[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2004 Edition]
[From the U.S. Government Printing Office]



[[Page i]]



                    26


          Part 1 (Sec.  1.1551-1 to End)

                         Revised as of April 1, 2004

Internal Revenue





          Containing a codification of documents of general 
          applicability and future effect
          As of April 1, 2004
          With Ancillaries
          Published by
          Office of the Federal Register
          National Archives and Records
          Administration

A Special Edition of the Federal Register

[[Page ii]]






                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2004



  For sale by the Superintendent of Documents, U.S. Government Printing 
                                  Office
  Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area 
                              (202) 512-1800
      Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

[[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........................     647
      Alphabetical List of Agencies Appearing in the CFR......     665
      Table of OMB Control Numbers............................     675
      List of CFR Sections Affected...........................     693

[[Page iv]]





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

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus,  26 CFR 1.1551-1 
                       refers to title 26, part 
                       1, section 1551-1.

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

[[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, 2004), 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, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in 11 separate 
volumes. For the period beginning January 1, 2001, 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). 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 202-741-6000 
or write to the Director, Office of the Federal Register, National 
Archives and Records Administration, Washington, DC 20408 or e-mail 
[email protected].

SALES

    The Government Printing Office (GPO) processes all sales and 
distribution of the CFR. For payment by credit card, call toll free, 
866-512-1800, or DC area, 202-512-1800, M-F 8 a.m. to 4 p.m. e.s.t. or 
fax your order to 202-512-2250, 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.

ELECTRONIC SERVICES

    The full text of the Code of Federal Regulations, the LSA (List of 
CFR Sections Affected), The United States Government Manual, the Federal 
Register, Public Laws, Public Papers, Weekly Compilation of Presidential 
Documents and the Privacy Act Compilation are available in electronic 
format at www.gpoaccess.gov/nara. For more information, contact 
Electronic Information Dissemination Services, U.S. Government Printing 
Office. Phone 202-512-1530, or 888-293-6498 (toll-free). E-mail, 
[email protected].

[[Page vii]]

    The Office of the Federal Register also offers a free service on the 
National Archives and Records Administration's (NARA) World Wide Web 
site for public law numbers, Federal Register finding aids, and related 
information. Connect to NARA's web site at www.archives.gov/federal--
register. The NARA site also contains links to GPO Access.

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

April 1, 2004.

[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
2004. The first thirteen volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Sec. Sec.  1.0-1-1.60; 
Sec. Sec.  1.61-1.169; Sec. Sec.  1.170-1.300; Sec. Sec.  1.301-1.400; 
Sec. Sec.  1.401-1.440; Sec. Sec.  1.441-1.500; Sec. Sec.  1.501-1.640; 
Sec. Sec.  1.641-1.850; Sec. Sec.  1.851-1.907; Sec. Sec.  1.908-1.1000; 
Sec. Sec.  1.1001-1.1400; Sec. Sec.  1.1401-1--1.1503-2A; and Sec.  
1.1551-1 to end. The fourteenth 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, Carol A. Conroy was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of 
Frances D. McDonald, assisted by Alomha S. Morris.

[[Page x]]




[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




           (This book contains part 1, Sec.  1.1551-1 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)




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


  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................................           5

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 5]]



                   SUBCHAPTER A_INCOME TAX (CONTINUED)




PART 1_INCOME TAXES--Table of Contents




                              RELATED RULES

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

                     Certain Controlled Corporations

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.
1.6011-4 Requirement of statement disclosing participation in certain 
          transactions by taxpayers.
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.
1.6013-1 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.
1.6013-6 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.
1.6015-0 Table of contents.
1.6015-1 Relief from joint and several liability on a joint return.
1.6015-2 Relief from liability applicable to all qualifying joint 
          filers.
1.6015-3 Allocation of deficiency for individuals who are no longer 
          married, are legally separated, or are not members of the same 
          household.
1.6015-4 Equitable relief.
1.6015-5 Time and manner for requesting relief.
1.6015-6 Nonrequesting spouse's notice and opportunity to participate in 
          administrative proceedings.
1.6015-7 Tax Court review.
1.6015-8 Applicable liabilities.
1.6015-9 Effective date.
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.
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.

[[Page 6]]

1.6016-4 Short taxable year.
1.6017-1 Self-employment tax returns.

                           Information Returns

1.6031(a)-1 Return of partnership income.
1.6031(a)-1T Return of partnership income (temporary).
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.
1.6038-3 Information returns required of certain United States persons 
          with respect to controlled foreign partnerships (CFPs).
1.6038A-0 Table of contents.
1.6038A-1 General requirements and definitions.
1.6038A-2 Requirement of return.
1.6038A-2T Requirement of return (temporary).
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-1 Reporting of certain transfers to foreign corporations.
1.6038B-1T Reporting of certain transactions to foreign corporations 
          (temporary).
1.6038B-2 Reporting of certain transfers to foreign partnerships.
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 Foreign-related items and other exceptions.
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 Magnetic media requirement.
1.6041-8 Cross-reference to penalties.
1.6041A-1 Returns regarding payments of remuneration for services and 
          certain direct sales.
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.
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).
1.6043-4T Information returns relating to certain acquisitions of 
          control and changes in capital structure (temporary).
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.
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.

[[Page 7]]

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).
1.6045-3T Information reporting for an acquisition of control or a 
          substantial change in capital structure (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.
1.6046A-1 Return requirement for United States persons who acquire or 
          dispose of an interest in a foreign partnership, or whose 
          proportional interest in a foreign partnership changes 
          substantially.
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.
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 paid after December 31, 
          1986.
1.6050P-0 Table of contents.
1.6050P-1 Information reporting for discharges of indebtedness by 
          certain financial entities.
1.6050S-0 Table of contents.
1.6050S-1 Information reporting for qualified tuition and related 
          expenses.
1.6050S-2 Information reporting for payments and reimbursements or 
          refunds of qualified tuition and related expenses.
1.6050S-3 Information reporting for payments of interest on qualified 
          education loans.
1.6050S-4 Information reporting for payments of interest on qualified 
          education loans.
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.

[[Page 8]]

          Signing and Verifying of Returns and Other Documents

1.6061-1 Signing of returns and other documents by individuals.
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.

               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.
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.
1.6081-2 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.
1.6081-8T Automatic extension of time to file certain information 
          returns (temporary).
1.6081-9T Automatic extension of time to file exempt organization 
          returns (temporary).

               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.
1.6107-2 Form and manner of furnishing copy of return and retaining copy 
          or record.
1.6109-1 Identifying numbers.
1.6109-2 Income tax return preparers furnishing identifying numbers for 
          returns or claims for refund filed after December 31, 1999.
1.6115-1 Disclosure requirements for quid pro quo contributions.

 Regulations Applicable to Returns or Claims for Refund Filed Prior to 
                             January 1, 2000

1.6109-2A Furnishing identifying number of income tax return preparer.

                      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.
1.6153-1 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.
1.6164-8 Payments on termination.

[[Page 9]]

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.
1.6302-2 Use of Government depositaries for payment of tax withheld on 
          nonresident aliens and foreign corporations.
1.6302-3 Use of Government depositaries in connection with estimated 
          taxes of certain trusts.
1.6302-4 Use of financial institutions in connection with income taxes; 
          voluntary payments by electronic funds transfer.
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.
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.
1.6695-2 Preparer due diligence requirements for determining earned 
          income credit eligibility.
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.

[[Page 10]]

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 entities 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.
1.7520-4 Transitional rules.
1.7701(l)-0 Table of contents.
1.7701(l)-1 Conduit financing arrangements.
1.7701(l)-3 Recharacterizing financing arrangements involving fast-pay 
          stock.
1.7702B-1 Consumer protection provisions.
1.7702B-2 Special rules for pre-1997 long-term care insurance contracts.
1.7703-1 Determination of marital status.
1.7704-1 Publicly traded partnerships.
1.7704-2 Transition provisions.
1.7704-3 Qualifying income.
1.7872-1--1.7872-4 [Reserved]
1.7872-5T Exempted loans (temporary).
1.7872-15 Split-dollar loans.

                      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).
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).

[[Page 11]]

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 1.6011-4T also issued under 26 U.S.C. 6001 and 6011(a).
    Section 1.6013-6 also issued under 26 U.S.C. 7701(b)(11).
    Section 1.6015-1 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-2 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-3 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-4 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-5 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-6 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-7 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-8 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-9 also issued under 26 U.S.C. 6015(h).
    Section 1.6031(a)-1 also issued under 26 U.S.C. 6031.
    Section 1.6031(a)-1T is also issued under section 404 of the Tax 
Equity and Fiscal Responsibility Act of 1982 (Public Law 97-248; 96 
Stat. 324, 669) (TEFRA).
    Sections 1.6035-1 through 1.6035-3 also issued under 26 U.S.C. 6035 
(a), (d), and (e).
    Section 1.6038-2 also issued under 26 U.S.C. 6038.
    Section 1.6038-3 also issued under 26 U.S.C. 6038.
    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-1 also issued under 26 U.S.C. 6038B.
    Section 1.6038B-1T also issued under 26 U.S.C 6038B.
    Section 1.6038B-2 also issued under 26 U.S.C. 6038B.
    Section 1.6041-1 also issued under 26 U.S.C. 6041(a).
    Section 1.6041-2 also issued under 26 U.S.C. 6041(d).
    Section 1.6041-3 also issued under 26 U.S.C. 62 and 6041(a).
    Section 1.6042-3 also issued under 26 U.S.C. 6045.
    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 1.6046A-1 also issued under 26 U.S.C. 6046A.
    Section 1.6049-4 also issued under 26 U.S.C. 6049 (a), (b), and (d).
    Section 1.6049-5 also issued under 26 U.S.C. 6049 (a), (b), 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 1.6050S-1 also issued under 26 U.S.C. 6050S(g).
    Section 1.6050S-2 also issued under 26 U.S.C. 6050S(g).
    Section 1.6050S-3 also issued under 26 U.S.C. 6050S(g).
    Section 1.6050S-4 also issued under 26 U.S.C. 6050S(g).

[[Page 12]]

    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 1.6081-8T also issued under 26 U.S.C. 6081.
    Section 1.6081-9T also issued under 26 U.S.C. 6081.
    Section 1.6302-1 also issued under 26 U.S.C. 6302(c) and (h).
    Section 1.6302-2 also issued under 26 U.S.C. 6302(h).
    Section 1.6302-3 also issued under 26 U.S.C. 6302(h).
    Section 1.6302-4 also issued under 26 U.S.C. 6302(a), (c), and (h).
    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. 6060(b) and 6695(b).
    Section 1.6695-2 also issued under 26 U.S.C. 6695(g).
    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 1.7701(l)-3 also issued under 26 U.S.C. 7701(l).
    Section 1.7872-5T also issued under 26 U.S.C. 7872.
    Section 1.7872-15 also issued under 26 U.S.C. 1275 and 7872.

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



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

[[Page 13]]

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 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

[[Page 14]]

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 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

[[Page 15]]

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 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

[[Page 16]]

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 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;

[[Page 17]]

    (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 Sec. Sec.  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 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 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

[[Page 18]]

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 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

[[Page 19]]

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 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:



P0......................................................................
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 effect 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 Sec. Sec.  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 Sec. Sec.  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 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).

[[Page 20]]


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 Sec.  1.441-2.

[T.D. 7528, 42 FR 64694, Dec. 28, 1977, as amended by T.D. 8996, 67 FR 
35012, May 17, 2002]



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 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

[[Page 21]]

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 ($50,000/4). 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 ($50,000/2). 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 ($50,000/3) 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 ($50,000/2). 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 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.


[[Page 22]]


    (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 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

[[Page 23]]

 
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             15,000          48,750          37,500          48,750
     535(c) (2) and (3).........................
----------------------------------------------------------------------------------------------------------------

    (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 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)

[[Page 24]]

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 ($50,000/3). 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 ($50,000/3), 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 ($50,000/4). 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 ($50,000/3). 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 ($50,000/2), 
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 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

[[Page 25]]

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 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

[[Page 26]]

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 
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

[[Page 27]]

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 Sec. Sec.  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).


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)

[[Page 28]]

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 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

[[Page 29]]

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 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

[[Page 30]]

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), 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

[[Page 31]]

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:

    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)

[[Page 32]]

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 claim for 
refund filed with the same district director for a taxable year which 
includes any such December 31.

[[Page 33]]

    (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 
Sec. Sec.  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 34]]

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 35]]

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;

[[Page 36]]

    (ii) A person or persons who owned more than 50 percent of the fair 
market 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

[[Page 37]]

went out of existence as a result of the transfer.
    (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.


[[Page 38]]


    (4) Election for certain short taxable years ending during 1964. If:
    (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

[[Page 39]]

considered to occur on the date the termination is made, and (ii) the 
termination of an election under section 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

[[Page 40]]

1561 through 1563 and the regulations thereunder, the term ``controlled 
group of corporations'' means any group of 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.

[[Page 41]]


The five or fewer persons whose stock ownership is considered for 
purposes of the 80 percent requirement must be the 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.

[[Page 42]]

    (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 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 Sec. Sec.  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:

[[Page 43]]

    (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 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.

[[Page 44]]

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 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

[[Page 45]]

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 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

[[Page 46]]

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 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

[[Page 47]]

    (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
    (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

[[Page 48]]

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 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

[[Page 49]]

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) 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 Sec. Sec.  
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

[[Page 50]]

(a)(2) of Sec.  1.1563-1. Thus, P is considered to own stock possessing 
100 percent (70/70) 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 percentx 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 (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 (75/85) 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 (50/70) 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 
Sec. Sec.  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

[[Page 51]]

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 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

[[Page 52]]

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 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\x50), and X is 
considered to own 18 shares of the S stock (\36/100\x50). 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\x50).

    (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,

[[Page 53]]

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 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 Sec. Sec.  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

[[Page 54]]

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 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

[[Page 55]]

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 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.

[[Page 56]]

    (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 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

[[Page 57]]

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 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]



Procedure and Administration--Table of Contents




                         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 Sec. Sec.  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

[[Page 58]]

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 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

[[Page 59]]

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.
    (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.  1.6011-4  Requirement of statement disclosing participation in 
certain transactions by taxpayers.

    (a) In general. Every taxpayer that has participated, as described 
in paragraph (c)(3) of this section, in a reportable transaction within 
the meaning of paragraph (b) of this section and who is required to file 
a tax return must attach to its return for the taxable year described in 
paragraph (e) of this section a disclosure statement in the form 
prescribed by paragraph (d) of this section. The fact that a transaction 
is a reportable transaction shall not affect the legal determination of 
whether the taxpayer's treatment of the transaction is proper.
    (b) Reportable transactions--(1) In general. A reportable 
transaction is a transaction described in any of the paragraphs (b)(2) 
through (7) of this section. The term transaction includes all of the 
factual elements relevant to the expected tax treatment of any 
investment, entity, plan, or arrangement, and includes any series of 
steps carried out as part of a plan. There are six categories of 
reportable transactions: listed transactions, confidential transactions, 
transactions with contractual protection, loss transactions, 
transactions with a significant book-tax difference, and transactions 
involving a brief asset holding period.
    (2) Listed transactions. A listed transaction is a transaction that 
is the same as or substantially similar to one of

[[Page 60]]

the types of transactions that the Internal Revenue Service (IRS) has 
determined to be a tax avoidance transaction and identified by notice, 
regulation, or other form of published guidance as a listed transaction.
    (3) Confidential transactions--(i) In general. A confidential 
transaction is a transaction that is offered to a taxpayer under 
conditions of confidentiality and for which the taxpayer has paid an 
advisor a minimum fee.
    (ii) Conditions of confidentiality. A transaction is considered to 
be offered to a taxpayer under conditions of confidentiality if the 
advisor who is paid the minimum fee places a limitation on disclosure by 
the taxpayer of the tax treatment or tax structure of the transaction 
and the limitation on disclosure protects the confidentiality of that 
advisor's tax strategies. A transaction is treated as confidential even 
if the conditions of confidentiality are not legally binding on the 
taxpayer. A claim that a transaction is proprietary or exclusive is not 
treated as a limitation on disclosure if the advisor confirms to the 
taxpayer that there is no limitation on disclosure of the tax treatment 
or tax structure of the transaction.
    (iii) Minimum fee. For purposes of this paragraph (b)(3), the 
minimum fee is:
    (A) $250,000 for a transaction if the taxpayer is a corporation.
    (B) $50,000 for all other transactions unless the taxpayer is a 
partnership or trust, all of the owners or beneficiaries of which are 
corporations (looking through any partners or beneficiaries that are 
themselves partnerships or trusts), in which case the minimum fee is 
$250,000.
    (iv) Determination of minimum fee. For purposes of this paragraph 
(b)(3), a minimum fee includes all fees for a tax strategy or for 
services for advice (whether or not tax advice) or for the 
implementation of a transaction. These fees include consideration in 
whatever form paid, whether in cash or in kind, for services to analyze 
the transaction (whether or not related to the tax consequences of the 
transaction), for services to implement the transaction, for services to 
document the transaction, and for services to prepare tax returns to the 
extent that the fees exceed the fees customary for return preparation. 
For purposes of this paragraph (b)(3), a taxpayer also is treated as 
paying fees to an advisor if the taxpayer knows or should know that the 
amount it pays will be paid indirectly to the advisor, such as through a 
referral fee or fee-sharing arrangement. A fee does not include amounts 
paid to a person, including an advisor, in that person's capacity as a 
party to the transaction. For example, a fee does not include reasonable 
charges for the use of capital or the sale or use of property.
    (v) Related parties. For purposes of this paragraph (b)(3), persons 
who bear a relationship to each other as described in section 267(b) or 
707(b) will be treated as the same person.
    (4) Transactions with contractual protection--(i) In general. A 
transaction with contractual protection is a transaction for which the 
taxpayer or a related party (as described in section 267(b) or 707(b)) 
has the right to a full or partial refund of fees (as described in 
paragraph (b)(4)(ii) of this section) if all or part of the intended tax 
consequences from the transaction are not sustained. A transaction with 
contractual protection also is a transaction for which fees (as 
described in paragraph (b)(4)(ii) of this section) are contingent on the 
taxpayer's realization of tax benefits from the transaction. All the 
facts and circumstances relating to the transaction will be considered 
when determining whether a fee is refundable or contingent, including 
the right to reimbursements of amounts that the parties to the 
transaction have not designated as fees or any agreement to provide 
services without reasonable compensation.
    (ii) Fees. Paragraph (b)(4)(i) of this section only applies with 
respect to fees paid by or on behalf of the taxpayer or a related party 
to any person who makes or provides a statement, oral or written, to the 
taxpayer or related party (or for whose benefit a statement is made or 
provided to the taxpayer or related party) as to the potential tax 
consequences that may result from the transaction.
    (iii) Exceptions--(A) Termination of transaction. A transaction is 
not considered to have contractual protection

[[Page 61]]

solely because a party to the transaction has the right to terminate the 
transaction upon the happening of an event affecting the taxation of one 
or more parties to the transaction.
    (B) Previously reported transaction. If a person makes or provides a 
statement to a taxpayer as to the potential tax consequences that may 
result from a transaction only after the taxpayer has entered into the 
transaction and reported the consequences of the transaction on a filed 
tax return, and the person has not previously received fees from the 
taxpayer relating to the transaction, then any refundable or contingent 
fees are not taken into account in determining whether the transaction 
has contractual protection. This paragraph (b)(4)(iii)(B) does not 
provide any substantive rules regarding when a person may charge 
refundable or contingent fees with respect to a transaction. See 
Circular 230, 31 CFR Part 10, for the regulations governing practice 
before the IRS.
    (5) Loss transactions--(i) In general. A loss transaction is any 
transaction resulting in the taxpayer claiming a loss under section 165 
of at least--
    (A) $10 million in any single taxable year or $20 million in any 
combination of taxable years for corporations;
    (B) $10 million in any single taxable year or $20 million in any 
combination of taxable years for partnerships that have only 
corporations as partners (looking through any partners that are 
themselves partnerships), whether or not any losses flow through to one 
or more partners; or $2 million in any single taxable year or $4 million 
in any combination of taxable years for all other partnerships, whether 
or not any losses flow through to one or more partners;
    (C) $2 million in any single taxable year or $4 million in any 
combination of taxable years for individuals, S corporations, or trusts, 
whether or not any losses flow through to one or more shareholders or 
beneficiaries; or
    (D) $50,000 in any single taxable year for individuals or trusts, 
whether or not the loss flows through from an S corporation or 
partnership, if the loss arises with respect to a section 988 
transaction (as defined in section 988(c)(1) relating to foreign 
currency transactions).
    (ii) Cumulative losses. In determining whether a transaction results 
in a taxpayer claiming a loss that meets the threshold amounts over a 
combination of taxable years as described in paragraph (b)(5)(i) of this 
section, only losses claimed in the taxable year that the transaction is 
entered into and the five succeeding taxable years are combined.
    (iii) Section 165 loss. (A) For purposes of this section, in 
determining the thresholds in paragraph (b)(5)(i) of this section, the 
amount of a section 165 loss is adjusted for any salvage value and for 
any insurance or other compensation received. See Sec.  1.165-1(c)(4). 
However, a section 165 loss does not take into account offsetting gains, 
or other income or limitations. For example, a section 165 loss does not 
take into account the limitation in section 165(d) (relating to wagering 
losses) or the limitations in sections 165(f), 1211, and 1212 (relating 
to capital losses). The full amount of a section 165 loss is taken into 
account for the year in which the loss is sustained, regardless of 
whether all or part of the loss enters into the computation of a net 
operating loss under section 172 or a net capital loss under section 
1212 that is a carryback or carryover to another year. A section 165 
loss does not include any portion of a loss, attributable to a capital 
loss carryback or carryover from another year, that is treated as a 
deemed capital loss under section 1212.
    (B) For purposes of this section, a section 165 loss includes an 
amount deductible pursuant to a provision that treats a transaction as a 
sale or other disposition, or otherwise results in a deduction under 
section 165. A section 165 loss includes, for example, a loss resulting 
from a sale or exchange of a partnership interest under section 741 and 
a loss resulting from a section 988 transaction.
    (6) Transactions with a significant book-tax difference--(i) In 
general. A transaction with a significant book-tax difference is a 
transaction where the amount for tax purposes of any item or items of 
income, gain, expense, or loss from the transaction differs by more

[[Page 62]]

than $10 million on a gross basis from the amount of the item or items 
for book purposes in any taxable year. For purposes of this 
determination, offsetting items shall not be netted for either tax or 
book purposes. For purposes of this paragraph (b)(6), the amount of an 
item for book purposes is determined by applying U.S. generally accepted 
accounting principles (U.S. GAAP) for worldwide income. However, if a 
taxpayer, in the ordinary course of its business, keeps books for 
reporting financial results to shareholders, creditors, or regulators on 
a basis other than U.S. GAAP, and does not maintain U.S. GAAP books for 
any purpose, then the taxpayer may determine the amount of a book item 
for purposes of this paragraph (b)(6) by using the books maintained by 
the taxpayer, provided the books are kept on the same basis consistently 
from year to year. Adjustments to any reserve for taxes are disregarded 
for purposes of determining the book-tax difference.
    (ii) Applicability--(A) In general. This paragraph (b)(6) applies 
only to--
    (1) Taxpayers that are reporting companies under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a) and related business entities (as 
described in section 267(b) or 707(b)); or
    (2) Business entities that have $250 million or more in gross assets 
for book purposes at the end of any financial accounting period that 
ends with or within the entity's taxable year in which the transaction 
occurs (for purposes of this determination, the assets of all related 
business entities (as defined in section 267(b) or 707(b)) must be 
aggregated).
    (B) Consolidated returns. For purposes of this paragraph (b)(6), in 
the case of taxpayers that are members of a group of affiliated 
corporations filing a consolidated return, transactions solely between 
or among members of the group will be disregarded. Moreover, where two 
or more members of the group participate in a transaction that is not 
solely between or among members of the group, items shall be aggregated 
(as if such members were a single taxpayer), but any offsetting items 
shall not be netted.
    (C) Foreign persons. In the case of a taxpayer that is a foreign 
person (other than a foreign corporation that is treated as a domestic 
corporation for Federal tax purposes under section 269B, 953(d), 1504(d) 
or any other provision of the Internal Revenue Code), only assets that 
are U.S. assets under Sec.  1.884-1(d) shall be taken into account for 
purposes of paragraph (b)(6)(ii)(A)(2) of this section, and only 
transactions that give rise to income that is effectively connected with 
the conduct of a trade or business within the United States (or to 
losses, expenses, or deductions allocated or apportioned to such income) 
shall be taken into account for purposes of this paragraph (b)(6).
    (D) Owners of disregarded entities. In the case of an eligible 
entity that is disregarded as an entity separate from its owner for 
Federal tax purposes, items of income, gain, loss, or expense that 
otherwise are considered items of the entity for book purposes shall be 
treated as items of its owner, and items arising from transactions 
between the entity and its owner shall be disregarded, for purposes of 
this paragraph (b)(6).
    (E) Partners of partnerships. In the case of a taxpayer that is a 
member or a partner of an entity that is treated as a partnership for 
Federal tax purposes, items of income, gain, loss, or expense that are 
allocable to the taxpayer for Federal tax purposes, but otherwise are 
considered items of the entity for book purposes, shall be treated as 
items of the taxpayer for purposes of this paragraph (b)(6).
    (7) Transactions involving a brief asset holding period. A 
transaction involving a brief asset holding period is any transaction 
resulting in the taxpayer claiming a tax credit exceeding $250,000 
(including a foreign tax credit) if the underlying asset giving rise to 
the credit is held by the taxpayer for 45 days or less. For purposes of 
determining the holding period, the principles of section 246(c)(3) and 
(c)(4) apply. Transactions resulting in a foreign tax credit for 
withholding taxes or other taxes imposed in respect of a dividend that 
are not disallowed under section 901(k) (including transactions eligible 
for the exception for securities dealers under section 901(k)(4)) are 
excluded from this paragraph (b)(7).

[[Page 63]]

    (8) Exceptions--(i) In general. A transaction will not be considered 
a reportable transaction, or will be excluded from any individual 
category of reportable transaction under paragraphs (b)(3) through (7) 
of this section, if the Commissioner makes a determination by published 
guidance that the transaction is not subject to the reporting 
requirements of this section. The Commissioner may make a determination 
by individual letter ruling under paragraph (f) of this section that an 
individual letter ruling request on a specific transaction or type of 
transaction satisfies the reporting requirements of this section with 
regard to that transaction or type of transaction for the taxpayer who 
requests the individual letter ruling.
    (ii) Special rule for RICs. For purposes of this section, a 
regulated investment company (RIC) as defined in section 851 or an 
investment vehicle that is owned 95 percent or more by one or more RICs 
at all times during the course of the transaction are not required to 
disclose a transaction that is described in any of paragraphs (b)(3) 
through (7) of this section unless the transaction is also a listed 
transaction.
    (iii) Special rule for lease transactions. For purposes of this 
section, leasing transactions of the type excepted from the registration 
requirements under section 6111(d) of the Code and the list maintenance 
requirements under section 6112 as described in Notice 2001-18 (2001-1 
C.B. 731) (see Sec.  601.601(d)(2) of this chapter) are excluded from 
paragraphs (b)(3) through (7) of this section.
    (c) Definitions. For purposes of this section, the following terms 
are defined as follows:
    (1) Taxpayer. The term taxpayer means any person described in 
section 7701(a)(1), including S corporations. Except as otherwise 
specifically provided in this section, the term taxpayer also includes 
an affiliated group of corporations that joins in the filing of a 
consolidated return under section 1501.
    (2) Corporation. When used specifically in this section, the term 
corporation means an entity that is required to file a return for a 
taxable year on any 1120 series form, or successor form, excluding S 
corporations.
    (3) Participation--(i) In general--(A) Listed transactions. A 
taxpayer has participated in a listed transaction if the taxpayer's tax 
return reflects tax consequences or a tax strategy described in the 
published guidance that lists the transaction under paragraph (b)(2) of 
this section. A taxpayer also has participated in a listed transaction 
if the taxpayer knows or has reason to know that the taxpayer's tax 
benefits are derived directly or indirectly from tax consequences or a 
tax strategy described in published guidance that lists a transaction 
under paragraph (b)(2) of this section. Published guidance may identify 
other types or classes of persons that will be treated as participants 
in a listed transaction.
    (B) Confidential transactions. A taxpayer has participated in a 
confidential transaction if the taxpayer's tax return reflects a tax 
benefit from the transaction and the taxpayer's disclosure of the tax 
treatment or tax structure of the transaction is limited in the manner 
described in paragraph (b)(3) of this section. If a partnership's, S 
corporation's or trust's disclosure is limited, and the partner's, 
shareholder's, or beneficiary's disclosure is not limited, then the 
partnership, S corporation, or trust, and not the partner, shareholder, 
or beneficiary, has participated in the confidential transaction.
    (C) Transactions with contractual protection. A taxpayer has 
participated in a transaction with contractual protection if the 
taxpayer's tax return reflects a tax benefit from the transaction and, 
as described in paragraph (b)(4) of this section, the taxpayer has the 
right to the full or partial refund of fees or the fees are contingent. 
If a partnership, S corporation, or trust has the right to a full or 
partial refund of fees or has a contingent fee arrangement, and the 
partner, shareholder, or beneficiary does not individually have the 
right to the refund of fees or a contingent fee arrangement, then the 
partnership, S corporation, or trust, and not the partner, shareholder, 
or beneficiary, has participated in the transaction with contractual 
protection.
    (D) Loss transactions. A taxpayer has participated in a loss 
transaction if the taxpayer's tax return reflects a section 165 loss and 
the amount of the section

[[Page 64]]

165 loss equals or exceeds the threshold amount applicable to the 
taxpayer as described in paragraph (b)(5)(i) of this section. If a 
taxpayer is a partner in a partnership, shareholder in an S corporation, 
or beneficiary of a trust and a section 165 loss as described in 
paragraph (b)(5) of this section flows through the entity to the 
taxpayer (disregarding netting at the entity level), the taxpayer has 
participated in a loss transaction if the taxpayer's tax return reflects 
a section 165 loss and the amount of the section 165 loss that flows 
through to the taxpayer equals or exceeds the threshold amounts 
applicable to the taxpayer as described in paragraph (b)(5)(i) of this 
section. For this purpose, a tax return is deemed to reflect the full 
amount of a section 165 loss described in paragraph (b)(5) of this 
section allocable to the taxpayer under this paragraph (c)(3)(i)(D), 
regardless of whether all or part of the loss enters into the 
computation of a net operating loss under section 172 or net capital 
loss under section 1212 that the taxpayer may carry back or carry over 
to another year.
    (E) Transactions with a significant book-tax difference. A taxpayer 
has participated in a transaction with a significant book-tax difference 
if the taxpayer's tax treatment of an item from the transaction differs 
from the book treatment of that item as described in paragraph (b)(6) of 
this section. In determining whether a transaction results in a 
significant book-tax difference for a taxpayer, differences that arise 
solely because a subsidiary of the taxpayer is consolidated with the 
taxpayer, in whole or in part, for book purposes, but not for tax 
purposes, are not taken into account.
    (F) Transactions involving a brief asset holding period. A taxpayer 
has participated in a transaction involving a brief asset holding period 
if the taxpayer's tax return reflects items giving rise to a tax credit 
described in paragraph (b)(7) of this section. If a taxpayer is a 
partner in a partnership, shareholder in an S corporation, or 
beneficiary of a trust and the items giving rise to a tax credit 
described in paragraph (b)(7) of this section flow through the entity to 
the taxpayer (disregarding netting at the entity level), the taxpayer 
has participated in a transaction involving a brief asset holding period 
if the taxpayer's tax return reflects the tax credit and the amount of 
the tax credit claimed by the taxpayer exceeds $250,000.
    (G) Shareholders of foreign corporations--(1) In general. A 
reporting shareholder of a foreign corporation participates in a 
transaction described in paragraphs (b)(2) through (5) and (b)(7) of 
this section if the foreign corporation would be considered to 
participate in the transaction under the rules of this paragraph (c)(3) 
if it were a domestic corporation filing a tax return that reflects the 
items from the transaction. A reporting shareholder participates in a 
transaction described in paragraph (b)(6) of this section only if the 
foreign corporation would be considered to participate in the 
transaction under the rules of this paragraph (c)(3) if it were a 
domestic corporation and the transaction reduces or eliminates an income 
inclusion that otherwise would be required under section 551, 951, or 
1293. A reporting shareholder (and any successor in interest) is 
considered to participate in a transaction under this paragraph 
(c)(3)(i)(G) only for its first taxable year with or within which ends 
the first taxable year of the foreign corporation in which the foreign 
corporation participates in the transaction, and for the reporting 
shareholder's five succeeding taxable years.
    (2) Reporting shareholder. The term reporting shareholder means a 
United States shareholder (as defined in section 551(a)) in a foreign 
personal holding company (as defined in section 552), a United States 
shareholder (as defined in section 951(b)) in a controlled foreign 
corporation (as defined in section 957), or a 10 percent shareholder (by 
vote or value) of a qualified electing fund (as defined in section 
1295).
    (ii) Examples. The following examples illustrate the provisions of 
paragraph (c)(3)(i) of this section:

    Example 1. Notice 95-53 (1995-2 C.B. 334) (see Sec.  601.601(d)(2) 
of this chapter), describes a lease stripping transaction in which one 
party (the transferor) assigns the right to receive future payments 
under a lease of tangible property and receives consideration which the 
transferor treats as current income. The transferor later transfers the

[[Page 65]]

property subject to the lease in a transaction intended to qualify as a 
transferred basis transaction, for example, a transaction described in 
section 351. The transferee corporation claims the deductions associated 
with the high basis property subject to the lease. The transferor's and 
transferee corporation's tax returns reflect tax positions described in 
Notice 95-53. Therefore, the transferor and transferee corporation have 
participated in the listed transaction. In the section 351 transaction, 
the transferor will have received stock with low value and high basis 
from the transferee corporation. If the transferor subsequently 
transfers the high basis/low value stock to a taxpayer in another 
transaction intended to qualify as a transferred basis transaction and 
the taxpayer uses the stock to generate a loss, and if the taxpayer 
knows or has reason to know that the tax loss claimed was derived 
indirectly from the lease stripping transaction, then the taxpayer has 
participated in the listed transaction. Accordingly, the taxpayer must 
disclose the transaction and the manner of the taxpayer's participation 
in the transaction under the rules of this section. If a bank lends 
money to the transferor, transferee corporation, or taxpayer for use in 
their transactions, the bank has not participated in the listed 
transaction because the bank's tax return does not reflect tax 
consequences or a tax strategy described in the listing notice (nor does 
the bank's tax return reflect a tax benefit derived from tax 
consequences or a tax strategy described in the listing notice), nor is 
the bank described as a participant in Notice 95-53.
    Example 2. XYZ is a limited liability company treated as a 
partnership for tax purposes. X, Y, and Z are members of XYZ. X is an 
individual, Y is an S corporation, and Z is a partnership. XYZ enters 
into a confidential transaction under paragraph (b)(3) of this section. 
X is bound by the confidentiality agreement, but Y and Z are not bound 
by the agreement. As a result of the transaction, XYZ, X, Y, and Z all 
reflect a tax benefit on their tax returns. Because XYZ's and X's 
disclosure of the tax treatment and tax structure are limited in the 
manner described in paragraph (b)(3) of this section and their tax 
returns reflect a tax benefit from the transaction, both XYZ and X have 
participated in the confidential transaction. Neither Y nor Z has 
participated in the confidential transaction because they are not 
subject to the confidentiality agreement.
    Example 3. Partnership AB has gross assets with a book value of over 
$250 million. Partner A is an SEC reporting company and partner B is an 
individual. AB enters into a transaction that results in a book-tax 
difference for AB of $25 million. The transaction is a reportable 
transaction for AB under paragraph (b)(6) of this section because the 
book-tax difference exceeds $10 million. As a result of A's partnership 
interest in AB and the allocation of items relating to the transaction 
to A, A has a book-tax difference of $11 million. The transaction is a 
reportable transaction for A under paragraph (b)(6) of this section 
because the $11 million book-tax difference exceeds $10 million. 
However, even though $14 million of the book-tax difference would be 
allocated to B, the transaction is not a reportable transaction for B 
under paragraph (b)(6) of this section because B, an individual, is not 
subject to paragraph (b)(6) of this section.
    Example 4. (i) P corporation, the parent corporation of a group of 
corporations that file a consolidated tax return, owns 60% of the stock 
of T corporation. T files its own tax return and is not included as a 
member of the P group on the P group consolidated tax return. For book 
purposes, some or all of T's income is included by the group of 
corporations that includes P. T engages in a transaction that results in 
items of book income but does not result in items of income for tax 
purposes. P and T are SEC reporting companies.
    (ii) T participated in the transaction. T has no items of taxable 
income but has items of book income. If items from the transaction 
result in a book-tax difference determined in accordance with paragraph 
(b)(6) of this section of $10 million in any single year, T will be 
required to file Form 8886. The P group did not participate in the 
transaction, and does not have a book-tax difference for purposes of 
paragraph (b)(6) of this section because, even if the P group included 
$10 million in book income, the book tax difference arises solely 
because T is not part of P's consolidated group for tax purposes.
    (iii) If the facts were changed so that P corporation owned 80% of 
the stock of T and T was a member of the P consolidated group for tax 
purposes, the P group would be the taxpayer that participated in the 
transaction. If, in any single year, the transaction produced items of 
income for book purposes of $10 million but no items of taxable income, 
P would be required to file Form 8886. This result would not change if T 
separately reported its items for book purposes, if P reported none of 
T's items on its consolidated financial statements, or if the P 
consolidated financial statements included only part of a $10 million 
book-tax difference relating to items from T's transaction.

