Under paragraph (b)(1) of this section, 
the incentive payment transaction is an intercompany transaction. Under 
paragraph (b)(2)(iii) of this section, S has a $10 intercompany item not 
yet taken into account under its separate entity method of accounting. 
Under the matching rule, S takes its intercompany item into account to 
reflect the difference between B's corresponding item taken into account 
and the recomputed corresponding item. In Year 1 there is a $10 
difference between B's $10 deduction taken into account and the $0 
recomputed deduction. Accordingly, under the matching rule S must take 
the $10 incentive payment into account as intercompany income in Year 1. 
S's $10 of income and B's $10 deduction are ordinary items. S's basis in 
the product is $100 rather than the $90 it would be under S's separate 
entity method of accounting. S's additional $10 of basis in the product 
is recovered based on subsequent events (e.g., S's cost recovery 
deductions or its sale of the product).
    Example 14. Source of income under section 863. (a) Intercompany 
sale with no independent factory price. S manufactures inventory in the 
United States, and recognizes $75 of income on sales to B in Year 1. B 
distributes the inventory in Country Y and recognizes $25 of income on 
sales to X, also in Year 1. Title passes from S to B, and from B to X, 
in Country Y. There is no independent factory price (as defined in 
regulations under section 863) for the sale from S to B. Under the 
matching rule, S's $75 intercompany income and B's $25 corresponding 
income are taken into account in Year 1. In determining the source of 
income, S and B are treated as divisions of a single corporation, and 
section 863 applies as if $100 of income were recognized from producing 
in the United States and selling in Country Y. Assume that applying the 
section 863 regulations on a single entity basis, $50 is treated as 
foreign source income and $50 as U.S. source income. Assume further that 
on a separate entity basis, S would have $37.50 of foreign source income 
and $37.50 of U.S. source income, and that all of B's $25 of income 
would be foreign source income. Thus, on a separate entity basis, S and 
B would have $62.50 of combined foreign source income and $37.50 of U.S. 
source income. Accordingly, under single entity treatment, $12.50 that 
would be treated as foreign source income on a separate entity basis is 
redetermined to be U.S. source income.

[[Page 196]]

Under paragraph (c)(1)(i) of this section, attributes are redetermined 
only to the extent of the $12.50 necessary to achieve the same effect as 
a single entity determination. Under paragraph (c)(4)(ii) of this 
section, the redetermined attribute must be allocated between S and B 
using a reasonable method. For example, it may be reasonable to 
recharacterize only S's foreign source income as U.S. source income 
because only S would have any U.S. source income on a separate entity 
basis. However, it may also be reasonable to allocate the redetermined 
attribute between S and B in proportion to their separate entity amounts 
of foreign source income (in a 3:2 ratio, so that $7.50 of S's foreign 
source income is redetermined to be U.S. source and $5 of B's foreign 
source income is redetermined to be U.S. source), provided the same 
method is applied to all similar transactions within the group.
    (b) Intercompany sale with independent factory price. The facts are 
the same as in paragraph (a) of this Example 14, except that an 
independent factory price exists for the sale by S to B such that $70 of 
S's $75 of income is attributable to the production function. Assume 
that on a single entity basis, $70 is treated as U.S. source income 
(because of the existence of the independent factory price) and $30 is 
treated as foreign source income. Assume that on a separate entity 
basis, $70 of S's income would be treated as U.S. source, $5 of S's 
income would be treated as foreign source income, and all of B's $25 
income would be treated as foreign source income. Because the results 
are the same on a single entity basis and a separate entity basis, the 
attributes are not redetermined under paragraph (c)(1)(i) of this 
section.
    (c) Sale of property reflecting intercompany services or 
intangibles. S earns $10 of income performing services in the United 
States for B. B capitalizes S's fees into the basis of property that it 
manufactures in the United States and sells to an unrelated person in 
Year 1 at a $90 profit, with title passing in Country Y. Under the 
matching rule, S's $10 income and B's $90 income are taken into account 
in Year 1. In determining the source of income, S and B are treated as 
divisions of a single corporation, and section 863 applies as if $100 
were earned from manufacturing in the United States and selling in 
Country Y. Assume that on a single entity basis $50 is treated as 
foreign source income and $50 is treated as U.S. source income. Assume 
that on a separate entity basis, S would have $10 of U.S. source income, 
and B would have $45 of foreign source income and $45 of U.S. source 
income. Accordingly, under single entity treatment, $5 of income that 
would be treated as U.S. source income on a separate entity basis is 
redetermined to be foreign source income. Under paragraph (c)(1)(i) of 
this section, attributes are redetermined only to the extent of the $5 
necessary to achieve the same effect as a single entity determination. 
Under paragraph (c)(4)(ii) of this section, the redetermined attribute 
must be allocated between S and B using a reasonable method. (If instead 
of performing services, S licensed an intangible to B and earned $10 
that would be treated as U.S. source income on a separate entity basis, 
the results would be the same.)
    Example 15. Section 1248. (a) Facts. On January 1 of Year 1, S forms 
FT, a wholly owned foreign subsidiary, with a $10 contribution. During 
Years 1 through 3, FT has earnings and profits of $40. None of the 
earnings and profits is taxed as subpart F income under section 951, and 
FT distributes no dividends to S during this period. On January 1 of 
Year 4, S sells its FT stock to B for $50. While B owns FT, FT has a 
deficit in earnings and profits of $10. On July 1 of Year 6, B sells its 
FT stock for $70 to X, an unrelated foreign corporation.
    (b) Timing. S's $40 of intercompany gain is taken into account in 
Year 6 to reflect the difference between B's $20 of gain taken into 
account and the $60 recomputed gain.
    (c) Attributes. Under the matching rule, the attributes of S's 
intercompany gain and B's corresponding gain are redetermined to have 
the same effect on consolidated taxable income (and consolidated tax 
liability) as if S and B were divisions of a single corporation. On a 
single entity basis, there is $60 of gain and the portion which is 
characterized as a dividend under section 1248 is determined on the 
basis of FT's $30 of earnings and profits at the time of the sale of FT 
to X (the sum of FT's $40 of earnings and profits while held by S and 
FT's $10 deficit in earnings and profits while held by B). Therefore, 
$30 of the $60 gain is treated as a dividend under section 1248. The 
remaining $30 is treated as capital gain. On a separate entity basis, 
all of S's $40 gain would be treated as a dividend under section 1248 
and all of B's $20 gain would be treated as capital gain. Thus, as a 
result of the single entity determination, $10 that would be treated as 
a dividend under section 1248 on a separate entity basis is redetermined 
to be capital gain. Under paragraph (c)(4)(ii) of this section, this 
redetermined attribute must be allocated between S's intercompany item 
and B's corresponding item by using a reasonable method. On a separate 
entity basis, only S would have any amount treated as a dividend under 
section 1248 available for redetermination. Accordingly, $10 of S's 
income is redetermined to be not subject to section 1248, with the 
result that $30 of S's intercompany gain is treated as a dividend and 
the remaining $10 is treated as capital gain. All of B's corresponding 
gain is treated as capital gain, as it would be on a separate entity 
basis.
    (d) B has loss. The facts are the same as in paragraph (a) of this 
Example 15, except that FT has no earnings and profits or deficit in

[[Page 197]]

earnings and profits while B owns FT, and B sells the FT stock to X for 
$40. On a single entity basis, there is $30 of gain, and section 1248 is 
applied on the basis of FT's $40 earnings and profits at the time of the 
sale of FT to X. Under section 1248, the amount treated as a dividend is 
limited to $30 (the amount of the gain). On a separate entity basis, S's 
entire $40 gain would be treated as a dividend under section 1248, and 
B's $10 loss would be a capital loss. B's $10 corresponding loss offsets 
$10 of S's intercompany gain and, under paragraph (c)(4)(i) of this 
section, the attributes of B's corresponding item control. Accordingly, 
$10 of S's gain must be redetermined to be capital gain. B's $10 loss 
remains a capital loss. (If, however, S sold FT to B at a loss and B 
sold FT to X at a gain, it may be unreasonable for the attributes of B's 
corresponding gain to control S's offsetting intercompany loss. If B's 
attributes were to control, for example, the group could possibly claim 
a larger foreign tax credit than would be available if S and B were 
divisions of a single corporation.)

    (d) Acceleration rule. S's intercompany items and B's corresponding 
items are taken into account under this paragraph (d) to the extent they 
cannot be taken into account to produce the effect of treating S and B 
as divisions of a single corporation. For this purpose, the following 
rules apply:
    (1) S's items--(i) Timing. S takes its intercompany items into 
account to the extent they cannot be taken into account to produce the 
effect of treating S and B as divisions of a single corporation. The 
items are taken into account immediately before it first becomes 
impossible to achieve this effect. For this purpose, the effect cannot 
be achieved--
    (A) To the extent an intercompany item or corresponding item will 
not be taken into account in determining the group's consolidated 
taxable income (or consolidated tax liability) under the matching rule 
(for example, if S or B becomes a nonmember, or if S's intercompany item 
is no longer reflected in the difference between B's basis (or an amount 
equivalent to basis) in property and the basis (or equivalent amount) 
the property would have if S and B were divisions of a single 
corporation); or
    (B) To the extent a nonmember reflects, directly or indirectly, any 
aspect of the intercompany transaction (e.g., if B's cost basis in 
property purchased from S is reflected by a nonmember under section 362 
following a section 351 transaction).
    (ii) Attributes. The attributes of S's intercompany items taken into 
account under this paragraph (d)(1) are determined as follows:
    (A) Sale, exchange, or distribution. If the item is from an 
intercompany sale, exchange, or distribution of property, its attributes 
are determined under the principles of the matching rule as if B sold 
the property, at the time the item is taken into account under paragraph 
(d)(1)(i) of this section, for a cash payment equal to B's adjusted 
basis in the property (i.e., at no net gain or loss), to the following 
person:
    (1) Property leaves the group. If the property is owned by a 
nonmember immediately after S's item is taken into account, B is treated 
as selling the property to that nonmember. If the nonmember is related 
for purposes of any provision of the Internal Revenue Code or 
regulations to any party to the intercompany transaction (or any related 
transaction) or to the common parent, the nonmember is treated as 
related to B for purposes of that provision. For example, if the 
nonmember is related to P within the meaning of section 1239(b), the 
deemed sale is treated as being described in section 1239(a). See 
paragraph (j)(6) of this section, under which property is not treated as 
being owned by a nonmember if it is owned by the common parent after the 
common parent becomes the only remaining member.
    (2) Property does not leave the group. If the property is not owned 
by a nonmember immediately after S's item is taken into account, B is 
treated as selling the property to an affiliated corporation that is not 
a member of the group.
    (B) Other transactions. If the item is from an intercompany 
transaction other than a sale, exchange, or distribution of property 
(e.g., income from S's services capitalized by B), its attributes are 
determined on a separate entity basis.
    (2) B's items--(i) Attributes. The attributes of B's corresponding 
items continue to be redetermined under the principles of the matching 
rule, with the following adjustments:

[[Page 198]]

    (A) If S and B continue to join with each other in the filing of 
consolidated returns, the attributes of B's corresponding items (and any 
applicable holding periods) are determined by continuing to treat S and 
B as divisions of a single corporation.
    (B) Once S and B no longer join with each other in the filing of 
consolidated returns, the attributes of B's corresponding items are 
determined as if the S division (but not the B division) were 
transferred by the single corporation to an unrelated person. Thus, S's 
activities (and any applicable holding period) before the intercompany 
transaction continue to affect the attributes of the corresponding items 
(and any applicable holding period).
    (ii) Timing. If paragraph (d)(1) of this section applies to S, B 
nevertheless continues to take its corresponding items into account 
under its accounting method. However, the redetermination of the 
attributes of a corresponding item under this paragraph (d)(2) might 
affect its timing.
    (3) Examples. The acceleration rule of this paragraph (d) is 
illustrated by the following examples.

    Example 1. Becoming a nonmember--timing. (a) Facts. S owns land with 
a basis of $70. On January 1 of Year 1, S sells the land to B for $100. 
On July 1 of Year 3, P sells 60% of S's stock to X for $60 and, as a 
result, S becomes a nonmember.
    (b) Matching rule. Under the matching rule, none of S's $30 gain is 
taken into account in Years 1 through 3 because there is no difference 
between B's $0 gain or loss taken into account and the recomputed gain 
or loss.
    (c) Acceleration of S's intercompany items. Under the acceleration 
rule of paragraph (d) of this section, S's $30 gain is taken into 
account in computing consolidated taxable income (and consolidated tax 
liability) immediately before the effect of treating S and B as 
divisions of a single corporation cannot be produced. Because the effect 
cannot be produced once S becomes a nonmember, S takes its $30 gain into 
account in Year 3 immediately before becoming a nonmember. S's gain is 
reflected under Sec. 1.1502-32 in P's basis in the S stock immediately 
before P's sale of the stock. Under Sec. 1.1502-32, P's basis in the S 
stock is increased by $30, and therefore P's gain is reduced (or loss is 
increased) by $18 (60% of $30). See also Secs. 1.1502-33 and 1.1502-
76(b). (The results would be the same if S sold the land to B in an 
installment sale to which section 453 would otherwise apply, because S 
must take its intercompany gain into account under this section.)
    (d) B's corresponding items. Notwithstanding the acceleration of S's 
gain, B continues to take its corresponding items into account under its 
accounting method. Thus, B's items from the land are taken into account 
based on subsequent events (e.g., its sale of the land).
    (e) Sale of B's stock. The facts are the same as in paragraph (a) of 
this Example 1, except that P sells 60% of B's stock (rather than S 
stock) to X for $60 and, as a result, B becomes a nonmember. Because the 
effect of treating S and B as divisions of a single corporation cannot 
be produced once B becomes a nonmember, S takes its $30 gain into 
account under the acceleration rule immediately before B becomes a 
nonmember. (The results would be the same if S sold the land to B in an 
installment sale to which section 453 would otherwise apply, because S 
must take its intercompany gain into account under this section.)
    (f) Discontinue filing consolidated returns. The facts are the same 
as in paragraph (a) of this Example 1, except that the P group receives 
permission under Sec. 1.1502-75(c) to discontinue filing consolidated 
returns beginning in Year 3. Under the acceleration rule, S takes its 
$30 gain into account on December 31 of Year 2.
    (g) No subgroups. The facts are the same as in paragraph (a) of this 
Example 1, except that P simultaneously sells all of the stock of both S 
and B to X (rather than 60% of S's stock), and S and B become members of 
the X consolidated group. Because the effect of treating S and B as 
divisions of a single corporation in the P group cannot be produced once 
S and B become nonmembers, S takes its $30 gain into account under the 
acceleration rule immediately before S and B become nonmembers. 
(Paragraph (j)(5) of this section does not apply to treat the X 
consolidated group as succeeding to the P group because the X group 
acquired only the stock of S and B.) However, so long as S and B 
continue to join with each other in the filing of consolidated returns, 
B continues to treat S and B as divisions of a single corporation for 
purposes of determining the attributes of B's corresponding items from 
the land.
    Example 2. Becoming a nonmember--attributes. (a) Facts. S holds land 
for investment with a basis of $70. On January 1 of Year 1, S sells the 
land to B for $100. B holds the land for sale to customers in the 
ordinary course of business, and expends substantial resources over a 
two-year period subdividing, developing, and marketing the land. On July 
1 of Year 3, before B has sold any of the land, P sells 60% of S's stock 
to X for $60 and, as a result, S becomes a nonmember.
    (b) Attributes. Under the acceleration rule, the attributes of S's 
gain are redetermined

[[Page 199]]

under the principles of the matching rule as if B sold the land to an 
affiliated corporation that is not a member of the group for a cash 
payment equal to B's adjusted basis in the land (because the land 
continues to be held within the group). Thus, whether S's gain is 
capital gain or ordinary income depends on the activities of both S and 
B. Because S and B no longer join with each other in the filing of 
consolidated returns, the attributes of B's corresponding items (e.g., 
from its subsequent sale of the land) are redetermined under the 
principles of the matching rule as if the S division (but not the B 
division) were transferred by the single corporation to an unrelated 
person at the time of P's sale of the S stock. Thus, B continues to take 
into account the activities of S with respect to the land before the 
intercompany transaction.
    (c) Depreciable property. The facts are the same as in paragraph (a) 
of this Example 2, except that the property sold by S to B is 
depreciable property. Section 1239 applies to treat all of S's gain as 
ordinary income because it is taken into account as a result of B's 
deemed sale of the property to a affiliated corporation that is not a 
member of the group (a related person within the meaning of section 
1239(b)).
    Example 3. Selling member's disposition of installment note. (a) 
Facts. S owns land with a basis of $70. On January 1 of Year 1, S sells 
the land to B in exchange for B's $110 note. The note bears a market 
rate of interest in excess of the applicable Federal rate, and provides 
for principal payments of $55 in Year 4 and $55 in Year 5. On July 1 of 
Year 3, S sells B's note to X for $110.
    (b) Timing. S's intercompany gain is taken into account under this 
section, and not under the rules of section 453. Consequently, S's sale 
of B's note does not result in its intercompany gain from the land being 
taken into account (e.g., under section 453B). The sale does not prevent 
S's intercompany items and B's corresponding items from being taken into 
account in determining the group's consolidated taxable income under the 
matching rule, and X does not reflect any aspect of the intercompany 
transaction (X has its own cost basis in the note). S will take the 
intercompany gain into account under the matching rule or acceleration 
rule based on subsequent events (e.g., B's sale of the land). See also 
paragraph (g) of this section for additional rules applicable to B's 
note as an intercompany obligation.
    Example 4. Cancellation of debt and attribute reduction under 
section 108(b). (a) Facts. S holds land for investment with a basis of 
$0. On January 1 of Year 1, S sells the land to B for $100. B also holds 
the land for investment. During Year 3, B is insolvent and B's nonmember 
creditors discharge $60 of B's indebtedness. Because of insolvency, B's 
$60 discharge is excluded from B's gross income under section 108(a), 
and B reduces the basis of the land by $60 under sections 108(b) and 
1017.
    (b) Acceleration rule. As a result of B's basis reduction under 
section 1017, $60 of S's intercompany gain will not be taken into 
account under the matching rule (because there is only a $40 difference 
between B's $40 basis in the land and the $0 basis the land would have 
if S and B were divisions of a single corporation). Accordingly, S takes 
$60 of its gain into account under the acceleration rule in Year 3. S's 
gain is long-term capital gain, determined under paragraph (d)(1)(ii) of 
this section as if B sold the land to an affiliated corporation that is 
not a member of the group for $100 immediately before the basis 
reduction.
    (c) Purchase price adjustment. Assume instead that S sells the land 
to B in exchange for B's $100 purchase money note, B remains solvent, 
and S subsequently agrees to discharge $60 of the note as a purchase 
price adjustment to which section 108(e)(5) applies. Under applicable 
principles of tax law, $60 of S's gain and $60 of B's basis in the land 
are eliminated and never taken into account. Similarly, the note is not 
treated as satisfied and reissued under paragraph (g) of this section.
    Example 5. Section 481. (a) Facts. S operates several trades or 
businesses, including a manufacturing business. S receives permission to 
change its method of accounting for valuing inventory for its 
manufacturing business. S increases the basis of its ending inventory by 
$100, and the related $100 positive section 481(a) adjustment is to be 
taken into account ratably over six taxable years, beginning in Year 1. 
During Year 3, S sells all of the assets used in its manufacturing 
business to B at a gain. Immediately after the transfer, B does not use 
the same inventory valuation method as S. On a separate entity basis, 
S's sale results in an acceleration of the balance of the section 481(a) 
adjustment to Year 3.
    (b) Timing and attributes. Under paragraph (b)(2) of this section, 
the balance of S's section 481(a) adjustment accelerated to Year 3 is 
intercompany income. However, S's $100 basis increase before the 
intercompany transaction eliminates the related difference for this 
amount between B's corresponding items taken into account and the 
recomputed corresponding items in subsequent periods. Because the 
accelerated section 481(a) adjustment will not be taken into account in 
determining the group's consolidated taxable income (and consolidated 
tax liability) under the matching rule, the balance of S's section 481 
adjustment is taken into account under the acceleration rule as ordinary 
income at the time of the intercompany transaction. (If S's sale had not 
resulted in accelerating S's

[[Page 200]]

section 481(a) adjustment on a separate entity basis, S would have no 
intercompany income to be taken into account under this section.)

    (e) Simplifying rules--(1) Dollar-value LIFO inventory methods--(i) 
In general. This paragraph (e)(1) applies if either S or B uses a 
dollar-value LIFO inventory method to account for intercompany 
transactions. Rather than applying the matching rule separately to each 
intercompany inventory transaction, this paragraph (e)(1) provides 
methods to apply an aggregate approach that is based on dollar-value 
LIFO inventory accounting. Any method selected under this paragraph 
(e)(1) must be applied consistently.
    (ii) B uses dollar-value LIFO--(A) In general. If B uses a dollar-
value LIFO inventory method to account for its intercompany inventory 
purchases, and includes all of its inventory costs incurred for a year 
in its cost of goods sold for the year (that is, B has no inventory 
increment for the year), S takes into account all of its intercompany 
inventory items for the year. If B does not include all of its inventory 
costs incurred for the year in its cost of goods sold for the year (that 
is, B has an inventory increment for the year), S does not take all of 
its intercompany inventory income or loss into account. The amount not 
taken into account is determined under either the increment averaging 
method of paragraph (e)(1)(ii)(B) of this section or the increment 
valuation method of paragraph (e)(1)(ii)(C) of this section. Separate 
computations are made for each pool of B that receives intercompany 
purchases from S, and S's amount not taken into account is layered based 
on B's LIFO inventory layers.
    (B) Increment averaging method. Under this paragraph (e)(1)(ii)(B), 
the amount not taken into account is the amount of S's intercompany 
inventory income or loss multiplied by the ratio of the LIFO value of 
B's current-year costs of its layer of increment to B's total inventory 
costs incurred for the year under its LIFO inventory method. If B 
includes more than its inventory costs incurred during any subsequent 
year in its cost of goods sold (a decrement), S takes into account the 
intercompany inventory income or loss layers in the same manner and 
proportion as B takes into account its inventory decrements.
    (C) Increment valuation method. Under this paragraph (e)(1)(ii)(C), 
the amount not taken into account is the amount of S's intercompany 
inventory income or loss for the appropriate period multiplied by the 
ratio of the LIFO value of B's current-year costs of its layer of 
increment to B's total inventory costs incurred in the appropriate 
period under its LIFO inventory method. The principles of paragraph 
(e)(1)(ii)(B) of this section otherwise apply. The appropriate period is 
the period of B's year used to determine its current-year costs.
    (iii) S uses dollar-value LIFO. If S uses a dollar-value LIFO 
inventory method to account for its intercompany inventory sales, S may 
use any reasonable method of allocating its LIFO inventory costs to 
intercompany transactions. LIFO inventory costs include costs of prior 
layers if a decrement occurs. For example, a reasonable allocation of 
the most recent costs incurred during the consolidated return year can 
be used to compute S's intercompany inventory income or loss for the 
year if S has an inventory increment and uses the earliest acquisitions 
costs method, but S must apportion costs from the most recent 
appropriate layers of increment if an inventory decrement occurs for the 
year.
    (iv) Other reasonable methods. S or B may use a method not 
specifically provided in this paragraph (e)(1) that is expected to 
reasonably take into account intercompany items and corresponding items 
from intercompany inventory transactions. However, if the method used 
results, for any year, in a cumulative amount of intercompany inventory 
items not taken into account by S that significantly exceeds the 
cumulative amount that would not be taken into account under paragraph 
(e)(1)(ii) or (iii) of this section, S must take into account for that 
year the amount necessary to eliminate the excess. The method is 
thereafter applied with appropriate adjustments to reflect the amount 
taken into account.
    (v) Examples. The inventory rules of this paragraph (e)(1) are 
illustrated by the following examples.


[[Page 201]]


    Example 1. Increment averaging method. (a) Facts. Both S and B use a 
double-extension, dollar-value LIFO inventory method, and both value 
inventory increments using the earliest acquisitions cost valuation 
method. During Year 2, S sells 25 units of product Q to B on January 15 
at $10/unit. S sells another 25 units on April 15, on July 15, and on 
September 15, at $12/unit. S's earliest cost of product Q is $7.50/unit 
and S's most recent cost of product Q is $8.00/unit. Both S and B have 
an inventory increment for the year. B's total inventory costs incurred 
during Year 2 are $6,000 and the LIFO value of B's Year 2 layer of 
increment is $600.
    (b) Intercompany inventory income. Under paragraph (e)(1)(iii) of 
this section, S must use a reasonable method of allocating its LIFO 
inventory costs to intercompany transactions. Because S has an inventory 
increment for Year 2 and uses the earliest acquisitions cost method, a 
reasonable method of determining its intercompany cost of goods sold for 
product Q is to use its most recent costs. Thus, its intercompany cost 
of goods sold is $800 ($8.00 most recent cost, multiplied by 100 units 
sold to B), and its intercompany inventory income is $350 ($1,150 sales 
proceeds from B minus $800 cost).
    (c) Timing. (i) Under the increment averaging method of paragraph 
(e)(1)(ii)(B) of this section, $35 of S's $350 of intercompany inventory 
income is not taken into account in Year 2, computed as follows:
[GRAPHIC] [TIFF OMITTED] TR18JY95.002

    (ii) Thus, $315 of S's intercompany inventory income is taken into 
account in Year 2 ($350 of total intercompany inventory income minus $35 
not taken into account).
    (d) S incurs a decrement. The facts are the same as in paragraph (a) 
of this Example 1, except that in Year 2, S incurs a decrement equal to 
50% of its Year 1 layer. Under paragraph (e)(1)(iii) of this section, S 
must reasonably allocate the LIFO cost of the decrement to the cost of 
goods sold to B to determine S's intercompany inventory income.
    (e) B incurs a decrement. The facts are the same as in paragraph (a) 
of this Example 1, except that B incurs a decrement in Year 2. S must 
take into account the entire $350 of Year 2 intercompany inventory 
income because all 100 units of product Q are deemed sold by B in Year 
2.
    Example 2. Increment valuation method. (a) The facts are the same as 
in Example 1. In addition, B's use of the earliest acquisition's cost 
method of valuing its increments results in B valuing its year-end 
inventory using costs incurred from January through March. B's costs 
incurred during the year are: $1,428 in the period January through 
March; $1,498 in the period April through June; $1,524 in the period 
July through September; and $1,550 in the period October through 
December. S's intercompany inventory income for these periods is: $50 in 
the period January through March ((25 x $10)-(25 x $8)); $100 in the 
period April through June ((25 x $12)-(25 x $8)); $100 in the period 
July through September ((25 x $12)-(25 x $8)); and $100 in the period 
October through December ((25 x $12)-(25 x $8)).
    (b) Timing. (i) Under the increment valuation method of paragraph 
(e)(1)(ii)(C) of this section, $21 of S's $350 of intercompany inventory 
income is not taken into account in Year 2, computed as follows:
[GRAPHIC] [TIFF OMITTED] TR18JY95.003

    (ii) Thus, $329 of S's intercompany inventory income is taken into 
account in Year 2 ($350 of total intercompany inventory income minus $21 
not taken into account).

[[Page 202]]

    (c) B incurs a subsequent decrement. The facts are the same as in 
paragraph (a) of this Example 2. In addition, assume that in Year 3, B 
experiences a decrement in its pool that receives intercompany purchases 
from S. B's decrement equals 20% of the base-year costs for its Year 2 
layer. The fact that B has incurred a decrement means that all of its 
inventory costs incurred for Year 3 are included in cost of goods sold. 
As a result, S takes into account its entire amount of intercompany 
inventory income from its Year 3 sales. In addition, S takes into 
account $4.20 of its Year 2 layer of intercompany inventory income not 
already taken into account (20% of $21).
    Example 3. Other reasonable inventory methods. (a) Facts. Both S and 
B use a dollar-value LIFO inventory method for their inventory 
transactions. During Year 1, S sells inventory to B and to X. Under 
paragraph (e)(1)(iv) of this section, to compute its intercompany 
inventory income and the amount of this income not taken into account, S 
computes its intercompany inventory income using the transfer price of 
the inventory items less a FIFO cost for the goods, takes into account 
these items based on a FIFO cost flow assumption for B's corresponding 
items, and the LIFO methods used by S and B are ignored for these 
computations. These computations are comparable to the methods used by S 
and B for financial reporting purposes, and the book methods and results 
are used for tax purposes. S adjusts the amount of intercompany 
inventory items not taken into account as required by section 263A.
    (b) Reasonable method. The method used by S is a reasonable method 
under paragraph (e)(1)(iv) of this section if the cumulative amount of 
intercompany inventory items not taken into account by S is not 
significantly greater than the cumulative amount that would not be taken 
into account under the methods specifically described in paragraph 
(e)(1) of this section. If, for any year, the method results in a 
cumulative amount of intercompany inventory items not taken into account 
by S that significantly exceeds the cumulative amount that would not be 
taken into account under the methods specifically provided, S must take 
into account for that year the amount necessary to eliminate the excess. 
The method is thereafter applied with appropriate adjustments to reflect 
the amount taken into account (e.g., to prevent the amount from being 
taken into account more than once).

    (2) Reserve accounting--(i) Banks and thrifts. Except as provided in 
paragraph (g)(3)(iv) of this section (deferral of items from an 
intercompany obligation), a member's addition to, or reduction of, a 
reserve for bad debts that is maintained under section 585 or 593 is 
taken into account on a separate entity basis. For example, if S makes a 
loan to a nonmember and subsequently sells the loan to B, any deduction 
for an addition to a bad debt reserve under section 585 and any 
recapture income (or reduced bad debt deductions) are taken into account 
on a separate entity basis rather than as intercompany items or 
corresponding items taken into account under this section. Any gain or 
loss of S from its sale of the loan to B is taken into account under 
this section, however, to the extent it is not attributable to recapture 
of the reserve.
    (ii) Insurance companies--(A) Direct insurance. If a member provides 
insurance to another member in an intercompany transaction, the 
transaction is taken into account by both members on a separate entity 
basis. For example, if one member provides life insurance coverage for 
another member with respect to its employees, the premiums, reserve 
increases and decreases, and death benefit payments are determined and 
taken into account by both members on a separate entity basis rather 
than taken into account under this section as intercompany items and 
corresponding items.
    (B) Reinsurance--(1) In general. Paragraph (e)(2)(ii)(A) of this 
section does not apply to a reinsurance transaction that is an 
intercompany transaction. For example, if a member assumes all or a 
portion of the risk on an insurance contract written by another member, 
the amounts transferred as reinsurance premiums, expense allowances, 
benefit reimbursements, reimbursed policyholder dividends, experience 
rating adjustments, and other similar items are taken into account under 
the matching rule and the acceleration rule. For purposes of this 
section, the assuming company is treated as B and the ceding company is 
treated as S.
    (2) Reserves determined on a separate entity basis. For purposes of 
determining the amount of a member's increase or decrease in reserves, 
the amount of any reserve item listed in section 807(c) or 832(b)(5) 
resulting from a reinsurance transaction that is an intercompany 
transaction is determined on a separate entity basis. But see section

[[Page 203]]

845, under which the Commissioner may allocate between or among the 
members any items, recharacterize any such items, or make any other 
adjustments necessary to reflect the proper source and character of the 
separate taxable income of a member.
    (3) Consent to treat intercompany transactions on a separate entity 
basis--(i) General rule. The common parent may request consent to take 
into account on a separate entity basis items from intercompany 
transactions other than intercompany transactions with respect to stock 
or obligations of members. Consent may be granted for all items, or for 
items from a class or classes of transactions. The consent is effective 
only if granted in writing by the Internal Revenue Service. Unless 
revoked with the written consent of the Internal Revenue Service, the 
separate entity treatment applies to all affected intercompany 
transactions in the consolidated return year for which consent is 
granted and in all subsequent consolidated return years. Consent under 
this paragraph (e)(3) does not apply for purposes of taking into account 
losses and deductions deferred under section 267(f).
    (ii) Time and manner for requesting consent. The request for consent 
described in paragraph (e)(3)(i) of this section must be made in the 
form of a ruling request. The request must be signed by the common 
parent, include any information required by the Internal Revenue 
Service, and be filed on or before the due date of the consolidated 
return (not including extensions of time) for the first consolidated 
return year to which the consent is to apply. The Internal Revenue 
Service may impose terms and conditions for granting consent. A copy of 
the consent must be attached to the group's consolidated returns (or 
amended returns) as required by the terms of the consent.
    (iii) Effect of consent on methods of accounting. A consent for 
separate entity accounting under this paragraph (e)(3), and a revocation 
of that consent, may require changes in members' methods of accounting 
for intercompany transactions. Because the consent, or a revocation of 
the consent, is effective for all intercompany transactions occurring in 
the consolidated return year for which the consent or revocation is 
first effective, any change in method is effected on a cut-off basis. 
Section 446(e) consent is granted for any changes in methods of 
accounting for intercompany transactions that are necessary solely to 
conform a member's methods to a binding consent with respect to the 
group under this paragraph (e)(3) or the revocation of that consent, 
provided the changes are made in the first consolidated return year for 
which the consent or revocation under this paragraph (e)(3) is 
effective. Therefore, section 446(e) consent must be separately 
requested under applicable administrative procedures if a member has 
failed to conform its practices to the separate entity accounting 
provided under this paragraph (e)(3) or the revocation of that treatment 
in the first consolidated return year for which the consent to use 
separate entity accounting or revocation of that consent is effective.
    (iv) Consent to treat intercompany transactions on a separate entity 
basis under prior law. A group that has received consent that is in 
effect as of the first day of the first consolidated return year 
beginning on or after July 12, 1995 to treat certain intercompany 
transactions as provided in Sec. 1.1502-13(c)(3) of the regulations (as 
contained in the 26 CFR part 1 edition revised as of April 1, 1995) will 
be considered to have obtained the consent of the Commissioner to take 
items from intercompany transactions into account on a separate entity 
basis as provided in paragraph (e)(3)(i) of this section. This treatment 
is applicable only to the items, class or classes of transactions for 
which consent was granted under prior law.
    (f) Stock of members--(1) In general. In addition to the general 
rules of this section, the rules of this paragraph (f) apply to stock of 
members.
    (2) Intercompany distributions to which section 301 applies--(i) In 
general. This paragraph (f)(2) provides rules for intercompany 
transactions to which section 301 applies (intercompany distributions). 
For purposes of determining whether a distribution is an intercompany 
distribution, it is treated as occurring under the principles of the 
entitlement rule of paragraph (f)(2)(iv)

[[Page 204]]

of this section. A distribution is not an intercompany distribution to 
the extent it is deducted by the distributing member. See, for example, 
section 1382(c)(1).
    (ii) Distributee member. An intercompany distribution is not 
included in the gross income of the distributee member (B). However, 
this exclusion applies to a distribution only to the extent there is a 
corresponding negative adjustment reflected under Sec. 1.1502-32 in B's 
basis in the stock of the distributing member (S). For example, no 
amount is included in B's gross income under section 301(c)(3) from a 
distribution in excess of the basis of the stock of a subsidiary that 
results in an excess loss account under Sec. 1.1502-32(a) which is 
treated as negative basis under Sec. 1.1502-19. B's dividend received 
deduction under section 243(a)(3) is determined without regard to any 
intercompany distributions under this paragraph (f)(2) to the extent 
they are not included in gross income. See Sec. 1.1502-26(b) 
(applicability of the dividends received deduction to distributions not 
excluded from gross income, such as a distribution from the common 
parent to a subsidiary owning stock of the common parent).
    (iii) Distributing member. The principles of section 311(b) apply to 
S's loss, as well as gain, from an intercompany distribution of 
property. Thus, S's loss is taken into account under the matching rule 
if the property is subsequently sold to a nonmember. However, section 
311(a) continues to apply to distributions to nonmembers (for example, 
loss is not recognized).
    (iv) Entitlement rule--(A) In general. For all Federal income tax 
purposes, an intercompany distribution is treated as taken into account 
when the shareholding member becomes entitled to it (generally on the 
record date). For example, if B becomes entitled to a cash distribution 
before it is made, the distribution is treated as made when B becomes 
entitled to it. For this purpose, B is treated as entitled to a 
distribution no later than the time the distribution is taken into 
account under the Internal Revenue Code (e.g., under section 305(c)). To 
the extent a distribution is not made, appropriate adjustments must be 
made as of the date it was taken into account.
    (B) Nonmember shareholders. If nonmembers own stock of the 
distributing corporation at the time the distribution is treated as 
occurring under this paragraph (f)(2)(iv), appropriate adjustments must 
be made to prevent the acceleration of the distribution to members from 
affecting distributions to nonmembers.
    (3) Boot in an intercompany reorganization--(i) Scope. This 
paragraph (f)(3) provides additional rules for an intercompany 
transaction in which the receipt of money or other property 
(nonqualifying property) results in the application of section 356. For 
example, the distribution of stock of a lower-tier member to a higher-
tier member in an intercompany transaction to which section 355 would 
apply but for the receipt of nonqualifying property is a transaction to 
which this paragraph (f)(3) applies. This paragraph (f)(3) does not 
apply if a party to the transaction becomes a member or nonmember as 
part of the same plan or arrangement. For example, if S merges into a 
nonmember in a transaction described in section 368(a)(1)(A), this 
paragraph (f)(3) does not apply.
    (ii) Treatment. Nonqualifying property received as part of a 
transaction described in this paragraph (f)(3) is treated as received by 
the member shareholder in a separate transaction. See, for example, 
sections 302 and 311 (rather than sections 356 and 361). The 
nonqualifying property is treated as taken into account immediately 
after the transaction if section 354 would apply but for the fact that 
nonqualifying property is received. It is treated as taken into account 
immediately before the transaction if section 355 would apply but for 
the fact that nonqualifying property is received. The treatment under 
this paragraph (f)(3)(ii) applies for all Federal income tax purposes.
    (4) Acquisition by issuer of its own stock. If a member acquires its 
own stock, or an option to buy or sell its own stock, in an intercompany 
transaction, the member's basis in that stock or option is treated as 
eliminated for all purposes. Accordingly, S's intercompany items from 
the stock or options of B are taken into account under

[[Page 205]]

this section if B acquires the stock or options in an intercompany 
transaction (unless, for example, B acquires the stock in exchange for 
successor property within the meaning of paragraph (j)(1) of this 
section in a nonrecognition transaction). For example, if B redeems its 
stock from S in a transaction to which section 302(a) applies, S's gain 
from the transaction is taken into account immediately under the 
acceleration rule.
    (5) Certain liquidations and distributions--(i) Netting allowed. S's 
intercompany item from a transfer to B of the stock of another 
corporation (T) is taken into account under this section in certain 
circumstances even though the T stock is never held by a nonmember after 
the intercompany transaction. For example, if S sells all of T's stock 
to B at a gain, and T subsequently liquidates into B in a separate 
transaction to which section 332 applies, S's gain is taken into account 
under the matching rule. Under paragraph (c)(6)(ii) of this section, S's 
intercompany gain taken into account as a result of a liquidation under 
section 332 or a comparable nonrecognition transaction is not 
redetermined to be excluded from gross income. Under this paragraph 
(f)(5)(i), if S has both intercompany income or gain and intercompany 
deduction or loss attributable to stock of the same corporation having 
the same material terms, only the income or gain in excess of the 
deduction or loss is subject to paragraph (c)(6)(ii) of this section. 
This paragraph (f)(5)(i) applies only to a transaction in which B's 
basis in its T stock is permanently eliminated in a liquidation under 
section 332 or any comparable nonrecognition transaction, including--
    (A) A merger of B into T under section 368(a);
    (B) A distribution by B of its T stock in a transaction described in 
section 355; or
    (C) A deemed liquidation of T resulting from an election under 
section 338(h)(10).
    (ii) Elective relief--(A) In general. If an election is made 
pursuant to this paragraph (f)(5)(ii), certain transactions are 
recharacterized to prevent S's items from being taken into account or to 
provide offsets to those items. This paragraph (f)(5)(ii) applies only 
if T is a member throughout the period beginning with S's transfer and 
ending with the completion of the nonrecognition transaction.
    (B) Section 332--(1) In general. If section 332 applies to T's 
liquidation into B, and B transfers T's assets to a new member (new T) 
in a transaction not otherwise pursuant to the same plan or arrangement 
as the liquidation, the transfer is nevertheless treated for all Federal 
income tax purposes as pursuant to the same plan or arrangement as the 
liquidation. For example, if T liquidates into B, but B forms new T by 
transferring substantially all of T's former assets to new T, S's 
intercompany gain or loss generally is not taken into account solely as 
a result of the liquidation if the liquidation and transfer would 
qualify as a reorganization described in section 368(a). (Under 
paragraph (j)(1) of this section, B's stock in new T would be a 
successor asset to B's stock in T, and S's gain would be taken into 
account based on the new T stock.)
    (2) Time limitation and adjustments. The transfer of an asset to new 
T not otherwise pursuant to the same plan or arrangement as the 
liquidation is treated under this paragraph (f)(5)(ii)(B) as pursuant to 
the same plan or arrangement only if B transfers it to new T pursuant to 
a written plan, a copy of which is attached to a timely filed original 
return (including extensions) for the year of T's liquidation, and the 
transfer is completed within 12 months of the filing of that return. 
Appropriate adjustments are made to reflect any events occurring before 
the formation of new T and to reflect any assets not transferred to new 
T as part of the same plan or arrangement. For example, if B retains an 
asset in the reorganization, the asset is treated under paragraph (f)(3) 
of this section as acquired by new T but distributed to B immediately 
after the reorganization.
    (3) Downstream merger, etc. The principles of this paragraph 
(f)(5)(ii)(B) apply, with appropriate adjustments, if B's basis in the T 
stock is eliminated in a transaction similar to a section 332 
liquidation, such as a transaction described in section 368 in which B

[[Page 206]]

merges into T. For example, if S and B are subsidiaries, and S sells all 
of T's stock to B at a gain followed by B's merger into T in a separate 
transaction described in section 368(a), S's gain is not taken into 
account solely as a result of the merger if T (as successor to B) forms 
new T with substantially all of T's former assets.
    (C) Section 338(h)(10)--(1) In general. This paragraph (f)(5)(ii)(C) 
applies to a deemed liquidation of T under section 332 as the result of 
an election under section 338(h)(10). This paragraph (f)(5)(ii)(C) does 
not apply if paragraph (f)(5)(ii)(B) of this section is applied to the 
deemed liquidation. Under this paragraph, B is treated with respect to 
each share of its T stock as recognizing as a corresponding item any 
loss or deduction it would recognize (determined after adjusting stock 
basis under Sec. 1.1502-32) if section 331 applied to the deemed 
liquidation. For all other Federal income tax purposes, the deemed 
liquidation remains subject to section 332.
    (2) Limitation on amount of loss. The amount of B's loss or 
deduction under this paragraph (f)(5)(ii)(C) is limited as follows--
    (i) The aggregate amount of loss recognized with respect to T stock 
cannot exceed the amount of S's intercompany income or gain that is in 
excess of S's intercompany deduction or loss with respect to shares of T 
stock having the same material terms as the shares giving rise to S's 
intercompany income or gain; and
    (ii) The aggregate amount of loss recognized under this paragraph 
(f)(5)(ii)(C) from T's deemed liquidation cannot exceed the net amount 
of deduction or loss (if any) that would be taken into account from the 
deemed liquidation if section 331 applied with respect to all T shares.
    (3) Asset sale, etc. The principles of this paragraph (f)(5)(ii)(C) 
apply, with appropriate adjustments, if T transfers all of its assets to 
a nonmember and completely liquidates in a transaction comparable to the 
section 338(h)(10) transaction described in paragraph (f)(5)(ii)(C)(1) 
of this section. For example, if S sells all of T's stock to B at a gain 
followed by T's merger into a nonmember in exchange for a cash payment 
to B in a transaction treated for Federal income tax purposes as T's 
sale of its assets to the nonmember and complete liquidation, the merger 
is ordinarily treated as a comparable transaction.
    (D) Section 355. If B distributes the T stock in an intercompany 
transaction to which section 355 applies (including an intercompany 
transaction to which 355 applies because of the application of paragraph 
(f)(3) of this section), the redetermination of the basis of the T stock 
under section 358 could cause S's gain or loss to be taken into account 
under this section. This paragraph (f)(5)(ii)(D) applies to treat B's 
distribution as subject to sections 301 and 311 (as modified by this 
paragraph (f)), rather than section 355. The election will prevent S's 
gain or loss from being taken into account immediately to the extent 
matching remains possible, but B's gain or loss from the distribution 
will also be taken into account under this section.
    (E) Election. An election to apply this paragraph (f)(5)(ii) is made 
in a separate statement entitled ``[Insert Name and Employer 
Identification Number of Common Parent] HEREBY ELECTS THE APPLICATION OF 
Sec. 1.1502-13(f)(5)(ii).'' The election must include a description of 
S's intercompany transaction and T's liquidation (or other transaction). 
It must specify which provision of Sec. 1.1502-13(f)(5)(ii) applies and 
how it alters the otherwise applicable results under this section 
(including, for example, the amount of S's intercompany items and the 
amount deferred or offset as a result of this Sec. 1.1502-13(f)(5)(ii)). 
A separate election must be made for each application of this paragraph 
(f)(5)(ii). The election must be signed by the common parent and filed 
with the group's income tax return for the year of T's liquidation (or 
other transaction). The Commissioner may impose reasonable terms and 
conditions to the application of this paragraph (f)(5)(ii) that are 
consistent with the purposes of this section.
    (6) Stock of common parent. In addition to the general rules of this 
section, this paragraph (f)(6) applies to parent stock (P stock) and 
positions in P stock held or entered into by another member.

[[Page 207]]

For this purpose, P stock is any stock of the common parent held 
(directly or indirectly) by another member or any stock of a member (the 
issuer) that was the common parent if the stock was held (directly or 
indirectly) by another member while the issuer was the common parent.
    (i) Loss stock--(A) Recognized loss. Any loss recognized, directly 
or indirectly, by a member with respect to P stock is permanently 
disallowed and does not reduce earnings and profits. See Sec. 1.1502-
32(b)(3)(iii)(A) for a corresponding reduction in the basis of the 
member's stock.
    (B) Other cases. If a member, M, owns P stock, the stock is 
subsequently owned by a nonmember, and, immediately before the stock is 
owned by the nonmember, M's basis in the share exceeds its fair market 
value, then, to the extent paragraph (f)(6)(i)(A) of this section does 
not apply, M's basis in the share is reduced to the share's fair market 
value immediately before the share is held by the nonmember. For 
example, if M owns shares of P stock with a $100x basis and M becomes a 
nonmember at a time when the P shares have a value of $60x, M's basis in 
the P shares is reduced to $60x immediately before M becomes a 
nonmember. Similarly, if M contributes the P stock to a nonmember in a 
transaction subject to section 351, M's basis in the shares is reduced 
to $60x immediately before the contribution. See Sec. 1.1502-
32(b)(3)(iii)(B) for a corresponding reduction in the basis of M's 
stock.
    (C) Waiver of built-in loss on P stock--(1) In general. If a 
nonmember that owns P stock with a basis in excess of its fair market 
value becomes a member of the P consolidated group in a qualifying cost 
basis transaction, the group may make an irrevocable election to reduce 
the basis of the P stock to its fair market value immediately before the 
nonmember becomes a member of the P group. If the nonmember was a member 
of another consolidated group immediately before becoming a member of 
the P group, the reduction in basis is treated as occurring immediately 
after it ceases to be a member of the prior group. A qualifying cost 
basis transaction is the purchase (i.e., a transaction in which basis is 
determined under section 1012) by members of the P consolidated group 
(while they are members) in a 12-month period of an amount of the 
nonmember's stock satisfying the requirements of section 1504(a)(2).
    (2) Election. The election described in this paragraph (6)(i)(C) 
must be made in a separate statement entitled ``ELECTION TO REDUCE BASIS 
OF P STOCK UNDER Sec. 1.1502-13(f)(6).'' The statement must be filed 
with the P consolidated group's return for the year in which the 
nonmember becomes a member, and it must be signed by both P and the 
nonmember. The statement must identify the fair market value of, and the 
amount of the basis reduction in, the P stock.
    (ii) Gain stock. If a member, M, would otherwise recognize gain on a 
qualified disposition of P stock, then immediately before the qualified 
disposition, M is treated as purchasing the P stock from P for fair 
market value with cash contributed to M by P (or, if necessary, through 
any intermediate members). A disposition is a qualified disposition only 
if--
    (A) The member acquires the P stock directly from the common parent 
(P) through a contribution to capital or a transaction qualifying under 
section 351(a) (or, if necessary, through a series of such transactions 
involving only members);
    (B) Pursuant to a plan, the member transfers the stock immediately 
to a nonmember that is not related, within the meaning of section 267(b) 
or 707(b), to any member of the group;
    (C) No nonmember receives a substituted basis in the stock within 
the meaning of section 7701(a)(42);
    (D) The P stock is not exchanged for P stock;
    (E) P neither becomes nor ceases to be the common parent as part of, 
or in contemplation of, the disposition or plan; and
    (F) M is neither a nonmember that becomes a member nor a member that 
becomes a nonmember as part of, or in contemplation of, the disposition 
or plan.
    (iii) Mark-to-market of P stock. Paragraphs (f)(6)(i) and (ii) of 
this section shall not apply to any gain or loss from

[[Page 208]]

a share of P stock held by a member, M, if--
    (A) M regularly trades in P stock (of the same class) with customers 
in the ordinary course of its business as a dealer;
    (B) The gain or loss on the share is taken into account by M 
pursuant to section 475(a);
    (C) M's basis in the share is not adjusted by reference to the basis 
of any other property or by reference to income, gain, deduction, or 
loss from other property; and
    (D) Neither M nor any other member of the group has structured or 
engaged in any transaction while a member (or in anticipation of 
becoming a member), during the taxable year or in any year within the 
preceding five taxable years that is open for assessment under section 
6501, with a principal purpose of avoiding gain or creating loss on P 
stock subject to section 475(a).
    (iv) Options, warrants, and other positions--(A) In general. This 
paragraph (f)(6) applies with appropriate adjustments to positions in P 
stock to the extent that P's gain or loss from an equivalent position 
would not be recognized under section 1032. Thus, if M purchases an 
option to buy or sell P stock and sells the option at a loss, the loss 
is permanently disallowed under paragraph (f)(6)(i)(A) of this section. 
Similarly, if M is the grantor of such an option and becomes a 
nonmember, then the principles of paragraph (f)(6)(i)(B) of this section 
apply to the extent that M would recognize loss from cash settlement of 
the option at its fair market value immediately before M becomes a 
nonmember, and proper adjustments must be made in the amount of any gain 
or loss subsequently realized from the position by M. If P grants M an 
option to acquire P stock in a transaction meeting the requirements of 
paragraph (f)(6)(ii) of this section, M is treated as having purchased 
the option from P for fair market value with cash contributed to M by P.
    (B) Mark-to-market of positions in P stock. For purposes of 
paragraph (f)(6)(iii) of this section, gain or loss with respect to a 
position taken into account under section 1256(a) is treated as taken 
into account under section 475(a) to the extent that the gain or loss 
would be taken into account under the principles of section 475.
    (v) Effective date. This paragraph (f)(6) applies to gain or loss 
taken into account on or after July 12, 1995, and to transactions 
occurring on or after July 12, 1995. For example, if S sells P stock to 
B at a loss prior to July 12, 1995, and B sells the P stock to a 
nonmember after July 12, 1995, S's loss is disallowed because it is 
taken into account after July 12, 1995. If a taxpayer takes a gain or 
loss into account or engages in a transaction on or after July 12, 1995, 
during a tax year ending prior to December 31, 1995, the taxpayer may 
treat the gain or loss or the transaction under the rules published in 
1995-32 I.R.B. 47, instead of under the rules of this paragraph (f)(6).
    (7) Examples. The application of this section to intercompany 
transactions with respect to stock of members is illustrated by the 
following examples.

    Example 1. Dividend exclusion and property distribution. (a) Facts. 
S owns land with a $70 basis and $100 value. On January 1 of Year 1, P's 
basis in S's stock is $100. During Year 1, S declares and makes a 
dividend distribution of the land to P. Under section 311(b), S has a 
$30 gain. Under section 301(d), P's basis in the land is $100. On July 1 
of Year 3, P sells the land to X for $110.
    (b) Dividend elimination and stock basis adjustments. Under 
paragraph (b)(1) of this section, S's distribution to P is an 
intercompany distribution. Under paragraph (f)(2)(ii) of this section, 
P's $100 of dividend income is not included in gross income. Under 
Sec. 1.1502-32, P's basis in S's stock is reduced from $100 to $0 in 
Year 1.
    (c) Matching rule and stock basis adjustments. Under the matching 
rule (treating P as the buying member and S as the selling member), S 
takes its $30 gain into account in Year 3 to reflect the $30 difference 
between P's $10 gain taken into account and the $40 recomputed gain. 
Under Sec. 1.1502-32, P's basis in S's stock is increased from $0 to $30 
in Year 3.
    (d) Loss property. The facts are the same as in paragraph (a) of 
this Example 1, except that S has a $130 (rather than $70) basis in the 
land. Under paragraph (f)(2)(iii) of this section, the principles of 
section 311(b) apply to S's loss from the intercompany distribution. 
Thus, S has a $30 loss that is taken into account under the matching 
rule in Year 3 to reflect the $30 difference between P's $10 gain taken 
into account and the $20 recomputed loss. (The results are the same 
under section 267(f).) Under Sec. 1.1502-32, P's basis in S's stock

[[Page 209]]

is reduced from $100 to $0 in Year 1, and from $0 to a $30 excess loss 
account in Year 3. (If P had distributed the land to its shareholders, 
rather than selling the land to X, P would take its $10 gain under 
section 311(b) into account, and S would take its $30 loss into account 
under the matching rule with $10 offset by P's gain and $20 
recharacterized as a noncapital, nondeductible amount.)
    (e) Entitlement rule. The facts are the same as in paragraph (a) of 
this Example 1, except that, after P becomes entitled to the 
distribution but before the distribution is made, S issues additional 
stock to the public and becomes a nonmember. Under paragraph (f)(2)(i) 
of this section, the determination of whether a distribution is an 
intercompany distribution is made under the entitlement rule of 
paragraph (f)(2)(iv) of this section. Treating S's distribution as made 
when P becomes entitled to it results in the distribution being an 
intercompany distribution. Under paragraph (f)(2)(ii) of this section, 
the distribution is not included in P's gross income. S's $30 gain from 
the distribution is intercompany gain that is taken into account under 
the acceleration rule immediately before S becomes a nonmember. Thus, 
there is a net $70 decrease in P's basis in its S stock under 
Sec. 1.1502-32 ($100 decrease for the distribution and a $30 increase 
for S's $30 gain). See also Sec. 1.1502-20(b) (additional stock basis 
reductions applicable to certain deconsolidations). Under paragraph 
(f)(2)(iv) of this section, P does not take the distribution into 
account again under separate return rules when received, and P is not 
entitled to a dividends received deduction.
    Example 2. Excess loss accounts. (a) Facts. S owns all of T's only 
class of stock with a $10 basis and $100 value. S has substantial 
earnings and profits, and T has $10 of earnings and profits. On January 
1 of Year 1, S declares and distributes a dividend of all of the T stock 
to P. Under section 311(b), S has a $90 gain. Under section 301(d), P's 
basis in the T stock is $100. During Year 3, T borrows $90 and declares 
and makes a $90 distribution to P to which section 301 applies, and P's 
basis in the T stock is reduced under Sec. 1.1502-32 from $100 to $10. 
During Year 6, T has $5 of earnings that increase P's basis in the T 
stock under Sec. 1.1502-32 from $10 to $15. On December 1 of Year 9, T 
issues additional stock to X and, as a result, T becomes a nonmember.
    (b) Dividend exclusion. Under paragraph (f)(2)(ii) of this section, 
P's $100 of dividend income from S's distribution of the T stock, and 
its $10 of dividend income from T's $90 distribution, are not included 
in gross income.
    (c) Matching and acceleration rules. Under Sec. 1.1502-19(b)(1), 
when T becomes a nonmember P must include in income the amount of its 
excess loss account (if any) in T stock. P has no excess loss account in 
the T stock. Therefore P's corresponding item from the deconsolidation 
of T is $0. Treating S and P as divisions of a single corporation, the T 
stock would continue to have a $10 basis after the distribution, and the 
adjustments under Sec. 1.1502-32 for T's $90 distribution and $5 of 
earnings would result in a $75 excess loss account. Thus, the recomputed 
corresponding item from the deconsolidation is $75. Under the matching 
rule, S takes $75 of its $90 gain into account in Year 9 as a result of 
T becoming a nonmember, to reflect the difference between P's $0 gain 
taken into account and the $75 recomputed gain. S's remaining $15 of 
gain is taken into account under the matching and acceleration rules 
based on subsequent events (for example, under the matching rule if P 
subsequently sells its T stock, or under the acceleration rule if S 
becomes a nonmember).
    (d) Reverse sequence. The facts are the same as in paragraph (a) of 
this Example 2, except that T borrows $90 and makes its $90 distribution 
to S before S distributes T's stock to P. Under paragraph (f)(2)(ii) of 
this section, T's $90 distribution to S ($10 of which is a dividend) is 
not included in S's gross income. The corresponding negative adjustment 
under Sec. 1.1502-32 reduces S's basis in the T stock from $10 to an $80 
excess loss account. Under section 311(b), S has a $90 gain from the 
distribution of T stock to P. Under section 301(d) P's initial basis in 
the T stock is $10 (the stock's fair market value), and the basis 
increases to $15 under Sec. 1.1502-32 as a result of T's earnings in 
Year 6. The timing and attributes of S's gain are determined in the 
manner provided in paragraph (c) of this Example 2. Thus, $75 of S's 
gain is taken into account under the matching rule in Year 9 as a result 
of T becoming a nonmember, and the remaining $15 is taken into account 
under the matching and acceleration rules based on subsequent events.
    (e) Partial stock sale. The facts are the same as in paragraph (a) 
of this Example 2, except that P sells 10% of T's stock to X on December 
1 of Year 9 for $1.50 (rather than T's issuing additional stock and 
becoming a nonmember). Under the matching rule, S takes $9 of its gain 
into account to reflect the difference between P's $0 gain taken into 
account ($1.50 sale proceeds minus $1.50 basis) and the $9 recomputed 
gain ($1.50 sale proceeds plus $7.50 excess loss account).
    (f) Loss, rather than cash distribution. The facts are the same as 
in paragraph (a) of this Example 2, except that T retains the loan 
proceeds and incurs a $90 loss in Year 3 that is absorbed by the group. 
The timing and attributes of S's gain are determined in the same manner 
provided in paragraph (c) of this Example 2. Under Sec. 1.1502-32, the 
loss in Year 3 reduces P's basis in the T stock from $100 to $10, and 
T's $5 of earnings in Year 6 increase the basis to $15. Thus, $75 of S's 
gain is taken into account under the matching

[[Page 210]]

rule in Year 9 as a result of T becoming a nonmember, and the remaining 
$15 is taken into account under the matching and acceleration rules 
based on subsequent events. (The timing and attributes of S's gain would 
be determined in the same manner provided in paragraph (d) of this 
Example 2 if T incurred the $90 loss before S's distribution of the T 
stock to P.)
    (g) Stock sale, rather than stock distribution. The facts are the 
same as in paragraph (a) of this Example 2, except that S sells the T 
stock to P for $100 (rather than distributing the stock). The timing and 
attributes of S's gain are determined in the same manner provided in 
paragraph (c) of this Example 2. Thus, $75 of S's gain is taken into 
account under the matching rule in Year 9 as a result of T becoming a 
nonmember, and the remaining $15 is taken into account under the 
matching and acceleration rules based on subsequent events.
    Example 3. Intercompany reorganization. (a) Facts. P forms S and B 
by contributing $200 to the capital of each. During Years 1 through 4, S 
and B each earn $50, and under Sec. 1.1502-32 P adjusts its basis in the 
stock of each to $250. (See Sec. 1.1502-33 for adjustments to earnings 
and profits.) On January 1 of Year 5, the fair market value of S's 
assets and its stock is $500, and S merges into B in a tax-free 
reorganization. Pursuant to the plan of reorganization, P receives B 
stock with a fair market value of $350 and $150 of cash.
    (b) Treatment as a section 301 distribution. The merger of S into B 
is a transaction to which paragraph (f)(3) of this section applies. P is 
treated as receiving additional B stock with a fair market value of $500 
and, under section 358, a basis of $250. Immediately after the merger, 
$150 of the stock received is treated as redeemed, and the redemption is 
treated under section 302(d) as a distribution to which section 301 
applies. Because the $150 distribution is treated as not received as 
part of the merger, section 356 does not apply and no basis adjustments 
are required under section 358(a)(1)(A) and (B). Because B is treated 
under section 381(c)(2) as receiving S's earnings and profits and the 
redemption is treated as occurring after the merger, $100 of the 
distribution is treated as a dividend under section 301 and P's basis in 
the B stock is reduced correspondingly under Sec. 1.1502-32. The 
remaining $50 of the distribution reduces P's basis in the B stock. 
Section 301(c)(2) and Sec. 1.1502-32. Under paragraph (f)(2)(ii) of this 
section, P's $100 of dividend income is not included in gross income. 
Under Sec. 1.302-2(c), proper adjustments are made to P's basis in its B 
stock to reflect its basis in the B stock redeemed, with the result that 
P's basis in the B stock is reduced by the entire $150 distribution.
    (c) Depreciated property. The facts are the same as in paragraph (a) 
of this Example 3, except that property of S with a $200 basis and $150 
fair market value is distributed to P (rather than cash of B). As in 
paragraph (b) of this Example 3, P is treated as receiving additional B 
stock in the merger and a $150 distribution to which section 301 applies 
immediately after the merger. Under paragraph (f)(2)(iii) of this 
section, the principles of section 311(b) apply to B's $50 loss and the 
loss is taken into account under the matching and acceleration rules 
based on subsequent events (e.g., under the matching rule if P 
subsequently sells the property, or under the acceleration rule if B 
becomes a nonmember). The results are the same under section 267(f).
    (d) Divisive transaction. Assume instead that, pursuant to a plan, S 
distributes the stock of a lower-tier subsidiary in a spin-off 
transaction to which section 355 applies together with $150 of cash. The 
distribution of stock is a transaction to which paragraph (f)(3) of this 
section applies. P is treated as receiving the $150 of cash immediately 
before the section 355 distribution, as a distribution to which section 
301 applies. Section 356(b) does not apply and no basis adjustments are 
required under section 358(a)(1) (A) and (B). Because the $150 
distribution is treated as made before the section 355 distribution, the 
distribution reduces P's basis in the S stock under Sec. 1.1502-32, and 
the basis allocated under section 358(c) between the S stock and the 
lower-tier subsidiary stock received reflects this basis reduction.
    Example 4. Stock redemptions and distributions. (a) Facts. Before 
becoming a member of the P group, S owns P stock with a $30 basis. On 
January 1 of Year 1, P buys all of S's stock. On July 1 of Year 3, P 
redeems the P stock held by S for $100 in a transaction to which section 
302(a) applies.
    (b) Gain under section 302. Under paragraph (f)(4) of this section, 
P's basis in the P stock acquired from S is treated as eliminated. As a 
result of this elimination, S's intercompany item will never be taken 
into account under the matching rule because P's basis in the stock does 
not reflect S's intercompany item. Therefore, S's $70 gain is taken into 
account under the acceleration rule in Year 3. The attributes of S's 
item are determined under paragraph (d)(1)(ii) of this section by 
applying the matching rule as if P had sold the stock to an affiliated 
corporation that is not a member of the group at no gain or loss. 
Although P's corresponding item from a sale of its stock would have been 
excluded from gross income under section 1032, paragraph (c)(6)(ii) of 
this section prevents S's gain from being treated as excluded from gross 
income; instead S's gain is capital gain.
    (c) Gain under section 311. The facts are the same as in paragraph 
(a) of this Example 4, except that S distributes the P stock to P in a 
transaction to which section 301 applies (rather than the stock being 
redeemed), and

[[Page 211]]

S has a $70 gain under section 311(b). The timing and attributes of S's 
gain are determined in the manner provided in paragraph (b) of this 
Example 4.
    (d) Loss stock. The facts are the same as in paragraph (a) of this 
Example 4, except that S has a $130 (rather than $30) basis in the P 
stock and has a $30 loss under section 302(a). The limitation under 
paragraph (c)(6)(ii) of this section does not apply to intercompany 
losses. Thus, S's loss is taken into account in Year 3 as a noncapital, 
nondeductible amount.
    Example 5. Intercompany stock sale followed by section 332 
liquidation. (a) Facts. S owns all of the stock of T, with a $70 basis 
and $100 value, and T's assets have a $10 basis and $100 value. On 
January 1 of Year 1, S sells all of T's stock to B for $100. On July 1 
of Year 3, when T's assets are still worth $100, T distributes all of 
its assets to B in an unrelated complete liquidation to which section 
332 applies.
    (b) Timing and attributes. Under paragraph (b)(3)(ii) of this 
section, B's unrecognized gain or loss under section 332 is a 
corresponding item for purposes of applying the matching rule. In Year 3 
when T liquidates, B has $0 of unrecognized gain or loss under section 
332 because B has a $100 basis in the T stock and receives a $100 
distribution with respect to its T stock. Treating S and B as divisions 
of a single corporation, the recomputed corresponding item would have 
been $30 of unrecognized gain under section 332 because B would have 
succeeded to S's $70 basis in the T stock. Thus, under the matching 
rule, S's $30 intercompany gain is taken into account in Year 3 as a 
result of T's liquidation. Under paragraph (c)(1)(i) of this section, 
the attributes of S's gain and B's corresponding item are redetermined 
as if S and B were divisions of a single corporation. Although S's gain 
ordinarily would be redetermined to be treated as excluded from gross 
income to reflect the nonrecognition of B's gain under section 332, S's 
gain remains capital gain because B's unrecognized gain under section 
332 is not permanently and explicitly disallowed under the Code. See 
paragraph (c)(6)(ii) of this section. However, relief may be elected 
under paragraph (f)(5)(ii) of this section.
    (c) Intercompany sale at a loss. The facts are the same as in 
paragraph (a) of this Example 5, except that S has a $130 (rather than 
$70) basis in the T stock. The limitation under paragraph (c)(6)(ii) of 
this section does not apply to intercompany losses. Thus, S's 
intercompany loss is taken into account in Year 3 as a noncapital, 
nondeductible amount. However, relief may be elected under paragraph 
(f)(5)(ii) of this section.
    Example 6. Intercompany stock sale followed by section 355 
distribution. (a) Facts. S owns all of the stock of T with a $70 basis 
and a $100 value. On January 1 of Year 1, S sells all of T's stock to M 
for $100. On June 1 of Year 6, M distributes all of its T stock to its 
nonmember shareholders in a transaction to which section 355 applies. At 
the time of the distribution, M has a basis in T stock of $100 and T has 
a value of $150.
    (b) Timing and attributes. Under paragraph (b)(3)(ii) of this 
section, M's $50 gain not recognized on the distribution under section 
355 is a corresponding item. Treating S and M as divisions of a single 
corporation, the recomputed corresponding item would be $80 of 
unrecognized gain under section 355 because M would have succeeded to 
S's $70 basis in the T stock. Thus, under the matching rule, S's $30 
intercompany gain is taken into account in Year 6 as a result of the 
distribution. Under paragraph (c)(1)(i) of this section, the attributes 
of S's intercompany item and M's corresponding item are redetermined to 
produce the same effect on consolidated taxable income as if S and M 
were divisions of a single corporation. Although S's gain ordinarily 
would be redetermined to be treated as excluded from gross income to 
reflect the nonrecognition of M's gain under section 355(c), S's gain 
remains capital gain because M's unrecognized gain under section 355(c) 
is not permanently and explicitly disallowed under the Code. See 
paragraph (c)(6)(ii) of this section. Because M's distribution of the T 
stock is not an intercompany transaction, relief is not available under 
paragraph (f)(5)(ii) of this section.
    (c) Section 355 distribution within the group. The facts are the 
same as under paragraph (a) of this Example 6, except that M distributes 
the T stock to B (another member of the group), and B takes a $75 basis 
in the T stock under section 358. Under paragraph (j)(2) of this 
section, B is a successor to M for purposes of taking S's intercompany 
gain into account, and therefore both M and B might have corresponding 
items with respect to S's intercompany gain. To the extent it is 
possible, matching with respect to B's corresponding items produces the 
result most consistent with treating S, M, and B as divisions of a 
single corporation. See paragraphs (j)(3) and (j)(4) of this section. 
However, because there is only $5 difference between B's $75 basis in 
the T stock and the $70 basis the stock would have if S, M, and B were 
divisions of a single corporation, only $5 can be taken into account 
under the matching rule with respect to B's corresponding items. (This 
$5 is taken into account with respect to B's corresponding items based 
on subsequent events.) The remaining $25 of S's $30 intercompany gain is 
taken into account in Year 6 under the matching rule with respect to M's 
corresponding item from its distribution of the T stock. The attributes 
of S's remaining $25 of gain are determined in the same manner as in 
paragraph (b) of this Example 6.

[[Page 212]]

    (d) Relief elected. The facts are the same as in paragraph (c) of 
this Example 6 except that P elects relief pursuant to paragraph 
(f)(5)(ii)(D) of this section. As a result of the election, M's 
distribution of the T stock is treated as subject to sections 301 and 
311 instead of section 355. Accordingly, M recognizes $50 of 
intercompany gain from the distribution, B takes a basis in the stock 
equal to its fair market value of $150, and S and M take their 
intercompany gains into account with respect to B's corresponding items 
based on subsequent events. (None of S's gain is taken into account in 
Year 6 as a result of M's distribution of the T stock.)

    (g) Obligations of members--(1) In general. In addition to the 
general rules of this section, the rules of this paragraph (g) apply to 
intercompany obligations.
    (2) Definitions. For purposes of this section--
    (i) Obligation of a member. An obligation of a member is--
    (A) Any obligation of the member constituting indebtedness under 
general principles of Federal income tax law (for example, under 
nonstatutory authorities, or under section 108, section 163, section 
171, or section 1275), but not an executory obligation to purchase or 
provide goods or services; and
    (B) Any security of the member described in section 475(c)(2)(D) or 
(E), and any comparable security with respect to commodities, but not if 
the security is a position with respect to the member's stock. See 
paragraphs (f)(4) and (6) of this section for special rules applicable 
to positions with respect to a member's stock.
    (ii) Intercompany obligations. An intercompany obligation is an 
obligation between members, but only for the period during which both 
parties are members.
    (3) Deemed satisfaction and reissuance of intercompany obligations--
(i) Application--(A) In general. If a member realizes an amount (other 
than zero) of income, gain, deduction, or loss, directly or indirectly, 
from the assignment or extinguishment of all or part of its remaining 
rights or obligations under an intercompany obligation, the intercompany 
obligation is treated for all Federal income tax purposes as satisfied 
under paragraph (g)(3)(ii) of this section and, if it remains 
outstanding, reissued under paragraph (g)(3)(iii) of this section. 
Similar principles apply under this paragraph (g)(3) if a member 
realizes any such amount, directly or indirectly, from a comparable 
transaction (for example, a marking-to-market of an obligation or a bad 
debt deduction), or if an intercompany obligation becomes an obligation 
that is not an intercompany obligation.
    (B) Exceptions. This paragraph (g)(3) does not apply to an 
obligation if any of the following applies:
    (1) The obligation became an intercompany obligation by reason of an 
event described in Sec. 1.108-2(e) (exceptions to the application of 
section 108(e)(4)).
    (2) The amount realized is from reserve accounting under section 585 
or section 593 (see paragraph (g)(3)(iv) of this section for special 
rules).
    (3) The amount realized is from the conversion of an obligation into 
stock of the obligor.
    (4) Treating the obligation as satisfied and reissued will not have 
a significant effect on any person's Federal income tax liability for 
any year. For this purpose, obligations issued in connection with the 
same transaction or related transactions are treated as a single 
obligation. However, this paragraph (g)(3)(i)(B)(4) does not apply to 
any obligation if the aggregate effect of this treatment for all 
obligations in a year would be significant.
    (ii) Satisfaction--(A) General rule. If a creditor member sells 
intercompany debt for cash, the debt is treated as satisfied by the 
debtor immediately before the sale for the amount of the cash. For other 
transactions, similar principles apply to treat the intercompany debt as 
satisfied immediately before the transaction. Thus, if the debt is 
transferred for property, it is treated as satisfied for an amount 
consistent with the amount for which the debt is deemed reissued under 
paragraph (g)(3)(iii) of this section, and the basis of the property is 
also adjusted to reflect that amount. If this paragraph (g)(3) applies 
because the debtor or creditor becomes a nonmember, the obligation is 
treated as satisfied for cash in an amount equal to its fair market 
value immediately before the debtor or creditor becomes a nonmember. 
Similar principles apply to intercompany obligations other than debt.

[[Page 213]]

    (B) Timing and attributes. For purposes of applying the matching 
rule and the acceleration rule--
    (1) Paragraph (c)(6)(ii) of this section (limitation on treatment of 
intercompany income or gain as excluded from gross income) does not 
apply to prevent any intercompany income or gain from being excluded 
from gross income; and
    (2) Any gain or loss from an intercompany obligation is not subject 
to section 108(a), section 354 or section 1091.
    (iii) Reissuance. If a creditor member sells intercompany debt for 
cash, the debt is treated as a new debt (with a new holding period) 
issued by the debtor immediately after the sale for the amount of cash. 
For other transactions, if the intercompany debt remains outstanding, 
similar principles apply to treat the debt as reissued immediately after 
the transaction. Thus, if the debt is transferred for property, it is 
treated as new debt issued for the property. See, for example, section 
1273(b)(3) or section 1274. If this paragraph (g)(3) applies because the 
debtor or creditor becomes a nonmember, the debt is treated as new debt 
issued for an amount of cash equal to its fair market value immediately 
after the debtor or creditor becomes a nonmember. Similar principles 
apply to intercompany obligations other than debt.
    (iv) Bad debt reserve. A member's deduction under section 585 or 
section 593 for an addition to its reserve for bad debts with respect to 
an intercompany obligation is not taken into account, and is not treated 
as realized under this paragraph (g)(3) until the intercompany 
obligation becomes an obligation that is not an intercompany obligation, 
or, if earlier, the redemption or cancellation of the intercompany 
obligation.
    (4) Deemed satisfaction and reissuance of obligations becoming 
intercompany obligations--(i) Application--(A) In general. This 
paragraph (g)(4) applies if an obligation that is not an intercompany 
obligation becomes an intercompany obligation.
    (B) Exceptions. This paragraph (g)(4) does not apply to an 
obligation if--
    (1) The obligation becomes an intercompany obligation by reason of 
an event described in Sec. 1.108-2(e) (exceptions to the application of 
section 108(e)(4)); or
    (2) Treating the obligation as satisfied and reissued will not have 
a significant effect on any person's Federal income tax liability for 
any year. For this purpose, obligations issued in connection with the 
same transaction or related transactions are treated as a single 
obligation. However, this paragraph (g)(4)(i)(B)(2) does not apply to 
any obligation if the aggregate effect of this treatment for all 
obligations in a year would be significant.
    (ii) Intercompany debt. If this paragraph (g)(4) applies to an 
intercompany debt--
    (A) Section 108(e)(4) does not apply;
    (B) The debt is treated for all Federal income tax purposes, 
immediately after it becomes an intercompany debt, as satisfied and a 
new debt issued to the holder (with a new holding period) in an amount 
determined under the principles of Sec. 1.108-2(f);
    (C) The attributes of all items taken into account from the 
satisfaction are determined on a separate entity basis, rather than by 
treating S and B as divisions of a single corporation;
    (D) Any intercompany gain or loss taken into account is treated as 
not subject to section 354 or section 1091; and
    (E) Solely for purposes of Sec. 1.1502-32(b)(4) and the effect of 
any election under that provision, any loss taken into account under 
this paragraph (g)(4) by a corporation that becomes a member as a result 
of the transaction in which the obligation becomes an intercompany 
obligation is treated as a loss carryover from a separate return 
limitation year.
    (iii) Other intercompany obligations. If this paragraph (g)(4) 
applies to an intercompany obligation other than debt, the principles of 
paragraph (g)(4)(ii) of this section apply to treat the intercompany 
obligation as satisfied and reissued for an amount of cash equal to its 
fair market value immediately after the obligation becomes an 
intercompany obligation.
    (5) Examples. The application of this section to obligations of 
members is illustrated by the following examples.


[[Page 214]]


    Example 1. Interest on intercompany debt. (a) Facts. On January 1 of 
Year 1, B borrows $100 from S in return for B's note providing for $10 
of interest annually at the end of each year, and repayment of $100 at 
the end of Year 5. B fully performs its obligations. Under their 
separate entity methods of accounting, B accrues a $10 interest 
deduction annually under section 163, and S accrues $10 of interest 
income annually under section 61(a)(4).
    (b) Matching rule. Under paragraph (b)(1) of this section, the 
accrual of interest on B's note is an intercompany transaction. Under 
the matching rule, S takes its $10 of income into account in each of 
Years 1 through 5 to reflect the $10 difference between B's $10 of 
interest expense taken into account and the $0 recomputed expense. S's 
income and B's deduction are ordinary items. (Because S's intercompany 
item and B's corresponding item would both be ordinary on a separate 
entity basis, the attributes are not redetermined under paragraph 
(c)(1)(i) of this section.)
    (c) Original issue discount. The facts are the same as in paragraph 
(a) of this Example 1, except that B borrows $90 (rather than $100) from 
S in return for B's note providing for $10 of interest annually and 
repayment of $100 at the end of Year 5. The principles described in 
paragraph (b) of this Example 1 for stated interest also apply to the 
$10 of original issue discount. Thus, as B takes into account its 
corresponding expense under section 163(e), S takes into account its 
intercompany income. S's income and B's deduction are ordinary items.
    (d) Tax-exempt income. The facts are the same as in paragraph (a) of 
this Example 1, except that B's borrowing from S is allocable under 
section 265 to B's purchase of state and local bonds to which section 
103 applies. The timing of S's income is the same as in paragraph (b) of 
this Example 1. Under paragraph (c)(4)(i) of this section, the 
attributes of B's corresponding item of disallowed interest expense 
control the attributes of S's offsetting intercompany interest income. 
Paragraph (c)(6)(ii) of this section does not prevent the 
redetermination of S's intercompany item as excluded from gross income, 
because section 265 permanently and explicitly disallows B's 
corresponding deduction. Accordingly, S's intercompany income is treated 
as excluded from gross income.
    Example 2. Intercompany debt becomes nonintercompany debt. (a) 
Facts. On January 1 of Year 1, B borrows $100 from S in return for B's 
note providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of Year 20. As of January 1 of Year 3, B 
has paid the interest accruing under the note and S sells B's note to X 
for $70, reflecting a change in the value of the note as a result of 
increases in prevailing market interest rates. B is never insolvent 
within the meaning of section 108(d)(3).
    (b) Deemed satisfaction. Under paragraph (g)(3) of this section, B's 
note is treated as satisfied for $70 immediately before S's sale to X. 
As a result of the deemed satisfaction of the obligation for less than 
its adjusted issue price, B takes into account $30 of discharge of 
indebtedness income under section 61(a)(12). On a separate entity basis, 
S's $30 loss would be a capital loss under section 1271(a)(1). Under the 
matching rule, however, the attributes of S's intercompany item and B's 
corresponding item must be redetermined to produce the same effect as if 
the transaction had occurred between divisions of a single corporation. 
B's corresponding item completely offsets S's intercompany item in 
amount. Accordingly, under paragraph (c)(4)(i) of this section, the 
attributes of B's $30 of discharge of indebtedness income control the 
attributes of S's loss. Thus, S's loss is treated as ordinary loss.
    (c) Deemed reissuance. Under paragraph (g)(3) of this section, B is 
also treated as reissuing, directly to X, a new note with a $70 issue 
price and a $100 stated redemption price at maturity. The new note is 
not an intercompany obligation, it has a $70 issue price and $100 stated 
redemption price at maturity, and the $30 of original issue discount 
will be taken into account by B and X under sections 163(e) and 1272.
    (d) Creditor deconsolidation. The facts are the same as in paragraph 
(a) of this Example 2, except that P sells S's stock to X (rather than 
S's selling the note of B). Under paragraph (g)(3) of this section, the 
note is treated as satisfied by B for its $70 fair market value 
immediately before S becomes a nonmember, and B is treated as reissuing 
a new note to S immediately after S becomes a nonmember. The results for 
S's $30 of loss and B's discharge of indebtedness income are the same as 
in paragraph (b) of this Example 2. The new note is not an intercompany 
obligation, it has a $70 issue price and $100 stated redemption price at 
maturity, and the $30 of original issue discount will be taken into 
account by B and S under sections 163(e) and 1272.
    (e) Debtor deconsolidation. The facts are the same as in paragraph 
(a) of this Example 2, except that P sells B's stock to X (rather than 
S's selling the note of B). The results are the same as in paragraph (d) 
of this Example 2.
    (f) Appreciated note. The facts are the same as in paragraph (a) of 
this Example 2, except that S sells B's note to X for $130 (rather than 
$70), reflecting a decline in prevailing market interest rates. Under 
paragraph (g)(3) of this section, B's note is treated as satisfied for 
$130 immediately before S's sale of the note to X. Under Sec. 1.163-
7(c), B takes into account $30 of repurchase premium. On a separate 
entity basis, S's $30 gain would be a

[[Page 215]]

capital gain under section 1271(a)(1), and B's $30 premium deduction 
would be an ordinary deduction. Under the matching rule, however, the 
attributes of S's intercompany item and B's corresponding item must be 
redetermined to produce the same effect as if the transaction had 
occurred between divisions of a single corporation. Under paragraph 
(c)(4)(i) of this section, the attributes of B's corresponding premium 
deduction control the attributes of S's intercompany gain. Accordingly, 
S's gain is treated as ordinary income. B is also treated as reissuing a 
new note directly to X which is not an intercompany obligation. The new 
note has a $130 issue price and a $100 stated redemption price at 
maturity. Under Sec. 1.61-12(c), B's $30 premium income under the new 
note is taken into account over the life of the new note.
    Example 3. Loss or bad debt deduction with respect to intercompany 
debt. (a) Facts. On January 1 of Year 1, B borrows $100 from S in return 
for B's note providing for $10 of interest annually at the end of each 
year, and repayment of $100 at the end of Year 5. In Year 3, S sells B's 
note to P for $60. B is never insolvent within the meaning of section 
108(d)(3). Assume B's note is not a security within the meaning of 
section 165(g)(2).
    (b) Deemed satisfaction and reissuance. Under paragraph (g)(3) of 
this section, B is treated as satisfying its note for $60 immediately 
before the sale, and reissuing a new note directly to P with a $60 issue 
price and a $100 stated redemption price at maturity. On a separate 
entity basis, S's $40 loss would be a capital loss, and B's $40 income 
would be ordinary income. Under the matching rule, however, the 
attributes of S's intercompany item and B's corresponding item must be 
redetermined to produce the same effect as if the transaction had 
occurred between divisions of a single corporation. Under paragraph 
(c)(4)(i) of this section, the attributes of B's corresponding discharge 
of indebtedness income control the attributes of S's intercompany loss. 
Accordingly, S's loss is treated as ordinary loss.
    (c) Partial bad debt deduction. The facts are the same as in 
paragraph (a) of this Example 3, except that S claims a $40 partial bad 
debt deduction under section 166(a)(2) (rather than selling the note to 
P). The results are the same as in paragraph (b) of this Example 3. B's 
note is treated as satisfied and reissued with a $60 issue price. S's 
$40 intercompany deduction and B's $40 corresponding income are both 
ordinary.
    (d) Insolvent debtor. The facts are the same as in paragraph (a) of 
this Example 3, except that B is insolvent within the meaning of section 
108(d)(3) at the time that S sells the note to P. On a separate entity 
basis, S's $40 loss would be capital, B's $40 income would be excluded 
from gross income under section 108(a), and B would reduce attributes 
under section 108(b) or section 1017. However, under paragraph 
(g)(3)(ii)(B) of this section, section 108(a) does not apply to B's 
income to characterize it as excluded from gross income. Accordingly, 
the attributes of S's intercompany loss and B's corresponding income are 
redetermined in the same manner as in paragraph (b) of this Example 3.
    Example 4. Nonintercompany debt becomes intercompany debt. (a) 
Facts. On January 1 of Year 1, B borrows $100 from X in return for B's 
note providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of Year 5. As of January 1 of Year 3, B has 
fully performed its obligations, but the note's fair market value is 
$70. On January 1 of Year 3, P buys all of X's stock. B is solvent 
within the meaning of section 108(d)(3).
    (b) Deemed satisfied and reissuance. Under paragraph (g)(4) of this 
section, B is treated as satisfying its indebtedness for $70 (determined 
under the principles of Sec. 1.108-2(f)(2)) immediately after X becomes 
a member. Both X's $30 capital loss under section 1271(a)(1) and B's $30 
of discharge of indebtedness income under section 61(a)(12) are taken 
into account in determining consolidated taxable income for Year 3. 
Under paragraph (g)(4)(ii)(C) of this section, the attributes of items 
resulting from the satisfaction are determined on a separate entity 
basis. But see section 382 and Sec. 1.1502-15T (or Sec. 1.1502-15A, as 
appropriate) (limitations on the absorption of built-in losses). B is 
also treated as reissuing a new note. The new note is an intercompany 
obligation, it has a $70 issue price and $100 stated redemption price at 
maturity, and the $30 of original issue discount will be taken into 
account by B and X in the same manner as provided in paragraph (c) of 
Example 1 of this paragraph (g)(5).
    (c) Election to file consolidated returns. Assume instead that B 
borrows $100 from S during Year 1, but the P group does not file 
consolidated returns until Year 3. Under paragraph (g)(4) of this 
section, B's indebtedness is treated as satisfied and a new note 
reissued immediately after the debt becomes intercompany debt. The 
satisfaction and reissuance are deemed to occur on January 1 of Year 3, 
for the fair market value of the note (determined under the principles 
of Sec. 1.108-2(f)(2)) at that time.
    Example 5. Notional principal contracts. (a) Facts. On April 1 of 
Year 1, M1 enters into a contract with counterparty M2 under which, for 
a term of five years, M1 is obligated to make a payment to M2 each April 
1, beginning in Year 2, in an amount equal to the London Interbank 
Offered Rate (LIBOR), as determined on the immediately preceding April 
1, multiplied by a $1,000 notional principal amount. M2 is obligated to 
make a payment to M1 each April 1, beginning in Year 2, in an amount 
equal to 8% multiplied by the same notional principal amount. LIBOR

[[Page 216]]

is 7.80% on April 1 of Year 1. On April 1 of Year 2, M2 owes $2 to M1.
    (b) Matching rule. Under Sec. 1.446-3(d), the net income (or net 
deduction) from a notional principal contract for a taxable year is 
included in (or deducted from) gross income. Under Sec. 1.446-3(e), the 
ratable daily portion of M2's obligation to M1 as of December 31 of Year 
1 is $1.50 ($2 multiplied by 275/365). Under the matching rule, M1's net 
income for Year 1 of $1.50 is taken into account to reflect the 
difference between M2's net deduction of $1.50 taken into account and 
the $0 recomputed net deduction. Similarly, the $.50 balance of the $2 
of net periodic payments made on April 1 of Year 2 is taken into account 
for Year 2 in M1's and M2's net income and net deduction from the 
contract. In addition, the attributes of M1's intercompany income and 
M2's corresponding deduction are redetermined to produce the same effect 
as if the transaction had occurred between divisions of a single 
corporation. Under paragraph (c)(4)(i) of this section, the attributes 
of M2's corresponding deduction control the attributes of M1's 
intercompany income. (Although M1 is the selling member with respect to 
the payment on April 1 of Year 2, it might be the buying member in a 
subsequent period if it owes the net payment.)
    (c) Dealer. The facts are the same as in paragraph (a) of this 
Example 5, except that M2 is a dealer in securities, and the contract 
with M1 is not inventory in the hands of M2. Under section 475, M2 must 
mark its securities to market at year-end. Assume that under section 
475, M2's loss from marking to market the contract with M1 is $100. 
Under paragraph (g)(3) of this section, M2 is treated as making a $100 
payment to M1 to terminate the contract immediately before section 475 
is applied. M1's $100 of income from the termination payment is taken 
into account under the matching rule to reflect M2's deduction under 
Sec. 1.446-3(h). The attributes of M1's intercompany income and M2's 
corresponding deduction are redetermined to produce the same effect as 
if the transaction had occurred between divisions of a single 
corporation. Under paragraph (c)(4)(i) of this section, the attributes 
of M2's corresponding deduction control the attributes of M1's 
intercompany income. Accordingly, M1's income is treated as ordinary 
income. Paragraph (g)(3) of this section also provides that, immediately 
after section 475 would apply, a new contract is treated as reissued 
with an upfront payment of $100. Under Sec. 1.446-3(f), the deemed $100 
up front payment by M1 to M2 is taken into account over the term of the 
new contract in a manner reflecting the economic substance of the 
contract (for example, allocating the payment in accordance with the 
forward rates of a series of cash-settled forward contracts that reflect 
the specified index and the $1,000 notional principal amount). (The 
timing of taking items into account is the same if M1, rather than M2, 
is the dealer subject to the mark-to-market requirement of section 475 
at year-end. However in this case, because the attributes of the 
corresponding deduction control the attributes of the intercompany 
income, M1's income from the deemed termination payment might be 
ordinary or capital.)

    (h) Anti-avoidance rules--(1) In general. If a transaction is 
engaged in or structured with a principal purpose to avoid the purposes 
of this section (including, for example, by avoiding treatment as an 
intercompany transaction), adjustments must be made to carry out the 
purposes of this section.
    (2) Examples. The anti-avoidance rules of this paragraph (h) are 
illustrated by the following examples. The examples set forth below do 
not address common law doctrines or other authorities that might apply 
to recast a transaction or to otherwise affect the tax treatment of a 
transaction. Thus, in addition to adjustments under this paragraph (h), 
the Commissioner can, for example, apply the rules of section 269 or 
Sec. 1.701-2 to disallow a deduction or to recast a transaction.

    Example 1. Sale of a partnership interest. (a) Facts. S owns land 
with a $10 basis and $100 value. B has net operating losses from 
separate return limitation years (SRLYs) subject to limitation under 
Sec. 1.1502-21T(c). Pursuant to a plan to absorb the losses without 
limitation by the SRLY rules, S transfers the land to an unrelated, 
calendar-year partnership in exchange for a 10% interest in the capital 
and profits of the partnership in a transaction to which section 721 
applies. The partnership does not have a section 754 election in effect. 
S later sells its partnership interest to B for $100. In the following 
year, the partnership sells the land to X for $100. Because the 
partnership does not have a section 754 election in effect, its $10 
basis in the land does not reflect B's $100 basis in the partnership 
interest. Under section 704(c), the partnership's $90 built-in gain is 
allocated to B, and B's basis in the partnership interest increases to 
$190 under section 705. In a later year, B sells the partnership 
interest to a nonmember for $100.
    (b) Adjustments. Under Sec. 1.1502-21T(c), the partnership's $90 
built-in gain allocated to B ordinarily increases the amount of B's SRLY 
limitation, and B's $90 loss from its sale of the partnership interest 
ordinarily is not subject to limitation under the SRLY rules. Because 
the contribution of property to the partnership and the sale of the 
partnership

[[Page 217]]

interest were part of a plan a principal purpose of which was to achieve 
a reduction in consolidated tax liability by creating offsetting gain 
and loss for B while deferring S's intercompany gain, B's allocable 
share of the partnership's gain from its sale of the land is treated 
under paragraph (h)(1) of this section as not increasing the amount of 
B's SRLY limitation.
    Example 2. Transitory status as an intercompany obligation. (a) 
Facts. P historically has owned 70% of X's stock and the remaining 30% 
is owned by unrelated shareholders. On January 1 of Year 1, S borrows 
$100 from X in return for S's note requiring $10 of interest annually at 
the end of each year, and repayment of $100 at the end of Year 20. As of 
January 1 of Year 3, the P group has substantial net operating loss 
carryovers, and the fair market value of S's note falls to $70 due to an 
increase in prevailing market interest rates. X is not permitted under 
section 166(a)(2) to take into account a $30 loss with respect to the 
note. Pursuant to a plan to permit X to take into account its $30 loss 
without disposing of the note, P acquires an additional 10% of X's 
stock, causing X to become a member, and P subsequently resells the 10% 
interest. X's $30 loss with respect to the note is a net unrealized 
built-in loss within the meaning of Sec. 1.1502-15T.
    (b) Adjustments. Under paragraph (g)(4) of this section, X 
ordinarily would take into account its $30 loss as a result of the note 
becoming an intercompany obligation, and S would take into account $30 
of discharge of indebtedness income. Under Sec. 1.1502-22T, X's loss is 
not combined with items of the other members and the loss would be 
carried to X's separate return years as a result of X becoming a 
nonmember. However, the transitory status of S's indebtedness to X as an 
intercompany obligation is structured with a principal purpose to 
accelerate the recognition of X's loss. Thus, S's note is treated under 
paragraph (h)(1) of this section as not becoming an intercompany 
obligation.
    Example 3. Corporate mixing bowl. (a) Facts. M1 and M2 are 
subsidiaries of P. M1 operates a manufacturing business on land it 
leases from M2. The land is the only asset held by M2. P intends to 
dispose of the M1 business, including the land owned by M2; P's basis in 
the M1 stock is equal to the stock's fair market value. M2's land has a 
value of $20 and a basis of $0 and P has a $0 basis in the stock of M2. 
In Year 1, with a principal purpose of avoiding gain from the sale of 
the land (by transferring the land to M1 with a carry-over basis without 
affecting P's basis in the stock of M1 or M2), M1 and M2 form 
corporation T; M1 contributes cash in exchange for 80% of the T stock 
and M2 contributes the land in exchange for 20% of the stock. In Year 3, 
T liquidates, distributing $20 cash to M2 and the land (plus $60 cash) 
to M1. Under Sec. 1.1502-34, section 332 applies to both M1 and M2. 
Under section 337, T recognizes no gain or loss from its liquidating 
distribution of the land to M1. T has neither gain nor loss on its 
distribution of cash to M2. In Year 4, P sells all of the stock of M1 to 
X and liquidates M2.
    (b) Adjustments. A principal purpose for the formation and 
liquidation of T was to avoid gain from the sale of M2's land. Thus, 
under paragraph (h)(1) of this section, M2 must take $20 of gain into 
account when the stock of M1 is sold to X.
    Example 4. Partnership mixing bowl. (a) Facts. M1 owns a self-
created intangible asset with a $0 basis and a fair market value of 
$100. M2 owns land with a basis of $100 and a fair market value of $100. 
In Year 1, with a principal purpose of creating basis in the intangible 
asset (which would be eligible for amortization under section 197), M1 
and M2 form partnership PRS; M1 contributes the intangible asset and M2 
contributes the land. X, an unrelated person, contributes cash to PRS in 
exchange for a substantial interest in the partnership. PRS uses the 
contributed assets in legitimate business activities. Five years and six 
months later, PRS liquidates, distributing the land to M1, the 
intangible to M2, and cash to X. The group reports no gain under 
sections 707(a)(2)(B) and 737(a) and claims that M2's basis in the 
intangible asset is $100 under section 732 and that the asset is 
eligible for amortization under section 197.
    (b) Adjustments. A principal purpose of the formation and 
liquidation of PRS was to create additional amortization without an 
offsetting increase in consolidated taxable income by avoiding treatment 
as an intercompany transaction. Thus, under paragraph (h)(1) of this 
section, appropriate adjustments must be made.
    Example 5. Sale and leaseback. (a) Facts. S operates a factory with 
a $70 basis and $100 value, and has loss carryovers from SRLYs. Pursuant 
to a plan to take into account the $30 unrealized gain while continuing 
to operate the factory, S sells the factory to X for $100 and leases it 
back on a long-term basis. In the transaction, a substantial interest in 
the factory is transferred to X. The sale and leaseback are not 
recharacterized under general principles of Federal income tax law. As a 
result of S's sale to X, the $30 gain is taken into account and 
increases S's SRLY limitation.
    (b) No adjustments. Although S's sale was pursuant to a plan to 
accelerate the $30 gain, it is not subject to adjustment under paragraph 
(h)(1) of this section. The sale is not treated as engaged in or 
structured with a principal purpose to avoid the purposes of this 
section.

    (i) [Reserved]
    (j) Miscellaneous operating rules. For purposes of this section--
    (1) Successor assets. Any reference to an asset includes, as the 
context may

[[Page 218]]

require, a reference to any other asset the basis of which is 
determined, directly or indirectly, in whole or in part, by reference to 
the basis of the first asset.
    (2) Successor persons--(i) In general. Any reference to a person 
includes, as the context may require, a reference to a predecessor or 
successor. For this purpose, a predecessor is a transferor of assets to 
a transferee (the successor) in a transaction--
    (A) To which section 381(a) applies;
    (B) In which substantially all of the assets of the transferor are 
transferred to members in a complete liquidation;
    (C) In which the successor's basis in assets is determined (directly 
or indirectly, in whole or in part) by reference to the basis of the 
transferor, but the transferee is a successor only with respect to the 
assets the basis of which is so determined; or
    (D) Which is an intercompany transaction, but only with respect to 
assets that are being accounted for by the transferor in a prior 
intercompany transaction.
    (ii) Intercompany items. If the assets of a predecessor are acquired 
by a successor member, the successor succeeds to, and takes into account 
(under the rules of this section), the predecessor's intercompany items. 
If two or more successor members acquire assets of the predecessor, the 
successors take into account the predecessor's intercompany items in a 
manner that is consistently applied and reasonably carries out the 
purposes of this section and applicable provisions of law.
    (3) Multiple triggers. If more than one corresponding item can cause 
an intercompany item to be taken into account under the matching rule, 
the intercompany item is taken into account in connection with the 
corresponding item most consistent with the treatment of members as 
divisions of a single corporation. For example, if S sells a truck to B, 
its intercompany gain from the sale is not taken into account by 
reference to B's depreciation if the depreciation is capitalized under 
section 263A as part of B's cost for a building; instead, S's gain 
relating to the capitalized depreciation is taken into account when the 
building is sold or as it is depreciated. Similarly, if B purchases 
appreciated land from S and transfers the land to a lower-tier member in 
exchange for stock, thereby duplicating the basis of the land in the 
basis of the stock, items with respect to both the stock and the land 
can cause S's intercompany gain to be taken into account; if the lower-
tier member becomes a nonmember as a result of the sale of its stock, 
the attributes of S's intercompany gain are determined with respect to 
the land rather than the stock.
    (4) Multiple or successive intercompany transactions. If a member's 
intercompany item or corresponding item affects the accounting for more 
than one intercompany transaction, appropriate adjustments are made to 
treat all of the intercompany transactions as transactions between 
divisions of a single corporation. For example, if S sells property to 
M, and M sells the property to B, then S, M, and B are treated as 
divisions of a single corporation for purposes of applying the rules of 
this section. Similar principles apply with respect to intercompany 
transactions that are part of the same plan or arrangement. For example, 
if S sells separate properties to different members as part of the same 
plan or arrangement, all of the participating members are treated as 
divisions of a single corporation for purposes of determining the 
attributes (which might also affect timing) of the intercompany items 
and corresponding items from each of the properties.
    (5) Acquisition of group--(i) Scope. This paragraph (j)(5) applies 
only if a consolidated group (the terminating group) ceases to exist as 
a result of--
    (A) The acquisition by a member of another consolidated group of 
either the assets of the common parent of the terminating group in a 
reorganization described in section 381(a)(2), or the stock of the 
common parent of the terminating group; or
    (B) The application of the principles of Sec. 1.1502-75(d)(2) or 
(d)(3).
    (ii) Application. If the terminating group ceases to exist under 
circumstances described in paragraph (j)(5)(i) of this section, the 
surviving group is treated as the terminating group for purposes of 
applying this section to the intercompany transactions

[[Page 219]]

of the terminating group. For example, intercompany items and 
corresponding items from intercompany transactions between members of 
the terminating group are taken into account under the rules of this 
section by the surviving group. This treatment does not apply, however, 
to members of the terminating group that are not members of the 
surviving group immediately after the terminating group ceases to exist 
(for example, under section 1504(a)(3) relating to reconsolidation, or 
section 1504(c) relating to includible insurance companies).
    (6) Former common parent treated as continuation of group. If a 
group terminates because the common parent is the only remaining member, 
the common parent succeeds to the treatment of the terminating group for 
purposes of applying this section so long as it neither becomes a member 
of an affiliated group filing separate returns nor becomes a corporation 
described in section 1504(b). For example, if the only subsidiary of the 
group liquidates into the common parent in a complete liquidation to 
which section 332 applies, or the common parent merges into the 
subsidiary and the subsidiary is treated as the common parent's 
successor under paragraph (j)(2)(i) of this section, the taxable income 
of the surviving corporation is treated as the group's consolidated 
taxable income in which the intercompany and corresponding items must be 
included. See Sec. 1.267(f)-1 for additional rules applicable to 
intercompany losses or deductions.
    (7) Becoming a nonmember. For purposes of this section, a member is 
treated as becoming a nonmember if it has a separate return year 
(including another group's consolidated return year). A member is not 
treated as having a separate return year if its items are treated as 
taken into account in computing the group's consolidated taxable income 
under paragraph (j)(5) or (6) of this section.
    (8) Recordkeeping. Intercompany and corresponding items must be 
reflected on permanent records (including work papers). See also section 
6001, requiring records to be maintained. The group must be able to 
identify from these permanent records the amount, location, timing, and 
attributes of the items, so as to permit the application of the rules of 
this section for each year.
    (9) Examples. The operating rules of this paragraph (j) are 
illustrated generally throughout this section, and by the following 
examples.

    Example 1. Intercompany sale followed by section 351 transfer to 
member. (a) Facts. S holds land for investment with a basis of $70. On 
January 1 of Year 1, S sells the land to M for $100. M also holds the 
land for investment. On July 1 of Year 3, M transfers the land to B in 
exchange for all of B's stock in a transaction to which section 351 
applies. Under section 358, M's basis in the B stock is $100. B holds 
the land for sale to customers in the ordinary course of business and, 
under section 362(b), B's basis in the land is $100. On December 1 of 
Year 5, M sells 20% of the B stock to X for $22. In an unrelated 
transaction on July 1 of Year 8, B sells 20% of the land for $22.
    (b) Definitions. Under paragraph (b)(1) of this section, S's sale of 
the land to M and M's transfer of the land to B are both intercompany 
transactions. S is the selling member and M is the buying member in the 
first intercompany transaction, and M is the selling member and B is the 
buying member in the second intercompany transaction. M has no 
intercompany items under paragraph (b)(2) of this section. Because B 
acquired the land in an intercompany transaction, B's items from the 
land are corresponding items to be taken into account under this 
section. Under the successor asset rule of paragraph (j)(1) of this 
section, references to the land include references to M's B stock. Under 
the successor person rule of paragraph (j)(2) of this section, 
references to M include references to B with respect to the land.
    (c) Timing and attributes resulting from the stock sale. Under 
paragraph (c)(3) of this section, M is treated as owning and selling B's 
stock for purposes of the matching rule even though, as divisions, M 
could not own and sell stock in B. Under paragraph (j)(3) of this 
section, both M's B stock and B's land can cause S's intercompany gain 
to be taken into account under the matching rule. Thus, S takes $6 of 
its gain into account in Year 5 to reflect the $6 difference between M's 
$2 gain taken into account from its sale of B stock and the $8 
recomputed gain. Under paragraph (j)(4) of this section, the attributes 
of this gain are determined by treating S, M, and B as divisions of a 
single corporation. Under paragraph (c)(1) of this section, S's $6 gain 
and M's $2 gain are treated as long-term capital gain. The gain would be 
capital on a separate entity basis (assuming that section 341 does not 
apply), and this treatment is not inconsistent with treating S, M, and B 
as divisions of a single corporation because the

[[Page 220]]

stock sale and subsequent land sale are unrelated transactions and B 
remains a member following the sale.
    (d) Timing and attributes resulting from the land sale. Under 
paragraph (j)(3) of this section, S takes $6 of its gain into account in 
Year 8 under the matching rule to reflect the $6 difference between B's 
$2 gain taken into account from its sale of an interest in the land and 
the $8 recomputed gain. Under paragraph (j)(4) of this section, the 
attributes of this gain are determined by treating S, M, and B as 
divisions of a single corporation and taking into account the activities 
of S, M, and B with respect to the land. Thus, both S's gain and B's 
gain might be ordinary income as a result of B's activities. (If B 
subsequently sells the balance of the land, S's gain taken into account 
is limited to its remaining $18 of intercompany gain.)
    (e) Sale of successor stock resulting in deconsolidation. The facts 
are the same as in paragraph (a) of this Example 1, except that M sells 
60% of the B stock to X for $66 on December 1 of Year 5 and B becomes a 
nonmember. Under the matching rule, M's sale of B stock results in $18 
of S's gain being taken into account (to reflect the difference between 
M's $6 gain taken into account and the $24 recomputed gain). Under the 
acceleration rule, however, the entire $30 gain is taken into account 
(to reflect B becoming a nonmember, because its basis in the land 
reflects M's $100 cost basis from the prior intercompany transaction). 
Under paragraph (j)(4) of this section, the attributes of S's gain are 
determined by treating S, M, and B as divisions of a single corporation. 
Because M's cost basis in the land will be reflected by B as a 
nonmember, all of S's gain is treated as from the land (rather than a 
portion being from B's stock), and B's activities with respect to the 
land might therefore result in S's gain being ordinary income.
    Example 2. Intercompany sale of member stock followed by 
recapitalization. (a) Facts. Before becoming a member of the P group, S 
owns P stock with a basis of $70. On January 1 of Year 1, P buys all of 
S's stock. On July 1 of Year 3, S sells the P stock to M for $100. On 
December 1 of Year 5, P acquires M's original P stock in exchange for 
new P stock in a recapitalization described in section 368(a)(1)(E).
    (b) Timing and attributes. Although P's basis in the stock acquired 
from M is eliminated under paragraph (f)(4) of this section, the new P 
stock received by M is exchanged basis property (within the meaning of 
section 7701(a)(44)) having a basis under section 358 equal to M's basis 
in the original P stock. Under the successor asset rule of paragraph 
(j)(1) of this section, references to M's original P stock include 
references to M's new P stock. Because it is still possible to take S's 
intercompany item into account under the matching rule with respect to 
the successor asset, S's gain is not taken into account under the 
acceleration rule as a result of the basis elimination under paragraph 
(f)(4) of this section. Instead, the gain is taken into account based on 
subsequent events with respect to M's new P stock (for example, a 
subsequent distribution or redemption of the new stock).
    Example 3. Back-to-back intercompany transactions--matching. (a) 
Facts. S holds land for investment with a basis of $70. On January 1 of 
Year 1, S sells the land to M for $90. M also holds the land for 
investment. On July 1 of Year 3, M sells the land for $100 to B, and B 
holds the land for sale to customers in the ordinary course of business. 
During Year 5, B sells all of the land to customers for $105.
    (b) Timing. Under paragraph (b)(1) of this section, S's sale of the 
land to M and M's sale of the land to B are both intercompany 
transactions. S is the selling member and M is the buying member in the 
first intercompany transaction, and M is the selling member and B is the 
buying member in the second intercompany transaction. Under paragraph 
(j)(4) of this section, S, M and B are treated as divisions of a single 
corporation for purposes of determining the timing of their items from 
the intercompany transactions. See also paragraph (j)(2) of this section 
(B is treated as a successor to M for purposes of taking S's 
intercompany gain into account). Thus, S's $20 gain and M's $10 gain are 
both taken into account in Year 5 to reflect the difference between B's 
$5 gain taken into account with respect to the land and the $35 
recomputed gain (the gain that B would have taken into account if the 
intercompany sales had been transfers between divisions of a single 
corporation, and B succeeded to S's $70 basis).
    (c) Attributes. Under paragraphs (j)(4) of this section, the 
attributes of the intercompany items and corresponding items of S, M, 
and B are also determined by treating S, M, and B as divisions of a 
single corporation. For example, the attributes of S's and M's 
intercompany items are determined by taking B's activities into account.
    Example 4. Back-to-back intercompany transactions--acceleration. (a) 
Facts. During Year 1, S performs services for M in exchange for $10 from 
M. S incurs $8 of employee expenses. M capitalizes the $10 cost of S's 
services under section 263 as part of M's cost to acquire real property 
from X. Under its separate entity method of accounting, S would take its 
income and expenses into account in Year 1. M holds the real property 
for investment and, on July 1 of Year 5, M sells it to B at a gain. B 
also holds the real property for investment. On December 1 of Year 8, 
while B still owns the real property, P sells all of M's stock to X and 
M becomes a nonmember.
    (b) M's items. M takes its gain into account immediately before it 
becomes a nonmember. Because the real property stays in the

[[Page 221]]

group, the acceleration rule redetermines the attributes of M's gain 
under the principles of the matching rule as if B sold the real property 
to an affiliated corporation that is not a member of the group for a 
cash payment equal to B's adjusted basis in the real property, and S, M, 
and B were divisions of a single corporation. Thus, M's gain is capital 
gain.
    (c) S's items. Under paragraph (b)(2)(ii) of this section, S 
includes the $8 of expenses in determining its $2 intercompany income. 
In Year 1, S takes into account $8 of income and $8 of expenses. Under 
paragraph (j)(4) of this section, appropriate adjustments must be made 
to treat both S's performance of services for M and M's sale to B as 
occurring between divisions of a single corporation. Thus, S's $2 of 
intercompany income is not taken into account as a result of M becoming 
a nonmember, but instead will be taken into account based on subsequent 
events (e.g., under the matching rule based on B's sale of the real 
property to a nonmember, or under the acceleration rule based on P's 
sale of the stock of S or B to a nonmember). See the successor person 
rules of paragraph (j)(2) of this section (B is treated as a successor 
to M for purposes of taking S's intercompany income into account).
    (d) Sale of S's stock. The facts are the same as in paragraph (a) of 
this Example 4, except that P sells all of S's stock (rather than M's 
stock) and S becomes a nonmember on July 1 of Year 5. S's remaining $2 
of intercompany income is taken into account immediately before S 
becomes a nonmember. Because S's intercompany income is not from an 
intercompany sale, exchange, or distribution of property, the attributes 
of the intercompany income are determined on a separate entity basis. 
Thus, S's $2 of intercompany income is ordinary income. M does not take 
any of its intercompany gain into account as a result of S becoming a 
nonmember.
    (e) Intercompany income followed by intercompany loss. The facts are 
the same as in paragraph (a) of this Example 4, except that M sells the 
real property to B at a $1 loss (rather than a gain). M takes its $1 
loss into account under the acceleration rule immediately before M 
becomes a nonmember. But see Sec. 1.267(f)-1 (which might further defer 
M's loss if M and B remain in a controlled group relationship after M 
becomes a nonmember). Under paragraph (j)(4) of this section appropriate 
adjustments must be made to treat the group as if both intercompany 
transactions occurred between divisions of a single corporation. 
Accordingly, P's sale of M stock also results in S taking into account 
$1 of intercompany income as capital gain to offset M's $1 of 
corresponding capital loss. The remaining $1 of S's intercompany income 
is taken into account based on subsequent events.
    Example 5. Successor group. (a) Facts. On January 1 of Year 1, B 
borrows $100 from S in return for B's note providing for $10 of interest 
annually at the end of each year, and repayment of $100 at the end of 
Year 20. As of January 1 of Year 3, B has paid the interest accruing 
under the note. On that date, X acquires all of P's stock and the former 
P group members become members of the X consolidated group.
    (b) Successor. Under paragraph (j)(5) of this section, although B's 
note ceases to be an intercompany obligation of the P group, the note is 
not treated as satisfied and reissued under paragraph (g) of this 
section as a result of X's acquisition of P stock. Instead, the X 
consolidated group succeeds to the treatment of the P group for purposes 
of paragraph (g) of this section, and B's note is treated as an 
intercompany obligation of the X consolidated group.
    (c) No subgroups. The facts are the same as in paragraph (a) of this 
Example 5, except that X simultaneously acquires the stock of S and B 
from P (rather than X acquiring all of P's stock). Paragraph (j)(5) of 
this section does not apply to X's acquisitions. Unless an exception 
described in paragraph (g)(3)(i)(B) applies, B's note is treated as 
satisfied immediately before S and B become nonmembers, and reissued 
immediately after they become members of the X consolidated group. The 
amount at which the note is satisfied and reissued under paragraph 
(g)(3) of this section is based on the fair market value of the note at 
the time of P's sales to X. Paragraph (g)(4) of this section does not 
apply to the reissued B note in the X consolidated group, because the 
new note is always an intercompany obligation of the X consolidated 
group.
    Example 6. Liquidation--80% distributee. (a) Facts. X has had 
preferred stock described in section 1504(a)(4) outstanding for several 
years. On January 1 of Year 1, S buys all of X's common stock for $60, 
and B buys all of X's preferred stock for $40. X's assets have a $0 
basis and $100 value. On July 1 of Year 3, X distributes all of its 
assets to S and B in a complete liquidation. Under Sec. 1.1502-34, 
section 332 applies to both S and B. Under section 337, X has no gain or 
loss from its liquidating distribution to S. Under sections 336 and 
337(c), X has a $40 gain from its liquidating distribution to B. B has a 
$40 basis under section 334(a) in the assets received from X, and S has 
a $0 basis under section 334(b) in the assets received from X.
    (b) Intercompany items from the liquidation. Under the matching 
rule, X's $40 gain from its liquidating distribution to B is not taken 
into account under this section as a result of the liquidation (and 
therefore is not yet reflected under Secs. 1.1502-32 and 1.1502-33). 
Under the successor person rule of paragraph

[[Page 222]]

(j)(2)(i) of this section, S and B are both successors to X. Under 
section 337(c), X recognizes gain or loss only with respect to the 
assets distributed to B. Under paragraph (j)(2)(ii) of this section, to 
be consistent with the purposes of this section, S succeeds to X's $40 
intercompany gain. The gain will be taken into account by S under the 
matching and acceleration rules of this section based on subsequent 
events. (The allocation of the intercompany gain to S does not govern 
the allocation of any other attributes.)
    Example 7. Liquidation--no 80% distributee. (a) Facts. X has only 
common stock outstanding. On January 1 of Year 1, S buys 60% of X's 
stock for $60, and B buys 40% of X's stock for $40. X's assets have a $0 
basis and $100 value. On July 1 of Year 3, X distributes all of its 
assets to S and B in a complete liquidation. Under Sec. 1.1502-34, 
section 332 applies to both S and B. Under sections 336 and 337(c), X 
has a $100 gain from its liquidating distributions to S and B. Under 
section 334(b), S has a $60 basis in the assets received from X and B 
has a $40 basis in the assets received from X.
    (b) Intercompany items from the liquidation. Under the matching 
rule, X's $100 intercompany gain from its liquidating distributions to S 
and B is not taken into account under this section as a result of the 
liquidation (and therefore is not yet reflected under Secs. 1.1502-32 
and 1.1502-33). Under the successor person rule of paragraph (j)(2)(i) 
of this section, S and B are both successors to X. Under paragraph 
(j)(2)(ii) of this section, to be consistent with the purposes of this 
section, S succeeds to X's $40 intercompany gain with respect to the 
assets distributed to B, and B succeeds to X's $60 intercompany gain 
with respect to the assets distributed to S. The gain will be taken into 
account by S and B under the matching and acceleration rules of this 
section based on subsequent events. (The allocation of the intercompany 
gain does not govern the allocation of any other attributes.)

    (k) Cross references--(1) Section 108. See Sec. 1.108-3 for the 
treatment of intercompany deductions and losses as subject to attribute 
reduction under section 108(b).
    (2) Section 263A(f). See section 263A(f) and Sec. 1.263A-9(g)(5) for 
special rules regarding interest from intercompany transactions.
    (3) Section 267(f). See section 267(f) and Sec. 1.267(f)-1 for 
special rules applicable to certain losses and deductions from 
transactions between members of a controlled group.
    (4) Section 460. See Sec. 1.460-4(j) for special rules regarding the 
application of section 460 to intercompany transactions.
    (5) Section 469. See Sec. 1.469-1(h) for special rules regarding the 
application of section 469 to intercompany transactions.
    (6) Sec. 1.1502-80. See Sec. 1.1502-80 for the non-application of 
certain Internal Revenue Code rules.
    (l) Effective dates--(1) In general. This section applies with 
respect to transactions occurring in years beginning on or after July 
12, 1995. If both this section and prior law apply to a transaction, or 
neither applies, with the result that items may be duplicated, omitted, 
or eliminated in determining taxable income (or tax liability), or items 
may be treated inconsistently, prior law (and not this section) applies 
to the transaction. For example, S's and B's items from S's sale of 
property to B which occurs in a consolidated return year beginning 
before July 12, 1995, are taken into account under prior law, even 
though B may dispose of the property in a consolidated return year 
beginning on or after July 12, 1995. Similarly, an intercompany 
distribution to which a shareholder becomes entitled in a consolidated 
return year beginning before July 12, 1995, but which is distributed in 
a consolidated return year beginning on or after that date is taken into 
account under prior law (generally when distributed), because this 
section generally takes dividends into account when the shareholder 
becomes entitled to them but this section does not apply at that time. 
If application of prior law to S's deferred gain or loss from a deferred 
intercompany transaction (as defined under prior law) occurring in a 
consolidated return year beginning prior to July 12, 1995, would be 
affected by an intercompany transaction (as defined under this section) 
occurring in a consolidated return year beginning on or after July 12, 
1995, S's deferred gain or loss continues to be taken into account as 
provided under prior law, and the items from the subsequent intercompany 
transaction are taken into account under this section. Appropriate 
adjustments must be made to prevent items from being duplicated,omitted, 
or eliminated in determining taxable income as a result of the 
application of

[[Page 223]]

both this section and prior law to the successive transactions, and to 
ensure the proper application of prior law.
    (2) Avoidance transactions. This paragraph (l)(2) applies if a 
transaction is engaged in or structured on or after April 8, 1994, with 
a principal purpose to avoid the rules of this section (and instead to 
apply prior law). If this paragraph (l)(2) applies, appropriate 
adjustments must be made in years beginning on or after July 12, 1995, 
to prevent the avoidance, duplication, omission, or elimination of any 
item (or tax liability), or any other inconsistency with the rules of 
this section. For example, if S is a dealer in real property and sells 
land to B on March 16, 1995 with a principal purpose of converting any 
future appreciation in the land to capital gain, B's gain from the sale 
of the land on May 11, 1997 might be characterized as ordinary income 
under this paragraph (l)(2).
    (3) Election for certain stock elimination transactions--(i) In 
general. A group may elect pursuant to this paragraph (l)(3) to apply 
this section (including the elections available under paragraph 
(f)(5)(ii) of this section) to stock elimination transactions to which 
prior law would otherwise apply. If an election is made, this section, 
and not prior law, applies to determine the timing and attributes of S's 
and B's gain or loss from stock with respect to all stock elimination 
transactions.
    (ii) Stock elimination transactions. For purposes of this paragraph 
(l)(3), a stock elimination transaction is a transaction in which stock 
transferred from S to B--
    (A) Is cancelled or redeemed on or after July 12, 1995;
    (B) Is treated as cancelled in a liquidation pursuant to an election 
under section 338(h)(10) with respect to a qualified stock purchase with 
an acquisition date on or after July 12, 1995;
    (C) Is distributed on or after July 12, 1995; or
    (D) Is exchanged on or after July 12, 1995 for stock of a member 
(determined immediately after the exchange) in a transaction that would 
cause S's gain or loss from the transfer to be taken into account under 
prior law.
    (iii) Time and manner of making election. An election under this 
paragraph (l)(3) is made by attaching to a timely filed original return 
(including extensions) for the consolidated return year including July 
12, 1995 a statement entitled ``[Insert Name and Employer Identification 
Number of Common Parent] HEREBY ELECTS THE APPLICATION OF Sec. 1.1502-
13(l)(3).'' See paragraph (f)(5)(ii)(E) of this section for the manner 
of electing the relief provisions of paragraph (f)(5)(ii) of this 
section.
    (4) Prior law. For transactions occurring in S's years beginning 
before July 12, 1995, see the applicable regulations issued under 
section 1502. See Secs. 1.1502-13, 1.1502-13T, 1.1502-14, 1.1502-14T, 
1.1502-31, and 1.1502-32 (as contained in the 26 CFR part 1 edition 
revised as of April 1, 1995).
    (5) Consent to adopt method of accounting. For intercompany 
transactions occurring in a consolidated group's first taxable year 
beginning on or after July 12, 1995, the Commissioner's consent under 
section 446(e) is hereby granted for any changes in methods of 
accounting that are necessary solely by reason of the timing rules of 
this section. Changes in method of accounting for these transactions are 
to be effected on a cut-off basis.

[T.D. 8597, 60 FR 36685, July 18, 1995, as amended by T.D. 8660, 61 FR 
10449, 10450, Mar. 14, 1996; T.D. 8677, 61 FR 33323, June 27, 1996; T.D. 
8660, 62 FR 12097, Mar. 14, 1997; T.D. 8677, 62 FR 12542, Mar. 17, 1997]



Sec. 1.1502-15T  SRLY limitation on built-in losses (temporary).

    (a) SRLY limitation. Built-in losses are subject to the SRLY 
limitation under Secs. 1.1502-21T(c) and 1.1502-22T(c) (including 
applicable subgroup principles). Built-in losses are treated as 
deductions or losses in the year recognized, except for the purpose of 
determining the amount of, and the extent to which the built-in loss is 
limited by, the SRLY limitation for the year in which it is recognized. 
Solely for such purpose, a built-in loss is treated as a hypothetical 
net operating loss carryover or net capital loss carryover arising in a 
SRLY, instead of as a deduction or loss in the year recognized. To the 
extent that a built-in loss is allowed as a deduction under this section 
in the year it is recognized, it offsets any consolidated taxable income 
for

[[Page 224]]

the year before any loss carryovers or carrybacks are allowed as a 
deduction. To the extent not so allowed, it is treated as a separate net 
operating loss or net capital loss carryover or carryback arising in the 
year of recognition and, under Sec. 1.1502-21T(c) or Sec. 1.1502-22T(c), 
the year of recognition is treated as a SRLY.
    (b) Built-in losses--(1) Defined. If a corporation has a net 
unrealized built-in loss under section 382(h)(3) (as modified by this 
section) on the day it becomes a member of the group (whether or not the 
group is a consolidated group), its deductions and losses are built-in 
losses under this section to the extent they are treated as recognized 
built-in losses under section 382(h)(2)(B) (as modified by this 
section). This paragraph (b) generally applies separately with respect 
to each member, but see paragraph (c) of this section for circumstances 
in which it is applied on a subgroup basis.
    (2) Operating rules. Solely for purposes of applying paragraph 
(b)(1) of this section, the principles of Sec. 1.1502-94T(c) apply with 
appropriate adjustments, including the following:
    (i) Ownership change. A corporation is treated as having an 
ownership change under section 382(g) on the day the corporation becomes 
a member of a group, and no other events (e.g., a subsequent ownership 
change under section 382(g) while it is a member) are treated as causing 
an ownership change. In the case of an asset acquisition by a group, the 
assets and liabilities acquired directly from the same transferor 
pursuant to the same plan are treated as the assets and liabilities of a 
corporation that becomes a member of the group (and has an ownership 
change) on the date of the acquisition. -
    (ii) Recognized built-in gain or loss. A loss that is included in 
the determination of net unrealized built-in gain or loss and that is 
recognized but disallowed or deferred (e.g., under Sec. 1.1502-20 or 
section 267) is not treated as a built-in loss unless and until the loss 
would be allowed during the recognition period without regard to the 
application of this section. Section 382(h)(1)(B)(ii) does not apply to 
the extent it limits the amount of recognized built-in loss that may be 
treated as a pre-change loss to the amount of the net unrealized built-
in loss.
    (c) Built-in losses of subgroups--(1) In general. In the case of a 
subgroup, the principles of paragraph (b) of this section apply to the 
subgroup, and not separately to its members. Thus, the net unrealized 
built-in loss and recognized built-in loss for purposes of paragraph (b) 
of this section are based on the aggregate amounts for each member of 
the subgroup. -
    (2) Members of subgroups. A subgroup is composed of those members 
that have been continuously affiliated with each other for the 60 
consecutive month period ending immediately before they become members 
of the group in which the loss is recognized. A member remains a member 
of the subgroup until it ceases to be affiliated with the loss member. 
For this purpose, the principles of Sec. 1.1502-21T(c)(2) (iv) through 
(vi) apply with appropriate adjustments.
    (3) Built-in amounts. Solely for purposes of determining whether the 
subgroup has a net unrealized built-in loss or whether it has a 
recognized built-in loss, the principles of Secs. 1.1502-91T (g) and (h) 
apply with appropriate adjustments.
    (d) Examples. For purposes of the examples in this section, unless 
otherwise stated, all groups file consolidated returns, all corporations 
have calendar taxable years, the facts set forth the only corporate 
activity, value means fair market value and the adjusted basis of each 
asset equals its value, all transactions are with unrelated persons, and 
the application of any limitation or threshold under section 382 is 
disregarded. The principles of this section are illustrated by the 
following examples:

    Example 1. Determination of recognized built-in loss. (a) P buys all 
the stock of T during Year 1 for $100, and T becomes a member of the P 
group. T has three depreciable assets. Asset 1 has an unrealized loss of 
$20 (basis $45, value $25), asset 2 has an unrealized loss of $25 (basis 
$50, value $25), and asset 3 has an unrealized gain of $25 (basis $25, 
value $50).
    (b) Under paragraph (b)(2)(i) of this section, T is treated as 
having an ownership change under section 382(g) on becoming a member of 
the P group. This treatment does not depend on whether P's acquisition 
of the T stock actually constitutes an ownership

[[Page 225]]

change under section 382(g), or whether T is subject to any limitation 
under section 382. Under paragraph (b)(1) of this section, none of T's 
$45 of unrealized loss is treated as a built-in loss unless T has a net 
unrealized built-in loss under section 382(h)(3) on becoming a member of 
the P group.
    (c) Under section 382(h)(3)(A), T has a $20 net unrealized built-in 
loss on becoming a member of the P group (($20)+($25)+$25=($20)). Assume 
that this amount exceeds the threshold requirement in section 
382(h)(3)(B). Under section 382(h)(2)(B), the entire amount of T's $45 
unrealized loss is treated as a built-in loss to the extent it is 
recognized during the 5-year recognition period described in section 
382(h)(7). Under paragraph (b)(2)(ii) of this section, the restriction 
under section 382(h)(1)(B)(ii), which limits the amount of recognized 
built-in loss that is treated as pre-change loss to the amount of the 
net unrealized built-in loss, is inapplicable for this purpose. 
Consequently, the entire $45 of unrealized loss (not just the $20 net 
unrealized loss) is treated under paragraph (b)(1) of this section as a 
built-in loss to the extent it is recognized within 5 years of T's 
becoming a member of the P group. Under paragraph (a) of this section, a 
built-in loss is subject to the SRLY limitation under Sec. 1.1502-
21T(c)(1).
    (d) Under paragraph (b)(2)(i) of this section, the results would be 
the same if T transferred all of its assets and liabilities to a 
subsidiary of the P group in a single transaction described in section 
351.
    Example 2. Actual application of section 382 not relevant. (a) The 
facts are the same as in Example 1, except that P buys 55 percent of the 
stock of T during Year 1, resulting in an ownership change of T under 
section 382(g). During Year 2, P buys the 45 percent balance of the T 
stock, and T becomes a member of the P group.
    (b) Although T has an ownership change for purposes of section 382 
in Year 1 and not Year 2, T's joining the P group in Year 2 is treated 
as an ownership change under section 382(g) for purposes of this 
section. Consequently, for purposes of this section, whether T has a net 
unrealized built-in loss under section 382(h)(3) is determined as if the 
day T joined the P group were a change date. Thus, the results are the 
same as in Example 1.
    Example 3. Determination of a recognized built-in loss of a 
subgroup. (a) During Year 1, P buys all of the stock of S for $100, and 
S becomes a member of the P group. M is the common parent of another 
group. At the beginning of Year 7, M acquires all of the stock of P, and 
P and S become members of the M group. At the time of M's acquisition of 
the P stock, P has (disregarding the stock of S) a $10 net unrealized 
built-in gain (two depreciable assets, asset 1 with a basis of $35 and a 
value of $55, and asset 2 with a basis of $55 and a value of $45), and S 
has a $75 net unrealized built-in loss (two depreciable assets, asset 3 
with a basis of $95 and a value of $10, and asset 4 with a basis of $10 
and a value of $20).
    (b) Under paragraph (c) of this section, P and S compose a subgroup 
on becoming members of the M group because P and S were continuously 
affiliated for the 60 month period ending immediately before they became 
members of the M group. Consequently, paragraph (b) of this section does 
not apply to P and S separately. Instead, their separately computed 
unrealized gains and losses are aggregated for purposes of determining 
whether and the extent to which any unrealized loss is treated as built-
in loss under this section and is subject to the SRLY limitation under 
Sec. 1.1502-21T(c).
    (c) Under paragraph (c) of this section, the P subgroup has a net 
unrealized built-in loss on the day P and S become members of the M 
group determined by treating the day they become members as a change 
date. The net unrealized built-in loss is the aggregate of P's net 
unrealized built-in gain of $10 and S's net unrealized built-in loss of 
$75, or an aggregate net unrealized built-in loss of $65. (The stock of 
S owned by P is disregarded for purposes of determining the net 
unrealized built-in loss. However, any loss allowed on the sale of the 
stock within the recognition period is taken into account in determining 
recognized built-in loss.) Assume that the $65 net unrealized built-in 
loss exceeds the threshold requirement under section 382(h)(3)(B).
    (d) Under paragraphs (b)(1), (b)(2)(ii), and (c) of this section, a 
loss recognized during the 5-year recognition period on an asset of P or 
S held on the day that P and S became members of the M group is a built-
in loss except to the extent the group establishes that such loss 
exceeds the amount by which the adjusted basis of such asset on the day 
the member became a member exceeded the fair market value of such asset 
on that same day. If P sells asset 2 for $45 in Year 7 and recognizes a 
$10 loss, the entire $10 loss is treated as a built-in loss under 
paragraphs (b)(2)(ii) and (c) of this section. If S sells asset 3 for 
$10 in Year 7 and recognizes an $85 loss, the entire $85 loss is treated 
as a built-in loss under paragraphs (b)(2)(ii) and (c) of this section 
(not just the $55 balance of the P subgroup's $65 net unrealized built-
in loss).
    (e) The determination of whether P and S constitute a SRLY subgroup 
for purposes of loss carryovers and carrybacks, and the extent to which 
built-in losses are not allowed under the SRLY limitation, is made under 
Sec. 1.1502-21T(c).
    Example 4. Computation of SRLY limitation. (a) During Year 1, 
individual A forms T by contributing $300 and T sustains a $100 net 
operating loss. During Year 2, T's assets decline in value to $100. At 
the beginning of

[[Page 226]]

Year 3, P buys all the stock of T for $100, and T becomes a member of 
the P group with a net unrealized built-in loss of $100. Assume that 
$100 exceeds the threshold requirements of section 382(h)(3)(B). During 
Year 3, T recognizes its unrealized built-in loss as a $100 ordinary 
loss. The members of the P group contribute the following net income to 
the consolidated taxable income of the P group (disregarding T's 
recognized built-in loss and any consolidated net operating loss 
deduction under Sec. 1.1502-21T) for Years 3 and 4:

------------------------------------------------------------------------
                                             Year 3    Year 4     Total 
------------------------------------------------------------------------
P group (without T).......................      $100      $100      $200
T.........................................        60        40       100
                                           -----------------------------
CTI.......................................       160       140       300
------------------------------------------------------------------------

    (b) Under paragraph (b) of this section, T's $100 ordinary loss in 
Year 3 (not taken into account in the consolidated taxable income 
computations above) is a built-in loss. Under paragraph (a) of this 
section, the built-in loss is treated as a net operating loss carryover 
for purposes of determining the SRLY limitation under Sec. 1.1502-
21T(c).
    (c) For Year 3, Sec. 1.1502-21T(c) limits T's $100 built-in loss and 
$100 net operating loss carryover from Year 1 to the aggregate of the P 
group's consolidated taxable income through Year 3 determined by 
reference to only T's items. For this purpose, consolidated taxable 
income is determined without regard to any consolidated net operating 
loss deductions under Sec. 1.1502-21T(a).
    (d) The P group's consolidated taxable income through Year 3 is $60 
when determined by reference to only T's items. Under Sec. 1.1502-
21T(c), the SRLY limitation for Year 3 is therefore $60.
    (e) Under paragraph (a) of this section, the $100 built-in loss is 
treated as a current deduction for all purposes other than determination 
of the SRLY limitation under Sec. 1.1502-21T(c). Consequently, a 
deduction for the built-in loss is allowed in Year 3 before T's loss 
carryover from Year 1 is allowed, but only to the extent of the $60 SRLY 
limitation. None of T's Year 1 loss carryover is allowed because the 
built-in loss ($100) exceeds the SRLY limitation for Year 3.
    (f) The $40 balance of the built-in loss that is not allowed in Year 
3 because of the SRLY limitation is treated as a $40 net operating loss 
arising in Year 3 that is carried to other years in accordance with the 
rules of Sec. 1.1502-21T(b). The $40 net operating loss is treated under 
paragraph (a) of this section and Sec. 1.1502-21T(c)(1)(ii) as a loss 
carryover or carryback from Year 3 that arises in a SRLY, and is subject 
to the rules of Sec. 1.1502-21T (including Sec. 1.1502-21T(c)) rather 
than this section.
    (g) The facts are the same as in paragraphs (a) through (f) of this 
Example 4, except that T also recognizes additional built-in losses in 
Year 4. For purposes of determining the SRLY limitation for these 
additional losses in Year 4 (or any subsequent year), the $60 of built-
in loss allowed as a deduction in Year 3 is treated under paragraph (a) 
of this section as a deduction in Year 3 that reduces the P group's 
consolidated taxable income when determined by reference to only T's 
items.
    Example 5. Built-in loss exceeding consolidated taxable income in 
the year recognized. (a) P buys all the stock of T during Year 1, and T 
becomes a member of the P group. At the time of acquisition, T has a 
depreciable asset with an unrealized loss of $45 (basis $100, value 
$55), which exceeds the threshold requirements of section 382(h)(3)(B). 
During Year 2, T sells its asset for $55 and recognizes the unrealized 
built-in loss. The P group has $10 of consolidated taxable income in 
Year 2, computed by disregarding T's recognition of the $45 built-in 
loss and the consolidated net operating loss deduction, while the 
consolidated taxable income would be $25 if determined by reference to 
only T's items (other than the $45 loss).
    (b) T's $45 loss is recognized in Year 2 and, under paragraph (b) of 
this section, constitutes a built-in loss. Under paragraph (a) of this 
section and Sec. 1.1502-21T(c)(1)(ii), the loss is treated as a net 
operating loss carryover to Year 2 for purposes of applying the SRLY 
limitation under Sec. 1.1502-21T(c).
    (c) For Year 2, T's SRLY limitation is the aggregate of the P 
group's consolidated taxable income through Year 2 determined by 
reference to only T's items. For this purpose, consolidated taxable 
income is determined by disregarding any built-in loss that is treated 
as a net operating loss carryover, and any consolidated net operating 
loss deductions under Sec. 1.1502-21T(a). Consolidated taxable income so 
determined is $25.
    (d) Under Sec. 1.1502-21T(c), $25 of the $45 built-in loss could be 
deducted in Year 2. Because the P group has only $10 of consolidated 
taxable income (determined without regard to the $45), the $25 loss 
creates a consolidated net operating loss of $15. This loss is carried 
back or over under the rules of Sec. 1.1502-21T(b) and absorbed under 
the rules of Sec. 1.1502-21T(a). This loss is not treated as arising in 
a SRLY (see Sec. 1.1502-21T(c)(1)(ii)) and therefore is not subject to 
the SRLY limitation under Sec. 1.1502-21T(c) in any consolidated return 
year of the group to which it is carried. The remaining $20 is treated 
as a loss carryover arising in a SRLY and is subject to the limitation 
of Sec. 1.1502-21T(c) in the year to which it is carried.

    (e) Predecessors and successors. For purposes of this section, any 
reference to a corporation or member includes, as the context may 
require, a reference to a successor or predecessor, as defined in 
Sec. 1.1502-1(f)(4).

[[Page 227]]

    (f) Effective date--(1) In general. This section applies to built-in 
losses recognized in consolidated return years beginning on or after 
January 1, 1997.
    (2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for 
rules generally permitting a group to apply the rules of this section to 
consolidated return years ending on or after January 29, 1991, and 
beginning before January 1, 1997. A group must treat all corporations 
that were affiliated on January 1, 1987, and continuously thereafter as 
having met the 60 consecutive month requirement of paragraph (c)(2) of 
this section on any day before January 1, 1992, on which the 
determination of net unrealized built-in gain or loss of a subgroup is 
made.

[T.D. 8677, 61 FR 33326, June 27, 1996]



Sec. 1.1502-16   Mine exploration expenditures.

    (a) Section 617--(1) In general. If the aggregate amount of the 
expenditures to which section 617(a) applies, paid or incurred with 
respect to mines or deposits located outside the United States (as 
defined in section 638 and the regulations thereunder), does not exceed:
    (i) $400,000 minus
    (ii) All amounts deducted or deferred during the taxable year and 
all preceding taxable years under section 617 or section 615 of the 
Internal Revenue Code of 1954 and section 23(ff) of the Internal Revenue 
Code of 1939 by corporations which are members of the group during the 
taxable year (and individuals or corporations which have transferred any 
mineral property to any such member within the meaning of section 
617(g)(2)(B)) for taxable years ending after December 31, 1950 and prior 
to the taxable year, then the deduction under section 617 with respect 
to such foreign expenditures and paragraph (c) of Sec. 1.1502-12 for 
each member shall be no greater than an allocable portion of such amount 
hereinafter referred to as the ``consolidated foreign exploration 
limitation.'' Such allocable portion shall be determined under 
subparagraph (2) of this paragraph. If the amount of such expenditures 
exceeds the consolidated foreign exploration limitation, no deduction 
shall be allowed with respect to such excess.
    (2) Allocable portion of limitation. A member's allocable portion of 
the consolidated foreign exploration limitation for a consolidated 
return year shall be:
    (i) The amount allocated by the common parent pursuant to an 
allocation plan adopted by the consolidated group, but in no event shall 
a member be allocated more than the amount it could have deducted had it 
filed a separate return. Such allocation plan must include a statement 
which also contains the total foreign exploration expenditures of each 
member which could have been deducted under section 617 if the member 
had filed a separate return. Such plan must be attached to a 
consolidated return filed on or before the due date of such return 
(including extensions of time), and may not be changed after such date, 
or
    (ii) If no plan is filed in accordance with subdivision (i) of this 
subparagraph, then the portion of the consolidated foreign exploration 
limitation allocable to each member incurring such expenditures is an 
amount equal to such limitation multiplied by a fraction, the numerator 
of which is the amount of foreign exploration expenditures which could 
have been deducted under section 617 by such member had it filed a 
separate return and the denominator of which is the aggregate of such 
amounts for all members of the group.
    (b) Section 615--(1) In general. If the aggregate amount of the 
expenditures, to which section 615(a) applies, which are paid or 
incurred by the members of the group during any consolidated return year 
exceeds the lesser of:
    (i) $100,000, or
    (ii) $400,000 minus all such expenditures deducted (or deferred) by 
corporations which are members of the group during the taxable year (and 
individuals or corporations which have transferred any mineral property 
to any such member within the meaning of section 615(c)(2)(B)) for 
taxable years ending after December 31, 1950, and prior to the taxable 
year, then the deduction (or amount deferrable) under section 615 and 
paragraph (c) of Sec. 1.1502-12 for each member shall be no greater than 
an allocable portion of such lesser amount, hereinafter referred to as 
the

[[Page 228]]

``consolidated exploration limitation''. Such allocable portion shall be 
determined under subparagraph (2) of this paragraph.
    (2) Allocable portion of limitation. A member's allocable portion of 
the consolidated exploration limitation for a consolidated return year 
shall be:
    (i) The amount allocated by the common parent pursuant to an 
allocation plan adopted by the consolidated group, but in no event shall 
a member be allocated more than the amount it could have deducted (or 
deferred) had it filed a separate return. Such allocation plan must 
include a statement which also contains the total exploration 
expenditures of each member for the taxable year, and the expenditures 
of each member which could have been deducted (or deferred) under 
section 615 if the member had filed a separate return. Such plan must be 
attached to a consolidated return filed on or before the due date of 
such return (including extensions of time), and may not be changed after 
such date, or
    (ii) If no plan is filed in accordance with subdivision (i) of this 
subparagraph, then the portion of the consolidated exploration 
limitation allocable to each member incurring such expenditures is an 
amount equal to such limitation multiplied by a fraction, the numerator 
of which is the amount which could have been deducted (or deferred) 
under section 615 by such member had it filed a separate return and the 
denominator of which is the aggregate of such amounts for all members of 
the group.
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example (1). Corporation X and its wholly owned subsidiaries, 
corporations Y and Z, file a consolidated return for the calendar year 
1971. None of the corporations have incurred exploration expenditures 
described in section 617 in previous years. During 1971, X incurred 
foreign exploration expenditures of $30,000, Y of $20,000, and Z of 
$40,000. The amount of foreign exploration expenditures deductible under 
section 617 for purposes of computing separate taxable income under 
Sec. 1.1502-12 will be the amount actually expended by each corporation.
    Example (2). Assume the same facts as in example (1) except that 
prior to 1971, X, Y, and Z had deducted (or deferred) under section 615 
and 617 a total of $300,000 of exploration expenditures. During 1971, 
with respect to deposits located outside the United States X incurred 
exploration expenditures of $25,000, Y of $75,000, and Z of $125,000. 
The consolidated exploration limitation under paragraph (a) of this 
section with respect to the foreign deposits (there is no limitation 
with respect to the domestic expenditures) is $100,000. X may allocate 
the $100,000 in any manner among the three members, except that X may 
not be allocated more than $25,000 nor Y more than $75,000, the amount 
actually expended by X and Y and which they could have deducted had they 
each filed a separate return. If the allocation is not made in 
accordance with paragraph (a)(2)(i) of this section, the $100,000 
limitation will be allocated under paragraph (a)(2)(ii) of this section 
as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                       Allocable
                         Corporation                           Expenditure   Fraction    Limitation     portion 
----------------------------------------------------------------------------------------------------------------
                                                                                25,000                          
X............................................................      $25,000    ------     x $100,000=     $12,500
                                                                               200,000                          
                                                                                                                
                                                                                75,000                          
Y............................................................      $75,000    ------     x $100,000=     $37,500
                                                                               200,000                          
                                                                                                                
                                                                               100,000                          
Z............................................................     $125,000    ------     x $100,000=     $50,000
                                                                               200,000                          
----------------------------------------------------------------------------------------------------------------

The denominator of $200,000 was calculated as follows:

    X=$25,000
    Y=$75,000
    Z=$100,000 (maximum amount allowed if filed separately)
Total $200,000.

    Example (3). Assume the same facts as in example (2) and that on 
January 1, 1971, X acquired all of the stock of corporation T which 
prior to its taxable year beginning January 1, 1971, had previously 
deducted (or deferred) $310,000 of exploration expenditures. Assume 
further that in 1971 X incurred $25,000 of foreign exploration 
expenditures, Y

[[Page 229]]

$50,000, T $50,000, and Z none. A consolidated return is filed for 1971. 
None of the expenditures may be deducted under section 617 since the 
consolidated exploration limitation is zero. The limitation is zero 
since the aggregate amount of previously deducted (or deferred) 
exploration expenditures by the members of the group exceeds $400,000. 
(The total of such expenditures is $410,000, of which $310,000 is 
attributable to T and, assuming the allocation of the limitation in 
example (2) is made under paragraph (a)(2)(ii) of this section, $12,500 
is attributable to X, $37,500 to Y, and $50,000 to Z.
    Example (4). Assume the same facts as in example (3) except that on 
December 31, 1971, X sold all of the stock in Z to an unrelated party. 
The consolidated exploration limitation for 1972 will be $40,000, 
computed by subtracting from $400,000, the aggregate amount of 
previously deducted (or deferred) exploration expenditures incurred by 
the members of the group prior to 1972. (The total of such expenditures 
is $360,000, of which $12,500 is attributable to X, $37,500 to Y and 
$310,000 to T.) Amounts previously deducted (or deferred) by Z are not 
taken into account since it was not a member of the group at any time 
during 1972. Amounts previously deducted (or deferred) by Z shall be 
taken into account by it for subsequent separate return years.

[T.D. 7192, 37 FR 12949, June 30, 1972]



Sec. 1.1502-17  Methods of accounting.

    (a) General rule. The method of accounting to be used by each member 
of the group shall be determined in accordance with the provisions of 
section 446 as if such member filed a separate return. For treatment of 
depreciable property after a transfer within the group, see paragraph 
(g) of Sec. 1.1502-12.
    (b) Adjustments required if method of accounting changes--(1) 
General rule. If a member of a group changes its method of accounting 
for a consolidated return year, the terms and conditions prescribed by 
the Commissioner under section 446(e), including section 481(a) where 
applicable, shall apply to the member. If the requirements of section 
481(b) are met because applicable adjustments under section 481(a) are 
substantial, the increase in tax for any prior year shall be computed 
upon the basis of a consolidated return or a separate return, whichever 
was filed for such prior year.
    (2) Changes in method of accounting for intercompany transactions. 
If a member changes its method of accounting for intercompany 
transactions for a consolidated return year, the change in method 
generally will be effected on a cut-off basis.
    (c) Anti-avoidance rules--(1) General rule. If one member (B) 
directly or indirectly acquires an activity of another member (S), or 
undertakes S's activity, with the principal purpose to avail the group 
of an accounting method that would be unavailable (or would be 
unavailable without securing consent from the Commissioner) if S and B 
were treated as divisions of a single corporation, B must use the 
accounting method for the acquired or undertaken activity determined 
under paragraph (c)(2) of this section or must secure consent from the 
Commissioner under applicable administrative procedures to use a 
different method.
    (2) Treatment as divisions of a single corporation. B must use the 
method of accounting that would be required if B acquired the activity 
from S in a transaction to which section 381 applied. Thus, the 
principles of section 381 (c)(4) and (c)(5) apply to resolve any 
conflicts between the accounting methods of S and B, and the acquired or 
undertaken activity is treated as having the accounting method used by 
S. Appropriate adjustments are made to treat all acquisitions or 
undertakings that are part of the same plan or arrangement as a single 
acquisition or undertaking.
    (d) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. Separate return treatment generally. X and its wholly-
owned subsidiary Y filed separate returns for their calendar years 
ending December 31, 1965. During calendar year 1965, X employed an 
accrual method of accounting, established a reserve for bad debts, and 
elected under section 171 to amortize bond premiums with respect to its 
fully taxable bonds. During calendar year 1965, Y employed the cash 
receipts and disbursements method, used the specific charge-off method 
with respect to its bad debts, and did not elect to amortize bond 
premiums under section 171 with respect to its bonds. X and Y filed a 
consolidated return for 1966. For 1966 X and Y must continue to compute 
income under their respective methods of accounting (unless a change in 
method under section 446 is made).

[[Page 230]]

    Example 2. Adopting methods. Corporation P is a member of a 
consolidated group. P provides consulting services to customers under 
various agreements. For one type of customer, P's agreements require 
payment only when the contract is completed (payment-on-completion 
contracts). P uses an overall accrual method of accounting. Accordingly, 
P takes its income from consulting contracts into account when earned, 
received, or due, whichever is earlier. With the principal purpose to 
avoid seeking the consent of the Commissioner to change its method of 
accounting for the payment-on-completion contracts to the cash method, P 
forms corporation S, and S begins to render services to those customers 
subject to the payment-on-completion contracts. P continues to render 
services to those customers not subject to these contracts.
    (b) Under paragraph (c) of this section, S must account for the 
consulting income under the payment-on-completion contracts on an 
accrual method rather than adopting the cash method contemplated by P.
    Example 3. Changing inventory sub-method. (a) Corporation P is a 
member of a consolidated group. P operates a manufacturing business that 
uses dollar-value LIFO, and has built up a substantial LIFO reserve. P 
has historically manufactured all its inventory and has used one natural 
business unit pool. P begins purchasing goods identical to its own 
finished goods from a foreign supplier, and is concerned that it must 
establish a separate resale pool under Sec. 1.472-8(c). P anticipates 
that it will begin to purchase, rather than manufacture, a substantial 
portion of its inventory, resulting in a recapture of most of its LIFO 
reserve because of decrements in its manufacturing pool. With the 
principal purpose to avoid the decrements, P forms corporation S in Year 
1. S operates as a distributor to nonmembers, and P sells all of its 
existing inventories to S. S adopts LIFO, and elects dollar-value LIFO 
with one resale pool. Thereafter, P continues to manufacture and 
purchase inventory, and to sell it to S for resale to nonmembers. P's 
intercompany gain from sales to S is taken into account under 
Sec. 1.1502-13. S maintains its Year 1 base dollar value of inventory so 
that P will not be required to take its intercompany items (which 
include the effects of the LIFO reserve recapture) into account.
    (b) Under paragraph (c) of this section, S must maintain two pools 
(manufacturing and resale) to the same extent that P would be required 
to maintain those pools under Sec. 1.472-8 if it had not formed S.

    (e) Effective dates. Paragraph (b) of this section applies to 
changes in method of accounting effective for years beginning on or 
after July 12, 1995. For changes in method of accounting effective for 
years beginning before that date, see Sec. 1.1502-17 (as contained in 
the 26 CFR part 1 edition revised as of April 1, 1995). Paragraphs (c) 
and (d) apply with respect to acquisitions occurring or activities 
undertaken in years beginning on or after July 12, 1995.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 8597, 60 FR 
36708, July 18, 1995]



Sec. 1.1502-18  Inventory adjustment.

    (a) Definition of intercompany profit amount. For purposes of this 
section, the term ``intercompany profit amount'' for a taxable year 
means an amount equal to the profits of a corporation (other than those 
profits which such corporation has elected not to defer pursuant to 
Sec. 1.1502- 13(c)(3) or which have been taken into account pursuant to 
Sec. 1.1502-13(f)(1)(viii)) arising in transactions with other members 
of the group with respect to goods which are, at the close of such 
corporation's taxable year, included in the inventories of any member of 
the group. See Sec. 1.1502-13(c)(2) with respect to the determination of 
profits. See the last sentence of Sec. 1.1502-13(f)(1)(i) for rules for 
determining which goods are considered to be disposed of outside the 
group and therefore not included in inventories of members.
    (b) Addition of initial inventory amount to taxable income. If a 
corporation:
    (1) Is a member of a group filing a consolidated return for the 
taxable year,
    (2) Was a member of such group for its immediately preceding taxable 
year, and
    (3) Filed a separate return for such preceding year,

then the intercompany profit amount of such corporation for such 
separate return year (hereinafter referred to as the ``initial inventory 
amount'') shall be added to the income of such corporation for the 
consolidated return year (or years) in which the goods to which the 
initial inventory amount is attributable are disposed of outside the 
group or such corporation becomes a nonmember. Such amount shall be 
treated as gain from the sale or exchange of property which is neither a

[[Page 231]]

capital asset nor property described in section 1231.
    (c) Recovery of initial inventory amount--(1) Unrecovered inventory 
amount. The term ``unrecovered inventory amount'' for any consolidated 
return year means the lesser of:
    (i) The intercompany profit amount for such year, or
    (ii) The initial inventory amount.

However, if a corporation ceases to be a member of the group during a 
consolidated return year, its unrecovered inventory amount for such year 
shall be considered to be zero.
    (2) Recovery during consolidated return years. (i) To the extent 
that the unrecovered inventory amount of a corporation for a 
consolidated return year is less than such amount for its immediately 
preceding year, such decrease shall be treated for such year by such 
corporation as a loss from the sale or exchange of property which is 
neither a capital asset nor property described in section 1231.
    (ii) To the extent that the unrecovered inventory amount for a 
consolidated return year exceeds such amount for the preceding year, 
such increase shall be treated as gain from the sale or exchange of 
property which is neither a capital asset nor property described in 
section 1231.
    (3) Recovery during first separate return year. For the first 
separate return year of a member following a consolidated return year, 
the unrecovered inventory amount for such consolidated return year 
(minus any part of the initial inventory amount which has not been added 
to income pursuant to paragraph (b) of this section) shall be treated as 
a loss from the sale or exchange of property which is neither a capital 
asset nor property described in section 1231.
    (4) Acquisition of group. For purposes of this section, a member of 
a group shall not become a nonmember or be considered as filing a 
separate return solely because of a termination of the group 
(hereinafter referred to as the ``terminating group'') resulting from:
    (i) The acquisition by a nonmember corporation of (a) the assets of 
the common parent in a reorganization described in subparagraph (A), 
(C), or (D) (but only if the requirements of subparagraphs (A) and (B) 
of section 354(b)(1) are met) of section 368 (a)(1), or (b) stock of the 
common parent, or
    (ii) The acquisition (in a transaction to which Sec. 1.1502-75(d)(3) 
applies) by a member of (a) the assets of a nonmember corporation in a 
reorganization referred to in subdivision (i) of this subparagraph, or 
(b) stock of a nonmember corporation,

if all the members of the terminating group (other than such common 
parent if its assets are acquired) immediately before the acquisition 
are members immediately after the acquisition of another group 
(hereinafter referred to as the ``succeeding group'') which files a 
consolidated return for the first taxable year ending after the date of 
acquisition. The members of the succeeding group shall succeed to any 
initial inventory amount and to any unrecovered inventory amount of 
members of the terminating group. This subparagraph shall not apply with 
respect to acquisitions occurring before August 25, 1971.
    (d) Examples. The provisions of paragraphs (a), (b), and (c) of this 
section may be illustrated by the following examples:

    Example (1). Corporations P, S, and T report income on the basis of 
a calendar year. Such corporations file separate returns for 1965. P 
manufactures widgets which it sells to both S and T, who act as 
distributors. The inventories of S and T at the close of 1965 are 
comprised of widgets which they purchased from P and with respect to 
which P derived profits of $5,000 and $8,000, respectively. P, S, and T 
file a consolidated return for 1966. During 1966, P sells widgets to S 
and T with respect to which it derives profits of $7,000 and $10,000, 
respectively. The inventories of S and T as of December 31, 1966, are 
comprised of widgets on which P derived net profits of $4,000 and 
$8,000, respectively. P's initial inventory amount is $13,000, P's 
intercompany profit amount for 1965 (such $13,000 amount is the profits 
of P with respect to goods sold to S and T and included in their 
inventories at the close of 1965). Assuming that S and T identify their 
goods on a first-in, first-out basis, the entire opening inventory 
amount of $13,000 is added to P's income for 1966 as gain from the sale 
or exchange of property which is neither a capital asset nor properly 
described in section 1231, since the goods to which the initial 
inventory amount is attributable were disposed of in 1966 outside the 
group. However, since P's unrecovered inventory amount for 1966, $12,000 
(the intercompany profit amount for the year, which is

[[Page 232]]

less than the initial inventory amount), is less than the unrecovered 
inventory amount for 1965, $13,000, this decrease of $1,000 is treated 
by P for 1966 as a loss from the sale or exchange of property which is 
neither a capital asset nor property described in section 1231.
    Example (2). Assume the same facts as in example (1) and that at the 
close of 1967, a consolidated return year, the inventories of S and T 
are comprised of widgets on which P derived profits of $5,000 and 
$3,000, respectively. Since P's unrecovered inventory amount for 1967, 
$8,000, is less than $12,000, the unrecovered inventory amount for 1966, 
this decrease of $4,000 is treated by P for 1967 as a loss from the sale 
or exchange of property which is neither a capital asset nor property 
described in section 1231.
    Example (3). Assume the same facts as in examples (1) and (2) and 
that in 1968, a consolidated return year, P's intercompany profit amount 
is $11,000. P will report $3,000 (the excess of $11,000, P's unrecovered 
inventory amount for 1968, over $8,000, P's unrecovered inventory amount 
for 1967) for 1968 as a gain from the sale or exchange of property which 
is neither a capital asset nor property described in section 1231.
    Example (4). Assume the same facts as in examples (1), (2), and (3) 
and that in 1969 P, S, and T file separate returns. P will report 
$11,000 (its unrecovered inventory amount for 1968, $11,000, minus the 
portion of the initial inventory amount which has not been added to 
income during 1966, 1967, and 1968, zero) as a loss from the sale or 
exchange of property which is neither a capital asset nor property 
described in section 1231.
    Example (5). Corporations P and S file a consolidated return for the 
first time for the calendar year 1966. P manufactures machines and sells 
them to S, which sells them to users throughout the country. At the 
close of 1965, S has on hand 20 machines which it purchased from P and 
with respect to which P derived profits of $3,500. During 1966, P sells 
6 machines to S on which it derives profits of $1,300, and S sells 5 
machines which it had on hand at the beginning of the year (S 
specifically identifies the machines which it sells) and on which P had 
derived profits of $900. P's initial inventory amount is $3,500, of 
which $900 is added to P's income in 1966 as gain from the sale or 
exchange of property which is neither a capital asset nor property 
described in section 1231, since such $900 amount is attributable to 
goods disposed of in 1966 outside the group, which goods were included 
in S's inventory at the close of 1965. If P and S continue to file 
consolidated returns, the remaining $2,600 of the initial inventory 
amount will be added to P's income as the machines on which such profits 
were derived are disposed of outside the group.
    Example (6). Assume that in example (5) S had elected to inventory 
its goods under section 472 (relating to last-in, first-out 
inventories). None of P's initial inventory amount of $3,500 would be 
added to P's income in 1966, since none of the goods to which such 
amount is attributable would be considered to be disposed of during such 
year under the last-in, first-out method of identifying inventories.

    (e) Section 381 transfer. If a member of the group is a transferor 
or distributor of assets to another member of the group within the 
meaning of section 381(a), then the acquiring corporation shall be 
treated as succeeding to the initial inventory amount of the transferor 
or distributor corporation to the extent that as of the date of 
distribution or transfer such amount has not yet been added to income. 
Such amount shall then be added to the acquiring corporation's income 
under the provisions of paragraph (b) of this section. For purposes of 
applying paragraph (c) of this section:
    (1) The initial inventory amount of the transferor or distributor 
corporation shall be added to such amount of the acquiring corporation 
as of the close of the acquiring corporation's taxable year in which the 
date of distribution or transfer occurs, and
    (2) The unrecovered inventory amount of the transferor or 
distributor corporation for its taxable year preceding the taxable year 
of the group in which the date of distribution or transfer occurs shall 
be added to such amount of the acquiring corporation.
    (f) Transitional rules for years before 1966--(1) In general. If:
    (i) A group filed a consolidated return for the taxable year 
immediately preceding the first taxable year to which this section 
applies,
    (ii) Any member of such group made an opening adjustment to its 
inventory pursuant to paragraph (b) of Sec. 1.1502-39A (as contained in 
the 26 CFR edition revised as of April 1, 1996), and
    (iii) Paragraph (c) of Sec. 1.1502-39A (as contained in the 26 CFR 
edition revised as of April 1, 1996), has not been applicable for any 
taxable year subsequent to the taxable year for which such adjustment 
was made,

then subparagraphs (2) and (3) of this paragraph shall apply.
    (2) Closing adjustment to inventory. (i) For the first consolidated 
return year

[[Page 233]]

to which this section applies, the increase in inventory prescribed in 
paragraph (c) of Sec. 1.1502-39A (as contained in the 26 CFR edition 
revised as of April 1, 1996), shall be made as if such year were a 
separate return year.
    (ii) For the first separate return year of a member to which this 
section applies, the adjustment to inventory (whether an increase or a 
decrease) prescribed in paragraph (c) of Sec. 1.1502-39A (as contained 
in the 26 CFR edition revised as of April 1, 1996), minus any adjustment 
already made pursuant to subdivision (i) of this subparagraph, shall be 
made to the inventory of such member.
    (3) Addition and recovery of initial inventory amount. Each selling 
member shall treat as an initial inventory amount its share of the net 
amount by which the inventories of all members are increased pursuant to 
subparagraph (2)(i) of this paragraph for the first taxable year to 
which this section applies. A member's share shall be such net amount 
multiplied by a fraction, the numerator of which is its initial 
inventory amount (computed under paragraph (b) as if such taxable year 
were its first consolidated return year), and the denominator of which 
is the sum of such initial inventory amounts of all members. Such 
initial inventory amount shall be added to the income of such selling 
member and shall be recovered at the time and in the manner prescribed 
in paragraphs (b) and (c) of this section.
    (4) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. (i) Corporations P, S, and T file consolidated returns for 
calendar 1966, having filed consolidated returns continuously since 
1962. P is a wholesale distributor of groceries selling to chains of 
supermarkets, including those owned by S and T. The opening inventories 
of S and T for 1962 were reduced by $40,000 and $80,000, respectively, 
pursuant to paragraph (b) of Sec. 1.1502-39A (as contained in the 26 CFR 
edition revised as of April 1, 1996). At the close of 1965, S and T have 
on hand in their inventories goods on which P derived profits of $80,000 
and $90,000, respectively. The inventories of S and T at the close of 
1966 include goods which they purchased from P during the year on which 
P derived profits of $85,000 and $105,000, respectively.
    (ii) The opening inventories of S and T for 1966, the first year to 
which this section applies, are increased by $40,000 and $80,000, 
respectively, pursuant to the provisions of subparagraph (2)(i) of this 
paragraph. P will take into account (as provided in paragraphs (b) and 
(c) of this section) an initial inventory amount of $120,000 as of the 
beginning of 1966, the net amount by which the inventories of S and T 
were increased in such year. Since the increases in the inventories of S 
and T are the maximum allowable under paragraph (c) of Sec. 1.1502-39A 
(as contained in the 26 CFR edition revised as of April 1, 1996) (i.e., 
the amount by which such inventories were originally decreased), no 
further adjustments will be made pursuant to subparagraph (2)(ii) of 
this paragraph to such inventories in the event that separate returns 
are subsequently filed.

    (5) Election not to eliminate. If a group filed a consolidated 
return for the taxable year immediately preceding the first taxable year 
to which this section applies, and for such preceding year the members 
of the group did not eliminate gain or loss on intercompany inventory 
transactions pursuant to the adoption under Sec. 1.1502-31A(b)(1) (as 
contained in the 26 CFR edition revised as of April 1, 1996) of a 
consistent accounting practice taking into account such gain or loss, 
then for purposes of this section each member shall be treated as if it 
had filed a separate return for such immediately preceding year.
    (g) Transitional rules for years beginning on or after July 12, 
1995. Paragraphs (a) through (f) of this section do not apply for 
taxable years beginning on or after July 12, 1995. Any remaining 
unrecovered inventory amount of a member under paragraph (c) of this 
section is recovered in the first taxable year beginning on or after 
July 12, 1995, under the principles of paragraph (c)(3) of this section 
by treating the first taxable year as the first separate return year of 
the member. The unrecovered inventory amount can be recovered only to 
the extent it was previously included in taxable income. The principles 
of this section apply, with appropriate adjustments, to comparable 
amounts under paragraph (f) of this section.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7246, 38 FR 
762, Jan. 4, 1973; T.D. 8597, 60 FR 36709, July 18, 1995: T.D. 8677, 61 
FR 33323, June 27, 1996]

[[Page 234]]



Sec. 1.1502-19  Excess loss accounts.

    (a) In general--(1) Purpose. This section provides rules for a 
member (P) to include in income its excess loss account in the stock of 
another member (S). The purpose of the excess loss account is to 
recapture in consolidated taxable income P's negative adjustments with 
respect to S's stock (e.g., under Sec. 1.1502-32 from S's deductions, 
losses, and distributions), to the extent the negative adjustments 
exceed P's basis in the stock.
    (2) Excess loss accounts--(i) In general. P's basis in S's stock is 
adjusted under the consolidated return regulations and other rules of 
law. Negative adjustments may exceed P's basis in S's stock. The 
resulting negative amount is P's excess loss account in S's stock. For 
example:
    (A) Once P's negative adjustments under Sec. 1.1502-32 exceed its 
basis in S's stock, the excess is P's excess loss account in the S 
stock. If P has further adjustments, they first increase or decrease the 
excess loss account.
    (B) If P forms S by transferring property subject to liabilities in 
excess of basis, Sec. 1.1502-80(d) provides for the nonapplicability of 
section 357(c) and the resulting negative basis under section 358 is P's 
excess loss account in the S stock.
    (ii) Treatment as negative basis. P's excess loss account is treated 
for all Federal income tax purposes as basis that is a negative amount, 
and a reference to P's basis in S's stock includes a reference to P's 
excess loss account.
    (3) Application of other rules of law. The rules of this section are 
in addition to other rules of law. See, e.g., Secs. 1.1502-32 
(investment adjustment rules establishing and adjusting excess loss 
accounts) and 1.1502-80(d) (nonapplicability of section 357(c)). The 
provisions of this section and other rules of law must not be applied to 
recapture the same amount more than once. For purposes of this section, 
the definitions in Sec. 1.1502-32 apply.
    (b) Excess loss account taken into account as income or gain--(1) 
General rule. If P is treated under this section as disposing of a share 
of S's stock, P takes into account its excess loss account in the share 
as income or gain from the disposition. Except as provided in paragraph 
(b)(4) of this section, the disposition is treated as a sale or exchange 
for purposes of determining the character of the income or gain.
    (2) Nonrecognition or deferral--(i) In general. P's income or gain 
under paragraph (b)(1) of this section is subject to any nonrecognition 
or deferral rules applicable to the disposition. For example, if S 
liquidates and the exchange of P's stock in S is subject to section 332, 
or P transfers all of its assets (including S's stock) to S in a 
reorganization to which section 361(a) applies, P's income or gain from 
the excess loss account is not recognized under these rules.
    (ii) Nonrecognition or deferral inapplicable. If P's income or gain 
under paragraph (b)(1) of this section is from a disposition described 
in paragraph (c)(1) (ii) or (iii) of this section (relating to 
deconsolidations and worthlessness), the income or gain is taken into 
account notwithstanding any nonrecognition or deferral rules (even if 
the disposition is also described in paragraph (c)(1)(i) of this 
section). For example, if P transfers S's stock to a nonmember in a 
transaction to which section 351 applies, P's income or gain from the 
excess loss account is taken into account.
    (3) Tiering up in chains. If the stock of more than one subsidiary 
is disposed of in the same transaction, the income or gain under this 
section is taken into account in the order of the tiers, from the lowest 
to the highest.
    (4) Insolvency--(i) In general. Gain under this section is treated 
as ordinary income to the extent of the amount by which S is insolvent 
(within the meaning of section 108(d)(3)) immediately before the 
disposition. For this purpose S's liabilities include any amount to 
which preferred stock would be entitled if S were liquidated immediately 
before the disposition, and any former liabilities that were discharged 
to the extent the discharge was treated as tax-exempt income under 
Sec. 1.1502-32(b)(3)(ii)(C) (special rule for discharges).
    (ii) Reduction for amount of distributions. The amount treated as 
ordinary income under this paragraph (b)(4) is reduced to the extent it 
exceeds the

[[Page 235]]

amount of P's excess loss account redetermined without taking into 
account S's distributions to P to which Sec. 1.1502-32(b)(2)(iv) 
applies.
    (c) Disposition of stock. For purposes of this section:
    (1) In general. P is treated as disposing of a share of S's stock:
    (i) Transfer, cancellation, etc. At the time--
    (A) P transfers or otherwise ceases to own the share for Federal 
income tax purposes, even if no gain or loss is taken into account; or
    (B) P takes into account gain or loss (in whole or in part) with 
respect to the share.
    (ii) Deconsolidation. At the time--
    (A) P becomes a nonmember, or a nonmember determines its basis in 
the share (or any other asset) by reference to P's basis in the share, 
directly or indirectly, in whole or in part (e.g., under section 362); 
or
    (B) S becomes a nonmember, or P's basis in the share is reflected, 
directly or indirectly, in whole or in part, in the basis of any asset 
other than member stock (e.g., under section 1071).
    (iii) Worthlessness. At the time--
    (A) Substantially all of S's assets are treated as disposed of, 
abandoned, or destroyed for Federal income tax purposes (e.g., under 
section 165(a) or Sec. 1.1502-80(c), or, if S's asset is stock of a 
lower-tier member, the stock is treated as disposed of under this 
paragraph (c)). An asset of S is not considered to be disposed of or 
abandoned to the extent the disposition is in complete liquidation of S 
or is in exchange for consideration (other than relief from 
indebtedness);
    (B) An indebtedness of S is discharged, if any part of the amount 
discharged is not included in gross income and is not treated as tax-
exempt income under Sec. 1.1502-32(b)(3)(ii)(C); or
    (C) A member takes into account a deduction or loss for the 
uncollectibility of an indebtedness of S, and the deduction or loss is 
not matched in the same tax year by S's taking into account a 
corresponding amount of income or gain from the indebtedness in 
determining consolidated taxable income.
    (2) Becoming a nonmember. A member is treated as becoming a 
nonmember if it has a separate return year (including another group's 
consolidated return year). For example, S may become a nonmember if it 
issues additional stock to nonmembers, but S does not become a nonmember 
as a result of its complete liquidation. A disposition under paragraph 
(c)(1)(ii) of this section must be taken into account in the 
consolidated return of the group. For example, if a group ceases under 
Sec. 1.1502-75(c) to file a consolidated return as of the close of its 
consolidated return year, the disposition under paragraph (c)(1)(ii) of 
this section is treated as occurring immediately before the close of the 
year. If S becomes a nonmember because P sells S's stock to a nonmember, 
P's sale is a disposition under both paragraphs (c)(1) (i) and (ii) of 
this section. If a group terminates under Sec. 1.1502-75(d) because the 
common parent is the only remaining member, the common parent is not 
treated as having a deconsolidation event under paragraph (c)(1)(ii) of 
this section.
    (3) Exception for acquisition of group--(i) Application. This 
paragraph (c)(3) applies only if a consolidated group (the terminating 
group) ceases to exist as a result of--
    (A) The acquisition by a member of another consolidated group of 
either the assets of the common parent of the terminating group in a 
reorganization described in section 381(a)(2), or the stock of the 
common parent of the terminating group; or
    (B) The application of the principles of Sec. 1.1502-75(d)(2) or 
(d)(3).
    (ii) General rule. Paragraph (c)(1)(ii) of this section does not 
apply solely by reason of the termination of a group in a transaction to 
which this paragraph (c)(3) applies, if there is a surviving group that 
is, immediately thereafter, a consolidated group. Instead, the surviving 
group is treated as the terminating group for purposes of applying this 
section to the terminating group. This treatment does not apply, 
however, to members of the terminating group that are not members of the 
surviving group immediately after the terminating group ceases to exist 
(e.g., under section 1504(a)(3) relating to reconsolidation, or section 
1504(c) relating to includible insurance companies).

[[Page 236]]

    (d) Special allocation of basis adjustments or determinations. If a 
member has an excess loss account in shares of a class of S's stock at 
the time of a basis adjustment or determination under the Internal 
Revenue Code with respect to other shares of the same class of S's stock 
owned by the member, the adjustment or determination is allocated first 
to equalize and eliminate that member's excess loss account. For 
example, if P owns 50 shares of S's only class of stock with a $100 
basis and 50 shares with a $100 excess loss account, and P contributes 
$200 to S without receiving additional shares, the contribution first 
eliminates P's excess loss account, then increases P's basis in each 
share by $1. (If P transfers the $200 in exchange for an additional 100 
shares of S's stock in a transaction to which section 351 applies, P's 
excess loss account is first eliminated, and P's basis in the additional 
shares is $100.) See Sec. 1.1502-32(c) for similar allocations of 
investment adjustments to prevent or eliminate excess loss accounts.
    (e) Anti-avoidance rule. If any person acts with a principal purpose 
contrary to the purposes of this section, to avoid the effect of the 
rules of this section or apply the rules of this section to avoid the 
effect of any other provision of the consolidated return regulations, 
adjustments must be made as necessary to carry out the purposes of this 
section.
    (f) Predecessors and successors. For purposes of this section, any 
reference to a corporation (or to a share of the corporation's stock) 
includes a reference to a successor or predecessor (or to a share of 
stock of a predecessor or successor), as the context may require.
    (g) Examples. For purposes of the examples in this section, unless 
otherwise stated, P owns all 100 shares of the only class of S's stock 
and S owns all 100 shares of the only class of T's stock, the stock is 
owned for the entire year, T owns no stock of lower-tier members, the 
tax year of all persons is the calendar year, all persons use the 
accrual method of accounting, the facts set forth the only corporate 
activity, all transactions are between unrelated persons, and tax 
liabilities are disregarded. The principles of this section are 
illustrated by the following examples.

    Example 1. Taxable disposition of stock. (a) Facts. P has a $150 
basis in S's stock, and S has a $100 basis in T's stock. For Year 1, P 
has $500 of ordinary income, S has no income or loss, and T has a $200 
ordinary loss. S sells T's stock to a nonmember for $60 at the close of 
Year 1.
    (b) Analysis. Under paragraph (c) of this section, the sale is a 
disposition of T's stock at the close of Year 1 (the day of the sale). 
Under Sec. 1.1502-32(b), T's loss results in S having a $100 excess loss 
account in T's stock immediately before the sale. Under paragraph (b)(1) 
of this section, S takes into account the $100 excess loss account as an 
additional $100 of gain from the sale. Consequently, S takes into 
account a $160 gain from the sale in determining the group's 
consolidated taxable income. Under Sec. 1.1502-32(b), T's $200 loss and 
S's $160 gain result in a net $40 decrease in P's basis in S's stock as 
of the close of Year 1, from $150 to $110.
    (c) Intercompany sale followed by sale to nonmember. The facts are 
the same as in paragraph (a) of this Example 1, except that S sells T's 
stock to P for $60 at the close of Year 1, and P sells T's stock to a 
nonmember at a gain at the beginning of Year 5. Under paragraph (c) of 
this section, S's sale is treated as a disposition of T's stock at the 
close of Year 1 (the day of the sale). Under Sec. 1.1502-13 and 
paragraph (b)(2) of this section, S's $160 gain from the sale is 
deferred and taken into account in Year 5 as a result of P's sale of the 
T stock. Under Sec. 1.1502-32(b), the absorption of T's $200 loss in 
Year 1 results in P having a $50 excess loss account in S's stock at the 
close of Year 1. In Year 5, S's $160 gain taken into account eliminates 
P's excess loss account in S's stock and increases P's basis in the 
stock to $110.
    (d) Intercompany distribution followed by sale to a nonmember. The 
facts are the same as in paragraph (a) of this Example 1, except that 
the value of the T stock is $60 and S declares and distributes a 
dividend of all of the T stock to P at the close of Year 1, and P sells 
the T stock to a nonmember at a gain at the beginning of Year 5. Under 
paragraph (c) of this section, S's distribution is treated as a 
disposition of T's stock at the close of Year 1 (the day of the 
distribution). S's $100 excess loss account in T's stock is treated as 
additional gain under section 311(b) from the distribution. Under 
section 301(d), P's basis in the T stock is $60. Under Sec. 1.1502-13, 
and paragraph (b)(2) of this section, S's $160 gain from the 
distribution is deferred and taken into account in Year 5 as a result of 
P's sale of the T stock. Under Sec. 1.1502-32(b), T's $200 loss and S's 
$60 distribution result in P having a $110 excess loss account in S's 
stock at the close of Year 1. In Year 5, S's $160 gain taken

[[Page 237]]

into account eliminates P's excess loss account in S's stock and 
increases P's basis in the stock to $50.
    Example 2. Basis determinations under the Internal Revenue Code in 
intercompany reorganizations. (a) Facts. P owns all of the stock of S 
and T. P has a $150 basis in S's stock and a $100 excess loss account in 
T's stock. P transfers T's stock to S without receiving additional S 
stock, in a transaction to which section 351 applies.
    (b) Analysis. Under paragraph (c) of this section, P's transfer is 
treated as a disposition of T's stock. Under section 351 and paragraph 
(b)(2) of this section, P does not recognize gain from the disposition. 
Under section 358 and paragraph (a)(2)(ii) of this section, P's $100 
excess loss account in T's stock decreases P's $150 basis in S's stock 
to $50. In addition, S takes a $100 excess loss account in T's stock 
under section 362. (If P had received additional S stock, paragraph (d) 
of this section would not apply to shift basis from P's original S stock 
because the basis of the original stock is not adjusted or determined as 
a result of the contribution; but paragraph (d) would apply to shift 
basis if P had transferred S's stock to T in exchange for additional T 
stock, because the basis of the additional T stock would be determined 
when P has an excess loss account in its original T stock.)
    (c) Intercompany merger. The facts are the same as in paragraph (a) 
of this Example 2, except that T merges into S in a reorganization 
described in section 368(a)(1)(A) (and in section 368(a)(1)(D)), and P 
receives no additional S stock in the reorganization. Under section 354 
and paragraph (b)(2) of this section, P does not recognize gain. Under 
section 358 and paragraph (a)(2)(ii) of this section, P's $100 excess 
loss account in T's stock decreases P's $150 basis in the S stock to 
$50. (Similarly, if S merges into T and P does not receive additional T 
stock, P's $150 basis in S's stock eliminates P's excess loss account in 
T's stock, and increases P's basis in T's stock to $50.)
    (d) Liquidation of only subsidiary. Assume instead that P and S are 
the only members of the P group, P has a $100 excess loss account in S's 
stock, and S liquidates in a transaction to which section 332 applies. 
Under paragraph (c)(2) of this section, the liquidation is not a 
deconsolidation event under paragraph (c)(1)(ii) of this section merely 
because P is the only remaining member. Under section 332 and paragraph 
(b)(2) of this section, P does not recognize gain. Under section 334(b), 
P succeeds to S's basis in the assets it receives from S in the 
liquidation. (P would also not recognize gain if P transferred all of 
its assets (including S's stock) to S in a reorganization to which 
section 361(a) applied, because S would be a successor to P under 
paragraph (f) of this section.)
    Example 3. Section 355 distribution of stock with an excess loss 
account. (a) Facts. P has a $30 excess loss account in S's stock, and S 
has a $90 excess loss account in T's stock. S distributes the T stock to 
P in a transaction to which section 355 applies, and neither P nor S 
recognizes any gain or loss. At the time of the distribution, the T 
stock represents 33% of the value of the S stock. Following the 
distribution, P's basis in the S stock is allocated under Sec. 1.358-2 
in proportion to the fair market values of the S stock and the T stock.
    (b) Analysis. Under paragraph (c) of this section, S's distribution 
of the T stock is treated as a disposition. Under section 355(c) and 
paragraph (b)(2) of this section, S does not recognize any gain from the 
distribution. Under section 358, S's excess loss account in the T stock 
is eliminated, and P's $30 excess loss account in the S stock is treated 
as basis allocated between the S stock and the T stock based on their 
relative values. Consequently, P has a $20 excess loss account in the S 
stock and a $10 excess loss account in the T stock. (If P had a $30 
basis rather than a $30 excess loss account in the S stock, S would not 
recognize gain, its excess loss account in the T stock would be 
eliminated, and P's basis in the stock of S and T would be $20 and $10, 
respectively.)
    (c) Section 355 distribution to nonmember. The facts are the same as 
in paragraph (a) of this Example 3, except that P also distributes the T 
stock to its shareholders in a transaction to which section 355 applies. 
Under paragraph (c) of this section, P's distribution is treated as a 
disposition of T's stock. Under paragraph (b)(2) of this section, 
because P's disposition is described in paragraph (c)(1)(ii) of this 
section, P's $10 excess loss account in the T stock must be taken into 
account at the time of the distribution, notwithstanding the 
nonrecognition rules of section 355(c).
    Example 4. Deconsolidation of a member. (a) Facts. P has a $50 
excess loss account in S's stock, and S has a $100 excess loss account 
in T's stock. T issues additional stock to a nonmember and, as a 
consequence, T becomes a nonmember.
    (b) Analysis. Under paragraph (c)(2) of this section, S is treated 
as disposing of each of its shares of T's stock immediately before T 
becomes a nonmember. Under paragraph (b)(1) of this section, S takes 
into account its $100 excess loss account as gain from the sale or 
exchange of T's stock. Under Sec. 1.1502-32(b) of this section, S's $100 
gain eliminates P's excess loss account in S's stock and increases P's 
basis in S's stock to $50.
    (c) Deconsolidation of a higher-tier member. The facts are the same 
as in paragraph (a) of this Example 4, except that S (rather than T) 
issues the stock and, as a consequence, both S and T become nonmembers. 
Under paragraph (c)(2) of this section, P is treated as

[[Page 238]]

disposing of S's stock and S is treated as disposing of T's stock 
immediately before S and T become nonmembers. Under Sec. 1.1502-32(b) 
and paragraph (b)(3) of this section, because S and T become nonmembers 
in the same transaction and T is the lower-tier member, S is first 
treated under paragraph (b)(1) of this section as taking into account 
its $100 excess loss account as gain from the sale or exchange of T's 
stock. Under Sec. 1.1502-32(b), S's $100 gain eliminates P's excess loss 
account in S's stock and increases P's basis in S's stock to $50 
immediately before S becomes a nonmember. Thus, only S's $100 gain is 
taken into account in the determination of the group's consolidated 
taxable income.
    (d) Intercompany gain and deconsolidation. The facts are the same as 
in paragraph (c) of this Example 4, except that T has $30 of gain that 
is deferred under Sec. 1.1502-13 and taken into account in determining 
consolidated taxable income immediately before T becomes a nonmember. 
Under Sec. 1.1502-32(b), T's $30 gain decreases S's excess loss account 
in T's stock from $100 to $70 immediately before S is treated as 
disposing of T's stock. Under paragraph (b)(1) of this section, S is 
treated as taking into account its $70 excess loss account as gain from 
the disposition of T's stock. Under Sec. 1.1502-32(b), S's $70 gain from 
the excess loss account and T's $30 deferred gain that is taken into 
account eliminate P's $50 excess loss account in S's stock and increase 
P's basis in S's stock to $50 immediately before S becomes a nonmember.
    Example 5. Worthlessness. (a) Facts. P forms S with a $150 
contribution, and S borrows $150. For Year 1, S has a $50 ordinary loss 
that is carried over as part of the group's consolidated net operating 
loss. For Year 2, P has $160 of ordinary income, and S has a $160 
ordinary loss. Under Sec. 1.1502-32(b), S's loss results in P having a 
$10 excess loss account in S's stock. During Year 3, the value of S's 
assets (without taking S's liabilities into account) continues to 
decline and S's stock becomes worthless within the meaning of section 
165(g) (without taking into account Sec. 1.1502-80(c)). For Year 4, S 
has $10 of ordinary income.
    (b) Analysis. Under paragraph (c)(1)(iii)(A) of this section, P is 
not treated as disposing of S's stock in Year 3 solely because S's stock 
becomes worthless within the meaning of section 165(g) (taking S's 
liabilities into account). In addition, because S's stock is not treated 
as worthless, section 382(g)(4)(D) does not prevent the Year 1 
consolidated net operating loss carryover from offsetting S's $10 of 
income in Year 4.
    (c) Discharge of indebtedness. The facts are the same as in 
paragraph (a) of this Example 5, except that, instead of S's stock 
becoming worthless within the meaning of section 165(g), S's creditor 
discharges $40 of S's indebtedness during Year 3, S is insolvent by more 
than $40 before the discharge, the discharge is excluded from the P 
group's gross income under section 108(a), and $40 of the $50 
consolidated net operating loss carryover attributable to S is 
eliminated under section 108(b). Under Sec. 1.1502- 32(b)(3)(ii)(C), S's 
$40 of discharge income is treated as tax-exempt income because there is 
a corresponding decrease under Sec. 1.1502-32(b)(3)(iii) for elimination 
of the loss carryover. Under paragraph (c)(1)(iii)(B) of this section, P 
is treated as disposing of S's stock if the amount discharged is not 
included in gross income and is not treated as tax-exempt income under 
Sec. 1.1502-32(b)(3)(ii)(C). Because the discharge is treated as tax-
exempt income, P is not treated as disposing of S's stock by reason of 
the discharge.
    Example 6. Avoiding worthlessness. (a) Facts. P forms S with a $100 
contribution and S borrows $150. For Years 1 through 5, S has a $210 
ordinary loss that is absorbed by the group. Under Sec. 1.1502-32(b), 
S's loss results in P having a $110 excess loss account in S's stock. S 
defaults on the indebtedness, but the creditor does not discharge the 
debt (or initiate collection procedures). At the beginning of Year 6, S 
ceases any substantial operations with respect to the assets, but 
maintains their ownership with a principal purpose to avoid P's taking 
into account its excess loss account in S's stock.
    (b) Analysis. Under paragraph (c)(1)(iii)(A) of this section, P's 
excess loss account on each of its shares of S's stock ordinarily is 
taken into account at the time substantially all of S's assets are 
treated as disposed of, abandoned, or destroyed for Federal income tax 
purposes. Under paragraph (e) of this section, however, S's assets are 
not taken into account at the beginning of Year 6 for purposes of 
applying paragraph (c)(1)(iii)(A) of this section. Consequently, S is 
treated as worthless at the beginning of Year 6, and P's $110 excess 
loss account is taken into account.

    (h) Effective date--(1) Application. This section applies with 
respect to determinations of the basis of (including an excess loss 
account in) the stock of a member in consolidated return years beginning 
on or after January 1, 1995. If this section applies, basis (and excess 
loss accounts) must be determined or redetermined as if this section 
were in effect for all years (including, for example, the consolidated 
return years of another consolidated group to the extent adjustments 
during those consolidated return years are still reflected). Any such 
determination or redetermination does not, however, affect any prior 
period.
    (2) Dispositions of stock before effective date--(i) In general. If 
P was treated as

[[Page 239]]

disposing of stock of S in a tax year beginning before January 1, 1995 
(including, for example, a deemed disposition because S was worthless) 
under the rules of this section then in effect, the amount of P's 
income, gain, deduction, or loss, and the stock basis reflected in that 
amount, are not redetermined under paragraph (h)(1) of this section. See 
paragraph (h)(3) of this section for the applicable rules.
    (ii) Intercompany amounts. For purposes of this paragraph (h)(2), a 
disposition does not include a transaction to which Sec. 1.1502-13, 
Sec. 1.1502-13T, Sec. 1.1502-14, or Sec. 1.1502-14T applies. Instead, 
the transaction is deemed to occur as the income, gain, deduction, or 
loss (if any) is taken into account.
    (3) Prior law. For prior determinations, see prior regulations under 
section 1502 as in effect with respect to the determination. See, e.g., 
Sec. 1.1502-19 as contained in the 26 CFR part 1 edition revised as of 
April 1, 1994.

[T.D. 8560, 59 FR 41677, Aug. 15, 1994, as amended by T.D. 8597, 62 FR 
12097, Mar. 14, 1997]



Sec. 1.1502-20  Disposition or deconsolidation of subsidiary stock.

    (a) Loss disallowance--(1) General rule. No deduction is allowed for 
any loss recognized by a member with respect to the disposition of stock 
of a subsidiary. See also Secs. 1.1502-11(c) (stock losses attributable 
to certain pre-1966 distributions) and 1.1502-80(c) (deferring the 
treatment of stock of members as worthless under section 165(g)).
    (2) Disposition. Disposition means any event in which gain or loss 
is recognized, in whole or in part.
    (3) Coordination with loss deferral and other disallowance rules--
(i) In general. Loss with respect to the stock of a subsidiary may be 
deferred or disallowed under other applicable provisions of the Code and 
regulations, including section 267(f). Paragraph (a)(1) of this section 
does not apply to loss that is disallowed under any other provision. If 
loss is deferred under any other provision, paragraph (a)(1) of this 
section applies when the loss is taken into account. However, if an 
overriding event described in paragraph (a)(3)(ii) of this section 
occurs before the deferred loss is taken into account, paragraph (a)(1) 
of this section applies to the loss immediately before the event occurs 
even though the loss may not be taken into account until a later time. 
Any loss not disallowed under paragraph (a)(1) of this section is 
subject to disallowance or deferral under other applicable provisions of 
the Code and regulations.
    (ii) Overriding events. For purposes of paragraph (a)(3)(i) of this 
section, the following are overriding events:
    (A) The stock ceases to be owned by a member of the consolidated 
group.
    (B) The stock is canceled or redeemed (regardless of whether it is 
retired or held as treasury stock).
    (C) The stock is treated as disposed of under Sec. 1.1502-
19(c)(1)(ii)(B) or (c)(1)(iii).
    (4) Netting. Paragraph (a) (1) of this section does not apply to 
loss with respect to the disposition of stock of a subsidiary, to the 
extent that, as a consequence of the same plan or arrangement, gain is 
taken into account by members with respect to stock of the same 
subsidiary having the same material terms. If the gain to which this 
paragraph (a)(4) applies is less than the amount of the loss with 
respect to the disposition of the subsidiary's stock, the gain is 
applied to offset loss with respect to each share disposed of as a 
consequence of the same plan or arrangement in proportion to the amount 
of the loss deduction that would have been disallowed under paragraph 
(a)(1) of this section with respect to such share before the application 
of this paragraph (a)(4). If the same item of gain could be taken into 
account more than once in limiting the application of paragraphs (a)(1) 
and (b)(1) of this section, the item is taken into account only once.
    (5) Examples. For purposes of the examples in this section, unless 
otherwise stated, all corporations have only one class of stock 
outstanding, all groups file consolidated returns on a calendar-year 
basis, the facts set forth the only corporate activity, all transactions 
are between unrelated persons, and tax liabilities are disregarded. The 
basis of each asset is the same for determining earnings and profits 
adjustments and taxable income. References to the investment adjustment 
system are references to the rules of Secs. 1.1502-

[[Page 240]]

19, 1.1502-32 and 1.1502-33. The principles of this paragraph (a) are 
illustrated by the following examples.


    Example 1. Loss attributable to recognized built-it gain. P buys all 
the stock of T for $100, and T becomes a member of the P group. T has an 
asset with a basis of $0 and a value of $100. T sells the asset for 
$100. Under the investment adjustment system, P's basis in the T stock 
increases to $200. Five years later, P sells all the T stock for $100 
and recognizes a loss of $100. Under paragraph (a)(1) of this section, 
no deduction is allowed to P for the $100 loss.
    Example 2. Effect of post-acquisition appreciation. P buys all the 
stock of T for $100, and T becomes a member of the P group. T has an 
asset with a basis of $0 and a value of $100. T sells the asset for 
$100. Under the investment adjustment system, P's basis in the T stock 
increases to $200. T reinvests the proceeds of the sale in an asset that 
appreciates in value to $180. Five years after the sale, P sells all the 
stock of T for $180 and recognizes a $20 loss. Under paragraph (a)(1) of 
this section, no deduction is allowed to P for the $20 loss.
    Example 3. Disallowance of duplicated loss.  P forms S with a 
contribution of $100 in exchange for all of the S stock, and S becomes a 
member of the P group. S has an operating loss of $60. The group is 
unable to use the loss, and the loss becomes a consolidated net 
operating loss carryover attributable to S. Five years later, P sells 
the stock of S for $40, recognizing a $60 loss. Under paragraph (a)(1) 
of this section, P's $60 loss on the sale of the S stock is disallowed. 
(See paragraph (g) of this section for the elective reattribution of S's 
$60 net operating loss to P in connection with the sale.)
    Example 4. Deemed asset sale election. (i) P forms S with a 
contribution of $100 in exchange for all of the S stock, and S becomes a 
member of the P group. S buys an asset for $100, and the value of the 
asset declines to $40. P sells all the S stock to P1 for $40. Under 
paragraph (a)(1) of this section, P's $60 loss on the sale of the S 
stock is disallowed.
    (ii) If P and P1 instead elect deemed asset sale treatment under 
section 338 (h) (10), S is treated as selling all of its assets, and no 
loss is recognized by P on its sale of the S stock. As a result of the 
recharacterization of the stock sale as an asset sale, the $60 loss in 
the asset is recognized. Under section 338 (h)(10), S's $60 loss is 
included in the consolidated return of the P group, and S is treated as 
liquidating into P under section 332 following the deemed asset sale. 
Paragraph (a)(1) of this section does not apply to S's $60 loss.
    Example 5. Gain and loss recognized with respect to stock as a 
consequence of the same plan or arrangement. P, the common parent of a 
group, owns 50 shares of the stock of T with an aggregate basis of $50, 
and S, a wholly owned subsidiary of P, owns the remaining 50 shares of 
T's stock with an aggregate basis of $100. All of the stock has the same 
terms. P and S sell all the T stock to the public for $140 pursuant to a 
single public offering. P therefore recognizes a gain of $20 and S 
recognizes a loss of $30. For purposes of paragraph (a)(4) of this 
section, the gain and loss recognized by P and S is considered to be a 
consequence of the same plan or arrangement. Accordingly, the amount of 
S's $30 loss disallowed under paragraph (a)(1) of this section is 
limited to $10 (the $30 reduced by P's $20 gain).
    Example 6. Deferred loss and recognized gain. (i) P is the common 
parent of a consolidated group, S is a wholly owned subsidiary of P, and 
T is a recently purchased, wholly owned subsidiary of S. S has a $100 
basis in the T stock, and T has an asset with a basis of $40 and a value 
of $100. T sells the asset for $100, recognizing a $60 gain. Under the 
investment adjustment system, S's basis in the T stock increases from 
$100 to $160. S sells its T stock to P for $100 in an intercompany 
transaction, recognizing a $60 intercompany loss that is deferred under 
section 267(f) and Sec. 1.1502-13. P subsequently sells all the stock of 
T for $100 to X, a member of the same controlled group (as defined in 
section 267(f)) as P but not a member of the P consolidated group.
    (ii) Under paragraph (a)(3)(i) of this section, the application of 
paragraph (a)(1) of this section to S's $60 intercompany loss on the 
sale of its T stock to P is deferred, because S's intercompany loss is 
deferred under section 267(f) and Sec. 1.1502-13. P's sale of the T 
stock to X ordinarily would result in S's intercompany loss being taken 
into account under the matching rule of Sec. 1.1502-13(c). The deferred 
loss is not taken into account under Sec. 1.267(f)-1, however, because 
P's sale to X (a member of the same controlled group as P) is a second 
intercompany transaction for purposes of section 267(f). Nevertheless, 
paragraph (a)(3)(ii) of this section provides that paragraph (a)(1) of 
this section applies to the intercompany loss as a result of P's sale to 
X because the T stock ceases to be owned by a member of the P 
consolidated group. Thus, the loss is disallowed under paragraph (a)(1) 
of this section immediately before P's sale and is therefore never taken 
into account under section 267(f).
    (iii) The facts are the same as in (i) of this Example, except that 
S is liquidated after its sale of the T stock to P, but before P's sale 
of the T stock to X, and P sells the T stock to X for $110. Under 
Secs. 1.1502-13(j) and 1.267(f)-1(b), P succeeds to S's intercompany 
loss as a result of S's liquidation. Thus, paragraph (a)(3)(i) of this 
section continues to defer the application of paragraph (a)(1) of this 
section until P's sale to X. Under paragraph (a)(4) of this section, the 
amount of S's $60 intercompany loss disallowed under paragraph (a)(1) of 
this section is limited to $50 because P's

[[Page 241]]

$10 gain on the disposition of the T stock is taken into account as a 
consequence of the same plan or arrangement.
    (iv) The facts are the same as in (i) of this Example, except that P 
sells the T stock to A, a person related to P within the meaning of 
section 267(b)(2). Although S's intercompany loss is ordinarily taken 
into account under the matching rule of Sec. 1.1502-13(c) as a result of 
P's sale, Sec. 1.267(f)-1(c)(2)(ii) provides that none of the 
intercompany loss is taken into account because A is a nonmember that is 
related to P under section 267(b). Under paragraph (a)(3)(i) of this 
section, paragraph (a)(1) of this section does not apply to loss that is 
disallowed under any other provision. Because Sec. 1.267(f)-1(c)(2)(ii) 
and section 267(d) provide that the benefit of the intercompany loss is 
retained by A if the property is later disposed of at a gain, the 
intercompany loss is not disallowed for purposes of paragraph (a)(3)(i) 
of this section. Thus, the intercompany loss is disallowed under 
paragraph (a)(1) of this section immediately before P's sale and is 
therefore never taken into account under section 267(d).

    (b) Basis reduction on deconsolidation--(1) General rule. If a 
member's basis in a share of stock of a subsidiary exceeds its value 
immediately before a deconsolidation of the share, the basis of the 
share is reduced at that time to an amount equal to its value. If both a 
disposition and a deconsolidation occur with respect to a share in the 
same transaction, paragraph (a) of this section applies and, to the 
extent necessary to effectuate the purposes of this section, this 
paragraph (b) applies following the application of paragraph (a) of this 
section.
    (2) Deconsolidation. Deconsolidation means any event that causes a 
share of stock of a subsidiary that remains outstanding to be no longer 
owned by a member of any consolidated group of which the subsidiary is 
also a member.
    (3) Value. Value means fair market value.
    (4) Netting. Paragraph (b)(1) of this section does not apply to 
reduce the basis of stock of a subsidiary, to the extent that, as a 
consequence of the same plan or arrangement as that giving rise to the 
deconsolidation, gain is taken into account by members with respect to 
stock of the same subsidiary having the same material terms. If the gain 
to which this paragraph (b)(4) applies is less than the amount of basis 
reduction with respect to shares of the subsidiary's stock, the gain is 
applied to offset basis reduction with respect to each share 
deconsolidated as a consequence of the same plan or arrangement in 
proportion to the amount of the reduction that would have been required 
under paragraph (b)(1) of this section with respect to such share before 
the application of this paragraph (b)(4). If the same item of gain could 
be taken into account more than once in limiting the application of 
paragraphs (a)(1) and (b)(1) of this section, the time is taken into 
account only once.
    (5) Loss within 2 years after basis reduction--(i) In general. If a 
share is deconsolidated and a direct or indirect disposition of the 
share occurs within 2 years after the date of the deconsolidation, a 
separate statement entitled ``Statement Pursuant to Section Sec. 1.1502-
20(b)(5)'' must be filed with the taxpayer's return for the year of 
disposition. If the taxpayer fails to file the statement as required, no 
deduction is allowed for any loss recognized with respect to the 
disposition. A disposition after the 2-year period described in this 
paragraph (b)(5) that is pursuant to an agreement, option, or other 
arrangement entered into within the 2-year period is treated as a 
disposition within the 2-year period for purposes of this section.
    (ii) Contents of statement. The statement required under paragraph 
(b)(5)(i) of this section must contain--
    (A) The name and employer identification number (E.I.N.) of the 
subsidiary.
    (B) The amount of prior basis reduction (if any) with respect to the 
stock of the subsidiary under paragraph (b)(1) of this section.
    (C) The basis of the stock of the subsidiary immediately before the 
disposition.
    (D) The amount realized on the disposition.
    (E) The amount of the loss recognized on the disposition.
    (6) Examples. The principles of this paragraph (b) are illustrated 
by the following examples.

    Example 1. Simultaneous application of loss disallowance rule and 
basis reduction rule to stock of the same subsidiary. (i) P buys all the 
stock of T for $100, and T becomes a member of the P group. T has an 
asset with a basis of $0 and a value of $100. T sells the asset for

[[Page 242]]

$100. Under the investment adjustment system, P's basis in the T stock 
increases to $200. Five years later, P sells 60 shares of T stock for 
$60 and recognizes $60 loss on the sale. The sale causes a 
deconsolidation of the remaining 40 shares of T stock held by P.
    (ii) P's $60 loss on the sale of T stock is disallowed under 
paragraph (a)(1) of this section. Under paragraph (b)(1) of this 
section, P must reduce the basis of the 40 shares of T stock it 
continues to own from $80 to $40, the value of the shares immediately 
before the deconsolidation.
    (iii) Although P's disposition of the 60 shares also causes a 
deconsolidation of these shares, paragraph (b)(1) of this section 
provides that, if both paragraph (a) and paragraph (b) of this section 
apply to a share in the same transaction, paragraph (a) of this section 
applies first and this paragraph (b) applies only to the extent 
necessary to effectuate the purposes of this section. Under paragraph 
(a)(1) of this section, P's $60 loss on the sale of the 60 shares is 
disallowed. Under the facts of this example, it is not necessary to also 
apply this paragraph (b) to the 60 shares in order to effectuate the 
purposes of this section.
    Example 2. Deconsolidation of subsidiary stock on contribution to a 
partnership. (i) P buys all the stock of T for $100, and T becomes a 
member of the P group. T has an asset with a basis of $0 and a value of 
$100. T sells the asset for $100. Under the investment adjustment 
system, P's basis in the T stock increases to $200. Five years later, P 
transfers all the stock of T to partnership M in exchange for a 
partnership interest in M, in a transaction to which section 721 
applies.
    (ii) At the time of the exchange, P's basis in the T stock is $200 
and the T stock's value is $100. Under paragraph (b) of this section, 
the transfer to M causes a deconsolidation of the T stock, and P must 
reduce its basis in the T stock, immediately before the transfer to M, 
from $200 to the stock's $100 value at the time of the transfer. As a 
result, P has a basis of $100 in its interest in M, and M has a basis of 
$100 in the stock of T.
    Example 3. Simultaneous application of loss disallowance and basis 
reduction to stock of different subsidiaries. (i) P owns all the stock 
of S, which in turn owns all the stock of S1, and S and S1 are members 
of the P group. P's basis in the S stock is $100 and S's basis in the S1 
stock is $100. S1 buys all the stock of T for $100, and T becomes a 
member of the P group. T has an asset with a basis of $0 and a value of 
$100. T sells the asset for $100. Under the investment adjustment 
system, S1's basis in the T stock, S's basis in the S1 stock, and P's 
basis in the S stock each increase from $100 to $200. S then sells all 
the S1 stock for $100 and recognizes a loss of $100.
    (ii) Under paragraph (a)(1) of this section, S's $100 loss on the 
sale of the S1 stock is disallowed.
    (iii) If S1 and T are not members of a consolidated group 
immediately after the sale of the stock of S1, the T stock is 
deconsolidated and, under paragraph (b)(1) of this section, S1 must 
reduce the basis of the T stock to its $100 value immediately before the 
sale.
    (iv) If S1 and T are members of a consolidated group immediately 
after the sale of the S1 stock, the T stock is not deconsolidated, and 
no reduction is required under paragraph (b)(1) of this section.
    Example 4. Extending the time period for dispositions. (i) In Year 
1, P, the common parent of a group, buys all 100 shares of the stock of 
T for $100. T's only asset has a basis of $0 and a value of $100. T 
sells the asset for $100. Under the investment adjustment system, P's 
basis in the T stock increases from $100 to $200. At the beginning of 
Year 5, P causes T to issue 30 additional shares of stock to the public 
for $30. This issuance causes a deconsolidation of the T stock owned by 
P, and paragraph (b)(1) of this section requires P to reduce its basis 
in the T stock from $200 to $100.
    (ii) Within 2 years after the date of the basis reduction, P agrees 
to sell all of its T stock for $90 at the end of Year 7. Under paragraph 
(b)(5) of this section, P's disposition of the T stock at the end of 
Year 7 is treated as occurring within the 2-year period following the 
basis reduction, because the disposition is pursuant to an agreement 
reached within 2 years after the basis reduction. Accordingly, P's $10 
loss may not be deducted unless P files the statement required under 
paragraph (b)(5) of this section. This result is reached whether or not 
the agreement is in writing. P's disposition would also have been 
treated as occurring within the 2-year period if the disposition were 
pursuant to an option issued within the period.
    Example 5. Deferred loss and subsequent basis reduction. (i) P is 
the common parent of a consolidated group, S is a wholly owned 
subsidiary of P, and T is a recently purchased, wholly owned subsidiary 
of S. S has a $100 basis in the T stock, and T has an asset with a basis 
of $40 and a value of $100. T sells the asset for $100, recognizing $60 
of gain. Under the investment adjustment system, S's basis in the T 
stock increases from $100 to $160. S sells its T stock to P for $100 in 
an intercompany transaction, recognizing a $60 intercompany loss that is 
deferred under section 267(f) and Sec. 1.1502-13. T issues 30 additional 
shares of stock to the public for $30 which causes a deconsolidation of 
the T stock owned by P.
    (ii) Under paragraph (a)(3)(i) of this section, the application of 
paragraph (a)(1) of this section to S's intercompany loss on the sale of 
its T stock to P is deferred because S's loss is deferred under section 
267(f) and Sec. 1.1502-13. Because the fair market value of the T stock 
owned by P is $100 immediately before the deconsolidation and P has a 
$100

[[Page 243]]

basis in the stock at that time, no basis reduction is required under 
paragraph (b)(1) of this section.
    (iii) T's issuance of additional shares to the public results in S's 
intercompany loss being taken into account under the acceleration rule 
of Sec. 1.1502-13(d) because there is no difference between P's $100 
basis in the T stock and the $100 basis the T stock would have had if P 
and S had been divisions of a single corporation. S's loss taken into 
account is disallowed under paragraph (a)(1) of this section.
    Example 6. Gain and basis reduction with respect to the same plan or 
arrangement. (i) P, the common parent of a group, owns 50 shares of T 
stock with an aggregate basis of $50, and S, a wholly owned subsidiary 
of P, owns the remaining 50 shares of T stock with an aggregate basis of 
$100. All of the stock has the same terms. P sells all of its T stock to 
the public for $70 and recognizes a $20 gain. The sale causes a 
deconsolidation of S's 50 shares of T stock.
    (ii) Under paragraph (b)(1) of this section, S must reduce the basis 
of its 50 shares of T stock from $100 to $70, the value of the shares 
immediately before the deconsolidation. However, under paragraph (b)(4) 
of this section, because P's $20 gain is recognized as a consequence of 
the same plan or arrangement as that giving rise to the deconsolidation, 
S's basis reduction is eliminated to the extent of $20. Thus, S must 
reduce the basis of its T stock from $100 to $90.
    Example 7. Netting allocated between loss disallowance and basis 
reduction. (i) P is the common parent of a group and S is its wholly 
owned subsidiary. P and S each own 50 shares of T stock and each has an 
aggregate basis of $50. All of the stock has the same terms. S recently 
purchased its T stock from S1, a lower tier subsidiary, in an 
intercompany transaction in which S1 recognized a $30 intercompany gain 
that was deferred under Sec. 1.1502-13. T has an asset with a basis of 
$0 and a value of $100. T sells the asset for $100, recognizing $100 of 
gain. Under the investment adjustment system, P and S each increase the 
basis of their T stock to $100. S sells all of its T stock to the public 
for $50 and recognizes a $50 loss. The sale causes a deconsolidation of 
P's T stock.
    (ii) S's $50 loss on the sale of T stock is disallowed under 
paragraph (a)(1) of this section. Under paragraph (b)(1) of this 
section, P must reduce its $100 basis in the T stock to the $50 value 
immediately before the deconsolidation.
    (iii) Under the matching rule of Sec. 1.1502-13, S's sale of its T 
stock results in S1's $30 intercompany gain being taken into account. 
Under paragraphs (a)(4) and (b)(4) of this section, the gain may be 
taken into account by P and S in limiting the application of paragraphs 
(a)(1) and (b)(1) of this section, but it may be taken into account only 
once. Under paragraph (a)(4) of this section, S may apply the gain to 
decrease the amount of loss disallowed under paragraph (a)(1) of this 
section from $50 to $20. None of the gain remains to decrease the $50 of 
P's basis reduction under paragraph (b)(1) of this section. (P may 
instead apply the gain to decrease the basis reduction under paragraph 
(b)(1) of this section instead of S decreasing its disallowed loss, but 
if the T stock is sold within 2 years, the statement described in 
paragraph (b)(5) of this section must be filed if a deduction is to be 
allowed for any loss recognized on the disposition.)

    (c) Allowable loss--(1) General rule. The amount of loss disallowed 
under paragraph (a)(1) of this section and the amount of basis reduction 
under paragraph (b)(1) of this section with respect to a share of stock 
shall not exceed the sum of the following amounts--
    (i) Extraordinary gain dispositions. The amount of income or gain 
(or its equivalent), net of directly related expenses, that is allocated 
to the share from extraordinary gain dispositions.
    (ii) Positive investment adjustments. The amount of the positive 
adjustment (if any) with respect to the share under Sec. 1.1502-32 for 
each consolidated return year, but only to the extent the amount exceeds 
the amount described in paragraph (c)(1)(i) of this section for the 
year.
    (iii) Duplicated loss. The amount of duplicated loss with respect to 
the share.
    (2) Operating rules. For purposes of applying paragraph (c)(1) of 
this section--
    (i) Extraordinary gain dispositions. An ``extraordinary gain 
disposition'' is--
    (A) An actual or deemed disposition of--
    (1) A capital asset as defined in section 1221 (determined without 
the application of any other rules of law).
    (2) Property used in a trade or business as defined in section 
1231(b) (determined without the application of any holding period 
requirement).
    (3) An asset described in section 1221 (1), (3), (4), or (5), if 
substantially all the assets in such category from the same trade or 
business are disposed of in one transaction (or series of related 
transactions).
    (4) Assets disposed of in an applicable asset acquisition under 
section 1060(c).

[[Page 244]]

    (B) A positive section 481(a) adjustment.
    (C) A discharge of indebtedness.
    (D) Any other event (or item) identified in guidance published in 
the Internal Revenue Bulletin.

    An extraordinary gain disposition is taken into account under 
paragraph (c)(1)(i) of this section only if it occurs on or after 
November 19, 1990. For this purpose, federal income taxes may be 
directly related to extraordinary gain dispositions only to the extent 
of the excess (if any) of the group's income tax liability actually 
imposed under subtitle A of the Internal Revenue Code for the taxable 
year of the extraordinary gain dispositions over the group's income tax 
liability for the taxable year redetermined by not taking into account 
the extraordinary gain dispositions. For this purpose, the group's 
income tax liability actually imposed and its redetermined income tax 
liability are determined without taking into account the foreign tax 
credit under section 27(a) of the Code.
    (ii) Positive investment adjustments. For purposes of paragraph 
(c)(1)(ii) of this section, a positive adjustment under Sec. 1.1502-32 
is the sum of the amounts under Sec. 1.1502-32(b)(2) (i) through (iii) 
for the consolidated return year (the adjustment determined without 
taking distributions into account). However, amounts included in any 
loss carryover are taken into account in the year they arise rather than 
the year absorbed.
    (iii) Applicable amounts. Amounts are described in paragraphs 
(c)(1)(i) and (ii) of this section only to the extent they are reflected 
in the basis of the share, directly or indirectly, immediately before 
the disposition or deconsolidation. For this purpose, an amount is 
reflected in the basis of a share if the share's basis would have been 
different without the amount. However, amounts included in any loss 
carryover are taken into account in the year they arise rather than the 
year absorbed.
    (iv) Related party rule. The amounts described in paragraphs (c)(1) 
(i) and (ii) of this section are not reduced or eliminated by reason of 
an acquisition of the share from a person related within the meaning of 
section 267(b) or section 707(b)(1), substituting ``10 percent'' for 
``50 percent'' each place that it appears, even if the share is not 
transferred basis property as defined in section 7701 (a)(43).
    (v) Pre-September 13, 1991 positive investment adjustments--(A) In 
general. The amount determined under paragraph (c)(1)(ii) of this 
section is limited for tax years of the subsidiary ending on or before 
September 13, 1991. The amount may not exceed the net increase, if any, 
in the basis of the share from--
    (1) The date the share was first acquired by a member (whether or 
not a member at that time); to
    (2) The end of the last taxable year ending on or before September 
13, 1991 (or, if earlier, the date of the disposition or 
deconsolidation). If the share is transferred basis property (within the 
meaning of section 7701 (a)(43) from a prior consolidated group, the 
date under paragraph (c)(2)(v)(A)(1) of this section is the date the 
share was first acquired by a member of the prior group. For purposes of 
this paragraph (c)(2)(v)(A), an increase in an excess loss account is 
treated as a decrease in stock basis and a decrease in an excess loss 
account is treated as an increase in stock basis.
    (B) Cessation of netting. If a lower amount would result under 
paragraph (c)(1)(ii) of this section by determining the amount under 
this paragraph (c)(2)(v) as of the end of an earlier taxable year ending 
after December 31, 1986--
    (1) The amount under this paragraph (c)(2)(v) is determined as of 
the earlier year end; and
    (2) The amount determined under paragraph (c)(1)(ii) of this section 
is not limited for tax years of the subsidiary ending after the earlier 
year end.
    (vi) Duplicated loss. ``Duplicated loss'' is determined immediately 
after a disposition or deconsolidation, and equals the excess (if any) 
of--
    (A) The sum of--
    (1) The aggregate adjusted basis of the assets of the subsidiary 
other than any stock and securities that the subsidiary owns in another 
subsidiary, and
    (2) Any losses attributable to the subsidiary and carried to the 
subsidiary's first taxable year following the disposition or 
deconsolidation, and

[[Page 245]]

    (3) Any deferred deductions (such as deductions deferred under 
section 469) of the subsidiary, over
    (B) The sum of--
    (1) The value of the subsidiary's stock, and
    (2) Any liabilities of the subsidiary, and
    (3) Any other relevant items.
    The amounts determined under this paragraph (c)(2)(vi) with respect 
to a subsidiary include its allocable share of corresponding amounts 
with respect to all lower tier subsidiaries. If 80 percent or more in 
value of the stock of a subsidiary is acquired by purchase in a single 
transaction (or in a series of related transactions during any 12-month 
period), the value of the subsidiary's stock may not exceed the purchase 
price of the stock divided by the percentage of the stock (by value) so 
purchased. For this purpose, stock is acquired by purchase if the 
transferee is not related to the transferor within the meaning of 
sections 267(b) and 707(b)(1), substituting ``10 percent'' for ``50 
percent'' each place that it appears, and the transferee's basis in the 
stock is determined wholly by reference to the consideration paid for 
such stock.
    (vii) Disallowance amounts applied only once. The amounts described 
in paragraph (c)(1) of this section are not applied more than once to 
disallow a loss, reduce basis, or reattribute loss under this section.
    (3) Statement of allowed loss. Paragraph (c)(1) of this section 
applies only if the separate statement required under this paragraph 
(c)(3) is filed with the taxpayer's return for the year of the 
disposition or deconsolidation. The statement must be entitled ``ALLOWED 
LOSS UNDER SECTION 1.1502-20(c)'' and must contain--
    (i) The name and employer identification number (E.I.N.) of the 
subsidiary.
    (ii) The basis of the stock of the subsidiary immediately before the 
disposition or deconsolidation.
    (iii) The amount realized on the disposition and the amount of fair 
market value on the deconsolidation.
    (iv) The amount of the deduction not disallowed under paragraph 
(a)(1) of this section by reason of this paragraph (c) and the amount of 
basis not reduced under paragraph (b)(1) of this section by reason of 
this paragraph (c).
    (v) The amount of loss disallowed under paragraph (a)(1) of this 
section and the amount of basis reduced under paragraph (b)(1) of this 
section.
    (4) Examples. For purposes of the examples in this paragraph, unless 
otherwise stated, the group files the statement required under paragraph 
(c)(3) of this section. The principles of this paragraph (c) are 
illustrated by the following examples.

    Example 1. Allowable loss attributable to lost built-in gain. (i) 
Individual A forms T. P buys all the stock of T from A for $100, and T 
becomes a member of the P group. T has a capital asset with a basis of 
$0 and a value of $100. The value of the asset declines, and T sells the 
asset for $40. Under the investment adjustment system, P's basis in the 
T stock increases to $140. P then sells all the stock of T for $40 and 
recognizes a loss of $100.
    (ii) The amount of the $100 loss disallowed under paragraph (a)(1) 
of this section may not exceed the amount determined under paragraph 
(c)(1) of this section. Under paragraphs (c)(2) (i) and (iii) of this 
section, T's $40 gain is from an extraordinary gain disposition and the 
amount is reflected in the basis of the T stock under Sec. 1.1502-32 
immediately before the disposition. Thus, the gain is described in 
paragraph (c)(1)(i) of this section. Because this amount is the only 
amount described in paragraph (c)(1) of this section, the amount of P's 
$100 loss that is disallowed under paragraph (a)(1) of this section is 
limited to $40. (No amount is described in paragraph (c)(1)(ii) of this 
section because the amount of T's positive investment adjustments does 
not exceed the amount included under paragraph (c)(1)(i) of this 
section.)
    (iii) The results would be the same if the asset, instead of being 
owned by T, is owned by a partnership in which T is a partner and T is 
allocated the $40 of gain under section 704(b). Under paragraphs (c)(2) 
(i) and (iii) of this section, T's $40 gain is from an extraordinary 
gain disposition, and the gain is reflected in the basis of the T stock 
under Sec. 1.1502-32 immediately before the disposition.
    Example 2. Extraordinary gain dispositions. (i) Individual A forms 
T. P buys all the stock of T from A for $100 in Year 1, and T becomes a 
member of the P group. T owns a capital asset, asset 1, with a basis of 
$0 and a value of $100. T sells asset 1 for $100 in Year 1 and invests 
the proceeds in a trade or business asset, asset 2. For Year 2, asset 2 
produces $30 of gross operating income and $20 of cost recovery 
deductions. On December 31 of Year 2, asset 2 has an $80 adjusted basis 
and T disposes of asset 2 for $85; however, because T

[[Page 246]]

incurs $20 of expenses directly related to the sale of asset 2, the 
disposition produces a $15 loss that is taken into account in the 
determination of taxable income or loss under Sec. 1.1502-32(b)(2)(i) 
(the loss offsets T's $10 of operating income for Year 2, as well as $5 
of operating income of P in that year). Under the investment adjustment 
system, P's basis in the T stock increases by $95, to $195, because T 
has $110 of income and a $15 loss. P sells the T stock for $95 in Year 5 
and recognizes a $100 loss.
    (ii) Under paragraphs (c)(2) (i) and (iii) of this section, the $100 
gain from the disposition of asset 1 is from an extraordinary gain 
disposition and is reflected in the basis of the T stock. Thus, the gain 
is described in paragraph (c)(1)(i) of this section. The sale of asset 2 
is not taken into account under paragraph (c)(1)(i) of this section 
because, net of directly related expenses, T does not have income or 
gain from the sale. (No amount is described under paragraph (c)(1)(ii) 
of this section because T's positive investment adjustments are taken 
into account under paragraph (c)(1)(i) of this section.) Because the 
$100 amount described under paragraph (c)(1)(i) of this section equals 
P's $100 loss from the disposition of the T stock, all of the loss is 
disallowed.
    Example 3. Positive investment adjustments. (i) Individual A forms 
T. S, a member of the P group, buys all the stock of T from A for $100, 
and T becomes a member of the P group. T has an asset with a basis of $0 
and a value of $100. The asset earns $100 of operating income in Year 1 
and declines in value to $0. T invests the operating income in another 
asset that produces a $25 operating loss for Year 2. Under the 
investment adjustment system, S's basis in the T stock increases to $200 
at the end of Year 1, and decreases to $175 at the end of Year 2. S 
sells all the stock of T for $75 in Year 5 and recognizes a loss of 
$100.
    (ii) Under paragraph (c)(1)(ii) of this section, the $100 of income 
from Year 1 is a positive investment adjustment. The amount is not 
reduced by the $25 operating loss for Year 2. Because the $100 amount 
described under paragraph (c)(1)(ii) of this section equals S's $100 
loss from the disposition of the T stock, all of the loss is disallowed.
    Example 4. Treatment of net operating income as attributable to 
built-in gain. (i) Individual A forms T. P buys all the stock of T from 
A for $100, and T becomes a member of the P group. T has a capital asset 
with a basis of $0 and a value of $100. The asset declines in value to 
$40. The asset earns $100 of operating income unrelated to its $60 
decline in value. Under the investment adjustment system, P's basis in 
the T stock increases to $200. P then sells all the stock of T for $140 
(the asset worth $40 and $100 cash) and recognizes a loss of $60.
    (ii) The $100 adjustment to the basis of the T stock is an amount 
described in paragraph (c)(1)(ii) of this section. Because this amount 
exceeds the amount of loss otherwise disallowed under paragraph (a)(1) 
of this section, P's entire $60 loss from the disposition of T stock is 
disallowed.
    Example 5. Carryover basis transactions--amounts attributable to 
separate return years. (i) Individual A forms T. S purchases all the 
stock of T from A for $100, and T becomes a member of the S group. T has 
a capital asset with a basis of $0 and a value of $100. T sells the 
asset for $100. Under the investment adjustment system, S's basis in the 
T stock increases to $200. P buys all of the stock of S for $100, and 
both S and T become members of the P group. S then sells the T stock for 
$100 and recognizes a loss of $100.
    (ii) Under paragraph (c)(2)(iii) of this section, the $100 
adjustment to S's basis in the T stock while a member of the S group is 
an amount described in paragraph (c)(1)(i) of this section with respect 
to the P group because it continues to be reflected in the basis of the 
T stock immediately before the stock is disposed of. Because this amount 
equals the loss otherwise disallowed under paragraph (a)(1) of this 
section, S's $100 loss from the disposition of T stock is disallowed.
    Example 6. Cost basis for subsidiary stock. (i) In Year 1, 
individual A forms T. T's assets appreciate in value from $0 to $100, 
and T recognizes $100 of gain in an extraordinary gain disposition. T 
reinvests the sale proceeds in assets that appreciate in value to $150. 
In Year 3, A sells all of the T stock to P for $150, and T becomes a 
member of the P group. While a member of the P group, T's assets decline 
in value to $130 and P sells the T stock in Year 7 for $130 and 
recognizes a $20 loss.
    (ii) Although T has a $100 gain from extraordinary gain 
dispositions, the gain is not reflected in P's basis in the T stock 
within the meaning of paragraph (c)(2)(iii) of this section. P's basis 
reflects the stock's value at the time of P's purchase, and is 
determined without regard to whether T recognized the gain before the 
purchase. Thus, no part of T's gain is described in paragraph (c)(1) of 
this section, and no part of the $20 loss is disallowed under paragraph 
(a) of this section. (For rules that apply if A and P are related 
persons, see paragraph (c)(2)(iv) of this section.)
    Example 7. Adjustments to stock basis under applicable rules of law. 
(i) Individual A forms T, and T's assets subsequently appreciate. T 
borrows $100 on a nonrecourse basis secured by the appreciated assets. P 
buys all of the stock of T from A for $150. After becoming a member of 
the P group, T has a $100 operating loss that is absorbed in the 
determination of consolidated taxable income and P's basis in the T 
stock is reduced to $50 under Sec. 1.1502-32. Because T's assets have 
declined

[[Page 247]]

in value, T's creditors discharge $60 of T's indebtedness. The $60 
discharge is not included in T's gross income under section 108(a), but 
no attributes are reduced under section 108(b).
    (ii) Under paragraph (c)(2)(i) of this section, the discharge of 
indebtedness is an extraordinary gain disposition. Under Sec. 1.1502-
32(b)(3)(ii), however, the $60 discharge of indebtedness is not treated 
as tax-exempt income that increases P's basis in the T stock. 
Consequently, under paragraph (c)(2)(iii) of this section, T's discharge 
of indebtedness income is not reflected in P's basis in the T stock. 
Thus, there is no amount under paragraph (c)(1) of this section.
    (iii) The facts are the same as in paragraph (i) of this Example, 
except that $60 of T's operating loss is not absorbed and is included in 
a consolidated net operating loss that is carried over under 
Sec. Sec. 1.1502-21A or 1.1502-21T, and the $60 is eliminated from the 
carryover under section 108(b) as a result of T's discharge of 
indebtedness. The absorption of $40 of T's loss reduces P's basis in the 
T stock from $150 to $110. The $60 discharge of indebtedness is treated 
as tax-exempt income that increases P's basis in the T stock, and the 
$60 attribute reduction is treated as a noncapital, nondeductible 
expense that reduces P's basis in the T stock. Thus, P's basis in T's 
stock remains $110 following the discharge and attribute reduction. 
Because P's basis is $110, rather than $50, the discharge of 
indebtedness income is reflected in P's basis for purposes of paragraph 
(c)(2)(iii) of this section. Thus, the amount under paragraph (c)(1)(i) 
of this section is $60.
    Example 8. Duplicated loss. (i) Individual A forms T with a 
contribution of $100 in exchange for all of the T stock. Individual B 
forms T1 with a contribution of land that has a $90 basis and $100 
value. T buys all the stock of T1 from B for $100. P buys all the stock 
of T from A for $100, and both T and T1 become members of the P group. 
The value of T1's land declines to $40. P sells all of the T stock for 
$40 and recognizes a loss of $60.
    (ii) Under paragraph (c)(1)(iii) of this section, P's amount of 
duplicated loss is $50. This is computed under paragraph (c)(2)(vi) of 
this section immediately after the disposition as the excess of--
    (A) The $90 aggregate adjusted basis of the assets of T and T1 
(other than stock and securities of T1 owned by T), over
    (B) The $40 fair market value of the T stock (determined under 
paragraph (c)(2)(vi) of this section). Because this amount is the only 
amount described in paragraph (c)(1) of this section, the amount of P's 
$60 loss disallowed under paragraph (a)(1) of this section is limited to 
$50.
    (iii) The result would be the same if the value of T1's property did 
not decline and T1 instead had an operating loss of $60 (attributable to 
borrowed funds) which the P group was unable to use. In that case, the 
$50 excess of the sum of--
    (A) The $90 aggregate adjusted basis of the assets of T and T1 
(other than stock and securities of members of the P group), plus the 
$60 net operating loss attributable to T1 and carried to its first 
taxable year following the disposition, over
    (B) The sum of the $40 fair market value of the T stock, plus the 
$60 of T1 liabilities, is an amount described in paragraph (c)(2)(vi) of 
this section. (See paragraph (g) of this section for the elective 
reattribution of T1's $60 net operating loss to P in connection with the 
sale.)
    Example 9. Intercompany stock sales.
    (i) P is the common parent of a consolidated group, S is a wholly 
owned subsidiary of P, and T is a wholly owned recently purchased 
subsidiary of S. S has a $100 basis in the T stock, and T has a capital 
asset with a basis of $0 and a value of $100. T's asset declines in 
value to $60. Before T has any positive investment adjustments or 
extraordinary gain dispositions, S sells its T stock to P for $60. T's 
asset reappreciates and is sold for $100, and T recognizes $100 of gain. 
Under the investment adjustment system, P's basis in the T stock 
increases to $160. P then sells all of the T stock for $100 and 
recognizes a loss of $60.
    (ii) S's sale of the T stock to P is an intercompany transaction. 
Thus, S's $40 loss is deferred under section 267(f) and Sec. 1.1502-13. 
Under paragraph (a)(3) of this section, the application of paragraph 
(a)(1) of this section to S's $40 loss is deferred until the loss is 
taken into account. Under the matching rule of Sec. 1.1502-13(c), the 
loss is taken into account to reflect the difference for each year 
between P's corresponding items taken into account and P's recomputed 
corresponding items (the corresponding items that P would take into 
account for the year if S and P were divisions of a single corporation). 
If S and P were divisions of a single corporation and the intercompany 
sale were a transfer between the divisions, P would succeed to S's $100 
basis and would have a $200 basis in the T stock at the time it sells 
the T stock ($100 of initial basis plus $100 under the investment 
adjustment system). S's $40 loss is taken into account at the time of 
P's sale of the T stock to reflect the $40 difference between the $60 
loss P takes into account and P's recomputed $100 loss.
    (iii) Under the matching rule of Sec. 1.1502-13(c), the attributes 
of S's $40 loss and P's $60 loss are redetermined to produce the same 
effect on consolidated taxable income (and consolidated tax liability) 
as if S and P were divisions of a single corporation. Under Sec. 1.1502-
13(b)(6), attributes of the losses include whether they are disallowed 
under this section. Because the amount described in paragraph (c)(1) of 
this section is $100, both S's $40 loss and P's $60 loss are disallowed.


[[Page 248]]


    (d) Successors--(1) General rule. This section applies, to the 
extent necessary to effectuate the purposes of this section, to any 
property the basis of which is determined, directly or indirectly, in 
whole or in part, by reference to the basis of a subsidiary's stock.
    (2) Examples. The principles of this paragraph (d) are illustrated 
by the following examples.

    Example 1. Status of successor as member. (i) P, the common parent 
of a group, buys all the stock of T for $100. T's only asset has a basis 
of $0 and a value of $100. T sells the asset for $100, and buys another 
asset for $100. Under the investment adjustment system, P's basis in the 
T stock increases to $200, and the earnings and profits of P increase by 
$100. P later transfers all the stock of T to an unrelated consolidation 
group in exchange for 10 percent of the stock of X, the common parent of 
that group, in a transaction described in section 368(a)(1)(B). At the 
time of the exchange, the value of the X stock received by P is $80.
    (ii) Under section 358, P has a basis of $200 in the X stock it 
receives in exchange for T. Under section 362, X has a $200 basis in the 
T stock.
    (iii) Neither paragraph (a)(1) nor (b)(1) of this section applies to 
the stock of T on P's transfer of the stock to the X group, because no 
gain or loss is recognized on the transfer, and the transfer is not a 
deconsolidation of the stock of T under paragraph (b)(2) of this 
section.
    (iv) The X stock owned by P after the reorganization is a successor 
interest to the T stock because P's basis in the X stock is determined 
by reference to P's basis in the T stock. The purposes of this section 
require that the reorganization exchange be treated as a deconsolidation 
event with respect to P's interest in the X stock. Because X is not a 
member of the P group, a failure to reduce the basis of the X stock 
owned by P to its fair market value would permit the P group to 
recognize and deduct the loss attributable to the T stock. However, 
because T is a member of the X group, a reduction in the basis of the T 
stock is not necessary to prevent the X group from recognizing and 
deducting the loss arising in the P group. The transfer of T stock to X 
therefore constitutes a deconsolidation of the X stock but not the T 
stock. Therefore, P must reduce its basis in the X stock from $200 to 
its $80 value at that time. However, X's basis in the T stock remains 
$200.
    Example 2. Continued application after deconsolidation. (i) P, the 
common parent of a group, buys all the stock of T for $100. T's only 
asset has a basis of $0 and a value of $100. T sells the asset for $100, 
and buys another asset for $100. Under the investment adjustment system, 
P's basis in the T stock increases to $200. P later transfers all the 
stock of T to partnership M in exchange for a partnership interest in M, 
in a transaction to which section 721 applies. The value of the T stock 
immediately before the transfer to M is $100. Less than 2 years later, P 
sells its interest in M for $80.
    (ii) Under paragraph (b)(1) of this section, because the stock of T 
is deconsolidated on the transfer to M, immediately before the transfer 
to M, P reduces its basis in the T stock to the stock's $100 value 
immediately before the transfer. As a result, P has a basis of $100 in 
its interest in M, and M has a basis of $100 in the T stock.
    (iii) When P sells its interest in M for $80, it recognizes a $20 
loss. Because the basis of P's interest in M is determined by reference 
to P's basis in the T stock, and the reporting requirements could 
otherwise be circumvented, P's partnership interest in M is a successor 
interest to the T stock. Under paragraph (b)(5) of this section, P is 
required to file a statement with its return for the year of its 
disposition of its interest in M in order to deduct its loss. If P does 
not file the required statement described in paragraph (b)(5) of this 
section, P's loss on the disposition of its interest in M is disallowed.

    (e) Anti-avoidance rules--(1) General rule. The rules of 
Sec. 1.1502-20 must be applied in a manner that is consistent with and 
reasonably carries out their purposes. If a taxpayer acts with a view to 
avoid the effect of the rules of this section, adjustments must be made 
as necessary to carry out their purposes.
    (2) Anti-stuffing rule--(i) Application. This paragraph (e)(2) 
applies if--
    (A) A transfer of any asset (including stock and securities) on or 
after March 9, 1990 is followed within 2 years by a direct or indirect 
disposition or a deconsolidation of stock, and
    (B) The transfer is with a view to avoiding, directly or indirectly, 
in whole or in part--
    (1) The disallowance of loss on the disposition or the basis 
reduction on the deconsolidation of stock of a subsidiary, or
    (2) The recognition of unrealized gain following the transfer.
    A disposition or deconsolidation after the 2-year period described 
in this paragraph (e)(2)(i) that is pursuant to an agreement, option, or 
other arrangement entered into within the 2-year period is treated as a 
disposition or deconsolidation within the 2-year period for purposes of 
this section.

[[Page 249]]

    (ii) Basis reduction. If this paragraph (e)(2) applies, the basis of 
the stock is reduced, immediately before the disposition or 
deconsolidation, to cause the disallowance of loss, the reduction of 
basis, or the recognition of gain, otherwise avoided by reason of the 
transfer.
    (3) Examples. The principles of this paragraph (e) are illustrated 
by the following examples.

    Example 1. Shifting of value. (i) P buys all the stock of T for 
$100, and T becomes a member of the P group. T has an asset with a basis 
of $0 and a value of $100. With the view described in paragraph (e)(1) 
of this section, P transfers land with a value of $100 and a basis of 
$100 to T in exchange for preferred stock with a $200 redemption price 
and liquidation preference. The $100 redemption premium (the excess of 
the $200 redemption price over the $100 issue price) ultimately 
increases the value of the preferred stock from $100 to $200 (and 
decreases the value of the common stock). T sells the built-in gain 
asset for $100, and P's aggregate basis in S's common and preferred 
stock increases to $300. In addition, as a result of a cumulative 
redetermination under Sec. 1.1502-32(c)(4), P's basis in the T preferred 
stock increases from $100 to $200 and P's basis in the common stock 
remains $100. P subsequently sells the common stock at a loss.
    (ii) Under section 305, the redemption premium is treated as a 
distribution of property to which section 301 and Sec. 1.1502-13(f)(2) 
apply. Under Secs. 1.1502-13 and 1.1502-32, P's aggregate basis in the 
preferred and common stock is unaffected by the deemed distributions.
    (iii) P's loss on the sale of the common stock is disallowed under 
paragraph (e)(1) of this section. This disallowance prevents the 
preferred stock from shifting value and stock basis adjustments from the 
common stock to avoid the disallowance of loss under this section.
    Example 2. Basic stuffing case. (i) In Year 1, P buys all the stock 
of T for $100, and T becomes a member of the P group. T has an asset 
with a basis of $0 and a value of $100. T sells the asset for $100. 
Under the investment adjustment system, P's basis in the T stock 
increases from $100 to $200. In Year 5, P transfers to T an asset with a 
basis of $0 and a value of $100 in a transaction to which section 351 
applies, with the view described in paragraph (e)(2)(i) of this section. 
In Year 6, P sells all the stock of T for $200.
    (ii) Under paragraph (e)(2)(ii) of this section, P must reduce the 
basis in its T stock by $100 immediately before the sale. This basis 
reduction causes a $100 gain to be recognized on the sale.
    (iii) The $100 basis reduction also would be required if the T stock 
is deconsolidated in Year 6 instead of being sold. P must reduce the 
basis in its T stock by $100 immediately before the deconsolidation.
    (iv) The $100 basis reduction also would be required if the P stock 
were acquired at the beginning of Year 6 by the M consolidated group, 
even though the asset transfer took place outside the M group. Paragraph 
(e)(2)(i) of this section requires only that the transferor have the 
view at the time of the transfer.
    Example 3. Stacking rules. (i) In Year 1, P buys all the stock of T 
for $100, and T becomes a member of the P group. T has an asset with a 
basis of $0 and a value of $100. T sells the asset for $100. Under the 
investment adjustment system, P's basis in the T stock increases from 
$100 to $200. In Year 5, when the value of the T stock remains $100, P 
transfers to T an asset with a basis of $0 and a value of $100 in a 
transaction to which section 351 applies, with the view described in 
paragraph (e)(2)(i) of this section. Thereafter, the value of the 
contributed asset declines to $10. In Year 6, P sells all the T stock 
for $110 and recognizes a $90 loss.
    (ii) Because the transferred asset declined in value by $90, the 
transfer enabled P to avoid the disallowance of loss by the sale of T 
only to the extent of $10. Under paragraph (e)(2)(ii) of this section, P 
must reduce the basis in its T stock immediately before the sale to 
cause recognition of gain in an amount equal to the loss disallowance 
otherwise avoided by reason of the transfer. The amount of this basis 
reduction is $100, causing a $10 gain to be recognized on the sale.
    (iii) The facts are the same as in (i) of this Example, except that 
the transferred asset does not decline in value and that T reinvests the 
$100 in proceeds from the asset sale in another asset that appreciates 
in value to $190. In Year 6, P sells T for $290. Because the new asset 
appreciated in value by $90, the transfer enabled P to avoid the 
disallowance of loss on the sale of T only to the extent of $10. Under 
paragraph (e)(2)(ii) of this section, P must reduce the basis in its T 
stock immediately before the sale to cause recognition of gain in an 
amount equal to the loss disallowance otherwise avoided by reason of the 
transfer. The amount of this basis reduction is $10, causing a $100 gain 
to be recognized on the sale.
    Example 4. Contribution of built-in loss asset. (i) In Year 1, P 
forms S with a contribution of $100 in exchange for all of S's stock, 
and S becomes a member of the P group. S buys an asset for $100, and the 
asset appreciates in value to $200. P then buys all the stock of T for 
$100, and T becomes a member of the P group. T has an asset with a basis 
of $0 and a value of $100. T sells the asset for $100, and under the 
investment adjustment system P's basis in the T stock increases from 
$100 to

[[Page 250]]

$200. In Year 5, when the value of the T stock remains $100, P transfers 
the T stock to S in a transaction to which section 351 applies, with the 
view described in paragraph (e)(2)(i) of this section. The transfer 
causes P's basis in the S stock to increase from $100 to $300 and the 
value of S to increase from $200 to $300. In Year 6, P sells the S stock 
for $300.
    (ii) Under paragraph (e)(2)(ii) of this section, P must reduce the 
basis in its S stock immediately before the sale to cause recognition of 
gain in an amount equal to the gain recognition otherwise avoided by 
reason of the transfer. The amount of this basis reduction is $100, 
causing a $100 gain to be recognized on the sale.
    Example 5. Absence of a view. (i) In Year 1, P buys all the stock of 
T for $100, and T becomes a member of the P group. T has 2 historic 
assets, asset 1 with a basis of $40 and value of $90, and asset 2 with a 
basis of $60 and value of $10. In Year 2, T sells asset 1 for $90. Under 
the investment adjustment system, P's basis in the T stock increases 
from $100 to $150. Asset 2 is not essential to the operation of T's 
business, and T distributes asset 2 to P in Year 5 with a view to having 
the group retain its $50 loss inherent in the asset. Under Sec. 1.1502-
13(f)(2), and the application of the principles of this rule in section 
267(f), T has a $50 intercompany loss that is deferred. Under 
Sec. 1.1502-32(b)(3)(iv), the distribution reduces P's basis in the T 
stock by $10 to $140 in Year 5. In Year 6, P sells all the T stock for 
$90. Under the acceleration rule of Sec. 1.1502-13(d), and the 
application of the principles of this rule in section 267(f), T's 
intercompany loss is ordinarily taken into account immediately before 
P's sale of the T stock. Assuming that the loss is absorbed by the 
group, P's basis in T's stock would be reduced from $140 to $90 under 
Sec. 1.1502-32(b)(3)(i), and there would be no gain or loss from the 
stock disposition. (Alternatively, if the loss is not absorbed and the 
loss is reattributed to P under paragraph (g) of this section, the 
reattribution would reduce P's basis in T's stock from $140 to $90.)
    (ii) A $50 loss is reflected both in T's basis in asset 2 and in P's 
basis in the T stock. Because the distribution results in the loss with 
respect to asset 2 being taken into account before the corresponding 
loss reflected in the T stock, and asset 2 is an historic asset of T, 
the distribution is not with the view described in paragraph (e)(2) of 
this section.
    Example 6. Extending the time period for dispositions. (i) In Year 
1, P buys all the stock of T for $100, and T becomes a member of the P 
group. T has an asset with a basis of $0 and a value of $100. T sells 
the asset for $100. Under the investment adjustment system, P's basis in 
the T stock increases from $100 to $200. At the beginning of Year 5, P 
transfers to T an asset with a basis of $0 and a value of $100 in a 
transaction to which section 351 applies, with the view described in 
paragraph (e)(2)(i) of this section. Within 2 years, P agrees to sell 
all the stock of T for $200 at the end of Year 7.
    (ii) Under paragraph (e)(2) (i) of this section, P's disposition of 
the T stock at the end of Year 7 is treated as occurring within the 2-
year period following P's transfer of the asset to T, because the 
disposition is pursuant to an agreement reached within 2 years after the 
transfer. Accordingly, under paragraph (e)(2)(ii) of this section, P 
must reduce the basis in its T stock by $100 immediately before the 
sale. This result is reached whether or not the agreement is in writing. 
P's disposition would also have been treated as occurring within the 2-
year period if the disposition were pursuant to an option issued within 
the period.

    (f) No tiering up of certain adjustments--(1) General rule. If the 
basis of stock of a subsidiary (S) owned by a another member (P) is 
reduced under this section on the deconsolidation of the S stock, no 
corresponding adjustment is made under Sec. 1.1502-32 to the basis of 
the stock of P if there is a disposition or deconsolidation of the P 
stock in the same transaction. If there is a disposition or 
deconsolidation in the same transaction of less than all the stock of P, 
appropriate adjustments must be made under Sec. 1.1502-32 with respect 
to P (and any higher-tier members).
    (2) Example. The principles of this paragraph (f) are illustrated by 
the following example.

    Example. (i) P, the common parent of a group, owns all the stock of 
S, S owns all the stock of S1, and S1 owns all the stock of S2. P's 
basis in the S stock is $100, S's basis in the S1 stock is $100, and 
S1's basis in the S2 stock is $100. In Year 1, S2 buys all the stock of 
T for $100. T has an asset with a basis of $0 and a value of $100. In 
Year 2, T sells the asset for $100. Under the investment adjustment 
system, the basis of each subsidiary's stock increases from $100 to 
$200. In Year 6, S sells all the stock of S1 for $100 to A, an 
individual, and recognizes a loss of $100. S1, S2, and T are not members 
of a consolidated group immediately after the sale because the new S1 
group does not file a consolidated return for its first tax year.
    (ii) Under paragraph (a)(1) of this section, no deduction is allowed 
to S for its loss from the sale of the S1 stock. Under Sec. 1.1502-
32(b)(3)(iii), S's disallowed loss is treated as a noncapital, 
nondeductible expense for Year 6 that reduces P's basis in the S stock. 
(Under Sec. 1.1502-33, S's earnings and profits for Year 6 are reduced 
by the amount of S's disallowed

[[Page 251]]

loss for earnings and profits purposes and, under Sec. 1.1502-33(b), 
this reduction is reflected in P's earnings and profits.)
    (iii) Under paragraphs (b)(1) and (f)(1) of this section, because 
the stock of T and S2 are deconsolidated as a result of S's sale of the 
S1 stock, the basis of their stock must be reduced immediately before 
the sale from $200 to $100 (the value immediately before the 
deconsolidation). Under Sec. 1.1502-32(b)(3)(iii), the basis reductions 
are treated as noncapital, nondeductible expenses for Year 6. Under 
paragraph (f)(2) of this section, however, because the S2 stock is 
deconsolidated in the same transaction, the basis reduction to the T 
stock does not tier up under Sec. 1.1502-32(a)(3). Similarly, because 
the S1 stock is disposed of in the same transaction, the basis reduction 
to the S2 stock also does not tier up. (Comparable treatment applies for 
purposes of earnings and profits under Sec. 1.1502-33.)

    (g) Reattribution of subsidiary's losses to common parent--(1) 
Reattribution rule. If a member disposes of stock of a subsidiary and 
the member's loss would be disallowed under paragraph (a)(1) of this 
section, the common parent may make an irrevocable election to 
reattribute to itself any portion of the net operating loss carryovers 
and net capital loss carryovers attributable to the subsidiary (and any 
lower tier subsidiary) without regard to the order in which they were 
incurred. The amount reattributed may not exceed the amount of loss that 
would be disallowed if no election is made under this paragraph (g). For 
this purpose, the amount of loss that would be disallowed is determined 
by applying paragraph (c)(1) of this section (without taking into 
account the requirement under paragraph (c)(3) of this section that a 
statement be filed) and by not taking the reattribution into account. 
The amount of loss that would be disallowed and the losses that may be 
reattributed are determined immediately after the disposition, but the 
reattribution is deemed to be made immediately before the disposition. 
The common parent succeeds to the reattributed losses as if the losses 
were succeeded to in a transaction described in section 381(a). Any 
owner shift of the subsidiary (including any deemed owner shift 
resulting from section 382(g)(4)(D) or 382(l)(3)) in connection with the 
disposition is not taken into account under section 382 with respect to 
the reattributed losses.
    (2) Insolvency limitation. If the subsidiary whose losses are to be 
reattributed, or any higher tier subsidiary, is insolvent within the 
meaning of section 108(d)(3) at the time of the disposition, losses of 
the subsidiary may be reattributed only to the extent they exceed the 
sum of the separate insolvencies of any subsidiaries (taking into 
account only the subsidiary and its higher tier subsidiaries) that are 
insolvent. For purposes of determining insolvency, liabilities owed to 
higher tier members are not taken into account, and stock of a 
subsidiary that is limited and preferred as to dividends and that is not 
owned by higher tier members is treated as a liability to the extent of 
the amount of preferred distributions to which the stock would be 
entitled if the subsidiary were liquidated on the date of the 
disposition.
    (3) Examples. The principles of this paragraph (g) are illustrated 
by the following examples.

    Example 1. Basic reattribution case. (i) P, the common parent of a 
group, forms S with a $100 contribution. For Year 1, S has a $60 
operating loss that is not absorbed and is included in the group's 
consolidated net operating loss that is carried over under 
Sec. Sec. 1.1502-21A or 1.1502-21T. Under Sec. 1.1502-32(b)(3)(i), P's 
basis in the S stock is not reduced to reflect S's loss because the loss 
is not absorbed. Under Sec. 1.1502-33(b), S's deficit in earnings and 
profits is reflected in P's earnings and profits even though the loss is 
not absorbed for tax purposes. During Year 2, S's remaining assets 
appreciate in value and P sells the S stock for $55. But for an election 
to reattribute losses under paragraph (g) of this section, P would have 
a $45 loss from the sale that would be disallowed.
    (ii) P elects under paragraph (g)(1) of this section to reattribute 
to itself $45 of S's losses (the maximum amount permitted). As a result, 
$45 of the $60 net operating loss carryover attributable to S is 
reattributed to P. This reattributed loss may be included in the net 
operating loss carryover to subsequent consolidated return years of the 
P group. P succeeds to these losses as if the losses were succeeded to 
in a transaction described in section 381(a) and they retain their 
character as ordinary losses. The remaining $15 of net operating loss 
carryover attributable to S is carried over to the first separate return 
year of S.
    (iii) Under Sec. 1.1502-32(b)(3)(iii), the reattribution of $45 of 
loss is a noncapital, nondeductible expense that reduces P's basis in

[[Page 252]]

the S stock from $100 to $55 immediately before the disposition. 
Consequently, P does not recognize any gain or loss from the 
disposition.
    (iv) Assume that $20 of S's losses arose in Year 1 and $40 in Year 
2, and that P elects to reattribute all $40 from Year 2 and $5 from Year 
1. P succeeds to these losses as if the losses were succeeded to in a 
transaction described in section 381(a), and the losses retain their 
character as ordinary losses arising in Years 1 and 2. The losses 
continue to be subject to any limitations originally applicable to S, 
but P succeeds to them and may absorb the losses independently of S. 
(For example, P's use of the Year 2 losses does not depend on S's use of 
the Year 1 losses that were not reattributed to P.)
    Example 2. Lower tier subsidiary. (i) P, the common parent of a 
group, forms S with a $100 contribution. S then forms T with a $40 
contribution and T borrows $60. For Year 1, S has a $30 operating loss 
and T has a $55 operating loss. The losses are not absorbed and are 
included in the group's consolidated net operating loss that is carried 
over under Sec. Sec. 1.1502-21A or 1.1502-21T. Under Sec. 1.1502-
32(b)(3)(i), P's basis in the S stock, and S's basis in the T stock, are 
not reduced to reflect the S and T losses because the group is unable to 
absorb the losses. (Under Sec. 1.1502-33(b), the deficits in earnings 
and profits of S and T are tiered up for earnings and profits purposes 
even though not absorbed for tax purposes.) During Year 2, P sells the S 
stock for $30 ($100 invested, minus S's $30 loss and $40 unrealized loss 
from its investment in the T stock). But for an election to reattribute 
losses under paragraph (g) of this section, P would have a $70 loss from 
the sale, which would be disallowed.
    (ii) S's $30 portion of the net operating loss carryover may be 
reattributed to P under paragraph (g)(1) of this section. Because T is 
insolvent by $15, paragraph (g)(2) of this section provides that only 
$40 of its $55 portion of the net operating loss carryover may be 
reattributed to P under paragraph (g)(1) of this section. There is no 
limitation, however, on which $40 of T's $55 loss may be reattributed.
    (iii) P elects under paragraph (g)(1) of this section to reattribute 
to itself $40 of T's losses (the maximum amount permitted). P does not 
elect, however, to reattribute to itself any of S's losses. As a result, 
$40 of the $85 net operating loss carryover is reattributed to P. This 
reattributed loss may be included in the net operating loss carryover to 
subsequent consolidated return years of the P group. Of the $45 
remaining net operating loss carryover, the $15 attributable to T and 
$30 attributable to S are carried over to their first separate return 
years.
    (iv) Under Sec. 1.1502-32(b)(3)(iii), the reattribution of loss is a 
noncapital, nondeductible expense that reduces P's basis in the S stock 
to $60 immediately before the disposition. Consequently, P recognizes 
only a $30 loss from the disposition of its S stock ($30 sale proceeds 
and $60 basis), and this loss is disallowed.
    Example 3. Separate return limitation year losses. (i) P, the common 
parent of a group, buys the stock of S for $100. S has a net operating 
loss carryover of $40 from a separate return limitation year, and assets 
with a value and basis of $100. The assets of S decline in value by $40, 
and P sells all the stock of S for $60. But for an election to 
reattribute losses under this paragraph (g), P would have a $40 loss on 
the sale of S that would be disallowed.
    (ii) S's $40 loss carryover from a separate return limitation year 
may be reattributed to P under paragraph (g)(1) of this section.
    (iii) P elects under paragraph (g)(1) of this section to reattribute 
to itself S's $40 (loss the maximum amount permitted). Following the 
reattribution, the loss is included in the net operating loss carryover 
to subsequent consolidated return years of the P group.
    (iv) Under Sec. 1.1502-32(b)(3)(iii), the reattribution of loss is a 
noncapital, nondeductible expense that reduces P's basis in the S stock 
to $60 immediately before the disposition. Consequently, P recognizes no 
gain or loss from the disposition of its S stock. For P's treatment of 
the $40 reattributed loss, see Sec. 1.1502-1(f).

    (4) [Reserved]
    (5) Time and manner of making the election--(i) In general. The 
election described in paragraph (g)(1) of this section must be made in a 
separate statement entitled ``this is an election under Sec. 1.1502-
20(g)(1) To reattribute losses of [insert names and employer 
identification numbers (E.I.N.) of each subsidiary whose losses are 
reattributed] to [insert name and employer identification number of 
common parent].'' The statement must include the following information--
    (A) For each subsidiary, the amount of each net operating loss and 
net capital loss, and the year in which each arose, that is reattributed 
to the common parent, and
    (B) If a subsidiary ceases to be a member, the name and employer 
identification number of the person acquiring the subsidiary's stock.
    The statement must be signed by the common parent, and by each 
subsidiary with respect to which loss is reattributed under this 
paragraph (g) that does not remain a member of the common parent's group 
immediately following the disposition. The statement must be

[[Page 253]]

filed with the group's income tax return for the tax year of the 
disposition and a copy of the statement must be retained by the 
subsidiary. If the acquirer is a subsidiary in a consolidated group, the 
name and employer identification number of the common parent of the 
group must be included in the statement, and a copy of the statement 
must also be delivered to the common parent.
    (ii) Filing of subsidiary's copy of statement. The subsidiary whose 
losses are reattributed (or the common parent of any consolidated group 
that acquires the subsidiary or lower tier subsidiary) must attach its 
copy of the statement described in paragraph (g)(5)(i) of this section 
to its income return for the first tax year ending after the due date, 
including extensions, of the return in which the election required by 
paragraph (g)(5)(i) of this section is to be filed.
    (h) Effective dates--(1) General rule. Except as otherwise provided 
in this paragraph (h), this section applies with respect to dispositions 
and deconsolidations on or after February 1, 1991. For this purpose, 
dispositions deferred under Sec. 1.1502-13 are deemed to occur at the 
time the deferred gain or loss is taken into account unless the stock 
was deconsolidated before February 1, 1991. If stock of a subsidiary 
became worthless during a taxable year including February 1, 1991, the 
disposition with respect to the stock is treated as occurring on the 
date the stock became worthless.
    (2) Election to accelerate effective date--(i) In general. A group 
may make an irrevocable election to apply this section to all its 
members, instead of Sec. 1.337(d)-2, with respect to all dispositions 
and deconsolidations on or after November 19, 1990.
    (ii) Time and manner of making the election--in general. The 
election described in paragraph (h)(2)(i) of this section must be made 
in a separate statement entitled ``this is an election under 
Sec. 1.1502-20(h)(2) to accelerate the application of Sec. 1.1502-20 to 
the consolidated group of which [insert name and employer identification 
number of common parent] is the common parent.'' The statement must be 
signed by the common parent and filed with the group's income tax return 
for the tax year of the first disposition or deconsolidation to which 
the election applies. If the separate statement required under this 
paragraph (h) (2) (ii) is to be filed with a return the due date 
(including extensions) of which is before April 16, 1991, the statement 
may be filed with an amended return for the year of the disposition or 
deconsolidation. Any other filings required under this Sec. 1.1502-20, 
such as the statement required under Sec. 1.1502-20(c)(3), which 
ordinarily cannot be made with an amended return, must be made at such 
time and in such manner as permitted by the Commissioner.
    (3) Binding contract rule. For purposes of this paragraph (h), if a 
disposition or deconsolidation is pursuant to a binding written contract 
entered into before March 9, 1990, and in continuous effect until the 
disposition or deconsolidation, the date the contract became binding is 
treated as the date of the disposition or deconsolidation.
    (4) Application of Sec. 1.1502-20T to certain transactions--(i) In 
general. If a group files the certification described in paragraph 
(h)(4)(ii) of this section, it may apply Sec. 1.1502-20T (as contained 
in the CFR edition revised as of April 1, 1990), to all of its members 
with respect to all dispositions and deconsolidations by the certifying 
group to which Sec. 1.1502-20T otherwise applied by its terms 
occurring--
    (A) On or after March 9, 1990 (but only if not pursuant to a binding 
contract described in Sec. 1.337(d)-1T(e)(2) (as contained in the CFR 
edition revised as of April 1, 1990) that was entered into before March 
9, 1990); and
    (B) Before November 19, 1990 (or thereafter, if pursuant to a 
binding contract described in Sec. 1.1502-20T(g)(3) that was entered 
into on or after March 9, 1990 and before November 19, 1990).
    The certification under this paragraph (h)(4)(i) with respect to the 
application of Sec. 1.1502-20T to any transaction described in this 
paragraph (h)(4)(i) may not be withdrawn and, if the certification is 
filed, Sec. 1.1502-20T must be applied to all such transactions on all 
returns (including amended returns) on which such transactions are 
included.

[[Page 254]]

    (ii) Time and manner of filing certification. The certification 
described in paragraph (h)(4)(i) of this section must be made in a 
separate statement entitled ``[insert name and employer identification 
number of common parent] hereby certifies under Sec. 1.1502-20 (h)(4) 
that the group of which it is the common parent is applying Sec. 1.1502-
20T to all transactions to which that section otherwise applied by its 
terms.'' The statement must be signed by the common parent and filed 
with the group's income tax return for the taxable year of the first 
disposition or deconsolidation to which the certification applies. If 
the separate statement required under this paragraph (h)(4) is to be 
filed with a return the due date (including extensions) of which is 
before November 16, 1991, the statement may be filed with an amended 
return for the year of the disposition or deconsolidation that is filed 
within 180 days after September 13, 1991. Any other filings required 
under Sec. 1.1502-20T, such as the statement required under Sec. 1.1502-
20T(f)(5), may be made with the amended return, regardless of whether 
Sec. 1.1502-20T permits such filing by amended return.
    (5) Cross reference. For transitional loss limitation rules, see 
Secs. 1.337(d)-1 and 1.337(d)-2.

[T.D. 8364, 56 FR 47392, Sept. 19, 1991; 57 FR 53550, Nov. 12, 1992, as 
amended by T.D. 8560, 59 FR 41680, Aug. 15, 1994; T.D. 8597, 60 FR 
36709, July 18, 1995; T.D. 8677, 61 FR 33323, June 27, 1996; T.D. 8597, 
62 FR 12098, Mar. 14, 1997]

                    Computation of Consolidated Items



Sec. 1.1502-21T  Net operating losses (temporary).

    (a) Consolidated net operating loss deduction. The consolidated net 
operating loss deduction (or CNOL deduction) for any consolidated return 
year is the aggregate of the net operating loss carryovers and 
carrybacks to the year. The net operating loss carryovers and carrybacks 
consist of--
    (1) Any CNOLs (as defined in paragraph (e) of this section) of the 
consolidated group; and
    (2) Any net operating losses of the members arising in separate 
return years.
    (b) Net operating loss carryovers and carrybacks to consolidated 
return and separate return years. Net operating losses of members 
arising during a consolidated return year are taken into account in 
determining the group's CNOL under paragraph (e) of this section for 
that year. Losses taken into account in determining the CNOL may be 
carried to other taxable years (whether consolidated or separate) only 
under this paragraph (b).
    (1) Carryovers and carrybacks generally. The net operating loss 
carryovers and carrybacks to a taxable year are determined under the 
principles of section 172 and this section. Thus, losses permitted to be 
absorbed in a consolidated return year generally are absorbed in the 
order of the taxable years in which they arose, and losses carried from 
taxable years ending on the same date, and which are available to offset 
consolidated taxable income for the year, generally are absorbed on a 
pro rata basis. See Example 2 of paragraph (c)(1)(iii) of this section 
for an illustration of pro rata absorption of losses subject to a SRLY 
limitation. Additional rules provided under the Code or regulations also 
apply. See, e.g., section 382(l)(2)(B).
    (2) Carryovers and carrybacks of CNOLs to separate return years--(i) 
In general. If any CNOL that is attributable to a member may be carried 
to a separate return year of the member, the amount of the CNOL that is 
attributable to the member is apportioned to the member (apportioned 
loss) and carried to the separate return year. If carried back to a 
separate return year, the apportioned loss may not be carried back to an 
equivalent, or earlier, consolidated return year of the group; if 
carried over to a separate return year, the apportioned loss may not be 
carried over to an equivalent, or later, consolidated return year of the 
group. For rules permitting the reattribution of losses of a subsidiary 
to the common parent when loss is disallowed on the disposition of 
subsidiary stock, see Sec. 1.1502-20(g).
    (ii) Special rules--(A) Year of departure from group. If a 
corporation ceases to be a member during a consolidated return year, net 
operating loss carryovers attributable to the corporation are first

[[Page 255]]

carried to the consolidated return year, and only the amount so 
attributable that is not absorbed by the group in that year is carried 
to the corporation's first separate return year.
    (B) Offspring rule. In the case of a member that has been a member 
continuously since its organization, the CNOL attributable to the member 
is included in the carrybacks to consolidated return years before the 
member's existence. See paragraph (f) of this section for applications 
to predecessors and successors. If the group did not file a consolidated 
return for a carryback year, the loss may be carried back to a separate 
return year of the common parent under paragraph (b)(2)(i) of this 
section, but only if the common parent was not a member of a different 
consolidated group or of an affiliated group filing separate returns for 
the year to which the loss is carried or any subsequent year in the 
carryback period. Following an acquisition described in Sec. 1.1502-
75(d) (2) or (3), references to the common parent are to the corporation 
that was the common parent immediately before the acquisition.
    (iii) Equivalent years. Taxable years are equivalent if they bear 
the same numerical relationship to the consolidated return year in which 
a CNOL arises, counting forward or backward from the year of the loss. 
For example, in the case of a member's third taxable year (which was a 
separate return year) that preceded the consolidated return year in 
which the loss arose, the equivalent year is the third consolidated 
return year preceding the consolidated return year in which the loss 
arose. See paragraph (b)(3)(iii) of this section for certain short 
taxable years that are disregarded in making this determination.
    (iv) Amount of CNOL attributable to a member. The amount of a CNOL 
that is attributable to a member is determined by a fraction the 
numerator of which is the separate net operating loss of the member for 
the year of the loss and the denominator of which is the sum of the 
separate net operating losses for that year of all members having such 
losses. For this purpose, the separate net operating loss of a member is 
determined by computing the CNOL by reference to only the member's items 
of income, gain, deduction, and loss, including the member's losses and 
deductions actually absorbed by the group in the taxable year (whether 
or not absorbed by the member).
    (v) Examples. For purposes of the examples in this section, unless 
otherwise stated, all groups file consolidated returns, all corporations 
have calendar taxable years, the facts set forth the only corporate 
activity, value means fair market value and the adjusted basis of each 
asset equals its value, all transactions are with unrelated persons, and 
the application of any limitation or threshold under section 382 is 
disregarded. The principles of this paragraph (b)(2) are illustrated by 
the following examples:

    Example 1. Offspring rule. (a) P is formed at the beginning of Year 
1 and files a separate return. P forms S on March 15 of Year 2, and P 
and S file a consolidated return. P purchases all the stock of T at the 
beginning of Year 3, and T becomes a member of the P group. T was formed 
in Year 2 and filed a separate return for that year. P, S, and T sustain 
a $1,100 CNOL in Year 3 and, under paragraph (b)(2)(iv) of this section, 
the loss is attributable $200 to P, $300 to S, and $600 to T.
    (b) Of the $1,100 CNOL in Year 3, the $500 amount of the CNOL that 
is attributable to P and S ($200 + $300) may be carried to P's separate 
return in Year 1. Even though S was not in existence in Year 1, the $300 
amount of the CNOL attributable to S may be carried back to P's separate 
return in Year 1 because S (unlike T) has been a member of the P group 
since its organization and P is a qualified parent under paragraph 
(b)(2)(ii)(B) of this section. To the extent not absorbed in that year, 
the loss may then be carried to the P group's return in Year 2. The $600 
amount of the CNOL attributable to T is a net operating loss carryback 
to T's separate return in Year 2.
    Example 2. Departing members. (a) The facts are the same as in 
Example 1. In addition, on June 15 of Year 4, P sells all the stock of 
T. The P group's consolidated return for Year 4 includes the income of T 
through June 15. T files a separate return for the period from June 16 
through December 31.
    (b) $600 of the Year 3 CNOL attributable to T is apportioned to T 
and is carried back to its separate return in Year 2. To the extent the 
$600 is not absorbed in T's separate return in Year 2, it is carried to 
the consolidated return in Year 4 before being carried to T's separate 
return in Year 4. Any portion of the loss not absorbed in T's Year 2 or 
in the

[[Page 256]]

P group's Year 4 is then carried to T's separate return in Year 4.

    (3) Special rules--(i) Election to relinquish carryback. A group may 
make an irrevocable election under section 172(b)(3) to relinquish the 
entire carryback period with respect to a CNOL for any consolidated 
return year. The election may not be made separately for any member 
(whether or not it remains a member), and must be made in a separate 
statement entitled ``THIS IS AN ELECTION UNDER SECTION 1.1502-
21T(b)(3)(i) TO WAIVE THE ENTIRE CARRYBACK PERIOD PURSUANT TO SECTION 
172(b)(3) FOR THE [insert consolidated return year] CNOLs OF THE 
CONSOLIDATED GROUP OF WHICH [insert name and employer identification 
number of common parent] IS THE COMMON PARENT.'' The statement must be 
signed by the common parent and filed with the group's income tax return 
for the consolidated return year in which the loss arises.
    (ii) Special election for groups that include insolvent financial 
institutions. For rules applicable to relinquishing the entire carryback 
period with respect to losses attributable to insolvent financial 
institutions, see Sec. 301.6402-7 of this chapter.
    (iii) Short years in connection with transactions to which section 
381(a) applies. If a member distributes or transfers assets to a 
corporation that is a member immediately after the distribution or 
transfer in a transaction to which section 381(a) applies, the 
transaction does not cause the distributor or transferor to have a short 
year within the consolidated return year of the group in which the 
transaction occurred that is counted as a separate year for purposes of 
determining the years to which a net operating loss may be carried.
    (iv) Special status losses. [Reserved]
    (c) Limitations on net operating loss carryovers and carrybacks from 
separate return limitation years--(1) SRLY limitation--(i) General rule. 
The aggregate of the net operating loss carryovers and carrybacks of a 
member arising (or treated as arising) in SRLYs that are included in the 
CNOL deductions for all consolidated return years of the group under 
paragraph (a) of this section may not exceed the aggregate consolidated 
taxable income for all consolidated return years of the group determined 
by reference to only the member's items of income, gain, deduction, and 
loss. For this purpose--
    (A) Consolidated taxable income is computed without regard to CNOL 
deductions;
    (B) Consolidated taxable income takes into account the member's 
losses and deductions (including capital losses) actually absorbed by 
the group in consolidated return years (whether or not absorbed by the 
member);
    (C) In computing consolidated taxable income, the consolidated 
return years of the group include only those years, including the year 
to which the loss is carried, that the member has been continuously 
included in the group's consolidated return, but exclude:
    (1) For carryovers, any years ending after the year to which the 
loss is carried; and
    (2) For carrybacks, any years ending after the year in which the 
loss arose; and
    (D) The treatment under Sec. 1.1502-15T of a built-in loss as a 
hypothetical net operating loss carryover in the year recognized is 
solely for purposes of determining the limitation under this paragraph 
(c) with respect to the loss in that year and not for any other purpose. 
Thus, for purposes of determining consolidated taxable income for any 
other losses, a built-in loss allowed under this section in the year it 
arises is taken into account.
    (ii) Losses treated as arising in SRLYs. If a net operating loss 
carryover or carryback did not arise in a SRLY but is attributable to a 
built-in loss (as defined under Sec. 1.1502-15T), the carryover or 
carryback is treated for purposes of this paragraph (c) as arising in a 
SRLY if the built-in loss was not allowed, after application of the SRLY 
limitation, in the year it arose. For an illustration, see Sec. 1.1502-
15T(d), Example 5.
    (iii) Examples. The principles of this paragraph (c)(1) are 
illustrated by the following examples:

    Example 1. Determination of SRLY limitation. (a) In Year 1, 
individual A forms T and T sustains a $100 net operating loss that is 
carried

[[Page 257]]

forward. P buys all the stock of T at the beginning of Year 2, and T 
becomes a member of the P group. The P group has $300 of consolidated 
taxable income in Year 2 (computed without regard to the CNOL 
deduction). Such consolidated taxable income would be $70 if determined 
by reference to only T's items.
    (b) T's $100 net operating loss carryover from Year 1 arose in a 
SRLY. See Sec. 1.1502-1(f)(2)(iii). Thus, the $100 net operating loss 
carryover is subject to the SRLY limitation in paragraph (c)(1) of this 
section. The SRLY limitation for Year 2 is consolidated taxable income 
determined by reference to only T's items, or $70. Thus, $70 of the loss 
is included under paragraph (a) of this section in the P group's CNOL 
deduction for Year 2.
    (c) The facts are the same as in paragraph (a) of this Example 1, 
except that such consolidated taxable income (computed without regard to 
the CNOL deduction and by reference to only T's items) is a loss (a 
CNOL) of $370. Because the SRLY limitation may not exceed the 
consolidated taxable income determined by reference to only T's items, 
and such items aggregate to a CNOL, T's $100 net operating loss 
carryover from Year 1 is not allowed under the SRLY limitation in Year 
2. Moreover, if consolidated taxable income (computed without regard to 
the CNOL deduction and by reference to only T's items) did not exceed 
$370 in Year 3, the carryover would still be restricted under 
Sec. 1.1502-21T(c) in Year 3, because the aggregate consolidated taxable 
income for all consolidated return years of the group computed by 
reference to only T's items would not be a positive amount.
    Example 2. Net operating loss carryovers. (a) In Year 1, individual 
A forms P and P sustains a $40 net operating loss that is carried 
forward. P has no income in Year 2. Unrelated corporation T sustains a 
net operating loss of $50 in Year 2 that is carried forward. P buys the 
stock of T during Year 3, but T is not a member of the P group for each 
day of the year. P and T file separate returns and sustain net operating 
losses of $120 and $60, respectively, for Year 3. The P group files 
consolidated returns beginning in Year 4. During Year 4, the P group has 
$160 of consolidated taxable income (computed without regard to the CNOL 
deduction). Such consolidated taxable income would be $70 if determined 
by reference to only T's items. These results are summarized as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                        Separate                
                                                            Separate      Separate     affiliated   Consolidated
                                                             year 1        year 2        year 3        year 4   
----------------------------------------------------------------------------------------------------------------
P.......................................................         $(40)           $0         $(120)           $90
T.......................................................            0           (50)          (60)            70
                                                         -------------------------------------------------------
CTI.....................................................  ............  ............  ............           160
----------------------------------------------------------------------------------------------------------------

    (b) P's Year 1, Year 2, and Year 3 are not SRLYs with respect to the 
P group. See Sec. 1.1502-1(f)(2)(i). Thus, P's $40 net operating loss 
arising in Year 1 and $120 net operating loss arising in Year 3 are not 
subject to the SRLY limitation under paragraph (c) of this section. 
Under the principles of section 172, paragraph (b) of this section 
requires that the loss arising in Year 1 be the first loss absorbed by 
the P group in Year 4. Absorption of this loss leaves $120 of the 
group's consolidated taxable income available for offset by other loss 
carryovers.
    (c) T's Year 2 and Year 3 are SRLYs with respect to the P group. See 
Sec. 1.1502-1(f)(2)(ii). Thus, T's $50 net operating loss arising in 
Year 2 and $60 net operating loss arising in Year 3 are subject to the 
SRLY limitation. Under paragraph (c)(1) of this section, the SRLY 
limitation for Year 4 is $70, and under paragraph (b) of this section, 
T's $50 loss from Year 2 must be included under paragraph (a) of this 
section in the P group's CNOL deduction for Year 4. The absorption of 
this loss leaves $70 of the group's consolidated taxable income 
available for offset by other loss carryovers.
    (d) P and T each carry over net operating losses to Year 4 from a 
taxable year ending on the same date (Year 3). The losses carried over 
from Year 3 total $180. Under paragraph (b) of this section, the losses 
carried over from Year 3 are absorbed on a pro rata basis, even though 
one arises in a SRLY and the other does not. However, the group cannot 
absorb more than $20 of T's $60 net operating loss arising in Year 3 
because its $70 SRLY limitation for Year 4 is reduced by T's $50 Year 2 
SRLY loss already included in the CNOL deduction for Year 4. Thus, the 
absorption of Year 3 losses is as follows:
    Amount of P's Year 3 losses absorbed = $120/($120 + $20) x $70 = 
$60.
    Amount of T's Year 3 losses absorbed = Sec. 20/($120 + $20) x $70 = 
$10.
    (e) The absorption of $10 of T's Year 3 loss further reduces T's 
SRLY limitation to $10 ($70 of initial SRLY limitation, reduced by the 
$60 net operating loss already included in the CNOL deductions for Year 
4 under paragraph (a) of this section).
    (f) P carries its remaining $60 Year 3 net operating loss and T 
carries its remaining $50 Year 3 net operating loss over to Year 5. 
Assume that, in Year 5, the P group has $90

[[Page 258]]

of consolidated taxable income (computed without regard to the CNOL 
deduction). The group's CTI determined by reference to only T's items is 
a CNOL of $4. For Year 5, the CNOL deduction includes $60 of P's Year 3 
loss but only $6 of T's Year 3 loss (the aggregate consolidated taxable 
income for Years 4 and 5 determined by reference to T's items, or $66, 
reduced by T's SRLY losses actually absorbed by the group in Year 4, or 
$60).
    Example 3. Net operating loss carrybacks. (a)(1) P owns all of the 
stock of S and T. The members of the P group contribute the following to 
the consolidated taxable income of the P group for Years 1, 2, and 3:

----------------------------------------------------------------------------------------------------------------
                                                                      Year 1     Year 2     Year 3       Total  
----------------------------------------------------------------------------------------------------------------
P.................................................................       $100        $60        $80        $240 
S.................................................................         20         20         30          70 
T.................................................................         30         10        (50)        (10)
                                                                   ---------------------------------------------
CTI...............................................................        150         90         60         300 
----------------------------------------------------------------------------------------------------------------

    (2) P sells all of the stock of T to individual A at the beginning 
of Year 4. For its Year 4 separate return year, T has a net operating 
loss of $30.
    (b) T's Year 4 is a SRLY with respect to the P group. See 
Sec. 1.1502-1(f)(1). T's $30 net operating loss carryback to the P group 
from Year 4 is not allowed under Sec. 1.1502-21T(c) to be included in 
the CNOL deduction under paragraph (a) of this section for Year 1, 2, or 
3, because the P group's consolidated taxable income would not be a 
positive amount if determined by reference to only T's items for all 
consolidated return years through Year 4 (without regard to the $30 net 
operating loss). However, the $30 loss is carried forward to T's Year 5 
and succeeding taxable years as provided under the Code.
    -Example 4. Computation of SRLY limitation for built-in losses 
treated as net operating loss carryovers. (a) In Year 1, individual A 
forms T by contributing $300 and T sustains a $100 net operating loss. 
During Year 2, T's assets decline in value by $100. At the beginning of 
Year 3, P buys all the stock of T for $100, and T becomes a member of 
the P group. At the time of the acquisition, T has a $100 net unrealized 
built-in loss, which exceeds the threshold requirements of section 
382(h)(3)(B). During Year 3, T recognizes its unrealized loss as a $100 
ordinary loss. The members of the P group contribute the following to 
the consolidated taxable income of the P group for Years 3 and 4 
(computed without regard to T's recognition of its unrealized loss and 
any CNOL deduction under Sec. 1.1502-21T):

------------------------------------------------------------------------
                                             Year 3    Year 4     Total 
------------------------------------------------------------------------
P group (without T).......................      $100      $100      $200
T.........................................        60        40       100
                                           -----------------------------
CTI.......................................       160       140       300
------------------------------------------------------------------------

    (b) Under Sec. 1.1502-15T(a), T's $100 of ordinary loss in Year 3 
constitutes a built-in loss that is subject to the SRLY limitation under 
Sec. 1.1502-21T(c). The amount of the limitation is determined by 
treating the deduction as a net operating loss carryover from a SRLY. 
The built-in loss is therefore subject to a $60 SRLY limitation for Year 
3. The built-in loss is treated as a net operating loss carryover solely 
for purposes of determining the extent to which the loss is not allowed 
by reason of the SRLY limitation, and for all other purposes the loss 
remains a loss arising in Year 3. Consequently, under paragraph (b) of 
this section, the $60 allowed under the SRLY limitation is absorbed by 
the P group before T's $100 net operating loss carryover from Year 1 is 
allowed.
    (c) Under Sec. 1.1502-15T(a), the $40 balance of the built-in loss 
that is not allowed in Year 3 because of the SRLY limitation is treated 
as a $40 net operating loss arising in Year 3 that is subject to the 
SRLY limitation because, under Sec. 1.1502-21T(c)(1)(ii), Year 3 is 
treated as a SRLY, and is carried to other years in accordance with the 
rules of paragraph (b) of this section. The SRLY limitation for Year 4 
is the P group's consolidated taxable income for Year 3 and Year 4 
determined by reference to only T's items and without regard to the 
group's CNOL deductions ($60+$40), reduced by T's loss actually absorbed 
by the group in Year 3 ($60). The SRLY limitation for Year 4 is $40.
    (d) Under paragraph (c) of this section and the principles of 
section 172(b), $40 of T's $100 net operating loss carryover from Year 1 
is included in the CNOL deduction under paragraph (a) of this section in 
Year 4.

    (2) SRLY subgroup limitation. In the case of a net operating loss 
carryover or carryback for which there is a SRLY subgroup, the 
principles of paragraph (c)(1) of this section apply to the SRLY 
subgroup, and not separately to its members. Thus, the contribution to 
consolidated taxable income and the net operating loss carryovers and 
carrybacks arising (or treated as arising) in SRLYs that are included in 
the CNOL deductions for all consolidated

[[Page 259]]

return years of the group under paragraph (a) of this section are based 
on the aggregate amounts of income, gain, deduction, and loss of the 
members of the SRLY subgroup for the relevant consolidated return years 
(as provided in paragraph (c)(1)(i)(C) of this section). For an 
illustration of aggregate amounts during the relevant consolidated 
return years following the year in which a member of a SRLY subgroup 
ceases to be a member of the group, see paragraph (c)(2)(vii) Example 4 
of this section. A SRLY subgroup may exist only for a carryover or 
carryback arising in a year that is not a SRLY (and is not treated as a 
SRLY under paragraph (c)(1)(ii) of this section) with respect to another 
group (the former group), whether or not the group is a consolidated 
group. A separate SRLY subgroup is determined for each such carryover or 
carryback. A consolidated group may include more than one SRLY subgroup 
and a member may be a member of more than one SRLY subgroup. Solely for 
purposes of determining the members of a SRLY subgroup with respect to a 
loss:
    (i) Carryovers. In the case of a carryover, the SRLY subgroup is 
composed of the member carrying over the loss (the loss member) and each 
other member that was a member of the former group that becomes a member 
of the group at the same time as the loss member. A member remains a 
member of the SRLY subgroup until it ceases to be affiliated with the 
loss member. The aggregate determination described in paragraph (c)(1) 
of this section and this paragraph (c)(2) includes the amounts of 
income, gain, deduction, and loss of each member of the SRLY subgroup 
for the consolidated return years during which it remains a member of 
the SRLY subgroup. For an illustration of the aggregate determination of 
a SRLY subgroup, see paragraph (c)(2)(vii) Example 2 of this section.
    (ii) Carrybacks. In the case of a carryback, the SRLY subgroup is 
composed of the member carrying back the loss (the loss member) and each 
other member of the group from which the loss is carried back that has 
been continuously affiliated with the loss member from the year to which 
the loss is carried through the year in which the loss arises.
    (iii) Built-in losses. In the case of a built-in loss, the SRLY 
subgroup is composed of the member recognizing the loss (the loss 
member) and each other member that was part of the subgroup with respect 
to the loss determined under Sec. 1.1502-15T(c)(2) immediately before 
the members became members of the group. The principles of paragraphs 
(c)(2)(i) and (ii) of this section apply to determine the SRLY subgroup 
for the built-in loss that is, under paragraph (c)(1)(ii) of this 
section, treated as arising in a SRLY with respect to the group in which 
the loss is recognized. For this purpose and as the context requires, a 
reference in those paragraphs to a group or former group is a reference 
to the subgroup determined under Sec. 1.1502-15T(c)(2).
    (iv) Principal purpose of avoiding or increasing a SRLY limitation. 
The members composing a SRLY subgroup are not treated as a SRLY subgroup 
if any of them is formed, acquired, or availed of with a principal 
purpose of avoiding the application of, or increasing any limitation 
under, this paragraph (c). Any member excluded from a SRLY subgroup, if 
excluded with a principal purpose of so avoiding or increasing any SRLY 
limitation, is treated as included in the SRLY subgroup.
    (v) Coordination with other limitations. This paragraph (c)(2) does 
not allow a net operating loss to offset income to the extent 
inconsistent with other limitations or restrictions on the use of 
losses, such as a limitation based on the nature or activities of 
members. For example, any dual consolidated loss may not reduce the 
taxable income to an extent greater than that allowed under section 
1503(d) and Sec. 1.1503-2. See also Sec. 1.1502-47(q) (relating to 
preemption of rules for life-nonlife groups).
    (vi) Anti-duplication. If the same item of income or deduction could 
be taken into account more than once in determining a limitation under 
this paragraph (c), or in a manner inconsistent with any other provision 
of the Code or regulations incorporating this paragraph (c), the item of 
income or deduction is taken into account only once and in such manner 
that losses are absorbed in accordance with the ordering

[[Page 260]]

rules in paragraph (b) of this section and the underlying purposes of 
this section.
    (vii) Examples. The principles of this paragraph (c)(2) are 
illustrated by the following examples:

    Example 1. Members of SRLY subgroups. (a) During Year 1, P sustains 
a $50 net operating loss. At the beginning of Year 2, P buys all the 
stock of S at a time when the aggregate basis of S's assets exceeds 
their aggregate value by $70 (as determined under Sec. 1.1502-15T). At 
the beginning of Year 3, P buys all the stock of T, T has a $60 net 
operating loss carryover at the time of the acquisition, and T becomes a 
member of the P group. During Year 4, S forms S1 and T forms T1, each by 
contributing assets with built-in gains which are, in the aggregate, 
material. S1 and T1 become members of the P group. M is the common 
parent of another group. During Year 7, M acquires all of the stock of 
P, and the members of the P group become members of the M group for the 
balance of Year 7. The $50 and $60 loss carryovers of P and T are 
carried to Year 7 of the M group, and the value and basis of S's assets 
did not change after it became a member of the former P group.
    (b) Under paragraph (c)(2) of this section, a separate SRLY subgroup 
is determined for each loss carryover and built-in loss. In the P group, 
P's $50 loss carryover is not treated as arising in a SRLY. See 
Sec. 1.1502-1(f). Consequently, the carryover is not subject to 
limitation under paragraph (c) of this section in the P group.
    (c) In the M group, P's $50 loss carryover is treated as arising in 
a SRLY and is subject to the limitation under paragraph (c) of this 
section. A SRLY subgroup with respect to that loss is composed of 
members which were members of the P group, the group as to which the 
loss was not a SRLY. The SRLY subgroup is composed of P, the member 
carrying over the loss, and each other member of the P group that became 
a member of the M group at the same time as P. A member of the SRLY 
subgroup remains a member until it ceases to be affiliated with P. For 
Year 7, the SRLY subgroup is composed of P, S, T, S1, and T1.
    (d) In the P group, S's $70 unrealized loss, if recognized within 
the 5-year recognition period after S becomes a member of the P group, 
is subject to limitation under paragraph (c) of this section. See 
Sec. 1.1502-15T and paragraph (c)(1)(ii) of this section. Because S was 
not continuously affiliated with P, T, or T1 for 60 consecutive months 
prior to joining the P group, these corporations cannot be included in a 
SRLY subgroup with respect to S's unrealized loss in the P group. See 
paragraph (c)(2)(iii) of this section. As a successor to S, S1 is 
included in a subgroup with S in the P group. Because S did not cease to 
exist, however, S1's contribution to consolidated taxable income may not 
be used to increase the consolidated taxable income of the P group that 
may be offset by the built-in loss. See paragraph (f) of this section.
    (e) In the M group, S's $70 unrealized loss, if recognized within 
the 5-year recognition period after S becomes a member of the M group, 
is subject to limitation under paragraph (c) of this section. Prior to 
becoming a member of the M group, S had been continuously affiliated 
with P (but not T or T1) for 60 consecutive months and S1 is a successor 
that has remained continuously affiliated with S. Those members had a 
net unrealized built-in loss immediately before they became members of 
the group under Sec. 1.1502-15T(c). Consequently, in Year 7, S, S1, and 
P compose a subgroup in the M group with respect to S's unrealized loss. 
S1's contribution to consolidated taxable income may not be used to 
increase the consolidated taxable income of the M group that may be 
offset by the recognized built-in loss. See paragraph (f) of this 
section.
    (f) In the P group, T's $60 loss carryover arose in a SRLY and is 
subject to limitation under paragraph (c) of this section. P, S, and S1 
were not members of the group in which T's loss arose and cannot be 
members of a SRLY subgroup with respect to the carryover in the P group. 
See paragraph (c)(2)(i) of this section. As a successor to T, T1 is 
included in a SRLY subgroup with T in the P group; however, because T 
did not cease to exist, T1's contribution to consolidated taxable income 
may not be used to increase the consolidated taxable income of the P 
group that may be offset by the carryover. See paragraph (f) of this 
section.
    (g) In the M group, T's $60 loss carryover arose in a SRLY and is 
subject to limitation under paragraph (c) of this section. T and T1 
remain the only members of a SRLY subgroup with respect to the 
carryover, but T1's contribution to consolidated taxable income may not 
be used to increase consolidated taxable income of the M group that may 
be offset by the carryover. See paragraph (f) of this section.
    Example 2. Computation of SRLY subgroup limitation. (a) Individual A 
forms S. Individual B forms T. In Year 2, P buys all the stock of S and 
T from A and B, and S and T become members of the P group. For Year 3, 
the P group has a $45 CNOL, which is attributable to P, and which P 
carries forward. M is the common parent of another group. At the 
beginning of Year 4, M acquires all of the stock of P and the former 
members of the P group become members of the M group.
    (b) P's year to which the loss is attributable, Year 3, is a SRLY 
with respect to the M group. See Sec. 1.1502-1(f)(1). However, P, S, and 
T compose a SRLY subgroup with respect to the Year 3 loss under 
paragraph

[[Page 261]]

(c)(2)(i) of this section because Year 3 is not a SRLY (and is not 
treated as a SRLY) with respect to the P group. P's loss is carried over 
to the M group's Year 4 and is therefore subject to the SRLY subgroup 
limitation in paragraph (c)(2) of this section.
    (c) In Year 4, the M group has $10 of consolidated taxable income 
(computed without regard to the CNOL deduction for Year 4). However, 
such consolidated taxable income would be $45 if determined by reference 
to only the items of P, S, and T, the members included in the SRLY 
subgroup with respect to P's loss carryover. Therefore, the SRLY 
subgroup limitation under paragraph (c)(2) of this section for P's net 
operating loss carryover from Year 3 is $45. Because the M group has 
only $10 of consolidated taxable income in Year 4, however, only $10 of 
P's net operating loss carryover is included in the CNOL deduction under 
paragraph (a) of this section in Year 4.
    (d) In Year 5, the M group has $100 of consolidated taxable income 
(computed without regard to the CNOL deduction for Year 5). Neither P, 
S, nor T has any items of income, gain, deduction, or loss in Year 5. 
Although the members of the SRLY subgroup do not contribute to the $100 
of consolidated taxable income in Year 5, the SRLY subgroup limitation 
for Year 5 is $35 (the sum of SRLY subgroup consolidated taxable income 
of $45 in Year 4 and $0 in Year 5, less the $10 net operating loss 
carryover actually absorbed by the M group in Year 4). Therefore, $35 of 
P's net operating loss carryover is included in the CNOL deduction under 
paragraph (a) of this section in Year 5.
    Example 3. Inclusion in more than one SRLY subgroup. (a) At the 
beginning of Year 1, S buys all the stock of T, and T becomes a member 
of the S group. For Year 1, the S group has a CNOL of $10, all of which 
is attributable to S and is carried over to Year 2. At the beginning of 
Year 2, P buys all the stock of S, and S and T become members of the P 
group. For Year 2, the P group has a CNOL of $35, all of which is 
attributable to P and is carried over to Year 3. At the beginning of 
Year 3, M acquires all of the stock of P and the former members of the P 
group become members of the M group.
    (b) P's and S's net operating losses arising in SRLYs with respect 
to the M group are subject to limitation under paragraph (c) of this 
section. P, S, and T compose a SRLY subgroup for purposes of determining 
the limitation for P's $35 net operating loss carryover arising in Year 
2 because, under paragraph (c)(2)(i) of this section, Year 2 is not a 
SRLY with respect to the P group. Similarly, S and T compose a SRLY 
subgroup for purposes of determining the limitation for S's $10 net 
operating loss carryover arising in Year 1 because Year 1 is not a SRLY 
with respect to the S group.
    (c) S and T are members of both the SRLY subgroup with respect to 
P's losses and the SRLY subgroup with respect to S's losses. Under 
paragraph (c)(2) of this section, S's and T's items cannot be included 
in the determination of the SRLY subgroup limitation for both SRLY 
subgroups for the same consolidated return year; paragraph (c)(2)(vi) of 
this section requires the M group to consider the items of S and T only 
once so that the losses are absorbed in the order of the taxable years 
in which they were sustained. Because S's loss was incurred in Year 1, 
while P's loss was incurred in Year 2, the items will be added in the 
determination of the consolidated taxable income of the S and T SRLY 
subgroup to enable S's loss to be absorbed first. The taxable income of 
the P, S, and T SRLY subgroup is then computed by including the 
consolidated taxable income for the S and T SRLY subgroup less the 
amount of any net operating loss carryover of S that is absorbed after 
applying this section to the S subgroup for the year.
    Example 4. Corporation ceases to be affiliated with a SRLY subgroup. 
(a) P and S are members of the P group and the P group has a CNOL of $30 
in Year 1, all of which is attributable to P and carried over to Year 2. 
At the beginning of Year 2, M acquires all of the stock of P, and P and 
S become members of the M group. P and S compose a SRLY subgroup with 
respect to P's net operating loss carryover. For Year 2, consolidated 
taxable income of the M group determined by reference to only the items 
of P (and without regard to the CNOL deduction for Year 2) is $40. 
However, such consolidated taxable income of the M group determined by 
reference to the items of both P and S is a loss of $20. Thus, the SRLY 
subgroup limitation under paragraph (c)(2) of this section prevents the 
M group from including any of P's net operating loss carryover in the 
CNOL deduction under paragraph (a) of this section in Year 2, and P 
carries the loss to Year 3.
    (b) At the end of Year 2, P sells all of the S stock and S ceases to 
be a member of the M group and, in turn, ceases to be affiliated with 
the P subgroup. For Year 3, consolidated taxable income of the M group 
is $50 (determined without regard to the CNOL deduction for Year 3), and 
such consolidated taxable income would be $10 if determined by reference 
to only items of P. However, the limitation under paragraph (c) of this 
section for Year 3 for P's net operating loss carryover still prevents 
the M group from including any of P's loss in the CNOL deduction under 
paragraph (a) of this section. The limitation results from the inclusion 
of S's items for Year 2 in the determination of the SRLY subgroup 
limitation for Year 3 even though S ceased to be a member of the M group 
(and the P subgroup) at the end of Year 2. Thus, the M group's 
consolidated taxable income determined by reference to only

[[Page 262]]

the SRLY subgroup members' items for all consolidated return years of 
the group through Year 3 (determined without regard to the CNOL 
deduction) is not a positive amount.

    (d) Coordination with consolidated return change of ownership 
limitation and transactions subject to old section 382--(1) Consolidated 
return changes of ownership. If a consolidated return change of 
ownership occurred before January 1, 1997, the principles of 
Sec. 1.1502-21A(d) apply to determine the amount of the aggregate of the 
net operating losses attributable to old members of the group that may 
be included in the consolidated net operating loss deduction under 
paragraph (a) of this section. For this purpose, Sec. 1.1502-1(g) is 
applied by treating that date as the end of the year of change.
    (2) Old section 382. The principles of Sec. 1.1502-21A(e) apply to 
disallow or reduce the amount of a net operating loss carryover of a 
member as a result of a transaction subject to old section 382.
    (e) Consolidated net operating loss. Any excess of deductions over 
gross income, as determined under Sec. 1.1502-11(a) (without regard to 
any consolidated net operating loss deduction), is also referred to as 
the consolidated net operating loss (or CNOL).
    (f) Predecessors and successors--(1) In general. For purposes of 
this section, any reference to a corporation, member, common parent, or 
subsidiary, includes, as the context may require, a reference to a 
successor or predecessor, as defined in Sec. 1.1502-1(f)(4).
    (2) Limitation on SRLY subgroups. Except as the Commissioner may 
otherwise determine, any increase in the consolidated taxable income of 
a SRLY subgroup that is attributable to a successor is disregarded 
unless the successor acquires substantially all the assets and 
liabilities of its predecessor and the predecessor ceases to exist.
    (g) Effective date.--(1) In general. This section generally applies 
to consolidated return years beginning on or after January 1, 1997.
    (2) SRLY limitation. Except in the case of those members (including 
members of a SRLY subgroup) described in paragraph (g)(3)(iii) of this 
section, a group does not take into account a consolidated taxable year 
beginning before January 1, 1997, in determining the aggregate of the 
consolidated taxable income under paragraph (c)(1) of this section 
(including for purposes of Sec. 1.1502-15T and Sec. 1.1502-22T(c)) for 
the members (or SRLY subgroups).
    (3) Application to prior periods. A consolidated group may apply the 
rules of this section to all consolidated return years ending on or 
after January 29, 1991, and beginning before January 1, 1997, provided 
that--
    (i) The group's tax liability as shown on an original or an amended 
return is consistent with the application of the rules of this section 
(other than this paragraph (g)) and Secs. 1.1502-15T, 1.1502-22T, 
1.1502-23T, 1.1502-91T through 1.1502-96T, and 1.1502-98T for each such 
year for which the statute of limitations does not preclude the filing 
of an amended return on January 1, 1997;
    (ii) Each section described in paragraph (g)(3)(i) of this section 
and Sec. 1.1502-1(f)(4)(ii) is applied by substituting ``taxable years 
ending on or after January 29, 1991'' for ``taxable years beginning on 
or after January 1, 1997'' (and ``before January 29, 1991'' for ``before 
January 1, 1997'' in the case of consolidated return changes of 
ownership) as the context requires;
    (iii) The rules of paragraph (c) of this section and Secs. 1.1502-
15T and 1.1502-22T(c) are applied only with respect to the losses and 
deductions of those corporations that became members of the group 
(including members of a subgroup), and to acquisitions occurring, on or 
after January 29, 1991, (and only with respect to such losses and 
deductions);
    (iv) The rules of Secs. 1.1502-15A, 1.1502-21A(c) and 1.1502-22A(c) 
are applied with respect to the losses and deductions of those 
corporations that became members of the group, and to acquisitions 
occurring, before January 29, 1991; and
    (v) Appropriate adjustments are made in the earliest subsequent open 
year to reflect any inconsistency in a year for which the statute of 
limitations precludes the filing of an amended return on January 1, 
1997.
    (4) Waiver of carrybacks. Paragraph (b)(3)(i) of this section 
(relating to the waiver of carrybacks) applies to net operating losses 
arising in a consolidated

[[Page 263]]

return year for which the due date of the income tax return (without 
regard to extensions) is on or after August 26, 1996.

[T.D. 8677, 61 FR 33328, June 27, 1996]



Sec. 1.1502-22T  Consolidated capital gain and loss (temporary).

    (a) Capital gain. The determinations under section 1222, including 
capital gain net income, net long-term capital gain, and net capital 
gain, with respect to members during consolidated return years are not 
made separately. Instead, consolidated amounts are determined for the 
group as a whole. The consolidated capital gain net income for any 
consolidated return year is determined by reference to--
    (1) The aggregate gains and losses of members from sales or 
exchanges of capital assets for the year (other than gains and losses to 
which section 1231 applies);
    (2) The consolidated net section 1231 gain for the year (determined 
under Sec. 1.1502-23T); and
    (3) The net capital loss carryovers or carrybacks to the year.
    (b) Net capital loss carryovers and carrybacks.--(1) In general. The 
determinations under section 1222, including net capital loss and net 
short-term capital loss, with respect to members during consolidated 
return years are not made separately. Instead, consolidated amounts are 
determined for the group as a whole. Losses included in the consolidated 
net capital loss may be carried to consolidated return years, and, after 
apportionment, may be carried to separate return years. The net capital 
loss carryovers and carrybacks consist of--
    (i) Any consolidated net capital losses of the group; and
    (ii) Any net capital losses of the members arising in separate 
return years.
    (2) Carryovers and carrybacks generally. The net capital loss 
carryovers and carrybacks to a taxable year are determined under the 
principles of section 1212 and this section. Thus, losses permitted to 
be absorbed in a consolidated return year generally are absorbed in the 
order of the taxable years in which they were sustained, and losses 
carried from taxable years ending on the same date, and which are 
available to offset consolidated capital gain net income, generally are 
absorbed on a pro rata basis. Additional rules provided under the Code 
or regulations also apply, as well as the SRLY limitation under 
paragraph (c) of this section. See, e.g., section 382(l)(2)(B).
    (3) Carryovers and carrybacks of consolidated net capital losses to 
separate return years. If any consolidated net capital loss that is 
attributable to a member may be carried to a separate return year under 
the principles of Sec. 1.1502-21T(b)(2), the amount of the consolidated 
net capital loss that is attributable to the member is apportioned and 
carried to the separate return year (apportioned loss).
    (4) Special rules--(i) Short years in connection with transactions 
to which section 381(a) applies. If a member distributes or transfers 
assets to a corporation that is a member immediately after the 
distribution or transfer in a transaction to which section 381(a) 
applies, the transaction does not cause the distributor or transferor to 
have a short year within the consolidated return year of the group in 
which the transaction occurred that is counted as a separate year for 
purposes of determining the years to which a net capital loss may be 
carried.
    (ii) Special status losses. [Reserved]
    (c) Limitations on net capital loss carryovers and carrybacks from 
separate return limitation years. The aggregate of the net capital 
losses of a member arising (or treated as arising) in SRLYs that are 
included in the determination of consolidated capital gain net income 
for all consolidated return years of the group under paragraph (a) of 
this section may not exceed the aggregate of the consolidated capital 
gain net income for all consolidated return years of the group 
determined by reference to only the member's items of gain and loss from 
capital assets as defined in section 1221 and trade or business assets 
defined in section 1231(b), including the member's losses actually 
absorbed by the group in the taxable year (whether or not absorbed by 
the member). The principles of Sec. 1.1502-21T(c)(including the SRLY 
subgroup principles under Sec. 1.1502-21T(c)(2)) apply

[[Page 264]]

with appropriate adjustments for purposes of applying this paragraph 
(c).
    (d) Coordination with respect to consolidated return change of 
ownership limitation occurring in consolidated return years beginning 
before January 1, 1997. If a consolidated return change of ownership 
occurred before January 1, 1997, the principles of Sec. 1.1502-22A(d) 
apply to determine the amount of the aggregate of the net capital loss 
attributable to old members of the group (as those terms are defined in 
Sec. 1.1502-1(g)), that may be included in the net capital loss 
carryover under paragraph (b) of this section. For this purpose, 
Sec. 1.1502-1(g) is applied by treating that date as the end of the year 
of change.
    (e) Consolidated net capital loss. Any excess of losses over gains, 
as determined under paragraph (a) of this section (without regard to any 
carryovers or carrybacks), is also referred to as the consolidated net 
capital loss.
    (f) Predecessors and successors. For purposes of this section, the 
principles of Sec. 1.1502-21T(f) apply with appropriate adjustments.
    (g) Effective date--(1) In general. This section applies to 
consolidated return years beginning on or after January 1, 1997.
    (2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for 
rules generally permitting a group to apply the rules of this section to 
consolidated return years ending on or after January 29, 1991, and 
beginning before January 1, 1997.

[T.D. 8677, 61 FR 33333, June 27, 1996]



Sec. 1.1502-23T  Consolidated net section 1231 gain or loss (temporary).

    (a) In general. Net section 1231 gains and losses of members arising 
during consolidated return years are not determined separately. Instead, 
the consolidated net section 1231 gain or loss is determined under this 
section for the group as a whole.
    (b) Recapture of ordinary loss. [Reserved]
    (c) Effective date--(1) In general. This section applies to gains 
and losses arising in the determination of consolidated net section 1231 
gain or loss for taxable years beginning on or after January 1, 1997.
    (2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for 
rules generally permitting a group to apply the rules of this section to 
consolidated return years ending on or after January 29, 1991, and 
beginning before January 1, 1997.

[T.D. 8677, 61 FR 33334, June 27, 1996]



Sec. 1.1502-24   Consolidated charitable contributions deduction.

    (a) Determination of amount of consolidated charitable contributions 
deduction. The deduction allowed by section 170 for the taxable year 
shall be the lesser of:
    (1) The aggregate deductions of the members of the group allowable 
under section 170 (determined without regard to section 170(b)(2)), plus 
the consolidated charitable contribution carryovers to such year, or
    (2) Five percent of the adjusted consolidated taxable income as 
determined under paragraph (c) of this section.
    (b) Carryover of excess charitable contributions. The consolidated 
charitable contribution carryovers to any consolidated return year shall 
consist of any excess consolidated charitable contributions of the 
group, plus any excess charitable contributions of members of the group 
arising in separate return years of such members, which may be carried 
over to the taxable year under the principles of section 170(b) (2) and 
(3). However, such consolidated carryovers shall not include any excess 
charitable contributions apportioned to a corporation for a separate 
return year pursuant to paragraph (e) of Sec. 1.1502-79.
    (c) Adjusted consolidated taxable income. For purposes of this 
section, the adjusted consolidated taxable income of the group for any 
consolidated return year shall be the consolidated taxable income 
computed without regard to this section, section 242, section 243(a) (2) 
and (3), Sec. 1.1502-25, Sec. 1.1502-26, and Sec. 1.1502-27, and without 
regard to any consolidated net operating or net capital loss carrybacks 
to such year.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966]

[[Page 265]]



Sec. 1.1502-26   Consolidated dividends received deduction.

    (a) In general. (1) The consolidated dividends received deduction 
for the taxable year shall be the lesser of:
    (i) The aggregate of the deduction of the members of the group 
allowable under sections 243(a)(1), 244(a), and 245 (computed without 
regard to the limitations provided in section 246(b)), or
    (ii) 85 percent of the consolidated taxable income computed without 
regard to the consolidated net operating loss deduction, consolidated 
section 247 deduction, the consolidated dividends received deduction, 
and any consolidated net capital loss carryback to the taxable year.

Subdivision (ii) of this subparagraph shall not apply for any 
consolidated return year for which there is a consolidated net operating 
loss. (See Sec. Sec. 1.1502-21T(e) or 1.1502-21A(f), as appropriate for 
the definition of a consolidated net operating loss.)
    (2) If any member computes a deduction under section 593(b)(2) for a 
taxable year beginning after July 11, 1969, and ending before August 30, 
1975, the deduction otherwise computed under this section shall be 
reduced by an amount determined by multiplying the deduction (determined 
without regard to this sentence and without regard to dividends received 
by the common parent if such parent does not use the percentage of 
income method provided by section 593(b)(2)) by the applicable 
percentage of the member with the highest applicable percentage 
(determined under subparagraphs (A) and (B) of section 593(b)(2)).
    (3) For taxable years ending on or after August 30, 1975, the 
deduction otherwise computed under this section shall be reduced by the 
sum of the amounts determined under paragraph (a)(4) of this section for 
each member that is a thrift institution that computes a deduction under 
section 593(b)(2).
    (4) For each thrift institution, the amount determined under this 
subparagraph is the product of:
    (i) The portion of the deduction determined with regard to the sum 
of the dividends received by: (A) The thrift institution, and (B) any 
member in which that thrift institution owns, directly and with the 
application of paragraph (a)(5) of this section, 5 percent or more of 
the stock on any day during the consolidated return year, and
    (ii) The thrift institution's applicable percentage determined under 
subparagraphs (A) and (B) of section 593(b)(2).

For purposes of this subparagraph, dividends allocated to a thrift 
institution under Sec. 1.596-1(c) shall be considered received by the 
thrift institution.
    (5) For purposes of paragraph (a)(4)(i) of this section, a member 
owning stock of another member (the ``second member'') shall be 
considered as owning its proportionate share of any stock of a member 
owned by the second member. Stock considered as being owned by reason of 
the preceding sentence shall, for purposes of applying that sentence, be 
treated as actually owned. The proportionate share of stock in a member 
owned by another member is the proportion which the value of the stock 
so owned bears to the value of all the outstanding stock in the member. 
For purposes of this paragraph the term ``stock'' includes nonvoting 
stock which is limited and preferred as to dividends.
    (6) For purposes of paragraph (a)(4)(i) of this section, if two or 
more thrift institutions that are both members of the group each owns 5 
percent or more of the same member's stock, the member's stock will be 
considered to be owned only by the thrift institution with the highest 
applicable percentage.
    (b) Intercompany dividends. The deduction determined under paragraph 
(a) of this section is determined without taking into account 
intercompany dividends to the extent that, under Sec. 1.1502-13(f)(2), 
they are not included in gross income. See Sec. 1.1502-13 for additional 
rules relating to intercompany dividends.
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example (1). Corporations P, S, and S-1 filed a consolidated return 
for the calendar year 1966 showing consolidated taxable income of 
$100,000 (determined without regard to the consolidated net operating 
loss deduction, consolidated dividends received deduction, and the 
consolidated section 247 deduction). Such corporations received 
dividends during such year from nonmember domestic corporations as 
follows:

[[Page 266]]



                                                                        
                                                               Dividends
                                                                        
Corporation:                                                            
  P.........................................................      $6,000
  S.........................................................      10,000
  S-1.......................................................      34,000
                                                             -----------
    Total...................................................      50,000
                                                                        

The dividends received deduction allowable to each member under section 
243(a)(1) (computed without regard to the limitation in section 246(b)) 
is as follows: P has $5,100 (85 percent of $6,000), S has $8,500 (85 
percent of $10,000), and S-1 has $28,900 (85 percent of $34,000), or a 
total of $42,500. Since $42,500 is less than $85,000 (85 percent of 
$100,000), the consolidated dividends received deduction is $42,500.
    Example (2). Assume the same facts as in example (1) except that 
consolidated taxable income (computed without regard to the consolidated 
net operating loss deduction, consolidated dividends received deduction, 
and the consolidated section 247 deduction) was $40,000. The aggregate 
of the dividends received deductions, $42,500, computed without regard 
to section 246(b), results in a consolidated net operating loss of 
$2,500. See section 172(d)(6). Therefore, paragraph (a)(2) of this 
section does not apply and the consolidated dividends received deduction 
is $42,500.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7631, 44 FR 
40497, July 11, 1979; T.D. 8597, 60 FR 36710, July 18, 1995; T.D. 8677, 
61 FR 33323, June 27, 1996]



Sec. 1.1502-27   Consolidated section 247 deduction.

    (a) Amount of deduction. The consolidated section 247 deduction for 
the taxable year shall be an amount computed as follows:
    (1) First, determine the amount which is the lesser of:
    (i) The aggregate of the dividends paid (within the meaning of 
section 247(a)) during such year by members of the group which are 
public utilities (within the meaning of section 247(b)(1)) on preferred 
stock (within the meaning of section 247(b)(2)), other than dividends 
paid to other members of the group, or
    (ii) The aggregate of the taxable income (or loss) (as determined 
under paragraph (b) of this section) of each such member which is a 
public utility.
    (2) Then, multiply the amount determined under subparagraph (1) of 
this paragraph by the fraction specified in section 247(a)(2).
    (b) Computation of taxable income. For purposes of paragraph 
(a)(1)(ii) of this section, the taxable income (or loss) of a member of 
the group described in paragraph (a)(1)(i) shall be determined under 
Sec. 1.1502-12, adjusted for the following items taken into account in 
the computation of consolidated taxable income:
    (1) The portion of the consolidated net operating loss deduction, 
the consolidated charitable contributions deduction, and the 
consolidated dividends received deduction, attributable to such member;
    (2) Such member's capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) (determined without 
regard to any net capital loss carryover or carryback attributable to 
such member);
    (3) Such member's net capital loss and section 1231 net loss, 
reduced by the portion of the consolidated net capital loss attributable 
to such member; and
    (4) The portion of any consolidated net capital loss carryover or 
carryback attributable to such member which is absorbed in the taxable 
year.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980]

         Basis, Stock Ownership, and Earnings and Profits Rules



Sec. 1.1502-30  Stock basis after certain triangular reorganizations.

    (a) Scope. This section provides rules for determining the basis of 
the stock of an acquiring corporation as a result of a triangular 
reorganization. The definitions and nomenclature contained in 
Sec. 1.358-6 apply to this section.
    (b) General rules--(1) Forward triangular merger, triangular C 
reorganization, or triangular B reorganization. P adjusts its basis in 
the stock of S as a result of a forward triangular merger, triangular C 
reorganization, or triangular B reorganization under Sec. 1.358-6(c) and 
(d), except that Sec. 1.358-6 (c)(1)(ii) and (d)(2) do not apply. 
Instead, P adjusts such basis by taking into account the full amount 
of--
    (i) T liabilities assumed by S or the amount of liabilities to which 
the T assets acquired by S are subject, and

[[Page 267]]

    (ii) The fair market value of any consideration not provided by P 
pursuant to the plan of reorganization.
    (2) Reverse triangular merger. If P adjusts its basis in the T stock 
acquired as a result of a reverse triangular merger under Sec. 1.358-6 
(c)(2)(i) and (d), Sec. 1.358-6 (c)(1)(ii) and (d)(2) do not apply. 
Instead, P adjusts such basis by taking into account the full amount 
of--
    (i) T liabilities deemed assumed by S or the amount of liabilities 
to which the T assets deemed acquired by S are subject, and
    (ii) The fair market value of any consideration not provided by P 
pursuant to the plan of reorganization.
    (3) Excess loss accounts. Negative adjustments under this section 
may exceed P's basis in its S or T stock. The resulting negative amount 
is P's excess loss account in its S or T stock. See Sec. 1.1502-19 for 
rules treating excess loss accounts as negative basis, and treating 
references to stock basis as including references to excess loss 
accounts.
    (4) Application of other rules of law. The rules for this section 
are in addition to other rules of law. See Sec. 1.1502-80(d) for the 
non-application of section 357(c) to P.
    (5) Examples. The rules of this paragraph (b) are illustrated by the 
following examples. For purposes of these examples, P, S, and T are 
domestic corporations, P and S file consolidated returns, P owns all of 
the only class of S stock, the P stock exchanged in the transaction 
satisfies the requirements of the applicable triangular reorganization 
provisions, the facts set forth the only corporate activity, and tax 
liabilities are disregarded.

    Example 1. Liabilities. (a) Facts. T has assets with an aggregate 
basis of $60 and fair market value of $100. T's assets are subject to 
$70 of liabilities. Pursuant to a plan, P forms S with $5 of cash (which 
S retains), and T merges into S. In the merger, the T shareholders 
receive P stock worth $30 in exchange for their T stock. The transaction 
is a reorganization to which sections 368 (a)(1)(A) and (a)(2)(D) apply.
    (b) Basis adjustment. Under Sec. 1.358-6, P adjusts its $5 basis in 
the S stock as if P had acquired the T assets with a carryover basis 
under section 362 and transferred these assets to S in a transaction in 
which P determines its basis in the S stock under section 358. Under the 
rules of this section, the limitation described in Sec. 1.358-
6(c)(1)(ii) does not apply. Thus, P adjusts its basis in the S stock by 
-$10 (the aggregate adjusted basis of T's assets decreased by the amount 
of liabilities to which the T assets are subject). Consequently, as a 
result of the reorganization, P has an excess loss account of $5 in its 
S stock.
    Example 2. Consideration not provided by P. (a) Facts. T has assets 
with an aggregate basis of $10 and fair market value of $100 and no 
liabilities. S is an operating company with substantial assets that has 
been in existence for several years. P has a $5 basis in its S stock. 
Pursuant to a plan, T merges into S and the T shareholders receive $70 
of P stock provided by P pursuant to the plan of reorganization and $30 
of cash provided by S in exchange for their T stock. The transaction is 
a reorganization to which sections 368 (a)(1)(A) and (a)(2)(D) apply.
    (b) Basis adjustment. Under Sec. 1.358-6, P adjusts its $5 basis in 
the S stock as if P had acquired the T assets with a carryover basis 
under section 362 and transferred these assets to S in a transaction in 
which P determines its basis in the S stock under section 358. Under the 
rules of this section, the limitation described in Sec. 1.358-6(d)(2) 
does not apply. Thus, P adjusts its basis in the S stock by -$20 (the 
aggregate adjusted basis of T's assets decreased by the fair market 
value of the consideration provided by S). As a result of the 
reorganization, P has an excess loss account of $15 in its S stock.
    (c) Appreciated asset. The facts are the same as in paragraph (a) of 
this Example 2, except that in the reorganization S provides an asset 
with a $20 adjusted basis and $30 fair market value instead of $30 cash. 
The basis is adjusted in the same manner as in paragraph (b) of this 
Example 2. In addition, because S recognizes a $10 gain from the asset 
under section 1001, P's basis in its S stock is increased under 
Sec. 1.1502-32(b) by S's $10 gain. Consequently, as a result of the 
reorganization, P has an excess loss account of $5 in its S stock. (The 
results would be the same if the appreciated asset provided by S was P 
stock with respect to which S recognized gain. See Sec. 1.1032-2(c)).
    Example 3. Reverse triangular merger. (a) Facts. T has assets with 
an aggregate basis of $60 and fair market value of $100. T's assets are 
subject to $70 of liabilities. P owns all of the only class of S stock. 
P has a $5 basis in its S stock. Pursuant to a plan, S merges into T 
with T surviving. In the merger, the T shareholders exchange their T 
stock for $2 cash from P and $28 worth of P stock provided by P pursuant 
to the plan. The transaction is a reorganization to which sections 368 
(a)(1)(A) and (a)(2)(E) apply.
    (b) Basis adjustment. Under Sec. 1.358-6, P's basis in the T stock 
acquired equals its $5 basis in its S stock immediately before the 
transaction adjusted by the $60 basis in the T

[[Page 268]]

assets deemed transferred, and the $70 of liabilities to which the T 
assets are subject. Under the rules of this section, the limitation 
described in Sec. 1.358-6(c)(1)(ii) does not apply. Consequently, P has 
an excess loss account of $5 in its T stock as a result of the 
transaction.

    (c) Effective date. This section applies to reorganizations 
occurring on or after December 21, 1995.

[T.D. 8648, 60 FR 66082, Dec. 21, 1995]



Sec. 1.1502-31   Stock basis after a group structure change.

    (a) In general--(1) Overview. If one corporation (P) succeeds 
another corporation (T) under the principles of Sec. 1.1502-75(d) (2) or 
(3) as the common parent of a consolidated group in a group structure 
change, the basis of members in the stock of the former common parent 
(or the stock of a successor) is adjusted or determined under this 
section. See Sec. 1.1502-33(f)(1) for the definition of group structure 
change. For example, if P owns all of the stock of another corporation 
(S), and T merges into S in a group structure change that is a 
reorganization described in section 368(a)(2)(D) in which P becomes the 
common parent of the T group, P's basis in S's stock must be adjusted to 
reflect the change in S's assets and liabilities. The rules of this 
section coordinate with the earnings and profits adjustments required 
under Sec. 1.1502-33(f)(1), generally conforming the results of 
transactions in which the T group continues under Sec. 1.1502-75 with P 
as the common parent. By preserving in P the relationship between T's 
earnings and profits and asset basis, these adjustments limit possible 
distortions under section 1502 (e.g., in the deconsolidation rules for 
earnings and profits under Sec. 1.1502-33(e), and the continued filing 
requirements under Sec. 1.1502-75(a)). This section applies whether or 
not T continues to exist after the group structure change.
    (2) Application of other rules of law. The rules of this section are 
in addition to other rules of law. The provisions of this section and 
other rules of law must not have the effect of duplicating an amount in 
P's basis in S's stock.
    (b) General rules. Except as otherwise provided in this section--
    (1) Asset acquisitions. If a corporation acquires the former common 
parent's assets (and any liabilities assumed or to which the assets are 
subject) in a group structure change, the basis of members in the stock 
of the acquiring corporation is adjusted immediately after the group 
structure change to reflect the acquiring corporation's allocable share 
of the former common parent's net asset basis as determined under 
paragraph (c) of this section. For example, if S acquires all of T's 
assets in a group structure change that is a reorganization described in 
section 368(a)(2)(D), P's basis in S's stock is adjusted to reflect T's 
net asset basis. If P owned some of T's stock before the group structure 
change, the results would be the same because P's basis in the T stock 
is not taken into account in determining P's basis in S's stock. If T's 
net asset basis is a negative amount, it reduces P's basis in S's stock 
and, if the reduction exceeds P's basis in S's stock, the excess is P's 
excess loss account in S's stock. See Sec. 1.1502-19 for rules treating 
P's excess loss account as negative basis, and treating a reference to 
P's basis in S's stock as including an excess loss account.
    (2) Stock acquisitions. If a corporation acquires stock of the 
former common parent in a group structure change, the basis of the 
members in the former common parent's stock immediately after the group 
structure change (including any stock of the former common parent owned 
before the group structure change) is redetermined in accordance with 
the results for an asset acquisition described in paragraph (b)(1) of 
this section. For example, if all of T's stock is contributed to P in a 
group structure change to which section 351 applies, P's basis in T's 
stock is T's net asset basis, rather than the amount determined under 
section 362. Similarly, if S merges into T in a group structure change 
described in section 368(a)(2)(E), P's basis in T's stock is the basis 
that P would have in S's stock under paragraph (b)(1) of this section if 
T had merged into S in a group structure change described in section 
368(a)(2)(D).
    (c) Net asset basis. The former common parent's net asset basis is 
the

[[Page 269]]

basis it would have in the stock of a newly formed subsidiary, if--
    (1) The former common parent transferred its assets (and any 
liabilities assumed or to which the assets are subject) to the 
subsidiary in a transaction to which section 351 applies;
    (2) The former common parent and the subsidiary were members of the 
same consolidated group (see Sec. 1.1502-80(d) for the non-application 
of section 357(c) to the transfer); and
    (3) The asset basis taken into account is each asset's basis 
immediately after the group structure change (e.g., taking into account 
any income or gain recognized in the group structure change and 
reflected in the asset's basis).
    (d) Additional adjustments. In addition to the adjustments in 
paragraph (b) of this section, the following adjustments are made:
    (1) Consideration not provided by P. The basis is reduced to reflect 
the fair market value of any consideration not provided by the member. 
For example, if S acquires T's assets in a group structure change 
described in section 368(a)(2)(D), and S provides an appreciated asset 
(e.g., stock of P) as partial consideration in the transaction, P's 
basis in S's stock is reduced by the fair market value of the asset.
    (2) Allocable share--(i) Asset acquisitions. If a corporation 
receives less than all of the former common parent's assets and 
liabilities in the group structure change, the former common parent's 
net asset basis taken into account under paragraph (b)(1) of this 
section is adjusted accordingly.
    (ii) Stock acquisitions. If a corporation owns less than all of the 
former common parent's stock immediately after a group structure change 
described in paragraph (b)(2) of this section, the percentage of the 
former common parent's net asset basis taken into account equals the 
percentage (by fair market value) of the former common parent's stock 
owned immediately after the group structure change. For example, if P 
owns less than all of the former common parent's stock immediately after 
the group structure change, only an allocable part of the basis 
determined under this section is reflected in the shares owned by P (and 
the amount allocable to shares owned by nonmembers has no effect on the 
basis of their shares).
    (3) Allocation among shares of stock. The basis determined under 
this section is allocated among shares under the principles of section 
358. For example, if P owns multiple classes of the former common 
parent's stock immediately after the group structure change, only an 
allocable part of the basis determined under this section is reflected 
in the basis of each share. See Sec. 1.1502-19(d), for special 
allocations with respect to excess loss accounts.
    (4) Higher-tier members. To the extent that the former common parent 
is owned by members other than the new common parent, the basis of 
members in the stock of all subsidiaries owning, directly or indirectly, 
in whole or in part, an interest in the former common parent's assets or 
liabilities is adjusted in accordance with the principles of this 
section. The adjustments are applied in the order of the tiers, from the 
lowest to the highest.
    (e) Waiver of loss carryovers of former common parent --(1) General 
rule. An irrevocable election may be made to treat all or any portion of 
a loss carryover attributable to the common parent as expiring for all 
Federal income tax purposes immediately before the group structure 
change. Thus, if the loss carryover is treated as expiring under the 
election, it will not result in a negative adjustment to the basis of 
P's stock under Sec. 1.1502-32(b).
    (2) Election. The election described in this paragraph (e) must be 
made in a separate statement entitled ``ELECTION TO TREAT LOSS CARRYOVER 
AS EXPIRING UNDER Sec. 1.1502-31(e).'' The statement must be filed with 
the consolidated group's return for the year that includes the group 
structure change, and it must be signed by the former and the new common 
parent. The statement must identify the amount of each loss carryover 
deemed to expire (or the amount of each loss carryover deemed not to 
expire, with any balance of any loss carryovers being deemed to expire).
    (f) Predecessors and successors. For purposes of this section, any 
reference to a corporation includes a reference to

[[Page 270]]

a successor or predecessor as the context may require. See Sec. 1.1502-
32(f) for definitions of predecessor and successor.
    (g) Examples. For purposes of the examples in this section, unless 
otherwise stated, all corporations have only one class of stock 
outstanding, the tax year of all persons is the calendar year, all 
persons use the accrual method of accounting, the facts set forth the 
only corporate activity, all transactions are between unrelated persons, 
and tax liabilities are disregarded. The principles of this section are 
illustrated by the following examples.

    Example 1. Forward triangular merger. (a) Facts. P is the common 
parent of one group and T is the common parent of another. T has assets 
with an aggregate basis of $60 and fair market value of $100 and no 
liabilities. T's shareholders have an aggregate basis of $50 in T's 
stock. In Year 1, pursuant to a plan, P forms S and T merges into S with 
the T shareholders receiving $100 of P stock in exchange for their T 
stock. The transaction is a reorganization described in section 
368(a)(2)(D). The transaction is also a reverse acquisition under 
Sec. 1.1502- 75(d)(3) because the T shareholders, as a result of owning 
T's stock, own more than 50% of the value of P's stock immediately after 
the transaction. Thus, the transaction is a group structure change under 
Sec. 1.1502-33(f)(1), and P's earnings and profits are adjusted to 
reflect T's earnings and profits immediately before T ceases to be the 
common parent of the T group.
    (b) Analysis. Under paragraph (b)(1) of this section, P's basis in 
S's stock is adjusted to reflect T's net asset basis. Under paragraph 
(c) of this section, T's net asset basis is $60, the basis T would have 
in the stock of a subsidiary under section 358 if T had transferred all 
of its assets and liabilities to the subsidiary in a transaction to 
which section 351 applies. Thus, P has a $60 basis in S's stock.
    (c) Pre-existing S. The facts are the same as in paragraph (a) of 
this Example 1, except that P has owned the stock of S for several years 
and P has a $50 basis in the S stock before the merger with T. Under 
paragraph (b)(1) of this section, P's $50 basis in S's stock is adjusted 
to reflect T's net asset basis. Thus, P's basis in S's stock is $110 
($50 plus $60).
    (d) Excess loss account included in former common parent's net asset 
basis. The facts are the same as in paragraph (a) of this Example 1, 
except that T has two assets, an operating asset with an $80 basis and 
$90 fair market value, and stock of a subsidiary with a $20 excess loss 
account and $10 fair market value. Under paragraph (c) of this section, 
T's net asset basis is $60 ($80 minus $20). See sections 351 and 358, 
and Sec. 1.1502-19. Consequently, P has a $60 basis in S's stock. Under 
section 362 and Sec. 1.1502-19, S has an $80 basis in the operating 
asset and a $20 excess loss account in the stock of the subsidiary.
    (e) Liabilities in excess of basis. The facts are the same as in 
paragraph (a) of this Example 1, except that T's assets have a fair 
market value of $170 (and $60 basis) and are subject to $70 of 
liabilities. Under paragraph (c) of this section, T's net asset basis is 
($10) ($60 minus $70). See sections 351 and 358, and Secs. 1.1502-19 and 
1.1502-80(d). Thus, P has a $10 excess loss account in S's stock. Under 
section 362, S has a $60 basis in its assets (which are subject to $70 
of liabilities). (Under paragraph (a)(2) of this section, because the 
liabilities are taken into account in determining net asset basis under 
paragraph (c) of this section, the liabilities are not also taken into 
account as consideration not provided by P under paragraph (d)(1) of 
this section.)
    (f) Consideration provided by S. The facts are the same as in 
paragraph (a) of this Example 1, except that P forms S with a $100 
contribution at the beginning of Year 1, and during Year 6, pursuant to 
a plan, S purchases $100 of P stock and T merges into S with the T 
shareholders receiving P stock in exchange for their T stock. Under 
paragraph (b)(1) of this section, P's $100 basis in S's stock is 
increased by $60 to reflect T's net asset basis. Under paragraph (d)(1) 
of this section, P's basis in S's stock is decreased by $100 (the fair 
market value of the P stock) because the P stock purchased by S and used 
in the transaction is consideration not provided by P.
    (g) Appreciated asset provided by S. The facts are the same as in 
paragraph (a) of this Example 1, except that P has owned the stock of S 
for several years, and the shareholders of T receive $60 of P stock and 
an asset of S with a $30 adjusted basis and $40 fair market value. S 
recognizes a $10 gain from the asset under section 1001. Under paragraph 
(b)(1) of this section, P's basis in S's stock is increased by $60 to 
reflect T's net asset basis. Under paragraph (d)(1) of this section, P's 
basis in S's stock is decreased by $40 (the fair market value of the 
asset provided by S). In addition, P's basis in S's stock is increased 
under Sec. 1.1502-32(b) by S's $10 gain.
    (h) Depreciated asset provided by S. The facts are the same as in 
paragraph (a) of this Example 1, except that P has owned the stock of S 
for several years, and the shareholders of T receive $60 of P stock and 
an asset of S with a $50 adjusted basis and $40 fair market value. S 
recognizes a $10 loss from the asset under section 1001. Under paragraph 
(b)(1) of this section, P's basis in S's stock is increased by $60 to 
reflect T's net asset basis. Under paragraph (d)(1) of this section, P's 
basis in S's stock is decreased by $40 (the fair

[[Page 271]]

market value of the asset provided by S). In addition, S's $10 loss is 
taken into account under Sec. 1.1502-32(b) in determining P's basis 
adjustments under that section.
    Example 2. Stock acquisition. (a) Facts. P is the common parent of 
one group and T is the common parent of another. T has assets with an 
aggregate basis of $60 and fair market value of $100 and no liabilities. 
T's shareholders have an aggregate basis of $50 in T's stock. Pursuant 
to a plan, P forms S and S acquires all of T's stock in exchange for P 
stock in a transaction described in section 368(a)(1)(B). The 
transaction is also a reverse acquisition under Sec. 1.1502-75(d)(3). 
Thus, the transaction is a group structure change under Sec. 1.1502-
33(f)(1), and the earnings and profits of P and S are adjusted to 
reflect T's earnings and profits immediately before T ceases to be the 
common parent of the T group.
    (b) Analysis. Under paragraph (d)(4) of this section, although S is 
not the new common parent of the T group, adjustments must be made to 
S's basis in T's stock in accordance with the principles of this 
section. Although S's basis in T's stock would ordinarily be determined 
under section 362 by reference to the basis of T's shareholders in T's 
stock immediately before the group structure change, under the 
principles of paragraph (b)(2) of this section, S's basis in T's stock 
is determined by reference to T's net asset basis. Thus, S's basis in 
T's stock is $60.
    (c) Higher-tier adjustments. Under paragraph (d)(4) of this section, 
P's basis in S's stock is adjusted to $60 (to be consistent with the 
adjustment to S's basis in T's stock).
    (d) Cross ownership. The facts are the same as in paragraph (a) of 
this Example 2, except that S has owned 10% of T's stock for several 
years and, pursuant to the plan, S acquires the remaining 90% of T's 
stock in exchange for P stock. The results are the same as in paragraphs 
(b) and (c) of this Example 2, because S's basis in the initial 10% of 
T's stock is redetermined under this section.
    (e) Allocable share. The facts are the same as in paragraph (a) of 
this Example 2, except that P owns only 90% of S's stock immediately 
after the group structure change. S's basis in T's stock is the same as 
in paragraph (b) of this Example 2. Under paragraph (d)(2) of this 
section, P's basis in its S stock is adjusted to $54 (90% of S's $60 
adjustment).
    Example 3. Taxable stock acquisition. (a) Facts. P is the common 
parent of one group and T is the common parent of another. T has assets 
with an aggregate basis of $60 and fair market value of $100 and no 
liabilities. T's shareholders have an aggregate basis of $50 in T's 
stock. Pursuant to a plan, P acquires all of T's stock in exchange for 
$70 of P's stock and $30 in a transaction that is a group structure 
change under Sec. 1.1502-33(f)(1). P's acquisition of T's stock is a 
taxable transaction. (Because of P's use of cash, the acquisition is not 
a transaction described in section 368(a)(1)(B).)
    (b) Analysis. Under paragraph (b)(2) of this section, P's basis in 
T's stock is adjusted to reflect T's net asset basis. Thus, although P's 
basis in T's stock would ordinarily be a cost basis of $100, P's basis 
in T's stock under this section is $60.

    (h) Effective date--(1) General rule. This section applies to group 
structure changes occurring in consolidated return years beginning on or 
after January 1, 1995.
    (2) Prior law. For prior years, see prior regulations under section 
1502 as in effect with respect to the transaction. See, e.g., 
Sec. 1.1502-31T as contained in the 26 CFR part 1 edition revised as of 
April 1, 1994.

[T.D. 8560, 59 FR 41683, Aug. 15, 1994]



Sec. 1.1502-32  Investment adjustments.

    (a) In general--(1) Purpose. This section provides rules for 
adjusting the basis of the stock of a subsidiary (S) owned by another 
member (P). These rules modify the determination of P's basis in S's 
stock under applicable rules of law by adjusting P's basis to reflect 
S's distributions and S's items of income, gain, deduction, and loss 
taken into account for the period that S is a member of the consolidated 
group. The purpose of the adjustments is to treat P and S as a single 
entity so that consolidated taxable income reflects the group's income. 
For example, if P forms S with a $100 contribution, and S takes into 
account $10 of income, P's $100 basis in S's stock under section 358 is 
increased by $10 under this section to prevent S's income from being 
taken into account a second time on P's disposition of S's stock. 
Comparable adjustments are made for tax-exempt income and noncapital, 
nondeductible expenses that S takes into account, to preserve their 
treatment under the Internal Revenue Code.
    (2) Application of other rules of law. The rules of this section are 
in addition to other rules of law. See, e.g., section 358 (basis 
determinations for distributees), section 1016 (adjustments to basis), 
Sec. 1.1502-11(b) (limitations on the use of losses), Sec. 1.1502-19 
(treatment of excess loss accounts), Sec. 1.1502-20 (additional rules 
relating to stock loss), and Sec. 1.1502-31 (basis after a group

[[Page 272]]

structure change). P's basis in S's stock must not be adjusted under 
this section and other rules of law in a manner that has the effect of 
duplicating an adjustment. See also paragraph (h)(5) of this section for 
basis reductions applicable to certain former subsidiaries.
    (3) Overview--(i) In general. The amount of the stock basis 
adjustments and their timing are determined under paragraph (b) of this 
section. Under paragraph (c) of this section, the amount of the 
adjustment is allocated among the shares of S's stock. Paragraphs (d) 
through (g) of this section provide definitions, an anti-avoidance rule, 
successor rules, and recordkeeping requirements.
    (ii) Excess loss account. Negative adjustments under this section 
may exceed P's basis in S's stock. The resulting negative amount is P's 
excess loss account in S's stock. See Sec. 1.1502-19 for rules treating 
excess loss accounts as negative basis, and treating references to stock 
basis as including references to excess loss accounts.
    (iii) Tiering up of adjustments. The adjustments to S's stock under 
this section are taken into account in determining adjustments to 
higher-tier stock. The adjustments are applied in the order of the 
tiers, from the lowest to the highest. For example, if P is also a 
subsidiary, P's adjustment to S's stock is taken into account in 
determining the adjustments to stock of P owned by other members.
    (b) Stock basis adjustments--(1) Timing of adjustments--(i) In 
general. Adjustments under this section are made as of the close of each 
consolidated return year, and as of any other time (an interim 
adjustment) if a determination at that time is necessary to determine a 
tax liability of any person. For example, adjustments are made as of P's 
sale of S's stock in order to measure P's gain or loss from the sale, 
and if P's interest in S's stock is not uniform throughout the year 
(e.g., because P disposes of a portion of its S stock, or S issues 
additional shares to another person), the adjustments under this section 
are made by taking into account the varying interests. An interim 
adjustment may be necessary even if tax liability is not affected until 
a later time. For example, if P sells only 50% of S's stock and S 
becomes a nonmember, adjustments must be made for the retained stock as 
of the disposition (whether or not P has an excess loss account in that 
stock). Similarly, if S liquidates during a consolidated return year, 
adjustments must be made as of the liquidation (even if the liquidation 
is tax free under section 332).
    (ii) Allocation of items. If Sec. 1.1502-76(b) applies to S for 
purposes of an adjustment before the close of the group's consolidated 
return year, the amount of the adjustment is determined under that 
section. If Sec. 1.1502-76(b) does not apply to the interim adjustment, 
the adjustment is determined under the principles of Sec. 1.1502-76(b), 
consistently applied, and ratable allocation under the principles of 
Sec. 1.1502-76(b)(2)(ii) or (iii) may be used without filing an election 
under Sec. 1.1502-76(b)(2). The principles would apply, for example, if 
P becomes a nonmember but S remains a member.
    (2) Amount of adjustments. P's basis in S's stock is increased by 
positive adjustments and decreased by negative adjustments under this 
paragraph (b)(2). The amount of the adjustment, determined as of the 
time of the adjustment, is the net amount of S's--
    (i) Taxable income or loss;
    (ii) Tax-exempt income;
    (iii) Noncapital, nondeductible expenses; and
    (iv) Distributions with respect to S's stock.
    (3) Operating rules. For purposes of determining P's adjustments to 
the basis of S's stock under paragraph (b)(2) of this section--
    (i) Taxable income or loss. S's taxable income or loss is 
consolidated taxable income (or loss) determined by including only S's 
items of income, gain, deduction, and loss taken into account in 
determining consolidated taxable income (or loss), treating S's 
deductions and losses as taken into account to the extent they are 
absorbed by S or any other member. For this purpose:
    (A) To the extent that S's deduction or loss is absorbed in the year 
it arises or is carried forward and absorbed in a subsequent year (e.g., 
under section 172, 465, or 1212), the deduction or loss

[[Page 273]]

is taken into account under paragraph (b)(2) of this section in the year 
in which it is absorbed.
    (B) To the extent that S's deduction or loss is carried back and 
absorbed in a prior year (whether consolidated or separate), the 
deduction or loss is taken into account under paragraph (b)(2) of this 
section in the year in which it arises and not in the year in which it 
is absorbed.
    (ii) Tax-exempt income--(A) In general. S's tax-exempt income is its 
income and gain which is taken into account but permanently excluded 
from its gross income under applicable law, and which increases, 
directly or indirectly, the basis of its assets (or an equivalent 
amount). For example, S's dividend income to which Sec. 1.1502-
13(f)(2)(ii) applies, and its interest excluded from gross income under 
section 103, are treated as tax-exempt income. However, S's income not 
recognized under section 1031 is not treated as tax- exempt income 
because the corresponding basis adjustments under section 1031(d) 
prevent S's nonrecognition from being permanent. Similarly, S's tax-
exempt income does not include gain not recognized under section 332 
from the liquidation of a lower-tier subsidiary, or not recognized under 
section 118 or section 351 from a transfer of assets to S.
    (B) Equivalent deductions. To the extent that S's taxable income or 
gain is permanently offset by a deduction or loss that does not reduce, 
directly or indirectly, the basis of S's assets (or an equivalent 
amount), the income or gain is treated as tax-exempt income and is taken 
into account under paragraph (b)(3)(ii)(A) of this section. In addition, 
the income and the offsetting item are taken into account under 
paragraph (b)(3)(i) of this section. For example, if S receives a $100 
dividend with respect to which a $70 dividends received deduction is 
allowed under section 243, $70 of the dividend is treated as tax-exempt 
income. Accordingly, P's basis in S's stock increases by $100 because 
the $100 dividend and $70 deduction are taken into account under 
paragraph (b)(3)(i) of this section (resulting in $30 of the increase), 
and $70 of the dividend is also taken into account under paragraph 
(b)(3)(ii)(A) of this section as tax-exempt income (resulting in $70 of 
the increase). (See paragraph (b)(3)(iii) of this section if there is a 
corresponding negative adjustment under section 1059.) Similarly, income 
from mineral properties is treated as tax-exempt income to the extent it 
is offset by deductions for depletion in excess of the basis of the 
property.
    (C) Discharge of indebtedness income--(1) In general. Discharge of 
indebtedness income of S that is excluded from gross income under 
section 108 is treated as tax-exempt income only to the extent the 
discharge is applied to reduce tax attributes (e.g., under section 108 
or 1017). Discharge of S's indebtedness is treated as applied to reduce 
tax attributes only to the extent the attribute reduction is taken into 
account as a reduction under paragraph (b)(3)(iii) of this section.
    (2) Expired loss carryovers. If the amount of the discharge exceeds 
the amount of the attribute reduction, the excess is nevertheless 
treated as applied to reduce tax attributes to the extent a loss 
carryover expired without tax benefit, the expiration was taken into 
account as a noncapital, nondeductible expense under paragraph 
(b)(3)(iii) of this section, and the loss carryover would have been 
reduced had it not expired.
    (D) Basis shifts. An increase in the basis of S's assets (or an 
equivalent as described in paragraph (b)(3)(iv)(B) of this section) is 
treated as tax-exempt income to the extent that the increase is not 
otherwise taken into account in determining stock basis, it corresponds 
to a negative adjustment that is taken into account by the group under 
this paragraph (b) (or incurred by the common parent), and it has the 
effect (viewing the group in the aggregate) of a permanent recovery of 
the reduction. For example, S's basis increase under section 50(c)(2) is 
treated as tax-exempt income to the extent the preceding basis reduction 
under section 50(c)(1) is reflected in the basis of a member's stock. On 
the other hand, if S increases the basis of an asset as the result of an 
accounting method change, and the related positive section 481(a) 
adjustment is taken into account over time, the basis increase is not 
treated as tax-exempt income.

[[Page 274]]

    (iii) Noncapital, nondeductible expenses--(A) In general. S's 
noncapital, nondeductible expenses are its deductions and losses that 
are taken into account but permanently disallowed or eliminated under 
applicable law in determining its taxable income or loss, and that 
decrease, directly or indirectly, the basis of its assets (or an 
equivalent amount). For example, S's Federal taxes described in section 
275 and loss not recognized under section 311(a) are noncapital, 
nondeductible expenses. Similarly, if a loss carryover (e.g., under 
section 172 or 1212) attributable to S expires or is reduced under 
section 108(b), it becomes a noncapital, nondeductible expense at the 
close of the last tax year to which it may be carried. However, if S 
sells and repurchases a security subject to section 1091, the disallowed 
loss is not a noncapital, nondeductible expense because the 
corresponding basis adjustments under section 1091(d) prevent the 
disallowance from being permanent.
    (B) Nondeductible basis recovery. Any other decrease in the basis of 
S's assets (or an equivalent as described in paragraph (b)(3)(iv)(B) of 
this section) may be a noncapital, nondeductible expense to the extent 
that the decrease is not otherwise taken into account in determining 
stock basis and is permanently eliminated for purposes of determining 
S's taxable income or loss. Whether a decrease is so treated is 
determined by taking into account both the purposes of the Code or 
regulatory provision resulting in the decrease and the purposes of this 
section. For example, S's noncapital, nondeductible expenses include any 
basis reduction under section 50(c)(1), section 1017, section 1059, 
Sec. 1.1502-20(b), or Sec. 1.1502-20(g). Also included as a noncapital, 
nondeductible expense is the amount of any gross-up for taxes paid by 
another taxpayer that S is treated as having paid (e.g., income included 
under section 78, or the portion of an undistributed capital gain 
dividend that is treated as tax deemed to have been paid by a 
shareholder under section 852(b)(3)(D)(ii), whether or not any 
corresponding amount is claimed as a tax credit). In contrast, a 
decrease generally is not a noncapital, nondeductible expense if it 
results because S redeems stock in a transaction to which section 302(a) 
applies, S receives assets in a liquidation to which section 332 applies 
and its basis in the assets is less than its basis in the stock 
canceled, or S distributes the stock of a subsidiary in a distribution 
to which section 355 applies.
    (iv) Special rules for tax-exempt income and noncapital, 
nondeductible expenses. For purposes of paragraphs (b)(3)(ii) and (iii) 
of this section:
    (A) Treatment as permanent. An amount is permanently excluded from 
gross income, or permanently disallowed or eliminated, if it is so 
treated by S even though another person may take a corresponding amount 
into account. For example, if S sells property to a nonmember at a loss 
that is disallowed under section 267(a), S's loss is a noncapital, 
nondeductible expense even though under section 267(d) the nonmember may 
treat a corresponding amount of gain as not recognized. (If the 
nonmember is a subsidiary in another consolidated group, its gain not 
recognized under section 267(d) is tax-exempt income under paragraph 
(b)(3)(ii)(A) of this section.)
    (B) Amounts equivalent to basis and adjustments to basis. Amounts 
equivalent to basis include the amount of money, the amount of a loss 
carryover, and the amount of an adjustment to gain or loss under section 
475(a) for securities described in section 475(a)(2). An equivalent to a 
basis increase includes a decrease in an excess loss account, and an 
equivalent to a basis decrease includes the denial of basis for taxable 
income.
    (C) Timing. An amount is taken into account in the year in which it 
would be taken into account under paragraph (b)(3)(i) of this section if 
it were subject to Federal income taxation.
    (D) Tax sharing agreements. Taxes are taken into account by applying 
the principles of section 1552 and the percentage method under 
Sec. 1.1502-33(d)(3) (and by assuming a 100% allocation of any decreased 
tax liability). The treatment of amounts allocated under this paragraph 
(b)(3)(iv)(D) is analogous to the treatment of allocations under 
Sec. 1.1552-1(b)(2). For example, if one member owes a payment to a 
second member, the first member is treated as indebted to the second 
member. The right to receive payment is treated as

[[Page 275]]

a positive adjustment under paragraph (b)(3)(ii) of this section, and 
the obligation to make payment is treated as a negative adjustment under 
paragraph (b)(3)(iii) of this section. If the obligation is not paid, 
the amount not paid generally is treated as a distribution, 
contribution, or both, depending on the relationship between the 
members.
    (v) Distributions. Distributions taken into account under paragraph 
(b)(2) of this section are distributions with respect to S's stock to 
which section 301 applies and all other distributions treated as 
dividends (e.g., under section 356(a)(2)). See Sec. 1.1502-13(f)(2)(iv) 
for taking into account distributions to which section 301 applies (but 
not other distributions treated as dividends) under the entitlement 
rule.
    (4) Waiver of loss carryovers from separate return limitation 
years--(i) General rule. If S has a loss carryover from a separate 
return limitation year when it becomes a member of a consolidated group, 
the group may make an irrevocable election to treat all or any portion 
of the loss carryover as expiring for all Federal income tax purposes 
immediately before S becomes a member of the consolidated group (deemed 
expiration). If S was a member of another group immediately before it 
became a member of the consolidated group, the expiration is also 
treated as occurring immediately after it ceases to be a member of the 
prior group.
    (ii) Stock basis adjustments from a waiver--(A) Qualifying 
transactions. If S becomes a member of the consolidated group in a 
qualifying cost basis transaction and an election under this paragraph 
(b)(4) is made, the noncapital, nondeductible expense resulting from the 
deemed expiration does not result in a corresponding stock basis 
adjustment for any member under this section. A qualifying cost basis 
transaction is the purchase (i.e., a transaction in which basis is 
determined under section 1012) by members of the acquiring consolidated 
group (while they are members) in a 12-month period of an amount of S's 
stock satisfying the requirements of section 1504(a)(2).
    (B) Nonqualifying transactions. If S becomes a member of the 
consolidated group other than in a qualifying cost basis transaction and 
an election under this paragraph (b)(4) is made, the basis of its stock 
that is owned by members immediately after it becomes a member is 
subject to reduction under the principles of this section to reflect the 
deemed expiration. The reduction occurs immediately before S becomes a 
member, but after it ceases to be a member of any prior group, and it 
therefore does not result in a corresponding stock basis adjustment for 
any higher-tier member of the transferring or acquiring consolidated 
group. Any basis reduction under this paragraph (b)(4)(ii)(B) is taken 
into account in making determinations of basis under the Code with 
respect to S's stock (e.g., a determination under section 362 because 
the stock is acquired in a transaction described in section 
368(a)(1)(B)), but it does not result in corresponding stock basis 
adjustments under this section for any higher-tier member. If the basis 
reduction exceeds the basis of S's stock, the excess is treated as an 
excess loss account to which the members owning S's stock succeed.
    (C) Higher-tier corporations. If S becomes a member of the 
consolidated group as a result, in whole or in part, of a higher-tier 
corporation becoming a member (whether or not in a qualifying cost basis 
transaction), additional adjustments are required. The highest-tier 
corporation (T) whose becoming a member resulted in S becoming a member, 
and T's chain of lower-tier corporations that includes S, are subject to 
the adjustment. The deemed expiration of S's loss carryover that results 
in a negative adjustment for the first higher-tier corporation is 
treated as an expiring loss carryover of that higher-tier corporation 
for purposes of applying paragraph (b)(4)(ii)(B) of this section to that 
corporation. For example, if P purchases all of the stock of T, T owns 
all of the stock of T1, T1 owns all of the stock of S, S becomes a 
member as a result of T becoming a member, and the election under this 
paragraph (b)(4) is made, the basis of the S stock is reduced and the 
reduction tiers up to T1, T1 treats the negative adjustment to its basis 
in S's stock as an expiring loss carryover of T1, and T then adjusts its 
basis in T1's stock. In addition, if T

[[Page 276]]

becomes a member of the acquiring group in a transaction other than a 
qualifying cost basis transaction, the amount that tiers up to T also 
reduces the basis of its stock under paragraph (b)(4)(ii)(B) of this 
section (but the amount does not tier up to higher-tier members).
    (iii) Net asset basis limitation. Basis reduced under this paragraph 
(b)(4) is restored before S becomes a member (and before the basis of 
S's stock is taken into account in determining basis under the Code) to 
the extent necessary to conform a share's basis to its allocable portion 
of net asset basis. In the case of higher-tier corporations under 
paragraph (b)(4)(ii)(C) of this section, the restoration does not tier 
up but is instead applied separately to each higher-tier corporation. 
For purposes of determining each corporation's net asset basis 
(including the basis of stock in lower-tier corporations), the 
restoration is applied in the order of tiers, from the lowest to the 
highest. For purposes of the restoration:
    (A) A member's net asset basis is the positive or negative 
difference between the adjusted basis of its assets (and the amount of 
any of its loss carryovers that are not deemed to expire) and its 
liabilities. Appropriate adjustments must be made, for example, to 
disregard liabilities that subsequently will give rise to deductions 
(e.g., liabilities to which section 461(h) applies).
    (B) Within a class of stock, each share has the same allocable 
portion of net asset basis. If there is more than one class of common 
stock, the net asset basis is allocated to each class by taking into 
account the terms of each class and all other facts and circumstances 
relating to the overall economic arrangement.
    (iv) Election. The election described in this paragraph (b)(4) must 
be made in a separate statement entitled ``ELECTION TO TREAT LOSS 
CARRYOVER AS EXPIRING UNDER Sec. 1.1502-32(b)(4).'' The statement must 
be filed with the consolidated group's return for the year S becomes a 
member, and it must be signed by the common parent and S. A separate 
statement must be made for each member whose loss carryover is deemed to 
expire. The statement must identify the amount of each loss carryover 
deemed to expire (or the amount of each loss carryover deemed not to 
expire, with any balance of any loss carryovers being deemed to expire), 
the basis of any stock reduced as a result of the deemed expiration, and 
the computation of the basis reduction.
    (5) Examples--(i) In general. For purposes of the examples in this 
section, unless otherwise stated, P owns all of the only class of S's 
stock, the stock is owned for the entire year, S owns no stock of lower-
tier members, the tax year of all persons is the calendar year, all 
persons use the accrual method of accounting, the facts set forth the 
only corporate activity, preferred stock is described in section 
1504(a)(4), all transactions are between unrelated persons, and tax 
liabilities are disregarded.
    (ii) Stock basis adjustments. The principles of this paragraph (b) 
are illustrated by the following examples.

    Example 1. Taxable income. (a) Current taxable income. For Year 1, 
the P group has $100 of taxable income when determined by including only 
S's items of income, gain, deduction, and loss taken into account. Under 
paragraph (b)(1) of this section, P's basis in S's stock is adjusted 
under this section as of the close of Year 1. Under paragraph (b)(2) of 
this section, P's basis in S's stock is increased by the amount of the P 
group's taxable income determined by including only S's items taken into 
account. Thus, P's basis in S's stock is increased by $100 as of the 
close of Year 1.
    (b) Intercompany gain that is not taken into account. The facts are 
the same as in paragraph (a) of this Example 1, except that S also sells 
property to another member at a $25 gain in Year 1, the gain is deferred 
under Sec. 1.1502-13 and taken into account in Year 3, and P sells 10% 
of S's stock to nonmembers in Year 2. Under paragraph (b)(3)(i) of this 
section, S's deferred gain is not additional taxable income for Year 1 
or 2 because it is not taken into account in determining the P group's 
consolidated taxable income for either of those years. The deferred gain 
is not tax-exempt income under paragraph (b)(3)(ii) of this section 
because it is not permanently excluded from S's gross income. The 
deferred gain does not result in a basis adjustment until Year 3, when 
it is taken into account in determining the P group's consolidated 
taxable income. Consequently, P's basis in the S shares sold is not 
increased to reflect S's gain from the intercompany sale of the 
property. In Year 3, the deferred gain is taken

[[Page 277]]

into account, but the amount allocable to the shares sold by P does not 
increase their basis because these shares are held by nonmembers.
    (c) Intercompany gain taken into account. The facts are the same as 
in paragraph (b) of this Example 1, except that P sells all of S's stock 
in Year 2 (rather than only 10%). Under Sec. 1.1502-13, S takes the $25 
gain into account immediately before S becomes a nonmember. Thus, P's 
basis in S's stock is increased to reflect S's gain from the 
intercompany sale of the property.
    Example 2. Tax loss. (a) Current absorption. For Year 2, the P group 
has a $50 consolidated net operating loss when determined by taking into 
account only S's items of income, gain, deduction, and loss. S's loss is 
absorbed by the P group in Year 2, offsetting P's income for that year. 
Under paragraph (b)(3)(i)(A) of this section, because S's loss is 
absorbed in the year it arises, P has a $50 negative adjustment with 
respect to S's stock. Under paragraph (b)(2) of this section, P reduces 
its basis in S's stock by $50. Under paragraph (a)(3)(ii) of this 
section, if the decrease exceeds P's basis in S's stock, the excess is 
P's excess loss account in S's stock.
    (b) Interim determination from stock sale. The facts are the same as 
in paragraph (a) of this Example 2, except that S's Year 2 loss arises 
in the first half of the calendar year, P sells 50% of S's stock on July 
1 of Year 2, and P's income for Year 2 does not arise until after the 
sale of S's stock. P's income for Year 2 (exclusive of the sale of S's 
stock) is offset by S's loss, even though the income arises after the 
stock sale, and no loss remains to be apportioned to S. See 
Secs. 1.1502-11 and 1.1502-21T(b). Under paragraph (b)(3)(i)(A) of this 
section, because S's $50 loss is absorbed in the year it arises, it 
reduces P's basis in the S shares sold by $25 immediately before the 
stock sale. Because S becomes a nonmember, the loss also reduces P's 
basis in the retained S shares by $25 immediately before S becomes a 
nonmember. See also Sec. 1.1502-20(b) (possible stock basis reduction on 
the deconsolidation of S).
    (c) Loss carryback. The facts are the same as in paragraph (a) of 
this Example 2, except that P has no income or loss for Year 2, S's $50 
loss is carried back and absorbed by the P group in Year 1 (offsetting 
the income of P or S), and the P group receives a $17 tax refund in Year 
2 that is paid to S. Under paragraph (b)(3)(i)(B) of this section, 
because the $50 loss is carried back and absorbed in Year 1, it is 
treated as a tax loss for Year 2 (the year in which it arises). Under 
paragraph (b)(3)(ii) of this section, the refund is treated as tax-
exempt income of S. Under paragraph (b)(3)(iv)(C) of this section, the 
tax- exempt income is taken into account in Year 2 because that is the 
year it would be taken into account under S's method of accounting if it 
were subject to Federal income taxation. Thus, under paragraph (b)(2) of 
this section, P reduces its basis in S's stock by $33 as of the close of 
Year 2 (the $50 tax loss, less the $17 tax refund).
    (d) Loss carryforward. The facts are the same as in paragraph (a) of 
this Example 2, except that P has no income or loss for Year 2, and S's 
loss is carried forward and absorbed by the P group in Year 3 
(offsetting the income of P or S). Under paragraph (b)(3)(i)(A) of this 
section, the loss is not treated as a tax loss under paragraph (b)(2) of 
this section until Year 3.
    Example 3. Tax-exempt income and noncapital, nondeductible expenses. 
(a) Facts. For Year 1, the P group has $500 of consolidated taxable 
income. However, the P group has a $100 consolidated net operating loss 
when determined by including only S's items of income, gain, deduction, 
and loss taken into account. Also for Year 1, S has $80 of interest 
income that is permanently excluded from gross income under section 103, 
and S incurs $60 of related expense for which a deduction is permanently 
disallowed under section 265.
    (b) Analysis. Under paragraph (b)(3)(i)(A) of this section, S has a 
$100 tax loss for Year 1. Under paragraph (b)(3)(ii)(A) of this section, 
S has $80 of tax-exempt income. Under paragraph (b)(3)(iii)(A) of this 
section, S has $60 of noncapital, nondeductible expense. Under paragraph 
(b)(3)(iv)(C) of this section, the tax-exempt income and noncapital, 
nondeductible expense are taken into account in Year 1 because that is 
the year they would be taken into account under S's method of accounting 
if they were subject to Federal income taxation. Thus, under paragraph 
(b) of this section, P reduces its basis in S's stock as of the close of 
Year 1 by an $80 net amount (the $100 tax loss, less $80 of tax-exempt 
income, plus $60 of noncapital, nondeductible expenses).
    Example 4. Discharge of indebtedness. (a) Facts. P forms S on 
January 1 of Year 1 and S borrows $200. During Year 1, S's assets 
decline in value and the P group has a $100 consolidated net operating 
loss when determined by including only S's items of income, gain, 
deduction, and loss taken into account. None of the loss is absorbed by 
the group in Year 1, and S is discharged from $100 of indebtedness at 
the close of Year 1. Under section 108(a), S's $100 of discharge of 
indebtedness income is excluded from gross income because of insolvency. 
Under section 108(b), S's $100 net operating loss is reduced to zero at 
the close of Year 1.
    (b) Analysis. Under paragraph (b)(3)(iii)(B) of this section, the 
reduction of the net operating loss is treated as a noncapital, 
nondeductible expense in Year 1 because the net operating loss is 
permanently disallowed by section 108(b). Under paragraph (b)(3)(ii)(C) 
of this section, all $100 of S's discharge of indebtedness income is 
treated as tax-exempt

[[Page 278]]

income in Year 1 because the discharge results in a $100 reduction to 
S's net operating loss. Consequently, the loss and the cancellation of 
the indebtedness result in no net adjustment to P's basis in S's stock 
under paragraph (b) of this section. (If the basis of assets were 
reduced under section 1017, rather than S's loss, the reduction would 
not occur until the beginning of Year 2 and the discharge would not be 
treated as tax-exempt income until that time.)
    (c) Insufficient attributes. The facts are the same as in paragraph 
(a) of this Example 4, except that $70 of S's net operating loss is 
absorbed in Year 1, offsetting P's income for that year, and the 
indebtedness is discharged at the beginning of Year 2. Under paragraph 
(b) of this section, the $70 of S's loss absorbed in Year 1 reduces P's 
basis in S's stock by $70 as of the close of Year 1. Under section 
108(a), S's discharge of indebtedness income in Year 2 is excluded from 
the P group's gross income because of insolvency. Under section 108(b), 
the remaining $30 of S's net operating loss carryover from Year 1 is 
reduced to zero at the close of Year 2. No other attributes are reduced. 
Under paragraph (b)(3)(iii)(B) of this section, the elimination of the 
remaining $30 net operating loss by section 108(b) is treated as a 
noncapital, nondeductible expense. Under paragraph (b)(3)(ii)(C) of this 
section, only $30 of the discharge is treated as tax-exempt income 
because only that amount is applied to reduce tax attributes. See also 
Sec. 1.1502-19(c)(1)(iii) (taking into account any excess loss account 
of P in S's stock). The remaining $70 of discharge income excluded under 
section 108(a) has no effect on P's basis in S's stock.
    (d) Purchase price adjustment. Assume instead that S buys land in 
Year 1 in exchange for S's $100 purchase money note (bearing interest at 
a market rate of interest in excess of the applicable Federal rate, and 
providing for a principal payment at the end of Year 10), and the seller 
agrees with S in Year 4 to discharge $60 of the note as a purchase price 
adjustment to which section 108(e)(5) applies. S has no discharge of 
indebtedness income that is treated as tax-exempt income under paragraph 
(b)(3)(ii) of this section. In addition, the $60 purchase price 
adjustment is not a noncapital, nondeductible expense under paragraph 
(b)(3)(iii) of this section. A purchase price adjustment is not 
equivalent to a discharge of indebtedness that is offset by a deduction 
or loss. Consequently, the purchase price adjustment results in no net 
adjustment to P's basis in S's stock under paragraph (b) of this 
section.
    Example 5. Distributions. (a) Amounts declared and distributed. For 
Year 1, the P group has $120 of consolidated taxable income when 
determined by including only S's items of income, gain, deduction, and 
loss taken into account. S declares and makes a $10 dividend 
distribution to P at the close of Year 1. Under paragraph (b) of this 
section, P increases its basis in S's stock as of the close of Year 1 by 
a $110 net amount ($120 of taxable income, less a $10 distribution).
    (b) Distributions in later years. The facts are the same as in 
paragraph (a) of this Example 5, except that S does not declare and 
distribute the $10 until Year 2. Under paragraph (b) of this section, P 
increases its basis in S's stock by $120 as of the close of Year 1, and 
decreases its basis by $10 as of the close of Year 2. (If P were also a 
subsidiary, the basis of its stock would also be increased in Year 1 to 
reflect P's $120 adjustment to basis of S's stock; the basis of P's 
stock would not be changed as a result of S's distribution in Year 2, 
because P's $10 of tax-exempt dividend income under paragraph (b)(3)(ii) 
of this section would be offset by the $10 negative adjustment to P's 
basis in S's stock for the distribution.)
    (c) Amounts declared but not distributed. The facts are the same as 
in paragraph (a) of this Example 5, except that, during December of Year 
1, S declares (and P becomes entitled to) another $70 dividend 
distribution with respect to its stock, but P does not receive the 
distribution until after it sells all of S's stock at the close of Year 
1. Under Sec. 1.1502-13(f)(2)(iv), S is treated as making a $70 
distribution to P at the time P becomes entitled to the distribution. 
(If S is distributing an appreciated asset, its gain under section 311 
is also taken into account under paragraph (b)(3)(i) of this section at 
the time P becomes entitled to the distribution.) Consequently, under 
paragraph (b) of this section, P increases its basis in S's stock as of 
the close of Year 1 by only a $40 net amount ($120 of taxable income, 
less two distributions totalling $80). Any further adjustments after S 
ceases to be a member and the $70 distribution is made would be 
duplicative, because the stock basis has already been adjusted for the 
distribution. Accordingly, the distribution will not result in further 
adjustments or gain, even if the distribution is a payment to which 
section 301(c)(2) or (3) applies.
    Example 6. Reorganization with boot. (a) Facts. P owns all of the 
stock of S and T. On January 1 of Year 1, P has a $100 basis in the S 
stock and a $60 basis in the T stock. S and T have no items of income, 
gain, deduction, or loss for Year 1. S and T each have substantial 
earnings and profits. At the close of Year 1, T merges into S in a 
reorganization described in section 368(a)(1)(A) (and in section 
368(a)(1)(D)). P receives no additional S stock, but does receive $10 
which is treated as a dividend under section 356(a)(2).
    (b) Analysis. Under section 358, P's basis in the S stock is 
increased by its basis in the T stock. Under Sec. 1.1502-13(f)(3) the 
money received is treated as being taken into account immediately after 
the transaction. Thus, the

[[Page 279]]

$10 is treated as a dividend distribution under section 301 and under 
paragraph (b)(3)(v) of this section, the $10 is a distribution to which 
paragraph (b)(2)(iv) of this section applies. Accordingly, P's basis in 
the S stock is $160 immediately after the merger, which is then 
decreased by the $10 distribution taken into account immediately after 
the transaction, resulting in a basis of $150.
    Example 7. Tiering up of basis adjustments. P owns all of S's stock, 
and S owns all of T's stock. For Year 1, the P group has $100 of 
consolidated taxable income when determined by including only T's items 
of income, gain, deduction, and loss taken into account, and $50 of 
consolidated taxable income when determined by including only S's items 
taken into account. S increases its basis in T's stock by $100 under 
paragraph (b) of this section. Under paragraph (a)(3) of this section, 
this $100 basis adjustment is taken into account in determining P's 
adjustments to its basis in S's stock. Thus, P increases its basis in 
S's stock by $150 under paragraph (b) of this section.
    Example 8. Allocation of items. (a) Acquisition in mid-year. P is 
the common parent of a consolidated group, and S is an unaffiliated 
corporation filing separate returns on a calendar-year basis. P acquires 
all of S's stock and S becomes a member of the P group on July 1 of Year 
1. For the entire calendar Year 1, S has $100 of ordinary income and 
under Sec. 1.1502-76(b) $60 is allocated to the period from January 1 to 
June 30 and $40 to the period from July 1 to December 31. Under 
paragraph (b) of this section, P increases its basis in S's stock by 
$40.
    (b) Sale in mid-year. The facts are the same as in paragraph (a) of 
this Example 8, except that S is a member of the P group at the 
beginning of Year 1 but ceases to be a member on June 30 as a result of 
P's sale of S's stock. Under paragraph (b) of this section, P increases 
its basis in S's stock by $60 immediately before the stock sale. (P's 
basis increase would be the same if S became a nonmember because S 
issued additional shares to nonmembers.)
    (c) Absorption of loss carryovers. Assume instead that S is a member 
of the P group at the beginning of Year 1 but ceases to be a member on 
June 30 as a result of P's sale of S's stock, and a $100 consolidated 
net operating loss attributable to S is carried over by the P group to 
Year 1. The consolidated net operating loss may be apportioned to S for 
its first separate return year only to the extent not absorbed by the P 
group during Year 1. Under paragraph (b)(3)(i) of this section, if the 
loss is absorbed by the P group in Year 1, whether the offsetting income 
arises before or after P's sale of S's stock, the absorption of the loss 
carryover is included in the determination of S's taxable income or loss 
for Year 1. Thus, P's basis in S's stock is adjusted under paragraph (b) 
of this section to reflect any absorption of the loss by the P group.
    Example 9. Gross-ups. (a) Facts. P owns all of the stock of S, and S 
owns all of the stock of T, a newly formed controlled foreign 
corporation that is not a passive foreign investment company. In Year 1, 
T has $100 of subpart F income and pays $34 of foreign income tax, 
leaving T with $66 of earnings and profits. The P group has $100 of 
consolidated taxable income when determined by taking into account only 
S's items (the inclusion under section 951(a), taking into account the 
section 78 gross-up). As a result of the section 951(a) inclusion, S 
increases its basis in T's stock by $66 under section 961(a).
    (b) Analysis. Under paragraph (b)(3)(i) of this section, S has $100 
of taxable income. Under paragraph (b)(3)(iii)(B) of this section, the 
$34 gross-up for taxes paid by T that S is treated as having paid is a 
noncapital, nondeductible expense (whether or not any corresponding 
amount is claimed by the P group as a tax credit). Thus, P increases its 
basis in S's stock under paragraph (b) of this section by the net 
adjustment of $66.
    (c) Subsequent distribution. The facts are the same as in paragraph 
(a) of this Example 9, except that T distributes its $66 of earnings and 
profits in Year 2. The $66 distribution received by S is excluded from 
S's income under section 959(a) because the distribution represents 
earnings and profits attributable to amounts that were included in S's 
income under section 951(a) for Year 1. In addition, S's basis in T's 
stock is decreased by $66 under section 961(b). The excluded 
distribution is not tax-exempt income under paragraph (b)(3)(ii) of this 
section because of the corresponding reduction to S's basis in T's 
stock. Consequently, P's basis in S's stock is not adjusted under 
paragraph (b) of this section for Year 2.
    Example 10. Recapture of tax-exempt items. (a) Facts. S is a life 
insurance company. For Year 1, the P group has $200 of consolidated 
taxable income, determined by including only S's items of income, gain, 
deduction, and loss taken into account (including a $300 small company 
deduction under section 806). In addition, S has $100 of tax-exempt 
interest income, $60 of which is S's company share. The remaining $40 of 
tax-exempt income is the policyholders' share that reduces S's deduction 
for increase in reserves.
    (b) Tax-exempt items generally. Under paragraph (b)(3)(i) of this 
section, S has $200 of taxable income for Year 1. Also for Year 1, S has 
$100 of tax-exempt income under paragraph (b)(3)(ii)(A) of this section, 
and another $300 is treated as tax-exempt income under paragraph 
(b)(3)(ii)(B) of this section because of the deduction under section 
806. Under paragraph (b)(3)(iii) of this section, S has $40 of 
noncapital, nondeductible expenses for Year 1 because S's deduction 
under section 807 for its increase in reserves has been

[[Page 280]]

permanently reduced by the $40 policyholders' share of the tax-exempt 
interest income. Thus, P increases its basis in S's stock by $560 under 
paragraph (b) of this section.
    (c) Recapture. Assume instead that S is a property and casualty 
company and, for Year 1, S accrues $100 of estimated salvage recoverable 
under section 832. Of this amount, $87 (87% of $100) is excluded from 
gross income because of the ``fresh start'' provisions of Sec. 11305(c) 
of P.L. 101-508 (the Omnibus Budget Reconciliation Act of 1990). Thus, S 
has $87 of tax-exempt income under paragraph (b)(3)(ii)(A) of this 
section that increases P's basis in S's stock for Year 1. (S also has 
$13 of taxable income over the period of inclusion under section 481.) 
In Year 5, S determines that the $100 salvage recoverable was 
overestimated by $30 and deducts $30 for the reduction of the salvage 
recoverable. However, S has $26.10 (87% of $30) of taxable income in 
Year 5 due to the partial recapture of its fresh start. Because S has no 
basis corresponding to this income, S is treated under paragraph 
(b)(3)(iii)(B) of this section as having a $26.10 noncapital, 
nondeductible expense in Year 5. This treatment is necessary to reflect 
the elimination of the erroneous fresh start in S's stock basis and 
causes a decrease in P's basis in S's stock by $30 for Year 5 (a $3.90 
taxable loss and a $26.10 special adjustment).