    Example 5. Domestic corporations X and Y each own 50 percent of the 
voting stock of CFC, a controlled foreign corporation. X, Y, and CFC 
each use the calendar year as their taxable year. CFC is not engaged in 
the conduct of a trade or business within the United States and has no 
U.S. source income. Accordingly, CFC is not required to file a U.S. 
Federal income tax return. See Sec.  1.6012-2(g). Under paragraph 
(c)(3)(i)(G)(2) of this section, X and Y are reporting shareholders

[[Page 66]]

with respect to CFC. CFC purchases a Euro-denominated bond on June 1, 
2003, for 104,400,000 Euros. The bond matures on June 7, 2003, and CFC 
collects 104,500,000 Euros, equal to the bond's 100,000,000 Euro face 
amount plus 5,000,000 Euros of accrued but unpaid interest, less a 10% 
foreign withholding tax of 500,000 Euros. The average dollar-Euro 
exchange rate for the year is $.80 = 1 Euro, so CFC adds $400,000 to its 
post-1986 foreign income taxes pool as a result of the transaction. See 
sections 986(a)(1) and 902(c)(2). Under paragraph (c)(3)(i)(G)(1) of 
this section, X and Y have each participated in a transaction involving 
a brief asset holding period described in paragraph (b)(7) of this 
section for their taxable years 2003 through 2008 because both X and Y 
are reporting shareholders of CFC, and CFC would have been considered to 
have participated in a reportable transaction if it were a domestic 
corporation.

    (4) Substantially similar. The term substantially similar includes 
any transaction that is expected to obtain the same or similar types of 
tax consequences and that is either factually similar or based on the 
same or similar tax strategy. Receipt of an opinion regarding the tax 
consequences of the transaction is not relevant to the determination of 
whether the transaction is the same as or substantially similar to 
another transaction. Further, the term substantially similar must be 
broadly construed in favor of disclosure. The following examples 
illustrate situations where a transaction is the same as or 
substantially similar to a listed transaction under paragraph (b)(2) of 
this section. (Such transactions may also be reportable transactions 
under paragraphs (b)(3) through (7) of this section.) The following 
examples illustrate the provisions of this paragraph (c)(4):

    Example 1. Notice 2000-44 (2000-2 C.B. 255) (see Sec.  601.601(d)(2) 
of this chapter), sets forth a listed transaction involving offsetting 
options transferred to a partnership where the taxpayer claims basis in 
the partnership for the cost of the purchased options but does not 
adjust basis under section 752 as a result of the partnership's 
assumption of the taxpayer's obligation with respect to the options. 
Transactions using short sales, futures, derivatives or any other type 
of offsetting obligations to inflate basis in a partnership interest 
would be the same as or substantially similar to the transaction 
described in Notice 2000-44. Moreover, use of the inflated basis in the 
partnership interest to diminish gain that would otherwise be recognized 
on the transfer of a partnership asset would also be the same as or 
substantially similar to the transaction described in Notice 2000-44.
    Example 2. Notice 2001-16 (2001-1 C.B. 730) (see Sec.  601.601(d)(2) 
of this chapter), sets forth a listed transaction involving a seller (X) 
who desires to sell stock of a corporation (T), an intermediary 
corporation (M), and a buyer (Y) who desires to purchase the assets (and 
not the stock) of T. M agrees to facilitate the sale to prevent the 
recognition of the gain that T would otherwise report. Notice 2001-16 
describes M as a member of a consolidated group that has a loss within 
the group or as a party not subject to tax. Transactions utilizing 
different intermediaries to prevent the recognition of gain would be the 
same as or substantially similar to the transaction described in Notice 
2001-16. An example is a transaction in which M is a corporation that 
does not file a consolidated return but which buys T stock, liquidates 
T, sells assets of T to Y, and offsets the gain recognized on the sale 
of those assets with currently generated losses.

    (5) Tax. For purposes of this section, the term tax means Federal 
income tax.
    (6) Tax benefit. A tax benefit includes deductions, exclusions from 
gross income, nonrecognition of gain, tax credits, adjustments (or the 
absence of adjustments) to the basis of property, status as an entity 
exempt from Federal income taxation, and any other tax consequences that 
may reduce a taxpayer's Federal income tax liability by affecting the 
amount, timing, character, or source of any item of income, gain, 
expense, loss, or credit.
    (7) Tax return. For purposes of this section, the term tax return 
means a Federal income tax return and a Federal information return.
    (8) Tax treatment. The tax treatment of a transaction is the 
purported or claimed Federal income tax treatment of the transaction.
    (9) Tax structure. The tax structure of a transaction is any fact 
that may be relevant to understanding the purported or claimed Federal 
income tax treatment of the transaction.
    (d) Form and content of disclosure statement. The IRS will release 
Form 8886, ``Reportable Transaction Disclosure Statement'' (or a 
successor form), for use by taxpayers in accordance with this paragraph 
(d). A taxpayer required to file a disclosure statement

[[Page 67]]

under this section must file a completed Form 8886 in accordance with 
the instructions to the form. The Form 8886 is the disclosure statement 
required under this section. The form must be attached to the 
appropriate tax returns as provided in paragraph (e) of this section. If 
a copy of a disclosure statement is required to be sent to the Office of 
Tax Shelter Analysis (OTSA) under paragraph (e) of this section, it must 
be sent to: Internal Revenue Service LM:PFTG:OTSA, Large & Mid-Size 
Business Division, 1111 Constitution Ave., NW., Washington, DC 20224, or 
to such other address as provided by the Commissioner.
    (e) Time of providing disclosure--(1) In general. The disclosure 
statement for a reportable transaction must be attached to the 
taxpayer's tax return for each taxable year for which a taxpayer 
participates in a reportable transaction. In addition, the disclosure 
statement for a reportable transaction must be attached to each amended 
return that reflects a taxpayer's participation in a reportable 
transaction. A copy of the disclosure statement must be sent to OTSA at 
the same time that any disclosure statement is first filed by the 
taxpayer. If a reportable transaction results in a loss which is carried 
back to a prior year, the disclosure statement for the reportable 
transaction must be attached to the taxpayer's application for tentative 
refund or amended tax return for that prior year. In the case of a 
taxpayer that is a partnership or S corporation, the disclosure 
statement for a reportable transaction must be attached to the 
partnership's or S corporation's tax return for each taxable year in 
which the partnership or S corporation participates in the transaction 
under the rules of paragraph (c)(3)(i) of this section.
    (2) Special rules--(i) Listed transactions. If a transaction becomes 
a listed transaction after the filing of a taxpayer's tax return 
(including an amended return) reflecting either tax consequences or a 
tax strategy described in the published guidance listing the transaction 
(or a tax benefit derived from tax consequences or a tax strategy 
described in the published guidance listing the transaction) and before 
the end of the period of limitations for the final return (whether or 
not already filed) reflecting the tax consequences, tax strategy, or tax 
benefit, then a disclosure statement must be filed as an attachment to 
the taxpayer's tax return next filed after the date the transaction is 
listed regardless of whether the taxpayer participated in the 
transaction in that year.
    (ii) Loss transactions. If a transaction becomes a loss transaction 
because the losses equal or exceed the threshold amounts as described in 
paragraph (b)(5)(i) of this section, a disclosure statement must be 
filed as an attachment to the taxpayer's tax return for the first 
taxable year in which the threshold amount is reached and to any 
subsequent tax return that reflects any amount of section 165 loss from 
the transaction.
    (3) Multiple disclosures. The taxpayer must disclose the transaction 
in the time and manner provided for under the provisions of this section 
regardless of whether the taxpayer also plans to disclose the 
transaction under other published guidance, for example, Rev. Proc. 94-
69 (1994-2 C.B. 804) (see Sec.  601.601(d)(2) of this chapter).
    (4) Example. The following example illustrates the application of 
this paragraph (e):

    Example. In January of 2004, F, a domestic calendar year 
corporation, enters into a transaction that is not a listed transaction 
when entered into and is not a transaction described in any of the 
paragraphs (b)(3) through (7) of this section. All the tax benefits from 
the transaction are reported on F's 2004 tax return. On March 1, 2008, 
the IRS publishes a notice identifying the transaction as a listed 
transaction described in paragraph (b)(2) of this section. Thus, upon 
issuance of the notice, the transaction becomes a reportable transaction 
described in paragraph (b) of this section. The statute of limitations 
for F's 2004 taxable year is still open. F is required to file Form 8886 
for the transaction as an attachment to F's next filed Federal income 
tax return and must send a copy of Form 8886 to OTSA. If F's 2007 
Federal income tax return has not been filed on or before the date the 
Service identifies the transaction as a listed transaction, Form 8886 
must be attached to F's 2007 return and at that time a copy of Form 8886 
must be sent to OTSA.
    (f) Rulings and protective disclosures--(1) Requests for ruling. A 
taxpayer may,

[[Page 68]]

on or before the date that disclosure would otherwise be required under 
this section, submit a request to the IRS for a ruling as to whether a 
transaction is subject to the disclosure requirements of this section. 
If the request fully discloses all relevant facts relating to the 
transaction, the potential obligation of that taxpayer to disclose the 
transaction will be suspended during the period that the ruling request 
is pending and, if the IRS subsequently concludes that the transaction 
is a reportable transaction subject to disclosure under this section, 
until the 60th day after the issuance of the ruling (or, if the request 
is withdrawn, 60 days after the date that the request is withdrawn). 
Furthermore, in that taxpayer's individual ruling, the Commissioner in 
his discretion may determine that the submission satisfies the 
disclosure rules under this section for that particular transaction or 
type of transaction.
    (2) Protective disclosures. If a taxpayer is uncertain whether a 
transaction must be disclosed under this section, the taxpayer may 
disclose the transaction in accordance with the requirements of this 
section, and indicate on the disclosure statement that the taxpayer is 
uncertain whether the transaction is required to be disclosed under this 
section and that the disclosure statement is being filed on a protective 
basis.
    (3) Rulings on the merits of a transaction. If a taxpayer requests a 
ruling on the merits of a specific transaction on or before the date 
that disclosure would otherwise be required under this section, and 
receives a favorable ruling as to the transaction, the disclosure rules 
under this section will be deemed to have been satisfied by that 
taxpayer with regard to that transaction, so long as the request fully 
discloses all relevant facts relating to the transaction which would 
otherwise be required to be disclosed under this section.
    (g) Retention of documents. In accordance with the instructions to 
Form 8886, the taxpayer must retain a copy of all documents and other 
records related to a transaction subject to disclosure under this 
section that are material to an understanding of the tax treatment or 
tax structure of the transaction. The documents must be retained until 
the expiration of the statute of limitations applicable to the final 
taxable year for which disclosure of the transaction was required under 
this section. (This document retention requirement is in addition to any 
document retention requirements that section 6001 generally imposes on 
the taxpayer.) The documents may include the following: marketing 
materials related to the transaction; written analyses used in decision-
making related to the transaction; correspondence and agreements between 
the taxpayer and any advisor, lender, or other party to the reportable 
transaction that relate to the transaction; documents discussing, 
referring to, or demonstrating the purported or claimed tax benefits 
arising from the reportable transaction; and documents, if any, 
referring to the business purposes for the reportable transaction. A 
taxpayer is not required to retain earlier drafts of a document if the 
taxpayer retains a copy of the final document (or, if there is no final 
document, the most recent draft of the document) and the final document 
(or most recent draft) contains all the information in the earlier 
drafts of the document that is material to an understanding of the 
purported tax treatment or tax structure of the transaction.
    (h) Effective dates. This section applies to Federal income tax 
returns filed after February 28, 2000. However, paragraphs (b)(3), 
(e)(1), and (e)(2)(i) of this section apply to transactions entered into 
on or after December 29, 2003. All the rules in this section may be 
relied upon for transactions entered into on or after January 1, 2003, 
and before December 29, 2003. Otherwise, the rules that apply with 
respect to transactions entered into before December 29, 2003, are 
contained in Sec.  1.6011-4 in effect prior to December 29, 2003, (see 
26 CFR part 1 revised as of April 1, 2003).

[T.D. 9046, 68 FR 10163, Mar. 4, 2003, as amended by T.D. 9108, 68 FR 
75130, Dec. 30, 2003]



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

[[Page 69]]

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 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

[[Page 70]]

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 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

[[Page 71]]

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 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.

[[Page 72]]

    (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 Sec. Sec.  
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 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 
Sec. Sec.  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.

[[Page 73]]

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 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

[[Page 74]]

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 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).

[[Page 75]]

    (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 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

[[Page 76]]

(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 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

[[Page 77]]

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.
    (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

[[Page 78]]

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 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 Sec. Sec.  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 Sec. Sec.  1.6044-1 to 1.6044-4, 
inclusive; and regarding certain payments of interest, see Sec. Sec.  
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 Sec. Sec.  1.6035-1 and 1.6035-2. For returns as to 
formation or reorganization of foreign corporations, see Sec. Sec.  
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

[[Page 79]]

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.
    (iv) For each trust electing to be taxed as, or as part of, an 
estate under section 645 for which a trustee acts, and for each related 
estate joining in a section 645 election for which an executor acts, if 
the aggregate gross income of the electing trust(s) and related estate, 
if any, joining in the election for the taxable year is $600 or more. 
(For the respective filing requirements of the trustee of each electing 
trust and executor of any related estate, see Sec.  1.645-1).
    (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 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

[[Page 80]]

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,
    (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 Sec. Sec.  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

[[Page 81]]

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; Sec. Sec.  1.6042-1 to 1.6042-3, inclusive, 
relating to returns regarding payments of dividends; Sec. Sec.  1.6044-1 
to 1.6044-4, inclusive, relating to returns regarding payments of 
patronage dividends; and Sec. Sec.  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.



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 Sec. Sec.  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 Sec. Sec.  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

[[Page 82]]

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 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

[[Page 83]]

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.  1.6013-1  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 84]]

    (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 85]]

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) Beginning on or before July 30, 1996, 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 86]]

    (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; T.D. 8725, 62 FR 39117, July 22, 1997]



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 87]]

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.
    (d) Return signed under duress. If an individual asserts and 
establishes that he or she signed a return under duress, the return is 
not a joint return. The individual who signed such return under duress 
is not jointly and severally liable for the tax shown on the return or 
any deficiency in tax with respect to the return. The return is adjusted 
to reflect only the tax liability of the individual who voluntarily 
signed the return, and the liability is determined at the applicable 
rates in section 1(d) for married individuals filing separate returns. 
Section 6212 applies to the assessment of any deficiency in tax on such 
return.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7102, 36 FR 
5497, Mar. 24, 1971; T.D. 9003, 67 FR 47285, July 18, 2002]



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,

[[Page 88]]

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 Sec. Sec.  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. 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,

[[Page 89]]

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 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

[[Page 90]]

    (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.
    (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]

[[Page 91]]



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]



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

[[Page 92]]

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.
    (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]

[[Page 93]]



Sec.  1.6015-0  Table of contents.

    This section lists captions contained in Sec. Sec.  1.6015-1 through 
1.6015-9.

Sec.  1.6015-1 Relief from joint and several liability on a joint 
          return.
    (a) In general.
    (b) Duress.
    (c) Prior closing agreement or offer in compromise.
    (1) In general.
    (2) Exception for agreements relating to TEFRA partnership 
proceedings.
    (3) Examples.
    (d) Fraudulent scheme.
    (e) Res judicata and collateral estoppel.
    (f) Community property laws.
    (1) In general.
    (2) Example.
    (g) Scope of this section and Sec. Sec.  1.6015-2 through 1.6015-9.
    (h) Definitions.
    (1) Requesting spouse.
    (2) Nonrequesting spouse.
    (3) Item.
    (4) Erroneous item.
    (5) Election or request.
    (i) [Reserved]
    (j) Transferee liability.
    (1) In general.
    (2) Example.

Sec.  1.6015-2 Relief from liability applicable to all qualifying joint 
          filers.

    (a) In general.
    (b) Understatement.
    (c) Knowledge or reason to know.
    (d) Inequity.
    (e) Partial relief.
    (1) In general.
    (2) Example.

Sec.  1.6015-3 Allocation of liability for individuals who are no longer 
          married, are legally separated, or are not members of the same 
          household.

    (a) Election to allocate liability.
    (b) Definitions.
    (1) Divorced.
    (2) Legally separated.
    (3) Members of the same household.
    (i) Temporary absences.
    (ii) Separate dwellings.
    (c) Limitations.
    (1) No refunds.
    (2) Actual knowledge.
    (i) In general.
    (A) Omitted income.
    (B) Deduction or credit.
    (1) Erroneous deductions in general.
    (2) Fictitious or inflated deduction.
    (ii) Partial knowledge.
    (iii) Knowledge of the source not sufficient.
    (iv) Factors supporting actual knowledge.
    (v) Abuse exception.
    (3) Disqualified asset transfers.
    (i) In general.
    (ii) Disqualified asset defined.
    (iii) Presumption.
    (4) Examples.
    (d) Allocation.
    (1) In general.
    (2) Allocation of erroneous items.
    (i) Benefit on the return.
    (ii) Fraud.
    (iii) Erroneous items of income.
    (iv) Erroneous deduction items.
    (3) Burden of proof.
    (4) General allocation method.
    (i) Proportionate allocation.
    (ii) Separate treatment items.
    (iii) Child's liability.
    (iv) Allocation of certain items.
    (A) Alternative minimum tax.
    (B) Accuracy-related and fraud penalties.
    (5) Examples.
    (6) Alternative allocation methods.
    (i) Allocation based on applicable tax rates.
    (ii) Allocation methods provided in subsequent published guidance.
    (iii) Example.

Sec.  1.6015-4 Equitable relief.

Sec.  1.6015-5 Time and manner for requesting relief.

    (a) Requesting relief.
    (b) Time period for filing a request for relief.
    (1) In general.
    (2) Definitions.
    (i) Collection activity.
    (ii) Section 6330 notice.
    (3) Requests for relief made before commencement of collection 
activity.
    (4) Examples.
    (5) Premature requests for relief.
    (c) Effect of a final administrative determination.

Sec.  1.6015-6 Nonrequesting spouse's notice and opportunity to 
          participate in administrative proceedings.

    (a) In general.
    (b) Information submitted.
    (c) Effect of opportunity to participate.
    (2) Waiver of the restrictions on collection.

Sec.  1.6015-7 Tax Court review.

    (a) In general.
    (b) Time period for petitioning the Tax Court.
    (c) Restrictions on collection and suspension of the running of the 
period of limitations.
    (1) Restrictions on collection under Sec.  1.6015-2 or 1.6015-3.
    (2) Waiver of the restrictions on collection.
    (3) Suspension of the running of the period of limitations.
    (i) Relief under Sec.  1.6015-2 or 1.6015-3.
    (ii) Relief under Sec.  1.6015-4.

[[Page 94]]

    (4) Definitions.
    (i) Levy.
    (ii) Proceedings in court.
    (iii) Assessment to which the election relates.

Sec.  1.6015-8 Applicable liabilities.

    (a) In general.
    (b) Liabilities paid on or before July 22, 1998.
    (c) Examples.

Sec.  1.6015-9 Effective date.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec.  1.6015-1  Relief from joint and several liability on a joint return.

    (a) In general. (1) An individual who qualifies and elects under 
section 6013 to file a joint Federal income tax return with another 
individual is jointly and severally liable for the joint Federal income 
tax liabilities for that year. A spouse or former spouse may be relieved 
of joint and several liability for Federal income tax for that year 
under the following three relief provisions:
    (i) Innocent spouse relief under Sec.  1.6015-2.
    (ii) Allocation of deficiency under Sec.  1.6015-3.
    (iii) Equitable relief under Sec.  1.6015-4.
    (2) A requesting spouse may submit a single claim electing relief 
under both or either Sec. Sec.  1.6015-2 and 1.6015-3, and requesting 
relief under Sec.  1.6015-4. However, equitable relief under Sec.  
1.6015-4 is available only to a requesting spouse who fails to qualify 
for relief under Sec. Sec.  1.6015-2 and 1.6015-3. If a requesting 
spouse elects the application of either Sec.  1.6015-2 or 1.6015-3, the 
Internal Revenue Service will consider whether relief is appropriate 
under the other elective provision and, to the extent relief is 
unavailable under either, under Sec.  1.6015-4. If a requesting spouse 
seeks relief only under Sec.  1.6015-4, the Secretary may not grant 
relief under Sec.  1.6015-2 or 1.6015-3 in the absence of an affirmative 
election made by the requesting spouse under either of those sections. 
If in the course of reviewing a request for relief only under Sec.  
1.6015-4, the IRS determines that the requesting spouse may qualify for 
relief under Sec.  1.6015-2 or 1.6015-3 instead of Sec.  1.6015-4, the 
Internal Revenue Service will correspond with the requesting spouse to 
see if the requesting spouse would like to amend his or her request to 
elect the application of Sec.  1.6015-2 or 1.6015-3. If the requesting 
spouse chooses to amend the claim for relief, the requesting spouse must 
submit an affirmative election under Sec.  1.6015-2 or 1.6015-3. The 
amended claim for relief will relate back to the original claim for 
purposes of determining the timeliness of the claim.
    (3) Relief is not available for liabilities that are required to be 
reported on a joint Federal income tax return but are not income taxes 
imposed under Subtitle A of the Internal Revenue Code (e.g., domestic 
service employment taxes under section 3510).
    (b) Duress. For rules relating to the treatment of returns signed 
under duress, see Sec.  1.6013-4(d).
    (c) Prior closing agreement or offer in compromise--(1) In general. 
A requesting spouse is not entitled to relief from joint and several 
liability under Sec.  1.6015-2, 1.6015-3, or 1.6015-4 for any tax year 
for which the requesting spouse has entered into a closing agreement 
with the Commissioner that disposes of the same liability that is the 
subject of the claim for relief. In addition, a requesting spouse is not 
entitled to relief from joint and several liability under Sec.  1.6015-
2, 1.6015-3, or 1.6015-4 for any tax year for which the requesting 
spouse has entered into an offer in compromise with the Commissioner. 
For rules relating to the effect of closing agreements and offers in 
compromise, see sections 7121 and 7122, and the regulations thereunder.
    (2) Exception for agreements relating to TEFRA partnership 
proceedings. The rule in paragraph (c)(1) of this section regarding the 
unavailability of relief from joint and several liability when the 
liability to which the claim for relief relates was the subject of a 
prior closing agreement entered into by the requesting spouse, shall not 
apply to an agreement described in section 6224(c) with respect to 
partnership items (or any penalty, addition to tax, or additional amount 
that relates to adjustments to partnership items) that is entered into 
while the requesting spouse is a party to a pending partnership-level 
proceeding conducted under

[[Page 95]]

the provisions of subchapter C of chapter 63 of subtitle F of the 
Internal Revenue Code (TEFRA partnership proceeding). If, however, a 
requesting spouse enters into a closing agreement pertaining to any 
penalty, addition to tax, or additional amount that relates to 
adjustments to partnership items, at a time when the requesting spouse 
is not a party to a pending TEFRA partnership proceeding (e.g., in 
connection with an affected items proceeding), then the provisions of 
paragraph (c)(1) shall apply. Similarly, if a requesting spouse enters 
into a closing agreement with respect to both partnership items 
(including affected items) and nonpartnership items, while the 
requesting spouse is a party to a pending TEFRA partnership proceeding, 
the provisions of paragraph (c)(1) shall apply to the portion of the 
closing agreement that relates to nonpartnership items and the 
provisions of this paragraph (c)(2) shall apply to the remainder of the 
closing agreement.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (c):

    Example 1. H and W file joint returns for taxable years 2002-2004, 
on which they claim losses attributable to H's limited partnership 
interest in Partnership A. In January 2006, the Internal Revenue Service 
commences an audit under the provisions of subchapter C of chapter 63 of 
subtitle F of the Internal Revenue Code (TEFRA partnership proceeding) 
regarding Partnership A's 2002-2004 taxable years, and sends H and W a 
notice under section 6223(a)(1). In September 2007, H files a bankruptcy 
petition under chapter 7 of the Bankruptcy Code and receives a discharge 
in April 2008. In August 2008, H and W enter into a closing agreement 
with the Internal Revenue Service, in which H and W agree to the 
disallowance of some of the claimed losses from Partnership A for 
taxable years 2002 through 2007. W may not later claim relief from joint 
and several liability under section 6015 as to the disallowed losses 
attributable to Partnership A for taxable years 2002 to 2007. This is 
because at the time W entered into the closing agreement, H's 
partnership items attributable to Partnership A had converted to 
nonpartnership items as a result of H's filing of the bankruptcy 
petition. The conversion of H's items also terminated W's status as a 
partner in the TEFRA partnership proceeding regarding Partnership A. 
Consequently, the closing agreement did not pertain to partnership items 
and W was not a party to a pending partnership-level proceeding 
regarding Partnership A when she entered into the closing agreement. 
Accordingly, the exception in paragraph (c)(2) of this section for 
agreements relating to TEFRA partnership proceedings does not apply.
    Example 2. H and W file a joint return for taxable year 2002, on 
which they claim $25,000 in losses attributable to H's general 
partnership interest in Partnership B. In November 2003, the Service 
proposes a deficiency in tax relating to H's and W's 2002 joint return 
arising from omitted taxable interest income in the amount of $2,000 
that is attributable to H. In July 2005, the Internal Revenue Service 
commences a TEFRA partnership proceeding regarding Partnership B's 2002 
and 2003 taxable years, and sends H and W a notice under section 
6223(a)(1). In March 2006, H and W enter into a closing agreement with 
the Service. The closing agreement provides for the disallowance of the 
claimed losses from Partnership B in excess of H's and W's out-of-pocket 
expenditures relating to Partnership B for taxable year 2002 and any 
subsequent year(s) in which H and W claimed losses from Partnership B. 
In addition, H and W agree to the imposition of the accuracy-related 
penalty under section 6662 with respect to the disallowed losses 
attributable to partnership B. In the closing agreement, H and W also 
agree to the deficiency resulting from the omitted interest income for 
taxable year 2002. W may not later claim relief from joint and several 
liability under section 6015 as to the deficiency in tax attributable to 
the omitted income of $2,000 for taxable year 2002, because this portion 
of the closing agreement pertains to nonpartnership items. In contrast, 
W may claim relief from joint and several liability as to the disallowed 
losses and accuracy-related penalty attributable to Partnership B for 
taxable year 2002 or any subsequent year(s). This is because this 
portion of the closing agreement pertains to partnership and affected 
items and was entered into at a time when W was a party to the pending 
partnership-level proceeding regarding Partnership B. Consequently, W 
never had the opportunity to raise the innocent spouse defense in the 
course of that TEFRA partnership proceeding. (See Sec.  1.6015-5(b)(5) 
relating to premature claims).
    (d) Fraudulent scheme. If the Secretary establishes that a spouse 
transferred assets to the other spouse as part of a fraudulent scheme, 
relief is not available under section 6015, and section 6013(d)(3) 
applies to the return. For purposes of this section, a fraudulent scheme 
includes a scheme to defraud the Service or another third party, 
including, but not limited to,

[[Page 96]]

creditors, ex-spouses, and business partners.
    (e) Res judicata and collateral estoppel. A requesting spouse is 
barred from relief from joint and several liability under section 6015 
by res judicata for any tax year for which a court of competent 
jurisdiction has rendered a final decision on the requesting spouse's 
tax liability if relief under section 6015 was at issue in the prior 
proceeding, or if the requesting spouse meaningfully participated in 
that proceeding and could have raised relief under section 6015. A 
requesting spouse has not meaningfully participated in a prior 
proceeding if, due to the effective date of section 6015, relief under 
section 6015 was not available in that proceeding. Also, any final 
decisions rendered by a court of competent jurisdiction regarding issues 
relevant to section 6015 are conclusive and the requesting spouse may be 
collaterally estopped from relitigating those issues.
    (f) Community property laws--(1) In general. In determining whether 
relief is available under Sec.  1.6015-2, 1.6015-3, or 1.6015-4, items 
of income, credits, and deductions are generally allocated to the 
spouses without regard to the operation of community property laws. An 
erroneous item is attributed to the individual whose activities gave 
rise to such item. See Sec.  1.6015-3(d)(2).
    (2) Example. The following example illustrates the rule of this 
paragraph (f):

    Example. (i) H and W are married and have lived in State A (a 
community property state) since 1987. On April 15, 2003, H and W file a 
joint Federal income tax return for the 2002 taxable year. In August 
2005, the Internal Revenue Service proposes a $17,000 deficiency with 
respect to the 2002 joint return. A portion of the deficiency is 
attributable to $20,000 of H's unreported interest income from his 
individual bank account. The remainder of the deficiency is attributable 
to $30,000 of W's disallowed business expense deductions. Under the laws 
of State A, H and W each own \1/2\ of all income earned and property 
acquired during the marriage.
    (ii) In November 2005, H and W divorce and W timely elects to 
allocate the deficiency. Even though the laws of State A provide that 
\1/2\ of the interest income is W's, for purposes of relief under this 
section, the $20,000 unreported interest income is allocable to H, and 
the $30,000 disallowed deduction is allocable to W. The community 
property laws of State A are not considered in allocating items for this 
purpose.

    (g) Scope of this section and Sec. Sec.  1.6015-2 through 1.6015-9. 
This section and Sec. Sec.  1.6015-2 through 1.6015-9 do not apply to 
any portion of a liability for any taxable year for which a claim for 
credit or refund is barred by operation of law or rule of law.
    (h) Definitions--(1) Requesting spouse. A requesting spouse is an 
individual who filed a joint return and elects relief from Federal 
income tax liability arising from that return under Sec.  1.6015-2 or 
1.6015-3, or requests relief from Federal income tax liability arising 
from that return under Sec.  1.6015-4.
    (2) Nonrequesting spouse. A nonrequesting spouse is the individual 
with whom the requesting spouse filed the joint return for the year for 
which relief from liability is sought.
    (3) Item. An item is that which is required to be separately listed 
on an individual income tax return or any required attachments. Items 
include, but are not limited to, gross income, deductions, credits, and 
basis.
    (4) Erroneous item. An erroneous item is any item resulting in an 
understatement or deficiency in tax to the extent that such item is 
omitted from, or improperly reported (including improperly 
characterized) on an individual income tax return. For example, 
unreported income from an investment asset resulting in an 
understatement or deficiency in tax is an erroneous item. Similarly, 
ordinary income that is improperly reported as capital gain resulting in 
an understatement or deficiency in tax is also an erroneous item. In 
addition, a deduction for an expense that is personal in nature that 
results in an understatement or deficiency in tax is an erroneous item 
of deduction. An erroneous item is also an improperly reported item that 
affects the liability on other returns (e.g., an improper net operating 
loss that is carried back to a prior year's return). Penalties and 
interest are not erroneous items. Rather, relief from penalties and 
interest will generally be determined based on the proportion of the 
total erroneous items from which the requesting spouse is relieved. If a 
penalty relates to a particular erroneous item, see Sec.  1.6015-
3(d)(4)(iv)(B).

[[Page 97]]

    (5) Election or request. A qualifying election under Sec.  1.6015-2 
or 1.6015-3, or request under Sec.  1.6015-4, is the first timely claim 
for relief from joint and several liability for the tax year for which 
relief is sought. A qualifying election also includes a requesting 
spouse's second election to seek relief from joint and several liability 
for the same tax year under Sec.  1.6015-3 when the additional 
qualifications of paragraphs (h)(5)(i) and (ii) of this section are 
met--
    (i) The requesting spouse did not qualify for relief under Sec.  
1.6015-3 when the Internal Revenue Service considered the first election 
solely because the qualifications of Sec.  1.6015-3(a) were not 
satisfied; and
    (ii) At the time of the second election, the qualifications for 
relief under Sec.  1.6015-3(a) are satisfied.
    (i) [Reserved]
    (j) Transferee liability--(1) In general. The relief provisions of 
section 6015 do not negate liability that arises under the operation of 
other laws. Therefore, a requesting spouse who is relieved of joint and 
several liability under Sec.  1.6015-2, 1.6015-3, or 1.6015-4 may 
nevertheless remain liable for the unpaid tax (including additions to 
tax, penalties, and interest) to the extent provided by Federal or state 
transferee liability or property laws. For the rules regarding the 
liability of transferees, see sections 6901 through 6904 and the 
regulations thereunder. In addition, the requesting spouse's property 
may be subject to collection under Federal or state property laws.
    (2) Example. The following example illustrates the rule of this 
paragraph (j):

    Example. H and W timely file their 1998 joint income tax return on 
April 15, 1999. H dies in March 2000, and the executor of H's will 
transfers all of the estate's assets to W. In July 2001, the Internal 
Revenue Service assesses a deficiency for the 1998 return. The items 
giving rise to the deficiency are attributable to H. W is relieved of 
the liability under section 6015, and H's estate remains solely liable. 
The Internal Revenue Service may seek to collect the deficiency from W 
to the extent permitted under Federal or state transferee liability or 
property laws.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec.  1.6015-2  Relief from liability applicable to all qualifying 
joint filers.