    (c) Allocation of adjustments among shares of stock--(1) In general. 
The portion of the adjustment under paragraph (b) of this section that 
is described in paragraph (b)(2)(iv) of this section (negative 
adjustments for distributions) is allocated to the shares of S's stock 
to which the distribution relates. The remainder of the adjustment, 
described in paragraphs (b)(2)(i) through (iii) of this section 
(adjustments for taxable income or loss, tax-exempt income, and 
noncapital, nondeductible expenses), is allocated among the shares of 
S's stock as provided in paragraphs (c)(2) through (4) of this section. 
If the remainder of the adjustment is positive, it is allocated first to 
any preferred stock to the extent provided in paragraph (c)(3) of this 
section, and then to the common stock as provided in paragraph (c)(2) of 
this section. If the remainder of the adjustment is negative, it is 
allocated only to common stock as provided in paragraph (c)(2) of this 
section. An adjustment under this section allocated to a share for the 
period the share is owned by a nonmember has no effect on the basis of 
the share. See paragraph (c)(4) of this section for the reallocation of 
adjustments, and paragraph (d) of this section for definitions. See 
Sec. 1.1502-19(d) for special allocations of basis determined or 
adjusted under the Code with respect to excess loss accounts.
    (2) Common stock--(i) Allocation within a class. The portion of the 
adjustment described in paragraphs (b)(2)(i) through (iii) of this 
section (the adjustment determined without taking distributions into 
account) that is allocable to a class of common stock is generally 
allocated equally to each share within the class. However, if a member 
has an excess loss account in shares of a class of common stock at the 
time of a positive adjustment, the portion of the adjustment allocable 
to the member with respect to the class is allocated first to equalize 
and eliminate that member's excess loss accounts and then to increase 
equally its basis in the shares of that class. Similarly, any negative 
adjustment is allocated first to reduce the member's positive basis in 
shares of the class before creating or increasing its excess loss 
account. Distributions and any adjustments or determinations under the 
Internal Revenue Code (e.g., under section 358, including any 
modifications under Sec. 1.1502-19(d)) are taken into account before the 
allocation is made under this paragraph (c)(2)(i).
    (ii) Allocation among classes--(A) General rule. If S has more than 
one class of common stock, the extent to which the adjustment described 
in paragraphs (b)(2)(i) through (iii) of this section (the adjustment 
determined without taking distributions into account) is allocated to 
each class is determined, based on consistently applied assumptions, by 
taking into account the terms of each class and all other facts and 
circumstances relating to the overall economic arrangement. The 
allocation generally must reflect the manner in which the classes 
participate in the economic benefit or burden (if any) corresponding to 
the items of income, gain, deduction, or loss allocated. In determining 
participation, any differences in voting rights are not taken into 
account, and the following factors are among those to be considered--

[[Page 281]]

    (1) The interest of each share in economic profits and losses (if 
different from the interest in taxable income);
    (2) The interest of each share in cash flow and other non-
liquidating distributions; and
    (3) The interest of each share in distributions in liquidation.
    (B) Distributions and Code adjustments. Distributions and any 
adjustments or determinations under the Internal Revenue Code are taken 
into account before the allocation is made under this paragraph 
(c)(2)(ii).
    (3) Preferred stock. If the adjustment under paragraphs (b)(2)(i) 
through (iii) of this section (the adjustment determined without taking 
distributions into account) is positive, it is allocated to preferred 
stock to the extent required (when aggregated with prior allocations to 
the preferred stock during the period that S is a member of the 
consolidated group) to reflect distributions described in section 301 
(and all other distributions treated as dividends) to which the 
preferred stock becomes entitled, and arrearages arising, during the 
period that S is a member of the consolidated group. For this purpose, 
the preferred stock is treated as entitled to a distribution no later 
than the time the distribution is taken into account under the Internal 
Revenue Code (e.g., under section 305). If the amount of distributions 
and arrearages exceeds the positive amount (when aggregated with prior 
allocations), the positive amount is first allocated among classes of 
preferred stock to reflect their relative priorities, and the amount 
allocated to each class is then allocated pro rata within the class. An 
allocation to a share with respect to arrearages and distributions for 
the period the share is owned by a nonmember is not reflected in the 
basis of the share under paragraph (b) of this section. However, if P 
and S cease to be members of one consolidated group and remain 
affiliated as members of another consolidated group, P's ownership of 
S's stock during consolidated return years of the prior group is treated 
for this purpose as ownership by a member to the extent that the 
adjustments during the prior consolidated return years are still 
reflected in the basis of the preferred stock.
    (4) Cumulative redetermination--(i) General rule. A member's basis 
in each share of S's preferred and common stock must be redetermined 
whenever necessary to determine the tax liability of any person. See 
paragraph (b)(1) of this section. The redetermination is made by 
reallocating S's net adjustment described in paragraphs (b)(2)(i) 
through (iii) of this section (the adjustment determined without taking 
distributions into account) for each consolidated return year (or other 
applicable period) of the group by taking into account all of the facts 
and circumstances affecting allocations under this paragraph (c) as of 
the redetermination date with respect to all of S's shares. For this 
purpose:
    (A) Amounts may be reallocated from one class of S's stock to 
another class, but not from one share of a class to another share of the 
same class.
    (B) If there is a change in the equity structure of S (e.g., as the 
result of S's issuance, redemption, or recapitalization of shares), a 
cumulative redetermination is made for the period before the change. If 
a reallocation is required by another redetermination after a change, 
amounts arising after the change are reallocated before amounts arising 
before the change.
    (C) If S becomes a nonmember as a result of a change in its equity 
structure, any reallocation is made only among the shares of S's stock 
immediately before the change. For example, if S issues stock to a 
nonmember creditor in exchange for its debt, and the exchange results in 
S becoming a nonmember, any reallocation is only among the shares of S's 
stock immediately before the exchange.
    (D) Any reallocation is treated for all purposes after it is made 
(including subsequent redeterminations) as the original allocation of an 
amount under this paragraph (c), but the reallocation does not affect 
any prior period.
    (ii) Prior use of allocations. An amount may not be reallocated 
under paragraph (c)(4)(i) of this section to the extent that the amount 
has been used before the reallocation. For this purpose, an amount has 
been used to the extent it has been taken into account, directly or 
indirectly, by any member in determining income, gain, deduction,

[[Page 282]]

or loss, or in determining the basis of any property that is not subject 
to this section (e.g., stock of a corporation that has become a 
nonmember). For example, if P sells a share of S stock, an amount 
previously allocated to the share cannot be reallocated to another share 
of S stock, but an amount allocated to another share of S stock can 
still be reallocated to the sold share because the reallocated amount 
has not been taken into account; however, any adjustment reallocated to 
the sold share may effectively be eliminated, because the reallocation 
was not in effect when the share was previously sold and P's gain or 
loss from the sale is not redetermined. If, however, P sells the share 
of S stock to another member, the amount is not used until P's gain or 
loss is taken into account under Sec. 1.1502-13.
    (5) Examples. The principles of this paragraph (c) are illustrated 
by the following examples.

    Example 1. Ownership of less than all the stock. (a) Facts. P owns 
80% of S's only class of stock with an $800 basis. For Year 1, S has 
$100 of taxable income.
    (b) Analysis. Under paragraph (c)(1) of this section, the $100 
positive adjustment under paragraph (b) of this section for S's taxable 
income is allocated among the shares of S's stock, including shares 
owned by nonmembers. Under paragraph (c)(2)(i) of this section, the 
adjustment is allocated equally to each share of S's stock. Thus, P 
increases its basis in S's stock under paragraph (b) of this section as 
of the close of Year 1 by $80. (The basis of the 20% of S's stock owned 
by nonmembers is not adjusted under this section.)
    (c) Varying interest. The facts are the same as in paragraph (a) of 
this Example 1, except that P buys the remaining 20% of S's stock at the 
close of business on June 30 of Year 1 for $208. Under paragraph (b)(1) 
of this section and the principles of Sec. 1.1502-76(b), S's $100 of 
taxable income is allocable $40 to the period from January 1 to June 30 
and $60 to the period from July 1 to December 31. Thus, for the period 
ending June 30, P is treated as having a $32 adjustment with respect to 
the S stock that P has owned since January 1 (80% of $40) and, under 
paragraph (c)(2)(i) of this section, the adjustment is allocated equally 
among those shares. For the period ending December 31, P is treated as 
having a $60 adjustment (100% of $60) that is also allocated equally 
among P's shares of S's stock owned after June 30. P's basis in the 
shares owned as of the beginning of the year therefore increases by $80 
(the sum of 80% of $40 and 80% of $60), from $800 to $880, and P's basis 
in the shares purchased on June 30 increases by $12 (20% of $60), from 
$208 to $220. Thus, P's aggregate basis in S's stock as of the end of 
Year 1 is $1,100.
    (d) Tax liability. The facts are the same as in paragraph (a) of 
this Example 1, except that P pays S's $34 share of the group's 
consolidated tax liability resulting from S's taxable income, and S does 
not reimburse P. S's $100 of taxable income results in a positive 
adjustment under paragraph (b)(3)(i) of this section, and S's $34 of tax 
liability results in a negative adjustment under paragraph (b)(3)(iv)(D) 
of this section and the principles of section 1552. Because S does not 
make any payment in recognition of the additional tax liability, by 
analogy to the treatment under Sec. 1.1552-1(b)(2), S is treated as 
having made a $34 payment that is described in paragraph (b)(3)(iii) of 
this section (noncapital, nondeductible expenses) and as having received 
an equal amount from P as a capital contribution. Thus, P increases its 
basis in its S stock by $52.80 (80% of the $100 of taxable income, less 
80% of the $34 tax payment). In addition, P increases its basis in S's 
stock by $34 under the Internal Revenue Code and paragraph (a)(2) of 
this section to reflect the capital contribution. In the aggregate, P 
increases its basis in S's stock by $86.80. (If, as in paragraph (c) of 
this Example 1, P buys the remaining 20% of S's stock at the close of 
business on June 30, P increases its basis in S's stock by another $7.90 
for the additional 20% interest in S's income after June 30 ($60 
multiplied by 20%, less 20% of the $20.40 tax payment on $60); the $34 
capital contribution by P is reflected in all of its S shares (not just 
the original 80%), and P's aggregate basis adjustment under this section 
is $94.70 ($86.80 plus $7.90).)
    Example 2. Preferred stock. (a) Facts. P owns all of S's common 
stock with an $800 basis, and nonmembers own all of S's preferred stock. 
The preferred stock was issued for $200, has a $20 annual, cumulative 
preference as to dividends, and has an initial liquidation preference of 
$200. For Year 1, S has $50 of taxable income and no distributions are 
declared or made.
    (b) Analysis of arrearages. Under paragraphs (c) (1) and (3) of this 
section, $20 of the $50 positive adjustment under paragraph (b) of this 
section is allocated first to the preferred stock to reflect the 
dividend arrearage arising in Year 1. The remaining $30 of the positive 
adjustment is allocated to the common stock, increasing P's basis from 
$800 to $830 as of the close of Year 1. (The basis of the preferred 
stock owned by nonmembers is not adjusted under this section.)
    (c) Current distribution. The facts are the same as in paragraph (a) 
of this Example 2, except that S declares and makes a $20 distribution 
with respect to the preferred stock

[[Page 283]]

during Year 1 in satisfaction of its preference. The results are the 
same as in paragraph (b) of this Example 2. 
    (d) Varying interest. The facts are the same as in paragraph (a) of 
this Example 2, except that S has no income or loss for Years 1 and 2, P 
purchases all of S's preferred stock at the beginning of Year 3 for 
$240, and S has $70 of taxable income for Year 3. Under paragraph (c)(3) 
of this section, $60 of the $70 positive adjustment under paragraph (b) 
of this section is allocated to the preferred stock to reflect the 
dividends arrearages for Years 1 through 3, but only the $20 for Year 3 
is reflected in the basis of the preferred stock under paragraph (b) of 
this section. (The remaining $40 is not reflected because the preferred 
stock was owned by nonmembers during Years 1 and 2.) Thus, P increases 
its basis in S's preferred stock from $240 to $260, and its basis in S's 
common stock from $800 to $810, as of the close of Year 3. (If P had 
acquired all of S's preferred stock in a transaction to which section 
351 applies, and P's initial basis in S's preferred stock was $200 under 
section 362, P's basis in S's preferred stock would increase from $200 
to $220.)
    (e) Varying interest with current distributions. The facts are the 
same as in paragraph (d) of this Example 2, except that S declares and 
makes a $20 distribution with respect to the preferred stock in each of 
Years 1 and 2 in satisfaction of its preference, and P purchases all of 
S's preferred stock at the beginning of Year 3 for $200. Under paragraph 
(c)(3) of this section, $40 of the $70 positive adjustment under 
paragraph (b) of this section is allocated to the preferred stock to 
reflect the distributions in Years 1 and 2, and $20 of the $70 is 
allocated to the preferred stock to reflect the arrearage for Year 3. 
However, as in paragraph (d) of this Example 2, only the $20 
attributable to Year 3 is reflected in the basis of the preferred stock 
under paragraph (b) of this section. Thus, P increases its basis in S's 
preferred stock from $200 to $220, and P increases its basis in S's 
common stock from $800 to $810.
    Example 3. Cumulative redetermination. (a) Facts. P owns all of S's 
common and preferred stock. The preferred stock has a $100 annual, 
cumulative preference as to dividends. For Year 1, S has $200 of taxable 
income, the first $100 of which is allocated to the preferred stock and 
the remaining $100 of which is allocated to the common stock. For Year 
2, S has no adjustment under paragraph (b) of this section, and P sells 
all of S's common stock at the close of Year 2.
    (b) Analysis. Under paragraph (c)(4) of this section, P's basis in 
S's common stock must be redetermined as of the sale of the stock. The 
redetermination is made by reallocating the $200 positive adjustment 
under paragraph (b) of this section for Year 1 by taking into account 
all of the facts and circumstances affecting allocations as of the sale. 
Thus, the $200 positive adjustment for Year 1 is reallocated entirely to 
the preferred stock to reflect the dividend arrearages for Years 1 and 
2. The reallocation away from the common stock reflects the fact that, 
because of the additional amount of arrearage in Year 2, the common 
stock is not entitled to any part of the $200 of taxable income from 
Year 1. Thus, the common stock has no positive or negative adjustment, 
and the preferred stock has a $200 positive adjustment. These 
reallocations are treated as the original allocations for Years 1 and 2. 
(The results for the common stock would be the same if the common and 
preferred stock were not owned by the same member, or the preferred 
stock were owned by nonmembers.)
    (c) Preferred stock issued after adjustment arises. The facts are 
the same as in paragraph (a) of this Example 3, except that S does not 
issue its preferred stock until the beginning of Year 2, S has no 
further adjustment under paragraph (b) of this section for Years 2 and 
3, and P sells S's common stock at the close of Year 3. Under paragraphs 
(c) (1) and (2) of this section, the $200 positive adjustment for Year 1 
is initially allocated entirely to the common stock. Under paragraph 
(c)(4) of this section, the $200 adjustment is reallocated to the 
preferred stock to reflect the arrearages for Years 2 and 3. Thus, the 
common stock has no positive or negative adjustment.
    (d) Common stock issued after adjustment arises. The facts are the 
same as in paragraph (a) of this Example 3, except that S has no 
preferred stock, S issues additional common stock of the same class at 
the beginning of Year 2, S has no further adjustment under paragraph (b) 
of this section in Years 2 and 3, and P sells its S common stock at the 
close of Year 3. Under paragraphs (c) (1) and (2) of this section, the 
$200 positive adjustment for Year 1 is initially allocated entirely to 
the original common stock. Under paragraph (c)(4)(i)(A) of this section, 
the $200 adjustment is not reallocated among the original common stock 
and the additional stock. Unlike the preferred stock in paragraph (c) of 
this Example 3, the additional common stock is of the same class as the 
original stock, and there is no reallocation between shares of the same 
class.
    (e) Positive and negative adjustments. The facts are the same as in 
paragraph (a) of this Example 3, except that S has a $200 loss for Year 
2 that results in a negative adjustment to the common stock before any 
redetermination. For purposes of the basis redetermination under 
paragraph (c)(4) of this section, the Year 1 and 2 adjustments under 
paragraph (b) of this section are not netted. Thus, as in paragraph (b) 
of this Example 3, the redetermination is made by reallocating

[[Page 284]]

the $200 positive adjustment for Year 1 entirely to the preferred stock. 
The $200 negative adjustment for Year 2 is allocated entirely to the 
common stock. Consequently, the preferred stock has a $200 positive 
cumulative adjustment, and the common stock has a $200 negative 
cumulative adjustment. (The results would be the same if there were no 
other adjustments described in paragraph (b) of this section, P sells 
S's common stock at the close of Year 3 rather than Year 2, and an 
additional $100 arrearage arises in Year 3; only adjustments under 
paragraph (b) of this section may be reallocated, and there is no 
additional adjustment for Year 3.)
    (f) Current distributions. The facts are the same as in paragraph 
(a) of this Example 3, except that, during Year 1, S declares and makes 
a distribution to P of $100 as a dividend on the preferred stock and 
$100 as a dividend on the common stock. The taxable income and 
distributions result in no Year 1 adjustment under paragraph (b) of this 
section for either the common or preferred stock. For example, if T 
merges into S, S is treated, as the context may require, as a successor 
to T and as becoming a member of the group. However, as in paragraph (b) 
of this Example 3, the redetermination under paragraph (c)(4) of this 
section is made by reallocating a $200 positive adjustment for Year 1 
(S's net adjustment described in paragraph (b) of this section, 
determined without taking distributions into account) to the preferred 
stock. Consequently, the preferred stock has a $100 positive cumulative 
adjustment ($200 of taxable income, less a $100 distribution with 
respect to the preferred stock) and the common stock has a $100 negative 
cumulative adjustment (for the distribution).
    (g) Convertible preferred stock. The facts are the same as in 
paragraph (a) of this Example 3, except that the preferred stock is 
convertible into common stock that is identical to the common stock 
already outstanding, the holders of the preferred stock convert the 
stock at the close of Year 2, and no stock is sold until the close of 
Year 5. Under paragraph (c)(4) of this section, the $200 positive 
adjustment for Year 1 is reallocated entirely to the preferred stock 
immediately before the conversion. The newly issued common stock is 
treated as a second class of S common stock, and adjustments under 
paragraph (b) of this section are allocated between the original and the 
new common stock under paragraph (c)(2)(ii) of this section. Although 
the preferred stock is converted to common stock, the $200 adjustment to 
the preferred stock is not subsequently reallocated between the original 
and the new common stock. Because the original and the new stock are 
equivalent, adjustments under paragraph (b) of this section for 
subsequent periods are allocated equally to each share.
    (h) Prior use of allocations. The facts are the same as in paragraph 
(a) of this Example 3, except that P sells 10% of S's common stock at 
the close of Year 1, and the remaining 90% at the close of Year 2. P's 
basis in the common stock sold in Year 1 reflects $10 of the adjustment 
allocated to the common stock for Year 1. Under paragraph (c)(4)(ii) of 
this section, because $10 of the Year 1 adjustment was used in 
determining P's gain or loss, only $90 is reallocated to the preferred 
stock, and $10 remains allocated to the common stock sold.
    (i) Lower-tier members. The facts are the same as in paragraph (a) 
of this Example 3, except that P owns only S's common stock, and P is 
also a subsidiary. If there is a redetermination under paragraph (c)(4) 
of this section by a member owning P's stock, a redetermination with 
respect to S's stock must be made first, and the effect of that 
redetermination on P's adjustments is taken into account under paragraph 
(b) of this section. However, as in paragraph (h) of this Example 3, to 
the extent an amount of the initial adjustments with respect to S's 
common stock have already been tiered up and used by a member owning P's 
stock, that amount remains with S's common stock (and the higher-tier 
member using the adjustment with respect to P's stock), and may not be 
reallocated to S's preferred stock.
    Example 4. Allocation to preferred stock between groups. (a) Facts. 
P owns all of S's only class of stock, and S owns all of T's common and 
preferred stock. The preferred stock has a $100 annual, cumulative 
preference as to dividends. For Year 1, T has $200 of taxable income, 
the first $100 of which is allocated to the preferred stock and the 
remaining $100 of which is allocated to the common stock, and S has no 
adjustments other than the amounts tiered up from T. S and T have no 
adjustments under paragraph (b) of this section for Years 2 and 3. X, 
the common parent of another consolidated group, purchases all of S's 
stock at the close of Year 3, and S and T become members of the X group. 
For Year 4, T has $200 of taxable income, and S has no adjustments other 
than the amounts tiered up from T.
    (b) Analysis for Years 1 through 3. Under paragraph (c)(4) of this 
section, the allocation of S's adjustments under paragraph (b) of this 
section (determined without taking distributions into account) must be 
redetermined as of the time P sells S's stock. As a result of this 
redetermination, T's common stock has no positive or negative adjustment 
and the preferred stock has a $200 positive adjustment.
    (c) Analysis for Year 4. Under paragraph (c)(3) of this section, the 
allocation of T's $200 positive adjustment in Year 4 to T's preferred 
stock with respect to arrearages is made by taking into account the 
consolidated return years of both the P group and

[[Page 285]]

the X group. Thus, the allocation of the $200 positive adjustment for 
Year 4 to T's preferred stock is not treated as an allocation for a 
period for which the preferred stock is owned by a nonmember. Thus, the 
$200 adjustment is reflected in S's basis in T's preferred stock under 
paragraph (b) of this section.

    (d) Definitions. For purposes of this section--
    (1) Class. The shares of a member having the same material terms 
(without taking into account voting rights) are treated as a single 
class of stock.
    (2) Preferred stock. Preferred stock is stock that is limited and 
preferred as to dividends and has a liquidation preference. A class of 
stock that is not described in section 1504(a)(4), however, is not 
treated as preferred stock for purposes of paragraph (c) of this section 
if members own less than 80% of each class of common stock (determined 
without taking this paragraph (d)(2) into account).
    (3) Common stock. Common stock is stock that is not preferred stock.
    (4) Becoming a nonmember. A member is treated as becoming a 
nonmember if it has a separate return year (including another group's 
consolidated return year). For example, S may become a nonmember if it 
issues additional stock to nonmembers, but S does not become a nonmember 
as a result of its complete liquidation.
    (e) Anti-avoidance rule--(1) General rule. If any person acts with a 
principal purpose contrary to the purposes of this section, to avoid the 
effect of the rules of this section or apply the rules of this section 
to avoid the effect of any other provision of the consolidated return 
regulations, adjustments must be made as necessary to carry out the 
purposes of this section.
    (2) Examples. The principles of this paragraph (e) are illustrated 
by the following examples.

    Example 1. Preferred stock treated as common stock. (a) Facts. S has 
100 shares of common stock and 100 shares of preferred stock described 
in section 1504(a)(4). P owns 80 shares of S's common stock and all of 
S's preferred stock. The shareholders expect that S will have negative 
adjustments under paragraph (b) of this section for Years 1 and 2 (all 
of which will be allocable to S's common stock), the negative 
adjustments will have no significant effect on the value of S's stock, 
and S will have offsetting positive adjustments thereafter. When the 
preferred stock was issued, P intended to cause S to recapitalize the 
preferred stock into additional common stock at the end of Year 2 in a 
transaction described in section 368(a)(1)(E). P's temporary ownership 
of the preferred stock is with a principal purpose to limit P's basis 
reductions under paragraph (b) of this section to 80% of the anticipated 
negative adjustments. The recapitalization is intended to cause 
significantly more than 80% of the anticipated positive adjustments to 
increase P's basis in S's stock because of P's increased ownership of 
S's common stock immediately after the recapitalization.
    (b) Analysis. S has established a transitory capital structure with 
a principal purpose to enhance P's basis in S's stock under this 
section. Under paragraph (e)(1) of this section, all of S's common and 
preferred stock is treated as a single class of common stock in Years 1 
and 2 for purposes of this section. Thus, S's items are allocated under 
the principles of paragraph (c)(2)(ii) of this section, and P decreases 
its basis in both the common and preferred stock accordingly.
    Example 2. Contribution of appreciated property. (a) Facts. P owns 
all of the stock of S and T, and S and T each own 50% of the stock of U. 
P's S stock has a $150 basis and $200 value, and P's T stock has a $200 
basis and $200 value. With a principal purpose to eliminate P's gain 
from an anticipated sale of S's stock, T contributes to U an asset with 
a $100 value and $0 basis, and S contributes $100 cash. U sells T's 
asset and recognizes a $100 gain that results in a $100 positive 
adjustment under paragraph (b) of this section.
    (b) Analysis. Under paragraph (c)(2) of this section, U's adjustment 
ordinarily would be allocated equally to each share of U's stock. If so 
allocated, P's basis in S's stock would increase from $150 to $200 and P 
would recognize no gain from the sale of S's stock for $200. Under 
paragraph (e)(1) of this section, however, because T transferred an 
appreciated asset to U with a principal purpose to shift a portion of 
the stock basis increase from P's stock in T to P's stock in S, the 
allocation of the $100 positive adjustment under paragraph (c) of this 
section between the shares of U's stock must take into account the 
contribution. Consequently, all $100 of the positive adjustment is 
allocated to the U stock owned by T, rather than $50 to the U stock 
owned by S and $50 to the U stock owned by T. P's basis in S's stock 
remains $150, and its basis in T's stock increases to $300. Thus, P 
recognizes a $50 gain from its sale of S's stock for $200.
    Example 3. Reorganizations. (a) Facts. P forms S with an $800 
contribution, $200 of which is in exchange for S's preferred stock 
described in section 1504(a)(4) and the balance of which is for S's 
common stock. For

[[Page 286]]

Years 1 through 3, S has a total of $160 of ordinary income, $60 of 
which is distributed with respect to the preferred stock in satisfaction 
of its $20 annual preference as to dividends. Under this section, P's 
basis in S's preferred stock is unchanged, and its basis in S's common 
stock is increased from $600 to $700. To reduce its gain from an 
anticipated sale of S's preferred stock, P forms T at the close of Year 
3 with a contribution of all of S's stock in exchange for corresponding 
common and preferred stock of T in a transaction to which section 351 
applies. At the time of the contribution, the fair market value of the 
common stock is $700 and the fair market value of the preferred stock is 
$300 (due to a decrease in prevailing market interest rates). P 
subsequently sells T's preferred stock for $300.
    (b) Analysis. Under section 358(b), P ordinarily has a $630 basis in 
T's common stock (70% of the $900 aggregate stock basis) and a $270 
basis in T's preferred stock (30% of the $900 aggregate stock basis). 
However, because P transferred S's stock to T with a principal purpose 
to shift the allocation of basis adjustments under this section, 
adjustments are made under paragraph (e)(1) of this section to preserve 
the allocation under this section. Thus, P has a $700 basis in T's 
common stock and a $200 basis in T's preferred stock. Consequently, P 
recognizes a $100 gain from the sale of T's preferred stock.
    Example 4. Post-deconsolidation basis adjustments. (a) Facts. For 
Year 1, the P group has $40 of taxable income when determined by 
including only S's items of income, gain, deduction, and loss taken into 
account, and P increases its basis in S's stock by $40 under paragraph 
(b) of this section. P anticipates that S will have a $40 ordinary loss 
for Year 2 that will be carried back and offset S's income in Year 1 and 
result in a $40 reduction to P's basis in S's stock for Year 2 under 
paragraph (b) of this section. With a principal purpose to avoid the 
reduction, P causes S to issue voting preferred stock that results in S 
becoming a nonmember at the beginning of Year 2. (Section 1.1502-20(b) 
does not reduce P's basis in the S stock as a result of S's 
deconsolidation.) As anticipated, S has a $40 loss for Year 2, which is 
carried back to Year 1 and offsets S's income from Year 1.
    (b) Analysis. Under paragraph (e)(1) of this section, because P 
caused S to become a nonmember with a principal purpose to absorb S's 
loss but avoid the corresponding negative adjustment under this section, 
and P bears a substantial portion of the loss because of its continued 
ownership of S common stock, the basis of P's common stock in S is 
decreased by $40 for Year 2. (If P has less than a $40 basis in the 
retained S stock, P must recognize income for Year 2 to the extent of 
the excess.) Section 1504(a)(3) limits the ability of S to subsequently 
rejoin the P group's consolidated return.
    (c) Carryback to pre-consolidation year. The facts are the same as 
in paragraph (a) of this Example 4, except that P anticipates that S's 
loss will be carried back and absorbed in a separate return year of S 
before Year 1 (rather than to the P group's consolidated return for Year 
1). Although P causes S to become a nonmember with a principal purpose 
to avoid the negative adjustment under this section, and P bears a 
substantial portion of the loss because of its continued ownership of S 
common stock, both S's income and loss are taken into account under the 
separate return rules. Consequently, no one has acted with a principal 
purpose contrary to the purposes of this section, and no adjustments are 
necessary to carry out the purposes of this section.
    Example 5. Pre-consolidation basis adjustments. (a) Facts. P forms S 
with a $100 contribution, and S becomes a member of the P affiliated 
group which does not file consolidated returns. For Years 1 through 3, S 
earns $300. P anticipates that it will elect under section 1501 for the 
P group to begin filing consolidated returns in Year 5. In anticipation 
of filing consolidated returns, and to avoid the negative stock basis 
adjustment that would result under paragraph (b) of this section from 
distributing S's earnings after Year 5, P causes S to distribute $300 
during Year 4 as a qualifying dividend within the meaning of section 
243(b). There is no plan or intention to recontribute the funds to S 
after the distribution.
    (b) Analysis. Although S's distribution of $300 is with a principal 
purpose to avoid a corresponding negative adjustment under this section, 
the $300 was both earned and distributed entirely under the separate 
return rules. Consequently, P and S have not acted with a principal 
purpose contrary to the purposes of this section, and no adjustments are 
necessary to carry out the purposes of this section.

    (f) Predecessors and successors. For purposes of this section, any 
reference to a corporation or to a share of stock includes a reference 
to a successor or predecessor as the context may require. A corporation 
is a successor if the basis of its assets is determined, directly or 
indirectly, in whole or in part, by reference to the basis of another 
corporation (the predecessor). For example, if T merges into S, S is 
treated, as the context may require, as a successor to T and as becoming 
a member of the group. A share is a successor if its basis is 
determined, directly or indirectly, in whole or in

[[Page 287]]

part, by reference to the basis of another share (the predecessor).
    (g) Recordkeeping. Adjustments under this section must be reflected 
annually on permanent records (including work papers). See also section 
6001, requiring records to be maintained. The group must be able to 
identify from these permanent records the amount and allocation of 
adjustments, including the nature of any tax-exempt income and 
noncapital, nondeductible expenses, so as to permit the application of 
the rules of this section for each year.
    (h) Effective date--(1) General rule. This section applies with 
respect to determinations of the basis of the stock of a subsidiary 
(e.g., for determining gain or loss from a disposition of stock) in 
consolidated return years beginning on or after January 1, 1995. If this 
section applies, basis must be determined or redetermined as if this 
section were in effect for all years (including, for example, the 
consolidated return years of another consolidated group to the extent 
adjustments from those years are still reflected). For example, if the 
portion of a consolidated net operating loss carryover attributable to S 
expired in 1990 and is treated as a noncapital, nondeductible expense 
under paragraph (b) of this section, it is taken into account in tax 
years beginning on or after January 1, 1995 as a negative adjustment for 
1990. Any such determination or redetermination does not, however, 
affect any prior period. Thus, the negative adjustment for S's 
noncapital, nondeductible expense is not taken into account for tax 
years beginning before January 1, 1995.
    (2) Dispositions of stock before effective date--(i) In general. If 
P disposes of stock of S in a consolidated return year beginning before 
January 1, 1995, the amount of P's income, gain, deduction, or loss, and 
the basis reflected in that amount, are not redetermined under this 
section. See Sec. 1.1502-19 as contained in the 26 CFR part 1 edition 
revised as of April 1, 1994 for the definition of disposition, and 
paragraph (h)(5) of this section for the rules applicable to such 
dispositions.
    (ii) Lower-tier members. Although P disposes of S's stock in a tax 
year beginning before January 1, 1995, S's determinations or adjustments 
with respect to the stock of a lower-tier member with which it continues 
to file a consolidated return are redetermined in accordance with the 
rules of this section (even if they were previously taken into account 
by P and reflected in income, gain, deduction, or loss from the 
disposition of S's stock). For example, assume that P owns all of S's 
stock, S owns all of T's stock, and T owns all of U's stock. If S sells 
80% of T's stock in a tax year beginning before January 1, 1995 (the 
effective date), the amount of S's income, gain, deduction, or loss from 
the sale, and the stock basis adjustments reflected in that amount, are 
not redetermined if P sells S's stock after the effective date. If S 
sells the remaining 20% of T's stock after the effective date, S's stock 
basis adjustments with respect to that T stock are also not redetermined 
because T became a nonmember before the effective date. However, if T 
and U continue to file a consolidated return with each other and T sells 
U's stock after the effective date, T's stock basis adjustments with 
respect to U's stock are redetermined (even though some of those 
adjustments may have been taken into account by S in its prior sale of 
T's stock before the effective date).
    (iii) Deferred amounts. For purposes of this paragraph (h)(2), a 
disposition does not include a transaction to which Sec. 1.1502-13, 
Sec. 1.1502-13T, Sec. 1.1502-14, or Sec. 1.1502-14T applies. Instead, 
the transaction is deemed to occur as the income, gain, deduction, or 
loss (if any) is taken into account.
    (3) Distributions--(i) Deemed dividend elections. If there is a 
deemed distribution and recontribution pursuant to Sec. 1.1502-32(f)(2) 
as contained in the 26 CFR part 1 edition revised as of April 1, 1994 in 
a consolidated return year beginning before January 1, 1995, the deemed 
distribution and recontribution under the election are treated as an 
actual distribution by S and recontribution by P as provided under the 
election.
    (ii) Affiliated earnings and profits. This section does not apply to 
reduce the basis in S's stock as a result of a distribution of earnings 
and profits accumulated in separate return years, if the distribution is 
made in a consolidated

[[Page 288]]

return year beginning before January 1, 1995, and the distribution does 
not cause a negative adjustment under the investment adjustment rules in 
effect at the time of the distribution. See paragraph (h)(5) of this 
section for the rules in effect with respect to the distribution.
    (4) Expiring loss carryovers. If S became a member of a consolidated 
group in a consolidated return year beginning before January 1, 1995, 
and S had a loss carryover from a separate return limitation year at 
that time, the group does not treat any expiration of the loss carryover 
(even if in a tax year beginning on or after January 1, 1995) as a 
noncapital, nondeductible expense resulting in a negative adjustment 
under this section. If S becomes a member of a consolidated group in a 
consolidated return year beginning on or after January 1, 1995, and S 
has a loss carryover from a separate return limitation year at that 
time, adjustments with respect to the expiration are determined under 
this section.
    (5) Prior law--(i) In general. For prior determinations, see prior 
regulations under section 1502 as in effect with respect to the 
determination. See, e.g., Secs. 1.1502-32 and 1.1502-32T as contained in 
the 26 CFR part 1 edition revised as of April 1, 1994.
    (ii) Continuing basis reductions for certain deconsolidated 
subsidiaries. If a subsidiary ceases to be a member of a group in a 
consolidated return year beginning before January 1, 1995, and its basis 
was subject to reduction under Sec. 1.1502-32T or Sec. 1.1502-32(g) as 
contained in the 26 CFR part 1 edition revised as of April 1, 1994, its 
basis remains subject to reduction under those principles. For example, 
if S ceased to be a member in 1990, and P's basis in any retained S 
stock was subject to a basis reduction account, the basis remains 
subject to reduction. Similarly, if an election could be made to apply 
Sec. 1.1502-32T instead of Sec. 1.1502-32(g), the election remains 
available. However, Secs. 1.1502-32T and 1.1502-32(g) do not apply as a 
result of a subsidiary ceasing to be a member in tax years beginning on 
or after January 1, 1995.

[T.D. 8560, 59 FR 41685, Aug. 15, 1994, as amended by T.D. 8677, 61 FR 
33323, June 27, 1996; T.D. 8560, 62 FR 12098, Mar. 14, 1997]



Sec. 1.1502-33  Earnings and profits.

    (a) In general--(1) Purpose. This section provides rules for 
adjusting the earnings and profits of a subsidiary (S) and any member 
(P) owning S's stock. These rules modify the determination of P's 
earnings and profits under applicable rules of law, including section 
312, by adjusting P's earnings and profits to reflect S's earnings and 
profits for the period that S is a member of the consolidated group. The 
purpose for modifying the determination of earnings and profits is to 
treat P and S as a single entity by reflecting the earnings and profits 
of lower-tier members in the earnings and profits of higher-tier members 
and consolidating the group's earnings and profits in the common parent. 
References in this section to earnings and profits include deficits in 
earnings and profits.
    (2) Application of other rules of law. The rules of this section are 
in addition to other rules of law. For example, the allowance for 
depreciation is determined in accordance with section 312(k). P's 
earnings and profits must not be adjusted under this section and other 
rules of law in a manner that has the effect of duplicating an 
adjustment. For example, if S's earnings and profits are reflected in 
P's earnings and profits under paragraph (b) of this section, and S 
transfers its assets to P in a liquidation to which section 332 applies, 
S's earnings and profits that P succeeds to under section 381 must be 
adjusted to prevent duplication.
    (b) Tiering up earnings and profits--(1) General rule. P's earnings 
and profits are adjusted under this section to reflect changes in S's 
earnings and profits in accordance with the applicable principles of 
Sec. 1.1502-32, consistently applied, and an adjustment to P's earnings 
and profits for a tax year under this paragraph (b)(1) is treated as 
earnings and profits of P for the tax year in which the adjustment 
arises. Under these principles, for example, the adjustments are made as 
of the close of each consolidated return year, and as of any other time 
if a determination at that time is necessary to determine the earnings 
and profits of any person. Similarly, S's earnings and profits are 
allocated under the principles of Sec. 1.1502-32(c), and the adjustments 
are

[[Page 289]]

applied in the order of the tiers, from the lowest to the highest. 
However, modifications to the principles include:
    (i) The amount of P's adjustment is determined by reference to S's 
earnings and profits, rather than S's taxable and tax-exempt items (and 
therefore, for example, the deferral of a negative adjustment for S's 
unabsorbed losses does not apply).
    (ii) The tax sharing rules under paragraph (d) of this section apply 
rather than those of Sec. 1.1502-32(b)(3)(iv)(D).
    (2) Affiliated earnings and profits. The reduction in S's earnings 
and profits under section 312 from a distribution of earnings and 
profits accumulated in separate return years of S that are not separate 
return limitation years does not tier up to P's earnings and profits. 
Thus, the increase in P's earnings and profits under section 312 from 
receipt of the distribution is not offset by a corresponding reduction.
    (3) Examples--(i) In general. For purposes of the examples in this 
section, unless otherwise stated, P owns all of the only class of S's 
stock, the stock is owned for the entire year, S owns no stock of lower-
tier members, the tax year of all persons is the calendar year, all 
persons use the accrual method of accounting, the facts set forth the 
only corporate activity, preferred stock is described in section 
1504(a)(4), all transactions are between unrelated persons, and tax 
liabilities are disregarded.
    (ii) Tiering up earnings and profits. The principles of this 
paragraph (b) are illustrated by the following examples.

    Example 1. Tier-up and distribution of earnings and profits. (a) 
Facts. P forms S in Year 1 with a $100 contribution. S has $100 of 
earnings and profits for Year 1 and no earnings and profits for Year 2. 
During Year 2, S declares and distributes a $50 dividend to P.
    (b) Analysis. Under paragraph (b)(1) of this section, S's $100 of 
earnings and profits for Year 1 increases P's earnings and profits for 
Year 1. P has no additional earnings and profits for Year 2 as a result 
of the $50 distribution in Year 2, because there is a $50 increase in 
P's earnings and profits as a result of the receipt of the dividend and 
a corresponding $50 decrease in S's earnings and profits under section 
312(a) that is reflected in P's earnings and profits under paragraph 
(b)(1) of this section.
    (c) Distribution of current earnings and profits. The facts are the 
same as in paragraph (a) of this Example 1, except that S distributes 
the $50 dividend at the end of Year 1 rather than during Year 2. Under 
paragraph (b)(1) of this section, P's earnings and profits are increased 
by $100 (S's $50 of undistributed earnings and profits, plus P's receipt 
of the $50 distribution). Thus, S's earnings and profits increase by $50 
and P's earnings and profits increase by $100.
    (d) Affiliated earnings and profits. The facts are the same as in 
paragraph (a) of this Example 1, except that P and S do not begin filing 
consolidated returns until Year 2. Because P and S file separate returns 
for Year 1, P's basis in S's stock remains $100 under Sec. 1.1502-32 and 
this section, S has $100 of earnings and profits, and none of S's 
earnings and profits is reflected in P's earnings and profits under 
paragraph (b) of this section. S's distribution in Year 2 ordinarily 
would reduce S's earnings and profits but not increase P's earnings and 
profits. (P's $50 of earnings and profits from the dividend would be 
offset by S's $50 reduction in earnings and profits that tiers up under 
paragraph (b) of this section.) However, under paragraph (b)(2) of this 
section, the negative adjustment for S's distribution to P does not 
apply. Thus, S's distribution reduces its earnings and profits by $50 
but increases P's earnings and profits by $50. (If S's earnings and 
profits had been accumulated in a separate return limitation year, 
paragraph (b)(2) of this section would not apply and the distribution 
would reduce S's earnings and profits but not increase P's earnings and 
profits.)
    (e) Earnings and profits deficit. Assume instead that after P forms 
S in Year 1 with a $100 contribution, S borrows additional funds and has 
a $150 deficit in earnings and profits for Year 1. The corresponding 
loss for tax purposes is not absorbed in Year 1, and is included in the 
group's consolidated net operating loss carried forward to Year 2. Under 
paragraph (b)(1) of this section, however, S's $150 deficit in earnings 
and profits decreases P's earnings and profits for Year 1 by $150. 
(Absorption of the loss in a later tax year has no effect on the 
earnings and profits of P and S.)
    Example 2. Section 355 distribution. (a) Facts. P owns all of S's 
stock and S owns all of T's stock. For Year 1, T has $100 of earnings 
and profits. Under paragraph (b)(1) of this section, the earnings and 
profits of T tier up to S and to P. S and P have no other earnings and 
profits for Year 1. S distributes T's stock to P at the end of Year 1 in 
a distribution to which section 355 applies.
    (b) Analysis. Because S's distribution of T's stock is a 
distribution to which section 355 applies, the applicable principles of 
Sec. 1.1502-32(b)(2)(iv) do not require P's earnings and profits to be 
adjusted by reason of the distribution. In addition, although S's 
earnings and profits may be reduced under section

[[Page 290]]

312(h) as a result of the distribution, the applicable principles of 
Sec. 1.1502-32(b)(3)(iii) do not require P's earnings and profits to be 
adjusted to reflect this reduction in S's earnings and profits.
    Example 3. Allocating earnings and profits among shares. P owns 80% 
of S's stock throughout Year 1. For Year 1, S has $100 of earnings and 
profits. Under paragraph (b)(1) of this section, $80 of S's earnings and 
profits is allocated to P based on P's ownership of S's stock. 
Accordingly, $80 of S's earnings and profits for Year 1 is reflected in 
P's earnings and profits for Year 1.

    (c) Special rules. For purposes of this section--
    (1) Stock of members. For purposes of determining P's earnings and 
profits from the disposition of S's stock, P's basis in S's stock is 
adjusted to reflect S's earnings and profits determined under paragraph 
(b) of this section, rather than under Sec. 1.1502-32. For example, P's 
basis in S's stock is increased by positive earnings and profits and 
decreased by deficits in earnings and profits. Similarly, P's basis in 
S's stock is not reduced for distributions to which paragraph (b)(2) of 
this section applies (affiliated earnings and profits). P may have an 
excess loss account in S's stock for earnings and profits purposes 
(whether or not there is an excess loss account under Sec. 1.1502-32), 
and the excess loss account is determined, adjusted, and taken into 
account in accordance with the principles of Secs. 1.1502-19 and 1.1502-
32.
    (2) Intercompany transactions. Intercompany items and corresponding 
items are not reflected in earnings and profits before they are taken 
into account under Sec. 1.1502-13. See Sec. 1.1502-13 for the applicable 
rules and definitions.
    (3) Example. The principles of this paragraph (c) are illustrated by 
the following example.

    Example. Adjustments to stock basis. (a) Facts. P forms S in Year 1 
with a $100 contribution. For Year 1, S has $75 of taxable income and 
$100 of earnings and profits. For Year 2, S has no taxable income or 
earnings and profits, and S declares and distributes a $50 dividend to 
P. P sells all of S's stock for $150 at the end of Year 2.
    (b) Analysis. Under paragraph (c)(1) of this section, P's basis in 
S's stock for earnings and profits purposes immediately before the sale 
is $150 (the $100 initial basis, plus S's $100 of earnings and profits 
for Year 1, minus the $50 distribution of earnings and profits in Year 
2). Thus, P recognizes no gain or loss from the sale of S's stock for 
earnings and profits purposes.
    (c) Earnings and profits deficit. Assume instead that S has a $100 
tax loss and earnings and profits deficit for Year 1. The tax loss is 
not absorbed in Year 1 and is included in the group's consolidated net 
operating loss carried forward to Year 2. Under paragraph (b) of this 
section, S's $100 deficit in earnings and profits decreases P's earnings 
and profits for Year 1. Under paragraph (c) of this section, P decreases 
its basis in S's stock for purposes of determining earnings and profits 
from $100 to $0. (If S had borrowed an additional $50 that it also lost 
in Year 1, P would have decreased its earnings and profits for Year 1 by 
the additional $50, and P would have had a $50 excess loss account in 
S's stock for earnings and profits purposes, which would be taken into 
account in determining P's earnings and profits from its sale of S's 
stock.)
    (d) Affiliated earnings and profits. Assume instead that P and S do 
not begin filing consolidated returns until Year 2. Under paragraph (b) 
of this section, the negative adjustment under Sec. 1.1502-32(b) for 
distributions does not apply to S's distribution of earnings and profits 
accumulated in a separate return year that is a not separate return 
limitation year. Thus, P's basis in S's stock for earnings and profits 
purposes remains $100, and P has $50 of earnings and profits from the 
sale of S's stock.

    (d) Federal income tax liability--(1) In general--(i) Extension of 
tax allocations. Section 1552 allocates the tax liability of a 
consolidated group among its members for purposes of determining the 
amounts by which their earnings and profits are reduced for taxes. 
Section 1552 does not reflect the absorption by one member of another 
member's tax attributes (e.g., losses, deductions and credits). For 
example, if P's $100 of income is offset by S's $100 of deductions, 
consolidated tax liability is $0 and no amount is allocated under 
section 1552. However, the group may elect under this paragraph (d) to 
allocate additional amounts to reflect the absorption by one member of 
the tax attributes of another member. Permissible methods are set forth 
in paragraphs (d)(2) through (4) of this section, and election 
procedures are provided in paragraph (d)(5) of this section. Allocations 
under this paragraph (d) must be reflected annually on permanent records 
(including work papers). Any

[[Page 291]]

computations of separate return tax liability are subject to the 
principles of section 1561.
    (ii) Effect of extended tax allocations. The amounts allocated under 
this paragraph (d) are treated as allocations of tax liability for 
purposes of Sec. 1.1552-1(b)(2). For example, if P's taxable income is 
offset by S's loss, and tax liability is allocated under the percentage 
method of paragraph (d)(3) of this section, P's earnings and profits are 
reduced as if its income were subject to tax, P is treated as liable to 
S for the amount of the tax, and corresponding adjustments are made to 
S's earnings and profits. If the liability of one member to another is 
not paid, the amount not paid generally is treated as a distribution, 
contribution, or both, depending on the relationship between the 
members.
    (2) Wait-and-see method. The wait-and-see method under this 
paragraph (d)(2) is derived from Securities and Exchange Commission 
procedures. In the year that a member's tax attribute is absorbed, the 
group's consolidated tax liability is allocated in accordance with the 
group's method under section 1552. When, in effect, the member with the 
tax attribute could have absorbed the attribute on a separate return 
basis in a later year, a portion of the group's consolidated tax 
liability for the later year that is otherwise allocated to members 
under section 1552 is reallocated. The reallocation takes into account 
all consolidated return years to which this paragraph (d) applies (the 
computation period), and is determined by comparing the tax allocated to 
a member during the computation period with the member's tax liability 
determined as if it had filed separate returns during the computation 
period.
    (i) Cap on allocation under section 1552. A member's allocation 
under section 1552 for a tax year may not exceed the excess, if any, 
of--
    (A) The total of the tax liabilities of the member for the 
computation period (including the current year), determined as if the 
member had filed separate returns; over
    (B) The total amount allocated to the member under section 1552 and 
this paragraph (d) for the computation period (except the current year).
    (ii) Reallocation of capped amounts. To the extent that the amount 
allocated to a member under section 1552 exceeds the limitation under 
paragraph (d)(2)(i) of this section, the excess is allocated among the 
remaining members in proportion to (but not to exceed the amount of) 
each member's excess, if any, of--
    (A) The total of the tax liabilities of the member for the 
computation period (including the current year), determined as if the 
member had filed separate returns; over
    (B) The total amount allocated to the member under section 1552 and 
this paragraph (d) for the computation period (including for the current 
year only the amount allocated under section 1552).
    (iii) Reallocation of excess capped amounts. If the reductions under 
paragraph (d)(2)(i) of this section exceed the amounts allocable under 
paragraph (d)(2)(ii) of this section, the excess is allocated among the 
members in accordance with the group's method under section 1552 without 
taking this paragraph (d)(2) into account.
    (3) Percentage method. The percentage method under this paragraph 
(d)(3) allocates tax liability based on the absorption of tax 
attributes, without taking into account the ability of any member to 
subsequently absorb its own tax attributes. The allocation under this 
method is in addition to the allocation under section 1552.
    (i) Decreased earnings and profits. A member's allocation under 
section 1552 for any year is increased, thereby decreasing its earnings 
and profits, by a fixed percentage (not to exceed 100%) of the excess, 
if any, of--
    (A) The member's separate return tax liability for the consolidated 
return year as determined under Sec. 1.1552-1(a)(2)(ii); over
    (B) The amount allocated to the member under section 1552.
    (ii) Increased earnings and profits. An amount equal to the total 
decrease in earnings and profits under paragraph (d)(3)(i) of this 
section (including amounts allocated as a result of a carryback) 
increases the earnings and profits of the members whose attributes are 
absorbed, and is allocated

[[Page 292]]

among them in a manner that reasonably reflects the absorption of the 
tax attributes.
    (4) Additional methods. The absorption by one member of the tax 
attributes of another member may be reflected under any other method 
approved in writing by the Commissioner.
    (5) Election of allocation method--(i) In general. Tax liability may 
be allocated under this paragraph (d) only if an election is filed with 
the group's first return. The election must--
    (A) Be made in a separate statement entitled ``ELECTION TO ALLOCATE 
TAX LIABILITY UNDER Sec. 1.1502-33(d)'';
    (B) State the allocation method elected under Sec. 1.1502-33(d) and 
under section 1552;
    (C) If the percentage method is elected, state the percentage (not 
to exceed 100%) to be used; and
    (D) If a method is permitted under paragraph (d)(4) of this section, 
attach evidence of approval of the method by the Commissioner.
    (ii) Consent--(A) Electing or changing methods. An election for a 
later year, or an election to change methods, may be made only with the 
written consent of the Commissioner.
    (B) Prior law elections. An election in effect for the last tax year 
beginning before January 1, 1995, remains in effect under this section. 
However, a group may elect to conform its earnings and profits 
computations to the method described in Sec. 1.1502-32(b)(3)(iv)(D) (the 
percentage method, using a 100% allocation), whether or not it has 
previously made an election for earnings and profits purposes. If a 
conforming election is made, the group must make all adjustments 
necessary to prevent amounts from being duplicated or omitted. The 
conforming election is made by attaching a statement entitled ``ELECTION 
TO CONFORM TAX ALLOCATIONS UNDER Secs. 1.1502-32 and 1.1502-33(d)'' to 
the consolidated group's return for its first tax year beginning on or 
after January 1, 1995. The statement must be signed by the common 
parent, and must specify whether the method is conformed only for years 
beginning on or after January 1, 1995 or as if the method were in effect 
for all prior years. The statement must also describe the adjustments 
made by reason of the change (e.g., to reflect prior use of earnings and 
profits).
    (6) Examples. The principles of this paragraph (d) are illustrated 
by the following examples.

    Example 1. Wait-and-see method. (a) Facts. P owns all of the stock 
of S1 and S2. The P group uses the wait-and-see method of allocation 
under paragraph (d)(2) of this section in conjunction with Sec. 1.1552-
1(a)(1). For Year 1, each member's taxable income, both for purposes of 
Sec. 1.1552-1(a)(1) and redetermined as if the member had filed separate 
returns, is as follows: P $0, S1 $2,000, and S2 ($1,000). Thus, the P 
group's consolidated tax liability for Year 1 is $340 (assuming a 34% 
tax rate).
    (b) Analysis. Under Sec. 1.1552-1(a)(1)(i), the tax liability of the 
P group is allocated among the members in accordance with the portion of 
the consolidated taxable income attributable to each member having 
taxable income. Thus, all of the P group's $340 consolidated tax 
liability is allocated to S1. As a result, S1 decreases its earnings and 
profits under section 1552 by $340 (even if S1 does not pay the tax 
liability). No further allocations are made under paragraph (d)(2) of 
this section because S2 cannot yet absorb its loss on a separate return 
basis.
    (c) Payment of tax liability. If S1 pays the $340 tax liability, 
there is no further effect on the income, earnings and profits, or stock 
basis of any member. If P pays the $340 tax liability (and the payment 
is not a loan from P to S1), P is treated as making a $340 contribution 
to the capital of S1; if S2 pays the $340 tax liability (and the payment 
is not a loan from S2 to S1), S2 is treated as making a $340 
distribution to P with respect to its stock, and P is treated as making 
a $340 contribution to the capital of S1. See Sec. 1.1552-1(b)(2).
    (d) Year 2. For Year 2, each member's taxable income, under 
Sec. 1.1552-1(a)(1)(ii) and redetermined as if the member had filed 
separate returns, without taking into account any carryover from Year 1, 
is as follows: P $0, S1 $1,000, and S2 $3,000. Thus, the P group's 
consolidated tax liability for Year 2 is $1,360 (assuming a 34% tax 
rate). Of this amount, section 1552 would allocate $340 to S1 and $1,020 
to S2. However, under paragraph (d)(2)(i) of this section, no more than 
$680 may be allocated to S2. This is because S2 would have had an 
aggregate tax liability of $680 if it had filed separate returns for 
Years 1 and 2 (a $0 tax liability for Year 1, and a $680 tax liability 
for Year 2, taking into account a $1,000 net operating loss carryover 
from Year 1). Under paragraph (d)(2)(ii) of this section, the entire 
excess of $340 which would otherwise be allocated to S2 under 
Sec. 1.1552-1(a)(1) is allocated to S1.

[[Page 293]]

This is because S1 would have had an additional $340 of aggregate tax 
liability if it had filed separate returns for Years 1 and 2 (a $680 tax 
liability for Year 1, and a $340 tax liability for Year 2, not taking 
into account S2's $1,000 net operating loss for Year 1). The effect of 
the allocation of $680 to S1 and $680 to S2 is determined under 
Sec. 1.1552-1(b)(2).
    Example 2. Percentage method. (a) Facts. The facts are the same as 
in Example 1, but the P group uses the percentage method of allocation 
under paragraph (d)(3) of this section, with a percentage of 100%. In 
addition, the taxable incomes and losses of the members are the same if 
computed as provided in Sec. 1.1552-1(a)(2)(ii).
    (b) Analysis. Under Sec. 1.1552-1(a)(2)(ii), $340 of tax liability 
is allocated to S1 for Year 1. Under paragraph (d)(3)(i) of this 
section, S1 is allocated another $340 of tax liability because S1 would 
have had a $680 tax liability if it had filed separate returns but only 
$340 is allocated to S1 under section 1552. Thus, S1's earnings and 
profits are decreased by the $680 total. Under paragraph (d)(3)(ii) of 
this section, S2's earnings and profits are increased by $340 because 
the additional $340 allocated to S1 under paragraph (d)(3)(i) of this 
section is attributable to the absorption of S2's losses.
    (c) Payment of tax liability. If S1 pays the $340 tax liability of 
the P group and pays $340 to S2, the Year 1 tax liability results in no 
further adjustments to the income, earnings and profits, or basis of any 
member's stock. If S1 pays the $340 tax liability of the P group and 
pays the other $340 to P instead of S2 because, for example, of an 
agreement among the members, S2 is treated as distributing $340 to P 
with respect to its stock in the year that S1 makes the payment to P. 
See Sec. 1.1552-1(b)(2).
    (d) Year 2. For Year 2, $340 is allocated to S1 and $1,020 is 
allocated to S2 under section 1552. No additional amounts are allocated 
under paragraph (d)(3) of this section.

    (e) Deconsolidations--(1) In general. Immediately before it becomes 
a nonmember, S's earnings and profits are eliminated to the extent they 
were taken into account by any member under this section. If S's 
earnings and profits are eliminated under this paragraph (e)(1), no 
corresponding adjustment is made to the earnings and profits of P (or 
any other member) under paragraph (b) of this section or to any basis in 
a member's stock under paragraph (c) of this section. For this purpose, 
S is treated as becoming a nonmember on the first day of its first 
separate return year (including another group's consolidated return 
year).
    (2) Acquisition of group--(i) Application. This paragraph (e)(2) 
applies only if a consolidated group (the terminating group) ceases to 
exist as a result of--
    (A) The acquisition by a member of another consolidated group of 
either the assets of the common parent of the terminating group in a 
reorganization described in section 381(a)(2), or the stock of the 
common parent of the terminating group; or
    (B) The application of the principles of Sec. 1.1502-75(d)(2) or 
(d)(3).
    (ii) General rule. Paragraph (e)(1) of this section does not apply 
solely by reason of the termination of a group because it is acquired, 
if there is a surviving group that is, immediately thereafter, a 
consolidated group. Instead, the surviving group is treated as the 
terminating group for purposes of applying this paragraph (e) to the 
terminating group. This treatment does not apply, however, to members of 
the terminating group that are not members of the surviving consolidated 
group immediately after the terminating group ceases to exist (e.g., 
under section 1504(a)(3) relating to reconsolidation, or section 1504(c) 
relating to includible insurance companies).
    (3) Certain corporate separations and reorganizations. The 
adjustments under paragraph (e)(1) of this section must be modified to 
the extent necessary to effectuate the principles of section 312(h). 
Thus, P's earnings and profits rather than S's earnings and profits may 
be eliminated immediately before S becomes a nonmember. P's earnings and 
profits are eliminated to the extent that its earnings and profits 
reflect S's earnings and profits after applying section 312(h) 
immediately after S becomes a nonmember (determined without taking this 
paragraph (e) into account).
    (4) Special uses of earnings and profits. Paragraph (e)(1) of this 
section does not apply for purposes of determining--
    (i) The extent to which a distribution is charged to reserve 
accounts under section 593(e);
    (ii) The extent to which a distribution is taxable to the recipient 
under sections 805(a)(4) and 832; and

[[Page 294]]

    (iii) Any other special use identified in guidance published in the 
Internal Revenue Bulletin.
    (5) Example. The principles of this paragraph (e) are illustrated by 
the following example.

    Example. (a) Facts. Individuals A and B own all of P's stock, and P 
owns all of the stock of S and T, each with a $500 basis. For Year 1, S 
has $100 of earnings and profits and T has $50 of earnings and profits. 
Under paragraph (b)(1) of this section, the earnings and profits of S 
and T tier up to P, and P has $150 of earnings and profits for Year 1. P 
sells all of S's stock for $600 at the close of Year 1.
    (b) Analysis. Under paragraph (e)(1) of this section, S's $100 of 
earnings and profits is eliminated immediately before S becomes a 
nonmember because the earnings and profits are taken into account under 
paragraph (b) of this section in P's earnings and profits. However, no 
corresponding adjustment is made to P's earnings and profits or to P's 
basis in S's stock for purposes of earnings and profits. P's earnings 
and profits for Year 1 remain $150 following the sale of S's stock.
    (c) Forward merger. The facts are the same as in paragraph (a) of 
this Example, except that, rather than P selling S's stock, S merges 
into a nonmember in a transaction described in section 368(a)(2)(D). 
Under paragraph (h) of this section, the nonmember is treated as a 
successor to S. Thus, as in paragraph (b) of this Example, S's $100 of 
earnings and profits is eliminated immediately before S ceases to be a 
member.
    (d) Acquisition of entire group. The facts are the same as in 
paragraph (a) of this Example, except that X, the common parent of 
another consolidated group, purchases all of P's stock at the close of 
Year 1, and P sells S's stock during Year 3. Under paragraph (e)(2) of 
this section, the earnings and profits of S and T are not eliminated as 
a result of X purchasing P's stock. However, S's earnings and profits 
from consolidated return years of both the P group and the X group are 
eliminated immediately before S becomes a nonmember of the X group.
    (e) Earnings and profits deficit. The facts are the same as in 
paragraph (d) of this Example, except that S has a $550 deficit in 
earnings and profits for Year 1. The effect of paragraph (e)(1) of this 
section is the same. Under paragraph (c)(1) of this section, P would 
have an excess loss account in S's stock for earnings and profits 
purposes under the principles of Secs. 1.1502-19 and 1.1502-32, and, 
under the principles of Sec. 1.1502-19(c)(2), the excess loss account is 
not taken into account as a result of X's purchase of P's stock. Under 
paragraph (e)(2) of this section, S's deficit is not eliminated under 
paragraph (e)(1) of this section immediately before X's purchase of P's 
stock. However, S's earnings and profits (or deficit) is eliminated 
immediately before S becomes a nonmember of the X group.
    (f) Section 355 distribution. The facts are the same as in paragraph 
(a) of this Example, except that, rather than selling S's stock, P 
distributes S's stock to A at the close of Year 1 in a distribution to 
which section 355 applies. Under paragraph (e)(3) of this section, P's 
earnings and profits may be reduced under section 312(h) as a result of 
the distribution. To the extent that P's earnings and profits are 
reduced, S's earnings and profits are not eliminated under paragraph 
(e)(1) of this section.

    (f) Changes in the structure of the group--(1) Changes in the common 
parent--(i) General rule. If P succeeds another corporation under the 
principles of Sec. 1.1502-75(d) (2) or (3) as the common parent of a 
consolidated group (a group structure change), the earnings and profits 
of P are adjusted immediately after P becomes the new common parent to 
reflect the earnings and profits of the former common parent immediately 
before the former common parent ceases to be the common parent. The 
adjustment is made as if P succeeds to the earnings and profits of the 
former common parent in a transaction described in section 381(a). See 
Sec. 1.1502-31 for the basis of the stock of members following a group 
structure change.
    (ii) Minority shareholders. If the former common parent's stock is 
not wholly owned by members of the consolidated group immediately after 
the former common parent ceases to be the common parent, appropriate 
adjustments must be made to reflect in the new common parent only an 
allocable part of the former common parent's earnings and profits.
    (iii) Higher-tier members. To the extent that earnings and profits 
are adjusted under this paragraph (f)(1), and the former common parent 
is owned by members other than P, the earnings and profits of the 
intermediate subsidiaries must be adjusted in accordance with the 
principles of this section.
    (iv) Example. The principles of this paragraph (f)(1) are 
illustrated by the following example.

    Example. (a) Facts. X is the common parent of a consolidated group 
with $100 of earnings and profits, and P is the common parent of another 
consolidated group with $20 of earnings and profits. P acquires all of 
X's stock at the close of Year 1 in exchange for 70% of

[[Page 295]]

P's stock. The exchange is a reverse acquisition under Sec. 1.1502-
75(d)(3), and the X group is treated as remaining in existence with P as 
its new common parent.
    (b) Adjustments for X group earnings and profits. Under paragraph 
(f)(1) of this section, P's earnings and profits are adjusted 
immediately after P becomes the new common parent, to reflect X's $100 
of earnings and profits immediately before X ceases to be the common 
parent. The adjustment is made as if P succeeds to X's earnings and 
profits in a transaction described in section 381(a). Thus, immediately 
after the acquisition, P has $120 of accumulated earnings and profits 
and X continues to have $100 of accumulated earnings and profits.
    (c) Adjustments for P group earnings and profits. Although the P 
group terminates on P's acquisition of X's stock, under paragraph (e)(2) 
of this section, no adjustments are made to the earnings and profits of 
any subsidiaries in the terminating P group.
    (d) Acquisition of separate return corporation. The facts are the 
same as in paragraph (a) of this Example, except that, immediately 
before the acquisition of its stock by P, X is not affiliated with any 
other corporation. The exchange is a reverse acquisition under 
Sec. 1.1502-75(d)(3), and P is treated as the common parent of the X 
group. Consequently, the results are the same as in paragraphs (b) and 
(c) of this Example.

    (2) Change in the location of subsidiaries. If the location of a 
member within a group changes, appropriate adjustments must be made to 
the earnings and profits of the members to prevent the earnings and 
profits from being eliminated. For example, if P transfers all of S's 
stock to another member in a transaction to which section 351 and 
Sec. 1.1502-13 apply, the transferee's earnings and profits are adjusted 
immediately after the transfer to reflect S's earnings and profits 
immediately before the transfer from consolidated return years. On the 
other hand, if the transferee purchases S's stock from P, the 
transferee's earnings and profits are not adjusted.
    (g) Anti-avoidance rule. If any person acts with a principal purpose 
contrary to the purposes of this section, to avoid the effect of the 
rules of this section or apply the rules of this section to avoid the 
effect of any other provision of the consolidated return regulations, 
adjustments must be made as necessary to carry out the purposes of this 
section.
    (h) Predecessors and successors. For purposes of this section, any 
reference to a corporation or to a share includes a reference to a 
successor or predecessor as the context may require. A corporation is a 
successor if its earnings and profits are determined, directly or 
indirectly, in whole or in part, by reference to the earnings and 
profits of another corporation (the predecessor). A share is a successor 
if its basis is determined, directly or indirectly, in whole or in part, 
by reference to the basis of another share (the predecessor).
    (i) [Reserved]
    (j) Effective date--(1) General rule. This section applies with 
respect to determinations of the earnings and profits of a member (e.g., 
for purposes of a characterizing a distribution to which section 301 
applies) in consolidated return years beginning on or after January 1, 
1995. If this section applies, earnings and profits must be determined 
or redetermined as if this section were in effect for all years 
(including, for example, the consolidated return years of another 
consolidated group to the extent the earnings and profits from those 
years are still reflected). For example, if a distribution by P to a 
nonmember shareholder in 1990 was a dividend because of an unabsorbed 
loss carryover attributable to S, P's earnings and profits in tax years 
beginning after January 1, 1995 are redetermined by taking into account 
a negative adjustment in the tax year S's loss arose and in 1990 for P's 
distribution, and any subsequent absorption of the loss has no effect on 
earnings and profits. Any such determination or redetermination does 
not, however, affect any prior period. Thus, the shareholder's treatment 
in 1990 of the distribution as a dividend (and the effect of the 
distribution on stock basis) is not redetermined under this section.
    (2) Dispositions of stock before effective date--(i) In general. If 
P disposes of stock of S in a consolidated return year beginning before 
January 1, 1995, the amount of P's earnings and profits with respect to 
S are not redetermined under paragraph (j)(1) of this section. See 
Sec. 1.1502-19 as contained in the 26 CFR part 1 edition revised as of 
April 1, 1994 for the definition of disposition,

[[Page 296]]

and paragraph (j)(5) of this section for the rules applicable to such 
dispositions.
    (ii) Lower-tier members. Although P disposes of S's stock in a tax 
year beginning before January 1, 1995, S's determinations or adjustments 
with respect to lower-tier members with which it continues to file a 
consolidated return are redetermined in accordance with the rules of 
this section (even if S's earnings and profits were previously taken 
into account by P). For example, assume that P owns all of S's stock, S 
owns all of T's stock, and T owns all of U's stock. If S sells 80% of 
T's stock in a tax year beginning before January 1, 1995 (the effective 
date), the amount of S's earnings and profits from the sale, and the 
adjustments to stock basis for earnings and profits purposes that are 
reflected in that amount, are not redetermined if P sells S's stock 
after the effective date. If S sells the remaining 20% of T's stock 
after the effective date, S's stock basis adjustments with respect to 
that T stock are also not redetermined because T became a nonmember 
before the effective date. However, if T and U continue to file a 
consolidated return with each other, paragraph (e)(1) of this section 
did not apply, and T sells U's stock after the effective date, T's 
earnings and profits with respect to U are redetermined (even though 
some of the earnings and profits may have been taken into account by S 
in its prior sale of T's stock before the effective date).
    (iii) Deferred amounts. For purposes of this paragraph (j)(2), a 
disposition does not include a transaction to which Sec. 1.1502-13, 
Sec. 1.1502-13T, Sec. 1.1502-14, or Sec. 1.1502-14T applies. Instead, 
the transaction is deemed to occur as the earnings and profits (if any) 
are taken into account.
    (3) Deconsolidations and group structure changes--(i) In general. 
Paragraphs (e) and (f) of this section apply with respect to 
deconsolidations and group structure changes occurring in consolidated 
return years beginning on or after January 1, 1995.
    (ii) Prior period group structure changes. If there was a group 
structure change in a consolidated return year beginning before January 
1, 1995, and earnings and profits were not determined under Sec. 1.1502-
33T(a) as contained in the 26 CFR part 1 edition revised as of April 1, 
1994, a distribution in a tax year ending after September 7, 1988, of 
earnings and profits that are not reflected in the earnings and profits 
of the distributee member, but would have been so reflected if 
Sec. 1.1502-33T(a) as contained in the 26 CFR part 1 edition revised as 
of April 1, 1994 had applied, the negative adjustment under paragraph 
(b) of this section for distributions does not apply (and there is 
therefore no offset to the increase in the earnings and profits of the 
distributee).
    (4) Deemed dividend elections. If there is a deemed distribution and 
recontribution pursuant to Sec. 1.1502-32(f)(2) as contained in the 26 
CFR part 1 edition revised as of April 1, 1994 in a consolidated return 
year beginning before January 1, 1995, the deemed distribution and 
recontribution under the election are treated as an actual distribution 
by S and recontribution by P as provided under the election.
    (5) Prior law. For prior determinations, see prior regulations under 
section 1502 as in effect with respect to the determination. See, e.g., 
Secs. 1.1502-33 and 1.1502-33T as contained in the 26 CFR part 1 edition 
revised as of April 1, 1994.

[T.D. 8560, 59 FR 41695, Aug. 15, 1994, as amended by T.D. 8597, 60 FR 
36710, July 18, 1995]



Sec. 1.1502-34   Special aggregate stock ownership rules.

    For purposes of Secs. 1.1502-1 through 1.1502-80, in determining the 
stock ownership of a member of a group in another corporation (the 
``issuing corporation'') for purposes of determining the application of 
section 165(g)(3)(A), 332(b)(1), 333(b), 351(a), or 904(f), in a 
consolidated return year, there shall be included stock owned by all 
other members of the group in the issuing corporation. Thus, assume that 
members A, B, and C each own 33\1/3\ percent of the stock issued by D. 
In such case, A, B, and C shall each be treated as meeting the 80-
percent stock ownership requirement for purposes of section 332,

[[Page 297]]

and no member can elect to have section 333 apply. Furthermore, the 
special rule for minority shareholders in section 337(d) cannot apply 
with respect to amounts received by A, B, or C in liquidation of D.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966]

                       Special Taxes and Taxpayers



Sec. 1.1502-42  Mutual savings banks, etc.

    (a) In general. This section applies to mutual savings banks and 
other institutions described in section 593(a).
    (b) Total deposits. In computing for purposes of section 
593(b)(1)(B)(ii) total deposits or withdrawable accounts at the close of 
the taxable year, the total deposits or withdrawable accounts of other 
members shall be excluded.
    (c) Taxable income; taxable years for which the due date (without 
extensions) for filing returns is before March 15, 1983. For taxable 
years for which the due date (without extensions) for filing returns is 
before March 15, 1983, a member's taxable income for purposes of section 
593(b)(2) is determined under Sec. 1.1502-27(b) (computed without regard 
to any deduction under section 593(b)(2)). In addition, for taxable 
years beginning after July 11, 1969, taxable income as computed under 
the preceding sentence is subject to the adjustments provided in section 
593(b)(2)(E). See Sec. 1.593-6A(b)(5).
    (d) Taxable income; taxable years for which the due date (without 
extensions) for filing returns is after March 14, 1983--(1) In general. 
For a taxable year for which the due date (without extensions) for 
filing returns is after March 14, 1983, a thrift's taxable income for 
purposes of section 593(b)(2) is its tentative taxable income (as 
defined in paragraph (e)(1) of this section).
    (2) Definitions. For purposes of this section:
    (i) A thrift is a member described in section 593(a).
    (ii) A nonthrift is a member that is not a thrift.
    (e) Tentative taxable income (or loss)--(1) Thrift. For purposes of 
this section, a thrift's tentative taxable income (or loss) is its 
separate taxable income (determined under Sec. 1.1502-12 without 
paragraph (q) thereof and without any deduction under section 593(b)), 
subject to the following adjustments in the following order:
    (i) The adjustments described in paragraph (e)(3) of this section;
    (ii) The adjustments described in section 593(b)(2)(E) for those 
thrifts with separate taxable income greater than zero (determined after 
the adjustments under paragraph (e)(3) of this section); and
    (iii) The adjustments described in paragraph (f) of this section.
    (2) Nonthrift. For purposes of this section, a nonthrift's tentative 
taxable income (or loss) is its separate taxable income (determined 
under Sec. 1.1502-12), adjusted for the portion of the consolidated net 
operating loss deduction attributable to the member, the portion of the 
consolidated net capital loss carryover or carryback attributable to the 
member, and further adjusted as described in paragraph (e)(3) of this 
section.
    (3) Adjustments for all members. For each member, the following 
adjustments taken into account in the computation of consolidated 
taxable income are included in determining its tentative taxable income 
(or loss) in order to adjust separate taxable income of the member to 
take into account certain consolidated items:
    (i) The portions of the consolidated charitable contributions 
deduction and the consolidated dividends received deduction attributable 
to the member.
    (ii) The member's capital gain net income, determined without any 
net capital loss carryover or carryback attributable to the member.
    (iii) The member's net capital loss and section 1231 net loss, 
reduced by the portion of the consolidated net capital loss attributable 
to the member.
    (f) Adjustments for thrifts--(1) Reductions. A thrift's separate 
taxable income (as adjusted under paragraph (e)(3) of this section) is 
reduced (but not below zero) by losses of thrifts and to the extent 
attributable to functionally related activities, losses of a nonthrift. 
Certain operating rules for determining the amount of the reductions are 
provided in paragraph (f)(4) of this section. The reductions are made in 
the following amounts in the following order:

[[Page 298]]

    (i) The thrift's allocable share (as determined under paragraph 
(h)(2) of this section) of another thrift's tentative taxable loss. That 
tentative taxable loss is determined by including a deduction under 
section 593(b) (other than paragraph (2) thereof) for the year in which 
the loss arises.
    (ii) The thrift's allocable share (as determined under paragraph 
(h)(3) of this section) of the portion of the consolidated net operating 
loss deduction attributable to it or another thrift. That consolidated 
net operating loss deduction is determined by including a deduction 
under section 593(b) (other than paragraph (2) thereof) for the year in 
which the loss arose. The portion of a consolidated net operating loss 
deduction attributable to another thrift is computed by excluding losses 
arising in taxable years for which the due date (without extensions) for 
filing returns is before March 15, 1983.
    (iii) The thrift's allocable share (as determined under paragraph 
(h)(4) of this section) of the loss attributable to functionally related 
activities of a nonthrift (as determined under paragraph (g) of this 
section). For a rule netting that share against certain income 
attributable to functionally related activities of that nonthrift, see 
paragraph (f)(4)(iv) of this section.
    (iv) The thrift's allocable share (as determined under paragraph 
(h)(3) of this section) of the portion of the consolidated net operating 
loss deduction attributable to functionally related activities of a 
nonthrift (as determined under paragraph (h)(5) of this section). That 
consolidated net operating loss deduction is determined by excluding 
losses arising in taxable years for which the due date (without 
extensions) for filing returns is before March 15, 1983. For a rule 
netting that share against certain income attributable to functionally 
related activities of that nonthrift, see paragraph (f)(4)(iv) of this 
section.
    (2) Increases. (i) A thrift's separate taxable income (as adjusted 
under paragraphs (e)(3) and (f)(1) of this section) is increased in a 
subsequent consolidated return year to restore reductions made in a 
prior consolidated return year to a thrift's separate taxable income by 
reason of losses of a nonthrift. This increase is the amount of the 
thrift's allocable share (as determined under paragraph (h)(6) of this 
section) of the income attributable to functionally related activities 
of a nonthrift in a consolidated return year and is made only in that 
year. This increase is made only if both the thrift and the nonthrift 
were members of the group in the consolidated return years in which both 
the reduction and increase are made.
    (ii) This subdivision (ii) limits the increases to a thrift's 
separate taxable income to assure that income of a particular nonthrift 
is used to restore reductions of a thrift only to the extent that such 
nonthrift's losses reduced the thrift's income. Therefore, as of the end 
of a consolidated return year, the cumulative increases to a thrift's 
tentative taxable income (by reason of income attributable to 
functionally related activities of a nonthrift) may not exceed the 
cumulative reductions to the thrift's separate taxable income made (by 
reason of the nonthrift's functionally related activities) under 
paragraph (f)(1) (iii) and (iv) of this section in the current and all 
prior consolidated return years during which both the thrift institution 
and the nonthrift institution were members of the group.
    (iii) For a netting rule, see paragraph (f)(4)(iv) of this section.
    (3) Special Rule. (i) If a carryback to a thrift's separate taxable 
income diminishes the reduction to a thrift's separate taxable income 
for a prior consolidated return year otherwise required by paragraph 
(f)(1) (iii) or (iv) of this section, then any increases to a thrift's 
separate taxable income under paragraph (f)(2) of this section for an 
intervening consolidated return year must be recomputed to take into 
account the effect of such carryback. Thus, if a net operating loss 
attributable to a thrift is carried back and completely offsets the 
thrift's separate taxable income (before the reductions under paragraph 
(f)(1) (iii) or (iv) or this section), any increase to the thrift's 
separate taxable income under paragraph (f)(2) of this section 
(attributable to a reduction in the year to which the loss is carried) 
for an intervening consolidated return year will be

[[Page 299]]

eliminated. The recomputation required by this subparagraph (3) must be 
reflected on an amended return for the intervening consolidated return 
year for which the increase was previously reported. See example (2) in 
paragraph (j) of this section.
    (ii) If a deficiency for an intervening consolidated return year 
results from the application of paragraph (f)(3)(i) of this section with 
respect to an item to which section 6501(h) applies, the deficiency may 
be assessed at any time within the period described in section 6501(h).
    (iii) For purposes of chapter 67 of the Code (relating to interest), 
the last date prescribed for payment of any tax owed as a result of the 
application of paragraph (f)(3)(i) of this section is deemed to be the 
last day of the taxable year for which the item carried back arose.
    (4) Operating rules. For purposes of paragraphs (d) through (j) of 
this section:
    (i) The portion of a consolidated net operating loss deduction 
attributable to a member is determined as follows:
    (A) First, determine under Sec. Sec. 1.1502-21T(b) (or Sec. 1.1502-
79A(a)(3), as appropriate) the portion of each consolidated net 
operating loss attributable to the member for the particular year in 
which the loss arose.
    (B) Second, apply the anti-double-counting rule in paragraph 
(h)(3)(iii) of this section so as not to take the same loss into account 
twice.
    (C) Finally, apply the loss absorption limit in paragraph 
(f)(4)(iii) of this section to the total amount of the consolidated net 
operating loss deduction from a particular loss year.
    (ii) Capital loss carryovers and carrybacks shall be taken into 
account in a manner consistent with the principles of paragraphs (d) 
through (j) of this section.
    (iii) This subdivision (iii) prescribes a loss absorption limit. The 
total amount of the consolidated net operating loss deduction from a 
given year (loss year) taken into account as reductions under paragraph 
(f)(1) of this section for another year (absorption year) shall not 
exceed the amount of the consolidated net operating loss deduction 
attributable to the loss year absorbed in computing consolidated taxable 
income for the absorption year. For this purpose, consolidated taxable 
income for the absorption year shall include a deduction under section 
593(b) (other than paragraph (2) thereof) for each thrift member.
    (iv) This subdivision (iv) prescribes a rule for netting in certain 
cases income attributable to functionally related activities of a 
nonthrift in a consolidated return year (``income year'') against losses 
attributable to functionally related activities of that nonthrift which 
arise in a consolidated return year (``loss year''). That nonthrift's 
income is netted against the portion of that nonthrift's loss which 
would otherwise be applied in a consolidated return year (``reduction 
year'') under paragraph (f)(1) (iii) or (iv) of this section to reduce a 
thrift's tentative taxable income, but:
    (A) Only if the income year is not later than the loss year and the 
reduction year, and
    (B) Only to the extent the income had not previously been taken into 
account under paragraph (f)(2) of this section or this subdivision (iv) 
as of the close of the later of the loss year and the reduction year.
    (g) Income (or loss) attributable to functionally related activities 
of a nonthrift--(1) In general. For purposes of this section, the income 
(or loss) attributable to functionally related activities of a nonthrift 
is the income (or loss) of the nonthrift:
    (i) Attributable to the provision of assets or the rendition of 
services to a thrift (such as the leasing of office space or providing 
computer or financial services), or
    (ii) Derived from the assets described in section 7701(a)(19)(C) 
(iii) through (x), but only if such assets comprise 5 percent or more of 
the gross assets of the nonthrift.
    (2) Amount of income (or loss). The amount of income (or loss) from 
such activities is the excess of (i) gross income from such activities 
over (ii) the deductions of the nonthrift allocable and apportionable to 
that gross income under the principles of Sec. 1.861-8. The loss 
attributable to functionally related activities of a nonthrift is the 
excess (if any) of such deductions over such

[[Page 300]]

gross income. That loss, however, may not exceed the amount of the 
tentative taxable loss of that nonthrift (determined by excluding losses 
arising in taxable years for which the due date (without extensions) for 
filing returns is before March 15, 1983).
    (h) Allocation of income and losses--(1) In general. Paragraphs 
(h)(2) through (5) of this section provides rules for allocating 
different losses among thrifts that have tentative taxable income 
greater than zero. Generally, these allocations are made in the order 
listed in paragraph (f)(1) of this section and are based upon the 
relative tentative taxable income of the thrifts to which the particular 
loss is allocated. For purposes of each allocation under a subdivision 
of such paragraph (f)(1), the tentative taxable income of the thrifts 
used in making this allocation is reduced by the thrift's allocable 
share of losses allocated to the thrift under a prior subdivision of 
such paragraph (f)(1). Accordingly, for purposes of this paragraph (h), 
tentative taxable income is determined without regard to paragraph (f) 
of this section, except as otherwise provided. Paragraph (h)(6) of this 
section provides rules for allocating income attributable to 
functionally related activities of a nonthrift based upon the relative 
reductions to thrift income made on account of that nonthrift.
    (2) Allocation of tentative taxable loss of other thrifts. For 
purposes of paragraph (f)(1)(i) of this section, a thrift's allocable 
share of another thrift's tentative taxable loss is the loss multiplied 
by a fraction. The numerator of the fraction is the tentative taxable 
income (if greater than zero) of the thrift, and the denominator is the 
aggregate of such tentative taxable income of each thrift.
    (3) Allocation of portions of a consolidated net operating loss 
deduction. (i) For purposes of paragraph (f)(1)(ii) of this section, a 
first thrift's allocable share of the portion of the consolidated net 
operating loss deduction attributable to another thrift is determined 
under paragraph (h)(2) of this section as if that portion were a 
tentative taxable loss of that other thrift and by computing tentative 
taxable income under such paragraph (h)(2) by taking into account 
paragraph (f)(1)(i) of this section. A thrift's allocable share of the 
portion of the consolidated net operating loss deduction attributable to 
that thrift is equal to that entire portion.
    (ii) For purposes of paragraph (f)(1)(iv) of this section, a 
thrift's allocable share of the portion of a consolidated net operating 
loss deduction attributable to functionally related activities of a 
nonthrift (determined under paragraph (h)(5) of this section) is 
determined under paragraph (h)(4) of this section as if that portion 
were a loss attributable to functionally related activities of the 
nonthrift and by computing tentative taxable income under such paragraph 
(h)(4) by taking into account paragraph (f)(1) (i), (ii), and (iii) of 
this section.
    (iii) This subdivision (iii) prevents the ``double-counting'' of 
losses. The reduction to the tentative taxable income of a thrift is 
diminished to the extent the loss that gave rise to the reduction has 
previously been taken into account in reducing a thrift's tentative 
taxable income. Thus, any loss taken into account as a reduction to a 
thrift's separate taxable income under any subdivision of paragraph 
(f)(1) of this section shall be reduced (but not below zero) to the 
extent taken into account:
    (A) In a prior consolidated return year under any subdivision of 
such paragraph (f)(1) or
    (B) In the current consolidated return year under a previous 
subdivision of such paragraph (f)(1).
    (4) Allocation of loss attributable to functionally related 
activities of a nonthrift. For purposes of paragraph (f)(1)(iii) of this 
section, a thrift's allocable share of a loss attributable to 
functionally related activities of a nonthrift is determined by 
multiplying the loss by a fraction. The numerator of the fraction is the 
tentative taxable income (if greater than zero) of the thrift (taking 
into account paragraph (f)(1) (i) and (ii) of this section) and the 
denominator is the aggregate of such tentative taxable income (so 
determined) of each thrift.
    (5) Portion of the consolidated net operating loss deduction 
attributable to functionally related activities of a particular

[[Page 301]]

nonthrift. The portion of the consolidated net operating loss deduction 
attributable to functionally related activities of a particular 
nonthrift is the lesser of the following two amounts:
    (i) The portion of the consolidated net operating loss deduction 
attributable to that nonthrift.
    (ii) The aggregate of the losses attributable to functionally 
related activities of that nonthrift for the taxable years in which the 
consolidated net operating loss deduction arose.
    (6) Allocation of income attributable to functionally related 
activities of a nonthrift. For purposes of paragraph (f)(2) of this 
section, a thrift institution's allocable share of the income 
attributable to functionally related activities of a nonthrift is 
determined by multiplying that income by a fraction. The numerator of 
the fraction is the amount of the cumulative reductions referred to in 
paragraph (f)(2)(ii) of this section (minus the cumulative increases 
under paragraph (f)(2) of this section) made on account of that 
nonthrift for the thrift and the denominator is the sum of such 
cumulative reductions (minus such cumulative increases) made on account 
of that nonthrift for all thrifts.
    (7) Proper accounting The provisions of section 482 apply in 
determining a thrift institution's tentative taxable income, and in 
determining the gross income and deductions attributable to functionally 
related activities. For example, an expense such as the salary of an 
individual who performs services for both a thrift and a nonthrift must 
be allocated in a manner that fairly reflects the value of the services 
rendered to each.
    (i) [Reserved]
    (j) Examples. The provisions of this section may be illustrated by 
the following examples. In each example the letter ``T'' for a member 
denotes a thrift and the letters ``NT'' denote a nonthrift. Also, in 
each example, a thrift loss includes a bad debt deduction under section 
593(b) (other than paragraph (2) thereof) for such year and a thrift 
with income would have such a bad debt deduction of zero.

    Example (1). (a) In 1983, corporations T1, T2, NT1, and NT2 are 
formed. These corporations constitute an affiliated group that files a 
consolidated return on the basis of a calendar year. For 1983, 1984, and 
1985, the tentative taxable income (or loss) of each member (before the 
application of paragraph (f) of this section) is as follows:

------------------------------------------------------------------------
                                                 1983     1984     1985 
------------------------------------------------------------------------
NT1...........................................   $(60)    $(140)     $15
T1............................................   1,000       500     750
NT2...........................................    (90)     (220)     150
T2............................................   (300)       400     250
------------------------------------------------------------------------

    In 1983, NT1, in addition to its other business activities, acted as 
a collection agency for T1. Deductions attributable to those activities 
exceeded gross income attributable to those activities by $70. NT1's 
other activities generated a $10 gain. In 1984 and 1985, NT1 acted as a 
collection agency for T1 as its sole activity.
    (b) The tentative taxable incomes of T1 and T2 for 1983 (determined 
under paragraph (e) of this section) as of the close of that year are 
adjusted by paragraph (f) of this section as follows:

                                                                        
(i) T1's tentative taxable income:                                      
  T1's tentative taxable income (before the                             
   application of paragraph (f) of this section.......  .......   $1,000
Less:                                                                   
  T2's tentative taxable loss.........................     $300  .......
  NT1's functionally related loss (limited by NT1's                     
   overall loss)......................................       60      360
                                                       -----------------
  T1's tentative taxable income for 1983..............  .......      640
                                                                        

    (ii) T2's tentative taxable income for 1983 is zero.
    (c) The tentative taxable incomes of T1 and T2 for 1984 (determined 
under paragraph (e) of this section as of the close of that year) are 
adjusted by paragraph (f) of this section as follows:
    (i) T1's tentative taxable income:

                                                                        
T1's tentative taxable income (before the application of                
 paragraph (f) of this section)................................     $500
Less:                                                                   
  T1's allocable portion of NT1's functionally related loss             
   (140x500/(500+400)).........................................       78
                                                                --------
  T1's tentative taxable income for 1984.......................      422
                                                                ========
(ii) T2's tentative taxable income:                                     
  T2's tentative taxable income (before the application of              
   paragraph (f) of this section...............................      400
Less:                                                                   
  T2's allocable portion of NT1's functionally related loss             
   (140x400/(500+400)).........................................       62
  T2's tentative taxable income for 1984.......................      338
                                                                        

    (d) For 1985, the amount under paragraph (f) (2) of this section for 
both T1 and T2 is $15 (NT1's tentative taxable income from functionally 
related activities for 1985). For 1983 and 1984, T1's tentative taxable 
income was

[[Page 302]]

reduced by a total of $138 (i.e., $60 + $78) due to NT1`s losses from 
functionally related activities. For 1984, T2's tentative taxable income 
was reduced by $62 due to those losses. Accordingly, under paragraph 
(f)(2) of this section, T1's tentative taxable income for 1983 is 
increased by $10 (i.e., $15x$138/($138+$62)) and T2's tentative taxable 
income is increased by $5 (i.e., $15x$62/($138+$62)).
    Example (2). (a) In 1983, corporations T, NT1, and NT2 are formed. 
these corporations constitute an affiliated group. NT2 provides computer 
services to T as its sole activity. For the calendar years 1983, 1984, 
and 1985, the group files a consolidated return. The tentative taxable 
income of each member (before the application of paragraph (f) of this 
section) is as follows:

                                                                        
------------------------------------------------------------------------
                                                 1983     1984     1985 
------------------------------------------------------------------------
T............................................     $100       $0   $(200)
NT1..........................................      200        0      100
NT2..........................................     (20)       20        0
------------------------------------------------------------------------

    (b) Under paragraph (f)(1) of this section, T's tentative taxable 
income for 1983 (determined at the close of that year) is reduced to $80 
(i.e., $100 less NT2's $20 loss). For 1984, under paragraph (f)(2) of 
this section, T's tentative taxable income is increased by $20. For 
1985, the consolidated net operating loss of $100 (all of which is 
attributable to T) is carried back to 1983. That $100 carryback is not 
limited by paragraph (f)(4)(iii) of this section, since consolidated 
taxable income for 1983 available for absorption after a bad debt 
deduction of $0 under section 593(b) (other than paragraph (2) thereof) 
for that year is $280. Accordingly, under paragraph (f)(1)(ii) of this 
section, T's tentative taxable income is reduced by the full $100, which 
is taken into account before the previous reduction of T's tentative 
taxable income under paragraph (f)(1)(iii) of this section. In addition, 
under paragraph (f)(3)(i) of this section, the group must file an 
amended return for 1984 to eliminate the increase to T's bad debt 
deduction for 1984 by reason of the consolidated net operating loss 
carryback to 1983.
    Example (3). (a) T and NT are formed in 1983 and are the only 
members of an affiliated group filing a consolidated return on a 
calendar year basis. NT provided computer services to T as its sole 
activity. For 1983, 1984, and 1985, the tentative taxable income of T 
and NT (before the application of paragraph (f) of this section) is as 
follows:

                                                                        
------------------------------------------------------------------------
                                                 1983     1984     1985 
------------------------------------------------------------------------
T............................................     $100       $0       $0
NT...........................................        0       40     (40)
------------------------------------------------------------------------

    (b) At the close of 1983, T's tentative taxable income is $100. For 
1985, however, the group has a consolidated net operating loss of $40, 
all of which is attributable to NT's functionally related activities and 
which is carried back to 1983. However, T's tentative taxable income for 
1983 is not reduced under paragraph (f)(1)(iv) of this section, since, 
under paragraph (f)(4)(iv) of this section, NT's 1984 income 
attributable to functionally related activities of $40 is netted against 
that $40 carryback.
    Example (4). (a) In 1983, corporations T1, T2, NT1, and NT2 are 
formed. For calendar years 1983, 1984, and 1985, the affiliated group 
consisting of T1, T2, NT1, and NT2 filed a consolidated return. NT1 
provided computer services to T1 as its sole activity. The tentative 
taxable income of each member (before the application of paragraph (f) 
of this section) is as follows:

                                                                        
------------------------------------------------------------------------
                                                 1983     1984     1985 
------------------------------------------------------------------------
T1...........................................     (50)      100       30
T2...........................................     (50)     (80)     (25)
NT1..........................................     (50)     (40)     (99)
NT2..........................................      120       30      100
------------------------------------------------------------------------

    (b) For 1983, the group has a consolidated net operating loss of 
$30, apportioned $10 each to T1, T2, and NT1 under Sec. 1.1502-
79A(a)(3). For 1984, the only thrift with tentative taxable income 
greater than zero (before applying paragraph (f) of this section) is T1. 
That tentative taxable income of $100 is first reduced to $20 by T2's 
$80 1984 loss under paragraph (f)(1)(i) of this section. Next, T1's 
remaining tentative taxable income of $20 is reduced to $10 by the 
portions attributable to T1 and T2 of the 1983 consolidated net 
operating loss carryover to 1984 under paragraph (f)(1)(ii) of this 
section. The sum of those portions is limited to $10 (i.e., $5 each) by 
paragraph (f)(4)(iii) of this section because 1984 consolidated taxable 
income available for absorption after a bad debt deduction under section 
593(b) (other than paragraph (2) thereof) for each thrift member for 
that year is $10. For that reason, paragraph (f)(4)(iii) of this section 
also prevents any further portion of that carryover from being taken 
into account in 1984 as a reduction under paragraph (f)(1) of this 
section. T1's remaining tentative taxable income of $10 is reduced to 
zero, under paragraph (f)(1)(iii) of this section, by NT1's 1984 
tentative taxable loss.

[[Page 303]]

    (c) For 1985, the only thrift with tentative taxable income greater 
than zero (before applying paragraph (f) of this section) is T1. T1's 
tentative taxable income for 1985 of $30 is reduced to $5 by T2's 1985 
loss of $25 under paragraph (f)(1)(i) of this section. Next, the 
portions attributable to T1 and T2 of the consolidated net operating 
loss carryover from 1983 to 1985 for purposes of paragraph (f)(1)(ii) of 
this section must be determined. That determination is made without 
applying the rules for loss absorption in computing consolidated taxable 
income under Sec. 1.1502-21A(b)(3). Those portions are instead 
determined in 3 steps under paragraph (f)(4)(i) of this section. The 
first of those steps is to determine each of T1's and T2's attributable 
portions of the 1983 consolidated net operating loss which under 
Sec. 1.1502-79A (a)(3) is $10 or $20 for both thrifts. The second of 
those steps is to apply the anti-double counting rule under paragraph 
(h)(3)(iii) of this section to reduce that $20 amount by the $10 total 
of the two $5 portions attributable to T1 and T2 of the consolidated net 
operating loss carryover from 1983 to 1984 taken into account as 
reductions to T1's tentative taxable income for 1984 under paragraph 
(f)(1)(ii) of this section. That leaves a $10 total amount available to 
be taken into account as reductions to T1's remaining tentative taxable 
income of $5 for 1985 under paragraph (f)(1)(ii) of this section. Under 
the third of those steps that $10 amount, however, is limited, under the 
loss absorption limit of paragraph (f)(4)(iii) of this section, to the 
$6 of the 1983 consolidated net operating loss carryover to 1985 which 
is absorbed in computing consolidated taxable income for 1985 since 1985 
consolidated taxable income available for absorption after a bad debt 
deduction under section 593(b) (other than paragraph (2) thereof) for 
that year is $6 (i.e., $30+$100-$99-$25). Because separate taxable 
income cannot be reduced below zero under paragraph (f)(1) of this 
section, T1's remaining tentative taxable income of $5 is thus reduced 
to zero by the portions attributable to T1 and T2, respectively, of the 
consolidated net operating loss carryover from 1983 to 1985 under 
paragraph (f)(1)(ii) of this section.

(Sec. 1502, 7805, Internal Revenue Code of 1954 (68A Stat. 367 and 917; 
(26 U.S.C. 1502 and 7805))

[T.D. 7637, 44 FR 46841, Aug. 9, 1979, as amended by T.D. 7815, 47 FR 
11516, Mar. 17, 1982; T.D. 7876, 48 FR 11258, Mar. 17, 1983; 48 FR 
13165, Mar. 30, 1983; T.D. 8677, 61 FR 33324, June 27, 1996]



Sec. 1.1502-43  Consolidated accumulated earnings tax.

    (a) Group subject to tax--(1) General rule. For a group filing a 
consolidated return for the taxable year, the accumulated earnings tax 
under section 531 is imposed on consolidated accumulated taxable income 
(as defined in paragraph (b) of this section). This tax applies to any 
group that is formed or availed of to avoid or prevent the imposition of 
the individual income tax on the shareholders of either any of its 
members or any other corporation by permitting earnings and profits to 
accumulate instead of dividing or distributing them. Section 531 and 
this section do not apply to a group that is treated as a ``personal 
holding company'' under section 542(a)(1) as a result of the application 
of section 542(b)(1). Special rules are provided in this section for 
other groups which include one or more personal holding companies.
    (2) Evidence of purpose to avoid income tax. (i) Under section 
533(a), the fact that the group's earnings and profits are permitted to 
accumulate beyond the reasonable needs of its business is determinative 
of the purpose to avoid the income tax with respect to shareholders, 
unless the group by the preponderance of the evidence proves to the 
contrary.
    (ii) The fact that a group is a mere holding or investment group is 
prima facie evidence of the group's purpose to avoid the income tax with 
respect to the shareholders. The activities of a member which is a 
personal holding company are not taken into account in determining if 
the group is a mere holding or investment group.
    (3) Earnings and profits. For purposes of this paragraph (a) and 
paragraph (d) of this section, the following rules apply:
    (i) If no member of the group is a personal holding company, the 
group's earnings and profits are the aggregate of the earnings and 
profits (or deficit) of each corporation that is a member at the close 
of the taxable year, determined in accordance with Sec. 1.1502-33.
    (ii) Earnings and profits resulting from the application of 
Sec. 1.1502-33(b) are not taken into account.
    (iii) Earnings and profits resulting from the disposition of a 
member's stock are determined without regard to the stock basis 
adjustments under Secs. 1.1502-32 and 1.1502-33(c)(1).

[[Page 304]]

    (4) Reasonable needs of the business. The reasonable needs of the 
group's business include the reasonable needs of the business of any 
corporation (other than a personal holding company) that is a member at 
the close of the taxable year. Thus, the earnings and profits of one 
member may be accumulated with respect to the reasonable business needs 
of another member. If under Sec. 1.537-3(b) the business of a nonmember 
corporation is considered the business of a member, then the earnings 
and profits of any member may be accumulated with respect to such 
nonmember's reasonable business needs.
    (5) Burden of proof. The notification described in section 534(b) 
and the statement described in section 534(c) are made to or by the 
common parent corporation in accordance with Sec. 1.1502-77.
    (b) Consolidated accumulated taxable income--(1) In general. 
``Consolidated accumulated taxable income'' is the group's consolidated 
taxable income determined under Sec. 1.1502-11 adjusted in the manner 
provided in paragraph (b)(2) of this section, minus the sum of--
    (i) The consolidated dividends paid deduction determined under 
paragraph (c) of this section and
    (ii) The consolidated accumulated earnings credit determined under 
paragraph (d) of this section.
    (2) Adjustments to consolidated taxable income. For purposes of 
paragraph (b)(1) of this section, consolidated taxable income is 
adjusted as follows:
    (i) Under section 535(b)(1), the deduction for taxes is the excess 
of--
    (A) The consolidated liability for tax determined without 
Sec. 1.1502-2 (b) through (d) and without the foreign tax credit 
provided by section 33, over
    (B) The consolidated foreign tax credit determined pursuant to 
Sec. 1.1502-4. Foreign taxes deductible under Sec. 1.535-2(a)(2) are 
also allowed as a deduction under section 535(b)(1).
    (ii) The consolidated charitable contributions deduction under 
Sec. 1.1502-24 does not apply. Under section 535(b)(2), there shall be 
allowed the aggregate charitable contributions of the members allowable 
under section 170, determined without section 170 (b)(2) and (d)(2).
    (iii) Under section 535(b)(3), the deductions provided in 
Secs. 1.1502-26 and 1.1502-27 are not allowed.
    (iv) Under section 535(b)(4), the consolidated net operating loss 
deduction described in Sec. Sec. 1.1502-21T(a) or 1.1502-21A(a), as 
appropriate is not allowed.
    (v) Under section 535(b)(5), there is allowed as a deduction the 
consolidated net capital loss, determined under Sec. Sec. 1.1502-22T(a) 
or 1.1502-22A(a), as appropriate .
    (vi) Under section 535(b)(6), there is allowed as a deduction an 
amount equal to (A) the excess of the consolidated net long-term capital 
gain (determined under Sec. Sec. 1.1502-22T(a) or 1.1502-41A, as 
appropriate over the consolidated net short-term capital loss 
(determined under Sec. Sec. 1.1502-22T(a) or 1.1502-41A, as 
appropriate), minus (B) the taxes attributable to this excess. This 
consolidated net short-term capital loss is determined without the 
consolidated net capital loss carryovers or carrybacks to the taxable 
year.
    (vii) Under section 535(b)(7), the consolidated net capital loss 
carryovers and carrybacks are not allowed. See Sec. Sec. 1.1502-22T(b) 
or 1.1502-22A(b), as appropriate.
    (viii) Sections 1.1502-15A (Limitations on built-in deductions not 
subject to Sec. 1.1502-15T) and 1.1502-15T (SRLY limitation on built-in 
losses (temporary)) do not apply.
    (3) Personal holding company a member. If a member is a personal 
holding company for the taxable year--
    (i) [Reserved]
    (ii) In applying paragraph (b)(2)(i) of this section, consolidated 
liability for tax (as determined under that paragraph (b)(2)(i)) is 
reduced by the portion thereof allocable to that member under section 
1552(a) (1), (2), (3), or (4) (or Sec. 1.1502-33(d)), whichever is 
applicable. The consolidated foreign tax credit is computed by excluding 
the taxable income and any foreign taxes paid or accrued by that member, 
and foreign taxes deductible under Sec. 1.535-2(a)(2) do not include 
foreign taxes attributable to that member.
    (c) Consolidated dividends paid deduction--(1) General rule. For 
purposes of this section, the consolidated dividends

[[Page 305]]

paid deduction is the aggregate of the members' deductions under section 
561(a) (1) and (2). This deduction is determined by excluding deductions 
for dividends paid to other members.
    (2) Exception for certain personal holding companies. [Reserved]
    (3) Dividends paid defined. For purposes of this paragraph (c), 
``dividends paid'' and ``dividend (or portion thereof) paid'' include 
amounts treated as dividends paid during the taxable year under sections 
562(b)(1), 563, and 565 (relating respectively to liquidating 
distributions, dividends paid after year end, and consent dividends).
    (4) Examples. This paragraph (c) can be illustrated by the following 
examples:

    Example (1). Corporations P and S constitute an affiliated group 
which files a consolidated return on a calendar year basis for 1984 and 
1985. P owns all of S's stock and two individuals own all of P's stock. 
Neither member of the group is a personal holding company for 1984. 
Assume that on December 15, 1984, S pays a dividend (as defined in 
section 316 (a)) of $2,000 to P, and P pays a dividend (as so defined) 
of $3,000 on January 15, 1985, to its individual shareholders. All 
dividends are paid in cash and are pro rata with no preference as to any 
shares or class of stock. For purposes of this paragraph (c), the 
consolidated dividends paid deduction for 1984 is $3,000, i.e., the 
dividend paid on January 15, 1985, by P to its nonmember shareholders. 
See section 563 (a). The $2,000 dividend paid by S to P is not taken 
into account in computing the consolidated dividends paid deduction.
    Example (2)--[Reserved]

    (d) Consolidated accumulated earnings credit. [Reserved]

[T.D. 7937, 49 FR 3462, Jan. 27, 1984, as amended by T.D. 8560, 59 FR 
41674, Aug. 15, 1994; T.D. 8677, 61 FR 33324, June 27, 1996; T.D. 8560, 
62 FR 12098, Mar. 14, 1997]



Sec. 1.1502-44  Percentage depletion for independent producers and royalty owners.

    (a) In general. The sum of the percentage depletion deductions for 
the taxable year for all oil or gas property owned by all members, plus 
any carryovers under section 613A(d)(1) or paragraph (d) of this section 
from a prior taxable year, may not exceed 65 percent of the group's 
adjusted consolidated taxable income (under paragraph (b) of this 
section) for the consolidated return year.
    (b) Adjusted consolidated taxable income. For purposes of this 
section, adjusted consolidated taxable income is an amount (not less 
than zero) equal to the group's consolidated taxable income determined 
without:
    (1) Any depletion with respect to an oil or gas property (other than 
a gas property with respect to which the depletion allowance for all 
production is determined pursuant to section 613A(b)) for which 
percentage depletion would exceed cost depletion in the absence of the 
depletable quantity limitations contained in section 613A(c) (1) and (6) 
and the consolidated taxable income limitation contained in paragraph 
(a) of this section.
    (2) Any consolidated net operating loss carryback to the 
consolidated return year under Secs. 1.1502-21T or 1.1502-21A (as 
appropriate) and
    (3) Any consolidated net capital loss carryback to the consolidated 
return year under Sec. Sec. 1.1502-22T or 1.1502-22A (as appropriate).
    (c) Allocation to oil and gas properties. The maximum amount 
allowable as a deduction under section 613A(c), after the application of 
paragraph (a) of this section, is allocated to properties held by 
members in accordance with the regulations under section 613A(d). Those 
regulations provide for an initial allocation and possible reallocation 
of the maximum allowable percentage depletion deduction among oil and 
gas properties. Thus, if, after the initial allocation, cost depletion 
exceeds the percentage depletion that would be allowable for a 
particular oil or gas property, cost depletion must be used for that 
property and the maximum amount of percentage depletion allowable as a 
deduction for the group is reallocated among only the remaining 
properties held by all members.
    (d) Carryover for disallowed amounts. (1) If any amount is 
disallowed as a deduction for the taxable year by reason of section 
613A(d)(1) or paragraph (a) of this section, the disallowed amount for 
each oil or gas property is treated as an amount allowed as a deduction 
under section 613A(c), for the following taxable year for the member 
that owned the property, in accordance with

[[Page 306]]

the regulations under section 613A and paragraphs (a) and (d)(2) of this 
section.
    (2) Any amount that was disallowed as a deduction in a separate 
return limitation year of a member may be carried to a consolidated 
return year only to the extent that 65 percent of the excess determined 
under paragraph (d)(3) of this section exceeds the sum of the otherwise 
allowable percentage depletion deductions for the member's oil and gas 
properties for the year.
    (3) The excess determined in this subparagraph (3) for a member is 
the excess, if any, of adjusted consolidated taxable income for the year 
under paragraph (b) of this section over that income recomputed by 
excluding the items of income and deductions of the member.
    (e) Effective date. This section applies to taxable years for which 
the due date (without extensions) for filing returns is after September 
30, 1980.

[T.D. 7725, 45 FR 65561, Oct. 3, 1980, as amended by T.D. 8677, 61 FR 
33324, June 27, 1996]



Sec. 1.1502-47  Consolidated returns by life- nonlife groups.

    (a) Scope--(1) In general. Under section 1504(b)(2), insurance 
companies that are taxed under section 802 or 821 (relating respectively 
to life insurance companies and to certain mutual insurance companies) 
are not treated as includible corporations for purposes of determining 
under section 1504(a) the existence of an affiliated group and the 
composition of its membership. Section 1504(c)(2) provides an election 
whereby certain life insurance companies and mutual insurance companies 
may be treated as includible corporations, and thus members, of a group 
composed of other includible corporations. This section provides 
regulations for the making of this election and for the determination of 
an electing group's composition and its consolidated tax liability.
    (2) General method of consolidation--(i) Subgroup method. The 
regulations adopt a subgroup method to determine consolidated taxable 
income. One subgroup is the group's nonlife companies (including those 
taxable under section 821). The other subgroup is the group's life 
insurance companies. Initially, the nonlife subgroup computes nonlife 
consolidated taxable income and the life subgroup computes consolidated 
partial life insurance company taxable income. A subgroup's income may 
in effect be reduced by a loss of the other subgroup. The life subgroup 
losses consist of consolidated loss from operations and life 
consolidated net capital loss. The nonlife ubgroup losses consist of 
nonlife consolidated net operating loss and nonlife consolidated net 
capital loss. Consolidated taxable income is therefore defined in 
pertinent part as the sum of nonlife consolidated taxable income and 
consolidated partial life insurance company taxable income reduced by 
life subgroup losses or nonlife subgroup losses.
    (ii) Subgroup loss. A subgroup loss does not actually affect the 
computation of nonlife consolidated taxable income or consolidated 
partial life insurance company taxable income. It merely constitutes a 
bottom-line adjustment in reaching consolidated taxable income. 
Furthermore, one subgroup's loss must first be carried back against 
income of the same subgroup before it may be used as a setoff against 
the second subgroup income in the taxable year the loss arose. (See 
section 1503(c)(1)). The carryback of the losses from one subgroup may 
not be used to offset income of the other subgroup in the year to which 
the loss is to be carried. This carryback of the first subgroup's loss 
may ``bump'' the second subgroup's loss that in effect previously 
reduced the income of the first subgroup. The second subgroup's loss 
that is bumped in appropriate cases may in effect reduce a succeeding 
year's income of the second or first subgroup. This approach gives the 
group the tax savings of the use of losses but the bumping rule assures 
that insofar as possible life deductions will be matched against life 
income and nonlife deductions against nonlife income.
    (iii) Carryover of subgroup loss. A subgroup's loss may be used in a 
succeeding year, but in any particular succeeding year the loss must be 
used to reduce the income of the same subgroup before it may be used as 
a setoff against the other subgroup's income.

[[Page 307]]

    (3) Authority. This section is prescribed under the authority of 
sections 1502, 1503(c), 1504(c)(2), and 7805(b).
    (4) Other provisions. The provisions of Secs. 1.1502-1 through 
1.1502-80 apply unless this section provides otherwise. Further, unless 
otherwise indicated in this section, a term used in this section has the 
same meaning as in sections 801-844.
    (b) Effective date. This section is effective for taxable years for 
which the due date (without extensions) for filing returns is after 
March 14, 1983.
    (c) Cross references. The following table provides cross references 
for some of the definitions and operating rules that are relevant in 
making the election and determining the group's composition and its tax 
liability:

                           Item and Paragraph

    General definitions  (d).
    Eligible corporation (Five-year rules)  (d)(12).
    Election  (e).
    Consolidated taxable income  (g).
    Nonlife consolidated taxable income  (h).
    Consolidated partial life insurance company taxable income  (j).
    Nonlife subgroup losses  (m).
    Life subgroup losses  (n).
    Alternative tax  (o).

    (d) Definitions. For purposes of this section:
    (1) Life insurance company. The term ``life company'' means a life 
insurance company as defined in section 801. Section 801 applies to each 
company separately.
    (2) Mutual insurance company. The term ``mutual company'' means a 
mutual insurance company taxable under section 821(a)(1).
    (3) Life insurance company taxable income. The term ``life insurance 
company taxable income'' is referred to as LICTI. The terms ``TII'', 
``GO'', and ``LO'' refer, respectively, to taxable investment income 
(section 804), gain from operations (section 809), and loss from 
operations (section 812). The term ``consolidated partial LICTI'' refers 
to consolidated LICTI without section 802(b)(3).
    (4) Group. The term ``group'' means an affiliated group of 
corporations (as defined in section 1504(a)). Unless otherwise indicated 
in this section, a group's composition is determined without section 
1504(b)(2).
    (5) Member. The term ``member'' means a corporation (including the 
common parent) that is an includible corporation in the group. A life 
company or mutual company is tentatively treated as a member for any 
taxable year for purposes of determining if it is an eligible 
corporation under paragraph (d)(12) of this section and therefore if it 
is an includible corporation under section 1504(c)(2). If such a company 
is eligible and includible (under section 1504(c)(2)), it will actually 
be treated as a member of the group.
    (6) Life member. A life member is a member of the group that is a 
life company.
    (7) Nonlife member. A nonlife member is a member of the group that 
is not a life company.
    (8) Life subgroup. A life subgroup is composed of those members that 
are life members. If the group has only one life member, it constitutes 
a life subgroup.
    (9) Nonlife subgroup. A nonlife subgroup is composed of those 
members that are nonlife members. If the group has only one nonlife 
member, it constitutes a nonlife subgroup.
    (10) Separate return year. The term ``separate return year'' means a 
taxable year of a corporation for which it files a separate return or 
for which it joins in the filing of a consolidated return by another 
group. For purposes of this subparagraph (10), the term ``group'' is 
defined with regard to section 1504(b)(2) for years in which an election 
under section 1504(c)(2) is not in effect. Thus, a separate return year 
includes a taxable year for which that election is not in effect.
    (11) Separate return limitation year. Section 1.1502-1(f)(2) 
provides exceptions to the definition of the term ``separate return 
limitation year''. For purposes of applying those exceptions to this 
section, for taxable years ending after December 31, 1980, the term 
``group'' is defined without regard to section 1504(b)(2) and the 
definition in

[[Page 308]]

this subparagraph (11) applies separately to the nonlife subgroup in 
determining nonlife consolidated taxable income under paragraph (h) of 
this section and to the life subgroup in determining consolidated 
partial LICTI under paragraph (j) of this section. Paragraph (m)(3)(ix) 
of this section defines the term ``separate return limitation year'' for 
purposes of determining whether the losses of one subgroup may be used 
against the income of the other subgroup.
    (12) Eligible corporations--(i) In general. A corporation is an 
eligible corporation for a taxable year of a group only if, throughout 
every day of the base period the corporation:
    (A) Was in existence and a member of the group determined without 
the exclusions in section 1504(b)(2) (see paragraphs (d)(12) (iii) 
through (vi) of this section),
    (B) Was engaged in the active conduct of a trade or business 
(``active business''),
    (C) Did not experience a change in tax character (see paragraph 
(d)(12)(vii) of this section), and
    (D) Did not undergo disproportionate asset acquisitions (see 
paragraph (d)(12)(viii) of this section).
    (ii) Base period. The base period consists of the common parent's 
five taxable years immediately preceding the group's taxable year for 
which the consolidated return and the determination of eligibility are 
made. Eligibility is determined for each consolidated return year 
beginning with the first year for which the election under section 
1504(c)(2) is effective.
    (iii) In existence. Except as provided in paragraphs (d)(12) (v) and 
(vi) of this section, a corporation organized after the base period 
begins is not eligible even though it is a member of the group 
immediately after its organization. For purposes of this subdivision 
(iii), a corporation that was a party to a reorganization described in 
section 368(a)(1)(F) shall be treated as the same entity both before and 
after the reorganization.
    (iv) Membership period. Except as provided in paragraphs (d)(12) (v) 
and (vi) of this section, a corporation must have been a member of the 
group throughout the base period to be eligible. Thus, an ineligible 
corporation includes one whose stock was acquired from outside the group 
at any time during the base period or one which was a member of a 
different group (whether by application of reverse acquistion rules in 
Sec. 1.1502-75(d)(3) or otherwise) at any time during the base period. 
For purposes of this subdivision (iv), the common parent of a group is 
treated as constituting a group (and hence is a member) during any 
period when it was not a member of an affiliated group within the 
meaning of section 1504(a) (applied without section 1504(b)(2)).
    (v) Tacking rule. The period during which an ``old'' corporation is 
in existence and a member of the group engaged in active business is 
included in (or ``tacks'' onto) the period for the ``new'' corporation 
if the following five conditions listed in this subdivision (v) are met. 
For purposes of this subparagraph (12), a ``new'' corporation is a 
corporation (whether or not newly organized) during the period its 
eligibility depends upon the tacking rule. The five conditions are as 
follows:
    (A) The first condition is that, at any time, 80 percent or more of 
the new corporation's assets it acquired (other than in the ordinary 
course of its trade or business) where acquired from the old corporation 
in one or more transactions described in section 351(a) or 381(a). This 
asset test is applied by using the fair market values of assets on the 
date they were acquired and without regard to liabilities. Assets 
acquired in the ordinary course of business will be excluded from total 
assets only if they were acquired after the new corporation became a 
member of the group (determined without section 1504(b)(2)). In 
addition, assets that the old corporation acquired from outside the 
group in transactions not conducted in the ordinary course of its trade 
or business are not included in the 80 percent (but are included in 
total assets) if the old corporation acquired those assets within five 
calendar years before the date of their transfer to the new corporation.
    (B) The second condition is that at the end of the taxable year 
during which the first condition is first met,

[[Page 309]]

the old corporation and the new corporation must both have the same tax 
character. For purposes of this paragraph (d)(12), a corporation's tax 
character is the section under which it would be taxed (i.e., sections 
11, 802, 821, or 831) if it filed a separate return. If the old 
corporation is not in existence (or adopts a plan of complete 
liquidation) at the end of that taxable year, this subdivision (v)(B) 
will apply to the old corporation's taxable year immediately preceding 
the beginning of the taxable year during which the first condition is 
first met.
    (C) The third condition is that, if the old and new corporation are 
life insurance companies, the transfer (or transfers) is not reasonably 
expected (at the time of the transfer) to result in the separation of 
profitable activities from loss activities.
    (D) The fourth condition is that, at the end of the taxable year 
during which the first condition is first met, the new corporation does 
not undergo a disproportionate asset acquisition under paragraph 
(d)(12)(viii) of this section.
    (E) The fifth condition is that, if there is more than one old 
corporation, the first three conditions apply to all of the 
corporations. Thus, the second condition (tax character) must be met by 
all of the old corporations transferring assets taken into account in 
meeting the test in paragraph (d)(12)(v)(A) of this section.
    (vi) Old group remaining in existence. If the common parent of a 
group (or a new common parent) became the common parent in a transaction 
described in Sec. 1.1502-75 (d)(2) or (d)(3) where a group remained in 
existence, then paragraph (d)(12) (ii) through (iv) of this section 
apply by treating that common parent as if it were also the previous 
common parent of the group that remains in existence. If this paragraph 
(d)(12)(vi) applies to a transaction, the tacking rule in paragraph 
(d)(12)(v) of this section does not apply to the transaction.
    (vii) Change in tax character. A corporation must not experience 
during the base period a change in tax character (as defined in 
paragraph (d)(12)(v)(B) of this section) if the change is attributable 
to an acquisition of assets from outside the group in transactions not 
conducted in the ordinary course of its trade or business. However, if a 
new corporation relies on the tacking rules in paragraph (d)(12)(v) of 
this section, this paragraph (d)(12)(vii) shall apply during the base 
period and the current consolidated return year and even if the change 
in tax character is attributable to an asset acquisition from within the 
group.
    (viii) Disproportionate asset acquisition. To be eligible, a 
corporation must not undergo during the base period disproportionate 
asset acquisitions which are attributable to an acquisition (or a series 
of acquisitions) of assets from outside the group in transactions not 
conducted in the ordinary course of its trade or business (special 
acquisition). Whether special acquisitions are disproportionate is 
determined at the end of each base period. Whether an acquisition 
results in a disproportionate asset acquisition depends on all of the 
facts and circumstances including the following factors and rules:
    (A) One factor is the portion of the insurance reserves (i.e., total 
reserves in section 801 (c)) of the acquiring company at the end of the 
base period which is attributable to special acquisitions.
    (B) A second factor is the portion of the fair market value of the 
assets (without reduction for liabilities) of the acquiring company at 
the end of the base period that is attributable to special acquisitions.
    (C) A third factor is the portion of the premiums generated during 
the last taxable year of the base period which are attributable to 
special acquisitions.
    (D) A corporation will not experience a disproportionate asset 
acquisition unless 75 percent of one factor (whether or not listed in 
this subdivision (viii)) is attributable to special acquisitions.
    (E) Money or other property contributed to a corporation by a 
shareholder that is not a member of the group (without section 
1504(b)(2)) is not a special acquisition.
    (F) If a new corporation relies on the tacking rules in paragraph 
(d)(12)(v) of this section, this subdivision (viii) applies to that 
corporation during a consolidated return year. Thus, if at any

[[Page 310]]

time during a consolidated return year, a new corporation undergoes a 
disproportionate asset acquisition, the corporation becomes ineligible 
at that time.
    (13) Ineligible corporation. A corporation that is not an eligible 
corporation is ineligible. If a life company or mutual company is 
ineligible, it is not treated under section 1504(c)(2) as an includible 
corporation. Losses of a nonlife member arising in years when it is 
ineligible may not be used under section 1503(c)(2) and paragraph (m) of 
this section to set off the income of a life member. If a life or mutual 
company is ineligible and is the common parent of the group (without 
section 1504(b)(2)), the election under section 1504(c)(2) may not be 
made.
    (14) Illustrations. The following examples illustrate this paragraph 
(d). In each example, L indicates a life company, another letter 
indicates a nonlife company, and each corporation uses the calendar year 
as its taxable year.

    Example (1). P has owned all of the stock of S since 1913. On 
January 1, 1980, P purchased all of the stock of L1!which 
owns all of the stock of L2!and S2. L1
!and L2!are treated as members for purposes of 
determining if they are eligible for 1982. However, for 1982, 
L1, L2, and S2!are ineligible because 
none of them has been a member of the group for P's five taxable years 
preceding 1982. For 1982, L1!and L2!may elect to 
file a consolidated return because they constitute an affiliated group 
under section 1504(c)(1), and P and S may file a consolidated return.
    Example (2). Since 1974, P has been a mutual insurance company 
owning all the stock of L1. In 1980, P transfers assets to 
S1., a new stock casualty company subject to taxation under 
section 831(a). For 1982, only P and L1 are eligible 
corporations. The tacking rule in paragraph (d)(12)(v) of this section 
does not apply in 1982 because the old corporation (P) and the new 
corporation (S1) do not have the same tax character. The 
result would be the same if P were a life company.
    Example (3). Since 1974, L has owned all the stock of L1 
which has owned all the stock of S1, a stock casualty 
company. L1 writes some accident and health insurance 
business. In 1980, L1 transfers this business, and 
S1 transfers some of its business, to a new stock casualty 
company, S2., in a transaction described in section 351 (a). 
The property transferred to S2. by L1 had a fair 
market value of $50 million. The property transferred by S1 
had a fair market value of $40 million. S2. is ineligible for 
1982 because the tacking rule in paragraph (d)(12)(v) of this section 
does not apply. The old corporations (L1 and S1) 
and the new corporation (S2.) do not all have the same tax 
character. See subparagraph (d)(12)(v)(B) and (E) of this section. The 
result would be the same if L1 transferred other property 
(e.g.,  stock and securities) with the same value, rather than accident 
and health insurance contracts, to S2.
    Example (4). Since 1974, P has owned all the stock of S and 
L1. L1 is a large life company engaged in active 
business since 1974. On January 1, 1982, L1 transfers in a 
section 351 (a) transaction assets (not acquired from outside the group) 
to a new life company, L2. For 1982, L2 is 
eligible because under paragraph (d)(12)(v) of this section, 
L2 is considered to have been in existence and a member of 
the group engaged in the active business since 1974 which is the period 
L1, the old corporation, was in existence and a member of the 
group so engaged.
    Example (5). The facts are the same as in example (4). Assume that 
the fair market value of the assets L1 transferred to 
L2 was $10 million on January 1, 1982 and that L2 
acquired no other assets prior to June 30, 1983. Assume further that on 
January 1, 1983, L1 acquires (other than in the ordinary 
course of its trade or business) assets having a fair market value of 
$40 million from L3, an unrelated life company. On June 30, 
1983, L1 transfers those assets to L2. 
L2 becomes ineligible on June 30, 1983. Since by fair market 
values, 80 percent (i.e., 40/50) of L2's assets are 
attributable to special acquisitions, L2 has undergone a 
disproportionate asset acquisition at that time. See paragraph 
(d)(12)(viii)(B), (D), and (F) of this section.
    Example (6). The facts are the same as in example (5) except that 
L1 transfers assets (other than life insurance contracts) 
having a fair market value of $40 million to L2 and 
L2 purchases the assets of L3 on June 30, 1983. 
the result of the 1983 acquisition is the same as in example (5).
    Example (7). The facts are the same as in example (5) except the 
acquired assets acquired by L2 in 1983 from L1 
have a fair market value of $20 million. In 1983, L2 had $1 
million of premiums on its pre-existing contracts but premiums generated 
by the acquired business for the entire year would have been $2 million. 
L2 is eligible in 1983 because it did not experience a 
disproportionate asset acquisition on June 30, 1983.
    Example (8). Since 1974, L, a State A corporation, has owned all of 
the stock of L1 and S1. On January 1, 1982, L 
merges into L3, a smaller State B corporation, which owns the 
stock of S2. The transaction is a reverse acquisition 
described in Sec. 1.1502-75(d)(3) and the group of which L was the 
common parent remains in existence. Under paragraph (d)(12)(vi) of this 
section, L3 is eligible for 1982. However, S2 is 
ineligible in 1982 under paragraph (d)(12)(iv) of this section.

[[Page 311]]

    Example (9). The facts are the same as in example (8) except that L 
acquires the stock of L3. L3 and S2 are 
both ineligible for 1982. On January 1, 1983, the fair market value of 
L3's assets are $5 million (without liabilities) and on that 
date L transfers assets (not acquired from outside the group) having a 
fair market value of $95 million (without liabilities) to L3. 
L and L3 are life companies at the end of 1983. L3 
is eligible in 1983 under the tacking rule in paragraph (d)(12)(v) of 
this section. S2 is ineligible in that year. The result would 
be the same if L3 was not a life company prior to January 1, 
1983. See paragraph (d)(12)(v)(B) of this section.
    Example (10). Since 1974, P has owned all of the stock of 
S1 and L1. On January 1, 1982, L1 
incorporates L2 and transfers cash and securities to 
L2. L2 begins writing a new line of specialty life 
insurance products and it qualifies as a life company for calendar year 
1982. L2 generates a loss from operations (section 812) 
attributable to its writing of new business. For 1982, L2 is 
ineligible under paragraph (d)(12)(v)(C) of this section.
    Example (11). The facts are the same as in example (10) except that 
L1 transfers to L2 a block of insurance contracts 
that generated losses for L1 and continued to generate losses 
for L2, producing a loss from operations. L2 is 
ineligible in 1982 under paragraph (d)(12)(v)(C) of this section.
    Example (12). Since 1974, X, a foreign corporation, has owned all 
the stock of S2 and S1, and S1 has 
owned all of the stock of L1. On January 1, 1982, X 
incorporates a new U.S. company P, and transfers the stock of S1 
and S2 to P. Assume that under Sec. 1.1502-75(d)(3) (relating 
to reverse acquisitions), the S1-L1 affiliated 
group remains in existence. Under paragraph (d)(12)(vi) of this section, 
P, S1, and L1 are eligible but S2 is 
ineligible. The result would be the same if X were an individual.
    Example (13). The facts are the same as in example (12) except that 
X owns all of the stock of S1, L1, and 
S2. In addition, on January 1, 1982, X transfers the stock of 
S1 and S2 to L1. L1 is 
eligible in 1982 under paragraph (d)(12)(iv) of this section. L1 
would still be eligible even if it owned a subsidiary during the base 
period but sold the subsidiary prior to January 1, 1982. S1 
and S2 are ineligible in 1982.
    Example (14). Since 1974, S1 has owned all of the stock 
of L1. S2, an unrelated company, has owned all of 
the stock of L2 and S3 for 10 years. S1 
and S2 are active stock casualty companies and not holding 
companies. On January 1, 1982, S1 and S2 merge 
into a new casualty company, S, in a transaction described in 
Sec. 1.1502-75(d)(3) so that the group of which S1 was the 
common parent remains in existence. S and L1 are eligible in 
1982 under paragraph (d)(12)(vi) of this section. L2 and 
S3 are ineligible.
    Example (15). The facts are the same as in example (14) except that 
S2 (the first corporation in Sec. 1.1502-75(d)(3)) acquires 
the stock of S1 in exchange for the stock of S2. 
The result is that only S2, S1, and L1 
are eligible in 1982.
    Example (16). Since 1974, S had owned all of the stock of 
L1. L1 is a large life company. On January 1, 
1982, L1 incorporates L2 and transfers $40 million 
in cash and securities to L2 in a transaction described in 
section 351(a). On March 1, 1982, L2 purchases the assets of 
L3, an unrelated life company. The purchased assets have a 
fair market value (without liabilities) of $30 million on March 1, 1982. 
L2 is ineligible for 1982 because the tacking rule in 
paragraph (d)(12)(v) of this section does not apply. L2 
experienced a disproportionate asset acquisition in 1982. See paragraph 
(d)(12)((v)(D) of this section.

    (e) Election--(1) In general. The election under section 1504(c)(2) 
may not be made if the group's common parent is an ineligible life 
company or an ineligible mutual company. The election under section 
1504(c)(2) may only be made by the common parent of the group (as 
defined in section 1504(c)(2) without the exclusions in section 
1504(b)(2)). For example, assume that P owns all of the stock of 
L1, an eligible life company, which owns the stock of 
S1. Assume further that P also owns the stock of 
L2, an ineligible life member, which (for more than five 
years) has owned the stock of a nonlife company, S2. Only P 
may make the election and, if it does so, P, L1, and S1 
may file a consolidated return under this section. L2 may not 
make the election under section 1504(c)(2) and may not file a 
consolidated return with S2.
    (2) How election is made--(i) General rule. The election under 
section 1504(c)(2) is generally made by the group's common parent in the 
same manner (and it has the same effect) as the election to file a 
consolidated return is made under Sec. 1.1502-75 (a) and (b) for a group 
which did not file a consolidated return for the immediately preceding 
taxable year. The procedure for making the election under section 
1504(c)(2) is the same whether or not a consolidated return was filed by 
the life members or the nonlife members for the immediately preceding 
taxable year.
    (ii) Special rule. Notwithstanding the general rule, however, if the 
nonlife

[[Page 312]]

members in the group filed a consolidated return for the immediately 
preceding taxable year and had executed and filed a Form 1122 that is 
effective for the preceding year, then such members will be treated as 
if they filed a Form 1122 when they join in the filing of a consolidated 
return under section 1504(c)(2) and they will be deemed to consent to 
the regulations under this section. However, an affiliation schedule 
(Form 851) must be filed by the group and the life members must execute 
a Form 1122 in the manner prescribed in Sec. 1.1502-75(h)(2).
    (3) Irrevocability. Except as provided in Sec. 1.1502-75(c) and 
paragraph (e)(4) of this section, the election under section 1504(c)(2) 
is irrevocable.
    (4) Permission to discontinue--(i) General rule. A ``section 
1504(c)(2) group'' with a common parent that has made the election to 
file a consolidated return under section 1504(c)(2) in a previous 
taxable year is granted permission to elect (under Sec. 1.1502-
75(c)(2)(ii)) to discontinue filing such a consolidated return for that 
group's first taxable year for which the regulations under this section 
are effective. This election to discontinue shall be exercised in the 
time and manner prescribed in Sec. 1.1502-75(c)(3), except that the 
group's common parent shall exercise this election to discontinue (and 
the other members of the section 1504(c)(2) group must comply with this 
election) by filing appropriate returns. For purposes of this paragraph 
(e)(4), an appropriate return is either a separate return or a 
consolidated return that is filed by newly exercising the privilege 
under Sec. 1.1502-75(a)(1).
    (ii) Types of groups. (A) A ``section 1504(c)(2) group'' is an 
affiliated group which files or filed a consolidated return pursuant to 
an election under section 1504(c)(2).
    (B) A ``limited group'' is an affiliated group (determined without 
section 1504(c)(2)) having at least one member which was a member of a 
section 1504(c)(2) group on the date that the section 1504(c)(2) group 
elected to discontinue under paragraph (e)(4)(i) of this section.
    (iii) Effect on restoration rules. If a group ceases to file a 
consolidated return or terminates or if a member leaves the group, 
certain items of income, gain, or loss on transactions between members 
are taken into account under Secs. 1.1502-13, 1.1502-18, and 1.1502-19 
(``restoration rules''). For purposes of applying these restoration 
rules solely by reason of an election under paragraph (e)(4)(i) or 
(e)(4)(v)(A) of this section to discontinue filing consolidated returns 
as a section 1504(c)(2) group, the following rules apply:
    (A) The section 1504(c)(2) group shall not be considered to 
terminate and no member of that group shall be treated as ceasing to be 
a member.
    (B) Members of that section 1504(c)(2) group that are included in 
the consolidated return of a limited group for the first taxable year 
for which the discontinuance is effective shall be considered to be 
filing a consolidated return as a continuation of the section 1504(c)(2) 
group. However, a corporation that is not a member of a particular 
limited group for that taxable year is considered to have a separate 
return year (and, for purposes of Sec. 1.1502-19(c), not to be a member 
of a group filing a consolidated return) with respect to that limited 
group's members.
    (C) Section 1.1502-13 shall be applied without regard to paragraph 
(f)(1)(vii).
    (iv) Illustrations. The following examples illustrate paragraph 
(e)(4)(i)-(iii) of this section. In these examples, L indicates a life 
company and another letter indicates a nonlife company. All corporations 
use the calendar year as the taxable year. For all taxable years 
involved, P owns all the stock of L1 and of S, L1 
owns all the stock of L2, L2 owns all the stock of 
L3, and S owns all the stock of L4. For 1981, P 
makes the life-nonlife election of section 1504(c)(2) and L4 
is an eligible corporation. For 1982, P makes the election to 
discontinue filing consolidated returns under section 1504(c)(2) in 
accordance with the permission granted in this paragraph (e)(4).

    Example (1). L1, L2, and L3 were 
eligible members. For 1982, P and S may either file separate returns or 
may file, as a limited group, a consolidated return. Similarly, 
L1, L2, and L3 may either file separate 
returns or may file a consolidated return as a limited group under 
section 1504(c)(1). L4 must file a separate return.

[[Page 313]]

    Example (2). For 1981, L1 was an ineligible member and 
L1, L2, and L3 filed a consolidated 
return under section 1504(c)(1). For 1982, L1, L2, 
and L3 must continue filing a consolidated return under 
section 1504(c)(1).
    Example (3). For 1981, L1 was an eligible member and 
L2 and L3 were ineligible members. For 1982, 
L1, L2, and L3 either must each file a 
separate return or must file a consolidated return as a limited group 
under section 1504(c)(1) having L1 as a common parent.
    Example (4). The facts are the same as in example (3). Assume 
further that for 1981, L2 and L3 file a 
consolidated return. During 1981, intercompany transactions (see 
Sec. 1.1502-13) occur in the life-nonlife group between P and 
L1, between P and S, and between S and L4 and 
occur in the ineligible life subgroup between L2 and 
L3. For 1982, the restoration rules of Sec. 1.1502-13, as 
modified by paragraph (e)(4)(iii)(B) of this section, will be applicable 
as indicated in the following table:

------------------------------------------------------------------------
   Intercompany transactions between             Sec.  1.1502-13        
------------------------------------------------------------------------
P and L1...............................          Yes.                   
P and S, if they file:                                                  
  Separate returns.....................          Yes.                   
  A consolidated return................          No.                    
S and L4...............................          Yes.                   
L2 and L3, if L1, L2, and L3 file:                                      
  Separate returns.....................          Yes.                   
  A consolidated return................          No.                    
------------------------------------------------------------------------

    (v) Additional rules. (A) If a group with a taxable year ending in 
the month of December, 1982, had made the election under section 
1504(c)(2) for a taxable year ending prior to December 1, 1982, and if 
that group meets the conditions of subdivision (vi) of this paragraph 
(e)(4), then the common parent may elect to discontinue filing a 
consolidated return for its taxable year ending in the month of 
December, 1982 (and other members of the section 1504(c)(2) group must 
comply with this election) by filing appropriate returns (see paragraph 
(e)(4)(i) of this section) before September 16, 1983.
    (B) If a group made the election under section 1504(c)(2) for its 
taxable year ending in the month of December, 1982, and if that group 
meets the conditions of subdivision (vi) of this paragraph (e)(4), then 
the common parent may elect to withdraw the section 1504(c)(2) election 
(and all other members of the group determined without section 
1504(b)(2) comply with the election) by filing before September 16, 
1983, any returns for the appropriate taxable years that would have been 
filed had the section 1504(c)(2) election never been made.
    (vi) A group referred to at subdivision (v)(A) or (B) of this (e)(4) 
meets the conditions of this subdivision (vi) if it--
    (A) filed before March 16, 1983, a return for its taxable year 
ending in the month of December, 1982, and
    (B) had not been granted an extension of time beyond March 15, 1983, 
for the filing of that return.
    (vii) Interest. For purposes of section 6601(a), interest runs from 
the original due date (without extensions) for the filing of such 
returns as are filed pursuant to an election (to discontinue or withdraw 
as the case may be) under this paragraph (e)(4).
    (5) Consent to regulations. If a group does not discontinue filing a 
consolidated return under paragraph (e)(4) of this section but continues 
to file a consolidated return for the group's first taxable year for 
which the regulations under this section are first effective, the 
members of the group will be deemed to have consented to the regulations 
under this section.
    (6) Cross reference. If an election is made under section 
1504(c)(2), see Sec. 1.1502-75 (e) and (f) for rules that apply for not 
including (or including) a member or a nonmember in the consolidated 
return.
    (f) Effect of election. If the common parent makes the election 
under section 1504(c)(2), the following rules apply:
    (1) Termination of group. A mere election under section 1504(c)(2) 
will not cause the creation of a new group or the termination of an 
affiliated group that files a consolidated return in the immediately 
preceding taxable year.
    (2) Effect of eligibility. If a life member is eligible after an 
election under section 1504(c)(2), it may not be included as a member of 
an affiliated group as defined in section 1504(c)(1).
    (3) Eligible and ineligible life companies. If any life company was 
a member of an affiliated group of life companies (as defined in section 
1504(c)(1)) but is ineligible for a taxable year for which the election 
under section 1504(c)(2) is effective, that year is not a separate 
return year merely by reason of the

[[Page 314]]

election under section 1504(c)(2) in applying Secs. 1.1502-13, 1.1502-
18, and 1.1502-19 to transactions occurring in prior consolidated return 
years of that affiliated group. In addition, if more than one ineligible 
life member of the group (as defined in section 1504(c)(1)) joined in 
the filing of a consolidated return in the taxable year immediately 
preceding the year for which the election under section 1504(c)(2) is 
effective and, solely as a result of the election, one of the ineligible 
life members becomes the common parent of such a group (section 
1504(c)(1)), the group must continue to file a consolidated return. For 
example, assume that L1 owns all of the stock of S1 
and all of the stock of L2. L2 owns the stock of 
L3. L1, L2, and L3 are life 
companies and S1 is a nonlife company. Assume further that in 
1981, L1, L2, and L3 file a 
consolidated return but L1 makes the election under section 
1504(c)(2) for 1982 and L2 and L3 are ineligible. 
L2 and L3 must continue to file a consolidated 
return in 1982. Moreover, L2 could elect in 1982 to file a 
consolidated return (section 1504(c)(1)) with L3 even if they 
did not file a consolidated return in 1981 with L1.
    (4) Inclusion of life company. If a life company is ineligible in 
the consolidated return year for which the election is effective, it 
will be treated as an includible corporation for the common parent's 
first taxable year in which the company becomes eligible.
    (5) Dividends received deduction. Section 243(b)(5) defines the term 
affiliated group for purposes of the election to deduct 100 percent of 
the qualifying dividends received by a member from another member of the 
group. Section 246(b)(6) limits certain multiple tax benefits and the 
deduction itself. Section 243(b) (5) and (6) do not apply to the mutual 
companies and life companies that are eligible corporations. See section 
1504(c)(2)(B)(i). Thus, the common parent of the group may elect to 
deduct 100 percent of the qualifying dividends received from an 
ineligible life company.
    (6) Controlled group. Sections 1563 (a)(4), (b)(2)(D), and (b)(3)(C) 
(insofar as it applies to corporations described in section 
1563(b)(2)(D)) do not apply to any eligible or ineligible life company 
that is a member of the group for a taxable year during which the 
election is effective. See paragraph (d)(4) of this section for the 
definition of group.
    (7) Consolidated tax. The tax liability of a group for a 
consolidated return year (before application of credits against that 
tax) is computed on a consolidated basis by adding together the 
following taxes:
    (i) The tax imposed under section 11 on consolidated taxable income 
(as determined under paragraph (g) of this section). The taxes imposed 
under sections 802(a), 821(a), and 831(a) will each be treated as a tax 
imposed under section 11.
    (ii) The tax imposed by section 1201 on consolidated net capital 
gain (as determined under paragraph (o) of this section) in lieu of the 
tax imposed under paragraph (f)(7)(i) of this section on that gain.
    (iii) Any taxes described in Sec. 1.1502-2 (other than by paragraphs 
(a), (f), and (h) thereof).
    (g) Consolidated taxable income. The consolidated taxable income is 
the sum of the following three amounts:
    (1) Nonlife consolidated taxable income. The nonlife consolidated 
taxable income (as defined in paragraph (h) of this section) of the 
nonlife subgroup, as set off by the life subgroup losses as provided in 
paragraph (n) of this section. The amount in this paragraph (g)(1) may 
not be less than zero.
    (2) Consolidated partial LICTI. The consolidated partial LICTI (as 
defined in paragraph (j) of this section) of the life subgroup, as set 
off by the nonlife subgroup losses as provided in paragraph (m) of this 
section. The amount in this paragraph (g)(2) may not be less than zero.
    (3) Surplus accounts. The sum of the amounts subtracted under 
section 815 from the policyholders' surplus accounts of the life 
members.
    (h) Nonlife consolidated taxable income--(1) In general. Nonlife 
consolidated taxable income is the consolidated taxable income of the 
nonlife subgroup, computed under Sec. 1.1502-11 as modified by this 
paragraph (h). For this purpose, separate taxable income of a member 
includes separate mutual insurance company taxable income (as defined in 
section 821(b)) and insurance

[[Page 315]]

company taxable income (as defined in section 832).
    (2) Nonlife consolidated net operating loss deduction--(i) In 
general. In applying Sec. Sec. 1.1502-21T or 1.1502-21A (as 
appropriate), the rules in this subparagraph (2) apply in determining 
for the nonlife subgroup the nonlife net operating loss and the portion 
of the nonlife net operating loss carryovers and carrybacks to the 
taxable year.
    (ii) Nonlife CNOL. The nonlife consolidated net operating loss is 
determined under Sec. Sec. 1.1502-21(A)(f) or 1.1502-21T(e) (as 
appropriate) by treating the nonlife subgroup as the group.
    (iii) Carryback. The nonlife consolidated net operating loss for the 
nonlife subgroup is carried back under Sec. Sec. 1.1502-21A or 1.1502-
21T (as appropriate) to the appropriate years (whether consolidated or 
separate) before the loss may be used as a nonlife subgroup loss under 
paragraphs (g)(2) and (m) of this section to set off consolidated 
partial LICTI in the year the loss arose. The election under section 
172(b)(3)(C) to relinquish the entire carryback period for the net 
operating loss of the nonlife subgroup may be made by the common parent 
of the group. Furthermore, the election may be made even though the 
election under section 812(b)(3) and paragraph (l)(3)(iii) of this 
section is not made.
    (iv) Subgroup rule. In determining the portion of the nonlife 
consolidated net operating loss that is absorbed when the loss is 
carried back to a consolidated return year beginning after December 31, 
1981, Sec. Sec. 1.1502-21A or 1.1502-21T (as appropriate) is applied by 
treating the nonlife subgroup as the group. Therefore, the absorption is 
determined without taking into account any life subgroup losses that 
were previously reported on a consolidated return as setting off nonlife 
consolidated taxable income for the year to which the nonlife loss is 
carried back.
    (v) Carryover. The portion of the nonlife consolidated net operating 
loss that is not absorbed in a prior year as a carryback, or as a 
nonlife subgroup loss that set off consolidated partial LICTI for the 
year the loss arose, constitutes a nonlife carryover under this 
subparagraph (2) to reduce nonlife consolidated taxable income before 
that portion may constitute a nonlife subgroup loss that sets off 
consolidated partial LICTI for a particular year.
    (vi) Transitional rules. The nonlife consolidated net operating loss 
deduction is subject to a transitional rule limitation in paragraph 
(h)(3) of this section.
    (vii) Example. The following example illustrates this paragraph 
(h)(2). In the example, L indicates a life company, another letter 
indicates a nonlife company, and each corporation uses the calendar year 
as its taxable year.

    Example. P owns all of the stock of S and L1. L1 
owns all of the stock of L2. For 1982, the group first files 
a consolidated return for which the election under section 1504(c)(2) is 
effective. P and S filed consolidated returns for 1979 through 1981. In 
1982, the P-S group sustains a nonlife consolidated net operating loss. 
The loss is carried back to the consolidated return years 1979, 1980, 
and 1981 of P and S by using the principles of Secs. 1.1502-21A and 
1.1502-79A and, because the election in 1982 under section 1504(c)(2) 
does not result under paragraph (f)(1) of this section in the creation 
of a new group or the termination of the P-S nonlife group, the loss is 
absorbed on the consolidated return in those years without regard to 
whether the loss in 1982 is attributable to P or S and without regard to 
their contribution to consolidated taxable income in 1979, 1980, or 
1981. The portion of the loss not absorbed in 1979, 1980, and 1981 may 
serve as a nonlife subgroup loss in 1982 that may set off the 
consolidated partial LICTI of L1 and L2 under 
paragraphs (g)(2) and (m) of this section.

    (3) Transitional rule--(i) In general. The portion of the nonlife 
consolidated net operating loss deduction in a consolidated return year 
beginning after December 31, 1980 (referred to as ``post-1980 year'') 
attributable to net operating losses sustained in separate return years 
ending before January 1, 1981 (referred to as ``pre-1981 year''), is 
subject to the rules and limitations in this subparagraph (3).
    (ii) Separate nonlife groups. To determine the limitation, first, 
identify for the post-1980 year one or more separate affiliated groups 
of nonlife companies (as defined in section 1504 without section 
1504(c)(2)). For this purpose, a single nonlife company may constitute a 
separate affiliated group if (A) it is not otherwise a member of a 
separate group or (B) it has a net operating loss sustained in the pre-
1981 year that may

[[Page 316]]

be carried over and that year is a separate return limitation year 
(determined under Sec. 1.1502-1(f) without paragraph (d)(11) of this 
section).
    (iii) Carryover. Second, identify the pre-1981 year net operating 
losses that may be carried over and that are attributable to each 
separate affiliated group of nonlife companies. The separate return 
limitation year rules in Sec. Sec. 1.1502-21A(c) or 1.1502-21T(c) (as 
appropriate) do not apply to any of these carryovers.
    (iv) Limitation. Third, treat the last taxable year ending before 
January 1, 1981, as if in that year there was a consolidated return 
change of ownership of each such separate affiliated group of nonlife 
companies and apply the consolidated return change of ownership 
limitation in Sec. 1.1502-21A(d) to the losses of each group by treating 
the members of each separate group as old members.
    (v) Examples. The following examples illustrate this paragraph 
(h)(3). In the examples L indicates a life company, another letter 
indicates a nonlife company, and each corporation uses the calendar year 
as its taxable year.

    Example (1). Throughout all of 1982, P owns all of the stock of S 
and L1 and L1 owns all of the stock of L2 
which in turn owns all of the stock of S1. Thus, for 1982, 
there are two nonlife subgroups under this subparagraph (3), P-S and 
S1. For 1981, P and S did not file a consolidated return and 
for 1980 P has a net operating loss of $200,000. Assume that P had no 
income in 1981. For 1982, the group makes an election under section 
1504(c)(2) to file a consolidated return and all corporations are 
eligible corporations. The consolidated taxable income for the nonlife 
subgroup for 1982 (determined without the consolidated net operating 
loss deduction) recomputed by including only items of income and 
deduction of P and S is $120,000. If $120,000 is the Sec. 1.1502-
21(d)(2) amount for P and S, then the amount of P's net operating loss 
for 1980 that may be carried over to P and S for 1982 cannot exceed 
$120,000.
    Example (2). (a) P owns all of the stock of S1. On 
January 1, 1979, P purchased all of the stock of L1 which 
owns all of the stock of L2 and S2. Prior to 1984, 
all of the corporations filed separate returns. For 1984, the group 
makes an election under section 1504(c)(2) to file a consolidated 
return.
    (b) 1981, 1982, and 1983 are not treated under paragraph (d)(11) of 
this section as separate return limitation years of the P, 
S1, and S2 nonlife subgroup. However, P and 
S1 will be treated as old members under paragraph (h)(3)(iv) 
of this section and under Sec. 1.1502-21A(d) with respect to their 
losses in 1979 and 1980 (whether a consolidated return was filed or 
separate returns were filed) so that the portion of nonlife consolidated 
taxable income attributable to S2 may not absorb the losses 
of P or S1. The rules that apply to the P-S1 
nonlife subgroup for 1979 and 1980 apply in an identical way to S2 
by treating S2 as a subgroup separate from the P-S1 
nonlife subgroup. See section 1507(c)(2)(A) of the Tax Reform Act of 
1976.
    (c) Similarly, L1 and L2 are treated as old 
members under paragraphs (l)(3) and (h)(3)(iv) of this section for 
losses arising in 1979 and 1980. However, since the L1--
L2 subgroup is also the life subgroup under paragraph (d)(8) 
of this section, the limitation in paragraph (h)(3)(iv) of this section 
does not affect the computation of consolidated partial LICTI for the 
life subgroup.

    (4) Nonlife consolidated capital gain net income or loss--(i) In 
general. In applying Sec. Sec. 1.1502-22T or 1.1502-22A (as 
appropriate),the rules in this subparagraph (4) apply in determining for 
the nonlife subgroup the nonlife consolidated capital gain net income or 
loss and the portion of the nonlife net capital loss carryovers and 
carrybacks to the taxable year. In particular, the nonlife consolidated 
capital gain net income and nonlife consolidated net capital loss are 
determined under the principles of Sec. Sec. 1.1502-22T or 1.1502-22A(a) 
(as appropriate) by treating the nonlife subgroup as the group.
    (ii) Additional principles. In applying Sec. Sec. 1.1502-22A or 
1.1502-22T to nonlife consolidated net capital loss carryovers and 
carrybacks, the principles set forth in paragraphs (h)(2) (iii) through 
(v) for applying Sec. Sec. 1.1502-21T or 1.1502-21A (as appropriate) to 
nonlife consolidated net operating loss carryovers and carrybacks shall 
also apply. Further, the portion of nonlife consolidated net capital 
loss carryovers attributable to losses sustained in taxable years ending 
before January 1, 1981, is subject to the limitations in paragraph 
(h)(3) of this section applied by substituting ``net capital loss'' for 
the term ``net operating loss'' and ``Sec. 1.1502-22A(d)'' for 
``Sec. 1.1502-21A(d)''.
    (iii) Special rules. The nonlife consolidated net capital loss is 
reduced, for purposes of determining the carryovers

[[Page 317]]

and carrybacks under Sec. Sec. 1.1502-22A(b)(1) or 1.1502-22T(b) by the 
lesser of:
    (A) The aggregate of the additional capital loss deductions allowed 
under section 822(c)(6) or section 832(c)(5), or
    (B) The nonlife consolidated taxable income computed without capital 
gains and losses.
    (i) [Reserved]
    (j) Consolidated partial LICTI. [Reserved]
    (k) Consolidated TII--(1) General rule. [Reserved]
    (2) Separate TII. [Reserved]
    (3) Company's share of investment yield. [Reserved]
    (4) Life consolidated capital gain net income. [Reserved]
    (5) Life consolidated net capital loss carryovers and carrybacks. 
The life consolidated net capital loss carryovers and carrybacks for the 
life subgroup are determined by applying the principles of 
Sec. Sec. 1.1502-22T or 1.1502-22A (as appropriate) as modified by the 
following rules in this subparagraph (5):
    (i) Life consolidated net capital loss is first carried back (or 
apportioned to the life members for separate return years) to be 
absorbed by life consolidated capital gain net income without regard to 
any nonlife subgroup capital losses and before the life consolidated net 
capital loss may serve as a life subgroup capital loss that sets off 
nonlife consolidated capital gain net income in the year the life 
consolidated net capital loss arose.
    (ii) If a life consolidated net capital loss is not carried back or 
is not a life subgroup loss that sets off nonlife consolidated capital 
gain net income in the year the life consolidated net capital loss 
arose, then it is carried over to the particular year under this 
paragraph (k)(5) first against life consolidated capital gain net income 
before it may serve as a life subgroup capital loss that sets off 
nonlife consolidated capital gain net income in that particular year.
    (iii) Section 818(f). Capital losses may not be deducted more than 
once and capital gain will not be included more than once. See section 
818(e) and also section 818(f).
    (iv) Capital loss carryovers are subject to the transitional rule in 
paragraph (k)(6) of this section.
    (6) Transitional rule. The portion of the life consolidated capital 
loss carryovers attributable to the net capital losses of the life 
members sustained in separate return years ending before January 1, 
1981, is subject to the same limitations as the capital losses of 
nonlife members in paragraph (h)(4)(iii) of this section by applying the 
principles of paragraph (h)(3) of this section to each separate 
affiliated group of life companies.
    (l) Consolidated GO or LO--(1) General rule. [Reserved]
    (2) Separate GO. [Reserved]
    (3) Consolidated operations loss deduction--(i) General rule. The 
consolidated operations loss deduction is an amount equal to the 
consolidated operations loss carryovers and carrybacks to the taxable 
year. The provisions of Sec. Sec. 1.1502-21T or 1.1502-21A (as 
appropriate) and section 812 apply to the extent not inconsistent with 
this paragraph (l)(3).
    (ii) Consolidated offset. For purposes of applying section 812 (b) 
and (d), the term ``consolidated offset'' means the increase in the 
consolidated operations loss deduction which reduces consolidated 
partial LICTI to zero. For setoff of consolidated LO against nonlife 
consolidated taxable income, see paragraph (n)(2) of this section.
    (iii) Carrybacks. A consolidated LO is first carried back to be 
absorbed by GO of a life member under section 809(d)(4) or consolidated 
partial LICTI (as the case may be under section 818(f)(2)) for prior 
consolidated return years (or apportioned to the life members for prior 
separate return years) without regard to any nonlife subgroup losses 
that were set off against consolidated partial LICTI and before the 
consolidated LO may serve as a life subgroup loss to be set off against 
nonlife consolidated taxable income in the year the consolidated LO 
arose. The election to relinquish the entire carryback period for the 
consolidated LO of the life subgroup may be made by the common parent of 
the group. See section 812(b)(3). Furthermore, the election may be made 
even though the election under section 172(b)(3)(C) and paragraph 
(h)(2)(iii) of this section is not made.

[[Page 318]]

    (iv) Carryovers. If a consolidated LO is not carried back or is not 
applied as a life subgroup loss that set off nonlife consolidated 
taxable income in the year the consolidated LO arose, then it is carried 
over to a particular year under this paragraph (l)(3) first against the 
GO of a life member under section 809(d)(4) or consolidated partial 
LICTI (as the case may be under section 818(f)(2)) before it may serve 
as a life subgroup loss that may be set off against nonlife consolidated 
taxable income for that particular year.
    (v) Transitional rule. The portion of a consolidated operations loss 
deduction that is attributable to LOs sustained in separate return years 
ending before January 1, 1981, is subject to the same rules and 
limitations that the nonlife consolidated net operating loss deduction 
is subject to in paragraph (h)(3) of this section as applied by 
identifying separate affiliated groups of life companies.
    (4) Life consolidated capital gain net income or loss. Life 
consolidated capital gain net income or loss is determined in the same 
manner as under paragraph (k)(4) of this section. However, a life 
member's company share is determined under section 809 (a) and (b)(3).
    (m) Consolidated partial LICTI setoff by nonlife subgroup losses--
(1) In general. The nonlife subgroup losses consist of the nonlife 
consolidated net operating loss and the nonlife consolidated net capital 
loss. Under paragraph (g)(2) of this section, consolidated partial LICTI 
is set off by the amounts of these two consolidated losses specified in 
paragraph (m)(2) of this section. The setoff is subject to the rules and 
limitations in paragraph (m)(3) of this section.
    (2) Amount of setoff--(i) Current year. Consolidated partial LICTI 
for the current taxable year is set off by the portion of the nonlife 
consolidated net operating loss and nonlife consolidated net capital 
loss arising in that year that cannot be carried back under paragraph 
(h) of this section to prior taxable years (whether consolidated or 
separate return years) of the nonlife subgroup.
    (ii) Carryovers. The portion of the offsettable nonlife consolidated 
net operating loss or nonlife consolidated net capital loss that has not 
been used as a nonlife subgroup loss setoff against consolidated partial 
LICTI in the year it arose may be carried over to succeeding taxable 
years under the principles of Sec. Sec. 1.1502-21T or 1.1502-21A (as 
appropriate) (relating to net operating loss deduction) or 
Sec. Sec. 1.1502-22T or 1.1502-22A (as appropriate) (relating to net 
capital loss carryovers). However, in any particular succeeding year, 
the losses will be used under paragraph (h) of this section in computing 
nonlife consolidated taxable income before being used in that year as a 
nonlife subgroup loss that sets off consolidated partial LICTI.
    (3) Nonlife subgroup loss rules and limitations. The nonlife 
subgroup losses are subject to the following operating rules and 
limitations:
    (i) Separate return years. The carryovers in paragraph (m)(2)(ii) of 
this section may include net operating losses and net capital losses of 
the nonlife members arising in separate return years ending after 
December 31, 1980, that may be carried over to a succeeding year under 
the principles (including limitations) of Sec. Sec. 1.1502-21T and 
1.1502-22T (or Sec. Sec. 1.1502-21A and 1.1502-22A, as appropriate). But 
see subdivision (ix) of this paragraph (m)(3).
    (ii) Capital loss. Nonlife consolidated net capital loss sets off 
consolidated partial LICTI only to the extent of life consolidated 
capital gain net income (as determined under paragraph (l)(4) of this 
section) and this setoff applies before any nonlife consolidated net 
operating loss sets off consolidated partial LICTI.
    (iii) Capital gain. Life consolidated capital gain net income is 
zero in any taxable year in which the life subgroup has a consolidated 
LO and, in any taxable year, it may not exceed consolidated partial 
LICTI.
    (iv) Ordering rule. Consolidated partial LICTI for a consolidated 
return year is set off by nonlife subgroup losses for that year before 
being set off (under paragraph (m)(2)(ii) of this section) by a 
carryover of a nonlife subgroup loss to that year.
    (v) Setoff at bottom line. The setoff of nonlife subgroup losses 
against consolidated partial LICTI does not affect life member 
deductions that depend in whole or in part on GO or TII. Thus,

[[Page 319]]

the setoff does not affect the amount of consolidated partial LICTI (as 
determined under paragraph (j) of this section) for any taxable year but 
it merely constitutes an adjustment in arriving at the group's 
consolidated taxable income under paragraph (g) of this section.
    (vi) Ineligible nonlife member. (A) The offsetable nonlife 
consolidated net operating loss that arises in any consolidated return 
year (that may be set off against consolidated partial LICTI in the 
current taxable year or in a succeeding taxable year) is the amount 
computed under paragraph (h)(2)(ii) of this section reduced by the 
ineligible NOL. For purposes of this subparagraph (3), the ``ineligible 
NOL'' is in the year the loss arose the amount of the separate net 
operating loss (determined under Sec. Sec. 1.1502-21T(b) or 1.1502-
79A(a)(3) (as appropriate) of any nonlife member that is ineligible in 
that year (and not the portion of the nonlife consolidated net operating 
loss attributable under Sec. Sec. 1.1502-21T(b) or 1.1502-79A(a)(3) (as 
appropriate) to such a member). (B) The carryovers of offsetable nonlife 
net operating losses under paragraph (m)(2)(ii) of this section do not 
include an ineligible NOL arising in a consolidated return year or a 
loss attributable to an ineligible member arising in a separate return 
year. See section 1503(c)(2). (C) For absorption within the nonlife 
subgroup of an ineligible NOL arising in a consolidated return year or a 
loss of an ineligible member arising in a separate return year which is 
not a separate return limitation year under paragraph (m)(3)(ix) of this 
section, see paragraph (m)(3)(vii) of this section.
    (vii) Absorption of ineligible NOL. (A) If all or a portion of a 
nonlife member's ineligible NOL (determined under paragraph 
(m)(3)(vi)(A) of this section) may be carried back or carried over under 
paragraph (h)(2) of this section to a particular consolidated return 
year of the nonlife subgroup (absorption year), then notwithstanding 
Sec. 1.1502-21A(b)(3)(ii), the amount carried to the absorption year 
will be absorbed by that member's contribution (to the extent thereof) 
to nonlife consolidated taxable income for that year.
    (B) For purposes of (A) of this subdivision (vii), a member's 
contribution to nonlife consolidated taxable income for an absorption 
year is the amount of such income (computed without the portion of the 
nonlife consolidated net operating loss deduction attributable to 
taxable years subsequent to the year the loss arose), minus such 
consolidated taxable income recomputed by excluding both that member's 
items of income and deductions for the absorption year. The deductions 
of the member include the prior application of this paragraph 
(m)(3)(vii) to the absorption of the nonlife consolidated net operating 
loss deduction for losses arising in taxable years prior to the 
particular loss year.
    (viii) Election to relinquish carryback. The offsetable nonlife 
consolidated net operating loss does not include the amount that could 
be carried back under paragraph (h) (2) of this section but for the 
common parent's election under section 172(b)(3)(C) to relinquish the 
carryback. See section 1503(c)(1).
    (ix) Separate return limitation year. The offsetable nonlife 
consolidated net operating and capital loss carryovers do not include 
any losses attributable to a nonlife member that were sustained (A) in a 
separate return limitation year (determined without section 1504(b)(2)) 
of that member (or a predecessor), or (B) in a separate return year 
ending after December 31, 1980, in which an election was in effect under 
neither section 1504(c)(2) nor section 243(b)(2). For purposes of this 
paragraph (m), a separate return limitation year includes a taxable year 
ending before January 1, 1981. See section 1507(c)(2)(A) of the Tax 
Reform Act of 1976 and Sec. Sec. 1.1502-15T and 1.1502-15A (including 
applicable exceptions thereto).
    (x) Percentage limitation. The offsetable nonlife consolidated net 
operating losses that may be set off against consolidated partial LICTI 
in a particular year may not exceed a percentage limitation. This 
limitation is the applicable percentage in section 1503(c)(1) of the 
lesser of two amounts.

The first amount is the sum of the offsetable nonlife consolidated net 
operating losses under paragraph (m)(2) of this section that may serve 
in the particular year (determined without

[[Page 320]]

this limitation) as a setoff against consolidated partial LICTI. The 
second amount is consolidated partial LICTI (as defined in paragraph (j) 
of this section) in the particular year reduced by any nonlife 
consolidated net capital loss that sets off consolidated partial LICTI 
in that year.
    (xi) Further limitation. Any offsetable nonlife consolidated net 
operating loss remaining after applying the percentage limitation that 
is carried over to a succeeding taxable year may not be set off against 
the consolidated partial LICTI attributable to a life member that was 
not an eligible life member in the year the loss arose. See section 
1503(c)(2).
    (xii) Restoration rule. The carryback of a consolidated LO or life 
consolidated net capital loss under paragraph (l) of this section that 
reduces consolidated partial LICTI (or life consolidated capital gain 
net income) for a prior year may reduce the amount of nonlife subgroup 
losses that would offset consolidated partial LICTI in that prior year. 
Thus, that amount may be carried over under paragraph (h) (2) or (4) of 
this section from that prior year in determining nonlife consolidated 
taxable income in a succeeding year or serve as offsetable nonlife 
subgroup losses in a succeeding year.
    (4) Acquired groups. [Reserved]
    (5) Illustrations. The following examples illustrates this paragraph 
(m). In the examples, L indicates a life company, another letter 
indicates a nonlife company, and each corporation uses the calendar year 
as its taxable year.

    Example (1). P owns all of the stock of L and S. S owns all of the 
stock of I, a nonlife member that is an ineligible corporation for 1982 
under paragraph (d)(13) of this section. For 1982, the group elects 
under section 1504(c)(2) to file a consolidated return. For 1982, assume 
that any nonlife consolidated net operating loss may not be carried back 
to a prior taxable year. Other facts are summarized in the following 
table.

------------------------------------------------------------------------
                                                                Separate
                                                                taxable 
                                                                 income 
                                                                 (loss) 
------------------------------------------------------------------------
P............................................................      $100 
S............................................................      (100)
I............................................................      (100)
                                                              ----------
    Nonlife consolidated net operating loss..................      (100)
------------------------------------------------------------------------

    Under paragraph (m)(3)(vi) of this section, P's separate income is 
considered to absorb the loss of S, an eligible member, first and the 
offsetable nonlife consolidated net operating loss is zero, i.e., the 
consolidated net operating loss ($100) reduced by I's loss ($100). The 
consolidated net operating loss ($100) may be carried over, but since it 
is entirely attributable to I (an ineligible member) its use is subject 
to the restrictions in paragraph (m)(3)(vi) of this section. The result 
would be the same if the group contained two additional members, 
S1, an eligible member, and I1, an ineligible 
member, where S1 had a loss of ($100) and I1 had 
income of $100.
    Example (2). The facts are the same as in example (1) except that 
for 1982 S's separate net operating loss is $200. Assume further that 
L's consolidated partial LICTI is $200. Under paragraph (m)(3)(vi) of 
this section, the offsetable nonlife consolidated net operating loss is 
$100, i.e., the nonlife consolidated net operating loss computed under 
paragraph (h)(2)(ii) of this section ($200), reduced by the separate net 
operating loss of I ($100). The offsetable nonlife consolidated net 
operating loss that may be set off against consolidated partial LICTI in 
1982 is $30, i.e., 30 percent of the lesser of the offsetable $100 or 
consolidated partial LICTI of $200. See paragraph (m)(3)(x) of this 
section. The nonlife subgroup may carry $170 to 1983 under paragraph 
(h)(2) of this section against nonlife consolidated taxable income, 
i.e., consolidated net operating loss ($200) less amount used in 1982 
($30). Under paragraph (m)(2)(ii) of this section, the offsetable 
nonlife consolidated net operating loss that may be carried to 1983 is 
$70, i.e., $100 minus $30. The facts and results are summarized in the 
table below.

----------------------------------------------------------------------------------------------------------------
                                                                           (Dollars omitted)                    
                                                     -----------------------------------------------------------
                                                          Facts        Offsetable      Limit       Unused loss  
----------------------------------------------------------------------------------------------------------------
                                                         (a)            (b)           (c)            (d)        
1. P................................................     100         .............  ...........  ...............
2. S................................................   (200)          (100)         ...........     (70)        
3. I................................................   (100)         .............  ...........    (100)        
4. Nonlife subgroup.................................   (200)          (100)         (100)          (170)        
5. L................................................     200         .............    200        ...............
6. 30% of lower of line 4(c) or 5(c)................  .............  .............     30        ...............
7. Unused offsetable loss...........................  .............  .............  ...........     (70)        
----------------------------------------------------------------------------------------------------------------


[[Page 321]]

Accordingly, under paragrah (g) of this section (assuming no amount is 
withdrawn from L's surplus accounts), consolidated taxable income is 
$170, i.e., line 5 (a) minus line 6(c)).
    Example (3). The facts are the same as in example (2) with the 
following additions for 1983. The nonlife subgroup has nonlife 
consolidated taxable income of $50 (all of which is attributable to I) 
before the nonlife consolidated net operating loss deduction under 
paragraph (h)(2) of this section. Consolidated partial LICTI is $100. 
Under paragraph (h)(2) of this section, $50 of the nonlife consolidated 
net operating loss carryover ($170) is used in 1983 and, under paragraph 
(m)(3) (vi) and (vii) of this section, the portion used in 1982 is 
attributable to I, the ineligible nonlife member. Accordingly, the 
offsetable nonlife consolidated net operating loss from 1982 under 
paragraph (m)(3)(ii) of this section is $70, i.e., the unused loss from 
1982. The offsetable nonlife consolidated net operating loss in 1983 is 
$24.50, i.e., 35 percent of the lesser of the offsetable loss of $70 or 
consolidated partial LICTI of $100. Accordingly, under paragraph (g) of 
this section (assuming no amount is withdrawn from L's surplus 
accounts), consolidated taxable income is $75.50, i.e., consolidated 
partial LICTI of $100 minus the offsetable loss of $24.50.
    Example (4). P owns all of the stock of S and L. For 1982, all 
corporations are eligible corporations, and the group elects under 
section 1504(c)(2) to file a consolidated return, the nonlife 
consolidated net operating loss is $100, and the nonlife consolidated 
net capital loss is $50. Assume that the losses may not be carried back 
and the capital losses are not attributable to built-in deductions under 
paragraph (m)(3)(ix) of this section or under Sec. 1.1502-15A. Other 
facts and the results are set forth in the following table:

------------------------------------------------------------------------
                                                            P-S      L  
------------------------------------------------------------------------
1. Nonlife consolidated net operating loss..............   ($100)  .....
2. Nonlife consolidated capital loss....................     (50)  .....
3. Consolidated partial LICTI...........................  .......   $100
4. Life consolidated capital gain net income included in                
 line 3.................................................  .......     50
                                                         ===============
5. Offsetable:                                                          
  (a) 30% of lower of line (1) or line (3)-(4)..........     (15)  .....
  (b) Line 2............................................     (50)  .....
                                                         ---------------
  (c) Total.............................................     (65)  .....
6. Unused losses available to be carried over:                          
  (a) From line 1 (line 1 minus line 5 (a)).............     (85)  .....
  (b) From line 2 (line 2 minus line 5 (b)).............       0   .....
------------------------------------------------------------------------

Accordingly, under paragraph (g) of this section consolidated taxable 
income is $35, i.e., line 3 minus line 5(c).
    Example (5). The facts are the same as in example (4). Assume 
further that for 1983 L has an LO that is carried back to 1982 and the 
LO is large enough to reduce consolidated partial LICTI for 1982 to zero 
as determined before any setoff for nonlife losses. Under paragraph 
(m)(3)(xii) of this section, the nonlife consolidated net operating loss 
of $15 and the nonlife consolidated net capital loss of $50 that were 
set off in 1982 respectively against consolidated partial LICTI and life 
consolidated capital gain net income are restored. These restored 
amounts may consititute part of the nonlife consolidated net operating 
loss carryover to 1983 under paragraph (h)(2) of this section or part of 
the nonlife net capital loss carryover to 1983 under paragraph (h)(4) of 
this section.
    Example (6). The facts are the same as in example (5) except that 
L's LO for 1983 as carried back reduces consolidated partial LICTI in 
1982 from $100 to $25. Since consolidated partial LICTI of $100 in 1982 
(before the carryback) included life consolidated capital gain net 
income of $50, under paragraph (m)(3)(iii) of this section, the life 
consolidated capital gain net income is $25, i.e., $50 but not more than 
$25. Therefore, under paragraph (m)(3)(ii) of this section, the 
offsetable nonlife capital loss in 1982 is $25 and, under paragraph (m) 
(3)(xii) of this section, $25 of the $50 nonlife consolidated net 
capital loss in 1982 may be carried under paragraph (h)(4) of this 
section to 1983. No nonlife consolidated net operating loss is used as a 
setoff against consolidated partial LICTI in 1982 under paragraph 
(m)(3)(xii) of this section by reason of the carryback of the 
consolidated LO from 1983 to 1982.

    (n) Nonlife consolidated taxable income set off by life subgroup 
losses--(1) In general. The life subgroup losses consist of the 
consolidated LO and the life consolidated net capital loss (as 
determined under paragraph (l)(4) of this section). Under paragraph 
(g)(1) of this section, nonlife consolidated taxable income is set off 
by the amounts of these two consolidated losses specified in paragraph 
(n)(2) of this section.
    (2) Amount of setoff. The portion of the consolidated LO or life 
consolidated net capital loss that may be set off against nonlife 
consolidated taxable income (determined under paragraph (h) of this 
section) is determined by applying the rules prescribed in paragraphs 
(m) (2) and (3) of this section in the following manner:
    (i) Substitute the term ``life'' for ``nonlife'', and vice versa.
    (ii) Substitute the term ``nonlife consolidated taxable income'' for 
``consolidated partial LICTI'', and vice versa.
    (iii) Substitute the term ``consolidated LO'' for ``non-life 
consolidated net operating loss'', ``paragraph (l)'' or

[[Page 322]]

``paragraph (j)'' for ``paragraph (h)'', and ``section 812(b)(3)'' for 
``section 172(b)(3)(C)''.
    (iv) Paragraphs (m)(3)(vi), (vii), (x), and (xi) of this section do 
not apply to a consolidated LO.
    (v) Capital losses may not be deducted more than once. See section 
818(e) and also the requirements in section 818(f).
    (vi) The setoff of life subgroup losses against nonlife consolidated 
taxable income does not affect nonlife member deductions that depend in 
whole or in part on taxable income.
    (3) Illustrations. The following examples illustrate this paragraph 
(n). In the examples, L indicates a life company, another letter 
indicates a nonlife company, and each corporation uses the calendar year 
as its taxable year.

    Example (1) P, S, L1!and L2 constitute a group 
that elects under section 1504(c)(2) to file a consolidated return for 
1982. In 1982, the nonlife subgroup consolidated taxable income is $100 
and there is $20 of nonlife consolidated net capital loss that cannot be 
carried back under paragraph (h) of this section to taxable years 
(whether consolidated or separate) preceding 1982. The nonlife subgroup 
has no carryover from years prior to 1982. Consolidated LO is $150 which 
under paragraph (l) of this section includes life consolidated capital 
gain net income of $25. The $150 LO is carried back under paragraph 
(l)(3) of this section to taxable years (whether consolidated or 
separate) preceding 1982 before it may offset in 1982 nonlife 
consolidated taxable income. Since life consolidated capital gain net 
income is zero for 1982, the nonlife capital loss offset is zero.
    Example (2). The facts are the same as in example (1). Assume 
further that no part of the $150 consolidated LO for 1982 can be used by 
L1 and L2!in years prior to 1982. For 1982, $100 
of consolidated LO sets off the $100 nonlife consolidated taxable 
income. The life subgroup carries under paragraph (l)(3) of this section 
to 1983 $50 of the consolidated LO ($150 minus $100). See paragraph 
(l)(3)(ii) of this section. The $50 carryover will be used in 1983 
against life subgroup income before it may be used in 1983 to setoff 
nonlife consolidated taxable income.
    Example (3). (a) The facts are the same as in example (1), except 
that for 1982 the nonlife consolidated taxable income is $150 and 
includes nonlife consolidated capital gain net income of $50, 
consolidated partial LICTI is $200, and a life consolidated net capital 
loss is $50. Assume that the $50 life consolidated net capital loss sets 
off the $50 nonlife consolidated capital gain net income. Consolidated 
taxable income under paragraph (g) of this section is $300, i.e., 
nonlife consolidated taxable income ($150) minus the setoff of the life 
consolidated net capital loss ($50), plus consolidated partial LICTI 
($200).
    (b) Assume that for 1983 the nonlife consolidated net operating loss 
is $150. Under paragraph (h)(2) of this section, the loss may be carried 
back to 1982 against nonlife consolidated taxable income. If P, the 
common parent, does not elect to relinquish the carryback under section 
172(b)(3)(C), the entire $150 must be carried back reducing 1982 nonlife 
consolidated taxable income to zero and nonlife consolidated capital 
gain net income to zero. Under paragraph (m)(3)(xii) of this section, 
the setoff in 1982 of the nonlife consolidated capital gain net income 
($50) by the life consolidated net capital loss ($50) is restored. 
Accordingly, the 1982 life consolidated net capital loss may be carried 
over by the life subgroup to 1983. Under paragraph (g) of this section, 
after the carryback consolidated taxable income for 1982 is $200, i.e., 
nonlife consolidated taxable income ($0) plus consolidated partial LICTI 
($200).
    Example (4). The facts are the same as in example (3), except that P 
elects under section 172 (b)(3)(C) to relinquish the carryback of $150 
arising in 1983. The setoff in part (a) of example (3) is not restored. 
However, the offsetable nonlife consolidated net operating loss for 1983 
(or that may be carried forward from 1983) is zero. See paragraph 
(m)(3)(viii) of this section. Nevertheless, the $150 nonlife 
consolidated net operating loss may be carried forward to be used by the 
nonlife group.
    Example (5). P owns all of the stock of S1!and of 
L1.!On January 1, 1978, L1!purchases all of the 
stock of L2.!For 1982, the group elects under section 
1504(c)(2) to file a consolidated return. For 1982, L1!is an 
eligible corporation under paragraph (d)(12) of this section but L2
!is ineligible. Thus, L1!but not L2 is a 
member for 1982. For 1982, L2!sustains an LO that cannot be 
carried back. For 1982, L2!is treated under paragraph (f)(6) 
of this section as a member of a controlled group of corporations under 
section 1563 with P, S, and L1.!For 1983, L2!is 
eligible and is included on the group's consolidated return. 
L2's LO for 1982 that may be carried to 1983 is not treated 
under paragraph (d)(11) of this section as having been sustained in a 
separate return limitation year for purposes of computing consolidated 
partial LICTI of the L1-L2!life subgroup for 1983. 
Furthermore, the portion of L2's LO not used under paragraph 
(l)(3) of this section against life subgroup income in 1983 may be 
included in offsetable consolidated operations loss under paragraph 
(n)(2) and (m)(3)(i) of this section that reduces in 1983 nonlife 
consolidated taxable income because L2's loss in 1982 was not 
sustained in a separate return limitation year under paragraph (n)(2) 
and (m)(3)(ix)(A) of this section or in a separate return year

[[Page 323]]

(1982) when an election was in effect neither under section 1504(c)(2) 
nor section 243(b)(2).

    (o) Alternative tax--(1) In general. For purposes of the alternative 
tax under paragraph (f)(7)(ii) of this section, consolidated net capital 
gain is the sum of the following two amounts:
    (i) The nonlife consolidated net capital gain reduced by any setoff 
of a life consolidated net capital loss.
    (ii) The life consolidated net capital gain reduced by any setoff of 
a nonlife consolidated net capital loss.
    (2) Net capital gain. For purposes of this paragraph (o):
    (i) Nonlife consolidated net capital gain is computed under 
Sec. Sec. 1.1502-41A or 1.1502-22T (as appropriate) except that it may 
not exceed nonlife consolidated taxable income (computed under paragraph 
(h) of this section).
    (ii) Life consolidated net capital gain is computed under 
Sec. Sec. 1.1502-41A or 1.1502-22T (as appropriate), applied in a manner 
consistent with paragraph (l)(4) of this section, except that it may not 
exceed consolidated partial LICTI (as determined under paragraph (j) of 
this section).
    (iii) Setoffs. Setoffs are determined under paragraphs (m) or (n) of 
this section (as the case may be).
    (p) Transitional rule for credit carryovers. For limitations on 
credits arising in taxable years ending before January 1, 1981, that may 
be carried over to taxable years beginning on or after that date, 
section 1507(c)(2)(A) of the Tax Reform Act of 1976 and the principles 
in paragraph (h)(3) of this section (relating to limitations on loss 
carryovers) apply.
    (q) Preemption. The rules in this section preempt any inconsistent 
rules in other sections (Sec. 1.1502-1 through 1.1502-80) of the 
consolidated return regulations. For example, the rules in paragraph 
(m)(3)(vi) apply notwithstanding Secs. 1.1502-21A(b)(3) and 1.1502-
79A(a)(3) (or Sec. 1.1502-21T, as appropriate).
    (r) Other consolidation principles. The fact that this section 
treats the life and nonlife members as separate groups in computing, 
respectively, consolidated partial LICTI (or LO) and nonlife 
consolidated taxable income (or loss) does not affect the usual rules in 
Secs. 1.1502-0--1.1502-80 unless this section provides otherwise. Thus, 
the usual rules in Sec. 1.1502-13 (relating to intercompany 
transactions) apply to both the life and nonlife members by treating 
them as members of one affiliated group.
    (s) Filing requirements. Nonlife consolidated taxable income or loss 
under paragraph (h) of this section shall be determined on a separate 
Form 1120 or 1120 M and consolidated partial LICTI under paragraph (j) 
of this section shall be determined on a separate Form 1120 L. The 
consolidated return shall be made on a separate Form 1120, 1120 M, or 
1120 L by the common parent (if the group includes a life company), 
which shows the set-offs under paragraphs (g), (m), and (n) of this 
section and clearly indicates by notation on the face of the return that 
it is a life-nonlife consolidated return (if the group includes a life 
company). See also Sec. 1.1502-75(j), relating to statements and 
schedules for subsidiaries.

(Secs. 1502 and 7805 of the Internal Revenue Code of 1954 (68A Stat. 
637, 917; 26 U.S.C. 1502, 7805))

[T.D. 7877, 48 FR 11441, Mar. 18, 1983, as amended by T.D. 7912, 48 FR 
40215, Sept. 6, 1983; T.D. 8560, 59 FR 41674, Aug. 15, 1994; T.D. 8597, 
60 FR 36679-36680, July 18, 1995; T.D. 8677, 61 FR 33324, June 27, 1996]

                Administrative Provisions and Other Rules



Sec. 1.1502-75   Filing of consolidated returns.

    (a) Privilege of filing consolidated returns--(1) Exercise of 
privilege for first consolidated return year. A group which did not file 
a consolidated return for the immediately preceding taxable year may 
file a consolidated return in lieu of separate returns for the taxable 
year, provided that each corporation which has been a member during any 
part of the taxable year for which the consolidated return is to be 
filed consents (in the manner provided in paragraph (b) of this section) 
to the regulations under section 1502. If a group wishes to exercise its 
privilege of filing a consolidated return, such consolidated return must 
be filed not later than the last day prescribed by law (including 
extensions of time) for the filing of the common parent's return. Such 
consolidated return may not be withdrawn after such last day (but the

[[Page 324]]

group may change the basis of its return at any time prior to such last 
day).
    (2) Continued filing requirement. A group which filed (or was 
required to file) a consolidated return for the immediately preceding 
taxable year is required to file a consolidated return for the taxable 
year unless it has an election to discontinue filing consolidated 
returns under paragraph (c) of this section.
    (b) How consent for first consolidated year exercised--(1) General 
rule. The consent of a corporation referred to in paragraph (a)(1) of 
this section shall be made by such corporation joining in the making of 
the consolidated return for such year. A corporation shall be deemed to 
have joined in the making of such return for such year if it files a 
Form 1122 in the manner specified in paragraph (h)(2) of this section.
    (2) Consent under facts and circumstances. If a member of the group 
fails to file Form 1122, the Commissioner may under the facts and 
circumstances determine that such member has joined in the making of a 
consolidated return by such group. The following circumstances, among 
others, will be taken into account in making this determination:
    (i) Whether or not the income and deductions of the member were 
included in the consolidated return;
    (ii) Whether or not a separate return was filed by the member for 
that taxable year; and
    (iii) Whether or not the member was included in the affiliations 
schedule, Form 851.

If the Commissioner determines that the member has joined in the making 
of the consolidated return, such member shall be treated as if it had 
filed a Form 1122 for such year for purposes of paragraph (h)(2) of this 
section.
    (3) Failure to consent due to mistake. If any member has failed to 
join in the making of a consolidated return under either subparagraph 
(1) or (2) of this paragraph, then the tax liability of each member of 
the group shall be determined on the basis of separate returns unless 
the common parent corporation establishes to the satisfaction of the 
Commissioner that the failure of such member to join in the making of 
the consolidated return was due to a mistake of law or fact, or to 
inadvertence. In such case, such member shall be treated as if it had 
filed a Form 1122 for such year for purposes of paragraph (h)(2) of this 
section, and thus joined in the making of the consolidated return for 
such year.
    (c) Election to discontinue filing consolidated returns--(1) Good 
cause--(i) In general. Notwithstanding that a consolidated return is 
required for a taxable year, the Commissioner, upon application by the 
common parent, may for good cause shown grant permission to a group to 
discontinue filing consolidated returns. Any such application shall be 
made to the Commissioner of Internal Revenue, Washington, DC 20224, and 
shall be made not later than the 90th day before the due date for the 
filing of the consolidated return (including extensions of time). In 
addition, if an amendment of the Code, or other law affecting the 
computation of tax liability, is enacted and the enactment is effective 
for a taxable year ending before or within 90 days after the date of 
enactment, then application for such a taxable year may be made not 
later than the 180th day after the date of enactment, and if the 
application is approved the permission to discontinue filing 
consolidated returns will apply to such taxable year notwithstanding 
that a consolidated return has already been filed for such year.
    (ii) Substantial adverse change in law affecting tax liability. 
Ordinarily, the Commissioner will grant a group permission to 
discontinue filing consolidated returns if the net result of all 
amendments to the Code or regulations with effective dates commencing 
within the taxable year has a substantial adverse effect on the 
consolidated tax liability of the group for such year relative to what 
the aggregate tax liability would be if the members of the group filed 
separate returns for such year. Thus, for example, assume P and S filed 
a consolidated return for the calendar year 1966 and that the provisions 
of the Code have been amended by a bill which was enacted by Congress in 
1966, but which is first effective for taxable years beginning on or 
after January 1, 1967. Assume further

[[Page 325]]

that P makes a timely application to discontinue filing consolidated 
returns. In order to determine whether the amendments have a substantial 
adverse effect on the consolidated tax liability for 1967, relative to 
what the aggregate tax liability would be if the members of the group 
filed separate returns for 1967, the difference between the tax 
liability of the group computed on a consolidated basis and taking into 
account the changes in the law effective for 1967 and the aggregate tax 
liability of the members of the group computed as if each such member 
filed separate returns for such year (also taking into account such 
changes) shall be compared with the difference between the tax liability 
of such group for 1967 computed on a consolidated basis without regard 
to the changes in the law effective in such year and the aggregate tax 
liability of the members of the group computed as if separate returns 
had been filed by such members for such year without regard to the 
changes in the law effective in such year.
    (iii) Other factors. In addition, the Commissioner will take into 
account other factors in determining whether good cause exists for 
granting permission to discontinue filing consolidated returns beginning 
with the taxable year, including:
    (a) Changes in law or circumstances, including changes which do not 
affect Federal income tax liability,
    (b) Changes in law which are first effective in the taxable year and 
which result in a substantial reduction in the consolidated net 
operating loss (or consolidated unused investment credit) for such year 
relative to what the aggregate net operating losses (or investment 
credits) would be if the members of the group filed separate returns for 
such year, and
    (c) Changes in the Code or regulations which are effective prior to 
the taxable year but which first have a substantial adverse effect on 
the filing of a consolidated return relative to the filing of separate 
returns by members of the group in such year.
    (2) Discretion of Commissioner to grant blanket permission--(i) 
Permission to all groups. The Commissioner, in his discretion, may grant 
all groups permission to discontinue filing consolidated returns if any 
provision of the Code or regulations has been amended and such amendment 
is of the type which could have a substantial adverse effect on the 
filing of consolidated returns by substantially all groups, relative to 
the filing of separate returns. Ordinarily, the permission to 
discontinue shall apply with respect to the taxable year of each group 
which includes the effective date of such an amendment.
    (ii) Permission to a class of groups. The Commissioner, in his 
discretion, may grant a particular class of groups permission to 
discontinue filing consolidated returns if any provision of the Code or 
regulations has been amended and such amendment is of the type which 
could have a substantial adverse effect on the filing of consolidated 
returns by substantially all such groups relative to the filing of 
separate returns. Ordinarily, the permission to discontinue shall apply 
with respect to the taxable year of each group within the class which 
includes the effective date of such an amendment.
    (3) Time and manner for exercising election. If, under subparagraph 
(1) or (2) of this paragraph, a group has an election to discontinue 
filing consolidated returns for any taxable year and such group wishes 
to exercise such election, then the common parent must file a separate 
return for such year on or before the last day prescribed by law 
(including extensions of time) for the filing of the consolidated return 
for such year. See section 6081 (relating to extensions of time for 
filing returns).
    (d) When group remains in existence--(1) General rule. A group 
remains in existence for a tax year if the common parent remains as the 
common parent and at least one subsidiary that was affiliated with it at 
the end of the prior year remains affiliated with it at the beginning of 
the year, whether or not one or more corporations have ceased to be 
subsidiaries at any time after the group was formed. Thus, for example, 
assume that individual A forms corporation P. P acquires 100 percent of 
the stock of corporation S on January 1, 1965, and P and S file a 
consolidated return for the calendar year 1965. On May 1, 1966, P 
acquires 100 percent of the stock of S-1, and on July 1, 1966, P

[[Page 326]]

sells the stock of S. The group (consisting originally of P and S) 
remains in existence in 1966 since P has remained as the common parent 
and at least one subsidiary (now S-1) remains affiliated with it.
    (2) Common parent no longer in existence--(i) Mere change in 
identity. For purposes of this paragraph, the common parent corporation 
shall remain as the common parent irrespective of a mere change in 
identity, form, or place of organization of such common parent 
corporation (see section 368(a)(1)(F)).
    (ii) Transfer of assets to subsidiary. The group shall be considered 
as remaining in existence notwithstanding that the common parent is no 
longer in existence if the members of the affiliated group succeed to 
and become the owners of substantially all of the assets of such former 
parent and there remains one or more chains of includible corporations 
connected through stock ownership with a common parent corporation which 
is an includible corporation and which was a member of the group prior 
to the date such former parent ceases to exist. For purposes of applying 
paragraph (f)(2)(i) of Sec. 1.1502-1 to separate return years ending on 
or before the date on which the former parent ceases to exist, such 
former parent, and not the new common parent, shall be considered to be 
the corporation described in such paragraph.
    (iii) Taxable years. If a transfer of assets described in 
subdivision (ii) of this subparagraph is an acquisition to which section 
381(a) applies and if the group files a consolidated return for the 
taxable year in which the acquisition occurs, then for purposes of 
section 381:
    (a) The former common parent shall not close its taxable year merely 
because of the acquisition, and all taxable years of such former parent 
ending on or before the date of acquisition shall be treated as taxable 
years of the acquiring corporation, and
    (b) The corporation acquiring the assets shall close its taxable 
year as of the date of acquisition, and all taxable years of such 
corporation ending on or before the date of acquisition shall be treated 
as taxable years of the transferor corporation.
    (iv) Exception. With respect to acquisitions occurring before 
January 1, 1971, subdivision (iii) of this subparagraph shall not apply 
if the group, in its income tax return, treats the taxable year of the 
former common parent as having closed as of the date of acquisition.
    (3) Reverse acquisitions--(i) In general. If a corporation 
(hereinafter referred to as the ``first corporation'') or any member of 
a group of which the first corporation is the common parent acquires 
after October 1, 1965:
    (a) Stock of another corporation (hereinafter referred to as the 
second corporation), and as a result the second corporation becomes (or 
would become but for the application of this subparagraph) a member of a 
group of which the first corporation is the common parent, or
    (b) Substantially all the assets of the second corporation,

in exchange (in whole or in part) for stock of the first corporation, 
and the stockholders (immediately before the acquisition) of the second 
corporation, as a result of owning stock of the second corporation, own 
(immediately after the acquisition) more than 50 percent of the fair 
market value of the outstanding stock of the first corporation, then any 
group of which the first corporation was the common parent immediately 
before the acquisition shall cease to exist as of the date of 
acquisition, and any group of which the second corporation was the 
common parent immediately before the acquisition shall be treated as 
remaining in existence (with the first corporation becoming the common 
parent of the group). Thus, assume that corporations P and S comprised 
group PS (P being the common parent), that P was merged into corporation 
T (the common parent of a group composed of T and corporation U), and 
that the shareholders of P immediately before the merger, as a result of 
owning stock in P, own 90 percent of the fair market value of T's stock 
immediately after the merger. The group of which P was the common parent 
is treated as continuing in existence with T and U being added as 
members of the group, and T taking the place of P as the common parent.


[[Page 327]]


For purposes of determining under (a) of this subdivision whether the 
second corporation becomes (or would become) a member of the group of 
which the first corporation is the common parent, and for purposes of 
determining whether the former stockholders of the second corporation 
own more than 50 percent of the outstanding stock of the first 
corporation, there shall be taken into account any acquisitions or 
redemptions of the stock of either corporation which are pursuant to a 
plan of acquisition described in (a) or (b) of this subdivision.
    (ii) Prior ownership of stock. For purposes of subdivision (i) of 
this subparagraph, if the first corporation, and any members of a group 
of which the first corporation is the common parent, have continuously 
owned for a period of at least 5 years ending on the date of the 
acquisition an aggregate of at least 25 percent of the fair market value 
of the outstanding stock of the second corporation, then the first 
corporation (and any subsidiary which owns stock of the second 
corporation immediately before the acquisition) shall, as a result of 
owning such stock, be treated as owning (immediately after the 
acquisition) a percentage of the fair market value of the first 
corporation's outstanding stock which bears the same ratio to (a) the 
percentage of the fair market value of all the stock of the second 
corporation owned immediately before the acquisition by the first 
corporation and its subsidiaries as (b) the fair market value of the 
total outstanding stock of the second corporation immediately before the 
acquisition bears to (c) the sum of (1) the fair market value, 
immediately before the acquisition, of the total outstanding stock of 
the first corporation, and (2) the fair market value, immediately before 
the acquisition, of the total outstanding stock of the second 
corporation (other than any such stock owned by the first corporation 
and any of its subsidiaries). For example, assume that corporation P 
owns stock in corporation T having a fair market value of $100,000, that 
P acquires the remaining stock of T from individuals in exchange for 
stock of P, that immediately before the acquisition the total 
outstanding stock of T had a fair market value of $150,000, and that 
immediately before the acquisition the total outstanding stock of P had 
a fair market value of $200,000. Assuming P owned at least 25 percent of 
the fair market value of T's stock for 5 years, then for purposes of 
this subparagraph, P is treated as owning (immediately after the 
acquisition) 40 percent of the fair market value of its own outstanding 
stock, determined as follows:
[$150,000/($200,000+$50,000)] x 662/3%=40%.
Thus, if the former individual stockholders of T own, immediately after 
the acquisition more than 10 percent of the fair market value of the 
outstanding stock of P as a result of owning stock of T, the group of 
which T was the common parent is treated as continuing in existence with 
P as the common parent, and the group of which P was the common parent 
before the acquisition ceases to exist.
    (iii) Election. The provisions of subdivision (ii) of this 
subparagraph shall not apply to any acquisition occurring in a taxable 
year ending after October 7, 1969, unless the first corporation elects 
to have such subdivision apply. The election shall be made by means of a 
statement, signed by any officer who is duly authorized to act on behalf 
of the first corporation, stating that the corporation elects to have 
the provisions of Sec. 1.1502-75(d)(3)(ii) apply and identifying the 
acquisition to which such provisions will apply. The statement shall be 
filed, on or before the due date (including extensions of time) of the 
return for the group's first consolidated return year ending after the 
date of the acquisition, with the internal revenue officer with whom 
such return is required to be filed.
    (iv) Transfer of assets to subsidiary. This subparagraph shall not 
apply to a transaction to which subparagraph (2)(ii) of this paragraph 
applies.
    (v) Taxable years. If, in a transaction described in subdivision (i) 
of this subparagraph, the first corporation files a consolidated return 
for the first taxable year ending after the date of acquisition, then:
    (a) The first corporation, and each corporation which, immediately 
before the acquisition, is a member of the group of which the first 
corporation is

[[Page 328]]

the common parent, shall close its taxable year as of the date of 
acquisition, and each such corporation shall, immediately after the 
acquisition, change to the taxable year of the second corporation, and
    (b) If the acquisition is a transaction described in section 
381(a)(2), then for purposes of section 381:
    (1) All taxable years ending on or before the date of acquisition, 
of the first corporation and each corporation which, immediately before 
the acquisition, is a member of the group of which the first corporation 
is the common parent, shall be treated as taxable years of the 
transferor corporation, and
    (2) The second corporation shall not close its taxable year merely 
because of such acquisition, and all taxable years ending on or before 
the date of acquisition, of the second corporation and each corporation 
which, immediately before the acquisition, is a member of any group of 
which the second corporation is the common parent, shall be treated as 
taxable years of the acquiring corporation.
    (vi) Exception. With respect to acquisitions occurring before April 
17, 1968, subdivision (v) of this subparagraph shall not apply if the 
parties to the transaction, in their income tax returns, treat 
subdivision (i) as not affecting the closing of taxable years or the 
operation of section 381.
    (4) [Reserved]
    (5) Coordination with section 833--(i) Election to continue old 
group. If, solely by reason of the enactment of section 833 (relating to 
certain Blue Cross or Blue Shield organizations and certain other health 
insurers), an organization to which section 833 applies (a ``section 833 
organization'') became the new common parent of an old group on January 
1, 1987, the old group may elect to continue in existence with that 
section 833 organization as its new common parent, provided all the old 
groups having the same section 833 organization as their new common 
parent elect to continue in existence. To revoke this election, see 
paragraph (d)(5)(x) of this section. To file as a new group, see 
paragraph (d)(5)(v) of this section.
    (ii) Old group. For purposes of this paragraph (d)(5), an old group 
is a group which, for its last taxable year ending in 1986, either filed 
a consolidated return or was eligible to (but did not) file a 
consolidated return.
    (iii) Manner of electing to continue--(A) Deemed election. If all 
the members of all the old groups having the same section 833 
organization as their new common parent are included for the first 
taxable year beginning after December 31, 1986, on the same consolidated 
(or amended consolidated) return and a Form 1122 was not filed, the old 
groups are deemed to have elected under paragraph (d)(5)(i) of this 
section to continue in existence.
    (B) Delayed election. If a deemed election to continue in existence 
was not made under paragraph (d)(5)(iii)(A) of this section, all the 
members of all the old groups having the same section 833 organization 
as their new common parent may make a delayed election under paragraph 
(d)(5)(i) of this section to continue in existence by:
    (1) Filing an appropriate consolidated (or amended consolidated) 
return or returns for each taxable year beginning after December 31, 
1986, (notwithstanding Sec. 1.1502-75(a)(1)) on or before January 3, 
1991, and
    (2) On the top of any such return prominently affixing a statement 
containing the following declaration: ``THIS RETURN'' (or, if 
applicable, ``AMENDED RETURN'') ``REFLECTS A DELAYED ELECTION TO 
CONTINUE UNDER Sec. 1.1502-75T(d)(5)(iii)(B)''. A delayed election to 
continue in existence automatically revokes a deemed election to file as 
a new group which was made under paragraph (d)(5)(vi) of this section.
    (iv) Effects of election to continue in existence. If an old group 
or groups elect to continue in existence under paragraph (d)(5)(i) of 
this section, the following rules apply:
    (A) Taxable years. Each member that filed returns other than on a 
calendar year basis shall close its taxable year on December 31, 1986, 
and change to a calendar year beginning on January 1, 1987. See section 
843 and Sec. 1.1502-76(a)(1).
    (B) Carryovers from separate return limitation years. For purposes 
of applying the separate return limitation year rules to carryovers from 
taxable years

[[Page 329]]

beginning before 1987 to taxable years beginning after 1986, the 
following rules apply:
    (1) Any taxable year beginning before 1987 of a corporation that was 
not a member of an old group (including a section 833 organization) will 
be treated as a separate return limitation year;
    (2) Any taxable year beginning before 1987 of a corporation that was 
a member of an old group that, without regard to this section and the 
enactment of section 833, was a separate return limitation year will 
continue to be treated as a separate return limitation year;
    (3) Any taxable year beginning before 1987 of a member of an old 
group (other than a separate return limitation year described in 
paragraph (d)(5)(iv)(B)(2) of this section) will not be treated as a 
separate return limitation year with respect to any corporation that was 
a member of such group for each day of that taxable year; and
    (4) Any taxable year beginning before 1987 of a member of an old 
group will be treated as a separate return limitation year with respect 
to any corporation that was not a member of such group for each day of 
that taxable year (e.g., a corporation that was not a member of an old 
group, including a section 833 organization, or a corporation that was a 
member of another old group).
    (C) Five-year rules for life-nonlife groups. Any life-nonlife 
election under section 1504(c)(2) in effect for an old group remains in 
effect. Any old group which was eligible to make a life-nonlife election 
will remain eligible to make the election. For purposes of section 
1503(c), a nonlife member is treated as ineligible under Sec. 1.1502-
47(d)(13) with respect to a life member, unless both were members of the 
same affiliated group (determined without regard to the exclusions in 
section 1504(b) (1) and (2)) for five taxable years immediately 
preceding the taxable year in which the loss arose. See paragraph 
(d)(5)(ix) of this section for a tacking rule.
    (v) Election to file as a new group. If, solely by reason of the 
enactment of section 833, a section 833 organization became the new 
common parent of an old group on January 1, 1987, the application of the 
five-year prohibition on reconsolidation in section 1504(a)(3)(A) to the 
old group is waived and the old group together with the new section 833 
organization common parent may elect to file as a new group provided 
that all includible corporations elect to file a consolidated (or 
amended consolidated) return as a new group for the first taxable year 
beginning after December 31, 1986. To revoke this election, see 
paragraph (d)(5)(x) of this section.
    (vi) Manner of electing to file as a new group--(A) Deemed election. 
The old group or groups and the section 833 organization are deemed to 
have elected under paragraph (d)(5)(v) of this section to file as a new 
group by filing, for the first taxable year beginning after December 31, 
1986, a Form 1122 and a consolidated (or amended consolidated) tax 
return.
    (B) Delayed election. If a deemed election to file as a new group 
was not made pursuant to paragraph (d)(5)(vi)(A) of this section, the 
old group or groups and the section 833 organization may make a delayed 
election under paragraph (d)(5)(v) of this section to file as a new 
group by
    (1) Filing an appropriate consolidated (or amended consolidated) 
return or returns for each taxable year beginning after December 31, 
1986 (notwithstanding Sec. 1.1502-75(a)(1)) on or before January 3, 
1991, and
    (2) On the top of any such return prominently affixing a statement 
containing the following declaration: ``THIS RETURN'' (or, if 
applicable, ``AMENDED RETURN'') ``REFLECTS A DELAYED ELECTION TO FILE AS 
A NEW GROUP UNDER Sec. 1.1502-75T (d)(5)(vi)(B)''. A delayed election to 
file as a new group automatically revokes any deemed election to 
continue in existence which was made under paragraph (d)(5)(iii) of this 
section.
    (vii) Effects of election to file as a new group. If an old group or 
groups elect to file as a new group under paragraph (d)(5)(v) of this 
section, the following rules apply:
    (A) Termination. Each old group is treated as if it terminated on 
January 1, 1987, and the termination is not treated as resulting from 
the acquisition by a nonmember of all of the stock of the common parent.

[[Page 330]]

    (B) Taxable years. Each member that filed returns other than on a 
calendar year basis shall close its taxable year on December 31, 1986, 
and change to a calendar year beginning on January 1, 1987. See section 
843 and Sec. 1.1502-76(a)(1).
    (C) Separate return limitation year and life-nonlife groups. For 
purposes of Sec. 1.1502-1(f), sections 1503(c) and 1504(c), and 
Sec. 1.1502-47, the group is treated as coming into existence as a new 
group on January 1, 1987. Thus, for example, paragraphs (d)(5)(iv) (B) 
and (C) of this section do not apply.
    (viii) Earnings and profits. All distributions after January 1, 1987 
by a corporation, whether or not such corporation was a member of an old 
group, to an existing Blue Cross or Blue Shield organization (as defined 
in section 833(c)(2)) out of earnings and profits accumulated before 
1987 are deemed made out of earnings and profits accumulated in pre-
affiliation years. See Sec. 1.1502-32(h)(5).
    (ix) Five-year tacking rules for certain life-nonlife groups. For 
purposes of applying Sec. 1.1502-47(d) (5) and (12) to any taxable year 
ending after 1986 to a corporation, whether or not the corporation was a 
member of an old group,
    (A) The determination of whether the corporation was in existence 
and a member or tentatively treated as a member of a group, for taxable 
years ending before 1987, is made without regard to the exclusions under 
section 1504(b) (1) and (2) of any section 833 organization or life 
insurance company (as the case may be) and
    (B) A section 833 organization is not treated as having a change in 
tax character solely by reason of the loss of its tax-exempt status due 
to the enactment of section 833.
This paragraph (d)(5)(ix) does not apply if an election to file as a new 
group under paragraph (d)(5)(v) of this section is made.
    (x) Time to revoke elections made before September 5, 1990. An 
election by an old group to continue in existence or to file as a new 
group that was made (or deemed made) before September 5, 1990, may be 
revoked by filing an appropriate return (or returns) on or before 
January 3, 1991. For purposes of this paragraph (d)(5)(x), appropriate 
returns include separate returns filed by each member of the group or 
consolidated returns filed in accordance with a delayed election either 
under paragraph (d)(5)(iii)(B) or (vi)(B) of this section.
    (xi) Examples. The following examples illustrate this paragraph 
(d)(5). In these examples, each corporation uses the calendar year as 
its taxable year.

    Example 1. B is a section 833 organization. For several years, B has 
owned all of the outstanding stock of X, Y, and Z. X has owned all the 
outstanding stock of X1 throughout X1's existence 
and Y has owned all of the outstanding stock of Y1 throughout 
Y1's existence. For 1986 X and X1 filed a 
consolidated federal income tax return but Y and Y1 filed 
separate returns. Under paragraph (d)(5)(ii) of this section, X and 
X1 and Y and Y1 each constitute an old group 
because they either filed a consolidated return or were eligible to file 
a consolidated return for 1986. The X and Y groups may elect under 
paragraph (d)(5)(i) of this section to continue in existence. If they 
elect to continue, under paragraph (d)(5)(iv)(B) of this section, the 
separate return limitation year rules apply as follows: any taxable year 
of B or Z beginning before 1987 is treated as a separate return 
limitation year with respect to each other and to all other members of 
the group; any taxable year of X or X1 beginning before 1987 
is treated as a separate return limitation year with respect to B, Z, Y 
and Y1, but not with respect to each other; and any taxable 
year of Y or Y1 beginning before 1987 is treated as a 
separate return limitation year with respect to B, Z, X and 
X1, but not with respect to each other.
    Example 2. The facts are the same as in Example 1 except that B is 
owned by C, another section 833 organization. If the X and Y groups 
elect to continue, the results are the same as in Example 1, except 
that, under paragraph (d)(5)(iv)(B)(1) of this section, for purposes of 
applying the separate return limitation year rules, any taxable year of 
C beginning before 1987 is also treated as a separate return limitation 
year with respect to all other members of the group.
    Example 3. The facts are the same as in Example 1 except that Y 
purchased Y1 on January 1, 1985. If the X and Y groups elect 
to continue, the results are the same as in Example 1, except that, 
under paragraph (d)(5)(iv)(B)(2) of this section, for purposes of 
applying the separate return limitation year rules, any taxable year of 
Y1 beginning before 1985 is treated as a separate return 
limitation year with respect to Y as well as with respect to all other 
members of the group.
    Example 4. B, a section 833 organization, has owned all the stock of 
X since November 1984. X has owned all the stock of L, a life insurance 
company, throughout L's existence.

[[Page 331]]

In 1986, X and L properly filed a life-nonlife consolidated return. 
Under paragraph (d)(5)(i) of this section, the X group elects to 
continue in existence. Under paragraph (d)(5)(iv)(C) of this section, 
the life-nonlife election will remain in effect. However, losses of B 
which arise before 1990 cannot be used to offset the income of L. See 
section 1503(c)(2) and Sec. 1.1502-47(d)(13) and paragraph (d)(5)(iv)(C) 
of this section. Under paragraph (d)(5)(iv)(B) of this section, the 
separate return limitation year rules apply as follows: any taxable year 
of B beginning before 1987 is treated as a separate return limitation 
year with respect to all other members of the group; and any taxable 
year of X or L beginning before 1987 is treated as a separate return 
limitation year with respect to B, but not with respect to each other.
    Example 5. The facts are the same as Example 4 except that, on 
January 1, 1984, B formed L1, a life insurance company. Under 
paragraph (d)(5)(ix) of this section and section 1504(c), the first year 
L1 is eligible to join in B's life-nonlife election is 1989.
    Example 6. The facts are the same as in Example 4 except that B and 
the X group elect under paragraph (d)(5)(v) of this section to file as a 
new group. The X group will be considered to have terminated under 
Sec. 1.1502-75(d)(1) on December 31, 1986. X and L are each separately 
subject to the separate return limitation year rules of Sec. 1.1502-
1(f). The first year L and L1 are eligible to join the new 
group in a life-nonlife election is 1992 (five years after the new group 
is formed). See section 1504(c)(2) and paragraphs (d)(5)(vii)(C) and 
(ix) of this section.

    The provisions contained in this Treasury decision are needed to 
immediately amend the consolidated return regulations in response to 
changes made by section 1012 of the Tax Reform Act of 1986. It is 
therefore found impracticable and contrary to the public interest to 
issue this Treasury decision with notice and public procedure under 
section 553(b) of title 5 of the United States Code or subject to the 
effective date limitations of section 553(d) of title 5, United States 
Code.
    (e) Failure to include subsidiary. If a consolidated return is 
required for the taxable year under the provisions of paragraph (a)(2) 
of this section, the tax liability of all members of the group for such 
year shall be computed on a consolidated basis even though:
    (1) Separate returns are filed by one or more members of the group, 
or
    (2) There has been a failure to include in the consolidated return 
the income of any member of the group.

If subparagraph (1) of this paragraph applies, the amounts assessed or 
paid upon the basis of separate returns shall be considered as having 
been assessed or paid upon the basis of a consolidated return.
    (f) Inclusion of one or more corporations not members of the group--
(1) Method of determining tax liability. If a consolidated return 
includes the income of a corporation which was not a member of the group 
at any time during the consolidated return year, the tax liability of 
such corporation will be determined upon the basis of a separate return 
(or a consolidated return of another group, if paragraph (a)(2) or 
(b)(3) of this section applies), and the consolidated return will be 
considered as including only the income of the corporations which were 
members of the group during that taxable year. If a consolidated return 
includes the income of two or more corporations which were not members 
of the group but which constitute another group, the tax liability of 
such corporations will be computed in the same manner as if separate 
returns had been made by such corporations unless the Commissioner upon 
application approves the making of a consolidated return for the other 
group or unless under paragraph (a)(2) of this section a consolidated 
return is required for the other group.
    (2) Allocation of tax liability. In any case in which amounts have 
been assessed and paid upon the basis of a consolidated return and the 
tax liability of one or more of the corporations included in the 
consolidated return is to be computed in the manner described in 
subparagraph (1) of this paragraph, the amounts so paid shall be 
allocated between the group composed of the corporations properly 
included in the consolidated return and each of the corporations the tax 
liability of which is to be computed on a separate basis (or on the 
basis of a consolidated return of another group) in such manner as the 
corporations which were included in the consolidated return may, subject 
to the approval of the Commissioner, agree upon or in the absence of an 
agreement upon the method used in allocating the tax liability of the 
members of the group under the provisions of section 1552(a).

[[Page 332]]

    (g) Computing periods of limitation--(1) Income incorrectly included 
in consolidated return. If:
    (i) A consolidated return is filed by a group for the taxable year, 
and
    (ii) The tax liability of a corporation whose income is included in 
such return must be computed on the basis of a separate return (or on 
the basis of a consolidated return with another group), then for the 
purpose of computing any period of limitation with respect to such 
separate return (or such other consolidated return), the filing of such 
consolidated return by the group shall be considered as the making of a 
return by such corporation.
    (2) Income incorrectly included in separate returns. If a 
consolidated return is required for the taxable year under the 
provisions of paragraph (a)(2) of this section, the filing of separate 
returns by the members of the group for such year shall not be 
considered as the making of a return for the purpose of computing any 
period of limitation with respect to such consolidated return unless 
there is attached to each such separate return a statement setting 
forth:
    (i) The most recent taxable year of the member for which its income 
was included in a consolidated return, and
    (ii) The reasons for the group's belief that a consolidated return 
is not required for the taxable year.
    (h) Method of filing return and forms--(1) Consolidated return made 
by common parent corporation. The consolidated return shall be made on 
Form 1120 for the group by the common parent corporation. The 
consolidated return, with Form 851 (affiliations schedule) attached, 
shall be filed with the district director with whom the common parent 
would have filed a separate return.
    (2) Filing of Form 1122 for first year. If, under the provisions of 
paragraph (a)(1) of this section, a group wishes to exercise its 
privilege of filing a consolidated return, then a Form 1122 must be 
executed by each subsidiary and must be attached to the consolidated 
return for such year. Form 1122 shall not be required for a taxable year 
if a consolidated return was filed (or was required to be filed) by the 
group for the immediately preceding taxable year.
    (3) Persons qualified to execute returns and forms. Each return or 
form required to be made or prepared by a corporation must be executed 
by the person authorized under section 6062 to execute returns of 
separate corporations.
    (i) [Reserved]
    (j) Statements and schedules for subsidiaries. The statement of 
gross income and deductions and the schedules required by the 
instructions on the return shall be prepared and filed in columnar form 
so that the details of the items of gross income, deductions, and 
credits for each member may be readily audited. Such statements and 
schedules shall include in columnar form a reconciliation of surplus for 
each corporation, and a reconciliation of consolidated surplus. 
Consolidated balance sheets as of the beginning and close of the taxable 
year of the group, taken from the books of the members, shall accompany 
the consolidated return and shall be prepared in a form similar to that 
required for reconciliation of surplus.
    (k) Cross-reference. See Sec. 1.338(h)(10)-1(e)(6) for special rules 
regarding filing consolidated returns when a section 338(h)(10) election 
is made for a target acquired from a selling consolidated group.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7016, 34 FR 
15556, Oct. 7, 1969; T.D. 7024, 35 FR 2774, Feb. 10, 1970; T.D. 7244, 37 
FR 28897, Dec. 30, 1972; T.D. 7246, 38 FR 766, Jan. 4, 1973; T.D. 8438, 
57 FR 44333, Sept. 25, 1992; T.D. 8515, 59 FR 2984, Jan. 20, 1994; T.D. 
8560, 59 FR 41675, 41700, Aug. 15, 1994]



Sec. 1.1502-76   Taxable year of members of group.

    (a) Taxable year of members of group--(1) Change to parent's taxable 
year. The consolidated return of a group must be filed on the basis of 
the common parent's taxable year, and each subsidiary must adopt the 
common parent's annual accounting period for the first consolidated 
return year for which the subsidiary's income is includible in the 
consolidated return. If any member is on a 52-53-week taxable year, the 
rule of the preceding sentence shall, with the advance consent of the 
Commissioner, be deemed satisfied if the taxable years of all members of 
the group end within the same 7-day period. Any

[[Page 333]]

request for such consent shall be filed with the Commissioner of 
Internal Revenue, Washington, DC 20224, not later than the 30th day 
before the due date (not including extensions of time) for the filing of 
the consolidated return.
    (2) Includible insurance company as member of group. If an 
includible insurance company required by section 843 to file its return 
on the basis of a calendar year is a member of the group and if the 
common parent of such group files its return on the basis of a fiscal 
year, then the first consolidated return which includes the income of 
such insurance company may be filed on the basis of the common parent's 
fiscal year, provided, however, that if such insurance company is a 
member of the group on the last day of the common parent's taxable year, 
all members other than such insurance company change to a calendar year 
or to a 52-53-week taxable year ending within a 7-day period which 
includes December 31, effective immediately after the close of the 
common parent's taxable year. If any member changes to a 52-53-week 
taxable year, the advance consent of the Commissioner shall be obtained 
in accordance with subparagraph (1) of this paragraph.
    (b) Items included in the consolidated return--(1) General rules--
(i) In general. A consolidated return must include the common parent's 
items of income, gain, deduction, loss, and credit for the entire 
consolidated return year, and each subsidiary's items for the portion of 
the year for which it is a member. If the consolidated return includes 
the items of a corporation for only a portion of its tax year determined 
without taking this section into account, items for the portion of the 
year not included in the consolidated return must be included in a 
separate return (including the consolidated return of another group). 
The rules of this paragraph (b) must be applied to prevent the 
duplication or elimination of the corporation's items.
    (ii) The day a corporation becomes or ceases to be a member--(A) End 
of the day rule. If a corporation (S) becomes or ceases to be a member 
during a consolidated return year, it becomes or ceases to be a member 
at the end of the day on which its status as a member changes, and its 
tax year ends for all Federal income tax purposes at the end of that 
day. Appropriate adjustments must be made if another provision of the 
Internal Revenue Code or the regulations thereunder contemplates the 
event occurring before or after S's change in status. For example, S's 
items restored under Sec. 1.1502-13 immediately before it becomes a 
nonmember are taken into account in determining the basis of S's stock 
under Sec. 1.1502-32. On the other hand, if a section 338(g) election is 
made in connection with S becoming a member, the deemed asset sale under 
that section takes place before S becomes a member. See Sec. 1.338-
1(e)(5) (deemed sale excluded from purchasing corporation's consolidated 
return.)
    (B) Next day rule. If, on the day of S's change in status as a 
member, a transaction occurs that is properly allocable to the portion 
of S's day after the event resulting in the change, S and all persons 
related to S under section 267(b) immediately after the event must treat 
the transaction for all Federal income tax purposes as occurring at the 
beginning of the following day. A determination as to whether a 
transaction is properly allocable to the portion of S's day after the 
event will be respected if it is reasonable and consistently applied by 
all affected persons. In determining whether an allocation is 
reasonable, the following factors are among those to be considered--
    (1) Whether income, gain, deduction, loss, and credit are allocated 
inconsistently (e.g., to maximize a seller's stock basis adjustments 
under Sec. 1.1502-32);
    (2) If the item is from a transaction with respect to S stock, 
whether it reflects ownership of the stock before or after the event 
(e.g., if a member transfers encumbered land to nonmember S in exchange 
for additional S stock in a transaction to which section 351 applies and 
the exchange results in S becoming a member of the consolidated group, 
the applicability of section 357(c) to the exchange must be determined 
under Sec. 1.1502-80(d) by treating the exchange as occurring after the 
event; on the other hand, if S is a member but has a minority 
shareholder and

[[Page 334]]

becomes a nonmember as a result of its redemption of stock with 
appreciated property, S's gain under section 311 is treated as from a 
transaction occurring before the event);
    (3) Whether the allocation is inconsistent with other requirements 
under the Internal Revenue Code (e.g., if a section 338(g) election is 
made in connection with a group's acquisition of S, the deemed asset 
sale must take place before S becomes a member and S's gain or loss with 
respect to its assets must be taken into account by S as a nonmember); 
and
    (4) Whether other facts exist, such as a prearranged transaction or 
multiple changes in S's status, indicating that the transaction is not 
properly allocable to the portion of S's day after the event resulting 
in S's change.
    (C) Successor corporations. For purposes of this paragraph 
(b)(1)(ii), any reference to a corporation includes a reference to a 
successor or predecessor as the context may require. A corporation is a 
successor if the basis of its assets is determined, directly or 
indirectly, in whole or in part, by reference to the basis of the assets 
of another corporation (the predecessor). For example, if a member forms 
S, S is treated as a member from the beginning of its existence.
    (iii) Group structure changes. If the common parent ceases to be the 
common parent but the group remains in existence, adjustments must be 
made in accordance with the principles of Sec. 1.1502-75(d)(2) and (3).
    (2) Determination of items included in separate and consolidated 
returns--(i) In general. The returns for the years that end and begin 
with S becoming (or ceasing to be) a member are separate tax years for 
all Federal income tax purposes. The returns are subject to the rules of 
the Internal Revenue Code applicable to short periods, as if S ceased to 
exist on becoming a member (or first existed on becoming a nonmember). 
For example, cost recovery deductions under section 168 must be 
allocated for short periods. On the other hand, annualization under 
section 443 is not required of S solely because it has a short year as a 
result of becoming a member. (Similarly, section 443 applies with 
respect to a consolidated return only to the extent that the group's 
return is for a short period and section 443 applies without taking this 
paragraph (b) into account.)
    (ii) Ratable allocation of a year's items--(A) Application. Although 
the periods ending and beginning with S's change in status are different 
tax years, items (other than extraordinary items) may be ratably 
allocated between the periods if--
    (1) S is not required to change its annual accounting period or its 
method of accounting as a result of its change in status (e.g., because 
its stock is sold between consolidated groups that have the same annual 
accounting periods); and
    (2) An irrevocable ratable allocation election is made under 
paragraph (b)(2)(ii)(D) of this section.
    (B) General rule--(1) Allocation within original year. Under a 
ratable allocation election, paragraph (b)(2) of this section applies by 
allocating to each day of S's original year (S's tax year determined 
without taking this section into account) an equal portion of S's items 
taken into account in the original year, except that extraordinary items 
must be allocated to the day that they are taken into account. All 
persons affected by the election must take into account S's 
extraordinary items and the ratable allocation of S's remaining items in 
a manner consistent with the election.
    (2) Items to be allocated. Under ratable allocation, the items to be 
allocated and their timing, location, character, and source are 
generally determined by treating the original year as a single tax year, 
and the items are not subject to the rules of the Internal Revenue Code 
applicable to short periods (unless the original year is a short 
period). However, the years ending and beginning with S's change in 
status are treated as different tax years (and as short periods) with 
respect to any item carried to or from these years (e.g., a net 
operating loss carried under section 172) and with respect to the 
application of section 481.
    (3) Multiple applications. If this paragraph (b) applies more than 
once with respect to an original year, adjustments must be made in 
accordance

[[Page 335]]

with the principles of this paragraph (b). For example, if S becomes a 
member of two different consolidated groups during the same original 
year and ratable allocation is elected with respect to both groups, 
ratable allocation is generally determined for both groups by treating 
the original year as a single tax year; however, if ratable allocation 
is elected only with respect to the first group, the ratable allocation 
is determined by treating the original year as a short period that does 
not include the period that S is a member of the second group. Ratable 
allocation is not a method of accounting, and ratable allocation with 
respect to one application of this paragraph (b) to S does not require 
ratable allocation to be subsequently applied with respect to S.
    (C) Extraordinary items. An extraordinary item is--
    (1) Any item from the disposition or abandonment of a capital asset 
as defined in section 1221 (determined without the application of any 
other rules of law);
    (2) Any item from the disposition or abandonment of property used in 
a trade or business as defined in section 1231(b) (determined without 
the application of any holding period requirement);
    (3) Any item from the disposition or abandonment of an asset 
described in section 1221(1), (3), (4), or (5), if substantially all the 
assets in the same category from the same trade or business are disposed 
of or abandoned in one transaction (or series of related transactions);
    (4) Any item from assets disposed of in an applicable asset 
acquisition under section 1060(c);
    (5) Any item carried to or from any portion of the original year 
(e.g., a net operating loss carried under section 172), and any section 
481(a) adjustment;
    (6) The effects of any change in accounting method initiated by the 
filing of the appropriate form after S's change in status;
    (7) Any item from the discharge or retirement of indebtedness (e.g., 
cancellation of indebtedness income or a deduction for retirement at a 
premium);
    (8) Any item from the settlement of a tort or similar third-party 
liability;
    (9) Any compensation-related deduction in connection with S's change 
in status (including, for example, deductions from bonus, severance, and 
option cancellation payments made in connection with S's change in 
status);
    (10) Any dividend income from a nonmember that S controls within the 
meaning of section 304 at the time the dividend is taken into account;
    (11) Any deemed income inclusion from a foreign corporation, or any 
deferred tax amount on an excess distribution from a passive foreign 
investment company under section 1291;
    (12) Any interest expense allocable under section 172(h) to a 
corporate equity reduction transaction causing this paragraph (b) to 
apply;
    (13) Any credit, to the extent it arises from activities or items 
that are not ratably allocated (e.g., the rehabilitation credit under 
section 47, which is based on placement in service); and
    (14) Any item which, in the opinion of the Commissioner, would, if 
ratably allocated, result in a substantial distortion of income in any 
consolidated return or separate return in which the item is included.
    (D) Election. The election to ratably allocate items under this 
paragraph (b)(2)(ii) must be made in a separate statement entitled 
``THIS IS AN ELECTION UNDER Sec. 1.1502-76(b)(2)(ii) TO RATABLY ALLOCATE 
THE YEAR'S ITEMS OF [insert name and employer identification number of 
the member].'' The statement must be signed by the member and by the 
common parent of each affected group, and must be filed with the returns 
including the items for the year's ending and beginning with S's change 
in status. If two or more members of the same consolidated group, as a 
consequence of the same plan or arrangement, cease to be members of that 
group and remain affiliated as members of another consolidated group, an 
election under this paragraph (b)(2)(ii)(D) may be made only if it is 
made by each such member. The statement must provide all of the 
following:

[[Page 336]]

    (1) Identify the extraordinary items, their amounts, and the 
separate or consolidated returns in which they are included.
    (2) Identify the aggregate amount to be ratably allocated, and the 
portion of the amount included in the separate and consolidated returns.
    (3) Include the name and employer identification number of the 
common parent (if any) of each group that must take the items into 
account.
    (iii) Ratable allocation of a month's items. If ratable allocation 
under paragraph (b)(2)(ii) of this section is not elected (e.g., because 
S is required to change its annual accounting period), this paragraph 
(b)(2)(iii) may be applied to ratably allocate only S's items taken into 
account in the month of its change in status, but only if the allocation 
is consistently applied by all affected persons. The ratable allocation 
is made by applying the principles of paragraph (b)(2)(ii) of this 
section under any reasonable method. For example, S may close its books 
both at the end of the preceding month and at the end of the month of 
the change, and allocate only its items (other than extraordinary items) 
from the month of the change. See paragraph (b)(1)(ii)(B) of this 
section for factors to be considered in determining whether the method 
is reasonable.
    (iv) Taxes. To the extent properly taken into account during the 
member's tax year (determined without the application of this paragraph 
(b)), Federal, state, local, and foreign taxes are allocated under 
paragraph (b)(2) of this section on the basis of the items or activities 
to which the taxes relate. Thus, income tax is allocated based on the 
inclusion of the income (determined under the principles of this 
paragraph (b)) to which the tax relates. For example, if a calendar-year 
domestic corporation has $100 of foreign source dividend income 
(determined in accordance with United States tax accounting principles 
but without taking this paragraph (b) into account) that is passive 
income for purposes of section 904, and $60 of the income is allocated 
under this paragraph (b) to the period of the calendar year after it 
becomes a member of a consolidated group, then 60% of the corporation's 
deemed paid foreign tax credit associated with its dividend income for 
the calendar year is taken into account in computing the group's passive 
basket consolidated foreign tax credit. Similarly, property taxes relate 
to the ownership of property and are allocated over the period that the 
property is owned. This paragraph (b)(2)(iv) applies without regard to 
any determination or allocation by another taxing jurisdiction.
    (v) Passthrough entities--(A) In general. If S is a partner in a 
partnership or an owner of a similar interest with respect to which 
items of the entity are taken into account by S, S is treated, solely 
for purposes of determining the year to which the entity's items are 
allocated under paragraph (b)(2) of this section, as selling or 
exchanging its entire interest in the entity immediately before S's 
change in status.
    (B) Treatment as a conduit. For purposes of this paragraph (b)(2), 
if a member (together with other members) would be treated under section 
318(a)(2) as owning an aggregate of at least 50% of any stock owned by 
the passthrough entity, the method that is used to determine the 
inclusion of the entity's items in the consolidated or separate return 
must be the same method that is used to determine the inclusion of the 
member's items in the consolidated or separate return.
    (C) Exception for certain foreign entities. This paragraph (b)(2)(v) 
does not apply to any foreign corporation generating the deemed 
inclusion of income, or to any passive foreign investment company 
generating a deferred tax amount on an excess distribution under section 
1291.
    (3) Anti-avoidance rule. If any person acts with a principal purpose 
contrary to the purposes of this paragraph (b), to substantially reduce 
the Federal income tax liability of any person, adjustments must be made 
as necessary to carry out the purposes of this section.
    (4) Examples. For purposes of the examples in this paragraph (b), 
unless otherwise stated, P and X are common parents of calendar-year 
consolidated groups, P owns all of the only class of T's stock, T owns 
no stock of lower-tier members, all persons use the accrual method of 
accounting, the facts

[[Page 337]]

set forth the only corporate activity, all transactions are between 
unrelated persons, tax liabilities are disregarded, and any election 
required under paragraph (b)(2) of this section is properly made. The 
principles of this paragraph (b) are illustrated by the following 
examples.

    Example 1. Items allocated between consolidated and separate 
returns. (a) Facts. P and S are the only members of the P group. P sells 
all of S's stock to individual A on June 30, and therefore S becomes a 
nonmember on July 1 of Year 2.
    (b) Analysis. Under paragraph (b)(1) of this section, the P group's 
consolidated return for Year 2 includes P's income for the entire tax 
year and S's income for the period from January 1 to June 30, and S must 
file a separate return for the period from July 1 to December 31.
    (c) Acquisition of another subsidiary before end of tax year. The 
facts are the same as in paragraph (a) of this Example 1, except that on 
July 31 P acquires all the stock of T (which filed a separate return for 
its year ending on November 30 of Year 1) and T therefore becomes a 
member on August 1 of Year 2. Under Sec. 1.1502-75(d) and paragraph 
(b)(1) of this section, the P group's consolidated return for Year 2 
includes P's income for the entire year, S's income from January 1 to 
June 30, and T's income from August 1 to December 31. S must file a 
separate return that includes its income from July 1 to December 31, and 
T must file a separate return that includes its income from December 1 
of Year 1 to July 31 of Year 2. (If P had acquired T after December 31, 
the P group that included S is a different group from the P group that 
includes T, and, for example, the P group that includes T must make a 
separate election under section 1501 and Sec. 1.1502-75 if consolidated 
returns are to be filed.)
    Example 2. Group structure change. (a) Facts. P owns all of the 
stock of S and T. Shortly after the beginning of Year 1, P merges into T 
in a reorganization described in section 368(a)(1)(A) (and in section 
368(a)(1)(D)), and P's shareholders receive T's stock in exchange for 
all of P's stock. The P group is treated under Sec. 1.1502-75(d)(2)(ii) 
as remaining in existence with T as its common parent.
    (b) Analysis. Under paragraph (b)(1) of this section, the P group's 
return must include the common parent's items for the entire 
consolidated return year and, if the common parent ceases to be the 
common parent but the group remains in existence, appropriate 
adjustments must be made. Consequently, although P did not exist for all 
of Year 1, P's items for the portion of Year 1 ending with the merger 
are treated as the items of the common parent that must be included in 
the P group's return for Year 1.
    (c) Reverse acquisition. Assume instead that X acquires all of P's 
assets in exchange for more than 50% of X's stock in a reorganization 
described in section 368(a)(1)(D). The reorganization constitutes a 
reverse acquisition under Sec. 1.1502-75(d)(3), with the X group 
terminating and the P group surviving with X as its common parent. 
Consequently, P's items for the portion of Year 1 ending with the 
acquisition are treated as the items of the common parent that must be 
included in the P group's return for Year 1, and X's items are treated 
for purposes of paragraph (b)(1) of this section as the items of a 
subsidiary included in the P group's return for the portion of Year 1 
for which X is a member.
    Example 3. Ratable allocation. (a) Facts. P sells all of T's stock 
to X, and T becomes a nonmember on July 1 of Year 1. T engages in the 
production and sale of merchandise throughout Year 1 and is required to 
use inventories. The sale is treated as causing T's tax year to end on 
June 30, and the periods beginning and ending with the sale are treated 
as two tax years for Federal income tax purposes.
    (b) Analysis. If ratable allocation under paragraph (b)(2)(ii) of 
this section is not elected, T must perform an inventory valuation as of 
the acquisition and also as of the end of Year 1. If ratable allocation 
is elected, T must perform an inventory valuation only as of the close 
of Year 1, and T's income from inventory is ratably allocated, along 
with T's other items that are not extraordinary items, between the P and 
X consolidated returns.
    (c) Merger into nonmember. Assume instead that T merges into a 
wholly owned subsidiary of X in a reorganization described in section 
368(a)(2)(D), and P receives 10% of X's stock in exchange for all of T's 
stock. Under paragraph (b)(2)(ii)(B) of this section, because T's tax 
year ends on June 30 under section 381(b)(1), T's original year 
determined without taking paragraph (b) of this section into account 
also ends on June 30. Consequently, a ratable allocation under paragraph 
(b)(2)(ii) of this section is the same as an allocation based on closing 
the books.
    Example 4. Net operating loss. P sells all of T's stock to X, T 
becomes a nonmember on June 30 of Year 1, and ratable allocation under 
paragraph (b)(2)(ii) of this section is elected. Under ratable 
allocation, the X group has a $100 consolidated net operating loss for 
Year 1, all of which is attributable to T. However, because of 
extraordinary items, T has $100 of income for the portion of Year 1 that 
T is a member of the P group. Under paragraph (b)(2)(ii)(B)(2) of this 
section, T's loss may be carried back from the X group to the portion of 
Year 1 that T was a member of the P group. See also section 172 and 
Sec. 1.1502-21(b). Under paragraph (b)(2)(ii)(C)(5) of this

[[Page 338]]

section, any item carried to or from any portion of the original year is 
an extraordinary item, and the loss therefore is not taken into account 
again in determining the ratable allocation under paragraph (b)(2)(ii) 
of this section.
    Example 5. Employee benefit plans. (a) Facts. P sells all of T's 
stock to X, and T becomes a nonmember on June 30 of Year 1. On March 15 
of Year 2, T contributes $100 to its retirement plan, which is a 
qualified plan under section 401(a). T is not required to make quarterly 
contributions to the plan for Year 1 under section 412(m). The 
contribution is made on account of T's taxable period beginning on July 
1 of Year 1, and is deemed in accordance with section 404(a)(6) to have 
been made on the last day of T's taxable period beginning on July 1 of 
Year 1. Ratable allocation under paragraph (b)(2)(ii) of this section is 
not elected.
    (b) Analysis. Under paragraph (b) of this section, the sale is 
treated as causing T's tax year to end on June 30, and the period 
beginning on July 1 is treated as a separate annual accounting period 
for all Federal income tax purposes. T's income from January 1 to June 
30 is included in the P group's Year 1 return, and T's income from July 
1 to December 31 is included in the X group's Year 1 return. Thus, the 
$100 contribution is deductible by T for the period of Year 1 that it is 
a member of the X group, subject to the applicable limitations of 
section 404, if a contribution on the last day of that period would 
otherwise be deductible.
    (c) The facts are the same as in paragraph (a) of this Example 5, 
except that, in accordance with section 404(a)(6), $40 of the $100 
contribution is made on account of T's taxable period beginning on 
January 1 of Year 1 and is deemed to be made on the last day of T's 
taxable period beginning on January 1 of Year 1. The remaining $60 is 
made on account of T's taxable period beginning on July 1 of Year 1 and 
is deemed to be made on the last day of T's taxable period beginning on 
July 1 of Year 1. As in paragraph (b) of this Example 5, under paragraph 
(b) of this section, the sale is treated as causing T's tax year to end 
on June 30, and the period beginning on July 1 is treated as a separate 
annual accounting period for all Federal income tax purposes. The $40 
portion of the contribution is deductible by T for the period of Year 1 
that it is a member of the P group, subject to the applicable 
limitations of section 404 and provided that a $40 contribution on the 
last day of that period would otherwise be deductible for that period, 
and the $60 portion is deductible by T for the period of Year 1 that it 
is a member of the X group, subject to the same conditions.
    (d) Ratable allocation. The facts are the same as in paragraph (a) 
of this Example 5, except that P, T, and X elect ratable allocation 
under paragraph (b)(2)(ii) of this section and T's deduction for the 
retirement plan contribution is not an extraordinary item. T's deduction 
may be ratably allocated, subject to the applicable limitations of 
section 404, and is allowable only if a contribution on the last day of 
Year 1 otherwise would be deductible for any period in the year. (The 
results would be the same if S were an unaffiliated corporation when 
acquired by X, and the due date of its last separate return (including 
extensions) were before the pension contribution was made on March 15 of 
Year 2.)
    Example 6. Allocation of partnership items. (a) Facts. P sells all 
of T's stock to X, and T becomes a nonmember on June 30 of Year 1. T has 
a 10% interest in the capital and profits of a calendar-year 
partnership.
    (b) Analysis. Under paragraph (b)(2)(v)(A) of this section, T is 
treated, solely for purposes of determining T's tax year in which the 
partnership's items are included, as selling or exchanging its entire 
interest in the partnership as of P's sale of T's stock. Thus, the 
deemed disposition is not taken into account under section 708, it does 
not result in gain or loss being recognized by T, and T's holding period 
is unaffected. However, under section 706(a), in determining T's income, 
T is required to include its distributive share of partnership items for 
the partnership's year ending within or with T's tax year. Under section 
706(c)(2), the partnership's tax year is treated as closing with respect 
to T for this purpose as of P's sale of T's stock. The allocation of T's 
distributive share of partnership items must be made under Sec. 1.706-
1(c)(2)(ii).
    (c) Controlled partnership. The facts are the same as in paragraph 
(a) of this Example 6, except that T has a 75% interest in the capital 
and profits of the partnership. Under paragraph (b)(2)(v)(B) of this 
section, T's distributive share of the partnership's items is treated as 
T's items for purposes of paragraph (b)(2) of this section. Thus, if 
ratable allocation under paragraph (b)(2)(ii) of this section is not 
elected, T's distributive share of the partnership's items must be 
determined under Sec. 1.706-1(c)(2)(ii) by an interim closing of the 
partnership's books. Similarly, if ratable allocation is elected for T's 
items that are not extraordinary items, T's distributive share of the 
partnership's nonextraordinary items must also be ratably allocated 
under Sec. 1.706-1(c)(2)(ii).

    (5) Effective date--(i) General rule. This paragraph (b) applies to 
corporations becoming or ceasing to be members of consolidated groups on 
or after January 1, 1995.
    (ii) Prior law. For prior transactions, see prior regulations under 
section 1502 as in effect with respect to the transaction. See, e.g., 
Sec. 1.1502-76(b) and (d) as

[[Page 339]]

contained in the 26 CFR part 1 edition revised as of April 1, 1994. 
However, Sec. 1.1502-76(b)(5) and (6) as contained in the 26 CFR part 1 
edition revised as of April 1, 1994 do not apply with respect to 
corporations becoming or ceasing to be members of consolidated groups on 
or after January 1, 1995. If both this paragraph (b) and prior law may 
apply to determine the inclusion of any amount in a return, appropriate 
adjustments must be made to prevent the omission or duplication of the 
amount.
    (c) Time for making separate returns for periods not included in 
consolidated return--(1) Consolidated return filed by due date for 
separate return. If the group has filed a consolidated return on or 
before the due date for the filing of a subsidiary's separate return 
(including extensions of time and determined without regard to any 
change of its taxable year required under paragraph (a) of this 
section), then the separate return for any portion of the subsidiary's 
taxable year for which its income is not included in the consolidated 
return of the group must be filed no later than the due date of such 
consolidated return (including extensions of time).
    (2) Consolidated return not filed by due date for separate return. 
If the group has not filed a consolidated return on or before the due 
date for the filing of a subsidiary corporation's separate return 
(including extensions of time and determined without regard to any 
change of its taxable year required under paragraph (a) of this 
section), then on or before such due date such subsidiary shall file a 
separate return either for the portion of its taxable year for which its 
income would not be included in a consolidated return if such a return 
were filed, or for its complete taxable year. However, if a separate 
return is filed for such portion of its taxable year and the group 
subsequently does not file a consolidated return, such subsidiary 
corporation shall file a substituted return for its complete taxable 
year not later than the due date (including extensions of time) 
prescribed for the filing of the common parent's return. On the other 
hand, if the return is filed for the subsidiary's complete taxable year 
and the group later files a consolidated return, such subsidiary must 
file an amended return not later than the due date (including extensions 
of time) for the filing of the consolidated return of the group. Such 
amended return shall be for that portion of such subsidiary's taxable 
year which is not included in the consolidated return. If, under this 
subparagraph, a substituted return must be filed, then the return 
previously filed shall not be considered a return within the meaning of 
section 6011. If, under this subparagraph, a substituted or amended 
return must be filed, then, for purposes of sections 6513(a) and 
6601(a), the last date prescribed for payment of tax shall be the due 
date (not including extensions of time) for the filing of the 
subsidiary's separate return (determined without regard to this 
subparagraph and without regard to any change of its taxable year 
required under paragraph (a) of this section).
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). Corporation P, which filed a separate return for the 
calendar year 1966, acquires all of the stock of corporation S as of the 
close of December 31, 1966. Corporation S reports its income on the 
basis of a fiscal year ending March 31. On June 15, 1967, the due date 
for the filing of a separate return by S (assuming no extensions of 
time), a consolidated return has not been filed for the group (P and S). 
On such date S may either file a return for the period April 1, 1966, 
through December 31, 1966, or it may file a return for the complete 
fiscal year ending March 31, 1967. If S files a return for the short 
period ending December 31, 1966, and if the group elects not to file a 
consolidated return for the calendar year 1967, S, on or before March 
15, 1968 (the due date of P's return, assuming no extensions of time), 
must file a substituted return for the complete fiscal year ending March 
31, 1967, in lieu of the return previously filed for the short period. 
Interest is computed from June 15, 1967. If, however, S files a return 
for the complete fiscal year ending March 31, 1967, and the group elects 
to file a consolidated return for the calendar year 1967, then S must 
file an amended return covering the period from April 1, 1966, through 
December 31, 1966, in lieu of the return previously filed for the 
complete fiscal year. Interest is computed from June 15, 1967.
    Example (2). Assume the same facts as in example (1) except that 
corporation P acquires all of the stock of corporation S at the close of 
September 30, 1967, and that P files a consolidated return for the group 
for 1967 on March 15, 1968 (not having obtained

[[Page 340]]

any extensions of time). Since a consolidated return has been filed on 
or before the due date (June 15, 1968) for the filing of the separate 
return for the taxable year ending March 31, 1968, the return of S for 
the short taxable year beginning April 1, 1967, and ending September 30, 
1967, should be filed no later than March 15, 1968.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7244, 37 FR 
28897, Dec. 30, 1972; T.D. 7246, 38 FR 766, Jan. 4, 1973; T.D. 8560, 59 
FR 41700, Aug. 15, 1994; T.D. 8560, 62 FR 12098, Mar. 14, 1997]



Sec. 1.1502-77   Common parent agent for subsidiaries.

    (a) Scope of agency of common parent corporation. The common parent, 
for all purposes (other than the making of the consent required by 
paragraph (a)(1) of Sec. 1.1502-75, the making of an election under 
section 936(e), the making of an election to be treated as a DISC under 
Sec. 1.992-2, and a change of the annual accounting period pursuant to 
paragraph (b)(3)(ii) of Sec. 1.991-1) shall be the sole agent for each 
subsidiary in the group, duly authorized to act in its own name in all 
matters relating to the tax liability for the consolidated return year. 
Except as provided in the preceding sentence, no subsidiary shall have 
authority to act for or to represent itself in any such matter. For 
example, any election available to a subsidiary corporation in the 
computation of its seperate taxable income must be made by the common 
parent, as must any change in an election previously made by the 
subsidiary corporation; all correspondence will be carried on directly 
with the common parent; the common parent shall file for all extensions 
of time including extensions of time for payment of tax under section 
6164; notices of deficiencies will be mailed only to the common parent, 
and the mailing to the common parent shall be considered as a mailing to 
each subsidiary in the group; notice and demand for payment of taxes 
will be given only to the common parent and such notice and demand will 
be considered as a notice and demand to each subsidiary; the common 
parent will file petitions and conduct proceedings before the Tax Court 
of the United States, and any such petition shall be considered as also 
having been filed by each such subsidiary. The common parent will file 
claims for refund or credit, and any refund will be made directly to and 
in the name of the common parent and will discharge any liability of the 
Government in respect thereof to any such subsidiary; and the common 
parent in its name will give waivers, give bonds, and execute closing 
agreements, offers in compromise, and all other documents, and any 
waiver or bond so given, or agreement, offer in compromise, or any other 
document so executed, shall be considered as having also been given or 
executed by each such subsidiary. Notwithstanding the provisions of this 
paragraph, any notice of deficiency, in respect of the tax for a 
consolidated return year, will name each corporation which was a member 
of the group during any part of such period (but a failure to include 
the name of any such member will not affect the validity of the notice 
of deficiency as to the other members); any notice and demand for 
payment will name each corporation which was a member of the group 
during any part of such period (but a failure to include the name of any 
such member will not affect the validity of the notice and demand as to 
the other members); and any levy, any notice of a lien, or any other 
proceeding to collect the amount of any assessment, after the assessment 
has been made, will name the corporation from which such collection is 
to be made. The provisions of this paragraph shall apply whether or not 
a consolidated return is made for any subsequent year, and whether or 
not one or more subsidiaries have become or have ceased to be members of 
the group at any time. Notwithstanding the provisions of this paragraph, 
the district director may, upon notifying the common parent, deal 
directly with any member of the group in respect of its liability, in 
which event such member shall have full authority to act for itself.
    (b) Notification of deficiency to corporation which has ceased to be 
a member of the group. If a subsidiary has ceased to be a member of the 
group and if such subsidiary files written notice of such cessation with 
the district director with whom the consolidated return is filed, then 
such district director upon request of such subsidiary will furnish

[[Page 341]]

it with a copy of any notice of deficiency in respect of the tax for a 
consolidated return year for which it was a member and a copy of any 
notice and demand for payment of such deficiency. The filing of such 
written notification and request by a corporation shall not have the 
effect of limiting the scope of the agency of the common parent provided 
for in paragraph (a) of this section and a failure by such district 
director to comply with such written request shall not have the effect 
of limiting the tax liability of such corporation provided for in 
Sec. 1.1502-6.
    (c) Effect of waiver given by common parent. Unless the district 
director agrees to the contrary, an agreement entered into by the common 
parent extending the time within which an assessment may be made or levy 
or proceeding in court begun in respect of the tax for a consolidated 
return year shall be applicable:
    (1) To each corporation which was a member of the group during any 
part of such taxable year, and
    (2) To each corporation the income of which was included in the 
consolidated return for such taxable year, notwithstanding that the tax 
liability of any such corporation is subsequently computed on the basis 
of a separate return under the provisions of Sec. 1.1502-75.
    (d) Effect of dissolution of common parent corporation. If the 
common parent corporation contemplates dissolution, or is about to be 
dissolved, or if for any other reason its existence is about to 
terminate, it shall forthwith notify the district director with whom the 
consolidated return is filed of such fact and designate, subject to the 
approval of such district director, another member to act as agent in 
its place to the same extent and subject to the same conditions and 
limitations as are applicable to the common parent. If the notice thus 
required is not given by the common parent, or the designation is not 
approved by the district director, the remaining members may, subject to 
the approval of such district director, designate another member to act 
as such agent, and notice of such designation shall be given to such 
district director. Until a notice in writing designating a new agent has 
been approved by such district director, any notice of deficiency or 
other communication mailed to the common parent shall be considered as 
having been properly mailed to the agent of the group; or, if such 
district director has reason to believe that the existence of the common 
parent has terminated, he may, if he deems it advisable, deal directly 
with any member in respect of its liability.
    (e) Cross-references--(1) Alternative agents. For rules relating to 
alternative agents of the group, see Sec. 1.1502-77.
    (2) Groups that include insolvent financial institutions. For 
further rules applicable to groups that include insolvent financial 
institutions, see Sec. 301.6402-7 of this chapter.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7323, 39 FR 
34409, Sept. 25, 1974; T.D. 7673, 45 FR 8588, Feb. 8, 1980; T.D. 8226, 
53 FR 34733, Sept. 8, 1988; T.D. 8446, 57 FR 53034, Nov. 6, 1992]



Sec. 1.1502-77T  Alternative agents of the group (temporary).

    (a) General rules--(1) Scope. This section applies if the 
corporation that is the common parent of the group ceases to be the 
common parent, whether or not the group remains in existence under 
Sec. 1.1502-75(d).
    (2) Notice of deficiency. A notice of deficiency mailed to any one 
or more corporations referred to in paragraph (a)(4) of this section is 
deemed for purposes of Sec. 1.1502-77 to be mailed to the agent of the 
group. If the group has designated an agent that has been approved by 
the district director under Sec. 1.1502-77(d), a notice of deficiency 
shall be mailed to that designated agent in addition to any other 
corporation referred to in paragraph (a)(4) of this section. However, 
failure by the district director to mail a notice of deficiency to that 
designated agent shall not invalidate the notice of deficiency mailed to 
any other corporation referred to in paragraph (a)(4) of this section.
    (3) Waiver of statute of limitations. A waiver of the statute of 
limitations with respect to the group given by any one or more 
corporations referred to in paragraph (a)(4) of this section is deemed 
to be given by the agent of the group.

[[Page 342]]

    (4) Alternative agents. The corporations referred to in paragraph 
(a) (2) and (3) of this section are--
    (i) The common parent of the group for all or any part of the year 
to which the notice or waiver applies,
    (ii) A successor to the former common parent in a transaction to 
which section 381(a) applies,
    (iii) The agent designated by the group under Sec. 1.1502-77(d), or
    (iv) If the group remains in existence under Sec. 1.1502-75(d) (2) 
or (3), the common parent of the group at the time the notice is mailed 
or the waiver given.
    (b) Effective date. Paragraph (a) of this section applies to 
statutory notices and waivers of the statute of limitations for taxable 
years for which the due date (without extensions) of the consolidated 
return is after September 7, 1988.

[T.D. 8226, 53 FR 34733, Sept. 8, 1988]



Sec. 1.1502-78   Tentative carryback adjustments.

    (a) General rule. If a group has a consolidated net operating loss, 
a consolidated net capital loss, or a consolidated unused investment 
credit for any taxable year, then any application under section 6411 for 
a tentative carryback adjustment of the taxes for a consolidated return 
year or years preceding such year shall be made by the common parent 
corporation to the extent such loss or unused investment credit is not 
apportioned to a corporation for a separate return year pursuant to 
Sec. Sec. 1.1502-21T(b), 1.1502-22T(b), or 1.1502-79(c) (or 
Sec. Sec. 1.1502-79A(a), 1.1502-79A(b), or 1.1502-79(c), as appropriate. 
In the case of the portion of a consolidated net operating loss or 
consolidated net capital loss or consolidated unused investment credit 
to which the preceding sentence does not apply, and in the case of a net 
capital or net operating loss or unused investment credit arising in a 
separate return year which may be carried back to a consolidated return 
year, the corporation or corporations to which any such loss or credit 
is attributable shall make any application under section 6411.
    (b) Special rules--(1) Payment of refund. Any refund allowable under 
an application referred to in paragraph (a) of this section shall be 
made directly to and in the name of the corporation filing the 
application, except that in all cases where a loss is deducted from the 
consolidated taxable income or a credit is allowed in computing the 
consolidated tax liability for a consolidated return year, any refund 
shall be made directly to and in the name of the common parent 
corporation. The payment of any such refund shall discharge any 
liability of the Government with respect to such refund.
    (2) Several liability. If a group filed a consolidated return for a 
taxable year for which there was an adjustment by reason of an 
application under section 6411, and if a deficiency is assessed against 
such group under section 6213(b)(2), then each member of such group 
shall be severally liable for such deficiency including any interest or 
penalty assessed in connection with such deficiency.
    (3) Groups that include insolvent financial institutions. For 
further rules applicable to groups that include insolvent financial 
institutions, see Sec. 301.6402-7 of this chapter.
    (c) Examples. The provisions of paragraphs (a) and (b) of this 
section may be illustrated by the following examples:

    Example (1). Corporations P, S, and S-1 filed a consolidated return 
for the calendar year 1966. P, S, and S-1 also filed a consolidated 
return for the calendar year 1969. The group incurred a consolidated net 
operating loss in 1969 attributable to S-1 which may be carried back to 
1966 as a consolidated net operating loss carryback. If a tentative 
carryback adjustment is desired, P, the common parent, must file an 
application under section 6411 and any refund will be made to P.
    Example (2). Assume the same facts as in example (1) except that P, 
S, and S-1 filed separate returns for the calendar year 1969, even 
though they were members of the same group for such year. S-1 incurred a 
net operating loss in 1969 which may be carried back to 1966. If a 
tentative carryback adjustment is desired, S-1 must file an application 
under section 6411 and any refund from such application will be made to 
P.
    Example (3). Corporations X, Y, and Z filed a consolidated return 
for the calendar year 1966. Z ceased to be a member of the group in 
1967. Z filed a separate return for 1968 while X and Y filed a 
consolidated return for such year. The group incurred a consolidated net 
operating loss in 1968 attributable to Y,

[[Page 343]]

which may be carried back to 1966. Z also incurred a net operating loss 
for 1968 which may be carried back to 1966. If a tentative carryback 
adjustment is claimed with respect to the consolidated net operating 
loss, X, the common parent, must file an application under section 6411. 
If a tentative carryback adjustment is desired with respect to Z's loss, 
Z must file an application. Any refunds attributable to either 
application will be made to X. If an assessment is made under section 
6213(b)(2) to recover an excessive tentative allowance made with respect 
to calendar year 1966, X, Y, and Z are severally liable for such 
assessment.
    Example (4). Corporations L and M filed a consolidated return for 
the calendar year 1966. Corporation N filed a separate return for such 
year. Later, N became a member of the group and filed a consolidated 
return with the group for the calendar year 1968. The group incurred a 
consolidated net operating loss in 1968 attributable to N which may be 
carried back to N's separate return for 1966. If a tentative carryback 
adjustment is desired, N must file an application under section 6411 and 
any refund will be made directly to N.

    (d) Adjustments of overpayments of estimated income tax. If a group 
paid its estimated income tax on a consolidated basis, then any 
application under section 6425 for an adjustment of overpayment of 
estimated income tax shall be made by the common parent corporation. If 
the members of a group paid estimated income taxes on a separate basis, 
then any application under section 6425 shall be made by the member of 
the group which claims an overpayment on a separate basis. Any refund 
allowable under an application under section 6425 shall be made directly 
to and in the name of the corporation filing the application.

[T.D. 6894, 31 FR 11794, Sept. 3, 1966, as amended by T.D. 7059, 35 FR 
14546, Sept. 17, 1970; T.D. 7246, 38 FR 767, Jan. 4, 1973; T.D. 8387, 56 
FR 67489, Dec. 31, 1991; T.D. 8446, 57 FR 53034, Nov. 6, 1992; T.D. 
8677, 61 FR 33324, June 27, 1996]



Sec. 1.1502-79   Separate return years.

    (a) Carryover and carryback of consolidated net operating losses to 
separate return years. For losses arising in consolidated return years 
beginning before January 1, 1997, see Sec. 1.1502-79A(a). For later 
years, see Sec. 1.1502-21T(b).
    (b) Carryover and carryback of consolidated net capital loss to 
separate return years. For losses arising in consolidated return years 
beginning before January 1, 1997, see Sec. 1.1502-79A(b). For later 
years, see Sec. 1.1502-22T(b).
    (c) Carryover and carryback of consolidated unused investment credit 
to separate return years--(1) In general. If a consolidated unused 
investment credit can be carried under the principles of section 46(b) 
and paragraph (b) of Sec. 1.1502-3 to a separate return year of a 
corporation (or could have been so carried if such corporation were in 
existence) which was a member of the group in the year in which such 
unused credit arose, then the portion of such consolidated unused credit 
attributable to such corporation (as determined under subparagraph (2) 
of this paragraph) shall be apportioned to such corporation (and any 
successor to such corporation in a transaction to which section 381(a) 
applies) under the principles of Sec. 1.1502-21T(b) (or 
Sec. Sec. 1.1502-79A(a)(1) and (2), as appropriate) and shall be an 
investment credit carryover or carryback to such separate return year.
    (2) Portion of consolidated unused investment credit attributable to 
a member--(i) Investment credit carryback. In the case of a consolidated 
unused credit which is an investment credit carryback, the portion of 
such consolidated unused credit attributable to a member of the group is 
an amount equal to such consolidated unused credit multiplied by a 
fraction, the numerator of which is the credit earned of such member for 
the consolidated unused credit year, and the denominator of which is the 
consolidated credit earned for such unused credit year.
    (ii) Investment credit carryover. In the case of a consolidated 
unused credit which is an investment credit carryover, the portion of 
such consolidated unused credit attributable to a member of the group is 
an amount equal to such consolidated unused credit multiplied by a 
fraction, the numerator of which is the credit earned with respect to 
any section 38 property placed in service in the consolidated unused 
credit year and owned by such member (whether or not placed in service 
by such member) at the close of the last day as of which the taxable 
income of such member is included in a consolidated return filed by the 
group, and the

[[Page 344]]

denominator of which is the consolidated credit earned for such unused 
credit year.
    (d) Carryover and carryback of consolidated unused foreign tax--(1) 
In general. If a consolidated unused foreign tax can be carried under 
the principles of section 904(d) and paragraph (e) of Sec. 1.1502-4 to a 
separate return year of a corporation (or could have been so carried if 
such corporation were in existence) which was a member of the group in 
the year in which such unused foreign tax arose, then the portion of 
such consolidated unused foreign tax attributable to such corporation 
(as determined under subparagraph (2) of this paragraph) shall be 
apportioned to such corporation (and any successor to such corporation 
in a transaction to which section 381(a) applies) under the principles 
of Sec. 1.1502-21T(b) (or Sec. Sec. 1.1502-79A(a)(1) and (2), as 
appropriate) and shall be deemed paid or accrued in such separate return 
year to the extent provided in section 904(d).
    (2) Portion of consolidated unused foreign tax attributable to a 
member. The portion of a consolidated unused foreign tax for any year 
attributable to a member of a group is an amount equal to such 
consolidated unused foreign tax multipled by a fraction, the numerator 
of which is the foreign taxes paid or accrued for such year (including 
those taxes deemed paid or accrued, other than by reason of section 
904(d)) to each foreign country or possession (or to all foreign 
countries or possessions if the overall limitation is effective) by such 
member, and the denominator of which is the aggregate of all such taxes 
paid or accrued for such year (including those taxes deemed paid or 
accrued, other than by reason of section 904(d)) to each such foreign 
country or possession (or to all foreign countries or possessions if the 
overall limitation is effective) by all the members of the group.
    (e) Carryover of consolidated excess charitable contributions to 
separate return years--(1) In general. If the consolidated excess 
charitable contributions for any taxable year can be carried under the 
principles of section 170(b)(2) and paragraph (b) of Sec. 1.1502-24 to a 
separate return year of a corporation (or could have been so carried if 
such corporation were in existence) which was a member of the group in 
the year in which such excess contributions arose, then the portion of 
such consolidated excess charitable contributions attributable to such 
corporation (as determined under subparagraph (2) of this paragraph) 
shall be apportioned to such corporation (and any successor to such 
corporation in a transaction to which section 381(a) applies) under the 
principles of Sec. 1.1502-21T(b) (or Sec. Sec. 1.1502-79A(a)(1) and (2), 
as appropriate) and shall be a charitable contribution carryover to such 
separate return year.
    (2) Portion of consolidated excess charitable contributions 
attributable to a member. The portion of the consolidated excess 
charitable contributions attributable to a member of a group is an 
amount equal to such consolidated excess contributions multiplied by a 
fraction, the numerator of which is the charitable contributions paid by 
such member for the taxable year, and the denominator of which is the 
aggregate of all such charitable contributions paid for such year by all 
the members of the group.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980; T.D. 8294, 55 FR 9438, Mar. 14, 1990; T.D. 8319, 55 
FR 49038, Nov. 26, 1990; T.D. 8364, 56 FR 47402, Sept. 19, 1991; T.D. 
8597, 60 FR 36710, July 18, 1995; T.D. 8677, 61 FR 33324, 33325, 33334, 
June 27, 1996]



Sec. 1.1502-80  Applicability of other provisions of law.

    (a) In general. The Internal Revenue Code, or other law, shall be 
applicable to the group to the extent the regulations do not exclude its 
application. Thus, for example, in a transaction to which section 381(a) 
applies, the acquiring corporation will succeed to the tax attributes 
described in section 381(c). Furthermore, sections 269 and 482 apply for 
any consolidated year. Section 304 applies except as provided in 
paragraph (b) of this section.
    (b) Non-applicability of section 304. Section 304 does not apply to 
any acquisition of stock of a corporation in an intercompany transaction 
or to any intercompany item from such transaction occurring on or after 
July 24, 1991.

[[Page 345]]

    (c) Deferral of section 165. For consolidated return years beginning 
on or after January 1, 1995, stock of a member is not treated as 
worthless under section 165 before the stock is treated as disposed of 
under the principles of Sec. 1.1502-19(c)(1)(iii). See Secs. 1.1502-
11(c) and 1.1502-20 for additional rules relating to stock loss.
    (d) Non-applicability of section 357(c)--(1) In general. Section 
357(c) does not apply to any transaction to which Sec. 1.1502-13, 
Sec. 1.1502-13T, Sec. 1.1502-14, or Sec. 1.1502-14T applies, if it 
occurs in a consolidated return year beginning on or after January 1, 
1995. For example, P, S, and T are members of a consolidated group, P 
owns all of the stock of S and T with bases of $30 and $20, 
respectively, S has a $30 basis in its assets and $40 of liabilities, 
and S merges into T in a transaction described in section 368(a)(1)(A) 
(and in section 368(a)(1)(D)); section 357(c) does not apply to the 
merger, P's basis in T's stock increases to $50 ($30 plus $20), and T 
succeeds to S's $30 basis in the assets transferred subject to the $40 
liability. Similarly, if S instead transferred its assets and 
liabilities to a newly formed subsidiary in a transaction to which 
section 351 applies, section 357(c) does not apply and S's basis in the 
subsidiary's stock is a $10 excess loss account. This paragraph (d) does 
not apply to a transaction if the transferor or transferee becomes a 
nonmember as part of the same plan or arrangement. The transferor (or 
transferee) is treated as becoming a nonmember once it is no longer a 
member of a consolidated group that includes the transferee (or 
transferor). For purposes of this paragraph (d), any reference to a 
transferor or transferee includes, as the context may require, a 
reference to a successor or predecessor.
    (2) Prior period transactions. If, in a tax year beginning before 
January 1, 1995, a member's stock with an excess loss account is 
transferred in a transaction to which Sec. 1.1502-13, Sec. 1.1502-13T, 
Sec. 1.1502-14, or Sec. 1.1502-14T applies, paragraph (d)(1) of this 
section applies to the stock transfer to the extent that the income, 
gain, deduction, or loss (if any) is not taken into account in a tax 
year beginning before January 1, 1995. For example, if P, S, and T, are 
members of a consolidated group, T's stock has an excess loss account, 
and P transfers the T stock to S in 1993 in a transaction to which 
section 351 and Sec. 1.1502-13 apply, section 357(c) applies to the 
transfer only to the extent P's gain is taken into account in tax years 
beginning before January 1, 1995.
    (e) Non-applicability of section 163(e)(5). Section 163(e)(5) does 
not apply to any intercompany obligation (within the meaning of 
Sec. 1.1502-13(g)) issued in a consolidated return year beginning on or 
after July 12, 1995.
    (f) Non-applicability of section 1031. Section 1031 does not apply 
to any intercompany transaction occurring in consolidated return years 
beginning on or after July 12, 1995.

[T.D. 8402, 57 FR 9385, Mar. 18, 1992, as amended by T.D. 8560, 59 FR 
41703, Aug. 15, 1994; T.D. 8597, 60 FR 36710, July 18, 1995; T.D. 8677, 
61 FR 33325, June 27, 1996; T.D. 8597, 62 FR 12098, Mar. 14, 1997]



Sec. 1.1502-81T  Alaska Native Corporations.

    (a) General Rule. The application of section 60(b)(5) of the Tax 
Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986 
(relating to Native Corporations established under the Alaska Native 
Claims Settlement Act (43 U.S.C. 1601 et seq.)) is limited to the use on 
a consolidated return of losses and credits of a Native Corporation, and 
of a corporation all of whose stock is owned directly by a Native 
Corporation, during any taxable year (beginning after the effective date 
of such sections and before 1992), or any part thereof, against the 
income and tax liability of a corporation affiliated with the Native 
Corporation. Thus, no other tax saving, tax benefit, or tax loss is 
intended to result from the application of section 60(b)(5) of the Tax 
Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986 
to any person (whether or not such person is a member of an affiliated 
group of which a Native Corporation is the common parent). In 
particular, except as approved by the Secretary, no positive adjustment 
under Sec. 1.1502-32(b) will be made with respect to the basis of stock 
of a corporation that is affiliated with a

[[Page 346]]

Native Corporation through application of section 60(b)(5) of the Tax 
Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986.
    (b) Effective Dates. This section applies to taxable years beginning 
after December 31, 1984.

[T.D. 8130, 52 FR 8448, Mar. 18, 1987, as amended by T.D. 8560, 59 FR 
41675, Aug. 15, 1994]



Sec. 1.1502-90T  Table of contents (temporary).

    The following table contains the major headings in Secs. 1.1502-91T 
through 1.1502-99T.

    Sec. 1.1502-91T  Application of section 382 with respect to a 
consolidated group (temporary).

(a) Determination and effect of an ownership change.
(1) In general.
(2) Special rule for post-change year that includes the change date.
(3) Cross reference.
(b) Definitions and nomenclature.
(c) Loss group.
(1) Defined.
(2) Coordination with rule that ends separate tracking.
(3) Example.
(d) Loss subgroup.
(1) Net operating loss carryovers.
(2) Net unrealized built-in loss.
(3) Loss subgroup parent.
(4) Principal purpose of avoiding a limitation.
(5) Special rules.
(6) Examples.
(e) Pre-change consolidated attribute.
(1) Defined.
(2) Example.
(f) Pre-change subgroup attribute.
(1) Defined.
(2) Example.
(g) Net unrealized built-in gain and loss.
(1) In general.
(2) Members included.
(i) Consolidated group.
(ii) Loss subgroup.
(3) Acquisitions of built-in gain or loss assets.
(4) Indirect ownership.
(h) Recognized built-in gain or loss.
(1) In general. [Reserved]
(2) Disposition of stock or an intercompany obligation of a member.
(3) Deferred gain or loss.
(4) Exchanged basis property.
(i) [Reserved]
(j) Predecessor and successor corporations.

    Sec. 1.1502-92T  Ownership change of a loss group or a loss subgroup 
(temporary).

(a) Scope.
(b) Determination of an ownership change.
(1) Parent change method.
(i) Loss group.
(ii) Loss subgroup.
(2) Examples.
(3) Special adjustments.
(i) Common parent succeeded by a new common parent.
(ii) Newly created loss subgroup parent.
(iii) Examples.
(4) End of separate tracking of certain losses.
(c) Supplemental rules for determining ownership change.
(1) Scope.
(2) Cause for applying supplemental rule.
(3) Operating rules.
(4) Supplemental ownership change rules.
(i) Additional testing dates for the common parent (or loss subgroup 
parent).
(ii) Treatment of subsidiary stock as stock of the common parent (or 
loss subgroup parent).
(iii) 5-percent shareholder of the common parent (or loss subgroup 
parent).
(5) Examples.
(d) Testing period following ownership change under this section.
(e) Information statements.
(1) Common parent of a loss group.
(2) Abbreviated statement with respect to loss subgroups.

    Sec. 1.1502-93T  Consolidated section 382 limitation (or subgroup 
section 382 limitation) (temporary).

(a) Determination of the consolidated section 382 limitation (or 
subgroup section 382 limitation).
(1) In general.
(2) Coordination with apportionment rule.
(b) Value of the loss group (or loss subgroup).
(1) Stock value immediately before ownership change.
(2) Adjustment to value.
(3) Examples.
(c) Recognized built-in gain of a loss group or loss subgroup.
(d) Continuity of business.
(1) In general.
(2) Example.
(e) Limitations of losses under other rules.

    Sec. 1.1502-94T  Coordination with section 382 and the regulations 
thereunder when a corporation becomes a member of a consolidated group 
(temporary).

(a) Scope.
(1) In general.
(2) Successor corporation as new loss member.
(3) Coordination in the case of a loss subgroup.
(4) End of separate tracking of certain losses.
(5) Cross-reference.
(b) Application of section 382 to a new loss member.
(1) In general.
(2) Adjustment to value.

[[Page 347]]

(3) Pre-change separate attribute defined.
(4) Examples.
(c) Built-in gains and losses.
(d) Information statements.

    Sec. 1.1502-95T  Rules on ceasing to be a member of a consolidated 
group (or loss subgroup) (temporary).

(a) In general.
(1) Consolidated group.
(2) Election by common parent.
(3) Coordination with Secs. 1.1502-91T through 1.1502-93T.
(b) Separate application of section 382 when a member leaves a 
consolidated group.
(1) In general.
(2) Effect of a prior ownership change of the group.
(3) Application in the case of a loss subgroup.
(4) Examples.
(c) Apportionment of a consolidated section 382 limitation.
(1) In general.
(2) Amount of apportionment.
(3) Effect of apportionment on the consolidated section 382 limitation.
(4) Effect on corporations to which the consolidated section 382 
limitation is apportioned.
(5) Deemed apportionment when loss group terminates.
(6) Appropriate adjustments when former member leaves during the year.
(7) Examples.
(d) Rules pertaining to ceasing to be a member of a loss subgroup.
(1) In general.
(2) Examples.
(e) Filing the election to apportion.
(1) Form of the election to apportion.
(2) Signing of the election.
(3) Filing of the election.
(4) Revocation of election.

    Sec. 1.1502-96T  Miscellaneous rules (temporary).

(a) End of separate tracking of losses.
(1) Application.
(2) Effect of end of separate tracking.
(3) Continuing effect of end of separate tracking.
(4) Special rule for testing period.
(5) Limits on effects of end of separate tracking.
(b) Ownership change of subsidiary.
(1) Ownership change of a subsidiary because of options or plan or 
arrangement.
(2) Effect of the ownership change.
(i) In general.
(ii) Pre-change losses.
(3) Coordination with Secs. 1.1502-91T, 1.1502-92T, and 1.1502-94T.
(4) Example.
(c) Continuing effect of an ownership change.

    Sec. 1.1502-97T  Special rules under section 382 for members under 
the jurisdiction of a court in a title 11 or similar case (temporary). 
[Reserved]
    Sec. 1.1502-98T  Coordination with section 383 (temporary).
    Sec. 1.1502-99T  Effective dates (temporary).

(a) Effective date.
(b) Testing period may include a period beginning before January 1, 
1997.
(c) Transition rules.
(1) Methods permitted.
(i) In general.
(ii) Adjustments to offset excess limitation.
(iii) Coordination with effective date.
(2) Permitted methods.
(d) Amended returns.
(e) Section 383.

[T.D. 8678, 61 FR 33336, June 27, 1996]



Sec. 1.1502-91T  Application of section 382 with respect to a consolidated group (temporary).

    (a) Determination and effect of an ownership change--(1) In general. 
This section and Secs. 1.1502-92T and 1.1502-93T set forth the rules for 
determining an ownership change under section 382 for members of 
consolidated groups and the section 382 limitations with respect to 
attributes described in paragraphs (e) and (f) of this section. These 
rules generally provide that an ownership change and the section 382 
limitation are determined with respect to these attributes for the group 
(or loss subgroup) on a single entity basis and not for its members 
separately. Following an ownership change of a loss group (or a loss 
subgroup) under Sec. 1.1502-92T, the amount of consolidated taxable 
income for any post-change year which may be offset by pre-change 
consolidated attributes (or pre-change subgroup attributes) shall not 
exceed the consolidated section 382 limitation (or subgroup section 382 
limitation) for such year as determined under Sec. 1.1502-93T.
    (2) Special rule for post-change year that includes the change date. 
If the post-change year includes the change date, section 382(b)(3)(A) 
is applied so that the consolidated section 382 limitation (or subgroup 
section 382 limitation) does not apply to the portion of consolidated 
taxable income that is allocable to the period in the year on or before 
the change date. See generally Sec. 1.382-6 (relating to the allocation 
of income and loss). The allocation of consolidated taxable income for 
the post-change year that includes the change date must be made before 
taking into account any consolidated net operating loss deduction (as 
defined in Sec. 1.1502-21T(a)).

[[Page 348]]

    (3) Cross reference. See Secs. 1.1502-94T and 1.1502-95T for rules 
that apply section 382 to a corporation that becomes or ceases to be a 
member of a group or loss subgroup.
    (b) Definitions and nomenclature. For purposes of this section and 
Secs. 1.1502-92T through 1.1502-99T, unless otherwise stated:
    (1) The definitions and nomenclature contained in section 382 and 
the regulations thereunder (including the nomenclature and assumptions 
relating to the examples in Sec. 1.382-2T(b)) and this section and 
Secs. 1.1502-92T through 1.1502-99T apply; and
    (2) In all examples, all groups file consolidated returns, all 
corporations file their income tax returns on a calendar year basis, the 
only 5-percent shareholder of a corporation is a public group, the facts 
set forth the only owner shifts during the testing period, and each 
asset of a corporation has a value equal to its adjusted basis.
    (c) Loss group--(1) Defined. A loss group is a consolidated group 
that:
    (i) Is entitled to use a net operating loss carryover to the taxable 
year that did not arise (and is not treated under Sec. 1.1502-21T(c) as 
arising) in a SRLY;
    (ii) Has a consolidated net operating loss for the taxable year in 
which a testing date of the common parent occurs (determined by treating 
the common parent as a loss corporation); or
    (iii) Has a net unrealized built-in loss (determined under paragraph 
(g) of this section by treating the date on which the determination is 
made as though it were a change date).
    (2) Coordination with rule that ends separate tracking. A 
consolidated group may be a loss group because a member's losses that 
arose in (or are treated as arising in) a SRLY are treated as described 
in paragraph (c)(1)(i) of this section. See Sec. 1.1502-96T(a).
    (3) Example. The following example illustrates the principles of 
this paragraph (c).

    Example. Loss group. (a) L and L1 file separate returns and each has 
a net operating loss carryover arising in Year 1 that is carried over to 
Year 2. A owns 40 shares and L owns 60 shares of the 100 outstanding 
shares of L1 stock. At the close of Year 1, L buys the 40 shares of L1 
stock from A. For Year 2, L and L1 file a consolidated return. The 
following is a graphic illustration of these facts:


[[Page 349]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.002



    (b) L and L1 become a loss group at the beginning of Year 2 because 
the group is entitled to use the Year 1 net operating loss carryover of 
L, the common parent, which did not arise (and is not treated under 
Sec. 1.1502-21T(c) as arising) in a SRLY. See Sec. 1.1502-94T for rules 
relating to the application of section 382 with respect to L1's net 
operating loss carryover from Year 1 which did arise in a SRLY.

    (d) Loss subgroup--(1) Net operating loss carryovers. Two or more 
corporations that become members of a consolidated group (the current 
group) compose a loss subgroup if:

[[Page 350]]

    (i) They were affiliated with each other in another group (the 
former group), whether or not the group was a consolidated group;
    (ii) They bear the relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent immediately after they become 
members of the current group; and
    (iii) At least one of the members carries over a net operating loss 
that did not arise (and is not treated under Sec. 1.1502-21T(c) as 
arising) in a SRLY with respect to the former group.
    (2) Net unrealized built-in loss. Two or more corporations that 
become members of a consolidated group compose a loss subgroup if they:
    (i) Have been continuously affiliated with each other for the 5 
consecutive year period ending immediately before they become members of 
the group;
    (ii) Bear the relationship described in section 1504(a)(1) to each 
other through a loss subgroup parent immediately after they become 
members of the current group; and
    (iii) Have a net unrealized built-in loss (determined under 
paragraph (g) of this section on the day they become members of the 
group by treating that day as though it were a change date).
    (3) Loss subgroup parent. A loss subgroup parent is the corporation 
that bears the same relationship to the other members of the loss 
subgroup as a common parent bears to the members of a group.
    (4) Principal purpose of avoiding a limitation. The corporations 
described in paragraph (d)(1) or (2) of this section do not compose a 
loss subgroup if any one of them is formed, acquired, or availed of with 
a principal purpose of avoiding the application of, or increasing any 
limitation under, section 382. Instead, Sec. 1.1502-94T applies with 
respect to the attributes of each such corporation. This paragraph 
(d)(4) does not apply solely because, in connection with becoming 
members of the group, the members of a group (or loss subgroup) are 
rearranged to bear a relationship to the other members described in 
section 1504(a)(1).
    (5) Special rules. See Sec. 1.1502-95T(d) for rules concerning when 
a corporation ceases to be a member of a loss subgroup. See also 
Sec. 1.1502-96T(a) for a special rule regarding the end of separate 
tracking of SRLY losses of a member that has an ownership change or that 
has been a member of a group for at least 5 consecutive years.
    (6) Examples. The following examples illustrate the principles of 
this paragraph (d).

    Example 1. Loss subgroup. (a) P owns all the L stock and L owns all 
the L1 stock. The P group has a consolidated net operating loss arising 
in Year 1 that is carried to Year 2. On May 2, Year 2, P sells all the 
stock of L to A, and L and L1 thereafter file consolidated returns. A 
portion of the Year 1 consolidated net operating loss is apportioned 
under Sec. 1.1502-21T(b) to each of L and L1, which they carry over to 
Year 2. The following is a graphic illustration of these facts:


[[Page 351]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.003



    (b) (1) L and L1 compose a loss subgroup within the meaning of 
paragraph (d)(1) of this section because--
    (i) They were affiliated with each other in the P group (the former 
group);
    (ii) They bear a relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent (L) immediately after they 
became members of the L group; and
    (iii) At least one of the members (here, both L and L1) carries over 
a net operating loss to the L group (the current group) that did not 
arise in a SRLY with respect to the P group.
    (2) Under paragraph (d)(3) of this section, L is the loss subgroup 
parent of the L loss subgroup.
    Example 2. Loss subgroup--section 1504(a)(1) relationship. (a) P 
owns all the stock of L and

[[Page 352]]

L1. L owns all the stock of L2. L1 and L2 own 40 percent and 60 percent 
of the stock of L3, respectively. The P group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. On May 
22, Year 2, P sells all the stock of L and L1 to P1, the common parent 
of another consolidated group. The Year 1 consolidated net operating 
loss is apportioned under Sec. 1.1502-21T(b), and each of L, L1, L2, and 
L3 carries over a portion of such loss to the first consolidated return 
year of the P1 group ending after the acquisition. The following is a 
graphic illustration of these facts:


[[Page 353]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.004



    (b) L and L2 compose a loss subgroup within the meaning of paragraph 
(d)(1) of this section. Neither L1 nor L3 is included in a loss subgroup 
because neither bears a relationship described in section 1504(a)(1) 
through a loss subgroup parent to any other member of the former group 
immediately after becoming members of the P1 group.
    Example 3. Loss subgroup--section 1504(a)(1) relationship. The facts 
are the same as in Example 2, except that the stock of L1 is transferred 
to L in connection with the sale of the

[[Page 354]]

L stock to P1. L, L1, L2, and L3 compose a loss subgroup within the 
meaning of paragraph (d)(1) of this section because--
    (1) They were affiliated with each other in the P group (the former 
group);
    (2) They bear a relationship described in section 1504(a)(1) to each 
other through a loss subgroup parent (L) immediately after they become 
members of the P1 group; and
    (3) At least one of the members (here, each of L, L1, L2, and L3) 
carries over to the P1 group (the current group) a net operating loss 
that did not arise in a SRLY with respect to the P group (the former 
group).

    (e) Pre-change consolidated attribute--(1) Defined. A pre-change 
consolidated attribute of a loss group is--
    (i) Any loss described in paragraph (c)(1) (i) or (ii) of this 
section (relating to the definition of loss group) that is allocable to 
the period ending on or before the change date; and
    (ii) Any recognized built-in loss of the loss group.
    (2) Example. The following example illustrates the principle of this 
paragraph (e).

    Example. Pre-change consolidated attribute. (a) The L group has a 
consolidated net operating loss arising in Year 1 that is carried over 
to Year 2. The L loss group has an ownership change at the beginning of 
Year 2.
    (b) The net operating loss carryover of the L loss group from Year 1 
is a pre-change consolidated attribute because the L group was entitled 
to use the loss in Year 2, the loss did not arise in a SRLY with respect 
to the L group, and therefore the loss was described in paragraph 
(c)(1)(i) of this section. Under paragraph (a) of this section, the 
amount of consolidated taxable income of the L group for Year 2 that may 
be offset by this loss carryover may not exceed the consolidated section 
382 limitation of the L group for that year. See Sec. 1.1502-93T for 
rules relating to the computation of the consolidated section 382 
limitation.

    (f) Pre-change subgroup attribute--(1) Defined. A pre-change 
subgroup attribute of a loss subgroup is--
    (i) Any net operating loss carryover described in paragraph 
(d)(1)(iii) of this section (relating to the definition of loss 
subgroup); and
    (ii) Any recognized built-in loss of the loss subgroup.
    (2) Example. The following example illustrates the principle of this 
paragraph (f).

    Example. Pre-change subgroup attribute. (a) P is the common parent 
of a consolidated group. P owns all the stock of L, and L owns all the 
stock of L1. L2 is not a member of an affiliated group, and has a net 
operating loss arising in Year 1 that is carried over to Year 2. On 
December 11, Year 2, L1 acquires all the stock of L2, causing an 
ownership change of L2. During Year 2, the P group has a consolidated 
net operating loss that is carried over to Year 3. On November 2, Year 
3, M acquires all the L stock from P. M, L, L1, and L2 thereafter file 
consolidated returns. All of the P group Year 2 consolidated net 
operating loss is apportioned under Sec. 1.1502-21T(b) to L and L2, 
which they carry over to the M group.
    (b)(1) L, L1, and L2 compose a loss subgroup because--
    (i) They were affiliated with each other in the P group (the former 
group);
    (ii) They bore a relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent (L) immediately after they 
became members of the L group; and
    (iii) At least one of the members (here, both L and L2) carries over 
a net operating loss to the M group (the current group) that is 
described in paragraph (d)(1)(iii) of this section.
    (2) For this purpose, L2's loss from Year 1 that was a SRLY loss 
with respect to the P group (the former group) is treated as described 
in paragraph (d)(1)(iii) of this section because of the application of 
the principles of Sec. 1.1502-96T(a). See paragraph (d)(5) of this 
section. M's acquisition results in an ownership change of L, and 
therefore the L loss subgroup under Sec. 1.1502-92T(a)(2). See 
Sec. 1.1502-93T for rules governing the computation of the subgroup 
section 382 limitation.
    (c) In the M group, L2's Year 1 loss continues to be subject to a 
section 382 limitation resulting from the ownership change that occurred 
on December 11, Year 2. See Sec. 1.1502-96T(c).

    (g) Net unrealized built-in gain and loss--(1) In general. The 
determination whether a consolidated group (or loss subgroup) has a net 
unrealized built-in gain or loss under section 382(h)(3) is based on the 
aggregate amount of the separately computed net unrealized built-in 
gains or losses of each member that is included in the group (or loss 
subgroup) under paragraph (g)(2) of this section, including items of 
built-in income and deduction described in section 382(h)(6). Thus, for 
example, amounts deferred under section 267, or under Sec. 1.1502-13 
(other than amounts deferred with respect to the stock of a member (or 
an intercompany obligation) included in the group (or loss subgroup) 
under paragraph (g)(2) of this

[[Page 355]]

section) are built-in items. The threshold requirement under section 
382(h)(3)(B) applies on an aggregate basis and not on a member-by-member 
basis. The separately computed amount of a member included in a group or 
loss subgroup does not include any unrealized built-in gain or loss on 
stock (including stock described in section 1504(a)(4) and Sec. 1.382-
2T(f)(18)(ii) and (iii)) of another member included in the group or loss 
subgroup (or on an intercompany obligation). However, a member of a 
group or loss subgroup includes in its separately computed amount the 
unrealized built-in gain or loss on stock of another member (or on an 
intercompany obligation) not included in the group or loss subgroup. If 
a member is not included in a group (or loss subgroup) under paragraph 
(g)(2) of this section, the determination of whether the member has a 
net unrealized built-in gain or loss under section 382(h)(3) is made on 
a separate entity basis. See Sec. 1.1502-94(c) (relating to built-in 
gain or loss of a new loss member) and Sec. 1.1502-96(a) (relating to 
the end of separate tracking of certain losses).
    (2) Members included--(i) Consolidated group. The members included 
in the determination whether a consolidated group has a net unrealized 
built-in gain or loss are all members of the group on the day that the 
determination is made other than--
    (A) A new loss member with a net unrealized built-in loss described 
in Sec. 1.1502-94T(a)(1)(ii); and
    (B) Members included in a loss subgroup described in Sec. 1.1502-
91T(d)(2).
    (ii) Loss subgroup. The members included in the determination 
whether a loss subgroup has a net unrealized built-in gain or loss are 
those members described in paragraphs (d)(2)(i) and (ii) of this 
section.
    (3) Acquisitions of built-in gain or loss assets. A member of a 
consolidated group (or loss subgroup) may not, in determining its 
separately computed net unrealized built-in gain or loss, include any 
gain or loss with respect to assets acquired with a principal purpose to 
affect the amount of its net unrealized built-in gain or loss. A group 
(or loss subgroup) may not, in determining its net unrealized built-in 
gain or loss, include any gain or loss of a member acquired with a 
principal purpose to affect the amount of its net unrealized built-in 
gain or loss.
    (4) Indirect ownership. A member's separately computed net 
unrealized built-in gain or loss is adjusted to the extent necessary to 
prevent any duplication of unrealized gain or loss attributable to the 
member's indirect ownership interest in another member through a 
nonmember if the member has a 5-percent or greater ownership interest in 
the nonmember.
    (h) Recognized built-in gain or loss--(1) In general. [Reserved]
    (2) Disposition of stock or an intercompany obligation of a member. 
Gain or loss recognized by a member on the disposition of stock 
(including stock described in section 1504(a)(4) and Sec. 1.382-
2T(f)(18)(ii) and (iii)) of another member or an intercompany obligation 
is treated as a recognized built-in gain or loss under section 382(h)(2) 
(unless disallowed under Sec. 1.1502-20 or otherwise), even though gain 
or loss on such stock or obligation was not included in the 
determination of a net unrealized built-in gain or loss under paragraph 
(g)(1) of this section.
    (3) Deferred gain or loss. Gain or loss that is deferred under 
provisions such as section 267 and Sec. 1.1502-13 is treated as 
recognized built-in gain or loss only to the extent taken into account 
by the group during the recognition period.
    (4) Exchanged basis property. If the adjusted basis of any asset is 
determined, directly or indirectly, in whole or in part, by reference to 
the adjusted basis of another asset held by the member at the beginning 
of the recognition period, the asset is treated, with appropriate 
adjustments, as held by the member at the beginning of the recognition 
period.
    (i) [Reserved]
    (j) Predecessor and successor corporations. A reference in this 
section and Secs. 1.1502-92T through 1.1502-99T to a corporation, 
member, common parent, loss subgroup parent, or subsidiary includes, as 
the context may require, a reference to a predecessor or successor 
corporation. For example, the determination whether a successor 
satisfies the continuous affiliation requirement

[[Page 356]]

of paragraph (d)(2)(i) of this section is made by reference to its 
predecessor.

[T.D. 8678, 61 FR 33337, June 27, 1996]



Sec. 1.1502-92T  Ownership change of a loss group or a loss subgroup (temporary).

    (a) Scope. This section provides rules for determining if there is 
an ownership change for purposes of section 382 with respect to a loss 
group or a loss subgroup. See Sec. 1.1502-94T for special rules for 
determining if there is an ownership change with respect to a new loss 
member and Sec. 1.1502-96T(b) for special rules for determining if there 
is an ownership change of a subsidiary.
    (b) Determination of an ownership change--(1) Parent change method--
(i) Loss group. A loss group has an ownership change if the loss group's 
common parent has an ownership change under section 382 and the 
regulations thereunder. Solely for purposes of determining whether the 
common parent has an ownership change--
    (A) The losses described in Sec. 1.1502-91T(c) are treated as net 
operating losses (or a net unrealized built-in loss) of the common 
parent; and
    (B) The common parent determines the earliest day that its testing 
period can begin by reference to only the attributes that make the group 
a loss group under Sec. 1.1502-91T(c).
    (ii) Loss subgroup. A loss subgroup has an ownership change if the 
loss subgroup parent has an ownership change under section 382 and the 
regulations thereunder. The principles of Sec. 1.1502-95T(b) (relating 
to ceasing to be a member of a consolidated group) apply in determining 
whether the loss subgroup parent has an ownership change. Solely for 
purposes of determining whether the loss subgroup parent has an 
ownership change--
    (A) The losses described in Sec. 1.1502-91T(d) are treated as net 
operating losses (or a net unrealized built-in loss) of the loss 
subgroup parent;
    (B) The day that the members of the loss subgroup become members of 
the group (or a loss subgroup) is treated as a testing date within the 
meaning of Sec. 1.382-2(a)(4); and
    (C) The loss subgroup parent determines the earliest day that its 
testing period can begin under Sec. 1.382-2T(d)(3) by reference to only 
the attributes that make the members a loss subgroup under Sec. 1.1502-
91T(d).
    (2) Examples. The following examples illustrate the principles of 
this paragraph (b).

    Example 1. Loss group--ownership change of the common parent. (a) A 
owns all the L stock. L owns 80 percent and B owns 20 percent of the L1 
stock. For Year 1, the L group has a consolidated net operating loss 
that resulted from the operations of L1 and that is carried over to Year 
2. The value of the L stock is $1000. The total value of the L1 stock is 
$600 and the value of the L1 stock held by B is $120. The L group is a 
loss group under Sec. 1.1502-91T(c)(1) because it is entitled to use its 
net operating loss carryover from Year 1. On August 15, Year 2, A sells 
51 percent of the L stock to C. The following is a graphic illustration 
of these facts:


[[Page 357]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.005



    (b) Under paragraph (b)(1)(i) of this section, section 382 and the 
regulations thereunder are applied to L to determine whether it (and 
therefore the L loss group) has an ownership change with respect to its 
net operating loss carryover from Year 1 attributable to L1 on August 
15, Year 2. The sale of the L stock to C causes an ownership change of L 
under Sec. 1.382-2T and of the L loss group under paragraph (b)(1)(i) of 
this section. The amount of consolidated taxable income of the L loss 
group for any post-change taxable year that may be offset by its pre-
change consolidated attributes (that is, the net operating loss 
carryover from Year 1 attributable to L1) may not exceed the 
consolidated section 382 limitation for the L loss group for the taxable 
year.
    Example 2. Loss group--owner shifts of subsidiaries disregarded. (a) 
The facts are the same as in Example 1, except that on August 15, Year 
2, A sells only 49 percent of the L stock to C and, on December 12, Year 
3, in an unrelated transaction, B sells the 20 percent of the L1 stock 
to D. A's sale of the L stock to C does not cause an ownership change of 
L under Sec. 1.382-2T nor of the L loss group under paragraph (b)(1)(i) 
of this section. The following is a graphic illustration of these facts:


[[Page 358]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.006



    (b) B's subsequent sale of L1 stock is not taken into account for 
purposes of determining whether the L loss group has an ownership change 
under paragraph (b)(1)(i) of this section, and, accordingly, there is no 
ownership change of the L loss group. See paragraph (c) of this section, 
however, for a supplemental ownership change method that would apply to 
cause an ownership change if the purchases by C and D were pursuant to a 
plan or arrangement.
    Example 3. Loss subgroup--ownership change of loss subgroup parent 
controls. (a) P owns all the L stock. L owns 80 percent and A owns 20 
percent of the L1 stock. The P group has a consolidated net operating 
loss arising in Year 1 that is carried over to Year 2. On September 9, 
Year 2, P sells 51 percent of the L stock to B, and L1 is apportioned a 
portion of the Year 1 consolidated net operating loss under Sec. 1.1502-
21T(b), which it carries over to its next taxable year. L and L1 file a 
consolidated return for their first taxable year ending after the sale 
to B. The following is a graphic illustration of these facts:


[[Page 359]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.007



    (b) Under Sec. 1.1502-91T(d)(1), L and L1 compose a loss subgroup on 
September 9, Year 2, the day that they become members of the L group. 
Under paragraph (b)(1)(ii) of this section, section 382 and the 
regulations thereunder are applied to L to determine whether it (and 
therefore the L loss subgroup) has an ownership change with respect to 
the portion of the Year 1 consolidated net operating loss that is 
apportioned to L1 on September 9, Year 2. L has an ownership change 
resulting from P's sale of 51 percent of the L stock to A. Therefore, 
the L loss subgroup has an ownership change with respect to that loss.
    Example 4. Loss group and loss subgroup--contemporaneous ownership 
changes. (a) A owns all the stock of corporation M, M owns 35 percent 
and B owns 65 percent of the L

[[Page 360]]

stock, and L owns all the L1 stock. The L group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. On May 
19, Year 2, B sells 45 percent of the L stock to M for cash. M, L, and 
L1 thereafter file consolidated returns. L and L1 are each apportioned a 
portion of the Year 1 consolidated net operating loss, which they carry 
over to the M group's Year 2 and Year 3 consolidated return years. The M 
group has a consolidated net operating loss arising in Year 2 that is 
carried over to Year 3. On June 9, Year 3, A sells 70 percent of the M 
stock to C. The following is a graphic illustration of these facts:

[[Page 361]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.008



    (b) Under Sec. 1.1502-91T(d)(1), L and L1 compose a loss subgroup on 
May 19, Year 2, the day they become members of the M group. Under 
paragraph (b)(1)(ii) of this section, section 382 and the regulations 
thereunder are applied to L to determine whether L (and therefore the L 
loss subgroup) has an ownership change with respect to the loss 
carryovers from Year 1 on May 19, Year 2, a testing date because of B's 
sale of L stock to M. The sale of L stock to M results in only a 45 
percentage point increase in A's ownership of L stock. Thus, there is no 
ownership change of L (or the L loss subgroup) with respect to those 
loss carryovers under paragraph (b)(1)(ii) of this section on that day.
    (c) June 9, Year 3, is also a testing date with respect to the L 
loss subgroup because of A's sale of M stock to C. The sale results

[[Page 362]]

in a 56 percentage point increase in C's ownership of L stock, and L has 
an ownership change. Therefore, the L loss subgroup has an ownership 
change on that day with respect to the loss carryovers from Year 1.
    (d) Paragraph (b)(1)(i) of this section requires that section 382 
and the regulations thereunder be applied to M to determine whether M 
(and therefore the M loss group) has an ownership change with respect to 
the net operating loss carryover from Year 2 on June 9, Year 3, a 
testing date because of A's sale of M stock to C. The sale results in a 
70 percentage point increase in C's ownership of M stock, and M has an 
ownership change. Therefore, the M loss group has an ownership change on 
that day with respect to that loss carryover.

    (3) Special adjustments--(i) Common parent succeeded by a new common 
parent. For purposes of determining if a loss group has an ownership 
change, if the common parent of a loss group is succeeded or acquired by 
a new common parent and the loss group remains in existence, the new 
common parent is treated as a continuation of the former common parent 
with appropriate adjustments to take into account shifts in ownership of 
the former common parent during the testing period (including shifts 
that occur incident to the common parent's becoming the former common 
parent).
    (ii) Newly created loss subgroup parent. For purposes of determining 
if a loss subgroup has an ownership change, if the member that is the 
loss subgroup parent has not been the loss subgroup parent for at least 
3 years as of a testing date, appropriate adjustments must be made to 
take into account owner shifts of members of the loss subgroup so that 
the structure of the loss subgroup does not have the effect of avoiding 
an ownership change under section 382. (See paragraph (b)(3)(iii) 
Example 3 of this section.)
    (iii) Examples. The following examples illustrate the principles of 
this paragraph (b)(3).

    Example 1. New common parent acquires old common parent. (a) A, who 
owns all the L stock, sells 30 percent of the L stock to B on August 26, 
Year 1. L owns all the L1 stock. The L group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 3. On July 
16, Year 2, A and B transfer their L stock to a newly created holding 
company, HC, in exchange for 70 percent and 30 percent, respectively, of 
the HC stock. HC, L, and L1 thereafter file consolidated returns. Under 
the principles of Sec. 1.1502-75(d), the L loss group is treated as 
remaining in existence, with HC taking the place of L as the new common 
parent of the loss group. The following is a graphic illustration of 
these facts:

[[Page 363]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.009



[[Page 364]]

    (b) On November 11, Year 3, A sells 25 percent of the HC stock to B. 
For purposes of determining if the L loss group has an ownership change 
under paragraph (b)(1)(i) of this section on November 11, Year 3, HC is 
treated as a continuation of L under paragraph (b)(3)(i) of this section 
because it acquired L and became the common parent without terminating 
the L loss group. Accordingly, HC's testing period commences on January 
1, Year 1, the first day of the taxable year of the L loss group in 
which the consolidated net operating loss that is carried over to Year 3 
arose (see Sec. 1.382-2T(d)(3)(i)). Immediately after the close of 
November 11, Year 3, B's percentage ownership interest in the common 
parent of the loss group (HC) has increased by 55 percentage points over 
its lowest percentage ownership during the testing period (zero 
percent). Accordingly, HC and the L loss group have an ownership change 
on that day.
    Example 2. New common parent in case in which common parent ceases 
to exist. (a) A, B, and C each own one-third of the L stock. L owns all 
the L1 stock. The L group has a consolidated net operating loss arising 
in Year 2 that is carried over to Year 3. On November 22, Year 3, L is 
merged into P, a corporation owned by D, and L1 thereafter files 
consolidated returns with P. A, B, and C, as a result of owning stock of 
L, own 90 percent of P's stock after the merger. D owns the remaining 10 
percent of P's stock. The merger of L into P qualifies as a reverse 
acquisition of the L group under Sec. 1.1502-75(d)(3)(i), and the L loss 
group is treated as remaining in existence, with P taking the place of L 
as the new common parent of the L group. The following is a graphic 
illustration of these facts:


[[Page 365]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.010



    (b) For purposes of determining if the L loss group has an ownership 
change on November 22, Year 3, the day of the merger, P is treated as a 
continuation of L so that the testing period for P begins on January 1, 
Year 2, the first day of the taxable year of the L loss group in which 
the consolidated net operating loss that is carried over to Year 3 
arose. Immediately after the close of November 22, Year 3, D is the only 
5-percent shareholder that has increased his ownership interest in P 
during the testing period (from zero to 10 percentage points).
    (c) The facts are the same as in paragraph (a) of this Example 2, 
except that A has held 23\1/3\ shares (23\1/3\ percent) of L's stock for 
five years, and A purchased an additional 10 shares of L stock from E 
two years before the merger. Immediately after the close of the day of 
the merger (a testing date), A's ownership interest in P, the common 
parent of the L loss group, has increased by 6\2/3\ percentage points 
over her lowest percentage

[[Page 366]]

ownership during the testing period (23\1/3\ percent to 30 percent).
    (d) The facts are the same as in (a) of this Example 2, except that 
P has a net operating loss arising in Year 1 that is carried to the 
first consolidated return year ending after the day of the merger. 
Solely for purposes of determining whether the L loss group has an 
ownership change under paragraph (b)(1)(i) of this section, the testing 
period for P commences on January 1, Year 2. P does not determine the 
earliest day for its testing period by reference to its net operating 
loss carryover from Year 1, which Secs. 1502-1(f)(3) and 1.1502-
75(d)(3)(i) treat as arising in a SRLY. See Sec. 1.1502-94T to determine 
the application of section 382 with respect to P's net operating loss 
carryover.
    Example 3. Newly acquired loss subgroup parent. (a) P owns all the L 
stock and L owns all the L1 stock. The P group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 3. On 
January 19, Year 2, L issues a 20 percent stock interest to B. On 
February 5, Year 3, P contributes its L stock to a newly formed 
subsidiary, HC, in exchange for all the HC stock, and distributes the HC 
stock to its sole shareholder A. HC, L, and L1 thereafter file 
consolidated returns. A portion of the P group's Year 1 consolidated net 
operating loss is apportioned to L and L1 under Sec. 1.1502-21T(b) and 
is carried over to the HC group's year ending after February 5, Year 3. 
HC, L, and L1 compose a loss subgroup within the meaning of Sec. 1.1502-
91T(d) with respect to the net operating loss carryovers from Year 1. 
The following is a graphic illustration of these facts:


[[Page 367]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.011



    (b) February 5, Year 3, is a testing date for HC as the loss 
subgroup parent with respect to the net operating loss carryovers of L 
and L1 from Year 1. See paragraph (b)(1)(ii)(B) of this section. For 
purposes of determining whether HC has an ownership change on the 
testing date, appropriate adjustments must be made with respect to the 
changes in the percentage ownership of the stock of HC because HC was 
not the loss subgroup parent for at least 3 years prior to the day on 
which it became a member of the HC loss subgroup (a testing date). The 
appropriate adjustments include adjustments so that HC succeeds to the 
owner shifts of other members of the former group. Thus, HC succeeds to 
the owner shift of L that resulted from the sale of the 20 percent 
interest to B in determining whether the HC loss subgroup has an 
ownership change on February 5, Year 3, and

[[Page 368]]

on any subsequent testing date that includes January 19, Year 2.

    (4) End of separate tracking of certain losses. If Sec. 1.1502-
96T(a) (relating to the end of separate tracking of attributes) applies 
to a loss subgroup, then, while one or more members that were included 
in the loss subgroup remain members of the consolidated group, there is 
an ownership change with respect to their attributes described in 
Sec. 1.1502-96T(a)(2) only if the consolidated group is a loss group and 
has an ownership change under paragraph (b)(1)(i) of this section (or 
such a member has an ownership change under Sec. 1.1502-96T(b) (relating 
to ownership changes of subsidiaries)). If, however, the loss subgroup 
has had an ownership change before Sec. 1.1502-96T(a) applies, see 
Sec. 1.1502-96T(c) for the continuing application of the subgroup's 
section 382 limitation with respect to its pre-change subgroup 
attributes.
    (c) Supplemental rules for determining ownership change--(1) Scope. 
This paragraph (c) contains a supplemental rule for determining whether 
there is an ownership change of a loss group (or loss subgroup). It 
applies in addition to, and not instead of, the rules of paragraph (b) 
of this section. Thus, for example, if the common parent of the loss 
group has an ownership change under paragraph (b) of this section, the 
loss group has an ownership change even if, by applying this paragraph 
(c), the common parent would not have an ownership change.
    (2) Cause for applying supplemental rule. This paragraph (c) applies 
to a loss group (or loss subgroup) if--
    (i) Any 5-percent shareholder of the common parent (or loss subgroup 
parent) increases its percentage ownership interest in the stock of 
both--
    (A) A subsidiary of the loss group (or loss subgroup) other than by 
a direct or indirect acquisition of stock of the common parent (or loss 
subgroup parent); and
    (B) The common parent (or loss subgroup parent); and
    (ii) Those increases occur within a 3 year period ending on any day 
of a consolidated return year or, if shorter, the period beginning on 
the first day following the most recent ownership change of the loss 
group (or loss subgroup).
    (3) Operating rules. Solely for purposes of this paragraph (c)--
    (i) A 5-percent shareholder of the common parent (or loss subgroup 
parent) is treated as increasing its percentage ownership interest in 
the common parent (or loss subgroup parent) or a subsidiary to the 
extent, if any, that any person acting pursuant to a plan or arrangement 
with the 5-percent shareholder increases its percentage ownership 
interest in the stock of that entity;
    (ii) The rules in section 382(l)(3) and Secs. 1.382-2T(h) and 1.382-
4(d) (relating to constructive ownership) apply with respect to the 
stock of the subsidiary by treating such stock as stock of a loss 
corporation; and
    (iii) In the case of a loss subgroup, a subsidiary includes any 
member of the loss subgroup other than the loss subgroup parent. (The 
loss subgroup parent is, however, a subsidiary of the loss group of 
which it is a member.)
    (4) Supplemental ownership change rules. The determination whether 
the common parent (or loss subgroup parent) has an ownership change is 
made by applying paragraph (b)(1) of this section as modified by the 
following additional rules--
    (i) Additional testing dates for the common parent (or loss subgroup 
parent). A testing date for the common parent (or loss subgroup parent) 
also includes--
    (A) Each day on which there is an increase in the percentage 
ownership of stock of a subsidiary as described in paragraph (c)(2) of 
this section; and
    (B) The first day of the first consolidated return year for which 
the group is a loss group (or the members compose a loss subgroup);
    (ii) Treatment of subsidiary stock as stock of the common parent (or 
loss subgroup parent). The common parent (or loss subgroup parent) is 
treated as though it had issued to the person acquiring (or deemed to 
acquire) the subsidiary stock an amount of its own stock (by value) that 
equals the value of the subsidiary stock represented by the percentage 
increase in that person's ownership of the subsidiary (determined on a 
separate entity basis). A similar principle applies if the increase

[[Page 369]]

in percentage ownership interest is effected by a redemption or similar 
transaction; and
    (iii) 5-percent shareholder of the common parent (or loss subgroup 
parent). Any person described in paragraph (c)(3)(i) of this section who 
is acting pursuant to the plan or arrangement is treated as a 5-percent 
shareholder of the common parent (or loss subgroup parent).
    (5) Examples. The following examples illustrate the principles of 
this paragraph (c).

    Example 1. Stock of the common parent under supplemental rules. (a) 
A owns all the L stock. L is not a member of an affiliated group and has 
a net operating loss carryover arising in Year 1 that is carried over to 
Year 6. On September 20, Year 6, L transfers all of its assets and 
liabilities to a newly created subsidiary, S, in exchange for S stock. L 
and S thereafter file consolidated returns. On November 23, Year 6, B 
contributes cash to L in exchange for a 45 percent ownership interest in 
L and contributes cash to S for a 20 percent ownership interest in S.
    (b) B is a 5-percent shareholder of L who increases his percentage 
ownership interest in L and S during the 3 year period ending on 
November 23, Year 6. Under paragraph (c)(4)(ii) of this section, the 
determination whether L (the common parent of a loss group) has an 
ownership change on November 23, Year 6 (or on any testing date in the 
testing period which includes November 23, Year 6), is made by applying 
paragraph (b)(1)(i) of this section and by treating the value of B's 20 
percent ownership interest in S as if it were L stock issued to B.
    Example 2. Plan or arrangement--public offering of subsidiary stock. 
(a) A owns all the stock of L and L owns all the stock of L1. The L 
group has a consolidated net operating loss arising in Year 1 that 
resulted from the operations of L1 and that is carried over to Year 2. 
As part of a plan, A sells 49 percent of the L stock to B on October 7, 
Year 2, and L1 issues new stock representing a 20 percent ownership 
interest in L1 to the public on November 6, Year 2. The following is a 
graphic illustration of these facts:


[[Page 370]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.012



    (b) A's sale of the L stock to B does not cause an ownership change 
of the L loss group on October 7, Year 2, under the rules of Sec. 1.382-
2T and paragraph (b)(1)(i) of this section.
    (c) Because the issuance of L1 stock to the public occurs in 
connection with B's acquisition of L stock pursuant to a plan, paragraph 
(c)(4) of this section applies to determine whether the L loss group has 
an ownership change on November 6, Year 2 (or on any testing date for 
which the testing period includes November 6, Year 2).

    (d) Testing period following ownership change under this section. If 
a loss group (or a loss subgroup) has had an ownership change under this 
section, the

[[Page 371]]

testing period for determining a subsequent ownership change with 
respect to pre-change consolidated attributes (or pre-change subgroup 
attributes) begins no earlier than the first day following the loss 
group's (or loss subgroup's) most recent change date.
    (e) Information statements.--(1) Common parent of a loss group. The 
common parent of a loss group must file the information statement 
required by Sec. 1.382-2T(a)(2)(ii) for a consolidated return year 
because of any owner shift, equity structure shift, or the issuance or 
transfer of an option--
    (i) With respect to the common parent and with respect to any 
subsidiary stock subject to paragraph (c) of this section; and
    (ii) With respect to an ownership change described in Sec. 1.1502-
96T(b) (relating to ownership changes of subsidiaries).
    (2) Abbreviated statement with respect to loss subgroups. The common 
parent of a consolidated group that has a loss subgroup during a 
consolidated return year must file the information statement required by 
Sec. 1.382-2T(a)(2)(ii) because of any owner shift, equity structure 
shift, or issuance or transfer of an option with respect to the loss 
subgroup parent and with respect to any subsidiary stock subject to 
paragraph (c) of this section. Instead of filing a separate statement 
for each loss subgroup parent, the common parent (which is treated as a 
loss corporation) may file the single statement described in paragraph 
(e)(1) of this section. In addition to the information concerning stock 
ownership of the common parent, the single statement must identify each 
loss subgroup parent and state which loss subgroups, if any, have had 
ownership changes during the consolidated return year. The loss subgroup 
parent is, however, still required to maintain the records necessary to 
determine if the loss subgroup has an ownership change. This paragraph 
(e)(2) applies with respect to the attributes of a loss subgroup until, 
under Sec. 1.1502-96T(a), the attributes are no longer treated as 
described in Sec. 1.1502-91T(d) (relating to the definition of loss 
subgroup). After that time, the information statement described in 
paragraph (e)(1) of this section must be filed with respect to those 
attributes.

[T.D. 8678, 61 FR 33341, June 27, 1996]



Sec. 1.1502-93T  Consolidated section 382 limitation (or subgroup section 382 limitation) (temporary).

    (a) Determination of the consolidated section 382 limitation (or 
subgroup section 382 limitation)--(1) In general. Following an ownership 
change, the consolidated section 382 limitation (or subgroup section 382 
limitation) for any post-change year is an amount equal to the value of 
the loss group (or loss subgroup), as defined in paragraph (b) of this 
section, multiplied by the long-term tax-exempt rate that applies with 
respect to the ownership change, and adjusted as required by section 382 
and the regulations thereunder. See, for example, section 382(b)(2) 
(relating to the carryforward of unused section 382 limitation), section 
382(b)(3)(B) (relating to the section 382 limitation for the post-change 
year that includes the change date), section 382(m)(2) (relating to 
short taxable years), and section 382(h) (relating to recognized built-
in gains and section 338 gains).
    (2) Coordination with apportionment rule. For special rules relating 
to apportionment of a consolidated section 382 limitation (or a subgroup 
section 382 limitation) when one or more corporations cease to be 
members of a loss group (or a loss subgroup) and to aggregation of 
amounts so apportioned, see Sec. 1.1502-95T(c).
    (b) Value of the loss group (or loss subgroup)--(1) Stock value 
immediately before ownership change. Subject to any adjustment under 
paragraph (b)(2) of this section, the value of the loss group (or loss 
subgroup) is the value, immediately before the ownership change, of the 
stock of each member, other than stock that is owned directly or 
indirectly by another member. For this purpose--
    (i) Ownership is determined under Sec. 1.382-2T;
    (ii) A member is considered to indirectly own stock of another 
member through a nonmember only if the member has a 5-percent or greater 
ownership interest in the nonmember; and

[[Page 372]]

    (iii) Stock includes stock described in section 1504(a)(4) and 
Sec. 1.382-2T(f)(18)(ii) and (iii).
    (2) Adjustment to value. The value of the loss group (or loss 
subgroup), as determined under paragraph (b)(1) of this section, is 
adjusted under any rule in section 382 or the regulations thereunder 
requiring an adjustment to such value for purposes of computing the 
amount of the section 382 limitation. See, for example, section 
382(e)(2) (redemptions and corporate contractions), section 382(l)(1) 
(certain capital contributions) and section 382(l)(4) (ownership of 
substantial nonbusiness assets). The value of the loss group (or loss 
subgroup) determined under this paragraph (b) is also adjusted to the 
extent necessary to prevent any duplication of the value of the stock of 
a member. For example, the principles of Sec. 1.382-8T (relating to 
controlled groups of corporations) apply in determining the value of a 
loss group (or loss subgroup) if, under Sec. 1.1502-91T(g)(2), members 
are not included in the determination whether the group (or loss 
subgroup) has a net unrealized built-in loss.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (b).
    Example 1. Basic case. (a) L, L1, and L2 compose a loss group. L has 
outstanding common stock, the value of which is $100. L1 has outstanding 
common stock and preferred stock that is described in section 
1504(a)(4). L owns 90 percent of the L1 common stock, and A owns the 
remaining 10 percent of the L1 common stock plus all the preferred 
stock. The value of the L1 common stock is $40, and the value of the L1 
preferred stock is $30. L2 has outstanding common stock, 50 percent of 
which is owned by L and 50 percent by L1. The L group has an ownership 
change. The following is a graphic illustration of these facts:

[GRAPHIC] [TIFF OMITTED] TR27JN96.013


    (b) Under paragraph (b)(1) of this section, the L group does not 
include the value of the stock of any member that is owned directly or 
indirectly by another member in computing its consolidated section 382 
limitation. Accordingly, the value of the stock of the loss group is 
$134, the sum of the value of--
    (1) The common stock of L ($100);
    (2) the 10 percent of the L1 common stock ($4) owned by A; and
    (3) The L1 preferred stock ($30) owned by A.
    Example 2. Indirect ownership. (a) L and L1 compose a consolidated 
group. L's stock has a value of $100. L owns 80 shares (worth $80) and 
corporation M owns 20 shares (worth $20) of the L1 stock. L also owns 79 
percent of the stock of corporation M. The L group has an ownership 
change. The following is a graphic illustration of these facts:


[[Page 373]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.014



    (b) Under paragraph (b)(1) of this section, because of L's more than 
5 percent ownership interest in M, a nonmember, L is considered to 
indirectly own 15.8 shares of the L1 stock held by M (79% x 20 shares). 
The value of the L loss group is $104.20, the sum of the values of--
    (1) The L stock ($100); and
    (2) The L1 stock not owned directly or indirectly by L (21% x $20, 
or $4.20).

    (c) Recognized built-in gain of a loss group or loss subgroup. If a 
loss group (or loss subgroup) has a net unrealized built-in gain, any 
recognized built-in gain of the loss group (or loss subgroup) is taken 
into account under section 382(h) in determining the consolidated 
section 382 limitation (or subgroup section 382 limitation).
    (d) Continuity of business--(1) In general. A loss group (or a loss 
subgroup) is treated as a single entity for purposes of determining 
whether it satisfies the continuity of business enterprise requirement 
of section 382(c)(1).
    (2) Example. The following example illustrates the principle of this 
paragraph (d).

    Example. Continuity of business enterprise. L owns all the stock of 
two subsidiaries, L1 and L2. The L group has an ownership change. It has 
pre-change consolidated attributes attributable to L2. Each of the 
members has historically conducted a separate line of business. Each 
line of business is approximately equal in value. One year after the 
ownership change, L discontinues its separate business and the business 
of L2. The separate business of L1 is continued for the remainder of the 
2 year period following the ownership change. The continuity of business 
enterprise requirement of section 382(c)(1) is met even though the 
separate businesses of L and L2 are discontinued.

    (e) Limitations of losses under other rules. If a section 382 
limitation for a post-change year exceeds the consolidated taxable 
income that may be offset by pre-change attributes for any reason, 
including the application of the limitation of Sec. 1.1502-21T(c), the 
amount of the excess is carried forward under section 382(b)(2) 
(relating to the carryforward of unused section 382 limitation).

[T.D. 8678, 61 FR 33351, June 27, 1996]



Sec. 1.1502-94T  Coordination with section 382 and the regulations thereunder when a corporation becomes a member of a consolidated group (temporary).

    (a) Scope--(1) In general. This section applies section 382 and the 
regulations thereunder to a corporation that is a new loss member of a 
consolidated group. A corporation is a new loss member if it--
    (i) Carries over a net operating loss that arose (or is treated 
under Sec. 1.1502-21T(c) as arising) in a SRLY with respect to the 
current group, and that is not described in Sec. 1.1502-91T(d)(1); or
    (ii) Has a net unrealized built-in loss (determined under paragraph 
(c) of this

[[Page 374]]

section on the day it becomes a member of the current group by treating 
that day as a change date) that is not taken into account under 
Sec. 1.1502-91T(d)(2) in determining whether two or more corporations 
compose a loss subgroup.
    (2) Successor corporation as new loss member. A new loss member also 
includes any successor to a corporation that has a net operating loss 
carryover arising in a SRLY and that is treated as remaining in 
existence under Sec. 1.382-2(a)(1)(ii) following a transaction described 
in section 381(a).
    (3) Coordination in the case of a loss subgroup. For rules regarding 
the determination of whether there is an ownership change of a loss 
subgroup with respect to a net operating loss or a net unrealized built-
in loss described in Sec. 1.1502-91T(d) (relating to the definition of 
loss subgroup) and the computation of a subgroup section 382 limitation 
following such an ownership change, see Secs. 1.1502-92T and 1.1502-93T.
    (4) End of separate tracking of certain losses. If Sec. 1.1502-
96T(a) (relating to the end of separate tracking of attributes) applies 
to a new loss member, then, while that member remains a member of the 
consolidated group, there is an ownership change with respect to its 
attributes described in Sec. 1.1502-96T(a)(2) only if the consolidated 
group is a loss group and has an ownership change under Sec. 1.1502-
92T(b)(1)(i) (or that member has an ownership change under Sec. 1.1502-
96T(b) (relating to ownership changes of subsidiaries)). If, however, 
the new loss member has had an ownership change before Sec. 1.1502-
96T(a) applies, see Sec. 1.1502-96T(c) for the continuing application of 
the section 382 limitation with respect to the member's pre-change 
losses.
    (5) Cross-reference. See section 382(a) and Sec. 1.1502-96T(c) for 
the continuing effect of an ownership change after a corporation becomes 
or ceases to be a member.
    (b) Application of section 382 to a new loss member--(1) In general. 
Section 382 and the regulations thereunder apply to a new loss member to 
determine, on a separate entity basis, whether and to what extent a 
section 382 limitation applies to limit the amount of consolidated 
taxable income that may be offset by the new loss member's pre-change 
separate attributes. For example, if an ownership change with respect to 
the new loss member occurs under section 382 and the regulations 
thereunder, the amount of consolidated taxable income for any post-
change year that may be offset by the new loss member's pre-change 
separate attributes shall not exceed the section 382 limitation as 
determined separately under section 382(b) with respect to that member 
for such year. If the post-change year includes the change date, section 
382(b)(3)(A) is applied so that the section 382 limitation of the new 
loss member does not apply to the portion of the taxable income for such 
year that is allocable to the period in such year on or before the 
change date. See generally Sec. 1.382-6 (relating to the allocation of 
income and loss).
    (2) Adjustment to value. The value of the new loss member is 
adjusted to the extent necessary to prevent any duplication of the value 
of the stock of a member. For example, the principles of Sec. 1.382-8T 
(relating to controlled groups of corporations) apply in determining the 
value of a new loss member.
    (3) Pre-change separate attribute defined. A pre-change separate 
attribute of a new loss member is--
    (i) Any net operating loss carryover of the new loss member 
described in paragraph (a)(1) of this section; and
    (ii) Any recognized built-in loss of the new loss member.
    (4) Examples. The following examples illustrate the principles of 
this paragraph (b).

    Example 1. Basic case. (a) A and P each own 50 percent of the L 
stock. On December 19, Year 6, P purchases 30 percent of the L stock 
from A for cash. L has net operating losses arising in Year 1 and Year 2 
that it carries over to Year 6 and Year 7. The following is a graphic 
illustration of these facts:


[[Page 375]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.015



    (b) L is a new loss member because it has net operating loss 
carryovers that arose in a SRLY with respect to the P group and L is not 
a member of a loss subgroup under Sec. 1.1502-91T(d). Under section 382 
and the regulations thereunder, L is a loss corporation on December 19, 
Year 6, that day is a testing date for L, and the testing period for L 
commences on December 20, Year 3. -
    (c) P's purchase of L stock does not cause an ownership change of L 
on December 19, Year 6, with respect to the net operating loss 
carryovers from Year 1 and Year 2 under section 382 and Sec. 1.382-2T. 
The use of the loss carryovers, however, is subject to limitation under 
Sec. 1.1502-21T(c). -
    Example 2. Multiple new loss members. (a) The facts are the same as 
in Example 1, and, on December 31, Year 6, L purchases all the stock of 
L1 from B for cash. L1 has a net operating loss of $40 arising in Year 3 
that it carries over to Year 7. The following is a graphic illustration 
of these facts:


[[Page 376]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.016



    (b) L1 is a new loss member because it has a net operating loss 
carryover from Year 3 that arose in a SRLY with respect to the P group 
and L1 is not a member of a loss subgroup under Sec. 1.1502-91T(d)(1). -
    (c) L's purchase of all the stock of L1 causes an ownership change 
of L1 on December 31, Year 6, under section 382 and Sec. 1.382-2T. 
Accordingly, a section 382 limitation based on the value of the L1 stock 
immediately before the ownership change limits the amount of 
consolidated taxable income of the P group for any post-change year that 
may be offset by L1's loss from Year 3.
    (d) L1's ownership change in connection with its becoming a member 
of the P group is an ownership change described in Sec. 1.1502-96T(a). 
Thus, starting on January 1, Year 7, the P group no longer separately 
tracks owner shifts of the stock of L1 with respect to L1's loss from 
Year 3. Instead, the P group

[[Page 377]]

is a loss group because of such loss under Sec. 1.1502-91T(c). -
    Example 3. Ownership changes of new loss members. (a) The facts are 
the same as in Example 2, and, on April 30, Year 7, C purchases all the 
stock of P for cash. -
    (b) L is a new loss member on April 30, Year 7, because its Year 1 
and Year 2 losses arose in SRLYs with respect to the P group and it is 
not a member of a loss subgroup under Sec. 1.1502-91T(d)(1). The testing 
period for L commences on May 1, Year 4. C's purchase of all the P stock 
causes an ownership change of L on April 30, Year 7, under section 382 
and Sec. 1.382-2T with respect to its Year 1 and Year 2 losses. 
Accordingly, a section 382 limitation based on the value of the L stock 
immediately before the ownership change limits the amount of 
consolidated taxable income of the P group for any post-change year that 
may be offset by L's Year 1 and Year 2 losses. The use of those 
carryovers is also subject to limitation under Sec. 1.1502-21T(c). -
    (c) The P group is a loss group on April 30, Year 7, because it is 
entitled to use L1's loss from Year 3, and such loss is no longer 
treated as a loss of a new loss member starting the day after L1's 
ownership change on December 31, Year 6. See Secs. 1.1502-96T(a) and 
1.1502-91T(c)(2). C's purchase of all the P stock causes an ownership 
change of P, and therefore the P loss group, on April 30, Year 7, with 
respect to L1's Year 3 loss. Accordingly, a consolidated section 382 
limitation based on the value of the P stock immediately before the 
ownership change limits the amount of consolidated taxable income of the 
P group for any post-change year that may be offset by L1's Year 3 loss.

     -(c) Built-in gains and losses. As the context may require, the 
principles of Secs. 1.1502-91T(g) and (h) and 1.1502-93T(c) (relating to 
built-in gains and losses) apply to a new loss member on a separate 
entity basis. See Sec. 1.1502-91T(g)(3).
    (d) Information statements. The common parent of a consolidated 
group that has a new loss member subject to paragraph (b)(1) of this 
section during a consolidated return year must file the information 
statement required by Sec. 1.382-2T(a)(2)(ii) because of any owner 
shift, equity structure shift, or issuance or transfer of an option with 
respect to the new loss member. Instead of filing a separate statement 
for each new loss member the common parent may file a single statement 
described in Sec. 1.382-2T(a)(2)(ii) with respect to the stock ownership 
of the common parent (which is treated as a loss corporation). In 
addition to the information concerning stock ownership of the common 
parent, the single statement must identify each new loss member and 
state which new loss members, if any, have had ownership changes during 
the consolidated return year. The new loss member is, however, required 
to maintain the records necessary to determine if it has an ownership 
change. This paragraph (d) applies with respect to the attributes of a 
new loss member until an event occurs which ends separate tracking under 
Sec. 1.1502-96T(a). After that time, the information statement described 
in Sec. 1.1502-92T(e)(1) must be filed with respect to these attributes.

[T.D. 8678, 61 FR 33352, June 27, 1996]



Sec. 1.1502-95T  Rules on ceasing to be a member of a consolidated group (or loss subgroup) (temporary).

    (a) In general--(1) Consolidated group. This section provides rules 
for applying section 382 on or after the day that a member ceases to be 
a member of a consolidated group (or loss subgroup). The rules concern 
how to determine whether an ownership change occurs with respect to 
losses of the member, and how a consolidated section 382 limitation (or 
subgroup section 382 limitation) is apportioned to the member. As the 
context requires, a reference in this section to a loss group, a member, 
or a corporation also includes a reference to a loss subgroup, and a 
reference to a consolidated section 382 limitation also includes a 
reference to a subgroup section 382 limitation.
    (2) Election by common parent. Only the common parent (not the loss 
subgroup parent) may make the election under paragraph (c) of this 
section to apportion either a consolidated section 382 limitation or a 
subgroup section 382 limitation.
    (3) Coordination with Secs. 1.1502-91T through 1.1502-93T. For rules 
regarding the determination of whether there is an ownership change of a 
loss subgroup and the computation of a subgroup section 382 limitation 
following such an ownership change, see Secs. 1.1502-91T through 1.1502-
93T.
    (b) Separate application of section 382 when a member leaves a 
consolidated group--(1) In general. Except as provided in Secs. 1.1502-
91T through 1.1502-93T

[[Page 378]]

(relating to rules applicable to loss groups and loss subgroups), 
section 382 and the regulations thereunder apply to a corporation on a 
separate entity basis after it ceases to be a member of a consolidated 
group (or loss subgroup). Solely for purposes of determining whether a 
corporation has an ownership change--
    (i) Any portion of a consolidated net operating loss that is 
apportioned to the corporation under Sec. 1.1502-21T(b) is treated as a 
net operating loss of the corporation beginning on the first day of the 
taxable year in which the loss arose;
    (ii) The testing period may include the period during which (or 
before which) the corporation was a member of the group (or loss 
subgroup); and
    (iii) Except to the extent provided in Sec. 1.1502-20(g) (relating 
to reattributed losses), the day it ceases to be a member of a 
consolidated group is treated as a testing date of the corporation 
within the meaning of Sec. 1.382-2(a)(4).
    (2) Effect of a prior ownership change of the group. If a loss group 
has had an ownership change under Sec. 1.1502-92T before a corporation 
ceases to be a member of a consolidated group (the former member)--
    (i) Any pre-change consolidated attribute that is subject to a 
consolidated section 382 limitation continues to be treated as a pre-
change loss with respect to the former member after the attribute is 
apportioned to the former member;
    (ii) The former member's section 382 limitation with respect to such 
attribute is zero except to the extent the common parent apportions 
under paragraph (c) of this section all or a part of the consolidated 
section 382 limitation to the former member;
    (iii) The testing period for determining a subsequent ownership 
change with respect to such attribute begins no earlier than the first 
day following the loss group's most recent change date; and
    (iv) As generally provided under section 382, an ownership change of 
the former member that occurs on or after the day it ceases to be a 
member of a loss group may result in an additional, lesser limitation 
amount with respect to such loss.
    (3) Application in the case of a loss subgroup. If two or more 
former members are included in the same loss subgroup immediately after 
they cease to be members of a consolidated group, the principles of 
paragraphs (b) and (c) of this section apply to the loss subgroup. 
Therefore, for example, an apportionment by the common parent under 
paragraph (c) of this section is made to the loss subgroup rather than 
separately to its members. -
    (4) Examples. The following examples illustrate the principles of 
this paragraph (b).

    -Example 1. Treatment of departing member as a separate corporation 
throughout the testing period. (a) A owns all the L stock. L owns all 
the stock of L1 and L2. The L group has a consolidated net operating 
loss arising in Year 1 that is carried over to Year 3. On January 12, 
Year 2, A sells 30 percent of the L stock to B. On February 7, Year 3, L 
sells 40 percent of the L2 stock to C, and L2 ceases to be a member of 
the group. A portion of the Year 1 consolidated net operating loss is 
apportioned to L2 under Sec. 1.1502-21T(b) and is carried to L2's first 
separate return year, which ends December 31, Year 3. The following is a 
graphic illustration of these facts:

[[Page 379]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.017



[[Page 380]]

    (b) Under paragraph (b)(1) of this section, L2 is a loss corporation 
on February 7, Year 3. Under paragraph (b)(1)(iii) of this section, 
February 7, Year 3, is a testing date. Under paragraph (b)(1)(ii) of 
this section, the testing period for L2 with respect to this testing 
date commences on January 1, Year 1, the first day of the taxable year 
in which the portion of the consolidated net operating loss apportioned 
to L2 arose. Therefore, in determining whether L2 has an ownership 
change on February 7, Year 3, B's purchase of 30 percent of the L stock 
and C's purchase of 40 percent of the L2 stock are each owner shifts. L2 
has an ownership change under section 382(g) and Sec. 1.382-2T because B 
and C have increased their ownership interests in L2 by 18 and 40 
percentage points, respectively, during the testing period. -
    Example 2. Effect of prior ownership change of loss group. (a) L 
owns all the L1 stock and L1 owns all the L2 stock. The L loss group had 
an ownership change under Sec. 1.1502-92T in Year 2 with respect to a 
consolidated net operating loss arising in Year 1 and carried over to 
Year 2 and Year 3. The consolidated section 382 limitation computed 
solely on the basis of the value of the stock of L is $100. On December 
31, Year 2, L1 sells 25 percent of the stock of L2 to B. L2 is 
apportioned a portion of the Year 1 consolidated net operating loss 
which it carries over to its first separate return year ending after 
December 31, Year 2. L2's separate section 382 limitation with respect 
to this loss is zero unless L elects to apportion all or a part of the 
consolidated section 382 limitation to L2. (See paragraph (c) of this 
section for rules regarding the apportionment of a consolidated section 
382 limitation.) L apportions $50 of the consolidated section 382 
limitation to L2. -
    (b) On December 31, Year 3, L1 sells its remaining 75 percent stock 
interest in L2 to C, resulting in an ownership change of L2. L2's 
section 382 limitation computed on the change date with respect to the 
value of its stock is $30. Accordingly, L2's section 382 limitation for 
post-change years ending after December 31, Year 3, with respect to its 
pre-change losses, including the consolidated net operating losses 
apportioned to it from the L group, is $30, adjusted as required by 
section 382 and the regulations thereunder.

    -(c) Apportionment of a consolidated section 382 limitation--(1) In 
general. The common parent may elect to apportion all or any part of a 
consolidated section 382 limitation to a former member (or loss 
subgroup). See paragraph (e) of this section for the time and manner of 
making the election to apportion.
    (2) Amount of apportionment. The common parent may apportion all or 
part of each element of the consolidated section 382 limitation 
determined under Sec. 1.1502-93T. For this purpose, the consolidated 
section 382 limitation consists of two elements--
    (i) The value element, which is the element of the limitation 
determined under section 382(b)(1) (relating to value multiplied by the 
long-term tax-exempt rate) without regard to such adjustments as those 
described in section 382(b)(2) (relating to the carryforward of unused 
section 382 limitation), section 382(b)(3)(B) (relating to the section 
382 limitation for the post-change year that includes the change date), 
section 382(h) (relating to built-in gains and section 338 gains), and 
section 382(m)(2) (relating to short taxable years); and
    (ii) The adjustment element, which is so much (if any) of the 
limitation for the taxable year during which the former member ceases to 
be a member of the consolidated group that is attributable to a 
carryover of unused limitation under section 382(b)(2) or to recognized 
built-in gains under 382(h).
    (3) Effect of apportionment on the consolidated section 382 
limitation. The value element of the consolidated section 382 limitation 
for any post-change year ending after the day that a former member (or 
loss subgroup) ceases to be a member(s) is reduced to the extent that it 
is apportioned under this paragraph (c). The consolidated section 382 
limitation for the post-change year in which the former member (or loss 
subgroup) ceases to be a member(s) is also reduced to the extent that 
the adjustment element for that year is apportioned under this paragraph 
(c).
    (4) Effect on corporations to which the consolidated section 382 
limitation is apportioned. The amount of the value element that is 
apportioned to a former member (or loss subgroup) is treated as the 
amount determined under section 382(b)(1) for purposes of determining 
the amount of that corporation's (or loss subgroup's) section 382 
limitation for any taxable year ending after the former member (or loss 
subgroup) ceases to be a member(s). Appropriate adjustments must be made 
to the limitation based on the value element so apportioned for a short 
taxable year, carryforward of unused limitation, or any other adjustment 
required under

[[Page 381]]

section 382. The adjustment element apportioned to a former member (or 
loss subgroup) is treated as an adjustment under section 382(b)(2) or 
section 382(h), as appropriate, for the first taxable year after the 
member (or members) ceases to be a member (or members).
    (5) Deemed apportionment when loss group terminates. If a loss group 
terminates, to the extent the consolidated section 382 limitation is not 
apportioned under paragraph (c)(1) of this section, the consolidated 
section 382 limitation is deemed to be apportioned to the loss subgroup 
that includes the common parent, or, if there is no loss subgroup that 
includes the common parent immediately after the loss group terminates, 
to the common parent. A loss group terminates on the first day of the 
first taxable year that is a separate return year with respect to each 
member of the former loss group.
    (6) Appropriate adjustments when former member leaves during the 
year. Appropriate adjustments are made to the consolidated section 382 
limitation for the consolidated return year during which the former 
member (or loss subgroup) ceases to be a member(s) to reflect the 
inclusion of the former member in the loss group for a portion of that 
year.
    (7) Examples. The following examples illustrate the principles of 
this paragraph (c).

    Example 1. Consequence of apportionment. (a) L owns all the L1 stock 
and L1 owns all the L2 stock. The L group has a $200 consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. At the 
close of December 31, Year 1, the group has an ownership change under 
Sec. 1.1502-92T. The ownership change results in a consolidated section 
382 limitation of $10 based on the value of the stock of the group. On 
August 29, Year 2, L1 sells 30 percent of the stock of L2 to A. L2 is 
apportioned $90 of the group's $200 consolidated net operating loss 
under Sec. 1.1502-21T(b). L, the common parent, elects to apportion $6 
of the consolidated section 382 limitation to L2. The following is a 
graphic illustration of these facts:

[GRAPHIC] [TIFF OMITTED] TR27JN96.018


    (b) For its separate return years ending after August 29, Year 2 
(other than the taxable year ending December 31, Year 2), L2's section 
382 limitation with respect to the $90 of the group's net operating loss 
apportioned to it is $6, adjusted, as appropriate, for any short taxable 
year, unused section 382 limitation, or other adjustment. For its 
consolidated return years ending after August 29, Year 2, (other than 
the year ending December 31, Year 2) the L group's consolidated section 
382 limitation with respect to the remaining $110 of pre-change 
consolidated attribute is $4 ($10 minus the $6 value element apportioned 
to L2), adjusted, as appropriate,

[[Page 382]]

for any short taxable year, unused section 382 limitation, or other 
adjustment.
    (c) For the L group's consolidated return year ending December 31, 
Year 2, the value element of its consolidated section 382 limitation is 
increased by $4 (rounded to the nearest dollar), to account for the 
period during which L2 was a member of the L group ($6, the consolidated 
section 382 limitation apportioned to L2, times 241/365, the ratio of 
the number of days during Year 2 that L2 is a member of the group to the 
number of days in the group's consolidated return year). See paragraph 
(c)(6) of this section. Therefore, the value element of the consolidated 
section 382 limitation for Year 2 of the L group is $8 (rounded to the 
nearest dollar).
    (d) The section 382 limitation for L2's short taxable year ending 
December 31, Year 2, is $2 (rounded to the nearest dollar), which is the 
amount that bears the same relationship to $6, the value element of the 
consolidated section 382 limitation apportioned to L2, as the number of 
days during that short taxable year, 124 days, bears to 365. See 
Sec. 1.382-4(c).
    Example 2. Consequence of no apportionment. The facts are the same 
as in Example 1, except that L does not elect to apportion any portion 
of the consolidated section 382 limitation to L2. For its separate 
return years ending after August 29, Year 2, L2's section 382 limitation 
with respect to the $90 of the group's pre-change consolidated attribute 
apportioned to L2 is zero under paragraph (b)(2)(ii) of this section. 
Thus, the $90 consolidated net operating loss apportioned to L2 cannot 
offset L2's taxable income in any of its separate return years ending 
after August 29, Year 2. For its consolidated return years ending after 
August 29, Year 2, the L group's consolidated section 382 limitation 
with respect to the remaining $110 of pre-change consolidated attribute 
is $10, adjusted, as appropriate, for any short taxable year, unused 
section 382 limitation, or other adjustment.
    Example 3. Apportionment of adjustment element. The facts are the 
same as in Example 1, except that L2 ceases to be a member of the L 
group on August 29, Year 3, and the L group has a $4 carryforward of an 
unused consolidated section 382 limitation (under section 382(b)(2)) to 
the 1993 consolidated return year.
    The carryover of unused limitation increases the consolidated 
section 382 limitation for the Year 3 consolidated return year from $10 
to $14. L may elect to apportion all or any portion of the $10 value 
element and all or any portion of the $4 adjustment element to L2.

    (d) Rules pertaining to ceasing to be a member of a loss subgroup--
(1) In general. A corporation ceases to be a member of a loss subgroup--
    (i) On the first day of the first taxable year for which it files a 
separate return; or
    (ii) The first day that it ceases to bear a relationship described 
in section 1504(a)(1) to the loss subgroup parent (treating for this 
purpose the loss subgroup parent as the common parent described in 
section 1504(a)(1)(A)).
    (2) Examples. The principles of this paragraph (d) are illustrated 
by the following examples.

    Example 1. Basic case. (a) P owns all the L stock, L owns all the L1 
stock and L1 owns all the L2 stock. The P group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. On 
December 11, Year 2, P sells all the stock of L to corporation M. Each 
of L, L1, and L2 is apportioned a portion of the Year 1 consolidated net 
operating loss, and thereafter each joins with M in filing consolidated 
returns. Under Sec. 1.1502-92T, the L loss subgroup has an ownership 
change on December 11, Year 2. The L loss subgroup has a subgroup 
section 382 limitation of $100. The following is a graphic illustration 
of these facts:

[[Page 383]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.019



[[Page 384]]

    (b) On May 22, Year 3, L1 sells 40 percent of the L2 stock to A. L2 
carries over a portion of the P group's net operating loss from Year 1 
to its separate return year ending December 31, Year 3. Under paragraph 
(d)(1) of this section, L2 ceases to be a member of the L loss subgroup 
on May 22, Year 3, which is both (1) the first day of the first taxable 
year for which it files a separate return and (2) the day it ceases to 
bear a relationship described in section 1504(a)(1) to the loss subgroup 
parent, L. The net operating loss of L2 that is carried over from the P 
group is treated as a pre-change loss of L2 for its separate return 
years ending after May 22, Year 3. Under paragraphs (a)(2) and (b)(2) of 
this section, the separate section 382 limitation with respect to this 
loss is zero unless M elects to apportion all or a part of the subgroup 
section 382 limitation of the L loss subgroup to L2.
    Example 2. Formation of a new loss subgroup. The facts are the same 
as in Example 1, except that A purchases 40 percent of the L1 stock from 
L rather than purchasing L2 stock from L1. L1 and L2 file a consolidated 
return for their first taxable year ending after May 22, Year 3, and 
each of L1 and L2 carries over a part of the net operating loss of the P 
group that arose in Year 1. Under paragraph (d)(1) of this section, L1 
and L2 cease to be members of the L loss subgroup on May 22, Year 3. The 
net operating losses carried over from the P group are treated as pre-
change subgroup attributes of the loss subgroup composed of L1 and L2. 
The subgroup section 382 limitation with respect to those losses is zero 
unless M elects to apportion all or part of the subgroup section 382 
limitation of the L loss subgroup to the L1 loss subgroup. The following 
is a graphic illustration of these facts:


[[Page 385]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.020



    Example 3. Ceasing to bear a section 1504(a)(1) relationship to a 
loss subgroup parent. (a) A owns all the stock of P, and P owns all the 
stock of L1 and L2. The P group has a consolidated net operating loss 
arising in Year 1 that is carried over to Year 3 and Year 4. Corporation 
M acquires all the stock of P on November 11, Year 3, and P, L1, and L2 
thereafter file consolidated returns with M. M's acquisition results in 
an ownership change of the P loss subgroup under Sec. 1.1502-
92T(b)(1)(ii). The following is a graphic illustration of these facts:

[[Page 386]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.021



[[Page 387]]

    (b) P distributes the L2 stock to M on October 7, Year 4. L2 ceases 
to be a member of the P loss subgroup on October 7, Year 4, the first 
day that it ceases to bear the relationship described in section 
1504(a)(1) to P, the P loss subgroup parent. See paragraph (d)(1)(ii) of 
this section. Thus, the section 382 limitation with respect to the pre-
change subgroup attributes attributable to L2 is zero except to the 
extent M elects to apportion all or a part of the subgroup section 382 
limitation of the P loss subgroup to L2.
    Example 4. Relationship through a successor. The facts are the same 
as in Example 3, except that, instead of P's distributing the stock of 
L2, L2 merges into L1 on October 7, Year 4. L1 (as successor to L2 in 
the merger within the meaning of Sec. 1.382-2T(f)(4)) continues to bear 
a relationship described in section 1504(a)(1) to P, the loss subgroup 
parent. Thus, L2 does not cease to be a member of the P loss subgroup as 
a result of the merger.

    (e) Filing the election to apportion--(1) Form of the election to 
apportion. An election under paragraph (c) of this section must be made 
by the common parent. The election must be made in the form of the 
following statement: ``THIS IS AN ELECTION UNDER Sec. 1.1502-95T OF THE 
INCOME TAX REGULATIONS TO APPORTION ALL OR PART OF THE [insert either 
CONSOLIDATED SECTION 382 LIMITATION or SUBGROUP SECTION 382 LIMITATION, 
as appropriate] TO [insert name and E.I.N. of the corporation (or the 
corporations that compose a new loss subgroup) to which allocation is 
made]. The declaration must also include the following information, as 
appropriate--
    (i) The date of the ownership change that resulted in the 
consolidated section 382 limitation (or subgroup section 382 
limitation);
    (ii) The amount of the consolidated section 382 limitation (or 
subgroup section 382 limitation) for the taxable year during which the 
former member (or new loss subgroup) ceases to be a member of the 
consolidated group (determined without regard to any apportionment under 
this section;
    (iii) The amount of the value element and adjustment element of the 
consolidated section 382 limitation (or subgroup section 382 limitation) 
that is apportioned to the former member (or new loss subgroup) pursuant 
to paragraph (c) of this section; and
    (iv) The name and E.I.N. of the common parent making the 
apportionment.
    (2) Signing of the election. The election statement must be signed 
by both the common parent and the former member (or, in the case of a 
loss subgroup, the common parent and the loss subgroup parent) by 
persons authorized to sign their respective income tax returns.
    (3) Filing of the election. The election statement must be filed by 
the common parent of the group that is apportioning the consolidated 
section 382 limitation (or the subgroup section 382 limitation) with its 
income tax return for the taxable year in which the former member (or 
new loss subgroup) ceases to be a member. The common parent must also 
deliver a copy of the statement to the former member (or the members of 
the new loss subgroup) on or before the day the group files its income 
tax return for the consolidated return year that the former member (or 
new loss subgroup) ceases to be a member. A copy of the statement must 
be attached to the first return of the former member (or the first 
return in which the members of a new loss subgroup join) that is filed 
after the close of the consolidated return year of the group of which 
the former member (or the members of a new loss subgroup) ceases to be a 
member.
    (4) Revocation of election. An election statement made under 
paragraph (c) of this section is revocable only with the consent of the 
Commissioner.

[T.D. 8678, 61 FR 33355, June 27, 1996]



Sec. 1.1502-96T   Miscellaneous rules (temporary).

    (a) End of separate tracking of losses--(1) Application. This 
paragraph (a) applies to a member (or a loss subgroup) with a net 
operating loss carryover that arose (or is treated under Sec. 1.1502-
21T(c) as arising) in a SRLY (or a net unrealized built-in gain or loss 
determined at the time that the member (or loss subgroup) becomes a 
member of the consolidated group if there is--
    (i) An ownership change of the member (or loss subgroup in 
connection with, or after, becoming a member of the group; or

[[Page 388]]

    (ii) A period of 5 consecutive years following the day that the 
member (or loss subgroup) becomes a member of a group during which the 
member (or loss subgroup) has not had an ownership change.
    (2) Effect of end of separate tracking. If this paragraph (a) 
applies with respect to a member (or loss subgroup), then, starting on 
the day after the earlier of the change date (but not earlier than the 
day the member (or loss subgroup) becomes a member of the consolidated 
group) or the last day of the 5 consecutive year period described in 
paragraph (a)(1)(ii) of this section, the member's net operating loss 
carryover that arose (or is treated under Sec. 1.1502-21T(c) as arising) 
in a SRLY, is treated as described in Sec. 1.1502-91T(c)(1)(i). Also, 
the member's separately computed net unrealized built-in gain or loss is 
included in the determination whether the group has a net unrealized 
built-in gain or loss. The preceding sentences also apply for purposes 
of determining whether there is an ownership change with respect to such 
attributes following such change date (or earlier day) or 5 consecutive 
year period. Thus, for example, starting the day after the change date 
or the end of the 5 consecutive year period--
    (i) The consolidated group which includes the new loss member or 
loss subgroup is no longer required to separately track owner shifts of 
the stock of the new loss member or loss subgroup parent to determine if 
an ownership change occurs with respect to the attributes of the new 
loss member or members included in the loss subgroup;
    (ii) The group includes the member's attributes in determining 
whether it is a loss group under Sec. 1.1502-91T(c);
    (iii) There is an ownership change with respect to such attributes 
only if the group is a loss group and has an ownership change; and
    (iv) If the group has an ownership change, such attributes are pre-
change consolidated attributes subject to the loss group's consolidated 
section 382 limitation.
    (3) Continuing effect of end of separate tracking. As the context 
may require, a current group determines which of its members are 
included in a loss subgroup on any testing date by taking into account 
the application of this section in the former group. See the example in 
Sec. 1.1502-91T(f)(2).
    (4) Special rule for testing period. For purposes of determining the 
beginning of the testing period for a loss group, the member's (or loss 
subgroup's) net operating loss carryovers (or net unrealized built-in 
gain or loss) described in paragraph (a)(2) of this section are 
considered to arise--
    -(i) in a case described in paragraph (a)(1)(i) of this section, in 
a taxable year that begins not earlier than the later of the day 
following the change date or the day that the member becomes a member of 
the group; and -(ii) in a case described in paragraph (a)(1)(ii) of this 
section, in a taxable year that begins 3 years before the end of the 5 
consecutive year period.
    (5) Limits on effects of end of separate tracking. The rule 
contained in this paragraph (a) applies solely for purposes of 
Secs. 1.1502-91T through 1.1502-95T and this section (other than 
paragraph (b)(2)(ii)(B) of this section (relating to the definition of 
pre-change attributes of a subsidiary)) and Sec. 1.1502-98T, and not for 
purposes of other provisions of the consolidated return regulations, 
including, for example, Secs. 1.1502-15T and 1.1502-21T (relating to the 
consolidated net operating loss deduction). See also paragraph (c) of 
this section for the continuing effect of an ownership change with 
respect to pre-change attributes.
    (b) Ownership change of subsidiary--(1) Ownership change of a 
subsidiary because of options or plan or arrangement. Notwithstanding 
Sec. 1.1502-92T, a subsidiary may have an ownership change for purposes 
of section 382 with respect to its attributes which a group or loss 
subgroup includes in making a determination under Sec. 1.1502-91T(c)(1) 
(relating to the definition of loss group) or Sec. 1.1502-91T(d) 
(relating to the definition of loss subgroup). The subsidiary has such 
an ownership change if it has an ownership change under the principles 
of Sec. 1.1502-95T(b) and section 382 and the regulations thereunder 
(determined on a separate entity basis by treating the subsidiary as not 
being a member of a consolidated group) in the event of--
    (i) The deemed exercise under Sec. 1.382-4(d) of an option or 
options (other than

[[Page 389]]

an option with respect to stock of the common parent) held by a person 
(or persons acting pursuant to a plan or arrangement) to acquire more 
than 20 percent of the stock of the subsidiary; or
    (ii) An increase by 1 or more 5-percent shareholders, acting 
pursuant to a plan or arrangement to avoid an ownership change of a 
subsidiary, in their percentage ownership interest in the subsidiary by 
more than 50 percentage points during the testing period of the 
subsidiary through the acquisition (or deemed acquisition pursuant to 
Sec. 1.382-4(d)) of ownership interests in the subsidiary and in higher-
tier members with respect to the subsidiary.
    (2) Effect of the ownership change--(i) In general. If a subsidiary 
has an ownership change under paragraph (b)(1) of this section, the 
amount of consolidated taxable income for any post-change year that may 
be offset by the pre-change losses of the subsidiary shall not exceed 
the section 382 limitation for the subsidiary. For purposes of this 
limitation, the value of the subsidiary is determined solely by 
reference to the value of the subsidiary's stock.
    (ii) Pre-change losses. The pre-change losses of a subsidiary are--
    (A) Its allocable part of any consolidated net operating loss which 
is attributable to it under Sec. 1.1502-21T(b) (determined on the last 
day of the consolidated return year that includes the change date) that 
is not carried back and absorbed in a taxable year prior to the year 
including the change date;
    (B) Its net operating loss carryovers that arose (or are treated 
under Sec. 1.1502-21T(c) as having arisen) in a SRLY; and
    (C) Its recognized built-in loss with respect to its separately 
computed net unrealized built-in loss, if any, determined on the change 
date.
    (3) Coordination with Secs. 1.1502-91T, 1.1502-92T, and 1.1502-94T. 
If an increase in percentage ownership interest causes an ownership 
change with respect to an attribute under this paragraph (b) and under 
Sec. 1.1502-92T on the same day, the ownership change is considered to 
occur only under Sec. 1.1502-92T and not under this paragraph (b). See 
Sec. 1.1502-94T for anti-duplication rules relating to value.
    (4) Example. The following example illustrates paragraph (b)(1)(ii) 
of this section.

    Example. Plan to avoid an ownership change of a subsidiary. (a) L 
owns all the stock of L1, L1 owns all the stock of L2, L2 owns all the 
stock of L3, and L3 owns all the stock of L4. The L group has a 
consolidated net operating loss arising in Year 1 that is carried over 
to Year 2. L has assets other than its L1 stock with a value of $900. 
L1, L2, and L3 own no assets other than their L2, L3, and L4 stock. L4 
has assets with a value of $100. During Year 2, A, B, C, and D, acting 
pursuant to a plan to avoid an ownership change of L4, acquire the 
following ownership interests in the members of the L loss group: (A) on 
September 11, Year 2, A acquires 20 percent of the L1 stock from L and B 
acquires 20 percent of the L2 stock from L1; and (B) on September 20, 
Year 2, C acquires 20 percent of the stock of L3 from L2 and D acquires 
20 percent of the stock of L4 from L3. The following is a graphic 
illustration of these facts:


[[Page 390]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.022



[[Page 391]]

    (b) The acquisitions by A, B, C, and D pursuant to the plan have 
increased their respective percentage ownership interests in L4 by 
approximately 10, 13, 16, and 20 percentage points, for a total of 
approximately 59 percentage points during the testing period. This more 
than 50 percentage point increase in the percentage ownership interest 
in L4 causes an ownership change of L4 under paragraph (b)(2) of this 
section.

    (c) Continuing effect of an ownership change. A loss corporation (or 
loss subgroup) that is subject to a limitation under section 382 with 
respect to its pre-change losses continues to be subject to the 
limitation regardless of whether it becomes a member or ceases to be a 
member of a consolidated group. See Sec. 1.382-5T(d) (relating to 
successive ownership changes and absorption of a section 382 
limitation).

[T.D. 8678, 61 FR 33362, June 27, 1996]



Sec. 1.1502-97T   Special rules under section 382 for members under the jurisdiction of a court in a title 11 or similar case (temporary). [Reserved]

[T.D. 8678, 61 FR 33364, June 27, 1996]



Sec. 1.1502-98T   Coordination with section 383 (temporary).

    The rules contained in Secs. 1.1502-91T through 1.1502-96T also 
apply for purposes of section 383, with appropriate adjustments to 
reflect that section 383 applies to credits and net capital losses. 
Similarly, in the case of net capital losses, general business credits, 
and excess foreign taxes that are pre-change attributes, Sec. 1.383-1 
applies the principles of Secs. 1.1502-91T through 1.1502-96T. For 
example, if a loss group has an ownership change under Sec. 1.1502-92T 
and has a carryover of unused general business credits from a pre-change 
consolidated return year to a post-change consolidated return year, the 
amount of the group's regular tax liability for the post-change year 
that can be offset by the carryover cannot exceed the consolidated 
section 383 credit limitation for that post-change year, determined by 
applying the principles of Secs. 1.383-1(c)(6) and 1.1502-93T (relating 
to the computation of the consolidated section 382 limitation).

[T.D. 8678, 61 FR 33364, June 27, 1996]



Sec. 1.1502-99T   Effective dates (temporary).

    (a) Effective date. Sections 1.1502-91T through 1.1502-96T and 
1.1502-98T apply to any testing date on or after January 1, 1997. 
Sections 1.1502-94T through 1.1502-96T also apply on any date on or 
after January 1, 1997, on which a corporation becomes a member of a 
group or on which a corporation ceases to be a member of a loss group 
(or a loss subgroup).
    (b) Testing period may include a period beginning before January 1, 
1997. A testing period for purposes of Secs. 1.1502-91T through 1.1502-
96T and 1.1502-98T may include a period beginning before January 1, 
1997. Thus, for example, in applying Sec. 1.1502-92T(b)(1)(i) (relating 
to the determination of an ownership change of a loss group), the 
determination of the lowest percentage ownership interest of any 5-
percent shareholder of the common parent during a testing period ending 
on a testing date occurring on or after January 1, 1997, takes into 
account the period beginning before January 1, 1997, except to the 
extent that the period is more than 3 years before the testing date or 
is otherwise before the beginning of the testing period. See 
Sec. 1.1502-92T(b)(1).
    (c) Transition rules--(1) Methods permitted--(i) In general. For the 
period ending before January 1, 1997, a consolidated group is permitted 
to use any method described in paragraph (c)(2) of this section which is 
consistently applied to determine if an ownership change occurred with 
respect to a consolidated net operating loss, a net operating loss 
carryover (including net operating loss carryovers arising in SRLYs), or 
a net unrealized built-in loss. If an ownership change occurred during 
that period, the group is also permitted to use any method described in 
paragraph (c)(2) of this section which is consistently applied to 
compute the amount of the section 382 limitation that applies to limit 
the use of taxable income in any post-change year ending before, on, or 
after January 1, 1997. The preceding sentence does not preclude the 
imposition of an additional, lesser limitation due to a subsequent 
ownership change nor, except as provided in paragraph (c)(1)(iii) of 
this

[[Page 392]]

section, does it permit the beginning of a new testing period for the 
loss group.
    (ii) Adjustments to offset excess limitation. If an ownership change 
occurred during the period ending before January 1, 1997, and a method 
described in paragraph (c)(2) of this section was not used for a post-
change year, the members (or group) must reduce the section 382 
limitation for post-change years for which an income tax return is filed 
after January 1, 1997, to offset, as quickly as possible, the effects of 
any section 382 limitation that members took into account in excess of 
the amount that would have been allowable under Secs. 1.1502-91T through 
1.1502-96T and 1.1502-98T.
    (iii) Coordination with effective date. Notwithstanding that a group 
may have used a method described in paragraph (c)(2)(ii) or (iii) of 
this section for the period before January 1, 1997, Secs. 1.1502-91T 
through 1.1502-96T and 1.1502-98T apply to any testing date occurring on 
or after January 1, 1997, for purposes of determining whether there is 
an ownership change with respect to any losses and, if so, the 
collateral consequences. Any ownership change of a member other than the 
common parent pursuant to a method described in paragraph (c)(2)(ii) or 
(iii) of this section does not cause a new testing period of the loss 
group to begin for purposes of applying Sec. 1.1502-92T on or after 
January 1, 1997.
    (2) Permitted methods. The methods described in this paragraph 
(c)(2) are:
    (i) A method that does not materially differ from the rules in 
Secs. 1.1502-91T through 1.1502-96T and 1.1502-98T (other than those in 
Sec. 1.1502-95T(c) (relating to the apportionment of a section 382 
limitation) as they would apply to a corporation that ceases to be a 
member of the group before January 1, 1997). As the context requires, 
the method must treat references to rules in current regulations as 
references to rules in regulations generally effective for taxable years 
before January 1, 1997. Thus, for example, the taxpayer must treat a 
reference to Sec. 1.382-4(d) (relating to options) as a reference to 
Sec. 1.382-2T(h)(4) for any testing date to which Sec. 1.382-2T(h)(4) 
applies. Similarly, a reference to Sec. 1.1502-21T(c) may be a reference 
to Sec. 1.1502-21A(c), as appropriate. Furthermore, the method must 
treat all corporations that were affiliated on January 1, 1987, and 
continuously thereafter as having met the 5 consecutive year requirement 
of Sec. 1.1502-91T(d)(2)(i) on any day before January 1, 1992, on which 
the determination of net unrealized built-in gain or loss of a loss 
subgroup is made;
    (ii) A reasonable application of the rules in section 382 and the 
regulations thereunder applied to each member on a separate entity 
basis, treating each member's allocable part of a consolidated net 
operating loss which is attributable to it under Sec. 1.1502-21T(b) as a 
net operating loss of that member and applying rules similar to 
Sec. 1.382-8T to avoid duplication of value in computing the section 382 
limitation for the member (see Sec. 1.382-8T(h) (relating to the 
effective date and transition rules regarding controlled groups)); or
    (iii) A method approved by the Commissioner upon application by the 
common parent.
    (d) Amended returns. A group may file an amended return in 
connection with an ownership change occurring before January 1, 1997, to 
modify the amount of a section 382 limitation with respect to a 
consolidated net operating loss, a net operating loss carryover 
(including net operating loss carryovers arising in SRLYs), or a 
recognized built-in loss (or gain) only if it files amended returns:
    (1) For the earliest taxable year ending after December 31, 1986, in 
which it had an ownership change, if any, under Sec. 1.1502-92T;
    (2) For all subsequent taxable years for which returns have already 
been filed as of the date of the amended return;
    (3) The modification with respect to all members for all taxable 
years ending in 1987 and thereafter complies with Secs. 1.1502-91T 
through 1.1502-96T and 1.1502-98T; and
    (4) The amended return(s) permitted by the applicable statute of 
limitations is/are filed before March 26, 1997.
    (e) Section 383. This section also applies for the purposes of 
section 383, with appropriate adjustments to reflect that section 383 
applies to credits and net capital losses.

[T.D. 8678, 61 FR 33364, June 27, 1996]

[[Page 393]]



Sec. 1.1502-100  Corporations exempt from tax.

    (a) In general--(1) Computation of tax liability. The tax liability 
for a consolidated return year of a group of two or more corporations 
described in section 1504(e) which are exempt from taxation under 
section 501 (hereinafter referred to in this section as ``exempt 
group'') shall be determined on a consolidated basis by applying the 
provisions of subchapter F of chapter 1 of the code in the manner 
provided in this section. See section 1504(e) for tax-exempt 
corporations eligible to file a consolidated return.
    (2) Applicability of other consolidated return provisions. The 
provisions of Sec. 1.1502-1 through Sec. 1.1502-80 shall be applicable 
to an exempt group to the extent they are not inconsistent with the 
provisions of this section or the provisions of subchapter F of chapter 
1 of the Code. For purposes of applying the provisions of Sec. 1.1502-1 
through Sec. 1.1502-80 to an exempt group, the following substitutions 
shall be made:
    (i) The term ``exempt group'' shall be substituted for the term 
``group'',
    (ii) The terms ``unrelated business taxable income'', ``separate 
unrelated business taxable income'', and ``consolidated unrelated 
business taxable income'' shall be substituted for the terms ``taxable 
income'', ``separate taxable income'', and ``consolidated taxable 
income'', and
    (iii) The term ``consolidated liability for tax determined under 
Sec. 1.1502-2'' (or an equivalent term) shall mean the consolidated 
liability for tax of an exempt group determined under paragraph (b) of 
this section.
    (b) Consolidated liability for tax. The tax liability for a 
consolidated return year of an exempt group is the tax imposed by 
section 511(a) or section 1201(a) on the consolidated unrelated business 
taxable income for the year (determined under paragraph (c) of this 
section), and by allowing the credits and surtax exemption provided in 
Sec. 1.1502-2.
    (c) Consolidated unrelated business taxable income. The consolidated 
unrelated business taxable income for a consolidated return year shall 
be determined by taking into account:
    (1) The separate unrelated business taxable income of each member of 
the exempt group (determined under paragraph (d) of this section);
    (2) Any consolidated net operating loss deduction (determined under 
Sec. Sec. 1.1502-21A or 1.1502-21T (as appropriate) subject to the 
limitations provided in section 512(b)(6);
    (3) Any consolidated charitable contribution deduction (determined 
under Sec. 1.1502-24) subject to the limitations provided in section 
512(b)(10); and
    (4) Any consolidated net gain or net loss from the disposition of 
debt-financed property (as defined in section 514(b)) taken into account 
as provided by section 514(a), or from the cutting of timber to which 
section 631 applies.
    (d) Separate unrelated business taxable income. The separate 
unrelated business taxable income of a member of an exempt group shall 
be computed in accordance with the provisions of section 512 covering 
the determination of unrelated business taxable income of separate 
corporations, except that:
    (1) The provisions of paragraphs (a) through (k) and (o) of 
Sec. 1.1502-12 shall apply; and
    (2) No charitable contributions deduction shall be taken into 
account under section 512(b)(10).

See sections 511(c) and 512(a)(3)(C) for special rules applicable to 
organizations described in section 501(c)(2).

[T.D. 7595, 44 FR 10382, Feb. 20, 1979, as amended by T.D. 8677, 61 FR 
33325, June 27, 1996]



Sec. 1.1503-1   Computation and payment of tax.

    (a) General rule. In any case in which a consolidated return is 
filed or required to be filed, the tax shall be determined, computed, 
assessed, collected, and adjusted in accordance with the regulations 
prescribed under section 1502 promulgated prior to the last date 
prescribed by law for the filing of such return.
    (b) Limitation. If the affiliated group includes one or more Western 
Hemisphere trade corporations (as defined in section 921) or one or more 
regulated public utilities (as defined in section 1503 (c)), the 
increase in tax described in section 1503 (a) shall be applied in a

[[Page 394]]

manner provided in the regulations under section 1502.

[T.D. 6500, 25 FR 12105, Nov. 26, 1960, as amended by T.D. 7244, 37 FR 
28897, Dec. 30, 1972]



Sec. 1.1503-2  Dual consolidated loss.

    (a) Purpose and scope. This section provides rules for the 
application of section 1503(d), concerning the determination and use of 
dual consolidated losses. Paragraph (b) of this section provides a 
general rule prohibiting a dual consolidated loss from offsetting the 
taxable income of a domestic affiliate. Paragraph (c) of this section 
provides definitions of the terms used in this section. Paragraph (d) of 
this section provides rules for calculating the amount of a dual 
consolidated loss and for adjusting the basis of stock of a dual 
resident corporation. Paragraph (e) of this section contains an anti-
avoidance provision. Paragraph (f) of this section applies the rules of 
paragraph (d) of this section to the computation of foreign tax credit 
limitations. Paragraph (g) of this section provides certain exceptions 
to the limitation rule of paragraph (b) of this section. Finally, 
paragraph (h) of this section provides the effective date of the 
regulations and a provision for the retroactive application of the 
regulations to qualifying taxpayers.
    (b) In general--(1) Limitation on the use of a dual consolidated 
loss to offset income of a domestic affiliate. Except as otherwise 
provided in this section, a dual consolidated loss of a dual resident 
corporation cannot offset the taxable income of any domestic affiliate 
in the taxable year in which the loss is recognized or in any other 
taxable year, regardless of whether the loss offsets income of another 
person under the income tax laws of a foreign country and regardless of 
whether the income that the loss may offset in the foreign country is, 
has been, or will be subject to tax in the United States. Pursuant to 
paragraph (c) (1) and (2) of this section, the same limitation shall 
apply to a dual consolidated loss of a separate unit of a domestic 
corporation as if the separate unit were a wholly owned subsidiary of 
such corporation.
    (2) Limitation on the use of a dual consolidated loss to offset 
income of a successor-in-interest. A dual consolidated loss of a dual 
resident corporation also cannot be used to offset the taxable income of 
another corporation by means of a transaction in which the other 
corporation succeeds to the tax attributes of the dual resident 
corporation under section 381 of the Code. Similarly, a dual 
consolidated loss of a separate unit of a domestic corporation cannot be 
used to offset income of the domestic corporation following the 
termination, liquidation, sale, or other disposition of the separate 
unit. However, if a dual resident corporation transfers its assets to 
another corporation in a transaction subject to section 381, and the 
acquiring corporation is a dual resident corporation of the same foreign 
country of which the transferor dual resident corporation is a resident, 
or a domestic corporation that carries on the business activities of the 
transferor dual resident corporation as a separate unit, then income 
generated by the transferee dual resident corporation, or separate unit, 
may be offset by the carryover losses of the transferor dual resident 
corporation. In addition, if a domestic corporation transfers a separate 
unit to another domestic corporation in a transaction subject to section 
381, the income generated by the separate unit following the transfer 
may be offset by the carryover losses of the separate unit.
    (3) Application of rules to multiple tiers of separate units. If a 
separate unit of a domestic corporation is owned indirectly through 
another separate unit, the principles of paragraph (b) (1) and (2) of 
this section shall apply as if the upper-tier separate unit were a 
subsidiary of the domestic corporation and the lower-tier separate unit 
were a lower-tier subsidiary.
    (4) Examples. The following examples illustrate the application of 
this paragraph (b).

    Example 1. P, a domestic corporation, owns all of the outstanding 
stock of DRC, a domestic corporation. P and DRC file a consolidated U.S. 
income tax return. DRC is managed and controlled in Country W, a country 
that determines the tax residence of corporations according to their 
place of management and control. Therefore, DRC is a dual resident 
corporation and any net operating loss it incurs is a dual consolidated 
loss. In Years 1 through 3, DRC incurs dual

[[Page 395]]

consolidated losses. Under this paragraph (b), the dual consolidated 
losses may not be used to offset P's income on the group's consolidated 
U.S. income tax return. At the end of Year 3, DRC sells all of its 
assets and discontinues its business operations. DRC is then liquidated 
into P, pursuant to the provisions of section 332. Normally, under 
section 381, P would succeed to, and be permitted to utilize, DRC's net 
operating loss carryovers. However, this paragraph (b) prohibits the 
dual consolidated losses of DRC from reducing P's income for U.S. tax 
purposes. Therefore, DRC's net operating loss carryovers will not be 
available to offset P's income.
    Example 2. The facts are the same as in Example 1, except that DRC 
does not sell its assets and, following the liquidation of DRC, P 
continues to operate DRC's business as a separate unit (e.g., a branch). 
DRC's loss carryovers are available to offset P's income generated by 
the assets previously owned by DRC and now held by the separate unit.

    (c) Definitions. The following definitions shall apply for purposes 
of this section.
    (1) Domestic corporation. The term ``domestic corporation'' has the 
meaning assigned to it by section 7701(a) (3) and (4). The term also 
includes any corporation otherwise treated as a domestic corporation by 
the Code, including, but not limited to, sections 269B, 953(d), and 1504 
(d). For purposes of this section, any separate unit of a domestic 
corporation, as defined in paragraph (c) (3) and (4) of this section, 
shall be treated as a separate domestic corporation.
    (2) Dual resident corporation. A dual resident corporation is a 
domestic corporation that is subject to the income tax of a foreign 
country on its worldwide income or on a residence basis. A corporation 
is taxed on a residence basis if it is taxed as a resident under the 
laws of the foreign country. An S corporation, as defined in section 
1361, is not a dual resident corporation. For purposes of this section, 
any separate unit of a domestic corporation, as defined in paragraph (c) 
(3) and (4) of this section, shall be treated as a dual resident 
corporation. Unless otherwise indicated, any reference in this section 
to a dual resident corporation refers also to a separate unit.
    (3) Separate unit--(i) The term ``separate unit'' shall mean any of 
the following:
    (A) A foreign branch, as defined in Sec. 1.367(a)-6T(g) (or a 
successor regulation), that is owned either directly by a domestic 
corporation or indirectly by a domestic corporation through ownership of 
a partnership or trust interest (regardless of whether the partnership 
or trust is a United States person);
    (B) an interest in a partnership; or
    (C) an interest in a trust.
    (ii) If two or more foreign branches located in the same foreign 
country are owned by a single domestic corporation and the losses of 
each branch are made available to offset the income of the other 
branches under the tax laws of the foreign country, within the meaning 
of paragraph (c)(15)(ii) of this section, then the branches shall be 
treated as one separate unit.
    (4) Hybrid entity separate unit. The term ``separate unit'' includes 
an interest in an entity that is not taxable as an association for U.S. 
income tax purposes but is subject to income tax in a foreign country as 
a corporation (or otherwise at the entity level) either on its worldwide 
income or on a residence basis.
    (5) Dual consolidated loss--(i) In general. The term ``dual 
consolidated loss'' means the net operating loss (as defined in section 
172(c) and the regulations thereunder) of a domestic corporation 
incurred in a year in which the corporation is dual resident 
corporation. The dual consolidated loss shall be computed under 
paragraph (d)(1) of this section. The fact that a particular item taken 
into account in computing a dual resident corporation's net operating 
loss is not taken into account in computing income subject to a foreign 
country's income tax shall not cause such item to be excluded from the 
calculation of the dual consolidated loss.
    (ii) Exceptions. A dual consolidated loss shall not include the 
following--
    (A) A net operating loss incurred by a dual resident corporation in 
a foreign country whose income tax laws--
    (1) Do not permit the dual resident corporation to use its losses, 
expenses or deductions to offset the income of any other person that is 
recognized in the same taxable year in which the losses, expenses or 
deductions are incurred; and

[[Page 396]]

    (2) Do not permit the losses, expenses or deductions of the dual 
resident corporation to be carried over or back to be used, by any 
means, to offset the income of any other person in other taxable years; 
or
    (B) A net operating loss incurred during that portion of the taxable 
year prior to the date on which the domestic corporation becomes a dual 
resident corporation or subsequent to the date on which the domestic 
corporation ceases to be a dual resident corporation. For purposes of 
determining the amount of the net operating loss incurred in that 
portion of the taxable year prior to the date on which the domestic 
corporation becomes a dual resident corporation or subsequent to the 
date on which the domestic corporation ceases to be a dual resident 
corporation, in no event shall more than the aggregate of the equal 
daily portion of the net operating loss commensurate with the portion of 
the taxable year during which the domestic corporation was not a dual 
resident corporation be allocated to that portion of the taxable year in 
which the domestic corporation was not a dual resident corporation.
    (iii) Dual consolidated losses of separate units that are 
partnership interests, including interests in hybrid entities. 
[Reserved]
    (6) Subject to tax. For purposes of determining whether a domestic 
corporation is subject to the income tax of a foreign country on its 
income, the fact that the corporation has no actual income tax liability 
to the foreign country for a particular taxable year shall not be taken 
into account.
    (7) Foreign country. For purposes of this section, possessions of 
the United States shall be considered foreign countries.
    (8) Consolidated group. The term ``consolidated group'' means an 
affiliated group, as defined in section 1504(a), with which a dual 
resident corporation or domestic owner files a consolidated U.S. income 
tax return.
    (9) Domestic owner. The term ``domestic owner'' means a domestic 
corporation that owns one or more separate units.
    (10) Affiliated dual resident corporation or affiliated domestic 
owner. The term ``affiliated dual resident corporation'' or ``affiliated 
domestic owner'' means a dual resident corporation or domestic owner 
that is a member of a consolidated group.
    (11) Unaffiliated dual resident corporation or unaffiliated domestic 
owner. The term ``unaffiliated dual resident corporation'' or 
``unaffiliated domestic owner'' means a dual resident corporation or 
domestic owner that is an unaffiliated domestic corporation.
    (12)  Successor-in-interest. The term ``successor-in-interest'' 
means an acquiring corporation that succeeds to the tax attributes of an 
acquired corporation by means of a transaction subject to section 381.
    (13) Domestic affiliate. The term ``domestic affiliate'' means any 
member of an affiliated group, without regard to the exceptions 
contained in section 1504(b) (other than section 1504(b)(3)) relating to 
includible corporations.
    (14) Unaffiliated domestic corporation. The term ``unaffiliated 
domestic corporation'' means a domestic corporation that is not a member 
of an affiliated group.
    (15) Use of loss to offset income of a domestic affiliate or another 
person--(i) A dual consolidated loss shall be deemed to offset income of 
a domestic affiliate in the year it is included in the computation of 
the consolidated taxable income of a consolidated group. The fact that 
no tax benefit results from the inclusion of the dual consolidated loss 
in the computation of the group's consolidated taxable income in the 
taxable year shall not be taken into account.
    (ii) Except as provided in paragraph (c)(15)(iii) of this section, a 
loss, expense, or deduction taken into account in computing a dual 
consolidated loss shall be deemed to offset income of another person 
under the income tax laws of a foreign country in the year it is made 
available for such offset. The fact that the other person does not have 
sufficient income in that year to benefit from such an offset shall not 
be taken into account. However, where the laws of a foreign country 
provide an election that would enable a dual resident corporation or 
separate unit to use its losses, expenses, or deductions to offset 
income of another person, the losses, expenses, or deductions

[[Page 397]]

shall be considered to offset such income only if the election is made.
    (iii) The losses, expenses, or deductions taken into account in 
computing a dual resident corporation's or separate unit's dual 
consolidated loss shall not be deemed to offset income of another person 
under the income tax laws of a foreign country for purposes of this 
section, if under the laws of the foreign country the losses, expenses, 
or deductions of the dual resident corporation or separate unit are used 
to offset the income of another dual resident corporation or separate 
unit within the same consolidated group (or income of another separate 
unit that is owned by the unaffiliated domestic owner of the first 
separate unit). If the losses, expenses, or deductions of a dual 
resident corporation or separate unit are made available under the laws 
of a foreign country to offset the income of other dual resident 
corporations or separate units within the same consolidated group (or 
other separate units owned by the unaffiliated domestic owner of the 
first separate unit), as well as the income of another person, and the 
laws of the foreign country do not provide applicable rules for 
determining which person's income is offset by the losses, expenses, or 
deductions, then for purposes of this section, the losses, expenses or 
deductions shall be deemed to offset the income of the other dual 
resident corporations or separate units, to the extent of such income, 
before being considered to offset the income of the other person.
    (iv) Except to the extent paragraph (g)(1) of this section applies, 
where the income tax laws of a foreign country deny the use of losses, 
expenses, or deductions of a dual resident corporation to offset the 
income of another person because the dual resident corporation is also 
subject to income taxation by another country on its worldwide income or 
on a residence basis, the dual resident corporation shall be treated as 
if it actually had offset its dual consolidated loss against the income 
of another person in such foreign country.
    (16) Examples. The following examples illustrate this paragraph (c).

    Example 1. X, a member of a consolidated group, conducts business 
through a branch in Country Y. Under Country Y's income tax laws, the 
branch is taxed as a permanent establishment and its losses may be used 
under the Country Y form of consolidation to offset the income of Z, a 
Country Y affiliate of X. In Year 1, the branch of X incurs an overall 
loss that would be treated as a net operating loss if the branch were a 
separate domestic corporation. Under paragraph (c)(3) of this section, 
the branch of X is treated as a separate domestic corporation and a dual 
resident corporation. Thus, under paragraph (c)(5), its loss constitutes 
a dual consolidated loss. Unless X qualifies for an exception under 
paragraph (g) of this section, paragraph (b) of this section precludes 
the use of the branch's loss to offset any income of X not derived from 
the branch operations or any income of a domestic affiliate of X.
    Example 2. A and B are members of a consolidated group. FC is a 
Country X corporation that is wholly owned by B. A and B organize a 
partnership, P, under the laws of Country X. P conducts business in 
Country X and its business activity constitutes a foreign branch within 
the meaning of paragraph (c)(3)(i)(A) of this section. P also earns U.S. 
source income that is unconnected with the branch operations and, 
therefore, is not subject to tax by Country X. Under the laws of Country 
X, the branch can consolidate with FC. The interests in P held by A and 
B are each treated as a dual resident corporation. The branch is also 
treated as a separate dual resident corporation. Unless an exception 
under paragraph (g) of this section applies, any dual consolidated loss 
incurred by P's branch cannot offset the U.S. source income earned by P 
or any other income of A or B.
    Example 3. X is classified as a partnership for U.S. income tax 
purposes. A, B, and C are the sole partners of X. A and B are domestic 
corporations and C is a Country Y corporation. For U.S. income tax 
purposes, each partner has an equal interest in each item of partnership 
profit or loss. Under Country Y's law, X is classified as a corporation 
and its income and losses may be used under the Country Y form of 
consolidation to offset the income of companies that are affiliates of 
X. Under paragraph (c)(3) and (4) of this section, the partnership 
interests held by A and B are treated as separate domestic corporations 
and as dual resident corporations. Unless an exception under paragraph 
(g) of this section applies, losses allocated to A and B can only be 
used to offset profits of X allocated to A and B, respectively.
    Example 4. P, a domestic corporation, files a consolidated U.S. 
income tax return with its two wholly-owned domestic subsidiaries, DRC1 
and DRC2. Each subsidiary is also treated as a Country Y resident for 
Country Y tax purposes. Thus, DRC1 and DRC2 are dual resident 
corporations. DRC1 owns FC, a Country Y corporation. Country Y's tax 
laws permit affiliated resident corporations to file a form of 
consolidated return. In Year 1,

[[Page 398]]

DRC1 incurs a $200 net operating loss for both U.S. and Country Y tax 
purposes, while DRC2 recognizes $200 of income under the tax laws of 
each country. FC also earns $200 of income for Country Y tax purposes. 
DRC1, DRC2, and FC file a Country Y consolidated return. However, 
Country Y has no applicable rules for determining which income is offset 
by DRC1's $200 loss. Under paragraph (c)(15)(iii) of this section, the 
loss shall be treated as offsetting DRC2's $200 of income. Because DRC1 
and DRC2 are members of the same consolidated group, for purposes of 
this section, the offset of DRC1's loss against the income of DRC2 is 
not considered a use of the loss against the income of another person 
under the laws of a foreign country.
    Example 5. DRC, a domestic corporation, files a consolidated U.S. 
income tax return with its parent, P. DRC is also subject to tax in 
Country Y on its worldwide income. Therefore, DRC is a dual resident 
corporation and any net operating loss incurred by DRC is a dual 
consolidated loss. Country Y's tax laws permit corporations that are 
subject to tax on their worldwide income to use the Country Y form of 
consolidation, thus enabling eligible corporations to use their losses 
to offset income of affiliates. However, to prevent corporations like 
DRC from offsetting losses against income of affiliates in Country Y and 
then again offsetting the losses against income of foreign affiliates 
under the tax laws of another country, Country Y prevents a corporation 
that is also subject to the income tax of another country on its 
worldwide income or on a residence basis from using the Country Y form 
of consolidation. There is no agreement, as described in paragraph 
(g)(1) of this section, between the United States and Country Y. Because 
of Country Y's statute, DRC will be treated as having actually offset 
its losses against the income of affiliates in Country Y under paragraph 
(c)(15)(iv) of this section. Therefore, DRC will not be able to file an 
agreement described in paragraph (g)(2) of this section and offset its 
losses against the income of P or any other domestic affiliate.


    (d) Special rules for accounting for dual consolidated losses--(1) 
Determination of amount of dual consolidated loss--(i) Dual resident 
corporation that is a member of a consolidated group. For purposes of 
determining whether a dual resident corporation that is a member of a 
consolidated group has a dual consolidated loss for the taxable year, 
the dual resident corporation shall compute its taxable income (or loss) 
in accordance with the rules set forth in the regulations under section 
1502 governing the computation of consolidated taxable income, taking 
into account only the dual resident corporation's items of income, gain, 
deduction, and loss for the year. However, for purposes of this 
computation, the following items shall not be taken into account:
    (A) Any net capital loss of the dual resident corporation; and
    (B) Any carryover or carryback losses.
    (ii) Dual resident corporation that is a separate unit of a domestic 
corporation. For purposes of determining whether a separate unit has a 
dual consolidated loss for the taxable year, the separate unit shall 
compute its taxable income (or loss) as if it were a separate domestic 
corporation and a dual resident corporation in accordance with the 
provisions of paragraph (d)(1)(i) of this section, using only those 
items of income, expense, deduction, and loss that are otherwise 
attributable to such separate unit.
    (2) Effect of a dual consolidated loss. For any taxable year in 
which a dual resident corporation or separate unit has a dual 
consolidated loss to which paragraph (b) of this section applies, the 
following rules shall apply.
    (i) If the dual resident corporation is a member of a consolidated 
group, the group shall compute its consolidated taxable income without 
taking into account the items of income, loss, or deduction taken into 
account in computing the dual consolidated loss. The dual consolidated 
loss may be carried over or back for use in other taxable years as a 
separate net operating loss carryover or carryback of the dual resident 
corporation arising in the year incurred. It shall be treated as a loss 
incurred by the dual resident corporation in a separate return 
limitation year and (without regard to whether the dual resident 
corporation is a common parent) shall be subject to all of the 
limitations of Sec. Sec. 1.1502-21A(c) or 1.1502-21T(c), as appropriate 
(relating to limitations on net operating loss carryovers and carrybacks 
from separate return limitation years).
    (ii) The unaffiliated domestic owner of a separate unit, or the 
consolidated group of an affiliated domestic owner, shall compute its 
taxable income without taking into account the items of income, loss or 
deduction taken into account in computing the separate

[[Page 399]]

unit's dual consolidated loss. The dual consolidated loss shall be 
treated as a loss incurred by a separate corporation and its use shall 
be subject to all of the limitations of Sec. Sec. 1.1502-21A(c) or 
1.1502-21T(c), as appropriate, as if the separate unit were filing a 
consolidated return with the unaffiliated domestic owner or with the 
consolidated group of the affiliated domestic owner.
    (3) Basis adjustments for dual consolidated losses--(i) Dual 
resident corporation that is a member of an affiliated group. When a 
dual resident corporation is a member of a consolidated group, each 
other member owning stock in the dual resident corporation shall adjust 
the basis of the stock in the following manner.
    (A) Positive adjustments. Positive adjustments shall be made in 
accordance with the principles of Sec. 1.1502-32(b)(1), except that 
there shall be no positive adjustment under Sec. 1.1502-32(b)(1)(ii) for 
any amount of the dual consolidated loss that is not absorbed as a 
result of the application of paragraph (b) of this section. In addition, 
there shall be no positive adjustment for any amount included in income 
pursuant to paragraph (g)(2)(vii) of this section.
    (B) Negative adjustments. Negative adjustments shall be made in 
accordance with the principles of Sec. 1.1502-32(b)(2), except that 
there shall be no negative adjustment under Sec. 1.1502-32(b)(2)(ii) for 
the amount of the dual consolidated loss subject to paragraph (b) of 
this section that is absorbed in a carryover year.
    (ii) Dual resident corporation that is a separate unit arising from 
an interest in a partnership. Where a separate unit is an interest in a 
partnership, the domestic owner shall adjust its basis in the separate 
unit in accordance with section 705, except that no increase in basis 
shall be permitted for any amount included as income pursuant to 
paragraph (g)(2)(vii) of this section.
    (4) Examples. The following examples illustrate this paragraph (d).


    Example 1. (i) P, S1, S2, and T are domestic corporations. P owns 
all of the stock of S1 and S2. S2 owns all of the stock of T. T is a 
resident of Country FC for Country FC income tax purposes. Therefore, T 
is a dual resident corporation. P, S1, S2, and T file a consolidated 
U.S. income tax return. X and Y are corporations that are not members of 
the consolidated group.
    (ii) At the beginning of Year 1, P has a basis of $1000 in the stock 
of S2. S2 has a $500 basis in the stock of T.
    (iii) In Year 1, T incurs interest expense in the amount of $100. In 
addition, T sells a noncapital asset, u, in which it has a basis of $10, 
to S1 for $50. T also sells a noncapital asset, v, in which it has a 
basis of $200, to S1 for $100. The sales of u and v are intercompany 
transactions described in Sec. 1.1502-13. T also sells a capital asset, 
z, in which it has a basis of $180, to Y for $90. In Year 1, S1 earns 
$200 of separate taxable income, calculated in accordance with 
Sec. 1.1502-12, as well as $90 of capital gain from a sale of an asset 
to X. P and S2 have no items of income, loss, or deduction for Year 1.
    (iv) In Year 1, T has a dual consolidated loss of $100 (attributable 
to its interest expense). T's $90 capital loss is not included in the 
computation of the dual consolidated loss. Instead, T's capital loss is 
included in the computation of the consolidated group's capital gain net 
income under Sec. 1.1502-22T(c) and is used to offset S1's $90 capital 
gain.
    (v) No elective agreement, as described in paragraph (g)(1) of this 
section, exists between the United States and Country FC. For Country FC 
tax purposes, T's $100 loss is offset against the income of a Country FC 
affiliate. Therefore, T is not eligible for the exception provided in 
paragraph (g)(2) of this section.
    (vi) Because T has a dual consolidated loss for the year, the 
consolidated taxable income of the consolidated group is calculated 
without regard to T's items of income, loss or deduction taken into 
account in computing the dual consolidated loss. Therefore, the 
consolidated taxable income of the consolidated group is $200 (the sum 
of $200 of separate taxable income earned by S1 plus $90 of capital gain 
earned by S1 minus $90 of capital loss incurred by T). The $40 gain 
recognized by T upon the sale of item u to S1 and the $100 loss 
recognized by T upon the sale of item v to S1 are deferred pursuant to 
Sec. 1.1502-13(c)(1).
    (vii) S2 may not make the positive adjustment provided for in 
Sec. 1.1502-32(b)(1)(ii) to its basis in the stock of T for the $100 
dual consolidated loss incurred by T. In addition, no positive 
adjustment in the basis of the stock is required for T's $90 capital 
loss because the loss has been absorbed by the consolidated group. S2, 
however, must make the negative adjustment provided for in Sec. 1.1502-
32(b)(2)(i) for its allocable part of T's deficit in earnings and 
profits for the taxable year attributable to both T's $100 dual 
consolidated loss and T's $90 capital loss. Thus, as provided in 
Sec. 1.1502-32(e)(1), S2 must make a $190 net negative adjustment to its 
basis in the stock of T, reducing its basis to $310. As

[[Page 400]]

provided in Sec. 1.1502-33(c)(4)(ii)(a), S2's earnings and profits for 
Year 1 will reflect S2's decrease in its basis in T stock for the 
taxable year. Since S2 has no other earnings and profits for the taxable 
year, S2 has a $190 deficit in earnings and profits for the year. As 
provided in Sec. 1.1502-32(b)(2)(i), P must make a negative adjustment 
to its basis in the stock of S2 for its allocable part of S2's deficit 
in earnings and profits for the taxable year. Thus, P must make a $190 
net negative adjustment to its basis in S2 stock, reducing its basis to 
$810.
    Example 2. (i) The facts are the same as in Example 1, except that 
in Year 2, S1 sells items u and v to X for no gain or loss. The 
disposition of items u and v outside of the consolidated group restores 
the deferred loss and gain to T. T also incurs $100 of interest expense 
in Year 2. In addition, T sells a noncapital asset, r, in which it has a 
basis of $100, to Y for $300. P and S2 have no items of income, loss, or 
deduction for Year 2.
    (ii) T has $40 of separate taxable income in Year 2, computed as 
follows:


($100).  interest expense                                               
($100).  sale of item v to S1                                           
$ 40 ..  sale of item u to S1                                           
$200 ..  sale of item r to Y                                            
--------                                                                
$ 40 ..                                                                 
                                                                        

    Thus, T has no dual consolidated loss for the year.
    (iii) Since T does not have a dual consolidated loss for the taxable 
year, the group's consolidated taxable income is calculated in 
accordance with the general rule of Sec. 1.1502-11 and not in accordance 
with paragraph (d)(2) of this section. T is the only member of the 
consolidated group that has any income or loss for the taxable year. 
Thus, the consolidated taxable income of the group, computed without 
regard to T's dual consolidated loss carryover, is $40.
    (iv) As provided by Sec. 1.1502-21A(c), the amount of the dual 
consolidated loss arising in Year 1 that is included in the group's 
consolidated net operating loss deduction for Year 2 is $40 (that is, 
the consolidated taxable income computed without regard to the 
consolidated net operating loss deduction minus such consolidated 
taxable income recomputed by excluding the items of income and deduction 
of T). Thus, the group has no consolidated taxable income for the year.
    (v) S2 must make the positive adjustment provided for in Sec. 1.502-
32(b)(1)(i) to its basis in T stock for its allocable part of T's 
undistributed earnings and profits for the taxable year. S2 cannot make 
the negative adjustment provided for in Sec. 1.1502-32(b)(2)(ii) for the 
dual consolidated loss of T incurred in Year 1 and absorbed in Year 2. 
Thus, as provided in Sec. 1.1502-32(e)(2), S2 must make a $40 net 
positive adjustment to its basis in T stock, increasing its basis to 
$350. As provided in Sec. 1.1502-33(c)(4)(ii)(a), S2's earnings and 
profits for Year 2 will reflect S2's increase in its basis in T stock 
for the taxable year. Since S2 has no other earnings and profits for the 
taxable year, S2 has $40 of earnings and profits for the year. As 
provided in Sec. 1.1502-32(b)(1)(i), P must make a positive adjustment 
to its basis in the stock of S2 for its allocable part of the 
undistributed earnings and profits of S2 for the taxable year. Thus, P 
must make a $40 net positive adjustment to its basis in S2 stock, 
increasing its basis to $850.

    (e) Special rule for use of dual consolidated loss to offset tainted 
income--(1) In general. The dual consolidated loss of any dual resident 
corporation that ceases to be a dual resident corporation shall not be 
used to offset income of such corporation to the extent that such income 
is tainted income, as defined in paragraph (e)(2) of this section.
    (2) Tainted income defined. Tainted income is any income derived 
from tainted assets, as defined in paragraph (e)(3) of this section, 
beginning on the date such assets are acquired by the dual resident 
corporation. In the absence of evidence establishing the actual amount 
of income that is attributable to the tainted assets, the portion of a 
corporation's income in a particular taxable year that is treated as 
tainted income shall be an amount equal to the corporation's taxable 
income for the year multiplied by a fraction, the numerator of which is 
the fair market value of the tainted asset at the end of the taxable 
year and the denominator of which is the fair market value of the total 
assets owned by the corporation at the end of the taxable year. 
Documentation submitted to establish the actual amount of income that is 
attributable to the tainted assets must be attached to the consolidated 
group's or unaffiliated dual resident corporation's timely filed tax 
return for the taxable year in which the income is recognized.
    (3) Tainted assets defined. Tainted assets are any asset acquired by 
a dual resident corporation in a non-recognition transaction, as defined 
in section 7701(a)(45), or any assets otherwise transferred to the 
corporation as a contribution to capital, at any time during the three 
taxable years immediately preceding the taxable year in which the 
corporation ceases to be a dual resident

[[Page 401]]

corporation or at any time thereafter. Tainted assets shall not include 
assets that were acquired by such dual resident corporation on or before 
December 31, 1986.
    (4) Exceptions. Income derived from assets acquired by a dual 
resident corporation shall not be subject to the limitation described in 
paragraph (e)(1) of this section, if--
    (i) For the taxable year in which the assets were acquired, the 
corporation did not have a dual consolidated loss (or a carry forward of 
a dual consolidated loss to such year); or
    (ii) The assets were acquired as replacement property in the 
ordinary course of business.
    (f) Computation of foreign tax credit limitations. If a dual 
resident corporation or separate unit is subject to paragraph (d)(2) of 
this section, the consolidated group or unaffiliated domestic owner 
shall compute its foreign tax credit limitation by applying the 
limitations of paragraph (d)(2). Thus, the dual consolidated loss is not 
taken into account until the year in which it is absorbed.
    (g) Exception--(1) Elective agreement in place between the United 
States and a foreign country. Paragraph (b) of this section shall not 
apply to a dual consolidated loss to the extent the dual resident 
corporation, or domestic owner of a separate unit, elects to deduct the 
loss in the United States pursuant to an agreement entered into between 
the United States and a foreign country that puts into place an elective 
procedure through which losses offset income in only one country.
    (2) Elective relief provision--(i) In general. Paragraph (b) of this 
section shall not apply to a dual consolidated loss if the consolidated 
group, unaffiliated dual resident corporation, or unaffiliated domestic 
owner elects to be bound by the provisions of this paragraph (g)(2). In 
order to elect relief under this paragraph (g)(2), the consolidated 
group, unaffiliated dual resident corporation, or unaffiliated domestic 
owner must attach to its timely filed U.S. income tax return for the 
taxable year in which the dual consolidated loss is incurred an 
agreement described in this paragraph (g)(2)(i). The agreement must be 
signed under penalties of perjury by the person who signs the return and 
must include the following items, in paragraphs labeled to correspond 
with the items set forth below:
    (A) A statement that the document submitted is an election and an 
agreement under the provisions of Sec. 1.1503-2(g)(2) of the Income Tax 
Regulations;
    (B) The name, address, identifying number, and place and date of 
incorporation of the dual resident corporation, and the country or 
countries that tax the dual resident corporation on its worldwide income 
or on a residence basis, or, in the case of a separate unit, 
identification of the separate unit, including the name under which it 
conducts business, its principal activity, and the country in which its 
principal place of business is located;
    (C) An agreement by the consolidated group, unaffiliated dual 
resident corporation, or unaffiliated domestic owner to comply with all 
of the provisions of paragraphs (g)(2) (iii) through (vii) of 
Sec. 1.1503-2;
    (D) A statement of the amount of the dual consolidated loss covered 
by the agreement;
    (E) A certification that no portion of the dual resident 
corporation's or separate unit's loss, expenses, or deductions taken 
into account in computing the dual consolidated loss has been, or will 
be, used to offset the income of any other person under the income tax 
laws of a foreign country; and
    (F) A certification that arrangements have been made to ensure that 
no portion of the dual consolidated loss will be used to offset the 
income of another person under the laws of a foreign country and that 
the consolidated group, unaffiliated dual resident corporation, or 
unaffiliated domestic owner will be informed of any such foreign use of 
any portion of the dual consolidated loss.
    (ii) Consistency rule--(A) If any loss, expense, or deduction taken 
into account in computing the dual consolidated loss of a dual resident 
corporation or separate unit is used under the laws of a foreign country 
to offset the income of another person, then the following other dual 
consolidated losses (if any) shall be treated as also having been used 
to offset income of another person under the laws of such foreign

[[Page 402]]

country, but only if the income tax laws of the foreign country permit 
any loss, expense, or deduction taken into account in computing the 
other dual consolidated loss to be used to offset the income of another 
person in the same taxable year;
    (1) Any dual consolidated loss of a dual resident corporation that 
is a member of the same consolidated group of which the first dual 
resident corporation or domestic owner is a member, if any loss, 
expense, or deduction taken into account in computing such dual 
consolidated loss is recognized under the income tax laws of such 
country in the same taxable year; and
    (2) Any dual consolidated loss of a separate unit that is owned by 
the same domestic owner that owns the first separate unit, or that is 
owned by any member of the same consolidated group of which the first 
dual resident corporation or domestic owner is a member, if any loss, 
expense, or deduction taken into account in computing such dual 
consolidated loss is recognized under the income tax laws of such 
country in the same taxable year.
    (B) The following examples illustrate the application of this 
paragraph (g)(2)(ii).

    Example 1. P, a domestic corporation, owns A and B, which are 
domestic corporations, and C, a Country X corporation. A is subject to 
the income tax laws of Country X on a residence basis and, thus, is a 
dual resident corporation. B conducts business in Country X through a 
branch, which is a separate unit under paragraph (c)(3) of this section. 
The income tax laws of Country X permit branches of foreign corporations 
to elect to file consolidated returns with Country X affiliates. In Year 
1, A incurs a dual consolidated loss, which is used to offset the income 
of C under the Country X form of consolidation. The branch of B also 
incurs a net operating loss. However, B elects not to use the loss on a 
Country X consolidated return to offset the income of foreign 
affiliates. The use of A's loss to offset the income of C in Country X 
will cause the separate unit of B to be treated as if it too had used 
its dual consolidated loss to offset the income of an affiliate in 
Country X. Therefore, an election and agreement under this paragraph 
(g)(2) cannot be made with respect to the separate unit's dual 
consolidated loss.
    Example 2. The facts are the same as in Example 1, except that the 
income tax laws of Country X do not permit branches of foreign 
corporations to file consolidated income tax returns with Country X 
affiliates. Therefore, an election and agreement described in this 
paragraph (g)(2) may be made for the dual consolidated loss incurred by 
the separate unit of B.

    (iii) Triggering events requiring the recapture of dual consolidated 
losses--(A) The consolidated group, unaffiliated dual resident 
corporation, or unaffiliated domestic owner must agree that, if there is 
a triggering event described in this paragraph (g)(2)(iii), and no 
exception applies under paragraph (g)(2)(iv) of this section, the 
consolidated group, unaffiliated dual resident corporation, or 
unaffiliated domestic owner will recapture and report as income the 
amount of the dual consolidated loss provided in paragraph (g)(2)(vii) 
of this section on its tax return for the taxable year in which the 
triggering event occurs (or, when the triggering event is a use of the 
loss for foreign purposes, the taxable year that includes the last day 
of the foreign tax year during which such use occurs). In addition, the 
consolidated group, unaffiliated dual resident corporation, or 
unaffiliated domestic owner must pay any applicable interest charge 
required by paragraph (g)(2)(vii) of this section. For purposes of this 
section, any of the following events shall constitute a triggering 
event:
    (1) In any taxable year up to and including the 15th taxable year 
following the year in which the dual consolidated loss that is the 
subject of the agreement filed under this paragraph (g)(2) was incurred, 
any portion of the losses, expenses, or deductions taken into account in 
computing the dual consolidated loss is used by any means to offset the 
income of any other person under the income tax laws of a foreign 
country;
    (2) An affiliated dual resident corporation or affiliated domestic 
owner ceases to be a member of the consolidated group that filed the 
election. For purposes of this paragraph (g)(2)(iii)(A)(2), a dual 
resident corporation or domestic owner shall be considered to cease to 
be a member of the consolidated group if it is no longer a member of the 
group within the meaning of Sec. 1.1502-1(b), or if the group ceases to 
exist because the common

[[Page 403]]

parent is no longer in existence or is no longer a common parent or the 
group no longer files on the basis of a consolidated return. Such 
disaffiliation, however, shall not constitute a triggering event if the 
taxpayer demonstrates, to the satisfaction of the Commissioner, that the 
dual resident corporation's or separate unit's losses, expenses, or 
deductions cannot be used to offset income of another person under the 
laws of a foreign country at any time after the affiliated dual resident 
corporation or affiliated domestic owner ceases to be a member of the 
consolidated group;
    (3) An unaffiliated dual resident corporation or unaffiliated 
domestic owner becomes a member of a consolidated group. Such 
affiliation of the dual resident corporation or domestic owner, however, 
shall not constitute a triggering event if the taxpayer demonstrates, to 
the satisfaction of the Commissioner, that the losses, expenses, or 
deductions of the dual resident corporation or separate unit cannot be 
used to offset the income of another person under the laws of a foreign 
country at any time after the dual resident corporation or domestic 
owner becomes a member of the consolidated group.
    (4) A dual resident corporation transfers assets in a transaction 
that results, under the laws of a foreign country, in a carryover of its 
losses, expenses, or deductions. For purposes of this paragraph 
(g)(2)(iii)(A)(4), a transfer, either in a single transaction or a 
series of transactions within a twelve-month period, of 50% or more of 
the dual resident corporation's assets (measured by the fair market 
value of the assets at the time of such transfer (or for multiple 
transactions, at the time of the first transfer)) shall be deemed a 
triggering event, unless the taxpayer demonstrates, to the satisfaction 
of the Commissioner, that the transfer of assets did not result in a 
carryover under foreign law of the dual resident corporation's losses, 
expenses, or deductions to the transferee of the assets;
    (5) A domestic owner of a separate unit transfers assets of the 
separate unit in a transaction that results, under the laws of a foreign 
country, in a carryover of the separate unit's losses, expenses, or 
deductions. For purposes of this paragraph (g)(2)(iii)(A)(5), a 
transfer, either in a single transaction or a series of transactions 
over a twelve-month period, of 50% or more of the separate unit's assets 
(measured by the fair market value of the assets at the time of the 
transfer (or for multiple transfers, at the time of the first 
transfer)), shall be deemed a triggering event, unless the taxpayer 
demonstrates, to the satisfaction of the Commissioner, that the transfer 
of assets did not result in a carryover under foreign law of the 
separate unit's losses, expenses, or deductions to the transferee of the 
assets;
    (6) An unaffiliated dual resident corporation or unaffiliated 
domestic owner becomes a foreign corporation by means of a transaction 
(e.g., a reorganization) that, for foreign tax purposes, is not treated 
as involving a transfer of assets (and carryover of losses) to a new 
entity. Such a transaction, however, shall not constitute a triggering 
event if the taxpayer demonstrates, to the satisfaction of the 
Commissioner, that the dual resident corporation's or separate unit's 
losses, expenses, or deductions cannot be used to offset income of 
another person under the laws of the foreign country at any time after 
the unaffiliated dual resident corporation or unaffiliated domestic 
owner becomes a foreign corporation.
    (7) A domestic owner of a separate unit, either in a single 
transaction or a series of transactions within a twelve-month period, 
sells, or otherwise disposes of, 50% or more of the interest in the 
separate unit (measured by voting power or value) owned by the domestic 
owner on the last day of the taxable year in which the dual consolidated 
loss was incurred. For purposes of this paragraph (g)(2)(iii)(A)(7), the 
domestic owner shall be deemed to have disposed of its entire interest 
in a hybrid entity separate unit if such hybrid entity becomes 
classified as a foreign corporation for U.S. tax purposes. The 
disposition of 50% or more of the interest in a separate unit, however, 
shall not constitute a triggering event if the taxpayer demonstrates, to 
the satisfaction of the Commissioner, that the losses, expenses, or 
deductions of the separate

[[Page 404]]

unit cannot be used to offset income of another person under the laws of 
the foreign country at any time after the disposition of the interest in 
the separate unit; or
    (8) The consolidated group, unaffiliated dual resident corporation, 
or unaffiliated domestic owner fails to file a certification required 
under paragraph (g)(2)(vi)(B) of this section.
    (B) A taxpayer wishing to rebut the presumption of a triggering 
event described in paragraphs (g)(2)(iii)(A)(2) through (7) of this 
section, by demonstrating that the losses, expenses, or deductions of 
the dual resident corporation or separate unit cannot be carried over or 
otherwise used under the laws of the foreign country, must attach 
documents demonstrating such facts to its timely filed U.S. income tax 
return for the year in which the presumed triggering event occurs.
    (C) The following example illustrates this paragraph (g)(2)(iii).

    Example. DRC, a domestic corporation, is a member of CG, a 
consolidated group. DRC is a resident Country Y for Country Y income tax 
purposes. Therefore, DRC is a dual resident corporation. In Year 1, DRC 
incurs a dual consolidated loss of $100. CG files an agreement described 
in paragraph (g)(2) of this section and, thus, the $100 dual 
consolidated loss is included in the computation of CG's consolidated 
taxable income. In Year 6, all of the stock of DRC is sold to P, a 
domestic corporation that is a member of NG, another consolidated group. 
The sale of DRC to P is a triggering event under paragraph 
(g)(2)(iii)(A) of this section, requiring the recapture of the dual 
consolidated loss. However, the laws of Country Y provide for a five-
year carryover period for losses. At the time of DRC's disaffiliation 
from CG, the losses, expenses and deductions that were included in the 
computation of the dual consolidated loss had expired for Country Y 
purposes. Therefore, upon adequate documentation that the losses, 
expenses, or deductions have expired for Country Y purposes, CG can 
rebut the presumption that a triggering event has occurred.

    (iv) Exceptions--(A) Acquisition by a member of the consolidated 
group. The following events shall not constitute triggering events, 
requiring the recapture of the dual consolidated loss under paragraph 
(g)(2)(vii) of this section:
    (1) An affiliated dual resident corporation or affiliated domestic 
owner ceases to be a member of a consolidated group solely by reason of 
a transaction in which a member of the same consolidated group succeeds 
to the tax attributes of the dual resident corporation or domestic owner 
under the provisions of section 381;
    (2) Assets of an affiliated dual resident corporation or assets of a 
separate unit of an affiliated domestic owner are acquired by a member 
of its consolidated group in any other transaction; or
    (3) An affiliated domestic owner of a separate unit transfers its 
interest in the separate unit to another member of its consolidated 
group.
    (B) Acquisition by an unaffiliated domestic corporation or a new 
consolidated group--(1) If the requirements of paragraph 
(g)(2)(iv)(B)(2) of this section are met, the following events shall not 
constitute triggering events, requiring the recapture of the dual 
consolidated loss under paragraph (g)(2)(vii) of this section:
    (i) An affiliated dual resident corporation or affiliated domestic 
owner becomes an unaffiliated domestic corporation or a member of a new 
consolidated group;
    (ii) An unaffiliated dual resident corporation or unaffiliated 
domestic owner becomes a member of a consolidated group;
    (iii) Assets of a dual resident corporation or a separate unit are 
acquired by an unaffiliated domestic corporation or a member of a new 
consolidated group; or
    (iv) A domestic owner of a separate unit transfers its interest in 
the separate unit to an unaffiliated domestic corporation or to a member 
of a new consolidated group.
    (2) If all of the following requirements are satisfied, the events 
listed in paragraph (g)(2)(iv)(B)(1) of this section shall not 
constitute triggering events requiring recapture under paragraph 
(g)(2)(vii) of this section.
    (i) The consolidated group, unaffiliated dual resident corporation, 
or unaffiliated domestic owner that filed the agreement under this 
paragraph (g)(2) and the unaffiliated domestic corporation or new 
consolidated group must enter into a closing agreement with the Internal 
Revenue Service providing

[[Page 405]]

that the consolidated group, unaffiliated dual resident corporation, or 
unaffiliated domestic owner and the unaffiliated domestic corporation or 
new consolidated group will be jointly and severally liable for the 
total amount of the recapture of dual consolidated loss and interest 
charge required in paragraph (g)(2)(vii) of this section, if there is a 
triggering event described in paragraph (g)(2)(iii) of this section;
    (ii) The unaffiliated domestic corporation or new consolidated group 
must agree to treat any potential recapture amount under paragraph 
(g)(2)(vii) of this section as unrealized built-in gain for purposes of 
section 384(a), subject to any applicable exceptions thereunder;
    (iii) The unaffiliated domestic corporation or new consolidated 
group must file an agreement described in paragraph (g)(2)(i) of this 
section with its timely filed income tax return for the taxable year in 
which the event described in paragraph (g)(2)(iv)(B)(1) of this section 
occurs. The agreement must be signed under penalties of perjury by the 
person who signs the tax return of the unaffiliated domestic corporation 
or new consolidated group.
    (C) Subsequent triggering events. Any triggering event described in 
paragraph (g)(2)(iii) of this section that occurs subsequent to one of 
the transactions described in paragraph (g)(2)(iv) (A) or (B) of this 
section and does not fall within the exceptions provided in paragraph 
(g)(2)(iv) (A) or (B) of this section shall require recapture under 
paragraph (g)(2)(vii) of this section.
    (v) Ordering rules for determining the foreign use of losses. If the 
laws of a foreign country provide for the use of losses of a dual 
resident corporation to offset the income of another person but do not 
provide applicable rules for determining the order in which such losses 
are used to offset the income of another person in a taxable year, then 
for purposes of this section, the following rules shall govern:
    (A) If under the laws of the foreign country the dual resident 
corporation has losses from different taxable years, the dual resident 
corporation shall be deemed to use first the losses from the earliest 
taxable year from which a loss may be carried forward or back for 
foreign law purposes.
    (B) Any net loss, or income, that the dual resident corporation has 
in a taxable year shall first be used to offset net income, or loss, 
recognized by affiliates of the dual resident corporation in the same 
taxable year before any carryover of the dual resident corporation's 
losses is considered to be used to offset any income from the taxable 
year.
    (C) Where different losses, expenses, or deductions (e.g., capital 
losses and ordinary losses) of a dual resident corporation incurred in 
the same taxable year are available to offset the income of another 
person, the different losses shall be deemed to offset such income on a 
pro rata basis.

    Example. DRC, a domestic corporation, is taxed as a resident under 
the tax laws of Country Y. Therefore, DRC is a dual resident 
corporation. FA is a Country Y affiliate of DRC. Country Y's tax laws 
permit affiliated corporations to file a form of consolidated return. In 
Year 1, DRC incurs a capital loss of $80 which, for Country Y purposes, 
offsets completely $30 of capital gain recognized by FA. Neither 
corporation has any other taxable income or loss for the year. In Year 1 
(and in other years), DRC recognizes the same amount of income for U.S. 
purposes as it does for Country Y purposes. Under paragraph (d)(1)(i) of 
this section, however, DRC's $80 capital loss is not a dual consolidated 
loss. In Year 2, DRC incurs a net operating loss of $100, while FA 
incurs a net operating loss of $50. DRC's $100 loss is a dual 
consolidated loss. Since the dual consolidated loss is not used to 
offset the income of another person under Country Y law, DRC is 
permitted to file an agreement described in this paragraph (g)(2). In 
Year 3, DRC has a net operating loss of $10 and FA has capital gains of 
$60. For Country Y purposes, DRC's $10 net operating loss is used to 
offset $10 of FA's $60 capital gain. DRC's $10 loss is a dual 
consolidated loss. Because the loss is used to offset FA's income, DRC 
will not be able to file an agreement under this paragraph (g)(2) with 
respect to the loss. Country Y permits FA's remaining $50 of Year 3 
income to be offset by carryover losses. However, Country Y has no 
applicable rules for determining which carryover losses from Years 1 and 
2 are used to offset such income. Under the ordering rules of paragraph 
(g)(2)(v)(A) of this section, none of DRC's $100 Year 2 loss will be 
deemed to offset FA's remaining $50 of Year 3 income. Instead, the $50 
of capital loss carryover from Year 1 will be considered to offset the 
income.


[[Page 406]]


    (vi) Reporting requirements--(A) In general. The consolidated group, 
unaffiliated dual resident corporation, or unaffiliated domestic owner 
must answer the applicable questions regarding dual consolidated losses 
on its U.S. income tax return filed for the year in which the dual 
consolidated loss is incurred and for each of the following fifteen 
taxable years.
    (B) Annual certification. Except as provided in paragraph 
(g)(2)(vi)(C) of this section, until and unless Form 1120 (or the 
Schedules thereto) contains questions pertaining to dual consolidated 
losses, the consolidated group, unaffiliated dual resident corporation, 
or unaffiliated domestic owner must file with its income tax return for 
each of the fifteen taxable years following the taxable year in which 
the dual consolidated loss is incurred a certification that the losses, 
expenses, or deductions that make up the dual consolidated loss have not 
been used to offset the income of another person under the tax laws of a 
foreign country. The annual certification must be signed under penalties 
of perjury by a person authorized to sign the agreement described in 
paragraph (g)(2)(i) of this section. The certification must identify the 
dual consolidated loss to which it pertains by setting forth the 
taxpayer's year in which the loss was incurred and the amount of such 
loss. In addition, the certification must warrant that arrangements have 
been made to ensure that the loss will not be used to offset the income 
of another person under the laws of a foreign country and that the 
taxpayer will be informed of any such foreign use of any portion of the 
loss. If dual consolidated losses of more than one taxable year are 
subject to the rules of this paragraph (g)(2)(vi)(B), the certifications 
for those years may be combined in a single document but each dual 
consolidated loss must be separately identified.
    (C) Exception. A consolidated group or unaffiliated domestic owner 
is not required to file annual certifications under paragraph 
(g)(2)(vi)(B) of this section with respect to a dual consolidated loss 
of any separate unit other than a hybrid entity separate unit.
    (vii) Recapture of loss and interest charge--(A) Presumptive rule--
(1) Amount of recapture. Except as otherwise provided in this paragraph 
(g)(2)(vii), upon the occurrence of a triggering event described in 
paragraph (g)(2)(iii) of this section, the taxpayer shall recapture and 
report as gross income the total amount of the dual consolidated loss to 
which the triggering event applies on its income tax return for the 
taxable year in which the triggering event occurs (or, when the 
triggering event is a use of the loss for foreign tax purposes, the 
taxable year that includes the last day of the foreign tax year during 
which such use occurs).
    (2) Interest charge. In connection with the recapture, the taxpayer 
shall pay an interest charge. Except as otherwise provided in this 
paragraph (g)(2)(vii), such interest shall be determined under the rules 
of section 6601(a) as if the additional tax owed as a result of the 
recapture had accrued and been due and owing for the taxable year in 
which the losses, expenses, or deductions taken into account in 
computing the dual consolidated loss gave rise to a tax benefit for U.S. 
income tax purposes. For purposes of this paragraph (g)(2)(vii)(A)(2), a 
tax benefit shall be considered to have arisen in a taxable year in 
which such losses, expenses or deductions reduced U.S. taxable income.
    (B) Rebuttal of presumptive rule--(1) Amount of recapture. The 
amount of dual consolidated loss that must be recaptured under this 
paragraph (g)(2)(vii) may be reduced if the taxpayer demonstrates, to 
the satisfaction of the Commissioner, the offset permitted by this 
paragraph (g)(2)(vii)(B). The reduction in the amount of recapture is 
the amount by which the dual consolidated loss would have offset other 
taxable income reported on a timely filed U.S. income tax return for any 
taxable year up to and including the year of the triggering event if 
such loss had been subject to the restrictions of paragraph (b) of this 
section (and therefore had been subject to the separate return 
limitation year restrictions of Sec. Sec. 1.1502-21A(c) or 1.1502-21T(c) 
(as appropriate) commencing in the

[[Page 407]]

taxable year in which the loss was incurred. A taxpayer utilizing this 
rebuttal rule must attach to its timely filed U.S. income tax return a 
separate accounting showing that the income for each year that offsets 
the dual resident corporation's or separate unit's recapture amount is 
attributable only to the dual resident corporation or separate unit.
    (2) Interest charge. The interest charge imposed under this 
paragraph (g)(2)(vii) may be appropriately reduced if the taxpayer 
demonstrates, to the satisfaction of the Commissioner, that the net 
interest owed would have been less than that provided in paragraph 
(g)(2)(vii)(A)(2) of this section if the taxpayer had filed an amended 
return for the year in which the loss was incurred, and for any other 
affected years up to and including the year of recapture, treating the 
dual consolidated loss as a loss subject to the restrictions of 
paragraph (b) of this section (and therefore subject to the separate 
return limitation year restrictions of Sec. Sec. 1.1502-21A(c) or 
1.1502-21T(c) (as appropriate). A taxpayer utilizing this rebuttal rule 
must attach to its timely filed U.S. income tax return a computation 
demonstrating the reduction in the net interest owed as a result of 
treating the dual consolidated loss as a loss subject to the 
restrictions of paragraph (b) of this section.
    (C) Computation of taxable income in year of recapture--(1) 
Presumptive rule. Except as otherwise provided in paragraph 
(g)(2)(vii)(C)(2) of this section, for purposes of computing the taxable 
income for the year of recapture, no current, carryover or carryback 
losses of the dual resident corporation or separate unit, of other 
members of the consolidated group, or of the domestic owner that are not 
attributable to the separate unit, may offset and absorb the recapture 
amount.
    (2) Rebuttal of presumptive rule. The recapture amount included in 
gross income may be offset and absorbed by that portion of the 
taxpayer's (consolidated or separate) net operating loss carryover that 
is attributable to the dual consolidated loss being recaptured, if the 
taxpayer demonstrates, to the satisfaction of the Commissioner, the 
amount of such portion of the carryover. A taxpayer utilizing this 
rebuttal rule must attach to its timely filed U.S. income tax return a 
computation demonstrating the amount of net operating loss carryover 
that, under this paragraph (g)(2)(vii)(C)(2), may absorb the recapture 
amount included in gross income.
    (D) Character and source of recapture income. The amount recaptured 
under this paragraph (g)(2)(vii) shall be treated as ordinary income in 
the year of recapture. The amount recaptured shall be treated as income 
having the same source and falling within the same separate category for 
purposes of section 904 as the dual consolidated loss being recaptured.
    (E) Reconstituted net operating loss. Commencing in the taxable year 
immediately following the year in which the dual consolidated loss is 
recaptured, the dual resident corporation or separate unit shall be 
treated as having a net operating loss in an amount equal to the amount 
actually recaptured under paragraph (g)(2)(vii) (A) or (B) of this 
section. This reconstituted net operating loss shall be subject to the 
restrictions of paragraph (b) of this section (and therefore, the 
separate return limitation year restrictions of Sec. Sec. 1.1502-21A(c) 
or 1.1502-21T(c) (as appropriate). The net operating loss shall be 
available only for carryover, under section 172(b), to taxable years 
following the taxable year of recapture. For purposes of determining the 
remaining carryover period, the loss shall be treated as if it had been 
recognized in the taxable year in which the dual consolidated loss that 
is the basis of the recapture amount was incurred.
    (F) Consequences of failing to comply with recapture provisions--(1) 
In general. If the taxpayer fails to comply with the recapture 
provisions of this paragraph (g)(2)(vii) upon the occurrence of a 
triggering event, then the dual resident corporation or separate unit 
that incurred the dual consolidated loss (or a successor-in-interest) 
shall not be eligible for the relief provided in paragraph (g)(2) of 
this section with respect to any dual consolidated losses incurred in 
the five taxable years beginning with the taxable year in which 
recapture is required.

[[Page 408]]

    (2) Exceptions. In the case of a triggering event other than a use 
of the losses, expenses, or deductions taken into account in computing 
the dual consolidated loss to offset income of another person under the 
income tax laws of a foreign country, this rule shall not apply in the 
following circumstances:
    (i) The failure to recapture is due to reasonable cause; or
    (ii) A taxpayer seeking to rebut the presumption of a triggering 
event satisfies the filing requirements of paragraph (g)(2)(iii)(B) of 
this section.
    (G) Examples. The following examples illustrate this paragraph 
(g)(2)(vii).

    Example 1. P, a domestic corporation, files a consolidated return 
with DRC, a dual resident corporation. In Year 1, DRC incurs a dual 
consolidated loss of $100 and P earns $100. P files an agreement under 
this paragraph (g)(2). Therefore, the consolidated group is permitted to 
offset P's $100 of income with DRC's $100 loss. In Year 2, DRC earns 
$30, which is completely offset by a $30 net operating loss incurred by 
P. In Year 3, DRC earns income of $25 while P recognizes no income or 
loss. In addition, there is a triggering event in Year 3. Therefore, 
under the presumptive rule of paragraph (g)(2)(vii)(A) of this section, 
DRC must recapture $100. However, the $100 recapture amount may be 
reduced by $25 (the amount by which the dual consolidated loss would 
have offset other taxable income if it had been subject to the separate 
return limitation year restrictions from Year 1) upon adequate 
documentation of such offset under paragraph (g)(2)(vii)(B)(1) of this 
section. Commencing in Year 4, the $100 (or $75) recapture amount is 
treated as a loss incurred by DRC in a separate return limitation year, 
subject to the restrictions of Sec. Sec. 1.1502-21A(c) or 1.1502-21T(c), 
as appropriate. The carryover period of the loss, for purposes of 
section 172(b), will start from Year 1, when the dual consolidated loss 
was incurred.
    Example 2. The facts are the same as in Example 1, except that in 
Year 2, DRC earns $75 and P earns $50. In Year 3, DRC earns $25 while P 
earns $30. A triggering event occurs in Year 3. The $100 presumptive 
amount of recapture can be reduced to zero by the $75 and $25 earned by 
DRC in Years 2 and 3, respectively, upon adequate documentation of such 
offset under paragraph (g)(2)(vii)(B)(1) of this section. Nevertheless, 
an interest charge will be owed. Under the presumptive rule of paragraph 
(g)(2)(vii)(A)(2) of this section, interest will be charged on the 
additional tax owed on the $100 of recapture income as if the tax had 
accrued in Year 1 (the year in which the dual consolidated loss reduced 
the income of P). However, the net interest will be reduced to the 
amount that would have been owed if the consolidated group had filed 
amended returns, treating the dual consolidated loss as a loss subject 
to the separate return limitation year restrictions of Sec. Sec. 1.1502-
21A(c) or 1.1502-21T(c), as appropriate, upon adequate documentation of 
such reduction of interest under paragraph (g)(2)(vii)(B)(2) of this 
section.
    Example 3. P, a domestic corporation, owns DRC, a domestic 
corporation that is subject to the income tax laws of Country Z on a 
residence basis. DRC owns FE, a Country Z corporation. In Year 1, DRC 
incurs a net operating loss for U.S. tax purposes. Under the tax laws of 
Country Z, the loss is not recognized until Year 3. The Year 1 net 
operating loss is a dual consolidated loss under paragraph (c)(5) of 
this section. The consolidated group elects relief under paragraph 
(g)(2) of this section by filing the appropriate agreement and uses the 
dual consolidated loss on its U.S. income tax return. In Year 3, the 
dual consolidated loss is used under the laws of Country Z to offset the 
income of FE, which is a triggering event under paragraph (g)(2)(iii) of 
this section. However, the consolidated group does not recapture the 
dual consolidated loss. The consolidated group's failure to comply with 
the recapture provisions of this paragraph (g)(2)(vii) prevents DRC from 
being eligible for the relief provided under paragraph (g)(2) of this 
section for any dual consolidated losses incurred in Years 3 through 7, 
inclusive.

    (h) Effective date--(1) In general. These regulations are effective 
for taxable years beginning on or after October 1, 1992. Section 1.1503-
2A is effective for taxable years beginning after December 31, 1986, and 
before October 1, 1992.
    (2) Taxpayers that have filed for relief under Sec. 1.1503-2A--(i) 
In general. Except as provided in paragraph (h)(ii)(b) of this section, 
taxpayers that have filed agreements described in Sec. 1.1503-2A(c)(3) 
or certifications described in Sec. 1.1503-2A(d)(3) shall continue to be 
subject to the provisions of such agreements or certifications, 
including the amended return or recapture requirements applicable in the 
event of a triggering event, for the remaining term of such agreements 
or certifications.
    (ii) Special transition rule. A taxpayer that has filed an agreement 
described in Sec. 1.1503-2A(c)(3) or a certification described in 
Sec. 1.1503-2A(d)(3) and that is in compliance with the provisions of 
Sec. 1.1503-2A may elect to replace such agreement or certification with 
an

[[Page 409]]

agreement described in paragraph (g)(2)(i) of this section. However, a 
taxpayer making this election must replace all agreements and 
certifications filed under Sec. 1.1503-2A. If the taxpayer is a 
consolidated group, the election must be made with respect to all dual 
resident corporations or separate units within the group. Likewise, if 
the taxpayer is an unaffiliated domestic owner, the election must be 
made with respect to all separate units of the domestic owner. The 
taxpayer must file the replacement agreement with its timely filed 
income tax return for its first taxable year commencing on or after 
October 1, 1992, stating that such agreement is a replacement for the 
agreement filed under Sec. 1.1503-2A(c)(3) or the certification filed 
under Sec. 1.1503-2A(d)(3) and identifying the taxable year for which 
the original agreement or certification was filed. A single agreement 
described in paragraph (g)(2)(i) of this section may be filed to replace 
more than one agreement or certification filed under Sec. 1.1503-2A; 
however, each dual consolidated loss must be separately identified. A 
taxpayer may also elect to apply Sec. 1.1503-2 for all open years, with 
respect to agreements filed under Sec. 1.1503-2A(c)(3) or certifications 
filed under Sec. 1.1503-2A(d)(3), in cases where the agreement or 
certification is no longer in effect and the taxpayer has complied with 
the provisions of Sec. 1.1503-2A. For example, a taxpayer may have had a 
triggering event under Sec. 1.1503-2A that is not a triggering event 
under Sec. 1.1503-2. If the taxpayer fully complied with the 
requirements of the agreement entered into under Sec. 1.1503-2A(c)(3) 
and filed amended U.S. income tax returns within the time required under 
Sec. 1.1503-2A(c)(3), the taxpayer may file amended U.S. income tax 
returns consistent with the position that the earlier triggering event 
is no longer a triggering event.
    (3) Taxpayers that are in compliance with Sec. 1.1503-2A but have 
not filed for relief thereunder. A taxpayer that is in compliance with 
the provisions of Sec. 1.1503-2A but has not filed an agreement 
described in Sec. 1.1503-2A(c)(3) or a certification described in 
Sec. 1.1503-2A(d)(3) may elect to have the provisions of Sec. 1.1503-2 
apply for any open year. In particular, a taxpayer may elect to apply 
the provisions of Sec. 1.1503-2 in a case where the dual consolidated 
loss has been subjected to the separate return limitation year 
restrictions of Sec. Sec. 1.1502-21A(c) or 1.1502-21T(c) (as 
appropriate) but the losses, expenses, or deductions taken into account 
in computing the dual consolidated loss have not been used to offset the 
income of another person for foreign tax purposes. However, if a 
taxpayer is a consolidated group, the election must be made with respect 
to all dual resident corporations or separate units within the group. 
Likewise, if the taxpayer is an unaffiliated domestic owner, the 
election must be made with respect to all separate units of the domestic 
owner.

[T.D. 8434, 57 FR 41084, Sept. 9, 1992; 57 FR 48722, Oct. 28, 1992; 57 
FR 57280, Dec. 3, 1992; 58 FR 13413, Mar. 11, 1993, as amended by T.D. 
8597, 60 FR 36680, July 18, 1995; T.D. 8677, 61 FR 33325, June 27, 1996]



Sec. 1.1504-0  Outline of provisions.

    In order to facilitate the use of Secs. 1.1504-1 through 1.1504-4, 
this section lists the captions contained in Secs. 1.1504-1 through 
1.1504-4.

Sec. 1.1504-1 Definitions.

Sec. 1.1504-2 [Reserved]

Sec. 1.1504-3 [Reserved]

Sec. 1.1504-4 Treatment of warrants, options, convertible obligations, 
          and other similar interests.
    (a) Introduction.
    (1) General rule.
    (2) Exceptions.
    (b) Options not treated as stock or as exercised.
    (1) General rule.
    (2) Options treated as exercised.
    (i) In general.
    (ii) Aggregation of options.
    (iii) Effect of treating option as exercised.
    (A) In general.
    (B) Cash settlement options, phantom stock, stock appreciation 
rights, or similar interests.
    (iv) Valuation.
    (3) Example.
    (c) Definitions.
    (1) Issuing corporation.
    (2) Related or sequential option.
    (3) Related persons.
    (4) Measurement date.
    (i) General rule.
    (ii) Issuances, transfers, or adjustments not treated as measurement 
dates.

[[Page 410]]

    (iii) Transactions increasing likelihood of exercise.
    (iv) Measurement date for options issued pursuant to a plan.
    (v) Measurement date for related or sequential options.
    (vi) Example.
    (5) In-the-money.
    (d) Options.
    (1) Instruments treated as options.
    (2) Instruments generally not treated as options.
    (i) Options on section 1504(a)(4) stock.
    (ii) Certain publicly traded options.
    (A) General rule.
    (B) Exception.
    (iii) Stock purchase agreements.
    (iv) Escrow, pledge, or other security agreements.
    (v) Compensatory options.
    (A) General rule.
    (B) Exceptions.
    (vi) Options granted in connection with a loan.
    (vii) Options created pursuant to a title 11 or similar case.
    (viii) Convertible preferred stock.
    (ix) Other enumerated instruments.
    (e) Elimination of federal income tax liability.
    (f) Substantial amount of federal income tax liability.
    (g) Reasonable certainty of exercise.
    (1) Generally.
    (i) Purchase price.
    (ii) In-the-money option.
    (iii) Not in-the-money option.
    (iv) Exercise price.
    (v) Time of exercise.
    (vi) Related or sequential options.
    (vii) Stockholder rights.
    (viii) Restrictive covenants.
    (ix) Intention to alter value.
    (x) Contingencies.
    (2) Cash settlement options, phantom stock, stock appreciation 
rights, or similar interests.
    (3) Safe harbors.
    (i) Options to acquire stock.
    (ii) Options to sell stock.
    (iii) Options exercisable at fair market value.
    (iv) Exceptions.
    (v) Failure to satisfy safe harbor.
    (h) Examples.
    (i) Effective date.

[T.D. 8462, 57 FR 61800, Dec. 29, 1992]



Sec. 1.1504-1   Definitions.

    The privilege of filing consolidated returns is extended to all 
includible corporations constituting affiliated groups as defined in 
section 1504. See the regulations under Sec. 1.1502 for a description of 
an affiliated group and the corporations which may be considered as 
includible corporations.

[T.D. 6500, 25 FR 12106, Nov. 26, 1960]
Secs. 1.1504-2--1.1504-3  [Reserved]



Sec. 1.1504-4   Treatment of warrants, options, convertible obligations, and other similar interests.

    (a) Introduction--(1) General rule. This section provides 
regulations under section 1504(a)(5) (A) and (B) regarding the 
circumstances in which warrants, options, obligations convertible into 
stock, and other similar interests are treated as exercised for purposes 
of determining whether a corporation is a member of an affiliated group. 
The fact that an instrument may be treated as an option under these 
regulations does not prevent such instrument from being treated as stock 
under general principles of law. Except as provided in paragraph (a)(2) 
of this section, this section applies to all provisions under the 
Internal Revenue Code and the regulations to which affiliation within 
the meaning of section 1504(a) (with or without the exceptions in 
section 1504(b)) is relevant, including those provisions that refer to 
section 1504(a)(2) (with or without the exceptions in section 1504(b)) 
without referring to affiliation, provided that the 80 percent voting 
power and 80 percent value requirements of section 1504(a)(2) are not 
modified therein.
    (2) Exceptions. This section does not apply to sections 163(j), 
864(e), or 904(i) or to the regulations thereunder. This section also 
does not apply to any other provision specified by the Internal Revenue 
Service in regulations, a revenue ruling, or revenue procedure. See 
Sec. 601.601(d)(2)(ii)(b) of this chapter.
    (b) Options not treated as stock or as excerised--(1) General rule. 
Except as provided in paragraph (b)(2) of this section, an option is not 
considered either as stock or as exercised. Thus, options are 
disregarded in determining whether a corporation is a member of an 
affiliated group unless they are described in paragraph (b)(2) of this 
section.
    (2) Options treated as exercised--(i) In general. Solely for 
purposes of determining whether a corporation is a member of an 
affiliated group, an option is treated as exercised if, on a

[[Page 411]]

measurement date with respect to such option--
    (A) It could reasonably be anticipated that, if not for this 
section, the issuance or transfer of the option in lieu of the issuance, 
redemption, or transfer of the underlying stock would result in the 
elimination of a substantial amount of federal income tax liability (as 
described in paragraphs (e) and (f) of this section); and
    (B) It is reasonably certain that the option will be exercised (as 
described in paragraph (g) of this section).
    (ii) Aggregation of options. All options with the same measurement 
date are aggregated in determining whether the issuance or transfer of 
an option in lieu of the issuance, redemption, or transfer of the 
underlying stock would result in the elimination of a substantial amount 
of federal income tax liability.
    (iii) Effect of treating option as exercised--(A) In general. An 
option that is treated as exercised is treated as exercised for purposes 
of determining the percentage of the value of stock owned by the holder 
and other parties, but is not treated as exercised for purposes of 
determining the percentage of the voting power of stock owned by the 
holder and other parties.
    (B) Cash settlement options, phantom stock, stock appreciation 
rights, or similar interests. If a cash settlement option, phantom 
stock, stock appreciation right, or similar interest is treated as 
exercised, the option is treated as having been converted into stock of 
the issuing corporation. If the amount to be received upon the exercise 
of such an option is determined by reference to a multiple of the 
increase in the value of a share of the issuing corporation's stock on 
the exercise date over the value of a share of the stock on the date the 
option is issued, the option is treated as converted into a 
corresponding number of shares of such stock. Appropriate adjustments 
must be made in any situation in which the amount to be received upon 
exercise of the option is determined in another manner.
    (iv) Valuation. For purposes of section 1504(a)(2)(B) and this 
section, all shares of stock within a single class are considered to 
have the same value. Thus, control premiums and minority and blockage 
discounts within a single class are not taken into account.
    (3) Example. The provisions of paragraph (b)(2) of this section may 
be illustrated by the following example:

    Example. (i) Corporation P owns all 100 shares of the common stock 
of Corporation S, the only class of S stock outstanding. Each share of S 
stock has a fair market value of $10 and has one vote. On June 30, 1992, 
P issues to Corporation X an option to acquire 80 shares of the S stock 
from P.
    (ii) If, under the provisions of this section, the option is treated 
as exercised, then, solely for purposes of determining affiliation, P is 
treated as owning only 20 percent of the value of the outstanding S 
stock and X is treated as owing the remaining 80 percent of the value of 
the S stock. P is still treated as owning all of the voting power of S. 
Accordingly, because P is treated as owning less than 80 percent of the 
value of the outstanding S stock, P and S are no longer affiliated. 
However, because X is not treated as owning any of the voting power of 
S, X and S are also not affiliated.

    (c) Definitions. For purposes of this section--
    (1) Issuing corporation. ``Issuing corporation'' means the 
corporation whose stock is subject to an option.
    (2) Related or sequential option. ``Related or sequential option'' 
means an option that is one of a series of options issued to the same or 
related persons. For purposes of this section, any options issued to the 
same person or related persons within a two-year period are presumed to 
be part of a series of options. This presumption may be rebutted if the 
facts and circumstances clearly establish that the options are not part 
of a series of options. Any options issued to the same person or related 
persons more than two years apart are presumed not to be part of a 
series of options. This presumption may be rebutted if the facts and 
circumstances clearly establish that the options are part of a series of 
options.
    (3) Related persons. Persons are related if they are related within 
the meaning of section 267(b) (without the application of sections 
267(c) and 1563(e)(1)) or 707(b)(1), substituting ``10 percent'' for 
``50 percent'' wherever it appears.
    (4) Measurement date--(i) General rule. ``Measurement date'' means a 
date on which an option is issued or transferred or on which the terms 
of an existing

[[Page 412]]

option or the underlying stock are adjusted (including an adjustment 
pursuant to the terms of the option or the underlying stock).
    (ii) Issuances, transfers, or adjustments not treated as measurement 
dates. A measurement date does not include a date on which--
    (A) An option is issued or transferred by gift, at death, or between 
spouses or former spouses under section 1041;
    (B) An option is issued or transferred--
    (1) Between members of an affiliated group (determined with the 
exceptions in section 1504(b) and without the application of this 
section); or
    (2) Between persons none of which is a member of the affiliated 
group (determined without the exceptions in section 1504(b) and without 
the application of this section), if any, of which the issuing 
corporation is a member, unless--
    (i) Any such person is related to (or acting in concert with) the 
issuing corporation or any member of its affiliated group; and
    (ii) The issuance or transfer is pursuant to a plan a principal 
purpose of which is to avoid the application of section 1504 and this 
section;
    (C) An adjustment occurs in the terms or pursuant to the terms of an 
option or the underlying stock that does not materially increase the 
likelihood that the option will be exercised; or
    (D) A change occurs in the exercise price of an option or in the 
number of shares that may be issued or transferred pursuant to the 
option as determined by a bona fide, reasonable, adjustment formula that 
has the effect of preventing dilution of the interests of the holders of 
the options.
    (iii) Transactions increasing likelihood of exercise. If a change or 
alteration referred to in this paragraph (c)(4)(iii) is made for a 
principal purpose of increasing the likelihood that an option will be 
exercised, a measurement date also includes any date on which--
    (A) The capital structure of the issuing corporation is changed; or
    (B) The fair market value of the stock of the issuing corporation is 
altered through a transfer of assets to or from the issuing corporation 
(other than regular, ordinary dividends) or by any other means.
    (iv) Measurement date for options issued pursuant to a plan. In the 
case of options issued pursuant to a plan, a measurement date for any of 
the options constitutes a measurement date for all options issued 
pursuant to the plan that are outstanding on the measurement date.
    (v) Measurement date for related or sequential options. In the case 
of related or sequential options, a measurement date for any of the 
options constitutes a measurement date for all related or sequential 
options that are outstanding on the measurement date.
    (vi) Example. The provisions of paragraph (c)(4)(v) of this section 
may be illustrated by the following example.

    Example. (i) Corporation P owns all 80 shares of the common stock of 
Corporation S, the only class of S stock outstanding. On January 1, 
1992, S issues a warrant, exercisable within 3 years, to U, an unrelated 
corporation, to acquire 10 newly issued shares of S common stock. On 
July 1, 1992, S issues a second warrant to U to acquire 10 additional 
newly issued shares of S common stock. On January 1, 1993, S issues a 
third warrant to T, a wholly owned subsidiary of U, to acquire 10 newly 
issued shares of S common stock. Assume that the facts and circumstances 
do not clearly establish that the options are not part of a series of 
options.
    (ii) January 1, 1992, July 1, 1992, and January 1, 1993, constitute 
measurement dates for the first warrant, the second warrant, and the 
third warrant, respectively, because the warrants were issued on those 
dates.
    (iii) Because the first and second warrants were issued within two 
years of each other, and both warrants were issued to U, the warrants 
constitute related or sequential options. Accordingly, July 1, 1992, 
constitutes a measurement date for the first warrant as well as for the 
second warrant.
    (iv) Because the first, second, and third warrants were all issued 
within two years of each other, and were all issued to the same or 
related persons, the warrants constitute related or sequential options. 
Accordingly, January 1, 1993, constitutes a measurement date for the 
first and second warrants, as well as for the third warrant.


    (5) In-the-money. ``In-the-money'' means the exercise price of the 
option is less than (or in the case of an option to sell stock, greater 
than) the fair market value of the underlying stock.

[[Page 413]]

    (d) Options--(1) Instruments treated as options. For purposes of 
this section, except to the extent otherwise provided in this paragraph 
(d), the following are treated as options:
    (i) A call option, warrant, convertible obligation, put option, 
redemption agreement (including a right to cause the redemption of 
stock), or any other instrument that provides for the right to issue, 
redeem, or transfer stock (including an option on an option); and
    (ii) A cash settlement option, phantom stock, stock appreciation 
right, or any other similar interest (except for stock).
    (2) Instruments generally not treated as options. For purposes of 
this section, the following will not be treated as options:
    (i) Options on section 1504(a)(4) stock. Options on stock described 
in section 1504(a)(4);
    (ii) Certain publicly traded options--(A) General rule. Options 
which on the measurement date are traded on (or subject to the rules of) 
a qualified board or exchange as defined in section 1256(g)(7), or on 
any other exchange, board of trade, or market specified by the Internal 
Revenue Service in regulations, a revenue ruling, or revenue procedure. 
See Sec. 601.601(d)(2)(ii)(b) of this chapter;
    (B) Exception. Paragraph (d)(2)(ii)(A) of this section does not 
apply to options issued, transferred, or listed with a principal purpose 
of avoiding the application of section 1504 and this section. For 
example, a principal purpose of avoiding the application of section 1504 
and this section may exist if warrants, convertible or exchangeable debt 
instruments, or other similar instruments have an exercise price (or, in 
the case of convertible or exchangeable instruments, a conversion or 
exchange premium) that is materially less than, or a term that is 
materially longer than, those that are customary for publicly traded 
instruments of their type. A principal purpose may also exist if a large 
percentage of an issuance of an instrument is placed with one investor 
(or group of investors) and a very small percentage of the issuance is 
traded on a qualified board or exchange;
    (iii) Stock purchase agreements. Stock purchase agreements or 
similar arrangements whose terms are commercially reasonable and in 
which the parties' obligations to complete the transaction are subject 
only to reasonable closing conditions;
    (iv) Escrow, pledge, or other security agreements. Agreements for 
holding stock in escrow or under a pledge or other security agreement 
that are part of a typical commercial transaction and that are subject 
to customary commercial conditions;
    (v) Compensatory options--(A) General rule. Stock appreciation 
rights, warrants, stock options, phantom stock, or other similar 
instruments provided to employees, directors, or independent contractors 
in connection with the performance of services for the corporation or a 
related corporation (and that is not excessive by reference to the 
services performed) and which--
    (1) Are nontransferable within the meaning of Sec. 1.83-3(d); and
    (2) Do not have a readily ascertainable fair market value as defined 
in Sec. 1.83-7(b) on the measurement date;
    (B) Exceptions. (1) Paragraph (d)(2)(v)(A) of this section does not 
apply to options issued or transferred with a principal purpose of 
avoiding the application of section 1504 and this section; and
    (2) Paragraph (d)(2)(v)(A) of this section ceases to apply to 
options that become transferable;
    (vi) Options granted in connection with a loan. Options granted in 
connection with a loan if the lender is actively and regularly engaged 
in the business of lending and the options are issued in connection with 
a loan to the issuing corporation that is commercially reasonable. This 
paragraph (d)(2)(vi) continues to apply if the option is transferred 
with the loan (or if a portion of the option is transferred with a 
corresponding portion of the loan). However, if the option is 
transferred without a corresponding portion of the loan, this paragraph 
(d)(2)(vi) ceases to apply;
    (vii) Options created pursuant to a title 11 or similar case. 
Options created by the solicitation or receipt of acceptances to a plan 
of reorganization in a title 11 or similar case (within the meaning of 
section 368(a)(3)(A)), the option created by the confirmation of the

[[Page 414]]

plan, and any option created under the plan prior to the time the plan 
becomes effective;
    (viii) Convertible preferred stock. Convertible preferred stock, 
provided the terms of the conversion feature do not permit or require 
the tender of any consideration other than the stock being converted; 
and
    (ix) Other enumerated instruments. Any other instruments specified 
by the Internal Revenue Service in regulations, a revenue ruling, or 
revenue procedure. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
    (e) Elimination of federal income tax liability. For purposes of 
this section, the elimination of federal income tax liability includes 
the elimination or deferral of federal income tax liability. In 
determining whether there is an elimination of federal income tax 
liability, the tax consequences to all involved parties are considered. 
Examples of elimination of federal income tax liability include the use 
of a loss or deduction that would not otherwise be utilized, the 
acceleration of a loss or deduction to a year earlier than the year in 
which the loss or deduction would otherwise be utilized, the deferral of 
gain or income to a year later than the year in which the gain or income 
would otherwise be reported, and the acceleration of gain or income to a 
year earlier than the year in which the gain or income would otherwise 
be reported, if such gain or income is offset by a net operating loss or 
net capital loss that would otherwise expire unused. The elimination of 
federal income tax liability does not include the deferral of gain with 
respect to the stock subject to the option that would be recognized if 
such stock were sold on a measurement date.
    (f) Substantial amount of federal income tax liability. The 
determination of what constitutes a substantial amount of federal income 
tax liability is based on all the facts and circumstances, including the 
absolute amount of the elimination, the amount of the elimination 
relative to overall tax liability, and the timing of items of income and 
deductions, taking into account present value concepts.
    (g) Reasonable certainty of exercise--(1) Generally. The 
determination of whether, as of a measurement date, an option is 
reasonably certain to be exercised is based on all the facts and 
circumstances, including:
    (i) Purchase price. The purchase price of the option in absolute 
terms and in relation to the fair market value of the stock or the 
exercise price of the option;
    (ii) In-the-money option. Whether and to what extent the option is 
in-the-money on the measurement date;
    (iii) Not in-the-money option. If the option is not in-the-money on 
the measurement date, the amount or percentage by which the exercise 
price of the option is greater than (or in the case of an option to sell 
stock, is less than) the fair market value of the underlying stock;
    (iv) Exercise price. Whether the exercise price of the option is 
fixed or fluctuates depending on the earnings, value, or other 
indication of economic performance of the issuing corporation;
    (v) Time of exercise. The time at which, or the period of time 
during which, the option can be exercised;
    (vi) Related or sequential options. Whether the option is one in a 
series of related or sequential options;
    (vii) Stockholder rights. The existence of an arrangement (either 
within the option agreement or in a related agreement) that, directly or 
indirectly, affords managerial or economic rights in the issuing 
corporation that ordinarily would be afforded to owners of the issuing 
corporation's stock (e.g., voting rights, dividend rights, or rights to 
proceeds on liquidation) to the person who would acquire the stock upon 
exercise of the option or a person related to such person. For this 
purpose, managerial or economic rights in the issuing corporation 
possessed because of actual stock ownership in the issuing corporation 
are not taken into account;
    (viii) Restrictive covenants. The existence of restrictive covenants 
or similar arrangements (either within the option agreement or in a 
related agreement) that, directly or indirectly, prevent or limit the 
ability of the issuing corporation to undertake certain activities while 
the option is outstanding (e.g., covenants limiting the payment of 
dividends or borrowing of funds);

[[Page 415]]

    (ix) Intention to alter value. Whether it was intended that through 
a change in the capital structure of the issuing corporation or a 
transfer of assets to or from the issuing corporation (other than 
regular, ordinary dividends) or by any other means, the fair market 
value of the stock of the issuing corporation would be altered for a 
principal purpose of increasing the likelihood that the option would be 
exercised; and
    (x) Contingencies. Any contingency (other than the mere passage of 
time) to which the exercise of the option is subject (e.g., a public 
offering of the issuing corporation's stock or reaching a certain level 
of earnings).
    (2) Cash settlement options, phantom stock, stock appreciation 
rights, or similar interests. A cash settlement option, phantom stock, 
stock appreciation right, or similar interest is treated as reasonably 
certain to be exercised if it is reasonably certain that the option will 
have value at some time during the period in which the option may be 
exercised.
    (3) Safe harbors--(i) Options to acquire stock. Except as provided 
in paragraph (g)(3)(iv) of this section, an option to acquire stock is 
not considered reasonably certain, as of a measurement date, to be 
exercised if--
    (A) The option may be exercised no more than 24 months after the 
measurement date and the exercise price is equal to or greater than 90 
percent of the fair market value of the underlying stock on the 
measurement date; or
    (B) The terms of the option provide that the exercise price of the 
option is equal to or greater than the fair market value of the 
underlying stock on the exercise date.
    (ii) Options to sell stock. Except as provided in paragraph 
(g)(3)(iv) of this section, an option to sell stock is not considered 
reasonably certain, as of a measurement date, to be exercised if--
    (A) The option may be exercised no more than 24 months after the 
measurement date and the exercise price is equal to or less than 110 
percent of the fair market value of the underlying stock on the 
measurement date; or
    (B) The terms of the option provide that the exercise price of the 
option is equal to or less than the fair market value of the underlying 
stock on the exercise date.
    (iii) Options exercisable at fair market value. For purposes of 
paragraphs (g)(3)(i)(B) and (g)(3)(ii)(B) of this section, an option 
whose exercise price is determined by a formula is considered to have an 
exercise price equal to the fair market value of the underlying stock on 
the exercise date if the formula is agreed upon by the parties when the 
option is issued in a bona fide attempt to arrive at fair market value 
on the exercise date and is to be applied based upon the facts in 
existence on the exercise date.
    (iv) Exceptions. The safe harbors of this paragraph (g)(3) do not 
apply if--
    (A) An arrangement exists that provides the holder or a related 
party with stockholder rights described in paragraph (g)(1)(vii) of this 
section (except for rights arising upon a default under the option or a 
related agreement);
    (B) It is intended that through a change in the capital structure of 
the issuing corporation or a transfer of assets to or from the issuing 
corporation (other than regular, ordinary dividends) or by any other 
means, the fair market value of the stock of the issuing corporation 
will be altered for a principal purpose of increasing the likelihood 
that the option will be exercised; or
    (C) The option is one in a series of related or sequential options, 
unless all such options satisfy paragraph (g)(3) (i) or (ii) of this 
section.
    (v) Failure to satisfy safe harbor. Failure of an option to satisfy 
one of the safe harbors of this paragraph (g)(3) does not affect the 
determination of whether an option is treated as reasonably certain to 
be exercised.
    (h) Examples. The provisions of this section may be illustrated by 
the following examples. These examples assume that the measurement dates 
set forth in the examples are the only measurement dates that have taken 
place or will take place.

    Example 1. (i) P is the common parent of a consolidated group, 
consisting of P, S, and T. P owns all 100 shares of S's only class of 
stock, which is voting common stock. P also owns all the stock of T. On 
June 30, 1992, when the fair market value of the S stock is $40 per 
share, P sells to U, an unrelated corporation, an option to acquire 40 
shares of

[[Page 416]]

the S stock that P owns at an exercise price of $30 per share, 
exercisable at any time within 3 years after the granting of the option. 
P and T have had substantial losses for 5 consecutive years while S has 
had substantial income during the same period. Because P, S, and T have 
been filing consolidated returns, P and T have been able to use all of 
their losses to offset S's income. It is anticipated that P, S, and T 
will continue their earnings histories for several more years. On July 
31, 1992, S declares and pays a dividend of $1 per share to P.
    (ii) If P, S, and T continue to file consolidated returns after June 
30, 1992, it could reasonably be anticipated that P, S, and T would 
eliminate a substantial amount of federal income tax liability by using 
P's and T's future losses to offset S's income in consolidated returns. 
Furthermore, based on the difference between the exercise price of the 
option and the fair market value of the S stock, it is reasonably 
certain, on June 30, 1992, a measurement date, that the option will be 
exercised. Therefore, the option held by U is treated as exercised. As a 
result, for purposes of determining whether P and S are affiliated, P is 
treated as owning only 60 percent of the value of outstanding shares of 
S stock and U is treated as owning the remaining 40 percent. P is still 
treated as owning 100 percent of the voting power. Because members of 
the P group are no longer treated as owning stock possessing 80 percent 
of the total value of the S stock as of June 30, 1992, S is no longer a 
member of the P group. Additionally, P is not entitled to a 100 percent 
dividends received deduction under section 243(a)(3) because P and S are 
also treated as not affiliated for purposes of section 243. P is only 
entitled to an 80 percent dividends received deduction under section 
243(c).
    Example 2. (i) The facts are the same as in Example 1 except that 
rather than P issuing an option to acquire 40 shares of S stock to U on 
June 30, 1992, P, pursuant to a plan, issues an option to U1 on July 1, 
1992, to acquire 20 shares of S stock, and issues an option to U2 on 
July 2, 1992, to acquire 20 shares of S stock.
    (ii) Because the options issued to U1 and U2 were issued pursuant to 
a plan, July 2, 1992, constitutes a measurement data for both options. 
Therefore, both options are aggregated in determining whether the 
issuance of the options, rather than the sale of the S stock, would 
result in the elimination of a substantial amount of federal income tax 
liability. Accordingly, as in Example 1, because the continued 
affiliation of P, S, and T could reasonably be anticipated to result in 
the elimination of a substantial amount of federal income tax liability 
and the options are reasonably certain to be exercised, the options are 
treated as exercised for purposes of determining whether P and S are 
affiliated, and P and S are no longer affiliated as of July 2, 1992.
    Example 3. (i) The facts are the same as in Example 1 except that 
the option gives U the right to acquire all 100 shares of the S stock, 
and U is the common parent of a consolidated group. The U group has had 
substantial losses for 5 consecutive years and it is anticipated that 
the U group will continue its earnings history for several more years.
    (ii) If P sold the S stock, in lieu of the option, to U, S would 
become a member of the U group. Because the U group files consolidated 
returns, if P sold the S stock to U, U would be able to use its future 
losses to offset future income of S. When viewing the transaction from 
the effect on all parties, the sale of the option, in lieu of the 
underlying S stock, does not result in the elimination of federal income 
tax liability because S's income would be offset by the losses of 
members of either the P or U group. Accordingly, the option is 
disregarded and S remains a member of the P group.
    Example 4. (i) P is the common parent of a consolidated group, 
consisting of P and S. P owns 90 of the 100 outstanding shares of S's 
only class of stock, which is voting common stock, and U, an unrelated 
corporation, owns the remaining 10 shares. On August 31, 1992, when the 
fair market value of the S stock is $100 per share, P sells a call 
option to U that entitles U to purchase 20 shares of S stock from P, at 
any time before August 31, 1993, at an exercise price of $115 per share. 
The call option does not provide U with any voting rights, dividend 
rights, or any other managerial or economic rights ordinarily afforded 
to owners of the S stock. There is no intention on August 31, 1992, to 
alter the value of S to increase the likelihood of the exercise of the 
call option.
    (ii) Because the exercise price of the call option is equal to or 
greater than 90 percent of the fair market value of the S stock on 
August 31, 1992, a measurement date, the option may be exercised no more 
than 24 months after the measurement date, and none of the items 
described in paragraph (g)(3)(iv) of this section that preclude 
application of the safe harbor are present, the safe harbor of paragraph 
(g)(3)(i) of this section applies and the call option is treated as if 
it is not reasonably certain to be exercised. Therefore, regardless of 
whether the continued affiliation of P and S would result in the 
elimination of a substantial amount of federal income tax liability, the 
call option is disregarded in determining whether S remains a member of 
the P group.
    Example 5. (i) The facts are the same as in Example 4 except that 
the call option gives U the right to vote similar to that of a 
shareholder.
    (ii) Under paragraph (g)(3)(iv) of this section, the safe harbor of 
paragraph (g)(3)(i) of this section does not apply because the call

[[Page 417]]

option entitles U to voting rights equivalent to that of a shareholder. 
Accordingly, all of the facts and circumstances surrounding the sale of 
the call option must be taken into consideration in determining whether 
it is reasonably certain that the call option will be exercised.
    Example 6. (i) In 1992, two unrelated corporations, X and Y, decide 
to engage jointly in a new business venture. To accomplish this purpose, 
X organizes a new corporation, S, on September 30, 1992. X acquires 100 
shares of the voting common stock of S, which are the only shares of S 
stock outstanding. Y acquires a debenture of S which is convertible, on 
September 30, 1995, into 100 shares of S common stock. If the conversion 
right is not exercised, X will have the right, on September 30, 1995, to 
put 50 shares of its S stock to Y in exchange for 50 percent of the 
debenture held by Y. The likelihood of the success of the venture is 
uncertain. It is anticipated that S will generate substantial losses in 
its early years of operation. X expects to have substantial taxable 
income during the three years following the organization of S.
    (ii) Under the terms of this arrangement, it is reasonably certain 
on September 30, 1992, a measurement date, that on September 30, 1995, 
either through Y's exercise of its conversion right or X's right to put 
S stock to Y, that Y will own 50 percent of the S stock. Additionally, 
it could reasonably be anticipated, on September 30, 1992, a measurement 
date, that the affiliation of X and S would result in the elimination of 
a substantial amount of federal income tax liability. Accordingly, for 
purposes of determining whether X and S are affiliated, X is treated as 
owning only 50 percent of the value of the S stock as of September 30, 
1992, a measurement date, and S is not a member of the X affiliated 
group.
    Example 7. (i) The facts are the same as in Example 6 except that 
rather than acquiring 100 percent of the S stock and the right to put S 
stock to Y, X acquires only 80 percent of the S stock, while S, rather 
than acquiring a convertible debenture, acquires 20 percent of the S 
stock, and an option to acquire an additional 30 percent of the S stock. 
The terms of the option are such that the option will only be exercised 
if the new business venture succeeds.
    (ii) In contrast to Example 6, because of the true business risks 
involved in the start-up of S and whether the business venture will 
ultimately succeed, along with the fact that X does not have an option 
to put S stock to Y, it is not reasonably certain on September 30, 1992, 
a measurement date, that the option will be exercised and that X will 
only own 50 percent of the S stock on September 30, 1995. Accordingly, 
the option is disregarded in determining whether S is a member of the X 
group.

    (i) Effective date. This section applies, generally, to options with 
a measurement date on or after February 28, 1992. This section does not 
apply to options issued prior to February 28, 1992, which have a 
measurement date on or after February 28, 1992, if the measurement date 
for the option occurs solely because of an adjustment in the terms of 
the option pursuant to the terms of the option as it existed on February 
28, 1992. Paragraph (b)(2)(iv) of this section applies to stock 
outstanding on or after February 28, 1992.

[T.D. 8462, 57 FR 61801, Dec. 29, 1992; 58 FR 7041, Feb. 3, 1993]

     Regulations Applicable to Taxable Years Before January 1, 1997



Sec. 1.1502-15A  Limitations on the allowance of built-in deductions for consolidated return years beginning before January 1, 1997.

    (a) Limitation on built-in deductions--(1) General rule. Built-in 
deductions (as defined in subparagraph (2) of this paragraph) for a 
taxable year shall be subject to the limitation of Sec. 1.1502-21A(c) 
(determined without regard to such deductions and without regard to net 
operating loss carryovers to such year) and the limitation of 
Sec. 1.1502-22A(c) (determined without regard to such deductions and 
without regard to capital loss carryovers to such year). If as a result 
of applying such limitations, built-in deductions are not allowable in 
such consolidated return year, such deductions shall be treated as a net 
operating loss or net capital loss (as the case may be) sustained in 
such year and shall be carried to those taxable years (consolidated or 
separate) to which a consolidated net operating loss or a consolidated 
net capital loss could be carried under Secs. 1.1502-21A, 1.1502-22A and 
1.1502-79A, (or Secs. 1.1502-21T and 1.1502-22T, as appropriate) except 
that such losses shall be treated as losses subject to the limitations 
contained in Sec. Sec. 1.1502-21T(c) or 1.1502-22T(c) (or 
Sec. Sec. 1.1502-21A(c), 1.1502-22A(c), as appropriate), as the case may 
be. Thus, for example, if member X sells a capital asset during a 
consolidated return year at a $1,000 loss and such loss is treated as a 
built-in deduction, then such loss shall be subject to

[[Page 418]]

the limitation contained in Sec. 1.1502-22(c), which, in general, would 
allow such loss to be offset only against X's own capital gain net 
income (net capital gain for taxable years beginning before January 1, 
1977). Assuming X had no capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) reflected in such year 
(after taking into account its capital losses, other than capital loss 
carryovers and the built-in deduction), such $1,000 loss shall be 
treated as a net capital loss and shall be carried over for 5 years 
under Sec. 1.1502-22, subject to the limitation contained in 
Sec. 1.1502-22(c) for consolidated return years.
    (2) Built-in deductions. (i) For purposes of this paragraph, the 
term ``built-in deductions'' for a consolidated return year means those 
deductions or losses of a corporation which are recognized in such year, 
or which are recognized in a separate return year and carried over in 
the form of a net operating or net capital loss to such year, but which 
are economically accrued in a separate return limitation year (as 
defined in Sec. 1.1502-1(f)). Such term does not include deductions or 
losses incurred in rehabilitating such corporation. Thus, for example, 
assume P is the common parent of a group filing consolidated returns on 
the basis of a calendar year and that P purchases all of the stock of S 
on December 31, 1966. Assume further that on December 31, 1966, S owns a 
capital asset with an adjusted basis of $100 and a fair market value of 
$50. If the group files a consolidated return for 1967, and S sells the 
asset for $30, $50 of the $70 loss is treated as a built-in deduction, 
since it was economically accrued in a separate return limitation year. 
If S sells the asset for $80 instead of $30, the $20 loss is treated as 
a built-in deduction. On the other hand, if such asset is a depreciable 
asset and is not sold by S, depreciation deductions attributable to the 
$50 difference between basis and fair market value are treated as built-
in deductions.
    (ii) In determining, for purposes of subdivision (i) of this 
subparagraph, whether a deduction or loss with respect to any asset is 
economically accrued in a separate return limitation year, the term 
``predecessor'' as used in Sec. 1.1502-1(f)(1) shall include any 
transferor of such asset if the basis of the asset in the hands of the 
transferee is determined (in whole or in part) by reference to its basis 
in the hands of such transferor.
    (3) Transitional rule. If the assets which produced the built-in 
deductions were acquired (either directly or by acquiring a new member) 
by the group on or before January 4, 1973, and the separate return 
limitation year in which such deductions were economically accrued ended 
before such date, then at the option of the taxpayer, the provisions of 
this paragraph before amendment by T.D. 7246 shall apply, and, in 
addition, if such assets were acquired on or before April 17, 1968, and 
the separate return limitation year in which the built-in deductions 
were economically accrued ended on or before such date, then at the 
option of the taxpayer, the provisions of Sec. 1.1502-31A(b)(9)(as 
contained in the 26 C.F.R. edition revised as of April 1, 1996) shall 
apply in lieu of this paragraph.
    (4) Exceptions. (i) Subparagraphs (1), (2), and (3) of this 
paragraph shall not limit built-in deductions in a taxable year with 
respect to assets acquired (either directly or by acquiring a new 
member) by the group if:
    (a) The group acquired the assets more than 10 years before the 
first day of such taxable year, or
    (b) Immediately before the group acquired the assets, the aggregate 
of the adjusted basis of all assets (other than cash, marketable 
securities, and goodwill) acquired from the transferor or owned by the 
new member did not exceed the fair market value of all such assets by 
more than 15 percent.
    (ii) For purposes of subdivision (i)(b) of this subparagraph, a 
security is not a marketable security if immediately before the group 
acquired the assets:
    (a) The fair market value of the security is less than 95 percent of 
its adjusted basis, or
    (b) The transferor or new member had held the security for at least 
24 months, or
    (c) The security is stock in a corporation at least 50 percent of 
the fair market value of the outstanding stock of which is owned by the 
transferor or new member.

[[Page 419]]

    (b) Effective date. This section applies to any consolidated return 
years to which Sec. 1.1502-21T does not apply. See Sec. 1.1502-21T(g) 
for effective dates of that section.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 6909, 31 FR 
16695, Dec. 30, 1966; T.D. 7246, 37 FR 761, Jan. 4, 1972; T.D. 7728, 45 
FR 72650, Nov. 3, 1980; T.D. 8677, 61 FR 33323, June 27, 1996. 
Redesignated and amended by T.D. 8677, 61 FR 33326, June 27, 1996]



Sec. 1.1502-21A   Consolidated net operating loss deduction generally applicable for consolidated return years beginning before January 1, 1997.

    (a) In general. The consolidated net operating loss deduction shall 
be an amount equal to the aggregate of the consolidated net operating 
loss carryovers and carrybacks to the taxable year (as determined under 
paragraph (b) of this section).
    (b) Consolidated net operating loss carryovers and carrybacks--(1) 
In general. The consolidated net operating loss carryovers and 
carrybacks to the taxable year shall consist of any consolidated net 
operating losses (as determined under paragraph (f) of this section) of 
the group, plus any net operating losses sustained by members of the 
group in separate return years, which may be carried over or back to the 
taxable year under the principles of section 172(b). However, such 
consolidated carryovers and carrybacks shall not include any 
consolidated net operating loss apportioned to a corporation for a 
separate return year pursuant to Sec. 1.1502-79A(a), and shall be 
subject to the limitations contained in paragraphs (c), (d), and (e) of 
this section and to the limitation contained in Sec. 1.1502-15A (or 
Sec. 1.1502-11(c), as appropriate).
    (2) Rules for applying section 172(b)(1)--(i) Regulated 
transportation corporations. For purposes of applying section 
172(b)(1)(C) (relating to net operating losses sustained by regulated 
transportation corporations), in the case of a consolidated net 
operating loss sustained in a taxable year for which a member of the 
group was a regulated transportation corporation (as defined in section 
172(j)(1)), the portion, if any, of such consolidated net operating loss 
which is attributable to such corporation (as determined under this 
paragraph shall be a carryover to the sixth taxable year following the 
loss year only if such corporation is a regulated transportation 
corporation for such sixth year, and shall be a carryover to the seventh 
taxable year following the loss year only if such corporation is a 
regulated transportation corporation for both such sixth and seventh 
years.
    (ii) Trade expansion losses. In the case of a carryback of a 
consolidated net operating loss from a taxable year for which a member 
of the group has been issued a certification under section 317 of the 
Trade Expansion Act of 1962 and with respect to which the requirements 
of section 172(b)(3)(A) have been met, section 172(b)(1)(A)(ii) shall 
apply only to the portion of such consolidated net operating loss 
attributable to such member.
    (iii) Foreign expropriation losses. An election under section 
172(b)(3)(C) (relating to 10-year carryover of portion of net operating 
loss attributable to a foreign expropriation loss) may be made for a 
consolidated return year only if the sum of the foreign expropriation 
losses (as defined in section 172(k)) of the members of the group for 
such year equals or exceeds 50 percent of the consolidated net operating 
loss for such year. If such election is made, the amount which may be 
carried over under section 172(b)(1)(D) is the smaller of (a) the sum of 
such foreign expropriation losses, or (b) the consolidated net operating 
loss.
    (3) Absorption rules. For purposes of determining the amount, if 
any, of a net operating loss (whether consolidated or separate) which 
can be carried to a taxable year (consolidated or separate), the amount 
of such net operating loss which is absorbed in a prior consolidated 
return year under section 172(b)(2) shall be determined by:
    (i) Applying all net operating losses which can be carried to such 
prior year in the order of the taxable years in which such losses were 
sustained, beginning with the taxable year which ends earliest, and
    (ii) Applying all such losses which can be carried to such prior 
year from taxable years ending on the same date on a pro rata basis, 
except that any portion of a net operating loss attributable to a 
foreign expropriation loss

[[Page 420]]

to which section 172(b)(1)(D) applies shall be applied last.
    (c) Limitation on net operating loss carryovers and carrybacks from 
separate return limitation years--(1) General rule. In the case of a net 
operating loss of a member of the group arising in a separate return 
limitation year (as defined in paragraph (f) of Sec. 1.1502-1) of such 
member (and in a separate return limitation year of any predecessor of 
such member), the amount which may be included under paragraph (b) of 
this section (computed without regard to the limitation contained in 
paragraph (d) of this section) in the consolidated net operating loss 
carryovers and carrybacks to a consolidated return year of the group 
shall not exceed the amount determined under subparagraph (2) of this 
paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph with respect to a member of the group 
is the excess, if any, of:
    (i) Consolidated taxable income (computed without regard to the 
consolidated net operating loss deduction), minus such consolidated 
taxable income recomputed by excluding the items of income and deduction 
of such member, over
    (ii) The net operating losses attributable to such member which may 
be carried to the consolidated return year arising in taxable years 
ending prior to the particular separate return limitation year.
    (3) Examples. The provisions of this paragraph and paragraphs (a) 
and (b) of this section may be illustrated by the following examples:

    Example (1). (i) Corporation P formed corporations S and T on 
January 1, 1965. P, S, and T filed separate returns for the calendar 
year 1965, a year for which an election under section 1562 was 
effective. T's return for that year reflected a net operating loss of 
$10,000. The group filed a consolidated return for 1966 reflecting 
consolidated taxable income of $30,000 (computed without regard to the 
consolidated net operating loss deduction). Among the transactions 
occurring during 1966 were the following:
    (a) P sold goods to T deriving deferred profits of $7,000 on such 
sales, $2,000 of which was restored to consolidated taxable income on 
the sale of such goods to outsiders;
    (b) T sold a machine to S deriving a deferred profit of $5,000, 
$1,000 of which was restored to consolidated taxable income as a result 
of S's depreciation deductions;
    (c) T distributed a $3,000 dividend to P; and
    (d) In addition to the transactions described above, T had other 
taxable income of $6,000.
    (ii) The carryover of T's 1965 net operating loss to 1966 is subject 
to the limitation contained in this paragraph, since 1965 was a separate 
return limitation year (an election under section 1562 was effective for 
such year). Thus, only $7,000 of T's $10,000 net operating loss is a 
consolidated net operating loss carryover to 1966, since such carryover 
is limited to consolidated taxable income (computed without regard to 
the consolidated net operating loss deduction), $30,000, minus such 
consolidated taxable income recomputed by excluding the items of income 
and deduction of T, $23,000 (i.e., consolidated taxable income computed 
without regard to the $1,000 restoration of T's deferred gain and T's 
$6,000 of other income). In making such recomputation, no change is made 
in the effect on consolidated taxable income of P's sale to T, or of the 
dividend from T to P.
    Example (2). (i) Corporation P was formed on January 1, 1966. P 
filed separate returns for the calendar years 1966 and 1967 reflecting 
net operating losses of $4,000 and $12,000, respectively. P purchased 
corporation S on March 15, 1967. S was formed on February 1, 1966, and 
filed a separate return for the taxable year ending January 31, 1967. S 
also filed a short period return for the period from February 1 to 
December 31, 1967, and joined with P in filing a consolidated return for 
1968. S sustained net operating losses of $5,000 and $6,000 for its 
taxable years ending January 31, 1967, and December 31, 1967, 
respectively. An election under section 1562 was not effective for P and 
S during the period involved. Consolidated taxable income for 1968 
(computed without regard to the consolidated net operating loss 
deduction) was $16,000; such consolidated taxable income recomputed by 
disregarding the items of income and deduction of S was $9,000.
    (ii) In order of time, the following losses are absorbed in 1968:
    (a) P's $4,000 net operating loss for the calendar year 1966 (such 
loss is not subject to the limitation contained in this paragraph since 
P is the common parent corporation for 1968);
    (b) S's $5,000 net operating loss for the year ended January 31, 
1967. Such loss is subject to the limitation contained in this 
paragraph, since S was not a member of the group on each day of such 
year. However, such loss can be carried over and absorbed in full since 
such limitation is $7,000 (consolidated taxable income computed without 
regard to the consolidated net operating loss deduction, $16,000, minus 
such consolidated taxable income recomputed, $9,000); and

[[Page 421]]

    (c) $6,000 of P's net operating loss and $1,000 of S's net operating 
loss for the taxable years ending December 31, 1967. This is determined 
by applying the losses from such year which can be carried to 1968 (P's 
$12,000 loss and $2,000 of S's $6,000 loss, since such $6,000 loss is 
limited under this paragraph) on a pro rata basis against the amount of 
such losses which can be absorbed in that year, $7,000 (consolidated 
taxable income of $16,000 less the $9,000 of losses absorbed from prior 
years). The carryover of S's loss to 1968 is subject to the limitation 
contained in that paragraph, since S was not a member of the group on 
each day of its taxable year ending December 31, 1967. Such loss is 
limited to $2,000, the excess of $7,000 (as determined under (ii)(b)) 
over $5,000 (S's carryover from the year ended January 31, 1967). If a 
consolidated return is filed in 1969, the consolidated net operating 
loss carryovers will consist of P's unabsorbed loss of $6,000 ($12,000 
minus $6,000) from 1967 and, subject to the limitation contained in this 
paragraph, S's unabsorbed loss of $5,000 ($6,000 minus $1,000) from its 
year ended December 31, 1967.

    (d) Limitation on carryovers where there has been a consolidated 
return change of ownership--(1) General rule. If a consolidated return 
change of ownership (as defined in paragraph (g) of Sec. 1.1502-1) 
occurs during the taxable year or an earlier taxable year, the amount 
which may be included under paragraph (b) of this section in the 
consolidated net operating loss carryovers to the taxable year with 
respect to the aggregate of the net operating losses attributable to old 
members of the group (as defined in paragraph (g)(3) of Sec. 1.1502-1) 
arising in taxable years (consolidated or separate) ending on the same 
day and before the taxable year in which the consolidated return change 
of ownership occurred shall not exceed the amount determined under 
subparagraph (2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph shall be the excess of:
    (i) The consolidated taxable income for the taxable year (determined 
without regard to the consolidated net operating loss deduction) 
recomputed by including only the items of income and deduction of the 
old members of the group, over
    (ii) The sum of the net operating losses attributable to the old 
members of the group which may be carried to the taxable year arising in 
taxable years ending prior to the particular loss year or years.
    (3) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. (i) Corporation P is formed on January 1, 1967, and on the 
same day it forms corporation S. P and S file a consolidated return for 
the calendar year 1967, reflecting a consolidated net operating loss of 
$500,000. On January 1, 1968, individual X purchases all of the 
outstanding stock of P. X subsequently contributes $1,000,000 to P and P 
purchases the stock of corporation T. P, S, and T file a consolidated 
return for 1968 reflecting consolidated taxable income of $600,000 
(computed without regard to the consolidated net operating loss 
deduction). Such consolidated taxable income recomputed by including 
only the items of income and deduction of P and S is $350,000.
    (ii) Since a consolidated return change of ownership took place in 
1968 (there was more than a 50 percent change of ownership of P), the 
amount of the consolidated net operating loss from 1967 which can be 
carried over to 1968 is limited to $350,000, the excess of $350,000 
(consolidated taxable income recomputed by including only the items of 
income and deduction of the old members of the group, P and S) over zero 
(the amount of the consolidated net operating loss carryovers 
attributable to the old members of the group arising in taxable years 
ending before 1967).
    (4) Cross-reference. See Sec. 1.1502-21T(d)(1) for the rule that 
applies the principles of this paragraph (d) in consolidated return 
years beginning on or after January 1, 1997, with respect to a 
consolidated return change of ownership occurring before January 1, 
1997.

    (e) Limitations on net operating loss carryovers under section 382--
(1) Section 382(a). (i) If at the end of a taxable year (consolidated or 
separate) there has been an increase in ownership of the stock of the 
common parent of a group (within the meaning of section 382(a)(1) (A) 
and (B)), and any member of the group has not continued to carry on a 
trade or business substantially the same as that conducted before any 
such increase (within the meaning of section 382(a)(1)(C)), then the 
portion of any consolidated net operating loss sustained in prior 
taxable years attributable to such member (as determined under this 
paragraph shall not be allowed as a carryover to such taxable year or to 
any subsequent taxable year.

[[Page 422]]

    (ii) If the provisions of section 382(a) disallow the deduction of a 
net operating loss carryover from a separate return year of a member of 
the group to a subsequent taxable year, no amount shall be included 
under paragraph (b) of this section as a consolidated net operating loss 
carryover to such a subsequent consolidated return year with respect to 
such separate return year of such member.
    (iii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. P, S, and T file a consolidated return for the calendar 
year 1969, reflecting a consolidated net operating loss attributable in 
part to each member. P owns 80 percent of S's stock and S owns 80 
percent of T's stock. On January 1, 1970, A purchases 50 percent of P's 
stock. During 1970 T's business is discontinued. Since there has been a 
50 percentage point increase in ownership of P, the common parent of the 
group, and since T has not continued to carry on the same trade or 
business after such increase, the portion of the 1969 consolidated net 
operating loss attributable to T shall not be included in any net 
operating loss deduction for 1970 or for any subsequent taxable years, 
whether consolidated or separate.

    (2) Section 382(b). If a net operating loss carryover from a 
separate return year of a predecessor of a member of the group to the 
taxable year is reduced under the provisions of section 382(b), the 
amount included under paragraph (b) of this section with respect to such 
predecessor shall be so reduced.
    (3) Effective date. This paragraph (e) disallows or reduces the net 
operating loss carryovers of a member as a result of a transaction to 
which old section 382 (as defined in Sec. 1.382-2T(f)(21)) applies. See 
Sec. 1.1502-21T(d)(2) for the rule that applies the principles of this 
paragraph (e) in consolidated return years beginning on or after January 
1, 1997, with respect to such a transaction.
    (f) Consolidated net operating loss. The consolidated net operating 
loss shall be determined by taking into account the following:
    (1) The separate taxable income (as determined under Sec. 1.1502-12) 
of each member of the group, computed without regard to any deduction 
under section 242;
    (2) Any consolidated capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977);
    (3) Any consolidated section 1231 net loss;
    (4) Any consolidated charitable contributions deduction;
    (5) Any consolidated dividends received deduction (determined under 
Sec. 1.1502-26 without regard to paragraph (a)(2) of that section); and
    (6) Any consolidated section 247 deduction (determined under 
Sec. 1.1502-27 without regard to paragraph (a)(1)(ii) of that section).
    (g) Groups that include insolvent financial institutions. For rules 
applicable to relinquishing the entire carryback period with respect to 
losses attributable to insolvent financial institutions, see 
Sec. 301.6402-7 of this chapter.
    (h) Effective date. Except as provided in Sec. 1.1502-21T (d)(1), 
(d)(2), and (g)(3), this section applies to consolidated return years 
beginning before January 1, 1997.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980; T.D. 8387, 56 FR 67489, Dec. 31, 1991; T.D. 8446, 
57 FR 53034, Nov. 6, 1992; T.D. 8677, 61 FR 33323, June 27, 1996. 
Redesignated and amended by T.D. 8677, 61 FR 33328, June 27, 1996]



Sec. 1.1502-22A  Consolidated net capital gain or loss generally applicable for consolidated return years beginning before January 1, 1997.

    (a) Computation--(1) Consolidated capital gain net income. The 
consolidated capital gain net income (net capital gain for taxable years 
beginning before January 1, 1977) for the taxable year shall be 
determined by taking into account:
    (i) The aggregate of the capital gains and losses (determined 
without regard to gains or losses to which section 1231 applies or net 
capital loss carryovers or carrybacks) of the members of the group for 
the consolidated return year,
    (ii) The consolidated section 1231 net gain for such year (computed 
in accordance with Sec. Sec. 1.1502-23A or 1.1502-23T), and
    (iii) The consolidated net capital loss carryovers or carrybacks to 
such year (as determined under paragraph (b) of this section).
    (2) Consolidated net capital loss. The consolidated net capital loss 
shall be

[[Page 423]]

determined under subparagraph (1) of this paragraph but without regard 
to subdivision (iii) thereof.
    (3) Special rules. For purposes of this section, capital gains and 
losses on intercompany transactions and transactions with respect to 
stock, bonds, and other obligations of a member of the group shall be 
reflected as provided in Secs. 1.1502-13, and 1.1502-19, and capital 
losses shall be limited as provided in Sec. Sec. 1.1502-15A and 1.1502-
11(c).
    (4) [Reserved]
    (5) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. (i) Corporations P, S, and T file consolidated returns on a 
calendar year basis for 1966 and 1967. The members had the following 
transactions involving capital assets during 1967: P sold an asset with 
a $10,000 basis to S for $17,000 and none of the circumstances of 
restoration described in Sec. 1.1502-13 occurred by the end of the 
consolidated return year; S sold an asset to individual A for $7,000 
which S had purchased during 1966 from P for $10,000, and with respect 
to which P had deferred a gain of $2,000; T sold an asset with a basis 
of $10,000 to individual B for $25,000. The group has a consolidated net 
capital loss carryover to the taxable year of $10,000.
    (ii) The consolidated net capital gain of the group is $4,000, 
determined as follows: P's net capital gain of $2,000, representing the 
deferred gain on the sale to S during the taxable year 1966, restored 
into income during taxable year 1967 (the $7,000 gain on P's deferred 
intercompany transaction is not taken into account for the current 
year), plus T's net capital gain of $15,000, minus S's net capital loss 
of $3,000 and the consolidated net capital loss carryover of $10,000.

    (b) Consolidated net capital loss carryovers and carrybacks--(1) In 
general. The consolidated net capital loss carryovers and carrybacks to 
the taxable year shall consist of any consolidated net capital losses of 
the group, plus any net capital losses of members of the group arising 
in separate return years of such members, which may be carried to the 
taxable year under the principles of section 1212(a). However, such 
consolidated carryovers and carrybacks shall not include any 
consolidated net capital loss apportioned to a corporation for a 
separate return year pursuant to Sec. 1.1502-79A(b) (or Sec. 1.1502-
22T(b), as appropriate) and shall be subject to the limitations 
contained in paragraphs (c) and (d) of this section. For purposes of 
section 1212(a)(1), the portion of any consolidated net capital loss for 
any taxable year attributable to a foreign expropriation capital loss is 
the amount of the foreign expropriation capital losses of all the 
members for such year (but not in excess of the consolidated net capital 
loss for such year).
    (2) Absorption rules. For purposes of determining the amount, if 
any, of a net capital loss (whether consolidated or separate) which can 
be carried to a taxable year (consolidated or separate), the amount of 
such net capital loss which is absorbed in a prior consolidated return 
year under section 1212(a)(1) shall be determined by:
    (i) Applying all net capital losses which can be carried to such 
prior year in the order of the taxable years in which such losses were 
sustained, beginning with the taxable year which ends earliest, and
    (ii) Applying all such losses which can be carried to such prior 
year from taxable years ending on the same date on a prorata basis, 
except that any portion of a net capital loss attributable to a foreign 
expropriation capital loss to which section 1212(a)(1)(B) applies shall 
be applied last.
    (c) Limitation on net capital loss carryovers and carrybacks from 
separate return limitation years--(1) General rule. In the case of a net 
capital loss of a member of the group arising in a separate return 
limitation year (as defined in paragraph (f) of Sec. 1.1502-1) of such 
member (and in a separate return limitation year of any predecessor of 
such member), the amount that may be included under paragraph (b) of 
this section (computed without regard to the limitation contained in 
paragraph (d) of this section) shall not exceed the amount determined 
under subparagraph (2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph with respect to a member of the group 
is the excess, if any, of:
    (i) The consolidated capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) for the taxable year 
(computed without regard to any net capital loss

[[Page 424]]

carryovers and carrybacks), minus such consolidated capital gain net 
income (net capital gain for taxable years beginning before January 1, 
1977) for the taxable year recomputed by excluding the capital gains and 
losses and the gains and losses to which section 1231 applies of such 
member, over
    (ii) The net capital losses attributable to such member which can be 
carried to the taxable year arising in taxable years ending prior to the 
particular separate return limitation year.
    (d) Limitation on capital loss carryovers where there has been a 
consolidated return change of ownership--(1) General rule. If a 
consolidated return change of ownership (as defined in paragraph (g) of 
Sec. 1.1502-1) occurs during the taxable year or an earlier taxable 
year, the amount which may be included under paragraph (b) of this 
section in the consolidated net capital loss carryovers to the taxable 
year with respect to the aggregate of the net capital losses 
attributable to old members of the group (as defined in paragraph (g)(3) 
of Sec. 1.1502-1) arising in taxable years (consolidated or separate) 
ending on the same day and before the taxable year in which the 
consolidated return change of ownership occurred shall not exceed the 
amount determined under subparagraph (2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph shall be the excess of:
    (i) The consolidated capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) (determined without 
regard to any net capital loss carryovers for the taxable year) 
recomputed by including only capital gains and losses and gains and 
losses to which section 1231 applies of the old members of the group, 
over
    (ii) The aggregate net capital losses attributable to the old 
members of the group which may be carried to the taxable year arising in 
taxable years ending prior to the particular loss year or years.
    (3) Cross-reference. See Sec. 1.1502-22T(d) for the rule that 
applies the principles of this paragraph (d) in consolidated return 
years beginning on or after January 1, 1997, with respect to a 
consolidated return change of ownership occurring before January 1, 
1997.
    (e) Effective date. This section applies to any consolidated return 
years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-21T(g) 
for effective dates of that section.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980; T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8677, 
33323, June 27, 1996. Redesignated and amended by T.D. 8677, 61 FR 
33333, June 27, 1996]



Sec. 1.1502-23A  Consolidated net section 1231 gain or loss generally applicable for consolidated return years beginning before January 1, 1997.

    (a) The consolidated section 1231 net gain or loss for the taxable 
year shall be determined by taking into account the aggregate of the 
gains and losses to which section 1231 applies of the members of the 
group for the consolidated return year. Section 1231 gains and losses on 
intercompany transactions shall be reflected as provided in Sec. 1.1502-
13. Section 1231 losses that are ``built-in deductions'' shall be 
subject to the limitations of Secs. 1.1502-21A(c) and 1.1502-22A(c), as 
provided in Sec. 1.1502-15A(a) (or Secs. 1.1502-21T(c) and 1.1502-
22T(c), as provided in Sec. 1.1502-15T(a), as appropriate).
    (b) Effective date. This section applies to any consolidated return 
years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-21T(g) 
for effective dates of that section.

[T.D. 7246, 38 FR 763, Jan. 4, 1973, as amended by T.D. 8677, 33323, 
June 27, 1996. Redesignated and amended by T.D. 8677, 61 FR 33334, June 
27, 1996]



Sec. 1.1502-41A  Determination of consolidated net long-term capital gain and consolidated net short-term capital loss generally applicable for consolidated 
          return years beginning before January 1, 1997.

    (a) Consolidated net long-term capital gain. The consolidated net 
long-term capital gain shall be determined by taking into account (1) 
those gains and losses to which Sec. 1.1502-22A(a) applies which are 
treated as long term under section 1222, and (2) the consolidated 
section 1231 net gain (computed in accordance with Sec. 1.1502-23A).
    (b) Consolidated net short-term capital loss. The consolidated net 
short-term

[[Page 425]]

capital loss shall be determined by taking into account (1) those gains 
and losses to which Sec. 1.1502-22A(a) applies which are treated as 
short term under section 1222, and (2) the consolidated net capital loss 
carryovers and carrybacks to the taxable year (as determined under 
Sec. 1.1502-22A(b)).
    (c) Effective date. This section applies to any consolidated return 
years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-21T(g) 
for effective dates of that section.

[T.D, 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 8677, 61 FR 
33323, June 27, 1996. Redesignated and amended by T.D. 8677, 61 FR 
33334, June 27, 1996]



Sec. 1.1502-79A  Separate return years generally applicable for consolidated return years beginning before January 1, 1997.

    (a) Carryover and carryback of consolidated net operating losses to 
separate return years--(1) In general. (i) If a consolidated net 
operating loss can be carried under the principles of section 172(b) and 
paragraph (b) of Sec. 1.1502-21A to a separate return year of a 
corporation (or could have been so carried if such corporation were in 
existence) which was a member in the year in which such loss arose, then 
the portion of such consolidated net operating loss attributable to such 
corporation (as determined under subparagraph (3) of this paragraph) 
shall be apportioned to such corporation (and any successor to such 
corporation in a transaction to which section 381(a) applies) and shall 
be a net operating loss carryover or carryback to such separate return 
year; accordingly, such portion shall not be included in the 
consolidated net operating loss carryovers or carrybacks to the 
equivalent consolidated return year. Thus, for example, if a member 
filed a separate return for the third year preceding a consolidated 
return year in which a consolidated net operating loss was sustained and 
if any portion of such loss is apportioned to such member for such 
separate return year, such portion may not be carried back by the group 
to its third year preceding such consolidated return year.
    (ii) If a corporation ceases to be a member during a consolidated 
return year, any consolidated net operating loss carryover from a prior 
taxable year must first be carried to such consolidated return year, 
notwithstanding that all or a portion of the consolidated net operating 
loss giving rise to the carryover is attributable to the corporation 
which ceases to be a member. To the extent not absorbed in such 
consolidated return year, the portion of the consolidated net operating 
loss attributable to the corporation ceasing to be a member shall then 
be carried to such corporation's first separate return year.
    (iii) For rules permitting the reattribution of losses of a 
subsidiary to the common parent in the case of loss disallowance or 
basis reduction on the disposition or deconsolidation of stock of the 
subsidiary, see Sec. 1.1502-20.
    (2) Nonapportionment to certain members not in existence. 
Notwithstanding subparagraph (1) of this paragraph, the portion of a 
consolidated net operating loss attributable to a member shall not be 
apportioned to a prior separate return year for which such member was 
not in existence and shall be included in the consolidated net operating 
loss carrybacks to the equivalent consolidated return year of the group 
(or, if such equivalent year is a separate return year, then to such 
separate return year), provided that such member was a member of the 
group immediately after its organization.
    (3) Portion of consolidated net operating loss attributable to a 
member. The portion of a consolidated net operating loss attributable to 
a member of a group is an amount equal to the consolidated net operating 
loss multiplied by a fraction, the numerator of which is the separate 
net operating loss of such corporation, and the denominator of which is 
the sum of the separate net operating losses of all members of the group 
in such year having such losses. For purposes of this subparagraph, the 
separate net operating loss of a member of the group shall be determined 
under Sec. 1.1502-12 (except that no deduction shall be allowed under 
section 242), adjusted for the following items taken into account in the 
computation of the consolidated net operating loss:

[[Page 426]]

    (i) The portion of the consolidated dividends received deduction, 
the consolidated charitable contributions deductions, and the 
consolidated section 247 deduction, attributable to such member;
    (ii) Such member's capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) (determined without 
regard to any net capital loss carryover attributable to such member);
    (iii) Such member's net capital loss and section 1231 net loss, 
reduced by the portion of the consolidated net capital loss attributable 
to such member (as determined under paragraph (b)(2) of this section); 
and
    (iv) The portion of any consolidated net capital loss carryover 
attributable to such member which is absorbed in the taxable year.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). (i) Corporation P was formed on January 1, 1966. P 
filed a separate return for the calendar year 1966. On March 15, 1967, P 
formed corporation S. P and S filed a consolidated return for 1967. On 
January 1, 1968, P purchased all the stock of corporation T, which had 
been formed in 1967 and had filed a separate return for its taxable year 
ending December 31, 1967.
    (ii) P, S, and T join in the filing of a consolidated return for 
1968, which return reflects a consolidated net operating loss of 
$11,000. $2,000 of such consolidated net operating loss is attributable 
to P, $3,000 to S, and $6,000 to T. Such apportionment of the 
consolidated net operating loss was made on the basis of the separate 
net operating losses of each member as determined under subparagraph (3) 
of this paragraph.
    (iii) $5,000 of the 1968 consolidated net operating loss can be 
carried back to P's separate return for 1966. Such amount is the portion 
of the consolidated net operating loss attributable to P and S. Even 
though S was not in existence in 1966, the portion attributable to S can 
be carried back to P's separate return year, since S (unlike T) was a 
member of the group immediately after its organization. The 1968 
consolidated net operating loss can be carried back against the group's 
income in 1967 except to the extent (i.e., $6,000) that it is 
apportioned to T for its 1967 separate return year and to the extent 
that it was absorbed in P's 1966 separate return year. The portion of 
the 1968 consolidated net operating loss attributable to T ($6,000) is a 
net operating loss carryback to its 1967 separate return.
    Example (2). (i) Assume the same facts as in example (1). Assume 
further that on June 15, 1969, P sells all the stock of T to an 
outsider, that P and S file a consolidated return for 1969 (which 
includes the income of T for the period January 1 through June 15), and 
that T files a separate return for the period June 16 through December 
31, 1969.
    (ii) The 1968 consolidated net operating loss, to the extent not 
absorbed in prior years, must first be carried to the consolidated 
return year 1969. Any portion of the $6,000 amount attributable to T 
which is not absorbed in T's 1967 separate return year or in the 1969 
consolidated return year shall then be carried to T's separate return 
year ending December 31, 1969.

    (b) Carryover and carryback of consolidated net capital loss to 
separate return years--(1) In general. If a consolidated net capital 
loss can be carried under the principles of section 1212(a) and 
paragraph (b) of Sec. 1.1502-22A to a separate return year of a 
corporation (or could have been so carried if such corporation were in 
existence) which was a member of the group in the year in which such 
consolidated net capital loss arose, then the portion of such 
consolidated net capital loss attributable to such corporation (as 
determined under subparagraph (2) of this paragraph) shall be 
apportioned to such corporation (and any successor to such corporation 
in a transaction to which section 381(a) applies) under the principles 
of paragraph (a) (1), (2) and (3) of this section and shall be a net 
capital loss carryback or carryover to such separate return year.
    (2) Portion of consolidated net capital loss attributable to a 
member. The portion of a consolidated net capital loss attributable to a 
member of a group is an amount equal to such consolidated net capital 
loss multiplied by a fraction, the numerator of which is the net capital 
loss of such member, and the denominator of which is the sum of the net 
capital losses of those members of the group having net capital losses. 
For purposes of this subparagraph, the net capital loss of a member of 
the group shall be determined by taking into account the following:
    (i) Such member's capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) or loss (determined 
without regard to any net capital loss carryover or carryback); and

[[Page 427]]

    (ii) Such member's section 1231 net loss, reduced by the portion of 
the consolidated section 1231 net loss attributable to such member.
    (c) through (e) [Reserved]
    (f) Effective date. Paragraphs (a) and (b) of this section apply to 
losses arising in consolidated return years to which Sec. 1.1502-21T(g) 
does not apply. For this purpose net operating loss deductions, 
carryovers, and carrybacks arise in the year from which they are 
carried. See Sec. 1.1502-21T(g) for effective dates of that section.

[T.D. 8677, 61 FR 33334, June 27, 1996]



DUAL CONSOLIDATED LOSSES INCURRED IN TAXABLE YEARS BEGINNING BEFORE OCTOBER 1, 1992--Table of Contents






Sec. 1.1503-2A  Dual consolidated loss.

    (a) In general. This section applies for purposes of determining 
whether and to what extent the net operating loss of a dual resident 
corporation incurred in tax years beginning after December 31, 1986, 
shall be allowed to reduce the taxable income of any other member of the 
affiliated group. Except as provided in paragraph (c) of this section, 
any dual consolidated loss of a domestic corporation incurred in taxable 
years beginning after December 31, 1986, cannot reduce the taxable 
income of any affiliate of such domestic corporation for that or any 
other taxable year, regardless of whether those losses offset income of 
another corporation under the income tax laws of the foreign country and 
regardless of whether any of the income of any corporation that the loss 
may reduce in the foreign country is, has been, or will be subject to 
tax in the United States. This rule shall also apply to preclude the use 
of a dual consolidated loss to offset any income of an affiliate 
(whether or not an election to file a consolidated return has been made) 
by means of a transaction subject to section 381 of the Code. For 
purposes of the preceding sentence, an ``affiliate'' means any member of 
the affiliated group as determined under section 1504(a) without regard 
to the exceptions contained in section 1504(b) (other than section 
1504(b)(3)) relating to includible corporations. Further, this rule 
shall also apply to preclude the use of a dual consolidated loss of a 
separate unit by a domestic corporation upon or as a result of the 
termination, liquidation, or sale of the separate unit. The following 
example illustrates the application of this paragraph (a).

    Example. P, a domestic corporation, owns all of the outstanding 
stock of DRC, a domestic corporation. DRC is managed and controlled in 
Country W, a country which determines the tax residence of corporations 
according to place of management and control. Therefore, the income of 
DRC is subject to tax in both the United States and in Country W. There 
are currently no other corporations in Country W which could use the 
losses of DRC to offset income under the income tax laws of Country W. P 
no longer wishes to operate DRC as a separate corporation. Therefore DRC 
will be liquidated into P under section 332 of the Code. Normally, P, 
under section 381, would succeed to and take into account DRC's net 
operating loss carryovers. However, this paragraph (a) prohibits the net 
operating loss of DRC from reducing P's income (including income of P 
generated by assets previously held by DRC) for U.S. tax purposes. 
Therefore, DRC's net operating loss carryovers will not be available to 
offset P's income unless one of the exceptions described in paragraph 
(c) of this section applies.

    (b) Definitions. The following definitions apply for purposes of 
this section.
    (1) Domestic corporation. For purposes of this section, the term 
``domestic corporation'' has the meaning assigned to it by sections 7701 
(a)(3) and (a)(4) and shall also include any corporation treated as a 
domestic corporation by the Internal Revenue Code, including, but not 
limited to, section 269B and section 1504(d). Subject to the rules of 
paragraph (d) of this section, any separate unit (as defined in 
paragraph (b)(4) of this section) of a domestic corporation will be 
treated as a separate domestic corporation (and as a dual resident 
corporation) for purposes of this section. The following example 
illustrates the application of this paragraph (b)(1).

    Example. A is a domestic corporation with a branch operation in 
Country X. A is owned by FP, a Country X corporation. Country X allows 
the Country X branch income and losses of A to be used to offset FP's 
losses or income. Under paragraph (d) of this section, the branch 
operations of A in Country X will

[[Page 428]]

be treated as a separate domestic corporation and as a dual resident 
corporation for purposes of this section. See paragraph (d) of this 
section for the treatment of any dual consolidated loss of the branch 
operations of A.
    (2) Dual consolidated loss. The term ``dual consolidated loss'' 
means the net operating loss (as defined in section 172(c) and the 
regulations thereunder) of a domestic corporation incurred in a year in 
which the corporation is a dual resident corporation. The fact that a 
particular item taken into account in computing such net operating loss 
deduction is not taken into account in computing income subject to 
income tax in a foreign country shall not cause such item to be excluded 
from the calculation of the dual consolidated loss. A dual consolidated 
loss shall arise even though no other person, corporation, or entity is 
permitted, under the income tax laws of the foreign country, to use by 
any means the losses, expenses or deductions of the dual resident 
corporation to offset income. A dual consolidated loss shall not 
include--
    (i) The net operating loss incurred during that portion of the 
taxable year prior to the date on which the domestic corporation becomes 
a dual resident corporation or subsequent to the date on which the 
domestic corporation ceases to be a dual resident corporation. For 
purposes of determining the amount of the net operating loss incurred in 
that portion of the taxable year prior to the date on which the domestic 
corporation becomes a dual resident corporation or subsequent to the 
date on which the domestic corporation ceases to be a dual resident 
corporation, in no event shall more than a pro rata portion of the net 
operating loss commensurate with the portion of the taxable year during 
which the domestic corporation was not a dual resident corporation be 
allocated to that portion of the taxable year in which the domestic 
corporation was not a dual resident corporation; or
    (ii) Losses incurred in taxable years beginning on or before 
December 31, 1986.
    (3) Dual resident corporation. For purposes of this section, a 
domestic corporation shall be a dual resident corporation if the 
worldwide income of such corporation is subject to the income tax of a 
foreign country, or such corporation is subject to the income tax of a 
foreign country on a residence basis (and not on a source basis).
    (4) Separate unit. Solely for purposes of this section, the term 
``separate unit'' shall mean any of the following:
    (i) A foreign branch as defined in Sec. 1.367 (a)-6T(g);
    (ii) A partnership interest; or
    (iii) A trust interest.
    (5) Subject to tax. For purposes of determining whether a domestic 
corporation is subject to the income tax of a foreign country on its 
income, the fact that the corporation has no actual tax liability to the 
foreign country for a particular taxable year shall not be taken into 
consideration.
    (c) Exceptions--(1) No ability to use dual consolidated loss under 
foreign law--(i) In general. Paragraph (a) of this section shall not 
apply to a dual consolidated loss if--
    (A) At no time after December 31, 1986, has there been any other 
person, corporation, or entity which, under the income tax laws of the 
foreign country, is permitted to use by any means the losses, expenses, 
or deductions of the dual resident corporation to offset income; and
    (B) Under the income tax laws of the foreign country, the losses, 
expenses, or deductions of the dual resident corporation incurred in 
taxable years beginning after December 31, 1986, cannot be carried over 
or back to be used, by any means, to offset the income of any other 
person, corporation, or entity in other years.
    (ii) Limitations. For purposes of paragraph (c)(1)(i) of this 
section, none of the following circumstances shall constitute a 
satisfaction of paragraph (c)(1)(i)(A) of this section--
    (A) The failure to make use of an election (including, but not 
limited to, the ability to surrender losses, expenses or deductions) 
that would enable another person, corporation, or entity to use the 
losses, expenses, or deductions of the dual resident corporation to 
offset income under the income tax laws of the foreign country;
    (B) The fact that the income tax laws of the foreign country deny 
the use of losses, expenses, or deductions of its

[[Page 429]]

corporate residents that are also residents for tax purposes of another 
country to offset income of another person, corporation, or entity;
    (C) The fact that the other person, corporation, or entity does not 
have sufficient income to benefit from an offset permitted under the 
income tax laws of the foreign country for a particular taxable year; or
    (D) The fact that the dual resident corporation has no losses, 
expenses, or deductions during a particular taxable year.
    (iii) Examples. The following examples illustrate this paragraph 
(c)(1).

    Example (1). DRC, a domestic corporation, is also subject to tax in 
Country Y on its worldwide income. DRC has been filing a consolidated 
return for U.S. income tax purposes with DP, its domestic parent. DRC 
has also been able to use its losses to offset income of its affiliates 
in Country Y by using Country Y's form of consolidation. In order to 
prevent companies like DRC from taking losses against income of 
affiliates under Country Y law and then again using the losses of DRC to 
offset income of affiliates for U.S. tax purposes. Country Y law 
prevents a company which is also subject to tax on its worldwide income 
in another country, or is subject to tax on a residence basis in another 
country, from using the Country Y form of consolidation. DRC is a dual 
resident corporation as defined in paragraph (b)(3) of this section. 
DRC's losses are dual consolidated losses as defined in paragraph (b)(2) 
of this section which under paragraph (a) of this section may not be 
used to offset income of any other U.S. affiliate of DRC. The Country Y 
statute does not cause the exception provided by this paragraph (c)(1) 
to apply.
    Example (2). P, a domestic corporation, owns DRC, a domestic 
corporation which is also subject to the income tax laws of Country Z on 
a residence basis, and FS, a Country Z corporation. Under Country Z 
laws, income or losses of DRC may not be consolidated with income or 
losses of P or FS. There is, however, a provision under Country Z's law 
by which DRC's unused losses could be carried forward, acquired, and 
used by FS if DRC is merged into FS. DRC's dual consolidated loss does 
not qualify for the exception from application of paragraph (a) provided 
by this paragraph (c)(1) because of the loss carryforward provisions 
under Country Z's income tax laws. However, DRC may qualify for an 
exemption from paragraph (a) of this section under the provisions of 
paragraph (c)(3) of this section.
    Example (3). DRC is a dual resident corporation subject to tax on a 
residence basis in foreign country Y. Under the income tax laws of Y, 
DRC could elect to use its losses to offset the income of foreign entity 
FE on a Country Y consolidated income tax return for the taxable year 
ending December 31, 1987. Regardless of whether such election is made, 
DRC fails to satisfy the requirement of paragraph (c)(1)(i)(A) of this 
section.
    Example (4). The same facts apply as in Example (3), except that 
Country Y changes its income tax law, effective as of January 1, 1987, 
to prevent the consolidation of losses by dual resident corporations. 
Under paragraph (c)(1)(ii)(B) of this section, the fact that this 
Country Y legislation prevents DRC from using its losses to offset the 
income of FE is disregarded and DRC fails to satisfy the requirement of 
paragraph (c)(1)(i)(A) of this section.
    Example (5). The same facts apply as in Example (4), except that FE 
has no taxable income in taxable years 1987 through 1989. Moreover, DRC 
is profitable throughout this period and consequently has no losses 
which it could share with FE. Under paragraphs (c)(1)(ii) (C) and (D) of 
this section, the fact that FE would not receive a tax benefit from 
consolidation with DRC on a Country Y return is disregarded and DRC 
fails to satisfy the requirement of paragraph (c)(1)(i)(A) of this 
section. Because DRC does not have a net operating loss during 1987 
through 1989, section 1503(d) does not affect the consolidation of DRC 
on a U.S. return for these years. However, DRC's failure to satisfy 
paragraph (c)(1)(i)(A) of this section at all times after December 31, 
1986 will make it ineligible for the exception described in paragraph 
(c)(1) of this section with respect to any future taxable year in which 
it incurs a net operating loss.
    Example (6). The same facts apply as in Example (5). In 1990, FE is 
transferred and is no longer eligible for consolidation on a Country Y 
return. There are no other entities with which DRC could consolidate 
under the income tax laws of Y. Nevertheless, since FE and DRC could 
have consolidated on a Country Y return during the period after December 
31, 1986 and before the transfer of FE, DRC fails to satisfy the 
requirement of paragraph (c)(1)(i)(A) of this section in 1990 and in all 
future taxable years.

    (2) Elective agreement in place between United States and the 
foreign country. Paragraph (a) of this section shall not apply to a dual 
consolidated loss to the extent such loss is subject to an election by 
the dual resident corporation to deduct the loss in the United States 
pursuant to an agreement entered into between the United States and the 
foreign country which puts into place an elective procedure through 
which losses would offset income in only one country.

[[Page 430]]

    (3) Agreement to amend returns upon later use of losses, expenses, 
or deductions of a dual resident corporation--(i) In general. 
Notwithstanding that, under the income tax laws of the foreign country, 
the losses, expenses, or deductions of the dual resident corporation can 
be carried over or back to offset, by some means, the income of any 
other person, corporation, or entity in other taxable years, paragraph 
(a) of this section shall not apply to a dual consolidated loss of that 
dual resident corporation if the requirements described in this 
paragraph (c)(3)(i) are satisfied.
    (A) At no time after December 31, 1986, has there been any other 
person, corporation, or entity which, under the income tax laws of the 
foreign country, is permitted to use by any means the losses, expenses, 
or deductions of the dual resident corporation to offset income. For 
purposes of the preceding sentence, none of the circumstances described 
in paragraphs (c)(1)(ii) (A) through (D) of this section shall 
constitute a satisfaction of this paragraph (c)(3)(i)(A).
    (B) The affiliated group or, if there is no affiliated group filing 
a consolidated return, the dual resident corporation which incurs the 
loss, files with its U.S. tax return for the taxable year in which the 
dual consolidated loss arises a binding agreement described in 
paragraphs (c)(3) (ii) and (iii) of this section. The agreement must be 
filed under this paragraph (c)(3) even if the only effect of the dual 
consolidated loss is to increase a net operating loss for U.S. tax 
purposes.
    (ii) Description of agreement. Except as otherwise provided in 
paragraph (c)(3)(viii) of this section, the agreement described in this 
paragraph (c)(3)(ii) must be attached to, and filed by the due date 
(including extensions) of, the tax return of the affiliated group or 
dual resident corporation for the taxable year in which the dual 
consolidated loss arises. The agreement must be signed under penalties 
of perjury by the person who signs the tax return of the group or dual 
resident corporation. The agreement must include the following items, in 
paragraphs labeled to correspond with the subdivisions set forth below:
    (A) The name, address, identifying number, and place and date of 
incorporation of the dual resident corporation and the country or 
countries which tax the dual resident corporation on a residence basis 
or which tax the worldwide income of the dual resident corporation;
    (B) A statement that the document submitted constitutes the 
agreement of the affiliated group or dual resident corporation in 
accordance with the requirements of Sec. 1.1503-2T(c)(3);
    (C) A statement of the amount of the dual consolidated loss to be 
covered by the agreement and the year in which it arose;
    (D) The agreement of the group or dual resident corporation to amend 
returns, as described in paragraph (c)(3)(iii) of this section;
    (E) A waiver of the period of limitations, as described in paragraph 
(c)(3)(iv) of this section; and
    (F) An agreement to file with the tax returns of the group or dual 
resident corporation for each of the fifteen years following the year 
the dual consolidated loss arose a waiver of the period of limitation, 
as described in paragrapah (c)(3)(iv) of this section, and a 
certification as described in paragraph (c)(3)(v) of this section.
    (iii) Terms of agreement. The affiliated group or dual resident 
corporation must agree that if there is a ``triggering event'' described 
in this paragraph (c)(3)(iii), then, the affiliated group filing a 
consolidated return, or if there is no affiliated group filing a 
consolidated return, the dual resident corporation, shall, within 90 
days after the date of occurrence of the triggering event, file an 
amended U.S. income tax return for the taxable year in which the dual 
consolidated loss arose reporting the dual consolidated loss on the 
amended return as a loss to which paragraph (a) of this section applies. 
An amended U.S. income tax return must also be filed for any other 
taxable year in which the tax liability increases as a result of such 
applications of paragraph (a) of this section. In addition, upon 
examination, the group or dual resident corporation must provide to the 
District Director a schedule of the amended carryforward and carryback 
losses and credits for each of the group's or dual

[[Page 431]]

resident corporation's taxable years for which no amended return is 
required to be filed pursuant to this paragraph (c)(3)(iii). For 
purposes of section 6601, the last date prescribed for payment of the 
additional amount of tax shown on an amended return filed pursuant to 
this paragraph (c)(3)(iii) shall be the same date as the date prescribed 
for the payment of tax for the taxable year with respect to which the 
amended return is filed. Any of the following events shall constitute a 
``triggering event'' for purposes of this section--
    (A) There is a failure for any taxable year to file the annual 
waiver or certification described in paragraphs (c)(3)(iv) and (v) of 
this section.
    (B) Prior to the close of the fifteenth taxable year following the 
taxable year in which the dual consolidated loss arose, any of the 
following events--
    (1) There is a failure to satisfy both the requirement of paragraph 
(c)(3)(i)(A) of this section and the requirements of paragraph (c)(4) of 
this section;
    (2) Where the agreement is made by an affiliated group filing a 
consolidated return, the dual resident corporation (or its successor-in-
interest) ceases to be a member of the affiliated group;
    (3) Where the agreement is made by a dual resident corporation that 
is not a member of an affiliated group filing a consolidated return, the 
dual resident corporation is no longer in existence; or
    (4) Where the dual resident corporation is a separate unit of a 
domestic corporation, the domestic corporation sells or transfers the 
dual resident corporation.
    (iv) Waiver of period of limitation. The affiliated group or the 
dual resident corporation (or the successor-in-interest of such group or 
dual resident corporation) must file, with the agreement to amend 
returns and with the tax return for each of the fifteen taxable years 
following the taxable year in which the dual consolidated loss arose, a 
waiver of the limitation on assessment of any tax resulting from the 
amendment of any return as described in paragraph (c)(3)(iii) of this 
section. The waiver shall extend the period for assessment of such tax 
to a date not earlier than three years after the return is filed for the 
fifteenth taxable year following the taxable year in which the dual 
consolidated loss arose. The waiver shall also contain such other terms 
with respect to assessment as may be considered by the Commissioner to 
be necessary to insure the assessment and collection of the correct tax 
liability for each year for which the waiver is required. The waiver 
must be signed by a person authorized to sign the agreement described in 
paragraph (c)(3)(ii) of this section. A failure, at any time, to comply 
with the requirements of this paragraph (c)(3) or with the terms of any 
agreement filed pursuant to this paragraph (c)(3) shall extend the 
period of assessment of such tax until three years after the date on 
which the Internal Revenue Service receives actual notice of the use of 
or of the ability to use the losses, expenses, or deductions of the dual 
resident corporation to offset the income of another person, 
corporation, or entity under the income tax laws of the foreign country.
    (v) Annual certification. The affiliated group or the dual resident 
corporation (or the successor-in-interest of such group or dual resident 
corporation) must file with its income tax return for each of the 
fifteen taxable years following the taxable year in which the dual 
consolidated loss arose a certification that the losses, expenses, or 
deductions of the dual resident corporation were not used or permitted 
to be used to offset the income of another person, corporation, or 
entity under the income tax laws of a foreign country. The annual 
certification pursuant to this paragraph (c)(3)(v) must be signed under 
penalties of perjury by a person authorized to sign the agreement 
described in paragraph (c)(3)(ii) of this section. The certification 
must identify the dual consolidated loss with respect to which it is 
given by setting forth the taxpayer's year in which the loss arose and 
the amount of such loss and must warrant that arrangements have been 
made to insure that the group or dual resident corporation will be 
informed of any subsequent use of or ability to use the losses, 
expenses, or deductions of the dual resident corporation to offset the 
income of another person, corporation, or entity

[[Page 432]]

under the income tax laws of the foreign country. If dual consolidated 
losses of more than one taxable year are subject to the rules of this 
paragraph (c)(3), the certifications for those years may be combined in 
a single document, but each dual consolidated loss must be separately 
identified.
    (vi) Special rules for a succeeding group or a successor-in-
interest--(A) Ceasing to be a member of the affiliated group. For 
purposes of this paragraph (c)(3), and except as otherwise provided in 
this paragraph (c)(3)(vi), a dual resident corporation shall be deemed 
to have ceased to be a member of the affiliated group that filed the 
agreement described in paragraph (c)(3)(ii) of this section if it is no 
longer a member of that group, as defined in Sec. 1.1502-1(b), or if the 
group ceases to exist because the common parent is no longer in 
existence or is no longer a common parent or the group no longer files 
on the basis of a consolidated return. However, the obligation to file 
an amended return pursuant to the agreement described in paragraph 
(c)(3)(ii) of this section shall not apply and the dual resident 
corporation shall not be deemed to have ceased to be a member of the 
group for purposes of this paragraph (c)(3) where the dual resident 
corporation ceases to be a member of the group solely by reason of an 
acquisition of its assets by a member of the group in a transaction to 
which section 381(a) applies provided the successor-in-interest of the 
dual resident corporation continues to be a member of the group.
    (B) Special rules for a succeeding group. The obligation to file an 
amended return pursuant to the agreement described in paragraph 
(c)(3)(ii) of this section shall not apply where the dual resident 
corporation becomes a member of a succeeding group as a result of an 
acquisition described in Sec. 1.1502-13(f)(2)(i) (a) or (b) (relating 
generally to the acquisition of assets of, by, or from a member of the 
affiliated group in a tax-free reorganization) and the succeeding group 
attaches to, and files with, its timely filed (including extensions) tax 
return for the taxable year in which the acquisition takes place a 
binding agreement--
    (1) Which sets forth the same terms as are described in paragraph 
(c)(3)(ii) of this section,
    (2) In which the group agrees to be bound by the terms of the 
agreement previously filed by the terminating group, and
    (3) In which the group agrees to all the terms set forth in 
paragraph (c)(3)(iii) of this section.

The agreement must be signed under penalties of perjury by the person 
who signs the tax return of the succeeding group.
    (C) Special rules for a successor-in-interest. In the case of a dual 
resident corporation that was not a member of an affiliated group filing 
a consolidated return in the taxable year in which the dual consolidated 
loss arose and that filed an agreement described in paragraph (c)(3)(ii) 
of this section, the assets of which are acquired in a transaction 
described in section 381(a), such corporation shall not be required to 
file an amended return pursuant to paragraph (c)(3)(iii)(B)(3) of this 
section provided its successor-in-interest attaches a binding agreement 
to its timely filed (including extensions) tax return for the taxable 
year in which the acquisition takes place. The agreement must be signed 
under penalties of perjury by the person who signs the tax return of the 
successor-in-interest. The agreement must:
    (1) Set forth the same terms as are described in paragraph 
(c)(3)(ii) of this section,
    (2) State the agreement of the successor-in-interest to be bound by 
the terms of the agreement previously filed by the dual resident 
corporation, and
    (3) State the agreement of the successor-in-interest to all the 
terms set forth in paragraph (c)(3)(iii) of this section.
    (vii) Definitions. For purposes of this section--
    (A) The terms succeeding group and terminating group shall have the 
same meaning as in Sec. 1.1502.13(f)(2)(i); and
    (B) The term successor-in-interest shall mean an acquiring 
corporation that succeeds to the tax attributes of an acquired 
corporation under the provisions of section 381 by reason of a 
transaction described in section 381(a).

[[Page 433]]

    (viii) Transition rules. An affiliated group or a dual resident 
corporation (or a succeeding group or a successor-in-interest of a dual 
resident corporation) that meets the eligibility requirements described 
in paragraph (c)(3)(ix) of this section will be permitted to apply the 
transition rules in this paragraph (c)(3)(viii) for taxable years ending 
before December 31, 1989.
    (A) The agreement in satisfaction of paragraph (c)(3) (ii) or (vi) 
of this section may be attached to the timely filed (including 
extensions) tax return of the affiliated group or of the dual resident 
corporation (or the succeeding group or the successor-in-interest of 
such dual resident corporation) for the first taxable year which ends on 
or after December 31, 1989. The agreement required for each of the 
taxable years ending before December 31, 1989 and for the first taxable 
year ending on or after December 31, 1989 may be combined on a single 
document.
    (B) The requirement of paragraphs (c)(3)(iv) and (c)(3)(v) of this 
section regarding the filing of an annual waiver of the period of 
limitation and certification shall be satisfied for the taxable years 
ending before December 31, 1989, and no failure to file shall be deemed 
to have occurred with respect to such taxable years for purposes of 
paragraph (c)(3)(iii)(A) of this section if the waivers and 
certifications required under paragraphs (c)(3)(iv) and (c)(3)(v) of 
this section are filed with the tax return for the first taxable year 
ending on or after December 31, 1989.
    (ix) Eligibility for transition rules. The rules in paragraph 
(c)(3)(viii) of this section shall apply only if, as of the date of the 
agreement in satisfaction of paragraph (c)(3) (ii) or (vi) of this 
section and filed pursuant to paragraph (c)(3)(viii) of this section, 
none of the triggering events described in paragraph (c)(3)(iii)(B) of 
this section has occurred.
    (4) No ability to use dual consolidated loss under foreign law after 
restructuring--(i) In general. Notwithstanding that a dual resident 
corporation fails to satisfy either paragraph (c)(1)(i)(A) or 
(c)(3)(i)(A) of this section, paragraph (a) of this section shall not 
apply to any dual consolidated loss (or portion of a dual consolidated 
loss) described in paragraph (c)(4)(iii) of this section provided the 
requirements of either paragraph (c)(1)(i)(B) or (c)(3)(i)(B) of this 
section are satisfied and a restructuring that meets the requirements of 
paragraph (c)(4)(ii) of this section has been completed.
    (ii) Qualified restructuring. A restructuring meets the requirements 
of this paragraph (c)(4)(ii) if it is completed on or before December 
31, 1989, in the foreign country so that at all times from the date of 
such restructuring to the close of the taxable year in which the dual 
consolidated loss arises, there is no other person, corporation, or 
entity which, under the income tax laws of the foreign country, is 
permitted to use by any means the losses, expenses, or deductions of the 
dual resident corporation to offset income. For purposes of the 
preceding sentence, none of the circumstances described in paragraphs 
(c)(1)(ii) (A) through (D) of this section shall constitute a 
satisfaction of this paragraph (c)(4)(ii).
    (iii) Qualified losses. Losses to which paragraph (c)(4)(i) of this 
section applies are the dual consolidated losses of a dual resident 
corporation that arise in a taxable year beginning after the 
restructuring described in paragraph (c)(4)(ii) of this section (or the 
portion of any dual consolidated loss that arises during that portion of 
the taxable year following the restructuring described in paragraph 
(c)(4)(ii) of this section). For purposes of determining the amount of 
the dual consolidated loss which arises in that portion of the taxable 
year following the restructuring, in no event shall more than a pro rata 
portion of the dual consolidated loss commensurate with the portion of 
the taxable year beginning with the date of completion of the 
restructuring and ending on the last day of that same taxable year be 
allocated to that portion of the taxable year following the 
restructuring.
    (d) Special rule for separate units--(1) Separate units 
characterized as corporations under foreign law. If a separate unit of a 
domestic corporation consists of an interest in an entity (including a 
foreign branch) that for U.S. tax purposes is not taxable as an 
association, but the entity is subject to income tax

[[Page 434]]

in a foreign jurisdiction as a corporation either on its worldwide 
income or on a residence basis (and not on a source basis), then for 
purposes of this section such separate unit of the domestic corporation 
will be treated as if it were a dual resident corporation and a wholly-
owned domestic subsidiary of the domestic corporation. For purposes of 
paragraphs (c) (3) and (4) of this section, any agreement, waiver and 
certification required to be filed with respect to such dual resident 
corporation shall be filed with the federal income tax return of the 
domestic corporation owning the separate unit or by the affiliated group 
with which the domestic corporation files a consolidated return.
    (2) Other separate units. Except as provided in paragraph (d)(3) of 
this section, if a separate unit of a domestic corporation (other than a 
separate unit described in paragraph (d)(1) of this section) is 
permitted under the income tax laws of a foreign country--
    (i) To use its losses, expenses, or deductions to offset the income 
of any other person, corporation, or entity in the taxable year in which 
the dual consolidated loss arises; or
    (ii) To carry over or back its losses, expenses, or deductions so 
that they may offset the income of any other person, corporation, or 
entity in other years, then such separate unit will be treated for 
purposes of this section as if it were a dual resident corporation and a 
wholly-owned domestic subsidiary of the domestic corporation. For 
purposes of the preceding sentence, none of the circumstances described 
in paragraphs (c)(1)(ii) (A) through (D) of this section shall preclude 
a separate unit from being treated as a dual resident corporation and a 
separate domestic corporation under this paragraph (d)(2). This 
paragraph (d)(2) applies regardless of whether the domestic corporation 
is a member of an affiliated group, and, if it is, regardless of whether 
the group files a consolidated return.
    (3) Certification. Paragraph (d)(2) of this section shall not apply 
with respect to any taxable year for which the domestic corporation 
owning the separate unit (or the affiliated group of which the domestic 
corporation is a member) files a certification as described in this 
paragraph (d)(3). The certification must be attached to, and filed by 
the due date (including extensions) of, the federal income tax return of 
the domestic corporation owning the separate unit (or the affiliated 
group with which the domestic corporation files a consolidated return) 
for the taxable year to which it applies. With respect to returns filed 
without an attached certification for taxable years ending before 
December 31, 1989, the certification in satisfaction of this paragraph 
(d)(3) may be attached to the return for the first taxable year ending 
on or after December 31, 1989. The certification must be signed under 
penalties of perjury by the person who signs the return. The 
certification must include the following items, in paragraphs labeled to 
correspond with the subdivisions set forth below:
    (i) A statement that the document submitted constitutes the 
certification required under the provisions of Sec. 1.1503-2T(d)(3);
    (ii) Identification of the separate unit, including the name under 
which it conducts business and its principal activity;
    (iii) Identification of the total losses, expenses, and deductions 
incurred by the separate unit and included on the tax return for the 
taxable year;
    (iv) Certification that no portion of the separate unit's losses, 
expenses or deductions identified above has been or will be used to 
offset the income of any other person, corporation, or entity under the 
income tax laws of the foreign country; and
    (v) An agreement to comply with the recapture and interest charge 
requirements of paragraph (d)(4) of this section.

If the domestic corporation has more than one separate unit, the 
certification described above may be made on a single document, but the 
total losses, expenses, and deductions must be separately identified for 
each separate unit to which the certification applies.
    (4) Recapture upon subsequent use. If in any taxable year any 
portion of the losses, expenses, or deductions of a separate unit which 
were the subject of a certification filed under paragraph (d)(3) of this 
section are used by any means to offset the income of any

[[Page 435]]

other person, corporation, or entity under the income tax laws of a 
foreign country, then the total amount of the dual consolidated loss 
shall be recaptured and reported as income on the tax return of the 
domestic corporation (or the affiliated group with which the domestic 
corporation files a consolidated return) for the taxable year that 
includes the last day of the taxable year for foreign tax purposes 
during which such use occurred. In addition, the domestic corporation 
owning the separate unit (or the affiliated group with which the 
domestic files a consolidated return) shall pay an interest charge on 
the amount of additional tax owed as a result of the recapture described 
in the preceding sentence. Such interest shall be determined under the 
rules of section 6601(a) as if the additional amount of tax had accrued 
and been due and owing for the taxable year in which the losses, 
expenses, or deductions giving rise to the recapture gave rise to a tax 
benefit for U.S. income tax purposes. For purposes of this paragraph 
(d)(4), a tax benefit will be considered to have arisen in a taxable 
year in which a loss that would have been considered a dual consolidated 
loss if paragraph (d)(3) of this section had not applied has reduced the 
U.S. income tax liability of the domestic corporation or of the 
affiliated group with which it files a consolidated return.
    (5) Treatment of separate units as separate entities--(i) In 
general. A separate unit of a domestic corporation will be treated as a 
separate entity for purposes of determining under this section whether 
losses of one entity are permitted under the income tax laws of the 
foreign country to offset the income of another entity.
    (ii) Exception for separate units in same country. If two or more 
separate units (not described in paragraph (d)(1) of this section) 
located in the same foreign country are owned by a single domestic 
corporation and the income and losses of such units are consolidated on 
an income tax return in that foreign country, then the separate units 
will be treated as one separate unit for purposes of paragraph (d)(2) of 
this section.
    (6) Examples. The following examples illustrate this paragraph (d).

    Example (1). X, a member of a U.S. affiliated group, has a foreign 
branch (as defined in Sec. 1.367(a)-6T(g)) in Country Y. Under the 
Country Y income tax laws, the branch will be taxed as a permanent 
establishment and its income and losses may be used (on an elective 
basis) in the Country Y form of consolidation to offset the income of Z, 
an affiliate of X, under Country Y law. The branch of X incurs a net 
operating loss during the taxable year ending December 31, 1987. The 
foreign branch of X will be treated as a separate domestic corporation 
and a dual resident corporation under paragraph (d)(2) of this section, 
and its net operating loss will constitute a dual consolidated loss. 
Consequently, under paragraph (a) of this section, the branch's net 
operating loss may not be used to offset the income of any other U.S. 
affiliate or any income of X other than income derived from the branch 
operations. However, the branch will not be treated as a dual resident 
corporation if X (or the affiliated group of which X is a member) files 
a certification for the taxable year as described in paragraph (d)(3) of 
this section that its net operating loss was not in fact used by Z (or 
any other entity) to offset income under the Country Y income tax laws, 
and that such loss will be recaptured if it is so used in the future.
    Example (2). X is classified as a partnership for U.S. tax purposes 
under Code section 7701 and applicable regulations. A, B and C are the 
sole partners of X. A and B are domestic corporations and C is a 
resident of foreign country Y. Under Country Y's law, X is classified as 
a corporation and its income and losses may be used in the Country Y 
form of consolidation to offset the income of the companies that are 
affiliates of X. X generates net operating losses. The partnership 
interests held by A and B are each treated as separate domestic 
corporations and dual resident corporations under paragraph (d)(1) of 
this section. A's and B's pro rata share of the losses of X are dual 
consolidated losses as defined in paragraph (b)(2) of this section. 
Under paragraph (a) of this section, the losses of X may not be used to 
offset the income of any other U.S. affiliate. A's pro rata share of 
losses of X may be used by A only to offset A's pro rata share of income 
of X. However, paragraph (a) of this section shall not apply to A's pro 
rata share of losses of X if A meets one of the exceptions described in 
paragraph (c) of this section. The same principles apply to limit the 
use of losses allocated to B.
    Example (3). Domestic corporation W owns two unincorporated business 
operations in Country Y. The two businesses, A and B, constitute 
separate foreign branches (as defined in Sec. 1.367(a)-6T(g)). Under the 
tax laws of

[[Page 436]]

Country Y, A is treated as a separate corporation and taxed on a 
residence basis. Thus, A is a separate unit described in paragraph 
(d)(1) of this section. B is not a separate unit described in paragraph 
(d)(1) of this section. W is a calendar year taxpayer for both United 
States and Country Y purposes. During the calendar year ending December 
31, 1987, A operated at a loss and B was profitable. Country Y allows 
both of W's branches to report their combined operations on a single 
income tax return. Thus, the losses incurred by A may be used on the 
1987 Country Y return to offset the income of B. A will be treated as a 
dual resident corporation under paragraph (d)(1) of this section. 
Because A is a separate unit described in paragraph (d)(1) of this 
section, paragraph (d)(5)(i) of this section treats A and B as separate 
entities for purposes of determining whether the losses, expenses, or 
deductions of A may be used to offset the income of another person, 
corporation, or entity and the exception in paragraph (d)(5)(ii) of this 
section does not apply. Since the loss incurred by A may be used to 
offset B's income under foreign tax laws, W will not qualify for the 
exceptions described in paragraph (c) of this section. Accordingly, W 
will report the income from B on its 1987 U.S. tax return, but will not 
be allowed to use the losses from A to offset that income or the income 
from any source other than from the operations of A.

    (e) Special rule for use of dual consolidated loss to offset tainted 
income--(1) In general. The dual consolidated loss of any dual resident 
corporation that ceases to be a dual resident corporation shall not be 
used to offset income of such corporation to the extent that such income 
is tainted income as defined in paragraph (e)(2) of this section.
    (2) Tainted income defined. Tainted income is any income derived 
from tainted assets (as defined in paragraph (e)(3) of this section), 
during the period beginning on the date of the transfer or acquisition 
of tainted assets and ending at the close of the fifteenth taxable year 
following the taxable year in which the dual resident corporation ceased 
to be a dual resident corporation.
    (3) Tainted assets defined. Tainted assets are any assets 
transferred to or acquired by a dual resident corporation in a non-
recognition transaction (as defined in section 7701(a)(45)) at any time 
during the three taxable years immediately preceding the taxable year in 
which such dual resident corporation ceased to be a dual resident 
corporation or at any time during the 15 taxable years immediately 
following the taxable year in which a dual resident corporation ceased 
to be a dual resident corporation. Tainted assets shall not include 
assets that were transferred to or acquired by such dual resident 
corporation on or before December 31, 1986.
    (4) Exception. For assets transferred to or acquired by a dual 
resident corporation prior to the time it ceased to be a dual resident 
corporation, if it can be shown that, for the year in which assets were 
transferred to or acquired by such corporation, the corporation did not 
incur a dual consolidated loss (or carry forward a dual consolidated 
loss to such year) and that there was a valid business reason for the 
transfer or acquisition of such assets, the income derived from such 
assets shall not be subject to the limitation described in paragraph 
(e)(1) of this section.
    (f) Special rules for accounting for dual consolidated losses--(1) 
Determination of amount of dual consolidated loss--(i) Dual resident 
corporation that is a member of an affiliated group. For purposes of 
determining whether a dual resident corporation that is a member of an 
affiliated group filing a consolidated return has a dual consolidated 
loss for the taxable year, the dual resident corporation shall compute 
its taxable income (or loss) in accordance with the provisions of 
Sec. 1.1502-12 (relating to computation of separate taxable income of a 
member of an affiliated group filing a consolidated return), determined 
by taking into account the adjustments provided in Sec. 1.1502-21T(b), 
that is:
    (A) The portion of the consolidated dividends received deduction, 
the consolidated charitable contributions deductions, and the 
consolidated section 247 deduction, attributable to such member;
    (B) Such member's capital gain net income (determined without regard 
to any net capital loss carryover attributable to such member);
    (C) Such member's net capital loss and section 1231 net loss, 
reduced by the portion of the consolidated net capital loss attributable 
to such member

[[Page 437]]

(as determined under paragraph (b)(2) of Sec. 1.1502-22T(b); and
    (D) The portion of any consolidated net capital loss carryover 
attributable to such member which is absorbed in the taxable year.

For purposes of this paragraph (f), any income, gain, or loss of a dual 
resident corporation shall not be deferred or eliminated under 
Sec. 1.1502-13 (b)(2) or (c), or Sec. 1.1502-14. Further, sections 267 
and 163(e)(3) shall not apply.
    (ii) Dual resident corporation that is a separate unit of a domestic 
corporation. For purposes of determining whether a dual resident 
corporation that is a separate unit of a domestic corporation has a dual 
consolidated loss for the taxable year, the dual resident corporation 
shall compute its taxable income (or loss) as if it were a separate 
domestic corporation and a dual resident corporation, using only those 
items of income, expenses, and deductions which are otherwise 
attributable to such separate unit.
    (2) Effect of dual consolidated loss. For any taxable year in which 
a dual resident corporation has a dual consolidated loss to which 
paragraph (a) of this section applies, the following rules shall apply.
    (i) If the dual resident corporation is a member of an affiliated 
group filing a consolidated return, then such affiliated group shall 
compute its taxable income without regard to the items of income, loss, 
or deduction of the dual resident corporation for the taxable year. The 
amount of taxable loss of the dual resident corporation for the taxable 
year shall be the amount of dual consolidated loss determined under 
paragraph (f)(1)(i) of this section. Such loss may be carried over or 
back for use in other taxable years as a net operating loss deduction by 
the dual resident corporation to the extent permitted under section 172. 
However, such loss shall be treated as a loss incurred by the dual 
resident corporation in a separate return limitation year, and, 
including in the case of a dual resident corporation that is a common 
parent, shall be subject to all of the limitations of Sec. Sec. 1.1502-
21A(c)(2) or 1.1502-21T(c) (as appropriate) (relating to limitations on 
net operating loss carryovers and carrybacks from separate return 
limitation years).
    (ii) If the dual resident corporation is a separate unit of a 
domestic corporation, then such domestic corporation and the affiliated 
group with which it may file a consolidated return shall compute taxable 
income for the taxable year without regard to the items of income, loss, 
or deductions of the dual resident corporation for the current year. 
Further, the loss of the dual resident corporation (the separate unit of 
the domestic corporation) shall be treated as a loss incurred by a 
separate corporation and its use shall be subject to all of the 
limitations of Sec. Sec. 1.1502-21A(c)(2) or 1.1502-21T(c) (as 
appropriate) (relating to limitations on net operating loss carryovers 
and carrybacks from separate return limitation years), as if such dual 
resident corporation were filing a consolidated return with the domestic 
corporation or with the affiliated group with which the domestic 
corporation files a consolidated return.
    (3) Basis adjustments for dual consolidated losses. When a dual 
resident corporation is a member of an affiliated group filing a 
consolidated return, each member owning stock in the dual resident 
corporation shall adjust the basis of the stock in the manner described 
in subparagraphs (i) and (ii) of this paragraph (f)(3).
    (i) Positive adjustment. Adjustments shall be made in accordance 
with the principles of Sec. 1.1502-32(b)(1), except that there shall be 
no positive adjustment under Sec. 1.1502-32(b)(1)(ii) for any amount of 
the dual consolidated loss which is not absorbed. There shall be no 
positive adjustment for any amount included in income upon the use of a 
dual consolidated loss in a foreign country under Sec. 1.1503-2T(c)(3).
    (ii) Negative adjustments. Adjustments shall be made in accordance 
with the principles of Sec. 1.1502-32(b)(2), except that there shall be 
no negative adjustments under Sec. 1.1502-32(b)(2)(ii) for the amount of 
the dual consolidated loss.
    (4) Examples. The following examples illustrate this paragraph (f).

    Example (1). (i) P, S1, S2, and T are domestic corporations. P owns 
all of the stock of S1 and S2. S2 owns all of the stock of T. T is

[[Page 438]]

a dual resident corporation. None of the exceptions described in 
paragraph (c) apply with respect to T. P, S1, S2, and T have filed and 
continue to file a consolidated federal income tax return. X, Y, and 
Bank are corporations which are not members of the affiliated group of 
which P is the common parent.
    (ii) At the beginning of 1989, P had a basis in S2 of $1000. S2 had 
a basis in T of $500.
    (iii) In 1989, T had an interest expense of $100 on a loan from 
Bank. T sold a noncapital item u in which it had a basis of $10 to S1 
for $50. T sold noncapital item v in which it had a basis of $200 to S1 
for $100. The sale of u and v are deferred intercompany transactions 
described in Sec. 1.1502-13(a)(2). S1 had separate taxable income 
calculated in accordance with Sec. 1.1502-12 of $200. In addition, S1 
sold item w in which it had a basis of $50 to T for $100. The sale of 
item w is a deferred intercompany transaction described in Sec. 1.1502-
13(a)(2). P and S2 had no items of income, loss, or deduction for 1989.
    (iv) For purposes of determining whether T has a dual consolidated 
loss in 1989 and the amount of such dual consolidated loss, T's taxable 
income (loss) is calculated under paragraph (f)(1) as follows:

($100).  interest expense to Bank                                       
($100).  sale of item v to S1                                           
$40....  sale of item u to S1                                           
--------                                                                
($160).                                                                 
                                                                        

T therefore has a dual consolidated loss of $160 for 1989.
    (v) Because T has a dual consolidated loss for the year, the 
consolidated taxable income of the P affiliated group is calculated 
without regard to the items of income, loss, or deduction of T. However, 
T is still a member of the P affiliated group. Therefore, the 
consolidated taxable income of the P group is $200 (attributable solely 
to the income of S1). The $50 gain recognized by S1 upon the sale of 
item w to T is deferred pursuant to Sec. 1.1502-13(c)(1).
    (vi) S2 may not make the positive adjustment provided for in 
Sec. 1.1502-32(b)(1)(ii) to its basis in T for the dual consolidated 
loss incurred by T. However, S2 must make the negative adjustment 
provided for in Sec. 1.1502-32(b)(2)(i) for the amount of its allocable 
part of the deficit in earnings and profits of T for the taxable year. 
Thus, as provided in Sec. 1.1502-32(e)(1), S2 shall make a net negative 
adjustment to its basis in T of $160 and S2's basis in T is now $340. As 
provided in Sec. 1.1502-33(b)(4)(ii)(a), S2's earnings and profits for 
1989 must reflect S2's decrease in its basis in T stock for the taxable 
year. Since S2 has no other earnings and profits for the taxable year, 
S2 has a deficit in earnings and profits of $160 for the taxable year. 
As provided in Sec. 1.1502-32(b)(2)(i), P must make a negative 
adjustment for the amount of its allocable part of the deficit in 
earnings and profits of S2 for the taxable year. Thus, P must make a net 
negative adjustment to its basis in S2 of $160 and P's basis in S2 is 
now $840.
    Example (2). (i) The facts are the same as in Example (1), except 
that in 1990, S1 sold items u and v to X for no gain or loss. T incurred 
an interest expense of $100 on a loan from Bank. T also sold item q in 
which it had a basis of $50 to S1 for $100. T also sold item r in which 
it had a basis of $100 to Y for $300. P and S2 had no items of income, 
loss, or deduction for 1990.
    (ii) For purposes of determining whether T has a dual consolidated 
loss in 1990 and the amount of such dual consolidated loss, T's taxable 
income (loss) is:

($100).  interest expense to Bank                                       
$50....  sale of item q to S1                                           
$200...  sale of item r to Y                                            
--------                                                                
$150...                                                                 
                                                                        

T therefore has no dual consolidated loss for 1990.
    (iii) Since T does not have a dual consolidated loss for the taxable 
year, the group's consolidated taxable income is calculated in 
accordance with the general rule of Sec. 1.1502-11 and not in accordance 
with the rule of Sec. 1.1503-2T(f)(2). T has separate taxable income 
calculated in accordance with Sec. 1.1502-12 of $100. On the disposition 
of items u and v outside the P affiliated group, no gain or loss is 
restored to income to T in accordance with Sec. 1.1502-13(f)(1)(i) 
because the gain or loss on these items was not deferred, pursuant to 
Sec. 1.1503-2T(f)(3). The $50 gain on the sale of item q from T to S1 is 
an intercompany transaction on which the gain or loss recognized is 
deferred pursuant to Sec. 1.1502-13(c)(1). The consolidated taxable 
income of the P affiliated group computed without regard to the 
consolidated net operating loss deduction is $100.
    (iv) As provided by Sec. 1.1502-21A(c)(2) of the regulations, the 
amount of the dual consolidated loss arising in 1989 which may be 
absorbed by the P affiliated group in 1990 is $100; that is, the 
consolidated taxable income computed without regard to the consolidated 
net operating loss deduction minus such consolidated taxable income 
recomputed by excluding the items of income and deduction of T. Section 
1.1502-21A(c) allows $100 of the dual consolidated loss to be included 
in the consolidated net operating loss deduction for 1990. The 
consolidated taxable income of the P group for 1990 is $0.
    (v) S2 must make the positive adjustment provided for in 
Sec. 1.1502-32(b)(1)(i) to its basis in T for the amount of its 
allocable part of the undistributed earnings and profits of T for the 
taxable year. S2 can not make the negative adjustment provided for in 
Sec. 1.1502-

[[Page 439]]

32(b)(2)(ii) for the dual consolidated loss of T incurred in 1989 and 
absorbed in 1990. Thus, as provided in Sec. 1.1502-32(e)(2), S2 shall 
make a net positive adjustment to its basis in T of $100 and S2's basis 
in T is now $440. As provided in Sec. 1.1502-33(b)(4)(ii)(a), S2's 
earnings and profits for 1989 must reflect S2's increase in its basis in 
T stock for the taxable year. Since S2 has no other earnings and profits 
for the taxable year, S2 has earnings and profits of $100 for the 
taxable year. As provided in Sec. 1.1502-32(b)(1)(i), P must make a 
positive adjustment for the amount of its allocable part of the 
undistributed earnings and profits of S2 for the taxable year. Thus, P 
must make a net positive adjustment to its basis in S2 of $100 and P's 
basis in S2 is now $940.

[T.D. 8261, 54 FR 37317, Sept. 8, 1989. Redesignated by T.D. 8434, 57 FR 
41093, Sept. 9, 1992, as amended by T.D. 8677, 61 FR 33325, June 27, 
1996]



RELATED RULES--Table of Contents






Sec. 1.1551-1   Disallowance of surtax exemption and accumulated earnings credit.

    (a) In general. If:
    (1) Any corporation transfers, on or after January 1, 1951, and 
before June 13, 1963, all or part of its property (other than money) to 
a transferee corporation,
    (2) Any corporation transfers, directly or indirectly, after June 
12, 1963, all or part of its property (other than money) to a transferee 
corporation, or
    (3) Five or fewer individuals are in control of a corporation and 
one or more of them transfer, directly or indirectly, after June 12, 
1963, property (other than money) to a transferee corporation, and the 
transferee was created for the purpose of acquiring such property or was 
not actively engaged in business at the time of such acquisition, and if 
after such transfer the transferor or transferors are in control of the 
transferee during any part of the taxable year of the transferee, then 
for such taxable year of the transferee the Secretary or his delegate 
may disallow the surtax exemption defined in section 11(d) or the 
accumulated earnings credit of $150,000 ($100,000 in the case of taxable 
years beginning before January 1, 1975) provided in paragraph (2) or (3) 
of section 535(c), unless the transferee establishes by the clear 
preponderance of the evidence that the securing of such exemption or 
credit was not a major purpose of the transfer.
    (b) Purpose of section 1551. The purpose of section 1551 is to 
prevent avoidance or evasion of the surtax imposed by section 11(c) or 
of the accumulated earnings tax imposed by section 531. It is not 
intended, however, that section 1551 be interpreted as delimiting or 
abrogating any principle of law established by judicial decision, or any 
existing provisions of the Code, such as sections 269 and 482, which 
have the effect of preventing the avoidance or evasion of income taxes. 
Such principles of law and such provisions of the Code, including 
section 1551, are not mutually exclusive, and in appropriate cases they 
may operate together or they may operate separately.
    (c) Application of section 269(b) to cases covered by section 1551. 
The provisions of section 269(b) and the authority of the district 
director thereunder, to the extent not inconsistent with the provisions 
of section 1551, are applicable to cases covered by section 1551. 
Pursuant to the authority provided in section 269(b) the district 
director may allow to the transferee any part of a surtax exemption or 
accumulated earnings credit for a taxable year for which such exemption 
or credit would otherwise be disallowed under section 1551(a); or he may 
apportion such exemption or credit among the corporations involved. For 
example, corporation A transfers on January 1, 1955, all of its property 
to corporations B and C in exchange for all of the stock of such 
corporations. Immediately thereafter, corporation A is dissolved and its 
stockholders become the sole stockholders of corporations B and C. 
Assuming that corporations B and C are unable to establish by the clear 
preponderance of the evidence that the securing of the surtax exemption 
defined in section 11(d) or the accumulated earnings credit provided in 
section 535, or both, was not a major purpose of the transfer, the 
district director is authorized under sections 1551(c) and 269(b) to 
allow one such exemption and credit and to apportion such exemption and 
credit between corporations B and C.
    (d) Actively engaged in business. For purposes of this section, a 
corporation maintaining an office for the purpose

[[Page 440]]

of preserving its corporate existence is not considered to be ``actively 
engaged in business'' even though such corporation may be deemed to be 
``doing business'' for other purposes. Similarly, for purposes of this 
section, a corporation engaged in winding up its affairs, prior to an 
acquisition to which section 1551 is applicable, is not considered to be 
``actively engaged in business.''
    (e) Meaning and application of the term ``control''--(1) In general. 
For purposes of this section, the term ``control'' means:
    (i) With respect to a transferee corporation described in paragraph 
(a) (1) or (2) of this section, the ownership by the transferor 
corporation, its shareholders, or both, of stock possessing either (a) 
at least 80 percent of the total combined voting power of all classes of 
stock entitled to vote, or (b) at least 80 percent of the total value of 
shares of all classes of stock.
    (ii) With respect to each corporation described in paragraph (a)(3) 
of this section, the ownership by five or fewer individuals of stock 
possessing (a) at least 80 percent of the total combined voting power of 
all classes of stock entitled to vote or at least 80 percent of the 
total value of shares of all classes of the stock of each corporation, 
and (b) more than 50 percent of the total combined voting power of all 
classes of stock entitled to vote or more than 50 percent of the total 
value of shares of all classes of stock of each corporation, taking into 
account the stock ownership of each such individual only to the extent 
such stock ownership is identical with respect to each such corporation.
    (2) Special rules. In determining for purposes of this section 
whether stock possessing at least 80 percent (or more than 50 percent in 
the case of subparagraph (1)(ii)(b) of this paragraph) of the total 
combined voting power of all classes of stock entitled to vote is owned, 
all classes of such stock shall be considered together; it is not 
necessary that at least 80 percent (or more than 50 percent) of each 
class of voting stock be owned. Likewise, in determining for purposes of 
this section whether stock possessing at least 80 percent (or more than 
50 percent) of the total value of shares of all classes of stock is 
owned, all classes of stock of the corporation shall be considered 
together; it is not necessary that at least 80 percent (or more than 50 
percent) of the value of shares of each class be owned. The fair market 
value of a share shall be considered as the value to be used for 
purposes of this computation. With respect to transfers described in 
paragraph (a) (2) or (3) of this section, the ownership of stock shall 
be determined in accordance with the provisions of section 1563(e) and 
the regulations thereunder. With respect to transfers described in 
paragraph (a)(1) of this section, the ownership of stock shall be 
determined in accordance with the provisions of section 544 and the 
regulations thereunder, except that constructive ownership under section 
544(a)(2) shall be determined only with respect to the individual's 
spouse and minor children. In determining control, no stock shall be 
excluded because such stock was acquired before January 1, 1951 (the 
effective date of section 1551(a)(1)), or June 13, 1963 (the effective 
date of section 1551(a) (2) and (3)).
    (3) Example. This paragraph may be illustrated by the following 
example:

    Example. On January 1, 1964, individual A, who owns 50 percent of 
the voting stock of corporation X, and individual B, who owns 30 percent 
of such voting stock, transfer property (other than money) to 
corporation Y (newly created for the purpose of acquiring such property) 
in exchange for all of Y's voting stock. After the transfer, A and B own 
the voting stock of corporations X and Y in the following proportions:

------------------------------------------------------------------------
                                                               Identical
             Individual                 Corp. X     Corp. Y    ownership
------------------------------------------------------------------------
A...................................          50          30          30
B...................................          30          50          30
                                     -----------------------------------
  Total.............................          80          80          60
------------------------------------------------------------------------

The transfer of property by A and B to corporation Y is a transfer 
described in paragraph (a)(3) of this section since (i) A and B own at 
least 80 percent of the voting stock of corporations X and Y, and (ii) 
taking into account each such individual's stock ownership only to the 
extent such ownership is identical with respect to each such 
corporation, A and B own more than 50 percent of the voting stock of 
corporations X and Y.

    (f) Taxable year of allowance or disallowance--(1) In general. The 
district director's authority with respect to

[[Page 441]]

cases covered by section 1551 is not limited to the taxable year of the 
transferee corporation in which the transfer of property occurs. Such 
authority extends to the taxable year in which the transfer occurs or 
any subsequent taxable year of the transferee corporation if, during any 
part of such year, the transferor or transferors are in control of the 
transferee.
    (2) Examples. This paragraph may be illustrated by the following 
examples:

    Example (1). On January 1, 1955, corporation D transfers property 
(other than money) to corporation E, a corporation not actively engaged 
in business at the time of the acquisition of such property, in exchange 
for 60 percent of the voting stock of E. During a later taxable year of 
E, corporation D acquires an additional 20 percent of such voting stock. 
As a result of such additional acquisition, D owns 80 percent of the 
voting stock of E. Accordingly, section 1551(a)(1) is applicable for the 
taxable year in which the later acquisition of stock occurred and for 
each taxable year thereafter in which the requisite control continues.
    Example (2). On June 20, 1963, individual A, who owns all of the 
stock of corporation X, transfers property (other than money) to 
corporation Y, a corporation not actively engaged in business at the 
time of the acquision of such property, in exchange for 60 percent of 
the voting stock of Y. During a later taxable year of Y, A acquires an 
additional 20 percent of such voting stock. After such acquisition A 
owns at least 80 percent of the voting stock of corporations X and Y. 
Accordingly, section 1551(a)(3) is applicable for the taxable year in 
which the later acquisition of stock occurred and for each taxable year 
thereafter in which the requisite control continues.
    Example (3). Individuals A and B each owns 50 percent of the stock 
of corporation X. On January 15, 1964, A transfers property (other than 
money) to corporation Y (newly created by A for the purpose of acquiring 
such property) in exchange for all the stock of Y. In a subsequent 
taxable year of Y, individual B buys 50 percent of the stock which A 
owns in Y (or he transfers money to Y in exchange for its stock, as a 
result of which he owns 50 percent of Y's stock). Immediately thereafter 
the stock ownership of A and B in corporation Y is identical to their 
stock ownership in corporation X. Accordingly, section 1551(a)(3) is 
applicable for the taxable year in which B acquires stock in corporation 
Y (see paragraph (g)(3) of this section) and for each taxable year 
thereafter in which the requisite control continues. Moreover, if B's 
acquisition of stock in Y is pursuant to a preexisting agreement with A, 
A's transfer to Y and B's acquisition of Y's stock are considered a 
single transaction and section 1551(a)(3) also would be applicable for 
the taxable year in which A's transfer to Y took place and for each 
taxable year thereafter in which the requisite control continues.

    (g) Nature of transfer--(1) Corporate transfers before June 13, 
1963. A transfer made before June 13, 1963, by any corporation of all or 
part of its assets, whether or not such transfer qualifies as a 
reorganization under section 368, is within the scope of section 
1551(a)(1), except that section 1551(a)(1) does not apply to a transfer 
of money only. For example, the transfer of cash for the purpose of 
expanding the business of the transferor corporation through the 
formation of a new corporation is not a transfer within the scope of 
section 1551(a)(1), irrespective of whether the new corporation uses the 
cash to purchase from the transferor corporation stock in trade or 
similar property.
    (2) Corporate transfers after June 12, 1963. A direct or indirect 
transfer made after June 12, 1963, by any corporation of all or part of 
its assets to a transferee corporation, whether or not such transfer 
qualifies as a reorganization under section 368, is within the scope of 
section 1551(a)(2) except that section 1551(a)(2) does not apply to a 
transfer of money only. For example, if a transferor corporation 
transfers property to its shareholders or to a subsidiary, the transfer 
of that property by the shareholders or the subsidiary to a transferee 
corporation as part of the same transaction is a transfer of property by 
the transferor corporation to which section 1551(a)(2) applies. A 
transfer of property pursuant to a purchase by a transferee corporation 
from a transferor corporation controlling the transferee is within the 
scope of section 1551(a)(2), whether or not the purchase follows a 
transfer of cash from the controlling corporation.
    (3) Other transfers after June 12, 1963. A direct or indirect 
transfer made after June 12, 1963, by five or fewer individuals to a 
transferee corporation, whether or not such transfer qualifies under one 
or more other provisions of the Code (for example, section 351), is 
within the scope of section 1551(a)(3) except that section 1551(a)(3) 
does not apply to a transfer of money only. Thus, if one of five or 
fewer individuals

[[Page 442]]

who are in control of a corporation transfers property (other than 
money) to a controlled transferee corporation, the transfer is within 
the scope of section 1551(a)(3) notwithstanding that the other 
individuals transfer nothing or transfer only money.
    (4) Examples. This paragraph may be illustrated by the following 
examples:

    Example (1). Individuals A and B each owns 50 percent of the voting 
stock of corporation X. On January 15, 1964, A and B each acquires 
property (other than money) from X and, as part of the same transaction, 
each transfers such property to his wholly owned corporation (newly 
created for the purpose of acquiring such property). A and B retain 
substantial continuing interests in corporation X. The transfers to the 
two newly created corporations are within the scope of section 
1551(a)(2).
    Example (2). Corporation W organizes corporation X, a wholly owned 
subsidiary, for the purpose of acquiring the properties of corporation 
Y. Pursuant to a reorganization qualifying under section 368(a)(1)(C), 
substantially all of the properties of corporation Y are transferred on 
June 15, 1963, to corporation X solely in exchange for voting stock of 
corporation W. There is a transfer of property from W to X within the 
meaning of section 1551(a)(2).
    Example (3). Individuals A and B, each owning 50 percent of the 
voting stock of corporation X, organize corporation Y to which each 
transfers money only in exchange for 50 percent of the stock of Y. 
Subsequently, Y uses such money to acquire other property from A and B 
after June 12, 1963. Such acquisition is within the scope of section 
1551(a)(3).
    Example (4). Individual A owns 55 percent of the stock of 
corporation X. Another 25 percent of corporation X's stock is owned in 
the aggregate by individuals B, C, D, and E. On June 15, 1963, 
individual A transfers property to corporation Y (newly created for the 
purpose of acquiring such property) in exchange for 60 percent of the 
stock of Y, and B, C, and D acquire all of the remaining stock of Y. The 
transfer is within the scope of section 1551(a)(3).

    (h) Purpose of transfer. In determining, for purposes of this 
section, whether the securing of the surtax exemption or accumulated 
earnings credit constituted ``a major purpose'' of the transfer, all 
circumstances relevant to the transfer shall be considered. ``A major 
purpose'' will not be inferred from the mere purchase of inventory by a 
subsidiary from a centralized warehouse maintained by its parent 
corporation or by another subsidiary of the parent corporation. For 
disallowance of the surtax exemption and accumulated earnings credit 
under section 1551, it is not necessary that the obtaining of either 
such credit or exemption, or both, have been the sole or principal 
purpose of the transfer of the property. It is sufficient if it appears, 
in the light of all the facts and circumstances, that the obtaining of 
such exemption or credit, or both, was one of the major considerations 
that prompted the transfer. Thus, the securing of the surtax exemption 
or the accumulated earnings credit may constitute ``a major purpose'' of 
the transfer, notwithstanding that such transfer was effected for a 
valid business purpose and qualified as a reorganization within the 
meaning of section 368. The taxpayer's burden of establishing by the 
clear preponderance of the evidence that the securing of either such 
exemption or credit or both was not ``a major purpose'' of the transfer 
may be met, for example, by showing that the obtaining of such 
exemption, or credit, or both, was not a major factor in relationship to 
the other consideration or considerations which prompted the transfer.

[T.D. 6911, 32 FR 3214, Feb. 24, 1967, as amended by T.D. 7376, 40 FR 
42745, Sept. 16, 1975]



Sec. 1.1552-1   Earnings and profits.

    (a) General rule. For the purpose of determining the earnings and 
profits of each member of an affiliated group which is required to be 
included in a consolidated return for such group filed for a taxable 
year beginning after December 31, 1953, and ending after August 16, 
1954, the tax liability of the group shall be allocated among the 
members of the group in accordance with one of the following methods, 
pursuant to an election under paragraph (c) of this section:
    (1)(i) The tax liability of the group shall be apportioned among the 
members of the group in accordance with the ratio which that portion of 
the consolidated taxable income attributable to each member of the group 
having taxable income bears to the consolidated taxable income.
    (ii) For consolidated return years beginning after December 31, 
1965, a member's portion of the tax liability of

[[Page 443]]

the group under the method of allocation provided by subdivision (i) of 
this subparagraph is an amount equal to the tax liability of the group 
multiplied by a fraction, the numerator of which is the taxable income 
of such member, and the denominator of which is the sum of the taxable 
incomes of all the members. For purposes of this subdivision the taxable 
income of a member shall be the separate taxable income determined under 
Sec. 1.1502-12, adjusted for the following items taken into account in 
the computation of consolidated taxable income:
    (a) The portion of the consolidated net operating loss deduction, 
the consolidated charitable contributions deduction, the consolidated 
dividends received deduction, the consolidated section 247 deduction, 
the consolidated section 582(c) net loss, and the consolidated section 
922 deduction, attributable to such member;
    (b) Such member's capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) (determined without 
regard to any net capital loss carryover attributable to such member);
    (c) Such member's net capital loss and section 1231 net loss, 
reduced by the portion of the consolidated net capital loss attributable 
to such member; and
    (d) The portion of any consolidated net capital loss carryover 
attributable to such member which is absorbed in the taxable year.

If the computation of the taxable income of a member under this 
subdivision results in an excess of deductions over gross income, then 
for purposes of this subdivision such member's taxable income shall be 
zero.
    (2)(i) The tax liability of the group shall be allocated to the 
several members of the group on the basis of the percentage of the total 
tax which the tax of such member if computed on a separate return would 
bear to the total amount of the taxes for all members of the group so 
computed.
    (ii) For consolidated return years beginning after December 31, 
1965, a member's portion of the tax liability of the group under the 
method of allocation provided by subdivision (i) of this subparagraph is 
an amount equal to the tax liability of the group multiplied by a 
fraction, the numerator of which is the separate return tax liability of 
such member, and the denominator of which is the sum of the separate 
return tax liabilities of all the members. For purposes of this 
subdivision the separate return tax liability of a member is its tax 
liability computed as if it has filed a separate return for the year 
except that:
    (a) Gains and losses on intercompany transactions shall be taken 
into account as provided in Sec. 1.1502-13 as if a consolidated return 
had been filed for the year;
    (b) Gains and losses relating to inventory adjustments shall be 
taken into account as provided in Sec. 1.1502-18 as if a consolidated 
return had been filed for the year;
    (c) Transactions with respect to stock, bonds, or other obligations 
of members shall be reflected as provided in Sec. 1.1502-13 (f) and (g) 
as if a consolidated return had been filed for the year;
    (d) Excess losses shall be included in income as provided in 
Sec. 1.1502-19 as if a consolidated return had been filed for the year;
    (e) In the computation of the deduction under section 167, property 
shall not lose its character as new property as a result of a transfer 
from one member to another member during the year;
    (f) A dividend distributed by one member to another member during 
the year shall not be taken into account in computing the deductions 
under section 243(a)(1), 244(a), 245, or 247 (relating to deductions 
with respect to dividends received and dividends paid);
    (g) Basis shall be determined under Secs. 1.1502-31 and 1.1502-32, 
and earnings and profits shall be determined under Sec. 1.1502-33, as if 
a consolidated return had been filed for the year;
    (h) Subparagraph (2) of Sec. 1.1502-3(f) shall apply as if a 
consolidated return had been filed for the year; and
    (i) For purposes of Subtitle A of the Code, the surtax exemption of 
the member shall be an amount equal to $25,000 ($50,000 in the case of a 
taxable year ending in 1975), divided by the number of members (or such 
portion of $25,000 or $50,000 which is apportioned

[[Page 444]]

to the member pursuant to a schedule attached to the consolidated return 
for the taxable year). (However, if for the taxable year some or all of 
the members are component members of a controlled group of corporations 
(within the meaning of section 1563) and if there are other such 
component members which do not join in filing the consolidated return 
for such year, the amount to be divided among the members filing the 
consolidated return shall be (in lieu of $25,000 or $50,000) the sum of 
the amounts apportioned to the component members which join in filing 
the consolidated return (as determined for taxable years beginning after 
December 31, 1974 under Sec. 1.1561-2(a)(2) or Sec. 1.1561-3, whichever 
is applicable, and for taxable years beginning before January 1, 1975, 
under Sec. 1.561-2A(a)(2) or Sec. 1.1561-3A whichever is applicable).)

If the computation of the separate return tax liability of a member 
under this subdivision does not result in a positive tax liability, then 
for purposes of this subdivision such member's separate return tax 
liability shall be zero.
    (3)(i) The tax liability of the group (excluding the tax increases 
arising from the consolidation) shall be allocated on the basis of the 
contribution of each member of the group to the consolidated taxable 
income of the group. Any tax increases arising from the consolidation 
shall be distributed to the several members in direct proportion to the 
reduction in tax liability resulting to such members from the filing of 
the consolidated return as measured by the difference between their tax 
liabilities determined on a separate return basis and their tax 
liabilities (determined without regard to the 2-percent increase 
provided by section 1503(a) and paragraph (a) of Sec. 1.1502-30A (as 
contained in the 26 CFR edition revised as of April 1, 1996) for taxable 
years beginning before January 1, 1964) based on their contributions to 
the consolidated taxable income.
    (ii) For consolidated return years beginning after December 31, 
1965, a member's portion of the tax liability of the group under the 
method of allocation provided by subdivision (i) of this subparagraph 
shall be determined by:
    (a) Allocating the tax liability of the group in accordance with 
subparagraph (1)(ii) of this paragraph, but
    (b) The amount of tax liability allocated to any member shall not 
exceed the separate return tax liability of such member, determined in 
accordance with subparagraph (2)(ii) of this paragraph, and
    (c) The sum of the amounts which would be allocated to the members 
but for (b) of this subdivision (ii) shall be apportioned among the 
other members in direct proportion to, but limited to, the reduction in 
tax liability resulting to such other members. Such reduction for any 
member shall be the excess, if any, of (1) its separate return tax 
liability determined in accordance with subparagraph (2)(ii) of this 
paragraph, over (2) the amount allocated to such member under (a) of 
this subdivision (ii).

If any amount remains after being apportioned among members with a 
reduction in tax liability to the extent of such reduction, as provided 
in (c) of this subdivision (ii), such remaining amount shall, 
notwithstanding (b) of this subdivision (ii), be allocated to the 
members in accordance with the fractions determined under subparagraph 
(1)(ii) of this paragraph.
    (4) The tax liability of the group shall be allocated in accordance 
with any other method selected by the group with the approval of the 
Commissioner. No method of allocation may be approved under this 
subparagraph which may result in the allocation of a positive tax 
liability for a taxable year, among the members who are allocated a 
positive tax liability for such year, in a total amount which is more or 
less than the tax liability of the group for such year. (However, see 
paragraph (d) of Sec. 1.1502-33.)
    (b) Application of rules--(1) Tax liability of the group. For 
purposes of section 1552 and this section, the tax liability of the 
group for a taxable year shall consist of the Federal income tax 
liability of the group for such year determined in accordance with 
Sec. 1.1502-2 or Sec. 1.1502-30A (as contained in the 26 CFR edition 
revised as of April 1, 1996), which-ever is applicable. Thus, in the 
case of a carryback of a loss or credit to such year, although the 
earnings

[[Page 445]]

and profits of the members of the group may not be adjusted until the 
subsequent taxable year from which the loss or credit was carried back, 
the effect of the carryback, for purposes of this section, shall be 
determined by allocating the amount of the adjustment as a part of the 
tax liability of the group for the taxable year to which the loss or 
credit is carried. For example, if a consolidated net operating loss is 
carried back from 1969 to 1967, the allocation of the tax liability of 
the group for 1967 shall be recomputed in accordance with the method of 
allocation used for 1967, and the changes resulting from such 
recomputation shall, for accrual method taxpayers, be reflected in the 
earnings and profits of the appropriate members in 1969.
    (2) Effect of allocation. The amount of tax liability allocated to a 
corporation as its share of the tax liability of the group, pursuant to 
this section, shall (i) result in a decrease in the earnings and profits 
of such corporation in such amount, and (ii) be treated as a liability 
of such corporation for such amount. If the full amount of such 
liability is not paid by such corporation, pursuant to an agreement 
among the members of the group or otherwise, the amount which is not 
paid will generally be treated as a distribution with respect to stock, 
a contribution to capital, or a combination thereof, as the case may be.
    (c) Method of election. (1) The election under paragraph (a) (1), 
(2), or (3) of this section shall be made not later than the time 
prescribed by law for filing the first consolidated return of the group 
for a taxable year beginning after December 31, 1953, and ending after 
August 16, 1954 (including extensions thereof). If the group elects to 
allocate its tax liability in accordance with the method prescribed in 
paragraph (a) (1), (2), or (3) of this section, a statement shall be 
attached to the return stating which method is elected. Such statement 
shall be made by the common parent corporation and shall be binding upon 
all members of the group. In the event that the group desires to 
allocate its tax liability in accordance with any other method pursuant 
to paragraph (a)(4) of this section, approval of such method by the 
Commissioner must be obtained within the time prescribed above. If such 
approval is not obtained in such time, the group shall allocate in 
accordance with the method prescribed in paragraph (a)(1) of this 
section. The request shall state fully the method which the group wishes 
to apply in apportioning the tax liability. Except as provided in 
subparagraph (2) of this paragraph, an election once made shall be 
irrevocable and shall be binding upon the group with respect to the year 
for which made and for all future years for which a consolidated return 
is filed or required to be filed unless the Commissioner authorizes a 
change to another method prior to the time prescribed by law for filing 
the return for the year in which such change is to be effective.
    (2) Each group may make a new election to use any one of the methods 
prescribed in paragraph (a) (1), (2), or (3) of this section for its 
first consolidated return year beginning after December 31, 1965, or in 
conjunction with an election under paragraph (d) of Sec. 1.1502-33, or 
may request the Commissioner's approval of a method under paragraph 
(a)(4) of this section for its first consolidated return year beginning 
after December 31, 1965, irrespective of its previous method of 
allocation under this section. If such new election is not made in 
conjunction with an election under paragraph (d) of Sec. 1.1502-33, it 
shall be effective for the first consolidated return year beginning 
after December 31, 1965, and all succeeding years. (See Sec. 1.1502-33 
for the method of making such new election in conjunction with an 
election under paragraph (d) of Sec. 1.1502-33.) Any other such new 
election (or request for the Commissioner's approval of a method under 
paragraph (a)(4) of this section) shall be made within the time 
prescribed by law for filing the consolidated return for the first 
taxable year beginning after December 31, 1965 (including extensions 
thereof), or within 60 days after July 3, 1968, whichever is later. Such 
new election shall be made by attaching a statement to the consolidated 
return for the first taxable year beginning after December 31, 1965, or 
if such election is made within the time prescribed above but after such 
return is filed, by filing a statement with the

[[Page 446]]

internal revenue officer with whom such return was filed.
    (d) Failure to elect. If a group fails to make an election in its 
first consolidated return, or any other election, in accordance with 
paragraph (c) of this section, the method prescribed under paragraph 
(a)(1) of this section shall be applicable and shall be binding upon the 
group in the same manner as if an election had been made to so allocate.
    (e) Definitions. Except as otherwise provided in this section, the 
terms used in this section shall have the same meaning as provided in 
the regulations under section 1502.
    (f) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Corporation P is the common parent owning all of the stock 
of corporations S1 and S2, members of an affiliated group. A 
consolidated return is filed for the taxable year ending December 31, 
1966, by P, S1, and S2. For 1966 such corporations had the following 
taxable incomes or losses computed in accordance with paragraph 
(a)(1)(ii) of this section:

P......................................................................0
S1................................................................$2,000
S2...............................................................(1,000)

The group has not made an election under paragraph (c) of this section 
or paragraph (d) of Sec. 1.1502-33. Accordingly, the method of 
allocation provided by paragraph (a)(1) of this section is in effect for 
the group. Assuming that the consolidated taxable income is equal to the 
sum of the members taxable income and losses, or $1,000, the tax 
liability of the group for the year (assuming a 22-percent rate) is 
$220, all of which is allocated to S1. S1 accordingly reduces its 
earnings and profits in the amount of $220, irrespective of who actually 
pays the tax liability. If S1 pays the $220 tax liability there will be 
no further ef-
fect upon the income, earnings and profits, or the basis of stock of any 
member. If, however, P pays the $220 tax liability (and such payment is 
not in fact a loan from P to S1), then P shall be treated as having made 
a contribution to the capital of S1 in the amount of $220. On the other 
hand, if S2 pays the $220 tax liability (and such payment is not in fact 
a loan from S2), then S2 shall be treated as having made a distribution 
with respect to its stock to P in the amount of $220, and P shall be 
treated as having made a contribution to the capital of S1 in the amount 
of $220.

[T.D. 6962, 33 FR 9655, July 3, 1968, as amended by T.D. 7825, 42 FR 
64694, Dec. 28, 1977; T.D. 7728, 45 FR 72650, Nov. 3, 1980; T.D. 8560, 
59 FR 41675, Aug. 15, 1994; T.D. 8597, 60 FR 36680, July 18, 1995; T.D. 
8677, 61 FR 33325, June 27, 1996]

                     Certain Controlled Corporations



Sec. 1.1561-0  Effective date.

    (a) Taxable years beginning after December 31, 1974. The provisions 
of Secs. 1.1561-1 through 1.1561-3 apply only to taxable years beginning 
after December 31, 1974.
    (b) Taxable years beginning before January 1, 1975. The provisions 
of Secs. 1.1561-1A through 1.1561-3A apply only to taxable years 
beginning before January 1, 1975.

[T.D. 7528, 42 FR 64694, Dec. 28, 1977]



Sec. 1.1561-1  Limitations on certain multiple tax benefits in the case of certain controlled corporations.

    (a) In general. Part II (section 1561 and following), subchapter B, 
chapter 6 of the Code, provides rules relating to certain controlled 
corporations. In general, section 1561 provides that the component 
members of a controled group of corporations on a December

[[Page 447]]

31, for their taxable years which include such December 31, shall be 
limited for purposes of subtitle A to:
    (1) One surtax exemption under section 11(d),
    (2) One $150,000 amount for purposes of computing the accumlated 
earnings credit under section 535(c) (2) and (3), and
    (3) One $25,000 amount for purposes of computing the limitation on 
the small business deduction of life insurance companies under sections 
804(a)(4) and 809 (d)(10).

For certain definitions (including the definition of a ``controlled 
group of corporations'' and a ``component member'') and special rules 
for purposes of part II of subchapter B, see section 1563 and the 
regulations thereunder.
    (b) Tax avoidance. The provisions of part II, subchapter B, chapter 
6 do not delimit or abrogate any principle of law established by 
judicial decision, or any existing provisions of the code, such as 
sections 269, 482, and 1551, which have the effect of preventing the 
avoidance or evasion of income taxes.
    (c) Special rules. (1) For purposes of sections 1561 and 1563 and 
the regulations thereunder, the term ``corporation'' includes an 
electing small business corporation (as defined in section 1371 (b)). 
However, for the treatment of an electing small business corporation as 
an excluded member of a controlled group of corporations, see paragraph 
(b)(2)(ii) of Sec. 1.1563-1.
    (2) In the case of corporations electing a 52-53-week taxable year 
under section 441(f)(1), the provisions of sections 1561 and 1563 and 
the regulations thereunder shall be applied in accordance with the 
special rule section 441(f)(2)(A). See paragraph (b)(1) of Sec. 1.441-2.

[T.D. 7528, 42 FR 64694, Dec. 28, 1977]



Sec. 1.1561-2  Determination of amount of tax benefits.

    (a) Surtax exemption. (1) If a corporation is a component member of 
a controlled group of corporations on December 31, the surtax exemption 
under section 11(d) of such corporation for the taxable year which 
includes such December 31 shall be an amount equal to:
    (i) $50,000 divided by the number of corporations which are 
component members of such group on such December 31, or
    (ii) If an apportionment plan is adopted under Sec. 1.1561-3 which 
is effective with respect to such taxable year such portion of $50,000 
as is apportioned to such member in accordance with such plan.
    (2) In the case of a controlled group of corporations which includes 
component members which join in the filing of a consolidated return and 
other component members which do not join in the filing of such a 
return, and where there is no apportionment plan effective under 
Sec. 1.1561-3 apportioning the $50,000 amount among the component 
members filing the consolidated return and the other component members 
of the controlled group, each component member of the controlled group, 
(including each component member which joins in filing the consolidated 
return) shall be treated as a separate corporation for purposes of 
equally apportioning the $50,000 amount under subparagraph (1)(i) of 
this paragraph. In such case, the surtax exemption of the corporations 
filing the consolidated return shall be the sum of the amounts 
apportioned to each component member which joins in filing the 
consolidated return.
    (3) The provisions of section 1561 may reduce the surtax exemption 
of any corporation which is a component member of a controlled group or 
corporations and which is subject to the tax imposed by section 11, or 
by any other provision of subtitle A of the Code if the tax under such 
other provisions is computed by reference to the amount of the surtax 
exemption provided by section 11. Such other provisions include, for 
example, sections 511(a)(1), 594, 802, 831, 852, 857, 882, 1201, and 
1378.
    (4) This paragraph (a) shall not apply with respect to any component 
member of a controlled group of corporations on a December 31 if one or 
more component members of such controlled group has a taxable year 
including such December 31 which ends after December 31, 1978. Rules 
pertaining to the apportionment of the surtax exemption with

[[Page 448]]

respect to component members of controlled groups of corporations to 
which this paragraph does not apply are reserved.
    (5) The application of this paragraph may be illustrated by the 
following examples:

    Example (1). Corporations W, X, Y, and Z are component members of a 
controlled group of corporations on December 31, 1975, and each 
corporation files its income tax return on the basis of a calendar year. 
For their taxable years ending on December 31, 1975, W and X each incurs 
a net operating loss; Y has $5,250 of taxable income; and Z has $30,000 
of taxable income. If an apportionment plan is not effective for such 
taxable years, the surtax exemption under section 11(d) of each 
corporation determined under subparagraph (1)(i) of this paragraph is 
$12,500 ($50,0004). However, the four corporations may avoid a 
pro rata division of the $50,000 amount by filing an apportionment plan 
in accordance with the provisions of Sec. 1.1561-3 allocating the 
$50,000 amount in any manner they deem proper.
    Example (2). Corporation A files its income tax return on the basis 
of a calendar year; corporation B files its income tax return on the 
basis of a fiscal year ending March 31. On December 31, 1975, A and B 
are the only component members of a controlled group of corporations. 
Under subparagraph (1)(i) of this paragraph, the surtax exemption of A 
for 1975, and the surtax exemption of B for its fiscal year ending March 
31, 1976, is $25,000 ($50,0002). However, if an apportionment 
plan is filed in accordance with the provisions of Sec. 1.1561-3, the 
surtax exemption of each such corporation will be the amount apportioned 
to the corporation pursuant to the plan.
    Example (3). Corporations R, P, and S are component members of a 
controlled group of corporations on December 31, 1975. P and S file a 
consolidated return for their fiscal years ending June 30, 1976. R files 
a separate return for its taxable year ending on December 31, 1975. No 
apportionment plan is effective with respect to R's, P's, and S's 
taxable years which include December 31, 1975. Therefore R, P, and S are 
each apportioned $16,666.67 ($50,0003) as their surtax exemption 
under section 11(d) for their taxable years including such date. The 
surtax exemption of the affiliated group filing a consolidated return (P 
and S) for the year ending June 30, 1976, is $33,333.34 (i.e., the sum 
of the $16,666.67 amounts apportioned to P and S). However, if an 
apportionment plan is filed in accordance with the provisions of 
Sec. 1.1561-3, the surtax exemption of the corporations which are 
members of the affiliated group filing a consolidated return and of each 
other corporation which is a component member of the controlled group of 
corporations will be the amount apportioned to such affiliated group and 
to each such other corporations pursuant to the plan.

    (b) Allocation of amounts of taxable income subject to normal tax. 
(1) In the case of a taxable year of a corporation, if:
    (i) The amount of normal tax under section 11(b) is equal to the sum 
of 20 percent of so much of the taxable income as does not exceed 
$25,000, plus 22 percent of so much of the taxable income as exceeds 
$25,000 for a taxable year, and
    (ii) The amount of surtax exemption of the corporation is less than 
$50,000 under paragraph (a)(1) (i) or (ii) of this section,

then for purposes of applying section 11(b), the taxable income subject 
to taxation at the rate of 20 percent shall be (in lieu of the first 
$25,000 of taxable income) one-half of the amount of the surtax 
exemption allocated to such corporation under paragraph (a)(1) (i) or 
(ii) of this section. In addition, the amount of taxable income subject 
to taxation at the rate of 22 percent shall be (in lieu of the amount of 
taxable income in excess of $25,000) the taxable income that exceeds 
one-half of the amount of the surtax exemption allocated to such 
corporation under paragraph (a)(1) (i) or (ii) of this section for such 
year. In the case of an affiliated group of corporations filing a 
consolidated return for a taxable year, the preceding sentence shall be 
applied by substituting the term ``affiliated group'' for the term 
``corporation'' each time it appears.
    (2) The provisions of this paragraph may be illustrated by the 
following example:

    Example. Corporations P and S are component members of a controlled 
group of corporations on December 31, 1975, and each corporation files a 
separate income tax return on the basis of a calendar year. For the 
taxable year ending on December 31, 1975, P incurs a net operating loss 
and S has $25,000 of taxable income. If an apportionment plan is not 
effective for that taxable year, the surtax exemption under section 
11(d) of each corporation (determined under paragraph (a)(1)(i) of this 
section) is $25,000 ($50,0002). For purposes of applying section 
11(b) to determine S's liability for tax for 1975, the

[[Page 449]]

amount of taxable income subject to taxation at the rate of 20 percent 
is limited to $12,500 (i.e., one-half of the amount of the surtax 
exemption allocated to S under paragraph (a)(1)(i) of this section), and 
the amount of taxable income subject to taxation at the rate of 22 
percent is $12,500 (i.e., the amount of taxable income in excess of one-
half of the amount of the surtax exemption). If, on the other hand, an 
apportionment plan is adopted by P and S effective for such taxable 
years apportioning the entire $50,000 surtax exemption to S, then, for 
purposes of applying section 11(b) to determine S's liability for tax 
for 1975, the amount of taxable income subject to taxation at the rate 
of 20 percent is $25,000.

    (3) If an apportionment plan is adopted under Sec. 1.1561-3 for a 
December 31, and if paragraph (b)(1) of this section applies to any 
component member whose taxable year includes such December 31, then the 
plan shall specify:
    (i) The amount subject to taxation at the rate of 20 percent, and
    (ii) The amount subject to taxation at the rate of 22 percent,

as determined under paragraph (b)(1) of this section for each component 
member. The information required to be included in a plan by this 
subparagraph is in addition to the information required under 
Sec. 1.1561-3(a). Where an existing apportionment plan is effective 
under Sec. 1.1561-3(a)(3) for such December 31, the additional 
information required under this subparagraph may be provided in an 
amendment of the existing plan as provided in Sec. 1.1561-3(c).
    (c) Accumulated earnings credit. (1) Except as provided in 
subparagraph (2) of this paragraph, if a corporation is a component 
member of a controlled group on a December 31, the amount for purposes 
of computing the accumlated earnings credit under section 535(c) (2) and 
(3) of such corporation shall be an amount equal to $150,000 divided by 
the number of corporations which are component members of such group on 
such December 31. In the case of a controlled group of corporations 
which includes component members which join in the filing of a 
consolidated return and other component members which do not join in the 
filing of such a return, each component member of the controlled group 
(including each component member which joins in filing the consolidated 
return) shall be treated as a separate corporation for purposes of 
equally apportioning the $150,000 amount under this subparagraph. In 
such case, the amount for purposes of computing the accumulated earnings 
credit for the component members filing the consolidated return shall be 
the sum of the amounts apportioned to each component member which joins 
in filing the consolidated return.
    (2) If, with respect to any component member of the controlled 
group, the amount determined under subparagraph (1) of this paragraph 
exceeds the sum of (i) such member's accumlated earnings and profits as 
of the close of the preceding taxable year, plus (ii) such member's 
earnings and profits for the taxable year which are retained (within the 
meaning of section 535(c)(1)), then any such excess shall be subtracted 
from the amount determined under subparagraph (1) of this paragraph with 
respect to such member and shall be divided equally among those 
remaining component members of the controlled group that do not have 
such an excess (until no such excess remains to be divided among those 
remaining members that have not had such an excess). The excess so 
divided among such remaining members shall be added to the amount 
determined under subparagraph (1) with respect to such members. If a 
controlled group of corporations includes component members which join 
in the filing of a consolidated return and other component members which 
do not join in filing such return, the component members filing the 
consolidated return shall be treated as a single corporation for 
purposes of this subparagraph.
    (3) A controlled group may not adopt an apportionment plan, as 
provided in Sec. 1.1561-3, with respect to the amounts computed under 
the provisions of this paragraph.
    (4) The provisions of this paragraph may be illustrated by the 
following example:

    Example. A controlled group is composed of four component member 
corporations, W, X, Y, and Z. Each corporation files a separate income 
tax return on the basis of a calendar year. The sum of the earnings and 
profits for the taxable year ending December 31, 1975, which are 
retained plus the sum of the accumulated earnings and profits (as of the 
close

[[Page 450]]

of the preceding taxable year) is $15,000, $75,000, $37,500, and 
$300,000 for W, X, Y, and Z, respectively. The amounts determined under 
this paragraph for W, X, Y, and Z for 1975 are $15,000, $48,750, 
$37,500, and $48,750, respectively, computed as follows:

----------------------------------------------------------------------------------------------------------------
                                                                         Component members                      
                                                 ---------------------------------------------------------------
                                                         W               X               Y               Z      
----------------------------------------------------------------------------------------------------------------
Earnings and profits............................         $15,000         $75,000         $37,500        $300,000
Amount computed under subparagraph (1)..........          37,500          37,500          37,500          37,500
Excess..........................................          22,500               0               0               0
Allocation of excess............................  ..............           7,500           7,500           7,500
New excess......................................  ..............  ..............           7,500  ..............
Reallocation of new excess......................  ..............           3,750  ..............           3,750
                                                 ---------------------------------------------------------------
    Amount to be used for purposes of section                                                                   
     535(c) (2) and (3).........................          15,000          48,750          37,500          48,750
----------------------------------------------------------------------------------------------------------------

    (d) Small business deduction of life insurance companies. (1) Except 
as provided in subparagraph (2) of this paragraph, if two or more life 
insurance companies which are taxable under section 802 are component 
members of a controlled group of corporations on a December 31, the 
amount for purposes of computing the limitation on the small business 
deduction under sections 804(a)(4) and 809(d)(10) of such corporations 
for their taxable years which include such December 31 shall be an 
amount equal to $25,000 divided by the number of life insurance 
companies taxable under section 802 which are component members of such 
group on such December 31.
    (2) If, with respect to any of the component members of the 
controlled group which are described in subparagraph (1) of this 
paragraph, the amount determined under such subparagraph exceeds 10 
percent of such member's investment yield (as defined in section 
304(c)), then any such excess shall be subtracted from the amount 
determined under subparagraph (1) of this paragraph with respect to such 
member and shall be divided equally among those remaining life insurance 
company members of the controlled group that do not have such an excess 
(until no such excess remains to be divided among those remaining 
members that have not had such an excess). The excess so divided among 
such remaining members shall be added to the amount determined under 
subparagraph (1) with respect to such members.
    (3) A controlled group may not adopt an apportionment plan, as 
provided in Sec. 1.1561-3, with respect to the amounts computed under 
the provisions of this paragraph.
    (e) Certain short taxable years. (1) If the return of a corporation 
is for a short period which does not include a December 31, and such 
corporation is a component member of a controlled group of corporations 
with respect to such short period, then for purposes of subtitle A of 
the Code:
    (i) The surtax exemption under section 11(d) of such corporation for 
such short period shall be an amount equal to $25,000 ($50,000 in the 
case of a taxable year ending in 1975), divided by the number of 
corporations which are component members of such controlled group on the 
last day of such short period;
    (ii) The amount to be used in computing the accumulated earnings 
credit under section 535(c) (2) and (3) of such corporation for such 
short period shall be an amount equal to $150,000 divided by the number 
of corporations which are members of such controlled group on the last 
day of such short period; and
    (iii) The amount to be used in computing the limitation on the small 
business deduction of life insurance companies under sections 804(a)(4) 
and 809(d)(10) of such corporation for such short period shall not 
exceed an amount equal to $25,000 divided by the number of life 
insurance companies taxable under section 802 which are component 
members of the controlled group on the last day of such short period.

For purposes of the preceding sentence, the term ``short period'' does 
not include any period if the income for such

[[Page 451]]

period is required to be included in a consolidated return under 
Sec. 1.1502-76. The determination of whether a corporation is a 
component member of a controlled group of corporations on the last day 
of a short period is made by applying the definition of ``component 
member'' contained in section 1563(b) and Sec. 1.1563-1 as if the last 
day of such short period were a December 31 occurring after December 31, 
1974.
    (2) The provisions of this paragraph may be illustrated by the 
following examples:

    Example (1). On January 2, 1975, corporation X transfers cash to 
newly formed corporation Y (which begins business on that date) and 
receives all of the stock of Y in return. X also owns all of the stock 
of corporation Z on each day of 1974 and 1975. X uses the calendar year 
as its taxable year and Z uses a fiscal year ending on March 31. Y 
adopts a fiscal year ending on June 30 as its annual accounting period, 
and, therefore, files a return for the short taxable year beginning on 
January 2, 1975, and ending on June 30, 1975. On June 30, 1975, Y is a 
component member of a parent-subsidiary controlled group of corporations 
of which X, Y, and Z are component members. Accordingly, the surtax 
exemption of Y for the short taxable year ending on June 30, 1975, is 
$16,666.67 ($50,0003). On December 31, 1975, X, Y, and Z are 
component members of a parent-subsidiary controlled group of 
corporations. Accordingly, the surtax exemption of each such corporation 
for its taxable year including December 31, 1975 (i.e., X's calendar 
year ending December 31, 1975, Z's fiscal year ending March 31, 1976, 
and Y's fiscal year ending June 30, 1976) is $16,666.67 
($50,0003), or, if an apportionment plan is filed under 
Sec. 1.1561-3, the amount apportioned pursuant to such plan.
     Example (2). On January 1, 1975, corporation P owns all of the 
stock of corporations S-1, S-2, and S-3. P, S-1, S-2, and S-3 file 
separate returns on a calendar year basis. On July 31, 1975, S-1 is 
liquidated and therefore files a return for the short taxable year 
beginning on January 1, 1975, and ending on July 31, 1975. On August 31, 
1975, S-2 is liquidated and therefore files a return for the short 
taxable year beginning on January 1, 1975, and ending on August 31, 
1975. On July 31, 1975, S-1 is a component member of a parent-subsidiary 
controlled group of corporations of which P, S-1, S-2, and S-3 are 
component members. Accordingly, the surtax exemption under section 11(d) 
of S-1 for the short taxable year ending on July 31, 1975, is $12,500 
($50,0004). On August 31, 1975, S-2 is a component member of a 
parent-subsidiary controlled group of corporations of which P, S-2, and 
S-3 are component members. Accordingly, the surtax exemption of S-2 for 
the short taxable year ending on August 31, 1975, is $16,666.67 
($50,0003). On December 31, 1975, P and S-3 are component 
members of a parent-subsidiary controlled group of corporations. 
Accordingly, the surtax exemption of each such corporation for the 
calendar year 1975 is $25,000 ($50,0002), or, if an 
apportionment plan is filed under Sec. 1.1561-3, the amount apportioned 
pursuant to such plan.

[T.D. 7528, 42 FR 64695, Dec. 28, 1977]



Sec. 1.1561-3  Apportionment of surtax exemption.

    (a) In general. (1) In the case of corporations which are component 
members of a controlled group of corporations on a December 31, the 
single $50,000 surtax exemption under section 11(d) may be apportioned 
among such members (for the taxable year of each such member which 
includes such December 31) if all such members consent, in the manner 
provided in paragraph (b) of this section, to an apportionment plan with 
respect to such December 31. Such plan shall provide for the 
apportionment of a fixed dollar amount to one or more of such members, 
but in no event shall the sum of the amounts so apportioned exceed 
$50,000. An apportionment plan shall not be considered as adopted with 
respect to a particular December 31 until each component member which is 
required to consent to the plan under paragraph (b)(1) of this section 
filed the original of a statement described in such paragraph (or, the 
original of a statement incorporating its consent is filed on its 
behalf). In the case of a return filed before a plan is adopted, the 
surtax exemption for purposes of such return shall be equally 
apportioned in accordance with the rules provided in Sec. 1.1561-
2(a)(1)(i). (If a valid apportionment plan is adopted after the return 
is filed and within the time prescribed by subparagraph (2) of this 
paragraph, such return should be amended (or a claim for refund should 
be made) to reflect the change from equal apportionment.)
    (2) A controlled group may adopt an apportionment plan with respect 
to a particular December 31 only if, at the time such plan is sought to 
be adopted, there is at least one year remaining in the statutory period 
(including any extensions thereof) for the assessment of

[[Page 452]]

a deficiency against any corporation the tax liability of which would be 
increased by the adoption of such plan. If there is less than one year 
remaining with respect to any such corporation, the director of the 
service center with which such corporation files its income tax return 
will ordinarily, upon request, enter into an agreement to extend such 
statutory period for the limited purpose of assessing any deficiency 
against such corporation attributable to the adoption of such 
apportionment plan.
    (3)(i) The amount apportioned to a component member of a controlled 
group of corporations in an apportionment plan adopted with respect to a 
particular December 31 shall constitute such member's surtax exemption 
for its taxable year including the particular December 31, and for all 
taxable years of such members including succeeding December 31's, unless 
the apportionment plan is amended in accordance with paragraph (c) of 
this section or is terminated under subdivision (ii) of this 
subparagraph. Thus, the apportionment plan (including any amendments 
thereof) has a continuing effect and need not be renewed annually.
    (ii) If an apportionment plan is adopted with respect to a 
particular December 31, such plan shall terminate with respect to a 
succeeding December 31, if:
    (a) The controlled group ceases to remain in existence during the 
calendar year ending on such succeeding December 31,
    (b) Any corporation which was a component member of such group on 
the particular December 31 is not a component member of such group on 
such succeeding December 31, or
    (c) Any corporation which was not a component member of such group 
on the particular December 31 is a component member of such group on 
such succeeding December 31.

An apportionment plan, once terminated with respect to a December 31, is 
no longer effective. Accordingly, unless a new apportionment plan is 
adopted, the surtax exemption of the component members of the controlled 
group for their taxable years which include such December 31 and all 
December 31's thereafter will be determined in accordance with the rules 
provided in paragraph (a)(1)(i) of Sec. 1.1561-2.
    (iii) For purposes of subdivision (ii) (a)--(a) A parent-subsidiary 
controlled group of corporations shall be considered as remaining in 
existence as long as its common parent corporation remains as a common 
parent.
    (b) A brother-sister controlled group of corporations shall be 
considered as remaining in existence as long as the requirements of 
paragraph (a)(3)(i) of Sec. 1.1563-1 continue to be satisfied with 
respect to at least two corporations, taking into account the stock 
ownership of only those five or fewer persons whose stock ownership was 
taken into account at the time the apportionment plan adopted by the 
component members of such group first became effective.
    (c) A combined group of corporations shall be considered as 
remaining in existence as long as the brother-sister controlled group of 
corporations referred to in paragraph (a)(4)(i) of Sec. 1.1563-1 in 
respect of such combined group remains in existence (within the meaning 
of (b) of this subdivision), and at least one such corporation is a 
common parent of a parent-subsidiary controlled group of corporations 
referred to in such paragraph (a)(4)(i).
    (d) If, by reason of paragraph (a)(5)(i) of Sec. 1.1563-1, two or 
more insurance companies subject to taxation under section 802 are 
treated as an insurance group separate from any corporations which are 
members of a controlled group described in paragraph (a) (2), (3), or 
(4) of Sec. 1.1563-1, such insurance group shall be considered as 
remaining in existence as long as the controlled group described in 
paragraph (a) (2), (3), or (4) of such section, as the case may be, 
remains in existence (within the meaning of (a), (b), or (c) of this 
subdivision), and there are at least two insurance companies which 
satisfy the requirements of paragraph (a)(5)(i) of such section.
    (iv) If an apportionment plan is terminated with respect to a 
particular December 31 by reason of an occurrence described in 
subdivision (ii) (b) or (c) of this subparagraph, each corporation which 
is a component member of the controlled group on such particular 
December 31 should, on or before the date

[[Page 453]]

it files its income tax return for the taxable year which includes such 
particular December 31, notify the service center with which it files 
such return of such termination. If an apportionment plan is terminated 
with respect to a particular December 31 by reason of an occurrence 
described in subdivision (ii)(a) of this subparagraph, each corporation 
which was a component member of the controlled group on the preceding 
December 31 should, on or before the date it files its income tax return 
for the taxable year which includes such particular December 31, notify 
the service center with which it files such return of such termination.
    (b) Consents to plan. (1)(i) The consent of a component member 
(other than a wholly-owned subsidiary) to an apportionment plan with 
respect to a particular December 31 shall be made by means of a 
statement, signed by any person who is duly authorized to act on behalf 
of the consenting member, stating that such member consents to the 
apportionment plan with respect to such December 31. The statement shall 
set forth in the name, address, taxpayer account number, and taxable 
year of the consenting component member, the amount apportioned to such 
member under the plan, and the service center where the original of the 
statement is to be filed. The consent of more than one component member 
may be incorporated in a single statement. The original of a statement 
of consent shall be filed with the service center with which the 
component member of the group on such December 31 which has the taxable 
year ending first on or after such date filed its return for such 
taxable year. (If two or more component members have the same such 
taxable year, a statement of consent may be filed with the service 
center with which the return for any such taxable year is filed.) The 
original of a statement of consent shall have attached thereto 
information (referred to in this paragraph as ``group identification'') 
setting forth the name, address, taxpayer account number, and taxable 
year of each component member of the controlled group on such December 
31 (including wholly-owned subsidiaries) and the amount apportioned to 
each such member under the plan. If more than one original statement is 
filed, a statement may incorporate the group identification by reference 
to the name, address, taxpayer account number, and taxable year of a 
component member of the group which has attached such group 
identification to the original of its statement.
    (ii) Each component member of the group on such December 31 (other 
than wholly-owned subsidiaries) should attach a copy of its consent (or 
a copy of the statement incorporating its consent) to the income tax 
return, amended return, or claim for refund filed with its service 
center for the taxable year including such date. Such copy shall either 
have attached thereto information on group identification or shall 
incorporate such information by reference to the name, address, taxpayer 
account number, and taxable year of a component member of the group 
which has attached such information to its income tax return, amended 
return, or claim for refund filed with the same service center for the 
taxable year including such date.
    (2)(i) Each component member of a controlled group which is a 
wholly-owned subsidiary of such group with respect to a December 31 
shall be deemed to consent to an apportionment plan with respect to such 
December 31, provided each component member of the group which is not a 
wholly-owned subsidiary consents to the plan. For purposes of this 
section, a component member of a controlled group shall be considered to 
be a wholly-owned subsidiary of the group with respect to a December 31 
if, on each day preceding such date during its taxable year which 
includes such date, all of its stock is owned directly by one or more 
corporations which are component members of the group on such December 
31.
    (ii) Each wholly-owned subsidiary of a controlled group with respect 
to a December 31 should attach a statement containing the information 
which is required to be set forth in a statement of consent to an 
apportionment plan with respect to such December 31 to the income tax 
return, amended return, or claim for refund filed with its service 
center for the taxable year which includes such date. Such statement

[[Page 454]]

should either have attached thereto information on group identification 
or incorporate such information by reference to the name, address, 
taxpayer account number, and taxable year of a component member of the 
group which has attached such information to its income tax return, 
amended return, or claim for refund filed with the same service center 
for the taxable year including such date.
    (c) Amendment of plan. An apportionment plan adopted with respect to 
a December 31 by a controlled group of corporations may be amended with 
respect to such December 31, or with respect to any succeeding December 
31 for which the plan is effective under paragraph (a)(3) of this 
section. An apportionment plan must be amended with respect to a 
particular December 31 and the amendments to the plan shall be effective 
only if adopted in accordance with the rules prescribed in this section 
for the adoption of an original plan with respect to such December 31.
    (d) Component members filing consolidated returns. If the component 
members of a controlled group of corporations on a December 31 include 
corporations which join in the filing of a consolidated return, the 
corporations filing the consolidated return shall be treated as a single 
component member for purposes of this section. Thus, for example, only 
one consent, executed by the common parent, to an apportionment plan 
filed pursuant to this section is required on behalf of the component 
members filing the consolidated return.

[T.D. 7528, 42 FR 64697, Dec. 28, 1977; 43 FR 4603, Feb. 3, 1978]



Sec. 1.1562-0  Effective date.

    The provisions of Secs. 1.1562-1 through 1.1562-7 apply only to 
taxable years beginning before January 1, 1975.

(Secs. 1561(a), (83 Stat. 599; 26 U.S.C. 1561 (a)) and 7805 (68A Stat. 
917; 26 U.S.C. 7805, of the Internal Revenue Code))

[T.D. 7528, 42 FR 64702, Dec. 28, 1977]



Sec. 1.1562-1   Privilege of controlled group to elect multiple surtax exemptions.

    (a) Election--(1) In general. (i) Under section 1562(a)(1) a 
controlled group of corporations has the privilege of electing to have 
each of its component members make its returns without regard to section 
1561 (relating to single surtax exemption in the case of a controlled 
group of corporations). The election shall be made with respect to a 
particular December 31 and shall be valid only if each corporation which 
is required to consent to the election under the provisions of paragraph 
(a)(1) of Sec. 1.1562-3 gives its consent in the manner and within the 
time prescribed in such section. An election shall not be considered as 
made with respect to a particular December 31 until each corporation 
which is required to consent to the election under paragraph (c)(1) of 
Sec. 1.1562-3 files the original of a statement described in such 
paragraph (or, the original of a statement incorporating its consent is 
filed on its behalf). Accordingly, for purposes of returns filed before 
an election is made, the surtax exemption of component members of a 
controlled group of corporations shall be determined in accordance with 
section 1561 and the regulations thereunder. (If a valid election is 
made after the return is filed and within the time prescribed in 
Sec. 1.1562-3, such return should be amended (or a claim for refund 
should be made) to reflect the change in the amount of the surtax 
exemption (and the imposition of the additional tax) resulting from the 
election.)
    (ii) An election once made with respect to a particular December 31 
may not thereafter be withdrawn unless such election is terminated with 
respect to such December 31 in accordance with the provisions of section 
1562(c) and Sec. 1.1562-2.
    (iii) An election under section 1562(a)(1) may be made by a 
controlled group of corporations with respect to any December 31 (after 
December 31, 1962), unless:
    (a) A component member of such group on such December 31 joins, or 
is required to join, in the filing of a consolidated return for its 
taxable year which includes such date, or
    (b) Such controlled group is not eligible to make an election with 
respect to such December 31 by reason of section 1562(d).


[[Page 455]]


See also section 243(b)(3)(A), relating to effect of election of 100-
percent dividends received deduction, which may prevent a controlled 
group from making an election under section 1562(a)(1) with respect to a 
particular December 31.
    (2) Years for which effective. (i) A valid election under section 
1562(a)(1) by a controlled group of corporations with respect to a 
particular December 31 is effective with respect to:
    (a) The taxable year of each component member of such group on such 
December 31 which includes such December 31, and
    (b) Any succeeding taxable year of any corporation which is a 
component member of such group (or a successor group) on a succeeding 
December 31 included within any such succeeding taxable year.

Under section 1562(c) and Sec. 1.1562-2, an election under section 
1562(a)(1) may be terminated with respect to a December 31 referred to 
in either (a) or (b) of this subdivision. For years affected by 
termination, see paragraph (c) of Sec. 1.1562-2.
    (ii) For the application of an election under section 1562(a)(1) to 
certain short taxable years not including a December 31, see section 
1562(f)(2) and Sec. 1.1562-6.
    (iii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. Corporation P is the common parent of a parent-subsidiary 
controlled group of corporations of which corporations P, S-1, and S-2 
are component members on December 31, 1964. On December 31, 1965, the 
controlled group of corporations consists of the same component members 
as on December 31, 1964, except that corporation S-3 is also a component 
member on December 31, 1965. On December 31, 1966, the controlled group 
of corporations consists of the same component members as on December 
31, 1965, except that S-1 is no longer a component member on December 
31, 1966. In January 1965, the controlled group makes a valid election 
under section 1562(a)(1) with respect to December 31, 1964. Under 
subdivision (i)(a) of this subparagraph, the election (unless 
terminated) is effective with respect to the taxable years of P, S-1, 
and S-2 which include December 31, 1964. Under subdivision (i)(b) of 
this subparagraph, the election (unless terminated) is also effective 
with respect to the taxable years of P, S-1, S-2, and S-3 which include 
December 31, 1965, and with respect to the taxable years of P, S-2, and 
S-3 which include December 31, 1966.

    (b) Effect of election--(1) General. If an election under section 
1562(a)(1) is effective with respect to a taxable year of a corporation, 
then:
    (i) Section 1561 shall not apply to such corporation for such 
taxable year, but
    (ii) The additional tax imposed by section 1562(b) shall apply to 
such corporation for such taxable year (except as otherwise provided in 
subparagraph (3) of this paragraph).
    (2) Additional tax. The additional tax imposed by section 1562(b) is 
an amount equal to 6 percent of so much of a corporation's taxable 
income for the taxable year as does not exceed the amount of such 
corporation's surtax exemption for such taxable year. However, if a 
corporation computes its tax under section 1201 (relating to alternative 
tax) and is subject to the additional tax imposed by section 1562(b) for 
such taxable year, the additional tax applies only to an amount equal to 
the taxable income reduced by the excess of the net long-term capital 
gain over the net short-term capital loss for such taxable year (to the 
extent such amount does not exceed the amount of such corporation's 
surtax exemption for such taxable year).
    (3) Exceptions. The additional tax imposed by section 1562(b) shall 
not apply to a corporation for any taxable year if:
    (i) Such corporation is the only component member of a controlled 
group on the December 31 included within such taxable year which has 
taxable income for the taxable years including such date, or
    (ii) Such corporation's surtax exemption is disallowed for such year 
under any provision of the Code. For purposes of this subdivision, if 
the component members of a controlled group of corporations on a 
December 31 are limited in the aggregate to a single $25,000 surtax 
exemption for their taxable years which include such date, then the 
surtax exemption of each such component member shall be considered to be 
disallowed for such taxable year regardless of how the $25,000 is 
allocated among such members. For example, if pursuant to the authority 
provided in

[[Page 456]]

section 269(b), the Commissioner allocates a single $25,000 surtax 
exemption equally between two corporations which are the only component 
members of an electing controlled group of corporations, the surtax 
exemption of each such corporation shall be considered to be disallowed.

The application of this subparagraph in respect of a taxable year of a 
component member of a controlled group of corporations does not 
constitute the termination of an election made under section 1562(a)(1). 
Accordingly, such election continues in effect for the subsequent 
taxable years of such corporation and the other corporations which are 
component members of the controlled group, unless the election is 
terminated under section 1562(c).
    (4) Taxable income defined. For purposes of this paragraph, the term 
``taxable income'' means:
    (i) In the case of a corporation subject to tax under section 511(a) 
(relating to tax on unrelated business income of charitable, etc., 
organizations at corporation rates), its ``unrelated business taxable 
income'' (as defined in section 512),
    (ii) In the case of a life insurance company, its ``life insurance 
company taxable income'' (as defined in section 802(b)),
    (iii) In the case of a regulated investment company, its 
``investment company taxable income'' (as defined in section 852(b)(2)),
    (iv) In the case of a real estate investment trust, its ``real 
estate investment trust taxable income'' (as defined in section 
857(b)(2)), and
    (v) In the case of an electing small business corporation, its 
``taxable income'' (as defined in section 1373(d)).
    (5) Tax treated as imposed by section 11, etc. For purposes of 
applying other sections of the Code, if for a taxable year a corporation 
is subject to both the tax imposed by section 11 and to the additional 
tax imposed by section 1562(b), then the additional tax is treated as if 
it were imposed by section 11. If a corporation is subject to a tax 
imposed by any section of chapter 1 of the Code other than section 11 
but such tax is computed by reference to section 11, the additional tax 
is treated for purposes of the Code as imposed by such other section. 
(For example, the tax imposed by section 831(a) is ``computed as 
provided in section 11''; therefore if a corporation is subject to both 
the tax imposed by section 831(a) and the additional tax imposed by 
section 1562(b) for any taxable year, the additional tax is treated as 
imposed by section 831(a) for such taxable year.) Accordingly, the 
credits against the tax imposed by chapter 1 of the Code allowable, for 
example, under sections 38 (relating to credit against tax for 
investment in certain depreciable property) and 33 (relating to credit 
for taxes of foreign countries and possessions of the United States) may 
be applied against the additional tax.
    (6) Special rules. For purposes of sections 244 (relating to 
dividends received on certain preferred stock), 247 (relating to 
dividends paid on certain preferred stock of public utilities), 804 
(a)(3) (relating to deduction for partially tax-exempt interest in the 
case of a life insurance company), and 922 (relating to special 
deduction for Western Hemisphere trade corporations), the normal tax 
rate referred to in such sections shall be determined without regard to 
the additional tax imposed by section 1562(b). For example, in the case 
of a corporation subject to the additional tax imposed by section 
1562(b) for its taxable year ending December 31, 1965, the percentage 
computed under section 244(a)(2)(B) for such taxable year would be 48 
percent.

[T.D. 6845, 30 FR 9744, Aug. 5, 1965, as amended by T.D. 6960, 33 FR 
9302, June 25, 1968; T.D. 7181, 37 FR 8067, Apr. 25, 1972]



Sec. 1.1562-2   Termination of election.

    (a) In general. An election under section 1562(a)(1) is terminated 
by any one of the occurrences described in paragraph (b) of this 
section. For years affected by termination, see paragraph (c) of this 
section.
    (b) Methods of termination--(1) Consent of the members. An election 
may be terminated with respect to a particular December 31 by consent of 
the component members of a controlled group of corporations. A 
termination by consent shall be made with respect to a particular 
December 31 and shall be valid only if each corporation which is 
required to consent to the termination

[[Page 457]]

under paragraph (a)(1) of Sec. 1.1562-3 gives its consent in the manner 
and within the time prescribed in such section. A termination by consent 
shall not be considered as made with respect to a particular December 31 
until each corporation which is required to consent to the termination 
under paragraph (c)(1) of Sec. 1.1562-3 files the original of a 
statement described in such paragraph (or, the original of a statement 
incorporating its consent is filed on its behalf).
    (2) Refusal by new member to consent. (i) If on a December 31 a 
controlled group of corporations which has made an election under 
section 1562(a)(1) includes a new member which files a statement that it 
does not consent to the election with respect to such December 31, then 
such election shall terminate with respect to such date. Such statement 
shall be signed by any person who is duly authorized to act on behalf of 
the new member, and shall be attached to the income tax return of such 
new member for its taxable year which includes such December 31, filed 
on or before the date prescribed by law (including extensions of time) 
for the filing of such return. The statement shall set forth the name, 
address, taxpayer account number, and taxable year of each corporation 
which was a component member of the controlled group on such December 
31. In the event of a termination under this subparagraph, each 
component member of the controlled group on such December 31 (other than 
such new member) should, within 30 days after such new member files the 
statement of refusal to consent, file notification of the termination 
with the district director with whom it filed (or will file) an income 
tax return for its taxable year which includes such December 31.
    (ii) For purposes of subdivision (i) of this subparagraph, a 
corporation shall be considered to be a new member of a controlled group 
of corporations on a December 31 if such corporation:
    (a) Is a component member of such group on such December 31, and
    (b) Was not a member of such group on the January 1 immediately 
preceding such December 31.
    (3) Consolidated returns. (i) If any corporation which is a 
component member of a controlled group of corporations on a December 31 
joins, or is required to join, in the filing of a consolidated return 
for its taxable year which includes such date, then an election under 
section 1562(a)(1) which is effective with respect to preceding taxable 
years of component members of the group shall terminate with respect to 
such December 31. In the event of a termination under this subparagraph, 
each component member of the controlled group on such December 31 which 
does not join in the filing of a consolidated return for the taxable 
year which includes such date, should, within 30 days after such 
consolidated return is filed, file notification of the termination with 
the district director with whom it filed (or will file) an income tax 
return for its taxable year which includes such December 31.
    (ii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. On each day of 1964 and 1965, Brown, an individual, owns 
all the stock of corporations M and P. Corporation P, in turn, owns all 
the stock of corporation S. Each corporation files a separate return for 
its taxable year ending on December 31, 1964. On April 30, 1965, the 
controlled group of corporations consisting of M, P, and S makes an 
election under section 1562(a)(1) with respect to December 31, 1964. On 
March 15, 1966, P and S join in the filing of a consolidated return for 
their taxable years ending December 31, 1965, and M files a separate 
return for its taxable year ending on such date. Under this 
subparagraph, the election by the controlled group with respect to 
December 31, 1964, is terminated with respect to December 31, 1965. On 
or before April 14, 1966, M should file notification of the termination 
with the district director with whom it filed its income tax return for 
1965.

    (4) Controlled group no longer in existence. If a controlled group 
of corporations is considered as going out of existence with respect to 
a particular December 31 under paragraph (b) of Sec. 1.1562-5, and if 
there is no successor group in respect of such controlled group under 
the rules provided in paragraph (c) of such section, then an election 
under section 1562(a)(1) with respect to such controlled group shall 
terminate with respect to such December 31.
    (c) Effect of termination. A termination under subparagraph (1), 
(2), (3),

[[Page 458]]

or (4) of paragraph (b) of this section is effective with respect to the 
December 31 referred to in such subparagraph. An election, once 
terminated, is no longer effective. Thus, a termination is effective 
with respect to the taxable year of each component member of a 
controlled group of corporations which includes such December 31 and 
with respect to all succeeding taxable years of each corporation which 
is a component member of such group (or a successor group). Moreover, 
after a termination, the controlled group (and any successor group) may 
not make a new election except as provided in section 1562(d) and 
Sec. 1.1562-4.

[T.D. 6845, 30 FR 9745, Aug. 5, 1965]



Sec. 1.1562-3   Consents to election and termination.

    (a) Consents required--(1) General. An election under paragraph 
(a)(1) of Sec. 1.1562-1, or a termination by consent under paragraph 
(b)(1) of Sec. 1.1562-2, may be made by a controlled group of 
corporations with respect to a particular December 31 only if each 
corporation, which was a component member of such group (or a successor 
group) on any December 31 falling within the period beginning on the 
particular December 31 and ending on the most recently past December 31, 
consents to the election or termination within the time prescribed in 
paragraph (b) of this section and in the manner prescribed in paragraph 
(c) of this section. Such election or termination may be made with 
respect to a particular December 31 whether or not the electing or 
terminating group ceases to remain in existence under the principles of 
paragraph (a) of Sec. 1.1562-5 before such election or termination is 
made. In the case of an election with respect to December 31, 1963, if 
each corporation which is required to consent to the election under the 
rules provided in Treasury Decision 6733, approved May 11, 1964 (29 FR 
6320, C.B. 1964-1 (Part 1), 635) gives its consent in the manner 
provided in such Treasury Decision before December 31, 1964, then a 
valid election under section 1562(a)(1) shall be considered to have been 
made with respect to December 31, 1963.
    (2) Examples. The provisions of subparagraph (1) of this paragraph 
may be illustrated by the following examples:

    Example (1). P Corporation is the common parent of a parent-
subsidiary controlled group of which corporations P, S-1, and S-2 are 
component members on December 31, 1965. On December 31, 1966, the 
controlled group consists of the same component members as on December 
31, 1965, except that S-1 is no longer a component member on December 
31, 1966. On December 31, 1967, the controlled group of corporations 
consists of the same component members as on December 31, 1966, except 
that corporation S-3 is also a component member on December 31, 1967. In 
January 1968, the controlled group desires to make an election under 
section 1562(a)(1) with respect to December 31, 1965. Such election may 
be made only if P, S-1 (even though S-1 was not a component member of 
the group on December 31, 1966, or December 31, 1967), S-2, and S-3 
(even though S-3 was not a component member of the group on December 31, 
1965, or December 31, 1966) consent to the election.
    Example (2). Assume the same facts as in example (1) and further 
assume that in January 1968, the controlled group makes a valid election 
with respect to December 31, 1965. If, in July 1968, the controlled 
group desires to terminate the election with respect to December 31, 
1966, P, S-2, and S-3 must consent to the termination.

    (b) Time for consents--(1) Consents to election. The consent of each 
component member of a controlled group of corporations which is required 
with respect to an election for a particular December 31, shall be made 
at any time after such December 31 and before the expiration of 3 years 
after the date on which the income tax return, for the taxable year of 
the component member of the group on such December 31 which has the 
taxable year ending first on or after such date, is required to be filed 
(determined without regard to any extensions of time for the filing of 
such return). See section 1562(e)(1).
    (2) Consents to termination. The consent of each component member of 
a controlled group of corporations which is required with respect to a 
termination for a particular December 31, shall be made at any time 
after such December 31 and before the expiration of 3 years after such 
date. See section 1562(e)(2).
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples:


[[Page 459]]


    Example (1). The component members of a controlled group of 
corporations on December 31, 1965, consist of 2 calendar-year 
corporations, X and Y. The group desires to make an election under 
section 1562(a)(1) with respect to December 31, 1965. Under subparagraph 
(1) of this paragraph, the required consents to the election must be 
made after December 31, 1965, and on or before March 15, 1969. The 
result is the same whether or not X or Y (or both) ceases to be a 
component member of the group after December 31, 1965, and whether or 
not X or Y (or both) is granted an extension of time for the filing of 
its income tax return for 1965.
    Example (2). Assume the same facts as in example (1) except that X 
files its income tax return on the basis of a fiscal year ending January 
31, and Y files its income tax return on the basis of a fiscal year 
ending on June 30. Under subparagraph (1) of this paragraph, the last 
day on which the required consents may be made with respect to an 
election for December 31, 1965, is April 15, 1969.
    Example (3). Assume the same facts as in example (1) or (2) except 
that an election under section 1562(a)(1) is effective for X's and Y's 
taxable years including December 31, 1965. Assume further that the group 
desires to terminate the election with respect to December 31, 1965. 
Under subparagraph (2) of this paragraph, the required consents to the 
termination must be made after December 31, 1965, and on or before 
December 31, 1968.

    (c) Manner of consenting--(1) General rule. (i) The consent of a 
corporation to an election or termination with respect to a particular 
December 31 (other than a corporation which is a wholly-owned subsidiary 
in respect of such election or termination) shall be made by means of a 
statement, signed by any person who is duly authorized to act on behalf 
of the consenting corporation, stating that such corporation consents to 
an election or termination (as the case may be) with respect to such 
December 31. Such statement shall set forth the name, address, and 
taxpayer account number of the consenting member and the internal 
revenue district where the original of the statement is to be filed. The 
consent of more than one component member may be incorporated in a 
single statement. The original of a statement of consent shall be filed 
with the district director with whom the component member of the group 
on the particular December 31 which has the taxable year ending first on 
or after such date filed its return for such taxable year. (If two or 
more component members have the same such taxable year, a statement of 
consent may be filed with the district director with whom the return for 
any such taxable year is filed.) The original of a statement shall have 
attached thereto information (referred to in this paragraph as ``group 
identification'') setting forth the name, address, taxpayer account 
number, and taxable year of each component member of the controlled 
group on such December 31 (including wholly-owned subsidiaries). If the 
particular December 31 is a December 31 other than the December 31 
immediately preceding the date on which such statement is filed then, as 
part of the ``group identification'', the original of the statement 
shall also set forth the information required in the preceding sentence 
with respect to each other corporation which was a component member of 
the group (or a successor group) on any December 31 occurring after the 
particular December 31 on which the consenting corporation was a 
component member of such group. If more than one original statement is 
filed, a statement may incorporate the group identification by reference 
to the name, address, taxpayer account number, and taxable year of a 
component member of the group which has attached such group 
identification to the original of its statement.
    (ii) Each corporation which was a component member of the electing 
(or terminating) controlled group (or a successor group) on a December 
31 falling within the period beginning on the particular December 31 and 
ending on the most recently past December 31 (other than a wholly-owned 
subsidiary in respect of such election or termination) should attach a 
copy of its consent (or a copy of the statement incorporating its 
consent) to each income tax return, amended return, or claim for refund 
filed with its district director for a taxable year which includes any 
such December 31. Such copy should either have attached thereto 
information on group identification or incorporate such information by 
reference to the name, address, taxpayer account number, and taxable 
year of a component member of the group which has attached such 
information to its income tax return, amended return, or

[[Page 460]]

claim for refund filed with the same district director for a taxable 
year which includes any such December 31.
    (2) Wholly-owned subsidiaries. (i) Each corporation which is a 
wholly-owned subsidiary of a controlled group of corporations in respect 
of an election or termination with respect to a particular December 31 
shall be deemed to consent to such election or termination (as the case 
may be). For purposes of this section, a corporation shall be considered 
to be a wholly-owned subsidiary of a controlled group in respect of an 
election or termination with respect to a particular December 31 if, on 
each day falling within the period beginning on the first day of such 
corporation's taxable year which included such December 31 and ending on 
the day on which such election or termination is made (or, if such 
corporation was not in existence on each day of such period, on each day 
falling within such period during which the corporation was in 
existence), all the stock of such corporation is owned directly by one 
or more corporations which are component members of such group (or a 
successor group) on any December 31 falling within such period.
    (ii) Each wholly-owned subsidiary should attach a statement to an 
income tax return, amended return, or claim for refund filed with its 
district director for each taxable year which contains a December 31 
falling within the period described in the last sentence of subdivision 
(i) of this subparagraph, stating that an election or termination (as 
the case may be) is effective for such taxable year and containing the 
information which would be required to be set forth in a statement of 
consent to the election or termination filed pursuant to subparagraph 
(1)(i) of this paragraph. Information on group identification may either 
be attached to the statement or incorporated by reference to the name, 
address, taxpayer account number, and taxable year of a component member 
of the group which has attached such group identification to an income 
tax return, amended return, or claim for refund filed with the same 
district director for the taxable year including such date.
    (d) Effect of consent. Under section 1562(e), any consent to an 
election under section 1562(a)(1) or a termination under section 
1562(c)(1) is deemed to be a consent to the application of section 
1562(g)(1) (relating to tolling of statute of limitations on assessment 
of deficiencies). See Sec. 1.1562-7.

[T.D. 6845, 30 FR 9746, Aug. 5, 1965]



Sec. 1.1562-4   Election after termination.

    (a) In general. Under section 1562(d), if a controlled group of 
corporations has made a valid election under section 1562(a)(1), and 
such election is terminated by any one of the occurrences described in 
paragraph (b) of Sec. 1.1562-2, then such group (or any controlled group 
which is a successor to such group within the meaning of paragraph (c) 
of Sec. 1.1562-5) is not eligible to make an election under section 
1562(a)(1) with respect to any December 31 before the sixth December 31 
after the particular December 31 with respect to which such termination 
was effective. For the particular December 31 with respect to which a 
termination is effective, see paragraph (c) of Sec. 1.1562-2.
    (b) Example. The provisions of this section may be illustrated by 
the following example:

    Example. In 1965, a controlled group of corporations makes a valid 
election under section 1562(a)(1) with respect to December 31, 1964. In 
1967, the election is terminated with respect to December 31, 1964, by 
consent pursuant to paragraph (b)(1) of Sec. 1.1562-2. The group (or any 
successor group) is not eligible to make another election with respect 
to any December 31 before December 31, 1970 (i.e., the sixth December 31 
after December 31, 1964, the particular December 31 with respect to 
which such termination was effective). If in this example the election 
had been terminated with respect to December 31, 1965, instead of 
December 31, 1964, the group (or any successor group) would not be 
eligible to make another election with respect to any December 31 before 
December 31, 1971.

[T.D. 6845, 30 FR 9747, Aug. 5, 1965]



Sec. 1.1562-5   Continuing and successor controlled groups.

    (a) Controlled group continuing in existence. For purposes of 
Secs. 1.1561-3 and 1.1562-1 through 1.1562-4:
    (1) Parent-subsidiary group. A parent-subsidiary controlled group of 
corporations shall be considered as remaining in existence as long as 
(i) such group is not considered, under paragraph (c)(3)

[[Page 461]]

of this section, to be a successor controlled group in respect of 
another controlled group, and (ii) its common parent corporation remains 
as a common parent and satisfies the requirements of paragraph 
(a)(2)(i)(b) of Sec. 1.1563-1 with respect to the ownership of stock of 
at least one corporation.
    (2) Brother-sister group. A brother-sister controlled group of 
corporations shall be considered as remaining in existence as long as 
the requirements of paragraph (a)(3)(i) of Sec. 1.1563-1 continue to be 
satisfied with respect to at least two corporations, taking into account 
the stock ownership of only those five or fewer persons whose stock 
ownership was taken into account with respect to the election under 
section 1562(a)(1).
    (3) Combined group. A combined group of corporations shall be 
considered as remaining in existence as long as (i) the brother-sister 
controlled group of corporations referred to in paragraph (a)(4)(i) of 
Sec. 1.1563-1 in respect of such combined group remains in existence 
(within the meaning of subparagraph (2) of this paragraph), and (ii) at 
least one such corporation is a common parent of a parent-subsidiary 
controlled group of corporations referred to in such paragraph 
(a)(4)(i).
    (4) Insurance group. If, by reason of paragraph (a)(5)(i) of 
Sec. 1.1563-1, two or more insurance companies subject to taxation under 
section 802 are treated as an insurance group separate from any 
corporations which are members of a controlled group described in 
paragraph (a) (2), (3), or (4) of Sec. 1.1563-1, such insurance group 
shall be considered as remaining in existence as long as (i) the 
controlled group described in paragraph (a) (2), (3), or (4) of such 
section, as the case may be, remains in existence (within the meaning of 
subparagraph (1), (2), or (3) of this paragraph), and (ii) there are at 
least two insurance companies which satisfy the requirements of 
paragraph (a)(5)(i) of such section.
    (b) Controlled group no longer in existence--(1) General. Except as 
provided in subparagraph (3) of this paragraph, a controlled group of 
corporations is considered as going out of existence with respect to a 
December 31 if such group ceases to remain in existence under the 
principles of paragraph (a) of this section during the calendar year 
ending on such date.
    (2) Examples. The provisions of subparagraph (1) of this paragraph 
may be illustrated by the following examples, in which each corporation 
referred to uses the calendar year as its taxable year:

    Example (1). Corporation P was organized on January 1, 1964, and 
acquired all the stock of corporation S-1 on February 1, 1964, and all 
the stock of corporation S-2 on March 1, 1965. On April 1, 1965, P sold 
all its S-1 stock to the public. Beginning on February 1, 1964, P is the 
common parent corporation of a parent-subsidiary controlled group of 
corporations. Under paragraph (a)(1) of this section, the controlled 
group remains in existence throughout the remainder of 1964 and 
throughout 1965 even though after April 1, 1965, P satisfies the stock 
ownership requirements of paragraph (a)(2)(i) (b) of Sec. 1.1563-1 only 
with respect to the stock of S-2, a corporation which was not a member 
of the group at the time the group was formed, and even though S-1 
ceased to be a member of the group after the group was formed. 
Accordingly, if the controlled group makes a valid election under 
section 1562(a)(1) with respect to December 31, 1964, such election will 
remain in effect with respect to December 31, 1965, unless terminated 
under section 1562(c) (1), (2), or (3). Moreover, if such election were 
made and subsequently terminated with respect to December 31, 1964, the 
group would not be eligible (by reason of section 1562(d)) to make an 
election under section 1562(a)(1) with respect to December 31, 1965.
    Example (2). Assume the same facts as in example (1) except that 
corporation S-2 is a franchised corporation as defined in section 
1563(f)(4) for its 1965 taxable year. On December 31, 1965, S-2 is 
treated as an excluded member of the parent-subsidiary controlled group 
of which P is the common parent. See section 1563(b)(2)(E). 
Nevertheless, such controlled group is considered as remaining in 
existence throughout 1965.
    Example (3). Assume the same facts as in example (1) except that P 
sold its S-1 stock on February 28, 1965, instead of April 1, 1965. Under 
the principles of paragraph (a)(1) of this section, the parent-
subsidiary controlled group ceases to remain in existence on February 
28, 1965. Accordingly, under subparagraph (1) of this paragraph, such 
group is considered as going out of existence with respect to December 
31, 1965. Thus, if the group makes a valid election under section 
1562(a)(1) with respect to December 31, 1964, such election terminates 
with respect to December 31, 1965. Moreover, the new controlled group of 
corporations consisting of P and S-2 is not precluded (by reason of 
section

[[Page 462]]

1562(d)) from making an election under section 1562(a)(1) with respect 
to December 31, 1965.
    Example (4). Smith, an individual, owns 80 percent of the only class 
of stock of corporations W and X on each day of 1966 and 1967. W, in 
turn, owns 80 percent of the only class of stock of corporation Y on 
each day of 1966. On April 15, 1967, X purchases 80 percent of the only 
class of corporation Z and on April 30, 1967, W sells all its stock in 
Y. Under paragraph (a)(3) of this section, the combined group remains in 
existence throughout 1966 and 1967 since (i) the brother-sister 
controlled group of corporations referred to in paragraph (a)(4)(i) of 
Sec. 1.1563-1 in respect of such combined group remains in existence, 
and (ii) at least one corporation is a common parent of a parent-
subsidiary controlled group referred to in such paragraph.
    Example (5). Assume the same facts as in example (4) except that Y 
and Z are life insurance companies subject to taxation under section 802 
of the Code. Further assume that throughout 1966 and 1967 Y owns all the 
stock of corporation S, and Z owns all the stock of corporation T. S and 
T are life insurance companies subject to taxation under section 802. 
Before April 15, 1967, under paragraph (a)(5)(i) of Sec. 1.1563-1, Y and 
S are treated as an insurance group of corporations. After April 30, 
1967, under paragraph (a)(4) of this section, Z and T are treated as an 
insurance group which remains in existence throughout 1966 and 1967, 
since the combined group remains in existence within the meaning of 
paragraph (a)(3) of this section throughout 1966 and 1967, and there are 
at all times at least two insurance companies which satisfy the 
requirements of paragraph (a)(5)(i) of Sec. 1.1563-1. (However, after 
April 30, 1967, Y and S cease to be members of the combined group and 
are considered to be a new controlled group of corporations.)
    Example (6). Jones, an individual, owns all the stock of 
corporations M and N on each day of 1966. On February 1, 1967, he gives 
all the stock of M to his 18-year-old son who continues to hold the M 
stock throughout the remainder of 1967. Since Jones (or his son) owns, 
or is considered as owning under paragraph (b)(6)(i) of Sec. 1.1563-3, 
all the stock of M and N on each day of 1967, under paragraph (a)(2) of 
this section the brother-sister controlled group consisting of M and N 
remains in existence throughout 1967.

    (3) Special rule. If:
    (i) Under subparagraph (1) of this paragraph, a controlled group of 
corporations would (without regard to this subparagraph) be considered 
as going out of existence with respect to a December 31 because two or 
more corporations cease to be members of such group during the calendar 
year ending on such date,
    (ii) Under paragraph (c) of this section, there is no successor 
group in respect of such group, and
    (iii) At least two of such corporations are considered to be 
component members of such group on such December 31 by reason of the 
additional member rule of paragraph (b)(3) of Sec. 1.1563-1,

then such group shall be considered as going out of existence with 
respect to the December 31 immediately succeeding such December 31. For 
example, assume that corporations P and S file their returns on the 
basis of the calendar year. P owns all the stock of S from January 1, 
1965, through December 1, 1965. On December 2, 1965, P sells the stock 
of S to the public. Under subparagraph (1) of this paragraph the 
controlled group consisting of P and S would (without regard to this 
subparagraph) be considered as going out of existence with respect to 
December 31, 1965, because P and S ceased to be members of the group on 
December 2, 1965. However, since there is no successor group in respect 
of the controlled group, and P and S are considered to be component 
members of such group on December 31, 1965, by reason of the additional 
member rule of paragraph (b)(3) of Sec. 1.1563-1, under this 
subparagraph the group is considered as going out of existence with 
respect to December 31, 1966, and not December 31, 1965.
    (c) Successor groups--(1) Transactions involving a former owner or 
owners. If, as a result of the transfer of stock of a corporation or 
corporations (whether by sale, exchange, distribution, contribution to 
capital, or otherwise), a controlled group (``old group'') goes out of 
existence, and a new controlled group (``new group'') comes into 
existence, then the new group shall be considered to be a successor to 
the old group, provided one of the following applies:
    (i) A person or persons who own stock of the new group that meets 
the more-than-50-percent stock ownership requirement of section 
1563(a)(2)(B) owned stock which met such stock ownership requirement 
with respect to the old group;
    (ii) A person or persons who owned more than 50 percent of the fair 
market

[[Page 463]]

value of the stock of the common parent of the old group owns, with 
respect to the new group, stock that meets the more-than-50-percent 
stock ownership requirement of section 1563(a)(2)(B); or
    (iii) A person or persons who owned stock that met the more-than-50-
percent stock ownership requirement of section 1563(a)(2)(B) with 
respect to the old group owns more than 50 percent of the fair market 
value of the stock of the common parent of the new group.

For purposes of this paragraph, the term ``owns'' includes direct 
ownership and ownership with the application of the rules contained in 
paragraph (b) of Sec. 1.1563-3. For purposes of this subparagraph, if as 
a result of the transfer of stock, a parent-subsidiary controlled group 
or a brother-sister controlled group becomes a part of a combined group, 
then such parent-subsidiary or brother-sister group shall be considered 
as going out of existence as a result of such transfer. Also for 
purposes of this subparagraph, if as a result of the transfer of stock, 
a combined group goes out of existence and a parent-subsidiary or 
brother-sister group which was part of such combined group remains, then 
such parent-subsidiary or brother-sister group shall be considered to be 
a new controlled group which came into existence as a result of such 
transfer.
    (2) Examples. The principles of subparagraph (1) of this paragraph 
may be illustrated by the following examples:

    Example (1). On each day of 1971, unrelated individuals Grey, Black, 
and Green own the following amounts of the only class of outstanding 
stock of each of corporations R and T: Grey owns 40 percent, Black owns 
40 percent, and Green owns 20 percent. On March 1, 1972, Grey sells all 
his stock in both corporations to unrelated individual Clay. As a result 
of the transfer, the brother-sister controlled group consisting of R and 
T goes out of existence. Since Black and Green, who owned stock which 
met the more-than-50-percent stock ownership requirement of section 
1563(a)(2)(B) with respect to the old group, owns stock of the new group 
(consisting of R and T) that meets the more-than-50-percent stock 
ownership requirement of section 1563(a)(2)(B), the new group is 
considered to be the successor to the old group. If Green also sold all 
his stock in both corporations to unrelated individual Barnes, Black 
would be the only stockholder of the new group whose stock ownership was 
taken into account in meeting the more-than-50-percent stock ownership 
requirement of section 1563(a)(2)(B) with respect to the old group. 
Since Black would not own stock of the new group that meets the more-
than-50-percent stock ownership requirement of section 1563(a)(2)(B), 
the new group would not be considered a successor to the controlled 
group which went out of existence.
    Example (2). On each day of 1971, all the outstanding stock of 
corporation P is owned in the following manner: Smith owns 30 percent, 
Jones owns 30 percent, and White owns 40 percent. P owns all the stock 
of corporation S1, S2, W1 and 
W2. On December 31, 1971, P, S1, S2, 
W1, and W2 are component members of the same 
controlled group. If on March 1, 1972, P distributes all the stock of 
S1 and S2 equally to Smith and Jones and all the 
stock of W1 and W2 to White, the controlled group 
consisting of P, S1, S2, W1, and 
W2 goes out of existence. Since Smith and Jones, who together 
owned stock which met the more-than-50-percent stock ownership 
requirement of section 1563 (a)(2)(B) with respect to the old group, now 
together own stock of the new group (consisting of S1 and 
S2) that meets the more-than-50-percent stock ownership 
requirement of section 1563(a)(2)(B), such new group is considered the 
successor to the old group. On the other hand, since White, the sole 
shareholder of W1 and W2, did not own stock which 
met such stock ownership requirement with respect to the old group, the 
new group consisting of W1 and W2 is not 
considered a successor of the old group.

    (3) Transactions involving two common parents. If, as a result of 
the transfer of stock of a corporation or corporations (whether by sale, 
exchange, distribution, contribution to capital, or otherwise):
    (i) A parent-subsidiary controlled group of corporations goes out of 
existence because its common parent corporation ceases to be a common 
parent, and
    (ii) The stockholders (immediately before the transfer) of such 
common parent corporation, as a result of owning stock in such common 
parent, own (immediately after the transfer) more than 50 percent of the 
fair market value of the stock of a corporation which is the common 
parent corporation of a controlled group of corporations immediately 
after the transfer,

the resulting controlled group shall be considered to be a successor 
group in respect of the controlled group which went out of existence as 
a result of the transfer.

[[Page 464]]

    (4) Example. The provisions of subparagraph (3) of this paragraph 
may be illustrated by the following example:

    Example. Corporation Y, the common parent of a parent-subsidiary 
controlled group, acquires the assets of corporation X, the common 
parent of another controlled group, in a statutory merger. The 
stockholders of X exchange their X stock for 60 percent of the fair 
market value of all of the outstanding shares of Y. Since, as a result 
of the exchange, (i) the parent-subsidiary controlled group of which X 
was the common parent goes out of existence because X ceases to be a 
common parent, and (ii) the stockholders of X, as a result of owning 
stock in X, own immediately after the exchange more than 50 percent of 
the fair market value of the stock of Y (the common parent of a 
controlled group of corporations immediately after the exchange), the 
controlled group of which Y is the common parent after the merger is 
considered to be a successor group in respect of the controlled group of 
which X was the common parent, and the group of which Y was the common 
parent before the merger is considered, under paragraph (a)(1) of this 
section, as no longer in existence. Thus, for example, if before the 
merger the controlled group of which X was the common parent was not 
eligible, by reason of the application of section 1562(d), to make an 
election under section 1562(a)(1) with respect to a December 31 
occurring before December 31, 1970, then the successor controlled group 
would also be ineligible to make an election with respect to a December 
31 occurring before December 31, 1970, whether or not the controlled 
group of which Y was the common parent before the merger had an election 
in effect pursuant to section 1562(a)(1).

[T.D. 6845, 30 FR 9747, Aug. 5, 1965, as amended by T.D. 7181, 37 FR 
8067, Apr. 25, 1972]



Sec. 1.1562-6  Election for short taxable years.

    (a) Application of election to short taxable years--(1) General. If 
the return of a corporation is for a short period which does not include 
a December 31, and if such corporation is a component member of a 
controlled group of corporations with respect to such short period, then 
an election under section 1562(a)(1) by such group shall apply with 
respect to such short period if:
    (i) Such election is in effect with respect to both the December 31, 
immediately preceding such short period (hereinafter in this section 
referred to as the ``preceding December 31'') and the December 31 
immediately succeeding such short period (hereinafter in this section 
referred to as the ``succeeding December 31''), or
    (ii) Such election is in effect with respect to either the preceding 
December 31 or the succeeding December 31, and each corporation which is 
a component member of such group with respect to a short period falling 
between such dates consents to the application of such election to such 
short period. See subparagraph (4) of this paragraph for rules relating 
to an election with respect to certain short taxable years ending during 
1964.
    (2) Component members. For purposes of this section, the 
determination of whether a corporation is a component member of a 
controlled group of corporations with respect to a short period shall be 
made by applying the definition of component member contained in section 
1563(b) and paragraph (b) of Sec. 1.1563-1 as if the last day of such 
short period were a December 31 occurring after December 31, 1963.
    (3) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. On December 31, 1964, corporations P, S-1, and S-2 are 
component members of a parent-subsidiary controlled group of 
corporations. P, S-1, and S-2 each uses the calendar year as its taxable 
year. On February 1, 1965, S-1 transfers property to newly formed 
corporation S-3 (which begins business on that date) and receives all 
the stock of S-3 in return. S-3 adopts a fiscal year ending on November 
30 as its taxable year and, therefore, files a return for the short 
taxable year beginning on February 1, 1965, and ending on November 30, 
1965. On December 5, 1965, S-2 is liquidated, and therefore files a 
return for the short taxable year beginning on January 1, 1965, and 
ending on December 5, 1965. S-2 and S-3 are component members of the 
controlled group of corporations with respect to their short taxable 
years falling between December 31, 1964, and December 31, 1965, within 
the meaning of subparagraph (2) of this paragraph. Assume that the 
controlled group has an election under section 1562(a)(1) in effect with 
respect to either December 31, 1964, or December 31, 1965, but not both 
such dates. Under subparagraph (1)(ii) of this paragraph, S-2 and S-3 
must both file consents to the application of the section 1562(a)(1) 
election with respect to their short periods in order for the election 
to be effective with respect to either such short period.

    (4) Election for certain short taxable years ending during 1964. If:

[[Page 465]]

    (i) A corporation is a component member of a controlled group of 
corporations with respect to a short taxable year beginning and ending 
in 1964,
    (ii) Each corporation which was a component member of such group on 
December 31, 1963 (determined without regard to paragraph (b)(2)(iii) of 
Sec. 1.1563-1, relating to the treatment of a corporation which has a 
taxable year ending on December 31, 1963, as an excluded member of a 
controlled group on such date) filed its income tax return on the basis 
of the calendar year ending on such date, and
    (iii) Such controlled group of corporations is considered as going 
out of existence with respect to December 31, 1964, pursuant to 
paragraph (b)(4) of Sec. 1.1562-2,

then, for purposes of paragraph (a)(1) (ii) of this section, an election 
by such controlled group under section 1562(a) (1) shall be deemed to 
have been in effect for the preceding December 31. Each corporation 
which is a component member of such group with respect to a short period 
falling between such preceding and succeeding December 31's must, on or 
before November 3, 1965, consent to the application of such election to 
its short period falling between such December 31's.
    (b) Status at time of filing return. If, on the date a corporation 
files its income tax return for a short period falling between a 
preceding and succeeding December 31 (with respect to which period it is 
a component member of a controlled group of corporations):
    (1) Election not effective. An election under section 1562(a)(1) is 
not effective with respect to either such preceding or succeeding 
December 31, then such member shall determine its surtax exemption for 
purposes of such return in accordance with section 1561(b).
    (2) Election effective for preceding December 31. An election under 
section 1562(a)(1) is effective with respect to such preceding December 
31, and if on the date the return is filed the election has not been 
terminated with respect to such succeeding December 31, then such member 
may compute its tax for purposes of such return on the assumption that 
the conditions of paragraph (a)(1)(i) of this section are satisfied with 
respect to such short period.
    (3) Election effective for preceding or succeeding December 31. An 
election under section 1562(a)(1) is effective with respect to either 
(but not both) such preceding or succeeding December 31, and the return 
is filed after such succeeding December 31, then the member's surtax 
exemption for purposes of such return shall be determined in accordance 
with section 1561(b) unless:
    (i) It attaches to such return its consent to the application of 
such election to such short period, and
    (ii) Each other corporation which is a component member of the group 
with respect to a short period falling between such December 31's files, 
within 30 days after such return is filed, a consent to the application 
of such election to its short period falling between such December 31's.
    (c) Election or termination after returns filed--(1) Election. If, 
after each component member of a controlled group with respect to a 
short period falling between a preceding and succeeding December 31 
files its return for such short period, the group makes an election 
under section 1562(a)(1) with respect to such succeeding December 31, 
then the election shall apply with respect to each such short period 
only if each such member files, within 30 days after such election is 
made, a consent to the application of such election to its short period.
    (2) Termination. If, after each component member of a controlled 
group with respect to a short period falling between a preceding and 
succeeding December 31 files its return for such short period, an 
election under section 1562(a)(1) which is effective with respect to 
such group with respect to such preceding December 31 is terminated with 
respect to such succeeding December 31, then such election shall apply 
with respect to each such short period only if each such member files, 
within 30 days after the termination occurs, a consent to the 
application of such election to its short period. For purposes of the 
preceding sentence, (i) the termination of an election by consent under 
section 1562(c)(1) shall be considered to occur on the date the 
termination is made, and (ii) the termination of an election under 
section

[[Page 466]]

1562(c) (2), (3), or (4) shall be considered to occur on the date the 
event causing termination occurs (for example, on the date a new member 
files a refusal to consent, or on the date a consolidated return is 
filed) unless the election is made after such date, in which case the 
termination shall be considered to occur on the date the election is 
made.
    (d) Manner of consenting. A consent referred to in paragraph (b)(3) 
or (c) of this section shall be made by means of a statement, signed by 
any person who is duly authorized to act on behalf of the consenting 
corporation, stating that such corporation consents to the application 
of an election under section 1562(a)(1) with respect to its short 
period. Each such statement shall set forth the name, address, taxpayer 
account number, and taxable year of (1) each corporation which is a 
component member of the electing controlled group with respect to a 
short period falling between the preceding December 31 and the 
succeeding December 31, and (2) each corporation which is a component 
member of such group on either the preceding or succeeding December 31. 
Each consenting corporation shall file such statement with the district 
director with whom it files (or filed) its income tax return for the 
short period.

[T.D. 6845, 30 FR 9749, Aug. 5, 1965]



Sec. 1.1562-7  Extension of statutory periods of limitation.

    (a)(1) Under section 1562(g)(1), the statutory period for assessment 
of any deficiency against a corporation which is a component member of a 
controlled group of corporations with respect to any taxable year, to 
the extent such deficiency is attributable to an election under section 
1562(a)(1) or a termination by consent under section 1562(c)(1), shall 
not expire before the expiration of one year after the date such 
election or termination is made.
    (2) Under section 1562(g)(2), the statutory period for allowing or 
making credit or refund of any overpayment of tax by a corporation which 
is a component member of a controlled group of corporations with respect 
to any taxable year, to the extent such overpayment is attributable to 
an election under section 1562(a)(1) or a termination by consent under 
section 1562(c)(1), shall not expire before the expiration of one year 
after the date such election or termination is made.
    (b) For purposes of this section, the deficiency or overpayment in 
tax attributable to an election under section 1562(a)(1) or a 
termination by consent under section 1562(c)(1) shall be that amount of 
the increase or decrease in tax over the amount previously determined 
(as defined in section 1314(a)) for any taxable year which results from 
the application or nonapplication of section 1562, as the case may be. 
In determining the amount of such increase or decrease, due regard shall 
be given to the effect of any change in the amount of the surtax 
exemption (or the application or nonapplication of the additional tax 
under section 1562(b)) on credits allowable for any taxable year. Thus, 
for example, as a result of such change it may be necessary to recompute 
the amount of the investment credit allowable under section 38 for a 
taxable year for which the election or termination is effective and for 
other taxable years affected, or treated as affected, by an investment 
credit carryback or carryover (as defined in section 46(b)) determined 
with reference to the taxable years with respect to which such election 
or termination is effective.
    (c) The provisions of this section shall not be construed to:
    (1) Shorten the period within which an assessment of a deficiency 
may otherwise be made or the credit or refund of an overpayment may 
otherwise be allowed or made, or
    (2) Apply to a deficiency or overpayment for a taxable year if the 
tax liability for such taxable year has been compromised under section 
7122, or is the subject of a closing agreement under section 7121.

[T.D. 6845, 30 FR 9750, Aug. 5, 1965]



Sec. 1.1563-1   Definition of controlled group of corporations and component members.

    (a) Controlled group of corporations--(1) In general. For purposes 
of sections 1561 through 1563 and the regulations thereunder, the term 
``controlled group of corporations'' means any group of

[[Page 467]]

corporations which is either a ``parent-subsidiary controlled group'' 
(as defined in subparagraph (2) of this paragraph), a ``brother-sister 
controlled group'' (as defined in subparagraph (3) of this paragraph), a 
``combined group'' (as defined in subparagraph (4) of this paragraph), 
or an ``insurance group'' (as defined in subparagraph (5) of this 
paragraph). For the exclusion of certain stock for purposes of applying 
the definitions contained in this paragraph, see section 1563(c) and 
Sec. 1.1563-2.
    (2) Parent-subsidiary controlled group. (i) The term ``parent-
subsidiary controlled group'' means one or more chains of corporations 
connected through stock ownership with a common parent corporation if:
    (a) Stock possessing at least 80 percent of the total combined 
voting power of all classes of stock entitled to vote or at least 80 
percent of the total value of shares of all classes of stock of each of 
the corporations, except the common parent corporation, is owned 
(directly and with the application of paragraph (b)(1) of Sec. 1.1563-3, 
relating to options) by one or more of the other corporations; and
    (b) The common parent corporation owns (directly and with the 
application of paragraph (b)(1) of Sec. 1.1563-3, relating to options) 
stock possessing at least 80 percent of the total combined voting power 
of all classes of stock entitled to vote or at least 80 percent of the 
total value of shares of all classes of stock of at least one of the 
other corporations, excluding, in computing such voting power or value, 
stock owned directly by such other corporations.
    (ii) The definition of a parent-subsidiary controlled group of 
corporations may be illustrated by the following examples:

    Example (1). P Corporation owns stock possessing 80 percent of the 
total combined voting power of all classes of stock entitled to vote of 
S Corporation. P is the common parent of a parent-subsidiary controlled 
group consisting of member corporations P and S.
    Example (2). Assume the same facts as in example (1). Assume further 
that S owns stock possessing 80 percent of the total value of shares of 
all classes of stock of T Corporation. P is the common parent of a 
parent-subsidiary controlled group consisting of member corporations P, 
S, and T. The result would be the same if P, rather than S, owned the T 
stock.
    Example (3). L Corporation owns 80 percent of the only class of 
stock of M Corporation and M, in turn, owns 40 percent of the only class 
of stock of O Corporation. L also owns 80 percent of the only class of 
stock of N Corporation and N, in turn, owns 40 percent of the only class 
of stock of O. L is the common parent of a parent-subsidiary controlled 
group consisting of member corporations L, M, N, and O.
    Example (4). X Corporation owns 75 percent of the only class of 
stock of Y and Z Corporations; Y owns all the remaining stock of Z; and 
Z owns all the remaining stock of Y. Since intercompany stockholdings 
are excluded (that is, are not treated as outstanding) for purposes of 
determining whether X owns stock possessing at least 80 percent of the 
voting power or value of at least one of the other corporations, X is 
treated as the owner of stock possessing 100 percent of the voting power 
and value of Y and of Z for purposes of subdivision (i)(b) of this 
subparagraph. Also, stock possessing 100 percent of the voting power and 
value of Y and Z is owned by the other corporations in the group within 
the meaning of subdivision (i)(a) of this subparagraph. (X and Y 
together own stock possessing 100 percent of the voting power and value 
of Z, and X and Z together own stock possessing 100 percent of the 
voting power and value of Y.) Therefore, X is the common parent of a 
parent-subsidiary controlled group of corporations consisting of member 
corporations X, Y, and Z.

    (3) Brother-sister controlled group. (i) The term ``brother-sister 
controlled group'' means two or more corporations if the same five or 
fewer persons who are individuals, estates, or trusts own (directly and 
with the application of the rules contained in paragraph (b) of 
Sec. 1.1563-3) stock possessing:
    (a) At least 80 percent of the total combined voting power of all 
classes of stock entitled to vote or at least 80 percent of the total 
value of shares of all classes of the stock of each corporation; and
    (b) More than 50 percent of the total combined voting power of all 
classes of stock entitled to vote or more than 50 percent of the total 
value of shares of all classes of stock of each corporation, taking into 
account the stock ownership of each such person only to the extent such 
stock ownership is identical with respect to each such corporation.

The five or fewer persons whose stock ownership is considered for 
purposes of the 80 percent requirement must be the

[[Page 468]]

same persons whose stock ownership is considered for purposes of the 
more-than-50 percent requirement.
    (ii) The principles of this subparagraph may be illustrated by the 
following examples:

    Example (1). The outstanding stock of corporations P, Q, R, S, and 
T, which have only one class of stock outstanding is owned by the 
following unrelated individuals:

                                                  Corporations                                                  
----------------------------------------------------------------------------------------------------------------
                Individuals                    P       Q       R       S       T         Identical ownership    
----------------------------------------------------------------------------------------------------------------
A.........................................     55%     51%     55%     55%     55%  51%.                        
B.........................................     45%     49%  ......  ......  ......  (45% in P & Q).             
C.........................................  ......  ......     45%  ......  ......  ............................
D.........................................  ......  ......  ......     45%  ......  ............................
E.........................................  ......  ......  ......  ......     45%  ............................
                                                   -------------------------------------------------------------
  Total...................................    100%    100%    100%    100%    100%  ............................
----------------------------------------------------------------------------------------------------------------

Corporations P and Q are members of a brother-sister controlled group of 
corporations. Although the more-than-50 percent identical ownership 
requirement is met for all 5 corporations, corporations R, S, and T are 
not members becasue at least 80 percent of the stock of each of those 
corporations is not owned by the same 5 or fewer persons whose stock 
ownership is considered for purposes of the more-than-50 percent 
identical ownership requirement.
    Example (2). The outstanding stock of corporations U and V, which 
have only one class of stock outstanding, is owned by the following 
unrelated individuals:

------------------------------------------------------------------------
                                                        Corporations    
                                                   ---------------------
                    Individuals                         U          V    
                                                    (percent)  (percent)
------------------------------------------------------------------------
A.................................................         12         12
B.................................................         12         12
C.................................................         12         12
D.................................................         12         12
E.................................................         13         13
F.................................................         13         13
G.................................................         13         13
H.................................................         13         13
                                                              ----------
  Total...........................................        100        100
------------------------------------------------------------------------

Any group of five of the shareholders will own more than 50 percent of 
the stock in each corporation, in identical holdings. However, U and V 
are not members of brother-sister controlled group because at least 80 
percent of the stock of each corporation is not owned by the same five 
or fewer persons.
    Example (3). Corporation X and Y each have two classes of stock 
outstanding, voting common and non-voting common. (None of this stock is 
excluded from the definition of stock under section 1563(c).) Unrelated 
individuals A and B owns the following percentages of the class of stock 
entitled to vote (voting) and of the total value of shares of all 
classes of stock (value) in each of corporations X and Y:

------------------------------------------------------------------------
                                               Corporations             
           Individuals           ---------------------------------------
                                           X                   Y        
------------------------------------------------------------------------
A...............................  100% voting, 60%    75% voting, 60%   
                                   value.              value.           
B...............................  0% voting, 10%      25% voting, 10%   
                                   value.              value.           
------------------------------------------------------------------------

No other shareholder of X owns (or is considered to own) any stock in Y. 
X and Y are a brother-sister controlled group of corporations. The group 
meets the more-than-50 percent ownership requirements because A and B 
own more than 50 percent of the total value of shares of all classes of 
stock of X and Y in identical holdings. (The group also meets the more-
than-50 percent ownership requirement because of A's voting stock 
ownership.) The group meets the 80 percent requirement because A and B 
own at least 80 percent of the total combined voting power of all 
classes of stock entitled to vote.
    Example (4). Assume the same facts as in example (3) except that the 
value of the stock owned by A and B is not more than 50 percent of the 
total value of shares of all classes of stock of each corporation in 
identical holdings. X and Y are not a brother-sister controlled group of 
corporations. The group meets the more-than-50 percent ownership 
requirement because A owns more than 50 percent of the total combined 
voting power of the voting stock of each corporation. For purposes of 
the 80 percent requirement, B's voting stock in Y cannot be combined 
with A's voting stock in Y since B, who does not own any voting stock in 
X, is not a person whose ownership is considered for purposes of the 
more-than-50 percent requirement. Because no other shareholder owns 
stock in both X and Y, these other shareholders' stock ownership is not 
counted towards meeting either the more-than-50 percent ownership 
requirement or the 80-percent ownership requirement.

    (iii) Paragraph (a)(3) of this section, as amended, by T.D. 8179 
applies to taxable years ending on or after December 31, 1970. See, 
however, the transitional rule in paragraph (d) of this section.
    (4) Combined group. (i) The term ``combined group'' means any group 
of three or more corporations, if:
    (a) Each such corporation is a member of either a parent-subsidiary 
controlled group of corporations or a

[[Page 469]]

brother-sister controlled group of corporations, and
    (b) At least one of such corporations is the common parent of a 
parent-subsidiary controlled group and also is a member of a brother-
sister controlled group.
    (ii) The definition of a combined group of corporations may be 
illustrated by the following examples:

    Example (1). Smith, an individual, owns stock possessing 80 percent 
of the total combined voting power of all classes of the stock of 
corporations X and Y. Y, in turn, owns stock possessing 80 percent of 
the total combined voting power of all classes of the stock of 
corporation Z. Since:
    (a) X, Y, and Z are each members of either a parent-subsidiary or 
brother-sister controlled group of corporations, and
    (b) Y is the common parent of a parent-subsidiary controlled group 
of corporations consisting of Y and Z, and also is a member of a 
brother-sister controlled group of corporations consisting of X and Y,

X, Y, and Z are members of the same combined group.
    Example (2). Assume the same facts as in example (1), and further 
assume that corporation X owns 80 percent of the total value of shares 
of all classes of stock of corporation T, X, Y, Z, and T are members of 
the same combined group.

    (5) Insurance group. (i) The term ``insurance group'' means two or 
more insurance companies subject to taxation under section 802 each of 
which is a member of a controlled group of corporations described in 
subparagraph (2), (3), or (4) of this paragraph. Such insurance 
companies shall be treated as a controlled group of corporations 
separate from any other corporations which are members of the controlled 
group described in such subparagraph (2), (3), or (4). For purposes of 
this section and Sec. 1.1562-5, the common parent of the controlled 
group described in subparagraph (2) of this paragraph shall be referred 
to as the common parent of the insurance group.
    (ii) The definition of an insurance group may be illustrated by the 
following example:

    Example. Corporation P owns all the stock of corporation I which, in 
turn, owns all the stock of corporation X. P also owns all the stock of 
corporation Y which, in turn, owns all the stock of corporation J. I and 
J are life insurance companies subject to taxation under section 802 of 
the Code. Since I and J are members of a parent-subsidiary controlled 
group of corporations, such companies are treated as members of an 
insurance group separate from the parent-subsidiary controlled group 
consisting of P, X, and Y. For purposes of this section and Sec. 1.1562-
5, P is referred to as the common parent of the insurance group even 
though P is not a member of such group.

    (6) Voting power of stock. For purposes of Sec. 1.1562-5, this 
section, and Secs. 1.1563-2 and 1.1563-3, in determining whether the 
stock owned by a person (or persons) possesses a certain percentage of 
the total combined voting power of all classes of stock entitled to vote 
of a corporation, consideration will be given to all the facts and 
circumstances of each case. A share of stock will generally be 
considered as possessing the voting power accorded to such share by the 
corporate charter, by-laws, or share certificate. On the other hand, if 
there is any agreement, whether express or implied, that a shareholder 
will not vote his stock in a corporation, the formal voting rights 
possessed by his stock may be disregarded in determining the percentage 
of the total combined voting power possessed by the stock owned by other 
shareholders in the corporation, if the result is that the corporation 
becomes a component member of a controlled group of corporations. 
Moreover, if a shareholder agrees to vote his stock in a corporation in 
the manner specified by another shareholder in the corporation, the 
voting rights possessed by the stock owned by the first shareholder may 
be considered to be possessed by the stock owned by such other 
shareholder if the result is that the corporation becomes a component 
member of a controlled group of corporations.
    (b) Component members--(1) In general. For purposes of sections 1561 
through 1563 and the regulations thereunder, a corporation is a 
component member of a controlled group of corporations on a December 31 
(and with respect to the taxable year which includes such December 31) 
if such corporation:
    (i) Is a member of such controlled group on such December 31 and is 
not treated as an excluded member under subparagraph (2) of this 
paragraph, or
    (ii) Is not a member of such controlled group on such December 31 
but is treated as an additional member

[[Page 470]]

under subparagraph (3) of this paragraph.
    (2) Excluded members. (i) A corporation, which is a member of a 
controlled group of corporations on the December 31 included within its 
taxable year, but was a member of such group for less than one-half of 
the number of days in such taxable year which precede such December 31, 
shall be treated as an excluded member of such group on such December 
31.
    (ii) A corporation which is a member of a controlled group of 
corporations on any December 31 shall be treated as an excluded member 
of such group on such date if, for its taxable year including such date, 
such corporation is:
    (a) Exempt from taxation under section 501(a) (except a corporation 
which has unrelated business taxable income for such taxable year which 
is subject to tax under section 511) or 521,
    (b) A foreign corporation not subject to taxation under section 
882(a) for the taxable year,
    (c) An electing small business corporation (as defined in section 
1371(b)) not subject to the tax imposed by section 1378,
    (d) A franchised corporation (as defined in section 1563(f)(4) and 
Sec. 1.1563- 4), or
    (e) An insurance company subject to taxation under section 802 or 
821, except that an insurance company taxable under section 802 which 
(without regard to this subdivision) is a component member of an 
insurance group described in paragraph (a)(5) of this section shall not 
be treated as an excluded member of such insurance group.
    (iii) A corporation which has a taxable year ending on December 31, 
1963, shall be treated as an excluded member of a controlled group on 
such date.
    (3) Additional members. A corporation which:
    (i) Is not a member of a controlled group of corporations on the 
December 31 included within its taxable year, and
    (ii) Is not described, with respect to such taxable year, in 
subparagraph (2)(ii) (a), (b), (c), (d), or (e), or (2)(iii) of this 
paragraph,

shall be treated as an additional member of such group on such December 
31 if it was a member of such group for one-half (or more) of the number 
of days in such taxable year which precede such December 31.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). Brown, an individual, owns all of the stock of 
corporations W and X on each day of 1964. W and X each uses the calendar 
year as its taxable year. On January 1, 1964, Brown also owns all the 
stock of corporation Y (a fiscal year corporation with a taxable year 
beginning on July 1, 1964, and ending on June 30, 1965), which stock he 
sells on October 15, 1964. On December 31, 1964, Brown purchases all the 
stock of corporation Z (a fiscal year corporation with a taxable year 
beginning on September 1, 1964, and ending on August 31, 1965). On 
December 31, 1964, W, X, and Z are members of the same controlled group. 
However, the component members of the group on such December 31 are W, 
X, and Y. Under subparagraph (2)(i) of this paragraph, Z is treated as 
an excluded member of the group on December 31, 1964, since Z was a 
member of the group for less than one-half of the number of days (29 out 
of 121 days) during the period beginning on September 1, 1964 (the first 
day of its taxable year) and ending on December 30, 1964. Under 
subparagraph (3) of this paragraph, Y is treated as an additional member 
of the group on December 31, 1964, since Y was a member of the group for 
at least one-half of the number of days (107 out of 183 days) during the 
period beginning on July 1, 1964 (the first day of its taxable year) and 
ending on December 30, 1964.
    Example (2). On January 1, 1964, corporation P owns all the stock of 
corporation S, which in turn owns all the stock of corporation S-1. On 
November 1, 1964, P purchases all of the stock of corporation X from the 
public and sells all of the stock of S to the public. Corporation X owns 
all the stock of corporation Y during 1964. P, S, S-1, X, and Y file 
their returns on the basis of the calendar year. On December 31, 1964, 
P, X, and Y are members of a parent-subsidiary controlled group of 
corporations; also, corporations S and S-1 are members of a different 
parent-subsidiary controlled group on such date. However, since X and Y 
have been members of the parent-subsidiary controlled group of which P 
is the common parent for less than one-half the number of days during 
the period January 1 through December 30, 1964, they are not component 
members of such group on such date. On the other hand, X and Y have been 
members of a parent-subsidiary controlled group of which X is the common 
parent for at least one-half the number of days during the period 
January 1 through December 30, 1964, and therefore they are component 
members of such group on December 31, 1964. Also since S and S-1 were 
members of the parent-subsidiary controlled group of which P is the

[[Page 471]]

common parent for at least one-half the number of days in the taxable 
years of each such corporation during the period January 1 through 
December 30, 1964, P, S, and S-1 are component members of such group on 
December 31, 1964.
    Example (3). Throughout 1964, corporation M owns all the stock of 
corporation F which, in turn, owns all the stock of corporations L-1, L-
2, X, and Y. M is a domestic mutual insurance company subject to 
taxation under section 821, F is a foreign corporation not engaged in 
trade or business within the United States, L-1 and L-2 are domestic 
life insurance companies subject to taxation under section 802, and X 
and Y are domestic corporations subject to tax under section 11 of the 
Code. Each corporation uses the calendar year as its taxable year. On 
December 31, 1964, M, F, L-1, L-2, X, and Y are members of a parent-
subsidiary controlled group of corporations. However, under subparagraph 
(2)(ii) of this paragraph, M, F, L-1, and L-2 are treated as excluded 
members of the group on December 31, 1964. Thus, on December 31, 1964, 
the component members of the parent-subsidiary controlled group of which 
M is the common parent include only X and Y. Furthermore, since 
subparagraph (2)(ii)(e) of this paragraph does not result in L-1 and L-2 
being treated as excluded members of an insurance group, L-1 and L-2 are 
component members of an insurance group on December 31, 1964.

    (5) Application of constructive ownership rules. For purposes of 
subparagraphs (2)(i) and (3) of this paragraph, it is necessary to 
determine whether a corporation was a member of a controlled group of 
corporations for one-half (or more) of the number of days in its taxable 
year which precede the December 31 falling within such taxable year. 
Therefore, the constructive ownership rules contained in paragraph (b) 
of Sec. 1.1563-3 (to the extent applicable in making such determination) 
must be applied on a day-by-day basis. For example, if P Corporation 
owns all the stock of X Corporation on each day of 1964, and on December 
30, 1964, acquires an option to purchase all the stock of Y Corporation 
(a calendar-year taxpayer which has been in existence on each day of 
1964), the application of paragraph (b)(1) of Sec. 1.1563-3 on a day-by-
day basis results in Y being a member of the brother-sister controlled 
group on only one day of Y's 1964 year which precedes December 31, 1964. 
Accordingly, since Y is not a member of such group for one-half or more 
of the number of days in its 1964 year preceding December 31, 1964, Y is 
treated as an excluded member of such group on December 31, 1964.
    (c) Overlapping groups--(1) In general. If on a December 31 a 
corporation is a component member of a controlled group of corporations 
by reason of ownership of stock possessing at least 80 percent of the 
total value of shares of all classes of stock of the corporation, and if 
on such December 31 such corporation is also a component member of 
another controlled group of corporations by reason of ownership of other 
stock (that is, stock not used to satisfy the at-least-80-percent total 
value test) possessing at least 80 percent of the total combined voting 
power of all classes of stock of the corporation entitled to vote, then 
such corporation shall be treated as a component member only of the 
controlled group of which it is a component member by reason of the 
ownership of at least 80 percent of the total value of its shares.
    (2) Brother-sister controlled groups. (i) If on a December 31, a 
corporation would, without application of this subparagraph, be a 
component member of more than one brother-sister controlled group on 
such date, such corporation shall be treated as a component member of 
only one such group on such date. Such a corporation may select which 
group in which it is to be included by filing an election as provided in 
this subparagraph. The election shall be in the form of a statement 
designating the group in which the corporation is to be included. The 
statement shall provide all the information with respect to stock 
ownership which is reasonably necessary to satisfy the Internal Revenue 
officer with whom it is filed that the corporation would, but for the 
election, be a component member of more than one controlled group. Once 
filed, the election is irrevocable and effective until such time that a 
change in the stock ownership of the corporation results in termination 
of membership in the controlled group in which such corporation has been 
included.
    (ii) Except as provided in subdivision (iii) of this subparagraph, 
the statement shall be signed by a person duly authorized to act on 
behalf of such corporation and shall be filed on or before

[[Page 472]]

the due date (including extension of time) for the filing of the income 
tax return of such corporation for the taxable year. However, in the 
case of an election with respect to December 31, 1970, the statement 
shall be considered as timely filed if filed on or before December 15, 
1971. In the event no election is filed in accordance with the 
provisions of this subdivision, then the district director with audit 
jurisdiction of such corporation's return for the taxable year which 
includes such December 31 shall determine the group in which such 
corporation is to be included, and such determination shall be binding 
for all subsequent years unless the corporation files a valid election 
with respect to any such subsequent year.
    (iii) If more than one corporation would, without application of 
this subparagraph, be a component member of more than one controlled 
group, a single statement shall be signed by persons duly authorized to 
act on behalf of each such corporation. Such statement shall designate 
the group in which each corporation is to be included. The statement 
shall be attached to the income tax return of the corporation that, 
among those corporations which would (without the application of this 
subparagraph) belong to more than one group, has the taxable year 
including such December 31 which ends on the earliest date. However, in 
the case of an election with respect to December 31, 1970, the statement 
may be filed by December 15, 1971, with the service center director with 
whom such corporation's return is filed for the taxable year which 
includes such December 31. In the event no election is filed in 
accordance with the provisions of this subdivision, then the district 
director with audit jurisdiction of such corporation's return for the 
taxable year that includes such December 31 shall determine the group in 
which each corporation is to be included, and such determination shall 
be binding for all subsequent years unless the corporations file a valid 
election with respect to any such subsequent year.
    (iv) The provisions of this subparagraph may be illustrated by the 
following examples (in which it is assumed that all the individuals are 
unrelated):

    Example (1). On each day of 1970 all the outstanding stock of 
corporations M, N, and P is held in the following manner:

------------------------------------------------------------------------
                                                       Corporations     
                   Individuals                   -----------------------
                                                     M       N       P  
------------------------------------------------------------------------
A...............................................     55%     40%      5%
B...............................................     40%     20%     40%
C...............................................      5%     40%     55%
------------------------------------------------------------------------

Since the more-than-50-percent stock ownership requirement of section 
1563(a)(2)(B) is met with respect to corporations M and N and with 
respect to corporations N and P, but not with respect to corporations M, 
N, and P, corporation N would, without the application of this 
subparagraph, be a component member on December 31, 1970, of overlapping 
groups consisting of M and N and of N and P. If N does not file an 
election in accordance with subdivision (ii) of this subparagraph, the 
district director with audit jurisdiction of N's return will determine 
the group in which N is to be included.
    Example (2). On each day of 1970, all the outstanding stock of 
corporations S, T, W, X, and Z is held in the following manner:

------------------------------------------------------------------------
                                                  Corporations          
             Individuals              ----------------------------------
                                         S      T      W      X      Z  
------------------------------------------------------------------------
D....................................    52%    52%    52%    52%    52%
E....................................    40%     2%     2%     2%     2%
F....................................     2%    40%     2%     2%     2%
G....................................     2%     2%    40%     2%     2%
H....................................     2%     2%     2%    40%     2%
I....................................     2%     2%     2%     2%    40%
------------------------------------------------------------------------

On December 31, 1970, the more-than-50-percent stock ownership 
requirement of section 1563(a)(2)(B) may be met with regard to any 
combination of the corporations but all five corporations cannot be 
included as component members of a single controlled group because the 
inclusion of all the corporations in a single group would be dependent 
upon taking into account the stock ownership of more than five persons. 
Therefore, if the corporations do not file a statement in accordance 
with subdivision (iii) of this subparagraph, the district director with 
audit jurisdiction of the return of the corporation whose taxable year 
ends on the earliest date will determine the group in which each 
corporation is to be included. The corporations or the district 
director, as the case may be, may designate that three corporations be 
included in one group and two corporations in another, or that any four 
corporations be included in one group and that the remaining corporation 
not be included in any group.

    (d) Transitional rules--(1) In general. Treasury decision 8179 
amended paragraph (a)(3) of this section to revise the definition of a 
brother-sister controlled

[[Page 473]]

group of corporations. In general, those amendments are effective for 
taxable years ending on or after December 31, 1970.
    (2) Limited nonretroactivity. (i) Under the authority of section 
7805(b), the Internal Revenue Service will treat an old group as a 
brother-sister controlled group corporations for purposes of applying 
sections 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 of 
the Code and sections 202, 203, 204, and 302 of the Employment 
Retirement Income Security Act of 1974 (ERISA) in a plan year or taxable 
year beginning before March 2, 1988. To the extent necessary to prevent 
an adverse effect on any old member (or any other corporation), or on 
any plan or other entity described in such sections (including plans, 
etc., of corporations not part of such old group), that would result 
solely from the retroactive effect of the amendment to this section by 
T.D. 8179. An adverse effect includes the disqualification of a plan or 
the disallowance of a deduction or credit for a contribution to a plan. 
The Internal Revenue Service, however, will not treat an old member as a 
member of an old group to the extent that such treatment will have an 
adverse effect on that old member.
    (ii) Section 7805(b) will not be applied pursuant to paragraph 
(d)(2)(i) of this section to treat an old member of an old group as a 
member of a brother-sister controlled group to prevent an adverse effect 
for a taxable year if, for that taxable year, that old member treats or 
has treated itself as not being a member of that old group for purposes 
of section 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 
of the Code and sections 202, 203, 204, and 302 and title IV of ERISA 
for such taxable year (such as by filing, with respect to such taxable 
year, a return, amended return, or claim for credit or refund in which 
the amount of any deduction, credit, limitation, or tax due is 
determined by treating itself as not being a member of the old group for 
purposes of those sections). However, the fact that one or more (but not 
all) of the old members do not qualify for section 7805(b) treatment 
because of the preceding sentence will not preclude that old member (or 
members) from being treated as a member of the old group under paragraph 
(d)(2)(i) of this section in order to prevent the disallowance of a 
deduction or credit of another old member (or other corporation) or to 
prevent the disqualification of, or other adverse effect on, another old 
member's plan (or other entity) described in the sections of the Code 
and ERISA enumerated in such paragraph.
    (3) Election of general nonretroactivity. In the case of a taxable 
year ending on or after December 31, 1970, and before March 2, 1988. An 
old group will be treated as a brother-sister controlled group of 
corporations for all purposes of the Code for such taxable year if--
    (i) Each old member files a statement consenting to such treatment 
for such taxable year with the District Director having audit 
jurisdiction over its return within six months after March 2, 1988, and
    (ii) No old member (A) files or has filed, with respect to such 
taxable year, a return, amended return, or claim for credit or refund in 
which the amount of any deduction, credit, limitation, or tax due is 
determined by treating any old member as not a member of the old group 
or (B) treats the employees of all members of the old group as not being 
employed by a single employer for purposes of sections 401, 404(a), 
408(k), 409A, 410, 411, 412, 414, 415, and 4971 of the Code and sections 
202, 203, 204, and 302 of ERISA for such taxable year.
    (4) Definitions. For purposes of this paragraph (d) of this 
section--
    (i) An ``old group'' is a brother-sister controlled group of 
corporations, determined by applying paragraph (a)(3) of this section as 
in effect before the amendments made by Treasury decision 8179, that is 
not a brother-sister controlled group of corporations, determined by 
applying paragraph (a)(3) of this section as amended by such Treasury 
decision, and
    (ii) An ``old member'' is any corporation that is a member of an old 
group.
    (5) Election to choose between membership in more than one 
controlled group. If--
    (i) An old member has filed an election under paragraph (c)(2) of 
this section to be treated as a component member of an old group for a 
December 31 before March 2, 1988, and

[[Page 474]]

    (ii) That corporation would (without regard to such paragraph) be a 
component member of more than one brother-sister controlled group (not 
including an old group) on the December 31, that corporation may make an 
election under that paragraph by filing an amended return on or before 
September 2, 1988. This paragraph (d)(5) does not apply to a corporation 
that is treated as a member of an old group under paragraph (d)(3) of 
this section.
    (6) Refunds. See section 6511(a) for period of limitation on filing 
claims for credit or refund.

[T.D. 6845, 30 FR 9751, Aug. 5, 1965, as amended by T.D. 6960, 33 FR 
9302, June 25, 1968; T.D. 7181, 37 FR 8068, Apr. 25, 1972; T.D. 7293, 38 
FR 32803, Nov. 28, 1973; T.D. 8179, 53 FR 6612, Mar. 2, 1988; 53 FR 
8302, Mar. 14, 1988]



Sec. 1.1563-2   Excluded stock.

    (a) Certain stock excluded. For purposes of sections 1561 through 
1563 and the regulations thereunder, the term ``stock'' does not 
include:
    (1) Nonvoting stock which is limited and preferred as to dividends, 
and
    (2) Treasury stock.
    (b) Stock treated as excluded stock--(1) Parent-subsidiary 
controlled group. If a corporation (hereinafter in this paragraph 
referred to as ``parent corporation'') owns 50 percent or more of the 
total combined voting power of all classes of stock entitled to vote or 
50 percent or more of the total value of shares of all classes of stock 
in another corporation (hereinafter in this paragraph referred to as 
``subsidiary corporation''), the provisions of subparagraph (2) of this 
paragraph shall apply. For purposes of this subparagraph, stock owned by 
a corporation means stock owned directly plus stock owned with the 
application of the constructive ownership rules of paragraph (b) (1) and 
(4) of Sec. 1.1563-3, relating to options and attribution from 
corporations. In determining whether the stock owned by a corporation 
possesses the requisite percentage of the total combined voting power of 
all classes of stock entitled to vote of another corporation, see 
paragraph (a)(6) of Sec. 1.1563-1.
    (2) Stock treated as not outstanding. If the provisions of this 
subparagraph apply, then for purposes of determining whether the parent 
corporation or the subsidiary corporation is a member of a parent-
subsidiary controlled group of corporations within the meaning of 
paragraph (a)(2) of Sec. 1.1563-1, the following stock of the subsidiary 
corporation shall, except as otherwise provided in paragraph (c) of this 
section, be treated as if it were not outstanding:
    (i) Plan of deferred compensation. Stock in the subsidiary 
corporation held by a trust which is part of a plan of deferred 
compensation for the benefit of the employees of the parent corporation 
or the subsidiary corporation. The term ``plan of deferred 
compensation'' shall have the same meaning such term has in section 
406(a)(3) and the regulations thereunder.
    (ii) Principal stockholders and officers. Stock in the subsidiary 
corporation owned (directly and with the application of the rules 
contained in paragraph (b) of Sec. 1.1563-3) by an individual who is a 
principal stockholder or officer of the parent corporation. A principal 
stockholder of the parent corporation is an individual who owns 
(directly and with the application of the rules contained in paragraph 
(b) of Sec. 1.1563-3) 5 percent or more of the total combined voting 
power of all classes of stock entitled to vote or 5 percent or more of 
the total value of shares of all classes of stock of the parent 
corporation. An officer of the parent corporation includes the 
president, vice-presidents, general manager, treasurer, secretary, and 
comptroller of such corporation, and any other person who performs 
duties corresponding to those normally performed by persons occupying 
such positions.
    (iii) Employees. Stock in the subsidiary corporation owned (directly 
and with the application of the rules contained in paragraph (b) of 
Sec. 1.1563-3) by an employee of the subsidiary corporation if such 
stock is subject to conditions which substantially restrict or limit the 
employee's right (or if the employee constructively owns such stock, the 
direct owner's right) to dispose of such stock and which run in favor of 
the parent or subsidiary corporation. In general, any condition which 
extends, directly or indirectly, to the parent corporation or the 
subsidiary corporation preferential rights

[[Page 475]]

with respect to the acquisition of the employee's (or direct owner's) 
stock will be considered to be a condition described in the preceding 
sentence. It is not necessary, in order for a condition to be considered 
to be in favor of the parent corporation or the subsidiary corporation, 
that the parent or subsidiary be extended a discriminatory concession 
with respect to the price of the stock. For example, a condition whereby 
the parent corporation is given a right of first refusal with respect to 
any stock of the subsidiary corporation offered by an employee for sale 
is a condition which substantially restricts or limits the employee's 
right to dispose of such stock and runs in favor of the parent 
corporation. Moreover, any legally enforceable condition which prohibits 
the employee from disposing of his stock without the consent of the 
parent (or a subsidiary of the parent) will be considered to be a 
substantial limitation running in favor of the parent corporation.
    (iv) Controlled exempt organization. Stock in the subsidiary 
corporation owned (directly and with the application of the rules 
contained in paragraph (b) of Sec. 1.1563-3) by an organization (other 
than the parent corporation):
    (a) To which section 501 (relating to certain educational and 
charitable organizations which are exempt from tax) applies, and
    (b) Which is controlled directly or indirectly by the parent 
corporation or subsidiary corporation, by an individual, estate, or 
trust that is a principal stockholder of the parent corporation, by an 
officer of the parent corporation, or by any combination thereof.

The terms ``principal stockholder of the parent corporation'' and 
``officer of the parent corporation'' shall have the same meanings in 
this subdivision as in subdivision (ii) of this subparagraph. The term 
``control'' as used in this subdivision means control in fact and the 
determination of whether the control requirement of (b) of this 
subdivision is met will depend upon all the facts and circumstances of 
each case, without regard to whether such control is legally enforceable 
and irrespective of the method by which such control is exercised or 
exercisable.
    (3) Brother-sister controlled group. If five or fewer persons 
(hereinafter referred to as common owners) who are individuals, estates, 
or trusts own (directly and with the application of the rules contained 
in paragraph (b) of Sec. 1.1563-3) stock possessing 50 percent or more 
of the total combined voting power of all classes of stock entitled to 
vote or 50 percent or more of the total value of shares of all classes 
of stock in a corporation, the provisions of subparagraph (4) of this 
paragraph shall apply. In determining whether the stock owned by such 
person or persons possesses the requisite percentage of the total 
combined voting power of all classes of stock entitled to vote of a 
corporation, see paragraph (a)(6) of Sec. 1.1563-1.
    (4) Stock treated as not outstanding. If the provisions of this 
subparagraph apply, then for purposes of determining whether a 
corporation is a member of a brother-sister controlled group of 
corporations within the meaning of paragraph (a)(3) of Sec. 1.1563-1, 
the following stock of such corporation shall, except as otherwise 
provided in paragraph (c) of this section, be treated as if it were not 
outstanding:
    (i) Exempt employees' trust. Stock in such corporation held by an 
employees' trust described in section 401(a) which is exempt from tax 
under section 501(a), if such trust is for the benefit of the employees 
of such corporation.
    (ii) Employees. Stock in such corporation owned (directly and with 
the application of the rules contained in paragraph (b) of Sec. 1.1563-
3) by an employee of such corporation if such stock is subject to 
conditions which run in favor of a common owner of such corporation (or 
in favor of such corporation) and which substantially restrict or limit 
the employee's right (or if the employee constructively owns such stock, 
the record owner's right) to dispose of such stock. The principles of 
subparagraph (2)(iii) of this paragraph shall apply in determining 
whether a condition satisfies the requirements of the preceding 
sentence. Thus, in general, a condition which extends, directly or 
indirectly, to a common owner or such corporation preferential rights 
with respect to the acquisition of the employee's (or record owner's)

[[Page 476]]

stock will be considered to be a condition which satisfies such 
requirements. For purposes of this subdivision, if a condition which 
restricts or limits an employee's right (or record owner's right) to 
dispose of his stock also applies to the stock in such corporation held 
by such common owner pursuant to a bona fide reciprocal stock purchase 
arrangement, such condition shall not be treated as one which restricts 
or limits the employee's (or record owner's) right to dispose of such 
stock. An example of a reciprocal stock purchase arrangement is an 
agreement whereby a common owner and the employee are given a right of 
first refusal with respect to stock of the employer corporation owned by 
the other party. If, however, the agreement also provides that the 
common owner has the right to purchase the stock of the employer 
corporation owned by the employee in the event that the corporation 
should discharge the employee for reasonable cause, the purchase 
arrangement would not be reciprocal within the meaning of this 
subdivision.
    (iii) Controlled exempt organization. Stock in such corporation 
owned (directly and with the application of the rules contained in 
paragraph (b) of Sec. 1.1563-3) by an organization:
    (a) To which section 501(c)(3) (relating to certain educational and 
charitable organizations which are exempt from tax) applies, and
    (b) Which is controlled directly or indirectly by such corporation, 
by an individual, estate, or trust that is a principal stockholder of 
such corporation, by an officer of such corporation, or by any 
combination thereof.

The terms ``principal stockholder'' and ``officer'' shall have the same 
meanings in this subdivision as in subparagraph (2)(ii) of this 
paragraph. The term ``control'' as used in this subdivision means 
control in fact and the determination of whether the control requirement 
of (b) of this subdivision is met will depend upon all the facts and 
circumstances of each case, without regard to whether such control is 
legally enforceable and irrespective of the method by which such control 
is exercised or exercisable.
    (5) Other controlled groups. The provisions of subparagraphs (1), 
(2), (3), and (4) of this paragraph shall apply in determining whether a 
corporation is a member of a combined group (within the meaning of 
paragraph (a)(4) of Sec. 1.1563-1) or an insurance group (within the 
meaning of paragraph (a)(5) of Sec. 1.1563-1). For example, under 
paragraph (a)(4) of Sec. 1.1563-1, in order for a corporation to be a 
member of a combined group such corporation must be a member of a 
parent-subsidiary group or a brother-sister group. Accordingly, the 
excluded stock rules provided by this paragraph are applicable in 
determining whether the corporation is a member of such group.
    (6) Meaning of employee. For purposes of this section Secs. 1.1563-3 
and 1.1563-4, the term ``employee'' has the same meaning such term is 
given in section 3306(i) of the Code (relating to definitions for 
purposes of the Federal Unemployment Tax Act). Accordingly, the term 
employee as used in such sections includes an officer of a corporation.
    (7) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). Corporation P owns 70 of the 100 shares of the only 
class of stock of corporation S. The remaining shares of S are owned as 
follows: 4 shares by Jones (the general manager of P), and 26 shares by 
Smith (who also owns 5 percent of the total combined voting power of the 
stock of P). P satisfies the 50 percent stock ownership requirement of 
subparagraph (1) of this paragraph with respect to S. Since Jones is an 
officer of P and Smith is a principal stockholder of P, under 
subparagraph (2)(ii) of this paragraph the S stock owned by Jones and 
Smith is treated as not outstanding for purposes of determining whether 
P and S are members of a parent-subsidiary controlled group of 
corporations within the meaning of paragraph (a)(2) of Sec. 1.1563-1. 
Thus, P is considered to own stock possessing 100 percent (7070) 
of the total voting power and value of all the S stock. Accordingly, P 
and S are members of a parent-subsidiary controlled group of 
corporations.
    Example (2). Assume the same facts as in example (1) and further 
assume that Jones owns 15 shares of the 100 shares of the only class of 
stock of corporation S-1, and corporation S owns 75 shares of such 
stock. P satisfies the 50 percent stock ownership requirement of 
subparagraph (1) of this paragraph with respect to S-1 since P is 
considered as owning 52.5 percent (70 percent x  75 percent) of the S-1 
stock with the application of paragraph (b)(4) of Sec. 1.1563-3. Since 
Jones is an officer of P, under subparagraph

[[Page 477]]

(2)(ii) of this paragraph, the S-1 stock owned by Jones is treated as 
not outstanding for purposes of determining whether S-1 is a member of 
the parent-subsidiary controlled group of corporations. Thus, S is 
considered to own stock possessing 88.2 percent (7585) of the 
voting power and value of the S-1 stock. Accordingly, P, S, and S-1 are 
members of a parent-subsidiary controlled group of corporations.
    Example (3). Corporation X owns 60 percent of the only class of 
stock of corporation Y. Davis, the president of Y, owns the remaining 40 
percent of the stock of Y. Davis has agreed that if he offers his stock 
in Y for sale he will first offer the stock to X at a price equal to the 
fair market value of the stock on the first date the stock is offered 
for sale. Since Davis is an employee of Y within the meaning of section 
3306(i) of the Code, and his stock in Y is subject to a condition which 
substantially restricts or limits his right to dispose of such stock and 
runs in favor of X, under subparagraph (2)(iii) of this paragraph such 
stock is treated as if it were not outstanding for purposes of 
determining whether X and Y are members of a parent-subsidiary 
controlled group of corporations. Thus, X is considered to own stock 
possessing 100 percent of the voting power and value of the stock of Y. 
Accordingly, X and Y are members of a parent-subsidiary controlled group 
of corporations. The result would be the same if Davis's wife, instead 
of Davis, owned directly the 40 percent stock interest in Y and such 
stock was subject to a right of first refusal running in favor of X.

    (c) Exception--(1) General. If stock of a corporation is owned by a 
person directly or with the application of the rules contained in 
paragraph (b) of Sec. 1.1563-3 and such ownership results in the 
corporation being a component member of a controlled group of 
corporations on a December 31, then the stock shall not be treated as 
excluded stock under the provisions of paragraph (b) of this section if 
the result of applying such provisions is that such corporation is not a 
component member of a controlled group of corporations on such December 
31.
    (2) Illustration. The provisions of this paragraph may be 
illustrated by the following example:

    Example. On each day of 1965, corporation P owns directly 50 of the 
100 shares of the only class of stock of corporation S. Jones, an 
officer of P, owns directly 30 shares of S stock and P has an option to 
acquire such 30 shares from Jones. The remaining shares of S are owned 
by unrelated persons. If, pursuant to the provisions of paragraph 
(b)(2)(ii) of this section, the 30 shares of S stock owned directly by 
Jones is treated as not outstanding, the result is that P would be 
treated as owning stock possessing only 71 percent (5070) of the 
total voting power and value of S stock, and S would not be a component 
member of a controlled group of corporations on December 31, 1965. 
However, since P is considered as owning the 30 shares of S stock with 
the application of paragraph (b)(1) of this section, and such ownership 
plus the S stock directly owned by P (50 shares) results in S being a 
component member of a controlled group of corporations on December 31, 
1965, the provisions of this paragraph apply. Therefore, the provisions 
of paragraph (b)(2)(ii) of this section do not apply with respect to the 
30 shares of S stock, and on December 31, 1965, S is a component member 
of a controlled group of corporations consisting of P and S.

[T.D. 6845, 30 FR 9753, Aug. 5, 1965, as amended by T.D. 7181, 37 FR 
8070, Apr. 4, 1972]



Sec. 1.1563-3   Rules for determining stock ownership.

    (a) In general. In determining stock ownership for purposes of 
Secs. 1.1562-5, 1.1563-1, 1.1563-2, and this section, the constructive 
ownership rules of paragraph (b) of this section apply to the extent 
such rules are referred to in such sections. The application of such 
rules shall be subject to the operating rules and special rules 
contained in paragraphs (c) and (d) of this section.
    (b) Constructive ownership--(1) Options. If a person has an option 
to acquire any outstanding stock of a corporation, such stock shall be 
considered as owned by such person. For purposes of this subparagraph, 
an option to acquire such an option, and each one of a series of such 
options, shall be considered as an option to acquire such stock. For 
example, assume Smith owns an option to purchase 100 shares of the 
outstanding stock of M Corporation. Under this subparagraph, Smith is 
considered to own such 100 shares. The result would be the same if Smith 
owned an option to acquire the option (or one of a series of options) to 
purchase 100 shares of M stock.
    (2) Attribution from partnerships. (i) Stock owned, directly or 
indirectly, by or for a partnership shall be considered as owned by any 
partner having an interest of 5 percent or more in either the capital or 
profits of the partnership in proportion to his interest in capital

[[Page 478]]

or profits, whichever such proportion is the greater.
    (ii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. Green, Jones, and White, unrelated individuals, are 
partners in the GJW partnership. The partners' interests in the capital 
and profits of the partnership are as follows:

------------------------------------------------------------------------
                                                    Capital     Profits 
                     Partner                     -----------------------
                                                    Percent     Percent 
------------------------------------------------------------------------
Green...........................................          36          25
Jones...........................................          60          71
White...........................................           4           4
------------------------------------------------------------------------

The GJW partnership owns the entire outstanding stock (100 shares) of X 
Corporation. Under this subparagraph, Green is considered to own the X 
stock owned by the partnership in proportion to his interest in capital 
(36 percent) or profits (25 percent), whichever such proportion is the 
greater. Therefore, Green is considered to own 36 shares of the X stock. 
However, since Jones has a greater interest in the profits of the 
partnership, he is considered to own the X stock in proportion to his 
interest in such profits. Therefore, Jones is considered to own 71 
shares of the X stock. Since White does not have an interest of 5 
percent or more in either the capital or profits of the partnership, he 
is not considered to own any shares of the X stock.

    (3) Attribution from estates or trusts. (i) Stock owned, directly or 
indirectly, by or for an estate or trust shall be considered as owned by 
any beneficiary who has an actuarial interest of 5 percent or more in 
such stock, to the extent of such actuarial interest. For purposes of 
this subparagraph, the actuarial interest of each beneficiary shall be 
determined by assuming the maximum exercise of discretion by the 
fiduciary in favor of such beneficiary and the maximum use of such stock 
to satisfy his rights as a beneficiary. A beneficiary of an estate or 
trust who cannot under any circumstances receive any interest in stock 
held by the estate or trust, including the proceeds from the disposition 
thereof, or the income therefrom, does not have an actuarial interest in 
such stock. Thus, where stock owned by a decedent's estate has been 
specifically bequeathed to certain beneficiaries and the remainder of 
the estate is bequeathed to other beneficiaries, the stock is 
attributable only to the beneficiaries to whom it is specifically 
bequeathed. Similarly, a remainderman of a trust who cannot under any 
circumstances receive any interest in the stock of a corporation which 
is a part of the corpus of the trust (including any accumulated income 
therefrom or the proceeds from a disposition thereof) does not have an 
actuarial interest in such stock. However, an income beneficiary of a 
trust does have an actuarial interest in stock if he has any right to 
the income from such stock even though under the terms of the trust 
instrument such stock can never be distributed to him. The factors and 
methods prescribed in Sec. 20.2031-7 of this chapter (Estate Tax 
Regulations) for use in ascertaining the value of an interest in 
property for estate tax purposes shall be used for purposes of this 
subdivision in determining a beneficiary's actuarial interest in stock 
owned directly or indirectly by or for a trust.
    (ii) For the purposes of this subparagraph, property of a decedent 
shall be considered as owned by his estate if such property is subject 
to administration by the executor or administrator for the purposes of 
paying claims against the estate and expenses of administration 
notwithstanding that, under local law, legal title to such property 
vests in the decedent's heirs, legatees or devisees immediately upon 
death. With respect to an estate, the term ``beneficiary'' includes any 
person entitled to receive property of the decedent pursuant to a will 
or pursuant to laws of descent and distribution. A person shall no 
longer be considered a beneficiary of an estate when all the property to 
which he is entitled has been received by him, when he no longer has a 
claim against the estate arising out of having been a beneficiary, and 
when there is only a remote possibility that it will be necessary for 
the estate to seek the return of property or to seek payment from him by 
contribution or otherwise to satisfy claims against the estate or 
expenses of administration. When pursuant to the preceding sentence, a 
person ceases to be a beneficiary, stock owned by the estate shall not 
thereafter be considered owned by him.
    (iii) Stock owned, directly or indirectly, by or for any portion of 
a trust

[[Page 479]]

of which a person is considered the owner under Subpart E, Part I, 
Subchapter J of the Code (relating to grantors and others treated as 
substantial owners) is considered as owned by such person.
    (iv) This subparagraph does not apply to stock owned by any 
employees' trust described in section 401(a) which is exempt from tax 
under section 501(a).
    (4) Attribution from corporations. (i) Stock owned, directly or 
indirectly, by or for a corporation shall be considered as owned by any 
person who owns (within the meaning of section 1563(d)) 5 percent or 
more in value or its stock in that proportion which the value of the 
stock which such person so owns bears to the value of all the stock in 
such corporation.
    (ii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. Brown, an individual, owns 60 shares of the 100 shares of 
the only class of outstanding stock of corporation P. Smith, an 
individual, owns 4 shares of the P stock, and corporation X owns 36 
shares of the P stock. Corporation P owns, directly and indirectly, 50 
shares of the stock of corporation S. Under this subparagraph, Brown is 
considered to own 30 shares of the S stock (\60/100\ x 50), and X is 
considered to own 18 shares of the S stock (\36/100\ x 50). Since Smith 
does not own 5 percent or more in value of the P stock, he is not 
considered as owning any of the S stock owned by P. If, in this example, 
Smith's wife had owned directly 1 share of the P stock, Smith (and his 
wife) would each own 5 shares of the P stock, and therefore Smith (and 
his wife) would be considered as owning 2.5 shares of the S stock (\5/
100\ x 50).

    (5) Spouse. (i) Except as provided in subdivision (ii) of this 
subparagraph, an individual shall be considered to own the stock owned, 
directly or indirectly, by or for his spouse, other than a spouse who is 
legally separated from the individual under a decree of divorce, whether 
interlocutory or final, or a decree of separate maintenance.
    (ii) An individual shall not be considered to own stock in a 
corporation owned, directly or indirectly, by or for his spouse on any 
day of a taxable year of such corporation, provided that each of the 
following conditions are satisfied with respect to such taxable year:
    (a) Such individual does not, at any time during such taxable year, 
own directly any stock in such corporation.
    (b) Such individual is not a member of the board of directors or an 
employee of such corporation and does not participate in the management 
of such corporation at any time during such taxable year.
    (c) Not more than 50 percent of such corporation's gross income for 
such taxable year was derived from royalties, rents, dividends, 
interest, and annuities.
    (d) Such stock in such corporation is not, at any time during such 
taxable year, subject to conditions which substantially restrict or 
limit the spouse's right to dispose of such stock and which run in favor 
of the individual or his children who have not attained the age of 21 
years. The principles of paragraph (b)(2)(iii) of Sec. 1.1563-2 shall 
apply in determining whether a condition is a condition described in the 
preceding sentence.
    (iii) For purposes of subdivision (ii) (c) of this subparagraph, the 
gross income of a corporation for a taxable year shall be determined 
under section 61 and the regulations thereunder. The terms 
``royalties'', ``rents'', ``dividends'', ``interest'', and ``annuities'' 
shall have the same meanings such terms are given for purposes of 
section 1244(c). See paragraph (e)(1)(ii), (iii), (iv), (v), and (vi) of 
Sec. 1.1244(c)-1.
    (6) Children, grandchildren, parents, and grandparents. (i) An 
individual shall be considered to own the stock owned, directly or 
indirectly, by or for his children who have not attained the age of 21 
years, and, if the individual has not attained the age of 21 years, the 
stock owned, directly or indirectly, by or for his parents.
    (ii) If an individual owns (directly, and with the application of 
the rules of this paragraph but without regard to this subdivision) 
stock possessing more than 50 percent of the total combined voting power 
of all classes of stock entitled to vote or more than 50 percent of the 
total value of shares of all classes of stock in a corporation, then 
such individual shall be considered to own the stock in such corporation 
owned, directly or indirectly, by or for his parents, grandparents, 
grandchildren, and

[[Page 480]]

children who have attained the age of 21 years. In determining whether 
the stock owned by an individual possesses the requisite percentage of 
the total combined voting power of all classes of stock entitled to vote 
of a corporation, see paragraph (a)(6) of Sec. 1.1563-1.
    (iii) For purposes of section 1563, and Secs. 1.1563-1 through 
1.1563-4, a legally adopted child of an individual shall be treated as a 
child of such individual by blood.
    (iv) The provisions of this subparagraph may be illustrated by the 
following example:

    Example--(a) Facts. Individual F owns directly 40 shares of the 100 
shares of the only class of stock of Z Corporation. His son, M (20 years 
of age), owns directly 30 shares of such stock, and his son, A (30 years 
of age), owns directly 20 shares of such stock. The remaining 10 shares 
of the Z stock are owned by an unrelated person.
    (b) F's ownership. Individual F owns 40 shares of the Z stock 
directly and is considered to own the 30 shares of Z stock owned 
directly by M. Since, for purposes of the more-than-50-percent stock 
ownership test contained in subdivision (ii) of this subparagraph, F is 
treated as owning 70 shares or 70 percent of the total voting power and 
value of the Z stock, he is also considered as owning the 20 shares 
owned by his adult son, A. Accordingly, F is considered as owning a 
total of 90 shares of the Z stock.
    (c) M's ownership. Minor son, M, owns 30 shares of the Z stock 
directly, and is considered to own the 40 shares of Z stock owned 
directly by his father, F. However, M is not considered to own the 20 
shares of Z stock owned directly by his brother, A, and constructively 
by F, because stock constructively owned by F by reason of family 
attribution is not considered as owned by him for purposes of making 
another member of his family the constructive owner of such stock. See 
paragraph (c)(2) of this section. Accordingly, M owns and is considered 
as owning a total of 70 shares of the Z stock.
    (d) A's ownership. Adult son, A, owns 20 shares of the Z stock 
directly. Since, for purposes of the more-than-50-percent stock 
ownership test contained in subdivision (ii) of this subparagraph, A is 
treated as owning only the Z stock which he owns directly, he does not 
satisfy the condition precedent for the attribution of Z stock from his 
father. Accordingly, A is treated as owning only the 20 shares of Z 
stock which he owns directly.

    (c) Operating rules and special rules--(1) In general. Except as 
provided in subparagraph (2) of this paragraph, stock constructively 
owned by a person by reason of the application of subparagraph (1), (2), 
(3), (4), (5), or (6) of paragraph (b) of this section shall, for 
purposes of applying such subparagraphs, be treated as actually owned by 
such person.
    (2) Members of family. Stock constructively owned by an individual 
by reason of the application of subparagraph (5) or (6) of paragraph (b) 
of this section shall not be treated as owned by him for purposes of 
again applying such subparagraphs in order to make another the 
constructive owner of such stock.
    (3) Precedence of option attribution. For purposes of this section, 
if stock may be considered as owned by a person under subparagraph (1) 
of paragraph (b) of this section (relating to option attribution) and 
under any other subparagraph of such paragraph, such stock shall be 
considered as owned by such person under subparagraph (1) of such 
paragraph.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). A, 30 years of age, has a 90 percent interest in the 
capital and profits of a partnership. The partnership owns all the 
outstanding stock of corporation X and X owns 60 shares of the 100 
outstanding shares of corporation Y. Under subparagraph (1) of this 
paragraph, the 60 shares of Y constructively owned by the partnership by 
reason of subparagraph (4) of paragraph (b) of this section is treated 
as actually owned by the partnership for purposes of applying 
subparagraph (2) of paragraph (b) of this section. Therefore, A is 
considered as owning 54 shares of the Y stock (90 percent of 60 shares).
    Example (2). Assume the same facts as in example (1). Assume further 
that B, who is 20 years of age and the brother of A, directly owns 40 
shares of Y stock. Although the stock of Y owned by B is considered as 
owned by C (the father of A and B) under paragraph (b)(6)(i) of this 
section, under subparagraph (2) of this paragraph such stock may not be 
treated as owned by C for purposes of applying paragraph (b)(6)(ii) of 
this section in order to make A the constructive owner of such stock.
    Example (3). Assume the same facts assumed for purposes of example 
(2), and further assume that C has an option to acquire the 40 shares of 
Y stock owned by his son, B. The rule contained in subparagraph (2) of 
this paragraph does not prevent the reattribution of such 40 shares to A 
because, under subparagraph (3) of this paragraph, C

[[Page 481]]

is considered as owning the 40 shares by reason of option attribution 
and not by reason of family attribution. Therefore, since A satisfies 
the more-than-50-percent stock ownership test contained in paragraph 
(b)(6)(ii) of this section with respect to Y, the 40 shares of Y stock 
constructively owned by C are reattributed to A, and A is considered as 
owning a total of 94 shares of Y stock.

    (d) Special rule of section 1563 (f)(3)(B)--(1) In general. If the 
same stock of a corporation is owned (within the meaning of section 
1563(d)) by two or more persons, then such stock shall be treated as 
owned by the person whose ownership of such stock results in the 
corporation being a component member of a controlled group on a December 
31 which has at least one other component member on such date.
    (2) Component member of more than one group. (i) If, by reason of 
subparagraph (1) of this paragraph, a corporation would (but for this 
subparagraph) become a component member of more than one controlled 
group on a December 31, such corporation shall be treated as a component 
member of only one such controlled group on such date. The determination 
as to which group such corporation is treated as a component member of 
shall be made in accordance with the rules contained in subdivisions 
(ii), (iii), and (iv) of this subparagraph.
    (ii) In any case in which a corporation is a component member of a 
controlled group of corporations on a December 31 as a result of 
treating each share of its stock as owned only by the person who owns 
such share directly, then each such share shall be treated as owned by 
the person who owns such share directly.
    (iii) If the application of subdivision (ii) of this subparagraph 
does not result in a corporation being treated as a component member of 
only one controlled group on a December 31, then the stock of such 
corporation described in subparagraph (1) of this paragraph shall be 
treated as owned by the one person described in such subparagraph who 
owns, directly and with the application of the rules contained in 
paragraph (b) (1), (2), (3), and (4) of this section, the stock 
possessing the greatest percentage of the total value of shares of all 
classes of stock of the corporation.
    (iv) If the application of subdivision (ii) or (iii) of this 
subparagraph does not result in a corporation being treated as a 
component member of only one controlled group of corporations on a 
December 31, then the determination of that group of which such 
corporation is to be treated as a component member shall be made by the 
district director with audit jurisdiction of such corporation's return 
for the taxable year that includes such December 31 unless such 
corporation files an election as provided in this subdivision. The 
election shall be in the form of a statement, signed by a person 
authorized to act on behalf of such corporation, designating the group 
in which the corporation has elected to be included. The statement shall 
provide all the information with respect to stock ownership which is 
reasonably necessary to satisfy the district director that the 
corporation would, but for the election, be a component member of more 
than one controlled group. The statement shall be filed on or before the 
due date (including extensions of time) for the filing of the income tax 
return of such corporation for the taxable year. However, in the case of 
an election with respect to December 31, 1970, the statement shall be 
considered as timely filed if filed on or before December 15, 1971. Once 
filed, the election is irrevocable and effective until subdivision (ii) 
or (iii) of this subparagraph applies or until there is a substantial 
change in the stock ownership of such corporation.
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples, in which each corporation referred to uses the 
calendar year as its taxable year and the stated facts are assumed to 
exist on each day of 1970 (unless otherwise provided in the example):

    Example (1). Jones owns all the stock of corporation X and has an 
option to purchase from Smith all the outstanding stock of corporation 
Y. Smith owns all the outstanding stock of corporation Z. Since the Y 
stock is considered as owned by two or more persons, under subparagraph 
(2)(ii) of this paragraph the Y stock is treated as owned only by Smith 
since he has direct ownership of such stock. Therefore, on December 31, 
1970, Y and Z are component members of the same brother-sister 
controlled group. If, however, Smith had owned his stock in corporation 
Z for less

[[Page 482]]

than one-half of the number of days of Z's 1970 taxable year, then under 
subparagraph (1) of this paragraph the Y stock would be treated as owned 
only by Jones since his ownership results in Y being a component member 
of a controlled group on December 31, 1970.
    Example (2). Individual H owns directly all the outstanding stock of 
corporation M. W (the wife of H) owns directly all the outstanding stock 
of corporation N. Neither spouse is considered as owning the stock 
directly owned by the other because each of the conditions prescribed in 
paragraph (b) (5)(ii) of this section is satisfied with respect to each 
corporation's 1970 taxable year. H owns directly 60 percent of the only 
class of stock of corporation P and W owns the remaining 40 percent of 
the P stock. Under subparagraph (2)(iii) of this paragraph, the stock of 
P is treated as owned only by H since H owns (directly and with the 
application of the rules contained in paragraph (b) (1), (2), (3), and 
(4) of this section) the stock possessing the greatest percentage of the 
total value of shares of all classes of stock of P. Accordingly, on 
December 31, 1970, P is treated as a component member of a brother-
sister group consisting of M and P.
    Example (3). Unrelated individuals A and B each own 49 percent of 
all the outstanding stock of corporation R, which in turn owns 70 
percent of the only class of outstanding stock of corporation S. The 
remaining 30 percent of the stock of corporation S is owned by unrelated 
individual C. C also owns the remaining 2 percent of the stock of 
corporation R. Under the attribution rule of paragraph (b)(4) of this 
section A and B are each considered to own 34.3 percent of the stock of 
corporation S. Accordingly, since five or fewer persons own at least 80 
percent of the stock of corporations R and S and also own more than 50 
percent identically (A's and B's identical ownership each is 34.3 
percent, C's identical ownership is 2 percent), on December 31, 1970, 
corporations R and S are treated as component members of the same 
brother-sister controlled group.

[T.D. 6845, 30 FR 9755, Aug. 5, 1965, as amended by T.D. 7181, 37 FR 
8070, Apr. 25, 1972; T.D. 7779, 46 FR 29474, June 2, 1981; T.D. 8179, 53 
FR 6613, Mar. 2, 1988]



Sec. 1.1563-4   Franchised corporations.

    (a) In general. For purposes of paragraph (b)(2)(ii)(d) of 
Sec. 1.1563-1, a member of a controlled group of corporations shall be 
considered to be a franchised corporation for a taxable year if each of 
the following conditions is satisfied for one-half (or more) of the 
number of days preceding the December 31 included within such taxable 
year (or, if such taxable year does not include a December 31, for one-
half or more of the number of days in such taxable year preceding the 
last day of such year):
    (1) Such member is franchised to sell the products of another 
member, or the common owner, of such controlled group.
    (2) More than 50 percent (determined on the basis of cost) of all 
the goods held by such member primarily for sale to its customers are 
acquired from members or the common owner of the controlled group, or 
both.
    (3) The stock of such member is to be sold to an employee (or 
employees) of such member pursuant to a bona fide plan designed to 
eliminate the stock ownership of the parent corporation (as defined in 
paragraph (b)(1) of Sec. 1.1563-2) or of the common owner (as defined in 
paragraph (b)(3) of Sec. 1.1563-2) in such member.
    (4) Such employee owns (or such employees in the aggregate own) 
directly more than 20 percent of the total value of shares of all 
classes of stock of such member. For purposes of this subparagraph, the 
determination of whether an employee (or employees) owns the requisite 
percentage of the total value of the stock of the member shall be made 
without regard to paragraph (b) of Sec. 1.1563-2, relating to certain 
stock treated as excluded stock. Furthermore, if the corporation has 
more than one class of stock outstanding, the relative voting rights as 
between each such class of stock shall be disregarded in making such 
determination.
    (b) Plan for elimination of stock ownership. (1) A plan referred to 
in paragraph (a)(3) of this section must:
    (i) Provide a reasonable selling price for the stock of the member, 
and
    (ii) Require that a portion of the employee's compensation or 
dividends, or both, from such member be applied to the purchase of such 
stock (or to the purchase of notes, bonds, debentures, or similar 
evidences of indebtedness of such member held by the parent corporation 
or the common owner).

It is not necessary, in order to satisfy the requirements of subdivision 
(ii) of this subparagraph, that the plan require that a percentage of 
every dollar of the compensation and dividends be applied to the 
purchase of the stock (or

[[Page 483]]

the indebtedness). The requirements of such subdivision are satisfied if 
an otherwise qualified plan provides that under certain specified 
conditions (such as a requirement that the member earn a specified 
profit) no portion of the compensation and/or dividends need be applied 
to the purchase of the stock (or indebtedness), provided such conditions 
are reasonable.
    (2) A plan for the elimination of the stock ownership of the parent 
corporation or of the common owner will satisfy the requirements of 
paragraph (a)(3) of this section and subparagraph (1) of this paragraph 
even though it does not require that the stock of the member be sold to 
an employee (or employees) if it provides for the redemption of the 
stock of the member held by the parent or common owner and under the 
plan the amount of such stock to be redeemed during any period is 
calculated by reference to the profits of such member during such 
period.

[T.D. 6845, 30 FR 9757, Aug. 5, 1965]



Sec. 1.1564-1   Limitations on additional benefits for members of controlled groups.

    (a) In general. Section 1564(a)(1) provides that, with respect to 
any December 31 after 1969 and before 1975, only one component member of 
a controlled group of corporations (as defined in section 1563(a)) shall 
be allowed the full amount of:
    (1) The $25,000 surtax exemption under section 1562 (relating to 
election of multiple surtax exemptions),
    (2) The $100,000 amount under section 535(c) (2) and (3) (relating 
to the accumulated earnings credit), and
    (3) The $25,000 limitation on the small business deduction of life 
insurance companies under sections 804(a)(4) and 809(d)(10).

The amounts otherwise allowed to the other component members of such 
controlled group for their taxable years which include such December 31 
shall be reduced to the amounts set forth in the following schedule:

------------------------------------------------------------------------
                                                    Amount       Small  
                                        Surtax    under sec.   business 
      Taxable years including--        exemption  535(c) (2)   deduction
                                                    and (3)   limitation
------------------------------------------------------------------------
Dec. 31, 1970.......................     $20,833     $83,333     $20,833
Dec. 31, 1971.......................      16,667      66,667      16,667
Dec. 31, 1972.......................      12,500      50,000      12,500
Dec. 31, 1973.......................       8,333      33,333       8,333
Dec. 31, 1974.......................       4,167      16,667       4,167
------------------------------------------------------------------------

    (b) Election. (1) Section 1564(a)(2) provides that, with respect to 
any December 31 after 1969 and before 1975, the component members of a 
controlled group of corporations shall elect which component member or 
members of such group shall be allowed for their taxable years which 
includes such December 31 the full amounts described in paragraph (a) 
(1), (2), and (3) of this section. In making such election, the members 
may allocate such full amounts among themselves in any manner they 
choose. For example, the group may select one of its members to receive 
the full amount of the $25,000 surtax exemption under section 1562 and 
another of its members to receive the full $100,000 amount under section 
535(c)(2), or it may select one of its members to claim both, such full 
amounts.
    (2) The election shall be made with respect to a particular December 
31 and shall be valid only if each corporation which is a component 
member of the controlled group on such December 31 gives its consent. 
The consents shall be made by means of a statement, signed by persons 
duly authorized to act on behalf of each of the component members (other 
than wholly owned subsidiaries), stating which member has been selected 
to receive the amount which is not reduced under paragraph (a) of this 
section. The member so selected shall attach the statement to its income 
tax return for the taxable year including such December 31. The 
statement shall set forth the name, address, employer identification 
number, and taxable years of each of the other component members 
(including wholly owned subsidiaries) of the controlled group. Such 
other members shall attach a copy of the statement to their income tax 
returns for their taxable years including such December 31. An election 
plan adopted by a controlled group with respect to a particular December 
31 shall be valid only for the taxable year of

[[Page 484]]

each member of the group which includes such December 31.
    (3) Each component member of a controlled group which is a wholly 
owned subsidiary of such group with respect to a December 31 shall be 
deemed to consent to an election with respect to such December 31, 
provided each component member of the group which is not a wholly owned 
subsidiary consents to the election plan. A component member of a 
controlled group shall be considered to be a wholly owned subsidiary of 
the group with respect to a December 31 if, on each day preceding such 
date during its taxable year which includes such date, all of its stock 
is owned directly by one or more corporations which are component 
members of the group on such December 31.

[T.D. 7181, 37 FR 8071, Apr. 25, 1972]





                         INFORMATION AND RETURNS

                           returns and records

    Source: Sections 1.6001-1 to 1.6091-4 contained in T.D. 6500, 25 FR 
12108, Nov. 26, 1960, unless otherwise noted.

                Records, Statements, and Special Returns



Sec. 1.6001-1  Records.

    (a) In general. Except as provided in paragraph (b) of this section, 
any person subject to tax under subtitle A of the Code (including a 
qualified State individual income tax which is treated pursuant to 
section 6361(a) as if it were imposed by chapter 1 of subtitle A), or 
any person required to file a return of information with respect to 
income, shall keep such permanent books of account or records, including 
inventories, as are sufficient to establish the amount of gross income, 
deductions, credits, or other matters required to be shown by such 
person in any return of such tax or information.
    (b) Farmers and wage-earners. Individuals deriving gross income from 
the business of farming, and individuals whose gross income includes 
salaries, wages, or similar compensation for personal services rendered, 
are required with respect to such income to keep such records as will 
enable the district director to determine the correct amount of income 
subject to the tax. It is not necessary, however, that with respect to 
such income individuals keep the books of account or records required by 
paragraph (a) of this section. For rules with respect to the records to 
be kept in substantiation of traveling and other business expenses of 
employees, see Sec. 1.162-17.
    (c) Exempt organizations. In addition to such permanent books and 
records as are required by paragraph (a) of this section with respect to 
the tax imposed by section 511 on unrelated business income of certain 
exempt organizations, every organization exempt from tax under section 
501(a) shall keep such permanent books of account or records, including 
inventories, as are sufficient to show specifically the items of gross 
income, receipts and disbursements. Such organizations shall also keep 
such books and records as are required to substantiate the information 
required by section 6033. See section 6033 and Secs. 1.6033-1 through 
1.6033-3.
    (d) Notice by district director requiring returns statements, or the 
keeping of records. The district director may require any person, by 
notice served upon him, to make such returns, render such statements, or 
keep such specific records as will enable the district director to 
determine whether or not such person is liable for tax under subtitle A 
of the Code, including qualified State individual income taxes, which 
are treated pursuant to section 6361(a) as if they were imposed by 
chapter 1 of subtitle A.
    (e) Retention of records. The books or records required by this 
section shall be kept at all times available for inspection by 
authorized internal revenue officers or employees, and shall be retained 
so long as the contents thereof may become material in the 
administration of any internal revenue law.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7122, 36 FR 
11025, June 8, 1971; T.D. 7577, 43 FR 59357, Dec. 20, 1978; T.D. 8308, 
55 FR 35593, Aug. 31, 1990]



Sec. 1.6001-2  Returns.

    For rules relating to returns required to be made by every 
individual, estate, or trust which is liable for one or more qualified 
State individual income

[[Page 485]]

taxes, as defined in section 6362, for a taxable year, see paragraph (b) 
of Sec. 301.6361-1 of this chapter (Regulations on procedure and 
Administration).

[T.D. 7577, 43 FR 59357, Dec. 20, 1978]

                        tax returns or statements



Sec. 1.6011-1   General requirement of return, statement, or list.

    (a) General rule. Every person subject to any tax, or required to 
collect any tax, under Subtitle A of the Code, shall make such returns 
or statements as are required by the regulations in this chapter. The 
return or statement shall include therein the information required by 
the applicable regulations or forms.
    (b) Use of prescribed forms. Copies of the prescribed return forms 
will so far as possible be furnished taxpayers by district directors. A 
taxpayer will not be excused from making a return, however, by the fact 
that no return form has been furnished to him. Taxpayers not supplied 
with the proper forms should make application therefor to the district 
director in ample time to have their returns prepared, verified, and 
filed on or before the due date with the internal revenue office where 
such returns are required to be filed. Each taxpayer should carefully 
prepare his return and set forth fully and clearly the information 
required to be included therein. Returns which have not been so prepared 
will not be accepted as meeting the requirements of the Code. In the 
absence of a prescribed form, a statement made by a taxpayer disclosing 
his gross income and the deductions therefrom may be accepted as a 
tentative return, and, if filed within the prescribed time, the 
statement so made will relieve the taxpayer from liability for the 
addition to tax imposed for the delinquent filing of the return, 
provided that without unnecessary delay such a tentative return is 
supplemented by a return made on the proper form.
    (c) Tax withheld on nonresident aliens and foreign corporations. For 
requirements respecting the return of the tax required to be withheld 
under chapter 3 of the Code on nonresident aliens and foreign 
corporations and tax-free covenant bonds, see Sec. 1.1461-2.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6922, 32 FR 
8713, June 17, 1967]



Sec. 1.6011-2  Returns, etc., of DISC's and former DISC's.

    (a) Records and information. Every DISC and former DISC (as defined 
in section 992(a)) must comply with section 6001 and the regulations 
thereunder, relating to required records, statements, and special 
returns. Thus, for example, a DISC is required to maintain the books of 
account or records described in Sec. 1.6001-1(a). In addition, every 
DISC must furnish to each of its shareholders on or before the last day 
of the second month following the close of the taxable year of the DISC 
a copy of Schedule K (Form 1120-DISC) disclosing the amounts of actual 
distributions and deemed distributions from the DISC to such shareholder 
for the taxable year of the DISC. In the case of a deficiency 
distribution to meet qualification requirements, see Sec. 1.992-3(a)(4) 
for requirements that distribution be designated in the form of a 
communication sent to a shareholder and service center at the time of 
distribution.
    (b) Returns--(1) Requirement of return. Every DISC (as defined in 
section 992(a)(1)) shall make a return of income. A former DISC (as 
defined in section 992(a)(3)) shall also make a return of income in 
addition to any other return required. The return required of a DISC or 
former DISC under this section shall be made on Form 1120-DISC. The 
provisions of Sec. 1.6011-1 shall apply with respect to a DISC and 
former DISC. A former DISC should indicate clearly on Form 1120-DISC 
that it is making a return of income as a former DISC (for example, by 
labeling at the top of the Form 1120-DISC ``Former DISC''). In the case 
of a former DISC, those items on the form which pertain to the 
computation of taxable income shall not be completed, but Schedules J, 
K, L, and M must be completed. Except as otherwise specifically provided 
in the Code or regulations, the return of a DISC or former DISC is 
considered to be an income tax return.

[[Page 486]]

    (2) Existence of DISC. A corporation which is a DISC and which is in 
existence during any portion of a taxable year is required to make a 
return for that fractional part of its taxable year during which it was 
in existence.

[T.D. 7533, 43 FR 6603, Feb. 15, 1978]



Sec. 1.6011-3  Requirement of statement from payees of certain gambling winnings.

    (a) General rule. Except as provided in paragraph (c) of this 
section, any person receiving a payment with respect to a wager in a 
sweepstakes, wagering pool, lottery, or other wagering transaction 
(including a parimutuel pool with respect to horse races, dog races, or 
jai alai) shall make a statement to the payer of such winnings upon the 
payer's demand. Such statements shall accompany the payer's return made 
with respect to the payment as required pursuant to section 3402(q) or 
6041, as the case may be.
    (b) Contents of statement. The statement referred to in paragraph 
(a) shall contain information (in addition to that required under 
section 6041(c)) as to the amount, if any, of winnings from identical 
wagers to which the recipient is entitled. If any person other than the 
recipient is entitled to all or a portion of the payment, the statement 
shall also include information as to the amount, if any, of winnings 
from identical wagers to which each such person is entitled. The 
statement shall be provided on Form W-2G or, if persons other than the 
recipient are entitled to all or a portion of such payment, on Form 
5754.
    (c) Exception. The requirement of paragraph (a) of this section does 
not apply with respect to any payment of winnings--
    (1) From a slot machine play, or a bingo or keno game,
    (2) Which is subject to withholding under section 3402(q) without 
regard to the existence of winnings from identical wagers, or
    (3) For which no return of information under section 6041 is 
required of the payer.
    (d) Meaning of terms, For purposes of this section, the terms 
``sweepstakes'', ``wagering pool'', ``lottery'', ``other wagering 
transaction'' and ``identical wagers'' shall have the same meanings as 
ascribed to them under Sec. 31.3402(q)-1.

[T.D. 7919, 48 FR 46297, Oct. 12, 1983]



Sec. 1.6012-1   Individuals required to make returns of income.

    (a) Individual citizen or resident-- (1) In general. Except as 
provided in subparagraph (2) of this paragraph, an income tax return 
must be filed by every individual for each taxable year beginning before 
January 1, 1973, during which he receives $600 or more of gross income, 
and for each taxable year beginning after December 31, 1972, during 
which he receives $750 or more of gross income, if such individual is:
    (i) A citizen of the United States, whether residing at home or 
abroad,
    (ii) A resident of the United States even though not a citizen 
thereof, or
    (iii) An alien bona fide resident of Puerto Rico during the entire 
taxable year.
    (2) Special rules. (i) For taxable years beginning before January 1, 
1970, an individual who is described in subparagraph (1) of this 
paragraph and who has attained the age of 65 before the close of his 
taxable year must file an income tax return only if he receives $1,200 
or more of gross income during his taxable year.
    (ii) For taxable years beginning after December 31, 1969, and before 
January 1, 1973, an individual described in subparagraph (1) of this 
paragraph (other than an individual referred to in section 142(b)):
    (a) Who is not married (as determined by applying section 143(a) and 
the regulations thereunder) must file an income tax return only if he 
receives $1,700 or more of gross income during his taxable year, except 
that if such an individual has attained the age of 65 before the close 
of his taxable year an income tax return must be filed by such 
individual only if he receives $2,300 or more of gross income during his 
taxable year.
    (b) Who is entitled to make a joint return under section 6013 and 
the regulations thereunder must file an income tax return only if his 
gross income received during his taxable year, when combined with the 
gross income of his spouse received during his taxable year, is $2,300 
or more. However, if such

[[Page 487]]

individual or his spouse has attained the age of 65 before the close of 
the taxable year an income tax return must be filed by such individual 
only if their combined gross income is $2,900 or more. If both the 
individual and his spouse have attained the age of 65 before the close 
of the taxable year such return must be filed only if their combined 
gross income is $3,500 or more. However, this subdivision (ii)(b) shall 
not apply if the individual and his spouse did not have the same 
household as their home at the close of their taxable year, if such 
spouse files a separate return for a taxable year which includes any 
part of such individual's taxable year, or if any other taxpayer is 
entitled to an exemption for such individual or his spouse under section 
151(e) for such other taxpayer's taxable year beginning in the calendar 
year in which such individual's taxable year begins. For example, a 
married student more than half of whose support is furnished by his 
father must file an income tax return if he receives $600 or more of 
gross income during his taxable year.
    (iii) For taxable years beginning after December 31, 1972, an 
individual described in subparagraph (1) of this paragraph (other than 
an individual referred to in section 142(b)):
    (a) Who is not married (as determined by applying section 143(a) and 
the regulations thereunder) must file an income tax return only if he 
receives $1,750 or more of gross income during his taxable year, except 
that if such an individual has attained the age of 65 before the close 
of his taxable year an income tax return must be filed by such 
individual only if he receives $2,500 or more of gross income during his 
taxable year.
    (b) Who is entitled to make a joint return under section 6013 and 
the regulations thereunder must file an income tax return only if his 
gross income received during his taxable year, when combined with the 
gross income of his spouse received during his taxable year, is $2,500 
or more. However, if such individual or his spouse has attained the age 
of 65 before the close of the taxable year an income tax return must be 
filed by such individual only if their combined gross income is $3,250 
or more. If both the individual and his spouse attain the age of 65 
before the close of the taxable year such return must be filed only if 
their combined gross income is $4,000 or more. However, this subdivision 
(iii)(b) shall not apply if the individual and his spouse did not have 
the same household as their home at the close of their taxable year, if 
such spouse files a separate return for a taxable year which includes 
any part of such individual's taxable year, or if any other taxpayer is 
entitled to an exemption for the taxpayer or his spouse under section 
151(e) for such other taxpayer's taxable year beginning in the calendar 
year in which such individual's taxable year begins. For example, a 
married student more than half of whose support is furnished by his 
father must file an income tax return if he receives $750 or more of 
gross income during the taxable year.
    (iv) For purposes of section 6012(a) (1)(A)(ii) and subdivisions 
(ii)(b) and (iii)(b) of this subparagraph, an individual and his spouse 
are considered to have the same household as their home at the close of 
a taxable year if the same household constituted the principal place of 
abode of both the individual and his spouse at the close of such taxable 
year (or on the date of death, if the individual or his spouse died 
within the taxable year). The individual and his spouse will be 
considered to have the same household as their home at the close of the 
taxable year notwithstanding a temporary absence from the household due 
to special circumstances, as, for example, in the case of a nonpermanent 
failure on the part of the individual and his spouse to have a common 
abode by reason of illness, education, business, vacation, or military 
service. For example, A, a calendar-year individual under 65 years of 
age, is married to B, also under 65 years of age, and is a member of the 
Armed Forces of the United States. During 1970 A is transferred to an 
overseas base. A and B give up their home, which they had jointly 
occupied until that time; B moves to the home of her parents for the 
duration of A's absence. They fully intend to set up a new joint 
household upon A's return. Neither A nor B must file a return for 1970 
if their combined gross income for the year is

[[Page 488]]

less than $2,300 and if no other taxpayer is entitled to a dependency 
exemption for A or B under section 151(e).
    (v) In the case of a short taxable year referred to in section 
443(a)(1), an individual described in subparagraph (1) of this paragraph 
shall file an income tax return if his gross income received during such 
short taxable year equals or exceeds his own personal exemption allowed 
by section 151(b) (prorated as provided in section 443(c)) and, when 
applicable, his additional exemption for age 65 or more allowed by 
section 151(c)(1) (prorated as provided in section 443(c)).
    (vi) For rules relating to returns required to be made by every 
individual who is liable for one or more qualified State individual 
income taxes, as defined in section 6362, for a taxable year, see 
paragraph (b) of Sec. 301.6361-1 of this chapter (Regulations on 
Procedure and Administration).
    (vii) For taxable years beginning after December 31, 1978, an 
individual who receives payments during the calendar year in which the 
taxable year begins under section 3507 (relating to advance payment of 
earned income credit) must file an income tax return.
    (3) Earned income from without the United States and gain from sale 
of residence. For the purpose of determining whether an income tax 
return must be filed for any taxable year beginning after December 31, 
1957, gross income shall be computed without regard to the exclusion 
provided for in section 911 (relating to earned income from sources 
without the United States). For the purpose of determining whether an 
income tax return must be filed for any taxable year ending after 
December 31, 1963, gross income shall be computed without regard to the 
exclusion provided for in section 121 (relating to sale of residence by 
individual who has attained age 65). In the case of an individual 
claiming an exclusion under section 121, he shall attach Form 2119 to 
the return required under this paragraph and in the case of an 
individual claiming an exclusion under section 911, he shall attach Form 
2555 to the return required under this paragraph.
    (4) Return of income of minor. A minor is subject to the same 
requirements and elections for making returns of income as are other 
individuals. Thus, for example, for a taxable year beginning after 
December 31, 1972, a return must be made by or for a minor who has an 
aggregate of $1,750 of gross income from funds held in trust for him and 
from his personal services, regardless of the amount of his taxable 
income. The return of a minor must be made by the minor himself or must 
be made for him by his guardian or other person charged with the care of 
the minor's person or property. See paragraph (b)(3) of Sec. 1.6012-3. 
See Sec. 1.73-1 for inclusion in the minor's gross income of amounts 
received for his personal services. For the amount of tax which is 
considered to have been properly assessed against the parent, if not 
paid by the child, see section 6201(c) and paragraph (c) of 
Sec. 301.6201-1 of this chapter (Regulations on Procedure and 
Administration).
    (5) Returns made by agents. The return of income may be made by an 
agent if, by reason of disease or injury, the person liable for the 
making of the return is unable to make it. The return may also be made 
by an agent if the taxpayer is unable to make the return by reason of 
continuous absence from the United States (including Puerto Rico as if a 
part of the United States) for a period of at least 60 days prior to the 
date prescribed by law for making the return. In addition, a return may 
be made by an agent if the taxpayer requests permission, in writing, of 
the district director for the internal revenue district in which is 
located the legal residence or principal place of business of the person 
liable for the making of the return, and such district director 
determines that good cause exists for permitting the return to be so 
made. However, assistance in the preparation of the return may be 
rendered under any circumstances. Whenever a return is made by an agent 
it must be accompanied by a power of attorney (or copy thereof) 
authorizing him to represent his principal in making, executing, or 
filing the return. A form 2848, when properly completed, is sufficient. 
In addition, where one spouse is physically unable by reason of disease 
or injury to sign a joint return, the other spouse may, with the oral 
consent of

[[Page 489]]

the one who is incapacitated, sign the incapacitated spouse's name in 
the proper place on the return followed by the words ``By 
____________________ Husband (or Wife),'' and by the signature of the 
signing spouse in his own right, provided that a dated statement signed 
by the spouse who is signing the return is attached to and made a part 
of the return stating:
    (i) The name of the return being filed,
    (ii) The taxable year,
    (iii) The reason for the inability of the spouse who is 
incapacitated to sign the return, and
    (iv) That the spouse who is incapacitated consented to the signing 
of the return.

The taxpayer and his agent, if any, are responsible for the return as 
made and incur liability for the penalties provided for erroneous, 
false, or fraudulent returns.
    (6) Form of return. Form 1040 is prescribed for general use in 
making the return required under this paragraph. Form 1040A is an 
optional short form which, in accordance with paragraph (a)(7) of this 
section, may be used by certain taxpayers. A taxpayer otherwise entitled 
to use Form 1040A as his return for any taxable year may not make his 
return on such form if he elects not to take the standard deduction 
provided in section 141, and in such case he must make his return on 
Form 1040. For taxable years beginning before January 1, 1970, a 
taxpayer entitled under section 6014 and Sec. 1.6014-1 to elect not to 
show his tax on his return must, if he desires to exercise such 
election, make his return on Form 1040A. Form 1040W is an optional short 
form which, in accordance with paragraph (a)(8) of this section, may be 
used only with respect to taxable years beginning after December 31, 
1958, and ending before December 31, 1961.
    (7)(i) Use of Form 1040A. Form 1040A may be filed only by those 
individuals entitled to use such form as provided by and in accordance 
with the instructions for such form.
    (ii) Computation and payment of tax. Unless a taxpayer is entitled 
to elect under section 6014 and Sec. 1.6014-1 not to show the tax on 
Form 1040A and does so elect, he shall compute and show on his return on 
Form 1040A the amount of the tax imposed by subtitle A of the Code and 
shall, without notice and demand therefor, pay any unpaid balance of 
such tax not later than the date fixed for filing the return.
    (iii) Change of election to use Form 1040A. A taxpayer who has 
elected to make his return on Form 1040A may change such election. Such 
change of election shall be within the time and subject to the 
conditions prescribed in section 144(b) and Sec. 1.144-2 relating to 
change of election to take, or not to take the standard deduction.
    (8) Use of Form 1040W for certain taxable years--(i) In general. An 
individual may use Form 1040W as his return for any taxable year 
beginning after December 31, 1958, and ending before December 31, 1961, 
in which the gross income of the individual, regardless of the amount 
thereof:
    (a) Consists entirely of remuneration for personal services 
performed as an employee (whether or not such remuneration constitutes 
wages as defined in section 3401(a)), dividends, or interest, and
    (b) Does not include more than $200 from dividends and interest.

For purposes of determining whether gross income from dividends and 
interest exceeds $200, dividends from domestic corporations are taken 
into account to the extent that they are includible in gross income. For 
purposes of this subparagraph, any reference to Form 1040 in Secs. 1.4-
2, 1.142-1, and 1.144-1 and this section shall also be deemed a 
reference to Form 1040W.
    (ii) Change of election to use Form 1040W. A taxpayer who has 
elected to make his return on Form 1040W may change such election. Such 
change of election shall be within the time and subject to the 
conditions prescribed in section 144(b) and Sec. 1.144-2, relating to 
change of election to take, or not to take, the standard deduction.
    (iii) Joint return of husband and wife on Form 1040W. A husband and 
wife, eligible under section 6013 and the regulations thereunder to file 
a joint return for the taxable year, may, subject to the provisions of 
this subparagraph, make a joint return on Form 1040W for

[[Page 490]]

any taxable year beginning after December 31, 1958, and ending before 
December 31, 1961, in which the aggregate gross income of the spouses 
(regardless of amount) consists entirely of remuneration for personal 
services performed as an employee (whether or not such remuneration 
constitutes wages as defined in section 3401(a)), dividends, or 
interest, and does not include more than $200 from dividends and 
interest. For purposes of determining whether gross income from sources 
to which the $200 limitation applies exceeds such amount in cases where 
both spouses receive dividends from domestic corporations, the amount of 
such dividends received by each spouse is taken into account to the 
extent that such dividends are includible in gross income. See section 
116 and Secs. 1.116-1 and 1.116-2. If a joint return is made by husband 
and wife on Form 1040W, the liability for the tax shall be joint and 
several.
    (9) Items of tax preference. For a taxable year ending after 
December 31, 1969, an individual shall attach Form 4625 to the return 
required by this paragraph if during the year the individual:
    (i) Has items of tax preference (described in section 57) in excess 
of its minimum tax exemption (determined under Sec. 1.58-1) or
    (ii) Uses a net operating loss carryover from a prior taxable year 
in which it deferred minimum tax under section 56(b).
    (b) Return of nonresident alien individual--(1) Requirement of 
return--(i) In general. Except as otherwise provided in subparagraph (2) 
of this paragraph, every nonresident alien individual (other than one 
treated as a resident under section 6013 (g) or (h)) who is engaged in 
trade or business in the United States at any time during the taxable 
year or who has income which is subject to taxation under subtitle A of 
the Code shall make a return on Form 1040NR. For this purpose it is 
immaterial that the gross income for the taxable year is less than the 
minimum amount specified in section 6012(a) for making a return. Thus, a 
nonresident alien individual who is engaged in a trade or business in 
the United States at any time during the taxable year is required to 
file a return on Form 1040 NR even though (a) he has no income which is 
effectively connected with the conduct of a trade or business in the 
United States, (b) he has no income from sources within the United 
States, or (c) his income is exempt from income tax by reason of an 
income tax convention or any section of the Code. However, if the 
nonresident alien individual has no gross income for the taxable year, 
he is not required to complete the return schedules but must attach a 
statement to the return indicating the nature of any exclusions claimed 
and the amount of such exclusions to the extent such amounts are readily 
determinable.
    (ii) Treaty income. If the gross income of a nonresident alien 
individual includes treaty income, as defined in paragraph (b)(1) of 
Sec. 1.871-12, a statement shall be attached to the return on Form 
1040NR showing with respect to that income:
    (a) The amounts of tax withheld,
    (b) The names and post office addresses of withholding agents, and
    (c) Such other information as may be required by the return form, or 
by the instructions issued with respect to the form, to show the 
taxpayer's entitlement to the reduced rate of tax under the tax 
convention.
    (2) Exceptions--(i) Return not required when tax is fully paid at 
source. A nonresident alien individual (other than one treated as a 
resident under section 6013 (g) or (h)) who at no time during the 
taxable year is engaged in a trade or business in the United States is 
not required to make a return for the taxable year if his tax liability 
for the taxable year is fully satisfied by the withholding of tax at 
source under chapter 3 of the Code. This subdivision does not apply to a 
nonresident alien individual who has income for the taxable year which 
is treated under section 871 (c) or (d) and Sec. 1.871-9 (relating to 
students or trainees) or Sec. 1.871-10 (relating to real property 
income) as income which is effectively connected for the taxable year 
with the conduct of a trade or business in the United States by that 
individual, or to a nonresident alien individual making a claim under 
Sec. 301.6402-3 of this chapter (Procedure and Administration 
Regulations) for the refund of an overpayment of tax for

[[Page 491]]

the taxable year. In addition, this subdivision does not apply to a 
nonresident alien individual who has income for the taxable year that is 
treated under section 871(b)(1) as effectively connected with the 
conduct of a trade or business within the United States by reason of the 
operation of section 897. For purposes of this subdivision, some of the 
items of income from sources within the United States upon which the tax 
liability will not have been fully satisfied by the withholding of tax 
at source under chapter 3 of the Code are:
    (a) Interest upon so-called tax-free covenant bonds upon which, in 
accordance with section 1451 and Sec. 1.1451-1, a tax of only 2 percent 
is required to be withheld at the source,
    (b) In the case of bonds or other evidences of indebtedness issued 
after September 28, 1965, amounts described in section 871(a)(1)(C),
    (c) Capital gains described in section 871(a)(2) and paragraph (d) 
of Sec. 1.871- 7, and
    (d) Accrued interest received in connection with the sale of bonds 
between interest dates, which, in accordance with paragraph (h) of 
Sec. 1.1441-4, is not subject to withholding of tax at the source.
    (ii) Return of individual for taxable year of change of U.S. 
citizenship or residence. (a) If an alien individual becomes a citizen 
or resident of the United States during the taxable year and is a 
citizen or resident of the United States on the last day of such year, 
he must make a return on Form 1040 for the taxable year. However, a 
separate schedule is required to be attached to this return to show the 
income tax computation for the part of the taxable year during which the 
alien was neither a citizen nor resident of the United States, unless an 
election under section 6013 (g) or (h) is in effect for the alien. A 
Form 1040NR, clearly marked ``Statement'' across the top, may be used as 
such a separate schedule.
    (b) If an individual abandons his U.S. citizenship or residence 
during the taxable year and is not a citizen or resident of the United 
States on the last day of such year, he must make a return on Form 
1040NR for the taxable year, even if an election under section 6013(g) 
was in effect for the taxable year preceding the year of abandonment. 
However, a separate schedule is required to be attached to this return 
to show the income tax computation for the part of the taxable year 
during which the individual was a citizen or resident of the United 
States. A Form 1040, clearly marked ``Statement'' across the top, may be 
used as such a separate schedule.
    (c) A return is required under this subdivision (ii) only if the 
individual is otherwise required to make a return for the taxable year.
    (iii) Beneficiaries of estates or trusts. A nonresident alien 
individual who is a beneficiary of an estate or trust which is engaged 
in trade or business in the United States is not required to make a 
return for the taxable year merely because he is deemed to be engaged in 
trade or business within the United States under section 875(2). 
However, such nonresident alien beneficiary will be required to make a 
return if he otherwise satisfies the conditions of subparagraph (1)(i) 
of this paragraph for making a return.
    (iv) Certain alien residents of Puerto Rico. This paragraph does not 
apply to a nonresident alien individual who is a bona fide resident of 
Puerto Rico during the taxable year. See section 876 and paragraph 
(a)(1)(iii) of this section.
    (3) Representative or agent for nonresident alien individual--(i) 
Cases where power of attorney is not required. The responsible 
representative or agent within the United States of a nonresident alien 
individual shall make on behalf of his nonresident alien principal a 
return of, and shall pay the tax on, all income coming within his 
control as representative or agent which is subject to the income tax 
under subtitle A of the Code. The agency appointment will determine how 
completely the agent is substituted for the principal for tax purposes. 
Any person who collects interest or dividends on deposited securities of 
a nonresident alien individual, executes ownership certificates in 
connection therewith, or sells such securities under special 
instructions shall not be deemed merely by reason of such acts to be the 
responsible representative or agent of the nonresident

[[Page 492]]

alien individual. If the responsible representative or agent does not 
have a specific power of attorney from the nonresident alien individual 
to file a return in his behalf, the return shall be accompanied by a 
statement to the effect that the representative or agent does not 
possess specific power of attorney to file a return for such individual 
but that the return is being filed in accordance with the provisions of 
this subdivision.
    (ii) Cases where power of attorney is required. Whenever a return of 
income of a nonresident alien individual is made by an agent acting 
under a duly authorized power of attorney for that purpose, the return 
shall be accompanied by the power of attorney in proper form, or a copy 
thereof, specifically authorizing him to represent his principal in 
making, executing, and filing the income tax return. Form 2848 may be 
used for this purpose. The agent, as well as the taxpayer, may incur 
liability for the penalties provided for erroneous, false, or fraudulent 
returns. For the requirements regarding signing of returns, see 
Sec. 1.6061-1. The rules of paragraph (e) of Sec. 601.504 of this 
chapter (Statement of Procedural Rules) shall apply under this 
subparagraph in determining whether a copy of a power of attorney must 
be certified.
    (iii) Limitation. A return of income shall be required under this 
subparagraph only if the nonresident alien individual is otherwise 
required to make a return in accordance with this paragraph.
    (4) Disallowance of deductions and credits. For provisions 
disallowing deductions and credits when a return of income has not been 
filed by or on behalf of a nonresident alien individual, see section 
874(a) and the regulations thereunder.
    (5) Effective date. This paragraph shall apply for taxable years 
beginning after December 31, 1966, except that it shall not be applied 
to require (i) the filing of a return for any taxable year ending before 
January 1, 1974, which, pursuant to instructions applicable to the 
return, is not required to be filed or (ii) the amendment of a return 
for such a taxable year which, pursuant to such instructions, is 
required to be filed. For corresponding rules applicable to taxable 
years beginning before January 1, 1967, see 26 CFR 1.6012-1(b) (Revised 
as of January 1, 1967).
    (c) Cross reference. For returns by fiduciaries for individuals, 
estates, and trusts, see Sec. 1.6012-3.

(Sec. 1445 (98 Stat. 655; 26 U.S.C. 1445), sec. 6012 (68A Stat. 732; 26 
U.S.C. 6012), and 7805 (68A Stat. 917; 26 U.S.C. 7805) of the Internal 
Revenue Code of 1954)

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.6012-1, see the List of CFR Sections Affected in the Finding Aids 
section of this volume.



Sec. 1.6012-2   Corporations required to make returns of income.