    (a) In general. A requesting spouse may be relieved of joint and 
several liability for tax (including additions to tax, penalties, and 
interest) from an understatement for a taxable year under this section 
if the requesting spouse elects the application of this section in 
accordance with Sec. Sec.  1.6015-1(h)(5) and 1.6015-5, and--
    (1) A joint return was filed for the taxable year;
    (2) On the return there is an understatement attributable to 
erroneous items of the nonrequesting spouse;
    (3) The requesting spouse establishes that in signing the return he 
or she did not know and had no reason to know of the understatement; and
    (4) It is inequitable to hold the requesting spouse liable for the 
deficiency attributable to the understatement.
    (b) Understatement. The term understatement has the meaning given to 
such term by section 6662(d)(2)(A) and the regulations thereunder.
    (c) Knowledge or reason to know. A requesting spouse has knowledge 
or reason to know of an understatement if he or she actually knew of the 
understatement, or if a reasonable person in similar circumstances would 
have known of the understatement. For rules relating to a requesting 
spouse's actual knowledge, see Sec.  1.6015-3(c)(2). All of the facts 
and circumstances are considered in determining whether a requesting 
spouse had reason to know of an understatement. The facts and 
circumstances that are considered include, but are not limited to, the 
nature of the erroneous item and the amount of the erroneous item 
relative to other items; the couple's financial situation; the 
requesting spouse's educational background and business experience; the 
extent of the requesting spouse's participation in the activity that 
resulted in the erroneous item; whether the requesting spouse failed to 
inquire, at or before the time the return was signed, about items on the 
return or omitted from the return that a reasonable person would 
question; and whether the erroneous item represented a departure from a 
recurring

[[Page 98]]

pattern reflected in prior years' returns (e.g., omitted income from an 
investment regularly reported on prior years' returns).
    (d) Inequity. All of the facts and circumstances are considered in 
determining whether it is inequitable to hold a requesting spouse 
jointly and severally liable for an understatement. One relevant factor 
for this purpose is whether the requesting spouse significantly 
benefitted, directly or indirectly, from the understatement. A 
significant benefit is any benefit in excess of normal support. Evidence 
of direct or indirect benefit may consist of transfers of property or 
rights to property, including transfers that may be received several 
years after the year of the understatement. Thus, for example, if a 
requesting spouse receives property (including life insurance proceeds) 
from the nonrequesting spouse that is beyond normal support and 
traceable to items omitted from gross income that are attributable to 
the nonrequesting spouse, the requesting spouse will be considered to 
have received significant benefit from those items. Other factors that 
may also be taken into account, if the situation warrants, include the 
fact that the requesting spouse has been deserted by the nonrequesting 
spouse, the fact that the spouses have been divorced or separated, or 
that the requesting spouse received benefit on the return from the 
understatement. For guidance concerning the criteria to be used in 
determining whether it is inequitable to hold a requesting spouse 
jointly and severally liable under this section, see Rev. Proc. 2000-15 
(2000-1 C.B. 447), or other guidance published by the Treasury and IRS 
(see Sec.  601.601(d)(2) of this chapter).
    (e) Partial relief--(1) In general. If a requesting spouse had no 
knowledge or reason to know of only a portion of an erroneous item, the 
requesting spouse may be relieved of the liability attributable to that 
portion of that item, if all other requirements are met with respect to 
that portion.
    (2) Example. The following example illustrates the rules of this 
paragraph (e):

    Example. H and W are married and file their 2004 joint income tax 
return in March 2005. In April 2006, H is convicted of embezzling $2 
million from his employer during 2004. H kept all of his embezzlement 
income in an individual bank account, and he used most of the funds to 
support his gambling habit. H and W had a joint bank account into which 
H and W deposited all of their reported income. Each month during 2004, 
H transferred an additional $10,000 from the individual account to H and 
W's joint bank account. W paid the household expenses using this joint 
account, and regularly received the bank statements relating to the 
account. W had no knowledge or reason to know of H's embezzling 
activities. However, W did have knowledge and reason to know of $120,000 
of the $2 million of H's embezzlement income at the time she signed the 
joint return because that amount passed through the couple's joint bank 
account. Therefore, W may be relieved of the liability arising from 
$1,880,000 of the unreported embezzlement income, but she may not be 
relieved of the liability for the deficiency arising from $120,000 of 
the unreported embezzlement income of which she knew and had reason to 
know.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec.  1.6015-3  Allocation of deficiency for individuals who are 

no longer married, are legally separated, or are not members of 
the same household.

    (a) Election to allocate deficiency. A requesting spouse may elect 
to allocate a deficiency if, as defined in paragraph (b) of this 
section, the requesting spouse is divorced, widowed, or legally 
separated, or has not been a member of the same household as the 
nonrequesting spouse at any time during the 12-month period ending on 
the date an election for relief is filed. For purposes of this section, 
the marital status of a deceased requesting spouse will be determined on 
the earlier of the date of the election or the date of death in 
accordance with section 7703(a)(1). Subject to the restrictions of 
paragraph (c) of this section, an eligible requesting spouse who elects 
the application of this section in accordance with Sec. Sec.  1.6015-
1(h)(5) and 1.6015-5 generally may be relieved of joint and several 
liability for the portion of any deficiency that is allocated to the 
nonrequesting spouse pursuant to the allocation methods set forth in 
paragraph (d) of this section. Relief may be available to both spouses 
filing the joint return if each spouse is eligible for and elects the 
application of this section.

[[Page 99]]

    (b) Definitions--(1) Divorced. A determination of whether a 
requesting spouse is divorced for purposes of this section will be made 
in accordance with section 7703 and the regulations thereunder. Such 
determination will be made as of the date the election is filed.
    (2) Legally separated. A determination of whether a requesting 
spouse is legally separated for purposes of this section will be made in 
accordance with section 7703 and the regulations thereunder. Such 
determination will be made as of the date the election is filed.
    (3) Members of the same household--(i) Temporary absences. A 
requesting spouse and a nonrequesting spouse are considered members of 
the same household during either spouse's temporary absences from the 
household if it is reasonable to assume that the absent spouse will 
return to the household, and the household or a substantially equivalent 
household is maintained in anticipation of such return. Examples of 
temporary absences may include, but are not limited to, absence due to 
incarceration, illness, business, vacation, military service, or 
education.
    (ii) Separate dwellings. A husband and wife who reside in the same 
dwelling are considered members of the same household. In addition, a 
husband and wife who reside in two separate dwellings are considered 
members of the same household if the spouses are not estranged or one 
spouse is temporarily absent from the other's household within the 
meaning of paragraph (b)(3)(i) of this section.
    (c) Limitations--(1) No refunds. Relief under this section is only 
available for unpaid liabilities resulting from understatements of 
liability. Refunds are not authorized under this section.
    (2) Actual knowledge--(i) In general. If, under section 
6015(c)(3)(C), the Secretary demonstrates that, at the time the return 
was signed, the requesting spouse had actual knowledge of an erroneous 
item that is allocable to the nonrequesting spouse, the election to 
allocate the deficiency attributable to that item is invalid, and the 
requesting spouse remains liable for the portion of the deficiency 
attributable to that item. The Service, having both the burden of 
production and the burden of persuasion, must establish, by a 
preponderance of the evidence, that the requesting spouse had actual 
knowledge of the erroneous item in order to invalidate the election.
    (A) Omitted income. In the case of omitted income, knowledge of the 
item includes knowledge of the receipt of the income. For example, 
assume W received $5,000 of dividend income from her investment in X Co. 
but did not report it on the joint return. H knew that W received $5,000 
of dividend income from X Co. that year. H had actual knowledge of the 
erroneous item (i.e., $5,000 of unreported dividend income from X Co.), 
and no relief is available under this section for the deficiency 
attributable to the dividend income from X Co. This rule applies equally 
in situations where the other spouse has unreported income although the 
spouse does not have an actual receipt of cash (e.g., dividend 
reinvestment or a distributive share from a flow-through entity shown on 
Schedule K-1, ``Partner's Share of Income, Credits, Deductions, etc.'').
    (B) Deduction or credit--(1) Erroneous deductions in general. In the 
case of an erroneous deduction or credit, knowledge of the item means 
knowledge of the facts that made the item not allowable as a deduction 
or credit.
    (2) Fictitious or inflated deduction. If a deduction is fictitious 
or inflated, the IRS must establish that the requesting spouse actually 
knew that the expenditure was not incurred, or not incurred to that 
extent.
    (ii) Partial knowledge. If a requesting spouse had actual knowledge 
of only a portion of an erroneous item, then relief is not available for 
that portion of the erroneous item. For example, if H knew that W 
received $1,000 of dividend income and did not know that W received an 
additional $4,000 of dividend income, relief would not be available for 
the portion of the deficiency attributable to the $1,000 of dividend 
income of which H had actual knowledge. A requesting spouse's actual 
knowledge of the proper tax treatment of an item is not relevant for 
purposes of demonstrating that the requesting spouse had actual 
knowledge of an erroneous item. For example, assume H did not

[[Page 100]]

know W's dividend income from X Co. was taxable, but knew that W 
received the dividend income. Relief is not available under this 
section. In addition, a requesting spouse's knowledge of how an 
erroneous item was treated on the tax return is not relevant to a 
determination of whether the requesting spouse had actual knowledge of 
the item. For example, assume that H knew of W's dividend income, but H 
failed to review the completed return and did not know that W omitted 
the dividend income from the return. Relief is not available under this 
section.
    (iii) Knowledge of the source not sufficient. Knowledge of the 
source of an erroneous item is not sufficient to establish actual 
knowledge. For example, assume H knew that W owned X Co. stock, but H 
did not know that X Co. paid dividends to W that year. H's knowledge of 
W's ownership in X Co. is not sufficient to establish that H had actual 
knowledge of the dividend income from X Co. In addition, a requesting 
spouse's actual knowledge may not be inferred when the requesting spouse 
merely had reason to know of the erroneous item. Even if H's knowledge 
of W's ownership interest in X Co. indicates a reason to know of the 
dividend income, actual knowledge of such dividend income cannot be 
inferred from H's reason to know. Similarly, the IRS need not establish 
that a requesting spouse knew of the source of an erroneous item in 
order to establish that the requesting spouse had actual knowledge of 
the item itself. For example, assume H knew that W received $1,000, but 
he did not know the source of the $1,000. W and H omit the $1,000 from 
their joint return. H has actual knowledge of the item giving rise to 
the deficiency ($1,000), and relief is not available under this section.
    (iv) Factors supporting actual knowledge. To demonstrate that a 
requesting spouse had actual knowledge of an erroneous item at the time 
the return was signed, the IRS may rely upon all of the facts and 
circumstances. One factor that may be relied upon in demonstrating that 
a requesting spouse had actual knowledge of an erroneous item is whether 
the requesting spouse made a deliberate effort to avoid learning about 
the item in order to be shielded from liability. This factor, together 
with all other facts and circumstances, may demonstrate that the 
requesting spouse had actual knowledge of the item, and the requesting 
spouse's election would be invalid with respect to that entire item. 
Another factor that may be relied upon in demonstrating that a 
requesting spouse had actual knowledge of an erroneous item is whether 
the requesting spouse and the nonrequesting spouse jointly owned the 
property that resulted in the erroneous item. Joint ownership is a 
factor supporting a finding that the requesting spouse had actual 
knowledge of an erroneous item. For purposes of this paragraph, a 
requesting spouse will not be considered to have had an ownership 
interest in an item based solely on the operation of community property 
law. Rather, a requesting spouse who resided in a community property 
state at the time the return was signed will be considered to have had 
an ownership interest in an item only if the requesting spouse's name 
appeared on the ownership documents, or there otherwise is an indication 
that the requesting spouse asserted dominion and control over the item. 
For example, assume H and W live in State A, a community property state. 
After their marriage, H opens a bank account in his name. Under the 
operation of the community property laws of State A, W owns \1/2\ of the 
bank account. However, W does not have an ownership interest in the 
account for purposes of this paragraph (c)(2)(iv) because the account is 
not held in her name and there is no other indication that she asserted 
dominion and control over the item.
    (v) Abuse exception. If the requesting spouse establishes that he or 
she was the victim of domestic abuse prior to the time the return was 
signed, and that, as a result of the prior abuse, the requesting spouse 
did not challenge the treatment of any items on the return for fear of 
the nonrequesting spouse's retaliation, the limitation on actual 
knowledge in this paragraph (c) will not apply. However, if the 
requesting spouse involuntarily executed the return, the requesting 
spouse may choose to establish that the return was signed under duress. 
In such a case, Sec.  1.6013-4(d) applies.

[[Page 101]]

    (3) Disqualified asset transfers--(i) In general. The portion of the 
deficiency for which a requesting spouse is liable is increased (up to 
the entire amount of the deficiency) by the value of any disqualified 
asset that was transferred to the requesting spouse. For purposes of 
this paragraph (c)(3), the value of a disqualified asset is the fair 
market value of the asset on the date of the transfer.
    (ii) Disqualified asset defined. A disqualified asset is any 
property or right to property that was transferred from the 
nonrequesting spouse to the requesting spouse if the principal purpose 
of the transfer was the avoidance of tax or payment of tax (including 
additions to tax, penalties, and interest).
    (iii) Presumption. Any asset transferred from the nonrequesting 
spouse to the requesting spouse during the 12-month period before the 
mailing date of the first letter of proposed deficiency (e.g., a 30-day 
letter or, if no 30-day letter is mailed, a notice of deficiency) is 
presumed to be a disqualified asset. The presumption also applies to any 
asset that is transferred from the nonrequesting spouse to the 
requesting spouse after the mailing date of the first letter of proposed 
deficiency. The presumption does not apply, however, if the requesting 
spouse establishes that the asset was transferred pursuant to a decree 
of divorce or separate maintenance or a written instrument incident to 
such a decree. If the presumption does not apply, but the Internal 
Revenue Service can establish that the purpose of the transfer was the 
avoidance of tax or payment of tax, the asset will be disqualified, and 
its value will be added to the amount of the deficiency for which the 
requesting spouse remains liable. If the presumption applies, a 
requesting spouse may still rebut the presumption by establishing that 
the principal purpose of the transfer was not the avoidance of tax or 
payment of tax.
    (4) Examples. The following examples illustrate the rules in this 
paragraph (c):

    Example 1. Actual knowledge of an erroneous item. (i) H and W file 
their 2001 joint Federal income tax return on April 15, 2002. On the 
return, H and W report W's self-employment income, but they do not 
report W's self-employment tax on that income. H and W divorce in July 
2003. In August 2003, H and W receive a 30-day letter from the Internal 
Revenue Service proposing a deficiency with respect to W's unreported 
self-employment tax on the 2001 return. On November 4, 2003, H files an 
election to allocate the deficiency to W. The erroneous item is the 
self-employment income, and it is allocable to W. H knows that W earned 
income in 2001 as a self-employed musician, but he does not know that 
self-employment tax must be reported on and paid with a joint return.
    (ii) H's election to allocate the deficiency to W is invalid 
because, at the time H signed the joint return, H had actual knowledge 
of W's self-employment income. The fact that H was unaware of the tax 
consequences of that income (i.e., that an individual is required to pay 
self-employment tax on that income) is not relevant.
    Example 2. Actual knowledge not inferred from a requesting spouse's 
reason to know. (i) H has long been an avid gambler. H supports his 
gambling habit and keeps all of his gambling winnings in an individual 
bank account, held solely in his name. W knows about H's gambling habit 
and that he keeps a separate bank account, but she does not know whether 
he has any winnings because H does not tell her, and she does not 
otherwise know of H's bank account transactions. H and W file their 2001 
joint Federal income tax return on April 15, 2002. On October 31, 2003, 
H and W receive a 30-day letter proposing a $100,000 deficiency relating 
to H's unreported gambling income. In February 2003, H and W divorce, 
and in March 2004, W files an election under section 6015(c) to allocate 
the $100,000 deficiency to H.
    (ii) While W may have had reason to know of the gambling income 
because she knew of H's gambling habit and separate account, W did not 
have actual knowledge of the erroneous item (i.e., the gambling 
winnings). The Internal Revenue Service may not infer actual knowledge 
from W's reason to know of the income. Therefore, W's election to 
allocate the $100,000 deficiency to H is valid.
    Example 3. Actual knowledge and failure to review return. (i) H and 
W are legally separated. In February 1999, W signs a blank joint Federal 
income tax return for 1998 and gives it to H to fill out. The return was 
timely filed on April 15, 1999. In September 2001, H and W receive a 30-
day letter proposing a deficiency relating to $100,000 of unreported 
dividend income received by H with respect to stock of ABC Co. owned by 
H. W knew that H received the $100,000 dividend payment in August 1998, 
but she did not know whether H reported that payment on the joint 
return.
    (ii) On January 30, 2002, W files an election to allocate the 
deficiency from the 1998 return to H. W claims she did not review the 
completed joint return, and therefore, she had no actual knowledge that 
there was an

[[Page 102]]

understatement of the dividend income. W's election to allocate the 
deficiency to H is invalid because she had actual knowledge of the 
erroneous item (dividend income from ABC Co.) at the time she signed the 
return. The fact that W signed a blank return is irrelevant. The result 
would be the same if W had not reviewed the completed return or if W had 
reviewed the completed return and had not noticed that the item was 
omitted.
    Example 4. Actual knowledge of an erroneous item of income. (i) H 
and W are legally separated. In June 2004, a deficiency is proposed with 
respect to H's and W's 2002 joint Federal income tax return that is 
attributable to $30,000 of unreported income from H's plumbing business 
that should have been reported on a Schedule C. No Schedule C was 
attached to the return. At the time W signed the return, W knew that H 
had a plumbing business but did not know whether H received any income 
from the business. W's election to allocate to H the deficiency 
attributable to the $30,000 of unreported plumbing income is valid.
    (ii) Assume the same facts as in paragraph (i) of this Example 5 
except that, at the time W signed the return, W knew that H received 
$20,000 of plumbing income. W's election to allocate to H the deficiency 
attributable to the $20,000 of unreported plumbing income (of which W 
had actual knowledge) is invalid. W's election to allocate to H the 
deficiency attributable to the $10,000 of unreported plumbing income (of 
which W did not have actual knowledge) is valid.
    (iii) Assume the same facts as in paragraph (i) of this Example 5 
except that, at the time W signed the return, W did not know the exact 
amount of H's plumbing income. W did know, however, that H received at 
least $8,000 of plumbing income. W's election to allocate to H the 
deficiency attributable to $8,000 of unreported plumbing income (of 
which W had actual knowledge) is invalid. W's election to allocate to H 
the deficiency attributable to the remaining $22,000 of unreported 
plumbing income (of which W did not have actual knowledge) is valid.
    (iv) Assume the same facts as in paragraph (i) of this Example 5 
except that H reported $26,000 of plumbing income on the return and 
omitted $4,000 of plumbing income from the return. At the time W signed 
the return, W knew that H was a plumber, but she did not know that H 
earned more than $26,000 that year. W's election to allocate to H the 
deficiency attributable to the $4,000 of unreported plumbing income is 
valid because she did not have actual knowledge that H received plumbing 
income in excess of $26,000.
    (v) Assume the same facts as in paragraph (i) of this Example 5 
except that H reported only $20,000 of plumbing income on the return and 
omitted $10,000 of plumbing income from the return. At the time W signed 
the return, W knew that H earned at least $26,000 that year as a 
plumber. However, W did not know that, in reality, H earned $30,000 that 
year as a plumber. W's election to allocate to H the deficiency 
attributable to the $6,000 of unreported plumbing income (of which W had 
actual knowledge) is invalid. W's election to allocate to H the 
deficiency attributable to the $4,000 of unreported plumbing income (of 
which W did not have actual knowledge) is valid.
    Example 5. Actual knowledge of a deduction that is an erroneous 
item. (i) H and W are legally separated. In February 2005, a deficiency 
is asserted with respect to their 2002 joint Federal income tax return. 
The deficiency is attributable to a disallowed $1,000 deduction for 
medical expenses H claimed he incurred. At the time W signed the return, 
W knew that H had not incurred any medical expenses. W's election to 
allocate to H the deficiency attributable to the disallowed medical 
expense deduction is invalid because W had actual knowledge that H had 
not incurred any medical expenses.
    (ii) Assume the same facts as in paragraph (i) of this Example 6 
except that, at the time W signed the return, W did not know whether H 
had incurred any medical expenses. W's election to allocate to H the 
deficiency attributable to the disallowed medical expense deduction is 
valid because she did not have actual knowledge that H had not incurred 
any medical expenses.
    (iii) Assume the same facts as in paragraph (i) of this Example 6 
except that the Internal Revenue Service disallowed $400 of the $1,000 
medical expense deduction. At the time W signed the return, W knew that 
H had incurred some medical expenses but did not know the exact amount. 
W's election to allocate to H the deficiency attributable to the 
disallowed medical expense deduction is valid because she did not have 
actual knowledge that H had not incurred medical expenses (in excess of 
the floor amount under section 213(a)) of more than $600.
    (iv) Assume the same facts as in paragraph (i) of this Example 6 
except that H claims a medical expense deduction of $10,000 and the 
Internal Revenue Service disallows $9,600. At the time W signed the 
return, W knew H had incurred some medical expenses but did not know the 
exact amount. W also knew that H incurred medical expenses (in excess of 
the floor amount under section 213(a)) of no more than $1,000. W's 
election to allocate to H the deficiency attributable to the portion of 
the overstated deduction of which she had actual knowledge ($9,000) is 
invalid. W's election to allocate the deficiency attributable to the 
portion of the overstated deduction of which she had no knowledge ($600) 
is valid.
    Example 6. Disqualified asset presumption. (i) H and W are divorced. 
In May 1999, W transfers $20,000 to H, and in April 2000, H and W 
receive a 30-day letter proposing a $40,000 deficiency on their 1998 
joint Federal income

[[Page 103]]

tax return. The liability remains unpaid, and in October 2000, H elects 
to allocate the deficiency under this section. Seventy-five percent of 
the net amount of erroneous items are allocable to W, and 25% of the net 
amount of erroneous items are allocable to H.
    (ii) In accordance with the proportionate allocation method (see 
paragraph (d)(4) of this section), H proposes that $30,000 of the 
deficiency be allocated to W and $10,000 be allocated to himself. H 
submits a signed statement providing that the principal purpose of the 
$20,000 transfer was not the avoidance of tax or payment of tax, but he 
does not submit any documentation indicating the reason for the 
transfer. H has not overcome the presumption that the $20,000 was a 
disqualified asset. Therefore, the portion of the deficiency for which H 
is liable ($10,000) is increased by the value of the disqualified asset 
($20,000). H is relieved of liability for $10,000 of the $30,000 
deficiency allocated to W, and remains jointly and severally liable for 
the remaining $30,000 of the deficiency (assuming that H does not 
qualify for relief under any other provision).
    Example 7. Disqualified asset presumption inapplicable. On May 1, 
2001, H and W receive a 30-day letter regarding a proposed deficiency on 
their 1999 joint Federal income tax return relating to unreported 
capital gain from H's sale of his investment in Z stock. W had no actual 
knowledge of the stock sale. The deficiency is assessed in November 
2001, and in December 2001, H and W divorce. According to a decree of 
divorce, H must transfer \1/2\ of his interest in mutual fund A to W. 
The transfer takes place in February 2002. In August 2002, W elects to 
allocate the deficiency to H. Although the transfer of \1/2\ of H's 
interest in mutual fund A took place after the 30-day letter was mailed, 
the mutual fund interest is not presumed to be a disqualified asset 
because the transfer of H's interest in the fund was made pursuant to a 
decree of divorce.
    Example 8. Overcoming the disqualified asset presumption. (i) H and 
W are married for 25 years. Every September, on W's birthday, H gives W 
a gift of $500. On February 28, 2002, H and W receive a 30-day letter 
from the Internal Revenue Service relating to their 1998 joint 
individual Federal income tax return. The deficiency relates to H's 
Schedule C business, and W had no knowledge of the items giving rise to 
the deficiency. H and W are legally separated in June 2003, and, despite 
the separation, H continues to give W $500 each year for her birthday. H 
is not required to give such amounts pursuant to a decree of divorce or 
separate maintenance.
    (ii) On January 27, 2004, W files an election to allocate the 
deficiency to H. The $1,500 transferred from H to W from February 28, 
2001 (a year before the 30-day letter was mailed) to the present is 
presumed disqualified. However, W may overcome the presumption that such 
amounts were disqualified by establishing that such amounts were 
birthday gifts from H and that she has received such gifts during their 
entire marriage. Such facts would show that the amounts were not 
transferred for the purpose of avoidance of tax or payment of tax.

    (d) Allocation--(1) In general. (i) An election to allocate a 
deficiency limits the requesting spouse's liability to that portion of 
the deficiency allocated to the requesting spouse pursuant to this 
section.
    (ii) Only a requesting spouse may receive relief. A nonrequesting 
spouse who does not also elect relief under this section remains liable 
for the entire amount of the deficiency. Even if both spouses elect to 
allocate a deficiency under this section, there may be a portion of the 
deficiency that is not allocable, for which both spouses remain jointly 
and severally liable.
    (2) Allocation of erroneous items. For purposes of allocating a 
deficiency under this section, erroneous items are generally allocated 
to the spouses as if separate returns were filed, subject to the 
following four exceptions:
    (i) Benefit on the return. An erroneous item that would otherwise be 
allocated to the nonrequesting spouse is allocated to the requesting 
spouse to the extent that the requesting spouse received a tax benefit 
on the joint return.
    (ii) Fraud. The Internal Revenue Service may allocate any item 
between the spouses if the Internal Revenue Service establishes that the 
allocation is appropriate due to fraud by one or both spouses.
    (iii) Erroneous items of income. Erroneous items of income are 
allocated to the spouse who was the source of the income. Wage income is 
allocated to the spouse who performed the services producing such wages. 
Items of business or investment income are allocated to the spouse who 
owned the business or investment. If both spouses owned an interest in 
the business or investment, the erroneous item of income is generally 
allocated between the spouses in proportion to each spouse's ownership 
interest in the business or investment, subject to the limitations of 
paragraph (c) of this section. In the absence of clear and convincing

[[Page 104]]

evidence supporting a different allocation, an erroneous income item 
relating to an asset that the spouses owned jointly is generally 
allocated 50% to each spouse, subject to the limitations in paragraph 
(c) of this section and the exceptions in paragraph (c)(2)(iv) of this 
section. For rules regarding the effect of community property laws, see 
Sec.  1.6015-1(f) and paragraph (c)(2)(iv) of this section.
    (iv) Erroneous deduction items. Erroneous deductions related to a 
business or investment are allocated to the spouse who owned the 
business or investment. If both spouses owned an interest in the 
business or investment, an erroneous deduction item is generally 
allocated between the spouses in proportion to each spouse's ownership 
interest in the business or investment. In the absence of clear and 
convincing evidence supporting a different allocation, an erroneous 
deduction item relating to an asset that the spouses owned jointly is 
generally allocated 50% to each spouse, subject to the limitations in 
paragraph (c) of this section and the exceptions in paragraph (d)(4) of 
this section. Deduction items unrelated to a business or investment are 
also generally allocated 50% to each spouse, unless the evidence shows 
that a different allocation is appropriate.
    (3) Burden of proof. Except for establishing actual knowledge under 
paragraph (c)(2) of this section, the requesting spouse must prove that 
all of the qualifications for making an election under this section are 
satisfied and that none of the limitations (including the limitation 
relating to transfers of disqualified assets) apply. The requesting 
spouse must also establish the proper allocation of the erroneous items.
    (4) General allocation method--(i) Proportionate allocation. (A) The 
portion of a deficiency allocable to a spouse is the amount that bears 
the same ratio to the deficiency as the net amount of erroneous items 
allocable to the spouse bears to the net amount of all erroneous items. 
This calculation may be expressed as follows:
[GRAPHIC] [TIFF OMITTED] TR18JY02.004

where X = the portion of the deficiency allocable to the spouse.

    (B) The proportionate allocation applies to any portion of the 
deficiency other than--
    (1) Any portion of the deficiency attributable to erroneous items 
allocable to the nonrequesting spouse of which the requesting spouse had 
actual knowledge;
    (2) Any portion of the deficiency attributable to separate treatment 
items (as defined in paragraph (d)(4)(ii) of this section);
    (3) Any portion of the deficiency relating to the liability of a 
child (as defined in paragraph (d)(4)(iii) of this section) of the 
requesting spouse or nonrequesting spouse;
    (4) Any portion of the deficiency attributable to alternative 
minimum tax under section 55;
    (5) Any portion of the deficiency attributable to accuracy-related 
or fraud penalties;
    (6) Any portion of the deficiency allocated pursuant to alternative 
allocation methods authorized under paragraph (d)(6) of this section.
    (ii) Separate treatment items. Any portion of a deficiency that is 
attributable to an item allocable solely to one spouse and that results 
from the disallowance of a credit, or a tax or an addition to tax (other 
than tax imposed by section 1 or section 55) that is required to be 
included with a joint return (a separate treatment item) is allocated 
separately to that spouse. If such credit or tax is attributable in 
whole or in part to both spouses, then the IRS will determine on a case 
by

[[Page 105]]

case basis how such item will be allocated. Once the proportionate 
allocation is made, the liability for the requesting spouse's separate 
treatment items is added to the requesting spouse's share of the 
liability.
    (iii) Child's liability. Any portion of a deficiency relating to the 
liability of a child of the requesting and nonrequesting spouse is 
allocated jointly to both spouses. For purposes of this paragraph, a 
child does not include the taxpayer's stepson or stepdaughter, unless 
such child was legally adopted by the taxpayer. If the child is the 
child of only one of the spouses, and the other spouse had not legally 
adopted such child, any portion of a deficiency relating to the 
liability of such child is allocated solely to the parent spouse.
    (iv) Allocation of certain items--(A) Alternative minium tax. Any 
portion of a deficiency relating to the alternative minimum tax under 
section 55 will be allocated appropriately.
    (B) Accuracy-related and fraud penalties. Any accuracy-related or 
fraud penalties under section 6662 or 6663 are allocated to the spouse 
whose item generated the penalty.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (d). In each example, assume that the requesting spouse or 
spouses qualify to elect to allocate the deficiency, that any election 
is timely made, and that the deficiency remains unpaid. In addition, 
unless otherwise stated, assume that neither spouse has actual knowledge 
of the erroneous items allocable to the other spouse. The examples are 
as follows:

    Example 1. Allocation of erroneous items. (i) H and W file a 2003 
joint Federal income tax return on April 15, 2004. On April 28, 2006, a 
deficiency is assessed with respect to their 2003 return. Three 
erroneous items give rise to the deficiency--
    (A) Unreported interest income, of which W had actual knowledge, 
from H's and W's joint bank account;
    (B) A disallowed business expense deduction on H's Schedule C; and
    (C) A disallowed Lifetime Learning Credit for W's post-secondary 
education, paid for by W.
    (ii) H and W divorce in May 2006, and in September 2006, W timely 
elects to allocate the deficiency. The erroneous items are allocable as 
follows:
    (A) The interest income would be allocated \1/2\ to H and \1/2\ to 
W, except that W has actual knowledge of it. Therefore, W's election to 
allocate the portion of the deficiency attributable to this item is 
invalid, and W remains jointly and severally liable for it.
    (B) The business expense deduction is allocable to H.
    (C) The Lifetime Learning Credit is allocable to W.
    Example 2. Proportionate allocation. (i) W and H timely file their 
2001 joint Federal income tax return on April 15, 2002. On August 16, 
2004, a $54,000 deficiency is assessed with respect to their 2001 joint 
return. H and W divorce on October 14, 2004, and W timely elects to 
allocate the deficiency. Five erroneous items give rise to the 
deficiency--
    (A) A disallowed $15,000 business deduction allocable to H;
    (B) $20,000 of unreported income allocable to H;
    (C) A disallowed $5,000 deduction for educational expense allocable 
to H;
    (D) A disallowed $40,000 charitable contribution deduction allocable 
to W; and
    (E) A disallowed $40,000 interest deduction allocable to W.
    (ii) In total, there are $120,000 worth of erroneous items, of which 
$80,000 are attributable to W and $40,000 are attributable to H.

           W's items                                          ..  .........  H's items
-------------------------------------------------------------    -----------------------------------------------
  $40,000  charitable deduction                               ..    $15,000  business deduction
   40,000  interest deduction                                 ..     20,000  unreported income
           .................................................  ..      5,000  education deduction
----------                                                       -----------
  $80,000  .................................................  ..    $40,000
 

    (iii) The ratio of erroneous items allocable to W to the total 
erroneous items is \2/3\ ($80,000/$120,000). W's liability is limited to 
$36,000 of the deficiency (\2/3\ of $54,000). The Internal Revenue 
Service may collect up to $36,000 from W and up to $54,000 from H (the 
total amount collected, however, may not exceed $54,000). If H also made 
an election, there would be no remaining joint and several liability, 
and the Internal Revenue Service would be permitted to collect $36,000 
from W and $18,000 from H.

[[Page 106]]

    Example 3. Proportionate allocation with joint erroneous item. (i) 
On September 4, 2001, W elects to allocate a $3,000 deficiency for the 
1998 tax year to H. Three erroneous items give rise to the deficiency--
    (A) Unreported interest in the amount of $4,000 from a joint bank 
account;
    (B) A disallowed deduction for business expenses in the amount of 
$2,000 attributable to H's business; and
    (C) Unreported wage income in the amount of $6,000 attributable to 
W's second job.
    (ii) The erroneous items total $12,000. Generally, income, 
deductions, or credits from jointly held property that are erroneous 
items are allocable 50% to each spouse. However, in this case, both 
spouses had actual knowledge of the unreported interest income. 
Therefore, W's election to allocate the portion of the deficiency 
attributable to this item is invalid, and W and H remain jointly and 
severally liable for this portion. Assume that this portion is $1,000. W 
may allocate the remaining $2,000 of the deficiency.

           H's items                                          ..  .........  W's items
-------------------------------------------------------------    -----------------------------------------------
   $2,000  business deduction                                 ..     $6,000  wage income
 

    Total allocable items: $8,000
    (iii) The ratio of erroneous items allocable to W to the total 
erroneous items is \3/4\ ($6,000/$8,000). W's liability is limited to 
$1,500 of the deficiency (\3/4\ of $2,000) allocated to her. The 
Internal Revenue Service may collect up to $2,500 from W (\3/4\ of the 
total allocated deficiency plus $1,000 of the deficiency attributable to 
the joint bank account interest) and up to $3,000 from H (the total 
amount collected, however, cannot exceed $3,000).
    (iv) Assume H also elects to allocate the 1998 deficiency. H is 
relieved of liability for \3/4\ of the deficiency, which is allocated to 
W. H's relief totals $1,500 (\3/4\ of $2,000). H remains liable for 
$1,500 of the deficiency (\1/4\ of the allocated deficiency plus $1,000 
of the deficiency attributable to the joint bank account interest).
    Example 4. Separate treatment items (STIs). (i) On September 1, 
2006, a $28,000 deficiency is assessed with respect to H's and W's 2003 
joint return. The deficiency is the result of 4 erroneous items--
    (A) A disallowed Lifetime Learning Credit of $2,000 attributable to 
H;
    (B) A disallowed business expense deduction of $8,000 attributable 
to H;
    (C) Unreported income of $24,000 attributable to W; and
    (D) Unreported self-employment tax of $14,000 attributable to W.
    (ii) H and W both elect to allocate the deficiency.
    (iii) The $2,000 Lifetime Learning Credit and the $14,000 self-
employment tax are STIs totaling $16,000. The amount of erroneous items 
included in computing the proportionate allocation ratio is $32,000 
($24,000 unreported income and $8,000 disallowed business expense 
deduction). The amount of the deficiency subject to proportionate 
allocation is reduced by the amount of STIs ($28,000-$16,000 = $12,000).
    (iv) Of the $32,000 of proportionate allocation items, $24,000 is 
allocable to W, and $8,000 is allocable to H.

W's share of allocable items       ..  H's share of allocable items
\3/4\ ($24,000/$32,000)            ..  \1/4\ ($8,000/$32,000)
 

    (v) W's liability for the portion of the deficiency subject to 
proportionate allocation is limited to $9,000 (\3/4\ of $12,000) and H's 
liability for such portion is limited to $3,000 (\1/4\ of $12,000).
    (vi) After the proportionate allocation is completed, the amount of 
the STIs is added to each spouse's allocated share of the deficiency.

           W's share of total deficiency                      ..  .........  H's share of total deficiency
-------------------------------------------------------------    -----------------------------------------------
  $ 9,000  allocated deficiency                               ..     $3,000  allocated deficiency
   14,000  self-employment tax                                ..      2,000  Lifetime Learning Credit
----------                                                       -----------
  $23,000  .................................................  ..     $5,000
 


[[Page 107]]

    (vii) Therefore, W's liability is limited to $23,000 and H's 
liability is limited to $5,000.
    Example 5. Requesting spouse receives a benefit on the joint return 
from the nonrequesting spouse's erroneous item. (i) In 2001, H reports 
gross income of $4,000 from his business on Schedule C, and W reports 
$50,000 of wage income. On their 2001 joint Federal income tax return, H 
deducts $20,000 of business expenses resulting in a net loss from his 
business of $16,000. H and W divorce in September 2002, and on May 22, 
2003, a $5,200 deficiency is assessed with respect to their 2001 joint 
return. W elects to allocate the deficiency. The deficiency on the joint 
return results from a disallowance of all of H's $20,000 of deductions.
    (ii) Since H used only $4,000 of the disallowed deductions to offset 
gross income from his business, W benefitted from the other $16,000 of 
the disallowed deductions used to offset her wage income. Therefore, 
$4,000 of the disallowed deductions are allocable to H and $16,000 of 
the disallowed deductions are allocable to W. W's liability is limited 
to $4,160 (\4/5\ of $5,200). If H also elected to allocate the 
deficiency, H's election to allocate the $4,160 of the deficiency to W 
would be invalid because H had actual knowledge of the erroneous items.
    Example 6. Calculation of requesting spouse's benefit on the joint 
return when the nonrequesting spouse's erroneous item is partially 
disallowed. Assume the same facts as in Example 5, except that H deducts 
$18,000 for business expenses on the joint return, of which $16,000 are 
disallowed. Since H used only $2,000 of the $16,000 disallowed 
deductions to offset gross income from his business, W received benefit 
on the return from the other $14,000 of the disallowed deductions used 
to offset her wage income. Therefore, $2,000 of the disallowed 
deductions are allocable to H and $14,000 of the disallowed deductions 
are allocable to W. W's liability is limited to $4,550 (\7/8\ of 
$5,200).