    (a) In general--(1) Requirement of return. Except as provided in 
paragraphs (e) and (g)(1) of this section with respect to charitable and 
other organizations having unrelated business income and to certain 
foreign corporations, respectively, every corporation, as defined in 
section 7701(a)(3), subject to taxation under subtitle A of the Code 
shall make a return of income regardless of whether it has taxable 
income or regardless of the amount of its gross income.
    (2) Existence of corporation. A corporation in existence during any 
portion of a taxable year is required to make a return. If a corporation 
was not in existence throughout an annual accounting period (either 
calendar year or fiscal year), the corporation is required to make a 
return for that fractional part of a year during which it was in 
existence. A corporation is not in existence after it ceases business 
and dissolves, retaining no assets, whether or not under State law it 
may thereafter be treated as continuing as a corporation for certain 
limited purposes connected with winding up its affairs, such as for the 
purpose of suing and being sued. If the corporation has valuable claims 
for which it will bring suit during this period, it has retained assets 
and therefore continues in existence. A corporation does not go out of 
existence if it is turned over to receivers or trustees who continue to 
operate it. If a corporation has received a charter but has never 
perfected its organization and has transacted no business and has no 
income from any source, it may upon

[[Page 493]]

presentation of the facts to the district director be relieved from the 
necessity of making a return. In the absence of a proper showing of such 
facts to the district director, a corporation will be required to make a 
return.
    (3) Form of return. The return required of a corporation under this 
section shall be made on Form 1120 unless the corporation is a type for 
which a special form is prescribed. The special forms of returns and 
schedules required of particular types of corporations are set forth in 
paragraphs (b) to (g), inclusive, of this section.
    (b) Personal holding companies. A personal holding company, as 
defined in section 542, including a foreign corporation within the 
definition of such section, shall attach Schedule PH, Computation of 
U.S. Personal Holding Company Tax, to the return required by paragraph 
(a) or (g), as the case may be, of this section.
    (c) Insurance companies--(1) Life insurance companies. A life 
insurance company subject to tax under section 802 or 811 shall make a 
return on Form 1120L. There shall be filed with the return (i) a copy of 
the annual statement, the form of which has been approved by the 
National Association of Insurance Commissioners, which is filed by the 
company for the year covered by such return with the insurance 
departments of States, Territories, and the District of Columbia, and 
which shows the reserves used by the company in computing the taxable 
income reported on its return, and (ii) copies of Schedule A (real 
estate) and Schedule D (bonds and stocks) of such annual statement.
    (2) Mutual insurance companies. A mutual insurance company (other 
than a life or marine insurance company and other than a fire insurance 
company subject to the tax imposed by section 831) or an interinsurer or 
reciprocal underwriter subject to tax under section 821 shall make a 
return on Form 1120M. See paragraph (a)(3) of Sec. 1.821-1. There shall 
be filed with the return (i) a copy of the annual statement, the form of 
which has been approved by the National Association of Insurance 
Commissioners, which is filed by the company for the year covered by 
such return with the insurance departments of States, Territories, and 
the District of Columbia, and (ii) copies of Schedule A (real estate) 
and Schedule D (bonds and stocks) of such annual statement.
    (3) Other insurance companies. Every insurance company (other than a 
life or mutual insurance company), every mutual marine insurance 
company, and every mutual fire insurance company, subject to tax under 
section 831, and every mutual savings bank conducting a life insurance 
business and subject to tax under section 594, shall make a return on 
Form 1120. See paragraph (c) of Sec. 1.831-1. There shall be filed with 
the return a copy of the annual statement, the form of which has been 
approved by the National Association of Insurance Commissioners, which 
contains the underwriting and investment exhibit for the year covered by 
such return.
    (4) Foreign insurance companies. The provisions of subparagraphs 
(1), (2), and (3) of this paragraph concerning the returns and 
statements of insurance companies subject to tax under section 802 or 
811, section 821, and section 831, respectively, are applicable to 
foreign insurance companies subject to tax under such sections, except 
that the copy of the annual statement, the form of which has been 
approved by the National Association of Insurance Commissioners, 
required to be submitted with the return shall, in the case of a foreign 
insurance company, be a copy of the statement relating to the United 
States business of such company.
    (d) Affiliated groups. For the forms to be used by affiliated 
corporations filing a consolidated return, see Sec. 1.1502-75.
    (e) Charitable and other organizations with unrelated business 
income. Every organization described in section 511(a)(2) which is 
subject to the tax imposed by section 511(a)(1) on its unrelated 
business taxable income shall make a return on Form 990-T for each 
taxable year if it has gross income, included in computing unrelated 
business taxable income for such taxable year, of $1,000 or more. The 
filing of a return of unrelated business income does not relieve the 
organization of the duty of filing other required returns.
    (f) Farmers' cooperatives. Farmers' cooperative organizations 
described in

[[Page 494]]

section 521 are required to make a return of income whether or not such 
organizations are subject to the taxes imposed by sections 11 and 1201 
as prescribed in section 522 or 1381. The return shall be made on Form 
990-C.
    (g) Returns by foreign corporations. (1) Requirement of return--(i) 
In general. Except as otherwise provided in subparagraph (2) of this 
paragraph, every foreign corporation which is engaged in trade or 
business in the United States at any time during the taxable year or 
which has income which is subject to taxation under subtitle A of the 
Code (relating to income taxes) shall make a return on Form 1120-F. 
Thus, for example, a foreign corporation which is engaged in trade or 
business in the United States at any time during the taxable year is 
required to file a return on Form 1120-F even though (a) it has no 
income which is effectively connected with the conduct of a trade or 
business in the United States, (b) it has no income from sources within 
the United States, or (c) its income is exempt from income tax by reason 
of an income tax convention or any section of the Code. However, if the 
foreign corporation has no gross income for the taxable year, it is not 
required to complete the return schedules but must attach a statement to 
the return indicating the nature of any exclusions claimed and the 
amount of such exclusions to the extent such amounts are readily 
determinable.
    (ii) Treaty income. If the gross income of a foreign corporation 
includes treaty income, as defined in paragraph (b)(1) of Sec. 1.871-12, 
a statement shall be attached to the return on Form 1120-F showing with 
respect to that income:
    (a) The amounts of tax withheld,
    (b) The names and post office addresses of withholding agents, and
    (c) Such other information as may be required by the return form or 
by the instructions issued with respect to the form, to show the 
taxpayer's entitlement to the reduced rate of tax under the tax 
convention.
    (iii) Balance sheet and reconciliation of income. At the election of 
the taxpayer, the balance sheets and reconciliation of income, as shown 
on Form 1120-F, may be limited to:
    (a) The assets of the corporation located in the United States and 
to its other assets used in the trade or business conducted in the 
United States, and
    (b) Its income effectively connected with the conduct of a trade or 
business in the United States and its other income from sources within 
the United States.
    (2) Exceptions--(i) Return not required when tax is fully paid at 
source--(a) In general. A foreign corporation which at no time during 
the taxable year is engaged in a trade or business in the United States 
is not required to make a return for the taxable year if its tax 
liability for the taxable year is fully satisfied by the withholding of 
tax at source under chapter 3 of the Code. For purposes of this 
subdivision, some of the items of income from sources within the United 
States upon which the tax liability will not have been fully satisfied 
by the withholding of tax at source under chapter 3 of the Code are:
    (1) Interest upon so-called tax-free covenant bonds upon which, in 
accordance with section 1451 and Sec. 1.1451-1, a tax of only 2 percent 
is required to be withheld at source,
    (2) In the case of bonds or other evidence of indebtedness issued 
after September 25, 1965, amounts described in section 881(a)(3),
    (3) Accrued interest received in connection with the sale of bonds 
between interest dates, which, in accordance with paragraph (h) of 
Sec. 1.1441-4, is not subject to withholding of tax at source.
    (b) Corporations not included. This subdivision (i) shall not apply:
    (1) To a foreign corporation which has income for the taxable year 
which is treated under section 882(d) or (e) and Sec. 1.882-2 as income 
which is effectively connected for the taxable year with the conduct of 
a trade or business in the United States by that corporation,
    (2) To a foreign corporation making a claim under Sec. 301.6402-3 of 
this chapter (Procedure and Administration Regulations) for the refund 
of an overpayment of tax for the taxable year, or
    (3) To a foreign corporation described in paragraph (c)(2)(i) of 
Sec. 1.532-1 whose accumulated taxable income for the taxable year is 
determined under paragraph (b)(2) of Sec. 1.535-1.

[[Page 495]]

    (ii) Beneficiaries of estates or trusts. A foreign corporation which 
is a beneficiary of an estate or trust which is engaged in trade or 
business in the United States is not required to make a return for the 
taxable year merely because it is deemed to be engaged in trade or 
business within the United States under section 875(2). However, such 
foreign corporation will be required to make a return if it otherwise 
satisfies the conditions of subparagraph (1)(i) of this paragraph for 
making a return.
    (iii) Special returns and schedules. The provisions of paragraphs 
(b) through (f) of this section shall apply to a foreign corporation 
except that a foreign corporation which is an insurance company to which 
paragraph (c)(3) of this section applies shall make a return on Form 
1120-F and not on Form 1120. If a foreign corporation which is an 
insurance company to which paragraph (c) (1) or (2) of this section 
applies has income for the taxable year from sources within the United 
States which is not effectively connected for that year with the conduct 
of a trade or business in the United States by that corporation, the 
corporation shall attach to its return on Form 1120L or 1120M, as the 
case may be, a separate schedule showing the nature and amount of the 
items of such income, the rate of tax applicable thereto, and the amount 
of tax withheld therefrom under chapter 3 of the Code.
    (3) Representative or agent for foreign corporation--(i) Cases where 
power of attorney is not required. The responsible representative or 
agent within the United States of a foreign corporation shall make on 
behalf of his principal a return of, and shall pay the tax on, all 
income coming within his control as representative or agent which is 
subject to the income tax under subtitle A of the Code. The agency 
appointment will determine how completely the agent is substituted for 
the principal for tax purposes. Any person who collects interest or 
dividends on deposited securities of a foreign corporation, executes 
ownership certificates in connection therewith, or sells such securities 
under special instructions shall not be deemed merely by reason of such 
acts to be the responsible representative or agent of the foreign 
corporation. If the responsible representative or agent does not have a 
specific power of attorney from the foreign corporation to file a return 
in its behalf, the return shall be accompanied by a statement to the 
effect that the representative or agent does not possess specific power 
of attorney to file a return for such corporation but that the return is 
being filed in accordance with the provisions of this subdivision.
    (ii) Cases where power of attorney is required. Whenever a return of 
income of a foreign corporation is made by an agent acting under a duly 
authorized power of attorney for that purpose, the return shall be 
accompanied by the power of attorney in proper form, or a copy thereof 
specifically authorizing him to represent his principal in making, 
executing, and filing the income tax return. Form 2848 may be used for 
this purpose. The agent, as well as the taxpayer, may incur liability 
for the penalties provided for erroneous, false, or fraudulent returns. 
For the requirements regarding signing of returns, see Sec. 1.6062-1. 
The rules of paragraph (e) of Sec. 601.504 of this chapter (Statement of 
Procedural Rules) shall apply under this subparagraph in determining 
whether a copy of a power of attorney must be certified.
    (iii) Limitation. A return of income shall be required under this 
subparagraph only if the foreign corporation is otherwise required to 
make a return in accordance with this paragraph.
    (4) Disallowance of deductions and credits. For provisions 
disallowing deductions and credits when a return of income has not been 
filed by or on behalf of a foreign corporation, see section 882(c)(2) 
and the regulations thereunder, and paragraph (b) (2) and (3) of 
Sec. 1.535-1.
    (5) Effective date. This paragraph shall apply for taxable years 
beginning after December 31, 1966, except that it shall not be applied 
to require (i) the filing of a return for any taxable year ending before 
January 1, 1974, which, pursuant to instructions applicable to the 
return, is not required to be filed or (ii) the amendment of a return 
for such a taxable year which, pursuant to such instructions, is 
required to be filed. For

[[Page 496]]

corresponding rules applicable to taxable years beginning before January 
1, 1967, see 26 CFR 1.6012-2(g) (Revised as of January 1, 1967).
    (h) Electing small business corporations. An electing small business 
corporation, whether or not subject to the tax imposed by section 1378, 
shall make a return on Form 1120-S. See also section 6037 and the 
regulations thereunder.
    (i) Items of tax preference--(1) In general. Every corporation 
required to make a return under this section, and having items of tax 
preference (described in section 57 and the regulation thereunder) in an 
amount specified by Form 4626, shall file such form as part of its 
return.
    (2) Organizations with unrelated business income and foreign 
corporations. Regardless of the provisions of paragraphs (e) and (g) of 
this section, any organization described in either such paragraph having 
items of tax preference (described in section 57 and the regulations 
thereunder) in any amount entering into the computation or unrelated 
business income is required to make a return on form 990-T or form 120F, 
respectively, and to attach the required form as part of such return.
    (j) Other provisions. For returns by fiduciaries for corporations, 
see Sec. 1.6012-3. For information returns by corporations regarding 
payments of dividends, see Secs. 1.6042-1 to 1.6042-3, inclusive; 
regarding corporate dissolutions or liquidations, see Sec. 1.6043-1; 
regarding distributions in liquidation, see Sec. 1.6043-2; regarding 
payments of patronage dividends, see Secs. 1.6044-1 to 1.6044-4, 
inclusive; and regarding certain payments of interest, see Secs. 1.6049-
1 and 1.6049-2. For information returns of officers, directors, and 
shareholders of foreign personal holding companies, as defined in 
section 552, see Secs. 1.6035-1 and 1.6035-2. For returns as to 
formation or reorganization of foreign corporations, see Secs. 1.6046-1 
to 1.6046-3, inclusive.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.6012-2, see the List of CFR Sections Affecting in the Finding 
Aids section of this volume.



Sec. 1.6012-3  Returns by fiduciaries.

    (a) For estates and trusts--(1) In general. Every fiduciary, or at 
least one of joint fiduciaries, must make a return of income on form 
1041 (or by use of a composite return pursuant to Sec. 1.6012-5) and 
attach the required form if the estate or trust has items of tax 
preference (as defined in section 57 and the regulations thereunder) in 
any amount:
    (i) For each estate for which he acts if the gross income of such 
estate for the taxable year is $600 or more;
    (ii) For each trust for which he acts, except a trust exempt under 
section 501(a), if such trust has for the taxable year any taxable 
income, or has for the taxable year gross income of $600 or more 
regardless of the amount of taxable income; and
    (iii) For each estate and each trust for which he acts, except a 
trust exempt under section 501(a), regardless of the amount of income 
for the taxable year, if any beneficiary of such estate or trust is a 
nonresident alien.
    (2) Wills and trust instruments. At the request of the Internal 
Revenue Service, a copy of the will or trust instrument (including any 
amendments), accompanied by a written declaration of the fiduciary under 
the penalties of perjury that it is a true and complete copy, shall be 
filed together with a statement by the fiduciary indicating the 
provisions of the will or trust instrument (including any amendments) 
which, in the fiduciary's opinion, determine the extent to which the 
income of the estate or trust is taxable to the estate or trust, the 
beneficiaries, or the grantor, respectively.
    (3) Domiciliary and ancillary representatives. In the case of an 
estate required to file a return under subparagraph (1) of this 
paragraph, having both domiciliary and ancillary representatives, the 
domiciliary and ancillary representatives must each file a return on 
Form 1041. The domiciliary representative is required to include in the 
return rendered by him as such domiciliary representative the entire 
income of the estate. The return of the ancillary representative shall 
be filed with the district director for his internal revenue district 
and shall show the name and address of the domiciliary representative, 
the amount of gross income received by the ancillary representative, and 
the deductions to be claimed against such income, including any

[[Page 497]]

amount of income properly paid or credited by the ancillary 
representative to any legatee, heir, or other beneficiary. If the 
ancillary representative for the estate of a nonresident alien is a 
citizen or resident of the United States, and the domiciliary 
representative is a nonresident alien, such ancillary representative is 
required to render the return otherwise required of the domiciliary 
representative.
    (4) Two or more trusts. A trustee of two or more trusts must make a 
separate return for each trust, even though such trusts were created by 
the same grantor for the same beneficiary or beneficiaries.
    (5) Trusts with unrelated business income. Every fiduciary for a 
trust described in section 511(b)(2) which is subject to the tax imposed 
on its unrelated business taxable income by section 511(b)(1) shall make 
a return on Form 990-T for each taxable year if the trust has gross 
income, included in computing unrelated business taxable income for such 
taxable year, of $1,000 or more. The filing of a return of unrelated 
business income does not relieve the fiduciary of such trust from the 
duty of filing other required returns.
    (6) Charitable remainder trusts. Every fiduciary for a charitable 
remainder annuity trust (as defined in Sec. 1.664-2) or a charitable 
remainder unitrust (as defined in Sec. 1.664-3) shall make a return on 
Form 1041-B for each taxable year of the trust even though it is 
nonexempt because it has unrelated business taxable income. The return 
on Form 1041-B shall be made in accordance with the instructions for the 
form and shall be filed with the designated Internal Revenue office on 
or before the 15th day of the fourth month following the close of the 
taxable year of the trust. A copy of the instrument governing the trust, 
accompanied by a written declaration of the fiduciary under the 
penalties of perjury that it is a true and complete copy, shall be 
attached to the return for the first taxable year of the trust.
    (7) Certain trusts described in section 4947(a)(1). For taxable 
years beginning after December 31, 1980, in the case of a trust 
described in section 4947(a)(1) which has no taxable income for a 
taxable year, the filing requirements of section 6012 and this section 
shall be satisfied by the filing, pursuant to Sec. 53.6011-1 of this 
chapter (Foundation Excise Tax Regulations) and Sec. 1.6033-2(a), by the 
fiduciary of such trust of--
    (i) Form 990-PF if such trust is treated as a private foundation, or
    (ii) Form 990 if such trust is not treated as a private foundation.

When the provisions of this paragraph (a)(7) are met, the fiduciary 
shall not be required to file Form 1041.
    (8) Estate and trusts liable for qualified tax. In the case of an 
estate or trust which is liable for one or more qualified State 
individual income taxes, as defined in section 6362, for a taxable year, 
see paragraph (b) of Sec. 301.6361-1 of this chapter (Regulations on 
Procedure and Administration) for rules relating to returns required to 
be made.
    (9) A trust any portion of which is treated as owned by the grantor 
or another person pursuant to sections 671 through 678. In the case of a 
trust any portion of which is treated as owned by the grantor or another 
person under the provisions of subpart E (section 671 and following) 
part I, subchapter J, chapter 1 of the Internal Revenue Code see 
Sec. 1.671-4.
    (b) For other persons--(1) Decedents. The executor or administrator 
of the estate of a decedent, or other person charged with the property 
of a decedent, shall make the return of income required in respect of 
such decedent. For the decedent's taxable year which ends with the date 
of his death, the return shall cover the period during which he was 
alive. For the filing of returns of income for citizens and alien 
residents of the United States, and alien residents of Puerto Rico, see 
paragraph (a) of Sec. 1.6012-1. For the filing of a joint return after 
death of spouse, see paragraph (d) of Sec. 1.6013-1.
    (2) Nonresident alien individuals--(i) In general. A resident or 
domestic fiduciary or other person charged with the care of the person 
or property of a nonresident alien individual shall make a return for 
that individual and pay the tax unless:
    (a) The nonresident alien individual makes a return of, and pays the 
tax on, his income for the taxable year,

[[Page 498]]

    (b) A responsible representative or agent in the United States of 
the nonresident alien individual makes a return of, and pays the tax on, 
the income of such alien individual for the taxable year, or
    (c) The nonresident alien individual has appointed a person in the 
United States to act as his agent for the purpose of making a return of 
income and, if such fiduciary is required to file a Form 1041 for an 
estate or trust of which such alien individual is a beneficiary, such 
fiduciary attaches a copy of the agency appointment to his return on 
Form 1041.
    (ii) Income to be returned. A return of income shall be required 
under this subparagraph only if the nonresident alien individual is 
otherwise required to make a return in accordance with paragraph (b) of 
Sec. 1.6012-1. The provisions of that paragraph shall apply in 
determining the form of return to be used and the income to be returned.
    (iii) Disallowance of deductions and credits. For provisions 
disallowing deductions and credits when a return of income has not been 
filed by or on behalf of a nonresident alien individual, see section 874 
and the regulations thereunder.
    (iv) Alien resident of Puerto Rico. This subparagraph shall not 
apply to the return of a nonresident alien individual who is a bona fide 
resident of Puerto Rico during the entire taxable year. See Sec. 1.876-
1.
    (v) Cross reference. For requirements of withholding tax at source 
on nonresident alien individuals and of returns with respect to such 
withheld taxes, see Secs. 1.1441-1 to 1.1465-1, inclusive.
    (3) Persons under a disability. A fiduciary acting as the guardian 
of a minor, or as the guardian or committee of an insane person, must 
make the return of income required in respect of such person unless, in 
the case of a minor, the minor himself makes the return or causes it to 
be made.
    (4) Corporations. A receiver, trustee in dissolution, trustee in 
bankruptcy, or assignee, who, by order of a court of competent 
jurisdiction, by operation of law or otherwise, has possession of or 
holds title to all or substantially all the property or business of a 
corporation, shall make the return of income for such corporation in the 
same manner and form as corporations are required to make such returns. 
Such return shall be filed whether or not the receiver, trustee, or 
assignee is operating the property or business of the corporation. A 
receiver in charge of only a small part of the property of a 
corporation, such as a receiver in mortgage foreclosure proceedings 
involving merely a small portion of its property, need not make the 
return of income. See also Sec. 1.6041-1, relating to returns regarding 
information at source; Secs. 1.6042-1 to 1.6042-3, inclusive, relating 
to returns regarding payments of dividends; Secs. 1.6044-1 to 1.6044-4, 
inclusive, relating to returns regarding payments of patronage 
dividends; and Secs. 1.6049-1 and 1.6049-2, relating to returns 
regarding certain payments of interest.
    (5) Individuals in receivership. A receiver who stands in the place 
of an individual must make the return of income required in respect of 
such individual. A receiver of only part of the property of an 
individual need not file a return, and the individual must make his own 
return.
    (c) Joint fiduciaries. In the case of joint fiduciaries, a return is 
required to be made by only one of such fiduciaries. A return made by 
one of joint fiduciaries shall contain a statement that the fiduciary 
has sufficient knowledge of the affairs of the person for whom the 
return is made to enable him to make the return, and that the return is, 
to the best of his knowledge and belief, true and correct.
    (d) Other provisions. For the definition of the term ``fiduciary'', 
see section 7701(a)(6) and the regulations thereunder. For information 
returns required to be made by fiduciaries under section 6041, see 
Sec. 1.6041-1. As to further duties and liabilities of fiduciaries, see 
section 6903 and Sec. 301.6903-1 of this chapter (Regulations on 
Procedure and Administration).

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.6012-3, see the List of CFR Sections Affecting in the Finding 
Aids section of this volume.

[[Page 499]]



Sec. 1.6012-4   Miscellaneous returns.

    For returns by regulated investment companies of tax on 
undistributed capital gain designated for special treatment under 
section 852(b)(3)(D), see Sec. 1.852-9. For returns with respect to tax 
withheld on nonresident aliens and foreign corporations and on tax-free 
covenant bonds, see Secs. 1.1461-1 to 1.1465-1, inclusive. For returns 
of tax on transfers to avoid income tax, see Sec. 1.1494-1. For the 
requirement of an annual report by persons completing a Government 
contract, see 26 CFR (1939) 17.16 (Treasury Decision 4906, approved June 
23, 1939), and 26 CFR (1939) 16.15 (Treasury Decision 4909, approved 
June 28, 1939) , as made applicable to section 1471 of the 1954 Code by 
Treasury Decision 6091, approved August 16, 1954 (19 FR 5167, C.B. 1954-
2, 47). See also Sec. 1.1471-1.

[T.D. 7332, 39 FR 44231, Dec. 23, 1974]

    Editorial Note: For the convenience of the user Secs. 16.15 and 
17.16 of 26 CFR (1939) are set forth below:

    Sec. 16.15  Annual reports for income taxable years--(a) General 
requirements. Every contracting party completing a contract or 
subcontract within the contracting party's income-taxable year ending 
after April 3, 1939 shall file with the district director of internal 
revenue for the internal revenue district in which the contracting 
party's Federal income tax returns are required to be filed an annual 
report on the prescribed form of the profit and excess profit on all 
contracts and subcontracts coming within the scope of the act and the 
regulations in this part and completed within the particular income-
taxable year. There shall be included as a part of such a report a 
statement, preferably in columnar form, showing separately for each such 
contract or subcontract completed by the contracting party within the 
income-taxable year the total contract price, the cost of performing the 
contract or subcontract and the resulting profit or loss on each 
contract or subcontract together with a summary statement showing in 
detail the computation of the net profit or net loss upon all contracts 
and subcontracts completed within the income-taxable year and the amount 
of the excess profit, if any, for the income-taxable year covered by the 
report. A copy of the report made to the Secretary of the Army (see 
Sec. 16.14) with respect to each contract or subcontract covered in the 
annual report, shall be filed as a part of such annual report. In case 
the income-taxable year of the contracting party is a period of less 
than twelve months (see Sec. 16.1), the report required by this section 
shall be made for such period and not for a full year.
    (b) Time for filing annual reports. Annual reports of contracts and 
subcontracts coming within the scope of the act and the regulations in 
this part completed by a contracting party within an income-taxable year 
must be filed on or before the 15th day of the ninth month following the 
close of the contracting party's income-taxable year. It is important 
that the contracting party render on or before the due date an annual 
report as nearly complete and final as it is possible for the 
contracting party to prepare. An extension of time granted the 
contracting party for filing its Federal income tax return does not 
serve to extend the time for filing the annual report required by this 
section. Authority consistent with authorizations for granting 
extensions of time for filing Federal income tax returns is hereby 
delegated to the various collectors of internal revenue for granting 
extensions of time for filing the reports required by this section. 
Application for extensions of time for filing such reports should be 
addressed to the district director of internal revenue for the district 
in which the contracting party files its Federal income tax returns and 
must contain a full recital of the causes for the delay.
    Sec. 17.16  Annual reports for income-taxable years--(a) General 
requirements. Every contracting party completing a contract or 
subcontract within the contracting party's income-taxable year ending 
after April 3, 1939 shall file, with the district director of internal 
revenue for the internal revenue district in which the contracting 
party's Federal income tax return is required to be filed, annual 
reports on the prescribed forms of the profit and excess profit on all 
contracts and subcontracts coming within the scope of the act. If any 
contracts or subcontracts so completed by the contracting party were 
entered into for the construction or manufacture of any complete naval 
vessel or any portion thereof, the profit and excess profit on all such 
contracts and subcontracts completed within the income-taxable year 
ending after April 3, 1939 shall be computed in accordance with the 
provisions of Sec. 17.6. If any contracts or subcontracts so completed 
by the contracting party were entered into for the construction or 
manufacture of any complete naval aircraft or any portion thereof, the 
profit and excess profit on all such contracts and subcontracts 
completed within the income-taxable year ending after April 3, 1939 
shall be computed in accordance with the provisions of Sec. 17.7. There 
shall be included as a part of the annual report a statement, preferably 
in columnar form, showing separately for each contract or subcontract 
completed by the contracting party within the income-taxable year and 
covered by the report, the total contract price, the cost of performing 
the contract or subcontract and resulting

[[Page 500]]

profit or loss on each contract or subcontract together with a summary 
statement showing in detail the computation of the net profit or net 
loss upon each group of contracts and subcontracts covered by the report 
and the amount of the excess profit, if any, with respect to each group 
of contracts and subcontracts covered by the report. A copy of the 
report made to the Secretary of the Navy (see Sec. 17.15) with respect 
to each contract or subcontract covered in the annual report, shall be 
filed as a part of such annual report. In case the income-taxable year 
of the contracting party is a period of less than twelve months (see 
Sec. 17.1), the reports required by this section shall be made for such 
period and not for a full year.
    (b) Time for filing annual reports. Annual reports of contracts and 
subcontracts completed by a contracting party within an income-taxable 
year ending after April 3, 1939 shall be filed on or before the 15th day 
of the ninth month following the close of the contracting party's 
income-taxable year. It is important that the contracting party render 
on or before the due date annual reports as nearly complete and final as 
it is possible for the contracting party to prepare. An extension of 
time granted the contracting party for filing its Federal income tax 
return does not serve to extend the time for filing the annual reports 
required by this section. Authority consistent with authorizations for 
granting extensions of time for filing Federal income tax returns is 
hereby delegated to the various district directors of internal revenue 
for granting extensions of time for filing the reports required by this 
section. Application for extension of time for filing such reports 
should be addressed to the district director of internal revenue for the 
district in which the contracting party files its Federal income tax 
returns and must contain a full recital of the causes for the delay.



Sec. 1.6012-5   Composite return in lieu of specified form.

    The Commissioner may authorize the use, at the option of a person 
required to make a return, of a composite return in lieu of any form 
specified in this part for use by such a person, subject to such 
conditions, limitations, and special rules governing the preparation, 
execution, filing, and correction thereof as the Commissioner may deem 
appropriate. Such composite return shall consist of a form prescribed by 
the Commissioner and an attachment or attachments of magnetic tape or 
other approved media. Notwithstanding any provisions in this part to the 
contrary, a single form and attachment may comprise the returns of more 
than one such person. To the extent that the use of a composite return 
has been authorized by the Commissioner, references in this part to a 
specific form for use by such a person shall be deemed to refer also to 
a composite return under this section.

[T.D. 7200, 37 FR 16544, Aug. 16, 1972]



Sec. 1.6012-6  Returns by political organizations.

    (a) Requirement of return--(1) In general. For taxable years 
beginning after December 31, 1974, every political organization 
described in section 527(e)(1), and every fund described in section 
527(f)(3) or section 527(g), and every organization described in section 
501(c) and exempt from taxation under section 501(a) shall make a return 
of income within the time provided in section 6072(b), if a tax is 
imposed on such an organization or fund by section 527(b).
    (2) Taxable years beginning after December 31, 1971, and before 
January 1, 1975. For taxable years beginning after December 31, 1971, 
and before January 1, 1975, any political organization which would be 
described in section 527(e)(1) if such section applied to such years 
shall not be required to make a return if such organization would not be 
required to make a return under paragraph (a)(1) of this section.
    (b) Form of return. The return required by an organization or fund 
upon which a tax is imposed by section 527(b) shall be made on Form 
1120-POL.

[T.D. 7516, 42 FR 57312, Nov. 2, 1977; 43 FR 2721, Jan. 19, 1978]



Sec. 1.6012-7T  Telephone return filing using voice signature (temporary).

    (a) In general. For all purposes of the Internal Revenue Code, a 
return completed by an eligible taxpayer under the TeleFile Voice 
Signature test in accordance with the instructions provided over the 
telephone is an individual Federal income tax return filed at the time 
the TeleFile system interactive voice computer states to the taxpayer 
that the filing is completed. For provisions relating to the signing and 
verification of the TeleFile Voice Signature test returns made under 
this

[[Page 501]]

section, see Secs. 1.6061-2T and 1.6065-2T, respectively.
    (b) Manner of filing return by telephone. An eligible taxpayer who 
chooses to participate in the TeleFile Voice Signature test must dial 
the telephone number provided by the Internal Revenue Service from a 
touch-tone telephone. When an eligible taxpayer dials this telephone 
number, the TeleFile system interactive voice computer will give the 
taxpayer filing instructions. The taxpayer must provide all the 
information and a voice signature at the time and in the manner required 
by those instructions.
    (c) Eligible taxpayer defined. An eligible taxpayer is a single 
individual who lives in the Cincinnati District Office geographic area, 
who is eligible to file Form 1040EZ, Income Tax Return for Single and 
Joint Filers With No Dependents, and whose current name and address 
appear on the mailing label attached to the taxpayer's tax package for 
the calendar year for which the Form 1040EZ is to be filed.
    (d) Address to which refunds are sent. If a taxpayer who files a 
TeleFile Voice Signature test return is entitled to a refund, the 
taxpayer's refund will be sent to the address on the mailing label 
attached to the taxpayer's tax package.
    (e) Effective dates. (1) This section is effective for--
    (i) 1992 calendar year returns filed by eligible taxpayers in the 
TeleFile Voice Signature test after January 13, 1993, and before April 
16, 1993; and
    (ii) 1993 calendar year returns filed by eligible taxpayers in the 
TeleFile Voice Signature test after January 12, 1994, and before April 
16, 1994.
    (2) No returns can be filed under the TeleFile Voice Signature tests 
between April 16, 1993, and January 12, 1994, or after April 15, 1994.

[T.D. 8510, 58 FR 68296, Dec. 27, 1993]



Sec. 1.6013-1   Joint returns.

    (a) In general. (1) A husband and wife may elect to make a joint 
return under section 6013(a) even though one of the spouses has no gross 
income or deductions. For rules for determining whether individuals 
occupy the status of husband and wife for purposes of filing a joint 
return, see paragraph (a) of Sec. 1.6013-4. For any taxable year with 
respect to which a joint return has been filed, separate returns shall 
not be made by the spouses after the time for filing the return of 
either has expired. See, however, paragraph (d)(5) of this section for 
the right of an executor to file a late separate return for a deceased 
spouse and thereby disaffirm a timely joint return made by the surviving 
spouse.
    (2) A joint return of a husband and wife (if not made by an agent of 
one or both spouses) shall be signed by both spouses. The provisions of 
paragraph (a)(5) of Sec. 1.6012-1, relating to returns made by agents, 
shall apply where one spouse signs a return as agent for the other, or 
where a third party signs a return as agent for one or both spouses.
    (b) Nonresident alien. A joint return shall not be made if either 
the husband or wife at any time during the taxable year is a nonresident 
alien, unless an election is in effect for the taxable year under 
section 6013 (g) or (h) and the regulations thereunder.
    (c) Different taxable years. Except as otherwise provided in this 
section, a husband and wife shall not file a joint return if they have 
different taxable years.
    (d) Joint return after death. (1) Section 6013(a)(2) provides that a 
joint return may be made for the survivor and the deceased spouse or for 
both deceased spouses if the taxable years of such spouses begin on the 
same day and end on different days only because of the death of either 
or both. Thus, if a husband and wife make this return on a calendar year 
basis, and the wife dies on August 1, 1956, a joint return may be made 
with respect to the calendar year 1956 of the husband and the taxable 
year of the wife beginning on January 1, 1956, and ending with her death 
on August 1, 1956. Similarly, if husband and wife both make their 
returns on the basis of a fiscal year beginning on July 1 and the wife 
dies on October 1, 1956, a joint return may be made with respect to the 
fiscal year of the husband beginning on July 1, 1956, and ending on June 
30, 1957, and with respect to the taxable year of the wife beginning on 
July 1, 1956, and ending with her death on October 1, 1956.

[[Page 502]]

    (2) The provision allowing a joint return to be made for the taxable 
year in which the death of either or both spouses occurs is subject to 
two limitations. The first limitation is that if the surviving spouse 
remarries before the close of his taxable year, he shall not make a 
joint return with the first spouse who died during the taxable year. In 
such a case, however, the surviving spouse may make a joint return with 
his new spouse provided the other requirements with respect to the 
filing of a joint return are met. The second limitation is that the 
surviving spouse shall not make a joint return with the deceased spouse 
if the taxable year of either spouse is a fractional part of a year 
under section 443(a)(1) resulting from a change of accounting period. 
For example, if a husband and wife make their returns on the calendar 
year basis and the wife dies on March 1, 1956, and thereafter the 
husband receives permission to change his annual accounting period to a 
fiscal year beginning July 1, 1956, no joint return shall be made for 
the short taxable year ending June 30, 1956. Similarly, if a husband and 
wife who make their returns on a calendar year basis receive permission 
to change to a fiscal year beginning July 1, 1956, and the wife dies on 
June 1, 1956, no joint return shall be made for the short taxable year 
ending June 30, 1956.
    (3) Section 6013(a)(3) provides for the method of making a joint 
return in the case of the death of one spouse or both spouses. The 
general rule is that, in the case of the death of one spouse, or of both 
spouses, the joint return with respect to the decedent may be made only 
by his executor or administrator, as defined in paragraph (c) of 
Sec. 1.6013-4. An exception is made to this general rule whereby, in the 
case of the death of one spouse, the joint return may be made by the 
surviving spouse with respect to both him and the decedent if all the 
following conditions exist:
    (i) No return has been made by the decedent for the taxable year in 
respect of which the joint return is made;
    (ii) No executor or administrator has been appointed at or before 
the time of making such joint return; and
    (iii) No executor or administrator is appointed before the last day 
prescribed by law for filing the return of the surviving spouse.

These conditions are to be applied with respect to the return for each 
of the taxable years of the decedent for which a joint return may be 
made if more than one such taxable year is involved. Thus, in the case 
of husband and wife on the calendar year basis, if the wife dies in 
February 1957, a joint return for the husband and wife for 1956 may be 
made if the conditions set forth in this subparagraph are satisfied with 
respect to such return. A joint return also may be made by the survivor 
for both himself and the deceased spouse for the calendar year 1957 if 
it is separately determined that the conditions set forth in this 
subparagraph are satisfied with respect to the return for such year. If, 
however, the deceased spouse should, prior to her death, make a return 
for 1956, the surviving spouse may not thereafter make a joint return 
for himself and the deceased spouse for 1956.
    (4) If an executor or administrator is appointed at or before the 
time of making the joint return or before the last day prescribed by law 
for filing the return of the surviving spouse, the surviving spouse 
cannot make a joint return for himself and the deceased spouse whether 
or not a separate return for the deceased spouse is made by such 
executor or administrator. In such a case, any return made solely by the 
surviving spouse shall be treated as his separate return. The joint 
return, if one is to be made, must be made by both the surviving spouse 
and the executor or administrator. In determining whether an executor or 
administrator is appointed before the last day prescribed by law for 
filing the return of the surviving spouse, an extension of time for 
making the return is included.
    (5) If the surviving spouse makes the joint return provided for in 
subparagraph (3) of this paragraph and thereafter an executor or 
administrator of the decedent is appointed, the executor or 
administrator may disaffirm such joint return. This disaffirmance, in 
order to be effective, must be made within one year after the last day 
prescribed by law for filing the return of the surviving spouse 
(including any extension of time for filing such return)

[[Page 503]]

and must be made in the form of a separate return for the taxable year 
of the decedent with respect to which the joint return was made. In the 
event of such proper disaffirmance the return made by the survivor shall 
constitute his separate return, that is, the joint return made by him 
shall be treated as his return and the tax thereon shall be computed by 
excluding all items properly includible in the return of the deceased 
spouse. The separate return made by the executor or administrator shall 
constitute the return of the deceased spouse for the taxable year.
    (6) The time allowed the executor or administrator to disaffirm the 
joint return by the making of a separate return does not establish a new 
due date for the return of the deceased spouse. Accordingly, the 
provisions of sections 6651 and 6601, relating to delinquent returns and 
delinquency in payment of tax, are applicable to such return made by the 
executor in disaffirmance of the joint return.
    (e) Return of surviving spouse treated as joint return. For 
provisions relating to the treatment of the return of a surviving spouse 
as a joint return for each of the next two taxable years following the 
year of the death of the spouse, see section 2 and Sec. 1.2-2.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7274, 38 FR 
11345, May 7, 1973; T.D. 7670, 45 FR 6929, Jan. 31, 1980]



Sec. 1.6013-2   Joint return after filing separate return.

    (a) In general. (1) Where an individual has filed a separate return 
for a taxable year for which a joint return could have been made by him 
and his spouse under section 6013(a), and the time prescribed by law for 
filing the return for such taxable year has expired, such individual and 
his spouse may, under conditions hereinafter set forth, make a joint 
return for such taxable year. The joint return filed pursuant to section 
6013(b) shall constitute the return of the husband and wife for such 
year, and all payments, credits, refunds, or other repayments, made or 
allowed with respect to the separate return of either spouse are to be 
taken into account in determining the extent to which the tax based on 
the joint return has been paid.
    (2) If a joint return is made under section 6013(b), any election, 
other than the election to file a separate return, made by either spouse 
in his separate return for the taxable year with respect to the 
treatment of any income, deduction, or credit of such spouse shall not 
be changed in the making of the joint return where such election would 
have been irrevocable if the joint return had not been made. Thus, if 
one spouse has made an irrevocable election to adopt and use the last-
in, first-out inventory method under section 472, this election may not 
be changed upon making the joint return under section 6013(b).
    (3) A joint return made under section 6013(b) after the death of 
either spouse shall, with respect to the decedent, be made only by his 
executor or administrator. Thus, where no executor or administrator has 
been appointed, a joint return cannot be made under section 6013(b).
    (4) A nonresidential alien treated as a resident under section 6013 
(g) or (h) for any taxable year ending on or after December 31, 1975, 
and the alien's U.S. citizen or resident spouse may file a joint return 
for that taxable year, even though one or both of the spouses have 
previously filed separate returns for that taxable year. In this case, 
the rule in paragraph (a)(3) of this section does not apply.
    (b) Limitations with respect to making of election. A joint return 
shall not be made under section 6013(b)(1) with respect to a taxable 
year:
    (1) Unless there is paid in full at or before the time of the filing 
of the joint return the amount shown as tax upon such joint return; or
    (2) After the expiration of three years from the last day prescribed 
by law for filing the return for such taxable year determined without 
regard to any extension of time granted to either spouse; or
    (3) After there has been mailed to either spouse, with respect to 
such taxable year, a notice of deficiency under section 6212, if the 
spouse, as to such notice, files a petition with the Tax Court of the 
United States within the time prescribed in section 6213; or

[[Page 504]]

    (4) After either spouse has commenced a suit in any court for the 
recovery of any part of the tax for such taxable year; or
    (5) After either spouse has entered into a closing agreement under 
section 7121 with respect to such taxable year, or after any civil or 
criminal case arising against either spouse with respect to such taxable 
year has been compromised under section 7122.
    (c) When return deemed filed; assessment and collection; credit or 
refund. (1) For the purpose of section 6501, relating to the period of 
limitations upon assessment and collection, and section 6651, relating 
to delinquent returns, a joint return made under section 6013(b) shall 
be deemed to have been filed, giving due regard to any extension of time 
granted to either spouse, on the following date:
    (i) Where both spouses filed separate returns, prior to making the 
joint return under section 6013(b), on the date the last separate return 
of either spouse was filed for the taxable year, but not earlier than 
the last date prescribed by law for the filing of the return of either 
spouse;
    (ii) Where only one spouse was required and did file a return prior 
to the making of the joint return under section 6013(b), on the date of 
the filing of the separate return, but not earlier than the last day 
prescribed by law for the filing of such return; or
    (iii) Where both spouses were required to file a return, but only 
one spouse did so file, on the date of the filing of the joint return 
under section 6013(b).
    (2) For the purpose of section 6511, relating to refunds and 
credits, a joint return made under section 6013(b) shall be deemed to 
have been filed on the last date prescribed by law for filing the return 
for such taxable year, determined without regard to any extension of 
time granted to either spouse for filing the return or paying the tax.
    (d) Additional time for assessment. In the case of a joint return 
made under section 6013(b), the period of limitations provided in 
sections 6501 and 6502 shall not be less than one year after the date of 
the actual filing of such joint return. The expiration of the one year 
is to be determined without regard to the rules provided in paragraph 
(c)(1) of this section, relating to the application of sections 6501 and 
6651 with respect to a joint return made under section 6013(b).
    (e) Additions to the tax and penalties. (1) Where the amount shown 
as the tax by the husband and wife on a joint return made under section 
6013(b) exceeds the aggregate of the amounts shown as tax on the 
separate return of each spouse, and such excess is attributable to 
negligence, intentional disregard of rules and regulations, or fraud at 
the time of the making of such separate return, there shall be assessed, 
collected, and paid in the same manner as if it were a deficiency an 
additional amount as provided by the following:
    (i) If any part of such excess is attributable to negligence, or 
intentional disregard of rules and regulations, at the time of the 
making of such separate return, but without any intent to defraud, this 
additional amount shall be 5 percent of the total amount of the excess.
    (ii) If any part of such excess is attributable to fraud with intent 
to evade tax at the time of the making of such separate return, this 
additional amount shall be 50 percent of the total amount of the excess. 
The latter addition is in lieu of the 50 percent addition to the tax 
provided in section 6653(b).
    (2) For purposes of section 7206 (1) and (2) and section 7207 
(relating to criminal penalties in the case of fraudulent returns), the 
term ``return'' includes a separate return filed by a spouse with 
respect to a taxable year for which a joint return is made under section 
6013(b) after the filing of a separate return.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7670, 45 FR 
6929, Jan. 31, 1980]



Sec. 1.6013-3   Treatment of joint return after death of either spouse.

    For purposes of section 21 (relating to change in rates during a 
taxable year), section 443 (relating to returns for a period of less 
than 12 months), and section 7851(a)(1)(A) (relating to the 
applicability of certain provisions of the Internal Revenue Code of 1954 
and the Internal Revenue Code of 1939),

[[Page 505]]

where the husband and wife have different taxable years because of death 
of either spouse, the joint return shall be treated as if the taxable 
years of both ended on the date of the closing of the surviving spouse's 
taxable year. Thus, in cases where the Internal Revenue Code of 1939 
otherwise would apply to the taxable year of the decedent spouse and the 
Internal Revenue Code of 1954 would apply to the taxable year of the 
surviving spouse, this provision makes the Internal Revenue Code of 1954 
applicable to the taxable years of both spouses if a joint return is 
filed.



Sec. 1.6013-4   Applicable rules.

    (a) Status as husband and wife. For the purpose of filing a joint 
return under section 6013, the status as husband and wife of two 
individuals having taxable years beginning on the same day shall be 
determined:
    (1) If the taxable year of each individual is the same, as of the 
close of such year; and
    (2) If the close of the taxable year is different by reason of the 
death of one spouse, as of the time of such death.

 An individual legally separated from his spouse under a decree of 
divorce or of separate maintenance shall not be considered as married. 
However, the mere fact that spouses have not lived together during the 
course of the taxable year shall not prohibit them from making a joint 
return. A husband and wife who are separated under an interlocutory 
decree of divorce retain the relationship of husband and wife until the 
decree becomes final. The fact that the taxpayer and his spouse are 
divorced or legally separated at any time after the close of the taxable 
year shall not deprive them of their right to file a joint return for 
such taxable year under section 6013.
    (b) Computation of income, deductions, and tax. If a joint return is 
made, the gross income and adjusted gross income of husband and wife on 
the joint return are computed in an aggregate amount and the deductions 
allowed and the taxable income are likewise computed on an aggregate 
basis. Deductions limited to a percentage of the adjusted gross income, 
such as the deduction for charitable, etc., contributions and gifts, 
under section 170, will be allowed with reference to such aggregate 
adjusted gross income. A similar rule is applied in the case of the 
limitation of section 1211(b) on the allowance of losses resulting from 
the sale or exchange of capital assets (see Sec. 1.1211-1). Although 
there are two taxpayers on a joint return, there is only one taxable 
income. The tax on the joint return shall be computed on the aggregate 
income and the liability with respect to the tax shall be joint and 
several. For computation of tax in the case of a joint return, see 
Sec. 1.2-1. For tax in the case of a joint return of husband and wife 
electing to pay the optional tax under section 3, see Sec. 1.3-1. For 
the election not to show on a joint return the amount of tax due in 
connection therewith, see paragraph (c) of Sec. 1.6014-1 and paragraph 
(d) of Sec. 1.6014-2. For separate computations of the self-employment 
tax of each spouse on a joint return, see paragraph (b) of Sec. 1.6017-
1.
    (c) Definition of executor or administrator. For purposes of section 
6013 the term ``executor or administrator'' means the person who is 
actually appointed to such office and not a person who is merely in 
charge of the property of the decedent.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7102, 36 FR 
5497, Mar. 24, 1971]



Sec. 1.6013-5   Spouse relieved of liability in certain cases.

    (a) In general. A person shall be relieved from liability for any 
tax, penalties, additions to tax, interest, or other amounts, to the 
extent that such liability is attributable to an omission from gross 
income in a taxable year, and:
    (1) He filed a joint return with a spouse in such taxable year,
    (2) An amount of income which exceeds 25 percent of the amount of 
gross income which is stated in the return (as determined in a manner 
provided by section 6501(e)(1)(A) of the Code) and which is attributable 
to such person's spouse was omitted from the return, and should have 
been, under chapter 1 of the Code, included in the return,
    (3) He establishes that he did not know of, and had no reason to 
know of such omission, and

[[Page 506]]

    (4) It is inequitable to hold the taxpayer liable for the deficiency 
in tax for such taxable year attributable to such omission.
    (b) Inequitable defined. Whether it is inequitable to hold a person 
liable for the deficiency in tax, within the meaning of paragraph (a)(4) 
of this section, is to be determined on the basis of all the facts and 
circumstances. In making such a determination a factor to be considered 
is whether the person seeking relief significantly benefited, directly 
or indirectly, from the items omitted from gross income. However, normal 
support is not a significant ``benefit'' for purposes of this 
determination. Evidence of direct or indirect benefit may consist of 
transfers of property, including transfers which may be received several 
years after the year in which the omitted item of income should have 
been included in gross income. Thus, for example, if a person seeking 
relief receives from his spouse an inheritance of property or life 
insurance proceeds which are traceable to items omitted from gross 
income by his spouse, that person will be considered to have benefited 
from those items. Other factors which may also be taken into account, if 
the situation warrants, include the fact that the person seeking relief 
has been deserted by his spouse or the fact that he has been divorced or 
separated from such spouse.
    (c) Community property laws. The determination of the spouse to whom 
items of gross income (other than gross income from property) are 
attributable shall be made without regard to any applicable community 
property laws.
    (d) Omission of income. Section 6013(e) of the Code shall apply only 
to income which is properly includible as gross income under chapter 1 
of the Code, which was, in fact, omitted from a joint return. Section 
6013(e) shall not apply to a tax deficiency resulting from erroneous or 
fraudulent deductions, claims, or other evasions or avoidances of tax.
    (e) Scope of section. This section does not apply to any taxable 
year for which a claim for credit or refund is barred by operation of 
any law or rule of law.

[T.D. 7320, 39 FR 28279, Aug. 6, 1974]



Sec. 1.6013-6  Election to treat nonresident alien individual as resident of the United States.

    (a) Election for special treatment--(1) In general. Two individuals 
who are husband and wife at the close of a taxable year ending on or 
after December 31, 1975, may make an election under this section for 
that taxable year if, at the close of that year, one spouse is a citizen 
or resident of the United States and the other spouse is a nonresident 
alien. The effect of the election is that each spouse is treated as a 
resident of the United States for purposes of chapters 1, 5, and 24 and 
sections 6012, 6013, 6072, and 6091 of the Code for the entire taxable 
year. An election made under this section is in effect for the taxable 
year for which made and for all subsequent years of the husband and 
wife, except:
    (i) Any taxable year for which the election is suspended, as 
described in paragraph (a)(3) of this section, and
    (ii) Any taxable year for which the election is terminated in 
accordance with paragraph (b) of this section and all subsequent taxable 
years.

A husband and wife may not make an election if an election previously 
made under this section by either spouse has been terminated under 
paragraph (b) of this section.
    (2) Particular rules. (i) As used in paragraph (a)(3) of this 
section, the term ``U.S. spouse'' means any married individual who is a 
citizen or resident of the United States at any time during a taxable 
year.
    (ii) An individual's residence is determined by application of the 
principles of Secs. 301.7701(b)-1 through 301.7701(b)-9 of this chapter 
relating to what constitutes residence in the United States by an alien 
individual.
    (iii) Whether two individuals are married at the close of a taxable 
year is determined by application of the rules in Sec. 1.6013-4(a).
    (iv) The provisions of section 879 and the regulations thereunder 
shall not apply for any taxable year for which an election under this 
section is in effect.
    (v) An individual who makes an election under this section may not, 
for United States income tax purposes, claim under any United States 
income tax treaty not to be a U.S. resident.

[[Page 507]]

The relationship of U.S. income tax treaties and the election under this 
section is illustrated by the following example.

    Example. H, a U.S. citizen, is married to W, a nonresident alien of 
the United States and a domiciliary of country X. H and W maintain their 
only permanent home in country X. W receives both U.S. source and 
country X source interest during the taxable year. The interest is not 
effectively connected with a permanent establishment or a fixed base in 
any country. H and W make the section 6013 (g) election. Under article 
ii (1) of the United States--country X Income Tax Convention interest 
derived and beneficially owned by a resident of one contracting state is 
exempt from tax in the other contracting state. Article 4 (1) of the 
treaty provides that an individual is a resident of a contracting state 
if subject to tax in that country by reason of the individual's 
domicile, residence, or citizenship. Under article 4 (1) of the treaty, 
W is a resident of country X by virtue of her domocile in country X and 
also of the United States by virtue of the section 6013 (g) election. 
Article 4 (2) of the treaty provides that if an individual is a resident 
of both the United States and country X by reason of article 4 (1), the 
individual shall be deemed to be a resident of the contracting state in 
which he or she has a permanent home available. Because W's sole 
permanent home is in country X, under article 4 (2) of the treaty W is 
treated as a resident of country X for purposes of the treaty. Because W 
has elected under section 6013(g) to be treated as a U.S. resident (and 
thus to be taxed on worldwide income), W may not, for U.S. income tax 
purposes, claim under the treaty not to be a U.S. resident. W, 
therefore, is subject to U.S. income tax on the interest. For purposes 
of country X income tax, W is considered a resident of country X under 
the treaty.

    (3) Suspension of election. (i) An election made under this section 
is suspended and is not in effect for a taxable year subsequent to the 
first taxable year for which made if neither spouse is a U.S. spouse 
during that subsequent taxable year. Thus, for example, the election is 
in suspense if both spouses are nonresident aliens for the entire 
taxable year.
    (ii) If either spouse dies during any taxable year for which the 
election under this section is in effect, other than the first taxable 
year for which the election is to be in effect, the taxable year shall 
include, solely for purposes of this paragraph (a)(3), only those days 
during the taxable year on which both spouses are alive. Thus, for 
example, if the U.S. spouse dies during the taxable year, the election 
is not suspended for that year even if the surviving nonresident alien 
spouse never acquires U.S. citizenship or residency. Similarly, if the 
nonresident alien spouse dies during the taxable year, the election is 
not suspended for that year even if the surviving U.S. spouse 
subsequently abandons U.S. citizenship or residency. However, if neither 
spouse was a U.S. spouse at any time during the period of the taxable 
year when both spouses were alive, the election is suspended for that 
year even if the surviving spouse subsequently acquires U.S. citizenship 
or residency.

For the effect of the death of either spouse on the status of the 
election in subsequent taxable years, see paragraph (b)(2) of this 
section.
    (4) Time and manner of making an election. (i) A husband and wife 
shall make the election under this section by attaching a statement to a 
joint return for the first taxable year for which the election is to be 
in effect. The election must be made before the expiration of the period 
prescribed by section 6511(a) (or section 6511(c) if the period is 
extended by agreement) for making a claim for credit or refund. If 
either or both spouses die after the close of the taxable year but 
before the joint return is filed, the election may be made by the 
executor, administrator, or other person charged with the property of 
the deceased spouse. If the election is made with a joint amended 
return, the amended return should be made on Form 1040 or 1040A, the 
word ``Amended'' should be written clearly on the front of the return, 
and an amended return also must be filed for each subsequent taxable 
year as to which a return previously has been filed by either spouse.
    (ii) The statement must contain a declaration that the election is 
being made and that the requirements of paragraph (a)(1) of this section 
are met for the taxable year. The statement must also contain the name, 
address, and taxpayer identifying number of each spouse. If the election 
is being made on behalf of a deceased spouse, the statement must contain 
the name and address of the executor, administrator, or other person 
making the

[[Page 508]]

election on behalf of the decreased spouse. The statement must be signed 
by both persons making the election.
    (b) Termination of election--(1) Revocation. (i) An election under 
this section shall terminate if either spouse revokes the election. An 
election that is revoked terminates as of the first taxable year for 
which the last day prescribed by section 6072(a) and 6081(a) for filing 
the return of tax has not yet occurred.
    (ii) Revocation of the election is made by filing a statement of 
revocation in the following manner. If the spouse revoking the election 
is required to file a return under section 6012, the statement is filed 
by attaching it to the return for the first taxable year to which the 
revocation applies. If the spouse revoking the election is not required 
to file a return under section 6012, but files a claim for refund under 
section 6511, the statement is filed by attaching it to the claim for 
refund. If the spouse revoking the election is not required to file a 
return and does not file a claim for refund, the statement is filed by 
submitting it to the service center director with whom was filed the 
most recent joint return of the spouses. The revocation may, if the 
revoking spouse dies after the close of the first taxable year to which 
the revocation applies but before the return, claim for refund, or 
statement of revocation is filed, be made by the executor, administrator 
or other person charged with the property of the deceased spouse.
    (iii) A revocation of the election is effective as of a particular 
taxable year if it is filed on or before the last day prescribed by 
section 6072(a) and 6081(a) for filing the return of tax for that 
taxable year. However, the revocation is not final until that last day.
    (iv) The statement of revocation must contain a declaration that the 
election under this section is being revoked. The statement must also 
contain the name, address, and taxpayer identifying number of each 
spouse. If the revocation is being made on behalf of a deceased spouse, 
the statement must contain the name and address of the executor, 
administrator, or other person revoking the election on behalf of the 
deceased spouse. The statement must also include a list of the States, 
foreign countries, and possessions of the United States which have 
community property laws and in which:
    (A) Each spouse is domiciled, or
    (B) real property is located from which either of the spouses 
receives income.

The statement must be signed by the person revoking the election.
    (2) Death. An election under this section shall terminate if either 
spouse dies. An election that terminates on account of death terminates 
as of the first taxable year of the surviving spouse following the 
taxable year in which the death occurred. However, if the surviving 
spouse is a citizen or resident of the United States who is entitled to 
the benefits of section 2, the election terminates as of the first 
taxable year following the last taxable year for which the surviving 
spouse is entitled to the benefits of section 2. If both spouses die 
within the same taxable year, the election terminates as of the first 
day after the close of the taxable year in which the deaths occurred.
    (3) Legal separation. An election under this section terminates if 
the spouses legally separate under a degree of divorce or of separate 
maintenance. An election that terminates on account of legal separation 
terminates as of the close of the taxable year preceding the taxable 
year in which the separation occurs. The rules in Sec. 1.6013-4(a) are 
relevant in determining whether two spouses are legally separated.
    (4) Inadequate records. An election under this section may be 
terminated by the Commissioner if it is determined that either spouse 
has failed to keep adequate records. An election that is terminated on 
account of inadequate records terminates as of the close of the taxable 
year preceding the taxable year for which the Commissioner determines 
that the election should be terminated. Adequate records are the books, 
records, and other information resonably necessary to ascertain the 
amount of liability for taxes under chapters 1, 5, and 24 of the code of 
either spouse for the taxable year. Adequate records also includes the 
granting of access to the books and records.

[[Page 509]]

    (c) Illustrations. The application of this section is illustrated by 
the following examples. In each case the individual's taxable year is 
the calendar year and the spouses are not legally separated.

    Example (1). W, a U.S. citizen for the entire taxable year 1979, is 
married to H, a nonresident alien individual. W and H may make the 
section 6013(g) election for 1979 by filing the statement of election 
with a joint return. If W and H make the election, income from sources 
within and without the United States received by W and H in 1979 and 
subsequent years must be included in gross income for each taxable year 
unless the election later is terminated or suspended. While W and H must 
file a joint return for 1979, joint or separate returns may be filed for 
subsequent years.
    Example (2). H and W are husband and wife and are both nonresident 
alien individuals. In June 1980 H becomes a U.S. resident and remains a 
resident for the balance of the year. H and W may make the section 
6013(g) election for 1980. If H and W make the election, income from 
sources within and without the United States received by H and W for the 
entire taxable year 1980 and subsequent years must be included in gross 
income for each taxable year, unless the election later is terminated or 
suspended.
    Example (3). W, a U.S. resident on December 31, 1981, is married to 
H, a nonresident alien. W and H make the section 6013(g) election and 
file joint returns for 1981 and succeeding years. On January 10, 1987, W 
becomes a nonresident alien. H has remained a nonresident alien. W and H 
may file a joint return or separate returns for 1987. As neither W or H 
is a U.S. resident at any time during 1988, their election is suspended 
for 1988. If W and H have U.S. source or foreign source income 
effectively connected with the conduct of a U.S. trade or business in 
1988, they must file separate returns as nonresident aliens. W becomes a 
U.S. resident again on January 5, 1990. Their election no longer is in 
suspense. Income from sources within and without the United States 
received by W or H in the years their election is not suspended must be 
included in gross income for each taxable year.
    Example (4). H, a U.S. citizen for the entire taxable year 1979, is 
married to W, who is not a U.S. citizen. While W believes that she is a 
U.S. resident, H and W make the section 6013(g) election for 1979 to 
cover the possibility that later it would be determined that she is a 
nonresident alien during 1979. The election for 1979 will not be 
considered evidence that W was a nonresident alien in prior years. 
Income from sources within and without the United States received by H 
amd W in 1979 and subsequent years must be included in gross income for 
each taxable year, unless the election later is terminated or suspended.

[T.D. 7670, 45 FR 6929, Jan. 31, 1980, as amended by T.D. 7842, 47 FR 
49842, Nov. 3, 1982; T.D. 8411, 57 FR 15241, Apr. 27, 1992]



Sec. 1.6013-7  Joint return for year in which nonresident alien becomes resident of the United States.

    (a) Election for special treatment--(1) In general. Two individuals 
who are husband and wife at the close of a taxable year ending on or 
after December 31, 1975, may make an election under this section for 
that taxable year if one spouse is a citizen or resident of the United 
States on the last day of that taxable year and the other spouse is a 
nonresident alien at the beginning of that taxable year and a citizen or 
resident of the United States at the close of that taxable year. Two 
married individuals who are nonresident aliens at the beginning of a 
taxable year and who are U.S. citizens or residents on the last day of 
that taxable year qualify for the election. The effect of the election 
is that each spouse is treated as a resident of the United States for 
purposes of chapters 1, 5, and 24 and sections 6012, 6013, 6072, and 
6091 of the code for all of that taxable year. A husband and wife may 
not make an election if an election has previously been made under this 
section by either spouse.
    (2) Particular rules. The rules in subdivisions (ii) through (v) of 
Sec. 1.6013-6(a)(2) are applicable to this section.
    (3) Time and manner of making an election. A husband and wife shall 
make the election under this section in accordance with the rules in 
Sec. 1.6013-6(a)(4).
    (b) Section 6013(g) election in effect. If an election under section 
6013(g) is in effect for a year subsequent to the first taxable year for 
which made and during that subsequent year the husband and wife meet the 
requirements of section 6013(h) and paragraph (a)(1) of this section, 
then the election under section 6013(g) shall apply to that subsequent 
taxable year. A separate election under section 6013(h) is not required 
for that subsequent taxable year.

[T.D. 7670, 45 FR 6931, Jan. 31, 1980]

[[Page 510]]



Sec. 1.6014-1   Tax not computed by taxpayer for taxable years beginning before January 1, 1970.

    (a) In general. If an individual is entitled under paragraph (a)(7) 
of Sec. 1.6012-1 to use as his return Form 1040A, he may elect not to 
show thereon the amount of the tax due in connection with such return if 
his gross income is less than $5,000.
    (b) Computation and payment of tax. A taxpayer who, in accordance 
with paragraph (a) of this section, elects not to show the tax on Form 
1040A is not required to pay the unpaid balance of such tax at the time 
he files the return. In such case, the tax will be computed for the 
taxpayer by the Internal Revenue Service, and a notice will be mailed to 
the taxpayer stating the amount of tax due. Where it is determined that 
a refund of tax is due, the Internal Revenue Service will send such 
refund to the taxpayer. See paragraph (c) of Sec. 301.6402-3 of this 
chapter (Regulations on Procedure and Administration).
    (c) Joint return. (1) A husband and wife who, pursuant to paragraph 
(a)(7) of Sec. 1.6012-1, file a joint return on Form 1040A may elect not 
to show the tax on such return if their aggregate gross income for the 
taxable year is less than $5,000.
    (2) The tax computed for the taxpayer who files Form 1040A and 
elects not to show thereon the tax due shall be the lesser of the 
following amounts:
    (i) A tax computed as though the return on Form 1040A constituted 
the separate returns of the spouses, or
    (ii) A tax computed as though the return on Form 1040A constituted a 
joint return.
    (d) Married individuals filing separate returns. In the case of a 
married individual who files a separate return and who elects under this 
section not to show his tax on Form 1040A his tax shall be computed with 
reference to the 10-percent standard deduction rather than the minimum 
standard deduction.
    (e) This section shall apply to taxable years beginning before 
January 1, 1970.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6581, 26 FR 
11678, Dec. 6, 1961; T.D. 6792, 30 FR 531, Jan. 15, 1965; T.D. 7102, 36 
FR 5497, Mar. 24, 1971]



Sec. 1.6014-2   Tax not computed by taxpayer for taxable years beginning after December 31, 1969.

    (a) In general. An individual subject to the tax imposed by section 
1 of the Code may, in accordance with the instructions applicable to the 
income tax return to be filed, elect, for any taxable year beginning 
after December 31, 1969, not to show on his income tax return for such 
year the amount of tax due in connection with such return.
    (b) Restriction on making an election. The election pursuant to this 
section shall not be made by an individual who does not file his return 
(or amended return) making such election on or before the date 
prescribed in section 6072(a) for the filing of the original return 
(determined without regard to any extension of time).
    (c) Effects of election. (1) A taxpayer who, in accordance with the 
provisions of this section, elects not to show the tax on his income tax 
return is not required to pay the unpaid balance of such tax at the time 
he files the return. In such case, the tax will be computed for the 
taxpayer by the Internal Revenue Service, and a notice will be mailed to 
the taxpayer stating the amount of tax due. Where it is determined that 
a refund of tax is due, the Internal Revenue Service will send such 
refund to the taxpayer. See paragraph (c) of Sec. 301.6402-3 of this 
chapter (Regulations on Procedure and Administration). The computation 
of tax by the Internal Revenue Service shall be treated for purposes of 
this chapter as if made by the taxpayer, and such computation or the 
issuance of a notice or refund pursuant thereto shall not relieve the 
taxpayer of liability for any deficiency (although the deficiency is 
based upon an amount of tax different from that computed for the 
taxpayer by the Internal Revenue Service) or affect the rights of the 
Internal Revenue Service with respect to any subsequent audit or other 
review of the taxpayer's return.
    (2) Where the election provided for in this section is made by a 
taxpayer who takes the standard deduction and who has adjusted gross 
income of less than $10,000, such election constitutes an election to 
pay the tax imposed by section 3.

[[Page 511]]

    (3) A taxpayer who makes an election under section 6014 shall not be 
precluded from claiming:
    (i) Status as a head of household or a surviving spouse;
    (ii) The credit under section 31 (relating to tax withheld on 
wages);
    (iii) The credit under section 37 (relating to retirement income);
    (iv) The credit under section 38 (relating to investment in certain 
depreciable property);
    (v) The credit under section 39 (relating to certain uses of 
gasoline and lubricating oil);
    (vi) The credit under section 41 (relating to contributions to 
candidates for public office);
    (vii) The credit under section 42 (relating to personal exemptions);
    (viii) The credit under section 43 (relating to earned income);
    (ix) The credit under section 44 (relating to purchase of new 
principal residence); or
    (x) The credit under section 45 (relating to overpayments of tax).
    (d) Joint returns. (1) A husband and wife who file a joint return 
may elect not to show the tax on such return in accordance with the 
rules prescribed in paragraphs (a) and (b) of this section.
    (2) The tax computed for a husband and wife who elect pursuant to 
this section not to show their tax on their joint income tax return 
shall be the lesser of the following amounts:
    (i) A tax computed as though the return of income constituted a 
joint return, or
    (ii) If sufficient information is provided for the taxable income of 
each spouse to be determined, a tax computed as though the return of 
income constituted the separate returns of the spouses.
    (e) Married individuals filing separate returns. This section shall 
apply to married individuals filing separate returns unless otherwise 
provided in the instructions accompanying a return. The instructions may 
require the taxpayer to attach to his return a statement to the effect 
that his tax and the tax of his spouse were determined in accordance 
with the rules of sections 141(d) and 142(a).
    (f) Revocation of election. An election pursuant to this section may 
be revoked on an amended return (whether such return is filed before or 
after the date prescribed in section 6072(a) for filing the original 
return).

[T.D. 7102, 36 FR 5497, Mar. 24, 1971, as amended by T.D. 7298, 38 FR 
35234, Dec. 26, 1973; T.D. 7391, 40 FR 55856, Dec. 2, 1975]



Sec. 1.6015(a)-1   Declaration of estimated income tax by individuals.

    (a) Requirement--(1) Taxable years beginning after December 31, 
1971. With respect to taxable years beginning after December 31, 1971, a 
declaration of estimated income tax by an individual is not required if 
the estimated tax (as defined in section 6015(c)) can reasonably be 
expected to be less than $100. In all other cases a declaration of 
estimated income tax shall be made by every individual if the following 
conditions are met and if such individual is not a nonresident alien 
individual who is excepted under section 6015(i) and Sec. 1.6015(i)-1 
from the requirements of making a declaration:
    (i) The gross income for the taxable year can reasonably be expected 
to exceed:
    (a) $20,000, in the case of:
    (1) A single individual including a head of a household (as defined 
in section 2(b)) or a surviving spouse (as defined in section 2(a)); or
    (2) A married individual entitled under section 6015(b) to file a 
joint declaration with his spouse, if his spouse has not received wages 
(as defined in section 3401(a)) for the taxable year; or
    (b) $10,000, in the case of a married individual entitled under 
section 6015(b) to file a joint declaration with his spouse, if both he 
and his spouse have received wages (as defined in section 3401(a)) for 
the taxable year; or
    (c) $5,000, in the case of a married individual not entitled under 
section 6015(b) to file a joint declaration with his spouse; or
    (ii) The gross income can reasonably be expected to include more 
than $500 from sources other than wages (as defined in section 3401(a)).
    (2) Taxable years beginning after December 31, 1966, and before 
January 1, 1972. With respect to taxable years beginning after December 
31, 1966, and before January 1, 1972, a declaration of estimated income 
tax by an individual

[[Page 512]]

is not required if the estimated tax (as defined in section 6015(c)) can 
reasonably be expected to be less than $40. In all other cases a 
declaration of estimated income tax shall be made by every individual if 
the following conditions are met and if such individual is not a 
nonresident alien individual who is excepted under section 6015(i) and 
Sec. 1.6015(i)-1 from the requirement of making a declaration:
    (i) The gross income for the taxable year can reasonably be expected 
to exceed:
    (a) $5,000, in the case of:
    (1) A single individual other than a head of a household (as defined 
in section 1(b)(2) for taxable years ending before January 1, 1971, or 
as defined in section 2(b) of the Code as amended by the Tax Reform Act 
of 1969 for taxable years beginning after December 31, 1970) or a 
surviving spouse (as defined in section 2(b) for taxable years ending 
before January 1, 1971, or as defined in section 2(a) of the Code as 
amended by the Tax Reform Act of 1969 for taxable years beginning after 
December 31, 1970);
    (2) A married individual not entitled under section 6015(b) to file 
a joint declaration with his spouse; or
    (3) A married individual entitled under section 6015(b) to file a 
joint declaration with his spouse, but only if the aggregate gross 
income of such individual and his spouse for the taxable year can 
reasonably be expected to exceed $10,000; or
    (b) $10,000, in the case of:
    (1) A head of household (as defined in section 1(b)(2) for taxable 
years ending before January 1, 1971, or as defined in section 2(b) of 
the Code as amended by the Tax Reform Act of 1969 for taxable years 
beginning after December 31, 1970); or
    (2) A surviving spouse (as defined in section 2(b) for taxable years 
ending before January 1, 1971, or as defined in section 2(a) of the Code 
as amended by the Tax Reform Act of 1969 for taxable years beginning 
after December 31, 1970); or
    (ii) The gross income can reasonably be expected to include more 
than $200 from sources other than wages (as defined in section 3401(a)).
    (3) Taxable years beginning before January 1, 1967. With respect to 
taxable years beginning before January 1, 1967, and after December 31, 
1960, a declaration of estimated income tax by an individual is not 
required if the estimated tax (as defined in section 6015(c)) can 
reasonably be expected to be less than $40. In all other cases a 
declaration shall be made by every citizen of the United States, whether 
residing at home or abroad, every individual residing in the United 
States though not a citizen thereof, every nonresident alien who is a 
resident of Canada, Mexico, or Puerto Rico and who has wages subject to 
withholding at the source under section 3402, and every nonresident 
alien who has been, or expects to be, a resident of Puerto Rico during 
the entire taxable year, if:
    (i) The gross income for the taxable year can reasonably be expected 
to exceed:
    (a) $5,000, in the case of:
    (1) A single individual other than a head of a household (as defined 
in section 1(b)(2)); or
    (2) A married individual not entitled under section 6015(b) to file 
a joint declaration with his spouse; or
    (3) A married individual entitled under section 6015(b) to file a 
joint declaration with his spouse, but only if the aggregate gross 
income of such individual and his spouse for the taxable year can 
reasonably be expected to exceed $10,000; or
    (b) $10,000, in the case of:
    (1) A head of a household (as defined in section 1(b)(2)); or
    (2) A surviving spouse (as defined in section 2(b)); or
    (ii) The gross income can reasonably be expected to include more 
than $200 from sources other than wages (as defined in section 3401(a)).
    (b) Income of child. In estimating his gross income for the taxable 
year a parent should not take into account the income of his minor 
child. Such income is not includible in the gross income of the parent. 
See section 73 and Sec. 1.73-1.
    (c) Exemption of spouse. For the purpose of determining whether a 
declaration of estimated tax is required under the provisions of 
paragraph (a)(3) of this section, a married person filing a

[[Page 513]]

separate declaration may not take into account the exemption of his 
spouse, if his spouse has, or is reasonably expected to have, gross 
income, or is reasonably expected to be the dependent of another 
taxpayer for the taxable year.
    (d) Nonresident alien individuals. For the rules exempting certain 
nonresident alien individuals from the requirement of making a 
declaration of estimated income tax, see Sec. 1.6015(i)-1.
    (e) Examples. The application of the provisions of this section may 
be illustrated by the following examples:

    Example (1). H maintains as his home a household which is the 
principal place of abode of himself and his two dependent children. H's 
wife died in 1970 and he has not remarried. H and his wife filed a joint 
return for 1970. H's salary from January 1, to June 30, 1972, is at the 
annual rate of $18,000. However, effective July 1, 1972, his annual 
salary is increased to $24,000, and under the facts then existing it is 
reasonable to assume that his salary for the remaining portion of 1972 
will remain unchanged and that his total salary for the year will, 
therefore, be $21,000. Since H is a surviving spouse (as defined in 
section 2(a)) and his gross income can reasonably be expected to exceed 
$20,000, he is required to file a declaration of estimated tax for 1972. 
Since it was not reasonable to assume that H's gross income for 1972 
would exceed $20,000 until July 1972 (after June 1 and before September 
2), H is not required to file a declaration until September 15, 1972. 
However, if H's estimated tax (as defined in section 6015(c)) can 
reasonably be expected to be less than $100, he is not required to file 
a declaration of estimated tax. See section 6073 and Secs. 1.6073-1 to 
1.6073-4, inclusive, for rules as to when a declaration must be filed.
    Example (2). H, a taxpayer making his return on the calendar year 
basis, has an annual salary of $12,000 in 1972. W, H's wife, received 
wages (as defined in section 3401(a)) in December 1972. W did not 
receive wages prior to December. Assuming that H and W are entitled to 
file a joint declaration of estimated tax under section 6015(b), H would 
not be required to file a declaration for 1972 until January 15, 1973, 
since prior to December 1972 W had not received wages. Since W received 
wages after September 1, 1972, H must file a declaration on or before 
January 15, 1973, because, under the rule contained in paragraph 
(a)(1)(i)(b) of this section, H's gross income could reasonably be 
expected to exceed $10,000 for 1972. However, no declaration would be 
required if H's estimated tax (as defined in section 6015(c)) could 
reasonably be expected to be less than $100. No declaration is required 
prior to January 15, 1973, because, under the rule contained in 
paragraph (a)(1)(i)(a)(2) of this section, H's gross income for 1972 
could not reasonably be expected to exceed $20,000.
    Example (3). P is a taxpayer making his return on the calendar year 
basis. P is engaged in the practice of his profession on his own account 
and has gross income of $2,000 from such profession for the 2 months of 
January and February 1972. He reasonably expects that his gross income 
from his profession will continue to average $1,000 each month 
throughout the year and that he will have no income from any other 
source during 1972. Since P has gross income which does not constitute 
wages subject to withholding, he is required to file a declaration of 
estimated tax for that year since he has income of more than $500 from 
sources other than wages, unless he reasonably expects his estimated tax 
to be less than $100.
    Example (4). S, a married taxpayer, has been regularly employed for 
many years. As of January 1, 1972, his weekly wages are $305. For many 
years, S has also owned stock in a corporation which has regularly paid 
him annual dividends ranging from $575 to $600. Because his gross income 
can reasonably be expected to include more than $500 from sources other 
than wages, S is required to make a declaration of estimated tax for 
1972, unless he reasonably expects his estimated tax to be less than 
$100.

    (f) Declarations made by agents. The declaration of income may be 
made by an agent if, by reason of disease or injury, the person liable 
for the making of the declaration is unable to make it. The declaration 
may also be made by an agent if the taxpayer is unable to make the 
declaration by reason of continuous absence from the United States 
(including Puerto Rico as if a part of the United States) for a period 
of at least 60 days prior to the date prescribed by law for making the 
declaration. In addition, a declaration may be made by an agent if the 
taxpayer requests permission, in writing, of the district director for 
the internal revenue district in which is located the legal residence or 
principal place of business of the person liable for the making of the 
declaration, and such district director determines that good cause 
exists for permitting the declaration to be so made. However, assistance 
in the preparation of the declaration may be rendered under any 
circumstances. Whenever a declaration is made by an agent it must be 
accompanied by a power of attorney (or copy

[[Page 514]]

thereof) authorizing him to represent his principal in making, 
executing, or filing the declaration. A form 2848, when properly 
completed, is sufficient. In addition, where one spouse is physically 
unable by reason of disease or injury to sign a joint declaration, the 
other spouse may, with the oral consent of the one who is incapacitated, 
sign the incapacitated spouse's name in the proper place in the 
declaration followed by the words ``By .................., Husband (or 
Wife)'', and by the signature of the signing spouse in his own right, 
provided that a dated statement signed by the spouse who is signing the 
declaration is attached to and made a part of the declaration stating:
    (1) The name of the declaration being filed,
    (2) The taxable year,
    (3) The reason for the inability of the spouse who is incapacitated 
to sign the declaration, and
    (4) That the spouse who is incapacitated consented to the signing of 
the declaration.

The taxpayer and his agent, if any, are responsible for the declaration 
as made and incur liability for the penalties provided for erroneous, 
false, or fraudulent declarations.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6817, 30 FR 
4537, Apr. 8, 1965; T.D. 7117, 36 FR 9422, May 25, 1971; T.D. 7274, 38 
FR 11345, May 7, 1973; T.D. 7282, 38 FR 19027, July 17, 1973; T.D. 7332, 
39 FR 44232, Dec. 23, 1974]



Sec. 1.6015(b)-1   Joint declaration by husband and wife.

    (a) In general. A husband and wife may make a joint declaration of 
estimated tax even though they are not living together. However, a joint 
declaration may not be made if they are separated under a decree of 
divorce or of separate maintenance. A joint declaration may not be made 
if the taxpayer's spouse is a nonresident alien (including a nonresident 
alien who is a bona fide resident of Puerto Rico during the entire 
taxable year) or if his spouse has a different taxable year. If the 
gross income of each spouse meets the requirements of section 6015(a), 
either a joint declaration must be made or a separate declaration must 
be made by each. If a joint declaration is made, the amount estimated as 
the income tax imposed by chapter 1 (other than by section 56) must be 
computed on the aggregate estimated taxable income of the spouses (see 
section 6013(d)(3) and Sec. 1.2-1), while (for taxable years beginning 
after December 31, 1966) the amount estimated as the self-employment tax 
imposed by chapter 2 must be computed on the separate estimated self-
employment income of each spouse. See sections 1401 and 1402 and 
Sec. 1.6017-1(b)(1). The liability with respect to the estimated tax, in 
the case of a joint declaration, shall be joint and several.
    (b) Application to separate returns. The fact that a joint 
declaration of estimated tax is made by them will not preclude a husband 
and his wife from filing separate returns. In case a joint declaration 
is made but a joint return is not made for the same taxable year, the 
payments made on account of the estimated tax for such year may be 
treated as payments on account of the tax liability of either the 
husband or wife for the taxable year or may be divided between them in 
such manner as they may agree. In the event the husband and wife fail to 
agree to a division, such payments shall be allocated between them in 
accordance with the following rule. The portion of such payments to be 
allocated to a spouse shall be that portion of the aggregate of all such 
payments as the amount of tax imposed by chapter 1 (other than by 
section 56) shown on the separate return of the taxpayer (plus, for 
taxable years beginning after December 31, 1966, the amount of tax 
imposed by chapter 2 shown on the return of the taxpayer) bears to the 
sum of the taxes imposed by chapter 1 (other than by section 56) shown 
on the separate returns of the taxpayer and his spouse (plus, for 
taxable years beginning after December 31, 1966, the sum of the taxes 
imposed by chapter 2 shown on the returns of the taxpayer and his 
spouse). For example, assume that for calendar yedar 1972 H and his 
Spouse W make a joint declaration of estimated tax and, pursuant 
thereto, pay a total of $19,500 of estimated tax. H and W subsequenty 
file separate returns for 1972 showing tax imposed by chapter 1 (other 
than by section 56) in the amount of $11,500

[[Page 515]]

and $8,000, respectively. In addition, H's return shows a tax imposed by 
chapter 2 in the amount of $500. H and W fail to agree to a division of 
the estimated tax paid. The amount of the aggregate estimated tax 
payments allocated to H is computed as follows:

(1) Amount of tax, imposed by chapter 1 (other than by                  
 section 56) shown on H's return.............................    $11,500
(2) Plus: Amount of tax imposed by chapter 2 shown on H's               
 return......................................................        500
                                                              ----------
(3) Total taxes imposed by chapter 1 (other than by section             
 56) and by chapter 2 shown on H's return....................     12,000
(4) Amount of tax imposed by chapter 1 (other than by section           
 56) shown on W's return.....................................     $8,000
                                                              ----------
(5) Total taxes imposed by chapter 1 (other than by section             
 56) and by chapter 2 shown on both H's and W's returns......     20,000
                                                              ==========
(6) Proportion of such taxes shown on H's return to total               
 amount of such taxes shown on both H's and W's returns                 
 ($12,00020,000).....................................        60%
(7) Amount of estimated tax payments allocated to H (60% of             
 $10,500)....................................................    $11,700
                                                                        

Accordingly, H's return would show remaining tax liability in the amount 
of $300 ($12,000 taxes shown less $11,700 estimated tax allocated).
    (c) Death of spouse. (1) A joint declaration may not be made after 
the death of either the husband or wife. However, if it is reasonable 
for a surviving spouse to assume that there will be filed a joint return 
for himself and the deceased spouse for his taxable year and the last 
taxable year of the deceased spouse he may, in making a separate 
declaration for his taxable year which includes the period comprising 
such last taxable year of his spouse, estimate the amount of the tax 
imposed by chapter 1 (other than by section 56) on his and his spouse's 
taxable income on an aggregate basis and compute his estimated tax with 
respect to such chapter 1 tax in the same manner as though a joint 
declaration had been filed.
    (2) If a joint declaration is made by husband and wife and 
thereafter one spouse dies, no further payments of estimated tax on 
account of such joint declaration are required from the estate of the 
decedent. The surviving spouse, however, shall be liable for the payment 
of any subsequent installments of the joint estimated tax unless an 
amended declaration setting forth the separate estimated tax for the 
taxable year is made by such spouse. Such separate estimated tax shall 
be paid at the times and in the amounts determined under the rules 
prescribed in section 6153. For the purpose of (i) the making of such 
amended declaration by the surviving spouse, and (ii) the allocation of 
payments made pursuant to a joint declaration between the surviving 
spouse and the legal representative of the decedent in the event a joint 
return is not filed, the payments made pursuant to the joint declaration 
may be divided between the decedent and the surviving spouse in such 
proportion as the surviving spouse and the legal representative of the 
decedent may agree. In the event the surviving spouse and the legal 
representative of the decedent fail to agree to a division, such 
payments shall be allocated in accordance with the following rule. The 
portion of such payments to be allocated to the surviving spouse shall 
be that portion of the aggregate amount of such payments as the amount 
of tax imposed by chapter 1 (other than by section 56) shown on the 
separate return of the surviving spouse (plus, for taxable years 
beginning after December 31, 1966, the amount of tax imposed by chapter 
2 shown on the return of the surviving spouse) bears to the sum imposed 
by chapter 1 (other than by section 56) shown on the separate returns of 
the surviving spouse and of the decedent (plus, for taxable years 
beginning after December 31, 1966, the sum of the taxes imposed by 
chapter 2 shown on the returns of the surviving spouse and of the 
decedent); and the balance of such payments shall be allocated to the 
decedent. This rule may be illustrated by analogizing the surviving 
spouse described in this rule to H in the example contained in paragraph 
(b) of this section and the decedent in this rule to W in that example.
    (d) Signing of declaration. A joint declaration of a husband and 
wife (if not made by an agent of one or both spouses) shall be signed by 
both spouses. The provisions of paragraph (f) of Sec. 1.6015(a)-1, 
relating to returns made by agents, shall apply where one spouse signs a 
declaration as agent for the other, or where a third party signs a

[[Page 516]]

declaration as agent for one or both spouses.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T. D. 7274, 38 FR 
11345, May 7, 1973; T.D. 7427, 41 FR 34027, Aug. 12, 1976]



Sec. 1.6015(c)-1  Definition of estimated tax.

    (a) In general. In the case of an individual, the term ``estimated 
tax'' means:
    (1) The amount which the individual estimates as the amount of the 
income tax imposed by chapter 1 (other than the tax imposed by section 
56 or for taxable years ending before September 30, 1968, the tax 
surcharge imposed by section 51) for the taxable year (and including the 
amount which he estimates as the amount of any qualified State 
individual income taxes which are treated pursuant to section 6361(a) as 
if they were imposed by chapter 1 for the taxable year), plus
    (2) For taxable years beginning after December 31, 1966, the amount 
which the individual estimates as the amount of the self-employment tax 
imposed by chapter 2 for the taxable year, minus
    (3) The amount which the individual estimates as the sum of any 
credits against tax provided by part IV of subchapter A of chapter 1. 
These credits are those provided by section 31 (relating to tax withheld 
on wages), section 32 (relating to tax withheld at source on nonresident 
aliens and foreign corporations and on tax-free covenant bonds), section 
33 (relating to foreign taxes), section 34 (relating to the credit for 
dividends received on or before December 31, 1964), section 35 (relating 
to partially tax-exempt interest), section 37 (relating to the elderly), 
section 38 (relating to the investment credit), section 39 (relating to 
certain uses of gasoline, special fuels, and lubricating oil), section 
40 (relating to expenses of work incentive programs), section 41 
(relating to contributions to candidates), section 42 (relating to 
general tax credit), section 43 (relating to earned income), section 44 
(relating to purchase of new principal residence), section 44A (relating 
to expenses for household and dependent care services necessary for 
gainful employment), section 44B (relating to credit for employment of 
certain new employees), and section 45 (relating to overpayments of 
tax), minus,
    (4) In the case of an individual who is subject to one or more 
qualified State individual income taxes, the amount which he estimates 
as the sum of the credits allowed against such taxes pursuant to section 
6362(b)(2) (B) or (C) or section 6362(c)(4) and paragraph (c) of 
Sec. 301.6362-4 of this chapter (Regulations on Procedure and 
Administration) (relating to the credit for income taxes of other States 
or political subdivisions thereof) and paragraph (c)(2) of 
Sec. 301.6361-1 (relating to the credit for tax withheld from wages on 
account of qualified State individual income taxes), and minus
    (5) For taxable years ending after February 29, 1980, the amount 
which the individual estimates will be the amount of such individual's 
overpayment of windfall profit tax imposed by section 4986 of the Code 
for the taxable year. For this purpose, the amount of such overpayment 
is the amount by which such individual's aggregate windfall profit tax 
liability for the taxable year as a producer of crude oil is reasonably 
expected to be exceeded by withholding of windfall profit tax for the 
taxable year.
    (b) Example. A, a self-employed individual not subject to any 
qualified State individual income tax, estimates that his liabilities 
for income tax and self-employment tax for 1973 will be $1,600 and $400, 
respectively. A is required to declare and pay an estimated tax of 
$2,000 for that year.

(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954 
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654, 
6655, and 7805))

[T.D. 7577, 43 FR 59358, Dec. 20, 1978, as amended by T.D. 8016, 50 FR 
11854, Mar. 26, 1985]



Sec. 1.6015(d)-1   Contents of declaration of estimated tax.

    (a) In general. (1) The declaration of estimated tax by an 
individual shall be made on Form 1040-ES. For the purpose of making the 
declaration, the amount of gross income which the taxpayer can 
reasonably be expected to receive or accrue, depending upon the method 
of accounting upon which taxable income is computed, and the

[[Page 517]]

amount of the estimated allowable deductions and credits to be taken 
into account in computing the amount of estimated tax shall be 
determined upon the basis of the facts and circumstances existing as at 
the time prescribed for the filing of the declaration as well as those 
reasonably to be anticipated for the taxable year. If, therefore, the 
taxpayer is employed at the date prescribed for filing his declaration 
at a given wage or salary, it should, in the absence of circumstances 
indicating the contrary, be presumed by him for the purpose of the 
declaration that such employment will continue to the end of the taxable 
year at the wage or salary received by him as of such date. In the case 
of income other than wages and salary the regularity in the payment of 
income, such as dividends, interest, rents, royalties, and income 
arising from estates and trusts is a factor to be taken into 
consideration. Thus, if the taxpayer owns shares of stock in a 
corporation and dividends have been paid regularly for several years 
upon such stock, the taxpayer in the preparation of his declaration 
should, in the absence of information indicating a change in the 
dividend policy, include the prospective dividends from the corporation 
for the taxable year as well as those actually received in such year 
prior to the filing of the declaration. In the case of a taxpayer 
engaged in business on his own account, there shall be made an estimate 
of gross income and deductions and credits in the light of the best 
available information affecting the trade, business, or profession.
    (2) In the case of any individual who can, at the time of the 
preparation of his declaration, reasonably anticipate that his gross 
income will be of such amount and character as to enable him to elect 
upon his return for such year to compute the tax under section 3 
(relating to optional tax), in lieu of the tax imposed by section 1, the 
declaration of estimated tax may be made upon the basis set forth in 
section 3 and Sec. 1.3-1. The filing of a declaration computed upon the 
basis of section 3 shall not constitute the making of an election under 
section 4 (relating to rules for optional tax) nor will it permit the 
filing of a return on the basis of the optional tax under section 3 
unless the taxpayer otherwise comes within the provisions of sections 3 
and 4. For the purpose of computing the tax liability in the case of 
married persons, if the taxable income of one spouse is determined 
without regard to the standard deduction, the standard deduction is not 
allowed to either. (See, however, paragraph (c) of Sec. 1.142-1 for 
exceptions where spouses are legally separated under a decree of divorce 
or separate maintenance.) Hence, where separate declarations are filed, 
one spouse should not use section 3 in computing the estimated tax 
unless the other spouse also uses section 3 or employs the standard 
deduction in computing the estimated tax.
    (b) Computation of estimated tax. In computing the estimated tax the 
taxpayer should take into account the following:
    (1) The amount estimated as the income tax imposed by chapter 1 
(other than by section 56) for the taxable year after the application of 
any allowable amounts estimated as the credit for foreign taxes, the 
dividends received credit (for dividends received on or before December 
31, 1964), the credit for partially tax-exempt interest, the retirement 
income credit, the investment credit, the credit for expenses of work 
incentive programs, the credit for contributions to candidates, the 
credit for overpayments of tax, but without regard to the credit under 
section 31 for tax withheld on wages or to the credit under section 39 
for certain uses of gasoline, special fuels, and lubricating oils;
    (2) For taxable years beginning after December 31, 1966 (and, if the 
taxpayer so desires, for an earlier taxable year), the amount estimated 
as the tax on self-employment income imposed by chapter 2;
    (3) The amounts estimated by the taxpayer as the credits under 
section 31 for tax withheld on wages and under section 39 for certain 
uses of gasoline, special fuels, and lubricating oils;
    (4) For taxable years ending after February 29, 1980, the amount 
which the taxpayer estimates will be the amount of such taxpayer's 
overpayment of windfall profit tax imposed by section 4986 of the Code 
for the taxable

[[Page 518]]

year. For this purpose, the amount of such overpayment is the amount by 
which such individual's aggregate windfall profit tax liability for the 
taxable year as a producer of crude oil is reasonably expected to be 
exceeded by withholding of windfall profit tax for the taxable year.
    (5) The excess, if any, of the sum of the amounts shown under 
subparagraphs (b) (1) and (2) of this paragraph over the sum of the 
amounts shown under subparagraphs (b)(3) and (4) of this paragraph shall 
be the estimated tax for the taxable year.
    (c) Use of prescribed form. Copies of Form 1040-ES will so far as 
possible be furnished taxpayers by district directors. A taxpayer will 
not be excused from making a declaration, however, by the fact that no 
form has been furnished to him. Taxpayers not supplied with the proper 
form should make application therefor to the district director in ample 
time to have their declarations prepared, verified, and filed with the 
district director on or before the date prescribed for filing the 
declaration. If the prescribed form is not available, a statement 
disclosing the amount estimated as the tax, the estimated credits, and 
the estimated tax after deducting such credits should be filed as a 
tentative declaration within the prescribed time, accompanied by the 
payment of the required installment. Such tentative declaration should 
be supplemented, without unnecessary delay, by a declaration made on the 
proper form.

(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954 
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654, 
6655, and 7805))

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7427, 41 FR 
34028, Aug. 12, 1976; T.D. 8016, 50 FR 11854, Mar. 26, 1985]



Sec. 1.6015(e)-1   Amendment of declaration.

    In the making of a declaration of estimated tax, the taxpayer is 
required to take into account the then existing facts and circumstances 
as well as those reasonably to be anticipated relating to prospective 
gross income, allowable deductions, and estimated credits for the 
taxable year. Amended or revised declarations may be made in any case in 
which the taxpayer estimates that his gross income, deductions, or 
credits will differ from the gross income, deductions, or credits 
reflected in the previous declaration. An amended declaration may also 
be made based upon a change in the number of exemptions to which the 
taxpayer may be entitled for the then current taxable year. However, 
only one amended declaration may be filed during any interval between 
installment dates. See paragraph (d) of Sec. 1.6073-1. An amended 
declaration may be filed jointly by husband and wife even though 
separate declarations have previously been filed. An amended declaration 
may be made on either Form 1040-ES (marked ``Amended''). See, however, 
paragraph (c) of Sec. 1.6015(d)-1 for procedure to be followed if the 
prescribed form is not available.

[T.D. 7427, 41 FR 34028, Aug. 12, 1976]



Sec. 1.6015(f)-1   Return as declaration or amendment.

    (a) Time for filing return. (1)(i) If a taxpayer pays in full the 
amount computed on the return as payable, and
    (a) If a taxpayer (other than a taxpayer referred to in (b) of this 
subdivision):
    (1) On the calendar year basis, files his return on or before 
January 31 of the succeeding calendar year, or
    (2) On a fiscal year basis, files his return on or before the last 
day of the first month immediately succeeding the close of such fiscal 
year, or
    (b) If an individual referred to in section 6073(b), relating to 
income from farming, or, with respect to taxable years beginning after 
December 31, 1962, from fishing:
    (1) On the calendar year basis, for taxable years beginning before 
January 1, 1969, files his return on or before February 15, or
    (2) On a fiscal year basis, for taxable years beginning before 
January 1, 1969, files his return on or before the 15th day of the 
second month after the close of his fiscal year, or
    (3) On the calendar year basis, for taxable years beginning after 
December 31, 1968, files his return on or before March 1, or
    (4) On a fiscal year basis, for taxable years beginning after 
December 31,

[[Page 519]]

1968, files his return on or before the first day of the third month 
after the close of his fiscal year, then:
    (ii)(a) If the declaration is not required to be filed during the 
taxable year, but is required to be filed on or before January 15 of the 
succeeding year (or the date corresponding thereto in the case of a 
fiscal year), such return shall be considered as such declaration; or
    (b) If a declaration was filed during the taxable year, such return 
shall be considered as the amendment of the declaration permitted by 
section 6015(e) to be filed on or before January 15 of the succeeding 
year (or the date corresponding thereto in the case of a fiscal year).

Hence, for example, an individual taxpayer on the calendar year basis 
who, subsequent to September 1, 1963, first meets the requirements of 
section 6015(a) which necessitate the filing of a declaration for 1963, 
may satisfy the requirements as to the filing of such declaration by 
filing his return for 1963 on or before January 31, 1964 (February 15, 
1964, in the case of a farmer or fisherman), and paying in full at the 
time of such filing the tax shown thereon to be payable. Likewise, if a 
taxpayer files on or before September 15, 1963, a timely declaration for 
such year and subsequent thereto and on or before January 31, 1964, 
files his return for 1963, and pays at the time of such filing the tax 
shown by the return to be payable, such return shall be treated as an 
amended declaration timely filed.
    (2) For the purpose of section 6015(f) a taxpayer may file his 
return on or before the last day of the first month following the close 
of the taxable year even though he has not been furnished Form W-2 by 
his employer. In such case the taxpayer shall compute, as accurately as 
possible, his wages for such year and the tax withheld for which he is 
entitled to a credit, reporting such wages and tax on his return, 
together with all other pertinent information necessary to the 
determination of his tax liability for such year.
    (b) Effect on addition to the tax. Compliance with the provisions of 
section 6015(f) will enable a taxpayer to avoid the addition to the tax 
imposed by section 6654 with respect to an underpayment of the 
installment not required to be paid until January 15 of the succeeding 
calendar year (or the corresponding date in the case of a fiscal year). 
With respect to an underpayment of any earlier installment, compliance 
with section 6015(f) will not relieve the taxpayer from the addition to 
the tax imposed by section 6654. However, the period of the underpayment 
under section 6654(c), with respect to any earlier installment, will 
terminate on January 15 of the succeeding calendar year (or the 
corresponding date in the case of a fiscal year). For example, a 
taxpayer discovers on January 14, 1956, that he has underpaid his 
estimated tax for the calendar year 1955. He may, in lieu of filing an 
amended declaration on January 15, 1956, and paying the balance of the 
estimated tax determined thereon, file his final return on January 31, 
1956, and pay in full the amount computed thereon as payable. By so 
doing, he will avoid the addition to the tax with respect to the 
underpayment of the installment required to be paid by January 15, 1956. 
The periods of underpayment, under section 6654(c), as to the 
installments required to be paid on April 15, 1955, June 15, 1955, and 
September 15, 1955, also terminate on January 15, 1956.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7028, 35 FR 
3806, Feb. 27, 1970; 35 FR 4293, Mar. 10, 1970]



Sec. 1.6015(g)-1   Short taxable years of individuals.

    (a) Requirement of declaration. No declaration may be made for a 
period of more than 12 months. For purposes of this section a taxable 
year of 52 or 53 weeks, in the case of a taxpayer who computes his 
taxable income in accordance with the election permitted by section 
441(f) shall be deemed a period of 12 months. For special rules 
affecting the time for filing declarations and paying estimated tax by 
such a taxpayer, see paragraph (b) of Sec. 1.441-2. A separate 
declaration for a fractional part of a year is required where, for 
example, there is a change, with the approval of the Commissioner, in 
the basis of computing taxable income from one taxable year to another 
taxable year. The periods to be covered by

[[Page 520]]

such separate declarations in the several cases are those set forth in 
section 443. No declaration is required if the short taxable year is:
    (1) A period of less than four months.
    (2) A period of at least four months but less than six months and 
the requirements of section 6015(a) are first met after the 1st day of 
the fourth month.
    (3) A period of at least six months but less than nine months and 
the requirements of section 6015(a) are first met after the 1st day of 
the sixth month, or
    (4) A period of nine months or more and the requirements of section 
6015(a) are first met after the 1st day of the ninth month.

In the case of a decedent, no declaration need be filed subsequent to 
the date of death. As to the requirement for an amended declaration if 
death of one spouse occurs after filing a joint declaration, see 
paragraph (c) of Sec. 1.6015(b)-1.
    (b) Income and income tax placed on annual basis. For the purpose of 
determining whether the anticipated income and tax for a short taxable 
year resulting from a change of annual accounting period, necessitates 
the filing of a declaration, income and income tax imposed by chapter 1 
(other than by section 56) shall be placed on an annual basis in the 
manner prescribed in section 443(b)(1). Thus, for example, an unmarried 
taxpayer who changes from a fiscal year basis to a calendar year basis 
beginning January 1, 1973, will have a short taxable year beginning July 
1, 1972, and ending December 31, 1972. If his anticipated gross income 
for such short taxable year consists solely of wages (as defined in 
section 3401(a)) in the amount of $11,000, his total gross income and 
his gross income from such wages for the purpose of determining whether 
a declaration is required is $22,000, the amount obtained by placing 
anticipated income of $11,000 upon an annual basis. Since the taxpayer's 
anticipated gross income from wages when placed upon an annual basis is 
in excess of $20,000, he is required to file a declaration of estimated 
tax for the short taxable year unless the estimated tax can reasonably 
be expected to be less than $100. However, for taxable years beginning 
after December 31, 1966, the amount which the individual estimates as 
the amount of self-employment tax imposed by chapter 2 shall be computed 
on the actual self-employment income for the short period.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7427, 41 FR 
34028, Aug. 12, 1976]



Sec. 1.6015(h)-1   Estates and trusts.

    An estate or trust, though generally taxed as an individual, is not 
required to file a declaration.



Sec. 1.6015(i)-1   Nonresident alien individuals.

    (a) Exception from requirement of making a declaration. No 
declaration of estimated income tax is required to be made under section 
6015(a) and Sec. 1.6015(a)-1 by a nonresident alien individual unless:
    (1) Such individual has wages, as defined in section 3401(a), and 
the regulations thereunder, upon which tax is required to be withheld 
under section 3402,
    (2) Such individual has income (other than compensation for personal 
services upon which tax is required to be withheld at source under 
section 1441) which is effectively connected for the taxable year with 
the conduct of a trade or business in the United States by such 
individual, or
    (3) Such individual has been, or expects to be, a resident of Puerto 
Rico during the entire taxable year.
    (b) Rules applicable to nonresident alien individuals required to 
make a declaration--(1) Tests to be applied. A nonresident alien 
individual who is not excepted by paragraph (a) of this section from the 
requirement of making a declaration of income tax is required to file a 
declaration if his gross income meets the requirements of section 
6015(a) and Sec. 1.6015(a)-1. In making the determination under section 
6015(a)(1) as to whether the amount of the gross income of a nonresident 
alien individual is such as to require making a declaration of estimated 
income tax, only the tests relating to a single individual (other than a 
head of household) or to a married individual not entitled to file a 
joint declaration with his spouse

[[Page 521]]

shall apply, since a nonresident alien individual may not make a joint 
declaration by reason of section 6015(b) and is not a head of household. 
Only in a rare case would a nonresident alien individual be a surviving 
spouse.
    (2) Determination of gross income. To determine the gross income of 
a nonresident alien individual who is not, or does not expect to be, a 
resident of Puerto Rico during the entire taxable year, see section 872 
and Secs. 1.872-1 and 1.872-2. To determine the gross income of a 
nonresident alien individual who is, or expects to be, a resident of 
Puerto Rico during the entire taxable year, see section 876 and 
Sec. 1.876-1. For purposes of applying paragraph (a)(2) of this section, 
income which is effectively connected for the taxable year with the 
conduct of a trade or business in the United States includes all income 
which is treated under section 871 (c) or (d) and Sec. 1.871-9 (relating 
to students and trainees) or Sec. 1.871-10 (relating to real property 
income) as income which is effectively connected for such year with the 
conduct of a trade or business in the United States.
    (c) Effective date. This section shall apply for taxable years 
beginning after December 31, 1966. For corresponding rules applicable to 
taxable years beginning before January 1, 1967, see 26 CFR 1.6015(a)-
1(d) (Rev. as of Jan. 1, 1971).

[T.D. 7332, 39 FR 44232, Dec. 23, 1974]



Sec. 1.6015(j)-1   Applicability.

    Section 6015 is applicable only with respect to taxable years 
beginning after December 31, 1954. Sections 58, 59, and 60 of the 
Internal Revenue Code of 1939 and the regulations thereunder, shall 
continue in force with respect to taxable years beginning before January 
1, 1955.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960. Redesignated by T.D. 7332, 39 FR 
44232, Dec. 23, 1974]



Sec. 1.6016-1   Declarations of estimated income tax by corporations.

    (a) Requirement. For taxable years ending on or after December 31, 
1955, a declaration of estimated tax shall be made by every corporation 
(including unincorporated business enterprises electing to be taxed as 
domestic corporations under section 1361), which is subject to taxation 
under section 11 or 1201(a), or subchapter L, chapter 1 of the Code 
(relating to insurance companies), if its income tax under such sections 
or such subchapter L for the taxable year can reasonably be expected to 
exceed the sum of $100,000 plus the amount of any estimated credits 
allowable under section 32 (relating to tax withheld at source on 
nonresident aliens and foreign corporations and on tax-free covenant 
bonds), section 33 (relating to taxes of foreign countries and 
possessions of the United States), and section 38 (relating to 
investment in certain depreciable property).
    (b) Definition of estimated tax. The term ``estimated tax'', in the 
case of a corporation, means the excess of the amount which such 
corporation estimates as its income tax liability for the taxable year 
under section 11 or 1201(a), or subchapter L, chapter 1 of the Code, 
over the sum of $100,000 and any estimated credits under sections 32, 
33, and 38. However, for the rule with respect to the limitation upon 
the $100,000 exemption for members of certain electing affiliated 
groups, see section 243(b)(3)(C)(v) and the regulations thereunder.
    (c) Examples. The application of this section may be illustrated by 
the following examples:

    Example (1). M, a corporation subject to tax under section 11, 
reasonably anticipates that it will have taxable income of $224,000 for 
the calendar year 1964. The normal tax and surtax result in an expected 
liability of $105,000. M determines that it will not have any allowable 
credits under sections 32, 33, and 38 for 1964. Since M's expected tax 
($105,000) exceeds the exemption ($100,000), a declaration of estimated 
tax is required to be filed, reporting an estimated tax of $5,000 
($105,000-$100,000) for the calendar year 1964.
    Example (2). Under the facts stated in example (1), except that M 
estimates it will have an allowable foreign tax credit under section 33 
in the amount of $4,000 and an allowable investment credit under section 
38 in the amount of $3,000, no declaration is required, since M's 
expected tax ($105,000) does not exceed the $100,000 plus the allowable 
credits totaling $7,000.

[T.D. 6768, 29 FR 14921, Nov. 4, 1964]



Sec. 1.6016-2   Contents of declaration of estimated tax.

    (a) In general. The declaration of estimated tax by a corporation 
shall be

[[Page 522]]

made on Form 1120-ES. For the purpose of making the declaration, the 
estimated tax should be based upon the amount of gross income which the 
taxpayer can reasonably be expected to receive or accrue as the case may 
be, depending upon the method of accounting upon the basis of which the 
taxable income is computed, and the amount of the estimated allowable 
deductions and credits to be taken into account. Such amounts of gross 
income, deductions, and credits should be determined upon the basis of 
facts and circumstances existing as at the time prescribed for the 
filing of the declaration as well as those reasonably to be anticipated 
for the taxable year.
    (b) Use of prescribed form. Copies of Form 1120-ES will so far as 
possible be furnished taxpayers by district directors. A taxpayer will 
not be excused from making a declaration, however, by the fact that no 
form has been furnished. Taxpayers not supplied with the proper form 
should make application therefor to the district director in ample time 
to have their declarations prepared, verified, and filed with the 
district director on or before the date prescribed for filing the 
declaration. If the prescribed form is not available a statement 
disclosing the estimated income tax after the exemption and the credits, 
if any, should be filed as a tentative declaration within the prescribed 
time, accompanied by the payment of the required installment. Such 
tentative declaration should be supplemented, without unnecessary delay, 
by a declaration made on the proper form.



Sec. 1.6016-3   Amendment of declaration.

    In the making of a declaration of estimated tax the corporation is 
required to take into account the then existing facts and circumstances 
as well as those reasonably to be anticipated relating to prospective 
gross income, allowable deductions, and estimated credits for the 
taxable year. Amended or revised declarations may be made in any case in 
which the corporation estimates that its gross income, deductions, or 
credits will materially change the estimated tax reported in the 
previous declaration. However, for the rule with respect to the number 
of amended declarations which may be filed for taxable years beginning 
after December 31, 1963, see paragraph (d)(2) of Sec. 1.6074-1. Such 
amended declaration may be made on either Form 1120-ES (marked 
``Amended'') or on the reverse side of the installment notice furnished 
the corporation by the district director. See, however, paragraph (b) of 
Sec. 1.6016-2 for procedure to be followed if the prescribed form is not 
available.

[T.D. 6768, 29 FR 14922, Nov. 4, 1964]



Sec. 1.6016-4   Short taxable year.

    (a) Requirement of declaration. No declaration may be made for a 
period of more than 12 months. For purposes of this section a taxable 
year of 52 or 53 weeks, in the case of a corporation which computes its 
taxable income in accordance with the election permitted by section 
441(f), shall be deemed a period of 12 months. For special rules 
affecting the time for filing declarations and paying estimated tax by 
such corporation, see paragraph (b) of Sec. 1.441-2. A separate 
declaration is required where a corporation is required to submit an 
income tax return for a period of less than 12 months, but only if such 
short period ends on or after December 31, 1955. However, no declaration 
is required if the short taxable year:
    (1) Begins on or before December 31, 1963, and is:
    (i) A period of less than 9 months, or
    (ii) A period of 9 or more months but less than 12 months and the 
requirements of section 6016(a) are not met before the 1st day of the 
last month in the short taxable year, or
    (2) Begins after December 31, 1963, and is:
    (i) A period of less than 4 months, or
    (ii) A period of 4 or more months but less than 12 months and the 
requirements of section 6016(a) are not met before the 1st day of the 
last month in the short taxable year.
    (b) Income placed on an annual basis. In cases where the short 
taxable year results from a change of annual accounting period, for the 
purpose of determining whether the anticipated income for a short 
taxable year will result in an estimated tax liability requiring the 
filing of a declaration, such income shall be placed on an annual basis 
in the manner prescribed in section 443(b)(1). If a tax computed on

[[Page 523]]

such annualized income exceeds the sum of $100,000 and any credits under 
part IV, of subchapter A, chapter 1 of the Code, the estimated tax shall 
be the same part of the excess so computed as the number of months in 
the short period is of 12 months. Thus, for example, a corporation which 
changes from a calendar year basis to a fiscal year basis beginning 
October 1, 1956, will have a short taxable year beginning January 1, 
1956, and ending September 30, 1956. If on or before August 31, 1956, 
the taxpayer anticipates that it will have income of $264,000 for the 9-
month taxable year the estimated tax is computed as follows:

(1) Anticipated taxable income for 9 months.................    $264,000
(2) Annualized income ($264,000 x 129)..............     352,000
(3) Tax liability on item (2)...............................     177,540
(4) Item (3) reduced by $100,000 (there are no credits under            
 part IV, subchapter A, chapter 1 of the Code)..............      77,540
(5) Estimated tax for 9-month period ($77,540 x 912)      58,155
                                                                        

Since the tax liability on the annualized income is in excess of 
$100,000, a declaration is required to be filed, reporting an estimated 
tax of $58,155 for the 9-month taxable period. This paragraph has no 
application where the short taxable year does not result from a change 
in the taxpayer's annual accounting period.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6768, 29 FR 
14922, Nov. 4, 1964]



Sec. 1.6017-1   Self-employment tax returns.

    (a) In general. (1) Every individual, other than a nonresident 
alien, having net earnings from self-employment, as defined in section 
1402, of $400 or more for the taxable year shall make a return of such 
earnings. For purposes of this section, an individual who is a resident 
of the Virgin Islands, Puerto Rico, or (for any taxable year beginning 
after 1960) Guam or American Samoa is not to be considered a nonresident 
alien individual. See paragraph (d) of Sec. 1.1402(b)-1. A return is 
required under this section if an individual has self-employment income, 
as defined in section 1402(b), even though he may not be required to 
make a return under section 6012 for purposes of the tax imposed by 
section 1 or 3. Provisions applicable to returns under section 6012(a) 
shall be applicable to returns under this section.
    (2) Except as otherwise provided in this subparagraph, the return 
required by this section shall be made on Form 1040. The form to be used 
by residents of the Virgin Islands, Guam, or American Samoa is From 
1040SS. In the case of a resident of Puerto Rico who is not required to 
make a return of income under section 6012(a), the form to be used is 
Form 1040SS, except that Form 1040PR shall be used if it is furnished by 
the Internal Revenue Service to such resident for use in lieu of Form 
1040SS.
    (b) Joint returns. (1) In the case of a husband and wife filing a 
joint return under section 6013, the tax on self-employment income is 
computed on the separate self-employment income of each spouse, and not 
on the aggregate of the two amounts. The requirement of section 
6013(d)(3) that in the case of a joint return the tax is computed on the 
aggregate income of the spouses is not applicable with respect to the 
tax on self-employment income. Where the husband and wife each has net 
earnings from self-employment of $400 or more, it will be necessary for 
each to complete separate schedules of the computation of self-
employment tax with respect to the net earnings of each spouse, despite 
the fact that a joint return is filed. If the net earnings from self-
employment of either the husband or the wife are less than $400, such 
net earnings are not subject to the tax on self-employment income, even 
though they must be shown on the joint return for purposes of the tax 
imposed by section 1 or 3.
    (2) Except as otherwise expressly provided, section 6013 is 
applicable to the return of the tax on self-employment income; 
therefore, the liability with respect to such tax in the case of a joint 
return is joint and several.
    (c) Social security account numbers. (1) Every individual making a 
return of net earnings from self-employment for any period commencing 
before January 1, 1962, is required to show thereon his social security 
account number, or, if he has no such account number, to make 
application therefor on Form SS-5 before filing such return. However, 
the failure to apply for or receive

[[Page 524]]

a social security account number will not excuse the individual from the 
requirement that he file such return on or before the due date thereof. 
Form SS-5 may be obtained from any district office of the Social 
Security Administration or from any district director. The application 
shall be filed with a district office of the Social Security 
Administration or, in the case of an individual not in the United 
States, with the district office of the Social Security Administration 
at Baltimore, Md. An individual who has previously secured a social 
security account number as an employee shall use that account number on 
his return of net earnings from self-employment.
    (2) For provisions applicable to the securing of identifying numbers 
and the reporting thereof on returns and schedules for periods 
commencing after December 31, 1961, see Sec. 1.6109-1.
    (d) Declaration of estimated tax with respect to taxable years 
beginning after December 31, 1966. For taxable years beginning after 
December 31, 1966, section 6015 provides that the term ``estimated tax'' 
includes the amount which an individual estimates as the amount of self-
employment tax imposed by chapter 2 for the taxable year. Thus, 
individuals upon whom self-employment tax is imposed by section 1401 
must make a declaration of estimated tax if they meet the requirements 
of section 6015(a); except as otherwise provided under section 6015(i).

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6691, 28 FR 
12816, Dec. 3, 1963; T.D. 7427, 41 FR 34028, Aug. 12, 1976]

                           information returns



Sec. 1.6031-1  Return of partnership income.

    (a) In general--(1) General rule. Except as provided in paragraphs 
(b) and (d) of this section with respect to certain organizations 
excluded from the application of subchapter K, chapter 1 of the Code, 
and certain partnerships having no U.S. business, an unincorporated 
organization defined as a partnership in section 761(a), through or by 
means of which any business, financial operation, or venture is carried 
on, shall make a return for each taxable year on form 1065. For purposes 
of filing a partnership return, an unincorporated organization will not 
be considered, within the meaning of section 761(a), to carry on a 
business, financial operation, or venture as a partnership before the 
first taxable year in which such organization receives income or incurs 
any expenditures treated as deductions for Federal income tax purposes. 
Such return shall state specifically the items of partnership gross 
income and the deductions allowable by subtitle A of the Code and shall 
include the names and addresses of all the partners and the amount of 
the distributive shares of income, gains, loss, deduction, or credit 
(including any items which enter into the determination of the tax 
imposed by section 56) allocated to each partner. Such return shall be 
made for the taxable year of the partnership, irrespective of the 
taxable years of the partners. For taxable years of a partnership and of 
a partner, see section 706 and Sec. 1.706-1. For signing of a 
partnership return, see Sec. 1.6063-1.
    (2) Special rule. Except in the case of an unincorporated 
organization deemed to be excluded from the application of subchapter K 
in the manner described in paragraph (b)(2)(ii) of Sec. 1.761-2 for the 
first year of its existence, an unincorporated organization described in 
paragraph (a) of Sec. 1.761-2 shall file a partnership return for the 
first taxable year in which the participants by a formal agreement 
undertake to engage in joint operations, or in the absence of a formal 
agreement for the first taxable year in which the participants with 
respect to the joint use of property jointly have income, or make or 
incur any expenditures treated as deductions for Federal income tax 
purposes. Additionally, if an organization described in paragraph (a) of 
Sec. 1.761-2 does not elect under section 761 and the regulations 
thereunder to be excluded from the application of subchapter K or 
chapter I of the Code, it is required to file a return for each taxable 
year subsequent to its first taxable year in accordance with the 
requirements of this section until an election is made in accordance 
with paragraph (b)(2)(i) of Sec. 1.761-2. Where no annual accounting 
period has been adopted by an organization described in paragraph (a) of 
Sec. 1.761-2, its taxable year shall be the calendar year

[[Page 525]]

in accordance with section 441(g). For special rules in the case of an 
organization making the election for exclusion under section 761, see 
paragraphs (b)(2)(i) and (c) of Sec. 1.761-2 and paragraph (b) of this 
section.
    (b) Unincorporated organizations excluded from the application of 
Subchapter K--(1) Wholly excluded. (i) Any unincorporated organization 
with respect to which under section 761(a) an election to be excluded 
from all the provisions of subchapter K of chapter 1 of the Code has 
been made in the manner described in paragraph (b)(2)(i) of Sec. 1.761-2 
shall file Form 1065 for the first year with respect to which such an 
election has been made and such return shall, in lieu of the information 
therein required, contain or be accompanied by the information required 
by such paragraph.
    (ii) Except as otherwise provided in subdivision (i) of this 
subparagraph, an unincorporated organization which is wholly excluded 
from the application of subchapter K need not file a partnership return.
    (2) Partially excluded. Any unincorporated organization excluded 
from the application of part of subchapter K of chapter 1 of the Code 
shall file a return on Form 1065 containing such information as the 
Commissioner may require. See section 761 and paragraph (c) of 
Sec. 1.761-2.
    (c) Partnerships having business or source of income within the 
United States. Every partnership engaged in trade or business, or having 
income from sources, within the United States shall file a partnership 
return in accordance with this section, whether or not its principal 
place of business is outside of the United States, and whether or not 
all its members are nonresident aliens.
    (d) Partnerships having no United States business--(1) No return 
required from partnership. A partnership carrying on no business in the 
United States and deriving no income from sources within the United 
States need not file a partnership return.
    (2) Returns of information with respect to partnership required of 
citizen or resident partners. Where a U.S. citizen or resident is a 
partner in a partnership described in subparagraph (1) of this paragraph 
which is not required to file a partnership return, the district 
director or director of the service center may require such person to 
render such statements or provide such information as is necessary to 
show whether or not such person is liable for tax on income derived from 
such partnership. In addition, if an election in accordance with the 
provisions of section 703 (relating to elections affecting the 
computation of taxable income derived from a partnership) or section 761 
(relating to the election to be excluded from the application of all or 
part of subchapter K, chapter 1 of the Code) is to be made by or for the 
partnership, a return on Form 1065 shall be filed for such partnership. 
See section 6063 and Sec. 1.6063-1, relating to the authority of a 
partner to sign a partnership return. The filing of one such return for 
a taxable year of the partnership by a citizen or resident partner shall 
constitute a filing for the partnership of such partnership return.
    (e) Place and time for filing returns--(1) Place for filing--(i) 
Returns filed with district director or Director of International 
Operations. The returns of partnerships doing business, or having income 
from sources, within the United States shall be filed with the district 
director for the internal revenue district in which the partnership has 
its principal office or principal place of business within the United 
States. If a partnership has no office, place of business, or agency 
within the United States, the return shall be filed with the Director of 
International Operations, Internal Revenue Service, Washington, DC 
20225. A partnership return filed under the authority of paragraph 
(d)(2) of this section shall be filed with the internal revenue officer 
with whom the citizen or resident partner files his separate income tax 
return.
    (ii) Returns filed with service centers. Notwithstanding subdivision 
(i) of this subparagraph, unless a return is filed by hand carrying, 
whenever instructions applicable to partnership returns provide that the 
return be filed with a service center, the return must be so filed in 
accordance with the instructions. Returns which are filed by hand 
carrying shall be filed with the district director (or with any person 
assigned the administrative supervision of an

[[Page 526]]

area, zone or local office constituting a permanent post of duty within 
the internal revenue district of such director) in accordance with 
paragraph (e)(1)(i) of this section).
    (2) Time for filing. The return of a partnership shall be filed on 
or before the fifteenth day of the fourth month following the close of 
the taxable year of the partnership, except that the return of a 
partnership consisting entirely of nonresident aliens shall be filed on 
or before the fifteenth day of the sixth month following the close of 
the taxable year of the partnership.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7012, 34 FR 
7690, May 15, 1969; T.D. 7280, 37 FR 20688, Oct. 3, 1972; T.D. 7495, 42 
FR 33726, July 1, 1977; T.D. 7564, 43 FR 40497, Sept. 12, 1978]



Sec. 1.6031(b)-1T  Statements to partners (temporary).

    (a) Statement required to be furnished to partners--(1) In general. 
Except as provided in this paragraph (a)(1) and paragraph (a)(2)(ii) of 
this section, any partnership required under section 6031(a) and the 
regulations thereunder to file a partnership return for a taxable year 
shall furnish to every person who was a partner (within the meaning of 
section 7701(a)(2)) at any time during the taxable year a written 
statement containing the information described in paragraph (a)(3) of 
this section. This section shall not apply to a real estate mortgage 
investment conduit (REMIC) treated as a partnership under subtitle F of 
the Code by reason of section 860F(e). For the reporting requirements 
applicable to REMICs see Sec. 1.6031(b)-2T.
    (2) Special rules applicable to partnership interests held by 
nominees--(i) Statements furnished to nominees. For any partnership 
taxable year beginning after October 22, 1986, a partnership shall 
provide a person that holds (directly or indirectly) an interest in such 
partnership as a nominee on behalf of another person at any time during 
such year with a statement under paragraph (a)(1) of this section with 
respect to such interest if--
    (A) Such nominee has not furnished the statement required under 
Sec. 1.6031(c)-1T(a)(1)(i) to the partnership with respect to such other 
person;
    (B) Such nominee either holds legal title to such partnership 
interest in its own name or is identified in a statement provided to the 
partnership pursuant to Sec. 1.6031(c)-1T(a)(1)(i) by another nominee as 
the person on whose behalf such other nominee holds such interest; and
    (C) Such nominee is not a person described in Sec. 1.6031(c)-
1T(a)(2) (relating to the special rule for clearing agencies).

In such case, the partnership shall assume, for purposes of this 
section, that the nominee is the beneficial owner of the partnership 
interest.
    (ii) Statements not required to be furnished to partners holding 
partnership interests through nominees. A partnership shall not be 
required to furnish a statement under paragraph (a)(1) of this section 
to a partner with respect to any portion of such partner's interest in 
the partnership that is owned through a nominee if--
    (A) Such nominee has not furnished (or is not required to furnish 
under Sec. 1.6031(c)-1T(a)(2)), a statement to the partnership under 
Sec. 1.6031(c)-1T(a)(1)(i) with respect to such partner; and
    (B) Such partner has not furnished (or is not required to furnish) a 
statement to the partnership under Sec. 1.6031(c)-1T(a)(3), with respect 
to such interest in the partnership.
    (3) Contents of statement. The statement required under paragraph 
(a)(1) of this section shall include the following information:
    (i) The partner's distributive share of partnership income, gain, 
loss, deduction, or credit required to be shown on the partnership 
return (or, for taxable years beginning before January 1, 1987, the 
partner's distributive share of partnership income, gain, loss, 
deduction, or credit shown on the partnership return); and
    (ii) To the extent provided by form or the accompanying 
instructions, any additional information that may be required to apply 
particular provisions of subtitle A of the Code to the partner with 
respect to items related to the partnership.
    (b) Time for furnishing statement. The statement required to be 
furnished by the partnership under paragraph (a)(1) of this section 
shall be furnished on or

[[Page 527]]

before the day on which the partnership return for that taxable year is 
required to be filed (determined with regard to extensions). For 
partnership returns the due date for which (determined without regard to 
extensions) is before January 1, 1987, the statement required to be 
furnished by the partnership under paragraph (a)(1) of this section 
shall be furnished on or before the day on which the partnership return 
is filed.
    (c) Statement may be provided to agent. If a partner designates 
another person, such as an attorney or an investment advisor, as the 
partner's (or nominee's) agent in dealing with the partnership, the 
partnership may provide the statement required under paragraph (a)(1) of 
this section with respect to such partner to such other person instead 
of the partner.
    (d) Penalties. For penalties for failure to comply with the 
requirements of section 6031(b) and paragraph (a) of this section, see 
section 6722(a).
    (e) Effective date. Except as otherwise provided in this section, 
the provisions of this section apply to partnership taxable years 
beginning after September 3, 1982.

[T.D. 8225, 53 FR 34490, Sept. 7, 1988]
Sec. 1.6031(b)-2T  REMIC reporting requirements (temporary). [Reserved]



Sec. 1.6031(c)-1T  Nominee reporting of partnership information (temporary).

    (a) Statements required to be furnished to partnership--(1) 
Statement from nominee--(i) In general. Except as otherwise provided in 
this section, any person who holds, directly or indirectly, an interest 
in a partnership (required under section 6031(a) and the regulations 
thereunder to file a partnership return for a taxable year) as a nominee 
on behalf of another person at any time during the partnership taxable 
year shall furnish to the partnership a written statement (or 
statements) for that taxable year with respect to such other person 
containing the information described in paragraph(a)(1)(ii) of this 
section.
    (ii) Contents of statement. The statement required under paragraph 
(a)(1)(i) of this section shall, except as otherwise provided in 
paragraph (a)(4) of this section, include the following information:
    (A) The name, address, and taxpayer identification number of the 
nominee;
    (B) The name, address, and taxpayer identification number of such 
other person;
    (C) Whether such other person is--
    (1) A person that is not a United States person;
    (2) A foreign government, an international organization, or any 
wholly-owned agency or instrumentality of either of the foregoing; or
    (3) A tax-exempt entity (within the meaning of section 168(h)(2));
    (D) A description of any interest in the partnership held by the 
nominee on behalf of such other person at the beginning of the 
partnership taxable year;
    (E) A description of any interest in the partnership that the 
nominee acquires (within the meaning of paragraph (g)(1) of this 
section) on behalf of such other person during the partnership taxable 
year, the method of acquisition (e.g., purchase, exchange, acquisition 
at death, gift, or commencement of nominee relationship) and acquisition 
cost (within the meaning of paragraph (g)(2) of this section) of such 
interest, and the date of the acquisition of such interest; and
    (F) A description of any interest in the partnership that the 
nominee transfers (within the meaning of paragraph (g)(5) of this 
section) on behalf of such other person during the partnership taxable 
year, the net proceeds from the transfer (within the meaning of 
paragraph (g)(6) of this section) of such interest, and the date of the 
transfer of such interest.

A description of a partnership interest must include sufficient detail 
to enable the partnership to furnish to such other person the statement 
required under Sec. 1.6031(b)-1T (a).
    (2) Special rule for clearing agencies. A clearing agency registered 
pursuant to the provisions of section 17A of the Securities Exchange Act 
of 1934 (or its nominee) that holds an interest in a partnership as a 
nominee on behalf of another person shall not be required to furnish any 
statement described in

[[Page 528]]

paragraph (a)(1)(i) of this section with respect to such interest.
    (3) Special rule for brokers and financial institutions--(i) 
Additional statement required. Any broker (within the meaning of 
paragraph (g)(3) of this section) or financial institution (within the 
meaning of paragraph (g)(4) of this section) that holds an interest in a 
partnership indirectly through a nominee described in paragraph (a)(2) 
of this section at any time during a partnership taxable year shall 
furnish (in addition to any statement (or statements) required under 
paragraph (a)(1)(i) of this section) to the partnership a written 
statement (or statements) containing the information described in 
paragraph (a)(3)(ii) of this section with respect to any interest in 
such partnership that it holds (directly or indirectly) for its own 
account at any time during such partnership taxable year.
    (ii) Contents of statement. The statement required under paragraph 
(a)(3)(i) of this section shall, except as otherwise provided in 
paragraph (a)(4) of this section, include the following information:
    (A) The name, address, and taxpayer identification number of the 
broker or financial institution;
    (B) Whether such broker of financial institution is a person that is 
not a United States person;
    (C) A description of any interest in the partnership held by the 
broker or financial institution for its own account at the beginning of 
the partnership taxable year;
    (D) A description of any interest in the partnership that the broker 
or financial institution acquires for its own account during the 
partnership taxable year, the method of acquisition and acquisition cost 
of such interest, and the date of the acquisition of such interest; and
    (E) A description of any interest in the partnership that the broker 
or financial institution transfers for its own account during the 
partnership taxable year, the net proceeds from the transfer of such 
interest, and the date of the transfer of such interest.

A description of a partnership interest held by a broker or financial 
institution for its own account must include sufficient detail to enable 
the partnership to furnish to the broker or financial institution the 
statement required under Sec. 1.6031(b)-1T (a).
    (4) Exception--(i) In general. Except as otherwise provided in this 
paragraph (a)(4), any statement required under paragraph (a) (1)(i) or 
(3)(i) of this section for a taxable year is not required to include--
    (A) That part of the information described in paragraph (a) 
(1)(ii)(E) and (3)(ii)(D) of this section regarding the method of 
acquisition and acquisition cost; or
    (B) That part of the information described in paragraph 
(a)(1)(ii)(F) and (3)(ii)(E) of this section regarding the net proceeds 
from the transfer;

to the extent that, prior to the beginning of the partnership taxable 
year, the partnership has provided the nominee with a written statement 
that the nominee need not provide such information to the partnership, 
and the partnership has not modified or revoked such statement. For 
purposes of the preceding sentence, the modification or revocation of a 
statement furnished to a nominee is effective for a partnership taxable 
year if and only if the partnership notifies the nominee of such 
modification or revocation by a written statement more than 60 days 
before the beginning of the partnership taxable year. The nominee shall 
retain a copy of any statement that is furnished to it by the 
partnership under this paragraph (a)(4) in the nominee's records so long 
as the contents thereof may become material in the administration of any 
internal revenue law.
    (ii) Effect of election under section 754. Paragraph (a)(4)(i)(A) of 
this section shall not apply to a partnership taxable year if--
    (A) The partnership has an election in effect under section 754 
(relating to optional adjustment to basis of partnership property) for 
such taxable year; and
    (B) The nominee knows or has reason to know of such election more 
than 60 days before the beginning of such taxable year.
    (5) Examples. The following examples illustrate the application of 
this paragraph (a):

    Example (1). B, a broker, holds 50 units of interest in Partnership 
P, a calendar year

[[Page 529]]

partnership, in street name for customer A, the beneficial owner. B 
holds the units on behalf of A at all times during 1989. B must furnish 
a statement to P for calendar year 1989 under paragraph (a)(1)(i) of 
this section that includes the information required under paragraph 
(a)(1)(ii) (A) through (D) of this section. The description of the 
partnership interest held by B on A's behalf on January 1, 1989, must 
identify the number of units of P held by B on A's behalf at that time 
(50), and the class of the partnership interest (including the Committee 
on Uniform Security Identification Procedures (CUSIP) number of the 
partnership interest, if known).
    Example (2). The facts are the same as in example (1), except that 
pursuant to A's instructions, B sells 25 of A's units of interest in P 
on August 1, 1989, receiving net proceeds from the transfer of $500. In 
addition to the information described in example (1), the statement that 
B must furnish to P must include the class of the partnership interest 
transferred (including the CUSIP number of the partnerhsip interest, if 
known), the number of units transferred (25), the net proceeds from the 
transfer ($500), and the date of the transfer (August 1, 1989.)
    Example (3). The facts are the same as in example (1), except that A 
is not the beneficial owner, but rather holds the units as a nominee on 
behalf of C, the beneficial owner, at all times during 1989. In addition 
to the statement that B must furnish to P (as described in Example (1) 
of this paragraph (a)(5)), A must furnish a statement to P for calendar 
year 1989 under paragraph (a)(1)(i) of this section that includes the 
information required under paragraph (a)(1)(ii) (A) through (D) of this 
section. If both A and B provide P with the statement required under 
paragraph (a)(1)(i) of this section, P must provide C with the statement 
required under Sec. 1.6031(b)-1T (a)(1).

    (b) Time for furnishing statements. A nominee may furnish to the 
partnership any statement required under paragraph (a) of this section 
annually, quarterly, monthly, or on any other basis, provided that all 
statements required to be furnished under paragraph (a) of this section 
for a partnership taxable year shall be furnished on or before the last 
day of the first month following the close of such partnership taxable 
year.
    (c) Use of magnetic media. A nominee required to furnish a written 
statement under paragraph (a) of this section, may, in lieu of 
furnishing such written statement, furnish the required information on 
magnetic tape or by other media if the partnership and the nominee so 
agree.
    (d) Use of single document. Any person who holds interests in a 
partnership as a nominee on behalf of more than one other person during 
the partnership taxable year, may, in lieu of furnishing to the 
partnership a separate statement for each such other person, furnish to 
the partnership a single document which includes, for each such other 
person, the information described in paragraph (a)(1)(ii) of this 
section. To the extent that a single document is used, references in 
this section to the statement required under paragraph (a)(1)(i) of this 
section shall be deemed to refer also to the information included in a 
single document under this paragraph (d).
    (e) Retention of information. The nominee shall retain a copy of any 
statement that is furnished to the partnership under this section in the 
nominee's records so long as the contents thereof may become material in 
the administration of any internal revenue law.
    (f) Use of agent. If a partnership has designated another person, 
such as a clearing organization, as the partnership's agent for purposes 
of receiving the statements required under paragraph (a) of this 
section, such statements may be furnished to that other person instead 
of the partnership. If a nominee has designated another person as its 
agent for purposes of furnishing to the partnership (or its agent) the 
statements required under paragraph (a) of this section, that other 
person may furnish such statements to the partnership (or its agent) on 
behalf of the nominee.
    (g) Meaning of terms. For purposes of this section, the following 
terms have the meanings set forth below:
    (1) The term acquires means--
    (i) A purchase or other acquisition of a partnership interest; or
    (ii) The commencement of a nominee relationship, including the 
substitution of one nominee for another.
    (2) The term acquisition cost means the sum of any money paid and 
the fair market value of any property (other than money) transferred to 
acquire a partnership interest increased by any expenses paid or 
incurred with respect to the acquisition (such as broker's fees or 
commissions).

[[Page 530]]

    (3) The term broker shall have the meaning set forth in paragraph 
(a)(1) of Sec. 1.6045-1.
    (4) The term financial institution means a financial institution 
such as a bank, mutual savings bank, savings and loan association, 
building and loan association, cooperative bank, homestead association, 
credit union, industrial loan association or bank or other similar 
organization.
    (5) The term transfer means--
    (i) A sale, exchange, or other disposition of a partnership 
interest; or
    (ii) The termination of a nominee relationship, including the 
substitution of one nominee for another.
    (6) The term net proceeds from the transfer means the sum of any 
money and the fair market value of any property (other than money) 
received in connection with a transfer of a partnership interest reduced 
by any expenses paid or incurred with respect to the transfer (such as 
broker's fees or commissions).
    (7) The term person includes the United States, a State, the 
District of Columbia, a foreign government, a political subdivision of a 
State or foreign government, or an international organization.
    (h) Statement required by nominees that do not comply with 
Sec. 1.6031(c)-1T (a)--(1) In general. Any person that--
    (i) Holds an interest in a partnership as a nominee (other than a 
nominee described in paragraph (a)(3) of this section) on behalf of 
another person at any time during the partnership taxable year;
    (ii) Does not furnish to such partnership the statement required 
under paragraph (a)(1)(i) of this section for such other person with 
respect to such interest in the partnership; and
    (iii) Receives from such partnership the statement described in 
paragraph (a)(1) of Sec. 1.6031(b)-1T with respect to such interest in 
the partnership;

shall furnish to such other person a written statement containing the 
information described in paragraph (h)(2) of this section with respect 
to such interest in the partnership.
    (2) Contents of statement. The statement required under paragraph 
(h)(1) of this section shall contain the following information:
    (i) The distributive share of partnership income, gain, loss, 
deduction or credit required to be shown on the partnership return that 
is allocable to such interest in the partnership; and
    (ii) Any additional information that may be required to apply 
particular provisions of subtitle A of the Code to the beneficial owner 
of such interest in the partnership in connection with items related to 
the partnership.
    (3) Time for furnishing statements. A nominee shall furnish the 
statement required under paragraph (h)(1) of this section within 30 days 
after receiving the statement described in paragraph (a) of 
Sec. 1.6031(b)-1T.
    (i) REMICs. This section shall not apply with respect to any 
interest in a real estate mortgage investment conduit (REMIC) treated as 
a partnership under subtitle F of the Code by reason of section 860F(e). 
For the nominee reporting requirements with respect to REMICs see 
Sec. 1.6031(c)-2T.
    (j) Penalties. [Reserved]
    (k) Effective date--(1) In general. Except as otherwise provided in 
paragraph (k)(2) of this section, the provisions of this section shall 
apply to partnership taxable years beginning after October 22, 1986.
    (2) Transitional rule for taxable years beginning before January 1, 
1989. For partnership taxable years beginning before January 1, 1989, --
    (i) Any statement that a nominee is required to furnish to a 
partnership under paragraph (a)(1) of this section shall not be required 
to include the following information:
    (A) The information described in paragraph (a)(1)(ii)(C) of this 
section;
    (B) That part of the information described in paragraph 
(a)(1)(ii)(E) of this section regarding the method of acquisition and 
acquisition cost of a partnership interest; or
    (C) That part of the information described in paragraph 
(a)(1)(ii)(F) of this section regarding the net proceeds from the 
transfer of a partnership interest.
    (ii) A broker or financial institution shall not be required to 
furnish the additional statement described in paragraph (a)(3)(i) of 
this section.

[T.D. 8225, 53 FR 34491, Sept. 7, 1988]

[[Page 531]]

Sec. 1.6031(c)-2T  Nominee reporting of REMIC information (temporary). 
[Reserved]



Sec. 1.6032-1  Returns of banks with respect to common trust funds.

    Every bank (as defined in section 581) maintaining a common trust 
fund shall make a return of income of the common trust fund, regardless 
of the amount of its taxable income. Member banks of an affiliated group 
that serve as co-trustees with respect to a common trust fund must act 
jointly in making a return for the fund. If a bank maintains more than 
one common trust fund, a separate return shall be made for each. No 
particular fund is prescribed for making the return under this section, 
but form 1065 may be used if it is designated by the bank as the return 
of a common trust fund. The return shall be made for the taxable year of 
the common trust fund and shall be filed on or before the 15th day of 
the fourth month following the close of such taxable year with the 
district director for the district in which the income tax return of the 
bank is filed. Such return shall state specifically with respect to the 
fund the items of gross income and the deductions allowed by subtitle A 
of the Code, shall include each participant's name and address, the 
participant's proportionate share of taxable income or net loss 
(exclusive of gains and losses from sales or exchanges of capital 
assets), the participant's proportionate share of gains and losses from 
sales or exchanges of capital assets, and the participant's share of 
items which enter into the determination of the tax imposed by section 
56. See Sec. 1.584-2 and Sec. 1.58-5. If the common trust fund is 
maintained by two or more banks that are members of the same affiliated 
group, the return must also identify the member bank in the group that 
has contributed each participant's property or money to the fund. A copy 
of the plan of the common trust fund must be filed with the return. If, 
however, a copy of such plan has once been filed with a return, it need 
not again be filed if the return contains a statement showing when and 
where it was filed. If the plan is amended in any way after such copy 
has been filed, a copy of the amendment must be filed with the return 
for the taxable year in which the amendment was made. For the signing of 
a return of a bank with respect to common trust funds, see Sec. 1.6062-
1, relating to the manner prescribed for the signing of a return of a 
corporation.

[T.D. 7564, 43 FR 40497, Sept. 12, 1978, as amended by T.D. 7935, 49 FR 
1695, Jan. 13, 1984]



Sec. 1.6033-1   Returns by exempt organizations; taxable years beginning before January 1, 1970.

    (a) In general. (1) Except as provided in section 6033(a) and 
paragraph (g) of this section, every organization exempt from taxation 
under section 501(a) shall file an annual return of information 
specifically stating its items of gross income, receipts and 
disbursements, and such other information as may be prescribed in the 
instructions issued with respect to the return. Such information return 
shall be filed annually regardless of the amount or source of the income 
or receipts of the organization. Except as provided in paragraph (d) of 
this section, such return shall be filed annually regardless of whether 
such organization is chartered by, or affiliated or associated with, any 
central, parent, or other organization.
    (2)(i) Except as otherwise provided in this subparagraph, every 
organization exempt from taxation under section 501 (a), and required to 
file a return under section 6033 and this section, other than an 
organization described in section 401 (a), 501(c) (3), or 501(d), shall 
file its annual return on Form 990. However, such an exempt 
organization, instead of filing Form 990, may file its annual return on 
Form 990 (SF), a short form, if its gross receipts for the taxable year 
do not exceed $10,000 and its total assets on the last day of its 
taxable year do not exceed $10,000.
    (ii) For purposes of this subparagraph and subparagraph (4) of this 
paragraph, ``gross receipts'' means the gross amount received by the 
organization during its annual accounting period from all sources 
without reduction for any costs or expenses including, for example, cost 
of goods or assets sold, cost of operations, or expenses of earning, 
raising, or collecting such amounts. Thus, ``gross receipts'' includes, 
but is

[[Page 532]]

not limited to, (a) the gross amount received as contributions, gifts, 
grants, and similar amounts without reduction for the expenses of 
raising and collecting such amounts, (b) the gross amount received as 
dues or assessments from members or affiliated organizations without 
reduction for expenses attributable to the receipt of such amounts, (c) 
gross sales or receipts from business activities (including business 
activities unrelated to the purpose for which the organization received 
an exemption, the net income or loss from which may be required to be 
reported on Form 990-T), (d) the gross amount received from the sale of 
assets without reduction for cost or other basis and expenses of sale, 
and (e) the gross amount received as investment income such as interest, 
dividends, rents, and royalties.
    (3) Every employees' trust described in section 401 (a) which is 
exempt from taxation under section 501 (a) shall file an annual return 
on Form 990-P. The return shall include the information required by 
paragraph (b)(5) (ii) of Sec. 1.401-1. In addition, the trust must file 
the information required to be filed by the employer pursuant to the 
provisions of Sec. 1.404(a)-2, unless the employer has notified the 
trustee in writing that he has or will timely file such information. If 
the trustee has received such notification from the employer, then such 
notification, or a copy thereof, shall be retained by the trust as a 
part of its records.
    (4) Except as otherwise provided in this subparagraph, every 
organization described in section 501(c) (3), which is required to file 
a return under section 6033 and this section, shall file its annual 
return on Form 990-A. However, such an exempt organization, instead of 
filing Form 990-A, may file its annual return on Form 990-A (SF), a 
short form, if its gross receipts for the taxable year do not exceed 
$10,000 and its total assets on the last day of its taxable year do not 
exceed $10,000. For purposes of this subparagraph, ``gross receipts'' 
shall be defined in the manner prescribed in subparagraph (2) (ii) of 
this paragraph. The forms prescribed by this subparagraph shall be as 
follows:
    (i) Form 990-A shall consist of parts I and II. Part I shall 
contain, in addition to information required in part II, such 
information as may be prescribed in the return and instructions which is 
required to be furnished by section 6033(a) or which is necessary to 
show whether or not such organization is exempt from tax under section 
501(a). Part II, which shall be open to public inspection pursuant to 
section 6104 and other applicable sections and the regulations 
thereunder, shall contain principally the information required by 
section 6033(b) and the regulations thereunder. The information 
contained in part II, to be furnished by the organization in duplicate 
in the manner prescribed by the instructions issued with respect to the 
return, is as follows:
    (a) Its gross income for the year. For this purpose, gross income 
includes tax-exempt income, but does not include contributions, gifts, 
grants, and similar amounts received. Whether or not an item constitutes 
a contribution, gift, grant, or similar amount, depends upon all the 
surrounding facts and circumstances.
    (b) Its expenses attributable to such income and incurred within the 
year.
    (c) Its disbursements out of income (including prior years' 
accumulations) made within the year for the purposes for which it is 
exempt. Information shall be included as to the class of activity with a 
separate total for each activity as well as the name, address, and 
amount received by each individual or organization receiving cash, other 
property, or services within the taxable year. If the donee is related 
by blood, marriage, adoption, or employment (including children of 
employees) to any person or corporation having an interest in the exempt 
organization, such as a creator, donor, director, trustee, or officer, 
the relationship of the donee shall be stated. Activities shall be 
classified according to purpose in greater detail than merely 
charitable, educational, religious, or scientific. For example, payments 
for nursing service, for laboratory construction, for fellowships, or 
for assistance to indigent families shall be so identified. Where the 
fair market value of the property at the time of disbursement is used as 
the measure of the disbursement, the book value of such

[[Page 533]]

property (and a statement of how book value was determined) shall also 
be furnished, and any difference between the fair market value at the 
time of disbursement and the book value should be reflected in the books 
of account. The expenses allocable to making the disbursements shall be 
set forth in such detail as is prescribed by the form or instructions.
    (d) Its accumulation of income within the year. The amount of such 
accumulation is obtained by subtracting from the amount in (a) of this 
subdivision the sum of the amounts determined in (b) and (c) of this 
subdivision and the expenses allocable to carrying out the purposes for 
which it is exempt.
    (e) Its aggregate accumulation of income at the beginning and end of 
the year. The aggregate accumulation of income shall be divided between 
that which is attributable to the gain or loss on the sale of assets 
(excluding inventory items) and that which is attributable to all other 
income. For this purpose expenses and disbursements shall be allocated 
on the basis of accounting records, the governing instrument, or 
applicable local law.
    (f) Its disbursements out of principal in the current and prior 
years for the purposes for which it is exempt. In addition, the same 
type of information shall be required with respect to disbursements out 
of principal made in the current year as is prescribed by (c) of this 
subdivision with respect to disbursements out of income.
    (g) A balance sheet showing its assets, liabilities, and net worth 
as of the beginning and end of such year. Detailed information on the 
assets, liabilities, and net worth shall be furnished on the schedule 
provided for this purpose on the Form 990-A. Such schedule shall be 
supplemented by attachments where appropriate.
    (h) The total of the contributions and gifts received by it during 
the year. A statement shall be included showing the gross amount of 
contributions and gifts collected by the organization, the expenses 
incurred by the organization in collecting such amount, and the net 
proceeds.
    (i) In addition to the information required in (a) through (h) of 
this subdivision, the organization shall furnish such specific 
information and answer such specific questions as are required by the 
form or instructions.
    (ii) Form 990-A (SF) is a short form consisting of a single part 
which contains such information as may be prescribed in the return and 
instructions which is required to be furnished by section 6033(a) or 
which is necessary to show whether or not such organization is exempt 
from tax under section 501(a). In addition, Form 990-A (SF) shall 
contain the information required by section 6033(b) which must be 
furnished in the manner prescribed in the instructions issued with 
respect to the return. Form 990-A (SF) shall be open to public 
inspection pursuant to section 6104 and other applicable sections and 
the regulations thereunder.
    (5)(i) Every religious or apostolic association or corporation 
described in section 501 (d) which is exempt from taxation under section 
501(a) shall file a return on Form 1065 for each taxable year, stating 
specifically the items of gross income and deductions, and its taxable 
income. There shall be attached to the return as a part thereof a 
statement showing the name and address of each member of the association 
or corporation and the amount of his distributive share of the taxable 
income of the association or corporation for such year.
    (ii) If the taxable year of any member is different from the taxable 
year of the association or corporation, the distributive share of the 
taxable income of the association or corporation to be included in the 
gross income of the member for his taxable year shall be based upon the 
taxable income of the association or corporation for its taxable year 
ending with or within the taxable year of the member.
    (b) Accounting period for filing return. A return on Form 990, 990-
A, 990 (SF), 990-A (SF), or 990-P shall be on the basis of the 
established annual accounting period of the organization. If the 
organization has no such established accounting period, such return 
shall be on the basis of the calendar year.
    (c) Returns when exempt status not established. An information 
return on Form 990, 990-A, 990 (SF), or 990-A (SF)

[[Page 534]]

is not required to be filed by an organization claiming an exempt status 
under section 501(a) prior to the establishment by the organization of 
such exempt status under section 501 and Sec. 1.501(a)-1. If the date 
for filing an income tax return and paying the tax occurs before the 
tax-exempt status of the organization has been established, the 
organization is required to file the income tax return and pay the tax. 
However, see sections 6081 and 6161 and the regulations thereunder for 
extensions of time for filing the return and paying the tax. Upon 
establishment of its exempt status, the organization may file a claim 
for a refund of income taxes paid for the period for which its exempt 
status is established.
    (d) Group returns. (1) A central, parent, or like organization 
(referred to in this paragraph as ``central organization''), exempt 
under section 501(a) and described in section 501(c), although required 
to file a separate annual return for itself under section 6033 and 
paragraph (a) of this section, may file annually, in addition to such 
separate annual return, a group return on Form 990 or 990-A, 990 (SF), 
or 990-A (SF), as may be appropriate. Form 990 (SF) or 990-A (SF) may be 
used where each local organization qualifies under paragraph (a) of this 
section. Such group return may be filed for two or more of the local 
organizations, chapters, or the like (referred to in this paragraph as 
``local organizations'') which are (i) affiliated with such central 
organization at the close of its annual accounting period, (ii) subject 
to the general supervision or control of the central organization, and 
(iii) exempt from taxation under the same paragraph of section 501(c) of 
the Code, although the local organizations are not necessarily exempt 
under the paragraph under which the central organization is exempt.
    (2)(i) The filing of the group return shall be in lieu of the filing 
of a separate return by each of the local organizations included in the 
group return. The group return shall include only those local 
organizations which in writing have authorized the central organization 
to include them in the group return, and which have made and filed, with 
the central organization, their statements, specifically stating their 
items of gross income, receipts, and disbursements, and such other 
information relating to them as is required to be stated in the group 
return. Such an authorization by a local organization shall be made 
annually, under the penalties of perjury, and shall be signed by a duly 
authorized officer of the local organization in his official capacity 
and shall contain the following statement, or a statement of like 
import: ``I hereby declare under the penalties of perjury that this 
authorization (including any accompanying schedules and statements) has 
been examined by me and to the best of my knowledge and belief is true, 
correct and complete and made in good faith for the taxable year 
stated.'' Such authorizations and statements shall be permanently 
retained by the central organization.
    (ii) There shall be attached to the group return and made a part 
thereof a schedule showing the name and address of each of the local 
organizations and the total number thereof included in such return, and 
a schedule showing the name and address of each of the local 
organizations and the total number thereof not included in the group 
return.
    (3) The group return shall be on the basis of the established annual 
accounting period of the central organization. Where such central 
organization has no established annual accounting period, such return 
shall be on the basis of the calendar year. The same income, receipts, 
and disbursements of a local organization shall not be included in more 
than one group return.
    (4) The group return shall be filed in accordance with these 
regulations and the instructions issued with respect to Form 990, 990-A, 
990 (SF), or 990-A (SF), whichever is appropriate, and shall be 
considered the return of each local organization included therein. The 
tax-exempt status of a local organization must be established under a 
group exemption letter issued to the central organization before a group 
return including the local organization will be

[[Page 535]]

considered as the return of the local organization. See Sec. 1.501(a)-1 
for requirements for establishing a tax-exempt status.
    (e) Time and place for filing. The annual return of information on 
Form 990, 990-A, 990 (SF), 990-A (SF), or 990-P shall be filed on or 
before the 15th day of the fifth calendar month following the close of 
the period for which the return is required to be filed. The annual 
return on Form 1065 required to be filed by a religious or apostolic 
association or corporation shall be filed on or before the 15th day of 
the fourth month following the close of the taxable year for which the 
return is required to be filed. Each such return shall be filed in 
accordance with the instructions applicable thereto.
    (f) Penalties. For criminal penalties for failure to file a return 
and filing a false or fraudulent return, see sections 7203, 7206, and 
7207.
    (g) Organizations not required to file annual returns. (1) (i) 
Annual returns on Form 990-A or Form 990-A (SF) are not required to be 
filed by an organization described in section 501 (c) (3) which has 
established its right to exemption from taxation under section 501 (a) 
and which is:
    (a) Organized and operated exclusively for religious purposes;
    (b) Operated, supervised, or controlled by or in connection with an 
organization which is organized and operated exclusively for religious 
purposes;
    (c) An educational organization which normally maintains a regular 
faculty and curriculum and normally has a regularly organized body of 
pupils or students in attendance at the place where its educational 
activities are regularly carried on; or
    (d) A charitable organization, or an organization for the prevention 
of cruelty to children or animals, which is supported, in whole or in 
part, by funds contributed by the United States or any State or 
political subdivision thereof, or which is primarily supported by 
contributions of the general public.
    (ii) An educational organization which normally maintains and has a 
regular faculty, curriculum, and student body and meets the conditions 
of subdivision (i)(c) of this subparagraph, which relieves it from the 
requirement of filing annual returns, shall not be considered as having 
thereafter failed to continue meeting such conditions if it is 
temporarily compelled to curtail or discontinue its normal and regular 
activities during the existence of abnormal circumstances and 
conditions.
    (iii) An organization organized and operated exclusively for 
charitable purposes or for the prevention of cruelty to children or 
animals is ``primarily supported by contributions of the general 
public'' for any accounting period if more than 50 percent of its income 
and receipts for such period is actually derived from voluntary 
contributions and gifts made by the general public, as distinguished 
from a few contributors or donors or from related or associated persons. 
For purposes of this subdivision, the words ``related or associated 
persons'' refer to persons of a particular group who are connected with 
or are interested in the activities of the organization, such as 
founders, incorporators, shareholders, members, fiduciaries, officers, 
employees, or the like, or who are connected with such persons by family 
or business relationships. An organization claiming an exception from 
the filing of an information return under this subdivision must maintain 
adequate records in order to substantiate such claim. Furthermore, if it 
is doubtful to an organization that it falls within this exception for 
filing annual information returns, it must file the return on Form 990-A 
or Form 990-A (SF).
    (2) The annual return on Form 990 or Form 990 (SF) need not be filed 
by:
    (i) A fraternal beneficiary society, order, or association, 
described in section 501(c)(8), or
    (ii) An organization described in section 501(c)(1) if it is a 
corporation wholly owned by the United States or any agency or 
instrumentality thereof, or is a wholly owned subsidiary of such a 
corporation,

which has established its exemption from tax under section 501(a).
    (3) The provisions of section 6033(a) relieving certain specified 
types of organizations exempt from tax under section 501(a) from filing 
annual returns do not abridge or impair in any way

[[Page 536]]

the powers and authority of district directors or directors of service 
centers provided for in other provisions of the Code and in the 
regulations thereunder to require the filing of such returns by such 
organizations. See section 6001 and Sec. 1.6001-1.
    (h) Records, statements, and other returns of tax-exempt 
organizations. (1) An organization which has established its right to 
exemption from tax under section 501(a) and has also established that it 
is not required to file annually the return of information on Form 990, 
990-A, 990 (SF), or 990-A (SF) shall immediately notify in writing the 
district director for the internal revenue district in which its 
principal office is located of any changes in its character, operations, 
or purpose for which it was originally created.
    (2) Every organization which has established its right to exemption 
from tax, whether or not it is required to file an annual return of 
information, shall submit such additional information as may be required 
by the district director for the purpose of enabling him to inquire 
further into its exempt status and to administer the provisions of 
subchapter F (section 501 and following), chapter 1 of the Code, and of 
section 6033. See section 6001 and Sec. 1.6001-1 with respect to the 
authority of the district director or directors of service centers to 
require such additional information and with respect to the permanent 
books of account or records to be kept by such organizations.
    (3) An organization which has established its right to exemption 
from tax under section 501(a), including an organization which is 
relieved under section 6033 and this section from filing annual returns 
of information, is not, however, relieved from the duty of filing other 
returns of information. See, for example, sections 6041 and 6051 and the 
regulations thereunder.
    (i) Unrelated business tax returns. In addition to the foregoing 
requirements of this section, certain organizations otherwise exempt 
from tax under section 501(a) and described in section 501(c) (2), (3), 
(5), (6), or (17) or section 401(a) which are subject to tax on 
unrelated business taxable income are also required to file returns on 
Form 990-T. See paragraph (e) of Sec. 1.6012-2 and paragraph (a)(5) of 
Sec. 1.6012-3 for requirements with respect to such returns.
    (j) Effective date. The provisions of this section shall apply with 
respect to returns filed for taxable years beginning before January 1, 
1970.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6722, 29 FR 
5075, Apr. 14, 1964; T.D. 6972, 33 FR 12907, Sept. 12, 1968; T.D. 6980, 
33 FR 16446, Nov. 9, 1968; T.D. 7122, 36 FR 11026, June 8, 1971]



Sec. 1.6033-2  Returns by exempt organizations (taxable years beginning after December 31, 1969) and returns by certain nonexempt organizations (taxable years 
          beginning after December 31, 1980).

    (a) In general. (1) Except as provided in section 6033(a)(2) and 
paragraph (g) of this section, every organization exempt from taxation 
under section 501(a) shall file an annual information return 
specifically setting forth its items of gross income, gross receipts and 
disbursements, and such other information as may be prescribed in the 
instructions issued with respect to the return. Except as provided in 
paragraph (d) of this section, such return shall be filed annually 
regardless of whether such organization is chartered by, or affiliated 
or associated with, any central, parent, or other organization.
    (2)(i) Except as otherwise provided in this paragraph and paragraph 
(g) of this section, every organization exempt from taxation under 
section 501(a), and required to file a return under section 6033 and 
this section (including, for taxable years ending before December 31, 
1972, private foundations, as defined in section 509(a)), other than an 
organization described in section 401(a) or 501(d), shall file its 
annual return on Form 990. For taxable years ending on or after December 
31, 1972, every private foundation shall file Form 990-PF as its annual 
information return. For taxable years beginning after December 31, 1977, 
every section 501(c)(21) black lung trust shall file an annual 
information return on Form 990-BL or any other form prescribed by the 
Internal Revenue Service for that purpose.
    (ii) The information generally required to be furnished by an 
organization exempt under section 501(a) is:
    (a) Its gross income for the year. For this purpose, gross income 
includes

[[Page 537]]

tax-exempt income, but does not include contributions, gifts, grants, 
and similar amounts received. Whether an item constitutes a 
contribution, gift, grant, or similar amount depends upon all the 
surrounding facts and circumstances. The computation of gross income 
shall be made by subtracting the cost of goods sold from all receipts 
other than gross contributions, gifts, grants, and similar amounts 
received and nonincludible dues and assessments from members and 
affiliates.
    (b) To the extent not included in gross income, its dues and 
assessments from members and affiliates for the year.
    (c) Its expenses incurred within the year attributable to gross 
income.
    (d) Its disbursements (including prior years' accumulations) made 
within the year for the purposes for which it is exempt.
    (e) A balance sheet showing its assets, liabilities, and net worth 
as of the beginning and end of such year. Detailed information relating 
to the assets, liabilities, and net worth shall be furnished on the 
schedule provided for this purpose on the return required by this 
section. Such schedule shall be supplemented by attachments where 
appropriate.
    (f) The total of the contributions, gifts, grants and similar 
amounts received by it during the taxable year, and the names and 
addresses of all persons who contributed, bequeathed, or devised $5,000 
or more (in money or other property) during the taxable year. In the 
case of a private foundation (as defined in section 509(a)), the names 
and addresses of all persons who became substantial contributors (as 
defined in section 507(d)(2)) during the taxable year shall be 
furnished. In addition, for its first taxable year beginning after 
December 31, 1969, each private foundation shall furnish the names and 
addresses of all persons who became substantial contributors before such 
taxable year. For special rules with respect to contributors and donors, 
see subdivision (iii) of this subparagraph.
    (g) The names and addresses of all officers, directors, or trustees 
(or any person having responsibilities or powers similar to those of 
officers, directors, or trustees) of the organization, and, in the case 
of a private foundation, all persons who are foundation managers, within 
the meaning of section 4946(b)(1). Organizations described in section 
501(c)(3) must also attach a schedule showing the names and addresses of 
the five employees (if any) who received the greatest amount of annual 
compensation in excess of $30,000; the total number of other employees 
who received annual compensation in excess of $30,000; the names and 
addresses of the five independent contractors (if any) who performed 
personal services of a professional nature for the organization (such as 
attorneys, accountants, and doctors, whether such services are performed 
by such persons in their individual capacity or as employees of a 
professional service corporation) and who received the greatest amount 
of compensation in excess of $30,000 from the organization for the year 
for the performance of such services; and the total number of other such 
independent contractors who received in excess of $30,000 for the year 
for the performance of such services.
    (h) A schedule showing the compensation and other payments made 
during the organization's annual accounting period (or during the 
calendar year ending within such period) which are includible in the 
gross income of each individual whose name is required to be listed in 
(g) of this subdivision.
    (i) For any taxable year ending on or after December 31, 1971, such 
information as is required by Forms 4848 and 4849 and, only with respect 
to any such taxable year ending before December 31, 1972, such 
information as is required by Form 2950. Such forms are required by this 
section to be filed by an organization exempt from tax under section 
501(a) which is an employer who maintains a funded pension or annuity 
plan for its employees. See paragraph (g) of this section for exceptions 
from filing. Form 4849 need not be filed by the organization if the 
fiduciary for the plan has given written notification to the 
organization that such form will be filed as an attachment to Form 990-P 
filed by the fiduciary. Form 4848 (and Form 4849 if required to be filed 
by the organization) shall be filed as a separate return on or before 
the due date

[[Page 538]]

for Form 990. For rules relating to the extension of time for filing, 
see section 6081 and the regulations thereunder and the instructions for 
Form 4848. A central organization which files Form 990 as a group return 
under paragraph (d) of this section may also file Form 4848 as a group 
return. The rules provided by paragraph (d) of this section with respect 
to a group return filed on Form 990 shall apply to a group return filed 
on Form 4848. Unless otherwise expressly provided therein, an 
authorization to include a local organization in a group for purposes of 
filing Form 990 as a group return shall be treated as an authorization 
to include such local organization in a group for purposes of filing 
Form 4848 as a group return. A group return on Form 4848 shall be filed 
in accordance with this section and the instructions to Form 4848 and 
shall be considered the return of each local organization included 
therein. In addition to the information required to be furnished by 
Forms 4848 and 4849, the district director may require any further 
information that he considers necessary to determine qualification of 
the plan under section 401 or the taxability under section 403(b) of a 
beneficiary under an annuity purchased by a section 501(c)(3) 
organization.
    (j) In the case of a private foundation liable for tax imposed under 
chapter 42, such information as is required by Form 4720.
    (k) Its lobbying expenditures, grass roots expenditures, exempt 
purpose expenditures, lobbying nontaxable amount, and grass roots 
nontaxable amount for the taxable year and for prior taxable years that 
are base years (within the meaning of Sec. 1.501(h)-3(c)(7)), if the 
organization has an election under section 501(h) in effect for the 
taxable year. An organization that is a member of an affiliated group of 
organizations (as defined in Sec. 56.4911-7(e)) but that is not a member 
of a limited affiliated group (as defined in Sec. 56.4911-10(b)) shall 
report this information based on the expenditures of all members of the 
group during the taxable year of the group that ends with or within the 
member's taxable year and for prior taxable years of the group that are 
base years (within the meaning of Sec. 56.4911-9(b)). For additional 
information required to be furnished by members of an affiliated group 
of organizations, and by controlling members in a limited affiliated 
group, see Secs. 56.4911-9(d) and 56.4911-10(f)(1), respectively.
    (iii) Special rules. In providing the names and addresses of 
contributors and donors under subdivision (ii)(f) of this subparagraph:
    (a) An organization described in section 501(c)(3) which meets the 
33\1/3\ percent-of-support test of the regulations under section 
170(b)(1)(A)(vi) (without regard to whether such organization otherwise 
qualifies as an organization described in section 170(b)(1)(A)) is 
required to provide the name and address of a person who contributed, 
bequeathed, or devised $5,000 or more during the year only if his amount 
is in excess of 2 percent of the total contributions, bequests and 
devises received by the organization during the year.
    (b) An organization other than a private foundation is required to 
report only the names and addresses of contributors of whom it has 
actual knowledge. For instance, an organization need not require an 
employer who withholds contributions from the compensation of employees 
and pays over to the organization periodically the total amounts 
withheld, to specify the amounts paid over with respect to a particular 
employee. In such case, unless the organization has actual knowledge 
that a particular employee gave more than $5,000 (and in excess of 2 
percent if (a) of this subdivision is applicable), the organization need 
report only the name and address of the employer, and the total amount 
paid over by him.
    (c) Separate and independent gifts made by one person in a 
particular year need be aggregated to determine if his contributions and 
bequests exceed $5,000 (and in excess of 2 percent if (a) of this 
subdivision is applicable), only if such gifts are of $1,000 or more.
    (d)(1) Organizations described in section 501(c) (8) or (10) (and, 
for taxable years beginning after December 31, 1970, organizations 
described in section 501(c)(7)) that receive contributions or bequests 
to be used exclusively for purposes described in section 170(c)(4), 
2055(a)(3), or 2522(a)(3), must attach a

[[Page 539]]

schedule with respect to all gifts which aggregate more than $1,000 from 
any one person showing the name of the donor, the amount of the 
contribution or bequest, the specific purpose for which such amount was 
received, and the specific use to which such amount was put. In the case 
of an amount set aside for such purposes, the organization shall 
indicate the manner in which such amount is held (for instance, whether 
such amount is commingled with amounts held for other purposes). If the 
contribution or bequest was transferred to another organization, the 
schedule must include the name of the transferee organization, a 
description of the nature of such organization, and a description of the 
relationship between the transferee and transferor organizations.
    (2) For taxable years beginning after December 31, 1970, such 
organizations must also attach a statement showing the total dollar 
amount of contributions and bequests received for such purposes which 
are $1,000 or less.
    (iv) Listing of States. A private foundation is required to attach 
to its return required by this section a list of all States:
    (a) To which the organization reports in any fashion concerning its 
organization, assets, or activities, or
    (b) With which the organization has registered (or which it has 
otherwise notified in any manner) that it intends to be, or is, a 
charitable organization or a holder of property devoted to a charitable 
purpose.
    (3)(i) For taxable years beginning after December 31, 1969, and 
ending before December 31, 1971, every employee's trust described in 
section 401(a) which is exempt from taxation under section 501(a) shall 
file an annual return on Form 990-P. The return shall include the 
information required by paragraph (b)(5)(ii) of Sec. 1.401-1. For such 
years, in addition, the trust must file the information required to be 
filed by the employer pursuant to the provisions of Sec. 1.404(a)-2, 
unless the employer has notified the trustee in writing that he has 
filed or will timely file such information. If the trustee has received 
such notification from the employer, then such notification, or a copy 
thereof, shall be retained by the trust as a part of its records.
    (ii) For taxable years ending on or after December 31, 1971, and 
before December 31, 1975, every employee's trust described in section 
401(a) which is exempt from taxation under section 501(a) shall file an 
annual return on Form 990-P. The trust shall furnish such information as 
is required by such form and the instructions issued with respect 
thereto.
    (4) For taxable years beginning after December 31, 1980, trusts 
described in section 4947(a)(1) and nonexempt private foundations shall 
comply with the requirements of section 6033 and this section in the 
same manner as organizations described in section 501(c)(3) which are 
exempt from tax under section 501(a). This section shall be applied for 
taxable years beginning after December 31, 1980 as if trusts described 
in section 4947(a)(1) and nonexempt private foundations were described 
in section 501(c)(3). Therefore, for purposes of this section, all 
references to exempt organizations shall include section 4947(a)(1) 
trusts and nonexempt private foundations and all references to private 
foundations shall include section 4947(a)(1) trusts that would be 
private foundations if they were described in section 501(c)(3) and all 
nonexempt private foundations. Similarly, for purposes of paragraph 
(a)(2)(ii)(d), the purposes for which a section 4947(a)(1) trust or a 
nonexempt private foundation is organized shall be treated as the 
purposes for which it is exempt. For purposes of this section, the term 
``nonexempt private foundation'' means a taxable organization (other 
than a section 4947(a)(1) trust) that is a private foundation. See 
section 509(b) and Sec. 1.509(b)-1. See also section 642(c)(6) and 
Sec. 1.642(c)-4.
    (b) Accounting period for filing return. A return required by this 
section shall be on the basis of the established annual accounting 
period of the organization. If the organization has no such established 
accounting period, such return shall be on the basis of the calendar 
year.
    (c) Returns when exempt status not established. An organization 
claiming an exempt status under section 501(a)

[[Page 540]]

prior to the establishment of such exempt status under section 501 and 
Sec. 1.501(a)-1, shall file a return required by this section in 
accordance with the instructions applicable thereto. In such case the 
organization must indicate on such return that it is being filed in the 
belief that the organization is exempt under section 501(a), but that 
the Internal Revenue Service has not yet recognized such exemption.
    (d) Group returns. (1) A central, parent, or like organization 
(referred to in this paragraph as ``central organization''), exempt 
under section 501(a) and described in section 501(c) (other than a 
private foundation), although required to file a separate annual return 
for itself under section 6033 and paragraph (a) of this section, may 
file annually, in addition to such separate annual return, a group 
return on Form 990. Such group return may be filed for two or more of 
the local organizations, chapters, or the like (referred to in this 
paragraph as ``local organizations'') which are (i) affiliated with such 
central organization at the close of its annual accounting period, (ii) 
subject to the general supervision or control of the central 
organization, and (iii) exempt from taxation under the same paragraph of 
section 501(c) of the Code, although the local organizations are not 
necessarily exempt under the paragraph under which the central 
organization is exempt. Such group return may not be filed for a local 
organization which is a private foundation.
    (2)(i) The filing of the group return shall be in lieu of the filing 
of a separate return by each of the local organizations included in the 
group return. The group return shall include only those local 
organizations which in writing have authorized the central organization 
to include them in the group return, and which have made and filed, with 
the central organization, their statements, specifically stating their 
items of gross income, receipts, and disbursements, and such other 
information relating to them as is required to be stated in the group 
return. Such an authorization and statement by a local organization 
shall be made under the penalties of perjury, shall be signed by a duly 
authorized officer of the local organization in his official capacity, 
and shall contain the following statement, or a statement of like 
import: ``I hereby declare under the penalties of perjury that this 
authorization (including any accompanying schedules and statements) has 
been examined by me and to the best of my knowledge and belief is true, 
correct and complete and made in good faith.'' Such authorization and 
statement with respect to a local organization shall be retained by the 
central organization until the expiration of 6 years after the last 
taxable year for which a group return filed by such central organization 
includes such local organization.
    (ii) There shall be attached to the group return and made a part 
thereof a schedule showing the name, address, and employer 
identification number of each of the local organizations and the total 
number thereof included in such return, and a schedule showing the name, 
address, and employer identification number of each of the local 
organizations and the total number thereof not included in the group 
return.
    (3) The group return shall be on the basis of the established annual 
accounting period of the central organization. Where such central 
organization has no established annual accounting period, such return 
shall be on the basis of the calendar year. The same income, receipts, 
and disbursements of a local organization shall not be included in more 
than one group return.
    (4) The group return shall be filed in accordance with these 
regulations and the instructions issued with respect to Form 990, and 
shall be considered the return of each local organization included 
therein. The tax exempt status of a local organization must be 
established under a group exemption letter issued to the central 
organization before a group return including the local organization will 
be considered as the return of the local organization. See 
Sec. 1.501(a)-1 for requirements for establishing a tax-exempt status.
    (5) In providing the information required by paragraph (a)(2)(ii) 
(f), (g), and (h) of this section, such information may be provided:
    (i) With respect to the central or parent organization on its Form 
990, and

[[Page 541]]

with respect to the local organizations on separate schedules attached 
to the group return for the year, or
    (ii) On a consolidated basis for all the local organizations and the 
central or parent organization on the group return.

Such information need be provided only with respect to those local 
organizations which are not excepted from filing under the provisions of 
paragraph (g) of this section. A central or parent organization shall 
indicate whether it has provided such information in the manner 
described in subdivision (i) or in subdivision (ii) of this 
subparagraph, and may not change the manner in which it provides such 
information without the consent of the Commissioner.
    (e) Time and place for filing. The annual return required by this 
section shall be filed on or before the 15th day of the fifth calendar 
month following the close of the period for which the return is required 
to be filed. The annual return on Form 1065 required to be filed by a 
religious or apostolic association or corporation shall be filed on or 
before the 15th day of the fourth month following the close of the 
taxable year for which the return is required to be filed. Each such 
return shall be filed in accordance with the instructions applicable 
thereto.
    (f) Penalties and additions to tax. For penalties and additions to 
tax for failure to file a return and filing a false or fraudulent 
return, see sections 6652, 7203, 7206, and 7207.
    (g) Organizations not required to file annual returns. (1) Annual 
returns required by this section are not required to be filed by an 
organization exempt from taxation under section 501(a) which is:
    (i) A church, an interchurch organization of local units of a 
church, a convention or association of churches, or an integrated 
auxiliary of a church (as defined in paragraph (h) of this section);
    (ii) An exclusively religious activity of any religious order;
    (iii) An organization (other than a private foundation) the gross 
receipts of which in each taxable year are normally not more than $5,000 
(as described in subparagraph (3) of this paragraph);
    (iv) A mission society sponsored by or affiliated with one or more 
churches or church denominations, more than one-half of the activities 
of which society are conducted in, or directed at persons in foreign 
countries;
    (v) A State institution, the income of which is excluded from gross 
income under section 115(a);
    (vi) An organization described in section 501(c)(1); or
    (vii) An educational organization (below college level) that is 
described in section 170(b)(1)(A)(ii), that has a program of a general 
academic nature, and that is affiliated (within the meaning of paragraph 
(h)(2) of this section) with a church or operated by a religious order.
    (2) The provisions of section 6033(a) relieving certain specified 
types of organizations exempt from taxation under section 501(a) from 
filing annual returns do not abridge or impair in any way the powers and 
authority of district directors or directors of service centers provided 
for in other provisions of the Code and in regulations thereunder to 
require the filing of returns or notices by such organizations. See 
section 6001 and Sec. 1.6001-1.
    (3) For purposes of subparagraph (1)(iii) of this paragraph, the 
gross receipts (as defined in subparagraph (4) of this paragraph) of an 
organization are normally not more than $5,000 if:
    (i) In the case of an organization which has been in existence for 1 
year or less, the organization has received, or donors have pledged to 
give, gross receipts of $7,500 or less during the first taxable year of 
the organization,
    (ii) In the case of an organization which has been in existence for 
more than one but less than 3 years, the average of the gross receipts 
received by the organization in its first 2 taxable years is $6,000 or 
less, and
    (iii) In the case of an organization which has been in existence for 
3 years or more, the average of the gross receipts received by the 
organization in the immediately preceding 3 taxable years, including the 
year for which the return would be required to be filed, is $5,000 or 
less.

[[Page 542]]

    (4) For purposes of this paragraph and paragraph (a)(2) of this 
section, ``gross receipts'' means the gross amount received by the 
organization during its annual accounting period from all sources 
without reduction for any costs or expenses including, for example, cost 
of goods or assets sold, cost of operations, or expenses of earning, 
raising, or collecting such amounts. Thus ``gross receipts'' includes, 
but is not limited to (i) the gross amount received as contributions, 
gifts, grants, and similar amounts without reduction for the expenses of 
raising and collecting such amounts, (ii) the gross amount received as 
dues or assessments from members or affiliated organizations without 
reduction for expenses attributable to the receipt of such amounts, 
(iii) gross sales or receipts from business activities (including 
business activities unrelated to the purpose for which the organization 
qualifies for exemption, the net income or loss from which may be 
required to be reported on Form 990-T), (iv) the gross amount received 
from the sale of assets without reduction for cost or other basis and 
expenses of sale, and (v) the gross amount received as investment 
income, such as interest, dividends, rents, and royalties.
    (5) [Reserved]
    (6) The Commissioner may relieve any organization or class of 
organizations from filing, in whole or in part, the annual return 
required by this section where he determines that such returns are not 
necessary for the efficient administration of the internal revenue laws.
    (h) Integrated auxiliary--(1) In general. For purposes of this 
title, the term integrated auxiliary of a church means an organization 
that is--
    (i) Described both in sections 501(c)(3) and 509(a) (1), (2), or 
(3);
    (ii) Affiliated with a church or a convention or association of 
churches; and
    (iii) Internally supported.
    (2) Affiliation. An organization is affiliated with a church or a 
convention or association of churches, for purposes of paragraph 
(h)(1)(ii) of this section, if--
    (i) The organization is covered by a group exemption letter issued 
under applicable administrative procedures, (such as Rev. Proc. 80-27 
(1980-1 C.B. 677); See Sec. 601.601(a)(2)(ii)(b)), to a church or a 
convention or association of churches;
    (ii) The organization is operated, supervised, or controlled by or 
in connection with (as defined in Sec. 1.509(a)-4) a church or a 
convention or association of churches; or
    (iii) Relevant facts and circumstances show that it is so 
affiliated.
    (3) Facts and circumstances. For purposes of paragraph (h)(2)(iii) 
of this section, relevant facts and circumstances that indicate an 
organization is affiliated with a church or a convention or association 
of churches include the following factors. However, the absence of one 
or more of the following factors does not necessarily preclude 
classification of an organization as being affiliated with a church or a 
convention or association of churches--
    (i) The organization's enabling instrument (corporate charter, trust 
instrument, articles of association, constitution or similar document) 
or by-laws affirm that the organization shares common religious 
doctrines, principles, disciplines, or practices with a church or a 
convention or association of churches;
    (ii) A church or a convention or association of churches has the 
authority to appoint or remove, or to control the appointment or removal 
of, at least one of the organization's officers or directors;
    (iii) The corporate name of the organization indicates an 
institutional relationship with a church or a convention or association 
of churches;
    (iv) The organization reports at least annually on its financial and 
general operations to a church or a convention or association of 
churches;
    (v) An institutional relationship between the organization and a 
church or a convention or association of churches is affirmed by the 
church, or convention or association of churches, or a designee thereof; 
and
    (vi) In the event of dissolution, the organization's assets are 
required to be distributed to a church or a convention or association of 
churches, or to an affiliate thereof within the meaning of this 
paragraph (h).

[[Page 543]]

    (4) Internal support. An organization is internally supported, for 
purposes of paragraph (h)(1)(iii) of this section, unless it both--
    (i) Offers admissions, goods, services or facilities for sale, other 
than on an incidental basis, to the general public (except goods, 
services, or facilities sold at a nominal charge or for an insubstantial 
portion of the cost); and
    (ii) Normally receives more than 50 percent of its support from a 
combination of governmental sources, public solicitation of 
contributions, and receipts from the sale of admissions, goods, 
performance of services, or furnishing of facilities in activities that 
are not unrelated trades or businesses.
    (5) Special rule. Men's and women's organizations, seminaries, 
mission societies, and youth groups that satisfy paragraphs (h)(1) (i) 
and (ii) of this section are integrated auxiliaries of a church 
regardless of whether such an organization meets the internal support 
requirement under paragraph (h)(1)(iii) of this section.
    (6) Effective date. This paragraph (h) applies for returns filed for 
taxable years beginning after December 31, 1969. For returns filed for 
taxable years beginning after December 31, 1969 but beginning before 
December 20, 1995, the definition for the term integrated auxiliary of a 
church set forth in Sec. 1.6033-2(g)(5) (as contained in the 26 CFR 
edition revised as of April 1, 1995) may be used as an alternative 
definition to such term set forth in this paragraph (h).
    (7) Examples of internal support. The internal support test of this 
paragraph (h) is illustrated by the following examples, in each of which 
it is assumed that the organization's provision of goods and services 
does not constitute an unrelated trade or business:

    Example 1. Organization A is described in sections 501(c)(3) and 
509(a)(2) and is affiliated (within the meaning of this paragraph (h)) 
with a church. Organization A publishes a weekly newspaper as its only 
activity. On an incidental basis, some copies of Organization A's 
publication are sold to nonmembers of the church with which it is 
affiliated. Organization A advertises for subscriptions at places of 
worship of the church. Organization A is internally supported, 
regardless of its sources of financial support, because it does not 
offer admissions, goods, services, or facilities for sale, other than on 
an incidental basis, to the general public. Organization A is an 
integrated auxiliary.
    Example 2. Organization B is a retirement home described in sections 
501(c)(3) and 509(a)(2). Organization B is affiliated (within the 
meaning of this paragraph (h)) with a church. Admission to Organization 
B is open to all members of the community for a fee. Organization B 
advertises in publications of general distribution appealing to the 
elderly and maintains its name on non-denominational listings of 
available retirement homes. Therefore, Organization B offers its 
services for sale to the general public on more than an incidental 
basis. Organization B receives a cash contribution of $50,000 annually 
from the church. Fees received by Organization B from its residents 
total $100,000 annually. Organization B does not receive any government 
support or contributions from the general public. Total support is 
$150,000 ($100,000 + $50,000), and $100,000 of that total is from 
receipts from the performance of services (66\2/3\% of total support). 
Therefore, Organization B receives more than 50 percent of its support 
from receipts from the performance of services. Organization B is not 
internally supported and is not an integrated auxiliary.
    Example 3. Organization C is a hospital that is described in 
sections 501(c)(3) and 509(a)(1). Organization C is affiliated (within 
the meaning of this paragraph (h)) with a church. Organization C is open 
to all persons in need of hospital care in the community, although most 
of Organization C's patients are members of the same denomination as the 
church with which Organization C is affiliated. Organization C maintains 
its name on hospital listings used by the general public, and 
participating doctors are allowed to admit all patients. Therefore, 
Organization C offers its services for sale to the general public on 
more than an incidental basis. Organization C annually receives $250,000 
in support from the church, $1,000,000 in payments from patients and 
third party payors (including Medicare, Medicaid and other insurers) for 
patient care, $100,000 in contributions from the public, $100,000 in 
grants from the federal government (other than Medicare and Medicaid 
payments) and $50,000 in investment income. Total support is $1,500,000 
($250,000 + $1,000,000 + $100,000 + $100,000 + $50,000), and $1,200,000 
($1,000,000 + $100,000 + $100,000) of that total is support from 
receipts from the performance of services, government sources, and 
public contributions (80% of total support). Therefore, Organization C 
receives more than 50 percent of its support from receipts from the 
performance of services, government sources, and public contributions. 
Organization C is not internally supported and is not an integrated 
auxiliary.


[[Page 544]]


    (i) Records, statements, and other returns of tax-exempt 
organizations. (1) An organization which is exempt from taxation under 
section 501(a) and is not required to file annually an information 
return required by this section shall immediately notify in writing the 
district director for the internal revenue district in which its 
principal office is located of any changes in its character, operations, 
or purpose for which it was originally created.
    (2) Every organization which is exempt from tax, whether or not it 
is required to file an annual information return, shall submit such 
additional information as may be required by the Internal Revenue 
Service for the purpose of inquiring into its exempt status and 
administering the provisions of subchapter F (section 501 and 
following), chapter 1 of subtitle A of the Code, section 6033, and 
chapter 42 of subtitle D of the Code. See section 6001 and Sec. 1.6001-1 
with respect to the authority of the district directors or directors of 
service centers to require such additional information and with respect 
to the books of account or records to be kept by such organizations.
    (3) An organization which has established its exemption from 
taxation under section 501(a), including an organization which is 
relieved under section 6033 and this section from filing annual returns 
of information, is not relieved of the duty of filing other returns of 
information. See, for example, sections 6041, 6043, 6051, 6057, and 6058 
and the regulations thereunder.
    (j) Unrelated business tax returns. In addition to the foregoing 
requirements of this section, certain organizations otherwise exempt 
from tax under section 501(a) which are subject to tax on unrelated 
business taxable income are also required to file returns on Form 990-T. 
See paragraph (e) of Sec. 1.6012-2 and paragraph (a)(5) of Sec. 1.6012-3 
for requirements with respect to such returns.
    (k) Effective date. The provisions of this section shall apply with 
respect to returns filed for taxable years beginning after December 31, 
1969.

[T.D. 7122, 36 FR 11026, June 8, 1971; 36 FR 11730, June 18, 1971]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.6033-2, see the List of Sections Affected in the Finding Aids 
section of this volume.



Sec. 1.6033-3  Additional provisions relating to private foundations.

    (a) In general. The foundation managers (as defined in section 
4946(b)) of every organization (including a trust described in section 
4947(a)(1)) which is (or is treated as) a private foundation (as defined 
in section 509) the assets of which are at least $5,000 at any time 
during a taxable year shall include the following information on its 
annual return in addition to that information required under 
Sec. 1.6033-2(a):
    (1) An itemized statement of its securities and all other assets at 
the close of the year, showing both book and market value,
    (2) An itemized list of all grants and contributions made or 
approved for future payment during the year, showing the amount of each 
such grant or contribution, the name and address of the recipient (other 
than a recipient who is not a disqualified person and who receives, from 
the foundation, grants to indigent or needy persons that, in the 
aggregate, do not exceed $1,000 during the year), any relationship 
between any individual recipient and the foundation's managers or 
substantial contributors, and a concise statement of the purpose of each 
such grant or contribution,
    (3) The address of the principal office of the foundation and (if 
different) of the place where its books and records are maintained,
    (4) The names and addresses of its foundation managers (within the 
meaning of section 4946(b)), that are substantial contributors (within 
the meaning of section 507(d)(2)) or that own 10 percent or more of the 
stock of any corporation of which the foundation owns 10 percent or more 
of the stock, or corresponding interests in partnerships or other 
entities, in which the foundation has a 10 percent or greater interest.

For purposes of subparagraph (2) of this paragraph, the business address 
of an individual grant recipient or foundation manager may be used by 
the foundation in its annual return in lieu of

[[Page 545]]

the home address of such recipient or manager, and the term 
``relationship'' shall include, but is not limited to, any case in which 
an individual recipient of a grant or contribution by a private 
foundation is (i) a member of the family (as defined in section 4946(d)) 
of a substantial contributor or foundation manager of such foundation, 
(ii) a partner of such substantial contributor or foundation manager, or 
(iii) an employee of such substantial contributor or foundation manager 
or of an organization which is effectively controlled (within the 
meaning of section 4946(a)(1)(H)(i) and the regulations thereunder), 
directly or indirectly, by one or more such substantial contributors or 
foundation managers.
    (b) Notice to public of availability of annual return. A copy of the 
notice required by section 6104(d) (relating to public inspection of 
private foundations' annual returns), and proof of publication thereof, 
shall be filed with the annual return required by Sec. 1.6033-2(a). A 
copy of such notice as published, and a statement signed by a foundation 
manager stating that such notice was published, setting forth the date 
of publication and the publication in which it appeared, shall be 
sufficient proof of publication for purposes of this paragraph.
    (c) Special rules--(1) Furnishing of copies to State officers. The 
foundation managers of a private foundation shall furnish a copy of the 
annual return required by section 6033 and Sec. 1.6033-2 to the Attorney 
General of:
    (i) Each State which the foundation is required to list on its 
return pursuant to Sec. 1.6033-2(a)(2)(iv),
    (ii) The State in which is located the principal office of the 
foundation, and
    (iii) The State in which the foundation was incorporated or created.

The annual return shall be sent to each Attorney General described in 
paragraphs (c)(1) (i), (ii), or (iii) of this section at the same time 
as it is sent to the Internal Revenue Service. Upon request the 
foundation managers shall also furnish a copy of the annual return to 
the Attorney General or other appropriate State officer (within the 
meaning of section 6104 (c)(2)) of any State. The foundation managers 
shall attach to each copy of the annual return sent to State officers 
under this subparagraph a copy of the Form 4720, if any, filed by the 
foundation for the year.
    (2) Cross-reference. For additional rules with respect to private 
foundations' returns and the public inspection of such returns, see 
section 6104(d) and the regulations thereunder.
    (d) Special rules for certain foreign organizations. The provisions 
of paragraphs (b) and (c) of this section shall not apply with respect 
to an organization described in section 4948(b). The foundation managers 
of such organizations are not required to publish notice of availability 
of the annual return for inspection, to make the annual return available 
at the principal office of the foundation for public inspection under 
section 6104(d), or to send copies of the annual return to State 
officers.
    (e) Effective date. The provisions of this section shall apply with 
respect to returns filed for taxable years beginning after December 31, 
1980.

[T.D. 8026, 50 FR 20756, May 20, 1985]



Sec. 1.6034-1  Information returns required of trusts described in section 4947(a)(2) or claiming charitable or other deductions under section 642(c).

    (a) In general. Every trust (other than a trust described in 
paragraph (b) of this section) claiming a charitable or other deduction 
under section 642(c) for the taxable year shall file, with respect to 
such taxable year, a return of information on form 1041-A. In addition, 
for taxable years beginning after December 31, 1969, every trust (other 
than a trust described in paragraph (b) of this section) described in 
section 4947 (a) (2) (including trusts described in section 664) shall 
file such return for each taxable year, unless all transfers in trust 
occurred before May 27, 1969. The return shall set forth the name and 
address of the trust and the following information concerning the trust 
in such detail as is prescribed by the form or in the instructions 
issued with respect to such form:
    (1) The amount of the charitable or other deduction taken under 
section 642(c) for the taxable year (and, for taxable years beginning 
prior to January 1, 1970, showing separately for each

[[Page 546]]

class of activity for which disbursements were made (or amounts were 
permanently set aside) the amounts which, during such year, were paid 
out (or which were permanently set aside) for charitable or other 
purposes under section 642(c));
    (2) The amount paid out during the taxable year which represents 
amounts permanently set aside in prior years for which charitable or 
other deductions have been taken under section 642(c), and separately 
listing for each class of activity, for which disbursements were made, 
the total amount paid out;
    (3) The amount for which charitable or other deductions have been 
taken in prior years under section 642(c) and which had not been paid 
out at the beginning of the taxable year;
    (4)(i) The amount paid out of principal in the taxable year for 
charitable, etc., purposes, and separately listing for each such class 
of activity, for which disbursements were made, the total amount paid 
out;
    (ii) The total amount paid out of principal in prior years for 
charitable, etc., purposes;
    (5) The gross income of the trust for the taxable year and the 
expenses attributable thereto, in sufficient detail to show the 
different categories of income and of expense; and
    (6) A balance sheet showing the assets, liabilities, and net worth 
of the trust as of the beginning of the taxable year.
    (b) Exceptions--(1) In general. A trust is not required to file a 
Form 1041-A for any taxable year with respect to which the trustee is 
required by the terms of the governing instrument and applicable local 
law to distribute currently all of the income of the trust. For this 
purpose, the income of the trust shall be determined in accordance with 
section 643(b) and Secs. 1.643(b)-1 and 1.643(b)-2.
    (2) Trusts described in section 4947(a)(1). For taxable years 
beginning after December 31, 1980, a trust described in section 
4947(a)(1) is not required to file a Form 1041-A.
    (c) Time and place for filing return. The return on form 1041-A 
shall be filed on or before the 15th day of the 4th month following the 
close of the taxable year of the trust, with the internal revenue 
officer designated by the instructions applicable to such form. For 
extensions of time for filing returns under this section, see 
Sec. 1.6081-1.
    (d) Other provisions. For publicity of information on Form 1041-A, 
see section 6104 and the regulations thereunder in part 301 of this 
chapter. For provisions relating to penalties for failure to file a 
return required by this section, see section 6652(d). For the criminal 
penalties for a willful failure to file a return and filing a false or 
fraudulent return, see sections 7203, 7206, and 7207.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7563, 43 FR 
40221, Sept. 11, 1978; T.D. 8026, 50 FR 20757, May 20, 1985]



Sec. 1.6035-1  Returns of U.S. officers, directors and 10-percent shareholders of foreign personal holding companies for taxable years beginning after September 
          3, 1982.

    (a) Requirement of returns--(1) In general. For taxable years of a 
foreign personal holding company beginning after September 3, 1982, each 
United States citizen or resident who is an officer, director, or 10-
percent shareholder of the foreign personal holding company (as defined 
in section 552) shall file with his income tax return, on or before the 
date that return is due, Form 5471 and the applicable schedules to be 
completed in accordance with the instructions setting forth corporate, 
shareholder, and income information for the foreign personal holding 
company's annual accounting period that ends with or within the 
officer's, director's, or shareholder's taxable year. In the case of a 
foreign personal holding company which is a specified foreign 
corporation (as defined in section 898), the taxable year of such 
corporation shall be treated as its annual accounting period.
    (2) General corporate information. The general foreign personal 
holding company information required by this section with respect to 
each taxable year is as follows:
    (i) The name and address and employer identification number (if any) 
of the corporation;
    (ii) The kind of business in which the corporation is engaged;
    (iii) The date of its incorporation;

[[Page 547]]

    (iv) The country under the laws of which the corporation is 
incorporated;
    (v) A description of each class of stock issued and outstanding by 
the corporation for the beginning and end of the annual accounting 
period;
    (vi) The number of shares and par value of common stock of the 
corporation issued and outstanding as of the beginning and end of the 
taxable year;
    (vii) The number of shares and par value of preferred stock of the 
corporation issued and outstanding as of the beginning and end of the 
taxable year, the rate of dividend on such stock and whether such 
dividend is cumulative or noncumulative; and
    (viii) Any other information required by the appropriate form and 
its instructions.

For purposes of this paragraph, the term ``share'' includes any security 
convertible into a share in the corporation and any option granted by 
the corporation with respect to any share in the corporation.
    (3) Shareholder information. The shareholder information required by 
this section is as follows:
    (i) The name, address and taxpayer identification number (if any) of 
each person, whether foreign or U.S., who was a shareholder during the 
taxable year and the class and number of shares held by each, together 
with an explanation of any changes in stock holdings during the taxable 
year,
    (ii) The name and address of each holder during the taxable year of 
securities convertible into stock of the corporation and the class, 
number, and face value of the securities held by each, together with and 
explanation of any changes in the holdings of such securities during the 
taxable year,
    (iii) The name and address of each holder during the taxable year of 
any option granted by the corporation with respect to any share in the 
corporation, and a full description of the options held by each, 
together with an explanation of any changes in the holdings of such 
options during the taxable year, and
    (iv) Any other information required by the appropriate form and its 
instructions.
    (4) Income information. The income information required by this 
section is the gross income, deductions and credits, taxable income, 
foreign personal holding company income, and undistributed foreign 
personal holding company income for the taxable year and other 
information required by the appropriate form and its instructions.
    (b) Persons required to file return--(1) In general. The 
determination of whether a United States citizen or resident is person 
who is an officer, director, or 10-percent shareholder required to file 
a return with respect to any foreign corporation is made as of the date 
that Form 5471 is required to be filed. If there is no such person 
required to file on that date (because, for example, the corporation has 
been dissolved), then filing is required of the persons who were 
officers, directors or 10-percent shareholders on the last day of the 
most recent taxable year of the corporation for which there was such a 
person who was a United States citizen or resident.
    (2) 10-percent shareholder. (i) The term ``10-percent shareholder'' 
means any individual who owns directly or indirectly (within the meaning 
of section 544) 10 percent or more in value of the outstanding stock of 
a foreign corporation.
    (ii) An individual who does not own 10 percent or more in value of 
the outstanding stock directly but is required to file solely by 
attribution of another United States person's stock ownership is excused 
from filing if the direct owner that is an individual furnishes all the 
information required.
    (3) Two or more persons required to submit the same information. If 
two or more persons are required to furnish the information for the same 
foreign personal holding company for the same period, one person may 
make one return on Form 5471. The single Form 5471 may be filed with the 
income tax return of any one of the persons and shall disclose the name, 
address, and identifying number of each other person or persons on whose 
behalf the return is filed. Each person on whose behalf the return is 
filed remains liable for any penalties imposed under sections 6679, 
7203, 7206, and 7207.
    (4) Statement required. Any United States citizen or resident 
required to furnish information under this section

[[Page 548]]

with his return who does not do so by reason of the provisions of 
subparagraph (2)(ii) or (3) of this paragraph shall file a statement 
with his income tax return indicating that such requirement has been or 
will be satisfied and identifying the return with which the information 
was or will be filed and the place of filing.
    (c) Separate returns for each corporation. If a person is required 
to file returns under section 6035 and this section with respect to more 
than one foreign personal holding company, separate returns must be 
filed with respect to each company.
    (d) Corrective filing. If an information return with respect to a 
taxable year of a foreign personal holding company beginning after 
September 3, 1982, is filed before [date which is 30 days after the date 
of publication of a Treasury decision in the Federal Register] and that 
return does not contain all of the information required by this section, 
then the filer of the return shall file an amended information return 
containing all of such information within 90 days after June 4, 1985.
    (e) Penalties--(1) Criminal penalties. For criminal penalties for 
failure to file a return and filing a false or fraudulent return, see 
sections 7203, 7206, and 7207.
    (2) Civil penalties. For civil penalties for failure to file a 
proper foreign personal holding company information return, see section 
6679 and the regulations thereunder.

[T.D. 8028, 50 FR 23408, June 4, 1985; 50 FR 26359, June 26, 1985, as 
amended by T.D. 8573, 59 FR 64301, Dec. 14, 1994]



Sec. 1.6035-2  Returns of U.S. officers and directors of foreign personal holding companies for taxable years beginning before September 4, 1982.

    For rules relating to information returns required to be filed by 
officers and directors of foreign personal holding companies for taxable 
years beginning before September 4, 1982, see section 6035(a) (as in 
effect before the enactment of the Tax Equity and Fiscal Responsibility 
Act of 1982) and 26 CFR 1.6035-1 (Revised as of April 1, 1981).

[T.D. 8028, 50 FR 23409, June 4, 1985]



Sec. 1.6035-3  Returns of 50-percent U.S. shareholders of foreign personal holding companies for taxable years beginning before September 4, 1982.

    For rules relating to information returns required to be filed by 
shareholders of foreign personal holding companies for taxable years 
beginning before September 4, 1982, see section 6035(b) (as in effect 
before the enactment of the Tax Equity and Fiscal Responsibility Act of 
1982) and 26 CFR 1.6035-2 (Revised as of April 1, 1961).

[T.D. 8028, 50 FR 23409, June 4, 1985]



Sec. 1.6036-1   Notice of qualification as executor or receiver.

    For provisions relating to the notice required of fiduciaries, see 
the regulations under section 6036 contained in part 301 of this chapter 
(Regulations on Procedure and Administration).



Sec. 1.6037-1   Return of electing small business corporation.

    (a) In general. Every small business corporation (as defined in 
section 1371(a)) which has made an election under section 1372(a) not to 
be subject to the tax imposed by chapter 1 of the Code shall file, with 
respect to each taxable year for which the election is in effect, a 
return of income on Form 1120-S. The return shall set forth the items of 
gross income and the deductions allowable in computing taxable income as 
required by the return form or in the instructions issued with respect 
thereto and shall be signed in accordance with section 6062 by the 
person authorized to sign a return. The return shall also set forth the 
following information concerning the electing small business 
corporation:
    (1) The names and addresses of all persons owning stock in the 
corporation at any time during the taxable year;
    (2) The number of shares of stock owned by each shareholder at all 
times during the taxable year;
    (3) The amount of money and other property distributed by the 
corporation during the taxable year to each shareholder;
    (4) The date of each distribution of money and other property; and

[[Page 549]]

    (5) Such other information as is required by the form or by the 
instructions issued with respect to such form.
    (b) Time and place for filing return. The return shall be filed on 
or before the 15th day of the third month following the close of the 
taxable year with the internal revenue officer designated in the 
instructions applicable to Form 1120-S. (See section 6072.)
    (c) Other provisions. The return on Form 1120-S will be treated as a 
return filed by the corporation under section 6012, relating to persons 
required to make returns of income, for purposes of the provisions of 
chapter 66 of the Code, relating to limitations. Thus, for example, the 
period of limitation on assessment and collection of any corporate tax 
found to be due upon a subsequent determination that the corporation was 
not entitled to the benefits of subchapter S, chapter 1 of the Code, 
will run from the date of filing the return under section 6037, or from 
the date prescribed for filing such return, whichever is the later.
    (d) Penalties. For criminal penalties for failure to file a return, 
supply information, or pay tax, and for filing a false or fraudulent 
return, statement, or other document, see sections 7203, 7206, and 7207.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7012, 34 FR 
7690, May 15, 1969]



Sec. 1.6038-1   Information returns required of domestic corporations with respect to annual accounting periods of certain foreign corporations beginning before 
          January 1, 1963.

    (a) Requirement of return. For taxable years beginning after 
December 31, 1960, every domestic corporation shall make a separate 
annual information return on Form 2952, in duplicate, with respect to 
each foreign corporation which it controls, as defined in paragraph (b) 
of this section, and with respect to each foreign subsidiary, as defined 
in paragraph (c) of this section, for each annual accounting period 
(described in paragraph (d) of this section) of each such controlled 
foreign corporation or foreign subsidiary beginning after December 31, 
1960, and before January 1, 1963. Such information shall not be required 
to be furnished, however, with respect to a corporation defined in 
section 1504(d) of the Code which makes a consolidated return for the 
taxable year. For annual accounting periods beginning after December 31, 
1962, see Sec. 1.6038-2.
    (b) Control. A domestic corporation shall be deemed to be in control 
of a foreign corporation if at any time during its taxable year it owns 
more than 50 percent of the voting stock of such foreign corporation.
    (c) Foreign subsidiary. A foreign corporation more than 50 percent 
of the voting stock of which is owned by a controlled foreign 
corporation at any time during the annual accounting period of such 
controlled foreign corporation shall be considered a foreign subsidiary.
    (d) Period covered by return--(1) Controlled foreign corporation. 
The information with respect to a controlled foreign corporation shall 
be furnished for its annual accounting period ending with or within the 
domestic corporation's taxable year.
    (2) Foreign subsidiary. The information with respect to a foreign 
subsidiary shall be furnished for such subsidiary's annual accounting 
period ending with or within the controlled foreign corporation's annual 
accounting period.
    (3) Annual accounting period defined. For purposes of this section, 
the annual accounting period of a controlled foreign corporation or of a 
foreign subsidiary is the annual period on the basis of which the 
controlled foreign corporation or foreign subsidiary regularly computes 
its income in keeping its books. The term ``annual accounting period'' 
may refer to a period of less than 1 year, where for example the foreign 
income, war profits, and excess profits taxes are determined on the 
basis of an accounting period of less than 1 year as described in 
section 902(c)(2).
    (e) Contents of return. The return on Form 2952 shall contain the 
following information with respect to each controlled corporation and 
each foreign subsidiary:
    (1) The name and address of the corporation;

[[Page 550]]

    (2) The principal place of business of the corporation;
    (3) The date of incorporation and the country under whose laws 
incorporated;
    (4) The nature of the corporation's business;
    (5) As regards the outstanding stock of the corporation:
    (i) A description of each class of the corporation's stock, and
    (ii) The number of shares of each class outstanding at the beginning 
and the end of the annual accounting period;
    (6) A list showing the name and address of, and the number of shares 
of each class of the corporation's stock held by, each citizen or 
resident of the United States, and each domestic corporation, who is a 
shareholder of record owning at any time during the annual accounting 
period 5 percent or more in value of any class of the corporation's 
outstanding stock;
    (7) The amount of the corporation's gross receipts, net profits 
before taxes and provision for foreign income taxes, for the annual 
accounting period, as reflected on the financial statements required 
under paragraph (f) of this section to be filed with the return; and
    (8) A summary showing the total amount of each of the following 
types of transactions of the corporation, which took place during the 
annual accounting period, with the domestic corporation or any 
shareholder of the domestic corporation owning at the time of the 
transaction 10 percent or more of the value of any class of stock 
outstanding of the domestic corporation:
    (i) Sales and purchases of stock in trade;
    (ii) Purchases of property of a character which is subject to the 
allowance for depreciation;
    (iii) Compensation paid and compensation received for the rendition 
of technical, managerial, engineering, construction, scientific, or like 
services;
    (iv) Commissions paid and commissions received;
    (v) Rents and royalties paid and rents and royalties received;
    (vi) Amounts loaned and amounts borrowed (other than open accounts 
which arise and are collected in the ordinary course of business);
    (vii) Dividends paid and dividends received;
    (viii) Interest paid and interest received; and
    (ix) Premiums received for insurance or reinsurance.

If the domestic corporation is a bank, as defined in section 581, or is 
controlled within the meaning of section 368(c) by a bank, the term 
``transactions'' shall not, as to a corporation with respect to which a 
return is filed, include banking transactions entered into on behalf of 
customers; in any event, however, deposits in accounts between a 
controlled foreign corporation or a foreign subsidiary and the domestic 
corporation or a 10-percent shareholder described in this subparagraph 
and withdrawals from such accounts shall be summarized by reporting end-
of-month balances.
    (f) Financial statements. The following information with respect to 
each controlled foreign corporation and each foreign subsidiary shall be 
attached to and filed as part of the return required by this section:
    (1) A statement of the corporation's profit and loss for the annual 
accounting period;
    (2) A balance sheet as of the end of the annual accounting period of 
the corporation showing:
    (i) The corporation's assets,
    (ii) The corporation's liabilities, and
    (iii) The corporation's net worth; and
    (3) An analysis of changes in the corporation's surplus accounts 
during the annual accounting period including both opening and closing 
balances.

The statements listed in subparagraphs (1), (2), and (3) of this 
paragraph shall be prepared in conformity with generally accepted 
accounting principles, and in such form and detail as is customary for 
the corporation's accounting records.
    (g) Method of reporting. All amounts furnished under paragraphs (e) 
and (f) of this section shall be expressed in United States currency 
with a statement of the exchange rates used.
    (h) Time and place for filing return. Returns on Form 2952 required 
under paragraph (a) of this section shall be filed with the domestic 
corporation's

[[Page 551]]

income tax return on or before the fifteenth day of the third month 
following the close of such corporation's taxable year.
    (i) Extensions of time for filing. District directors are authorized 
to grant reasonable extensions of time for filing returns on Form 2952 
in accordance with the applicable provisions of Sec. 1.6081-1. An 
application by a domestic corporation for an extension of time for 
filing a return of income shall also be considered as an application for 
an extension of time for filing returns on Form 2952.
    (j) Failure to furnish information--(1) Effect on foreign tax 
credit. (i) Failure by a domestic corporation to furnish, in accordance 
with the provisions of this section, any return or any information in 
any return, required to be filed for a taxable year under authority of 
section 6038 on or before the date prescribed in paragraph (h) of this 
section (determined with regard to any extension of time for such 
filing) shall affect the application of section 902 as provided in 
subparagraph (2) of this paragraph. Such failure shall affect the 
application of section 902 to such domestic corporation or to any person 
who acquires from any person any portion (but only to the extent of such 
portion) of the interest of such domestic corporation in any controlled 
foreign corporation or foreign subsidiary.
    (ii) Where the domestic corporation, having filed the return 
required by this section except for an omission of, or error with 
respect to, some of the information referred to in paragraphs (e) and 
(f) of this section, establishes to the satisfaction of the Commissioner 
that such omission or error was inadvertent or for reasonable cause and 
that such domestic corporation has substantially complied with this 
section, such omission or error shall not constitute a failure under 
this section.
    (2) Reduction of foreign taxes. In the application of section 902 to 
the domestic corporation or person referred to in subparagraph (1)(i) of 
this paragraph for any taxable year, the amount of taxes paid or deemed 
paid by each controlled foreign corporation and each foreign subsidiary 
for the accounting period or periods for which the domestic corporation 
was required for the taxable year of the failure to furnish information 
under this section shall be reduced by 10 percent. The 10 percent 
reduction is not limited to the taxes paid or deemed paid by the 
controlled foreign corporation or foreign subsidiary with respect to 
which there is a failure to file information but shall apply to the 
taxes paid or deemed paid by all controlled foreign corporations and 
foreign subsidiaries.
    (3) Reduction for continued failure. (i) If the failure, referred to 
in subparagraph (1)(i) of this paragraph, continues for 90 days or more 
after date of written notice by the district director to the domestic 
corporation, then the amount of the reduction referred to in 
subparagraph (2) of this paragraph shall be 10 percent plus an 
additional 5 percent for each 3-month period, or fraction thereof, 
during which such failure continues after the expiration of such 90-day 
period.
    (ii) Taxes paid by a foreign subsidiary when once reduced for a 
failure shall not be reduced again for the same failure in their status 
as taxes deemed paid by a controlled foreign corporation. Where a 
failure continues, each additional periodic 5 percent reduction, 
referred to in subdivision (i) of this subparagraph, shall be considered 
as part of the one reduction.
    (4) Reasonable cause. (i) For purposes of subsection (b) of section 
6038 and this section the time prescribed for furnishing information 
under this paragraph, and the beginning of the 90-day period after 
notice by the district director, shall be treated as being not earlier 
than the last day on which (as shown to the satisfaction of the district 
director) reasonable cause existed for failure to furnish such 
information.
    (ii) A domestic corporation, which wishes to avoid a reduction in 
foreign tax credit as provided in subparagraphs (2) and (3) of this 
paragraph for failure to furnish information in accordance with this 
section, must make an affirmative showing of all facts alleged as a 
reasonable cause for such failure in the form of a written statement 
containing a declaration that it is made under the penalties of perjury.
    (5) Penalties. The information required by section 6038 of the Code 
must be furnished even though there are no

[[Page 552]]

foreign taxes which would be reduced under the provisions of 
subparagraph (2) of this paragraph. For criminal penalties for failure 
to file a return and filing a false or fraudulent return, see sections 
7203, 7206, and 7207 of the Code.

[T.D. 6506, 25 FR 12241, Nov. 30, 1960, as amended by T.D. 6621, 27 FR 
11878, Dec. 1, 1962]



Sec. 1.6038-2  Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations beginning after 
          December 31, 1962.

    (a) Requirement of return. Every U.S. person shall make a separate 
annual information return with respect to each annual accounting period 
(described in paragraph (e) of this section) beginning after December 
31, 1962, of each foreign corporation which that person controls (as 
defined in paragraph (b) of this section) for an uninterrupted period of 
30 days or more during such annual accounting period. Such information 
shall not be required to be furnished, however, with respect to a 
corporation defined in section 1504(d) of the Code which makes a 
consolidated return for the taxable year. The return shall be made, with 
respect to annual accounting periods ending with or within the United 
States person's taxable year, on--
    (1) Form 2952 if such taxable year ends before December 31, 1982,
    (2) Form 5471 if such taxable year ends on or after December 31, 
1983, or
    (3) Either Form 5471 or Form 2952 if such taxable year ends on or 
after December 31, 1982 and before December 31, 1963.
    (b) Control. A person shall be deemed to be in control of a foreign 
corporation if at any time during that person's taxable year it owns 
stock possessing more than 50 percent of the total combined voting power 
of all classes of stock entitled to vote, or more than 50 percent of the 
total value of shares of all classes of stock of the foreign 
corporation. A person in control of a corporation which, in turn, owns 
more than 50 percent of the combined voting power, or of the value, of 
all classes of stock of another corporation is also treated as being in 
control of such other corporation. The provisions of this paragraph may 
be illustrated by the following example:

    Example. Corporation A owns 51 percent of the voting stock in 
Corporation B. Corporation B owns 51 percent of the voting stock in 
Corporation C. Corporation C in turn owns 51 percent of the voting stock 
in Corporation D. Corporation D is controlled by Corporation A.

    (c) Attribution rules. For the purpose of determining control of 
domestic or foreign corporations the constructive ownership rules of 
section 318(a) shall apply except that:
    (1) Stock owned by or for a partner or a beneficiary of an estate or 
trust shall not be considered owned by the partnership, estate, or trust 
when the effect is to consider a United States person as owning stock 
owned by a person who is not a United States person;
    (2) A corporation will not be considered as owning stock owned by or 
for a 50 percent or more shareholder when the effect is to consider a 
United States person as owning stock owned by a person who is not a 
United States person; and
    (3) If 10 percent or more in value of the stock in a corporation is 
owned, directly or indirectly, by or for any person, section 
318(a)(2)(C) shall apply.

The constructive ownership rules of section 318(a) apply only for 
purposes of determining control as defined in paragraph (b) of this 
section.
    (d) U.S. person. For purposes of section 6038 and this section, the 
term ``United States person'' has the meaning assigned to it by section 
7701(a)(30) of the Code, except that--
    (1) With respect to a corporation organized under the laws of the 
Commonwealth of Puerto Rico, such term does not include an individual 
who is a bona fide resident of Puerto Rico, if a dividened received by 
such individual during the taxable year from such corporation would be 
excluded from gross income under section 933(1),
    (2) With respect to a corporation organized under the laws of the 
Virgin Islands, such term does not include an individual who is a bona 
fide resident of the Virgin Islands and whose income tax obligation 
under Subtitle A (relating to income taxes) of the Code for the taxable 
year is satisfied pursuant to

[[Page 553]]

section 28(a) of the Revised Organic Act of the Virgin Islands, approved 
July 22, 1954 (48 U.S.C. 1642), by paying tax on income derived from all 
sources both within and outside the Virgin Islands into the treasury of 
the Virgin Islands,
    (3) With respect to a corporation organized under the laws of Guam 
or the Northern Mariana Islands, such term does not include an 
individual who is a bona fide resident of Guam or the Northern Mariana 
Islands, respectively, and who is relieved of liability for income tax 
to the United States under section 935(c)(3) of the Code or section 601 
of the Covenant to Establish a Commonwealth of the Northern Mariana 
Islands in Political Union with the United States of America (Pub. L. 
94-241), respectively, for such individual's taxable year referred to in 
paragraph (e) of this section, and
    (4) With respect to a corporation organized under the laws of any 
possession of the United States (other than Guam, the Northern Mariana 
Islands, Puerto Rico, or the Virgin Islands), such term does not include 
an individual who is a bona fide resident of such possession for the 
entire taxable year and whose income derived from sources within any 
possession of the United States is not, by reason of section 931(a), 
includible in gross income under subtitle A (relating to income taxes) 
of the Code for the taxable year.
    (5) For taxable years ending after December 31, 1987, with respect 
to a corporation organized under the laws of American Samoa, the term 
does not include an individual who is a bona fide resident of American 
Samoa, provided--
    (i) 80 percent or more of the gross income of the corporation for 
the 3-year period ending at the close of the taxable year (or for such 
part of such period as such corporation or any predecessor has been in 
existence) was derived from sources within American Samoa or was 
effectively connected with the conduct of a trade or business in 
American Samoa; and
    (ii) 50 percent or more of the gross income of such corporation for 
such period (or part) was derived from the conduct of an active trade or 
business within American Samoa.

An individual for whom an election under section 6013 (g) or (h) is in 
effect shall, subject to the exceptions contained in this paragraph (d), 
be considered a United States person for purposes of section 6038 and 
this section.
    (e) Period covered by return. The information required under 
paragraphs (f) and (g) of this section with respect to a foreign 
corporation shall be furnished for the annual accounting period of the 
foreign corporation ending with or within the United States person's 
taxable year. For purposes of this section, the annual accounting period 
of a foreign corporation is the annual period on the basis of which that 
corporation regularly computes its income in keeping its books. In the 
case of a specified foreign corporation (as defined in section 898), the 
taxable year of such corporation shall be treated as its annual 
accounting period. The term annual accounting period may refer to a 
period of less than one year, where, for example, the foreign income, 
war profits, and excess profits taxes are determined on the basis of an 
accounting period of less than one year as described in section 
902(c)(5). If more than one annual accounting period ends with or within 
the United States person's taxable year, separate annual information 
returns shall be submitted for each annual accounting period.
    (f) Contents of return. The return on Form 2952 or Form 5471 shall 
contain so much of the following information, and in such form or 
manner, as the form shall prescribe with respect to each foreign 
corporation:
    (1) The name, address, and employer identification number, if any, 
of the corporation;
    (2) The principal place of business of the corporation;
    (3) The date of incorporation and the country under whose laws 
incorporated;
    (4) The name and address of the foreign corporation's statutory or 
resident agent in the country of incorporation;
    (5) The name, address, and identifying number of any branch office 
or agent of the foreign corporation located in the United States;
    (6) The name and address of the person (or persons) having custody 
of the

[[Page 554]]

books of account and records of the foreign corporation, and the 
location of such books and records if different from such address;
    (7) The nature of the corporation's business and the principal 
places where conducted;
    (8) As regards the outstanding stock of the corporation--
    (i) A description of each class of the corporation's stock, and
    (ii) The number of shares of each class outstanding at the beginning 
and end of the annual accounting period;
    (9) A list showing the name, address, and identifying number of, and 
the number of shares of each class of the corporation's stock held by, 
each United States person who is a shareholder owning at any time during 
the annual accounting period 5 percent or more in value of any class of 
the corporation's outstanding stock;
    (10) For the annual accounting period, the amount of the 
corporation's:
    (i) Current earnings and profits;
    (ii) Foreign income, war profits, and excess profits taxes paid or 
accrued;
    (iii) Distributions out of current earnings and profits for the 
period;
    (iv) Distributions other than those described in paragraph 
(f)(10)(iii) of this section and the source thereof; and
    (v) For Forms 5471 filed for taxable years ending after December 15, 
1990, such earnings and profits information as the form shall prescribe, 
including post-1986 undistributed earnings described in section 
902(c)(1), pre-1987 amounts, total earnings and profits, and previously 
taxed earnings and profits described in section 959(c); and
    (11) A summary showing the total amount of each of the following 
types of transactions of the corporation, which took place during the 
annual accounting period, with the person required to file this return, 
any other corporation controlled by that person, or any United States 
person owning at the time of the transaction 10 percent or more in value 
of any class of stock outstanding of the foreign corporation, or of any 
corporation controlling that foreign corporation:
    (i) Sales and purchases of stock in trade;
    (ii) Purchases of tangible property other than stock in trade;
    (iii) Sales and purchases of patents, inventions, models, or designs 
(whether or not patented), copyrights, trademarks, secret formulas or 
processes, or any other similar property rights;
    (iv) Compensation paid and compensation received for the rendition 
of technical, managerial, engineering, construction, scientific, or like 
services;
    (v) Commission paid and commissions received;
    (vi) Rents and royalties paid and rents and royalties received;
    (vii) Amount loaned and amounts borrowed (except open accounts 
resulting from sales and purchases reported under other items listed in 
this paragraph (f)(11) that arise and are collected in full in the 
ordinary course of business);
    (viii) Dividends paid and dividends received;
    (ix) Interest paid and interest received; and
    (x) Premiums received for insurance or reinsurance.

For purposes of this paragraph (f)(11), if the United States person is a 
bank, as defined in section 581, or is controlled within the meaning of 
section 368(c) by a bank, the term ``transactions'' shall not, as to a 
corporation with respect to which a return is filed, include banking 
transactions entered into on behalf of customers; in any event, however, 
deposits in accounts between a foreign corporation, controlled (within 
the meaning of paragraph (b) of this section) by a United States person, 
and a person described in this paragraph (f)(11) and withdrawals from 
such accounts shall be summarized by reporting end-of-month balances.
    (g) Financial statements. The following information with respect to 
the foreign corporation shall be attached to and filed as part of the 
return required by this section. Forms 5471 filed after September 30, 
1991, shall contain this information in such form or manner as the form 
shall prescribe with respect to each foreign corporation:
    (1) A statement of the corporation's profit and loss for the annual 
accounting period;
    (2) A balance sheet as of the end of the annual accounting period of 
the corporation showing--

[[Page 555]]

    (i) The corporation's asset;
    (ii) The corporation's liabilities; and
    (iii) The corporation's net worth; and
    (3) An analysis of changes in the corporation's surplus accounts 
during the annual accounting period including both opening and closing 
balances.

The information listed in this paragraph (g) shall be prepared in 
conformity with generally accepted accounting principles, and in such 
detail as is customary for the corporation's accounting records.
    (h) Method of reporting. Except as provided in this paragraph (h), 
all amounts furnished under paragraphs (f) and (g) of this section shall 
be expressed in United States dollars with a statement of the exchange 
rates used. The following rules shall apply for taxable years ending 
after December 31, 1994, with respect to returns filed after December 
31, 1995. All amounts furnished under paragraph (g) of this section 
shall be expressed in United States dollars computed and translated in 
conformity with United States generally accepted accounting principles. 
Amounts furnished under paragraph (g)(1) of this section shall also be 
furnished in the foreign corporation's functional currency as required 
on the form. Earnings and profits amounts furnished under paragraphs 
(f)(10) (i), (iii), (iv), and (v) of this section shall be expressed in 
the foreign corporation's functional currency except to the extent the 
form requires specific items to be translated into United States 
dollars. Tax amounts furnished under paragraph (f)(10)(ii) of this 
section shall be furnished in the foreign currency in which the taxes 
are payable and in United States dollars translated in accordance with 
section 986(a). All amounts furnished under paragraph (f)(11) of this 
section shall be expressed in U.S. dollars translated from functional 
currency at the weighted average exchange rate for the year as defined 
in Sec. 1.989(b)-1. The foreign corporation's functional currency is 
determined under section 985. All statements submitted on or with the 
return required under this section shall be rendered in the English 
language.
    (i) Time and place for filing return. Returns on Form 2952 or Form 
5471 required under paragraph (a) of this section shall be filed with 
the United States person's income tax return on or before the date 
required by law for the filing of that person's income tax return. 
District directors and directors of service centers are authorized to 
grant reasonable extensions of time for filing returns on Form 2952 or 
Form 5471 in accordance with the applicable provisions of Sec. 1.6081-1 
of this chapter. An application for an extension of time for filing a 
return of income shall also be considered as an application for an 
extension of time for filing returns on Form 2952 or Form 5471.
    (j) Two or more persons required to submit the same information--(1) 
Return jointly made. If two or more persons are required to furnish 
information with respect to the same foreign corporation for the same 
period, such persons may, in lieu of making separate returns, jointly 
make one return. Such joint return shall be filed with the income tax 
return of any one of the persons making such joint return.
    (2) Persons excepted from furnishing information--(i) Conditions. 
Any person required to furnish information under this section with 
respect to a foreign corporation need not furnish that information 
provided all of the following conditions are met:
    (A) Such person does not directly own an interest in the foreign 
corporation;
    (B) Such person is required to furnish the information solely by 
reason of attribution of stock ownership from a United States person 
under paragraph (c) of this section; and
    (C) The person from whom the stock ownership is attributed furnishes 
all of the information required under this section of the person to whom 
the stock ownership is attributed.
    (ii) Illustrations. The rule of this paragraph (j)(2) is illustrated 
by the following examples:

    Example (1). A, a U.S. person owns 100 percent of the stock of M, a 
domestic corporation. A also owns 100 percent of the stock of N, a 
foreign corporation organized under the laws of foreign country Y. A, in 
filing the information return required by this section with respect to N 
Corporation, in fact furnishes all of the information required of M 
Corporation with respect to N Corporation. M Corporation need not file 
the information.

[[Page 556]]

    Example (2). X, a domestic corporation owns 100 percent of the stock 
of Y, a domestic corporation, Y Corporation owns 100 percent of the 
stock of Z, a foreign corporation. X Corporation is not excused by this 
paragraph (j)(2) from filing information with respect to Z Corporation 
because X Corporation is deemed to control Z Corporation under the 
provisions of paragraph (b) of this section without recourse to the 
attribution rules in paragraph (c) of this section.

    (3) Statement required. Any United States person required to furnish 
information under this section with his return who does not do so by 
reason of the provisions of paragraph (j)(1) or (2) of this section 
shall file a statement with his income tax return indicating that such 
liability has been (or, in the case of a joint return made under 
paragraph (j)(1) of this section, will be) satisfied and identifying the 
return with which the information was or will be filed and the place of 
filing.
    (k) Failure to furnish information--(1) Dollar amount penalty--(i) 
In general. If any person required to file Form 2952 or Form 5471 under 
section 6038 and this section fails to furnish any information described 
in paragraphs (f) and (g) of this section within the time prescribed by 
paragraph (i) of this section, such person shall pay a penalty of $1,000 
for each annual accounting period of each foreign corporation with 
respect to which such failure occurs.
    (ii) Increase in penalty for continued failure after notification. 
If a failure described in paragraph (k)(1)(i) of this section continues 
for more than 90 days after the date on which the district director 
mails notice of such failure to the person required to file Form 2952 or 
Form 5471, such person shall pay a penalty of $1,000, in addition to the 
penalty imposed by section 6038(b)(1) and paragraph (k)(1)(i) of this 
section, for each 30-day period (or fraction thereof) during which such 
failure continues after such 90-day period has expired. The additional 
penalty imposed by section 6038(b)(2) and this paragraph (k)(1)(ii) 
shall be limited to a maximum of $24,000 for each failure.
    (iii) Effective date. The penalty imposed by section 6038(b) and 
this paragraph (k)(1) shall apply with respect to information for annual 
accounting periods ending after September 3, 1982.
    (2) Penalty of reducing foreign tax credit--(i) Effect on foreign 
tax credit. Failure of a United States person to furnish, in accordance 
with the provisions of this section, any return or any information in 
any return, required to be filed for a taxable year under authority of 
section 6038 on or before the date prescribed in paragraph (i) of this 
section may affect the application of section 901 as provided in 
paragraph (k)(2)(ii) of this section and may affect the application of 
sections 902 and 960 as provided in paragraph (k)(2)(iii) of this 
section. Such failure may affect the application of sections 902 and 960 
to any such United States person which is a corporation or to any person 
who acquires from any other person any portion (but only to the extent 
of such portion) of the interest of such other person in any such 
foreign corporation.
    (ii) Application of section 901. In the application of section 901 
to a United States person referred to in paragraph (k)(2)(i) of this 
section, the amount of taxes paid or deemed paid by such person for any 
taxable year, with or within which the annual accounting peroid of a 
foreign corporation for which such person failed to furnish information 
required under this section ended, may be reduced by 10 percent. 
However, no tax reduced under paragraph (k)(2)(iii) of this section or 
deemed paid under section 904(c) shall be reduced under the provisions 
of this paragraph (k)(2)(ii).
    (iii) Application of sections 902 and 960. In the application of 
sections 902 and 960 to a United States person referred to in paragraph 
(k)(2)(i) of this section for any taxable year, the amount of taxes paid 
or deemed paid by each foreign corporation for the accounting period or 
periods for which such person was required for the taxable year of the 
failure to furnish information under this section may be reduced by 10 
percent. The 10-percent reduction is not limited to the taxes paid or 
deemed paid by the foreign corporation with respect to which there is a 
failure to file information but may apply to the taxes paid or deemed 
paid by all foreign corporations controlled by that person. In applying 
subsections (a) and (b) of section 902, and in applying subsection (a) 
of section 960, the reduction

[[Page 557]]

provided by this paragraph (k)(2) shall not apply for purposes of 
determining the amount of accumulated profits in excess of income, war 
profits, and excess profits taxes.
    (iv) Reduction for continued failure after notice. (A) If the 
failure referred to in paragraph (k)(2)(i) of this section continues for 
more than 90 days after the date on which the district director mails 
notice of such failure to such United States person, then the amount of 
the reduction referred to in paragraphs (k)(2) (ii) and (iii) of this 
section may be 10 percent plus an additional 5 percent for each 3-month 
period, or fraction thereof, during which such failure continues after 
the expiration of such 90-day period.
    (B) No taxes shall be reduced under this paragraph (k)(2) more than 
once for the same failure. Taxes paid by a foreign corporation when once 
reduced for a failure shall not be reduced again for the same failure in 
their status as taxes deemed paid by a corporate shareholder. Where a 
failure continues, each additional periodic 5-percent reduction, 
referred to in paragraph (k)(2)(iv)(A) of this section, shall be 
considered as part of the one reduction.
    (v) Limitation on reduction of foreign tax credit. The amount of the 
reduction under this paragraph (k)(2) for each failure to furnish 
information with respect to a foreign corporation as required under this 
section shall not exceed the greater of:
    (A) $10,000, or
    (B) The income of the foreign corporation for its annual accounting 
period with respect to which the failure occurs. For purposes of this 
section if a person is required to furnish information with respect to 
more than one foreign corporation, controlled (within the meaning of 
paragraph (b) of this section) by that person, each failure to submit 
information for each such corporation constitutes a separate failure.
    (vi) Offset for dollar amount penalty imposed. The total amount of 
the reduction or reductions which, but for this paragraph (k)(2)(vi), 
may be made under this paragraph (k)(2) with respect to any separate 
failure, shall not exceed the maximum amount of such reductions which 
may be imposed, reduced (but not below zero) by the amount of the dollar 
amount penalty imposed by paragraph (k)(1) of this section with respect 
to such separate failure.
    (3) Reasonable cause. (i) For purposes of section 6038 (b) and (c) 
and this section, the time prescribed for furnishing information under 
paragraph (i) of this section, and the beginning of the 90-day period 
after mailing of notice by the district director under paragraphs 
(k)(1)(ii) and (2)(iv)(A) of this section, shall be treated as being not 
earlier than the last day on which reasonable cause existed for failure 
to furnish the information.
    (ii) To show that reasonable cause existed for failure to furnish 
information as required by section 6038 and this section, the person 
required to report such information must make an affirmative showing of 
all facts alleged as reasonable cause for such failure in a written 
statement containing a declaration that it is made under the penalties 
of prejury. The statement must be filed with the district director for 
the district or the director of the service center where the return is 
required to be filed. The district director or the director of the 
service center shall determine whether the failure to furnish 
information was due to reasonable cause, and if so, the period of time 
for which such reasonable cause existed. In the case of a return that 
has been filed as required by this section except for an omission of, or 
error with respect to, some of the information required, if the person 
who filed the return establishes to the satisfaction of the district 
director or the director of the service center that the person has 
substantially complied with this section, then the omission or error 
shall not constitute a failure under this section.
    (4) Other penalties. The information required by section 6038 and 
this section must be furnished even though there are no foreign taxes 
which would be reduced under the provisions of this section, and even 
though the information required may not affect the amount of any tax due 
under the Internal Revenue Code. For criminal penalties for failure to 
file a return and filing a false or fraudulent return, see sections 
7203, 7206, and 7207 of the Code.

[[Page 558]]

    (5) Illustrations. The provisions of this paragraph may be 
illustrated by the following examples.

    Example (1). M, a domestic corporation owns 100 percent of the stock 
of N, a foreign corporation. Both M and N use the calendar year as a 
taxable year and annual accounting period, and all of the following 
events occur in or with respect to the 1980 taxable year. The dividend 
from N is the only dividend from a foreign corporation received by M 
during the taxable year, and the foreign taxes listed are the only 
foreign taxes paid or deemed paid by M and N for the taxable year. On 
March 15, 1981, M filed its income tax return and paid its income tax, 
but M did not file Form 2952 with respect to N's 1980 annual accounting 
period. On June 1, 1961, the district director mailed notice to M of M's 
failure to file Form 2952 with respect to N. On November 30, 1981, M 
filed a complete Form 2952 with respect to N's 1980 annual accounting 
period.

(a) Gains, profits, and income of N........................     $100,000
(b) Foreign tax paid by N with respect to such gains,                   
 profits, and income.......................................       40,000
(c) Reduction of foreign tax paid by N (for purposes of M's             
 section 902 deemed paid credit) resulting from M's failure             
 to file information with respect to N as required under                
 section 6038(a) and this section: failure to file within               
 the time prescribed in paragraph (i) of this section, 10-              
 percent reduction; continued failure for one additional 3-             
 month period after 90-day period after notice mailed, 5-               
 percent reduction; total reduction, 15 percent ($40,000                
 times 15 percent).........................................        6,000
(d) Foreign tax paid by N after section 6038(c)(1)(B)                   
 reduction.................................................       34,000
(e) Dividend paid by N to M................................       45,000
(f) Accumulated profits of N as defined in section                      
 902(c)(1) (determined without regard to the section                    
 6038(c)(1)(B) reduction)..................................      100,000
(g) Accumulated profits of N as described in section 902(a)             
 (determined without regard to the section 6038(c)(1)(B)                
 reduction)................................................       60,000
(h) For purposes of the section 902 credit, M is deemed to              
 have paid the same proportion of foreign taxes paid                    
 (reduced as provided under section 6038(c)) with respect               
 to the accumulated profits described in section 902(a)                 
 (determined without regard to the reduction provided under             
 section 6038(c)) as the amount of the dividend (determined             
 without regard to section 78) bears to such amount of                  
 accumulated profits.......................................       25,500
                                                                        

                            (45,00060,000) x 34,000=25,500......
M must include $25,500 in gross income as a dividend under the 
provisions of section 78 of the Code. This example illustrates that the 
reductions in foreign taxes paid by the foreign corporation provided 
under section 8038(c) are taken into account in determining the amount 
included in gross income of the domestic corporation under section 78 of 
the Code as foreign taxes deemed paid, but such reductions are not taken 
into account in computing accumulated profits for purposes of 
determining the portion of foreign taxes deemed paid with respect to a 
particular dividend. The dollar amount penalty imposed by section 8038 
(b) and paragraph (k)(1) of this section does not apply with respect to 
information for annual accounting periods ending before September 4, 
1982, and therefore does not apply to M with respect to M's failure to 
file Form 2952 in this example.
    Example (2). The facts are the same as in example (1) except that 
all of the events occur in or with respect to the 1982 taxable year. On 
March 15, 1983. M filed its income tax return and paid its income tax, 
but M did not file Form 2952 or Form 5471 with respect to N's 1982 
annual accounting period. On June 1, 1983, the district director mailed 
notice to M of M's failure to file Form 2952 or Form 5471 with respect 
to N. On November 30, 1983, M filed a complete Form 5471 with respect to 
N's 1982 annual accounting period. Under paragraph (k)(1)(i) of this 
section, M is subject to a penalty of $1,000. Under paragraph (k)(1)(ii) 
of this section, that penalty is increased by $4,000 because the failure 
continued for 92 days (three full 30-day periods and a fraction of a 
fourth 30-day period) after the end of the 90-day period following 
mailing of the notice by the district director, bringing M's dollar 
amount penalty under paragraph (k)(1) of this section to $5,000. For 
purpose of determining the foreign tax credit available to M, there may 
be imposed a reduction of foreign tax paid by N of $6,000, which would 
be the total of reductions under paragraph (k)(2) of this section with 
respect to M's failure to file under section 6038 for N's 1982 annual 
accounting period, before application of paragraph (k)(2)(vi) of this 
section. Under said paragraph (k)(2)(vi), the amount of the foreign tax 
reduction imposed is reduced by the amount of the dollar amount penalty, 
leaving a foreign tax reduction penalty of $1,000 which may be imposed 
in addition to the $5,000 dollar amount penalty. If imposed, the $1,000 
tax reduction would then be applied in the calculation of

[[Page 559]]

taxes deemed paid by M under section 902 as in example (1), items (c), 
(d), and (h).

[T.D. 8040, 50 FR 30163, July 24, 1985, as amended by T.D. 8573, 59 FR 
64302, Dec. 14, 1994]



Sec. 1.6038A-0  Table of contents.

    This section lists the captions that appear in the regulations under 
section 6038A.

           Sec. 1.6038A-1 General requirements and definitions

(a) Purpose and scope.
(b) In general.
(c) Reporting corporation.
(1) In general.
(2) 25-percent foreign-owned.
(3) 25-percent foreign shareholder.
(i) In general.
(ii) Total voting power and value.
(iii) Direct 25-percent foreign shareholder.
(iv) Indirect 25-percent foreign shareholder.
(4) Application to prior open years.
(5) Exceptions.
(i) Treaty country residents having no permanent establishment.
(ii) Qualified exempt shipping income.
(iii) Status as a foreign related party.
(d) Related party.
(e) Attribution rules.
(1) Attribution under section 318.
(2) Attribution of transactions with related parties engaged in by a 
          partnership.
(f) Foreign person.
(g) Foreign related party.
(h) Small corporation exception.
(i) Safe harbor for reporting corporations with related party 
          transactions of de minimis value.
(1) In general.
(2) Aggregate value of gross payments made or received.
(j) Related reporting corporations.
(k) Consolidated return groups.
(1) Required information.
(2) Maintenance of records and authorization of agent.
(3) Monetary penalties.
(l) District Director.
(m) Examples.
(n) Effective dates.
(1) Section 1.6038A-1.
(2) Section 1.6038A-2.
(3) Section 1.6038A-3.
(4) Section 1.6038A-4.
(5) Section 1.6038A-5.
(6) Section 1.6038A-6.
(7) Section 1.6038A-7.

                  Sec. 1.6038A-2 Requirement of return

(a) Form 5472 required.
(1) In general.
(2) Reportable transaction.
(b) Contents of return.
(1) Reporting corporation.
(2) Related party.
(3) Foreign related party transactions for which only monetary 
          consideration is paid or received by the reporting 
          corporation.
(4) Foreign related party transactions involving nonmonetary 
          consideration or less than full consideration.
(5) Additional information.
(6) Reasonable estimate.
(i) Estimate within 25 percent of actual amount.
(ii) Other estimates.
(7) Small amounts.
(8) Accrued payments and receipts.
(c) Method of reporting.
(d) Time and place for filing returns.
(e) Untimely filed return.
(f) Exceptions.
(1) No reportable transactions.
(2) Transactions solely with a domestic reporting corporation.
(3) Transactions with a corporation subject to reporting under section 
          6038.
(4) Transactions with a foreign sales corporation.
(g) Filing Form 5472 when transactions with related parties engaged in 
          by a partnership are attributed to a reporting corporation.
(h) Effective dates for certain reporting corporations.

                    Sec. 1.6038A-3 Record maintenance

(a) General maintenance requirements.
(1) Section 6001 and section 6038A.
(2) Safe harbor.
(3) Examples.
(b) Other maintenance requirements.
(1) Indirectly related records.
(2) Foreign related party or third-party maintenance.
(3) Translation of records.
(4) Exception for foreign governments.
(c) Specific records to be maintained for safe harbor.
(1) In general.
(2) Descriptions of categories of documents to be maintained.
(i) Original entry books and transaction records.
(ii) Profit and loss statements.
(iii) Pricing documents.
(iv) Foreign country and third party filings.
(v) Ownership and capital structure records.
(vi) Records of loans, services, and other non-sales transactions.
(3) Material profit and loss statements.
(4) Existing records test.
(5) Significant industry segment test.
(i) In general.
(ii) Form of the statements.
(iii) Special rule for component sales.
(iv) Level of specificity required.
(v) Examples.
(6) High profit test.
(i) In general.

[[Page 560]]

(ii) Return on assets test.
(iii) Additional rules.
(7) Definitions.
(i) U.S.-connected products or services.
(ii) Industry segment.
(iii) Gross revenue of an industry segment.
(iv) Identifiable assets of an industry segment.
(v) Operating profit of an industry segment.
(vi) Product.
(vii) Related products or services.
(viii) Model.
(ix) Product line.
(8) Example.
(i) Facts.
(ii) Existing records test.
(iii) Signficant industry segments.
(iv) High profit test.
(v) Material profit and loss statements.
(d) Liability for certain partnership record maintenance.
(e) Agreements with the District Director or the Assistant Commissioner 
          (International).
(1) In general.
(2) Content of agreement.
(i) In general.
(ii) Significant industry segment test.
(iii) Example.
(3) Circumstances of agreement.
(4) Agreement as part of APA process.
(f) U.S. maintenance.
(1) General rule.
(2) Non-U.S. maintenance requirements.
(3) Prior taxable years.
(4) Scheduled production for high volume or other reasons.
(5) Required U.S. maintenance.
(g) Period of retention.
(h) Application of record maintenance rules to banks and other financial 
          institutions. [Reserved]
(i) Effective dates.

                     Sec. 1.6038A-4 Monetary penalty

(a) Imposition of monetary penalty.
(1) In general.
(2) Liability for certain partnership transactions.
(3) Calculation of monetary penalty.
(b) Reasonable cause.
(1) In general.
(2) Affirmative showing required.
(i) In general.
(ii) Small corporations.
(iii) Facts and circumstances taken into account.
(c) Failure to maintain records or to cause another to maintain records.
(d) Increase in penalty where failure continues after notification.
(1) In general.
(2) Additional penalty for another failure.
(3) Cessation of accrual.
(4) Continued failures.
(e) Other penalties.
(f) Examples.
    Example (1)--Failure to file Form 5472.
Example (2)--Failure to maintain records.
(g) Effective dates.

                  Sec. 1.6038A-5 Authorization of agent

(a) Failure to authorize.
(b) Authorization by related party.
(1) In general.
(2) Authorization for prior years.
(c) Foreign affiliated groups.
(1) In general.
(2) Application of noncompliance penalty adjustment.
(d) Legal effect of authorization of agent.
(1) Agent for purposes of commencing judicial proceedings.
(2) Foreign related party found where reporting corporation found.
(e) Successors in interest.
(f) Deemed compliance.
(1) In general.
(2) Reason to know.
(3) Effect of deemed compliance.
(g) Effective dates.

              Sec. 1.6038A-6 Failure to furnish information

(a) In general.
(b) Coordination with treaties.
(c) Enforcement proceeding not required.
(d) De minimis failure.
(e) Suspension of statute of limitations.
(f) Effective dates.

                      Sec. 1.6038A-7 Noncompliance

(a) In general.
(b) Determination of the amount.
(c) Separate application.
(d) Effective dates.

[T.D. 8353, 56 FR 28060, June 19, 1991]



Sec. 1.6038A-1  General requirements and definitions.

    (a) Purpose and scope. This section and Secs. 1.6038A-2 through 
1.6038A-7 provide rules for certain foreign-owned U.S. corporations and 
foreign corporations engaged in trade or business within the United 
States (reporting corporations) relating to information that must be 
furnished, records that must be maintained, and the authorization of the 
reporting corporation to act as agent for related foreign persons for 
purposes of sections 7602, 7603, and 7604 that must be executed. Section 
6038A(a) and this section require that a reporting corporation furnish 
certain information annually and maintain certain records relating to 
transactions between the reporting corporation and certain related 
parties. This section also provides definitions of terms used

[[Page 561]]

in section 6038A. Section 1.6038A-2 provides guidance concerning the 
information to be submitted and the filing of the required return. 
Section 1.6038A-3 provides guidance concerning the maintenance of 
records. Section 1.6038A-4 provides guidance concerning the application 
of the monetary penalty for the failure either to furnish information or 
to maintain records. Section 1.6038A-5 provides guidance concerning the 
authorization of an agent for purposes of sections 7602, 7603, and 7604. 
Section 1.6038A-6 provides guidance concerning the failure to furnish 
information requested by a summons. Finally, Sec. 1.6038A-7 provides 
guidance concerning the application of the noncompliance penalty for 
failure by the related party to authorize an agent or by the reporting 
corporation to substantially comply with a summons.
    (b) In general. A reporting corporation must furnish the information 
described in Sec. 1.6038A-2 by filing an annual information return (Form 
5472 or any successor), and must maintain records as described in 
Sec. 1.6038A-3.
    (c) Reporting corporation--(1) In general. For purposes of section 
6038A, a reporting corporation is either a domestic corporation that is 
25-percent foreign-owned as defined in paragraph (c)(2) of this section, 
or a foreign corporation that is 25-percent foreign-owned and engaged in 
trade or business within the United States. After November 4, 1990, a 
foreign corporation engaged in a trade or business within the United 
States at any time during a taxable year is a reporting corporation. See 
section 6038C.
    (2) 25-percent foreign-owned. A corporation is 25-percent foreign-
owned if it has at least one direct or indirect 25-percent foreign 
shareholder at any time during the taxable year.
    (3) 25-percent foreign shareholder--(i) In general. A foreign person 
is a 25-percent foreign shareholder of a corporation if the person owns 
at least 25 percent of--
    (A) The total voting power of all classes of stock of the 
corporation entitled to vote, or
    (B) The total value of all classes of stock of the corporation.
    (ii) Total voting power and value. In determining whether one 
foreign person owns 25 percent of the total voting power of all classes 
of stock of a corporation entitled to vote or 25 percent of the total 
value of all classes of stock of a corporation, consideration will be 
given to all the facts and circumstances of each case, under principles 
similar to Sec. 1.957-1(b)(2) (consideration of arrangements to shift 
formal voting power away from a foreign person).
    (iii) Direct 25-percent foreiqn shareholder. A foreign person is a 
direct 25-percent foreign shareholder if it owns directly at least 25 
percent of the stock of the reporting corporation, either by vote or by 
value.
    (iv) Indirect 25-percent foreign shareholder. A foreign person is an 
indirect 25-percent foreign shareholder if it owns indirectly (or under 
the attribution rules of section 318 is considered to own indirectly) at 
least 25 percent of the stock of the reporting corporation, either by 
vote or by value.
    (4) Application to prior open years. For taxable years beginning 
before July 11, 1989, the definition of a reporting corporation under 
this paragraph applies in determining whether a foreign-owned 
corporation is a reporting corporation. An examination may be reopened 
if the statute of limitations period for that taxable year has not 
expired. A taxable year may not be reopened under section 6038A for 
examination purposes if the taxable year is open under section 6511 only 
for purposes of the carryback of net operating losses or net capital 
losses.
    (5) Exceptions--(i) Treaty country residents having no permanent 
establishment. A foreign corporation that has no permanent establishment 
in the United States under an applicable income tax convention is not a 
reporting corporation for purposes of section 6038A and this section. 
Accordingly, such a foreign corporation is not subject to Secs. 1.6038A-
2, 1.6038A-3, and 1.6038A-5. It must timely and fully provide the 
required notice to the Commissioner under section 6114. See section 6114 
and the regulations thereunder for the notice that such a corporation 
must file and the applicable penalties for failure to file such notice.

[[Page 562]]

    (ii) Qualified exempt shipping income. A foreign corporation whose 
gross income is exempt from U.S. taxation under section 883 is not a 
reporting corporation provided that it timely and fully complies with 
the reporting requirements required to claim such exemption. In the 
event that such a corporation does not timely and fully comply with the 
reporting requirements under sections 887 and 883, it will be a 
reporting corporation subject to section 6038A, including the 
application of the monetary penalty for failure to file required 
information.
    (iii) Status as foreign related party. Nothing in this paragraph 
affects the determination of whether a person is a foreign related party 
as defined in paragraph (g) of this section.
    (d) Related party. The term ``related party'' means--
    (1) Any direct or indirect 25-percent foreign shareholder of the 
reporting corporation,
    (2) Any person who is related within the meaning of sections 267(b) 
or 707(b)(1) to the reporting corporation or to a 25-percent foreign 
shareholder of the reporting corporation, or
    (3) Any other person who is related to the reporting corporation 
within the meaning of section 482 and the regulations thereunder. 
However, the term ``related party'' does not include any corporation 
filing a consolidated federal income tax return with the reporting 
corporation.
    (e) Attribution rules--(1) Attribution under section 318. For 
purposes of determining whether a corporation is 25-percent foreign-
owned and whether a person is a related party under section 6038A, the 
constructive ownership rules of section 318 shall apply, and the 
attribution rules of section 267(c) also shall apply to the extent they 
attribute ownership to persons to whom section 318 does not attribute 
ownership. However, ``10 percent'' shall be substituted for ``50 
percent'' in section 318(a)(2)(C), and section 318(a)(3) (A), (B), and 
(C) shall not be applied so as to consider a U.S. person as owning stock 
that is owned by a person who is not a U.S. person. Additionally, 
section 318(a)(3)(C) and Sec. 1.318-1(b) shall not be applied so as to 
consider a U.S. corporation as being a reporting corporation if, but for 
the application of such sections, the U.S. corporation would not be 25-
percent foreign owned.
    (2) Attribution of transactions with related parties engaged in by a 
partnership. The transactions in which a domestic or foreign partnership 
engages shall be attributed to any reporting corporation whose interest 
in the capital or profits of the partnership, either directly or 
indirectly, combined with the interests of all related parties of the 
reporting corporation partner, equals 25 percent or more of the total 
partnership interests. Attribution of such transactions shall be made 
only to the extent of the partnership interest held by that reporting 
corporation partner. See sections 875 and 702(a) and the regulations 
thereunder. (Attribution shall not be made however, of transactions 
directly between the partnership and a reporting corporation.) 
Accordingly, a reporting corporation partner that is deemed to engage in 
transactions with related parties under this rule is subject to the 
information reporting requirements of Sec. 1.6038A-2, to the record 
maintenance requirements of Sec. 1.6038A-3, to the monetary penalty 
under Sec. 1.6038A-4, to the requirement of authorization of agent under 
Sec. 1.6038A-5, to the rules of Sec. 1.6038A-6 relating to the 
requirement to produce records, and to the noncompliance penalty 
adjustment under Sec. 1.6038A-7.
    (f) Foreign person. For purposes of section 6038A, a foreign person 
is--
    (1) Any individual who is not a citizen or resident of the United 
States, but not including any individual for whom an election under 
section 6013 (g) or (h) (relating to an election to file a joint return) 
is in effect;
    (2) Any individual who is a citizen of any possession of the United 
States and who is not otherwise a citizen or resident of the United 
States;
    (3) Any partnership, association, company, or corporation that is 
not created or organized in the United States or under the law of the 
United States or any State thereof;
    (4) Any foreign trust or foreign estate, as defined in section 
7701(a)(31); or
    (5) Any foreign government (or agency or instrumentality thereof). 
To the

[[Page 563]]

extent that a foreign government is engaged in the conduct of commercial 
activity as defined under section 892 and the regulations thereunder, it 
will be treated as a foreign person under section 6038A and this section 
only for purposes of the information reporting requirements of 
Sec. 1.6038A-2. A foreign government will not be treated as a foreign 
related party for purposes of Secs. 1.6038A-3 and 1.6038A-5.
For purposes of section 6038A, a possession of the United States shall 
be considered to be a foreign country.
    (g) Foreign related party. A foreign related party is a foreign 
person as defined under paragraph (f) of this section that is also a 
related party as defined under paragraph (d) of this section.
    (h) Small corporation exception. A reporting corporation that has 
less than $10,000,000 in U.S. gross receipts for a taxable year is not 
subject to Secs. 1.6038A-3 and 1.6038A-5 for that taxable year. Such a 
corporation, however, remains subject to the information reporting 
requirements of Sec. 1.6038A-2 and the general record maintenance 
requirements of section 6001. For purposes of this paragraph, U.S. gross 
receipts includes all amounts received or accrued to the extent that 
such amounts are taken into account for the determination and 
computation of the gross income of the corporation. For purposes of this 
test, the U.S. gross receipts of all related reporting corporations 
shall be aggregated.
    (i) Safe harbor for reporting corporations with related party 
transactions of de minimis value--(1) In general. A reporting 
corporation is not subject to Secs. 1.6038A-3 and 1.6038A-5 for any 
taxable year in which the aggregate value of all gross payments it makes 
to and receives from foreign related parties with respect to related 
party transactions (including monetary consideration, nonmonetary 
consideration, and the value of transactions involving less than full 
consideration), is not more than $5,000,000 and is less than 10 percent 
of its U.S. gross income. Such a corporation, however, remains subject 
to the information reporting requirements of Sec. 1.6038A-2 and the 
general record maintenance requirements of section 6001. For purposes of 
this paragraph, U.S. gross income means the gross income reportable by 
the reporting corporation (or the aggregate gross income reportable by 
all related reporting corporations) for U.S. income tax purposes. Gross 
payments made to or received from foreign related parties cannot be 
netted; rather, the gross payments made to and received from foreign 
related parties are to be aggregated. Thus, for example, if a reporting 
corporation receives $4,700,000 of gross payments from a related party 
and makes $500,000 of gross payments to the same related party, it has 
aggregate gross payments of $5,200,000, and, therefore, does not qualify 
for the safe harbor under this paragraph.
    (2) Aggregate value of gross payments made or received. The 
aggregate value of gross payments made to (or received from) a foreign 
related party with respect to foreign related party transactions is 
determined by totaling the dollar amounts of foreign related party 
transactions as described in Sec. 1.6038A-2(b) (3) and (4) on all Forms 
5472 filed by the reporting corporation or related reporting 
corporations.
    (j) Related reporting corporations. A reporting corporation is 
related to another reporting corporation if it is related to that other 
reporting corporation under the principles described in paragraphs (d) 
and (e) of this section.
    (k) Consolidated return groups--(1) Required information. If a 
reporting corporation is a member of an affiliated group for which a 
U.S. consolidated income tax return is filed, the return requirement of 
Sec. 1.6038A-2 may be satisfied by filing a consolidated Form 5472. The 
common parent, as identified on Form 851, must attach a schedule to the 
consolidated Form 5472 stating which members of the U.S. affiliated 
group are reporting corporations under section 6038A, and which of those 
are joining in the consolidated Form 5472. The schedule must provide the 
name, address, and taxpayer identification number of each member whose 
transactions are included on the consolidated Form 5472. A member is not 
required to join in filing a consolidated Form 5472 merely because other 
members of the group choose to file one or more Forms 5472 on a 
consolidated basis.

[[Page 564]]

    (2) Maintenance of records and authorization of agent. Either the 
common parent or the principal operating company of an affiliated group 
filing a consolidated income tax return may be authorized under 
Sec. 1.6038A-5 to act as the agent for foreign related persons engaged 
in transactions with members of the group solely for purposes of section 
7602, 7603, and 7604 under section 6038A(e)(1) and Sec. 1.6038A-5. Each 
member of the group, however, must maintain the records required under 
section 6038A (a) and Sec. 1.6038A-3 relating to its related party 
transactions.
    (3) Monetary penalties. The common parent (or principal operating 
company) and all reporting corporations that join in the filing of a 
consolidated Form 5472 are liable jointly and severally for penalties 
for failure to file Form 5472 and for failure to mantain records under 
section 6038A(d) and Sec. 1.6038A-4(e). See Sec. 1.1502-77(a) regarding 
the scope of agency of the common parent corporation.
    (l) District Director. For purposes of the regulations under section 
6038A, the term ``District Director'' means any District Director, or 
the Assistant Commissioner (International) when performing duties 
similar to those of a District Director with respect to any person over 
which the Assistant Commissioner (International) has appropriate 
jurisdiction.
    (m) Examples. The following examples illustrate the rules of this 
section.
    Example 1. P, a U.S. partnership that is engaged in a U.S. trade or 
business, is 75 percent owned by FC1, a foreign corporation that, in 
turn, is wholly owned by another foreign corporation, FC2. The remaining 
25 percent of P is owned by Corp, a domestic corporation, that is wholly 
owned by FC3. P engages in transactions solely with FC2 and FC3. These 
transactions are attributed to FC1 and Corp. Under section 875, FC1 is 
considered as being engaged in a U.S. trade or business. For purposes of 
section 6038A and this section, FC1 and Corp are reporting corporations 
and must report their pro rata shares of the value of the transactions 
with FC2 and FC3. Thus, Corp must report 25 percent of P's transactions 
with FC3 and FC1 must report 75 percent of P's transactions with FC2.
    Example 2. FC2 and FC3 are both foreign corporations that are wholly 
owned by FC1, also a foreign corporation. FC2 engages in a trade or 
business in the United States through a branch. The branch engages in 
related party transactions with FC1. FC2 is a reporting corporation. FC3 
is a foreign related party. FC1 is a direct 25-percent foreign 
shareholder of both FC2 and FC3. Neither FC1 nor FC3 is a reporting 
corporation.
    Example 3. FC1 owns 25 percent of total voting power in each of FC2 
and FC3. FC2 and FC3 each own 20 percent of the total voting power of 
Corp, a domestic corporation. The remaining stock of Corp is owned by an 
unrelated domestic corporation. Neither FC2 nor FC3 is engaged in a U.S. 
trade or business. Under section 318(a)(2)(C) and paragraph (e) of this 
section, FC1 constructively owns its proportionate share of the stock of 
Corp owned directly by FC2 and FC3. Thus, FCl is treated as 
constructively owning five percent of Corp through each of FC2 and FC3 
or a total of 10 percent of the Corp stock. Consequently, Corp is not a 
reporting corporation because no 25 percent shareholder exists.
    Example 4. FP owns 100 percent of FCl which, in turn, owns 100 
percent of FC2. FC2 owns 100 percent of FC3 which owns 100 percent of 
RC. FP, FC1, and FC2 are indirect 25-percent foreign shareholders of RC, 
and FC3 is a direct 25-percent foreign shareholder.
    Example 5. FP owns 100 percent of USS, a U.S. corporation, and 25 
percent of FS, a foreign corporation. The remaining 75 percent of FS is 
publicly owned by numerous small shareholders. Sales transactions occur 
between USS and FS. Applying the rules of this section, USS is a 
reporting corporation. It is determined that USS and FS are each 
controlled by FP under section 482 and the regulations thereunder. 
Therefore, FS is related to USS within the meaning of section 482 and is 
a related party to USS. Accordingly, the sales transactions between USS 
and FS are subject to section 6038A.
    Example 6. The facts are the same as in Example 5, except that the 
remaining 75 percent of FS is owned by one shareholder that is unrelated 
to the FP group and it is determined that FS is not controlled by FP for 
purposes of section 482. Under these facts, FS is not a related party of 
either FP or USS. Accordingly, section 6038A does not apply to the sales 
transactions between FS and USS.
    Example 7. P, a U.S. multinational, is a holding company that wholly 
owns X, a U.S. operating company, which in turn wholly owns FS, a 
controlled foreign corporation. Applying the rule of section 
318(a)(3)(C), FS is deemed to own the stock of X that is actually held 
by P. However, under the rules of paragraph (e) of this section, X will 
not be a reporting corporation by reason of section 318.
    (n) Effective dates--(1) Section 1.6038A-1. Paragraphs (c) (relating 
to the definition of a reporting corporation), (d) (relating to the 
definition of a related

[[Page 565]]

party), (e)(1) (relating to the application of section 318), and (f) 
(relating to the definition of a foreign person) of this section are 
effective for taxable Years beginning after July 10, 1989. The remaining 
paragraphs of this section are effective December 10, 1990, without 
regard to when the taxable year began.
    (2) Section 1.6038A-2. Section 1.6038A-2 (relating to the 
requirement to file Form 5472) is generally effective for taxable years 
beginning after July 10, 1989. However, Sec. 1.6038A-2 as it applies to 
reporting corporations whose sole trade or business in the United States 
is a banking, financing, or similar business as defined in Sec. 1.864-
4(c)(5)(i) is effective for taxable years beginning after December 10, 
1990.
    (3) Section 1.6038A-3. Section 1.6038A-3 (relating to the record 
maintenance requirement) is generally effective December 10, 1990. 
However, records described in Sec. 1.6038A-3 in existence on or after 
March 20, 1990, must be maintained, without regard to when the taxable 
year to which the records relate began.
    (4) Section 1.6038A-4. Section 1.6038A-4 (relating to the monetary 
penalty) is generally effective for taxable years beginning after July 
10, 1989, for the failure to file Form 5472. For the failure to maintain 
records or the failure to produce documents under Sec. 1.6038A-4(f)(2), 
the section is effective December 10, 1990, without regard to when the 
taxable year to which the records relate began.
    (5) Section 1.6038A-5. Section 1.6038A-5 (relating to the 
authorization of agent requirement) is effective December 10, 1990, 
without regard to when the taxable year to which the records relate 
began.
    (6) Section 1.6038A-6. Section 1.6038A-6 (relating to the failure to 
furnish information under a summons) is effective November 6, 1990, 
without regard to when the taxable year to which the summons relates 
began.
    (7) Section 1.6038A-7. Section 1.6038A-7 (relating to the 
noncompliance penalty adjustment) is effective December 10, 1990, 
without regard to when the taxable year began.

[T.D. 8353, 56 FR 28061, June 19, 1991; T.D. 8353, 56 FR 41792, Aug. 23, 
1991]



Sec. 1.6038A-2  Requirement of return.

    (a) Form 5472 required--(1) In general. Each reporting corporation 
as defined in Sec. 1.6038A-1(c) (or members of an affiliated group 
filing together as described in Sec. 1.6038A-1(k)) shall make a separate 
annual information return on Form 5472 with respect to each related 
party as defined in Sec. 1.6038A-1(d) with which the reporting 
corporation (or any group member joining in a consolidated Form 5472) 
has had any reportable transaction during the taxable year. The 
information required by section 6038A and this section must be furnished 
even though it may not affect the amount of any tax due under the Code.
    (2) Reportable transaction. A reportable transaction is any 
transaction of the types listed in paragraphs (b) (3) and (4) of this 
section. However, if neither party to the transaction is a United States 
person as defined in section 7701(a)(30) and the transaction--
    (i) Will not generate in any taxable year gross income from sources 
within the United States or income effectively connected, or treated as 
effectively connected, with the conduct of a trade or business within 
the United States, and
    (ii) Will not generate in any taxable year any expense, loss, or 
other deduction that is allocable or apportionable to such income, the 
transaction is not a reportable transaction.
    (b) Contents of return--(1) Reporting corporation. Form 5472 must 
provide the following information in the manner the form prescribes with 
respect to each reporting corporation:
    (i) Its name, address (including mailing code), and U.S. taxpayer 
identification number; each country in which the reporting corporation 
files an income tax return as a resident under the tax laws of that 
country; its country or countries of organization, and incorporation; 
its total assets for U.S. reporting corporation; the places where it 
conducts its business; and its principal business activity.
    (ii) The name, address, and U.S. taxpayer identification number, if 
applicable, of all its direct and indirect 25-percent foreign 
shareholders (for an indirect 25-percent foreign shareholder, explain 
the attribution of ownership);

[[Page 566]]

each country in which each 25-percent foreign shareholder files an 
income tax return as a resident under the tax laws of that country; the 
places where each 25-percent shareholder conducts its business; and the 
country or countries of organization, citizenship, and incorporation of 
each 25-percent foreign shareholder.
    (iii) The number of Forms 5472 filed for the taxable year and the 
aggregate value in U.S. dollars of gross payments as defined in 
Sec. 1.6038A-1(h)(2) made with respect to all foreign related party 
transactions reported on all Forms 5472.
    (2) Related party. The reporting corporation must provide 
information on Form 5472, set forth in the manner the form prescribes, 
about each related party, whether foreign or domestic, with which the 
reporting corporation had a transaction of the types described in 
paragraphs (b) (3) and (4) of this section during its taxable year, 
including the following information:
    (i) The name, U.S. taxpayer identification number, if applicable, 
and address of the related party.
    (ii) The nature of the reated party's business and the principal 
place or places where it conducts its business.
    (iii) Each country in which the related party files an income tax 
return as a resident under the tax laws of that country.
    (iv) The relationship of the reporting corporation to the related 
party.
    (3) Foreign related party transactions for which only monetary 
consideration is paid or received by the reporting corporation. If the 
related party is a foreign person, the reporting corporation must set 
forth on Form 5472 the dollar amounts of all reportable transactions for 
which monetary consideration (including U.S. and foreign currency) was 
the sole consideration paid or received during the taxable year of the 
reporting corporation. The total amount of such transactions, as well as 
the separate amounts for each type of transaction described below, must 
be reported on Form 5472, in the manner the form prescribes. Where 
actual amounts are not determinable, a reasonable estimate (as described 
in paragraph (b)(6) of this section) is permitted. The types of 
transactions described in this paragraph are:
    (i) Sales and purchases of stock in trade (inventory);
    (ii) Sales and purchases of tangible property other than stock in 
trade;
    (iii) Rents and royalties paid and received (other than amounts 
reported under paragraph (b)(3)(iv) of this section);
    (iv) Sales, purchases, and amounts paid and received as 
consideration for the use of all intangible property, including (but not 
limited to) copyrights, designs, formulas, inventions, models, patents, 
processes, trademarks, and other similar intangible property rights;
    (v) Consideration paid and received for technical, managerial, 
engineering, construction, scientific, or other services;
    (vi) Commissions paid and received;
    (vii) Amounts loaned and borrowed (except open accounts resulting 
from sales and purchases reported under other items listed in this 
paragraph (b)(3) that arise and are collected in full in the ordinary 
course of business);
    (viii) Interest paid and received;
    (ix) Premiums paid and received for insurance and reinsurance; and
    (x) Other amounts paid or received not specifically identified in 
this paragraph (b)(3) to the extent that such amounts are taken into 
account for the determination and computation of the taxable income of 
the reporting corporation.

Amounts required to be reported under paragraph (b)(3)(vii) of this 
section shall be reported as monthly averages or outstanding balances at 
the beginning and end of the taxable year, as the form shall prescribe.
    (4) Foreign related party transactions involving nonmonetary 
consideration or less than full consideration. If the related party is a 
foreign person, the reporting corporation must provide on Form 5472 a 
description of any reportable transaction, or group of reportable 
transactions, listed in paragraph (b)(3) of this section, for which any 
part of the consideration paid or received was not monetary 
consideration, or for which less than full consideration was paid or 
received. A description required under paragraph (b)(4) of this section

[[Page 567]]

shall include sufficient information from which to determine the nature 
and approximate monetary value of the transaction or group of 
transactions, and shall include:
    (i) A description of all property (including monetary 
consideration), rights, or obligations transferred from the reporting 
corporation to the foreign related party and from the foreign related 
party to the reporting corporation;
    (ii) A description of all services performed by the reporting 
corporation for the foreign related party and by the foreign related 
party for the reporting corporation; and
    (iii) A reasonable estimate of the fair market value of all 
properties and services exchanged, if possible, or some other reasonable 
indicator of value.

If, for any transaction, the entire consideration received includes both 
tangible and intangible property and the consideration paid is solely 
monetary consideration, the transaction should be reported under 
paragraph (b)(3) of this section if the intangible property was related 
and incidental to the transfer of the tangible property (for example, a 
right to warranty services.)
    (5) Additional information. In addition to the information required 
under paragraphs (b) (3) and (4) of this section, a reporting 
corporation must provide on Form 5472, in the manner the form 
prescribes, the following information:
    (i) If the reporting corporation imports goods from a foreign 
related party, whether the costs taken into account in computing the 
basis or inventory cost of such goods are greater than the costs taken 
into account in computing the valuation of the goods for customs 
purposes, adjusted pursuant to section 1059A and the regulations 
thereunder, and if so, the reasons for the difference.
    (ii) If the costs taken into account in computing the basis or 
inventory cost of such goods are greater than the costs taken into 
account in computing the valuation of the goods for customs purposes, 
whether the documents supporting the reporting corporation's treatment 
of the items set forth in paragraph (b)(5)(i) of this section are in 
existence and available in the United States at the time Form 5472 is 
filed.
    (6) Reasonable estimate--(i) Estimate within 25 percent of actual 
amount. Any amount reported under this section is considered to be a 
reasonable estimate if it is at least 75 percent and not more than 125 
percent of the actual amount.
    (ii) Other estimates. If any amount reported under this paragraph 
(b) of this section fails to meet the reasonable estimate test of 
paragraph (b)(6)(i) of this section, the reporting corporation 
nevertheless may show that such amount is a reasonable estimate by 
making an affirmative showing of relevant facts and circumstances in a 
written statement containing a declaration that it is made under the 
penalties of perjury. The District Director shall determine whether the 
amount reported was a reasonable estimate.
    (7) Small amounts. If any actual amount required under this section 
does not exceed $50,000, the amount may be reported as ``$50,000 or 
less.''
    (8) Accrued payments and receipts. For purposes of this section, in 
the case of an accrual basis taxpayer, the terms ``paid'' and 
``received'' shall include accrued payments and receipts, respectively.
    (c) Method of reporting. All statements required on or with the Form 
5472 under this section and Sec. 1.6038A-5 shall be in the English 
language. All amounts required to be reported under paragraph (b) of 
this section shall be expressed in United States currency, with a 
statement of the exchange rates used.
    (d) Time and place for filing returns. A Form 5472 required under 
this section shall be filed with the reporting corporation's income tax 
return for the taxable year by the due date (including extensions) of 
that return. A duplicate Form 5472 (including any attachments and 
schedules) shall be filed at the same time with the Internal Revenue 
Service Center, Philadelphia, PA 19255.
    (e) Untimely filed return. If the reporting corporation's income tax 
return is untimely filed, Form 5472 (with a duplicate to Philadelphia) 
nonetheless shall be timely filed at the service center where the return 
is due. When the income tax return is ultimately filed, a copy of Form 
5472 must be attached.

[[Page 568]]

    (f) Exceptions--(1) No reportable transactions. A reporting 
corporation is not required to file Form 5472 if it has no transactions 
of the types listed in paragraphs (b) (3) and (4) of this section during 
the taxable year with any related party.
    (2) Transactions solely with a domestic reporting corporation. If 
all of a foreign reporting corporation's reportable transactions are 
with one or more related domestic reporting corporations that are not 
members of the same affiliated group, the foreign reporting corporation 
shall furnish on Form 5472 only the information required under 
paragraphs (b) (1) and (2) of this section, if the domestic reporting 
corporations provide the information required under paragraphs (b) (3) 
through (5) of this section. Such a foreign reporting corporation 
nonetheless is subject to the record maintenance requirements of 
Sec. 1.6038A-3 and the requirements of Secs. 1.6038A-5 and 1.6038A-6. 
The name, address, and taxpayer identification number of each domestic 
reporting corporation that provided such information must be indicated 
on Form 5472 in the space provided for the information under paragraphs 
(b) (1) and (2) of this section.
    (3) Transactions with a corporation subject to reporting under 
section 6038. A reporting corporation is not required to make a return 
of information on Form 5472 with respect to a related foreign 
corporation for a taxable year for which a U.S. person that controls the 
foreign related corporation makes a return of information on Form 5471 
that is required under section 6038 and this section, if that return 
contains information required under Sec. 1.6038-2(f)(11) with respect to 
the reportable transactions between the reporting corporation and the 
related corporation for that taxable year. Such a reporting corporation 
also is not subject to Secs. 1.6038A-3 and 1.6038A-5. It remains subject 
to the general record maintenance requirements of section 6001.
    (4) Transactions with a foreign sales corporation. A reporting 
corporation is not required to make a return of information on Form 5472 
with respect to a related corporation that qualifies as a foreign sales 
corporation for a taxable year for which the foreign sales corporation 
files Form 1120-FSC.
    (g) Filing Form 5472 when transactions with related parties engaged 
in by a partnership are attributed to a reporting corporation. If 
transactions engaged in by a partnership are attributed under 
Sec. 1.6038A-1(e)(2) to a reporting corporation, the reporting 
corporation need report on Form 5472 only the percentage of the value of 
the transaction or transactions equal to the percentage of its 
partnership interest. Thus, for example, if a partnership buys $1000 of 
widgets from the foreign parent of a reporting corporation whose 
partnership interest in the partnership equals 50 percent of the 
partnership interests (and the remaining 50 percent is held by unrelated 
parties), the reporting corporation must report $500 of purchases from a 
foreign related party on Form 5472.
    (h) Effective dates for certain reporting corporations. For 
effective dates for this section, see Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28063, June 19, 1991]



Sec. 1.6038A-3  Record maintenance.

    (a) General maintenance requirements--(1) Section 6001 and section 
6038A. A reporting corporation must keep the permanent books of account 
or records as required by section 6001 that are sufficient to establish 
the correctness of the federal income tax return of the corporation, 
including information, documents, or records (``records'') to the extent 
they may be relevant to determine the correct U.S. tax treatment of 
transactions with related parties. Under section 6001, the District 
Director may require any person to make such returns, render such 
statements, or keep such specific records as will enable the District 
Director to determine whether or not that person is liable for any of 
the taxes to which the regulations under part I have application. See 
section 6001 and the regulations thereunder. Such records must be 
permanent, accurate, and complete, and must clearly establish income, 
deductions, and credits. Additionally, in appropriate cases, such 
records include sufficient relevant cost data from which a profit and 
loss statement may be prepared for products or services transferred 
between a reporting corporation

[[Page 569]]

and its foreign related parties. This requirement includes records of 
the reporting corporation itself, as well as to records of any foreign 
related party that may be relevant to determine the correct U.S. tax 
treatment of transactions between the reporting corporation and foreign 
related parties. The relevance of such records with respect to related 
party transactions shall be determined upon the basis of all the facts 
and circumstances. Section 6038A and this section provide detailed 
guidance regarding the required maintenance of records with respect to 
such transactions and specify penalties for noncompliance. Banks and 
other financial institutions shall follow the specific record 
maintenance rules described in paragraph (h) of this section.
    (2) Safe harbor. A safe harbor for record maintenance is provided 
under paragraph (c) of this section, which sets forth detailed guidance 
concerning the types of records to be maintained with respect to related 
party transactions. The safe harbor consists of an all-inclusive list of 
record types that could be relevant to different taxpayers under a 
variety of facts and circumstances. It does not constitute a checklist 
of records that every reporting corporation must maintain or that 
generally should be requested by the Service. A specific reporting 
corporation is required to maintain, and the Service will request, only 
those records enumerated in the safe harbor (including material profit 
and loss statements) that may be relevant to its business or industry 
and to the correct U.S. tax treatment of its transactions with its 
foreign related parties. Accordingly, not every item listed in the safe 
harbor must be maintained by every reporting corporation. A corporation 
that maintains or causes another person to maintain the records listed 
in paragraph (c)(2) of this section that may be relevant to its foreign 
related party transactions and to its business or industry will be 
deemed to have met the record maintenance requirements of section 6038A.
    (3) Examples. The following examples illustrate the rules of this 
paragraph.

    Example 1. RC, a U.S. reporting corporation, is owned by two 
shareholders, F and P. F is a foreign corporation that owns 30 percent 
of the stock of RC. P is a domestic corporation that owns the remaining 
70 percent. RC purchases tangible property from F; however, the only 
potential audit issue with respect to these transactions is their 
treatment under section 482. It is determined that F does not in fact 
control RC and the two corporations do not constitute a group of 
``controlled taxpayers'' for purposes of section 482 and the regulations 
thereunder. There are no other reportable transactions between RC and F. 
Under Sec. 1.6038A-1(g), F is a foreign related party with respect to 
RC. Accordingly, RC is required to report its purchases of property from 
F under the reporting requirements of Sec. 1.6038A-2. Nevertheless, 
because section 482 is not applicable to the transactions between RC and 
F, the records created by F with respect to its sales to RC are not 
relevant for purposes of determining the correct tax treatment of these 
transactions. RC is required to maintain its own records of these 
transactions under the requirements of section 6001, but the 
transactions are not subject to the record maintenance requirements of 
this section. If, however, on audit it is determined that F does control 
RC, all records relevant to determining the arm's length consideration 
for the tangible property under section 482 will be subject to these 
requirements.
    Example 2. FP, a foreign person, owns 30 percent of the stock of RC, 
a reporting corporation. The remaining 70 percent of RC stock is held by 
persons that are not 25-percent foreign shareholders. It is determined 
that FP is related to RC within the meaning of section 482 and the 
regulations thereunder. The only transactions between FP and RC are FP's 
capital contributions, dividends paid from RC to FP, and loans from FP 
to RC. Under section 6001, RC is required to maintain all documentation 
necessary to establish the U.S. tax treatment of the capital 
contributions, dividends, and loans. RC is not required to maintain 
records in other categories listed in paragraph (c)(3) of this section 
because they are not relevant to the transactions between FP and RC. 
Records of FP not related to these transactions are not subject to the 
record maintenance requirements under section 6038A(a) and this section.
    Example 3. G, a foreign multinational group, creates Sub, a wholly-
owned U.S. subsidiary, in order to purchase tangible property from 
unrelated parties in the United States and resell such property to G. 
The property purchased by Sub is either used in G's business or resold 
to other unrelated parties by G. Sub's sole function is to act as a 
buyer for G and these purchases are the only transactions that G has 
with any U.S. affiliates. Under all the facts and circumstances of this 
case, it is determined that an analysis of the group's worldwide profit 
attributable to the property it purchases from Sub is not

[[Page 570]]

relevant for purposes of determining the tax treatment of the sales from 
Sub to G. Therefore, the records with respect to the profitability of G 
are not subject to the record maintenance requirements of this section. 
However, all records related to the appropriate method under section 482 
for determining an arm's-length consideration for the property sold by 
Sub to G are subject to the record maintenance requirements of this 
section.
    Example 4. S, a U.S. reporting corporation, is the purchasing agent 
for its multinational parent group. It arranges for the purchase and 
export of miscellaneous tangible property to X, Y, and Z, each of which 
is a foreign related party. The miscellaneous tangible property is 
purchased from unrelated third parties for resale to X, Y, and Z. These 
resales of miscellaneous tangible property constitute the sole 
transactions between S and X, Y, and Z. The purchasing agent activity of 
S is not an integral part of the business activity of S or of any 
beneficiary of the purchasing agent services provided by S as defined in 
Sec. 1.482-2(b)(7). Under Sec. 1.482-2(b)(7), the arm's-length charge is 
deemed to be equal to the costs or deductions incurred with respect to 
the provision of the purchasing agent services. S is required to 
maintain records to permit verification upon audit of such costs or 
deductions. The records of X, Y, and Z are not relevant to the costs or 
deductions incurred by S with respect to its purchasing agent 
activities. Therefore, under section 6038A and this section, only the 
records maintained by S that permit verification of the costs and 
deductions of the purchasing agent services are relevant. Accordingly, 
solely with respect to these transactions, records of X, Y, and Z need 
not be maintained under section 6038A or this section. If, however, upon 
audit, it is determined that S is not merely engaging in services not 
integral to its business as defined in Sec. 1.482-2(b)(7), the record 
maintenance requirements under section 6038A(a) and this section will be 
applicable to the records of S, X, Y and Z to the extent that such 
records are relevant for determining the correct tax treatment of 
transactions engaged in by X, Y, or Z with S. If S has other 
transactions with X, S must maintain or cause to be maintained records 
that may be relevant with respect to those transactions.

    (b) Other maintenance requirements--(1) Indirectly related records. 
This section applies to records that are directly or indirectly related 
to transactions between the reporting corporation and any foreign 
related parties. An example of records that are indirectly related to 
such transactions is records possessed by a foreign subsidiary of a 
foreign related party that document the raw material or component costs 
of a product that is manufactured or assembled by the subsdiary and sold 
as a finished product by the foreign related party to the reporting 
corporation.
    (2) Foreign related party or third-party maintenance. If records 
that are required to be maintained under this section are in the control 
of a foreign related party, the records may be obtained or compiled (if 
not already in the possession of the foreign related party or already 
compiled) under the direction of the reporting corporation and then 
maintained by the reporting corporation, the foreign related party, or a 
third party. Thus, for example, a foreign related party may either 
itself maintain such records outside the United States or permit a third 
party to maintain such records outside the United States, provided that 
the conditions described in paragraph (f) of this section are met. Upon 
a request for such records by the Service, a foreign related party or 
third party may make arrangements with the District Director to furnish 
the records directly, rather than through the reporting corporation.
    (3) Translation of records. When records are provided to the Service 
under a request for production, any portion of such records must be 
translated into the English language within 30 days of a request for 
translation of that portion by the District Director. To the extent that 
any requested documents are identical to documents that have already 
been translated, an explanation of how such documents are identical 
instead may be provided. An extension of this time period may be 
requested under paragraph (f)(4) of this section. Appropriate extensions 
will be liberally granted for translation requests where circumstances 
warrant. If a good faith effort is made to translate accurately the 
requested documents within the specified time period, the reporting 
corporation will not be subject to the penalties in Secs. 1.6038A-4 and 
1.6038A-7.
    (4) Exception for foreign governments. A foreign government is not 
subject to the obligation to maintain records under this section.

[[Page 571]]

    (5) Records relating to conduit financing arrangements. See 
Sec. 1.881-4 relating to conduit financing arrangements.
    (c) Specific records to be maintained for safe harbor--(1) In 
general. A reporting corporation that maintains or causes another person 
to maintain the records specified in this paragraph (c) that are 
relevant to its business or industry and to the correct U.S. tax 
treatment of its transactions with its foreign related parties will 
deemed to have met the record maintenance requirements of this section. 
This paragraph provides general descriptions of the categories of 
records to be maintained; the particular title or label applied by a 
reporting corporation or related party does not control. Functional 
equivalents of the specified documents are acceptable. Record 
maintenance in accordance with this safe harbor, however, requires only 
the maintenance of types of documents described in paragraph (c)(2) of 
this section that are directly or indirectly related to transactions 
between the reporting corporation and any foreign related party. 
Additionally, to the extent the reporting corporation establishes that 
records in a particular category are not applicable to the industry or 
business of the reporting corporation and any foreign related party, 
maintenance of such records is not required under this paragraph. Record 
maintenance in accordance with this paragraph (c) generally does not 
require the original creation of records that are ordinarily not created 
by the reporting corporation or its related parties. (If, however, a 
document that is actually created is described in this paragraph (c), it 
is to be maintained even if the document is not of the type ordinarily 
created by the reporting corporation or its related parties.) There are 
two exceptions to the rule. First, basic accounting records that are 
sufficient to document the U.S. tax effects of transactions between 
related parties must be created and retained, if they do not otherwise 
exist. Second, records sufficient to produce material profit and loss 
statements as described in paragraphs (c)(2) (ii) and (3) of this 
section that are relevant for determining the U.S. tax treatment of 
transactions between the reporting corporation and foreign related 
parties must be created if such records are not ordinarily maintained. 
All internal records storage and retrieval systems used for each taxable 
year must be retained.
    (2) Descriptions of categories of documents to be maintained. The 
following records must be maintained in order to satisfy this paragraph 
(c) to the extent they may be relevant to determine the correct U.S. tax 
treatment of transactions between the reporting corporation and any 
foreign related party.
    (i) Original entry books and transaction records. This category 
includes books and records of original entry or their functional 
equivalents, however designated or labelled, that are relevant to 
transactions between any foreign related party and the reporting 
corporation. Examples include, but are not limited to, general ledgers, 
sales journals, purchase order books, cash receipts books, cash 
disbursement books, canceled checks and bank statements, workpapers, 
sales contracts, and purchase invoices. Descriptive material to 
explicate entries in the foregoing types of records, such as a chart of 
accounts or an accounting policy manual, is included in this category.
    (ii) Profit and loss statements. This category includes records from 
which the reporting corporation can compile and supply, within a 
reasonable time, material profit and loss statements of the reporting 
corporation and all related parties as defined in Sec. 1.6038A-1 (d) 
(the ``related party group'') that reflect profit or loss of the related 
party group attributable to U.S.-connected products or services as 
defined in paragraph (c)(7)(i) of this section. The determination of 
whether a profit and loss statement is material is made under the rules 
provided in paragraph (c)(3) of this section. The material profit and 
loss statements described in this paragraph (c)(2)(ii) must reflect the 
consolidated revenue and expenses of all members of the related party 
group. Thus, records in this category include the documentation of the 
cost of raw materials used by a related party to manufacture finished 
goods that are then sold by another related party to the reporting 
corporation. The records should be kept under U.S. generally accepted 
accounting principles if they

[[Page 572]]

are ordinarily maintained in such manner; if not, an explanation of the 
material differences between the accounting principles used and U.S. 
generally accepted accounting principles must be made available. The 
statements need not reflect tracing of the actual costs borne by the 
group with respect to its U.S.-connected products or services; rather, 
any reasonable method may be used to allocate the group's worldwide 
costs to the revenues generated by the sales of those products or 
services. An explanation of the methods used to allocate specific items 
to a particular profit and loss statement must be made available. The 
explanation of material differences between accounting principles and 
the explanation of allocation methods must be sufficient to permit a 
comparison of the profitability of the group to that of the reporting 
corporation attributable to the provision of U.S.-connected products or 
services.
    (iii) Pricing documents. This category includes all documents 
relevant to establishing the appropriate price or rate for transactions 
between the reporting corporation and any foreign related party. 
Examples include, but are not limited to, documents related to 
transactions involving the same or similar products or services entered 
into by the reporting corporation or a foreign related party with 
related and unrelated parties; shipping and export documents; commission 
agreements; documents relating to production or assembly facilities; 
third-party and intercompany purchase invoices; manuals, specifications, 
and similar documents relating to or describing the performance of 
functions conducted at particular locations; intercompany correspondence 
discussing any instructions or assistance relating to such transactions 
provided to the reporting corporations by the related foreign person (or 
vice versa); intercompany and intracompany correspondence concerning the 
price or the negotiation of the price used in such transactions; 
documents related to the value and ownership of intangibles used or 
developed by the reporting corporation or the foreign related party; 
documents related to cost of goods sold and other expenses; and 
documents related to direct and indirect selling, and general and 
administrative expenses (for example, relating to advertising, sales 
promotions, or warranties).
    (iv) Foreign country and third party filings. This category includes 
financial and other documents relevant to transactions between a 
reporting corporation and any foreign related party filed with or 
prepared for any foreign government entity, any independent commission, 
or any financial institution.
    (v) Ownership and capital structure records. This category includes 
records or charts showing the relationship between the reporting 
corporation and the foreign related party; the location, ownership, and 
status (for example, joint venture, partnership, branch, or division) of 
all entities and offices directly or indirectly involved in the 
transactions between the reporting corporation and any foreign related 
party; a worldwide organization chart; records showing the management 
structure of all foreign affiliates; and loan documents, agreements, and 
other documents relating to any transfer of the stock of the reporting 
corporation that results in the change of the status of a foreign person 
as a foreign related party.
    (vi) Records of loans, services, and other non-sales transactions. 
This category includes relevant documents relating to loans (including 
all deposits by one foreign related party or reporting corporation with 
an unrelated party and a subsequent loan by that unrelated party to a 
foreign related party or reporting corporation that is in substance a 
direct loan between a reporting corporation and a foreign related 
party); guarantees of a foreign related party of debts of the reporting 
corporation, and vice versa; hedging arrangements or other risk shifting 
or currency risk shifting arrangements involving the reporting 
corporation and any foreign related party; security agreements between 
the reporting corporation and any foreign related party; research and 
development expense allocations between any foreign related party and 
the reporting corporation; service transactions between any foreign 
related party and the reporting corporation, including, for example, a 
description of the allocation of charges

[[Page 573]]

for management services, time or travel records, or allocation studies; 
import and export transactions between a reporting corporation and any 
foreign related party; the registration of patents and copyrights with 
respect to transactions between the reporting corporation and any 
foreign related party: and documents regarding lawsuits in foreign 
countries that relate to such transactions between a reporting 
corporation and any foreign related party (for example, product 
liability suits for U.S. products).
    (vii) Records relating to conduit financing arrangements. See 
Sec. 1.881-4 relating to conduit financing arrangements.
    (3) Material profit and loss statements. For purposes of paragraph 
(c)(2)(ii) of this section, the determination of whether a profit and 
loss statement is material will be made according to the following 
rules. An agreement between the reporting corporation and the District 
Director as described in paragraph (e) of this section may identify 
material profit and loss statements of the related party group and 
describe the items to be included in any profit and loss statements for 
which records are to be maintained to satisfy the requirements of 
paragraph (c)(2)(ii) of this section. In the absence of such an 
agreement, a profit and loss statement will be material if it meets any 
of the following tests: the existing records test described in paragraph 
(c)(4) of this section, the significant industry segment test described 
in paragraph (c)(5) of this section, or the high profit test described 
in paragraph (c)(6) of this section.
    (4) Existing records test. A profit and loss statement is material 
under the existing records test described in this paragraph (c)(4) if 
any member of the related party group creates or compiles such statement 
in the course of its business operations and the statement reflects the 
profit or loss of the related party group attributable to the provision 
of U.S.-connected products or services (regardless of whether the profit 
and loss attributable to U.S.-connected products or services is shown 
separately or included within the calculation of aggregate figures on 
the statement). For example, a profit and loss statement is described in 
this paragraph if it was produced for internal accounting or management 
purposes, or for disclosure to shareholders, financial institutions, 
government agencies, or any other persons. Such existing statements and 
the records from which they were complied (to the extent such records 
relate to profit and loss attributable to U.S.-connected products or 
services) are subject to the record maintenance requirements described 
in paragraph (c)(2)(ii) of this section.
    (5) Significant industry segment test--(i) In general. A profit and 
loss statement is material under the significant industry segment test 
described in this paragraph (c)(5) if--
    (A) The statement reflects the profit or loss of the related party 
group attributable to the group's provision of U.S.-connected products 
or services within a single industry segment (as defined in paragraph 
(c)(7)(ii) of this section);
    (B) The worldwide gross revenue attributable to such industry 
segment is 10 percent or more of the worldwide gross revenue 
attributable to the group's combined industry segments; and
    (C) The amount of gross revenue earned by the group from the 
provision of U.S.-connected products or services within such industry 
segment is $25 million or more in the taxable year.
    (ii) Form of the statements. Profit and loss statements compiled for 
the group's provision of U.S.-connected products or services in each 
significant industry segment must reflect revenues and expenses 
attributable to the operations in such segment by all members of the 
related party group. Statements may show each related party's revenues 
and expenses separately, or may be prepared in a consolidated format. 
Any reasonable method may be used to allocate the group's worldwide 
costs within the industry segment to the U.S.-connected products or 
services within that segment. An explanation of the methods used to 
prepare consolidated statements and to allocate specific items to a 
particular profit and loss statement must be made available, and the 
records from which the consolidations and allocations were prepared must 
be maintained.

[[Page 574]]

    (iii) Special rule for component sales. Where the U.S.-connected 
products or services consist of components that are incorporated into 
other products or services before sale to customers, the portion of the 
total gross revenue derived from sales of the finished products or 
services attributable to the components may be determined on the basis 
of relative costs of production. Thus, where relevant for determining 
whether the $25 million threshold in paragraph (c)(5)(i)(C) of this 
section has been met, the amount of gross revenue derived by the related 
party group from the provision of the finished products or services may 
be reduced by multiplying it by a fraction, the numerator of which is 
the costs of production of the related party group attributable to the 
component products or services that constitute U.S.-connected products 
or services and the denominator of which is the costs of production of 
the related party group attributable to the finished products in which 
such components are incorporated.
    (iv) Level of specificity required. In applying the significant 
industry segment test of this paragraph (c)(5), groups of related 
products and services must be chosen to provide a reasonable level of 
specificity that results in the greatest number of separate significant 
industry segments in comparison to other possible classifications. This 
determination must be made on the basis of the particular facts 
presented by the operations of the related party group. The following 
rules, however, provide general guidelines for making such 
classifications. First, the related party group's operations that 
involve the provision of U.S.-connected products should be grouped into 
product lines. The rules of this paragraph (c)(5) should then be applied 
to determine if any such product line would, standing alone, constitute 
a significant industry segment when compared to the related party 
group's operations as a whole. Any significant industry segments 
determined at the level of product lines should be further segregated, 
and tested for significant industry segments, at the level of separate 
products. Finally, any significant industry segments determined at the 
level of separate products should be segregated, and tested for 
significant industry segments, at the level of separate models. Similar 
principles should be applied in classifying and testing types of 
services. A profit and loss statement reflecting the related party 
group's provision of any product or service (or group of products or 
services as classified under these rules) that constitutes a significant 
industry segment will be considered material for purposes of this 
paragraph (c)(5). For definitions of the terms ``product'', ``related 
products or services'', ``model'', and ''product line'', see paragraph 
(c)(7) of this section.
    (v) Examples. The rules for determining reasonable levels of 
specificity for significant industry segments may be illustrated by the 
following examples.

    Example 1. A related party group is engaged in the manufacture and 
worldwide sales of automobiles and aftermarket parts. The group's 
operations within the categories of ``automobiles'' and ``aftermarket 
parts''. are each sufficient to constitute significant industry segments 
for the group under the rules of this paragraph (c)(5). No narrower 
classification of aftermarket parts results in any significant industry 
segments. Automobiles produced by the group are generally classified for 
marketing purposes by trade names; aggregating groups of automobiles by 
these trade names results in three significant industry segments, those 
for trade names A, B, and C. Finally, two car models sold under the 
trade name A (``A1'' and ``A2'') and one car model sold under the trade 
name B (``B3''), produce sufficient revenue to constitute significant 
industry segments. Such classifications into trade names and car models 
are generally used in the related party group's industry; moreover, 
different types of classifications would produce fewer significant 
industry segments. Accordingly, a reasonable level of specificity for 
this related party group's industry segments would be eight categories 
of products consisting of ``automobiles'', ``aftermarket parts'', ``A'', 
``B'', ``C'', ``A1'', ``A2'', and ``B3''.
    Example 2. A related party group is engaged in manufacturing 
electronic goods that are distributed at retail in the United States by 
the reporting corporation. The group sells three types of products in 
the United States: televisions, radios, and video cassette recorders 
(VCRs). Each of these three broad product areas constitutes a 
significant industry segment for the group as a whole. VCRs can be 
further segregated by price into

[[Page 575]]

high-end and low-end models, and the provision of each constitutes a 
significant industry segment for the group. Revenues from only one VCR 
model, model number VCRX-10, are sufficiently large to make the 
provision of that model a significant industry segment. With respect to 
televisions, the group normally accounts for these products by size. 
Using this classification, portable televisions, medium-sized 
televisions, and consoles each constitute significant industry segments. 
Narrower classifications by television model numbers result in no 
additional significant industry segments. Finally, a single radio 
product line, those sold under the trade name R, produces sufficient 
revenue to constitute a significant industry segment, but no other radio 
models or product groups are large enough to constitute a significant 
industry segment. In each case, these classifications conform to normal 
business practices in the industry and result in the greatest possible 
number of significant industry segments for this related party group. 
Accordingly, a reasonable level of specificity for this related party 
group's industry segments would include the ten categories consisting of 
``VCRs'', ``high-end VCRs'', ``low-end VCRs'', ``model number VCRX-10'', 
``televisions'', ``portable televisions'', ``medium-sized televisions'', 
``console televisions'', ``radios'', and ``radio trade name R''.

    (6) High profit test--(i) In general. A profit and loss statement is 
material under the high profit test described in this paragraph (c)(6) 
if--
    (A) The statement reflects the profit or loss of the related party 
group attributable to the group's provision of U.S.-connected products 
or services within a single industry segment (as defined in paragraph 
(c)(7)(ii) of this section);
    (B) The amount of gross revenue earned by the group from the 
provision of U.S.-connected products or services within such industry 
segment is $100 million or more in the taxable year; and
    (C) The return on assets test described in paragraph (c)(6)(ii) of 
this section is satisfied with respect to the products and services 
attributable to such segment.

Accordingly, a significant industry segment (as determined under 
paragraph (c)(5) of this section) must be divided into any narrower 
industry segments that meet the high profit test of this paragraph 
(c)(6), even if such narrower segments would not, standing alone, meet 
the significant industry segment test of paragraph (c)(5) of this 
section.
    (ii) Return on assets test. An industry segment meets the return on 
assets test if the rate of return on assets earned by the related party 
group on its worldwide operations within this industry segment exceeds 
15 percent, and is at least 200 percent of the return on assets earned 
by the group in all industry segments combined. For purposes of this 
paragraph, the rate of return on assets earned by an industry segment is 
determined by dividing that segment's operating profit (as defined in 
paragraph (c)(7)(v) of this section) by its identifiable assets (as 
defined in paragraph (c)(7)(iv) of this section).
    (iii) Additional rules. The rules in paragraphs (c)(5)(ii) through 
(iv) of this section describing the application of the significant 
industry segment test shall apply in a similar manner for purposes of 
the high profit test.
    (7) Definitions. The following definitions apply for purposes of 
paragraphs (c)(2)(ii), (c)(5), and (c)(6) of this section.
    (i) U.S.-connected products or services. The term U.S.-connected 
products or services means products or services that are imported to or 
exported from the United States by transfers between the reporting 
corporation and any of its foreign related parties.
    (ii) Industry segment. An industry segment is a segment of the 
related party group's combined operations that is engaged in providing a 
product or service or a group of related products or services (as 
defined in paragraph (c)(7)(vii) of this section) primarily to customers 
that are not members of the related party group.
    (iii) Gross revenue of an industry segment. Gross revenue of an 
industry segment includes receipts (prior to reduction for cost of goods 
sold) both from sales to customers outside of the related party group 
and from sales or transfers to other industry segments within the 
related party group (but does not include sales or transfers between 
members of the related party group within the same industry segment). 
Interest from sources outside the related party group and interest 
earned on trade receivables between industry segments is included in 
gross revenue if

[[Page 576]]

the asset on which the interest is earned is included among the industry 
segment's identifiable assets, but interest earned on advances or loans 
to other industry segments is not included.
    (iv) Identifiable assets of an industry segment. The identifiable 
assets of an industry segment are those tangible and intangible assets 
of the related party group that are used by the industry segment, 
including assets that are used exclusively by that industry segment and 
an allocated portion of assets used jointly by two or more industry 
segments. The value of an identifiable asset may be determined using any 
reasonable method (such as book value or fair market value) applied 
consistently. Any allocation of assets among industry segments must be 
made on a reasonable basis, and a description of such basis must be 
provided. Assets of an industry segment that transfers products or 
services to another industry segment shall not be allocated to the 
receiving segment. Assets that represent part of the related party 
group's investment in an industry segment, such as goodwill, shall be 
included in the industry segment's identifiable assets. Assets 
maintained for general corporate purposes (that is, those not used in 
the operations of any industry segment) shall not be allocated to 
industry segments.
    (v) Operating profit of an industry segment. The operating profit of 
an industry segment is its gross revenue (as defined in paragraph 
(c)(7)(iii) of this section) minus all operating expenses. None of the 
following shall be added or deducted in computing the operating profit 
of an industry segment: revenue earned at the corporate level and not 
derived from the operations of any industry segment; general corporate 
expenses; interest expense; domestic and foreign income taxes; and other 
extraordinary items not reflecting the ongoing business operations of 
the industry segment.
    (vi) Product. The term product means an item of property (or 
combination of component parts) that is the result of a production 
process, is primarily sold to unrelated parties (or incorporated by the 
related party group into other products sold to unrelated parties), and 
performs a specific function.
    (vii) Related products or services. The term related products or 
services means groupings of products and types of services that reflect 
reasonable accounting, marketing, or other business practices within the 
industries in which the related party group operates.
    (viii) Model. The term model means a classification of products that 
incorporate particular components, options, styles, and any other unique 
features resulting in product differentiation. Examples of models are 
electronic products that are sold or accounted for under a single model 
number and automobiles sold under a single model name.
    (ix) Product line. The term product line means a group of products 
that are aggregated into a single classification for accounting, 
marketing, or other business purposes. Examples of product lines are 
groups of products that perform similar functions; products that are 
marketed under the same trade names, brand names, or trademarks; and 
products that are related economically (that is, having similar rates of 
profitability, similar degrees of risk, and similar opportunities for 
growth).
    (8) Example. The application of the rules for determining material 
profit and loss statements under paragraphs (c)(4) through (7) of this 
section is illustrated by the following example.

    Example. (i) Facts. A multinational enterprise manufactures 50 
different agricultural and chemical products that are sold through Subl, 
its wholly owned U.S. subsidiary, and other subsidiaries located in 
foreign countries. The parent company of the enterprise, P, is a foreign 
corporation. The corporations participating in the enterprise form a 
related party group, and Subl is a reporting corporation for purposes of 
section 6038A. Under the facts and circumstances of this case, an 
analysis of the group's worldwide profit attributable to its products 
sold in the U.S. is relevant for determining an arm's length 
consideration under section 482 for the transfers of goods between Subl 
and its foreign affiliates.
    (ii) Existing records test. For management purposes, the group 
prepares profit and loss statements that are segmented by sales in 
different geographic markets. One of these statements shows the combined 
worldwide

[[Page 577]]

profitability of the group. Another statement shows the profitability of 
the group attributable to its North American sales. Both of these profit 
and loss statements reflect aggregate figures that include sales to 
unrelated parties of products that have been transferred from P and 
other group members to Subl (that is, the group's ``U.S.-connected 
products''). The two statements meet the existing records test described 
in paragraph (c)(4) of this section.
    (iii) Significant industry segments. The group's worldwide gross 
revenue in all industry segments is $2 billion. An analysis of the 
group's 50 products demonstrates that they are reasonably grouped into 
eight industry segments (each of which earns roughly $250 million in 
worldwide gross revenue). Segments 1 through 6 relate to agricultural 
products and Segments 7 and 8 relate to other chemical products. More 
specific categories would result in groupings that generate less than 10 
percent of the group's worldwide gross revenue (that is, less than $200 
million each); these narrower categories would thus fail the gross 
revenue percentage test of paragraph (c)(5)(i)(B) of this section. The 
gross revenue in each of the eight segments from the sale to unrelated 
parties of U.S.-connected products is as follows: $180 million for 
Segment 1; $30 million for Segment 2; and less than $25 million for each 
of Segments 3 through 8. Under the $25 million threshold test of 
paragraph (c)(5)(i)(C) of this section, the group's significant industry 
segments are thus limited to Segments 1 and 2. In addition, the combined 
operations of the group related to agricultural products (encompassing 
Segments 1 through 6 on an aggregated basis), constitute a single 
significant industry segment.
    (iv) High profit test. One highly profitable product line within 
Segment 1, HPPL, accounts for $120 million gross revenue from Sub1's 
domestic sales of U.S.-connected products (and thus exceeds the $100 
million gross revenue threshold in paragraph (c)(6)(i)(B) of this 
section). The return on the identifiable assets attributable to the HPPL 
product line is 85 percent, which is more than 15 percent and more than 
twice the return on assets earned by the group from its worldwide 
operations in its combined industry segments. The group's industry 
segment for HPPL thus meets the high profit test described in paragraph 
(c)(6) of this section.
    (v) Material Profit and Loss Statements. The group's material profit 
and loss statements consist of statements for combined worldwide sales 
and North American sales (under the existing records test); Segment 1, 
Segment 2, and aggregated Segments 1-6 (under the significant industry 
segment test); and HPPL (under the high profit test). Under paragraph 
(c) of this section, Subl is required to retain the combined worldwide 
sales and North American sales profit and loss statements and to 
maintain sufficient records so that it can compile and supply upon 
request statements of the group's profitability from sales of its U.S.-
connected products within Segment l, Segment 2, aggregated Segments 1-6, 
and HPPL. These records need not be in the possession of Subl and may be 
kept under the control of and produced by P or any third party. The 
statements for Segment l, Segment 2, aggregated Segments 1-6, and HPPL 
do not require tracing of actual costs to the U.S.-connected products; 
rather, these statements may be prepared by using any reasonable method 
to allocate a portion of the industry segment's overall operating costs 
to the sales of U.S.-connected products within that segment.

    (d) Liability for certain partnership record maintenance. A 
reporting corporation to which transactions engaged in by a partnership 
are attributed under Sec. 1.6038A-1 (e)(2) is subject to the record 
maintenance requirements of this section to the extent of the 
transactions so attributed.
    (e) Agreements with the District Director--(1) In general. The 
District Director who has audit jurisdiction over the reporting 
corporation may negotiate and enter into an agreement with a reporting 
corporation that establishes the records the reporting corporation must 
maintain or cause another to maintain, how the records must be 
maintained, the period of retention for the records, and by whom the 
records must be maintained in order to satisfy the reporting 
corporation's obligations under this section.
    (2) Content of agreement--(i) In general. The agreement may include 
provisions relating to the authorization of agent requirement, the 
record maintenance requirement, and the production and translation time 
periods that vary the rules contained in these regulations under section 
6038A. The District Director will generally require a reporting 
corporation to maintain only those records specified under the safe 
harbor provisions of paragraph (c) of this section that permit an 
adequate audit of the income tax return of the reporting corporation and 
to provide such authorizations of agent that permit adequate access to 
such records. In most instances, required record maintenance for a 
particular reporting corporation under a negotiated agreement will be 
less than the broad range of records described under the safe harbor

[[Page 578]]

provisions. Additionally, a provision specifying the effective date and 
the expiration date of the agreement that may vary the effective date of 
the regulations may be included.
    (ii) Significant industry segment test. A District Director may 
determine which industry segment profit and loss statements are material 
for purposes of requiring the maintenance of records (under either 
paragraph (a)(1) of this section or the safe harbor described in 
paragraph (a)(2) of this section). The industry segments that the 
District Director determines are material need not be the industry 
segments that meet the significant industry segment test under paragraph 
(c)(5) of this section or the high profit test under paragraph (c)(6) of 
this section. For this purpose, a reporting corporation will be required 
to maintain only those records from which profit and loss statements for 
the related party group may be constructed with respect to industry 
segments identified by the District Director. To the extent that 
existing profit and loss statements are similar in scope and level of 
detail to statements for industry segments that would otherwise be 
described under the tests of paragraphs (c)(5) and (6) of this section, 
the District Director shall accept the existing statements instead of 
the statements that would otherwise be required under paragraphs (c)(5) 
and (6) of this section.
    (iii) Example. The following example illustrates the rules of 
paragraph (e)(2)(ii) of this section.

    Example. The District Director determines that RC, a reporting 
corporation that is a manufacturer of related chemical products, has two 
industry segments, Segment 1 and Segment 2. While both industry segments 
meet the significant industry segment test of paragraph (c)(5) of this 
section, Segment 1 has a relatively low volume of sales to foreign 
related parties. Additionally, Segment 1 consists of products that 
produce only a small profit margin because the product is generic and 
other companies also sell the product. The District Director enters into 
an agreement with RC that requires only records from which a profit and 
loss statement for the related party group can be constructed for 
Segment 2. Therefore, RC is not required to maintain records for Segment 
1 from which a profit and loss statement for the related party group can 
be constructed. The other record maintenance requirements under this 
section apply, however.

    (3) Circumstances of agreement. The District Director generally will 
enter into an agreement under this paragraph (e) upon request by the 
reporting corporation when the District Director believes that the 
District has or can obtain sufficient knowledge of the business or 
industry of the reporting corporation to limit the record maintenance 
requirement to particular documents.
    (4) Agreement as part of APA process. An agreement with a reporting 
corporation under this paragraph (e) may be entered into as a part of 
the Advance Pricing Agreement (APA) process at any time during the APA 
process, insofar as the agreement relates to the subject matter of the 
APA.
    (f) U.S. maintenance--(1) General rule. Records that must be 
maintained under this section must be maintained within the United 
States, unless the conditions described in paragraph (f)(2) of this 
section are met.
    (2) Non-U.S. maintenance requirements. A reporting corporation may 
maintain outside the United States records not ordinarily maintained in 
the United States but required to be maintained in the United States 
under this section. However, the reporting corporation must either:
    (i) Deliver to the Service the original documents (or duplicates) 
requested within 60 days of the request by the Service for such records 
and provide translations of such documents within 30 days of a request 
for translations of specific documents; or
    (ii) Move the original documents (or duplicates) requested to the 
United States within 60 days of the request of the Service for such 
records; provide the Service with an index to the requested records, the 
name and address of a custodian located within the United States having 
control over the records, and the address where the records are located 
within 60 days of the Service's request for the records; and continue to 
maintain the records within the United States throughout the period of 
retention described in paragraph (g) of this section. For summons 
procedures with respect to records that have been moved to the

[[Page 579]]

United States, see sections 6038A(e), 7602, 7603, and 7604.

With respect to any material profit and loss statements required to be 
created (either under paragraph (c) of this section or under an 
agreement with the District Director), unless otherwise specified, ``120 
days'' shall be substituted for ``60 days'' in this paragraph (f)(2), 
and labels and text with respect to such statements must be in the 
English language.
    (3) Prior taxable years. The non-U.S. maintenance requirements 
described in paragraph (f)(2) of this section apply to records located 
outside the United States that were in existence on or after March 20, 
1990, without regard to the taxable year to which such records relate.
    (4) Scheduled production for high volume or other reasons. Upon a 
written request, for good cause shown, the District Director may grant 
an extension of the time for the production or translation of the 
requested documents. Such requests should be made within 30 days of the 
request for records by the Service. If an extension is needed because of 
the volume of records requested or the amount of translation requested, 
the District Director may allow production or translation to be 
scheduled over a period of time so that not all records need be produced 
or translated at the same time.
    (5) Required U.S. maintenance. The District Director (with the 
concurrence of the Assistant Commissioner (International)), may require, 
for cause, the maintenance within the United States of any records 
specified in paragraph (f)(1) of this section. Such a requirement will 
be imposed only if there exists a clear pattern of failure to maintain 
or timely produce the required records. The assessment of a monetary 
penalty under section 6038A(d) and Sec. 1.6038A-4 for failure to 
maintain records is not necessarily sufficient to require the 
maintenance of records within the United States.
    (g) Period of retention. Records required to be maintained by 
section 6038A(a) and this section shall be kept as long as they may be 
relevant or material to determining the correct tax treatment of any 
transaction between the reporting corporation and a related party, but 
in no case less than the applicable statute of limitations on assessment 
and collection with respect to the taxable year in which the transaction 
or item to which the records relate affects the U.S. tax liability of 
the reporting corporation. See section 6001 and the regulations 
thereunder.
    (h) Application of record maintenance rules to banks and other 
financial institutions. [Reserved].
    (i) Effective dates. For effective dates for this section, see 
Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28065, June 19, 1991; T.D. 8353, 56 FR 41792, Aug. 23, 
1991, as amended by T.D. 8611, 60 FR 41015, Aug. 11, 1995]



Sec. 1.6038A-4  Monetary penalty.

    (a) Imposition of monetary penalty--(1) In general. If a reporting 
corporation fails to furnish the information described in Sec. 1.6038A-2 
within the time and manner prescribed in Sec. 1.6038A-2 (d) and (e), 
fails to maintain or cause another to maintain records as required by 
Sec. 1.6038A-3, or (in the case of records maintained outside the United 
States) fails to meet the non-U.S. record maintenance requirements 
within the applicable time prescribed in Sec. 1.6038A-3(f), a penalty of 
$10,000 shall be assessed for each taxable year with respect to which 
such failure occurs. Such a penalty may be imposed by the District 
Director or the Director of the Internal Revenue Service Center where 
the Form 5472 is filed. The filing of a substantially incomplete Form 
5472 constitutes a failure to file Form 5472. Where, however, the 
information described in Sec. 1.6038A-2 (b)(3) through (5) is not 
required to be reported, a Form 5472 filed without such information is 
not a substantially incomplete Form 5472.
    (2) Liability for certain partnership transactions. A reporting 
corporation to which transactions engaged in by a partnership are 
attributed under Sec. 1.6038A-1(e)(2) is subject to the rules of this 
section to the extent failures occur with respect to the partnership 
transactions so attributed.
    (3) Calculation of monetary penalty. If a reporting corporation 
fails to maintain records as required by Sec. 1.6038A-3 of transactions 
with multiple related parties, the monetary penalty may be assessed for 
each failure to maintain

[[Page 580]]

records with respect to each related party. The monetary penalty, 
however, shall be imposed on a reporting corporation only once for a 
taxable year with respect to each related party for a failure to furnish 
the information required on Form 5472, for a failure to maintain or 
cause another to maintain records, or for a failure to comply with the 
non-U.S. maintenance requirements described in Sec. 1.6038A-3(f). An 
additional penalty for another failure may be imposed, however, under 
the rules of paragraph (d)(2) of this section. Thus, unless such 
failures continue after notification as described in paragraph (d) of 
this section, the maximum penalty under this paragraph with respect to 
each related party for all such failures in a taxable year is $10,000. 
The members of a group of corporations filing a consolidated return are 
jointly and severally liable for any monetary penalty that may be 
imposed under this section.
    (b) Reasonable cause--(1) In general. Certain failures may be 
excused for reasonable cause, including not timely filing Form 5472, not 
maintaining or causing another to maintain records as required by 
Sec. 1.6038A-3, and not complying with the non-U.S. maintenance 
requirements described in Sec. 1.6038A-3(f). If an affirmative showing 
is made that the taxpayer acted in good faith and there is reasonable 
cause for a failure that results in the assessment of the monetary 
penalty, the period during which reasonable cause exists shall be 
treated as beginning on the day reasonable cause is established and 
ending not earlier than the last day on which reasonable cause existed 
for any such failure. Additionally, the beginning of the 90-day period 
after mailing of a notice by the District Director or the Director of an 
Internal Revenue Service Center of a failure described in paragraph (d) 
of this section shall be treated as not earlier than the last day on 
which reasonable cause existed.
    (2) Affirmative showing required--(i) In general. To show that 
reasonable cause exists for purposes of paragraph (b)(1) of this 
section, the reporting corporation must make an affirmative showing of 
all the facts alleged as reasonable cause for the failure in a written 
statement containing a declaration that it is made under penalties of 
perjury. The statement must be filed with the District Director (in the 
case of failure to maintain or furnish requested information permitted 
to be maintained outside the United States within the time required 
under Sec. 1.6038A-3(f) or a failure to file Form 5472) or the Director 
of the Internal Revenue Service Center where the Form 5472 is required 
to be filed (in the case of failure to file Form 5472). The District 
Director or the Director of the Internal Revenue Service Center where 
the Form 5472 is required to be filed, as appropriate, shall determine 
whether the failure was due to reasonable cause, and if so, the period 
of time for which reasonable cause existed. If a return has been filed 
as required by Sec. 1.6038A-2 or records have been maintained as 
required by Sec. 1.6038A-3, except for an omission of, or error with 
respect to, some of the information required or a record to be 
maintained, the omission or error shall not constitute a failure for 
purposes of section 6038A(d) if the reporting corporation that filed the 
return establishes to the satisfaction of the District Director or the 
Director of the Internal Revenue Service Center that it has 
substantially complied with the filing of Form 5472 or the requirement 
to maintain records.
    (ii) Small corporations. The District Director shall apply the 
reasonable cause exception liberally in the case of a small corporation 
that had no knowledge of the requirements imposed by section 6038A; has 
limited presence in and contact with the United States; and promptly and 
fully complies with all requests by the District Director to file Form 
5472, and to furnish books, records, or other materials relevant to the 
reportable transaction. A small corporation is a corporation whose gross 
receipts for a taxable year are $20,000,000 or less.
    (iii) Facts and circumstances taken into account. The determination 
of whether a taxpayer acted with reasonable cause and in good faith is 
made on a case-by-case basis, taking into account all pertinent facts 
and circumstances. Circumstances that may indicate reasonable cause and 
good faith include an honest misunderstanding of fact or law

[[Page 581]]

that is reasonable in light of the experience and knowledge of the 
taxpayer. Isolated computational or transcriptional errors generally are 
not inconsistent with reasonable cause and good faith. Reliance upon an 
information return or on the advice of a professional (such as an 
attorney or accountant) does not necessarily demonstrate reasonable 
cause and good faith. Similarly, reasonable cause and good faith is not 
necessarily indicated by reliance on facts that, unknown to the 
taxpayer, are incorrect. Reliance on an information return, professional 
advice or other facts, however, constitutes reasonable cause and good 
faith if, under all the circumstances, the reliance was reasonable. A 
taxpayer, for example, may have reasonable cause for not filing a Form 
5472 or for not maintaining records under section 6038A if the taxpayer 
has a reasonable belief that it is not owned by a 25-percent foreign 
shareholder. A reasonable belief means that the taxpayer does not know 
or has no reason to know that it is owned by a 25-percent foreign 
shareholder. For example, a reporting corporation would not know or have 
reason to know that it is owned by a 25-percent foreign shareholder if 
its belief that it is not so owned is consistent with other information 
reported or otherwise furnished to or known by the reporting 
corporation. A taxpayer may have reasonable cause for not treating a 
foreign corporation as a related party for purposes of section 6038A 
where the foreign corporation is a related party solely by reason of 
Sec. 1.6038A-1(d)(3) (under the principles of section 482), and the 
taxpayer had a reasonable belief that its relationship with the foreign 
corporation did not meet the standards for related parties under section 
482.
    (c) Failure to maintain records or to cause another to maintain 
records. A failure to maintain records or to cause another to maintain 
records is determined by the District Director upon the basis of the 
reporting corporation's overall compliance (including compliance with 
the non-U.S. maintenance requirements under Sec. 1.6038A-3(f)(2)) with 
the record maintenance requirements. It is not an item-by-item 
determination. Thus, for example, a failure to maintain a single or 
small number of items may not constitute a failure for purposes of 
section 6038A(d), unless the item or items are essential to the correct 
determination of transactions between the reporting corporation and any 
foreign related parties. The District Director shall notify the 
reporting corporation in writing of any determination that it has failed 
to comply with the record maintenance requirement.
    (d) Increase in penalty where failure continues after notification--
(1) In general. If any failure described in this section continues for 
more than 90 days after the day on which the District Director or the 
Director of the Internal Revenue Service Center where the Form 5472 is 
required to be filed mails notice of the failure to the reporting 
corporation, the reporting corporation shall pay a penalty (in addition 
to the penalty described in paragraph (a) of this section) of $10,000 
with respect to each related party for which a failure occurs for each 
30-day period during which the failure continues after the expiration of 
the 90-day period. Any uncompleted fraction of a 30-day period shall 
count as a 30-day period for purposes of this paragraph (d).
    (2) Additional penalty for another failure. An additional penalty 
for a taxable year may be imposed, however, if at a time subsequent to 
the time of the imposition of the monetary penalty described in 
paragraph (a) of this section, a second failure is determined and the 
second failure continues after notification under paragraph (d)(1) of 
this section. Thus, if a taxpayer fails to file Form 5472 and is 
assessed a monetary penalty and later, upon audit, is determined to have 
failed to maintain records, an additional penalty for the failure to 
maintain records may be assessed under the rules of this paragraph if 
the failure to maintain records continues after notification under this 
paragraph.
    (3) Cessation of accrual. The monetary penalty will cease to accrue 
if the reporting corporation either files Form 5472 (in the case of a 
failure to file Form 5472), furnishes information to substantially 
complete Form 5472, or demonstrates compliance with respect to the 
maintenance of records (in the

[[Page 582]]

case of a failure to maintain records) for the taxable year in which the 
examination occurs and subsequent years to the satisfaction of the 
District Director. The monetary penalty also will cease to accrue if 
requested information, documents, or records, kept outside the United 
States under the requirements of Sec. 1.6038A-3(f) and not produced 
within the time specified are produced or moved to the United States 
under the rules of paragraph (f)(2)(ii) of this section.
    (4) Continued failures. If a failure under this section relating to 
a taxable year beginning before July 11, 1989 occurs, and if the failure 
continues following 90 days after the notice of failure under this 
paragraph is sent, the amount of the additional penalty to be assessed 
under this paragraph is $10,000 for each 30-day period beginning after 
November 5, 1990, during which the failure continues. There is no 
limitation on the amount of the monetary penalty that may be assessed 
after November 5, 1990.
    (e) Other penalties. For criminal penalties for failure to file a 
return and filing a false or fraudulent return, see sections 7203 and 
7206 of the Code. For the penalty relating to an underpayment of tax, 
see section 6662.
    (f) Examples. The following examples illustrate the rules of this 
section.

    Example 1--Failure to file Form 5472. Corp X, a U.S. reporting 
corporation, engages in related party transactions with FC. Corp X does 
not timely file a Form 5472 or maintain records relating to the 
transactions with FC for Year 1 or subsequent years. The Service Center 
with which Corp X files its income tax return imposes a $10,000 penalty 
for each of Years 1, 2, and 3 under section 6038A (d) and this section 
for failure to provide information as required on Form 5472 and mails a 
notice of failure to provide inrormation. Corp X does not file Form 
5472. Ninety days following the mailing of the notice of failure to Corp 
X an additional penaly of $10,000 is imposed. On the 135th day following 
the mailing of the notice of failure, Corp X files Form 5472 for Years 
1, 2, and 3. The total penalty owed by Corp X for Year 1 is $30,000. 
($10,000 for not timely filing Form 5472, $10,000 for the first 30-day 
period following the expiration of the 90-day period, and $10,000 for 
the fraction of the second 30-day period). The penalty for Years 2 and 3 
for the failure to file Form 5472 is also $30,000 for each year, 
calculated in the same manner as for Year 1. The total penalty for 
failure to file Form 5472 for Years 1, 2, and 3 is $90,000.
    Example 2--Failure to maintain records. Assume the same facts as in 
Example 1. In Year 5, Corp X is audited for Years 1 through 3. Corp X 
has not been maintaining records relating to the transactions with FC. 
The District Director issues a notice of failure to maintain records. 
Corp X has already been subject to the monetary penalty of $10,000 for 
each of Years 1, 2, and 3 for failure to file Form 5472 and, therefore, 
a monetary penalty under paragraph (a) of this section for failure to 
maintain records is not assessed. However, an additional penalty is 
assessed after the 90th day following the mailing of the notice of 
failure to maintain records. Corp X develops a record maintenance system 
as required by section 6038A and Sec. 1.6038A-3. On the 180th day 
following the mailing of the notice of failure to maintain records, Corp 
X demonstrates to the satisfaction of the District Director that the 
newly developed record maintenance system will comply with the 
requirements of Sec. 1.6038A-3 and the increase in the monetary penalty 
after notification ceases to accrue. The additional penalty for failure 
to maintain records is $30,000. An additional penalty of $30,000 per 
year is assessed for each of years 2 and 3 for the failure to maintain 
records for a total of $90,000.

    (g) Effective dates. For effective dates for this section, see 
Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28072, June 19, 1991]



Sec. 1.6038A-5  Authorization of agent.

    (a) Failure to authorize. The rules of Sec. 1.6038A-7 shall apply to 
any transaction between a foreign related party and a reporting 
corporation (including any transaction engaged in by a partnership that 
is attributed to the reporting corporation under Sec. 1.6038A-1(e)(2)), 
unless the foreign related party authorizes (in the manner described in 
paragraph (b) of this section) the reporting corporation to act as its 
limited agent solely for purposes of sections 7602, 7603, and 7604 with 
respect to any request by the Service to examine records or produce 
testimony that may be relevant to the tax treatment of such a 
transaction or with respect to any summons by the Service for such 
records or testimony. The fact that a reporting corporation is 
authorized to act as an agent for a foreign related party is to be 
disregarded for purposes of determining whether the foreign related 
party either has a trade or business in the United States for purposes

[[Page 583]]

of the Code or a permanent establishment or fixed base in the United 
States for purposes of an income tax treaty.
    (b) Authorization by related party--(1) In general. Upon request by 
the Service, a foreign related party shall authorize as its agent 
(solely for purposes of sections 7602, 7603, and 7604) the reporting 
corporation with which it engages in transactions. The authorization 
must be signed by the foreign related party or an officer of the foreign 
related party possessing the authority to authorize an agent for 
purposes of Rule 4 of the Federal Rules of Civil Procedure. The 
reporting corporation will accept this appointment by providing a 
statement to that effect, signed by an officer of the reporting 
corporation possessing the authority to accept such an appointment. The 
agency shall be effective at all times. For taxable years beginning 
after July 10, 1989, the authorization and acceptance must be provided 
to the Service within 30 days of a request by the Service to the 
reporting corporation for such an authorization. The authorization must 
contain a heading and statement as set forth below. A foreign government 
is not subject to the authorization of agent requirement.

                         AUTHORIZATION OF AGENT

    ``[Name of foreign related party] hereby expressly authorizes [name 
of reporting corporation] to act as its agent solely for purposes of 
sections 7602, 7603, and 7604 of the Internal Revenue Code with respect 
to any request to examine records or produce testimony that may be 
relevant to the U.S. income tax treatment of any transaction between 
[name of the above-named foreign related party] and [name of reporting 
corporation] or with respect to any summons for such records or 
testimony.
_______________________________________________________________________
Signature of or for [name of foreign related party]
_______________________________________________________________________
(Title)
_______________________________________________________________________
(Date)
    (If signed by a corporate officer, partner, or fiduciary on behalf 
of a foreign related party: I certify that I have the authority to 
execute this authorization of agent to act on behalf of [name of foreign 
related party]).
_______________________________________________________________________
    Type or print your name below if signing for a foreign related party 
that is not an individual.
_______________________________________________________________________
    [Name of reporting corporation] accepts this appointment to act as 
agent for [name of foreign related party] for the above purpose.
_______________________________________________________________________
Signature for (Name of Reporting Corporation]
_______________________________________________________________________
(Title)
_______________________________________________________________________
(Date)
    I certify that I have the authority to accept this appointment to 
act as agent on behalf of (name of foreign related party] and agree to 
accept service of process for the above purposes.
    Type or print your name below.
_______________________________________________________________________

    (2) Authorization for prior years. A foreign related party shall 
authorize a reporting corporation to act as its agent with respect to 
taxable years for which a Form 5472 is required to be filed prior to the 
date on which the final regulations under section 6038A are published by 
providing the above executed authorization of agent within 30 days of a 
request by the Service for such an authorization.
    (c) Foreign affiliated groups--(1) In general. A foreign corporation 
that has effective legal authority to make the authorization of agent 
under paragraph (b) of this section on behalf of any group of foreign 
related parties may execute such an authorization for any members of the 
group. A single authorization may be made on a consolidated basis. In 
such a case, the common parent must attach a schedule to the 
authorization of agent stating which members of the group would 
otherwise be required to separately authorize the reporting corporation 
as agent. The schedule must provide the name, address, relationship to 
the reporting corporation, and U.S. taxpayer identification number, if 
applicable, of each member.
    (2) Application of noncompliance penalty adjustment. In 
circumstances where a consolidated authorization of agent has been 
executed, if the agency authorization for any member of the group is not 
legally effective for purposes of sections 7602, 7603, and 7604, the 
noncompliance penalty adjustment under section 6038A(e) and 
Sec. 1.6038A-7 shall apply.

[[Page 584]]

    (d) Legal effect of authorization of agent. The legal consequences 
of a foreign related party authorizing a reporting corporation to act as 
its agent for purposes of sections 7602, 7603, and 7604 of the Code are 
as follows.
    (1) Agent for purposes of commencing judicial proceedings. A 
reporting corporation that is authorized by a foreign related party to 
act as its agent for purposes of sections 7602, 7603, and 7604 
(including service of process) is also the agent of the foreign related 
party for purposes of--
    (i) The filing of a petition to quash under section 6038A(e)(4)(A) 
or a petition to review an Internal Revenue Service determination of 
noncompliance under section 6038A(e)(4)(B), and
    (ii) The commencement of a judicial proceeding to enforce a summons 
under section 7604, whether commenced in conjunction with a petition to 
quash under section 6038A(e)(4)(A) or commenced as a separate proceeding 
in the federal district court for the district in which the person to 
whom the summons is issued resides or is found.
    (2) Foreign related party found where reporting corporation found. 
For any purposes relating to sections 7602, 7603, or 7604 (including 
service of process), a foreign related party that authorizes a reporting 
corporation to act on its behalf under section 6038A(e)(1) and this 
section may be found anywhere where the reporting corporation has 
residence or is found.
    (e) Successors in interest. A successor in interest to a related 
party must execute the authorization of agent as described in paragraph 
(b) of this section.
    (f) Deemed compliance--(1) In general. In exceptional circumstances, 
the District Director may treat a reporting corporation as authorized to 
act as agent for a related party for purposes of sections 7602, 7603, 
and 7604 in the absence of an actual agency appointment by the foreign 
related party, in circumstances where the actual absence of an 
appointment is reasonable. Factors to be considered include--
    (i) If neither the reporting corporation nor the other party to the 
transaction knew or had reason to know that the two parties were related 
at the time of the transaction, and
    (ii) The extent to which the taxpayer establishes to the 
satisfaction of the District Director that all transactions between the 
reporting corporation and the related party were on arm's length terms 
and did not involve the participation of any known related party.
    (2) Reason to know. Whether the reporting corporation or other party 
had reason to know that the two parties were related at the time of the 
transaction will be determined by all the facts and circumstances.
    (3) Effect of deemed compliance. If a reporting corporation is 
deemed under this paragraph (f) to have been authorized to act as an 
agent for a foreign related party for purposes of sections 7602, 7603, 
and 7604, such deemed compliance is applicable only for that particular 
transaction and other reportable transactions entered into prior to the 
time when the reporting corporation knew or had reason to know that the 
related party, in fact, was related. The noncompliance rule of 
Sec. 1.6038A-7 shall apply to any transaction subsequent to that time 
with the same related party, unless the related party actually 
authorizes the reporting corporation to act as its agent under paragraph 
(a) of this section. In addition, the record maintenance requirements of 
Sec. 1.6038A-3 will apply to all subsequent transactions and, with 
respect to prior transactions, will apply to relevant records in 
existence at the time the relationship was discovered.
    (g) Effective dates. For effective dates for this section, see 
Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28073, June 19, 1991; T.D. 8353, 56 FR 41792, Aug. 23, 
1991]



Sec. 1.6038A-6  Failure to furnish information.

    (a) In general. The rules of Sec. 1.6038A-7 may be applied with 
respect to a transaction between a foreign related party and the 
reporting corporation (including any transaction engaged in by a 
partnership that is attributed to the reporting corporation under Sec.  
1.6038A-1(e)(2)) if a summons is issued to the reporting corporation to 
produce any records or testimony, either directly or as agent for such 
related party, to determine the correct treatment under title 1 of the 
Code of such a transaction

[[Page 585]]

between the reporting corporation and the related party; and if--
    (1)(i) The summons is not quashed in a proceeding, if any, begun 
under section 6038A(e)(4) and is not determined to be invalid in a 
proceeding, if any, begun under section 7604 to enforce such summons; 
and
    (ii) The reporting corporation does not substantially and timely 
comply with the summons, and the District Director has sent by certified 
or registered mail a notice under section 6038A(e)(2)(C) to the 
reporting corporation that it has not so complied; or
    (2) The reporting corporation fails to maintain or to cause another 
to maintain records as required by Sec. 1.6038A-3, and by reason of that 
failure, the summons is quashed in a proceeding under section 
6038A(e)(4) or in a proceeding begun under section 7604 to enforce the 
summons, or the reporting corporation is not able to provide the records 
requested in the summons.
    (b) Coordination with treaties. Where records of a related party are 
obtainable on a timely and efficient basis under information exchange 
procedures provided under a tax treaty or tax information exchange 
agreement (TIEA), the Service generally will make use of such procedures 
before issuing a summons. The absence or pendency of a treaty or TIEA 
request may not be asserted as grounds for refusing to comply with a 
summons or as a defense against the assertion of the noncompliance 
penalty adjustment under Sec. 1.6038A-7. For purposes of this paragraph, 
information is available on a timely and efficient basis if it can be 
obtained within 180 days of the request.
    (c) Enforcement proceeding not required. The District Director is 
not required to begin an enforcement proceeding to enforce the summons 
in order to apply the rules of Sec. 1.6038A-7.
    (d) De minimis failure. Where a reporting corporation's failure to 
comply with the requirement to furnish information under this section is 
de minimis, the District Director, in the exercise of discretion, may 
choose not to apply the noncompliance penalty. Thus, for example, in 
cases where a particular document or group of documents is not furnished 
upon request or summons, the District Director (in the District 
Director's sole discretion), may choose not to apply the noncompliance 
penalty if the District Director deems the document or documents not to 
have significant or sufficient value in the determination of the 
correctness of the tax treatment of the related party transaction.
    (e) Suspension of statute of limitations. If the reporting 
corporation brings an action under section 6038A(e)(4)(A) (proceeding to 
quash) or (e)(4)(B) (review of secretarial determination of 
noncompliance), the running of any period of limitation under section 
6501 (relating to assessment and collection of tax) or under section 
6531 (relating to criminal prosecutions) for the taxable year or years 
to which the summons that is the subject of such proceeding relates 
shall be suspended for the period during which such proceeding, and 
appeals therein, are pending. In no event shall any such period expire 
before the 90th day after the day on which there is a final 
determination in such proceeding.
    (f) Effective dates. For effective dates for this section, see 
Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28075, June 19, 1991]



Sec. 1.6038A-7  Noncompliance.

    (a) In general. In the case of any failure described in 
Sec. 1.6038A-5 or Sec. 1.6038A-6, the rules of this Sec. 1.6038A-7 apply 
to the reporting corporation. In such a case--
    (1) The amount of the deduction allowed under subtitle A for any 
amount paid or incurred by the reporting corporation to the related 
party in connection with such transaction, and
    (2) The cost to the reporting corporation of any property acquired 
in such transaction from the related party or transferred by such 
corporation in such transaction to the related party, may be determined 
by the District Director.
    (b) Determination of the amount. The amount of the deduction or the 
cost to the reporting corporation shall be the amount determined by the 
District Director (in the District Director's sole discretion) from the 
District Director's own knowledge or from such information as the 
District Director may choose to obtain through testimony or otherwise. 
The District Director shall consider any information or materials

[[Page 586]]

that have been submitted by the reporting corporation or a foreign 
related party. The District Director, however, may disregard any 
information, documents, or records submitted by the reporting 
corporation or the related party if (in the District Director's sole 
discretion) the District Director deems that they are insufficiently 
probative of the relevant facts.
    (c) Separate application. If the noncompliance penalty of this 
section applies with respect to transactions with a related party of the 
reporting corporation, it will not be applied with respect to any other 
related parties of the reporting corporation solely upon the basis of 
that failure. Thus, for example, if a reporting corporation engages in 
transactions with related party A and related party B, and the reporting 
corporation does not respond to a summons for records related to the 
transactions between the reporting corporation and related party A, the 
noncompliance penalty imposed as a result of such failure will not apply 
to the transactions between the reporting corporation and related party 
B. If a separate summons is issued for records relating to the 
transactions between the reporting corporation and related party B and 
the reporting corporation does not produce such records, the 
noncompliance penalty may be applied to those transactions.
    (d) Effective dates. For effective dates for this section, see 
Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28075, June 19, 1991]



Sec. 1.6038B-1T  Reporting of transactions described in section 367 (temporary).

    (a) Purpose and scope. This section sets forth information reporting 
requirements under section 6038B, concerning certain transfers of 
property to foreign persons. Paragraph (b) of this section provides 
general rules explaining when and how to carry out the reporting 
required under section 6038B. Paragraphs (c) and (d) of this section 
specify the information that is required to be reported with respect to 
transfers of property that are described in section 367 (a) and (d), 
respectively. Finally, paragraph (f) of this section sets forth the 
consequences of a failure to comply with the requirements of section 
6038B and this section. Except as specifically provided to the contrary 
elsewhere in this section, this section applies to transfers occurring 
after December 31, 1984.
    (b) Time and manner of reporting--(1) In general. Any U.S. person 
that is required to report pursuant to section 6038B and the rules of 
this section must attach the required information to Form 926 (Return by 
Transferor of Property to a Foreign Corporation, Foreign Estate or 
Trust, or Foreign Partnership). Form 926 and the required attachments 
must be filed at the Internal Revenue Service Center where the U.S. 
person is required to file its Federal income tax return. 
Notwithstanding any statement to the contrary on Form 926, the form and 
attachments must be filed with the transferor's tax return for the 
taxable year that includes the date of the transfer (as defined in 
paragraph (b)(3) of this section). However, in the case of a transfer 
that occurred prior to June 16, 1986, Form 926 and the required 
attachments must be filed by September 16, 1986, if that date is later 
than the date the filing would otherwise be required under the preceding 
sentence. Section 7502 and regulations thereunder shall apply in 
determining whether the form and attachments are timely filed. Any 
attachment to Form 926 required under the rules of this section is filed 
subject to the transferor's declaration under penalties of perjury on 
Form 926 that the information submitted is true, correct and complete to 
the best of the transferor's knowledge and belief.
    (2) Person required to file--(i) In general. Form 926 and the 
attachments required under the rules of this section must be filed by 
each U.S. person that makes a transfer described in section 367 (a) or 
(d). For special reporting rules applicable to transfers described under 
section 367(e)(1), see paragraph (e) of this section; no reporting is 
required for transfers described in section 367(e)(2). No notice shall 
be required under this section with respect to a transfer of stock of 
securities described in Sec. 1.367(a)-3T(f)(1) or with respect to a 
transfer described in section 367(a)(2). If two or more persons transfer 
jointly-owned property to a foreign

[[Page 587]]

corporation in a transfer with respect to which a notice is required 
under this section, then each person must report with respect to the 
particular interest he transferred, specifying the nature and extent of 
the interest. However, a husband and wife (and their minor children) may 
jointly file a single information return. If two or more U.S. persons 
owning stock or securities in a corporation transfer such stock or 
securities to a foreign corporation in the same transaction, then the 
corporation whose stock or securities are transferred may, at its 
choice, file the notice required by this section on behalf of its 
shareholders. In that case, a single Form 926, signed by the responsible 
officer of the corporation, shall be filed, containing the required 
information with respect to each shareholder, other than shareholders 
described in Sec. 1.367(a)-3T(f)(1).
    (ii) Indirect transfers. If a U.S. person that holds an interest in 
an entity is considered to make an indirect transfer (when the entity 
transfers property to a foreign corporation) under the provisions of--
    (A) Section 367(a)-1T(c)(2)(i)(B) (concerning mergers to which 
section 368(a)(2)(D) applies);
    (B) Section 367(a)-1T(c)(2)(i)(C) (concerning mergers to which 
section 368(a)(2)(E) applies);
    (C) Section 367(a)-1T(c)(2)(ii) (concerning reorganizations 
described in section 368(a)(1)(B));
    (D) Section 367(a)-1T(c)(2)(iii) (concerning reorganizations 
described in section 368(a)(1)(C));
    (E) Section 367(a)-1T(c)(3)(i) (concerning transfers of property by 
a partnership); or
    (F) Section 367(a)-1T(c)(4) (concerning transfers of property by a 
trust or estate),

then the requirements of this section shall apply with respect to each 
such person. However, the requirements of this section may be satisfied 
by the entity, on behalf of its interest-holders, by the filing of a 
single information return containing the required information with 
respect to each interest-holder (other than persons described in 
Sec. 1.367(a)-3T(f)(1)) that is considered to make a transfer described 
in section 367(a). If the entity chooses to satisfy the requirements of 
this section on behalf of its interest-holders, Form 926 must be signed 
by a responsible officer in the case of a corporation, by a general 
partner in the case of a partnership, and by a trustee, executor, or 
equivalent fiduciary in the case of a trust or estate.
    (3) Date of transfer--(i) In general. For purposes of this section, 
the date of a transfer described in section 367 is the first date on 
which title to, possession of, or rights to the use of stock, 
securities, or other property passes pursuant to the plan for purposes 
of subtitle A of the Internal Revenue Code. A transfer will not be 
considered to begin with a decision of a board of directors or similar 
action unless the transaction otherwise takes effect for purposes of 
subtitle A of the Internal Revenue Code on that date.
    (ii) Termination of section 1504(d) election. A transfer deemed to 
occur as a result of the termination of an election under section 
1504(d) will be considered to occur on the date the contiguous country 
corporation first fails to continue to qualify for the election under 
section 1504(d). The rule of this paragraph (b)(3)(ii) is illustrated by 
the following example.

    Example. Domestic corporation W previously made a valid election 
under section 1504(d) to have its Mexican subsidiary S treated as a 
domestic corporation. On August 1, 1986, W disposes of its right, title, 
and interest in 10 percent of the stock of S by selling such stock to an 
unrelated United States person who is not a director of S. S first fails 
to continue to qualify for the election under section 1504(d) on August 
1, 1986, since on such date it ceases to be directly or indirectly 
wholly owned or controlled by W. The constructive transfer of assets 
from ``domestic'' corporation S to Mexican corporation S is considered 
to occur on that date.

    (iii) Change in classification. A transfer deemed to occur as a 
result of a change in classification of an entity caused by a change in 
the governing documents, articles, or agreements of the entity (as 
described in Sec. 1.367(a)-1T(c)(6)) will be considered to occur on the 
date that such changes take effect for purposes of subtitle A of the 
Internal Revenue Code.
    (iv) U.S. resident under section 6013 (g) or (h). A transfer made by 
an alien individual who is considered to be a U.S.

[[Page 588]]

resident by reason of a timely election under section 6013 (g) or (h) 
will be considered to occur, for purposes of this section (but not for 
purposes of section 367), on the later of--
    (A) The date on which the election under section 6013 (g) or (h) is 
made; or
    (B) The date on which the transfer would otherwise be considered to 
occur under the rules of this paragraph (b)(3).

The rule of this paragraph (b)(3)(iv) is illustrated by the following 
example.

    Example. D is a nonresident alien individual who is married to a 
United States citizen. On March 1, 1986, D transfers property to a 
foreign corporation in an exchange described in section 351. On April 
15, 1987, D and the spouse timely file with their tax return for the 
taxable year ended December 31, 1986, an election under section 6013(g) 
for D to be treated as a United States resident. The election is 
effective on January 1, 1986. For purposes of section 6038 B, the 
transfer described in section 367(a) made by D in connection with the 
section 351 exchange is considered to occur on April 15, 1987, the date 
on which the timely election was made under section 6013(g).

    (c) Information required with respect to transfers described in 
section 367 (a)(1). A U.S. person that transfers property to a foreign 
corporation in an exchange described in section 367(a)(1) (other than a 
transfer described in section 367(a)(2)) must provide the following 
information in paragraphs labelled to correspond with the number or 
letter set forth below. If a particular item is not applicable to the 
subject transfer, list its heading and state that it is not applicable.
    (1) Transferor. Provide the name, U.S. taxpayer identification 
number, and address of the U.S. person making the transfer.
    (2) Transfer. Provide the following information concerning the 
transfer:
    (i) Name, U.S. taxpayer identification number (if any), address, and 
country of incorporation of transferee foreign corporation;
    (ii) A general description of the transfer, and any wider 
transaction of which it forms a part, including a chronology of the 
transfers involved and an identification of the other parties to the 
transaction to the extent known.
    (3) Consideration received. Provide a description of the 
consideration received by the U.S. person making the transfer, including 
its estimated fair market value and, in the case of stock or securities, 
the class or type, amount, and characteristics of the interest received.
    (4) Property transferred. Provide a description of the property 
transferred. The description must be divided into the following 
categories, and must include the estimated fair market value and 
adjusted basis of the property, as well as any additional information 
specified below.
    (i) Active business property. Describe any transferred property 
(other than stock or securities) to be used in the active conduct of a 
trade or business outisde of the United States. Provide here a general 
description of the business conducted (or to be conducted) by the 
transferee, including the location of the business, the number of its 
employees, the nature of the business, and copies of the most recently 
prepared balance sheet and profit and loss statement. Property listed 
within this category may be identified by general type. For example, 
upon the transfer of the assets of a manufacturing operation, a 
reasonable description of the property to be used in the business might 
include the categories of office equipment and supplies, computers and 
related equipment, motor vehicles, and several major categories of 
manufacturing equipment. However, any property that is includible both 
in this subdivision (i) and in subdivision (iii) of this paragraph 
(c)(4) (property subject to depreciation recapture under Sec. 1.367(a)-
4T (b)) must be identified in the manner required in subdivision (iii). 
If property is considered to be transferred for use in the active 
conduct of a trade or business under a special rule in Sec. 1.367(a)-4T, 
specify the applicable rule and provide information supporting the 
application of the rule. If property is subject to section 367(a)(1) 
regardless of its use in a trade or business under the rules of 
Sec. 1.367(a)-4T or Sec. 1.367(a)-5T, list the property only in response 
to subdivision (vii) of this paragraph (c)(4).
    (ii) Stock or securities. Describe any transferred stock or 
securities, including the class or type, amount, and characteristics of 
the transferred stock

[[Page 589]]

or securities, as well as the name, address, place of incorporation, and 
general description of the corporation issuing the stock. In addition, 
provide the following information if applicable:
    (A) Active trade or business stock. If the stock or securities are 
considered to be transferred for use in the active conduct of a trade or 
business outside of the United States under the rules of Sec. 1.367(a)-
3T(d)(2), provide information supporting the application of the rule.
    (B) Application of special rules. If any provision of Sec. 1.367(a)-
3T applies to except the transfer of stock or securities from the rule 
of section 367(a)(1), provide information supporting the claimed 
application of such provision (including information supporting the 
nonapplicability of either anti-abuse rule under Sec. 1.367(a)-3T(h)). 
If the transferor is entering into an agreement to recognize gain upon a 
later disposition of the transferred stock by the transferee foreign 
corporation under Sec. 1.367(a)-3T(g), attach the agreement and waiver 
as required by the rules of that paragraph.
    (iii) Depreciated property. Describe any property that is subject to 
depreciation recapture under the rules of Sec. 1.367(a)-4T(b). Property 
within this category must be separately identified to the same extent as 
was required for purposes of the previously claimed depreciation 
deduction. Specify with respect to each such asset the relevant 
recapture provision, the number of months in which such property was in 
use within the United States, the total number of months the property 
was in use, the fair market value of the property, a schedule of the 
depreciation deduction taken with respect to the property, and a 
calculation of the amount of depreciation required to be recaptured.
    (iv) Property to be leased. Describe any property to be leased to 
other persons by the transferee foreign corporation (unless such 
property is considered to be transferred for use in the active conduct 
of a trade or business and was thus listed under subdivision (i) of this 
paragraph (c)(4)). If the rules of Sec. 1.367(a)-4T(c)(2) apply to 
except the transfer from the rule of section 367(a)(1), provide 
information supporting the claimed application of such provision.
    (v) Property to be sold. Describe any transferred property that is 
to be sold or otherwise disposed of by the transferee foreign 
corporation, as described in Sec. 1.367(a)-4T(d).
    (vi) Transfers to FSCs. Describe any property that is subject to the 
special rule of Sec. 1.367(a)-4T(g) for transfers to FSCs. Provide 
information supporting the claimed application of that rule.
    (vii) Tainted property. Describe any property that is subject to 
Sec. 1.367(a)-5T (concerning property that is subject to the rule of 
section 367(a)(1) regardless of whether it is transferred for use in the 
active conduct of a trade or business outside of the United States). 
Such description must be divided into the relevant categories, as 
follows:
    (A) Inventory, etc. Property described in Sec. 1.367(a)-5T(b);
    (B) Installment obligations, etc. Property described in 
Sec. 1.367(a)-5T(c);
    (C) Foreign currency, etc. Property described in Sec. 1.367(a)-
5T(d);
    (D) Intangible property. Property described in Sec. 1.367(a)-5T(e); 
and
    (E) Leased property. Property described in Sec. 1.367(a)-4T(f).

If any exception provided in Sec. 1.367(a)-5T applies to the transferred 
property (making section 367(a)(1) not applicable to the transfer), 
provide information supporting the claimed application of such 
exception.
    (viii) Foreign loss branch. Provide the information specified in 
paragraph (c)(5) of this section.
    (ix) Other intangibles. Describe an intangible property sold or 
licensed by the transferor to the transferee foreign corporation, and 
set forth the general terms of each sale or license.
    (5) Transfer of foreign branch with previously deducted losses. If 
the property transferred is property of a foreign branch with previously 
deducted losses subject to the rules of Sec. 1.367(a)-6T, provide the 
following information:
    (i) Branch operation. Describe the foreign branch the property of 
which is transferred, in accordance with the definition of 
Sec. 1.367(a)-6T(g).
    (ii) Branch property. Describe the property of the foreign branch, 
including its adjusted basis and fair market value. For this purpose 
property must

[[Page 590]]

be identified with reasonable particularity, but may be identified by 
category rather than listing every asset separately. Substantially 
similar property may be listed together for this purpose, and property 
of minor value may be grouped into functional categories. For example, a 
reasonable description of the property of a business office might 
include the following categories: Word processing or data processing 
equipment, other office equipment and furniture, and office supplies.
    (iii) Previously deducted losses. Set forth a detailed calculation 
of the sum of the losses incurred by the foreign branch before the 
transfer, and a detailed calculation of any reduction of such losses, in 
accordance with Sec. 1.367(a)-6T (d) and (e).
    (iv) Character of gain. Set forth a statement of the character of 
the gain required to be recognized, in accordance with Sec. 1.367(a)-
6T(c)(1).
    (d) Transfers subject to section 367(d)--(1) Initial transfer. A 
U.S. person that transfers inntangible property to a foreign corporation 
in an exchange described in section 351 or 361 must provide the 
following information in paragraphs labelled to correspond with the 
number or letter set forth below. If a particular item is not applicable 
to the subject transfer, list its heading and state that it is not 
applicable. The information required by subdivisions (i) through (iii) 
need only be provided if such information was not otherwise provided 
under paragraph (c) of this section. (Note that the U.S. transferor may 
subsequently be required to file another return under paragraph (d)(2) 
of this section.)
    (i) Transferor. Provide the name, U.S. taxpayer identification 
number, and address of the U.S. person making the transfer.
    (ii) Transfer. Provide information concerning the transfer, 
including:
    (A) Name, U.S. taxpayer identification number (if any), address, and 
country of incorporation of the transferee foreign corporation; (B) A 
general description of the transfer, and any wider transaction of which 
it forms a part, including a chronology of the transfers involved and an 
identification of the other parties to the transaction to the extent 
known.
    (iii) Consideration received. Provide a description of the 
consideration received by the U.S. person making the transfer, including 
its estimated fair market value and, in the case of stock or securities, 
the class or type, amount, and characteristics of the interest received.
    (iv) Intangible property transferred. Provide a description of the 
intangible property transferred, including its adjusted basis. 
Generally, each intangible asset must be separately identified. 
Operating intangibles and foreign goodwill or going concern value, as 
defined in Sec. 1.367(a)-1T(d)(5) (ii) and (iii), should be so 
identified and classified.
    (v) Annual payment. Provide and explain the calculation of the 
annual deemed payment for the use of the intangible property required to 
be recognized by the transferor under the rules of section 367(d).
    (vi) Election to treat as sale. List any intangible with respect to 
which an election is being made under Sec. 1.367(d)-1T(g)(2) to treat 
the transfer as a sale. Include the fair market value of the intangible 
on the date of the transfer and a calculation of the gain required to be 
recognized in the year of the transfer by reason of the election.
    (vii) Coordination with loss rules. List any intangible property 
subject to section 367(d) the transfer of which also gives rise to the 
recognition of gain under section 904(f)(3) or Sec. 1.367(a)-6T. Provide 
a calculation of the gain required to be recognized with respect to such 
property, in accordance with the provisions of Sec. 1.367(d)-1T(g)(4).
    (viii) Other intangibles. Describe any intangible property sold or 
licensed by the transferor to the transferee foreign corporation, and 
set forth the general terms of each sale or license.
    (2) Subsequent transfers. If a U.S. person transfers intangible 
property to a foreign corporation in an exchange described in section 
351 or 361, and at any time thereafter (within the useful life of the 
intangible property) either that U.S. person disposes of the stock of 
the transferee foreign corporation or the transferee foreign corporation 
disposes of the transferred intangible, then the U.S. person must 
provide the following information in paragraphs labelled to correspond 
with the number or letter

[[Page 591]]

set forth below. The information required by subdivisions (i) and (ii) 
need only be provided if such information was not otherwise provided in 
the same return, pursuant to paragraph (c) or (d)(1) of this section. 
For purposes of determining the date on which a return under this 
subparagraph (2) is required to be filed, the date of transfer is the 
date of the subsequent transfer of stock or intangible property.
    (i) Transferor. Provide the name, U.S. taxpayer identification 
number, and address of the U.S. person making the transfer.
    (ii) Initial transfer. Provide the following information concerning 
the initial transfer:
    (A) The date of the transfer;
    (B) The name, U.S. taxpayer identification number (if any), address, 
and country of incorporation of the transferee foreign corporation; and
    (C) A general description of the transfer and any wider transaction 
of which it formed a part.
    (iii) Subsequent transfer. Provide the following information 
concerning the subsequent transfer:
    (A) A general description of the subsequent transfer and any wider 
transaction of which it forms a part;
    (B) A calculation of any gain required to be recognized by the U.S. 
person under the rules of Sec. 1.367(d)-1T (d) through (f); and
    (C) The name, address, and identifying number of each person that 
under the rules of Sec. 1.367(d)-1T (e) or (f) will be considered to 
receive contingent annual payments for the use of the intangible 
property.
    (e) Transfers subject to section 367(e). (1) In general. If a 
domestic corporation (distributing corporation) makes a distribution 
described in section 367(e)(1), the distributing corporation must comply 
with the reporting requirements under this paragraph (e)(1). Form 926 
and other requirements described in this section need not be met by the 
distributing corporation in the case of a distribution described in 
section 367(e)(1).
    (2) Reporting requirements if transaction is taxable under section 
367(e)(1). If the distribution is taxable to the distributing 
corporation under section 367(e)(1) and the regulations thereunder, the 
distributing corporation must attach to its Federal income tax return 
for the taxable year that includes the date of the transfer a statement 
titled ``Section 367(e)(1) Reporting--Compliance With Section 6038B'', 
signed under penalties of perjury by an officer of the corporation, 
disclosing the following information:
    (i) A description of the transaction in which the U.S. distributing 
corporation distributed stock or securities of a controlled corporation 
(whether domestic or foreign) to one or more foreign distributees.
    (ii) The basis and fair market value of the stock and securities 
that were distributed by the distributing corporation in the 
transaction.
    (3) Reporting requirements if transaction qualifies for an exception 
to section 367(e)(1). If the distributing corporation qualifies for an 
exception under Sec. 1.367(e)-1T(c)(1), the requirements of section 
6038B are satisfied if the distributing corporation complies with the 
reporting requirements contained in Sec. 1.367(e)-1T(c)(1)(ii). If the 
distributing corporation qualifies for an exception under Sec. 1.367(e)-
1T(c)(2), the requirements of section 6038B are satisfied if the 
distributing corporation complies with the reporting requirements 
contained in Sec. 1.367(e)-1T(c)(2)(iii). If the distributing 
corporation qualifies for an exception under Sec. 1.367(e)-1T(c)(3), the 
requirements of section 6038B are satisfied if the distributing 
corporation complies with the reporting requirements contained in 
Sec. 1.367(e)-1T(c)(3).
    (f) Failure to comply with reporting requirements--(1) Consequences 
of failure. If a U.S. person is required to file a notice under 
Sec. 1.6038B-1T(b) and fails to comply with the applicable reporting 
requirements of section 6038B and this section, then with respect to the 
particular property as to which there was a failure to comply--
    (i) That property shall not be considered to have been transferred 
for use in the active conduct of a trade or business outside of the 
United States, for purposes of section 367(a) and regulations 
thereunder;
    (ii) The U.S. person shall pay a penalty equal to 25 percent of the 
amount of gain realized on the exchange of that

[[Page 592]]

property (without regard to whether gain is recognized on the transfer); 
and
    (iii) The period of limitations on assessment of tax upon the 
transfer of that property shall not begin to run until the date on which 
the transferor does comply with the applicable reporting requirements.

Thus, the time for assessment of tax is extended indefinitely if the 
transferor's failure to comply is continued indefinitely.
    (2) Failure to comply. A failure to comply with the requirements of 
section 6038B is--
    (i) The failure to report at the proper time and in the proper 
manner any material information required to be reported under the rules 
of this section; or
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section.

Thus, a transferor that timely files Form 926 with the attachments 
required under the rules of this section shall, nevertheless, have 
failed to comply if, for example, the transferor reports therein that 
property will be used in the active conduct of a trade or business 
outside of the United States, but in fact such property continues to be 
used in a trade or business within the United States.
    (3) Reasonable cause exception. The provisions of paragraph (f)(1) 
of this section shall not apply if the transferor shows that a failure 
to comply was due to reasonable cause and not willful neglect. The 
transferor may do so by providing a written statement to the district 
director having jurisdiction of the taxpayer's return for the year of 
the transfer, setting forth the reasons for the failure to comply. 
Whether a failure to comply was due to reasonable cause shall be 
determined by the district director under all the facts and 
circumstances.

[T.D. 8087, 51 FR 17957, May 16, 1986, as amended by T.D. 8682, 61 FR 
42177, Aug. 14, 1996]



Sec. 1.6039-1   Information returns required of corporations with respect to certain stock option transactions occurring on or after January 1, 1964.

    (a) Requirement of return under section 6039(a)(1). Every 
corporation which transfers stock to any person pursuant to such 
person's exercise on or after January 1, 1964, of a qualified stock 
option described in section 422(b), or a restricted stock option 
described in section 424(b), shall make, for each calendar year in which 
such a transfer occurs, an information return on Form 3921 with respect 
to each transfer made during such year. The return shall include the 
following information:
    (1) The name, address and employer identification number of the 
corporation transferring the stock;
    (2) The name, address, and identifying number of the person to whom 
the share or shares of stock were transferred;
    (3) The name and address of the corporation the stock of which is 
the subject of the option (if other than the corporation transferring 
the stock);
    (4) The date the option was granted;
    (5) The date the shares were transferred to the person exercising 
the option;
    (6) The fair market value of the stock at the time the option was 
exercised;
    (7) The number of shares of stock transferred pursuant to the 
option;
    (8) The type of option under which the transferred shares were 
acquired; and
    (9) Such other information as may be required by the return or by 
the instructions issued with respect thereto.
    (b) Requirement of return under section 6039(a)(2). (1) Every 
corporation which records, or has by its agent recorded, a transfer of 
the title to stock acquired by the transferor pursuant to his exercise 
on or after January 1, 1964, of:
    (i) An option granted under an employee stock purchase plan which 
meets the requirements of section 423(b), and with respect to which the 
special rule of section 423(c) applied, or
    (ii) A restricted stock option which meets the requirements of 
section

[[Page 593]]

424(b), and with respect to which the special rule of section 424(c)(1) 
applies,

shall make, for each calendar year in which such a recorded transfer of 
title to such stock occurs, an information return on Form 3922 with 
respect to each transfer containing the information required by 
subparagraph (2) of this paragraph.
    (2) The return required by subparagraph (1) of this paragraph shall 
contain the following information:
    (i) The name and address of the corporation whose stock is being 
transferred;
    (ii) The name, address, and identifying number of the transferor;
    (iii) The date such stock was transferred to the transferor;
    (iv) The number of shares to which title is being transferred; and
    (v) The type of option under which the transferred shares were 
acquired.
    (3) If the return required by this paragraph is made by the 
authorized ``transfer agent'' of the corporation, it shall be deemed to 
have been made by the corporation. The term ``transfer agent'', as used 
in this paragraph, means any designee authorized to keep the stock 
ownership records of a corporation and to record a transfer of title of 
the stock of such corporation on behalf of such corporation.
    (4) Where a corporation is required by this paragraph to make an 
information return for the calendar year, such return will only have to 
supply information relating to the first recorded transfer of title to 
the share or shares of stock. Thus, for example, if the owner has record 
title to a share or shares of stock transferred to a recognized broker 
or financial institution and the stock is subsequently sold by such 
broker or institution (on behalf of the owner) the corporation is only 
required to report information relating to the transfer of record title 
to the broker or financial institution. Similarly, a return is required 
when a share of stock is transferred by the optionee to himself and 
another person (or persons) as joint tenants, tenants by the entireties 
or tenants in common. However, when stock is originally issued to the 
optionee and another person (or persons) as joint tenants, or as tenants 
by the entirety, and a stock certificate was not previously actually 
issued to the optionee as a sole owner, the return required by this 
paragraph shall be made (at such time and in such manner as is provided 
by this section with respect to a transfer by the optionee) in respect 
of the first transfer of the title to such stock by the optionee.
    (5) Every corporation which transfers any share of stock pursuant to 
the exercise of an option described in this paragraph shall identify 
such stock in a manner sufficient to enable the accurate reporting of 
the transfer of record title to such shares. Such identification may be 
accomplished by assigning to the certificates of stock issued pursuant 
to the exercise of such options a special serial number, or color.
    (c) Time, place, and manner of filing. (1) The returns on Forms 3921 
and 3922 required by section 6039(a) (1) and (2) and paragraphs (a) and 
(b) of this section shall be filed as attachments to a summary report on 
Form 4067 which must be signed by the person required to file the 
returns or its duly authorized agent. With respect to returns on Form 
3921, the summary report on Form 4067 shall indicate the number of 
returns filed, the number of shares transferred pursuant to exercise of 
options, the dates on which the options exercised were offered or 
granted, the fair market value of shares subject to option on such 
dates, the method by which such value was determined, the type of 
options under which the transferred shares were acquired, and such other 
information as may be required by the form or by the instructions issued 
with respect thereto. With respect to returns on Form 3922, the summary 
report on Form 4067 shall indicate the number of returns filed, the 
number of shares transferred, the type of options under which the 
transferred shares were acquired and such other information as may be 
required by the form or by the instructions issued with respect thereto. 
The summary report on Form 4067 and the attached returns on Forms 3921 
and 3922 required for any calendar year shall be filed on or before 
February 28 of the following year with any of the Internal Revenue 
Service Centers.

[[Page 594]]

    (2) If a return is made by the authorized ``transfer agent'' of the 
corporation, as described in paragraph (b)(3) of this section, it shall 
be filed with the district director for the district where the income 
tax return of the principal corporation is filed after the close of the 
calendar year for which the return is required, but on or before 
February 28th of the following calendar year.
    (3) For provisions relating to the extension of time for filing the 
returns required by this section, see Sec. 1.6081-1.
    (4) For provisions relating to the time for performance of an act 
when the last day prescribed for performance falls on Saturday, Sunday, 
or a legal holiday, see Sec. 301.7503-1 of this chapter (Regulations on 
Procedure and Administration).
    (d) Stock to which this section applies. The rules of this section 
shall apply to any full share of stock acquired pursuant to the exercise 
of any qualified or restricted stock option, or any option granted under 
an employee stock purchase plan, irrespective of whether the transfer of 
stock pursuant to such excercise qualified for the special tax treatment 
of section 421 and the regulations thereunder. In addition, the rules of 
paragraph (b) of this section shall apply to any full shares of stock 
received in respect of stock which was originally acquired pursuant to 
the exercise of an option described in the preceding sentence. See 
section 425(b). For definitions of the terms ``exercise'' and 
``transfer'' see paragraphs (f) and (g) of Sec. 1.421-7. A return is 
required under paragraph (b) of this section irrespective of whether the 
transfer of the title constitutes a disposition of such stock as defined 
by section 425(c).

[T.D. 6887, 31 FR 8813, June 24, 1966]



Sec. 1.6039-2   Statements to persons with respect to whom information is furnished.

    (a) Requirement and form of statement. Every corporation required to 
make a return on Form 3921 or 3922 under section 6039(a) and 
Sec. 1.6039-1 shall furnish to each person whose identifying number is 
(or should be) shown on such return a written statement containing the 
information required to be shown on such return. This requirement may be 
met by furnishing a copy of the appropriate return to such person. A 
statement shall be considered to be furnished to a person within the 
meaning of this section if it is mailed to such person at his last known 
address.
    (b) Time for furnishing statements--(1) In general. Each statement 
required by this section to be furnished to any person for a calendar 
year shall be furnished to such person on or before January 31, of the 
year following the year for which the statement is required.
    (2) Extension of time. For good cause shown upon written application 
of the corporation required to furnish statements under this section, 
the district director may grant an extension of time not exceeding 30 
days in which to furnish such statements. The application shall be 
addressed to the district director with whom the income tax returns of 
the applicant-corporation are filed and shall contain a full recital of 
the reasons for requesting the extension to aid the district director in 
determining the period of the extension, if any, which will be granted. 
Such a request in the form of a letter to the district director signed 
by the applicant (or its agent) will suffice as an application. The 
application shall be filed on or before the date prescribed in 
subparagraph (1) of this paragraph for furnishing the statements 
required by this section.
    (3) Last day for furnishing statement. For provisions relating to 
the time for performance of an act when the last day prescribed for 
performance falls on Saturday, Sunday, or a legal holiday, see 
Sec. 301.7503-1 of this chapter (Regulations on Procedure and 
Administration).
    (c) Penalty. For provisions relating to the penalty provided for 
failure to furnish a statement under this section, see Sec. 301.6678-1 
of this chapter (Regulations on Procedure and Administration).

[T.D. 6887, 31 FR 8814, June 24, 1966]



Sec. 1.6041-1   Return of information as to payments of $600 or more.

    (a) General rule. (1) Except as provided in Sec. 1.6041-3, every 
person engaged in a trade or business shall make an information return 
for each calendar year with respect to payments made by him during the 
calendar year in the

[[Page 595]]

course of his trade or business to another person of fixed or 
determinable:
    (i) Salaries, wages, commissions, fees, and other forms of 
compensation for services rendered aggregating $600 or more;
    (ii) Interest, rents, royalties, annuities, pensions, and other 
gains, profits, and income aggregating $600 or more; or
    (iii) Foreign items, as defined in Sec. 1.6041-4, aggregating $600 
or more.

The payments described in subdivisions (i), (ii), and (iii) of this 
subparagraph shall not include any payments with respect to which a 
statement is required by, or may be required under authority of, section 
6042(a) (relating to dividends), section 6043(a)(2) (relating to 
distributions in liquidation) section 6044(a) (relating to patronage 
dividends), section 6045 (relating to brokers' transactions with 
customers), or section 6049(a) (1) and (2) (relating to interest). Thus, 
the term ``interest'', as used in subdivision (ii) of this subparagraph, 
includes all interest other than that coming within the definition of 
interest provided in Sec. 1.6049-2. For example, a closely held 
corporation borrows money from one of its officers on a promissory note 
not in registered form the yearly interest on which is $300. It also 
pays royalties to such officer amounting to $400 a year. An information 
return is required under subdivision (ii) of this subparagraph with 
respect to the payments to such officer since the interest does not come 
within the definition of interest provided in Sec. 1.6049-2 and the 
aggregate of the interest and royalty payments is in excess of $600.
    (2) Prescribed form. The return required by subparagraph (1) of this 
paragraph shall be made on Forms 1096 and 1099 except that (i) the 
return with respect to distributions to beneficiaries of a trust or of 
an estate shall be made on Form 1041, and (ii) the return with respect 
to certain payments of compensation to an employee by his employer shall 
be made on Forms W-3 and W-2 under the provisions of Sec. 1.6041-2 
(relating to return of information as to payments to employees). Where 
Form 1099 is required to be filed under this section, a separate Form 
1099 shall be furnished for each person to whom payments described in 
subdivision (i), (ii), or (iii) of subparagraph (1) of this paragraph 
are made. For time and place for filing Forms 1096 and 1099, see 
Sec. 1.6041-6.
    (b) Persons engaged in trade or business--(1) In general. The term 
``all persons engaged in a trade or business'', as used in section 
6041(a), includes not only those so engaged for gain or profit, but also 
organizations the activities of which are not for the purpose of gain or 
profit. Thus, the term includes the organizations referred to in section 
401(a), 501(c), 501(d) and 521 and in paragraph (g) of this section. On 
the other hand, section 6041(a) applies only to payments in the course 
of trade or business; hence it does not apply to an amount paid by the 
proprietor of a business to a physician for medical services rendered by 
the physician to the proprietor's child.
    (2) Special rule for REMICs. For purposes of chapter 1 subtitle F, 
chapter 61A, part IIIB, the terms ``all persons engaged in a trade or 
business'' and ``any service-recipient engaged in a trade or business'' 
includes a real estate mortgage investment conduit or REMIC (as defined 
in section 860D).
    (c) Fixed or determinable income. Income is fixed when it is to be 
paid in amounts definitely predetermined. Income is determinable 
whenever there is a basis of calculation by which the amount to be paid 
may be ascertained. The income need not be paid annually or at regular 
intervals. The fact that the payments may be increased or decreased in 
accordance with the happening of an event does not for purposes of this 
section make the payments any the less determinable. A salesman working 
by the month for a commission on sales which is paid or credited monthly 
receives determinable income.
    (d) Payments specifically included. (1) Sums paid in respect of life 
insurance, endowment, or annuity contracts are required to be reported 
in returns of information under this section:
    (i) Unless the payment is made in respect of a life insurance or 
endowment contract by reason of the death of the insured and is not 
required to be reported by paragraph (b) of Sec. 1.6041-2,

[[Page 596]]

    (ii) Unless the payment is made by reason of the surrender prior to 
maturity or lapse of a policy, other than a policy which was purchased 
(a) by a trust described in section 401(a) which is exempt from tax 
under section 501(a), (b) as part of a plan described in section 403(a), 
or (c) by an employer described in section 403(b) (1) (A),
    (iii) Unless the payment is interest as defined in Sec. 1.6049-2 and 
is made after December 31, 1962,
    (iv) Unless the payment is a payment with respect to which a return 
is required by Sec. 1.6047-1, relating to employee retirement plans 
covering owner-employees,
    (v) Unless the payment is payment with respect to which a return is 
required by Sec. 1.6052-1, relating to payment of wages in the form of 
group-term life insurance.
    (2) Fees for professional services paid to attorneys, physicians, 
and members of other professions are required to be reported in returns 
of information if paid by persons engaged in a trade or business and 
paid in the course of such trade or business.
    (3) Amounts paid as prizes and awards which are required to be 
included in gross income under section 74 and Sec. 1.74-1 when paid in 
the course of a trade or business shall be reported in returns of 
information.
    (4) Amounts paid as disability payments under section 105(d) are 
required to be reported in returns of information under this section.
    (e) Payment made in medium other than cash. If any payment required 
to be reported on Form 1099 is made in property other than money, the 
fair market value of the property at the time of payment is the amount 
to be included on such form.
    (f) When payment deemed made. For purposes of a return of 
information, an amount is deemed to have been paid when it is credited 
or set apart to a person without any substantial limitation or 
restriction as to the time or manner of payment or condition upon which 
payment is to be made, and is made available to him so that it may be 
drawn at any time, and its receipt brought within his own control and 
disposition.
    (g) Payments made by the United States or a State. Information 
returns on:
    (1) Forms 1096 and 1099 and
    (2) Forms W-3 and W-2 (when made under the provisions of 
Sec. 1.6041-2)

of payments made by the United States or a State, or political 
subdivision thereof, or the District of Columbia, or any agency or 
instrumentality of any one or more of the foregoing, shall be made by 
the officer or employee of the United States, or of such State, or 
political subdivision, or of the District of Columbia, or of such agency 
or instrumentality, as the case may be, having control of such payments 
or by the officer or employee appropriately designated to make such 
returns.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6628, 27 FR 
12794, Dec. 28, 1962, T.D. 6888, 31 FR 9205, July 6, 1966; T.D. 7284, 38 
FR 20827, Aug. 3, 1973; T.D. 7580, 43 FR 60159, Dec. 26, 1978; T.D. 
7888, 48 FR 17587, Apr. 25, 1983; T.D. 8458, 57 FR 61313, Dec. 24, 1992]



Sec. 1.6041-2   Return of information as to payments to employees.

    (a)(1) In general. Wages, as defined in section 3401, paid to an 
employee are required to be reported on Form W-2. See section 6011 and 
the Employment Tax Regulations thereunder. All other payments of 
compensation, including the cash value of payments made in any medium 
other than cash, to an employee by his employer in the course of the 
trade or business of the employer must also be reported on Form W-2 if 
the total of such payments and the amount of the employee's wages (as 
defined in section 3401), if any, required to be reported on Form W-2 
aggregates $600 or more in a calendar year. A separate Form W-2 shall be 
furnished for each employee for whom a return must be made. At the 
election of the employer, components of amounts required to be reported 
on Form W-2 pursuant to the provisions of this subparagraph may be 
reported on more than one Form W-2.
    (2) Transmittal form. The transmittal form for a return on Form W-2 
made pursuant to the provisions of subparagraph (1) of this paragraph 
shall be Form W-3. In a case where an employer must file a Form W-3 
under this paragraph and also under Sec. 31.6011(a)-4 or

[[Page 597]]

Sec. 31.6011(a)-5 of this chapter (Employment Tax Regulations), the Form 
W-3 filed under such Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 shall also 
be used as the transmittal form for a return on Form W-2 made pursuant 
to the provisions of this paragraph.
    (3) Time for filing--(i) General rule. In a case where an employer 
must file Forms W-3 and W-2 under this paragraph and also under 
Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 of this chapter (Employment Tax 
Regulations), the time for filing such forms under this paragraph shall 
be the same as the time (including extensions thereof) for filing such 
forms under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5.
    (ii) Exception. In a case where an employer is not required to file 
Forms W-3 and W-2 under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 of this 
chapter (Employment Tax Regulations), returns on Forms W-3 and W-2 
required under this paragraph for any calendar year shall be filed on or 
before February 28 of the following year.
    (iii) Cross reference. For extensions of time for filing returns, 
see section 6081 and the regulations thereunder.
    (4) Place for filing. The returns on Forms W-3 and W-2 required 
under this paragraph shall be filed pursuant to the rules contained in 
Sec. 31.6091-1 of this chapter (Employment Tax Regulations), relating to 
the place for filing certain returns.
    (b) Distributions under employees' trust or plan. (1) Amounts which 
are:
    (i) Distributed or made available to a beneficiary, and to which 
section 402 (relating to employees' trusts) or section 403 (relating to 
employee annuity plans) applies, or
    (ii) Described in section 72(m)(3)(B), shall be reported on Forms 
1096 and 1099 to the extent such amounts are includible in the gross 
income of such beneficiary if the amounts so includible aggregate $600 
or more in any calendar year. In addition, every trust described in 
section 501(c)(17) which makes one or more payments (including 
separation and sick and accident benefits) totaling $600 or more in 1 
year to an individual must file an annual information return on Form 
1096, accompanied by a statement on Form 1099, for each such individual. 
Payments made by an employer or a person other than the trustee of the 
trust should not be considered in determining whether the $600 minimum 
has been paid by the trustee. The provisions of this subparagraph shall 
not be applicable to payments of supplemental unemployment compensation 
benefits made after December 31, 1970, which are treated as if they were 
wages for purposes of section 3401(a). Such amounts are required to be 
reported on Forms W-3 and W-2. See paragraph (b)(14) of Sec. 31.3401(a)-
1 of this chapter (Employment Tax Regulations).
    (2) Any amount with respect to which a statement is required by 
Sec. 1.6047-1, relating to employee retirement plans covering owner-
employees, shall not be included in amounts required to be reported 
under section 6041.
    (c) Special rule for calendar years before 1972. For calendar years 
before 1972, the provisions of this section will be deemed to have been 
complied with if the returns for such years were filed in accordance 
with the provisions of this section in effect prior to [insert date on 
which final regulations under this section are published in the Federal 
Register] or with the instructions applicable to the appropriate forms.

[T.D. 7284, 38 FR 20827, Aug. 3, 1973, as amended by T.D. 7580, 43 FR 
60159, Dec. 26, 1978]



Sec. 1.6041-3  Payments for which no return of information is required under section 6041.

    Returns of information are not required under section 6041 and 
Secs. 1.6041-1 and 1.6041-2 with respect to payments of the following 
character:
    (a) Payments of income required to be reported on Forms 1042, 1042S, 
1000, 1001 (including all special variations thereof), 1120-S, 941, W-3, 
and W-2 (however, see Sec. 1.6041-2 with respect to Forms W-3 and W-2);
    (b) Payments by a broker to his customer (but for reporting 
requirements as to certain of such payments made after December 31, 
1962, see sections 6042 and 6049 and the regulations thereunder in this 
part);
    (c) Payments to a corporation, except payments made after December 
31, 1970, to a corporation engaged in providing medical and health care 
services

[[Page 598]]

or engaged in the billing and collecting of payments in respect to the 
providing of medical and health care services, other than payments to:
    (1) A hospital or extended care facility described in section 
501(c)(3) which is exempt from taxation under section 501(a), or
    (2) A hospital or extended care facility owned and operated by the 
United States, a State, the District of Columbia, a possession of the 
United States, or a political subdivision, agency or instrumentality of 
any of the foregoing.

For reporting requirements as to payments by cooperatives, and to 
certain other payments, see sections 6042, 6044, and 6049 and the 
regulations thereunder in this part;
    (d) Payments of bills for merchandise, telegrams, telephone, 
freight, storage, and similar charges;
    (e) Payments of rent made to real estate agents (but the agent is 
subject to the requirements of paragraph (a) (1)(ii) and (2)(ii) of 
Sec. 1.6041-1);
    (f) Payments representing earned income for services rendered 
without the United States made to a citizen of the United States, if it 
is reasonable to believe that such amounts will be excluded from gross 
income under the provisions of section 911 and the regulations 
thereunder;
    (g) Salaries and profits paid or distributed by a partnership to the 
individual partners;
    (h) Payments of commissions to general agents by fire insurance 
companies or other companies insuring property, except when specifically 
directed by the Commissioner to be filed;
    (i)(1) In general. Payments made under reimbursement or other 
expense allowance arrangements that meet the requirements of section 
62(c) of the Code and Sec. 1.62-2, that do not exceed the amount of the 
expenses substantiated (i.e., amounts which are treated as paid under an 
accountable plan), and that are received by an employee on or after 
January 1, 1989, with respect to expenses paid or incurred on or after 
January 1, 1989;
    (2) Transition rule. Payments made under reimbursement or other 
expense allowance arrangements that are received by an employee on or 
after January 1, 1989, but prior to July 1, 1990, to the extent that the 
employee is required to account (within the meaning of the term 
``account'' as set forth in Sec. 1.162-17(b)(4) or 1.274-5T(f)(4), 
whichever is applicable) and does so account to the payor for such 
expenses, provided the payor has made a reasonable, good faith effort to 
comply with the requirements of section 62(c). In general, compliance 
with the provisions of this section, as in effect for payments made 
under reimbursement or other expense allowance arrangements that were 
received by an employee before January 1, 1989, with respect to expenses 
paid or incurred before January 1, 1989, will constitute such reasonable 
good faith compliance. In no event, however, will reasonable good faith 
compliance exist if a payor fails to report payments made under an 
arrangement (other than a per diem or mileage allowance type 
arrangement) under which an employee is not required to substantiate 
expenses paid or incurred or is not required to return amounts in excess 
of the substantiated expenses;
    (j) Payments of interest on obligations of the United States, or a 
State, Territory, or political subdivision thereof, or the District of 
Columbia, or any agency or instrumentality of any one or more of the 
foregoing (but for requirements for reporting certain such payments by 
the United States or any agency or instrumentality thereof, see 
Secs. 1.1461-1 to 1.1461-3, inclusive);
    (k) Payments of interest on corporate bonds (but for reporting 
requirements as to payments made after December 31, 1962, of interest on 
certain corporate bonds, see Sec. 1.6049-1 to Sec. 1.6049-3, inclusive; 
and as to payments of interest on bonds, mortgages, deeds of trust, or 
other similar obligations issued before January 1, 1934, and containing 
a taxfree covenant, see Secs. 1.1461-1 to 1.1461-3, inclusive);
    (l) Payments made to employees for services performed in Puerto 
Rico;
    (m) Amounts paid as an allowance or reimbursement for traveling or 
other bona fide ordinary and necessary expenses, including an allowance 
for meals and lodging or a per diem allowance in lieu of subsistence, to 
persons in the service of an international organization (without regard 
to whether

[[Page 599]]

there is a requirement to account for such amounts) if-
    (1) The organization is designated as an international organization 
by the President of the United States in Executive Orders issued 
pursuant to 22 U.S.C. 288, and
    (2) The organization has immunity with respect to the invoilability 
of its archives pursuant to an international agreement having full force 
and effect in the United States.
    (n) A payment to an informer as an award, fee, or reward for 
information relating to criminal activity, but only if such payment is 
made by the United States, a State, Territory, or political subdivision 
thereof, or the District of Columbia, or any agency or instrumentality 
of any one or more of the foregoing, or, with respect to payments made 
after December 31, 1987, by an organization that is described in section 
501(c)(3) and that makes such payments in furtherance of a charitable 
purpose to lessen the burdens of government within the meaning of 
Sec. 1.501(c)(3)-1(d)(2).
    (o) On and after September 9, 1968, payments by a person carrying on 
the banking business of interest on a deposit evidenced by a negotiable 
time certificate of deposit (but for reporting requirements as to 
payments made after December 31, 1962, of interest on certain deposits, 
see sec. 6049 and the regulations thereunder in this part); and
    (p) Payments made to principals by persons carrying on the banking 
business, and by persons which are mutual savings banks, cooperative 
banks, building and loan associations, homestead associations, credit 
unions, or similar organizations chartered and supervised by Federal or 
State law, of funds collected when acting in the capacity of collection 
agents. This exception does not apply to collection of items on a 
regular and continuing basis under a so-called escrow, trust, custody, 
or investment advisory agreement. However, returns of information are 
not required unless payment is of the type with respect to which such 
returns would otherwise be required under section 6041 if the payer were 
engaged in a trade or business; nor are returns of information required 
on payments pursuant to a trust with respect to which Form 1041 is 
required to be filed by the trustee. The exception from reporting set 
forth in this paragraph shall apply until such time as the Commissioner 
determines that it is feasible for such persons to report the payments, 
and this paragraph is amended accordingly to require such reporting.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.6041-3, see the List of Sections Affected in the Finding Aids 
section of this volume.



Sec. 1.6041-4   Returns of information as to foreign items.

    (a) In general. If the amount of foreign items, as defined in 
paragraph (b) of this section, paid in any calendar year to a citizen or 
resident of the United States (individual or fiduciary), or a 
partnership any member of which is a citizen or resident of the United 
States, is $600 or more, an information return on Form 1099 setting 
forth the amount of such items is required to be filed by any person who 
accepts the item for collection as a matter of business or for profit, 
such as a bank. As used in this section, the term ``collection'' 
includes (1) payment of the foreign item in cash; (2) the crediting of 
the account of the person presenting the foreign item; (3) the tentative 
crediting of the account of the person presenting the foreign item until 
the amount of the foreign item is received by the bank or collecting 
agent from abroad; and (4) the receipt of foreign items for the purpose 
of transmitting them abroad for deposits.
    (b) Foreign items defined. The term ``foreign items'', as used in 
this section, means any item of interest upon the bonds of a foreign 
country or of a nonresident foreign corporation not having a fiscal or 
paying agent in the United States (including Puerto Rico as if a part of 
the United States), or any item of dividends upon the stock of such 
corporation.
    (c) License to collect foreign items. A bank or agent collecting 
foreign items is required to obtain a license pursuant to the provisions 
of section 7001 and the regulations thereunder in part 301

[[Page 600]]

of this chapter (Regulations on Procedure and Administration).



Sec. 1.6041-5   Information as to actual owner.

    When a person receiving a payment described in section 6041 is not 
the actual owner of the income received, the name and address of the 
actual owner shall be furnished upon demand of the person paying the 
income, and in default of compliance with such demand the payee becomes 
liable for the penalties provided. See section 7203.



Sec. 1.6041-6   Returns made on Forms 1096 and 1099 under section 6041; contents and time and place for filing.

    Returns made under section 6041 on Forms 1096 and 1099 for any 
calendar year shall be filed on or before February 28 of the following 
year with any of the Internal Revenue Service Centers, the addresses of 
which are listed in the instructions for such forms. The name and 
address of the person making the payment and the name and address of the 
recipient of the payment shall be stated on Form 1099. If the present 
address of the recipient is not available, the last known post office 
address must be given. See section 6109 and the regulations thereunder 
for rules requiring the inclusion of identifying numbers in Form 1099.

[T.D. 7284, 38 FR 20828, Aug. 3, 1973]



Sec. 1.6041-7   Permission to submit information required by Form 1099 or W-2 on magnetic tape.

    (a) General. For rules relating to permission to submit the 
information required by Form 1099 or W-2 on magnetic tape or other 
media, see Sec. 1.9101-1. See also paragraph (b)(2) of Sec. 31.6011(a)-7 
of this chapter (Employment Tax Regulations) for additional rules 
relating to Form W-2.
    (b) Returns on magnetic tape by departments of health care carriers. 
(1) For calendar years beginning on or after January 1, 1971, a health 
care carrier, or an agent thereof, making payment of fees or other 
compensation to providers of medical and health care services, may make 
a separate return on magnetic tape for each separate department within a 
specific line of such carrier's business, so long as all of such returns 
taken together contain all of the information required by section 6041 
with respect to each provider of medical and health care services to 
whom such health care carrier makes payments aggregating $600 or more 
during the calendar year. Examples of separate departments within a 
specific line of such carrier's business (such as health and accident 
insurance) include, but are not limited to, separate departments to 
process claims of individual and group policyholders; and separate 
departments established along geographic lines.
    (2) For purposes of this paragraph, the term ``health care carrier'' 
means any person making health care payments: (i) In exchange for the 
payment of a premium, (ii) in accordance with an employee benefit 
program, or (iii) in connection with a government-sponsored health care 
program.

[T.D. 7106, 36 FR 6422, Apr. 3, 1971]



Sec. 1.6042-1   Return of information as to dividends paid in calendar years before 1963.

    (a) Requirement of return--(1) In general. Except as provided in 
subparagraphs (2) and (3) of this paragraph, every domestic corporation, 
or foreign corporation engaged in business within the United States or 
having an office or place of business or a fiscal or paying agent in the 
United States, making payments during any calendar year before 1963 of 
$10 or more of dividends and distributions (other than distributions in 
liquidation) to any shareholder who is an individual (citizen or 
resident of the United States), a resident fiduciary, or a resident 
partnership any member of which is a citizen or resident shall file for 
the calendar year a return setting forth the amount of such payments for 
such calendar year. A separate return on Form 1099, showing the name and 
address of the payer and the shareholder, and the amount paid, shall be 
prepared with respect to each shareholder. These returns shall be 
accompanied by transmittal Form 1096.
    (2) Federal land bank associations and certain other corporations. A 
corporation described in section 501(c) (12), (15), or (16), or section 
521(b)(1), or a Federal land bank association or a production

[[Page 601]]

credit association, making a payment of a dividend, or a distribution, 
to any shareholder in any calendar year before 1963 shall file an 
information return with respect to such payments when they total $100 or 
more during the calendar year.
    (3) Savings and loan associations, etc. A savings and loan 
association, a cooperative bank, a homestead association, a credit 
union, or a building and loan association is required to file an 
information return with respect to distributions made to a shareholder 
during any calendar year before 1963 only if the amount thereof paid to 
the shareholder during the calendar year, or such amount when aggregated 
with other payments made to the shareholder during such year of 
interest, rents, royalties, annuities, pensions, and other gains, 
profits, and income, as described in paragraph (a)(2)(ii) of 
Sec. 1.6041-1, totals $600 or more. For this purpose, the term 
``distributions to a shareholder'' includes periodical distributions of 
earnings on running installment shares of stock paid or credited by a 
building and loan association to its holders of that class of stock, and 
the sum received upon withdrawal from a building and loan association in 
excess of the amounts paid in on account of membership fees and stock 
subscriptions, consisting of accumulated profits.
    (b) Nontaxable or partly nontaxable distributions. In the case of a 
distribution which is made from a depletion or depreciation reserve, or 
which for any other reason is deemed by the corporation to be nontaxable 
or partly nontaxable to its shareholders, the corporation shall fill in 
the information on both sides of Form 1096.
    (c) Information as to actual owner--(1) In general. When the person 
receiving a payment with respect to which an information return is 
required under authority of the Code is not the actual owner of the 
income received, the name and address of the actual owner or payee shall 
be furnished upon demand of the person paying the income, and in default 
of a compliance with such demand the payee becomes liable for the 
penalties provided. See section 7203. Dividends on stock are prima facie 
the income of the record owner of the stock. If a record owner of stock 
who is not the actual owner thereof receives dividends on such stock in 
any calendar year before 1963, he shall file a Form 1087 disclosing the 
name and address of the actual owner or payee, the name of the issuing 
corporation, the number of shares of such stock, and the amount of 
dividends received with respect to such stock during the calendar year. 
(For the reporting by a nominee of dividends received by him on behalf 
of another person in any calendar year after 1962, see Sec. 1.6042-2.) 
Unless such a disclosure is made the record owner will be held liable 
for any tax based upon such dividends. A separate Form 1087 shall be 
filed by the record owner for each of the stockholdings of each actual 
owner for whom he acts as nominee. However, where the record owner is a 
banking institution, trust company, or brokerage firm, it may, provided 
it maintains such records as will permit a prompt substantiation of each 
payment of dividends made to the actual owner, file one Form 1087 for 
each actual owner for whom it acts as nominee and report thereon the 
total amount of the dividends paid to such actual owner (without 
itemization as to the issuing company, class of stock, etc.).
    (2) Exceptions. The filing of Form 1087 is not required if:
    (i) The record owner is required to file a fiduciary return on Form 
1041, or a withholding return on Form 1042, disclosing the name and 
address of the actual owner or payee;
    (ii) The actual owner or payee is a nonresident alien individual, 
foreign partnership, or foreign corporation and the tax has been 
withheld at the source before receipt of the dividends by the record 
owner;
    (iii) The record owner is a banking institution, a trust company, or 
a brokerage firm which prepares the individual income tax return of the 
actual owner, provided the verification on the return with respect to 
the preparation thereof is executed by such record owner;
    (iv) The record owner is a nominee of a banking institution or trust 
company exercising trust powers, and such banking institution or trust 
company is required to file a fiduciary return on

[[Page 602]]

Form 1041 which reflects the name and address of the actual owner or 
payee;
    (v) The actual owner is an organization exempt from taxation under 
section 501(a) and is exempt from the requirement of filing a return 
under section 6033 and paragraph (g) of Sec. 1.6033-1; or
    (vi) The record owner is a banking institution or trust company 
exercising trust powers, or a nominee thereof, and the actual owner is 
an organization exempt from taxation under section 501(a) for which such 
banking institution or trust company files an annual return.

See Sec. 1.1441-1, relating to withholding of tax on nonresident alien 
individuals, and Sec. 1.1442-1, relating to withholding of tax on 
nonresident foreign corporations.
    (d) Time and place for filing. Returns made under this section on 
Forms 1096 and 1099 and Form 1087 for any calendar year shall be filed 
on or before February 28 of the following year with any of the Internal 
Revenue Service Centers, the addresses of which are listed in the 
instructions for such forms.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6628, 27 FR 
12795, Dec. 28, 1962]



Sec. 1.6042-2   Returns of information as to dividends paid in calendar years after 1962.

    (a) Requirement of reporting--(1) In general. (i) Every person who 
makes payments of dividends (as defined in Sec. 1.6042-3) aggregating 
$10 or more to any other person during a calendar year after 1962 shall 
make an information return on Forms 1096 and 1099 for such calendar year 
showing the aggregate amount of such payments, the name and address of 
the person to whom paid, the total of such payments for all persons, and 
such other information as is required by the forms. In the case of 
dividends paid during the calendar year 1963 or 1964, the requirement of 
this subdivision for the filing of Form 1099 will be met if a person 
making payments of dividends to another person on two or more classes of 
stock files a separate Form 1099 with respect to each such class of 
stock on which $10 or more of dividends are paid to such other person 
during the calendar year. Thus, if during 1963 a corporation pays to a 
person dividends totaling $15 on its common stock and $20 on its 
preferred stock, it may file separate Forms 1099 with respect to the 
payments of $15 and $20. If the dividends on the preferred stock totaled 
$5 instead of $20, no return would be required with respect to the $5. 
In addition, in the case of dividends paid during calendar years 
beginning with 1965 and continuing until such time as the Commissioner 
determines that it is feasible to aggregate payments on two or more 
separate stock ownership accounts and this subdivision is amended 
accordingly to provide for reporting on an aggregate basis, the 
requirement of this subdivision for the filing of Form 1099 will be met 
if a person making payments of dividends to another person on two or 
more such separate stock ownership accounts (regardless of whether the 
payments are made on only one class of stock) files a separate Form 1099 
with respect to each such stock ownership account on which $10 or more 
of dividends are paid to such other person during the calendar year.
    (ii) Every person, except to the extent that he acts as a nominee 
described in subdivision (iii) of this subparagraph, who during a 
calendar year after 1962 receives payments of dividends as a nominee on 
behalf of another person aggregating $10 or more shall make an 
information return on Forms 1096 and 1087 for such calendar year showing 
the aggregate amount of such dividends, the name and address of the 
person on whose behalf received, the total of such dividends received on 
behalf of all persons, and such other information as is required by the 
forms. Notwithstanding the preceding sentence, the filing of Form 1087 
is not required if:
    (a) The record owner is required to file a fiduciary return on Form 
1041 disclosing the name, address, and identifying number of the actual 
owner;
    (b) The record owner is a nominee of a banking institution or trust 
company exercising trust powers, and such banking institution or trust 
company is required to file a fiduciary return on Form 1041 disclosing 
the name, address, and identifying number of the actual owner; or

[[Page 603]]

    (c) The record owner is a banking institution or trust company 
exercising trust powers, or a nominee thereof, and the actual owner is 
an organization exempt from taxation under section 501(a) for which such 
banking institution or trust company files an annual return;

but only if the name, address, and identifying number of the record 
owner are included on or with the Form 1041 fiduciary return filed for 
the estate or trust or the annual return filed for the tax exempt 
organization.
    (iii) Every person who is a nominee acting as a custodian of a unit 
investment trust described in section 851(f)(1) and paragraph (d) of 
Sec. 1.851-7 who, during a calendar year after 1968, receives payments 
of dividends in such capacity, shall make an information return on Forms 
1096 and 1099M, for such calendar year showing the information required 
by such forms and instructions thereto and the name, address, and 
identifying number of the nominee identified as such. This subdivision 
shall not apply if the regulated investment company agrees with the 
nominee to satisfy the requirements of section 6042 and the regulations 
thereunder with respect to each holder of an interest in the unit 
investment trust whose shares are being held by the nominee as custodian 
and within the time limit for furnishing statements prescribed by 
Sec. 1.6042-4, files with the Internal Revenue Service office where such 
company's return is to be filed for the taxable year, a statement that 
the holders of the unit investment trust with whom the agreement was 
made have been directly notified by the regulated investment company. 
Such statement shall include the name, sponsor, and custodian of each 
unit investment trust whose holders have been directly notified. The 
nominee's requirements under this subdivision shall be deemed met if the 
regulated investment company transmits a copy of such statement to the 
nominee within such period; provided, however, if the regulated 
investment company fails or is unable to satisfy the requirements of 
section 6042 with respect to the holders of interest in the unit 
investment trust, it shall so notify the Internal Revenue Service within 
45 days following the close of its taxable year. The custodian shall, 
upon notice by the Internal Revenue Service that the regulated 
investment company has failed to comply with the agreement, satisfy the 
requirements of this subdivision within 30 days of such notice.
    (2) Definitions. The term ``person'' when used in this section does 
not include the United States, a State, the District of Columbia, a 
foreign government, a political subdivision of a State or of a foreign 
government, or an international organization. Therefore, dividends paid 
by or to one of these entities need not be reported. For purposes of 
this section, a person who receives a dividend shall be considered to 
have received it as a nominee if he is not the actual owner of such 
dividend and if he was required under Sec. 1.6109-1 to furnish his 
identifying number to the payer of the dividend (or would have been so 
required if the total of such dividends for the year had been $10 or 
more), and such number was (or would have been) required to be included 
on an information return filed by the payer with respect to the 
dividend. However, a person shall not be considered to be a nominee as 
to any portion of a dividend which is actually owned by another person 
whose name is also shown on the information return filed by the payer or 
nominee with respect to such dividend. Thus, in the case of stock 
jointly owned by a husband and wife, the husband will not be considered 
as receiving any portion of a dividend on that stock as a nominee for 
his wife if his wife's name is included on the information return filed 
by the payer with respect to the dividend.
    (3) Determination of person to whom a dividend is paid or for whom 
it is received. For purposes of applying the provisions of this section, 
the person whose identifying number is required to be included by the 
payer of a dividend on an information return with respect to such 
dividend shall be considered the person to whom the dividend is paid. In 
the case of a dividend received by a nominee on behalf of another 
person, the person whose identifying number is required to be included 
on an information return made by the nominee with respect to such 
dividend shall be considered the person on whose behalf

[[Page 604]]

such dividend is received by the nominee. Thus, in the case of a 
dividend made payable to a person other than the record owner of the 
stock with respect to which the dividend is paid, the record owner of 
the stock shall be considered the person to whom the dividend is paid 
for purposes of applying the reporting requirements in this section, 
since his identifying number is required to be included on the 
information return filed under this section by the payer of the 
dividend. Similarly, if a stockbroker receives a dividend on stock held 
in street name for the joint account of a husband and wife, the dividend 
is considered as received on behalf of the husband since his identifying 
number should be shown on the information return filed by the nominee 
under this section. Thus, if the wife has a separate account with the 
same stockbroker, any dividends received by the stockbroker for her 
separate account should not be aggregated with the dividends received 
for the joint account for purposes of information reporting. For 
regulations relating to the use of identifying numbers, see Sec. 1.6109-
1.
    (4) Inclusion of other payments. The Form 1099 filed by any person 
with respect to payments of dividends to another person during a 
calendar year may, at the election of the maker, include other payments 
made by him to such other person during such year which are required to 
be reported on Form 1099. Similarly, the Form 1087 filed by a nominee 
with respect to payments of dividends received by him on behalf of any 
other person during a calendar year may include payments of interest 
received by him on behalf of such person during such year which are 
required to be reported on Form 1087. In addition, any person required 
to report payments on both Forms 1087 and 1099 for any calendar year may 
use one Form 1096 to summarize and transmit such forms.
    (b) When payment deemed made. For purposes of a return of 
information, an amount is deemed to have been paid when it is credited 
or set apart to a person without any substantial limitation or 
restriction as to the time or manner of payment or condition upon which 
payment is to be made, and is made available to him so that it may be 
drawn at any time, and its receipt brought within his own control and 
disposition.
    (c) Time and place for filing. The returns required under this 
section for any calendar year shall be filed after September 30 of such 
year, but not before the payer's final payment for the year, and on or 
before February 28 of the following year with any of the Internal 
Revenue Service Centers, the addresses of which are listed in the 
instructions for Form 1096. For extensions of time for filing returns 
under this section, see Sec. 1.6081-1.
    (d) Penalty. For penalty for failure to file the statements required 
by this section, see Sec. 301.6652-1 of this chapter (Regulations on 
Procedure and Administration).
    (e) Permission to submit information required by Form 1087 or 1099 
on magnetic tape. For rules relating to permission to submit the 
information required by Form 1087 or 1099 on magnetic tape or other 
media, see Sec. 1.9101-1.

[T.D. 6628, 27 FR 12796, Dec. 29, 1962, as amended by T.D. 6677, 28 FR 
10147, Sept. 17, 1963; T.D. 6879, 31 FR 3493, Mar. 8, 1966; T.D. 6883, 
31 FR 6589, May 3, 1966; T.D. 7000, 34 FR 996, Jan. 23, 1969; T.D. 7187, 
37 FR 13258, July 6, 1972]



Sec. 1.6042-3   Dividends subject to reporting.

    (a) In general. Except as provided by paragraph (b) of this section, 
the term ``dividend'' for purposes of this section and Secs. 1.6042-2 
and 1.6042-4 means:

    (1) Any distribution made by a corporation to its shareholders which 
is a dividend as defined in section 316; and
    (2) Any payment made by a stockbroker to any person as a substitute 
for a dividend (as so defined). See Sec. 1.6045-2T(h) for coordination 
of the reporting requirements under sections 6042 and 6045(d) with 
respect to payments in lieu of dividends.

A ``dividend'' paid by an insurance company to a policy holder, other 
than a dividend upon its capital stock, is not a dividend for purposes 
of this section. Similarly, payments (however denominated) by a mutual 
savings bank, savings and loan association, or similar

[[Page 605]]

organization, in respect of deposits, investment certificates, or 
withdrawable or repurchasable shares are not dividends for purposes of 
this section (but, for provisions requiring reporting of such payments, 
see Secs. 1.6049-1 to 1.6049-3, inclusive). The payments by a 
stockbroker which are defined as dividends in subparagraph (2) of this 
paragraph include any payment made in lieu of a dividend to a person 
whose stock has been borrowed in connection with a short sale or other 
similar transaction. See Sec. 1.6045-2(h) for coordination of the 
reporting requirements under sections 6042 and 6045(d) with respect to 
payments in lieu of dividends.
    (b) Exceptions. The term ``dividend'' does not include:
    (1) Any distribution or payment by a foreign corporation if it is 
not engaged in business within the United States and does not have an 
office or place of business or a fiscal or paying agent in the United 
States,
    (2) Any distribution or payment which is subject to withholding 
under section 1441 or 1442 (relating to withholding of tax on 
nonresident aliens and foreign corporations, respectively) by the person 
making the distribution or payment, or which would be so subject to 
withholding but for the provisions of a treaty, or for the fact that it 
is attributable to income from sources outside the United States, or for 
the fact that withholding is not required by reason of paragraph (a) or 
(f) of Sec. 1.1441-4,
    (3) In the case of a nominee, any distribution or payment which he 
receives and with respect to which he is required to withhold under 
section 1441 or 1442, or would be so required to withhold but for the 
provisions of a treaty, or for the fact that the distribution or payment 
is attributable to income from sources outside the United States, or for 
the fact that withholding is not required by reason of paragraph (a) or 
(f) of Sec. 1.1441-4, or
    (4) Any amount which is treated under section 1373 (relating to 
undistributed taxable income of electing small business corporations) as 
an amount distributed as a dividend.
    (c) Special rule. If a person makes a payment which may be a 
dividend, or if a nominee receives a payment which may be a dividend, 
but such person or nominee is unable to determine the portion of the 
payment which is a dividend (as defined in paragraphs (a) and (b) of 
this section) at the time he files his return under Sec. 1.6042-2, he 
shall, for purposes of such section, treat the entire amount of such 
payment as a dividend.

(Secs. 6045 and 7805 of the Internal Revenue Code of 1954 (98 Stat. 699, 
26 U.S.C. 6045, 68A Stat. 917, 26 U.S.C. 7805)

[T.D. 6628, 27 FR 12797, Dec. 28, 1962, as amended by T.D. 6908, 31 FR 
16774, Dec. 31, 1966; T.D. 7987, 49 FR 42719, Oct. 24, 1984; T.D. 8029, 
50 FR 23680, June 5, 1985]



Sec. 1.6042-4  Statements to recipients of dividend payments.

    (a) Requirement. A person required to make an information return 
under section 6042(a)(1) and Sec. 1.6042-2 must furnish a statement to 
each recipient whose identifying number is required to be shown on the 
related information return for dividend payments.
    (b) Form of the statement. The statement required by paragraph (a) 
of this section must be either the official Form 1099 prescribed by the 
Internal Revenue Service for the respective calendar year or an 
acceptable substitute statement that contains provisions that are 
substantially similar to those of the official Form 1099 for the 
respective calendar year. For further guidance on how to prepare an 
acceptable substitute statement, see Rev. Proc. 95-30 (1995-27 I.R.B. 9) 
(or its successor), republished as ``Rules and Specifications for 
Private Printing of Substitute Forms 1096, 1098, 1099 Series, 5498, and 
W-2G.'' See Sec. 601.601(d)(2) of this chapter.
    (c) Aggregation of payments. A payor may aggregate on one Form 1099 
all payments made to a recipient with respect to each separate account 
during a calendar year.
    (d) Manner of providing statements to recipients--(1) In general. 
The Form 1099, or acceptable substitute statement, must be provided to 
the recipient either in person or by first-class mail to the recipient's 
last known address in a statement mailing.
    (2) Statement mailing requirement. The mailing required under 
section 6042(c) of a Form 1099 to a payee-recipient

[[Page 606]]

must qualify as a statement mailing. A statement mailing must contain 
the required Form 1099 or acceptable substitute statement (written 
statement) and must comply with enclosure and envelope restrictions.
    (i) Enclosure restrictions. To qualify as a statement mailing, the 
mailing cannot contain any enclosures except those listed in this 
paragraph (d)(2)(i). Moreover, no promotional or advertising material is 
permitted in the mailing of the written statement. Even a de minimis 
amount of promotional or advertising material violates the statement 
mailing requirement. However, a logo on the envelope containing the 
written statement and on nontax enclosures described in paragraph 
(d)(2)(i) (A) through (D) of this section does not violate the written 
statement requirement. The written statement required under section 
6042(c) and paragraph (a) of this section may be perforated to a check 
or to a statement of the recipient-payee's specific account with the 
payor described in paragraph (d)(2)(i) (A) or (C) of this section. The 
enclosure to which the written statement is perforated must contain, in 
a bold and conspicuous type, the legend: ``Important Tax Return Document 
Attached.'' The enclosures permitted in a mailing are limited to--
    (A) A check with respect to the account reported on the written 
statement;
    (B) A letter explaining why a check with respect to such account is 
not enclosed with the written statement (for example, because a dividend 
has not been declared payable);
    (C) A statement of the taxpayer-recipient's specific account with 
the payor if payments on such account are reflected on the written 
statement;
    (D) A letter limited to an explanation of the tax consequences of 
the information set forth on the enclosed written statement;
    (E) Payee statements related to other Forms 1099, Form 1098, and 
Form 5498 (or the account balance on a Form 5498), Forms W-2 and W-2G; 
and
    (F) Any document concerning the solicitation of the Form W-9 or Form 
W-8.
    (ii) Envelope and delivery restrictions--(A) Envelope restrictions. 
The outside of the envelope in which the written statement is mailed and 
each nontax enclosure enclosed in the envelope must contain, in a bold 
and conspicuous type, the legend: ``Important Tax Return Document 
Enclosed.'' For purposes of this paragraph (d)(2)(ii), a nontax 
enclosure is any item listed in paragraphs (d)(2)(i)(A) through (C) of 
this section. However, a payor is not required to include the legend on 
the outside of an envelope containing only the enclosures in paragraph 
(d)(2)(i)(D) through (F) of this section.
    (B) Delivery restrictions. The requirement to provide the written 
statement in person or by first-class mail may be satisfied by sending 
the written statement and any enclosures described in paragraph 
(d)(2)(i) of this section by intra-office mail, provided that intra-
office mail is used by the payor in sending account activity, balance 
information, and other correspondence to the payee. If a payor does not 
personally deliver the written statement (i.e., the Form 1099 or its 
acceptable substitute) to the recipient or mail it to the recipient in a 
statement mailing as described in this paragraph (d), the payor is 
considered to have failed to mail the statement required under section 
6042(c) and will be subject to the penalty under section 6722.
    (e) Time for furnishing statements--(1) In general. Each statement 
required by section 6042(c) and this section to be furnished to any 
person for a calendar year must be furnished to such person after 
November 30 of the year and on or before January 31 (February 10 in the 
case of a nominee filing under Sec. 1.6042-2(a)(1)(iii)) of the 
following year, but no statement may be furnished before the final 
dividend for the calendar year has been paid. However, the statement may 
be furnished at any time after April 30 if it is furnished with the 
final dividend for the calendar year.

    (2) Extensions of time. For good cause upon written application of 
the person required to furnish statements under this section, the 
Director, Martinsburg Computing Center, may grant an extension of time 
not exceeding 30 days in which to furnish such statements. The 
application must be addressed to the Director, Martinsburg Computing 
Center, and must contain a full recital

[[Page 607]]

of the reasons for requesting the extension to aid the Director in 
determining the period of the extension, if any, that will be granted. 
Such a request in the form of a letter to the Director, Martinsburg 
Computing Center, signed by the applicant will suffice as an 
application. The application must be filed on or before the date 
prescribed in paragraph (e)(1) of this section.
    (3) Last day for furnishing statement. For provisions relating to 
the time for performance of an act when the last day prescribed for 
performance falls on Saturday, Sunday, or a legal holiday, see section 
7503 and Sec. 301.7503-1 of this chapter (Regulations on Procedure and 
Administration).
    (f) Penalty. For provisions relating to the penalty for the failure 
to furnish a statement under this section, see section 6722.
    (g) Effective date. This section is effective for payee statements 
due after December 31, 1995, without regard to extensions. For the 
substantially similar statement mailing requirements that apply with 
respect to forms required to be filed after October 22, 1986, and before 
January 1, 1996, see Rev. Proc. 84-70 (1984-2 C.B. 716) (or successor 
revenue procedures). See Sec. 601.601(d)(2) of this chapter.

[T.D. 8637, 60 FR 66110, Dec. 21, 1995]



Sec. 1.6043-1   Return regarding corporate dissolution or liquidation.

    (a) Requirement of returns. Within 30 days after the adoption of any 
resolution or plan for or in respect of the dissolution of a corporation 
or the liquidation of the whole or any part of its capital stock, the 
corporation shall file a return on Form 966, containing the information 
required by paragraph (b) of this section and by such form. Such return 
shall be filed with the district director for the district in which the 
income tax return of the corporation is filed. Further, if after the 
filing of a Form 966 there is an amendment of or supplement to the 
resolution or plan, an additional Form 966, based on the resolution or 
plan as amended or supplemented, must be filed within 30 days after the 
adoption of such amendment or supplement. A return must be filed under 
section 6043 and this section in respect of a liquidation whether or not 
any part of the gain or loss to the shareholders upon the liquidation is 
recognized under the provisions of section 1002.
    (b) Contents of return--(1) In general. There shall be attached to 
and made a part of the return required by section 6043 and paragraph (a) 
of this section a certified copy of the resolution or plan, together 
with any amendments thereof or supplements thereto, and such return 
shall in addition contain the following information:
    (i) The name and address of the corporation;
    (ii) The place and date of incorporation;
    (iii) The date of the adoption of the resolution or plan and the 
dates of any amendments thereof or supplements thereto; and
    (iv) The internal revenue district in which the last income tax 
return of the corporation was filed and the taxable year covered 
thereby.
    (2) Returns in respect of amendments or supplements. If a return has 
been filed pursuant to section 6043 and this section, any additional 
return made necessary by an amendment of or a supplement to the 
resolution or plan will be deemed sufficient if it gives the date the 
prior return was filed and contains a duly certified copy of the 
amendment or supplement and all other information required by this 
section and by Form 966 which was not given in the prior return.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6949, 33 FR 
5531, Apr. 9, 1968; T.D. 7926, 48 FR 55847, Dec. 16, 1983]



Sec. 1.6043-2   Return of information respecting distributions in liquidation.

    (a) Unless the distribution is one in respect of which information 
is required to be filed pursuant to paragraph (b) of Sec. 1.332-6, 
paragraph (a) of Sec. 1.368-3, or Sec. 1.1081-11, every corporation 
making any distribution of $600 or more during a calendar year to any 
shareholder in liquidation of the whole or any part of its capital stock 
shall file a return of information on Forms 1096 and 1099L, giving all 
the information required by such forms and by the regulations in this 
part. A separate Form 1099L must be prepared for each

[[Page 608]]

shareholder to whom such distribution was made, showing the name and 
address of such shareholder, the number and class of shares owned by him 
in liquidation of which such distribution was made, and the total amount 
distributed to him on each class of stock. If the amount distributed to 
such shareholder on any class of stock consisted in whole or in part of 
property other than money, the return on such form shall in addition 
show the amount of money distributed, if any, and shall list separately 
each class of property other than money distributed, giving a 
description of the property in each such class and a statement of its 
fair market value at the time of the distribution. Such forms, 
accompanied by transmittal Form 1096 showing the number of Forms 1099L 
filed therewith, shall be filed on or before February 28 of the year 
following the calendar year in which such distribution was made with any 
of the Internal Revenue Service Centers, the addresses of which are 
listed in the instructions for such forms.
    (b) If the distribution is in complete liquidation of a domestic 
corporation pursuant to a plan of liquidation in accordance with which 
all the capital stock of the corporation is cancelled or redeemed, and 
the transfer of all property under the liquidation occurs within some 
one calendar month pursuant to section 333, and any shareholder claims 
the benefit of such section, the return on Form 1096 shall show:
    (1) The amount of earnings and profits of the corporation 
accumulated after February 28, 1913, determined as of the close of such 
calendar month, without diminution by reason of distributions made 
during such calendar month, but including in such computation all items 
of income and expense accrued up to the date on which the transfer of 
all the property under the liquidation is completed;
    (2) The ratable share of such earnings and profits of each share of 
stock canceled or redeemed in the liquidation;
    (3) The date and circumstances of the acquisition by the corporation 
of any or securities distributed to shareholders in the liquidation;
    (4) If the liquidation is pursuant to section 333(g), a schedule 
showing the amount of earnings and profits to which the corporation has 
succeeded after December 31, 1963, pursuant to any corporate 
reorganization or pursuant to a liquidation to which section 332 
applies, except earnings and profits which on December 31, 1963, 
constituted earnings and profits of a corporation referred to in section 
333(g)(3), and except earnings and profits which were earned after such 
date by a corporation referred to in section 333(g)(3); and
    (5) If the liquidation occurs after December 31, 1966, and is 
pursuant to section 333(g)(2), the amount of earnings and profits of the 
corporation accumulated after February 28, 1913, and before January 1, 
1967, and the ratable share of such earnings and profits of each share 
of stock canceled or redeemed in the liquidation.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6949, 33 FR 
5531, Apr. 9, 1968]



Sec. 1.6043-3  Return regarding liquidation, dissolution, termination, or substantial contraction of organizations exempt from taxation under section 501(a).

    (a) In general--(1) Requirement to provide information. Except as 
provided in paragraph (b) of this section, for taxable years beginning 
after December 31, 1969, every organization which for any of its last 5 
taxable years preceding any liquidation, dissolution, termination, or 
substantial contraction of the organization was exempt from taxation 
under section 501(a) shall provide the information will respect to such 
liquidation, dissolution, termination, or substantial contraction 
required by the instructions accompanying the organization's annual 
return of information. The information required by this section shall be 
provided with, and at the time prescribed for filing, the organization's 
annual return of information for the period during which any 
liquidation, dissolution (or the adopting of a resolution or plan for 
the dissolution or liquidation in whole or part), termination or 
substantial contraction occurred with respect to the organization. An 
organization which is no longer exempt from taxation under section 
501(a) shall use the annual return

[[Page 609]]

of information it would have been required to file when the organization 
was exempt.
    (2) Transitional rule. In the case of an annual return of 
information of an organization which was filed before September 11, 
1978, if the organization had failed to provide the information with 
such return in accordance with paragraph (a)(1) of this section, the 
organization may comply with this section by providing the information 
with the organization's first annual return of information filed after 
such date.
    (b) Exceptions. The following organizations are not required to 
provide the information under paragraph (a) of this section:
    (1) Churches, their integrated auxiliaries, or conventions or 
associations of churches;
    (2) Any organization which is not a private foundation (as defined 
in section 509(a)) and the gross receipts of which in each taxable year 
are normally not more than $5,000;
    (3) Any organization which has terminated its private foundation 
status under section 507(b)(1)(B) with respect to a liquidation, 
dissolution, termination, or substantial contraction which is in 
connection with the termination under section 507(b)(1)(B);
    (4) Any organization described in section 401(a) if the employer who 
established such organization files a return which provides the 
information under paragraph (a) of this section;
    (5) Any organization described in section 501(c)(1) and any 
corporation described in section 501(c)(2) which holds title to property 
for such 501(c)(1) organizations;
    (6) Any organization described in section 501(c)(14)(A) subject to a 
group exemption letter issued to a state regulatory body; and
    (7) Any subordinate unit of a central organization (other than a 
private foundation) which established its exempt status under the group 
ruling procedure of regulations Sec. 601.201 (n)(7), if the central or 
parent organization files an annual information return for the group in 
accordance withSec. 1.6033-2(d); and
    (8) Any organization no longer exempt from taxation under section 
501(a) and which during the period of its exemption under such section 
was neither described in section 501(c)(3) nor a corporation described 
in section 501(c)(2) which held title to property for an organization 
described in section 501(c)(3).

The Commissioner may relieve any organization or class or organizations 
from filing the return required by section 6043(b) of this section, 
where it is determined that such information is not necessary for the 
efficient administration of the internal revenue laws.
    (c) Penalties. For provisions relating to the penalty provided for 
failure to furnish any information required by this section, see section 
6652(d) and the regulations thereunder.
    (d) Definitions. (1)(i) The term ``substantial contraction'', as 
used in this section, shall include any partial liquidation or any other 
significant disposition of assets, other than transfers for full and 
adequate consideration or distributions out of current income. For 
purposes of this subparagraph, the term ``significant disposition of 
assets'' shall not include any disposition for a taxable year where the 
aggregate of--
    (A) The dispositions for the taxable year and
    (B) Where any disposition for the taxable year is part of a series 
of related dispositions made during such prior taxable years, the total 
of the related dispositions made during prior taxable years, is less 
than 25 percent of the fair market value of the net assets of the 
organization at the beginning of the taxable year (in the case of (A) of 
this subdivision) or at the beginning of the first taxable year in which 
any of the series of related dispositions was made (in the case of (B) 
of this subdivision). A ``significant disposition of assets'' may result 
from the transfer of assets to a single organization or to several 
organizations, and it may occur in a single taxable year (as in (A) of 
this subdivision) or over the course of two or more taxable years (as in 
(B) of this subdivision). The determination whether a significant 
disposition has occurred through a series of related dispositions 
(within the meaning of (B) of this subdivision) will be determined from 
all the facts and circumstances of the particular case. Ordinarily, a 
distribution described in section

[[Page 610]]

170(b)(1)(D)(ii) shall not be taken into account as a significant 
disposition of assets within the meaning of this subparagraph.
    (ii) The provisions of this subparagraph may be illustrated by the 
following examples:

    Example (1). M, an organization described is section 501(c)(4), is 
on the calendar year basis. It has net assets worth $100,000 as of 
January 1, 1971. In 1971, in addition to distributions out of current 
income, M transfers $10,000 to N, $10,000 to O, and $10,000 to P. Such 
dispositions to N, O, and P are not distributions described in section 
170(b)(1)(E)(ii). N, O, and P are all organizations described in section 
501(c)(4). Under subdivision (i)(a) of this subparagraph, M has made a 
significant disposition of its assets in 1971 since M has disposed of 
more than 25 percent of its net assets (with respect to the fair market 
value of such assets as of January 1, 1971). Thus. M is subject to the 
provisions of section 6043(b) and this section for the year 1971.
    Example (2). U, a tax-exempt private foundation on the calendar year 
basis, has net assets worth $100,000 as of January 1, 1971. As part of a 
series of related dispositions in 1971 and 1972. U transfers in 1971, in 
addition to distributions out of current income, $10,000 to private 
foundation X and $10,000 to private foundation Y, and in 1972, in 
addition to distributions out of current income, U transfers $10,000 to 
private foundation Z. Such dispositions to X, Y, and Z are not 
distributions described in section 170(b)(1)(E)(ii). Under subdivision 
(i) of this subparagraph, U is treated as having made a series of 
related dispositions in 1971 and 1972. The aggregate of the 1972 
disposition (under subdivision (i)(a)of this subparagraph) and the 
series of related dispositions (under subdivision (i)(b) of this 
subparagraph) is $30,000, which is more than 25 percent of the fair 
market value of U's net assets as of the beginning of 1971 ($100,000), 
the first year in which any such disposition was made. Thus, U has made 
a significant disposition of its assets and is subject to the provisions 
of section 6043(b) and this section for the year 1972.
    Example (3) Assume in Example (1) that in 1973 M makes a $5,000 
disposition related to the 1971 disposition. Under subdivision (i)(B) of 
this subparagraph M is treated as having made a series of related 
dispositions in 1971 and 1973. The aggregate of the 1971 disposition 
under subdivision (i)(A) of this subparagraph and the 1973 related 
disposition under subdivision (i)(B) of this subparagraph is $35,000, 
which is more than 25 percent of the fair market value of M's net assets 
as of the beginning of 1971, the first year in which any disposition was 
made. Thus M has made a significant disposition of its assets and is 
subject to the provisions of section 6043(b) and this section for the 
year 1973.
    (2) For the definition of the term ``normally'' as used in paragraph 
(b)(2) of this section, see Sec. 1.6033-2(g)(3).
    (3) For examples of the term ``integrated auxiliaries'' as used in 
paragraph (b)(1) of this section, see Sec. 1.6033-2(g)(1)(i)(a).

[T.D. 7563, 43 FR 40221, Sept. 11, 1978]



Sec. 1.6044-1   Returns of information as to patronage dividends with respect to patronage occurring in taxable years beginning before 1963.

    (a) Requirement--(1) In general. Except as provided in subparagraph 
(2) of this paragraph, any corporation allocating to any patron in 
respect of patronage occurring in any taxable year of the corporation 
beginning before January 1, 1963, amounts aggregating $100 or more 
during a calendar year as patronage dividends, rebates, or refunds 
(whether in cash, merchandise, capital stock, revolving fund 
certificates, retain certificates, letters of advice, or in some other 
manner that discloses to each patron the amount of such dividend, 
rebate, or refund) shall for each such calendar year file a return of 
information with respect to such allocation on Forms 1096 and 1099. A 
separate Form 1099 shall be prepared for each patron showing the name 
and address of the patron to whom such allocation is made, and the 
amount of the allocation. The allocation shall be reported for the 
calendar year during which the allocation is made, regardless of whether 
the allocation is deemed for the purpose of section 522 to be made at 
the close of a preceding taxable year of the corporation.
    (2) Exception. A return is not required under this section in the 
case of any corporation (including any cooperative or nonprofit 
corporation engaged in rural electrification) described in section 
501(c) (12) or (15) which is exempt from tax under section 501(a), or in 
the case of any corporation subject to a tax imposed by subchapter L, 
chapter 1, of the Code.
    (b) Time and place for filing. Returns made under this section on 
Forms 1096 and 1099 for any calendar year shall be filed on or before 
February 28 of the following year with any of the Internal Revenue 
Service Centers, the addresses

[[Page 611]]

of which are listed in the instructions for such forms.
    (c) Definitions. The terms ``cooperative association'', ``patron'', 
``patronage dividends, rebates, and refunds'', and ``allocation'' are 
defined, for the purpose of this section, in paragraph (b) of 
Sec. 1.522-1.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6628, 27 FR 
12798, Dec. 28, 1962]



Sec. 1.6044-2   Returns of information as to payments of patronage dividends with respect to patronage occurring in taxable years beginning after 1962.

    (a) Requirement of reporting--(1) In general. Except as provided in 
Sec. 1.6044-4, every organization described in paragraph (b) of this 
section which makes payments with respect to patronage occurring on or 
after the first day of the first taxable year of the organization 
beginning after December 31, 1962, of amounts described in Sec. 1.6044-3 
aggregating $10 or more to any person during any calendar year shall 
make an information return on Forms 1096 and 1099 for the calendar year 
showing the aggregate amount of such payments, the name and address of 
the person to whom paid, the total of such payments for all persons, and 
such other information as is required by the forms.
    (2) Definitions. The term ``person'' when used in this section does 
not include the United States, a State, the District of Columbia, a 
foreign government, a political subdivision of a State or of a foreign 
government, or an international organization. Therefore, payment of 
amounts described in Sec. 1.6044-3 to one of these entities need not be 
reported.
    (3) Determination of person to whom a patronage dividend is paid. 
For purposes of applying the provisions of this section, the person 
whose identifying number is required to be included by the cooperative 
on an information return with respect to a patronage dividend shall be 
considered the person to whom such dividend is paid. For regulations 
relating to the use of identifying numbers, see Sec. 1.6109-1.
    (4) Inclusion of other payments. The Form 1099 filed by an 
organization with respect to payments of patronage dividends made to any 
person during a calendar year may, at the election of the organization, 
include other payments made by it to such person during such year which 
are required to be reported on Form 1099.
    (b) Organizations subject to reporting requirement. The 
organizations subject to the reporting requirements of paragraph (a) of 
this section are:
    (1) Any organization exempt from tax under section 521 (relating to 
exemption of farmers' cooperatives from tax), and
    (2) Any corporation operating on a cooperative basis other than an 
organization:
    (i) Which is exempt from tax under chapter 1 (other than section 
521), or
    (ii) Which is subject to the provisions of part II of subchapter H 
of chapter 1 (relating to mutual savings banks, etc.), or subchapter L 
of chapter 1 (relating to insurance companies), or
    (iii) Which is engaged in furnishing electric energy, or providing 
telephone service, to persons in rural areas.
    (c) When payment deemed made. For purposes of this section, money or 
other property (except written notices of allocation) is deemed to have 
been paid when it is credited or set apart to a person without any 
substantial limitation or restriction as to the time or manner of 
payment or condition upon which payment is to be made, and is made 
available to him so that it may be drawn at any time, and its receipt 
brought within his own control and disposition. A written notice of 
allocation is considered to have been paid when it is issued by the 
organization to the distributee. Similarly, a qualified check (as 
defined in section 1388(d)(4)) is considered to have been paid when it 
is issued to the distributee.
    (d) Time and place for filing. The return required under this 
section on Forms 1096 and 1099 for any calendar year shall be filed 
after September 30 of such year, but not before the payer's final 
payment for the year, and on or before February 28 of the following 
year, with any of the Internal Revenue Service Centers, the addresses of 
which are listed in the instructions for such forms. For extensions of 
time for filing returns under this section, see Sec. 1.6081-1.

[[Page 612]]

    (e) Penalty. For penalty for failure to file the statements required 
by this section, see Sec. 301.6652-1 of this chapter (Regulations on 
Procedure and Administration).
    (f) Permission to submit information required by Form 1099 on 
magnetic tape. For rules relating to permission to submit the 
information required by Form 1099 on magnetic tape or other media, see 
Sec. 1.9101-1.

[T.D. 6628, 27 FR 12798, Dec. 28, 1962, as amended by T.D. 6677, 28 FR 
10147, Sept. 17, 1963; T.D. 6879, 31 FR 3493, Mar. 8, 1966; T.D. 6883, 
31 FR 6589, May 3, 1966]



Sec. 1.6044-3   Amounts subject to reporting.

    (a) In general. Except as provided in paragraph (c) of this section, 
the amounts subject to reporting under Sec. 1.6044-2 are:
    (1) Payments by all organizations subject to such reporting 
requirements of:
    (i) Patronage dividends (as defined in section 1388(a)) paid in 
money, qualified written notices of allocation (as defined in section 
1388(c)), or other property (except nonqualified written notices of 
allocation as defined in section 1388(d)); and
    (ii) Amounts described in section 1382(b)(2) (relating to redemption 
of nonqualified written notices of allocation previously paid as 
patronage dividends) paid in money or property (except written notices 
of allocation); and
    (2) Payments by farmers' cooperatives exempt from tax under section 
521 of:
    (i) Amounts described in section 1382(c)(2)(A) (relating to 
distributions with respect to earnings derived from sources other than 
patronage) paid in money, qualified written notices of allocation, or 
other property (except nonqualified written notices of allocation); and
    (ii) Amounts described in section 1382(c)(2)(B) (relating to 
redemption of nonqualified written notices of allocation previously paid 
as distributions with respect to earnings derived from sources other 
than patronage) paid in money or other property (except written notices 
of allocation).
    (b) Special rules. (1) If an organization makes a distribution 
consisting in whole or in part of a written notice of allocation and a 
qualified check and, at the time it files its return under Sec. 1.6044-
2, is unable to determine whether such written notice of allocation and 
such check constitute nonqualified written notices of allocation, such 
organization shall for purposes of such return treat such written notice 
of allocation as a qualified written notice of allocation and such 
qualified check as a payment in money.
    (2) An amount described in paragraph (a) of this section is subject 
to reporting even though the organization paying such amount is allowed 
no deduction for it because it was not paid within the time prescribed 
in section 1382. Thus, a patronage dividend of $25 paid by a marketing 
cooperative must be reported even though it is paid after the end of the 
payment period (see section 1382(d)) for the organization's taxable year 
in which the patronage occurred.
    (c) Exceptions. Reporting under Sec. 1.6044-2 of payments of amounts 
described in paragraph (a) of this section is not required:
    (1) If such payments are made by a foreign corporation which is not 
engaged in business within the United States and does not have an office 
or place of business or a fiscal or paying agent in the United States, 
or
    (2) If such payments are subject to withholding under section 1441 
or 1442 (relating to withholding of tax on nonresident aliens and 
foreign corporations, respectively) by the person making the 
distribution or payment, or would be so subject to withholding but for 
the provisions of a treaty, or for the fact that it is attributable to 
income from sources outside the United States.
    (d) Determination of amount paid. For purposes of Sec. 1.6044-2 and 
this section, in determining the amount of any payment subject to 
reporting under paragraph (a) of this section:
    (1) Property (other than a qualified written notice of allocation) 
shall be taken into account at its fair market value, and
    (2) A qualified written notice of allocation shall be taken into 
account at its stated dollar amount.

[T.D. 6628, 27 FR 12798, Dec. 28, 1962]

[[Page 613]]



Sec. 1.6044-4   Exemption for certain consumer cooperatives.

    (a) In general--(1) Determination of exemption. Exemption from the 
reporting requirements of Sec. 1.6044-2 shall, upon application 
therefor, be granted by the district director to any cooperative which 
he determines is primarily engaged in selling at retail goods or 
services of a type which is generally for personal, living, or family 
use. A cooperative is not exempt from the reporting requirements merely 
because it is an organization of a type to which section 6044(c) and 
this section relate. In order for the exemption from reporting to apply, 
it is necessary that the cooperative file an application in accordance 
with this section and obtain a determination of exemption.
    (2) Basis for exemption. For a cooperative to qualify for the 
exemption from reporting provided by section 6044(c) and this section 85 
percent of its gross receipts for the preceding taxable year, or 85 
percent of its aggregate gross receipts for the preceding three taxable 
years, must have been derived from the sale at retail of goods or 
services of a type which is generally for personal, living, or family 
use. In determining whether an item is of a type that is generally for 
personal, living, or family use, an item which may be purchased either 
for such use or for business use and which when acquired for business 
purposes is generally purchased at wholesale will, when sold by a 
cooperative at retail, be treated as goods or services of a type 
generally for personal, living, or family use.
    (3) Period of exemption. A determination of exemption from reporting 
shall apply beginning with the payments made during the calendar year in 
which the determination is made and shall automatically cease to be 
effective beginning with payments made after the close of the first 
taxable year of the cooperative in which less than 70 percent of its 
gross receipts is derived from the sale at retail of goods or services 
of a type which is generally for personal, living, or family use.
    (b) Application for exemption. Application for exemption from the 
reporting requirements of section 6044 shall be made on Form 3491, and 
shall be filed with the district director for the internal revenue 
district in which the cooperative has its principal place of business.

[T.D. 6628, 27 FR 12799, Dec. 28, 1962]



Sec. 1.6044-5  Statements to recipients of patronage dividends.

    (a) Requirement. A person required to make an information return 
under section 6044(a)(1) and Sec. 1.6044-2 must furnish a statement to 
each recipient whose identifying number is required to be shown on the 
related information return for patronage dividends paid.
    (b) Form, manner, and time for providing statements to recipients. 
The statement required by paragraph (a) of this section must be either 
the official Form 1099 prescribed by the Internal Revenue Service for 
the respective calendar year or an acceptable substitute statement. The 
rules under Sec. 1.6042-4 (relating to statements with respect to 
dividends) apply comparably in determining the form of an acceptable 
substitute statement permitted by this section. Those rules also apply 
for purposes of determining the manner of and time for providing the 
Form 1099 or its acceptable substitute to a recipient under this 
section. However, each Form 1099 or acceptable substitute statement 
required by this section must be furnished on or before January 31 of 
the following year, but no statement may be furnished before the final 
payment has been made for the calendar year.
    (c) Penalty. For provisions relating to the penalty for the failure 
to furnish a statement under this section, see section 6722.
    (d) Effective date. This section is effective for payee statements 
due after December 31, 1995, without regard to extensions. For the 
substantially similar statement mailing requirements that apply with 
respect to forms required to be filed after October 22, 1986, and before 
January 1, 1996, see Rev. Proc. 84-70 (1984-2 C.B. 716) (or successor 
revenue procedures). See Sec. 601.601(d)(2) of this chapter.

[T.D. 8637, 60 FR 66111, Dec. 21, 1995]

[[Page 614]]



Sec. 1.6045-1  Returns of information of brokers and barter exchanges.

    (a) Meaning of terms. The following definitions apply for purposes 
of this section:
    (1) The term broker means a person that, in the ordinary course of a 
trade or business during the calendar year, stands ready to effect sales 
to be made by others.
    (2) The term customer means, with respect to a sale effected by a 
broker, the person (other than such broker) that makes the sale, if the 
broker acts as:
    (i) An agent for such person in the sale;
    (ii) A principal in the sale; or
    (iii) The participant in the sale responsible for paying to such 
person or crediting to such person's account the gross proceeds on the 
sale.
    (3) The term security means:
    (i) A share of stock in a corporation (foreign or domestic);
    (ii) An interest in a trust;
    (iii) An interest in a partnership;
    (iv) A debt obligation;
    (v) An interest in or right to purchase any of the foregoing in 
connection with the issuance thereof from the issuer or an agent of the 
issuer or from an underwriter that purchases any of the foregoing from 
the issuer, or
    (vi) An interest in a security described in paragraph (a)(3) (i) or 
(iv) (but not including options or executory contracts that require 
delivery of such type of security).
    (4) The term barter exchange means any person with members or 
clients that contract either with each other or with such person to 
trade or barter property or services either directly or through such 
person. The term does not include arrangements that provide solely for 
the informal exchange of similar services on a noncommercial basis.
    (5) The term commodity means:
    (i) Any type of personal property or an interest therein (other than 
securities as defined in paragraph (a)(3)) the trading of regulated 
futures contracts in which has been approved by the Commodity Futures 
Trading Commission;
    (ii) Lead, palm oil, rapeseed, tea, tin, or an interest in any of 
the foregoing; or
    (iii) Any other personal property or an interest therein that is of 
a type the Secretary determines is to be treated as a ``commodity'' 
under this section, from and after the date specified in a notice of 
such determination published in the Federal Register.
    (6) The term regulated futures contract means a regulated futures 
contract within the meaning of section 1256(b).
    (7) The term forward contract means:
    (i) An executory contract that requires delivery of a commodity in 
exchange for cash and which contract is not a regulated futures 
contract; or
    (ii) An executory contract that requires delivery of personal 
property or an interest therein in exchange for cash, or a cash 
settlement contract, if such executory contract or cash settlement 
contract is of a type the Secretary determines is to be treated as a 
``forward contract'' under this section, from and after the date 
specified in a notice of such determination published in the Federal 
Register.
    (8) The term closing transaction means any termination of an 
obligation under a forward contract or a regulated futures contract.
    (9) The term sale means any disposition of securities, commodities, 
regulated futures contracts, or forward contracts for cash, and includes 
redemptions of stock, retirements of indebtedness, and enterings into 
short sales. In the case of a regulated futures contract or a forward 
contract, the term ``sale'' means any closing transaction. When a 
closing transaction in a regulated futures contract involves making or 
taking delivery, the profit or loss on the contract is a sale, and, if 
delivery is made, such delivery is a separate sale. When a closing 
transaction in a forward contract involves making or taking delivery, 
the delivery is a sale without separation of the profit or loss on the 
contract from the profit or loss on the delivery, except that taking 
delivery for United States dollars is not a sale. The term ``sale'' does 
not include grants or purchases of options, exercises of call options, 
or enterings into contracts that require delivery of personal property 
or an interest therein.
    (10) The term effect means, with respect to a sale, to act as:

[[Page 615]]

    (i) An agent for a party in the sale wherein the nature of the 
agency is such that the agent ordinarily would know the gross proceeds 
from the sale; or
    (ii) A principal in such sale.
Acting as an agent or principal with respect to grants or purchases of 
options, exercises of call options, or enterings into contracts that 
require delivery of personal property or an interest therein is not of 
itself effecting a sale. A broker that has on its books a forward 
contract under which delivery is made effects such delivery.
    (11) The term foreign currency means currency of a foreign country.
    (12) The term convertible foreign currency means a foreign currency 
that is either:
    (i) Readily convertible into United States dollars; or
    (ii) Of a type the Secretary determines is to be treated as a 
``convertible foreign currency,'' from and after the date specified in a 
notice of such determination published in the Federal Register.
    (13) The term cash means United States dollars or any convertible 
foreign currency.
    (b) Examples. The following examples illustrate the definitions in 
paragraph (a):

    Example (1). The following persons generally are brokers within the 
meaning of paragraph (a)(1):
    (i) A mutual fund, an underwriter of the mutual fund, or an agent 
for the mutual fund, any of which stands ready to redeem or repurchase 
shares in such mutual fund.
    (ii) An obligor that regularly issues and retires its own notes.
    (iii) A professional custodian (such as a bank) that regularly 
arranges sales for custodial accounts pursuant to instructions from the 
owner of the property.
    (iv) A depositary trust or other person who regularly acts as an 
escrow agent in corporate acquisitions, if the nature of the activities 
of the agent is such that the agent ordinarily would know the gross 
proceeds from sales.
    (v) A stock transfer agent for a corporation, which agent records 
transfers of stock in such corporation, if the nature of the activities 
of the agent is such that the agent ordinarily would know the gross 
proceeds from sales.
    (vi) A dividend reinvestment agent for a corporation that stands 
ready to purchase or redeem shares.
    Example (2). The following persons are not brokers within the 
meaning of paragraph (1)(a) in the absence of additional facts that 
indicate the person is a broker:
    (i) A stock transfer agent for a corporation, which agent daily 
records transfers of stock in such corporation, if the nature of the 
activities of the agent is such that the agent ordinarily would not know 
the gross proceeds from sales.
    (ii) A person (such as a stock exchange) that merely provides 
facilities in which others effect sales.
    (iii) An escrow agent or nominee if such agency is not in the 
ordinary course of a trade or business.
    (iv) An escrow agent, otherwise a broker, which agent effects no 
sales other than such transactions as are incidental to the purpose of 
the escrow (such as sales to collect on collateral).
    (v) A floor broker on a commodities exchange, which broker maintains 
no records with respect to the terms of sales.
    (vi) A corporation that issues and retires long-term debt on an 
irregular basis.
    (vii) A clearing organization.
    Example (3). A, B, and C belong to a carpool in which they commute 
to and from work. Every third day, each member of the carpool provides 
transportation for the other two members. Because the carpool 
arrangement provides solely for the informal exchange of similar 
services on a noncommercial basis, the carpool is not a barter exchange 
within the meaning of paragraph (a)(4).
    Example (4). X is an organization whose members include retail 
merchants, wholesale merchants, and persons in the trade or business of 
performing services. X's members exchange property and services among 
themselves using credits on the books of X as a medium of exchange. Each 
exchange through X is reflected on the books of X by crediting the 
account of the member providing property or services and debiting the 
account of the member receiving such property or services. X also 
provides information to its members concerning property and services 
available for exchange through X. X charges its members a commission on 
each transaction in which credits on its books are used as a medium of 
exchange. X is a barter exchange within the meaning of paragraph (a)(4) 
of this section.
    Example (5). A warehouse receipt is an interest in personal property 
for purposes of paragraph (a). Consequently, a warehouse receipt for a 
quantity of lead is a commodity under paragraph (a)(5)(ii). Similarly an 
executory contract that requires delivery of a warehouse receipt for a 
quantity of lead is a forward contract under paragraph (a)(7)(ii).
    Example (6). The only customers of a depository trust acting as an 
escrow agent in corporate acquisitions which trust is a broker, are 
shareholders to whom the trust makes

[[Page 616]]

payments or shareholders for whom the trust is acting as an agent.
    Example (7). The only customers of a stock transfer agent, which 
agent is a broker are shareholders to whom the agent makes payments or 
shareholders for whom the agent is acting as an agent,
    Example (8). D, an individual not otherwise exempt from reporting, 
is the holder of an obligation issued by P, a corporation. R, a broker, 
acting as an agent for P, retires such obligation held by D. Such 
obligor payments from R represent obligor payments by P. (See paragraph 
(c)(3)(v)). D, the person to whom the gross proceeds are paid or 
credited by R, is the customer of R.

    (c) Reporting by brokers--(1) Requirement of reporting. Any broker 
shall, except as otherwise provided, report in the manner prescribed in 
this section.
    (2) Sales required to be reported. Except as provided in paragraphs 
(c)(3), (c)(5), (g), and (p)(1), a broker shall make a return of 
information with respect to each sale by a customer of the broker 
effected by the broker in the ordinary course of a trade or business in 
which the broker stands ready to effect sales to be made by others.
    (3) Exceptions. The exceptions set forth in paragraph (c)(3) of 
Sec. 5f.6045-1 of this chapter apply to sales effected on or after May 
29, 1984. For an exception for certain sales of agricultural commodities 
and certificates issued by the Commodity Credit Corporation after 
January 1, 1993, see paragraph (c)(7) of this section. With respect to 
sales effected before May 29, 1984, the exceptions provided in 
Sec. 1.6045-1(c)(3) (as contained in the CFR edition revised as of April 
1, 1984) apply.

    Editorial Note: At 57 FR 53032, Nov. 6, 1992 paragraph (c)(3) of 
Sec. 1.6045-1 was revised (above), effective January 1, 1993. At 57 FR 
58984, Dec. 14, 1992 paragraph (c)(3) was revised (below), effective 
July 1, 1983. The IRS will publish a document in the Federal Register 
clarifying this discrepancy.

    (3) Exceptions--(i) In general. Except as provided in paragraph 
(c)(3)(ii) of this section, the exceptions set forth in paragraph (c)(3) 
of Sec. 5f.6045-1 of this chapter apply to sales effected on or after 
May 29, 1984. For an exception for certain sales of agricultural 
commodities and certificates issued by the Commodity Credit Corporation 
after January 1, 1993, see paragraph (c)(7) of this section. With 
respect to sales effected before May 29, 1984, the exceptions provided 
in Sec. 1.6045-1(c)(3) (as contained in the CFR edition revised as of 
April 1, 1984) apply.
    (ii) Excepted sales. No return of information is required with 
respect to a sale effected by a broker for a customer if the sale is an 
excepted sale. For this purpose, a sale is an excepted sale if it is so 
designated by the Internal Revenue Service in a revenue ruling or 
revenue procedure published in the Internal Revenue Bulletin. (See 
Sec. 601.601(d)(2)(ii)(b) of this chapter).

    (4) Examples. The examples set forth in paragraph (c)(4) of 
Sec. 5f.6045-1 illustrate the application of the exceptions to sales 
effected on or after May 29, 1984. With respect to sales effected before 
May 29, 1984, the examples provided in 26 CFR 1.6045-1(c)(4) (revised as 
of April 1, 1983) illustrate the application of the exceptions.
    (5) Form of reporting for regulated futures contracts--(i) In 
general. A broker effecting closing transactions in regulated futures 
contracts shall report information with respect to regulated futures 
contracts solely in the manner prescribed in this paragraph (c)(5). In 
the case of a sale that involves making delivery pursuant to a regulated 
futures contract, only the profit or loss on the contract is reported as 
a transaction with respect to regulated futures contracts under this 
paragraph (c)(5); such sales are, however, subject to reporting under 
paragraph (d)(2). The information required under this paragraph (c)(5) 
must be reported on a calendar year basis, unless the broker is advised 
in writing by an account's owner that the owner's taxable year is other 
than a calendar year and the broker elects to report with respect to 
regulated futures contracts in such account on the basis of the owner's 
taxable year. The following information must be reported as required by 
Form 1099 with respect to regulated futures contracts held in a 
customer's account:
    (a) The name, address, and taxpayer identification number of the 
customer.
    (b) The net realized profit or loss from all regulated futures 
contracts closed during the calendar year.
    (c) The net unrealized profit or loss in all open regulated futures 
contracts

[[Page 617]]

at the end of the preceding calendar year.
    (d) The net unrealized profit or loss in all open regulated futures 
contracts at the end of the calendar year.
    (e) The aggregate profit or loss from regulated futures contracts 
((b)+(d)-(c)).
    (f) Any other information required by Form 1099. See 17 CFR 1.33. 
For this purpose, the end of a year is the close of business of the last 
business day of such year. In reporting under this paragraph (c)(5), the 
broker shall make such adjustments for commissions that have actually 
been paid and for option premiums as are consistent with the books of 
the broker. No additional returns of information with respect to 
regulated futures contracts so reported are required.
    (ii) Examples. The following examples illustrate the application of 
the rules in this paragraph (c)(5):

    Example (1). On October 30, 1984, A, an individual who is a calendar 
year taxpayer not otherwise exempt from reporting, buys one March 1985 
put on Treasury Bond futures (i.e. A purchases an option to enter into a 
short regulated futures contract of $100,000 face value U.S. Treasury 
bonds). A pays $500 for the option. On December 19, 1984, A, through B, 
exercises the option and enters into the futures contract. On February 
15, 1985, A, through B, enters into a closing transaction with respect 
to the futures contract. These are A's only transactions in the account. 
Since B's books list A's regulated futures contract on December 31, 
1984, B must report for A, for 1984, the unrealized profit or loss in 
the contract as of December 31, 1984. For 1985, B will report the same 
amount for A as the unrealized profit or loss at the beginning of 1985. 
The return of information for 1985 will also include the gain or loss 
from the contract in the net realized profit or loss from all regulated 
futures contracts sales during 1985.
    Example (2). The facts are the same as in Example (1) except that A 
does not enter into the closing transaction, but instead, on March 20, 
1985, B informs A that A will make delivery under the contract. On March 
22, 1985, A does so; consequently, A becomes entitled to the gross 
proceeds. B enters the closing transaction on its books on March 20, 
1985. In addition to the returns of information required by paragraph 
(c)(5), as described in Example (1), B must report the March 22, 1985 
delivery as a separate transaction. B may use as the sale date for the 
delivery either March 20, 1985, the date the transaction is entered on 
the books of B, or March 22, 1985, the date A becomes entitled to the 
gross proceeds. B may not deduct the $500 premium from the gross 
proceeds with respect to the March 22, 1985 delivery.
    Example (3). The facts are the same as in Example (2) except that A 
buys a call on Treasury bond futures and takes delivery. B will supply 
the returns of information required by paragraph (c)(5), as described in 
Example (1). B is not required to make a return of information with 
respect to A's taking delivery.
    Example (4). C, an individual who is a calendar year taxpayer not 
otherwise exempt from reporting, has an account with D, a broker. C 
trades both regulated futures contracts and forward contracts through 
C's account with D. D must report C's regulated futures contracts on an 
annual basis as required by paragraph (c)(5). With respect to C's 
forward contracts, D may elect to use the calendar month, quarter, or 
year as D's reporting period as provided in paragraph (c)(6).

    (6) Reporting periods and filing groups--(i) Reporting period--(a) 
In general. A broker may elect to use the calendar month, quarter, or 
year as the broker's reporting period. A broker may separately elect a 
reporting period for each filing group.
    (b) Election. For each calendar year, a broker shall elect a 
reporting period by filing Forms 1096 and 1099 in the manner elected. A 
different reporting period may be subsequently elected by filing in the 
manner subsequently elected, provided no duplication of reported 
transactions results.
    (ii) Filing group--(a) In general. A broker may elect to group 
customers or customer accounts by office, branch, department or other 
method of operational classification and separately file Forms 1096 and 
1099 for each filing group.
    (b) Election. For each calendar year, a broker shall elect filing 
groups by filing Forms 1096 and 1099 in the manner elected. Different 
filing groups may be subsequently elected by filing in the manner 
subsequently elected, provided no duplication of reported transactions 
results.
    (iii) Example.The following example illustrates the rules of this 
paragraph (c)(6):

    Example. The A department of C, a broker, files a separate report 
for each month of 1984, whereas the B department of C files one report 
for all of 1984. C makes no other reports

[[Page 618]]

or returns of information under section 6045 for 1984. C had thereby 
elected two filing groups for 1984, the A department and the B 
department. The A department has the calendar month as its 1984 
reporting period, whereas the B department has the calendar year as its 
1984 reporting period. The same result would occur if A and B were 
offices or branches of C.

    (7) Exception for certain sales of agricultural commodities and 
commodity certificates--(i) Agricultural commodities. No return of 
information is required under section 6045 for a spot or forward sale of 
an agricultural commodity. This paragraph (c)(7)(i) does not except from 
reporting sales of agricultural commodities pursuant to regulated 
futures contracts, sales of derivative interests in agricultural 
commodities, or sales described in paragraph (c)(7)(iii) of this 
section.
    (ii) Commodity Credit Corporation certificates. Except as otherwise 
provided in a revenue ruling or revenue procedure, no return of 
information is required under section 6045 with respect to a sale of a 
commodity certificate issued by the Commodity Credit Corporation under 7 
CFR 1470.4 (1990).
    (iii) Sales involving designated warehouses. Paragraph (c)(7)(i) of 
this section does not apply to any sale involving a warehouse receipt 
for an agricultural commodity issued by a designated warehouse for an 
agricultural commodity of the type for which the warehouse is a 
designated warehouse.
    (iv) Definitions. For purposes of this paragraph (c)(7):
    (A) Agricultural commodity. An ``agricultural commodity'' includes, 
but is not limited to, a commodity within the meaning of paragraph 
(a)(5) of this section that is a grain, feed, livestock, meat, oil seed, 
timber, or fiber.
    (B) Spot sale. A spot sale is a sale that results in the 
substantially contemporaneous delivery of a commodity.
    (C) Forward sale. A forward sale is a sale pursuant to a forward 
contract within the meaning of paragraph (a)(7) of this section.
    (D) Designated warehouse. A designated warehouse is a warehouse, 
depository, or other similar entity, designated by a commodity exchange 
under 7 CFR 1.43 (1992), in which or out of which a particular type of 
agricultural commodity is deliverable in satisfaction of a regulated 
futures contract.
    (v) Effective dates. Paragraph (c)(7) of this section applies to 
sales effected on or after January 1, 1993. For sales effected before 
January 1, 1993, the following transactions are excepted from the 
information reporting requirements of section 6045:
    (A) Spot or forward sales of agricultural products or commodities 
(but not sales of interests in agricultural products or commodities, 
such as sales of regulated futures contracts or forward contracts), 
effected by any person regardless of whether that person takes title to 
the agricultural products or commodities; and
    (B) Sales of negotiable commodity certificates issued by the 
Commodity Credit Corporation.
    (d) Information required--(1) In general. A broker that is required 
to make a return of information under paragraph (c) during a reporting 
period shall report on a separate Form 1096 for each filing group, 
showing such information as may be required by Form 1096, in the form, 
manner, and number of copies required by Form 1096.
    (2) Transactional reporting. As to each sale with respect to which a 
broker is required to make a return of information under this section, 
the broker, except as provided in paragraphs (c)(5) and (p)(1), shall 
show on Form 1099 the name, address, and taxpayer identification number 
of the customer, the property sold, Committee on Uniform Security 
Identification Procedures (CUSIP) number of the security sold (if 
known), the gross proceeds, sale date, and such other information as may 
be required by Form 1099, in the form, manner, and number of copies 
required by Form 1099.
    (3) Bond sales between interest payment dates. As to each sale of a 
debt obligation prior to maturity with respect to which a broker is 
required to make a return of information under this section, a broker 
shall show separately on Form 1099 the amount of accrued and unpaid 
interest as of the sale date that must be reported by the customer as 
interest income under Sec. 1.61-7(d) (but not the amount of any original 
issue or market discount). Such interest information shall be shown in 
the manner

[[Page 619]]

and at the time required by Form 1099 and section 6049.
    (4) Sale date--(i) In general. Except as otherwise provided in this 
paragraph (d) (4), a broker may report a sale as occurring on the date 
the sale is entered on the books of the broker of the date the customer 
becomes entitled to the gross proceeds thereof. The method of reporting 
the date the sale occurs shall be consistently applied by the broker as 
to all reports with respect to a filing group during a calendar year.
    (ii) Exception. For purposes of this section, a broker shall report 
a short sale as occurring on the date the short sale is entered on the 
books of the broker.
    (iii) Example. The following example illustrates the application of 
the rules in this paragraph (d)(4):

    Example. C, an individual not otherwise exempt from reporting, 
through J, a broker, enters into a short sale with respect to 100 shares 
of the stock of corporation B for $50 per share on July 12, 1985. J is 
required to report the sale as occurring on July 12, 1985 with gross 
proceeds of $5,000 dollars.

    (5) Gross proceeds. The gross proceeds on a sale are the total 
amount paid to the customer or credited to the customer's account as a 
result of such sale reduced by the amount of any interest reported under 
paragraph (d)(3) and increased by any amount not so paid or credited by 
reason of repayment of margin loans. In the case of a closing 
transaction which results in a loss, gross proceeds are the amount 
debited from the customer's account. The broker may, but is not required 
to, take commissions and option premiums into account in determining 
gross proceeds, provided the treatment chosen is consistent with the 
books of the broker.
    (6) Conversion of proceeds paid in foreign currency--(i) Convertible 
currency. In the event the proceeds of a sale are paid in convertible 
foreign currency, the amount subject to reporting under this section 
shall be computed by converting such foreign currency into United States 
dollars at the exchange rate determined in the following manner. The 
broker may choose, with respect to a filing group, to use either the 
exchange rate on the date the sale occurs or the exchange rate at the 
close of business on the last business day of the reporting period in 
which the sale occurs. In either case, the broker may use as such 
exchange rate the rate at which the broker was able to purchase the 
foreign currency at the relevant time or, if there is no such rate, the 
exchange rate quote for such foreign currency at such time in any 
generally recognized financial publication, provided the broker 
consistently uses the same publication.
    (ii) Nonconvertible currency. [Reserved]
    (e) Reporting of barter exchanges--(1) Requirement of reporting. A 
barter exchange shall, except as otherwise provided, report in the 
manner prescribed in this section.
    (2) Exchanges required to be reported--(i) In general. Except as 
provided in paragraphs (e)(2)(ii), (g), and (p)(2), a barter exchange 
shall make a return of information with respect to exchanges of personal 
property or services through the barter exchange during the calendar 
year among its members or clients or between such persons and the barter 
exchange. For this purpose, property or services are exchanged through a 
barter exchange if payment for property or services is made by means of 
a credit on the books of the barter exchange or scrip issued by the 
barter exchange or if the barter exchange arranges a direct exchange of 
property or services among its members or clients or exchanges property 
or services with a member or client.
    (ii) Exemption. A barter exchange through which there are fewer than 
100 exchanges during the calendar year is not required to report for, or 
make a return of information with respect to exchanges during, such 
calendar year. The Commissioner may require multiple barter exchanges to 
be combined for purposes of the proceeding sentence upon a determination 
that a material purpose for the formation or continuation of one or more 
of the barter exchanges to be combined was to receive one or more 
exemptions pursuant to this subparagraph.
    (f) Information required--(1) In general. A person that is a barter 
exchange during a calendar year shall report on Form 1096 showing the 
information required thereon for such year.

[[Page 620]]

    (2) Transactional reporting--(i) In general. As to each exchange 
with respect to which a barter exchange is required to make a return of 
information under this section, the barter exchange, except as provided 
in paragraph (p)(2), shall show on Form 1099 the name, address, and 
taxpayer identification number of each member or client providing 
property or services in the exchange, the property or services provided, 
the amount received by the member or client for such property or 
services, the date on which the exchange occurred, and such other 
information as may be required by Form 1099, in the form, manner, and 
number of copies required by Form 1099.
    (ii) Exception for corporate member or client. As to each corporate 
member or client providing property or services in an exchange for which 
a return of information is required under this section, the barter 
exchange may report the name, address, and taxpayer identification 
number of the corporate member or client, the aggregate amount received 
by the corporate member or client during the reporting period for 
property or services provided by such corporate member or client in 
exchange for which a return of information is required, and such other 
information as may be required by Form 1099, in the form, manner, and 
number of copies required by Form 1099.
    (iii) Definition. For purposes of paragraph (f)(2)(ii) of this 
section, the term ``corporate member or client'' means a member or 
client of a barter exchange which is a corporation as defined in section 
7701(a)(3) (including an insurance company). The term corporation 
includes a pool, syndicate, partnership, or unincorporated association 
composed exclusively of corporations. A barter exchange may treat a 
member or client as a corporation (and therefore as a corporate member 
or client) if such member or client provides an exemption certificate as 
described in A-29 of Sec. 35a.9999-1 of the Temporary Employment Tax 
Regulations or provided that--
    (A) The name of the member or client contains the term ``insurance 
company,'' ``indemnity company,'' ``reinsurance company,'' or 
``assurance company'';
    (B) The name of the member or client contains one of the following 
unambiguous expressions of corporate status: Incorporated, Inc., 
Corporation, Corp., or P.C., but not Company or Co.; or
    (C) The member or client is known to the barter exchange to be a 
corporation through a corporate resolution or similar document on file 
with the barter exchange clearly indicating corporate status.
    (3) Exchange date. For purposes of this section an exchange is 
considered to occur with respect to a member or client of a barter 
exchange on the date cash, property, a credit, or scrip is actually or 
constructively received by the member or client as a result of the 
exchange. (See Sec. 1.451-2 for rules pertaining to constructive 
receipt.)
    (4) Amount received. The amount received by a member or client in an 
exchange includes cash received, the fair market value of any property 
or services received, and the fair market value of any credits to the 
account of the member or client on the books of the barter exchange or 
scrip issued to the member or client by the barter exchange, but does 
not include any amount received by the member or client in a subsequent 
exchange of credits or scrip. For purposes of this section, the fair 
market value of a credit or scrip is the value assigned to such credit 
or scrip by the issuing barter exchange for the purpose of exchanges 
unless the Commissioner requires the use of a different value that the 
Commissioner determines more accurately reflects fair market value.
    (5) Meaning of terms. For purposes of this paragraph (f)--(i) A 
credit is an amount on the books of the barter exchange that is 
transferable from one member or client of the barter exchange to another 
such member or client, or to the barter exchange in payment for property 
or services;
    (ii) Scrip is a token issued by the barter exchange that is 
transferable from one member or client, of the barter exchange to 
another such member or client, or to the barter exchange, in payment for 
property or services; and
    (iii) Property does not include a credit or scrip.

[[Page 621]]

    (6) Reporting period. A barter exchange shall use the calendar year 
as the reporting period.
    (g) Exempt foreign persons--(1) In general. No return of information 
is required with respect to the participation in any transaction during 
a calendar year of a person who furnishes during such calendar year (or 
who has furnished during any of the two preceding calendar years) to the 
broker or barter exchange (irrespective of whether the branch of the 
broker or barter exchange is within or without the United States) a 
statement, signed under penalty of perjury, that such person is an 
exempt foreign person, unless an employee or other agent of the broker 
or barter exchange who is responsible for receiving or reviewing such 
statement has actual knowledge that such statement is incorrect. 
However, the broker or barter exchange may, at its option, require the 
statement to be provided with respect to each separate transaction. The 
broker or barter exchange shall retain such statement for at least four 
years following the end of the last calendar year for which a return of 
information is not required by reason of such statement. See 
Sec. 1.6001-1 (relating to records in general) for the requirements 
relating to the retention of statements provided under this paragraph 
(g). If, after providing such statement, the person ceases to be an 
exempt foreign person, such person shall so notify the broker or barter 
exchange in writing within 30 days of this change in status. For 
purposes of this paragraph (g), an exempt foreign person is a person 
who, during a calendar year in which such person participates in 
transactions with respect to which a return of information would 
otherwise be required under this section:
    (i) Is neither a citizen of the United States, a resident of the 
United States, nor a person treated as a resident of the United States 
by reason of an election under section 6013 (g) or (h);
    (ii) Is not subject to the provisions of section 877;
    (iii) In the case of an individual, has not been, and at the time 
the statement is furnished reasonably expects not to be, present in the 
United States for a period aggregating 183 or more days (or is a 
beneficiary of a tax treaty to which the United States is a party and 
pursuant to which gains from such person's transactions are exempt from 
Federal income taxation); and
    (iv) At the time the statement is furnished, is not, or reasonably 
expects not to be, engaged in a trade or business in the United States 
during such year (or is a beneficiary of a tax treaty to which the 
United States is a party and pursuant to which gains from such person's 
transactions are exempt from Federal income taxation).
    (2) Example. The following example illustrates the application of 
the exception to the reporting requirements for exempt foreign persons:

    Example. In March 1983, F, an individual, opens an account with G, a 
foreign branch of a brokerage firm incorporated in the United States. G 
requires new customers to complete a form signed under penalty of 
perjury that includes 4 questions corresponding to the 4 criteria for an 
exempt foreign person listed in paragraph (g)(1)(i) through (iv). F's 
responses to the 4 questions indicate that the 4 criteria are satisfied, 
and the sole employee of G responsible for receiving and reviewing such 
statement has no actual knowledge to the contrary. G does not require F 
to provide a statement that F is an exempt foreign person for each 
separate transaction it effects on F's behalf and does not require F to 
provide such a statement on a periodic basis. During 1984, 1985 and 
1986, F does not furnish to G a statement that F is an exempt foreign 
person. If G is not notified by F that F has ceased to be an exempt 
foreign person, G is not required to make a return of information with 
respect to sales effected for F during 1983, 1984 and 1985. However, if 
no other exception applies, G is required to make a return of 
information with respect to sales effected for F during 1986.The same 
result would occur if G were a United States branch of either a United 
States or a foreign brokerage firm.

    (h) Identity of customer--(1) In general. For purposes of this 
section, a broker or barter exchange shall treat the person who appears 
on the books and records of the broker or barter exchange with respect 
to property or services as the principals with respect thereto.
    (2) Examples. The following examples illustrate the rule of this 
paragraph (h):

    Example (1). The records of A, a broker, show an account in the name 
of ``B''. B is a

[[Page 622]]

nominee for C. All reporting with respect to such account shall treat B 
as the customer.
    Example (2). J, an individual, places an order with H, a broker, to 
sell J's stock that is held by P, a broker/dealer, in an account for J 
with P designated as nominee for J, and to credit the gross proceeds 
from the sale to J's account with P. The account is in the name of P, so 
that H's customer is P.

    (i) [Reserved]
    (j) Time and place for filing. Forms 1096 and 1099 required under 
this section shall be filed after the last calendar day of the reporting 
period elected by the broker or barter exchange and on or before the end 
of the second calendar month following the close of the calendar year of 
such reporting period with the appropriate Internal Revenue Service 
Center, the address of which is listed in the instructions for Form 
1096.
    (k) Requirement and time for furnishing statement--(1) Requirement 
for furnishing statements. A broker or barter exchange making a return 
of information under this section with respect to a transaction shall 
furnish to the person whose identifying number is (or is required to be) 
shown on such return a written statement showing the information 
required by paragraph (c)(5), (d), (f), or (p) of this section and 
containing a legend stating that such information is being reported to 
the Internal Revenue Service if the return of information is not made on 
magnetic media, this requirement may be satisfied by furnishing to such 
person a copy of all Forms 1099 with respect to such person filed with 
the Internal Revenue Service Center. A statement shall be considered to 
be furnished to a person to whom a statement is required to be made 
under this paragraph (k) if it is mailed to such person at the last 
address of such person known to the broker or barter exchange.
    (2) Time for furnishing statements. A broker or barter exchange may 
furnish the statements required by this paragraph (k) yearly, quarterly, 
monthly or on any other basis, without regard to the reporting period 
elected by the broker or barter exchange, provided that all statements 
required to be furnished under this paragraph (k) for a calendar year 
shall be furnished on or before January 31 of the following calendar 
year.
    (l) Use of magnetic media--(1) In general. Except as otherwise 
provided by paragraphs (l) (2) and (3), a broker or a barter exchange 
required to file returns of information under this section, shall, in 
lieu of filing Form 1099 for such year, file such returns of information 
on magnetic media authorized by the Commissioner and shall follow the 
appropriate revenue procedures for such magnetic media filing in lieu of 
following Form 1099 instructions.
    (2) Exception for undue hardship. (i) The Commissioner may authorize 
a broker or barter exchange to file returns of information on Form 1099 
instead of on magnetic media if undue hardship is shown on an 
application filed with the appropriate Internal Revenue Service Center.
    (ii) In the case of a person who is a broker or barter exchange on 
July 1, 1983, an application to file returns of information on Form 1099 
must be filed on or before September 15, 1983. In the case of a person 
who becomes a broker or barter exchange after July 1, 1983, such 
application must be filed by the end of the second month following the 
month in which such person becomes a broker or barter exchange.
    (3) Transitional rule. A broker or barter exchange may submit 
returns of information on Form 1099 for reporting periods that:
    (i) End before January 1, 1984; or
    (ii) Begin before 30 days after the date on which a timely filed 
request to file returns of information on Form 1099 is denied.
    (m) Reporting on options transactions. [Reserved]
    (n) Reporting on bond discounts. [Reserved]
    (o) Additional reporting by stock transfer agents. [Reserved]
    (p) Transitional rules--(1) Information required from brokers. In 
the case of reporting periods ending before January 1, 1984, a broker 
may show the information required by this paragraph (p)(1) on Form 1099 
in lieu of the information required under paragraph (d)(2). As to each 
customer account for which a return of information is required under 
this section with respect to sales, the broker must report the name, 
address, and taxpayer identification number of

[[Page 623]]

the customer, the aggregate gross proceeds of all sales of the account 
during the reporting period for which a return of information is 
required under this section, and such other information as may be 
required by Form 1099, in the form, manner, and number of copies 
required by Form 1099.
    (2) Information required from barter exchanges. In the case of 
reporting periods ending before January 1, 1984, a barter exchange may 
show the information required by this paragraph (p)(2) on Form 1099 in 
lieu of the information required under paragraph (f)(2). As to each 
member or client providing property or services in an exchange for which 
a return of information is required under this section, the barter 
exchange must report the name, address, and taxpayer identification 
number of the member or client, the aggregate amount received by the 
member or client during the reporting period for property or services 
provided by such member or client in exchanges for which a return of 
information is required, and such other information as may be required 
by Form 1099, in the form, manner, and number of copies required by Form 
1099.
    (q) Effective date. This section applies to calendar year 1983 and 
all succeeding calendar years, and, as to 1983, only to transactions 
occurring on or after July 1, 1983. With regard to paragraph (l) of this 
section, see section 6011(e) of the Internal Revenue Code for 
information returns required to be filed after December 31, 1989, and 
before January 1, 1997; and see Sec. 1.6045-1T(l) for information 
returns required to be filed after December 31, 1996.

(Secs. 6011(e), 6045 and 7805 of the Internal Revenue Code of 1954, (96 
Stat. 610, 68A Stat. 747, 917; 26 U.S.C. 6011(e), 6045, 7805); secs. 
3451(b), 3452 (b), (c), (d), and (f), 3453 (b), (c),
and (e), 3454 (a) and (b), 3455(b), 3456 (b) and (d), and of the 
Internal Revenue Code of 1954 (96 Stat. 576, 26 U.S.C. 3451(b); 96 Stat. 
577, 578, and 579, 26 U.S.C. 3452 (b), (c), (d), and (f); 96 Stat. 580, 
26 U.S.C. 3453 (b), (c), and (e); 96 Stat. 580 and 582, 26 U.S.C. 3454 
(a) and (b); 96 Stat. 584, 26 U.S.C. 3455(b); 96 Stat. 585, 26 U.S.C. 
3456 (b) and (d); 68A Stat. 775, 26 U.S.C 6302 and in section 308 of the 
Tax Equity and Fiscal Responsibility Act of 1982 (96 Stat. 591); (secs. 
6045 and 7805 of the Internal Revenue Code of 1954 (96 Stat. 600, 68A 
Stat. 917; 26 U.S.C. 6045, 7805))

[T.D. 7873, 48 FR 10304, Mar. 11, 1983, as amended by T.D. 7932, 48 FR 
57485, Dec. 30, 1983; 49 FR 2469, Jan. 20, 1984; T.D. 7960, 49 FR 22283, 
May 29, 1984; T.D. 8445, 57 FR 53032, Nov. 6, 1992; T.D. 8452, 57 FR 
58984, Dec. 14, 1992; T.D. 8683, 61 FR 53060, Oct. 10, 1996]



Sec. 1.6045-1T  Returns of information of brokers and barter exchanges (temporary).

    (a)-(k) [Reserved]
    For further guidance, see Sec. 1.6045-1 (a) through (k).
    (l) Use of magnetic media. For information returns filed after 
December 31, 1996, see Sec. 301.6011-2T of this chapter for rules 
relating to filing information returns on magnetic media and for rules 
relating to waivers granted for undue hardship. For information returns 
filed prior to January 1, 1997, see Sec. 1.6045-1(l).

[T.D. 8683, 61 FR 53060, Oct. 10, 1996]



Sec. 1.6045-2  Furnishing statement required with respect to certain substitute payments.

    (a) Requirement of furnishing statements--(1) In general. Any broker 
(as defined in paragraph (a)(4)(ii) of this section) that transfers 
securities (as defined in Sec. 1.6045-1(a)(3)) of a customer (as defined 
in paragraph (a)(4)(iii) of this section) for use in a short sale and 
receives on behalf of the customer a

[[Page 624]]

substitute payment (as defined in paragraph (a)(4)(i)) shall, except as 
otherwise provided, furnish a statement to the customer identifying such 
payment as being a substitute payment.
    (2) Special rule for transfers for broker's own use. Any broker that 
borrows securities of a customer for use in a short sale entered into 
for the broker's own account shall be deemed to have transferred the 
stock to itself and received on behalf of the customer any substitute 
payment made with respect to the transferred securities, and shall be 
required to furnish a statement with respect to such payments in 
accordance with paragraph (a)(1) of this section.
    (3) Special rule for furnishing statements to individual customers 
with respect to payments in lieu of dividends--(i) In general. Except as 
otherwise provided, a broker that receives a substitute payment in lieu 
of a dividend on behalf of a customer who is an individual (``individual 
customer'') need not furnish a statement to the customer.
    (ii) Exception for certain dividends. Any broker that receives on 
behalf of an individual customer a substitute payment in lieu of--
    (A) An exempt-interest dividend (as defined in paragraph (a)(4)(vii) 
of this section);
    (B) A capital gain dividend (as defined in paragraph (a)(4)(vi) of 
this section);
    (C) A distribution treated as a return of capital under section 
301(c)(2) or (c)(3); or
    (D) An FTC dividend (as defined in paragraph (a)(4)(viii) of this 
section) shall furnish a statement to the individual customer 
identifying the payment as being a substitute payment as prescribed by 
this section, provided that the broker has reason to know not later than 
the record date of the dividend payment that the payment is a substitute 
payment in lieu of an exempt-interest dividend, a capital gain dividend, 
a distribution treated as a return of capital, or an FTC dividend.
    (4) Meaning of terms. The following definitions apply for purposes 
of this section.
    (i) The term substitute payment means a payment in lieu of--
    (A) Tax-exempt interest, to the extent that interest has accrued on 
the obligation for the period during which the short sale is open;
    (B) A dividend, the ex-dividend date for which occurs during the 
period after the transfer of stock for use in a short sale, and prior to 
the closing of the short sale; or
    (C) Any other item specified in a rule-related notice published in 
the Federal Register (provided that such items shall be subject to the 
rules of this section only subsequent to the time of such publication).

For purposes of this section original issue discount accruing on an 
obligation (the interest upon which is exempt from tax under section 
103) for the period during which the short sale is open shall be deemed 
a payment in lieu of tax-exempt interest.
    (ii) The term broker means both a person described in Sec. 1.6045-
1(a)(1) and a person that, in the ordinary course of a trade or business 
during the calendar year, loans securities owned by others.
    (iii) The term customer means, with respect to a transfer of 
securities for use in a short sale, the person that is the record owner 
of the securities so transferred.
    (iv) The term dividend means a dividend (as defined in section 316) 
or a distribution that is treated as a return of capital under section 
301(c)(2) or (c)(3).
    (v) The term tax-exempt interest means interest to which the 
exception in section 6049 (b)(2)(B) applies.
    (vi) The term capital gain dividend means a capital gain dividend as 
defined in section 852(b)(3)(C) or section 857(b)(3)(C).
    (vii) The term exempt-interest dividend means an exempt-interest 
dividend as defined in section 852(b)(5)(A).
    (viii) The term FTC dividend means a dividend with respect to which 
the recipient is entitled to claim a foreign tax credit under section 
901 (but not by virtue of taxes deemed paid under section 902 or 960).
    (5) Examples. The following examples illustrate the definition of a 
substitute payment in lieu of tax-exempt interest found in paragraph 
(a)(4)(i)(A) of this section.


[[Page 625]]


    Example (1). On September 1, 1984, L, a broker, borrows 200 State Q 
Bonds (the interest upon which is exempt from tax under section 103) 
held in street name for customer R and transfers the bonds to W for use 
in a short sale. The bonds each have a face value of $100 and bear 12% 
stated annual interest paid semiannually on January 1 and July 1 of each 
year. The bonds were not issued with original issue discount. On 
November 1, 1984, W closes the short sale and returns State Q Bonds to 
L. On January 1, 1985, L receives a $1200 interest payment 
(6% x $100 x 200 bonds =$1200) from State Q with respect to R's bonds. 
Four hundred dollars (2 months the bonds were on loan/6 months in the 
interest period =\1/3\ x $1200=$400) of the interest payment represents 
accrued interest on the obligations for the period during which the 
short sale was open and is a substitute payment in lieu of tax-exempt 
interest within the meaning of paragraph (a)(4)(i)(A) of this section. L 
must furnish a statement under paragraph (a) of this section to R for 
calendar year 1985 with respect to the $400 substitute payment.
    Example (2). Assume the same facts as in Example (1), except that W 
closes the short sale on February 1, 1985. On January 1, 1985, L 
receives a $1200 payment from W with respect to R's bonds. Eight hundred 
dollars (4 months the bonds were on loan prior to January 1, 1985/6 
months in the interest period =\2/3\ x $1200=$800) of the payment 
represents accrued interest on the obligation for the period during 
which the short sale was open and is a substitute payment in lieu of 
tax-exempt interest. On July 1, 1985, L receives a $1200 payment from 
State Q. Two hundred dollars (1 month the bonds were on loan after 
December 31, 1984/6 months in the interest period =\1/6\ x $1200=$200) 
of the payment represents accrued interest on the obligation for the 
period during which the short sale was open and is a substitute payment 
in lieu of the tax-exempt interest. Because both payments are received 
by L in 1985, L must furnish a statement under paragraph (a) of this 
section to R for that year with respect to both payments.

    (b) Exceptions--(1) Minimal payments. No statement is required to be 
furnished under section 6045(d) or this section to any customer if the 
aggregate amount of the substitute payments received by a broker on 
behalf of the customer during a calendar year for which a statement must 
be furnished is less than $10.
    (2) Exempt recipients--(i) In general. A statement shall not be 
required to be furnished with respect to substitute payments made to a 
broker on behalf of--
    (A) An organization exempt from taxation under section 501(a),
    (B) An individual retirement plan,
    (C) The United States, a possession of the United States, or an 
instrumentality or a political subdivision or a wholly-owned agency of 
the foregoing,
    (D) A State, the District of Columbia, or a political subdivision or 
a wholly-owned agency or instrumentality of either of the foregoing.
    (E) A foreign government or a political subdivision thereof, or
    (F) An international organization.
    (ii) Determination of whether a person is described in paragraph 
(b)(2)(i) of this section. The determination of whether a person is 
described in paragraph (b)(2)(i) of this section shall be made in the 
manner provided in Sec. 5f.6045-1(c)(3)(i)(B) of the Temporary Income 
Tax Regulations under the Tax Equity and Fiscal Responsibility Act of 
1982.
    (3) Exempt foreign persons. A statement shall not be required to be 
furnished with respect to substitute payments made to a broker on behalf 
of a person that is an exempt foreign person as described in 
Sec. 1.6045-1(g)
    (c) Form of statement. A broker shall furnish the statement required 
by paragraph (a) of this section on Form 1099. The statement must show 
the aggregate dollar amount of all substitute payments received by the 
broker on behalf of a customer (for which the broker is required to 
furnish a statement) during a calendar year, and such other information 
as may be required by Form 1099. A statement shall be considered to be 
furnished to a customer if it is mailed to the customer at the last 
address of the customer known to the broker.
    (d) Time for furnishing statements. A broker must furnish the 
statements required by paragraph (a) of this section for each calendar 
year. Such statements shall be furnished after April 30th of such 
calendar year but in no case before the final substitute payment for the 
calendar year is made, and on or before January 31 of the following 
calendar year.
    (e) When substitute payment deemed received. A Broker is deemed to 
have received a substitute payment on behalf of a customer when the 
amount is paid or deemed paid to the broker (or as it

[[Page 626]]

accrues in the case of original issue discount deemed a payment in lieu 
of tax-exempt interest).
    (f) Identification of customer and recordkeeping with respect to 
substitute payments--(1) Payments in lieu of tax-exempt interest and 
exempt-interest dividends. A broker that receives substitute payments in 
lieu of tax-exempt interest, exempt-interest dividends, or other items 
(to the extent specified in a rule-related notice published pursuant to 
paragraph (a)(4)(i)(C) of this section) on behalf of a customer and is 
required to furnish a statement under paragraph (a) of this section must 
determine the identity of the customer whose security was transferred 
and on whose behalf the broker received such substitute payments by 
specific identification of the record owner of the security so 
transferred. A broker must keep adequate records of the determination so 
made.
    (2) Payments in lieu of dividends other than exempt-interest 
dividends--(i) Requirements and methods. A broker that receives 
substitute payments in lieu of dividends, other than exempt-interest 
dividends, on behalf of a customer and is required to furnish a 
statement under paragraph (a) of this section must make a determination 
of the identity of the customer whose stock was transferred and on whose 
behalf such broker receives substitute payments. Such determination must 
be made as of the record date with respect to the dividend distribution, 
and must be made in a consistent manner by the broker in accordance with 
any of the following methods:
    (A) Specific identification of the record owner of the transferred 
stock;
    (B) The method of allocation and selection specified in paragraph 
(f)(2)(ii) of this section; or
    (C) Any other method, with the prior approval of the Commissioner.

A broker must keep adequate records of the determination so made.
    (ii) Method of allocation and selection--(A) Allocation to borrowed 
shares and individual and nonindividual pools. With respect to each 
substitute payment in lieu of a dividend received by a broker, the 
broker must allocate the transferred shares (i.e., the shares giving 
rise to the substitute payment) among all shares of stock of the same 
class and issue as the transferred shares which were (1) borrowed by the 
broker, and (2) which the broker holds (or has transferred in a 
transaction described in paragraph (a)(1) of this section) and is 
authorized by its customers to transfer (including shares of stock of 
the same class and issue held for the broker's own account) (``loanable 
shares''). The broker may first allocate the transferred shares to any 
borrowed shares. Then to the extent that the number of transferred 
shares exceeds the number of borrowed shares (or if the broker does not 
allocate to the borrowed shares first), the broker must allocate the 
transferred shares between two pools, one consisting of the loanable 
shares of all individual customers (the ``individual pool'') and the 
other consisting of the loanable shares of all nonindividual customers 
(the ``nonindividual pool''). The transferred shares must be allocated 
to the individual pool in the same proportion that the number of 
loanable shares held by individual customers bears to the total number 
of loanable shares available to the broker. Similarly, the transferred 
shares must be allocated to the nonindividual pool in the same 
proportion that the number of loanable shares held by nonindividual 
customers bears to the total number of loanable shares available to the 
broker.
    (B) Selection of deemed transferred shares within the nonindividual 
pool. The broker must select which shares within the nonindividual pool 
are deemed transferred for use in a short sale (the ``deemed transferred 
shares''). Selection of deemed transferred shares may be made either by 
purely random lottery or on a first-in-first-out (``FIFO'') basis.
    (C) Selection of deemed transferred shares within the individual 
pool. The broker must select which shares within the individual pool are 
deemed transferred shares (in the manner described in the preceding 
paragraph) only with respect to substitute payments as to which a 
statement is required to be furnished under paragraph (a)(2)(ii) of this 
section.
    (3) Examples. The following examples illustrate the identification 
of customer rules of paragraph (f)(2):


[[Page 627]]


    Example (1). A, a broker, holds X corporation common stock (of which 
there is only a single class) in street name for five customers: C, a 
corporation; D, a partnership; E, a corporation; F, an individual; and 
G, a corporation. C owns 100 shares of X stock, D owns 50 shares of X 
stock, E owns 100 shares of X stock, F owns 50 shares of X stock, and G 
owns 100 shares of X stock. A is authorized to loan all of the X stock 
of C, D, E, and F. G, however, has not authorized A to loan its X 
stocks. A does not hold any X stock in its trading account nor has A 
borrowed any X stock from another broker. A transfers 150 shares of X 
stock to H for use in a short sale on July 1, 1985. A dividend of $2 per 
share is declared with respect to X stock on August 1, 1985, payable to 
the owners of record as of August 15, 1985 (the ``record'' date). A 
receives $2 per transferred share as a payment in lieu of a dividend 
with respect to X stock or a total of $300 on September 15, 1985. H 
closes the short sale and returns X stock to A on January 2, 1986. A's 
records specifically identify the owner of each loanable share of stock 
held in street name. From A's records it is determined that the shares 
transferred to H consisted of 100 shares owned by C, 25 shares owned by 
D, and 25 shares owned by F. The substitute payment in lieu of dividends 
with respect to X stock is therefore attributed to C, D and F based on 
the actual number of their shares that were transferred to H. 
Accordingly, C receives $200 (100 shares  x  $2 per share), and D and F 
each receive $50 (25 shares each  x  $2 per share). A must furnish 
statements identifying the payments as being in lieu of dividends to 
both C and D, unless they are exempt recipients as defined in paragraph 
(b)(2) of this section or exempt foreign persons as defined in paragraph 
(b)(3) of this section. Assuming that A had no reason to know on the 
record date of the payment that the dividend paid by X is of a type 
described in paragraphs (a)(3)(ii)(A) through (D) of this section, A 
need not furnish F with a statement under section 6045(d) because F is 
an individual. (However, A may be required to furnish F with a statement 
in accordance with section 6042 and the regulations thereunder. See 
paragraph (h) of this section.) By recording the ownership of each share 
transferred to H, A has complied with the identification requirement of 
paragraph (f)(2) of this section.
    Example (2). Assume the same facts as in example (1), except that 
A's records do not specifically identify the record owner of each share 
of stock. Rather, all shares of X stock held in street name are pooled 
together. When A receives the $2 per share payment in lieu of a 
dividend, A determines the identity of the customers to which the 
payment relates by the method of allocation and selection prescribed in 
paragraph (f)(2)(ii) of this section. First, the transferred shares are 
allocated proportionately between the individual pool and the 
nonindividual pool. One-sixth of the transferred shares or 25 shares are 
allocated to the individual pool (50 loanable shares owned by 
individuals/300 total loanable shares-\1/6\; \1/6\ x 150 transferred 
shares=25 shares). Assuming A has no reason to know by the record date 
of the payment that the payment is in lieu of a dividend of a type 
described in paragraphs (a)(3)(ii)(A) through (D) of this section, no 
selection of deemed transferred shares within the individual customer 
pool is required. (However, A may be required to furnish F with a 
statement under section 6042 and the regulations thereunder. See 
paragraph (h) of this section.) Five-sixths of the transferred shares or 
125 shares are allocated to the nonindividual pool (250 loanable shares 
owned by nonindividuals/300 total loanable shares=\5/6\; \5/6\ x 150 
transferred shares=125 shares). A must select which 125 shares within 
the nonindividual pool are deemed to have been transferred. Using a 
purely random lottery, A selects 100 shares identified as being owned by 
C, and 25 shares identified as being owned by D. Accordingly, A is 
deemed to have transferred 100 shares and 25 shares owned by C and D 
respectively, and received substitute payments in lieu of dividends of 
$200 (100 shares  x  $2 per share) and $50 (25 shares  x  $2 per share) 
on behalf of C and D respectively. A must furnish statements to both C 
and D identifying such payments as being in lieu of dividends unless 
they are exempt recipients as defined in paragraph (b) (2) of this 
section or exempt foreign persons as defined in paragraph (b) (3) of 
this section. A has complied with the identification requirement of 
paragraph (f)(2) of this section.

    (g) Reporting by brokers--(1) Requirement of reporting. Any broker 
required to furnish a statement under paragraph (a) of this section 
shall report on Form 1096 showing such information as may be required by 
Form 1096, in the form, manner, and number of copies required by Form 
1096. With respect to each customer for which a broker is required to 
furnish a statement, the broker shall make a return of information on 
Form 1099, in the form, manner and number of copies required by Form 
1099.
    (2) Use of magnetic media. Brokers not receiving an undue hardship 
exception under paragraph (l)(2) of Sec. 1.6045-1 shall file the returns 
required by this paragraph on magnetic media in accordance with 
paragraph (l)(1) of Sec. 1.6045-1.
    (3) Time and place of filing. The returns required under this 
paragraph (g) for any calendar year shall be filed after September 30 of 
such year, but not before the final substitute payment

[[Page 628]]

for the year is received by the broker, and on or before February 28 of 
the following year with any of the Internal Revenue Service Centers, the 
addresses of which are listed in the instructions for Form 1096.
    (h) Coordination with section 6042. In cases in which reporting is 
required by both sections 6042 and 6045(d) with respect to the same 
substitute payment in lieu of a dividend, the provisions of section 
6045(d) control, and no report or statement under section 6042 need be 
made. If reporting is not required under section 6045(d) with respect to 
a substitute payment in lieu of a dividend, a report under section 6042 
must be made if required in accordance with the rules of section 6042 
and the regulations thereunder. Thus, if a broker receives a substitute 
payment in lieu of a dividend on behalf of an individual customer and 
the broker does not have reason to know by the record date of the 
payment that the payment is in lieu of a dividend of a type described in 
paragraphs (a)(3)(ii)(A) through (D) of this section, the broker must 
report with respect to the substitute payment if required in accordance 
with section 6042 and the regulations thereunder.
    (i) Effective date. These regulations apply to substitute payments 
received by a broker after December 31, 1984. With regard to paragraph 
(g)(2) of this section, see section 6011(e) of the Internal Revenue Code 
for information returns required to be filed after December 31, 1989, 
and before January 1, 1997; and see Sec. 1.6045-2T(g)(2) for information 
returns required to be filed after December 31, 1996.

[T.D. 8029, 50 FR 23677, June 5, 1985, as amended by T.D. 8683, 61 FR 
53060, Oct. 10, 1996]



Sec. 1.6045-2T  Furnishing statement required with respect to certain substitute payments (temporary).

    (a)-(g)(1) [Reserved]
    For further guidance, see Sec. 1.6045-2 (a) through (g)(1).
    (g)(2) Use of magnetic media. For information returns filed after 
December 31, 1996, see Sec. 301.6011-2T of this chapter for rules 
relating to filing information returns on magnetic media and for rules 
relating to waivers granted for undue hardship. For information returns 
filed prior to January 1, 1997, see Sec. 1.6045-2(g)(2).

[T.D. 8683, 61 FR 53060, Oct. 10, 1996]



Sec. 1.6045-4  Information reporting on real estate transactions with dates of closing on or after January 1, 1991.

    (a) Requirement of reporting. Except as otherwise provided in 
paragraphs (c) and (d) of this section, a real estate reporting person 
(``reporting person'') must make an information return with respect to a 
real estate transaction and, under paragraph (m) of this section, must 
furnish a statement to the transferor. A reporting person may also 
report with respect to transactions otherwise excepted in paragraphs (c) 
and (d) of this section. However, if the reporting person so elects, the 
return must be filed and the statement furnished in accordance with the 
provisions of this section. For the definition of a real estate 
transaction for purposes of these reporting requirements, see paragraph 
(b) of this section. For rules for determining the reporting person with 
respect to a real estate transaction, see paragraph (e) of this section.
    (b) Definition of real estate transaction--(1) In general. A 
transaction is a ``real estate transaction'' under this section if the 
transaction consists in whole or in part of the sale or exchange of 
``reportable real estate'' (as defined in paragraph (b)(2) of this 
section) for money, indebtedness, property other than money, or 
services. The term ``sale or exchange'' shall include any transaction 
properly treated as a sale or exchange for Federal income tax purposes, 
whether or not the transaction is currently taxable. Thus, for example, 
a sale or exchange of a principal residence is a real estate transaction 
under this section even though the transferor is entitled to defer 
recognition under section 1034 (relating to rollover of gain on sale of 
principal residence), or the transferor is entitled to the special one-
time exclusion of gain from the sale of a principal residence provided 
by section 121 to certain persons who have attained age 55.
    (2) Definition of reportable real estate. Except as otherwise 
provided in paragraph (c)(2) of this section, the term

[[Page 629]]

``reportable real estate'' means any present or future ownership 
interest in--
    (i) Land (whether improved or unimproved), including air space;
    (ii) Any inherently permanent structure, including any residential, 
commercial or industrial building;
    (iii) Any condominium unit, including appurtenant fixtures and 
common elements (including land); or
    (iv) Any stock in a cooperative housing corporation (as defined in 
section 216).

For purposes of this section, the term ``ownership interest'' includes 
fee simple interests, life estates, reversions, remainders, and 
perpetual easements. In addition, the term ``ownership interest'' 
includes any previously created rights to possession or use for all or a 
portion of any particular year (i.e., a leasehold, easement, or 
``timeshare''), with a remaining term of at least 30 years, including 
any period for which such rights may be renewed at the option of the 
holder of the rights, as determined on the date of closing (as defined 
in paragraph (h)(2)(ii) of this section). Thus, for example, a pre-
existing leasehold on a building with an original term of 99 years is an 
ownership interest in real estate for purposes of this section if it has 
a remaining term of 35 years as of the date of closing, but not if it 
has a remaining term of only 10 years as of the date of closing. 
However, the term ``ownership interest'' does not include an option to 
acquire otherwise reportable real estate.
    (c) Exception for certain exempt transactions--(1) Certain 
transfers. No return of information is required with respect to--
    (i) A transaction that is not a sale or exchange (such as a gift 
(including a transaction treated as a gift under section 1041) or 
bequest, or a financing or refinancing that is not related to the 
acquisition of reportable real estate), even if the transaction involves 
reportable real estate, as defined in paragraph (b)(2) of this section;
    (ii) A transfer in full or partial satisfaction of any indebtedness 
secured by the property so transferred including a foreclosure, a 
transfer in lieu of foreclosure or an abandonment; or
    (iii) A transaction (a ``de minimis transfer'') in which it can be 
determined with certainty that the total consideration (in money, 
services and property), received or to be received in connection with 
the transaction is less than $600 in value (determined without regard to 
any allocation of gross proceeds among multiple transferors under 
paragraph (i)(5) of this section) as of the date of the closing (as 
defined in paragraph (h)(2)(ii) of this section), even if the 
transaction involves reportable real estate. Thus, for example, if a 
contract for sale of reportable real estate recites total consideration 
of ``$1.00 plus other valuable consideration,'' the transfer is not a de 
minimis transfer unless the reporting person can determine that the 
``other valuable consideration'' received or to be received is less than 
$599 in value as measured on the date of closing.
    (2) Certain property. Notwithstanding the provisions of paragraph 
(b)(2) of this section, no return of information is required with 
respect to a sale or exchange of an interest in any of the following 
property--provided the sale or exchange of such property is not related 
to the sale or exchange of reportable real estate--
    (i) An interest in surface or subsurface natural resources (i.e., 
timber, water, ores and other natural deposits) or crops, whether or not 
such natural resources or crops are severed from the land;
    (ii) A burial plot or vault; or
    (iii) A manufactured structure used as a dwelling that is 
manufactured and assembled at a location different from that where it is 
used, but only if such structure is not affixed, at the date of closing 
(as defined in paragraph (h)(2)(ii) of this section), to a foundation. 
Thus, a transfer of an unaffixed mobile home that is unrelated to the 
sale or exchange of reportable real estate is excepted from the 
reporting requirements of this section.
    (d) Exception for certain exempt transferors--(1) General rule. No 
return of information is required with respect to a transferor that is a 
corporation under section 7701(a)(3) or section 7704(a) or is considered 
under paragraph (d)(2) of this section to be--
    (i) A corporation;

[[Page 630]]

    (ii) A governmental unit; or
    (iii) An exempt volume transferor.

In the case of a real estate transaction with respect to which there is 
one or more exempt transferor(s) and one or more non-exempt 
transferor(s), the reporting person is required to report with respect 
to any non-exempt transferor. The special rule for allocation of gross 
proceeds, as provided in paragraph (i)(5) of this section, applies to 
such a transaction.
    (2) Treatment as exempt transferor. Absent actual knowledge to the 
contrary, a reporting person may treat a transferor as--
    (i) A corporation if--
    (A) The name of the transferor contains an unambiguous expression of 
corporate status, such as Incorporated, Inc., Corporation, Corp., or 
P.C. (but not Company or Co.);
    (B) The name of the transferor contains the term ``insurance 
company,'' ``reinsurance company,'' or ``assurance company''; or
    (C) The transfer or loan documents clearly indicate the corporate 
status of the transferor;
    (ii) A governmental unit if the transferor is--
    (A) The United States or a state, the District of Columbia, a 
possession of the United States, a political subdivision of any of the 
foregoing, or any wholly owned agency or instrumentality of any one or 
more of the foregoing; or
    (B) A foreign government, a political subdivision thereof, an 
international organization, as defined in section 7701(a)(18), or any 
wholly-owned agency or instrumentality of the foregoing; or
    (iii) An exempt volume transferor if, and only if, the reporting 
person receives a certification of exempt status under paragraph (d)(3) 
of this section.
    (3) Certification of exempt status--(i) In general. A certification 
of exempt status must contain--
    (A) The name, address, and taxpayer identification number of the 
transferor (the address must be that of the permanent residence (in the 
case of an individual), that of the principal office (in the case of a 
corporation or partnership), or that of the permanent residence or 
principal office of any fiduciary (in the case of a trust or estate));
    (B) Sufficient information to identify any otherwise reportable real 
estate not reported by virtue of the exempt status of the transferor; 
and
    (C) A declaration that the transferor has sold or exchanged during 
either of the prior two calendar years, or previously sold or exchanged 
during the current calendar year, or, as of the date of closing (as 
defined in paragraph (h)(2)(ii) of this section), reasonably expects to 
sell or exchange during the current calendar year at least 25 separate 
items of reportable real estate (as defined in paragraph (b)(2) of this 
section) to at least 25 separate transferees, and that each such item, 
at the date of closing of the sale of such item was or will be held 
primarily for sale or resale to customers in the ordinary course of a 
trade or business. For example, the declaration may be worded as 
follows:

_______________________________________________________________________
[Insert name of transferor]

[check one or more]:
    (1) ____ has sold or exchanged during either of the prior two 
calendar years,
    (2) ____ previously sold or exchanged during the current calendar 
year,
    (3) ____ on the date of closing expects to sell or exchange during 
the current calendar year,

at least 25 separate items of reportable real estate to at least 25 
separate transferees and each such item, at the date of closing of such 
item was or will be held primarily for sale or resale to customers in 
the ordinary course of a trade or business.

    (ii) Additional requirements. A certification of exempt status must 
be--
    (A) Signed under penalties of perjury by the transferor or any 
person who is authorized to sign a declaration under penalties of 
perjury in behalf of the transferor as described in section 6061 and the 
regulations thereunder;
    (B) Received by the reporting person no later than the time of 
closing; and
    (C) Retained by the reporting person for four years following the 
close of the calendar year in which the date of closing (as determined 
under paragraph (h)(2)(ii) of this section) occurs.
    (iii) Reporting person may accept or disregard certification. A 
reporting person may solicit or merely accept a certification of exempt 
status. Moreover, notwithstanding a transferor's furnishing of such 
certification, a reporting

[[Page 631]]

person may disregard the certification and, instead, report with respect 
to the transaction. See paragraph (a) of this section for the 
requirement that such elective reporting must be in compliance with the 
provisions of this section.
    (e) Person required to report--(1) In general. Although there may be 
other persons involved in a real estate transaction, only the reporting 
person is required to report with respect to any real estate 
transaction. Except as provided in a designation agreement under 
paragraph (e)(5) of this section, the reporting person with respect to a 
real estate transaction is--
    (i) The person responsible for closing the transaction, as defined 
in paragraph (e)(3) of this section; or
    (ii) If there is no person responsible for closing the transaction, 
the person determined to be the reporting person under paragraph (e)(4) 
of this section.

A person may be the reporting person with respect to a transaction 
whether or not such person performs or is licensed to perform real 
estate brokerage services for a commission or fee.
    (2) Employees, agents, and partners. For purposes of this paragraph 
(e), if an employee, agent, or partner (other than an employee, agent, 
or partner of the transferor or the transferee) acting within the scope 
of such person's employment, agency, or partnership participates in a 
real estate transaction--
    (i) Such participation shall be attributed to such person's 
employer, principal, or partnership; and
    (ii) Only the employer, principal, or partnership (and not such 
person) may be the reporting person with respect to such transaction as 
a result of such participation.
    However, the participation of a person described in paragraph 
(e)(3)(i) of this section (i.e., a person listed on the Uniform 
Settlement Statement as the settlement agent) acting as an agent of 
another is not attributed to the principal.
    (3) Person responsible for closing the transaction--(i) Uniform 
Settlement Statement used. If a Uniform Settlement Statement prescribed 
under the Real Estate Settlement Procedures Act of 1974 (RESPA), 12 
U.S.C. 2601 et seq. (a ``Uniform Settlement Statement''), is used with 
respect to the real estate transaction and a person is listed as 
settlement agent on the statement, such person is the person responsible 
for closing the transaction. For purposes of this section, a Uniform 
Settlement Statement shall include any amendments or variations thereto, 
or substitutions therefore that may hereafter be prescribed under RESPA, 
provided that any such amended, varied, or substituted form requires 
disclosure of the parties to the transaction, the application of the 
proceeds of the transaction, and the identity of the settlement agent or 
other person responsible for preparing the form.
    (ii) Other closing statement used. If a Uniform Settlement Statement 
is not used, or if a Uniform Settlement Statement is used, but no person 
is listed as settlement agent, the person responsible for closing the 
transaction is the person who prepares a closing statement presented to 
the transferor and transferee at, or in connection with, the closing of 
the real estate transaction. For purposes of this section, a closing 
statement is any closing statement, settlement statement (including a 
Uniform Settlement Statement), or other written document that identifies 
the transferor and transferee, reasonably identifies the transferred 
real estate, and describes the manner in which the proceeds payable to 
the transferor are to be (or were) disbursed at, or in connection with, 
the closing.
    (iii) No closing statement used or multiple closing statements used. 
If no closing statement is used or multiple closing statements are used, 
the person responsible for closing the transaction is the first-listed 
of the persons that participate in the transaction as--
    (A) The attorney for the transferee who is present at the occasion 
of the delivery of either the transferee's note or a significant portion 
of the cash proceeds to the transferor, or who prepares or reviews the 
preparation of the document(s) transferring legal or equitable ownership 
of the real estate;
    (B) The attorney for the transferor who is present at the occasion 
of the delivery of either the transferee's note or a significant portion 
of the cash proceeds to the transferor, or who prepares or reviews the 
preparation of the

[[Page 632]]

document(s) transferring legal or equitable ownership of the real 
estate; or
    (C) The disbursing title or escrow company that is most significant 
in terms of gross proceeds disbursed.

If more than one attorney would be the person responsible for closing 
the transaction under the preceding sentence, the person among such 
attorneys who is considered responsible for closing the transaction 
under this paragraph (e)(3)(iii) is the person whose involvement in the 
transaction is most significant.
    (4) Determination of the real estate reporting person in the absence 
of a person responsible for closing the transaction. If no person is 
responsible for closing the transaction (within the meaning of paragraph 
(e)(3) of this section), the reporting person with respect to the real 
estate transaction is the person first-listed below of the persons that 
participate in the transaction as--
    (i) The mortgage lender (as defined in paragraph (e)(6)(i) of this 
section);
    (ii) The transferor's broker (as defined in paragraph (e)(6)(ii) of 
this section);
    (iii) The transferee's broker (as defined in paragraph (e)(6)(iii) 
of this section); or
    (iv) The transferee (as defined in paragraph (e)(6)(iv) of this 
section).
    (5) Designation agreement--(i) In general. If a written designation 
agreement executed at or prior to the time of closing designates one of 
the persons described in paragraph (e)(5)(ii) of this section as the 
reporting person with respect to the transaction and the designated 
person is a party to the agreement, the designated person is the 
reporting person with respect to the transaction. It is not necessary 
that all parties to the transaction (or that more than one party) be 
parties to the agreement.
    (ii) Persons eligible. A person may be designated as the reporting 
person under this paragraph (e)(5) only if the person is--
    (A) The person responsible for closing the transaction (as defined 
in paragraph (e)(3) of this section);
    (B) A person described in paragraph (e)(3)(iii) (A), (B) or (C) of 
this section (whether or not such person is responsible for closing the 
transaction); or
    (C) The mortgage lender (as defined in paragraph (e)(6)(i) of this 
section).
    (iii) Form of designation agreement. A designation agreement may be 
in any form that is consistent with the requirements of this paragraph 
(e)(5), and may be included on a closing statement with respect to the 
transaction. The designation agreement must, however, include the name 
and address of the transferor and transferee and the address and any 
additional information necessary to identify the real estate 
transferred. The agreement must identify, by name and address, the 
person designated as the reporting person with respect to the 
transaction, and all other parties (if any) to the agreement. All 
parties to the agreement must date and sign the agreement and must 
retain the agreement for four years following the close of the calendar 
year in which the date of closing (as determined under paragraph 
(h)(2)(ii) of this section) occurs. Upon request by the Internal Revenue 
Service, or any person involved in the transaction who did not 
participate in the designation agreement, the agreement must be made 
available for inspection.
    (6) Meaning of terms--(i) Mortgage lender. For purposes of this 
paragraph (e), the term ``mortgage lender'' means the person who lends 
new funds in connection with the transaction, but only if the repayment 
of such funds is secured in whole or in part by the real estate 
transferred. If new funds are advanced by more than one person, the 
mortgage lender is the person who advances the largest amount of new 
funds. If two or more persons advance equal amounts of new funds and no 
other person advances a greater amount of new funds, the mortgage lender 
among the persons advancing such equal amounts is the person with the 
security interest that is most senior in terms of priority. For purposes 
of this paragraph (e)(6)(i), any amounts advanced by the transferor are 
not treated as new funds.
    (ii) Transferor's broker. For purposes of this paragraph (e), the 
term ``transferor's broker'' means only the broker that contracts with 
the transferor and is compensated in connection with the transaction.

[[Page 633]]

    (iii) Transferee's broker. For purposes of this paragraph (e), the 
term ``transferee's broker'' means only the broker that participates to 
a significant extent in the preparation of the transferee's offer to 
acquire the real estate or that presents such offer to the transferor. 
If more than one person is so described, the transferee's broker is the 
person whose participation in the preparation of the transferee's offer 
to acquire the real estate is most significant or, in the event there is 
no such person, the person whose participation in the presentation of 
the offer is most significant.
    (iv) Transferee. For purposes of this paragraph (e), the term 
``transferee'' means the person who acquires the greatest interest in 
the real estate. If there is no such person, the transferee is the 
person listed first on the document(s) transferring legal or equitable 
ownership of the real estate.
    (f) Multiple transferors--(1) General rule. In the case of multiple 
transferors, each of which transfers an interest in the same reportable 
real estate, the reporting person shall make a separate information 
return with respect to each transferor. Paragraph (i)(5) of this section 
provides rules for the determination of gross proceeds to be reported in 
the case of multiple transferors.
    (2) Rules for spouses. Transferors who are husband and wife at the 
time of closing and hold the reportable real estate as tenants in 
common, joint tenants, tenants by the entirety, or community property 
are treated as a single transferor for purposes of paragraphs (f)(1), 
(h)(1)(i), (i)(5) and (l)(1)(i) of this section, unless the reporting 
person receives, at or prior to the time of closing, an uncontested 
allocation of gross proceeds between them. In the case of a husband and 
wife treated as a single transferor, the reporting person may treat 
either as the transferor for purposes of paragraphs (h)(1)(i) and (l)(1) 
of this section, relating to reporting and soliciting taxpayer 
identification numbers.
    (g) Prescribed form. Except as otherwise provided in paragraph (k) 
of this section, the information return required by paragraph (a) of 
this section shall be made on Form 1099.
    (h) Information required--(1) In general. The following information 
must be set forth on the Form 1099 required by this section:
    (i) The name, address, and taxpayer identification number (TIN) of 
the transferor (see also paragraph (f)(2) of this section);
    (ii) A general description of the real estate transferred (in 
accordance with paragraph (h)(2)(i) of this section);
    (iii) The date of closing (as defined in paragraph (h)(2)(ii) of 
this section);
    (iv) To the extent required by the Form 1099 and its instructions, 
the entire gross proceeds with respect to the transaction (as determined 
under the rules of paragraph (i) of this section), and, in the case of 
multiple transferors, the gross proceeds allocated to the transferor (as 
determined under paragraph (i)(5) of this section);
    (v) To the extent required by the Form 1099 and its instructions, an 
indication that the transferor--
    (A) Received (or will, or may, receive) property (other than cash 
and consideration treated as cash in computing gross proceeds) or 
services as part of the consideration for the transaction,
    (B) May receive property (other than cash) or services in 
satisfaction of an obligation having a stated principal amount, or
    (C) May receive, in connection with a contingent payment 
transaction, an amount of gross proceeds that cannot be determined with 
certainty using the method described in paragraph (i)(3)(iii) of this 
section and is therefore not included in gross proceeds under paragraphs 
(i)(3)(i) and (i)(3)(iii) of this section;
    (vi) The real estate reporting person's name, address, and TIN;
    (vii) [Reserved]; and
    (viii) Any other information required by the Form 1099 or its 
instructions.
    (2) Meaning of terms--(i) General description of the real estate 
transferred. A general description of the real estate transferred 
includes the complete address of the property. If the address would not 
sufficiently identify the property, a general description of the real 
estate also includes a legal description (e.g., section, lot, and block) 
of the property.

[[Page 634]]

    (ii) Date of closing. In the case of a real estate transaction with 
respect to which a Uniform Settlement Statement is used, the date of 
closing shall be the date (if any) properly described as the 
``Settlement Date'' on such statement. In all other cases, the date of 
closing shall be the earlier of the date on which title is transferred 
or the date on which the economic burdens and benefits of ownership of 
the real estate shift from the transferor to the transferee.
    (i) Gross proceeds--(1) In general. Except as otherwise provided in 
this paragraph (i), the term ``gross proceeds'' means the total cash 
received or to be received by or on behalf of the transferor in 
connection with the real estate transaction. For purposes of this 
paragraph (i), the following amounts are treated as cash received or to 
be received by or on behalf of the transferor in connection with the 
real estate transaction:
    (i) The stated principal amount of any obligation to pay cash to or 
for the benefit of the transferor in the future (including any 
obligation having a stated principal amount that may be satisfied by the 
delivery of property (other than cash) or services);
    (ii) The amount of any liability of the transferor assumed by the 
transferee as part of the consideration for the transfer or of any 
liability to which the real estate acquired is subject (whether or not 
the transferor is personally liable for the debt); and
    (iii) In the case of a contingent payment transaction, as defined in 
paragraph (i)(3)(ii) of this section, the maximum determinable proceeds, 
as defined in paragraph (i)(3)(iii) of this section.

Gross proceeds does not include the value of any property (other than 
cash and consideration treated as cash) or services received by, or on 
behalf of, the transferor in connection with the real estate 
transaction. See paragraph (h)(1)(v) of this section for the information 
that must be included on the Form 1099 required by this section in cases 
in which the transferor receives (or will, or may, receive) property 
(other than cash and consideration treated as cash) or services as part 
of the consideration for the transfer.
    (2) Treatment of sales commissions and similar expenses. In 
computing gross proceeds, the total cash received or to be received by 
or on behalf of the transferor shall not be reduced by expenses borne by 
the transferor (such as sales commissions, expenses of advertising the 
real estate, expenses of preparing the deed, and the cost of legal 
services in connection with the transfer).
    (3) Special rules for contingent payments--(i) In general. If a real 
estate transaction is a contingent payment transaction, gross proceeds 
consist of the maximum determinable proceeds, if any.
    (ii) Contingent payment transaction. For purposes of this section, 
the term ``contingent payment transaction'' means a real estate 
transaction with respect to which the receipt, by or on behalf of the 
transferor, of cash or consideration treated as cash under paragraph 
(i)(1)(i) of this section is subject to a contingency.
    (iii) Maximum determinable proceeds. For purposes of this section, 
the term ``maximum determinable proceeds'' means the gross proceeds 
determined by assuming that all of the contingencies contemplated by the 
documents available at closing are met or otherwise resolved in a manner 
that will maximize the gross proceeds. If the maximum amount of gross 
proceeds cannot be determined with certainty using this method, the 
maximum determinable proceeds are the greatest amount that can be 
determined with certainty using this method. See paragraph (h)(1)(v)(C) 
of this section for the information that must be included on the Form 
1099 required by this section in cases in which the maximum amount of 
gross proceeds cannot, by using the method described in this paragraph 
(i)(3)(iii), be determined with certainty.
    (4) Uniform Settlement Statement used. If a Uniform Settlement 
Statement is used with respect to a real estate transaction involving a 
transfer of reportable real estate solely for cash and consideration 
treated as cash in computing gross proceeds, the gross proceeds 
generally will be the same amount as the contract sales price properly 
shown on that statement.

[[Page 635]]

    (5) Special rules for multiple transferors--(i) General rules. In 
the case of multiple transferors (within the meaning of paragraph (f) of 
this section) each of which transfers an interest in the same reportable 
real estate, the reporting person must request the transferors to 
provide an allocation of the gross proceeds among the transferors. The 
request must be made at or before the time of closing. Neither the 
request nor the response is required to be in writing. The reporting 
person must make a reasonable effort to contact all transferors of whom 
the reporting person has actual knowledge. The reporting person may, 
however, rely on the unchallenged response of any transferor and need 
not make additional efforts to contact other transferors after at least 
one complete allocation (whether or not contained in a single response) 
is received. Except as otherwise provided in this paragraph (i)(5), the 
reporting person shall report the gross proceeds in accordance with any 
allocation received at or before the time of closing. The reporting 
person may (but is not required to) report the gross proceeds in 
accordance with any allocation received after the time of closing and 
before the date (determined without regard to extensions) the Forms 1099 
are required to be filed. The reporting person may not report the gross 
proceeds in accordance with any allocation received on or after the date 
(determined without regard to extensions) the Forms 1099 are required to 
be filed. If no gross proceeds are allocated to a transferor because no 
allocation or an incomplete allocation is received by the reporting 
person, the reporting person shall report the entire unallocated gross 
proceeds (if any) on the return of information made with respect to such 
transferor. If the reporting person receives conflicting allocations 
from the transferors, the reporting person shall report the entire gross 
proceeds on each return of information made with respect to the 
transaction.
    (ii) Rules for spouses. The reporting person need not request an 
allocation of gross proceeds if the only transferors are husband and 
wife at the time of closing. If there are other transferors, the 
reporting person need only make a reasonable effort to contact either 
the husband or wife in connection with the request for an allocation. 
See paragraph (f)(2) of this section for rules that treat a husband and 
wife as multiple transferors if an uncontested allocation of gross 
proceeds is received by the reporting person at or prior to the time of 
closing.
    (6) Multiple asset transactions. In the case of a real estate 
transaction reportable under this section that involves the transfer of 
reportable real estate and other assets, the amount attributable to both 
the real estate and other assets is treated as the gross proceeds with 
respect to that real estate transaction. No allocation of gross proceeds 
is made among the assets.
    (j) Time and place for filing. A reporting person shall file the 
information returns required by this section with respect to a real 
estate transaction after December 31 of the calendar year that includes 
the date of closing (as determined under paragraph (h)(2)(ii) of this 
section) and on or before February 28 of the following calendar year. 
The returns shall be filed with the appropriate Internal Revenue Service 
Center at the address listed in the Instructions to Form 1099.
    (k) Use of magnetic media and substitute forms--(1) Magnetic media--
(i) General rule. A reporting person that is required to make a return 
of information under this section shall, except as otherwise provided in 
paragraph (k)(1) (ii) or (iii) of this section, submit the information 
required by this section on magnetic media (within the meaning of 26 CFR 
301.6011-2). Returns on magnetic media shall be made in accordance with 
26 CFR 301.6011-2) and applicable revenue procedures.
    (ii) Exception for low-volume filers. For rules allowing a reporting 
person to make the information returns required by this section on the 
prescribed paper Form 1099 if the reporting person is required by this 
section to file fewer than 250 returns during the calendar year, see 
section 6011(e) and guidance issued by the Internal Revenue Service 
thereunder.
    (iii) Undue hardship. The Commissioner may authorize a reporting 
person to file information returns on the prescribed paper Form 1099 
instead of on magnetic media if undue hardship is

[[Page 636]]

shown either on Form 8508, Request for Waiver From Filing Information 
Returns on Magnetic Media, or on a written statement requesting a waiver 
for undue hardship filed with the Martinsburg Computing Center, 
Martinsburg, West Virginia in accordance with applicable revenue 
procedures.
    (2) Substitute forms. A reporting person that is described in 
paragraph (k)(1)(ii) of this section or that receives permission to file 
returns on the prescribed paper Form 1099 under paragraph (k)(1)(iii) of 
this section may prepare and use a form that contains provisions 
identical with those of Form 1099 if the reporting person complies with 
all applicable revenue procedures relating to substitute Form 1099, 
including any requirement relating to the use of machine-readable paper 
forms.
    (l) Requesting taxpayer identification numbers (TINS)--(1) 
Solicitation--(i) General requirements. A reporting person who is 
required to make an information return with respect to a real estate 
transaction under this section must solicit a TIN from the transferor at 
or before the time of closing. The solicitation may be made in person or 
in a mailing that includes other items. Any person whose TIN is 
solicited under this paragraph (l) must furnish such TIN to the 
reporting person and certify that the TIN is correct. See paragraph 
(f)(2) of this section for rules that treat a husband and wife as a 
single transferor (and provide for the TIN solicitation of either) in 
the absence of an allocation of gross proceeds under paragraph (i)(5) of 
this section.
    (ii) Content of solicitation. The solicitation shall be made by 
providing to the person from whom the TIN is solicited a written 
statement that the person is required by law to furnish a correct TIN to 
the reporting person, and that the person may be subject to civil or 
criminal penalties for failing to furnish a correct TIN. For example, 
the solicitation may be worded as follows:

    You are required by law to provide [insert name of reporting person] 
with your correct taxpayer identification number. If you do not provide 
[insert name of reporting person] with your correct taxpayer 
identification number, you may be subject to civil or criminal penalties 
imposed by law.

The solicitation shall contain space for the name, address, and TIN of 
the person from whom the TIN is solicited and for the person to certify 
under penalties of perjury that the TIN furnished is that person's 
correct TIN. The wording of the certification must be substantially 
similar to the following: ``Under penalties of perjury, I certify that 
the number shown on this statement is my correct taxpayer identification 
number.'' The requirements of this paragraph (l)(1)(ii) may be met by 
providing to the transferor a copy of Form W-9. In the case of a real 
estate transaction for which a Uniform Settlement Statement is used, the 
requirements of this paragraph (l)(1)(ii) may be met by providing to the 
transferor a copy of such statement that is modified to conform to the 
requirements of this paragraph (l)(1)(ii).
    (iii) Retention requirement. The solicitation shall be retained by 
the reporting person for four years following the close of the calendar 
year that includes the date of closing (as determined under paragraph 
(h)(2)(ii) of this section). Such solicitation must be made available 
for inspection upon request by the Internal Revenue Service.
    (2) No TIN provided. A reporting person that does not receive the 
transferor's TIN will not be subject to any penalty cross-referenced in 
paragraph (n) of this section by reason of failure to report such TIN if 
the reporting person has complied with the requirements of paragraph 
(l)(1) of this section in good faith (determined with proper regard for 
a course of conduct and the overall results achieved for the year).
    (m) Furnishing statements to transferors--(1) Requirement of 
furnishing statements. A reporting person who is required to make a 
return of information under paragraph (a) of this section shall furnish 
to the transferor whose TIN is required to be shown on the return a 
written statement of the information required to be shown on such 
return. The written statement must bear either the legend shown on the 
recipient copy of Form 1099 or the following:

    This is important tax information and is being furnished to the 
Internal Revenue Service. If you are required to file a return, a 
negligence penalty or other sanction may

[[Page 637]]

be imposed on you if this item is required to be reported and the IRS 
determines that it has not been reported.

This requirement may be satisfied by furnishing to the transferor a copy 
of a completed Form 1099 (or substitute Form 1099 that complies with 
current revenue procedures). In the case of a real estate transaction 
for which a Uniform Settlement Statement is used, this requirement also 
may be satisfied by furnishing to the transferor a copy of a completed 
statement that is modified to comply with the requirements of this 
paragraph (m), and by designating on the Uniform Settlement Statement 
the items of information (such as gross proceeds or allocated gross 
proceeds) required to be set forth on the Form 1099. For purposes of 
this paragraph (m), a statement shall be considered furnished to a 
transferor if it is given to the transferor in person, either at the 
closing or thereafter, or is mailed to the transferor at the 
transferor's last known address.
    (2) Time for furnishing statement. The statement required under this 
paragraph (m) shall be furnished to the transferor on or after the date 
of closing and before February 1 of the following calendar year.
    (n) Cross-reference to penalties. See the following sections 
regarding penalties for failure to comply with the requirements of 
section 6045(e) and this section:
    (1) Section 6721 for failure to file a correct information return;
    (2) Section 6722 for failure to furnish a correct statement to the 
transferor;
    (3) Section 6723 for failure to comply with other information 
reporting requirements (including the requirement to furnish a TIN);
    (4) Section 6724 for definitions and rules relating to waiver and 
payment; and
    (5) Section 7203 for willful failure to supply information 
(including a taxpayer identification number).
    (o) No separate charge. A reporting person may not separately charge 
any person involved in a real estate transaction for complying with any 
requirements of this section.
    (p) Backup withholding requirements. [Reserved.]
    (q) Federally-subsidized indebtedness. [Reserved].
    (r) Examples. The following examples illustrate the application of 
this section:

    Example 1--Sale or exchange. (i) On June 1, 1991, A, an individual, 
buys a house from B, an individual, for $200,000. The entire $200,000 is 
financed by B under an ``installment land contract,'' whereby A takes 
possession and assumes all significant economic benefits and burdens of 
ownership of the house, and B retains legal title to the property until 
A fully performs under the contract. On June 1, 1994, A refinances his 
purchase of the house with Z, a financial institution. The balance owed 
to B is repaid and B relinquishes title to the house. A retains 
possession and the benefits and burdens of ownership of the house.
    (ii) For federal income tax purposes, the transaction occurring on 
June 1, 1991 is considered a sale of the house by B, notwithstanding his 
retention of legal title to the property. B's sale is subject to 
information reporting under this section. However, the transaction 
occurring on June 1, 1994 is not a sale or exchange for federal income 
tax purposes, and notwithstanding the change in legal title upon the 
deeding over of the property, that transaction is not subject to 
information reporting under this section.
    Example 2--Sale or exchange. On August 10, 1991, C, an individual, 
accepts an offer from Y, a corporation that acts on behalf of T (C's 
employer) to facilitate moves of T's transferred employees from one part 
of the country to another. Under the offer, C transfers his residence to 
Y for $250,000 by executing a deed to the property in blank and giving Y 
a power of attorney to dispose of the residence. C also immediately 
vacates the residence, whereupon Y begins paying all costs associated 
with the residence and is entitled to all income from the residence, 
including sales proceeds. On October 1, 1991, Y sells the residence to D 
and inserts C's name in the deed previously executed by C. Thus, neither 
Y nor T ever become record owners of the residence. C's transfer of the 
residence to Y on August 10, 1991 is a sale of reportable real estate 
and is subject to information reporting under this section; however, the 
sale on October 1, 1991 is not required to be reported because Y (the 
transferor in that sale) is a corporation. See paragraph (d) of this 
section.
    Example 3--Definition of ownership interest. E, an individual, owns 
a perpetual timeshare interest in a residential unit of real property at 
an oceanfront resort. For consideration, on November 15, 1991, E sells 
her rights in the property for the period January 1, 1992 through 
December 31, 1992 to F. The transfer of E's property interest is not the 
transfer of

[[Page 638]]

an ownership interest, as defined in paragraph (b)(2) of this section 
and therefore is not reportable real estate under paragraph (b)(2) of 
this section. Accordingly, the transfer is not a real estate transaction 
under section (b)(1) of this section, and no return of information is 
required with respect to E's property transfer.
    Example 4--Gross proceeds (exchange). (i) G, an individual, agrees 
to transfer Blackacre, which has a fair market value of $100,000, plus 
$10,000 cash to H, an individual, in exchange for Whiteacre, which as a 
fair market value of $120,000 and is encumbered by a $10,000 liability 
(which is assumed by G). No other liabilities are involved in the 
transaction. P is the reporting person with respect to both sides of the 
transaction.
    (ii) With respect to the transfer of Blackacre by G to H, P must 
report gross proceeds of $-0- (even though the exchange agreement may 
recite total exchange value of $120,000). See paragraph (i)(1) of this 
section. In addition, (to the extent required by the Form 1099 and its 
instructions) P must indicate that G will receive property as part of 
the consideration for the transaction. See paragraph (h)(v)(A) of this 
section.
    (iii) With respect to the transfer of Whiteacre by H to G, P must 
report gross proceeds of $20,000 (the amount received by H consisting of 
cash ($10,000) and consideration treated as cash ($10,000) under 
paragraph (i) of this section). No other amount is reported under 
paragraph (i)(1) of this section even though the exchange agreement may 
recite total exchange value of $120,000. In addition, (to the extent 
required by the Form 1099 and its instructions) P must indicate that H 
will receive property as part of the consideration for the transaction. 
See paragraph (h)(v)(A) of this section.
    Example 5--Gross proceeds (deferred exchange). [Reserved]
    Example 6--Gross proceeds (contingencies). K, an individual, sells 
an unencumbered apartment building to L for $500,000, payable at 
closing, plus an amount equal to 2% of gross rents from the apartment 
building for each of the next 5 years, the contingent payments to be 
made annually with adequate stated interest. The agreement provides that 
the maximum amount K may receive (including the downpayment but 
excluding the interest) is $600,000. Under paragraph (i)(3)(ii) of this 
section the real estate transaction is a ``contingent payment 
transaction.'' Under paragraph (i)(3)(iii) of this section, the maximum 
amount of gross proceeds determined by assuming all contingencies are 
satisfied is $600,000. Thus, $600,000 is the ``maximum determinable 
proceeds'' and is the amount reported.
    Example 7--Gross proceeds (contingencies). The facts are the same as 
in example (6), except that the agreement does not provide for adequate 
stated interest. The result is the same as in example (6).
    Example 8--Gross proceeds (contingencies). The facts are same as in 
example (6), except that no maximum amount is stated in the agreement 
(or any other document available at closing). Under paragraph 
(i)(3)(iii) of this section, assuming all contingencies are satisfied, 
the maximum amount of gross proceeds cannot be determined with 
certainty. The greatest amount that can be determined with certainty at 
the time of the closing, assuming all contingencies are satisfied, is 
$500,000, the cash downpayment. Therefore, $500,000 is the ``maximum 
determinable proceeds'' under paragraph (i)(3)(iii) of this section and 
is the amount reported. In addition, (to the extent required by the Form 
1099 and its instructions) the reporting person must indicate that the 
gross proceeds cannot be determined with certainty. See paragraph 
(h)(1)(iv)(C) of this section.
    Example 9--Gross proceeds (contingencies). The facts are the same as 
in example (8), except that the agreement provides that the minimum 
amount K will receive (including the downpayment) is $570,000. Thus, 
under paragraph (i)(3)(iii) of this section, assuming all contingencies 
are satisfied, the maximum amount of gross proceeds cannot be determined 
with certainty. The greatest amount that can be determined with 
certainty at the time of the closing, assuming all contingencies are 
satisfied, is $570,000, the minimum amount stated in the agreement. 
Therefore, $570,000 is the ``maximum determinable proceeds'' under 
paragraph (i)(3)(iii) of this section and is the amount reported. In 
addition, (to the extent required by the Form 1099 and its instructions) 
the reporting person must indicate that the gross proceeds cannot be 
determined with certainty. See paragraph (h)(1)(iv)(C) of this section.

    (s) Effective date. This section is effective for real estate 
transactions with dates of closing (as determined under paragraph 
(h)(2)(ii) of this section) that occur on or after January 1, 1991.

[T.D. 8323, 55 FR 51284, Dec. 13, 1990; 56 FR 559, Jan. 7, 1991; 56 FR 
3419, Jan. 30, 1991]



Sec. 1.6046-1   Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock, on or after January 1, 1963.

    (a) Officers or directors--(1) When liability arises on January 1, 
1963. Each U.S. citizen or resident who is on January 1, 1963, an 
officer or director of a foreign corporation shall make a return on Form 
959 showing the name, address, and identifying number of each U.S. 
person who, on January 1,

[[Page 639]]

1963, owns 5 percent or more in value of the outstanding stock of such 
foreign corporation.
    (2) When liability arises after January 1, 1963--(i) Requirement of 
return. Each U.S. citizen or resident who is at any time after January 
1, 1963, an officer or director of a foreign corporation shall make a 
return on Form 959 setting forth the information described in 
subdivision (ii) of this subparagraph with respect to each U.S. person 
who, during the time such citizen or resident is such an officer or 
director:
    (a) Acquires (whether in one or more transactions) outstanding stock 
of such corporation which has, or which when added to any such stock 
then owned by him (excluding any stock owned by him on January 1, 1963, 
if on that date he owned 5 percent or more in value of such stock) has, 
a value equal to 5 percent or more in value of the outstanding stock of 
such foreign corporation, or
    (b) Acquires (whether in one or more transactions) an additional 5 
percent or more in value of the outstanding stock of such foreign 
corporation.
    (ii) Information required to be shown on return. The return required 
under subdivision (i) of this subparagraph shall contain the following 
information:
    (a) Name, address, and identifying number of each shareholder with 
respect to whom the return is filed;
    (b) A statement showing that the shareholder is either described in 
subdivision (i)(a) or (i)(b) of this subparagraph; and
    (c) The date on which the shareholder became a person described in 
subdivision (i)(a) or (i)(b) of this subparagraph.
    (3) Application of rules. The provisions of this paragraph may be 
illustrated by the following examples:

    Example (1). A, a United States citizen, is, on January 1, 1963, a 
director of M, a foreign corporation. X, on January 1, 1963, is a United 
States person owning 5 percent in value of the outstanding stock of M 
Corporation. A must file a return under the provisions of subparagraph 
(1) of this paragraph.
    Example (2). The facts are the same as in Example (1) except that X 
owns only 2 percent in value of the outstanding stock of M Corporation 
on January 1, 1963. On July 1, 1963, X acquires 2 percent in value of 
the outstanding stock of M Corporation and on September 1, 1963, he 
acquires an additional 2 percent in value of such stock. The July 1, 
1963, transaction does not give rise to liability to file a return; 
however, A must file a return as a result of the September 1, 1963, 
transaction because X's holdings now exceed 5 percent.
    Example (3). The facts are the same as in Example (2) and, on 
September 15, 1963, X acquires an additional 4 percent in value of the 
outstanding stock of M Corporation (X's total holdings are now 10 
percent). On November 1, 1963, X acquires an additional 2 percent in 
value of the outstanding stock of M Corporation. The September 15, 1963, 
transaction does not give rise to liability to file a return since X has 
not acquired 5 percent in value of the outstanding stock of M 
Corporation since A last became liable to file a return. However, A must 
file a return as a result of the November 1, 1963, transaction because X 
has not acquired an additional 5 percent in value of the outstanding 
stock of M Corporation.
    Example (4). The facts are the same as in examples (2) and (3) and, 
in addition, B, a United States citizen, becomes an officer of M 
Corporation on October 1, 1963. B is not required to file a return 
either as a result of the facts set forth in Example (2) or as a result 
of the September 15, 1963, transaction described in Example (3). 
However, B is required to file a return as a result of the November 1, 
1963, transaction described in Example (3) because X has acquired an 
additional 5 percent in value of the outstanding stock of M Corporation 
while B is an officer or director.

    (b) Returns required of U.S. persons when liability to file arises 
on January 1, 1963. Each U.S. person who, on January 1, 1963, owns 5 
percent or more in value of the outstanding stock of a foreign 
corporation, shall make a return on Form 959 with respect to such 
foreign corporation setting forth the following information:
    (1) The name, address, and identifying number of the shareholder (or 
shareholders) filing the return, and the internal revenue district in 
which such shareholder filed his most recent United States income tax 
return;
    (2) The name, business address, and employer identification number, 
if any, of the foreign corporation, the name of the country under the 
laws of which it is incorporated, and the name of the country in which 
is located its principal place of business;
    (3) The date of organization and, if any, of each reorganization of 
the foreign corporation if such reorganization occurred on or after 
January 1, 1960,

[[Page 640]]

while the shareholder owned 5 percent or more in value of the 
outstanding stock of such corporation;
    (4) The name and address of the foreign corporation's statutory or 
resident agent in the country of incorporation;
    (5) The name, address, and identifying number of any branch office 
or agent of the foreign corporation located in the United States;
    (6) If the foreign corporation has filed a United States income tax 
return, or participated in the filing of a consolidated return, for any 
of its last three calendar or fiscal years immediately preceding January 
1, 1963, state each year for which a return was filed (including, in the 
case of a consolidated return, the name of the corporation filing such 
return), the type of form used, the internal revenue office to which it 
was sent, and the amount of tax, if any, paid;
    (7) The name and address of the person (or persons) having custody 
of the books of account and records of the foreign corporation, and the 
location of such books and records if different from such address;
    (8) The names, addresses, and identifying numbers of all United 
States persons who are principal officers (for example, president, vice 
president, secretary, treasurer, and comptroller) or members of the 
board of directors of the foreign corporation as of January 1, 1963;
    (9) A complete description of the principal business activities in 
which the foreign corporation is actually engaged and, if the foreign 
corporation is a member of a group constituting a chain of ownership 
with respect to each unit of which the shareholder owns 5 percent or 
more in value of the outstanding stock, a chart showing the foreign 
corporation's position in the chain of ownership and the percentages of 
ownership;
    (10) The following information prepared in accordance with generally 
accepted accounting principles and in such detail as is customary for 
the corporation's accounting records:
    (i) The corporation's profit and loss statement for the most recent 
complete annual accounting period; and
    (ii) The corporation's balance sheet as of the end of the most 
recent complete annual accounting period;
    (11) A statement showing as of January 1, 1963, the amount and type 
of any indebtedness of the foreign corporation:
    (i) To any United States person owning 5 percent or more in value of 
its stock, or
    (ii) To any other foreign corporation owning 5 percent or more in 
value of the outstanding stock of the foreign corporation with respect 
to which the return is filed provided that the shareholder filing the 
return owns 5 percent or more in value of the outstanding stock of such 
other foreign corporation,

together with the name, address, and identifying number, if any, of each 
such shareholder or entity;
    (12) A statement, as of January 1, 1963, showing the name, address, 
and identifying number, if any, of each person who is, on January 1, 
1963, a subscriber to the stock of the foreign corporation, and the 
number of shares subscribed to by each;
    (13) A statement showing the number of shares of each class of stock 
of the foreign corporation owned by each shareholder filing the return 
and:
    (i) If such stock was acquired after December 31, 1953, the dates of 
acquisition, the amounts paid or value given therefor, the method of 
acquisition, i.e., by original issue, purchase on open market, direct 
purchase, gift, inheritance, etc., and from whom acquired; or
    (ii) If such stock was acquired before Janaury 1, 1954, a statement 
that such stock was acquired before such date, and the value at which 
such stock is carried on the books of such shareholder;
    (14) A statement showing as of January 1, 1963, the name, address, 
and identifying number of each United States person who owns 5 percent 
or more in value of the outstanding stock of the foreign corporation, 
the classes of stock held, the number of shares of each class held, 
including the name, address, and identifying number, if any, of each 
actual owner if such person is different from the shareholder of record 
and a statement of the nature

[[Page 641]]

and amount of the interests of each such actual owner; and
    (15) The total number of shares of each class of outstanding stock 
of the foreign corporation (or other data indicating the shareholder's 
percentage of ownership).
    (c) Returns required of U.S. persons when liability to file arises 
after January 1, 1963--(1) U.S. persons required to file. A return on 
Form 959, containing the information required by subparagraph (3) of 
this paragraph, shall be made by each U.S. person when at any time after 
January 1, 1963:
    (i) Such person acquires (whether in one or more transactions) 
outstanding stock of such foreign corporation which has, or which when 
added to any such stock then owned by him (excluding any stock owned by 
him on January 1, 1963, if on that date he owned 5 percent or more in 
value of such stock) has, a value equal to 5 percent or more in value of 
the outstanding stock of such foreign corporation, or
    (ii) Such person, having already acquired the interest referred to 
in paragraph (b) of this section or in subdivision (i) of this 
subparagraph--
    (a) Acquires (whether in one or more transactions) an additional 5 
percent or more in value of the outstanding stock of such foreign 
corporation,
    (b) Owns 5 percent or more in value of the outstanding stock of such 
foreign corporation when such foreign corporation is reorganized (as 
defined in paragraph (f)), or
    (c) Disposes of sufficient stock in such foreign corporation to 
reduce his interest to less than 5 percent in value of the outstanding 
stock of such foreign corporation.

The provisions of this subparagraph may be illustrated by the following 
examples:

    Example (1). On January 15, 1963, A, a United States person, 
acquires 5 percent in value of the outstanding stock of M, a foreign 
corporation. A must file a return under the provisions of this 
subparagraph.
    Example (2). On January 1, 1963, B, a United States person, owns 2 
percent in value of the outstanding stock of M, a foreign corporation. B 
is not required to file a return under the provisions of this section 
because he does not own 5 percent or more in value of the outstanding 
stock of M Corporation. On February 1, 1963, B acquires an additional 3 
percent in value of the outstanding stock of M Corporation. B must file 
a return under the provisions of this subparagraph.
    Example (3). On January 1, 1963, C, a United States person, owns 6 
percent in value of the outstanding stock of M, a foreign corporation. C 
must file a return under the provisions of paragraph (b) of this 
section. On February 1, 1963, C acquires an additional 2 percent in 
value of the outstanding stock of M Corporation in a transaction not 
involving a reorganization. C is not required to file a return under the 
provisions of this subparagraph.
    Example (4). The facts are the same as in Example (3) except that, 
in addition, on April 1, 1963, C acquires 2 percent in value of the 
outstanding stock of M Corporation in a transaction not involving a 
reorganization. (C's total holdings are now 10 percent.) C is not 
required to file a return under the provisions of this subparagraph 
because he has not acquired 5 percent or more in value of the 
outstanding stock of M Corporation since he last became liable to file a 
return. On May 1, 1963, C acquires 1 percent in value of the outstanding 
stock of M Corporation. C must file a return under the provisions of 
this subparagraph.
    Example (5). On June 1, 1963, D, a United States person, owns 12 
percent in value of the outstanding stock of M, a foreign corporation. 
Also, on June 1, 1963, M Corporation is reorganized and, as a result of 
such reorganization, D owns only 6 percent of the outstanding stock of 
such foreign corporation. D must file a return under the provisions of 
this subparagraph.
    Example (6). The facts are the same as in Example (5) except that, 
in addition, on November 1, 1970, D donates 2 percent of the outstanding 
stock of M Corporation to a charity. Since D has disposed of sufficient 
stock to reduce his interest in M Corporation to less than 5 percent in 
value of the outstanding stock of such corporation, D must file a return 
under the provisions of this subparagraph.

    (2) Shareholders who become U.S. persons. A return on Form 959, 
containing the information required by subparagraph (3) of this 
paragraph, shall be made by each person who at any time after Janaury 1, 
1963, becomes a U.S. person while owning 5 percent or more in value of 
the outstanding stock of such foreign corporation.
    (3) Information required to be shown on return--(i) In general. The 
return on Form 959, required to be filed by persons described in 
subparagraph (1) or (2) of this paragraph, shall set forth the same 
information as is required by the

[[Page 642]]

provisions of paragraph (b) of this section except that where such 
provisions require information with respect to January 1, 1963, such 
information shall be furnished with respect to the date on which 
liability arises to file the return required under this paragraph.
    (ii) Additional information. In addition to the information required 
under subdivision (i) of this subparagraph, the following information 
shall also be furnished in the return required under this paragraph:
    (a) The date on or after January 1, 1963, if any, on which such 
shareholder (or shareholders) last filed a return under this section 
with respect to the corporation;
    (b) If a return is filed by reason of becoming a United States 
person, the date the shareholder became a United States person;
    (c) If a return is filed by reason of the disposition of stock, the 
date and method of such disposition and the person to whom such 
disposition was made; and
    (d) If a return is filed by reason of the organization or 
reorganization of the foreign corporation on or after January 1, 1963, 
the following information with respect to such organization or 
reorganization:
    (1) A statement showing a detailed list of the classes and kinds of 
assets transferred to the foreign corporation including a description of 
the assets (such as a list of patents, copyrights, stock, securities, 
etc.), the fair market value of each asset transferred (and, if such 
asset is transferred by a United States person, its adjusted basis), the 
date of transfer, the name, address, and identifying number, if any, of 
the owner immediately prior to the transfer, and the consideration paid 
by the foreign corporation for such transfer;
    (2) A statement showing the assets transferred and the notes or 
securities issued by the foreign corporation, the name, address, and 
identifying number, if any, of each person to whom such transfer or 
issue was made, and the consideration paid to the foreign corporation 
for such transfer or issue; and
    (3) An analysis of the changes in the corporation's surplus accounts 
occurring on or after January 1, 1963.
    (iii) Exclusion of information previously furnished. In any case 
where any identical item of information required to be filed under this 
paragraph by a shareholder with respect to a foreign corporation has 
previously been furnished by such shareholder in any return made in 
accordance with the provisions of this section, such shareholder may 
satisfy the requirements of this paragraph by filing Form 959, 
identifying such item of information, the date furnished, and stating 
that it is unchanged.
    (d) Associations, etc. Returns are required to be filed in 
accordance with the provisions of this section with respect to any 
foreign association, foreign joint-stock company, or foreign insurance 
company, etc., which would be considered to be a corporation under 
Sec. 301.7701-2 of this chapter (Regulations on Procedure and 
Administration). Persons who would qualify by the nature of their 
functions and ownership in such associations, etc., as officers, 
directors, or shareholders thereof will be treated as such for purposes 
of this section without regard to their designations under local law.
    (e) Special provisions--(1) Return jointly made. Any two or more 
persons required under paragraph (a) of this section to make a return 
with respect to one or more shareholders of the same corporation, or 
under paragraph (b) or (c) of this section to make a return with respect 
to the same corporation, may in lieu of making several returns, jointly 
make one return.
    (2) Separate return for each corporation. When returns are required 
with respect to more than one foreign corporation, a separate return 
must be made for each corporation.
    (3) Use of power of attorney by officers or directors--(i) In 
general. Any two or more persons required under paragraph (a) of this 
section to make a return with respect to one or more shareholders of the 
same corporation may, by means of one or more duly executed powers of 
attorney, constitute one of their number as attorney in fact for the 
purpose of making such returns or for the purpose of making a joint 
return under subparagraph (1) of this paragraph.

[[Page 643]]

    (ii) Nature of power of attorney. The power of attorney referred to 
in subdivision (i) of this subparagraph shall be limited to the making 
of returns required under paragraph (a) of this section and shall be 
limited to a single calendar year with respect to which such returns are 
required.
    (iii) Manner of execution of power of attorney. The use of technical 
language in the preparation of the power of attorney referred to in 
subdivision (i) of this subparagraph is not necessary. Such power of 
attorney shall be signed by the individual United States citizen or 
resident required to file a return or returns under paragraph (a) of 
this section. Such power of attorney must be acknowledged before a 
notary public or, in lieu thereof, witnessed by two disinterested 
persons. The notarial seal must be affixed unless such seal is not 
required under the laws of the state or country wherein such power of 
attorney is executed.
    (iv) Manner of execution of return under authority of power of 
attorney. A return made under authority of one or more powers of 
attorney referred to in subdivision (i) of this subparagraph shall be 
signed by the attorney in fact for each principal for which such 
attorney in fact is acting. A copy of such one or more powers of 
attorney shall be kept at a convenient and safe location accessible to 
internal revenue officers, and shall at all times be available for 
inspection by such officers.
    (v) Effect on penalties. The fact that a return is made under 
authority of a power of attorney referred to in subdivision (i) of this 
subparagraph shall not affect the principal's liability for penalties 
provided for failure to file a return required under paragraph (a) of 
this section or for filing a false or fraudulent return.
    (4) Persons excepted from filing returns--(i) Return required of 
officer or director under paragraph (a)(1). Notwithstanding paragraph 
(a)(1) of this section, any U.S. citizen or resident required to make a 
return under such paragraph with respect to shareholders of a foreign 
corporation, need not make such return if, on January 1, 1963, three or 
fewer U.S. persons own 95 percent or more in value of the outstanding 
stock of such foreign corporation and file a return or returns with 
respect to such corporation under paragraph (b) of this section.
    (ii) Return required of officer or director under paragraph (a)(2). 
Notwithstanding paragraph (a)(2) of this section, any U.S. citizen or 
resident required to make a return under such paragraph with respect to 
a person acquiring stock of a foreign corporation in an acquisition 
described in subdivision (i)(a) or (b) of such paragraph need not make 
such return, if:
    (a) As a result of such acquisition of stock of such foreign 
corporation, a U.S. person files a return as a shareholder under 
paragraph (c) (1) of this section, and
    (b) Immediately after such acquisition of stock, three or fewer U.S. 
persons own 95 percent or more in value of the outstanding stock of such 
foreign corporation.
    (iii) Return required by reason of attribution rules. 
Notwithstanding paragraph (b) or (c) of this section, any person 
required to make a return under such paragraph with respect to a foreign 
corporation need not make such return, if:
    (a) Such person does not directly own an interest in the foreign 
corporation,
    (b) Such person is required to furnish the information solely by 
reason of attribution of stock ownership from a U.S. person under 
paragraph (i) of this section, and
    (c) The person from whom the stock ownership is attributed furnishes 
all of the information required under paragraph (b) or (c) of this 
section of the person to whom such stock ownership is attributed.
    (iv) Return required of officer or director with respect to person 
described in subdivision (iii). Notwithstanding paragraph (a) of this 
section, any U.S citizen or resident required to make a return under 
such paragraph with respect to a person exempted under subdivision (iii) 
of this subparagraph from making a return need not make a return with 
respect to such person.
    (5) Persons excepted from furnishing items of information. Any 
person required to furnish any item of information under paragraph (b) 
or (c) of this

[[Page 644]]

section with respect to a foreign corporation, may, if such item of 
information is furnished by another person having an equal or greater 
stock interest (measured in terms of value of such stock) in such 
foreign corporation, satisfy such requirement by filing a statement with 
his return on Form 959 indicating that such liability has been satisfied 
and identifying the return in which such item of information was 
included.
    (f) Meaning of terms. For purposes of this section:
    (1) Acquisition. Stock in a foreign corporation shall be considered 
acquired when a person has an unqualified right to receive such stock 
even though such stock is not actually issued. For example, when under 
the law of a foreign country, all the necessary steps for incorporation 
are completed but stock in the corporation will not be issued within 30 
days, every United States citizen or resident who is an officer or a 
director of such corporation, provided a United States person has an 
interest of 5 percent or more in such corporation, and every such United 
States person shall, within 90 days of the date of incorporation, file 
the returns required under section 6046 and this section. In the case of 
a reorganization, new stock may be acquired, depending on the type of 
reorganization, whether or not any stock certificates are surrendered or 
exchanged or the designation of such stock is altered.
    (2) Reorganization. With respect to a foreign corporation, the term 
``reorganization'' shall mean not only a transaction described in 
section 368(a)(1) and the regulations thereunder but also any other 
transaction or series of transactions which has the same effect.
    (3) U.S. person. For purposes of section 6046 and this section the 
term ``United States person'' has the meaning assigned to it by section 
7701(a)(30) of the Code, except that:
    (i) With respect to a corporation organized under the laws of the 
Commonwealth of Puerto Rico, such term does not include an individual 
who is a bona fide resident of Puerto Rico, if a dividend received by 
such individual during the taxable year from such corporation would, for 
purposes of section 933(1), be treated as income derived from sources 
within Puerto Rico,
    (ii) With respect to a corporation organized under the laws of the 
Virgin Islands, such term does not include an individual who is a bona 
fide resident of the Virgin Islands and whose income tax obligation 
under subtitle A (relating to income taxes) of the Code for the taxable 
year is satisfied pursuant to section 28(a) of the Revised Organic Act 
of the Virgin Islands, approved July 22, 1954 (48 U.S.C. 1642), by 
paying tax on income derived from all sources both within and outside 
the Virgin Islands into the treasury of the Virgin Islands, and
    (iii) With respect to a corporation organized under the laws of any 
possession of the United States (other than Puerto Rico or the Virgin 
Islands), such term does not include an individual who is a bona fide 
resident of such possession and whose income derived from sources within 
any possession of the United States is not, by reason of section 931(a), 
includible in gross income under subtitle A (relating to income taxes) 
of the Code for the taxable year.

The provisions of paragraph (b), (c), or (d), respectively, of 
Sec. 1.957-4 shall apply for purposes of determining whether an 
individual is excepted under subdivision (i), (ii), or (iii), 
respectively, of this subparagraph from being a U.S. person with respect 
to a corporation described in such subdivision.
    (4) Applicable Form 959. The Form 959 which shall be used for 
purposes of this section is Form 959 (Revised January 1963) or such 
subsequent revision of such form as may be in use at the time the 
liability to file a return on Form 959 arises.
    (5) Accounting period and taxable year. In the case of a specified 
foreign corporation (as defined in section 898), the taxable year of 
such corporation shall be treated as its annual accounting period.
    (g) Method of reporting. All amounts furnished in returns prescribed 
under this section shall be expressed in United States currency with a 
statement of the exchange rates used. All statements required to be 
submitted on or with returns under this section shall be rendered in the 
English language. For

[[Page 645]]

taxable years ending after December 31, 1994, with respect to returns 
filed after December 31, 1995, all amounts furnished under paragraph (c) 
of this section shall be expressed in United States dollars computed and 
translated in conformity with United States generally accepted 
accounting principles. Amounts furnished under paragraph (c)(3)(i) of 
this section shall also be furnished in the foreign corporation's 
functional currency as required on the form. Information described in 
paragraphs (b)(10) and (c)(3) of this section shall be submitted in such 
form or manner as the form shall prescribe.
    (h) Actual ownership of stock. If any shareholder, referred to in 
this section, is not the actual owner of the stock of the foreign 
corporation, the information required under this section shall be 
furnished in the name of and by such actual owner. For example, in the 
case of stock held by a nominee, the information required under this 
section shall be furnished by the actual owner of such stock.
    (i) Constructive ownership of stock--(1) In general. Stock owned 
directly or indirectly by or for a foreign corporation or a foreign 
partnership shall be considered as being owned proportionately by its 
shareholders or partners. Thus, any United States person who is a member 
of a nonresident foreign partnership which becomes a shareholder in a 
foreign corporation shall be considered to be a shareholder in such 
foreign corporation to the extent of his proportionate share in such 
partnership.
    (2) Members of family. An individual shall be considered as owning 
the stock owned directly or indirectly by or for his brothers and 
sisters (whether by the whole or half blood), his spouse, his ancestors, 
and his lineal descendants. However, when stock is treated as owned by 
an individual under the rule provided in this subparagraph, it shall not 
be treated as owned by him for the purpose of again applying such rule 
in order to make another the constructive owner of such stock. The 
provisions of this subparagraph may be illustrated by the following 
example:

    Example. H, W, and HF are United States citizens. W, wife of H, owns 
20 percent of the value of the outstanding stock of X, a foreign 
corporation. X Corporation owns 90 percent of the value of the 
outstanding stock of Y Corporation, a foreign corporation. Y Corporation 
becomes the owner of 50 percent of the value of the outstanding stock of 
each of two newly organized foreign corporations, M and N. In applying 
the ``members of family'' rule, H is considered to own 20 percent of the 
value of the outstanding stock of X Corporation, and 18 percent of the 
value of the outstanding stock of Y Corporation, and 9 percent of M 
Corporation and N Corporation. However, HF, the father of H, is not 
considered to own stock of X, Y, M, or N since his son, H, is not 
treated as the owner of such stock for purposes of again applying the 
``members of family'' rule.

    (j) Time and place for filing return--(1) Time for filing. Any 
return required by section 6046 and this section shall be filed on or 
before the 90th day after the date on which a United States citizen, 
resident, or person becomes liable to file such return under any 
provision of section 6046(a) and of paragraph (a), (b), or (c) of this 
section. With respect to returns filed after September 3, 1982, such 
return shall be filed on or before such later date (if any) as may be 
authorized by the return form. The Director of the Internal Revenue 
Service Center where the return is required to be filed is authorized to 
grant reasonable extensions of time for filing returns under section 
6046 and this section in accordance with the applicable provisions of 
section 6081(a) and Sec. 1.6081-1.
    (2) Place for filing. Returns required by section 6046 and this 
section shall be filed with the Internal Revenue Service Center 
designated in the instructions of the applicable form.
    (k) Penalties. (1) For criminal penalties for failure to file a 
return and filing a false or fraudulent return, see sections 7203, 7206, 
and 7207.
    (2) For civil penalty for failure to file return, or failure to show 
information required on a return, under this section, see section 6679.

(Approved by the Office of Management and Budget under control number 
1545-0794)

[T.D. 6623, 27 FR 11882, Dec. 1, 1962, as amended by T.D. 6997, 34 FR 
932, Jan. 22, 1969; T.D. 7322, 39 FR 30932, Aug. 27, 1974; T.D. 7925, 48 
FR 55454, Dec. 13, 1983; T.D. 8573, 59 FR 64302, Dec. 14, 1994]

[[Page 646]]



Sec. 1.6046-2   Returns as to foreign corporations which are created or organized, or reorganized, on or after September 15, 1960, and before January 1, 1963.

    (a) Requirement of returns. In the case of any foreign corporation 
which is created or organized, or reorganized, on or after September 15, 
1960, and before January 1, 1963:
    (1) Each United States citizen or resident who was an officer or 
director of such corporation at any time within 60 days after such 
creation or organization, or reorganization, and
    (2) Each United States shareholder of such corporation by or for 
whom, at any time within 60 days after such creation or organization, or 
reorganization, 5 percent or more in value of such corporation's then 
outstanding stock was owned directly or indirectly (including, in the 
case of an individual stock owned by members of his family),

shall file a return on Form 959 (Rev. Oct. 1960), United States 
Information Return With Respect to the Creation or Organization, or 
Reorganization, of a Foreign Corporation.
    (b) Information required to be shown on return. The return required 
by section 6046, prior to its amendment by section 20(b) of the Revenue 
Act of 1962, and this section shall set forth the following information:
    (1) The name and address of the person (or persons) filing the 
return, and an indication that he is a United States shareholder, 
officer, or director;
    (2) The name and business address of the foreign corporation;
    (3) The name of the country under the laws of which the foreign 
corporation was created or organized, or reorganized;
    (4) The name and address of the foreign corporation's statutory or 
resident agent in the country of incorporation;
    (5) The date of the foreign corporation's creation or organization, 
or reorganization;
    (6) A statement of the manner in which the creation or organization, 
or reorganization, of the foreign corporation was effected;
    (7) A complete statement of the reasons for, and the purposes sought 
to be accomplished by, the creation or organization, or reorganization, 
of the foreign corporation;
    (8) A statement showing the classes and kinds of assets transferred 
to the foreign corporation in connection with its creation or 
organization, or reorganization, including a list completely describing 
each asset or group of assets, its value, date of transfer, and the name 
and address of person (or persons) owning such asset or group 
immediately prior to the transfer;
    (9) A statement showing the assets transferred and the securities 
issued by the foreign corporation in its creation or organization or 
reorganization, as well as the name and address of each person to whom 
such a transfer or issuance was made;
    (10) A statement specifying the amount and type of any indebtedness 
due from the foreign corporation to each of its shareholders and the 
name of each such shareholder;
    (11) The names and addresses of the shareholders of the foreign 
corporation at the time of its creation or organization or 
reorganization, and the classes of stock and number of shares held by 
each;
    (12) The names and addresses of subscribers to the stock of the 
foreign corporation, and the number of shares subscribed to by each; and
    (13) The name and address of the person (or persons) having custody 
of the books of account and records of the foreign corporation, and the 
location of such books and records if different from such address.
    (c) Time and place for filing return. The return required by section 
6046, prior to its amendment by section 20(b) of the Revenue Act of 
1962, and this section shall be filed with the Internal Revenue Service 
Center designated in the instructions of the applicable form. Such 
return shall be filed on or before the 90th day after the date such 
foreign corporation is created or organized, or reorganized.

[T.D. 6623, 27 FR 11882, Dec. 1, 1962, as amended by T.D. 7322, 39 FR 
30932, Aug. 27, 1974]



Sec. 1.6046-3   Returns as to formation or reorganization of foreign corporations prior to September 15, 1960.

    (a) Requirement of returns. Every attorney, accountant, fiduciary, 
bank,

[[Page 647]]

trust company, financial institution, or other person, who, on or before 
September 14, 1960, aids, assists, counsels, or advises in, or with 
respect to, the formation, organization, or reorganization of any 
foreign corporation shall file an information return on Form 959 (as in 
use prior to the October 1960 revision). The return must be filed in 
every such case regardless of:
    (1) The nature of the counsel or advice given, whether for or 
against the formation, organization, or reorganization of the foreign 
corporation, or the nature of the aid or assistance rendered, and
    (2) The action taken upon the advice or counsel, that is, whether 
the foreign corporation is actually formed, organized or reorganized.
    (b) Special provisions--(1) Employers. In the case of aid, 
assistance, counsel, or advice in, or with respect to, the formation, 
organization, or reorganization of a foreign corporation given by a 
person in whole or in part through the medium of employees (including, 
in the case of a corporation, the officers thereof), the return made by 
the employer must set forth in detail the information required by this 
section including that which, as an incident to such employment, is 
within the possession or knowledge or under the control of such 
employees.
    (2) Employees. The obligation of an employee (including, in the case 
of a corporation, the officers thereof) to file a return with respect to 
any aid, assistance, counsel, or advice in or with respect to the 
formation, organization, or reorganization of a foreign corporation, 
given as an incident to his employment, will be satisfied if a return as 
prescribed by this section is duly filed by the employer. Clerks, 
stenographers, and other employees rendering aid or assistance solely of 
a clerical or mechanical character in or with respect to the formation, 
organization, or reorganization of a foreign corporation are not 
required to file returns by reason of such services.
    (3) Partners. In the case of aid, assistance, counsel, or advice in, 
or with respect to, the formation, organization, or reorganization of a 
foreign corporation given by one or more members of a partnership in the 
course of its business, the obligation of each such individual member to 
file a return will be satisfied if a return as prescribed by this 
section is duly filed by the partnership executed by all the members of 
the firm who gave any such aid, assistance, counsel, or advice. If, 
however, the partnership has been dissolved at the time the return is 
due, individual returns must be filed by each member of the former 
partnership who gave any such aid, assistance, counsel, or advice.
    (4) Return jointly made. If two or more persons aid, assist, 
counsel, or advise in, or with respect to, the formation, organization, 
or reorganization of a particular foreign corporation, any two or more 
of such persons may, in lieu of filing several returns, jointly execute 
and file one return.
    (5) Separate return for each corporation. If a person aids, assists, 
counsels, or advises in, or with respect to, the formation, 
organization, or reorganization of more than one foreign corporation, a 
separate return must be filed with respect to each foreign corporation.
    (c) Information required to be shown on return. The return required 
by section 6046, prior to its amendment by section 7(a) of the Act of 
September 14, 1960, and this section shall set forth the following 
information to the extent the information is within the possession or 
knowledge, or under the control, of the person filing the return:
    (1) The name and address of the person (or persons) to whom, and the 
person (or persons) for whom, or on whose behalf, the aid, assistance, 
counsel, or advice was given;
    (2) The name and address of the foreign corporation and the country 
under the laws of which it was formed, organized, or reorganized;
    (3) The month and year when the foreign corporation was formed, 
organized, or reorganized;
    (4) A statement of the manner in which the formation, organization, 
or reorganization of the foreign corporation was effected;
    (5) A complete statement of the reasons for, and the purposes sought 
to be accomplished by, the formation, organization, or reorganization of 
the foreign corporation;

[[Page 648]]

    (6) A statement showing the classes and kinds of assets transferred 
to the foreign corporation in connection with its formation, 
organization, or reorganization, including a detailed list of any stock 
or securities included in such assets, and a statement showing the names 
and addresses of the persons who were the owners of such assets 
immediately prior to the transfer;
    (7) The names and addresses of the shareholders of the foreign 
corporation at the time of the completion of its formation, 
organization, or reorganization, showing the classes of stock and number 
of shares held by each and, in the case of Forms 959 filed after 
December 31, 1958, the names and addresses of the subscribers to the 
stock of the foreign corporation and the number of shares subscribed to 
by each;
    (8) The name and address of the person (or persons) having custody 
of the books of account and records of the foreign corporation; and
    (9) Such other information as is required by the return form.
    (d) Privileged communications. An attorney-at-law is not required to 
file a return with respect to any advice given or information obtained 
through the relationship of attorney and client.
    (e) Time and place for filing return--(1) Time for filing. Returns 
required by section 6046, prior to its amendment by section 7(a) of the 
Act of September 14, 1960, and this section shall be filed within 30 
days after the first performance of any of the functions referred to in 
paragraph (a) of this section. If in a particular case, the aid, 
assistance, counsel, or advice given by any person extends over a period 
of more than one day, such person, to avoid multiple filing of returns, 
shall file a return within 30 days after either of the following events:
    (i) The formation, organization, or reorganization of the foreign 
corporation, or
    (ii) The termination of his aid, assistance, counsel, or advice in, 
or with respect to, the formation, organization, or reorganization of 
the foreign corporation.
    (2) Place for filing. Returns required by section 6046 of the 
Internal Revenue Code of 1954 and this section shall be filed with the 
Internal Revenue Service Center designated in the instructions of the 
applicable form.
    (f) Penalties. For criminal penalties for failure to file a return 
and filing a false or fraudulent return, see sections 7203, 7206, and 
7207.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6623, 27 FR 
11882, Dec. 1, 1962; T.D. 7322, 39 FR 30932, Aug. 27, 1974]



Sec. 1.6047-1   Information to be furnished with regard to employee retirement plan covering an owner-employee.

    (a) Trustees and insurance companies--(1) Requirement of return. (i) 
Every trustee of a trust described in section 401(a) and exempt from tax 
under section 501(a) which makes payments of amounts described in 
subparagraph (2) of this paragraph aggregating $10 or more during any 
calendar year to an individual (or his beneficiary) who was covered, 
within the meaning of paragraph (a)(2) of Sec. 1.401-10, as an owner-
employee under the plan of which such trust is a part shall make a 
return on Forms 1096 and 1099 for such year showing the name and address 
of the person to whom paid, the aggregate amount of such payments, 
specifically identified as an amount to which this paragraph applies, 
and such other information as is required by the forms. A separate Form 
1099 shall be filed with respect to each payee. The term ``owner-
employee'' means an owner-employee as defined in section 401(c)(3) and 
paragraph (d) of Sec. 1.401-10. Any custodial account which satisfies 
the requirements of section 401(f) shall be treated as a qualified trust 
and the custodian of such a custodial account must comply with the 
requirements of this section as if he were the trustee.
    (ii) Every issuer of a contract which is treated as an annuity 
contract under sections 401 through 404 purchased by a trust described 
in section 401(a) and exempt from tax under section 501(a) or under a 
plan described in section 403(a) which makes payments of amounts 
described in subparagraph (2) of this paragraph aggregating $10 or more 
during any calendar year to an individual (or his beneficiary) who was 
covered, within the meaning of paragraph (a)(2) of Sec. 1.401-10, as an 
owner-employee under the plan of which such trust is a part or under 
which such contract was

[[Page 649]]

purchased shall make a return on Forms 1096 and 1099 for such year 
showing the name and address of the person to whom paid, the aggregate 
amount of such payments, specifically identified as an amount to which 
this paragraph applies, and such other information as is required by the 
form. A separate Form 1099 shall be filed with respect to each payee.
    (2) Amounts subject to this section. The amounts subject to 
reporting under subparagraph (1) of this paragraph include all amounts 
distributed or made available to which section 402(a) (relating to 
employees' trusts) or section 403(a) (relating to employee annuity 
plans) applies, whether or not such amounts are includible in gross 
income and whether or not attributable to contributions made while the 
individual to whom they relate was an owner-employee. However, amounts 
subject to reporting do not include any amounts distributed or made 
available by the trustee of any trust or the issuer of any contract 
under any plan with respect to which he has not received the 
notification provided in either subparagraph (3) of this paragraph or 
paragraph (b) of this section. Amounts distributed or made available 
under the plan include, for example, amounts received by the individual 
as loans on contracts purchased under the plan, and payments made to the 
individual by reason of the surrender of contracts purchased under the 
plan, whether or not prior to their maturity.
    (3) Notification by trustee. The trustee of any trust described in 
section 401(a) and exempt from tax under section 501(a) who receives 
notification from any owner-employee that contributions have been made 
to the trust on behalf of that owner-employee as an owner-employee shall 
notify in writing the issuer of any contract which is treated as an 
annuity contract under sections 401 through 404 purchased by the trust 
for the benefit of that owner-employee that such contributions have been 
made to such trust. Such notification shall be delivered to such issuer 
at the time such contract is purchased or within 90 days after the 
notification required by paragraph (b) of this section is received by 
the trustee, whichever is later. Only one such notification must be made 
with respect to any contract.
    (4) Record keeping. Any trustee, insurance company, or other person, 
which is referred to in subparagraph (1) of this paragraph and which is 
notified under section 6047(b) that contributions to the trust or under 
the plan have been made on behalf of an owner-employee shall maintain a 
record of such notification until all funds of the trust or under the 
plan on behalf of the owner-employee have been distributed.
    (5) Inclusion of other payments. The Form 1099 filed under this 
section by any person with respect to payments to another person during 
a calendar year may, at the election of the maker, include other 
payments made by him to such other person during such year which are 
required to be reported on Form 1099.
    (6) Time and place for filing. The return required under this 
section for any calendar year shall be filed after the close of that 
year and on or before February 28 of the following year with any of the 
Internal Revenue Service Centers, the addresses of which are listed in 
the instructions for Form 1096. For extensions of time for filing 
returns under this section, see Sec. 1.6081-1.
    (b) Notification by owner-employee. Any owner-employee on behalf of 
whom contributions are made to a trust described in section 401(a) and 
exempt under section 501(a) or under a plan described in section 403(a) 
shall notify in writing:
    (1) The trustee of such a trust, or
    (2) The issuer of any contract which is treated as an annuity 
contract under sections 401 through 404 under such plan,

that such contributions have been made to such trust or plan. Such 
notification shall be delivered to such trustee or such issuer during 
the first calendar year in which such contributions are made or on or 
before February 28 of the year following such year. Only one such 
notification must be made with respect to any contract or any trust.
    (c) Penalties. For civil penalty for failure to file a return 
required by this section, and for criminal penalty for furnishing 
fraudulent information

[[Page 650]]

under this section, see Secs. 301.6652-3 and 301.7207-1 respectively.
    (d) Permission to submit information required by Form 1099 on 
magnetic tape. For rules relating to permission to submit the 
information required by Form 1099 on magnetic tape or other media, see 
Sec. 1.9101-1.

[T.D. 6677, 28 FR 10147, Sept. 17, 1963, as amended by T.D. 6883, 31 FR 
6589, May 3, 1966; T.D. 7551, 43 FR 29292, July 7, 1978]



Sec. 1.6049-1  Returns of information as to interest paid in calendar years before 1983 and original issue discount includible in gross income for calendar 
          years before 1983.

    (a) Requirement of reporting--(1) In general. (i) Every person who 
makes payments of interest (as defined in Sec. 1.6049-2) aggregating $10 
or more to any other person during a calendar year before 1983 shall 
make an information return on Forms 1096 and 1099 for such calendar year 
showing the aggregate amount of such payments, the name and address of 
the person to whom paid, the total of such payments for all persons, and 
such other information as is required by the forms. In the case of 
interest paid during calendar years beginning with 1963 and continuing 
until such time as the Commissioner determines that it is feasible to 
aggregate payments on two or more accounts, insurance contracts, or 
investment certificates and this subdivision is amended accordingly to 
provide for reporting on an aggregate basis, the requirement of this 
subdivision for the filing of Form 1099 will be met if a person making 
payments of interest to another person on two or more such accounts, 
insurance contracts, or investment certificates, files a separate Form 
1099 with respect to each such account, contract, or certificate on 
which $10 or more of interest is paid to such other person during the 
calendar year. In the case of evidences of indebtedness described in 
section 6049(b)(1)(A), separate Forms 1099 may be filed as provided in 
the preceding sentence with respect to holdings in different issues. 
Thus, if a bank pays to a person interest totaling $15 on one account 
and $20 on a second account, it may file separate Forms 1099 with 
respect to the payments of $15 and $20. If the interest on the second 
account totaled $5 instead of $20, no return would be required with 
respect to the $5.
    (ii)(a) Every person which is a corporation that has outstanding any 
bond, debenture, note, or certificate or other evidence of indebtedness 
(referred to in this section and Sec. 1.6049-2 as an obligation) in 
``registered form'' (as defined in paragraph (d) of Sec. 1.6049-2) 
issued after May 27, 1969 (other than an obligation issued by a 
corporation pursuant to a written commitment which was binding on May 
27, 1969, and at all times thereafter) and on or before December 31, 
1982, as to which there is during any calendar year before 1983 an 
amount of original issue discount (as defined in Sec. 1.6049-2) 
aggregating $10 or more includible as interest in the gross income for 
such calendar year of any holder (determined, if semiannual record date 
reporting is being used under (b)(1) of this subdivision, by treating 
each holder as holding the obligation on every day it was outstanding 
during the calendar year), shall make an information return on Forms 
1096 and 1099-OID for such calendar year showing the following:
    (1) The name and address of each record holder for whom such 
aggregate amount of original issue discount is $10 or more and, for 
calendar years subsequent to 1972, the account, serial, or other 
identifying number of each obligation for which a return is being made.
    (2) The aggregate amount of original issue discount includible by 
each such holder for the period during the calendar year for which the 
return is made (or, if the aggregation rules of (b)(2) of this 
subdivision are being used, that he held the obligations). If however, 
the semiannual record date reporting rules are being used under (b)(1) 
of this subdivision, such aggregate amount shall be determined by 
treating each such record date holder as if he held each such obligation 
on every day it was outstanding during the calendar year. For purposes 
of this section, an obligation shall be considered to be outstanding 
from the date of original issue (as defined in paragraph (b)(3) of 
Sec. 1.1232-3). In the case of a time deposit open account arrangement 
to

[[Page 651]]

which paragraph (e)(5) of Sec. 1.1232-3A applies, for example, the 
amount to be shown under this subdivision (2) on the Forms 1096 and 
1099-OID is the sum (computed under such paragraph (e)(5)) of the 
amounts separately computed for each deposit made pursuant to the 
arrangement.
    (3) The issue price of the obligation (as defined in paragraph 
(b)(2) of Sec. 1.1232-3).
    (4) The stated redemption price of the obligation at maturity (as 
defined in paragraph (b)(1)(iii) of Sec. 1.1232-3).
    (5) The ratable monthly portion of original issue discount with 
respect to the obligation as defined in section 1232(a)(3)(A) 
(determined without regard to a reduction for a purchase allowance or 
whether the holder purchased at a premium).
    (6) The name and address of the person filing the form.
    (7) Such other information as is required by the form. And,
    (8) The sum, for all such holders of the aggregate amounts of such 
original issue discount includible for such calendar year for each such 
holder.
    (b) With respect to any obligation (other than an obligation to 
which paragraph (e) or (f) of Sec. 1.1232-3A applies (relating 
respectively to deposits in banks and similar financial institutions and 
to face-amount certificates)), the issuing corporation (or an agent 
acting on its behalf):
    (1) Shall be permitted (until this subdivision (1) is amended) to 
prepare a Form 1099-OID only for each person who is a holder of record 
of the obligation on the semiannual record date (if any) used by the 
corporation (or agent) for the payment of stated interest or, if there 
is no such date, the semiannual record dates shall be considered to be 
June 30, and December 31.
    (2) Shall be permitted to aggregate all original issue discount with 
respect to 2 or more obligations of the same issue for which the amounts 
specified in (a)(2), (a)(3), (a)(4), and (a)(5) of this subdivision are 
proportional and, therefore, may file one Form 1099-OID for all such 
obligations being aggregated, except that for calendar year 1971 this 
aggregation rule shall apply only where such specified amounts are 
identical. For an illustration of proportional aggregation, see example 
(4) in (d) of this subdivision.
    (c) In any case in which any one holder of a particular obligation 
for the calendar year held such obligation on more than one record date, 
only one Form 1099-OID shall be filed for that year with respect to that 
holder and that obligation. This provision applies only in the case in 
which any corporation prepares Forms 1099-OID in accordance with the 
record date reporting rule of (b)(1) of this subdivision.
    (d) The requirements of (a)(3), (a)(4), and (a)(5) of this 
subdivision shall not apply to a time deposit open account arrangement 
to which paragraph (e)(5) of Sec. 1.1232-3A applies, or to a face-amount 
certificate to which paragraph (f) of Sec. 1.1232-3A applies.
    (e) The provisions of this subdivision (ii) may be illustrated by 
the following examples:

    Example (1). On January 1, 1971, a corporation issued a 10-year bond 
in registered form which pays stated interest to the holder of record on 
June 30 and December 31. The bond has an issue price (as defined in 
paragraph (b)(2) of Sec. 1.1232-3) of $7,600, a stated redemption price 
(as defined in paragraph (b)(1) of Sec. 1.1232-3) at maturity of 
$10,000, and a ratable monthly portion of original issue discount (as 
defined in section 1232(a)(3)(A)) of $20. The corporation's books 
indicate that A was the holder of record on June 30, 1971, and B was the 
holder on December 31, 1971. Under (b)(1) of this subdivision, the 
corporation is permitted to file separate Forms 1099-OID for both A and 
B showing, on each form, all items required by (a) of this subdivision, 
including the total original issue discount of $240 for the entire 
calendar year (which includes original issue discount for all holders), 
the issue price of $7,600, the stated redemption price at maturity of 
$10,000, and the ratable monthly portion of original issue discount of 
$20.
    Example (2). Assume the facts stated in Example (1), except that A 
is recorded on the books of the corporation as holding the bond on June 
30 and December 31, 1971. The corporation shall complete and file only 
one Form 1099-OID for A.
    Example (3). Assume the facts stated in Example (1), except that the 
books of the corporation show that A held 2 of the bonds at all times in 
1971. The amounts of the items listed in (a)(2), (a)(3), (a)(4), and 
(a)(5) of this subdivision are identical for the 2 bonds. Under (b)(2) 
of this subdivision, the corporation is permitted to treat the 2 bonds 
as one for purposes of completing and filing a Form

[[Page 652]]

1099-OID for 1971 and aggregate the amounts being reported.
    Example (4). On January 1, 1972, a corporation issued to C 3 bonds 
in registered form of the same issue with stated redemption prices of 
$1,000, $5,000, and $10,000. The aggregate amounts of original issue 
discount for each year, the issue prices, the stated redemption prices, 
and the monthly portions of original issue discount are the same for 
each $1,000 of stated redemption price. Thus, all relevant amounts for 
any one bond are proportional to such amounts for any other bond. 
Therefore, so long as C holds the bonds the corporation shall be 
permitted to aggregate on one Form 1099-OID all original issue discount 
with respect to such obligations in accordance with (b)(2) of this 
subdivision.
    Example (5). On June 1, 1971, a corporation issues a 10-year bond to 
D, for which the ratable monthly portion of original issue discount is 
$10. For 1971, the corporation uses the record date reporting system 
permitted by (b)(1) of this subdivision. The corporation's books show 
that E held the bond on June 30, 1971, and that F held the bond on 
December 31, 1971, the dates on which the corporation pays stated 
interest on the bond. The corporation shall file a Form 1099-OID for 
both E and F showing on each form the aggregate amount of original issue 
discount includible for 1971 or $70 since E and F are each treated as if 
each held the bond every day it was outstanding and it was outstanding 7 
months in 1971. As to D, the corporation is not required to file a Form 
1099-OID since D did not hold the bond on either of the 2 record dates.

    (iii) Every person who during a calendar year before 1983 receives 
payments of interest as a nominee on behalf of another person 
aggregating $10 or more shall make an information return on Forms 1096 
and 1087 for such calendar year showing the aggregate amount of such 
interest, the name and address of the person on whose behalf received, 
the total of such interest received on behalf of all persons, and such 
other information as is required by the forms.
    (iv) Except with respect to an obligation to which paragraph (e) or 
(f) of Sec. 1.1232-3A applies (relating respectively to deposits in 
banks and similar financial institutions and to face-amount 
certificates), every person who is a nominee on behalf of the actual 
owner of an obligation as to which there is original issue discount 
aggregating $10 or more includible in the gross income of such owner 
during a calendar year before 1983, regardless of whether he receives a 
Form 1099-OID with respect to such discount, shall make an information 
return on Forms 1096 and 1087-OID for such calendar year showing in the 
manner prescribed on such forms the same information for the actual 
owner as is required or permitted in subdivision (ii) of this 
subparagraph for the record holder.
    (v) Notwithstanding the provisions of subdivisions (iii) and (iv) of 
this subparagraph, the filing of Form 1087 or Form 1087-OID is not 
required if:
    (a) The record owner is required to file a fiduciary return on Form 
1041 disclosing the name, address, and identifying number of the actual 
owner;
    (b) The record owner is a nominee of a banking institution or trust 
company exercising trust powers, and such banking institution or trust 
company is required to file a fiduciary return on Form 1041 disclosing 
the name, address, and identifying number of the actual owner; or
    (c) The record owner is a banking institution or trust company 
exercising trust powers, or a nominee thereof, and the actual owner is 
an organization exempt from taxation under section 501(a) for which such 
banking institution or trust company files an annual return,

but only if the name, address, and identifying number of the record 
owner are included on or with the Form 1041 fiduciary return filed for 
the estate or trust or the annual return filed for the tax exempt 
organization.
    (vi) Every person carrying on the banking business who makes 
payments of interest to another person (whether or not aggregating $10 
or more) during a calendar year with respect to a certificate of deposit 
issued in bearer form (other than such a certificate issued in an amount 
of $100,000 or more) shall make an information return on Forms 1096 and 
1099-BCD for such calendar year. The preceding sentence applies whether 
such payments are made during the term of the certificate or at its 
redemption. The information return required by this subdivision for the 
calendar year shall show the following:
    (a) The name, address, and taxpayer identification number of the 
person to whom the interest is paid;

[[Page 653]]

    (b) The aggregate amount of interest paid to such person during the 
calendar year with respect to the certificate of deposit;
    (c) The name, address, and taxpayer identification number of the 
person to whom the certificate was originally issued;
    (d) The portion of the interest with respect to the certificate 
reported under (b) that is attibutable to the current calendar year; and
    (e) Such other information as is required by the form.

The application of this subdivision (vi) may be illustrated by the 
following examples:

    Example (1). On June 1, 1978, X Bank issues a $1,000 bearer 
certificate of deposit to A. The certificate of deposit is not 
redeemable until May 31, 1979, and no interest is to be paid on the 
instrument until its redemption. On September 1, 1978. A transfers the 
bearer certificate to B and on May 31, 1979, B presents the certificate 
to X for payment and receives the $1,000 principal amount plus all the 
accrued interest. Under paragraph (a)(1)(vi) of this section, X is not 
required to make an information return for 1978 with respect to the 
bearer certificate of deposit because no interest is actually paid to a 
holder of the certificate during 1978. X is required to file an 
information return for 1979 with respect to the certificate, identifying 
B as the payee of the entire amount of the interest and A as the 
original purchaser of the certificate. (For rules relating to statements 
to be made to recipients of interest payments, see Sec. 1.6049-3.)
    Example (2). On July 1, 1978, Y Bank issues a $5,000 bearer 
certificate of deposit to C. The certificate of deposit is not 
redeemable until June 30, 1981, and no interest is to be paid on the 
instrument until its redemption. C holds the certificate for the entire 
term and on June 30, 1981, presents it to Y for payment and receives the 
$5,000 principal amount plus the accrued interest. Under paragraph 
(a)(1)(vi) of this section, Y is not required to file an information 
return for calendar years 1978, 1979, or 1980 with respect to this 
bearer certificate of deposit because no interest is acutally paid to C 
during those calendar years. Y is required to file an information return 
for 1981 with respect to the certificate identifying C as the payee of 
the entire amount of the interest and as the original purchaser. 
(Although Y is not required to file an information return for interest 
paid on the certificate until its redemption in 1981, C must report as 
income on his tax returns for 1978, 1979, 1980, and 1981 the ratable 
portion of such interest includible in income under section 1232.)

    (2) Definitions. (i) The term ``person'' when used in this section 
does not include the United States, a State, the District of Columbia, a 
foreign government, a political subdivision of a State or of a foreign 
government, or an international organization. Therefore, interest paid 
by or to one of these entities need not be reported. Similarly, original 
issue discount in respect of an obligation issued by or to one of these 
entities need not be reported.
    (ii) For purposes of this section, a person who receives interest 
shall be considered to have received it as a nominee if he is not the 
actual owner of such interest and if he was required under Sec. 1.6109-1 
to furnish his identifying number to the payer of the interest (or would 
have been so required if the total of such interest for the year had 
been $10 or more), and such number was (or would have been) required to 
be included on an information return filed by the payer with respect to 
the interest. However, a person shall not be considered to be a nominee 
as to any portion of an interest payment which is actually owned by 
another person whose name is also shown on the information return filed 
by the payer or nominee with respect to such interest payment. Thus, in 
the case of a savings account jointly owned by a husband and wife, the 
husband will not be considered as receiving any portion of the interest 
on that account as a nominee for his wife if his wife's name is included 
on the information return filed by the payer with respect to the 
interest.
    (iii) For purposes of this section, in the case of a person who 
receives a Form 1099-OID, the determination of who is considered a 
nominee shall be made in a manner consistent with the principles of 
subdivision (ii) of this subparagraph.
    (iv) For purposes of this section and Sec. 1.6049-3, the term ``Form 
1099-OID'' means the appropriate Form 1099 for original issue discount 
prescribed for the calendar year.
    (3) Determination of person to whom interest is paid or for whom it 
is received. For purposes of applying the provisions of this section, 
the person whose identifying number is required to be included by the 
payer of interest on an

[[Page 654]]

information return with respect to such interest shall be considered the 
person to whom the interest is paid. In the case of interest received by 
a nominee on behalf of another person, the person whose identifying 
number is required to be included on an information return made by the 
nominee with respect to such interest shall be considered the person on 
whose behalf such interest is received by the nominee. Thus, in the case 
of interest made payable to a person other than the record owner of the 
obligation with respect to which the interest is paid, the record owner 
of the obligation shall be considered the person to whom the interest is 
paid for purposes of applying the reporting requirements of this 
section, since his identifying number is required to be included on the 
information return filed under such section by the payer of the 
interest. Similarly, if a stockbroker receives interest on a bond held 
in street name for the joint account of a husband and wife, the interest 
is considered as received on behalf of the husband since his identifying 
number should be shown on the information return filed by the nominee 
under this section. Thus, if the wife has a separate account with the 
same stockbroker, any interest received by the stockbroker for her 
separate account should not be aggregated with the interest received for 
the joint account for purposes of information reporting. For regulations 
relating to the use of identifying numbers, see Sec. 1.6109-1.
    (4) Determination of person by whom original issue discount is 
includible or for whom a Form 1099-OID showing original issue discount 
is received. For purposes of applying the provisions of this section, 
the determination of the person by whom original issue discount is 
includible or for whom a Form 1099-OID is received shall be made in a 
manner consistent with the principles of subparagraph (3) of this 
paragraph.
    (5) Inclusion of other payments. The Form 1099 filed by any person 
with respect to payments of interest to another person during a calendar 
year prior to 1972 may, at the election of the maker, include payments 
other than interest made by him to such other person during such year 
which are required to be reported on Form 1099. Similarly, the Form 1087 
filed by a nominee with respect to payments of interest received by him 
on behalf of any other person during a calendar year prior to 1972 may 
include payments of dividends received by him on behalf of such person 
during such year which are required to be reported on Form 1087. 
However, except as provided in subparagraph (1)(ii) (b) of this 
paragraph, a separate Form 1087-OID or 1099-OID shall be filed for each 
obligation in respect of which original issue discount is required to be 
reported for any calendar year before 1983. In addition, any person 
required to report payments on both Forms 1087, 1087-OID, 1099, and 
1099-OID, for any calendar year may use one Form 1096 to summarize and 
transmit such forms.
    (b) When payment deemed made. For purposes of section 6049, interest 
is deemed to have been paid when it is credited or set apart to a person 
without any substantial limitation or restriction as to the time or 
manner of payment or condition upon which payment is to be made, and is 
made available to him so that it may be drawn at any time, and its 
receipt brought within his own control and disposition.
    (c) Time and place for filing--(1) Payment of interest. The returns 
required under this section for any calendar year for the payment of 
interest shall be filed after September 30 of such year, but not before 
the payer's final payment for the year, and on or before February 28 of 
the following year with any of the Internal Revenue Service Centers, the 
addresses of which are listed in the instructions for Form 1096. For 
extensions of time for filing returns under this section, see 
Sec. 1.6081-1.
    (2) Original issue discount. (i) The returns required under this 
section for any calendar year for original issue discount shall be filed 
after December 31 of such year and on or before February 28 of the 
following year with any of the Internal Revenue Service Centers, the 
addresses of which are listed in the instructions for Form 1096. For 
extensions of time for filing returns under this section, see 
Sec. 1.6081-1.
    (ii) The time for filing returns for the calendar year 1971 required 
under this section for original issue discount in

[[Page 655]]

respect of obligations to which paragraph (e) of Sec. 1.1232-3A applies 
(relating to deposits in banks and other similar financial institutions) 
is extended to April 15, 1972.
    (d) Penalty. For penalty for failure to file the statements required 
by this section, see Sec. 301.6652-1 of this chapter (Regulations on 
Procedure and Administration).
    (e) Permission to submit information required by Form 1087 or 1099 
on magnetic tape. For rules relating to permission to submit the 
information required by Form 1087 or 1099 on magnetic tape or other 
media, see Sec. 1.9101-1.

(Secs. 6049 (a), (b), and (d) and 7805 of the Internal Revenue Code of 
1954 (96 Stat. 592, 594; 26 U.S.C. 6049 (a), (b), and (d); 68A Stat. 
917, 26 U.S.C. 7805), and in sec. 309 of the Tax Equity and Fiscal 
Responsibility Act of 1982 (96 Stat. 591)

[T.D. 6628, 27 FR 12800, Dec. 28, 1962, as amended by T.D. 6879, 31 FR 
3494, Mar. 8, 1966; T.D. 6883, 31 FR 6589, May 8, 1966; T.D. 7000, 34 FR 
996, Jan. 23, 1969, T.D. 7154, 36 FR 25009, Dec. 28, 1971; 37 FR 527, 
Jan. 13, 1972; T.D. 7311, 39 FR 11881, Apr. 1, 1974; T.D. 7584, 44 FR 
1103, Jan. 4, 1979; T.D. 7881, 48 FR 12968, Mar. 28, 1983]



Sec. 1.6049-2  Interest and original issue discount subject to reporting in calendar years before 1983.

    (a) Interest in general. Except as provided in paragraph (b) of this 
section, the term ``interest'' when used in this section and 
Secs. 1.6049-1 and 1.6049-3 means:
    (1) Interest on evidences of indebtedness issued by a corporation in 
``registered form'' (as defined in paragraph (d) of this section). The 
phrase ``evidences of indebtedness'' includes bond, debentures, notes, 
certificates and other similar instruments regardless of how 
denominated.
    (2) Interest on deposits (except deposits evidenced by negotiable 
time certificates of deposit issued in an amount of $100,000 or more) 
paid (or credited) by persons carrying on the banking business. In the 
case of a certificate of deposit issued in bearer form, the term 
``interest'', as used in the preceding sentence and in paragraph 
(a)(1)(vi) of Sec. 1.6049-1, has the same meaning as in Sec. 1.61-7 
(regardless of whether taxable to the payee in the year the information 
return is made).
    (3) Amounts, whether or not designated as interest, paid (or 
credited) by mutual savings banks, savings and loan associations, 
building and loan associations, cooperative banks, homestead 
associations, credit unions, or similar organizations in respect of 
deposits, face amount certificates, investment certificates, or 
withdrawable or repurchasable shares. Thus, even though amounts paid or 
credited by such organizations with respect to deposits are designated 
as ``dividends'', such amounts are included in the definition of 
interest for purposes of section 6049.
    (4) Interest on amounts held by insurance companies under agreements 
to pay interest thereon. This includes interest paid by insurance 
companies with respect to policy ``dividend'' accumulations (see 
sections 61 and 451 and the regulations thereunder for rules as to when 
such interest is considered paid), and interest paid with respect to the 
proceeds of insurance policies left with the insurer. The so-called 
``interest element'' in the case of annuity or installment payments 
under life insurance or endowment contracts does not constitute interest 
for purposes of this section.
    (5) Interest on deposits with stockbrokers, bondbrokers, and other 
persons engaged in the business of dealing in securities.
    (b) Exceptions. The term ``interest'' when used in section 6049 does 
not include:
    (1) Interest on obligations described in section 103(a) (1) or (3), 
relating to certain governmental obligations.
    (2) Any payment by:
    (i) A foreign corporation,
    (ii) A nonresident alien individual, or
    (iii) A partnership composed in whole or in part of nonresident 
aliens,

if such corporation, individual, or partnership is not engaged in trade 
or business within the United States and does not have an office or 
place of business or a fiscal or paying agent in the United States.
    (3) Any interest which is subject to withholding under section 1441 
or 1442 (relating to withholding of tax on nonresident aliens and 
foreign corporations, respectively) by the person making the payment, or 
which would be so

[[Page 656]]

subject to withholding but for the provisions of a treaty, or for the 
fact that under section 861(a)(1) it is not from sources within the 
United States, or for the fact that withholding is not required by 
reason of paragraph (a) or (f) of Sec. 1.1441-4.
    (4) In the case of a nominee, any interest which he receives and 
with respect to which he is required to withhold under section 1441 or 
1442, or would be so required to withhold but for the provisions of a 
treaty, or for the fact that under section 861(a)(1) it is not from 
sources within the United States, or for the fact that withholding is 
not required by reason of paragraph (a) or (f) of Sec. 1.1441-4.
    (5) Any amount on which the person making the payment is required to 
deduct and withhold a tax under section 1451 (relating to tax-free 
covenant bonds), or would be so required but for section 1451(d) 
(relating to benefit of personal exemptions).
    (6) Any amount which is subject to reporting as original issue 
discount.
    (c) Original issue discount--(1) In general. The term ``original 
issue discount'' when used in this section and Secs. 1.6049-1 and 
1.6049-3 means original issue discount subject to the ratable inclusion 
rules of paragraph (a) of Sec. 1.1232-3A, determined without regard to 
any reduction by reason of a purchase allowance under paragraph 
(a)(2)(ii) of Sec. 1.1232-3A or a purchase at a premium as defined in 
paragraph (d)(2) of Sec. 1.1232-3.
    (2) Coordination with interest reporting. In the case of an 
obligation issued after May 27, 1969 (other than an obligation issued 
pursuant to a written commitment which was binding on May 27, 1969, and 
at all times thereafter) and on or before December 31, 1982, original 
issue discount which is not subject to the reporting requirements of 
paragrah (a)(1)(ii) of Sec. 1.6049-1 is interest within the meaning of 
pargraph (a) of this section. Original issue discount which is subject 
to the reporting requirements of paragraph (a)(1)(ii) of Sec. 1.6049-1 
is not interest within the meaning of paragraph (a) of this section.
    (3) Exceptions. Reporting of original issue discount is not required 
in respect of an obligation which paragraph (b)(2) of this section 
except from interest reporting.
    (d) Definition of ``in registered form.'' For purposes of 
Sec. 1.6049-1 and this section, an evidence of indebtedness is in 
registered form if it is registered as to both principal and interest 
(or, for purposes of reporting with respect to original issue discount, 
if it is registered as to principal) and if its transfer must be 
effected by the surrender of the old instrument and either the 
reissuance by the corporation of the old instrument to the new holder or 
the issuance by the corporation of a new instrument to the new holder.

(Secs. 6049 (a), (b), and (d) and 7805 of the Internal Revenue Code of 
1954 (96 Stat. 592, 594; 26 U.S.C. 6049 (a), (b), and (d); 68A Stat. 
917, 26 U.S.C. 7805), and in sec. 309 of the Tax Equity and Fiscal 
Responsibility Act of 1982 (96 Stat. 591)

[T.D. 6628, 27 FR 12801, Dec. 28, 1962, as amended by T.D. 6908, 31 FR 
16774, Dec. 31, 1966; T.D. 6966, 33 FR 11262, Aug. 8, 1968; T.D. 7154, 
36 FR 25011, Dec. 28, 1971; T.D. 7584, 44 FR 1104, Jan. 4, 1979; T.D. 
7881, 48 FR 12968, Mar. 28, 1983]



Sec. 1.6049-3  Statements to recipients of interest payments and holders of obligations to which there is attributed original issue discount in calendar years 
          before 1983.

    (a) Requirement. Every person filing (1) a Form 1099 or 1087 under 
section 6049(a)(1) and Sec. 1.6049-1 with respect to payments of 
interest or (2) a Form 1099-OID or 1087--OID with respect to original 
issue discount includible in gross income, shall furnish to the person 
whose identifying number is (or should be) shown on the form a written 
statement showing the information required by paragraph (b) of this 
section. With respect to interest, no statement is required to be 
furnished under section 6049(c) and this section to any person if the 
aggregate of the payments to (or received on behalf of) such person 
shown on the form would be less than $10. With respect to original issue 
discount, no statement is required to be furnished under section 6049(c) 
and this section to any person if the aggregate amount of original issue 
discount on the statement to such person with respect to the obligation 
would be less than $10. References in this section to Form 1099 shall be 
construed to include

[[Page 657]]

Form 1099-BCD, except that in applying paragraph (b)(2) of this section 
no information relating to the person to whom the certificate of deposit 
was originally issued shall be disclosed to another person to whom the 
payment of interest is made.
    (b) Form of statement--(1) In general. The written statement 
required to be furnished to a person under paragraph (a) of this section 
shall show:
    (i) With respect to payments of interest (as defined in Sec. 1.6049-
2) aggregating $10 or more to any person during a calendar year before 
1983:
    (a) The aggregate amount of payments shown on the Form 1099 or 1087 
as having been made to (or received on behalf of) such person and a 
legend stating that such amount is being reported to the Internal 
Revenue Service, and
    (b) The name and address of the person filing the form, and
    (ii) With respect to original issue discount (as defined in 
Sec. 1.6049-2) which would aggregate $10 or more on the statement to the 
holder during a calendar year after 1970 and prior to calendar year 
1983:
    (a) The aggregate amount or original issue discount includible by 
(or on behalf of) such person with respect to the obligation, as shown 
on Form 1099-OID or Form 1087-OID for such calendar year (determined by 
applying the rules of paragraph (a)(1)(ii) of Sec. 1.6049-1 for purposes 
of completing either form),
    (b) All other items shown on such Form 1099-OID or Form 1087-OID for 
such calendar year (so determined), and
    (c) A legend stating that such amount and such items are being 
reported to the Internal Revenue Service.
    (2) Special rule. The requirements of this section for the 
furnishing of a statement to any person, including the legend 
requirement of this paragraph, may be met by the furnishing to such 
person of a copy of the Form 1099, 1099-OID, 1087, or 1087-OID filed 
pursuant to Sec. 1.6049-1, or a reasonable facsimile thereof, in respect 
of such person. However, in the case of Form 1087-OID or 1099-OID, a 
copy of the instructions must also be sent to such person. A statement 
shall be considered to be furnished to a person within the meaning of 
this section if it is mailed to such person at his last known address.
    (c) Time for furnishing statements--(1) In general--(i) Payment of 
interest. Each statement required by this section to be furnished to any 
person for a calendar year for the payment of interest shall be 
furnished to such person after November 30 of the year and on or before 
January 31 of the following year, but no statement may be furnished 
before the final interest payment for the calendar year has been paid. 
However, the statement may be furnished at any time after April 30 if it 
is furnished with the final interest payment for the calendar year.
    (ii) Original issue discount. (a) Except as otherwise provided in 
this subdivision (ii), each statement required by this section to be 
furnished to any person for a calendar year for original issue discount 
shall be furnished to such person after December 31 of the year and on 
or before January 31 of the following year.
    (b) The time for furnishing each statement required by this section 
to be furnished to any person for the calendar year 1971 for original 
issue discount in respect of obligations to which paragraph (e) of 
Sec. 1.1232-3A applies (relating to deposits in banks and other similar 
financial institutions) is extended to March 15, 1972.
    (c) The time for furnishing each statement required by this section 
to be furnished by a nominee to any person for the calendar year 1971 
for original issue discount is extended to February 28, 1972.
    (2) Extensions of time. For good cause shown upon written 
application of the person required to furnish statements under this 
section, the district director may grant an extension of time not 
exceeding 30 days in which to furnish such statements. The application 
shall be addressed to the district director with whom the income tax 
returns of the applicant are filed and shall contain a full recital of 
the reasons for requesting the extension to aid the district director in 
determining the period of the extension, if any, which will be granted. 
Such a request in the form of a letter to the district director signed 
by the applicant will suffice as an application. The application shall 
be filed

[[Page 658]]

on or before the date prescribed in subparagraph (1) of this paragraph 
for furnishing the statements required by this section.
    (3) Last day for furnishing statement. For provisions relating to 
the time for performance of an act when the last day prescribed for 
performance falls on Saturday, Sunday, or a legal holiday, see 
Sec. 301.7503-1 of this chapter (Regulations on Procedure and 
Administration).
    (d) Penalty. For provisions relating to the penalty provided for 
failure to furnish a statement under this section see Sec. 301.6678-1 of 
this chapter (Regulations on Procedure and Administration).

(Secs. 6049 (a), (b), and (d) and 7805 of the Internal Revenue Code of 
1954 (96 Stat. 592, 594; 26 U.S.C. 6049 (a), (b), and (d); 68A Stat. 
917, 26 U.S.C. 7805), and in sec. 309 of the Tax Equity and Fiscal 
Responsibility Act of 1982 (96 Stat. 591)

[T.D. 6628, 27 FR 12801, Dec. 28, 1962, as amended by T.D. 7154, 36 FR 
25011, Dec. 28, 1971; 37 FR 527, Jan. 13, 1972; T.D. 7584, 44 FR 1104, 
Jan. 4, 1979; T.D. 7624, 44 FR 31012, May 30, 1979; T.D. 7881, 48 FR 
12968, Mar. 28, 1983]



Sec. 1.6049-4  Return of information as to interest paid and original issue discount includible in gross income after December 31, 1982.

    (a) Requirement of reporting--(1) In general. Except as provided in 
paragraph (c) of this section, an information return shall be made by 
the persons described in paragraph (a)(2) of this section with respect 
to any payment of interest (as defined in Sec. 1.6049-5) after December 
31, 1982. Such return shall contain the information required in 
paragraph (b) of this section.
    (2) Persons required to make reports. The persons required to make 
an information return under section 6049(a) and this section are:
    (i) Every person who is required to deduct and withhold the tax 
imposed by section 3451;
    (ii) Every person who makes a payment of interest aggregating $10 or 
more to any other person during a calendar year; and
    (iii) Every person who collects (or otherwise acts as a middleman 
(as defined in paragraph (f)(4) of this section) with respect to) 
payments of interest on behalf of another person aggregating $10 or more 
during a calendar year.
    (b) Information to be reported--(1) Interest payments. Except as 
provided in paragraph (b)(3) and (b)(5) of this section, in the case of 
a payment of interest other than original issue discount treated as 
interest under Sec. 1.6049-5(c), an information return on Forms 1096 and 
1099 shall be made for the calendar year showing the aggregate amount of 
the payments, the name, address, and taxpayer identification number of 
the person to whom paid, the amount of tax deducted and withheld under 
section 3451 from the payments, and such other information as is 
required by the forms. An information return is required if the 
aggregate amount of interest is $10 or more unless the tax imposed by 
section 3451 is required to be withheld. In such event, the amount 
required to be shown is the amount subject to withholding even if such 
amount is less than $10.
    (2) Original issue discount.  Except as provided in paragraph (b)(3) 
and (b)(5) of this section, in the case of original issue discount, an 
information return on Forms 1096 and 1099 shall be made for each 
calendar year of any holder of an obligation as to which there is 
original issue discount includible in gross income aggregating $10 or 
more. For calendar years before 1992, semiannual record date reporting 
under Sec. 1.6049-1(a)(1)(ii)(b)(1) may be used, and if it is used, the 
original issue discount includible in gross income is determined by 
treating each holder as holding the obligation on every day it was 
outstanding during the calendar year. An information return shall be 
made, however, in any case in which an amount of tax is required to be 
deducted and withheld under section 3451. In such case, the amount 
required to be reported is the amount subject to withholding even if the 
amount of original issue discount includible in gross income is less 
than $10. With respect to an obligation described in Sec. 1.1232-3A (e) 
or (f) (relating respectively to deposits in banks and similar financial 
institutions and to face-amount certificates), Sec. 1.6049-
1(a)(1)(ii)(d) and the last sentence of Sec. 1.6049-1(a)(1)(ii)(a)(2) 
shall apply. The information return shall show:
    (i) The name, address, and taxpayer identification number of each 
record

[[Page 659]]

holder for whom an amount of original issue discount is includible in 
gross income;
    (ii) The account, serial, or other identifying number of each 
obligation with respect to which a return is being made;
    (iii) The aggregate amount of original issue discount includible in 
the gross income of each holder for the period during the calendar year 
for which the return is made (or, if the aggregation rules of 
Sec. 1.6049-1(a)(1)(ii)(b)(2) are being used, the aggregate amount or 
original issue discount for the period such holder held the 
obligations). For calendar years before 1992, semiannual record date 
reporting under Sec. 1.6049-1(a)(1)(ii)(b)(1) may be used, and if it is 
used, the original issue discount includible in gross income is 
determined by treating each holder as holding the obligation on every 
day it was outstanding during the calendar year. For purposes of this 
section, an obligation shall be considered to be outstanding from the 
date of original issue (as defined in Sec. 1.1232-3(b)(3));
    (iv) The amount of tax withheld under section 3451, if any;
    (v) The name and address of the person filing the return: and
    (vi) Such other information as is required by the forms.

    Section 1.6049-1(a)(1)(ii)(b)(2) and, for calendar years before 
1992, Sec. 1.6049-1(a)(1)(ii) (b)(1), and (c), apply for purposes of 
this paragraph.
    (3) Returns made by middleman. Except as provided in paragraph 
(b)(5) of this section, every person acting as a middleman (as defined 
in paragraph (f)(4) of this section) shall make an information return on 
Forms 1096 and 1099 for the calendar year. In the case of interest 
payments (other than original issue discount), the return shall show the 
aggregate amount of such interest, the name, address, and taxpayer 
identification number of the person on whose behalf received, the amount 
of tax withheld under section 3451, if any, and such other information 
as is required by the forms. In the case of original issue discount, the 
return shall show the information required to be shown for the actual 
owner, as described in paragraph (b)(2) of this section. A middleman 
shall make an information return regardless of whether the middleman 
receives a Form 1099. A middleman shall not be required to make an 
information return if the payments of interest aggregate less than $10 
unless such amount is subject to withholding under section 3451. If an 
amount of tax is required to be deducted and withheld under section 
3451, a return shall be made irrespective of the amount of the payment 
and irrespective of whether the payment is made to an exempt recipient 
described in paragraph (c)(1)(ii) of this section.
    (4) Returns made with respect to payments on certificates of deposit 
issued in bearer form. Except as provided in paragraph (b)(5) of this 
section, every person carrying on the banking business who makes 
payments of interest to another person (whether or not aggregating $10 
or more) during a calendar year with respect to a certificate of deposit 
issued in bearer form shall make an information return on Forms 1096 and 
1099. The information return shall show the information required in 
Sec. 1.6049-1(a)(1)(vi) (a) through (e) inclusive and a statement as to 
the amount of tax withheld under section 3451, if any.
    (5) Interest payments to Canadian nonresident alien individuals--(i) 
General rule. In the case of interest paid to a Canadian nonresident 
alien individual (as described in Sec. 1.6049-8(a)), the payor or 
middleman shall make an information return on Form 1042-S for the 
calendar year in which the interest is paid. The payor or middleman 
shall prepare and transmit Form 1042-S at the time and in the manner 
prescribed by section 1461 and the regulations under that section and by 
the form and its accompanying instructions. See Sec. 1.6049-6(e)(4) for 
furnishing a copy of the Form 1042-S to the payee. To determine whether 
an information return is required for original issue discount, see 
Secs. 1.6049-5(c) and 1.6049-8(a).
    (ii) Effective date. Paragraph (b)(5)(i) of this section shall be 
effective for payments made after December 31, 1996 with respect to a 
Form W-8 (Certificate of Foreign Status) furnished to the payor or 
middleman after that date.
    (c) Information returns not required--(1) Payment to exempt 
recipient. (i) In the case of a payment to a person described in 
paragraph (c)(1)(ii) of this section,

[[Page 660]]

no return shall be required to be made unless such payment is made by a 
person required to make a return by paragraph (a)(2)(i) of this section 
(relating to persons required to withhold tax). Thus, a person who 
withholds tax under section 3451 is required to make an information 
return regardless of whether the payee is an exempt recipient described 
in paragraph (c)(1)(ii) of this section.
    (ii) An information return shall not be required with respect to 
payments made to:
    (A) A corporation as defined in section 7701(a)(3), whether domestic 
or foreign,
    (B) An organization exempt from taxation under section 501(a) or an 
individual retirement plan,
    (C) The United States or a State, the District of Columbia, a 
possession of the United States, or a political subdivision or a wholly-
owned agency or instrumentality of any one or more of the foregoing,
    (D) A foreign government, a political subdivision thereof, or an 
international organization,
    (E) A foreign central bank of issue (as defined in Sec. 1.895-
1(b)(i) to be a bank which is by law or government sanction the 
principal authority, other than the government itself, issuing 
instruments intended to circulate as currency),
    (F) A dealer in securities or commodities required to register as 
such under the laws of the United States or a State,
    (G) A real estate investment trust (as defined in section 856),
    (H) An entity registered at all times during the taxable year under 
the Investment Company Act of 1940,
    (I) A common trust fund (as defined in section 584(a)),
    (J) A nominee or custodian,
    (K) A financial institution such as a mutual savings bank, savings 
and loan association, building and loan association, cooperative bank, 
homestead association, credit union, industrial loan association or 
bank, or other similar organization,
    (L) A broker as defined in section 6045(c), or
    (M) Any trust which:
    (1) Is exempt from tax under section 664(c) (i.e., a charitable 
remainder annuity trust or a charitable remainder unitrust), or
    (2) Is described in section 4947(a)(1) (relating to a certain 
charitable trust).

A payor who may treat any person as an exempt recipient for withholding 
purposes as described in Sec. 31.3452(c)-1 (b) through (p) without 
requiring such person to file an exemption certificate may treat the 
persons listed in this subdivision (ii)(A) through (M) as an exempt 
recipient for information reporting purposes. A payor shall make an 
information return with respect to an individual who files an exemption 
certificate to be exempt from withholding under section 3451. The 
individual is not exempt for reporting purposes. A payor shall make an 
information return with respect to a trust which is an exempt individual 
under section 3452(b)(4) and Sec. 31.3452(b)-1(d). See Sec. 1.6049-
4(c)(2) providing that the trust satisfies the reporting requirements 
under section 6049 if the trust files a Form 1041 and furnishes a 
beneficiary a Form K-1 containing the information required to be shown 
on the form, including amounts withheld under section 3451.
    (iii) The application of this paragraph (c) may be illustrated by 
the following examples:

    Example (1). In 1980, Corporation Y issued 10-year debentures with 9 
percent interest coupons payable semiannually on June 30 and December 
31. Individual F, who is exempt from withholding under section 3451, 
presents a coupon for payment at Bank M on the interest payment date. 
Bank M transmits the coupon to Bank N, which in turn presents the coupon 
to Corporation Y for payment. Bank M is required to make an information 
return with respect to the payment to individual F under Sec. 1.6049-
4(a)(2)(iii). Bank N is not required to make an information return with 
respect to the payment to Bank M, and Corporation Y is not required to 
make an information return with respect to the payment to Bank N because 
Banks M and N are exempt recipients described in Sec. 1.6049-
4(c)(1)(ii)(K).
    Example (2). Broker E acquires a bond issued in 1980 by the United 
States Treasury through the Bureau of Public Debt. Broker E sells 
interests in the bond to the public after December 31, 1982. A purchaser 
may acquire an interest in any interest payment falling

[[Page 661]]

due under the bond or an interest in the principal of the bond. The bond 
is held by Custodian H for the benefit of the persons acquiring these 
interests. Custodian H files an exemption certificate claiming exemption 
from withholding under Sec. 31.3452(c)-1(n). On receipt of interest and 
principal payments under the bond, Custodian H transfers the amount 
received to the person whose ownership interest corresponds to the 
component giving rise to the payment. Under section 1232B, each bond 
component is treated as a bond issued with original issue discount equal 
to the excess of the stated redemption price at maturity over the 
purchase price of the bond component. Accordingly, H is required to make 
an information return setting forth the information required in 
Sec. 1.6049-4(b)(2) with respect to each holder of an interest in the 
bond. The Bureau of Public Debt is not required to make an information 
return since it made payment to Custodian H who is an exempt recipient 
described in Sec. 1.6049-4(c)(1)(ii)(J).
    Example (3). On January 1, 1984, the United States Treasury through 
the Bureau of Public Debt issues $1 million of obligations with a 
maturity of 1 year or less. The obligations are represented by entries 
on records maintained through Federal Reserve banks and branches for the 
account of member banks of the Federal Reserve system. Bank O, which is 
a member bank of the Federal Reserve system, tenders an offer for 
$100,000 of the obligations. The Federal Reserve opens an account for 
Bank O showing that it owns $100,000 of the obligations. When Bank O 
sells any of these obligations to an investor, it maintains a book entry 
account showing such investor's ownership. Upon maturity, the United 
States Treasury credits the amount due the Federal Reserve bank holding 
an interest in the obligation. The Federal Reserve bank in turn credits 
the account of Bank O, which then credits the accounts of the persons 
owning the obligations. Bank O must make the information return required 
under section 6049 and this section with respect to the payments made by 
it to persons not described in Sec. 1.6049-4(c)(1). Thus, if, at 
maturity of the obligation, Bank O held an obligation on its books for 
D, an individual, Bank O is required to make an information return with 
respect to the payment made to individual D. Neither the Bureau of 
Public Debt nor the Federal Reserve bank is required to make an 
information return since such payments were made to persons described in 
Sec. 1.6049-4(c)(1)(ii).
    Example (4). Assume the same facts as example (3) except a brokerage 
house buys the $100,000 of obligations through the Federal Reserve bank. 
The Federal Reserve maintains a book entry account showing that a member 
bank holds $100,000 of obligations for a brokerage house. The brokerage 
house sells these obligations to its customers. The brokerage house 
holds $50,000 of the obligations for a pension trust, $30,000 of the 
obligations for Corporation Z, and $10,000 of the obligations each for 
Individuals I and J. The brokerage house is required to make an 
information return with respect to the payments of interest at maturity 
on the obligations it holds for its customers who are not described in 
Sec. 1.6049-4(c)(1). Thus, the brokerage house is required to make an 
information return with respect to the payments made to Individuals I 
and J. No information return is required with respect to the payments 
made to the pension trust or Corporation Z because such persons are 
exempt recipients described in Sec. 1.6049-4(c)(1)(ii). The Bureau of 
Public Debt and the Federal Reserve bank are not required to make an 
information return because they made payment to a person described in 
Sec. 1.6049-4(c)(1)(ii).

    (2) Payments by certain middlemen. An information return shall not 
be required if:
    (i) The record owner is required to file a fiduciary return on Form 
1041 disclosing the name, address, and taxpayer identification number of 
the actual owner, and furnishes Form K-1 to each actual owner containing 
the information required to be shown on the form, including amounts 
withheld under section 3451;
    (ii) The record owner is a nominee of a banking institution or trust 
company exercising trust powers, and such banking institution or trust 
company is required to file a fiduciary return on Form 1041 disclosing 
the name, address, and identifying number of the actual owner, and 
furnishes Form K-1 to each actual owner containing the information 
required to be shown on the form, including amounts withheld under 
section 3451;
    (iii) The record owner is a banking institution or trust company 
exercising trust powers, or a nominee thereof, and the actual owner is 
an organization exempt from taxation under section 501(a) for which such 
banking institution or trust company files an annual return, but only if 
the name, address, and taxpayer identification number of the record 
owner is included on or with the Form 1041 fiduciary return filed for 
the estate or trust or the annual return filed for the tax exempt 
organization.
    (d) Special rules--(1) Aggregation of payments. For purposes of 
paragraph (b) of this section, until such time as the

[[Page 662]]

Commissioner determines that it is feasible to require aggregation of 
payments on two or more accounts, insurance contracts, or investment 
certificates, and, until this section is amended accordingly to provide 
for reporting on an aggregate basis, the requirement for filing Form 
1099 under this section will be met if a person making payments of 
interest subject to reporting files a separate Form 1099 with respect to 
each account, insurance contract, or investment certificate. In the case 
of obligations described in section 6049(b)(1)(A), separate Forms 1099 
may be filed as provided in the preceding sentence with respect to 
holdings in different issues.
    (2) Treatment of original issue discount. The amount of original 
issue discount subject to reporting under section 6049 shall be the 
amount of original issue discount includible in the gross income of any 
holder that is treated as paid under Sec. 1.6049-5(c).
    (3) Conversion of amounts paid in foreign currency into United 
States dollars--(i) Convertible foreign currency. In the event that an 
amount of interest or an amount of original issue discount on an 
obligation with a maturity at issue of not more than 1 year is paid or 
credited in convertible foreign currency, the amount shall be converted 
into United States dollars, and the amount subject to reporting under 
section 6049 shall be computed on such United States dollar amount, on 
the date of the payment or crediting. For this purpose, the term 
``convertible foreign currency'' means currency of a foreign country 
that either is readily convertible into United States dollars or is of a 
type the Secretary determines is to be treated as a convertible foreign 
currency from the date specified in a notice of such determination 
published in the Federal Register.
    (ii) Nonconvertible foreign currency. [Reserved]
    (iii) Original issue discount on foreign currency obligations with a 
maturity at issue of more than 1 year. [Reserved]
    (4) Determination of person to whom interest or original issue 
discount is paid or for whom it is received. Section 1.6049-1(a)(3) and 
(4) shall apply with respect to payments of interest and original issue 
discount after December 31, 1982.
    (5) Payments by governmental units. In the case of payments made by 
any governmental unit or any agency or instrumentality thereof, the 
officer or employee having control of the payment of interest or 
original issue discount (or the person appropriately designated for 
purposes of this section) shall make the returns and statements required 
under section 6049.
    (6) When payment deemed made--(i) In general. Except as provided in 
paragraph (d)(6)(ii) of this section, for purposes of section 6049, 
interest is deemed to have been paid when it is credited or set apart to 
a person without any substantial limitation or restriction as to the 
time or manner of payment or condition upon which payment is to be made, 
and is made available to him so that it may be drawn at any time, and 
its receipt brought within his own control and disposition.
    (ii) Instruments paid on presentment or demand. In the case of a 
payment made on an obligation described in paragraph (e)(2) of this 
section (relating to transactional reporting), interest is deemed to 
have been paid at the time the obligation is presented for payment. For 
example, interest represented by a coupon detached from a bond is 
considered paid for purposes of section 6049 when the coupon is 
presented for payment.
    (7) Permission to submit information required by Form 1099 on 
magnetic tape. For rules relating to permission to submit the 
information required by Form 1099 on magnetic tape or other media, see 
Sec. 1.9101-1.
    (8) Obligations that are not exempt from taxation. When an issuer of 
an obligation that is not exempt from taxation receives an envelope or 
``shell'', signed by the payee, stating that interest on the obligation 
is exempt from taxation under section 103(a) (as described in 
Sec. 1.6049-5(b)(1)(ii)), the issuer shall make an information return 
under section 6049. The information return shall show the name, address, 
and taxpayer identification number of the person who signed the 
statement claiming that interest on the obligation is exempt from 
taxation, the amount of interest paid, and such other information as is 
required by the form. An information return is required regardless of 
the amount of interest. The issuer shall

[[Page 663]]

also furnish a written statement to such person showing the information 
required by Sec. 1.6049-6(b).
    (9) Savings bonds--(i) In general. A person who makes payment on a 
United States savings bond when the bond is presented for payment shall 
report the difference between the amount to be paid and the amount paid 
for the bond. The amount subject to reporting shall not be reduced to 
take into account:
    (A) Amounts previously included in the income of a holder as a 
result of an election under section 454 to include annually the increase 
in the redemption price of the bond; or
    (B) Amounts accrued prior to transfer of the bond where the bond has 
been reissued in the name of the person presenting the bond for payment.

With respect to a savings bond that is reissued in another person's 
name, the amount subject to reporting when the bond is reissued is the 
amount of interest that has accrued. With respect to a savings bond that 
is exchanged in a tax-deferred transaction (as described in section 
1037), the amount subject to reporting is the amount of cash paid to the 
holder at the time of the transaction.
    (ii) Examples. The application of the provisions of paragraph 
(d)(10)(i) of this section may be illustrated by the following examples:

    Example (1). On June 10, 1943, A purchases a $50 Series E savings 
bond. The amount paid for the savings bond is $37.50. A elects under 
section 454 to include the increase in the redemption price of the bond 
annually in income. A presents the bond to Bank M to be cashed on July 
1, 1983. The amount to be paid on the bond on that date is $204.96. Bank 
M is required to make an information return under section 6049 showing 
that it paid $167.46 (the difference between $204.96 and $37.50) of 
interest, without regard to A's election to include annually the 
increase in the redemption price of the bond.
    Example (2). On December 1, 1970, B purchases a $500 Series E 
savings bond. The amount paid for the bond is $375. On August 1, 1984, 
the bond is reissued by the Bureau of Public Debt by deleting B's name 
and inserting the name of B's child. At the time of reissue, the 
redemption value of the bond is $1,015.80. The accrued interest is 
$640.80 (the difference between $1,015.80 and $375). The reissue is a 
taxable transaction, and B must include in income the accrued interest 
at the time of reissue. The Bureau of Public Debt is required to make an 
information return under section 6049 showing that it paid $640.80 of 
interest to B.
    Example (3). Assume the same facts as in example (2) except that B 
exchanges the bond for a Series HH savings bond in the amount of $1,000 
issued in B's name. The exchange is tax-deferred under section 1037. The 
Bureau of Public Debt stamps a legend on the bond stating that interest 
of $625 has been deferred. The amount of $15.80 is paid to B. The Bureau 
of the Public Debt must make an informatiion return showing that it paid 
$15.80 of interest to B.
    Example (4). Assume the same facts as in example (3) except that the 
exchange is not a tax-deferred exchange. The Bureau of the Public Debt 
must make an information return showing that it paid $640.80 of interest 
to B.

    (e) Transactional reporting--(1) In general. An information return 
required to be made under paragraph (b) of this section may be made on a 
transaction-by-transaction basis, rather than on an annual aggregation 
basis, if payment described in paragraph (e)(2) of this section is made 
by a person described in paragraph (e)(3) of this section.
    (2) Payments subject to transactional reporting. An information 
return may be made on a transactional basis if payment is made on:
    (i) A United States savings bond,
    (ii) An interest coupon (but see Sec. 1.6049-5(b) which provides 
that no information return is required to be made with respect to an 
interest coupon that is exempt from taxation),
    (iii) A discount obligation having a maturity at issue of 1 year or 
less, including commercial paper and short-term government obligations 
defined in section 1232(a)(3), and
    (iv) Any obligation similar to those described in subdivisions (i) 
through (iii).

The information return with respect to payments on the types of 
obligations described in this paragraph shall be made on Form 1099-INT. 
A payor may include all interest paid in one transaction on one 
information return, irrespective of whether obligations of different 
issuers are paid as part of the transaction.
    (3) Persons subject to transactional reporting. A person may make a 
return on a transactional basis if the person is:

[[Page 664]]

    (i) A middleman (as defined in paragraph (f)(4) of this section) who 
is required to make an information return under paragraph (b)(3) of this 
section with respect to any payment described in paragraph (e)(2) of 
this section, or
    (ii) A Federal agency making payments on a United States savings 
bond.
    (4) Transaction defined. For purposes of this paragraph (e), a 
transaction means a payment at one time on one or more obligations. For 
example, if an individual who is exempt from withholding under section 
3451 presents at one time five Series EE bonds on each of which $3 of 
interest has accrued, $15 of interest will be paid as part of the 
transaction. Accordingly, an information return is required under 
Sec. 1.6049-4 (a)(2)(iii) because the interest paid in the transaction 
exceeds $10. If only three of the savings bonds were presented, however, 
no return would be required even if the remaining two bonds were 
redeemed the following day. See paragraph (a)(2)(i) of this section for 
the requirement that an information return be made if any amount of tax 
is withheld under section 3451.
    (5) Information required. The information return for any transaction 
under paragraph (e) of this section shall show the following:
    (i) The name, address, and taxpayer identification number of the 
person to whom the interest is paid;
    (ii) The name and address of the person filing the form;
    (iii) The amount of interest paid;
    (iv) The amount of tax withheld under section 3451, if any; and
    (v) Such other information as is required by the form.
    (f) Definitions. For purposes of section 6049, this section, and 
Secs. 1.6049-5 and 1.6049-6:
    (1) Person. The term person includes any governmental unit, 
international organization, and any agency or instrumentality thereof. 
Therefore, interest paid by one of these entities must be reported 
unless one of the exceptions under section 6049 applies.
    (2) Natural person. The term natural person means any individual, 
but shall not include a partnership (whether of not composed entirely of 
individuals), a trust, or an estate.
    (3) Obligation. The term obligation includes bonds, debentures, 
notes, certificates, and other evidences of indebtedness regardless of 
how denominated.
    (4) Middleman--(i) In general. The term middleman means any person. 
including a financial institution as described in paragraph (c)(1)(K) of 
this section, a broker as defined in section 6045(c), or a nominee, who 
makes payment of interest for, or collects interest on behalf of, 
another person, or otherwise acts in a capacity as intermediary between 
a payor and a payee. For example, a person (other than an issuer of an 
obligation) who makes payment on an interest coupon of the obligation to 
another person is a middleman, irrespective of whether such person 
purchases the coupon for his own account, accepts the coupon as agent 
for the payee, or otherwise deals with the coupon. The term 
``middleman'' also includes a trustee, including a corporate trustee of 
a trust where the trust is the payee. See Sec. 1.6049-4(c)(2) providing 
that the trustee does not have to make an information return on Form 
1099 to a beneficiary if the trustee is required to file Form 1041 and 
furnishes Form K-1 to the beneficiary showing the information required 
to be shown on the form, including amounts withheld under section 3451. 
A person shall not be considered to be a middleman as to any portion of 
an interest payment which is actually owned by another person whose name 
is also shown on the information return filed with respect to such 
interest payment. Thus, in the case of a savings account jointly owned 
by a husband and wife, the husband will not be considered as acting in 
the capacity of a middleman with respect to his wife if his wife's name 
is included on the information return filed by the payor with respect to 
the interest.
    (ii) Example. The application of the provisions of paragraph (f)(4) 
of this section may be illustrated by the following example:

    Example. In January, 1984, Broker B purchases on behalf of its 
customer, Individual A, and obligation issued by partnership RR in a 
public offering on that date. Broker B holds the obligation for A 
throughout 1984. The obligation bears no stated interest and matures in 
January 1986, Broker B is a middleman with respect to the obligation of 
RR

[[Page 665]]

that it holds for A. Broker B is required to make an information return 
showing the amount of original issue treated as paid to A during 1984 
under Sec. 1.6049-5(c).

    (g) Time and place for filling a return for the payment of 
interest--(1) Annual return. Except as provided in paragraph (g)(2) of 
this section, the returns required under this section for any calendar 
year for the payment of interest shall be filed after September 30 of 
such year, but not before the payor's final payment to the payee for the 
year, and on or before February 28 of the following year. Such returns 
shall be filed with the appropriate Internal Revenue Service Center, the 
address of which is listed in the instructions for Form 1096. For 
extensions of time for filing returns under this section, see 
Sec. 1.6081-1.
    (2) Transactional return. In the case of a return under paragraph 
(e) of this section, relating to returns on a transactional basis, such 
return shall be filed at any time but in no event later than February 28 
of the year following the calendar year in which the interest was paid. 
The return shall be filed with the appropriate Internal Revenue Service 
Center, the address of which is listed in the instructions for Form 
1096. For extensions of time for filing returns under this section, see 
Sec. 1.6081-1.

[T.D. 7881, 48 FR 12968, Mar. 28, 1983, as amended by T.D. 8366, 56 FR 
49518, Sept. 30, 1991; T.D. 8664, 61 FR 17573, Apr. 22, 1996]



Sec. 1.6049-5  Interest and original issue discount subject to reporting after December 31, 1982.

    (a) Interest subject to reporting requirement. For purposes of 
Secs. 1.6049-4, 1.6049-6 and this section, except as provided in 
paragraph (b) of this section, the term ``interest'' means:
    (1) Interest on an obligation:
    (i) In registered form (as defined in Sec. 5f.103-1(c)), or
    (ii) Of a type offered to the public. Principles consistent with 
Sec. 5f.163-1 shall be applied to determine whether an obligation is of 
a type offered to the public.
    (2) Interest on deposits with persons carrying on the banking 
business. Such term shall include deposits evidenced by time 
certificates of deposit issued in any amount whether negotiable or non-
negotiable. The term ``interest'' includes payments to a mortgage escrow 
account and amounts paid with respect to repurchase agreements and 
banker's acceptances. Property which the payee receives from the payor 
as interest (or in lieu of a cash payment of interest) shall be interest 
for purposes of section 6049. The amount subject to reporting is the 
fair market value of such property.
    (3) Amounts, whether or not designated as interest, paid or credited 
by mutual savings banks, savings and loan associations, building and 
loan associations, cooperative banks, homestead associations, credit 
unions, industrial loan associations or banks, or similar organizations, 
in respect of deposits, face amount certificates, investment 
certificates, or withdrawable or repurchasable shares. Thus, even though 
amounts paid or credited by such organizations with respect to deposits 
are designated as ``dividends'', such amounts are included in the 
definition of interest for purposes of section 6049. The term 
``interest'' includes payments to a mortgage escrow account and amounts 
paid with respect to repurchase agreements. Property which the payee 
receives from the payor as interest (or in lieu of a cash payment of 
interest) is ``interest'' for purposes of section 6049. The fair market 
value of such property is the amount subject ot reporting.
    (4) Interest on amounts held by insurance companies under an 
agreement to pay interest thereon. Any increment in value of ``advance 
premiums'', ``prepaid premiums'', or ``premium deposit funds'' which is 
applied to the payment of premiums due on insurance policies, or made 
available for withdrawal by the policyholder, shall be considered 
interest subject to reporting. Interest that an insurance company pays 
pursuant to an agreement with the policyholder to a beneficiary because 
the payment due has been delayed is interest subject to reporting. 
Interest subject to reporting also includes interest paid by insurance 
companies with respect to policy ``dividend'' accumulations (see 
sections 61 and 451 and the regulations thereunder for rules as to when 
such interest is considered paid), and interest paid with respect to the

[[Page 666]]

proceeds of insurance policies left with the insurer. The so-called 
``interest element'' in the case of annuity or installment payments 
under life insurance or endowment contracts does not constitute interest 
for purposes of section 6049.
    (5) Interest on deposits with brokers as defined in section 6045(c) 
and the regulations thereunder. Any payment made in lieu of interest to 
a person whose obligation has been borrowed in connection with a short 
sale or other similar transaction is subject to reporting under section 
6049. See Sec. 1.6045-2T for reporting requirements with respect to 
payments in lieu of tax-exempt interest. See Sec. 1.6045-2 for reporting 
requirements with respect to payments in lieu of tax-exempt interest.
    (6) Interest paid on amounts held by investment companies as defined 
in section 3 of the Investment Company Act of 1940 (15 U.S.C. section 80 
a-3) and on amounts invested in other pooled funds or trusts. For 
purposes of section 6049, interest paid on amounts invested in pooled 
funds or trusts, such as mortgage pass-through certificates or mortgage 
participation certificates, shall be considered to be the interest paid 
as stated on the certificate, and shall not be the interest on any notes 
or obligations underlying such certificates. SeeSec. 1.6049-4(c)(2) 
providing that in the case of interest paid on amounts invested in such 
pooled funds or trusts, the reporting requirements of section 6049 shall 
be considered satisfied if the issuer files Form 1041 as the fiduciary 
of a grantor trust and furnishes Form K-1 to each beneficiary, 
containing the information required by the form, including amounts 
withheld under section 3451. SeeSec. 31.3454(a)-1(a)(7) for the 
provisions relating to withholding.
    (b) Interest excluded from reporting requirement--(1) In general. 
Subject to the provisions of Sec. 1.6049-8, the term interest does not 
include:
    (i) Interest on any obligation issued by a natural person as defined 
in Sec. 1.6049-4(f)(2) irrespective of whether such interest is 
collected on behalf of the holder of the obligation by a middleman.
    (ii) Interest on any obligation if such interest is exempt from 
taxation under section 103(a), relating to certain governmental 
obligations, or interest which is exempt from taxation under any other 
provision of law without regard to the identity of the holder. The 
holder of a tax exempt obligation must provide written certification to 
the payor (other than the issuer of the obligation) that the obligation 
is exempt from taxation. A statement that interest coupons are tax 
exempt on the envelope or ``shell'' commonly used by financial 
institutions to process such coupons, signed by the payee, will be 
sufficient for this purpose if the envelope is properly completed (i.e., 
shows the name, address, and taxpayer identification number of the 
payee). A payor may rely on such written certification in treating such 
interest as tax exempt for purposes of section 6049. See Sec. 1.6049-
4(d)(8) with respect to the requirement that the issuer of a taxable 
obligation shall make an information return if such issuer receives an 
envelope which improperly claims that the interest coupons contained 
therein are tax exempt.
    (iii) Interest on amounts held in escrow to guarantee performance on 
a contract or to provide security. However, interest on amounts held in 
escrow with a person described in paragraph (a) (2) or (3) of this 
section is interest subject to reporting under section 6049.
    (iv) Interest that a governmental unit pays with respect to tax 
refunds.
    (v) Interest on deposits posted for security, such as deposits 
posted with a public utility company. However, interest on deposits 
posted for security with a person described in paragraph (a) (2) or (3) 
of this section is interest subject to reporting under section 6049.
    (vi) Any amount paid to:
    (A) Any nonresident alien or foreign corporation, if the amount paid 
is subject to withholding of tax under subchapter A of chapter 3 of the 
Code by the person paying such amount, or
    (B) Any nonresident alien or foreign corporation, if the amount paid 
would be subject to withholding of tax under subchapter A of chapter 3 
of the Code by the person paying such amount but for the fact that:
    (1) Under section 862(a)(1) such amount is considered to be from 
sources outside the United States,

[[Page 667]]

    (2) The amount is exempted from withholding of tax by reason of the 
provisions of a tax treaty,
    (3) The amount of tax is exempt from withholding of tax under 
section 1441(a) or 1442(a) by reason of the application of section 
1441(c) and paragraph (a) or (f) of Sec. 1.1441-4, or
    (4) The amount is original issue discount (within the meaning of 
section 1232 (b)(1)),
    (vii) Any amount paid with respect to an obligation of, or a deposit 
with, an issuer or other obligor which is:
    (A) A foreign government or international organization or any agency 
or instrumentality thereof,
    (B) A foreign central bank of issue,
    (C) A foreign corporation not engaged in trade or business in the 
United States within the calendar year of the payment,
    (D) A foreign corporation, the interest payments of which would be 
exempt from withholding under subchapter A of chapter 3 of the Code if 
such an amount were paid to a person who is not a United States person, 
or
    (E) A partnership which is not engaged in a trade or business in the 
United States within the calendar year of the payment and which is 
composed in whole of nonresident alien individuals or persons described 
in paragraphs (b)(1)(vii) (A) through (C) of this section.
    (viii) Any amount on which the person making the payment is required 
to deduct and withhold a tax under section 1451 (relating to tax-free 
convenant bonds), or would be so required but for section 1451(d) 
(relating to benefit of personal exemptions).
    (ix) Any amount not otherwise described in paragraph (b)(1) of this 
section which is paid outside the United States and which is income from 
sources outside the United States within the meaning of section 
862(a)(1).
    (2) Amount paid to persons who are not United States persons. (i) A 
payor may treat an amount as an amount described in paragraph 
(b)(1)(vi)(A) of this section if such payor in fact withholds tax on 
such amount under subchapter A of chapter 3 of the Code in accordance 
with the provisions of chapter 3.
    (ii) Unless it has actual knowledge that the payee of an amount is a 
United States person, a payor may treat such amount as an amount 
described in paragraph (b)(1)(vi)(B)(2) of this section if with respect 
to such amount the payor is provided by the payee with a Form 1001 in 
accordance with Sec. 1.1441-6 (b) or (c), or with a certificate or 
corresponding letter in accordance with Sec. 1.1441-6(c)(3).
    (iii) Unless it has actual knowledge that the payee of an amount is 
a United States person, a payor may treat such amount as an amount 
described in paragraph (b)(1)(vi)(B)(3) of this section if with respect 
to such amount it has received a Form 4224 from the payee in accordance 
with Sec. 1.1441-4(a) or has on file with respect to such amount a 
notice described in Sec. 1.1441-4(f)(2)(ii).
    (iv) Unless it has actual knowledge that the payee of an amount is a 
United States person, a payor may treat such amount as an amount 
described in paragraphs (b)(1)(vi)(B) (1) or (4) of this section if it 
receives a statement, signed by the payee under penalties of perjury, 
certifying that the payee is not a United States person, or, in the case 
that the payee is an indivudual, that he is neither a citizen nor a 
resident of the United States. In addition to such certification, the 
statement shall contain the name of the payee, the address of the payee, 
and the taxpayer identification number (if any) of the payee. The 
address provided for an individual shall be that of his permanent 
residence; the address provided for a partnership or corporation shall 
be the address of its principal office; and the address provided for a 
trust or an estate shall be the address of the permanent residence or 
principal office of any fiduciary of the trust or estate. The statement 
may be made, at the option of the payor, on a Form W-8 or on a form 
prepared by the payor which is substantially similar to Form W-8. Blank 
copies of Form W-8 will be supplied to payors upon request to the 
district director. The statement must be received by the payor in the 
calendar year in which the payment is made or collected or in either of 
the preceding 2 calendar years. The payor, however, may require the 
statement from the payee each time it makes a payment

[[Page 668]]

to, or collects an amount on behalf of, the payee. The payor shall 
retain the statement for at least 4 years following the end of the last 
calendar year during which the amount to which the statement relates, is 
paid or collected. If the person providing the statement becomes a 
United States citizen or resident during the period to which the 
statement relates such person shall notify the payor in writing within 
30 days of such change in status. In the case of a trust or an estate, 
the statement shall be provided by a fiduciary, as defined in section 
7701(a)(6), on behalf of the trust or estate; and in the case of a 
partnership, the statement shall be provided by any general partner on 
behalf of the partnership. The payor need not receive the statement 
described in this paragraph (b)(2)(iv) with respect to an amount paid to 
a payee during a calendar year if, with respect to any other payment to 
such payee in that year, the payor has withheld tax under subchapter A 
of chapter 3 of the Code in accordance with the provisions of chapter 3 
or if, with respect to any amount that is or may be paid to the payee 
during that year, the payor has received the documentation described in 
paragraph (b)(2) (ii) or (iii) of this section in accordance with the 
provisions of Sec. 1.1441-4 or Sec. 1.1441-6.
    (3) Amounts paid by certain foreign obligors and amounts from 
sources outside the United States. (i) The provisions of this paragraph 
(b)(3)(i) apply with respect to determinations made by paying agents and 
middlemen as to whether an amount is paid with respect to an obligation 
or deposit of an entity described in paragraph (b)(1)(vii) of this 
section and as to whether an amount is income from sources outside the 
United States for purposes of paragraph (b)(1)(ix) of this section. 
Absent actual knowledge to the contrary, a paying agent or middleman may 
treat an entity as a foreign government, an international organization, 
or a foreign central bank of issue if the paying agent or middleman 
could treat such entity as an exempt recipient without requiring an 
exemption certificate as provided in Sec. 31.3452(c)-1 (g), (h), or (i). 
Absent actual knowledge to the contrary, a middleman generally may treat 
a corporation as a foreign corporation if its name reasonably so 
indicates and may treat such corporation as a corporation either which 
is not engaged in trade or business within the United States or the 
interest payments of which would be exempt from withholding under 
subchapter A of chapter 3 of the Code if such payments were made to a 
person who is not a United States person. However, a paying agent of, or 
a middleman having a contractual relationship with, the foreign 
corporation with respect to the payment or collection of an amount must 
receive a statement, signed under penalties of perjury, from the 
secretary or other authorized representative of the foreign corporation 
either that the corporation is not, or does not expect during the 
calendar year of payment to be, engaged in trade or business in the 
United States or that the interest paid by the foreign corporation would 
be exempt from withholding under subchapter A of chapter 3 of the Code 
if such interest were paid to a person who is not a United States 
person. Absent actual knowledge to the contrary, a middleman generally 
may treat a domestic corporation as as corporation the interest payments 
of which would not be subject to withholding under subchapter A of 
chapter 3 of the Code if such payments were made to a person who is not 
a United States person if an annual report, offering circular, or other 
standard source of financial information published by the corporation 
reasonably so indicates. However, a paying agent of, or middleman having 
a contractual relationship with, a domestic corporation with respect to 
the payment or collection of an amount may, absent actual knowledge to 
the contrary, treat a domestic corporation as such a corporation only if 
the secretary or other authorized representative of the corporation 
provides the paying agent or middleman with a statement, signed under 
penalties of perjury, that interest paid by such corporation would not 
be subject to withholding under subchapter A of chapter 3 of the Code if 
such interest were paid to a person who is not a United States person. A 
paying agent or middleman may, absent actual knowledge to the contrary, 
treat a partnership as a partnership which is not engaged in trade

[[Page 669]]

or business in the United States during the calendar year of payment and 
which is composed in whole of nonresident alien individuals or persons 
described in paragraph (b)(1)(vii) (A), (B), or (C) of this section if 
it receives a statement, signed under penalties of perjury, from any 
general partner of the partnership that the partnership is not, and is 
not expected during the calendar year of the payment to be, engaged in 
trade or business in the United States and that all of its partners are, 
and are expected during the calendar year of payment to be, nonresident 
alien individuals or persons described in paragraph (b)(1)(vii) (A), 
(B), or (C) of this section. A statement received by a paying agent or 
middleman in accordance with the provisions of this paragraph (b)(3) 
must be provided to such paying agent or middleman in the calendar year 
in which a payment is made or collected or in either of the 2 preceding 
calendar years. The paying agent or middleman may, however, require such 
a statement from the corporation or partnership each time it makes a 
payment for the corporation or partnership. The paying agent or 
middleman shall retain the statement for at least 4 years following the 
end of the last calendar year during which an amount to which the 
statement relates is paid or collected. If after providing such 
statement the status of the corporation or partnership changes from that 
reflected in the statement, the corporation or partnership shall notify 
the paying agent or middleman within 30 days of such change in status.
    (ii) Notwithstanding the provisions of paragraph (b)(1)(vii) of this 
section, amounts described in such paragraph are considered to be 
interest for purposes of this section when paid within the United States 
to a United States person. In such case, the person required to report 
under section 6049 is the payor which makes the payment within the 
United States. For purposes of this paragraph, the term ``United States 
person'' is defined in section 7701(a)(30).
    (iii) Paragraph (b)(3)(ii) of this section shall not apply with 
respect to an international organization (as described in paragraph 
(b)(1)(vii)(A) of this section) which is paying interest within the 
United States if the international organization is an organization of 
which the United States is a member and which enjoys immunity with 
respect to the inviolability of its archives pursuant to an 
international agreement having full force and effect in the United 
States.
    (iv) For purposes of paragraph (b)(3)(ii) of this section, a payor 
may, unless it has actual knowledge to the contrary, treat a person to 
whom it makes a payment within the United States as a person who is not 
a United States person if, during the calendar year of payment, it 
withholds tax on any amount paid to such person under subchapter A of 
chapter 3 of the Code in accordance with the provisions of chapter 3 or, 
if, with respect to any amount which is or may be paid to such person 
during that calendar year, it has received documentation described in 
paragraph (b)(2) (ii), (iii), or (iv) of this section in accordance with 
the provisions of such paragraphs and of Sec. 1.1441-4 or Sec. 1.1441-6.
    (4) Examples. The application of paragraph (b) of this section may 
be illustrated by the following examples:

    Example (1). Corporation X is a foreign corporation which is not 
engaged in trade or business in the United States during the calendar 
year. A, a United States citizen, holds bonds of Corporation X that were 
issued in a public offering. A collects the interest on such bonds by 
presenting the coupons to M, a paying agent of Corporation X whose 
office is in the United States. Amounts paid with respect to obligations 
of Corporation X are generally not considered to be interest for 
purposes of section 6049 since Corporation X is an entity described in 
paragraph (b)(1)(vii)(C) of this section. However, because M makes a 
payment of such amounts within the United States to a United States 
person, the payment by M is considered to be a payment of interest for 
purposes of section 6049, and M is required to report under section 
6049.
    Example (2). The facts are the same as in example (1) except that A 
presents his coupons directly to Corporation X at its office in the 
United States. In accordance with paragraph (b)(3)(ii) of this section, 
the payment by Corporation X with respect to the coupons is considered 
to be a payment of interest for purposes of section 6049, and 
Corporation X is required to report.
    Example (3). The facts are the same as in example (1) except that A 
is a nonresident

[[Page 670]]

alien individual. A provides M with the statement described in paragraph 
(b)(2)(iv) of this section, which certifies that A is not a United 
States citizen or resident. Unless M has actual knowledge that the 
statement provided by A is false, M may rely on such statement and is 
not required to report under section 6049.
    Example (4). The facts are the same as in example (1) except that 
Corporation X is engaged in trade or business in the United States and 
50 percent or more of its gross income for the preceding 3-year period 
described in section 861(a)(1)(C) has been income which is effectively 
connected to its United States trade or business. Corporation X is not a 
beneficiary of an income tax treaty to which the United States is a 
party. A presents its coupons for payment directly to Corporation X at 
its office outside the United States. The amount paid by Corporation X 
is not excluded from the definition of interest for purposes of section 
6049 under either paragraph (b)(1)(vii) (C) or (D) of this section since 
Corporation X is engaged in trade or business in the United States and 
since all or a portion of the interest paid by it would be subject to 
withholding under Subchapter A of Chapter 3 of the Code if such interest 
were paid to a person who is not a United States person. Therefore, 
Corporation X is required to report the amount paid to A under section 
6049.
    Example (5). The facts are the same as in example (4) except that 
Corporation X is a resident of a country which has an income tax treaty 
with the United States that precludes the United States from imposing 
tax on interest paid by residents of that country to persons who are not 
United States persons. Under paragraph (b)(1)(vii)(D) of this section, 
the amount paid by Corporation X on its bonds is not considered to be 
interest for purposes of section 6049 since, by reason of the 
application of a treaty, interest paid by Corporation X would be exempt 
from withholding under Subchapter A of Chapter 3 of the Code if such 
interest were paid to a person other than a United States person. 
Corporation X is not required to report on the amounts paid to A under 
section 6049.
    Example (6). The facts are the same as in example (5) except that A 
presents its coupons from the Corporation X bonds for payment to N, a 
paying agent of Corporation X in the United States. The payment by N to 
A is considered to be a payment of interest under paragraph (b)(3)(ii) 
of this section, and N is required to report the payment to A under 
section 6049.
    Example (7). Corporation Y is a domestic corporation, all of the 
gross income of which for the 3-year period described in section 861 
(a)(1)(B) has been from sources outside the United States. B, a United 
States citizen, holds bonds issued by Corporation Y in a public 
offering. B presents the coupons from such bonds for payment to 
Corporation Y at an office maintained by Corporation Y outside the 
United States. Under paragraph (b)(1)(ix) of this section, the amounts 
paid by Corporation Y are not considered to be interest for purposes of 
section 6049 since such amounts are considered to be from sources 
outside the United States under sections 861(a)(1)(B) and 862(a)(1) and 
are paid outside the United States. Corporation Y is not required under 
section 6049 to report its payment to B.
    Example (8). D has a deposit in an account maintained with a foreign 
branch of R, a domestic corporation which carries on a commercial 
banking business. R makes payment of amounts with respect to such 
deposit outside the United States. Such amounts are considered to be 
income from sources outside the United States under sections 
861(a)(1)(F)(i) and 862(a)(1) and, in accordance with paragraph 
(b)(1)(ix) of this section, are not considered to be interest for 
purposes of section 6049. Therefore, R is not required to report under 
section 6049 regardless of whether D is or is not a United States 
person.
    Example (9). The facts are the same as in example (8) except that 
D's deposit is in a Puerto Rican branch of a United States bank. The 
amounts paid with respect to such deposit are income from sources 
outside the United States within the meaning of sections 861(a)(1)(F)(i) 
and 862(a)(1). In accordance with the provisions of paragraph (b)(1)(ix) 
of this section, such amounts are not considered to be interest for 
purposes of section 6049, and R is not required by section 6049 to 
report the amounts paid to D regardless of whether D is or is not a 
United States person.
    Example (10). E, a nonresident alien individual, maintains an 
account in the United States with Corporation S, a domestic corporation 
which carries on a commerical banking business. S receives the statement 
described in paragraph (b)(2)(iv) of this section from E with respect to 
the amount paid on the deposit in E's account with S. The amount paid by 
S to E with respect E's deposit is considered to be from sources outside 
the United States under sections 861(a)(1)(A) and 862(a)(1) and is not 
subject to withholding under Subchapter A of Chapter 3 of the Code. In 
accordance with provisions of paragraph (b)(1)(vi)(B)(1) of this 
section, such amount is not considered to be interest for purposes of 
section 6049. Thus, S is not required to report.
    Example (11). U is a domestic corporation which is engaged in a 
commerical banking business in the United States and outside the United 
States through a foreign branch. F, an alien individual resident of the 
United States, holds a non-deposit obligation of U which is a part of a 
public debt issuance. F makes a demand for payment of the interest

[[Page 671]]

due on such obligation at the foreign branch of U. The amount paid by U 
is considered to be income from sources within the United States under 
section 861(a)(1) and is considered to be interest under section 6049. 
U, therefore, is required to report the payment to F under section 6049.
    Example (12). The facts are the same as in example (11) except that 
the obligation held by F was issued by W, a wholly-owned foreign 
subsidiary of U. W is not engaged in trade or business in the United 
States during the calendar year. F makes a demand for payment at the 
office of W outside the United States. Under paragraph (b)(1)(vii)(C) of 
this section, the amounts paid by W to F are not considered to be 
interest for purposes of section 6049. Therefore, W is not required 
under section 6049 to report the payment to F, regardless of whether F 
is or is not a United States person.
    Example (13). Q, a domestic corporation, acts within the United 
States as custodian for G with respect to obligations of Z that are 
owned by G. G is a nonresident alien individual who is a resident of a 
country with which the United States has an income tax treaty. Z is a 
foreign corporation the interest payments of which would not be subject 
to withholding under Subchapter A of Chapter 3 of the Code if such 
payments were made to a person who is not a United States person. During 
the preceding calendar year, Q received a Form 1001 from G in accordance 
with the provisions of Sec. 1.1441-6(c) with respect to interest paid on 
other corporate obligations held by Q on G's behalf. During the present 
calendar year Q collects amounts paid on the Z obligations on behalf of 
G. G does not give Q the statement described in paragraphs (b)(2)(iv) 
and (b)(3)(iv) of this section with respect to such amounts. However, as 
the Form 1001 submitted by G in the preceding calendar year is effective 
during the present calendar year with respect to certain amounts that 
are or may be paid to G, Q is not required to report on the amounts 
collected on G's behalf with respect to the Z obligations.

    (c) Original issue discount treated as payment of interest. In 
determining whether an obligation is one which was issued at a discount 
and the amount of discount which is includible in income of the holder, 
a payor (other than the issuer of the obligation) may rely on the 
Internal Revenue Service's publication of publicly traded original issue 
discount obligations. In the case of an obligation as to which there is 
during any calendar year an amount of original issue discount includible 
in the gross income of any holder (as determined under sections 1232 and 
1232A and the regulations thereunder), the issuer of the obligation or a 
middleman (as defined in Sec. 1.6049-4(f)(4)) shall be treated as having 
paid to such holder during such calendar year an amount of interest 
equal to the amount of original issue discount so includible without 
regard to any reduction by reason of a purchase allowance under sections 
1232(a)(2)(C)(ii), 1232A (a)(6) or (b)(4) or a purchase at a premium 
under 1232A(c)(4)(A) or paragraph (d)(2) of Sec. 1.1232-3. Thus, the 
determination of the amount of original issue discount includible in the 
gross income of any holder with respect to any obligation shall be 
determined as if any holder of the obligation were the original holder. 
In the case of (1) an obligation to which section 1232A does not apply 
(for example, a short-term government obligation as defined in section 
1232(a)(3)) and (2) an obligation issued on or before December 31, 1982, 
in bearer form, the amount of original issue discount includible in 
gross income shall be treated as if paid in the calendar year in which 
the date of maturity occurs or in which the date of redemption occurs if 
redemption occurs before maturity. The amount subject to reporting on an 
obligation issued in bearer form with a maturity at the date of issue of 
more than 1 year (a long term obligation) is the amount of original 
issue discount includible in the gross income of the holder during the 
calendar year of maturity or redemption if redemption occurs before 
maturity. The amount of original issue discount subject to reporting on 
a long term obligation shall not be reduced to reflect any purchase 
allowance. Discount on short term government obligations as defined in 
section 1232(a)(3), such as Treasury bills, and discount on other 
obligations with a maturity at the date of issue of not more than 1 year 
(a short term obligation), including commercial paper, when paid at 
maturity or redemption if redemption occurs before maturity, shall 
constitute a payment of interest for purposes of section 6049. In 
general, the amount subject to reporting on short term obligations is 
the difference between the stated redemption price at maturity and the 
original issue price. The procedure set forth in section 3455(b)(2)(B) 
and Sec. 31.3455(b)-1(b)(3) for

[[Page 672]]

establishing the price at which a holder purchased an obligation 
subsequent to the date of original issue shall apply for purposes of 
section 6049. Original issue discount on an obligation (including an 
obligation with a maturity of not more than 6 months from the date of 
original issue) held by a nonresident alien individual or foreign 
corporation is interest described in paragraph (b)(1)(vi) (A) or (B) of 
this section and, therefore is not interest subject to reporting under 
section 6049 unless it is described in Sec. 1.6049-8(a) (relating to 
bank deposit interest paid to a Canadian nonresident alien individual).

[T.D. 7881, 48 FR 12972, Mar. 28, 1983, as amended by T.D. 7987, 49 FR 
42719, Oct. 24, 1984; T.D. 8029, 50 FR 23680, June 5, 1985; T.D. 8664, 
61 FR 17573, Apr. 22, 1996]



Sec. 1.6049-5T   Reporting by brokers of interest and original issue discount on and after January 1, 1986 (temporary).

    For purposes of Sec. 1.6049-5 (c), relating to original issue 
discount treated as interest subject to reporting, on and after January 
1, 1986, a payor who is a broker or middleman holding as a nominee--
    (a) A bank certificate of deposit (without regard to whether the 
broker or middleman sold the certificate of deposit to the owner), or
    (b) Any other original issue discount debt instrument that is 
specified by the Commissioner,

must determine whether that obligation is one that was issued at a 
discount and the amount of discount that is includible in the income of 
the owner. However, before January 1, 1987, reporting is required only 
with respect to certificates of deposit (or any such other obligations) 
held by a broker or middleman as a nominee on or after June 1, 1986, 
that were sold by the broker or middleman (whether for the broker's 
account or as an agent of the issuer) to the owner. The preceding two 
sentences do not apply to certificates of deposit (or any such other 
obligations) held on or after January 1, 1986, but disposed of before 
June 1, 1986; reporting requirements with respect to such certificates 
of deposit (or any other such obligations) shall be determined under the 
provisions of Sec. 1.6049-5 (c) as in effect immediately prior to 
publication of this Sec. 1.6049-5T.

[T.D. 8109, 51 FR 45106, Dec. 17, 1986]



Sec. 1.6049-6  Statements to recipients of interest payments and holders of obligations for attributed original issue discount.

    (a) Requirement of furnishing statement to recipient. Every person 
filing a Form 1099 under section 6049(a) and Sec. 1.6049-4(e) shall 
furnish to the person whose identifying number is required to be shown 
on the form a written statement showing the information required by 
paragraph (b) of this section. With respect to interest other than 
interest reported on a transactional basis under Sec. 1.6049-4(e), no 
statement is required to be furnished under section 6049(c) and this 
section if the aggregate of the payments for the calendar year is less 
than $10, unless such payment is subject to the tax imposed under 
section 3406. In the case of any payment that is subject to withholding 
under section 3406, a statement shall be furnished irrespective of the 
amount of the payment. With respect to payments which are reported on a 
transactional basis, no statement is required to be furnished under 
section 6049(c) and this section to a person if the payment of interest 
to (or received on behalf of) such person for the transaction is less 
than $10 unless the payment is subject to withholding under section 
3406. Again, in the case of any payment that is subject to withholding 
under section 3406, a statement shall be furnished irrespective of the 
amount of the payment.
    (b) Form of statement. The written statement required to be 
furnished to a person under paragraph (a) of this section shall show the 
following information:
    (1) With respect to payments of interest (other than original issue 
discount) to any person during a calendar year, the statement shall 
show:
    (i) The aggregate amount of payments shown on Form 1099 as having 
been made to (or received on behalf of) such person;
    (ii) The amount of tax withheld under section 3406, if any;
    (iii) The name and address of the person filing the form; and

[[Page 673]]

    (iv) A legend stating that such amount is being reported to the 
Internal Revenue Service.
    (2) With respect to original issue discount includible in the gross 
income of a holder of an obligation during a calendar year, the 
statement shall show:
    (i) The aggregate amount of original issue discount includible in 
the gross income by (or on behalf of) such person for the calendar year 
with respect to the obligation (determined by applying the rules of 
paragraph (b)(2) of Sec. 1.6049-4);
    (ii) The amount of tax withheld under section 3406, if any;
    (iii) The account, serial, or other identifying number of each 
obligation with respect to which a return is being made;
    (iv) All other items shown on Form 1099 for such calendar year; and
    (v) A legend stating that such amount and such items are being 
reported to the Internal Revenue Service.
    (c) Time for furnishing statements. Each statement required by this 
section to be furnished to any person for a calendar year with respect 
to a payment of interest (other than interest where a middleman or a 
Federal agency makes a return on a transactional basis (as described in 
paragraph (e) of Sec. 1.6049-4)) shall be furnished to such person after 
April 30 of the year of payment and on or before January 31 of the 
following year, but no statement may be furnished before the final 
interest payment for the calendar year. If a middleman or a Federal 
agency makes a return on a transactional basis, the statement shall be 
furnished at, or any time subsequent to, the time of payment, but in no 
event later than January 31 of the year following the calendar year of 
payment.
    (d) Special rule. The requirements of this section for the 
furnishing of a statement to any person, including the legend 
requirement of paragraph (b)(1)(iv) and (2)(v) of this section, may be 
met by the furnishing to such person a copy of the Form 1099 filed 
pursuant to Sec. 1.6049-4, or a reasonable facsimile thereof, in respect 
of such person. However, in the case of Form 1099 with respect to 
original issue discount on obligations subject to section 1232A, a copy 
of the instructions must also be sent to such person. A statement shall 
be considered to be furnished to a person within the meaning of this 
section if it is mailed to such person at his last known address.
    (e) Statements to recipients--(1) Requirement. A person required to 
make an information return under section 6049(a) and Sec. 1.6049-4 must 
furnish a statement to each recipient whose identifying number is 
required to be shown on the related information return for interest or 
original issue discount paid or accrued.
    (2) Form, manner, and time for providing statements to recipients. 
The statement required by paragraph (e)(1) of this section must be 
either the official Form 1099 prescribed by the Internal Revenue Service 
for the respective calendar year or an acceptable substitute statement. 
The rules under Sec. 1.6042-4 (relating to statements with respect to 
dividends) apply comparably in determining the form of an acceptable 
substitute statement permitted by this paragraph (e). Those rules also 
apply for purposes of determining the manner of and time for providing 
the Form 1099 or its acceptable substitute to a recipient under 
paragraph (e)(1) of this section. However, with respect to original 
issue discount, the Form 1099 or acceptable substitute statement 
required by paragraph (e)(1) of this section must show the aggregate 
amount of original issue discount includible in the gross income by the 
recipient for the calendar year with respect to the obligation 
(determined by applying the rules of Sec. 1.6049-4(b)(2)), and the 
amount, serial number, or other identifying number of each obligation 
with respect to which a return is being made. With respect to interest 
or original issue discount, the Form 1099 or acceptable substitute 
statement required by paragraph (e)(1) of this section must be furnished 
to the recipient on or before January 31 of the year following the 
calendar year for which the return under section 6049(a)(1) was required 
to be made.
    (3) Penalty. For provisions relating to the penalty for the failure 
to furnish a statement under this section, see section 6722.
    (4) Special rule for amounts described in Sec. 1.6049-8(a) paid 
after December 31, 1996.

[[Page 674]]

In the case of amounts described in Sec. 1.6049-8(a) (relating to 
payments of interest to Canadian nonresident alien individuals) paid 
after December 31, 1996, any person who makes a Form 1042-S under 
section 6049(a) and Sec. 1.6049-4(b)(5) shall furnish a statement to the 
recipient. The statement shall include a copy of the Form 1042-S 
required to be prepared pursuant to Sec. 1.6049-4(b)(5) and a statement 
to the effect that the information on the form is being furnished to the 
United States Internal Revenue Service and may be furnished to Canada.
    (5) Effective date. This paragraph (e) is effective for payee 
statements due after December 31, 1995, without regard to extensions. 
For the substantially similar statement mailing requirements that apply 
with respect to forms required to be filed after October 22, 1986, and 
before January 1, 1996, see Rev. Proc. 84-70 (1984-2 C.B. 716) (or 
successor revenue procedures). See Sec. 601.601(d)(2) of this chapter.

[T.D. 7881, 48 FR 12976, Mar. 28, 1983, as amended by T.D. 8637, 60 FR 
66111, Dec. 21, 1995; 61 FR 11307, Mar. 20, 1996; T.D. 8664, 61 FR 
17574, Apr. 22, 1996; T.D. 8664, 61 FR 40993, Aug. 7, 1996]



Sec. 1.6049-7  Returns of information with respect to REMIC regular interests and collateralized debt obligations.

    (a) Definition of interest--(1) In general. For purposes of section 
6049(a), for taxable years beginning after December 31, 1986, the term 
interest includes:
    (i) Interest actually paid with respect to a collateralized debt 
obligation (as defined in paragraph (d)(2) of this section),
    (ii) Interest accrued with respect to a REMIC regular interest (as 
defined in section 860G(a)(1)), or
    (iii) Original issue discount accrued with respect to a REMIC 
regular interest or a collateralized debt obligation.
    (2) Interest deemed paid. For purposes of this section and in 
determining who must make an information return under section 6049(a), 
interest as defined in paragraphs (a)(1) (ii) and (iii) of this section 
is deemed paid when includible in gross income under section 860B (b) or 
section 1272.
    (b) Information required to be reported to the Internal Revenue 
Service--(1) Requirement of filing Form 8811 by REMICs and other 
issuers--(i) In general. Except in the case of a REMIC all of whose 
regular interests are owned by one other REMIC, every REMIC and every 
issuer of a collateralized debt obligation (as defined in paragraph 
(d)(2) of this section) must make an information return on Form 8811, 
Information Return for Real Estate Mortgage Investment Conduits (REMICs) 
and Issuers of Collateralized Debt Obligations. Form 8811 must be filed 
in the time and manner prescribed in paragraph (b)(1)(iii) of this 
section. The submission of Form 8811 to the Internal Revenue Service 
does not satisfy the election requirement specified in Sec. 1.860D-1T(d) 
and does not require election of REMIC status.
    (ii) Information required to be reported. The following information 
must be reported to the Internal Revenue Service on Form 8811--
    (A) The name, address, and employer identification number of the 
REMIC or the issuer of a collateralized debt obligation (as defined in 
paragraph (d)(2) of this section);
    (B) The name, title, and either the address or the address and 
telephone number of the official or representative of the REMIC or the 
issuer of a collateralized debt obligation who will provide to any 
person specified in paragraph (e)(4) of this section the interest and 
original issue discount information specified in paragraph (e)(2) of 
this section;
    (C) The startup day (as defined in section 860G(a)(9)) of the REMIC 
or the issue date (as defined in section 1275(a)(2)) of the 
collateralized debt obligation;
    (D) The Committee on Uniform Security Identification Procedure 
(CUSIP) number, aocount number, serial number, or other identifying 
number or information, of each class of REMIC regular interest or 
collateralized debt obligation;
    (E) The name, title, address, and telephone number of the official 
or representative of the REMIC or the issuer of a collateralized debt 
obligation whom the Internal Revenue Service may contact, and
    (F) Any other information required by Form 8811.

[[Page 675]]

    (iii) Time and manner of filing of information return--
    (A) Manner of filing. Form 8811 must be filed with the Internal 
Revenue Service at the address specified on the form. The information 
specified in paragraph (b(1)(ii) of this section must be provided on 
Form 8811 regardless of whether other information returns are filed by 
use of electronic media.
    (B) Time for filing. Form 8811 must be filed by each REMIC or issuer 
of a collateralized debt obligation on or before the later of July 31, 
1989, or the 30th day after--
    (1) the startup day (as defined in section 860G(a)(9)) in the case 
of a REMIC, or
    (2) the issue date (as defined in section 1275(a)(2)) in the case of 
a collateralized debt obligation.

Further, each REMIC or issuer of a collateralized debt obligation must 
file a new Form 8811 on or before the 30th day after any change in the 
information previously provided on Form 8811.
    (2) Requirement of reporting by REMICs, issuers, and nominees--(i) 
In general. Every person described in paragraph (b)(2)(ii) of this 
section who pays to another person $10 or more of interest (as defined 
in paragraph (a) of this section) during any calendar year must file an 
information return on Form 1099, unless the interest is paid to a person 
specified in paragraph (c) of this section.
    (ii) Person required to make reports. The persons required to make 
an information return under section 6049(a) and this section are--
    (A) REMICs or issuers of collateralized debt obligations (as defined 
in paragraph (d)(2) of this section), and
    (B) Any broker who holds as a nominee or middleman who holds as a 
nominee any REMIC regular interest or any collateralized debt 
obligation.
    (iii) Information to be reported--(A) REMIC regular interests and 
collateralized debt obligations not issued with original issue discount. 
An information return on Form 1099 must be made for each holder of a 
REMIC regular interest or collateralized debt obligation not issued with 
original issue discount, but only if the holder has been paid interest 
(as defined in paragraph (a) of this section) of $10 or more for the 
calendar year. The information return must show--
    (1) The name, address, and taxpayer identification number of the 
record holder,
    (2) The CUSIP number, account number, serial number, or other 
identifying number or information, of each REMIC regular interest or 
collateralized debt obligation, with respect to which a return is being 
made,
    (3) The aggregate amount of interest paid or deemed paid to the 
record holder for the period during the calendar year for which the 
return is made,
    (4) The name, address, and taxpayer identification number of the 
person required to file this return, and
    (5) Any other information required by the form.
    (B) REMIC regular interests and collateralized debt obligations 
issued with original issue discount. An information return on Form 1099 
must be made for each holder of a REMIC regular interest or a 
collateralized debt obligation issued with original issue discount, but 
only if the holder has been paid interest (as defined in paragraph (a) 
of this section) of $10 or more for the calendar year. The information 
return must show--
    (1) The name, address, and taxpayer identification number of the 
record holder,
    (2) The CUSIP number, account number, serial number, or other 
identifying number or information, of each REMIC regular interest or 
collateralized debt obligation, with respect to which a return is being 
made,
    (3) The aggregate amount of original issue discount deemed paid to 
the record holder for the period during the calendar year for which the 
return is made,
    (4) The aggregate amount of interest, other than original issue 
discount, paid or deemed paid to the record holder for the period during 
the calendar year for which the return is made,
    (5) The name, address, and taxpayer identification number of the 
person required to file this return, and
    (6) Any other information required by the form.
    (C) Cross-reference. See Sec. 1.67-3T(f)(3)(ii) for additional 
information

[[Page 676]]

required to be included on an information return on Form 1099 with 
respect to certain holders of regular interests in REMICs described in 
Sec. 1.67-3T(a)(2)(ii).
    (iv) Time and place for filing a return with respect to amounts 
includible as interest. The returns required under paragraph (b)(2) of 
this section for any calendar year must be filed after September 30 of 
that year, but not before the payor's final payment to the payee for the 
year, and on or before February 28 of the following year. These returns 
must be filed with the appropriate Internal Revenue Service Center, the 
address of which is listed in the instructions for Form 1099. For 
extensions of time for filing returns under this section, see 
Sec. 1.6081-1. For magnetic media filing requirements, see 
Sec. 301.6011-2 of this chapter.
    (c) Information returns not required. An information return is not 
required under section 6049(a) and this section with respect to payments 
of interest on a REMIC regular interest or collateralized debt 
obligation, if the holder of the REMIC regular interest or the 
collateralized debt obligation is--
    (1) An organization exempt from taxation under section 501(a) or an 
individual retirement plan;
    (2) The United States or a State, the District of Columbia, a 
possession of the United States, or a political subdivision or a wholly-
owned agency or instrumentality of any one or more of the foregoing;
    (3) A foreign government, a political subdivision thereof, or an 
international organization;
    (4) A foreign central bank of issue (as defined in Sec. 1.895-
1(b)(1) to be a bank which is by law or government sanction the 
principal authority, other than the government itself, issuing 
instruments intended to circulate as currency);
    (5) A trust described in section 4947(a)(1) (relating to certain 
charitable trusts);
    (6) For calendar quarters and calendar years after 1988, a broker 
(as defined in section 6045(c) and Sec. 1.6045-1(a)(1));
    (7) For calendar quarters and calendar years after 1988, a person 
who holds the REMIC regular interest or collateralized debt obligation 
as a middleman (as defined in Sec. 1.6049-4(f)(4));
    (8) For calendar quarters and calendar years after 1988, a 
corporation (as defined in section 7701(a)(3)), whether domestic or 
foreign;
    (9) For calendar quarters and calendar years after 1988, a dealer in 
securities or commodities required to register as such under the laws of 
the United States or a State;
    (10) For calendar quarters and calendar years after 1988, a real 
estate investment trust (as defined in section 856);
    (11) For calendar quarters and calendar years after 1988, an entity 
registered at all times during the taxable year under the Investment 
Company Act of 1940;
    (12) For calendar quarters and calendar years after 1988, a common 
trust fund (as defined in section 584 (a));
    (13) For calendar quarters and calendar years after 1988, a 
financial institution such as a mutual savings bank, savings and loan 
association, building and loan association, cooperative bank, homestead 
association, credit union, industrial loan association or bank, or other 
similar organization;
    (14) For calendar quarters and calendar years after 1988, any trust 
which is exempt from tax under section 664(c) (i.e., a charitable 
remainder annuity trust or a charitable remainder unitrust); and
    (15) For calendar quarters and calendar years after 1988, a REMIC.
    (d) Special provisions and definitions--(1) Incorporation of 
referenced rules. The special rules of Sec. 1.6049-4(d) are incorporated 
in this section, as applicable, except that Sec. 1.6049-4(d)(2) does not 
apply to any REMIC regular interest or any other debt instrument to 
which section 1272(a)(6) applies. Further, Sec. 1.6049-5(c) does not 
apply to any REMIC regular interest or any other debt instrument to 
which section 1272(a)(6) applies.
    (2) Collateralized debt obligation. For purposes of this section, 
the term ``collateralized debt obligation'' means any debt instrument 
(except a tax-exempt obligation) described in section 1272(a)(6)(C)(ii) 
that is issued after December 31, 1986.

[[Page 677]]

    (e) Requirement of furnishing information to certain nominees, 
corporations, and other specified persons--(1) In general. For calendar 
quarters and calendar years after 1988, each REMIC or issuer of a 
collateralized debt obligation (as defined in paragraph (d)(2) of this 
section) must provide the information specified in paragraph (e)(2) of 
this section in the time and manner prescribed in paragraph (e)(3) of 
this section to any persons specified in paragraph (e)(4) of this 
section who request the information.
    (2) Information required to be reported. For each class of REMIC 
regular interest or collateralized debt obligation and for each calendar 
quarter specified by the person requesting the information, the REMIC or 
issuer of a collateralized debt obligation must provide the following 
information--
    (i) The name, address and Employer Identification Number of the 
REMIC or issuer of a collateralized debt obligation;
    (ii) The CUSIP number, account number, serial number, or other 
identifying number or information, of each specified class of REMIC 
regular interest or collateralized debt obligation and, for calendar 
quarters and calendar years after 1991, whether the information being 
reported is with respect to a REMIC regular interest or a collateralized 
debt obligation;
    (iii) Interest paid on a collateralized debt obligation in the 
specified class for each calendar quarter, and the aggregate amount for 
the calendar year if the request is made for the last quarter of the 
calendar year;
    (iv) Interest accrued on a REMIC regular interest in the specified 
class for each accrual period any day of which is in the specified 
calendar quarter, and the aggregate amount for the calendar year if the 
request is made for the last quarter of the calendar year;
    (v) Original issue discount accrued on a collateralized debt 
obligation or REMIC regular interest in the specified class for each 
accrual period any day of which is in that calendar quarter, and the 
aggregate amount for the calendar year if the request is made for the 
last quarter of the calendar year;
    (vi) The daily portion of original issue discount per $1,000 of 
original principal amount (or for calendar quarters prior to 1992, per 
other specified unit) as determined under section 1272(a)(6) and the 
regulations thereunder for each accrual period any day of which is in 
the specified calendar quarter;
    (vii) The length of the accrual period;
    (viii) The adjusted issue price (as defined in section 
1275(a)(4)(B)(ii)) of the REMIC regular interest or the collateralized 
debt obligation at the beginning of each accrual period any day of which 
is in the specified calendar quarter;
    (ix) The information required by paragraph (f)(3) of this section;
    (x) Information required to compute the accrual of market discount 
including, for calendar years after 1989, the information required by 
paragraphs (f)(2)(i)(G) or (f)(2)(ii)(K) of this section; and
    (xi) For calendar quarters and calendar years after 1991, if the 
REMIC is a single class REMIC (as described in Sec. 1.67-3T 
(a)(2)(ii)(B)), the information described in Sec. 1.67-3T (f)(1) and 
(f)(3)(ii) (A) and (B).
    (3) Time and manner for providing information--(i) Manner of 
providing information. The information specified in paragraph (e)(2) of 
this section may be provided as follows--
    (A) By telephone;
    (B) By written statement sent by first class mail to the address 
provided by the requesting party;
    (C) By causing it to be printed in a publication generally read by 
and available to persons specified in paragraph (e)(4) and by notifying 
the requesting persons in writing or by telephone of the publication in 
which it will appear, the date of its appearance, and, if possible, the 
page upon which it appears; or
    (D) By any other method agreed to by the parties. If the information 
is published, then the publication should also specify the date and, if 
possible, the page on which corrections, if any, will be printed.
    (ii) Time for furnishing the information. Each REMIC or issuer of a 
collateralized debt obligation must furnish the information specified in 
paragraph (e)(2) of this section on or before the later of--

[[Page 678]]

    (A) The 30th day after the close of the calendar quarter for which 
the information was requested, or
    (B) The day that is two weeks after the receipt of the request.
    (4) Persons entitled to request information. The following persons 
may request the information specified in paragraph (e)(2) of this 
section with respect to a specified class of REMIC regular interests or 
collateralized debt obligations from a REMIC or issuer of a 
collateralized debt obligation in the manner prescribed in paragraph 
(e)(5) of this section--
    (i) Any broker who holds on its own behalf or as a nominee any REMIC 
regular interest or collateralized debt obligation in the specified 
class,
    (ii) Any middleman who is required to make an information return 
under section 6049 (a) and paragraph (b)(2) of this section and who 
holds as a nominee any REMIC regular interest or collateralized debt 
obligation in the specified class,
    (iii) Any corporation or non-calendar year taxpayer who holds a 
REMIC regular interest or collateralized debt obligation in the 
specified class directly, rather than through a nominee,
    (iv) Any other person specified in paragraphs (c)(9) through (15) of 
this section who holds a REMIC regular interest or collateralized debt 
obligation in the specified class directly, rather than through a 
nominee, or
    (v) A representative or agent for a person specified in paragraphs 
(e)(4)(i), (ii), (iii) or (iv) of this section.
    (5) Manner of requesting information from the REMIC. A requesting 
person specified in paragraph (e)(4) of this section should obtain 
Internal Revenue Service Publication 938, Real Estate Mortgage 
Investment Conduit (REMIC) and Collateralized Debt Obligation Reporting 
Information (or other guidance published by the Internal Revenue 
Service). This publication contains a directory of REMICs and issuers of 
collateralized debt obligations. The requesting person can locate the 
REMIC or issuer from whom information is needed and request the 
information from the official or representative of the REMIC or issuer 
in the manner specified in the publication. The publication will specify 
either an address or an address and telephone number. If the publication 
provides only an address, the request must be made in writing and mailed 
to the specified address. Further, the request must specify the calendar 
quarters (e.g., all calendar quarters in 1989) and the classes of REMIC 
regular interests or collateralized debt obligations for which 
information is needed.
    (f) Requirement of furnishing statement to recipient--(1) In 
general. Every person filing a Form 1099 under section 6049 (a) and this 
section must furnish to the holder (the person whose identifying number 
is required to be shown on the form) a written statement showing the 
information required by paragraph (f)(2) of this section. The written 
statement provided by a REMIC must also contain the information 
specified in paragraph (f)(3) of this section.
    (2) Form of statement--(i) REMIC regular interests and 
collateralized debt obligations not issued with original issue discount. 
For a REMIC regular interest or collateralized debt obligation issued 
without original issue discount, the written statement must specify for 
the calendar year the following information--
    (A) The aggregate amount shown on Form 1099 to be included in income 
by that person for the calendar year;
    (B) The name, address, and taxpayer identification number of the 
person required to furnish this statement;
    (C) The name, address, and taxpayer identification number of the 
person who must include the amount of interest in gross income;
    (D) A legend, including a statement that the amount is being 
reported to the Internal Revenue Service, that conforms to the legend on 
Form 1099, Copy B, For Recipient;
    (E) The CUSIP number, account number, serial number, or other 
identifying number or information, of each REMIC regular interest or 
collateralized debt obligation, with respect to which a return is being 
made;
    (F) All other items shown on Form 1099 for the calendar year; and
    (G) Information necessary to compute accrual of market discount. For 
calendar years after 1989, this requirement is satisfied by furnishing 
to the holder for each accrual period during

[[Page 679]]

the year a fraction computed in the manner described in either paragraph 
(f)(2)(i)(G)(1) or (f)(2)(i)(G)(2) of this section. For calendar years 
after December 31, 1991, the REMIC or the issuer of the collateralized 
debt obligation must be consistent in the method used to compute this 
fraction.
    (1) The numerator of the fraction equals the interest, other than 
original issue discount, allocable to the accrual period. The 
denominator of the fraction equals the interest, other than original 
issue discount, allocable to the accrual period plus the remaining 
interest, other than original issue discount, as of the end of that 
accrual period. The interest allocable to each accrual period and the 
remaining interest are calculated by taking into account events which 
have occurred before the close of the accrual period and the prepayment 
assumption, if any, determined as of the startup day (as defined in 
section 860G(a)(9)) of the REMIC or the issue date (as defined in 
section 1275(a)(2)) of the collateralized debt obligaiton that would be 
made in computing original issue discount if the debt instrument had 
been issued with original issue discount.
    (2) If the REMIC regular interest or the collateralized debt 
obligation has de minimis original issue discount (as defined in section 
1273(a)(3) and any regulations thereunder), then, at the option of the 
REMIC or the issuer of the collateralized debt obligation, the fraction 
may be computed in the manner specified in paragraph (f)(2)(ii)(K) of 
this section taking into account the de minimis original issue discount.
    (ii) REMIC regular interests and collateralized debt obligations 
issued with original issue discount. For a REMIC regular interest or 
collateralized debt obligation issued with original issue discount, the 
written statement must specify for the calendar year the following 
information--
    (A) The aggregate amount of original issue discount includible in 
the gross income of the holder for the calendar year with respect to the 
REMIC regular interest or the collateralized debt obligation;
    (B) The aggregate amount of interest, other than original issue 
discount, includible in the gross income of the holder for the calendar 
year with respect to the REMIC regular interest or the collateralized 
debt obligation;
    (C) The name, address, and taxpayer identification number of the 
person required to file this form;
    (D) The name, address, and taxpayer identification number of the 
person who must include the amount of interest specified in paragraphs 
(f)(2)(ii) (A) and (B) of this section in gross income;
    (E) For calendar years after 1987, the daily portion of original 
issue discount per $l,000 of original principal amount (or for calendar 
years prior to 1992, per other specified unit) as determined under 
section 1272(a)(6) and the regulations thereunder for each accrual 
period any day of which is in that calendar year;
    (F) For calendar years after 1987, the length of the accrual period;
    (G) All other items shown on Form 1099 for the calendar year;
    (H) A legend, including a statement that the information required 
under paragraphs (f)(2)(ii) (A), (B), (C), (D) and (G) of this section 
is being reported to the Internal Revenue Service, that conforms to the 
legend on Form 1099, Copy B, For Recipient;
    (I) For calendar years after 1987, the adjusted issue price (as 
defined in section 1275(a)(4)(B)(ii)) of the REMIC regular interest or 
the collateralized debt obligation at the beginning of each accrual 
period with respect to which interest income is required to be reported 
on Form 1099 for the calendar year;
    (J) The CUSIP number, account number, serial number, or other 
identifying number or information, of each class of REMIC regular 
interest or collateralized debt obligation, with respect to which a 
return is being made; and
    (K) Information necessary to compute accrual of market discount. For 
calendar years after 1989, this information includes:
    (1) For each accrual period in the calendar year, a fraction, the 
numerator of which equals the original issue discount allocable to that 
accrual period, and the denominator of which equals the original issue 
discount allocable to that accrual period plus the remaining original 
issue discount as of the end of that accrual period, and

[[Page 680]]

    (2) [Reserved]
    The original issue discount allocable to each accrual period and the 
remaining original issue discount are calculated by taking into account 
events which have occurred before the close of the accrual period and 
the prepayment assumption determined as of the startup day (as defined 
in section 860G (a)(9)) of the REMIC or the issue date (as defined in 
section 1275 (a)(2)) of the collateralized debt obligation.
    (3) Information with respect to REMIC assets--(i) 95 percent asset 
test. For calendar years after 1988, the written statement provided by a 
REMIC must also contain the following information for each calendar 
quarter--
    (A) The percentage of REMIC assets that are qualifying real property 
loans under section 593,
    (B) The percentage of REMIC assets that are assets described in 
section 7701 (a)(19), and
    (C) The percentage of REMIC assets that are real estate assets 
defined in section 856 (c)(6)(B), computed by reference to the average 
adjusted basis (as defined in section 1011) of the REMIC assets during 
the calendar quarter (as described in Sec. 1.860F-4 (e)(1)(iii)). If for 
any calendar quarter the percentage of REMIC assets represented by a 
category is at least 95 percent, then the statement need only specify 
that the percentage for that category, for that calendar quarter, was at 
least 95 percent.
    (ii) Additional information required if the 95 percent test not met. 
If, for any calendar quarter after 1988, less than 95 percent of the 
assets of the REMIC are real estate assets defined in section 856 
(c)(6)(B), then, for that calendar quarter, the REMIC's written 
statement must also provide to any real estate investment trust (REIT) 
that holds a regular interest the following information--
    (A) The percentage of REMIC assets described in section 856 
(c)(5)(A), computed by reference to the average adjusted basis of the 
REMIC assets during the calendar quarter (as described in Sec. 1.860F-4 
(e)(1)(iii)),
    (B) The percentage of REMIC gross income (other than gross income 
from prohibited transactions defined in section 860F (a)(2)) described 
in section 856 (c)(3)(A) through (E), computed as of the close of the 
calendar quarter, and
    (C) The percentage of REMIC gross income (other than gross income 
from prohibited transactions defined in section 860F (a)(2)) described 
in section 856 (c)(3)(F), computed as of the close of the calendar 
quarter. For purposes of this paragraph (f)(3)(ii)(C), the term 
``foreclosure property'' contained in section 856 (c)(3)(F) shall have 
the meaning specified in section 860G (a)(8).
    In determining whether a REIT satisfies the limitations of section 
856 (c)(2), all REMIC gross income is deemed to be derived from a source 
specified in section 856 (c)(2).
    (iii) Calendar years 1988 and 1989. For calendar years 1988 and 
1989, the percentage of assets required in paragraphs (f)(3)(i) and (ii) 
of this section may be computed by reference to the average fair market 
value of the assets of the REMIC during the calendar quarter (as 
described in Sec. 1.860F-4 (e)(1)(iii)), instead of by reference to the 
average adjusted basis of the assets of the REMIC during the calendar 
quarter.
    (4) Cross-reference. See Sec. 1.67-3T (f)(2)(ii) for additional 
information that may be separately stated on the statement required by 
this paragraph (f) with respect to certain holders of regular interests 
in REMICs described in Sec. 1.67-3T (a)(2)(ii).
    (5) Time for furnishing statements--(i) For calendar quarters and 
calendar years after 1988. For calendar quarters and calendar years 
after 1988, each statement required under this paragraph (f) to be 
furnished to any person for a calendar year with respect to amounts 
includible as interest must be furnished to that person after April 30 
of that year and on or before March 15 of the following year, but not 
before the final interest payment (if any) for the calendar year.
    (ii) For calendar quarters and calendar years prior to 1989--(A) In 
general. For calendar quarters and calendar years prior to 1989, each 
statement required under this paragraph (f) to be furnished to any 
person for a calendar year with respect to amounts includible as 
interest must be furnished to that person

[[Page 681]]

after April 30 of that year and on or before January 31 of the following 
year, but not before the final interest payment (if any) for the 
calendar year.
    (B) Nominee reporting. For calendar quarters and calendar years 
prior to 1989, each statement required under this paragraph (f) to be 
furnished by a nominee must be furnished to the actual owner of a REMIC 
regular interest or a collateralized debt obligation to which section 
1272 (a)(6) applies on or before the later of--
    (1) The 30th day after the nominee receives such information, or
    (2) January 31 of the year following the calendar year to which the 
statement relates.
    (6) Special rules--(i) Copy of Form 1099 permissible. The 
requirements of this paragraph (f) for the furnishing of a statement to 
any person, including the legend requirement of paragraphs (f)(2)(i)(D) 
and (f)(2)(ii)(H) of this section, may be met by furnishing to that 
person--
    (A) A copy of the Form 1099 filed pursuant to paragraph (b)(2) of 
this section in respect of that person, plus a separate statement 
(mailed with the Form 1099) that contains the information described in 
paragraphs (f)(2)(i)(E) and (G), (f)(2)(ii)(E), (F), (I), and (K), 
(f)(3), and (f)(4) of this section, if applicable, or
    (B) A substitute form that contains all the information required 
under this paragraph (f) and that complies with any current revenue 
procedure concerning the reproduction of paper substitutes of Forms 1099 
and the furnishing of substitute statements to forms recipients. The 
inclusion on the substitute form of the information specified in this 
paragraph (f) that is not required by the official Forms 1099 will not 
cause the substitute form to fail to meet any requirements that limit 
the information that may be provided with a substitute form.
    (ii) Statement furnished by mail. A statement mailed to the last 
known address of any person shall be considered to be furnished to that 
person within the meaning of this section.
    (7) Requirement that nominees furnish information to corporations 
and certain other specified persons--(i) In general. For calendar 
quarters and calendar years after 1988, every broker or middleman must 
provide in writing or by telephone the information specified in 
paragraph (e)(2) of this section to--
    (A) A corporation,
    (B) A non-calendar year taxpayer, or
    (C) Any other person specified in paragraphs (c)(9) through (15) of 
this section

who requests the information and for whom the broker or middleman holds 
as a nominee a REMIC regular interest or a collateralized debt 
obligation. A corporation, non-calendar year taxpayer, or any other 
person specified in paragraphs (c)(9) through (15) of this section may 
request the information in writing or by telephone for any REMIC regular 
interest or collateralized debt obligation for calendar quarters any day 
of which the person held the interest or obligation.
    (ii) Time for furnishing information. The statement required in 
paragraph (f)(7)(i) of this section must be furnished on or before the 
later of--
    (A) The 45th day after receipt of the request,
    (B) The 45th day after the close of the calendar quarter for which 
the information was requested, or
    (C) If the request is made for the last calendar quarter in a year, 
March 15 of the year following the calendar quarter for which the 
information was requested.
    (g) Information required to be set forth on face of debt 
instrument--(1) In general. In the case of any REMIC regular interest or 
collateralized debt obligation that is issued after April 8, 1988, and 
that has original issue discount, the issuer must set forth on the face 
of the REMlC regular interest or collateralized debt obligation--
    (i) The amount of the original issue discount,
    (ii) The issue date,
    (iii) The rate at which interest is payable (if any) as of the issue 
date,
    (iv) The Yield to maturity, including a statement as to the 
assumption made under section 1272 (a)(6)(B)(iii),
    (v) The method used to determine yield where there is a short 
accrual period, and
    (vi) The amount of the original issue discount allowable to the 
short accrual

[[Page 682]]

period based on the prepayment assumption determined on the startup day 
(as defined in section 860G (a)(9)) or the issue date (as defined in 
section 1275 (a)(2)).

In cases where it is not possible to set forth the information required 
by this paragraph (g) on the face of the REMIC regular interest or 
collateralized debt obligation by the issue date, the issuer must 
deliver to the holder a sticker containing this information within 10 
days after the issue date. For rules relating to the penalty imposed for 
failure to show the information required by this paragraph (g) on the 
regular interest or collateralized debt obligation, see section 6706 (a) 
and the regulations thereunder.
    (2) Issuer. For purposes of this paragraph (g), the term ``issuer'' 
includes not only domestic issuers but also any foreign issuer who is 
otherwise subject to United States income tax law, unless the issue is 
neither listed on an established securities market (as defined in 
Sec. 1.453-3 (d)(4)) in the United States nor offered for sale or resale 
in the United States in connection with its original issuance.

[T.D. 8366, 56 FR 49518, Sept. 30, 1991; T.D. 8366, 57 FR 5054, Feb. 12, 
1992, as amended by T.D. 8431, 57 FR 40322, Sept. 3, 1992; 57 FR 46243, 
Oct. 7, 1992]



Sec. 1.6049-7T  Market discount fraction reported with other financial information with respect to REMICs and collateralized debt obligations (temporary).

    For purposes of Sec. 1.6049-7(f)(2)(i)(G)(1) relating to the market 
discount fraction to be reported with other financial information with 
respect to REMICs and other collateralized debt obligations, if the 
REMIC regular interest or the collateralized debt obligation has de 
minimis original issue discount (as defined in section 1273(a)(3) and 
any regulations thereunder), then, at the option of the REMIC or the 
issuer of the collateralized debt obligation, a fraction computed in the 
manner specified in paragraph (f)(2)(ii)(K) of this section taking into 
account the de minimis original issue discount may be reported instead 
of the fraction specified in Sec. 1.6049-7(f)(2)(i)(G)(1)(i). The REMIC 
or the issuer of the collateralized debt obligation, however, must be 
consistent in the method used to compute this fraction.

[T.D. 8366, 56 FR 49518, Sept. 30, 1991]



Sec. 1.6049-8  Interest and original issue discount paid to residents of Canada.

    (a) Interest subject to reporting requirement. For purposes of 
Secs. 1.6049-4, 1.6049-6 and this section and except as provided in 
paragraph (b) of this section, the term interest means interest paid to 
a Canadian nonresident alien individual after December 31, 1996, where 
the interest is described in section 871(i)(2)(A) with respect to a 
deposit maintained at an office within the United States. For purposes 
of the regulations under section 6049, a Canadian nonresident alien 
individual is an individual who resides in Canada and is not a United 
States citizen. The payor or middleman may rely upon the permanent 
residence address (as defined in section 1441 and the regulations under 
that section) as stated on the Form W-8 (described in section 6049 and 
the regulations under that section) in order to determine whether the 
payment is made to a Canadian nonresident alien individual. Amounts 
described in this paragraph (a) are not subject to backup withholding 
under section 3406. See Sec. 31.3406(g)-1(d) of this chapter.
    (b) Interest excluded from reporting requirement. The term interest 
does not include an amount that is paid by the issuer or its agent 
outside the United States with respect to an obligation that is 
described in paragraph (b) (1) or (2) of this section.
    (1)(i) The obligation is not in registered form (within the meaning 
of section 163(f) and the regulations thereunder); is part of a larger 
single public offering of securities; and is described in section 
163(f)(2)(B).
    (ii) Unless it has actual knowledge to the contrary, a middleman may 
treat an obligation as if it is described in section 163(f)(2)(B) if the 
obligation or coupon therefrom, whichever is presented for payment, 
contains the statement described in section 163(f)(2)(B)(ii)(II) and the 
regulations thereunder.
    (2)(i) The obligation has a face or principal amount of not less 
than

[[Page 683]]

$500,000, and satisfies the requirements described in paragraphs 
(b)(2)(i) (A), (B), and (C) of this section.
    (A) The obligation satisfies the requirements of sections 
163(f)(2)(B) (i) and (ii)(I) and the regulations thereunder (as if it 
were a registration-required obligation within the meaning of section 
163(f)(2)(A)) and is issued in accordance with the procedures of 
Sec. 1.163-5(c)(2)(i)(D)).
    (B) If the obligation is in registered form, it is registered in the 
name of an exempt recipient described in Sec. 1.6049-4(c)(1)(ii).
    (C) The obligation has on its face and on any detachable coupons the 
following statement (or a similar statement having the same effect): 
``By accepting this obligation or coupon, the holder represents and 
warrants that it is not a United States person (other than an exempt 
recipient described in the regulations under section 6049(b)(4) of the 
Internal Revenue Code and the regulations thereunder) and that it is not 
acting for or on behalf of a United States person (other than an exempt 
recipient described in the regulations under section 6049(b)(4) of the 
Internal Revenue Code and the regulations thereunder).''
    (ii) Unless the middleman has actual knowledge to the contrary, it 
may treat an obligation as satisfying the requirements of sections 
163(f)(2)(B) (i) and (ii)(I) and the regulations thereunder if the 
obligation or a coupon therefrom, whichever is presented for payment, 
contains the statement in paragraph (b)(2)(i)(C) of this section.

[T.D. 8664, 61 FR 17574, Apr. 22, 1996]



Sec. 1.6050A-1  Reporting requirements of certain fishing boat operators.

    (a) Requirement of reporting. The operator of a boat on which one or 
more individuals during a calendar year performed services described in 
Sec. 31.3121(b)(20)-1(a) shall make an information return on Form 1099F 
for that calendar year. The return shall include the following 
information:
    (1) The name and taxpayer identification number of each individual 
performing the services;
    (2) The percentage of each individual's share of the catch of fish 
or other forms of aquatic life (hereinafter ``fish'');
    (3) The percentage of the operator's share of the catch of fish;
    (4) If the individual receives all or part of his share of the catch 
in kind, the type and weight of the share and, if it can be ascertained, 
the fair market value of his share;
    (5) If the individual receives a share of the proceeds of the catch, 
the dollar amount received; and
    (6) Any other information that is required by the form.

For purposes of this section, the term, ``boat operator'' means an 
employer (as defined in Sec. 31.3121(d)-2) of an employee whose services 
are excepted from employment by section 3121(b)(20) and 
Sec. 31.3121(b)(20)-1. The boat operator may make separate returns on 
Form 1099F for each crew member for each voyage, or he may aggregate the 
information required by this paragraph for an individual for all or any 
part of a return period in which the type of catch (if required) and the 
percentage due the crew member remain the same.
    (b) Time and place for filing. Returns required to be made under 
this section on Form 1099F shall be filed with the Internal Revenue 
Service Center, designated in the instructions for Form 1099F, on or 
before February 28 of the year follolwing the year in which the relevant 
services were performed.
    (c) Requirement of and time for furnishing statement--(1) 
requirement of furnishing statement. Every person filing a Form 1099F 
under this section shall furnish to the individual whose identifying 
number is (or should be) shown on the form a written statement showing 
the information required by paragraph (a) of this section. The 
requirement of the preceding sentence may be met by furnishing to the 
individual copy B of Form 1099F or a reasonable facsimile of Form 1099F 
that was filed pursuant to this section.
    (2) Time for furnishing statement. Each statement required by this 
paragraph to be furnished to any individual for a calendar year shall be 
furnished on or before January 31 of the year following the calendar 
year for which the return was made.

[T.D. 7716, 45 FR 57123, Aug. 27, 1980]

[[Page 684]]



Sec. 1.6050B-1  Information returns by person making unemployment compensation payments.

    For taxable years beginning after December 31, 1978, every person 
who makes payments of unemployment compensation (as defined in section 
85 (c)) aggregating $10 or more to any individual during any calendar 
year shall file a Form 1099UC in accordance with the instructions to 
such form.

[T.D. 7705, 45 FR 46070, July 9, 1980]



Sec. 1.6050D-1  Information returns relating to energy grants and financing.

    (a) Requirement of reporting. Every person who administers a 
Federal, State, or local program a principal purpose of which is to 
provide subsidized energy financing (as defined in section 23(c)(10)(C) 
and the regulations thereunder) or grants for projects designed to 
conserve or produce energy shall make an information return for each 
calendar year beginning after December 31, 1983. However, the preceding 
sentence shall not apply if none of the financing and grants provided 
under such program during the calendar year relate either to 
expenditures described in section 23(c)(1) or (2), relating to the 
residential energy credit, made by a taxpayer before January 1, 1986, 
with respect to a dwelling unit or to section 38 property (as defined in 
section 48 and the regulations thereunder). That return shall be made on 
Form 6497 or, in the case of taxable gants, on Form 1099-G. (The latter 
form is prescribed pursuant to section 6041 as well as section 6050D.) 
The return shall include the following information:
    (1) The name, address, and taxpayer identification number of each 
taxpayer receiving financing or a grant made under such program during 
the calendar year with respect to either section 38 property or in the 
case of financing or a grant for energy conservation expenditures or 
renewable energy source expenditures made by the taxpayer before January 
1, 1986, a dwelling unit that is located in the United States;
    (2) The aggregate amount of financing and grants received by the 
taxpayer under the program during the calendar year,
    (3) In the case of returns for financing or nontaxable grants, the 
name of the program under which the financing or grants are made; and
    (4) Any other information that is required by the form.

For purposes of this section, the term ``person'' means the officer or 
employee having control of the program, or the person appropriately 
designated for purposes of section 6050D and this section.
    (b) Time and place for filing. Returns required to be made under 
this section shall be filed with the Internal Revenue Service Center 
designated in the instructions for Form 6497 or 1099-G by the last day 
of the first February following the calendar year for which the return 
(reporting payments made during such calendar year) is required.

(Secs. 6050D and 7805, Internal Revenue Code of 1954 (94 Stat. 259, 26 
U.S.C. 6050D; 68A Stat. 917, 26 U.S.C. 7805))

[T.D. 8018, 50 FR 12532, Mar. 29, 1985, as amended by T.D. 8146, 52 FR 
26673, July 16, 1987]



Sec. 1.6050E-1  Reporting of State and local income tax refunds.

    (a) Applicability. Section 6050E and this section apply to any 
refund officer who, with respect to an individual, makes payments of 
refunds of State or local income taxes or allows credits or offsets with 
respect to such taxes aggregating $10 or more for such individual in any 
calendar year.
    (b) Definitions. For purposes of this section.--
    (1) The term refund officer means the officer or employee of a State 
or local taxing jurisdiction having control of payments of refunds or 
the allowance of credits or offsets, or the person approporiately 
designated for purposes of this section.
    (2) The term State shall include the District of Columbia but shall 
not include the Commonwealth of Puerto Rico or any possession of the 
United States.
    (3) The term individual shall not include an estate or trust.
    (4) The term credit or offset means an overpayment of tax which, in 
lieu of being refunded to the taxpayer, is:
    (i) Applied against an existing liability of the taxpayer,

[[Page 685]]

    (ii) Available for application against a future liability of the 
taxpayer, or
    (iii) Otherwise used or available for use for the taxpayer's 
benefit.
    (c) Requirement of reporting. Every refund officer described in 
paragraph (a) of this section shall make an information return in 
accordance with this section for each calendar year. An information 
return must be made even if the refund officer is not required to 
furnish a statement to the applicable taxpayer under paragraph (k)(2) of 
this section.
    (d) Prescribed Form. Except as otherwise provided in paragraph (i) 
of this section, the information return required by paragraph (c) of 
this section shall be made on Forms 1096 and 1099.
    (e) Refunds involving different taxable years. In the case of 
refunds paid or credits or offsets allowed during a calendar year with 
respect to two or more taxable years of an individual, a separate Form 
1099 shall be filed with respect to each taxable year of the individual. 
Thus, if during calendar year 1983 a refund officer pays to an 
individual a refund of $15 with respect to that individual's taxable 
year ending in 1982 and $20 with respect to that individual's taxable 
year ending in 1981, a separate Form 1099 shall be filed for each of the 
two payments. If, instead, the refund with respect to the individual's 
taxable year ending in 1982 were $5 instead of $15, no return would be 
required for the payment of $5.
    (f) Information required. The information required to be reported on 
Forms 1096 and 1099 includes the aggregate amount of refunds, credits, 
and offsets made or allowed during the calendar year with respect to the 
taxable year of the individual covered by the return; the name, address 
and taxpayer identification number of the individual with respect to 
whom such payment, credit, or offset was made or allowed; the taxable 
year covered by the return; and such other information as may be 
required by the forms. In addition, the nature of the tax is required to 
be indicated on the Form 1099 in any case where the refund, credit or 
offset is made or allowed with respect to a payment attributable to an 
income tax that applies exclusively to income from a trade or business 
and is not a tax of general application.
    (g) When credit or offset deemed allowed. For purposes of a return 
of information under this section, a credit or offset is deemed to be 
allowed when the liability to pay or credit such amount is admitted by 
the State or local taxing jurisdiction. Thus, if an amount with respect 
to a taxpayer's 1982 taxable year is credited in 1983 to reduce the 
liability of the taxpayer to make estimated tax payments in 1983, it is 
reportable as a credit allowed in 1983. It is not reportable in the 
taxable year that gives rise to the refund, credit or offset.
    (h) Time and place for filing. The returns required under this 
section for any calendar year shall be filed after September 30 of that 
calendar year, but not before the refund officer's final payment (or 
allowance of credit or offset) for the year, and on or before February 
28 of the following year. Returns shall be filed with the appropriate 
Internal Revenue Service Center, the addresses of which are listed in 
the instructions for Forms 1099. For extensions of time for filing 
returns under this section, see Sec. 1.6081-1.
    (i) Use of magnetic media and substitute forms--(1) Magnetic media. 
A refund officer may be required to file the Forms 1099 required by this 
section on magnetic media or machine-readable paper forms. See section 
6011(e) and applicable regulations and revenue procedures thereunder. If 
a refund officer is not required to file the Forms 1099 required by this 
section on magnetic media, the refund officer may request permission 
under applicable regulations and revenue procedures to submit the 
information required by this section on magnetic media.
    (2) Substitute forms. A refund officer may prepare and use a form 
which contains provisions identical with those of Form 1096 if the 
refund officer complies with all revenue procedures relating to 
substitute Form 1096 in effect at that time. In addition, if a refund 
officer is not required to file the Forms 1099 required by this section 
on magnetic media or machine-readable paper forms, the refund officer 
may prepare and use a form which contains provisions identical with 
those of Form 1099

[[Page 686]]

if the refund officer complies with all revenue procedures relating to 
substitute Form 1099 in effect at that time.
    (j) Voluntary information exchange agreements. The requirements of 
reporting information to the Internal Revenue Service under this section 
may be satisfied for any calendar year by submission of the information 
required under paragraph (f) of this section in accordance with the 
terms of a voluntary information exchange agreement between the State 
and the United States in effect during such year.
    (k) Requirement of furnishing statements to recipients--(1) In 
general. Except as provided in paragraph (k)(2) of this section, every 
refund officer required to make a return of information under this 
section shall furnish to the individual whose identifying number is 
required to be shown on the return a written statement showing the 
aggregate amount shown on the information return of refunds, credits and 
offsets made or allowed to such individual with respect to each taxable 
year of the individual, the name of the State or local taxing 
jurisdiction paying such refund or allowing such credits or offsets, the 
taxable year giving rise to the refund, credit or offset and a legend 
stating that such amount is being reported to the Internal Revenue 
Service. The requirement of this paragraph may be met by furnishing to 
the individual a copy of the Form 1099 filed with respect to that 
individual provided that the form bears a legend stating that such 
amount is being reported to the Internal Revenue Service. For purposes 
of this paragraph, a statement shall be considered to be furnished to an 
individual if it is mailed to the individual at the individual's last 
known address.
    (2) Exception for nonitemizers. A refund officer need not furnish a 
statement to an individual under paragraph (k)(1) of this section if the 
refund officer verifies that the individual did not claim itemized 
deductions for Federal income tax purposes for the taxable year giving 
rise to the refund, credit, or offset. This exception shall not apply, 
however, if the refund, credit, or offset is made or allowed with 
respect to a payment attributable to an income tax that applies 
exclusively to income from a trade or business and is not a tax of 
general application. For purposes of this paragraph (k)(2), verification 
shall be made solely from--
    (i) The State or local income tax return, or
    (ii) Information obtained through a voluntary information exchange 
agreement with the United States for the applicable taxable year.
    (3) Verification from the State or local income tax return. A refund 
officer shall verify from the State or local income tax return that an 
individual did not claim itemized deductions for Federal income tax 
purposes for the applicable taxable year only if--
    (i)(A) An individual who itemized deductions for Federal income tax 
purposes either must attach a copy of Schedule A of the individual's 
Federal income tax return to the State or local income tax return or 
must transcribe information from Schedule A of the individual's Federal 
income tax return on the State or local income tax return;
    (B) The information contained on or transcribed from the Schedule A 
is required for the purpose of computing liability for the State or 
local income tax; and
    (C) The omission of a copy of the Schedule A, or of the information 
required to be transcribed from the Schedule A, is consistent with the 
taxpayer's computation of tax on the State or local income tax return; 
or
    (ii) Individuals are required to transcribe information from their 
Federal income tax return (other than from Schedule A) on the State or 
local income tax return for the purpose of computing liability for the 
State or local income tax and the information can be used to determine 
conclusively whether the taxpayer itemized deductions for Federal income 
tax purposes.
    (4) Example. The provisions of paragraph (k)(3)(ii) of this section 
may be illustrated by the following example:

    Example. State X asks for transcription of the following information 
on its 1983 income tax return from the taxpayer's 1983 Federal income 
tax return: Adjusted gross income; taxable income; and number of 
exemptions claimed. The amount of adjusted gross income and the number 
of exemptions claimed on the Federal income tax return are taken into 
account in computing the liability for

[[Page 687]]

income tax under the laws of State X. The amount of taxable income 
transcribed from the Federal return, however, does not enter into the 
computation of liability for income tax under the laws of State X. Thus, 
this amount may not be taken into account by the refund officer of State 
X for purposes of verifying whether a taxpayer itemized deductions for 
Federal income tax purposes. Since the refund officer of State X will 
not be able to determine conclusively from the amount of adjusted gross 
income and the number of exemptions transcribed from the Federal return 
whether a taxpayer itemized deductions for Federal income tax purposes, 
the transcribed information does not meet the requirements of paragraph 
(k)(3)(ii) of this section.

    (l) Time for furnishing statements--(1) General rule. The statement 
required under paragraph (k) of this section shall be furnished after 
December 31 of the year in which the refund is paid or credit or offset 
is allowed, and on or before January 31 of the following year.
    (2) Extensions of time. For good cause shown upon written 
application of the refund officer, the service center director may grant 
an extension of time not exceeding 30 days in which to furnish 
statements under this paragraph. The application shall be addressed to 
the Service Center with which the Forms 1099 required under this section 
are required to be filed and shall contain a concise statement of the 
reasons for requesting the extension to aid the service center director 
in determining the period of the extension, if any, which will be 
granted. The application shall state at the top of the first page that 
it is made under this section and shall be signed by the refund officer. 
In general, the application shall be filed after September 30 of the 
year in which the refund is paid or credit or offset is allowed, and 
before January 15 of the following year.
    (m) Effective date. This section applies to payments of refunds and 
credits and offsets allowed after December 31, 1982.

[T.D. 8052, 50 FR 37349, Sept. 13, 1985]



Sec. 1.6050H-0  Table of contents.

    This section lists the major captions that appear in Secs. 1.6050H-1 
and 1.6050H-2.
Sec. 1.6050H-1  Information reporting of mortgage interest received in a 
trade or business from an individual.
    (a) Information reporting requirement.
    (1) Overview.
    (2) Reporting requirement.
    (3) Optional reporting.
    (b) Qualified mortgage.
    (1) In general.
    (2) Mortgage.
    (i) In general.
    (ii) Transitional rule for certain obligations existing on December 
31, 1984.
    (iii) Transitional rule for certain obligations existing on December 
31, 1987.
    (3) Payor of record.
    (4) Lender of record.
    (c) Interest recipient.
    (1) Trade or business requirement.
    (2) Interest received or collected on behalf of another person.
    (i) General rule.
    (ii) Exception.
    (3) Interest received in the form of points.
    (i) In general.
    (ii) If designation agreement is in effect.
    (4) Governmental unit.
    (5) Examples.
    (d) Additional rules.
    (1) Reporting by foreign person.
    (2) Reporting with respect to nonresident alien individual.
    (i) In general.
    (ii) Nonresident alien individual status.
    (3) Reporting by cooperative housing corporations.
    (e) Amount of interest received on mortgage for calendar year.
    (1) In general.
    (2) Calendar year.
    (i) In general.
    (ii) De minimis rule.
    (iii) Applicability to points.
    (3) Certain interest not received on mortgage.
    (i) Interest received from seller on payor of record's mortgage.
    (ii) Interest received from governmental unit.
    (4) Interest calculated under Rule of 78s method of accounting.
    (f) Points treated as interest.
    (1) General rule.
    (2) Limitations.
    (3) Special rule.
    (i) Amounts paid directly by payor of record.
    (ii) Examples.
    (4) Construction loans.
    (i) In general.
    (ii) Limitation on refinancing of construction loans.
    (5) Amounts paid to mortgage brokers.
    (6) Effect on deduction of points.
    (g) Effective date.
    (1) In general.
    (2) Points.

[[Page 688]]

Sec. 1.6050H-2  Time, form, and manner of reporting interest received on 
qualified mortgage.
    (a) Requirement to file return.
    (1) Form of return.
    (2) Information included on return.
    (3) Reimbursements of interest on a qualified mortgage.
    (4) Time and place for filing return.
    (5) Use of magnetic media.
    (b) Requirement to furnish statement.
    (1) In general.
    (2) Information included on statement.
    (3) Statement furnished pursuant to Federal mortgage program.
    (4) Copy of Form 1098 to payor of record.
    (5) Furnishing statement with other information reports.
    (6) Time and place for furnishing statement.
    (c) Notice requirement for use of Rule of 78s method of accounting.
    (1) In general.
    (2) Time and manner.
    (d) Reporting under designation agreement.
    (1) In general.
    (2) Qualified person.
    (3) Designation agreement.
    (4) Penalties.
    (e) Penalty provisions.
    (1) Returns and statements the due date for which (determined 
without regard for extensions) is after December 31, 1987, and before 
December 31, 1989.
    (i) Failure to file return or to furnish statement.
    (ii) Failure to furnish TIN.
    (iii) Failure to include correct information.
    (2) Returns and statements the due date for which (determined 
without regard for extensions) is after December 31, 1989.
    (i) Failure to file return or to furnish statement.
    (ii) Failure to furnish TIN.
    (iii) Failure to include correct information.
    (f) Requirement to request and to obtain TIN.
    (1) In general.
    (2) Manner of requesting TIN.
    (g) Effective date.
    (1) In general.
    (2) Points.

[T.D. 8571, 59 FR 63250, Dec. 8, 1994]



Sec. 1.6050H-1  Information reporting of mortgage interest received in a trade or business from an individual.

    (a) Information reporting requirement--(1) Overview. The information 
reporting requirements of section 6050H, this section, and Sec. 1.6050H-
2 apply to an interest recipient who receives at least $600 of interest 
on a qualified mortgage for a calendar year or who makes a reimbursement 
of interest described in Sec. 1.6050H-2(a)(2)(iv). Paragraph (b) of this 
section defines qualified mortgage. Paragraph (c) of this section 
defines interest recipient. Paragraph (d) of this section contains 
additional rules relating to the reporting requirement for foreign 
persons, cooperative housing corporations, and nonresident alien 
individuals. Paragraph (e) of this section contains rules for 
determining the amount of interest received on a mortgage for a calendar 
year. Paragraph (f) of this section provides rules for determining when 
prepaid interest in the form of points is taken into account as interest 
for purposes of section 6050H, this section, and Sec. 1.6050H-2.
    (2) Reporting requirement. Except as otherwise provided in this 
section and Sec. 1.6050H-2, an interest recipient that either receives 
at least $600 of interest on a qualified mortgage for a calendar year or 
makes reimbursements of interest described in Sec. 1.6050H-2(a)(2)(iv) 
must, with respect to that interest--
    (i) File an information return with the Internal Revenue Service; 
and
    (ii) Furnish a statement to the payor of record on the mortgage.
    (3) Optional reporting. An interest recipient may, but is not 
required to, report its receipt of less than $600 of interest on a 
qualified mortgage for a calendar year. Similarly, an interest recipient 
also may report reimbursements of interest on a qualified mortgage even 
if the reimbursements are not required to be reported by Sec. 1.6050H-
2(a)(2)(iv). An interest recipient that chooses, but is not required, to 
file a return as provided in this section and Sec. 1.6050H-2(a) or to 
furnish a statement as provided in this section and Sec. 1.6050H-2(b) is 
subject to the requirements of this section and Sec. 1.6050H-2.
    (b) Qualified mortgage--(1) In general. A mortgage is a qualified 
mortgage if the payor of record on the mortgage is an individual, 
including an individual acting in a capacity as a sole proprietor of a 
business. A mortgage is not a qualified mortgage if the payor of

[[Page 689]]

record on the mortgage is not an individual (such as a trust, estate, 
partnership, association, company, or corporation), even though an 
individual is a co-borrower on the mortgage and all the trustees, 
beneficiaries, partners, members, or shareholders of the payor of record 
are individuals.
    (2) Mortgage--(i) In general. Except as otherwise provided in 
paragraphs (b)(2)(ii) and (b)(2)(iii) of this section, an obligation is 
a mortgage if real property (regardless of where located) secures all or 
part of the obligation. An interest recipient must determine whether 
real property secures an obligation at the time the obligation is 
created or, if security is added or removed at a later time, at that 
later time. Real property includes a manufactured home as defined in 
section 25(e)(10). An obligation includes a line of credit or a credit 
card obligation. For purposes of this section and Sec. 1.6050H-2, a 
borrower incurs a line of credit or credit card obligation when the 
borrower first has the right to borrow against the line of credit or 
credit card, whether the borrower actually borrows an amount at that 
time. An obligation will not fail to be treated as a mortgage solely 
because, under an applicable State or local homestead law or other 
debtor protection law in effect on August 16, 1986, the security 
interest is ineffective or the enforceability of the security interest 
is restricted.
    (ii) Transitional rule for certain obligations existing on December 
31, 1984--(A) In general. An obligation that existed on December 31, 
1984, is not a mortgage if, at the time the payor of record incurred the 
obligation, the interest recipient reasonably classified the obligation 
as other than a mortgage, real property loan, real estate loan, or other 
similar type of obligation. A reasonable classification of an obligation 
must be consistent with industry practices and determined according to 
the purpose of the obligation, the property securing the obligation, and 
any other reasonable factor. For purposes of this paragraph 
(b)(2)(ii)(A), an obligation was not reasonably classified as other than 
a mortgage, real property loan, real estate loan, or other similar type 
of obligation if, at the time the payor of record incurred the 
obligation, more than one-half of the obligations in the particular 
class in which the obligation was classified were secured primarily by 
real property.
    (B) Examples. The following examples illustrate the rules of 
paragraph (b)(2)(ii)(A) of this section:

    Example (1). B offers an unsecured line of credit and a line of 
credit secured by real property. B separately markets the two credit 
lines, and they are governed by different terms and conditions. For 
accounting purposes, B classifies the two types of loans as a single 
class. For purposes of paragraph (b)(2)(ii)(A) of this section, the two 
types of loans are different classes of obligations.
    Example (2). B operates a program to make loans to small businesses. 
Depending on the amount of the loan and the credit history of the 
borrower, B may or may not require security for the loan. If B requires 
security, it may consist of real or personal property. For accounting 
purposes, B classifies all of the loans within this program as a single 
class. For purposes of paragraph (b)(2)(ii)(A) of this section, all of 
the loans within this program may be classified as belonging to a single 
class.

    (iii) Transitional rule for certain obligations existing on December 
31, 1987. An obligation that was incurred after December 31, 1984, and 
that existed on December 31, 1987, is not a mortgage if the obligation 
is not primarily secured by real property.
    (3) Payor of record. A payor of record on a mortgage is the person 
carried on the books and records of the interest recipient as the 
principal borrower on the mortgage. If the books and records of the 
interest recipient do not indicate which borrower is the principal 
borrower, the interest recipient must designate a borrower as the 
principal borrower.
    (4) Lender of record. The lender of record is the person who, at the 
time the loan is made, is named as the lender on the loan documents and 
whose right to receive payment from the payor of record is secured by 
the payor of record's principal residence. An intention by the lender of 
record to sell or otherwise transfer the loan to a third party 
subsequent to the close of the transaction will not affect the 
determination of who is the lender of record.
    (c) Interest recipient--(1) Trade or business requirement. Except as 
provided in

[[Page 690]]

paragraph (c)(4) of this section, an interest recipient is a person that 
is engaged in a trade or business (whether or not the trade or business 
of lending money) and that, in the course of the trade or business, 
either receives interest on a mortgage or makes a reimbursement of 
interest on a qualified mortgage described in Sec. 1.6050H-2(a)(3). For 
purposes of this paragraph (c)(1), if a person holds a mortgage which 
was originated or acquired in the course of a trade or business, the 
interest on the mortgage is considered to be received in the course of 
that trade or business. For example, if real estate developer A lends 
money to individual B to enable B to purchase a house in a subdivision 
owned and developed by A, and B gives a mortgage to A for the loan, A is 
an interest recipient for interest received on the mortgage. 
Alternatively, if C, a person engaged in the trade or business of being 
a physician, lends money to individual D to enable D to purchase C's 
home, and D gives a mortgage to C for the loan, C is not an interest 
recipient for interest received on the mortgage, because C will not 
receive the interest in the course of the trade or business of being a 
physician.
    (2) Interest received or collected on behalf of another person--(i) 
General rule. Except as otherwise provided in paragraph (c)(2)(ii) or 
(3) of this section, a person that, in the course of its trade or 
business, receives or collects interest on a mortgage on behalf of 
another person (e.g., the lender of record) is the interest recipient 
(the initial recipient) for the mortgage. In this case, the reporting 
requirement of paragraph (a) of this section does not apply to the 
transfer of interest from the initial recipient to the person for which 
the initial recipient receives or collects the interest. For example, if 
financial institution A collects interest on behalf of financial 
institution B, A is the initial recipient for the mortgage and is 
subject to the reporting requirements of section 6050H, and B is not 
required to report the interest received on the mortgage from A.
    (ii) Exception--(A) Scope of exception. Paragraph (c)(2)(i) of this 
section does not apply for any period for which--
    (1) An initial recipient does not possess the information needed to 
comply with the reporting requirement of paragraph (a) of this section; 
and
    (2) The person for which the interest is received or collected would 
receive the interest in the course of its trade or business if the 
interest were paid directly to that person. For purposes of this 
paragraph (c)(2)(ii)(A)(2), if interest is received or collected on 
behalf of a person other than an individual, that person is presumed to 
receive interest in a trade or business.
    (B) Application of exception. If the exception provided by this 
paragraph (c)(2)(ii) applies, the person for which the interest is 
received or collected is the interest recipient with respect to interest 
received or collected on the mortgage during the period described in 
this paragraph (c)(2)(ii).
    (3) Interest received in the form of points. For purposes of this 
section and Sec. 1.6050H-2, in the case of prepaid interest received in 
the form of points (as defined in paragraph (f) of this section):
    (i) In general. Except as provided in paragraph (c)(3)(ii) of this 
section, only the lender of record or a qualified person (as defined in 
Sec. 1.6050H-2(d)(2)) is treated as receiving the points. The lender of 
record or qualified person is treated as receiving all points paid 
directly by the payor of record in connection with the purchase of the 
principal residence.
    (ii) If designation agreement is in effect. If a designation 
agreement is executed pursuant to Sec. 1.6050H-2(d) with respect to 
points, only the designated party under the agreement is treated as 
receiving points with respect to any mortgage to which the agreement 
applies. The designated party is treated as receiving all points with 
respect to any mortgage to which the agreement applies.
    (4) Governmental unit. A governmental unit or an agency or 
instrumentality of a governmental unit that receives interest on a 
mortgage is an interest recipient without regard to the requirement of 
paragraph (c)(1) of

[[Page 691]]

this section that the interest be received in the course of a trade or 
business. A governmental unit or an agency or instrumentality of a 
governmental unit that is an interest recipient must designate an 
officer or employee to satisfy the reporting requirements of paragraph 
(a) of this section.
    (5) Examples. The following examples illustrate the rules of 
paragraph (c) of this section:

    Example (1). Financial institution F collects mortgage interest on 
behalf of financial institution G and deposits the amount collected into 
G's account held with F. F possesses the information needed to comply 
with the reporting requirement of paragraph (a) of this section. F is 
the interest recipient for the mortgage. G is not required to report.
    Example (2).  The facts are the same as in example (1), except that 
F does not possess the information needed to comply with the reporting 
requirement. G, the person for which F collects the interest, is the 
interest recipient for the mortgage. F is not required to report.
    Example (3). S, an individual, sells real property to another 
individual, P, and takes back a mortgage from P to finance the sale. S 
does not receive the interest in the course of a trade or business. B, a 
bank, collects P's payments of principal and interest on behalf of S and 
deposits that amount into an account held at the bank in S's name. B 
does not possess the information needed to comply with the reporting 
requirement of paragraph (a) of this section. B is the interest 
recipient for P's mortgage without regard to paragraph (c)(2)(ii) of 
this section, because S would not receive the interest in the course of 
a trade or business. S is not required to report.
    Example (4). X collects mortgage interest on behalf of Y, who would 
receive the interest in the course of a trade or business. X possesses 
the information needed to comply with the reporting requirement of 
paragraph (a) of this section. On July 1, 1988, Z assumes X's interest 
collection responsibilities. Z does not possess the information needed 
to comply with the reporting requirement of paragraph (a) of this 
section. X is the interest recipient for interest received from January 
1, 1988, through June 30, 1988. Because Z does not possess the requisite 
information and Y would receive the interest in the course of a trade or 
business, Y is the interest recipient for interest received from July 1, 
1988, through December 31, 1988.
    Example (5). On December 1, Borrower obtains from Lender funds with 
which to purchase an existing structure to be used as Borrower's 
principal residence. In connection with the mortgage, Lender charges 
Borrower $300 as points. Borrower pays this amount to Lender at closing 
using unborrowed funds. In addition, Lender receives from Borrower with 
respect to the mortgage $300 as interest (as determined under paragraph 
(e) of this section) other than points. Because Lender has received at 
least $600 in interest, including points, with respect to Borrower's 
mortgage during the calendar year, Lender must report the payments in 
accordance with paragraph (a) of this section and Sec. 1.6050H-2. Under 
those sections, Lender must separately state on the information return 
and the statement to Borrower the $300 received as interest (other than 
points) and the $300 received as points.

    (d) Additional rules--(1) Reporting by foreign person. An interest 
recipient that is not a United States person (as defined in section 
7701(a)(30)) must report interest received on a qualified mortgage only 
if it receives the interest--
    (i) At a location in the United States, or
    (ii) At a location outside the United States if the interest 
recipient is--
    (A) A controlled foreign corporation (within the meaning of section 
957(a)), or
    (B) A person, 50 percent or more of the gross income of which, from 
all sources for the three-year period ending with the close of the 
taxable year preceding the receipt of interest (or for such part of the 
period as the person was in existence), was effectively connected with 
the conduct of a trade or business within the United States.
    (2) Reporting with respect to nonresident alien individual--(i) In 
general. The reporting requirement of paragraph (a) of this section does 
not apply if--
    (A) The payor of record is a nonresident alien individual, and
    (B) Real property located in the United States does not secure the 
mortgage.
    (ii) Nonresident alien individual status. For purposes of paragraph 
(d)(2)(i)(A) of this section, an interest recipient must apply the 
following documentary evidence rules to determine whether a payor of 
record is a nonresident alien individual:
    (A) If interest is paid outside the United States, the interest 
recipient must satisfy the documentary evidence standard provided in 
Sec. 35a.9999-4T (Q/A-5 (iii)) with respect to the payor of record; and

[[Page 692]]

    (B) If interest is paid within the United States, the interest 
recipient must secure from the payor of record a Form W-8 or a 
substantially similar statement signed by the payor under penalty of 
perjury as described in Sec. 1.6049-5(b)(2)(iv).

For purposes of this paragraph (d)(2)(ii), the place of payment is the 
place where the payor of record completes the acts necessary to effect 
payment. An amount paid by transfer to an account maintained by an 
interest recipient in the United States or by mail to a United States 
address is considered to be paid within the United States.
    (3) Reporting by cooperative housing corporations. For purposes of 
this section and Sec. 1.6050H-2, an amount received by a cooperative 
housing corporation from an individual tenant-stockholder that 
represents the tenant-stockholder's proportionate share of interest 
described in section 216(a)(2) is interest received on a qualified 
mortgage in the course of the cooperative housing corporation's trade or 
business. A cooperative housing corporation is an interest recipient 
with respect to each tenant-stockholder's proportionate share of 
interest and must report $600 or more of interest received from an 
individual tenant-stockholder. The terms ``cooperative housing 
corporation,'' ``tenant-stockholder,'' and ``tenant-stockholder's 
proportionate share'' are defined in section 216 and the regulations 
thereunder.
    (e) Amount of interest received on mortgage for calendar year--(1) 
In general. For purposes of this section and Sec. 1.6050H-2, interest 
includes mortgage prepayment penalties and late charges other than late 
charges for a specific mortgage service. Interest also includes prepaid 
interest in the form of points (as defined in paragraph (f) of this 
section). Whether an interest recipient receives $600 or more of 
interest on a mortgage for a calendar year is determined on a mortgage-
by-mortgage basis. An interest recipient need not aggregate interest 
received on all of the mortgages of a payor of record held by the 
interest recipient to determine whether the $600 threshold is met. 
Therefore, an interest recipient need not report interest of less than 
$600 received on a mortgage, even though it receives a total of $600 or 
more of interest on all of the mortgages of the payor of record for a 
calendar year.
    (2) Calendar year--(i) In general. Except as otherwise provided in 
paragraph (e)(2)(ii) or (iii) of this section, the calendar year for 
which interest is received is the later of the calendar year in which 
the interest is received or the calendar year in which the interest 
properly accrues.
    (ii) De minimis rule. An interest recipient may treat interest 
received during the current calendar year which properly accrues by 
January 15 of the subsequent calendar year as interest received for the 
current calendar year. For example, if an interest recipient receives a 
monthly interest payment on December 31, 1988, which includes interest 
accruing for the period December 5, 1988, to January 5, 1989, the 
interest recipient may treat the entire interest payment as received for 
1988. If a portion of an interest payment received in a current calendar 
year accrues after January 15 of the subsequent calendar year, an 
interest recipient must report as interest received for the current 
calendar year only the portion that properly accrues by the end of the 
current calendar year. For example, if an interest recipient receives a 
monthly payment that includes interest accruing for the period December 
20, 1988, through January 20, 1989, the interest recipient may not 
report as interest received for 1988 any interest accruing after 
December 31, 1988. The interest recipient must report the interest 
accruing after December 31, 1988, as received for calendar year 1989.
    (iii) Applicability to points. Paragraphs (e)(2)(i) and (ii) of this 
section do not apply to prepaid interest in the form of points (as 
defined in paragraph (f) of this section). Points (as defined in 
paragraph (f) of this section) must be reported in the calendar year in 
which they are received.
    (3) Certain interest not received on mortgage--(i) Interest received 
from seller on payor of record's mortgage. Interest received from a 
seller or a person related to a seller within the meaning of section 
267(b) or section 707(b)(1) on a

[[Page 693]]

payor of record's mortgage is not interest received on a mortgage. For 
example, interest is not received on a mortgage if a real estate 
developer deposits an amount in escrow with an interest recipient and 
advises it to draw on the account to pay interest on a payor of record's 
mortgage (e.g., a buy-down mortgage). Similarly, interest is not 
received on a mortgage if an interest recipient receives a lump sum from 
a real estatge developer for interest on a payor of record's mortgage.
    (ii) Interest received from governmental unit. Interest received 
from a governmental unit or an agency or instrumentality of a 
governmental unit is not interest received on a mortgage. For example, 
interest is not received on a mortgage if received as a housing 
assistance payment from the Department of Housing and Urban Development 
on a mortgage insured under section 235 of the National Housing Act (12 
U.S.C. 1701-1715z (1982 & Supp. 1983)). Except as otherwise provided in 
paragraph (e) (1) and (2) of this section, interest received on a 
mortgage is only the excess of interest received on the mortgage over 
interest received from a governmental unit or an agency or 
instrumentality of a governmental unit.
    (4) Interest calculated under Rule of 78s method of accounting. An 
interest recipient permitted by Revenue Procedure 83-40, 1983-1, C.B. 
774 (or other revenue procedure) to use the Rule of 78s method of 
accounting to calculate interest earned on a transaction may report as 
interest received on a mortgage interest earned on the transaction as 
calculated under the Rule of 78s method of accounting only if the 
interest recipient satisfies the notice requirement of Sec. 1.6050H-
2(c).
    (f) Points treated as interest--(1) General rule. Subject to the 
limitations of paragraph (f)(2) of this section, an amount is deemed to 
be points paid in respect of indebtedness incurred in connection with 
the purchase of the payor of record's principal residence (points) for 
purposes of this section and Sec. 1.6050H-2 to the extent that the 
amount--
    (i) Is clearly designated on the Uniform Settlement Statement 
prescribed under the Real Estate Settlement Procedures Act of 1974, 12 
U.S.C. 2601 et seq., (e.g., the Form HUD-1) as points incurred in 
connection with the indebtedness, for example as loan origination fees 
(including amounts so designated on Veterans Affairs (VA) and Federal 
Housing Administration (FHA) loans), loan discount, discount points, or 
points;
    (ii) Is computed as a percentage of the stated principal amount of 
the indebtedness incurred by the payor of record;
    (iii) Conforms to an established practice of charging points in the 
area in which the loan is issued and does not exceed the amount 
generally charged in the area;
    (iv) Is paid in connection with the acquisition by the payor of 
record of a residence that is the principal residence of the payor of 
record and that secures the loan. For this purpose, the lender of record 
may rely on a signed written statement of the payor of record that 
states whether the proceeds of the loan are for the purchase of the 
mortgagor's principal residence; and
    (v) Is paid directly by the payor of record.
    (2) Limitations. An amount is not points for purposes of this 
section to the extent that the amount is--
    (i) Paid in connection with indebtedness incurred for the 
improvement of a principal residence;
    (ii) Paid in connection with indebtedness incurred to purchase or 
improve a residence that is not the payor of record's principal 
residence, such as a second home, vacation property, investment 
property, or trade or business property;
    (iii) Paid in connection with a home equity loan or a line of 
credit, even though the loan is secured by the payor of record's 
principal residence;
    (iv) Paid in connection with a refinancing loan (except as provided 
by paragraph (f)(4) of this section), including a loan incurred to 
refinance indebtedness owed by the borrower under the terms of a land 
contract, a contract for deed, or similar forms of seller financing;
    (v) Paid in lieu of amounts that ordinarily are stated separately on 
the Form HUD-1, such as appraisal fees, inspection fees, title fees, 
attorney fees, and property taxes; or

[[Page 694]]

    (vi) Paid in connection with the acquisition of a principal 
residence, to the extent that the amount is allocable to indebtedness in 
excess of the aggregate amount that may be treated as acquisition 
indebtedness under section 163(h)(3)(B)(ii).
    (3) Special rule--(i) Amounts paid directly by payor of record. For 
purposes of this section, an amount is considered paid directly by the 
payor of record if it is--
    (A) Provided by the payor of record from funds that have not been 
borrowed from the lender of record for this purpose as part of the 
overall transaction. The amount provided may include amounts designated 
as down payments, escrow deposits, earnest money applied at the closing, 
and other funds actually paid over by the payor of record at or before 
the time of closing; or
    (B) Paid as points (within the meaning of this paragraph (f)) on 
behalf of the payor of record by the seller. For this purpose, an amount 
paid as points to an interest recipient by the seller on behalf of the 
payor of record is treated as paid to the payor of record and then paid 
directly by the payor of record to the interest recipient.
    (ii) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples:

    Example 1. Financed payment of points. Buyer purchases a principal 
residence for $100,000. There is a total of $7,000 in closing costs 
(exclusive of down payment) charged in connection with the sale. Of this 
amount, $3,000 is charged as points (within the meaning of paragraph (f) 
of this section). At closing, Buyer makes a down payment of $20,000 and 
provides unborrowed funds in the amount of $4,000 for the payment of 
various closing costs other than points. Buyer finances payment of the 
points by increasing the principal amount of the loan by $3,000. Seller 
makes no payments on Buyer's behalf. Because Buyer has provided at 
closing funds that have not been borrowed from the lender of record for 
this purpose in an amount at least equal to the amount charged as points 
in the transaction, the lender of record (or a qualified person) must 
report $3,000 as points in accordance with this section and 
Sec. 1.6050H-2.
    Example 2. Seller-paid points. Buyer purchases a principal residence 
for $100,000. There is a total of $7,000 in closing costs (exclusive of 
down payment) charged in connection with the sale. Of this amount, 
$3,000 is charged as points (within the meaning of this paragraph (f)). 
Seller agrees to pay all closing costs on behalf of Buyer, including the 
amount charged as points. Accordingly, the amount paid by Seller as 
points is treated as paid directly by Buyer, and the lender of record 
(or a qualified person) must report the $3,000 as points in accordance 
with this section and Sec. 1.6050H-2.

    (4) Construction loans--(i) In general. An amount paid in connection 
with indebtedness incurred to construct a residence, or to refinance 
indebtedness incurred to construct a residence, is deemed to be points 
for purposes of this section to the extent the amount--
    (A) Is clearly designated on the loan documents as points incurred 
in connection with the indebtedness, for example, as loan origination 
fees, loan discount, discount points, or points;
    (B) Is computed as a percentage of the stated principal amount of 
the indebtedness incurred by the payor of record;
    (C) Conforms to an established practice of charging points in the 
area in which the loan is issued and does not exceed the amount 
generally charged in the area;
    (D) Is paid in connection with indebtedness incurred by the payor of 
record to construct (or to refinance construction of) a residence that 
is to be used, when completed, as the principal residence of the payor 
of record;
    (E) Is paid directly by the payor of record; and
    (F) Is not allocable to indebtedness in excess of the aggregate 
amount that may be treated as acquisition indebtedness under section 
163(h)(3)(B)(ii).
    (ii) Limitation on refinancing of construction loans. Amounts paid 
in connection with refinancing indebtedness incurred to construct a 
residence are not treated as points to the extent they are allocable to 
indebtedness that exceeds the indebtedness incurred to construct the 
residence.
    (5) Amounts paid to mortgage brokers. Amounts received directly or 
indirectly by a mortgage broker are treated as points under this 
paragraph (f) to the same extent the amounts would be so treated if they 
were paid to and retained by the lender of record, and must be reported 
by the lender of record in accordance with this section and 
Sec. 1.6050H-2.

[[Page 695]]

    (6) Effect on deduction of points. This section and Sec. 1.6050H-2 
address only the information reporting requirements of section 6050H and 
do not affect a payor of record's deduction for any amount in accordance 
with applicable provisions of the Internal Revenue Code.
    (g) Effective date--(1) In general. Except as provided in paragraph 
(g)(2) of this section, this section is effective for mortgage interest 
received after December 31, 1987. Section 1.6050H-1T contains rules for 
reporting mortgage interest received after December 31, 1984, and before 
January 1, 1988.
    (2) Points. The reporting requirements of this section do not apply 
to prepaid interest received in the form of points before January 1, 
1995. In addition, the inclusion of points in the determination of 
interest under paragraph (e)(1) of this section applies only to 
transactions occurring after December 31, 1994.

[T.D. 8191, 53 FR 12002, Apr. 12, 1988, as amended by T.D. 8571, 59 FR 
63251, Dec. 8, 1994]



Sec. 1.6050H-1T  Information reporting of mortgage interest received in a trade or business from individuals after 1985 and before 1988 (temporary).

    The following questions and answers relate to the requirement of 
reporting mortgage interest under section 6050H of the Internal Revenue 
Code of 1954, as added by section 145 of the Tax Reform Act of 1984 
(Pub. L. 98-369, 98 Stat. 685):

                        Requirement of Reporting

                               In general

    Q-1: What does section 6050H provide with respect to the reporting 
of mortgage interest?
    A-1: In general, section 6050H provides that an information return 
must be made by any person who is engaged in a trade or business and 
who, in the course of such trade or business, receives from any 
individual $600 or more of interest on any mortgage in a calender year. 
For purposes of this section--
    (a) Any person who is engaged in a trade or business and who, in the 
course of such trade or business, receives interest on any mortgage is 
referred to as an ``interest recipient''; and
    (b) Any individual who pays interest on any mortgage is referred to 
as a ``payor''.

                      Interest Subject To Reporting

    Q-2: Does the reporting requirement apply to all interest received 
by an interest recipient?
    A-2: No. The reporting requirement applies only to interest received 
from a payor on a mortgage (as defined in A-4 and A-5 of this section). 
The reporting requirement does not apply to interest received from a 
trust, estate, partnership, association, company, or corporation.
    Q-3: Does the reporting requirement apply to any amount of mortgage 
interest received from a payor?
    A-3: No. The reporting requirement applies only if $600 or more of 
interest is received from a payor on any mortgage in a calendar year. 
The $600 threshold is determined on an obligation by obligation basis. 
Therefore, if the interest received from a payor on an obligation is 
less than $600, reporting with respect to that interest is not required 
even if the total interest received from the payor on all obligations 
held by the interest recipient exceeds $600 in a calendar year.
    Q-4: What is a mortgage, for purposes of this section and section 
6050H, with respect to obligations in existence on December 31, 1984?
    A-4: An obligation in existence on December 31, 1984, that is 
secured primarily by real property (regardless of whether the property 
is located inside or outside the United States) is a mortgage unless, at 
the time the obligation was incurred, the interest recipient reasonably 
classified such obligation as other than a mortgage, real property loan, 
real estate loan, or other similar type of obligation. (See A-12 of this 
section for rules relating to interest received by foreign persons.) For 
example, if an obligation incurred in 1980 was secured primarily by real 
property, but the interest recipient reasonably classified the 
obligation as a commercial loan because the proceeds were used to 
finance the payor's trade or business, the obligation is not considered 
a mortgage for purposes of this section and section 6050H. If, however, 
a majority of the obligations in a particular class are primarily 
secured by real property, it is not reasonable to classify such 
obligations as other than mortgages, real property loans, real estate 
loans, or other similar types of obligations; such obligations are, 
therefore, mortgages for purposes of section 6050H and this section. For 
purposes of this definition, real property includes stock in a 
cooperative housing corporation. A mortgage does not include a credit 
card obligation that is secured primarily by real property or a line of 
credit that is secured primarily by real property.
    Q-5: What is a mortgage, for purposes of this section and section 
6050H, with respect to obligations incurred after December 31, 1984?

[[Page 696]]

    A-5: With respect to obligations incurred after December 31, 1984, a 
mortgage is any obligation that is secured primarily by real property, 
regardless of whether the property is located inside or outside the 
United States. (See A-12 of this section for rules relating to interest 
received by foreign persons.) For purposes of this definition, real 
property includes stock in a cooperative housing corporation. A mortgage 
does not include a credit card obligation that is secured primarily by 
real property or a line of credit that is secured primarily by real 
property. The determination of whether a particular obligation is a 
mortgage shall be made without regard to the interest recipient's 
classification of that obligation. For example, if an obligation is 
secured primarily by real property, but the interest recipient 
classifies the obligation as a commercial loan because the proceeds are 
to be used to finance the payor's trade or business, the obligation is 
nevertheless a mortgage for purposes of this section and section 6050H.
    Q-6: If the amount of interest received on a mortgage in a calendar 
year is less than the amount of interest due on the mortgage, what 
amount of interest must be reported under this section?
    A-6: The amount of interest received must be reported. For example, 
assume that $800 of interest is payable in a calendar year but only $600 
of interest is received in the calendar year. The amount of interest 
received ($600) must be reported under this section. Similarly, assume 
that an interest recipient accrues $900 of interest on a mortgage in a 
calendar year but only $800 of interest is payable and is received in 
the calendar year (resulting in a $100 increase in the unpaid balance of 
the loan). The amount of interest received ($800) must be reported under 
this section.
    Q-7: If a payor remits 13 payments of interest on any mortgage in a 
calendar year, but the interest recipient receives only 12 payments in 
the calendar year, what amount should the interest recipient report?
    A-7: The interest recipient should report the interest actually 
received in the calendar year. For example, if a payor mails the 13th 
payment on December 31 or a calendar year, and the interest recipient 
does not receive it until the following calendar year, the interest 
recipient should report only the 12 payments received in the calendar 
year.

                      Trade or Business Requirement

    Q-8: Must an interest recipient be engaged in the trade or business 
of lending money to be subject to the reporting requirement of this 
section?
    A-8: No. An interest recipient (other than a governmental unit, or 
any agency or instrumentality thereof) is subject to this reporting 
requirement if the interest recipient is engaged in any trade or 
business and, in the course of such trade or business, receives from an 
individual $600 or more of interest on any mortgage in a calendar year. 
For example, if A, a real estate developer, provides financing to B, an 
individual, to enable B to purchase a house in a subdivision owner and 
developed by A, and that house is the primary security for the 
financing, A is subject to this reporting requirement. Alternatively, if 
C, a physician, who is not engaged in any other trade or business, lends 
money to D to enable D to purchase C's home, C is not subject to the 
reporting requirement of this section because C will not receive the 
interest in the course of his sole trade or business of being a 
physician.
    Q-9: How does the trade or business requirement apply to a 
governmental unit?
    A-9: A governmental unit (or any agency or instrumentality thereof) 
which receives from a payor $600 or more of interest on any mortgage in 
a calendar year is subject to the reporting requirement without regard 
to the requirement that the money be received in the course of a trade 
or business. A governmental unit (or any agency or instrumentality 
thereof) that is subject to the reporting requirement must designate an 
officer or employee to make the return. The designated officer or 
employee must make the return in the form and manner prescribed by this 
section.

              Treatment of Cooperative Housing Corporations

    Q-10: How does this reporting requirement apply in the case of 
cooperative housing corporation?
    A-10: For purposes of section 6050H and this section, a cooperative 
housing corporation (as defined in section 216) is treated as a person 
who is engaged in a trade or business and who, in the course of such 
trade or business, receives interest from its tenant-stockholders on a 
mortgage. Therefore, a cooperative housing corporation is required to 
report under section 6050H and this section.

                 Interest Received on Behalf of Another

    Q-11: If, in the course of a trade or business, a person receives 
(collects) interest on behalf of another, who is required to report?
    A-11: The person first receiving (collecting) the interest is 
required to report. For example, a servicing bank that receives $600 or 
more of mortgage interest in a calendar year from a payor on behalf of a 
lender is required to report the interest received under this section. 
No reporting is required under this section upon the transfer of the 
interest from the servicing bank to the lender for whom the interest was 
received.

                  Interest Received by Foreign Persons

    Q-12: Must an interest recipient that is a foreign person report 
under section 6050H and this section?

[[Page 697]]

    A-12: An interest recipient that is a foreign person must report 
with respect to mortgage interest that is received at a location within 
the United States. In the case of interest received at locations outside 
the United States, an interest recipient that is a foreign person must 
report--
    (a) If the foreign person is a controlled foreign corporation within 
the meaning of section 957(a); or
    (b) If the foreign person is a corporation any interest received 
from which would be considered to be from sources within the United 
States under section 861(a)(1)(C) (without regard to whether the 
interest is paid or credited by a domestic branch of a foreign 
corporation engaged in the commercial banking business).