    (6) Alternative allocation methods--(i) Allocation based on 
applicable tax rates. If a deficiency arises from two or more erroneous 
items that are subject to tax at different rates (e.g., ordinary income 
and capital gain items), the deficiency will be allocated after first 
separating the erroneous items into categories according to their 
applicable tax rate. After all erroneous items are categorized, a 
separate allocation is made with respect to each tax rate category using 
the proportionate allocation method of paragraph (d)(4) of this section.
    (ii) Allocation methods provided in subsequent published guidance. 
Additional alternative methods for allocating erroneous items under 
section 6015(c) may be prescribed by the Treasury and IRS in subsequent 
revenue rulings, revenue procedures, or other appropriate guidance.
    (iii) Example. The following example illustrates the rules of this 
paragraph (d)(6):

    Example. Allocation based on applicable tax rates. H and W timely 
file their 1998 joint Federal income tax return. H and W divorce in 
1999. On July 13, 2001, a $5,100 deficiency is assessed with respect to 
H's and W's 1998 return. Of this deficiency, $2,000 results from 
unreported capital gain of $6,000 that is attributable to W and $4,000 
of capital gain that is attributable to H (both gains being subject to 
tax at the 20% marginal rate). The remaining $3,100 of the deficiency is 
attributable to $10,000 of unreported dividend income of H that is 
subject to tax at a marginal rate of 31%. H and W both timely elect to 
allocate the deficiency, and qualify under this section to do so. There 
are erroneous items subject to different tax rates; thus, the 
alternative allocation method of this paragraph (d)(6) applies. The 
three erroneous items are first categorized according to their 
applicable tax rates, then allocated. Of the total amount of 20% tax 
rate items ($10,000), 60% is allocable to W and 40% is allocable to H. 
Therefore, 60% of the $2,000 deficiency attributable to these items (or 
$1,200) is allocated to W. The remaining 40% of this portion of the 
deficiency ($800) is allocated to H. The only 31% tax rate item is 
allocable to H. Accordingly, H is liable for $3,900 of the deficiency 
($800 + $3,100), and W is liable for the remaining $1,200.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec.  1.6015-4  Equitable relief.

    (a) A requesting spouse who files a joint return for which a 
liability remains unpaid and who does not qualify for full relief under 
Sec.  1.6015-2 or 1.6015-3 may request equitable relief under this 
section. The Internal Revenue Service has the discretion to grant 
equitable relief from joint and several liability to a requesting spouse 
when, considering all of the facts and circumstances, it would be 
inequitable to hold the requesting spouse jointly and severally liable.
    (b) This section may not be used to circumvent the limitation of 
Sec.  1.6015-3(c)(1) (i.e., no refunds under Sec.  1.6015-3). Therefore, 
relief is not available under this section to obtain a refund of 
liabilities already paid, for which the requesting spouse would 
otherwise qualify for relief under Sec.  1.6015-3.

[[Page 108]]

    (c) For guidance concerning the criteria to be used in determining 
whether it is inequitable to hold a requesting spouse jointly and 
severally liable under this section, see Rev. Proc. 2000-15 (2000-1 C.B. 
447), or other guidance published by the Treasury and IRS (see Sec.  
601.601(d)(2) of this chapter).

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec.  1.6015-5  Time and manner for requesting relief.

    (a) Requesting relief. To elect the application of Sec.  1.6015-2 or 
1.6015-3, or to request equitable relief under Sec.  1.6015-4, a 
requesting spouse must file Form 8857, ``Request for Innocent Spouse 
Relief'' (or other specified form); submit a written statement 
containing the same information required on Form 8857, which is signed 
under penalties of perjury; or submit information in the manner 
prescribed by the Treasury and IRS in forms, relevant revenue rulings, 
revenue procedures, or other published guidance (see Sec.  601.601(d)(2) 
of this chapter).
    (b) Time period for filing a request for relief--(1) In general. To 
elect the application of Sec.  1.6015-2 or 1.6015-3, or to request 
equitable relief under Sec.  1.6015-4, a requesting spouse must file 
Form 8857 or other similar statement with the Internal Revenue Service 
no later than two years from the date of the first collection activity 
against the requesting spouse after July 22, 1998, with respect to the 
joint tax liability.
    (2) Definitions--(i) Collection activity. For purposes of this 
paragraph (b), collection activity means a section 6330 notice; an 
offset of an overpayment of the requesting spouse against a liability 
under section 6402; the filing of a suit by the United States against 
the requesting spouse for the collection of the joint tax liability; or 
the filing of a claim by the United States in a court proceeding in 
which the requesting spouse is a party or which involves property of the 
requesting spouse. Collection activity does not include a notice of 
deficiency; the filing of a Notice of Federal Tax Lien; or a demand for 
payment of tax. The term property of the requesting spouse, for purposes 
of this paragraph (b), means property in which the requesting spouse has 
an ownership interest (other than solely through the operation of 
community property laws), including property owned jointly with the 
nonrequesting spouse.
    (ii) Section 6330 notice. A section 6330 notice refers to the notice 
sent, pursuant to section 6330, providing taxpayers notice of the 
Service's intent to levy and of their right to a collection due process 
(CDP) hearing.
    (3) Requests for relief made before commencement of collection 
activity. An election or request for relief may be made before 
collection activity has commenced. For example, an election or request 
for relief may be made in connection with an audit or examination of the 
joint return or a demand for payment, or pursuant to the CDP hearing 
procedures under section 6320 in connection with the filing of a Notice 
of Federal Tax Lien. For more information on the rules regarding 
collection due process for liens, see the Treasury regulations under 
section 6320. However, no request for relief may be made before the date 
specified in paragraph (b)(5) of this section.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (b):

    Example 1. On January 11, 2000, a section 6330 notice is mailed to H 
and W regarding their 1997 joint Federal income tax liability. The 
Internal Revenue Service levies on W's employer on June 5, 2000. The 
Internal Revenue Service levies on H's employer on July 10, 2000. An 
election or request for relief must be made by January 11, 2002, which 
is two years after the Internal Revenue Service sent the section 6330 
notice.
    Example 2. The Internal Revenue Service offsets an overpayment 
against a joint liability for 1995 on January 12, 1998. The offset only 
partially satisfies the liability. The Internal Revenue Service takes no 
other collection actions. On July 24, 2001, W elects relief with respect 
to the unpaid portion of the 1995 liability. W's election is timely 
because the Internal Revenue Service has not taken any collection 
activity after July 22, 1998; therefore, the two-year period has not 
commenced.
    Example 3. Assume the same facts as in Example 2, except that the 
Internal Revenue Service sends a section 6330 notice on January 22, 
1999. W's election is untimely because it is filed more than two years 
after the first collection activity after July 22, 1998.
    Example 4. H and W do not remit full payment with their timely filed 
joint Federal income tax return for the 1989 tax year. No

[[Page 109]]

collection activity is taken after July 22, 1998, until the United 
States files a suit against both H and W to reduce the tax assessment to 
judgment and to foreclose the tax lien on their jointly-held business 
property on July 1, 1999. H elects relief on October 2, 2000. The 
election is timely because it is made within two years of the filing of 
a collection suit by the United States against H.
    Example 5. W files a Chapter 7 bankruptcy petition on July 10, 2000. 
On September 5, 2000, the United States files a proof of claim for her 
joint 1998 income tax liability. W elects relief with respect to the 
1998 liability on August 20, 2002. The election is timely because it is 
made within two years of the date the United States filed the proof of 
claim in W's bankruptcy case.

    (5) Premature requests for relief. The Internal Revenue Service will 
not consider premature claims for relief under Sec.  1.6015-2, 1.6015-3, 
or 1.6015-4. A premature claim is a claim for relief that is filed for a 
tax year prior to the receipt of a notification of an audit or a letter 
or notice from the IRS indicating that there may be an outstanding 
liability with regard to that year. Such notices or letters do not 
include notices issued pursuant to section 6223 relating to TEFRA 
partnership proceedings. A premature claim is not considered an election 
or request under Sec.  1.6015-1(h)(5).
    (c) Effect of a final administrative determination--(1) In general. 
A requesting spouse is entitled to only one final administrative 
determination of relief under Sec.  1.6015-1 for a given assessment, 
unless the requesting spouse properly submits a second request for 
relief that is described in Sec.  1.6015-1(h)(5).
    (2) Example. The following example illustrates the rule of this 
paragraph (c):

    Example: In January 2001, W becomes a limited partner in partnership 
P, and in February 2001, she starts her own business from which she 
earns $100,000 of net income for the year. H and W file a joint return 
for tax year 2001, on which they claim $20,000 in losses from their 
investment in P, and they omit W's self-employment tax. In March 2003, 
the Internal Revenue Service commences an audit under the provisions of 
subchapter C of chapter 63 of subtitle F of the Internal Revenue Code 
(TEFRA partnership proceeding) and sends H and W a notice under section 
6223(a)(1). In September 2003, the Internal Revenue Service audits H's 
and W's 2001 joint return regarding the omitted self-employment tax. H 
may file a claim for relief from joint and several liability for the 
self-employment tax liability because he has received a notification of 
an audit indicating that there may be an outstanding liability on the 
joint return. However, his claim for relief regarding the TEFRA 
partnership proceeding is premature under paragraph (b)(5) of this 
section. H will have to wait until the Internal Revenue Service sends 
him a notice of computational adjustment or assesses the liability 
resulting from the TEFRA partnership proceeding before he files a claim 
for relief with respect to any such liability. The assessment relating 
to the TEFRA partnership proceeding is separate from the assessment for 
the self-employment tax; therefore, H's subsequent claim for relief for 
the liability from the TEFRA partnership proceeding is not precluded by 
his previous claim for relief from the self-employment tax liability 
under this paragraph (c).

[T.D. 9003, 67 FR 47285, July 18, 2002, as amended at 67 FR 54735, Aug. 
26, 2002]



Sec.  1.6015-6  Nonrequesting spouse's notice and opportunity to 
participate in administrative proceedings.

    (a) In general. (1) When the Internal Revenue Service receives an 
election under Sec.  1.6015-2 or 1.6015-3, or a request for relief under 
Sec.  1.6015-4, the Internal Revenue Service must send a notice to the 
nonrequesting spouse's last known address that informs the nonrequesting 
spouse of the requesting spouse's claim for relief. For further guidance 
regarding the definition of last known address, see Sec.  301.6212-2 of 
this chapter. The notice must provide the nonrequesting spouse with an 
opportunity to submit any information that should be considered in 
determining whether the requesting spouse should be granted relief from 
joint and several liability. A nonrequesting spouse is not required to 
submit information under this section. Upon the request of either 
spouse, the Internal Revenue Service will share with one spouse the 
information submitted by the other spouse, unless such information would 
impair tax administration.
    (2) The Internal Revenue Service must notify the nonrequesting 
spouse of the Service's preliminary and final determinations with 
respect to the requesting spouse's claim for relief under section 6015.
    (b) Information submitted. The Internal Revenue Service will 
consider all of the information (as relevant to each

[[Page 110]]

particular relief provision) that the nonrequesting spouse submits in 
determining whether relief from joint and several liability is 
appropriate, including information relating to the following--
    (1) The legal status of the requesting and nonrequesting spouses' 
marriage;
    (2) The extent of the requesting spouse's knowledge of the erroneous 
items or underpayment;
    (3) The extent of the requesting spouse's knowledge or participation 
in the family business or financial affairs;
    (4) The requesting spouse's education level;
    (5) The extent to which the requesting spouse benefitted from the 
erroneous items;
    (6) Any asset transfers between the spouses;
    (7) Any indication of fraud on the part of either spouse;
    (8) Whether it would be inequitable, within the meaning of 
Sec. Sec.  1.6015-2(d) and 1.6015-4, to hold the requesting spouse 
jointly and severally liable for the outstanding liability;
    (9) The allocation or ownership of items giving rise to the 
deficiency; and
    (10) Anything else that may be relevant to the determination of 
whether relief from joint and several liability should be granted.
    (c) Effect of opportunity to participate. The failure to submit 
information pursuant to paragraph (b) of this section does not affect 
the nonrequesting spouse's ability to seek relief from joint and several 
liability for the same tax year. However, information that the 
nonrequesting spouse submits pursuant to paragraph (b) of this section 
is relevant in determining whether relief from joint and several 
liability is appropriate for the nonrequesting spouse should the 
nonrequesting spouse also submit an application for relief.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec.  1.6015-7  Tax Court review.

    (a) In general. Requesting spouses may petition the Tax Court to 
review the denial of relief under Sec.  1.6015-1.
    (b) Time period for petitioning the Tax Court. Pursuant to section 
6015(e), the requesting spouse may petition the Tax Court to review a 
denial of relief under Sec.  1.6015-1 within 90 days after the date 
notice of the Service's final determination is mailed by certified or 
registered mail (90-day period). If the IRS does not mail the requesting 
spouse a final determination letter within 6 months of the date the 
requesting spouse files an election under Sec.  1.6015-2 or 1.6015-3, 
the requesting spouse may petition the Tax Court to review the election 
at any time after the expiration of the 6-month period, and before the 
expiration of the 90-day period. The Tax Court also may review a claim 
for relief if Tax Court jurisdiction has been acquired under another 
section of the Internal Revenue Code such as section 6213(a) or 6330(d).
    (c) Restrictions on collection and suspension of the running of the 
period of limitations--(1) Restrictions on collection under Sec.  
1.6015-2 or 1.6015-3. Unless the Internal Revenue Service determines 
that collection will be jeopardized by delay, no levy or proceeding in 
court shall be made, begun, or prosecuted against a requesting spouse 
electing the application of Sec.  1.6015-2 or 1.6015-3 for the 
collection of any assessment to which the election relates until the 
expiration of the 90-day period described in paragraph (b) of this 
section, or if a petition is filed with the Tax Court, until the 
decision of the Tax Court becomes final under section 7481. For more 
information regarding the date on which a decision of the Tax Court 
becomes final, see section 7481 and the regulations thereunder. 
Notwithstanding the above, if the requesting spouse appeals the Tax 
Court's decision, the Internal Revenue Service may resume collection of 
the liability from the requesting spouse on the date the requesting 
spouse files the notice of appeal, unless the requesting spouse files an 
appeal bond pursuant to the rules of section 7485. Jeopardy under this 
paragraph (c)(1) means conditions exist that would require an assessment 
under section 6851 or 6861 and the regulations thereunder.
    (2) Waiver of the restrictions on collection. A requesting spouse 
may, at any time (regardless of whether a notice of the Service's final 
determination of relief is mailed), waive the restrictions on collection 
in paragraph (c)(1) of this section.

[[Page 111]]

    (3) Suspension of the running of the period of limitations--(i) 
Relief under Sec.  1.6015-2 or 1.6015-3. The running of the period of 
limitations in section 6502 on collection against the requesting spouse 
of the assessment to which an election under Sec.  1.6015-2 or 1.6015-3 
relates is suspended for the period during which the Internal Revenue 
Service is prohibited by paragraph (c)(1) of this section from 
collecting by levy or a proceeding in court and for 60 days thereafter. 
However, if the requesting spouse signs a waiver of the restrictions on 
collection in accordance with paragraph (c)(2) of this section, the 
suspension of the period of limitations in section 6502 on collection 
against the requesting spouse will terminate on the date that is 60 days 
after the date the waiver is filed with the Internal Revenue Service.
    (ii) Relief under Sec.  1.6015-4. If a requesting spouse seeks only 
equitable relief under Sec.  1.6015-4, the restrictions on collection of 
paragraph (c)(1) of this section do not apply. Accordingly, the request 
for relief does not suspend the running of the period of limitations on 
collection.
    (4) Definitions--(i) Levy. For purposes of this paragraph (c), levy 
means an administrative levy or seizure described by section 6331.
    (ii) Proceedings in court. For purposes of this paragraph (c), 
proceedings in court means suits filed by the United States for the 
collection of Federal tax. Proceedings in court does not refer to the 
filing of pleadings and claims and other participation by the Internal 
Revenue Service or the United States in suits not filed by the United 
States, including Tax Court cases, refund suits, and bankruptcy cases.
    (iii) Assessment to which the election relates. For purposes of this 
paragraph (c), the assessment to which the election relates is the 
entire assessment of the deficiency to which the election relates, even 
if the election is made with respect to only part of that deficiency.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec.  1.6015-8  Applicable liabilities.

    (a) In general. Section 6015 applies to liabilities that arise after 
July 22, 1998, and to liabilities that arose prior to July 22, 1998, 
that were not paid on or before July 22, 1998.
    (b) Liabilities paid on or before July 22, 1998. A requesting spouse 
seeking relief from joint and several liability for amounts paid on or 
before July 22, 1998, must request relief under section 6013(e) and the 
regulations thereunder.
    (c) Examples. The following examples illustrate the rules of this 
section:

    Example 1. H and W file a joint Federal income tax return for 1995 
on April 15, 1996. There is an understatement on the return attributable 
to an omission of H's wage income. On October 15, 1998, H and W receive 
a 30-day letter proposing a deficiency on the 1995 joint return. W pays 
the outstanding liability in full on November 30, 1998. In March 1999, W 
files Form 8857, requesting relief from joint and several liability 
under section 6015(b). Although W's liability arose prior to July 22, 
1998, it was unpaid as of that date. Therefore, section 6015 is 
applicable.
    Example 2. H and W file their 1995 joint Federal income tax return 
on April 15, 1996. On October 14, 1997, a deficiency of $5,000 is 
assessed regarding a disallowed business expense deduction attributable 
to H. On June 30, 1998, the Internal Revenue Service levies on the 
$3,000 in W's bank account in partial satisfaction of the outstanding 
liability. On August 31, 1998, W files a request for relief from joint 
and several liability. The liability arose prior to July 22, 1998. 
Section 6015 is applicable to the $2,000 that remained unpaid as of July 
22, 1998, and section 6013(e) is applicable to the $3,000 that was paid 
prior to July 22, 1998.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec.  1.6015-9  Effective date.

    Sections 1.6015-0 through 1.6015-9 are applicable for all elections 
under Sec.  1.6015-2 or 1.6015-3 or any requests for relief under Sec.  
1.6015-4 filed on or after July 18, 2002.

[T.D. 9003, 67 FR 47285, July 18, 2002]



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

[[Page 112]]

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 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:

[[Page 113]]

    (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 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 Sec. Sec.  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

[[Page 114]]

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 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

[[Page 115]]

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 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           $11,500
 section 56) shown on H's return.............................
(2) Plus: Amount of tax imposed by chapter 2 shown on H's            500
 return......................................................
                                                              ----------
(3) Total taxes imposed by chapter 1 (other than by section       12,000
 56) and by chapter 2 shown on H's return....................
(4) Amount of tax imposed by chapter 1 (other than by section     $8,000
 56) shown on W's return.....................................
                                                              ----------
(5) Total taxes imposed by chapter 1 (other than by section       20,000
 56) and by chapter 2 shown on both H's and W's returns......
                                                              ==========
(6) Proportion of such taxes shown on H's return to total            60%
 amount of such taxes shown on both H's and W's returns
 ($12,000/20,000)............................................
(7) Amount of estimated tax payments allocated to H (60% of      $11,700
 $10,500)....................................................
 


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

[[Page 116]]

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 
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

[[Page 117]]

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 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:

[[Page 118]]

    (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 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

[[Page 119]]

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, 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

[[Page 120]]

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 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.

[[Page 121]]



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 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 Sec. Sec.  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).

[[Page 122]]

    (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 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

[[Page 123]]

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 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 ($264,000x12/9).......................     352,000
(3) Tax liability on item (2)...............................     177,540
(4) Item (3) reduced by $100,000 (there are no credits under      77,540
 part IV, subchapter A, chapter 1 of the Code)..............
(5) Estimated tax for 9-month period ($77,540x9/12).........      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

[[Page 124]]

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 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(a)-1  Return of partnership income.

    (a) Domestic partnerships--(1) Return required. Except as provided 
in paragraphs (a)(3) and (c) of this section and Sec.  1.6031(a)-1T, 
every domestic partnership must file a return of partnership income 
under section 6031 (partnership return) for each taxable year on the 
form prescribed for the partnership return. The partnership return must 
be filed for the taxable year of the partnership regardless 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 the rules governing 
partnership statements to partners and nominees, see Sec.  1.6031(b)-1T. 
For the rules requiring the disclosure of certain transactions, see 
Sec.  1.6011-4T.
    (2) Content of return. The partnership return must contain the 
information required by the prescribed form and the accompanying 
instructions.
    (3) Special rule. (i) A partnership that has no income, deductions, 
or credits for federal income tax purposes for a taxable year is not 
required to file a partnership return for that year.

[[Page 125]]

    (ii) [Reserved]. For further guidance see Sec.  1.6031(a)-
1T(a)(3)(ii).
    (4) Failure to file. For the consequences of a failure to comply 
with the requirements of section 6031(a) and this paragraph (a), see 
sections 6229(a), 6231(f), 6698, and 7203.
    (b) Foreign partnerships--(1) General rule. A foreign partnership is 
not required to file a partnership return, if the foreign partnership 
does not have gross income that is (or is treated as) effectively 
connected with the conduct of a trade or business within the United 
States (ECI) and does not have gross income (including gains) derived 
from sources within the United States (U.S.-source income). Except as 
provided in paragraphs (b)(2) and (3) of this section, a foreign 
partnership that has ECI or has U.S.-source income that is not ECI must 
file a partnership return for its taxable year in accordance with the 
rules for domestic partnerships in paragraph (a) of this section.
    (2) Foreign partnerships with de minimis U.S.-source income and de 
minimis U.S. partners. A foreign partnership (other than a withholding 
foreign partnership, as defined in Sec.  1.1441-5(c)(2)(i)) that has 
$20,000 or less of U.S.-source income and has no ECI during its taxable 
year is not required to file a partnership return if, at no time during 
the partnership taxable year, one percent or more of any item of 
partnership income, gain, loss, deduction, or credit is allocable in the 
aggregate to direct United States partners. The United States partners 
must directly report their shares of the allocable items of partnership 
income, gain, loss, deduction, and credit.
    (3) Filing obligations for certain other foreign partnerships with 
no ECI--(i) General requirements for modified filing obligations. A 
foreign partnership will be subject to the modified filing obligations 
in paragraphs (b)(3)(ii) and (iii) of this section if, in addition to 
satisfying the requirements contained in paragraphs (b)(3)(ii) and (iii) 
of this section--
    (A) The partnership is not a withholding foreign partnership as 
defined in Sec.  1.1441-5(c)(2)(i);
    (B) Forms 1042 and 1042-S are filed by the partnership with respect 
to the amounts subject to reporting under Sec.  1.1461-1(b) and (c), 
unless the partnership is not required to file such returns under Sec.  
1.1461-1(b)(2) and (c)(4), in which case Forms 1042 and 1042-S must be 
filed by another withholding agent or agents; and
    (C) The tax liability of the partners withrespect to such amounts 
has been fully satisfied by the withholding of tax at the source, if 
applicable, under chapter 3 of the Internal Revenue Code.
    (ii) Foreign partnerships with U.S.-source income but no U.S. 
partners. A foreign partnership that has U.S.-source income is not 
required to file a partnership return if the partnership has no ECI and 
no United States partners at any time during the partnership's taxable 
year.
    (iii) Foreign partnerships with U.S.-source income and U.S. 
partners. Except as provided in paragraph (b)(2) of this section, a 
foreign partnership with one or more United States partners that has 
U.S.-source income but no ECI must file a partnership return. However, 
such a foreign partnership need not file Statements of Partner's Share 
of Income, Credit, Deduction, etc. (Schedules K-1) for any partners 
other than its direct United States partners and its passthrough 
partners (whether U.S. or foreign) through which United States partners 
hold an interest in the foreign partnership. Schedules K-1 that are not 
excepted from filing under this paragraph (b)(3)(iii) must contain the 
same information required of a domestic partnership filing under 
paragraph (a) of this section.
    (4) Information or returns required of partners who are United 
States persons--(i) In general. If a United States person is a partner 
in a partnership that is not required to file a partnership return, the 
district director or director of the relevant service center may require 
that person to render the statements or provide the information 
necessary to verify the accuracy of the reporting by that person of any 
items of partnership income, gain, loss, deduction, or credit.
    (ii) Controlled foreign partnerships. Certain United States persons 
who are partners in a foreign partnership controlled (within the meaning 
of section 6038(e)(1)) by United States persons may be required to 
provide information

[[Page 126]]

with respect to the partnership under section 6038.
    (5) Certain partnership elections. For a partnership that is not 
otherwise required to file a partnership return, if an election that can 
only be made by the partnership under section 703 (affecting the 
computation of taxable income derived from a partnership) is to be made 
by or for the partnership, a return on the form prescribed for the 
partnership return must be filed for the partnership. Unless otherwise 
provided in the form or the accompanying instructions, a return filed 
solely to make an election need only contain a written statement citing 
paragraph (b)(5)(ii) of this section, listing the name and address of 
the partnership making the election, and clearly identifying the 
specific election being made. A return filed under paragraph (b)(5)(ii) 
of this section solely to make an election is not a partnership return. 
Thus, such a return is not a return filed under section 6031(a) for 
purposes of sections 6501 (except regarding the specific election 
issue), 6231(a)(1)(A), and 6233. The return must be signed by--
    (i) Each partner that is a partner in the partnership at the time 
the election is made; or
    (ii) Any partner of the partnership who is authorized (under local 
law or the partnership's organizational documents) to make the election 
and who represents to having such authorization under penalties of 
perjury.
    (6) Exclusion for certain organizations. The return requirement of 
section 6031 and this section does not apply to the International 
Telecommunications Satellite Organization, the International Maritime 
Satellite Organization, or any organization that is a successor of 
either.
    (c) Partnerships excluded from the application of subchapter K of 
the Internal Revenue Code--(1) Wholly excluded--(i) Year of election. An 
eligible partnership as described in Sec.  1.761-2(a) that elects to be 
excluded from all the provisions of subchapter K of chapter 1 of the 
Internal Revenue Code in the manner specified by Sec.  1.761-2(b)(2)(i) 
must timely file the form prescribed for the partnership return for the 
taxable year for which the election is made. In lieu of the information 
otherwise required, the return must contain or be accompanied by the 
information required by Sec.  1.761-2(b)(2)(i).
    (ii) Subsequent years. Except as otherwise provided in paragraph 
(c)(1)(i) of this section, an eligible partnership that elects to be 
wholly excluded from the application of subchapter K is not required to 
file a partnership return.
    (2) Deemed excluded. An eligible partnership that is deemed to have 
elected exclusion from the application of subchapter K beginning with 
its first taxable year, as specified in Sec.  1.761-2(b)(2)(ii), is not 
required to file a partnership return.
    (d) Definitions--(1) Partnership. For the meaning of the term 
partnership, see Sec.  1.761-1(a).
    (2) United States person. In applying this section, a United States 
person is a person described in section 7701(a)(30); the government of 
the United States, a State, or the District of Columbia (including an 
agency or instrumentality thereof); or a corporation created or 
organized in Guam, the Commonwealth of Northern Mariana Islands, the 
U.S. Virgin Islands, and American Samoa, if the requirements of section 
881(b)(1)(A), (B), and (C) are met for such corporation. The term does 
not include an alien individual who is a resident of Puerto Rico, Guam, 
the Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, 
or American Samoa, as determined under Sec.  301.7701(b)-1(d) of this 
chapter.
    (3) United States partner. In applying this section, a United States 
partner is any United States person who holds a direct or indirect 
interest in the partnership.
    (4) Indirect interest. An indirect interest is any interest held 
through one or more passthrough partners, as defined in section 
6231(a)(9).
    (e) Procedural requirements--(1) Place for filing. The return of a 
partnership must be filed with the service center prescribed in the 
relevant IRS revenue procedure, publication, form, or instructions to 
the form (see Sec.  601.601(d)(2)).
    (2) Time for filing. The return of a partnership must be filed on or 
before the fifteenth day of the fourth month

[[Page 127]]

following the close of the taxable year of the partnership.
    (3) Magnetic media filing. For magnetic media filing requirements 
with respect to partnerships, see section 6011(e)(2) and the regulations 
thereunder.
    (f) Effective dates. This section applies to taxable years of a 
partnership beginning after December 31, 1999, except that--
    (1) Paragraph (b)(3) of this section applies to taxable years of a 
foreign partnership beginning after December 31, 2000; and
    (2) [Reserved]. For further guidance, see Sec.  1.6031(a)-1T(f)(2).

[T.D. 8841, 64 FR 61500, Nov. 12, 1999, as amended by T.D. 9000, 67 FR 
41328, June 18, 2002; T.D. 9094, 68 FR 63734, Nov. 10, 2003; 68 FR 
70584, Dec. 18, 2003]



Sec.  1.6031(a)-1T  Return of partnership income (temporary).

    (a) through (a)(3)(i) [Reserved]. For further guidance see Sec.  
1.6031(a)-1(a) through (a)(3)(i).
    (ii) The Commissioner may, in guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this chapter), 
provide for an exception to partnership reporting under section 6031 and 
for conditions for the exception, if all or substantially all of a 
partnership's income is derived from the holding or disposition of tax-
exempt obligations (as defined in section 1275(a)(3) and Sec.  1.1275-
1(e)) or shares in a regulated investment company (as defined in section 
851(a)) that pays exempt-interest dividends (as defined in section 
852(b)(5)).
    (a)(4) through (f)(1) [Reserved]. For further guidance see Sec.  
1.6031(a)-1(a)(4) through (f)(1).
    (f)(2) Effective dates. Paragraph (a)(3)(ii) of this section applies 
to taxable years of a partnership beginning on or after November 5, 
2003. The applicability of paragraph (a)(3)(ii) of this section expires 
on or before November 6, 2006.

[T.D. 9094, 68 FR 63734, Nov. 10, 2003; 68 FR 70584, Dec. 18, 2003]



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--

[[Page 128]]

    (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 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;

[[Page 129]]

    (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 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

[[Page 130]]

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 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

[[Page 131]]

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).
    (3) The term broker shall have the meaning set forth in paragraph 
(a)(1) of Sec.  1.6045ca-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

[[Page 132]]

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]



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

[[Page 133]]

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 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

[[Page 134]]

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 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.

[[Page 135]]

    (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) 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

[[Page 136]]

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 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

[[Page 137]]

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 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

[[Page 138]]

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 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

[[Page 139]]

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 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 Sec. Sec.  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

[[Page 140]]

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 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

[[Page 141]]

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) 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

[[Page 142]]

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 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

[[Page 143]]

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.
    (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--

[[Page 144]]

    (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).
    (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

[[Page 145]]

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.

    (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

[[Page 146]]

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 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

[[Page 147]]

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 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 Sec. Sec.  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]

[[Page 148]]



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;
    (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

[[Page 149]]

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 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

[[Page 150]]

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
    (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. For 
the rules requiring the disclosure of certain transactions, see Sec.  
1.6011-4T.
    (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; T.D. 9000, 67 FR 41328, June 18, 2002]



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

[[Page 151]]

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;
    (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

[[Page 152]]

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 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

[[Page 153]]

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 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.


[[Page 154]]


    (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 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

[[Page 155]]

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 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,

[[Page 156]]

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--
    (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

[[Page 157]]

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. (For a rule regarding attribution 
from a nonresident alien, see paragraph (l) of this section).
    (ii) If an individual who is a United States person required to 
furnish information with respect to a foreign corporation under section 
6038 is entitled under a treaty to be treated as a nonresident of the 
United States, and if the individual claims this treaty benefit, and if 
there are no other United States persons that are required to furnish 
information under section 6038 with respect to the foreign corporation, 
then the individual may satisfy the requirements of paragraphs (f)(10), 
(f)(11), (g), and (h) of this section by filing the audited foreign 
financial statements of the foreign corporation with the individual's 
return required under section 6038.
    (iii) 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.
    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

[[Page 158]]

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 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

[[Page 159]]

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.
    (5) Illustrations. 1'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,             40,000
 profits, and income.......................................
(c) Reduction of foreign tax paid by N (for purposes of M's        6,000
 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).........................................
(d) Foreign tax paid by N after section 6038(c)(1)(B)             34,000
 reduction.................................................
(e) Dividend paid by N to M................................       45,000
(f) Accumulated profits of N as defined in section               100,000
 902(c)(1) (determined without regard to the section
 6038(c)(1)(B) reduction)..................................

[[Page 160]]

 
(g) Accumulated profits of N as described in section 902(a)       60,000
 (determined without regard to the section 6038(c)(1)(B)
 reduction)................................................
(h) For purposes of the section 902 credit, M is deemed to        25,500
 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.......................................
 
       (45,000/60,000)x34,000=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 taxes deemed 
paid by M under section 902 as in example (1), items (c), (d), and (h).

    (l) Other persons excepted from filing. For tax years of foreign 
corporations ending on or after December 29, 1999, any person required 
to furnish information under this section with respect to a foreign 
corporation does not have to furnish that information if the following 
conditions are met--
    (1) Such person does not own a direct or indirect interest in the 
foreign corporation; and
    (2) Such person is required to furnish information solely by reason 
of attribution of stock ownership from a nonresident alien(s) under 
paragraph (c) of this section.

[T.D. 8040, 50 FR 30163, July 24, 1985, as amended by T.D. 8573, 59 FR 
64302, Dec. 14, 1994; T.D. 8733, 62 FR 53385, Oct. 14, 1997; T.D. 8850, 
64 FR 72550, Dec. 28, 1999]



Sec.  1.6038-3  Information returns required of certain United States 
persons with respect to controlled foreign partnerships (CFPs).

    (a) Persons required to make return--(1) Controlling fifty-percent 
partners. The term controlling fifty-percent partner means a United 
States person that controlled (as defined in paragraph (b)(1) of this 
section) the foreign partnership at any time during the partnership's 
tax year (as defined in paragraph (b)(8) of this section). Except as 
provided in paragraph (c), (d), or (e) of this section, for each tax 
year of a foreign partnership during which the partnership has one or 
more controlling fifty-percent partners, each controlling fifty-percent 
partner must complete and file Form 8865, ``Return of U.S. Persons With 
Respect To Certain Foreign Partnerships,'' containing the information 
described in paragraph (g) of this section.