                           Multiple Borrowers

    Q-13: When there is more than one borrower on a mortgage, must the 
interest recipient report with respect to each borrower?
    A-13: No. The interest recipient must report only with respect to 
the payor of record (as defined in A-14 of this section) on the 
mortgage. The amount of interest subject to reporting is the full amount 
received by the interest recipient with respect to the mortgage during 
the calendar year.
    Q-14: Who is a payor of record?
    A-14: For purposes of this section, the payor of record is the 
individual carried on the books and records of the interest recipient as 
the principal borrower or the individual designated by the interest 
recipient as the payor of record.

                     Interest Paid by Third Parties

    Q-15: If an interest recipient receives interest on a mortgage from 
a person other than the borrower, must the interest recipient report 
this amount as received from the borrower?
    A-15: In general, yes. Except as otherwise provided in this A-15 and 
A-15a of this section, an interest recipient must report all amounts 
received on a borrower's mortgage as received from the borrower under 
section 6050H and this section. For example, assume that N is the 
borrower on a mortgage and that interest is received on the mortgage 
from N's mother. The interest that is received from N's mother on N's 
mortgage is reportable under section 6050H and this section as received 
from N. However, interest that is paid by a seller on a purchaser's 
mortgage shall not be reported under section 6050H and this section as 
received from the purchaser. For example, if a real estate developer 
deposits an amount in escrow with the interest recipient and advises the 
interest recipient to draw on the account to pay interest on a 
purchaser's mortgage, this interest is not reportable under section 
6050H and this section. Similarly, if a real estate developer pays a 
lump sum to the interest recipient for interest on a purchaser's 
mortgage, this interest is not reportable under section 6050H and this 
section. In addition, amounts received by the interest recipient as 
housing assistance payments from the Department of Housing and Urban 
Development (``HUD'') on a borrower's mortgage that is insured under 
section 235 of the National Housing Act (12 U.S.C. 1701-1715z (1982 and 
Supp. 1983)) shall not be reported as interest received from the 
borrower. In such a case, therefore, only the amount of interest 
received on the mortgage that exceeds the amount of housing assistance 
payments received from HUD shall be reported.
    Q-15a: If an interest recipient receives, with respect to a 
borrower's mortgage, an amount from a governmental unit, or any agency 
or instrumentality thereof (other than an amount received from HUD as 
described in A-15 of this section), should the interest recipient report 
the amount as received from the borrower?
    A-15a: If the interest is received after December 31, 1986, it must 
be reported in the same manner as interest on mortgages with respect to 
which housing assistance payments are received from HUD, as described in 
A-15 of this section. If the interest is received before January 1, 
1987, it may, but need not, be reported.

                        Form and Manner of Return

                             Form of Return

    Q-16: What form must be used to make a return required by section 
6050H and this section?
    A-16: An interest recipient must make the return on Form 1098 (with 
Form 1096 as the transmittal form). The interest recipient may, however, 
prepare and use a form that contains provisions substantially similar to 
those of Forms 1096 and 1098 if that person complies with any revenue 
procedures relating to substitute Forms 1096 and 1098 in effect at that 
time. A separate return must be made for each mortgage with respect to 
which $600 or more of interest is received for a calendar year.

                     Information Included on Return

    Q-17: What information must an interest recipient include on Form 
1098?
    A-17: An interest recipient must include the following information 
on the Form 1098:
    (a) The name, address, and TIN (as defined in section 7701(a)) of 
the payor or payor of record;
    (b) The name and address of the interest recipient;
    (c) The amount of interest (not including points and other prepaid 
interest) received on the mortgage in the calendar year; and
    (d) Any other information as may be required by Form 1098 or its 
instructions.

[[Page 698]]

                             Time for Filing

    Q-18: When must an interest recipient file the return or returns 
required by section 6050H and this section?
    A-18: An interest recipient must file the return or returns on or 
before February 28 of the year following the calendar year in which the 
mortgage interest is received.

                            Place for Filing

    Q-19: Where must the return or returns required under section 6050H 
and this section be filed?
    A-19: The return or returns must be filed with the same Internal 
Revenue Service Center where other returns of the interest recipient are 
filed.

                          Use of Magnetic Media

    Q-20: What rules apply with respect to the use of magnetic media?
    A-20: Any return required under section 6050H and this section must 
be filed on magnetic media to the extent required by section 6011(e) and 
the regulations thereunder. Any person not required by section 6011(e) 
to file returns on magnetic media may request permission to do so. See 
Sec. 1.9101 for rules relating to permission to submit information on 
magnetic tape or other media. If a person required to file returns on 
magnetic media fails to do so, the penalty under section 6652 (failure 
to file an information return) applies.

             Requirement of Furnishing Statements to Payors

                               In General

    Q-21: What statements are required to be furnished to payors under 
section 6050H and this section?
    A-21: Any interest recipient required to make an information return 
under section 6050H must also furnish a statement to the payor or, if 
applicable, payor of record (see A-13 and A-14 of this section). For the 
date when the statement must be furnished, see A-26 of this section.
    Q-22: Is the statement considered to be furnished to the payor or 
payor of record if it is mailed to him at his last known address?
    A-22: Yes.
    Q-23: If an interest recipient furnishes a statement required under 
a Federal mortgage program will the requirements of A-21 of this section 
be met?
    A-23: Yes, if the statement furnished contains all the information 
required under A-24 of this section and is furnished to the payors or 
payors of record by the date required under A-26 of this section.

                    Information Included on Statement

    Q-24: What information must be included on the statement required to 
be furnished to payors or payors of record under section 6050H and this 
section?
    A-24: The statement must include the following information:
    (a) The information required under A-17 of this section;
    (b) A legend stating that the information is being reported to the 
Internal Revenue Service; and
    (c) A legend stating that the amount reported on the statement is 
deductible by the payor for Federal income tax purposes only to the 
extent the payor actually paid the amount and was not reimbursed by 
another person.

                       Copy of Form 1098 to Payors

    Q-25: Can an interest recipient meet the requirement to furnish a 
statement to a payor or payor of record by furnishing a copy of the Form 
1098 filed with respect to that payor or payor of record?
    A-25: Yes. The requirement of furnishing a statement may be met by 
furnishing to the payor or payor of record a copy of the Form 1098 
containing the same information filed with the Service with respect to 
such payor, or a form that contains provisions substantially similar to 
those of Form 1098, provided that the form bears the legends described 
in A-24 of this section.

                      Time for Furnishing Statement

    Q-26: When is a statement required to be furnished by an interest 
recipient to the payor or payor of record?
    A-26: A statement is required to be furnished by the interest 
recipient to the payor or payor of record on or before January 31 of the 
year following the calendar year in which the mortgage interest is 
received.

                                Penalties

                               In General

    Q-27: Are there any penalties for failing to comply with the 
requirements of section 6050H and this section?
    A-27: Yes. The penalty for failing to make an information return 
with respect to a payor or payor of record is provided in section 6652. 
The penalty for failing to furnish a statement to a payor or payor of 
record is provided in section 6678.
    Q-28: Are there any penalties for failing to furnish a TIN upon 
request?
    A-28: Yes. Any payor or payor of record is subject to a $50 penalty 
by the Internal Revenue Service if such payor fails to furnish his TIN 
upon the request of an interest recipient. For rules relating to the 
requesting of TINs by interest recipients, see A-30 and A-31 of this 
section.
    Q-29: Is an interest recipient subject to any penalties for failing 
to furnish the TIN of a payor or payor of record?

[[Page 699]]

    A-29: Yes. In general, the penalties provided under section 6676 
will be assessed against interest recipients who fail to furnish to the 
Internal Revenue Service the TIN of a payor or payor of record. With 
respect to mortgages in existence on December 31, 1984, however, the 
interest recipient will not be subject to the section 6676 penalties if 
the interest recipient followed the rules of A-30 and A-31 of this 
section for requesting TINs and properly processed the responses.

                             Requesting TINS

    Q-30: What rules apply with respect to the requesting of TINs by 
interest recipients?
    A-30: With respect to obligations incurred after December 31, 1984, 
the interest recipient must take all reasonable steps to obtain the TIN 
of the payor or payor of record at the time the obligation is incurred. 
With respect to any mortgage for which the interest recipient does not 
have the TIN of the payor or payor of record in its accounting system, 
the interest recipient must request, at least once a year, the TIN of 
such payor.
    The request for a TIN need not be in a separate mailing. The request 
may be included, for example, in the interest recipient's regular 
mailings of payment coupon booklets or annual statements. However, if 
the interest recipient makes no other mailings to the payor or payor of 
record during 1985 (or during the year in which the obligation is 
incurred for obligations incurred after 1985), then the interest 
recipient must request the TIN in a separate mailing.
    Q-31: What form must the interest recipient use to request the TIN 
of a payor or a payor of record?
    A-31: No particular form must be used to request the TIN. However, 
the request must be made on a separate piece of paper and the request 
must clearly notify the payor that the Internal Revenue Service requires 
the payor to furnish his TIN in order to verify any deduction for 
mortgage interest. The interest recipient must also notify such payor 
that he is subject to a $50 penalty, imposed by the Internal Revenue 
Service, if he fails to furnish his TIN.

                             Effective Date

    Q-32: When is this section effective?
    A-32: This section generally is effective for mortgage interest 
received after December 31, 1984, and before January 1, 1988. However, 
Q/A-15a of this section is effective for mortgage interest received 
after December 31, 1986, and before January 1, 1988.

(26 U.S.C. 6050H)

[T.D. 8047, 50 FR 33530, Aug. 20, 1985, as amended by T.D. 8191, 53 FR 
12002, Apr. 12, 1988]



Sec. 1.6050H-2  Time, form, and manner of reporting interest received on qualified mortgage.

    (a) Requirement to file return--(1) Form of return. An interest 
recipient must file a return required by Sec. 1.6050H-1(a) on Form 1098 
(with Form 1096 as the transmittal form). An interest recipient may use 
forms containing provisions substantially similar to those in Forms 1098 
and 1096 if it complies with applicable revenue procedures relating to 
substitute Forms 1098 and 1096. An interest recipient must file a 
separate return for each qualified mortgage for which it receives $600 
or more of interest for a calendar year.
    (2) Information included on return. An interest recipient must 
include on Form 1098:
    (i) The name, address, and taxpayer identification number (TIN) (as 
defined in section 7701(a)(41)) of the payor of record;
    (ii) The name, address, and TIN of the interest recipient;
    (iii) The amount of interest (other than points) required to be 
reported with respect to the qualified mortgage for the calendar year;
    (iv) With respect to reimbursements of interest on a qualified 
mortgage (as discussed in paragraph (a)(3) of this section) made to the 
payor of record in the calendar year--
    (A) Reimbursements aggregating $600 or more; and
    (B) Reimbursements aggregating less than $600, but only if $600 or 
more of interest on the qualified mortgage is received in the calendar 
year from the payor of record;
    (v) The amount of points paid directly by the payor of record 
(within the meaning of Sec. 1.6050H-1(f)(3)) required to be reported 
with respect to the qualified mortgage for the calendar year; and
    (vi) Any other information required by Form 1098 or its 
instructions.

Section 1.6050H-1(e) contains rules to determine the amount of interest 
received on a mortgage for a calendar year.
    (3) Reimbursements of interest on a qualified mortgage. For purposes 
of paragraph (a)(2)(iv) of this section, a reimbursement of interest on 
a qualified mortgage is a reimbursement of an

[[Page 700]]

amount received in a prior year that was required to be reported for 
that prior year under paragraph (a)(2)(iii) of this section by any 
interest recipient. Only the interest recipient that makes the 
reimbursement is required to report the reimbursement under this 
section. Form 1098 and the statement furnished to the payor of record 
under paragraph (b) of this section must not include any amount that 
constitutes interest on the reimbursement paid to the payor of record. 
Rules relating to the requirement to report interest on a reimbursement 
are, in the case of a person carrying on the banking business (or a 
middleman, as defined in Sec. 1.6049-4(f)(4), of a person carrying on 
the banking business), provided in section 6049 and the regulations 
thereunder, and, for other persons, provided in section 6041 and the 
regulations thereunder. Reimbursements of interest on a qualified 
mortgage (as described in this section) made in 1993 and subsequent 
calendar years must be reported on Form 1098 and statements furnished to 
payors of record. Reimbursements made prior to 1993 are not required to 
be reported.
    (4) Time and place for filing return. An interest recipient must 
file a return required by paragraph (a) of this section on or before 
February 28 of the year following the calendar year for which it 
receives the mortgage interest. If no interest is required to be 
reported for the calendar year, but a reimbursement of interest on a 
qualified mortgage is required to be reported for the calendar year, 
then a return required by paragraph (a) of this section must be filed on 
or before February 28 of the year following the calendar year in which 
the reimbursement was made. An interest recipient must file the return 
required by paragraph (a) of this section with the IRS office designated 
in the instructions for Form 1098.
    (5) Use of magnetic media. An interest recipient must file the 
return required by paragraph (a) of this section on magnetic media only 
if required by section 6011(e) and the regulations thereunder. An 
interest recipient not required by section 6011(e) to file returns on 
magnetic media may request permission to do so. Section 301.6011-2 
contains rules relating to the use of magnetic media. A failure to file 
on magnetic media when required constitutes a failure to file an 
information return under section 6721.
    (b) Requirement to furnish statement--(1) In general. An interest 
recipient that must file a return under paragraph (a) of this section 
must furnish a statement to the payor of record.
    (2) Information included on statement. An interest recipient must 
include on the statement that it must furnish to a payor of record:
    (i) The information required under paragraph (a)(2) of this section;
    (ii) A legend that--
    (A) Identifies the statement as important tax information that is 
being furnished to the IRS; and
    (B) Notifies the payor of record that if the payor of record is 
required to file a return, a negligence penalty or other sanction may be 
imposed on the payor of record if the IRS determines that an 
underpayment of tax results because the payor of record overstated a 
deduction for this mortgage interest (if any) or understated income from 
this mortgage interest reimbursement (if any) on the payor of record's 
return;
    (iii) A legend stating that the payor of record may be unable to 
deduct the full amount of mortgage interest reported on the statement; 
that limitations based on the cost and value of the property securing 
the mortgage may apply; and that the payor of record may only deduct 
mortgage interest to the extent it was incurred, actually paid by the 
payor of record, and not reimbursed by another person; and
    (iv) With respect to any information required to be reported under 
paragraph (a)(2)(iv) of this section, an instruction providing that the 
amount of the reimbursement is not to be deducted and that the amount 
must be included in the gross income of the payor of record if the 
reimbursed interest was deducted by the payor of record in a prior year 
so as to reduce income tax.
    (3) Statement furnished pursuant to Federal mortgage program. An 
interest recipient that furnishes a statement to a payor of record under 
a Federal mortgage program will satisfy the requirement of paragraph 
(b)(1) of this section

[[Page 701]]

if the statement contains all the information and legends required by 
paragraph (b)(2) of this section and is furnished by the time and at the 
place required by paragraph (b)(6) of this section.
    (4) Copy of Form 1098 to payor of record. An interest recipient will 
satisfy the requirement of paragraph (b)(1) of this section by 
furnishing to a payor of record a copy of Form 1098 (or a substitute 
statement that complies with applicable revenue procedures) containing 
all the information filed with the Internal Revenue Service and all the 
legends required by paragraph (b)(2) of this section by the time and at 
the place required by paragraph (b)(6) of this section.
    (5) Furnishing statement with other information reports. An interest 
recipient may transmit the statement required by paragraph (b)(1) of 
this section to the payor of record with other information, including 
other information returns, as permitted by applicable revenue 
procedures.
    (6) Time and place for furnishing statement. An interest recipient 
must furnish a statement required by paragraph (b)(1) of this section to 
a payor of record on or before January 31 of the year following the 
calendar year for which it receives the mortgage interest. If no 
mortgage interest is required to be reported for the calendar year, but 
a reimbursement of interest on a qualified mortgage is required to be 
reported for the calendar year, then the statement required by paragraph 
(b)(1) of this section must be furnished on or before January 31 of the 
year following the calendar year in which the reimbursement was made. 
The interest recipient will be considered to have furnished the 
statement to the payor of record if it mails the statement to the payor 
of record's last known address.
    (c) Notice requirement for use of Rule of 78s method of accounting--
(1) In general. An interest recipient seeking to report interest 
received on a mortgage under the Rule of 78s method of accounting as 
permitted under Sec. 1.6050H-1(e)(4) must notify the payor of record 
that the Rule of 78s method of accounting was used to calculate interest 
received on the mortgage and that the payor of record may not deduct as 
interest the amount calculated under the Rule of 78s method of 
accounting unless the payor of record properly uses that method to 
determine interest deductions. The notice must state that the payor of 
record may use the Rule of 78s method of accounting to determine 
interest paid for Federal income tax purposes only for a self-amortizing 
consumer loan requiring level payments at regular intervals (at least 
annually) over no longer than a five-year period, with no balloon 
payment at the end of the loan term, and only when the loan agreement 
provides for use of the Rule of 78s method of accounting to determine 
interest earned. See Rev. Proc. 83-40, 1983-1 C.B. 774; Rev. Rul. 83-84, 
1983-1 C.B. 97.
    (2) Time and manner. An interest recipient must provide notice 
required by paragraph (c)(1) of this section to a payor of record on or 
with the statement required by paragraph (b) of this section. An 
interest recipient may provide notice on a separate paper or on the 
statement required by paragraph (b) of this section.
    (d) Reporting under designation agreement--(1) In general. An 
interest recipient that receives or collects interest (including points) 
on a mortgage may designate a qualified person to satisfy the reporting 
requirements of paragraphs (a), (b), and (c) of this section. If a 
designated qualified person reports as permitted under this paragraph 
(d), it will satisfy the requirement of paragraph (a)(2)(ii) of this 
section by including on Form 1098 (and Form 1096) the name, address, and 
TIN of the designated qualified person.
    (2) Qualified person. A qualified person is either--
    (i) A trade or business with respect to which the interest recipient 
is under common control within the meaning of Sec. 1.414(c)-2; or
    (ii) A person who is named as the designee by the lender of record 
or by a qualified person (under paragraph (d)(2) of this section) in a 
designation agreement entered into in accordance with paragraph (d)(3) 
of this section, and who either was involved in the original loan 
transaction or is a subsequent purchaser of the loan.
    (3) Designation agreement. An interest recipient that designates a 
qualified

[[Page 702]]

person to satisfy the reporting requirements described in paragraphs 
(a), (b), and (c) of this section must make that designation in a 
written designation agreement. The designation agreement must identify 
the mortgage(s) and calendar years for which the designated qualified 
person must report, and must be signed by both the designator and 
designee. A designee may report an amount as having been paid directly 
by the payor of record (for purposes of paragraph (a)(2)(v) of this 
section) only if the designation agreement contains the designator's 
representation that it did not lend such amount to the payor of record 
as part of the overall transaction. The designator must retain a copy of 
the designation agreement for four years following the close of the 
calendar year in which the loan is made. The designation agreement need 
not be filed with the Internal Revenue Service.
    (4) Penalties. A designated qualified person is subject to any 
applicable penalties provided in part II of subchapter B of chapter 68 
of the Internal Revenue Code as if it were an interest recipient. A 
designator is relieved from liability for applicable penalties by 
designating a qualified person under the provisions of paragraph (d)(3) 
of this section. Paragraph (e) of this section describes applicable 
penalties.
    (e) Penalty provisions--(1) Returns and statements the due date for 
which (determined without regard for extensions) is after December 31, 
1987, and before December 31, 1989. For purposes of this paragraph 
(e)(1) only, all references to sections of the Internal Revenue Code 
refer to sections of the Internal Revenue Code of 1986, as amended on or 
before December 31, 1987.
    (i) Failure to file return or to furnish statement. The section 6721 
penalty applies to an interest recipient that fails to file a return 
required by paragraph (a) of this section with respect to a payor of 
record. The section 6722 penalty applies to an interest recipient that 
fails to furnish a statement required by paragraph (b) of this section 
to a payor of record.
    (ii) Failure to furnish TIN. The section 6676 penalty may apply to 
an interest recipient that fails to furnish the TIN of a payor of record 
on a return required by paragraph (a) of this section. The section 6676 
penalty may apply to an interest recipient that fails to request and to 
obtain the TIN of a payor of record under paragraph (f) of this section.
    (iii) Failure to include correct information. The section 6723 
penalty may apply to an interest recipient that fails to include correct 
information on a return required by paragraph (a) of this section or on 
a statement required by paragraph (b) of this section to be furnished to 
a payor of record.
    (2) Returns and statements the due date for which (determined 
without regard for extensions) is after December 31, 1989--(i) Failure 
to file return or to furnish statement. The section 6721 penalty applies 
to an interest recipient that fails to file a return required by 
paragraph (a) of this section with respect to a payor of record. The 
section 6722 penalty applies to an interest recipient that fails to 
furnish a statement required by paragraph (b) of this section to a payor 
of record.
    (ii) Failure to furnish TIN. The section 6721 penalty may apply to 
an interest recipient that fails to furnish the TIN of a payor of record 
on a return required by paragraph (a) of this section. The section 6721 
penalty may apply to an interest recipient that fails to request and to 
obtain the TIN of a payor of record under paragraph (f) of this section.
    (iii) Failure to include correct information. The section 6721 
penalty may apply to an interest recipient that fails to include correct 
information on a return required by paragraph (a) of this section. The 
section 6722 penalty may apply to an interest recipient that fails to 
include correct information on a statement required by paragraph (b) of 
this section to be furnished to a payor record.
    (f) Requirement to request and to obtain TIN--(1) In general. For 
obligations incurred after December 31, 1987, an interest recipient must 
make all reasonable efforts to obtain the TIN of a payor of record when 
the payor of record incurs the obligation. For example, an interest 
recipient may require a borrower to furnish a TIN during the mortgage 
approval or application process. If an interest recipient does not

[[Page 703]]

maintain the TIN of a payor of record on a mortgage, whenever incurred, 
it must request the TIN at least annually and must process responses 
properly and promptly.
    (2) Manner of requesting TIN. An interest recipient need not 
separately mail a request for a TIN. An interest recipient may include a 
request in its regular mailing of payment coupon booklets or annual 
statements. If an interest recipient makes no mailing to a payor of 
record during the year in which the payor of record incurs the 
obligation, it must request the TIN in a separate mailing. No particular 
form is required to request a TIN. Nevertheless, an interest recipient 
must make the request on a separate paper and must clearly notify a 
payor of record that the Internal Revenue Service requires the payor of 
record to furnish a TIN in order to verify any mortgage interest 
deduction. An interest recipient must notify a payor of record that 
failure to furnish a TIN subjects the payor of record to a $50 penalty 
imposed by the Internal Revenue Service. A request for a TIN made on 
Form W-9 satisfies the requirement of this paragraph (f)(2).
    (g) Effective date--(1) In general. Except as provided in paragraph 
(g)(2) of this section, this section is effective for mortgage interest 
received after December 31, 1987. Section 1.6050H-1T contains rules for 
reporting mortgage interest received after December 31, 1984, and before 
January 1, 1988.
    (2) Points. The reporting requirement of this section does not apply 
to prepaid interest in the form of points received before January 1, 
1995.

[T.D. 8191, 53 FR 12005, Apr. 12, 1988, as amended by T.D. 8507, 58 FR 
68753, Dec. 29, 1993; T.D. 8571, 59 FR 63253, Dec. 8, 1994]



Sec. 1.6050I-0  Table of contents.

    This section lists the major captions that appear in Secs. 1.6050I-1 
and 1.6050I-2.

 Sec. 1.6050I-1  Returns relating to cash in excess of $10,000 received 
                         in a trade or business.

    (a) Reporting requirement.
    (1) In general.
    (2) Cash received for the account of another.
    (3) Cash received by agents.
    (i) General rule.
    (ii) Exception.
    (iii) Example.
    (b) Multiple payments.
    (1) Initial payment in excess of $10,000.
    (2) Initial payment of $10,000 or less.
    (3) Subsequent payments.
    (4) Example.
    (c) Meaning of terms.
    (1) Cash.
    (i) Amounts received prior to February 3, 1992.
    (ii) Amounts received on or after February 3, 1992.
    (iii) Designated reporting transaction.
    (iv) Exception for certain loans.
    (v) Exception for certain installment sales.
    (vi) Exception for certain down payment plans.
    (vii) Examples.
    (2) Consumer durable.
    (3) Collectible.
    (4) Travel or entertainment activity.
    (5) Retail sale.
    (6) Trade or business.
    (7) Transaction.
    (8) Recipient.
    (d) Exceptions to the reporting requirements of section 6050I.
    (1) Receipt of cash by certain financial institutions.
    (2) Receipt of cash by certain casinos having gross annual gaming 
revenue in excess of $1,000,000.
    (i) In general.
    (ii) Casinos exempt under 31 CFR 103.45(c).
    (iii) Reporting of cash received in a nongaming business.
    (iv) Example.
    (3) Receipt of cash not in the course of the recipient's trade or 
business.
    (4) Receipt is made with respect to a foreign cash transaction.
    (i) In general.
    (ii) Example.
    (e) Time, manner, and form of reporting.
    (1) Time of reporting.
    (2) Form of reporting.
    (3) Manner of reporting.
    (i) Where to file.
    (ii) Verification.
    (iii) Retention of returns.
    (f) Requirement of furnishing statements.
    (1) In general.
    (2) Form of statement.
    (3) When statement is to be furnished.
    (g) Cross-reference to penalty provisions.
    (1) Failure to file correct information return.
    (2) Failure to furnish correct statement.
    (3) Criminal penalties.

 Sec. 1.6050I-2  Returns relating to cash in excess of $10,000 received 
                        as bail by court clerks.

    (a) Reporting requirement.
    (b) Meaning of terms.
    (c) Time, form, and manner of reporting.
    (1) Time of reporting.
    (i) In general.

[[Page 704]]

    (ii) Multiple payments.
    (2) Form of reporting.
    (3) Manner of reporting.
    (i) Where to file.
    (ii) Verification of identity.
    (d) Requirement to furnish statements.
    (1) Information to Federal prosecutors.
    (i) In general.
    (ii) Form of statement.
    (2) Information to payors of bail.
    (i) In general.
    (ii) Form of statement.
    (iii) Aggregate amount.
    (e) Cross-reference to penalty provisions.
    (f) Effective date.

[T.D. 8652, 61 FR 7, Jan. 2, 1996]



Sec. 1.6050I-1  Returns relating to cash in excess of $10,000 received in a trade or business.

    (a) Reporting requirement--(1) In general. Any person (as defined in 
section 7701(a)(1)) who, in the course of a trade or business in which 
such person is engaged, receives cash in excess of $10,000 in 1 
transaction (or 2 or more related transactions) shall, except as 
otherwise provided, make a return of information with respect to the 
receipt of cash.
    (2) Cash received for the account of another. Cash in excess of 
$10,000 received by a person for the account of another must be reported 
under this section. Thus, for example, a person who collects delinquent 
accounts receivable for an automobile dealer must report with respect to 
the receipt of cash in excess of $10,000 from the collection of a 
particular account even though the proceeds of the collection are 
credited to the account of the automobile dealer (i.e., where the rights 
to the proceeds from the account are retained by the automobile dealer 
and the collection is made on a fee-for-service basis).
    (3) Cash received by agents--(i) General rule. Except as provided in 
paragraph (a)(3)(ii) of this section, a person who in the course of a 
trade or business acts as an agent (or in some other similar capacity) 
and receives cash in excess of $10,000 from a principal, must report the 
receipt of cash under this section.
    (ii) Exception. An agent who receives cash from a principal and uses 
all of the cash within 15 days in a cash transaction (the ``second cash 
transaction'') which is reportable under section 6050I or 5312 of title 
31 of the United States Code and the regulations thereunder (31 CFR Part 
103), and who discloses the name, address, and taxpayer identification 
number of the principal to the recipient in the second cash transaction 
need not report the initial receipt of cash under this section. An agent 
will be deemed to have met the disclosure requirements of this paragraph 
(a)(3)(ii) if the agent discloses only the name of the principal and the 
agent knows that the recipient has the principal's address and taxpayer 
identification number.
    (iii) Example. The following example illustrates the application of 
the rules in paragraphs (a)(3) (i) and (ii) of this section:

    Example. B, the principal, gives D, an attorney, $75,000 in cash to 
purchase real property on behalf of B. Within 15 days D purchases real 
property for cash from E, a real estate developer, and discloses to E, 
B's name, address, and taxpayer identification number. Because the 
transaction qualifies for the exception provided in paragraph (a)(3)(ii) 
of this section, D need not report with respect to the initial receipt 
of cash under this section. The exception does not apply, however, if D 
pays E by means other than cash, or effects the purchase more than 15 
days following receipt of the cash from B, or fails to disclose B's 
name, address, and taxpayer identification number (assuming D does not 
know that E already has B's address and taxpayer identification number), 
or purchases the property from a person whose sale of the property is 
not in the course of that person's trade or business. In any such case, 
D is required to report the receipt of cash from B under this section.

    (b) Multiple payments. The receipt of multiple cash deposits or cash 
installment payments (or other similar payments or prepayments) on or 
after January 1, 1990, relating to a single transaction (or two or more 
related transactions), is reported as set forth in paragraphs (b)(1) 
through (b)(3) of this section.
    (1) Initial payment in excess of $10,000. If the initial payment 
exceeds $10,000, the recipient must report the initial payment within 15 
days of its receipt.
    (2) Initial payment of $10,000 or less. If the initial payment does 
not exceed $10,000, the recipient must aggregate the initial payment and 
subsequent payments made within one year of the initial payment until 
the aggregate amount exceeds $10,000, and report with respect to the 
aggregate amount within 15 days after receiving the payment

[[Page 705]]

that causes the aggregate amount to exceed $10,000.
    (3) Subsequent payments. In addition to any other required report, a 
report must be made each time that previously unreportable payments made 
within a 12-month period with respect to a single transaction (or two or 
more related transactions), individually or in the aggregate, exceed 
$10,000. The report must be made within 15 days after receiving the 
payment in excess of $10,000 or the payment that causes the aggregate 
amount received in the 12- month period to exceed $10,000. (If more than 
one report would otherwise be required for multiple cash payments within 
a 15-day period that relate to a single transaction (or two or more 
related transactions), the recipient may make a single combined report 
with respect to the payments. The combined report must be made no later 
than the date by which the first of the separate reports would otherwise 
be required to be made.) A report with respect to payments of $10,000 or 
less that are reportable under this paragraph (b)(3) and are received 
after December 31, 1989, but before July 10, 1990, is due July 24, 1990.
    (4) Example. The following example illustrates the application of 
the rules in paragraphs (b)(1) through (b)(3) of this section:

    Example. On January 10, 1991, M receives an initial cash payment of 
$11,000 with respect to a transaction. M receives subsequent cash 
payments with respect to the same transaction of $4,000 on February 15, 
1991, $6,000 on March 20, 1991, and $12,000 on May 15, 1991. M must make 
a report with respect to the payment received on January 10, 1991, by 
January 25, 1991. M must also make a report with respect to the payments 
totalling $22,000 received from February 15, 1991, through May 15, 1991. 
This report must be made by May 30, 1991, that is, within 15 days of the 
date that the subsequent payments, all of which were received within a 
12-month period, exceeded $10,000.
    (c) Meaning of terms. The following definitions apply for purposes 
of this section--
    (1) Cash--(i) Amounts received prior to February 3, 1992. For 
amounts received prior to February 3, 1992, the term cash means the coin 
and currency of the United States or of any other country, which 
circulate in and are customarily used and accepted as money in the 
country in which issued.
    (ii) Amounts received on or after February 3, 1992. For amounts 
received on or after February 3, 1992, the term cash means--
    (A) The coin and currency of the United States or of any other 
country, which circulate in and are customarily used and accepted as 
money in the country in which issued; and
    (B) A cashier's check (by whatever name called, including 
``treasurer's check'' and ``bank check''), bank draft, traveler's check, 
or money order having a face amount of not more than $10,000--
    (1) Received in a designated reporting transaction as defined in 
paragraph (c)(1)(iii) of this section (except as provided in paragraphs 
(c)(1)(iv), (v), and (vi) of this section), or
    (2) Received in any transaction in which the recipient knows that 
such instrument is being used in an attempt to avoid the reporting of 
the transaction under section 6050I and this section.
    (iii) Designated reporting transaction. A designated reporting 
transaction is a retail sale (or the receipt of funds by a broker or 
other intermediary in connection with a retail sale) of--
    (A) A consumer durable,
    (B) A collectible, or
    (C) A travel or entertainment activity.
    (iv) Exception for certain loans. A cashier's check, bank draft, 
traveler's check, or money order received in a designated reporting 
transaction is not treated as cash pursuant to paragraph 
(c)(l)(ii)(B)(1) of this section if the instrument constitutes the 
proceeds of a loan from a bank (as that term is defined in 31 CFR part 
103). The recipient may rely on a copy of the loan document, a written 
statement from the bank, or similar documentation (such as a written 
lien instruction from the issuer of the instrument) to substantiate that 
the instrument constitutes loan proceeds.
    (v) Exception for certain installment sales. A cashier's check, bank 
draft, traveler's check, or money order received in a designated 
reporting transaction is not treated as cash pursuant

[[Page 706]]

to paragraph (c)(1)(ii)(B)(1) of this section if the instrument is 
received in payment on a promissory note or an installment sales 
contract (including a lease that is considered to be a sale for Federal 
income tax purposes). However, the preceding sentence applies only if--
    (A) Promissory notes or installment sales contracts with the same or 
substantially similar terms are used in the ordinary course of the 
recipient's trade or business in connection with sales to ultimate 
consumers; and
    (B) The total amount of payments with respect to the sale that are 
received on or before the 60th day after the date of the sale does not 
exceed 50 percent of the purchase price of the sale.
    (vi) Exception for certain down payment plans. A cashier's check, 
bank draft, traveler's check, or money order received in a designated 
reporting transaction is not treated as cash pursuant to paragraph 
(c)(1)(ii)(B)(1) of this section is the instrument is received pursuant 
to a payment plan requiring one or more down payments and the payment of 
the balance of the purchase price by a date no later than the date of 
the sale (in the case of an item of travel or entertainment, a date no 
later than the earliest date that any item of travel or entertainment 
pertaining to the same trip or event is furnished). However, the 
preceding sentence applies only if--
    (A) The recipient uses payment plans with the same or substantially 
similar terms in the ordinary course of its trade or business in 
connection with sales to ultimate consumers; and
    (B) The instrument is received more than 60 days prior to the date 
of the sale (in the case of an item of travel or entertainment, the date 
on which the final payment is due).
    (vii) Examples. The following examples illustrate the definition of 
``cash'' set forth in paragraphs (c)(l)(ii) through (vi) of this 
section.

    Example 1. D, an individual, purchases gold coins from M, a coin 
dealer, for $13,200. D tenders to M in payment United States currency in 
the amount of $6,200 and a cashier's check in the face amount of $7,000 
which D had purchased. Because the sale is a designated reporting 
transaction, the cashier's check is treated as cash for purposes of 
section 6050I and this section. Therefore, because M has received more 
than $10,000 in cash with respect to the transaction, M must make the 
report required by section 6050I and this section.
    Example 2. E, an individual, purchases an automobile from Q, an 
automobile dealer, for $11,500. E tenders to Q in payment United States 
currency in the amount of $2,000 and a cashier's check payable to E and 
Q in the amount of $9,500. The cashier's check constitutes the proceeds 
of a loan from the bank issuing the check. The origin of the proceeds is 
evident from provisions inserted by the bank on the check that instruct 
the dealer to cause a lien to be placed on the vehicle as security for 
the loan. The sale of the automobile is a designated reporting 
transaction. However, under paragraph (c)(1)(iv) of this section, 
because E has furnished Q documentary information establishing that the 
cashier's check constitutes the proceeds of a loan from the bank issuing 
the check, the cashier's check is not treated as cash pursuant to 
paragraph (c)(1)(ii)(B)(1) of this section.
    Example 3. F, an individual, purchases an item of jewelry from S, a 
retail jeweler, for $12,000. F gives S traveler's checks totalling 
$2,400 and pays the balance with a personal check payable to S in the 
amount of $9,600. Because the sale is a designated reporting 
transaction, the traveler's checks are treated as cash for purposes of 
section 6050I and this section. However, because the personal check is 
not treated as cash for purposes of section 6050I and this section, S 
has not received more than $10,000 in cash in the transaction and no 
report is required to be filed under section 6050I and this section.
    Example 4. G, an individual, purchases a boat from T, a boat dealer, 
for $16,500. G pays T with a cashier's check payable to T in the amount 
of $16,500. The cashier's check is not treated as cash because the face 
amount of the check is more than $10,000. Thus, no report is required to 
be made by T under section 6050I and this section.
    Example 5. H, an individual, arranges with W, a travel agent, for 
the chartering of a passenger aircraft to transport a group of 
individuals to a sports event in another city. H also arranges with W 
for hotel accommodations for the group and for admission tickets to the 
sports event. In payment, H tenders to W money orders which H had 
previously purchased. The total amount of the money orders, none of 
which individually exceeds $10,000 in face amount, exceeds $10,000. 
Because the transaction is a designated reporting transaction, the money 
orders are treated as cash for purposes of section 6050I and this 
section. Therefore, because W has received more than $10,000 in cash 
with respect to the transaction, W must make the report required by 
section 6050I and this section.

[[Page 707]]

    (2) Consumer durable. The term consumer durable means an item of 
tangible personal property of a type that is suitable under ordinary 
usage for personal consumption or use, that can reasonably be expected 
to be useful for at least 1 year under ordinary usage, and that has a 
sales price of more than $10,000. Thus, for example, a $20,000 
automobile is a consumer durable (whether or not it is sold for business 
use), but a $20,000 dump truck or a $20,000 factory machine is not.
    (3) Collectible. The term collectible means an item described in 
paragraphs (A) through (D) of section 408(m)(2) (determined without 
regard to section 408(m)(3)).
    (4) Travel or entertainment activity. The term travel or 
entertainment activity means an item of travel or entertainment (within 
the meaning of Sec. 1.274-2(b)(1)) pertaining to a single trip or event 
where the aggregate sales price of the item and all other items 
pertaining to the same trip or event that are sold in the same 
transaction (or related transactions) exceeds $10,000.
    (5) Retail sale. The term retail sale means any sale (whether for 
resale or for any other purpose) made in the course of a trade or 
business if that trade or business principally consists of making sales 
to ultimate consumers.
    (6) Trade or business. The term trade or business has the same 
meaning as under section 162 of the Internal Revenue Code of 1954.
    (7) Transaction--(i) The term transaction means the underlying event 
precipitating the payer's transfer of cash to the recipient. 
Transactions include (but are not limited to) a sale of goods or 
services; a sale of real property; a sale of intangible property; a 
rental of real or personal property; an exchange of cash for other cash; 
the establishment or maintenance of or contribution to a custodial, 
trust, or escrow arrangement; a payment of a preexisting debt; a 
conversion of cash to a negotiable instrument; a reimbursement for 
expenses paid; or the making or repayment of a loan. A transaction may 
not be divided into multiple transactions in order to avoid reporting 
under this section.
    (ii) The term related transactions means any transaction conducted 
between a payer (or its agent) and a recipient of cash in a 24-hour 
period. Additionally, transactions conducted between a payer (or its 
agent) and a cash recipient during a period of more than 24 hours are 
related if the recipient knows or has reason to know that each 
transaction is one of a series of connected transactions.
    (iii) The following examples illustrate the definition of paragraphs 
(c)(7) (i) and (ii).

    Example (1). A person has a tacit agreement with a gold dealer to 
purchase $36,000 in gold bullion. The $36,000 purchase represents a 
single transaction under paragraph (c)(7)(i) of this section and the 
reporting requirements of this section cannot be avoided by recasting 
the single sales transaction into 4 separate $9,000 sales transactions.
    Example (2). An attorney agrees to represent a client in a criminal 
case with the attorney's fee to be determined on an hourly basis. In the 
first month in which the attorney represents the client, the bill for 
the attorney's services comes to $8,000 which the client pays in cash. 
In the second month in which the attorney represents the client, the 
bill for the attorney's services comes to $4,000, which the client again 
pays in cash. The aggregate amount of cash paid ($12,000) relates to a 
single transaction as defined in paragraph (c)(7)(i) of this section, 
the sale of legal services relating to the criminal case, and the 
receipt of cash must be reported under this section.
    Example (3). A person intends to contribute a total of $45,000 to a 
trust fund, and the trustee of the fund knows or has reason to know of 
that intention. The $45,000 contribution is a single transaction under 
paragraph (c)(7)(i) of this section and the reporting requirement of 
this section cannot be avoided by the grantor's making five separate 
$9,000 cash contributions to a single fund or by making five $9,000 cash 
contributions to five separate funds administered by a common trustee.
    Example (4). K, an individual, attends a one day auction and 
purchases for cash two items, at a cost of $9,240 and $1,732.50 
respectively (tax and buyer's premium included). Because the 
transactions are related transactions as defined in paragraph (c)(7)(ii) 
of this section, the auction house is required to report the aggregate 
amount of cash received from the related sales ($10,972.50), even though 
the auction house accounts separately on its books for each item sold 
and presents the purchaser with separate bills for each item purchased.
    Example (5). F, a coin dealer, sells for cash $9,000 worth of gold 
coins to an individual on three successive days. Under paragraph

[[Page 708]]

(c)(7)(ii) of this section the three $9,000 transactions are related 
transactions aggregating $27,000 if F knows, or has reason to know, that 
each transaction is one of a series of connected transactions.

    (8) Recipient. (i) The term recipient means the person receiving the 
cash. Except as provided in paragraph (c)(8)(ii) of this section, each 
store, division, branch, department, headquarters, or office 
(``branch'') (regardless of physical location) comprising a portion of a 
person's trade or business shall for purposes of this section be deemed 
a separate recipient.
    (ii) A branch that receives cash payments will not be deemed a 
separate recipient if the branch (or a central unit linking such branch 
with other branches) would in the ordinary course of business have 
reason to know the identity of payers making cash payments to other 
branches of such person.
    (iii) Examples. The following examples illustrate the application of 
the rules in paragraphs (c)(8)(i) and (ii) of this section:

    Example (1). N, an individual, purchases regulated futures contracts 
at a cost of $7,500 and $5,000, respectively, through two different 
branches of Commodities Broker X on the same day. N pays for each 
purchase with cash. Each branch of Commodities Broker X transmits the 
sales information regarding each of N's purchases to a central unit of 
Commodities Broker X (which settles the transactions against N's 
account). Under paragraph (c)(8)(ii) of this section the separate 
branches of Commodities Broker X are not deemed to be separate 
recipients; therefore. Commodities Broker X must report with respect to 
the two related regulated futures contracts sales in accordance with 
this section.
    Example (2). P, a corporation, owns and operates a racetrack. P's 
racetrack contains 100 betting windows at which pari-mutuel wagers may 
be made. R, an individual, places cash wagers of $3,000 each at five 
separate betting windows. Assuming that in the ordinary course of 
business each betting window (or a central unit linking windows) does 
not have reason to know the identity of persons making wagers at other 
betting windows, each betting window would be deemed to be a separate 
cash recipient under paragraph (c)(8)(i) of this section. As no 
individual recipient received cash in excess of $10,000, no report need 
be made by P under this section.

    (d) Exceptions to the reporting requirements of section 6050I--(1) 
Receipt of cash by certain financial institutions. A financial 
institution as defined in subparagraphs (A), (B), (C), (D), (E), (F), 
(G), (J), (K), (R), and (S) of section 5312 (a)(2) of Title 31, United 
States Code is not required to report the receipt of cash exceeding 
$10,000 under section 6050I.
    (2) Receipt of cash by certain casinos having gross annual gaming 
revenue in excess of $1,000,000--(i) In general. If a casino receives 
cash in excess of $10,000 and is required to report the receipt of such 
cash directly to the Treasury Department under 31 CFR 103.22(a)(2) and 
103.25 and is subject to the recordkeeping requirements of 31 CFR 
103.36, then the casino is not required to make a return with respect to 
the receipt of such cash under section 6050I and these regulations.
    (ii) Casinos exempt under 31 CFR 103.45(c). Under the authority of 
section 6050I(c)(1)(A), the Secretary may exempt from the reporting 
requirements of section 6050I casinos with gross annual gaming revenue 
in excess of $1,000,000 that are exempt under 31 CFR 103.45(c) from 
reporting certain cash transactions to the Treasury Department under 31 
CFR 103.22(a)(2) and 103.25. The determination whether a casino which is 
granted an exemption under 31 CFR 103.45(c) will be required to report 
under section 6050I will be made on a case by case basis, concurrently 
with the granting of such an exemption.
    (iii) Reporting of cash received in a nongaming business. Nongaming 
businesses (such as shops, restaurants, entertainment, and hotels) at 
casino hotels and resorts are separate trades or businesses in which the 
receipt of cash in excess of $10,000 is reportable under section 6050I 
and these regulations. Thus, a casino exempt under paragraph (d)(2) (i) 
or (ii) of this section must report with respect to cash in excess of 
$10,000 received in its nongaming businesses.
    (iv) Example. The following example illustrates the application of 
the rules in paragraphs (d)(2) (i) and (iii) of this section:

    Example. A and B are casinos having gross annual gaming revenue in 
excess of $1,000,000. C is a casino with gross annual gaming revenue of 
less than $1,000,000. Casino

[[Page 709]]

A receives $15,000 in cash from a customer with respect to a gaming 
transaction which the casino reports to the Treasury Department under 31 
CFR 103.22(a)(2) and 103.25. Casino B receives $15,000 in cash from a 
customer in payment for accommodations provided to that customer at 
Casino B's hotel. Casino C receives $15,000 in cash from a customer with 
respect to a gaming transaction. Casino A is not required to report the 
transaction under section 6050I or these regulations because the 
exception for certain casinos provided in paragraph (d)(2)(i) (``the 
casino exception'') applies. Casino B is required to report under 
section 6050I and these regulations because the casino exception does 
not apply to the receipt of cash from a nongaming activity. Casino C is 
required to report under section 6050I and these regulations because the 
casino exception does not apply to casinos having gross annual gaming 
revenue of $1,000,000 or less which do not have to report to the 
Treasury Department under 31 CFR 103.22(a)(2) and 103.25.

    (3) Receipt of cash not in the course of the recipient's trade or 
business. The receipt of cash in excess of $10,000 by a person other 
than in the course of the person's trade or business is not reportable 
under section 6050I. Thus, for example, F, an individual in the trade or 
business of selling real estate, sells a motorboat for $12,000, the 
purchase price of which is paid in cash. F did not use the motorboat in 
any trade or business in which F was engaged. F is not required to 
report under section 6050I or these regulations because the exception 
provided in this paragraph (d)(3) applies.
    (4) Receipt is made with respect to a foreign cash transaction--(i) 
In general. Generally, there is no requirement to report with respect to 
a cash transaction if the entire transaction occurs outside the United 
States (the fifty states and the District of Columbia). An entire 
transaction consists of both the transaction as defined in paragraph 
(c)(7)(i) of this section and the receipt of cash by the recipient. If, 
however, any part of an entire transaction occurs in the Commonwealth of 
Puerto Rico or a possession or territory of the United States and the 
recipient of cash in that transaction is subject to the general 
jurisdiction of the Internal Revenue Service under title 26 of the 
United States Code, the recipient is required to report the transaction 
under this section.
    (ii) Example. The following example illustrates the application of 
the rules in paragraph (d)(4)(i) of this section:

    Example. W, an individual engaged in the trade or business of 
selling aircraft, reaches an agreement to sell an airplane to a U.S. 
citizen living in Mexico. The agreement, no portion of which is 
formulated in the United States, calls for a purchase price of $125,000 
and requires delivery of and payment for the airplane to be made in 
Mexico. Upon delivery of the airplane in Mexico, W receives $125,000 in 
cash. W is not required to report under section 6050I or these 
regulations because the exception provided in paragraph (d)(4)(i) of 
this section (``foreign transaction exception'') applies. If, however, 
any part of the agreement to sell had been formulated in the United 
States, the foreign transaction exception would not apply and W would be 
required to report the receipt of cash under section 6050I and these 
regulations.

    (e) Time, manner, and form of reporting--(1) Time of reporting. The 
reports required by this section must be filed with the Internal Revenue 
Service by the 15th day after the date the cash is received. However, in 
the case of multiple payments relating to a single transaction (or two 
or more related transactions), see paragraph (b) of this section.
    (2) Form of reporting. A report required by paragraph (a) of this 
section must be made on Form 8300. A return of information made in 
compliance with this paragraph must contain the name, address, and 
taxpayer identification number of the person from whom the cash was 
received; the name, address, and taxpayer identification number of the 
person on whose behalf the transaction was conducted (if the recipient 
knows or has reason to know that the person from whom the cash was 
received conducted the transaction as an agent for another person); the 
amount of cash received; the date and nature of the transaction; and any 
other information required by Form 8300. Form 8300 can be obtained from 
any Internal Revenue Service Forms Distribution Center.
    (3) Manner of reporting--(i) Where to file. A person making a return 
of information under this section must file Form 8300 by mailing it to 
the address shown in the instructions to the form.

[[Page 710]]

    (ii) Verification. A person making a return of information under 
this section must verify the identity of the person from whom the 
reportable cash is received. Verification of the identity of a person 
who purports to be an alien must be made by examination of such person's 
passport, alien identification card, or other official document 
evidencing nationality or residence. Verification of the identity of any 
other person may be made by examination of a document normally 
acceptable as a means of identification when cashing or accepting checks 
(for example, a driver's license or a credit card). In addition, a 
return will be considered incomplete if the person required to make a 
return knows (or has reason to know) that an agent is conducting the 
transaction for a principal, and the return does not identify both the 
principal and the agent.
    (iii) Retention of returns. A person required to make an information 
return under this section must keep a copy of each return filed for five 
years from the date of filing.
    (f) Requirement of furnishing statements--(1) In general. Any person 
required to make an information return under this section must furnish a 
single, annual, written statement to each person whose name is set forth 
in a return (``identified person'') filed with the Internal Revenue 
Service.
    (2) Form of statement. The statement required by the preceding 
paragraph need not follow any particular format, but it must contain the 
following information:
    (i) The name and address of the person making the return;
    (ii) The aggregate amount of reportable cash received by the person 
who made the information return required by this section during the 
calendar year in all cash transactions relating to the identified 
person; and
    (iii) A legend stating that the information contained in the 
statement is being reported to the Internal Revenue Service.
    (3) When statement is to be furnished. Statements required under 
this paragraph (f) must be furnished to an identified person on or 
before January 31 of the year following the calendar year in which the 
cash is received. A statement shall be considered to be furnished to an 
identified person if it is mailed to the identified person at the 
identified person's last known address.
    (g) Cross-reference to penalty provisions--(1) Failure to file 
correct information return. See section 6721 for civil penalties 
relating to the failure to file a correct return under section 6050I(a) 
and paragraph (a) of this section.
    (2) Failure to furnish correct statement. See section 6722 for civil 
penalties relating to the failure to furnish a correct statement to 
identified persons under section 6050I(e) and paragraph (f) of this 
section.
    (3) Criminal penalties. Any person who willfully fails to make a 
return or makes a false return under section 6050I and this section may 
be subject to criminal prosecution.

[T.D. 8098, 51 FR 31611, Sept. 4, 1986; 51 FR 33033, Sept. 18, 1986, as 
amended by T.D. 8373, 56 FR 57976, 57977, Nov. 15, 1991; 58 FR 16496, 
Mar. 29, 1993; T.D. 8479, 58 FR 33764, June 21, 1993]



Sec. 1.6050I-2  Returns relating to cash in excess of $10,000 received as bail by court clerks.

    (a) Reporting requirement. Any clerk of a Federal or State court who 
receives more than $10,000 in cash as bail for any individual charged 
with a specified criminal offense must make a return of information with 
respect to that cash receipt. For purposes of this section, a clerk is 
the clerk's office or the office, department, division, branch, or unit 
of the court that is authorized to receive bail. If someone other than a 
clerk receives bail on behalf of a clerk, the clerk is treated as 
receiving the bail for purposes of this paragraph (a).
    (b) Meaning of terms. The following definitions apply for purposes 
of this section--
    Cash means--
    (1) The coin and currency of the United States, or of any other 
country, that circulate in and are customarily used and accepted as 
money in the country in which issued; and
    (2) A cashier's check (by whatever name called, including 
treasurer's check and bank check), bank draft,

[[Page 711]]

traveler's check, or money order having a face amount of not more than 
$10,000.
    Specified criminal offense means--
    (1) A Federal criminal offense involving a controlled substance (as 
defined in section 802 of title 21 of the United States Code), provided 
the offense is described in Part D of Subchapter I or Subchapter II of 
title 21 of the United States Code;
    (2) Racketeering (as defined in section 1951, 1952, or 1955 of title 
18 of the United States Code);
    (3) Money laundering (as defined in section 1956 or 1957 of title 18 
of the United States Code); and
    (4) Any State criminal offense substantially similar to an offense 
described in this paragraph (b).
    (c) Time, form, and manner of reporting--(1) Time of reporting--(i) 
In general. The information return required by this section must be 
filed with the Internal Revenue Service by the 15th day after the date 
the cash bail is received.
    (ii) Multiple payments. If multiple payments are made to satisfy 
bail reportable under this section and the initial payment does not 
exceed $10,000, the initial payment and subsequent payments must be 
aggregated and the information return required by this section must be 
filed with the Internal Revenue Service by the 15th day after receipt of 
the payment that causes the aggregate amount to exceed $10,000. However, 
if payments are made to satisfy separate bail requirements, no 
aggregation is required. Thus, if in Month 1 a clerk receives $6,000 in 
bail for an individual charged with a specified criminal offense and 
later, in Month 2, receives $7,000 in bail for that same individual 
charged with another specified criminal offense, no aggregation is 
required.
    (2) Form of reporting. The return of information required by 
paragraph (a) of this section must be made on Form 8300 and must contain 
the following information--
    (i) The name, address, and taxpayer identification number (TIN) of 
the individual charged with the specified criminal offense;
    (ii) The name, address, and TIN of each person posting the bail 
(payor of bail), other than a person posting bail who is licensed as a 
bail bondsman in the jurisdiction in which the bail is received;
    (iii) The amount of cash received;
    (iv) The date the cash was received; and
    (v) Any other information required by Form 8300 or its instructions.
    (3) Manner of reporting--(i) Where to file. Returns required by this 
section must be filed with the Internal Revenue Service office 
designated in the instructions for Form 8300. A copy of the information 
return required to be filed under this section must be retained for five 
years from the date of filing.
    (ii) Verification of identity. A clerk required to make an 
information return under this section must, in accordance with 
Sec. 1.6050I-1(e)(3)(ii), verify the identity of each payor of bail 
listed in the return.
    (d) Requirement to furnish statements--(1) Information to Federal 
prosecutors--(i) In general. A clerk required to make an information 
return under this section must furnish a written statement to the United 
States Attorney for the jurisdiction in which the individual charged 
with the specified crime resides and the United States Attorney for the 
jurisdiction in which the specified criminal offense occurred 
(applicable United States Attorney(s)). The written statement must be 
filed with the applicable United States Attorney(s) by the 15th day 
after the date the cash bail is received.
    (ii) Form of statement. The written statement must include the 
information required by paragraph (c)(2) of this section. The 
requirement of this paragraph (d)(1)(ii) will be satisfied if the clerk 
provides to the applicable United States Attorney(s) a copy of the Form 
8300 that is filed with the Internal Revenue Service pursuant to this 
section.
    (2) Information to payors of bail--(i) In general. A clerk required 
to make an information return under this section must furnish a written 
statement to each payor of bail whose name is set forth in a return 
required by this section. A statement required under this paragraph 
(d)(2) must be furnished to a payor of bail on or before January 31 of 
the year following the calendar year in which the cash is received. A 
statement will be considered furnished to a

[[Page 712]]

payor of bail if it is mailed to the payor's last known address.
    (ii) Form of statement. The statement required by this paragraph 
(d)(2) need not follow any particular format, but must contain the 
following information--
    (A) The name and address of the clerk's office making the return;
    (B) The aggregate amount of reportable cash received during the 
calendar year by the clerk who made the information return required by 
this section in all cash transactions relating to the payor of bail; and
    (C) A legend stating that the information contained in the statement 
has been reported to the Internal Revenue Service and the applicable 
United States Attorney(s).
    (iii) Aggregate amount. The requirement of furnishing the aggregate 
amount in paragraph (d)(2)(ii)(B) of this section will be satisfied if 
the clerk provides to the payor of bail either a single written 
statement listing the aggregate amount, or a copy of each Form 8300 
relating to that payor of bail.
    (e) Cross-reference to penalty provisions. See sections 6721 through 
6724 for penalties relating to the failure to comply with the provisions 
of this section.
    (f) Effective date. This section applies to cash received by court 
clerks on or after February 13, 1995.

[T.D. 8652, 61 FR 7, Jan. 2, 1996]



Sec. 1.6050J-1T  Questions and answers concerning information returns relating to foreclosures and abandonments of security (temporary).

    The following questions and answers relate to the requirement of 
reporting foreclosures and abandonments of security under section 6050J 
of the Internal Revenue Code Act of 1954, as added by section 148 of the 
Tax Reform Act of 1984 (98 Stat. 687).

                        Requirement of Reporting

                               In General

    Q-1: What does section 6050J provide with respect to the reporting 
of acquisitions and abandonments of property that secures indebtedness?
    A-1: Section 6050J provides that an information return must be made 
by any person who, in connection with a trade or business conducted by 
the person (except as provided in A-13), lends money and, in full or 
partial satisfaction of the debt, acquires an interest in any property 
that is security for the debt, or has reason to know that the property 
has been abandoned. For purposes of these questions and answers, a 
person who lends money in connection with a trade or business is 
referred to as a ``lender''.

                      Trade or Business Requirement

    Q-2: Must a person be in the trade or business of lending money in 
order to be subject to the reporting requirement of this section?
    A-2: No. A person does not have to be in the trade or business of 
lending money to be subject to this reporting requirement. Thus, if L 
sells automobiles and lends money to B to enable B to purchase an 
automobile from L for use in B's trade or business, and that automobile 
is security for the loan, L would be subject to this reporting 
requirement. Similarly, if P promotes interests in an oil well, and 
lends money to I to enable I to invest in the oil well which is security 
for the loan, P would be subject to this reporting requirement.
    Q-3: How does the reporting requirement apply in the case of pools, 
fixed investment trusts, or other similar arrangements through which 
undivided beneficial interests or participations in indebtedness are 
offered?
    A-3: In these cases, the owners of the undivided beneficial 
interests or participations are not subject to this reporting 
requirement. Instead, the trustee, record owner, or person acting in a 
similar capacity is treated as the lender for purposes of this reporting 
requirement and is the party required to report. For purposes of both 
section 6050J and the applicable penalty provisions, only one return and 
one statement must be filed with respect to each loan or other evidence 
of indebtedness. For situations when more than one return or statement 
must be filed, see A-29, A-31, and A-41. The trustee, record owner, or 
person acting in a similar capacity, rather than the owners of 
beneficial interests or participations, is subject to the applicable 
penalty provisions (see A-43).
    Q-4: How does the reporting requirement apply in the case of 
corporate, tax-exempt, or other bond issues?
    A-4: In these cases, the owners or holders of a bond issue are not 
required to report. Instead, the trustee or person acting in a similar 
capacity is treated as the lender for purposes of this reporting 
requirement and is the party required to report. For purposes of both 
section 6050J and the applicable penalty provisions, only one return and 
one statement must be filed with respect to a bond issue. For situations 
when more than one return or statement must be filed, see A-29, A-31, 
and A-41. The trustee or person acting in a similar capacity, rather 
than the owners or

[[Page 713]]

holders of a bond issue, is subject to the applicable penalty provisions 
(see A-43).

                      Property Subject to Reporting

    Q-5: Does the reporting requirement apply to all types of property 
securing indebtedness?
    A-5: No. The reporting requirement does not apply to any loan made 
to an individual and secured by an interest in tangible personal 
property which is neither held for investment nor used in a trade or 
business. For rules governing when the reporting requirment applies to 
tangible personal property of a type ordinarily used for personal 
purposes, see A-8.
    Q-6: Does the reporting requirement apply when property securing 
indebtedness is held both for personal use and for use in a trade or 
business?
    A-6: Yes. The reporting requirement applies when property securing 
indebtedness is held both for personal use and for use in a trade or 
business. Similarly, the reporting requirement applies when the borrower 
holds such property both for personal use and for investment purposes.
    Q-7: Does the reporting requirement apply to indebtedness secured by 
a personal residence?
    A-7: Yes. A lender is subject to the reporting requirement if the 
property that is security for the loan is real property, including a 
personal residence, whether or not held for investment or used in a 
trade or business.
    Q-8: In the case of a loan made to an individual and secured by 
personal property of a type that is ordinarily used for personal 
purposes, how does a lender know whether such property is used in a 
trade or business or held for investment purposes?
    A-8: In the case of a loan made to an individual and secured by 
personal property of a type that is ordinarily used for personal 
purposes, such as an automobile, computer, or boat, the lender is 
subject to the reporting requirement if the lender knows that the 
property will be used in a trade or business or held for investment 
purposes. For this purpose, a lender knows information if the 
information is included on the books and records of the lender or its 
agents pertaining to the loan, or is known by the lender or agent's 
officers, partners, principals or employees, but only if such 
information was acquired in the course of their ordinary business 
activities on behalf of the lender. For example, if a borrower indicates 
on the loan agreement or disclosure statement that the borrower intends 
to use the property securing the loan in the borrower's trade or 
business, the lender is subject to this reporting requirement. 
Similarly, if the borrower notifies the lender that the borrower intends 
to convert the property from personal use to use in a trade or business, 
the lender is subject to the reporting requirement.
    Q-9: If a lender maintains a system under which the lender 
classifies loans according to the use of property that secures the loan 
(such as use in a trade or business or personal use), may the lender 
rely on this system in determining whether the reporting requirement 
applies?
    A-9: Yes. A lender may rely on the classification system to 
determine whether the reporting requirement applies, provided that the 
classification system is designed and reasonably maintained to ensure 
accuracy in identifying the use of property.

                       Acquisition of an Interest

    Q-10: For purposes of the reporting requirement, when is a lender 
treated as acquiring an interest in property that is security for 
indebtedness?
    A-10: In general, an interest in property is acquired on the earlier 
of the date title is transferred to the lender or the date possession 
and the burdens and benefits of ownership are transferred to the lender. 
If State or other applicable law provides for an objection period within 
which the borrower and other appropriate parties may object to the 
lender's proposal to retain the property in satisfaction of the 
indebtedness, a lender is treated as acquiring an interest in the 
property on the date this objection period expires. If the lender 
purchases the property at a sale held to satisfy the indebtedness, such 
as at a foreclosure or execution sale, the lender is treated as 
acquiring an interest in the property on the later of the date of the 
sale or the date the borrower's right of redemption, if any, expires. 
See A-15 for rules governing reporting when a party other than the 
lender acquires property securing indebtedness at a foreclosure, 
execution or similar sale.
    Q-11: If a lender takes possession of property that is security for 
a loan for a limited purpose, such as completing construction on or 
improvement to the property, is the lender treated as having acquired an 
interest in the property at that point?
    A-11: No. The lender in these circumstances is not treated as 
acquiring an interest in the property. However, the lender must report 
if he later acquires an interest in the property in full or partial 
satisfaction of the indebtedness (see A-10 or A-15).

                          Indirect Acquisition

    Q-12: If a lender acquires an interest in a partnership, trust, or 
other entity in full or partial satisfaction of a loan that is secured 
by the assets or property owned by the partnership, trust, or other 
entity, is the lender treated as acquiring an interest in the property 
securing the loan?
    A-12: Yes. A lender in this case acquires an interest in the 
underlying assets or property

[[Page 714]]

and the reporting requirements of this section apply to the acquisition 
of that interest in a partnership, trust, or other entity.

                     Treatment of Governmental Units

    Q-13: How does the reporting requirement apply to a governmental 
unit?
    A-13: A governmental unit (or any agency or instrumentality thereof) 
which lends money secured by property is subject to the reporting 
requirement without regard to the requirement that the money be lent in 
connection with a trade or business. A governmental unit (or any agency 
or instrumentality thereof) subject to the reporting requirement must 
designate an officer or employee to make the return. The officer or 
employee appropriately designated must make the return in the form and 
manner prescribed by this section.

               Notification of Sale Under Section 7425(b)

    Q-14: Does a return filed as required under this section constitute 
a notification of sale under section 7425(b)?
    A-14: No. A return filed under this section is not considered a 
notification of sale under section 7425(b).

                           Sale to Third Party

    Q-15: If a party other than the lender purchases property securing a 
loan at a foreclosure, execution, or similar sale, must the lender 
report under this section?
    A-15: Yes. The lender must report if a party other than the lender 
purchases property securing the lender's loan at a foreclosure, 
execution, or similar sale. If the proceeds of that sale are applied to 
satisfy all or any portion of the lender's loan, the lender must treat 
the property as having been abandoned. The lender will be treated as 
having reason to know that the property has been abandoned as of the 
date of the sale (see A-19). If no proceeds of such a sale are made 
available to satisfy any portion of the lender's loan but the lender's 
security interest foreclosed upon is terminated, reduced, or otherwise 
impaired by reason of the sale, the lender will be treated as having 
reason to know that the property has been abandoned as of the date of 
the sale (see A-19).

                     Treatment of Foreign Borrowers

    Q-16: How does the reporting requirement apply in the case of 
foreign borrowers where the property securing the loan is located 
outside the United States?
    A-16: No reporting is required where both of the following 
requirements are met: (a) The property securing the loan is located 
outside the United States, and (b) at any time before the lender is 
required to report, the borrower furnishes the lender with a statement, 
signed upon penalty of perjury, that he is an exempt foreign person 
(unless an employee or other agent of the lender who is responsible for 
receiving or reviewing these statements has actual knowledge that the 
statement is incorrect). For purposes of this section, the borrower is 
an exempt foreign person if he:
    (1) Is not a citizen of the United States, a resident of the United 
States, a person treated as a resident of the United States by reason of 
an election under section 6013 (g) or (h) or a United States corporation 
or other United States entity;
    (2) Is not subject to the provisions of section 877; and
    (3) At the time the statement is furnished, is not, or reasonably 
expects not to be, engaged in a trade or business in the United States 
during the current year in connection with the loan or property securing 
the loan.

If, after providing the statement, the borrower ceases to be an exempt 
foreign person, he must so notify the lender in writing within 30 days 
of this change in status. If the lender is so notified, this exemption 
from the reporting requirement no longer applies.

                              Abandonments

    Q-17: For purposes of this reporting requirement, when has an 
abandonment occurred?
    A-17: An abandonment has occurred when the objective facts and 
circumstances indicate that the borrower intended to and has permanently 
discarded the property from use.
    Q-18: Does the fact that a lender knows or has reason to know of an 
abandonment of property securing a loan mean that the borrower is 
entitled to an abandonment loss?
    A-18: No. The definition of an abandonment of property securing a 
loan in A-17 applies only for purposes of this reporting requirement and 
is not intended to apply for other purposes, such as determining whether 
a borrower would be entitled to an abandonment loss.
    Q-19: Under what circumstances will a lender be considered to have 
reason to know that property which is security for a loan has been 
abandoned?
    A-19: Whether a lender has reason to know that property which is 
security for a loan has been abandoned is to be determined with 
reference to all the facts and circumstances concerning the status of 
the property. When the lender in the ordinary course of business becomes 
aware or should become aware of circumstances indicating that the 
property has been abandoned, the lender will be deemed to know all the 
information that would have been discovered through a reasonable 
inquiry. For example, if a borrower has failed (without adequate 
explanation) to make payments on the loan for a substantial period, the 
lender must make a reasonable inquiry to determine whether there has 
been

[[Page 715]]

an abandonment. If a reasonable inquiry would reveal objective facts and 
circumstances indicating that the borrower intended to and has 
permanently discarded the property from use, then the lender has reason 
to know that the property has been abandoned. If a lender knows or has 
reason to know that the property has been abandoned and reasonably 
expects to commence foreclosure, execution sale, or similar proceedings, 
see A-20.
    Q-20: If a lender has reason to know that property that is security 
for a loan has been abandoned and reasonably expects to commence within 
three months foreclosure, execution sale, or similar proceedings, is 
reporting of the abandonment required?
    A-20: In these circumstances, the lender need not report as of the 
date he knows or has reason to know that the property has been 
abandoned. Instead, the lender must report as of the date he acquires an 
interest in the property or a third party purchases the property at a 
foreclosure, execution or similar sale (see A-10 and A-15). In any other 
case, the lender must report as of the date the lender knows or has 
reason to know that the property has been abandoned (see A-18).
    Q-21: If a lender has reason to know that property that is security 
for a loan has been abandoned and reasonably expects to commence within 
three months foreclosure, execution sale or similar proceedings but in 
fact does not commence such proceedings within the three month period, 
must the lender report?
    A-21: Yes. In these circumstances, the lender's obligation to report 
the abandonment arises at the close of the three month period. For 
example, if on December 31, 1985, a lender first has reason to know that 
property securing his loan has been abandoned and reasonably expects to 
commence foreclosure proceedings within three months, the lender is not 
required to report as of December 31, 1985 (see A-20). However, if the 
lender does not in fact commence foreclosure proceedings by March 31, 
1986, the lender's obligation to report arises on this date. The lender 
must provide information on the abandonment under A-27 as of the date 
the lender first had reason to know of the abandonment (December 31, 
1985). The lender must file the return required under this section with 
the Internal Revenue Service on or before February 28, 1987, and furnish 
a statement to the borrower on or before January 31, 1987 (see A-33 and 
A-40).

                       Subsequent Holder of a Loan

    Q-22: To whom does the reporting requirement apply when a person 
lends money secured by property and subsequently transfers his interest 
in the indebtedness to another person?
    A-22: The subsequent holder of a loan is treated as the lender for 
purposes of this reporting requirement and is the party required to 
report with respect to events occurring after the date he acquires the 
loan. This rule applies to all subsequent holders of a secured loan, 
including governmental units or any agencies or instrumentalities 
thereof. For example, if the Federal National Mortgage Association 
purchases real property loans from a lender, it would be subject to the 
reporting requirement.

                            Multiple Lenders

    Q-23: If more than one person lends money secured by the same 
property, and one lender forecloses upon or otherwise acquires an 
interest in the property, must the other lenders report under this 
section?
    A-23: Yes. In these circumstances, other lenders must report if they 
know or have reason to know that the property securing their loans is 
foreclosed upon or otherwise acquired by another lender and the sale or 
other acquisition terminates, reduces, or otherwise impairs their 
security interests in the property (see A-15). For example, if there is 
a first and second mortgage on a building, and the second mortgagee 
knows or has reason to know that the first mortgagee has foreclosed upon 
the building, the second mortgagee is subject to the reporting 
requirement even if no part of the indebtedness owed to him is satisfied 
by the proceeds of the foreclosure sale. For a description of the 
reporting requirement applicable to the first mortgagee, see A-10 and A-
15.
    Q-24: If more than one person lends money secured by property, and 
one lender knows or has reason to know that the property has been 
abandoned, must each lender report under this section?
    A-24: No. Each lender is required to report only when he knows or 
has reason to know that property has been abandoned (see A-19).

                        Form and Manner of Return

                             Form of Return

    Q-25: What form shall be used to make a return required by section 
6050J?
    A-25: Except as provided in A-35, the return must be made on Forms 
1096 and 1099. The person required to make the return, however, may 
prepare and use a form which contains provisions substantially similar 
with those of Forms 1096 and 1099 if the person complies with any 
revenue procedures relating to substitute Forms 1096 and 1099 in effect 
at that time.

                     Information Included on Return

    Q-26: What information must be included on a return required by 
reason of an acquisition of an interest in property that is security for 
a loan?
    A-26: The following information must be included on the return:

[[Page 716]]

    (a) The name and address of the borrower with respect to the secured 
indebtedness;
    (b) The borrower's TIN, as defined in Section 7701(a);
    (c) A general description of the property in which an interest is 
acquired;
    (d) Whether the borrower is personally liable for repayment of the 
indebtedness;
    (e) The date on which the person acquired an interest in the 
property (see A-10 or A-15);
    (f) The amount of the indebtedness outstanding at the time the 
interest in property is acquired;
    (g) If the borrower is personally liable for repayment of the 
indebtedness, the fair market value of the property at the time the 
interest is acquired;
    (h) The amount of the indebtedness satisfied by the acquisition; and
    (i) Any other information as may be required by Forms 1096 and 1099.
    Q-27: What information must be included on a return required because 
a person knows or has reason to know that property which is security for 
a loan has been abandoned?
    A-27: The following information must be included on the return:
    (a) The information required in A-26 (a), (b), and (d);
    (b) A general description of the property abandoned;
    (c) The date on which the person first knows or has reason to know 
that the property has been abandoned;
    (d) The amount of the indebtedness outstanding as of the date on 
which the person first knows or has reason to know that the property has 
been abandoned;
    (e) If the borrower is personally liable for repayment of the 
indebtedness, the fair market value of the property at the time of 
abandonment; and
    (f) Any other information as may be required by Forms 1096 and 1099.

                          Partnership Borrower

    Q-28: If a borrower is a partnership, must the TIN of each partner 
be reported?
    A-28: No. If a borrower is a partnership, only the TIN of the 
partnership must be reported.

                           Multiple Borrowers

    Q-29: If there is more than one borrower on a single secured loan, 
must a person required to report under this section make a return with 
respect to each borrower on the loan?
    A-29: Yes. Generally, a separate return must be made with respect to 
each borrower on a secured loan. However, only one report is required if 
the lender knows that the borrowers hold property as tenants by the 
entirety or that the property is held as community property.

                     General Description of Property

    Q-30: What type of information constitutes a general description of 
the property?
    A-30: A general description of the property consists of information 
that sufficiently identifies the property. In the case of real property, 
a general description consists of the property's address unless this 
information is not available or would not sufficiently identify the 
property, in which case a legal description (i.e., section, lot, block) 
must be provided instead. A general description of personal property 
consists of the type, make and model (where applicable) of the property. 
For example, an automobile would be described as ``Car--1983 Pontiac 
Firebird.'' However, in the case of a single loan secured by more than 
one piece of personal property, a general description consists of the 
type or category of the pieces acquired or abandoned. For example, if 
the security for a single loan is six desks and seven typewriters, a 
general description of the property would be ``Office Equipment.''

                 Multiple Acquisitions and Abandonments

    Q-31: Must each acquisition and abandonment that occurs in a taxable 
year be reported on a separate return?
    A-31: Generally, each acquisition and abandonment required to be 
reported by a person for a taxable year must be reported on a separate 
return. However, in the case of a single loan secured by more than one 
piece of property, separate returns will not be required when a person 
acquires an interest in, or knows or has reason to know of the 
abandonment of, more than one piece of property that is security for the 
single loan in a taxable year. Instead, the person shall make one return 
for all of the acquisitions and one return for all of the abandonments 
of property that are security for the loan for a taxable year.

                            Fair Market Value

    Q-32: In the case of a foreclosure, execution, or similar sale, what 
is the fair market value of the property for purposes of the reporting 
requirement?
    A-32: In general, in the absence of clear and convincing evidence to 
the contrary, the proceeds of the foreclosure, execution, or similar 
sale will be considered the fair market value of the property for 
purposes of this reporting requirement.

                             Time for Filing

    Q-33: When must a person file the return or returns required by 
section 6050J with the Internal Revenue Service?
    A-33: The return or returns must be filed on or before February 28th 
of the year following the calendar year in which the acquisition of an 
interest in the property occurs

[[Page 717]]

or in which the lender knows or has reason to know of the abandonment of 
the property.

                            Place for Filing

    Q-34: Where must the return or returns be filed?
    A-34: The return or returns must be filed with the appropriate 
Internal Revenue Service Center, the addresses of which are listed in 
the instructions for the Form 1099 series.

                          Use of Magnetic Media

    Q-35: What rules apply with respect to the use of magnetic media?
    A-35: Any return required under section 6050J must be filed on 
magnetic media to the extent required by section 6011(e). Any person not 
required by section 6011(e) to file returns under section 6050J on 
magnetic media may request permission to do so. See Sec. 1.9101 for 
rules relating to permission to submit information on magnetic tape or 
other media. If a person required to file returns on magnetic media 
fails to do so, the penalty under section 6652 (failure to file an 
information return) applies.

            Requirement of Furnishing Statements to Borrowers

                               In General

    Q-36: What statements must be furnished to borrowers?
    A-36: Any person required to make an information return under 
section 6050J must furnish a statement to each borrower whose name is 
required to be set forth in a return filed with the Internal Revenue 
Service. For the date when the statement must be furnished, see A-40.
    Q-37: Is the statement considered to be furnished to the borrower if 
it is mailed to the borrower at the borrower's last known address?
    A-37: Yes.

                    Information Included on Statement

    Q-38: What information must be included on the statement?
    A-38: The statement must include the following information:
    (a) Except in the case where the return is made on behalf of a 
governmental unit (or any agency or instrumentality thereof), the name 
and address of the person required to make the information return;
    (b) In the case where the return is made on behalf of a governmental 
unit or any agency or instrumentality thereof, the name and address of 
such unit, agency or instrumentality;
    (c) The information required under A-26 or A-27, whichever is 
applicable; and
    (d) A legend stating that the information is being reported to the 
Internal Revenue Service.

                     Copy of Form 1099 to Borrowers

    Q-39: May the requirement of furnishing a statement be met by 
furnishing a copy of the Form 1099 filed with respect to that borrower?
    A-39: Yes. The requirement of furnishing a statement may be met by 
furnishing to the borrower a copy of the Form 1099 containing the same 
information filed with the Service with respect to that borrower, or a 
reasonable facsimile thereof, provided that the form or the reasonable 
facsimile bears a legend stating that the information is being reported 
to the Internal Revenue Service.

                      Time of Furnishing Statement

    Q-40: When is a statement required to be furnished to the borrower?
    A-40: A statement is required to be furnished to the borrower on or 
before January 31 of the year following the calendar year in which the 
acquisition or abandonment of property occurs.

                           Multiple Borrowers

    Q-41: If a person required to report under this section must make an 
information return with respect to more than one borrower on a single 
loan, of an interest in the property occurs or in which the lender knows 
or has reason to know of the abandonment of the property.
    A-41: Yes. A separate statement must be furnished to each borrower 
with respect to which a separate return is required under section 6050J.

                           Extensions of Time

    Q-42: Are there any circumstances under which an extension of time 
may be granted with respect to the requirement of furnishing statements 
to borrowers?
    A-42: Yes. Upon written application of the person required to 
report, the service center director may, for good cause shown, grant 
that person an additional period (not to exceed 30 days) in which to 
furnish statements under section 6050J with respect to any calendar 
year. The application for an extension must be addressed to the director 
of the service center with which the returns must be filed. The 
application must contain a concise statement of the reasons for 
requesting the extension in order to aid the service center director in 
determining the period of extension, if any, to be granted. The 
application must state at the top of the first page that it is made 
under section 1.6050J-1T and must be signed by the person required to 
report under section 6050J. In general, the application should be filed 
not earlier than September 30 of the year in which the acquisition of an 
interest in the property occurs or in which the lender knows or has 
reason to know of the abandonment of the property,

[[Page 718]]

and not later than January 15 of the following year.

                                Penalties

    Q-43: Are there penalties for failing to comply with the 
requirements of section 6050J and the regulations thereunder?
    A-43: Yes. The penalty for failing to make any information return 
with respect to any borrower under section 6050J is provided in section 
6652. The penalty for failing to furnish a statement to any borrower is 
provided in section 6678.

                             Effective Date

    Q-44: When is section 6050J effective?
    A-44: Section 6050J is effective for acquisitions and abandonments 
of property after December 31, 1984.

(Approved by the Office of Management and Budget under control number 
1545-0877)

(Secs. 6050J and 7805 of the Internal Revenue Code of 1954 (98 Stat. 
687, 68A Stat. 917, 26 U.S.C. 6050J, 7805 respectively)

[T.D. 7971, 49 FR 34460, Aug. 31, 1984]



Sec. 1.6050K-1  Returns relating to sales or exchanges of certain partnership interests.

    (a) Partnership return required--(1) In general. Except as otherwise 
provided in this paragraph (a), a partnership shall make a separate 
return on Form 8308 with respect to each section 751(a) exchange (as 
defined in paragraph (a)(4)(i) of this section) of an interest in such 
partnership which occurs after December 31, 1984. A partnership that is 
in doubt as to whether partnership property constitutes section 751 
property to any extent or as to whether a transfer of a partnership 
interest constitutes a section 751(a) exchange may file Form 8308 in 
order to avoid the risk of incurring a penalty under section 6721. The 
penalty under section 6721 will generally apply, however, to 
partnerships that do not file Form 8308 where in fact a section 751(a) 
exchange occurred, except as provided in paragraphs (a)(2) and (e) of 
this section.
    (2) Return required under section 6045. No return shall be required 
under section 6050K(a) and paragraph (a)(1) of this section with respect 
to the sale or exchange of a partnership interest if a return is 
required to be filed under section 6045 with respect to such sale or 
exchange.
    (3) Single or composite documents. The Commissioner may authorize 
the use, at the option of the partnership, of a single document which 
includes all of the partnership's returns for a calendar year in the 
case of partnerships required under paragraph (a)(1) of this section to 
make 25 or more returns on Form 8308 for any calendar year. In addition, 
the Commissioner may authorize the use for this purpose, also at the 
option of such a partnership, of a composite document. These 
authorizations shall be subject to such conditions, limitations, and 
special rules governing the preparation, execution, filing, and 
correction thereof as the Commissioner may deem appropriate. Such 
composite document shall consist of a form prescribed by the 
Commissioner and an attachment or attachments of magnetic tape or other 
approved media. To the extent that the use of a single or composite 
document has been authorized by the Commissioner, references in this 
section to Form 8303 shall be deemed to refer also to returns included 
in a single or composite document under this paragraph (a)(3). Any 
single or composite document so authorized shall include the information 
required to be provided on Form 8308 under paragraph (b) of this section 
with respect to each section 751(a) exchange.
    (4) Definitions. For purposes of section 6050K of the Code and this 
section--
    (i) Section 751(a) exchange. The term section 751(a) exchange means 
any sale or exchange of a partnership interest (or portion thereof) in 
which any portion of any money or other property received by a 
transferor partner in exchange for all or a part of his or her interest 
in the partnership is attributable to section 751 property. The term 
does not include a distribution which is treated as a sale or exchange 
between the distributee and the partnership under section 751(b) of the 
Code.
    (ii) Section 751 property. The term section 751 property means 
unrealized receivables, as defined in section 751(c) of the Code, and 
inventory items which have appreciated substantially in value 
(``substantially appreciated inventory items''), as defined in section 
751(d) of the Code.

[[Page 719]]

    (iii) Transferor and transferee. The term transferor means the 
beneficial owner of a partnership interest immediately before the 
transfer of that interest. The term ``transferee'' means the beneficial 
owner of a partnership interest immediately after the transfer of that 
interest. However, if a partnership does not know the identity of the 
beneficial owner of an interest in the partnership, the record holder of 
such interest shall be treated as the transferor or transferee (as the 
case may be) for purposes of paragraphs (b) and (c) of this section.
    (b) Contents of return. The return on Form 8308 shall include the 
following information:
    (1) The names, addresses, and taxpayer identification numbers of the 
transferee and transferor in the exchange and of the partnership filing 
the return;
    (2) The date of the exchange; and
    (3) Such other information as may be required by Form 8308 or its 
instructions.
    (c) Statement to be furnished to transferor and transferee. Every 
partnership required to file a return under paragraph (a) of this 
section must furnish to each person whose name is required to be set 
forth in such return a written statement on or before January 31 of the 
calendar year following the calendar year in which the section 751 (a) 
exchange occurred to which the return under paragraph (a) relates (or, 
if later, 30 days after the partnership is notified of the exchange as 
defined in paragraph (e) of this section). The partnership shall use a 
copy of the completed Form 8308 as a statement unless the Form 8308 
contains information with respect to more than one section 751 (a) 
exchange (see paragraph (a) (3) of this section). If the partnership 
does not use a copy of Form 8308 as a statement, the statement shall 
include the information required to be shown on Form 8308 with respect 
to the section 751 (a) exchange to which the person to whom the 
statement is furnished is a party. In addition, it shall state that--
    (1) The information shown on the statement has been supplied to the 
Internal Revenue Service,
    (2) A transferor of a partnership interest in a sale or exchange 
described in section 751 (a) of the Internal Revenue Code is required to 
treat a portion of any gain or loss resulting from the sale or exchange 
as ordinary income or loss, and
    (3) The transferor in a section 751 (a) sale or exchange is required 
under paragraph (a) (3) of Sec. 1.751-1 to attach a statement relating 
to the sale or exchange to his or her income tax return for the taxable 
year in which the sale or exchange occurred.
    (d) Requirement that transferor notify partnership--(1) In general. 
The transferor of any partnership interest in a section 751 (a) exchange 
shall notify the partnership of such exchange in writing within 30 days 
of the exchange (or, if earlier, January 15 of the calendar year 
following the calendar year in which the exchange occurred). The written 
notification from the transferor shall include the following 
information:
    (i) The names and addresses of the transferor and transferee in the 
section 751 (a) exchange;
    (ii) The taxpayer identification numbers of the transferor and, if 
known, of the transferee; and
    (iii) The date of the exchange.

Any transferor who notified a partnership under section 6050K (c) (1) 
prior to January 22, 1986 by a notification that does not meet the 
requirements of this paragraph (d) shall furnish such partnership with 
the written notification described in this paragraph (d) on or before 
February 21, 1986.
    (2) Return required under section 6045. No transferor shall be 
required to notify a partnership of the sale or exchange of a 
partnership interest under section 6050K (c) (1) or paragraph (d) (1) of 
this section if a return is required to be filed under section 6045 with 
respect to such sale or exchange.
    (e) Partnership not required to make a return or furnish statements 
under this section until it has notice of the exchange. A partnership 
shall not be required to make a return or furnish statements under 
section 6050K and this section with respect to any section 751 (a) 
exchange until it has been notified of the exchange. For purposes of 
section 6050K (c) (2) and this section, a partnership is notified of a 
section 751 (a) exchange when either:

[[Page 720]]

    (1) The partnership receives the written notification from the 
transferor required under paragraph (d) of this section; or
    (2) The partnership has knowledge that there has been a transfer of 
a partnership interest or any portion thereof, and, at the time of the 
transfer, the partnership had any section 751 property. However, no 
return or statements are required under section 6050K if the transfer 
was not a section 751 (a) exchange (e.g., a transfer which in its 
entirety constitutes a gift for federal income tax purposes). For 
purposes of this paragraph (e) (2), the partnership may rely on a 
written statement from the transferor that the transfer was not a 
section 751 (a) exchange in the absence of knowledge to the contrary. 
For rules applicable where the partnership is in doubt as to whether 
partnership property constitutes section 751 property to any extent or 
as to whether a transfer of a partnership interest constitutes a section 
751 (a) exchange, see paragraph (a) (1) of this section.
    (f) Partnership return is to be attached to Form 1065--(1) In 
general. Any partnership return on Form 8308 required under this section 
shall be filed as an attachment to the partnership's Form 1065 for its 
taxable year in which the calendar year in which the section 751 (a) 
exchange occurred ends and shall be filed at the time (determined with 
regard to any extension of time for filing) and place prescribed for 
filing of the partnership's Form 1065 for that taxable year (see 
paragraph (e) of Sec. 1.6031-1 for the time and place for filing Form 
1065).
    (2) Notification after Form 1065 is filed. If a partnership is 
notified of an exchange (as defined in paragraph (e) of this section) 
after the partnership has filed Form 1065 for the taxable year with 
respect to which the exchange should have been reported, Form 8308 shall 
be filed with the service center or other Internal Revenue office with 
which the partnership's Form 1065 was filed, on or before the thirtieth 
day after the partnership is notified of the exchange.
    (g) Penalties. For penalties for failure of:
    (1) Transferors to furnish the notification required by paragraph 
(d) of this section see section 6722 (b);
    (2) Partnerships to furnish any statement required under paragraph 
(c) of this section see section 6722 (a); and
    (3) Partnerships to file the return on Form 8308 as required by 
paragraph (a) of this section see section 6721.

[T.D. 8119, 52 FR 41, Jan. 2, 1987]



Sec. 1.6050L-1  Information return by donees relating to certain dispositions of donated property.

    (a) Information returns--(1) Disposition of charitable deduction 
property. If a donee of any charitable deduction property (as defined in 
paragraph (e) of this section), sells, exchanges, consumes, or otherwise 
disposes of (with or without consideration) such property (or any 
portion thereof) within 2 years after the date of the donor's 
contribution of such property, the donee shall make an information 
return on the form prescribed by the Internal Revenue Service. For 
special rules with respect to successor donees, see paragraph (c) of 
this section.
    (2) Disposition of items appraised for $500 or less--(i) In general. 
Paragraph (a)(1) of this section shall not apply with respect to an item 
of charitable deduction property disposed of by sale if the appraisal 
summary (as defined in Sec. 1.170A-13(c)(4)) signed by the donee with 
respect to the item contains, at the time of the donee's signature, a 
statement signed by the donor that the appraised value of the item does 
not exceed $500. In the case of an appraisal summary that describes more 
than one item, this exception shall apply only with respect to an item 
clearly identified as having an appraised value of $500 or less. For 
purposes of this paragraph (a)(2)(i), items that form a set (such as, 
for example, a collection of books written by the same author, 
components of a stereo system, or a group of place settings of a pattern 
of silverware) are considered one item. In addition, all nonpublicly 
traded stock is considered one item as are all nonpublicly traded 
securities other than nonpublicly traded stock.
    (ii) Transitional rule. Paragraph (a)(2)(i) of this section is 
satisfied with

[[Page 721]]

respect to an appraisal summary submitted to the donee on or before 
January 31, 1986, if such donee obtained the required statement from the 
donor on or before March 31, 1986, on either an amended appraisal 
summary or an attachment to the original appraisal summary.
    (3) Consumption for distribution of exempt purpose. Paragraph (a)(1) 
of this section shall not apply with respect to an item of charitable 
deduction property consumed or distributed by a donee without 
consideration if the consumption or distribution is in furtherance of a 
purpose or function constituting a basis for such donee's exemption 
under section 501 of the Code. For example, no reporting is required 
with respect to medical supplies consumed or distributed by a tax-exempt 
relief organization in aiding disaster victims.
    (b) Information required to be provided on return. The information 
return required by paragraph (a)(1) of this section shall include the 
following:
    (1) The name, address, and employer identification number of the 
donee making the information return;
    (2) A description of the property (or portion disposed of) in 
sufficient detail to identify the charitable deduction property received 
by such donee;
    (3) The name and taxpayer identification number of the donor (social 
security number if the donor is an individual or employer identification 
number if the donor is a corporation or partnership);
    (4) The date of the contribution to such donee;
    (5) Any amount received by such donee with respect to the 
disposition;
    (6) The date of the disposition by such donee; and
    (7) Such other information as may be specified by the form or its 
instructions.
    (c) Successor donees--(1) In general. Section 6050L and this section 
shall apply to successor donees that receive charitable deduction 
property (as defined in paragraph (e) of this section) that was 
transferred by the original donee after July 5, 1988, (whether the 
successor donee received the property from the original donee or another 
successor donee). For definitions of the terms ``donor,'' ``donee,'' 
``original donee,'' and ``successor donee,'' see Sec. 1.170A-
13(c)(7)(iv)-(vii).
    (2) Information required to be provided on return. With respect to 
charitable deduction property that is transferred to one or more 
successor donees to which this section applies, the information return 
required by paragraph (a)(1) of this section shall include, in addition 
to the information described in paragraph (b) of this section, the 
following:
    (i) The name, address, and employer identification number of the 
immediately succeeding successor donee (if any) and the immediately 
preceding successor donee (if any);
    (ii) The name, address, and employer identification number of the 
original donee if different from the information required by paragraph 
(b)(1) of this section;
    (iii) The date of contribution to the original donee; and
    (iv) Such other information as may be specified by the form or its 
instructions.
    (3) Information to be provided to transferor. Every successor donee 
to which this section applies that receives any charitable deduction 
property within the 2-year period described in paragraph (a)(1) of this 
section shall provide its name, address, and employer identification 
number to that preceding donee on or before the 15th day after the later 
of--
    (i) The date of transfer to such successor donee, or
    (ii) The date such successor donee receives a copy of the appraisal 
summary from the preceding donee.
    (4) Donees that transfer property to successor donees. In addition 
to complying with the requirements of paragraph (a)(1) of this section, 
every donee that transfers any charitable deduction property to a 
successor donee to which this section applies within the 2-year period 
described in paragraph (a)(1) of this section--
    (i) Shall provide its name, address, and employer identification 
number and a copy of the appraisal summary (as described in Sec. 1.170A-
13(c)(4)) relating to the transferred property to the successor donee on 
or before the 15th day after the latest of--
    (A) The date of such transfer, or

[[Page 722]]

    (B) The date the original donee signs the appraisal summary, or
    (C) In a case in which the transferring donee is a successor donee, 
the date such donee receives a copy of the appraisal summary from such 
donee's transferor, and
    (ii) Shall provide a copy of its information return required by 
paragraph (a)(1) this section to the successor donee on or before the 
15th day after the transferring donee files the information return 
pursuant to paragraph (e)(2) of this section.
    (5) Donee. In the case of charitable deduction property that is 
transferred to a successor donee to which this section applies, the term 
donee as used in paragraph (a)(2) and (e) of this section means only the 
original donee.
    (d) Special rules--(1) Statement to be furnished to donors. Every 
donee making a return under section 6050L and this section with respect 
to the disposition of charitable deduction property shall furnish a copy 
of the return to the donor of the property.
    (2) Retention of appraisal summary. Every donee shall retain the 
appraisal summary described in Sec. 1.170A-13(c)(4) in the donee's 
records for so long as it may be relevant in the administration of any 
internal revenue law.
    (e) Charitable deduction property. For purposes of this section, the 
term charitable deduction property means any property (other than money 
and publicly traded securities to which Sec. 1.170A-13(c)(7)(xi)(B) does 
not apply) contributed after December 31, 1984, with respect to which 
the donee signs (or is presented with for signature in cases described 
in Sec. 1.170A-13(c)(4)(iv)(C)(2)) an appraisal summary (as required by 
Sec. 1.170A-13(c)(4)(i)(B)). For purposes of this section, if such donee 
signs (or is presented with for signature in cases described in 
Sec. 1.170A-13(c)(4)(iv)(C)(2)) the appraisal summary after the date of 
contribution of the property, the property is deemed to be charitable 
deduction property from the date of contribution.
    (f) Place and time for filing information returns--(1) Place for 
filing. The donee information return required by section 6050L and this 
section shall be filed with the Internal Revenue Service center listed 
on the return form or its instructions.
    (2) Time for filing--(i) In general. Except as provided in paragraph 
(f)(2)(ii) of this section, the donee information return shall be filed 
on or before the 125th day after a donee sells, exchanges, consumes or 
otherwise disposes of the charitable deduction property. A donee 
information return filed pursuant to this paragraph (f)(2)(i) does not 
have to include the information required by paragraphs (b) (3), (4), 
(5), or (6), or (c)(2)(i)-(iii) of this section if such information is 
not available to the donee by the due date of the return.
    (ii) Exception. Notwithstanding paragraph (f)(2)(i) of this section, 
in the case of a donee who, on the date of receipt of the transferred 
property, had no reason to believe that the substantiation requirements 
of Sec. 1.170A-13(c) apply with respect to the property, the donee 
information return is not required to be filed until the 60th day after 
the later of May 5, 1988, or the date on which such donee has reason to 
believe that the substantiation requirements of Sec. 1.170A-13(c) apply 
with respect to the property. A donee information return filed pursuant 
to this paragraph (f)(2)(ii) does not have to include the information 
required by paragraph (b) (3), (4), (5), or (6), or (c)(2)(i)-(iii) of 
this section if such information is not available to the donee by the 
due date of the return.
    (g) Penalties. For penalties for failure to compy with the 
requirements of this section, see sections 6676, 6721, and 6723.

[T.D. 8199, 53 FR 16085, May 5, 1988; T.D. 8199, 53 FR 18372, May 23, 
1988]



Sec. 1.6050M-1  Information returns relating to persons receiving contracts from certain Federal executive agencies.

    (a) General rule. Except as otherwise provided in paragraph (c) of 
this section, the head of every Federal executive agency or his or her 
delegate shall make an information return to the Internal Revenue 
Service reporting the following information with respect to each 
contract entered into by that Federal executive agency--
    (1) Name and address of the contractor;

[[Page 723]]

    (2) Contractor's TIN and, if the contractor is a member of an 
affiliated group of corporations that files its Federal income tax 
returns on a consolidated basis, the name and TIN of the common parent 
of the affiliated group;
    (3) The date of the contract action;
    (4) The expected date of completion of the contract as determined 
under any reasonable method, such as the expected contract delivery date 
under the contract schedule;
    (5) The total amount obligated under the contract action; and
    (6) Any other information required by Forms 8596 and 8596A and their 
instructions, or by any other administrative guidance issued by the 
Internal Revenue Service (such as a revenue procedure).

See paragraph (e) of this section relating to the manner in which to 
report increases in amounts obligated under existing contracts. See 
paragraph (d)(5) of this section for special rules for agencies that 
submit contract information to the Federal Procurement Data Center. For 
provisions concerning the requesting and furnishing of identifying 
numbers, see section 6109 and the regulations thereunder.
    (b) Definitions. The following definitions apply for purposes of 
this section--
    (1) Federal executive agency. The term ``Federal executive agency'' 
means--
    (i) Any executive agency (as defined in 5 U.S.C. 105) other than the 
General Accounting Office;
    (ii) Any military department (as defined in 5 U.S.C. 102); and
    (iii) The United States Postal Service and the Postal Rate 
Commission.
    (2) Contract--(i) General rule. The term ``contract'' means an 
obligation of a Federal executive agency to make payment of money (or 
other property) to a person in return for the sale of property, the 
rendering of services, or other consideration. The term ``contract'' 
includes, for example, such an obligation arising from a written 
agreement executed by the agency and the contractor, an award or notice 
of award, a job order or task letter issued under a basic ordering 
agreement, a letter contract, an order that becomes effective only upon 
written acceptance or performance, or an action described in paragraph 
(e) of this section.
    (ii) Exceptions. For purposes of this section, the term ``contract'' 
does not include--
    (A) A license granted by a Federal executive agency;
    (B) An obligation of a contractor (other than a Federal executive 
agency) to a subcontractor;
    (C) A debt instrument of the United States Government or a Federal 
agency, such as a Treasury note, Treasury bond, Treasury bill, savings 
bond, or similar instrument; or
    (D) An obligation of a Federal executive agency to lend money, lease 
property to a lessee, or sell property.
    (iii) Special rule for certain contracts of the Small Business 
Administration. Any subcontract entered into by the Small Business 
Administration (SBA) under a prime contract between the SBA and a 
procuring Federal executive agency pursuant to section 8(a) of the Small 
Business Act (15 U.S.C. 637(a)) shall not be treated as a contract of 
the SBA but shall be treated as a contract of the procuring agency for 
purposes of this section.
    (iv) Certain schedule contracts. For purposes of this section, any 
of the following contracts entered into on behalf of one or more Federal 
executive agencies is not a ``contract'' to be reported by the General 
Services Administration or the Department of Veteran's Affairs at the 
time of execution:
    (A) A Federal Supply Schedule Contract entered into by the General 
Services Administration,
    (B) An Automated Data Processing Schedule Contract entered into by 
the General Services Administration, or
    (C) A schedule contract entered into by the Department of Veteran's 
Affairs.

Instead, an order placed by a Federal executive agency, including the 
General Services Administration or the Department of Veteran's Affairs, 
under such a schedule contract is a ``contract'' for purposes of this 
section.
    (v) Blanket purchase agreements. For purposes of this section, the 
term contract does not include a blanket purchase agreement between one 
or more Federal executive agencies and one or more contractors. Instead, 
an order

[[Page 724]]

placed by a Federal executive agency under the terms of a blanket 
purchase agreement is a ``contract'' for purposes of this section.
    (vi) Contracts entered into using non-appropriated funds. [Reserved]
    (3) Contractor. The term contractor means any person who enters into 
a contract with a Federal executive agency.
    (4) Person and TIN. The terms person and TIN are defined in sections 
7701(a) (1) and (41), respectively.
    (c) Exceptions to information reporting requirement--(1) General 
exceptions. The following do not need to be reported pursuant to this 
section:
    (i) Any contract or contract action for which the amount obligated 
is $25,000 or less;
    (ii) Any contract with a contractor who, in making the agreement, is 
acting in his or her capacity as an employee of a Federal executive 
agency (e.g., any contract of employment under which the employee is 
paid wages subject to the withholding provisions contained in chapter 24 
of subtitle C);
    (iii) Any contract between a Federal executive agency and another 
Federal governmental unit (or any agency or instrumentality thereof);
    (iv) Any contract with a foreign government (or any agency or 
instrumentality thereof);
    (v) Any contract with a state or local governmental unit (or any 
agency or instrumentality thereof);
    (vi) Any contract with a person who is not required to have a TIN 
(see, for example, Sec. 301.6109-1(g));
    (vii) Any contract the terms of which provide that all amounts 
payable under the contract by any Federal executive agency will be paid 
on or before the 120th day following the date of the contract action, 
and for which it is reasonable to except that all amounts will be so 
paid.
    (viii) Any contract under which all money (or other property) that 
will be received by the contractor after the 120th day after the date of 
the contract action will come from persons other than a Federal 
executive agency or an agent of such an agency (e.g., a contract under 
which the contractor will collect amounts owed to a Federal executive 
agency by the agency's debtor and will remit to the agency the money 
collected less an amount that serves as the contractor's consideration 
under the contract).
    (ix) Any contract for which the Commissioner determines that the 
information described in paragraph (a) of this section will not 
facilitate the collection of Federal tax liabilities because of the 
manner, method, or timing of payment by the agency under that contract.
    (2) Special rule for certain classified or confidential contracts. 
Contracts described in section 6050M(e)(3), relating to certain 
classified or confidential contracts, are to be reported only in 
accordance with section 6050M(e)(2).
    (d) Filing requirements--(1) Frequency and time for filing. The 
information returns required by this section with respect to contracts 
of a Federal executive agency entered into on or after January 1, 1989, 
must be filed on a quarterly basis for the calendar quarters ending on 
the last day of March, June, September, and December. Except as provided 
in paragraph (d)(5) of this section, the returns for contracts entered 
into during a calendar quarter must be filed on or before the last day 
of the month following that quarter. Notwithstanding the preceding 
sentence, returns filed before May 7, 1990, will be considered timely 
filed.
    (2) Form of reporting--(i) General rule concerning magnetic media. 
The information returns required by this section with respect to 
contracts of a Federal executive agency for each calendar quarter shall 
be made in one submission (or in multiple submissions if permitted by 
paragraph (d)(4) of this section). Except as provided in paragraph 
(d)(2)(ii) of this section, the required returns shall be made on 
magnetic media (within the meaning of Sec. 301.6011-2(a)(1)) in 
accordance with any applicable revenue procedure or other guidance 
promulgated by the Internal Revenue Service for the filing of such 
returns under section 6050M.
    (ii) Magnetic media exception for low-volume filers. Any Federal 
executive agency that on any October 1 has a reasonable expectation of 
entering into, during the one year period beginning on that date, fewer 
than 250 contracts

[[Page 725]]

that are subject to the reporting requirements under this section may 
make the information returns required by this section for each quarter 
of that one year period on the prescribed paper Form 8596 in accordance 
with the instructions accompanying such form.
    (3) Place of filing--(i) Returns on magnetic media. Information 
returns made under this section on magnetic media shall be filed with 
the Internal Revenue Service at the Martinsburg Computing Center, 
Martinsburg, West Virginia 25401-1359, in accordance with any applicable 
revenue procedure or other guidance promulgated by the Internal Revenue 
Service relating to the filing of returns under section 6050M.
    (ii) Form 8596. Information returns made on Form 8596 shall be filed 
with the Ifternal Revenue Service at the location specified in the 
instructions for that form.
    (4) Special rule concerning multiple returns. To the extent 
permitted in any revenue procedure or other guidance relating to the 
filing of information returns under this section, a Federal executive 
agency which files information returns under this section on magnetic 
media may make more than one magnetic media submission for any quarter, 
if each submission for that quarter contains all of the information 
required by paragraph (a) of this section with respect to contracts 
entered into by one or more departments, branches, bureaus, agencies, or 
other readily identifiable operating functions (such as a geographic 
region) of the Federal executive agency.
    (5) Special rules for agencies reporting to the Federal Procurement 
Data Center--(i) Election to have the Director of the Federal 
Procurement Data Center make returns on behalf of agency. If, in 
complying with the requirements of the Federal Procurement Data System 
(FPDS) (as established under the authority of the Office of Federal 
Procurement Policy Act, as amended, 41 U.S.C. 401 et seq.), a Federal 
executive agency is required to submit to the Federal Procurement Data 
Center (FPDC) all the information with respect to one or more contracts 
required to be reported by paragraph (a) of this section, that Federal 
executive agency may, in lieu of making returns directly to the Internal 
Revenue Service with respect to those contracts, elect to have the 
Director of the FPDC (or his or her delegate) make the required returns 
with respect to all of those contracts on its behalf. In order to make 
this election for such contracts entered into during a calendar quarter, 
the head of a Federal executive agency (or his or her delegate) shall 
attach to its submission to the FPDC for that quarter a signed statement 
to the effect that:
    (A) The Director of the FPDC (or his or her delegate) is authorized, 
in accordance with an election made under 26 CFR 1.6050M-1(d)(5) to 
make, on the agency's behalf, the required returns for such contracts 
for that quarter, and
    (B) Under the penalties of perjury, such official has examined the 
information to be submitted by the agency to the FPDC for making those 
returns and certifies that information to be, to the best of such 
official's knowledge and belief, a compilation of agency records 
maintained in the normal course of business for the purpose of providing 
the information necessary for making true, correct, and complete returns 
as required by section 6050M.

If the election is made, the Director of the FPDC (or his or her 
delegate) shall, on the electing agency's behalf, make the returns 
required by paragraph (a) of this section with respect to the contracts 
to which the election applies.
    (ii) Time, manner, and place of filing. The Director of the FPDC (or 
his or her delegate) must--
    (A) Make the required returns for a quarter on or before the earlier 
of;
    (1) 45 days following the date that the contract information is 
required to be submitted to the FPDC, or
    (2) 90 days following the end of the calendar quarter for which the 
election is made, except that, if that calendar quarter ends September 
30, 105 days following the end of that quarter, and
    (B) Comply with paragraph (d)(2)(i) and (3)(i) of this section, 
relating to form and place of filing.

Notwithstanding the preceding sentence, returns made before May 7, 1990, 
will be considered timely filed.
    (iii) Contracts reported directly to the Internal Revenue Service. 
Even if the election is made, all information with

[[Page 726]]

respect to any particular contract required to be reported under 
paragraph (a) of this section must be reported directly to the Internal 
Revenue Service by the electing agency if the FPDS does not require that 
information to be submitted to the FPDC. An electing agency shall not, 
however, make direct returns to the Internal Revenue Service of contract 
information that is subject to the election.
    (6) Certification of return--(i) Returns made directly with the 
Internal Revenue Service. Each return made under this section by a 
Federal executive agency directly with the Internal Revenue Service on 
magnetic media or on Forms 8596 and 8596-A shall be signed by the head 
of the Federal executive agency (or his or her delegate) under the 
penalties of perjury, certifying that such official has examined the 
return, that it is prepared pursuant to the requirements of section 
6050M and that, to the best of such official's knowledge and belief, it 
is compiled from agency records maintained in the normal course of 
business for the purpose of making a true, correct, and complete return 
as required by section 6050M.
    (ii) Returns made by Director of FPDC on agency's behalf. Each 
return made under this section by the Director of the FPDC on behalf of 
a Federal executive agency shall be signed by the Director of the FPDC 
(or his or her delegate) under the penalties of perjury, certifying that 
such official has examined the return, that it is prepared pursuant to 
the requirements of section 6050M and that, to the best of such 
official's knowledge and belief, it is compiled from information 
submitted by the Federal executive agency to the FPDC pursuant to 
Sec. 1.6050M-1(d)(5)(i) for the purpose of making a true, correct, and 
complete return as required by section 6050M.
    (e) Special rules relating to increases in amount obligated. If, 
through the exercise of an option contained in a basic or initial 
contract or under any other rule of contract law, express or implied, 
the amount of money or other property obligated under the contract is 
increased by more than $25,000 in one contract action, then that action 
shall be treated as the entering into of a new contract with respect to 
which the information required by paragraph (a) of this section is to be 
reported to the Internal Revenue Service for the calendar quarter in 
which the increase occurs.
    (f) Effective date--(1) Contracts required to be reported. Except as 
otherwise provided in this paragraph (f), this section applies to each 
Federal executive agency with respect to its contracts entered into on 
or after January 1, 1989 (including any increase in amount obligated on 
or after January 1, 1989, that is treated as a new contract under 
paragraph (e) of this section).
    (2) Contracts not required to be reported. A Federal executive 
agency is not required to report--
    (i) Any basic or initial contract entered into before January 1, 
1989,
    (ii) Any increase contract action occurring before January 1, 1989, 
that is treated as a new contract under paragraph (e) of this section, 
or
    (iii) Any increase contract action that is treated as a new contract 
under paragraph (e) of this section if the basic or initial contract to 
which that contract action relates was entered into before January 1, 
1989, and--
    (A) The increase occurs before April 1, 1990, or
    (B) The amount of the increase does not exceed $50,000.
    (3) Illustration--(i) If Federal executive agency enters into an 
initial contract on December 1, 1988, and the amount of money obligated 
under the contract is increased by $55,000 on April 15, 1990, then (A) 
there is no reporting requirement with respect to the contract when 
entered into on December 1, 1988, and (B) the April 15, 1990, increase, 
which is treated as a new contract under paragraph (e) of this section, 
is subject to the reporting requirements of this section because it is 
considered to be a new contract entered into on April 15, 1990.
    (ii) If the $55,000 increase had occurred before April 1, 1990, 
there would have been no reporting requirement with respect to that 
increase.

[T.D. 8275, 54 FR 50369, Dec. 6, 1989; 55 FR 13522, Apr. 11, 1990]

[[Page 727]]



Sec. 1.6050N-1  Statements to recipients of royalties.

    (a) Requirement. A person required to make an information return 
under section 6050N(a) must furnish a statement to each recipient whose 
name is required to be shown on the related information return for 
royalties paid.
    (b) Form, manner, and time for providing statements to recipients. 
The statement required by paragraph (a) of this section must be either 
the official Form 1099 prescribed by the Internal Revenue Service for 
the respective calendar year or an acceptable substitute statement. The 
rules under Sec. 1.6042-4 (relating to statements with respect to 
dividends) apply comparably in determining the form of the acceptable 
substitute statement permitted by this section. Those rules also apply 
for purposes of determining the manner of and time for providing the 
Form 1099 or its acceptable substitute statement to a recipient under 
this section.
    (c) Penalty. For provisions relating to the penalty for failure to 
furnish a statement under this section, see section 6722.
    (d) Effective date. This section is effective for payee statements 
due after December 31, 1995, without regard to extensions. For the 
substantially similar statement mailing requirements that apply with 
respect to forms required to be filed after October 22, 1986, and before 
January 1, 1996, see Rev. Proc. 84-70 (1984-2 C.B. 716) (or successor 
revenue procedures). See Sec. 601.601(d)(2) of this chapter.

[T.D. 8637, 60 FR 66111, Dec. 21, 1995]



Sec. 1.6050P-0  Table of contents.

    This section lists the major captions that appear in Sec. 1.6050P-1.

Sec. 1.6050P-1  Information reporting for discharges of indebtedness by 
                       certain financial entities

(a) Reporting requirement.
(1) In general.
(2) No aggregation.
(3) Amounts not includible in income.
(4) Time and place for reporting.
(i) In general.
(ii) Indebtedness discharged in bankruptcy.
(b) Date of discharge.
(1) In general.
(2) Identifiable events.
(i) In general.
(ii) Statute of limitations.
(iii) Decision to discontinue collection activity; creditor's defined 
          policy.
(iv) Expiration of non-payment testing period.
(3) Permitted reporting.
(c) Indebtedness.
(d) Exceptions from reporting requirement.
(1) Certain bankruptcy discharges.
(i) In general.
(ii) Business or investment debt.
(2) Interest.
(3) Non-principal amounts in lending transactions.
(4) Indebtedness of foreign persons held by foreign branches of U.S. 
          financial institutions.
(i) Reporting requirements.
(ii) Definition.
(5) Acquisition of indebtedness by related party.
(6) Releases.
(7) Guarantors and sureties.
(e) Additional rules.
(1) Multiple debtors.
(i) In general.
(ii) Amount to be reported.
(2) Multiple creditors.
(i) In general.
(ii) Partnerships.
(iii) Pass-through securitized indebtedness arrangement.
(A) Reporting requirements.
(B) Definition.
(iv) REMICs.
(3) Coordination with reporting under section 6050J.
(4) Direct or indirect subsidiary.
(5) Use of magnetic media.
(6) TIN solicitation requirement.
(i) In general.
(ii) Manner of soliciting TIN.
(7) Recordkeeping requirements.
(8) No multiple reporting.
(f) Requirement to furnish statement.
(1) In general.
(2) Furnishing copy of Form 1099-C.
(3) Time and place for furnishing statement.
(g) Penalties.
(h) Effective dates.
(1) In general.
(2) Earlier application.

[T.D. 8654, 61 FR 268, Jan. 4, 1996]



Sec. 1.6050P-1  Information reporting for discharges of indebtedness by certain financial entities.

    (a) Reporting requirement--(1) In general. Except as provided in 
paragraph (d) of this section, any applicable financial entity (as 
defined in section 6050P(c)(1)) that discharges an indebtedness of any 
person (within the meaning of section 7701(a)(1)) of at least $600

[[Page 728]]

during a calendar year must file an information return on Form 1099-C 
with the Internal Revenue Service. Solely for purposes of the reporting 
requirements of section 6050P and this section, a discharge of 
indebtedness is deemed to have occurred, except as provided in paragraph 
(b)(3) of this section, if and only if there has occurred an 
identifiable event described in paragraph (b)(2) of this section, 
whether or not an actual discharge of indebtedness has occurred on or 
before the date on which the identifiable event has occurred. The return 
must include the following information--
    (i) The name, address, and taxpayer identification number (TIN), as 
defined in section 7701(a)(41), of each person for which there was an 
identifiable event during the calendar year;
    (ii) The date on which the identifiable event occurred, as described 
in paragraph (b) of this section;
    (iii) The amount of indebtedness discharged, as described in 
paragraph (c) of this section;
    (iv) An indication whether the identifiable event was a discharge of 
indebtedness in a bankruptcy, if known; and
    (v) Any other information required by Form 1099-C or its 
instructions, or current revenue procedures.
    (2) No aggregation. For purposes of reporting under this section, 
multiple discharges of indebtedness of less than $600 are not required 
to be aggregated unless such separate discharges are pursuant to a plan 
to evade the reporting requirements of this section.
    (3) Amounts not includible in income. Except as otherwise provided 
in this section, discharged indebtedness must be reported regardless of 
whether the debtor is subject to tax on the discharged debt under 
sections 61 and 108 or otherwise by applicable law.
    (4) Time and place for reporting--(i) In general. Except as provided 
in paragraph (a)(4)(ii) of this section, returns required by this 
section must be filed with the Internal Revenue Service office 
designated in the instructions for Form 1099-C on or before February 28 
of the year following the calendar year in which the identifiable event 
occurs.
    (ii) Indebtedness discharged in bankruptcy. Indebtedness discharged 
in bankruptcy that is required to be reported under this section must be 
reported for the later of the calendar year in which the amount of 
discharged indebtedness first becomes ascertainable, or the calendar 
year in which the identifiable event occurs.
    (b) Date of discharge--(1) In general. Solely for purposes of this 
section, except as provided in paragraph (b)(3) of this section, 
indebtedness is discharged on the date of the occurrence of an 
identifiable event specified in paragraph (b)(2) of this section.
    (2) Identifiable events--(i) In general. An identifiable event is--
    (A) A discharge of indebtedness under title 11 of the United States 
Code (bankruptcy);
    (B) A cancellation or extinguishment of an indebtedness that renders 
a debt unenforceable in a receivership, foreclosure, or similar 
proceeding in a federal or State court, as described in section 
368(a)(3)(A)(ii) (other than a discharge described in paragraph 
(b)(2)(i)(A) of this section);
    (C) A cancellation or extinguishment of an indebtedness upon the 
expiration of the statute of limitations for collection of an 
indebtedness, subject to the limitations described in paragraph 
(b)(2)(ii) of this section, or upon the expiration of a statutory period 
for filing a claim or commencing a deficiency judgment proceeding;
    (D) A cancellation or extinguishment of an indebtedness pursuant to 
an election of foreclosure remedies by a creditor that statutorily 
extinguishes or bars the creditor's right to pursue collection of the 
indebtedness;
    (E) A cancellation or extinguishment of an indebtedness that renders 
a debt unenforceable pursuant to a probate or similar proceeding;
    (F) A discharge of indebtedness pursuant to an agreement between an 
applicable financial entity and a debtor to discharge indebtedness at 
less than full consideration;
    (G) A discharge of indebtedness pursuant to a decision by the 
creditor, or the application of a defined policy of the creditor, to 
discontinue collection activity and discharge debt; or
    (H) The expiration of the non-payment testing period, as described 
in paragraph (b)(2)(iv) of this section.

[[Page 729]]

    (ii) Statute of limitations. In the case of an expiration of the 
statute of limitations for collection of an indebtedness, an 
identifiable event occurs under paragraph (b)(2)(i)(C) of this section 
only if, and at such time as, a debtor's affirmative statute of 
limitations defense is upheld in a final judgment or decision of a 
judicial proceeding, and the period for appealing the judgment or 
decision has expired.
    (iii) Decision to discontinue collection activity; creditor's 
defined policy. For purposes of the identifiable event described in 
paragraph (b)(2)(i)(G) of this section, a creditor's defined policy 
includes both a written policy of the creditor and the creditor's 
established business practice. Thus, for example, a creditor's 
established practice to discontinue collection activity and abandon 
debts upon expiration of a particular non-payment period is considered a 
defined policy for purposes of paragraph (b)(2)(i)(G) of this section.
    (iv) Expiration of non-payment testing period. There is a rebuttable 
presumption that an identifiable event under paragraph (b)(2)(i)(H) of 
this section has occurred during a calendar year if a creditor has not 
received a payment on an indebtedness at any time during a testing 
period (as defined in this paragraph (b)(2)(iv)) ending at the close of 
the year. The testing period is a 36-month period increased by the 
number of calendar months during all or part of which the creditor was 
precluded from engaging in collection activity by a stay in bankruptcy 
or similar bar under state or local law. The presumption that an 
identifiable event has occurred may be rebutted by the creditor if the 
creditor (or a third-party collection agency on behalf of the creditor) 
has engaged in significant, bona fide collection activity at any time 
during the 12-month period ending at the close of the calendar year, or 
if facts and circumstances existing as of January 31 of the calendar 
year following expiration of the 36-month period indicate that the 
indebtedness has not been discharged. For purposes of this paragraph 
(b)(2)(iv)--
    (A) Significant, bona fide collection activity does not include 
merely nominal or ministerial collection action, such as an automated 
mailing;
    (B) Facts and circumstances indicating that an indebtedness has not 
been discharged include the existence of a lien relating to the 
indebtedness against the debtor (to the extent of the value of the 
security), or the sale or packaging for sale of the indebtedness by the 
creditor; and
    (C) In no event will an identifiable event described in paragraph 
(b)(2)(i)(H) of this section occur prior to December 31, 1997.
    (3) Permitted reporting. If a discharge of indebtedness occurs 
before the date on which an identifiable event occurs, the discharge 
may, at the creditor's discretion, be reported under this section.
    (c) Indebtedness. For purposes of this section, indebtedness means 
any amount owed to an applicable financial entity, including stated 
principal, fees, stated interest, penalties, administrative costs and 
fines. The amount of indebtedness discharged may represent all, or only 
a part, of the total amount owed to the applicable financial entity.
    (d) Exceptions from reporting requirement--(1) Certain bankruptcy 
discharges--(i) In general. Reporting is required under this section in 
the case of a discharge of indebtedness in bankruptcy only if the 
creditor knows from information included in the reporting entity's books 
and records pertaining to the indebtedness that the debt was incurred 
for business or investment purposes as defined in paragraph (d)(1)(ii) 
of this section.
    (ii) Business or investment debt. Indebtedness is considered 
incurred for business purposes if it is incurred in connection with the 
conduct of any trade or business other than the trade or business of 
performing services as an employee. Indebtedness is considered incurred 
for investment purposes if it is incurred to purchase property held for 
investment, as defined in section 163(d)(5).
    (2) Interest. The discharge of an amount of indebtedness that is 
interest is not required to be reported under this section.
    (3) Non-principal amounts in lending transactions. In the case of a 
lending transaction, the discharge of an amount other than stated 
principal is not required to be reported under this

[[Page 730]]

section. For this purpose, a lending transaction is any transaction in 
which a lender loans money to, or makes advances on behalf of, a 
borrower (including revolving credits and lines of credit).
    (4) Indebtedness of foreign debtors held by foreign branches of U.S. 
financial institutions--(i) Reporting requirements. [Reserved]
    (ii) Definition. An indebtedness held by a foreign branch of a U.S. 
financial institution is described in this paragraph (d)(4) only if--
    (A) The financial institution is engaged through a branch or office 
in the active conduct of a banking or similar business outside the 
United States;
    (B) The branch or office is a permanent place of business that is 
regularly maintained, occupied, and used to carry on a banking or 
similar financial business;
    (C) The business is conducted by at least one employee of the branch 
or office who is regularly in attendance at such place of business 
during normal working hours;
    (D) The indebtedness is extended outside of the United States by the 
branch or office in connection with that trade or business; and
    (E) The financial institution does not know or have reason to know 
that the debtor is a United States person.
    (5) Acquisition of indebtedness by related party. No reporting is 
required under this section in the case of a deemed discharge of 
indebtedness under section 108(e)(4) (relating to the acquisition of an 
indebtedness by a person related to the debtor), unless the disposition 
of the indebtedness by the creditor was made with a view to avoiding the 
reporting requirements of this section.
    (6) Releases. The release of a co-obligor is not required to be 
reported under this section if the remaining debtors remain liable for 
the full amount of any unpaid indebtedness.
    (7) Guarantors and sureties. Solely for purposes of the reporting 
requirements of this section, a guarantor is not a debtor. Thus, in the 
case of guaranteed indebtedness, reporting under this section is not 
required with respect to a guarantor, whether or not there has been a 
default and demand for payment made upon the guarantor.
    (e) Additional rules--(1) Multiple debtors--(i) In general. In the 
case of indebtedness of $10,000 or more incurred on or after January 1, 
1995, that involves more than one debtor, a reporting entity is subject 
to the requirements of paragraph (a) of this section for each debtor 
discharged from such indebtedness. In the case of indebtedness incurred 
prior to January 1, 1995, and indebtedness of less than $10,000 incurred 
on or after January 1, 1995, involving multiple debtors, reporting under 
this section is required only with respect to the primary (or first-
named) debtor. Additionally, only one return of information is required 
under this section if the reporting entity knows, or has reason to know, 
that co-obligors were husband and wife living at the same address when 
an indebtedness was incurred, and does not know or have reason to know 
that such circumstances have changed at the date of a discharge of the 
indebtedness. This paragraph (e)(1) applies to discharges of 
indebtedness after December 31, 1994.
    (ii) Amount to be reported. In the case of multiple debtors jointly 
and severally liable on an indebtedness, the amount of discharged 
indebtedness required to be reported under this section with respect to 
each debtor is the total amount of indebtedness discharged. For this 
purpose, multiple debtors are presumed to be jointly and severally 
liable on an indebtedness in the absence of clear and convincing 
evidence to the contrary.
    (2) Multiple creditors--(i) In general. Except as otherwise provided 
in this paragraph (e)(2), if indebtedness is owned (or treated as owned 
for federal income tax purposes) by more than one creditor, each 
creditor that is an applicable financial entity must comply with the 
reporting requirements of this section with respect to any discharge of 
indebtedness of $600 or more allocable to such creditor. A creditor will 
be considered to have complied with the requirements of this section if 
a lead bank, fund administrator, or other designee of the creditor 
complies on its behalf in any reasonable manner, such as by filing a 
single return reporting the aggregate amount of indebtedness discharged, 
or by filing a return with respect to the portion of the discharged

[[Page 731]]

indebtedness allocable to the creditor. For purposes of this paragraph 
(e)(2)(i), any reasonable method may be used to determine the portion of 
discharged indebtedness allocable to each creditor.
    (ii) Partnerships. For purposes of paragraph (e)(2)(i) of this 
section, indebtedness owned by a partnership is treated as owned by the 
partners.
    (iii) Pass-through securitized indebtedness arrangement--(A) 
Reporting requirements. [Reserved]
    (B) Definition. For purposes of this paragraph (e)(2)(iii), a pass-
through securitized indebtedness arrangement is any arrangement whereby 
one or more debt obligations are pooled and held for twenty or more 
persons whose interests in the debt obligations are undivided co-
ownership interests that are freely transferrable. Co-ownership 
interests that are actively traded personal property (as defined in 
Sec. 1.1092(d)-1) are presumed to be freely transferrable and held by 
twenty or more persons.
    (iv) REMICs. [Reserved]
    (3) Coordination with reporting under section 6050J. If, in the same 
calendar year, a discharge of indebtedness reportable under section 
6050P occurs in connection with a transaction also reportable under 
section 6050J (relating to foreclosures and abandonments of secured 
property), an applicable financial entity need not file both a Form 
1099-A and a Form 1099-C with respect to the same debtor. The filing 
requirements of section 6050J will be satisfied with respect to a 
borrower if, in lieu of filing Form 1099-A, a Form 1099-C is filed in 
accordance with the instructions for the filing of that form. This 
paragraph (e)(3) applies to discharges of indebtedness after December 
31, 1994.
    (4) Direct or indirect subsidiary. For purposes of section 
6050P(c)(1)(C), the term direct or indirect subsidiary means a 
corporation in a chain of corporations beginning with an entity 
described in section 6050P(c)(1)(A), if at least 50 percent of the total 
combined voting power of all classes of stock entitled to vote, or at 
least 50 percent of the total value of all classes of stock, of such 
corporation is directly owned by the entity described in section 
6050P(c)(1)(A), or by one or more other corporations in the chain.
    (5) Use of magnetic media. Any return required under this section 
must be filed on magnetic media to the extent required by section 
6011(e) and the regulations thereunder. A failure to file on magnetic 
media when required constitutes a failure to file an information return 
under section 6721. Any person not required by section 6011(e) to file 
returns on magnetic media may request permission to do so under 
applicable regulations and revenue procedures.
    (6) TIN solicitation requirement--(i) In general. For purposes of 
reporting under this section, a reasonable effort must be made to obtain 
the correct name/taxpayer identification number (TIN) combination of a 
person whose indebtedness is discharged. A TIN obtained at the time an 
indebtedness is incurred satisfies the requirement of this section, 
unless the entity required to file knows that such TIN is incorrect. If 
the TIN is not obtained prior to the occurrence of an identifiable 
event, it must be requested of the debtor for purposes of satisfying the 
requirement of this paragraph (e)(6).
    (ii) Manner of soliciting TIN. Solicitations made in the manner 
described in Sec. 301.6724-1(e)(1)(i) and (2) of this chapter will be 
deemed to have satisfied the reasonable effort requirement set forth in 
paragraph (e)(6)(i) of this section. A TIN solicitation made after the 
occurrence of an identifiable event must clearly notify the debtor that 
the Internal Revenue Service requires the debtor to furnish its TIN, and 
that failure to furnish such TIN may subject the debtor to a $50 penalty 
imposed by the Internal Revenue Service. A TIN provided under this 
section is not required to be certified under penalties of perjury.
    (7) Recordkeeping requirements. Any applicable financial entity 
required to file a return with the Internal Revenue Service under this 
section must also retain a copy of the return, or have the ability to 
reconstruct the data required to be included on the return under 
paragraph (a)(1) of this section, for at least four years from the date 
such return is required to be filed under paragraph (a)(4) of this 
section.

[[Page 732]]

    (8) No multiple reporting. If discharged indebtedness is reported 
under this section, no further reporting under this section is required 
for the amount so reported, notwithstanding that a subsequent 
identifiable event occurs with respect to the same amount. Further, no 
additional reporting or Form 1099-C correction is required if a creditor 
receives a payment of all or a portion of a discharged indebtedness 
reported under this section for a prior calendar year.
    (f) Requirement to furnish statement--(1) In general. Any applicable 
financial entity required to file a return under this section must 
furnish to each person whose name is shown on such return a written 
statement that includes the following information--
    (i) The information required by paragraph (a)(1) of this section;
    (ii) The name, address, and TIN of the applicable financial entity 
required to file a return under paragraph (a) of this section;
    (iii) A legend identifying the statement as important tax 
information that is being furnished to the Internal Revenue Service; and
    (iv) Any other information required by Form 1099-C or its 
instructions, or current revenue procedures.
    (2) Furnishing copy of Form 1099-C. The requirement to provide a 
statement to the debtor will be satisfied if the applicable financial 
entity furnishes copy B of the Form 1099-C or a substitute statement 
that complies with the requirements of the current revenue procedure for 
substitute Forms 1099.
    (3) Time and place for furnishing statement. The statement required 
by this paragraph (f) must be furnished to the debtor on or before 
January 31 of the year following the calendar year in which the 
identifiable event occurs. The statement will be considered furnished to 
the debtor if it is mailed to the debtor's last known address.
    (g) Penalties. For penalties for failure to comply with the 
requirements of this section, see sections 6721 through 6724.
    (h) Effective dates--(1) In general. The rules in this section apply 
to discharges of indebtedness after December 21, 1996, except paragraphs 
(e)(1) and (e)(3) of this section, which apply to discharges of 
indebtedness after December 31, 1994.
    (2) Earlier application. Notwithstanding the provisions of paragraph 
(h)(1) of this section, an applicable financial entity may, at its 
discretion, apply any of the provisions of this section to any discharge 
of indebtedness occurring on or after January 1, 1996, and before 
December 22, 1996.

[T.D. 8654, 61 FR 268, Jan. 4, 1996]



Sec. 1.6052-1   Information returns regarding payment of wages in the form of group-term life insurance.

    (a) Requirement of reporting--(1) In general. Every employer, who 
during any calendar year provides any one of his employees remuneration 
for services in the form of group-term life insurance on the life of 
such employee any part of the cost of which is to be included in such 
employee's gross income as provided in section 79(a), shall make a 
separate return on Form W-2 with respect to each such employee for such 
year which includes the following information:
    (i) Name, address, and identifying number of the employer;
    (ii) Name, address, and social security number of the employee; and
    (iii) Total amount includible in the employee's gross income by 
reason of the provisions of section 79(a), computed as if each employee 
reported his income on the basis of a calendar year (determined as if 
the employer making such return is the only employer paying the employee 
remuneration in the form of group-term life insurance on his life which 
is includible in his gross income under section 79(a)).

Returns on Form W-2 required to be filed pursuant to the provisions of 
this section shall be transmitted by Form W-3. In a case where, with 
respect to the same employee, an employer must make a return on Form W-2 
under this section and also under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 
of this chapter (Employment Tax Regulations), or under Sec. 1.6041-2 
(relating to return of information as to payments to employees), such 
employer may make such returns on the same Form W-2 or on separate

[[Page 733]]

Forms W-2. In a case where an employer must file a Form W-3 under this 
section and also under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 of this 
chapter (Employment Tax Regulations), the Form W-3 filed under such 
Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 shall also be used as the 
transmittal form for a return on Form W-2 made pursuant to the 
provisions of this section.
    (2) Definitions. Terms used in subparagraph (a)(1) of this section 
and in section 79 and the regulations thereunder have the meaning 
ascribed to them in section 79 and the regulations thereunder.
    (b) Time and place for filing--(1) Time for filing--(i) General 
rule. In a case where an employer must file Forms W-3 and W-2 under this 
section and also under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 of this 
chapter (Employment Tax Regulations), the time for filing such forms 
under this section shall be the same as the time (including extensions 
thereof) for filing such forms under Sec. 31.6011(a)-4 or 
Sec. 31.6011(a)-5.
    (ii) Exception. In a case where an employer is not required to file 
Forms W-3 and W-2 under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 of this 
chapter (Employment Tax Regulations), returns on Forms W-3 and W-2 
required under paragraph (a) of this section for any calendar year shall 
be filed on or before February 28 of the following year.
    (iii) Cross reference. For extensions of time for filing returns, 
see section 6081 and the regulations thereunder.
    (2) Place for filing. The returns on Forms W-3 and W-2 required 
under paragraph (a) of this section shall be filed pursuant to the rules 
contained in Sec. 31.6091-1 of this chapter (Employment Tax 
Regulations), relating to the place for filing certain returns.
    (c) Special rule for calendar years before 1972. For calendar years 
before 1972, the provisions of this section will be deemed to have been 
complied with if the returns for such years were filed in accordance 
with the provisions of this section in effect prior to August 3, 1973, 
or with the instructions applicable to the appropriate forms.
    (d) Last day for filing return. For provisions relating to the time 
for performance of an act when the last day prescribed for performance 
falls on Saturday, Sunday, or a legal holiday, see Sec. 301.7503-1 of 
this chapter (Regulations on Procedure and Administration).
    (e) Penalty. For provisions relating to the penalty provided for 
failure to file the information returns required by this section, see 
section 6652 and the regulations thereunder.

[T.D. 6888, 31 FR 9205, July 6, 1966, as amended by T.D. 7284, 38 FR 
20828, Aug. 3, 1973; T.D. 7580, 43 FR 60160, Dec. 26, 1978; T.D. 7623, 
44 FR 28800, May 17, 1979]



Sec. 1.6052-2  Statements to be furnished employees with respect to wages paid in the form of group-term life insurance.

    (a) Requirement. Every employer filing a return under section 
6052(a) and Sec. 1.6052-1 with respect to group-term life insurance on 
the life of an employee shall furnish to the employee whose name is set 
forth in such return a written statement showing the information 
required by paragraph (b) of this section.
    (b) Form of statement. The written statement required to be 
furnished to an employee under paragraph (a) of this section shall show:
    (1) The total amount includible in the employee's gross income by 
reason of the provisions of section 79(a), but determined as if the 
employer furnishing such statement is the only employer paying the 
employee remuneration in the form of group-term life insurance on his 
life which is includible in his gross income under section 79(a).
    (2) The name, address, and identifying number of the employer filing 
the statement.

The requirement of this section for the furnishing of a statement to an 
employee may be satisfied by the furnishing to such employee of a copy 
of the return filed pursuant to Sec. 1.6052-1 in respect of such 
employee. A statement shall be considered to be furnished to a person 
within the meaning of this section if it is mailed to such person at his 
last known address.
    (c) Time for furnishing statements--(1) In general. Each statement 
required by this section to be furnished to any employee for a calendar 
year shall be furnished to such person after the close of

[[Page 734]]

that year and on or before January 31 of the following year.
    (2) Extensions of time. For good cause shown upon written 
application of the employer required to furnish statements under this 
section, the district director may grant an extension of time not 
exceeding 30 days in which to furnish such statements. The application 
shall be addressed to the district director with whom the income tax 
returns of the applicant are filed and shall contain a full recital of 
the reasons for requesting the extension to aid the district director in 
determining the period of the extension, if any, which will be granted. 
Such a request in the form of a letter to the district director signed 
by the applicant will suffice as an application. The application shall 
be filed on or before the date prescribed in subparagraph (1) of this 
paragraph for furnishing the statements required by this section.
    (3) Last day for furnishing statement. For provisions relating to 
the time for performance of an act when the last day prescribed for 
performance falls on Saturday, Sunday, or a legal holiday, see 
Sec. 301.7503-1 of this chapter (Regulations on Procedure and 
Administration).
    (d) Special rule where Form W-2 is used. The provisions of this 
paragraph shall apply notwithstanding anything to the contrary in 
paragraph (b) or (c) of this section. The requirement of this section 
for the furnishing of a statement to an employee may be satisfied by 
furnishing to such employee the employee's copy of Form W-2 filed 
pursuant to Sec. 1.6052-1 in respect of such employee. In a case where 
the statement furnished by an employer to an employee for purposes of 
complying with this section is the employee's copy of a Form W-2, then 
the rules in Sec. 31.6051-1 of this chapter (Employment Tax Regulations) 
shall apply with respect to the means and time (including extensions 
thereof) for furnishing such statements to the employee and making 
corrections on such form.
    (e) Definitions. Terms used in this section and in section 79 and 
the regulations thereunder have the meaning ascribed to them in section 
79 and the regulations thereunder.
    (f) Penalty. For provisions relating to the penalty provided for 
failure to furnish a statement under this section, see section 6678 and 
the regulations thereunder.
    (g) Special rule for calendar years before 1972. For calendar years 
before 1972, the provisions of this section will be deemed to have been 
complied with if the statements for such years were furnished in 
accordance with the provisions of this section in effect prior to August 
3, 1973, or with the instructions applicable to the appropriate forms.

[T.D. 6888, 31 FR 9205, July 6, 1966, as amended by T.D. 7284, 38 FR 
20828, Aug. 3, 1973; T.D. 7580, 43 FR 60160, Dec. 26, 1978; T.D. 7623, 
44 FR 28800, May 17, 1979]



Sec. 1.6060-1  Reporting requirements for income tax return preparers.

    (a) In general. (1) Each person who employs (or engages) one or more 
income tax return preparers to prepare any return of tax under subtitle 
A of the Internal Revenue Code of 1954 or claim for refund of tax under 
subtitle A of the Internal Revenue Code of 1954, other than for the 
person, at any time during a return period shall satisfy the 
requirements of section 6060 of the Code by:
    (i) Retaining a record of the name, taxpayer identification number, 
and principal place of work during the return period of each income tax 
return preparer employed (or engaged) by the person at any time during 
that period; and
    (ii) Making that record available for inspection upon request by the 
district director.

The record described in this paragraph (a) must be retained and kept 
available for inspection for the 3-year period following the close of 
the return period to which that record relates.
    (2) The person may chose any form of documentation to be used under 
this section as a record of the preparers employed (or engaged) during a 
return period. However, the record must disclose on its face which 
individuals were employed (or engaged) as income tax return preparers 
during that period.
    (3) For the definition of the term ``income tax return preparer'' 
(or ``preparer''), see section 7701(a)(36) and Sec. 301.7701-15. For the 
definition of the

[[Page 735]]

term ``return period'', see paragraph (b) of this section.
    (4)(i) For purposes of this section, any individual who, in acting 
as an income tax return preparer, is not employed by another income tax 
return preparer shall be treated as his (or her) own employer. Thus, a 
sole proprietor shall retain and make available a record with respect to 
himself (or herself) as provided in this section.
    (ii) A partnership shall, for purposes of this section, be treated 
as the employer of the partners of the partnership and shall retain and 
make available a record with respect to the partners and others employed 
(or engaged) by the partnership as provided in this section.
    (b) Return period defined. For purposes of this section, the term 
return period means the 12-month period beginning on July 1 of each 
year.
    (c) Penalty. For the civil penalty for failure to retain and make 
available a record of the preparers employed (or engaged) during a 
return period as required under this section, or for failure to include 
an item in the record required to be retained and made available under 
this section, see Sec. 1.6695-1(e).

[T.D. 7640, 44 FR 49451, Aug. 23, 1979]

          signing and verifying of returns and other documents



Sec. 1.6061-1   Signing of returns and other documents by individuals.

    (a) Requirement. Each individual (including a fiduciary) shall sign 
the income tax return required to be made by him, except that the return 
may be signed for the taxpayer by an agent who is duly authorized in 
accordance with paragraph (a)(5) or (b) of Sec. 1.6012-1 to make such 
return. Other returns, statements, or documents required under the 
provisions of subtitle A or F of the Code or of the regulations 
thereunder to be made by any person with respect to any tax imposed by 
subtitle A of the Code shall be signed in accordance with any 
regulations contained in this chapter, or any instructions, issued with 
respect to such returns, statements, or other documents.
    (b) Cross references. For provisions relating to the signing of 
returns, statements, or other documents required to be made by 
corporations and partnerships with respect to any tax imposed by 
subtitle A of the Code, see Secs. 1.6062-1 and 1.6063-1, respectively. 
For provisions relating to the making of returns by agents, see 
paragraphs (a)(5) and (b) of Sec. 1.6012-1; and to the making of returns 
for minors and persons under a disability, see paragraph (a)(4) of 
Sec. 1.6012-1 and paragraph (b) of Sec. 1.6012-3.

[T.D. 7332, 39 FR 44232, Dec. 23, 1974]



Sec. 1.6061-2T  Signing of returns by voice signature (temporary).

    (a) In general. An eligible taxpayer who makes an income tax return 
under Sec. 1.6012-7T in the TeleFile Voice Signature test is treated, 
for all purposes of the Internal Revenue Code, as having signed that 
return by providing the voice signature at the time and in the manner 
required by the instructions that are provided over the telephone by the 
TeleFile system interactive voice computer. For provisions relating to 
the verification of the TeleFile returns made under Sec. 1.6012-7T, see 
Sec. 1.6065-2T.
    (b) Effective dates. This section is effective for--
    (1) 1992 calendar year returns filed by eligible taxpayers in the 
TeleFile Voice Signature test after January 13, 1993, and before April 
16, 1993; and
    (2) 1993 calendar year returns filed by eligible taxpayers in the 
TeleFile Voice Signature test after January 12, 1994, and before April 
16, 1994.

[T.D. 8510, 58 FR 68296, Dec. 27, 1993]



Sec. 1.6062-1   Signing of returns, statements, and other documents made by corporations.

    (a) Returns--(1) In general. Returns required to be made by 
corporations under the provisions of subtitle A or F of the Code, or the 
regulations thereunder, with respect to any tax imposed by subtitle A of 
the Code, shall be signed for the corporation by the president, vice-
president, treasurer, assistant treasurer, chief accounting officer, or 
any other officer duly authorized to sign such returns. It is not 
necessary that the corporate seal be affixed to the return. Spaces 
provided on return forms for affixing the corporate seal are for the 
convenience of corporations required by charter, or by law of the

[[Page 736]]

jurisdiction in which they are incorporated, to affix their corporate 
seals in the execution of instruments.
    (2) By fiduciaries. A return with respect to income required to be 
made for a corporation by a fiduciary, pursuant to the provisions of 
section 6012(b)(3), shall be signed by such fiduciary. See paragraph 
(b)(4) of Sec. 1.6012-3.
    (3) By agents. A return with respect to income required to be made 
by an agent for a foreign corporation shall be signed by such agent. See 
paragraph (g) of Sec. 1.6012-2.
    (b) Statements and other documents. Statements and other documents 
required to be made by or for corporations under the provisions of 
subtitle A or F of the Code, or the regulations thereunder, with respect 
to any tax imposed by subtitle A, shall be signed in accordance with the 
regulations contained in this chapter, or the forms and instructions, 
issued with respect to such statements or other documents.
    (c) Evidence of authority to sign. An individual's signature on a 
return, statement, or other document made by or for a corporation shall 
be prima facie evidence that such individual is authorized to sign such 
return, statement, or other document.
    (d) Related provisions. For the rules realating to the verification 
of returns, see Sec. 1.6065-1.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7293, 38 FR 
32804, Nov. 28, 1973]



Sec. 1.6063-1   Signing of returns, statements, and other documents made by partnerships.

    (a) In general. Returns, statements, and other documents required to 
be made by partnerships under the provisions of subtitle A or F of the 
Code, or the regulations thereunder, with respect to any tax imposed by 
subtitle A of the Code shall be signed by any one of the partners. 
However, with respect to the signing of powers of attorney, see 
paragraph (a)(2) of Sec. 601.504 of this chapter (Statement of 
Procedural Rules).
    (b) Evidence of authority to sign. A partner's signature on a 
return, statement, or other document made by or for a partnership of 
which he is a member shall be prima facie evidence that such partner is 
authorized to sign such return, statement, or other document.



Sec. 1.6065-1   Verification of returns.

    (a) Persons signing returns. If a return, declaration, statement, or 
other document made under the provisions of subtitle A or F of the Code, 
or the regulation thereunder, with respect to any tax imposed by 
subtitle A of the Code is required by the regulations contained in this 
chapter, or the form and instructions, issued with respect to such 
return, declaration, statement, or other document, to contain or be 
verified by a written declaration that it is made under the penalties of 
perjury, such return, declaration, statement, or other document shall be 
so verified by the person signing it.
    (b) Persons preparing returns--(1) In general. Except as provided in 
subparagraph (2) of this paragraph, if a return, declaration, statement, 
or other document is prepared for a taxpayer by another person for 
compensation or as an incident to the performance of other services for 
which such person receives compensation, and the return, declaration, 
statement, or other document requires that it shall contain or be 
verified by a written declaration that it is prepared under the 
penalties of perjury, the preparer must so verify the return, 
declaration, statement, or other document. A person who renders mere 
mechanical assistance in the preparation of a return, declaration, 
statement, or other document as, for example, a stenographer or typist, 
is not considered as preparing the return, declaration, statement, or 
other document.
    (2) Exception. The verification required by subparagraph (1) of this 
paragraph is not required on returns, declarations, statements, or other 
documents which are prepared:
    (i) For an employee either by his employer or by an employee 
designated for such purpose by the employer, or
    (ii) For an employer as a usual incident of the employment of one 
regularly or continuously employed by such employer.

[[Page 737]]



Sec. 1.6065-2T  Verification of returns by voice signature (temporary).

    (a) In general. An eligible taxpayer who makes an income tax return 
under Sec. 1.6012-7T in the TeleFile Voice signature test, by providing 
the voice signature at the time and in the manner required by the 
instructions that are provided over the telephone by the TeleFile system 
interactive voice computer, is treated for all purposes of the Internal 
Revenue Code as having affirmed that the return is made under penalties 
of perjury and as having verified the return.
    (b) Effective dates. This section is effective for--
    (1) 1992 calendar year returns filed by eligible taxpayers in the 
TeleFile Voice Signature test after January 13, 1993, and before April 
16, 1993; and
    (2) 1993 calendar year returns filed by eligible taxpayers in the 
TeleFile Voice Signature test after January 12, 1994, and before April 
16, 1994.

[T.D. 8510, 58 FR 68297, Dec. 27, 1993]

               time for filing returns and other documents



Sec. 1.6071-1   Time for filing returns and other documents.

    (a) In general. Whenever a return, statement, or other document is 
required to be made under the provisions of subtitle A or F of the Code, 
or the regulations thereunder, with respect to any tax imposed by 
subtitle A of the Code, and the time for filing such return, statement, 
or other document is not provided for by the Code, it shall be filed at 
the time prescribed by the regulations contained in this chapter with 
respect to such return, statement, or other document.
    (b) Return for a short period. In the case of a return with respect 
to tax under subtitle A of the Code for a short period (as defined in 
section 443), the district director or director of the Internal Revenue 
Service Center may, upon a showing by the taxpayer of unusual 
circumstances, prescribe a time for filing the return for such period 
later than the time when such return would otherwise be due. However, 
the district director or director of the Internal Revenue Service Center 
may not extend the time when the return for a DISC (as defined in 
section 992(a)(1)) must be filed, as specified in section 6072(b).
    (c) Time for filing certain information returns. (1) For provisions 
relating to the time for filing returns of partnership income, see 
paragraph (e)(2) of Sec. 1.6031-1.
    (2) For provisions relating to the time for filing information 
returns by banks with respect to common trust funds, see Sec. 1.6032-1.
    (3) For provisions relating to the time for filing information 
returns by certain organizations exempt from taxation under section 
501(a), see paragraph (e) of Sec. 1.6033-1.
    (4) For provisions relating to the time for filing returns by trusts 
claiming charitable deductions under section 642(c), see paragraph (c) 
of Sec. 1.6034-1.
    (5) For provisions relating to the time for filing information 
returns by officers, directors, and shareholders of foreign personal 
holding companies, see Secs. 1.6035-1 and 1.6035-2.
    (6) For provisions relating to the time for filing information 
returns with respect to certain stock option transactions, see paragraph 
(c) of Sec. 1.6039-1.
    (7) For provisions relating to the time for filing information 
returns by persons making certain payments, see paragraph (a)(4) of 
Sec. 1.6041-2 and Sec. 1.6041-6.
    (8) For provisions relating to the time for filing information 
returns regarding payments of dividends, see paragraph (d) of 
Sec. 1.6042-1, and paragraph (c) of Sec. 1.6042-2 (relating to returns 
for calendar years after 1962).
    (9) For provisions relating to the time for filing information 
returns by corporations with respect to contemplated dissolution or 
liquidations, see paragraph (a) of Sec. 1.6043-1.
    (10) For provisions relating to the time for filing information 
returns by corporations with respect to distributions in liquidation, 
see paragraph (a) of Sec. 1.6043-2.
    (11) For provisions relating to the time for filing information 
returns with respect to payments of patronage dividends, see paragraph 
(b) of Sec. 1.6044-1, and paragraph (d) of Sec. 1.6044-2 (relating to 
returns for calendar years after 1962).

[[Page 738]]

    (12) For provisions relating to the time for filing information 
returns with respect to formation or reorganization of foreign 
corporations, see Sec. 1.6046-1.
    (13) For provisions relating to the time for filing information 
returns regarding certain payments of interest, see paragraph (c) of 
Sec. 1.6049-1.
    (14) For provisions relating to the time for filing information 
returns with respect to payment of wages in the form of group-term life 
insurance, see paragraph (b) of Sec. 1.6052-1.
    (15) For provisions relating to the time for filing ownership 
certificates with respect to interest payments on certain bonds, 
mortgages, deeds of trust, and other similar obligations, see 
Sec. 1.1461-1.
    (16) For provisions relating to the time for filing the annual 
information return on Form 1042S of the tax withheld under chapter 3 of 
the Code (relating to withholding of tax on nonresident aliens and 
foreign corporations and tax-free covenant bonds), see paragraph (c) of 
Sec. 1.1461-2.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6887, 31 FR 
8814, June 24, 1966; T.D. 6908, 31 FR 16775, Dec. 31, 1966; T.D. 7284, 
38 FR 20829, Aug. 3, 1973; T.D. 7533, 43 FR 6604, Feb. 15, 1978]



Sec. 1.6072-1   Time for filing returns of individuals, estates, and trusts.

    (a) In general. Except as provided in paragraphs (b) and (c) of this 
section, returns of income required under sections 6012, 6013, 6014, and 
6017 of individuals, estates, domestic trusts, and foreign trusts having 
an office or place of business in the United States (including unrelated 
business tax returns of such trusts referred to in section 511(b)(2)) 
shall be filed on or before the fifteenth day of the fourth month 
following the close of the taxable year.
    (b) Decedents. In the case of a final return of a decedent for a 
fractional part of a year, the due date of such return shall be the 
fifteenth day of the fourth month following the close of the 12-month 
period which began with the first day of such fractional part of the 
year.
    (c) Nonresident alien individuals and foreign trusts.  The income 
tax return of a nonresident alien individual (other than one treated as 
a resident under section 6013 (g) or (h)) and of a foreign trust which 
does not have an office or place of business in the United States 
(including unrelated business tax returns of such trusts referred to in 
section 511(b)(2)0 shall be filed on or before the fifteenth day of the 
sixth month following the close of the taxable year. However, a 
nonresident alien individual who for the taxable year has wages subject 
to withholding under chapter 24 of the Code shall file his income tax 
return on or before the fifteenth day of the fourth month following the 
close of the taxable year.
    (d) Last day for filing return. For provisions relating to the time 
for filing a return where the last day for filing falls on Saturday, 
Sunday, or a legal holiday, see section 7503 and Sec. 301.7503-1 of this 
chapter (Regulations on Procedure and Administration).

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7426, 41 FR 
33263, Aug. 9, 1976; T.D. 7670, 45 FR 6931, Jan. 31, 1980]



Sec. 1.6072-2   Time for filing returns of corporations.

    (a) Domestic and certain foreign corporations. The income tax return 
required under section 6012 of a domestic corporation or of a foreign 
corporation having an office or place of business in the United States 
shall be filed on or before the fifteenth day of the third month 
following the close of the taxable year.
    (b) Foreign corporations not having an office or place of business 
in the United States. The income tax return of a foreign corporation 
which does not have an office or place of business in the United States 
shall be filed on or before the fifteenth day of the sixth month 
following the close of the taxable year.
    (c) Exempt organizations. For taxable years beginning after November 
10, 1978, the income tax return required under section 6012 and 
Sec. 1.6012-2(e) of an organization exempt from taxation under section 
501(a) (other than an employee's trust under section 401(a)) shall be 
filed on or before the fifteenth day of the fifth month following the 
close of the organization's taxable year.

[[Page 739]]

    (d) Cooperative organizations. The income tax return of the 
following cooperative organizations shall be filed on or before the 
fifteenth day of the ninth month following the close of the taxable 
year:
    (1) A farmers', fruit growers', or like association, organized and 
operated in compliance with the requirements of section 521 and 
Sec. 1.521-1; and
    (2) For a taxable year beginning after December 31, 1962, a 
corporation described in section 1381(a)(2), which is under a valid 
enforceable written obligation to pay patronage dividends (as defined in 
section 1388(a) and paragraph (a) of Sec. 1.1388-1) in an amount equal 
to at least 50 percent of its net earnings from business done with or 
for its patrons, or which paid patronage dividends in such an amount out 
of the net earnings from business done with or for patrons during the 
most recent taxable year for which it had such net earnings. Net 
earnings for this purpose shall not be reduced by any taxes imposed by 
Subtitle A of the Code and shall not be reduced by dividends paid on 
capital stock or other proprietary interest.
    (e) DISC's and former DISC's. The return required under section 
6011(c)(2) of a corporation which is a DISC (as defined in section 
992(a) shall be filed on or before the 15th day of the 9th month 
following the close of the taxable year. For the rule that a DISC may 
not have an extension of time in which to file such return, see 
Secs. 1.6071-1(b), 1.6081-1(a), and 1.6081-3(e). The return required 
under Sec. 1.6011-2(b)(1) by a former DISC shall be filed at the time it 
is required to file its income tax return.
    (f) Cross references. For provisions relating to the time for filing 
a return where the last day for filing falls on Saturday, Sunday, or a 
legal holiday, see section 7503 and Sec. 301.7503-1 of this chapter 
(Regulations on Procedure and Administration). For provisions relating 
to the fixing of a later time for filing in the case of a return for a 
short period, see paragraph (b) of Sec. 1.6071-1. For provisions 
relating to time for filing consolidated returns and separate returns 
for short periods not included in consolidated returns, see 
Secs. 1.1502-75 and 1.1502-76.

[T.D. 6500, 25 FR 12133, Nov. 26, 1960, as amended by T.D. 6643, 28 FR 
3163, Apr. 2, 1963; T.D. 7244, 37 FR 28897, Dec. 30, 1972; T.D. 7533, 43 
FR 6604, Feb. 15, 1978; T.D. 7896, 48 FR 23818, May 27, 1983]



Sec. 1.6072-3   Income tax due dates postponed in case of China Trade Act corporations.

    (a) With respect to a taxable year beginning after December 31, 
1948, and ending before October 1, 1956, the income tax return of any 
corporation organized under the China Trade Act of 1922 (15 U.S.C. ch. 
4), as amended, shall not become due until December 31, 1956, provided 
that during any such taxable year conditions in China have been 
generally so unsettled as to militate against the normal commercial 
operations and corporate activities of such corporation. However, the 
postponement of the due date shall not apply to an income tax return for 
any such taxable year if:
    (1) The books of account and business records are available so as to 
permit the filing of a proper return, and the corporation has otherwise 
been in a position to carry on its commercial operations and corporate 
activities and to make a proper distribution of its earnings or profits, 
if any, so as to permit the certification required by section 941(b); or
    (2) All the commercial operations and corporate activities of such 
corporation have been carried on in Hong Kong, Macao, or Taiwan 
(Formosa).
    (b) Notwithstanding the provisions of paragraph (a) (1) or (2) of 
this section, the postponed due date referred to in this section will 
apply if a corporation satisfies the Commissioner that special 
circumstances exist, related to the unsettled conditions in China, which 
warrant such postponement.
    (c) The postponed due date provided for in this section is expressly 
subject to the power of the Commissioner to extend, as in other cases, 
the time for filing the income tax return. See section 6081 and the 
regulations thereunder.

[[Page 740]]



Sec. 1.6072-4   Time for filing other returns of income.

    (a) Reports for recovery of excessive profits on Government 
contracts. For the time for filing annual reports by persons completing 
Government contracts, see 26 CFR (1939) 17.16 (Treasury Decision 4906, 
approved June 23, 1939), and 26 CFR (1939) 16.15 (Treasury Decision 
4909, approved June 28, 1939), as made applicable to section 1471 of the 
Internal Revenue Code of 1954 by Treasury Decision 6091, approved August 
16, 1954 (19 FR 5167, C.B. 1954-2, 47).
    (b) Returns of tax on transfers to avoid income tax. For the time 
for filing returns of tax under Chapter 5 of the Code, see Sec. 1.1494-
1.

[T.D. 6908, 31 FR 16775, Dec. 31, 1966]



Sec. 1.6073-1   Time and place for filing declarations of estimated income tax by individuals.

    (a) Individuals other than farmers or fishermen. Declarations of 
estimated tax for the calendar year shall be made on or before April 
15th of such calendar year by every individual whose anticipated income 
for the year meets the requirements of section 6015(a). If, however, the 
requirements necessitating the filing of the declaration are first met, 
in the case of an individual on the calendar year basis, after April 
1st, but before June 2d of the calendar year, the declaration must be 
filed on or before June 15th; if such requirements are first met after 
June 1st and before September 2d, the declaration must be filed on or 
before September 15th; and if such requirements are first met after 
September 1st, the declaration must be filed on or before January 15th 
of the succeeding calendar year. In the case of an individual on the 
fiscal year basis, see Sec. 1.6073-2. A special rule applies to 
nonresident aliens who do not have wages subject to withholding under 
Chapter 24 of the code and are not treated as residents under section 
6013 (g) or (h) of the code. For taxable years beginning after December 
31, 1976, these aliens are not required to file a declaration of 
estimated tax before June 15th.
    (b) Farmers or fishermen--(1) In general. In the case of an 
individual on a calendar year basis:
    (i) If at least two-thirds of the individual's total estimated gross 
income from all sources for the calendar year is from farming or fishing 
(including oyster farming), or
    (ii) If at least two-thirds of the individual's total gross income 
from all sources shown on the return for the preceding taxable year was 
from farming or fishing (including oyster farming) (with respect to 
declarations of estimated tax for taxable years beginning after November 
10, 1978),

He may file a declaration of estimated tax on or before the 15th day of 
January of the succeeeding calendar year in lieu of the time prescribed 
in paragraph (a) of this section. For the filing of a return in lieu of 
a declaration, see paragraph (a) of Sec. 1.6015-1.
    (2) Farmers. The estimated gross income from farming is the 
estimated income resulting from oyster farming, the cultivation of the 
soil, the raising or harvesting of any agricultural or horticultural 
commodities, and the raising of livestock, bees, or poultry. In other 
words, the requisite gross income must be derived from the operations of 
a stock, dairy, poultry, fruit, or truck farm, or plantation, ranch, 
nursery, range, orchard, or oyster bed. If an individual receives for 
the use of his land income in the form of a share of the crops produced 
thereon such income is from farming. As to determination of income of 
farmers, see sections 61 and 162 and the regulations thereunder.
    (3) Fishermen. The estimated gross income from fishing is the 
estimated income resulting from the catching, taking, harvesting, 
cultivating or farming of any kind of fish, shellfish (for example, 
clams and mussels), crustacea (for example, lobsters, crabs, and 
shrimps), sponges, seaweeds, or other aquatic forms of animal and 
vegetable life. The estimated gross income from fishing includes the 
income expected to be received by an officer or member of the crew of a 
vessel while the vessel is engaged in any such activity, whether or not 
the officer or member of the crew is himself so engaged, and, in the 
case of an individual who is engaged in any such activity in the employ 
of any person, the income expected to be received by such individual 
from such employment. In addition, income expected to

[[Page 741]]

be received for services performed as an ordinary incident to any such 
activity is estimated gross income from fishing. Similarly, for example, 
the estimated gross income from fishing includes income expected to be 
received from the shore services of an officer or member of the crew of 
a vessel engaged in any such activity, if such services are an ordinary 
incident to any such activity. Services performed as an ordinary 
incident to such activities include, for example, services performed in 
such cleaning, icing, and packing of fish as are necessary for the 
immediate preservation of the catch.
    (c) Nonresident aliens. Notwithstanding the provisions of paragraph 
(a) of this section, for taxable years beginning after December 31, 
1976, in the case of a nonresident alien described in section 6072(c) 
(relating to returns of nonresident aliens whose wages are not subject 
to withholding) whose estimated gross income for the calendar year meets 
the requirements of section 6015(a), a declaration of estimated tax for 
the calendar year need not be made before June 15th of such calendar 
year.
    (d) Place for filing declaration. Except as provided in paragraph 
(b) of Sec. 301.6091-1 (relating to hand-carried documents), the 
declaration of estimated tax shall be filed at the place prescribed by 
the instructions applicable to such declaration. For example, if the 
instructions applicable to a declaration provide that the declaration of 
a taxpayer located in North Carolina be filed with the Director, 
Internal Revenue Service Center, Chamblee, Ga., such declaration shall 
be filed with the service center.
    (e) Amendment of declaration. An amended declaration of estimated 
tax may be filed during any interval between installment dates 
prescribed for the taxable year. However, no amended declaration may be 
filed until after the installment date on or before which the original 
declaration was filed and only one amended declaration may be filed 
during each interval between installment dates. Except as provided in 
paragraph (b) of Sec. 301.6091-1 (relating to hand-carried documents), 
an amended declaration shall be filed with the internal revenue officer 
with whom the original declaration was filed.

[T.D. 6678, 28 FR 10516, Oct. 1, 1963, as amended by T.D. 6950, 33 FR 
5355, Apr. 4, 1968; T.D. 7670, 45 FR 6931, Jan. 31, 1980; T.D. 7719, 45 
FR 60902, Sept. 15, 1980]



Sec. 1.6073-2   Fiscal years.

    (a) Individuals other than farmers or fishermen. In the case of an 
individual on the fiscal year basis, the declaration must be filed on or 
before the 15th day of the 4th month of the taxable year. If, however, 
the requirements of section 6015(a) are first met after the 1st day of 
the 4th month and before the 2d day of the 6th month, the declaration 
must be filed on or before the 15th day of the 6th month of the taxable 
year. If such requirements are first met after the 1st day of the 6th 
month, and before the 2d day of the 9th month, the declaration must be 
filed on or before the 15th day of the 9th month of the taxable year. If 
such requirements are first met after the 1st day of the 9th month, the 
declaration must be filed on or before the 15th day of the 1st month of 
the succeeding fiscal year. Thus, if an individual taxpayer has a fiscal 
year ending on June 30, 1956, his declaration must be filed on or before 
October 15, 1955, if the requirements of section 6015(a) are met on or 
before October 1, 1955. If, however, such requirements are not met until 
after October 1, 1955, and before December 2, 1955, the declaration need 
not be filed until December 15, 1955.
    (b) Farmers or fishermen. In the case of an individual on a fiscal 
year basis:
    (1) If at least two-thirds of the individual's total estimated gross 
income from all sources for the fiscal year is from farming or fishing 
(including oyster farming), or
    (2) If at least two-thirds of the individual's total gross income 
from all sources shown on the return for the preceding taxable year was 
from farming or fishing (including oyster farming) (with respect to 
declarations of estimated tax for taxable years beginning after November 
10, 1978),

he may file a declaration on or before the 15th day of the month 
immediately following the close of his taxable year, in lieu of the time 
prescribed in paragraph (a) of this section.

[[Page 742]]

    (c) Nonresident aliens. Notwithstanding the provisions of paragraph 
(a) of this section, in the case of a nonresident alien described in 
section 6072(c) (relating to returns of nonresident aliens whose wages 
are not subject to withholding) whose anticipated income for the fiscal 
year meets the requirements of section 6015(a), Sec. 1.6015(a)-1, and 
Sec. 1.6015(i)-1, the declaration of estimated tax for the fiscal year 
need not be filed before the 15th day of the 6th month of such fiscal 
year.

[T.D. 6678, 28 FR 10516, Oct. 1, 1963, as amended by T.D. 7719, 45 FR 
60903, Sept. 15, 1980]



Sec. 1.6073-3  Short taxable years.

    (a) Individuals other than farmers or fishermen. In the case of 
short taxable years the declaration shall be filed on or before the 15th 
day of the 4th month of such taxable year if the requirements of section 
6015(a) are met on or before the 1st day of the 4th month of such year. 
If such requirements are first met after the 1st day of the 4th month 
but before the 2d day of the 6th month, the declaration must be filed on 
or before the 15th day of the 6th month. If such requirements are first 
met after the 1st day of the 6th month but before the 2d day of the 9th 
month, the declaration must be filed on or before the 15th day of the 
9th month. If, however, the period for which the declaration is filed is 
one of 4 months, or one of 6 months and the requirements of section 
6015(a) are not met until after the 1st day of the 4th month, or one of 
9 months and such requirements are not met until after the 1st day of 
the 6th month, the declaration may be filed on or before the 15th day of 
the succeeding taxable year.
    (b) Farmers or fishermen. In the case of an individual:
    (1) Whose current taxable year is a short taxable year and whose 
estimated gross income from farming or fishing (including oyster 
farming) is at least two-thirds of his total estimated gross income from 
all sources for such current taxable year, or
    (2) Whose taxable year preceding the current taxable year was a 
short taxable year and whose gross income from farming or fishing 
(including oyster farming) was at least two-thirds of the total gross 
income from all sources shown on the return for such preceding short 
taxable year (with respect to declarations of estimated tax for taxable 
years beginning after November 10, 1978),

he may file a declaration of estimated tax on or before the 15th day of 
the month immediately following the close of the current taxable year, 
in lieu of the time prescribed in paragraph (a) of this section.
    (c) Nonresident aliens. Notwithstanding the provisions of paragraph 
(a) of this section, in the case of a short taxable year, a nonresident 
alien described in section 6072(c) (relating to returns of nonresident 
aliens whose wages are not subject to withholding) whose anticipated 
income for the short taxable year meets the requirements of section 
6015(a). Sections 1.6015(a)-1, 1.6015(g)-1, and 1.6015(i)-1 on or before 
the 1st day of the 6th month following the beginning of such year need 
not file a declaration of estimated tax before the 15th day of the 6th 
month following the beginning of such year.

[T.D. 6678, 28 FR 10516, Oct. 1, 1963, as amended by T.D. 7719, 45 FR 
60903, Sept. 15, 1980]



Sec. 1.6073-4   Extension of time for filing declarations by individuals.

    (a) In general. District directors and directors of service centers 
are authorized to grant a reasonable extension of time for filing a 
declaration or an amended declaration. Except as provided in paragraph 
(b) of Sec. 301.6091-1 (relating to hand-carried documents), an 
application for an extension of time for filing such a declaration shall 
be addressed to the internal revenue officer with whom the taxpayer is 
required to file his declaration, and must contain a full recital of the 
causes for the delay. Except in the case of taxpayers who are abroad, no 
extension for filing declarations may be granted for more than 6 months.
    (b) Citizens outside of the United States. In the case of a United 
States citizen outside the United States and Puerto Rico on the 15th day 
of the 4th month of his taxable year, an extension of time for filing 
his declaration of estimated tax otherwise due on or before the 15th day 
of the 4th month of the

[[Page 743]]

taxable year is granted to and including the 15th day of the 6th month 
of the taxable year. For purposes of applying this paragraph to taxable 
years beginning prior to January 1, 1964, Alaska shall be considered 
outside the United States.
    (c) Residents outside the United States. In the case of a U.S. 
resident living or traveling outside the United States and Puerto Rico 
on the 15th day of the 4th month of a taxable year beginning after 
December 31, 1978, an extension of time for filing the declaration of 
estimated tax otherwise due on or before the 15th day of the 4th month 
of the taxable year is granted to and including the 15th day of the 6th 
month of the taxable year.
    (d) Addition to tax applicable. An extension of time for filing the 
declaration of estimated tax automatically extends the time for paying 
the estimated tax (without interest) for the same period. However, such 
extension does not relieve the taxpayer from the addition to the tax 
imposed by section 6654, and the period of the underpayment will be 
determined under section 6654(c) without regard to such extension.

[T.D. 6500, 25 FR 12008, Nov. 26, 1960, as amended by T.D. 6638, 28 FR 
1765, Feb. 26, 1963; T.D. 6950, 33 FR 5355, Apr. 4, 1968; T.D. 7736, 45 
FR 76143, Nov. 18, 1980]



Sec. 1.6074-1   Time and place for filing declarations of estimated income tax by corporations.

    (a) Taxable years beginning on or before December 31, 1963. For 
taxable years ending on or after December 31, 1955, and beginning on or 
before December 31, 1963, declarations of estimated tax for the taxable 
year shall be filed on or before the 15th day of the 9th month of such 
year by every corporation whose then anticipated income tax liability 
under section 11 or 1201(a), or subchapter L, chapter 1 of the Code, for 
the year meets the requirements of section 6016(a). If, however, the 
requirements necessitating the filing of a declaration are first met 
after the last day of the 8th month and before the first day of the 12th 
month of the taxable year the declaration shall be filed on or before 
the 15th day of the 12th month of the taxable year. If, however, the 
requirements of section 6016(a) are not met before the first day of the 
12th month of the taxable year, no declaration need be filed for such 
year.
    (b) Taxable years beginning after December 31, 1963. A declaration 
of estimated tax for a taxable year beginning after December 31, 1963, 
required of a corporation by section 6016 shall be filed as follows:

------------------------------------------------------------------------
  If the requirements of section 6016 are     The declaration shall be  
                first met--                     filed on or before--    
------------------------------------------------------------------------
before the 1st day of the 4th month of the  the 15th day of the 4th     
 taxable year.                               month of the taxable year  
after the last day of the 3d month and      the 15th day of the 67th    
 before the 1st day of the 6th month of      month of the taxable year  
 the taxable year.                                                      
after the last day of the 5th month and     the 15th day of the 9th     
 before the 1st day of the 9th month of      month of the taxable year  
 the taxable year.                                                      
after the last day of the 8th month and     the 15th day of the 12th    
 before the 1st day of the 12th month of     month of the taxable year  
 the taxable year.                                                      
------------------------------------------------------------------------

    (c) Place for filing declaration. Except as provided in paragraph 
(b) of Sec. 301.6091-1 (relating to hand-carried documents), the 
declaration of estimated tax shall be filed at the place prescribed by 
the instructions applicable to such declaration. For example, if the 
instructions applicable to a declaration provide that the declaration of 
a corporation located in North Carolina be filed with the Director, 
Internal Revenue Service Center, Chamblee, Ga., such declaration shall 
be filed with the service center.
    (d) Amendment of declaration--(1) Taxable years beginning on or 
before December 31, 1963. A declaration of estimated tax for a taxable 
year beginning on or before December 31, 1963, which is filed by a 
corporation prior to the 15th day of the 12th month of the taxable year 
may be amended in the manner prescribed in Sec. 1.6016-3, at any time on 
or before such 15th day. An amended declaration shall be filed with the 
internal revenue officer with whom the original declaration was filed.
    (2) Taxable years beginning after December 31, 1963. In any case 
where a declaration of estimated tax for a taxable year beginning after 
December 31, 1963, has been filed, an amended declaration of estimated 
tax may be filed during any interval between installment dates 
prescribed for the taxable year. However, no amended declaration may be

[[Page 744]]

filed until after the installment date on or before which the original 
declaration was filed and only one amended declaration may be filed 
during each interval between installment dates. See Sec. 1.6016-3 for 
the manner of making an amended declaration. Except as provided in 
paragraph (b) of Sec. 301.6091-1 (relating to hand-carried documents), 
an amended declaration shall be filed with the internal revenue officer 
with whom the original declaration was filed.

[T.D. 6768, 29 FR 14922, Nov. 4, 1964, as amended by T.D. 6950, 33 FR 
5355, Apr. 4, 1968]



Sec. 1.6074-2   Time for filing declarations by corporations in case of a short taxable year.

    (a) Taxable years beginning on or before December 31, 1963--(1) In 
general. In the case of a short taxable year of 9 months or more 
beginning on or before December 31, 1963, where the requirements of 
section 6016(a) are met before the 1st day of the 9th month of the short 
taxable year, the declaration shall be filed on or before the 15th day 
of the 9th month of such short year. In the case of a short taxable year 
of more than 9 months, where the requirements of section 6016(a) are 
first met after the last day of the 8th month, but before the 1st day of 
the last month of the short taxable year, the declaration shall be filed 
on or before the 15th day of the last month of such short year. See 
Sec. 1.6016-4, relating to the requirement of a declaration in the case 
of a short taxable year, and paragraph (a) of Sec. 1.6154-2, relating to 
the time for payment of the estimated tax in case of a short taxable 
year.
    (2) Example. The application of the provisions of this paragraph may 
be illustrated by the following example:

    Example. A corporation which changes from a calendar year basis to a 
fiscal year basis beginning November 1, 1960, will have a short taxable 
year beginning January 1, 1960, and ending October 31, 1960. If the 
requirements of section 6016(a) are met before September 1, 1960 (the 
1st day of the 9th month), the corporation is required to file its 
declaration on or before September 15, 1960 (the 15th day of the 9th 
month). However, if the requirements of section 6016(a) are first met 
after August 31, 1960 (the last day of the 8th month), but before 
October 1, 1960 (the 1st day of the last month of the short year), the 
corporation is required to file its declaration on or before October 15, 
1960 (the 15th day of the last month of the short year).

    (b) Taxable years beginning after December 31, 1963--(1) In general. 
In the case of a short taxable year of 4 or more months which begins 
after December 31, 1963, the declaration shall be filed on or before the 
applicable date specified in paragraph (b) of Sec. 1.6074-1, except that 
in the case of a short taxable year ending after November 30, 1964, the 
declaration shall be filed on or before the 15th day of the last month 
of the short taxable year if the requirements of section 6016(a) are 
first met before the first day of such last month and the date specified 
in such paragraph (b) as applicable is not within the short taxable 
year. See Sec. 1.6016-4, relating to the requirement of a declaration in 
the case of a short taxable year, and paragraph (b) of Sec. 1.6154-2, 
relating to the time for payment of the estimated tax in case of a short 
taxable year.
    (2) Examples. The application of the provisions of this paragraph 
may be illustrated by the following examples:

    Example (1). A corporation filing on a calendar year basis which 
changes to a fiscal year beginning September 1, 1965, will have a short 
taxable year beginning January 1, 1965, and ending August 31, 1965. If 
the requirements of section 6016(a) are met before April 1, 1965 (the 
1st day of the 4th month), the declaration of estimated tax must be 
filed on or before April 15, 1965 (the 15th day of the 4th month).
    Example (2). If, in the first example, the corporation first meets 
the requirements of section 6016(a) during July 1965, then the 
requirements of section 6016(a) were met before the first day of the 
last month of the short taxable year, and a declaration of estimated tax 
is required to be filed on or before August 15, 1965, for the short 
taxable year. However, if the corporation does not meet the requirements 
of section 6016(a) until August 1, 1965, then the requirements of 
section 6016(a) were not met before the first day of the last month of 
the short taxable year, and no declaration of estimated tax is required 
to be filed for the short taxable year.

    (c) Amendment of declaration--(1) Taxable years beginning on or 
before December 31, 1963. Where a declaration of estimated tax for a 
short taxable year of more than 9 months beginning on or before December 
31, 1963, is filed before the 15th day of the last month of the

[[Page 745]]

short taxable year, an amended declaration may be filed any time on or 
before such 15th day.
    (2) Taxable years beginning after December 31, 1963. Where a 
declaration of estimated tax for a short taxable year beginning after 
December 31, 1963, has been filed, an amended declaration may be filed 
during any interval between installment dates. However, no amended 
declaration for a short taxable year may be filed until after the 
installment date on or before which the original declaration was filed 
and only one amended declaration may be filed during each interval 
between installment dates. For purposes of this subparagraph the term 
``installment date'' includes the 15th day of the last month of a short 
taxable year if such 15th day does not fall on a prescribed installment 
date.

[T.D. 6768, 29 FR 14923, Nov. 4, 1964]



Sec. 1.6074-3   Extension of time for filing declarations by corporations.

    (a) In general. District directors and directors of service centers 
are authorized to grant a reasonable extension of time for filing a 
declaration or an amended declaration. Except as provided in paragraph 
(b) of Sec. 301.6091-1 (relating to hand-carried documents), an 
application by a corporation for an extension of time for filing such a 
declaration shall be addressed to the internal revenue officer with whom 
the corporation is required to file its declaration and must contain a 
full recital of the causes for the delay.
    (b) Addition to tax applicable. An extension of time granted to a 
corporation for filing a declaration of estimated tax automatically 
extends the time for paying the estimated tax (without interest) for the 
same period. However, such extension does not relieve the corporation 
from the addition to the tax imposed by section 6655, and the period of 
the underpayment will be determined under section 6655(c) without regard 
to such extension.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6950, 33 FR 
5355, Apr. 4, 1968]

                  Extension of Time for Filing Returns



Sec. 1.6081-1   Extension of time for filing returns.

    (a) In general. District directors and directors of service centers 
are authorized to grant a reasonable extension of time for filing any 
return, declaration, statement, or other document which relates to any 
tax imposed by subtitle A of the code and which is required under the 
provisions of subtitle A or F of the code or the regulations thereunder. 
However, other than in the case of taxpayers who are abroad, such 
extensions of time shall not be granted for more than 6 months, and an 
extension of time for the filing of a return of a DISC (as defined in 
section 992(a)), as specified in section 6072(b), shall not be granted. 
Except in the case of an extension of time pursuant to Sec. 1.6081-2, an 
extension of time for filing an income-tax return shall not operate to 
extend the time for the payment of the tax or any installment thereof 
unless specified to the contrary in the extension. In the case of an 
extension of time pursuant to Sec. 1.6081-2, an extension of time for 
filing an income-tax return shall operate to extend the time for the 
payment of the tax or any installment thereof unless specified to the 
contrary in the extension. For rules relating to extension of time for 
paying tax, see Sec. 1.6161-1.
    (b) Application for extension of time--(1) In general. A taxpayer 
desiring an extension of the time for filing a return, statement, or 
other document shall submit an application therefor on or before the due 
date of such return, statement, or other document. Except as provided in 
subparagraph (3) of this paragraph and, except as provided in paragraph 
(b) of Sec. 301.6091-1 (relating to hand-carried documents), such 
application shall be made to the internal revenue officer with whom such 
return, statement, or other document is required to be filed. Such 
application shall be in writing, properly signed by the taxpayer or his 
duly authorized agent, and shall clearly set forth (i) the particular 
tax return, information return, statement, or other document, including 
the taxable year or period

[[Page 746]]

thereof, with respect to which the extension of the time for filing is 
desired, and (ii) a full recital of the reasons for requesting the 
extension to aid such internal revenue officer in determining the period 
of extension, if any, which will be granted. In the case of a cemetery 
perpetual care fund trust, a distributee cemetery's failure to make 
timely expenditures of distributions which prevents accurate 
determination of the allowable deduction under section 642(i) will be 
considered reasonable grounds for a 6-month extension of time for filing 
the trust's return. See Sec. 1.642(i)-1(c)(2).
    (2) Additional information in the case of Form 1040. In addition to 
the information required under subparagraph (1) of this paragraph, the 
application of a taxpayer desiring an extension of the time for filing 
an individual income tax return on Form 1040 for any taxable year 
beginning after December 31, 1958, shall also set forth (i) whether an 
income tax return has been filed on or before its due date for each of 
the three taxable years immediately preceding the taxable year of such 
return, and if not, the reason for each failure, and (ii) whether the 
taxpayer was required to file a declaration of estimated tax for the 
taxable year of such return, and if so, whether each required estimated 
tax payment was made on or before its due date. For purposes of this 
subparagraph a return is considered as filed on or before its due date 
if it is filed on or before the applicable date provided in section 6072 
or on or before the last day of the period covered by an extension of 
time granted pursuant to the provisions of section 6081, and each 
required payment of estimated tax is considered as paid on or before its 
due date if it is paid on or before the applicable date provided in 
section 6153 on or before the last day of the period covered by an 
extension of time granted pursuant to the provisions of section 6161.
    (3) Information returns filed with Service Center. An application 
for an extension of the time for filing any information return required 
to be filed with an Internal Revenue Service Center shall state the 
location of the Service Center with which such return will be filed. 
Except as provided in paragraph (b) of Sec. 301.6091-1 (relating to 
hand-carried documents), such application shall be made to the internal 
revenue officer with whom the applicant is required to file an income 
tax return or with whom the applicant would be required to file an 
income tax return if such a return were required of him.
    (4) Taxpayer unable to sign. In any case in which a taxpayer is 
unable, by reason of illness, absence, or other good cause, to sign a 
request for an extension, any person standing in close personal or 
business relationship to the taxpayer may sign the request on his 
behalf, and shall be considered as a duly authorized agent for this 
purpose, provided the request sets forth the reasons for a signature 
other than the taxpayer's and the relationship existing between the 
taxpayer and the signer.
    (5) Form of application. The application for an extension of the 
time for filing a return, statement, or other document may be made in 
the form of a letter. However, in the case of an individual income tax 
return on Form 1040, the application for an extension of the time for 
filing may be made either on Form 2688 or in the form of a letter.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6581, 26 FR 
11678, Dec. 6, 1961; T.D. 6950, 33 FR 5355, Apr. 4, 1968; T.D. 7260, 38 
FR 4258, Feb. 12, 1973; T.D. 7533, 43 FR 6604, Feb. 15, 1978; T.D. 7651, 
44 FR 61597, Oct. 26, 1979; T.D. 8241, 54 FR 7762, Feb. 23, 1989]



Sec. 1.6081-1T  Extension of time to file return in case of taxpayers with mixed straddles (temporary).

    The due date for the income tax return of trusts, estates, 
partnerships, and individual taxpayers filing their return for calendar 
year 1984 or for a fiscal year ending before February 1, 1985, shall be 
October 15, 1985, if--
    (a) The taxpayer obtained an extension of time to file the return 
pursuant to Sec. 1.6081-1 or Sec. 1.6081-4, and the due date for the 
return (taking the extension into account) falls after August 7, 1985 
and before October 16, 1985;
    (b) The taxpayer did not file the return prior to August 8, 1985; 
and
    (c) The taxpayer held one or more mixed straddles (within the 
meaning of section 1092(b)(2)) at any time after December 31, 1983, and 
before August 8, 1985.

[T.D. 8058, 50 FR 42014, Oct. 17, 1985]

[[Page 747]]



Sec. 1.6081-2  Automatic extension of time to file partnership return of income.

    (a) In general. A partnership required to file a return of income on 
Form 1065, U.S. Partnership Return of Income, for any taxable year will 
be allowed an automatic 3-month extension of time to file the return 
after the date prescribed for filing the return if an application under 
this section is filed in accordance with paragraph (b) of this section. 
In the case of a partnership described in Sec. 1.6081-5(a)(1), the 
automatic extension allowed under this section runs concurrently with an 
extension of time to file granted pursuant to Sec. 1.6081-5(a).
    (b) Requirements. In order to satisfy this paragraph (b), an 
application for an automatic extension under this section must be--
    (1) Submitted on Form 8736, Application for Automatic Extension of 
Time To File U.S. Return for a Partnership, REMIC or for Certain Trusts, 
or in any other manner as may be prescribed by the Commissioner;
    (2) Filed on or before the later of--
    (i) The date prescribed for filing the partnership return (without 
regard to any extensions of the time for filing such return); or
    (ii) The expiration of any extension of time to file granted such 
partnership pursuant to Sec. 1.6081-5(a); and
    (3) Filed with the Internal Revenue Service office designated in the 
application's instructions.
    (c) Payment of section 7519 amount. An automatic extension of time 
for filing a partnership return under this section does not extend the 
time for payment of any amount due under section 7519, relating to 
required payments for entities electing not to have a required taxable 
year.
    (d) Section 444 election. An automatic extension of time for filing 
a partnership return will run concurrently with any extension of time 
for filing a return allowed because of section 444, relating to the 
election of a taxable year other than a required taxable year.
    (e) Effect of extension on partner. An automatic extension of time 
for filing a partnership return under this section does not operate to 
extend the time for filing a partner's income tax return or the time for 
the payment of any tax due on the partner's income tax return.
    (f) Termination of automatic extension. The district director, 
including the Assistant Commissioner (International), or the director of 
a service center may terminate at any time an automatic extension by 
mailing to the partnership a notice of termination. The notice must be 
mailed at least 10 days prior to the termination date designated in such 
notice. The notice of termination must be mailed to the address shown on 
Form 8736 or to the partnerships's last known address.
    (g) Penalties. See section 6698 for failure to file a partnership 
return.
    (h) Coordination with Sec. 1.6081-1. Except in undue hardship cases, 
no extension of time for filing a partnership return of income will be 
granted under Sec. 1.6081-1 until an automatic extension has been 
allowed pursuant to the provisions of this section.
    (i) Effective date. This section is effective for applications for 
an automatic extension of time to file a partnership return of income 
filed on or after December 31, 1996.

[T.D. 8703, 61 FR 69029, Dec. 31, 1996]



Sec. 1.6081-3  Automatic extension of time for filing corporation income tax returns.

    (a) In general. A corporation shall be allowed an automatic 
extension of time to the fifteenth day of the sixth month (third month 
in the case of taxable years ending before December 31, 1982) following 
the month in which falls the date prescribed for the filing of its 
income tax return provided the following requirements are met:

    (1) An application must be signed by a person authorized by the 
corporation to request such extension. Such person must be a person 
authorized under section 6062 to execute the return of the corporation; 
a person currently enrolled to practice before the Treasury Department; 
or after November 7, 1965, either an attorney who is a member in good 
standing of the bar of the highest court of a State, possession, 
territory, commonwealth, or the District of Columbia, or a certified 
public accountant duly qualified to practice in a State, possession, 
territory, commonwealth, or the District of Columbia.

[[Page 748]]

    (2) The application must be filed on or before the date prescribed 
for the filing of the return of the corporation with the internal 
revenue officer with whom the corporation is required to file its income 
tax return.
    (3) The corporation shall make a remittance, on or before the date 
prescribed for payment, of the amount of the properly estimated unpaid 
tax liability. For taxable years beginning before 1983, the corporation 
shall make a remittance of an estimated amount of tax which shall not be 
less than would be required as the first installment under section 
6152(a)(1) should the corporation elect to pay the tax in installments.

Upon the timely filing of Form 7004, properly prepared, the 6-month (3-
month in the case of taxable years ending before December 31, 1982) 
extension shall be considered as allowed. For taxable years beginning 
before 1983, if the taxpayer elects to pay in installments the tax shown 
on Form 7004, the installment privilege provided in section 6152(a)(1) 
is limited to the amount shown on the form.
    (b) Consolidated returns. An application for an automatic extension 
of time for filing a consolidated return shall be made by a person 
authorized by the parent corporation to request such extension. Such 
person must be a person authorized under section 6062 to execute the 
return of the parent corporation; a person currently enrolled to 
practice before the Treasury Department; or after November 7, 1965, 
either an attorney who is a member in good standing of the bar of the 
highest court of a State, possession, territory, commonwealth, or the 
District of Columbia, or a certified public accountant duly qualified to 
practice in a State, possession, territory, commonwealth, or the 
District of Columbia. There shall be attached to such application a 
statement listing the name and address of each member of the affiliated 
group for which such consolidated return will be made. For taxable years 
beginning after December 31, 1970, the application shall be filed with 
the internal revenue officer with which the parent corporation will file 
its income tax return. Upon the timely filing of Form 7004 with the 
internal revenue officer with which such corporation files its return, 
the 6-month (3-month in the case of taxable years ending before December 
31, 1982) extension shall be considered as granted to the affiliated 
group for the filing of its consolidated return or for the filing of 
each member's separate return.
    (c) Special rule for the extension of time for the payment of tax. 
Notwithstanding the application of Sec. 1.6081-1(a), any automatic 
extension of time for filing a corporation income tax return granted 
under paragraph (a) or (b) of this section shall not operate to extend 
the time for payment of any tax due on such return.
    (d) Termination of automatic extension. The district director, 
including the Director of International Operations, or the director of a 
service center may, in his discretion, terminate at any time an 
automatic extension by mailing to the corporation (parent corporation in 
the case of an affiliated group), or the person who requested such 
extension for the corporation, a notice of termination. The notice shall 
be mailed at least 10 days prior to the termination date designated in 
such notice. The notice of termination shall be sufficient for all 
purposes when mailed to the corporation at its address shown on Form 
7004 or to the person who requested such extension for the corporation 
at his last known address or last known place of business, even if such 
corporation has terminated its existence, or such person is deceased or 
is under a legal disability.
    (e) Paragraphs (a) through (d) of this section shall not apply to 
returns filed by a DISC pursuant to section 6011(c)(2).

[T.D. 7567, 43 FR 45582, Oct. 3, 1978, as amended by T.D. 7885, 48 FR 
16484, Apr. 18, 1983]



Sec. 1.6081-4  Automatic extension of time for filing individual income tax returns.

    (a) In general--(1) Period of extension. An individual who is 
required to file an individual income tax return will be allowed an 
automatic 4-month extension of time to file the return after the date 
prescribed for filing the return provided the requirements contained in 
paragraphs (a)(2), (3), and (4) of this

[[Page 749]]

section are met. In the case of an individual described in Sec. 1.6081-
5(a)(5) or (6), the automatic 4-month extension will run concurrently 
with the extension of time to file granted pursuant to Sec. 1.6081-5.
    (2) Manner for submitting an application. An application must be 
submitted--
    (i) On Form 4868, Application for Automatic Extension of Time to 
File U.S. Individual Income Tax Return; or
    (ii) In any other manner as may be prescribed by the Commissioner.
    (3) Time and place for filing application. Except in the case of an 
individual described in Sec. 1.6081-5(a)(5) or (6), the application must 
be filed on or before the date prescribed for filing the individual 
income tax return. In the case of an individual described in 
Sec. 1.6081-5(a)(5) or (6), the application must be filed on or before 
the expiration of the extension of time to file granted pursuant to 
Sec. 1.6081-5. The application must be filed with the Internal Revenue 
Service office designated in the application's instructions.
    (4) Proper estimate of tax. An application for extension must show 
the full amount properly estimated as tax for the taxable year.
    (5) Coordination with Sec. 1.6081-1. Except in undue hardship cases, 
no extension of time for filing an individual income tax return will be 
granted under Sec. 1.6081-1 until an automatic extension has been 
allowed pursuant to the provisions of this paragraph (a).
    (b) Special rule for the extension of time for the payment of tax. 
Notwithstanding the application of Sec. 1.6081-1(a), any automatic 
extension of time for filing an individual income tax return granted 
under paragraph (a) of this section shall not operate to extend the time 
for payment of any tax due on such return.
    (c) Termination of automatic extension. The district director, 
including the Assistant Commissioner (International), or the director of 
a service center may terminate at any time an automatic extension by 
mailing to the taxpayer a notice of termination. The notice must be 
mailed at least 10 days prior to the termination date designated in such 
notice. The notice of termination must be mailed to the taxpayer at the 
address shown on Form 4868 or to the taxpayer's last known address.
    (d) Penalties. See section 6651 for failure to file an individual 
income tax return or failure to pay the amount shown as tax on the 
return. In particular, see Sec. 301.6651-1(c)(3) of this chapter 
(relating to a presumption of reasonable cause in certain circumstances 
involving an automatic extension of time for filing an individual income 
tax return).
    (e) Effective date. This section is effective for applications for 
an automatic extension of time to file an individual income tax return 
filed on or after December 31, 1996.

[T.D. 7567, 43 FR 45583, Oct. 3, 1978, as amended by T.D. 7885, 48 FR 
16484, Apr. 18, 1983; T.D. 8651, 61 FR 261, Jan. 4, 1996; T.D. 8703, 61 
FR 69030, Dec. 31, 1996]



Sec. 1.6081-5  Extensions of time in the case of certain partnerships, corporations and U.S. citizens and residents.

    (a) The rules in paragraphs (a) through (e) of this section apply to 
returns of income due after April 15, 1988. An extension of time for 
filing returns of income and for paying any tax shown on the return is 
hereby granted to and including the fifteenth day of the sixth month 
following the close of the taxable year in the case of:
    (1) Partnerships which are required under Sec. 1.6031-1(e)(2) to 
file returns on the fifteenth day of the fourth month following the 
close of the taxable year of the partnership, and which keep their 
records and books of account outside the United States and Puerto Rico;
    (2) Domestic corporations which transact their business and keep 
their records and books of account outside the United States and Puerto 
Rico;
    (3) Foreign corporations which maintain an office or place of 
business within the United States;
    (4) Domestic corporations whose principal income is from sources 
within the possessions of the United States;
    (5) United States citizens or residents whose tax homes and abodes, 
in a real and substantial sense, are outside the United States and 
Puerto Rico; and
    (6) United States citizens and residents in military or naval 
service on

[[Page 750]]

duty, including non-permanent or short term duty, outside the United 
States and Puerto Rico.
    (b) In order to qualify for the extension under this section, a 
statement must be attached to the return showing that the person for 
whom the return is made is a person described in paragraph (a) of this 
section.
    (c) For purposes of paragraph (a)(5) of this section, whether a 
person is a United States resident will be determined in accordance with 
section 7701(b) of the Code. The term ``tax home,'' as used in paragraph 
(a)(5), will have the same meaning which it has for purposes of section 
162(a)(2) (relating to travel expenses away from home). If a person does 
not have a regular or principal place of business, that person's tax 
home will be considered to be his regular place of abode in a real and 
substantial sense.
    (d) In order to qualify for the extension under paragraph (a)(6), 
the assigned tour of duty outside the United States and Puerto Rico must 
be for a period that includes the entire due date of the return.
    (e) A person otherwise qualifying for the extension under paragraph 
(a)(5) or paragraph (a)(6) shall not be disqualified because he is 
physically present in the United States or Puerto Rico at any time, 
including the due date of the return.
    (f) With respect to income tax returns due on April 15, 1988, an 
extension of time for filing a return of income and for paying any tax 
shown on that return is hereby granted to and including the fifteenth 
day of the sixth month following the close of the taxable year in the 
case of citizens or residents of the United States who are traveling 
outside the United States and Puerto Rico. A taxpayer will be considered 
to be traveling outside the United States and Puerto Rico only if the 
period of travel outside the United States and Puerto Rico is a period 
of at least fourteen days continuous travel that includes all of April 
15, 1988. For returns due after April 15, 1988, no extension will be 
granted to taxpayers traveling outside the United States and Puerto 
Rico.

[T.D. 8312, 55 FR 37227, Sept. 10, 1990; 55 FR 41310, Oct. 10, 1990]



Sec. 1.6081-6  Automatic extension of time to file trust income tax return.

    (a) In general. A trust required to file an income tax return on 
Form 1041, U.S. Income Tax Return for Estates and Trusts, for any 
taxable year will be allowed an automatic 3-month extension of time to 
file the return after the date prescribed for filing the return if an 
application under this section is filed in accordance with paragraph (b) 
of this section.
    (b) Requirements. To satisfy this paragraph (b), an application for 
an automatic extension under this section must--
    (1) Be submitted on Form 8736, Application for Automatic Extension 
of Time To File U.S. Return for a Partnership, REMIC or for Certain 
Trusts, or in any other manner as may be prescribed by the Commissioner;
    (2) Be filed on or before the date prescribed for filing the trust 
income tax return with the Internal Revenue Service office designated in 
the application's instructions; and
    (3) Show the full amount properly estimated as tax for the trust for 
the taxable year.
    (c) Effect of extension on beneficiary. An automatic extension of 
time to file a trust income tax return under this section will not 
operate to extend the time for filing the income tax return of a 
beneficiary of the trust or the time for the payment of any tax due on 
the beneficiary's income tax return.
    (d) Termination of automatic extension. The district director, 
including the Assistant Commissioner (International), or the director of 
a service center may terminate at any time an automatic extension by 
mailing to the trust a notice of termination. The notice must be mailed 
at least 10 days prior to the termination date designated in such 
notice. The notice of termination must be mailed to the address shown on 
Form 8736 or to the trust's last known address.
    (e) Penalties. See section 6651 for failure to file a trust income 
tax return or failure to pay the amount shown as tax on the return.
    (f) Coordination with Sec. 1.6081-1. Except in undue hardship cases, 
no extension of time for filing a trust income tax return will be 
granted under Sec. 1.6081-1

[[Page 751]]

until an automatic extension has been allowed pursuant to the provisions 
of this section.
    (g) Effective date. This section is effective for applications for 
an automatic extension of time to file a trust income tax return filed 
on or after December 31, 1996.

[T.D. 8703, 61 FR 69030, Dec. 31, 1996]



Sec. 1.6081-7  Automatic extension of time to file Real Estate Mortgage Investment Conduit (REMIC) income tax return.

    (a) In general. A Real Estate Mortgage Investment Conduit (REMIC) 
required to file an income tax return on Form 1066, U.S. Real Estate 
Mortgage Investment Conduit Income Tax Return, for any taxable year will 
be allowed an automatic 3-month extension of time to file the return 
after the date prescribed for filing the return if an application under 
this section is filed in accordance with paragraph (b) of this section.
    (b) Requirements. To satisfy this paragraph (b), an application for 
an automatic extension under this section must--
    (1) Be submitted on Form 8736, Application for Automatic Extension 
of Time To File U.S. Return for a Partnership, REMIC or for Certain 
Trusts, or in any other manner as may be prescribed by the Commissioner;
    (2) Be filed on or before the date prescribed for filing the REMIC 
income tax return with the Internal Revenue Service office designated in 
the application's instructions; and
    (3) Show the full amount properly estimated as tax for the REMIC for 
the taxable year.
    (c) Effect of extension on residual or regular interest holders. An 
automatic extension of time to file a REMIC income tax return under this 
section will not operate to extend the time for filing the income tax 
return of a residual or regular interest holder of the REMIC or the time 
for the payment of any tax due on the residual or regular interest 
holder's income tax return.
    (d) Termination of automatic extension. The district director, 
including the Assistant Commissioner (International), or the director of 
a service center may terminate at any time an automatic extension by 
mailing to the REMIC a notice of termination. The notice must be mailed 
at least 10 days prior to the termination date designated in such 
notice. The notice of termination must be mailed to the address shown on 
Form 8736 or to the REMIC's last known address.
    (e) Penalties. See sections 6698 and 6651 for failure to file a 
REMIC income tax return or failure to pay the amount shown as tax on the 
return.
    (f) Coordination with Sec. 1.6081-1. Except in undue hardship cases, 
no extension of time for filing a REMIC income tax return will be 
granted under Sec. 1.6081-1 until an automatic extension has been 
allowed pursuant to the provisions of this section.
    (g) Effective date. This section is effective for applications for 
an automatic extension of time to file a REMIC income tax return filed 
on or after December 31, 1996.

[T.D. 8703, 61 FR 69030, Dec. 31, 1996]

               Place for Filing Returns or Other Documents



Sec. 1.6091-1   Place for filing returns or other documents.

    (a) In general. Except as provided in Sec. 1.6091-4, whenever a 
return, statement, or other document is required to be made under the 
provisions of subtitle A or F of the Code, or the regulations 
thereunder, with respect to any tax imposed by subtitle A of the Code, 
and the place for filing such return, statement, or other document is 
not provided for by the Code, it shall be filed at the place prescribed 
by the regulations contained in this chapter.
    (b) Place for filing certain information returns. (1) For the place 
for filing returns of parnership income, see paragraph (e)(1) of 
Sec. 1.6031-1.
    (2) For the place for filing information returns by banks with 
respect to common trust funds, see Sec. 1.6032-1.
    (3) For the place for filing information returns by certain 
organizations exempt from taxation under section 501(a), see paragraph 
(e) of Sec. 1.6033-1.
    (4) For the place for filing information returns by trusts claiming 
charitable deductions under section 642(c), see paragraph (c) of 
Sec. 1.6034-1.

[[Page 752]]

    (5) For the place for filing information returns by officers, 
directors, and shareholders of foreign personal holding companies, see 
paragraph (d) of Sec. 1.6035-1 and paragraph (d) of Sec. 1.6035-2.
    (6) For the place for filing information returns relating to certain 
stock option transactions, see paragraph (c) of Sec. 1.6039-1.
    (7) For the place for filing returns of information reporting 
certain payments, see paragraph (a)(5) of Sec. 1.6041-2 and Sec. 1.6041-
6.
    (8) For the place for filing returns of information regarding 
payments of dividends, see paragraph (d) of Sec. 1.6042-1 and paragraph 
(c) of Sec. 1.6042-2 (relating to returns for calendar years after 
1962).
    (9) For the place for filing information returns by corporations 
relating to contemplated dissolution or liquidation, see paragraph (a) 
of Sec. 1.6043-1.
    (10) For the place for filing information returns by corporations 
relating to distributions in liquidation, see paragraph (a) of 
Sec. 1.6043-2.
    (11) For the place for filing returns of information regarding 
payments of patronage dividends, see paragraph (b) of Sec. 1.6044-1, and 
paragraph (d) of Sec. 1.6044-2 (relating to returns for calendar years 
after 1962).
    (12) For the place for filing information returns relating to 
formation or reorganization of foreign corporations, see paragraph (e) 
of Sec. 1.6046-1.
    (13) For the place for filing information returns regarding certain 
payments of interest, see paragraph (c) of Sec. 1.6049-1.
    (14) For the place for filing information returns with respect to 
payment of wages in the form of group-term life insurance, see paragraph 
(b) of Sec. 1.6052-1.
    (15) For the place for filing information returns on Form 1042S with 
respect to certain amounts paid to nonresident alien individuals, 
foreign partnerships, or foreign corporations, see paragraph (c) of 
Sec. 1.1461-2.
    (16) For the place for filing information returns on Form 5074 with 
respect to the allocation of individual income tax to Guam, see 
paragraph (b)(3) of Sec. 1.935-1 and paragraph (d) of Sec. 301.7654-1 of 
this chapter (Regulations on Procedure and Administration).

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6887, 31 FR 
8814, June 24, 1966; T.D. 6922, 32 FR 8713, June 17, 1967; T.D. 7284, 38 
FR 20829, Aug. 3, 1973; T.D. 7385, 40 FR 50264, Oct. 29, 1975]



Sec. 1.6091-2   Place for filing income tax returns.

    Except as provided in Sec. 1.6091-3 (relating to income tax returns 
required to be filed with the Director of International Operations) and 
Sec. 1.6091-4 (relating to exceptional cases):
    (a) Individuals, estates, and trusts. (1) Except as provided in 
paragraph (c) of this section, income tax returns of individuals, 
estates, and trusts shall be filed with the district director for the 
internal revenue district in which is located the legal residence or 
principal place of business of the person required to make the return, 
or, if such person has no legal residence or principal place of business 
in any internal revenue district, with the District Director at 
Baltimore, Md. 21202.
    (2) An individual employed on a salary or commission basis who is 
not also engaged in conducting a commercial or professional enterprise 
for profit on his own account does not have a ``principal place of 
business'' within the meaning of this section.
    (b) Corporations. Except as provided in paragraph (c) of this 
section, income tax returns of corporations shall be filed with the 
district director for the internal revenue district in which is located 
the principal place of business or principal office or agency of the 
corporation.
    (c) Returns filed with service centers. Notwithstanding paragraphs 
(a) and (b) of this section, whenever instructions applicable to income 
tax returns provide that the returns be filed with a service center, the 
returns must be so filed in accordance with the instructions.
    (d) Hand-carried returns. Notwithstanding paragraphs (1) and (2) of 
section 6091(b) and paragraph (c) of this section:
    (1) Persons other than corporations. Returns of persons other than 
corporations which are filed by hand carrying shall be filed with the 
district director

[[Page 753]]

(or with any person assigned the adminstrative supervision of an area, 
zone or local office constituting a permanent post of duty within the 
internal revenue district of such director) as provided in paragraph (a) 
of this section.
    (2) Corporations. Returns of corporations which are filed by hand 
carrying shall be filed with the district director (or with any person 
assigned the administrative supervision of an area, zone or local office 
constituting a permanent post of duty within the internal revenue 
district of such director) as provided in paragraph (b) of this section.

See Sec. 301.6091-1 of this chapter (Regulations on Procedure and 
Administration) for provisions relating to the definition of hand 
carried.
    (e) Amended returns. In the case of amended returns filed after 
April 14, 1968, except as provided in paragraph (d) of this section:
    (1) Persons other than corporations. Amended returns of persons 
other than corporations shall be filed with the service center serving 
the internal revenue district referred to in paragraph (a) of this 
section.
    (2) Corporations. Amended returns of corporations shall be filed 
with the service center serving the internal revenue district referred 
to in paragraph (b) of this section.
    (f) Returns of persons subject to a termination assessment. 
Notwithstanding paragraph (c) of this section:
    (1) Persons other than corporations. Returns of persons other than 
corporations with respect to whom an assessment was made under section 
6851(a) with respect to the taxable year shall be filed with the 
district director as provided in paragraph (a) of this section.
    (2) Corporations. Returns of corporations with respect to whom an 
assessment was made under section 6851(a) with respect to the taxable 
year shall be filed with the district director as provided in paragraph 
(b) of this section.
    (g) Returns of persons subject to a termination assessment. 
Notwithstanding paragraph (c) of this section, income tax returns of 
persons with respect to whom an income tax assessment was made under 
section 6852(a) with respect to the taxable year must be filed with the 
district director as provided in paragraphs (a) and (b) of this section.

[T.D. 6950, 33 FR 5356, Apr. 4, 1968, as amended by T.D. 7012, 34 FR 
7690, May 15, 1969; T.D. 7495, 42 FR 33726, July 1, 1977; T.D. 7575, 43 
FR 58816, Dec. 18, 1978; T.D. 8628, 60 FR 62210, Dec. 5, 1995]



Sec. 1.6091-3   Income tax returns required to be filed with Director of International Operations.

    The following income tax returns shall be filed with the Director of 
International Operations, Internal Revenue Service, Washington, DC 
20225, or the district director, or the director of the service center, 
depending on the appropriate officer designated on the return form or in 
the instructions issued with respect to such form:
    (a) Income tax returns on which all, or a portion, of the tax is to 
be paid in foreign currency. See Secs. 301.6316-1 to 301.6316-6 
inclusive, and Secs. 301.6316-8 and 301.6316-9 of this chapter 
(Regulations on Procedure and Administration).
    (b) Income tax returns on an individual citizen of the United States 
whose principal place of abode for the period with respect to which the 
return is filed is outside the United States. A taxpayer's principal 
place of abode will be considered to be outside the United States if his 
legal residence is outside the United States or if his return bears a 
foreign address.
    (c) Income tax returns of an individual citizen of a possession of 
the United States (whether or not a citizen of the United States) who 
has no legal residence or principal place of business in any internal 
revenue district in the United States.
    (d) Except in the case of any departing alien return under section 
6851 and Sec. 1.6851-2, the income tax return of any nonresident alien 
(other than one treated as a resident under section 6013 (g) or (h)).
    (e) The income tax return of an estate or trust the fiduciary of 
which is outside the United States and has no legal residence or 
principal place of business in any internal revenue district in the 
United States.
    (f) Income tax returns of foreign corporations.

[[Page 754]]

    (g) The return by a withholding agent of the income tax required to 
be withheld at source under chapter 3 of the Code on nonresident aliens 
and foreign corporations and tax-free covenant bonds, as provided in 
Sec. 1.1461-2.
    (h) Income tax returns of persons who claim the benefits of section 
911 (relating to earned income from sources without the United States).
    (i) Income tax returns of corporations which claim the benefits of 
section 922 (relating to special deduction for Western Hemisphere trade 
corporations) except in the case of consolidated returns filed pursuant 
to the regulations under section 1502.
    (j) Income tax returns of persons who claim the benefits of section 
931 (relating to income from sources within possessions of the United 
States).
    (k) Income tax returns of persons who claim the benefits of section 
933 (relating to income from sources within Puerto Rico).
    (l) Income tax returns of corporations which claim the benefits of 
section 941 (relating to the special deduction for China Trade Act 
corporations).

[T.D. 6950, 33 FR 5357, Apr. 4, 1968, as amended by T.D. 7012, 34 FR 
7690, May 15, 1969; T.D. 7670, 45 FR 6931, Jan. 31, 1980]



Sec. 1.6091-4   Exceptional cases.

    (a) Permission to file in district other than required district. (1) 
The Commissioner may permit the filing of any income tax return required 
to be made under the provisions of subtitle A or F of the Code, or the 
regulations in this part, in any internal revenue district, 
notwithstanding the provisions of paragraphs (1) and (2) of section 
6091(b) and Secs. 1.6091-1 to 1.6091-3, inclusive.
    (2) In cases where the Commissioner authorizes (for all purposes 
except venue) a director of an internal revenue service center to 
receive returns, such returns pursuant to instructions issued with 
respect thereto, may be sent directly to the director and are thereby 
filed with him for all purposes except as a factor in determining venue. 
However, after initial processing all such returns shall be forwarded by 
the director of a service center to the office with which such returns 
are, without regard to this subparagraph, required to be filed. For the 
sole purpose of determining venue, such returns are filed only with such 
office.
    (3) Notwithstanding the provisions of other sections of this chapter 
or any rule issued under this chapter:
    (i) In cases where, in accordance with subparagraph (2) of this 
paragraph, a return is filed with the director of a service center, the 
authority of the district director with whom such return would, without 
regard to such subparagraph, be required to be filed shall remain the 
same as if the return had been so filed;
    (ii) Unless a return or other document is a proper attachment to, or 
is, a return which the director of a service center is expressly 
authorized to receive, such return or other document shall be filed as 
if all returns sent directly to the service centers, in accordance with 
subparagraph (2) of this paragraph, were filed in the office where such 
returns are, without regard to such subparagraph, required to be filed; 
and
    (iii) Unless the performance of an act is directly related to the 
sending of a return directly to the director of a service center, such 
act shall be performed as if all returns sent directly to the service 
centers, in accordance with subparagraph (2) of this paragraph, were 
filed in the office where such returns are, without regard to such 
subparagraph, required to be filed.
    (4) The application of subparagraphs (2) and (3) of this paragraph 
may be illustrated by the following examples:

    Example (1). The Commissioner has authorized the Director, Internal 
Revenue Service Center, Chamblee, Georgia (for all purposes except 
venue), to receive Forms 1040 and 1040A. A, a resident of Greensboro, 
North Carolina, is required to file his Form 1040 for the calendar year 
1964 with the District Director, Greensboro, North Carolina. In 
addition, A is required to file his declaration of estimated tax, Form 
1040ES, for the calendar year 1965, which under paragraph (c) of 
Sec. 1.6073-1 must be filed with the district director for the district 
in which A expects to file his income tax return. Under subparagraph (2) 
of this paragraph A may send his Form 1040 to either the director of the 
service center or to his district director. However, since his Form 
1040ES is not a proper attachment to his income tax return, he shall 
send his Form 1040ES to his district director (with whom he is, without 
regard to

[[Page 755]]

subparagraph (2) of this paragraph, required to file his income tax 
return).
    Example (2). Assume the same facts as in Example (1), and in 
addition, that A is required to attach copies of his Forms W-2 to his 
income tax return, Form 1040. Therefore, A must attach copies of his 
Forms W-2 to his Form 1040 and send both to either his district director 
or the director of the service center.
    Example (3). Assume the facts in Example (1) and in addition, that A 
sends his Form 1040 to the director of the service center. Assume 
further that A is entitled to file a claim under section 6421 for refund 
of certain taxes paid for gasoline used for certain nonhighway uses. 
Under paragraph (c) of Sec. 48.6421(c)-1 of this chapter the claim on 
Form 843 shall be filed with the district director with whom the 
claimant filed his latest income tax return. Since Form 843 is not a 
proper attachment to A's Form 1040, the claim shall be sent to A's 
district director since his is the office with which A would, without 
regard to subparagraph (2) of this paragraph, be required to file his 
Form 1040.
    Example (4). Taxpayer B sends his Form 1040 to the director of a 
service center. B wishes to apply for an extension of the period of 
replacement for involuntarily converted property pursuant to section 
1033 of the Code. Under paragraph (c)(3) of Sec. 1.1033(a)-2 of this 
chapter such application is to be made to the district director for the 
internal revenue district in which the income tax return is filed for 
the first taxable year during which any of the gain from the involuntary 
conversion is realized. Pursuant to subparagraph (3) of this paragraph, 
B shall apply to the district director for the internal revenue district 
in which such income tax return is, without regard to subparagraph (2) 
of this paragraph, required to be filed. Such district director is 
authorized to grant or withhold such extension of the period of 
replacement.
    Example (5). Taxpayer C sends his return directly to the director of 
a service center. C wishes to receive certain information concerning the 
value of a reversionary interest with respect to his charitable 
contribution under section 170 of the Code. Under paragraph (d)(2) of 
Sec. 1.170-2 of this Chapter, C may upon request, obtain the information 
from the district director with whom he files his income tax return. 
Under subparagraph (3) of this paragraph, C shall request such 
information from the district director with whom he would, without 
regard to subparagraph (2) of this paragraph, be required to file his 
return.

    (b) Returns of officers and employees of the Internal Revenue 
Service. The Commissioner may require any officer or employee of the 
Internal Revenue Service to file his income tax return in any district 
selected by the Commissioner.
    (c) Residents of Guam. Income tax returns of an individual citizen 
of the United States who is a resident of Guam shall be filed with Guam, 
as provided in paragraph (b)(1) of Sec. 1.935-1.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6793, 30 FR 
704, Jan. 22, 1965; T.D. 7385, 40 FR 50264, Oct. 29, 1975]

                        Miscellaneous Provisions



Sec. 1.6102-1   Computations on returns or other documents.

    For provisions with respect to the rounding off to whole-dollar 
amounts of money items on returns and accompanying schedules, see 
Sec. 301.6102-1 of this chapter (Regulations on Procedure and 
Administration).

[T.D. 6500, 25 FR 12137, Nov. 26, 1960]



Sec. 1.6107-1  Income tax return preparer must furnish copy of return to taxpayer and must retain a copy or record.

    (a) Furnishing copy to taxpayer. The person who is an income tax 
return preparer of any return of tax under subtitle A of the Internal 
Revenue Code of 1954 or claim for refund of tax under subtitle A of the 
Internal Revenue Code of 1954 shall furnish a completed copy of the 
original return or claim for refund to the taxpayer (or nontaxable 
entity) not later than the time the original return or claim for refund 
is presented for the signature of the taxpayer (or nontaxable entity). 
The preparer may, if it wishes request a receipt or other evidence from 
the taxpayer (or nontaxable entity) sufficient to show satisfaction of 
the requirement of this paragraph (a).
    (b) Copy or record to be retained. The person who is an income tax 
return preparer of any return or claim for refund shall:
    (1)(i) Retain a completed copy of the return or claim for refund; or
    (ii) Retain a record, by list, card file, or otherwise of the name, 
taxpayer identification number, and taxable year of the taxpayer (or 
nontaxable entity) for whom the return or claim for refund was prepared 
and the type of return of claim for refund prepared;
    (2) Retain a record, by retention of a copy of the return or claim 
for refund, maintenance of a list or card file, or

[[Page 756]]

otherwise, for each return or claim for refund presented to the taxpayer 
(or nontaxable entity) of the name of the individual preparer required 
to sign the return or claim for refund pursuant to Sec. 1.6695-1(b); and
    (3) Make the copy or record of returns and claims for refund and 
record of the individuals required to sign available for inspection upon 
request by the district director.

The material described in this paragraph (b) shall be retained and kept 
available for inspection for the 3-year period following the close of 
the return period during which the return or claim for refund was 
presented for signature to the taxpayer (or nontaxable entity). However, 
in the case of a return which becomes due (with extensions, if any) 
during a return period following the return period during which the 
return was presented for signature, the material shall be retained and 
kept available for inspection for the 3-year period following the close 
of the later return period in which the return became due. For the 
definition of ``return period'' see section 6060(c). If the person 
subject to the record retention requirement of this paragraph (b) is a 
corporation or a partnership which is dissolved before completion of the 
3-year period, then all persons who under state law are responsible for 
the winding up of the affairs of the corporation or partnership shall be 
subject, on behalf of the corporation or partnership, to these record 
retention requirements until completion of the 3-year period. If state 
law does not specify any person or persons as responsible for winding 
up, then, collectively, the directors or general partners shall be 
subject, on behalf of the corporation or partnership, to the record 
retention requirements of this paragraph (b). For purposes of the 
penalty imposed by section 6695(d), such designated persons shall be 
deemed to be the income tax return preparer and will be jointly and 
severally liable for each failure.
    (c) Preparer. For the definition of ``income tax return preparer'', 
see section 7701(a)(36) and Sec. 3071.7701-15. For purposes of applying 
this section, in the case of:
    (1) An employment arrangement between two or more income tax return 
preparers, the person who employs (or engages) one or more other 
preparers to prepare for compensation any return or claim for refund 
other than for the person shall be considered to be the sole income tax 
return preparer; and
    (2) A partnership arrangement for the preparation of returns and 
claims for refund, the partnership shall be considered to be the sole 
income tax return preparer.
    (d) Penalties. (1) For the civil penalty for failure to furnish a 
copy of the return or claim for refund to the taxpayers (or nontaxable 
entity) as required under paragraphs (a) and (c) of this section, see 
section 6695(a) and Sec. 1.6695-(a).
    (2) For the civil penalty for failure to retain a copy of the return 
or claim for refund, or to retain a record as required under paragraphs 
(b) and (c) of this section, see section 6695(d) and Sec. 1.6695-1(d).

(Sec. 6060(b), Internal Revenue Code of 1954 (90 Stat. 1691, (26 U.S.C. 
6060(b))); sec. 7805, Internal Revenue Code of 1954 (68A Stat. 917, (26 
U.S.C. 7805))

[T.D. 7519, 42 FR 59967, Nov. 23, 1977, as amended by T.D. 7640, 44 FR 
49452, Aug. 23, 1979; T.D. 7948, 49 FR 8601, Mar. 8, 1984]



Sec. 1.6109-1   Identifying numbers.

    (a) Information to be furnished after April 15, 1974. For provisions 
concerning the requesting and furnishing of identifying numbers with 
respect to returns, statements, and other documents which must be filed 
after April 15, 1974, see Sec. 301.6109-1 of this chapter (Regulations 
on Procedure and Administration).
    (b) Information to be furnished before April 15, 1974. For 
provisions concerning the requesting and furnishing of identifying 
numbers with respect to returns, statements, and other documents which 
must be filed before April 16, 1974, see 26 CFR Sec. 1.6109-1 (revised 
as of April 1, 1973).

[T.D. 7306, 39 FR 9946, Mar. 15, 1974; 39 FR 11080, Mar. 25, 1974]



Sec. 1.6109-2  Furnishing identifying number of income tax return preparer.

    (a) Furnishing identifying number. Each return of tax under subtitle 
A of the Internal Revenue Code of 1954 or claim for refund of tax under 
subtitle A

[[Page 757]]

of the Internal Revenue Code of 1954 prepared by one or more income tax 
return preparers shall bear the identifying number of the preparer 
required by Sec. 1.6695-1(b) to sign the return or claim for refund. In 
addition, it there is a partnership or employment arrangement between 
two or more preparers, the identifying number of the partnership or the 
person who employs (or engages) one or more other persons to prepare for 
compensation the return or claim for refund shall also appear on the 
return or claim for refund. If the preparer is:
    (1) An individual (not described in subparagraph (2) of this 
paragraph (a) who is a citizen or resident of the United States such 
preparer's social security account number shall be affixed; and
    (2) A person (whether an individual, corporation, or partnership) 
who employs (or engages) one or more persons to prepare the return or 
claim for refund (other than for the person), or who is not a citizen or 
resident of the United States and also is not employed or engaged by 
another preparer, such preparer's employer identification number shall 
be affixed.

For the definition of the term ``income tax return preparer'' (or 
``preparer'') see section 7701(a)(36) and Sec. 301.7701-15.
    (b) Furnishing address. (1) Each return or claim for refund which is 
prepared by one or more income tax return preparers shall bear the 
street address, city, State, and postal ZIP code of that preparer's 
place of business where the preparation of the return or claim for 
refund was completed. However, if this place of business is not 
maintained on a year-round basis, the return or claim for refund shall 
bear the street address, city, State, and postal ZIP code of such 
preparer's principal office or business location which is maintained on 
a yearround basis, or it none, that preparer's residence.
    (2) For purposes of satisfying the requirement of the first sentence 
of paragraph (b)(1) of this section, and income tax return preparer, 
may, on returns and claims for refund, disclose only the postal ZIP code 
of the described place of business as a satisfactory address, but only 
if the preparer first by written notice advises each affected Internal 
Revenue Service Center that he intends to follow this practice.
    (c) Penalty. For the civil penalty for failure to furnish an 
identifying number as required under paragraph (a) of this section, see 
section 6695(c) and Sec. 1.6695-1(c).

[T.D. 7519, 42 FR 59967, Nov. 23, 1977]



Sec. 1.6115-1  Disclosure requirements for quid pro quo contributions.

    (a) Good faith estimate defined--(1) In general. A good faith 
estimate of the value of goods or services provided by an organization 
described in section 170(c) in consideration for a taxpayer's payment to 
that organization is an estimate of the fair market value, within the 
meaning of Sec. 1.170A-1(c)(2), of the goods or services. The 
organization may use any reasonable methodology in making a good faith 
estimate, provided it applies the methodology in good faith. If the 
organization fails to apply the methodology in good faith, the 
organization will be treated as not having met the requirements of 
section 6115. See section 6714 for the penalties that apply for failure 
to meet the requirements of section 6115.
    (2) Good faith estimate for goods or services that are not 
commercially available. A good faith estimate of the value of goods or 
services that are not generally available in a commercial transaction 
may be determined by reference to the fair market value of similar or 
comparable goods or services. Goods or services may be similar or 
comparable even though they do not have the unique qualities of the 
goods or services that are being valued.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (a).

    Example 1. Facility not available on a commercial basis. Museum M, 
an organization described in section 170(c), is located in Community N. 
In return for a payment of $50,000 or more, M allows a donor to hold a 
private event in a room located in M. Private events other than those 
held by such donors are not permitted to be held in M. In Community N, 
there are four hotels, O, P, Q, and R, that have ballrooms with the same 
capacity as the room in M. Of these hotels, only O and P have ballrooms 
that offer amenities and atmosphere that are similar to the amenities 
and atmosphere of the room in M (although O and P lack the unique 
collection of art

[[Page 758]]

that is displayed in the room in M). Because the capacity, amenities, 
and atmosphere of ballrooms in O and P are comparable to the capacity, 
amenities, and atmosphere of the room in M, a good faith estimate of the 
benefits received from M may be determined by reference to the cost of 
renting either the ballroom in O or the ballroom in P. The cost of 
renting the ballroom in O is $2500 and, therefore, a good faith estimate 
of the fair market value of the right to host a private event in the 
room at M is $2500. In this example, the ballrooms in O and P are 
considered similar and comparable facilities to the room in M for 
valuation purposes, notwithstanding the fact that the room in M displays 
a unique collection of art.
    Example 2. Services available on a commercial basis. Charity S is an 
organization described in section 170(c). S offers to provide a one-hour 
tennis lesson with Tennis Professional T in return for the first payment 
of $500 or more that it receives. T provides one-hour tennis lessons on 
a commercial basis for $100. Taxpayer pays $500 to S and in return 
receives the tennis lesson with T. A good faith estimate of the fair 
market value of the lesson provided in exchange for Taxpayer's payment 
is $100.
    Example 3. Celebrity presence. Charity U is an organization 
described in section 170(c). In return for the first payment of $1000 or 
more that it receives, U will provide a dinner for two followed by an 
evening tour of Museum V conducted by Artist W, whose most recent works 
are on display at V. W does not provide tours of V on a commercial 
basis. Typically, tours of V are free to the public. Taxpayer pays $1000 
to U and in return receives a dinner valued at $100 and an evening tour 
of V conducted by W. Because tours of V are typically free to the 
public, a good faith estimate of the value of the evening tour conducted 
by W is $0. In this example, the fact that Taxpayer's tour of V is 
conducted by W rather than V's regular tour guides does not render the 
tours dissimilar or incomparable for valuation purposes.

    (b) Certain goods or services disregarded. For purposes of section 
6115, an organization described in section 170(c) may disregard goods or 
services described in Sec. 1.170A-13(f)(8)(i).
    (c) Value of the right to purchase tickets to college or university 
athletic events. For purposes of section 6115, the right to purchase 
tickets for seating at an athletic event in exchange for a payment 
described in section 170(l) is treated as having a value equal to twenty 
percent of such payment.
    (d) Goods or services provided to employees or partners of donors--
(1) Certain goods or services disregarded. For purposes of section 6115, 
goods or services provided by an organization described in section 
170(c) to employees of a donor or to partners of a partnership that is a 
donor in return for a payment to the donee organization may be 
disregarded to the extent that the goods or services provided to each 
employee or partner are the same as those described in Sec. 1.170A-
13(f)(8)(i).
    (2) Description permitted in lieu of good faith estimate for other 
goods or services. The written disclosure statement required by section 
6115 may include a description of goods or services, in lieu of a good 
faith estimate of their value, if the donor is--
    (i) An employer and, in return for the donor's quid pro quo 
contribution, an organization described in section 170(c) provides the 
donor's employees with goods or services other than those described in 
paragraph (d)(1) of this section; or
    (ii) A partnership and, in return for its quid pro quo contribution, 
the organization provides partners in the partnership with goods or 
services other than those described in paragraph (d)(1) of this section.
    (e) Effective date. This section applies to contributions made on or 
after December 16, 1996. However, taxpayers may rely on the rules of 
this section for contributions made on or after January 1, 1994.

[T.D. 8690, 61 FR 65954, Dec. 16, 1996]

                      TIME AND PLACE FOR PAYING TAX

                  Place and Due Date for Payment of Tax



Sec. 1.6151-1   Time and place for paying tax shown on returns.

    (a) In general. Except as provided in section 6152 and paragraph (b) 
of this section, the tax shown on any income tax return shall, without 
assessment or notice and demand, be paid to the internal revenue officer 
with whom the return is filed at the time fixed for filing the return 
(determined without regard to any extension of time for filing the 
return). For provisions relating to the time for filing income tax 
returns, see section 6072 and Secs. 1.6072-1 to 1.6072-4, inclusive. For 
provisions relating to the place for filing income tax returns,

[[Page 759]]

see section 6091 and Secs. 1.6091-1 to 1.6091-4, inclusive.
    (b)(1) Returns on which tax is not shown. If a taxpayer files a 
return and in accordance with section 6014 and the regulations 
thereunder, elects not to show the tax on the return, the amount of tax 
determined to be due shall be paid within 30 days after the date of 
mailing to the taxpayer a notice stating the amount payable and making 
demand upon the taxpayer therefor. However, if the notice is mailed to 
the taxpayer more than 30 days before the due date of the return, 
payment of the tax shall not be required prior to such due date.
    (2) Where tax is shown on the return. In any case in which a 
taxpayer files a return on Form 1040A pursuant to paragraph (a)(7) of 
Sec. 1.6012-1 and shows the amount of tax on the return, the unpaid 
balance of the tax shall, without assessment or notice and demand, be 
paid not later than the date fixed for filing the return.
    (c) Date fixed for payment of tax. In any case in which a tax 
imposed by subtitle A of the Code is required to be paid on or before a 
certain date, or within a certain period, any reference in subtitle A or 
F of the Code to the date fixed for payment of such tax shall be deemed 
a reference to the last day fixed for such payment (determined without 
regard to any extension of time for paying the tax).
    (d) Use of Government depositaries. (1) For provisions relating to 
the use of Federal Reserve banks or authorized financial institutions in 
depositing income and estimated income taxes of certain corporations, 
see Sec. 1.6302-1.
    (2) For provisions relating to the use of such financial 
institutions for the deposit of taxes required to be withheld under 
chapter 3 of the Code on nonresident aliens and foreign corporations and 
tax-free covenant bonds, see Sec. 1.6302-2.

(Approved by the Office of Management and Budget under control number 
1545-0257)

[T.D. 6500, 25 FR 12137, Nov. 26, 1960, as amended by T.D. 6922, 32 FR 
8713, June 17, 1967; T.D. 6950, 33 FR 5357, Apr. 4, 1968; T.D. 7102, 36 
FR 5498, Mar. 24, 1971; T.D. 7953, 49 FR 19644, May 9, 1984]



Sec. 1.6152-1   Installment payments.

    (a) Privilege of corporation to elect to make installment payments--
(1) Amount to be paid. In the case of any taxable year ending on or 
after December 31, 1954, a corporation subject to the taxes imposed by 
chapter 1 of the Code may elect, as provided in subparagraph (2) of this 
paragraph, to pay the unpaid amount of such tax for the taxable year in 
two equal installments instead of making a single payment. If such an 
election is made, the installments shall be paid as follows:
    (i) Fifty percent on or before the date prescribed for the payment 
of the tax as a single payment, and
    (ii) The remaining 50 percent on or before three months after the 
date prescribed for the payment of the first installment.

For provisions relating to installment payments of estimated income tax 
by corporations, see section 6154 and Secs. 1.6154-1 to 1.6154-3, 
inclusive.
    (2) Method of election. A corporation shall be considered to have 
made an election to pay its tax in installments if:
    (i) It files its income tax return on or before the date prescribed 
therefor (determined without regard to any extension of time) and pays 
50 percent of the unpaid amount of the tax at such time, or
    (ii) It files an application on Form 7004 for an automatic extension 
of time to file its income tax return, as provided in Sec. 1.6081-3, and 
pays 50 percent of the unpaid amount of the tax at such time. Except as 
provided in paragraph (c) of this section, the installment privilege is 
limited to the unpaid amount of tax as shown on the income tax return 
filed in accordance with the provisions of subdivision (i) of this 
subparagraph, or as shown on the Form 7004 filed in accordance with the 
provisions of this subdivision.
    (3) Use of Government depositaries. For provisions relating to the 
use of Federal Reserve banks and authorized financial institutions in 
depositing the taxes see Sec. 1.6302-1.
    (b) Privilege of estates of decedents to make installment payments. 
With respect to the income tax imposed by chapter 1 of the Code upon 
estates of decedents, the fiduciary may elect to pay the tax

[[Page 760]]

in four equal installments instead of in a single payment. If the 
election is made, the tax shall be paid as follows:
    (1) Twenty-five percent on or before the date prescribed for the 
payment of the tax as a single payment,
    (2) Twenty-five percent on or before three months after the date 
prescribed for payment of the first installment,
    (3) Twenty-five percent on or before six months after the date 
prescribed for payment of the first installment, and
    (4) Twenty-five percent on or before nine months after the date 
prescribed for payment of the first installment.
    (c) Proration of deficiency to installments. If an election has been 
made to pay the tax imposed by chapter 1 of the Code in installments, 
and a deficiency has been assessed, the deficiency shall be prorated 
equally to all the installments, whether paid or unpaid. Except as 
provided in section 6861, relating to jeopardy assessment, the part of 
the deficiency so prorated to any installment which is not yet due shall 
be collected at the same time as and as part of such installment. The 
part of the deficiency so prorated to any installment the date for 
payment of which has arrived shall be paid upon notice and demand from 
the district director.
    (d) Acceleration of payment. If a taxpayer elects under the 
provisions of this section to pay the tax in installments, any 
installment may be paid prior to the date prescribed for its payment. If 
an installment is not paid in full on or before the date fixed for its 
payment the whole amount of the unpaid tax shall be paid upon notice and 
demand from the district director.

(Approved by the Office of Management and Budget under control number 
1545-0257)

[T.D. 6500, 25 FR 12138, Nov. 26, 1960, as amended by T.D. 6914, 32 FR 
3819, Mar. 8, 1967; T.D. 7953, 49 FR 19644, May 9, 1984]



Sec. 1.6153-1   Payment of estimated tax by individuals.

    (a) In general. (1) The time for payment of the estimated tax by 
individuals for calendar years shall be as follows:

------------------------------------------------------------------------
                                          Dates of payment of estimated 
       Date of filing declaration                      tax              
------------------------------------------------------------------------
(i) On or before April 15..............  In 4 equal installments--one at
                                          time of filing declaration,   
                                          one on or before June 15, one 
                                          on or before September 15, and
                                          one on or before January 15 of
                                          the succeeding taxable year   
(ii) After April 15 and before June 16   In 3 equal installments--one at
 if not required to be filed on or        time of filing declaration,   
 before April 15.                         one on or before September 15,
                                          and one on or before January  
                                          15 of the succeeding taxable  
                                          year                          
(iii) After June 15 and before           In 2 equal installments--one at
 September 16 if not required to be       time of filing declaration,   
 filed on or before June 15.              and the other on or before    
                                          January 15 of the succeeding  
                                          taxable year                  
(iv) After September 15 if not required  In full at time of filing      
 to be filed on or before September 15.   declaration                   
------------------------------------------------------------------------

    (2) If, for example, due to the nature and amount of his gross 
income for 1955, the taxpayer is not required to file his declaration as 
of April 15, but is required to file the declaration on or before June 
15, 1955, the case comes within the scope of subparagraph (1)(ii) of 
this paragraph and the estimated tax is payable in 3 equal installments, 
the 1st on the date of filing, the 2d on or before September 15, 1955, 
and the 3d installment on or before January 15, 1956.
    (3) If a declaration is filed after the time prescribed in section 
6073(a) (including any extension of time granted for filing the 
declaration), there shall be paid at such time all installments of the 
estimated tax which would have been payable on or before such date of 
filing if the declaration had been timely filed in accordance with the 
provisions of section 6073(a). The remaining installments shall be paid 
at the times and in the amounts in which they would have been payable if 
the declaration had been timely filed. Thus, for example, B, a single 
man who makes his return on the calendar year basis, was employed from 
the beginning of 1955 and for several years prior thereto at an annual 
salary of $6,000, thus meeting the requirements of section 6015(a). B 
filed his declaration for 1955 on September 16, 1955. In such case, B 
should have filed a declaration on or

[[Page 761]]

before April 15, 1955, and at the time of filing his declaration he was 
delinquent in the payment of three installments of his estimated tax for 
the taxable year 1955. Hence, upon his filing the declaration on 
September 16, 1955, three-fourths of the estimated tax shown thereon 
must be paid.
    (4) In the case of a decedent, payments of estimated tax are not 
required subsequent to the date of death. See, however, paragraph (c) of 
Sec. 1.6015(b)-1, relating to the making of an amended declaration by a 
surviving spouse if a joint declaration was made before the death of the 
decedent.
    (5) The payment of any installment of the estimated tax shall be 
considered payment on account of the tax for such taxable year. Hence, 
upon the return for such taxable year, the aggregate amount of the 
payments of estimated tax should be entered as payments to be applied 
against the tax shown on such return.
    (b) Farmers or fishermen. Special provisions are made with respect 
to the filing of the declaration and the payment of the tax by an 
individual whose estimated gross income from farming or, with respect to 
taxable years beginning after December 31, 1962, from fishing is at 
least two-thirds of his total gross income from all sources for the 
taxable year. As to what constitutes income from farming or fishing 
within the meaning of this paragraph, see paragraph (b) of Sec. 1.6073-
1. The declaration of such an individual may be filed on or before 
January 15 of the succeeding taxable year in lieu of the time prescribed 
for individuals generally. Where such an individual makes a declaration 
of estimated tax after September 15 of the taxable year, the estimated 
tax shall be paid in full at the time of the filing of the declaration.
    (c) Amendment of declaration. If any amendment of a declaration is 
filed, the remaining installments, if any, shall be ratably increased or 
decreased, as the case may be, to reflect the increase or decrease in 
the estimated tax by reason of the amendment. If any amendment is made 
after September 15 of the taxable year, any increase in the estimated 
tax by reason thereof shall be paid at the time of making the amendment.
    (d) Installments paid in advance. At the election of the taxpayer 
any installment of the estimated tax may be paid prior to the date 
prescribed for its payment.

[T.D. 6500, 25 FR 12139, Nov. 26, 1960, as amended by T.D. 6678, 28 FR 
10517, Oct. 1, 1963]



Sec. 1.6153-2   Fiscal years.

    In the case of an individual on the fiscal year basis, the dates 
prescribed for payment of the estimated tax shall be the 15th day of the 
4th month, the 15th day of the 6th month, and the 15th day of the 9th 
month of the taxable year and the 15th day of the 1st month of the 
succeeding taxable year. For example, if an individual having a fiscal 
year ending on June 30, 1956, first meets the requirements of section 
6015(a) on January 15, 1956, and the declaration is filed on or before 
March 15, 1956, the estimated tax shall be paid in 2 equal installments, 
one at the time of filing of such declaration and the other on or before 
July 15, 1956.

[T.D. 6500, 25 FR 12139, Nov. 26, 1960]



Sec. 1.6153-3  Short taxable years.

    In the case of a short taxable year of an individual for which a 
declaration is required to be filed the estimated tax shall be paid in 
equal installments, one at the time of filing the declaration, one on 
the 15th day of the 6th month of the taxable year and another on the 
15th day of the 9th month of such year unless the short taxable year 
closed during or prior to such 6th or 9th month, and one on the 15th day 
of the 1st month of the succeeding taxable year. For example, if the 
short taxable year is the period of 10 months from January 1, 1955, to 
October 31, 1955, and the declaration is required to be filed on or 
before April 15, 1955, the estimated tax is payable in 4 equal 
installments, one on the date of filing the declaration, and one each on 
June 15, September 15, and November 15, 1955. If in such case the 
declaration is required to be filed after April 15 but on or before June 
15, the tax will be payable in 3 equal installments, one on the date of 
filing the declaration, and one each on September 15, and November 15, 
1955. The provisions of paragraph (a)(3) of

[[Page 762]]

Sec. 1.6153-1, relating to payment of estimated tax in any case in which 
the declaration is filed after the time prescribed in section 6073 and 
Secs. 1.6073-1 to 1.6073-4, inclusive, are equally applicable to the 
payment of the estimated tax for short taxable years.

[T.D. 6500, 25 FR 12139, Nov. 26, 1960]



Sec. 1.6153-4  Extension of time for paying the estimated tax.

    An extension of time granted an individual under section 6081 for 
filing the declaration of estimated tax automatically extends the time 
for paying the estimated tax (without interest) for the same period. See 
Sec. 1.6073-4 for rules relating to extensions of time for filing 
declarations of estimated tax by individuals. Except as provided in 
paragraph (b) of Sec. 301.6091-1 (relating to hand-carried documents), 
an application for an extension of time for paying a particular 
installment of the estimated tax shall be addressed to the internal 
revenue officer with whom the taxpayer files his declaration. Each 
application must contain a full recital of the causes for the delay. 
Such extension may be for a reasonable period not to exceed 6 months 
from the date fixed for payment thereof except in the case of a taxpayer 
who is abroad. Such extension does not relieve the taxpayer from the 
addition to the tax imposed by section 6654, and the period of the 
underpayment will be determined under section 6654(c) without regard to 
such extension.

[T.D. 6950, 33 FR 5357, Apr. 4, 1968]



Sec. 1.6154-1   Payment of estimated tax by corporations.

    (a) Taxable years beginning on or before December 31, 1963--(1) 
Amount required to be paid. Every corporation required to file a 
declaration of estimated tax for a taxable year beginning on or before 
December 31, 1963, shall pay the following percentage of its estimated 
tax:

------------------------------------------------------------------------
                                              The amount required to be 
                                                paid is the following   
         If the taxable year ends--          percentage of the estimated
                                                         tax            
------------------------------------------------------------------------
On or after Dec. 31, 1955, and before Dec.                              
 31, 1956..................................                           10
On or after Dec. 31, 1956, and before Dec.                              
 31, 1957..................................                           20
On or after Dec. 31, 1957, and before Dec.                              
 31, 1958..................................                           30
On or after Dec. 31, 1958, and before Dec.                              
 31, 1959..................................                           40
On or after Dec. 31, 1959..................                           50
------------------------------------------------------------------------

    (2) Time for payment. (i) In the case of a corporation on the 
calendar year basis which files its declaration on or before September 
15 of the taxable year, the percentage of the estimated tax required to 
be paid is payable in two equal installments, one at the time of filing 
the declaration, and the other on or before December 15 of the taxable 
year. If the corporation files its declaration after September 15 of the 
taxable year, the percentage of the estimated tax required to be paid is 
payable in full on or before December 15 of the taxable year.
    (ii) In the case of a corporation whose taxable year is a fiscal 
year, the dates prescribed for payment of the estimated tax shall be the 
15th day of the 9th month and the 15th day of the 12th month of such 
taxable year. If the corporation files its declaration after the 15th 
day of such 9th month, the percentage of the estimated tax required to 
be paid is payable in full on or before the 15th day of such 12th month.
    (3) Amendment of declaration. In the case of an amended declaration, 
filed in accordance with section 6074, the installment payable on the 
15th day of the 12th month of the taxable year shall be ratably 
increased or decreased, as the case may be, to reflect the increase or 
decrease in the estimated tax by reason of the amended declaration. For 
example, X, a corporation on the calendar year basis, filed a 
declaration on September 15, 1955, reporting an estimated tax in the 
amount of $20,000. The first installment of $1,000 (5 percent of 
$20,000) accompanied the declaration. However, X filed an amended 
declaration on December 15, 1955, showing an estimated tax of $30,000. 
Since X has already paid $1,000, it must make a payment in the amount of 
$2,000 computed as follows:

Required amount of estimated tax which must be paid for                 
 calendar year 1955 (10% of $30,000)........................      $3,000
Amount paid with original estimate (5% of $20,000)..........       1,000
                                                             -----------
Balance to accompany amended declaration....................       2,000
                                                                        


[[Page 763]]

Had the amended declaration been filed on December 10, 1955, then only 
the balance of the first installment ($500) otherwise due on September 
15 would have been required to be paid with the declaration and the 
installment required to be paid on or before December 15, 1955, would be 
$1,500.
    (b) Taxable years beginning after December 31, 1963--(1) Amount and 
time for payment of each installment--(i) In general. Paragraphs (1) 
through (4) of section 6154(a) contain four tables setting forth the 
percentages of estimated tax for each taxable year beginning after 
December 31, 1963, which shall be paid as installments of estimated tax 
and the date on or before which each such installment shall be paid. The 
date on or before which the declaration of estimated tax for a taxable 
year is required, under the provisions of section 6074(a), to be filed 
determines which of the four installment payment tables shall be used by 
the corporation for that taxable year. Therefore, if the declaration is 
required to be filed by the 15th day of the 4th, 6th, 9th, or 12th 
month, the estimated tax will be required to be paid in four, three, 
two, or one installment, respectively. However, see subdivision (iii) of 
this subparagraph for the rules applicable in case of the late filing of 
a declaration.
    (ii) Examples. The application of the tables in section 6154(a) may 
be illustrated by the following examples:

    Example (1). X, a corporation reporting on a calendar year basis, is 
required for the calendar year 1966 to file a declaration of estimated 
tax on or before the 15th day of the 4th month thereof (April 15, 1966) 
reporting an estimated tax liability of $250,000. Assuming that the 
original declaration is filed on or before April 15, 1966, and is not 
subsequently amended, X is required to pay its estimated tax in four 
installments. The first and second installments, each in the amount of 
$22,500 (9 percent of $250,000), are to be paid on or before April 15, 
1966, and June 15, 1966, respectively, and the third and fourth 
installments, each in the amount of $62,500 (25 percent of $250,000), 
are to be paid on or before September 15, 1966, and December 15, 1966, 
respectively.
    Example (2). Y, a corporation which reports on a calendar year 
basis, is required for the calendar year 1967 to file a declaration of 
estimated tax on or before the 15th day of the 6th month thereof (June 
15, 1967) reporting an estimated tax liability of $100,000. Assuming 
that the original declaration is filed on or before June 15, 1967, and 
is not subsequently amended, Y is required to pay its estimated tax in 
three installments. The first installment, in the amount of $18,666.67 
(18\2/3\ percent of $100,000), is to be paid on or before June 15, 1967, 
and the second and third installments, each in the amount of $29,666.67 
(29\2/3\ percent of $100,000), are to be paid on or before September 15, 
1967, and December 15, 1967, respectively.
    Example (3). Z, a corporation which reports on a fiscal year basis 
ending with June 30 of each year, is required for the fiscal year ended 
June 30, 1968, to file a declaration of estimated tax on or before the 
15th day of the fourth month thereof (October 15, 1967) reporting an 
estimated tax liability of $200,000. Assuming that the original 
declaration is filed on or before October 15, 1967, and is not 
subsequently amended, Z is required to pay its estimated tax in four 
installments. The first and second installments, each in the amount of 
$28,000 (14 percent of $200,000), are to be paid on or before October 
15, 1967, and December 15, 1967, respectively, and the third and fourth 
installments, each in the amount of $50,000 (25 percent of $200,000), 
are to be paid on or before March 15, 1968, and June 15, 1968, 
respectively.

    (iii) Late filing of declaration of estimated tax. If a declaration 
of estimated tax is filed after the date prescribed by section 6074(a) 
(determined without regard to any extension of time for filing the 
declaration under section 6081), the tables set forth in paragraphs (2), 
(3), and (4) of section 6154(a) do not apply except as provided in this 
subdivision. In such a case, there shall be paid at the time of the 
filing of the declaration all installments of the estimated tax which 
would have been payable under the appropriate table in section 6154(a) 
on or before such date of filing if the declaration had been timely 
filed in accordance with the provisions of section 6074(a). The 
remaining installments shall be paid at the times and in the amounts in 
which they would have been payable if the declaration had been timely 
filed. For example, Z, a corporation filing its returns on a calendar 
year basis, fails to file a declaration of estimated tax on April 15, 
1968, even though the requirements for filing a declaration were met 
before April 1, 1968. However, Z does file its declaration of estimated 
tax on July 1, 1968, disclosing an estimated tax of $75,000. As the 
first two installment dates specified in paragraph (1) of section 
6154(a)

[[Page 764]]

(the 15th days of the 4th and 6th months) have passed, Z is required to 
pay $28,500 (2 installments, each in the amount of 19 percent of 
$75,000) when the declaration is filed on July 1, 1968. If there are no 
subsequent amendments of the declaration for this year, Z will be 
required to pay installments, each in the amount of $18,750 (25 percent 
of $75,000), on or before September 15, 1968, and December 15, 1968, 
respectively.
    (2) Amendment of declaration--(i) In general. If any amendment of a 
declaration is filed, the amount of each remaining installment 
(including the installment due on the date of the filing of the 
amendment where the amendment is filed on an installment date), if any, 
is the amount which would have been payable as such installment if the 
new estimate had been the original estimate, adjusted as provided in 
this subdivision. The adjustment is for the difference between (a) the 
amount of estimated tax required to be paid before the date of the 
filing of the amendment and (b) the amount of estimated tax which would 
have been required to have been paid before such date if the new 
estimate had been the original estimate. The difference is divided by 
the number of remaining installments (including the installment due on 
the date of the filing of the amendment where the amendment is filed on 
an installment date), and the resulting amount is added to (if the 
amended declaration increases the amount of estimated tax) or subtracted 
from (if the amended declaration decreases the amount of the estimated 
tax) the amount which would have been payable on each remaining 
installment date if the new estimate had been the original estimate.
    (ii) Examples. The application of the provisions of this 
subparagraph may be illustrated by the following examples:

    Example (1). X, a calendar year corporation, determines that its 
estimated tax liability for the year 1967 is $100,000 and files a 
declaration of estimated tax by April 15, 1967, with an installment 
payment of $14,000. On June 15, 1967, the second installment payment of 
$14,000 is made. On July 1, 1967, X discovers that its 1967 estimated 
tax may reasonably be expected to be $150,000 and on September 15, 1967, 
files an amended declaration in that amount. The amounts to be paid on 
September 15, 1967, and December 15, 1967, are computed as follows:

Installment payments required to be made under the original             
 declaration before date of filing of amendment (14% of                 
 $100,000 is $14,000 x 2)...................................     $28,000
Installment payments which would have been required to be               
 made before date of filing of amendment if the original                
 declaration were in the amount of the amended declaration              
 (14% of $150,000 is $21,000 x 2)...........................      42,000
                                                             -----------
Difference..................................................      14,000
                                                             -----------
Amount of each installment payment due on September 15,                 
 1967, and December 15, 1967, computed as if the original               
 declaration were in the amount of the amended declaration              
 (25% of $150,000)..........................................     $37,500
Add: Amount of difference divided by number of remaining                
 installments ($14,0002)............................       7,000
                                                             -----------
Amount of each remaining installment (September 15, 1967,               
 and December 15, 1967).....................................      44,500
                                                             ===========
                                                                        

    Example (2). Assume the same facts as in example (1), except that 
instead of filing the amended declaration on September 15, 1967, X files 
an amended declaration on June 15, 1967, disclosing an estimated tax of 
$70,000. The installment payments for June 15, 1967, September 15, 1967, 
and December 15, 1967, are computed as follows:

Installment payment required to be made under the original              
 declaration before the date of filing of amendment (14% of             
 $100,000)..................................................     $14,000
Installment payment which would have been required to be                
 made before date of filing of amendment if the original                
 declaration were in the amount of the amended declaration              
 (14% of $70,000)...........................................       9,800
                                                             -----------
Difference..................................................       4,200
                                                             ===========
June 15, 1967, installment computation:                                 
Installment payment due on June 15, 1967, computed as if the            
 original declaration were in the amount of the amended                 
 declaration (14% of $70,000)...............................       9,800
Less: Amount of difference divided by number of remaining               
 installments ($4,2003).............................       1,400
                                                             -----------
Amount to be paid as an installment on June 15, 1967........       8,400
                                                             -----------
September 15, 1967, and December 15, 1967, installments                 
 computation:                                                           
Amount of each installment payment due on September 15,                 
 1967, and December 15, 1967, computed as if the original               
 declaration were in the amount of the amended declaration              
 (25% of $70,000)...........................................      17,500
Less: Amount of difference divided by number of remaining               
 installments ($4,2003).............................       1,400
                                                             -----------
Amount of each remaining installment (September 15, 1967,               
 and December 15, 1967).....................................      16,100
                                                             ===========
                                                                        

    (c) Installments paid in advance. A corporation may, at its 
election, pay any

[[Page 765]]

installment of its estimated tax in advance of the due date.
    (d) Considered payment of income tax. Payments of estimated tax 
shall be considered payments on account of the income tax liability for 
the taxable year. Hence the amount of estimated tax paid shall be 
entered on the income tax return and applied in payment of the tax 
liability shown thereon.

[T.D. 6768, 29 FR 14924, Nov. 4, 1964]



Sec. 1.6154-2   Short taxable years.

    (a) Taxable years beginning on or before December 31, 1963--(1) In 
general. In the case of a corporation filing a declaration for a short 
taxable year beginning on or before December 31, 1963, the amount of the 
estimated tax required to be paid shall be paid as follows:
    (i) If the short taxable year is a period of more than 9 months and 
the declaration is required to be filed on or before the 15th day of the 
9th month, the amount of the estimated tax required to be paid shall be 
paid in 2 installments; the 1st on or before the 15th day of the 9th 
month and the 2d on or before the 15th day of the last month of the 
short taxable year.
    (ii) If the short taxable year is a period of 9 or more months and 
the declaration is not required to be filed until the 15th day of the 
last month of the short taxable year, the amount of the estimated tax 
required to be paid shall be paid in full on or before the 15th day of 
the last month of the short taxable year.
    (2) Examples. The application of the provisions of subparagraph (1) 
of this paragraph may be illustrated by the following examples:

    Example (1). If a corporation changes from a calendar year to a 
fiscal year beginning November 1, 1956, and ending October 31, 1957, a 
declaration is required on or before September 15, 1956, for the short 
taxable year January 1, 1956, to October 31, 1956, if such corporation 
otherwise meets the requirements of section 6016(a) on or before August 
31, 1956. In such case the first installment of the estimated tax must 
be paid with the declaration filed on September 15, 1956. The second 
installment must be paid on or before October 15, 1956, the 15th day of 
the last month of the short taxable year.
    Example (2). If, in the first example, the corporation did not meet 
the requirements of section 6016(a) until after August 31, 1956, but 
before October 1, 1956, the declaration would have been due on October 
15, 1956. In such case the amount of the estimated tax required to be 
paid must be paid in full with the declaration filed on October 15, 
1956.

    (b) Taxable years beginning after December 31, 1963--(1) In general. 
In the case of a short taxable year which begins after December 31, 
1963, and in respect of which a declaration of estimated tax is required 
to be filed (see paragraph (b) of Sec. 1.6074-2), the amount of, and 
time for payment of, each installment of estimated tax shall be 
determined by paragraphs (1) to (4), inclusive, of section 6154(a), 
except that in the case of a short taxable year ending after November 
30, 1964, any estimated tax payable in installments which is not paid 
before the 15th day of the last month of the short taxable year (whether 
or not the date otherwise specified in section 6154(a) for payment has 
arrived) shall be paid on such 15th day of the last month of the short 
taxable year.
    (2) Examples. The application of the provisions of subparagraph (1) 
of this paragraph may be illustrated by the following examples:

    Example (1). X, a corporation filing on a calendar year basis, 
changes to a fiscal year beginning September 1, 1965, and ending August 
31, 1966, and is required to file a declaration on or before April 15, 
1965, for the short taxable year January 1, 1965, to August 31, 1965. X 
must make two 4 percent installment payments of the estimated tax, the 
first on or before April 15, 1965, and the second on or before June 15, 
1965, and must pay 50 percent (25 percent for the 3d installment plus 25 
percent for the 4th installment) of the estimated tax on or before 
August 15, 1965 (the 15th day of the last month of the short taxable 
year), as the last installment.
    Example (2). If, in the first example, X does not meet the 
requirements of section 6016(a) until June 15, 1965, the declaration is 
due on or before August 15, 1965. X is required to pay 58 percent of the 
estimated tax on or before August 15, 1965 (the 15th day of the last 
month of the short taxable year).

    (3) Late filing of declaration of estimated tax. In the case of a 
declaration of estimated tax for a short taxable year beginning after 
December 31, 1963, filed after the date prescribed by section 6074(a) 
(determined without regard to any extension of time for filing the 
declaration under section 6081), the provisions of paragraph (b)(1)(iii) 
of

[[Page 766]]

Sec. 1.6154-1 shall be applied in determining the amount of and time for 
payment of each installment. However, in the case of short taxable years 
beginning after December 31, 1963, and ending after November 30, 1964, 
where, under the provisions of paragraph (b)(1)(iii) of Sec. 1.6154-1, 
installments are to be paid after the close of the short taxable year, 
such installments shall be paid on or before the 15th day of the last 
month of the short taxable year.
    (4) Amended declarations. In the case of an amended declaration of 
estimated tax for a short taxable year beginning after December 31, 
1963, filed in accordance with section 6074(b), the provisions of 
paragraph (b)(2) of Sec. 1.6154-1 shall apply to determine the amount of 
each remaining installment. However, where, under the provisions of such 
paragraph (b)(2), installments are to be paid after the close of the 
short taxable year, such installments shall be paid on or before the 
15th day of the last month of the short taxable year.

[T.D. 6768, 29 FR 14925, Nov. 4, 1964]



Sec. 1.6154-3   Extension of time for paying estimated tax.

    An extension of time granted a corporation under section 6081 for 
filing the declaration of estimated tax automatically extends the time 
for paying the estimated tax (without interest) for the same period. See 
Sec. 1.6074-3 for rules relating to extensions of time for filing 
declarations of estimated tax by corporations. Except as provided in 
paragraph (b) of Sec. 301.6091-1 (relating to hand-carried documents), 
an application for an extension of time for paying an installment of the 
estimated tax shall be addressed to the internal revenue officer with 
whom the taxpayer files its declaration. Each application must contain a 
full recital of the causes for the delay. Any such extension will not 
relieve the taxpayer from the addition to the tax imposed by section 
6655, and the period of the underpayment will be determined under 
section 6655(c) without regard to such extension.

[T.D. 6950, 33 FR 5357, Apr. 4, 1968]



Sec. 1.6154-4   Use of Government depositaries.

    For provisions relating to the use of Federal Reserve banks and 
authorized financial institutions in depositing the taxes see 
Sec. 1.6302-1.

(Approved by the Office of Management and Budget under control number 
1545-0257)

[T.D. 6914, 32 FR 3819, Mar. 8, 1967, as amended by T.D. 7953, 49 FR 
19644, May 9, 1984]



Sec. 1.6154-5  Definition of estimated tax.

    For taxable years beginning after December 31, 1976, the term 
estimated tax means the excess of--
    (a) The amount which the corporation estimates as its income tax 
liability for the taxable year under section 11 or 1201(a), or 
subchapter L of chapter 1 of the Code, whichever is applicable, over
    (b) The sum of--
    (1) Any estimated credits against tax provided by part IV of 
subchapter A of chapter 1 of the Code, plus
    (2) For taxable years ending after February 29, 1980, the amount 
which the corporation estimates will be the amount of such corporation's 
overpayment of windfall profit tax imposed by section 4986 of the Code 
for the taxable year. For this purpose, the amount of such overpayment 
is the amount by which such corporation's aggregate windfall profit tax 
liability for the taxable year as a producer of crude oil is reasonably 
expected to be exceeded by withholding of windfall profit tax for the 
taxable year.

(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954 
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654, 
6655, and 7805))

[T.D. 8016, 50 FR 11855, Mar. 26, 1985]

                     Extensions of Time for Payment

    Source: Sections 1.6161-1 to 1.6165-1 contained in T.D. 6500, 25 FR 
12140, Nov. 26, 1960, unless otherwise noted.



Sec. 1.6161-1   Extension of time for paying tax or deficiency.

    (a) In general--(1) Tax shown or required to be shown on return. A 
reasonable extension of the time for payment of the amount of any tax 
imposed by subtitle A of the Code and shown or required to be shown on 
any return, or

[[Page 767]]

for payment of the amount of any installment of such tax, may be granted 
by the district directors (including the Director of International 
Operations) at the request of the taxpayer. The period of such extension 
shall not be in excess of six months from the date fixed for payment of 
such tax or installment, except that if the taxpayer is abroad the 
period of the extension may be in excess of six months.
    (2) Deficiency. The time for payment of any amount determined as a 
deficiency in respect of tax imposed by chapter 1 of the Code, or for 
the payment of any part thereof, may, at the request of the taxpayer, be 
extended by the internal revenue officer to whom the tax is required to 
be paid for a period not to exceed 18 months from the date fixed for 
payment of the deficiency, as shown on the notice and demand, and, in 
exceptional cases, for a further period not in excess of 12 months. No 
extension of the time for payment of a deficiency shall be granted if 
the deficiency is due to negligence, to intentional disregard of rules 
and regulations, or to fraud with intent to evade tax.
    (b) Undue hardship required for extension. An extension of the time 
for payment shall be granted only upon a satisfactory showing that 
payment on the due date of the amount with respect to which the 
extension is desired will result in an undue hardship. The extension 
will not be granted upon a general statement of hardship. The term 
``undue hardship'' means more than an inconvenience to the taxpayer. It 
must appear that substantial financial loss, for example, loss due to 
the sale of property at a sacrifice price, will result to the taxpayer 
for making payment on the due date of the amount with respect to which 
the extension is desired. If a market exists, the sale of property at 
the current market price is not ordinarily considered as resulting in an 
undue hardship.
    (c) Application for extension. An application for an extension of 
the time for payment of the tax shown or required to be shown on any 
return, or for the payment of any installment thereof, or for the 
payment of any amount determined as a deficiency shall be made on Form 
1127 and shall be accompanied by evidence showing the undue hardship 
that would result to the taxpayer if the extension were refused. Such 
application shall also be accompanied by a statement of the assets and 
liabilities of the taxpayer and an itemized statement showing all 
receipts and disbursements for each of the 3 months immediately 
preceding the due date of the amount to which the application relates. 
The application, with supporting documents, must be filed on or before 
the date prescribed for payment of the amount with respect to which the 
extension is desired. If the tax is required to be paid to the Director 
of International Operations, such application must be filed with him, 
otherwise, the application must be filed with the applicable district 
director referred to in paragraph (a) or (b) of Sec. 1.6091-2, 
regardless of whether the return is to be filed with, or tax is to be 
paid to, such district director. The application will be examined, and 
within 30 days, if possible, will be denied, granted, or tentatively 
granted subject to certain conditions of which the taxpayer will be 
notified. If an additional extension is desired, the request therefor 
must be made on or before the expiration of the period for which the 
prior extension is granted.
    (d) Payment pursuant to extension. If an extension of time for 
payment is granted, the amount the time for payment of which is so 
extended shall be paid on or before the expiration of the period of the 
extension without the necessity of notice and demand. The granting of an 
extension of the time for payment of the tax or deficiency does not 
relieve the taxpayer from liability for the payment of interest thereon 
during the period of the extension. See section 6601 and Sec. 301.6601-1 
of this chapter (Regulations on Procedure and Administration). Further, 
the granting of an extension of the time for payment of one installment 
of the tax does not extend the time for payment of subsequent 
installments.
    (e) Cross reference. For extensions of time for payment of estimated 
tax, see Secs. 1.6073-4 and 1.6074-3.

[T.D. 6500, 25 FR 12140, Nov. 26, 1960, as amended by T.D. 6950, 33 FR 
5357, Apr. 4, 1968; T.D. 7260, 38 FR 4259, Feb. 12, 1973]

[[Page 768]]



Sec. 1.6162-1   Extension of time for payment of tax on gain attributable to liquidation of personal holding companies.

    (a) In general. (1) If it is shown to the satisfaction of the 
district director that undue hardship to the taxpayer will result from 
the payment of such portion of the amount determined as the tax under 
chapter 1 of the Code by the taxpayer as is attributable to the short-
term or long-term capital gain derived by the taxpayer from the receipt 
by him of property other than money on a complete liquidation of a 
corporation to which section 331(a)(1) or 342 applies, the district 
director may grant an extension of time for the payment of such portion 
of the tax. For the meaning of the term ``undue hardship'', see 
paragraph (b) of Sec. 1.6161-1.
    (2) The extension of time for payment shall be for a period not in 
excess of five years. The extension shall only be granted for a taxable 
year beginning before January 1, 1956, and shall apply only if the 
corporation, for its taxable year preceding the year in which occurred 
the complete liquidation (or the first of the series of distributions in 
complete liquidation), was, under the law applicable to such taxable 
year, a personal holding company or a foreign personal holding company.
    (b) Requirement of bond. As a condition to the granting of an 
extension of time for payment, the taxpayer will usually be required by 
the district director to furnish a bond as provided in section 6165 and 
the regulations thereunder. For other provisions with respect to bonds, 
see section 7101 and the regulations in part 301 of this chapter 
(Regulations on Procedure and Administration).



Sec. 1.6164-1   Extensions of time for payment of taxes by corporations expecting carrybacks.

    (a) In general. If a corporation in any taxable year files a 
statement with respect to an expected net operating loss carryback from 
such taxable year, such corporation may extend the time for the payment 
of all or part of any tax imposed by subtitle A of the Code for the 
taxable year immediately preceding such taxable year to the extent and 
subject to the limitations provided in section 6164. A corporation may 
extend the time for payment with respect to only such taxes as meet the 
following requirements:
    (1) The tax must be one imposed by subtitle A of the Code;
    (2) The tax must be for the taxable year immediately preceding the 
taxable year of the expected net operating loss;
    (3) The tax must be shown on the return or must be assessed within 
the taxable year of the expected net operating loss; and
    (4) The tax must not have been paid or required to have been paid 
prior to the filing of the statement.
    (b) Statement for purpose of extending time for payment. (1) The 
time for payment of the tax is automatically extended upon the filing of 
a statement on Form 1138 by the corporation with the district director 
for the district where the tax is payable. The statement on Form 1138 
must be filled out in accordance with the instructions accompanying the 
form, and all information required by the form and the instructions must 
be furnished by the taxpayer. The district director, upon request, will 
furnish a receipt for any statement filed. Such receipt will show the 
date the statement was filed.
    (2) The period of extension is that provided in section 6164(d) and 
Sec. 1.6164-5 unless sooner terminated by action of either the district 
director or the corporation.



Sec. 1.6164-2   Amount of tax the time for payment of which may be extended.

    (a) Total amount to which extension may relate. The total amount of 
tax the time for payment of which may be extended under section 6164 may 
not exceed the amount of the reduction of the taxes previously 
determined attributable to the expected carryback.
    (b) Amount of tax to which extension may relate. (1) The taxpayer 
shall specify on Form 1138 the kind of tax and the amount thereof the 
time for payment of which is to be extended. The amount of tax to which 
an extension may relate shall not exceed the amount of such tax shown on 
the return as filed, increased by any amount assessed as a deficiency 
(or as interest or addition to the tax) prior to the date of filing the

[[Page 769]]

statement and decreased by any amount paid or required to be paid prior 
to such date. In determining the amount of tax required to be paid prior 
to the date of filing the statement, only the following amounts shall be 
taken into consideration:
    (i) The amount of the tax shown on the return as filed; and
    (ii) Any amount assessed as a deficiency (or as interest or addition 
to the tax) if the tenth day after notice and demand for its payment 
occurs prior to the date of the filing of the statement.
    (2) Delinquent installments are to be considered amounts required to 
be paid prior to the date of filing the statement. In the case of any 
authorized extension of time under sections 6161 and 6162, the amount of 
tax the time for payment of which is so extended is not to be considered 
required to be paid prior to the end of such extension. Similarly, any 
amount assessed as a deficiency (or as interest or addition to the tax) 
is not to be considered required to be paid prior to the date of the 
filing of the statement unless the tenth day after notice and demand for 
its payment falls prior to the date of the filing of the statement.
    (3) The taxpayer may choose to extend the time for payment of all of 
one or more taxes, or it may choose to extend the time for payment of 
portions of several taxes. The taxes chosen by the taxpayer need not be 
those taxes which are affected by the carryback.



Sec. 1.6164-3   Computation of the amount of reduction of the tax previously determined.

    (a) Tax previously determined. The taxpayer is to determine the 
amount of the reduction, attributable to the expected carryback, in the 
aggregate of the taxes previously determined for taxable years prior to 
the taxable year of the expected net operating loss. The tax previously 
determined is to be ascertained in accordance with the method prescribed 
in section 1314(a). Thus, the tax previously determined will be the tax 
shown on the return as filed, increased by any amounts assessed (or 
collected without assessment) as deficiencies prior to the date of the 
filing of the statement, and decreased by any amounts abated, credited, 
refunded, or otherwise repaid prior to such date. Any items as to which 
the Internal Revenue Service and the taxpayer are in disagreement at the 
time of the filing of the statement shall be taken into account in 
ascertaining the tax previously determined only if, and to the extent 
that, they were reported in the return, or were reflected in any amounts 
assessed (or collected without assessment) as deficiencies, or in any 
amounts abated, credited, refunded, or otherwise repaid, prior to the 
date of the filing of the statement. The tax previously determined will 
reflect the foreign tax credit and the credit for tax withheld at source 
provided in section 32.
    (b) Reduction attributable to the expected carryback. The reduction, 
attributable to the expected carryback or related adjustments, in any 
tax previously determined is to be ascertained by applying the expected 
carryback as if it were a determined net operating loss carryback, in 
accordance with the provisions of section 172 and the regulations 
thereunder. Items must be taken into account only to the extent that 
such items were included in the return, or were reflected in amounts 
assessed (or collected without assessment) as deficiencies, or in 
amounts abated, credited, refunded, or otherwise repaid, prior to the 
date of the filing of the statement. Thus, for example, if the taxpayer 
claims a deduction for depreciation of $10,000 in its return and the 
Internal Revenue Service asserts that only $4,000 is properly 
deductible, no change is to be made in the $10,000 depreciation 
deduction as shown by the taxpayer on his return unless a deficiency has 
been assessed, or an amount collected without assessment, prior to the 
date of filing of the statement as a result of a change in the 
depreciation deduction, or unless such change in the depreciation 
deduction was reflected in an amount abated, credited, refunded, or 
otherwise repaid prior to such date.

[T.D. 6500, 25 FR 12140, Nov. 26, 1960, as amended by T.D. 6862, 30 FR 
14432, Nov. 18, 1965]

[[Page 770]]



Sec. 1.6164-4   Payment of remainder of tax where extension relates to only part of the tax.

    (a) Time for payment. If an extension of time relates to only part 
of the tax, the time for payment of the remainder of the tax shall be 
considered to be the dates on which payments would have been required if 
such remainder had been the tax and the taxpayer had elected to pay the 
tax in installments as provided in section 6152(a).
    (b) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Corporation X, which keeps its books and makes its tax 
returns on the calendar year basis, filed its income tax return for 1956 
on March 15, 1957. The corporation showed a tax of $1,000 on its return 
and paid 50 percent of such tax, or $500 on March 15, 1957. On June 3, 
1957, Corporation X, pursuant to the provisions of section 6164, 
extended the time for payment of $400 of such tax. The remainder of the 
tax the time for payment of which was not so extended, i.e., $600, is to 
be considered the tax for purposes of determining when it is to be paid. 
The remainder is considered to be due on the dates on which payment 
would have been required if such remainder had been the tax. Since the 
taxable year ended on December 31, 1956, the tax is payable in two equal 
installments of $300 each on March 15, 1957, and June 17, 1957. The 
taxpayer, having paid $500 on March 15, 1957, will have $100 to pay on 
June 17, 1957.



Sec. 1.6164-5   Period of extension.

    If the time for the payment of any tax has been extended pursuant to 
section 6164, such extension shall expire:
    (a) On the last day of the month in which falls the last date 
prescribed by law (including any extension of time granted the taxpayer) 
for the filing of the return for the taxable year of the expected net 
operating loss; or
    (b) If an application for a tentative carryback adjustment provided 
in section 6411 with respect to such loss is filed before the expiration 
of the period specified in paragraph (a) of this section, on the date on 
which notice is mailed by registered mail prior to September 3, 1958, 
and by either registered or certified mail on and after September 3, 
1958, to the taxpayer that such application is allowed or disallowed in 
whole or in part.



Sec. 1.6164-6   Revised statements.

    (a) Requirements and effect. A corporation may file more than one 
statement under section 6164 with respect to any one taxable year. Each 
statement is to be considered a new statement and not an amendment of 
any prior statement. Each such new statement is to be in lieu of the 
last statement previously filed with respect to the taxable year. The 
new statement may extend the time for payment of a greater or lesser 
amount of tax than was extended under the prior statement or may change 
the kind of tax the time for payment of which is to be extended. The 
extension may not relate to any amount of tax which was paid or required 
to be paid prior to the date of filing the new statement. Any amount of 
tax the time for payment of which was extended under a prior statement, 
however, may continue to be extended under the new statement. If the 
amount the time for payment of which is extended under the new statement 
is less than the amount so extended under the last statement previously 
filed, the extension of time shall be terminated on the date the new 
statement is filed as to the difference between the two amounts. See 
Sec. 1.6164-8 for the dates on which such difference must be paid. If a 
corporation pays any amount of tax, the time for payment of which was 
extended, prior to the date the extension would otherwise terminate, the 
extension with respect to such amount shall be deemed terminated, 
without regard to whether a new statement is filed, on the date such 
amount is paid. The corporation shall indicate on each new statement 
filed that it has already filed one or more prior statements with 
respect to the taxable year. The corporation shall likewise indicate the 
date each prior statement was filed and the amount of each tax the time 
for payment of which was extended under each prior statement.
    (b) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Corporation Y, which keeps its books and makes its tax 
returns on the calendar year basis, filed its income tax return for 1956 
on March 15, 1957, showing a tax of $100,000. At the same time it filed 
a statement under section 6164 in which it stated

[[Page 771]]

that it expected to have a net operating loss of $75,000 in 1957 and 
that the reduction in the tax previously determined for 1955 (the second 
taxable year preceding the year of the expected net operating loss) 
attributable to the expected net operating loss carryback resulting from 
such expected loss, would be $39,000. The corporation accordingly 
extended the time for payment of $39,000 of its income tax for 1956, and 
paid $30,500 (50 percent of the excess of $100,000 over $39,000) of such 
tax on March 15, 1957 (see section 6164(c) and Sec. 1.6164-4). As a 
result of its operations during the next several months, the corporation 
filed a second statement on June 3, 1957, in which it stated that its 
expected net operating loss for 1957 would amount to $150,000 and that 
the corresponding reduction in the tax for 1955 would amount to $78,000. 
Corporation Y under the new statement may extend the time for payment of 
$30,500, the installment due on June 17, 1957, and the time for payment 
of the $39,000 extended under the first statement filed on March 15, 
1957, may continue to be extended under the second statement. The 
$30,500 which was paid on March 15, 1957, will not be affected by the 
second statement filed on June 3, 1957.



Sec. 1.6164-7   Termination by district director.

    (a) After an examination of the statement filed by the corporation 
is made. The district director is authorized to make such examination of 
the statements filed as he deems necessary and practicable. If, upon 
such examination as he may make, the district director believes that, as 
of the time he makes the examination, all or any part of the statement 
is in a material respect erroneous or unreasonable, he will terminate 
the extension as to any part of the amount to which such extension 
relates which he deems should be terminated.
    (b) Jeopardy. If the district director believes that the collection 
of any amount to which an extension under section 6164 relates is in 
jeopardy, he will immediately terminate the extension. In the case of 
such a termination, notice and demand shall be made by the district 
director for payment of such amount, and there may be no further 
extension of time under section 6164 with respect to such amount.



Sec. 1.6164-8   Payments on termination.

    (a) In general. If an extension of time under section 6164 is 
terminated with respect to any amount either (1) by the filing of a new 
statement by the taxpayer under section 6164(e) extending the time for 
payment of a lesser amount than was extended in a prior statement, or 
(2) by action of the district director under section 6164(f) after 
making an examination of the statement filed by the corporation, no 
further extension of time may be made under section 6164 with respect to 
such amount. The time for payment of such amount shall be the dates on 
which payments would have been required if there had been no extension 
with respect to such amount and the taxpayer had elected under section 
6152(a) to pay the tax in installments.
    (b) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Corporation Z, which keeps its books and makes its tax 
returns on the calendar year basis, filed its income tax return for 1956 
on March 15, 1957, showing a tax of $100,000. At the same time it filed 
a statement under section 6164 extending the time for payment of the 
entire $100,000 on the basis of an expected net operating loss carryback 
from 1957. On April 10, 1957, the corporation filed a new statement 
indicating that the reduction, attributable to the carryback from 1957, 
in its income tax for 1956, would only be $80,000, and thus terminated 
the above extension of $20,000. The time for payment of such $20,000 may 
not be extended again, and such $20,000 is payable as if it were the tax 
for 1956 and Corporation Z had elected to pay such tax in installments. 
That is, $10,000 is payable on March 15, 1957, and $10,000 payable on 
June 17, 1957. Inasmuch as the March 15 date had already passed when the 
Corporation Z terminated the extension with respect to the $20,000, 
$10,000 is payable immediately upon such termination, and the other 
installment of $10,000 is payable on June 17, 1957. This example would 
also apply if the extension of time for payment of the $20,000 were 
terminated instead by the district director on April 10, 1957.



Sec. 1.6164-9   Cross references.

    For provisions with respect to interest due on amounts the payment 
of which is extended under section 6164, see section 6601 and paragraph 
(e) of Sec. 301.6601-1 of this chapter (Regulations on Procedure and 
Administration). For extensions of time under section 6164 in

[[Page 772]]

the case of corporations making or required to make consolidated 
returns, see Sec. 1. 1502-77(a).

[T.D. 6500, 25 FR 12140, Nov. 26, 1960, as amended by T.D. 7244, 37 FR 
28897, Dec. 30, 1972]



Sec. 1.6165-1   Bonds where time to pay the tax or deficiency has been extended.

    The district director, including the Director of International 
Operations, may, as a condition to the granting of an extension of time 
within which to pay any tax or any deficiency therein, require the 
taxpayer to furnish a bond in an amount not exceeding double the amount 
of the tax with respect to which the extension is granted. Such bond 
shall be furnished in accordance with the provisions contained in 
section 7101 and the regulations in part 301 of this chapter 
(Regulations on Procedure and Administration).

                               COLLECTION

                           General Provisions



Sec. 1.6302-1  Use of Government depositaries in connection with corporation income and estimated income taxes and certain taxes of tax-exempt organizations.

    (a) Requirement. A corporation (and, for taxable years beginning 
after December 31, 1986, any organization subject to the tax imposed by 
section 511, and any private foundation subject to the tax imposed by 
section 4940) shall deposit with an authorized depositary of Federal 
taxes all payments of tax imposed by chapter 1 of the Code (or treated 
as so imposed by section 6154 (h)), including any payments of estimated 
tax, on or before the date otherwise prescribed for paying such tax. 
This paragraph does not apply to a foreign corporation or entity which 
has no office or place of business in the United States.
    (b) Depositary forms. A deposit required to be made by this section 
shall be made separately from a deposit required by any other section. A 
corporation may make one, or more than one, remittance of the amount 
required by this section to be deposited. Each remittance shall be 
accompanied by a Federal Tax Deposit form which shall be prepared in 
accordance with the instructions applicable thereto. The remittance, 
together with the Federal Tax Deposit form, shall be forwarded to a 
financial institution authorized as a depositary for Federal taxes in 
accordance with 31 CFR part 214 or, at the election of the corporation, 
to a Federal Reserve bank. For procedures governing the deposit of 
Federal taxes at a Federal Reserve bank, see 31 CFR part 214.7. The 
timeliness of the deposit will be determined by the date stamped on the 
Federal Tax Deposit form by the Federal Reserve bank or the authorized 
financial institution or, if section 7502(e) applies, by the date the 
deposit is treated as received under section 7502(e). Each corporation 
making deposits under this section shall report on the return, for the 
period with respect to which such deposits are made, information 
regarding such deposits according to the instructions that apply to such 
return. Amounts deposited under this section shall be considered as 
payment of the tax.
    (c) Procurement of the prescribed forms. Copies of the Federal Tax 
Deposit form will so far as possible be furnished corporations. A 
corporation will not be excused from making a deposit, however, by the 
fact that no form has been furnished to it. Corporations not supplied 
with the proper form should make application therefor to the district 
director (or director of a service center) in ample time to make the 
required deposits within the time prescribed. The corporation may secure 
the form or additional forms by applying therefor and supplying the 
district director or director of a service center with its name, 
identification number, address and the taxable year to which the 
deposits will relate.
    (d) Failure to deposit. For provisions relating to the penalty for 
failure to make a deposit within the prescribed time, see the provisions 
of Sec. 301.6656-1 of this chapter (Regulations on Procedure and 
Administration).

(Approved by the Office of Management and Budget under control number 
1545-0257)

[T.D. 6914, 32 FR 3820, Mar. 8, 1967, as amended by T.D. 6941, 32 FR 
18040, Dec. 16, 1967; T.D. 7293, 38 FR 32804, Nov. 28, 1973; T.D. 7953, 
49 FR 19644, May 9, 1984; T.D. 8157, 52 FR 33809, Sept. 9, 1987]

[[Page 773]]




Sec. 1.6302-1T  Use of Government depositaries in connection with corporation income and estimated income taxes and certain taxes of tax-exempt organizations--
          deposits required to be made by electronic funds transfer 
          after December 31, 1994 (temporary).

    (a)-(b)(1) [Reserved]
    (b)(2) Deposits by electronic funds transfer. For the requirement to 
deposit corporation income and estimated income taxes and certain taxes 
of tax-exempt organizations by electronic funds transfer, see 
Sec. 31.6302-1T(h) of this chapter. A taxpayer not required to deposit 
by electronic funds transfer pursuant to Sec. 31.6302-1T(h) of this 
chapter remains subject to the rules of Sec. 1.6302-1(b).

[T.D. 8553, 59 FR 35416, July 11, 1994]




Sec. 1.6302-2   Use of Government depositaries for payment of tax withheld on nonresident aliens and foreign corporations.

    (a) Time for making deposits--(1) Deposits for 1973 and subsequent 
years--(i) Monthly deposits. Except as provided in subdivisions (ii) and 
(iv) of this subparagraph, every withholding agent who, pursuant to 
chapter 3 of the Code, has accumulated at the close of any calendar 
month beginning on or after January 1, 1973, an aggregate amount of 
undeposited taxes of $200 or more shall deposit such aggregate amount 
with a Federal Reserve bank or authorized financial institution (see 
paragraph (b)(1)(ii) of this section) within 15 days after the close of 
such calendar month. However, the preceding sentence shall not apply if 
the withholding agent has made a deposit of taxes pursuant to 
subdivision (ii) of this subparagraph with respect to a quarter-monthly 
period which occurred during such month.
    (ii) Quarter-monthly deposits. If at the close of any quarter-
monthly period within a calendar month beginning on or after January 1, 
1973, the aggregate amount of undeposited taxes required to be withheld 
pursuant to chapter 3 of the Code is $2,000 or more, the withholding 
agent shall deposit such aggregate amount in a Federal Reserve bank or 
authorized financial institution within 3 banking days after the close 
of such quarter-monthly period. For purposes of determining the amount 
of undeposited taxes at the close of a quarter-monthly period, 
undeposited taxes withheld with respect to items paid during a prior 
quarter-monthly period shall not be taken into account if the 
withholding agent made a deposit with respect to such prior quarter-
monthly period. A withholding agent will be considered to have complied 
with the requirements of this subdivision with respect to the close of a 
quarter-monthly period if:
    (a) His deposit is not less than 90 percent of the aggregate amount 
of the taxes required to be withheld during the period for which the 
deposit is made, and
    (b) If such quarter-monthly period occurs in a month other than 
December, he deposits any underpayment with his first deposit which is 
otherwise required by this subparagraph to be made after the 15th day of 
the following month. Any underpayment of $200 or more for a quarter-
monthly period closing during December must be deposited on or before 
the following January 31.

For purposes of this subparagraph, the term ``quarter-monthly period'' 
means the first 7 days of a calendar month, the 8th day through the 15th 
day of a calendar month, the 16th day through the 22d day of a calendar 
month, or the portion of a calendar month following the 22d day of such 
month.
    (iii) Excess deposits. The excess (if any) of a deposit over the 
actual taxes for a monthly or quarter-monthly deposit period shall be 
applied in order of time to each of the withholding agent's succeeding 
deposits with respect to the same calendar year, until exhausted, to the 
extent that the amount by which the taxes for a subsequent deposit 
period exceed the deposit for such subsequent deposit period.
    (iv) Annual deposits. If at the close of the month of December of 
each calendar year beginning on or after January 1, 1973, the aggregate 
amount of undeposited taxes required to be withheld pursuant to chapter 
3 of the Code is less than $200, the withholding agent may deposit such 
aggregate amount in a Federal Reserve bank or authorized financial 
institution on or before

[[Page 774]]

March 15 of the following calendar year. If such aggregate amount is not 
so deposited, it shall be remitted in accordance with paragraph (a)(2) 
of Sec. 1.1461-3.
    (2) Cross reference. For rules relating to the adjustment of 
deposits, see Sec. 1.1461-4(b) and Sec. 1.6414-1. For rules requiring 
payment of any undeposited tax, see Sec. 1.1461-3.
    (b) Depositary forms--(1) Remittances. Each remittance of amounts 
required to be deposited by paragraph (a) of this section shall be 
accompanied by a Federal Tax Deposit form which shall be prepared in 
accordance with the instructions applicable thereto. The remittance, 
together with the Federal Tax Deposit form, shall be forwarded to a 
financial institution authorized as a depositary for Federal taxes in 
accordance with 31 CFR part 214 or, at the election of the withholding 
agent, to a Federal Reserve bank. For procedures governing the deposit 
of Federal taxes at a Federal Reserve bank, see 31 CFR 214.7. The 
timeliness of the deposit will be determined by the date stamped on the 
Federal Tax Deposit form by the Federal Reserve bank or the authorized 
financial institution or, if section 7502(e) applies, by the date the 
deposit is treated as received under section 7502(e). Each withholding 
agent making deposits under this section shall report on the return, for 
the period with respect to which such deposits are made, information 
regarding such deposits according to the instructions that apply to such 
return.
    (2) Voluntary deposits. An amount of tax which is not required to be 
deposited may nevertheless be deposited if the withholding agent so 
desires.
    (3) Separation of deposits. A deposit required by paragraph (a) of 
this section for any period occurring in one calendar year shall be made 
separately from any deposit for any period occurring in another calendar 
year. In addition, a deposit required to be made by paragraph (a) of 
this section shall be made separately from a deposit required by any 
other section.
    (4) Multiple remittances. A withholding agent may make one, or more 
than one, remittance of the amount required to be deposited if each 
remittance is accompanied by the applicable deposit form.
    (5) Time deemed paid. In general amounts deposited under this 
section shall be considered as paid on the last day prescribed for 
filing the return (Form 1042) in respect of such tax (determined without 
regard to any extension of time for filing such return), or at the time 
deposited, whichever is later. For purposes of section 6511 and the 
regulations thereunder, relating to period of limitation on credit or 
refund, if an amount is so deposited prior to April 15th of a calendar 
year immediately succeeding the calendar year in which occurs the period 
for which such amount was so deposited, such amount shall be considered 
as paid on such April 15th.
    (c) Procurement of Federal Tax Deposit form. Copies of the Federal 
Tax Deposit form will so far as possible be furnished withholding 
agents. A withholding agent will not be excused from making a deposit, 
however, by the fact that no form has been furnished to it. A 
withholding agent not supplied with the form should make application 
therefor in ample time to make the required deposits within the time 
prescribed. The withholding agent may secure the form or additional 
forms by applying therefor and supplying its name, identification 
number, address, and the taxable period to which the deposit will 
relate. Copies of the Federal Tax Deposit form may be secured by 
application therefor to the district director or director of a service 
center.
    (d) Penalties for failure to make deposits. For provisions relating 
to the penalty for failure to make a deposit within the time prescribed 
by this section, see Sec. 301.6656-1 of this chapter (Procedure and 
Administration Regulations).
    (e) Saturday, Sunday, or legal holidays. For provisions relating to 
the time for performance of acts where the last day falls on Saturday, 
Sunday, or a legal holiday, see Sec. 301.7503-1 of this chapter 
(Procedure and Administration Regulations).
    (f) Employer identification number. For the definition of the term 
``employer identification number'', see Sec. 301.7701-12 of this chapter 
(Procedure and Administration Regulations). For provisions relating to 
the penalty for failure to

[[Page 775]]

include the employer identification number in a return, statement, or 
other document, see Sec. 301.6676-1 of such chapter.
    (g) Effective date. Except as otherwise provided, this section shall 
apply to tax required to be withheld under chapter 3 of the Code after 
1966.

(Approved by the Office of Management and Budget under control number 
1545-0257)

[T.D. 6922, 32 FR 8713, June 17, 1967, as amended by T.D. 6941, 32 FR 
18040, Dec. 16, 1967; T.D. 7243, 38 FR 22, Jan. 3, 1973; T.D. 7953, 49 
FR 19644, May 9, 1984]




Sec. 1.6302-2T  Use of Government depositaries for payment of tax withheld on nonresident aliens and foreign corporations--deposits required to be made by 
          electronic funds transfer after December 31, 1994 (temporary).

    (a)-(b) [Reserved]
    (c) Deposits by electronic funds transfer. For the requirement to 
deposit taxes withheld on nonresident aliens and foreign corporations by 
electronic funds transfer, see Sec. 31.6302-1T(h) of this chapter. A 
taxpayer not required to deposit by electronic funds transfer pursuant 
to Sec. 31.6302-1T(h) of this chapter remains subject to the rules of 
Sec. 1.6302-2(b).

[T.D. 8553, 59 FR 35416, July 11, 1994]




Sec. 1.6302-3  Use of Government depositaries in connection with estimated taxes of certain trusts.

    (a) Requirement. A bank or other financial institution described in 
paragraph (b) of this section shall deposit in its Treasury Tax & Loan 
account 0described in 31 CFR 203 or with a Federal Reserve Bank all 
payments of estimated tax required to be paid on or after September 15, 
1988, under section 6654(l) with respect to trusts for which such 
institution acts as a fiduciary on or before the date otherwise 
prescribed for paying such tax.
    (b) Banks and financial institutions subject to this requirement. 
The requirement of paragraph (a) of this section applies to banks and 
other financial institutions described in sections 581 and 591 that have 
been designated as authorized Federal tax depositaries described in 
section 6302(c) and that act as fiduciaries for at least 200 trusts to 
which section 6654(l) applies that during the calendar year are required 
to make installment payments of estimated tax with respect to such 
trusts. For purposes of this section, a fiduciary is the person 
responsible for filing the tax returns and paying the taxes with respect 
to a trust.
    (c) Cross-references. For provisions relating to the procedures for 
depositing the estimated tax payments described in paragraph (a) of this 
section and for reporting such deposits on magnetic tape, see Revenue 
Procedure 87-64 \1\ or its successor. For provisions relating to the 
penalty for failure to make a deposit within the prescribed time, see 
Sec. 301.6656-1 of this chapter (Regulations on Procedure and 
Administration).
---------------------------------------------------------------------------

    \1\ This information is available from the Internal Revenue Service, 
Department of the Treasury, 1111 Constitution Ave., NW., Room 5300, 
Washington, DC 20224.

[T.D. 8192, 53 FR 12008, Apr. 12, 1988; T.D. 8192, 53 FR 13464, Apr. 25, 
1988]




Sec. 1.6302-3T   Use of Government depositaries in connection with estimated taxes of certain trusts--deposits required to be made by electronic funds transfer 
          after December 31, 1994 (temporary).

    (a)-(b) [Reserved]
    (c) Cross-references. For further guidance and instructions for 
certain banks and financial institutions acting as fiduciaries with 
respect to taxable trusts, see Revenue Procedure 89-49, 1989-2 C.B. 615 
(see Sec. 601.601(d)(2) of this chapter) or any successor revenue 
procedure. For the requirement to deposit estimated tax payments of 
taxable trusts by electronic funds transfer, see Sec. 31.6302-1T(h) of 
this chapter.

[T.D. 8553, 59 FR 35416, July 11, 1994]




Sec. 1.6302-4T  Use of financial institutions in connection with individual income taxes (temporary).

    Voluntary payments by electronic funds transfer. An individual may 
voluntarily remit by electronic funds transfer all payments of tax 
imposed by subtitle A of the Code, including any payments of estimated 
tax. Such payments must be made in accordance with procedures to be 
prescribed by the Commissioner.

[T.D. 8661, 61 FR 11549, Mar. 21, 1996]

[[Page 776]]




Sec. 1.6361-1  Collection and administration of qualified State individual income taxes.

    Except as otherwise provided in Secs. 301.6361-1 to 301.6365-2, 
inclusive, of this chapter (Regulations on Procedure and 
Administration), the provisions of this part under subtitle F of the 
Internal Revenue Code of 1954 relating to the collection and 
administration of the taxes imposed by chapter 1 of such Code on the 
incomes of individuals (or relating to civil or criminal sanctions with 
respect to such collection and administration) shall apply to the 
collection and administration of qualified State individual income taxes 
(as defined in section 6362 of such Code and the regulations thereunder) 
as if such taxes were imposed by chapter 1.

[T.D. 7577, 43 FR 59358, Dec. 20, 1978]

                    ABATEMENTS, CREDITS, AND REFUNDS




Sec. 1.6411-1   Tentative carryback adjustments.

    (a) In general. Any taypayer who has a net operating loss under 
section 172, a net capital loss under section 1211(a) which is a 
carryback under section 1212, an unused investment credit under section 
46, or an unused work incentive program (WIN) credit under section 50A, 
may file an application under section 6411 for a tentative carryback 
adjustment of the taxes for taxable years prior to the taxable year of 
the net operating or capital loss or the unused credit, whichever is 
applicable, which are affected by the net operating loss carryback, the 
capital loss carryback, the unused investment credit carryback, or the 
unused WIN credit carryback, resulting from such loss or unused credit. 
The regulations under section 6411 shall apply with respect to 
investment credit carrybacks for taxable years ending after December 31, 
1961, but only with respect to applications for tentative carryback 
adjustments for investment credit carrybacks filed after November 2, 
1966. The regulations under section 6411 shall apply with respect to WIN 
credit carrybacks for taxable years beginning after December 31, 1971. 
The right to file an application for a tentative carryback adjustment is 
not limited to corporations, but is available to any taxpayer otherwise 
entitled to carryback a loss or unused credit. A corporation may file an 
application for a tentative carryback adjustment even though it has not 
extended the time for payment of tax under section 6164. In determining 
any decrease in tax under Secs. 1.6411-1 through 1.6411-4, the decrease 
in tax is determined net of any increase in the tax imposed by section 
56 (relating to the minimum tax for tax preferences).
    (b) Contents of application. (1) The application for a tentative 
carryback adjustment shall be filed, in the case of a corporation, on 
Form 1139, and in the case of taxpayers other than corporations, on Form 
1045. The application shall be filled out in accordance with the 
instructions accompanying the form, and all information required by the 
form and the instructions must be furnished by the taxpayer.
    (2) An application for a tentative carryback adjustment does not 
constitute a claim for credit or refund. If such application is 
disallowed by the district director or director of a service center in 
whole or in part, no suit may be maintained in any court for the 
recovery of any tax based on such application. The filing of an 
application for a tentative carryback adjustment will not constitute the 
filing of a claim for credit or refund within the meaning of section 
6511 for purposes of determining whether a claim for credit or refund 
was filed prior to the expiration of the applicable period of 
limitation. The taxpayer, however, may file a claim for credit or refund 
under section 6402 at any time prior to the expiration of the applicable 
period of limitation, and may maintain a suit based on such claim if it 
is disallowed or if the district director or director of a service 
center does not act on the claim within 6 months from the date it is 
filed. Such claim may be filed before, simultaneously with, or after the 
filing of the application for a tentative carryback adjustment. A claim 
for credit or refund under section 6402 filed after the filing of an 
application for a tentative carryback adjustment is not to be considered 
an amendment of such application. Such claim, however, in proper cases 
may constitute an amendment to a prior claim filed under section 6402.

[[Page 777]]

    (c) Time and place for filing application. Except as otherwise 
provided in this paragraph the application for a tentative carryback 
adjustment shall be filed on or after the date of the filing of the 
return for the taxable year of the net operating loss, net capital loss, 
unused investment credit, or unused WIN credit and shall be filed within 
a period of twelve months from the end of such taxable year. With 
respect to any portion of an investment credit carryback or a WIN credit 
carryback from a taxable year attributable to a net operating loss 
carryback or a capital loss carryback from a subsequent taxable year, 
the twelve-month period shall be measured from the end of such 
subsequent taxable year. In the case of an application for a tentative 
carryback adjustment attributable to the carryback of an unused 
investment credit, the twelve-month period for filing shall not expire 
before the close of December 31, 1966. Any application filed prior to 
the date on which the return for the taxable year of the loss or unused 
credit is filed shall be considered to have been filed on the date such 
return is filed. In the case of an application filed before April 15, 
1968, the application shall be filed with the internal revenue officer 
to whom the tax was paid or by whom the assessment was made. Except as 
provided in paragraph (b) of Sec. 301.6091-1 (relating to hand-carried 
documents), in the case of an application filed after April 14, 1968, if 
the tax was paid to the Director of International Operations, the 
application shall be filed with him; otherwise the application shall be 
filed with the internal revenue office with which the return was filed.

[T.D. 6500, 25 FR 12144, Nov. 26, 1960, as amended by T.D. 6862, 30 FR 
14432, Nov. 18, 1965; T.D. 6950, 33 FR 5357, Apr. 4, 1968; T.D. 7301, 39 
FR 973, Jan. 4, 1974; T.D. 7564, 43 FR 40498, Sept. 12, 1978; T.D. 8107, 
51 FR 43347, Dec. 2, 1986]




Sec. 1.6411-2   Computation of tentative carryback adjustment.

    (a) Tax previously determined. The taxpayer is to determine the 
amount of decrease, attributable to the carryback, in tax previously 
determined for each taxable year before the taxable year of the net 
operating loss, net capital loss, unused investment credit, or unused 
WIN credit. The tax previously determined is to be ascertained in 
accordance with the method prescribed in section 1314(a). Thus, the tax 
previously determined will be the tax shown on the return as filed, 
increased by any amounts assessed (or collected without assessment) as 
deficiencies before the date of the filing of the application for a 
tentative carryback adjustment, and decreased by any amounts abated, 
credited, refunded, or otherwise repaid prior to such date. Any items as 
to which the Internal Revenue Service and the taxpayer are in 
disagreement at the time of the filing of the application shall be taken 
into account in ascertaining the tax previously determined only if, and 
to the extent that, they were reported in the return, or were reflected 
in any amounts assessed (or collected without assessment) as 
deficiencies, or in any amounts abated, credited, refunded, or otherwise 
repaid, before the date of filing the application. The tax previously 
determined, therefore, will reflect the foreign tax credit and the 
credit for tax withheld at source provided in section 32.
    (b) Decrease attributable to carryback. The decrease in tax 
previously determined which is affected by the carryback or any related 
adjustments, is to be determined, except for such carryback and related 
adjustments, on the basis of the items which entered into the 
computation of such tax as previously determined; the tax previously 
determined being ascertained in the manner described in this section. In 
determining any such decrease, items shall be taken into account only to 
the extent that they were reported in the return, or were reflected in 
amounts assessed (or collected without assessment) as deficiencies, or 
in amounts abated, credited, refunded, or otherwise repaid, before the 
date of filing the application for a tentative carryback adjustment. If 
the Internal Revenue Service and the taxpayer are in disagreement as to 
the proper treatment of any item, it shall be assumed for purposes of 
determining the decrease in the tax previously determined that such item 
was correctly reported

[[Page 778]]

by the taxpayer unless, and to the extent that, the disagreement has 
resulted in the assessment of a deficiency (or the collection of an 
amount without an assessment), or the allowing or making of an 
abatement, credit, refund, or other repayment, before the date of filing 
the application. Thus, if the taxpayer claimed a deduction on its return 
of $50,000 for salaries paid its officers but the district director 
asserts that such deduction should not exceed $20,000, and the Internal 
Revenue Service and the taxpayer have not agreed on the amount properly 
deductible before the date the application for a tentative carryback 
adjustment is filed, $50,000 shall be considered as the amount properly 
deductible for purposes of determining the decrease in tax previously 
determined in respect of the application for a tentative carryback 
adjustment. In determining the decrease in tax previously determined, 
any items which are affected by the carryback must be adjusted to 
reflect such carryback. Thus, unless otherwise provided, any deduction 
limited, for example, by adjusted gross income, such as the deduction 
for medical, dental, etc., expenses is to be recomputed on the basis of 
the adjusted gross income as affected by the carryback.

[T.D. 6500, 25 FR 12144, Nov. 26, 1960, as amended by T.D. 7301, 39 FR 
973, Jan. 4, 1974]




Sec. 1.6411-3   Allowance of adjustments.

    (a) Time prescribed. The district director or director of a service 
center (either of whom are sometimes hereinafter referred to in this 
section as internal revenue officer) shall act upon any application for 
a tentative carryback adjustment filed under section 6411(a) within a 
period of 90 days from whichever of the following two dates is the 
later:
    (1) The date the application is filed; or
    (2) The last day of the month in which falls the last date 
prescribed by law (including any extension of time granted the taxpayer) 
for filing the return for the taxable year of the net operating loss, 
net capital loss, unused investment credit, or unused WIN credit from 
which the carryback results.
    (b) Examination. Within the 90-day period described in paragraph (a) 
of this section, the district director or director of a service center 
shall make, to the extent he deems practicable in such period, an 
examination of the application to discover omissions and errors of 
computation. He shall determine within such period the decrease in tax 
previously determined, affected by the carryback or any related 
adjustments, upon the basis of the application and such examination. 
Such decrease shall be determined in the same manner as that provided in 
section 1314(a) for the determination by the taxpayer of the decrease in 
taxes previously determined which must be set forth in the application 
for a tentative carryback adjustment. Such internal revenue officer, 
however, may correct any errors of computation or omissions he may 
discover upon examination of the application. In determining the 
decrease in tax previously determined which is affected by the carryback 
or any related adjustment, he accordingly may correct any mathematical 
error appearing on the application and he may likewise correct any 
modification required by the law and incorrectly made by the taxpayer in 
computing the net operating loss, net capital loss, unused investment 
credit, or unused WIN credit, the resulting carrybacks, or the net 
operating loss deduction, capital loss deduction, investment credit or 
WIN credit allowable. If the required modification has not been made by 
the taxpayer and such internal revenue officer has available the 
necessary information to make such modification within the 90-day 
period, he may, in his discretion, make such modification. In 
determining such decrease, however, such internal revenue officer will 
not, for example, change the amount claimed on the return as a deduction 
for depreciation because he believes that the taxpayer has claimed an 
excessive amount; likewise, he will not include in gross income any 
amount not so included by the taxpayer, even though such officer 
believes that such amount is subject to tax and properly should be 
included in gross income.
    (c) Disallowance in whole or in part. If the district director or 
director of a service center finds that an application for a tentative 
carryback adjustment contains materials omissions or errors

[[Page 779]]

of computation, he may disallow such application in whole or in part 
without further action. If, however, he deems that any error of 
computation can be corrected by him within the 90-day period, he may do 
so and allow the application in whole or in part. Such internal revenue 
officer's determination as to whether he can correct any error of 
computation within the 90-day period shall be conclusive. Similarly, his 
action in disallowing, in whole or in part, any application for a 
tentative carryback adjustment shall be final and may not be challenged 
in any proceeding. The taxpayer in such case, however, may file a claim 
for credit or refund under section 6402, and may maintain a suit based 
on such claim if it is disallowed or if such internal revenue officer 
does not act upon the claim within 6 months from the date it is filed.
    (d) Application of decrease. (1) Each decrease determined by the 
district director or director of a service center in any previously 
determined tax which is affected by the carryback or any related 
adjustments shall first be applied against any unpaid amount of the tax 
with respect to which such decrease was determined. Such unpaid amount 
of tax may include one or more of the following:
    (i) An amount with respect to which the taxpayer is delinquent;
    (ii) An amount the time for payment of which has been extended under 
section 6164 and which is due and payable on or after the date of the 
allowance of the decrease; and
    (iii) An amount (including an amount the time for payment of which 
has been extended under section 6162, but not including an amount the 
time for payment of which has been extended under section 6164) which is 
due and payable on or after the date of the allowance of the decrease.
    (2) In case the unpaid amount of tax includes more than one of such 
amounts, the district director, or director of a service center in his 
discretion, shall determine against which amount or amounts, and in what 
proportion, the decrease is to be applied. In general, however, the 
decrease will be applied against any amounts described in subparagraph 
(1) (i), (ii), and (iii) of this paragraph in the order named. If there 
are several amounts of the type described in subparagraph (1)(iii) of 
this paragraph, any amount of the decrease which is to be applied 
against such amount will be applied by assuming that the tax previously 
determined minus the amount of the decrease to be so applied is ``the 
tax'' and that the taxpayer had elected to pay such tax in installments. 
The unpaid amount of tax against which a decrease may be applied under 
subparagraph (1) of this paragraph may not include any amount of tax for 
any taxable year other than the year of the decrease. After making such 
application, such internal revenue officer will credit any remainder of 
the decrease against any unsatisfied amount of any tax for the taxable 
year immediately preceding the taxable year of the net operating loss, 
capital loss, unused investment credit, or unused WIN credit, the time 
for payment of which has been extended under section 6164.
    (3) Any remainder of the decrease after such application and credits 
may, within the 90-day period, in the discretion of the district 
director or director of a service center, be credited against any tax or 
installment thereof then due from the taxpayer, and, if not so credited, 
shall be refunded to the taxpayer within such 90-day period.

[T.D. 6950, 33 FR 5358, Apr. 4, 1968, as amended by T.D. 7301, 39 FR 
973, Jan. 4, 1974]




Sec. 1.6411-4  Consolidated groups.

    For further rules applicable to consolidated groups, see 
Sec. 1.1502-78. For further rules applicable to consolidated groups that 
include insolvent financial institutions, see Sec. 301.6402-7 of this 
chapter.

[T.D. 8446, 57 FR 53034, Nov. 6, 1992]




Sec. 1.6414-1   Credit or refund of tax withheld on nonresident aliens and foreign corporations.

    (a) In general. Any withholding agent who for the calendar year pays 
more than the correct amount of:
    (1) Tax required to be withheld under chapter 3 of the Code, or
    (2) Interest, addition to the tax, additional amount, or penalty 
with respect to such tax,


[[Page 780]]


may file a claim for credit or refund of the overpayment in the manner 
and subject to the conditions stated in the Procedure and Administration 
Regulations (Part 301 of this chapter) under section 6402, or may claim 
credit for the overpayment as provided in paragraph (b) of this section.
    (b) Claim for credit on Form 1042. The withholding agent may claim 
credit of an overpayment described in paragraph (a) of this section for 
any calendar year by showing the amount of overpayment on the return on 
Form 1042 for such calendar year, which shall constitute a claim for 
credit under this paragraph. The claim for credit shall be evidenced by 
a statement on the return setting forth the amount determined as an 
overpayment and showing such other information as may be required by the 
instructions relating to the return. The amount so claimed as a credit 
may be applied, to the extent it has not been applied under paragraph 
(b) of Sec. 1.1461-4, by the withholding agent to reduce the amount of a 
payment or deposit of tax required by Sec. 1.1461-3 or paragraph (a) of 
Sec. 1.6302-2 for any payment period occurring in the calendar year 
following the calendar year of overwithholding. The amount so claimed as 
a credit shall also be entered on the annual return on Form 1042 for the 
calendar year following the calendar year of overwithholding and shall 
be applied as a payment on account of the tax shown on such form. If the 
withholding agent files a claim for credit or refund of the overpayment 
on Form 843 in accordance with Sec. 301.6402-2 of this chapter 
(Procedure and Administration Regulations), or a claim for refund of the 
overpayment on Form 1042 in accordance with Sec. 301.6402-3 of such 
chapter, he may not claim credit for the overpayment under this 
paragraph.
    (c) Overpayment of amounts actually withheld. No credit or refund to 
the withholding agent shall be allowed for the amount of any overpayment 
of tax which, after taking into account paragraph (b) of Sec. 1.1464-1, 
the withholding agent has actually withheld from an item of income under 
chapter 3 of the Code.

[T.D. 6922, 32 FR 8714, June 17, 1967]




Sec. 1.6425-1   Adjustment of overpayment of estimated income tax by corporation.

    (a) In general. Any corporation which has made an overpayment of 
estimated income tax for a taxable year beginning after December 31, 
1967, may file an application for an adjustment of such overpayment. The 
right to file an application for an adjustment of overpayment of 
estimated income tax is limited to corporations.
    (b) Contents of application. (1) The application for an adjustment 
of overpayment of estimated income tax shall be filed on Form 4466. The 
application shall be filled out in accordance with the instructions 
accompanying the form, and all information required by the form and 
instructions must be furnished by the corporation. The application shall 
be verified in the manner prescribed by section 6065 as in the case of a 
return of the corporation.
    (2) An application for an adjustment of overpayment of estimated 
income tax does not constitute a claim for credit or refund. If such 
application is disallowed by the district director, or director of a 
service center, in whole or in part, no suit may be maintained in any 
court for the recovery of any tax based on such application. The filing 
of an application for an adjustment of overpayment of estimated income 
tax will not constitute the filing of a claim for credit or refund 
within the meaning of section 6511 for the purpose of determining 
whether a claim for refund was filed prior to the expiration of the 
applicable period of limitation. The corporation, however, may file a 
claim for credit or refund under section 6402 at any time prior to the 
expiration of the applicable period of limitation and may maintain a 
suit based on such claim if it is disallowed or if the district 
director, or director of a service center, does not act on the claim 
within 6 months from the date it is filed. Such claim may be filed 
before, simultaneously with, or after the filing of the application for 
the adjustment of overpayment of estimated tax. A claim for credit or 
refund under section 6402 filed after the filing of an application for 
an adjustment of overpayment of

[[Page 781]]

estimated income tax is not to be considered an amendment of such 
application. Such claim, however, in proper cases, may constitute an 
amendment to a prior claim filed under section 6402.
    (c) Time and place for filing application. (1) The application for 
an adjustment of overpayment of estimated income tax shall be filed 
after the last day of the taxable year and on or before the 15th day of 
the third month thereafter, or before the date on which the corporation 
first files its income tax return for such taxable year (whether or not 
it subsequently amends the return), whichever is earlier.
    (2) Except as provided in paragraph (b)(2) of Sec. 301.6091-1 of 
this chapter (relating to hand-carried documents), the application on 
Form 4466 shall be filed with the internal revenue officer designated in 
instructions applicable to such form.

[T.D. 7059, 35 FR 14546, Sept. 17, 1970]




Sec. 1.6425-2   Computation of adjustment of overpayment of estimated tax.

    (a) Income tax liability defined. For purposes of Secs. 1.6425-1 
through 1.6425-3 and 1.6655-5, relating to excessive adjustment, the 
term ``income tax liability'' means the excess of:
    (1) The tax imposed by section 11 or 1201(a), or subchapter L of 
chapter 1 of the Code, whichever is applicable, over
    (2) The credits against tax provided by part IV of subchapter A of 
chapter 1 of the code.
    (b) Computation of adjustment. The amount of an adjustment under 
section 6425 is an amount equal to the excess of the estimated income 
tax paid by the corporation during the taxable year over the amount 
which, at the time of filing Form 4466, the corporation estimates as its 
income tax liability for the taxable year.

[T.D. 7059, 35 FR 14547, Sept. 17, 1970]



Sec. 1.6425-3   Allowance of adjustments.

    (a) Limitation. No application under section 6425 shall be allowed 
unless the amount of the adjustment is (1) at least 10 percent of the 
amount which, at the time of filing Form 4466 the corporation estimates 
as its income tax liability for the taxable year, and (2) at least $500.
    (b) Time prescribed. The Internal Revenue Service shall act upon an 
application for an adjustment of overpayment of estimated income tax 
within a period of 45 days from the date on which such application is 
filed.
    (c) Examination. Within the 45-day period described in paragraph (b) 
of this section, the Internal Revenue Service shall make, to the extent 
it deems practicable in such period, a limited examination of the 
application to discover omissions and errors therein. The Service shall 
calculate the adjustment, which calculation must be set forth in the 
application for such adjustment, in the manner provided in section 
6425(c)(2) for the determination by the corporation of such adjustment. 
The Service, however, may correct any material error or omission that is 
discovered upon examination of the application. In determining the 
adjustment, the Service may correct any mathematical error appearing on 
the application, and it may likewise make any modification required by 
the law to correct the corporation's computation of the adjustment. If 
the required modification has not been made by the corporation and the 
Service has available the necessary information to make such 
modification within the 45- day period, it may make such modification. 
The examination of the application and the allowance of the adjustment 
shall not prejudice any right of the Service to claim later that the 
adjustment was improper.
    (d) Disallowance in whole or in part. If the Internal Revenue 
Service finds that an application for an adjustment of overpayment of 
estimated tax contains material omissions or errors, the Service may 
disallow such application in whole or in part without further action. 
If, however, the Service deems that any omission or error can be 
corrected by it within the 45-day period, it may do so and allow the 
application in whole or in part. In the case of a disallowance or 
modification, the Service shall notify the corporation of such action. 
The Service's determination as to whether it can correct any omission or 
error shall be conclusive. Similarly, its action in disallowing, in 
whole or in

[[Page 782]]

part, any application for an adjustment of overpayment of estimated 
income tax shall be final and may not be challenged in any proceeding. 
The corporation in such case, however, may file a claim for credit or 
refund under section 6402, and may maintain a suit based on such claim 
if it is disallowed or if the Service does not act upon the claim within 
6 months from the date it is filed.
    (e) Application of adjustment. If the Internal Revenue Service 
allows the adjustment, it may first credit the amount of the adjustment 
against any liability in respect of an internal revenue tax on the part 
of the corporation which is due and payable on the date of the allowance 
of the adjustment before making payment of the balance to the 
corporation. In such a case, the Service shall notify the corporation of 
the credit, and refund the balance of the adjustment.
    (f) Effect of adjustment. (1) For purposes of all sections of the 
Code except section 6655, relating to additions to tax for failure to 
pay estimated income tax, any adjustment under section 6425 is to be 
treated as a reduction of prior estimated tax payments as of the date 
the credit is allowed or the refund is paid. For the purpose of section 
6655 (a) through (f) credit or refund of an adjustment is to be treated 
as if not made in determining whether there has been any underpayment of 
estimated income tax and, if there is an underpayment, the period during 
which the underpayment existed. However, an excessive adjustment under 
section 6425 shall be taken into account in applying the addition to tax 
under section 6655(g).
    (2) Excessive adjustment. For the effect of an excessive adjustment 
under section 6425, see Sec. 1.6655-5.

[T.D. 7059, 35 FR 14547, Sept. 17, 1970]

   ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE PENALTIES



Sec. 1.6654-1  Addition to the tax in the case of an individual.

    (a) In general. (1) Section 6654 imposes an addition to the taxes 
under chapters 1 and 2 of the Code in the case of any underpayment of 
estimated tax by an individual (with certain exceptions described in 
section 6654(d)), including any underpayment of estimated qualified 
State individual income taxes which are treated pursuant to section 
6361(a) as if they were imposed by chapter 1. This addition to the tax 
is in addition to any applicable criminal penalties and is imposed 
whether or not there was reasonable cause for the underpayment. The 
amount of the underpayment for any installment date is the excess of:
    (i) The following percentages of the tax shown on the return for the 
taxable year or, if no return was filed, of the tax for such year, 
divided by the number of installment dates prescribed for such taxable 
year:
    (A) 80 percent in the case of taxable years beginning after December 
31, 1966, of individuals not referred to in section 6073(b) (relating to 
income from farming or fishing);
    (B) 70 percent in the case of taxable years beginning before January 
1, 1967, of such individuals; and
    (C) 66\2/3\ percent in the case of individuals referred to in 
section 6073(b); over
    (ii) The amount, if any, of the installment paid on or before the 
last day prescribed for such payment.
    (2) The amount of the addition is determinated at the annual rate 
referred to in the regulations under section 6621 upon the underpayment 
of any installment of estimated tax for the period from the date such 
installment is required to be paid until the 15th day of the fourth 
month following the close of the taxable year, or the date such 
underpayment is paid, whichever is earlier. For purposes of determining 
the period of the underpayment (i) the date prescribed for the payment 
of any installment of estimated tax shall be determined without regard 
to any extension of time, and (ii) a payment of estimated tax on any 
installment date, to the extent that it exceeds the amount of the 
installment determined under subparagraph (1)(i) of this paragraph for 
such installment date, shall be considered a payment of any previous 
underpayment.
    (3) In determining the amount of the installment paid on or before 
the last day prescribed for payment thereof, the estimated tax shall be 
computed without any reduction for the amount which the taxpayer 
estimates as his

[[Page 783]]

credit under section 31 (relating to tax withheld at source on wages), 
and the amount of such credit shall be deemed a payment of estimated 
tax. An equal part of the amount of such credit shall be deemed paid on 
each installment date (determined under section 6153) for the taxable 
year unless the taxpayer establishes the dates on which all amounts were 
actually withheld. In the latter case, all amounts withheld shall be 
considered as payments of estimated tax on the dates such amounts were 
actually withheld. Under section 31 the entire amount withheld during a 
calendar year is allowed as a credit against the tax for the taxable 
year which begins in such calendar year. However, where more than one 
taxable year begins in any calendar year no portion of the amount 
withheld during the calendar year will be treated as a payment of 
estimated tax for any taxable year other than the last taxable year 
beginning in such calendar year. The rules prescribed in this 
subparagraph for determining the time as of which the amount withheld 
shall be deemed paid are applicable even though such amount was withheld 
during a taxable year preceding that for which the credit is allowed.
    (4) The term tax when used in subparagraph (1)(i) of this paragraph 
shall mean:
    (i) The tax imposed by chapter 1 of the Code (other than by section 
56 or, for taxable years ending before September 30, 1968, the tax 
surcharge imposed by section 51), including any qualified State 
individual income taxes which are treated pursuant to section 6361(a) as 
if they were imposed by chapter 1, plus--
    (ii) For taxable years beginning after December 31, 1966, the tax 
imposed by chapter 2 of the Code, minus
    (iii) All credits allowed by part IV, subchapter A of chapter 1, 
except the credit provided by section 31, relating to tax withheld at 
source on wages, minus
    (iv) In the case of an individual who is subject to one or more 
qualified State individual incomes taxes, the sum of the credits allowed 
against such taxes pursuant to section 6362(b)(2) (B) or (C) or section 
6362(c)(4) and paragraph (c) of Sec. 301.6362-4 of this chapter 
(Regulations on Procedure and Administration) (relating to the credit 
for income taxes of other States or political subdivisions thereof) and 
paragraph (c)(2) of Sec. 301.6361-1 (relating to the credit for tax 
withheld from wages on account of qualified State individual income 
taxes), and minus
    (v) For taxable years ending after February 29, 1980, the 
individual's overpayment of windfall profit tax imposed by section 4986 
of the Code for the taxable year. For this purpose, the amount of such 
overpayment is the sum of (A) the amount by which such individual's 
aggregate windfall profit tax liability for the taxable year as a 
producer of crude oil is exceeded by withholding of windfall profit tax 
for the taxable year, and (B) any amount treated under section 6429 or 
6430 as an overpayment of windfall profit tax for crude oil removed 
during the taxable year. The deemed payment date in section 
4995(a)(4)(B) for the amount of windfall profit tax withheld with 
respect to payments for crude oil shall have no effect in the 
determination of the overpayment of windfall profit tax.
    (b) Statement relating to underpayment. If there has been an 
underpayment of estimated tax as of any installment date prescribed for 
its payment and the taxpayer believes that one or more of the exceptions 
described in Sec. 1.6654-2 precludes the assertion of the addition to 
the tax under section 6654, he should attach to his income tax return 
for the taxable year a Form 2210 showing the applicability of any 
exception upon which he relies.
    (c) Examples. The method prescribed in paragraph (a) of this section 
for computing the addition to the tax may be illustrated by the 
following examples:

    Example (1). An individual taxpayer files his return for the 
calendar year 1972 on April 15, 1973, showing a tax (income and self-
employment tax) of $30,000. He had paid a total of $20,000 of estimated 
tax in four installments of $5,000 on each of the four installment dates 
prescribed for such year. No other payments were made prior to the date 
the return was filed. Since the amount of each installment paid by the 
last date prescribed for payment thereof is less than one-quarter of 80 
percent of the tax shown on the return, the addition to the tax is 
applicable in respect of the underpayment existing as of

[[Page 784]]

each installment date and is computed as follows:

(1) Amount of tax shown on return.......................         $30,000
(2) 80 percent of item (1)..............................          24,000
                                                         ---------------
(3) One-fourth of item (2)..............................           6,000
(4) Deduct amount paid on each installment date.........           5,000
                                                         ---------------
(5) Amount of underpayment for each installment date                    
 (item (3) minus item (4))..............................           1,000
                                                         ===============
(6) Addition to the tax:                                                
  1st installment--period 4-15-72 to 4-15-73............              60
  2nd installment--period 6-15-72 to 4-15-73............              50
  3rd installment--period 9-15-72 to 4-15-73............              35
  4th installment--period 1-15-73 to 4-15-73............              15
                                                         ---------------
    Total...............................................            $160
                                                                        

    Example (2). An individual taxpayer files his return for the 
calendar year 1955 on April 15, 1956, showing a tax of $30,000. The 
requirements of section 6015(a) were first met after April 1 and before 
June 2, 1955, and a total of $18,000 of estimated tax was paid in three 
equal installments of $6,000 on each of the three installment dates 
prescribed for such year. Since the amount of each installment paid by 
the last date prescribed for payment thereof is less than one-third of 
70 percent of the tax shown on the return, the addition to the tax is 
existing as of each installment date and is applicable in respect of the 
underpayment computed as follows:

(1) Amount of tax shown on return..........................      $30,000
(2) 70 percent of item (1).................................       21,000
                                                   ==========           
(3) One-third of item (2)..................................        7,000
(4) Deduct amount paid on each installment date............        6,000
                                                   ==========           
(5) Amount of underpayment for each installment date (item              
 (3) minus item (4)).......................................       1,000 
(6) Addition to the tax:                                                
  1st installment--period 6-15-55 to 4-15-56......      $50             
  2d installment--period 9-15-55 to 4-15-56.......       35             
  3d installment--period 1-15-56 to 4-15-56.......       15             
      Total.......................................      100             
                                                                        

(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954 
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654, 
6655, and 7805))

[T.D. 6500, 25 FR 12146, Nov. 26, 1960, as amended by T.D. 7384, 40 FR 
49322, Oct. 22, 1975; T.D. 7427, 41 FR 34029, Aug. 12, 1976; T.D. 7577, 
43 FR 59358, Dec. 20, 1978; T.D. 8016, 50 FR 11855, Mar. 26, 1985]



Sec. 1.6654-2   Exceptions to imposition of the addition to the tax in the case of individuals.

    (a) In general. The addition to the tax under section 6654 will not 
be imposed for any underpayment of any installment of estimated tax if, 
on or before the date prescribed for payment of the installment, the 
total amount of all payments of estimated tax made equals or exceeds the 
least of the following amounts:
    (1) The amount which would have been required to be paid on or 
before the date prescribed for payment if the estimated tax were the tax 
shown on the return for the preceding taxable year, provided that the 
preceding taxable year was a year of 12 months and a return showing a 
liability for tax was filed for such year. However, this subparagraph 
shall not apply with respect to any taxable year which ends on or after 
September 30, 1968, for which a tax is imposed by section 51 (relating 
to tax surcharge), in the case of a payment of estimated tax the time 
prescribed for payment of which is on or after September 15, 1968.
    (2) The amount which would have been required to be paid on or 
before the date prescribed for payment if the estimated tax were an 
amount equal to a percentage of the tax computed by placing on an annual 
basis the taxable income for the calendar months in the taxable year 
ending before the month in which the installment is required to be paid. 
That percentage is 80 percent in the case of taxable years beginning 
after December 31, 1966, of individuals not referred to in section 
6073(b) (relating to income from farming or fishing), 70 percent in the 
case of taxable years beginning before January 1, 1967, of such 
individuals, and 66\2/3\ percent in the case of individuals referred to 
inferred to in section 6073(b). With respect to taxable years beginning 
after December 31, 1966, the adjusted self-employment income shall be 
taken into account in determining the amount referred to in this 
subparagraph if net earnings from self-employment (as defined in section 
1402(a)) for the taxable year equal or exceed $400. For purposes of this 
subparagraph:
    (i) Taxable income shall be placed on an annualized basis:

[[Page 785]]

    (A) For taxable years beginning after 1976, by:
    (1) Multiplying by 12 (or the number of months in the taxable year 
if less than 12) the adjusted gross income and the itemized deductions 
for the calendar months in the taxable year ending before the month in 
which the installment is required to be paid,
    (2) Dividing the resulting amounts by the number of such calendar 
months,
    (3) Increasing the amount of the annualized adjusted gross income by 
the unused zero bracket amount, if any, determined by reference to the 
annualized itemized deductions, or decreasing the amount of the 
annualized adjusted gross income by the excess itemized deductions, if 
any, determined by reference to the annualized itemized deductions (the 
amount resulting under this step is annualized tax table income), and
    (4) Deducting from the annualized tax table income the deduction for 
personal exemptions (such personal exemptions being determined as of the 
date prescribed for payment of the installment).

If the taxpaper would be eligible to use the tax tables on the basis of 
annualized tax table income, the amount which would have been required 
to be paid for purposes of this subparagraph may be determined by 
applying the tax tables to annualized tax table income. the amount 
resulting under (3).
    (B) For taxable years beginning before 1977, by:
    (1) Multiplying by 12 (or the number of months in the taxable year 
if less than 12) the taxable income (computed without the standard 
deduction and without the deduction for personal exemptions), or the 
adjusted gross income if the standard deduction is to be used for the 
calendar months in the taxable year ending before the month in which the 
installment is required to be paid,
    (2) Dividing the resulting amount by the number of such calendar 
months, and
    (3) Deducting from such amount the standard deduction, if 
applicable, and the deduction for personal exemptions (such personal 
exemptions being determined as of the date prescribed for payment of the 
installment).
    (ii) The term ``adjusted self-employment income'' means:
    (A) The net earnings from self-employment (as defined in section 
1402(a)) for the calendar months in the taxable year ending before the 
month in which the installment is required to be paid, computed as if 
such months constituted the taxable year, but not more than
    (B) The excess of:
    (1) For taxable years beginning after 1966, $6,600
    (2) For taxable years beginning after 1971, $9,000,
    (3) For taxable years beginning after 1972, $10,800,
    (4) For taxable years beginning after 1973, $13,200, and
    (5) For taxable years beginning after 1974, an amount equal to the 
contribution and benefit base (as determined under section 230 of the 
Social Security Act) which is effective for the calendar year in which 
the taxable year begins, over the amount of the wages (within the 
meaning of section 1402(b)) for such calendar months placed on an annual 
basis. For this purpose, wages are annualized by multiplying by 12 (or 
the number of months in the taxable year in the case of a taxable year 
of less than 12 months) the wages for such calendar months and dividing 
the resulting amount by the number of such months.
    (3) An amount equal to 90 percent of the tax computed, at the rates 
applicable to the taxable year, on the basis of the actual taxable 
income for the calendar months in the taxable year ending before the 
month in which the the installment is required to ber paid, as if such 
months constituted the entire taxable year. For taxable years beginning 
after December 31, 1966, such computation shall include the tax imposed 
by chapter 2 on the actual self-employment income for such months. For 
purposes of this subparagraph, the term ``actual self-employment 
income'' means:
    (i) The net earnings from self-employment (as defined in section 
1402(a))for such calendar months, computed as if such months constituted 
the taxable year, but not more than

[[Page 786]]

    (ii) The excess of:
    (A) For taxable years beginning after 1966, $6,600,
    (B) For taxable years beginning after 1971, $9,000,
    (C) For taxable years beginning after 1972, $10,800,
    (D) For taxable years beginning after 1973, $13,200, and
    (E) For taxable years beginning after 1974, an amount equal to the 
contribution and benefit base (as determined under section 230 of the 
Social Security Act) which is effective for the calendar year in which 
the taxable year begins, over the amount of wages (within the meaning of 
section 1402(b)) for such months.
    (4) The amount which would have been required to be paid on or 
before the date prescribed for payment if the estimated tax were an 
amount equal to a tax determined on the basis of the tax rates and the 
taxpayer's status with respect to personal exemptions under section 151 
for the taxable year, but otherwise on the basis of the facts shown on 
the return for the preceding taxable year and the law applicable to such 
year, in the case of an individual required to file a return for such 
preceding taxable year.

In the case of a taxpayer whose taxable year consists of 52 or 53 weeks 
in accordance with section 441(f), the rules prescribed by paragraph (b) 
of Sec. 1.441-2 shall be applicable in determining, for purposes of 
subparagraph (1) of this paragraph, whether a taxable year was a year of 
12 months and, for purposes of subparagraphs (2) and (3) of this 
paragraph, the number of calendar months in a taxable year preceding the 
date prescribed for payment of an installment of estimated tax. For the 
rules to be applied in determining taxable income for any period 
described in subparagraphs (2) and (3) of this paragraph in the case of 
a taxpayer who employs accounting periods (e.g., thirteen 4-week periods 
or four 13-week periods) none of which terminates with the end of the 
applicable period described in subparagraph (2) or (3) of this 
paragraph, see paragraph (a)(5) of Sec. 1.6655-2.
    (b) Meaning of terms. As used in this section and Sec. 1.6654-3:
    (1) The term ``tax'' means:
    (i) The tax imposed by chapter 1 of the Code (other than by section 
56), including any qualified State individual income taxes which are 
treated pursuant to section 6361(a) as if they were imposed by chapter 
1, plus
    (ii) For taxable years beginning after December 31, 1966, the tax 
imposed by chapter 2 of the Code, minus
    (iii) The credits against tax allowed by part iv, subchapter A, 
chapter 1 of the Code, other than the credit against tax provided by 
section 31 (relating to tax withheld on wages), and without reduction 
for any payments of estimated tax, minus
    (iv) In the case of an individual who is subject to one or more 
qualified State individual income taxes, the sum of the credits allowed 
against such taxes pursuant to section 6262(b)(2) (B) or (C) or section 
6262(c)(4) and paragraph (c) of Sec. 301.6362-4 of this chapter 
(Regulations on Procedure and Administration) (relating to the credit 
for income taxes of other States or political subdivisions thereof) and 
paragraph (c)(2) of Sec. 301.6361-1 (relating to the credit for tax 
withheld from wages on account of qualified State individual income 
taxes), and minus
    (v) For taxable years ending after February 29, 1980, the 
individual's overpayment of windfall profit tax imposed by section 4986 
of the Code for the taxable year. For this purpose, the amount of such 
overpayment is the sum of (A) the amount by which such individual's 
aggregate windfall profit tax liability for the taxable year as producer 
of crude oil is exceeded by withholding of windfall profit tax for the 
taxable year, and (B) any amount treated under section 6429 or 6430 as 
an overpayment of windfall profit tax for crude oil removed during the 
taxable year. The deemed payment date in section 4995(a)(4)(B) for the 
amount of windfall profit tax withheld with respect to payments for 
crude oil shall have no effect in the determination of the overpayment 
of windfall profit tax.
    (2) The credits against tax allowed by part IV, subchapter A, 
chapter 1 of the Code, are:
    (i) In the case of the exception described in paragraph (a)(1) of 
this section, the credits shown on the return for the preceding taxable 
year,

[[Page 787]]

    (ii) In the case of the exceptions described in paragraph (a)(2) and 
(3) of this section, the credits computed under the law and rates 
applicable to the current taxable year, and
    (iii) In the case of the exception described in paragraph (a)(4) of 
this section, the credits shown on the return for the preceding taxable 
year, except that if the amount of any such credit would be affected by 
any change in rates or status with respect to personal exemptions, the 
credits shall be determined by reference to the rates and status 
applicable to the current taxable year.

A change in rate may be either a change in the rate of tax, such as a 
change in the rate of the tax imposed by section 1 or section 1401, or a 
change in a percentage affecting the computation of the credit, such as 
a change in the rate of withholding under chapter 3 of the Code or a 
change in the percentage of a qualified investment which is specified in 
section 46 for use in determining the amount of the investment credit 
allowed by section 38.
    (3) The term ``return for the preceding taxable year'' means the 
income tax return for such year which is required by section 6012(a)(1) 
and, in the case of taxable years beginning after December 31, 1966, the 
self-employment tax return for such year which is required by section 
607.
    (c) Examples. The following examples illustrate the application of 
the exceptions to the imposition of the addition to the tax for an 
underpayment of estimated tax, in the case of an individual whose 
taxable year is the calendar year:

    Example (1). A, a married man with one child and a dependent parent, 
files a joint return with his spouse, B, for 1955 on April 15, 1956, 
showing taxable income of $44,000 and a tax of $16,760. A and B had 
filed a joint declaration of estimated tax on April 15, 1955, showing an 
estimated tax of $10,000 which was paid in four equal installments of 
$2,500 each on April 15, June 15, and September 15, 1955, and January 
15, 1956. The balance of $6,760 was paid with the return. A and B have 
an underpayment of estimated tax of $433 (\1/4\ of 70 percent of 
$16,760, less $2,500) for each installment date. The 1954 calendar year 
return of A and B showed a liability of $10,000. Since the total amount 
of estimated tax paid by each installment date equalled the amount that 
would have been required to be paid on or before each of such dates if 
the estimated tax were the tax shown on the return for the preceding 
year, the exception described in paragraph (a)(1) of this section 
applies and no addition to the tax will be imposed.
    Example (2). Assume the same facts as in example (1), except that 
the joint return of A and B for 1954 showed taxable income of $32,000 
and a tax liability of $10,400. Assume further that only two personal 
exemptions under section 151 appeared on the 1954 return. The exception 
described in paragraph (a)(1) of this section would not apply. However, 
A and B are entitled to four exemptions under section 151 for 1955. 
Taxable income for 1954 based on four exemptions, but otherwise on the 
basis of the facts shown on the 1954 return, would be $30,800. The tax 
on such amount in the case of a joint return would be $9,836. Since the 
total amount of estimated tax paid by each installment date exceeds the 
amount which would have been required to be paid on or before each of 
such dates if the estimated tax were $9,836, the exception described in 
paragraph (a)(4) of this section applies and no addition to the tax will 
be imposed.
    Example (3). C, who is self-employed (other than as a farmer or 
fisherman), has annualized taxable income of $6,900 for the period 
January 1, 1967, through August 31, 1967, the income tax on which is 
$1,171. For the same period his net earnings from self-employment are 
$5,000 and his wages are $2,000. The estimated tax payments made by C 
for 1967 on or before September 15, 1967, total $1,200. For the purposes 
of the exception described in paragraph (a)(2) of this section, the 
adjusted self-employment income is $3,600, computed as follows:

(1) Net earnings from self-employment..........................   $5,000
(2) $6,600 minus annualized wages ($6,600-3,000 ($2,000 x               
 128)).................................................    3,600
(3) Lesser of (1) or (2).......................................    3,600
                                                                        

The tax on C's adjusted self-employment income would be $230.40 
($3,600 x 6.4 percent). Since the total amount of estimated tax paid on 
or before September 15, 1967, exceeds $1,121.12, that is, 80 percent of 
$1,401.40 ($1,171+230.40), the exception described in paragraph (a)(2) 
of this section applies and no addition to tax will be imposed.
    Example (4). D, who is self-employed (other than as a farmer or 
fisherman), has actual taxable income of $3,800 for the period January 
1, 1967, through August 31, 1967, the income tax on which is $586. For 
the same period his net earnings from self-employment are $5,000 and his 
wages are $2,000. The estimated tax payments made by D for 1967 on or 
before September 15, 1967, total $840. For the purposes of the exception 
described in paragraph (a)(3) of this section, the actual self-

[[Page 788]]

employment income for this period is $4,600, computed as follows:

(1) Net earnings from self-employment..........................   $5,000
(2) $6,600 minus wages ($6,600-2,000)..........................    4,600
(3) Lesser of (1) or (2).......................................    4,600
                                                                        

The tax on D's actual self-employment income would be $294.40 
($4,600 x 6.4 percent). Since the total amount of estimated tax paid by 
September 15, 1967, exceeds $792.36, that is, 90 percent of $880.40 
($586+294.40), the exception described in paragraph (a)(3) of this 
section applies and no addition to tax will be imposed.
    Example (5). E and F, his spouse, filed a joint return for the 
calendar year 1967, showing a tax liability of $10,000. The liability, 
attributable primarily to income received during the last quarter of the 
year, included both income and self-employment tax. Their aggregate 
payments of estimated tax on or before September 15, 1967, total $1,350, 
representing three installments of $450 paid on each of the first three 
installment dates prescribed for the taxable year. Since each 
installment paid, $450, was less then $2,000 (\1/4\ of 80 percent of 
$10,000), there was an underpayment on each of the installment dates. 
Assume that the exceptions described in paragraph (a) (1) and (4) of 
this section do not apply. Actual taxable income for the three months 
ending March 31, 1967, was $2,000 and for the five months ending May 31, 
1967, was $4,500. Actual self-employment income, for the same periods, 
was $2,000 and $4,000, respectively. Since the amounts paid by the April 
15 and June 15 installment dates, $450 and $900, respectively, exceed 
$376.20 and $873.90, respectively (90 percent of the income tax on the 
actual taxable income of $2,000 and $4,500, respectively, determined on 
the basis of a joint return, and the self-employment tax on the actual 
self-employment income of $2,000 and $4,000, respectively), the 
exception described in paragraph (a)(3) of this section applies and no 
addition to the tax will be imposed for the underpayments on the April 
15 and June 15 installment dates. For the eight months ending August 31, 
1967, actual taxable income, assuming E and F did not elect to use the 
standard deduction, was $7,500; net earnings from self-employment were 
$6,000@ and wages were $2,700. Since the total amount paid by the 
September 15 installment date, $1,350, was less than $1,381.14 (90 
percent of the income tax on the actual taxable income of $7,500 
determined on the basis of a joint return and the self-employment tax on 
actual self-employment income of $3,900 ($6,600-2,700)), the exception 
described in paragraph (a)(3) of this section does not apply to the 
September 15 installment. Furthermore, the exception described in 
paragraph (a)(2) of this section does not apply, as illustrated by the 
following computation:

(1) Income tax:                                                         
    Taxable income for the period ending Aug. 31, 1967                  
     (without deduction for personal exemptions) on an                  
     annual basis ($8,700 x 128)....................  $13,050.00
  Deduction for two personal exemptions.....................    1,200.00
                                                             -----------
                                                               11,850.00
    Tax on $11,850 (on the basis of a joint return).........    2,227.00
(2) Self-employment tax:                                                
    Net earnings from self-employment.......................    6,000.00
    Adjusted self-employment income ($6,600-4,050 annualized            
     wages ($2,700 x 128))..........................    2,550.00
    Tax on adjusted self-employment income ($2,550 x 6.4                
     percent)...............................................      163.20
(3) Total tax ($2,227.00+163.20)............................    2,390.20
(4) \3/4\ of 80 percent of $2,390.20........................    1,434.12
Amount paid by Sept. 15, 1967...............................    1,350.00
                                                                        

An addition to the tax will thus be imposed for the underpayment of 
$1,550 ($2,000-450) on the September 15 installment.
    Example (6). Assume the same facts as in example (5) and assume 
further that adjusted gross income for the eight months ending August 
31, 1967, was $9,200 and the amount of deductions (other than the 
deduction for personal exemptions) not allowable in determining adjusted 
gross income aggregate only $500. If E and F elect, they may use the 
standard deduction in computing the tax for purposes of the exceptions 
described in paragraph (a) (2) and (3) of this section. Taxable income 
for purposes of the exception described in paragraph (a)(3) of this 
section would be reduced to $7,080 ($9,200 less $1,200 for two personal 
exemptions and $920 for the standard deduction). The income tax thereon 
is $1,205.20; income tax and self-employment tax total $454.80 
($1,205.20+249.60 ($3,900 x 6.4 percent)). Since the amount paid by the 
September 15 installment date, $1,350, exceeds $1,309.32 (90 percent of 
$1,454.80), the exception described in paragraph (a)(3) of this section 
applies. However, the exception described in paragraph (a)(2) of this 
section does not apply, as illustrated by the following computation:

Adjusted gross income for period ending Aug. 31, 1967.......   $9,200.00
Adjusted gross income annualized ($9,200 x 128).....   13,800.00
Taxable income annualized ($13,800 minus $1,200 for two                 
 personal exemptions and $1,000 for the standard deduction).   11,600.00
Tax on $11,600 (on basis of joint return)...................    2,172.00
Self-employment tax on adjusted self-employment income                  
 ($2,550 x 6.4 percent)                                           163.20
Total tax ($2,172.00+163.20.................................    2,335.20
\3/4\ of 80 percent of $2,335.20............................    1,401.12
Amount paid by Sept. 15, 1967...............................    1,350.00
                                                                        

    Example (7). G was a married individual, 73 years of age, who filed 
a joint return with his wife, H, for the calendar year 1956. H, who was 
70 years of age, had no income during the year. G had taxable income in 
the amount of $7,000 for the eight-month period ending on August 31, 
1956, which included

[[Page 789]]

$2,000 of dividend income (after excluding $50 under section 116) and 
$900 of rental income. The $7,000 figure also reflected a deduction of 
$2,400 for personal exemptions ($600 x 4), since G and H are both over 
65 years of age. The application of the exception described in paragraph 
(a)(2) of this section to an underpayment of estimated tax on the 
September 15 installment date may be illustrated by the following 
computation:

Taxable income for the period ending Aug. 31, 1956 (without             
 deduction for personal exemptions) on an annual basis                  
 ($9,400 x 128).....................................  $14,100.00
Deduction for personal exemptions...........................    2,400.00
                                                             -----------
Taxable income on an annual basis...........................   11,700.00
Tax (on the basis of a joint return)........................    2,642.00
Dividends received for 8-month period.......................    2,050.00
Less: Amount excluded from gross income under section 116...       50.00
                                                             -----------
Dividends included in gross income..........................    2,000.00
Dividend income annualized ($2,000 x 128)...........    3,000.00
Dividends received credit under section 34 (4 percent of                
 $3,000)....................................................      120.00
                                                             -----------
Tax less dividends received credit..........................    2,522.00
Retirement income (as defined in section 37(c)) includes:               
  Dividend income (to extent included in gross income)......    2,000.00
  Rental income.............................................      900.00
                                                             -----------
Total retirement income.....................................    2,900.00
Limit on amount of retirement income under section 37(d)....    1,200.00
Retirement income credit under section 37 (20 percent of                
 $1,200)....................................................      240.00
                                                             -----------
Tax less credits under section 34 and section 37............    2,282.00
Amount determined under the exception described in paragraph            
 (a)(2) of this section (\3/4\ of 70 percent of $2,282).....    1,198.05
                                                                        

    Example (8). C, an unmarried individual for whom another taxpayer is 
entitled to a deduction under section 151(e), has adjusted gross income 
of $4,000 for the period January 1, 1977, through August 31, 1977. All 
of C's income is non-exempt interest. For the same period C, who is 
entitled to one personal exemption, has itemized deductions amounting to 
$300. C is entitled to no credits other than the general tax credit. C 
filed a declaration of estimated tax on April 15, 1977, and on or before 
September 15, 1977, makes estimated tax payments for 1977 which total 
$460. For purposes of determing whether the exception described in 
paragraph (a)(2) of this section applies, the following computations are 
necessary:

Adjusted gross income for the period ending Aug. 31,                    
 1977, on an annual basis ($4,000  x  128)...          $6,000.00
Itemized deductions for the period ending Aug. 31,                      
 1977, on an annual basis ($300  x  128).....            450.00 
Unused zero bracket amount computation                                  
 required under sec. 63(e)(1)(D):                                       
    Zero bracket amount.................    $2,200.00                   
    Annualized itemized deductions......       450.00                   
                                         -------------                  
      Unused zero bracket amount........     1,750.00                   
    Annualized adjusted gross income.................           6,000.00
    Plus: unused zero bracket amount.................           1,750.00
                                         --------------                 
      Annualized tax table income....................           7,750.00
Tax from tables......................................             757.00
Amount specified in paragraph (a)(2) of this section                    
 (\3/4\  x  80 pct.  x  $757)........................            $454.20
                                                                        

    The exception described in paragraph (a)(2) applies, and no addition 
to tax will be imposed.

    Example (9). An unmarried taxpayer entitled to one exemption, has 
adjusted gross income of $16,000 and itemized deductions of $2,000 for 
the period for the period January 1, 1977, through August 31, 1977. D 
has no net earnings from self-employment and is entitled to no credits 
other than the general tax credit. D files a declaration of estimated 
tax on April 15, 1977, and on or before September 15, 1977, makes 
estimated tax payments for 1977 which total $3,000. For purposes of 
determining whether the exception in paragraph (a)(2) of this section 
applies, the following computations are necessary:

Adjusted gross income for the period ending Aug. 31, 1977,              
 on an annual basis ($16,000  x  128)..............      $24,000
Itemized deductions for the period ending Aug. 31, 1977, on             
 an annual basis ($2,000  x  128)..................       3,000 
    Annualized itemized deductions................   $3,000             
    Minus zero bracket amount.....................    2,200             
                                                   ---------            
      Excess itemized deductions..................      800             
    Annualized adjusted gross income.......................       24,000
    Minus excess itemized deductions.......................          800
                                                   ----------           
      Annualized tax table income..........................       23,200
    Minus: Personal exemption..............................          750
                                                   ----------           
      Annualized taxable income............................       22,450
Tax under sec. 1(c) on annualized taxable income...........        5,325
Minus: general tax credit..................................          180
                                                   ----------           
      Total................................................        5,145
Amount specified in paragraph (a)(2) of this section (\3/4\             
  x  80 pct.  x  $5,145)...................................        3,087
                                                                        

    The exception described in paragraph (a)(2) does not apply.

    (d) Determination of taxable income for installment periods--(1) In 
general. (i) In determining the applicability of the exceptions 
described in paragraph (a) (2) and (3) of this section, there must be an 
accurate determination of the amount

[[Page 790]]

of income and deductions for the calendar months in the taxable year 
preceding the installment date as of which the determination is made, 
that is, for the period terminating with the last day of the third, 
fifth, or eighth month of the taxable year. For example, a taxpayer 
distributes year-end bonuses to his employees but does not determine the 
amount of the bonuses until the last month of the taxable year. He may 
not deduct any portion of such year-end bonuses in determining his 
taxable income for any installment period other than the final 
installment period for the taxable year, since deductions are not 
allowable until paid or accrued, depending on the taxpayer's method of 
accounting.
    (ii) If a taxpayer on an accrual method of accounting wishes to use 
either of the exceptions described in paragraphs (a) (2) and (3) of this 
section, he must establish the amount of income and deductions for each 
applicable period. If his income is derived from a business in which the 
production, purchase, or sale of merchandise is an income-producing 
factor requiring the use of inventories, he will be unable to determine 
accurately the amount of his taxable income for the applicable period 
unless he can establish, with reasonable accuracy, his cost of goods 
sold for the applicable installment period. The cost of goods sold for 
such period shall be considered, unless a more exact determination is 
available, as such part of the cost of goods sold during the entire 
taxable year as the gross receipts from sales for such installment 
period is of gross receipts from sales for the entire taxable year.
    (2) Members of partnerships. The provisions of this subparagraph 
shall apply in determining the applicability of the exceptions described 
in paragraphs (a) (2) and (3) of this section to an underpayment of 
estimated tax by a taxpayer who is a member of a partnership.
    (i) For purposes of determining taxable income, there shall be taken 
into account:
    (A) The partner's distributive share of partnership items set forth 
under section 702,
    (B) The amount of any guaranteed payments under section 707(c), and
    (C) Gains or losses on partnership distributions which are treated 
as gains or losses on sales of property.
    (ii) For purposes of determining net earnings from self-employment 
(for taxable years beginning after December 31, 1966) there shall be 
taken into account:
    (A) The partner's distributive share of income or loss, described in 
section 702(a)(9), subject to the special rules set forth in section 
1402(a) and Secs. 1.1402(a)-1 to 1.1402(a)-16, inclusive, and
    (B) The amount of any guaranteed paments under section 707(c), 
except for payments received from a partnership not engaged in a trade 
or business within the meaning of section 1402(c) and Sec. 1.1402(c)-1.

In determining a partner's taxable income and, for taxable years 
beginning after December 31, 1966, net earnings from self-employment, 
for the months in his taxable year which precede the month in which the 
installment date falls, the partner shall take into account items set 
forth in sections 702 and 1402(a) for any partnership taxable year 
ending with or within his taxable year to the extent that such items are 
attributable year which precede the month in which the installment date 
falls. For special rules used in computing a partner's net earnings from 
self-employment in the case of the termination of his taxable year as a 
result of death, see section 1402(f) and Sec. 1.1402(f)-1. In addition, 
a partner shall include in his taxing after December 31, 1966, net 
earnings from self-employment, for the months in his taxable year which 
precede the month in which the installment date falls guaranteed 
payments from the partnership to the extent that such guaranteed 
payments are includible in his taxable income for such months. See 
section 706(a), section 707(c), paragraph (c) of Sec. 1.707-1 and 
section 1402(a).
    (iii) The provisions of subdivision (i) (A) and (B) of this 
subdivision (ii) of this subparagraph may be illustrated by the 
following examples:

    Example (1). A, whose taxable year is the calendar year, is a member 
of a partnership whose taxable year ends on January 31. A must take into 
account, in determining his taxable income for the installment due on 
April 15, 1973, all of his distributive share of

[[Page 791]]

partnership items described in section 702 and the amount of any 
guaranteed payments made to him which were deductible by the partnership 
in the partnership taxable year beginning on February 1, 1972, and 
ending on January 31, 1973. A must take into account, in determining his 
net earnings from self-employment, his distributive share of partnership 
income or loss described in section 702(a)(9), subject to the special 
rules set forth in section 1402(a) and Secs. 1.1402(a)-1 to 1.1402(a)-
16, inclusive.
    Example (2). Assume that the taxable year of the partnership of 
which A, a calendar year taxpayer, is a member ends on June 30. A must 
take into account in the determination of his taxable income and net 
earnings from self-employment for the installment due on April 15, 1973, 
his distributive share of partnership items for the period July 1, 1972, 
through March 31, 1973; for the installment due on June 15, 1973, he 
must take into account such amounts for the period July 1, 1972, through 
May 31, 1973; and for the installment due on September 15, 1973, he must 
take into account such amounts for the entire partnership taxable year 
of July 1, 1972, through June 30, 1973 (the date on which the 
partnership taxable year ends).

    (3) Beneficiaries of estates and trusts. In determining the 
applicability of the exceptions described in paragraph (a) (2) and (3) 
of this section as of any installment date, the beneficiary of an estate 
or trust must take into account his distributable share of income from 
the estate or trust for the applicable period (whether or not actually 
distributed) if the trust or estate is required to distribute income to 
him currently. If the estate or trust is not required to distribute 
income currently, only the amounts actually distributed to the 
beneficiary during such period must be taken into account. If the 
taxable year of the beneficiary and the taxable year of the estate or 
trust are different, there shall be taken into account the beneficiary's 
distributable share of income, or the amount actually distributed to him 
as the case may be, during the months in the taxable year of the estate 
or trust ending within the taxable year of the beneficiary which precede 
the month in which the installment date falls. See subparagraph (2) of 
this paragraph for examples of a similar rule which is applied when a 
partner and the partnership of which he is a member have different 
taxable years.
    (e) Special rule in case of change from joint return or separate 
return for the preceding taxable year--(1) Joint return to separate 
returns. In determining the applicability of the exceptions described in 
paragraph (a) (1) and (4) of this section to an underpayment of 
estimated tax, a taxpayer filing a separate return who filed a joint 
return for the preceding taxable year shall be subject to the following 
rule: The tax:
    (i) Shown on the return for the preceding taxable year, or
    (ii) Based on the tax rates and personal exemptions for the current 
taxable year but otherwise determined on the basis of the facts shown on 
the return for the preceding taxable year, and the law applicable to 
such year,

shall be that portion of the tax which bears the same ratio to the whole 
of the tax as the amount of the tax for which the taxpayer would have 
been liable bears to the sum of the taxes for which the taxpayer and his 
spouse would have been liable had each spouse filed a separate return 
for the preceding taxable year. For rules with respect to the allocation 
of joint payments of estimated tax, see section 6015(b) and 
Sec. 1.605(b)-1(b).
    (2) Examples. The rule in paragraph (i) of this paragraph may be 
illustrated by the following examples:

    Example (1). H and W filed a joint return for the calendar year 1955 
showing taxable income of $20,000 and a tax of $5,280. Of the $20,000 
taxable income, $18,000 was atributable to H, and $2,000 was 
attributable to W. H and W filed separate returns for 1956. The tax 
shown on the return for the preceding taxable year, for purposes of 
determining the applicability of the exception described in paragraph 
(a)(1) of this section to an underpayment of estimated tax by H for 
1956, is determined as follows:

Taxable income of H for 1955............................         $18,000
Tax on $18,000 (on basis of separate return)............           6,200
Taxable income of W for 1955............................           2,000
Tax on $2,000 (on basis of separate return).............             400
Aggregate tax of H and W (on basis of separate returns).           6,600
Portion of 1955 tax shown on joint return attributable                  
 to H (6200/6600 x 5280)................................           4,960
                                                                        

    Example (2). Assume the same facts as in example (1) and that H and 
W file a joint declaration of estimated tax for 1956 and pay estimated 
tax in amounts determined on the basis of their eligibility for three 
rather than two exemptions for 1956. H and W ultimately file separate 
income tax returns for 1956. Assume further that the exception described 
in paragraph (a)(1) of this section does not

[[Page 792]]

apply. The tax based on the tax rates and personal exemptions for 1956 
but otherwise determined on the basis of the facts shown on the return 
for 1955 and the law applicable to 1955, for purposes of determining the 
applicability of the exception described in paragraph (a)(4) of this 
section to an underpayment of estimated tax by H for 1956, is determined 
as follows:

Taxable income of H and W for 1955 based on additional                  
 personal exemption for 1956................................     $19,400
Tax on 1955 income based on joint return rate for 1956......       5,076
Portion of 1955 tax attributable to H (computed as in                   
 example (1) but allowing benefit of additional exemption to            
 H).........................................................   5900/6300
Portion of tax attributable to H based on tax rates and                 
 personal exemptions for 1956 but otherwise on facts on 1955            
 return ($5900/6300 x $5,076)...............................      $4,754
                                                                        

    Example (3). Assume that H and W had the same taxable income in 1972 
as in 1955, and that they filed a joint return for 1972 and separate 
returns for 1973. Assume further that H's taxable income for 1972 
included net earnings from self-employment in excess of the $9,000 
maximum base for the self-employment tax for 1972, and that the joint 
return filed by H and W for 1972 showed tax under Chapter 1 (other than 
section 56) and tax under Chapter 2 totaling $5,055. The tax shown on 
the return for 1972, for purposes of determining the applicability of 
the exception described in paragraph (a)(1) of this section to an 
underpayment of estimated tax by H for 1973, is determined as follows:

Taxable income of H for 1972............................         $18,000
Chapter 1 tax (other than section 56 tax) on $18,000 (on                
 basis of separate return)..............................           5,170
Self-employment income of H for 1972....................           9,000
Chapter 2 tax on $9,000.................................            $675
                                                         ---------------
Total of such taxes.....................................          $5,845
Taxable income of W for 1972............................           2,000
Chapter 1 tax (other than section 56 tax) on $2,000 (on                 
 basis of separate return)..............................             310
                                                         ---------------
Aggregate tax on H and W (on basis of separate returns).          $6,155
Portion of 1972 tax shown on joint return attributable                  
 to H (5845/6155 x $5,055)..............................       $4,800.40
                                                                        

    (3) Separate return to joint return. In the case of a taxpayer who 
files a joint return for the taxable year with respect to which there is 
an underpayment of estimated tax and who filed a separate return for the 
preceding taxable year:
    (i) The tax shown on the return for the preceding taxable year, for 
purposes of determining the applicability of the exception described in 
paragraph (a)(1) of this section, shall be the sum of both the tax shown 
on the return of the taxpayer and the tax shown on the return of the 
taxpayer's spouse for such preceding year, and
    (ii) The facts shown on both the taxpayer's return and the return of 
his spouse for the preceding taxable year shall be taken into account 
for purposes of determining the applicability of the exception described 
in paragraph (a)(4) of this section.
    (4) Example. The rules described in subparagraph (3) of this 
paragraph may be illustrated by the following example:

    Example. H and W filed separate income tax returns for the calendar 
year 1954 showing tax liabilities of $2,640 and $350, respectively. In 
1956 they married and participated in the filing of a joint return for 
that year. In the filing of a joint return for that year. Thus, for the 
purpose of determining the applicability of the exceptions described in 
paragraph (a)(1) and (4) of this section to an underpayment of estimated 
tax for the year 1955, the tax shown on the return for the preceding 
taxable year is $2,990 ($2,640 plus $350).

(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954 
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654, 
6655, and 7805))

[T.D. 7427, 41 FR 34029, Aug. 12, 1976, as amended by T.D. 7577, 43 FR 
59359, Dec. 20, 1978; T.D. 7585, 44 FR 1105, Jan. 4, 1979; T.D. 8016, 50 
FR 11855, Mar. 26, 1985; 50 FR 18244, Apr. 30, 1985]



Sec. 1.6654-3   Short taxable years of individuals.

    (a) In general. The provisions of section 6654, with certain 
modifications relating to the application of subsection (d) thereof, 
which are explained in paragraph (b) of this section, are applicable in 
the case of a short taxable year for which a declaration is required to 
be filed. (See Sec. 1.6015(g)-1 for requirement of declaration for short 
taxable year.)
    (b) Rules as to application of section 6654(d). (1) In any case in 
which the taxable year for which an underpayment of estimated tax exists 
is a short taxable year due to a change in annual accounting periods, in 
determining the tax:
    (i) Shown on the return for the preceding taxable year (for purposes 
of section 6654(d)(1)), or
    (ii) Based on the personal exemptions and rates for the current 
taxable year but otherwise on the basis of the facts

[[Page 793]]

shown on the return for the preceding taxable year, and the law 
applicable to such year (for purposes of section 6654(d)(4)),

the tax will be reduced by multiplying it by the number of months in the 
short taxable year and dividing the resulting amount by 12.
    (2) If the taxable year for which an underpayment of estimated tax 
exists is a short taxable year due to a change in annual accounting 
periods, in annualizing the taxable income for the months in the taxable 
year preceding an installment date, for purposes of section 
6654(d)(1)(C), the personal exemptions allowed as deductions under 
section 151 shall be reduced to the same extent that they are reduced 
under section 443(c) in computing the tax for a short taxable year.
    (3) If ``the preceding taxable year'' referred to in section 
6654(d)(4) was a short taxable year, for purposes of determining the 
applicability of the exception described in section 6654(d)(4), the tax, 
computed on the basis in the facts shown on the return for the preceding 
year, shall be the tax computed on the annual basis in the manner 
described in section 443(b)(1) (prior to its reduction in the manner 
described in the last sentence thereof). If the tax rates or the 
taxpayer's status with respect to personal exemptions for the taxable 
year with respect to which the underpayment occurs differ from such 
rates or status applicable to the preceding taxable year, the tax 
determined in accordance with this subparagraph shall be recomputed to 
reflect the rates and status applicable to the year with respect to 
which the underpayment occurs.

[T.D. 6500, 25 FR 12149, Nov. 26, 1960, as amended by T.D. 7427, 41 FR 
34033, Aug. 12, 1976]



Sec. 1.6654-4   Waiver of penalty for underpayment of 1971 estimated tax by an individual.

    (a) In general. Section 207 of the Revenue Act of 1971 provides 
that, in the case of individuals, the penalty prescribed by section 
6654(a) and Sec. 1.6654-1 for underpayment of estimated tax shall not 
apply in certain cases to taxable years beginning after December 31, 
1970, and ending before January 1, 1972. The penalty shall be waived 
only if the taxpayer meets one of the gross income requirements 
contained in paragraph (b) of this section and if the limitation 
contained in paragraph (c) of this section is not applicable.
    (b) Gross income requirement. Except as provided in paragraph (c) of 
this section, the waiver provided in paragraph (a) of this section shall 
be applicable only:
    (1) If the gross income for the taxable year does not exceed $10,000 
in the case of:
    (i) A single individual who is neither a head of a household (as 
defined in section 2(b)) nor a surviving spouse (as defined in section 
2(a)), or
    (ii) A married individual not entitled under section 6013 to file a 
joint return for the taxable year, or
    (2) If the gross income for the taxable year does not exceed $20,000 
in the case of:
    (i) A head of a household (as defined in section 2(b)) or
    (ii) A surviving spouse (as defined in section 2(a)), or
    (3) If the aggregate gross income for the taxable year does not 
exceed $20,000 in the case of a married individual (entitled under 
section 6013 to file a joint return for the taxable year) and his 
spouse.
    (c) Limitation. Notwithstanding any other provision of this section, 
the waiver provided in paragraph (a) of this section shall not be 
applicable if, in the taxable year, the taxpayer has income from sources 
other than wages (as defined in section 3401(a)) in excess of $200 ($400 
in the case of a husband and wife entitled to file a joint return for 
the taxable year under section 6013). Thus, for example, even if the 
aggregate gross income of a husband and wife (entitled under section 
6013 to file a joint return for the taxable year) does not exceed 
$20,000, the waiver of the penalty for underpayment of estimated tax 
shall not apply if the husband and wife have, in the aggregate, income 
from sources other than wages in excess of $400.

[T.D. 7282, 38 FR 19028, July 17, 1973]



Sec. 1.6654-5   Applicability.

    Section 6654 is applicable only with respect to taxable years 
beginning

[[Page 794]]

after December 31, 1954. Section 294(d) of the Internal Revenue Code of 
1939 shall continue in force with respect to taxable years beginning 
before January 1, 1955.

[T.D. 6500, 25 FR 12150, Nov. 26, 1960. Redesignated by T.D. 7282, 38 FR 
19028, July 17, 1973]



Sec. 1.6655-1   Addition to the tax in the case of a corporation.

    (a) In general. (1) Section 6655 imposes an addition to the tax 
under chapter 1 of the Code in the case of any underpayment of estimated 
tax by a corporation (with certain exceptions described in section 
6655(d)). This addition to the tax is in addition to any applicable 
criminal penalties and is imposed whether or not there was reasonable 
cause for the underpayment. The amount of the underpayment for any 
installment date is the excess of:
    (i) 70 percent of the tax shown on the return for the taxable year 
or, if no return was filed, 70 percent of the tax for such year, 
multiplied by the percentage of estimated tax required to be paid on or 
before the installment date, over
    (ii) The amount, if any, of the installment paid on or before the 
last day prescribed for such payment.
    (2) The amount of the addition is determined at the annual rate 
referred to in the regulations under section 6621 upon the underpayment 
of any installment of estimated tax for the period from the date such 
installment is required to be paid until the 15th day of the third month 
following the close of the taxable year, or the date such underpayment 
is paid, whichever is earlier. For purposes of determining the period of 
the underpayment (i) the date prescribed for payment of any installment 
of estimated tax shall be determined without regard to any extension of 
time, and (ii) a payment of estimated tax on any installment date, to 
the extent that it exceeds the amount of the installment determined 
under subparagraph (1)(i) of this paragraph for such date, shall be 
considered a payment of the previous underpayment, if any.
    (3) The term tax as used in subparagraph (1)(i) of this paragraph 
means the excess of the tax imposed by section 11 or 1201(a), or 
subchapter L, chapter 1 of the Code, whichever is applicable, over the 
sum of $100,000 and the credits against tax provided by sections 32, 33, 
and 38. However, for the rule with respect to the limitation upon the 
$100,000 exemption for members of certain electing affiliated groups, 
see section 243(b)(3)(C)(v) and the regulations thereunder.
    (4) For special rules relating to the determination of the amount of 
the underpayment in the case of a corporation whose income is included 
in a consolidated return, see Sec. 1.1502-5(b).
    (b) Statement relating to underpayment. If there has been an 
underpayment of estimated tax as of the installment date prescribed for 
its payment and the taxpayer believes that one or more of the exceptions 
described in Sec. 1.6655-2 precludes the assertion of the addition to 
the tax under section 6655, it should attach to its income tax return 
for the taxable year a Form 2220 showing the applicability of any 
exception upon which the taxpayer relies.
    (c) Example. The method prescribed in paragraph (a) of this section 
of computing the addition to the tax may be illustrated by the following 
example:

    Example. A corporation using the calendar year basis reported on its 
declaration for 1955, estimated tax in the amount of $50,000. It made 
payments of $2,500 each on September 15, 1955, and December 15, 1955. On 
March 15, 1956, it filed its final income tax return showing a tax 
liability of $200,000. Since the amount of each of the two installments 
paid by the last date prescribed for payment thereof was less than 5 
percent of 70 percent of the tax shown on the return, the addition to 
the tax under section 6655(a) is applicable and is computed as follows:

(1) Tax as defined in paragraph (a) of this section                     
 ($200,000-$100,000 (no credits allowable under sections                
 32 and 33))............................................        $100,000
(2) 70% of item (1).....................................          70,000
(3) Amount of estimated tax required to be paid on each                 
 installment date (5% of $70,000).......................           3,500
(4) Deduct amount paid on each installment date.........           2,500
                                                         ---------------
(5) Amount of underpayment for each installment date                    
 (item (3) minus item (4))..............................           1,000
                                                         ---------------
(6) Addition to the tax:                                                
  First installment--period 9-15-55 to 3-15-56..........              30
  Second installment--period 12-15-55 to 3-15-56........              15
                                                         ---------------
      Total.............................................              45
                                                                        


[[Page 795]]

[T.D. 6500, 25 FR 12150, Nov. 26, 1960, as amended by T.D. 6768, 29 FR 
14926, Nov. 4, 1964; T.D. 7244, 37 FR 28897, Dec. 30, 1972; T.D. 7384, 
40 FR 49322, Oct. 22, 1975]



Sec. 1.6655-2   Exceptions to imposition of the addition to the tax in the case of corporations.

    (a) In general. The addition to the tax under section 6655 will not 
be imposed for any underpayment of any installment of estimated tax if, 
on or before the date prescribed for payment of the installment, the 
total amount of all payments of estimated tax made equals or exceeds the 
amount which would have been required to be paid on or before such date 
if the estimated tax were the least of the following amounts:
    (1) The tax shown on the return for the preceding taxable year, 
provided that the preceding taxable year was a year of 12 months and a 
return showing a liability for tax was filed for such year;
    (2) An amount equal to a tax determined on the basis of the tax 
rates for the taxable year but otherwise on the basis of the facts shown 
on the return for the preceding taxable year and the law applicable to 
such year, in the case of a corporation required to file a return for 
such preceding taxable year; or
    (3) An amount equal to 70 percent of the tax determined by placing 
on an annual basis the taxable income for:
    (i) The first 3 months of the taxable year, in the case of the 
installment required to be paid in the 4th month,
    (ii) Either the first 3 months or the first 5 months of the taxable 
year (whichever results in no addition being imposed), in the case of 
the installment required to be paid in the 6th month,
    (iii) Either the first 6 months or the first 8 months of the taxable 
year (whichever results in no addition being imposed), in the case of 
the installment required to be paid in the 9th month, and
    (iv) Either the first 9 months or the first 11 months of the taxable 
year (whichever results in no addition being imposed), in the case of 
the installment required to be paid in the 12th month.

The taxable income so determined shall be placed on an annual basis by 
first multiplying it by 12, and then dividing the resulting amount by 
the number of months in the taxable year for which the taxable income 
was so determined.
    (4) In the case of a taxpayer whose taxable year consists of 52 or 
53 weeks in accordance with section 441(f), the rules prescribed by 
paragraph (b) of Sec. 1.441-2 shall be applicable in determining, for 
purposes of subparagraph (1) of this paragraph, whether a taxable year 
was a year of 12 months and in determining, for purposes of subparagraph 
(3) of this paragraph, the commencement of the 3-month period, or the 3- 
or 5-month period, or the 6- or 8-month period, or the 9- or 11-month 
period, whichever is applicable. For example, if a taxable year begins 
on December 26, 1956, taxable income for the first 6 months of such 
year, for purposes of subparagraph (3) of this paragraph, shall be 
taxable income for the period beginning on December 26, 1956, and ending 
on June 30, 1957, since such taxable year is deemed to commence on 
January 1, 1957, under section 441(f).
    (5) If the end of any accounting period employed by the taxpayer 
(e.g., any of either thirteen 4-week periods or four 13-week periods) 
does not correspond to the termination date of the applicable 3-month, 
or 3- or 5-month, or 6- or 8-month, or 9- or 11-month, period, taxable 
income shall be determined from the beginning of the taxable year to the 
close of the accounting period ending immediately before the termination 
date of the applicable 3-month, or 3- or 5- month, or 6- or 8-month, or 
9- or 11-month, period and to the close of the accounting period within 
which such termination date falls. There shall be determined that 
portion of the difference between the two amounts of taxable income so 
determined which bears the same ratio to the total difference between 
such amounts as the number of days from the close of the first such 
accounting period to the close of such applicable 3-month, or 3- or 5-
month, or 6- or 8-month, or 9- or 11-month, period bears to the total 
number of days between the termination dates of such two accounting 
periods. The portion of the difference

[[Page 796]]

between such amounts so determined shall then be added to (or subtracted 
from) taxable income determined to the close of the first such 
accounting period to determine taxable income for such applicable 3-
month, or 3- or 5-month, or 6- or 8-month, or 9- or 11-month, period. 
For example, a taxpayer whose taxable year consists of 52 or 53 weeks in 
accordance with section 441(f) has a taxable year beginning on December 
26, 1956, and thirteen 4-week accounting periods are employed in 
determining taxable income. Taxable income from December 26, 1956, to 
the close of the 4-week accounting period ending on June 11, 1957, is 
$200,000, and taxable income from December 26, 1956, to the close of the 
4-week accounting period ending on July 9, 1957, is $228,000. Taxable 
income for the 6-month period ending on June 30, 1957, is $219,000 
($200,000+(19 x 28,000 28)).
    (b) Meaning of terms. (1) For the purpose of the exceptions 
described in paragraph (a) of this section, the term tax means the 
excess of the tax imposed by section 11 or 1201(a), or subchapter L, 
chapter 1 of the Code, whichever is applicable, over the sum of $100,000 
plus the credits against tax allowed by sections 32, 33, and 38.
    (2) The credits against the tax allowed by sections 32, 33, and 38, 
are:
    (i) In the case of the exception described in paragraph (a)(1) of 
this section, such credits shown on the return for the preceding taxable 
year,
    (ii) In the case of the exception described in paragraph (a)(2) of 
this section, such credits shown on the return for the preceding taxable 
year, except that if the amount of any such credits would be affected by 
any change in rates, the credits shall be determined by reference to the 
rates applicable to the current taxable year, and
    (iii) In the case of the exception described in paragraph (a)(3) of 
this section, such credits computed under the law and rates applicable 
to the current taxable year.