[[Page 161]]

    (2) Controlling ten-percent partners. If at any point during a 
foreign partnership's tax year (as defined in paragraph (b)(8) of this 
section) a United States person owned a ten-percent or greater interest 
in the partnership while the partnership was controlled by United States 
persons owning ten-percent or greater interests, such United States 
person is a controlling ten-percent partner. See paragraph (b)(1) of 
this section for the definition of control. However, a United States 
person is not a controlling ten-percent partner with respect to a 
particular foreign partnership for a particular tax year of the foreign 
partnership if at any point during that year the partnership had a 
controlling fifty-percent partner, as defined in paragraph (a)(1) of 
this section. Except as provided in paragraph (c), (d), or (e) of this 
section, for each tax year of a partnership during which the partnership 
has controlling ten-percent partners, each controlling ten-percent 
partner must complete and file Form 8865 containing the information 
described in paragraph (g)(1) of this section.
    (3) Separate returns for each partnership. A United States person 
required to report under this paragraph (a) must file a separate Form 
8865 for each foreign partnership with respect to which the person is a 
controlling fifty-percent partner or a controlling ten-percent partner.
    (b) Ownership determinations and definitions--(1) Control. Control 
of a foreign partnership is ownership of more than a fifty-percent 
interest in the partnership.
    (2) Fifty-percent interest. A fifty-percent interest in a 
partnership is an interest equal to fifty percent of the capital 
interest in such partnership, an interest equal to fifty percent of the 
profits interest in such partnership, or an interest to which fifty 
percent of the deductions or losses of such partnership are allocated.
    (3) Ten-percent interest. A ten-percent interest in a partnership is 
an interest equal to ten percent of the capital interest in such 
partnership, an interest equal to ten percent of the profits interest in 
such partnership, or an interest to which ten percent of the deductions 
or losses of such partnership are allocated.
    (4) Constructive ownership rules. For purposes of determining an 
interest in a partnership, the constructive ownership rules of section 
267(c) (other than section 267(c)(3)) apply, taking into account that 
such rules refer to corporations and not to partnerships. However, an 
interest will be attributed from a nonresident alien under the family 
attribution rules of section 267(c)(2) and (4) only if the person to 
whom the interest is attributed owns a direct or indirect (under the 
rules of 267(c)(1) or (5)) interest in the foreign partnership.
    (5) Determination of amount of interest. Whether a person owns a 
fifty-percent interest, or a ten-percent interest, as described in 
paragraphs (b)(2) and (3) of this section, is determined for each tax 
year of the foreign partnership by reference to the agreement of the 
partners relating to such interests during that tax year.
    (6) Definition of United States person. The term United States 
person is defined in section 7701(a)(30).
    (7) Definition of a foreign partnership. A foreign partnership is a 
partnership described in section 7701(a)(5).
    (8) Tax year of a foreign partnership. The tax year of a foreign 
partnership is determined under section 706.
    (9) Examples. The rules of paragraph (a) of this section and this 
paragraph (b) are illustrated by the following examples:

    Example 1. Sole U.S. partner does not own more than a fifty-percent 
interest. No United States person owns any interest (directly or 
constructively) in FPS, a foreign partnership whose tax year under 
section 706 is the calendar year. On January 1, 2001, US, a United 
States person with the calendar year as its tax year, contributes 
property to FPS in exchange for a 40% interest in a section 721 
transaction. No United States persons acquire directly or constructively 
any other interests in FPS during FPS's 2001 tax year. US is not a 
controlling fifty-percent partner during FPS's 2001 tax year. US did not 
own during that tax year, either directly or constructively, more than a 
50% interest in the partnership under paragraphs (b)(2) and (4) of this 
section. Also, US is not a controlling ten-percent partner; although US 
owned a 10% or greater interest, US persons owning at least 10% 
interests did not control FPS. Therefore, US does not have to file with 
its

[[Page 162]]

2001 income tax return a Form 8865 with respect to FPS under section 
6038. (But see section 6038B for the reporting obligations of US with 
respect to its transfer of property to FPS and section 6046A for the 
reporting obligation of US with respect to its acquisition of an 
interest in FPS. See also Sec.  1.6046A-1(f)(1) regarding the overlap 
between sections 6038B and 6046A.
    Example 2. Controlling ten-percent partners. Assume the same facts 
as in Example 1. In addition, on January 1, 2002, US1, a United States 
person unrelated to US and a calendar year taxpayer, purchases a 15% 
interest in FPS from a foreign partner of FPS. Neither US nor US1 is a 
controlling fifty-percent partner during FPS's 2002 tax year because 
neither one owns more than a 50% percent interest in FPS during that 
year. However, US and US1 are controlling ten-percent partners for that 
year because each owns at least a 10% interest (US owns a 40% interest 
and US1 owns a 15% interest) and together they control FPS because 
collectively they own more than a 50% interest in FPS. As controlling 
ten-percent partners, under section 6038, each is required to file a 
Form 8865 with its 2002 income tax return. (US1 must also report its 
acquisition of the 15% interest in FPS under section 6046A on its Form 
8865 filed with its 2002 income tax return.)
    Example 3. Constructive ownership rules. Assume the same facts as in 
Example 2. In addition, on January 1, 2003, US2, a United States person 
and the brother of US, purchases 50% of the stock of FC, a foreign 
corporation. FC owns a 20% interest in FPS. Thus, under sections 
6038(e)(3) and 267(c)(1), US2 indirectly owns a 10% interest in FPS (10% 
is US2's proportionate share of FC's 20% interest in FPS), and under 
sections 6038(e)(3) and 267(c)(2), US2 is attributed US's 40% interest. 
Additionally, US directly owns a 40% interest in FPS and is attributed 
US2's 10% interest pursuant to section 6038(e)(3) and section 267(c)(2). 
Therefore, US2 is considered to own a 50% interest (10% indirectly and 
40% from US) in FPS, and US is considered to own a 50% interest in FPS 
(40% directly and 10% from US2). FPS has no controlling fifty-percent 
partners, because neither US, US1, nor US2, owns a greater than 50% 
interest. However, US, US1, and US2 are each controlling ten-percent 
partners and each must file Form 8865 pursuant to section 6038 for FPS's 
2003 tax year ending December 31, 2003. Each must attach Form 8865 to 
its tax return for its 2003 tax year.
    Example 4. Controlling fifty-percent partners. Assume the same facts 
as in Example 3. In addition, on June 1, 2004, US acquires an additional 
1% direct interest in FPS. US is now a controlling fifty-percent partner 
of FPS, because US owns a 41% interest directly and a 10% interest 
constructively from US2. US2 is also a controlling fifty-percent 
partner, because US2 owns 10% indirectly and 41% constructively from US. 
Both US and US2 are required to file Form 8865 containing all the 
information required to be submitted by controlling fifty-percent 
partners. (But see paragraph (c)(1) of this section, which contains 
filing exceptions when there are multiple controlling fifty-percent 
partners). US1 is no longer a controlling ten-percent partner because 
FPS now has at least one controlling fifty-percent partner, and US1 does 
not qualify as a controlling fifty-percent partner. Therefore, US1 is 
not required to file Form 8865 under section 6038.
    Example 5. Constructive ownership from a nonresident alien. US, a 
United States person, does not own directly or constructively an 
interest in FPS, a foreign partnership. The tax year of FPS is the 
calendar year. NRA, a nonresident alien, is the mother of US. In 2002, 
NRA acquires a 55% interest in FPS. Because US owns neither a direct nor 
a constructive interest in FPS under sections 6038(e)(3) and 267(c)(1) 
or (5), NRA's interest is not attributed to US under sections 6038(e)(3) 
and 267(c)(2). If in 2003 NRA becomes a United States person, NRA's 
interest will be attributed to US. However, US is excused from filing 
Form 8865 if US satisfies the requirements of the constructive owners 
exception in paragraph (c)(2) of this section. In 2003, NRA is a 
controlling fifty-percent partner and must file a Form 8865 under 
section 6038 for FPS's 2003 tax year.

    (c) Exceptions when more than one United States person is required 
to file Form 8865 pursuant to section 6038--(1) Multiple controlling 
fifty-percent partners--(i) In general. If, with respect to the same 
foreign partnership for the same tax year, more than one United States 
person is a controlling fifty-percent partner, then in lieu of each 
controlling fifty-percent partner filing a separate Form 8865, only one 
Form 8865 from one of the controlling fifty-percent partners is 
required, provided all of the requirements of paragraph (c)(1)(ii) of 
this section are satisfied. A person that is a controlling fifty-percent 
partner solely because of an interest to which deductions or losses are 
allocated may file the single return only if there is no United States 
person that is a controlling fifty-percent partner by reason of an 
interest in capital or profits.
    (ii) Requirements--(A) The person undertaking the filing obligation 
must file Form 8865 with that person's income tax return in the manner 
provided by Form 8865 and the accompanying instructions. The return must

[[Page 163]]

contain all of the information that would have been required to be 
reported by this section if each controlling fifty-percent partner had 
filed its own Form 8865.
    (B) Any controlling fifty-percent partner not filing Form 8865 must 
file with its income tax return a statement titled ``Controlled Foreign 
Partnership Reporting'' containing the following information--
    (1) A statement that the person qualified as a controlling fifty-
percent partner, but is not submitting Form 8865 pursuant to the 
multiple controlling fifty-percent partners exception;
    (2) The name, address, and taxpayer identification number (if any) 
of the foreign partnership of which the person qualified as a 
controlling fifty-percent partner;
    (3) A representation that the filing requirement has been or will be 
satisfied;
    (4) The name and address of the person filing the single return;
    (5) The Internal Revenue Service Center where the single return is 
required to be filed; and
    (6) Any additional information that Form 8865 and the accompanying 
instructions require.
    (iii) Penalties. If the requirements listed in paragraph (c)(1)(ii) 
of this section are not satisfied, a United States person that did not 
file a Form 8865 pursuant to this paragraph will be subject to the 
penalties in paragraph (k) of this section, unless the reasonable cause 
provision in paragraph (k)(4) of this section is satisfied.
    (2) Certain constructive owners excepted from furnishing 
information--(i) In general. A United States person that does not own a 
direct interest in the foreign partnership and that is required to file 
Form 8865 under this section solely by reason of constructive ownership 
from a United States person(s) pursuant to paragraph (b)(4) of this 
section (an indirect partner) is not required to file Form 8865 if all 
of the requirements listed in paragraph (c)(2)(ii) of this section are 
met.
    (ii) Requirements--(A) The United States person(s) whose interest 
the indirect partner constructively owns reports all the information 
such person(s) is required to submit under this section, unless such 
person also is required to file solely by reason of constructive 
ownership from a United States person(s) pursuant to paragraph (b)(4) of 
this section, or another person reports the information pursuant to 
paragraph (c)(1) of this section.
    (B) The indirect partner files with its income tax return a 
statement titled ``Controlled Foreign Partnership Reporting'' containing 
the following information--
    (1) A representation that the indirect partner was required to file 
Form 8865, but is not doing so pursuant to the constructive owners 
exception;
    (2) The names and addresses of the United States persons whose 
interests the indirect partner constructively owns;
    (3) The name and address of the foreign partnership with respect to 
which the indirect partner would have had to have filed Form 8865 but 
for this exception; and
    (4) Any additional information that Form 8865 and the accompanying 
instructions require.
    (iii) Penalties. A United States person that pursuant to this 
paragraph (c)(2) does not file a return will be subject to the penalties 
in paragraph (k) of this section if the requirements listed in paragraph 
(c)(2)(ii) of this section are not satisfied, unless such failure is due 
to reasonable cause, as defined in paragraph (k)(4) of this section.
    (iv) Overlap with multiple controlling fifty-percent partners 
exception--(A) If a United States person qualifies for both the 
exception in paragraph (c)(1) of this section and the exception in this 
paragraph (c)(2), such person may only utilize the multiple controlling 
fifty-percent partners exception in paragraph (c)(1) of this section to 
avoid filing Form 8865.
    (B) Example. The following example illustrates the operation of this 
paragraph (c)(2)(iv):

    Example. US is a U.S. citizen. US owns 100% of the stock of DC, a 
domestic corporation. DC owns a 60% direct interest in FPS, a foreign 
partnership. DC and US are the only U.S. persons that own interests 
directly or constructively in FPS. DC owns directly a greater than 50% 
interest in FPS. US constructively owns DC's interest pursuant to 
sections 6038(e)(3) and 267(c)(1). Therefore, both DC and US are 
controlling fifty-percent

[[Page 164]]

partners. US qualifies for both the exception in paragraph (c)(1) of 
this section (multiple controlling fifty-percent partners) and the 
exception in paragraph (c)(2) of this section (constructive owner 
exception). US may only utilize the paragraph (c)(1) exception to avoid 
its filing obligation. Accordingly, DC may file a single Form 8865 on 
behalf of US and itself. However, that form must contain all the 
information that would have been submitted had DC and US each submitted 
a separate Form 8865.

    (3) Members of an affiliated group of corporations filing a 
consolidated return. If one or more members of an affiliated group of 
corporations filing a consolidated return are required under section 
6038 to file a Form 8865 for a particular foreign partnership, the 
common parent corporation may file one Form 8865 on behalf of all of the 
members of the group required to report under section 6038. Except with 
respect to group members who also qualify under the exception in 
paragraph (c)(2) of this section, the Form 8865 must contain all the 
information that would have been required to be submitted if each group 
member were required to file its own Form 8865.
    (d) Exception for certain trusts. Trusts relating to state and local 
government employee retirement plans are not required to report under 
this section, unless the instructions to Form 8865 provide otherwise.
    (e) Reporting under this section not required with respect to 
partnerships excluded from the application of subchapter K. The 
reporting requirements of this section will not apply to any United 
States person in respect of an eligible partnership as described in 
Sec.  1.761-2(a) if such partnership has validly elected to be excluded 
from all of the provisions of subchapter K of chapter 1 of the Internal 
Revenue Code in the manner specified in Sec.  1.761-2(b)(2)(i), or such 
partnership is deemed to have elected to be excluded from all of the 
provisions of subchapter K of chapter 1 of the Internal Revenue Code in 
accordance with the provisions of Sec.  1.761-2(b)(2)(ii).
    (f) Period covered by return. The information required under this 
section must be furnished for the tax year of the foreign partnership 
ending with or within the United States person's tax year. See section 
706 for rules regarding tax years of partnerships.
    (g) Contents of return--(1) Information required to be submitted by 
controlling fifty-percent partners and controlling ten-percent partners. 
All controlling fifty-percent partners and all controlling ten-percent 
partners must submit the following information on Form 8865 in the form 
and manner and to the extent prescribed by Form 8865 and its 
instructions--
    (i) The name, address, and taxpayer identification number (if any) 
of the foreign partnership of which the person qualified as a 
controlling fifty-percent partner or a controlling ten-percent partner;
    (ii) A statement of the income, gain, losses, deductions and credits 
allocated to the direct interest in the partnership of the person 
reporting under section 6038;
    (iii) A list of all partnerships (foreign or domestic) in which the 
foreign partnership owned a direct interest, or owned a constructive 
interest of ten percent of more under the rules of section 267(c)(1) or 
(5), during the partnership's tax year for which the Form 8865 is being 
filed;
    (iv) Information about all foreign entities that were disregarded as 
entities separate from their owner under Sec. Sec.  301.7701-2 and 
301.7701-3 that were owned by the foreign partnership during the 
partnership's tax year for which the Form 8865 is being filed;
    (v) A summary of the transactions that took place during the 
partnership's tax year between the partnership and the person filing the 
return, between the partnership and any other partnership of which the 
person filing the return is a controlling fifty-percent partner, and 
between the partnership and any corporation controlled (under section 
6038(e)(2) and the regulations thereunder) by the person filing the 
return; and
    (vi) Any other information that Form 8865 or its accompanying 
instructions require to be submitted.
    (2) Additional information required to be submitted by controlling 
fifty-percent partners. In addition to the information required pursuant 
to paragraph (g)(1) of this section, controlling fifty-percent

[[Page 165]]

partners must also submit the following information in the form and 
manner and to the extent required by Form 8865 and its instructions--
    (i) A list of the names, addresses and tax identification numbers 
(if any) of each United States person that owned a direct interest of 
ten percent or more in the partnership during the partnership's tax 
year, and of each United States and foreign person whose interests in 
the partnership the controlling fifty-percent partner constructively 
owned under paragraph (b)(4) of this section during the partnership's 
tax year;
    (ii) A list of transactions between the partnership and any United 
States person owning at the time of the transaction at least a 10-
percent direct interest (as defined in paragraph (b)(3) of this section) 
in the foreign partnership;
    (iii) A statement of the aggregate of the partners' distributive 
shares of items of income, gain, losses, deductions and credits;
    (iv) A statement of income, gain, losses, deductions and credits 
allocated to each United States person holding a direct interest in the 
foreign partnership of ten percent or more; and
    (v) Any other information Form 8865 or its accompanying instructions 
require controlling fifty-percent partners to submit.
    (h) Method of reporting. Except as otherwise provided on Form 8865 
or the accompanying instructions, all amounts required to be furnished 
on Form 8865 must be expressed in United States dollars. All statements 
required on or with Form 8865 pursuant to this section must be in 
English.
    (i) Time and place for filing return--(1) In general. Form 8865 must 
be filed with the United States person's income tax return on or before 
the due date (including extensions) of that return. If the United States 
person is not required to file an income tax return for its tax year 
with which or within which the foreign partnership's tax year ends, but 
is required to file an information return for that year (for example, 
Form 1065, ``U.S. Partnership Return of Income,'' or Form 990, ``Return 
of Organization Exempt from Income Tax''), the Form 8865 must be filed 
with the United States person's information return filed on or before 
the due date (including extensions) of that return.
    (2) Duplicate return. If required by the instructions to Form 8865, 
a duplicate Form 8865 (including attachments and schedules) must also be 
filed.
    (j) Overlap with section 6031. A partner may be required to file 
Form 8865 under this section and the foreign partnership in which it is 
a partner may also be required to file a Form 1065 or Form 1065-B under 
section 6031(e) for the same partnership tax year. For cases where a 
United States person is a controlling fifty-percent partner or a 
controlling ten-percent partner with respect to a foreign partnership, 
and that foreign partnership completes and files Form 1065 or Form 1065-
B, the instructions for Form 8865 will specify the filing requirements 
that address this overlap in reporting obligations.
    (k) Failure to comply with reporting requirement--(1) In general. 
Any United States person required to file Form 8865 under Section 6038 
and this section that fails to comply (as defined in paragraph (k)(2) of 
this section) with the reporting requirements of this section, will be 
subject to the penalties described in paragraph (k)(3) of this section.
    (2) Failure to comply. A failure to comply is separately determined 
for each foreign partnership for which a United States person has a 
section 6038 reporting obligation. A failure to comply with the 
requirements of section 6038 includes the following--
    (i) The failure to report at the proper time and in the proper 
manner any 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.
    (3) Penalties. A United States person that fails to comply (as 
defined in paragraph (k)(2) of this section) with the reporting 
requirements of this section must pay the following penalties, subject 
to the reasonable cause exception in paragraph (k)(4) of this section:
    (i) Dollar amount penalty--(A) $10,000 penalty. A penalty of $10,000 
shall be imposed for each tax year of each foreign partnership with 
respect to which a failure to comply occurs.

[[Page 166]]

    (B) Increase in penalty. If a failure to comply with the applicable 
reporting requirements of section 6038 and this section continues for 
more than 90 days after the date on which the Commissioner or the 
Commissioner's delegate mails notice of the failure to the United States 
person required to file Form 8865, the person must pay an additional 
penalty of $10,000 for each 30-day period (or fraction thereof) during 
which the failure continues after the 90-day period has expired.
    (C) Limitation. The additional penalty imposed on any United States 
person by section 6038(b)(2) and paragraph (k)(3)(i)(B) of this section 
is limited to a maximum of $50,000 for each partnership for each tax 
year with respect to which the failure occurs.
    (ii) Penalty of reducing foreign tax credit--(A) Effect on foreign 
tax credit. Failure to comply with the reporting requirements of section 
6038 and this section may cause a reduction of foreign tax credits under 
section 901 (taxes of foreign countries and of possessions of the United 
States). In applying section 901 to a United States person for any tax 
year with or within which its foreign partnership's tax year ended, the 
amount of taxes paid (and deemed paid under sections 902 and 960) by the 
United States person will be reduced by 10 percent if the person fails 
to comply. However, no tax deemed paid under section 904(c) will be 
reduced under the provisions of this paragraph (k)(3)(ii).
    (B) Reduction for continued failure. If a failure to comply with the 
reporting requirements of section 6038 and this section continues for 
more than 90 days after the date on which the Commissioner or the 
Commissioner's delegate mails notice of the failure to the person 
required to file Form 8865, then the amount of the reduction in 
paragraph (k)(3)(ii)(A) of this section will be 10 percent, plus an 
additional 5 percent for each 3-month period (or fraction thereof) 
during which the failure continues after the 90-day period has expired.
    (C) Limitation on reduction. The amount of the reduction under 
paragraphs (k)(3)(ii)(A) and (B) of this section for each failure to 
furnish information required under this section will not exceed the 
greater of $10,000, or the gross income of the foreign partnership for 
its tax year with respect to which the failure occurred.
    (D) Offset for dollar amount penalty imposed. The total amount of 
the reduction which, but for this paragraph (k)(3)(ii)(D), may be made 
under this paragraph (k)(3)(ii) with respect to any separate failure, 
may not exceed the maximum amount of the reductions that may be imposed, 
reduced (but not below zero) by the dollar amount penalty imposed by 
paragraph (k)(3)(i) of this section with respect to the failure.
    (4) Reasonable cause limitation. The time prescribed for filing a 
complete Form 8865, and the beginning of the 90-day period after the 
Commissioner or the Commissioner's delegate mails notice under 
paragraphs (k)(3)(i)(B) and (ii)(B) of this section, will be treated as 
being not earlier than the last day on which reasonable cause existed 
for failure to furnish the information. The United States person may 
show reasonable cause by providing a written statement to the 
Commissioner's delegate having jurisdiction over the person's return to 
which the Form 8865 should have been attached, setting forth the reasons 
for the failure to comply. Whether a failure to comply was due to 
reasonable cause will be determined by the Commissioner, or the 
Commissioner's delegate, under all the facts and circumstances.
    (5) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6038, see section 6501(c)(8).
    (1) Effective date. Except as otherwise provided, this section shall 
apply for tax years of a foreign partnership ending on or after December 
31, 2000. For tax years of a foreign partnership ending before December 
23, 2002, see Sec.  1.6038-3(j) in effect prior to the amendments made 
by T.D. 9033 (see 26 CFR part 1 revised April 1, 2002).

[T.D. 8850, 64 FR 72550, Dec. 28, 1999, as amended by T.D. 9033, 67 FR 
78175, Dec. 23, 2002; T.D. 9065, 68 FR 39012, July 1, 2003]



Sec.  1.6038A-0  Table of contents.

    This section lists the captions that appear in the regulations under 
section 6038A.


[[Page 167]]



          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.
(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.

[[Page 168]]

(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 Sec. Sec.  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 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

[[Page 169]]

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 Sec. Sec.  
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.
    (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

[[Page 170]]

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 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 Sec. Sec.  1.6038A-3 
and 1.6038A-5.

[[Page 171]]


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 Sec. Sec.  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 Sec. Sec.  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.
    (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

[[Page 172]]

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 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

[[Page 173]]

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); 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.

[[Page 174]]

    (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 
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

[[Page 175]]

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) [Reserved]. For further guidance, see Sec.  1.6038A-2T(d).
    (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.
    (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

[[Page 176]]

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 Sec. Sec.  
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 Sec. Sec.  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, as amended by T.D. 9113, 69 FR 
5932, Feb. 9, 2004]



Sec.  1.6038A-2T  Requirement of return (temporary).

    (a) through (c) [Reserved]. For further guidance, see Sec.  1.6038A-
2(a) through (c).
    (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. A Form 5472 that is timely filed 
electronically satisfies the duplicate filing requirement.
    (e) Through (g) [Reserved]. For further guidance, see Sec.  1.6038A-
2(e) through (g).
    (h) Effective date. (1) This section applies for taxable years 
ending on or after January 1, 2003. For taxable years ending prior to 
January 1, 2003, see Sec.  1.6038A-2(d) in effect prior to January 1, 
2003 (see 26 CFR part 1 revised as of April 1, 2002).
    (2) The applicability of this section expires on or before February 
6, 2007.

[T.D. 9113, 69 FR 5932, Feb. 9, 2004]



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,

[[Page 177]]

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 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

[[Page 178]]

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 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

[[Page 179]]

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 Sec. Sec.  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.
    (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

[[Page 180]]

(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 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

[[Page 181]]

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 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

[[Page 182]]

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.
    (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

[[Page 183]]

``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 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

[[Page 184]]

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 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

[[Page 185]]

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 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

[[Page 186]]

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 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

[[Page 187]]

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 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

[[Page 188]]

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 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

[[Page 189]]

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 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.

[[Page 190]]

    (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 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

[[Page 191]]

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 
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

[[Page 192]]

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.
    (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

[[Page 193]]

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 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

[[Page 194]]

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 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-1  Reporting of certain transfers to foreign corporations.

    (a) Purpose and scope. This section sets forth information reporting 
requirements under section 6038B concerning certain transfers of 
property to foreign corporations. Paragraph (b) of this section provides 
general rules explaining when and how to carry out the reporting 
required under section 6038B with respect to the transfers to foreign 
corporations. Paragraph (c) of this section and Sec.  1.6038B-1T(d) 
specify the information that is required to be reported with respect to 
certain transfers of property that are described in section 
6038B(a)(1)(A) and 367(d), respectively. Section 1.6038B-1(e) describes 
the filing requirements for property transfers described in section 
367(e). Paragraph (f) of this section sets forth the consequences of a 
failure to comply with the requirements of section 6038B and this 
section. For effective dates, see paragraph (g) of this section. For 
rules regarding transfers to foreign partnerships, see section 
6038B(a)(1)(B) and any regulations thereunder.
    (b)(1)(i) and (ii) [Reserved]. For further guidance, see Sec.  
1.6038B-1T(b)(1)(i) and (ii).
    (iii) Transfers of jointly-owned property. If two or more persons 
transfer jointly-owned property to a foreign 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 transferred, 
specifying the nature and extent of the interest. However, a husband and 
wife who jointly file a single Federal income tax return may file a 
single Form 926 with their tax return.
    (2) Exceptions and special rules for transfers of stock or 
securities under section 367(a)--(i) Transfers on or after July 20, 
1998. A U.S. person that transfers stock or securities on or after July 
20, 1998 in a transaction described in section 6038B(a)(1)(A) will be 
considered to have satisfied the reporting requirement under section 
6038B and paragraph (b)(1) of this section if either--
    (A) The U.S. transferor owned less than 5 percent of both the total 
voting power and the total value of the transferee foreign corporation 
immediately after the transfer (taking into account the attribution 
rules of section 318 as modified by section 958(b)), and either:
    (1) The U.S. transferor qualified for nonrecognition treatment with 
respect to the transfer (i.e., the transfer was not taxable under 
Sec. Sec.  1.367(a)-3(b) or (c)); or
    (2) The U.S. transferor is a tax-exempt entity and the income was 
not unrelated business income; or
    (3) The transfer was taxable to the U.S. transferor under Sec.  
1.367(a)-3(c), and such person properly reported the income from the 
transfer on its timely-

[[Page 195]]

filed (including extensions) Federal income tax return for the taxable 
year that includes the date of the transfer; or
    (4) The transfer is considered to be to a foreign corporation solely 
by reason of Sec.  1.83-6(d)(1) and the fair market value of the 
property transferred did not exceed $100,000; or
    (B) The U.S. transferor owned 5 percent or more of the total voting 
power or the total value of the transferee foreign corporation 
immediately after the transfer (taking into account the attribution 
rules of section 318 as modified by section 958(b)) and either:
    (1) The transferor (or one or more successors) properly entered into 
a gain recognition agreement under Sec.  1.367(a)-8; or
    (2) The transferor is a tax-exempt entity and the income was not 
unrelated business income; or
    (3) The transferor properly reported the income from the transfer on 
its timely-filed (including extensions) Federal income tax return for 
the taxable year that includes the date of the transfer; or
    (4) The transfer is considered to be to a foreign corporation solely 
by reason of Sec.  1.83-6(d)(1) and the fair market value of the 
property transferred did not exceed $100,000.
    (ii) Transfers before July 20, 1998. With respect to transfers 
occurring after December 16, 1987, and prior to July 20, 1998, a U.S. 
transferor that transferred U.S. or foreign stock or securities in a 
transfer described in section 367(a) is not subject to section 6038B if 
such person is described in paragraph (b)(2)(i)(A) of this section.
    (3) Special rule for transfers of cash. A U.S. person that transfers 
cash to a foreign corporation in a transfer described in section 
6038B(a)(1)(A) must report the transfer if--
    (i) Immediately after the transfer such person holds directly, 
indirectly, or by attribution (determined under the rules of section 
318(a), as modified by section 6038(e)(2)) at least 10 percent of the 
total voting power or the total value of the foreign corporation; or
    (ii) The amount of cash transferred by such person or any related 
person (determined under section 267(b)(1) through (3) and (10) through 
(12)) to such foreign corporation during the 12-month period ending on 
the date of the transfer exceeds $100,000.
    (4) [Reserved]. For further guidance, see Sec.  1.6038B-1T(b)(4).
    (c) Information required with respect to transfers described in 
section 6038B(a)(1)(A). A United States person that transfers property 
to a foreign corporation in an exchange described in section 
6038B(a)(1)(A) (including cash transferred in taxable years beginning 
after February 5, 1999, and other unappreciated property) must provide 
the following information, in paragraphs labeled to correspond with the 
number or letter set forth in this paragraph (c) and Sec.  1.6038B-
1T(c)(1) through (5). If a particular item is not applicable to the 
subject transfer, the taxpayer must list its heading and state that it 
is not applicable. For special rules applicable to transfers of stock or 
securities, see paragraph (b)(2)(ii) of this section.
    (1) through (5) [Reserved]. For further guidance, see Sec.  1.6038B-
1T(c)(1) through (5).
    (6) Application of section 367(a)(5). If the asset is transferred in 
an exchange described in section 361(a) or (b), a statement that the 
conditions set forth in the second sentence of section 367(a)(5) and any 
regulations under that section have been satisfied, and an explanation 
of any basis or other adjustments made pursuant to section 367(a)(5) and 
any regulations thereunder.
    (d) [Reserved]. For further guidance, see Sec.  1.6038B-1T(d).
    (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) or section 367(e)(2), the distributing 
corporation must comply with the reporting requirements of this 
paragraph (e). Unless otherwise provided in this section, a distributing 
corporation making a distribution described in sections 367(e)(1) or 
367(e)(2) must file a Form 926, ``Return by a U.S. Transferor of 
Property to a Foreign Corporation (under section 367),'' as amended and 
modified by this section.

[[Page 196]]

    (2) Reporting requirements for section 367(e)(1) distributions of 
domestic controlled corporations. A domestic distributing corporation 
making a distribution of the stock or securities of a domestic 
corporation under section 355 is not required to file a Form 926, as 
described in paragraph (e)(1) of this section, and shall have no other 
reporting requirements under section 6038B.
    (3) Reporting requirements for section 367(e)(1) distributions of 
foreign controlled corporations. If the distributing corporation makes a 
section 355 distribution of the stock or securities of a foreign 
controlled corporation to distributee shareholders who are not qualified 
U.S. persons, as defined in Sec.  1.367(e)-1(b)(1), then the 
distributing corporation shall complete Part 1 of the Form 926 and 
attach a signed copy of such form to its U.S. income tax return for the 
year of the distribution. The distributing corporation shall also attach 
to its U.S. income tax return for the year of distribution a statement 
signed under the penalties of perjury entitled, ``Addendum to Form 
926.'' The addendum shall contain a brief description of the 
transaction, state the number of shares distributed to distributees who 
are not qualified U.S. persons (applying the rules contained in Sec.  
1.367(e)-1(d)), and state the basis and fair market value of the 
distributed stock or securities (including a list stating the amounts 
that were distributed to distributees who were not qualified U.S. 
persons and distributees who were qualified U.S. persons).
    (4) Reporting rules for section 367(e)(2) distributions by domestic 
liquidating corporations. If the distributing corporation makes a 
distribution of property in complete liquidation under section 332 to a 
foreign distributee corporation that meets the stock ownership 
requirements of section 332(b) with respect to the stock of the 
distributing corporation, then the distributing corporation shall 
complete a Form 926 and attach a signed copy of such form to its U.S. 
income tax return for the year of the distribution. The property 
description contained in Part III of the Form 926 shall contain a 
description of all property distributed by the liquidating corporation 
(regardless of whether the property qualifies for nonrecognition). The 
description shall also identify the property excepted from gain 
recognition under Sec.  1.367(e)-2(b)(2)(ii) and (iii). If the 
distributing corporation distributes property that will be used by the 
foreign distributee corporation in a U.S. trade or business and the 
distributing corporation does not recognize gain on such distribution 
under Sec.  1.367(e)-2(b)(2)(i), then the distributing corporation may 
satisfy the requirements of this section by completing Part 1 of the 
Form 926, noting thereon that the information required by the Form 926 
is contained in the statement required by Sec.  1.367(e)-
2(b)(2)(i)(C)(2), and attaching a signed copy of the Form 926 to its 
U.S. income tax return for the year of the distribution.
    (f) Failure to comply with reporting requirements--(1) Consequences 
of failure. If a U.S. person is required to file a notice (or otherwise 
comply) under paragraph (b) of this section and fails to comply with the 
applicable 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 the regulations 
thereunder;
    (ii) The U.S. person shall pay a penalty under section 6038B(b)(1) 
equal to 10 percent of the fair market value of the transferred property 
at the time of the exchange, but in no event shall the penalty exceed 
$100,000 unless the failure with respect to such exchange was due to 
intentional disregard (described under paragraph (g)(4) of this 
section); and
    (iii) The period of limitations on assessment of tax upon the 
transfer of that property does not expire before the date which is 3 
years after the date on which the Secretary is furnished the information 
required to be reported under this section. See section 6501(c)(8) and 
any regulations thereunder.
    (2) Failure to comply. A failure to comply with the requirements of 
section 6038B is--

[[Page 197]]

    (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 the 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.
    (4) Definition of intentional disregard. If the transferor fails to 
qualify for the exception under paragraph (f)(3) of this section and if 
the taxpayer knew of the rule or regulation that was disregarded, the 
failure will be considered an intentional disregard of section 6038B, 
and the monetary penalty under paragraph (f)(1)(ii) of this section will 
not be limited to $100,000. See Sec.  1.6662-3(b)(2).
    (g) This section applies to transfers occurring on or after July 20, 
1998, except for transfers of cash made in tax years beginning on or 
before February 5, 1999, which are not required to be reported under 
section 6038B, and except for paragraph (e) of this section, which 
applies to transfers that are subject to Sec. Sec.  1.367(e)-1(f) and 
1.367(e)-2(e). See Sec.  1.6038B-1T for transfers occurring prior to 
July 20, 1998. See also Sec.  1.6038B-1T(e) in effect prior to August 9, 
1999 (as contained in 26 CFR part 1 revised April 1, 1999), for 
transfers described in section 367(e) that are not subject to Sec. Sec.  
1.367(e)-1(f) and 1.367(e)-2(e).

[T.D. 8770, 63 FR 33568, June 19, 1998, as amended by T.D. 8817, 64 FR 
5715, Feb. 5, 1999; 64 FR 15686, 15687, Apr. 1, 1999; T.D. 8834, 64 FR 
43082, Aug. 9, 1999; T.D. 8850, 64 FR 72553, Dec. 28, 1999; T.D. 9100, 
68 FR 70708, Dec. 19, 2003]



Sec.  1.6038B-1T  Reporting of certain transactions to foreign 
corporations (temporary).

    (a) [Reserved]. For further guidance, see Sec.  1.6038B-1(a).
    (b) Time and manner of reporting--(1) In general--(i) Reporting 
procedure. Except for stock or securities qualifying under the special 
reporting rule of Sec.  1.6038B-1(b)(2) , and certain exchanges 
described in section 354 (listed below), any U.S. person that makes a 
transfer described in section 6038B(a)(1)(A), 367(d) or (e), is required 
to report pursuant to section 6038B and the rules of Sec.  1.6038B-1 and 
this section and must attach the required information to Form 926, 
``Return by a U.S. Transferor of Property to a Foreign Corporation.'' 
For special rules regarding cash transfers made in tax years beginning 
after February 5, 1999, see Sec.  1.6038B-1(b)(3) and (g) . For purposes 
of determining a U.S. transferor that is subject to section 6038B, the 
rules of Sec.  1.367(a)-1T(c) and Sec.  1.367(a)-3(d) shall apply with 
respect to a transfer described in section 367(a), and the rules of 
Sec.  1.367(a)-1T(c) shall apply with respect to a transfer described in 
section 367(d). Additionally, if in an exchange described in section 
354, a U.S. person exchanges stock of a foreign corporation in a 
reorganization described in section 368(a)(1)(E), or a U.S. person 
exchanges stock of a domestic or foreign corporation for stock of a 
foreign corporation pursuant to an asset reorganization described in 
section 368(a)(1)(C), (D), or (F), that is not treated as an indirect 
stock transfer under section 367(a), then the U.S. person exchanging 
stock is not required to report under section 6038B. Notwithstanding any 
statement to the contrary on Form 926, the form and attachments must be 
attached to, and filed by the due date (including extensions) of the 
transferor's income tax

[[Page 198]]

return for the taxable year that includes the date of the transfer (as 
defined in Sec.  1.6038B-1T(b)(4)). For taxable years beginning before 
January 1, 2003, 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. For taxable years beginning after December 31, 2002, Form 926 
and any attachments shall be verified by signing the income tax return 
with which the form and attachments are filed.
    (ii) Reporting by corporate transferor. For transfers by 
corporations in taxable years beginning before January 1, 2003, Form 926 
must be signed by an authorized officer of the corporation if the 
transferor is not a member of an affiliated group under section 
1504(a)(1) that files a consolidated Federal income tax return and by an 
authorized officer of the common parent corporation if the transferor is 
a member of such an affiliated group. For transfers by corporations in 
taxable years beginning after December 31, 2002, Form 926 shall be 
verified by signing the income tax return to which the form is attached.
    (b)(2) through (b)(3) [Reserved]. For further guidance, see Sec.  
1.6038B-1(b)(2) through (b)(3).
    (4) 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. 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) Introductory text [Reserved]. For further guidance, see Sec.  
1.6038B-1(c).

[[Page 199]]

    (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 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

[[Page 200]]

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 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).
    (6) [Reserved]. For further guidance, see Sec.  1.6038B-1(c)(6).
    (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

[[Page 201]]

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 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

[[Page 202]]

considered to receive contingent annual payments for the use of the 
intangible property.
    (e) [Reserved]. For further guidance, see Sec.  1.6038B-1(e).
    (f) [Reserved]. For further guidance, see Sec.  1.6038B-1(f).
    (g) Effective date. This section applies to transfers occurring 
after December 31, 1984. See Sec.  1.6038B-1T(a) through (b)(2), (c) 
introductory text, and (f) (26 CFR part 1, revised April 1, 1998) for 
transfers occurring prior to July 20, 1998. See Sec.  1.6038B-1 for 
transfers occurring on or after July 20, 1998.

[T.D. 8087, 51 FR 17957, May 16, 1986, as amended by T.D. 8682, 61 FR 
42177, Aug. 14, 1996; T.D. 8770, 63 FR 33570, June 19, 1998; T.D. 8834, 
64 FR 43083, Aug. 9, 1999; T.D. 9100, 68 FR 70708, Dec. 19, 2003; 69 FR 
5017, Feb. 3, 2004]



Sec.  1.6038B-2  Reporting of certain transfers to foreign partnerships.

    (a) Reporting requirements--(1) Requirement to report transfers. A 
United States person that transfers property to a foreign partnership in 
a contribution described in section 721 (including section 721(b)) must 
report that transfer on Form 8865 ``Information Return of U.S. Persons 
With Respect to Certain Foreign Partnerships'' pursuant to section 6038B 
and the rules of this section, if--
    (i) Immediately after the transfer, the United States person owns, 
directly, indirectly, or by attribution, at least a 10-percent interest 
in the partnership, as defined in section 6038(e)(3)(C) and the 
regulations thereunder; or
    (ii) The value of the property transferred, when added to the value 
of any other property transferred in a section 721 contribution by such 
person (or any related person) to such partnership during the 12-month 
period ending on the date of the transfer, exceeds $100,000.
    (2) Indirect transfer through a domestic partnership--For purposes 
of this section, if a domestic partnership transfers property to a 
foreign partnership in a section 721 transaction, the domestic 
partnership's partners shall be considered to have transferred a 
proportionate share of the property to the foreign partnership. However, 
if the domestic partnership properly reports all of the information 
required under this section with respect to the contribution, no partner 
of the transferor partnership, whether direct or indirect (through tiers 
of partnerships), is also required to report under this section. For 
illustrations of this rule, see Examples 4 and 5 of paragraph (a)(7) of 
this section.
    (3) Indirect transfer through a foreign partnership. [Reserved]
    (4) Requirement to report dispositions--(i) In general. If a United 
States person was required to report a transfer to a foreign partnership 
of appreciated property under paragraph (a)(1) or (2) of this section, 
and the foreign partnership disposes of the property while such United 
States person remains a direct or indirect partner, that United States 
person must report the disposition by filing Form 8865. The form must be 
attached to, and filed by the due date (including extensions) of, the 
United States person's income tax return for the year in which the 
disposition occurred.
    (ii) Disposition of contributed property in nonrecognition 
transaction. If a foreign partnership disposes of contributed 
appreciated property in a nonrecognition transaction and substituted 
basis property is received in exchange, and the substituted basis 
property has built-in gain under Sec.  1.704-3(a)(8), the original 
transferor is not required to report the disposition. However, the 
transferor must report the disposition of the substituted basis property 
in the same manner as provided for the contributed property.
    (5) Time for filing Form 8865. The Form 8865 on which a transfer is 
reported must be attached to the transferor's timely filed (including 
extensions) income tax return for the tax year that includes the date of 
the transfer. If the person required to report under this section is not 
required to file an income tax return for its tax year during which the 
transfer occurred, but is required to file an information return for 
that year (for example, Form 1065, ``U.S. Partnership Return of 
Income,'' or Form 990, ``Return of Organization Exempt from Income 
Tax''), the person should attach the Form 8865 to its information 
return.

[[Page 203]]

    (6) Returns to be made--(i) Separate returns for each partnership. 
If a United States person transfers property reportable under this 
section to more than one foreign partnership in a taxable year, the 
United States person must submit a separate Form 8865 for each 
partnership.
    (ii) Duplicate form to be filed. If required by the instructions 
accompanying Form 8865, a duplicate Form 8865 (including attachments and 
schedules) must also be filed by the due date for submitting the 
original Form 8865 under paragraph (a)(5)(i) or (ii) of this section, as 
applicable.
    (7) Examples. The application of this paragraph (a) may be 
illustrated by the following examples:

    Example 1. On November 1, 2001, US, a United States person that uses 
the calendar year as its taxable year, contributes $200,000 to FP, a 
foreign partnership, in a transaction subject to section 721. After the 
contribution, US owns a 5% interest in FP. US must report the 
contribution by filing Form 8865 for its taxable year ending December 
31, 2001. On March 1, 2002, US makes a $40,000 section 721 contribution 
to FP, after which US owns a 6% interest in FP. US must report the 
$40,000 contribution by filing Form 8865 for its taxable year ending 
December 31, 2002, because the contribution, when added to the value of 
the other property contributed by US to FP during the 12-month period 
ending on the date of the transfer, exceeds $100,000.
    Example 2. F, a nonresident alien, is the brother of US, a United 
States person. F owns a 15% interest in FP, a foreign partnership. US 
contributes $99,000 to FP, in exchange for a 1-percent partnership 
interest. Under sections 6038(e)(3)(C) and 267(c)(2), US is considered 
to own at least a 10-percent interest in FP and, therefore, US must 
report the $99,000 contribution under this section.
    Example 3. US, a United States person, owns 40 percent of FC, a 
foreign corporation. FC owns a 20-percent interest in FP, a foreign 
partnership. Under section 267(c)(1), US is considered to own 8 percent 
of FP due to its ownership of FC. US contributes $50,000 to FP in 
exchange for a 5-percent partnership interest. Immediately after the 
contribution, US is considered to own at least a 10-percent interest in 
FP and, therefore, must report the $50,000 contribution under this 
section.
    Example 4. US, a United States person, owns a 60-percent interest in 
USP, a domestic partnership. On March 1, 2001, USP contributes $200,000 
to FP, a foreign partnership, in exchange for a 5-percent partnership 
interest. Under paragraph (a)(2) of this section, US is considered as 
having contributed $120,000 to FP ($200,000 x 60%). However, under 
paragraph (a)(2), if USP properly reports the contribution to FP, US is 
not required to report its $120,000 contribution. If US directly 
contributes $5,000 to FP on June 10, 2001, US must report the $5,000 
contribution because US is considered to have contributed more than 
$100,000 to FP in the 12-month period ending on the date of the $5,000 
contribution.
    Example 5.  US, a United States person, owns an 80-percent interest 
in USP, a domestic partnership. USP owns an 80-percent interest in USP1, 
a domestic partnership. On March 1, 2001, USP1 contributes $200,000 to 
FP, a foreign partnership, in exchange for a 3-percent partnership 
interest. Under paragraph (a)(2) of this section, USP is considered to 
have contributed $160,000 ($200,000 x 80%) to FP. US is considered to 
have contributed $128,000 to FP ($200,000 x 80% x 80%). However, if USP1 
reports the transfer of the $200,000 to FP, neither US nor USP are 
required to report under this section the amounts they are considered to 
have contributed. Additionally, regardless of whether USP1 reports the 
$200,000 contribution, if USP reports the $160,000 contribution it is 
considered to have made, US does not have to report under this section 
the $128,000 contribution US is considered to have made.

    (b) Transfers by trusts relating to state and local government 
employee retirement plans. Trusts relating to state and local government 
employee retirement plans are not required to report transfers under 
this section, unless otherwise specified in the instructions to Form 
8865.
    (c) Information required with respect to transfers of property. With 
respect to transfers required to be reported under paragraph (a)(1) or 
(2) of this section, the return must contain information in such form or 
manner as Form 8865 (and its accompanying instructions) prescribes with 
respect to reportable events, including--
    (1) The name, address, and U.S. taxpayer identification number of 
the United States person making the transfer;
    (2) The name, U.S. taxpayer identification number (if any), and 
address of the transferee foreign partnership, and the type of entity 
and country under whose laws the partnership was created or organized;
    (3) A general description of the transfer, and of any wider 
transaction of which it forms a part, including the date of transfer;

[[Page 204]]

    (4) The names and addresses of the other partners in the foreign 
partnership, unless the transfer is solely of cash and the transferor 
holds less than a ten-percent interest in the transferee foreign 
partnership immediately after the transfer. However, for tax years of 
U.S. persons beginning on or after January 1, 2000, the person reporting 
pursuant to section 6038B (the transferor) must provide the names and 
addresses of each United States person that owned a ten-percent or 
greater direct interest in the foreign partnership during the 
transferor's tax year in which the transfer occurred, and the names and 
addresses of any other United States or foreign persons that were direct 
partners in the foreign partnership during that tax year and that were 
related to the transferor during that tax year. See paragraph (i)(4) of 
this section for the definition of a related person;
    (5) A description of the partnership interest received by the United 
States person, including a change in partnership interest;
    (6) A separate description of each item of contributed property that 
is appreciated property subject to the allocation rules of section 
704(c)(except to the extent that the property is permitted to be 
aggregated in making allocations under section 704(c)), or is intangible 
property, including its estimated fair market value and adjusted basis; 
and
    (7) A description of other contributed property, not specified in 
paragraph (c)(6) of this section, aggregated by the following categories 
(with, in each case, a brief description of the property)--
    (i) Stock in trade of the transferor (inventory);
    (ii) Tangible property (other than stock in trade) used in a trade 
or business of the transferor;
    (iii) Cash;
    (iv) Stock, notes receivable and payable, and other securities; and
    (v) Other property.
    (d) Information required with respect to dispositions of property. 
In respect of dispositions required to be reported under paragraph 
(a)(4) of this section, the return must contain information in such form 
or manner as Form 8865 (and its accompanying instructions) prescribes 
with respect to reportable events, including--
    (1) The date and manner of disposition;
    (2) The gain and depreciation recapture amounts, if any, realized by 
the partnership; and
    (3) Any such amounts allocated to the United States person.
    (e) Method of reporting. Except as otherwise provided on Form 8865, 
or the accompanying instructions, all amounts reported as required under 
this section must be expressed in United States currency, with a 
statement of the exchange rates used. All statements required on or with 
Form 8865 pursuant to this section must be in the English language.
    (f) Reporting under this section not required of partnerships 
excluded from the application of subchapter K--(1) Election to be wholly 
excluded. The reporting requirements of this section will not apply to 
any United States person in respect of an eligible partnership as 
described in Sec.  1.761-2(a), if such partnership has validly elected 
to be excluded from all of the provisions of subchapter K of chapter 1 
of the Internal Revenue Code in the manner specified in Sec.  1.761-
2(b)(2)(i).
    (2) Deemed excluded. The reporting requirements of this section will 
not apply to any United States person in respect of an eligible 
partnership as described in Sec.  1.761-2(a), if such partnership is 
validly deemed to have elected to be excluded from all of the provisions 
of subchapter K of chapter 1 of the Internal Revenue Code in accordance 
with the provisions of Sec.  1.761-2(b)(2)(ii).
    (g) Deemed contributions. Deemed contributions resulting from IRS-
initiated section 482 adjustments are not required to be reported under 
section 6038B. However, taxpayers must report deemed contributions 
resulting from taxpayer-initiated adjustments. Such information will be 
furnished timely if filed by the due date, including extensions, for 
filing the taxpayer's income tax return for the year in which the 
adjustment is made.
    (h) Failure to comply with reporting requirements--(1) Consequences 
of failure. If a United States person is required to

[[Page 205]]

file a return under paragraph (a) of this section and fails to comply 
with the reporting requirements of section 6038B and this section, then 
such person is subject to the following penalties:
    (i) The United States person is subject to a penalty equal to 10 
percent of the fair market value of the property at the time of the 
contribution. Such penalty with respect to a particular transfer is 
limited to $100,000, unless the failure to comply with respect to such 
transfer was due to intentional disregard.
    (ii) The United States person must recognize gain (reduced by the 
amount of any gain recognized, with respect to that property, by the 
transferor after the transfer) as if the contributed property had been 
sold for fair market value at the time of the contribution. Adjustments 
to the basis of the partnership's assets and any relevant partner's 
interest as a result of gain being recognized under this provision will 
be made as though the gain was recognized in the year in which the 
failure to report was finally determined.
    (2) Failure to comply. A failure to comply with the requirements of 
section 6038B includes--
    (i) The failure to report at the proper time and in the proper 
manner any information required to be reported under the rules of this 
section; and
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section.
    (3) Reasonable cause exception. Under section 6038B(c)(2) and this 
section, the provisions of paragraph (h)(1) of this section will not 
apply if the transferor shows that a failure to comply was due to 
reasonable cause and not willful neglect. The transferor may attempt to 
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 will be determined by the district 
director under all the facts and circumstances.
    (4) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6038B, see section 6501(c)(8).
    (i) Definitions--(1) Appreciated property. Appreciated property is 
property that has a fair market value in excess of basis.
    (2) Domestic partnership. A domestic partnership is a partnership 
described in section 7701(a)(4).
    (3) Foreign partnership. A foreign partnership is a partnership 
described in section 7701(a)(5).
    (4) Related person. Persons are related persons if they bear a 
relationship described in section 267(b)(1) through (3) or (10) through 
(12), after application of section 267(c) (except for (c)(3)), or in 
section 707(b)(1)(B).
    (5) Substituted basis property. Substituted basis property is 
property described in section 7701(a)(42).
    (6) Taxpayer-initiated adjustment. A taxpayer-initiated adjustment 
is a section 482 adjustment that is made by the taxpayer pursuant to 
Sec.  1.482-1(a)(3).
    (7) United States person. A United States person is a person 
described in section 7701(a)(30).
    (j) Effective dates-- (1) In general. Except as otherwise provided 
in this section, this section applies to transfers made on or after 
January 1, 1998. However, for a transfer made on or after January 1, 
1998, but before January 1, 1999, the filing requirements of this 
section may be satisfied by--
    (i) Filing a Form 8865 with the taxpayer's income tax return 
(including a partnership return of income) for the first taxable year 
beginning on or after January 1, 1999; or
    (ii) Filing a Form 926 (modified to reflect that the transferee is a 
partnership, not a corporation) with the taxpayer's income tax return 
(including a partnership return of income) for the taxable year in which 
the transfer occurred.
    (2) Transfers made between August 5, 1997 and January 1, 1998. A 
United States person that made a transfer of property between August 5, 
1997, and January 1, 1998, that is required to be reported under section 
6038B may satisfy its reporting requirement by reporting in accordance 
with the provisions of this section or in accordance with the provisions 
of Notice 98-17

[[Page 206]]

(1998-11 IRB 6)(see Sec.  601.601(d)(2) of this chapter).
    (3) Special rule for transfers made before January 1, 2000. Even if 
not reported in accordance with the rules provided in paragraph (a)(5) 
of this section, or paragraph (j) (1) or (2) of this section, a transfer 
that occurred before January 1, 2000 will nevertheless be considered 
timely reported if the transferor reports it on a Form 8865 attached to 
an amended tax return for the transferor's tax year in which the 
transfer occurred, provided such amended return is filed no later than 
September 15, 2000.

[T.D. 8817, 64 FR 5715, Feb. 5, 1999; 64 FR 15686, Apr. 1, 1999; T.D. 
8850, 64 FR 72554, Dec. 28, 1999]



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 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

[[Page 207]]

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.
    (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

[[Page 208]]

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) Information returns required--(i) Payments 
required to be reported. Except as otherwise provided in Sec. Sec.  
1.6041-3 and 1.6041-4, every person engaged in a trade or business shall 
make an information return for each calendar year with respect to 
payments it makes during the calendar year in the course of its trade or 
business to another person of fixed or determinable income described in 
paragraph (a)(1)(i) (A) or (B) of this section. For purposes of the 
regulations under this section, the person described in this paragraph 
(a)(1)(i) is a payor.
    (A) Salaries, wages, commissions, fees, and other forms of 
compensation for services rendered aggregating $600 or more.
    (B) Interest (including original issue discount), rents, royalties, 
annuities, pensions, and other gains, profits, and income aggregating 
$600 or more.
    (ii) Information returns required under other provisions of the 
Internal Revenue Code. The payments described in paragraphs (a)(1)(i) 
(A) and (B) of this section shall not include any payments of amounts 
with respect to which an information return 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), sections 6049(a) (1) and (2) 
(relating to interest), section 6050N(a) (relating to royalties), or 
section 6050P (a) or (b) (relating to cancellation of indebtedness). In 
addition, the payments described in paragraphs (a)(1)(i) (A) and (B) of 
this section shall not include amounts excepted from the definition of 
dividends under section 6042(b)(2) and Sec.  1.6042-

[[Page 209]]

3(b)(1), amounts described in section 6044(b), amounts excepted from 
reporting under Sec.  1.6045-1(g), amounts excepted from the definition 
of interest under section 6049(b)(2) (C) or (D), Sec.  1.6049-4(c), or 
1.6049-5(b)(6) through (15). Notwithstanding the preceding sentence, 
interest with respect to a notional principal contract excluded from the 
definition of interest under Sec.  1.6049-5(b)(15) is reportable under 
this section. The term interest as used in this paragraph (a)(1)(ii) 
otherwise includes all interest, other than interest coming within the 
definition of interest provided in Sec.  1.6049-5(a). For example, a 
closely held corporation borrows money from one of its officers on a 
promissory note not in registered form bearing annual stated interest of 
$300. The corporation also pays royalties to the officer amounting to 
$400 a year. An information return is required under this paragraph 
(a)(1) to report the payments to the officer because the interest does 
not come within the definition of interest in Sec.  1.6049-5(a) and the 
aggregate of interest and royalties exceeds $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. For the requirement to submit the information required by Form 
1099 on magnetic media for payments after December 31, 1983, see section 
6011(e) and Sec.  301.6011-2 of this chapter (Procedure and 
Administration Regulations).
    (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 (i) 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 payment made 
jointly to two or more payees may be fixed and determinable income to 
one payee even though the payment is not fixed and determinable income 
to another payee. For example, property insurance proceeds paid jointly 
to the owner of damaged property and to a contractor that repairs the 
property may be fixed and determinable income to the contractor but not 
fixed and determinable income to the owner, and should be reported to 
the contractor. 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) In general. Amounts 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

[[Page 210]]

contract by reason of the death of the insured and is not required to be 
reported by paragraph (b) of Sec.  1.6041-2,
    (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) Professional fees. 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) Prizes and awards. Amounts paid as prizes and awards that 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 are required to be 
reported in returns of information under this section.
    (4) Disability payments. Amounts paid as disability payments under 
section 105(d) are required to be reported in returns of information 
under this section.
    (5) Notional principal contracts. Except as provided in paragraphs 
(b)(5)(i) and (ii) of this section, amounts paid after December 31, 
2000, with respect to notional principal contracts referred to in Sec.  
1.863-7 or 1.988-2(e) to persons who are not described in Sec.  1.6049-
4(c)(1)(ii) are required to be reported in returns of information under 
this section. The amount required to be reported under this paragraph 
(d)(5) is limited to the amount of cash paid from the notional principal 
contract as described in Sec.  1.446-3(d). A non-periodic payment is 
reportable for the year in which an actual payment is made. Any amount 
of interest determined under the provisions of Sec.  1.446-3(g)(4) 
(dealing with interest in the case of a significant non-periodic 
payment) is reportable under this paragraph (d)(5) and not under section 
6049 (see Sec.  1.6049-5(b)(15)). See Sec.  1.6041-4(a)(4) for reporting 
exceptions regarding payments to foreign persons. See, however, Sec.  
1.1461-1(c)(1) for reporting amounts described under this paragraph 
(d)(5) that are paid to foreign persons. The provisions of Sec.  1.6049-
5(d) shall apply for determining whether a payment with respect to a 
notional principal contract is made to a foreign person. See Sec.  
1.6049-4(a) for a definition of payor. For purposes of this paragraph 
(d)(5), a payor includes a middleman defined in Sec.  1.6049-4(f)(4).
    (i) An amount paid with respect to a notional principal contract is 
not required to be reported if the payment is made outside the United 
States (as defined in Sec.  1.6049-5(e)) by a non-U.S. payor or a non-
U.S. middleman.
    (ii) An amount paid with respect to a notional principal contract is 
not required to be reported if the payment is made outside the United 
States (as defined in Sec.  1.6049-5(e)) by a payor that has no actual 
knowledge that the payee is a U.S. person, and the payor is--
    (A) A U.S. payor or U.S. middleman that is not a U.S. person (such 
as a controlled foreign corporation defined in section 957(a) or certain 
foreign corporations or foreign partnerships engaged in a U.S. trade or 
business); or
    (B) A foreign branch of a U.S. bank. See Sec.  1.6049-5(c)(5) for a 
definition of a U.S. payor, a U.S. middleman, a non-U.S. payor, and a 
non-U.S. middleman.
    (e) Payment made on behalf of another person--(1) In general. A 
person that makes a payment in the course of its trade or business on 
behalf of another person is the payor that must make a return of 
information under this section with respect to that payment if the 
payment is described in paragraph (a) of this section and, under all the 
facts and circumstances, that person--
    (i) Performs management or oversight functions in connection with 
the payment (this would exclude, for example, a person who performs mere 
administrative or ministerial functions

[[Page 211]]

such as writing checks at another's direction); or
    (ii) Has a significant economic interest in the payment (i.e., an 
economic interest that would be compromised if the payment were not 
made, such as by creation of a mechanic's lien on property to which the 
payment relates, or a loss of collateral).
    (2) Determination of payor obligated to report. If two or more 
persons meet the requirements for making a return of information with 
respect to a payment, as set forth in paragraph (e)(1) of this section, 
the person obligated to report the payment is the person closest in the 
chain to the payee, unless the parties agree in writing that one of the 
other parties meeting the requirements set forth in paragraph (e)(1) of 
this section will report the payment.
    (3) Special rule for payment by employee to employer. 
Notwithstanding the provisions of paragraph (e)(1) of this section, an 
employee acting in the course of his employment who makes a payment to 
his employer on behalf of another person is not required to make a 
return of information with respect to that payment.
    (4) Optional method to report. A person that makes a payment on 
behalf of another person but is not required to make an information 
return under paragraph (e)(1) of this section may elect to do so 
pursuant to the procedures established by the Commissioner. See, e.g., 
Rev. Proc. 84-33 (1984-1 C.B. 502) (optional method for a paying agent 
to report and deposit amounts withheld for payors under the statutory 
provisions of backup withholding) (see Sec.  601.601(d)(2) of this 
chapter).
    (5) Examples. The provisions of this paragraph (e) are illustrated 
by the following examples:

    Example 1. Bank B provides financing to C, a real estate developer, 
for a construction project. B makes disbursements from the account for 
labor, materials, services, and other expenses related to the 
construction project. In connection with the payments, B performs the 
following functions: approves payments to the general contractor or 
subcontractors; ensures that loan proceeds are properly applied and that 
all approved bills are properly paid to avoid mechanics' or 
materialmen's liens; conducts site inspections to determine whether work 
has been completed (but does not check the quality of the work). B is 
performing management or oversight functions in connection with the 
payments and is subject to the information reporting requirements of 
section 6041 with respect to payments.
    Example 2. Mortgage company D holds a mortgage on business property 
owned by E. When the property is damaged by a storm, E's insurance 
company issues a check payable to both D and E in settlement of E's 
claim. Pursuant to the contract between D and E, D holds the insurance 
proceeds in an escrow account and makes disbursements, according to E's 
instructions, to contractors and subcontractors performing repairs on 
the property. D is not performing management or oversight functions, but 
D has a significant economic interest in the payments because the 
purpose of the arrangement is to ensure that property on which D holds a 
mortgage is repaired or replaced. D is subject to the information 
reporting requirements of section 6041 with respect to the payments to 
contractors.
    Example 3. Settlement agent F provides real estate closing services 
to real estate brokers and agents. F deposits money received from the 
buyer or lender in an escrow account and makes payments from the account 
to real estate agents or brokers, appraisers, land surveyors, building 
inspectors, or similar service providers according to the provisions of 
the real estate contract and written instructions from the lender. F may 
also make disbursements pursuant to oral instructions of the seller or 
purchaser at closing. F is not performing management or oversight 
functions and does not have a significant economic interest in the 
payments, and is not subject to the information reporting requirements 
of section 6041. For the rules relating to F's obligation to report the 
gross proceeds of the sale, see section 6045(e) and Sec.  1.6045-4.
    Example 4. Assume the same facts as in Example 3. In addition, the 
seller instructs F to hire a contractor to perform repairs on the 
property. F selects the contractor, negotiates the cost, monitors the 
progress of the project, and inspects the work to ensure it complies 
with the contract. With respect to the payments to the contractor, F is 
performing management or oversight functions and is subject to the 
information reporting requirements of section 6041.
    Example 5. G is a rental agent who manages certain rental property 
on behalf of property owner H. G finds tenants, arranges leases, 
collects rent, responds to tenant inquiries regarding maintenance, and 
hires and makes payments to repairmen. G subtracts her commission and 
any maintenance payments from rental payments and remits the remainder 
to H. With respect to payments to repairmen, G is performing management 
or oversight functions and is subject to the information reporting 
requirements of section

[[Page 212]]

6041. With respect to the payment of rent to H, G is subject to the 
information reporting requirements of section 6041 regardless of whether 
she performs management or oversight functions or has a significant 
economic interest in the payment. See Sec.  1.6041-3(d) for rules 
relating to rental agents. See Sec.  1.6041-1(f) to determine the amount 
that G should report to H as rent.
    Example 6. Literary agent J receives a payment from publisher L of 
fees earned by J's client, author K. J deposits the payment into a bank 
account in J's name. From time to time and as directed by K, J makes 
payments from these funds to attorneys, managers, and other third 
parties for services rendered to K. After subtracting J's commission, J 
pays K the net amount. J does not order or direct the provision of 
services by the third parties to K, and J exercises no discretion in 
making the payments to the third parties or to K. J is not performing 
management or oversight functions and does not have a significant 
economic interest in the payments and is not subject to the information 
reporting requirements of section 6041 in connection with the payments 
to K or to the third parties. For the rules relating to L's obligation 
to report the payment of the fees to K, see paragraphs (a)(1)(i) and (f) 
of this section. For the rules relating to K's obligation to report the 
payment of the commission to J and the payments to the third parties for 
services, see paragraphs (a)(1)(i) and (d)(2) of this section.
    Example 7. Attorney P deposits into a client trust fund a settlement 
payment from R, the defendant in a breach of contract action for lost 
profits in which P represented plaintiff Q. P makes payments from the 
client trust fund to service providers such as expert witnesses and 
private investigators for expenses incurred in the litigation. P decides 
whom to hire, negotiates the amount of payment, and determines that the 
services have been satisfactorily performed. In the event of a dispute 
with a service provider, P withholds payment until the dispute is 
settled. With respect to payments to the service providers, P is 
performing management or oversight functions and is subject to the 
information reporting requirements of section 6041.
    Example 8. Assume the same facts as in Example 7. In addition, 
assume that after paying the service providers and deducting his legal 
fee, P pays Q the remaining funds that P had received from the 
settlement with R. With respect to the payment to Q, P is not performing 
management or oversight functions, does not have a significant economic 
interest in the payment, and is not subject to the information reporting 
requirements of section 6041. For the rules relating to R's obligation 
to report the payment of the settlement proceeds to P, see section 
6045(f) and the regulations thereunder. For the rules relating to R's 
obligation to report the payment of the settlement proceeds to Q, see 
paragraphs (a)(1)(i) and (f) of this section. For the rules relating to 
Q's obligation to report the payment of attorney fees to P, see 
paragraphs (a)(1)(i) and (d)(2) of this section.
    Example 9. Medical insurer S operates as the administrator of a 
health care program under a contract with a state. S makes payments of 
government funds to health care providers who provide care to eligible 
patients. S receives and reviews claims submitted by patients or health 
care providers, determines if the claims meet all the requirements of 
the program (e.g., that the care is authorized and that the patients are 
eligible beneficiaries), and determines the amount of payment. S is 
performing management or oversight functions and is subject to the 
information reporting requirements of section 6041 with respect to the 
payments.
    Example 10. Race track employee T holds deposits made by horse owner 
U in a special escrow account in U's name. U enters into a contract with 
jockey V to ride U's horse in a race at the track. As directed by U, T 
pays V the fee for riding U's horse from U's escrow account. T is not 
performing management or oversight functions, does not have a 
significant economic interest in the payment, and is not subject to the 
information reporting requirements of section 6041. For the rules 
relating to U's obligation to report the payment of the fee to V, see 
paragraph (a)(1)(i) of this section.
    Example 11. X is a certified public accountant employed by Firm Y, 
and is not a partner. Client Z pays X directly for accounting services. 
X remits the amount received to Y, as required by the terms of his 
employment. X does not have any reporting obligation with respect to the 
payment to Y. For the rules relating to Z's obligation to report the 
payment to Y for services, see paragraphs (a)(1)(i) and (d)(2) of this 
section.
    Example 12. Bank contracts with Title Company with respect to the 
disbursement of funds on a construction loan. Pursuant to their 
arrangement, the contractor sends draw requests to Title Company, which 
inspects the work, verifies the amount requested, and then sends the 
draw request to Bank with supporting documents. Bank pays Title Company 
the amount of the draw request, and Title Company insures Bank against 
any loss if it cannot obtain the necessary lien waivers. Bank has a 
significant economic interest in the payment as a mortgagee, and Title 
Company exercises management or oversight over the payment. Since Title 
Company is closest in the chain to the contractor, Title Company should 
report the payment, unless the parties agree in writing that Bank will 
report the payment.

    (f) Amount to be reported when fees, expenses or commissions are 
deducted--(1) In general. The amount to be reported

[[Page 213]]

as paid to a payee is the amount includible in the gross income of the 
payee (which in many cases will be the gross amount of the payment or 
payments before fees, commissions, expenses, or other amounts owed by 
the payee to another person have been deducted), whether the payment is 
made jointly or separately to the payee and another person. The 
Commissioner may, by guidance published in the Internal Revenue 
Bulletin, illustrate the circumstances under which the gross amount or 
less than the gross amount may be reported.
    (2) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples:

    Example 1. Attorney P represents client Q in a breach of contract 
action for lost profits against defendant R. R settles the case for 
$100,000 damages and $40,000 for attorney fees. Under applicable law, 
the full $140,000 is includible in Q's gross taxable income. R issues a 
check payable to P and Q in the amount of $140,000. R is required to 
make an information return reporting a payment to Q in the amount of 
$140,000. For the rules with respect to R's obligation to report the 
payment to P, see section 6045(f) and the regulations thereunder.
    Example 2. Assume the same facts as in Example 1, except that R 
issues a check to Q for $100,000 and a separate check to P for $40,000. 
R is required to make an information return reporting a payment to Q in 
the amount of $140,000. For the rules with respect to R's obligation to 
report the payment to P, see section 6045(f) and the regulations 
thereunder.
    (g) 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.
    (h) 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.
    (i) 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.
    (j) Effective date. The provisions of paragraphs (b), (c), (e), and 
(f) apply to payments made after December 31, 2002.

[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; 
T.D. 8734, 62 FR 53471, Oct. 14, 1997; T.D. 8804, 64 FR 11378, Mar. 9, 
1999; T.D. 8881, 65 FR 32205, May 22, 2000; T.D. 9010, 67 FR 48756, July 
26, 2002]



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. For example, if a payment of 
$700 was made to an employee and $400 thereof represents wages subject 
to withholding under section 3402 and the remaining $300 represents 
compensation not subject to withholding, such wages and compensation 
must both be reported on Form W-2. 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

[[Page 214]]

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 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, returns on Forms W-3 and W-2 required under this paragraph (a) 
for any calendar year shall be filed on or before February 28 (March 31 
if filed electronically) 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.
    (5) Statement for employees. An employer required under this 
paragraph (a) to file Form W-2 with respect to an employee is also 
required under sections 6041(d) and 6051 to furnish a written statement 
to the employee. This written statement must be furnished on Form W-2 in 
accordance with section 6051 and the regulations.
    (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) Payments to foreign persons. See Sec.  1.6041-4 for reporting 
exemptions regarding payments to foreign persons. See Sec.  1.6049-5(d) 
for determining whether a payment is made to a foreign person.

[T.D. 7284, 38 FR 20827, Aug. 3, 1973, as amended by T.D. 7580, 43 FR 
60159, Dec. 26, 1978; T.D. 8734, 62 FR 53472, Oct. 14, 1997; T.D. 8895, 
65 FR 50406, Aug. 18, 2000; T.D. 9114, 69 FR 7570, Feb. 18, 2004]



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 
Sec. Sec.  1.6041-1 and 1.6041-2 for payments described in

[[Page 215]]

paragraphs (a) through (q) of this section. See Sec.  1.6041-4 for 
reporting exemptions regarding payments to foreign persons.
    (a) Payments of income required to be reported on Forms 1120-S, 941, 
W-2, and W-3 (however, see Sec.  1.6041-2(a) with respect to Forms W-2 
and W-3).
    (b) Payments by a broker to his customer (but for reporting 
requirements as to certain of such payments, see sections 6042, 6045, 
and 6049 and the regulations thereunder in this part).
    (c) Payments of bills for merchandise, telegrams, telephone, 
freight, storage, and similar charges.
    (d) Payments of rent made to rental agents (but the agent is 
required to report payments of rent to the landlord in accordance with 
Sec.  1.6041-1(a)(1)(i)(B) and (2)).
    (e) 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.
    (f) Compensation and profits paid or distributed by a partnership to 
the individual partners (but for reporting requirements, see Sec.  
1.6031-1).
    (g) 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.
    (h)(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.
    (i) 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 
Sec. Sec.  1.1461-1 to 1.1461-3, inclusive).
    (j) Payments of interest on corporate bonds (but for reporting 
requirements as to payments on certain corporate bonds, see Sec.  
1.6049-5.
    (k) 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 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.
    (l) A payment to an informer as an award, fee, or reward for 
information

[[Page 216]]

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).
    (m) 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).
    (n) Payments to individuals as scholarships or fellowship grants 
within the meaning of section 117(b)(1), whether or not ``qualified 
scholarships'' as described in section 117(b). This exception does not 
apply to any amount of a scholarship or fellowship grant that represents 
payment for services within the meaning of section 117(c). Instead, 
these amounts are required to be reported as wages on Form W-2. See 
Sec.  1.1461-1(c) for applicable reporting requirements for amounts paid 
to foreign persons.
    (o) Per diem of certain alien trainees described under section 
1441(c)(6).
    (p) Payments made to the following persons:
    (1) A corporation described in Sec.  1.6049-4(c)(1)(ii)(A), except a 
corporation engaged in providing medical and health care services or 
engaged in the billing and collecting of payments in respect to the 
providing of medical and health care services. However, no reporting is 
required where payment is made to a hospital or extended care facility 
described in section 501(c)(3) which is exempt from taxation under 
section 501(a) or to 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.
    (2) An organization exempt from taxation under section 501(a), as 
described in Sec.  1.6049-4(c)(1)(ii)(B)(1), or an individual retirement 
plan, as described in Sec.  1.6049-4(c)(1)(ii)(C).
    (3) The United States, as described in Sec.  1.6049-4(c)(1)(ii)(D).
    (4) A State, the District of Columbia, a possession of the United 
States, or any political subdivision of any of the foregoing, as 
described in Sec.  1.6049-4(c)(1)(ii)(E).
    (5) A foreign government or political subdivision of a foreign 
government, as described in Sec.  1.6049-4(c)(1)(ii)(F).
    (6) An international organization, as described in Sec.  1.6049-
4(c)(1)(ii)(G).
    (7) A foreign central bank of issue, as described in Sec.  1.6049-
4(c)(1)(ii)(H) and the Bank for International Settlements.
    (8) Any wholly owned agency or instrumentality of any person 
described in paragraph (q) (2), (3), (4), (5), (6), or (7) of this 
section.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting Sec.  
1.6041-3, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and on GPO Access.