The provisions of subdivision (ii) of this subparagraph may be 
illustrated by the following example:

    Example. Assume that during the taxable year within which the normal 
tax rate in section 11 changes from 30 percent to 25 percent, 
Corporation X has an underpayment of estimated tax. One-fourth of the 
taxable income of Corporation X for the taxable year preceding that in 
which such underpayment occurs was from sources within foreign country 
Y. The return of Corporation X for such preceding year shows taxable 
income of $325,000 and a tax, without regard to any credits, of 
$163,500. The credit allowed by section 33 on account of taxes paid to 
foreign country Y may not exceed one-fourth of such amount, or $40,875, 
under section 904. The tax for the preceding year, computed by using the 
rates applicable to the year during which the underpayment occurs, would 
be reduced to $147,250 and the limitation under section 904 on the 
credit allowed under section 33 for taxes paid to foreign country Y 
would be reduced to $36,812.50, for purposes of determining the 
applicability of the exception described in paragraph (a)(2) of this 
section. Therefore, the exception described in paragraph (a)(2) of this 
section will be applicable if, on or before the date prescribed for such 
payment, the total amount paid by Corporation X equals or exceeds the 
amount which would have been required to be paid by such date if the 
estimated tax were $10,437.50 ($147,250 less 
($100,000$36,812.50)).

    (3) For the purpose of the exceptions described in paragraphs (a) 
(1) and (2) of this section, the term ``return for the preceding taxable 
year'' means the income tax return for such year which is required by 
section 6012(a)(2).
    (c) Examples. The application of the exceptions to the imposition of 
the addition to tax may be illustrated by examples employing the 
following statement of facts:

                           Statement of Facts

    Y, a corporation reporting on a calendar year basis, filed a 
declaration on April 15, 1965, showing an estimated tax of $47,100 for 
its taxable year ending December 31, 1965. The first installment of 4 
percent of the estimated tax or $1,884 was paid with the filing of the 
declaration, the second installment in the same amount was paid on June 
15, 1965, and the third and fourth installments of $11,775 (25 percent 
of the estimated tax) each were paid on September 15, 1965, and December 
15, 1965, respectively. Y reported a tax liability of $175,900 on its 
return due March 15, 1966. There was an underpayment in the amount of 
$241.20 on each of the first and second installment dates and $1,507.50 
on each of the third and fourth installments dates determined as 
follows:

(1) Tax as defined in paragraph (b) of this section                     
 ($175,900-$100,000)....................................      $75,900.00
(2) 70% of item (1).....................................       53,130.00
(3) 4% of item (2)......................................        2,125.20

[[Page 797]]

                                                                        
(4) Deduct amount paid on each of the first and second                  
 installment dates......................................        1,884.00
                                                         ---------------
(5) Amount of underpayment at each of the first and                     
 second installment dates (item (3) minus item (4)).....          241.20
                                                         ===============
(6) 25% of item (2).....................................       13,282.50
(7) Deduct amount paid on each of the last two                          
 installment dates......................................       11,775.00
                                                         ---------------
(8) Amount of underpayment at each of the third and                     
 fourth installment dates (item (6) minus item (7)).....        1,507.50
                                                         ===============
                                                                        

The application of each exception described in paragraph (a) of this 
section is determined as follows:
    (1) Assume Y reported a liability of $158,000 on its return for the 
taxable year ending December 31, 1964. If the estimated tax were 
$158,000 reduced by $100,000, or $58,000, the amount which would have 
been required to be paid on or before each of the first and second 
installment dates would be 4 percent of $58,000, or $2,320. The amount 
which would have been required to be paid on or before each of the third 
and fourth installment dates would be 25 percent of $58,000, or $14,500. 
Since these amounts exceed the corresponding amounts actually paid on 
each installment date ($1,884 and $11,775, respectively), the exception 
described in paragraph (a) (1) of this section does not apply.
    (2) As the corporation tax rates under section 11 are different for 
the taxable years ending December 31, 1964, and December 31, 1965, the 
amount of tax determined under paragraph (a)(2) of this section and the 
amounts required to be paid on or before each installment date must be 
determined. The tax liability determined on the basis of the calendar 
year 1965 rates but on the basis of the calendar year 1964 return is 
$151,900 and the estimated tax is $151,900 less $100,000, or $51,900. 
The amount which would have been required to be paid on or before each 
of the first and second installment dates would be 4 percent of $51,900, 
or $2,076, and the amount which would have been required to be paid on 
or before each of the third and fourth installment dates would be 25 
percent of $51,900, or $12,975. Since these amounts exceed the 
corresponding amounts actually paid on each installment date ($1,884 and 
$11,775, respectively), the exception described in paragraph (a)(2) of 
this section does not apply.
    (3) Y determined that its taxable income for the first 3, 5, 6, 8, 
9, and 11 months was $87,500, $155,000, $185,000, $246,000, $288,000, 
and $341,000, respectively. The income for each period is annualized as 
follows:

                     $87,500 x 123=$350,000

                     $155,000 x 125=$372,000

                     $185,000 x 126=$370,000

                     $246,000 x 128=$369,000

                     $288,000 x 129=$384,000

                    $341,000 x 1211=$372,000

To determine whether the installment payment made on April 15, 1965, 
equals or exceeds the amount which would have been required to be paid 
if the estimated tax were equal to 70 percent of the tax computed on the 
annualized income for the 3-month period, the following computation is 
necessary:

                                                                        
                                                             3 months   
                                                                        
(1) Annualized income...................................        $350,000
(2) Tax on item (1) reduced by $100,000.................          61,500
(3) 70 percent of item (2)..............................          43,050
(4) 4 percent of item (3)...............................           1,722
                                                                        

To determine whether the installment payments made on or before June 15, 
1965, equal or exceed the amount which would have been required to be 
paid if the estimated tax were equal to 70 percent of the tax computed 
on the annualized income for either the 3- or 5-month period, the 
following computation is necessary:

------------------------------------------------------------------------
                                            3 months         5 months   
------------------------------------------------------------------------
(1) Annualized income.................      $350,000.00      $372,000.00
(2) Tax on item (1) reduced by                                          
 $100,000.............................        61,500.00        72,060.00
(3) 70 percent of item (2)............        43,050.00        50,442.00
(4) 8 percent of item (3).............         3,444.00         4,035.36
------------------------------------------------------------------------

To determine whether the installment payments made on or before 
September 15, 1965, equal or exceed the amount which would have been 
required to be paid if the estimated tax were equal to 70 percent of the 
tax computed on the annualized income for either the 6- or 8-month 
period, the following computation is necessary:

------------------------------------------------------------------------
                                            6 months         8 months   
------------------------------------------------------------------------
(1) Annualized income.................      $370,000.00      $369,000.00
(2) Tax on item (1) reduced by                                          
 $100,000.............................        71,100.00        70,620.00
(3) 70 percent of item (2)............        49,770.00        49,434.00
(4) 33 percent of item (3)............        16,424.10        16,313.22
------------------------------------------------------------------------

To determine whether the installment payments made on or before December 
15, 1965, equal or exceed the amount which would have been required to 
be paid if the estimated tax were equal to 70 percent of the tax 
computed on the annualized income for either the 9- or 11-month period, 
the following computation is necessary:

[[Page 798]]



------------------------------------------------------------------------
                                            9 months        11 months   
------------------------------------------------------------------------
(1) Annualized income.................      $384,000.00      $372,000.00
(2) Tax on item (1) reduced by                                          
 $100,000.............................        77,820.00        72,060.00
(3) 70 percent of item (2)............        54,474.00        50,442.00
(4) 58 percent of item (3)............        31,594.92        29,256.36
------------------------------------------------------------------------

    The total amounts of all payments of estimated tax actually paid on 
or before the installment dates of April 15, 1965, June 15, 1965, 
September 15, 1965, and December 15, 1965, are $1,884, $3,768, $15,543, 
and $27,318, respectively. Since the total amounts of estimated tax 
actually paid on the first and second installment dates (April 15, 1965, 
and June 15, 1965) exceed the amounts required to be paid on such dates 
if the estimated tax were 70 percent of the tax determined by placing on 
an annualized basis the taxable income for the first 3 months of the 
taxable year, the exception described in paragraph (a)(3) of this 
section applies and no addition to tax will be imposed for the 
installments paid on April 15, 1965, and June 15, 1965. However, since 
the total amount of all payments of estimated tax actually paid on or 
before the third and fourth installment dates (September 15, 1965, and 
December 15, 1965) does not equal or exceed the applicable alternative 
amounts, the addition to the tax with respect to the underpayment of the 
September 15, 1965, and December 15, 1965, installments must be imposed.

    (d) Determination of taxable income for portion of taxable year. In 
determining the applicability of the exception described in paragraph 
(a)(3) of this section, there must be an accurate determination of the 
amount of income and deductions for the appropriate period, that is, for 
the first 3, 5, 6, 8, 9, or 11 months of the taxable year. See paragraph 
(d)(1) of Sec. 1.6654-2 for a description of a similar requirement with 
respect to individuals.

[T.D. 6500, 25 FR 12151, Nov. 26, 1960, as amended by T.D. 6768, 29 FR 
14926, Nov. 4, 1964]



Sec. 1.6655-2T  Safe harbor for certain installments of tax due before July 1, 1987 (temporary).

    (a) Applicability--(1) Safe harbor. The safe harbor provided by 
paragraph (b) of this section applies only to installment payments of 
corporate estimated tax required to be made before July 1, 1987, for 
taxable years beginning in 1987.
    (2) Subsequent payment. The requirement that a corporation using the 
safe harbor provided by this section make a timely subsequent 
installment payment in accordance with paragraph (c) of this section 
applies with respect to the corporation's first installment payment 
(``the subsequent installment payment'') of estimated tax required to be 
made after the last payment computed under the safe harbor rule.
    (3) Section inapplicable to new corporation. This section shall not 
apply in the case of any corporation whose first taxable year began 
after December 31, 1986.
    (b) Safe harbor for use of annualization exception--(1) In general. 
A corporation computing an installment payment of estimated tax using 
the annualization exception provided in section 6655(d)(3) will not be 
subject to an addition to tax under section 6655 with respect to an 
installment payment of estimated tax that satisfies the requirements of 
this paragraph (b), except as provided in paragraph (c) of this section. 
For purposes of this paragraph (b)--
    (i) A corporation shall assume that its annualized taxable income 
for the current year equals or exceeds 120 percent of the taxable income 
shown on its return for the preceding taxable year, and
    (ii) The term ``tax'' as used in section 6655(d)(3) shall be defined 
by reference to section 6655(f) without regard to section 6655(f)(1) (B) 
and (C) (that is, without regard to the alternative minimum tax imposed 
by section 55 or the environmental tax imposed by section 59A).
    (2) Special rules for determining taxable income for preceding year. 
For purposes of paragraph (b)(1)(i) of this section, the taxable income 
shown on the return of the corporation for its preceding taxable year 
shall be--
    (i) Adjusted to eliminate any net operating loss deduction taken 
into account in that preceding year, and
    (ii) Annualized, if that preceding year was of less than 12 months.
    (3) Credits taken into account--(i) In general. In computing the 
amount of an installment payment under paragraph (b)(1) of this section, 
the corporation may take into account any credits against tax that are 
permitted to be

[[Page 799]]

taken into account under section 6655(d)(3) for the current taxable 
year.
    (ii) Foreign tax credit. For purposes of paragraph (b)(3)(i) of this 
section, the amount of foreign tax credit that is permitted to be taken 
into account for the current taxable year is equal to the foreign tax 
credit allowed for the preceding taxable year multiplied by the fraction 
specified in the following sentence. The numerator of the fraction is 
the highest tax rate applicable for the taxable year under section 11, 
as adjusted under section 15, and the denominator is 46 percent. This 
alternative computation of the foreign tax credit is applicable only for 
purposes of computing a safe harbor installment payment under paragraph 
(b) of this section and cannot be applied for other estimated tax 
purposes.
    (4) Net operating loss carryover. A corporation that has a net 
operating loss carryover as of the first day of the taxable year for 
which the estimated tax is being paid may use that carryover to reduce 
the annualized taxable income referred to in paragraph (b)(1)(i) of this 
section. For example, if a corporation with a net operating loss 
carryover of $3,000 had taxable income of $10,000 in 1986, it may use 
the carryover to reduce its annualized taxable income to $9,000, 
(($10,000  x  120%) - 3,000).
    (c) Corporation must bring aggregate payments to required level 
through timely subsequent installment--(1) In general. A corporation 
using the safe harbor provided by paragraph (b) of this section shall 
make a timely subsequent installment payment of estimated tax in an 
amount sufficient to satisfy the requirements of either paragraph (c)(3) 
or paragraph (c)(4) of this section.
    (2) Applicable percentage. For purposes of this paragraph (c), the 
applicable percentage is--
    (i) 45 percent (50 percent  x  90 percent), if the subsequent 
installment payment is the second installment payment for the taxable 
year, or
    (ii) 67.5 percent (75 percent  x  90 percent), if the subsequent 
installment payment is the third installment payment for the taxable 
year.
    (3) Annualization exception. The subsequent installment payment of a 
corporation satisfies the requirements of this paragraph (c)(3) if the 
amount of the payment is sufficient to satisfy the requirements of 
section 6655(d)(3) with respect to all applicable taxes specified in 
section 6655(f). Thus, the corporation must determine its annualized 
taxable income under section 6655(d)(3)(A) (ii) or (iii), whichever is 
applicable, and compute the resulting tax. The resulting tax shall 
include the alternative minimum tax under section 55 and the 
environmental tax under section 59A and may take credits into account to 
the extent permitted under section 6655(d)(3). The sum of this 
subsequent installment payment and the earlier installment payment or 
payments of the corporation must equal or exceed the applicable 
percentage of the tax so computed. In determining whether the 
corporation has satisfied the requirements of section 6655(d)(3)(A) (ii) 
or (iii) with respect to the subsequent installment, the safe harbor 
provided in paragraph (b)(1) of this section shall not apply.
    (4) Installment payments equal to applicable percentage of tax shown 
on return. The subsequent installment payment of a corporation satisfies 
the requirement of this paragraph (c)(4) if the sum of that payment and 
the earlier installment payment or payments of the corporation equals or 
exceeds the applicable percentage of the tax shown on the return of the 
corporation for the taxable year to which the installment payments 
relate. The tax shown on the return includes all taxes specified in 
section 6655(f).
    (5) Consequence of corporation's failure to satisfy requirements for 
subsequent installment--(i) In general. If a corporation fails to 
satisfy the requirements set out in this paragraph (c), the corporation 
shall lose the benefit of the safe harbor provided by paragraph (b)(1) 
of this section.
    (ii) Limit on penalty. The aggregate underpayment penalty with 
respect to any installment payment or payments for which a corporation 
loses the benefit of the safe harbor under paragraph (c)(5)(i) of this 
section shall be limited to the ``shortfall penalty amount.'' The 
shortfall penalty amount is the penalty that would be imposed under 
section 6655(a) if there were an underpayment of the subsequent 
installment payment equal to the excess of--

[[Page 800]]

    (A) The amount required to be paid, as determined under this 
paragraph (c), on or before the due date of the subsequent installment 
payment, over
    (B) The amount actually paid on or before such date with respect to 
the subsequent installment payment.

For purposes of this determination, the period of the underpayment shall 
run from the due date of the subsequent installment payment until the 
earlier of the dates specified in section 6655(c) (1) or (2).
    (iii) Example. The provisions of this paragraph (c)(5) may be 
illustrated by the following example:

    Example. Corporation M, which uses the calendar year as its taxable 
year, relies on the safe harbor provided by paragraph (b) of this 
section for its first two installment payments of estimated tax for 
1987. M is required by this paragraph (c) to make a timely subsequent 
installment payment of $1,000,000 by September 15, 1987, but M's actual 
installment payment by that date is only $990,000. Because of this 
shortfall, M loses the benefit of the safe harbor and is subject to 
underpayment penalties with respect to the first two installments. The 
aggregate penalties with respect to those two installments, however, 
cannot exceed the amount of the underpayment penalty to which M would be 
subject if there were an underpayment of $10,000 with respect to the 
September 15, 1987, installment payment. Such penalties are independent 
of any penalty that may apply with respect to M's third installment 
payment under the normal rules of section 6655.

    (d) Example. The provisions of this section may be illustrated by 
the following example:

    Example. (i) Corporation X (which is not a life insurance company) 
uses as its taxable year a fiscal year ending on January 31 and is 
required to pay an installment of estimated income tax by May 15, 1987, 
for its taxable year beginning on February 1, 1987. On its return for 
the taxable year ending January 31, 1987, which was a year of 12 months, 
X reported taxable income of $10,000,000 ($9,000,000 of which was 
ordinary income and $1,000,000 of which was net capital gain) and did 
not claim any net operating loss deduction. As of February 1, 1987, X 
has no net operating loss carryforwards and no credit carryforwards. X 
has no credits against tax that are permitted to be taken into account 
under section 6655(d)(3) for 1987. If X uses the safe harbor provided in 
paragraph (b)(1) of this section, X must make by May 15, 1987, an 
installment payment of estimated tax of at least $1,037,836, computed as 
follows:

(1) Taxable income shown on return for taxable year                     
 ending on January 31, 1987............................      $10,000,000
(2) Annualized taxable income for taxable year ending                   
 January 31, 1988, determined pursuant to paragraph                     
 (b)(1) of this section (Item (1)x120%)................      $12,000,000
                                                                        
(Note: 120%xordinary income of $9,000,000=$10,800,000;                  
120%xnet capital gain of $1,000,000=$1,200,000)                         
                                                                        
 (3) Tax on annualized taxable income (Item 2) using                    
 rates under section 11 and 1201, taking into account                   
 section 15, applicable to the taxable year ending                      
 January 31, 1988......................................       $4,612,603
(4) Amount described in section 6655(d)(3)(A)(i) (Item                  
 (3)x22.5%)............................................       $1,037,836
                                                                        

    (ii) To preclude imposition of an addition to tax under section 6655 
with respect to its May 15, 1987, installment payment, X must make by 
July 15, 1987, a second installment payment of estimated tax sufficient 
to bring its aggregate payments to the minimum level required under 
paragraph (c) of this section.
    (iii) X may satisfy the requirements of paragraph (c)(3) of this 
section by making a second installment payment sufficient to bring X 
within the exception provided in section 6655(d)(3). Thus, if X 
determines under that section that the aggregate of X's installment 
payments of estimated tax by July 15, 1987, must equal at least 
$3,000,000, X may obtain the benefit of the safe harbor provided in 
paragraph (b)(1) of this section with respect to the May 15, 1987, 
installment payment by making a timely second installment payment of 
$1,962,164 ($3,000,000--$1,037,836).
    (iv) Even if X fails to satisfy the requirements of paragraph (c)(3) 
of this section, X may obtain the benefit of the safe harbor for the May 
15, 1987, installment payment if X's second installment payment, when 
aggregated with the first payment, equals at least 45 percent of the tax 
(including the alternative minimum tax under section 55 and the 
environmental tax under section 59A) shown on X's return for X's taxable 
year beginning on February 1, 1987. Thus, if the tax shown on that 
return is $6,000,000, X's second installment payment under paragraph 
(c)(4) of this section must be at least $1,662,164, computed as follows:

45 percent of $6,000,000...............................       $2,700,000
    less first payment.................................        1,037,836
                                                        ----------------

[[Page 801]]

                                                                        
Minimum second installment.............................       $1,662,164
                                                                        


[T.D. 8132, 52 FR 10051, Mar. 30, 1987]



Sec. 1.6655-3   Short taxable years in the case of corporations.

    (a) In general. The provisions of section 6655, with certain 
modifications relating to the application of subsection (d) thereof, 
which are explained in paragraph (b) of this section, are applicable in 
the case of a short taxable year for which a declaration is required to 
be filed. (See Sec. 1.6016-4 for requirement of declaration for short 
taxable year.)
    (b) Rules as to application of section 6655(d). In any case in which 
the taxable year for which an underpayment of estimated tax exists is a 
short taxable year due to a change in annual accounting periods, in 
determining the tax:
    (1) Shown on the return for the preceding taxable year (for purposes 
of section 6655(d)(1));
    (2) Based on the current year's rates but otherwise on the basis of 
the facts shown on the return for the preceding taxable year and the law 
applicable to such year (for purposes of section 6655(d)(2)); or
    (3) Computed by placing taxable income for a portion of the current 
year on an annual basis under section 6655(d)(3);

the tax will be reduced by multiplying it by the number of months in the 
short taxable year and dividing the resulting amount by 12. The 
application of the exception provided in section 6655(d)(3) shall be 
determined as if the estimated tax were 70 percent of the tax so 
reduced.
    (c) Preceding taxable year a short taxable year. If ``the preceding 
taxable year'' referred to in section 6655(d)(2) was a short taxable 
year, the tax computed on the basis of the facts shown on the return for 
such preceding year, for purposes of determining the applicability of 
the exception described in section 6655(d)(2), shall be the tax computed 
on the annual basis in the manner described in section 443(b)(1) (prior 
to its reduction in the manner described in the last sentence thereof). 
If the tax rates for the taxable year with respect to which the 
underpayment occurs differ from the rates applicable to the preceding 
taxable year, the tax determined in accordance with the preceding 
sentence shall be recomputed using the rates applicable to the year with 
respect to which the underpayment occurs.

[T.D. 6500, 25 FR 12152, Nov. 26, 1960]



Sec. 1.6655-5   Addition to tax on account of excessive adjustment under section 6425.

    (a) In general. (1) Section 6655(g) imposes an addition to the tax 
under chapter 1 of the Code in the case of any excessive amount (as 
defined in subparagraph (3) of this paragraph) of an adjustment under 
section 6425 which is made before the 15th day of the third month 
following the close of a taxable year beginning after December 31, 1967. 
This addition to tax is imposed whether or not there was reasonable 
cause for an excessive adjustment.
    (2) If the amount of an adjustment under section 6425 is excessive, 
there shall be added to the tax under chapter 1 for the taxable year an 
amount determined at the annual rate referred to in the regulations 
under section 6621 upon the excessive amount from the date on which the 
credit is allowed or the refund paid to the 15th day of the third month 
following the close of the taxable year. A refund is paid on the date it 
is allowed under section 6407.
    (3) The excessive amount is equal to the lesser of the amount of the 
adjustment or the amount by which (i) the income tax liability (as 
defined in section 6425(c) of the Code) for the taxable year, as shown 
on the return for the taxable year, exceeds (ii) the estimated income 
tax paid during the taxable year, reduced by the amount of the 
adjustment.
    (4) The computation of the addition to the tax imposed by section 
6655 is made independently of, and does not affect the computation of, 
any addition to the tax which a corporation may otherwise owe for an 
underpayment of an installment of estimated tax.
    (5) The provisions of section 6655 may be illustrated by the 
following example:

    Example. Corporation A, a calendar year taxpayer, had an 
underpayment as defined in section 6655(b) for its fourth installment of

[[Page 802]]

estimated tax which was due on December 15, 1968, in the amount of 
$10,000. Nevertheless, on January 1, 1969, corporation A filed an 
application for adjustment of overpayment of estimated income tax for 
1968 in the amount of $20,000. On February 15, 1969, the Internal 
Revenue Service in response to the application, refunded $20,000 to 
Corporation A. On March 15, 1969, corporation A filed its 1968 tax 
return and made a payment in settlement of its total tax liability. 
Under section 6655(a), corporation A is subject to an addition to tax in 
the amount of $150 ($10,000 x 6 percent x \3/12\) on account of 
corporation A's December 15, 1968 underpayment. Under section 6655(g) 
corporation A is subject to an addition to tax in the amount of $100 
($20,000 x 6 percent  x \1/2\) on account of corporation A's excessive 
adjustment under section 6425. In determining the amount of the addition 
to tax under section 6655(a) for failure to pay estimated income tax, 
the excessive adjustment under section 6425 is not taken into account.

    (6) An adjustment is generally to be treated as a reduction of 
estimated income tax paid as of the date of the adjustment. However, for 
purposes of Secs. 1.6655-1 through 1.6655-3, the adjustment is to be 
treated as if not made in determining whether there has been any 
underpayment of estimated income tax and, if there is an underpayment, 
the period during which the underpayment existed.

[T.D. 7059, 35 FR 14548, Sept. 17, 1970, as amended by T.D. 7384, 40 FR 
49322, Oct. 22, 1975]



Sec. 1.6655-7  Special rules for estimating the corporate alternative minimum tax book income adjustment under the annualization exception.

    (a) In general. For purposes of section 6655(e) (relating to the 
``annualization exception'') a corporate taxpayer must take into account 
the tax imposed by section 55 (relating to the alternative minimum tax) 
and the tax imposed by section 59A (relating to the environmental tax). 
Thus, a taxpayer using the annualization exception must estimate 
alternative mimimum taxable income, including the book income 
adjustment, for the period of the taxable year that is annualized (the 
``annualization period'').
    (b) Estimating the book income adjustment. The book income 
adjustment for the annualization period is determined in accordance with 
the rules of Sec. 1.56-1, except as otherwise provided in this section.
    (c) Applicable financial statement for the annualization period--(1) 
In general. A taxpayer's applicable financial statement for an 
annualization period is the financial statement of highest priority 
described in section 56(f)(3)(A) and Sec. 1.56-1(c) that is prepared for 
such annualization period by the date the installment payment is due. 
However, if a taxpayer reasonably expects to have a financial statement 
of higher priority for such period no later than 30 days after the date 
the installment payment is due, the taxpayer shall make a reasonable 
estimate of the adjusted net book income that will result from such 
statement, and such estimate shall be used as the taxpayer's adjusted 
net book income for that annualization period. If the date that is 30 
days after the due date of the installment falls on a Saturday, Sunday 
or legal holiday, the 30-day period is extended to the immediately 
following day that is not a Saturday, Sunday or legal holiday. For 
example, an event arising subsequent to the installment due date that 
causes the taxpayer's estimate of net book income to be understated will 
not result in a recomputation of the book income adjustment for the 
annualization period, if, based on all the facts and circumstances at 
the time the installment payment was made, it was not reasonably 
foreseeable that the subsequent event would occur.
    (2) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. A is a public corporation that is a calendar year taxpayer. 
A's first installment payment of estimated tax is due April 15. A uses 
the annualization exception under section 6655(e) in order to determine 
whether it is liable for an addition to tax due to an underpayment of 
estimated tax. In the case of the first installment, the applicable 
annualization period is the first three months of the taxable year. On 
April 15, A has an unaudited financial statement for the first three-
month period that is used for credit purposes. By May 15, A will file a 
quarterly report, Form 10-Q, with the Securities and Exchange 
Commission. Since the financial statement filed with the SEC has higher 
priority than the unaudited statement and A can reasonably expect to 
have such statement no later than 30 days after

[[Page 803]]

the installment due date, A must make a reasonable estimate of the 
adjusted net book income that will result from such statement. This 
estimate shall be used as A's adjusted net book income for the 
annualization period.

    (d) Earnings and profits--(1) In general. If an applicable financial 
statement is not available by the date a payment is due for an 
annualization period or reasonably expected to be available no later 
than 30 days after the payment is due under the rules of paragraph (c) 
of this section, current earnings and profits for the applicable 
annualization period must be used in lieu of net book income. See 
Sec. 1.56-1(b)(5) for rules relating to computing current earnings and 
profits for purposes of computing the book income adjustment.
    (2) Election to use earnings and profits--(i) In general. A taxpayer 
may elect to use current earnings and profits for the applicable 
annualization period if the taxpayer has only a statement for such 
period that is described in section 56(f)(3)(A)(iv) and Sec. 1.56-
1(c)(1)(iv) and th taxpayer has elected under the rules of section 
56(f)(3)(B)(ii) and Sec. 1.56-1(c)(2) to use current earnings and 
profits to compute the book income adjustment for purposes of filing its 
annual Federal income tax return. Once the election has been made, 
current earnings and profits must be used for any annualization period 
for which the taxpayer has only an applicable financial statement 
described in section 56(f)(3)(A)(iv) and Sec. 1.56-1(c)(1)(iv).
    (ii) Election during 1987 taxable year. During its taxable year 
beginning in 1987, a taxpayer may elect to use current earnings and 
profits for an applicable annualization period even if the taxpayer has 
not elected to use current earnings and profits for purposes of 
computing its annual Federal income tax liability under section 
56(f)(3)(B)(ii) and Sec. 1.56-1(c)(2). In addition, a taxpayer electing 
in 1987 to use current earnings and profits for purposes of its 
installment payments of estimated tax is not required to use current 
earnings and profits to compute the book income adjustment when filing 
its annual Federal income tax return. However, unless an annual election 
under section 56(f)(3)(B)(ii) is made when filing the taxpayer's 1987 
Federal income tax return, the election to use current earnings and 
profits for purposes of computing its estimated tax liability in taxable 
years beginning after 1987 is terminated.
    (iii) Manner of making election. If a taxpayer elects to use current 
earnings and profits for the applicable annualization period under the 
rules of this section, the taxpayer must attach a statement to its 
Federal income tax return for the taxable year in which the election was 
made. The statement must include the electing taxpayer's name, address 
and taxpayer identification number, identify the election and indicate 
that it was made under the provisions of Sec. 1.6655-7, state that the 
only financial statement of the taxpayer available for the annualization 
period is described in Sec. 1.56-1(c)(1)(iv).

[T.D. 8307, 55 FR 33689, Aug. 17, 1990]



Sec. 1.6655(e)-1  Time and manner for making election under the Omnibus Budget Reconciliation Act of 1993.

    (a) Description. Section 6655(e)(2)(C), as added by section 13225 of 
the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66, 107 Stat. 
486), allows a corporate taxpayer to make an annual election to use a 
different annualization period to determine annualized income for 
purposes of paying any required installment of estimated income tax for 
a taxable year beginning after December 31, 1993.
    (b) Time and manner for making the election. An election under 
section 6655(e)(2)(C) must be made on or before the date required for 
the payment of the first required installment for the taxable year. For 
a calendar or fiscal year corporation, Form 8842, Election to Use 
Different Annualization Periods for Corporate Estimated Tax, must be 
filed by the 15th day of the 4th month of the taxable year for which the 
election is to apply. Form 8842 must be filed with the Internal Revenue 
Service Center where the corporation files its income tax return.
    (c) Revocability of election. The election described in this section 
is irrevocable.

[[Page 804]]

    (d) Effective date. The rules set forth in this section are 
effective December 12, 1996.

[T.D. 8688, 61 FR 65322, Dec. 12, 1996]



Sec. 1.6661-1  Addition to tax in the case of a substantial understatement of tax liability.

    (a) In general. Section 6661 imposes an addition to tax (penalty) 
for an understatement of tax liability that constitutes a substantial 
understatement of income tax. This section prescribes the effective date 
of the penalty. The manner of computing understatements subject to the 
penalty is set forth in Sec. 1.6661-2. The definition of ``substantial 
authority'' is set forth in Sec. 1.6661-3. Rules concerning the adequacy 
of disclosure are set forth in Sec. 1.6661-4. The treatment of ``tax 
shelters'' is provided in Sec. 1.6661-5. The circumstances in which the 
penalty may or will be waived by the Commissioner are set forth in 
Sec. 1.6661-6.
    (b) Effective date. The penalty under section 6661 applies to 
returns the due date (determined without regard to extensions of the 
time for filing) of which is after December 31, 1982. The penalty does 
not apply to amended returns, so-called, if the due date for the return 
to which the amended return relates (determined without regard to 
extensions) is before January 1, 1983.

[T.D. 8017, 50 FR 12014, Mar. 27, 1985]



Sec. 1.6661-2  Computation of penalty; meaning of terms.

    (a) Amount of penalty. If there is a substantial understatement of 
income tax for a taxable year (as defined in paragraph (b) of this 
section), section 6661 imposes a penalty equal to 10 percent of the 
understatement of tax liability.
    (b) Substantial understatement. The term substantial understatement 
means an understatement (as defined in paragraph (c) of this section) 
that exceeds the greater of--
    (1) 10 percent of the tax required to be shown on the return for the 
taxable year (as defined in paragraph (d)(4) of this section); or
    (2) $5,000 ($10,000 in the case of a corporation other than an S 
corporation (as defined in section 1361(a)(1)) or a personal holding 
company (as defined in section 542)).
    (c) Understatement. The term understatement means the excess of--
    (1) The amount of tax required to be shown on the return for the 
taxable year (as defined in paragraph (d)(4) of this section), over
    (2) The amount of tax shown on the return for the taxable year (as 
defined in paragraph (d)(2) of this section), reduced by any rebate (as 
defined in paragraph (d)(3) of this section).
    (d) Determination of amounts--(1) Amount of tax. For purposes of 
section 6661, the amount of tax is the amount of tax imposed by Subtitle 
A of the Code.
    (2) Tax shown on return. For purposes of section 6661, the amount of 
tax shown on the return for the taxable year is determined with the 
adjustments prescribed in this paragraph (d)(2), without regard to the 
items described in paragraph (d)(5) of this section, without regard to 
any net operating loss carryback, tax credit carryback, capital loss 
carryback, or commodity futures loss carryback (``carryback''), and 
without regard to any amount of additional tax shown on a return 
(including an amended return, so-called) filed after the taxpayer is 
first contacted by the Internal Revenue Service concerning the tax 
liability of the taxpayer for the taxable year. See Sec. 1.6661-6(c) for 
rules relating to waiver of the penalty if the taxpayer files a 
``qualified amended return.'' If no return was filed for the taxable 
year or if the return (other than a return filed under section 6014) 
shows no tax due, the amount of tax shown on the return is considered to 
be zero. The amount of tax shown on the return for the taxable year is 
determined by computing the tax as if the following items (in addition 
to the items that were properly reported on the return) had received the 
proper tax treatment:
    (i) Items (other than tax shelter items as defined in Sec. 1.6661-
5(c)) for which there is or was substantial authority for the treatment 
claimed (as provided in Sec. 1.6661-3).
    (ii) Items (other than tax shelter items as defined in Sec. 1.6661-
5(c)) with respect to which there is adequate disclosure (as provided in 
Sec. 1.6661-4).

[[Page 805]]

    (iii) Tax shelter items (as defined in Sec. 1.6661-5(c)) for which 
there is or was substantial authority for the treatment claimed (as 
provided in Sec. 1.6661-3), and with respect to which the taxpayer 
reasonably believes that the tax treatment of the item was more likely 
than not the proper tax treatment (as provided in Sec. 1.6661-5(d)).
    (iv) Items taken into account in computing the amount of any net 
operating loss, unused tax credit, or net capital loss for a taxable 
year the return for which was due (determined without regard to 
extensions of time for filing) before January 1, 1983 (regardless of 
whether there is substantial authority or adequate disclosure with 
respect to such items).
    (3) Rebate. For purposes of section 6661, the amount of a rebate is 
the rebate (within the meaning of section 6211(b)(2) and Sec. 301.6211-
1(f)), determined as if any items to which the rebate is attributable 
that are described in paragraphs (d)(2) (i) through (iv) of this section 
(in addition to the items that were properly reported on the return) had 
received the proper tax treatment.
    (4) Tax required to be shown. For purposes of section 6661, the 
amount of tax required to be shown on the return for the taxable year is 
the amount of tax imposed on the taxpayer for the taxable year 
determined without regard to items described in paragraph (d)(5) of this 
section and without regard to any allowable carryback that was not taken 
into account in computing the amount of a rebate for the taxable year.
    (5) Items disregarded. The amount of tax shown on the return for the 
taxable year and the amount of tax required to be shown on the return 
for the taxable year are both determined without regard to--
    (i) The credit under section 31 for tax withheld;
    (ii) The credit under section 33 for tax withheld at source on 
nonresident aliens and foreign corporations;
    (iii) Any credit resulting from the collection of amounts assessed 
under section 6851 as the result of a termination assessment;
    (iv) Payments of tax or estimated tax by the taxpayer; and
    (v) Any tax that the taxpayer is not required to assess on the 
return (such as the tax imposed by section 535 on the accumulated 
taxable income of a corporation).
    (6) Treatment of carryovers--(i) In general. A net operating loss 
carryover, tax credit carryover, or capital loss carryover shall be 
treated for purposes of section 6661 as a credit or deduction in the 
year in which the carryover is taken into account. See paragraph 
(d)(2)(iv) of this section for rules applicable to carryovers from a 
taxable year the return for which was due (without regard to extensions 
of time for filing) before January 1, 1983.
    (ii) Carryovers treated as carrybacks. For purposes of section 6661, 
a carryover to a taxable year shall be treated as a carryback rather 
than a carryover with respect to such year to the extent such carryover 
exceeds the amount of the carryover determined without taking into 
account carrybacks from taxable years subsequent to such years.
    (e) Examples. The following examples illustrate the computation of 
an understatement:

    Example (1). In 1983, An individual calendar year taxpayer, files a 
return for 1982, which shows taxable income of $18,200 and tax liability 
of $3,194. Subsequent adjustments on audit for 1982 increase taxable 
income to $51,500 and tax liability to $17,068. There was substantial 
authority for an item resulting in an adjustment that increases taxable 
income by $5,300. The item is not a tax shelter item. In computing the 
amount of the understatement, the amount of tax shown on A's return is 
determined as if the item for which there was substantial authority had 
been given the proper tax treatment. Thus, the amount of tax that is 
treated as shown on A's return is $4,837 (the tax on $23,500) ($18,200 
taxable income actually shown on A's return plus $5,300, the amount of 
the adjustment for which there was substantial authority). The amount of 
the understatement is $12,231 ($17,068 (the amount of tax required to be 
shown) less $4,837 (the amount of tax treated as shown on A's return 
after adjustment for the item for which there was substantial 
authority)). Because the understatement exceeds the greater of 10 
percent of the tax required to be shown on the return for the year 
($1,707 ($17,068 x .10)) or $5,000, A has a substantial understatement 
of income tax for the year. The amount of section 6661 penalty is 
$1,223.10 (.10 x $12,231).
    Example (2). Corporation X was formed on January 1, 1982. In 1983, X 
adopts a calendar

[[Page 806]]

taxable year and files a return for 1982 showing a tax liability of 
$10,000. In 1984, X determines that it has an unused investment tax 
credit for taxable year 1983 in the amount of $20,000. X files an 
amended return, so-called, for taxable year 1982 claiming an investment 
tax credit carryback of $20,000 and receives a rebate of $10,000 (the 
tax liability shown on X's original return for taxable year 1982). On 
audit for taxable years 1982 and 1983, adjustments increase tax 
liability for 1982 to $24,000, and decrease the unused investment tax 
credit for 1983 to $8,000. There was not substantial authority and X did 
not make adequate disclosure with respect to the items comprising the 
1982 adjustments, but there was substantial authority for $1,000 of the 
$12,000 investment tax credit disallowed for 1983. The amount of the 
section 6661 penalty for 1982 is computed as follows:
    (i) The amount of tax required to be shown on the return for 1982 is 
$16,000 (i.e., the tax liability as adjusted on audit ($24,000) reduced 
by the allowable tax credit carryback taken into account in computing 
the amount of the rebate ($8,000)).
    (ii) The amount of tax shown on the return is $10,000 (i.e., the tax 
shown on the return without adjustment for carryback of the investment 
tax credit).
    (iii) The amount of the rebate is $9,000 (i.e., the amount of the 
rebate determined as if the items described in paragraph (d)(2)(i) of 
this section ($1,000 item for which there was substantial authority) had 
received the proper tax treatment ($10,000-$1,000=$9,000)).
    (iv) The understatement is $15,000 (i.e., the excess of the tax 
required to be shown ($16,000) over the tax shown reduced by the rebate 
($10,000-$9,000=$1,000)).
    (v) Since the understatement exceeds the greater of 10 percent of 
the tax required to be shown or $10,000, X has a substantial 
understatement of income tax for the year. The amount of the section 
6661 penalty is $1,500 (.10 x $15,000).
    Example (3). Corporation Y was formed on January 1, 1982. In 1983, Y 
adopts a calendar taxable year and files a return for 1982 showing tax 
liability of $50,000. Y subsequently determines that it has unused 
investment tax credits in the amount of $20,000 for taxable year 1983, 
$20,000 for taxable year 1984, and $37,000 for taxable year 1985. Y 
files an amended return, so-called, for taxable year 1982 claiming 
investment tax credit carrybacks of $77,000 and receives a rebate of 
$50,000 (the tax liability shown on Y's original return for 1982). On 
audit for taxable years 1982, 1983, 1984, and 1985, the only adjustments 
decrease the unused investment tax credit for taxable year 1983 to 
$5,000, and the unused investment tax credit for 1984 to $8,000. There 
was not substantial authority and X did not make adequate disclosure 
with respect to the items comprising the 1983 and 1984 adjustments. The 
amount of the section 6661 penalty for 1982 is computed as follows:
    (i) The amount of the tax required to be shown on the return for 
1982 is $27,000 (i.e., the original tax liability ($50,000) reduced by 
the allowable carrybacks taken into account in computing the amount of 
the rebate ($5,000+$8,000+$10,000=$23,000)).
    (ii) The amount of the tax shown on the return is $50,000 (i.e., the 
tax shown on the return without adjustment for carryback of the 
investment tax credit).
    (iii) The amount of the rebate is $50,000 (i.e., the amount of the 
rebate determined as if any items described in paragraph (d)(2)(i)-(iv) 
of this section ($0) had received the proper tax treatment 
($50,000-0=$50,000)).
    (iv) The understatement is $27,000 (i.e., the excess of the tax 
required to be shown ($27,000) over the tax shown reduced by the rebate 
($50,000-$50,000=0)).
    (v) Since the understatement exceeds the greater of 10 percent of 
the tax required to be shown or $10,000, Y has a substantial 
understatement of income tax for the year. The amount of the section 
6661 penalty is $2,700 (.10 x $27,000).

    (f) Coordination with penalty for valuation overstatments--(1) In 
general. The amount of the penalty imposed under section 6661 shall be 
determined without taking into account the portion of the substantial 
understatement on which the penalty under section 6659 (relating to 
valuation overstatements) has been imposed. The portion of the 
understatement on which the penalty under section 6659 has been imposed 
is taken into account, however, in determining whether there is a 
substantial understatement of tax. For purposes of section 6661, a 
penalty under section 6659 is not considered to have been imposed to the 
extent that the penalty is waived under the authority of section 
6659(e). If a penalty is imposed under section 6659, the amount to which 
the section 6661 penalty applies is the amount by which the 
understatement exceeds the amount of the underpayment attributable to a 
valuation overstatement as determined under section 6659.
    (2) Example. The following example illustrates the coordination of 
the penalties under sections 6659 and 6661:

    Example. In 1983, A, an individual calendar year taxpayer, files a 
return for 1982 which shows taxable income of $40,000 and tax liability 
of $11,408. Subsequent adjustments on audit for 1982 increases taxable 
income to

[[Page 807]]

$70,000 and tax liability to $26,318. The increase in taxable income is 
attributable to a $20,000 adjustment for a valuation overstatement and a 
$10,000 adjustment not related to a valuation overstatement. There are 
no adjustments under paragraph (d)(2) of this section. Since the amount 
of the understatement, $14,910 ($26,318-$11,408), exceeds the greater of 
$2,631.80 (10 percent of the tax required to be shown) or $5,000, there 
is a substantial understatement. Assume that under section 6659 the 
$20,000 adjustment for the valuation overstatement results in a $10,000 
underpayment attributable to a valuation overstatement on which the 
section 6659 penalty is imposed. The amount of the understatement on 
which the section 6661 penalty is imposed is $4,910. (The amount by 
which the $14,910 understatement exceeds the $10,000 underpayment to 
which the section 6659 penalty applies.) The amount of the section 6661 
penalty is $491 ($4,910 x .10).

[T.D. 8017, 50 FR 12014, Mar. 27, 1985]



Sec. 1.6661-3  Substantial authority.

    (a) General rule--(1) Effect of having substantial authority. If 
there is or was substantial authority for the tax treatment of an item 
(other than a tax shelter item as defined in Sec. 1.6661-5(c)), the item 
is treated as if it were shown properly on the return for the taxable 
year in computing the amount of tax shown on the return. Thus, for 
purposes of section 6661, the tax attributable to the item is not 
included in the understatement for the year. (See paragraph (d)(2) of 
Sec. 1.6661-2.)
    (2) Substantial authority standard. The substantial authority 
standard is less stringent than a ``more likely than not'' standard 
(that is, a greater than 50-percent likelihood of being upheld in 
litigation), but stricter than a reasonable basis standard (the standard 
which, in general, will prevent imposition of the penalty under section 
6653 (a), relating to negligence or international disregard of rules and 
regulations). Thus, a position with respect to the tax treatment of an 
item that is arguable but fairly unlikely to prevail in court would 
satisfy a reasonable basis standard, but not the substantial authority 
standard.
    (b) Determination of whether substantial authority is present--(1) 
Evaluation of authorities. There is substantial authority for the tax 
treatment of an item only if the weight of the authorities supporting 
the treatment is substantial in relation to the weight of authorities 
supporting contrary positions. All authorities relevant to the tax 
treatment of an item, including the authorities contrary to the 
treatment, are taken into account in determining whether substantial 
authority exists and the weight of those authorities is determined in 
light of the pertinent facts and circumstances in the manner prescribed 
in paragraph (b)(3) of this section. There may be substantial authority 
for more than one position with respect to the same item. The taxpayer's 
belief that the authorities with respect to the tax treatment of an item 
constitute substantial authority is not taken into account in 
determining whether there is substantial authority.
    (2) Types of authority. In determining whether there is substantial 
authority (other than in cases described in paragraph (b) (4) (i) of 
this section), only the following will be considered authority. 
Applicable provisions of the Internal Revenue Code and other statutory 
provisions; temporary and final regulations construing such statutes; 
court cases; administrative pronouncements (including revenue rulings 
and revenue procedures); tax treaties and regulations thereunder, and 
Treasury Department and other official explanations of such treaties; 
and Congressional intent as reflected in committee reports, joint 
explanatory statements of managers included in conference committee 
reports, and floor statements made prior to enactment by one of a bill's 
managers. Conclusions reached in treatises, legal periodicals, legal 
opinions or opinions rendered by other tax professionals, descriptions 
of statutes prepared after enactment (such as ``General Explanations'' 
prepared by the Staff of the joint Committee on Taxation), general 
counsel memoranda (other than those published in pre-1955 volumes of the 
Cumulative Bulletin), actions on decisions, technical memoranda, written 
determinations (except as provided in paragraph (b)(4)(i) of this 
section), and proposed regulations are not authority. The authorities 
underlying such expressions of opinion where applicable to the facts of 
a particular case, however, may give rise to substantial authority for 
the tax treatment of an

[[Page 808]]

item. (See Sec. 1.6661-6(b), however, regarding waiver of the penalty 
when the taxpayer relies on proposed regulations.)
    (3) Nature of analysis. Except as otherwise provided in this 
section, the weight of the authorities for the tax treatment of an item 
is determined by the same analysis that a court would be expected to 
follow in evaluating the tax treatment of the item. Thus, the weight of 
authorities depends on their persuasiveness and relevance as well as 
their source. For example, a case or revenue ruling having some facts in 
common with the tax treatment at issue would not be considered 
particularly relevant if the authority is materially distinguishable on 
its facts, or is otherwise inapplicable to the tax treatment at issue. 
Similarly, an authority that merely states a conclusion ordinarily would 
be given less weight than an authority that reaches its conclusion by 
cogently relating the applicable law to pertinent facts. There may be 
substantial authority for the tax treatment of an item despite the 
absence of certain types of authority. Thus, a taxpayer may have 
substantial authority for a position that is supported only by a well-
reasoned construction of the applicable statutory provision.
    (4) Special rules--(i) Written determinations. There is substantial 
authority for the tax treatment of an item if the treatment is supported 
by the holding of a ruling or a determination letter (as defined in 
Sec. 301.6110-2 (d) and (e)) issued to the taxpayer, by the holding of a 
technical advice memorandum in which the taxpayer is named, or by an 
affirmative statement in a revenue agent's report with respect to a 
prior taxable year of the taxpayer (``written determinations''). The 
preceding sentence shall not apply, however, if there has been a 
misstatement or omission of a material fact, the facts that subsequently 
develop are materially different from the facts on which the written 
determination was based, or authority supporting a contrary position has 
arisen since the date of the written determination.
    (ii) Taxpayer's jurisdiction. The applicability of court cases to 
the taxpayer by reason of the taxpayer's residence in a particular 
jurisdiction is not taken into account in determining whether there is 
substantial authority for the tax treatment of an item. Notwithstanding 
the preceding sentence, however there is substantial authority for the 
tax treatment of an item if the treatment is supported by controlling 
precedent of a United States Court of Appeals to which the taxpayer has 
a right of appeal with respect to the item.
    (iii) When substantial authority determined. For purposes of section 
6661, there is substantial authority for the tax treatment of an item if 
there is substantial authority at the time the return containing the 
item is filed or there was substantial authority on the last day of the 
taxable year to which the return relates.

[T.D. 8017, 50 FR 12016, Mar. 27, 1985]



Sec. 1.6661-4  Disclosure of certain information.

    (a) In general. Items (other than tax shelter items as defined in 
Sec. 1.6661-5(c)) for which there is adequate disclosure are treated as 
if such items were shown properly on the return for the taxable year in 
computing the amount of tax shown on the return. Thus, for purposes of 
section 6661, the tax attributable to such items is not included in the 
understatement for the year. (See paragraph (d)(2) of Sec. 1.6661-2.) 
Disclosure is adequate with respect to the tax treatment of an item on a 
return only if it is made on such return or in a statement attached 
thereto. Thus, disclosure with respect to a recurring item, such as the 
basis of recovery property, made on a return or statement attached 
thereto for one taxable year is not adequate disclosure with respect to 
the item for any other taxable year. (See paragraph (d) of this section 
for special rules relating to disclosure with respect to carrybacks and 
carryovers.)
    (b) Disclosure in attached statement--(1) In general. Disclosure 
will be adequate with respect to an item (or group of similar items, 
such as the specific deduction of business bad debts or the deduction of 
amounts paid or incurred for supplies by a taxpayer engaged in 
business), if it is made on a properly completed Form 8275 or if it 
takes the

[[Page 809]]

form of a statement attached to the return that includes the following:
    (i) A caption identifying the statement as disclosure under section 
6661.
    (ii) An identification of the item (or group of similar items) with 
respect to which disclosure is made.
    (iii) The amount of the item (or group of similar items).
    (iv) The facts affecting the tax treatment of the item (or group of 
similar items) that reasonably may be expected to apprise the Internal 
Revenue Service of the nature of the potential controversy concerning 
the tax treatment of the item (or items).
    (2) Disclosure of legal issue. In lieu of setting forth the facts 
affecting the tax treatment of an item (or group of similar items) in 
accordance with paragraph (b)(1)(iv) of this section, the taxpayer may 
set forth a concise description of the legal issue presented by such 
facts.
    (3) A concise description of the taxpayer's legal position with 
respect to the items.
    (4) Requirement of particularity. Disclosure is not adequate with 
respect to an item (or group of similar items) if it consists of 
undifferentiated information that is not arranged in a manner that 
reasonably may be expected to apprise the Internal Revenue Service of 
the identity of the item, its amount, and the nature of the potential 
controversy concerning the item (or items). For example, attachment to 
the return of an acquisition agreement generally will not constitute 
adequate disclosure of the issues involved in determining the basis of 
certain acquired assets.
    (c) Disclosure on return. The Commissioner may by revenue procedure 
prescribe the circumstances in which information provided on the return 
in accordance with the applicable forms and instructions will be 
adequate disclosure for purposes of section 6661.
    (d) Carryovers and carrybacks. In the case of a carryover or 
carryback attributable to the tax treatment of an item on a return to 
which section 6661 applies (see paragraph (b) of Sec. 1.6661-1 and 
paragraph (d)(2)(iv) of Sec. 1.6661-2), disclosure is adequate with 
respect to the item only if it is made on the return for the taxable 
year in which the item arises or in a statement attached thereto. In 
such a case, disclosure with respect to the item is not required on the 
return for the taxable year in which the carryover or carryback 
attributable to the item is taken into account.
    (e) Pass-through entities. In the case of items attributable to a 
pass-through entity (``pass-through items''), disclosure regarding the 
tax treatment of such items should be made on the return of the entity 
or on an attachment thereto. For this purpose, a pass-through entity is 
a partnership, an S corporation (as defined in section 1361(a)(1)), an 
estate, a trust, a regulated investment company (as defined in section 
851(a)), or a real estate investment trust (as defined in section 
856(a)). A taxpayer (partner, shareholder, or beneficiary) also may make 
adequate disclosure with respect to a pass-through item, however, if the 
taxpayer files a separate statement in duplicate, one copy attached to 
and filed with the taxpayer's return and the other copy filed with the 
Internal Revenue Service Center with which the return of the entity is 
required to be filed. Each statement filed shall relate to the pass-
through items of only one entity and shall include the following:
    (1) An identification of the taxpayer and the entity by name, 
address, and taxpayer identification number.
    (2) The taxable year of the entity to which the disclosure relates.
    (3) An identification of the items with respect to which the 
taxpayer has made disclosure under this paragraph.
    (4) Such additional information as would be required for adequate 
disclosure with respect to the items under paragraphs (a), (b), and (d) 
of this section.
    (5) A notation to the effect that the statement is to be associated 
with the return of the entity.

[T.D. 8017, 50 FR 12017, Mar. 27, 1985]



Sec. 1.6661-5  Items relating to tax shelters.

    (a) In general. (1) Tax shelter items (as defined in paragraph (c) 
of this section) are treated as if such items were shown properly on the 
return for the taxable year in computing the amount of tax shown on the 
return if--

[[Page 810]]

    (i) There is or was substantial authority for the tax treatment of 
the items (as provided in Sec. 1.6661-3); and
    (ii) The taxpayer reasonably believes at the time the return is 
filed that the tax treatment claimed is more likely than not the proper 
tax treatment of the items (see paragraph (d) of this section).

Thus, for purposes of section 6661, the tax attributable to such items 
is not included in the understatement for the year. (See paragraph 
(d)(2) of Sec. 1.6661-2.)
    (2) Disclosure (whether or not adequate under Sec. 1.6661-4) with 
respect to tax shelter items (as defined in paragraph (c) of this 
section) does not affect the amount of the understatement.
    (b) Tax shelter--(1) In general. For purposes of section 6661, the 
term ``tax shelter'' means--
    (i) A partnership or other entity (such as a corporation or trust),
    (ii) An investment plan or arrangement, or
    (iii) Any other plan or arrangement, if the principal purpose of the 
entity, plan, or arrangement, based on objective evidence, is the 
avoidance or evasion of Federal income tax. The principal purpose of an 
entity, plan or arrangement is the avoidance or evasion of Federal 
income tax if that purpose exceeds any other purpose. See Sec. 1.269-
3(a). Typical of tax shelters are transactions structured with little or 
no motive for the realization of economic gain, and transactions that 
utilize the mismatching of income and deductions, overvalued assets or 
assets with values subject to substantial uncertainty, nonrecourse 
financing, financing techniques which do not conform to standard 
commercial business practices, or the mischaracterization of the 
substance of the transaction. The existence of economic substance does 
not of itself establish that a transaction is not a tax shelter if the 
transaction includes other characteristics that indicate it is a tax 
shelter.
    (2) Principal purpose. The principal purpose of an entity, plan or 
arrangement is not the avoidance or evasion of Federal income tax if the 
entity, plan or arrangement has as its purpose the claiming of 
exclusions from income, accelerated deductions or other tax benefits in 
a manner consistent with the statute and Congressional purpose. For 
example, an entity, plan or arrangement will not be considered to have 
as its principal purpose the avoidance or evasion of Federal income tax 
merely as a result of the following uses of tax benefits provided by the 
Internal Revenue Code: The claiming of the investment credit under 
section 38; the purchase or holding of an obligation bearing interest 
which is excluded from gross income under section 103; entering into a 
safe-harbor lease transaction under section 168(f)(8); taking an 
accelerated cost recovery system (ACRS) allowance under section 168; 
taking the percentage depletion allowance under section 613 or section 
613A; deducting intangible drilling and development costs as expenses 
under section 263(c); establishing a qualified retirement plan under the 
provisions of sections 401-409A, claiming the possession tax credit 
under section 936; or claiming tax benefits available by reason of an 
election under section 992 to be taxed as a domestic international sales 
corporation (DISC), under section 927(f)(1) to be taxed as a foreign 
sales corporation (FSC), or under section 1362 to be taxed as an S 
corporation.
    (c) Tax shelter item. An item of income, gain, loss, deduction or 
credit will be considered a ``tax shelter item'' if the item is directly 
or indirectly attributable to the principal purpose of a tax shelter to 
avoid or evade Federal income tax. Thus, if a partnership is established 
for the principal purposes of the avoidance or evasion of Federal income 
tax by acquiring and overvaluing property for the purpose of claiming 
the investment credit under section 38, the investment credit with 
respect to the property would be a tax shelter item. However, a 
deduction claimed in connection with a separate transaction carried on 
by the same partnership is not a tax shelter item if the transaction 
does not constitute a plan or arrangement the principal purpose of which 
is the avoidance or evasion of tax.
    (d) Reasonable belief. For purposes of section 6661, a taxpayer will 
be considered reasonably to believe that the tax treatment of an item is 
more likely than not the proper tax treatment if--

[[Page 811]]

    (1) The taxpayer analyzes the pertinent facts and authorities in the 
manner described in Sec. 1.6661-3(b)(3) and, in reliance upon that 
analysis, reasonably concludes that there is a greater than 50-percent 
likelihood that the tax treatment of the item will be upheld in 
litigation if the claimed treatment is challenged by the Internal 
Revenue Service; or
    (2) The taxpayer in good faith relies on the opinion of a 
professional tax advisor, if the opinion is based on the tax advisor's 
analysis of the pertinent facts and authorities in the manner described 
in Sec. 1.6661-3(b)(3) and unambiguously states that the tax advisor 
concludes that there is a greater than 50-percent likelihood that the 
tax treatment of the item will be upheld in litigation if the claimed 
tax treatment is challenged by the Internal Revenue Service.
    (e) Pass-through entities. In the case of tax shelter items (as 
defined in paragraph (e) of this section) attributable to a pass-through 
entity (as defined in Sec. 1.6661-4(e)), the actions described in 
paragraphs (d) (1) and (2) of this section, if taken by the entity, will 
be deemed to have been taken by the taxpayer and will be considered in 
determining whether the taxpayer reasonably believes that the tax 
treatment of an item is more likely than not the proper tax treatment.

[T.D. 8017, 50 FR 12017, Mar. 27, 1985]



Sec. 1.6661-6  Waiver of penalty.

    (a) In general. The Commissioner may waive all or part of the 
penalty imposed by section 6661 on a showing by the taxpayer that there 
was reasonable cause for the understatement (or part thereof) and that 
the taxpayer acted in good faith. The circumstances taken into account 
in determining whether to waive the penalty are described in paragraph 
(b) of this section. In addition, paragraph (c) of this section 
describes circumstances in which the penalty will always be waived.
    (b) Reasonable cause and good faith. In making a determination 
regarding waiver of the penalty under section 6661, the most important 
factor in all cases not described in paragraph (c) of this section will 
be the extent of the taxpayer's effort to assess the taxpayer's proper 
tax liability under the law. For example, reliance on a position 
contained in a proposed regulation would ordinarily constitute 
reasonable cause and good faith. In addition, circumstances that may 
indicate reasonable cause and good faith include an honest 
misunderstanding of fact or law that is reasonable in light of the 
experience, knowledge, and education of the taxpayer. Moreover, a 
computational or transcriptional error would, in general, indicate 
reasonable cause and good faith. Reliance on an information return or on 
the advice of a professional (such as an appraiser, an attorney, or an 
accountant) would not necessarily constitute a showing of reasonable 
cause and good faith. Similarly, reliance on facts that, unknown to the 
taxpayer, are incorrect would not necessarily constitute a showing of 
reasonable cause and good faith. Reliance on an information return, 
professional advice, or other facts, however, would constitute a showing 
of reasonable cause and good faith if, under all the circumstances, such 
reliance was reasonable and the taxpayer acted in good faith. For 
example, reliance on erroneous information (such as an error relating to 
the cost of property, the date property was placed in service, or the 
amount of opening or closing inventory) inadvertently included in data 
compiled by the various divisions of a multidivisional corporation or in 
financial books and records prepared by those divisions would, in 
general, indicate reasonable cause and good faith, provided the 
corporation had internal controls and procedures, reasonable under the 
circumstances, that were designed to identify factual errors. 
Accordingly, waiver of the section 6661 penalty attributable to an 
understatement caused by such an error would be appropriate. Similarly, 
a taxpayer's reliance on erroneous information reported on a Form 1099 
would indicate reasonable cause and good faith, and waiver would be 
appropriate, if the taxpayer did not know or have reason to know that 
the information was incorrect. Generally, a taxpayer would know or have 
reason to know that the information on a Form 1099 is incorrect only if 
such information is inconsistent with other information reported to the

[[Page 812]]

taxpayer or is inconsistent with the taxpayer's knowledge concerning the 
amount and rate of return of the payor's obligation. In the case of an 
understatement that is related to an item on the return of a pass-
through entity (as defined in Sec. 1.6661-4(e)), the good faith or lack 
of good faith of the entity generally will be imputed to the taxpayer 
that has the understatement. Any good faith imputed to the taxpayer 
under the preceding sentence, however, may be refuted by other factors 
indicating lack of good faith on the part of the taxpayer.
    (c) Automatic waiver; qualified amended returns--(1) In general. If 
the taxpayer shows an additional amount of tax or makes adequate 
disclosure with respect to an item in the manner prescribed in 
Sec. 1.6661-4 on a qualified amended return, the Commissioner will waive 
any penalty that would not have been imposed if the additional amount of 
tax had been shown or the adequate disclosure had been made on the 
return of the taxpayer. Thus, the entire penalty will be waived if there 
would not have been a substantial understatement (as defined in 
paragraph (b) of Sec. 1.6661-2) had the taxpayer shown the additional 
amount of tax or made the adequate disclosure on the taxpayer's original 
return.
    (2) Qualified amended return. For purposes of this paragraph, a 
``qualified amended return'' is an amended return, so-called, or a 
timely request for an administrative adjustment under section 6227, 
filed after the due date of the return and before the earlier of--
    (i) The time the taxpayer is first contacted by the Internal Revenue 
Service concerning an examination of the return; or
    (ii) The time any person described in section 6700(a) (relating to 
the penalty for promoting abusive tax shelters) is first contacted by 
the Internal Revenue Service concerning an examination of an activity 
described in section 6700(a) with respect to which the taxpayer claimed 
any tax benefit on the return directly or indirectly through the entity, 
plan, or arrangement described in section 6700(a)(1)(A).
    (3) Pass-through entities. For purposes of paragraph (c)(1) of this 
section, no account is taken of an additional amount of tax shown or 
disclosure made with respect to an item attributable to a pass-through 
entity (as defined in Sec. 1.6661-4(e)), unless the qualified amended 
return is filed by the taxpayer before the date such pass-through entity 
is first contacted by the Internal Revenue Service concerning an 
examination of the return of which the item is attributable.
    (4) Special rule. The Commissioner may by revenue procedure 
prescribe the manner in which this section may apply to particular 
classes of taxpayers.

[T.D. 8017, 50 FR 12018, Mar. 27, 1985]



Sec. 1.6662-0  Table of contents.

    This section lists the captions that appear in Secs. 1.6662-1 
through 1.6662-7.

        Sec. 1.6662-1  Overview of the accuracy-related penalty.

                Sec. 1.6662-2  Accuracy-related penalty.

    (a) In general.
    (b) Amount of penalty.
    (1) In general.
    (2) Increase in penalty for gross valuation misstatement.
    (c) No stacking of accuracy-related penalty components.
    (d) Effective dates.
    (1) Returns due before January 1, 1994.
    (2) Returns due after December 31, 1993.
    (3) Special rules for tax shelter items.

     Sec. 1.6662-3  Negligence or disregard of rules or regulations.

    (a) In general.
    (b) Definitions and rules.
    (1) Negligence.
    (2) Disregard of rules or regulations.
    (3) Reasonable basis.
    (i) In general [Reserved].
    (ii) Relationship to other standards.
    (c) Exception for adequate disclosure.
    (1) In general.
    (2) Method of disclosure.
    (d) Special rules in the case of carrybacks and carryovers.
    (1) In general.
    (2) Transition rule for carrybacks to pre-1990 years.
    (3) Example.

        Sec. 1.6662-4  Substantial understatement of income tax.

    (a) In general.
    (b) Definitions and computational rules.
    (1) Substantial.
    (2) Understatement.

[[Page 813]]

    (3) Amount of the tax required to be shown on the return.
    (4) Amount of the tax imposed which is shown on the return.
    (5) Rebate.
    (6) Examples.
    (c) Special rules in the case of carrybacks and carryovers.
    (1) In general.
    (2) Understatements for carryback years not reduced by amount of 
carrybacks.
    (3) Tainted items defined.
    (i) In general.
    (ii) Tax shelter items.
    (4) Transition rule for carrybacks to pre-1990 years.
    (5) Examples.
    (d) Substantial authority.
    (1) Effect of having substantial authority.
    (2) Substantial authority standard.
    (3) Determination of whether substantial authority is present.
    (i) Evaluation of authorities.
    (ii) Nature of analysis.
    (iii) Types of authority.
    (iv) Special rules.
    (A) Written determinations.
    (B) Taxpayer's jurisdiction.
    (C) When substantial authority determined.
    (v) Substantial authority for tax returns due before January 1, 
1990.
    (e) Disclosure of certain information.
    (1) Effect of adequate disclosure.
    (2) Circumstances where disclosure will not have an effect.
    (f) Method of making adequate disclosure.
    (1) Disclosure statement.
    (2) Disclosure on return.
    (3) Recurring item.
    (4) Carrybacks and carryovers.
    (5) Pass-through entities.
    (g) Items relating to tax shelters.
    (1) In general.
    (i) Noncorporate taxpayers.
    (ii) Corporate taxpayers.
    (A) In general.
    (B) Special rule for transactions occurring prior to December 9, 
1994.
    (iii) Disclosure irrelevant.
    (iv) Cross-reference.
    (2) Tax shelter.
    (i) In general.
    (ii) Principal purpose.
    (3) Tax shelter item.
    (4) Reasonable belief.
    (i) In general.
    (ii) Facts and circumstances; reliance on professional tax advisor.
    (5) Pass-through entities.

   Sec. 1.6662-5  Substantial and gross valuation misstatements under 
                               chapter 1.

    (a) In general.
    (b) Dollar limitation.
    (c) Special rules in the case of carrybacks and carryovers.
    (1) In general.
    (2) Transition rule for carrybacks to pre-1990 years.
    (d) Examples.
    (e) Definitions.
    (1) Substantial valuation misstatement.
    (2) Gross valuation misstatement.
    (3) Property.
    (f) Multiple valuation misstatements on a return.
    (1) Determination of whether valuation misstatements are substantial 
or gross.
    (2) Application of dollar limitation.
    (g) Property with a value or adjusted basis of zero.
    (h) Pass-through entities.
    (1) In general.
    (2) Example.
    (i) [Reserved]
    (j) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. [Reserved]
    (k) Returns affected.

   Sec. 1.6662-5T Substantial and gross valuation misstatements under 
                         chapter 1 (Temporary).

    (a) through (e)(3) [Reserved]
    (e)(4) Tests related to section 482.
    (i) Substantial valuation misstatement.
    (ii) Gross valuation misstatement.
    (iii) Property.
    (f) through (i) [Reserved]
    (j) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments.

Sec. 1.6662-6 Transactions between persons described in section 482 and 
               net section 482 transfer price adjustments.

    (a) In general.
    (1) Purpose and scope.
    (2) Reported results.
    (3) Identical terms used in the section 482 regulations.
    (b) The transactional penalty.
    (1) Substantial valuation misstatement.
    (2) Gross valuation misstatement.
    (3) Reasonable cause and good faith.
    (c) Net adjustment penalty.
    (1) Net section 482 adjustment.
    (2) Substantial valuation misstatement.
    (3) Gross valuation misstatement.
    (4) Setoff allocation rule.
    (5) Gross receipts.
    (6) Coordination with reasonable cause exception under section 
6664(c).
    (7) Examples.
    (d) Amounts excluded from net section 482 adjustments.
    (1) In general.
    (2) Application of a specified section 482 method.
    (i) In general.
    (ii) Specified method requirement.
    (iii) Documentation requirement.
    (A) In general.

[[Page 814]]

    (B) Principal documents.
    (C) Background documents.
    (3) Application of an unspecified method.
    (i) In general.
    (ii) Unspecified method requirement.
    (A) In general.
    (B) Specified method potentially applicable.
    (C) No specified method applicable.
    (iii) Documentation requirement.
    (A) In general.
    (B) Principal and background documents.
    (4) Certain foreign to foreign transactions.
    (5) Special rule.
    (6) Examples.
    (e) Special rules in the case of carrybacks and carryovers.
    (f) Rules for coordinating between the transactional penalty and the 
net adjustment penalty.
    (1) Coordination of a net section 482 adjustment subject to the net 
adjustment penalty and a gross valuation misstatement subject to the 
transactional penalty.
    (2) Coordination of net section 482 adjustment subject to the net 
adjustment penalty and substantial valuation misstatements subject to 
the transactional penalty.
    (3) Examples.
    (g) Effective date.

Sec. 1.6662-7  Omnibus Budget Reconciliation Act of 1993 changes to the 
                        accuracy-related penalty.

    (a) Scope.
    (b) No disclosure exception for negligence penalty.
    (c) Disclosure standard for other penalties is reasonable basis.
    (d) Definition of reasonable basis.
    (1) In general [Reserved].
    (2) Relationship to other standards.

[T.D. 8381, 56 FR 67497, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 
1992, as amended by T.D. 8519, 59 FR 4794, Feb. 2, 1994; T.D. 8533, 59 
FR 12548, Mar. 17, 1994; T.D. 8551, 59 FR 35031, July 8, 1994; T.D. 
8617, 60 FR 45663, Sept. 1, 1995; T.D. 8656, 61 FR 4879, Feb. 9, 1996; 
T.D. 8656, 61 FR 14248, Apr. 1, 1996]



Sec. 1.6662-1  Overview of the accuracy-related penalty.

    Section 6662 imposes an accuracy-related penalty on any portion of 
an underpayment of tax required to be shown on a return that is 
attributable to one or more of the following:
    (a) Negligence or disregard of rules or regulations;
    (b) Any substantial understatement of income tax;
    (c) Any substantial valuation misstatement under chapter 1;
    (d) Any substantial overstatement of pension liabilities; or
    (e) Any substantial estate or gift tax valuation understatement.

Sections 1.6662-1 through 1.6662-5 address only the first three 
components of the accuracy-related penalty, i.e., the penalties for 
negligence or disregard of rules or regulations, substantial 
understatements of income tax, and substantial (or gross) valuation 
misstatements under chapter 1. The penalties for disregard of rules or 
regulations and for a substantial understatement of income tax may be 
avoided by adequately disclosing certain information as provided in 
Sec. 1.6662-3(c) and Secs. 1.6662-4(e) and (f), respectively. The 
penalties for negligence and for a substantial (or gross) valuation 
misstatement under chapter 1 may not be avoided by disclosure. No 
accuracy-related penalty may be imposed on any portion of an 
underpayment if there was reasonable cause for, and the taxpayer acted 
in good faith with respect to, such portion. The reasonable cause and 
good faith exception to the accuracy-related penalty is set forth in 
Sec. 1.6664-4.

[T.D. 8381, 56 FR 67498, Dec. 31, 1991, as amended by T.D. 8617, 60 FR 
45664, Sept. 1, 1995]



Sec. 1.6662-2  Accuracy-related penalty.

    (a) In general. Section 6662(a) imposes an accuracy-related penalty 
on any portion of an underpayment of tax (as defined in section 6664(a) 
and Sec. 1.6664-2) required to be shown on a return if such portion is 
attributable to one or more of the following types of misconduct:
    (1) Negligence or disregard of rules or regulations (see 
Sec. 1.6662-3);
    (2) Any substantial understatement of income tax (see Sec. 1.6662-
4); or
    (3) Any substantial (or gross) valuation misstatement under chapter 
1 (``substantial valuation misstatement'' or ``gross valuation 
misstatement''), provided the applicable dollar limitation set forth in 
section 6662(e)(2) is satisfied (see Sec. 1.6662-5).

The accuracy-related penalty applies only in cases in which a return of 
tax is filed, except that the penalty does not apply in the case of a 
return prepared by the Secretary under the authority of section 6020(b). 
The accuracy-related penalty under section 6662

[[Page 815]]

and the penalty under section 6651 for failure to timely file a return 
of tax may both be imposed on the same portion of an underpayment if a 
return is filed, but is filed late. The fact that a return is filed 
late, however, is not taken into account in determining whether an 
accuracy-related penalty should be imposed. No accuracy-related penalty 
may be imposed on any portion of an underpayment of tax on which the 
fraud penalty set forth in section 6663 is imposed.
    (b) Amount of penalty--(1) In general. The amount of the accuracy-
related penalty is 20 percent of the portion of an underpayment of tax 
required to be shown on a return that is attributable to any of the 
types of misconduct listed in paragraphs (a)(1) through (a)(3) of this 
section, except as provided in paragraph (b)(2) of this section.
    (2) Increase in penalty for gross valuation misstatement. In the 
case of a gross valuation misstatement, as defined in section 6662(h)(2) 
and Sec. 1.6662-5(e)(2), the amount of the accuracy-related penalty is 
40 percent of the portion of an underpayment of tax required to be shown 
on a return that is attributable to the gross valuation misstatement, 
provided the applicable dollar limitation set forth in section 
6662(e)(2) is satisfied.
    (c) No stacking of accuracy-related penalty components. The maximum 
accuracy-related penalty imposed on a portion of an underpayment may not 
exceed 20 percent of such portion (40 percent of the portion 
attributable to a gross valuation misstatement), notwithstanding that 
such portion is attributable to more than one of the types of misconduct 
described in paragraph (a) of this section. For example, if a portion of 
an underpayment of tax required to be shown on a return is attributable 
both to negligence and a substantial understatement of income tax, the 
maximum accuracy-related penalty is 20 percent of such portion. 
Similarly, the maximum accuracy-related penalty imposed on any portion 
of an underpayment that is attributable both to negligence and a gross 
valuation misstatement is 40 percent of such portion.
    (d) Effective dates--(1) Returns due before January 1, 1994. Section 
1.6662-3(c) and Secs. 1.6662-4 (e) and (f) (relating to methods of 
making adequate disclosure) (as contained in 26 CFR part 1 revised April 
1, 1995) apply to returns the due date of which (determined without 
regard to extensions of time for filing) is after December 31, 1991, but 
before January 1, 1994. Except as provided in the preceding sentence and 
in paragraphs (d)(2) and (3) of this section, Secs. 1.6662-1 through 
1.6662-5 apply to returns the due date of which (determined without 
regard to extensions of time for filing) is after December 31, 1989, but 
before January 1, 1994. To the extent the provisions of these 
regulations were not reflected in the statute as amended by the Omnibus 
Budget Reconciliation Act of 1989 (OBRA 1989), in Notice 90-20, 1990-1 
C.B. 328, or in rules and regulations in effect prior to March 4, 1991 
(to the extent not inconsistent with the statute as amended by OBRA 
1989), these regulations will not be adversely applied to a taxpayer who 
took a position based upon such prior rules on a return filed before 
January 1, 1992.
    (2) Returns due after December 31, 1993. Except as provided in 
paragraph (d)(3) and the last sentence of this paragraph (d)(2), the 
provisions of Secs. 1.6662-1 through 1.6662-4 and Sec. 1.6662-7 (as 
revised to reflect the changes made to the accuracy-related penalty by 
the Omnibus Budget Reconciliation Act of 1993) and of Sec. 1.6662-5 
apply to returns the due date of which (determined without regard to 
extensions of time for filing) is after December 31, 1993. These changes 
include raising the disclosure standard for the penalties for 
disregarding rules or regulations and for a substantial understatement 
of income tax from not frivolous to reasonable basis, eliminating the 
disclosure exception for the negligence penalty, and providing guidance 
on the meaning of reasonable basis. The Omnibus Budget Reconciliation 
Act of 1993 changes relating to the penalties for negligence or 
disregard of rules or regulations will not apply to returns (including 
qualified amended returns) that are filed on or before March 14, 1994, 
but the provisions of Secs. 1.6662-1 through 1.6662-3 (as contained in 
26 CFR part 1 revised April 1, 1995) relating to those penalties will 
apply to such returns.

[[Page 816]]

    (3) Special rules for tax shelter items. Sections 1.6662-4(g)(1) and 
1.6662-4(g)(4) apply to returns the due date of which (determined 
without regard to extensions of time for filing) is after September 1, 
1995. Except as provided in the last sentence of this paragraph (d)(3), 
Secs. 1.6662-4(g)(1) and 1.6662-4(g)(4) (as contained in 26 CFR part 1 
revised April 1, 1995) apply to returns the due date of which 
(determined without regard to extensions of time for filing) is on or 
before September 1, 1995 and after December 31, 1989. For transactions 
occurring after December 8, 1994, Secs. 1.6662-4(g)(1) and 1.6662-
4(g)(2) (as contained in 26 CFR part 1 revised April 1, 1995) are 
applied taking into account the changes made to section 6662(d)(2)(C) 
(relating to the substantial understatement penalty for tax shelter 
items of corporations) by section 744 of Title VII of the Uruguay Round 
Agreements Act, Pub. L. 103-465 (108 Stat. 4809).

[T.D. 8381, 56 FR 67498, Dec. 31, 1991, as amended by T.D. 8617, 60 FR 
45664, Sept. 1, 1995]



Sec. 1.6662-3  Negligence or disregard of rules or regulations.

    (a) In general. If any portion of an underpayment, as defined in 
section 6664(a) and Sec. 1.6664-2, of any income tax imposed under 
subtitle A of the Code that is required to be shown on a return is 
attributable to negligence or disregard of rules or regulations, there 
is added to the tax an amount equal to 20 percent of such portion. The 
penalty for disregarding rules or regulations does not apply, however, 
if the requirements of Sec. 1.6662-3(c)(1) are satisfied and the 
position in question is adequately disclosed as provided in Sec. 1.6662-
3(c)(2), or to the extent that the reasonable cause and good faith 
exception to this penalty set forth in Sec. 1.6664-4 applies. In 
addition, if a position with respect to an item is contrary to a revenue 
ruling or notice (other than a notice of proposed rulemaking) issued by 
the Internal Revenue Service and published in the Internal Revenue 
Bulletin, this penalty does not apply if the position has a realistic 
possibility of being sustained on its merits. See Sec. 1.6694-2(b) of 
the preparer penalty regulations for a description of the realistic 
possibility standard.
    (b) Definitions and rules--(1) Negligence. The term negligence 
includes any failure to make a reasonable attempt to comply with the 
provisions of the internal revenue laws or to exercise ordinary and 
reasonable care in the preparation of a tax return. ``Negligence'' also 
includes any failure by the taxpayer to keep adequate books and records 
or to substantiate items properly. A position with respect to an item is 
attributable to negligence if it lacks a reasonable basis. Negligence is 
strongly indicated where--
    (i) A taxpayer fails to include on an income tax return an amount of 
income shown on an information return, as defined in section 6724(d)(1);
    (ii) A taxpayer fails to make a reasonable attempt to ascertain the 
correctness of a deduction, credit or exclusion on a return which would 
seem to a reasonable and prudent person to be ``too good to be true'' 
under the circumstances;
    (iii) A partner fails to comply with the requirements of section 
6222, which requires that a partner treat partnership items on its 
return in a manner that is consistent with the treatment of such items 
on the partnership return (or notify the Secretary of the 
inconsistency); or
    (iv) A shareholder fails to comply with the requirements of section 
6242, which requires that an S corporation shareholder treat subchapter 
S items on its return in a manner that is consistent with the treatment 
of such items on the corporation's return (or notify the Secretary of 
the inconsistency).
    (2) Disregard of rules or regulations. The term disregard includes 
any careless, reckless or intentional disregard of rules or regulations. 
The term ``rules or regulations'' includes the provisions of the 
Internal Revenue Code, temporary or final Treasury regulations issued 
under the Code, and revenue rulings or notices (other than notices of 
proposed rulemaking) issued by the Internal Revenue Service and 
published in the Internal Revenue Bulletin. A disregard of rules or 
regulations is

[[Page 817]]

``careless'' if the taxpayer does not exercise reasonable diligence to 
determine the correctness of a return position that is contrary to the 
rule or regulation. A disregard is ``reckless'' if the taxpayer makes 
little or no effort to determine whether a rule or regulation exists, 
under circumstances which demonstrate a substantial deviation from the 
standard of conduct that a reasonable person would observe. A disregard 
is ``intentional'' if the taxpayer knows of the rule or regulation that 
is disregarded. Nevertheless, a taxpayer who takes a position contrary 
to a revenue ruling or a notice has not disregarded the ruling or notice 
if the contrary position has a realistic possibility of being sustained 
on its merits.
    (3) Reasonable basis--(i) In general. [Reserved]
    (ii) Relationship to other standards. The reasonable basis standard 
is significantly higher than the not frivolous standard applicable to 
preparers under section 6694 and defined in Sec. 1.6694-2(c)(2).
    (c) Exception for adequate disclosure--(1) In general. No penalty 
under section 6662(b)(1) may be imposed on any portion of an 
underpayment that is attributable to a position contrary to a rule or 
regulation if the position is disclosed in accordance with the rules of 
paragraph (c)(2) of this section and, in case of a position contrary to 
a regulation, the position represents a good faith challenge to the 
validity of the regulation. This disclosure exception does not apply, 
however, in the case of a position that does not have a reasonable basis 
or where the taxpayer fails to keep adequate books and records or to 
substantiate items properly.
    (2) Method of disclosure. Disclosure is adequate for purposes of the 
penalty for disregarding rules or regulations if made in accordance with 
the provisions of Secs. 1.6662-4(f)(1), (3), (4), and (5), which permit 
disclosure on a properly completed and filed Form 8275 or 8275-R, as 
appropriate. In addition, the statutory or regulatory provision or 
ruling in question must be adequately identified on the Form 8275 or 
8275-R, as appropriate. The provisions of Sec. 1.6662-4(f)(2), which 
permit disclosure in accordance with an annual revenue procedure for 
purposes of the substantial understatement penalty, do not apply for 
purposes of this section.
    (d) Special rules in the case of carrybacks and carryovers--(1) In 
general. The penalty for negligence or disregard of rules or regulations 
applies to any portion of an underpayment for a year to which a loss, 
deduction or credit is carried, which portion is attributable to 
negligence or disregard of rules or regulations in the year in which the 
carryback or carryover of the loss, deduction or credit arises (the 
``loss or credit year'').
    (2) Transition rule for carrybacks to pre-1990 years. A 20 percent 
penalty under section 6662(b)(1) is imposed on any portion of an 
underpayment for a carryback year, the return for which is due (without 
regard to extensions) before January 1, 1990, if--
    (i) That portion is attributable to negligence or disregard of rules 
or regulations in a loss or credit year; and
    (ii) The return for the loss or credit year is due (without regard 
to extensions) after December 31, 1989.
    (3) Example. The following example illustrates the provisions of 
paragraph (d) of this section. This example does not take into account 
the reasonable cause exception under Sec. 1.6664-4.

    Example. Corporation M is a C corporation. In 1990, M had a loss of 
$200,000 before taking into account a deduction of $350,000 that M 
claimed as an expense in careless disregard of the capitalization 
requirements of section 263 of the Code. M failed to make adequate 
disclosure of the item for 1990. M reported a $550,000 loss for 1990 and 
carried back the loss to 1987 and 1988. M had reported taxable income of 
$400,000 for 1987 and $200,000 for 1988, before application of the 
carryback. The carryback eliminated all of M's taxable income for 1987 
and $150,000 of taxable income for 1988. After disallowance of the 
$350,000 expense deduction and allowance of a $35,000 depreciation 
deduction with respect to the capitalized amount, the correct loss for 
1990 was determined to be $235,000. Because there is no underpayment for 
1990, the penalty for negligence or disregard of rules or regulations 
does not apply for 1990. However, as a result of the 1990 adjustments, 
the loss carried back to 1987 is reduced from $550,000 to $235,000. 
After application of the $235,000 carryback, M has taxable income of 
$165,000 for 1987 and $200,000 for 1988. This adjustment results in 
underpayments for 1987 and 1988 that are attributable to the disregard 
of rules or regulations on the 1990 return.

[[Page 818]]

Therefore, the 20 percent penalty rate applies to the 1987 and 1988 
underpayments attributable to the disallowed carryback.

[T.D. 8381, 56 FR 67498, Dec. 31, 1991, as amended by T.D. 8617, 60 FR 
45664, Sept. 1, 1995]



Sec. 1.6662-4  Substantial understatement of income tax.

    (a) In general. If any portion of an underpayment, as defined in 
section 6664(a) and Sec. 1.6664-2, of any income tax imposed under 
subtitle A of the Code that is required to be shown on a return is 
attributable to a substantial understatement of such income tax, there 
is added to the tax an amount equal to 20 percent of such portion. 
Except in the case of any item attributable to a tax shelter (as defined 
in paragraph (g)(2) of this section), an understatement is reduced by 
the portion of the understatement that is attributable to the tax 
treatment of an item for which there is substantial authority, or with 
respect to which there is adequate disclosure. General rules for 
determining the amount of an understatement are set forth in paragraph 
(b) of this section and more specific rules in the case of carrybacks 
and carryovers are set forth in paragraph (c) of this section. The rules 
for determining when substantial authority exists are set forth in 
Sec. 1.6662-4(d). The rules for determining when there is adequate 
disclosure are set forth in Sec. 1.6662-4 (e) and (f). This penalty does 
not apply to the extent that the reasonable cause and good faith 
exception to this penalty set forth in Sec. 1.6664-4 applies.
    (b) Definitions and computational rules--(1) Substantial. An 
understatement (as defined in paragraph (b)(2) of this section) is 
``substantial'' if it exceeds the greater of--
    (i) 10 percent of the tax required to be shown on the return for the 
taxable year (as defined in paragraph (b)(3) of this section); or
    (ii) $5,000 ($10,000 in the case of a corporation other than an S 
corporation (as defined in section 1361(a)(1)) or a personal holding 
company (as defined in section 542)).
    (2) Understatement. Except as provided in paragraph (c)(2) of this 
section (relating to special rules for carrybacks), the term 
``understatement'' means the excess of--
    (i) The amount of the tax required to be shown on the return for the 
taxable year (as defined in paragraph (b)(3) of this section), over
    (ii) The amount of the tax imposed which is shown on the return for 
the taxable year (as defined in paragraph (b)(4) of this section), 
reduced by any rebate (as defined in paragraph (b)(5) of this section).
    The definition of understatement also may be expressed as--

Understatement = X - (Y - Z)
where X = the amount of the tax required to be shown on the return; Y = 
the amount of the tax imposed which is shown on the return; and Z = any 
rebate.

    (3) Amount of the tax required to be shown on the return. The 
``amount of the tax required to be shown on the return'' for the taxable 
year has the same meaning as the ``amount of income tax imposed'' as 
defined in Sec. 1.6664-2(b).
    (4) Amount of the tax imposed which is shown on the return. The 
``amount of the tax imposed which is shown on the return'' for the 
taxable year has the same meaning as the ``amount shown as the tax by 
the taxpayer on his return,'' as defined in Sec. 1.6664-2(c), except 
that--
    (i) There is no reduction for the excess of the amount described in 
Sec. 1.6664-2(c)(1)(i) over the amount described in Sec. 1.6664-
2(c)(1)(ii), and
    (ii) The tax liability shown by the taxpayer on his return is 
recomputed as if the following items had been reported properly:
    (A) Items (other than tax shelter items as defined in Sec. 1.6662-
4(g)(3)) for which there is substantial authority for the treatment 
claimed (as provided in Sec. 1.6662-4(d)).
    (B) Items (other than tax shelter items as defined in Sec. 1.6662-
4(g)(3)) with respect to which there is adequate disclosure (as provided 
in Sec. 1.6662-4 (e) and (f)).
    (C) Tax shelter items (as defined in Sec. 1.6662-4(g)(3)) for which 
there is substantial authority for the treatment claimed (as provided in 
Sec. 1.6662-4(d)), and with respect to which the taxpayer reasonably 
believed that the tax treatment of the items was more likely than

[[Page 819]]

not the proper tax treatment (as provided in Sec. 1.6662-4(g)(4)).
    (5) Rebate. The term rebate has the meaning set forth in 
Sec. 1.6664-2(e), except that--
    (i) ``Amounts not so shown previously assessed (or collected without 
assessment)'' includes only amounts not so shown previously assessed (or 
collected without assessment) as a deficiency, and
    (ii) The amount of the rebate is determined as if any items to which 
the rebate is attributable that are described in paragraph (b)(4) of 
this section had received the proper tax treatment.
    (6) Examples. The following examples illustrate the provisions of 
paragraph (b) of this section. These examples do not take into account 
the reasonable cause exception under Sec. 1.6664-4:

    Example 1. In 1990, Individual A, a calendar year taxpayer, files a 
return for 1989, which shows taxable income of $18,200 and tax liability 
of $2,734. Subsequent adjustments on audit for 1989 increase taxable 
income to $51,500 and tax liability to $12,339. There was substantial 
authority for an item resulting in an adjustment that increases taxable 
income by $5,300. The item is not a tax shelter item. In computing the 
amount of the understatement, the amount of tax shown on A's return is 
determined as if the item for which there was substantial authority had 
been given the proper tax treatment. Thus, the amount of tax that is 
treated as shown on A's return is $4,176, i.e., the tax on $23,500 
($18,200 taxable income actually shown on A's return plus $5,300, the 
amount of the adjustment for which there was substantial authority). The 
amount of the understatement is $8,163, i.e., $12,339 (the amount of tax 
required to be shown) less $4,176 (the amount of tax treated as shown on 
A's return after adjustment for the item for which there was substantial 
authority). Because the $8,163 understatement exceeds the greater of 10 
percent of the tax required to be shown on the return for the year, 
i.e., $1,234 ($12,339  x  .10) or $5,000, A has a substantial 
understatement of income tax for the year.
    Example 2. Individual B, a calendar year taxpayer, files a return 
for 1990 that fails to include income reported on an information return, 
Form 1099, that was furnished to B. The Service detects this omission 
through its document matching program and assesses $3,000 in unreported 
tax liability. B's return is later examined and as a result of the 
examination the Service makes an adjustment to B's return of $4,000 in 
additional tax liability. Assuming there was neither substantial 
authority nor adequate disclosure with respect to the items adjusted, 
there is an understatement of $7,000 with respect to B's return. There 
is also an underpayment of $7,000. (See Sec. 1.6664-2.) The amount of 
the understatement is not reduced by imposition of a negligence penalty 
on the $3,000 portion of the underpayment that is attributable to the 
unreported income. However, if the Services does impose the negligence 
penalty on this $3,000 portion, the Service may only impose the 
substantial understatement penalty on the remaining $4,000 portion of 
the underpayment. (See Sec. 1.6662-2(c), which prohibits stacking of 
accuracy-related penalty components.)

    (c) Special rules in the case of carrybacks and carryovers--(1) In 
general. The penalty for a substantial understatement of income tax 
applies to any portion of an underpayment for a year to which a loss, 
deduction or credit is carried that is attributable to a ``tainted 
item'' for the year in which the carryback or carryover of the loss, 
deduction or credit arises (the ``loss or credit year''). The 
determination of whether an understatement is substantial for a 
carryback or carryover year is made with respect to the return of the 
carryback or carryover year. ``Tainted items'' are taken into account 
with items arising in a carryback or carryover year to determine whether 
the understatement is substantial for that year.
    (2) Understatements for carryback years not reduced by amount of 
carrybacks. The amount of an understatement for a carryback year is not 
reduced on account of a carryback of a loss, deduction or credit to that 
year.
    (3) Tainted items defined--(i) In general. Except in the case of a 
tax shelter item (as defined in paragraph (g)(3) of this section), a 
``tainted item'' is any item for which there is neither substantial 
authority nor adequate disclosure with respect to the loss or credit 
year.
    (ii) Tax shelter items. In the case of a tax shelter item (as 
defined in paragraph (g)(3) of this section), a ``tainted item'' is any 
item for which there is not, with respect to the loss or credit year, 
both substantial authority and a reasonable belief that the tax 
treatment is more likely than not the proper treatment.
    (4) Transition rule for carrybacks to pre-1990 years. A 20 percent 
penalty

[[Page 820]]

under section 6662(b)(2) is imposed on any portion of an underpayment 
for a carryback year, the return for which is due (without regard to 
extensions) before January 1, 1990, if--
    (i) That portion is attributable to one or more ``tainted items'' 
(as defined in paragraph (c)(3) of this section) arising in a loss or 
credit year; and
    (ii) The return for the loss or credit year is due (without regard 
to extensions) after December 31, 1989.

The preceding sentence applies only if the understatement in the 
carryback year is substantial. See Example 2 in paragraph (c)(5) of this 
section.
    (5) Examples. The following examples illustrate the rules of 
paragraph (c) of this section regarding carrybacks and carryovers. These 
examples do not take into account the reasonable cause exception under 
Sec. 1.6664-4.

    Example 1. (i) Corporation N, a calendar year taxpayer, is a C 
corporation. N was formed on January 1, 1987, and timely filed the 
following income tax returns:

                                                  [In dollars]                                                  
----------------------------------------------------------------------------------------------------------------
                                                                                      Tax Year                  
                                                                  ----------------------------------------------
                                                                                                          1990  
                                                                      1987       1988         1989      (before 
                                                                                                         NOLCO) 
----------------------------------------------------------------------------------------------------------------
Taxable income...................................................     30,000     100,000    (300,000)     50,000
Tax liability....................................................      4,575      22,250  ...........      7,500
----------------------------------------------------------------------------------------------------------------

    (ii) During 1990, N files Form 1139, Corporation Application for 
Tentative Refund, to carry back the NOL generated in 1989 (NOLCB). N 
received refunds of $4,575 for 1987 and $22,250 for 1988.
    (iii) For tax year 1990, N carries over $50,000 of the 1989 loss to 
offset $50,000 of income earned in 1990 and reduce taxable income to 
zero. N would have reported $7,500 of tax liability for 1990 if it were 
not for use of the net operating loss carryover (NOLCO). N assumes there 
is a remaining NOLCO of $120,000 to be applied for tax year 1991.
    (iv) In June 1991, the Service completes its examination of the 1989 
loss year return and makes the following adjustment:

Taxable income per 1989 return............................    ($300,000)
Adjustment: Unreported income.............................      310,000 
                                                           -------------
Corrected taxable income..................................      $10,000 
Corrected tax liability...................................       $1,500 
                                                                        

    (v) There was not substantial authority for N's treatment of the 
items comprising the 1989 adjustment and N did not make adequate 
disclosure.
    (vi) As a result of the adjustment to the 1989 return, N had an 
understatement of $4,575 for tax year 1987; an understatement of $22,250 
for tax year 1988; an understatement of $1,500 for tax year 1989; and an 
understatement of $7,500 for tax year 1990. Only the $22,250 
understatement for 1988 is a substantial understatement, i.e., it 
exceeds the greater of (a) $2,225 (10 percent of the tax required to be 
shown on the return for the taxable year (.10 X $22,250)) or (b) 
$10,000. The underpayment for 1988 is subject to a penalty rate of 20 
percent.
    Example 2. The facts are the same as in Example 1, except that in 
addition to examining the 1989 return, the Service also examines the 
1987 return and makes an adjustment that results in an understatement. 
(This adjustment is unrelated to the adjustment on the 1987 return for 
the disallowance of the NOLCB from 1989.) If the understatement 
resulting from the adjustment to the 1987 return, when combined with the 
understatement resulting from the disallowance of the NOLCB from 1989, 
exceeds the greater of (a) 10 percent of the tax required to be shown on 
the return for 1987 or (b) $10,000, the underpayment for 1987 will also 
be subject to a substantial understatement penalty. The portion of the 
underpayment attributable to the adjustment unrelated to the 
disallowance of the NOLCB will be subject to a penalty rate of 25 
percent under former section 6661. The portion of the underpayment 
attributable to the disallowance of the NOLCB will be subject to a 
penalty rate of 20 percent under section 6662.
    Example 3. Individual P, a calendar year single taxpayer, files his 
1990 return reporting taxable income of $10,000 and a tax liability of 
$1,504. An examination of the 1990 return results in an adjustment for 
unreported income of $25,000. There was not substantial authority for 
P's failure to report the income, and P did not make adequate disclosure 
with respect to the unreported income. P's correct tax liability for 
1990 is determined to be $7,279, resulting in an understatement of 
$5,775 (the difference between the amount of tax required to be shown on 
the return ($7,279) and the tax shown on the return ($1,504)). Because 
the understatement exceeds the greater of (a) $728 (10 percent of the 
tax required to be shown on the return (.10  x  $7,279)) or (b) $5,000, 
the understatement is substantial. Subsequently, P files his 1993 return 
showing a net operating loss. The loss is carried back to his 1990 
return, reducing his taxable income for 1990 to zero. However, the 
amount of the understatement for 1990 is not reduced on account of the 
NOLCB to that year. P is subject to the 20 percent penalty rate under 
section 6662 on the underpayment attributable to the substantial 
understatement for 1990, notwithstanding that

[[Page 821]]

the tax required to be shown on the return for that year, after 
application of the NOLCB, is zero.

    (d) Substantial authority--(1) Effect of having substantial 
authority. If there is substantial authority for the tax treatment of an 
item, the item is treated as if it were shown properly on the return for 
the taxable year in computing the amount of the tax shown on the return. 
Thus, for purposes of section 6662(d), the tax attributable to the item 
is not included in the understatement for that year. (For special rules 
relating to tax shelter items see Sec. 1.6662-4(g).)
    (2) Substantial authority standard. The substantial authority 
standard is an objective standard involving an analysis of the law and 
application of the law to relevant facts. The substantial authority 
standard is less stringent than the ``more likely than not'' standard 
(the standard that is met when there is a greater than 50-percent 
likelihood of the position being upheld), but more stringent than the 
reasonable basis standard (the standard which, if satisfied, generally 
will prevent imposition of the penalty under section 6662(b)(1) for 
negligence). The possibility that a return will not be audited or, if 
audited, that an item will not be raised on audit, is not relevant in 
determining whether the substantial authority standard (or the 
reasonable basis standard) is satisfied.
    (3) Determination of whether substantial authority is present --(i) 
Evaluation of authorities. There is substantial authority for the tax 
treatment of an item only if the weight of the authorities supporting 
the treatement is substantial in relation to the weight of authorities 
supporting contrary treatment. All authorities relevant to the tax 
treatment of an item, including the authorities contrary to the 
treatment, are taken into account in determining whether substantial 
authority exists. The weight of authorities is determined in light of 
the pertinent facts and circumstances in the manner prescribed by 
paragraph (d)(3)(ii) of this section. There may be substantial authority 
for more than one position with respect to the same item. Because the 
substantial authority standard is an objective standard, the taxpayer's 
belief that there is substantial authority for the tax treatment of an 
item is not relevant in determining whether there is substantial 
authority for that treatment.
    (ii) Nature of analysis. The weight accorded an authority depends on 
its relevance and persuasiveness, and the type of document providing the 
authority. For example, a case or revenue ruling having some facts in 
common with the tax treatment at issue is not particularly relevant if 
the authority is materially distinguishable on its facts, or is 
otherwise inapplicable to the tax treatment at issue. An authority that 
merely states a conclusion ordinarily is less persuasive than one that 
reaches its conclusion by cogently relating the applicable law to 
pertinent facts. The weight of an authority from which information has 
been deleted, such as a private letter ruling, is diminished to the 
extent that the deleted information may have affected the authority's 
conclusions. The type of document also must be considered. For example, 
a revenue ruling is accorded greater weight than a private letter ruling 
addressing the same issue. An older private letter ruling, technical 
advice memorandum, general counsel memorandum or action on decision 
generally must be accorded less weight than a more recent one. Any 
document described in the preceding sentence that is more than 10 years 
old generally is accorded very little weight. However, the 
persuasiveness and relevance of a document, viewed in light of 
subsequent developments, should be taken into account along with the age 
of the document. There may be substantial authority for the tax 
treatment of an item despite the absence of certain types of authority. 
Thus, a taxpayer may have substantial authority for a position that is 
supported only by a well-reasoned construction of the applicable 
statutory provision.
    (iii) Types of authority. Except in cases described in paragraph 
(d)(3)(iv) of this section concerning written determinations, only the 
following are authority for purposes of determining whether there is 
substantial authority for the tax treatment of an item: Applicable 
provisions of the Internal Revenue Code and other statutory provisions; 
proposed, temporary and final

[[Page 822]]

regulations construing such statues; revenue rulings and revenue 
procedures; tax treaties and regulations thereunder, and Treasury 
Department and other official explanations of such treaties; court 
cases; congressional intent as reflected in committee reports, joint 
explanatory statements of managers included in conference committee 
reports, and floor statements made prior to enactment by one of a bill's 
managers; General Explanations of tax legislation prepared by the Joint 
Committee on Taxation (the Blue Book); private letter rulings and 
technical advice memoranda issued after October 31, 1976; actions on 
decisions and general counsel memoranda issued after March 12, 1981 (as 
well as general counsel memoranda published in pre-1955 volumes of the 
Cumulative Bulletin); Internal Revenue Service information or press 
releases; and notices, announcements and other administrative 
pronouncements published by the Service in the Internal Revenue 
Bulletin. Conclusions reached in treatises, legal periodicals, legal 
opinions or opinions rendered by tax professionals are not authority. 
The authorities underlying such expressions of opinion where applicable 
to the facts of a particular case, however, may give rise to substantial 
authority for the tax treatment of an item. Notwithstanding the 
preceding list of authorities, an authority does not continue to be an 
authority to the extent it is overruled or modified, implicitly or 
explicitly, by a body with the power to overrule or modify the earlier 
authority. In the case of court decisions, for example, a district court 
opinion on an issue is not an authority if overruled or reversed by the 
United States Court of Appeals for such district. However, a Tax Court 
opinion is not considered to be overruled or modified by a court of 
appeals to which a taxpayer does not have a right of appeal, unless the 
Tax Court adopts the holding of the court of appeals. Similarly, a 
private letter ruling is not authority if revoked or if inconsistent 
with a subsequent proposed regulation, revenue ruling or other 
administrative pronouncement published in the Internal Revenue Bulletin.
    (iv) Special rules--(A) Written determinations. There is substantial 
authority for the tax treatment of an item by a taxpayer if the 
treatment is supported by the conclusion of a ruling or a determination 
letter (as defined in Sec. 301.6110-2 (d) and (e)) issued to the 
taxpayer, by the conclusion of a technical advice memorandum in which 
the taxpayer is named, or by an affirmative statement in a revenue 
agent's report with respect to a prior taxable year of the taxpayer 
(``written determinations''). The preceding sentence does not apply, 
however, if--
    (1) There was a misstatement or omission of a material fact or the 
facts that subsequently develop are materially different from the facts 
on which the written determination was based, or
    (2) The written determination was modified or revoked after the date 
of issuance by--
    (i) A notice to the taxpayer to whom the written determination was 
issued,
    (ii) The enactment of legislation or ratification of a tax treaty,
    (iii) A decision of the United States Supreme Court,
    (iv) The issuance of temporary or final regulations, or
    (v) The issuance of a revenue ruling, revenue procedure, or other 
statement published in the Internal Revenue Bulletin.

Except in the case of a written determination that is modified or 
revoked on account of Sec. 1.6662-4(d)(3)(iv)(A)(1), a written 
determination that is modified or revoked as described in Sec. 1.6662-
4(d)(3)(iv)(A)(2) ceases to be authority on the date, and to the extent, 
it is so modified or revoked. See section 6404(f) for rules which 
require the Secretary to abate a penalty that is attributable to 
erroneous written advice furnished to a taxpayer by an officer or 
employee of the Internal Revenue Service.
    (B) Taxpayer's jurisdiction. The applicability of court cases to the 
taxpayer by reason of the taxpayer's residence in a particular 
jurisdiction is not taken into account in determining whether there is 
substantial authority for the tax treatment of an item. Notwithstanding 
the preceding sentence, there is substantial authority for the tax 
treatment of an item if the treatment is supported by controlling 
precedent of a United States Court of Appeals to

[[Page 823]]

which the taxpayer has a right of appeal with respect to the item.
    (C) When substantial authority determined. There is substantial 
authority for the tax treatment of an item if there is substantial 
authority at the time the return containing the item is filed or there 
was substantial authority on the last day of the taxable year to which 
the return relates.
    (v) Substantial authority for tax returns due before January 1, 
1990. There is substantial authority for the tax treatment of an item on 
a return that is due (without regard to extensions) after December 31, 
1982 and before January 1, 1990, if there is substantial authority for 
such treatment under either the provisions of paragraph (d)(3)(iii) of 
this section (which set forth an expanded list of authorities) or of 
Sec. 1.6661-3(b)(2) (which set forth a narrower list of authorities). 
Under either list of authorities, authorities both for and against the 
position must be taken into account.
    (e) Disclosure of certain information--(1) Effect of adequate 
disclosure. Items for which there is adequate disclosure as provided in 
this paragraph (e) and in paragraph (f) of this section are treated as 
if such items were shown properly on the return for the taxable year in 
computing the amount of the tax shown on the return. Thus, for purposes 
of section 6662(d), the tax attributable to such items is not included 
in the understatement for that year.
    (2) Circumstances where disclosure will not have an effect. The 
rules of paragraph (e)(1) of this section do not apply where the item or 
position on the return--
    (i) Does not have a reasonable basis (as defined in Sec. 1.6662-
3(b)(3));
    (ii) Is attributable to a tax shelter (as defined in section 
6662(d)(2)(C)(iii) and paragraph (g)(2) of this section); or
    (iii) Is not properly substantiated, or the taxpayer failed to keep 
adequate books and records with respect to the item or position.
    (f) Method of making adequate disclosure--(1) Disclosure statement. 
Disclosure is adequate with respect to an item (or group of similar 
items, such as amounts paid or incurred for supplies by a taxpayer 
engaged in business) or a position on a return if the disclosure is made 
on a properly completed form attached to the return or to a qualified 
amended return (as defined in Sec. 1.6664-2(c)(3)) for the taxable year. 
In the case of an item or position other than one that is contrary to a 
regulation, disclosure must be made on Form 8275 (Disclosure Statement); 
in the case of a position contrary to a regulation, disclosure must be 
made on Form 8275-R (Regulation Disclosure Statement).
    (2) Disclosure on return. The Commissioner may by annual revenue 
procedure (or otherwise) prescribe the circumstances under which 
disclosure of information on a return (or qualified amended return) in 
accordance with applicable forms and instructions is adequate. If the 
revenue procedure does not include an item, disclosure is adequate with 
respect to that item only if made on a properly completed Form 8275 or 
8275-R, as appropriate, attached to the return for the year or to a 
qualified amended return.
    (3) Recurring item. Disclosure with respect to a recurring item, 
such as the basis of recovery property, must be made for each taxable 
year in which the item is taken into account.
    (4) Carrybacks and carryovers. Disclosure is adequate with respect 
to an item which is included in any loss, deduction or credit that is 
carried to another year only if made in connection with the return (or 
qualified amended return) for the taxable year in which the carryback or 
carryover arises (the ``loss or credit year''). Disclosure is not also 
required in connection with the return for the taxable year in which the 
carryback or carryover is taken into account.
    (5) Pass-through entities. Disclosure in the case of items 
attributable to a pass-through entity (pass-through items) is made with 
respect to the return of the entity, except as provided in this 
paragraph (f)(5). Thus, disclosure in the case of pass-through items 
must be made on a Form 8275 or 8275-R, as appropriate, attached to the 
return (or qualified amended return) of the entity, or on the entity's 
return in accordance with the revenue procedure described in paragraph 
(f)(2) of this section, if applicable. A taxpayer (i.e., partner, 
shareholder, beneficiary, or holder of a residual interest in a

[[Page 824]]

REMIC) also may make adequate disclosure with respect to a pass-through 
item, however, if the taxpayer files a properly completed Form 8275 or 
8275-R, as appropriate, in duplicate, one copy attached to the 
taxpayer's return (or qualified amended return) and the other copy filed 
with the Internal Revenue Service Center with which the return of the 
entity is required to be filed. Each Form 8275 or 8275-R, as 
appropriate, filed by the taxpayer should relate to the pass-through 
items of only one entity. For purposes of this paragraph (f)(5), a pass-
through entity is a partnership, S corporation (as defined in section 
1361(a)(1)), estate, trust, regulated investment company (as defined in 
section 851(a)), real estate investment trust (as defined in section 
856(a)), or real estate mortgage investment conduit (``REMIC'') (as 
defined in section 860D(a)).
    (g) Items relating to tax shelters--(1) In general--(i) Noncorporate 
taxpayers. Tax shelter items (as defined in paragraph (g)(3) of this 
section) of a taxpayer other than a corporation are treated for purposes 
of this section as if such items were shown properly on the return for a 
taxable year in computing the amount of tax shown on the return, and 
thus the tax attributable to such items is not included in the 
understatement for the year, if--
    (A) There is substantial authority (as provided in paragraph (d) of 
this section) for the tax treatment of that item; and
    (B) The taxpayer reasonably believed at the time the return was 
filed that the tax treatment of that item was more likely than not the 
proper treatment.
    (ii) Corporate taxpayers--(A) In general. Except as provided in 
paragraph (g)(1)(ii)(B) of this section, all tax shelter items (as 
defined in paragraph (g)(3) of this section) of a corporation are taken 
into account in computing the amount of any understatement.
    (B) Special rule for transactions occurring prior to December 9, 
1994. The tax shelter items of a corporation arising in connection with 
transactions occurring prior to December 9, 1994 are treated for 
purposes of this section as if such items were shown properly on the 
return if the requirements of paragraph (g)(1)(i) are satisfied with 
respect to such items.
    (iii) Disclosure irrelevant. Disclosure made with respect to a tax 
shelter item of either a corporate or noncorporate taxpayer does not 
affect the amount of an understatement.
    (iv) Cross-reference. See Sec. 1.6664-4(e) for certain rules 
regarding the availability of the reasonable cause and good faith 
exception to the substantial understatement penalty with respect to tax 
shelter items of corporations.
    (2) Tax shelter--(i) In general. For purposes of section 6662(d), 
the term ``tax shelter'' means--
    (A) A partnership or other entity (such as a corporation or trust),
    (B) An investment plan or arrangement, or
    (C) Any other plan or arrangement,

if the principal purpose of the entity, plan or arrangement, based on 
objective evidence, is to avoid or evade Federal income tax. The 
principal purpose of an entity, plan or arrangement is to avoid or evade 
Federal income tax if that purpose exceeds any other purpose. Typical of 
tax shelters are transactions structured with little or no motive for 
the realization of economic gain, and transactions that utilize the 
mismatching of income and deductions, overvalued assets or assets with 
values subject to substantial uncertainty, certain nonrecourse 
financing, financing techniques that do not conform to standard 
commercial business practices, or the mischaracterization of the 
substance of the transaction. The existence of economic substance does 
not of itself establish that a transaction is not a tax shelter if the 
transaction includes other characteristics that indicate it is a tax 
shelter.
    (ii) Principal purpose. The principal purpose of an entity, plan or 
arrangement is not to avoid or evade Federal income tax if the entity, 
plan or arrangement has as its purpose the claiming of exclusions from 
income, accelerated deductions or other tax benefits in a manner 
consistent with the statute and Congressional purpose. For example, an 
entity, plan or arrangement does not have as its principal purpose the 
avoidance or evasion of Federal income tax solely as a result of the 
following uses of tax benefits

[[Page 825]]

provided by the Internal Revenue Code: the purchasing or holding of an 
obligation bearing interest that is excluded from gross income under 
section 103; taking an accelerated depreciation allowance under section 
168; taking the percentage depletion allowance under section 613 or 
section 613A; deducting intangible drilling and development costs as 
expenses under section 263(c); establishing a qualified retirement plan 
under sections 401-409; claiming the possession tax credit under section 
936; or claiming tax benefits available by reason of an election under 
992 to be taxed as a domestic international sales corporation 
(``DISC''), under section 927(f)(1) to be taxed as a foreign sales 
corporation (``FSC''), or under section 1362 to be taxed as an S 
corporation.
    (3) Tax shelter item. An item of income, gain, loss, deduction or 
credit is a ``tax shelter item'' if the item is directly or indirectly 
attributable to the principal purpose of a tax shelter to avoid or evade 
Federal income tax. Thus, if a partnership is established for the 
principal purpose of avoiding or evading Federal income tax by acquiring 
and overstating the basis of property for purposes of claiming 
accelerated depreciation, the depreciation with respect to the property 
is a tax shelter item. However, a deduction claimed in connection with a 
separate transaction carried on by the same partnership is not a tax 
shelter item if the transaction does not constitute a plan or 
arrangement the principal purpose of which is to avoid or evade tax.
    (4) Reasonable belief--(i) In general. For purposes of section 
6662(d) and paragraph (g)(1)(i)(B) of this section (pertaining to tax 
shelter items of noncorporate taxpayers), a taxpayer is considered 
reasonably to believe that the tax treatment of an item is more likely 
than not the proper tax treatment if (without taking into account the 
possibility that a return will not be audited, that an issue will not be 
raised on audit, or that an issue will be settled)--
    (A) The taxpayer analyzes the pertinent facts and authorities in the 
manner described in paragraph (d)(3)(ii) of this section, and in 
reliance upon that analysis, reasonably concludes in good faith that 
there is a greater than 50-percent likelihood that the tax treatment of 
the item will be upheld if challenged by the Internal Revenue Service; 
or
    (B) The taxpayer reasonably relies in good faith on the opinion of a 
professional tax advisor, if the opinion is based on the tax advisor's 
analysis of the pertinent facts and authorities in the manner described 
in paragraph (d)(3)(ii) of this section and unambiguously states that 
the tax advisor concludes that there is a greater than 50-percent 
likelihood that the tax treatment of the item will be upheld if 
challenged by the Internal Revenue Service.
    (ii) Facts and circumstances; reliance on professional tax advisor. 
All facts and circumstances must be taken into account in determining 
whether a taxpayer satisfies the requirements of paragraph (g)(4)(i) of 
this section. However, in no event will a taxpayer be considered to have 
reasonably relied in good faith on the opinion of a professional tax 
advisor for purposes of paragraph (g)(4)(i)(B) of this section unless 
the requirements of Sec. 1.6664-4(c)(1) are met. The fact that the 
requirements of Sec. 1.6664-4(c)(1) are satisfied will not necessarily 
establish that the taxpayer reasonably relied on the opinion in good 
faith. For example, reliance may not be reasonable or in good faith if 
the taxpayer knew, or should have known, that the advisor lacked 
knowledge in the relevant aspects of Federal tax law.
    (5) Pass-through entities. In the case of tax shelter items 
attributable to a pass-through entity, the actions described in 
paragraphs (g)(4)(i)(A) and (B) of this section, if taken by the entity, 
are deemed to have been taken by the taxpayer and are considered in 
determining whether the taxpayer reasonably believed that the tax 
treatment of an item was more likely than not the proper tax treatment.

[T.D. 8381, 56 FR 67499, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 
1992, as amended by T.D. 8617, 60 FR 45665, Sept. 1, 1995]



Sec. 1.6662-5  Substantial and gross valuation misstatements under chapter 1.

    (a) In general. If any portion of an underpayment, as defined in 
section 6664(a) and Sec. 1.6664-2, of any income tax

[[Page 826]]

imposed under chapter 1 of subtitle A of the Code that is required to be 
shown on a return is attributable to a substantial valuation 
misstatement under chapter 1 (``substantial valuation misstatement''), 
there is added to the tax an amount equal to 20 percent of such portion. 
Section 6662(h) increases the penalty to 40 percent in the case of a 
gross valuation misstatement under chapter 1 (``gross valuation 
misstatement''). No penalty under section 6662(b)(3) is imposed, 
however, on a portion of an underpayment that is attributable to a 
substantial or gross valuation misstatement unless the aggregate of all 
portions of the underpayment attributable to substantial or gross 
valuation misstatements exceeds the applicable dollar limitation ($5,000 
or $10,000), as provided in section 6662(e)(2) and paragraphs (b) and 
(f)(2) of this section. This penalty also does not apply to the extent 
that the reasonable cause and good faith exception to this penalty set 
forth in Sec. 1.6664-4 applies. There is no disclosure exception to this 
penalty.
    (b) Dollar limitation. No penalty may be imposed under section 
6662(b)(3) for a taxable year unless the portion of the underpayment for 
that year that is attributable to substantial or gross valuation 
misstatements exceeds $5,000 ($10,000 in the case of a corporation other 
than an S corporation (as defined in section 1361(a)(1)) or a personal 
holding company (as defined in section 542)). This limitation is applied 
separately to each taxable year for which there is a substantial or 
gross valuation misstatement.
    (c) Special rules in the case of carrybacks and carryovers--(1) In 
general. The penalty for a substantial or gross valuation misstatement 
applies to any portion of an underpayment for a year to which a loss, 
deduction or credit is carried that is attributable to a substantial or 
gross valuation misstatement for the year in which the carryback or 
carryover of the loss, deduction or credit arises (the ``loss or credit 
year''), provided that the applicable dollar limitation set forth in 
section 6662(e)(2) is satisfied in the carryback or carryover year.
    (2) Transition rule for carrybacks to pre-1990 years. The penalty 
under section 6662(b)(3) is imposed on any portion of an underpayment 
for a carryback year, the return for which is due (without regard to 
extensions) before January 1, 1990, if--
    (i) That portion is attributable to a substantial or gross valuation 
misstatement for a loss or credit year; and
    (ii) The return for the loss or credit year is due (without regard 
to extensions) after December 31, 1989.

The preceding sentence applies only if the underpayment for the 
carryback year exceeds the applicable dollar limitation ($5,000, or 
$10,000 for most corporations). See Example 3 in paragraph (d) of this 
section.
    (d) Examples. The following examples illustrate the provisions of 
paragraphs (b) and (c) of this section. These examples do not take into 
account the reasonable cause exception under Sec. 1.6664-4.

    Example 1. Corporation Q is a C corporation. In 1990, the first year 
of its existence, Q had taxable income of $200,000 without considering 
depreciation of a particular asset. On its calendar year 1990 return, Q 
overstated its basis in this asset by an amount that caused a 
substantial valuation misstatement. The overstated basis resulted in 
depreciation claimed of $350,000, which was $250,000 more than the 
$100,000 allowable. Thus, on its 1990 return, Q showed a loss of 
$150,000. In 1991, Q had taxable income of $450,000 before application 
of the loss carryover, and Q claimed a carryover loss deduction under 
section 172 of $150,000, resulting in taxable income of $300,000 for 
1991. Upon audit of the 1990 return, the basis of the asset was 
corrected, resulting in an adjustment of $250,000. For 1990, the 
underpayment resulting from the $100,000 taxable income 
(-$150,000+$250,000) is attributable to the valuation misstatement. 
Assuming the underpayment resulting from the $100,000 taxable income 
exceeds the $10,000 limitation, the penalty will be imposed in 1990. For 
1991, the elimination of the loss carryover results in additional 
taxable income of $150,000. The underpayment for 1991 resulting from 
that adjustment is also attributable to the substantial valuation 
misstatement on the 1990 return. Assuming the underpayment resulting 
from the $150,000 additional taxable income for 1991 exceeds the $10,000 
limitation, the substantial valuation misstatement penalty also will be 
imposed for that year.
    Example 2. (i) Corporation T is a C corporation. In 1990, the first 
year of its existence, T had a loss of $3,000,000 without considering

[[Page 827]]

depreciation of its major asset. On its calendar year 1990 return, T 
overstated its basis in this asset in an amount that caused a 
substantial valuation misstatement. This overstatement resulted in 
depreciation claimed of $3,500,000, which was $2,500,000 more than the 
$1,000,000 allowable. Thus, on its 1990 return, T showed a loss of 
$6,500,000. In 1991, T had taxable income of $4,500,000 before 
application of the carryover loss, but claimed a carryover loss 
deduction under section 172 in the amount of $4,500,000, resulting in 
taxable income of zero for that year and leaving a $2,000,000 carryover 
available. Upon audit of the 1990 return, the basis of the asset was 
corrected, resulting in an adjustment of $2,500,000.
    (ii) For 1990, the underpayment is still zero 
(-$6,500,000+$2,500,000=-$4,000,000). Thus, the penalty does not apply 
in 1990. The loss for 1990 is reduced to $4,000,000.
    (iii) For 1991, there is additional taxable income of $500,000 as a 
result of the reduction of the carryover loss ($4,500,000 reported 
income before carryover loss minus corrected carryover loss of 
$4,000,000=$500,000). The underpayment for 1991 resulting from reduction 
of the carryover loss is attributable to the valuation misstatement on 
the 1990 return. Assuming the underpayment resulting from the $500,000 
additional taxable income exceeds the $10,000 limitation, the 
substantial valuation misstatement penalty will be imposed in 1991.
    Example 3. Corporation V is a C corporation. In 1990, V had a loss 
of $100,000 without considering depreciation of a particular asset which 
it had fully depreciated in earlier years. V had a depreciable basis in 
the asset of zero, but on its 1990 calendar year return erroneously 
claimed a basis in the asset of $1,250,000 and depreciation of $250,000. 
V reported a $350,000 loss for the year 1990, and carried back the loss 
to the 1987 and 1988 tax years. V had reported taxable income of 
$300,000 in 1987 and $200,000 in 1988, before application of the 
carryback. The $350,000 carryback eliminated all taxable income for 
1987, and $50,000 of the taxable income for 1988. After disallowance of 
the $250,000 depreciation deduction for 1990, V still had a loss of 
$100,000. Because there is no underpayment for 1990, no valuation 
misstatement penalty is imposed for 1990. However, as a result of the 
1990 depreciation adjustment, the carryback to 1987 is reduced from 
$350,000 to $100,000. After absorption of the $100,000 carryback, V has 
taxable income of $200,000 for 1987. This adjustment results in an 
underpayment for 1987 that is attributable to the valuation misstatement 
on the 1990 return. The valuation misstatement for 1990 is a gross 
valuation misstatement because the correct adjusted basis of the 
depreciated asset was zero. (See paragraph (e)(2) of this section.) 
Therefore, the 40 percent penalty rate applies to the 1987 underpayment 
attributable to the 1990 misstatement, provided that this underpayment 
exceeds $10,000. The adjustment also results in the elimination of any 
loss carryback to 1988 resulting in an increase in taxable income for 
1988 of $50,000. Assuming the underpayment resulting from this 
additional $50,000 of income exceeds $10,000, the gross valuation 
misstatement penalty is imposed on the underpayment for 1988.

    (e) Definitions--(1) Substantial valuation misstatement. There is a 
substantial valuation misstatement if the value or adjusted basis of any 
property claimed on a return of tax imposed under chapter 1 is 200 
percent or more of the correct amount.
    (2) Gross valuation misstatement. There is a gross valuation 
misstatement if the value or adjusted basis of any property claimed on a 
return of tax imposed under chapter 1 is 400 percent or more of the 
correct amount.
    (3) Property. For purposes of this section, the term ``property'' 
refers to both tangible and intangible property. Tangible property 
includes property such as land, buildings, fixtures and inventory. 
Intangible property includes property such as goodwill, covenants not to 
compete, leaseholds, patents, contract rights, debts and choses in 
action.
    (f) Multiple valuation misstatements on a return--(1) Determination 
of whether valuation misstatements are substantial or gross. The 
determination of whether there is a substantial or gross valuation 
misstatement on a return is made on a property-by-property basis. 
Assume, for example, that property A has a value of 60 but a taxpayer 
claims a value of 110, and that property B has a value of 40 but the 
taxpayer claims a value of 100. Because the claimed and correct values 
are compared on a property-by-property basis, there is a substantial 
valuation misstatement with respect to property B, but not with respect 
to property A, even though the claimed values (210) are 200 percent or 
more of the correct values (100) when compared on an aggregate basis.
    (2) Application of dollar limitation. For purposes of applying the 
dollar limitation set forth in section 6662(e)(2), the determination of 
the portion of an underpayment that is attributable to a substantial or 
gross valuation misstatement is made by aggregating

[[Page 828]]

all portions of the underpayment attributable to substantial or gross 
valuation misstatements. Assume, for example, that the value claimed for 
property C on a return is 250 percent of the correct value, and that the 
value claimed for property D on the return is 400 percent of the correct 
value. Because the portions of an underpayment that are attributable to 
a substantial or gross valuation misstatement on a return are aggregated 
in applying the dollar limitation, the dollar limitation is satisfied if 
the portion of the underpayment that is attributable to the misstatement 
of the value of property C, when aggregated with the portion of the 
underpayment that is attributable to the misstatement of the value of 
property D, exceeds $5,000 ($10,000 in the case of most corporations).
    (g) Property with a value or adjusted basis of zero. The value or 
adjusted basis claimed on a return of any property with a correct value 
or adjusted basis of zero is considered to be 400 percent or more of the 
correct amount. There is a gross valuation misstatement with respect to 
such property, therefore, and the applicable penalty rate is 40 percent.
    (h) Pass-through entities--(1) In general. The determination of 
whether there is a substantial or gross valuation misstatement in the 
case of a return of a pass-through entity (as defined in Sec. 1.6662-
4(f)(5)) is made at the entity level. However, the dollar limitation 
($5,000 or $10,000, as the case may be) is applied at the taxpayer level 
(i.e., with respect to the return of the shareholder, partner, 
beneficiary, or holder of a residual interest in a REMIC).
    (2) Example. The rules of paragraph (h)(1) of this section may be 
illustrated by the following example.

    Example. Partnership P has two partners, individuals A and B. P 
claims a $40,000 basis in a depreciable asset which, in fact, has a 
basis of $15,000. The determination that there is a substantial 
valuation misstatement is made solely with reference to P by comparing 
the $40,000 basis claimed by P with P's correct basis of $15,000. 
However, the determination of whether the $5,000 threshold for 
application of the penalty has been reached is made separately for each 
partner. With respect to partner A, the penalty will apply if the 
portion of A's underpayment attributable to the passthrough of the 
depreciation deduction, when aggregated with any other portions of A's 
underpayment also attributable to substantial or gross valuation 
misstatements, exceeds $5,000 (assuming there is not reasonable cause 
for the misstatements (see Sec. 1.6664-4(c)).

    (i) [Reserved]
    (j) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. [Reserved]
    (k) Returns affected. Except in the case of rules relating to 
transactions between persons described in section 482 and net sections 
482 transfer price adjustments, the provisions of section 6662(b)(3) 
apply to returns due (without regard to extensions of time to file) 
after December 31, 1989, notwithstanding that the original substantial 
or gross valuation misstatement occurred on a return that was due 
(without regard to extensions) before January 1, 1990. Assume, for 
example, that a calendar year corporation claimed a deduction on its 
1990 return for depreciation of an asset with a basis of X. Also assume 
that it had reported the same basis for computing depreciation on its 
returns for the preceding 5 years and that the basis shown on the return 
each year was 200 percent or more of the correct basis. The corporation 
may be subject to a penalty for substantial valuation misstatements on 
its 1989 and 1990 returns, even though the original misstatement 
occurred prior to the effective date of sections 6662(b)(3) and (e).

[T.D. 8381, 56 FR 67504, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 
1992]



Sec. 1.6662-5T  Substantial and gross valuation misstatements under chapter 1 (temporary).

    (a)-(e)(3) [Reserved]. For further information, see Sec. 1.6662-5(a) 
through (e)(3).
    (e)(4) Tests related to section 482--(i) Substantial valuation 
misstatement. There is a substantial valuation misstatement if there is 
a misstatement described in Sec. 1.6662-6 (b)(1) or (c)(1) (concerning 
substantial valuation misstatements pertaining to transactions between 
related persons).
    (ii) Gross valuation misstatement. There is a gross valuation 
misstatement if there is a misstatement described in Sec. 1.6662-6

[[Page 829]]

(b)(2) or (c)(2) (concerning gross valuation misstatements pertaining to 
transactions between related persons).
    (iii) Property. For purposes of this section, the term property 
refers to both tangible and intangible property. Tangible property 
includes property such as money, land, buildings, fixtures and 
inventory. Intangible property includes property such as goodwill, 
covenants not to compete, leaseholds, patents, contract rights, debts, 
choses in action, and any other item of intangible property described in 
Sec. 1.482-4(b).
    (f)-(h) [Reserved] For further information, see Sec. 1.6662-5 (f) 
through (h).
    (i) [Reserved]
    (j) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. For rules relating to the 
penalty imposed with respect to a substantial or gross valuation 
misstatement arising from a section 482 allocation, see Sec. 1.6662-6.

[T.D. 8656, 61 FR 4879, Feb. 9, 1996; T.D. 8656, 61 FR 14248, Apr. 1, 
1996]



Sec. 1.6662-6  Transactions between persons described in section 482 and net section 482 transfer price adjustments.

    (a) In general--(1) Purpose and scope. Pursuant to section 6662(e) a 
penalty is imposed on any underpayment attributable to a substantial 
valuation misstatement pertaining to either a transaction between 
persons described in section 482 (the transactional penalty) or a net 
section 482 transfer price adjustment (the net adjustment penalty). The 
penalty is equal to 20 percent of the underpayment of tax attributable 
to that substantial valuation misstatement. Pursuant to section 6662(h) 
the penalty is increased to 40 percent of the underpayment in the case 
of a gross valuation misstatement with respect to either penalty. 
Paragraph (b) of this section provides specific rules related to the 
transactional penalty. Paragraph (c) of this section provides specific 
rules related to the net adjustment penalty, and paragraph (d) of this 
section describes amounts that will be excluded for purposes of 
calculating the net adjustment penalty. Paragraph (e) of this section 
sets forth special rules in the case of carrybacks and carryovers. 
Paragraph (f) of this section provides coordination rules between 
penalties. Paragraph (g) of this section provides the effective date of 
this section.
    (2) Reported results. Whether an underpayment is attributable to a 
substantial or gross valuation misstatement must be determined from the 
results of controlled transactions that are reported on an income tax 
return, regardless of whether the amount reported differs from the 
transaction price initially reflected in the taxpayer's books and 
records. The results of controlled transactions that are reported on an 
amended return will be used only if the amended return is filed before 
the Internal Revenue Service has contacted the taxpayer regarding the 
corresponding original return. A written statement furnished by a 
taxpayer subject to the Coordinated Examination Program or a written 
statement furnished by the taxpayer when electing Accelerated Issue 
Resolution or similar procedures will be considered an amended return 
for purposes of this section if it satisfies either the requirements of 
a qualified amended return for purposes of Sec. 1.6664-2(c)(3) or such 
requirements as the Commissioner may prescribe by revenue procedure. In 
the case of a taxpayer that is a member of a consolidated group, the 
rules of this paragraph (a)(2) apply to the consolidated income tax 
return of the group.
    (3) Identical terms used in the section 482 regulations. For 
purposes of this section, the terms used in this section shall have the 
same meaning as identical terms used in regulations under section 482.
    (b) The transactional penalty--(1) Substantial valuation 
misstatement. In the case of any transaction between related persons, 
there is a substantial valuation misstatement if the price for any 
property or services (or for the use of property) claimed on any return 
is 200 percent or more (or 50 percent or less) of the amount determined 
under section 482 to be the correct price.
    (2) Gross valuation misstatement. In the case of any transaction 
between related persons, there is a gross valuation

[[Page 830]]

misstatement if the price for any property or services (or for the use 
of property) claimed on any return is 400 percent or more (or 25 percent 
or less) of the amount determined under section 482 to be the correct 
price.
    (3) Reasonable cause and good faith. Pursuant to section 6664(c), 
the transactional penalty will not be imposed on any portion of an 
underpayment with respect to which the requirements of Sec. 1.6664-4 are 
met. In applying the provisions of Sec. 1.6664-4 in a case in which the 
taxpayer has relied on professional analysis in determining its transfer 
pricing, whether the professional is an employee of, or related to, the 
taxpayer is not determinative in evaluating whether the taxpayer 
reasonably relied in good faith on advice. A taxpayer that meets the 
requirements of paragraph (d) of this section with respect to an 
allocation under section 482 will be treated as having established that 
there was reasonable cause and good faith with respect to that item for 
purposes of Sec. 1.6664-4. If a substantial or gross valuation 
misstatement under the transactional penalty also constitutes (or is 
part of) a substantial or gross valuation misstatement under the net 
adjustment penalty, then the rules of paragraph (d) of this section (and 
not the rules of Sec. 1.6664-4) will be applied to determine whether the 
adjustment is excluded from calculation of the net section 482 
adjustment.
    (c) Net adjustment penalty--(1) Net section 482 adjustment. For 
purposes of this section, the term net section 482 adjustment means the 
sum of all increases in the taxable income of a taxpayer for a taxable 
year resulting from allocations under section 482 (determined without 
regard to any amount carried to such taxable year from another taxable 
year) less any decreases in taxable income attributable to collateral 
adjustments as described in Sec. 1.482-1(g). For purposes of this 
section, amounts that meet the requirements of paragraph (d) of this 
section will be excluded from the calculation of the net section 482 
adjustment. Substantial and gross valuation misstatements that are 
subject to the transactional penalty under paragraph (b) (1) or (2) of 
this section are included in determining the amount of the net section 
482 adjustment. See paragraph (f) of this section for coordination rules 
between penalties.
    (2) Substantial valuation misstatement. There is a substantial 
valuation misstatement if a net section 482 adjustment is greater than 
the lesser of 5 million dollars or ten percent of gross receipts.
    (3) Gross valuation misstatement. There is a gross valuation 
misstatement if a net section 482 adjustment is greater than the lesser 
of 20 million dollars or twenty percent of gross receipts.
    (4) Setoff allocation rule. If a taxpayer meets the requirements of 
paragraph (d) of this section with respect to some, but not all of the 
allocations made under section 482, then for purposes of determining the 
net section 482 adjustment, setoffs, as taken into account under 
Sec. 1.482-1(g)(4), must be applied ratably against all such 
allocations. The following example illustrates the principle of this 
paragraph (c)(4):

    Example. (i) The Internal Revenue Service makes the following 
section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of an           
 increase in royalty payments........................................  $
                                                                       9
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
(2) Attributable to an increase in sales proceeds due to a decrease     
 in the profit margin of a related buyer.............................  6
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
(3) Because of a setoff under Sec.  1.482-1(g)(4)....................  (
                                                                       5
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       )
                                                                      --
    Total section 482 adjustments....................................  1
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                        

    (ii) The taxpayer meets the requirements of paragraph (d) with 
respect to adjustment number one, but not with respect to adjustment 
number two. The five million dollar setoff will be allocated ratably 
against the nine million dollar adjustment ($9,000,000/
$15,000,000 x $5,000,000=$3,000,000) and the six million dollar 
adjustment ($6,000,000/$15,000,000 x $5,000,000=$2,000,000). 
Accordingly, in determining the net section 482 adjustment, the nine 
million dollar adjustment is reduced to six million dollars ($9,000,000-
$3,000,000) and the six million dollar adjustment is reduced to four 
million dollars ($6,000,000-$2,000,000). Therefore, the net section 482 
adjustment equals four million dollars.

    (5) Gross receipts. For purposes of this section, gross receipts 
must be computed pursuant to the rules contained

[[Page 831]]

in Sec. 1.448-1T(f)(2)(iv), as adjusted to reflect allocations under 
section 482.
    (6) Coordination with reasonable cause exception under section 
6664(c). Pursuant to section 6662(e)(3)(D), a taxpayer will be treated 
as having reasonable cause under section 6664(c) for any portion of an 
underpayment attributable to a net section 482 adjustment only if the 
taxpayer meets the requirements of paragraph (d) of this section with 
respect to that portion.
    (7) Examples. The principles of this paragraph (c) are illustrated 
by the following examples:

    Example 1. (i) The Internal Revenue Service makes the following 
section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of              
 an increase in royalty payments...........................   $2,000,000
(2) Attributable to an increase in sales proceeds due to a              
 decrease in the profit margin of a related buyer..........    2,500,000
(3) Attributable to a decrease in the cost of goods sold                
 because of a decrease in the cost plus mark-up of a                    
 related seller............................................    2,000,000
                                                            ------------
    Total section 482 adjustments..........................    6,500,000
                                                                        

    (ii) None of the adjustments are excluded under paragraph (d) of 
this section. The net section 482 adjustment ($6.5 million) is greater 
than five million dollars. Therefore, there is a substantial valuation 
misstatement.
    Example 2. (i) The Internal Revenue Service makes the following 
section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of an           
 increase in royalty payments........................................  $
                                                                       1
                                                                       1
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
(2) Attributable to an increase in sales proceeds due to a decrease     
 in the profit margin of a related buyer.............................  2
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
(3) Because of a setoff under Sec.  1.482-1(g)(4)....................  (
                                                                       9
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       )
                                                                      --
    Total section 482 adjustments....................................  4
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                        

    (ii) The taxpayer has gross receipts of sixty million dollars after 
taking into account all section 482 adjustments. None of the adjustments 
are excluded under paragraph (d) of this section. The net section 482 
adjustment ($4 million) is less than the lesser of five million dollars 
or ten percent of gross receipts ($60 million x 10%=$6 million). 
Therefore, there is no substantial valuation misstatement.
    Example 3. (i) The Internal Revenue Service makes the following 
section 482 adjustments to the income of an affiliated group that files 
a consolidated return for the taxable year:

(1) Attributable to Member A...............................   $1,500,000
(2) Attributable to Member B...............................    1,000,000
(3) Attributable to Member C...............................    2,000,000
                                                            ------------
    Total section 482 adjustments..........................    4,500,000
                                                                        

    (ii) Members A, B, and C have gross receipts of 20 million dollars, 
12 million dollars, and 11 million dollars, respectively. Thus, the 
total gross receipts are 43 million dollars. None of the adjustments are 
excluded under paragraph (d) of this section. The net section 482 
adjustment ($4.5 million) is greater than the lesser of five million 
dollars or ten percent of gross receipts ($43 million  x  10% = $4.3 
million). Therefore, there is a substantial valuation misstatement.
    Example 4. (i) The Internal Revenue Service makes the following 
section 482 adjustments to the income of an affiliated group that files 
a consolidated return for the taxable year:

(1) Attributable to Member A...............................   $1,500,000
(2) Attributable to Member B...............................    3,000,000
(3) Attributable to Member C...............................    2,500,000
                                                            ------------
    Total section 482 adjustments..........................    7,000,000
                                                                        

    (ii) Members A, B, and C have gross receipts of 20 million dollars, 
35 million dollars, and 40 million dollars, respectively. Thus, the 
total gross receipts are 95 million dollars. None of the adjustments are 
excluded under paragraph (d) of this section. The net section 482 
adjustment (7 million dollars) is greater than the lesser of five 
million dollars or ten percent of gross receipts ($95 million  x  10% = 
$9.5 million). Therefore, there is a substantial valuation misstatement.
    Example 5. (i) The Internal Revenue Service makes the following 
section 482 adjustments to the income of an affiliated group that files 
a consolidated return for the taxable year:

(1) Attributable to Member A...............................   $2,000,000
(2) Attributable to Member B...............................    1,000,000
(3) Attributable to Member C...............................    1,500,000
                                                            ------------
    Total section 482 adjustments..........................    4,500,000
                                                                        

    (ii) Members A, B, and C have gross receipts of 10 million dollars, 
35 million dollars, and 40 million dollars, respectively. Thus, the 
total gross receipts are 85 million dollars. None of the adjustments are 
excluded under paragraph (d) of this section.

[[Page 832]]

The net section 482 adjustment ($4.5 million) is less than the lesser of 
five million dollars or ten percent of gross receipts ($85 million  x  
10%=$8.5 million). Therefore, there is no substantial valuation 
misstatement even though individual member A's adjustment ($2 million) 
is greater than ten percent of its individual gross receipts ($10 
million  x  10%=$1 million).

    (d) Amounts excluded from net section 482 adjustments--(1) In 
general. An amount is excluded from the calculation of a net section 482 
adjustment if the requirements of paragraph (d) (2), (3), or (4) of this 
section are met with respect to that amount.
    (2) Application of a specified section 482 method--(i) In general. 
An amount is excluded from the calculation of a net section 482 
adjustment if the taxpayer establishes that both the specified method 
and documentation requirements of this paragraph (d)(2) are met with 
respect to that amount. For purposes of this paragraph (d), a method 
will be considered a specified method if it is described in the 
regulations under section 482 and the method applies to transactions of 
the type under review. A qualified cost sharing arrangement is 
considered a specified method. See Sec. 1.482-7. An unspecified method 
is not considered a specified method. See Secs. 1.482-3(e) and 1.482-
4(d).
    (ii) Specified method requirement. The specified method requirement 
is met if the taxpayer selects and applies a specified method in a 
reasonable manner. The taxpayer's selection and application of a 
specified method is reasonable only if, given the available data and the 
applicable pricing methods, the taxpayer reasonably concluded that the 
method (and its application of that method) provided the most reliable 
measure of an arm's length result under the principles of the best 
method rule of Sec. 1.482-1(c). A taxpayer can reasonably conclude that 
a specified method provided the most reliable measure of an arm's length 
result only if it has made a reasonable effort to evaluate the potential 
applicability of the other specified methods in a manner consistent with 
the principles of the best method rule. The extent of this evaluation 
generally will depend on the nature of the available data, and it may 
vary from case to case and from method to method. This evaluation may 
not entail an exhaustive analysis or detailed application of each 
method. Rather, after a reasonably thorough search for relevant data, 
the taxpayer should consider which method would provide the most 
reliable measure of an arm's length result given that data. The nature 
of the available data may enable the taxpayer to conclude reasonably 
that a particular specified method provides a more reliable measure of 
an arm's length result than one or more of the other specified methods, 
and accordingly no further consideration of such other specified methods 
is needed. Further, it is not necessary for a taxpayer to conclude that 
the selected specified method provides a more reliable measure of an 
arm's length result than any unspecified method. For examples 
illustrating the selection of a specified method consistent with this 
paragraph (d)(2)(ii), see Sec. 1.482-8. Whether the taxpayer's 
conclusion was reasonable must be determined from all the facts and 
circumstances. The factors relevant to this determination include the 
following:
    (A) The experience and knowledge of the taxpayer, including all 
members of the taxpayer's controlled group.
    (B) The extent to which reliable data was available and the data was 
analyzed in a reasonable manner. A taxpayer must engage in a reasonably 
thorough search for the data necessary to determine which method should 
be selected and how it should be applied. In determining the scope of a 
reasonably thorough search for data, the expense of additional efforts 
to locate new data may be weighed against the likelihood of finding 
additional data that would improve the reliability of the results and 
the amount by which any new data would change the taxpayer's taxable 
income. Furthermore, a taxpayer must use the most current reliable data 
that is available before the end of the taxable year in question. 
Although the taxpayer is not required to search for relevant data after 
the end of the taxable year, the taxpayer must maintain as a principal 
document described in paragraph (d)(2)(iii)(B)(9) of this section any 
relevant data it obtains after the end of the taxable year but before 
the return is filed, if that

[[Page 833]]

data would help determine whether the taxpayer has reported its true 
taxable income.
    (C) The extent to which the taxpayer followed the relevant 
requirements set forth in regulations under section 482 with respect to 
the application of the method.
    (D) The extent to which the taxpayer reasonably relied on a study or 
other analysis performed by a professional qualified to conduct such a 
study or analysis, including an attorney, accountant, or economist. 
Whether the professional is an employee of, or related to, the taxpayer 
is not determinative in evaluating the reliability of that study or 
analysis, as long as the study or analysis is objective, thorough, and 
well reasoned. Such reliance is reasonable only if the taxpayer 
disclosed to the professional all relevant information regarding the 
controlled transactions at issue. A study or analysis that was 
reasonably relied upon in a prior year may reasonably be relied upon in 
the current year if the relevant facts and circumstances have not 
changed or if the study or analysis has been appropriately modified to 
reflect any change in facts and circumstances.
    (E) If the taxpayer attempted to determine an arm's length result by 
using more than one uncontrolled comparable, whether the taxpayer 
arbitrarily selected a result that corresponds to an extreme point in 
the range of results derived from the uncontrolled comparables. Such a 
result generally would not likely be closest to an arm's length result. 
If the uncontrolled comparables that the taxpayer uses to determine an 
arm's length result are described in Sec. 1.482-1(e)(2)(ii)(B), one 
reasonable method of selecting a point in the range would be that 
provided in Sec. 1.482-1(e)(3).
    (F) The extent to which the taxpayer relied on a transfer pricing 
methodology developed and applied pursuant to an Advance Pricing 
Agreement for a prior taxable year, or specifically approved by the 
Internal Revenue Service pursuant to a transfer pricing audit of the 
transactions at issue for a prior taxable year, provided that the 
taxpayer applied the approved method reasonably and consistently with 
its prior application, and the facts and circumstances surrounding the 
use of the method have not materially changed since the time of the 
IRS's action, or if the facts and circumstances have changed in a way 
that materially affects the reliability of the results, the taxpayer 
makes appropriate adjustments to reflect such changes.
    (G) The size of a net transfer pricing adjustment in relation to the 
size of the controlled transaction out of which the adjustment arose.
    (iii) Documentation requirement--(A) In general. The documentation 
requirement of this paragraph (d)(2)(iii) is met if the taxpayer 
maintains sufficient documentation to establish that the taxpayer 
reasonably concluded that, given the available data and the applicable 
pricing methods, the method (and its application of that method) 
provided the most reliable measure of an arm's length result under the 
principles of the best method rule in Sec. 1.482-1(c), and provides that 
documentation to the Internal Revenue Service within 30 days of a 
request for it in connection with an examination of the taxable year to 
which the documentation relates. With the exception of the documentation 
described in paragraphs (d)(2)(iii)(B) (9) and (10) of this section, 
that documentation must be in existence when the return is filed. The 
district director may, in his discretion, excuse a minor or inadvertent 
failure to provide required documents, but only if the taxpayer has made 
a good faith effort to comply, and the taxpayer promptly remedies the 
failure when it becomes known. The required documentation is divided 
into two categories, principal documents and background documents as 
described in paragraphs (d)(2)(iii) (B) and (C) of this section.
    (B) Principal documents. The principal documents should accurately 
and completely describe the basic transfer pricing analysis conducted by 
the taxpayer. The documentation must include the following--
    (1) An overview of the taxpayer's business, including an analysis of 
the economic and legal factors that affect the pricing of its property 
or services;
    (2) A description of the taxpayer's organizational structure 
(including an organization chart) covering all related

[[Page 834]]

parties engaged in transactions potentially relevant under section 482, 
including foreign affiliates whose transactions directly or indirectly 
affect the pricing of property or services in the United States;
    (3) Any documentation explicitly required by the regulations under 
section 482;
    (4) A description of the method selected and an explanation of why 
that method was selected;
    (5) A description of the alternative methods that were considered 
and an explanation of why they were not selected;
    (6) A description of the controlled transactions (including the 
terms of sale) and any internal data used to analyze those transactions. 
For example, if a profit split method is applied, the documentation must 
include a schedule providing the total income, costs, and assets (with 
adjustments for different accounting practices and currencies) for each 
controlled taxpayer participating in the relevant business activity and 
detailing the allocations of such items to that activity;
    (7) A description of the comparables that were used, how 
comparability was evaluated, and what (if any) adjustments were made;
    (8) An explanation of the economic analysis and projections relied 
upon in developing the method. For example, if a profit split method is 
applied, the taxpayer must provide an explanation of the analysis 
undertaken to determine how the profits would be split;
    (9) A description or summary of any relevant data that the taxpayer 
obtains after the end of the tax year and before filing a tax return, 
which would help determine if a taxpayer selected and applied a 
specified method in a reasonable manner; and
    (10) A general index of the principal and background documents and a 
description of the recordkeeping system used for cataloging and 
accessing those documents.
    (C) Background documents. The assumptions, conclusions, and 
positions contained in principal documents ordinarily will be based on, 
and supported by, additional background documents. Documents that 
support the principal documentation may include the documents listed in 
Sec. 1.6038A-3(c) that are not otherwise described in paragraph 
(d)(2)(iii)(B) of this section. Every document listed in those 
regulations may not be relevant to pricing determinations under the 
taxpayer's specific facts and circumstances and, therefore, each of 
those documents need not be maintained in all circumstances. Moreover, 
other documents not listed in those regulations may be necessary to 
establish that the taxpayer's method was selected and applied in the way 
that provided the most reliable measure of an arm's length result under 
the principles of the best method rule in Sec. 1.482-1(c). Background 
documents need not be provided to the Internal Revenue Service in 
response to a request for principal documents. If the Internal Revenue 
Service subsequently requests background documents, a taxpayer must 
provide that documentation to the Internal Revenue Service within 30 
days of the request. However, the district director may, in his 
discretion, extend the period for producing the background 
documentation.
    (3) Application of an unspecified method--(i) In general. An 
adjustment is excluded from the calculation of a net section 482 
adjustment if the taxpayer establishes that both the unspecified method 
and documentation requirements of this paragraph (d)(3) are met with 
respect to that amount.
    (ii) Unspecified method requirement--(A) In general. If a method 
other than a specified method was applied, the unspecified method 
requirement is met if the requirements of paragraph (d)(3)(ii) (B) or 
(C) of this section, as appropriate, are met.
    (B) Specified method potentially applicable. If the transaction is 
of a type for which methods are specified in the regulations under 
section 482, then a taxpayer will be considered to have met the 
unspecified method requirement if the taxpayer reasonably concludes, 
given the available data, that none of the specified methods was likely 
to provide a reliable measure of an arm's length result, and that it 
selected and applied an unspecified method in a way that would likely 
provide a reliable measure of an arm's length result. A taxpayer can 
reasonably conclude that

[[Page 835]]

no specified method was likely to provide a reliable measure of an arm's 
length result only if it has made a reasonable effort to evaluate the 
potential applicability of the specified methods in a manner consistent 
with the principles of the best method rule. However, it is not 
necessary for a taxpayer to conclude that the selected method provides a 
more reliable measure of an arm's length result than any other 
unspecified method. Whether the taxpayer's conclusion was reasonable 
must be determined from all the facts and circumstances. The factors 
relevant to this conclusion include those set forth in paragraph 
(d)(2)(ii) of this section.
    (C) No specified method applicable. If the transaction is of a type 
for which no methods are specified in the regulations under section 482, 
then a taxpayer will be considered to have met the unspecified method 
requirement if it selected and applied an unspecified method in a 
reasonable manner. For purposes of this paragraph (d)(3)(ii)(C), a 
taxpayer's selection and application is reasonable if the taxpayer 
reasonably concludes that the method (and its application of that 
method) provided the most reliable measure of an arm's length result 
under the principles of the best method rule in Sec. 1.482-1(c). 
However, it is not necessary for a taxpayer to conclude that the 
selected method provides a more reliable measure of an arm's length 
result than any other unspecified method. Whether the taxpayer's 
conclusion was reasonable must be determined from all the facts and 
circumstances. The factors relevant to this conclusion include those set 
forth in paragraph (d)(2)(ii) of this section.
    (iii) Documentation requirement--(A) In general. The documentation 
requirement of this paragraph (d)(3) is met if the taxpayer maintains 
sufficient documentation to establish that the unspecified method 
requirement of paragraph (d)(3)(ii) of this section is met and provides 
that documentation to the Internal Revenue Service within 30 days of a 
request for it. That documentation must be in existence when the return 
is filed. The district director may, in his discretion, excuse a minor 
or inadvertent failure to provide required documents, but only if the 
taxpayer has made a good faith effort to comply, and the taxpayer 
promptly remedies the failure when it becomes known.
    (B) Principal and background documents. See paragraphs (d)(2)(iii) 
(B) and (C) of this section for rules regarding these two categories of 
required documentation.
    (4) Certain foreign to foreign transactions. For purposes of 
calculating a net section 482 adjustment, any increase in taxable income 
resulting from an allocation under section 482 that is attributable to 
any controlled transaction solely between foreign corporations will be 
excluded unless the treatment of that transaction affects the 
determination of either corporation's income from sources within the 
United States or taxable income effectively connected with the conduct 
of a trade or business within the United States.
    (5) Special rule. If the regular tax (as defined in section 55(c)) 
imposed on the taxpayer is determined by reference to an amount other 
than taxable income, that amount shall be treated as the taxable income 
of the taxpayer for purposes of section 6662(e)(3). Accordingly, for 
taxpayers whose regular tax is determined by reference to an amount 
other than taxable income, the increase in that amount resulting from 
section 482 allocations is the taxpayer's net section 482 adjustment.
    (6) Examples. The principles of this paragraph (d) are illustrated 
by the following examples:

    Example 1. (i) The Internal Revenue Service makes the following 
section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of              
 an increase in royalty payments...........................   $9,000,000
(2) Not a 200 percent or 400 percent adjustment............    2,000,000
(3) Attributable to a decrease in the cost of goods sold                
 because of a decrease in the cost plus mark-up of a                    
 related seller............................................    9,000,000
                                                            ------------
    Total section 482 adjustments..........................   20,000,000
                                                                        


[[Page 836]]

    (ii) The taxpayer has gross receipts of 75 million dollars after all 
section 482 adjustments. The taxpayer establishes that for adjustments 
number one and three, it applied a transfer pricing method specified in 
section 482, the selection and application of the method was reasonable, 
it documented the pricing analysis, and turned that documentation over 
to the IRS within 30 days of a request. Accordingly, eighteen million 
dollars is excluded from the calculation of the net section 482 
adjustment. Because the net section 482 adjustment is two million 
dollars, there is no substantial valuation misstatement.
    Example 2. (i) The Internal Revenue Service makes the following 
section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of              
 an increase in royalty payments...........................   $9,000,000
(2) Attributable to an adjustment that is 200 percent or                
 more of the correct section 482 price.....................    2,000,000
(3) Attributable to a decrease in the cost of goods sold                
 because of a decrease in the cost plus mark-up of a                    
 related seller............................................    9,000,000
                                                            ------------
    Total section 482 adjustments..........................   20,000,000
                                                                        

    (ii) The taxpayer has gross receipts of 75 million dollars after all 
section 482 adjustments. The taxpayer establishes that for adjustments 
number one and three, it applied a transfer pricing method specified in 
section 482, the selection and application of the method was reasonable, 
it documented that analysis, and turned the documentation over to the 
IRS within 30 days. Accordingly, eighteen million dollars is excluded 
from the calculation of the section 482 transfer pricing adjustments for 
purposes of applying the five million dollar or 10% of gross receipts 
test. Because the net section 482 adjustment is only two million 
dollars, the taxpayer is not subject to the net adjustment penalty. 
However, the taxpayer may be subject to the transactional penalty on the 
underpayment of tax attributable to the two million dollar adjustment.
    Example 3. CFC1 and CFC2 are controlled foreign corporations within 
the meaning of section 957. Applying section 482, the IRS disallows a 
deduction for 25 million dollars of the interest that CFC1 paid to CFC2, 
which results in CFC1's U.S. shareholder having a subpart F inclusion in 
excess of five million dollars. No other adjustments under section 482 
are made with respect to the controlled taxpayers. However, the increase 
has no effect upon the determination of CFC1's or CFC2's income from 
sources within the United States or taxable income effectively connected 
with the conduct of a trade or business within the United States. 
Accordingly, there is no substantial valuation misstatement.

    (e) Special rules in the case of carrybacks and carryovers. If there 
is a substantial or gross valuation misstatement for a taxable year that 
gives rise to a loss, deduction or credit that is carried to another 
taxable year, the transactional penalty and the net adjustment penalty 
will be imposed on any resulting underpayment of tax in that other 
taxable year. In determining whether there is a substantial or gross 
valuation misstatement for a taxable year, no amount carried from 
another taxable year shall be included. The following example 
illustrates the principle of this paragraph (e):

    Example. The Internal Revenue Service makes a section 482 adjustment 
of six million dollars in taxable year 1, no portion of which is 
excluded under paragraph (d) of this section. The taxpayer's income tax 
return for year 1 reported a loss of three million dollars, which was 
carried to taxpayer's year 2 income tax return and used to reduce income 
taxes otherwise due with respect to year 2. A determination is made that 
the six million dollar allocation constitutes a substantial valuation 
misstatement, and a penalty is imposed on the underpayment of tax in 
year 1 attributable to the substantial valuation misstatement and on the 
underpayment of tax in year 2 attributable to the disallowance of the 
net operating loss in year 2. For purposes of determining whether there 
is a substantial or gross valuation misstatement for year 2, the three 
million dollar reduction of the net operating loss will not be added to 
any section 482 adjustments made with respect to year 2.

    (f) Rules for coordinating between the transactional penalty and the 
net adjustment penalty--(1) Coordination of a net section 482 adjustment 
subject to the net adjustment penalty and a gross valuation misstatement 
subject to the transactional penalty. In determining whether a net 
section 482 adjustment exceeds five million dollars or 10 percent of 
gross receipts, an adjustment attributable to a substantial or gross 
valuation misstatement that is subject to the transactional penalty will 
be taken into account. If the net section 482 adjustment exceeds five 
million dollars or ten percent of gross receipts, any portion of such 
amount that is attributable to a gross valuation misstatement will be 
subject to the

[[Page 837]]

transactional penalty at the forty percent rate, but will not also be 
subject to net adjustment penalty at a twenty percent rate. The 
remaining amount is subject to the net adjustment penalty at the twenty 
percent rate, even if such amount is less than the lesser of five 
million dollars or ten percent of gross receipts.
    (2) Coordination of net section 482 adjustment subject to the net 
adjustment penalty and substantial valuation misstatements subject to 
the transactional penalty. If the net section 482 adjustment exceeds 
twenty million dollars or 20 percent of gross receipts, the entire 
amount of the adjustment is subject to the net adjustment penalty at a 
forty percent rate. No portion of the adjustment is subject to the 
transactional penalty at a twenty percent rate.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (f):

    Example 1. (i) Applying section 482, the Internal Revenue Service 
makes the following adjustments for the taxable year:

(1) Attributable to an adjustment that is 400 percent or                
 more of the correct section 482 arm's length result.......   $2,000,000
(2) Not a 200 or 400 percent adjustment....................    2,500,000
                                                            ------------
    Total..................................................    4,500,000
                                                                        

    (ii) The taxpayer has gross receipts of 75 million dollars after all 
section 482 adjustments. None of the adjustments is excluded under 
paragraph (d) (Amounts excluded from net section 482 adjustments) of 
this section, in determining the five million dollar or 10% of gross 
receipts test under section 6662(e)(1)(B)(ii). The net section 482 
adjustment (4.5 million dollars) is less than the lesser of five million 
dollars or ten percent of gross receipts ($75 million  x  10% = $7.5 
million). Thus, there is no substantial valuation misstatement. However, 
the two million dollar adjustment is attributable to a gross valuation 
misstatement. Accordingly, the taxpayer may be subject to a penalty, 
under section 6662(h), equal to 40 percent of the underpayment of tax 
attributable to the gross valuation misstatement of two million dollars. 
The 2.5 million dollar adjustment is not subject to a penalty under 
section 6662(b)(3).
    Example 2. The facts are the same as in Example 1, except the 
taxpayer has gross receipts of 40 million dollars. The net section 482 
adjustment ($4.5 million) is greater than the lesser of five million 
dollars or ten percent of gross receipts ($40 million  x  10% = $4 
million). Thus, the five million dollar or 10% of gross receipts test 
has been met. The two million dollar adjustment is attributable to a 
gross valuation misstatement. Accordingly, the taxpayer is subject to a 
penalty, under section 6662(h), equal to 40 percent of the underpayment 
of tax attributable to the gross valuation misstatement of two million 
dollars. The 2.5 million dollar adjustment is subject to a penalty under 
sections 6662(a) and 6662(b)(3), equal to 20 percent of the underpayment 
of tax attributable to the substantial valuation misstatement.
    Example 3. (i) Applying section 482, the Internal Revenue Service 
makes the following transfer pricing adjustments for the taxable year:

(1) Attributable to an adjustment that is 400 percent or                
 more of the correct section 482 arm's length result.......   $6,000,000
(2) Not a 200 or 400 percent adjustment....................   15,000,000
                                                            ------------
    Total..................................................   21,000,000
                                                                        

    (ii) None of the adjustments are excluded under paragraph (d) 
(Amounts excluded from net section 482 adjustments) in determining the 
twenty million dollar or 20% of gross receipts test under section 
6662(h). The net section 482 adjustment (21 million dollars) is greater 
than twenty million dollars and thus constitutes a gross valuation 
misstatement. Accordingly, the total adjustment is subject to the net 
adjustment penalty equal to 40 percent of the underpayment of tax 
attributable to the 21 million dollar gross valuation misstatement. The 
six million dollar adjustment will not be separately included for 
purposes of any additional penalty under section 6662.

    (g) Effective date. This section is effective February 9, 1996. 
However, taxpayers may elect to apply this section to all open taxable 
years beginning after December 31, 1993.

[T.D. 8656, 61 FR 4880, Feb. 9, 1996; T.D. 8656, 61 FR 14248, Apr. 1, 
1996]



Sec. 1.6662-7  Omnibus Budget Reconciliation Act of 1993 changes to the accuracy-related penalty.

    (a) Scope. The Omnibus Budget Reconciliation Act of 1993 made 
certain changes to the accuracy-related penalty in section 6662. This 
section provides rules reflecting those changes.
    (b) No disclosure exception for negligence penalty. The penalty for 
negligence in section 6662(b)(1) may not be

[[Page 838]]

avoided by disclosure of a return position.
    (c) Disclosure standard for other penalties is reasonable basis. The 
penalties for disregarding rules or regulations in section 6662(b)(1) 
and for a substantial understatement of income tax in section 6662(b)(2) 
may be avoided by adequate disclosure of a return position only if the 
position has at least a reasonable basis. See Sec. 1.6662-3(c) and 
Secs. 1.6662-4(e) and (f) for other applicable disclosure rules.
    (d) Definition of reasonable basis--(1) In general. [Reserved]
    (2) Relationship to other standards. The reasonable basis standard 
is significantly higher than the not frivolous standard applicable to 
preparers under section 6694 and defined in Sec. 1.6694-2(c)(2).

[T.D. 8617, 60 FR 45665, Sept. 1, 1995]



Sec. 1.6664-0  Table of contents.

    This section lists the captions in Secs. 1.6664-1 through 1.6664-4T.

  Sec. 1.6664-1  Accuracy-related and fraud penalties; definitions and 
                             special rules.

    (a) In general.
    (b) Effective date.
    (1) In general.
    (2) Reasonable cause and good faith exception to section 6662 
penalties.

                      Sec. 1.6664-2  Underpayment.

    (a) Underpayment defined.
    (b) Amount of income tax imposed.
    (c) Amount shown as the tax by the taxpayer on his return.
    (1) Defined.
    (2) Effect of qualified amended return.
    (3) Qualified amended return defined.
    (4) Special rule for qualified amended returns.
    (d) Amounts not so shown previously assessed (or collected without 
assessment).
    (e) Rebates.
    (f) Underpayments for certain carryback years not reduced by amount 
of carrybacks.
    (g) Examples.

   Sec. 1.6664-3  Ordering rules for determining the total amount of 
                           penalties imposed.

    (a) In general.
    (b) Order in which adjustments are taken into account.
    (c) Manner in which unclaimed prepayment credits are allocated.
    (d) Examples.

Sec. 1.6664-4  Reasonable cause and good faith exception to section 6662 
                               penalties.

    (a) In general.
    (b) Facts and circumstances taken into account.
    (1) In general.
    (2) Examples.
    (c) Reliance on opinion or advice.
    (1) Fact and circumstances; minimum requirements.
    (i) All facts and circumstances considered.
    (ii) No unreasonable assumptions.
    (iii) Law is related to actual facts.
    (2) Definitions.
    (i) Advice.
    (ii) Material.
    (3) Cross-reference.
    (d) Pass-through items.
    (e) Special rules for substantial understatement penalty 
attributable to tax shelter items of corporations.
    (1) In general; facts and circumstances.
    (2) Reasonable cause based on legal justification.
    (i) Minimum requirements.
    (A) Authority requirement.
    (B) Belief requirement.
    (ii) Legal justification defined.
    (3) Minimum requirements not dispositive.
    (4) Other factors.
    (f) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. [Reserved]
    (g) Valuation misstatements of charitable deduction property.
    (1) In general.
    (2) Definitions.
    (i) Charitable deduction property.
    (ii) Qualified appraisal.
    (iii) Qualified appraiser.

Sec. 1.6664-4T Reasonable cause and good faith exception to section 6662 
                                penalties

    (a)--(c) [Reserved]
    (d) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments.

[T.D. 8381, 56 FR 67505, Dec. 31, 1991, as amended by T.D. 8519, 59 FR 
4799, Feb. 2, 1994; T.D. 8617, 60 FR 45666, Sept. 1, 1995; T.D. 8656, 61 
FR 4885, Feb. 9, 1996]



Sec. 1.6664-1  Accuracy-related and fraud penalties; definitions and special rules.

    (a) In general. Section 6664(a) defines the term ``underpayment'' 
for purposes of the accuracy-related penalty under section 6662 and the 
fraud penalty under section 6663. The definition of ``underpayment'' of 
income taxes imposed under subtitle A is set forth in Sec. 1.6664-2. 
Ordering rules for computing the total amount of accuracy-related

[[Page 839]]

and fraud penalties imposed with respect to a return are set forth in 
Sec. 1.6664-3. Section 6664(c) provides a reasonable cause and good 
faith exception to the accuracy-related penalty. Rules relating to the 
reasonable cause and good faith exception are set forth in Sec. 1.6664-
4.
    (b) Effective date--(1) In general. Sections 1.6664-1 through 
1.6664-3 apply to returns the due date of which (determined without 
regard to extensions of time for filing) is after December 31, 1989.
    (2) Reasonable cause and good faith exception to section 6662 
penalties. Section 1.6664-4 applies to returns the due date of which 
(determined without regard to extensions of time for filing) is after 
September 1, 1995. Except as provided in the last sentence of this 
paragraph (b)(2), Sec. 1.6664-4 (as contained in 26 CFR part 1 revised 
April 1, 1995) applies to returns the due date of which (determined 
without regard to extensions of time for filing) is on or before 
September 1, 1995 and after December 31, 1989. For transactions 
occurring after December 8, 1994, Sec. 1.6664-4 (as contained in 26 CFR 
part 1 revised April 1, 1995) is applied taking into account the changes 
made to section 6662(d)(2)(C) (relating to the substantial 
understatement penalty for tax shelter items of corporations) by section 
744 of Title VII of the Uruguay Round Agreements Act, Pub. L. 103-465 
(108 Stat. 4809).

[T.D. 8381, 56 FR 67506, Dec. 31, 1991, as amended by T.D. 8617, 60 FR 
45666, Sept. 1, 1995]



Sec. 1.6664-2  Underpayment.

    (a) Underpayment defined. In the case of income taxes imposed under 
subtitle A, an underpayment for purposes of section 6662, relating to 
the accuracy-related penalty, and section 6663, relating to the fraud 
penalty, means the amount by which any income tax imposed under this 
subtitle (as defined in paragraph (b) of the section) exceeds the excess 
of--
    (1) The sum of--
    (i) The amount shown as the tax by the taxpayer on his return (as 
defined in paragraph (c) of this section), plus
    (ii) Amounts not so shown previously assessed (or collected without 
assessment) (as defined in paragraph (d) of this section), over
    (2) The amount of rebates made (as defined in paragraph (e) of this 
section).

The definition of underpayment also may be expressed as--

                         Underpayment=W-(X+Y-Z),

where W=the amount of income tax imposed; X=the amount shown as the tax 
by the taxpayer on his return; Y=amounts not so shown previously 
assessed (or collected without assessment); and Z=the amount of rebates 
made.
    (b) Amount of income tax imposed. For purposes of paragraph (a) of 
this section, the ``amount of income tax imposed'' is the amount of tax 
imposed on the taxpayer under subtitle A for the taxable year, 
determined without regard to--
    (1) The credits for tax withheld under sections 31 (relating to tax 
withheld on wages) and 33 (relating to tax withheld at source on 
nonresident aliens and foreign corporations);
    (2) Payments of tax or estimated tax by the taxpayer;
    (3) Any credit resulting from the collection of amounts assessed 
under section 6851 as the result of a termination assessment, or section 
6861 as the result of a jeopardy assessment; and
    (4) Any tax that the taxpayer is not required to assess on the 
return (such as the tax imposed by section 531 on the accumulated 
taxable income of a corporation).
    (c) Amount shown as the tax by the taxpayer on his return--(1) 
Defined. For purposes of paragraph (a) of this section, the ``amount 
shown as the tax by the taxpayer on his return'' is the tax liability 
shown by the taxpayer on his return, determined without regard to the 
items listed in Sec. 1.6664-2(b) (1), (2), and (3), except that it is 
reduced by the excess of--
    (i) The amounts shown by the taxpayer on his return as credits for 
tax withheld under section 31 (relating to tax withheld on wages) and 
section 33 (relating to tax withheld at source on nonresident aliens and 
foreign corporations), as payments of estimated tax, or as any other 
payments made by the taxpayer with respect to a taxable year

[[Page 840]]

before filing the return for such taxable year, over
    (ii) The amounts actually withheld, actually paid as estimated tax, 
or actually paid with respect to a taxable year before the return is 
filed for such taxable year.
    (2) Effect of qualified amended return. The ``amount shown as the 
tax by the taxpayer on his return'' includes an amount shown as 
additional tax on a qualified amended return (as defined in paragraph 
(c)(3) of this section), except that such amount is not included if it 
relates to a fraudulent position on the original return.
    (3) Qualified amended return defined. A qualified amended return is 
an amended return, or a timely request for an administrative adjustment 
under section 6227, filed after the due date of the return for the 
taxable year (determined with regard to extensions of time to file) and 
before the earliest of--
    (i) The time the taxpayer is first contacted by the Internal Revenue 
Service concerning an examination of the return;
    (ii) The time any person described in section 6700(a) (relating to 
the penalty for promoting abusive tax shelters) is first contacted by 
the Internal Revenue Service concerning an examination of an activity 
described in section 6700(a) with respect to which the taxpayer claimed 
any tax benefit on the return directly or indirectly through the entity, 
plan or arrangement described in section 6700(a)(1)(A); or
    (iii) In the case of a pass-through item (as defined in Sec. 1.6662-
4(f)(5)), the time the pass-through entity (as defined in Sec. 1.6662-
4(f)(5)) is first contacted by the Internal Revenue Service in 
connection with an examination of the return to which the pass-through 
item relates.

A qualified amended return includes an amended return that is filed 
solely to disclose information pursuant to Sec. 1.6662-3(c) or 
Sec. 1.6662-4 (e) and (f) and that does not report any additional tax 
liability.
    (4) Special rule for qualified amended returns. The Commissioner may 
by revenue procedure prescribe the manner in which the rules of 
paragraph (c) of this section regarding qualified amended returns apply 
to particular classes of taxpayers.
    (d) Amounts not so shown previously assessed (or collected without 
assessment). For purposes of paragraph (a) of this section, ``amounts 
not so shown previously assessed'' means only amounts assessed before 
the return is filed that were not shown on the return, such as 
termination assessments under section 6851 and jeopardy assessments 
under section 6861 made prior to the filing of the return for the 
taxable year. For purposes of paragraph (a) of this section, the amount 
``collected without assessment'' is the amount by which the total of the 
credits allowable under section 31 (relating to tax withheld on wages) 
and section 33 (relating to tax withheld at source on nonresident aliens 
and foreign corporations), estimated tax payments, and other payments in 
satisfaction of tax liability made before the return is filed, exceed 
the tax shown on the return (provided such excess has not been refunded 
or allowed as a credit to the taxpayer).
    (e) Rebates. The term ``rebate'' means so much of an abatement 
credit, refund or other repayment, as was made on the ground that the 
tax imposed was less than the excess of--
    (1) The sum of--
    (i) The amount shown as the tax by the taxpayer on his return, plus
    (ii) Amounts not so shown previously assessed (or collected without 
assessment), over
    (2) Rebates previously made.
    (f) Underpayments for certain carryback years not reduced by amount 
of carrybacks. The amount of an underpayment for a taxable year that is 
attributable to conduct proscribed by sections 6662 or 6663 is not 
reduced on account of a carryback of a loss, deduction or credit to that 
year. Such conduct includes negligence or disregard of rules or 
regulations; a substantial understatement of income tax; and a 
substantial (or gross) valuation misstatement under chapter 1, provided 
that the applicable dollar limitation is satisfied for the carryback 
year.
    (g) Examples. The following examples illustrate this section:

    Example 1. Taxpayer's 1990 return showed a tax liability of $18,000. 
Taxpayer had no amounts previously assessed (or collected

[[Page 841]]

without assessment) and received no rebates of tax. Taxpayer claimed a 
credit in the amount of $23,000 for income tax withheld under section 
3402, which resulted in a refund received of $5,000. It is later 
determined that the taxpayer should have reported additional income and 
that the correct tax for the taxable year is $25,500. There is an 
underpayment of $7,500, determined as follows:


Tax imposed under subtitle A....................  ..........     $25,500
Tax shown on return.............................     $18,000  ..........
Tax previously assessed (or collected without                           
 assessment)....................................        None  ..........
Amount of rebates made..........................        None  ..........
                                                 -----------------------
Balance.........................................  ..........     $18,000
                                                 -----------------------
      Underpayment..............................  ..........      $7,500
                                                                        


    Example 2. The facts are the same as in Example 1 except that the 
taxpayer failed to claim on the return a credit of $1,500 for income tax 
withheld. This $1,500 constitutes an amount collected without assessment 
as defined in paragraph (d) of this section. The underpayment is $6,000, 
determined as follows:


Tax imposed under subtitle A....................  ..........     $25,500
Tax shown on return.............................     $18,000  ..........
Tax previously assessed (or collected without                           
 assessment)....................................       1,500  ..........
Amount of rebates made..........................        None  ..........
                                                 -----------------------
Balance.........................................  ..........     $19,500
                                                 -----------------------
      Underpayment..............................  ..........      $6,000
                                                                        


    Example 3. On Form 1040 filed for tax year 1990, taxpayer reported a 
tax liability of $10,000, estimated tax payments of $15,000, and 
received a refund of $5,000. Estimated tax payments actually made with 
respect to tax year 1990 were only $7,000. For purposes of determining 
the amount of underpayment subject to a penalty under section 6662 or 
section 6663, the tax shown on the return is $2,000 (reported tax 
liability of $10,000 reduced by the overstated estimated tax of $8,000 
($15,000-$7,000)). The underpayment is $8,000, determined as follows:


Tax imposed under subtitle A....................  ..........     $10,000
Tax shown on return.............................      $2,000  ..........
Tax previously assessed (or collected without                           
 assessment)....................................        None  ..........
Amount of rebates made..........................        None  ..........
                                                 -----------------------
Balance.........................................  ..........      $2,000
                                                 -----------------------
      Underpayment..............................  ..........      $8,000
                                                                        



[T.D. 8381, 56 FR 67506, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 
1992]



Sec. 1.6664-3  Ordering rules for determining the total amount of penalties imposed.

    (a) In general. This section provides rules for determining the 
order in which adjustments to a return are taken into account for the 
purpose of computing the total amount of penalties imposed under 
sections 6662 and 6663, where--
    (1) There is at least one adjustment with respect to which no 
penalty has been imposed and at least one with respect to which a 
penalty has been imposed, or
    (2) There are at least two adjustments with respect to which 
penalties have been imposed and they have been imposed at different 
rates.

This section also provides rules for allocating unclaimed prepayment 
credits to adjustments to a return.
    (b) Order in which adjustments are taken into account. In computing 
the portions of an underpayment subject to penalties imposed under 
sections 6662 and 6663, adjustments to a return are considered made in 
the following order:
    (1) Those with respect to which no penalties have been imposed.
    (2) Those with respect to which a penalty has been imposed at a 20 
percent rate (i.e., a penalty for negligence or disregard of rules or 
regulations, substantial understatement of income tax, or substantial 
valuation misstatement, under sections 6662(b)(1) through 6662(b)(3), 
respectively).
    (3) Those with respect to which a penalty has been imposed at a 40 
percent rate (i.e., a penalty for a gross valuation misstatement under 
sections 6662 (b)(3) and (h)).
    (4) Those with respect to which a penalty has been imposed at a 75 
percent rate (i.e., a penalty for fraud under section 6663).
    (c) Manner in which unclaimed prepayment credits are allocated. Any 
income tax withholding or other payment

[[Page 842]]

made before a return was filed, that was neither claimed on the return 
nor previously allowed as a credit against the tax liability for the 
taxable year (an ``unclaimed prepayment credit''), is allocated as 
follows--
    (1) If an unclaimed prepayment credit is allocable to a particular 
adjustment, such credit is applied in full in determining the amount of 
the underpayment resulting from such adjustment.
    (2) If an unclaimed prepayment credit is not allocable to a 
particular adjustment, such credit is applied in accordance with the 
ordering rules set forth in paragraph (b) of this section.
    (d) Examples. The following examples illustrate the rules of this 
Sec. 1.6664-3. These examples do not take into account the reasonable 
cause exception to the accuracy-related penalty under Sec. 1.6664-4.

    Example 1. A and B, husband and wife, filed a joint federal income 
tax return for calendar year 1989, reporting taxable income of $15,800 
and a tax liability of $2,374. A and B had no amounts previously 
assessed (or collected without assessment) and no rebates had been made. 
Subsequently, the return was examined and the following adjustments and 
penalties were agreed to:


Adjustment 1 (No penalty imposed)..............  ..........      $1,000
Adjustment 2 (Substantial understatement                               
 penalty imposed)...............................  ..........      40,000
Adjustment 3 (Civil fraud penalty imposed).....  ..........      45,000
                                                 -----------------------
Total adjustments...............................  ..........     $86,000
Taxable income shown on return..................  ..........      15,800
                                                 -----------------------
Taxable income as corrected.....................  ..........    $101,800
Computation of underpayment:                                            
    Tax imposed by subtitle A...................  ..........     $25,828
    Tax shown on return.........................      $2,374  ..........
    Previous assessments........................        None  ..........
    Rebates.....................................        None  ..........
                                                 -----------------------
    Balance.....................................  ..........      $2,374
                                                 -----------------------
      Underpayment..............................  ..........     $23,454
                                                                        


    Computation of the portions of the underpayment on which penalties 
under section 6662(b)(2) and section 6663 are imposed:
    Step 1 Determine the portion, if any, of the underpayment on which 
no accuracy-related or fraud penalty is imposed:


Taxable income shown on return..............................     $15,800
Adjustment 1...............................................       1,000
                                                             -----------
      ``Adjusted'' taxable income...........................     $16,800
                                                             ===========
Tax on ``adjusted'' taxable income..........................      $2,524
Tax shown on return.........................................       2,374
                                                             -----------
      Portion of underpayment on which no penalty is imposed        $150
                                                                        


    Step 2 Determine the portion, if any, of the underpayment on which a 
penalty of 20 percent is imposed:


``Adjusted'' taxable income from step 1.....................     $16,800
Adjustment 2...............................................      40,000
                                                             -----------
      ``Adjusted'' taxable income...........................      56,800
                                                             ===========
Tax on ``adjusted'' taxable income..........................     $11,880
Tax on ``adjusted'' taxable income from step 1..............      $2,524
                                                             -----------
      Portion of underpayment on which 20 percent penalty is            
       imposed..............................................      $9,356
                                                                        


    Step 3 Determine the portion, if any, of the underpayment on which a 
penalty of 75 percent is imposed:


Total underpayment..............................  ..........     $23,454
Less the sum of the portions of such                                    
 underpayment determined in:                                            
    Step 1......................................        $150            
    Step 2......................................       9,356            
                                                 -----------------------
Total...........................................  ..........      $9,506
                                                 -----------------------
      Portion of underpayment on which 75                               
       percent penalty is imposed...............  ..........     $13,948
                                                                        


    Example 2. The facts are the same as in Example 1 except that the 
taxpayers failed to claim on their return a credit of $1,500 for income 
tax withheld on unreported additional income that resulted in Adjustment 
2. Because the unclaimed prepayment credit is allocable to Adjustment 
2, the portion of the underpayment attributable to that adjustment is 
$7,856 ($9,356--$1,500). The portions of

[[Page 843]]

the underpayment attributable to Adjustments 1 and 3 remain the same.
    Example 3. The facts are the same as in Example 1 except that the 
taxpayers made a timely estimated tax payment of $1,500 for 1989 which 
they failed to claim (and which the Service had not previously allowed). 
This unclaimed prepayment credit is not allocable to any particular 
adjustment. Therefore, the credit is allocated first to the portion of 
the underpayment on which no penalty is imposed ($150). The remaining 
amount ($1,350) is allocated next to the 20 percent penalty portion of 
the underpayment ($9,356). Thus, the portion of the underpayment that is 
not penalized is zero ($150--$150), the portion subject to a 20 percent 
penalty is $8,006 ($9,356--$1,350) and the portion subject to a 75 
percent penalty is unchanged at $13,948.

[T.D. 8381, 56 FR 67507, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 
1992]



Sec. 1.6664-4  Reasonable cause and good faith exception to section 6662 penalties.

    (a) In general. No penalty may be imposed under section 6662 with 
respect to any portion of an underpayment upon a showing by the taxpayer 
that there was reasonable cause for, and the taxpayer acted in good 
faith with respect to, such portion. Rules for determining whether the 
reasonable cause and good faith exception applies are set forth in 
paragraphs (b) through (g) of this section.
    (b) Facts and circumstances taken into account--(1) In general. The 
determination of whether a taxpayer acted with reasonable cause and in 
good faith is made on a case-by-case basis, taking into account all 
pertinent facts and circumstances. (See paragraph (e) of this section 
for certain rules relating to a substantial understatement penalty 
attributable to tax shelter items of corporations.) Generally, the most 
important factor is the extent of the taxpayer's effort to assess the 
taxpayer's proper tax liability. Circumstances that may indicate 
reasonable cause and good faith include an honest misunderstanding of 
fact or law that is reasonable in light of all of the facts and 
circumstances, including the experience, knowledge, and education of the 
taxpayer. An isolated computational or transcriptional error generally 
is not inconsistent with reasonable cause and good faith. Reliance on an 
information return or on the advice of a professional tax advisor or an 
appraiser does not necessarily demonstrate reasonable cause and good 
faith. Similarly, reasonable cause and good faith is not necessarily 
indicated by reliance on facts that, unknown to the taxpayer, are 
incorrect. Reliance on an information return, professional advice, or 
other facts, however, constitutes reasonable cause and good faith if, 
under all the circumstances, such reliance was reasonable and the 
taxpayer acted in good faith. (See paragraph (c) of this section for 
certain rules relating to reliance on the advice of others.) For 
example, reliance on erroneous information (such as an error relating to 
the cost or adjusted basis of property, the date property was placed in 
service, or the amount of opening or closing inventory) inadvertently 
included in data compiled by the various divisions of a multidivisional 
corporation or in financial books and records prepared by those 
divisions generally indicates reasonable cause and good faith, provided 
the corporation employed internal controls and procedures, reasonable 
under the circumstances, that were designed to identify such factual 
errors. Reasonable cause and good faith ordinarily is not indicated by 
the mere fact that there is an appraisal of the value of property. Other 
factors to consider include the methodology and assumptions underlying 
the appraisal, the appraised value, the relationship between appraised 
value and purchase price, the circumstances under which the appraisal 
was obtained, and the appraiser's relationship to the taxpayer or to the 
activity in which the property is used. (See paragraph (g) of this 
section for certain rules relating to appraisals for charitable 
deduction property.) A taxpayer's reliance on erroneous information 
reported on a Form W-2, Form 1099, or other information return indicates 
reasonable cause and good faith, provided the taxpayer did not know or 
have reason to know that the information was incorrect. Generally, a 
taxpayer knows, or has reason to know, that the information on an 
information return is incorrect if such information is inconsistent with 
other information reported or otherwise furnished to the taxpayer, or 
with the taxpayer's

[[Page 844]]

knowledge of the transaction. This knowledge includes, for example, the 
taxpayer's knowledge of the terms of his employment relationship or of 
the rate of return on a payor's obligation.
    (2) Examples. The following examples illustrate this paragraph (b). 
They do not involve tax shelter items. (See paragraph (e) of this 
section for certain rules relating to the substantial understatement 
penalty attributable to the tax shelter items of corporations.)

    Example 1. A, an individual calendar year taxpayer, engages B, a 
professional tax advisor, to give A advice concerning the deductibility 
of certain state and local taxes. A provides B with full details 
concerning the taxes at issue. B advises A that the taxes are fully 
deductible. A, in preparing his own tax return, claims a deduction for 
the taxes. Absent other facts, and assuming the facts and circumstances 
surrounding B's advice and A's reliance on such advice satisfy the 
requirements of paragraph (c) of this section, A is considered to have 
demonstrated good faith by seeking the advice of a professional tax 
advisor, and to have shown reasonable cause for any underpayment 
attributable to the deduction claimed for the taxes. However, if A had 
sought advice from someone that A knew, or should have known, lacked 
knowledge in the relevant aspects of Federal tax law, or if other facts 
demonstrate that A failed to act reasonably or in good faith, A would 
not be considered to have shown reasonable cause or to have acted in 
good faith.
    Example 2. C, an individual, sought advice from D, a friend who was 
not a tax professional, as to how C might reduce his Federal tax 
obligations. D advised C that, for a nominal investment in Corporation 
X, D had received certain tax benefits which virtually eliminated D's 
Federal tax liability. D also named other investors who had received 
similar benefits. Without further inquiry, C invested in X and claimed 
the benefits that he had been assured by D were due him. In this case, C 
did not make any good faith attempt to ascertain the correctness of what 
D had advised him concerning his tax matters, and is not considered to 
have reasonable cause for the underpayment attributable to the benefits 
claimed.
    Example 3. E, an individual, worked for Company X doing odd jobs and 
filling in for other employees when necessary. E worked irregular hours 
and was paid by the hour. The amount of E's pay check differed from week 
to week. The Form W-2 furnished to E reflected wages for 1990 in the 
amount of $29,729. It did not, however, include compensation of $1,467 
paid for some hours E worked. Relying on the Form W-2, E filed a return 
reporting wages of $29,729. E had no reason to know that the amount 
reported on the Form W-2 was incorrect. Under the circumstances, E is 
considered to have acted in good faith in relying on the Form W-2 and to 
have reasonable cause for the underpayment attributable to the 
unreported wages.
    Example 4. H, an individual, did not enjoy preparing his tax returns 
and procrastinated in doing so until April 15th. On April 15th, H 
hurriedly gathered together his tax records and materials, prepared a 
return, and mailed it before midnight. The return contained numerous 
errors, some of which were in H's favor and some of which were not. The 
net result of all the adjustments, however, was an underpayment of tax 
by H. Under these circumstances, H is not considered to have reasonable 
cause for the underpayment or to have acted in good faith in attempting 
to file an accurate return.

    (c) Reliance on opinion or advice--(1) Facts and circumstances; 
minimum requirements. All facts and circumstances must be taken into 
account in determining whether a taxpayer has reasonably relied in good 
faith on advice (including the opinion of a professional tax advisor) as 
to the treatment of the taxpayer (or any entity, plan, or arrangement) 
under Federal tax law. However, in no event will a taxpayer be 
considered to have reasonably relied in good faith on advice unless the 
requirements of this paragraph (c)(1) are satisfied. The fact that these 
requirements are satisfied will not necessarily establish that the 
taxpayer reasonably relied on the advice (including the opinion of a 
professional tax advisor) in good faith. For example, reliance may not 
be reasonable or in good faith if the taxpayer knew, or should have 
known, that the advisor lacked knowledge in the relevant aspects of 
Federal tax law.
    (i) All facts and circumstances considered. The advice must be based 
upon all pertinent facts and circumstances and the law as it relates to 
those facts and circumstances. For example, the advice must take into 
account the taxpayer's purposes (and the relative weight of such 
purposes) for entering into a transaction and for structuring a 
transaction in a particular manner. In addition, the requirements of 
this paragraph (c)(1) are not satisfied if the taxpayer fails to 
disclose a fact that it knows, or should know, to be relevant to the 
proper tax treatment of an item.

[[Page 845]]

    (ii) No unreasonable assumptions. The advice must not be based on 
unreasonable factual or legal assumptions (including assumptions as to 
future events) and must not unreasonably rely on the representations, 
statements, findings, or agreements of the taxpayer or any other person. 
For example, the advice must not be based upon a representation or 
assumption which the taxpayer knows, or has reason to know, is unlikely 
to be true, such as an inaccurate representation or assumption as to the 
taxpayer's purposes for entering into a transaction or for structuring a 
transaction in a particular manner.
    (2) Advice defined. Advice is any communication, including the 
opinion of a professional tax advisor, setting forth the analysis or 
conclusion of a person, other than the taxpayer, provided to (or for the 
benefit of) the taxpayer and on which the taxpayer relies, directly or 
indirectly, with respect to the imposition of the section 6662 accuracy-
related penalty. Advice does not have to be in any particular form.
    (3) Cross-reference. For rules applicable to advisors, see e.g., 
Secs. 1.6694-1 through 1.6694-3 (regarding preparer penalties), 31 CFR 
10.22 (regarding diligence as to accuracy), 31 CFR 10.33 (regarding tax 
shelter opinions), and 31 CFR 10.34 (regarding standards for advising 
with respect to tax return positions and for preparing or signing 
returns).
    (d) Pass-through items. The determination of whether a taxpayer 
acted with reasonable cause and in good faith with respect to an 
underpayment that is related to an item reflected on the return of a 
pass-through entity is made on the basis of all pertinent facts and 
circumstances, including the taxpayer's own actions, as well as the 
actions of the pass-through entity.
    (e) Special rules for substantial understatement penalty 
attributable to tax shelter items of corporations--(1) In general; facts 
and circumstances. The determination of whether a corporation acted with 
reasonable cause and in good faith in its treatment of a tax shelter 
item (as defined in Sec. 1.6662-4(g)(3)) is based on all pertinent facts 
and circumstances. Paragraphs (e)(2), (3), and (4) of this section set 
forth rules that apply, in the case of a penalty attributable to a 
substantial understatement of income tax (within the meaning of section 
6662(d)), in determining whether a corporation acted with reasonable 
cause and in good faith with respect to a tax shelter item.
    (2) Reasonable cause based on legal justification--(i) Minimum 
requirements. A corporation's legal justification (as defined in 
paragraph (e)(2)(ii) of this section) may be taken into account, as 
appropriate, in establishing that the corporation acted with reasonable 
cause and in good faith in its treatment of a tax shelter item only if 
the authority requirement of paragraph (e)(2)(i)(A) of this section and 
the belief requirement of paragraph (e)(2)(i)(B) of this section are 
satisfied (the minimum requirements). Thus, a failure to satisfy the 
minimum requirements will preclude a finding of reasonable cause and 
good faith based (in whole or in part) on the corporation's legal 
justification.
    (A) Authority requirement. The authority requirement is satisfied 
only if there is substantial authority (within the meaning of 
Sec. 1.6662-4(d)) for the tax treatment of the item.
    (B) Belief requirement. The belief requirement is satisfied only if, 
based on all facts and circumstances, the corporation reasonably 
believed, at the time the return was filed, that the tax treatment of 
the item was more likely than not the proper treatment. For purposes of 
the preceding sentence, a corporation is considered reasonably to 
believe that the tax treatment of an item is more likely than not the 
proper tax treatment if (without taking into account the possibility 
that a return will not be audited, that an issue will not be raised on 
audit, or that an issue will be settled)--
    (1) The corporation analyzes the pertinent facts and authorities in 
the manner described in Sec. 1.6662-4(d)(3)(ii), and in reliance upon 
that analysis, reasonably concludes in good faith that there is a 
greater than 50-percent likelihood that the tax treatment of the item 
will be upheld if challenged by the Internal Revenue Service; or
    (2) The corporation reasonably relies in good faith on the opinion 
of a professional tax advisor, if the opinion is based on the tax 
advisor's analysis of

[[Page 846]]

the pertinent facts and authorities in the manner described in 
Sec. 1.6662-4(d)(3)(ii) and unambiguously states that the tax advisor 
concludes that there is a greater than 50-percent likelihood that the 
tax treatment of the item will be upheld if challenged by the Internal 
Revenue Service. (For this purpose, the requirements of paragraph (c) of 
this section must be met with respect to the opinion of a professional 
tax advisor.)
    (ii) Legal justification defined. For purposes of this paragraph 
(e), legal justification includes any justification relating to the 
treatment or characterization under the Federal tax law of the tax 
shelter item or of the entity, plan, or arrangement that gave rise to 
the item. Thus, a taxpayer's belief (whether independently formed or 
based on the advice of others) as to the merits of the taxpayer's 
underlying position is a legal justification.
    (3) Minimum requirements not dispositive. Satisfaction of the 
minimum requirements of paragraph (e)(2) of this section is an important 
factor to be considered in determining whether a corporate taxpayer 
acted with reasonable cause and in good faith, but is not necessarily 
dispositive. For example, depending on the circumstances, satisfaction 
of the minimum requirements may not be dispositive if the taxpayer's 
participation in the tax shelter lacked significant business purpose, if 
the taxpayer claimed tax benefits that are unreasonable in comparison to 
the taxpayer's investment in the tax shelter, or if the taxpayer agreed 
with the organizer or promoter of the tax shelter that the taxpayer 
would protect the confidentiality of the tax aspects of the structure of 
the tax shelter.
    (4) Other factors. Facts and circumstances other than a 
corporation's legal justification may be taken into account, as 
appropriate, in determining whether the corporation acted with 
reasonable cause and in good faith with respect to a tax shelter item 
regardless of whether the minimum requirements of paragraph (e)(2) of 
this section are satisfied.
    (f) Tranactions between persons described in section 482 and net 
section 482 transfer price adjustments. [Reserved]
    (g) Valuation misstatements of charitable deduction property--(1) In 
general. There may be reasonable cause and good faith with respect to a 
portion of an underpayment that is attributable to a substantial (or 
gross) valuation misstatement of charitable deduction property (as 
defined in paragraph (e)(2)(i) of this section) only if--
    (i) The claimed value of the property was based on a qualified 
appraisal (as defined in paragraph (e)(2)(ii) of this section) by a 
qualified appraiser (as defined in paragraph (e)(2)(iii) of this 
section), and
    (ii) In addition to obtaining a qualified appraisal, the taxpayer 
made a good faith investigation of the value of the contributed 
property.

The rules of this paragraph (e) apply regardless of whether Sec. 1.170A-
13 permits a taxpayer to claim a charitable contribution deduction for 
the property without obtaining a qualified appraisal. The rules of this 
paragraph (e) apply in addition to the generally applicable rules 
concerning reasonable cause and good faith.
    (2) Definitions--(i) Charitable deduction property. For purposes of 
this paragraph (e), the term ``charitable deduction property'' means any 
property (other than money or publicly traded securities, as defined in 
Sec. 1.170A-13(c)(7)(xi)) contributed by the taxpayer in a contribution 
for which a deduction was claimed under section 170.
    (ii) Qualified appraisal. For purposes of this paragraph (e), the 
term ``qualified appraisal'' means a qualified appraisal as defined in 
Sec. 1.170A-13(c)(3).
    (iii) Qualified appraiser. For purposes of this paragraph (e), the 
term ``qualified appraiser'' means a qualified appraiser as defined in 
Sec. 1.170A-13(c)(5).

[T.D. 8381, 56 FR 67508, Dec. 31, 1991; T.D. 8381, 57 FR 6166, Feb. 20, 
1992, as amended by T.D. 8617, 60 FR 45666, Sept. 1, 1995]



Sec. 1.6664-4T  Reasonable cause and good faith exception to section 6662 penalties.

    (a)-(e) [Reserved]
    (f) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. For purposes of applying the 
reasonable cause and good faith exception of section 6664(c) to net 
section 482 adjustments, the

[[Page 847]]

rules of Sec. 1.6662-6(d) apply. A taxpayer that does not satisfy the 
rules of Sec. 1.6662-6(d) for a net section 482 adjustment cannot 
satisfy the reasonable cause and good faith exception under section 
6664(c). The rules of this section apply to underpayments subject to the 
transactional penalty in Sec. 1.6662-6(b). If the standards of the net 
section 482 penalty exclusion provisions under Sec. 1.6662-6(d) are met 
with respect to such underpayments, then the taxpayer will be considered 
to have acted with reasonable cause and good faith for purposes of this 
section.

[T.D. 8656, 61 FR 4885, Feb. 9, 1996]



Sec. 1.6694-0  Table of contents.

    This section lists the captions that appear in Secs. 1.6694-1 
through 1.6694-4.

 Sec. 1.6694-1  Section 6694 penalties applicable to income tax return 
                                preparer.

    (a) Overview.
    (b) Income tax return preparer.
    (1) In general.
    (2) Signing and nonsigning preparers.
    (3) Example.
    (c) Understatement of liability.
    (d) Abatement of penalty where taxpayer's liability not understated.
    (e) Verification of information furnished by taxpayer.
    (1) In general.
    (2) Example.
    (f) Effective date.

    Sec. 1.6694-2  Penalty for understatement due to an unrealistic 
                                position.

    (a) In general.
    (1) Proscribed conduct.
    (2) Special rule for employers and partnerships.
    (b) Realistic possibility of being sustained on its merits.
    (1) In general.
    (2) Authorities.
    (3) Examples.
    (4) Written determinations.
    (5) When ``realistic possibility'' determined.
    (i) Signing preparers.
    (ii) Nonsigning preparers.
    (c) Exception for adequate disclosure of nonfrivolous positions.
    (1) In general.
    (2) Frivolous.
    (3) Adequate disclosure.
    (i) Signing preparers.
    (ii) Nonsigning preparers.
    (A) Advice to taxpayers.
    (B) Advice to another preparer.
    (d) Exception for reasonable cause and good faith.
    (1) Nature of the error causing the understatement.
    (2) Frequency of errors.
    (3) Materiality of errors.
    (4) Preparer's normal office practice.
    (5) Reliance on advice of another preparer.
    (e) Burden of proof.

 Sec. 1.6694-3  Penalty for understatement due to willful, reckless, or 
                          intentional conduct.

    (a) In general.
    (1) Proscribed conduct.
    (2) Special rule for employers and partnerships.
    (b) Willful attempt to understate liability.
    (c) Reckless or intentional disregard.
    (d) Examples.
    (e) Adequate disclosure.
    (1) Signing preparers.
    (2) Nonsigning preparers.
    (i) Advice to taxpayers.
    (ii) Advice to another preparer.
    (f) Rules or regulations.
    (g) Section 6694(b) penalty reduced by section 6694(a) penalty.
    (h) Burden of proof.

Sec. 1.6694-4  Extension of period of collection where preparer pays 15 
  percent of a penalty for understatement of taxpayer's liability and 
                    certain other procedural matters.

    (a) In general.
    (b) Preparer must bring suit in district court to determine 
liability for penalty.
    (c) Suspension of running of period of limitations on collection.
    (d) Effective date.

[T.D. 8382, 56 FR 67514, Dec. 31, 1991]



Sec. 1.6694-1  Section 6694 penalties applicable to income tax return preparer.

    (a) Overview. Section 6694(a) and section 6694(b) impose penalties 
on income tax return preparers for certain understatements of liability 
on a return or claim for refund. The section 6694(a) penalty is imposed 
for an understatement of liability with respect to tax imposed by 
subtitle A of the Internal Revenue Code that is due to a position for 
which there was not a realistic possibility of being sustained on its 
merits. The section 6694(b) penalty is imposed for an understatement of 
liability with respect to tax imposed by subtitle A of the Internal 
Revenue Code that is due to a willful attempt to understate tax 
liability or that is due to reckless or intentional disregard of rules 
or regulations. See Sec. 1.6694-2 for

[[Page 848]]

rules relating to the penalty under section 6694(a). See Sec. 1.6694-3 
for rules relating to the penalty under section 6694(b).
    (b) Income tax return preparer--(1) In general. Solely for purposes 
of the regulations under section 6694, the term ``income tax return 
preparer'' (``preparer'') means any person who is an income tax return 
preparer within the meaning of section 7701(a)(36) and Sec. 301.7701-15 
of this chapter, except that no more than one individual associated with 
a firm (for example, as a partner or employee) is treated as a preparer 
with respect to the same return or claim for refund. If a signing 
preparer is associated with a firm, that individual, and no other 
individual associated with the firm, is a preparer with respect to the 
return or claim for purposes of section 6694. If two or more individuals 
associated with a firm are income tax return preparers with respect to a 
return or claim for refund, within the meaning of section 7701(a)(36) 
and Sec. 301.7701-15 of this chapter, and none of them is the signing 
preparer, only one of the individuals is a preparer (i.e., nonsigning 
preparer) with respect to that return or claim for purposes of section 
6694. In such a case, ordinarily, the individual who is a preparer for 
purposes of section 6694 is the individual with overall supervisory 
responsibility for the advice given by the firm with respect to the 
return or claim. To the extent provided in Sec. 1.6694-2(a)(2) and 
Sec. 1.6694-3(a)(2), an individual and the firm with which the 
individual is associated may both be subject to penalty under section 
6694 with respect to the same return or claim for refund. If an 
individual (other than the sole proprietor) who is associated with a 
sole proprietorship is subject to penalty under section 6694, the sole 
proprietorship is considered a ``firm'' for purposes of this paragraph.
    (2) Signing and nonsigning preparers. A ``signing preparer'' is any 
preparer who signs a return of tax or claim for refund as a preparer. A 
``nonsigning preparer'' is any preparer who is not a signing preparer. 
Examples of nonsigning preparers are preparers who provide advice 
(written or oral) to a taxpayer or to a preparer who is not associated 
with the same firm as the preparer who provides the advice.
    (3) Example. The provisions of paragraph (b) of this section are 
illustrated by the following example:

    Example. Attorney A provides advice to Client C concerning the 
proper treatment of a significant item on C's income tax return. The 
advice constitutes preparation of a substantial portion of the return. 
In preparation for providing that advice, A discusses the matter with 
Attorney B, who is associated with the same firm as A, but A is the 
attorney with overall supervisory responsibility for the advice. Neither 
Attorney A nor any other attorney associated with A's firm signs C's 
return as a preparer. For purposes of the regulations under section 
6694, A is a preparer with respect to C's return and is subject to 
penalty under section 6694 with respect to C's return. B is not a 
preparer with respect to C's return and, therefore, is not subject to 
penalty under section 6694 with respect to a position taken on C's 
return. This would be true even if B recommends that A advise C to take 
an undisclosed position that did not satisfy the realistic possibility 
standard. In addition, since B is not a preparer for purposes of the 
regulations under section 6694, A may not avoid a penalty under section 
6694 with respect to C's return by claiming he relied on the advice of 
B. See Sec. 1.6694-2(d)(5).

    (c) Understatement of liability. For purposes of the regulations 
under section 6694, an ``understatement of liability'' exists if, 
viewing the return or claim for refund as a whole, there is an 
understatement of the net amount payable with respect to any tax imposed 
by subtitle A of the Internal Revenue Code, or an overstatement of the 
net amount creditable or refundable with respect to any tax imposed by 
subtitle A of the Internal Revenue Code. The net amount payable in a 
taxable year with respect to the return for which the preparer engaged 
in conduct proscribed by section 6694 is not reduced by any carryback. 
Tax imposed by subtitle A of the Internal Revenue Code does not include 
additions to the tax provided by section 6654 and section 6655 (relating 
to underpayments of estimated tax). Except as provided in paragraph (d) 
of this section, the determination of whether an understatement of 
liability exists may be made in a proceeding involving the preparer 
apart from any proceeding involving the taxpayer.

[[Page 849]]

    (d) Abatement of penalty where taxpayer's liability not understated. 
If a penalty under section 6694(a) or section 6694(b) concerning a 
return or claim for refund has been assessed against one or more 
preparers, and if it is established at any time in a final 
administrative determination or a final judicial decision that there was 
no understatement of liability relating to the return or claim for 
refund, then--
    (1) The assessment must be abated; and
    (2) If any amount of the penalty was paid, that amount must be 
refunded to the person or persons who so paid, as if the payment were an 
overpayment of tax, without consideration of any period of limitations.
    (e) Verification of information furnished by taxpayer--(1) In 
general. For purposes of section 6694(a) and section 6694(b), the 
preparer generally may rely in good faith without verification upon 
information furnished by the taxpayer. Thus, the preparer is not 
required to audit, examine or review books and records, business 
operations, or documents or other evidence in order to verify 
independently the taxpayer's information. However, the preparer may not 
ignore the implications of information furnished to the preparer or 
actually known by the preparer. The preparer must make reasonable 
inquiries if the information as furnished appears to be incorrect or 
incomplete. Additionally, some provisions of the Code or regulations 
require that specific facts and circumstances exist-- for example, that 
the taxpayer maintain specific documents, before a deduction may be 
claimed. The preparer must make appropriate inquiries to determine the 
existence of facts and circumstances required by a Code section or 
regulation as a condition to the claiming of a deduction.
    (2) Example. The provisions of paragraph (e) of this section are 
illustrated by the following example:

    Example. A taxpayer, during an interview conducted by the preparer, 
stated that he had paid $6,500 in doctor bills and $5,000 in deductible 
travel and entertainment expenses during the tax year, when in fact he 
had paid smaller amounts. On the basis of this information, the preparer 
properly calculated deductions for medical expenses and for travel and 
entertainment expenses which resulted in an understatement of liability 
for tax. The preparer had no reason to believe that the medical expense 
and travel and entertainment expense information presented was incorrect 
or incomplete. The preparer did not ask for underlying documentation of 
the medical expenses but inquired about the existence of travel and 
entertainment expense records. The preparer was reasonably satisfied by 
the taxpayer's representations that the taxpayer had adequate records 
(or other sufficient corroborative evidence) for the deduction of $5,000 
for travel and entertainment expenses. The preparer is not subject to a 
penalty under section 6694.

    (f) Effective date. Sections 1.6694-1 through 1.6694-3 are generally 
effective for documents prepared and advice given after December 31, 
1991. However, Sec. 1.6694-3(c)(3) (which provides that a preparer is 
not considered to have recklessly or intentionally disregarded a revenue 
ruling or notice if the position contrary to the ruling or notice has a 
realistic possibility of being sustained on its merits) is effective for 
documents prepared and advice given after December 31, 1989. Except as 
provided in the preceding sentence, section 6694 and the existing rules 
and regulations thereunder (to the extent not inconsistent with the 
statute as amended by the Omnibus Budget Reconciliation Act of 1989), 
and Notice 90-20, 1990-1 C.B. 328, apply to documents prepared and 
advice given on or before December 31, 1991. For the effective date of 
Sec. 1.6694-4, see Sec. 1.6694-4(d).

[T.D. 8382, 56 FR 67514, Dec. 31, 1991; T.D. 8382, 57 FR 6061, Feb. 19, 
1992]



Sec. 1.6694-2  Penalty for understatement due to an unrealistic position.

    (a) In general--(1) Proscribed conduct. Except as otherwise provided 
in this section, if any part of an understatement of liability relating 
to a return of tax under subtitle A of the Internal Revenue Code or 
claim for refund of tax under subtitle A of the Internal Revenue Code is 
due to a position for which there was not a realistic possibility of 
being sustained on its merits, any person who is a preparer with respect 
to such return or claim for refund who knew or reasonably should have 
known of such position is subject to a penalty of $250 with respect to 
such return or claim for refund.

[[Page 850]]

    (2) Special rule for employers and partnerships. An employer or 
partnership of a preparer subject to penalty under section 6694(a) is 
also subject to penalty only if--
    (i) One or more members of the principal management (or principal 
officers) of the firm or a branch office participated in or knew of the 
conduct proscribed by section 6694(a);
    (ii) The employer or partnership failed to provide reasonable and 
appropriate procedures for review of the position for which the penalty 
is imposed; or
    (iii) Such review procedures were disregarded in the formulation of 
the advice, or the preparation of the return or claim for refund, that 
included the position for which the penalty is imposed.
    (b) Realistic possibility of being sustained on its merits--(1) In 
general. A position is considered to have a realistic possibility of 
being sustained on its merits if a reasonable and well-informed analysis 
by a person knowledgeable in the tax law would lead such a person to 
conclude that the position has approximately a one in three, or greater, 
likelihood of being sustained on its merits (realistic possibility 
standard). In making this determination, the possibility that the 
position will not be challenged by the Internal Revenue Service (e.g., 
because the taxpayer's return may not be audited or because the issue 
may not be raised on audit) is not to be taken into account. The 
analysis prescribed by Sec. 1.6662-4(d)(3)(ii) for purposes of 
determining whether substantial authority is present applies for 
purposes of determining whether the realistic possibility standard is 
satisfied.
    (2) Authorities. The authorities considered in determining whether a 
position satisfies the realistic possibility standard are those 
authorities provided in Sec. 1.6662-4(d)(3)(iii).
    (3) Examples. The provisions of paragraphs (b)(1) and (b)(2) of this 
section are illustrated by the following examples:

    Example 1. A new statute is unclear as to whether a certain 
transaction that a taxpayer has engaged in will result in favorable tax 
treatment. Prior law, however, supported the taxpayer's position. There 
are no regulations under the new statute and no authority other than the 
statutory language and committee reports. The committee reports state 
that the intent was not to adversely affect transactions similar to the 
taxpayer's transaction. The taxpayer's position satisfies the realistic 
possibility standard.
    Example 2. A taxpayer has engaged in a transaction that is adversely 
affected by a new statutory provision. Prior law supported a position 
favorable to the taxpayer. The preparer believes that the new statute is 
inequitable as applied to the taxpayer's situation. The statutory 
language is unambiguous as it applies to the transaction (e.g., it 
applies to all manufacturers and the taxpayer is a manufacturer of 
widgets). The committee reports do not specifically address the 
taxpayer's situation. A position contrary to the statute does not 
satisfy the realistic possibility standard.
    Example 3. The facts are the same as in Example 2, except the 
committee reports indicate that Congress did not intend to apply the new 
statutory provision to the taxpayer's transaction (e.g., to a 
manufacturer of widgets). Thus, there is a conflict between the general 
language of the statute, which adversely affects the taxpayer's 
transaction, and a specific statement in the committee reports that 
transactions such as the taxpayer's are not adversely affected. A 
position consistent with either the statute or the committee reports 
satisfies the realistic possibility standard. However, a position 
consistent with the committee reports constitutes a disregard of a rule 
or regulation and, therefore, must be adequately disclosed in order to 
avoid the section 6694(b) penalty.
    Example 4. The instructions to an item on a tax form published by 
the Internal Revenue Service are incorrect and are clearly contrary to 
the regulations. Before the return is prepared, the Internal Revenue 
Service publishes an announcement acknowledging the error and providing 
the correct instruction. Under these facts, a position taken on a return 
which is consistent with the regulations satisfies the realistic 
possibility standard. On the other hand, a position taken on a return 
which is consistent with the incorrect instructions does not satisfy the 
realistic possibility standard. However, if the preparer relied on the 
incorrect instructions and was not aware of the announcement or the 
regulations, the reasonable cause and good faith exception may apply 
depending on all facts and circumstances. See Sec. 1.6694-2(d).
    Example 5. A statute is silent as to whether a taxpayer may take a 
certain position on the taxpayer's 1991 Federal income tax return. Three 
private letter rulings issued to other taxpayers in 1987 and 1988 
support the taxpayer's position. However, proposed regulations issued in 
1990 are clearly contrary to the taxpayer's position. After the issuance 
of

[[Page 851]]

the proposed regulations, the earlier private letter rulings cease to be 
authorities and are not taken into account in determining whether the 
taxpayer's position satisfies the realistic possibility standard. See 
Sec. 1.6694-2(b)(2) and Sec. 1.6662-4(d)(3)(iii). The taxpayer's 
position may or may not satisfy the realistic possibility standard, 
depending on an analysis of all the relevant authorities.
    Example 6. In the course of researching whether a particular 
position has a realistic possibility of being sustained on its merits, a 
preparer discovers that a taxpayer took the same position on a return 
several years ago and that the return was audited by the Service. The 
taxpayer tells the preparer that the revenue agent who conducted the 
audit was aware of the position and decided that the treatment on the 
return was correct. The revenue agent's report, however, made no mention 
of the position. The determination by the revenue agent is not authority 
for purposes of the realistic possibility standard. However, the 
preparer's reliance on the revenue agent's determination in the audit 
may qualify for the reasonable cause and good faith exception depending 
on all facts and circumstances. See Sec. 1.6694-2(d). Also see 
Sec. 1.6694-2(b)(4) and Sec. 1.6662-4(d)(3)(iv)(A) regarding affirmative 
statements in a revenue agent's report.
    Example 7. In the course of researching whether an interpretation of 
a phrase incorporated in the Internal Revenue Code has a realistic 
possibility of being sustained on its merits, a preparer discovers that 
identical language in the taxing statute of another jurisdiction (e.g., 
a state or foreign country) has been authoritatively construed by a 
court of that jurisdiction in a manner which would be favorable to the 
taxpayer, if the same interpretation were applied to the phrase 
applicable to the taxpayer's situation. The construction of the statute 
of the other jurisdiction is not authority for purposes of determining 
whether the position satisfies the realistic possibility standard. See 
Sec. 1.6694-2(b)(2) and Sec. 1.6662-4(d)(3)(iii). However, as in the 
case of conclusions reached in treatises and legal periodicals, the 
authorities underlying the court's opinion, if relevant to the 
taxpayer's situation, may give a position favorable to the taxpayer a 
realistic possibility of being sustained on its merits. See Sec. 1.6694-
2(b)(2) and Sec. 1.6662-4(d)(3)(iii).
    Example 8. In the course of researching whether an interpretation of 
a statutory phrase has a realistic possibility of being sustained on its 
merits, a preparer discovers that identical language appearing in 
another place in the Internal Revenue Code has consistently been 
interpreted by the courts and by the Service in a manner which would be 
favorable to the taxpayer, if the same interpretation were applied to 
the phrase applicable to the taxpayer's situation. No authority has 
interpreted the phrase applicable to the taxpayer's situation. The 
interpretations of the identical language are relevant in arriving at a 
well reasoned construction of the language at issue, but the context in 
which the language arises also must be taken into account in determining 
whether the realistic possibility standard is satisfied.
    Example 9. A new statutory provision is silent on the tax treatment 
of an item under the provision. However, the committee reports 
explaining the provision direct the Treasury to issue regulations 
interpreting the provision in a specified way. No regulations have been 
issued at the time the preparer must recommend a position on the tax 
treatment of the item, and no other authorities exist. The position 
supported by the committee reports satisfies the realistic possibility 
standard.

    (4) Written determinations. To the extent a position has substantial 
authority with respect to the taxpayer by virtue of a ``written 
determination'' as provided in Sec. 1.6662-4(d)(3)(iv)(A), such position 
will be considered to satisfy the realistic possibility standard with 
respect to the taxpayer's preparer for purposes of section 6694(a).
    (5) When ``realistic possibility'' determined. For purposes of this 
section, the requirement that a position satisfy the realistic 
possibility standard must be satisfied on the date prescribed by 
paragraph (b)(5)(i) or (b)(5)(ii) of this section, whichever is 
applicable.
    (i) Signing preparers.--(A) In the case of a signing preparer, the 
relevant date is the date the preparer signs and dates the return or 
claim for refund.
    (B) If the preparer did not date the return or claim for refund, the 
relevant date is the date the taxpayer signed and dated the return or 
claim for refund. If the taxpayer also did not date the return or claim 
for refund, the relevant date is the date the return or claim for refund 
was filed.
    (ii) Nonsigning preparers. In the case of a nonsigning preparer, the 
relevant date is the date the preparer provides the advice. That date 
will be determined based on all the facts and circumstances.
    (c) Exception for adequate disclosure of nonfrivolous positions--(1) 
In general. The section 6694(a) penalty will not be imposed on a 
preparer if the position taken is not frivolous and is adequately 
disclosed. For an exception to

[[Page 852]]

the section 6694(a) penalty for reasonable cause and good faith, see 
paragraph (d) of this section.
    (2) Frivolous. For purposes of this section, a ``frivolous'' 
position with respect to an item is one that is patently improper.
    (3) Adequate disclosure--(i) Signing preparers. In the case of a 
signing preparer, disclosure of a position that does not satisfy the 
realistic possibility standard is adequate only if the disclosure is 
made in accordance with Sec. 1.6662-4(f) (which permits disclosure on a 
properly completed and filed Form 8275 or 8275-R, as appropriate, or on 
the return in accordance with an annual revenue procedure).
    (ii) Nonsigning preparers. In the case of a nonsigning preparer, 
disclosure of a position that does not satisfy the realistic possibility 
standard is adequate if the position is disclosed in accordance with 
Sec. 1.6662-4(f) (which permits disclosure on a properly completed and 
filed Form 8275 or 8275-R, as appropriate, or on the return in 
accordance with an annual revenue procedure). In addition, disclosure of 
a position is adequate in the case of a nonsigning preparer if, with 
respect to that position, the preparer complies with the provisions of 
paragraph (c)(3)(ii)(A) or (B) of this section, whichever is applicable.
    (A) Advice to taxpayers. If a nonsigning preparer provides advice to 
the taxpayer with respect to a position that does not satisfy the 
realistic possibility standard, disclosure of that position is adequate 
if the advice includes a statement that the position lacks substantial 
authority and, therefore, may be subject to penalty under section 
6662(d) unless adequately disclosed in the manner provided in 
Sec. 1.6662-4(f) (or in the case of a tax shelter item, that the 
position lacks substantial authority and, therefore, may be subject to 
penalty under section 6662(d) regardless of disclosure). If the advice 
with respect to the position is in writing, the statement concerning 
disclosure (or the statement regarding possible penalty under section 
6662(d)) also must be in writing. If the advice with respect to the 
position is oral, advice to the taxpayer concerning the need to disclose 
(or the advice regarding possible penalty under section 6662(d)) also 
may be oral. The determination as to whether oral advice as to 
disclosure (or the oral advice regarding possible penalty under section 
6662(d)) was in fact given is based on all facts and circumstances. 
Contemporaneously prepared documentation of the oral advice regarding 
disclosure (or the oral advice regarding possible penalty under section 
6662(d)) generally is sufficient to establish that the advice was given 
to the taxpayer.
    (B) Advice to another preparer. If a nonsigning preparer provides 
advice to another preparer with respect to a position that does not 
satisfy the realistic possibility standard, disclosure of that position 
is adequate if the advice includes a statement that disclosure under 
section 6694(a) is required. If the advice with respect to the position 
is in writing, the statement concerning disclosure also must be in 
writing. If the advice with respect to the position is oral, advice to 
the preparer concerning the need to disclose also may be oral. The 
determination as to whether oral advice as to disclosure was in fact 
given is based on all facts and circumstances. Contemporaneously 
prepared documentation of the oral advice regarding disclosure generally 
is sufficient to establish that the advice regarding disclosure was 
given to the other preparer.
    (d) Exception for reasonable cause and good faith. The penalty under 
section 6694(a) will not be imposed if considering all the facts and 
circumstances, it is determined that the understatement was due to 
reasonable cause and that the preparer acted in good faith. Factors to 
consider include:
    (1) Nature of the error causing the understatement. Whether the 
error resulted from a provision that was so complex, uncommon, or highly 
technical that a competent preparer of returns or claims of the type at 
issue reasonably could have made the error. The reasonable cause and 
good faith exception does not apply to an error that would have been 
apparent from a general review of the return or claim for refund by the 
preparer.
    (2) Frequency of errors. Whether the understatement was the result 
of an isolated error (such as an inadvertent

[[Page 853]]

mathematical or clerical error) rather than a number of errors. Although 
the reasonable cause and good faith exception generally applies to an 
isolated error, it does not apply if the isolated error is so obvious, 
flagrant or material that it should have been discovered during a review 
of the return or claim. Furthermore, the reasonable cause and good faith 
exception does not apply if there is a pattern of errors on a return or 
claim for refund even though any one error, in isolation, would have 
qualified for the reasonable cause and good faith exception.
    (3) Materiality of errors. Whether the understatement was material 
in relation to the correct tax liability. The reasonable cause and good 
faith exception generally applies if the understatement is of a 
relatively immaterial amount. Nevertheless, even an immaterial 
understatement may not qualify for the reasonable cause and good faith 
exception if the error or errors creating the understatement are 
sufficiently obvious or numerous.
    (4) Preparer's normal office practice. Whether the preparer's normal 
office practice, when considered together with other facts and 
circumstances such as the knowledge of the preparer, indicates that the 
error in question would rarely occur and the normal office practice was 
followed in preparing the return or claim in question. Such a normal 
office practice must be a system for promoting accuracy and consistency 
in the preparation of returns or claims and generally would include, in 
the case of a signing preparer, checklists, methods for obtaining 
necessary information from the taxpayer, a review of the prior year's 
return, and review procedures. Notwithstanding the above, the reasonable 
cause and good faith exception does not apply if there is a flagrant 
error on a return or claim for refund, a pattern of errors on a return 
or claim for refund, or a repetition of the same or similar errors on 
numerous returns or claims.
    (5) Reliance on advice of another preparer. Whether the preparer 
relied on the advice of or schedules prepared by (``advice'') another 
preparer as defined in Sec. 1.6694-1(b). The reasonable cause and good 
faith exception applies if the preparer relied in good faith on the 
advice of another preparer (or a person who would be considered a 
preparer under Sec. 1.6694-1(b) had the advice constituted preparation 
of a substantial portion of the return or claim for refund) who the 
preparer had reason to believe was competent to render such advice. A 
preparer is not considered to have relied in good faith if--
    (i) The advice is unreasonable on its face;
    (ii) The preparer knew or should have known that the other preparer 
was not aware of all relevant facts; or
    (iii) The preparer knew or should have known (given the nature of 
the preparer's practice), at the time the return or claim for refund was 
prepared, that the advice was no longer reliable due to developments in 
the law since the time the advice was given.

The advice may be written or oral, but in either case the burden of 
establishing that the advice was received is on the preparer.
    (e) Burden of proof. In any proceeding with respect to the penalty 
imposed by section 6694(a), the issues on which the preparer bears the 
burden of proof include whether--
    (1) The preparer knew or reasonably should have known that the 
questioned position was taken on the return;
    (2) There is reasonable cause and good faith with respect to such 
position; and
    (3) The position was disclosed adequately in accordance with 
paragraph (c) of this section.

[T.D. 8382, 56 FR 67516, Dec. 31, 1991; T.D. 8382, 57 FR 6061, Feb. 19, 
1992]



Sec. 1.6694-3  Penalty for understatement due to willful, reckless, or intentional conduct.

    (a) In general--(1) Proscribed conduct. If any part of an 
understatement of liability relating to a return of tax under subtitle A 
of the Internal Revenue Code or claim for refund of tax under subtitle A 
of the Internal Revenue Code is due to--
    (i) A willful attempt in any manner to understate the liability for 
tax by a preparer of the return or claim for refund; or
    (ii) Any reckless or intentional disregard of rules or regulations 
by any such person,


[[Page 854]]


such preparer is subject to a penalty of $1,000 with respect to such 
return or claim for refund.
    (2) Special rule for employers and partnerships. An employer or 
partnership of a preparer subject to penalty under section 6694(b) is 
also subject to penalty only if--
    (i) One or more members of the principal management (or principal 
officers) of the firm or a branch office participated in or knew of the 
conduct proscribed by section 6694(b);
    (ii) The employer or partnership failed to provide reasonable and 
appropriate procedures for review of the position for which the penalty 
is imposed; or
    (iii) Such review procedures were disregarded in the formulation of 
the advice, or the preparation of the return or claim for refund, that 
included the position for which the penalty is imposed.
    (b) Willful attempt to understate liability. A preparer is 
considered to have willfully attempted to understate liability if the 
preparer disregards, in an attempt wrongfully to reduce the tax 
liability of the taxpayer, information furnished by the taxpayer or 
other persons. For example, if a preparer disregards information 
concerning certain items of taxable income furnished by the taxpayer or 
other persons, the preparer is subject to the penalty. Similarly, if a 
taxpayer states to a preparer that the taxpayer has only two dependents, 
and the preparer reports six dependents on the return, the preparer is 
subject to the penalty.
    (c) Reckless or intentional disregard. (1) Except as provided in 
paragraphs (c)(2) and (c)(3) of this section, a preparer is considered 
to have recklessly or intentionally disregarded a rule or regulation if 
the preparer takes a position on the return or claim for refund that is 
contrary to a rule or regulation (as defined in paragraph (f) of this 
section) and the preparer knows of, or is reckless in not knowing of, 
the rule or regulation in question. A preparer is reckless in not 
knowing of a rule or regulation if the preparer makes little or no 
effort to determine whether a rule or regulation exists, under 
circumstances which demonstrate a substantial deviation from the 
standard of conduct that a reasonable preparer would observe in the 
situation.
    (2) A preparer is not considered to have recklessly or intentionally 
disregarded a rule or regulation if the position contrary to the rule or 
regulation is not frivolous as defined in Sec. 1.6694-2(c)(2), is 
adequately disclosed in accordance with paragraph (e) of this section 
and, in the case of a position contrary to a regulation, the position 
represents a good faith challenge to the validity of the regulation.
    (3) In the case of a position contrary to a revenue ruling or notice 
(other than a notice of proposed rulemaking) published by the Service in 
the Internal Revenue Bulletin, a preparer also is not considered to have 
recklessly or intentionally disregarded the ruling or notice if the 
position has a realistic possibility of being sustained on its merits.
    (d) Examples. The provisions of paragraphs (b) and (c) of this 
section are illustrated by the following examples:

    Example 1. A taxpayer provided a preparer with detailed check 
registers reflecting personal and business expenses. One of the expenses 
was for domestic help, and this expense was identified as personal on 
the check register. The preparer knowingly deducted the expenses of the 
taxpayer's domestic help as wages paid in the taxpayer's business. The 
preparer is subject to the penalty under section 6694(b).
    Example 2. A taxpayer provided a preparer with detailed check 
registers to compute the taxpayer's expenses. However, the preparer 
knowingly overstated the expenses on the return. After adjustments by 
the examiner, the tax liability increased significantly. Because the 
preparer disregarded information provided in the check registers, the 
preparer is subject to the penalty under section 6694(b).
    Example 3. A revenue ruling holds that certain expenses incurred in 
the purchase of a business must be capitalized. The Code is silent as to 
whether these expenses must be capitalized or may be deducted currently, 
but several cases from different courts hold that these particular 
expenses may be deducted currently. There is no other authority. Under 
these facts, a position taken contrary to the revenue ruling on a return 
or claim for refund is not a reckless or intentional disregard of a 
rule, since the position contrary to the revenue ruling has a realistic 
possibility of being sustained on its merits. Therefore, the preparer 
will not be subject to a penalty under section 6694(b) even though the 
position is not adequately disclosed.

[[Page 855]]

    Example 4. Final regulations provide that certain expenses incurred 
in the purchase of a business must be capitalized. One Tax Court case 
has expressly invalidated that portion of the regulations. Under these 
facts, a position contrary to the regulation will subject the preparer 
to the section 6694(b) penalty even though the position may have a 
realistic possibility of being sustained on its merits. However, because 
the contrary position on these facts represents a good faith challenge 
to the validity of the regulations, the preparer will not be subject to 
the section 6694(b) penalty if the position is adequately disclosed in 
the manner provided in paragraph (e) of this section.

    (e) Adequate disclosure--(1) Signing preparers. In the case of a 
signing preparer, disclosure of a position that is contrary to a rule or 
regulation is adequate only if the disclosure is made in accordance with 
Sec. 1.6662-4(f) (1), (3), (4) and (5) (which permit disclosure on a 
properly completed and filed Form 8275 or 8275-R, as appropriate). In 
addition, the disclosure of a position that is contrary to a rule or 
regulation must adequately identify the rule or regulation being 
challenged. The provisions of Sec. 1.6662-4(f)(2) (which permit 
disclosure on the return in accordance with an annual revenue procedure) 
do not apply for purposes of this section.
    (2) Nonsigning preparers. In the case of a nonsigning preparer, 
disclosure of a position that is contrary to a rule or regulation is 
adequate if the position is disclosed in the manner provided in 
paragraph (e)(1) of this section. In addition, disclosure of a position 
is adequate in the case of a nonsigning preparer if, with respect to 
that position, the preparer complies with the provisions of paragraph 
(e)(2) (i) or (ii) of this section, whichever is applicable.
    (i) Advice to taxpayers. In the case of a nonsigning preparer who 
provides advice to the taxpayer with respect to a position that is 
contrary to a rule or regulation, disclosure of that position is 
adequate if the advice includes a statement that--
    (A) The position is contrary to a specified rule or regulation and, 
therefore, is subject to a penalty described in section 6662(c) unless 
adequately disclosed in the manner provided in Sec. 1.6662-3(c)(2) 
(which permits disclosure on a properly completed and filed Form 8275 or 
8275-R, as appropriate, and which requires adequate identification of 
any rule or regulation being challenged); and
    (B) In the case of a position contrary to a regulation, the position 
must represent a good faith challenge to the validity of the regulation.

If the advice with respect to the position is in writing, the statement 
concerning disclosure also must be in writing. If the advice with 
respect to the position is oral, advice to the taxpayer concerning the 
need to disclose also may be oral. The determination as to whether oral 
advice as to disclosure was in fact given is based on all facts and 
circumstances. Contemporaneously prepared documentation of the oral 
advice regarding disclosure generally is sufficient to establish that 
the advice was given to the taxpayer.
    (ii) Advice to another preparer. If a nonsigning preparer provides 
advice to another preparer with respect to a position that is contrary 
to a rule or regulation, disclosure of that position is considered 
adequate if the advice includes a statement that disclosure under 
section 6694(b) is required. If the advice with respect to the position 
is in writing, the statement concerning disclosure also must be in 
writing. If the advice with respect to the position is oral, advice to 
the preparer concerning the need to disclose also may be oral. The 
determination as to whether oral advice as to disclosure was in fact 
given is based on all facts and circumstances. Contemporaneously 
prepared documentation of the oral advice regarding disclosure generally 
is sufficient to establish that the advice was given to the other 
preparer.
    (f) Rules or regulations. The term ``rules or regulations'' includes 
the provisions of the Internal Revenue Code, temporary or final Treasury 
regulations issued under the Code, and revenue rulings or notices (other 
than notices of proposed rulemaking) issued by the Internal Revenue 
Service and published in the Internal Revenue Bulletin.
    (g) Section 6694(b) penalty reduced by section 6694(a) penalty. The 
amount of any penalty to which a preparer may be subject under section 
6694(b) for a

[[Page 856]]

return or claim for refund is $1,000 reduced by any amount assessed and 
collected against the preparer under section 6694(a) for the same return 
or claim.
    (h) Burden of proof. In any proceeding with respect to the penalty 
imposed by section 6694(b), the Government bears the burden of proof on 
the issue of whether the preparer willfully attempted to understate the 
liability for tax. See section 7427. The preparer bears the burden of 
proof on such other issues as whether--
    (1) The preparer recklessly or intentionally disregarded a rule or 
regulation;
    (2) A position contrary to a regulation represents a good faith 
challenge to the validity of the regulation; and
    (3) Disclosure was adequately made in accordance with paragraph (e) 
of this section.

[T.D. 8382, 56 FR 67518, Dec. 31, 1991]



Sec. 1.6694-4  Extension of period of collection where preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other 
          procedural matters.

    (a) In general. (1) The Internal Revenue Service will investigate 
the preparation by a preparer of a return of tax under subtitle A of the 
Internal Revenue Code or claim for refund of tax under subtitle A of the 
Internal Revenue Code and will send a report of the examination to the 
preparer before the assessment of either--
    (i) A penalty for understating tax liability due to a position for 
which there was not a realistic possibility of being sustained on its 
merits under section 6694(a); or
    (ii) A penalty for willful understatement of liability or reckless 
or intentional disregard of rules or regulations under section 6694(b).

Unless the period of limitations (if any) under section 6696(d) may 
expire without adequate opportunity for assessment, the Internal Revenue 
Service will also send, before assessment of either penalty, a 30-day 
letter to the preparer notifying him of the proposed penalty or 
penalties and offering an opportunity to the preparer to request further 
administrative consideration and a final administrative determination by 
the Internal Revenue Service concerning the assessment. If the preparer 
then makes a timely request, assessment may not be made until the 
Internal Revenue Service makes a final administrative determination 
adverse to the preparer.
    (2) If the Internal Revenue Service assesses either of the two 
penalties described in section 6694(a) and section 6694(b), it will send 
to the preparer a statement of notice and demand, separate from any 
notice of a tax deficiency, for payment of the amount assessed.
    (3) Within 30 days ofter the day on which notice and demand of 
either of the two penalties described in section 6694(a) and section 
6694(b) is made against the preparer, the preparer must either--
    (i) Pay the entire amount assessed (and may file a claim for refund 
of the amount paid at any time not later than 3 years after the date of 
payment); or
    (ii) Pay an amount which is not less than 15 percent of the entire 
amount assessed with respect to each return or claim for refund and file 
a claim for refund of the amount paid.
    (4) If the preparer pays an amount and files a claim for refund 
under paragraph (a)(3)(ii) of this section, the Internal Revenue Service 
may not make, begin, or prosecute a levy or proceeding in court for 
collection of the unpaid remainder of the amount assessed until the 
later of--
    (i) A date which is more than 30 days after the earlier of--
    (A) The day on which the preparer's claim for refund is denied; or
    (B) The expiration of 6 months after the day on which the preparer 
filed the claim for refund; and
    (ii) Final resolution of any proceeding begun as provided in 
paragraph (b) of this section.

However, the Internal Revenue Service may counterclaim in any proceeding 
begun as provided in paragraph (b) of this section for the unpaid 
remainder of the amount asssessed. Final resolution of a proceeding 
includes any settlement between the Internal Revenue Service and the 
preparer, any final determination by a court (for which the period for 
appeal, if any, has expired)

[[Page 857]]

and, generally, the types of determinations provided under section 
1313(a) (relating to taxpayer deficiencies). Notwithstanding section 
7421(a) (relating to suits to restrain asssessment or collection), the 
beginning of a levy or proceeding in court by the Internal Revenue 
Service in contravention of this paragraph (a)(4) may be enjoined by a 
proceeding in the proper court.
    (b) Preparer must bring suit in district court to determine 
liability for penalty. If, within 30 days after the earlier of--
    (1) The day on which the preparer's claim for refund filed under 
paragraph (a)(3)(ii) of this section is denied; or
    (2) The expiration of 6 months after the day on which the preparer 
filed the claim for refund.
The preparer fails to begin a proceeding for refund in the appropriate 
United States district court, the Internal Revenue Service may proceed 
with collection of the amount of the penalty not paid under paragraph 
(a)(3)(ii) of this section.
    (c) Suspension of running of period of limitations on collection. 
The running of the period of limitations provided in section 6502 on the 
collection by levy or by a proceeding in court of the unpaid amount of a 
penalty or penalties described in section 6694(a) or section 6694(b) is 
suspended for the period during which the Internal Revenue Service, 
under paragraph (a)(4) of this section, may not collect the unpaid 
amount of the penalty or penalties by levy or a proceeding in court.
    (d) Effective date. The provisions of this section are effective as 
of December 19, 1989.

[T.D. 8382, 56 FR 67519, Dec. 31, 1991, T.D. 8382, 57 FR 6061, Feb. 19, 
1992]



Sec. 1.6695-1  Other assessable penalties with respect to the preparation of income tax returns for other persons.

    (a) Failure to furnish copy to taxpayer. (1) A person who is an 
income tax return preparer of any return of tax under subtitle A of the 
Internal Revenue Code or claim for refund of tax under subtitle A of the 
Internal Revenue Code and who fails to satisfy the requirements imposed 
by section 6107(a) and Sec. 1.6107-1 (a) and (c) to furnish a copy of 
the return or claim for refund to the taxpayer (or nontaxable entity), 
shall be subject to a penalty of $50 for such failure, with a maximum 
penalty of $25,000 per person imposed with respect to each calendar 
year, unless it is shown that the failure is due to reasonable cause and 
not due to willful neglect. Thus, no penalty may be imposed under 
section 6695(a) and this paragraph (a)(1) upon a person who is an income 
tax return preparer solely by reason of--
    (i) Section 301.7701-15 (a)(2) and (b) on account of having given 
advice on specific issues of law; or
    (ii) Section 301.7701-15(b)(3) on account of having prepared the 
return solely because of having prepared another return which affects 
amounts reported on the return.
    (2) No penalty may be imposed under section 6695(a) and paragraph 
(a)(1) of this section upon an income tax return preparer who furnishes 
a copy of the return or claim for refund to a taxpayer:
    (i) Who holds an elected or politically appointed position with the 
government of the United States or a State or political subdivision 
thereof; and
    (ii) Who, in order faithfully to carry out his official duties, has 
so arranged his affairs that he has less than full knowledge of the 
property which he holds or of the debts for which he is responsible, if 
information is deleted from the copy in order to preserve or maintain 
this arrangement.
    (b) Failure to sign return. (1)Unless the Secretary has prescribed 
another method of signing pursuant to Sec. 301.6061-1(b) of this chapter 
on or after July 21, 1995, an individual who is an income tax return 
preparer with respect to a return of tax under subtitle A of the 
Internal Revenue Code (Code) or claim for refund of tax under subtitle A 
of the Code shall manually sign the return or claim for refund (which 
may be a photocopy) in the appropriate space provided on the return or 
claim for refund after it is completed and before it is presented to the 
taxpayer (or nontaxable entity) for signature. Except as provided in 
paragraphs (b)(4) (iii) and (iv) of this section, an individual preparer 
may not satisfy this requirement by use of a facsimile signature stamp 
or signed

[[Page 858]]

gummed label. If the preparer is unavailable for signature, another 
preparer shall review the entire preparation of the return or claim for 
refund, and then shall manually sign the return or claim for refund.
    (2) If more than one income tax return preparer is involved in the 
preparation of the return or claim for refund, the individual preparer 
who has the primary responsibility as between or among the preparers for 
the overall substantive accuracy of the preparation of such return or 
claim for refund shall be considered to be the income tax return 
preparer for purposes of this paragraph.
    (3) The application of paragraphs (b) (1) and (2) of this section is 
illustrated by the following examples:

    Example (1). X law firm employs Y, a lawyer, to prepare for 
compensation returns and claims for refund of taxes. X is employed by T, 
a taxpayer, to prepare his 1977 Federal tax return. X assigns Y to 
prepare T's return. Y obtains the information necessary for completing 
the return from T and makes determinations with respect to the proper 
application of the tax laws to such information in order to determine 
T's tax liability. Y then forwards such information to C, a computer tax 
service which performs the mathematical computations and prints the 
return form by means of computers. C then sends the completed return to 
Y who reviews the accuracy of the return. Y is the individual preparer 
who is primarily responsible for the overall accuracy of T's return. Y 
must sign the return as preparer.
    Example (2). X partnership is a national accounting firm which 
prepares for compensation returns and claims for refund of taxes. A and 
B, employees of X, are involved in preparing the 1977 tax return of T 
Corporation. After they complete the return, including the gathering of 
the necessary information, the proper application of the tax laws to 
such information, and the performance of the necessary mathematical 
computations, C, a supervisory employee of X, reviews the return. As 
part of this review, C reviews the information provided and the 
application of the tax laws to this information. The mathematical 
computations and carried-forward amounts are proved by D, an employee of 
X's comparing and proving department. The policies and practices of X 
require that P, a partner, finally review the return. The scope of P's 
review includes reviewing the information provided by applying to this 
information his knowledge of T's affairs, observing that X's policies 
and practices have been followed, and making the final determination 
with respect to the proper application of the tax laws to determine T's 
tax liability. P may or may not exercise these responsibilities, or may 
exercise them to a greater or lesser extent, depending on the degree of 
complexity of the return, his confidence in C (or A and B), and other 
factors. P is the individual preparer who is primarily responsible for 
the overall accuracy of T's return. P must sign the return as preparer.
    Example (3). C corporation maintains an office in Seattle, 
Washington, for the purpose of preparing for compensation returns and 
claims for refund of taxes. C makes compensatory arrangements with 
individuals (but provides no working facilities) in several States to 
collect information from taxpayers and to make determinations with 
respect to the proper application of the tax laws to the information in 
order to determine the tax liabilities of such taxpayers. E, an 
individual, who has such an arrangement in Los Angeles with C, collects 
information from T, a taxpayer, and completes a worksheet kit supplied 
by C which is stamped with E's name and an identification number 
assigned to E by C. In this process, E classifies this information in 
appropriate income and deduction categories for the tax determination. 
The completed worksheet kit signed by E, is then mailed to C. D, an 
employee in C's office, reviews the worksheet kit to make sure it was 
properly completed. D does not review the information obtained from T 
for its validity or accuracy. D may, but did not, make the final 
determination with respect to the proper application of tax laws to the 
information. The data from the worksheet is entered into a computer and 
the return form is completed. The return is prepared for submission to T 
with filing instructions. E is the individual preparer primarily 
responsible for the overall accuracy of T's return. E must sign the 
return as preparer.
    Example (4). X employs A, B, and C to prepare income tax returns for 
taxpayers. After A and B have collected the information from the 
taxpayer and applied the tax laws to the information, the return form is 
completed by computer service. On the day the returns prepared by A and 
B are ready for their signatures, A is away from the city for 1 week on 
another assignment and B is on detail to another office for the day. C 
may sign the returns prepared by A, provided that (i) C reviews the 
information obtained by A relative to the taxpayer, and (ii) C reviews 
the preparation of each return prepared by A. C may not sign the returns 
prepared by B because B is available.

    (4)(i) The manual signature requirement of paragraphs (b) (1) and 
(2) of this section may be satisfied by a photocopy of a copy of the 
return or claim for refund which copy is manually signed by the preparer 
after completion

[[Page 859]]

of its preparation. After a copy of the return or claim for refund is 
signed by the preparer and before it is photocopied, no person other 
than the preparer may alter any entries on the copy other than to 
correct arithmetical errors discernible on the return or claim for 
refund. The employer of the preparer or the partnership in which the 
preparer is a partner, or the preparer (if not employed or engaged by a 
preparer and not a partner in a partnership which is a preparer), shall 
retain the manually signed copy of the return or claim for refund. A 
record of any arithmetical errors corrected shall be retained by the 
person required to retain the manually signed copy of the return or 
claim for refund and made available upon request.
    (ii) If mechanical preparation of the return or claim for refund is 
accomplished by computer not under the control of the individual 
preparer, then the manual signature requirement of paragraphs (b) (1) 
and (2) of this section may be satisfied by a manually signed 
attestation by the individual preparer attached to the return or claim 
for refund that all the information contained in the return or claim for 
refund was obtained from the taxpayer and is true and correct to the 
best of his knowledge, but only if that information (including any 
supplemental written information provided and signed by the preparer) is 
not altered on the return or claim for refund by another person. For 
purposes of the preceding sentence, the correction of arithmetical or 
clerical errors, discernible from the information submitted by the 
preparer does not constitute an alteration. The information submitted by 
the preparer shall be retained by the employer of the preparer or by the 
partnership in which the preparer is a partner, or by the preparer (if 
not employed or engaged by a preparer and not a partner in a partnership 
which is a preparer). A record of any arithmetical or clerical errors 
corrected shall be retained by the person required to retain the 
information submitted by the preparer and made available upon request.
    (iii) A preparer of a return or claim for refund for a nonresident 
alien individual taxpayer who is authorized to sign the return or claim 
for refund for the taxpayer may satisfy the manual signature requirement 
of paragraphs (b) (1) and (2) of this section by a facsimile signature 
if the preparer is permitted to use a facsimile signature in signing the 
return or claim for refund for the taxpayer. This subdivision (iii) 
shall apply only if the preparer submits to the Internal Revenue Service 
with the returns or claims for refund bearing the preparer's facsimile 
signature a letter, manually signed by the preparer, indentifying by 
taxpayer name and identification number each return or claim for refund 
bearing the facsimile signature and declaring that the facsimile 
signature appearing on these returns or claims for refund is the 
signature used by the preparer to sign these documents. After the 
facsimile signature is affixed, no person other than the preparer may 
alter any entries on the return or claim for refund other than to 
correct arithmetical errors discernible on the return or claim for 
refund. The employer of the preparer or the partnership in which the 
preparer is a partner, or the preparer (if not employed or engaged by a 
preparer and not a partner in a partnership which is a preparer) shall 
retain a manually signed copy of the letter submitted to the Internal 
Revenue Service with the returns or claims for refund. A record of any 
arithmetical errors corrected shall be retained by the person required 
to retain the manually signed letter and made available upon request.
    (iv) A preparer of a fiduciary return may satisfy the manual 
signature requirement of paragraphs (b) (1) and (2) of this section by a 
facsimile signature only if the preparer submits to the Internal Revenue 
Service with the returns bearing the preparer's facsimile signature a 
letter, manually signed by the preparer, identifying by taxpayer name 
and identification number each return bearing the facsimile signature 
and declaring under penalties of perjury that the facsimile signature 
appearing on these returns is the signature used by the preparer to sign 
these documents. After the facsimile signature is affixed, no person 
other than the preparer may alter any entries on

[[Page 860]]

the return other than to correct arithmetical errors discernable on the 
return. The employer of the preparer or the partnership in which the 
preparer is a partner, or the preparer (if not employed or engaged by a 
preparer and not a partner in a partnership which is a preparer), shall 
retain a manually signed copy of the letter submitted to the Internal 
Revenue Service with the returns. A record of any arithmetical errors 
corrected shall be retained by the person required to keep the manually 
signed letter and that person shall make the record available to the 
Internal Revenue Service upon request. The preparer of a fiduciary claim 
for refund may not satisfy the manual signature requirement of 
paragraphs (b) (1) and (2) of this section by a facsimile signature.
    (v) Any items required to be retained and kept available for 
inspection under paragraph (b)(4) (i), (ii), (iii), or (iv) of this 
section shall be retained and kept available for inspection for the same 
period that the material described in Sec. 1.6107-1(b) must be retained 
and kept available for inspection.
    (vi) If the district director, service center director, or 
compliance center director (director) determines that a preparer or 
preparers have abused the permissive signature rules of this paragraph 
(b)(4), such as by altering the return or claim for refund after 
signature (in contravention of paragraph (b)(4)(i) of this section), by 
altering information on the return or claim for refund after attestation 
(in contravention of paragraph (b)(4)(ii) of this section), or by 
failing to comply with the provisions of paragraph (b)(4) (iii) or (iv) 
of this section, then the director may, by written notice, prospectively 
deny to the preparer or preparers the right to use the permissive 
signature rules of this paragraph (b)(4).
    (5) An individual required by this paragraph (b) to sign a return or 
claim for refund shall be subject to a penalty of $50 for each failure 
to sign, with a maximum of $25,000 per person imposed with respect to 
each calendar year, unless it is shown that the failure is due to 
reasonable cause and not due to willful neglect. For purposes of this 
paragraph (b), reasonable cause is a cause which arises despite ordinary 
care and prudence exercised by the individual preparer. Thus, no penalty 
may be imposed under section 6695(b) and this paragraph (b) upon a 
person who is an income tax return preparer solely by reason of--
    (i) Section 301.7701-15(a)(2) and (b) on account of having given 
advice on specific issues of law; or
    (ii) Section 301.7701-15(b)(3) on account of having prepared the 
return solely because of having prepared another return which affects 
amounts reported on the return.

If the preparer asserts reasonable cause for failure to sign, the 
Service shall require a written statement in substantiation of the 
preparer's claim of reasonable cause.
    (c) Failure to furnish identifying number. (1) A person who is an 
income tax return preparer of any return of tax under subtitle A of the 
Internal Revenue Code or claim for refund of tax under subtitle A of the 
Internal Revenue Code and who fails to satisfy the requirement of 
section 6109(a)(4) and Sec. 1.6109-2(a) to furnish one or more 
identifying numbers of preparers on a return or claim for refund shall 
be subject to a penalty of $50 for each failure, with a maximum of 
$25,000 per person imposed with respect to each calendar year, unless it 
is shown that the failure is due to reasonable cause and not due to 
willful neglect. Thus, no penalty may be imposed under section 6695(c) 
and this paragraph (c)(1) upon a person who is an income tax return 
preparer solely by reason of--
    (i) Section 301.7701-15 (a)(2) and (b) on account of having given 
advice on specific issues of law; or
    (ii) Section 301.7701-15(b)(3) on account of having prepared the 
return solely because of having prepared another return which affects 
amounts reported on the return.
    (2) No penalty may be imposed under section 6695(c) and paragraph 
(c)(1) of this section upon:
    (i) A preparer who is employed (or engaged) by a person who is also 
a preparer of the return or claim for refund, or
    (ii) A preparer who is a partner in a partnership which is also a 
preparer of the return or claim for refund.

[[Page 861]]

    (3) No more than one penalty of $50 may be imposed under section 
6695(c) and paragraph (c)(1) of this section with respect to a single 
return or claim for refund.
    (d) Failure to retain copy or record. (1) A person who is an income 
tax return preparer of any return of tax under subtitle A of the 
Internal Revenue Code of 1954 or claim for refund of tax under subtitle 
A of the Internal Revenue Code of 1954 and who fails to satisfy the 
reruirements imposed upon him by section 6107(b) and Sec. 1.6107-1 (b) 
and (c) (other than the record requirement described in both 
Sec. 1.6107-1(b) (2) and (3)) to retain and make available a copy of the 
return or claim for refund, or to include the return or claim for refund 
in a record of returns and claims for refund and make the record 
available for inspection, shall be subject to a penalty of $50 for the 
failure, unless it is shown that the failure is due to reasonable cause 
and not due to willful neglect. Thus, no penalty may be imposed under 
section 6695(d) and this paragraph (d)(1) upon a person who is an income 
tax return preparer solely by reason of:
    (i) Section 301.7701-15 (a)(2) and (b) on account of having given 
advice on specific issues of law; or
    (ii) Section 301.7701-15(b)(3) on account of having prepared the 
return solely because of having prepared another return which affects 
amounts reported on the return.
    (2) A person may not, for returns or claims for refund presented to 
the taxpayers (or nontaxable entities) during any single return period, 
be subject to more than $25,000 in penalties under section 6695(d) and 
paragraph (d)(1) of this section.
    (e) Failure to file correct information returns. A person who is 
subject to the reporting requirements of section 6060 and Sec. 1.6060-1 
and who fails to satisfy these requirements shall pay a penalty of $50 
for each such failure, with a maximum of $25,000 per person imposed for 
each calendar year, unless such failure was due to reasonable cause and 
not due to willful neglect.
    (f) Negotiation of check. (1) No person who is an income tax return 
preparer may endorse or otherwise negotiate, directly or through an 
agent, a check for the refund of tax under subtitle A of the Internal 
Revenue Code of 1954 which is issued to a taxpayer other than the 
preparer if the person was a preparer of the return or claim for refund 
which gave rise to the refund check.
    (2) Section 6695(f) and paragraph (f)(1) and (3) of this section do 
not apply to a preparer-bank which--
    (i) Cashes a refund check and remits all of the cash to the taxpayer 
or accepts a refund check for deposit in full to a taxpayer's account, 
so long as the bank does not initially endorse or negotiate the check 
(unless the bank has made a loan to the taxpayer on the basis of the 
anticipated refund); or
    (ii) Endorses a refund check for deposit in full to a taxpayer's 
account pursuant to a written authorization of the taxpayer (unless the 
bank has made a loan to the taxpayer on the basis of the anticipated 
refund).

A preparer-bank may also subsequently endorse or negotiate a refund 
check as a part of the check-clearing process through the financial 
system after initial endorsement or negotiation.
    (3) The preparer shall be subject to a penalty of $500 for each 
endorsement or negotiation of a check prohibited under section 6695(f) 
and paragraph (f)(1) of this section.

(Sec. 6060(b), Internal Revenue Code of 1954 (90 Stat. 1691, (26 U.S.C. 
6060(b))); sec. 7805, Internal Revenue Code of 1954 (68A Stat. 917, (26 
U.S.C. 7805))

[T.D. 7519, 42 FR 59969, Nov. 23, 1977, as amended by T.D. 7640, 44 FR 
49452, Aug. 23, 1979; T.D. 8549, 59 FR 33432, June 29, 1994; T.D. 8689, 
61 FR 65320, Dec. 12, 1996]



Sec. 1.6696-1  Claims for credit or refund by income tax return preparers.

    (a) Notice and demand. (1) The Internal Revenue Service shall issue 
to each income tax return preparer one or more statements of notice and 
demand for payment for all penalties assessed against the preparer under 
section 6694 and Sec. 1.6694-1, or under section 6695 and Sec. 1.6695-1.
    (2) For the definition of the term ``income tax return preparer'' 
(or ``preparer''), see section 7701(a)(36) and Sec. 301.7701-15. 
However, a person who prepares a claim for credit or refund under this 
section for another person is

[[Page 862]]

not, with respect to that preparation, an income tax return preparer as 
defined in section 7701(a)(36) and Sec. 301.7701-15.
    (b) Claim filed by preparer. A claim for credit or refund of a 
penalty (or penalties) assessed against a preparer under section 6694 
and Sec. 1.6694-1, or under section 6695 and Sec. 1.6695-1, may be filed 
under this section only by the preparer (or the preparer's estate) 
against whom the penalty (or penalties) is assessed and not by for 
example, the preparer's employer. This paragraph is not intended, 
however, to impose any restrictions on the preparation of this claim for 
credit or refund. rified by a written declaration by the preparer that 
the information is provided under penalty of perjury.
    (c) Separation and consolidation of claims. (1) Unless paragraph 
(c)(2) of this section applies, a preparer shall file a separate claim 
for each penalty asserted in each statement of notice and demand issued 
to the preparer.
    (2) A preparer may file one or more consolidated claims for any or 
all penalties imposed on the preparer by a single Internal Revenue 
Service Center (or district director) under section 6695(a) and 
Sec. 1.6695-1(a) (relating to failure to furnish copy of return to 
taxpayer), section 6695(b) and Sec. 1.6695-1(b) (relating to failure to 
sign), section 6695(c) and Sec. 1.6695-1(c) (relating to failure to 
furnish identifying number), or under section 6695(d) and Sec. 1.6695(d) 
(relating to failure to retain copy of return or record), whether the 
penalties are asserted on a single or on separate statements of notice 
and demand. In addition, a preparer may file one consolidated claim for 
any or all penalties imposed on the preparer by a single Internal 
Revenue Service Center (or district director) under section 6695(e) and 
Sec. 1.6695-1(e) (relating to failure to file correct information 
return), which are asserted on a single statement of notice and demand.
    (d) Content of claim. Each claim for credit or refund or any penalty 
(or penalities) paid by a preparer under section 6694 and Sec. 1.6694-1, 
or under section 6695 and Sec. 1.6695-1, shall include the following 
information, verified by a written declaration by the preparer that the 
information is provided under penalty of perjury;
    (1) The preparers's name.
    (2) The preparer's identification number. If the preparer is:
    (i) An individual (not described in subdivision (iii) of this 
paragraph (d)(2)) who is a citizen or resident of the United States, the 
preparer's social security account number shall be provided;
    (ii) An individual who is not a citizen or resident of the United 
States and also was not employed (or engaged) by another preparer to 
prepare the document (or documents) with respect to which the penalty 
(or penalties) was assessed, the preparer's employer identification 
shall be provided; or
    (iii) A person (whether an individual, corporation, or partnership) 
who employed (or engaged) one or more persons to prepare the document 
(or documents) with respect to which the penalty (or penalties) was 
assessed, the preparer's employer identification number shall be 
provided.
    (3) The preparer's address where the Internal Revenue Service mailed 
the statement (or statements) of notice and demand and, if different, 
the preparer's address shown on the document (or documents) with respect 
to which the penalty (or penalities) was assessed.
    (4)(i) The address of the Internal Revenue Service Center (or 
district director) which issued to the preparer the statement (or 
statements) of noticve and demand for payment of the penalty (or 
penalties) included in the claim; and
    (ii) The date (or dates) and identifying number (or numbers) of the 
statement (or statements) of notice and demand.
    (5)(i) The identification, by amount, type, and document of which 
related, of each penalty included in the claim. Each document referred 
to in the preceding sentence shall be identified by the form title or 
number, by the taxpayer's (or nontaxable entity's) name and 
identification number, and by the taxable year to which the document 
relates;

[[Page 863]]

    (ii) The date (or dates) of payment of the amount (or amounts) of 
the penalty (or penalties) included in the claim; and
    (iii) The total amount claimed.
    (6) A statement setting forth in detail:
    (i) Each ground upon which each penalty overpayment claim is based; 
and
    (ii) Facts sufficient to apprise the Internal Revenue Servicve of 
the exact basis of each such claim.
    (e) Form for filing claim. Notwithstanding Sec. 301.640-2(c), Form 
6118 is the form prescribed for making a claim as provided in this 
section.
    (f) Place for filing claim.  A claim filed under this section shall 
be filed with the Internal Revenue Service Center (or district director) 
which issued to the preparer the statement (or statements) of notice and 
demand for payment of the penalty (or penalities) included in the claim.
    (g) Time for filing claim. (1) Except as provided in section 
6694(c)(1) and Sec. 1.6694-2, (a)(3)(ii) and (4), and in section 6694(d) 
and Sec. 1.6694-1(c):
    (i) A claim for a penalty paid by a preparer under section 6694 and 
Sec. 1.6694-1, or under section 6695 and Sec. 1.6695-1, shall be filed 
within 3 years from the date the payment was make; and
    (ii) A consolidated claim, permitted under paragraph (c)(2) of this 
section, shall be filed within 3 years from the first date of payment of 
any penalty included in the claim.

For purposes of this paragraph (g)(1), payment is considered made on the 
date payment is received by the Internal Revenue Service or, where 
applicable, on the date an amount is credited in satisfaction of the 
penalty.
    (2) The rules under sections 7502 and 7503 and the regulations 
thereunder apply to the timely filing of a claim as provided in this 
section.
    (h) Application of refund to outstanding liability of income tax 
return preparer. The Internal Revenue Service may, within the applicable 
period of limitation, credit any amount of an overpayment by a preparer 
of a penalty (or penalities) paid under section 6694 and Sec. 1.6694-1, 
or under section 6695 and Sec. 1.6695-1, against any outstanding 
liability for any tax (or for any interest, additional amount, addition 
to the tax, or assessable penalty) owed by the preparer making the 
overpayment. If a portion of an overpayment is so credited, only the 
balance will be refunded to the preparer.
    (i) Interest. (1) Section 6611 and the regulations thereunder apply 
to the payment by the Internal Revenue Service of interest on an 
overpayment by a preparer of a penalty (or penalties) paid under section 
6694 and Sec. 1.6694-1, or under section 6695 and Sec. 1.6695-1.
    (2) Section 6601 and the regulations thereunder apply to the payment 
of interest by a preparer to the Internal Revenue Service on any penalty 
(or penalties) assessed against the preparer under section 6694 and 
Sec. 1.6694-1 or under section 6695 and Sec. 1.6695-1.
    (j) Suits for refund of preparer penalty. (1) A preparer may not 
maintain a civil action for the recovery of any penalty paid under 
section 6694 and Sec. 1.6694-1 or under section 6695 and Sec. 1.6695-1, 
unless the preparer has previously filed a claim for credit or refund of 
the penalty as provided in this section (and the court has jurisdiction 
of the proceeding). See sections 6694(c) and 7422.
    (2)(i) Except as provided in section 6694(c)(2) and Sec. 1.6694-
2(b), the periods of limitation contained in section 6532 and the 
regulations thereunder apply to a preparer's suit for the recovery of 
any penalty paid under section 6694 and Sec. 1.6694-1, or under section 
6695 and Sec. 1.6695-1.
    (ii) The rules under section 7503 and the regulations thereunder 
apply to the timely commencement by a preparer of a suit for the 
recovery of any penalty paid under section 6694 and Sec. 1.6694-1, or 
under section 6695 and Sec. 1.6695-1.

[T.D. 7621, 44 FR 27985, May 14, 1979]



Sec. 1.6709-1T  Penalties with respect to mortgage credit certificates (temporary).

    (a) Material misstatement--(1) Negligence. If any person makes a 
material misstatement in any affidavit or other statement under a 
penalty of perjury made with respect to the issuance of a mortgage 
credit certificate and such misstatement is due to the negligence of 
that person, that person shall pay a penalty of $1,000 for each mortgage 
credti certificate with respect to which that misstatement was made.

[[Page 864]]

    (2) Fraud. If a misstatement described in subparagraph (1) is due to 
fraud on the part of the person making the misstatement, that person 
shall pay a penalty of $10,000 for each mortgage credit certificate with 
respect to which the fraudulent misstatement was made. The penalty 
imposed by this paragraph (a)(2) is in addition to any criminal penalty.
    (b) Reports. (1) Any person required by Sec. 1.25-8T to file a 
report with respect to any mortgage credit certificate who fails to file 
the report at the time and in the manner required by Sec. 1.25-8T shall 
pay a penalty of $200 for each mortgage credit certificate with respect 
to which that failure occurred. The preceding sentence shall not apply 
if it is shown that such failure is due to reasonable cause and not to 
willful neglect.
    (2) In the case of any report required under Sec. 1.25-8T(b), the 
aggregate amount of the penalty imposed by this paragraph shall not 
exceed $2,000.

[T.D. 8023, 50 FR 19355, May 8, 1985]

                 JEOPARDY, BANKRUPTCY, AND RECEIVERSHIPS



Sec. 1.6851-1  Termination assessments of income tax.

    (a) Authority for making--(1) In general. This section applies to 
assessments authorized by a district director under section 6851(a) 
(hereinafter referred to as termination assessments). The district 
director shall immediately authorize a termination assessment of the 
income tax for the current or preceding taxable year if the district 
director finds that a taxpayer designs to do an act which would tend to 
prejudice proceedings to collect the income tax for such year or years 
unless such proceedings are brought without delay. In addition, the 
district director shall immediately authorize such a termination 
assessment if the district director determines that the taxpayer designs 
to do any act which would tend to render such proceedings wholly or 
patially ineffective unless brought without delay. A termination 
assessment will be made if collection is determined to be in jeopardy 
because at least one of the following conditions exists.
    (i) The taxpayer is or appears to be designing quickly to depart 
from the United States or to conceal himself or herself.
    (ii) The taxpayer is or appears to be designing quickly to place 
his, her, or its property beyond the reach of the Government either by 
removing it from the United States, by concealing it, by dissipating it, 
or by transferring it to other persons.
    (iii) The taxpayer's financial solvency is or appears to be 
imperiled.

Paragraph (a)(1)(iii) of this section does not include cases where the 
taxpayer becomes insolvent by virtue of the accrual of the proposed 
assessment of tax, and penalty, if any. A tax assessed under this 
section shall become immediately due and payable and the district 
director shall serve upon such taxpayer notice and demand for immediate 
payment of such tax.
    (2) Computation of tax. If a termination assessment of the income 
tax for the current year is made, the income tax for such year shall be 
computed for the period beginning on the first day of such year and 
ending on the day of the assessment. A credit shall be allowed for any 
tax for the taxable year previously assessed under section 6851. The 
taxpayer is entitled to a deduction for the personal exemptions (as 
limited in the case of certain non-resident aliens) without any 
proration for or because of the short taxable period.
    (3) Taxable year not affected by termination. Notwithstanding any 
termination assessment a taxpayer shall file a return in accordance with 
section 6012 and the regulations thereunder for the taxpayer's full 
taxable year. The term ``full taxable year'' means the taxpayer's usual 
annual accounting period determined without regard to any action under 
section 6851 and this section. The return shall show all items of gross 
income, deductions, and credits for such taxable year. Any tax collected 
as a result of a termination assessment will be applied against the tax 
due for the taxpayer's full taxable year. Except as provided in 
Sec. 1.6851-2 (relating to departing aliens), no return is required to 
be filed for a terminated period other than a full taxable year.

[[Page 865]]

    (4) Evidence of compliance with income tax obligations. Citizens of 
the United States or of possessions of the United States departing from 
the United States or its possessions will not be required to procure 
certificates of compliance or to present any other evidence of 
compliance with income tax obligations. However, for the rules relating 
to the furnishing of evidence of compliance with the income tax 
obligations by certain departing aliens, see Sec. 1.6851-2.
    (5) Section 6851 inapplicable where section 6861 applies. No 
termination assessment for the preceding taxable year shall be made 
after the due date of the taxpayer's return for such year (determined 
with regard to extensions of time to file such return).
    (b) Notice of deficiency. Where notice and demand for payment 
(following a termination assessment) takes place after February 28, 
1977, the district director shall, within 60 days after the later of:
    (1) The date the taxpayer files a return for the full taxable year; 
or
    (2) The due date of such return (determined with regard to 
extensions); send the taxpayer a notice of deficiency under section 
6212(a). The amount of the deficiency shall be computed in accordance 
with section 6211 and the regulations thereunder. In applying section 
6211, the tax imposed and the amount shown upon the return shall be 
determined on the basis of the taxpayer's full taxable year. Thus, for 
example assume that on November 1, 1979, a termination assessment 
against A, a calendar year taxpayer, is made in the amount of $18,000. 
The termination assessment is for the period from January 1, 1979 
through November 1, 1979. Further assume that on or before April 15, 
1980, A files a form 1040 showing an income tax liability for the full 
year 1979 of $10,000. If the district director determines A's liability 
for tax for 1979 is $16,000, a notice of deficiency for $6,000 shall be 
sent to A on or before June 14, 1980. Assuming that the district 
director had collected the $18,000 assessed, $2,000 shall be refunded.
    (c) Immediate payment. The district director shall make demand for 
immediate payment of the amount of the termination assessment, and the 
taxpayer shall immediately pay such amount or shall immediately file the 
bond provided in section 6863.
    (d) Abatement. The provisions of Secs. 301.6861-1(e) and 301.6861-
1(f) relating to the abatement of jeopardy assessments, shall apply to 
assessments made under section 6851.

[T.D. 7575, 43 FR 58816, Dec. 18, 1978]



Sec. 1.6851-2   Certificates of compliance with income tax laws by departing aliens.

    (a) In general--(1) Requirement. The rules of this section are 
applicable, except as otherwise expressly provided, to any alien who 
departs from the United States or any of its possessions after January 
20, 1961. Except as provided in subparagraph (2) of this paragraph, no 
such alien, whether resident or nonresident, may depart from the United 
States unless he first procures a certificate that he has complied with 
all of the obligations imposed upon him by the income tax laws. In order 
to procure such a certificate, an alien who intends to depart from the 
United States (i) must file with the district director for the internal 
revenue district in which he is located the statements or returns 
required by paragraph (b) of this section to be filed before obtaining 
such certificate, (ii) must appear before such district director if the 
district director deems it necessary, and (iii) must pay any taxes 
required under paragraph (b) of this section to be paid before obtaining 
the certificate. Either such certificate of compliance, properly 
executed, or evidence that the alien is excepted under subparagraph (2) 
of this paragraph from obtaining the certificate must be presented at 
the point of departure. An alien who presents himself at the point of 
departure without a certificate of compliance, or evidence establishing 
that such a certificate is not required, will be subject at such 
departure point to examination by an internal revenue officer or 
employee and to the completion of returns and statements and payment of 
taxes as required by paragraph (b) of this section.
    (2) Exceptions--(i) Employees of foreign governments or 
international organizations--(a) Diplomatic representatives,

[[Page 866]]

their families and servants. (1) Representatives of foreign governments 
bearing diplomatic passports, whether accredited to the United States or 
other countries, and members of their households shall not, upon 
departure from the United States or any of its possessions, be examined 
as to their liability for United States income tax or be required to 
obtain a certificate of compliance. If a foreign government does not 
issue diplomatic passports but merely indicates on passports issued to 
members of its diplomatic service the status of the bearer as a member 
of such service, such passports are considered as diplomatic passports 
for income tax purposes.
    (2) Likewise, the servant of a diplomatic representative who 
accompanies any individual bearing a diplomatic passport upon departure 
from the United States or any of its possessions shall not be required, 
upon such departure, to obtain a certificate of compliance or to submit 
to examination as to his liability for United States income tax. If the 
departure of such a servant from the United States or any of its 
possessions is not made in the company of an individual bearing a 
diplomatic passport, the servant is required to obtain a certificate of 
compliance. However, such certificate will be issued to him on Form 2063 
without examination as to his income tax liability upon presentation to 
the district director for the internal revenue district in which the 
servant is located of a letter from the chief of the diplomatic mission 
to which the servant is attached certifying (i) that the name of the 
servant appears on the ``White List'', a list of employees of diplomatic 
missions, and (ii) that the servant is not obligated to the United 
States for any income tax, and will not be so obligated up to and 
including the intended date of departure.
    (b) Other employees. Any employee of an international organization 
or of a foreign government (other than a diplomatic representative to 
whom (a) of this subdivision applies) whose compensation for official 
services rendered to such organization or government is excluded from 
gross income under section 893 and who has received no gross income from 
sources within the United States, and any member of his household who 
has received no gross income from sources within the United States, 
shall not, upon departure from the United States or any of its 
possessions after November 30, 1962, be examined as to his liability for 
United States income tax or be required to obtain a certificate of 
compliance.
    (c) Effect of waiver. An alien who has filed with the Attorney 
General the waiver provided for under section 247(b) of the Immigration 
and Nationality Act (8 U.S.C. 1257(b)) is not entitled to the exception 
provided by this subdivision.
    (ii) Alien students, industrial trainees, and exchange visitors. A 
certificate of compliance shall not be required, and examination as to 
United States income tax liability shall not be made, upon the departure 
from the United States or any of its possessions of--
    (A) An alien student, industrial trainee, or exchange visitor, and 
any spouse and children of that alien, admitted solely on an F-1, F-2, 
H-3, H-4, J-1 or J-2 visa, who has received no gross income from sources 
inside the United States other than--
    (1) Allowances to cover expenses incident to study or training in 
the United States (including expenses for travel, maintenance, and 
tuition);
    (2) The value of any services or accommodations furnished incident 
to such study or training;
    (3) Income derived in accordance with the employment authorizations 
in 8 CFR 274a.12(b) and (c) that apply to the alien's visa; or
    (4) Interest on deposits described in section 871(i)(2)(A); or
    (B) An alien student, and any spouse or children of that alien 
admitted solely on an M-1 or M-2 visa, who has received no gross income 
from sources inside the United States other than income derived in 
accordance with the employment authorization in 8 CFR 274a.12(c)(6) or 
interest on deposits described in section 871(i)(2)(A).
    (iii) Other aliens temporarily in the United States. A certificate 
of compliance shall not be required, and examination as to United States 
income tax liability shall not be made, upon the departure from the 
United States or any of its possessions of an alien hereinafter 
described in this subdivision,

[[Page 867]]

unless the district director has reason to believe that such alien has 
received taxable income during the taxable year up to and including the 
date of departure or during the preceding taxable year and that 
collection of income tax from such alien will be jeopardized by his 
departure from the United States:
    (a) An alien visitor for pleasure admitted solely on a B-2 visa;
    (b) An alien visitor for business admitted on a B-1 visa, or on both 
a B-1 visa and a B-2 visa, who does not remain in the United States or a 
possession thereof for a period or periods exceeding a total of 90 days 
during the taxable year;
    (c) An alien in transit through the United States or any of its 
possessions on a C-1 visa or under a contract, including a bond 
agreement, between a transportation line and the Attorney General 
pursuant to section 238(d) of the Immigration and Nationality Act (8 
U.S.C. 1228(d));
    (d) An alien who is admitted to the United States on a border-
crossing identification card or with respect to whom passports, visas, 
and border-crossing identification cards are not required, if such alien 
is a visitor for pleasure, or if such alien is a visitor for business 
who does not remain in the United States or a possession thereof for a 
period or periods exceeding a total of 90 days during the taxable year, 
or if such alien is in transit through the United States or any of its 
possessions;
    (e) An alien military trainee admitted to the United States to 
pursue a course of instruction under the auspices of the Department of 
Defense who departs from the United States on official military travel 
orders; or
    (f) An alien resident of Canada or Mexico who commutes between such 
country and the United States at frequent intervals for the purpose of 
employment and whose wages are subject to the withholding of tax.
    (b) Issuance of certificate of compliance--(1) In general. (i) Upon 
the departure of an alien required to secure a certificate of compliance 
under paragraph (a) of this section, the district director shall 
determine whether the departure of such alien jeopardizes the collection 
of any income tax for the current or the preceding taxable year, but the 
district director may determine that jeopardy does not exist in some 
cases. If the district director finds that the departure of such an 
alien results in jeopardy, the taxable period of the alien will be 
terminated, and the alien will be required to file returns and make 
payment of tax in accordance with subparagraph (3)(iii) of this 
paragraph. On the other hand, if the district director finds that the 
departure of the alien does not result in jeopardy, the alien will be 
required to file the statement or returns required by subparagraph (2) 
or (3)(ii) of this paragraph, but will not be required to pay income tax 
before the usual time for payment.
    (ii) The departure of an alien who is a resident of the United 
States or a possession thereof (or treated as a resident under section 
6013 (g) or (h)) and who intends to continue such residence (or 
treatment as a resident) shall be treated as not resulting in jeopardy, 
and thus not requiring termination of his taxable period, except when 
the district director has information indicating that the alien intends 
by such departure to avoid the payment of his income tax. In the case of 
a nonresident alien (including a resident alien discontinuing 
residence), the fact that the alien intends to depart from the United 
States will justify termination of his taxable period unless the alien 
establishes to the satisfaction of the district director that he intends 
to return to the United States and that his departure will not 
jeopardize collection of the tax. The determination of whether the 
departure of the alien results in jeopardy will be made on examination 
of all the facts in the case. Evidence tending to establish that 
jeopardy does not result from the departure of the alien may be 
provided, for example, by information showing that the alien is engaged 
in trade or business in the United States or that he leaves sufficient 
property in the United States to secure payment of his income tax for 
the taxable year and of any income tax for the preceding year which 
remains unpaid.
    (2) Alien having no taxable income and resident alien whose taxable 
period is not terminated. A statement on Form 2063

[[Page 868]]

shall be filed with the district director by every alien required to 
obtain a certificate of compliance:
    (i) Who is a resident of the United States and whose taxable period 
is not terminated either because he has had no taxable income for the 
taxable year up to and including the date of his departure (and for the 
preceding taxable year where the period for making the income tax return 
for such year has not expired) or because, although he has had taxable 
income for such period or periods, the district director has not found 
that this departure jeopardizes collection of the tax on such income; or
    (ii) Who is not a resident of the United States and who has had no 
taxable income for the taxable year up to and including the date of his 
departure (and for the preceding taxable year where the period for 
making the income tax return for such year has not expired).

Any alien described in subdivision (i) or (ii) of this subparagraph who 
is in default in making return of, or paying, income tax for any taxable 
year shall, in addition, file with the district director any returns 
which have not been made as required and pay to the district director 
the amount of any tax for which he is in default. Upon compliance by an 
alien with the foregoing requirements of this subparagraph, the district 
director shall execute and issue to the alien the certificate of 
compliance attached to Form 2063. The certificate of compliance so 
issued shall be effective for all departures of the alien during his 
current taxable year, subject to revocation upon any subsequent 
departure should the district director have reason to believe that such 
subsequent departure would result in jeopardy. The statement required of 
a resident alien under this subparagraph, if made before January 21, 
1961, with respect to a departure after January 20, 1961, may be made on 
a Form 1040C in lieu of a Form 2063.
    (3) Nonresident alien having taxable income and resident alien whose 
taxable period is terminated--(i) Nonresident alien having taxable 
income. Every nonresident alien required to obtain a certificate of 
compliance (but not described in subparagraph (2) of this paragraph) who 
wishes to establish that his departure does not result in jeopardy shall 
furnish to the district director such information as may be required for 
the purpose of determining whether the departure of the alien 
jeopardizes collection of the income tax and thus requires termination 
of his taxable period.
    (ii) Nonresident alien whose taxable period is not terminated. Every 
nonresident alien described in subdivision (i) of this subparagraph 
whose taxable period is not terminated upon departure shall file with 
the district director:
    (a) A return in duplicate on Form 1040C for the taxable year of his 
intended departure, showing income received, and reasonably expected to 
be received, during the entire taxable year within which the departure 
occurs; and
    (b) Any income tax returns which have not been filed as required.

Upon compliance by the alien with the foregoing requirements of this 
subdivision, and the payment of any income tax for which he is in 
default, the district director shall execute and issue to the alien the 
certificate of compliance on the duplicate copy of Form 1040C. The 
certificate of compliance so issued shall be effective for all 
departures of the alien during his current taxable year, subject to 
revocation by the district director upon any subsequent departure if the 
taxable period of the alien is terminated on such subsequent departure.
    (iii) Alien (whether resident or nonresident) whose taxable period 
is terminated. Every alien required to obtain a certificate of 
compliance, whether resident or nonresident, whose taxable period is 
terminated upon departure shall file with the district director:
    (a) A return in duplicate on Form 1040C for the short taxable period 
resulting from such termination, showing income received, and reasonably 
expected to be received, during the taxable year up to and including the 
date of departure;
    (b) Where the period for filing has not expired, the return required 
under section 6012 and Sec. 1.6012-1 for the preceding taxable year; and
    (c) Any other income tax returns which have not been filed as 
required.

Upon compliance with the foregoing requirements of this subdivision, and

[[Page 869]]

payment of the income tax required to be shown on the returns filed 
pursuant to (a) and (b) of this subdivision and of any income tax due 
and owing for prior years, the departing alien will be issued the 
certificate of compliance on the duplicate copy of Form 1040C. The 
certificate of compliance so issued shall be effective only for the 
specific departure with respect to which it is issued. A departing alien 
may postpone payment of the tax required to be shown on the returns 
filed in accordance with (a) and (b) of this subdivision until the usual 
time of payment by furnishing a bond as provided in Sec. 301.6863-1.
    (4) Joint return on Form 1040C. A departing alien may not file a 
joint return on Form 1040C unless:
    (i) Such alien and his spouse may reasonably be expected to be 
eligible to file a joint return at the normal close of their taxable 
periods for which the return is made; and
    (ii) If the taxable period of such alien is terminated, the taxable 
periods of both spouses are so terminated as to end at the same time.
    (5) Annual return. Notwithstanding that Form 1040C has been filed 
for either the entire taxable year of departure or for a terminated 
period, the return required under section 6012 and Sec. 1.6012-1 for 
such taxable year shall be filed. Any income tax paid on income shown on 
the return on Form 1040C shall be applied against the tax determined to 
be due on the income required to be shown on the subsequent return under 
section 6012 and Sec. 1.6012-1.

[T.D. 6537, 26 FR 547, Jan. 20, 1961, as amended by T.D. 6620, 27 FR 
11803, Nov. 30, 1962; T.D. 7575, 43 FR 58817, Dec. 18, 1978; T.D. 7670, 
45 FR 6931, Jan. 31, 1980; T.D. 8332, 56 FR 3034, Jan. 28, 1991; T.D. 
8526, 59 FR 10067, Mar. 3, 1994]



Sec. 1.6851-3  Furnishing of bond to insure payment; cross reference.

    See section 6863 and Sec. 301.6863-1 of this chapter (regulations on 
procedure and administration) for rules relating to the furnishing of 
bond to stay collection.

[T.D. 7575, 43 FR 58817, Dec. 18, 1978]

                              The Tax Court

 Declaratory Judgments Relating To Qualification of Certain Retirement 
                                  Plans



Sec. 1.7476-1  Interested parties.

    (a) In general--(1) Notice requirement. Before the Internal Revenue 
Service can issue an advance determination as to the qualified status of 
certain retirement plans, the applicant must provide the Internal 
Revenue Service with satisfactory evidence that such applicant has 
notified the persons who qualify as interested parties, under 
regulations prescribed under section 7476(b)(1) of the Code, of the 
application for such determination. See section 3001(a) of the Employee 
Retirement Income Security Act of 1974 (88 Stat. 995). For the rules for 
giving notice to interested parties, see Sec. 1.7476-2 and paragraph (o) 
of Sec. 601.201 of this chapter (Statement of Procedural Rules).
    (2) Declaratory judgments. Section 7476 provides a procedure for 
obtaining a declaratory judgment by the Tax Court with respect to the 
initial or continuing qualification under subchapter D of chapter 1 of 
the Code of a retirement plan defined in section 7476(d), in the case of 
an actual controversy involving:
    (i) A determination by the Internal Revenue Service with respect to 
the initial qualification or continuing qualification under such 
subchapter of such a plan, or
    (ii) A failure by the Internal Revenue Service to make a 
determination with respect to:
    (A) Such initial qualification of such a plan, or
    (B) Such continuing qualification of such a plan, if the controversy 
arises from a plan amendment or plan termination.

Under section 7476(d) the term ``retirement plan'' means a pension 
profitsharing, or stock bonus plan described in section 401(a), or a 
trust which is part of such a plan, an annuity plan described in section 
403(a), or a bond purchase plan described in section 405(a). This 
procedure is available only to the employer, the plan administrator as 
defined in section 414(g), an

[[Page 870]]

employee who qualifies as an interested party as defined in this 
section, or the Pension Benefit Guaranty Corporation, where such person 
has an actual controversy involving a determination described in 
paragraph (a)(2)(ii) of this section. In the case of an application for 
such a determination, this procedure is available only if such 
determination or failure to make such determination is with respect to 
an application described in paragraph (b)(7) of this section. In 
addition, in the case of such an application, if a petitioner was the 
applicant for the determination, the Tax Court may hold, under section 
7476(b)(2), the filing of a pleading for a declaratory judgment to be 
premature unless the petitioner establishes to the satisfaction of the 
Tax Court that such petitioner has caused the interested parties to be 
notified in accordance with this section and Sec. 1.7476.2
    (b) Interested parties--(1) In general. If paragraphs (b) (2), (3), 
(4), and (5) of this section do not apply, then, except as otherwise 
provided in paragraphs (b)(6) (i), (ii), and (iii) of this section, the 
following persons shall be interested parties with respect to an 
application for an advance determination as to the qualified status of a 
retirement plan:
    (i) All present employees of the employer who are eligible to 
participate in the plan (as defined in paragraph (d)(2) of this 
section), and
    (ii) All other present employees of the employer whose principal 
place of employment (as defined in paragraph (d)(3) of this section) is 
the same as the principal place of employment of any employee described 
in paragraph (b)(1)(i) of this section.
    (2) Certain plans covering a principal owner. Notwithstanding 
paragraph (b)(1) of this section, where:
    (i) A principal owner (within the meaning of paragraph (d)(2) of 
Sec. 1.414(c)-3) of the employer or of a common parent of the employer 
(where the employer is a member of a parent-subsidiary group of trades 
or businesses under common control under section 414 (b) or (c)) is 
eligible to participate in the plan, and
    (ii) The number of employees employed by such employer (including 
all employees who by reason of section 414 (b) or (c) are treated as 
employees of such employer) is 100 or less then except as otherwise 
provided in paragraphs (b)(6) (i), (ii), and (iv) of this section, all 
present employees of the employer shall be interested parties with 
respect to an application for an advance determinations as to the 
qualified status of the retirement plan.
    (3) Certain plan amendments. In the case of an application for an 
advance determination as to whether a plan amendment affects the 
continuing qualification of a plan, if:
    (i) There is outstanding a favorable determination letter for a plan 
year to which section 410 applies, and
    (ii) The amendment does not alter the participation provisions of 
the plan, then paragraphs (b) (1) and (2) of this section shall not 
apply, and all present employees of the employer who are eligible to 
participate in the plan (as defined in paragraph (d)(2) of this 
section), shall be interested parties. For the purpose of this paragraph 
(b)(3), if qualification of the plan is dependent upon benefits under 
the plan integrating with those benefits provided under the Social 
Security Act or a similar program, and if such integration results in 
excluding any employee or could possibly result in any participant's 
benefit being reduced to zero and the amendment alters contributions to 
or the amount of benefits payable under the plan, then the amendment 
shall be considered to alter the participation provisions of the plan.
    (4) Collectively bargained plans. In the case of an application with 
respect to a plan described in section 413(a) (relating to collectively 
bargained plans), paragraphs (b) (1), (2) and (3) of this section shall 
not apply and all present employees covered by a collective-bargaining 
agreement pursuant to which the plan is maintained shall be interested 
parties.
    (5) Plan terminations. In the case of an application for an advance 
determination with respect to whether a plan termination affects the 
continuing qualification of a retirement plan, paragraphs (b) (1), (2), 
(3) and (4) of this section shall not apply, and all present employees 
with accrued benefits under the plan, all former employees with

[[Page 871]]

vested benefits under the plan, and all beneficiaries of decreased 
former employees currently receiving benefits under the plan, shall be 
interested parties.
    (6) Exceptions. (i) In the case of an application to which paragraph 
(b) (1) or (2) of this section applies, an employee who is not eligible 
to participate in the plan shall not be an interested party if such 
employee is excluded from consideration for purposes of section 
410(b)(1) by reason of section 410(b)(2) (B) or (C).
    (ii) In the case of an application to which paragraph (b) (1) or (2) 
of this section applies, an application to which paragraph (b) (1) or 
(2) of this section applies, an employee who is not eligible to 
participate in the plan shall not be an interested party if such plan 
meets the eligibility standards of section 410(b)(1)(A).
    (iii) In the case of an application to which paragraph (b)(1) of 
this section applies, an employee who is not eligible to participate in 
the plan shall not be an interested party with respect to such plan if 
such employee is eligible to participate in any other plan of the 
employer with respect to which a favorable determination letter is 
outstanding (whether or not issued pursuant to an application to which 
this section applies), or in such a plan of another employer whose 
employees, by reason of section 414 (b) or (c), are treated as employees 
of the employer making the application.
    (iv) In the case of an application to which paragraph (b)(2) of this 
section applies, an employee who is not eligible to participate in the 
plan shall not be an interested party with respect to such plan if such 
employee is eligible to participate in a plan described in section 
413(a) (relating to collectively bargained plans) maintained by the 
employer with respect to which a favorable determination letter is 
outstanding (whether or not issued purusant to an application to which 
this section applies), or in such a plan of another employer whose 
employees by reason of section 414 (b) or (c), are treated as employees 
of the employer making the application.
    (7) Applicability. Paragraph (b) of this section shall only apply in 
the case of an application made to the internal Revenue Service 
requesting an advance determination that a retirement plan as defined in 
section 7476(d) and paragraph (a) of this section meets the requirements 
for qualification for a plan year or years to which section 410 applies 
to such plan. See paragraphs (c) (4) and (5) of this section for special 
rules in respect of years to which section 410 applies.
    (c) Special rules. For purposes of paragraph (b) of this section and 
Sec. 1.7476-2:
    (1) Time of determination. The status of an individual as an 
interested party and as a present employee or former employee shall be 
determined as of a date determined by the applicant, which date shall 
not be earlier than five business days before the first date on which 
the notice of the application is given to interested parties pursuant to 
Sec. 1.7476-2 nor later than the date on which such notice is given.
    (2) Controlled groups, etc. An individual shall be considered to be 
an employee of an employer if such employee is treated as that 
employer's employee under section 414 (b) or (c).
    (3) Self-employed individuals. A self-employed individual shall be 
considered an employee.
    (4) Years to which section 410 relates. For purposes of paragraph 
(b)(7) of this section, section 410 shall be considered to apply to a 
plan year if an election has been made under section 1017(d) of the 
Employee Retirement Income Security Act of 1974 to have section 410 
apply to such plan year, whether or not the election is conditioned upon 
the issuance by the Commissioner of a favorable determination letter.
    (5) Government, church plans, etc. In the case of an organization 
described in section 410(c)(1), section 410 will be considered to apply 
to a plan year of such organization for any plan year to which section 
410(c)(2) applies to such plan.
    (d) Definitions. For the purposes of paragraph (b) of this section 
and Sec. 1.7476-2:
    (1) Employer. The term ``employer'' includes all employers who 
maintain the plan with respect to which an advance determination 
applies. A sole proprietor shall be considered such person's own 
employer and a partnership

[[Page 872]]

is considered to be the employer of each of the partners.
    (2) Eligible to participate. For purposes of this section, an 
employee is eligible to participate in a plan if such employee:
    (i) Is a participant in the plan,
    (ii) Would be a participant in the plan if such employee met the 
minimum age and service requirements of the plan or
    (iii) Would be a participant in the plan upon making mandatory 
employee contributions.

In applying this paragraph (d)(2), plan provisions (with respect to 
which the determination regarding qualification is to be based) not in 
effect on the first date on which notice is given to interested parties 
shall be treated as though they were in effect on such date.
    (3) Place of employment. A place of employment includes all 
worksites within a plant, installation, store, office, or similar 
facility. Any employee who has no principal place of employment shall be 
treated as though such employee's principal place of employment is that 
place to which such employee regularly reports to the employer.

[T.D. 7421, 41 FR 20876, May 21, 1976; 41 FR 22561, June 4, 1976, as 
amended by T.D. 8179, 53 FR 6613, Mar. 2, 1988]



Sec. 1.7476-2   Notice to interested parties.

    (a) In general. Any person applying to a district director for a 
determination described in paragraph (b)(7) of Sec. 1.7476-1 shall cause 
notice of the application to be given to persons who qualify as 
interested parties under Sec. 1.7476-1 with respect to the application, 
whether or not such application is received by the Internal Revenue 
Service before the date on which section 410 applies to the plan.
    (b) Nature of notice. The notice required by this section shall be 
given in writing, shall contain the information and be given within the 
time prescribed in paragraph (o)(3) of Sec. 601.201 of this chapter 
(Statement of Procedural Rules), and shall be given in the manner 
prescribed in paragraph (c) of this section.
    (c) Method of giving notice--(1) Present employee. In the case of a 
present employee who is an interested party, notice shall be given in 
person, by mailing, by posting, or by printing it in a publication of 
the employer or an employee organization which is distributed in such a 
manner so as to be reasonably available to such employee. Notice given 
by posting shall be made by posting such notice (i) at those locations 
within the principal places of employment of the interested parties 
which are customarily used for employer notices to employees with regard 
to labor-management relations matters, or (ii) if the plan is maintained 
pursuant to one or more collective-bargaining agreements, at those 
locations described in (i) or at those locations customarily used by the 
employee representatives for posting notices with regard to labor-
management relations maters (such as local union meeting places) in the 
geographical area or areas within which the interested parties are 
employed. Regardless of which method is used to notify an employee, if 
an interested party who is a present employee is in a unit of employees 
covered by a collective-bargaining agreement between employee 
representatives and one or more employers, notice shall also be given in 
person or by mail to the collective-bargaining representative of such 
interested party.
    (2) Former employee or beneficiary. (i) Except as otherwise provided 
in paragraph (c)(2)(ii) of this section, in the case of a former 
employee or beneficiary who is an interested party, notice shall be 
given in person or by mail to the last known address of such former 
employee or beneficiary.
    (ii) In cases in which compliance with the methods for notication 
prescribed in paragraph (c)(2)(i) of this section will present unusual 
financial or administrative burdens or, by reason of the peculiar 
circumstances of the case, cannot reasonably be expected to result in 
adequate and timely notice, applicants for advance determination letters 
may cause notice to be given to former employees or beneficiaries by 
methods other than those described in such paragraph (c)(2)(i) provided 
such methods are reasonably calculated to provide timely notice to such 
employees or beneficiaries who are interested parties, or to established 
representatives of such interested parties who

[[Page 873]]

may be reasonably expected to act in their interest and on their behalf. 
In such a case, the application for determination shall be accompanied 
by a full description of the method of notification used, as well as the 
particular financial or administrative burdens that would have occurred 
if notice had been given pursuant to the methods prescribed in paragraph 
(c)(2)(i) of this section, or the reasons why such prescribed methods 
would not have resulted in adequate or timely notice.
    (d) Effective date. (1) The provisions of Sec. 1.7476-1 and this 
section shall apply to applications referred to in paragraph (b) of 
Sec. 1.7476-1 made on or after June 21, 1976. Sections 11.7476-1, and 
11.7476-2 of this chapter (Temporary Income Tax Regulations under the 
Employee Retirement Income Security Act of 1974) as promulgated by 
Treasury Decision 7358 (May 30, 1975) shall apply to applications made 
before such date. However, an applicant may elect to have the provisions 
of Sec. 1.7476-1 and this section apply with respect to an application 
made after May 20, 1976 and before June 21, 1976. Such election may be 
made by attaching to the application as originally submitted, a 
statement that the applicant has elected to have the provisions of 
Sec. 1.7476-1 and this section apply.
    (2) Notwithstanding paragraph (d)(1) of this section, if:
    (i) The plan or plan amendment which is the subject of an 
application for advance determination, is adopted on or before May 30, 
1976, and,
    (ii) Such application for advance determination is made before 
September 2, 1976, the applicant may elect to have the provisions of 
Secs. 11.7476-1 and 11.7476-2 of this chapter (Temporary Income Tax 
Regulations under the Employee Retirement Income Security Act of 1974) 
apply with respect to such application made on or after June 21, 1976 
and before September 2, 1976. Such an election may be made by attaching 
to the application as originally submitted, a statement that the 
applicant has elected to have the provisions of Secs. 11.7476-1 and 
11.7476-2 of this chapter (Temporary Income Tax Regulations under the 
Employee Retirement Income Security Act of 1974) apply.

[T.D. 7421, 41 FR 20876, May 21, 1976]



Sec. 1.7476-3   Notice of determination.

    (a) In general. Under section 7476(b)(5) if a district director 
sends to the employer, the plan administrator, an interested party with 
respect to the plan, or the Pension Benefit Guaranty Corporation (or in 
the case of certain individuals who qualify as interested parties under 
paragraph (b) of Sec. 1.7476-1, to the person described under paragraph 
(c) of this section as the representative of such individuals) by 
certified or registered mail a notice of determination with respect to 
the qualification of a retirement plan described in section 7476(d), no 
proceeding for a declaratory judgment by the United States Tax Court 
with respect to the qualification of such plan may be initiated by such 
person unless the pleading initiating such proceeding is filed by such 
person with such Court before the ninety-first day after the day after 
such notice is mailed.
    (b) Address for notice of determination--(1) Applicant. In the case 
of the applicant for a determination, a notice of determination referred 
to in section 7476(b)(5) shall be sufficient if mailed to such person at 
the address set forth on the application for the determination.
    (2) Interested party. In the case of an interested party or parties 
who, pursuant to section 3001(b) of the Employee Retirement Income 
Security Act of 1974 (88 Stat. 995), submitted a comment to a district 
director with respect to the qualification of the plan, a notice of 
determination referred to in section 7476(b)(5) shall be sufficient if 
mailed to the address designated in the comment as the address to which 
correspondence should be sent.
    (c) Representative of interested parties. (1) In the case of an 
interested party who, in accordance with section 3001(b) of the Employee 
Retirement Income Security Act of 1974 (88 Stat. 995), requests the 
Secretary of Labor to submit a comment to a district director on matters 
respecting the qualification of the plan, where pursuant to such request 
such Secretary does in fact submit such a comment, the Administrator of 
Pension and Welfare Benefit Programs, Department of Labor, shall be the 
representative of such interested party for purposes of receiving the 
notice referred to in section 7476(b)(5)

[[Page 874]]

with respect to those matters on which the Secretary of Labor commented.
    (2) In the event a single comment with respect to the qualification 
of the plan is submitted to a district director by two or more 
interested parties, the representative designated in the comment for 
receipt of correspondence shall be the representative of all the 
interested parties submitting the comment for purposes of receiving the 
notice referred to in section 7476(b)(5) on behalf of all of them. Such 
designated representative must be either one of the interested parties 
who submitted the comment or a person described in paragraph (e)(6) (i), 
(ii) or (iii) of Sec. 601.201 of this chapter (Statement of Procedural 
Rules). If one person is not designated in the comment as the 
representative for receipt of correspondence, a notice of determination 
mailed to any interested party who submitted the comment shall be notice 
to all the interested parties who submitted the comment for purposes of 
section 7476(b)(5).

[T.D. 7421, 41 FR 20877, May 21, 1976]



Sec. 1.7519-0T  Table of contents (temporary).

    This section lists the captions that appear in the temporary 
regulations under section 7519.

Sec. 1.7519-1T  Required payments for entities electing not to have 
required year (temporary).

    (a) In general.
    (1) Applicability.
    (2) Returns and required payments.
    (3) Required payment.
    (4) Examples.
    (b) Definitions and special rules.
    (1) Applicable percentage.
    (i) In general.
    (ii) Exception for certain applicable election years beginning after 
1987.
    (iii) Example.
    (2) Adjusted highest section 1 rate.
    (i) General rule.
    (ii) Period for determining highest section rate.
    Base year.
    (4) Special rules for certain applicable election years.
    (i) First applicable election year of new entities.
    (ii) Applicable election years ending prior to the required taxable 
year.
    (5) Net base year income.
    (i) In general.
    (ii) Partnership net income.
    (A) In general.
    (B) Treatment of deductions and losses.
    (C) Partner limitations disregarded.
    (iii) S corporation net income.
    (A) In general.
    (B) Treatment of deductions and losses.
    (C) Shareholder limitations disregarded.
    (iv) Applicable payments.
    (A) In general.
    (B) Exceptions.
    (C) Special rule for corporation electing S status.
    (D) Special rules for certain payments.
    (1) Certain indirect payments.
    (2) Payments by a downstream controlled partnership.
    (i) In general.
    (ii) Definition of a downstream controlled partnership.
    (3) Examples.
    (v) Special rule for base year of less than twelve months.
    (A) In general.
    (B) Annualized short base year income.
    (vi) Examples.
    (c) Regunds of required payments.
    (d) Examples.

Sec. 1.7519-2T  Required payments--procedures and administration 
(temporary).

    (a) Payment and return required.
    (1) In general.
    (2) Return required.
    (i) In general.
    (ii) Procedure if amount for applicable election year (and all 
preceding years) is not greater than $500.
    (3) Time and place for filing return.
    (i) Applicable election years beginning in 1987.
    (A) Taxpayers that would otherwise file Form 720 for the second 
quarter of 1988.
    (B) Other taxpayers.
    (ii) Applicable election years beginning after 1987.
    (A) Return made on Form 720.
    (B) Return made on form other than Form 720.
    (iii) Special rule for back-up section 444 election.
    (4) Time and place for making required payment.
    (i) Applicable election years beginning in 1987.
    (ii) Applicable election years beginning after 1987.
    (iii) Special rule for back-up section 444 election.
    (5) Penalties for failure to pay.
    (6) Refund of required payment.
    (i) In general.
    (ii) Procedures for claiming refund.
    (iii) Interest on refund.
    (b) Assessment and collection of payment.
    (c) Termination due to willful failure.

[[Page 875]]

    (d) Negligence and fraud penalties made applicable.

Sec. 1.7519.3T  Effective date (temporary).



Sec. 1.7519-1T  Required payments for entities electing not to have required year (temporary).

    (a) In general--(1) Applicability. This section applies to any 
taxable year that a partnership or S corporation has an election under 
section 444 in effect (an ``applicable election year'').
    (2) Returns and required payments. For each applicable election 
year, a partnership or S corporation must--
    (i) File a return as provided in Sec. 1.7519--2T (a)(2), and
    (ii) Make a required payment (as defined in paragraph (a)(3) of this 
section) as provided in Sec. 1.7519-2T.
However, if the required payment for an applicable election year is not 
more than $500 and the partnership or S corporation has not been 
required to make a required payment for a prior year, the partnership or 
S corporation should not make a required payment for such applicable 
election year.
    (3) Required payment. The term ``required payment'' means, with 
respect to any applicable election year, an amount equal to the excess 
of--

    (i) The product of the applicable percentage of the adjusted highest 
section 1 rate, multiplied by the net base year income (as defined in 
paragraph (b) (5) of this section) of the entity over
    (ii) The cumulative amount of required payments actually made for 
all preceding applicable election years (reduced by the cumulative 
amount of such payments refundable under section 7519(c) for all such 
preceding years).

Furthermore, the amount of the required payment is determined without 
regard to the required payment of any other partnership or S 
corporation. See example (3) in paragraph (d) of this section.
    (4) Examples. The provisions of paragraph (a) of this section may be 
illustrated by the following examples.

    Example (1). A, a partnership, makes a section 444 election to 
retain its taxable year ending September 30. For A's first applicable 
election year, A's required payment, as defined in paragraph (a) (3) of 
this section, is $400. Thus, A does not have to make a required payment 
for that year. However, A is required to file the return prescribed by 
Sec. 1.7519-2T(a)(2).
    Example (2). The facts are the same as in example (1), and, in 
addition to those facts, for A's second applicable election year, the 
amount determined under paragraph (a)(3)(i) of this section is $800. 
Because A did not actually make a required payment for A's first 
applicable election year, A's required payment is $800 for its second 
applicable election year. Since the required payment is greater than 
$500, A must make a required payment for its second applicable election 
year. Furthermore, A must file the return prescribed by Sec. 1.7519-
2T(a)(2).
    Example (3). The facts are the same as in example (2), and, in 
addition to those facts, for A's third applicable election year, the 
amount determined under paragraph (a)(3)(i) of this section is $1,200. 
Thus, A's required payment is $400 ($1,200 determined under paragraph 
(a)(3)(i) of this section less $800 determined under paragraph 
(a)(3)(ii) of this section). Although A's required payment for its third 
applicable election year is not more than $500, A must make its required 
payment for such year because the required payment for a preceding 
applicable election year exceeded $500. A must also file the return 
prescribed by Sec. 1.7519-2T(a)(2) for its third applicable election 
year.

    (b) Definitions and special rules--(1) Applicable percentage--(i) In 
general. Except as provided in paragraph (b)(1)(ii) of this section, the 
term ``applicable percentage'' means the percentage determined in 
accordance with the following table:

------------------------------------------------------------------------
                                                                 The    
  If the applicable election year of the partnership or S    applicable 
                corporation begins during--                  percentage 
                                                                is--    
------------------------------------------------------------------------
1987......................................................           .25
1988......................................................           .50
1989......................................................           .75
1990 or thereafter........................................           100
------------------------------------------------------------------------

    (ii) Exception for certain applicable election years beginning after 
1987. [Reserved]
    (iii) Example. The provisions of paragraph (b)(1) of this section 
may be illustrated by the following example.

    Example. B is a corporation that has historically used a June 30 
taxable year. For its taxable year beginning July 1, 1987, B elects to 
be an S corporation and elects under Sec. 1.444-1T(b)(3) to retain its 
June 30 taxable year. Had B changed to a calendar year, its required 
year under section 1378, B's shareholders would not have been entitled 
to the 4-year spread under section 806(e)(2)(C) of the

[[Page 876]]

Tax Reform Act of 1986 because B was not an S corporation for its 
taxable year beginning in 1986. Nevertheless, for purposes of 
determining the required payment for B's applicable election year 
beginning July 1, 1987, the applicable percentage is 25 percent.

    (2) Adjusted highest section 1 rate--(i) General rule. For any 
applicable election year, the term ``adjusted highest section 1 rate'' 
means the highest rate of tax under section 1 applicable to the period 
defined in paragraph (b)(2)(ii) of this section, plus 1 percentage 
point. Notwithstanding the preceding sentence, the adjusted highest 
section 1 rate is 36 percent for applicable election years beginning in 
1987. For purposes of this section, the highest rate of tax is 
determined without regard to the effect of section 1(g), relating to the 
phaseout of the 15-percent rate and personal exemptions.
    (ii) Period for determining highest section 1 rate. For purposes of 
paragraph (b)(2)(i) of this section, the period for determining the 
highest rate of tax under section 1 is the 12 month period that--

    (A) Ends with the required taxable year for the applicable election 
year, and
    (B) Includes the end of the base year.

For example, assume that a partnership's applicable election year begins 
on October 1, 1988 and that the required taxable year for such 
applicable election year is December 31. Based upon these facts, the 
period for determining the highest section 1 rate is the 12-month period 
ending December 31, 1988.
    (3) Base year. The term ``base year'' means, with respect to any 
applicable election year, the taxable year of the partnership or S 
corporation preceding such applicable election year.
    (4) Special rules for certain applicable election years--(i) First 
applicable election year of new entities. If an applicable election year 
is a partnership's or S corporation's first year in existence (i.e., the 
partnership or S corporation is newly formed and therefore does not have 
a base year), the required payment for such applicable election year is 
zero.
    (ii) Applicable election years ending prior to the required taxable 
year. If a partnership or S corporation makes a section 444 election and 
the resulting applicable election year (the ``first applicable election 
year'') of the partnership or S corporation ends prior to the last day 
of the required year, the required payment for the first applicable 
election year is zero. See example (5) in paragraph (b)(5)(vi) of this 
section.
    (5) Net base year income--(i) In general. Except as provided in 
paragraph (b)(5)(v) of this section (relating to short base years), the 
net base year income of a partnership or S corporation is the sum of--

    (A) The deferral ratio multiplied by the partnership's or S 
corporation's net income for the base year, plus
    (B) The excess (if any) of--
    (1) The deferral ratio multiplied by the aggregate amount of 
applicable payments made by the partnership or S corporation during the 
base year, over
    (2) The aggregate amount of such applicable payments made during the 
deferral period of the base year.

The term ``deferral ratio'' means the ratio which the number of months 
in the deferral period (as defined in Sec. 1.444-1T (b)(4)) of the 
applicable election year bears to 12 months.
    (ii) Partnership net income. For purposes of paragraph (b)(5)(i) of 
this section--
    (A) In general. The net income of the partnership is the amount (not 
below zero) determined by taking into account the aggregate amount of 
the partnership's items described in section 702(a), except for--
    (1) Credits,
    (2) Tax-exempt income, and
    (3) Guaranteed payments under section 707(c).
    (B) Treatment of deductions and losses. For purposes of determining 
the aggregate amount of partnership items, deductions and losses are 
treated as negative income. Thus, for example, if under section 702(a) a 
partnership has $1,000 of ordinary taxable income, $500 of specially 
allocated deductions, and $300 of capital loss, the net income of the 
partnership is $200 ($1,000-$500-$300).
    (C) Partner limitations disregarded. Any limitation on the amount of 
a partnership item described in section 702(a) which may be taken into 
account for purposes of computing the taxable

[[Page 877]]

income of a partner shall be disregarded in computing the net income of 
the partnership.
    (iii) S corporation net income. For purposes of paragraph (b)(5)(i) 
of this section--
    (A) In general. The net income of an S corporation is the amount 
(not below zero) determined by taking into account the aggregate amount 
of the S corporation's items described in section 1366(a) (other than 
credits and tax-exempt income). If the S corporation was a C corporation 
for the base year, the taxable income of the C corporation shall be 
treated as the net income of the S corporation for such year.
    (B) Treatment of deductions and losses. For purposes of determining 
the aggregate amount of S corporation items, deductions and losses are 
treated as negative income. Thus, for example, if under section 1366(a) 
an S corporation has $2,000 of ordinary taxable income, $1,000 of 
deductions described in section 1366(a)(1)(A) of the Code, and $500 of 
capital loss, the net income of the S corporation is $500 ($2,000-
$1,000-$500).
    (C) Shareholder limitations disregarded. Any limitation on any 
amount described in section 1366(a) which may be taken into account for 
purposes of computing the taxable income of a shareholder shall be 
disregarded in computing the net income of the S corporation.
    (iv) Applicable payments--(A) In general. The term applicable 
payment means any amount deductible in the base year that is includable 
at any time, directly or indirectly, in the gross income of a taxpayer 
that during the base year is a partner or shareholder.
    (B) Exceptions. The term applicable payment does not include any 
guaranteed payments under section 707(c).
    (C) Special rule for corporation electing S status. If an S 
corporation was a C corporation for the base year, the corporation shall 
be treated as if it were an S corporation for the base year for purposes 
of determining the amount of applicable payments under this section. 
Thus, amounts deductible by the C corporation in the base year that are 
includable at any time in the gross income of a taxpayer that is a 
shareholder during the base year are treated as if from an S 
corporation, and therefore within the meaning of the term ``applicable 
payments.''
    (D) Special rules for certain payments--(1) Certain indirect 
payments. For purposes of paragraph (b)(5)(iv)(A) of this section, an 
amount is indirectly includable in the gross income of a partner or 
shareholder of a partnership or S corporation that has a section 444 
election in effect (an electing partnership or S corporation) if the 
amount is includable in the gross income of--
    (i) The spouse (other than a spouse who is legally separated from 
the partner or shareholder under a decree of divorce or separate 
maintenance) or child (under age 14) of such partner or shareholder, or
    (ii) A corporation more than 50 percent (measured by fair market 
value) of which is owned in the aggregate by partners or shareholders 
(and individuals related under paragraph (b)(5)(iv)(D)(1)(i) of this 
section to any such partners or shareholders), of the electing 
partnership or S corporation, or
    (iii) A partnership more than 50 percent of the profits and capital 
of which is owned in the aggregate by partners or shareholders (and 
individuals related under paragraph (b)(5)(iv)(D)(1)(i) of this section 
to any such partners or shareholders) of the electing partnership or S 
corporation, or
    (iv) A trust more than 50 percent of the beneficial ownership of 
which is owned in the aggregate by partners or shareholders (and 
individuals related under paragraph (b)(5)(iv)(D)(1)(i) of this section 
to any such partners or shareholders), of the electing partnership or S 
corporation.

For purposes of this paragraph (b)(5)(iv)(D)(1), ownership by any person 
described in this paragraph (b)(5)(iv)(D)(1) shall be treated as 
ownership by the partners or shareholders of the electing partnership or 
S corporation. This paragraph (b)(5)(iv)(D)(1) does not apply to amounts 
deductible by a partnership or S corporation that has made a section 444 
election (the ``deducting partnership'') and included in the gross 
income of a partnership or S corporation defined in paragraphs 
(b)(5)(iv)(D)(1) (ii) or (iii) of this section

[[Page 878]]

(the ``including partnership''), if the including partnership has the 
same taxable year as the deducting partnership and the including 
partnership has a section 444 election in effect. Furthermore, 
notwithstanding the general effective date provided in Sec. 1.7519-3T, 
this paragraph (b)(5)(iv)(D)(1) is effective for amounts deductible on 
or after June 1, 1988.
    (2) Payments by a downstream controlled partnership--(i) In general. 
If a partnership or S corporation has made a section 444 election, any 
amounts deducted by a downstream controlled partnership will be 
considered deducted by the partnership or S corporation that has made 
the section 444 election for purposes of determining the applicable 
payments of the partnership or S corporation that has made the section 
444 election.
    (ii) Definition of a downstream controlled partnership. If a 
partnership or S corporation that has made a section 444 election owns 
more than 50 percent of a partnership's profits and capital, such owned 
partnership is considered a downstream controlled partnership for 
purposes of paragraph (b)(5)(iv)(D)(2)(i) of this section. Furthermore, 
if more than 50 percent of a partnership's profits and capital are owned 
by a downstream controlled partnership, such owned partnership is 
considered a downstream controlled partnership for purposes of paragraph 
(b)(5)(iv)(D)(2)(i) of this section.
    (3) Examples. The provisions of this paragraph (b)(5)(iv)(D) may be 
illustrated by the following examples.

    Example (1). I1 and I2, calendar year individuals, own 100 percent 
of the profits and capital of C1, a partnership. In addition to owning 
C1, I1 and I2 also own 100 percent of the profits and capital of C2, a 
calendar year partnership. For its taxable years beginning February 1, 
1987, 1988, and 1989, C1 has a section 444 election in effect to use a 
January 31 taxable year. During its base years beginning February 1, 
1986, 1987, and 1988, C1 deducted $10,000, $11,000, and $12,000, 
respectively that was included in C2's gross income. Furthermore, of the 
$12,000 deducted by C1 for its taxable year beginning February 1, 1988, 
$7,000 was deducted during the period June 1, 1988 to January 31, 1989. 
Pursuant to paragraph (b)(5)(iv)(D)(1) of this section, the $7,000 
deducted by C1 on or after June 1, 1988, and included in C2's gross 
income is considered an applicable payment for C1's base year beginning 
February 1, 1988. Amounts deducted by C1 prior to June 1, 1988, are not 
subject to paragraph (b)(5)(iv)(D)(1) of this section.
    Example (2). The facts are the same as in example (1), except that 
I1 and I2 own only 51 percent of C2's profits and capital. Since the two 
partners in C1 (i.e., I1 and I2) own more than 50 percent of C2's 
profits and capital, C2 is considered controlled by the partners of C1 
pursuant to paragraph (b)(5)(iv)(D)(1)(iii) of this section. Thus, the 
conclusions in example (1) are unchanged. Furthermore, if the $7,000 
deducted by C1 was included in the income of a partnership more than 50 
percent of the profits and capital of which is owned by C2, such $7,000 
would be considered an applicable payment for its base year beginning 
February 1, 1988.
    Example (3). The facts are the same as in example (1), except that 
for its taxable years beginning February 1, 1987, 1988, and 1989, C2 has 
a section 444 election in effect to use a January 31 taxable year. Since 
both C1 and C2 have the same taxable year and both have section 444 
elections in effect, paragraph (b)(5)(iv)(D)(1) of this section does not 
apply to the $7,000 deducted by C1 for its base year beginning February 
1, 1988.
    Example (4). I3 and I4, calendar year individuals, own 100 percent 
of the profits and capital of C3, a partnership. C3 has made a section 
444 election to retain a year ending June 30 for its taxable year 
beginning July 1, 1987. Furthermore, C3 owns more than 50 percent of the 
profits and capital of C4, a partnership that historically used a June 
30 taxable year. Pursuant to Sec. 1.706-3T(b), C4 retains its year 
ending June 30 for its taxable year beginning July 1, 1987. For its 
taxable year beginning July 1, 1986, C4 deducted $20,000 that was 
included in I3's gross income. Pursuant to paragraph (b)(5)(iv)(D)(2) of 
this section, the $20,000 deducted by C4 is considered an applicable 
payment by C3 for its base year beginning July 1, 1986.
    Example (5). The facts are the same as in example (4), except that 
the $20,000 deducted by C4 is included in the gross income of a calendar 
year partnership 100 percent owned by I3 and I4. Pursuant to paragraphs 
(b)(5)(v)(D) (1) and (2) of this section, the $20,000 deducted by C4 is 
considered an applicable payment by C3 for its base year beginning July 
1, 1986.
    Example (6). The facts are the same as in example (4), except that 
instead of directly owning a portion of C4, C3 owns more than 50 percent 
of the profits and capital of C5. Furthermore, C5 owns more than 50 
percent of the profits and capital of C4. Pursuant to paragraph 
(b)(5)(iv)(D)(2)(ii) of this section, both C5 and C4 are considered 
downstream controlled partnerships of C3. Thus, pursuant to paragraph 
(b)(5)(iv)(D)(2)(i) of this section, the $20,000 deducted by C4 is 
considered an

[[Page 879]]

applicable payment by C3 for its base year beginning July 1, 1986.

    (v) Special rule for base year of less than twelve months--(A) In 
general. If a base year is a taxable year of less than twelve months (a 
``short base year''), net base year income for such year is an amount 
equal to the excess, if any, of--
    (1) The deferral ratio multiplied by the annualized short base year 
income, over
    (2) Applicable payments made during the deferral period of the 
applicable election year following the base year.
    (B) Annualized short base year income. The annualized short base 
year income is determined by--
    (1) Increasing the net income for the short base year by applicable 
payments deductible in the short base year, and
    (2) Multiplying the short base year income as increased in paragraph 
(b)(5)(v)(B)(1) of this section by twelve, and dividing the result by 
the number of months in the short base year.
    (vi) Examples. The provisions of paragraph (b)(5) of this section 
may be illustrated by the following examples.

    Example (1). D, a partnership, is owned 10 percent by a C 
corporation with a September 30 taxable year and 90 percent by calendar 
year individuals. D has historically used a September 30 taxable year. 
For its taxable year beginning October 1, 1987, D makes a section 444 
election to retain its September 30 taxable year. For the base year from 
October 1, 1986 to September 30, 1987, D has net income of $200,000 and 
no applicable payments. D's deferral ratio is \3/12\ (the ratio of the 
number of months in the deferral period to 12 months). Based upon these 
facts, D has net base year income of $50,000 ($200,000  x  \3/12\).
    Example (2). The facts are the same as in example (1) except that 
D's net income for the base year is $140,000, after applicable payments 
of $60,000. Of the applicable payments $15,000 were deductible during 
the deferral period of the base year. Based upon these facts, D has net 
base year income of $35,000, determined as follows:

Net income multiplied by deferral ratio    $140,000                     
                                          x  \3/12\                     
                                        ------------                    
                                                                 $35,000
Plus the excess, if any, of applicable                                  
 payments multiplied by deferral ratio.     $60,000                     
                                          x  \3/12\                     
                                        ------------                    
                                                       $15,000          
Over aggregate amount of applicable                                     
 payments deductible during deferral                                    
 period of base year...................                $15,000         0
                                                               ---------
  Net base year income.................                          $35,000
                                                               =========
------------------------------------------------------------------------

    Example (3). The facts are the same as in examle (2) except that of 
the $60,000 applicable payments only $10,000 are deductible during the 
deferral period of the base year. Based on these facts, D has net base 
year income of $40,000, determined as follows:

Net income multiplied by deferral ratio    $140,000                     
                                             x 3/12                     
                                        ------------                    
                                                                 $35,000
Plus the excess, if any, of applicable                                  
 payments multiplied by deferral ratio.     $60,000                     
                                             x 3/12                     
                                        ------------                    
                                                       $15,000  ........
Over aggregate amount of applicable                                     
 payments deductible during deferral                                    
 period of base year...................                $10,000          
                                                                  $5,000
                                                               ---------
  Net base year income.................                          $40,000
                                                               =========
------------------------------------------------------------------------

    Example (4). E is a C corporation that has historically used a 
January 31 taxable year. For its taxable year beginning February 1, 
1987, E makes an election to be an S corporation and also makes a 
section 444 election to retain its January 31 taxable year. E's taxable 
income for the taxable year beginning February 1, 1986 to January 31, 
1987 is

[[Page 880]]

$120,000. Pursuant to paragraph (b)(5)(iii)(A) of this section, the base 
year for X's first applicable election year is the taxable year 
beginning February 1, 1986 and ending January 31, 1987. Thus, E's net 
income for the base year is $120,000. During the base year, E pays its 
sole shareholder, A, a salary of $5,000 a month plus a $30,000 bonus on 
January 15, 1987. Thus, under paragraph (b)(5)(iv)(C) of this section, 
E's applicable payments for the base year are $90,000, of which $55,000 
are applicable payments deductible during the deferral period of the 
base year (February 1 to December 31, 1986). Based upon these facts, E's 
net base year income is $137,500, determined as follows:

Net income multiplied by                                                
 deferral ratio...............        $120,000                          
                                       x 11/12                          
                               ----------------                         
                                                                $110,000
Plus the excess, if any, of                                             
 applicable payments                                                    
 multiplied by the deferral                                             
 ratio........................         $90,000                          
                                        x11/12                          
                               ----------------                         
                                                    $82,500             
Over aggregate amount of                                                
 applicable payments                                                    
 deductible during deferral                                             
 period of base year..........                      $55,000      $27,500
                                                            ------------
  Net base year income........                                  $137,500
                                                            ============
------------------------------------------------------------------------

    Example (5). E, a corporation that has historically used a taxable 
year ending July 31, makes an election to be an S corporation for its 
taxable year beginning August 1, 1987. For that year, E also makes a 
section 444 election to use a taxable year ending September 30. Thus, E 
has two applicable election years beginning in 1987, the first beginning 
August 1, 1987 and ending September 30, 1987, and the second beginning 
October 1, 1987 and ending September 30, 1988. E's required year under 
section 1378 is the calendar year. Because E's first applicable election 
year ends prior to the last day of E's required year (i.e., December 31, 
1987), the required payment for E's first applicable election year is 
zero. However, E is required to file a return for such year as provided 
in Sec. 1.7519-2T.
    Example (6). The facts are the same as in example (5). E's second 
applicable election year is the year from October 1, 1987 to September 
30, 1988, and the base year for the second applicable election year is a 
period of less than 12 months (i.e., August 1, 1987 to September 30, 
1987). Thus, E must compute its net base year income using the special 
rule for short base years provided in paragraph (b)(5)(v) of this 
section. Assume E's net income for the short base year is $50,000, and 
E's applicable payments for the short base year are $15,000. Pursuant to 
paragraph (b)(5)(v)(B) of this section, E's annualized short base year 
net income is $390,000 ($65,000 x 12/2). Furthermore, assume E's 
applicable payments for the deferral period of its second applicable 
election year are $20,000. Based on these facts, the net base year 
income for the applicable election year beginning October 1, 1987 is 
$77,500, computed as follows:

Annualized short base year income multiplied                            
 by deferral ratio............................     $390,000             
                                                     x 3/12             
                                               -------------            
                                                                 $97,500
Less:                                                                   
  Applicable payments for deferral period.....                   $20,000
                                                            ------------
    Net base year income......................                   $77,500
                                                            ============
------------------------------------------------------------------------

    (c) Refunds of required payments. A partnership of S corporation is 
entitled to make a claim for refund, in accordance with the procedures 
provided in Sec. 1.7519-2T(a)(6), if--
    (1) The amount specified in paragraph (a)(3)(i) of this section is 
less than the amount specified in paragraph (a)(3)(ii) of this section; 
or
    (2) The partnership or S corporation terminates its section 444 
election, within the meaning of Sec. 1.444-1T(a)(5).
    (d) Example. The provisions of this section may be illustrated by 
the following examples.

    Example (1). G, a partnership, is owned 10 percent by a C 
corporation with a June 30 taxable year, and 90 percent by calendar year 
individuals. G has historically used a June 30 taxable year. For its 
taxable year beginning July 1, 1987, G makes a section 444 election to 
retain its June 30 taxable year. For the base year from July 1, 1986 to 
June 30, 1987,

[[Page 881]]

G has net income of $300,000 and no applicable payments. G's deferral 
ratio is 6/12 (the ratio of the number of months in the deferral period 
to 12 months). Based on these facts, G's net base year income is 
$150,000 ($300,000 x 6/12). Thus, G's required payment for its first 
applicable election year is $13,500 ($150,000 of net base year income 
multiplied by 9 percent (the product of the applicable percentage for 
1987, 25 percent, and the highest section 1 rate for 1987, 36 percent)).
    Example (2). The facts are the same as in example (1). In addition, 
G continues its section 444 election for the taxable year beginning July 
1, 1988, and G's net base year income for the year beginning July 1, 
1987 is $150,000. The required payment for G's second applicable 
election year is $8,250 ($150,000 of net base year income multiplied by 
14.5 percent (the product of the applicable percentage for 1988 
applicable election years, 50 percent, and the adjusted highest section 
1 rate for 1988, 29 percent) less G's $13,500 required payment for the 
first applicable election year).
    Example (3). H, a partnership with a taxable year ending September 
30, desires to make a section 444 election for its taxable year 
beginning October 1, 1987. H is 15 percent owned by I, a partnership 
with a taxable year ending September 30, and 85 percent owned by 
calendar year individuals. Assume H and I are qualified to make section 
444 elections as a result of the ``same taxable year exception'' 
provided in Sec. 1.444-2T(e). If H and I make section 444 elections, 
they must each make a required payment (assuming the amount computed 
under paragraph (a)(3) of this section is greater than $500). Pursuant 
to paragraph (a)(3) of this section, the required payments of H and I 
are calculated independent of each other. Thus, in determining the 
amount of its required payment, I may not exclude its income 
attributable to H, even though H must also make a required payment on 
the same income.
    Example (4). The facts are the same as in example (1) except that H 
is 90 percent owned by I and 10 percent owned by calendar year 
individuals. Pursuant to Sec. 1.706-3T, if I makes a section 444 
election to retain its taxable year ending September 30, H's required 
year will be September 30, because H's majority interest partner will 
have a September 30 taxable year. Thus, H is not required to make a 
section 444 election and a required payment in order to use a September 
30 taxable year. I, however, must make a required payment.


[T.D. 8205, 53 FR 19706, May 27, 1988]



Sec. 1.7519-2T  Required payments--procedures and administration (temporary).

    (a) Payment and return required--(1) In general. With respect to any 
taxable year for which a partnership or S corporation has a section 444 
election in effect (an ``applicable election year''), the partnership or 
S corporation shall file a return as provided in paragraphs (a) (2) and 
(3) of this section and make a payment, if required, as provided in 
paragraph (a)(4) of this section.
    (2) Return required--(i) In general. A return showing the required 
payment shall be made, even if the required payment for the applicable 
election year is zero. For an applicable election year beginning in 
1987, the return shall be made on Form 720, ``Quarterly Federal Excise 
Tax Return.'' For an applicable election year beginning after 1987, the 
return shall also be made on Form 720 unless another form is prescribed 
by the Commissioner.
    (ii) Procedure if amount for applicable election year (and all 
proceeding years) is not greater than $500. If a partnership or S 
corporation is not required to make a payment under section 7519 for an 
applicable election year, the partnership or S corporation should type 
or legibly print ``zero'' on the appropriate line of the prescribed 
form.
    (3) Time and place for filing return--(i) Applicable election years 
beginning in 1987. For an applicable election year beginning in 1987, 
the Form 720 must be filed with the Service Center indicated by the 
instructions for the Form 720. The date for filing such form is as 
follows--
    (A) Taxpayers that would otherwise file Form 720 for the second 
quarter of 1988. Taxpayers that are required, without regard to this 
section, to file Form 720 for the second quarter of 1988 (e.g., 
taxpayers reporting liability for manufacturers excise tax) must file 
Form 720 by the normal due date of such form for the second quarter of 
1988. Thus, such taxpayers must generally file Form 720 on or before 
July 31, 1988. However, if such taxpayers must also report tax imposed 
by section 4251 (relating to communications services tax), sections

[[Page 882]]

4261 and 4271 (relating to air transportation tax), or section 4986 
(relating to windfall profits tax) for the second quarter of 1988, they 
must file Form 720 on or before August 31, 1988.
    (B) Other taxpayers. Taxpayers that are not described in paragraph 
(a)(3)(i)(A) of this section (i.e., taxpayers that but for this section 
would not be required to file Form 720 for the second quarter of 1988) 
must file Form 720 on or before July 31, 1988.
    (ii) Applicable election years beginning after 1987--(A) Return made 
on Form 720. [Reserved].
    (B) Return made on form other than Form 720. For an applicable 
election year beginning after 1987, the return showing the required 
payment is to be filed with the Service Center indicated by the 
instructions for the form prescribed for payment. The return must be 
filed on or before the date prescribed by the instructions to the form.
    (iii) Special rule for back-up section 444 election. See Sec. 1.444-
3T(b)(4)(iii) for a special rule that may extend the due date for filing 
a return required by paragraph (a)(2) of this section.
    (4) Time and place for making required payment--(i) Applicable 
election years beginning in 1987. For an applicable election year 
beginning in 1987, the required payment is due and payable without 
assessment and notice on or before the date the taxpayer's Form 720 for 
the second quarter is due (as specified in paragraph (a)(3) of this 
section). The required payment must be paid by check or money order, and 
such check or money order must indicate the partnership's or S 
corporation's taxpayer identification number and must include the 
statement: ``IRS NO. 11 PAYMENT.'' The check or money order must be 
sent, together with Form 720, to the Service Center indicated by the 
instructions for the Form 720.
    (ii) Applicable election years beginning after 1987. For an 
applicable election year beginning after 1987, the required payment is 
due and payable without assessment or notice, on or before May 15 of the 
calendar year following the calendar year in which the applicable 
election year begins.
    (iii) Special rule for back-up section 444 election. See Sec. 1.444-
3T(b)(4)(iii) for a special rule that may extend the due date for making 
a required payment.
    (5) Penalties for failure to pay. In the case of any failure by a 
partnership or S corporation to pay the required payment on or before 
the date prescribed in paragraph (a)(4) of this section, there shall be 
assessed on such partnership or S corporation a penalty of 10 percent of 
the underpayment. For purposes of this section, the term 
``underpayment'' means the excess of the amount of the payment required 
under this section over the amount (if any) of such payment paid on or 
before the date prescribed in paragraph (a)(4) of this section.
    (6) Refund of required payment--(i) In general. If a partnership or 
S corporation is entitled to make a claim for refund pursuant to 
Sec. 1.7519-1T(c), such partnership or S corporation should file a claim 
for refund, as provided in paragraph (a)(6)(ii) of this section. 
However, in no event shall a refund be made prior to April 15 of the 
second calendar year that follows the calendar year in which an 
applicable election year begins. For example, assume a partnership made 
a section 444 election to retain its taxable year for its taxable year 
beginning October 1, 1987, and as a result made a required payment for 
such year. Further assume that the partnership terminates its election 
for its taxable year beginning October 1, 1988. Based on these facts, 
the partnership will be entitled to a refund, but no earlier than April 
15, 1989.
    (ii) Procedures for claiming refund. [Reserved].
    (iii) Interest on refund. No interest shall be allowed with respect 
to any refund of a required payment under Sec. 1.7519-1T(C).
    (b) Assessment and collection of payment. A required payment shall 
be assessed and collected in the same manner as if it were a tax imposed 
by subtitle C. Furthermore, no deduction shall be allowable to a 
partnership or S corporation (or their owners) with respect to the 
required payment.
    (c) Termination due to willful failure. See Sec. 1.444-
1T(a)(5)(i)(C), which provides that willful failure to comply with the 
requirements of this section will result in the termination of the 
section 444 election.

[[Page 883]]

    (d) Negligence and fraud penalties made applicable. For purposes of 
section 6653, relating to additions to tax for negligence and fraud, any 
payment required by this section shall be treated as a tax.

[T.D. 8205, 53 FR 19709, May 27, 1988]



Sec. 1.7519-3T  Effective date (temporary).

    The provisions of Secs. 1.7519-1T through Sec. 1.7519-3T are 
effective for taxable years beginning after December 31, 1986.

[T.D. 8205, 53 FR 19710, May 27, 1988]

                      general actuarial valuations



Sec. 1.7520-1  Valuation of annuities, unitrust interests, interests for life or terms of years, and remainder or reversionary interests.

    (a) General actuarial valuations. (1) Except as otherwise provided 
in this section and in Sec. 1.7520-3 (relating to exceptions to the use 
of prescribed tables under certain circumstances), in the case of 
certain transactions after April 30, 1989, subject to income tax, the 
fair market value of annuities, interests for life or for a term of 
years (including unitrust interests), remainders, and reversions is 
their present value determined under this section. See Sec. 20.2031-7(d) 
(and, for certain prior periods, Sec. 20.2031-7A) of this chapter, 
Estate Tax Regulations, for the computation of the value of annuities, 
unitrust interests, life estates, terms for years, remainders, and 
reversions, other than interests described in paragraphs (a)(2) and 
(a)(3) of this section.
    (2) For a transfer to a pooled income fund after April 30, 1989, see 
Sec. 1.642(c)-6(e) (or, for certain prior periods, Sec. 1.642(c)-6A) 
with respect to the valuation of the remainder interest.
    (3) For a transfer to a charitable remainder annuity trust after 
April 30, 1989, see Sec. 1.664-2 with respect to the valuation of the 
remainder interest. See Sec. 1.664-4 (or, for certain prior periods, 
Sec. 1.664-4A) with respect to the valuation of the remainder interest 
in property transferred to a charitable remainder unitrust.
    (b) Components of valuation--(1) Interest rate component--(i) 
Section 7520 Interest rate. The section 7520 interest rate is the rate 
of return, rounded to the nearest two-tenths of one percent, that is 
equal to 120 percent of the applicable Federal mid-term rate, compounded 
annually, for purposes of section 1274(d)(1), for the month in which the 
valuation date falls. In rounding the rate to the nearest two-tenths of 
a percent, any rate that is midway between one two-tenths of a percent 
and another is rounded up to the higher of those two rates. For example, 
if 120 percent of the applicable Federal mid-term rate is 10.30, the 
section 7520 interest rate component is 10.4. The section 7520 interest 
rate is published monthly by the Internal Revenue Service in the 
Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this 
chapter).
    (ii) Valuation date. Except as provided in Sec. 1.7520-2, the 
valuation date is the date on which the transaction takes place.
    (2) Mortality component. The mortality component reflects the 
mortality data most recently available from the United States census. As 
new mortality data becomes available after each decennial census, the 
mortality component described in this section will be revised 
periodically and the revised mortality component tables will be 
published in the regulations at that time. For transactions with 
valuation dates after April 30, 1989, the mortality component table 
(Table 80CNSMT) is contained in Sec. 20.2031-7(d) of this chapter 
(Estate Tax Regulations). See Sec. 20.2031-7A for mortality component 
tables applicable to transactions for which the valuation date falls 
before May 1, 1989.
    (c) Tables. The present value on the valuation date of an annuity, 
life estate, term of years, remainder, or reversion is computed by using 
the section 7520 interest rate component that is described in paragraph 
(b)(1) of this section and the mortality component that is described in 
paragraph (b)(2) of this section. Actuarial factors for determining 
these present values are included in tables in these regulations and in 
publications by the Internal Revenue Service. If a special factor is 
required in order to value an interest, the Internal Revenue Service 
will furnish the factor upon a request for a ruling. The request for a 
ruling must be accompanied by a recitation of the

[[Page 884]]

facts, including the date of birth for each measuring life and copies of 
relevant instruments. A request for a ruling must comply with the 
instructions for requesting a ruling published periodically in the 
Internal Revenue Bulletin (see Rev. Proc. 94-1, 1994-1 I.R.B. 10, and 
subsequent updates, and Secs. 601.201 and 601.601(d)(2)(ii)(b) of this 
chapter) and include payment of the required user fee.
    (1) Regulation sections containing tables with interest rates 
between 4.2 and 14 percent. Section 1.642(c)-6(e)(4) contains Table S 
used for determining the present value of a single life remainder 
interest in a pooled income fund as defined in Sec. 1.642(c)-5. Section 
1.664-4(e)(6) contains Table D (actuarial factors used in determining 
the present value of a remainder interest postponed for a term of 
years), Table U(1) (actuarial factors for one life), and Table F (payout 
factors) used in determining the present value of a remainder interest 
in a charitable remainder unitrust as defined in Sec. 1.664-3. Section 
20.2031-7(d)(6) of this chapter (Estate Tax Regulations) contains Table 
S (actuarial factors for one life), Table B (actuarial factors used in 
determining the present value of an interest for a term of years), Table 
K (annuity end-of-interval adjustment factors), Table J (term certain 
annuity beginning-of-interval adjustment factors), and Table 80CNSMT 
(mortality components) used in determining the present value of 
annuities, life estates, remainders, and reversions. The regulations 
will be revised periodically to include new mortality component tables 
and new tables of factors.
    (2) Internal Revenue Service publications containing tables with 
interest rates between 2.2 and 26 percent. The following documents (with 
the exception of Publication 1459) have been published for sale by the 
Superintendent of Documents, United States Government Printing Office, 
Washington, DC 20402:
    (i) Internal Revenue Service Publication 1457, ``Actuarial Values, 
Alpha Volume,'' (8/89). This publication includes tables of valuation 
factors, as well as examples that show how to compute other valuation 
factors, for determining the present value of annuities, life estates, 
terms of years, remainders, and reversions, measured by one or two 
lives. These factors may also be used in the valuation of interests in a 
charitable remainder annuity trust as defined in Sec. 1.664-2 of this 
chapter and a pooled income fund as defined in Sec. 1.642(c)-5 of this 
chapter.
    (ii) Internal Revenue Service Publication 1458, ``Actuarial Values, 
Beta Volume,'' (8/89). This publication includes term certain tables and 
tables of one and two life valuation factors for determining the present 
value of remainder interests in a charitable remainder unitrust as 
defined in Sec. 1.664-3 of this chapter.
    (iii) Internal Revenue Service Publication 1459, ``Actuarial Values, 
Gamma Volume,'' (8-89) is no longer available for purchase from the 
Superintendent of Documents. However, it may be obtained by requesting a 
copy from: CC:DOM:CORP:T:R (IRS Publication 1459), room 5228, Internal 
Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. 
This publication includes tables for computing depreciation adjustment 
factors. See Sec. 1.170A-12 of this chapter.
    (d) Effective date. This section is effective as of May 1, 1989.

[T.D. 8540, 59 FR 30149, June 10, 1994]



Sec. 1.7520-2  Valuation of charitable interests.

    (a) In general--(1) Valuation. Except as otherwise provided in this 
section and in Sec. 1.7520-3 (relating to exceptions to the use of 
prescribed tables under certain circumstances), the fair market value of 
annuities, interests for life or for a term of years, remainders, and 
reversions for which an income tax charitable deduction is allowable is 
the present value of such interests determined under Sec. 1.7520-1.
    (2) Prior-month election rule. If any part of the property interest 
transferred qualifies for an income tax charitable deduction under 
section 170(c), the taxpayer may elect (under paragraph (b) of this 
section) to compute the present value of the interest transferred by use 
of the section 7520 interest rate for the month during which the 
interest is transferred or the section 7520 interest rate component for 
either of the 2 months preceding the month during which the interest is

[[Page 885]]

transferred. Paragraph (b) of this section explains how a prior-month 
election is made. The interest rate for the month so elected is the 
applicable section 7520 interest rate. If the actuarial factor for 
either or both of the 2 months preceding the month during which the 
interest is transferred is based on a mortality experience that is 
different from the mortality experience at the date of the transfer and 
if the taxpayer elects to use the section 7520 rate for a prior month 
with the different mortality experience, the taxpayer must use the 
actuarial factor derived from the mortality experience in effect during 
the month of the section 7520 rate elected. All actuarial computations 
relating to the transfer must be made by applying the interest rate 
component and the mortality component of the month elected by the 
taxpayer.
    (3) Transfers of more than one interest in the same property. If a 
taxpayer transfers more than one interest in the same property at the 
same time, for purposes of valuing the transferred interests, the 
taxpayer must use the same interest rate and mortality component for 
each interest in the property transferred. If more than one interest in 
the same property is transferred in two or more separate transfers at 
different times, the value of each interest is determined by the use of 
the interest rate component and mortality component in effect during the 
month of the transfer of that interest or, if applicable under paragraph 
(a)(2) of this section, either of the two months preceding the month of 
the transfer.
    (4) Information required with tax return. The following information 
must be attached to the income tax return (or to the amended return) if 
the taxpayer claims a charitable deduction for the present value of a 
temporary or remainder interest in property--
    (i) A complete description of the interest that is transferred, 
including a copy of the instrument of transfer;
    (ii) The valuation date of the transfer;
    (iii) The names and identification numbers of the beneficiaries of 
the transferred interest;
    (iv) The names and birthdates of any measuring lives, a description 
of any relevant terminal illness condition of any measuring life, and 
(if applicable) an explanation of how any terminal illness condition was 
taken into account in valuing the interest; and
    (v) A computation of the deduction showing the applicable section 
7520 interest rate that is used to value the transferred interest.
    (5) Place for filing returns. See section 6091 of the Internal 
Revenue Code and the regulations thereunder for the place for filing the 
return or other document required by this section.
    (b) Election of interest rate component--(1) Time for making 
election. A taxpayer makes a prior-month election under paragraph (a)(2) 
of this section by attaching the information described in paragraph 
(b)(2) of this section to the taxpayer's income tax return or to an 
amended return for that year that is filed within 24 months after the 
later of the date the original return for the year was filed or the due 
date for filing the return.
    (2) Manner of making election. A statement that the prior-month 
election under section 7520(a) of the Internal Revenue Code is being 
made and that identifies the elected month must be attached to the 
income tax return (or to the amended return).
    (3) Revocability. The prior-month election may be revoked by filing 
an amended return within 24 months after the later of the date the 
original return of tax for the year was filed or the due date for filing 
the return. The revocation must be filed in the place referred to in 
paragraph (a)(5) of this section.
    (c) Effective dates. Paragraph (a) of this section is effective as 
of May 1, 1989. Paragraph (b) of this section is effective for elections 
made after June 10, 1994.

[T.D. 8540, 59 FR 30149, June 10, 1994]



Sec. 1.7520-3  Limitation on the application of section 7520.

    (a) Internal Revenue Code sections to which section 7520 does not 
apply. Section 7520 of the Internal Revenue Code does not apply for 
purposes of--

[[Page 886]]

    (1) Part I, subchapter D of subtitle A (section 401 et. seq.), 
relating to the income tax treatment of certain qualified plans. 
(However, section 7520 does apply to the estate and gift tax treatment 
of certain qualified plans and for purposes of determining excess 
accumulations under section 4980A);
    (2) Sections 72 and 101(b), relating to the income taxation of life 
insurance, endowment, and annuity contracts, unless otherwise provided 
for in the regulations under sections 72, 101, and 1011 (see, 
particularly, Secs. 1.101-2(e)(1)(iii)(b)(2), and 1.1011-2(c), Example 
8);
    (3) Sections 83 and 451, unless otherwise provided for in the 
regulations under those sections;
    (4) Section 457, relating to the valuation of deferred compensation, 
unless otherwise provided for in the regulations under section 457;
    (5) Sections 3121(v) and 3306(r), relating to the valuation of 
deferred amounts, unless otherwise provided for in the regulations under 
those sections;
    (6) Section 6058, relating to valuation statements evidencing 
compliance with qualified plan requirements, unless otherwise provided 
for in the regulations under section 6058;
    (7) Section 7872, relating to income and gift taxation of interest-
free loans and loans with below-market interest rates, unless otherwise 
provided for in the regulations under section 7872; or
    (8) Section 2702(a)(2)(A), relating to the value of a nonqualified 
retained interest upon a transfer of an interest in trust to or for the 
benefit of a member of the transferor's family; and
    (9) Any other sections of the Internal Revenue Code to the extent 
provided by the Internal Revenue Service in revenue rulings or revenue 
procedures. (See Secs. 601.201 and 601.601 of this chapter).
    (b) Other limitations on the application of section 7520--(1) In 
general--(i) Ordinary beneficial interests. For purposes of this 
section:
    (A) An ordinary annuity interest is the right to receive a fixed 
dollar amount at the end of each year during one or more measuring lives 
or for some other defined period. A standard section 7520 annuity factor 
for an ordinary annuity interest represents the present worth of the 
right to receive $1.00 per year for a defined period, using the interest 
rate prescribed under section 7520 for the appropriate month. If an 
annuity interest is payable more often than annually or is payable at 
the beginning of each period, a special adjustment must be made in any 
computation with a standard section 7520 annuity factor.
    (B) An ordinary income interest is the right to receive the income 
from, or the use of, property during one or more measuring lives or for 
some other defined period. A standard section 7520 income factor for an 
ordinary income interest represents the present worth of the right to 
receive the use of $1.00 for a defined period, using the interest rate 
prescribed under section 7520 for the appropriate month.
    (C) An ordinary remainder or reversionary interest is the right to 
receive an interest in property at the end of one or more measuring 
lives or some other defined period. A standard section 7520 remainder 
factor for an ordinary remainder or reversionary interest represents the 
present worth of the right to receive $1.00 at the end of a defined 
period, using the interest rate prescribed under section 7520 for the 
appropriate month.
    (ii) Certain restricted beneficial interests. A restricted 
beneficial interest is an annuity, income, remainder, or reversionary 
interest that is subject to a contingency, power, or other restriction, 
whether the restriction is provided for by the terms of the trust, will, 
or other governing instrument or is caused by other circumstances. In 
general, a standard section 7520 annuity, income, or remainder factor 
may not be used to value a restricted beneficial interest. However, a 
special section 7520 annuity, income, or remainder factor may be used to 
value a restricted beneficial interest under some circumstances. See 
paragraph (b)(4) Example 2 of this section, which illustrates a 
situation where a special section 7520 actuarial factor is needed to 
take into account the shorter life expectancy of the terminally ill 
measuring life. See Sec. 1.7520-1(c) for requesting a special factor 
from the Internal Revenue Service.
    (iii) Other beneficial interests. If, under the provisions of this 
paragraph (b),

[[Page 887]]

the interest rate and mortality components prescribed under section 7520 
are not applicable in determining the value of any annuity, income, 
remainder, or reversionary interest, the actual fair market value of the 
interest (determined without regard to section 7520) is based on all of 
the facts and circumstances if and to the extent permitted by the 
Internal Revenue Code provision applicable to the property interest.
    (2) Provisions of governing instrument and other limitations on 
source of payment--(i) Annuities. A standard section 7520 annuity factor 
may not be used to determine the present value of an annuity for a 
specified term of years or the life of one or more individuals unless 
the effect of the trust, will, or other governing instrument is to 
ensure that the annuity will be paid for the entire defined period. In 
the case of an annuity payable from a trust or other limited fund, the 
annuity is not considered payable for the entire defined period if, 
considering the applicable section 7520 interest rate at the valuation 
date of the transfer, the annuity is expected to exhaust the fund before 
the last possible annuity payment is made in full. For this purpose, it 
must be assumed that it is possible for each measuring life to survive 
until age 110. For example, for a fixed annuity payable annually at the 
end of each year, if the amount of the annuity payment (expressed as a 
percentage of the initial corpus) is less than or equal to the 
applicable section 7520 interest rate at the date of the transfer, the 
corpus is assumed to be sufficient to make all payments. If the 
percentage exceeds the applicable section 7520 interest rate and the 
annuity is for a definite term of years, multiply the annual annuity 
amount by the Table B term certain annuity factor, as described in 
Sec. 1.7520-1(c)(1), for the number of years of the defined period. If 
the percentage exceeds the applicable section 7520 interest rate and the 
annuity is payable for the life of one or more individuals, multiply the 
annual annuity amount by the Table B annuity factor for 110 years minus 
the age of the youngest individual. If the result exceeds the limited 
fund, the annuity may exhaust the fund, and it will be necessary to 
calculate a special section 7520 annuity factor that takes into account 
the exhaustion of the trust or fund. This computation would be modified, 
if appropriate, to take into account annuities with different payment 
terms. See Sec. 25.7520-3(b)(2)(v) Example 5 of this chapter, which 
provides an illustration involving an annuity trust that is subject to 
exhaustion.
    (ii) Income and similar interests--(A) Beneficial enjoyment. A 
standard section 7520 income factor for an ordinary income interest may 
not be used to determine the present value of an income or similar 
interest in trust for a term of years or for the life of one or more 
individuals unless the effect of the trust, will, or other governing 
instrument is to provide the income beneficiary with that degree of 
beneficial enjoyment of the property during the term of the income 
interest that the principles of the law of trusts accord to a person who 
is unqualifiedly designated as the income beneficiary of a trust for a 
similar period of time. This degree of beneficial enjoyment is provided 
only if it was the transferor's intent, as manifested by the provisions 
of the governing instrument and the surrounding circumstances, that the 
trust provide an income interest for the income beneficiary during the 
specified period of time that is consistent with the value of the trust 
corpus and with its preservation. In determining whether a trust 
arrangement evidences that intention, the treatment required or 
permitted with respect to individual items must be considered in 
relation to the entire system provided for in the administration of the 
subject trust. Similarly, in determining the present value of the right 
to use tangible property (whether or not in trust) for one or more 
measuring lives or for some other specified period of time, the interest 
rate component prescribed under section 7520 and Sec. 1.7520-1 may not 
be used unless, during the specified period, the effect of the trust, 
will or other governing instrument is to provide the beneficiary with 
that degree of use, possession, and enjoyment of the property during the 
term of interest that applicable state law accords to a person who is 
unqualifiedly designated

[[Page 888]]

as a life tenant or term holder for a similar period of time.
    (B) Diversions of income and corpus. A standard section 7520 income 
factor for an ordinary income interest may not be used to value an 
income interest or similar interest in property for a term of years or 
for one or more measuring lives if--
    (1) The trust, will, or other governing instrument requires or 
permits the beneficiary's income or other enjoyment to be withheld, 
diverted, or accumulated for another person's benefit without the 
consent of the income beneficiary; or
    (2) The governing instrument requires or permits trust corpus to be 
withdrawn from the trust for another person's benefit during the income 
beneficiary's term of enjoyment without the consent of and 
accountability to the income beneficiary for such diversion.
    (iii) Remainder and reversionary interests. A standard section 7520 
remainder interest factor for an ordinary remainder or reversionary 
interest may not be used to determine the present value of a remainder 
or reversionary interest (whether in trust or otherwise) unless, 
consistent with the preservation and protection that the law of trusts 
would provide for a person who is unqualifiedly designated as the 
remainder beneficiary of a trust for a similar duration, the effect of 
the administrative and dispositive provisions for the interest or 
interests that precede the remainder or reversionary interest is to 
assure that the property will be adequately preserved and protected 
(e.g., from erosion, invasion, depletion, or damage) until the remainder 
or reversionary interest takes effect in possession and enjoyment. This 
degree of preservation and protection is provided only if it was the 
transferor's intent, as manifested by the provisions of the arrangement 
and the surrounding circumstances, that the entire disposition provide 
the remainder or reversionary beneficiary with an undiminished interest 
in the property transferred at the time of the termination of the prior 
interest.
    (iv) Pooled income fund interests. In general, pooled income funds 
are created and administered to achieve a special rate of return. A 
beneficial interest in a pooled income fund is not ordinarily valued 
using a standard section 7520 income or remainder interest factor. The 
present value of a beneficial interest in a pooled income fund is 
determined according to rules and special remainder factors prescribed 
in Sec. 1.642(c)-6 and, when applicable, the rules set forth in 
paragraph (b)(3) of this section, if the individual who is the measuring 
life is terminally ill at the time of the transfer.
    (3) Mortality component. The mortality component prescribed under 
section 7520 may not be used to determine the present value of an 
annuity, income interest, remainder interest, or reversionary interest 
if an individual who is a measuring life is terminally ill at the time 
of the transaction. For purposes of this paragraph (b)(3), an individual 
who is known to have an incurable illness or other deteriorating 
physical condition is considered terminally ill if there is at least a 
50 percent probability that the individual will die within 1 year. 
However, if the individual survives for eighteen months or longer after 
the date of the transaction, that individual shall be presumed to have 
not been terminally ill at the time of the transaction unless the 
contrary is established by clear and convincing evidence.
    (4) Examples. The provisions of this paragraph (b) are illustrated 
by the following examples:

    Example 1. Annuity funded with unproductive property. The taxpayer 
transfers corporation stock worth $1,000,000 to a trust. The trust 
provides for a 6 percent ($60,000 per year) annuity in cash or other 
property to be paid to a charitable organization for 25 years and for 
the remainder to be distributed to the donor's child. The trust 
specifically authorizes, but does not require, the trustee to retain the 
shares of stock. The section 7520 interest rate for the month of the 
transfer is 8.2 percent. The corporation has paid no dividends on this 
stock during the past 5 years, and there is no indication that this 
policy will change in the near future. Under applicable state law, the 
corporation is considered to be a sound investment that satisfies 
fiduciary standards. Therefore, the trust's sole investment in this 
corporation is not expected to adversely affect the interest of either 
the annuitant or the remainder beneficiary. Considering the 6 percent 
annuity payout rate and the 8.2 percent section 7520

[[Page 889]]

interest rate, the trust corpus is considered sufficient to pay this 
annuity for the entire 25-year term of the trust, or even indefinitely. 
Although it appears that neither beneficiary would be able to compel the 
trustee to make the trust corpus produce investment income, the annuity 
interest in this case is considered to be an ordinary annuity interest, 
and the standard section 7520 annuity factor may be used to determine 
the present value of the annuity. In this case, the section 7520 annuity 
factor would represent the right to receive $1.00 per year for a term of 
25 years.
    Example 2. Terminal illness. The taxpayer transfers property worth 
$1,000,000 to a charitable remainder unitrust described in section 
664(d)(2) and Sec. 1.664-3. The trust provides for a fixed-percentage 7 
percent unitrust benefit (each annual payment is equal to 7 percent of 
the trust assets as valued at the beginning of each year) to be paid 
quarterly to an individual beneficiary for life and for the remainder to 
be distributed to a charitable organization. At the time the trust is 
created, the individual beneficiary is age 60 and has been diagnosed 
with an incurable illness and there is at least a 50 percent probability 
of the individual dying within 1 year. Assuming the presumption in 
paragraph (b)(3) of this section does not apply, because there is at 
least a 50 percent probability that this beneficiary will die within 1 
year, the standard section 7520 unitrust remainder factor for a person 
age 60 from the valuation tables may not be used to determine the 
present value of the charitable remainder interest. Instead, a special 
unitrust remainder factor must be computed that is based on the section 
7520 interest rate and that takes into account the projection of the 
individual beneficiary's actual life expectancy.

    (5) Additional limitations. Section 7520 does not apply to the 
extent as may otherwise be provided by the Commissioner.
    (c) Effective date. Section 1.7520-3(a) is effective as of May 1, 
1989. The provisions of paragraph (b) of this section are effective with 
respect to transactions after December 13, 1995.

[T.D. 8540, 59 FR 30150, June 10, 1994, as amended by T.D. 8630, 60 FR 
63915, Dec. 13, 1995]



Sec. 1.7520-4  Transitional rules.

    (a) Reliance. If the valuation date is after April 30, 1989, and 
before June 10, 1994, a taxpayer can rely on Notice 89-24, 1989-1 C.B. 
660, or Notice 89-60, 1989-1 C.B. 700 (See Sec. 601.601(d)(2)(ii)(b) of 
this chapter), in valuing the transferred interest.
    (b) Effective date. This section is effective as of May 1, 1989.

[T.D. 8540, 59 FR 30150, June 10, 1994]



Sec. 1.7701(l)-1  Conduit financing arrangements.

    (a) Scope. Section 7701(l) authorizes the issuance of regulations 
that recharacterize any multiple-party financing transaction as a 
transaction directly among any two or more of such parties where the 
Secretary determines that such recharacterization is appropriate to 
prevent avoidance of any tax imposed by title 26 of the United States 
Code.
    (b) Regulations issued under authority of section 7701(l). The 
following regulations are issued under the authority of section 
7701(l)--
    (1) Sec. 1.871-1(b)(7);
    (2) Sec. 1.881-3;
    (3) Sec. 1.881-4;
    (4) Sec. 1.1441-3(j);
    (5) Sec. 1.1441-7(d);
    (6) Sec. 1.6038A-3(b)(5); and
    (7) Sec. 1.6038A-3(c)(2)(vii).

[T.D. 8611, 60 FR 41015, Aug. 11, 1995]



Sec. 1.7703-1   Determination of marital status.

    (a) General rule. The determination of whether an individual is 
married shall be made as of the close of his taxable year unless his 
spouse dies during his taxable year, in which case such determination 
shall be made as of the time of such death; and, except as provided in 
paragraph (b) of this section, an individual shall be considered as 
married even though living apart from his spouse unless legally 
separated under a decree of divorce or separate maintenance. The 
provisions of this paragraph may be illustrated by the following 
examples:

    Example (1). Taxpayer A and his wife B both make their returns on a 
calendar year basis. In July 1954, they enter into a separation 
agreement and thereafter live apart, but no decree of divorce or 
separate maintenance is issued until March 1955. If A itemizes and 
claims his actual deductions on his return for the calendar year 1954, B 
may not elect the standard deduction on her return since B is considered 
as married to A (although permanently separated by agreement) on the 
last day of 1954.

[[Page 890]]

    Example (2). Taxpayer A makes his returns on the basis of a fiscal 
year ending June 30. His wife B makes her returns on the calendar year 
basis. A died in October 1954. In such case, since A and B were married 
as of the date of death, B may not elect the standard deduction for the 
calendar year 1954 if the income of A for the short taxable year ending 
with the date of his death is determined without regard to the standard 
deduction.

    (b) Certain married individuals living apart. (1) For purposes of 
Part IV of Subchapter B of Chapter 1 of the Code, an individual is not 
considered as married for taxable years beginning after December 31, 
1969, if (i) such individual is married (within the meaning of paragraph 
(a) of this section) but files a separate return; (ii) such individual 
maintains as his home a household which constitutes for more than one-
half of the taxable year the principal place of abode of a dependent (a) 
who (within the meaning of section 152 and the regulations thereunder) 
is a son, stepson, daughter, or stepdaughter of the individual, and (b) 
with respect to whom such individual is entitled to a deduction for the 
taxable year under section 151; (iii) such individual furnishes over 
half of the cost of maintaining such household during the taxable year; 
and (iv) during the entire taxable year such individual's spouse is not 
a member of such household.
    (2) For purposes of subparagraph (1)(ii)(a) of this paragraph, a 
legally adopted son or daughter of an individual, a child (described in 
paragraph (c)(2) of Sec. 1.152-2) who is a member of an individual's 
household if placed with such individual by an authorized placement 
agency (as defined in paragraph (c)(2) of Sec. 1.152-2) for legal 
adoption by such individual, or a foster child (described in paragraph 
(c)(4) of Sec. 1.152-2) of an individual if such child satisfies the 
requirements of section 152(a)(9) of the Code and paragraph (b) of 
Sec. 1.152-1 with respect to such individual, shall be treated as a son 
or daughter of such individual by blood.
    (3) For purposes of subparagraph (1)(ii) of this paragraph, the 
household must actually constitute the home of the individual for his 
taxable year. However, a physical change in the location of such home 
will not prevent an individual from qualifying for the treatment 
provided in subparagraph (1) of this paragraph. It is not sufficient 
that the individual maintain the household without being its occupant. 
The individual and the dependent described in subparagraph (1)(ii)(a) of 
this paragraph must occupy the household for more than one-half of the 
taxable year of the individual. However, the fact that such dependent is 
born or dies within the taxable year will not prevent an individual from 
qualifying for such treatment if the household constitutes the principal 
place of abode of such dependent for the remaining or preceding part of 
such taxable year. The individual and such dependent will be considered 
as occupying the household during temporary absences from the household 
due to special circumstances. A nonpermanent failure to occupy the 
common abode by reason of illness, education, business, vacation, 
military service, or a custody agreement under which a child or 
stepchild is absent for less than 6 months in the taxable year of the 
taxpayer, shall be considered a temporary absence due to special 
circumstances. Such absence will not prevent an individual from 
qualifying for the treatment provided in subparagraph (1) of this 
paragraph if (i) it is reasonable to assume that such individual or the 
dependent will return to the household and (ii) such individual 
continues to maintain such household or a substantially equivalent 
household in anticipation of such return.
    (4) An individual shall be considered as maintaining a household 
only if he pays more than one-half of the cost thereof for his taxable 
year. The cost of maintaining a household shall be the expenses incurred 
for the mutual benefit of the occupants thereof by reason of its 
operation as the principal place of abode of such occupants for such 
taxable year. The cost of maintaining a household shall not include 
expenses otherwise incurred. The expenses of maintaining a household 
include property taxes, mortgage interest, rent, utility charges, upkeep 
and repairs, property insurance, and food consumed on the premises. Such 
expenses do not include the cost of clothing, education,

[[Page 891]]

medical treatment, vacations, life insurance, and transportation. In 
addition, the cost of maintaining a household shall not include any 
amount which represents the value of services rendered in the household 
by the taxpayer or by a dependent described in subparagraph (1)(ii)(a) 
of this paragraph.
    (5) For purposes of subparagraph (1)(iv) of this paragraph, an 
individual's spouse is not a member of the household during a taxable 
year if such household does not constitute such spouse's place of abode 
at any time during such year. An individual's spouse will be considered 
to be a member of the household during temporary absences from the 
household due to special circumstances. A nonpermanent failure to occupy 
such household as his abode by reason of illness, education, business, 
vacation, or military service shall be considered a mere temporary 
absence due to special circumstances.
    (6) The provisions of this paragraph may be illustrated by the 
following example:

    Example. Taxpayer A, married to B at the close of the calendar year 
1971, his taxable year, is living apart from B, but A is not legally 
separated from B under a decree of divorce or separate maintenance. A 
maintains a household as his home which is for 7 months of 1971 the 
principal place of abode of C, his son, with respect to whom A is 
entitled to a deduction under section 151. A pays for more than one-half 
the cost of maintaining that household. At no time during 1971 was B a 
member of the household occupied by A and C. A files a separate return 
for 1971. Under these circumstances, A is considered as not married 
under section 143(b) for purposes of the standard deduction. Even though 
A is married and files a separate return A may claim for 1971 as his 
standard deduction the larger of the low income allowance up to a 
maximum of $1,050 consisting of both the basic allowance and additional 
allowance (rather than the basic allowance only subject to the $500 
limitation applicable to a separate return of a married individual) or 
the percentage standard deduction subject to the $1,500 limitation 
(rather than the $750 limitation applicable to a separate return of a 
married individual). See Sec. 1.141-1. For purposes of the provisions of 
part IV of subchapter B of chapter 1 of the Code and the regulations 
thereunder, A is treated as unmarried.

[T.D. 7123, 36 FR 11086, June 9, 1971. Redesignated by T.D. 8712, 62 FR 
2283, Jan. 16, 1997]

    Effective Date Note: By T.D. 8712, 62 FR 2283, Jan. 16, 1997, 
Sec. 1.7703-1 was redesignated from Sec. 1.143-1, effective May 16, 
1997.



Sec. 1.7704-1  Publicly traded partnerships.

    (a) In general--(1) Publicly traded partnership. A domestic or 
foreign partnership is a publicly traded partnership for purposes of 
section 7704(b) and this section if--
    (i) Interests in the partnership are traded on an established 
securities market; or
    (ii) Interests in the partnership are readily tradable on a 
secondary market or the substantial equivalent thereof.
    (2) Partnership interest--(i) In general. For purposes of section 
7704(b) and this section, an interest in a partnership includes--
    (A) Any interest in the capital or profits of the partnership 
(including the right to partnership distributions); and
    (B) Any financial instrument or contract the value of which is 
determined in whole or in part by reference to the partnership 
(including the amount of partnership distributions, the value of 
partnership assets, or the results of partnership operations).
    (ii) Exception for non-convertible debt. For purposes of section 
7704(b) and this section, an interest in a partnership does not include 
any financial instrument or contract that--
    (A) Is treated as debt for federal tax purposes; and
    (B) Is not convertible into or exchangeable for an interest in the 
capital or profits of the partnership and does not provide for a payment 
of equivalent value.
    (iii) Exception for tiered entities. For purposes of section 7704(b) 
and this section, an interest in a partnership or a corporation 
(including a regulated investment company as defined in section 851 or a 
real estate investment trust as defined in section 856) that holds an 
interest in a partnership (lower-tier partnership) is not considered an 
interest in the lower-tier partnership.