Sec.  1.6041-4  Foreign-related items and other exceptions.

    (a) Exempted foreign-related items--(1) Returns of information are 
not required for payments that a payor can, prior to payment, associate 
with documentation upon which it may rely to treat as made to a foreign 
beneficial owner in accordance with Sec.  1.1441-1(e)(1)(ii) or as made 
to a foreign payee in accordance with Sec.  1.6049-5(d)(1) or presumed 
to be made to a foreign payee under Sec.  1.6049-5(d)(2), (3), (4), or 
(5). However, such payments may be reportable under Sec.  1.1461-1(b) 
and (c). For purposes of this paragraph (a)(1), the provisions in Sec.  
1.6049-5(c) (regarding rules applicable to documentation of foreign 
status and definition of U.S. payor and non-U.S. payor) shall apply. See 
Sec.  1.1441-1(b)(3)(iii)(B) and (C) for special payee rules regarding 
scholarships, grants, pensions, annuities, etc.

[[Page 217]]

The provisions of Sec.  1.1441-1 shall apply by substituting the term 
payor for the term withholding agent and without regard to the fact that 
the provisions apply only to amounts subject to withholding under 
chapter 3 of the Internal Revenue Code and the regulations under that 
chapter.
    (2) Returns of information are not required for payments of amounts 
from sources outside the United States (determined under the provisions 
of part I, subchapter N, chapter 1 of the Internal Revenue Code and the 
regulations under those provisions) made by a non-U.S. payor or non-U.S. 
middleman outside the United States. For a definition of non-U.S. payor 
and non-U.S. middleman, see Sec.  1.6049-5(c)(5). For circumstances in 
which a payment is considered to be made outside the United States, see 
Sec.  1.6049-5(e).
    (3) Returns of information are not required for amounts paid by a 
foreign intermediary described in Sec.  1.1441-1(c)(13) that it has 
received in its capacity as an intermediary and that are associated with 
a valid withholding certificate described in Sec.  1.1441-1(e)(3)(ii) or 
(iii) and payments made by a U.S. branch of a foreign bank or of a 
foreign insurance company described in Sec.  1.1441-1(b)(2)(iv) (other 
than a U.S. branch that is treated as a U.S. person) that are associated 
with a valid withholding certificate described in Sec.  1.1441-
1(e)(3)(v), which certificate the intermediary or branch has furnished 
to the payor or middleman from whom it has received the payment, unless, 
and to the extent, the intermediary or branch knows that the payments 
are required to be reported under Sec.  1.6041-1 and were not so 
reported. For example, if a foreign intermediary or U.S. branch 
described in Sec.  1.1441-1(b)(2)(iv) fails to provide information 
regarding U.S. persons that are not exempt from reporting under Sec.  
1.6041-3(q) to the person from whom the intermediary or U.S. branch 
receives the payment, the foreign intermediary or U.S. branch must 
report the payment on an information return. The exception of this 
paragraph (a)(3) shall not apply to a qualified intermediary that 
assumes reporting responsibility under chapter 61 of the Internal 
Revenue Code.
    (4) Returns of information are not required for amounts paid with 
respect to notional principal contracts referred to in Sec.  1.863-7 or 
1.988-2(e) which the payor may treat as effectively connected income of 
a foreign payee under the provisions of Sec.  1.1441-4(a)(3) or if the 
payee provides a representation in a master agreement that governs the 
transactions in notional principal contracts between the parties (for 
example, an International Swap and Derivatives Association (ISDA) 
Agreement, including the Schedule thereto) or in the confirmation on the 
particular notional principal contract transaction that the counterparty 
is a foreign person. See, however, Sec.  1.1461-1(c)(2)(i) for 
applicable reporting requirements.
    (5) Returns of information are not required for the period that the 
amounts paid represent assets blocked as described in Sec.  1.1441-
2(e)(3). The exemption in this paragraph (a)(5) shall terminate when 
payment is deemed to occur in accordance with the provisions of Sec.  
1.1441-2(e)(3).
    (6) For rules concerning direct sellers, see Sec.  1.6041A-
1(d)(3)(i)(C).
    (b) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under paragraph (a) of this section are presumed made to 
U.S. payees who are not exempt recipients if, prior to payment, the 
payor or middleman cannot reliably associate the payment either with a 
Form W-9 furnished by one of the joint owners in the manner required in 
Sec. Sec.  31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (a)(1) of this section furnished by 
each joint owner upon which the payor or middleman can rely to treat 
each joint owner as a foreign payee or foreign beneficial owner.
    (c) Conversion into United States dollars of amounts paid in foreign 
currency. For rules concerning foreign currency conversion, see Sec.  
1.6049-4(d)(3)(i).
    (d) Effective date. The provisions of this section apply to payments 
made after December 31, 2000.

[T.D. 8734, 62 FR 53473, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999; T.D. 8881, 
65 FR 32205, May 22, 2000]

[[Page 218]]



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 (March 31 if filed 
electronically) 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, as amended by T.D. 8895, 65 FR 
50406, Aug. 18, 2000]



Sec.  1.6041-7  Magnetic media requirement.

    (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. High-volume filers of information returns 
must file their returns on magnetic media. See section 6011(e) and Sec.  
301.6011-2 of this chapter (Procedure and Administration Regulations) 
for the requirements for filing on magnetic media.
    (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, as amended by T.D. 8734, 62 FR 
53473, Oct. 14, 1997]



Sec.  1.6041-8  Cross-reference to penalties.

    For provisions relating to the penalty provided for failure to file 
timely a correct information return required under section 6041(a) or 
(b), see Sec.  301.6721-1 of this chapter (Procedure and Administration 
Regulations). For provisions relating to the penalty provided for 
failure to furnish timely a correct payee statement required under 
section 6041(d), see Sec.  301.6722-1 of this chapter. See Sec.  
301.6724-1 of this chapter for the waiver of a penalty if the failure is 
due to reasonable cause and is not due to willful neglect.

[T.D. 8734, 62 FR 53474, Oct. 14, 1997]



Sec.  1.6041A-1  Returns regarding payments of remuneration for 
services and certain direct sales.

    (a) through (c) [Reserved]
    (d) Exceptions to return requirement. [Reserved]
    (1) and (2) [Reserved]

[[Page 219]]

    (3) Foreign transactions--(i) In general. No return shall be 
required under section 6041A with respect to payments described in this 
paragraph (d)(3).
    (A) Returns of information are not required for payments that a 
payor can, prior to payment, associate with documentation upon which it 
may rely to treat as made to a foreign beneficial owner in accordance 
with Sec.  1.1441-1(e)(1)(ii) or as made to a foreign payee in 
accordance with Sec.  1.6049-5(d)(1) or presumed to be made to a foreign 
payee under Sec.  1.6049-5(d)(2), (3), (4), or (5). However, such 
payments may be reportable under Sec.  1.1461-1(b) and (c). For purposes 
of this paragraph (d)(3)(i)(A), the provisions in Sec.  1.6049-5(c) 
(regarding rules applicable to documentation of foreign status and 
definition of U.S. payor and non-U.S. payor) shall apply. The provisions 
of Sec.  1.1441-1 shall apply by substituting the term payor for the 
term withholding agent.
    (B) Returns of information are not required for payments of 
remuneration for services from sources outside the United States 
(determined under the provisions of part I, subchapter N, chapter 1 of 
the Internal Revenue Code and the regulations under those provisions) if 
payments are made outside the United States by a non-U.S. payor or non 
U.S. middleman. For a definition of non U.S. payor or non-U.S. 
middleman, see Sec.  1.6049-5(c)(5). For circumstances in which a 
payment is considered to be made outside the United States, see Sec.  
1.6049-5(e).
    (C) Returns of information are not required under sections 6041 or 
6041A for amounts paid outside of the United States (within the meaning 
of Sec.  1.6049-5(e)) as remuneration for services as a direct seller 
(within the meaning of section 3508) performed outside of the United 
States or for sales described in section 6041A(b) made outside of the 
United States of consumer products for resale outside of the United 
States.
    (ii) Payor. The term payor has the same meaning as described in 
Sec.  1.6049-4(a)(2).
    (iii) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under paragraph (d)(3)(i) of this section are presumed 
made to U.S. payees who are not exempt recipients if, prior to payment, 
the payor or middleman cannot reliably associate the payment either with 
a Form W-9 furnished by one of the joint owners in the manner required 
in Sec. Sec.  31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (d)(3)(i)(A) of this section 
furnished by each joint owner upon which it can rely to treat each joint 
owner as a foreign payee or foreign beneficial owner.
    (iv) Conversion into United States dollars of amounts paid in 
foreign currency. For rules concerning foreign currency conversion, see 
Sec.  1.6049-4(d)(3)(i).
    (v) Effective date. The provisions of this paragraph (d)(3) apply to 
payments made after December 31, 2000.
    (e) [Reserved]
    (f) Statements to be furnished to persons with respect to whom 
information is required to be furnished--(1) [Reserved]
    (2) Time for furnishing statement. [Reserved]
    (3) Contents of statement. [Reserved]
    (g) [Reserved]
    (h) Cross-reference to penalties. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6041A(a) or (b), see Sec.  301.6721-1 of this 
chapter (Procedure and Administration Regulations). For provisions 
relating to the penalty provided for failure to furnish timely a correct 
payee statement required under section 6041A(e), see Sec.  301.6722-1 of 
this chapter. See Sec.  301.6724-1 of this chapter for the waiver of a 
penalty if the failure is due to reasonable cause and is not due to 
willful neglect.

[T.D. 8734, 62 FR 53474, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999; T.D. 8881, 
65 FR 32205, May 22, 2000]



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

[[Page 220]]

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 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

[[Page 221]]

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 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.

    (a) Requirement of reporting--(1) In general. An information return 
on Form 1099 shall be made under section 6042(a) by--
    (i) Every person who makes a payment of dividends (as defined in 
Sec.  1.6042-3) to any other person during a calendar year. The 
information return shall show the aggregate amount of the dividends, the 
name, address, and taxpayer identifying number of the person to whom 
paid, the amount of tax deducted and withheld under section 3406 from 
the dividends, if any, and such other information as required by the 
forms. An information return is generally not required if the amount of 
dividends paid to the other person during the calendar year aggregates 
less than $10 or if the payment is made to a person who is an exempt 
recipient described in Sec.  1.6049-4(c)(1)(ii) unless the payor backup 
withholds under section 3406 on such payment (because, for example, the 
payee has failed to furnish a Form W-9 on request), in which case the 
payor must make a return under this section, unless the payor refunds 
the amount withheld pursuant to Sec.  31.6413(a)-3 of this chapter.
    (ii) Every person, except to the extent that he acts as a nominee 
described in paragraph (a)(1)(iii) of this section, who receives 
payments of dividends as a nominee on behalf of another person shall 
make a return of information under this section for the calendar year of 
the payment . The information return shall show the aggregate amount of 
the dividends, the name, address, and taxpayer identification number of 
the person on whose behalf the dividends are received, the amount of tax 
deducted and withheld under section 3406 from the dividends, if any, and 
such other information as required by the forms. An information return 
is generally not required if the amount of the dividends received on 
behalf of the other person during the calendar year aggregates less than 
$10. However, a return of information is not required under this section 
if--
    (A) The record owner is, pursuant to section 6012(a) (3) or (4) and 
Sec.  1.6012-3, required to file a fiduciary return on Form 1041 that is 
filed for the estate or trust disclosing the name, address, and 
identifying number of both the record owner and actual owner and 
furnishes

[[Page 222]]

Form K-1 to each actual owner containing the information required to be 
shown on the form, including amounts withheld under section 3406;
    (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, pursuant to section 6012(a) (3) or (4) and Sec.  1.6012-3, 
required to file a fiduciary return on Form 1041 that is filed for the 
estate or trust disclosing the name, address, and identifying number of 
both the record owner and 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 3406; 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 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 1099, 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

[[Page 223]]

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 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 1099 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 1099.
    (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 (March 31 if filed electronically) 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) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6042(a), see Sec.  301.6721-1 of this chapter 
(Procedure and Administration Regulations). See Sec.  301.6724-1 of this 
chapter for the waiver of a penalty if the failure is due to reasonable 
cause and is not due to willful neglect.
    (e) Magnetic media requirement. 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. For the requirement to submit the 
information required by Form 1099 on magnetic media for payments after 
December 31, 1983, see section 6011(e) and Sec.  301.6011-2 of this 
chapter (Procedure and Administration Regulations).

[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; T.D. 8734, 62 FR 53474, Oct. 14, 1997; T.D. 
8804, 64 FR 11378, Mar. 9, 1999; T.D. 8895, 65 FR 50406, Aug. 18, 2000]

[[Page 224]]



Sec.  1.6042-3  Dividends subject to reporting.

    (a) In general. Except as provided in paragraph (b) of this section, 
the term dividend for purposes of this section and Sec. Sec.  1.6042-2 
and 1.6042-4 means the amounts described in the following paragraphs (a) 
(1) through (3) of this section--
    (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. Such a payment includes any payment made in lieu of a 
dividend to a person whose stock has been borrowed. See Sec.  1.6045-
2(h) for coordination of the reporting requirements under sections 6042 
and 6045(d) with respect to such payments; and
    (3) A distribution from a regulated investment company (irrespective 
of the fact that any part of the distribution may not represent ordinary 
income (i.e., may, for example, represent a capital gain dividend as 
defined in section 852(b)(3)(C)).
    (b) Exceptions--(1) In general. For purposes of Sec. Sec.  1.6042-2 
and 1.6042-4, the amounts described in paragraphs (b)(1)(i) through 
(vii) of this section are not dividends.
    (i) Amounts paid by an insurance company to a policyholder, other 
than a dividend upon its capital stock.
    (ii) Payments (however denominated) by a mutual savings bank, 
savings and loan association, or similar organization, in respect of 
deposits, investment certificates, or withdrawable or repurchasable 
shares. See, however, section 6049 and the regulations under that 
section for provisions requiring reporting of these payments.
    (iii) Distributions or payments that a payor can, prior to payment, 
reliably associate with documentation upon which it may rely to treat as 
made to a foreign beneficial owner in accordance with Sec.  1.1441-
1(e)(1)(ii) or as made to a foreign payee in accordance with Sec.  
1.6049-5(d)(1) or presumed to be made to a foreign payee under Sec.  
1.6049-5(d) (2), (3), (4), or (5). However, such payments may be 
reportable under Sec.  1.1461-1(b) and (c). For purposes of this 
paragraph (b)(1)(iii), the provisions in Sec.  1.6049-5(c) (regarding 
rules applicable to documentation of foreign status and definition of 
U.S. payor and non-U.S. payor) shall apply. The provisions of Sec.  
1.1441-1 shall apply by substituting the term payor for the term 
withholding agent and without regard to the fact that the provisions 
apply only to amounts subject to withholding under chapter 3 of the 
Internal Revenue Code (Code).
    (iv) Distributions or payments from sources outside the United 
States (as determined under the provisions of part I, subchapter N, 
chapter 1 of the Code and the regulations under those provisions) paid 
outside the United States by a non-U.S. payor or a non-U.S. middleman. 
For a definition of non-U.S. payor and non-U.S. middleman, see Sec.  
1.6049-5(c)(5). For circumstances in which a payment is considered to be 
made outside the United States, see Sec.  1.6049-5(e).
    (v) Distributions or payments for the period that the amounts 
represent assets blocked as described in Sec.  1.1441-2(e)(3). The 
exemption in this paragraph (b)(1)(v) shall terminate when payment is 
deemed to occur in accordance with the rules of Sec.  1.1441-2(e)(3).
    (vi) Payments made by a foreign intermediary described in Sec.  
1.1441-1(c)(13) of amounts that it has received in its capacity as an 
intermediary and that are associated with a valid withholding 
certificate described in Sec.  1.1441-1(e)(3)(ii) or (iii) and payments 
made by a U.S. branch of a foreign bank or of a foreign insurance 
company described in Sec.  1.1441-1(b)(2)(iv) (other than a U.S. branch 
that is treated as a U.S. person) that are associated with a valid 
withholding certificate described in Sec.  1.1441-1(e)(3)(v), which 
certificate the intermediary or branch has furnished to the payor or 
middleman from whom it has received the payment, unless, and to the 
extent, the intermediary or branch knows that the payments are required 
to be reported under Sec.  1.6042-2 and were not so reported. For 
example, if a foreign intermediary or U.S. branch described in Sec.  
1.1441-1(b)(2)(iv) fails to provide information regarding U.S. persons 
that are not exempt from reporting under Sec.  1.6049-4(c)(1)(ii) to the 
person from whom the intermediary or U.S. branch receives the payment, 
the amount paid by the foreign intermediary or U.S. branch to such 
person

[[Page 225]]

is a dividend. The exception of this paragraph (b)(1)(vi) shall not 
apply to a qualified intermediary that assumes reporting responsibility 
under chapter 61 of the Internal Revenue Code.
    (vii) With respect to amounts paid or credited after December 31, 
1982, any amount paid or credited to any person described in Sec.  
1.6049-4(c)(1)(ii), unless a tax is withheld under section 3406 and is 
not refunded by the payor in accordance with Sec.  31.6413(a)-3 of this 
chapter (Employment Tax Regulations).
    (2) Payor. The term payor has the same meaning as described in Sec.  
1.6049-4(a)(2).
    (3) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under this paragraph (b) are presumed made to U.S. payees 
who are not exempt recipients if, prior to payment, the payor or 
middleman cannot reliably associate the payment either with a Form W-9 
furnished by one of the joint owners in the manner required in 
Sec. Sec.  31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (b)(1)(iii) of this section 
furnished by each joint owner upon which it can rely to treat each joint 
owner as a foreign payee or foreign beneficial owner. For purposes of 
applying this paragraph (b)(3), the grace period described in Sec.  
1.6049-5(d)(2)(ii) shall apply only if each payee qualifies for such 
grace period.
    (4) Conversion into United States dollars of amounts paid in foreign 
currency. For rules concerning foreign currency conversion, see Sec.  
1.6049-4(d)(3)(i).
    (5) Effective date--(i) General rule. The provisions of this 
paragraph (b) apply to payments made after December 31, 2000.
    (ii) Transition rules. The validity of a withholding certificate 
(namely, Form W-8 or other form upon which the payor is permitted to 
rely to hold the payee as a foreign person) that was valid on January 1, 
1998, under the regulations in effect prior to January 1, 2001 (see 26 
CFR parts 1 and 35a, revised April 1, 1999) and expired, or will expire, 
at any time during 1998, is extended until December 31, 1998. The 
validity of a withholding certificate that is valid on or after January 
1, 1999, remains valid until its validity expires under the regulations 
in effect prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised 
April 1, 1999) but in no event shall such withholding certificate remain 
valid after December 31, 2000. The rule in this paragraph (b)(5)(ii), 
however, does not apply to extend the validity period of a withholding 
certificate that expires solely by reason of changes in the 
circumstances of the person whose name is on the certificate. 
Notwithstanding the first three sentences of this paragraph (b)(5)(ii), 
a payor may choose not to take advantage of the transition rule in this 
paragraph (b)(5)(ii) with respect to one or more withholding 
certificates valid under the regulations in effect prior to January 1, 
2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and, therefore, 
to require withholding certificates conforming to the requirements 
described in this section (new withholding certificates). For purposes 
of this section, a new withholding certificate is deemed to satisfy the 
documentation requirement under the regulations in effect prior to 
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999). 
Further, a new withholding certificate remains valid for the period 
specified in Sec.  1.1441-1(e)(4)(ii), regardless of when the 
certificate is obtained.
    (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.

[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; T.D. 8734, 62 FR 53475, Oct. 14, 1997; T.D. 
8804, 63 FR 72186, Dec. 31, 1998; 64 FR 73411, Dec. 30, 1999; T.D. 8881, 
65 FR 32205, May 22, 2000]

[[Page 226]]



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 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, as 
described in Sec.  31.3406(h)-3(a) of this chapter, or of the Form W-8 
as described in Sec.  1.1441-1(e)(1).
    (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.

[[Page 227]]

    (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 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) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to furnish timely a correct payee statement 
required under section 6042(c), see Sec.  301.6722-1 of this chapter 
(Procedure and Administration Regulations). See Sec.  301.6724-1 of this 
chapter for the waiver of a penalty if the failure is due to reasonable 
cause and is not due to willful neglect.
    (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, as amended by T.D. 8734, 62 FR 
53476, Oct. 14, 1997]



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

[[Page 228]]

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 Sec.  1.332-6(b), 1.368-3(a), or 
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 1099, giving all the information required by such form 
and by the regulations in this part. A separate Form 1099 must be 
prepared for each 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 1099 filed therewith, shall be filed on or before February 28 
(March 31 if filed electronically) 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 Form 1096.
    (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

[[Page 229]]

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; T.D. 8734, 62 FR 53476, Oct. 14, 1997; T.D. 8804, 63 
FR 72188, Dec. 31, 1998; T.D. 8895, 65 FR 50406, Aug. 18, 2000]



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 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

[[Page 230]]

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 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.


[[Page 231]]


    (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.  1.6043-4T  Information returns relating to certain acquisitions 
of control and changes in capital structure (temporary).

    (a) Information returns for an acquisition of control or a 
substantial change in capital structure--(1) General rule. If there is 
an acquisition of control (as defined in paragraph (c) of this section) 
or a substantial change in the capital structure (as defined in 
paragraph (d) of this section) of a domestic corporation (reporting 
corporation), the reporting corporation must file a completed Form 8806, 
``Information Return for Acquisition of Control or Substantial Change in 
Capital Structure'', in accordance with the instructions to that form. 
Form 8806 will request the information required in paragraphs (a)(1)(i) 
through (vi) of this section and any other information specified in the 
instructions.
    (i) Reporting corporation. Provide the name, address, and taxpayer 
identification number (TIN) of the reporting corporation.
    (ii) Common parent, if any, of the reporting corporation. If the 
reporting corporation was a subsidiary member of an affiliated group 
filing a consolidated return immediately prior to the acquisition of 
control or the substantial change in capital structure, provide the 
name, address, and TIN of the common parent of that affiliated group.
    (iii) Acquiring corporation. Provide the name, address and TIN of 
any corporation that acquired control of the reporting corporation 
within the meaning of paragraph (c) of this section or combined with or 
received assets from the reporting corporation pursuant to a substantial 
change in capital structure within the meaning of paragraph (d) of this 
section (acquiring corporation). State whether the acquiring corporation 
is foreign (as defined in section 7701(a)(5)) or is a dual resident 
corporation (as defined in Sec.  1.1503-2(c)(2)). In either case, state 
whether the acquiring corporation was newly formed prior to its 
involvement in the transaction.
    (iv) Common parent, if any, of acquiring corporation. If the 
acquiring corporation named in paragraph (a)(1)(iii) of this section was 
a subsidiary member of an affiliated group filing a consolidated return 
immediately prior to the acquisition of control or the substantial 
change in capital structure, provide the name, address, and TIN of the 
common parent of that affiliated group.
    (v) Information about acquisition of control or substantial change 
in capital structure. Provide--
    (A) A description of the transaction or transactions that gave rise 
to the acquisition of control or the substantial change in capital 
structure of the corporation;
    (B) The date or dates of the transaction or transactions that gave 
rise to the acquisition of control or the substantial change in capital 
structure;
    (C) A description of and a statement of the fair market value of any 
stock provided to the reporting corporation's shareholders in exchange 
for their stock if the reporting corporation reasonably determines that 
the shareholders are not required to recognize gain (if any) from the 
receipt of such stock for U.S. federal income tax purposes; and
    (D) A statement of the amount of cash plus the fair market value of 
any property (including stock if the reporting corporation reasonably 
determines that its shareholders would be required to recognize gain (if 
any) on the receipt of such stock, but excluding stock described in 
paragraph (a)(1)(v)(C) of this section) provided to the reporting 
corporation's shareholders in exchange for each share of their stock.
    (2) Consent election. Form 8806 will provide the reporting 
corporation with the ability to elect to permit the IRS to publish 
information that will inform brokers of the transaction and enable 
brokers to satisfy their reporting obligations under Sec.  1.6045-3T. 
The information to be published, on the IRS website and/or in an IRS 
publication, would be limited to the name and address of the 
corporation, the date of

[[Page 232]]

the transaction, a description of the shares affected by the 
transaction, and the amount of cash and the fair market value of any 
property (excluding stock described in paragraph (a)(1)(v)(C) of this 
section) provided to each class of shareholders in exchange for a share.
    (3) Time for making return--(i) In general. Form 8806 must be filed 
on or before the 45th day following the acquisition of control or 
substantial change in capital structure of the corporation, or, if 
earlier, on or before January 5th of the year following the calendar 
year in which the acquisition of control or substantial change in 
capital structure occurs.
    (ii) Transition rule. If an acquisition of control or a substantial 
change in capital structure of a corporation occurs after December 31, 
2002, and before December 29, 2003, Form 8806 must be filed on or before 
January 5, 2004.
    (4) Exception where transaction is reported under section 6043(a). 
No reporting is required under paragraph (a) of this section with 
respect to a transaction for which information is required to be 
reported pursuant to section 6043(a), provided the transaction is 
properly reported in accordance with that section.
    (5) Exception where shareholders are exempt recipients. No reporting 
is required under paragraph (a) of this section if the reporting 
corporation reasonably determines that all of its shareholders who 
receive cash, stock or other property pursuant to the acquisition of 
control or substantial change in capital structure are exempt recipients 
under paragraph (b)(5) of this section.
    (b) Information returns regarding shareholders--(1) General rule. A 
corporation that is required to file Form 8806 pursuant to paragraph 
(a)(1) of this section shall file a return of information on Forms 1096, 
``Annual Summary and Transmittal of U.S. Information Returns'', and 
1099-CAP, ``Changes in Corporate Control and Capital Structure'', with 
respect to each shareholder of record in the corporation (before or 
after the acquisition of control or the substantial change in capital 
structure) who receives cash, stock, or other property pursuant to the 
acquisition of control or the substantial change in capital structure 
and who is not an exempt recipient as defined in paragraph (b)(5) of 
this section. A corporation is not required to file a Form 1096 or 1099-
CAP with respect to a clearing organization if the corporation makes the 
election described in paragraph (a)(2) of this section.
    (2) Time for making information returns. Forms 1096 and 1099-CAP 
must be filed on or before February 28 (March 31 if filed 
electronically) of the year following the calendar year in which the 
acquisition of control or the substantial change in capital structure 
occurs.
    (3) Contents of return. A separate Form 1099-CAP must be filed with 
respect to amounts received by each shareholder (who is not an exempt 
recipient as defined in paragraph (b)(5) of this section) showing--
    (i) The name, address, telephone number and TIN of the reporting 
corporation;
    (ii) The name, address and TIN of the shareholder;
    (iii) The number and class of shares in the reporting corporation 
exchanged by the shareholder;
    (iv) The aggregate amount of cash and the fair market value of any 
stock (other than stock described in paragraph (a)(1)(v)(C) of this 
section) or other property provided to the shareholder in exchange for 
its stock; and
    (v) Such other information as may be required by the instructions to 
Form 1099-CAP.
    (4) Furnishing of forms to shareholders. The Form 1099-CAP filed 
with respect to each shareholder must be furnished to such shareholder 
on or before January 31 of the year following the calendar year in which 
the shareholder receives cash, stock, or other property as part of the 
acquisition of control or the substantial change in capital structure. 
The Form 1099-CAP filed with respect to a clearing organization must be 
furnished to the clearing organization on or before January 5th of the 
year following the calendar year in which the acquisition of control or 
substantial change in capital structure occurred. A Form 1099-CAP is not 
required to be furnished to a clearing organization if the reporting 
corporation makes the election described in paragraph (a)(2) of this 
section.

[[Page 233]]

    (5) Exempt recipients. A corporation is not required to file a Form 
1099-CAP pursuant to this paragraph (b) of this section with respect to 
any of the following shareholders that is not a clearing organization:
    (i) Any shareholder who receives solely stock described in paragraph 
(a)(1)(v)(C) of this section in exchange for its stock in the 
corporation.
    (ii) Any shareholder who is required to recognize gain (if any) as a 
result of the receipt of cash, stock, or other property if the 
corporation reasonably determines that the amount of such cash plus the 
fair market value of such stock and other property does not exceed 
$1,000. Stock described in paragraph (a)(1)(v)(C) of this section is not 
taken into account for purposes of this paragraph (b)(5)(ii).
    (iii) Any shareholder described in paragraphs (b)(5)(iii)(A) through 
(M) of this section if the corporation has actual knowledge that the 
shareholder is described in one of paragraphs (b)(5)(iii)(A) through (M) 
of this section or if the corporation has a properly completed exemption 
certificate from the shareholder (as provided in Sec.  31.3406(h)-3 of 
this chapter). The corporation also may treat a shareholder as described 
in paragraphs (b)(5)(iii)(A) through (M) of this section based on the 
applicable indicators described in Sec.  1.6049-4(c)(1)(ii).
    (A) A corporation, as described in Sec.  1.6049-4(c)(1)(ii)(A) 
(except for corporations for which an election under section 1362(a) is 
in effect).
    (B) A tax-exempt organization, as described in Sec.  1.6049-
4(c)(1)(ii)(B)(1).
    (C) An individual retirement plan, as described in Sec.  1.6049-
4(c)(1)(ii)(C).
    (D) The United States, as described in Sec.  1.6049-4(c)(1)(ii)(D).
    (E) A state, as described in Sec.  1.6049-4(c)(1)(ii)(E).
    (F) A foreign government, as described in Sec.  1.6049-
4(c)(1)(ii)(F).
    (G) An international organization, as described in Sec.  1.6049-
4(c)(1)(ii)(G).
    (H) A foreign central bank of issue, as described in Sec.  1.6049-
4(c)(1)(ii)(H).
    (I) A securities or commodities dealer, as described in Sec.  
1.6049-4(c)(1)(ii)(I).
    (J) A real estate investment trust, as described in Sec.  1.6049-
4(c)(1)(ii)(J).
    (K) An entity registered under the Investment Company Act of 1940 
(15 U.S.C. 80a-1), as described in Sec.  1.6049-4(c)(1)(ii)(K).
    (L) A common trust fund, as described in Sec.  1.6049-
4(c)(1)(ii)(L).
    (M) 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.
    (iv) Any shareholder that the corporation, prior to the transaction, 
associates with documentation upon which the corporation may rely in 
order to treat payments to the shareholder as made to a foreign 
beneficial owner in accordance with Sec.  1.1441-1(e)(1)(ii) or as made 
to a foreign payee in accordance with Sec.  1.6049-5(d)(1) or presumed 
to be made to a foreign payee under Sec.  1.6049-5(d)(2) or (3). For 
purposes of this paragraph (b)(5)(iv), the provisions in Sec.  1.6049-
5(c) (regarding rules applicable to documentation of foreign status and 
definition of U.S. payor and non-U.S. payor) shall apply. The provisions 
of Sec.  1.1441-1 shall apply by using the terms corporation and 
shareholder in place of the terms withholding agent and payee and 
without regard to the fact that the provisions apply only to amounts 
subject to withholding under chapter 3 of the Internal Revenue Code. The 
provisions of Sec.  1.6049-5(d) shall apply by using the terms 
corporation and shareholder in place of the terms payor and payee. 
Nothing in this paragraph (b)(5)(iv) shall be construed to relieve a 
corporation of its withholding obligations under section 1441.
    (v) Any shareholder if, on January 31 of the year following the 
calendar year in which the shareholder receives cash, stock, or other 
property, the corporation did not know and did not have reason to know 
that the shareholder received such cash, stock, or other property in a 
transaction or series of related transactions that would result in an 
acquisition of control or a substantial change in capital structure.
    (6) Coordination with other sections. In general, no reporting is 
required under paragraph (b) of this section with respect to amounts 
that are required to

[[Page 234]]

be reported under section 6042 or section 6045, unless the corporation 
knows or has reason to know that such amounts are not properly reported 
in accordance with those sections. A corporation must satisfy the 
requirements under paragraph (b) of this section with respect to any 
shareholder of record that is a clearing organization.
    (c) Acquisition of control of a corporation--(1) In general. For 
purposes of this section, an acquisition of control of a corporation 
(first corporation) occurs if, in a transaction or series of related 
transactions, either--
    (i) Stock representing control of the first corporation is 
distributed by a second corporation to shareholders of the second 
corporation and the fair market value of such stock on the date of 
distribution is $100,000,000 or more; or
    (ii) (A) Before an acquisition of stock of the first corporation 
(directly or indirectly) by a second corporation, the second corporation 
does not have control of the first corporation;
    (B) After the acquisition, the second corporation has control of the 
first corporation;
    (C) The fair market value of the stock acquired in the transaction 
and in any related transactions as of the date or dates on which such 
stock was acquired is $100,000,000 or more; and
    (D) The shareholders of the first corporation (determined without 
applying the constructive ownership rule of section 318(a)) receive 
cash, stock, or other property pursuant to the acquisition.
    (2) Control. For purposes of this section, control is determined in 
accordance with the first sentence of section 304(c)(1).
    (3) Constructive ownership. (i) Except as otherwise provided in this 
section, the constructive ownership rules of section 318(a) (except for 
section 318(a)(4), providing for constructive ownership through an 
option to acquire stock), modified as provided in section 304(c)(3)(B), 
shall apply for determining whether there has been an acquisition of 
control.
    (ii) The determination of whether there has been an acquisition of 
control shall be made without regard to whether the person or persons 
from whom control was acquired retain indirect control of the first 
corporation under section 318(a).
    (iii) For purposes of paragraph (c)(1)(ii) of this section, section 
318(a) shall not apply to cause a second corporation to be treated as 
owning, before an acquisition of stock in a first corporation (directly 
or indirectly) by the second corporation, any stock that is acquired in 
the first corporation. For example, if the shareholders of a domestic 
corporation form a new holding company and then transfer their shares in 
the domestic corporation to the new holding company, the new holding 
company shall not be treated as having control of the domestic 
corporation before the acquisition. The new holding company acquires 
control of the domestic corporation as a result of the transfer. 
Similarly, if the shareholders of a domestic parent corporation transfer 
their shares in the parent corporation to a subsidiary of the parent in 
exchange for shares in the subsidiary, the subsidiary shall not be 
treated as having control of the parent before the transaction. The 
subsidiary acquires control of the parent as a result of the transfer.
    (4) Corporation includes group. For purposes of this paragraph (c), 
if two or more corporations act pursuant to a plan or arrangement with 
respect to acquisitions of stock, such corporations will be treated as 
one corporation for purposes of this section. Whether two or more 
corporations act pursuant to a plan or arrangement depends on the facts 
and circumstances.
    (5) Section 338 election. For purposes of this paragraph (c), an 
acquisition of stock of a corporation with respect to which an election 
under section 338 is made is treated as an acquisition of stock (and not 
as an acquisition of the assets of such corporation).
    (d) Substantial change in capital structure of a corporation--(1) In 
general. A corporation has a substantial change in capital structure if 
it has a change in capital structure (as defined in paragraph (d)(2) of 
this section) and the amount of any cash and the fair market value of 
any property (including stock) provided to the shareholders of such 
corporation pursuant to the change in capital structure, as of the