[[Page 892]]

    (3) Definition of transfer. For purposes of section 7704(b) and this 
section, a transfer of an interest in a partnership means a transfer in 
any form, including a redemption by the partnership or the entering into 
of a financial instrument or contract described in paragraph 
(a)(2)(i)(B) of this section.
    (b) Established securities market. For purposes of section 7704(b) 
and this section, an established securities market includes--
    (1) A national securities exchange registered under section 6 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f);
    (2) A national securities exchange exempt from registration under 
section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) because 
of the limited volume of transactions;
    (3) A foreign securities exchange that, under the law of the 
jurisdiction where it is organized, satisfies regulatory requirements 
that are analogous to the regulatory requirements under the Securities 
Exchange Act of 1934 described in paragraph (b) (1) or (2) of this 
section (such as the London International Financial Futures Exchange; 
the Marche a Terme International de France; the International Stock 
Exchange of the United Kingdom and the Republic of Ireland, Limited; the 
Frankfurt Stock Exchange; and the Tokyo Stock Exchange);
    (4) A regional or local exchange; and
    (5) An interdealer quotation system that regularly disseminates firm 
buy or sell quotations by identified brokers or dealers by electronic 
means or otherwise.
    (c) Readily tradable on a secondary market or the substantial 
equivalent thereof--(1) In general. For purposes of section 7704(b) and 
this section, interests in a partnership that are not traded on an 
established securities market (within the meaning of section 7704(b) and 
paragraph (b) of this section) are readily tradable on a secondary 
market or the substantial equivalent thereof if, taking into account all 
of the facts and circumstances, the partners are readily able to buy, 
sell, or exchange their partnership interests in a manner that is 
comparable, economically, to trading on an established securities 
market.
    (2) Secondary market or the substantial equivalent thereof. For 
purposes of paragraph (c)(1) of this section, interests in a partnership 
are readily tradable on a secondary market or the substantial equivalent 
thereof if--
    (i) Interests in the partnership are regularly quoted by any person, 
such as a broker or dealer, making a market in the interests;
    (ii) Any person regularly makes available to the public (including 
customers or subscribers) bid or offer quotes with respect to interests 
in the partnership and stands ready to effect buy or sell transactions 
at the quoted prices for itself or on behalf of others;
    (iii) The holder of an interest in the partnership has a readily 
available, regular, and ongoing opportunity to sell or exchange the 
interest through a public means of obtaining or providing information of 
offers to buy, sell, or exchange interests in the partnership; or
    (iv) Prospective buyers and sellers otherwise have the opportunity 
to buy, sell, or exchange interests in the partnership in a time frame 
and with the regularity and continuity that is comparable to that 
described in the other provisions of this paragraph (c)(2).
    (3) Secondary market safe harbors. The fact that a transfer of a 
partnership interest is not within one or more of the safe harbors 
described in paragraph (e), (f), (g), (h), or (j) of this section is 
disregarded in determining whether interests in the partnership are 
readily tradable on a secondary market or the substantial equivalent 
thereof.
    (d) Involvement of the partnership required. For purposes of section 
7704(b) and this section, interests in a partnership are not traded on 
an established securities market within the meaning of paragraph (b)(5) 
of this section and are not readily tradable on a secondary market or 
the substantial equivalent thereof within the meaning of paragraph (c) 
of this section (even if interests in the partnership are traded or 
readily tradable in a manner described in paragraph (b)(5) or (c) of 
this section) unless--
    (1) The partnership participates in the establishment of the market 
or the inclusion of its interests thereon; or
    (2) The partnership recognizes any transfers made on the market by--

[[Page 893]]

    (i) Redeeming the transferor partner (in the case of a redemption or 
repurchase by the partnership); or
    (ii) Admitting the transferee as a partner or otherwise recognizing 
any rights of the transferee, such as a right of the transferee to 
receive partnership distributions (directly or indirectly) or to acquire 
an interest in the capital or profits of the partnership.
    (e) Transfers not involving trading--(1) In general. For purposes of 
section 7704(b) and this section, the following transfers (private 
transfers) are disregarded in determining whether interests in a 
partnership are readily tradable on a secondary market or the 
substantial equivalent thereof--
    (i) Transfers in which the basis of the partnership interest in the 
hands of the transferee is determined, in whole or in part, by reference 
to its basis in the hands of the transferor or is determined under 
section 732;
    (ii) Transfers at death, including transfers from an estate or 
testamentary trust;
    (iii) Transfers between members of a family (as defined in section 
267(c)(4));
    (iv) Transfers involving the issuance of interests by (or on behalf 
of) the partnership in exchange for cash, property, or services;
    (v) Transfers involving distributions from a retirement plan 
qualified under section 401(a) or an individual retirement account;
    (vi) Block transfers (as defined in paragraph (e)(2) of this 
section);
    (vii) Transfers pursuant to a right under a redemption or repurchase 
agreement (as defined in paragraph (e)(3) of this section) that is 
exercisable only--
    (A) Upon the death, disability, or mental incompetence of the 
partner; or
    (B) Upon the retirement or termination of the performance of 
services of an individual who actively participated in the management 
of, or performed services on a full-time basis for, the partnership;
    (viii) Transfers pursuant to a closed end redemption plan (as 
defined in paragraph (e)(4) of this section);
    (ix) Transfers by one or more partners of interests representing in 
the aggregate 50 percent or more of the total interests in partnership 
capital and profits in one transaction or a series of related 
transactions; and
    (x) Transfers not recognized by the partnership (within the meaning 
of paragraph (d)(2) of this section).
    (2) Block transfers. For purposes of paragraph (e)(1)(vi) of this 
section, a block transfer means the transfer by a partner and any 
related persons (within the meaning of section 267(b) or 707(b)(1)) in 
one or more transactions during any 30 calendar day period of 
partnership interests representing in the aggregate more than 2 percent 
of the total interests in partnership capital or profits.
    (3) Redemption or repurchase agreement. For purposes of section 
7704(b) and this section, a redemption or repurchase agreement means a 
plan of redemption or repurchase maintained by a partnership whereby the 
partners may tender their partnership interests for purchase by the 
partnership, another partner, or a person related to another partner 
(within the meaning of section 267(b) or 707(b)(1)).
    (4) Closed end redemption plan. For purposes of paragraph 
(e)(1)(viii) of this section, a redemption or repurchase agreement (as 
defined in paragraph (e)(3) of this section) is a closed end redemption 
plan only if--
    (i) The partnership does not issue any interest after the initial 
offering (other than the issuance of additional interests prior to 
August 5, 1988); and
    (ii) No partner or person related to any partner (within the meaning 
of section 267(b) or 707(b)(1)) provides contemporaneous opportunities 
to acquire interests in similar or related partnerships which represent 
substantially identical investments.
    (f) Redemption and repurchase agreements. For purposes of section 
7704(b) and this section, the transfer of an interest in a partnership 
pursuant to a redemption or repurchase agreement (as defined in 
paragraph (e)(3) of this section) that is not described in paragraph 
(e)(1) (vii) or (viii) of this section is disregarded in determining 
whether interests in the partnership are readily tradable on a secondary 
market or the substantial equivalent thereof only if--
    (1) The redemption or repurchase agreement provides that the 
redemption or repurchase cannot occur until

[[Page 894]]

at least 60 calendar days after the partner notifies the partnership in 
writing of the partner's intention to exercise the redemption or 
repurchase right;
    (2) Either--
    (i) The redemption or repurchase agreement requires that the 
redemption or repurchase price not be established until at least 60 
calendar days after receipt of such notification by the partnership or 
the partner; or
    (ii) The redemption or repurchase price is established not more than 
four times during the partnership's taxable year; and
    (3) The sum of the percentage interests in partnership capital or 
profits transferred during the taxable year of the partnership (other 
than in private transfers described in paragraph (e) of this section) 
does not exceed 10 percent of the total interests in partnership capital 
or profits.
    (g) Qualified matching services--(1) In general. For purposes of 
section 7704(b) and this section, the transfer of an interest in a 
partnership through a qualified matching service is disregarded in 
determining whether interests in the partnership are readily tradable on 
a secondary market or the substantial equivalent thereof.
    (2) Requirements. A matching service is a qualified matching service 
only if--
    (i) The matching service consists of a computerized or printed 
listing system that lists customers' bid and/or ask quotes in order to 
match partners who want to sell their interests in a partnership (the 
selling partner) with persons who want to buy those interests;
    (ii) Matching occurs either by matching the list of interested 
buyers with the list of interested sellers or through a bid and ask 
process that allows interested buyers to bid on the listed interest;
    (iii) The selling partner cannot enter into a binding agreement to 
sell the interest until the 15th calendar day after the date information 
regarding the offering of the interest for sale is made available to 
potential buyers and such time period is evidenced by contemporaneous 
records ordinarily maintained by the operator at a central location;
    (iv) The closing of the sale effected by virtue of the matching 
service does not occur prior to the 45th calendar day after the date 
information regarding the offering of the interest for sale is made 
available to potential buyers and such time period is evidenced by 
contemporaneous records ordinarily maintained by the operator at a 
central location;
    (v) The matching service displays only quotes that do not commit any 
person to buy or sell a partnership interest at the quoted price 
(nonfirm price quotes) or quotes that express interest in a partnership 
interest without an accompanying price (nonbinding indications of 
interest) and does not display quotes at which any person is committed 
to buy or sell a partnership interest at the quoted price (firm quotes);
    (vi) The selling partner's information is removed from the matching 
service within 120 calendar days after the date information regarding 
the offering of the interest for sale is made available to potential 
buyers and, following any removal (other than removal by reason of a 
sale of any part of such interest) of the selling partner's information 
from the matching service, no offer to sell an interest in the 
partnership is entered into the matching service by the selling partner 
for at least 60 calendar days; and
    (vii) The sum of the percentage interests in partnership capital or 
profits transferred during the taxable year of the partnership (other 
than in private transfers described in paragraph (e) of this section) 
does not exceed 10 percent of the total interests in partnership capital 
or profits.
    (3) Closing. For purposes of paragraph (g)(2)(iv) of this section, 
the closing of a sale occurs no later than the earlier of--
    (i) The passage of title to the partnership interest;
    (ii) The payment of the purchase price (which does not include the 
delivery of funds to the operator of the matching service or other 
closing agent to hold on behalf of the seller pending closing); or
    (iii) The date, if any, that the operator of the matching service 
(or any person related to the operator within the

[[Page 895]]

meaning of section 267(b) or 707(b)(1)) loans, advances, or otherwise 
arranges for funds to be available to the seller in anticipation of the 
payment of the purchase price.
    (4) Optional features. A qualified matching service may be sponsored 
or operated by a partner of the partnership (either formally or 
informally), the underwriter that handled the issuance of the 
partnership interests, or an unrelated third party. In addition, a 
qualified matching service may offer the following features--
    (i) The matching service may provide prior pricing information, 
including information regarding resales of interests and actual prices 
paid for interests; a description of the business of the partnership; 
financial and reporting information from the partnership's financial 
statements and reports; and information regarding material events 
involving the partnership, including special distributions, capital 
distributions, and refinancings or sales of significant portions of 
partnership assets;
    (ii) The operator may assist with the transfer documentation 
necessary to transfer the partnership interest;
    (iii) The operator may receive and deliver funds for completed 
transactions; and
    (iv) The operator's fee may consist of a flat fee for use of the 
service, a fee or commission based on completed transactions, or any 
combination thereof.
    (h) Private placements--(1) In general. For purposes of section 
7704(b) and this section, except as otherwise provided in paragraph 
(h)(2) of this section, interests in a partnership are not readily 
tradable on a secondary market or the substantial equivalent thereof 
if--
    (i) All interests in the partnership were issued in a transaction 
(or transactions) that was not required to be registered under the 
Securities Act of 1933 (15 U.S.C. 77a et seq.); and
    (ii) The partnership does not have more than 100 partners at any 
time during the taxable year of the partnership.
    (2) Exception for certain offerings outside of the United States. 
Paragraph (h)(1) of this section does not apply to the offering and sale 
of interests in a partnership that was not required to be registered 
under the Securities Act of 1933 by reason of Regulation S (17 CFR 
230.901 through 230.904) unless the offering and sale of the interests 
would not have been required to be registered under the Securities Act 
of 1933 if the interests had been offered and sold within the United 
States.
    (3) Anti-avoidance rule. For purposes of determining the number of 
partners in the partnership under paragraph (h)(1)(ii) of this section, 
a person (beneficial owner) owning an interest in a partnership, grantor 
trust, or S corporation (flow-through entity), that owns, directly or 
through other flow-through entities, an interest in the partnership, is 
treated as a partner in the partnership only if--
    (i) Substantially all of the value of the beneficial owner's 
interest in the flow-through entity is attributable to the flow-through 
entity's interest (direct or indirect) in the partnership; and
    (ii) A principal purpose of the use of the tiered arrangement is to 
permit the partnership to satisfy the 100-partner limitation in 
paragraph (h)(1)(ii) of this section.
    (i) [Reserved]
    (j) Lack of actual trading--(1) General rule. For purposes of 
section 7704(b) and this section, interests in a partnership are not 
readily tradable on a secondary market or the substantial equivalent 
thereof if the sum of the percentage interests in partnership capital or 
profits transferred during the taxable year of the partnership (other 
than in transfers described in paragraph (e), (f), or (g) of this 
section) does not exceed 2 percent of the total interests in partnership 
capital or profits.
    (2) Examples. The following examples illustrate the rules of this 
paragraph (j):

    Example 1. Calculation of percentage interest transferred. (i) ABC, 
a calendar year limited partnership formed in 1996, has 9,000 units of 
limited partnership interests outstanding at all times during 1997, 
representing in the aggregate 95 percent of the total interests in 
capital and profits of ABC. The remaining 5 percent is held by the 
general partner.
    (ii) During 1997, the following transactions occur with respect to 
the units of ABC's limited partnership interests--
    (A) 800 units are sold through the use of a qualified matching 
service that meets the requirements of paragraph (g) of this section;

[[Page 896]]

    (B) 50 units are sold through the use of a matching service that 
does not meet the requirements of paragraph (g) of this section; and
    (C) 500 units are transferred as a result of private transfers 
described in paragraph (e) of this section.
    (iii) The private transfers of 500 units and the sale of 800 units 
through a qualified matching service are disregarded under paragraph 
(j)(1) of this section for purposes of applying the 2 percent rule. As a 
result, the total percentage interests in partnership capital and 
profits transferred for purposes of the 2 percent rule is .528 percent, 
determined by--
    (A) Dividing the number of units sold through a matching service 
that did not meet the requirements of paragraph (g) of this section (50) 
by the total number of outstanding limited partnership units (9,000); 
and
    (B) Multiplying the result by the percentage of total interests 
represented by limited partnership units (95 percent)
([50/9,000] x .95=.528 percent).
    Example 2. Application of the 2 percent rule. (i) ABC operates a 
service consisting of computerized video display screens on which 
subscribers view and publish nonfirm price quotes that do not commit any 
person to buy or sell a partnership interest and unpriced indications of 
interest in a partnership interest without an accompanying price. The 
ABC service does not provide firm quotes at which any person (including 
the operator of the service) is committed to buy or sell a partnership 
interest. The service may provide prior pricing information, including 
information regarding resales of interests and actual prices paid for 
interests; transactional volume information; and information on special 
or capital distributions by a partnership. The operator's fee may 
consist of a flat fee for use of the service; a fee based on completed 
transactions, including, for example, the number of nonfirm quotes or 
unpriced indications of interest entered by users of the service; or any 
combination thereof.
    (ii) The ABC service is not an established securities market for 
purposes of section 7704(b) and this section. The service is not an 
interdealer quotation system as defined in paragraph (b)(5) of this 
section because it does not disseminate firm buy or sell quotations. 
Therefore, partnerships whose interests are listed and transferred on 
the ABC service are not publicly traded for purposes of section 7704(b) 
and this section as a result of such listing or transfers if the sum of 
the percentage interests in partnership capital or profits transferred 
during the taxable year of the partnership (other than in transfers 
described in paragraph (e), (f), or (g) of this section) does not exceed 
2 percent of the total interests in partnership capital or profits. In 
addition, assuming the ABC service complies with the necessary 
requirements, the service may qualify as a matching service described in 
paragraph (g) of this section.

    (k) Percentage interests in partnership capital or profits--(1) 
Interests considered--(i) General rule. Except as otherwise provided in 
this paragraph (k), for purposes of this section, the total interests in 
partnership capital or profits are determined by reference to all 
outstanding interests in the partnership.
    (ii) Exceptions--(A) General partner with greater than 10 percent 
interest. If the general partners and any person related to the general 
partners (within the meaning of section 267(b) or 707(b)(1)) own, in the 
aggregate, more than 10 percent of the outstanding interests in 
partnership capital or profits at any one time during the taxable year 
of the partnership, the total interests in partnership capital or 
profits are determined without reference to the interests owned by such 
persons.
    (B) Derivative interests. Any partnership interests described in 
paragraph (a)(2)(i)(B) of this section are taken into account for 
purposes of determining the total interests in partnership capital or 
profits only if and to the extent that the partnership satisfies 
paragraph (d) (1) or (2) of this section.
    (2) Monthly determination. For purposes of this section, except in 
the case of block transfers (as defined in paragraph (e)(2) of this 
section), the percentage interests in partnership capital or profits 
represented by partnership interests that are transferred during a 
taxable year of the partnership is equal to the sum of the percentage 
interests transferred for each calendar month during the taxable year of 
the partnership in which a transfer of a partnership interest occurs 
(other than a private transfer as described in paragraph (e) of this 
section). The percentage interests in capital or profits of interests 
transferred during a calendar month is determined by reference to the 
partnership interests outstanding during that month.
    (3) Monthly conventions. For purposes of paragraph (k)(2) of this 
section, a partnership may use any reasonable convention in determining 
the interests outstanding for a month, provided the convention is 
consistently used by

[[Page 897]]

the partnership from month to month during a taxable year and from year 
to year. Reasonable conventions include, but are not limited to, a 
determination by reference to the interests outstanding at the beginning 
of the month, on the 15th day of the month, or at the end of the month.
    (4) Block transfers. For purposes of paragraph (e)(2) of this 
section (defining block transfers), the partnership must determine the 
percentage interests in capital or profits for each transfer of an 
interest during the 30 calendar day period by reference to the 
partnership interests outstanding immediately prior to such transfer.
    (5) Example. The following example illustrates the rules of this 
paragraph (k):

    Example. Conventions. (i) ABC limited partnership, a calendar year 
partnership formed in 1996, has 1,000 units of limited partnership 
interests outstanding on January 1, 1997, representing in the aggregate 
95 percent of the total interests in capital and profits of ABC. The 
remaining 5 percent is held by the general partner.
    (ii) The following transfers take place during 1997--
    (A) On January 15, 10 units of limited partnership interests are 
sold in a transaction that is not a private transfer;
    (B) On July 10, 1,000 additional units of limited partnership 
interests are issued by the partnership (the general partner's 
percentage interest is unchanged); and
    (C) On July 20, 15 units of limited partnership interests are sold 
in a transaction that is not a private transfer.
    (iii) For purposes of determining the sum of the percentage 
interests in partnership capital or profits transferred, ABC chooses to 
use the end of the month convention. The percentage interests in 
partnership capital and profits transferred during January is .95 
percent, determined by dividing the number of transferred units (10) by 
the total number of limited partnership units (1,000) and multiplying 
the result by the percentage of total interests represented by limited 
partnership units ([10/1,000] x .95). The percentage interests in 
partnership capital and profits transferred during July is .7125 percent 
([15/2,000] x .95). ABC is not required to make determinations for the 
other months during the year because no transfers of partnership 
interests occurred during such months. ABC may qualify for the 2 percent 
rule for its 1997 taxable year because less than 2 percent (.95 
percent+.7125 percent=1.6625 percent) of its total interests in 
partnership capital and profits was transferred during that year.
    (iv) If ABC had chosen to use the beginning of the month convention, 
the interests in capital or profits sold during July would have been 
1.425 percent ([15/1,000] x .95) and ABC would not have satisfied the 2 
percent rule for its 1997 taxable year because 2.375 percent (.95 + 
1.425) of ABC's interests in partnership capital and profits was 
transferred during that year.

    (l) Effective date--(1) In general. Except as provided in paragraph 
(l)(2) of this section, this section applies to taxable years of a 
partnership beginning after December 31, 1995.
    (2) Transition period. For partnerships that were actively engaged 
in an activity before December 4, 1995, this section applies to taxable 
years beginning after December 31, 2005, unless the partnership adds a 
substantial new line of business after December 4, 1995, in which case 
this section applies to taxable years beginning on or after the addition 
of the new line of business. Partnerships that qualify for this 
transition period may continue to rely on the provisions of Notice 88-75 
(1988-2 C.B. 386) (see Sec. 601.601(d)(2) of this chapter) for guidance 
regarding the definition of readily tradable on a secondary market or 
the substantial equivalent thereof for purposes of section 7704(b).
    (3) Substantial new line of business. For purposes of paragraph 
(1)(2) of this section--
    (i) Substantial is defined in Sec. 1.7704-2(c); and
    (ii) A new line of business is defined in Sec. 1.7704-2(d), except 
that the applicable date is ``December 4, 1995'' instead of ``December 
17, 1987''.
    (4) Termination under section 708(b)(1)(B). The termination of a 
partnership under section 708(b)(1)(B) due to the sale or exchange of 50 
percent or more of the total interests in partnership capital and 
profits is disregarded in determining whether a partnership qualifies 
for the transition period provided in paragraph (l)(2) of this section.

[T.D. 8629, 60 FR 62029, Dec. 4, 1995]



Sec. 1.7704-2  Transition provisions.

    (a) Transition rule.--(1) Statutory dates. Section 7704 generally 
applies to taxable years beginning after December 31, 1987. In the case 
of an existing partnership, however, section 7704 and the regulations 
thereunder apply to

[[Page 898]]

taxable years beginning after December 31, 1997.
    (2) Effective date of regulations. These regulations are effective 
for taxable years beginning after December 31, 1991.
    (b) Existing partnership--(1) In general. For purposes of 
Sec. 1.7704-2, the term ``existing partnership'' means any partnership 
if--
    (i) The partnership was a publicly traded partnership (within the 
meaning of section 7704(b)) on December 17, 1987;
    (ii) A registration statement indicating that the partnership was to 
be a publicly traded partnership was filed with the Securities and 
Exchange Commission (SEC) with respect to the partnership on or before 
December 17, 1987; or
    (iii) With respect to the partnership, an application was filed with 
a state regulatory commission on or before December 17, 1987, seeking 
permission to restructure a portion of a corporation as a publicly 
traded partnership.
    (2) Changed status of an existing partnership. A partnership will 
not qualify as an existing partnership after a new line of business is 
substantial.
    (c) Substantial--(1) In general. A new line of business is 
substantial as of the earlier of--
    (i) The taxable year in which the partnership derives more than 15 
percent of its gross income from that line of business; or
    (ii) The taxable year in which the partnership directly uses in that 
line of business more than 15 percent (by value) of its total assets.
    (2) Timing rule. If a substantial new line of business is added 
during the taxable year (e.g., by acquisition), the line of business is 
treated as substantial as of the date it is added; otherwise a 
substantial new line of business is treated as substantial as of the 
first day of the taxable year in which it becomes substantial.
    (d) New line of business--(1) In general. A new line of business is 
any business activity of the partnership not closely related to a pre-
existing business of the partnership to the extent that the activity 
generates income other than ``qualifying income'' within the meaning of 
section 7704 and the regulations thereunder.
    (2) Pre-existing business. A business activity is a pre-existing 
business of the partnership if--
    (i) The partnership was actively engaged in the activity on or 
before December 17, 1987; or
    (ii) The partnership is actively engaged in the business activity 
that was specifically described as a proposed business activity of the 
partnership in a registration statement or amendment thereto filed on 
behalf of the partnership with the SEC on or before December 17, 1987. 
For this purpose, a specific description does not include a general 
grant of authority to conduct any business.
    (3) Closely related. All of the facts and circumstances will 
determine whether a new business activity is closely related to a pre-
existing business of the partnership. The following factors, among 
others, will help to establish that a new business activity is closely 
related to a pre-existing business of the partnership and therefore is 
not a new line of business:
    (i) The activity provides products or services very similar to the 
products or services provided by the pre-existing business.
    (ii) The activity markets products and services to the same class of 
customers as that of the pre-existing business.
    (iii) The activity is of a type that is normally conducted in the 
same business location as the pre-existing business.
    (iv) The activity requires the use of similar operating assets as 
those used in the pre-existing business.
    (v) The activity's economic success depends on the success of the 
pre-existing business.
    (vi) The activity is of a type that would normally be treated as a 
unit with the pre-existing business in the business' accounting records.
    (vii) If the activity and the pre-existing business are regulated or 
licensed, they are regulated or licensed by the same or similar 
governmental authority.
    (viii) The United States Bureau of the Census assigns the activity 
the same four-digit Industry Number Standard Identification Code 
(Industry SIC Code) as the pre-existing business.

[[Page 899]]

Such codes are set forth in the Executive Office of the President, 
Office of Management and Budget, Standard Industrial Classification 
Manual, prepared, and from time to time revised, by the Statistical 
Policy Division of the United States Office of Management and Budget. 
For example, if a partnership's pre-existing business is manufacturing 
steam turbines and then the partnership begins an activity manufacturing 
hydraulic turbines, both activities would be assigned the same Industry 
SIC Code, 3511--Steam, Gas, and Hydraulic Turbines, and Turbine 
Generator Set Units. In the case of a pre-existing business or activity 
that is listed under the Industry SIC Code, 9999--Nonclassifiable 
Establishments--or under a miscellaneous category (e.g., most Industry 
SIC Codes ending in a ``9'' are miscellaneous categories), the 
similarity of the SIC Codes is ignored as a factor in determining 
whether the activity is closely related to the pre-existing business. 
The dissimilarity of the SIC Codes is considered in determining whether 
the business activity is closely related to the pre-existing line of 
business.
    (e) Activities conducted through controlled corporations--(1) In 
general. An activity conducted by a corporation controlled by an 
existing partnership may be treated as an activity of the existing 
partnership if the effect of the arrangement is to permit the 
partnership to engage in an activity the income from which is not 
subject to a corporate-level tax and which would be a new line of 
business if conducted directly by the partnership. This determination is 
based upon all facts and circumstances.
    (2) Safe harbor--(i) In general. This paragraph (e)(2) provides a 
safe harbor for activities of a corporation controlled by an existing 
partnership. An activity conducted by a corporation controlled by an 
existing partnership is not deemed to be an activity of the partnership 
for purposes of determining whether an existing partnership has added a 
new line of business if no more than 10% of the gross income that the 
partnership derives from the corporation during the taxable year is 
section 7704(d) qualifying income that is recharacterized as 
nonqualifying income under paragraphs (e)(2) (ii) and (iii) of this 
section. The Internal Revenue Service will not presume that an activity 
conducted through a corporation controlled by an existing partnership is 
an activity of the partnership solely because the partnership fails to 
satisfy the requirements of this paragraph (e)(2)(i).
    (ii) Recharacterization of qualifying income. Gross income received 
by a partnership from a controlled corporation that would be qualifying 
income under section 7704(d) is subject to recharacterization as 
nonqualifying income if the amount is deductible in computing the income 
of the controlled corporation.
    (iii) Extent of recharacterization. The amount of income described 
in paragraph (e)(2)(ii) of this section that is recharacterized as 
nonqualifying income is--
    (A) The amount described in paragraph (e)(2)(ii) of this section; 
multiplied by
    (B) The controlled corporation's taxable income (determined without 
regard to deductions for amounts paid to the partnership) that would not 
be qualifying income within the meaning of section 7704(d) if earned 
directly by the partnership; divided by
    (C) The controlled corporation's taxable income (determined without 
regard to deductions for amounts paid to the partnership).
    (3) Control. For purposes of paragraphs (e) (1) and (2) of this 
section, control of a corporation is determined generally under the 
rules of section 304(c). However, the application of section 304(c) is 
modified to apply only to partners who own five percent or more by value 
(directly or indirectly) of the existing partnership unless a principal 
purpose of the arrangement is to avoid tax at the corporate level.
    (4) Example. The following example illustrates the application of 
the this paragraph (e):

    Example. (i) PTP, an existing partnership, acquired all the stock of 
X corporation on January 1, 1993. During PTP's 1993 taxable year it 
received $185,000 of dividends and $15,000 of interest from X. 
Determined without regard to interest paid to PTP, X's taxable income 
during that period was $500,000

[[Page 900]]

none of which was ``qualifying income'' within the meaning of section 
7704 and the regulations thereunder. In computing the income of X, the 
$15,000 of interest paid to PTP is deductible.
    (ii) Under paragraph (e)(2)(ii) of section, all $15,000 of PTP's 
interest income was nonqualifying income ($15,000 x 500,000/500,000). 
Under paragraph (e)(2) of this section, however, the activities of X 
will not be considered to be activities of PTP for the 1993 taxable year 
because no more than 10 percent of the gross income that PTP derived 
from X would be treated as other than qualifying income (15,000/
200,000=7.5%).

    (f) Activities conducted through tiered partnerships. An activity 
conducted by a partnership in which an existing partnership holds an 
interest (directly or through another partnership) will be considered an 
activity of the existing partnership.
    (g) Exceptions--(1) Coordination with gross income requirements of 
section 7704(c)(2). A partnership that is either an existing partnership 
as of December 31, 1997, or an existing partnership that ceases to 
qualify as an existing partnership is subject to section 7704 and the 
regulations thereunder. Section 7704(a) does not apply to these 
partnerships, however, if these partnerships meet the gross income 
requirements of paragraphs (c) (1) and (2) of section 7704. For purposes 
of applying section 7704(c) (1) and (2) to these partnerships, the only 
taxable years that must be tested are those beginning on and after the 
earlier of--
    (i) January 1, 1998; or
    (ii) The day on which the partnership ceases to qualify as an 
existing partnership because of the addition of a new line of business; 
or
    (iii) The first day of the first taxable year in which a new line of 
business becomes substantial (if the new line of business becomes 
substantial after the year in which it is added).
    (2) Specific exceptions. In determining whether a partnership is an 
existing partnership for purposes of section 7704, the following events 
do not in themselves terminate the status of existing partnerships--
    (i) Termination of the partnership under section 708(b)(1)(B) due to 
the sale or exchange of 50 percent or more of the total interests in 
partnership capital and profits;
    (ii) Issuance of additional partnership units; and
    (iii) Dropping a line of business. This event, however, could affect 
an existing partnership's status indirectly. For example, dropping one 
line of business could change the composition of the partnership's gross 
income. The change in composition could make a new line of business 
``substantial,'' under paragraph (c) of this section, and terminate the 
partnership's status. See paragraph (b)(2) of this section.
    (h) Examples. The following examples illustrate the application of 
this section:

    Example 1. (i) On December 17, 1987, PTP, a calendar-year publicly 
traded partnership, owned and operated citrus groves. On March 1, 1993, 
PTP purchased a processing business involving frozen citrus products. In 
the partnership's 1993 taxable year, the partnership directly used in 
the processing business more than 15 percent (by value) of its total 
assets.
    (ii) The citrus grove activities provide different products from the 
processing activities, are marketed to customers different from the 
customers of the processing activities, require different types of 
operating assets, are not commonly conducted at the same location, are 
not commonly treated as a unit in accounting records, do not depend upon 
one another for economic success, and do not have the same Industry SIC 
Code. Under the facts and circumstances, the processing business is not 
closely related to the citrus grove operation and is a new line of 
business under paragraph (d)(1) of this section.
    (iii) The assets of the partnership used in the new line of business 
are substantial under paragraph (c)(2) of this section. Because PTP 
added a substantial new line of business after December 17, 1987, 
paragraph (b)(2) of this section terminates PTP's status as an existing 
partnership on March 1, 1993.
    Example 2. (i) On December 17, 1987, PTP, a calendar-year publicly 
traded partnership, owned and operated retirement centers that serve the 
elderly. Each center contains three sections--
    (A) A residential section, which includes suites of rooms, dining 
facilities, lounges, and gamerooms;
    (B) An assisted-living section, which provides laundry and 
housekeeping services, health monitoring, and emergency care; and
    (C) A nursing section, which provides private and semiprivate rooms, 
dining facilities, examination and treatment rooms, drugs, medical 
equipment, and physical, speech, and occupational therapy.
    (ii) The business activities of each section constitute pre-existing 
businesses of PTP

[[Page 901]]

under paragraph (d)(2) of this section, because PTP was actively engaged 
in the activities on or before December 17, 1987.
    (iii) The nursing sections primarily furnish health care. They 
employ nurses and therapists, are subject to federal, state, and local 
licensing requirements, and may change certain costs to government 
programs like Medicare and Medicaid.
    (iv) In 1993, PTP acquired new nursing homes that treat inpatient 
adults of all ages. The nursing homes provide private and semiprivate 
rooms, dining facilities, examination and treatment rooms, drugs, 
medical equipment, and physical, speech, and occupational therapy. The 
nursing homes primarily furnish health care. They employ nurses and 
therapists, are subject to federal, state, and local licensing 
requirements, and may charge certain costs to government programs like 
Medicare and Medicaid.
    (v) PTP's new nursing homes and old nursing sections provide very 
similar services, market to very similar customers, use similar types of 
property and personnel, and are licensed by the same regulatory 
agencies. The nursing homes and old nursing sections have the same 
Industry SIC Code. Under these facts and circumstances, the new nursing 
homes are closely related to a pre-existing business of the partnership. 
Accordingly, under paragraph (d)(1) of this section, the acquisition of 
the new nursing homes is not the addition of a new line of business.
    (vi) PTP was a publicly traded partnership on December 17, 1987, and 
was an existing partnership under paragraph (b)(1)(i) of this section. 
Because PTP has added no substantial new line of business after December 
17, 1987, paragraph (b)(2) of this section does not terminate PTP's 
status as an existing partnership.
    Example 3. (i) On December 17, 1987, PTP, a calendar-year publicly 
traded partnership, owned and operated cable television systems in the 
northeastern United States. PTP's registration statement described as 
its proposed business activities the ownership and operation of cable 
television systems, any ancillary operations, and any business permitted 
by the laws of the state in which PTP was formed.
    (ii) PTP's cable systems include cables strung along telephone 
lines, converter boxes in subscribers' homes, other types of cable 
equipment, satellite dishes that receive programs broadcast by various 
television networks, and channels that carry public service 
announcements of local interest. Subscribers pay the systems a fee for 
the right to receive both the local announcements and the network 
signals relayed through the cables. Those fees constitute PTP's primary 
revenue. The systems operate under franchise agreements negotiated with 
each municipality in which they do business.
    (iii) On September 1, 1993, PTP purchased a television station in 
the northwestern United States. The station owns broadcasting 
facilities, satellite dishes that receive programs broadcast by the 
station's network, and a studio that produces programs of interest to 
the area that receives the station's broadcasts. Fees from advertisers 
constitute the station's primary revenue. The station operates under a 
license from the Federal Communications Commission.
    (iv) In the partnership's 1993 taxable year, the station generated 
less than 15 percent of PTP's gross income and constituted less than 15 
percent of its total assets (by value). In PTP's 1994 taxable year, the 
station generated more than 15 percent of PTP's gross income.
    (v) The cable systems relay signals through cables to subscribers 
and earn revenue from subscriber fees; the station broadcasts signals to 
the general public and earns revenue by selling air time for 
commercials. Despite certain similarities, the two types of activities 
generally require different operating assets and earn income from 
different sources. They are regulated by different agencies. They are 
not commonly conducted at the same location and do not generally depend 
upon one another for their economic success. They have different 
Industry SIC Codes. Under the facts and circumstances, the television 
station activities are not closely related to PTP's pre-existing 
business, the cable system activities.
    (vi) As of December 17, 1987, PTP did not own and operate any 
television station. PTP's registration statement specifically described 
as its proposed business activities only the ownership and operation of 
cable television systems and any ancillary operations. For purposes of 
paragraph (d)(2) of this section, a specific description does not 
include PTP's general authority to carry on any business permitted by 
the state of its formation. Therefore, the television station line of 
business was not specifically described as a proposed business activity 
of PTP in its registration statement. PTP's acquisition of the 
television station business activity constitutes a new line of business 
under paragraph (d)(1) of this section.
    (vii) PTP was a publicly traded partnership on December 17, 1987, 
and was an existing partnership under paragraph (b)(1)(i) of this 
section. PTP added a new line of business in 1993, but that line of 
business was not substantial under paragraph (c) of this section, and 
thus PTP remained an existing partnership for its 1993 taxable year. In 
1994, the new line of business became substantial because it generated 
more than 15 percent of PTP's gross income. Paragraph (b)(2) of this 
section therefore terminates PTP's existing partnership status as of 
January 1, 1994, the first day of the first taxable year beginning after

[[Page 902]]

December 31, 1987, in which PTP's new line of business became 
substantial.

[T.D. 8450, 57 FR 58708, Dec. 11, 1992]
Secs. 1.7872-1--1.7872-4  [Reserved]



Sec. 1.7872-5T  Exempted loans (temporary).

    (a) In general--(1) General rule. Except as provided in paragraph 
(a)(2) of this section, notwithstanding any other provision of section 
7872 and the regulations thereunder, section 7872 does not apply to the 
loans listed in paragraph (b) of this section because the interest 
arrangements do not have a significant effect on the Federal tax 
liability of the borrower or the lender.
    (2) No exemption for tax avoidance loans. If a taxpayer structures a 
transaction to be a loan described in paragraph (b) of this section and 
one of the principal purposes of so structuring the transaction is the 
avoidance of Federal tax, then the transaction will be recharacterized 
as a tax avoidance loan as defined in section 7872 (c)(1)(D).
    (b) List of exemptions. Except as provided in paragraph (a) of this 
section, the following transactions are exempt from section 7872:
    (1) Loans which are made available by the lender to the general 
public on the same terms and conditions and which are consistent with 
the lender's customary business practice;
    (2) Accounts or withdrawable shares with a bank (as defined in 
section 581), or an institution to which section 591 applies, or a 
credit union, made in the ordinary course of its business;
    (3) Acquisitions of publicly traded debt obligations for an amount 
equal to the public trading price at the time of acquisition;
    (4) Loans made by a life insurance company (as defined in section 
816 (a)), in the ordinary course of its business, to an insured, under a 
loan right contained in a life insurance policy and in which the cash 
surrender values are used as collateral for the loans;
    (5) Loans subsidized by the Federal, State (including the District 
of Columbia), or Municipal government (or any agency or instrumentality 
thereof), and which are made available under a program of general 
application to the public;
    (6) Employee-relocation loans that meet the requirements of 
paragraph (c)(1) of this section;
    (7) Obligations the interest on which is excluded from gross income 
under section 103;
    (8) Obligations of the United States government;
    (9) Gift loans to a charitable organization (described in section 
170(c)), but only if at no time during the taxable year will the 
aggregate outstanding amount of gift loans by the lender to that 
organization exceed $250,000. Charitable organizations which are 
effectively controlled, within the meaning of Sec. 1.482-1(a)(1), by the 
same person or persons shall be considered one charitable organization 
for purposes of this limitation.
    (10) Loans made to or from a foreign person that meet the 
requirements of paragraph (c)(2) of this section;
    (11) Loans made by a private foundation or other organization 
described in section 170(c), the primary purpose of which is to 
accomplish one or more of the purposes described in section 
170(c)(2)(B);
    (12) Indebtedness subject to section 482, but such indebtedness is 
exempt from the application of section 7872 only during the interest-
free period, if any, determined under Sec. 1.482-2(a)(1)(iii) with 
respect to intercompany trade receivables described in Sec. 1.482-
2(a)(1)(ii)(A)(ii). See also Sec. 1.482-2(a)(3);
    (13) All money, securities, and property--
    (i) Received by a futures commission merchant or registered broker/
dealer or by a clearing organization (A) to margin, guarantee or secure 
contracts for future delivery on or subject to the rules of a qualified 
board or exchange (as defined in section 1256(g)(7)), or (B) to 
purchase, margin, guarantee or secure options contracts traded on or 
subject to the rules of a qualified board or exchange, so long as the 
amounts so received to purchase, margin, guarantee or secure such 
contracts for future delivery or such options contracts are reasonably 
necessary for such purposes and so long as any commissions received by 
the futures commission merchant, registered broker-dealer, or clearing 
organization are not reduced for those making deposits of money,

[[Page 903]]

and all money accruing to account holders as the result of such futures 
and options contacts or
    (ii) Received by a clearing organization from a member thereof as a 
required deposit to a clearing fund, guaranty fund, or similar fund 
maintained by the clearing organization to protect it against defaults 
by members.
    (14) Loans the interest arrangements of which the taxpayer is able 
to show have no significant effect on any Federal tax liability of the 
lender or the borrower, as described in paragraph (c)(3) of this 
section; and
    (15) Loans, described in revenue rulings or revenue procedures 
issued under section 7872(g)(1)(C), if the Commissioner finds that the 
factors justifying an exemption for such loans are sufficiently similar 
to the factors justifying the exemptions contained in this section.
    (c) Special rules--(1) Employee-relocation loans--(i) Mortgage 
loans. In the case of a compensation-related loan to an employee, where 
such loan is secured by a mortgage on the new principal residence 
(within the meaning of section 217 and the regulations thereunder) of 
the employee, acquired in connection with the transfer of that employee 
to a new principal place of work (which meets the requirements in 
section 217(c) and the regulations thereunder), the loan will be exempt 
from section 7872 if the following conditions are satisfied:
    (A) The loan is a demand loan or is a term loan the benefits of the 
interest arrangements of which are not transferable by the employee and 
are conditioned on the future performance of substantial services by the 
employee;
    (B) The employee certifies to the employer that the employee 
reasonably expects to be entitled to and will itemize deductions for 
each year the loan is outstanding; and
    (C) The loan agreement requires that the loan proceeds be used only 
to purchase the new principal residence of the employee.
    (ii) Bridge loans. In the case of a compensation-related loan to an 
employee which is not described in paragraph (c)(1)(i) of this section, 
and which is used to purchase a new principal residence (within the 
meaning of section 217 and the regulations thereunder) of the employee 
acquired in connection with the transfer of that employee to a new 
principal place of work (which meets the requirements in section 217(c) 
and the regulations thereunder), the loan will be exempt from section 
7872 if the following conditions are satisfied:
    (A) The conditions contained in paragraphs (c)(1)(i) (A), (B), and 
(C) of this section;
    (B) The loan agreement provides that the loan is payable in full 
within 15 days after the date of the sale of the employee's immediately 
former principal residence;
    (C) The aggregate principal amount of all outstanding loans 
described in this paragraph (c)(1)(ii) to an employee is no greater than 
the employer's reasonable estimate of the amount of the equity of the 
employee and the employee's spouse in the employee's immediately former 
principal residence, and
    (D) The employee's immediately former principal residence is not 
converted to business or investment use.
    (2) Below-market loans involving foreign persons. (i) Section 7872 
shall not apply to a below-market loan (other than a compensation-
related loan or a corporation-shareholder loan where the borrower is a 
shareholder that is not a C corporation as defined in section 
1361(a)(2)) if the lender is a foreign person and the borrower is a U.S. 
person unless the interest income imputed to the foreign lender (without 
regard to this paragraph) would be effectively connected with the 
conduct of a U.S. trade or business within the meaning of section 864(c) 
and the regulations thereunder and not exempt from U.S. income taxation 
under an applicable income tax treaty.
    (ii) Section 7872 shall not apply to a below-market loan where both 
the lender and the borrower are foreign persons unless the interest 
income imputed to the lender (without regard to this paragraph) would be 
effectively connected with the conduct of a U.S. trade or business 
within the meaning of section 864(c) and the regulations thereunder and 
not exempt from U.S. income taxation under an applicable income tax 
treaty.

[[Page 904]]

    (iii) For purposes of this section, the term ``foreign person'' 
means any person that is not a U.S. person.
    (3) Loans without significant tax effect. Whether a loan will be 
considered to be a loan the interest arrangements of which have a 
significant effect on any Federal tax liability of the lender or the 
borrower will be determined according to all of the facts and 
circumstances. Among the factors to be considered are--
    (i) Whether items of income and deduction generated by the loan 
offset each other;
    (ii) The amount of such items;
    (iii) The cost to the taxpayer of complying with the provisions of 
section 7872 if such section were applied; and
    (iv) Any non-tax reasons for deciding to structure the transaction 
as a below-market loan rather than a loan with interest at a rate equal 
to or greater than the applicable Federal rate and a payment by the 
lender to the borrower.

(26 U.S.C. 7872)

[T.D. 8045, 50 FR 33520, Aug. 20, 1985, as amended by T.D. 8093, 51 FR 
25033, July 10, 1986; 51 FR 28553, Aug. 8, 1986; T.D. 8204, 53 FR 18282, 
May 23, 1988]

                      PUBLIC LAW 74, 84TH CONGRESS

    Source: Sections 1.9000-1 to 1.9000-8 contained in T.D. 6500, 25 FR 
12155, Nov. 26, 1960, unless otherwise noted.



Sec. 1.9000-1   Statutory provisions.

    The Act of June 15, 1955 (Pub. L. 74, 84th Cong., 69 Stat. 134), 
provides as follows:

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,
    Section 1. Repeal of sections 452 and 462--(a) Prepaid income. 
Section 452 of the Internal Revenue Code of 1954 is hereby repealed.
    (b) Reserves for estimated expenses, etc. Section 462 of the 
Internal Revenue Code of 1954 is hereby repealed.
    Sec. 2. Technical amendments. The following provisions of the 
Internal Revenue Code of 1954 are hereby amended as follows:
    (1) Subsection (c) of section 381 is amended by striking out 
paragraph (7) (relating to carryover of prepaid income in certain 
corporate acquisitions).
    (2) The table of sections for subpart B of part II of subchapter E 
of chapter 1 (relating to taxable year for which items of gross income 
included) is amended by striking out
    ``Sec. 452. Prepaid income.''
    (3) The table of sections for subpart C of such part II (relating to 
taxable year for which deductions are taken) is amended by striking out:
    ``Sec. 462. Reserves for estimated expenses, etc.''
    Sec. 3. Effective date. The amendments made by this act shall apply 
with respect to taxable years beginning after December 31, 1953, and 
ending after August 16, 1954.
    Sec. 4. Saving provisions--(a) Filing of statement. If:
    (1) the amount of any tax required to be paid for any taxable year 
ending on or before the date of the enactment of this act is increased 
by reason of the enactment of this act, and
    (2) the last date prescribed for payment of such tax (or any 
installment thereof) is before December 15, 1955,

then the taxpayer shall, on or before December 15, 1955, file a 
statement which shows the increase in the amount of such tax required to 
be paid by reason of the enactment of this act.
    (b) Form and effect of statement--(1) Form of statement, etc. The 
statement required by subsection (a) shall be filed at the place fixed 
for filing the return. Such statement shall be in such form, and shall 
include such information necessary or appropriate to show the increase 
in the amount of the tax required to be paid for the taxable year by 
reason of the enactment of this act, as the Secretary of the Treasury or 
his delegate shall by regulations prescribe.
    (2) Treatment as amount shown on return. The amount shown on a 
statement filed under subsection (a) as the increase in the amount of 
the tax required to be paid for the taxable year by reason of the 
enactment of this act shall, for all purposes of the internal revenue 
laws, be treated as tax shown on the return. Notwithstanding the 
preceding sentence, that portion of the amount of increase in tax for 
any taxable year which is attributable to a decrease (by reason of the 
enactment of this act) in the net operating loss for a succeeding 
taxable year shall not be treated as tax shown on the return.
    (3) Waiver of interest in case of payment on or before December 15, 
1955. If the taxpayer, on or before December 15, 1955, files the 
statement referred to in subsection (a) and pays in full that portion of 
the amount shown thereon for which the last date prescribed for payment 
is before December 15, 1955, then for purposes of computing interest 
(other than interest on overpayments) such portion shall be treated as 
having been paid on the last date prescribed for payment. This paragraph 
shall not apply if the amount shown on the statement as the increase in 
the amount of the tax required to be paid for the taxable year by reason 
of the enactment of this act is greater than the actual increase unless 
the

[[Page 905]]

taxpayer establishes, to the satisfaction of the Secretary of the 
Treasury or his delegate, that his computation of the greater amount was 
based upon a reasonable interpretation and application of sections 452 
and 462 of the Internal Revenue Code of 1954, as those sections existed 
before the enactment of this act.
    (c) Special rules--(1) Interest for period before enactment. 
Interest shall not be imposed on the amount of any increase in tax 
resulting from the enactment of this act for any period before the day 
after the date of the enactment of this act.
    (2) Estimated tax. Any addition to the tax under section 294(d) of 
the Internal Revenue Code of 1939 shall be computed as if this act had 
not been enacted. In the case of any installment for which the last date 
prescribed for payment is before December 15, 1955, any addition to the 
tax under section 6654 of the Internal Revenue Code of 1954 shall be 
computed as if this act had not been enacted.
    (3) Treatment of certain payments which taxpayer is required to 
make. If:
    (A) The taxpayer is required to make a payment (or an additional 
payment) to another person by reason of the enactment of this act, and
    (B) The Internal Revenue Code of 1954 prescribes a period, which 
expires after the close of the taxable year, within which the taxpayer 
must make such payment (or additional payment) if the amount thereof is 
to be taken into account (as a deduction or otherwise) in computing 
taxable income for such taxable year,

then, subject to such regulations as the Secretary of the Treasury or 
his delegate may prescribe, if such payment (or additional payment) is 
made on or before December 15, 1955, it shall be treated as having been 
made within the period prescribed by such Code.
    (4) Treatment of certain dividends. Subject to such regulations as 
the Secretary of the Treasury or his delegate may prescribe, for 
purposes of section 561(a)(1) of the Internal Revenue Code of 1954, 
dividends paid after the 15th day of the third month following the close 
of the taxable year and on or before December 15, 1955, may be treated 
as having been paid on the last day of the taxable year, but only to the 
extent (A) that such dividends are attributable to an increase in 
taxable income for the taxable year resulting from the enactment of this 
act, and (B) elected by the taxpayer.
    (5) Determination of date prescribed. For purposes of this section, 
the determination of the last date prescribed for payment or for filing 
a return shall be made without regard to any extension of time therefor 
and without regard to any provision of this section.
    (6) Regulations. For requirement that the Secretary of the Treasury 
or his delegate shall prescribe all rules and regulations as may be 
necessary by reason of the enactment of this act, see section 7805(a) of 
the Internal Revenue Code of 1954.



Sec. 1.9000-2   Effect of repeal in general.

    (a) Section 452 (relating to prepaid income) and section 462 
(relating to reserves for estimated expenses) of the Internal Revenue 
Code of 1954 were repealed by the Act of June 15, 1955 (Pub. L. 74, 84th 
Cong., 69 Stat. 134), with respect to all years subject to such Code. 
The effect of the repeal will generally be to increase the tax liability 
of taxpayers who elected to adopt the methods of accounting provided by 
sections 452 and 462. References to sections of law in Secs. 1.9000-2 to 
1.9000-8, inclusive, are references to the Internal Revenue Code of 1954 
unless otherwise specified.
    (b) The Act of June 15, 1955, provides that if the amount of any tax 
is increased by the repeal of sections 452 and 462 and if the last date 
prescribed for the payment of such tax (or any installment thereof) is 
before December 15, 1955, then the taxpayer shall on or before such date 
file a statement as prescribed in Sec. 1.9000-3. The last date 
prescribed for payment for this purpose shall be determined without 
regard to any extensions of time and without regard to the provisions of 
the Act of June 15, 1955.



Sec. 1.9000-3   Requirement of statement showing increase in tax liability.

    (a) Returns filed before June 15, 1955. Where a return reflecting an 
election under section 452 or 462 was filed before June 15, 1955, the 
taxpayer must file on or before December 15, 1955, a statement on Form 
2175 showing the increase in tax liability resulting from the repeal of 
sections 452 and 462. The provisions of this paragraph may be 
illustrated by the following example:

    Example. Corporation X filed its income tax return for the calendar 
year 1954 on March 15, 1955, and elected under section 6152 to pay the 
unpaid amount of the tax shown thereon in two equal installments. Such 
installment payments are due on March 15, 1955, and June 15, 1955, 
respectively. The corporation elected to compute its tax for such 
taxable year under the methods of accounting provided by sections 452 
and 462. Corporation X's tax liability is increased by reason of the 
enactment of Public Law 74, and since the last

[[Page 906]]

date prescribed for paying its tax expires before December 15, 1955, it 
is required to submit the prescribed statement on or before December 15, 
1955, showing its increase in tax liability.

    (b) Returns filed on or after June 15, 1955. A taxpayer filing a 
return on or after June 15, 1955, for a taxable year ending on or before 
such date, may elect to apply the accounting methods provided in 
sections 452 and 462. The election may be exercised by either of the 
following methods:
    (1) By computing the tax liability shown on such return as though 
the provisions of sections 452 and 462 had not been repealed. In such a 
case, the taxpayer must file on or before December 15, 1955, a statement 
on Form 2175 showing the increase in tax liability resulting from the 
repeal of sections 452 and 462.
    (2) By computing his tax liability without regard to sections 452 
and 462. In this case, Form 2175 must be filed with the return. However, 
taxable income and the tax liability computed with the application of 
sections 452 and 462 shall be shown on lines 8 and 14, respectively, of 
the form in lieu of the amounts otherwise called for on those lines.

If a taxpayer does not make an election to have the provisions of 
sections 452 and 462 apply, the savings provisions of section 4 of the 
Act of June 15, 1955, are not applicable.
    (c) Taxable years ending after June 15, 1955. A taxpayer having a 
taxable year ending after June 15, 1955, may not elect to apply the 
methods of accounting prescribed in sections 452 and 462 in computing 
taxable income for such taxable year. Such a taxpayer must file his 
return and pay the tax as if such sections had not been enacted.
    (d) Other situations requiring statements. (1) A person who made an 
election under section 452 or 462 but whose tax liability was not 
increased by reason of the enactment of the Act of June 15, 1955, is 
nevertheless required to file a statement on Form 2175 if his gross 
income is increased or his deductions are decreased as the result of the 
repeal of sections 452 and 462. A partnership which makes an election 
under such sections must file such a statement. In addition, a partner, 
stockholder, distributee, etc. (whether or not such person made an 
election under section 452 or 462), shall file a statement showing any 
increase in his tax liability resulting from the effects of the repeal 
on the gross income or deductions of any person mentioned in the 
previous sentences of this subparagraph.
    (2) A statement shall also be filed for a taxable year, other than a 
year to which an election under section 452 or 462 is applicable, if the 
repeal of such sections increases the tax liability of such year. Thus, 
a statement must be filed for any taxable year to which a net operating 
loss is carried from a year to which an election under section 452 or 
462 is applicable, provided that the repeal of such sections affects the 
amount of the tax liability for the year to which such loss is carried. 
A separate statement must also be filed for a year in which there is a 
net operating loss which is changed by reason of the repeal of sections 
452 and 462. Where there is a short taxable year involved, a taxpayer 
may have two taxable years to which elections under sections 452 and 462 
are applicable and, in such a case, a statement, on Form 2175, must be 
filed for each such year.



Sec. 1.9000-4   Form and content of statement.

    (a) Information to be shown. The statement shall be filed on Form 
2175 which may be obtained from district directors. It shall be filed 
with the district director for the internal revenue district in which 
the return was filed. The statement shall be prepared in accordance with 
the instructions contained thereon and shall show the following 
information:
    (1) The name and address of the taxpayer,
    (2) The amounts of each type of income deferred under section 452,
    (3) The amount of the addition to each reserve deducted under 
section 462,
    (4) The taxable income and the tax liability of the taxpayer 
computed with the application of sections 452 and 462,
    (5) The taxable income and the tax liability of the taxpayer 
computed without the application of sections 452 and 462,

[[Page 907]]

    (6) The details of the recomputation of taxable income and tax 
liability, including any changes in other items of income, deductions, 
and credits resulting from the repeal of sections 452 and 462, and
    (7) If self-employment tax is increased, the computations and 
information required on page 3 of Schedule C, Form 1040.
    (b) Procedure for recomputing tax liability. In determining the 
taxable income and the tax liability computed without the application of 
sections 452 and 462, such items as vacation pay and prepaid 
subscription income shall be reported under the law and regulations 
applicable to the taxable year as if such sections had not been enacted. 
The tax liability for the year shall be recomputed by restoring to 
taxable income the amount of income deferred under section 452 and the 
amount of the deduction taken under section 462. Other deductions or 
credits affected by such changes in taxable income shall be adjusted. 
For example, if the deduction for contributions allowed for the taxable 
year was limited under section 170(b), the amount of such deduction 
shall be recomputed, giving effect to the increase in adjusted gross 
income or taxable income, as the case may be, by reason of the 
adjustments required by the repeal of sections 452 and 462.



Sec. 1.9000-5   Effect of filing statement.

    (a) Years other than years affected by a net operating loss 
carryback. If the taxpayer files a timely statement in accordance with 
the provisions of Sec. 1.9000-3, the amount of the increase in tax shown 
on such statement for a taxable year shall, except as provided in 
paragraph (b) of this section, be considered for all purposes of the 
Code, as tax shown on the return for such year. In general, such 
increase shall be assessed and collected in the same manner as if it had 
been tax shown on the return as originally filed. The provisions of this 
paragraph may be illustrated by the following example:

    Example. A taxpayer filed his return showing a tax liability 
computed under the methods of accounting provided by sections 452 and 
462 as $1,000 and filed the statement in accordance with Sec. 1.9000-3 
showing an increase in tax liability of $200. The tax computed as though 
sections 452 and 462 had not been enacted is $1,200, and the difference 
of $200 is the increase in the tax attributable to the repeal of 
sections 452 and 462. This increase is considered to be tax shown on the 
return for such taxable year. Additions to the tax for fraud or 
negligence under section 6653 will be determined by reference to $1,200 
(that is, $1,000 plus $200) as the tax shown on the return.

    (b) Years affected by a net operating loss carryback. In the case of 
a year which is affected by a net operating loss carryback from a year 
to which an election under section 452 or 462 applies, that portion of 
the amount of increase in tax shown on the statement for the year to 
which the loss is carried back which is attributable to a decrease in 
such net operating loss shall not be treated as tax shown on the return.



Sec. 1.9000-6   Provisions for the waiver of interest.

    (a) In general. If the statement is filed in accordance with 
Sec. 1.9000-3 and if that portion of the increase in tax which is due 
before December 15, 1955 (without regard to any extension of time for 
payment and without regard to the provisions of Secs. 1.9000-2 to 
1.9000-8, inclusive), is paid in full on or before such date, then no 
interest shall be due with respect to that amount. The provisions of 
this paragraph may be illustrated by the following example:

    Example. Corporation M's return for the calendar year 1954 was filed 
on March 15, 1955, and the tax liability shown thereon was paid in equal 
installments on March 15, 1955, and June 15, 1955. M filed a statement 
on December 15, 1955, showing the increase in its tax liability 
resulting from the repeal of sections 452 and 462 and paid at that time 
the increase in tax shown thereon. No interest will be imposed with 
respect to the amount of such payment.

Interest shall be computed under the applicable provisions of the 
internal revenue laws on any portion of the increase in tax shown on the 
statement which is due after December 15, 1955, and which is not paid 
when due.
    (b) Limitation on application of waiver. The provisions of paragraph 
(a) of this section shall not apply to any portion of the increase in 
tax shown on the statement if such increase reflects an amount in excess 
of that attributable

[[Page 908]]

solely to the repeal of sections 452 and 462, i. e., is attributable in 
whole or in part to excessive or unwarranted deferrals or accruals under 
section 452 or 462, as the case may be, in computing the tax liability 
with the application of such sections. Notwithstanding the preceding 
sentence, paragraph (a) of this section shall be applicable if the 
taxpayer can show that the tax liability as computed with the 
application of sections 452 and 462 is based upon a reasonable 
interpretation and application of such sections as they existed prior to 
repeal. If the taxpayer complied with the provisions of the regulations 
under sections 452 and 462 in computing the tax liability with the 
application of such sections, he will be regarded as having reasonably 
interpreted and applied sections 452 and 462. In this regard, it is not 
essential that the taxpayer submit with his return the detailed 
information required by such regulations in support of the deduction 
claimed under section 462, but such information shall be supplied at the 
request of the Commissioner.
    (c) Interest for periods prior to June 16, 1955. No interest shall 
be imposed with respect to any increase in tax resulting solely from the 
repeal of sections 452 and 462 for any period prior to June 16, 1955 
(the day after the date of the enactment of the Act of June 15, 1955). 
The preceding sentence does not apply to that part of any increase in 
tax which is due to the improper application of sections 452 and 462. 
The provisions of this paragraph shall not apply to interest imposed 
under section 3779 of the Internal Revenue Code of 1939. (See paragraph 
(d) of this section.)
    (d) Amounts deferred by corporations expecting carrybacks. Interest 
shall be imposed at the rate of 6 percent on so much of the amount of 
tax deferred under section 3779 of the Internal Revenue Code of 1939 as 
is not satisfied within the meaning of section 3779(i)(1), 
notwithstanding the fact that a greater amount would have been 
satisfied, had sections 452 and 462 not been repealed. Interest will be 
imposed at such rate until the amount not so satisfied is paid.



Sec. 1.9000-7   Provisions for estimated tax.

    (a) Additions to tax under section 294(d) of the Internal Revenue 
Code of 1939. Any addition to the tax under section 294(d) (relating to 
estimated tax) of the Internal Revenue Code of 1939 shall be computed as 
if the tax for the year for which the estimate was made were computed 
with sections 452 and 462 still applicable to such taxable year. For the 
purpose of the preceding sentence, it is not necessary for the taxpayer 
actually to have made an election under section 452 or 462; it is only 
necessary for the taxpayer to have taken such sections into account in 
estimating its tax liability for the year. Thus, if in determining the 
amount of estimated tax, the taxpayer computed his estimated tax 
liability by applying those sections, that portion of any additions to 
tax under section 294(d) resulting from the repeal of sections 452 and 
462 shall be disregarded.
    (b) Additions to tax under section 6654. In the case of an 
underpayment of estimated tax, any additions to the tax under section 
6654, with respect to installments due before December 15, 1955, shall 
be computed without regard to any increase in tax resulting from the 
repeal of sections 452 and 462. Any additions to the tax with respect to 
installments due on or after December 15, 1955, shall be imposed in 
accordance with the applicable provisions of the Code, and as though 
sections 452 and 462 had not been enacted. Thus, a taxpayer whose 
declaration of estimated tax was based upon an estimate of his taxable 
income for the year of the estimate which was determined by taking 
sections 452 and 462 into account, must file an amended declaration on 
or before the due date of the next installment of estimated tax due on 
or after December 15, 1955. Such amended declaration shall reflect an 
estimate of the tax without the application of such sections. If the 
taxpayer bases his estimate on the tax for the preceding taxable year 
under section 6654(d)(1)(A), an amended declaration must be filed on or 
before the due date of the next installment due on or after December 15, 
1955, if the tax for the preceding taxable year is increased as the 
result of

[[Page 909]]

the repeal of sections 452 and 462. Similarly, if the taxpayer bases his 
estimate on the tax computed under section 6654(d)(1)(B), he must file 
an amended declaration on or before the due date of the next installment 
due on or after December 15, 1955, taking into account the repeal of 
sections 452 and 462 with respect to the preceding taxable year. Any 
increase in estimated tax shown on an amended declaration filed in 
accordance with this paragraph must be paid in accordance with section 
6153(c).
    (c) Estimated tax of corporations. Corporations required to file a 
declaration of estimated tax under section 6016 for taxable years ending 
on and after December 31, 1955, shall estimate their tax liability for 
such year as if sections 452 and 462 had not been enacted. Thus, if the 
corporation bases its estimated tax liability under section 6655(d) (1) 
or (2) on its operations for the preceding taxable year, the effect of 
the repeal of sections 452 and 462 with respect to such year must be 
taken into account.



Sec. 1.9000-8   Extension of time for making certain payments.

    (a) Time for payment specified in Code. (1) If the treatment of any 
payment (including its allowance as a deduction or otherwise) is 
dependent upon the making of a payment within a period of time specified 
in the Code the period within which the payment is to be made is 
extended where the amount to be paid is increased by reason of the 
repeal of sections 452 and 462: Provided, That:
    (i) The taxpayer, because of a pre-existing obligation, is required 
to make a payment or an additional payment to another person by reason 
of such repeal;
    (ii) The deductibility of the payment or additional payment is 
contingent upon its being made within a period prescribed by the Code, 
which period expires after the close of the taxable year; and
    (iii) The payment or additional payment is made on or before 
December 15, 1955.

If the foregoing conditions are met, the payment or additional payment 
will be treated as having been made within the time specified in the 
Code, and, subject to any other conditions in the Code, it shall be 
deductible for the year to which it relates. The provision of this 
paragraph may be illustrated by the following examples:

    Example 1. Section 267 (relating to losses, expenses and interest 
between related taxpayers) applies to amounts accrued by taxpayer A for 
salary payable to B. For the calendar year 1954, A is obligated to pay B 
a salary equal to 5 percent of A's taxable income for the taxable year. 
The amount accrued as salary payable to B for 1954 is $5,000 with the 
taxable income reflecting the application of section 462. As a result of 
the repeal of section 462 the salary payable to B for 1954 is increased 
to $6,000. The additional $1,000 is paid to B on December 15, 1955. In 
recomputing A's tax liability for 1954 the additional deduction of 
$1,000 for salary payable to B will be treated as having been made 
within two and one-half months after the close of the taxable year and 
will be deductible in that year.
    Example 2. On March 1, 1955, Corporation X, a calendar year taxpayer 
using the accrual method of accounting, makes a payment described in 
section 404(a)(6) (relating to contributions to an employees' trust) of 
$10,000 which is accrued for 1954 and is determined on the basis of the 
amount of taxable income for that year. The taxpayer filed its return on 
March 15, 1955. By reason of the repeal of section 462, X's taxable 
income is increased so that it is required to make an additional 
contribution of $2,000 to the employees' trust. The additional payment 
is made on December 15, 1955. For purposes of recomputing X's tax 
liability for 1954, this additional payment is deemed to have been made 
on the last day of 1954.

    (2) The time for inclusion in the taxable income of the payee of any 
additional payment of the type described in subparagraph (1) of this 
paragraph, shall be determined without regard to section 4(c)(3) of the 
Act of June 15, 1955, and Secs. 1.9000-2 to 1.9000-8, inclusive.
    (b) Dividends paid under section 561. under section 4(c)(4) of the 
Act of June 15, 1955, the period during which distributions may be 
recognized as dividends paid under section 561 for a taxable year to 
which section 452 or 462 apply may be extended under the conditions set 
forth below.
    (1) Accumulated earnings tax or personal holding company tax. In the 
case of the accumulated earnings tax or the personal holding company 
tax, if:

[[Page 910]]

    (i) The income of a corporation is increased for a taxable year by 
reason of the repeal of sections 452 and 462 so that it would become 
liable for the tax (or an increase in the tax) imposed on accumulated 
earnings or personal holding companies unless additional dividends are 
distributed;
    (ii) The corporation distributes dividends to its stockholders after 
the 15th day of the 3d month following the close of its taxable year and 
on or before December 15, 1955, which dividends are attributable to an 
increase in its accumulated taxable income or undistributed personal 
holding company income, as the case may be, resulting from the repeal of 
sections 452 and 462, and
    (iii) The corporation elects in its statement, submitted under 
Sec. 1.9000-3, to have the provisions of section 4(c)(4) of the Act of 
June 15, 1955, apply:

Then such dividends shall be treated as having been paid on the last day 
of the taxable year to which the statement applies.
    (2) Regulated investment companies. In the case of a regulated 
investment company taxable under section 852, if:
    (i) The taxable income of the regulated investment company is 
increased by reason of the repeal of sections 452 and 462 (without 
regard to any deduction for dividends paid as provided for in this 
subparagraph);
    (ii) The company distributes dividends to its stockholders after the 
15th day of the 3d month following the close of its taxable year and on 
or before December 15, 1955, which dividends are attributable to an 
increase in its investment company income resulting from the repeal of 
sections 452 and 462; and
    (iii) The company elects in its statement, submitted under 
Sec. 1.9000-3, to have the provisions of section 4(c)(4) of the Act of 
June 15, 1955, apply:

then such dividends are to be treated as having been paid on the last 
day of the taxable year to which the statement applies. The dividends 
paid are to be determined under this subparagraph without regard to the 
provisions of section 855.
    (3) Related provisions. An election made under subparagraph (1) or 
(2) of this paragraph is irrevocable. The time for inclusion in the 
taxable income of the distributees of any distributions of the type 
described in subparagraph (1) or (2) of this paragraph shall be 
determined without regard to section 4(c)(4) of the Act of June 15, 
1955, and Secs. 1.9000-2 to 1.9000-8, inclusive.

             RETIREMENT-STRAIGHT LINE ADJUSTMENT ACT OF 1958

    Source: Sections 1.9001 to 1.9001-4 contained in T.D. 6500, 25 FR 
12158, Nov. 26, 1960, unless otherwise noted.



Sec. 1.9001   Statutory provisions; Retirement-Straight Line Adjustment Act of 1958.

    Section 94 of the Technical Amendments Act of 1958 (72 Stat. 1669) 
provides as follows:

    Sec. 94. Change from retirement to straight line method of computing 
depreciation in certain cases--(a) Short title. This section may be 
cited as the ``Retirement-Straight Line Adjustment Act of 1958''.
    (b) Making of election. Any taxpayer who held retirement-straight 
line property on his 1956 adjustment date may elect to have this section 
apply. Such an election shall be made at such time and in such manner as 
the Secretary shall prescribe. Any election under this section shall be 
irrevocable and shall apply to all retirement-straight line property as 
hereinafter provided in this section (including such property for 
periods when held by predecessors of the taxpayer).
    (c) Retirement-straight line property defined. For purposes of this 
section, the term ``retirement-straight line property'' means any 
property of a kind or class with respect to which the taxpayer or a 
predecessor (under the terms and conditions prescribed for him by the 
Commissioner) for any taxable year beginning after December 31, 1940, 
and before January 1, 1956, changed from the retirement to the straight 
line method of computing the allowance of deductions for depreciation.
    (d) Basis adjustments as of 1956 adjustment date. If the taxpayer 
has made an election under this section, then in determining the 
adjusted basis on his 1956 adjustment date of all retirement-straight 
line property held by the taxpayer, in lieu of the adjustments for 
depreciation provided in section 1016(a) (2) and (3) of the Internal 
Revenue Code of 1954, the following adjustments shall be made (effective 
as of his 1956 adjustment date) in respect of all periods before the 
1956 adjustment date:
    (1) Depreciation sustained before March 1, 1913. For depreciation 
sustained before March 1, 1913, on retirement-straight line property 
held by the taxpayer or a predecessor on such date for which cost was or 
is claimed as basis and which either:

[[Page 911]]

    (A) Retired before changeover. Was retired by the taxpayer or a 
predecessor before the changeover date, but only if (i) a deduction was 
allowed in computing net income by reason of such retirement, and (ii) 
such deduction was computed on the basis of cost without adjustment for 
depreciation sustained before March 1, 1913. In the case of any such 
property retired during any taxable year beginning after December 31, 
1929, the adjustment under this subparagraph shall not exceed that 
portion of the amount attributable to depreciation sustained before 
March 1, 1913, which resulted (by reason of the deduction so allowed) in 
a reduction in taxes under the Internal Revenue Code of 1954 or prior 
income, war-profits, or excess-profits tax laws.
    (B) Held on changeover date. Was held by the taxpayer or a 
predecessor on the changeover date. This subparagraph shall not apply to 
property to which paragraph (2) applies.

The adjustment determined under this paragraph shall be allocated (in 
the manner prescribed by the Secretary) among all retirement-straight 
line property held by the taxpayer on his 1956 adjustment date.
    (2) Property disposed of after changeover and before 1956 adjustment 
date. For that portion of the reserve prescribed by the Commissioner in 
connection with the changeover which was applicable to property:
    (A) Sold, or
    (B) With respect to which a deduction was allowed for Federal income 
tax purposes by reason of casualty or ``abnormal'' retirement in the 
nature of special obsolescence, if such sale occurred in, or such 
deduction was allowed for, a period on or after the changeover date and 
before the taxpayer's 1956 adjustment date.
    (3) Depreciation allowable from changeover to 1956 adjustment date. 
For depreciation allowable, under the terms and conditions prescribed by 
the Commissioner in connection with the changeover, for all periods on 
and after the changeover date and before the taxpayer's 1956 adjustment 
date.

This subsection shall apply only with respect to taxable years beginning 
after December 31, 1955.
    (e) Effect on period from changeover to 1956 adjustment date. If the 
taxpayer has made an election under this section, then in determining 
the adjusted basis of any retirement-straight line property as of any 
time on or after the changeover date and before the taxpayer's 1956 
adjustment date, in lieu of the adjustments for depreciation provided in 
section 1016(a) (2) and (3) of the Internal Revenue Code of 1954 and the 
corresponding provisions of prior revenue laws, the following 
adjustments shall be made:
    (1) For prescribed reserve. For the amount of the reserve prescribed 
by the Commissioner in connection with the changeover.
    (2) For allowable depreciation. For the depreciation allowable under 
the terms and conditions prescribed by the Commissioner in connection 
with the changeover.

This subsection shall not apply in determining adjusted basis for 
purposes of section 437(c) of the Internal Revenue Code of 1939. This 
subsection shall apply only with respect to taxable years beginning on 
or after the changeover date and before the taxpayer's 1956 adjustment 
date.
    (f) Equity invested capital, etc. If an election is made under this 
section, then (notwithstanding the terms and conditions prescribed by 
the Commissioner in connection with the changeover):
    (1) Equity invested capital. In determining equity invested capital 
under sections 458 and 718 of the Internal Revenue Code of 1939, 
accumulated earnings and profits as of the changeover date, and as of 
the beginning of each taxable year thereafter, shall be reduced by the 
depreciation sustained before March 1, 1913, as computed under 
subsection (d)(1)(B); and
    (2) Definition of equity capital. In determining the adjusted basis 
of assets for the purpose of section 437(c) of the Internal Revenue Code 
of 1939 (and in addition to any other adjustments required by such 
Code), the basis shall be reduced by depreciation sustained before March 
1, 1913 (as computed under subsection (d)), together with any 
depreciation allowable under subsection (e)(2) for any period before the 
year for which the excess profits credit is being computed.
    (g) Definitions. For purposes of this section:
    (1) Depreciation. The term ``depreciation'' means exhaustion, wear 
and tear, and obsolescence.
    (2) Changeover. The term ``changeover'' means a change from the 
retirement to the straight line method of computing the allowance of 
deductions for depreciation.
    (3) Changeover date. The term ``changeover date'' means the first 
day of the first taxable year for which the changeover was effective.
    (4) 1956 adjustment date. The term ``1956 adjustment date'' means, 
in the case of any taxpayer, the first day of his first taxable year 
beginning after December 31, 1955.
    (5) Predecessor. The term ``predecessor'' means any person from whom 
property of a kind or class to which this section refers was acquired, 
if the basis of such property is determined by reference to its basis in 
the hands of such person. Where a series of transfers of property has 
occurred and where in each instance the basis of the property was 
determined by reference to its basis in the hands of the prior holder, 
the term includes each such prior holder.
    (6) The term ``Secretary'' means the Secretary of the Treasury or 
his delegate.
    (7) The term ``Commissioner'' means the Commissioner of Internal 
Revenue.

[[Page 912]]



Sec. 1.9001-1   Change from retirement to straight-line method of computing depreciation.

    (a) In general. The Retirement-Straight Line Adjustment Act of 1958 
(72 Stat. 1669), which is contained in section 94 of the Technical 
Amendments Act of 1958, approved September 2, 1958, provides various 
adjustments to be made by certain railroads which changed from the 
retirement to the straight-line method of computing the allowance of 
deductions for the depreciation of those roadway assets which are 
defined in this section as retirement-straight line property. The 
adjustments are available to all eligible taxpayers who make an 
irrevocable election to have the provisions of the Retirement-Straight 
Line Adjustment Act of 1958 apply. This election shall be made at the 
time and in the manner prescribed by this section. If an election is 
made in accordance with this section, then the provisions of the Act and 
of Secs. 1.9001 to 1.9001-4, inclusive, shall apply. An election made in 
accordance with this section shall not be considered a change in 
accounting method for purposes of section 481 of the Code.
    (b) Making of election. (1) Subsection (b) of the Act provides that 
any taxpayer who held retirement-straight line property on its 1956 
adjustment date may elect to have the provisions of the Act apply. The 
election shall be irrevocable and shall apply to all retirement-straight 
line property, including such property for periods when held by 
predecessors of the taxpayer.
    (2) An election may be made in accordance with the provisions of 
this section even though the taxpayer has, at the time of election, 
litigated some or all of the issues covered by the provisions of the Act 
and has received from the courts a determination which is less favorable 
to the taxpayer than the treatment provided by the Act. Once an election 
has been made in accordance with the provisions of this section, the 
taxpayer may not receive the benefit of more favorable treatment, as a 
result of litigation, than that provided by the Act on the issues 
involved.
    (3) The election to have the provisions of the Act apply shall be 
made by filing a statement to that effect, on or before January 11, 
1960, with the district director for the internal revenue district in 
which the taxpayer's income tax return for its first taxable year 
beginning after December 31, 1955, was filed. A copy of this statement 
shall be filed with any amended return, or claim for refund, made under 
the Act.
    (c) Definitions. For purposes of the Act and Secs. 1.9001 to 1.9001-
4, inclusive:
    (1) The Act. The term the Act means the Retirement-Straight Line 
Adjustment Act of 1958, as contained in section 94 of the Technical 
Amendments Act of 1958 (72 Stat. 1669).
    (2) Commissioner. The term Commissioner means the Commissioner of 
Internal Revenue.
    (3) Retirement-straight line property. The term retirement-straight 
line property means any property of a kind or class with respect to 
which the taxpayer (or a predecessor of the taxpayer) changed, pursuant 
to the terms and conditions prescribed for it by the Commissioner, from 
the retirement to the straight-line method of computing the allowance 
for any taxable year beginning after December 31, 1940, and before 
January 1, 1956, of deductions for depreciation. The term does not 
include any specific property which has always been properly accounted 
for in accordance with the straight-line method of computing the 
depreciation allowances or which, under the terms-letter, was permitted 
or required to be accounted for under the retirement method.
    (4) Depreciation. The term depreciation means exhaustion, wear and 
tear, and obsolescence.
    (5) Predecessor. The term predecessor means any person from whom 
property of a kind or class to which the Act refers was acquired, if the 
basis of such property is determined by reference to its basis in the 
hands of such person. Where a series of transfers of property has 
occurred and where in each instance the basis of the property was 
determined by reference to its basis in the hands of the prior holder, 
the term includes each such prior holder.
    (6) Changeover. The term changeover means a change from the 
retirement to the straight-line method of computing

[[Page 913]]

the allowance of deductions for depreciation.
    (7) Changeover date. The term changeover date means the first day of 
the first taxable year for which the changeover was effective.
    (8) 1956 adjustment date. The term 1956 adjustment date means, in 
the case of any taxpayer, the first day of its first taxable year 
beginning after December 31, 1955.
    (9) Terms-letter. The term terms-letter means the terms and 
conditions prescribed by the Commissioner in connection with the 
changeover.
    (10) Terms-letter reserve. The term terms-letter reserve means the 
reserve for depreciation prescribed by the Commissioner in connection 
with the changeover.
    (11) Depreciation sustained before March 1, 1913. The term 
depreciation sustained before March 1, 1913 may be construed to mean, to 
the extent that it is impossible to determine the actual amount of such 
depreciation from the books and records, that amount which is obtained 
by (i) deducting the ``cost of reproduction new less depreciation'' from 
the ``cost of reproduction new'', as ascertained as of the valuation 
date by the Interstate Commerce Commission under the provisions of 
section 19a of part I of the Interstate Commerce Act (49 U.S.C. 19a), 
and then (ii) making such retroactive adjustments to the remainder as 
are required, in the opinion of the Commissioner of Internal Revenue, to 
properly reflect the depreciation sustained before March 1, 1913. For 
this purpose, any retirement-straight line property held on March 1, 
1913, and retired on or before the valuation date shall be taken into 
account.



Sec. 1.9001-2   Basis adjustments for taxable years beginning on or after 1956 adjustment date.

    (a) In general. Subsection (d) of the Act provides the basis 
adjustments required to be made by the taxpayer as of the 1956 
adjustment date in respect of all periods before that date in order to 
determine the adjusted basis of all retirement-straight line property 
held by the taxpayer on that date. This adjusted basis on the 1956 
adjustment date shall be used by the taxpayer for all purposes of the 
Code for any taxable year beginning after December 31, 1955. In order to 
arrive at the adjusted basis on the 1956 adjustment date, the taxpayer 
shall start with the unadjusted basis of all retirement-straight line 
property held on the changeover date by the taxpayer or a predecessor 
and shall, with respect to both the asset and reserve accounts, (1) make 
the adjustments prescribed by this section and subsection (d) of the Act 
and (2) also make those adjustments required, in accordance with the 
method of accounting regularly used, for those additions, retirements, 
and other dispositions of property which occurred on or after the 
changeover date and before the taxpayer's 1956 adjustment date. For an 
illustration of adjustments required in accordance with the method of 
accounting regularly used, see paragraph (e)(3) of this section. The 
adjustments required by subsection (d) of the Act shall be made in lieu 
of the adjustments for depreciation otherwise required by section 
1016(a) (2) and (3) of the Code. The adjustments required by subsection 
(d) of the Act are set forth in paragraphs (b), (c), and (d) of this 
section.
    (b) Adjustment for depreciation sustained before March 1, 1913--(1) 
In general. Subsection (d)(1) of the Act requires an adjustment to be 
made as of the 1956 adjustment date for depreciation sustained before 
March 1, 1913, on all retirement-straight line property held on March 1, 
1913, by the taxpayer or a predecessor for which cost was or is claimed 
as basis and which was either (i) retired before the changeover date by 
the taxpayer or a predecessor or (ii) held on the changeover date by the 
taxpayer or a predecessor. This adjustment for depreciation sustained 
before March 1, 1913, shall be made in accordance with the conditions 
and limitations described in subparagraphs (2) and (3) of this paragraph 
and shall be allocated, in the manner prescribed in subparagraph (4) of 
this paragraph, among all retirement-straight line property held by the 
taxpayer on its 1956 adjustment date. The term ``cost'', when used in 
this paragraph with reference to the basis of property, shall be 
construed to mean the amount paid for the property or, if that amount 
could not be determined, then such other

[[Page 914]]

amount as was accepted by the Commissioner as ``cost'' for basis 
purposes.
    (2) Depreciation sustained on property retired before the changeover 
date. Pursuant to subsection (d)(1)(A) of the Act, an adjustment to the 
basis of retirement-straight line property held by the taxpayer on its 
1956 adjustment date shall be made as of that date for depreciation 
sustained before March 1, 1913, on all retirement-straight line property 
held on March 1, 1913, by the taxpayer or a predecessor for which cost 
was claimed as the basis and which was retired before the changeover 
date by the taxpayer or a predecessor, except that:
    (i) The adjustment shall be made only if a deduction was allowed in 
computing net income by reason of the retirement and the deduction so 
allowed was computed on the basis of the cost of the property unadjusted 
for depreciation sustained before March 1, 1913, and
    (ii) In the case of any such property retired during any taxable 
year beginning after December 31, 1929, the adjustment shall not exceed 
that portion of the amount attributable to depreciation sustained before 
March 1, 1913, which resulted, by reason of the deduction so allowed, in 
a reduction of taxes under the Code or under prior income, war-profits 
or excess-profits tax laws.
    (3) Depreciation sustained on property held on the changeover date. 
Pursuant to subsection (d)(1)(B) of the Act, an adjustment to the basis 
of retirement-straight line property held by the taxpayer on its 1956 
adjustment date shall be made as of that date for depreciation sustained 
before March 1, 1913, on all retirement-straight line property held on 
March 1, 1913, by the taxpayer or a predecessor for which cost was or is 
claimed as basis and which was held on the changeover date by the 
taxpayer or a predecessor. This subparagraph shall not apply, however, 
to any such property which (i) was disposed of on or after the 
changeover date by reason of sale, casualty, or abnormal retirement in 
the nature of special obsolescence, and (ii) is property to which 
paragraph (c) of this section and subsection (d)(2) of the Act apply.
    (4) Manner of allocating adjustment. Pursuant to subsection (d)(1) 
of the Act, the amount of the adjustment required under this paragraph 
for depreciation sustained before March 1, 1913, which is attributable 
to a particular kind or class of retirement-straight line property held 
by the taxpayer on its 1956 adjustment date shall be made with respect 
to that kind or class of such property. If the adjustment required under 
this paragraph for depreciation sustained before March 1, 1913, is 
attributable to retirement-straight property of a particular kind or 
class no longer held by the taxpayer on its 1956 adjustment date, then 
the part of the adjustment to be allocated to any retirement-straight 
line property held by the taxpayer on its 1956 adjustment date shall be 
that amount which bears the same ratio to the adjustment as the 
unadjusted basis of the property so held bears to the entire unadjusted 
basis of all retirement-straight line property held by the taxpayer on 
its 1956 adjustment date.
    (c) Adjustment for part of terms-letter reserve applicable to 
property disposed of on or after changeover date and before 1956 
adjustment date. Pursuant to subsection (d)(2) of the Act, an adjustment 
to the basis of retirement-straight line property held by the taxpayer 
on its 1956 adjustment date shall be made as of that date for that part 
of the terms-letter reserve which was applicable to any retirement-
straight line property disposed of by sale, casualty, or abnormal 
retirement in the nature of special obsolescence, but only if the sale 
occurred in, or a deduction by reason of such casualty or abnormal 
retirement was allowed for Federal income-tax purposes for a period on 
or after the changeover date and before the taxpayer's 1956 adjustment 
date. This paragraph shall apply even though, in computing the adjusted 
basis of the property for purposes of determining gain or loss on the 
sale, casualty, or abnormal retirement, the basis of the retirement-
straight line property was not reduced by the part of the terms-letter 
reserve applicable to the property. If necessary, the adjustment 
required by this paragraph shall be allocated, in the manner prescribed 
in paragraph (b)(4) of this section, among all retirement-straight line 
property

[[Page 915]]

held by the taxpayer on its 1956 adjustment date.
    (d) Adjustment for depreciation allowable under the terms-letter for 
periods on and after the changeover date and before the 1956 adjustment 
date. Pursuant to subsection (d)(3) of the Act, an adjustment to the 
basis of retirement-straight line property held by the taxpayer on its 
1956 adjustment date shall be made as of that date for the entire amount 
of depreciation allowable under the terms-letter for all periods on and 
after the changeover date and before the taxpayer's 1956 adjustment 
date. This adjustment shall include all such depreciation allowable with 
respect to any retirement-straight line property which was disposed of 
on or after the changeover date and before the 1956 adjustment date.
    (e) Illustration of basis adjustments required for taxable years 
beginning on or after the 1956 adjustment date. The application of this 
section may be illustrated by the following example, which is based upon 
the assumption that multiple asset accounts are used:

    Example. (1) Assume that on its changeover date, January 1, 1943, 
the taxpayer or its predecessor held retirement-straight line property 
with an unadjusted cost basis of $10,000. The terms-letter reserve 
established as of January 1, 1943, with respect to such property was 
$3,000. Depreciation sustained before March 1, 1913, on retirement-
straight line property held on that date by the taxpayer or its 
predecessor, for which cost was or is claimed as basis, amounts to $800. 
Of this total depreciation sustained before March 1, 1913, $200 is 
attributable to retirement-straight line property retired before January 
1, 1943, under circumstances requiring the adjustment under paragraph 
(b)(2) of this section, and $600 is attributable to retirement-straight 
line property held on January 1, 1943, by the taxpayer or its 
predecessor. On December 31, 1954, retirement-straight line property 
costing $1,500 was permanently retired under circumstances giving rise 
to an abnormal retirement in the nature of special obsolescence. The 
terms-letter reserve applicable to this retired property was $450, of 
which $120 represents depreciation sustained before March 1, 1913. On 
December 31, 1954, retirement-straight line property costing $1,000 was 
also permanently retired under circumstances giving rise to a normal 
retirement. None of the property retired on December 31, 1954, had any 
market or salvage value on that date. Depreciation allowable under the 
terms-letter on retirement-straight line property for all periods on and 
after January 1, 1943, and before January 1, 1956 (the taxpayer's 1956 
adjustment date), amounts to $2,155, of which $345 is applicable to the 
property retired as an abnormal retirement.
    (2) The reserve for depreciation as of January 1, 1956, contains a 
credit balance of $3,360, determined as follows but without regard to 
the Act:

(i) Credits to reserve:                                                 
  Terms-letter reserve as of January 1, 1943................      $3,000
  Depreciation allowable under terms-letter from January 1,             
   1943, to December 31, 1955...............................       2,155
                                                 -------------          
  Balance...................................................       5,155
(ii) Charges to reserve:                                                
  Part of terms-letter reserve applicable to                            
   property abnormally retired..................        $450            
  Depreciation applicable to property abnormally                        
   retired and allowable from January 1, 1943,                          
   to December 31, 1954.........................         345            
  Adjustment for normal retirement..............       1,000            
                                                 ------------           
                                                                  $1,795
                                                             -----------
(iii) Balance as of January 1, 1956.........................       3,360
                                                 =============          
                                                                        

    (3) The adjusted basis on January 1, 1956, of the retirement-
straight line property held by the taxpayer on that date is $6,010, 
determined as follows and in accordance with this section:

(i) Asset account:                                                      
  Unadjusted cost on January 1, 1943........................     $10,000
  Less:                                                                 
    Adjustment for abnormal retirement..........      $1,500            
    Adjustment for normal retirement............       1,000            
                                                 ------------           
                                                                   2,500
                                                             -----------
  Balance as of January 1, 1956.............................       7,500
                                                 =============          
(ii) Credits to reserve for depreciation:                               
  Depreciation sustained before March 1, 1913, on--                     
      Property retired before January 1, 1943...............        200 
      Property held on January 1, 1943..........        $600            
      Less part of such depreciation sustained                          
       on property abnormally retired on                                
       December 31, 1954........................         120            
                                                 ------------           
                                                                     480
  Part of terms-letter reserve applicable to property                   
   abnormally retired on December 31, 1954 (including $120              
   depreciation sustained before March 1, 1913).............         450

[[Page 916]]

                                                                        
  Depreciation allowable under terms-letter from January 1,             
   1943, to December 31, 1955...............................       2,155
                                                 -------------          
      Total Credits.........................................       3,285
                                                 =============          
(iii) Charges to reserve for depreciation:                              
  Part of terms-letter reserve applicable to property                   
   abnormally retired.......................................         450
  Depreciation applicable to property abnormally retired and            
   allowable from January 1, 1943, to December 31, 1954.....         345
  Adjustment for normal retirement..........................       1,000
                                                 -------------          
      Total charges.........................................       1,795
                                                 =============          
(iv) Balance in reserve for depreciation:                               
  Total credits.............................................       3,285
  Total charges.............................................       1,795
                                                 -------------          
      Balance as of January 1, 1956.........................       1,490
                                                 =============          
(v) Adjusted basis of property:                                         
  Balance in asset account..................................       7,500
  Balance in reserve for depreciation.......................       1,490
                                                 -------------          
  Adjusted basis as of January 1, 1956......................       6,010
                                                 =============          
                                                                        

    (4) The following adjustments to the reserve determined under 
subparagraph (2) of this paragraph may be made in order to arrive at the 
reserve determined under subparagraph (3)(iv) of this paragraph:

(i) Credit balance in reserve, as determined under                      
 subparagraph (2) of this paragraph.........................     $3,360 
(ii) Credit adjustments:                                                
  Depreciation sustained before March 1, 1913,                          
   on--                                                                 
    Property retired before January 1, 1943.....        $200            
    Property held on January 1, 1943............         480            
  Part of terms-letter reserve applicable to                            
   property abnormally retired on December 31,                          
   1954.........................................         450            
                                                 ============           
                                                                   1,130
                                                             -----------
      Balance...............................................       4,490
(iii) Debit adjustment:                                                 
  Terms-letter reserve as of January 1, 1943................       3,000
                                                 -------------          
(iv) Credit Balance in reserve, as determined under                     
 subparagraph (3)(iv) of this paragraph.....................       1,490
                                                 =============          
                                                                        

    (5) The $6,010 adjusted basis as of January 1, 1956, of the 
retirement-straight line property held by the taxpayer on that date is 
to be recovered over the estimated remaining useful life of that 
property. The remaining useful life of the property will be reviewed 
regularly, and appropriate adjustments in the rates will be made as 
necessary in order to spread the remaining cost less estimated salvage 
over the estimated remaining useful life of the property. See 
Sec. 1.167(a)-1.



Sec. 1.9001-3   Basis adjustments for taxable years between changeover date and 1956 adjustment date.

    (a) In general. (1) Subsection (e) of the Act provides the 
adjustments required to be made in determining the adjusted basis of any 
retirement-straight line property as of any time on or after the 
changeover date and before the taxpayer's 1956 adjustment date. This 
adjusted basis shall be used for all purposes of the Internal Revenue 
Code of 1939 and the Internal Revenue Code of 1954 for taxable years 
beginning on or after the changeover date and before the taxpayer's 1956 
adjustment date, except as provided in subparagraph (4) of this 
paragraph. The adjustments so required, which are set forth in 
paragraphs (b) and (c) of this section, shall not be used in determining 
the adjusted basis of property for taxable years beginning before the 
changeover date or on or after the taxpayer's 1956 adjustment date.
    (2) In order to arrive at the adjusted basis as of any specific date 
occurring on or after the changeover date and before the 1956 adjustment 
date, the taxpayer shall start with the unadjusted basis of all 
retirement-straight line property held on the changeover date by the 
taxpayer or its predecessor and shall, as of that specific date and with 
respect to both the asset and reserve accounts, (i) make the adjustments 
prescribed by this section and subsection (e) of the Act and (ii) also 
make those adjustments required, in accordance with the method of 
accounting regularly used, for additions, retirements, and other 
dispositions of property. For an illustration of adjustments required in 
accordance with the method of accounting regularly used, see the example 
in paragraph (d) of this section.
    (3) The adjustments required by subsection (e) of the Act shall be 
made in lieu of the adjustments for depreciation otherwise required by 
section 1016(a) (2) and (3) of the Code and by the corresponding 
provisions of prior revenue laws.
    (4) Although this section, and subsection (e) of the Act, shall 
apply in determining the excess-profits tax, they shall not apply in 
determining adjusted

[[Page 917]]

basis for the purpose of computing equity capital for any day under 
section 437(c) (relating to the Excess Profits Tax Act of 1950) (64 
Stat. 1137) of the Internal Revenue Code of 1939. For the adjustments to 
be made in computing equity capital under such section, see paragraph 
(c) of Sec. 1.9001-4.
    (b) Adjustment for terms-letter reserve. Pursuant to subsection 
(e)(1) of the Act, the basis of any retirement-straight line property 
shall be adjusted, as of any specific applicable date occurring on or 
after the changeover date and before the 1956 adjustment date, for the 
amount of the terms-letter reserve applicable to such property.
    (c) Adjustment for depreciation allowable under the terms-letter. 
Pursuant to subsection (e)(2) of the Act, the basis of any retirement-
straight line property shall be adjusted, as of any specific applicable 
date occurring on or after the changeover date and before the 1956 
adjustment date, for depreciation applicable to such property and 
allowable under the terms-letter.
    (d) Illustration of basis adjustments required for taxable years 
beginning on or after the changeover date and before the 1956 adjustment 
date. The application of this section may be illustrated by the 
following example, which is based upon the assumption that multiple 
asset accounts are used:

    Example. (1) The facts are assumed to be the same as those in the 
example under paragraph (e) of Sec. 1.9001-2, except that the adjusted 
basis of retirement-straight line property is determined as of January 
1, 1955, and the depreciation allowable under the terms-letter from the 
changeover date to December 31, 1954, is $2,100.
    (2) The adjusted basis on January 1, 1955, of the retirement-
straight line property held by the taxpayer on that date is $4,195, 
determined as follows and in accordance with this section:

(i) Asset account:                                                      
  Unadjusted cost on January 1, 1943.......................     $10,000 
  Less:                                                                 
    Adjustment for abnormal retirement............   $1,500             
    Adjustment for normal retirement..............    1,000             
                                                   ---------            
                                                                   2,500
                                                   ----------           
      Balance as of January 1, 1955........................        7,500
                                                   ==========           
(ii) Credits to reserve for depreciation:                               
  Entire terms-letter reserve as of January 1, 1943........        3,000
  Depreciation allowable under terms-letter from January 1,             
   1943, to December 31, 1954..............................        2,100
                                                   ----------           
      Total credits........................................        5,100
                                                   ==========           
(iii) Charges to reserve for depreciation:                              
  Part of terms-letter reserve applicable to property                   
   abnormally retired on December 31, 1954.................          450
  Depreciation applicable to property abnormally retired                
   and allowable from January 1, 1943, to December 31, 1954          345
    Adjustment for normal retirement.......................        1,000
                                                   ==========           
      Total charges........................................        1,795
                                                   ==========           
(iv) Balance in reserve for depreciation:                               
    Total credits..........................................        5,100
    Total charges..........................................        1,795
                                                   ----------           
      Balance as of January 1, 1955........................        3,305
                                                   ==========           
(v) Adjusted basis of property:                                         
    Balance in asset account...............................        7,500
    Balance in reserve for depreciation....................        3,305
                                                   ----------           
      Adjusted basis as of January 1, 1955.................        4,195
                                                   ==========           
                                                                        



Sec. 1.9001-4   Adjustments required in computing excess-profits credit.

    (a) In general. Subsection (f) of the Act provides adjustments 
required to be made in computing the excess-profits credit for any 
taxable year under the Excess Profits Tax Act of 1940 (54 Stat. 975) or 
under the Excess Profits Tax Act of 1950 (64 Stat. 1137). These 
adjustments are set forth in paragraphs (b) and (c) of this section, and 
they shall apply notwithstanding the terms-letter.
    (b) Equity invested capital. (1) Pursuant to subsection (f)(1) of 
the Act, in determining equity invested capital for any day of any 
taxable year under section 458 (relating to the Excess Profits Tax Act 
of 1950) or section 718 (relating to the Excess Profits Tax Act of 1940) 
of the Internal Revenue Code of 1939, the accumulated earnings and 
profits as of the changeover date, and as of the beginning of each 
taxable year thereafter, shall be reduced by the depreciation sustained 
before March 1, 1913, on all retirement-straight line property held on 
March 1, 1913, by the taxpayer or a predecessor for which cost was or is 
claimed as basis and which was held on the changeover date by the 
taxpayer or a predecessor.

[[Page 918]]

    (2) For the computation of accumulated earnings and profits in 
determining equity invested capital, see 26 CFR (1941 Supp.) 30.718-2, 
as amended by Treasury Decision 5299, approved October 1, 1943, 8 FR 
13451, C.B. 1943, 747 (Regulations 109); 26 CFR (1943 Cum. Supp.) 
35.718-2 (Regulations 112); and 26 CFR (1939) 41.458-4 (Regulations 
130).
    (c) Equity capital. (1) Pursuant to subsection (f)(2) of the Act, in 
determining the adjusted basis of assets for the purpose of computing 
equity capital for any day under section 437(c) (relating to the Excess 
Profits Tax Act of 1950) of the Internal Revenue Code of 1939, the basis 
of the assets which enter into the computation shall also be reduced by:
    (i) Depreciation sustained before March 1, 1913, on all retirement-
straight line property held on March 1, 1913, by the taxpayer or a 
predecessor for which cost was or is claimed as basis and which was:
    (a) Retired before the changeover date by the taxpayer or a 
predecessor, or
    (b) Held on the changeover date by the taxpayer or a predecessor and 
also held as of the beginning of the day for which the equity capital is 
being determined; and
    (ii) All depreciation applicable to the assets which enter into the 
computation and allowable under the terms-letter for all periods on and 
after the changeover date and before the taxable year for which the 
excess-profits credit is being computed.
    (2) The adjustment required to be made by subparagraph (1)(i)(a) of 
this paragraph as of the beginning of the day for which the equity 
capital is being determined shall be made in accordance with the 
conditions and limitation described in paragraph (b)(2) of Sec. 1.9001-
2.
    (3) For the determination of equity capital under section 437(c) of 
the Internal Revenue Code of 1939, see 26 CFR (1939) 40.437-5 
(Regulations 130).

              DEALER RESERVE INCOME ADJUSTMENT ACT OF 1960



Sec. 1.9002   Statutory provisions; Dealer Reserve Income Adjustment Act of 1960 (74 Stat. 124).

    Section 1. Short title. This Act may be cited as the ``Dealer 
Reserve Income Adjustment Act of 1960''.
    Sec. 2. Persons to whom this Act applies. This Act shall apply to 
any person who, for his most recent taxable year ending on or before 
June 22, 1959:
    (1) Computed, or was required to compute, taxable income under an 
accrual method of accounting.
    (2) Treated any dealer reserve income, which should have been taken 
into account (under the accrual method of accounting) for such taxable 
year, as accruable for a subsequent taxable year, and
    (3) Before September 1, 1960, makes an election under section 3(a) 
or 4(a) of this Act.
    Sec. 3. Election to have section 481 apply--(a) General rule. If:
    (1) For the year of the change (determined under subsection (b)), 
the treatment of dealer reserve income by any person to whom this Act 
applies is changed to a method proper under the accrual method of 
accounting (whether or not such person initiated the change),
    (2) Such person makes an election under this subsection, and
    (3) Such person does not make the election provided by section 4(a),

then, for purposes of section 481 of the Internal Revenue Code of 1954, 
the change described in paragraph (1) shall be treated as a change in 
method of accounting not initiated by the taxpayer.
    (b) Year of change, etc. In applying section 481 of the Internal 
Revenue Code of 1954 for purposes of this section, the ``year of the 
change'' in the case of any person is:
    (1) Except as provided in paragraph (2), the first taxable year 
ending after June 22, 1959, or
    (2) The earliest taxable year (whether the Internal Revenue Code of 
1954 or the Internal Revenue Code of 1939 applies to such year) for 
which:
    (A) On or before June 22, 1959:
    (i) The Secretary of the Treasury or his delegate issued a notice of 
deficiency, or a written notice of a proposed deficiency, with respect 
to dealer reserve income, or
    (ii) Such person filed with the Secretary or his delegate a claim 
for refund or credit with respect to dealer reserve income, and

[[Page 919]]

    (B) The assessment of any deficiency, or the refund or credit of any 
overpayment, whichever is applicable, was not, on June 21, 1959, 
prevented by the operation of any law or rule of law.

For purposes of this section, section 481 of such Code shall be treated 
as applying to any year of the change to which the Internal Revenue Code 
of 1939 applies.
    Sec. 4. Election to have section 481 not apply; payment in 
installments--(a) General rule. If a person to whom this Act applies 
makes an election under this subsection, then for purposes of Chapter 1 
of the Internal Revenue Code of 1954 (and the corresponding provisions 
of prior law) a change in the treatment of dealer reserve income to a 
method proper under the accrual method of accounting shall be treated as 
not a change in method of accounting in respect of which section 481 of 
the Internal Revenue Code of 1954 applies. Any election under this 
subsection shall apply to all taxable years ending on or before June 22, 
1959 (whether the provisions of the Internal Revenue Code of 1954 or the 
corresponding provisions of prior law apply), for which the assessment 
of any deficiency, or for which refund or credit of any overpayment, 
whichever is applicable, was not, on June 21, 1959, prevented by the 
operation of any law or rule of law.
    (b) Election to pay tax in installments--(1) Eligibility. If the net 
increase in tax (as defined in paragraph (2)) which results solely from 
the effect of the election provided by subsection (a) exceeds $2,500, 
then the taxpayer may elect (at the time the election is made under 
subsection (a)) to pay in two or more (but not to exceed 10) equal 
annual installments any portion of such net increase which (on the date 
of such election) is unpaid.
    (2) Net increase in tax defined. For purposes of this section, the 
term ``net increase in tax'' means the amount (if any) by which:
    (A) The sum of the increases in tax (including interest) for all 
taxable years to which the election applies and which is attributable to 
the election, exceeds
    (B) The sum of the decreases in tax (including interest) for all 
taxable years to which the election applies and which is attributable to 
the election.

For purposes of this paragraph, interest for the period before the date 
of the election shall be computed as provided in Chapter 67 of the 
Internal Revenue Code of 1954 (or the corresponding provisions of prior 
revenue laws).
    (c) Due date for installments. If an election is made under 
subsection (b), the first installment shall be paid on or before the 
date prescribed by section 6151(a) of the Internal Revenue Code of 1954 
for payment of the tax for the taxable year in which the election was 
made, and each succeeding installment shall be paid on or before the 
date which is one year after the date prescribed by this subsection for 
payment of the preceding installment.
    (d) Effect of subsequent redetermination of tax--(1) 
Redetermination. If:
    (A) The taxpayer makes an election under subsection (b), and
    (B) There is a redetermination of the taxpayer's tax for any taxable 
year to which the election provided by subsection (a) applies,

then the net increase in tax (as defined in subsection (b)(2) shall be 
redetermined.
    (2) Effect of increase. If the redetermination described in 
paragraph (1)(B) results in an increase in the net increase in tax (as 
defined in subsection (b)(2)), the resulting increase shall be prorated 
to ull the installments. The part of such resulting increase so prorated 
to any installment the date for payment of which has not arrived shall 
be collected at the same time as, and as a part of, such installment. 
The part of such resulting increase so prorated to any installment the 
date for payment of which has arrived shall be paid upon notice and 
demand from the Secretary of the Treasury or his delegate.
    (3) Effect of decrease. For treatment of a decrease in the net 
increase in tax as the result of a redetermination described in 
paragraph (1)(B), see section 6403 of the Internal Revenue Code of 1954 
(relating to overpayment of installment).
    (e) Suspension of interest--(1) In general. If an election under 
subsection (a) applies and there is a net increase in tax (as defined in 
subsection (b)(2)), no interest shall be imposed on any underpayment 
(and no interest shall be paid on any overpayment) attributable to such 
election for the period beginning on the date of such election and 
ending on the date prescribed by section 6151(a) of the Internal Revenue 
Code of 1954 for payment of the tax for the taxable year in which the 
election was made.
    (2) No interest during installment period. If an election under 
subsection (b) applies, no interest shall be imposed for the period on 
or after the date fixed for payment of the first installment unless 
payment of unpaid installments is accelerated under subsection (f) or 
(g).
    (3) Interest where payment is accelerated. If payment is accelerated 
under subsection (f) or (g), interest determined in accordance with the 
provisions of section 6601 of the Internal Revenue Code of 1954 on the 
entire unpaid tax shall be payable:
    (A) If payment is accelerated under subsection (f), from the date of 
notice and demand provided by such subsection to the date such tax is 
paid, or
    (B) If payment is accelerated under subsection (g), from the date 
fixed for paying the unpaid installment to the date such tax is paid.

[[Page 920]]

    (f) Termination of installment payment privilege. The extension of 
time provided by this section for payment of tax shall cease to apply, 
and any unpaid installments shall be paid upon notice and demand from 
the Secretary of the Treasury or his delegate, if:
    (1) In the case of a taxpayer who is an individual, he dies or 
ceases to engage in a trade or business,
    (2) In the case of a taxpayer who is a partner, the entire interest 
of such partner is transferred or liquidated or the partnership 
terminates, or
    (3) In the case of a taxpayer which is a corporation, the taxpayer 
ceases to engage in a trade or business, unless the unpaid portion of 
the tax payable in installments is required to be taken into account by 
the acquiring corporation under section 5(d).
    (g) Failure to pay installment. If any installment under this 
section is not paid on or before the date fixed for its payment by this 
section (including any extension of time for payment of such 
installment), the unpaid installments shall be paid upon notice and 
demand from the Secretary of the Treasury or his delegate.
    (h) Suspension of running of periods of limitation. The running of 
the periods of limitation provided by section 6502 of the Internal 
Revenue Code of 1954 (or corresponding provision of prior law) for the 
collection of any amount of tax payable in installments under this 
section shall be suspended for the period of any extension of time for 
payment granted under this section.
    Sec. 5. Definitions; special rules--(a) Dealer reserve income. For 
purposes of this Act, the term ``dealer reserve income'' means:
    (1) That part of the consideration derived by any person from the 
sale or other disposition of customers' sales contracts, notes, and 
other evidences of indebtedness (or derived from customers' finance 
charges connected with such sales or other dispositions) which is:
    (A) Attributable to the sale by such person to such customers, in 
the ordinary course of his trade or business, of real property or 
tangible personal property, and
    (B) Held in a reserve account, by the financial institution to which 
such person disposed of such evidences of indebtedness, for the purpose 
of securing obligations of such person or of such customers, or both; 
and
    (2) That part of the consideration:
    (A) Derived by any person from a sale described in paragraph (1)(A) 
in respect of which part or all of the purchase price of the property 
sold is provided by a financial institution to or for the customer to 
whom such property is sold, or
    (B) Derived by such person from finance charges connected with the 
financing of such sale,

which is held in a reserve account by such financial institution for the 
purpose of securing obligations of such person or of such customer, or 
both.
    (b) Financial institution. For purposes of this Act, the term 
``financial institution'' means any person regularly engaged in the 
business of acquiring evidences of indebtedness of the kind described in 
subsection (a)(1), or of financing sales of the kind described in 
subsection (a)(2), or both.
    (c) Other terms; application of other laws. Except where otherwise 
distinctly expressed or manifestly intended, terms used in this Act 
shall have the same meaning as when used in the Internal Revenue Code of 
1954 and all provisions of law shall apply with respect to this Act as 
if this Act were a part of such Code.
    (d) Acquiring corporation. In the case of the acquisition of assets 
of a corporation by another corporation in a distribution or transfer 
described in section 381(a) of the Internal Revenue Code of 1954, the 
acquiring corporation shall, for purposes of this Act, be treated as if 
it were the distributor or transferor corporation.
    (e) Statutes of limitations--(1) Extension of period for assessment 
and refund or credit. For purposes of applying sections 3 and 4 of this 
Act, if the assessment of any deficiency, or the refund or credit of any 
overpayment, for any taxable year was not prevented on June 21, 1959, by 
the operation of any law or rule of law, but would be so prevented prior 
to September 1, 1961, the period within which such assessment, or such 
refund or credit, may be made shall not expire prior to September 1, 
1961. An election by a taxpayer under section 3 or 4 of this Act shall 
be considered as a consent to the application of the provisions of this 
subsection.
    (2) Years closed by closing agreement or compromise. For purposes of 
this Act, if the assessment of any deficiency, or the refund or credit 
of any overpayment, for any taxable year is prevented on the date of an 
election under section 3 or 4 of this Act by the operation of the 
provisions of Chapter 74 of the Internal Revenue Code of 1954 (relating 
to closing agreements and compromises) or by the corresponding 
provisions of the Internal Revenue Code of 1939, such assessment, or 
such refund or credit, shall be considered as having been prevented on 
June 21, 1959.
    (f) Regulations. The Secretary of the Treasury or his delegate shall 
prescribe such regulations as may be necessary to carry out the purposes 
of this Act, including regulations relating to:
    (1) The application of the provisions of this Act in the case of 
partnerships, and

[[Page 921]]

    (2) The manner in which the elections provided by this Act are to be 
made.

[T.D. 6490, 25 FR 8369, Sept. 1, 1960]



Sec. 1.9002-1   Purpose, applicability, and definitions.

    (a) In general. The Dealer Reserve Income Adjustment Act of 1960 (74 
Stat. 124) contains transitional provisions relating to adjustments to 
income resulting from a change in the income tax treatment of dealer 
reserve income. The purpose of the Act is to provide eligible taxpayers 
who elect to have its provisions apply with two alternatives for 
accounting for the adjustments to income resulting from a change to a 
proper method of reporting dealer reserve income. The Act also provides 
certain taxpayers with an election to pay in installments any net 
increase in tax. Eligible taxpayers must make any election under the 
provisions of the Act prior to September 1, 1960. If any election is 
made, then the applicable provisions of the Act and Secs. 1.9002-1 to 
1.9002-8, inclusive, shall apply.
    (b) Eligibility to elect. In order to be eligible to make any of the 
elections provided by the Act, a taxpayer must have, for his most recent 
taxable year ending on or before June 22, 1959, (1) computed, or been 
required to compute, taxable income under an accrual method of 
accounting, and (2) treated dealer reserve income (or portions thereof) 
which should have been taken into account (under the accrual method of 
accounting) for such most recent taxable year as accruable for a 
subsequent taxable year. Thus, the elections provided by the Act are not 
available to a person who, for his most recent taxable year ending on or 
before June 22, 1959, reported dealer reserve income under a method 
proper under the accrual method of accounting or who was not required to 
compute taxable income under the accrual method of accounting. An 
election may be made even though the taxpayer is litigating his 
liability for income tax based upon his treatment of dealer reserve 
income, whether in The Tax Court of the United States or any other 
court, and an election filed by a taxpayer who is litigating his 
liability for income tax based upon his treatment of dealer reserve 
income does not constitute a waiver of his right to continue pending 
litigation until final judicial determination. He must, however, comply 
with the provisions of the Act and the regulations thereunder.
    (c) Definitions. For purposes of the Act and Secs. 1.9002-1 to 
1.9002-8, inclusive:
    (1) The Act. The term the Act means the Dealer Reserve Income 
Adjustment Act of 1960 (74 Stat. 124).
    (2) Dealer reserve income. The term dealer reserve income means:
    (i) That part of the consideration derived by any person from the 
sale or other disposition of customers' sales contracts, notes, and 
other evidences of indebtedness (or derived from customers' finance 
charges connected with such sales or other dispositions) which is:
    (a) Attributable to the sale by such person to such customers, in 
the ordinary course of his trade or business, of real property or 
tangible personal property, and
    (b) Held in a reserve account, by the financial institution to which 
such person disposed of such evidences of indebtedness, for the purpose 
of securing obligations of such person or of such customers, or both; 
and
    (ii) That part of the consideration:
    (a) Derived by any person from a sale described in subdivision 
(i)(a) of this subparagraph in respect of which part or all of the 
purchase price of the property sold is provided by a financial 
institution to or for the customer to whom such property is sold, or
    (b) Derived by such person from finance charges connected with the 
financing of such sale, which is held in a reserve account by such 
financial institution for the purpose of securing obligations of such 
person or of such customer, or both. Thus, the term includes amounts 
held in a reserve account by a financial institution in transactions in 
which the customer becomes obligated to the institution as well as such 
amounts so held by a financial institution in transactions in which the 
taxpayer is the obligee on the contract, note, or other evidence of 
indebtedness. For purposes of the definition of the term ``dealer 
reserve income'' it is immaterial whether or not the taxpayer guarantees 
the customer's obligation in excess of the reserve retained by the

[[Page 922]]

financial institution. The term does not include the consideration 
derived from transactions relating to the sale of intangible property 
such as stocks, bonds, copyrights, patents, etc. Further, the term does 
not include consideration derived by the taxpayer from transactions 
relating to the sale of property by a person not the taxpayer or to 
casual sales of property not in the ordinary course of the taxpayer's 
trade or business.
    (3) Financial institution. The term financial institution means any 
person regularly engaged in the business of acquiring evidences of 
indebtedness of the kind described in section 5(a)(1) of the Act, or of 
financing sales of the kind described in section 5(a)(2) of the Act, or 
both. It thus includes banking institutions, finance companies, building 
and loan associations, and other similar type organizations, as well as 
an individual or partnership regularly engaged in the described 
business.
    (4) Taxpayer. The term taxpayer means any person to whom the Act 
applies.
    (5) Other terms. All other terms which are not specifically defined 
shall have the same meaning as when used in the Code except where 
otherwise distinctly expressed or manifestly intended.

[T.D. 6490, 25 FR 8371, Sept. 1, 1960]



Sec. 1.9002-2   Election to have the provisions of section 481 of the Internal Revenue Code of 1954 apply.

    (a) In general. Section 3(a) of the Act provides that if the income 
tax treatment of dealer reserve income by the taxpayer is changed 
(whether or not such change is initiated by the taxpayer) to a proper 
method under the accrual method of accounting, then the taxpayer may 
elect to have such change treated as a change in method of accounting 
not initiated by the taxpayer to which the provisions of section 481 of 
the Code apply. This election may be made only when the alternative 
election under section 4(a) of the Act has not been exercised.
    (b) Year of change. Where an election has been made under section 
3(a) of the Act to have section 481 of the Code apply, then for purposes 
of applying section 481 of the Code the year of change shall be 
determined in accordance with the provisions of section 3(b) of the Act. 
Section 3(b) provides that the year of change is the earlier of (1) the 
first taxable year ending after June 22, 1959, or (2) the earliest 
taxable year for which, on or before June 22, 1959,
    (i) There was issued a notice of deficiency or written notice of a 
proposed deficiency attributable to the erroneous treatment of dealer 
reserve income, or
    (ii) The taxpayer filed a claim for refund or credit with respect to 
the treatment of such income,

and in respect of which the assessment of any deficiency, or the refund 
or credit of any overpayment, was not prevented on June 21, 1959, by the 
operation of any law or rule of law. The written notice of proposed 
deficiency includes a 15- or 30-day letter issued under established 
procedure or other similar written notification.
    (c) Application to pre-1954 Code years. If the earliest year 
described in paragraph (b) of this section is a year subject to the 
Internal Revenue Code of 1939 in respect of which assessment of any 
deficiency or refund or credit of any overpayment was not prevented on 
June 21, 1959, by the operation of any law or rule of law, section 481 
of the Internal Revenue Code of 1954 shall be treated as applying in the 
same manner it would have applied had it been enacted as part of the 
Internal Revenue Code of 1939.
    (d) Examples. The operation of this section in determining the year 
of change may be illustrated by the following examples:

    Example (1). D, a taxpayer on the calendar year basis who employs 
the accrual method of accounting, voluntarily changed to the proper 
method of accounting for dealer reserve income for the taxable year 
1959. A statutory notice of deficiency, however, was issued prior to 
June 23, 1959, relating to the erroneous treatment of such income for 
the taxable year 1956, which was the earliest taxable year in respect of 
which assessment of a deficiency or credit or refund of an overpayment 
was not prevented on June 21, 1959. Prior to September 1, 1960, D 
properly exercises his election under section 3 of the Act to have the 
change in the treatment of dealer reserve income treated as a change in 
method of accounting not initiated by the taxpayer to which section 481 
of the Code applies. Under these facts, 1956 is the year of the change 
for purposes of applying section

[[Page 923]]

481. Accordingly, the net amount of any adjustment found necessary as a 
result of the change in the treatment of dealer reserve income which is 
attributable to taxable years subject to the 1954 Code shall be taken 
into account for the year of change in accordance with section 481. The 
net amount of the adjustments attributable to pre-1954 Code years is to 
be disregarded. The income of each taxable year succeeding the year of 
change in respect of which the assessment of any deficiency or refund or 
credit of any overpayment is not prevented will be recomputed under the 
proper method of accounting initiated by the change.
    Example (2). Assume the same facts as set forth in example (1), 
except that no notice of a proposed deficiency of any type has been 
issued, and assume further that no claim for refund has been filed. 
Since there was no earlier year open on June 21, 1959, for which the 
taxpayer either was notified of a proposed deficiency attributable to 
the erroneous treatment of dealer reserve income or for which he had 
filed a claim for refund or credit with respect to the treatment of such 
income, the year of change is 1959, the first taxable year ending after 
June 22, 1959. Accordingly, the net amount of any adjustment found 
necessary as a result of the change in the treatment of dealer reserve 
income which is attributable to taxable years subject to the 1954 Code 
shall be taken into account for the year of the change in accordance 
with section 481. The net amount of the adjustments attributable to pre-
1954 Code years is to be disregarded.
    Example (3). Assume the same facts as set forth in example (1), 
except that a refund claim specifying adjustments relative to dealer 
reserve income was timely filed for the taxable year 1951, which was the 
earliest taxable year for which a refund or credit of an overpayment or 
assessment of a deficiency was not prevented on June 21, 1959. Under 
this factual situation, the year of change for purposes of applying 
section 481 would be 1951. Section 481 would be applied to 1951 and be 
given effect for that year in the same manner as it would have applied 
had it been enacted as a part of the 1939 Code and as if the change to 
the proper method of accounting had not been initiated by the taxpayer. 
Any adjustment with regard to dealer reserve income attributable to pre-
1951 years is disregarded. The income of each taxable year succeeding 
the year of change in respect of which the assessment of any deficiency 
or refund or credit of any overpayment is not prevented will be 
recomputed under the proper method of accounting initiated by the 
change.

[T.D. 6490, 25 FR 8371, Sept. 1, 1960]



Sec. 1.9002-3   Election to have the provisions of section 481 of the Internal Revenue Code of 1954 not apply.

    Section 4(a) of the Act provides that in the treatment of dealer 
reserve income by the taxpayer is changed to a method proper under the 
accrual method of accounting, then the taxpayer may elect to have such 
change treated as not a change in method of accounting to which the 
provisions of section 481 of the Internal Revenue Code of 1954 apply. 
This election shall apply to all taxable years ending on or before June 
22, 1959, for which the assessment of any deficiency, or for which 
refund or credit of any overpayment, was not prevented on June 21, 1959, 
by the operation of any law or rule of law. This election may be made 
only if the alternative election under section 3(a) of the Act has not 
been exercised. If an election is made under section 4(a) of the Act, 
taxable income (or net income in the case of a taxable year to which the 
Internal Revenue Code of 1939 applies) shall be recomputed under a 
proper method of accounting for dealer reserve income for each taxable 
year to which the election applies, without regard to section 481.

[T.D. 6490, 25 FR 8372, Sept. 1, 1960]



Sec. 1.9002-4   Election to pay net increase in tax in installments.

    (a) Election. If an election is made under section 4(a) of the Act 
and if the net increase in tax determined in accordance with paragraph 
(b) of this section exceeds $2,500, the taxpayer may also make an 
election under section 4(b) of the Act prior to September 1, 1960, to 
pay any portion of such net increase in tax, unpaid on the date of the 
election, in 2 or more, but not to exceed 10, equal annual installments. 
If the taxpayer making the election under section 4(a) of the Act is a 
partnership or a small business corporation electing under Subchapter S, 
Chapter 1 of the Code, the determination as to whether the net increase 
in tax exceeds $2,500 shall be made separately as to each partner or 
shareholder, respectively, with regard to his individual liability. 
Thus, if a partnership makes an election under section 4(a) of the

[[Page 924]]

Act, and partners A and B had a net increase in tax of $3,000 and 
$2,000, respectively, as a result of dealer reserve income adjustments 
to partnership income, partner A may elect under section 4(b) of the Act 
to pay the net increase in 2 or more, but not exceeding 10, equal annual 
installments to the extent that such tax was unpaid on the date of the 
election. Partner B may not make the election since his net increase in 
tax does not exceed $2,500.
    (b) Net increase in tax. (1) The term ``net increase in tax'' means 
the amount by which the sum of the increases in tax (including interest) 
for all taxable years to which the election under section 4(a) of the 
Act applies and which is attributable to the election exceeds the sum of 
the decreases in tax (including interest) for all taxable years to which 
the election under such section applies and which is attributable to the 
election.
    (2) In determining the net increase in tax, the tax and interest for 
each taxable year to which the election applies is computed by taking 
into account all adjustments necessary to reflect the change to the 
proper treatment of dealer reserve income. If the computation results in 
additional tax for a taxable year, then interest is computed under 
section 6601 of the Code (or corresponding provisions of prior law) on 
such additional tax for the taxable year involved from the last date 
prescribed for payment of the tax for such taxable year to the date the 
election is made. The interest so computed is then added to the 
additional tax determined for such taxable year. The sum of these two 
items (tax plus interest) represents the increase in tax for such 
taxable year. If the computation of the tax after taking into account 
the appropriate dealer reserve income adjustments results in a reduction 
in tax for any taxable year to which the election applies, interest 
under section 6611 of the Code (or corresponding provisions of prior 
law) is computed from the date of the overpayment of the tax for such 
year to the date of the election. The amount of the interest so computed 
is then added to the reduction in tax to determine the total decrease in 
tax for such year. The net increase in tax is then determined by adding 
together the total increases in tax for each year to which the election 
applies and from the resulting total subtracting the sum of the total 
decreases in tax for each year. If the total increases in tax for all 
such years do not exceed the total decreases in tax, there is no net 
increase in tax for purposes of section 4(b) of the Act. For purposes of 
determining the net increase in tax, net operating losses affecting the 
computation of tax for any prior taxable year not otherwise affected 
shall be taken into account.
    (c) Time for paying installments. If the election under this section 
is made to pay the unpaid portion of the net increase in tax in 
installments, the first installment shall be paid on or before the date 
prescribed by section 6151(a) of the Code for payment of the tax for the 
taxable year in which such election is made. Each succeeding installment 
shall be paid on or before the date which is one year after the date 
prescribed for the payment of the preceding installment.
    (d) Termination of installment privilege--(1) For nonpayment of 
installment. The extension of time provided by section 4(b) of the Act 
for payment of the net increase in tax in installments shall terminate, 
and any unpaid installments shall be paid upon notice and demand from 
the district director if any installment under such section is not paid 
by the taxpayer on or before the date fixed for its payment, including 
any extension of time for payment of any such installment.
    (2) For other reasons. The extension of time provided by section 
4(b) of the Act for payment of the net increase in tax in installments 
shall terminate, and any unpaid installments shall be paid upon notice 
and demand from the district director if:
    (i) In the case of an individual, he dies or ceases to engage in any 
trade or business,
    (ii) In the case of a partner, his entire interest in the 
partnership is transferred or liquidated or the partnership terminates, 
or
    (iii) In the case of a corporation, it ceases to engage in a trade 
or business, unless the unpaid portion of the tax payable in 
installments is required to be taken into account by an acquiring

[[Page 925]]

corporation under section 5(d) of the Act.

The installment privilege is not terminated under this subparagraph even 
though the taxpayer terminates the trade or business in respect of which 
the dealer reserve income is attributable provided the taxpayer 
continues in a trade or business. Further, the privilege is not 
terminated by a transfer of a part of a partnership interest so long as 
the partner retains any interest in the partnership. Also, the privilege 
is not terminated by a transaction falling within the provisions of 
section 381(a) of the Code if, under section 5(d) of the Act, the 
acquiring corporation is required to take into account the unpaid 
portion of the net increase in tax. In such a case the privilege may be 
continued by the acquiring corporation in the same manner and under the 
same conditions as though it were the distributor or transferor 
corporation.
    (e) Redetermination of tax subsequent to exercise of installment 
election. Section 4(d) of the Act provides that where a taxpayer has 
elected to pay the net increase in tax in installments and thereafter it 
becomes necessary to redetermine the taxpayer's tax for any taxable year 
to which the election provided by section 4(a) of the Act applies, then 
the net increase in tax shall be redetermined. Where the redetermination 
does not involve adjustments affecting the treatment of dealer reserve 
income, then the net increase in tax previously computed will not be 
disturbed. The net increase in tax is limited to the amount of tax 
computed under section 4(b)(2) of the Act as a result of the change in 
treatment accorded dealer reserve income. If the redetermination of tax 
for any taxable year to which the election applies results in an 
addition to the net increase in tax previously computed, then such 
addition shall be prorated to all of the installments whether paid or 
unpaid. The part of the addition, prorated to installments which are not 
yet due, shall be collected at the same time as, and as a part of, such 
installments. The part of the addition prorated to installments, the 
time for payment of which has arrived, shall be paid upon notice and 
demand from the district director. Under section 4(g) of the Act, 
failure to make such payment within 10 days after issuance of notice and 
demand will terminate the installment privilege. The imposition of 
interest on the addition to the net increase in tax as a result of the 
redetermination will be determined in the same manner as interest on the 
previously computed net increase in tax. Thus, no interest will be 
imposed on the amount of the addition to the net increase in tax 
prorated to installments not yet due unless the installment privilege is 
terminated under subsection (f) or (g) of section 4 of the Act. If a 
reduction in the net increase in tax results from a redetermination of 
tax for any taxable year to which the election applies, the entire 
amount of such reduction shall, in accordance with the provisions of 
section 6403 of the Code (relating to overpayment of installments), be 
prorated to the installments which are not yet due, resulting in a pro 
rata reduction in each of such installments. Where the redetermination 
does not involve adjustments pertaining to dealer reserve income, then 
any resulting deficiency pertaining to the year to which the election 
applies will be assessed and collected, in accordance with the 
applicable provisions of the Code (or corresponding provisions of prior 
law) without regard to any election made under the Act.
    (f) Periods of limitation. Section 4(h) of the Act provides that 
where there is an extension of time for payment of tax under the 
provisions of section 4(b) of the Act, the running of the periods of 
limitation provided by section 6502 of the Code (or corresponding 
provisions of prior law) for collection of such tax is suspended for the 
period of time for which the extension is granted.

[T.D. 6490, 25 FR 8372, Sept. 1, 1960]



Sec. 1.9002-5   Special rules relating to interest.

    (a) In general. Where an election is made under section 4(a) of the 
Act interest is computed under section 6601 of the Code (or 
corresponding provisions of prior law) on any increase in tax 
attributable to such election for each taxable year involved for the 
period

[[Page 926]]

from the last date prescribed for payment of the tax for such year 
(determined without regard to any extensions of time for filing the 
return) through the date preceding the date on which the election is 
made. Where the election under section 4(a) of the Act results in a 
decrease in tax for any year to which the election applies, interest is 
computed in accordance with section 6611 of the Code (or corresponding 
provisions of prior law) from the date of overpayment through the date 
preceding the date on which the election is made. Where there is a net 
increase in tax as a result of the election under section 4(a) of the 
Act, no interest shall be imposed on any underpayment (and no interest 
shall be paid on any overpayment) attributable to the dealer reserve 
income adjustment for any year to which the election applies for the 
period commencing with the date such election is made and ending on the 
date prescribed for filing the return (determined without regard to 
extensions of time) for the taxable year in which the election is made. 
This rule applies regardless of whether the election under section 4(b) 
of the Act is made. If there is no net increase in tax, interest on any 
underpayment or overpayment attributable to the dealer reserve income 
adjustment for any taxable year to which the election applies for the 
period commencing with the date of the election shall be determined in 
accordance with Secs. 301.6601-1 and 301.6611-1 of this chapter 
(Regulations on Procedure and Administration).
    (b) Installment period--(1) Where payment is not accelerated. If the 
election under section 4(b) of the Act is made to pay the net increase 
in tax in installments, no interest will be imposed on such net increase 
in tax for the period beginning with the due date fixed under section 
4(c) of the Act for the first installment payment and ending with the 
date fixed under such section for the last installment payment unless 
payment of the unpaid installments is accelerated under other provisions 
of the Act. See subsections (f) and (g) of section 4 of the Act.
    (2) Where payment is accelerated. Where payment of the unpaid 
installments is accelerated because of the termination of the 
installment privilege, interest will be computed under section 6601 of 
the Code on the entire unpaid net increase in tax for the applicable 
period set forth below:
    (i) In the case of acceleration under section 4(f) of the Act for 
reasons other than nonpayment of an installment, from the date of the 
notice and demand for payment of the unpaid tax to the date of payment; 
or
    (ii) In the case of acceleration under section 4(g) of the Act for 
nonpayment of an installment, from the date fixed for payment of the 
installment to the date of payment.

When payment is accelerated under section 4(f) of the Act, however, no 
interest will be charged where payment of the unpaid installments is 
made within 10 days of issuance of the notice and demand for such 
payment.

[T.D. 6490, 25 FR 8373, Sept. 1, 1960]



Sec. 1.9002-6   Acquiring corporation.

    Section 5(d) of the Act provides that for purposes of such Act in 
the case of the acquisition of the assets of a corporation by another 
corporation in a distribution or transfer described in section 381(a) of 
the Code the acquiring corporation shall be treated as if it were the 
distributor or transferor corporation.

[T.D. 6490, 25 FR 8373, Sept. 1, 1960]



Sec. 1.9002-7   Statute of limitations.

    (a) Extension of period for assessment and refund or credit. Under 
section 5(e) of the Act, if an election is made to have the Act apply, 
and if the assessment of any deficiency, or the refund or credit of any 
overpayment attributable to the election, for any taxable year to which 
the Act applies was not prevented on June 21, 1959, by the operation of 
any law or rule of law (except as provided in paragraph (b) of this 
section, relating to closing agreements and compromises), but would be 
so prevented prior to September 1, 1961, the period within which such 
assessment, or such refund or credit, may be made with respect to such 
taxable year shall not expire prior to September 1, 1961. An election 
under either section 3 or 4 of the Act will be considered to be a 
consent to the extension of the period

[[Page 927]]

of limitation for purposes of assessment for any year to which the Act 
applies. Thus, for example, if, as the result of an election under 
section 4(a) of the Act, assessment of a deficiency for the taxable year 
1955 was not prevented by the statute of limitations, a judicial 
decision that had become final, or otherwise, on June 21, 1959, but 
would (except for section 5(e) of the Act) be prevented on a later date, 
as for instance September 1, 1959, then for purposes of applying section 
4 of the Act, assessment may be made at any time prior to September 1, 
1961, with respect to such year if the taxpayer made an election under 
the Act prior to September 1, 1960. Section 5(e) of the Act will, in no 
event, operate to shorten the period of limitation otherwise applicable 
with respect to any taxable year.
    (b) Years closed by closing agreement or compromise. For purposes of 
the Act, if the assessment of any deficiency or a refund or credit of 
any overpayment for any taxable year was not prevented on June 21, 1959, 
but is prevented on the date of an election under section 3 or 4 of the 
Act by the operation of the provisions of chapter 74 of the Code 
(relating to closing agreements and compromises), assessment, refund, or 
credit will, nevertheless, be considered as being prevented on June 21, 
1959.

[T.D. 6490, 25 FR 8373, Sept. 1, 1960]



Sec. 1.9002-8   Manner of exercising elections.

    (a) By whom election is to be made--(1) In general. Generally, the 
taxpayer to whom the Act applies will exercise the elections provided 
therein. In the case of a partnership or a corporation electing under 
the provisions of subchapter S, chapter 1 of the Code, the election 
shall be exercised by the persons specified in subparagraphs (2) and (3) 
of this paragraph, respectively.
    (2) Partnerships. In the case of a partnership, the election under 
section 3 or 4(a) of the Act shall be exercised by the partnership. If 
an election is made by the partnership under section 4(a) of the Act, 
any election under section 4(b) of the Act to pay the net increase in 
tax in installments shall be made by each partner separately. The 
determination as to whether the net increase in tax resulting from the 
election under section 4(a) of the Act exceeds $2,500 shall be made with 
reference to the increase or decrease in the tax of each partner 
attributable to the adjustment to his distributive share of the 
partnership income resulting from the election.
    (3) Subchapter S corporations. In the case of an electing small 
business corporation under subchapter S, chapter 1 of the Code, the 
election under section 3 or 4(a) of the Act shall be made by such 
corporation. An election under section 4(b) of the Act to pay the net 
increase in tax in installments shall, to the extent the net increase in 
tax resulting from the election is attributable to adjustments to income 
for taxable years for which the corporation was not an electing small 
business corporation, be made by the corporation. The determination as 
to whether the net increase in tax for such taxable years exceeds $2,500 
shall be made with reference to the increase or decrease in tax of the 
corporation. Any election under section 4(b) of the Act to pay the net 
increase in tax in installments shall, to the extent the increase in tax 
is attributable to years for which the corporation was an electing small 
business corporation, be made by the shareholders separately. The 
determination in such a case as to whether the net increase in tax for 
such taxable years exceeds $2,500 shall be made with reference to the 
increases or decreases in the tax of each shareholder attributable to 
the adjustments to taxable income of the electing small business 
corporation resulting from the election.
    (b) Time and manner of making elections--(1) In general. Any 
election made under the Act shall be made by the taxpayers described in 
paragraph (a) of this section before September 1, 1960, by filing a 
statement with the district director with whom such taxpayer's income 
tax return for the taxable year in which the election is made is 
required to be filed. A copy of the statement of election shall be 
attached to and filed with such taxpayer's income tax return for such 
taxable year.
    (2) Election to have section 481 apply. An election under section 3 
of the Act shall be made in the form of a statement which shall include 
the following:

[[Page 928]]

    (i) A clear indication that an election is being made under section 
3 of the Act;
    (ii) Information sufficient to establish eligibility to make the 
election; and
    (iii) The year of change as defined in section 3(b) of the Act.

An amended income tax return reflecting the increase or decrease in tax 
attributable to the election shall be filed for the year of change 
together with schedules showing how the tax was recomputed under section 
481 of the Code. If income tax returns have been filed for any taxable 
years subsequent to the year of change, amended returns reflecting the 
proper treatment of dealer reserve income for such years shall also be 
filed. In the case of partnerships and electing small business 
corporations under subchapter S, chapter 1 of the Code, amended returns 
shall be filed by the partnership or electing small business 
corporation, as well as by the partners or shareholders, as the case may 
be. Any amended return shall be filed with the office of the district 
director with whom the taxpayer files his income tax return for the 
taxable year in which the election is made and, if practicable, on the 
same date the statement of election is filed, but amended returns shall 
be filed in no event later than November 30, 1960, unless an extension 
of time is granted under section 6081 of the Code. Whenever the amended 
returns do not accompany the statement of election, a copy of the 
statement shall be submitted with the amended returns.
    (3) Election not to have section 481 apply. An election under 
section 4(a) of the Act shall be made in the form of a statement which 
shall include the following:
    (i) A clear indication that an election is being made under section 
4(a) of the Act;
    (ii) Information sufficient to establish eligibility to make the 
election; and
    (iii) The taxable years to which the election applies.

Amended income tax returns reflecting the increase or decrease in tax 
attributable to the election shall be filed for the taxable years to 
which the election applies. If income tax returns have been filed for 
any subsequent taxable years, amended returns reflecting the proper 
treatment of dealer reserve income for such years shall also be filed. 
In the case of partnerships and electing small business corporations 
under subchapter S, chapter 1 of the Code, amended returns shall be 
filed by the partnership or electing small business corporation, as well 
as by the partners or shareholders, as the case may be. Any amended 
return shall be filed with the office of the district director with whom 
the taxpayer files his income tax return for the taxable year in which 
the election is made and, if practicable, on the same date the statement 
of election is filed, but amended returns shall be filed in no event 
later than November 30, 1960, unless an extension of time is granted 
under section 6081 of the Code. Whenever the amended returns do not 
accompany the statement of election, a copy of the statement shall be 
submitted with the amended return.
    (4) Election to pay tax in installments. (i) Except as otherwise 
provided in subdivision (ii) of this subparagraph, if the taxpayer 
making the election under section 4(a) of the Act also desires to make 
the election under section 4(b) of the Act to pay the increase in tax in 
installments, then the statement of election shall include the following 
additional information:
    (a) A clear indication that an election is also being made under 
section 4(b) of the Act;
    (b) A summary of the total increases and decreases in tax, together 
with interest thereon, in sufficient detail to establish eligibility to 
make the election; and
    (c) The number of annual installments in which the taxpayer elects 
to pay the net increase in tax.
    (ii) Where a partnership or electing small business corporation 
under subchapter S, chapter 1 of the Code, has made an election under 
section 4(a) of the Act, and any partner or shareholder, as the case may 
be, desires to make an election under section 4(b) of the Act, a 
statement of election shall be filed by such partner or shareholder 
containing the following information:
    (a) A clear indication that an election is being made under section 
4(b) of the Act;

[[Page 929]]

    (b) A summary of the total increases and decreases in tax, together 
with interest thereon, of such partner or shareholder in sufficient 
detail to establish eligibility to make the election;
    (c) The number of annual installments in which the partner or 
shareholder elects to pay the net increase in tax; and
    (d) The office of the district director and the date on which the 
election under section 4(a) of the Act was filed by such partnership or 
corporation.

The statement of election under section 4(b) of the Act shall be 
accompanied by a copy of the statement of election under section 4(a) of 
the Act made by the partnership or electing small business corporation 
under subchapter S, chapter 1 of the Code, as the case may be.
    (c) Effect of election. An election made under section 3 or 4 of the 
Act shall become irrevocable on September 1, 1960, and shall be binding 
on the taxpayer for all taxable years to which it applies.

[T.D. 6490, 25 FR 8373, Sept. 1, 1960]

             PUBLIC DEBT AND TAX RATE EXTENSION ACT OF 1960

    Authority: Sections 1.9003 to 1.9003-5 issued under sec. 302(c), 74 
Stat. 292, as amended; 26 U.S.C. 613 note.



Sec. 1.9003   Statutory provisions; section 4 of the Act of September 14, 1960 (Pub. L. 86-781, 74 Stat. 1017).

    Sec. 4. Subsection (c) of section 302 of the Public Debt and Tax 
Rate Extension Act of 1960 (Pub. L. 86-564; 74 Stat. 293) is amended to 
read as follows:
    (c) Effective date--(1) In general. Except as provided in paragraph 
(2), the amendments made by subsections (a) and (b) shall be applicable 
only with respect to taxable years beginning after December 31, 1960.
    (2) Calcium carbonates, etc.--(A) Election for past years. In the 
case of calcium carbonates or other minerals when used in making cement, 
if an election is made by the taxpayer under subparagraph (C):
    (i) The amendments made by subsection (b) shall apply to taxable 
years with respect to which such election is effective, and
    (ii) Provisions having the same effect as the amendments made by 
subsection (b) shall be deemed to be included in the Internal Revenue 
Code of 1939 and shall apply to taxable years with respect to which such 
election is effective in lieu of the corresponding provisions of such 
Code.
    (B) Years to which applicable. An election made under subparagraph 
(C) to have the provisions of this paragraph apply shall be effective 
for all taxable years beginning before January 1, 1961, in respect of 
which:
    (i) The assessment of a deficiency,
    (ii) The refund or credit of an overpayment, or
    (iii) The commencement of a suit for recovery of a refund under 
section 7405 of the Internal Revenue Code of 1954,

is not prevented on the date of the enactment of this paragraph by the 
operation of any law or rule of law. Such election shall also be 
effective for any taxable year beginning before January 1, 1961, in 
respect of which an assessment of a deficiency has been made but not 
collected on or before the date of the enactment of this paragraph.
    (C) Time and manner of election. An election to have the provisions 
of this paragraph apply shall be made by the taxpayer on or before the 
60th day after the date of publication in the Federal Register of final 
regulations issued under authority of subparagraph (F), and shall be 
made in such form and manner as the Secretary of the Treasury or his 
delegate shall prescribe by regulations. Such election, if made, may not 
be revoked.
    (D) Statutes of limitation. Notwithstanding any other law, the 
period within which an assessment of a deficiency attributable to the 
application of the amendments made by subsection (b) may be made with 
respect to any taxable year to which such amendments apply under an 
election made under subparagraph (C), and the period within which a 
claim for refund or credit of an overpayment attributable to the 
application of such amendments may be made with respect to any such 
taxable year, shall not expire prior to one year after the last day for 
making an election under subparagraph (C). An election by a taxpayer 
under subparagraph (C) shall be considered as a consent to the 
application of the provisions of this subparagraph.
    (E) Terms; applicability of other laws. Except where otherwise 
distinctly expressed or manifestly intended, terms used in this 
paragraph shall have the same meaning as when used in the Internal 
Revenue Code of 1954 (or corresponding provisions of the Internal 
Revenue Code of 1939) and all provisions of law shall apply with respect 
to this paragraph as if this paragraph were a part of such Code (or 
corresponding provisions of the Internal Revenue Code of 1939).
    (F) Regulations. The Secretary of the Treasury or his delegate shall 
prescribe such regulations as may be necessary to carry out the 
provisions of this paragraph.

[T.D. 6492, 25 FR 8904, Sept. 16, 1960]

[[Page 930]]



Sec. 1.9003-1   Election to have the provisions of section 613(c) (2) and (4) of the 1954 Code, as amended, apply for past years.

    (a) In general. Section 4 of the Act of September 14, 1960 (Pub. L. 
86-781, 74 Stat. 1017), amended section 302(c) of the Public Debt and 
Tax Rate Extension Act of 1960 to permit certain taxpayers for taxable 
years beginning before January 1, 1961, to apply the provisions of 
section 302(b) of that Act. Section 302(b) of the Act amended section 
613(c) (2) and (4) of the Internal Revenue Code of 1954 to read in part 
as follows:

    Sec. 613. Percentage Depletion. * * *
    (c) Definition of gross income from property. For purposes of this 
section:

                                * * * * *

    (2) Mining. The term ``mining'' includes not merely the extraction 
of the ores or minerals from the ground but also the treatment processes 
considered as mining described in paragraph (4) (and the treatment 
processes necessary or incidental thereto), and so much of the 
transportation of ores or minerals (whether or not by common carrier) 
from the point of extraction from the ground to the plants or mills in 
which such treatment processes are applied thereto as is not in excess 
of 50 miles unless the Secretary or his delegate finds that the physical 
and other requirements are such that the ore or mineral must be 
transported a greater distance to such plants or mills.

                                * * * * *

    (4) Treatment processes considered as mining. The following 
treatment processes where applied by the mine owner or operator shall be 
considered as mining to the extent they are applied to the ore or 
mineral in respect of which he is entitled to a deduction for depletion 
under section 611:

                                * * * * *

    (F) In the case of calcium carbonates and other minerals when used 
in making cement--all processes (other than preheating of the kiln feed) 
applied prior to the introduction of the kiln feed into the kiln, but 
not including any subsequent process;

    (b) Election. Under section 302(c)(2) of the Act, the taxpayer, in 
the case of calcium carbonates or other minerals when used by him in 
making cement, may elect to apply the provisions of section 613(c) (2) 
and (4) of the 1954 Code as amended in lieu of the corresponding 
provisions of prior law. The taxpayer must make the election in 
accordance with Sec. 1.9003-4 on or before November 15, 1960, and the 
election shall become irrevocable on November 15, 1960.
    (c) Years to which the election is applicable. If the election 
described in paragraph (b) of this section is made by the taxpayer, the 
provisions of section 613(c) (2) and (4) as amended by section 302(b) of 
the Act apply to all taxable years beginning before January 1, 1961, in 
respect of which:
    (1) The assessment of any deficiency,
    (2) Refund or credit of any overpayment,
    (3) Commencement of a suit for recovery of a refund under section 
7405 of the Internal Revenue Code of 1954,

is not prevented on September 14, 1960, by the operation of any law or 
rule of law. The election also applies to taxable years beginning before 
January 1, 1961, in respect of which an assessment of a deficiency has 
been made but not collected on or before September 14, 1960.

[T.D. 6492, 25 FR 8905, Sept. 16, 1960]



Sec. 1.9003-2   Effect of election.

    (a) In general. If a taxpayer makes the election described in 
paragraph (b) of Sec. 1.9003-1, he shall be deemed to have consented to 
the application of section 302(b) of the Act with respect to all taxable 
years to which the election applies. Thus, subparagraph (F) of section 
613(c)(4) of the Internal Revenue Code of 1954 as amended must be 
applied in determining gross income from mining for the taxable years to 
which the election applies (including years subject to the Internal 
Revenue Code of 1939) whether or not the taxpayer is litigating the 
issue. Further, the election shall apply to all calcium carbonates or 
other minerals mined and used by the taxpayer in making cement.
    (b) Effect on gross income from mining. The election is only 
determinative of what constitutes ``mining'' for purposes of computing 
percentage depletion and has no effect on the method employed in 
determining the amount of gross income from mining. In applying the 
election to the years affected there shall be taken into account the

[[Page 931]]

effect that any adjustments resulting from the election shall have on 
other items affected thereby, such as charitable contributions, foreign 
tax credit, net operating loss, and the effect that adjustments to any 
such items shall have on other taxable years. The provisions of section 
302(b) of the Act are applicable with respect to taxable years subject 
to the Internal Revenue Code of 1939 for purposes of applying sections 
450 and 453 of that Code.

[T.D. 6492, 25 FR 8905, Sept. 16, 1960]



Sec. 1.9003-3   Statutes of limitation.

    Under section 302(c)(2) of the Act, the period within which the 
assessment of any deficiency or the credit or refund of any overpayment 
attributable to the election may be made shall not expire sooner than 1 
year after November 15, 1960. Thus, if assessment of a deficiency or 
credit or refund of an overpayment, whichever is applicable, is not 
prevented on September 14, 1960, the time for making assessment or 
credit or refund shall not expire for at least 1 year after November 15, 
1960, notwithstanding any other provision of law to the contrary. Even 
though assessment of a deficiency is prevented on September 14, 1960, if 
commencement of a suit for recovery of a refund under section 7405 of 
the Code may be made on such date, then any deficiency resulting from 
the election may be assessed at any time within 1 year after November 
15, 1960. If the taxpayer makes the election he shall be deemed to have 
consented to the application of the provisions of section 302(c)(2) of 
the Act extending the time for assessing a deficiency attributable to 
the election. Section 302(c)(2) of the Act does not shorten the period 
of limitations otherwise applicable. An agreement may be entered into 
under section 6501(c)(4) of the Code and corresponding provisions of 
prior law to extend the period for assessment.

[T.D. 6492, 25 FR 8905, Sept. 16, 1960]



Sec. 1.9003-4   Manner of exercising election.

    (a) By whom election is to be made. Generally, the taxpayer whose 
tax liability is affected by the election shall make the election. In 
the case of a partnership, or a corporation electing under the 
provisions of subchapter S, chapter 1 of the Code, the election shall be 
exercised by the partnership or such corporation, as the case may be.
    (b) Time and manner of making election. The election shall be made 
on or before November 15, 1960, by filing a statement with the district 
director with whom the taxpayer's income tax return for the taxable year 
in which the election is made is required to be filed. The statement 
shall include the following:
    (1) A clear indication that an election is being made under section 
302(c)(2) of the Act, and
    (2) The taxable years to which the election applies.

Amended income tax returns reflecting any increase or decrease in tax 
attributable to the election shall be filed for the taxable years to 
which the election applies. In the case of partnerships and electing 
small business corporations under subchapter S, chapter 1 of the Code, 
amended returns shall be filed by the partnership or electing small 
business corporations, as well as by the partners or shareholders, as 
the case may be. Any amended return shall be filed with the office of 
the district director with whom the taxpayer files his income tax return 
for the taxable year in which the election is made and, if practicable, 
on the same date the statement of election is filed, but amended returns 
shall be filed in no event later than February 28, 1961, unless an 
extension of time is granted under section 6081 of the Code. Whenever 
the amended returns do not accompany the statement of election, a copy 
of the statement shall be submitted with the amended returns. The 
amended returns shall be accompanied by payment of the additional tax 
(together with interest thereon) resulting from the election.

[T.D. 6492, 25 FR 8905, Sept. 16, 1960]



Sec. 1.9003-5   Terms; applicability of other laws.

    All other terms which are not otherwise specifically defined shall 
have the same meaning as when used in the Code (or the corresponding 
provisions of prior law) except where otherwise distinctly expressed or 
manifestly intended to the contrary. Further, all

[[Page 932]]

provisions of law contained in the Code (or the corresponding provisions 
of prior law) shall apply to the extent that they can apply. Thus, all 
of the provisions of subtitle F of the Code and the corresponding 
provisions of prior law shall apply to the extent they can apply, 
including the provisions of law relating to assessment, collection, 
credit or refund, and limitations. For purposes of this section and 
Secs. 1.9003-1 to 1.9003-4, inclusive, the term ``Act'' means the Public 
Debt and Tax Rate Extension Act of 1960 as amended (74 Stat. 293, 1018).

[T.D. 6492, 25 FR 8905, Sept. 16, 1960]

CERTAIN BRICK AND TILE CLAY, FIRE CLAY, AND SHALE; REGULATIONS UNDER THE 
                        ACT OF SEPTEMBER 26, 1961



Sec. 1.9004   Statutory provisions; the Act of September 26, 1961 (Pub. L. 87-312, 75 Stat. 674).

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled, That (a) Election for 
past years. In the case of brick and tile clay, fire clay, or shale used 
by the mineowner or operator in the manufacture of building or paving 
brick, drainage and roofing tile, sewer pipe, flower pots, and kindred 
products (without regard to the applicable rate of percentage 
depletion), if an election is made under subsection (c), for the purpose 
of applying section 613(c) of the Internal Revenue Code of 1954 (and 
corresponding provision of the Internal Revenue Code of 1939) for each 
of the taxable years with respect to which the election is effective:
    (1) Gross income from the property shall be 50 per centum of the 
amount for which the manufactured products are sold during the taxable 
year except that with respect to such manufactured products, gross 
income from the property shall not exceed an amount equal to $12.50 
multiplied by the number of short tons used in the manufactured products 
sold during the taxable year, and
    (2) For purposes of computing the 50 per centum limitation under 
section 613(a) of the Internal Revenue Code of 1954 (or the 
corresponding provision of the Internal Revenue Code of 1939), the 
taxable income from the property (computed without allowance for 
depletion) shall be 50 per centum of the taxable income from the 
manufactured products sold during the taxable year (computed without 
allowance for depletion).
    (b) Years to which applicable. An election made under subsection (c) 
to have the provisions of this section apply shall be effective for all 
taxable years beginning before January 1, 1961, in respect of which:
    (1) The assessment of a deficiency,
    (2) The refund or credit of an overpayment, or
    (3) The commencement of a suit for recovery of a refund under 
section 7405 of the Internal Revenue Code of 1954, is not prevented on 
the date of the enactment of this Act by the operation of any law or 
rule of law. Such election shall also be effective for any taxable year 
beginning before January 1, 1961, in respect of which an assessment of a 
deficiency has been made but not collected on or before the date of the 
enactment of this Act.
    (c) Time and manner of election. An election to have the provisions 
of this section apply shall be made by the taxpayer on or before the 
sixtieth day after the date of publication in the Federal Register of 
final regulations issued under authority of subsection (f), and shall be 
made in such form and manner as the Secretary of the Treasury or his 
delegate shall prescribe by regulations. Such election, if made, may not 
be revoked.
    (d) Statutes of limitation. Notwithstanding any other law, the 
period within which an assessment of a deficiency attributable to the 
election under subsection (c) may be made with respect to any taxable 
year for which such election is effective, and the period within which a 
claim for refund or credit of an overpayment attributable to the 
election under such subsection may be made with respect to any such 
taxable year, shall not expire prior to one year after the last day for 
making an election under subsection (c). An election by a taxpayer under 
subsection (c) shall be considered as a consent to the application of 
the provisions of this subsection.
    (e) Terms; applicability of other laws. Except where otherwise 
distinctly expressed or manifestly intended, terms used in this section 
shall have the same meaning as when used in the Internal Revenue Code of 
1954 (or corresponding provisions of the Internal Revenue Code of 1939) 
and all provisions of law shall apply with respect to this section as if 
this section were a part of such Code (or corresponding provisions of 
the Internal Revenue Code of 1939).
    (f) Regulations. The Secretary of the Treasury or his delegate shall 
prescribe such regulations as may be necessary to carry out the 
provisions of this section.

(75 Stat. 674; 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9632, Oct. 12, 1961]



Sec. 1.9004-1   Election relating to the determination of gross income from the property for taxable years beginning prior to 1961 in the case of certain clays 
          and shale.

    (a) In general. The Act of September 26, 1961 (Pub. L. 87-312, 75 
Stat. 674),

[[Page 933]]

provides that certain taxpayers may elect to apply the provisions 
thereof to all taxable years beginning before January 1, 1961, with 
respect to which the election is effective. The Act prescribes special 
rules for the application of section 613 (a) and (c) of the Internal 
Revenue Code of 1954 (and corresponding provisions of the Internal 
Revenue Code of 1939) in the case of shale and certain clays used by the 
mine owner or operator in the manufacture of certain clay and shale 
products.
    (b) Election. The election to apply the provisions of the Act may be 
made only by a mine owner or operator with respect to brick and tile 
clay, fire clay, or shale which he mined and used in the manufacture of 
building or paving brick, drainage and roofing tile, sewer pipe, flower 
pots, and kindred products. The election must be made in accordance with 
Sec. 1.9004-4 on or before December 11, 1961, and the election shall 
become irrevocable on December 11, 1961.
    (c) Years to which the election is applicable. If the election 
described in paragraph (b) of this section is made by the taxpayer, the 
provisions of the Act shall be effective for all taxable years beginning 
before January 1, 1961, in respect of which the:
    (1) Assessment of a deficiency,
    (2) Refund or credit of an overpayment, or
    (3) Commencement of a suit for recovery of a refund under section 
7405 of the Internal Revenue Code of 1954,

is not prevented on September 26, 1961, by the operation of any law or 
rule of law. The election is also effective for any taxable year 
beginning before January 1, 1961, in respect of which an assessment of a 
deficiency has been made but not collected on or before September 26, 
1961.

(75 Stat. 674; 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9632, Oct. 12, 1961]



Sec. 1.9004-2   Effect of election.

    (a) In general. If a taxpayer makes the election described in 
paragraph (b) of Sec. 1.9004-1, he shall be deemed to have consented to 
the application of the Act with respect to all the clay and shale 
described in that paragraph for all taxable years for which the election 
is effective whether or not the taxpayer is litigating the issue for any 
of such years. Thus, in applying section 613 of the Internal Revenue 
Code of 1954 (and corresponding provisions of the Internal Revenue Code 
of 1939) to those years:
    (1) The ``gross income from the property'' for purposes of section 
613(c) of the Internal Revenue Code of 1954 (and corresponding 
provisions of the Internal Revenue Code of 1939) shall be 50 percent of 
the amount for which the mineowner or operator sold, during the taxable 
year, the building or paving brick, drainage and roofing tile, sewer 
pipe, flower pots, and kindred products manufactured from the clay and 
shale described in paragraph (b) of Sec. 1.9004-1, but shall not exceed 
an amount equal to $12.50 multiplied by the number of short tons of all 
such clay or shale mined and used by the mineowner or operator in the 
manufacture of the products sold during the taxable year; and
    (2) The ``taxable income from the property'' (computed without 
allowance for depletion) for purposes of section 613(a) of the Internal 
Revenue Code of 1954 (and corresponding provisions of the Internal 
Revenue Code of 1939) shall be 50 percent of the taxable income from the 
manufactured products sold during the taxable year (computed without 
allowance for depletion).
    (b) Effect on depletion rates and other items. The election shall 
have no effect on the applicable rate of percentage depletion for the 
taxable years to which the election is effective. In applying the 
election to the years affected there shall be taken into account the 
effect that any adjustments resulting from the election shall have on 
other items affected thereby, such as charitable contributions, foreign 
tax credit, net operating loss, and the effect that adjustments to any 
such items shall have on other taxable years. The provisions of the Act 
are applicable with respect to taxable years subject to the Internal 
Revenue Code of 1939 for purposes of applying sections 450 and 453 of 
that Code.

(75 Stat. 674; 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9632, Oct. 12, 1961]

[[Page 934]]



Sec. 1.9004-3   Statutes of limitation.

    The period within which the assessment of any deficiency or the 
credit or refund of any overpayment attributable to the election may be 
made shall not expire sooner than one year after December 11, 1961. 
Thus, if assessment of a deficiency or credit or refund of an 
overpayment, whichever is applicable, is not prevented on September 26, 
1961, the time for making assessment or credit or refund shall not 
expire for at least one year after December 11, 1961, notwithstanding 
any other provision of law to the contrary. Even though assessment of a 
deficiency is prevented on September 26, 1961, if commencement of a suit 
for recovery of a refund under section 7405 of the Internal Revenue Code 
of 1954 may be made on such date, then any deficiency resulting from the 
election may be assessed at any time within 1 year after December 11, 
1961. If a taxpayer makes the election, he shall be deemed to have 
consented to the application of the provisions of the Act extending the 
time for assessing a deficiency attributable to the election. The Act 
does not shorten the periods of limitation otherwise applicable. An 
agreement may be entered into under section 6501(c)(4) of the Internal 
Revenue Code of 1954 and corresponding provisions of prior law to extend 
the period for assessment.

(75 Stat. 674; 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9632, Oct. 12, 1961]



Sec. 1.9004-4   Manner of exercising election.

    (a) By whom election is to be made. Generally, the taxpayer whose 
tax liability is affected by the election shall make the election. In 
the case of a partnership, or a corporation electing under the 
provisions of subchapter S, chapter 1 of the Internal Revenue Code of 
1954, the election shall be exercised by the partnership or such 
corporation, as the case may be.
    (b) Time and manner of making election. The election shall be made 
on or before December 11, 1961, by filing a statement with the district 
director with whom the taxpayer's income tax return for the taxable year 
in which the election is made is required to be filed. The statement 
shall include the following:
    (1) A clear indication that an election is being made under the Act, 
and
    (2) The taxable years to which the election applies.

Amended income tax returns reflecting any increase or decrease in tax 
attributable to the election shall be filed for the taxable years to 
which the election applies. In the case of partnerships and electing 
small business corporations under subchapter S, chapter 1 of the 
Internal Revenue Code of 1954, amended returns shall be filed by the 
partnership or electing small business corporation, as well as by the 
partners or shareholders, as the case may be. Any amended return shall 
be filed with the office of the district director with whom the taxpayer 
files his income tax return for the taxable year in which the election 
is made and, if practicable, on the same date the statement of election 
is filed, but amended returns shall be filed in no event later than 
March 31, 1962, unless an extension of time is granted under section 
6081 of the Internal Revenue Code of 1954. Whenever the amended returns 
do not accompany the statement of election, a copy of the statement 
shall be submitted with the amended returns. The amended returns shall 
be accompanied by payment of the additional tax (together with interest 
thereon) resulting from the election.

(75 Stat. 674, 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9633, Oct. 12, 1961]



Sec. 1.9004-5   Terms; applicability of other laws.

    All other terms which are not otherwise specifically defined shall 
have the same meaning as when used in the Internal Revenue Code of 1954 
(or the corresponding provisions of prior law) except where otherwise 
distinctly expressed or manifestly intended to the contrary. Further, 
all provisions of law contained in the Code (or the corresponding 
provisions of prior law) shall apply to the extent that they can apply. 
Thus, all the provisions of subtitle F of the Code (and the 
corresponding provisions of prior law) shall apply to the extent they 
can apply, including the provisions of law relating to assessment, 
collection, credit or refund, and

[[Page 935]]

limitations. For purposes of this section and Secs. 1.9004-1 to 1.9004-
4, inclusive, the term ``Act'' means the Act of September 26, 1961 (Pub. 
L. 87-312, 75 Stat. 674).

(75 Stat. 674, 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9633, Oct. 12, 1961]

 QUARTZITE AND CLAY USED IN PRODUCTION OF REFRACTORY PRODUCTS; ELECTION 
                         FOR PRIOR TAXABLE YEARS



Sec. 1.9005   Statutory provisions; section 2 of the Act of September 26, 1961 (Pub. L. 87-321, 75 Stat. 683).

    Sec. 2. Election for quartzite and clay used in the production of 
refractory products--(a) Election for past years. If an election is made 
under subsection (c), in the case of quartzite and clay used by the mine 
owner or operator in the production of refractory products, for the 
purpose of applying section 613(c) of the Internal Revenue Code of 1954 
(and corresponding provisions of the Internal Revenue Code of 1939) for 
each of the taxable years with respect to which the election is 
effective:
    (1) The term ``ordinary treatment processes'' shall include 
crushing, grinding, and separating the mineral from waste, but shall not 
include any subsequent process; and
    (2) The gross income from mining for each short ton of such 
quartzite or clay used in the production of all refractory products sold 
during the taxable year shall be equal to 87\1/2\ percent of the lesser 
of:
    (A) The average lowest published or advertised price, or
    (B) The average lowest actual selling price, at which, during the 
taxable year, the mine owner or operator offered to sell, or sold, such 
quartzite or clay (in the form and condition of such products after the 
application of only the processes described in paragraph (1) and before 
transportation from the plant in which such processes were applied). For 
purposes of this paragraph, exceptional, unusual, or nominal sales or 
selling prices shall be disregraded. If the mine owner or operator makes 
no sales of, or makes only exceptional, unusual, or nominal sales of, 
such quartzite or clay after application of only the processes described 
in paragraph (1), then in lieu of the price provided for in subparagraph 
(A) or (B) there shall be used the average lowest recognized selling 
price for the taxable year for such quartzite or clay in the marketing 
area of the mine owner or operator published in a trade journal or other 
industry publication.
    (b) Years to which applicable. An election made under subsection (c) 
to have the provisions of this section apply shall be effective on and 
after January 1, 1951, for all taxable years beginning before January 1, 
1961, in respect of which:
    (1) The assessment of a deficiency,
    (2) The refund or credit of an overpayment, or
    (3) The commencement of a suit for recovery of a refund under 
section 7405 of the Internal Revenue Code of 1954,

is not prevented on the date of the enactment of this Act by the 
operation of any law or rule of law. Such election shall also be 
effective on and after January 1, 1951, for any taxable year beginning 
before January 1, 1961, in respect of which an assessment of a 
deficiency has been made but not collected on or before the date of the 
enactment of this Act.
    (c) Time and manner of election. An election to have the provisions 
of this section apply shall be made by the taxpayer on or before the 
60th day after the date of publication in the Federal Register of final 
regulations issued under authority of subsection (f), and shall be made 
in such form and manner as the Secretary of the Treasury or his delegate 
shall prescribe by regulations. Such election, if made, may not be 
revoked.
    (d) Statutes of limitations. Notwithstanding any other law, the 
period within which an assessment of a deficiency attributable to the 
election under subsection (c) may be made with respect to any taxable 
year for which such election is effective, and the period within which a 
claim for refund or credit of an overpayment attributable to the 
election under such subsection may be made with respect to any such 
taxable year, shall not expire prior to one year after the last day for 
making an election under subsection (c). An election by a taxpayer under 
subsection (c) shall be considered as a consent to the application of 
the provisions of this subsection.
    (e) Terms; applicability of other laws. Except where otherwise 
distinctly expressed or manifestly intended, terms used in this section 
shall have the same meaning as when used in the Internal Revenue Code of 
1954 (or corresponding provisions of the Internal Revenue Code of 1939) 
and all provisions of law shall apply with respect to this section as if 
this section were a part of such Code (or corresponding provisions of 
the Internal Revenue Code of 1939).
    (f) Regulations. The Secretary of the Treasury or his delegate shall 
prescribe such regulations as may be necessary to carry out the 
provisions of this section.

(Sec. 2(f), 75 Stat. 683; 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12077, Dec. 16, 1961]

[[Page 936]]



Sec. 1.9005-1   Election relating to the determination of gross income from the property for taxable years beginning prior to 1961 in the case of clay and 
          quartzite used in making refractory products.

    (a) In general. Section 2 of the Act of September 26, 1961 (Pub. L. 
87-321, 75 Stat. 683), provides that certain taxpayers may elect to 
apply the provisions of such section to all taxable years beginning 
before January 1, 1961, with respect to which the election is effective. 
Section 2 of the Act prescribes special rules for the application of 
section 613(c) of the Internal Revenue Code of 1954 (and corresponding 
provisions of the Internal Revenue Code of 1939) in the case of 
quartzite and clay used by the mine owner or operator in the production 
of refractory products.
    (b) Election. The election to apply the provisions of section 2 of 
the Act may be made only in the case of quartzite and clay used in the 
production of products generally recognized as refractory products by 
the refractories industry. Examples of such products are clay firebrick, 
silica brick, and refractory bonding mortars. The election may be made 
only by a taxpayer who both mined the clay or quartzite and used it in 
the production of refractory products. The election must be made in 
accordance with Sec. 1.9005-4 on or before February 14, 1962, and the 
election shall become irrevocable on that date.
    (c) Years to which the election is applicable. If the election 
described in paragraph (b) of this section is made by the taxpayer, the 
provisions of section 2 of the Act shall be effective on and after 
January 1, 1951, for all taxable years beginning before January 1, 1961, 
in respect of which the:
    (1) Assessment of a deficiency,
    (2) Refund or credit of an overpayment, or
    (3) Commencement of a suit for recovery of a refund under section 
7405 of the Internal Revenue Code of 1954,

was not prevented on September 26, 1961, by the operation of any law or 
rule of law. The election is also effective on and after January 1, 
1951, for any taxable year beginning before January 1, 1961, in respect 
of which an assessment of a deficiency has been made but not collected 
on or before September 26, 1961.

(Sec. 2(f), 76 Stat. 683, 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12078, Dec. 16, 1961]



Sec. 1.9005-2   Effect of election.

    (a) In general. If a taxpayer makes the election described in 
paragraph (b) of Sec. 1.9005-1, he shall be deemed to have consented to 
the application of section 2 of the Act with respect to all the clay and 
quartzite described in that paragraph for all taxable years for which 
the election is effective whether or not the taxpayer is litigating the 
issue for any of such years. Thus, in applying section 613(c) of the 
Internal Revenue Code of 1954 (and corresponding provisions of the 
Internal Revenue Code of 1939) to those years:
    (1) The term ``ordinary treatment processes'' shall include 
crushing, grinding, and separating the mineral from waste, but shall not 
include any subsequent process; and
    (2) The gross income from mining for each short ton of quartzite or 
clay mined by the taxpayer and used by him in the production of all 
refractory products sold during the taxable year shall be equal to 87\1/
2\ percent of the lesser of:
    (i) The average lowest published or advertised price, or
    (ii) The average lowest actual selling price at which the mine owner 
or operator offered to sell or sold any such quartzite or clay during 
the taxable year.
    (b) Rules for applying paragraph (a) of this section. (1) The price 
described in paragraph (a)(2) of this section and any price described in 
this paragraph shall be determined with reference to quartzite or clay 
in the form and condition of such products after the application of only 
the processes described in paragraph (a)(1) of this section and before 
transportation from the plant in which such processes were applied.
    (2) If quartzite and clay were mined and used by the taxpayer in the 
production of refractory products, a separate price shall be used with 
respect to each mineral.
    (3) There shall be used for each mineral the lowest price at which 
it was sold or offered for sale by the taxpayer during the taxable year. 
Thus, only one

[[Page 937]]

price shall be used with respect to each mineral regardless of 
variations in type or grade.
    (4) For purposes of this paragraph, exceptional, unusual, or nominal 
sales of quartzite or clay shall be disregarded. Thus, for example, if 
the taxpayer made an accommodation sale during the taxable year at other 
than the regular price, such sale is to be disregarded.
    (5) If the taxpayer made no sales during the taxable year of 
quartzite or clay in the form and condition described in subparagraph 
(1) of this paragraph, or if his sales were exceptional, unusual, or 
nominal, there shall be used the lowest recognized selling price for the 
taxpayer's marketing area for quartzite or clay (of the same grade and 
type as that used by him) which was published for the taxable year in a 
trade journal or other industry publication.
    (6) If subparagraph (5) of this paragraph does not apply for the 
reason that there is no recognized selling price published in a trade 
journal or other industry publication for the taxpayer's marketing area, 
there shall be used the lowest price at which quartzite or clay 
comparable to that used by the taxpayer was sold or offered for sale 
during the taxable year in that area by other producers similarly 
circumstanced as the taxpayer or, if appropriate, the lowest price paid 
by the taxpayer for purchased quartzite or clay.
    (7) If the lowest selling price otherwise applicable under the 
preceding provisions of this paragraph fluctuated during the taxable 
year, the two or more lowest selling prices shall be averaged according 
to the number of days during the taxable year that each such price was 
in effect.
    (c) The provisions of paragraphs (a) and (b) of this section may be 
illustrated by the following examples:

    Example (1)--(i) Facts. Taxpayer A, a calendar year taxpayer, mined 
quartzite and clay and used them in the production of recognized 
refractory products. During the taxable year, the lowest price for which 
A sold clay after the application of crushing and grinding was $13.75 
per short ton. He also sold some ground clay of a different type at 
$20.00 per short ton. A sold quartzite after the application of crushing 
and grinding for various prices, depending upon type, ranging from 
$14.00 per short ton to $20.00 per short ton. During the taxable year, 
the prices for the various types of ground clay and quartzite did not 
change. None of the sales by A of ground clay or quartzite were 
exceptional, unusual, or nominal.
    (ii) Determination of gross income from mining. If A makes the 
election described in paragraph (b) of Sec. 1.9005-1, the gross income 
from mining per short ton of clay mined by A and used in the production 
of refractory products sold during the taxable year is $12.03 (87\1/2\ 
percent of $13.75), and the gross income from mining per short ton of 
quartzite mined by A and used in the production of refractory products 
sold during the taxable year is $12.25 (87\1/2\ percent of $14.00). To 
determine his gross income from mining, A must compute the sum of:
    (a) $12.03 multiplied by the number of short tons of clay which were 
mined by A (whether or not during the taxable year) and which were used 
by A in the production of refractory products (refractory bonding 
mortar, fire brick, etc.) sold during the taxable year; plus
    (b) $12.25 multiplied by the number of short tons of quartzite which 
were mined by A (whether or not during the taxable year) and which were 
used by A in the production of refractory products sold during the 
taxable year.
    Example (2). Assume the same facts as in example (1) except that on 
October 1 of the taxable year A's lowest price for clay after the 
application of crushing and grinding increased to $14.40 per short ton. 
In this case, the average lowest price for which A sold ground clay 
during the taxable year must be determined by taking into account the 
price adjustment of October 1. Under these circumstances, the average 
lowest price for the ground clay would be $13.91, that is $13.75 x 273/
365 plus $14.40 x 92/365.

    (d) Effect on depletion rates and other items. The election shall 
have no effect on the applicable rate of percentage depletion for the 
taxable years for which the election is effective. In applying the 
election to the years affected there shall be taken into account the 
effect that any adjustments resulting from the election shall have on 
other items affected thereby, such as charitable contributions, foreign 
tax credit, net operating loss, and the effect that adjustments to any 
such items shall have on other taxable years. The provisions of section 
2 of the Act are applicable with respect to taxable years subject to the 
Internal Revenue Code of 1939 for purposes of applying sections 450 and 
453 of that Code. The election shall

[[Page 938]]

have no effect on the determination of the treatment processes which are 
to be considered as mining or on the determination of gross income from 
mining for any taxable year beginning after December 31, 1960.

(Sec. 2(f), 75 Stat. 683; 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12078, Dec. 16, 1961]



Sec. 1.9005-3   Statutes of limitation.

    Notwithstanding any provision of law to the contrary, the period 
within which the assessment of any deficiency attributable to the 
election may be made, or within which the credit or refund of any 
overpayment attributable to the election may be made, shall not expire 
sooner than one year after the last day for making the election. Thus, 
if assessment of a deficiency or credit or refund of an overpayment, 
whichever is applicable, was not prevented on September 26, 1961, the 
time for making assessment or credit or refund shall not expire for at 
least one year after the last day for making the election. Even though 
assessment of a deficiency was prevented on September 26, 1961, if 
commencement of a suit for recovery of a refund under section 7405 of 
the Internal Revenue Code of 1954 may have been made on such date, then 
any deficiency resulting from the election may be assessed at any time 
within one year after the last day for making the election. If a 
taxpayer makes the election, he shall be deemed to have consented to the 
application of the provisions of section 2 of the Act extending the time 
for assessing a deficiency attributable to the election. Section 2 of 
the Act does not shorten the period of limitations otherwise applicable. 
An agreement may be entered into under section 6501(c)(4) of the 
Internal Revenue Code of 1954 and corresponding provisions of prior law 
to extend the period for assessment.

(Sec. 2(f), 75 Stat. 683; 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12079, Dec. 16, 1961]



Sec. 1.9005-4   Manner of exercising election.

    (a) By whom election is to be made. Generally, the taxpayer whose 
tax liability is affected by the election shall make the election. In 
the case of a partnership, or a corporation electing under the 
provisions of subchapter S, chapter 1 of the Internal Revenue Code of 
1954, the election shall be exercised by the partnership or such 
corporation, as the case may be.
    (b) Time and manner of making election. The election shall be made 
on or before February 14, 1962, by filing a statement with the district 
director with whom the taxpayer's income tax return for the taxable year 
in which the election is made is required to be filed. The statement 
shall include the following:
    (1) A clear indication that an election is being made under section 
2 of the Act, and
    (2) The taxable years to which the election applies.

Amended income tax returns reflecting any increase or decrease in tax 
attributable to the election shall be filed for the taxable years to 
which the election applies. In the case of partnerships and electing 
small business corporations under subchapter S, chapter 1 of the 
Internal Revenue Code of 1954, amended returns shall be filed by the 
partnership or electing small business corporation, as well as by the 
partners or shareholders, as the case may be. Any amended return shall 
be filed with the office of the district director with whom the taxpayer 
files his income tax return for the taxable year in which the election 
is made, and, if practicable, on the same date the statement of election 
is filed, but amended returns shall be filed in no event later than May 
31, 1962, unless an extension of time is granted under section 6081 of 
the Internal Revenue Code of 1954. Whenever the amended returns do not 
accompany the statement of election, a copy of the statement shall be 
submitted with the amended returns. The amended returns shall be 
accompanied by payment of the additional tax (together with interest 
thereon) resulting from the election.

(Sec. 2(f), 75 Stat. 683; 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12079, Dec. 16, 1961]



Sec. 1.9005-5   Terms; applicability of other laws.

    All other terms which are not otherwise specifically defined shall 
have the

[[Page 939]]

same meaning as when used in the Internal Revenue Code of 1954 (or the 
corresponding provisions of prior law) except where otherwise distinctly 
expressed or manifestly intended to the contrary. Further, all 
provisions of law contained in the Code (or the corresponding provisions 
of prior law) shall apply to the extent that they can apply. Thus, all 
the provisions of subtitle F of the Code (and the corresponding 
provisions of prior law) shall apply to the extent they can apply, 
including the provisions of law relating to assessment, collection, 
credit or refund, and limitations. For purposes of this section and 
Secs. 1.9005-1 to 1.9005-4, inclusive, the term ``Act'' means the Act of 
September 26, 1961 (Pub. L. 87-321, 75 Stat. 683).

(Sec. 2(f), 75 Stat. 683; 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12079, Dec. 16, 1961]

                         Tax Reform Act of 1969



Sec. 1.9006   Statutory provisions; Tax Reform Act of 1969.

    Section 946 of the Tax Reform Act of 1969 (83 Stat. 729) provides as 
follows:

    Sec. 946. Interest and penalties in case of certain taxable years--
(a) Interest on underpayment. Notwithstanding section 6601 of the 
Internal Revenue Code of 1954, in the case of any taxable year ending 
before the date of the enactment of this Act, no interest on any 
underpayment of tax, to the extent such underpayment is attributable to 
the amendments made by this Act, shall be assessed or collected for any 
period before the 90th day after such date.
    (b) Declarations of estimated tax. In the case of a taxable year 
beginning before the date of the enactment of this Act, if any taxpayer 
is required to make a declaration or amended declaration of estimated 
tax, or to pay any amount or additional amount of estimated tax, by 
reason of the amendments made by this Act, such amount or additional 
amount shall be paid ratably on or before each of the remaining 
installment dates for the taxable year beginning with the first 
installment date on or after the 30th day after such date of enactment. 
With respect to any declaration or payment of estimated tax before such 
first installment date, sections 6015, 6154, 6654, and 6655 of the 
Internal Revenue Code of 1954 shall be applied without regard to the 
amendments made by this Act. For purposes of this subsection, the term 
``installment date'' means any date on which, under section 6153 or 6154 
of such Code (whichever is applicable), an installment payment of 
estimated tax is required to be made by the taxpayer.

[T.D. 7088, 36 FR 3052, Feb. 17, 1971]



Sec. 1.9006-1   Interest and penalties in case of certain taxable years.

    (a) Interest on underpayment. The Internal Revenue Code of 1954 was 
amended in many important respects by the Tax Reform Act of 1969. 
Certain of these amendments affect taxable years ending prior to 
December 30, 1969 (the date of enactment of the Act) and thereby may 
cause underpayments of tax by a number of taxpayers for those years. 
Under section 6601(a) of the Code, interest at the rate of 6 percent per 
annum is imposed upon the amount of any such underpayment. The effect of 
section 946(a) of the Act is to prevent the assessment or collection of 
interest on an underpayment of tax for any taxable year ending before 
December 30, 1969, if such underpayment is attributable to any amendment 
made by such Act, for the period from the due date for payment until 
March 30, 1970. Thus, the taxpayer is afforded an interest-free period 
of 90 days from the date of enactment of such Act within which to 
account for the changes in the law affecting him and to remit the amount 
of such underpayment. If, on or after March 30, 1970, the amount of any 
underpayment (or portion thereof) attributable to an amendment made by 
the Act remains unpaid, then, as of such date, such underpayment (or 
portion thereof) shall be subject to interest as provided by section 
6601 of the Code, to be computed from such date. However, if a 
corporation or farmers' cooperative elects to pay its final tax in two 
installments under section 6152 of the Code and if the second 
installment is due after March 30, 1970, then, in order to escape the 
imposition of interest under section 6601, such corporation or 
cooperative need pay only one-half of the additional tax arising from an 
amendment made by the Act before March 30, 1970, with the remaining one-
half payable as part of the second installment on the regular due date 
for that installment. In the case of an underpayment of tax which is 
only partly attributable to an amendment made by the Act, section 946(a) 
of such

[[Page 940]]

Act shall apply only to the extent that such underpayment is so 
attributable.
    (b) Declarations and payments of estimated tax. (1) In the case of a 
taxable year beginning before December 30, 1969, section 946(b) of the 
Tax Reform Act of 1969 provides transitional rules with respect to the 
payment of estimated tax and, in the case of an individual, the filing 
of a declaration of estimated tax. Under such section 946(b) in the case 
of such a year, if any taxpayer is required to make a declaration or 
amended declaration of estimated tax, or to pay any amount or additional 
amount of estimated tax, by reason of the amendments made by the Act, 
such amount or additional amount shall be paid ratably on or before each 
of the remaining installment dates for the taxable year beginning with 
the first installment date on or after February 15, 1970. For purposes 
of section 946(b) of such Act and this section, the term ``installment 
date'' means any date on which, under section 6153 or 6154 of the Code 
(whichever is applicable), an installment payment of estimated tax is 
required to be made by the taxpayer.
    (2) With respect to any declaration or payment of estimated tax 
before February 15, 1970, sections 6015, 6153, 6154, 6654, and 6655 of 
the Code shall be applied without regard to the amendments made by such 
Act. Therefore, any underpayment which occurs solely by reason of the 
amendments made by such Act shall not be treated as an underpayment in 
the case of installment dates before February 15, 1970. Similarly, in 
the case of a taxpayer all of whose installment dates occur prior to 
February 15, 1970, no payment of estimated tax need be made to reflect 
the amendments made by such Act.
    (3) The following example illustrates the application of the 
provisions of subparagraphs (1) and (2) of this paragraph:

    Example. A, a fiscal year taxpayer with a taxable year from July 1, 
1969, through June 30, 1970, had, without regard to the enactment of the 
Tax Reform Act of 1969, a total tax liability, which would have been 
shown on his return, of $500. A is not a farmer or fisherman described 
in section 6037(b). A's tax liability is increased by $20 to $520, 
attributable to an amendment made by such Act. A makes an installment 
payment of estimated tax of $90 on each of the following four 
installment dates: October 15, 1969; December 15, 1969; March 15, 1970; 
and July 15, 1970. Assume that A is unaffected by the exceptions 
provided in section 6654(d). Therefore, A is underpaid by $10 on both 
October 15 and December 15, and by $18 on both March 15 and July 15. 
Such underpayments are computed as follows:

(a) October 15 and December 15 installment dates:                       
  (1) Tax without regard to Tax Reform Act of 1969...............   $500
  (2) 80% of item (1)............................................    400
  (3) Minimum payment to avoid underpayment, determined without         
   regard to Act:                                                       
    October 15, 1969 (25% of item (2))...........................    100
    December 15, 1969 (25% of item (2))..........................    100
  (4) Actual payment:                                                   
  October 15, 1969...............................................     90
  December 15, 1969..............................................     90
  (5) Amount of underpayment:                                           
    October 15, 1969 ($100-$90)..................................     10
    December 15, 1969 ($100-$90).................................     10
(b) March 15 and July 15 installment dates:                             
  (1) Tax with regard to Act.....................................    520
  (2) 80% of item (1)............................................    416
  (3) Less total of minimum payments to avoid underpayment,             
   determined without regard to Act for October 15, 1969 and            
   December 15, 1969 ($100+$100).................................    200
                                                                  ------
  (4) Difference of items (2) and (3)............................    216
  (5) Minimum payment to avoid underpayment, determined with            
   regard to Act:                                                       
    March 15 (50% of $216).......................................    108
    July 15 (50% of $216)........................................    108
  (6) Actual payment:                                                   
    March 15.....................................................     90
    July 15......................................................     90
  (7) Amount of underpayment:                                           
    March 15 ($108-$90)..........................................     18
    July 15 ($108-$90)...........................................     18
                                                                        

    (c) Cross references. (1) Taxpayers affected by the following 
sections, among others, of the Tax Reform Act of 1969 may be subject to 
the provisions of section 946 (a) or (b) (whichever is applicable) of 
such Act:
    (i) Act section 201(a), which adds section 170(f)(2) to the Code and 
which applies to gifts made after July 31, 1969.
    (ii) Act section 201(c), which repeals section 673(b) of the Code 
and which applies to transfers in trust made after April 22, 1969.
    (iii) Act section 212(c), which amends section 1031 of the Code and 
which applies to taxable years to which the 1954 Code applies.
    (iv) Act section 332, which amends section 677 of the Code and which 
applies to property transferred in trust after October 9, 1969.
    (v) Act section 411(a), which adds section 279 to the Code and which 
applies

[[Page 941]]

to interest paid or incurred on an indebtedness incurred after October 
9, 1969.
    (vi) Act sections 412 (a) and (b), which adds section 453(b)(3) to 
the Code and which apply to sales or other dispositions occurring after 
May 27, 1969, which are not made pursuant to a contract entered into on 
or before that date.
    (vii) Act section 413, which amends sections 1232(a), 1232(b)(2), 
and 6049 of the Code and which applies to bonds and other evidences of 
indebtedness issued after May 27, 1969.
    (viii) Act section 414, which adds section 249 to the Code and which 
applies to convertible bonds or other convertible evidences of 
indebtedness repurchased after April 22, 1969.
    (ix) Act section 421(a), which amends section 305 of the Code and 
which applies to distributions made after January 10, 1969.
    (x) Act sections 516 (a) and (d), which add section 1001(e) to the 
Code and which apply to sales of life estates made after October 9, 
1969.
    (xi) Act section 601, which amends section 103 of the Code and which 
applies to obligations issued after October 9, 1969.
    (xii) Act section 703 which amends sections 46(b) and 47(a) of the 
Code and which applies to section 38 property built or acquired after 
April 18, 1969.
    (xiii) Act section 905, which adds section 311(d) to the Code and 
which applies to distributions made after November 30, 1969.
    (2) In addition to the references in subparagraph (1) of this 
paragraph, section 946(b) of the Tax Reform Act of 1969 may apply to 
taxpayers affected by the following sections, among others, of such Act:
    (i) Act section 201(a), which adds section 170(e) to the Code and 
which applies to contributions paid after December 31, 1969.
    (ii) Act sections 501 (a) and (b), which amend section 613 of the 
Code and which apply to taxable years beginning after October 9, 1969.
    (iii) Act sections 516 (c) and (d) which add section 1253 to the 
Code and which apply to transfers after December 31, 1969.
    (iv) Act section 701(a), which amends section 51 of the Code and 
which applies to taxable years ending after December 31, 1969, and 
beginning before July 1, 1970.

[T.D. 7088, 36 FR 3053, Feb. 17, 1971]

                        MISCELLANEOUS PROVISIONS



Sec. 1.9101-1   Permission to submit information required by certain returns and statements on magnetic tape.

    In any case where the use of a Form 1087 or 1099 is required by the 
regulations under this part for the purpose of making a return or 
reporting information, such requirement may be satisfied by submitting 
the information required by such form on magnetic tape or by other 
media, provided that the prior consent of the Commissioner or other 
authorized officer or employee of the Internal Revenue Service has been 
obtained. Applications for such consent must be filed in accordance with 
procedures established by the Internal Revenue Service. In any case 
where the use of Form W-2 is required for the purpose of making a return 
or reporting information, such requirement may be satisfied by 
submitting the information required by such form on magnetic tape or 
other approved media, provided that the prior consent of the 
Commissioner of Social Security (or other authorized officer or employee 
thereof) has been obtained.

[T.D. 6883, 31 FR 6589, May 3, 1966, as amended by T.D. 7580, 43 FR 
60159, Dec. 26, 1978]



Sec. 1.9200-1  Deduction for motor carrier operating authority.

    (a) In general. Section 266 of the Economic Recovery Tax Act of 1981 
(Pub. L. 97-34, 95 Stat. 265) provides that, for purposes of chapter 1 
of the Internal Revenue Code of 1954, an ordinary deduction shall be 
allowed in computing the taxable income of all taxpayers who either held 
one or more motor carrier operating authorities on July 1, 1980, or 
later acquired a motor carrier operating authority pursuant to a binding 
contract in effect on July 1, 1980. The deduction for each motor carrier 
operating authority is to be allowed ratably over a 60-month period and 
is equal to the adjusted basis of the motor carrier operating authority 
on

[[Page 942]]

July 1, 1980. Except as provided in this section, no deduction is 
allowable for any diminution in value of any motor carrier operating 
authority caused by administrative or legislative actions to decrease 
restrictions on entry into the interstate motor carrier business.
    (b) Person entitled to claim deduction. In general, the deduction 
provided by this section for a particular motor carrier operating 
authority may be claimed only by the taxpayer which held the authority 
on July 1, 1980. However, if another person acquired the motor carrier 
operating authority after July 1, 1980, pursuant to a binding contract 
in effect on that date, the deduction for such authority may be claimed 
only by the acquirer and may not be claimed by the taxpayer which held 
the authority on July 1, 1980. A taxpayer, otherwise entitled to claim a 
deduction under this section, who sells a motor carrier operating 
authority after July 1, 1980 may not claim an amortization deduction for 
such authority for any month which begins after the date of such sale. 
In addition, acquisition of a motor carrier operating authority after 
July 1, 1980, if not pursuant to a binding contract in effect on July 1, 
1980, will not entitle the acquirer to a deduction under this section, 
unless the operating authority is acquired pursuant to a transaction to 
which section 381 applies.
    (c) Allowance of deduction--(1) Determination of period for 
deduction.--(i) General rule. Except as provided in paragraph (c)(1)(ii) 
of this section, the 60-month period for taking the deduction provided 
by this section for a particular motor carrier operating authority 
begins with the month of July 1980, or, if later, the month in which the 
motor carrier operating authority was acquired pursuant to a binding 
contract in effect on July 1, 1980.
    (ii) Election. In lieu of beginning the 60-month period as provided 
in paragraph (c)(1)(i) of this section, the taxpayer may elect to begin 
the 60-month period with the first month of the taxpayer's first taxable 
year beginning after July 1, 1980. This election, if made, shall apply 
to the deduction for all motor carrier operating authorities either held 
by the taxpayer on July 1, 1980, or later acquired by the taxpayer by 
the end of the first month of the first taxable year beginning after 
July 1, 1980, pursuant to a binding contract in effect on July 1, 1980. 
Any such election will not apply to the determination of the period for 
amortizing the bases of authorities acquired by the taxpayer after the 
end of the first month of the first taxable year beginning after July 1, 
1980.
    (2) Amount of monthly deduction. In the case of each motor carrier 
operating authority for which the taxpayer is entitled (under paragraph 
(b) of this section) to claim a deduction, the deduction for each month 
during the 60-month period relating to the motor carrier operating 
authority is equal to the adjusted basis (determined under paragraph (e) 
of this section) of the motor carrier operating authority divided by 60.
    (d) Definition of motor carrier-operating authority. For purposes of 
Sec. 1.9200-2 and this section, the term ``motor carrier operating 
authority'' means a certificate or permit held by a motor common carrier 
or motor contract carrier of property and issued pursuant to the Revised 
Interstate Commerce Act, 49 U.S.C. 10921-10933 (Supp. III 1979). The 
terms ``motor common carrier'' and ``motor contract carrier'' shall be 
defined as in 49 U.S.C. 10102 (Supp. III 1979) and do not include 
persons meeting the definition of freight forwarder contained in 49 
U.S.C. 10102 (Supp. III 1979).
    (e) Adjusted basis of motor carrier operating authority--(1) In 
general. Except as provided in paragraph (e)(2) of this section, the 
adjusted basis of a motor carrier operating authority for which a 
deduction is allowed under this section is the adjusted basis of the 
motor carrier operating authority as determined under sections 1012 and 
1016 in the hands of the taxpayer who is entitled to claim the deduction 
under paragraph (b) of this section.
    (2) Special rule in case of certain stock acquisitions--(i) Election 
by holder. A corporation entitled to claim a deduction under paragraph 
(b) of this section for a motor carrier operating authority may elect to 
allocate a portion of the cost basis of a qualified acquiring party in 
the stock of an acquired corporation, to the basis of the authority. A

[[Page 943]]

qualified acquiring party is a corporation (or a noncorporate person or 
group of noncorporate persons described in paragraph (e)(2)(ii) of this 
section) that after June 21, 1952, and on or before July 1, 1980 (or 
after July 1, 1980 under a binding contract in effect on such date) 
acquired by purchase, within the meaning of section 334(b)(3) and during 
a period of not more than 12 months, 80 percent or more of the stock (as 
described in section 334(b)(2)(B)) of a corporation (the acquired 
corporation) which held the authority directly or indirectly on the date 
which is the end of the period of 12 months or less within which such 80 
percent of the acquired corporation's stock was purchased. The election 
to allocate basis in an acquired corporation's stock to the basis in an 
authority may be made only if 80 percent of all classes of the acquired 
corporation's stock (other than nonvoting stock which is limited and 
preferred as to dividends) was acquired by purchase (within the meaning 
of section 334(b)(3)) during a period of not more than 12 months, as 
described in section 334(b)(2)(B). If the qualified acquiring party is a 
corporation, the taxpayer holding the authority on July 1, 1980, may 
elect the basis allocation of this paragraph only if it is a member of 
the affiliated group (as defined in section 1504(a)) of which the 
qualified acquiring party is a member. If there is more than one 
acquisition of stock that might permit an election to allocate basis 
under this paragraph (e)(2)(i), the taxpayer may elect to allocate to 
the authority only the basis in the acquired corporation's stock held by 
the qualified acquiring party which became a qualified acquiring party 
as a result of the last of such acquisitions.
    (ii) Certain noncorporate persons treated as qualified parties. For 
purposes of paragraphs (e)(2) (i) through (vi) of this section, the term 
``qualified acquiring party'' shall include a noncorporate person or 
group of noncorporate persons which, after June 21, 1952 and on or 
before July 1, 1980, acquired in one purchase, stock in a corporation 
(the acquired corporation) which at the time of acquisition held, 
directly or indirectly, a motor carrier operating authority. In order to 
be treated as a qualified acquiring party under this paragraph, a 
noncorporate person or group of noncorporate persons must have held 
stock constituting control (within the meaning of section 368(c)) of the 
acquired corporation on July 1, 1980. A group of noncorporate persons 
consists of two or more noncorporate persons who, acting together on the 
same date, made the required purchase of stock in the acquired 
corporation.
    (iii) Portion of stock basis allocable to basis of authority when 
stock of direct holder of authority is acquired. If the qualified 
acquiring party acquired the stock of a corporation directly holding the 
authority, the portion of the stock basis allocable to the basis of the 
authority is the amount that would have been properly allocable under 
section 334(b)(2) if the qualified acquiring party were a corporation 
that had received the authority in a distribution of all the acquired 
corporation's assets in a complete liquidation of the acquired 
corporation immediately after the acquisition of the acquired 
corporation's stock. If the acquired corporation's stock was acquired on 
more than one date, the date on which the liquidation is deemed to have 
occurred shall be the date which is the date of the last acquisition by 
purchase of stock of the acquired corporation within the 12-month period 
described in section 334(b)(2)(B).
    (iv) Portion of stock basis allocable to basis of authority when 
stock of indirect holder of authority is acquired. If the qualified 
acquiring party acquired the stock of a corporation indirectly holding 
the authority (such as by owning all of the stock of a subsidiary that 
directly holds the authority), a portion of the qualified acquiring 
party's cost basis in the stock of the acquired corporation may be 
allocated to the basis in the operating authority. The portion allocable 
is the amount that would have been properly allocable under section 
334(b)(2) if, immediately before the liquidation of the acquired 
corporation on the date of the last acquisition by purchase of stock of 
the acquired corporation within the 12-month period described in section 
334(b)(2)(B), the authority had been transferred in such a way (such as 
by liquidating the subsidiary that directly holds the authority) that 
the qualified acquiring party would have received direct ownership

[[Page 944]]

of the authority upon the liquidation of the acquired corporation 
immediately after the acquisition.
    (v) Other assets to be accounted for. For purposes of paragraphs 
(e)(2) (iii) or (iv) of this section, in determining the portion of 
stock basis properly allocable to the operating authority under section 
334(b)(2), the portion of the qualified acquiring party's basis in the 
acquired corporation's stock that would have been allocable following 
the liquidation to other assets of the acquired corporation, including 
intangible assets such as goodwill and going concern value, must be 
taken into account.
    (vi) Adjustments to basis in acquired corporation's stock and other 
assets. If a taxpayer makes the election provided by paragraph (e)(2)(i) 
of this section, the qualified acquiring party's basis in the stock of 
the acquired corporation shall be decreased, effective as of July 1, 
1980, by the amount determined by the following formula:

                                                                        
 Basis in acquired corporation's stock         Amount allocated to basis
----------------------------------------      in authority under section
 Basis in acquired corporation's stock    x    334(b)(2) minus acquired 
 plus unsecured liabilities of acquired         corporation's basis in  
              corporation                             authority.        
                                                                        

In addition, if the aggregate basis of the assets of the acquired 
corporation other than the authority as of July 1, 1980 (reduced by the 
liabilities secured by such assets) exceeds the qualified acquiring 
party's basis in the stock of the acquired corporation remaining after 
application of the preceding sentence, then the bases of such assets 
shall be reduced proportionately so that their aggregate basis as of 
such date (minus secured liabilities) is equal to such remaining stock 
basis. If the acquired corporation held the authority indirectly, 
appropriate basis reductions shall be made to reflect the transfers 
deemed to have occurred under paragraph (e)(iv) of this section.
    (vii) Pre-TEFRA law applies. References made in this section to 
section 334 of the Code relate to such section as it existed before 
amendment by the Tax Equity and Fiscal Responsibility Act of 1982.
    (f) Adjustment to basis of motor carrier operating authority. A 
taxpayer's basis in a motor carrier operating authority must be reduced 
by the amount of any amortization deductions allowable to the taxpayer 
under this section.
    (g) Examples. The principles of this section may be illustrated by 
the following examples:

    Example (1) (i). Corporation X acquired all the stock of corporation 
Y for $130,000 in 1970. Y's assets at the time of acquisition consisted 
of a motor carrier operating authority valued at $180,000 in which it 
has a basis of $60,000, trucks with a fair market value of $70,000 and 
an aggregate basis of $30,000, and goodwill valued at $30,000. Y has 
$50,000 of liabilities secured by the trucks and $100,000 of unsecured 
liabilities. Both X and Y use a June 30 fiscal year for tax purposes.
    (ii) Y is the only taxpayer eligible to claim a deduction under 
Sec. 1.9200-1(b). If X sold its Y stock to Z in October 1980 (other than 
pursuant to a binding contract in effect on July 1, 1980), Y would 
continue to be the only taxpayer eligible to claim the deduction. 
However, if Y sold the operating authority to W in February 1981, 
neither Y nor W would be eligible to claim the monthly deduction for the 
remainder of the 60-month period. Also, Y would realize gain or loss on 
the sale after reducing its basis in the authority by any amortization 
claimed for the period prior to the sale.
    (iii) Y must begin the 60-month period in July 1980 unless it elects 
under paragraph (c)(1)(ii) of this section to begin the 60-month period 
with the first month of the first taxable year beginning after July 1, 
1980, which in Y's case would be July 1981.
    (iv) Y's allowable monthly deduction is equal to its adjusted basis 
in the operating authority of $60,000, divided by 60, or $1,000. 
However, Y may elect under Sec. 1.9200-1(e)(2) to allocate to its basis 
in the authority a portion of X's basis in Y stock, since X is a 
qualified acquiring party under paragraph (e)(2)(i) of this section and 
Y is a member of an affiliated group of which X is a member. Assuming Y 
makes the election, Y may allocate to the basis of the authority the 
amount of X's basis in Y stock that would have been allocable under 
section 334(b)(2) if X had received the authority in a distribution of 
all

[[Page 945]]

of Y's assets in a complete liquidation of Y immediately after X 
acquired Y's stock.

Therefore, for purposes of the allocation, X's $130,000 cost basis in Y 
stock is deemed to be increased by Y's $100,000 of unsecured liabilities 
to $230,000. Of the $230,000 deemed basis, $180,000 is allocated to the 
authority, $30,000 to goodwill, and $20,000 to the trucks. Y's allowable 
monthly amortization deduction would be $180,000 divided by 60, or 
$3,000. X's $130,000 cost basis in its Y stock must be decreased to 
$62,174 as provided in paragraph (e)(2)(vi) of this section. Y's $30,000 
aggregate basis in its trucks remains unchanged.
    Example (2). Assume the same facts as in Example (1), except that 
Y's aggregate basis in the trucks is $120,000. If Y makes the election 
under Sec. 1.9200-1(e)(2), the same allocation as in Example (1) would 
occur. However, in addition to the decrease in X's basis in its Y stock 
to $62,174, the $120,000 aggregate basis in the trucks must be reduced 
to $112,174 (so that the $112,174 basis minus secured liabilities of 
$50,000 is equal to X's $62,174 remaining stock basis).
    Example (3). Assume the same facts as in Example (1), excet that X 
pays a negotiated purchase price of $120,000 for the Y stock, in order 
to take into account an anticipated tax liability of $10,000, relating 
to potential section 1245 recapture. If Y makes the election under 
Sec. 1.9200-1(e)(2), then for purposes of allocating X's basis in Y 
stock, X's cost basis is deemed to be increased by Y's $100,000 of 
unsecured liabilities as well as the $10,000 of potential tax liability 
resulting from section 1245 recapture, to $230,000. The $10,000 of 
potential recapture tax is treated as a general liability and the deemed 
basis is allocated among Y's assets as in Example (1). In order to take 
into account the potential recapture tax liability, such amount must be 
based on the same fair market values that are used to determine the 
amount of the stock basis allocable to the operating authority.

(Sec. 266, Economic Recovery Tax Act of 1981 (Pub. L. 97-34; 95 Stat. 
265); sec. 517, Highway Revenue Act of 1982 (Pub. L. 97-424; 96 Stat. 
2097); and sec. 7805, Internal Revenue Code of 1954 (68A Stat. 917; 26 
U.S.C. 7805)

[T.D. 7947, 49 FR 8247, Mar. 6, 1984; 49 FR 12244, Mar. 29, 1984]



Sec. 1.9200-2  Manner of taking deduction.

    (a) In general. The deduction provided by Sec. 1.9200-1 shall be 
taken by multiplying the amount of the monthly deduction determined 
under Sec. 1.9200-1 (c)(2) for each motor carrier operating authority by 
the number of months in the taxable year for which the deduction is 
allowable, and entering the resulting amount at the appropriate place on 
the taxpayer's return for each year in which the deduction is properly 
claimed. Additionally, any taxpayer who has claimed the deduction 
provided by Sec. 1.9200-1 must (unless it has already filed a statement 
containing the required information) attach a statement to the next 
income tax return of the taxpayer which has a filing due date on or 
after June 4, 1984. The statement shall provide, in addition to the 
taxpayer's name, address, and taxpayer identification number, the 
following information for each motor carrier operating authority for 
which a deduction was claimed:
    (1) The taxable year of the taxpayer for which the deduction was 
first claimed;
    (2) Whether the taxpayer's deduction was determined using the 
adjusted basis of the authority under section 1012 or an allocated stock 
basis under Sec. 1.9200-1 (e) (2); and
    (3) If an allocation of stock basis has been made under Sec. 1.9200-
1(e)(2), the calculations made in determining the amount of basis to be 
allocated to the authority.
    (b) Filing and amendment of returns. A taxpayer who has filed its 
return for the taxable year that includes July 1, 1980, claiming the 
deduction allowed under Sec. 1.9200-1, may amend its return for such 
year in order to elect under Sec. 1.9200-1(c)(1)(ii) to begin the 60-
month period in the subsequent taxable year. A taxpayer eligible to take 
the deduction under Sec. 1.9200-1 who has filed its returns for both the 
taxable year that includes July 1, 1980, and the following taxable year 
without claiming the deduction, may claim the deduction by filing 
amended returns or claims for refund for the taxable year in which the 
taxpayer elects to begin the 60-month period, and for subsequent taxable 
years. If a taxpayer first claims the deduction on an amended return 
under the preceding sentence, the statement required by paragraph (a) of 
this section must be attached to such amended return.
    (c) Deduction taken for operating authority other than under 
Sec. 1.9200-1. If a deduction other than the deduction allowed under 
Sec. 1.9200-1 was taken in any taxable year for the reduction in value 
of a motor carrier operating authority

[[Page 946]]

caused by administrative or legislative actions to decrease restrictions 
on entry into the interstate motor carrier business, the taxpayer should 
file an amended return for such taxable year which computes taxable 
income without regard to such deduction.

(Approved by the Office of Management and Budget under control number 
1545-0767)

(Sec. 266, Economic Recovery Tax Act of 1981 (Pub. L. 97-34; 95 Stat. 
265); sec. 517, Highway Revenue Act of 1982 (Pub. L. 97-424; 96 Stat. 
2097); and sec. 7805, Internal Revenue Code of 1954 (68A Stat. 917; 26 
U.S.C. 7805)

[T.D. 7947, 49 FR 8249, Mar. 6, 1984]
[[Page 947]]



                              FINDING AIDS




  --------------------------------------------------------------------

  A list of CFR titles, subtitles, chapters, subchapters and parts and 
an alphabetical list of agencies publishing in the CFR are included in 
the CFR Index and Finding Aids volume of the Code of Federal Regulations 
which is published separately and revised annually.

  Table of CFR Titles and Chapters
  Alphabetical List of Agencies Appearing in the CFR
  Table of OMB Control Numbers
  List of CFR Sections Affected



[[Page 949]]



                    Table of CFR Titles and Chapters




                      (Revised as of April 1, 1997)

                      Title 1--General Provisions

         I  Administrative Committee of the Federal Register 
                (Parts 1--49)
        II  Office of the Federal Register (Parts 50--299)
        IV  Miscellaneous Agencies (Parts 400--500)

                          Title 2--[Reserved]

                        Title 3--The President

         I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

         I  General Accounting Office (Parts 1--99)
        II  Federal Claims Collection Standards (General 
                Accounting Office--Department of Justice) (Parts 
                100--299)

                   Title 5--Administrative Personnel

         I  Office of Personnel Management (Parts 1--1199)
        II  Merit Systems Protection Board (Parts 1200--1299)
       III  Office of Management and Budget (Parts 1300--1399)
        IV  Advisory Committee on Federal Pay (Parts 1400--1499)
         V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
        VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
       VII  Advisory Commission on Intergovernmental Relations 
                (Parts 1700--1799)
      VIII  Office of Special Counsel (Parts 1800--1899)
        IX  Appalachian Regional Commission (Parts 1900--1999)
        XI  Armed Forces Retirement Home (Part 2100)
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)
        XV  Office of Administration, Executive Office of the 
                President (Parts 2500--2599)
       XVI  Office of Government Ethics (Parts 2600--2699)
       XXI  Department of the Treasury (Parts 3100--3199)
      XXII  Federal Deposit Insurance Corporation (Part 3201)
     XXIII  Department of Energy (Part 3301)

[[Page 950]]

      XXIV  Federal Energy Regulatory Commission (Part 3401)
      XXVI  Department of Defense (Part 3601)
    XXVIII  Department of Justice (Part 3801)
      XXIX  Federal Communications Commission (Parts 3900--3999)
       XXX  Farm Credit System Insurance Corporation (Parts 4000--
                4099)
      XXXI  Farm Credit Administration (Parts 4100--4199)
    XXXIII  Overseas Private Investment Corporation (Part 4301)
      XXXV  Office of Personnel Management (Part 4501)
        XL  Interstate Commerce Commission (Part 5001)
       XLI  Commodity Futures Trading Commission (Part 5101)
      XLII  Department of Labor (Part 5201)
     XLIII  National Science Foundation (Part 5301)
       XLV  Department of Health and Human Services (Part 5501)
      XLVI  Postal Rate Commission (Part 5601)
     XLVII  Federal Trade Commission (Part 5701)
    XLVIII  Nuclear Regulatory Commission (Part 5801)
         L  Department of Transportation (Part 6001)
       LII  Export-Import Bank of the United States (Part 6201)
      LIII  Department of Education (Parts 6300--6399)
       LIV  Environmental Protection Agency (Part 6401)
      LVII  General Services Administration (Part 6701)
     LVIII  Board of Governors of the Federal Reserve System (Part 
                6801)
       LIX  National Aeronautics and Space Administration (Part 
                6901)
        LX  United States Postal Service (Part 7001)
       LXI  National Labor Relations Board (Part 7101)
      LXII  Equal Employment Opportunity Commission (Part 7201)
     LXIII  Inter-American Foundation (Part 7301)
       LXV  Department of Housing and Urban Development (Part 
                7501)
      LXVI  National Archives and Records Administration (Part 
                7601)
      LXIX  Tennessee Valley Authority (Part 7901)
      LXXI  Consumer Product Safety Commission (Part 8101)
     LXXIV  Federal Mine Safety and Health Review Commission (Part 
                8401)
     LXXVI  Federal Retirement Thrift Investment Board (Part 8601)
    LXXVII  Office of Management and Budget (Part 8701)

                          Title 6--[Reserved]

                         Title 7--Agriculture

            Subtitle A--Office of the Secretary of Agriculture 
                (Parts 0--26)
            Subtitle B--Regulations of the Department of 
                Agriculture
         I  Agricultural Marketing Service (Standards, 
                Inspections, Marketing Practices), Department of 
                Agriculture (Parts 27--209)
        II  Food and Consumer Service, Department of Agriculture 
                (Parts 210--299)

[[Page 951]]

       III  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 300--399)
        IV  Federal Crop Insurance Corporation, Department of 
                Agriculture (Parts 400--499)
         V  Agricultural Research Service, Department of 
                Agriculture (Parts 500--599)
        VI  Natural Resources Conservation Service, Department of 
                Agriculture (Parts 600--699)
       VII  Farm Service Agency, Department of Agriculture (Parts 
                700--799)
      VIII  Grain Inspection, Packers and Stockyards 
                Administration (Federal Grain Inspection Service), 
                Department of Agriculture (Parts 800--899)
        IX  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Fruits, Vegetables, Nuts), Department 
                of Agriculture (Parts 900--999)
         X  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Milk), Department of Agriculture 
                (Parts 1000--1199)
        XI  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Miscellaneous Commodities), Department 
                of Agriculture (Parts 1200--1299)
       XIV  Commodity Credit Corporation, Department of 
                Agriculture (Parts 1400--1499)
        XV  Foreign Agricultural Service, Department of 
                Agriculture (Parts 1500--1599)
       XVI  Rural Telephone Bank, Department of Agriculture (Parts 
                1600--1699)
      XVII  Rural Utilities Service, Department of Agriculture 
                (Parts 1700--1799)
     XVIII  Rural Housing Service, Rural Business-Cooperative 
                Service, Rural Utilities Service, and Farm Service 
                Agency, Department of Agriculture (Parts 1800--
                2099)
      XXVI  Office of Inspector General, Department of Agriculture 
                (Parts 2600--2699)
     XXVII  Office of Information Resources Management, Department 
                of Agriculture (Parts 2700--2799)
    XXVIII  Office of Operations, Department of Agriculture (Parts 
                2800--2899)
      XXIX  Office of Energy, Department of Agriculture (Parts 
                2900--2999)
       XXX  Office of Finance and Management, Department of 
                Agriculture (Parts 3000--3099)
      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
     XXXII  [Reserved]
    XXXIII  Office of Transportation, Department of Agriculture 
                (Parts 3300--3399)
     XXXIV  Cooperative State Research, Education, and Extension 
                Service, Department of Agriculture (Parts 3400--
                3499)
      XXXV  Rural Housing Service, Department of Agriculture 
                (Parts 3500--3599)

[[Page 952]]

     XXXVI  National Agricultural Statistics Service, Department 
                of Agriculture (Parts 3600--3699)
    XXXVII  Economic Research Service, Department of Agriculture 
                (Parts 3700--3799)
   XXXVIII  World Agricultural Outlook Board, Department of 
                Agriculture (Parts 3800--3899)
       XLI  [Reserved]
      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)

                    Title 8--Aliens and Nationality

         I  Immigration and Naturalization Service, Department of 
                Justice (Parts 1--499)

                 Title 9--Animals and Animal Products

         I  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 1--199)
        II  Grain Inspection, Packers and Stockyards 
                Administration (Packers and Stockyards Programs), 
                Department of Agriculture (Parts 200--299)
       III  Food Safety and Inspection Service, Meat and Poultry 
                Inspection, Department of Agriculture (Parts 300--
                599)

                           Title 10--Energy

         I  Nuclear Regulatory Commission (Parts 0--199)
        II  Department of Energy (Parts 200--699)
       III  Department of Energy (Parts 700--999)
         X  Department of Energy (General Provisions) (Parts 
                1000--1099)
        XI  United States Enrichment Corporation (Parts 1100--
                1199)
        XV  Office of the Federal Inspector for the Alaska Natural 
                Gas Transportation System (Parts 1500--1599)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)

                      Title 11--Federal Elections

         I  Federal Election Commission (Parts 1--9099)

                      Title 12--Banks and Banking

         I  Comptroller of the Currency, Department of the 
                Treasury (Parts 1--199)
        II  Federal Reserve System (Parts 200--299)
       III  Federal Deposit Insurance Corporation (Parts 300--399)
        IV  Export-Import Bank of the United States (Parts 400--
                499)
         V  Office of Thrift Supervision, Department of the 
                Treasury (Parts 500--599)
        VI  Farm Credit Administration (Parts 600--699)

[[Page 953]]

       VII  National Credit Union Administration (Parts 700--799)
      VIII  Federal Financing Bank (Parts 800--899)
        IX  Federal Housing Finance Board (Parts 900--999)
        XI  Federal Financial Institutions Examination Council 
                (Parts 1100--1199)
       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)
        XV  Thrift Depositor Protection Oversight Board (Parts 
                1500--1599)
      XVII  Office of Federal Housing Enterprise Oversight, 
                Department of Housing and Urban Development (Parts 
                1700-1799)
     XVIII  Community Development Financial Institutions Fund, 
                Department of the Treasury (Parts 1800--1899)

               Title 13--Business Credit and Assistance

         I  Small Business Administration (Parts 1--199)
       III  Economic Development Administration, Department of 
                Commerce (Parts 300--399)

                    Title 14--Aeronautics and Space

         I  Federal Aviation Administration, Department of 
                Transportation (Parts 1--199)
        II  Office of the Secretary, Department of Transportation 
                (Aviation Proceedings) (Parts 200--399)
       III  Commercial Space Transportation, Federal Aviation 
                Administration, Department of Transportation 
                (Parts 400--499)
         V  National Aeronautics and Space Administration (Parts 
                1200--1299)

                 Title 15--Commerce and Foreign Trade

            Subtitle A--Office of the Secretary of Commerce (Parts 
                0--29)
            Subtitle B--Regulations Relating to Commerce and 
                Foreign Trade
         I  Bureau of the Census, Department of Commerce (Parts 
                30--199)
        II  National Institute of Standards and Technology, 
                Department of Commerce (Parts 200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Foreign-Trade Zones Board, Department of Commerce 
                (Parts 400--499)
       VII  Bureau of Export Administration, Department of 
                Commerce (Parts 700--799)
      VIII  Bureau of Economic Analysis, Department of Commerce 
                (Parts 800--899)
        IX  National Oceanic and Atmospheric Administration, 
                Department of Commerce (Parts 900--999)
        XI  Technology Administration, Department of Commerce 
                (Parts 1100--1199)
      XIII  East-West Foreign Trade Board (Parts 1300--1399)

[[Page 954]]

       XIV  Minority Business Development Agency (Parts 1400--
                1499)
            Subtitle C--Regulations Relating to Foreign Trade 
                Agreements
        XX  Office of the United States Trade Representative 
                (Parts 2000--2099)
            Subtitle D--Regulations Relating to Telecommunications 
                and Information
     XXIII  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                2300--2399)

                    Title 16--Commercial Practices

         I  Federal Trade Commission (Parts 0--999)
        II  Consumer Product Safety Commission (Parts 1000--1799)

             Title 17--Commodity and Securities Exchanges

         I  Commodity Futures Trading Commission (Parts 1--199)
        II  Securities and Exchange Commission (Parts 200--399)
        IV  Department of the Treasury (Parts 400--499)

          Title 18--Conservation of Power and Water Resources

         I  Federal Energy Regulatory Commission, Department of 
                Energy (Parts 1--399)
       III  Delaware River Basin Commission (Parts 400--499)
        VI  Water Resources Council (Parts 700--799)
      VIII  Susquehanna River Basin Commission (Parts 800--899)
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

         I  United States Customs Service, Department of the 
                Treasury (Parts 1--199)
        II  United States International Trade Commission (Parts 
                200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)

                     Title 20--Employees' Benefits

         I  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 1--199)
        II  Railroad Retirement Board (Parts 200--399)
       III  Social Security Administration (Parts 400--499)
        IV  Employees' Compensation Appeals Board, Department of 
                Labor (Parts 500--599)
         V  Employment and Training Administration, Department of 
                Labor (Parts 600--699)
        VI  Employment Standards Administration, Department of 
                Labor (Parts 700--799)
       VII  Benefits Review Board, Department of Labor (Parts 
                800--899)

[[Page 955]]

      VIII  Joint Board for the Enrollment of Actuaries (Parts 
                900--999)
        IX  Office of the Assistant Secretary for Veterans' 
                Employment and Training, Department of Labor 
                (Parts 1000--1099)

                       Title 21--Food and Drugs

         I  Food and Drug Administration, Department of Health and 
                Human Services (Parts 1--1299)
        II  Drug Enforcement Administration, Department of Justice 
                (Parts 1300--1399)
       III  Office of National Drug Control Policy (Parts 1400--
                1499)

                      Title 22--Foreign Relations

         I  Department of State (Parts 1--199)
        II  Agency for International Development, International 
                Development Cooperation Agency (Parts 200--299)
       III  Peace Corps (Parts 300--399)
        IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
         V  United States Information Agency (Parts 500--599)
        VI  United States Arms Control and Disarmament Agency 
                (Parts 600--699)
       VII  Overseas Private Investment Corporation, International 
                Development Cooperation Agency (Parts 700--799)
        IX  Foreign Service Grievance Board Regulations (Parts 
                900--999)
         X  Inter-American Foundation (Parts 1000--1099)
        XI  International Boundary and Water Commission, United 
                States and Mexico, United States Section (Parts 
                1100--1199)
       XII  United States International Development Cooperation 
                Agency (Parts 1200--1299)
      XIII  Board for International Broadcasting (Parts 1300--
                1399)
       XIV  Foreign Service Labor Relations Board; Federal Labor 
                Relations Authority; General Counsel of the 
                Federal Labor Relations Authority; and the Foreign 
                Service Impasse Disputes Panel (Parts 1400--1499)
        XV  African Development Foundation (Parts 1500--1599)
       XVI  Japan-United States Friendship Commission (Parts 
                1600--1699)
      XVII  United States Institute of Peace (Parts 1700--1799)

                          Title 23--Highways

         I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)
        II  National Highway Traffic Safety Administration and 
                Federal Highway Administration, Department of 
                Transportation (Parts 1200--1299)
       III  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 1300--1399)

[[Page 956]]

                Title 24--Housing and Urban Development

            Subtitle A--Office of the Secretary, Department of 
                Housing and Urban Development (Parts 0--99)
            Subtitle B--Regulations Relating to Housing and Urban 
                Development
         I  Office of Assistant Secretary for Equal Opportunity, 
                Department of Housing and Urban Development (Parts 
                100--199)
        II  Office of Assistant Secretary for Housing-Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 200--299)
       III  Government National Mortgage Association, Department 
                of Housing and Urban Development (Parts 300--399)
         V  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 500--599)
        VI  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 600--699) [Reserved]
       VII  Office of the Secretary, Department of Housing and 
                Urban Development (Housing Assistance Programs and 
                Public and Indian Housing Programs) (Parts 700--
                799)
      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs and Section 202 Direct Loan Program) 
                (Parts 800--899)
        IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--999)
         X  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Interstate Land Sales 
                Registration Program) (Parts 1700--1799)
       XII  Office of Inspector General, Department of Housing and 
                Urban Development (Parts 2000--2099)
        XX  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 3200--3899)
       XXV  Neighborhood Reinvestment Corporation (Parts 4100--
                4199)

                           Title 25--Indians

         I  Bureau of Indian Affairs, Department of the Interior 
                (Parts 1--299)
        II  Indian Arts and Crafts Board, Department of the 
                Interior (Parts 300--399)
       III  National Indian Gaming Commission, Department of the 
                Interior (Parts 500--599)
        IV  Office of Navajo and Hopi Indian Relocation (Parts 
                700--799)
         V  Bureau of Indian Affairs, Department of the Interior, 
                and Indian Health Service, Department of Health 
                and Human Services (Part 900)
        VI  Office of the Assistant Secretary-Indian Affairs, 
                Department of the Interior (Part 1001)

[[Page 957]]

       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Parts 1200--1299)

                      Title 26--Internal Revenue

         I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--799)

           Title 27--Alcohol, Tobacco Products and Firearms

         I  Bureau of Alcohol, Tobacco and Firearms, Department of 
                the Treasury (Parts 1--299)

                   Title 28--Judicial Administration

         I  Department of Justice (Parts 0--199)
       III  Federal Prison Industries, Inc., Department of Justice 
                (Parts 300--399)
         V  Bureau of Prisons, Department of Justice (Parts 500--
                599)
        VI  Offices of Independent Counsel, Department of Justice 
                (Parts 600--699)
       VII  Office of Independent Counsel (Parts 700--799)

                            Title 29--Labor

            Subtitle A--Office of the Secretary of Labor (Parts 
                0--99)
            Subtitle B--Regulations Relating to Labor
         I  National Labor Relations Board (Parts 100--199)
        II  Office of Labor-Management Standards, Department of 
                Labor (Parts 200--299)
       III  National Railroad Adjustment Board (Parts 300--399)
        IV  Office of Labor-Management Standards, Department of 
                Labor (Parts 400--499)
         V  Wage and Hour Division, Department of Labor (Parts 
                500--899)
        IX  Construction Industry Collective Bargaining Commission 
                (Parts 900--999)
         X  National Mediation Board (Parts 1200--1299)
       XII  Federal Mediation and Conciliation Service (Parts 
                1400--1499)
       XIV  Equal Employment Opportunity Commission (Parts 1600--
                1699)
      XVII  Occupational Safety and Health Administration, 
                Department of Labor (Parts 1900--1999)
        XX  Occupational Safety and Health Review Commission 
                (Parts 2200--2499)
       XXV  Pension and Welfare Benefits Administration, 
                Department of Labor (Parts 2500--2599)
     XXVII  Federal Mine Safety and Health Review Commission 
                (Parts 2700--2799)
        XL  Pension Benefit Guaranty Corporation (Parts 4000--
                4999)

[[Page 958]]

                      Title 30--Mineral Resources

         I  Mine Safety and Health Administration, Department of 
                Labor (Parts 1--199)
        II  Minerals Management Service, Department of the 
                Interior (Parts 200--299)
       III  Board of Surface Mining and Reclamation Appeals, 
                Department of the Interior (Parts 300--399)
        IV  Geological Survey, Department of the Interior (Parts 
                400--499)
        VI  Bureau of Mines, Department of the Interior (Parts 
                600--699)
       VII  Office of Surface Mining Reclamation and Enforcement, 
                Department of the Interior (Parts 700--999)

                 Title 31--Money and Finance: Treasury

            Subtitle A--Office of the Secretary of the Treasury 
                (Parts 0--50)
            Subtitle B--Regulations Relating to Money and Finance
         I  Monetary Offices, Department of the Treasury (Parts 
                51--199)
        II  Fiscal Service, Department of the Treasury (Parts 
                200--399)
        IV  Secret Service, Department of the Treasury (Parts 
                400--499)
         V  Office of Foreign Assets Control, Department of the 
                Treasury (Parts 500--599)
        VI  Bureau of Engraving and Printing, Department of the 
                Treasury (Parts 600--699)
       VII  Federal Law Enforcement Training Center, Department of 
                the Treasury (Parts 700--799)
      VIII  Office of International Investment, Department of the 
                Treasury (Parts 800--899)

                      Title 32--National Defense

            Subtitle A--Department of Defense
         I  Office of the Secretary of Defense (Parts 1--399)
         V  Department of the Army (Parts 400--699)
        VI  Department of the Navy (Parts 700--799)
       VII  Department of the Air Force (Parts 800--1099)
            Subtitle B--Other Regulations Relating to National 
                Defense
       XII  Defense Logistics Agency (Parts 1200--1299)
       XVI  Selective Service System (Parts 1600--1699)
       XIX  Central Intelligence Agency (Parts 1900--1999)
        XX  Information Security Oversight Office, National 
                Archives and Records Administration (Parts 2000--
                2099)
       XXI  National Security Council (Parts 2100--2199)
      XXIV  Office of Science and Technology Policy (Parts 2400--
                2499)
     XXVII  Office for Micronesian Status Negotiations (Parts 
                2700--2799)
    XXVIII  Office of the Vice President of the United States 
                (Parts 2800--2899)
      XXIX  Presidential Commission on the Assignment of Women in 
                the Armed Forces (Part 2900)

[[Page 959]]

               Title 33--Navigation and Navigable Waters

         I  Coast Guard, Department of Transportation (Parts 1--
                199)
        II  Corps of Engineers, Department of the Army (Parts 
                200--399)
        IV  Saint Lawrence Seaway Development Corporation, 
                Department of Transportation (Parts 400--499)

                          Title 34--Education

            Subtitle A--Office of the Secretary, Department of 
                Education (Parts 1--99)
            Subtitle B--Regulations of the Offices of the 
                Department of Education
         I  Office for Civil Rights, Department of Education 
                (Parts 100--199)
        II  Office of Elementary and Secondary Education, 
                Department of Education (Parts 200--299)
       III  Office of Special Education and Rehabilitative 
                Services, Department of Education (Parts 300--399)
        IV  Office of Vocational and Adult Education, Department 
                of Education (Parts 400--499)
         V  Office of Bilingual Education and Minority Languages 
                Affairs, Department of Education (Parts 500--599)
        VI  Office of Postsecondary Education, Department of 
                Education (Parts 600--699)
       VII  Office of Educational Research and Improvement, 
                Department of Education (Parts 700--799)
        XI  National Institute for Literacy (Parts 1100-1199)
            Subtitle C--Regulations Relating to Education
       XII  National Council on Disability (Parts 1200--1299)

                        Title 35--Panama Canal

         I  Panama Canal Regulations (Parts 1--299)

             Title 36--Parks, Forests, and Public Property

         I  National Park Service, Department of the Interior 
                (Parts 1--199)
        II  Forest Service, Department of Agriculture (Parts 200--
                299)
       III  Corps of Engineers, Department of the Army (Parts 
                300--399)
        IV  American Battle Monuments Commission (Parts 400--499)
         V  Smithsonian Institution (Parts 500--599)
       VII  Library of Congress (Parts 700--799)
      VIII  Advisory Council on Historic Preservation (Parts 800--
                899)
        IX  Pennsylvania Avenue Development Corporation (Parts 
                900--999)
        XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
       XII  National Archives and Records Administration (Parts 
                1200--1299)
       XIV  Assassination Records Review Board (Parts 1400-1499)

[[Page 960]]

             Title 37--Patents, Trademarks, and Copyrights

         I  Patent and Trademark Office, Department of Commerce 
                (Parts 1--199)
        II  Copyright Office, Library of Congress (Parts 200--299)
        IV  Assistant Secretary for Technology Policy, Department 
                of Commerce (Parts 400--499)
         V  Under Secretary for Technology, Department of Commerce 
                (Parts 500--599)

           Title 38--Pensions, Bonuses, and Veterans' Relief

         I  Department of Veterans Affairs (Parts 0--99)

                       Title 39--Postal Service

         I  United States Postal Service (Parts 1--999)
       III  Postal Rate Commission (Parts 3000--3099)

                  Title 40--Protection of Environment

         I  Environmental Protection Agency (Parts 1--799)
         V  Council on Environmental Quality (Parts 1500--1599)

          Title 41--Public Contracts and Property Management

            Subtitle B--Other Provisions Relating to Public 
                Contracts
        50  Public Contracts, Department of Labor (Parts 50-1--50-
                999)
        51  Committee for Purchase From People Who Are Blind or 
                Severely Disabled (Parts 51-1--51-99)
        60  Office of Federal Contract Compliance Programs, Equal 
                Employment Opportunity, Department of Labor (Parts 
                60-1--60-999)
        61  Office of the Assistant Secretary for Veterans 
                Employment and Training, Department of Labor 
                (Parts 61-1--61-999)
            Subtitle C--Federal Property Management Regulations 
                System
       101  Federal Property Management Regulations (Parts 101-1--
                101-99)
       105  General Services Administration (Parts 105-1--105-999)
       109  Department of Energy Property Management Regulations 
                (Parts 109-1--109-99)
       114  Department of the Interior (Parts 114-1--114-99)
       115  Environmental Protection Agency (Parts 115-1--115-99)
       128  Department of Justice (Parts 128-1--128-99)
            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]
            Subtitle E--Federal Information Resources Management 
                Regulations System
       201  Federal Information Resources Management Regulation 
                (Parts 201-1--201-99) [Reserved]
            Subtitle F--Federal Travel Regulation System
       301  Travel Allowances (Parts 301-1--301-99)
       302  Relocation Allowances (Parts 302-1--302-99)

[[Page 961]]

       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Parts 303-1--303-2)
       304  Payment from a Non-Federal Source for Travel Expenses 
                (Parts 304-1--304-99)

                        Title 42--Public Health

         I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
        IV  Health Care Financing Administration, Department of 
                Health and Human Services (Parts 400--499)
         V  Office of Inspector General-Health Care, Department of 
                Health and Human Services (Parts 1000--1999)

                   Title 43--Public Lands: Interior

            Subtitle A--Office of the Secretary of the Interior 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Lands
         I  Bureau of Reclamation, Department of the Interior 
                (Parts 200--499)
        II  Bureau of Land Management, Department of the Interior 
                (Parts 1000--9999)
       III  Utah Reclamation Mitigation and Conservation 
                Commission (Parts 10000--10005)

             Title 44--Emergency Management and Assistance

         I  Federal Emergency Management Agency (Parts 0--399)
        IV  Department of Commerce and Department of 
                Transportation (Parts 400--499)

                       Title 45--Public Welfare

            Subtitle A--Department of Health and Human Services, 
                General Administration (Parts 1--199)
            Subtitle B--Regulations Relating to Public Welfare
        II  Office of Family Assistance (Assistance Programs), 
                Administration for Children and Families, 
                Department of Health and Human Services (Parts 
                200--299)
       III  Office of Child Support Enforcement (Child Support 
                Enforcement Program), Administration for Children 
                and Families, Department of Health and Human 
                Services (Parts 300--399)
        IV  Office of Refugee Resettlement, Administration for 
                Children and Families Department of Health and 
                Human Services (Parts 400--499)
         V  Foreign Claims Settlement Commission of the United 
                States, Department of Justice (Parts 500--599)
        VI  National Science Foundation (Parts 600--699)
       VII  Commission on Civil Rights (Parts 700--799)
      VIII  Office of Personnel Management (Parts 800--899)

[[Page 962]]

         X  Office of Community Services, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 1000--1099)
        XI  National Foundation on the Arts and the Humanities 
                (Parts 1100--1199)
       XII  ACTION (Parts 1200--1299)
      XIII  Office of Human Development Services, Department of 
                Health and Human Services (Parts 1300--1399)
       XVI  Legal Services Corporation (Parts 1600--1699)
      XVII  National Commission on Libraries and Information 
                Science (Parts 1700--1799)
     XVIII  Harry S. Truman Scholarship Foundation (Parts 1800--
                1899)
       XXI  Commission on Fine Arts (Parts 2100--2199)
      XXII  Christopher Columbus Quincentenary Jubilee Commission 
                (Parts 2200--2299)
     XXIII  Arctic Research Commission (Part 2301)
      XXIV  James Madison Memorial Fellowship Foundation (Parts 
                2400--2499)
       XXV  Corporation for National and Community Service (Parts 
                2500--2599)

                          Title 46--Shipping

         I  Coast Guard, Department of Transportation (Parts 1--
                199)
        II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
        IV  Federal Maritime Commission (Parts 500--599)

                      Title 47--Telecommunication

         I  Federal Communications Commission (Parts 0--199)
        II  Office of Science and Technology Policy and National 
                Security Council (Parts 200--299)
       III  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                300--399)

           Title 48--Federal Acquisition Regulations System

         1  Federal Acquisition Regulation (Parts 1--99)
         2  Department of Defense (Parts 200--299)
         3  Department of Health and Human Services (Parts 300--
                399)
         4  Department of Agriculture (Parts 400--499)
         5  General Services Administration (Parts 500--599)
         6  Department of State (Parts 600--699)
         7  Agency for International Development (Parts 700--799)
         8  Department of Veterans Affairs (Parts 800--899)
         9  Department of Energy (Parts 900--999)
        10  Department of the Treasury (Parts 1000--1099)

[[Page 963]]

        12  Department of Transportation (Parts 1200--1299)
        13  Department of Commerce (Parts 1300--1399)
        14  Department of the Interior (Parts 1400--1499)
        15  Environmental Protection Agency (Parts 1500--1599)
        16  Office of Personnel Management Federal Employees 
                Health Benefits Acquisition Regulation (Parts 
                1600--1699)
        17  Office of Personnel Management (Parts 1700--1799)
        18  National Aeronautics and Space Administration (Parts 
                1800--1899)
        19  United States Information Agency (Parts 1900--1999)
        20  Nuclear Regulatory Commission (Parts 2000--2099)
        21  Office of Personnel Management, Federal Employees 
                Group Life Insurance Federal Acquisition 
                Regulation (Parts 2100--2199)
        23  Social Security Administration (Parts 2300--2399)
        24  Department of Housing and Urban Development (Parts 
                2400--2499)
        25  National Science Foundation (Parts 2500--2599)
        28  Department of Justice (Parts 2800--2899)
        29  Department of Labor (Parts 2900--2999)
        34  Department of Education Acquisition Regulation (Parts 
                3400--3499)
        35  Panama Canal Commission (Parts 3500--3599)
        44  Federal Emergency Management Agency (Parts 4400--4499)
        51  Department of the Army Acquisition Regulations (Parts 
                5100--5199)
        52  Department of the Navy Acquisition Regulations (Parts 
                5200--5299)
        53  Department of the Air Force Federal Acquisition 
                Regulation Supplement (Parts 5300--5399)
        54  Defense Logistics Agency, Department of Defense (Part 
                5452)
        57  African Development Foundation (Parts 5700--5799)
        61  General Services Administration Board of Contract 
                Appeals (Parts 6100--6199)
        63  Department of Transportation Board of Contract Appeals 
                (Parts 6300--6399)
        99  Cost Accounting Standards Board, Office of Federal 
                Procurement Policy, Office of Management and 
                Budget (Parts 9900--9999)

                       Title 49--Transportation

            Subtitle A--Office of the Secretary of Transportation 
                (Parts 1--99)
            Subtitle B--Other Regulations Relating to 
                Transportation
         I  Research and Special Programs Administration, 
                Department of Transportation (Parts 100--199)
        II  Federal Railroad Administration, Department of 
                Transportation (Parts 200--299)

[[Page 964]]

       III  Federal Highway Administration, Department of 
                Transportation (Parts 300--399)
        IV  Coast Guard, Department of Transportation (Parts 400--
                499)
         V  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 500--599)
        VI  Federal Transit Administration, Department of 
                Transportation (Parts 600--699)
       VII  National Railroad Passenger Corporation (AMTRAK) 
                (Parts 700--799)
      VIII  National Transportation Safety Board (Parts 800--999)
         X  Surface Transportation Board, Department of 
                Transportation (Parts 1000--1399)

                   Title 50--Wildlife and Fisheries

         I  United States Fish and Wildlife Service, Department of 
                the Interior (Parts 1--199)
        II  National Marine Fisheries Service, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 200--299)
       III  International Fishing and Related Activities (Parts 
                300--399)
        IV  Joint Regulations (United States Fish and Wildlife 
                Service, Department of the Interior and National 
                Marine Fisheries Service, National Oceanic and 
                Atmospheric Administration, Department of 
                Commerce); Endangered Species Committee 
                Regulations (Parts 400--499)
         V  Marine Mammal Commission (Parts 500--599)
        VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

                      CFR Index and Finding Aids

            Subject/Agency Index
            List of Agency Prepared Indexes
            Parallel Tables of Statutory Authorities and Rules
            Acts Requiring Publication in the Federal Register
            List of CFR Titles, Chapters, Subchapters, and Parts
            Alphabetical List of Agencies Appearing in the CFR



[[Page 965]]





           Alphabetical List of Agencies Appearing in the CFR




                      (Revised as of April 1, 1997)

                                                  CFR Title, Subtitle or
                     Agency                               Chapter

ACTION                                            45, XII
Administrative Committee of the Federal Register  1, I
Advanced Research Projects Agency                 32, I
Advisory Commission on Intergovernmental          5, VII
     Relations
Advisory Committee on Federal Pay                 5, IV
Advisory Council on Historic Preservation         36, VIII
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development              22, II
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, IX, X, XI
Agricultural Research Service                     7, V
Agriculture Department
  Agricultural Marketing Service                  7, I, IX, X, XI
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Commodity Credit Corporation                    7, XIV
  Cooperative State Research, Education, and      7, XXXIV
       Extension Service
  Economic Research Service                       7, XXXVII
  Energy, Office of                               7, XXIX
  Environmental Quality, Office of                7, XXXI
  Farm Service Agency                             7, VII, XVIII
  Federal Acquisition Regulation                  48, 4
  Federal Crop Insurance Corporation              7, IV
  Finance and Management, Office of               7, XXX
  Food and Consumer Service                       7, II
  Food Safety and Inspection Service              9, III
  Foreign Agricultural Service                    7, XV
  Forest Service                                  36, II
  Grain Inspection, Packers and Stockyards        7, VIII; 9, II
       Administration
  Information Resources Management, Office of     7, XXVII
  Inspector General, Office of                    7, XXVI
  National Agricultural Library                   7, XLI
  National Agricultural Statistics Service        7, XXXVI
  Natural Resources Conservation Service          7, VI
  Operations, Office of                           7, XXVIII
  Rural Business-Cooperative Service              7, XVIII, XLII
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV
  Rural Telephone Bank                            7, XVI
  Rural Utilities Service                         7, XVII, XVIII, XLII
  Secretary of Agriculture, Office of             7, Subtitle A
  Transportation, Office of                       7, XXXIII
  World Agricultural Outlook Board                7, XXXVIII
Air Force Department                              32, VII
  Federal Acquisition Regulation Supplement       48, 53
Alaska Natural Gas Transportation System, Office  10, XV
     of the Federal Inspector
Alcohol, Tobacco and Firearms, Bureau of          27, I
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
Animal and Plant Health Inspection Service        7, III; 9, I

[[Page 966]]

Appalachian Regional Commission                   5, IX
Architectural and Transportation Barriers         36, XI
     Compliance Board
Arctic Research Commission                        45, XXIII
Armed Forces Retirement Home                      5, XI
Arms Control and Disarmament Agency, United       22, VI
     States
Army Department                                   32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
Assassination Records Review Board                36, XIV
Benefits Review Board                             20, VII
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase From People Who Are
Board for International Broadcasting              22, XIII
Census Bureau                                     15, I
Central Intelligence Agency                       32, XIX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X
Christopher Columbus Quincentenary Jubilee        45, XXII
     Commission
Civil Rights, Commission on                       45, VII
Civil Rights, Office for                          34, I
Coast Guard                                       33, I; 46, I; 49, IV
Commerce Department                               44, IV
  Census Bureau                                   15, I`
  Economic Affairs, Under Secretary               37, V
  Economic Analysis, Bureau of                    15, VIII
  Economic Development Administration             13, III
  Emergency Management and Assistance             44, IV
  Export Administration, Bureau of                15, VII
  Federal Acquisition Regulation                  48, 13
  Fishery Conservation and Management             50, VI
  Foreign-Trade Zones Board                       15, IV
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II
  National Marine Fisheries Service               50, II, IV
  National Oceanic and Atmospheric                15, IX; 50, II, III, IV, 
       Administration                             VI
  National Telecommunications and Information     15, XXIII; 47, III
       Administration
  National Weather Service                        15, IX
  Patent and Trademark Office                     37, I
  Productivity, Technology and Innovation,        37, IV
       Assistant Secretary for
  Secretary of Commerce, Office of                15, Subtitle A
  Technology, Under Secretary for                 37, V
  Technology Administration                       15, XI
  Technology Policy, Assistant Secretary for      37, IV
Commercial Space Transportation                   14, III
Commodity Credit Corporation                      7, XIV
Commodity Futures Trading Commission              5, XLI; 17, I
Community Planning and Development, Office of     24, V, VI
     Assistant Secretary for
Community Services, Office of                     45, X
Comptroller of the Currency                       12, I
Construction Industry Collective Bargaining       29, IX
     Commission
Consumer Product Safety Commission                5, LXXI; 16, II
Cooperative State Research, Education, and        7, XXXIV
     Extension Service
Copyright Office                                  37, II
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Customs Service, United States                    19, I
Defense Contract Audit Agency                     32, I
Defense Department                                5, XXVI; 32, Subtitle A
  Advanced Research Projects Agency               32, I
  Air Force Department                            32, VII
  Army Department                                 32, V; 33, II; 36, III, 
                                                  48, 51
  Defense Intelligence Agency                     32, I

[[Page 967]]

  Defense Logistics Agency                        32, I, XII; 48, 54
  Defense Mapping Agency                          32, I
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 2
  Navy Department                                 32, VI; 48, 52
  Secretary of Defense, Office of                 32, I
Defense Contract Audit Agency                     32, I
Defense Intelligence Agency                       32, I
Defense Logistics Agency                          32, XII; 48, 54
Defense Mapping Agency                            32, I
Defense Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
Drug Enforcement Administration                   21, II
East-West Foreign Trade Board                     15, XIII
Economic Affairs, Under Secretary                 37, V
Economic Analysis, Bureau of                      15, VIII
Economic Development Administration               13, III
Economic Research Service                         7, XXXVII
Education, Department of                          5, LIII
  Bilingual Education and Minority Languages      34, V
       Affairs, Office of
  Civil Rights, Office for                        34, I
  Educational Research and Improvement, Office    34, VII
       of
  Elementary and Secondary Education, Office of   34, II
  Federal Acquisition Regulation                  48, 34
  Postsecondary Education, Office of              34, VI
  Secretary of Education, Office of               34, Subtitle A
  Special Education and Rehabilitative Services,  34, III
       Office of
  Vocational and Adult Education, Office of       34, IV
Educational Research and Improvement, Office of   34, VII
Elementary and Secondary Education, Office of     34, II
Employees' Compensation Appeals Board             20, IV
Employees Loyalty Board                           5, V
Employment and Training Administration            20, V
Employment Standards Administration               20, VI
Endangered Species Committee                      50, IV
Energy, Department of                             5, XXIII; 10, II, III, X
  Federal Acquisition Regulation                  48, 9
  Federal Energy Regulatory Commission            5, XXIV; 18, I
  Property Management Regulations                 41, 109
Energy, Office of                                 7, XXIX
Engineers, Corps of                               33, II; 36, III
Engraving and Printing, Bureau of                 31, VI
Enrichment Corporation, United States             10, XI
Environmental Protection Agency                   5, LIV; 40, I
  Federal Acquisition Regulation                  48, 15
  Property Management Regulations                 41, 115
Environmental Quality, Office of                  7, XXXI
Equal Employment Opportunity Commission           5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary  24, I
     for
Executive Office of the President                 3, I
  Administration, Office of                       5, XV
  Environmental Quality, Council on               40, V
  Management and Budget, Office of                25, III, LXXVII; 48, 99
  National Drug Control Policy, Office of         21, III
  National Security Council                       32, XXI; 47, 2
  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II
  Trade Representative, Office of the United      15, XX
       States
Export Administration, Bureau of                  15, VII
Export-Import Bank of the United States           5, LII; 12, IV
Family Assistance, Office of                      45, II
Farm Credit Administration                        5, XXXI; 12, VI
Farm Credit System Insurance Corporation          5, XXX; 12, XIV
Farm Service Agency                               7, VII, XVIII
Federal Acquisition Regulation                    48, 1
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III

[[Page 968]]

Federal Claims Collection Standards               4, II
Federal Communications Commission                 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of   41, 60
Federal Crop Insurance Corporation                7, IV
Federal Deposit Insurance Corporation             5, XXII; 12, III
Federal Election Commission                       11, I
Federal Emergency Management Agency               44, I
  Federal Acquisition Regulation                  48, 44
Federal Employees Group Life Insurance Federal    48, 21
     Acquisition Regulation
Federal Employees Health Benefits Acquisition     48, 16
     Regulation
Federal Energy Regulatory Commission              5, XXIV; 18, I
Federal Financial Institutions Examination        12, XI
     Council
Federal Financing Bank                            12, VIII
Federal Highway Administration                    23, I, II; 49, III
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Board                     12, IX
Federal Inspector for the Alaska Natural Gas      10, XV
     Transportation System, Office of
Federal Labor Relations Authority, and General    5, XIV; 22, XIV
     Counsel of the Federal Labor Relations 
     Authority
Federal Law Enforcement Training Center           31, VII
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Pay, Advisory Committee on                5, IV
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
Federal Property Management Regulations System    41, Subtitle C
Federal Railroad Administration                   49, II
Federal Register, Administrative Committee of     1, I
Federal Register, Office of                       1, II
Federal Reserve System                            12, II
  Board of Governors                              5, LVIII
Federal Retirement Thrift Investment Board        5, VI, LXXVI
Federal Service Impasses Panel                    5, XIV
Federal Trade Commission                          5, XLVII; 16, I
Federal Transit Administration                    49, VI
Federal Travel Regulation System                  41, Subtitle F
Finance and Management, Office of                 7, XXX
Fine Arts, Commission on                          45, XXI
Fiscal Service                                    31, II
Fish and Wildlife Service, United States          50, I, IV
Fishery Conservation and Management               50, VI
Food and Drug Administration                      21, I
Food and Consumer Service                         7, II
Food Safety and Inspection Service                9, III
Foreign Agricultural Service                      7, XV
Foreign Assets Control, Office of                 31, V
Foreign Claims Settlement Commission of the       45, V
     United States
Foreign Service Grievance Board                   22, IX
Foreign Service Impasse Disputes Panel            22, XIV
Foreign Service Labor Relations Board             22, XIV
Foreign-Trade Zones Board                         15, IV
Forest Service                                    36, II
General Accounting Office                         4, I, II
General Services Administration                   5, LVII
  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5
  Federal Property Management Regulations System  41, 101, 105
  Federal Travel Regulation System                41, Subtitle F
  Payment From a Non-Federal Source for Travel    41, 304
       Expenses
  Payment of Expenses Connected With the Death    41, 303
       of Certain Employees
  Relocation Allowances                           41, 302
  Travel Allowances                               41, 301

[[Page 969]]

Geological Survey                                 30, IV
Government Ethics, Office of                      5, XVI
Government National Mortgage Association          24, III
Grain Inspection, Packers and Stockyards          7, VIII; 9, II
     Administration
Great Lakes Pilotage                              46, III
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          5, XLV; 45, Subtitle A
  Child Support Enforcement, Office of            45, III
  Children and Families, Administration for       45, II, III, IV, X
  Community Services, Office of                   45, X
  Family Assistance, Office of                    45, II
  Federal Acquisition Regulation                  48, 3
  Food and Drug Administration                    21, I
  Health Care Financing Administration            42, IV
  Human Development Services, Office of           45, XIII
  Indian Health Service                           25, V
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Health Care Financing Administration              42, IV
Housing and Urban Development, Department of      5, LXV; 24, Subtitle B
  Community Planning and Development, Office of   24, V, VI
       Assistant Secretary for
  Equal Opportunity, Office of Assistant          24, I
       Secretary for
  Federal Acquisition Regulation                  48, 24
  Federal Housing Enterprise Oversight, Office    12, XVII
       of
  Government National Mortgage Association        24, III
  Housing--Federal Housing Commissioner, Office   24, II, VIII, X, XX
       of Assistant Secretary for
  Inspector General, Office of                    24, XII
  Public and Indian Housing, Office of Assistant  24, IX
       Secretary for
  Secretary, Office of                            24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of  24, II, VIII, X, XX
     Assistant Secretary for
Human Development Services, Office of             45, XIII
Immigration and Naturalization Service            8, I
Independent Counsel, Office of                    28, VII
Indian Affairs, Bureau of                         25, I, V
Indian Affairs, Office of the Assistant           25, VI
     Secretary
Indian Arts and Crafts Board                      25, II
Indian Health Service                             25, V
Information Agency, United States                 22, V
  Federal Acquisition Regulation                  48, 19
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General
  Agriculture Department                          7, XXVI
  Health and Human Services Department            42, V
  Housing and Urban Development Department        24, XII
Institute of Peace, United States                 22, XVII
Inter-American Foundation                         5, LXIII; 22, X
Intergovernmental Relations, Advisory Commission  5, VII
     on
Interior Department
  Endangered Species Committee                    50, IV
  Federal Acquisition Regulation                  48, 14
  Federal Property Management Regulations System  41, 114
  Fish and Wildlife Service, United States        50, I, IV
  Geological Survey                               30, IV
  Indian Affairs, Bureau of                       25, I, V
  Indian Affairs, Office of the Assistant         25, VI
       Secretary
  Indian Arts and Crafts Board                    25, II
  Land Management, Bureau of                      43, II
  Minerals Management Service                     30, II
  Mines, Bureau of                                30, VI
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Reclamation, Bureau of                          43, I

[[Page 970]]

  Secretary of the Interior, Office of            43, Subtitle A
  Surface Mining and Reclamation Appeals, Board   30, III
       of
  Surface Mining Reclamation and Enforcement,     30, VII
       Office of
Internal Revenue Service                          26, I
International Boundary and Water Commission,      22, XI
     United States and Mexico, United States 
     Section
International Development, Agency for             22, II
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
  International Development, Agency for           22, II; 48, 7
  Overseas Private Investment Corporation         5, XXXIII; 22, VII
International Fishing and Related Activities      50, III
International Investment, Office of               31, VIII
International Joint Commission, United States     22, IV
     and Canada
International Organizations Employees Loyalty     5, V
     Board
International Trade Administration                15, III; 19, III
International Trade Commission, United States     19, II
Interstate Commerce Commission                    5, XL
James Madison Memorial Fellowship Foundation      45, XXIV
Japan-United States Friendship Commission         22, XVI
Joint Board for the Enrollment of Actuaries       20, VIII
Justice Department                                5, XXVIII; 28, I
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             4, II
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration and Naturalization Service          8, I
  Offices of Independent Counsel                  28, VI
  Prisons, Bureau of                              28, V
  Property Management Regulations                 41, 128
Labor Department                                  5, XLII
  Benefits Review Board                           20, VII
  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Employment Standards Administration             20, VI
  Federal Acquisition Regulation                  48, 29
  Federal Contract Compliance Programs, Office    41, 60
       of
  Federal Procurement Regulations System          41, 50
  Labor-Management Relations and Cooperative      29, II
       Programs, Bureau of
  Labor-Management Programs, Office of            29, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Pension and Welfare Benefits Administration     29, XXV
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A
  Veterans' Employment and Training, Office of    41, 61; 20, IX
       the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I
Labor-Management Relations and Cooperative        29, II
     Programs, Bureau of
Labor-Management Programs, Office of              29, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Library of Congress                               36, VII
  Copyright Office                                37, II
Management and Budget, Office of                  5, III, LXXVII; 48, 99
Marine Mammal Commission                          50, V
Maritime Administration                           46, II
Merit Systems Protection Board                    5, II
Micronesian Status Negotiations, Office for       32, XXVII
Mine Safety and Health Administration             30, I
Minerals Management Service                       30, II
Mines, Bureau of                                  30, VI

[[Page 971]]

Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
National Aeronautics and Space Administration     5, LIX; 14, V
  Federal Acquisition Regulation                  48, 18
National Agricultural Library                     7, XLI
National Agricultural Statistics Service          7, XXXVI
National Archives and Records Administration      5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
National Bureau of Standards                      15, II
National Capital Planning Commission              1, IV
National Commission for Employment Policy         1, IV
National Commission on Libraries and Information  45, XVII
     Science
National and Community Service, Corporation for   45, XXV
National Council on Disability                    34, XII
National Credit Union Administration              12, VII
National Drug Control Policy, Office of           21, III
National Foundation on the Arts and the           45, XI
     Humanities
National Highway Traffic Safety Administration    23, II, III; 49, V
National Indian Gaming Commission                 25, III
National Institute for Literacy                   34, XI
National Institute of Standards and Technology    15, II
National Labor Relations Board                    29, I
National Marine Fisheries Service                 50, II, IV
National Mediation Board                          29, X
National Oceanic and Atmospheric Administration   15, IX; 50, II, III, IV, 
                                                  VI
National Park Service                             36, I
National Railroad Adjustment Board                29, III
National Railroad Passenger Corporation (AMTRAK)  49, VII
National Science Foundation                       5, XLIII; 45, VI
  Federal Acquisition Regulation                  48, 25
National Security Council                         32, XXI
National Security Council and Office of Science   47, II
     and Technology Policy
National Telecommunications and Information       15, XXIII; 47, III
     Administration
National Transportation Safety Board              49, VIII
National Weather Service                          15, IX
Natural Resources Conservation Service            7, VI
Navajo and Hopi Indian Relocation, Office of      25, IV
Navy Department                                   32, VI
  Federal Acquisition Regulation                  48, 52
Neighborhood Reinvestment Corporation             24, XXV
Nuclear Regulatory Commission                     5, XLVIII; 10, I
  Federal Acquisition Regulation                  48, 20
Occupational Safety and Health Administration     29, XVII
Occupational Safety and Health Review Commission  29, XX
Offices of Independent Counsel                    28, VI
Operations Office                                 7, XXVIII
Overseas Private Investment Corporation           5, XXXIII; 22, VII
Panama Canal Commission                           48, 35
Panama Canal Regulations                          35, I
Patent and Trademark Office                       37, I
Payment From a Non-Federal Source for Travel      41, 304
     Expenses
Payment of Expenses Connected With the Death of   41, 303
     Certain Employees
Peace Corps                                       22, III
Pennsylvania Avenue Development Corporation       36, IX
Pension and Welfare Benefits Administration       29, XXV
Pension Benefit Guaranty Corporation              29, XL
Personnel Management, Office of                   5, I, XXXV; 45, VIII
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
Postal Rate Commission                            5, XLVI; 39, III
Postal Service, United States                     5, LX; 39, I
Postsecondary Education, Office of                34, VI

[[Page 972]]

President's Commission on White House             1, IV
     Fellowships
Presidential Commission on the Assignment of      32, XXIX
     Women in the Armed Forces
Presidential Documents                            3
Prisons, Bureau of                                28, V
Productivity, Technology and Innovation,          37, IV
     Assistant Secretary
Public Contracts, Department of Labor             41, 50
Public and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Health Service                             42, I
Railroad Retirement Board                         20, II
Reclamation, Bureau of                            43, I
Refugee Resettlement, Office of                   45, IV
Regional Action Planning Commissions              13, V
Relocation Allowances                             41, 302
Research and Special Programs Administration      49, I
Rural Business-Cooperative Service                7, XVIII, XLII
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV
Rural Telephone Bank                              7, XVI
Rural Utilities Service                           7, XVII, XVIII, XLII
Saint Lawrence Seaway Development Corporation     33, IV
Science and Technology Policy, Office of          32, XXIV
Science and Technology Policy, Office of, and     47, II
     National Security Council
Secret Service                                    31, IV
Securities and Exchange Commission                17, II
Selective Service System                          32, XVI
Small Business Administration                     13, I
Smithsonian Institution                           36, V
Social Security Administration                    20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI
Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
Special Trustee for American Indians, Office of   25, VII
State Department                                  22, I
  Federal Acquisition Regulation                  48, 6
Surface Mining and Reclamation Appeals, Board of  30, III
Surface Mining Reclamation and Enforcement,       30, VII
     Office of
Surface Transportation Board                      49, X
Susquehanna River Basin Commission                18, VIII
Technology Administration                         15, XI
Technology Policy, Assistant Secretary for        37, IV
Technology, Under Secretary for                   37, V
Tennessee Valley Authority                        5, LXIX; 18, XIII
Thrift Depositor Protection Oversight Board       12, XV
Thrift Supervision Office, Department of the      12, V
     Treasury
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     5, L
  Coast Guard                                     33, I; 46, I; 49, IV
  Commercial Space Transportation                 14, III
  Contract Appeals, Board of                      48, 63
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 12
  Federal Aviation Administration                 14, I
  Federal Highway Administration                  23, I, II; 49, III
  Federal Railroad Administration                 49, II
  Federal Transit Administration                  49, VI
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 49, V
  Research and Special Programs Administration    49, I
  Saint Lawrence Seaway Development Corporation   33, IV
  Secretary of Transportation, Office of          14, II; 49, Subtitle A
  Surface Transportation Board                    49, X
Transportation, Office of                         7, XXXIII
Travel Allowances                                 41, 301
Treasury Department                               5, XXI; 17, IV
  Alcohol, Tobacco and Firearms, Bureau of        27, I

[[Page 973]]

  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs Service, United States                  19, I
  Engraving and Printing, Bureau of               31, VI
  Federal Acquisition Regulation                  48, 10
  Federal Law Enforcement Training Center         31, VII
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  International Investment, Office of             31, VIII
  Monetary Offices                                31, I
  Secret Service                                  31, IV
  Secretary of the Treasury, Office of            31, Subtitle A
  Thrift Supervision, Office of                   12, V
Truman, Harry S. Scholarship Foundation           45, XVIII
United States and Canada, International Joint     22, IV
     Commission
United States and Mexico, International Boundary  22, XI
     and Water Commission, United States Section
United States Enrichment Corporation              10, XI
Utah Reclamation Mitigation and Conservation      43, III
     Commission
Veterans Affairs Department                       38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training, Office of the  41, 61; 20, IX
     Assistant Secretary for
Vice President of the United States, Office of    32, XXVIII
Vocational and Adult Education, Office of         34, IV
Wage and Hour Division                            29, V
Water Resources Council                           18, VI
Workers' Compensation Programs, Office of         20, I
World Agricultural Outlook Board                  7, XXXVIII

[[Page 975]]

                                     

                                     



                   Table of OMB Control NumbersSecs. 



     PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Sec. 602.101  OMB Control numbers.

    (a) Purpose. This part collects and displays the control numbers 
assigned to collections of information in Internal Revenue Service 
regulations by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1980. The Internal Revenue Service intends 
that this part (together with 26 CFR 601.9000) comply with the 
requirements of Secs. 1320.7(f), 1320.12, 1320.13, and 1320.14 of 5 CFR 
part 1320 (OMB regulations implementing the Paperwork Reduction Act), 
for the display of control numbers assigned by OMB to collections of 
information in Internal Revenue Service regulations. This part does not 
display control numbers assigned by the Office of Management and Budget 
to collections of information of the Bureau of Alcohol, Tobacco, and 
Firearms.
    (b) Cross-reference. For display of control numbers assigned by the 
Office of Management and Budget to Internal Revenue Service collections 
of information in the Statement of Procedural Rules (26 CFR part 601), 
see 26 CFR 601.9000.
    (c) Display.


------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
1.23-5.....................................................    1545-0074
1.25-1T....................................................    1545-0922
                                                               1545-0930
1.25-2T....................................................    1545-0922
                                                               1545-0930
1.25-3T....................................................    1545-0922
                                                               1545-0930
1.25-4T....................................................    1545-0922
1.25-5T....................................................    1545-0922
1.25-6T....................................................    1545-0922
1.25-7T....................................................    1545-0922
1.25-8T....................................................    1545-0922
1.28-1.....................................................    1545-0619
1.31-2.....................................................    1545-0074
1.32-2.....................................................    1545-0074
1.37-1.....................................................    1545-0074
1.37-3.....................................................    1545-0074
1.41-2.....................................................    1545-0619
1.41-3.....................................................    1545-0619
1.41-4A....................................................    1545-0074
1.41-4 (b) and (c).........................................    1545-0074
1.41-8(d)..................................................    1545-0732
1.41-9.....................................................    1545-0619
1.42-1T....................................................    1545-0984
                                                               1545-0988
1.42-2.....................................................    1545-1005
1.42-5.....................................................    1545-1291
1.42-6.....................................................    1545-1102
1.42-8.....................................................    1545-1102
1.42-10....................................................    1545-1102
1.42-13....................................................    1545-1357
1.42-14....................................................    1545-1423
1.43-3(a)(3)...............................................    1545-1292
1.43-3(b)(3)...............................................    1545-1292
1.44A-1....................................................    1545-0068
1.44A-3....................................................    1545-0074
1.44B-1....................................................    1545-0219
1.458-1....................................................    1545-0879
1.458-2....................................................    1545-0152
1.46-1.....................................................    1545-0123
                                                               1545-0155
1.46-3.....................................................    1545-0155
1.46-4.....................................................    1545-0155
1.46-5.....................................................    1545-0155
1.46-6.....................................................    1545-0155
1.46-8.....................................................    1545-0155
1.46-9.....................................................    1545-0155
1.46-10....................................................    1545-0118
1.46-11....................................................    1545-0155
1.47-1.....................................................    1545-0166
                                                               1545-0155
1.47-3.....................................................    1545-0166
                                                               1545-0155
1.47-4.....................................................    1545-0123
1.47-5.....................................................    1545-0092
1.47-6.....................................................    1545-0099
1.48-3.....................................................    1545-0155
1.48-4.....................................................    1545-0808
                                                               1545-0155
1.48-5.....................................................    1545-0155
1.48-6.....................................................    1545-0155
1.48-12....................................................    1545-0155
1.50A-1....................................................    1545-0895
1.50A-2....................................................    1545-0895
1.50A-3....................................................    1545-0895
1.50A-4....................................................    1545-0895
1.50A-5....................................................    1545-0895

[[Page 976]]

                                                                        
1.50A-6....................................................    1545-0895
1.50A-7....................................................    1545-0895
1.50B-1....................................................    1545-0895
1.50B-2....................................................    1545-0895
1.50B-3....................................................    1545-0895
1.50B-4....................................................    1545-0895
1.50B-5....................................................    1545-0895
1.51-1.....................................................    1545-0219
                                                               1545-0241
                                                               1545-0244
                                                               1545-0797
1.52-2.....................................................    1545-0219
1.52-3.....................................................    1545-0219
1.56-1.....................................................    1545-0123
1.56(g)-1..................................................    1545-1233
1.56A-1....................................................    1545-0227
1.56A-2....................................................    1545-0227
1.56A-3....................................................    1545-0227
1.56A-4....................................................    1545-0227
1.56A-5....................................................    1545-0227
1.57-5.....................................................    1545-0227
1.58-1.....................................................    1545-0175
1.58-9(c)(5)(iii)(B).......................................    1545-1093
1.58-9(e)(3)...............................................    1545-1093
1.61-2.....................................................    1545-0771
1.61-2T....................................................    1545-0771
1.61-4.....................................................    1545-0187
1.61-15....................................................    1545-0074
1.62-2.....................................................    1545-1148
1.63-1.....................................................    1545-0074
1.67-2T....................................................    1545-0110
1.67-3T....................................................    1545-0118
1.67-3.....................................................    1545-1018
1.71-1T....................................................    1545-0074
1.72-4.....................................................    1545-0074
1.72-6.....................................................    1545-0074
1.72-9.....................................................    1545-0074
1.72-17....................................................    1545-0074
1.72-17A...................................................    1545-0074
1.72-18....................................................    1545-0074
1.74-1.....................................................    1545-1100
1.79-2.....................................................    1545-0074
1.79-3.....................................................    1545-0074
1.83-2.....................................................    1545-0074
1.83-5.....................................................    1545-0074
1.83-6.....................................................    1545-1448
1.103-10...................................................    1545-0123
                                                               1545-0940
1.103-15AT.................................................    1545-0720
1.103-18...................................................    1545-1226
1.103(n)-2T................................................    1545-0874
1.103(n)-4T................................................    1545-0874
1.103A-2...................................................    1545-0720
1.105-4....................................................    1545-0074
1.105-5....................................................    1545-0074
1.105-6....................................................    1545-0074
1.108(a)-1.................................................    1545-0046
1.108(a)-2.................................................    1545-0046
1.108(c)-1.................................................    1545-1421
1.117-5....................................................    1545-0869
1.119-1....................................................    1545-0067
1.120-3....................................................    1545-0057
1.121-1....................................................    1545-0072
1.121-2....................................................    1545-0072
1.121-3....................................................    1545-0072
1.121-4....................................................    1545-0072
                                                               1545-0091
1.121-5....................................................    1545-0072
1.127-2....................................................    1545-0768
1.132-1T...................................................    1545-0771
1.132-2....................................................    1545-0771
1.132-2T...................................................    1545-0771
1.132-5....................................................    1545-0771
1.132-5T...................................................    1545-0771
                                                               1545-1098
1.141-1....................................................    1545-1451
1.141-12...................................................    1545-1451
1.142-2....................................................    1545-1451
1.148-0....................................................    1545-1098
1.148-1....................................................    1545-1098
1.148-2....................................................    1545-1098
                                                               1545-1347
1.148-3....................................................    1545-1098
                                                               1545-1347
1.148-4....................................................    1545-1098
                                                               1545-1347
1.148-5....................................................    1545-1098
1.148-6....................................................    1545-1098
                                                               1545-1451
1.148-7....................................................    1545-1098
1.148-7....................................................    1545-1347
1.148-8....................................................    1545-1098
1.148-11...................................................    1545-1098
1.148-11...................................................    1545-1347
1.149(e)-1.................................................    1545-0720
1.151-1....................................................    1545-0074
1.152-3....................................................    1545-0071
1.152-4....................................................    1545-0074
1.152-4T...................................................    1545-0074
1.162-1....................................................    1545-0139
1.162-2....................................................    1545-0139
1.162-3....................................................    1545-0139
1.162-4....................................................    1545-0139
1.162-5....................................................    1545-0139
1.162-6....................................................    1545-0139
1.162-7....................................................    1545-0139
1.162-8....................................................    1545-0139
1.162-9....................................................    1545-0139
1.162-10...................................................    1545-0139
1.162-11...................................................    1545-0139
1.162-12...................................................    1545-0139
1.162-13...................................................    1545-0139
1.162-14...................................................    1545-0139
1.162-15...................................................    1545-0139
1.162-16...................................................    1545-0139
1.162-17...................................................    1545-0139
1.162-18...................................................    1545-0139
1.162-19...................................................    1545-0139
1.162-20...................................................    1545-0139
1.162-27...................................................    1545-1466
1.163-5....................................................    1545-0786
                                                               1545-1132
1.163-8T...................................................    1545-0995
1.163-10T..................................................    1545-0074
1.163(d)-1.................................................    1545-1421
1.165-1....................................................    1545-0177
1.165-2....................................................    1545-0177
1.165-3....................................................    1545-0177
1.165-4....................................................    1545-0177
1.165-5....................................................    1545-0177
1.165-6....................................................    1545-0177
1.165-7....................................................    1545-0177
1.165-8....................................................    1545-0177
1.165-9....................................................    1545-0177
1.165-10...................................................    1545-0177
1.165-11...................................................    1545-0074
                                                               1545-0177
                                                               1545-0786
1.165-12...................................................    1545-0786
1.166-1....................................................    1545-0123
1.166-2....................................................    1545-1254
1.166-4....................................................    1545-0123
1.166-10...................................................    1545-0123
1.167(a)-5T................................................    1545-1021

[[Page 977]]

                                                                        
1.167(a)-7.................................................    1545-0172
1.167(a)-11................................................    1545-0152
                                                               1545-0172
1.167(a)-12................................................    1545-0172
1.167(d)-1.................................................    1545-0172
1.167(e)-1.................................................    1545-0172
1.167(f)-11................................................    1545-0172
1.167(l)-1.................................................    1545-0172
1.168(d)-1.................................................    1545-1146
1.168(f)(8)-1T.............................................    1545-0923
1.168(i)-1.................................................    1545-1331
1.168-5....................................................    1545-0172
1.169-4....................................................    1545-0172
1.170-1....................................................    1545-0074
1.170-2....................................................    1545-0074
1.170-3....................................................    1545-0123
1.170A-1...................................................    1545-0074
1.170A-2...................................................    1545-0074
1.170A-4(A)(b).............................................    1545-0123
1.170A-8...................................................    1545-0074
1.170A-9...................................................    1545-0052
                                                               1545-0074
1.170A-11..................................................    1545-0123
                                                               1545-0074
1.170A-12..................................................    1545-0020
                                                               1545-0074
1.170A-13..................................................    1545-0074
                                                               1545-0754
                                                               1545-0908
                                                               1545-1431
1.170A-13(f)...............................................    1545-1464
1.170A-14..................................................    1545-0763
1.171-3....................................................    1545-0172
1.172-1....................................................    1545-0172
1.172-13...................................................    1545-0863
1.173-1....................................................    1545-0172
1.174-3....................................................    1545-0152
1.174-4....................................................    1545-0152
1.175-3....................................................    1545-0187
1.175-6....................................................    1545-0152
1.177-1....................................................    1545-0172
1.179-2....................................................    1545-1201
1.179-3....................................................    1545-1201
1.179-5....................................................    1545-0172
1.180-2....................................................    1545-0074
1.182-6....................................................    1545-0074
1.183-1....................................................    1545-0195
1.183-2....................................................    1545-0195
1.183-3....................................................    1545-0195
1.183-4....................................................    1545-0195
1.190-3....................................................    1545-0074
1.194-2....................................................    1545-0735
1.194-4....................................................    1545-0735
1.197-1T...................................................    1545-1425
1.213-1....................................................    1545-0074
1.215-1T...................................................    1545-0074
1.217-2....................................................    1545-0182
1.243-3....................................................    1545-0123
1.243-4....................................................    1545-0123
1.243-5....................................................    1545-0123
1.248-1....................................................    1545-0172
1.261-1....................................................    1545-1041
1.263(e)-1.................................................    1545-0123
1.263A-1...................................................    1545-0987
1.263A-1T..................................................    1545-0187
1.263A-2...................................................    1545-0987
1.263A-3...................................................    1545-0987
                                                               1545-0987
1.263A-8(b)(2)(iii)........................................    1545-1265
1.263A-9(d)(1).............................................    1545-1265
1.263A-9(f)(1)(ii).........................................    1545-1265
1.263A-9(f)(2)(iv).........................................    1545-1265
1.263A-9(g)(2)(iv)(C)......................................    1545-1265
1.263A-9(g)(3)(iv).........................................    1545-1265
1.265-1....................................................    1545-0074
1.265-2....................................................    1545-0123
1.266-1....................................................    1545-0123
1.267(f)-1.................................................    1545-0885
1.268-1....................................................    1545-0184
1.274-1....................................................    1545-0139
1.274-2....................................................    1545-0139
1.274-3....................................................    1545-0139
1.274-4....................................................    1545-0139
1.274-5A...................................................    1545-0139
                                                               1545-0771
1.274-5T...................................................    1545-0074
                                                               1545-0172
                                                               1545-0771
1.274-6....................................................    1545-0139
                                                               1545-0771
1.274-6T...................................................    1545-0074
                                                               1545-0771
1.274-7....................................................    1545-0139
1.274-8....................................................    1545-0139
1.279-6....................................................    1545-0123
1.280C-4...................................................    1545-1155
1.280F-3T..................................................    1545-0074
1.281-4....................................................    1545-0123
1.302-4....................................................    1545-0074
1.305-3....................................................    1545-0123
1.305-5....................................................    1545-1438
1.307-2....................................................    1545-0074
1.312-15...................................................    1545-0172
1.316-1....................................................    1545-0123
1.331-1....................................................    1545-0074
1.332-4....................................................    1545-0123
1.332-6....................................................    1545-0123
1.337(d)-1.................................................    1545-1160
1.337(d)-2.................................................    1545-1160
1.338-1....................................................    1545-1295
1.338(b)-1.................................................    1545-1295
1.338(h)(10)-1.............................................    1545-1295
1.341-7....................................................    1545-0123
1.351-3....................................................    1545-0074
1.355-5....................................................    1545-0123
1.362-2....................................................    1545-0123
1.367(a)-1T................................................    1545-0026
1.367(a)-2T................................................    1545-0026
1.367(a)-3.................................................    1545-0026
                                                               1545-1478
1.367(a)-3T................................................    1545-0026
1.367(a)-6T................................................    1545-0026
1.367(d)-1T................................................    1545-0026
1.367(e)-1T................................................    1545-1487
1.367(e)-2T................................................    1545-1124
1.368-3....................................................    1545-0123
1.371-1....................................................    1545-0123
1.371-2....................................................    1545-0123
1.374-3....................................................    1545-0123
1.381(b)-1.................................................    1545-0123
1.381(c)(4)-1..............................................    1545-0123
                                                               1545-0152
                                                               1545-0879
1.381(c)(5)-1..............................................    1545-0123
                                                               1545-0152
1.381(c)(6)-1..............................................    1545-0123
                                                               1545-0152
1.381(c)(8)-1..............................................    1545-0123
1.381(c)(10)-1.............................................    1545-0123
1.381(c)(11)-1(k)..........................................    1545-0123
1.381(c)(13)-1.............................................    1545-0123
1.381(c)(17)-1.............................................    1545-0045
1.381(c)(25)-1.............................................    1545-0045
1.382-1T...................................................    1545-0123

[[Page 978]]

                                                                        
1.382-2....................................................    1545-0123
1.382-2T...................................................    1545-0123
1.382-3....................................................    1545-1281
                                                               1545-1345
1.382-4....................................................    1545-1120
1.382-6....................................................    1545-1381
1.382-8T...................................................    1545-1437
1.382-9....................................................    1545-1260
                                                               1545-1120
                                                               1545-1275
                                                               1545-1324
1.382-91...................................................    1545-1260
                                                               1545-1324
1.383-1....................................................    1545-0074
                                                               1545-1120
1.401(a)-11................................................    1545-0710
1.401(a)-20................................................    1545-0928
1.401(a)-31................................................    1545-1341
1.401(a)-50................................................    1545-0710
1.401(a)(31)-1.............................................    1545-1341
1.401(b)-1.................................................    1545-0197
1.401(f)-1.................................................    1545-0710
1.401(k)-1.................................................    1545-1039
                                                               1545-1069
1.401-1....................................................    1545-0020
                                                               1545-0197
                                                               1545-0200
                                                               1545-0534
                                                               1545-0710
1.401-12(n)................................................    1545-0806
1.401-14...................................................    1545-0710
1.402(c)-2.................................................    1545-1341
1.402(f)-1.................................................    1545-1341
1.403(b)-1.................................................    1545-0710
1.403(b)-2.................................................    1545-1341
1.404(a)-4.................................................    1545-0710
1.404(a)-12................................................    1545-0710
1.404A-2...................................................    1545-0123
1.404A-6...................................................    1545-0123
1.408-2....................................................    1545-0390
1.408-5....................................................    1545-0747
1.408-6....................................................    1545-0203
                                                               1545-0390
1.408-7....................................................    1545-0119
1.410(a)-2.................................................    1545-0710
1.410(d)-1.................................................    1545-0710
1.411(a)-11T...............................................    1545-1471
1.411(d)-6T................................................    1545-1477
1.412(b)-5.................................................    1545-0710
1.412(c)(1)-2..............................................    1545-0710
1.412(c)(2)-1..............................................    1545-0710
1.412(c)(3)-2..............................................    1545-0710
1.414(c)-5.................................................    1545-0797
1.414(r)-1.................................................    1545-1221
1.415-2....................................................    1545-0710
1.415-6....................................................    1545-0710
1.417(e)-1T................................................    1545-1471
1.441-3T...................................................    1545-0134
1.442-1....................................................    1545-0074
                                                               1545-0123
                                                               1545-0134
                                                               1545-0152
1.442-2T...................................................    1545-0134
1.442-3T...................................................    1545-0134
1.443-1....................................................    1545-0123
1.444-3T...................................................    1545-1036
1.446-1....................................................    1545-0074
                                                               1545-0152
1.446-4(d).................................................    1545-1412
1.448-1(g).................................................    1545-0152
1.448-1(h).................................................    1545-0152
1.448-1(i).................................................    1545-0152
1.448-2T...................................................    1545-0152
1.451-1....................................................    1545-0091
1.451-3....................................................    1545-0152
                                                               1545-0736
1.451-4....................................................    1545-0123
1.451-5....................................................    1545-0074
1.451-6....................................................    1545-0074
1.451-7....................................................    1545-0074
1.453-1....................................................    1545-0152
1.453-2....................................................    1545-0152
1.453-8....................................................    1545-0152
                                                               1545-0228
1.453-10...................................................    1545-0152
1.453A-1...................................................    1545-0152
                                                               1545-1134
1.453A-2...................................................    1545-0152
                                                               1545-1134
1.453A-3...................................................    1545-0963
1.454-1....................................................    1545-0074
1.455-2....................................................    1545-0152
1.455-6....................................................    1545-0123
1.456-2....................................................    1545-0123
1.456-6....................................................    1545-0123
1.456-7....................................................    1545-0123
1.458-1....................................................    1545-0879
1.458-2....................................................    1545-0152
1.460-6....................................................    1545-1031
1.461-1....................................................    1545-0074
1.461-2....................................................    1545-0096
1.461-4....................................................    1545-0917
1.461-5....................................................    1545-0917
1.463-1T...................................................    1545-0916
1.465-1T...................................................    1545-0712
1.466-1T...................................................    1545-0152
1.466-4....................................................    1545-0152
1.468A-3...................................................    1545-1269
                                                               1545-1378
1.468A-4...................................................    1545-0954
1.468A-7...................................................    1545-0954
1.468A-8...................................................    1545-1269
1.468B-1(j)................................................    1545-1299
1.468B-2(k)................................................    1545-1299
1.468B-2(l)................................................    1545-1299
1.468B-3(b)................................................    1545-1299
1.468B-3(e)................................................    1545-1299
1.468B-5(b)................................................    1545-1299
1.469-1....................................................    1545-1008
1.469-2T...................................................    1545-0712
                                                               1545-1091
1.469-4T...................................................    1545-0985
                                                               1545-1037
1.471-2....................................................    1545-0123
1.471-5....................................................    1545-0123
1.471-6....................................................    1545-0123
1.471-8....................................................    1545-0123
1.471-11...................................................    1545-0123
                                                               1545-0152
1.472-1....................................................    1545-0042
                                                               1545-0152
1.472-2....................................................    1545-0152
1.472-3....................................................    1545-0042
1.472-5....................................................    1545-0152
1.472-8....................................................    1545-0028
                                                               1545-0042
1.475(b)-4.................................................    1545-1496
1.481-4....................................................    1545-0152
1.481-5....................................................    1545-0152
1.482-1....................................................    1545-1364
1.482-4....................................................    1545-1364
1.482-7....................................................    1545-1364
1.501(a)-1.................................................    1545-0056
                                                               1545-0057

[[Page 979]]

                                                                        
1.501(c)(3)-1..............................................    1545-0056
1.501(c)(9)-5..............................................    1545-0047
1.501(c)(17)-3.............................................    1545-0047
1.501(e)-1.................................................    1545-0814
1.503(c)-1.................................................    1545-0047
                                                               1545-0052
1.505(c)-1T................................................    1545-0916
1.507-1....................................................    1545-0052
1.507-2....................................................    1545-0052
1.508-1....................................................    1545-0052
                                                               1545-0056
1.509(a)-3.................................................    1545-0047
1.509(a)-5.................................................    1545-0047
1.509(c)-1.................................................    1545-0052
1.512(a)-1.................................................    1545-0687
1.512(a)-4.................................................    1545-0047
                                                               1545-0687
1.521-1....................................................    1545-0051
                                                               1545-0058
1.527-2....................................................    1545-0129
1.527-5....................................................    1545-0129
1.527-6....................................................    1545-0129
1.527-9....................................................    1545-0129
1.528-8....................................................    1545-0127
1.533-2....................................................    1545-0123
1.534-2....................................................    1545-0123
1.542-3....................................................    1545-0123
1.545-2....................................................    1545-0123
1.545-3....................................................    1545-0123
1.547-2....................................................    1545-0045
                                                               1545-0123
1.547-3....................................................    1545-0123
1.551-4....................................................    1545-0074
1.552-3....................................................    1545-0099
1.552-4....................................................    1545-0099
1.552-5....................................................    1545-0099
1.556-2....................................................    1545-0704
1.561-1....................................................    1545-0044
1.561-2....................................................    1545-0123
1.562-3....................................................    1545-0123
1.563-2....................................................    1545-0123
1.564-1....................................................    1545-0123
1.565-1....................................................    1545-0043
                                                               1545-0123
1.565-2....................................................    1545-0043
1.565-3....................................................    1545-0043
1.565-5....................................................    1545-0043
1.565-6....................................................    1545-0043
1.585-1....................................................    1545-0123
1.585-3....................................................    1545-0123
1.585-8....................................................    1545-1290
1.586-2....................................................    1545-0123
1.593-1....................................................    1545-0123
1.593-6....................................................    1545-0123
1.593-6A...................................................    1545-0123
1.593-7....................................................    1545-0123
1.595-1....................................................    1545-0123
1.597-2....................................................    1545-1300
1.597-4....................................................    1545-1300
1.597-6....................................................    1545-1300
1.597-7....................................................    1545-1300
1.611-2....................................................    1545-0099
1.611-3....................................................    1545-0007
                                                               1545-0099
1.612-4....................................................    1545-0074
1.612-5....................................................    1545-0099
1.613-3....................................................    1545-0099
1.613-4....................................................    1545-0099
1.613-6....................................................    1545-0099
1.613-7....................................................    1545-0099
1.613A-3...................................................    1545-0919
1.613A-3(e)................................................    1545-1251
1.613A-3(l)................................................    1545-0919
1.613A-5...................................................    1545-0099
1.613A-6...................................................    1545-0099
1.614-2....................................................    1545-0099
1.614-3....................................................    1545-0099
1.614-5....................................................    1545-0099
1.614-6....................................................    1545-0099
1.614-8....................................................    1545-0099
1.617-1....................................................    1545-0099
1.617-3....................................................    1545-0099
1.617-4....................................................    1545-0099
1.631-1....................................................    1545-0007
1.631-2....................................................    1545-0007
1.641(b)-2.................................................    1545-0092
1.642(c)-1.................................................    1545-0092
1.642(c)-2.................................................    1545-0092
1.642(c)-5.................................................    1545-0074
1.642(c)-6.................................................    1545-0020
                                                               1545-0074
                                                               1545-0092
1.642(g)-1.................................................    1545-0092
1.642(i)-1.................................................    1545-0092
1.663(b)-2.................................................    1545-0092
1.664-1....................................................    1545-0196
1.664-2....................................................    1545-0196
1.664-3....................................................    1545-0196
1.664-4....................................................    1545-0020
                                                               1545-0196
1.665(a)-0A through                                                     
1.665(g)-2A................................................    1545-0192
1.666(d)-1A................................................    1545-0092
1.671-4....................................................    1545-1442
1.701-1....................................................    1545-0099
1.702-1....................................................    1545-0074
1.703-1....................................................    1545-0099
1.704-2....................................................    1545-1090
1.706-1....................................................    1545-0099
                                                               1545-0074
                                                               1545-0134
1.706-1T...................................................    1545-0099
1.707-3(c)(2)..............................................    1545-1243
1.707-5(a)(7)(ii)..........................................    1545-1243
1.707-6(c).................................................    1545-1243
1.707-8....................................................    1545-1243
1.708-1....................................................    1545-0099
1.732-1....................................................    1545-0099
1.736-1....................................................    1545-0074
1.743-1....................................................    1545-0074
1.751-1....................................................    1545-0074
                                                               1545-0099
                                                               1545-0941
1.752-5....................................................    1545-1090
1.754-1....................................................    1545-0099
1.755-1....................................................    1545-0099
1.755-2T...................................................    1545-1021
1.761-2....................................................    1545-1338
1.801-1....................................................    1545-0123
                                                               1545-0128
1.801-3....................................................    1545-0123
1.801-5....................................................    1545-0128
1.801-8....................................................    1545-0128
1.804-4....................................................    1545-0128
1.811-2....................................................    1545-0128
1.812-2....................................................    1545-0128
1.815-6....................................................    1545-0128
1.818-4....................................................    1545-0128
1.818-5....................................................    1545-0128
1.818-8....................................................    1545-0128
1.819-2....................................................    1545-0128
1.821-1....................................................    1545-1027
1.821-3....................................................    1545-1027
1.821-4....................................................    1545-1027

[[Page 980]]

                                                                        
1.822-5....................................................    1545-1027
1.822-6....................................................    1545-1027
1.822-8....................................................    1545-1027
1.822-9....................................................    1545-1027
1.823-2....................................................    1545-1027
1.823-5....................................................    1545-1027
1.823-6....................................................    1545-1027
1.825-1....................................................    1545-1027
1.826-1....................................................    1545-1027
1.826-2....................................................    1545-1027
1.826-3....................................................    1545-1027
1.826-4....................................................    1545-1027
1.826-6....................................................    1545-1027
1.831-3....................................................    1545-0123
1.831-4....................................................    1545-0123
1.832-4....................................................    1545-1227
1.832-5....................................................    1545-0123
1.848-2(g)(8)..............................................    1545-1287
1.848-2(h)(3)..............................................    1545-1287
1.848-2(i)(4)..............................................    1545-1287
1.851-2....................................................    1545-1010
1.851-4....................................................    1545-0123
1.852-1....................................................    1545-0123
1.852-4....................................................    1545-0123
                                                               1545-0145
1.852-6....................................................    1545-0123
                                                               1545-0144
1.852-7....................................................    1545-0074
1.852-9....................................................    1545-0074
                                                               1545-0123
                                                               1545-0144
                                                               1545-0145
1.852-11...................................................    1545-1094
1.853-3....................................................    1545-0123
1.853-4....................................................    1545-0123
1.854-2....................................................    1545-0123
1.855-1....................................................    1545-0123
1.856-2....................................................    1545-0123
                                                               1545-1004
1.856-6....................................................    1545-0123
1.856-7....................................................    1545-0123
1.856-8....................................................    1545-0123
1.857-8....................................................    1545-0123
1.857-9....................................................    1545-0074
1.858-1....................................................    1545-0123
1.860-2....................................................    1545-0045
1.860-4....................................................    1545-0045
                                                               1545-1054
                                                               1545-1057
1.860E-2(a)(5).............................................    1545-1276
1.860E-2(a)(7).............................................    1545-1276
1.860E-2(b)(2).............................................    1545-1276
1.861-2....................................................    1545-0089
1.861-3....................................................    1545-0089
1.861-8....................................................    1545-0126
1.861-8(e)(6) and (g)......................................    1545-1224
1.861-9T...................................................    1545-0121
                                                               1545-1072
1.863-1....................................................    1545-1476
1.863-3....................................................    1545-1467
1.863-3A...................................................    1545-0126
1.863-4....................................................    1545-0126
1.863-7....................................................    1545-0132
1.864-4....................................................    1545-0126
1.871-1....................................................    1545-0096
1.871-6....................................................    1545-0795
1.871-7....................................................    1545-0089
1.871-10...................................................    1545-0089
                                                               1545-0165
1.874-1....................................................    1545-0089
1.881-4....................................................    1545-1440
1.882-4....................................................    1545-0126
1.884-0....................................................    1545-1070
1.884-1....................................................    1545-1070
1.884-2....................................................    1545-1070
1.884-2T...................................................    1545-0126
                                                               1545-1070
1.884-4....................................................    1545-1070
1.884-5....................................................    1545-1070
1.892-1T...................................................    1545-1053
1.892-2T...................................................    1545-1053
1.892-3T...................................................    1545-1053
1.892-4T...................................................    1545-1053
1.892-5T...................................................    1545-1053
1.892-6T...................................................    1545-1053
1.892-7T...................................................    1545-1053
1.897-2....................................................    1545-0123
                                                               1545-0902
1.897-3....................................................    1545-0123
1.897-5T...................................................    1545-0902
1.897-6T...................................................    1545-0902
1.901-2....................................................    1545-0746
1.901-2A...................................................    1545-0746
1.901-3....................................................    1545-0122
1.902-1....................................................    1545-0122
                                                               1545-1458
1.904-1....................................................    1545-0121
                                                               1545-0122
1.904-2....................................................    1545-0121
                                                               1545-0122
1.904-3....................................................    1545-0121
1.904-4....................................................    1545-0121
1.904-5....................................................    1545-0121
1.904(f)-1.................................................    1545-0121
                                                               1545-0122
1.904(f)-2.................................................    1545-0121
1.904(f)-3.................................................    1545-0121
1.904(f)-4.................................................    1545-0121
1.904(f)-5.................................................    1545-0121
1.904(f)-6.................................................    1545-0121
1.904(f)-7.................................................    1545-1127
1.905-2....................................................    1545-0122
1.905-3T...................................................    1545-1056
1.905-4T...................................................    1545-1056
1.905-5T...................................................    1545-1056
1.911-1....................................................    1545-0067
                                                               1545-0070
1.911-2....................................................    1545-0067
                                                               1545-0070
1.911-3....................................................    1545-0067
                                                               1545-0070
1.911-4....................................................    1545-0067
                                                               1545-0070
1.911-5....................................................    1545-0067
                                                               1545-0070
1.911-6....................................................    1545-0067
                                                               1545-0070
1.911-7....................................................    1545-0067
                                                               1545-0070
1.913-13...................................................    1545-0067
1.921-1T...................................................    1545-0190
                                                               1545-0884
                                                               1545-0935
                                                               1545-0939
1.921-2....................................................    1545-0884
1.921-3T...................................................    1545-0935
1.923-1T...................................................    1545-0935
1.924(a)-1T................................................    1545-0935
1.925(a)-1T................................................    1545-0935
1.925(b)-1T................................................    1545-0935
1.926(a)-1T................................................    1545-0935
1.927(a)-1T................................................    1545-0935
1.927(b)-1T................................................    1545-0935
1.927(d)-1.................................................    1545-0884

[[Page 981]]

                                                                        
1.927(d)-2T................................................    1545-0935
1.927(e)-1T................................................    1545-0935
1.927(e)-2T................................................    1545-0935
1.927(f)-1.................................................    1545-0884
1.931-1....................................................    1545-0074
                                                               1545-0123
1.934-1....................................................    1545-0782
1.935-1....................................................    1545-0074
                                                               1545-0087
                                                               1545-0803
1.936-1....................................................    1545-0215
                                                               1545-0217
1.936-4....................................................    1545-0215
1.936-5....................................................    1545-0704
1.936-6....................................................    1545-0215
1.936-7....................................................    1545-0215
1.936-10(c)................................................    1545-1138
1.952-2....................................................    1545-0126
1.953-2....................................................    1545-0126
1.954-1....................................................    1545-1068
1.954-2....................................................    1545-1068
1.955-2....................................................    1545-0123
1.955-3....................................................    1545-0123
1.955A-2...................................................    1545-0755
1.955A-3...................................................    1545-0755
1.956-1....................................................    1545-0704
1.956-2....................................................    1545-0704
1.959-1....................................................    1545-0704
1.959-2....................................................    1545-0704
1.960-1....................................................    1545-0122
1.962-2....................................................    1545-0704
1.962-3....................................................    1545-0704
1.962-4....................................................    1545-0704
1.964-1....................................................    1545-0126
                                                               1545-0704
                                                               1545-1072
1.964-3....................................................    1545-0126
1.970-2....................................................    1545-0126
1.985-2....................................................    1545-1051
                                                               1545-1131
1.985-3....................................................    1545-1051
1.988-0....................................................    1545-1131
1.988-1....................................................    1545-1131
1.988-2....................................................    1545-1131
1.988-3....................................................    1545-1131
1.988-4....................................................    1545-1131
1.988-5....................................................    1545-1131
1.992-1....................................................    1545-0190
                                                               1545-0938
1.992-2....................................................    1545-0190
                                                               1545-0884
                                                               1545-0938
1.992-3....................................................    1545-0190
                                                               1545-0938
1.992-4....................................................    1545-0190
                                                               1545-0938
1.993-3....................................................    1545-0938
1.993-4....................................................    1545-0938
1.994-1....................................................    1545-0938
1.995-5....................................................    1545-0938
1.1012-1...................................................    1545-0074
                                                               1545-1139
1.1014-4...................................................    1545-0184
1.1015-1...................................................    1545-0020
1.1017-2...................................................    1545-0028
                                                               1545-0046
1.1031(d)-1T...............................................    1545-1021
1.1033(a)-2................................................    1545-0184
1.1033(g)-1................................................    1545-0184
1.1034-1...................................................    1545-0072
1.1039-1...................................................    1545-0184
1.1041-1T..................................................    1545-0074
1.1042-1T..................................................    1545-0916
1.1044(a)-1................................................    1545-1421
1.1060-1T..................................................    1545-1021
1.1071-1...................................................    1545-0184
1.1071-4...................................................    1545-0184
1.1081-4...................................................    1545-0028
                                                               1545-0046
                                                               1545-0123
1.1081-11..................................................    1545-0074
                                                               1545-0123
1.1082-1...................................................    1545-0046
1.1082-2...................................................    1545-0046
1.1082-3...................................................    1545-0046
                                                               1545-0184
1.1082-4...................................................    1545-0046
1.1082-5...................................................    1545-0046
1.1082-6...................................................    1545-0046
1.1083-1...................................................    1545-0123
1.1092(b)-1T...............................................    1545-0644
1.1092(b)-2T...............................................    1545-0644
1.1092(b)-3T...............................................    1545-0644
1.1092(b)-4T...............................................    1545-0644
1.1092(b)-5T...............................................    1545-0644
1.1211-1...................................................    1545-0074
1.1212-1...................................................    1545-0074
1.1221-2...................................................    1545-1403
1.1221-2(d)(2)(iv).........................................    1545-1480
1.1221-2(e)(5).............................................    1545-1480
1.1221-2(g)(5)(ii).........................................    1545-1480
1.1221-2(g)(6)(ii).........................................    1545-1480
1.1221-2(g)(6)(iii)........................................    1545-1480
1.1221-2T(c)...............................................    1545-1403
1.1231-1...................................................    1545-0177
                                                               1545-0184
1.1231-2...................................................    1545-0177
                                                               1545-0184
1.1231-2...................................................    1545-0074
1.1232-3...................................................    1545-0074
1.1237-1...................................................    1545-0184
1.1239-1...................................................    1545-0091
1.1242-1...................................................    1545-0184
1.1243-1...................................................    1545-0123
1.1244(e)-1................................................    1545-0123
                                                               1545-1447
1.1245-1...................................................    1545-0184
1.1245-2...................................................    1545-0184
1.1245-3...................................................    1545-0184
1.1245-4...................................................    1545-0184
1.1245-5...................................................    1545-0184
1.1245-6...................................................    1545-0184
1.1247-1...................................................    1545-0122
1.1247-2...................................................    1545-0122
1.1247-4...................................................    1545-0122
1.1247-5...................................................    1545-0122
1.1248-7...................................................    1545-0074
1.1250-1...................................................    1545-0184
1.1250-2...................................................    1545-0184
1.1250-3...................................................    1545-0184
1.1250-4...................................................    1545-0184
1.1250-5...................................................    1545-0184
1.1251-1...................................................    1545-0184
1.1251-2...................................................    1545-0074
                                                               1545-0184
1.1251-3...................................................    1545-0184
1.1251-4...................................................    1545-0184
1.1252-1...................................................    1545-0184
1.1252-2...................................................    1545-0184
1.1254-1(c)(3).............................................    1545-1352
1.1254-4...................................................    1545-1493
1.1254-5(d)(2).............................................    1545-1352
1.1258-1...................................................    1545-1452
1.1272-3...................................................    1545-1353

[[Page 982]]

                                                                        
1.1273-2(h)(2).............................................    1545-1353
1.1274-3(d)................................................    1545-1353
1.1274-5(b)................................................    1545-1353
1.1274A-1(c)...............................................    1545-1353
1.1275-2...................................................    1545-1450
1.1275-3...................................................    1545-0887
                                                               1545-1353
                                                               1545-1450
1.1275-4...................................................    1545-1450
1.1275-6...................................................    1545-1450
1.1287-1...................................................    1545-0786
1.1291-9...................................................    1545-1507
1.1291-10..................................................    1545-1507
                                                               1545-1304
1.1294-1T..................................................    1545-1002
                                                               1545-1028
1.1295-1T..................................................    1545-1028
1.1297-3T..................................................    1545-1028
1.1311(a)-1................................................    1545-0074
1.1361-1...................................................    1545-0731
1.1362-1...................................................    1545-1308
1.1362-2...................................................    1545-1308
1.1362-3...................................................    1545-1308
1.1362-4...................................................    1545-1308
1.1362-5...................................................    1545-1308
1.1362-6...................................................    1545-1308
1.1362-7...................................................    1545-1308
1.1367-1(f)................................................    1545-1139
1.1368-1(f)(2).............................................    1545-1139
1.1368-1(f)(3).............................................    1545-1139
1.1368-1(f)(4).............................................    1545-1139
1.1368-1(g)(2).............................................    1545-1139
1.1374-1A..................................................    1545-0130
1.1377-1...................................................    1545-1462
1.1383-1...................................................    1545-0074
1.1385-1...................................................    1545-0074
                                                               1545-0098
1.1388-1...................................................    1545-0118
                                                               1545-0123
1.1398-1...................................................    1545-1375
1.1398-2...................................................    1545-1375
1.1402(a)-2................................................    1545-0074
1.1402(a)-5................................................    1545-0074
1.1402(a)-11...............................................    1545-0074
1.1402(a)-15...............................................    1545-0074
1.1402(a)-16...............................................    1545-0074
1.1402(b)-1................................................    1545-0171
1.1402(c)-2................................................    1545-0074
1.1402(e)(1)-1.............................................    1545-0074
1.1402(e)(2)-1.............................................    1545-0074
1.1402(e)-1A...............................................    1545-0168
1.1402(e)-2A...............................................    1545-0168
1.1402(e)-3A...............................................    1545-0168
1.1402(e)-4A...............................................    1545-0168
1.1402(e)-5A...............................................    1545-0168
1.1402(f)-1................................................    1545-0074
1.1402(h)-1................................................    1545-0064
1.1441-2...................................................    1545-0795
1.1441-3...................................................    1545-0165
                                                               1545-0795
1.1441-5...................................................    1545-0096
                                                               1545-0795
1.1441-6...................................................    1545-0055
                                                               1545-0795
1.1441-7...................................................    1545-0795
1.1441-8T..................................................    1545-1053
1.1443-1...................................................    1545-0096
1.1445-1...................................................    1545-0902
1.1445-2...................................................    1545-0902
                                                               1545-1060
1.1445-3...................................................    1545-0902
                                                               1545-1060
1.1445-4...................................................    1545-0902
1.1445-5...................................................    1545-0902
1.1445-6...................................................    1545-0902
                                                               1545-1060
1.1445-7...................................................    1545-0902
1.1445-8...................................................    1545-0096
1.1445-9T..................................................    1545-0902
1.1445-10T.................................................    1545-0902
1.1451-1...................................................    1545-0054
1.1451-2...................................................    1545-0054
1.1461-1...................................................    1545-0054
                                                               1545-0055
                                                               1545-0795
1.1461-2...................................................    1545-0054
                                                               1545-0055
                                                               1545-0096
                                                               1545-0795
1.1461-3...................................................    1545-0054
                                                               1545-0055
                                                               1545-0096
                                                               1545-0795
1.1461-4...................................................    1545-0054
                                                               1545-0055
                                                               1545-0096
1.1462-1...................................................    1545-0795
1.1492-1...................................................    1545-0026
1.1494-1...................................................    1545-0026
1.1502-5...................................................    1545-0257
1.1502-9...................................................    1545-0121
1.1502-13..................................................    1545-0123
                                                               1545-0885
                                                               1545-1161
                                                               1545-1433
1.1502-16..................................................    1545-0123
1.1502-18..................................................    1545-0123
1.1502-19..................................................    1545-0123
1.1502-20..................................................    1545-1160
1.1502-21T.................................................    1545-1237
1.1502-31..................................................    1545-1344
1.1502-32..................................................    1545-1344
1.1502-33..................................................    1545-1344
1.1502-47..................................................    1545-0123
1.1502-75..................................................    1545-0025
                                                               1545-0123
                                                               1545-0133
                                                               1545-0152
1.1502-76..................................................    1545-1344
1.1502-77..................................................    1545-0123
1.1502-77T.................................................    1545-1046
1.1502-78..................................................    1545-0582
1.1502-95T.................................................    1545-1218
1.1503-2A..................................................    1545-1083
1.1552-1...................................................    1545-0123
1.1561-3...................................................    1545-0123
1.1563-1...................................................    1545-0123
                                                               1545-0797
1.1563-3...................................................    1545-0123
1.6001-1...................................................    1545-0058
                                                               1545-0074
                                                               1545-0099
                                                               1545-0123
                                                               1545-0865
1.6011-1...................................................    1545-0055
                                                               1545-0074
                                                               1545-0085
                                                               1545-0089
                                                               1545-0090
                                                               1545-0091
                                                               1545-0096
                                                               1545-0121
                                                               1545-0458
                                                               1545-0666

[[Page 983]]

                                                                        
                                                               1545-0675
                                                               1545-0908
1.6011-2...................................................    1545-0055
                                                               1545-0938
1.6011-3...................................................    1545-0238
                                                               1545-0239
1.6012-1...................................................    1545-0067
                                                               1545-0085
                                                               1545-0089
                                                               1545-0675
                                                               1545-0074
1.6012-2...................................................    1545-0047
                                                               1545-0051
                                                               1545-0067
                                                               1545-0123
                                                               1545-0126
                                                               1545-0130
                                                               1545-0128
                                                               1545-0175
                                                               1545-0687
                                                               1545-0890
                                                               1545-1023
                                                               1545-1027
1.6012-3...................................................    1545-0047
                                                               1545-0067
                                                               1545-0092
                                                               1545-0196
                                                               1545-0687
1.6012-4...................................................    1545-0067
1.6012-5...................................................    1545-0067
                                                               1545-0967
                                                               1545-0970
                                                               1545-0991
                                                               1545-0936
                                                               1545-1023
                                                               1545-1033
                                                               1545-1079
1.6012-6...................................................    1545-0067
1.6012-7T..................................................    1545-1348
                                                               1545-0089
                                                               1545-0129
1.6013-1...................................................    1545-0074
1.6013-2...................................................    1545-0091
1.6013-6...................................................    1545-0074
1.6013-7...................................................    1545-0074
1.6015(a)-1................................................    1545-0087
1.6015(b)-1................................................    1545-0087
1.6015(d)-1................................................    1545-0087
1.6015(e)-1................................................    1545-0087
1.6015(f)-1................................................    1545-0087
1.6015(g)-1................................................    1545-0087
1.6015(h)-1................................................    1545-0087
1.6015(i)-1................................................    1545-0087
1.6017-1...................................................    1545-0074
                                                               1545-0087
                                                               1545-0090
1.6031(b)-1T...............................................    1545-0099
1.6031(c)-1T...............................................    1545-0099
1.6031-1...................................................    1545-0099
                                                               1545-0970
1.6032-1...................................................    1545-0099
1.6033-2...................................................    1545-0047
                                                               1545-0049
                                                               1545-0052
                                                               1545-0092
                                                               1545-0687
                                                               1545-1150
1.6033-3...................................................    1545-0052
1.6034-1...................................................    1545-0092
                                                               1545-0094
1.6035-1...................................................    1545-0704
1.6035-2...................................................    1545-0704
1.6035-3...................................................    1545-0704
1.6037-1...................................................    1545-0130
                                                               1545-1023
1.6038-2...................................................    1545-0704
                                                               1545-0805
                                                               1545-1317
1.6038A-2..................................................    1545-1191
1.6038A-3..................................................    1545-1191
                                                               1545-1440
1.6038B-1T.................................................    1545-0026
1.6039-2...................................................    1545-0820
1.6041-1...................................................    1545-0008
                                                               1545-0108
                                                               1545-0112
                                                               1545-0115
                                                               1545-0120
                                                               1545-0295
                                                               1545-0350
                                                               1545-0367
                                                               1545-0387
                                                               1545-0441
                                                               1545-0957
1.6041-2...................................................    1545-0008
                                                               1545-0119
                                                               1545-0350
                                                               1545-0441
1.6041-3...................................................    1545-1148
1.6041-4...................................................    1545-0115
                                                               1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0957
1.6041-5...................................................    1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0957
1.6041-6...................................................    1545-0008
                                                               1545-0115
1.6041-7...................................................    1545-0112
                                                               1545-0295
                                                               1545-0350
                                                               1545-0367
                                                               1545-0387
                                                               1545-0441
                                                               1545-0957
1.6042-1...................................................    1545-0110
1.6042-2...................................................    1545-0110
                                                               1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0957
1.6042-3...................................................    1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0957
1.6042-4...................................................    1545-0110
1.6043-1...................................................    1545-0041
1.6043-2...................................................    1545-0041
                                                               1545-0110
                                                               1545-0295
                                                               1545-0387
1.6043-3...................................................    1545-0047
1.6044-1...................................................    1545-0118
1.6044-2...................................................    1545-0118
1.6044-3...................................................    1545-0118
1.6044-4...................................................    1545-0118
1.6044-5...................................................    1545-0118
1.6045-1...................................................    1545-0715
1.6045-2...................................................    1545-0115
1.6045-4...................................................    1545-1085
1.6046-1...................................................    1545-0704
                                                               1545-0794

[[Page 984]]

                                                                        
                                                               1545-1317
1.6046-2...................................................    1545-0704
1.6046-3...................................................    1545-0704
1.6047-1...................................................    1545-0119
                                                               1545-0295
                                                               1545-0387
1.6049-1...................................................    1545-0112
                                                               1545-0117
                                                               1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0597
                                                               1545-0957
1.6049-2...................................................    1545-0117
1.6049-3...................................................    1545-0117
1.6049-4...................................................    1545-0096
                                                               1545-0112
                                                               1545-0117
                                                               1545-1018
                                                               1545-1050
1.6049-5...................................................    1545-0096
                                                               1545-0112
                                                               1545-0117
1.6049-6...................................................    1545-0096
1.6049-7...................................................    1545-1018
1.6049-7T..................................................    1545-0112
                                                               1545-0117
                                                               1545-0118
1.6050A-1..................................................    1545-0115
1.6050B-1..................................................    1545-0120
1.6050D-1..................................................    1545-0120
                                                               1545-0232
1.6050E-1..................................................    1545-0120
1.6050H-1..................................................    1545-0901
                                                               1545-1380
1.6050H-2..................................................    1545-0901
                                                               1545-1339
                                                               1545-1380
1.6050H-1T.................................................    1545-0901
1.6050I-2..................................................    1545-1449
1.6050J-1T.................................................    1545-0877
1.6050K-1..................................................    1545-0941
1.6050P-1..................................................    1545-1419
1.6050P-1T.................................................    1545-1419
1.6052-1...................................................    1545-0008
1.6052-2...................................................    1545-0008
1.6060-1...................................................    1545-0074
1.6061-1...................................................    1545-0123
1.6061-2T..................................................    1545-1348
1.6062-1...................................................    1545-0123
1.6063-1...................................................    1545-0123
1.6065-1...................................................    1545-0123
1.6071-1...................................................    1545-0123
                                                               1545-0810
1.6072-1...................................................    1545-0074
1.6072-2...................................................    1545-0123
                                                               1545-0807
1.6073-1...................................................    1545-0087
1.6073-2...................................................    1545-0087
1.6073-3...................................................    1545-0087
1.6073-4...................................................    1545-0087
1.6074-1...................................................    1545-0123
1.6074-2...................................................    1545-0123
1.6081-1...................................................    1545-0066
                                                               1545-0148
                                                               1545-0233
                                                               1545-1057
                                                               1545-1081
1.6081-2...................................................    1545-0148
                                                               1545-1054
                                                               1545-1036
1.6081-3...................................................    1545-0233
1.6081-4...................................................    1545-0188
                                                               1545-1479
6081-6.....................................................    1545-0148
                                                               1545-1054
6081-7.....................................................    1545-0148
                                                               1545-1054
1.6091-3...................................................    1545-0089
1.6107-1...................................................    1545-0074
1.6109-1...................................................    1545-0074
1.6109-2...................................................    1545-0074
1.6115-1...................................................    1545-1464
1.6151-1...................................................    1545-0074
1.6152-1...................................................    1545-0135
                                                               1545-0233
1.6153-1...................................................    1545-0087
1.6153-4...................................................    1545-0087
1.6154-2...................................................    1545-0257
1.6154-3...................................................    1545-0135
1.6154-5...................................................    1545-0976
1.6161-1...................................................    1545-0087
1.6162-1...................................................    1545-0087
1.6164-1...................................................    1545-0135
1.6164-2...................................................    1545-0135
1.6164-3...................................................    1545-0135
1.6164-5...................................................    1545-0135
1.6164-6...................................................    1545-0135
1.6164-7...................................................    1545-0135
1.6164-8...................................................    1545-0135
1.6164-9...................................................    1545-0135
1.6302-1...................................................    1545-0257
1.6302-2...................................................    1545-0098
                                                               1545-0257
1.6411-1...................................................    1545-0098
                                                               1545-0135
                                                               1545-0582
1.6411-2...................................................    1545-0098
                                                               1545-0582
1.6411-3...................................................    1545-0098
                                                               1545-0582
1.6411-4...................................................    1545-0582
1.6414-1...................................................    1545-0096
1.6425-1...................................................    1545-0170
1.6425-2...................................................    1545-0170
1.6425-3...................................................    1545-0170
1.6654-1...................................................    1545-0087
                                                               1545-0140
1.6654-2...................................................    1545-0087
1.6654-3...................................................    1545-0087
1.6654-4...................................................    1545-0087
1.6655-1...................................................    1545-0142
1.6655-2...................................................    1545-0142
1.6655-3...................................................    1545-0142
1.6655-7...................................................    1545-0123
1.6655(e)-1................................................    1545-1421
1.6661-3...................................................    1545-0988
                                                               1545-1031
1.6661-4...................................................    1545-0739
1.6662-3(c)................................................    1545-0889
1.6662-4(e) and (f)........................................    1545-0889
1.6662-6...................................................    1545-1426
1.6694-1...................................................    1545-0074
1.6694-2...................................................    1545-0074
1.6694-2(c)................................................    1545-1231
1.6694-3(e)................................................    1545-1231
1.6695-1...................................................    1545-0074
                                                               1545-1385
1.6696-1...................................................    1545-0074
                                                               1545-0240
1.6851-1...................................................    1545-0086
                                                               1545-0138
1.6851-2...................................................    1545-0086
                                                               1545-0138

[[Page 985]]

                                                                        
1.7476-1...................................................    1545-0197
1.7476-2...................................................    1545-0197
1.7519-2T..................................................    1545-1036
1.7520-1...................................................    1545-1343
1.7520-2...................................................    1545-1343
1.7520-3...................................................    1545-1343
1.7520-4...................................................    1545-1343
1.9100-1...................................................    1545-0074
1.9101-1...................................................    1545-0008
2.1-4......................................................    1545-0123
2.1-5......................................................    1545-0123
2.1-6......................................................    1545-0123
2.1-10.....................................................    1545-0123
2.1-11.....................................................    1545-0123
2.1-12.....................................................    1545-0123
2.1-13.....................................................    1545-0123
2.1-20.....................................................    1545-0123
2.1-22.....................................................    1545-0123
2.1-26.....................................................    1545-0123
3.2........................................................    1545-0123
4.954-1....................................................    1545-1068
4.954-2....................................................    1545-1068
5.6411-1...................................................    1545-0098
                                                               1545-0582
                                                               1545-0042
                                                               1545-0074
                                                               1545-0129
                                                               1545-0172
                                                               1545-0619
5c.44F-1...................................................    1545-0619
5c.128-1...................................................    1545-0123
5c.168(f)(8)-1.............................................    1545-0123
5c.168(f)(8)-2.............................................    1545-0123
5c.168(f)(8)-6.............................................    1545-0123
5c.168(f)(8)-8.............................................    1545-0123
5c.305-1...................................................    1545-0110
5c.442-1...................................................    1545-0152
5f.103-1...................................................    1545-0720
5f.103-3...................................................    1545-0720
5f.6045-1..................................................    1545-0715
6a.103A-2..................................................    1545-0123
                                                               1545-0720
6a.103A-3..................................................    1545-0720
7.367(b)-1.................................................    1545-0026
7.367(b)-3.................................................    1545-0026
7.367(b)-7.................................................    1545-0026
7.367(b)-9.................................................    1545-0026
7.367(b)-10................................................    1545-0026
7.465-1....................................................    1545-0712
7.465-2....................................................    1545-0712
7.465-3....................................................    1545-0712
7.465-4....................................................    1545-0712
7.465-5....................................................    1545-0712
7.936-1....................................................    1545-0217
7.999-1....................................................    1545-0216
7.6039A-1..................................................    1545-0015
7.6041-1...................................................    1545-0115
11.410-1...................................................    1545-0710
11.412(c)-7................................................    1545-0710
11.412(c)-11...............................................    1545-0710
12.7.......................................................    1545-0190
12.8.......................................................    1545-0191
12.9.......................................................    1545-0195
14a.422A-1.................................................    1545-0123
15A.453-1..................................................    1545-0228
16.3-1.....................................................    1545-0159
16A.126-2..................................................    1545-0074
16A.1255-1.................................................    1545-0184
16A.1255-2.................................................    1545-0184
18.1371-1..................................................    1545-0130
18.1378-1..................................................    1545-0130
18.1379-1..................................................    1545-0130
18.1379-2..................................................    1545-0130
20.2011-1..................................................    1545-0015
20.2014-5..................................................    1545-0015
                                                               1545-0260
20.2014-6..................................................    1545-0015
20.2016-1..................................................    1545-0015
20.2031-2..................................................    1545-0015
20.2031-3..................................................    1545-0015
20.2031-4..................................................    1545-0015
20.2031-6..................................................    1545-0015
20.2031-7..................................................    1545-0020
20.2031-10.................................................    1545-0015
20.2032-1..................................................    1545-0015
20.2032A-3.................................................    1545-0015
20.2032A-4.................................................    1545-0015
20.2032A-8.................................................    1545-0015
20.2039-4..................................................    1545-0015
20.2051-1..................................................    1545-0015
20.2053-3..................................................    1545-0015
20.2053-9..................................................    1545-0015
20.2053-10.................................................    1545-0015
20.2055-1..................................................    1545-0015
20.2055-2..................................................    1545-0015
                                                               1545-0092
20.2055-3..................................................    1545-0015
20.2056(b)-4...............................................    1545-0015
20.2056(b)-7...............................................    1545-0015
20.2056A-2.................................................    1545-1443
20.2056A-3.................................................    1545-1360
20.2056A-4.................................................    1545-1360
20.2056A-10................................................    1545-1360
20.2106-1..................................................    1545-0015
20.2106-2..................................................    1545-0015
20.2204-1..................................................    1545-0015
20.2204-2..................................................    1545-0015
20.6001-1..................................................    1545-0015
20.6011-1..................................................    1545-0015
20.6018-1..................................................    1545-0015
                                                               1545-0531
20.6018-2..................................................    1545-0015
20.6018-3..................................................    1545-0015
20.6018-4..................................................    1545-0015
                                                               1545-0022
20.6036-2..................................................    1545-0015
20.6061-1..................................................    1545-0015
20.6065-1..................................................    1545-0015
20.6075-1..................................................    1545-0015
20.6081-1..................................................    1545-0015
                                                               1545-0181
20.6091-1..................................................    1545-0015
20.6161-1..................................................    1545-0015
                                                               1545-0181
20.6161-2..................................................    1545-0015
                                                               1545-0181
20.6163-1..................................................    1545-0015
20.6166-1..................................................    1545-0181
20.6166A-1.................................................    1545-0015
20.6166A-3.................................................    1545-0015
20.6324A-1.................................................    1545-0754
20.7520-1..................................................    1545-1343
20.7520-2..................................................    1545-1343
20.7520-3..................................................    1545-1343
20.7520-4..................................................    1545-1343
22.0.......................................................    1545-0015
25.2511-2..................................................    1545-0020
25.2512-2..................................................    1545-0020
25.2512-3..................................................    1545-0020
25.2512-5..................................................    1545-0020
25.2512-9..................................................    1545-0020
25.2513-1..................................................    1545-0020
25.2513-2..................................................    1545-0020
                                                               1545-0021

[[Page 986]]

                                                                        
25.2513-3..................................................    1545-0020
25.2518-2..................................................    1545-0959
25.2522(a)-1...............................................    1545-0196
25.2522(c)-3...............................................    1545-0020
                                                               1545-0196
25.2523(a)-1...............................................    1545-0020
                                                               1545-0196
25.2523(f)-1...............................................    1545-0015
25.2701-2..................................................    1545-1241
25.2701-4..................................................    1545-1241
25.2701-5..................................................    1545-1273
25.2702-6..................................................    1545-1273
25.6001-1..................................................    1545-0020
                                                               1545-0022
25.6011-1..................................................    1545-0020
25.6019-1..................................................    1545-0020
25.6019-2..................................................    1545-0020
25.6019-3..................................................    1545-0020
25.6019-4..................................................    1545-0020
25.6061-1..................................................    1545-0020
25.6065-1..................................................    1545-0020
25.6075-1..................................................    1545-0020
25.6081-1..................................................    1545-0020
25.6091-1..................................................    1545-0020
25.6091-2..................................................    1545-0020
25.6151-1..................................................    1545-0020
25.6161-1..................................................    1545-0020
25.7520-1..................................................    1545-1343
25.7520-2..................................................    1545-1343
25.7520-3..................................................    1545-1343
25.7520-4..................................................    1545-1343
26.2601-1..................................................    1545-0985
26.2632-1..................................................    1545-0985
26.2642-1..................................................    1545-0985
26.2642-2..................................................    1545-0985
26.2642-3..................................................    1545-0985
26.2642-4..................................................    1545-0985
26.2652-2..................................................    1545-0985
26.2662-1..................................................    1545-0015
                                                               1545-0985
26.2662-2..................................................    1545-0985
31.3102-3..................................................    1545-0029
                                                               1545-0059
                                                               1545-0065
31.3121(b)(19)-1...........................................    1545-0029
31.3121(d)-1...............................................    1545-0004
31.3121(i)-1...............................................    1545-0034
31.3121(k)-4...............................................    1545-0137
31.3121(r)-1...............................................    1545-0029
31.3121(s)-1...............................................    1545-0029
31.3302(a)-2...............................................    1545-0028
31.3302(a)-3...............................................    1545-0028
31.3302(b)-2...............................................    1545-0028
31.3302(e)-1...............................................    1545-0028
31.3306(c)(18)-1...........................................    1545-0029
31.3401(a)-1...............................................    1545-0029
31.3401(a)(6)-1............................................    1545-0029
                                                               1545-0096
                                                               1545-0795
31.3401(a)(7)-1............................................    1545-0029
31.3401(a)(8)(A)-1 ........................................    1545-0029
                                                               1545-0666
31.3401(a)(8)(C)-1 ........................................    1545-0029
31.3401(a)(15)-1...........................................    1545-0182
31.3401(c)-1...............................................    1545-0004
31.3402(b)-1...............................................    1545-0010
31.3402(c)-1...............................................    1545-0010
31.3402(f)(1)-1............................................    1545-0010
31.3402(f)(2)-1............................................    1545-0010
                                                               1545-0410
31.3402(f)(3)-1............................................    1545-0010
31.3402(f)(4)-1............................................    1545-0010
31.3402(f)(4)-2............................................    1545-0010
31.3402(f)(5)-1............................................    1545-0010
                                                               1545-1435
31.3402(h)(1)-1............................................    1545-0029
31.3402(h)(3)-1............................................    1545-0010
31.3402(h)(3)-1............................................    1545-0029
31.3402(h)(4)-1............................................    1545-0010
31.3402(i)-(1).............................................    1545-0010
31.3402(i)-(2).............................................    1545-0010
31.3402(k)-1...............................................    1545-0065
31.3402(l)-(1).............................................    1545-0010
31.3402(m)-(1).............................................    1545-0010
31.3402(n)-(1).............................................    1545-0010
31.3402(o)-2...............................................    1545-0415
31.3402(o)-3...............................................    1545-0008
                                                               1545-0010
                                                               1545-0415
                                                               1545-0717
31.3402(p)-1...............................................    1545-0415
                                                               1545-0717
31.3402(q)-1...............................................    1545-0238
                                                               1545-0239
31.3404-1..................................................    1545-0029
31.3405(c)-1...............................................    1545-1341
31.3406(a)-1...............................................    1545-0112
31.3406(a)-2...............................................    1545-0112
31.3406(a)-3...............................................    1545-0112
31.3406(a)-4...............................................    1545-0112
31.3406(b)(2)-1............................................    1545-0112
31.3406(b)(2)-2............................................    1545-0112
31.3406(b)(2)-3............................................    1545-0112
31.3406(b)(2)-4............................................    1545-0112
31.3406(b)(2)-5............................................    1545-0112
31.3406(b)(3)-1............................................    1545-0112
31.3406(b)(3)-2............................................    1545-0112
31.3406(b)(3)-3............................................    1545-0112
31.3406(b)(3)-4............................................    1545-0112
31.3406(b)(4)-1............................................    1545-0112
31.3406(c)-1...............................................    1545-0112
31.3406(d)-1...............................................    1545-0112
31.3406(d)-2...............................................    1545-0112
31.3406(d)-3...............................................    1545-0112
31.3406(d)-4...............................................    1545-0112
31.3406(d)-5...............................................    1545-0112
31.3406(e)-1...............................................    1545-0112
31.3406(f)-1...............................................    1545-0112
31.3406(g)-1...............................................    1545-0096
                                                               1545-0112
31.3406(g)-2...............................................    1545-0112
31.3406(g)-3...............................................    1545-0112
31.3406(h)-1...............................................    1545-0112
31.3406(h)-2...............................................    1545-0112
31.3406(h)-3...............................................    1545-0112
31.3406(i)-1...............................................    1545-0112
31.3501(a)-1T..............................................    1545-0771
31.3503-1..................................................    1545-0024
31.3504-1..................................................    1545-0029
31.6001-1..................................................    1545-0798
31.6001-2..................................................    1545-0034
                                                               1545-0798
31.6001-3..................................................    1545-0798
31.6001-4..................................................    1545-0028
31.6001-5..................................................    1545-0798
31.6001-6..................................................    1545-0029
                                                               1459-0798
31.6011(a)-1...............................................    1545-0029
                                                               1545-0034
                                                               1545-0035
                                                               1545-0059
                                                               1545-0074
                                                               1545-0718
                                                               1545-0256

[[Page 987]]

                                                                        
31.6011(a)-2...............................................    1545-0001
                                                               1545-0002
31.6011(a)-3...............................................    1545-0028
31.6011(a)-3A..............................................    1545-0955
31.6011(a)-4...............................................    1545-0034
                                                               1545-0035
                                                               1545-0718
                                                               1545-1413
31.6011(a)-5...............................................    1545-0718
                                                               1545-0028
31.6011(a)-6...............................................    1545-0028
31.6011(a)-7...............................................    1545-0074
31.6011(a)-8...............................................    1545-0028
31.6011(a)-9...............................................    1545-0028
31.6011(a)-10..............................................    1545-0112
31.6011(b)-1...............................................    1545-0003
31.6011(b)-2...............................................    1545-0029
31.6051-1..................................................    1545-0008
                                                               1545-0182
                                                               1545-0458
31.6051-2..................................................    1545-0008
31.6051-3..................................................    1545-0008
31.6053-1..................................................    1545-0029
                                                               1545-0062
                                                               1545-0064
                                                               1545-0065
31.6053-2..................................................    1545-0008
31.6053-3..................................................    1545-0065
                                                               1545-0714
31.6053-4..................................................    1545-0065
31.6065(a)-1...............................................    1545-0029
31.6071(a)-1...............................................    1545-0001
                                                               1545-0028
                                                               1545-0029
31.6071(a)-1A..............................................    1545-0955
31.6081(a)-1...............................................    1545-0008
                                                               1545-0028
31.6091-1..................................................    1545-0028
                                                               1545-0029
31.6157-1..................................................    1545-0955
31.6205-1..................................................    1545-0029
31.6301(c)-1AT.............................................    1545-0035
                                                               1545-0112
                                                               1545-0257
31.6302-1..................................................    1545-1413
31.6302-2..................................................    1545-1413
31.6302-3..................................................    1545-1413
31.6302-4..................................................    1545-1413
31.6302(c)-2...............................................    1545-0001
                                                               1545-0257
31.6302(c)-2A..............................................    1545-0955
31.6302(c)-3...............................................    1545-0257
31.6402(a)-2...............................................    1545-0256
31.6413(a)-1...............................................    1545-0029
31.6413(a)-2...............................................    1545-0029
                                                               1545-0256
31.6413(c)-1...............................................    1545-0029
                                                               1545-0171
31.6414-1..................................................    1545-0029
32.1.......................................................    1545-0029
                                                               1545-0415
32.2.......................................................    1545-0029
35a.3406-2.................................................    1545-0112
35a.9999-3.................................................    1545-0112
35a.9999-5.................................................    1545-0029
36.3121(l)(1)-1............................................    1545-0137
36.3121(l)(1)-2............................................    1545-0137
36.3121(l)(3)-1............................................    1545-0123
36.3121(1)(7)-1............................................    1545-0123
36.3121(1)(10)-1...........................................    1545-0029
36.3121(1)(10)-3...........................................    1545-0029
36.3121(1)(10)-4...........................................    1545-0257
40.6302(c)-3(b)(2)(ii).....................................    1545-1296
40.6302(c)-3(b)(2)(iii)....................................    1545-1296
40.6302(c)-3(e)............................................    1545-1296
40.6302(c)-3(f)(2)(ii).....................................    1545-1296
41.4481-1..................................................    1545-0143
41.4481-1T.................................................    1545-0143
41.4481-2..................................................    1545-0143
41.4482(b)-1T..............................................    1545-0143
41.4483-3..................................................    1545-0143
41.6001-1..................................................    1545-0143
41.6001-2..................................................    1545-0143
41.6001-3..................................................    1545-0143
41.6071(a)-1...............................................    1545-0143
41.6081(a)-1...............................................    1545-0143
41.6091-1..................................................    1545-0143
41.6109-1..................................................    1545-0143
41.6151(a)-1...............................................    1545-0143
41.6156-1..................................................    1545-0143
41.6161(a)(1)-1............................................    1545-0143
44.4401-1..................................................    1545-0235
44.4403-1..................................................    1545-0235
44.4412-1..................................................    1545-0236
44.4901-1..................................................    1545-0236
44.4905-1..................................................    1545-0236
44.4905-2..................................................    1545-0236
44.6001-1..................................................    1545-0235
44.6011(a)-1...............................................    1545-0235
                                                               1545-0236
44.6071-1..................................................    1545-0235
44.6091-1..................................................    1545-0235
44.6151-1..................................................    1545-0235
44.6419-1..................................................    1545-0235
44.6419-1..................................................    1545-0235
44.6419-2..................................................    1545-0235
46.4371-4..................................................    1545-0023
46.4374-1..................................................    1545-0023
46.4701-1..................................................    1545-0023
                                                               1545-0257
48.4041-4..................................................    1545-0023
48.4041-5..................................................    1545-0023
48.4041-6..................................................    1545-0023
48.4041-7..................................................    1545-0023
48.4041-9..................................................    1545-0023
48.4041-10.................................................    1545-0023
48.4041-11.................................................    1545-0023
48.4041-12.................................................    1545-0023
48.4041-13.................................................    1545-0023
48.4041-18.................................................    1545-0023
48.4041-19.................................................    1545-0023
48.4041-20.................................................    1545-0023
48.4041-21.................................................    1545-1270
48.4042-2..................................................    1545-0023
48.4061(a)-1...............................................    1545-0023
48.4061(a)-2...............................................    1545-0023
48.4061(b)-3...............................................    1545-0023
48.4064-1..................................................    1545-0014
                                                               1545-0242
48.4071-1..................................................    1545-0023
48.4073-1..................................................    1545-0023
48.4073-3..................................................    1545-0023
                                                               1545-1074
                                                               1545-1087
48.4081-2(c)(3)............................................    1545-1270
48.4081-3(d)(2)(iii).......................................    1545-1270
48.4081-3(e)(2)(ii)........................................    1545-1270
48.4081-3(f)(2)(ii)........................................    1545-1270
48.4081-4(b)(2)(ii)........................................    1545-1270
48.4081-4(b)(3)(i).........................................    1545-1270
48.4081-4(c)...............................................    1545-1270
48.4081-6(c)(1)(ii)........................................    1545-1270
48.4081-7..................................................    1545-1270
48.4081-9..................................................    1545-1270

[[Page 988]]

                                                                        
48.4082-2..................................................    1545-1418
48.4101-1..................................................    1545-1418
48.4101-2..................................................    1545-1418
48.4161(a)-1...............................................    1545-0723
48.4161(a)-2...............................................    1545-0723
48.4161(a)-3...............................................    1545-0723
48.4161(b)-1...............................................    1545-0723
                                                               1545-0723
48.4216(a)-2...............................................    1545-0023
48.4216(a)-3...............................................    1545-0023
48.4216(c)-1...............................................    1545-0023
48.4221-1..................................................    1545-0023
48.4221-2..................................................    1545-0023
48.4221-3..................................................    1545-0023
48.4221-4..................................................    1545-0023
48.4221-5..................................................    1545-0023
48.4221-6..................................................    1545-0023
48.4221-7..................................................    1545-0023
48.4222(a)-1...............................................    1545-0023
                                                               1545-0014
48.4222(b)-1...............................................    1545-0023
48.4223-1..................................................    1545-0023
                                                               1545-0723
                                                               1545-0723
                                                               1545-0723
                                                               1545-0257
48.6302(c)-1...............................................    1545-0023
                                                               1545-0257
48.6412-1..................................................    1545-0723
48.6416(a)-1...............................................    1545-0023
                                                               1545-0723
48.6416(a)-2...............................................    1545-0723
48.6416(a)-3...............................................    1545-0723
48.6416(b)(2)-3............................................    1545-1087
48.6416(b)(1)-1............................................    1545-0723
48.6416(b)(1)-2............................................    1545-0723
48.6416(b)(1)-3............................................    1545-0723
48.6416(b)(1)-4............................................    1545-0723
48.6416(b)(2)-1............................................    1545-0723
48.6416(b)(2)-2............................................    1545-0723
48.6416(b)(2)-3............................................    1545-0723
                                                               1545-1087
48.6416(b)(2)-4............................................    1545-0723
48.6416(b)(3)-1............................................    1545-0723
48.6416(b)(3)-2............................................    1545-0723
48.6416(b)(3)-3............................................    1545-0723
48.6416(b)(4)-1............................................    1545-0723
48.6416(b)(5)-1............................................    1545-0723
48.6416(c)-1...............................................    1545-0723
48.6416(e)-1...............................................    1545-0023
                                                               1545-0723
48.6416(f)-1...............................................    1545-0023
                                                               1545-0723
48.6416(g)-1...............................................    1545-0723
48.6416(h)-1...............................................    1545-0723
48.6420(c)-2...............................................    1545-0023
48.6420(f)-1...............................................    1545-0023
48.6420-1..................................................    1545-0162
                                                               1545-0723
48.6420-2..................................................    1545-0162
                                                               1545-0723
48.6420-3..................................................    1545-0162
                                                               1545-0723
48.6420-4..................................................    1545-0162
                                                               1545-0723
48.6420-5..................................................    1545-0162
                                                               1545-0723
48.6420-6..................................................    1545-0162
                                                               1545-0723
48.6420-7..................................................    1545-0162
                                                               1545-0723
48.6421-0..................................................    1545-0162
                                                               1545-0723
48.6421-1..................................................    1545-0162
                                                               1545-0723
48.6421-2..................................................    1545-0162
                                                               1545-0723
48.6421-3..................................................    1545-0162
                                                               1545-0723
48.6421-4..................................................    1545-0162
                                                               1545-0723
48.6421-5..................................................    1545-0162
                                                               1545-0723
48.6421-6..................................................    1545-0162
                                                               1545-0723
48.6421-7..................................................    1545-0162
                                                               1545-0723
48.6424-0..................................................    1545-0723
48.6424-1..................................................    1545-0723
48.6424-2..................................................    1545-0723
48.6424-3..................................................    1545-0723
48.6424-4..................................................    1545-0723
48.6424-5..................................................    1545-0723
48.6424-6..................................................    1545-0723
48.6427-0..................................................    1545-0723
48.6427-1..................................................    1545-0023
                                                               1545-0162
                                                               1545-0723
48.6427-2..................................................    1545-0162
                                                               1545-0723
48.6427-3..................................................    1545-0723
48.6427-4..................................................    1545-0723
48.6427-5..................................................    1545-0723
48.6427-8..................................................    1545-1418
48.6427-9..................................................    1545-1418
49.4251-1..................................................    1545-1075
49.4251-2..................................................    1545-1075
49.4253-3..................................................    1545-0023
49.4253-4..................................................    1545-0023
49.4264(b)-1...............................................    1545-0023
                                                               1545-0226
                                                               1545-0226
                                                               1545-0912
                                                               1545-0912
                                                               1545-0257
                                                               1545-0230
                                                               1545-0224
                                                               1545-0225
                                                               1545-0224
                                                               1545-0230
49.4271-1(d)...............................................    1545-0685
52.4682-1(b)(2)(iii).......................................    1545-1153
52.4682-2(b)...............................................    1545-1153
                                                               1545-1361
52.4682-2(d)...............................................    1545-1153
                                                               1545-1361
52.4682-3(c)(2)............................................    1545-1153
52.4682-3(g)...............................................    1545-1153
52.4682-4(f)...............................................    1545-1153
                                                               1545-0257
52.4682-5(d)...............................................    1545-1361
52.4682-5(f)...............................................    1545-1361
53.4940-1..................................................    1545-0052
                                                               1545-0196
53.4942(a)-1...............................................    1545-0052
53.4942(a)-2...............................................    1545-0052
53.4942(a)-3...............................................    1545-0052
53.4942(b)-3...............................................    1545-0052
53.4945-1..................................................    1545-0052
53.4945-4..................................................    1545-0052
53.4945-5..................................................    1545-0052
53.4945-6..................................................    1545-0052
53.4947-1..................................................    1545-0196
53.4947-2..................................................    1545-0196

[[Page 989]]

                                                                        
53.4948-1..................................................    1545-0052
53.4961-2..................................................    1545-0024
53.4963-1..................................................    1545-0024
53.6001-1..................................................    1545-0052
53.6011-1..................................................    1545-0049
                                                               1545-0052
                                                               1545-0092
                                                               1545-0196
53.6065-1..................................................    1545-0052
53.6071-1..................................................    1545-0049
53.6081-1..................................................    1545-0066
                                                               1545-0148
53.6161-1..................................................    1545-0575
54.4972-1..................................................    1545-0197
54.4975-7..................................................    1545-0575
54.4977-1T.................................................    1545-0771
54.4981A-1T................................................    1545-0203
54.6011-1..................................................    1545-0575
54.6011-1T.................................................    1545-0575
55.6001-1..................................................    1545-0123
55.6011-1..................................................    1545-0999
                                                               1545-0123
                                                               1545-1016
55.6061-1..................................................    1545-0999
55.6071-1..................................................    1545-0999
56.4911-6..................................................    1545-0052
56.4911-7..................................................    1545-0052
56.4911-9..................................................    1545-0052
56.4911-10.................................................    1545-0052
56.6001-1..................................................    1545-1049
56.6011-1..................................................    1545-1049
56.6081-1..................................................    1545-1049
56.6161-1..................................................    1545-1049
                                                               1545-0257
145.4051-1.................................................    1545-0745
145.4052-1.................................................    1545-0120
                                                               1545-0745
                                                               1545-1076
145.4061-1.................................................    1545-0745
                                                               1545-0257
                                                               1545-0230
                                                               1545-0224
156.6001-1.................................................    1545-1049
156.6011-1.................................................    1545-1049
156.6081-1.................................................    1545-1049
156.6161-1.................................................    1545-1049
301.6011-2.................................................    1545-0225
                                                               1545-0350
                                                               1545-0387
                                                               1545-0441
                                                               1545-0957
301.6017-1.................................................    1545-0090
301.6034-1.................................................    1545-0092
301.6035-1.................................................    1545-0123
301.6036-1.................................................    1545-0013
                                                               1545-0773
301.6047-1.................................................    1545-0367
                                                               1545-0957
301.6057-1.................................................    1545-0710
301.6057-2.................................................    1545-0710
301.6058-1.................................................    1545-0710
301.6059-1.................................................    1545-0710
301.6103(c)-1..............................................    1545-0280
301.6104(a)-1..............................................    1545-0495
301.6104(a)-5..............................................    1545-0056
301.6104(a)-6..............................................    1545-0056
301.6104(b)-1..............................................    1545-0094
                                                               1545-0742
301.6104(d)-1..............................................    1545-0092
301.6109-1.................................................    1545-0003
                                                               1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0957
                                                               1545-1461
301.6110-3.................................................    1545-0074
301.6110-5.................................................    1545-0074
301.6111-1T................................................    1545-0865
                                                               1545-0881
301.6112-1T................................................    1545-0865
301.6222(a)-2T.............................................    1545-0790
301.6222(b)-1T.............................................    1545-0790
301.6222(b)-2T.............................................    1545-0790
301.6222(b)-3T.............................................    1545-0790
301.6227(b)-1T.............................................    1545-0790
                                                               1545-0790
301.6231(a)(7)-1...........................................    1545-0790
301.6241-1T................................................    1545-0130
301.6316-4.................................................    1545-0074
301.6316-5.................................................    1545-0074
301.6316-6.................................................    1545-0074
301.6316-7.................................................    1545-0029
301.6324A-1................................................    1545-0015
301.6361-1.................................................    1545-0074
                                                               1545-0024
301.6361-2.................................................    1545-0024
301.6361-3.................................................    1545-0074
301.6402-2.................................................    1545-0024
                                                               1545-0073
                                                               1545-0091
301.6402-3.................................................    1545-0055
                                                               1545-0073
                                                               1545-0091
                                                               1545-0132
301.6402-5.................................................    1545-0928
301.6404-1.................................................    1545-0024
301.6404-2T................................................    1545-0024
301.6404-3.................................................    1545-0024
301.6405-1.................................................    1545-0024
301.6501(c)-1..............................................    1545-1241
301.6501(d)-1..............................................    1545-0074
                                                               1545-0430
301.6501(o)-2..............................................    1545-0728
301.6511(d)-1..............................................    1545-0582
                                                               1545-0024
301.6511(d)-2..............................................    1545-0582
                                                               1545-0024
301.6511(d)-3..............................................    1545-0024
                                                               1545-0582
301.6652-2.................................................    1545-0092
301.6656-1.................................................    1545-0794
301.6656-2.................................................    1545-0794
301.6685-1.................................................    1545-0092
301.6689-1T................................................    1545-1056
301.6707-1T................................................    1545-0865
                                                               1545-0881
301.6708-1T................................................    1545-0865
301.6712-1.................................................    1545-1126
301.6723-1A(d).............................................    1545-0909
301.6903-1.................................................    1545-0013
301.6905-1.................................................    1545-0074
301.7001-1.................................................    1545-0123
301.7101-1.................................................    1545-1029
301.7207-1.................................................    1545-0092
301.7216-2.................................................    1545-0074
301.7216-2(o)..............................................    1545-1209
301.7425-3.................................................    1545-0854
301.7430-2(c)..............................................    1545-1356
301.7507-8.................................................    1545-0123
301.7507-9.................................................    1545-0123
301.7513-1.................................................    1545-0429
301.7517-1.................................................    1545-0015
301.7605-1.................................................    1545-0795
301.7623-1.................................................    1545-0409

[[Page 990]]

                                                                        
301.7654-1.................................................    1545-0803
301.7701-3.................................................    1545-1486
301.7701-4.................................................    1545-1465
301.7701-16................................................    1545-0795
301.7701(b)-1..............................................    1545-0089
301.7701(b)-2..............................................    1545-0089
301.7701(b)-3..............................................    1545-0089
301.7701(b)-4..............................................    1545-0089
301.7701(b)-5..............................................    1545-0089
301.7701(b)-6..............................................    1545-0089
301.7701(b)-7..............................................    1545-0089
301.7701(b)-9..............................................    1545-0089
301.7805-1.................................................    1545-0805
301.9001-1.................................................    1545-0220
301.9001-2T................................................    1545-1488
301.9001-3T................................................    1545-1488
301.9100-4T................................................    1545-0016
                                                               1545-0042
                                                               1545-0074
                                                               1545-0129
                                                               1545-0172
                                                               1545-0619
301.9100-6T................................................    1545-0872
301.9100-7T................................................    1545-0982
301.9100-8.................................................    1545-1112
301.9100-11T...............................................    1545-0123
301.9100-12T...............................................    1545-0026
                                                               1545-0074
                                                               1545-0172
                                                               1545-1027
301.9100-13T...............................................    1545-0046
301.9100-14T...............................................    1545-0046
301.9100-15T...............................................    1545-0046
301.9100-16T...............................................    1545-0152
302.1-7....................................................    1545-0024
305.7701-1.................................................    1545-0823
305.7871-1.................................................    1545-0823
404.6048-1.................................................    1545-0160
420.0-1....................................................    1545-0710
Part 502...................................................    1545-0844
Part 503...................................................    1545-0837
Part 509...................................................    1545-0846
Part 513...................................................    1545-0834
Part 514...................................................    1545-0845
Part 516...................................................    1545-0841
Part 517...................................................    1545-0849
Part 520...................................................    1545-0833
Part 521...................................................    1545-0848
601.104....................................................    1545-0233
601.105....................................................    1545-0091
601.201....................................................    1545-0019
                                                               1545-0819
601.204....................................................    1545-0152
601.401....................................................    1545-0257
601.504....................................................    1545-0150
601.601....................................................    1545-0800
601.602....................................................    1545-0295
                                                               1545-0387
                                                               1545-0957
601.702....................................................    1545-0429
------------------------------------------------------------------------

(26 U.S.C. 7805)

[T.D. 8011, 50 FR 10222, Mar. 14, 1985]

    Editorial Note: For Federal Register citations affecting 
Sec. 602.101, see the List of CFR Sections Affected in the Findings Aids 
section of 26 CFR part 600-end.

    Effective Date Note: By T.D. 8712, at 62 FR 2275, Jan. 16, 1997, in 
Sec. 602.1, the table in paragraph (c) was amended by adding entries for 
Secs. 1.141-1, 1.141-12, 1,142-2 and 1.148-6, effective May 16, 1997.

[[Page 991]]



List of CFR Sections Affected



All changes in sections of part 1, Sec. 1.1401 to end of Title 26 of the 
Code of Federal Regulations which were made by documents published in 
the Federal Register since January 1, 1986, are enumerated in the 
following list. Entries indicate the nature of the changes effected. 
Page numbers refer to Federal Register pages. The user should consult 
the entries for chapters and parts as well as sections for revisions.
For the period before January 1, 1973, see the ``List of CFR Sections 
Affected, 1949-1963, 1964-1972, and 1973-1985'' published in seven 
separate volumes.

                                  1986

26 CFR
                                                                   51 FR
                                                                    Page
Chapter I
1.1445-1  Added....................................................46629
1.1445-1T  Removed.................................................46651
1.1445-2  Added....................................................46633
1.1445-2T  Removed.................................................46651
1.1445-3  Added....................................................46637
1.1445-3T  Removed.................................................46651
1.1445-4  Added....................................................46641
1.1445-4T  Removed.................................................46651
1.1445-5  Added....................................................46642
1.1445-5T  Removed.................................................46651
1.1445-6  Added....................................................46648
1.1445-6T  Removed.................................................46651
1.1445-7  Added....................................................46650
1.1445-7T  Removed.................................................46651
1.1445-8T  Added (temporary).......................................46653
1.1502-75T  Added (temporary)........................................749
1.6012-1  (b)(2)(i) amended........................................46651
1.6038B-1T  Added (temporary)......................................17957
1.6049-5T  Added (temporary).......................................45106
1.6050I-1  Added...................................................31611
    (d)(2)(ii) and (iv) Example corrected..........................33033
1.6302-1T  Added (temporary).......................................46620
1.6411-1  (d) removed..............................................43347
1.7872-5T  (b) (9), (12), and (13) revised (temporary).............25033
    (b)(9) corrected...............................................28553

                                  1987

26 CFR
                                                                   52 FR
                                                                    Page
Chapter I
1.1402(e)-5T  Added (temporary)....................................12162
1.1441-5  (c) revised..............................................33933
1.1445-1  (c)(2)(ii) heading, (B)(1), and (f) heading and (3)(ii) 
        corrected...................................................3796
    (b)(4), (e)(4) introductory text and (f)(2) corrected...........3916
    Correctly designated............................................4822
1.1445-1T  Correctly designated.....................................2648
1.1445-2  (d)(1) corrected..........................................3917
1.1445-2T  Correctly designated.....................................2648
1.1445-3  (b)(1), (c)(2) introductory text, and (g) introductory 
        text, (2), (3), and (4) corrected...........................3796
1.1445-3T  Correctly designated.....................................2648
1.1445-4  (f)(3) (ii) and (iii) corrected...........................3796
    (c)(2) corrected................................................3917
1.1445-4T  Correctly designated.....................................2648

[[Page 992]]

1.1445-5  (b)(2)(i) introductory text, (3)(iii)(C), and (7), 
        (c)(1)(i), (iii) (A), (B) introductory text and (2), and 
        (C) table, and (3)(iv)(A) corrected; (b)(3)(iii) and 
        (c)(3)(i) correctly designated..............................3796
    Heading, (a) and (b)(2)(ii) introductory text, (c)(1) (ii), 
(iii)(A) and (B)(2), and (e) heading corrected; (b)(8) (i) and (v) 
and (c)(1)(iii)(B)(1) correctly designated..........................3917
1.1445-5T  Correctly designated.....................................2648
1.1445-6  (c) introductory text and (e)(1)(ii) corrected............3796
    (c) introductory text corrected.................................3917
1.1445-6T  Correctly designated.....................................2648
1.1445-7  Heading corrected.........................................3796
1.1445-7T  Correctly designated.....................................2648
1.1445-8T  (b) correctly designated; (b)(1) introductory text and 
        (g) corrected...............................................1691
1.1502-9  Added....................................................32005
    (f) Example (5) corrected......................................43434
1.1502-13  (c)(2) amended..........................................10084
1.1502-81T  Added (temporary).......................................8448
1.6041-3  (i) amended; (j) removed; (k) through (q) redesignated 
        as (j) through (p); new (m) revised........................30358
1.6045-3T  Added (temporary).......................................10744
1.6050D-1  (a) introductory text and (1) amended...................26673
1.6050K-1  Added......................................................41
1.6050K-1T  Removed...................................................41
1.6302-1  Heading and (a) revised..................................33809
1.6302-1T  Removed.................................................33809
1.6655-2T  Added (temporary).......................................10051
1.6655-7T  Added (temporary).......................................15320

                                  1988

26 CFR
                                                                   53 FR
                                                                    Page
Chapter I
1.1402(e)-1A  Revised..............................................33461
1.1402(e)-5A  Redesignated from 1.1402(e)-5T and (c)(2) amended....33461
1.1402(e)-5T  Removed; regulations redesignated as 1402(e)-5A and 
        (c)(2) amended.............................................33461
1.1441-8T  Added (temporary).......................................24066
    (a) and (b) corrected..........................................27595
1.1445-2  (d)(2) (iii) and (iv) and (6) removed....................16230
1.1445-5  (b)(2)(iii) and (8)(v) and (c)(2)(i) removed.............16230
1.1445.9T  Added (temporary).......................................16230
1.1445-10T  Added (temporary)......................................16230
1.1445-11T  Added (temporary)......................................16231
1.1502-13  (c)(7) and (f)(2)(iii) added............................12679
1.1502-13T  (c) and (f) added (temporary)..........................12679
1.1502-14  (c)(3) added............................................12679
1.1502-14T  Added (temporary)......................................12679
1.1502-31  (c) added...............................................34731
1.1502-31T  Added (temporary)......................................34731
    Correctly designated....................................19165, 19283
    (a)(3)(vii) corrected..........................................39015
1.1502-32  (g)(4) added.............................................8749
1.1502-32T  Added (temporary).......................................8749
1.1502-33  (c)(6) added............................................34733
1.1502-33T  Added (temporary)......................................34733
1.1502-77  (e) added...............................................34733
1.1502-77T  Added (temporary)......................................34733
1.1563-1  (a)(3)(i) introductory text and (c)(2)(iv) Examples (1) 
        and (2) amended; (a)(3)(ii) Examples (1) and (2) revised; 
        (a)(3)(i)(b) flush text, (ii) Examples (3) and (4) and 
        (iii) and (d) added.........................................6612
    (a)(3)(ii) Example (3) corrected................................8302
1.1563-3  (d)(3) Example (3) revised................................6613
1.6031(b)-1T  Added (temporary)....................................34490
1.6031(b)-2T  Heading added (temporary)............................34491
1.6031(c)-1T  Added (temporary)....................................34491
1.6031(c)-2T  Heading added (temporary)............................34492
1.6041-3  (n) revised..............................................12150
1.6049-7T  Added (temporary)........................................7512
1.6050H-0  Added...................................................12002
1.6050H-1  Added...................................................12002
1.6050H-1T  Heading revised; text amended (temporary)..............12002
1.6050H-2  Added...................................................12005
1.6050L-1  Added...................................................16085

[[Page 993]]

    (a)(2)(i) and (3) heading corrected............................18372
1.6050L-1T  Removed................................................16085
1.6081-2T  Added (temporary).......................................11067
1.6081-3T  Added (temporary).......................................11067
1.6302-3  Added....................................................12008
    (a) and (b) corrected..........................................13464
1.7476-1  (b)(2)(i) amended.........................................6613
1.7519-0T  Added (temporary).......................................19705
1.7519-1T  Added (temporary).......................................19706
1.7519-2T  Added (temporary).......................................19709
1.7519-3T  Added (temporary).......................................19710
1.7872-5T  (b)(12) revised (temporary).............................18282

                                  1989

26 CFR
                                                                   54 FR
                                                                    Page
Chapter I
1.1502-14  (a)(5) added............................................10981
1.1502-31T  Correctly designated............................19165, 19283
1.1502-32  (b)(3) and (c)(4) added.................................10981
1.1502-32T  (b) heading, (1) and (2) redesignated as (a)(6) 
        heading, (i) and (ii); new (a)(6)(ii) amended; new (b) 
        added (temporary)..........................................10981
1.1503-2T  Added (temporary).......................................37317
1.6041-3  (i) revised..............................................51027
1.6049-7T  Revised.................................................37103
    (e)(2)(x), (f)(2)(i)(G), (ii)(k) and (7)(ii) corrected.........41088
    (f)(3)(ii) (B) and (C) corrected...............................50043
1.6050M-1  Added...................................................50369
1.6081-1  (a) amended (temporary)...................................7762
    Effective date paragraph corrected.............................11523
    Technical correction...........................................13606
1.6081-2  Redesignated as 1.6081-4T and revised (temporary).........7763
    Effective date paragraph corrected.............................11523
1.6081-4  Technical correction.....................................13606
1.6081-4T  Redesignated from 1.6081-2 and revised (temporary).......7763
    Effective date paragraph corrected.............................11523

                                  1990

26 CFR
                                                                   55 FR
                                                                    Page
Chapter I
1.1441-4  (b)(1)(ii) amended (temporary)............................3716
1.1441-4T  Added (temporary)........................................3716
1.1445-5  (c)(3)(i) revised; (c)(3)(v) removed; (c)(3)(vi) 
        redesignated as (c)(3)(v)..................................50553
1.1445-8  Added....................................................50553
1.1445-8T  Removed.................................................50553
1.1502-1  (h) redesignated from 1.1502-1T..........................49038
1.1502-1T  Added (temporary)........................................9434
    Redesignated as 1.1502-1 (h); heading removed..................49038
1.1502-12  (r) added (temporary)....................................9434
    (r) revised....................................................49038
1.1502-13  (c)(1)(iii) amended......................................9422
1.1502-13T  (c)(2) and (f)(2) amended; (l) through (o) added 
        (temporary).................................................9422
1.1502-14  (c)(3) amended...........................................9424
1.1502-14T  (a) and (b) amended; (c) and (d) added (temporary)......9424
1.1502-20T  Added (temporary).......................................9434
    Removed........................................................49038
1.1502-32  (a) amended (temporary)..................................9437
    (a) amended....................................................49038
1.1502-33  (c)(6) amended (temporary)...............................9437
    (c)(6) amended.................................................49038
1.1502-79  (a)(1)(iii) added (temporary)............................9438
    (a)(1)(iii) removed............................................49038
1.1502-75T  Heading revised; (c) and (d) added.....................36276
    (d)(5)(ii), (iii)(B)(1), and (v) corrected.....................41310
1.6001-1  (c) amended..............................................35593
1.6033-2  (a)(2)(ii)(k) added......................................35593
1.6041-3  (i) revised..............................................51695
1.6045-3T  Heading and (p) revised (temporary).....................51284
1.6045-4  Added....................................................51284
1.6050H-2T  Added (temporary)........................................734
1.6050I-1T  Revised................................................28022
1.5060M-1  (b)(2)(iv) revised; (d)(5)(i)(A) corrected..............13522
1.6081-4T  Removed.................................................37227
1.6081-5  Added....................................................37227
    (a)(1) corrected...............................................41310
1.6655-7  Redesignated from 1.6655-7T and revised..................33689

[[Page 994]]

1.6655-7T  Redesignated as 1.6655-7 and revised....................33689

                                  1991

26 CFR
                                                                   56 FR
                                                                    Page
Chapter I
1.1445-8  (b)(3)(i) corrected.......................................4542
1.1502-12  Revised.................................................47401
1.1502-19  (a)(6) redesignated as (a)(6)(i) and amended; 
        (a)(6)(ii) added...........................................47392
1.1502-20  Added...................................................47392
1.1502-21  (g) added...............................................67489
1.1502-32  (a) revised.............................................47401
1.1502-33  (c)(6) amended..........................................47402
1.1502-77  (e) revised.............................................67489
1.1502-78  (b)(3) added............................................67489
1.1502-79  (a)(1)(iii) added.......................................47402
1.6038A-0  Added...................................................28060
1.6038A-1  Removed.................................................28060
    Added..........................................................28061
    (c)(4) corrected...............................................41792
1.6038A-2  Added...................................................28063
1.6038A-3  Added...................................................28065
    (a)(3) Example 3, (c)(7)(i), and (e)(2)(iii) Example corrected
                                                                   41792
1.6038A-4  Added...................................................28072
1.6038A-5  Added...................................................28073
    (b)(1) corrected...............................................41792
1.6038A-6  Added...................................................28075
1.6038A-7  Added...................................................28075
1.6045-4  (d)(3)(iii), (e)(1) introductory text and (f)(2) 
        corrected....................................................559
    (m)(1), (r) Examples 2 and 4 corrected..........................3419
1.6049-4  (b)(2) introductory text and (iii) amended; (b)(2) 
        concluding text revised....................................49518
1.6049-7  Added....................................................49518
1.6049-7T  Revised.................................................49518
5c  Authority citation revised.....................................49522
    Authority citation corrected...................................51176
1.6050I-1  (c)(1) and (g) revised; (c)(2), (3) and (4) 
        redesignated as (c)(6), (7) and (8) and amended; new 
        (c)(2) through (5) added...................................57976
    (c)(7) and (8) amended.........................................57977
1.6411-4  Revised..................................................67489
1.6662-0  Added....................................................67497
1.6662-1  Added....................................................67498
1.6662-2  Added....................................................67498
1.6662-3  Added....................................................67498
1.6662-4  Added....................................................67499
1.6662-5  Added....................................................67504
1.6664-0  Added....................................................67505
1.6664-1  Added....................................................67506
1.6664-2  Added....................................................67506
1.6664-3  Added....................................................67507
1.6664-4  Added....................................................67508
1.6694-0  Added....................................................67514
1.6694-1  Revised..................................................67514
1.6694-2  Revised..................................................67516
1.6694-3  Added....................................................67518
1.6694-4  Added....................................................67519
1.6851-2  (a)(2)(ii) revised........................................3034
1.6851-2T  Added (temporary)........................................3034
1.9100-1  Removed..................................................64982

                                  1992

26 CFR
                                                                   57 FR
                                                                    Page
Chapter I
1.1441-5  (d) amended..............................................15241
1.1502-13T  (o) redesignated as (p); new (o) added..................9385
    (o)(1)(i) corrected.....................................21152, 48426
1.1502-14  (a)(5) revised...........................................9211
1.1502-20  (a)(5) Example 6, (e)(1), (2)(i)(B)(2) introductory 
        text, and (h)(1) amended; (c)(2)(i)(D) and (v) revised.....53550
1.1502-21  (g) revised.............................................53034
1.1502-32  (b)(3) and (c)(4) revised; new (k) introductory text 
        and (2) added; (k)(1) introductory text, (i), (ii) and 
        (iii) redesignated from 1.1502-32T(b) introductory text, 
        (1), (2) and (3)............................................9211
1.1502-32T  Concluding text removed.................................8074
    (b) introductory text, (1), (2) and (3) redesignated as 
1.1502-32 (k)(1) introductory text, (i), (ii) and (iii); (b) 
removed.............................................................9211
1.1502-75  (d)(5) redesignated from 1.1502-75T (d)(5)..............44333
1.1502-75T  Heading revised; (d)(5) redesignated as 1.1502-75 
        (d)(5); (c) and (d) removed................................44333
1.1502-77  (e) revised.............................................53034
1.1502-78  (b)(3) revised..........................................53034
1.1502-80  Revised..................................................9385
1.1503-2  Added....................................................41084

[[Page 995]]

    (g)(2)(iii)(A) introductory text, (A)(7), (vii)(C)(1), 
(h)(2)(ii) and (3) corrected.......................................48722
    (c)(16) Example 4, (d)(3)(i)(A), (4) Example 1, (e)(3) and 
(g)(2)(iii)(A)(1) corrected........................................57280
1.1503-2T  Redesignated as 1.1503-2A; heading amended..............41093
1.1504-0  Added....................................................61800
1.1504-4  Added....................................................61801
1.1503-2A  Undesignated center heading added; 1.1503-2A 
        redesignated from 1.1503-2T; heading amended...............41093
1.6013-6  (a)(2)(ii) amended.......................................15241
1.6041-1  (b) text redesignated as (b)(1); new (b)(1) heading and 
        (b)(2) added...............................................61313
1.6045-1  (c)(3) revised; (c)(7) added.............................53032
    (c)(3) revised.................................................58984
1.6049-7  Correctly designated; (f)(4), (5)(i) and (6)(i)(A) 
        corrected...................................................5054
    (f)(2)(i)(G) revised...........................................40322
    (G) corrected..................................................46243
1.6411-4  Correctly revised.........................................6073
    Revised........................................................53034
1.6662-0  Corrected.................................................6165
1.6662-4  (b)(2)(ii), (4)(i), (b)(6), (c)(5) Example 1 and 
        (d)(3)(ii) corrected........................................6165
1.6662-5  (b) corrected.............................................6165
1.6664-2  (c)(1) introductory text, (d), (g) Example 1, Example 2, 
        and Example 3...............................................6165
1.6664-3  (d) Example 1 corrected...................................6165
1.6664-4  (b)(1) and (e)(2)(ii) corrected...........................6166
1.6694-1  (e)(2) Example corrected..................................6061
1.6694-2  (d)(4) and (5) corrected..................................6061
1.6694-4  (b)(2) corrected..........................................6061
1.6695-1  (f) reinstated...........................................60733
1.7704-2  Added....................................................58708

                                  1993

26 CFR
                                                                   58 FR
                                                                    Page
Chapter I
1.1502-7  Removed..................................................25557
1.1502-13  (c)(1)(iii) amended; (l) through (o) redesignated from 
        1.1502-13T(l) through (o); newly redesignated (o) revised 
                                                                   13411
    (c)(2) amended.................................................42234
1.1502-13T  (l) through (o) redesignated as 1.1502-13 (l) through 
        (o); new 1502-13T(l) through (o) added.....................13411
1.1502-14  (g) redesignated from 1.1502-14T(c).....................13411
    (g) revised....................................................13412
1.1502-14T  (c) redesignated as 1.1502-14 (g); new (c) added.......13411
    (a) amended....................................................13412
1.1502-25  Removed.................................................25557
1.1503-2  (d)(2)(ii) corrected.....................................13413
1.1504-4  Designation and (b)(3) Example corrected..................7041
1.1561-1A  Removed.................................................25557
1.1561-2A  Removed.................................................25557
1.1561-3A  Removed.................................................25557
1.6012-7T  Added....................................................4080
    Revised........................................................68296
1.6045-3T  Removed.................................................25557
1.6050H-2  (a)(2)(iii) and (b)(2)(iii) amended, (a)(2)(iv) 
        redesignated as (a)(2)(v), (a)(3) and (4) redesignated as 
        (4) and (5), new (a)(2)(iv), new (a)(3) and (b)(2)(iv) 
        added, new (a)(4), (b)(2)(ii) and (b)(6) revised...........68753
1.6050I-1  (d)(4)(i) amended.......................................16496
    (b) and (e)(1) revised.........................................33764
1.6050I-1T  Removed................................................33764
1.6050P-0T  Added..................................................68303
1.6050P-1T  Added..................................................68303
1.6061-2T  Added....................................................4080
    Revised........................................................68296
1.6065-2T  Added....................................................4080
    Revised........................................................68297
1.6655(e)-1T  Added................................................68301

                                  1994

26 CFR
                                                                   59 FR
                                                                    Page
Chapter I
1.1502-1  (a) amended..............................................41675
1.1502-11  (b) revised.............................................41675
1.1502-13  (j) introductory text, (l)(2) Example 1, (m)(3) Example 
        3, (o)(1)(i), (ii) and (2) Example amended.................41674

[[Page 996]]

    (c)(1)(iii) and (h) Example 17 amended; (c)(7) redesignated as 
(c)(8); new (c)(7) added...........................................41677
    (c)(1)(i) and (2) amended......................................67215
1.1502-14  (b)(3)(ii), (d)(3)(ii), (4)(ii)(b), (g)(1)(i), (ii) and 
        (2) Example 1 amended......................................41674
    (a)(2) and (5) revised; (a)(4) redesignated as (a)(6); new 
(a)(4) and (b)(4) added; new (a)(6) Example amended................41677
1.1502-19  Revised.................................................41677
1.1502-20  (a)(1), (3)(ii), (5) introductory text, (c)(1)(i), 
        (ii), (2)(i)(A)(1), (B), (D), (ii), (iii), (4) Example 2, 
        Example 7, (e)(3) Example 1 and (f) revised; (c)(2)(vii) 
        added; (e)(3) Example 8 and (g)(3) removed; (g)(4) 
        redesignated as (g)(3); (a)(4), (5) Example 6, (6) Example 
        5, (c)(2), (i)(4) Examples 1, 3, 6, (e)(3) Example 2, new 
        (g)(3) Examples 1, 2, and 3 amended........................41680
1.1502-31  Revised.................................................41683
1.1502-31T  Removed................................................41685
1.1502-32  Revised.................................................41685
1.1502-32T  Removed................................................41695
1.1502-33  Revised.................................................41695
1.1502-33T  Removed................................................41700
1.1502-43  (a)(3)(ii) and (iii) amended............................41674
1.1502-47  (e)(4)(iii)(B) amended..................................41674
1.1502-75  (k) added................................................2984
    (d)(5)(viii) amended...........................................41675
    (d)(1) amended.................................................41700
1.1502-75T  Removed.................................................2984
1.1502-76  (b) revised; (d) removed................................41700
1.1502-80  (c) and (d) added.......................................41703
1.1502-81T  (a) amended............................................41675
1.1552-1  (c)(2) amended...........................................41675
1.6035-1  Amended..................................................64301
1.6038-2  (d)(5) and (f)(10)(v) added; (e), (f)(10)(iii), (iv), 
        (g) introductory text and concluding text amended; (h) 
        revised....................................................64302
1.6046-1  (b)(10) and (g) amended; (f)(5) added....................64302
1.6050H-0  Revised.................................................63250
1.6050H-1  (a), (c)(1), (2), (e)(1), (2)(i) and (g) revised; 
        (c)(3) redesignated as (c)(5); (b)(4), new (c)(3), (5) 
        Example 5, (e)(2)(iii) and (f) added.......................63251
1.6050H-2  (a)(2)(iii), (d), (e)(1) and (g) revised; (a)(2)(iv)(B) 
        amended; (a)(2)(v) (e)(2) and (3) redesignated as 
        (a)(2)(vi), (e)(1)(ii) and (iii); new (a)(2)(v), (e)(1)(i) 
        and new (2) added..........................................63253
1.6050H-2T  Removed.................................................4830
1.6050I-0T  Added..................................................64573
1.6050I-2T  Added..................................................64573
1.6302-1T  Added...................................................35416
1.6302-2T  Added...................................................35416
1.6302-3T  Added...................................................35416
1.6662-0  Amended.....................................4794, 12548, 35031
1.6662-5T  Added....................................................4794
1.6662-6T  Added....................................................4795
    Heading, (d)(2)(ii), (iii)(A), (B), (3)(ii)(B) and (C) 
revised; (d)(2)(iii)(D) and (3)(iii)(C) added......................35031
1.6662-7T  Added...................................................12548
    (a)(2)  corrected..............................................14749
1.6664-0  Amended...................................................4799
1.6664-4T  Added....................................................4799
1.6695-1  (a)(1) introductory text, (b)(1), (4)(iv), (v), (5) 
        introductory text, (c)(1) introductory text, (3) and (e) 
        revised; (b)(4)(vi) added..................................33432
1.6851-2  (a)(2)(ii) revised.......................................10067
1.6851-2T  Removed.................................................10067
1.7520-1--1.7520-4  Undesignated center heading added..............30149
1.7520-1  Added....................................................30149
1.7520-2  Added....................................................30149
1.7520-3  Added....................................................30150
1.7520-4  Added....................................................30150

                                  1995

26 CFR
                                                                   60 FR
                                                                    Page
Chapter I
1.1441-3  (j) added; OMB number....................................41014
1.1441-7  (d) added; OMB number....................................41014
    (d)(2)(ii) Example 4 corrected.................................55312
1.1445-1  Heading and (g)(10) revised..............................66076
1.1445-5  (c)(1)(iii)(A) and (d)(1) amended; (c)(1)(iii)(B) 
        removed; (c)(1)(iii)(C) redesignated as (c)(1)(iii)(B); 
        (c)(1)(ii), new (iii)(B), (iv) and (3)(ii) revised.........66076
1.1445-8  (c)(2)(i) revised........................................66077

[[Page 997]]

1.1502-3  (a)(2) amended...........................................36679
1.1502-4  (j) Example 1 amended....................................36679
1.1502-9  (f) Example 6 amended....................................36679
1.1502-12  (a) and (g)(2) amended..................................36679
1.1502-13  Revised.................................................36685
1.1502-13T  Added (temporary)......................................36670
    Removed........................................................36708
1.1502-14  (c)(1) amended...........................................2508
      Removed......................................................36708
1.1502-14T  Removed................................................36708
1.1502-17  (c) redesignated as (d); new (d) Example redesignated 
        as (d) Example 1; (b), new (d) heading and introductory 
        text revised; new (c), (d) Examples 2, 3 and (e) added; 
        new (d) Example 1 amended..................................36708
1.1502-18  (f) heading revised; (g) added..........................36709
1.1502-20  (a)(5) Example 6, (b)(6) Examples 5, 7, (c)(4) Example 
        3 and (h)(1) amended; (c)(4) Example 9 added; (e)(3) 
        Examples 2 and 8 removed; (e)(3) Examples 3 through 7 
        redesignated as (e)(3) Examples 2 through 6; new (e)(3) 
        Example 5 revised..........................................36709
1.1502-22  (a)(3) and (5) Example  amended.........................36679
1.1502-26  (b) amended.............................................36679
    (b) revised....................................................36710
1.1502-30  Added...................................................66082
1.1502-33  (c)(2) revised..........................................36710
1.1502-47  (e)(4)(iii) and (iv) Example 4 amended..................36679
    (e)(4) Example 4, (f)(3) and (r) amended.......................36680
1.1502-79  (f) removed.............................................36710
1.1502-80  (e) and (f) added.......................................36710
1.1503-2  (d)(4) Example 1 amended.................................36680
1.1552-1  (a)(2)(ii)(c) amended....................................36680
1.6012-3  (a)(9) revised...........................................66090
1.6033-2  (g)(1)(i) and (vii) revised; (g)(5) removed; (h), (i) 
        and (j) redesignated as (i), (j) and (k); new (h) added....65552
1.6038A-3  (b)(5) and (c)(2)(vii) added............................41015
1.6042-4  Revised..................................................66110
1.6044-5  Revised..................................................66111
1.6049-6  Heading revised; (a), (b)(1)(ii) and (2)(ii) amended; 
        (e) added; authority citation removed......................66111
1.6050N-1  Added...................................................66111
1.6091-2  (g) added................................................62210
1.6662-0  Amended..................................................45663
1.6662-1  Amended..................................................45664
1.6662-2  (d) heading revised; (d) redesignated as (d)(1); new 
        (d)(1) amended; (d)(2) and (3) added.......................45664
1.6662-3  (a) amended; (b)(3), (c)(1) and (2) revised..............45664
1.6662-4  (d)(2) revised; (e)(2), (g)(1), (4) and (5) revised......45665
1.6662-7  Added....................................................45665
1.6662-7T  Removed.................................................45666
1.6664-0  Amended..................................................45666
1.6664-1  (b) revised..............................................45666
1.6664-4  (a) amended; (c), (d) and (e) redesignated as (d), (f) 
        and (g); (a), (b)(1), (2) introductory text, Example 1 and 
        new (d) revised; new (c) and new (e) added.................45666
1.6695-1T  Added (temporary).......................................37589
1.7520-3  (b) revised; (c) amended.................................63915
1.7701(l)-1  Added.................................................41015
1.7704-1  Added....................................................62029

                                  1996

26 CFR
                                                                   61 FR
                                                                    Page
1.1445-5  (c)(1)(iii)(B) table corrected............................7157
1.1501-1  Removed..................................................33325
1.1502-0  Revised..................................................33325
1.1502-1  (b), (f)(1) and (2) introductory text revised; (f)(4) 
        and (j) added..............................................33325
1.1502-2  (h) revised..............................................33326
1.1502-9  (a) and (f) Example 5 amended............................33323
1.1502-11  (a)(2), (3), (4) and (b)(2)(iii) Examples 1, 2 and 3 
        amended....................................................33323
    (c) redesignated from 1.1502-15(b); new (c) heading revised....33326
1.1502-12  (b) amended.............................................33323
1.1502-13  (f)(6) added............................................10449
    (g)(2)(i)(B) amended...........................................10450

[[Page 998]]

    (c)(7)(ii) Example 10, (g)(5) Example 4 and (h)(2) Examples 1 
and 2 amended......................................................33323
1.1502-15  (a)(1) and (3) amended..................................33323
    (b) redesignated as 1.1502-11(c); section redesignated as 
1.1502-15A.........................................................33326
1.1502-15T  Added..................................................33326
1.1502-18  (f)(1)(ii), (iii), (2)(i), (ii), (4) Example and (5) 
        amended....................................................33323
1.1502-20  (a)(1), (c)(4) Example 7 and (g)(3) Examples 1 and 2 
        amended....................................................33323
1.1502-21  (b)(1), (2)(i) and (e)(1)(i) amended....................33323
    Redesignated as 1.1502-21A and amended.........................33328
1.1502-21T  Added..................................................33328
1.1502-22  (a)(1)(ii), (3) and (b)(1) amended......................33323
    Redesignated as 1.1502-22A and amended.........................33333
1.1502-22T  Added..................................................33333
1.1502-23  Amended.................................................33323
    Redesignated as 1.1502-23A and amended.........................33334
1.1502-23T  Added..................................................33334
1.1502-26  (a)(1)(ii) amended......................................33323
1.1502-32  (b)(5) Example 2 amended................................33323
1.1502-41  (a) and (b) amended.....................................33323
    Redesignated as 1.1502-41A and amended.........................33334
1.1502-42  (f)(4)(i)(A) and (j) Example 4..........................33324
1.1502-43  (b)(2)(iv) through (viii) amended.......................33324
1.1502-44  (b)(2) and (3) amended..................................33324
1.1502-47  (h)(2)(i) through (iv), (vii) Example, (3)(iii), (iv), 
        (v), (4)(i), (ii), (iii), (k)(5), (l)(3)(i), (m)(2)(ii), 
        (3)(i), (vi)(A), (vii), (ix), (5) Example 4, (o)(2)(i), 
        (ii) and (q) amended.......................................33324
1.1502-78  (a) amended.............................................33324
1.1502-79  (a)(1)(i) and (b)(1) amended............................33324
    (c)(1), (d)(1) and (e)(1) amended..............................33325
    (a) and (b) redesignated as 1.1502-79A(a) and (b); new (a) and 
new (b) added......................................................33334
1.1502-80  (c) amended.............................................33325
1.1502-90T  Added..................................................33336
1.1502-91T  Added..................................................33337
1.1502-92T  Added..................................................33341
1.1502-93T  Added..................................................33351
1.1502-94T  Added..................................................33352
1.1502-95T  Added..................................................33355
1.1502-96T  Added..................................................33362
1.1502-98T  Added..................................................33364
1.1502-99T  Added..................................................33364
1.1502-100  (c)(2) amended.........................................33325
1.1503-2  (d)(2)(i), (ii), (4) Examples 1 and 2, 
        (g)(2)(vii)(B)(1), (2), (E), (G) Examples 1 and 2 and 
        (h)(3) amended.............................................33325
1.1502-0A--1.1502-51A  Undesignated center heading revised.........33325
1.1502-0A  Removed.................................................33325
1.1502-1A  Removed.................................................33325
1.1502-2A  Removed.................................................33325
1.1502-3A  Removed.................................................33325
1.1502-10A  Removed................................................33325
1.1502-11A  Removed................................................33325
1.1502-12A  Removed................................................33325
1.1502-13A  Removed................................................33325
1.1502-14A  Removed................................................33325
1.1502-15A  Removed................................................33325
    Redesignated from 1.1502-15; heading revised; (