[[Page 235]]

date or dates on which the cash or other property is provided, is 
$100,000,000 or more.
    (2) Change in capital structure. For purposes of this section, a 
corporation has a change in capital structure if the corporation in a 
transaction or series of transactions--
    (i) Undergoes a recapitalization with respect to its stock;
    (ii) Redeems its stock (including deemed redemptions);
    (iii) Merges, consolidates or otherwise combines with another 
corporation or transfers all or substantially all of its assets to one 
or more corporations;
    (iv) Transfers all or part of its assets to another corporation in a 
title 11 or similar case and, in pursuance of the plan, distributes 
stock or securities of that corporation; or
    (v) Changes its identity, form or place of organization.
    (e) Reporting by successor entity. If a corporation (transferor) 
transfers all or substantially all of its assets to another entity 
(transferee) in a transaction that constitutes a substantial change in 
the capital structure of transferor, transferor must satisfy the 
reporting obligations in paragraph (a) or (b) of this section. If 
transferor does not satisfy the reporting obligations in paragraph (a) 
or (b) of this section, then transferee must satisfy those reporting 
obligations. If neither transferor nor transferee satisfies the 
reporting obligations in paragraphs (a) and (b) of this section, then 
transferor and transferee shall be jointly and severally liable for any 
applicable penalties (see paragraph (g) of this section).
    (f) Receipt of property. For purposes of this section, a shareholder 
is treated as receiving property (or as having property provided to it) 
pursuant to an acquisition of control or a substantial change in capital 
structure if a liability of the shareholder is assumed in the 
transaction and, as a result of the transaction, an amount is realized 
by the shareholder from the sale or exchange of stock.
    (g) Penalties for failure to file. For penalties for failure to file 
as required under this section, see section 6652(l). The information 
returns required to be filed under paragraphs (a) and (b) of this 
section shall be treated as one return for purposes of section 6652(l) 
and, accordingly, the penalty shall not exceed $500 for each day the 
failure continues (up to a maximum of $100,000) with respect to any 
acquisition of control or any substantial change in capital structure. 
Failure to file as required under this section also includes the 
requirement to file on magnetic media as required by section 6011(e) and 
Sec.  1.6011-2. In addition, criminal penalties under sections 7203, 
7206 and 7207 may apply in appropriate cases.
    (h) Examples. The following examples illustrate the application of 
the rules of this section. For purposes of these examples, assume the 
transaction is not reported under sections 6042, 6043(a) or 6045, unless 
otherwise specified, and assume that the fair market value of the 
consideration provided to the shareholders exceeds $100,000,000. The 
examples are as follows:

    Example 1. The shareholders of X, a domestic corporation and parent 
of an affiliated group, exchange their X stock for stock in Y, a newly 
formed foreign holding corporation. After the transaction, Y owns all 
the outstanding X stock. The X shareholders must recognize gain (if any) 
on the exchange of their stock as a result of the application of section 
367(a). Because the transaction results in an acquisition of control of 
X, X must comply with the rules in paragraphs (a) and (b) of this 
section. X must file Form 8806 reporting the transaction. X must also 
file a Form 1099-CAP with respect to each shareholder who is not an 
exempt recipient showing the fair market value of the Y stock received 
by that shareholder, and X must furnish a copy of the Form 1099-CAP to 
that shareholder. If X elects on the Form 8806 to permit the IRS to 
publish information regarding the transaction, X is not required to file 
or furnish Forms 1099-CAP with respect to shareholders that are clearing 
organizations.
    Example 2.  C, a domestic corporation, and parent of an affiliated 
group merges into D, an unrelated domestic corporation. Pursuant to the 
transaction, the C shareholders exchange their C stock for D stock or 
for a combination of short term notes and D stock. The transaction does 
not satisfy the requirements of section 368, and the C shareholders must 
recognize gain (if any) on the exchange. Because the transaction results 
in a substantial change in the capital structure of C, C (or D as the 
successor to C) must comply with the rules in paragraphs (a) and (b) of 
this section. C must file Form 8806. C

[[Page 236]]

(or D as the successor to C) also must file a Form 1099-CAP with respect 
to each shareholder who is not an exempt recipient showing the fair 
market value of the short term notes and the fair market value of the D 
stock provided to that shareholder. In addition, C (or D) must furnish a 
copy of the Form 1099-CAP to that shareholder.
    Example 3. (i) The facts are the same as in Example 2, except that C 
reasonably determines that--
    (A) The transaction satisfies the requirements of section 368;
    (B) The C shareholders who exchange their C stock solely for D stock 
will not be required to recognize gain (if any) on the exchange; and
    (C) The C shareholders who exchange their C stock for a combination 
of short term notes and D stock will be required to recognize gain (if 
any) on the exchange solely with respect to the receipt of the short 
term notes.
    (ii) C is required to file Form 8806 under paragraph (a) of this 
section. C (or D as the successor to C) must also comply with the rules 
in paragraph (b) of this section. With respect to each shareholder who 
receives a combination of short term notes and D stock, and who is not 
an exempt recipient, C (or D) must file a Form 1099-CAP showing the fair 
market value of the short term notes provided to the shareholder, and C 
(or D) must furnish a copy of the Form 1099-CAP to that shareholder. The 
Form 1099-CAP should not show the fair market value of the D stock 
provided to the shareholder. C and D are not required to file and 
furnish Forms 1099-CAP with respect to shareholders who receive only D 
stock in exchange for their C stock.
    Example 4. The facts are the same as in Example 3, except C hires a 
transfer agent to effectuate the exchange. The transfer agent is treated 
as a broker under section 6045 and is required to report the fair market 
value of the short term notes provided to C's shareholders under Sec.  
1.6045-3T. Under paragraph (b)(6) of this section, C and D are not 
required to file information returns under paragraph (b) of this section 
with respect to a shareholder of record, unless C or D knows or has 
reason to know that the transfer agent does not satisfy its information 
reporting obligation under Sec.  1.6045-3T with respect to that 
shareholder. Thus, if the transfer agent satisfies its information 
reporting requirements under Sec.  1.6045-3T with respect to shareholder 
I, an individual who receives both D stock and short term notes, C and D 
are not required to file a Form 1099-CAP with respect to I. Conversely, 
if the transfer agent does not have an information reporting obligation 
under Sec.  1.6045-3T with respect to one of C's shareholder's of record 
(for example, a clearing organization that is an exempt recipient under 
Sec.  1.6045-3T(b)(ii)), or if C or D knows or has reason to know that 
the transfer agent has not satisfied its information reporting 
requirement with respect to a shareholder, then C (or D) must provide a 
Form 1099-CAP to that shareholder.

    (i) Effective date. This section applies to any acquisition of 
control and any substantial change in capital structure occurring after 
December 31, 2001, if the reporting corporation or any shareholder is 
required to recognize gain (if any) as a result of the application of 
section 367(a) as a result of the transaction. However, paragraphs (a) 
through (h) of this section apply to acquisitions of control and 
substantial changes in capital structure occurring after December 31, 
2002, if the reporting corporation or any shareholder is required to 
recognize gain (if any) as a result of the application of section 367(a) 
as a result of the transaction. For transactions prior to January 1, 
2003, see Sec.  1.6043-4T as published in 26 CFR part 1 (revised as of 
April 1, 2003). This section expires on November 14, 2005.

[T.D. 9101, 68 FR 75122, Dec. 30, 2003]



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

[[Page 237]]

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 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.

    (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. The organization is 
required to make an information return regardless of the amount of the 
payment if the tax imposed by section 3406 is required to be withheld. 
Thus, in the case of any amount subject to backup withholding under 
section 3406 and not refunded by the payor before the due date of the 
information return in accordance with the regulations under section 
3406, an information return shall be made even if the payment is not 
generally reportable because it is made to an exempt recipient described 
in Sec.  1.6049-4(c)(1)(ii) or the amount paid during the calendar year 
to the recipient aggregates less than $10.
    (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

[[Page 238]]

    (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 (March 31 if filed 
electronically) 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.
    (e) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6044(a), see Sec.  301.6721-1 of this chapter 
(Procedure and Administration Regulations). See Sec.  301.6724-1 of this 
chapter for the waiver of a penalty if the failure is due to reasonable 
cause and is not due to willful neglect.
    (f) Magnetic media requirement. For the requirement to submit the 
information required by Form 1099 on magnetic media for payments after 
December 31, 1983, see section 6011(e) and Sec.  301.6011-2 of this 
chapter (Procedure and Administration Regulations). 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; T.D. 8734, 62 FR 53476, Oct. 14, 1997; T.D. 
8895, 65 FR 50407, Aug. 18, 2000]



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

[[Page 239]]

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. An amount described in paragraph (a) of this section 
does not include--
    (1) Any amount described in Sec.  1.6042-3(b); or
    (2) With respect to amounts paid or credited after December 31, 
1982, any amount paid or credited to any person described in Sec.  
1.6049-4(c)(1)(ii).
    (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, as amended by T.D. 8734, 62 FR 
53476, Oct. 14, 1997]



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

[[Page 240]]

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) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to furnish timely a correct payee statement 
required under section 6044(e), see Sec.  301.6722-1 of this chapter 
(Procedure and Administration Regulations). See Sec.  301.6724-1 of this 
chapter for the waiver of a penalty if the failure is due to reasonable 
cause and is not due to willful neglect.
    (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, as amended by T.D. 8734, 62 FR 
53476, Oct. 14, 1997]



Sec.  1.6045-1  Returns of information of brokers and barter exchanges.

    (a) Definitions. The following definitions apply for purposes of 
this section and Sec.  1.6045-2:
    (1) The term broker means any person (other than a person who is 
required to report a transaction under section 6043), U.S. or foreign, 
that, in the ordinary course of a trade or business during the calendar 
year, stands ready to effect sales to be made by others. A broker 
includes an obligor that regularly issues and retires its own debt 
obligations or a corporation that regularly redeems its own stock. 
However, with respect to a sale (including a redemption or retirement) 
effected at an office outside the United States, a broker includes only 
a person described as a U.S. payor or U.S. middleman in Sec.  1.6049-
5(c)(5). In addition, a broker does not include an international 
organization described in Sec.  1.6049-4(c)(1)(ii)(G) that redeems or 
retires an obligation of which it is the issuer.
    (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

[[Page 241]]

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:
    (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 cash means United States dollars or any convertible 
foreign currency.
    (13) The term person includes any governmental unit and any agency 
or instrumentality thereof.
    (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) A professional custodian (such as a bank) that regularly 
arranges sales for custodial accounts pursuant to instructions from the 
owner of the property.
    (iii) 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.
    (iv) 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.
    (v) 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

[[Page 242]]

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 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--(i) Sales effected for exempt recipients--
    (A) In general. No return of information is required with respect to 
a sale effected for a customer that is an exempt recipient under 
paragraph (c)(3)(i)(B) of this section.
    (B) Exempt recipient defined. The term exempt recipient means--
    (1) A corporation as defined in section 7701(a)(3), whether domestic 
or foreign;
    (2) An organization exempt from taxation under section 501(a) or an 
individual retirement plan;
    (3) The United States or a State, the District of Columbia, a 
possession of the United States, a political subdivision of any of the 
foregoing, a wholly owned agency or instrumentality of any one or more 
of the foregoing, or a pool or partnership composed exclusively of any 
of the foregoing;
    (4) A foreign government, a political subdivision thereof, an 
international organization, or any wholly owned agency or 
instrumentality of the foregoing;
    (5) A foreign central bank of issue as defined in Sec.  1.895-
1(b)(1) (i.e., a bank that is by law or government sanction the 
principal authority, other than the government itself, issuing 
instruments intended to circulate as currency);

[[Page 243]]

    (6) A dealer in securities or commodities registered as such under 
the laws of the United States or a State;
    (7) A futures commission merchant registered as such with the 
Commodity Futures Trading Commission;
    (8) A real estate investment trust (as defined in section 856);
    (9) An entity registered at all times during the taxable year under 
the Investment Company Act of 1940 (15 U.S.C. 80a-1, et seq.);
    (10) A common trust fund (as defined in section 584(a)); or
    (11) 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.
    (C) Exemption certificate. A broker may treat a person described in 
paragraph (c)(3)(i)(B) of this section as an exempt recipient based on a 
properly completed exemption certificate (as provided in Sec.  
31.3406(h)-3) of this chapter, on the broker's actual knowledge that the 
payee is a person described in paragraph (c)(3)(i)(B), or on the 
applicable indicators described in Sec.  1.6049-4(c)(1)(ii)(A) through 
(M). A broker may require an exempt recipient to file a properly 
completed exemption certificate and may treat an exempt recipient that 
fails to do so as a recipient that is not exempt.
    (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 (see Sec.  601.601(d)(2) of this chapter).
    (iii) Multiple brokers. If a broker is instructed to initiate a sale 
by a person that is an exempt recipient described in paragraph 
(c)(3)(i)(B)(6), (7), or (11) of this section, no return of information 
is required with respect to the sale by that broker. In a redemption of 
stock or retirement of securities, only the broker responsible for 
paying the holder redeemed or retired, or crediting the gross proceeds 
on the sale to that holder's account, is required to report the sale.
    (iv) Cash on delivery transactions. In the case of a sale of 
securities through a cash on delivery account, a delivery versus payment 
account, or other similar account or transaction, only the broker that 
receives the gross proceeds from the sale against delivery of the 
securities sold is required to report the sale. If, however, the 
broker's customer is another broker (second-party broker) that is an 
exempt recipient, then only the second-party broker is required to 
report the sale.
    (v) Fiduciaries and partnerships. No return of information is 
required with respect to a sale effected by a custodian or trustee in 
its capacity as such or a redemption of a partnership interest by a 
partnership, provided the sale is otherwise reported by the custodian or 
trustee on a properly filed Form 1041, or the redemption is otherwise 
reported by the partnership on a properly filed Form 1065, and all 
Schedule K-1 reporting requirements are satisfied.
    (vi) Sales at issue price. No return of information is required with 
respect to a sale of an interest in a regulated investment company that 
can hold itself out as a money market fund under Rule 2a-7 under the 
Investment Company Act of 1940 that computes its current price per share 
for purposes of distributions, redemptions, and purchases so as to 
stabilize the price per share at a constant amount that approximates its 
issue price or the price at which it was originally sold to the public.
    (vii) Obligor payments on certain obligations. No return of 
information is required with respect to payments representing obligor 
payments on--
    (A) Nontransferable obligations (including savings bonds, savings 
accounts, checking accounts, and NOW accounts);
    (B) Obligations as to which the entire gross proceeds are reported 
by the broker on Form 1099 under provisions of the Internal Revenue Code 
other than section 6045 (including stripped coupons issued prior to July 
1, 1982); or
    (C) Retirement of short-term obligations (i.e., obligations with a 
fixed maturity date not exceeding 1 year from the date of issue) that 
have original issue discount, as defined in section 1273(a)(1), with or 
without application of the de minimis rule.

[[Page 244]]

    (D) Demand obligations that also are callable by the obligor and 
that have no premium or discount.
    (viii) Foreign currency. No return of information is required with 
respect to a sale of foreign currency other than a sale pursuant to a 
forward contract or regulated futures contract that requires delivery of 
foreign currency.
    (ix) Fractional share. No return of information is required with 
respect to a sale of a fractional share of stock if the gross proceeds 
on the sale of the fractional share are less than $20.
    (x) Certain retirements. No return of information is required from 
an issuer or its agent with respect to the retirement of book entry or 
registered form obligations as to which the relevant books and records 
indicate that no interim transfers have occurred.
    (xi) Cross reference. 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.
    (xii) Effective date. The provisions of this paragraph (c)(3) apply 
for sales effected after December 31, 2002.
    (4) Examples. The following examples illustrate the application of 
the rules in paragraph (c)(3) of this section:

    Example 1. P, an individual who is not an exempt recipient, places 
an order with B, a person generally known in the investment community to 
be a federally registered broker/dealer, to effect a sale of P's stock 
in a publicly traded corporation. B, in turn, places an order to sell 
the stock with C, a second broker, who will execute the sale. B 
discloses to C the identity of the customer placing the order. C is not 
required to make a return of information with respect to the sale 
because C was instructed by B, an exempt recipient as defined in 
paragraph (c)(3)(i)(B)(6) of this section, to initiate the sale. B is 
required to make a return of information with respect to the sale 
because P is B's customer and is not an exempt recipient.
    Example 2. Assume the same facts as in Example 1 except that B has 
an omnibus account with C so that B does not disclose to C whether the 
transaction is for a customer of B or for B's own account. C is not 
required to make a return of information with respect to the sale 
because C was instructed by B, an exempt recipient as defined in 
paragraph (c)(3)(i)(B)(6) of this section, to initiate the sale. B is 
required to make a return of information with respect to the sale 
because P is B's customer and is not an exempt recipient.
    Example 3. D, an individual who is not an exempt recipient, enters 
into a cash on delivery stock transaction by instructing K, a federally 
registered broker/dealer, to sell stock owned by D, and to deliver the 
proceeds to L, a custodian bank. Concurrently with the above 
instructions, D instructs L to deliver D's stock to K (or K's designee) 
against delivery of the proceeds from K. The records of both K and L 
with respect to this transaction show an account in the name of D. 
Pursuant to paragraph (h)(1) of this section, D is considered the 
customer of K and L. Under paragraph (c)(3)(iv) of this section, K is 
not required to make a return of information with respect to the sale 
because K will pay the gross proceeds to L against delivery of the 
securities sold. L is required to make a return of information with 
respect to the sale because D is L's customer and is not an exempt 
recipient.
    Example 4. Assume the same facts as in Example 3 except that E, a 
federally registered investment advisor, instructs K to sell stock owned 
by D and to deliver the proceeds to L. Concurrently with the above 
instructions, E instructs L to deliver D's stock to K (or K's designee) 
against delivery of the proceeds from K. The records of both K and L 
with respect to the transaction show an account in the name of D. 
Pursuant to paragraph (h)(1) of this section, D is considered the 
customer of K and L. Under paragraph (c)(3)(iv) of this section, K is 
not required to make a return of information with respect to the sale 
because K will pay the gross proceeds to L against delivery of the 
securities sold. L is required to make a return of information with 
respect to the sale because D is L's customer and is not an exempt 
recipient.
    Example 5. Assume the same facts as in Example 4 except that the 
records of both K and L with respect to the transaction show an account 
in the name of E. Pursuant to paragraph (h)(1) of this section, E is 
considered the customer of K and L. Under paragraph (c)(3)(iv) of this 
section, K is not required to make a return of information with respect 
to the sale because K will pay the gross proceeds to L against delivery 
of the securities sold. L is required to make a return of information 
with respect to the sale because E is L's customer and is not an exempt 
recipient. E is required to make a return of information with respect to 
the sale because D is E's customer and is not an exempt recipient.
    Example 6. F, an individual who is not an exempt recipient, owns 
bonds that are held by G, a federally registered broker/dealer, in an 
account for F with G designated as nominee for F. Upon the retirement of 
the bonds, the gross proceeds are automatically credited to the account 
of F. G is required to make a return of information with respect to the 
retirement because G is the broker responsible for making payments of 
the gross proceeds to F.

[[Page 245]]

    (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 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) Determination of profit or loss from foreign currency 
contracts. A broker effecting a closing transaction in foreign currency 
contracts (as defined in section 1256(g)) shall report information with 
respect to such contracts in the manner prescribed in paragraph 
(c)(5)(i) of this section. If a foreign currency contract is closed by 
making or taking delivery, the net realized profit or loss for purposes 
of paragraph (c)(5)(i)(B) of this section is determined by comparing the 
contract price to the spot price for the contract currency at the time 
and place specified in the contract. If a foreign currency contract is 
closed by entry into an offsetting contract, the net realized profit or 
loss for purposes of paragraph (c)(5)(i)(B) of this section is 
determined by comparing the contract price to the price of the 
offsetting contract. The net unrealized profit or loss in a foreign 
currency contract for purposes of paragraphs (c)(5)(i) (C) and (D) of 
this section is determined by comparing the contract price to the 
broker's price for similar contracts at the close of business of the 
relevant year.
    (iii) 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,

[[Page 246]]

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 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.

[[Page 247]]

    (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 and at the time required by Form 1099 and section 
6049.
    (4) Sale date. With respect to sales of property that are reportable 
under this section, a broker must report a sale as occurring on the date 
the sale is entered on the books of the broker.
    (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 into United States dollars of proceeds paid in 
foreign currency--(i) Conversion rules. When a payment is made in a 
foreign currency, the U.S. dollar amount shall be determined by 
converting such foreign currency into U.S. dollars on the date of 
payment at the spot rate (as defined in Sec.  1.988-1(d)(1)) or pursuant 
to a reasonable spot rate convention. For example, a withholding agent 
may use a month-end spot rate or a monthly average spot rate. A spot 
rate convention must be used consistently with respect to all non-dollar 
amounts withheld and from year to year. Such convention cannot be 
changed without the consent of the Commissioner or his or her delegate.
    (ii) Effect of identification under Sec.  1.988-5(a), (b), or (c) 
where the taxpayer effects a sale and a hedge through the same broker--
(A) In general. In lieu of the amount reportable under paragraph 
(d)(6)(i) of this section, the amount subject to reporting shall be the 
integrated amount computed under Sec.  1.988-5(a), (b) or (c) if--

[[Page 248]]

    (1) A taxpayer effects through a broker a sale or exchange of 
nonfunctional currency (as defined in Sec.  1.988-1(c)) and hedges all 
or a part of such sale as provided in Sec.  1.988-5(a), (b) or (c) with 
the same broker; and
    (2) The taxpayer complies with the requirements of Sec.  1.988-5(a), 
(b) or (c) and so notifies the broker prior to the end of the calendar 
year in which the sale occurs.
    (B) Effective date. The provisions of this paragraph (d)(6)(ii) 
apply to transactions entered into after December 31, 2000.
    (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.
    (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 Sec.  31.3406(h)-3(a) of this chapter or provided that--

[[Page 249]]

    (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.
    (6) Reporting period. A barter exchange shall use the calendar year 
as the reporting period.
    (g) Exempt foreign persons--(1) Brokers. No return of information is 
required to be made by a broker with respect to a customer who is 
considered to be an exempt foreign person under this paragraph (g)(1). A 
broker may treat a customer as an exempt foreign person under the 
circumstances described in paragraphs (g)(1)(i) through (iii) of this 
section.
    (i) With respect to a sale effected at an office of a broker either 
inside or outside the United States, the broker may treat the customer 
as an exempt foreign person if the broker can, prior to the payment, 
associate the payment with documentation upon which it can rely in order 
to treat the customer as a foreign beneficial owner in accordance with 
Sec.  1.1441-1(e)(1)(ii), or as made to a foreign payee in accordance 
with Sec.  1.6049-5(d)(1) or presumed to be made to a foreign payee 
under Sec.  1.6049-5(d)(2) or (3). For purposes of this paragraph 
(g)(1)(i), the provisions in Sec.  1.6049-5(c) (regarding rules 
applicable to documentation of foreign status and definition of U.S. 
payor, U.S. middleman, non-U.S. payor, and non-U.S. middleman) shall 
apply. The provisions of Sec.  1.1441-1 shall apply by substituting the 
terms broker and customer for the terms withholding agent and payee and 
without regard for the fact that the provisions apply to amounts subject 
to withholding under chapter 3 of the Internal Revenue Code (Code). The 
provisions of Sec.  1.6049-5(d) shall apply by substituting the terms 
broker and customer for the terms payor and payee. For purposes of this 
paragraph (g)(1)(i), a broker that is required to obtain, or chooses to 
obtain, a beneficial owner withholding certificate described in Sec.  
1.1441-1(e)(2)(i) from an individual may rely on the withholding 
certificate only to the extent the certificate includes a certification 
that the beneficial owner has not been, and at the time the certificate 
is furnished, reasonably expects not to be present in

[[Page 250]]

the United States for a period aggregating 183 days or more during each 
calendar year to which the certificate pertains. The certification is 
not required if a broker receives documentary evidence under Sec.  
1.6049-5(c)(1) or (4).
    (ii) With respect to a redemption or retirement of stock or an 
obligation (the interest or original issue discount on, which is 
described in Sec.  1.6049-5(b) (6), (7), (10), or (11) or the dividends 
on, which are described in Sec.  1.6042-3(b)(1)(iv)) that is effected at 
an office of a broker outside the United States by the issuer (or its 
paying or transfer agent), the broker may treat the customer as an 
exempt foreign person if the broker is not also acting in its capacity 
as a custodian, nominee, or other agent of the payee.
    (iii) With respect to a sale effected by a broker at an office of 
the broker either inside or outside the United States, the broker may 
treat the customer as an exempt foreign person for the period that those 
proceeds are assets blocked, as described in Sec.  1.1441-2(e)(3). For 
purposes of this paragraph (g)(1)(iii) and section 3406, a sale is 
deemed to occur in accordance with paragraph (d)(4) of this section. The 
exemption in this paragraph (g)(1)(iii) shall terminate when payment of 
the proceeds is deemed to occur in accordance with the provisions of 
Sec.  1.1441-2(e)(3).
    (2) Barter exchange. No return of information is required by a 
barter exchange with respect to a client or a member that the barter 
exchange may treat as a foreign person pursuant to the procedures 
described in paragraph (g)(1) of this section.
    (3) Applicable rules--(i) Joint owners. Amounts paid to joint owners 
for which a certificate or documentation is required as a condition for 
being exempt from reporting under paragraph (g) (1)(i) or (2) of this 
section are presumed made to U.S. payees who are not exempt recipients 
if, prior to payment, the broker or barter exchange cannot reliably 
associate the payment either with a Form W-9 furnished by one of the 
joint owners in the manner required in Sec. Sec.  31.3406(d)-1 through 
31.3406(d)-5 of this chapter, or with documentation described in 
paragraph (g)(1)(i) of this section furnished by each joint owner upon 
which it can rely to treat each joint owner as a foreign payee or 
foreign beneficial owner. For purposes of applying this paragraph 
(g)(3)(i), the grace period described in Sec.  1.6049-5(d)(2)(ii) shall 
apply only if each payee qualifies for such grace period.
    (ii) Special rules for determining who the customer is. For purposes 
of this paragraph (g), the determination of who the customer is shall be 
made on the basis of the provisions in Sec.  1.6049-5(d) by substituting 
in that section the terms payor and payee with the terms broker and 
customer.
    (iii) Place of effecting sale--(A) Sale outside the United States. 
For purposes of this paragraph (g), a sale is considered to be effected 
by a broker at an office outside the United States if, in accordance 
with instructions directly transmitted to such office from outside the 
United States by the broker's customer, the office completes the acts 
necessary to effect the sale outside the United States. The acts 
necessary to effect the sale may be considered to have been completed 
outside the United States without regard to whether--
    (1) Pursuant to instructions from an office of the broker outside 
the United States, an office of the same broker within the United States 
undertakes one or more steps of the sale in the United States; or
    (2) The gross proceeds of the sale are paid by a draft drawn on a 
United States bank account or by a wire or other electronic transfer 
from a United States account.
    (B) Sale inside the United States. For purposes of this paragraph 
(g), a sale that is considered to be effected by a broker at an office 
outside the United States under paragraph (g)(3)(iii)(A) of this section 
shall nevertheless be considered to be effected by a broker at an office 
inside the United States if either--
    (1) The customer has opened an account with a United States office 
of that broker;
    (2) The customer has transmitted instructions concerning this and 
other sales to the foreign office of the broker from within the United 
States by mail,

[[Page 251]]

telephone, electronic transmission or otherwise (unless the 
transmissions from the United States have taken place in isolated and 
infrequent circumstances);
    (3) The gross proceeds of the sale are paid to the customer by a 
transfer of funds into an account (other than an international account 
as defined in Sec.  1.6049-5(e)(4)) maintained by the customer in the 
United States or mailed to the customer at an address in the United 
States;
    (4) The confirmation of the sale is mailed to a customer at an 
address in the United States; or
    (5) An office of the same broker within the United States negotiates 
the sale with the customer or receives instructions with respect to the 
sale from the customer.
    (iv) Special rules where the customer is a foreign intermediary or 
certain U.S. branches. A foreign intermediary, as defined in Sec.  
1.1441-1(c)(13), is an exempt foreign person, except when the broker has 
actual knowledge (within the meaning of Sec.  1.6049-5(c)(3)) that the 
person for whom the intermediary acts is a U.S. person that is not 
exempt from reporting under paragraph (c)(3) of this section or the 
broker is required to presume under Sec.  1.6049-5(d)(3) that the payee 
is a U.S. person that is not an exempt recipient. If an intermediary, as 
defined in Sec.  1.1441-1(c)(13), or a U.S. branch described in Sec.  
1.1441-1(b)(2)(iv) (other than a U.S. branch that is treated as a U.S. 
person) receives a payment from a payor or middleman, which payment the 
payor or middleman can associate with a valid withholding certificate 
described in Sec.  1.1441-1(e)(3)(ii), (iii), or (v) furnished by such 
intermediary or U.S. branch, then the intermediary or U.S. branch is not 
required to report such payment when it, in turn, pays the amount to the 
person whose name is on the certificate furnished by the intermediary or 
U.S. branch to the payor or middleman, unless, and to the extent, the 
intermediary or U.S. branch knows that the payment is required to be 
reported under this section and was not so reported. For example, if a 
foreign intermediary or U.S. branch fails to provide information 
regarding U.S. persons that are not exempt from reporting under 
paragraph (c)(3) of this section to the person from whom the 
intermediary or U.S. branch receives the payment, the foreign 
intermediary or U.S. branch must report the payment on an information 
return. The exception of this paragraph (g)(3)(iv) shall not apply to a 
qualified intermediary that assumes reporting responsibility under 
chapter 61 of the Internal Revenue Code.

    (4) Examples. The application of the provisions of this paragraph 
(g) may be illustrated by the following examples:

    Example 1. FC is a foreign corporation that is not a U.S. payor or 
U.S. middleman described in Sec.  1.6049-5(c)(5) that regularly issues 
and retires its own debt obligations. A is an individual whose residence 
address is inside the United States, who holds a bond issued by FC that 
is in registered form (within the meaning of section 163(f) and the 
regulations under that section). The bond is retired by FP, a foreign 
corporation that is a broker within the meaning of paragraph (a)(1) of 
this section and the designated paying agent of FC. FP mails the 
proceeds to A at A's U.S. address. The sale would be considered to be 
effected at an office outside the United States under paragraph 
(g)(3)(iii)(A) of this section except that the proceeds of the sale are 
mailed to a U.S. address. For that reason, the sale is considered to be 
effected at an office of the broker inside the United States under 
paragraph (g)(3)(iii)(B) of this section. Therefore, FC is a broker 
under paragraph (a)(1) of this section with respect to this transaction 
because, although it is not a U.S. payor or U.S. middleman, as described 
in Sec.  1.6049-5(c)(5), it is deemed to effect the sale in the United 
States. FP is a broker for the same reasons. However, under the multiple 
broker exception under paragraph (c)(3)(iii) of this section, FP, rather 
than FC, is required to report the payment because FP is responsible for 
paying the holder the proceeds from the retired obligations. Under 
paragraph (g)(1)(i) of this section, FP may not treat A as an exempt 
foreign person and must make an information return under section 6045 
with respect to the retirement of the FC bond, unless FP obtains the 
certificate or documentation described in paragraph (g)(1)(i) of this 
section.

    Example 2. The facts are the same as in Example 1 except that FP 
mails the proceeds to A at an address outside the United States. Under 
paragraph (g)(3)(iii)(A) of this section, the sale is considered to be 
effected at an office of the broker outside the United States.

[[Page 252]]

Therefore, under paragraph (a)(1) of this section, neither FC nor FP is 
a broker with respect to the retirement of the FC bond. Accordingly, 
neither is required to make an information return under section 6045.
    Example 3. The facts are the same as in Example 2 except that FP is 
also the agent of A. The result is the same as in Example 2. Neither FP 
nor FC are brokers under paragraph (a)(1) of this section with respect 
to the sale since the sale is effected outside the United States and 
neither of them are U.S. payors (within the meaning of Sec.  1.6049-
5(c)(5)).
    Example 4. The facts are the same as in Example 1 except that the 
registered bond held by A was issued by DC, a domestic corporation that 
regularly issues and retires its own debt obligations. Also, FP mails 
the proceeds to A at an address outside the United States. Interest on 
the bond is not described in paragraph (g)(1)(ii) of this section. The 
sale is considered to be effected at an office outside the United States 
under paragraph (g)(3)(iii)(A) of this section. DC is a broker under 
paragraph (a)(1)(i)(B) of this section. DC is not required to report the 
payment under the multiple broker exception under paragraph (c)(3)(iii) 
of this section. FP is not required to make an information return under 
section 6045 because FP is not a U.S. payor described in Sec.  1.6049-
5(c)(5) and the sale is effected outside the United States. Accordingly, 
FP is not a broker under paragraph (a)(1) of this section.
    Example 5. The facts are the same as in Example 4 except that FP is 
also the agent of A. DC is a broker under paragraph (a)(1) of this 
section. DC is not required to report under the multiple broker 
exception under paragraph (c)(3)(iii) of this section. FP is not 
required to make an information return under section 6045 because FP is 
not a U.S. payor described in Sec.  1.6049-5(c)(5) and the sale is 
effected outside the United States and therefore FP is not a broker 
under paragraph (a)(1) of this section.
    Example 6. The facts are the same as in Example 4 except that the 
bond is retired by DP, a broker within the meaning of paragraph (a)(1) 
of this section and the designated paying agent of DC. DP is a U.S. 
payor under Sec.  1.6049-5(c)(5). DC is not required to report under the 
multiple broker exception under paragraph (c)(3)(iii) of this section. 
DP is required to make an information return under section 6045 because 
it is the person responsible for paying the proceeds from the retired 
obligations unless DP obtains the certificate or documentary evidence 
described in paragraph (g)(1)(i) of this section.
    Example 7. Customer A, an individual, owns U.S. corporate bonds 
issued in registered form after July 18, 1984 and carrying a stated rate 
of interest. The bonds are held through an account with foreign bank, X, 
and are held in street name. X is a wholly-owned subsidiary of a U.S. 
company and is not a qualified intermediary within the meaning of Sec.  
1.1441-1(e)(5)(ii). X has no documentation regarding A. A instructs X to 
sell the bonds. In order to effect the sale, X acts through its agent in 
the United States, Y. Y sells the bonds and remits the sales proceeds to 
X. X credits A's account in the foreign country. X does not provide 
documentation to Y.
    (i) Y's obligations to withhold and report. Y treats X as the 
customer, and not A, because Y cannot treat X as an intermediary because 
it has received no documentation from X. Y is not required to report the 
sales proceeds under the multiple broker exception under paragraph 
(c)(3)(iii) of this section, because X is an exempt recipient. Further, 
Y is not required to report the amount of accrued interest paid to X on 
Form 1042-S under Sec.  1.1461-1(c)(2)(ii) because accrued interest is 
not an amount subject to reporting unless the withholding agent knows 
that the obligation is being sold with a primary purpose of avoiding 
tax.
    (ii) X's obligations to withhold and report. Although X has 
effected, within the meaning of paragraph (a)(1) of this section, the 
sale of a security at an office outside the United States under 
paragraph (g)(3)(iii) of this section, X is treated as a broker, under 
paragraph (a)(1) of this section, because as a wholly-owned subsidiary 
of a U.S. corporation, X is a U.S. payor. See Sec.  1.6049-5(c)(5). 
Under the presumptions described in Sec.  1.6049-5(d)(2), X must presume 
that, with respect to the sales proceeds, A is a U.S. person who is not 
an exempt recipient. Therefore the payment of sales proceeds to A by X 
is reportable on a Form 1099 under paragraph (c)(2) of this section. X 
has no obligation to backup withhold on the payment based on the 
exemption under Sec.  31.3406(g)-1(e) of this chapter, unless X has 
actual knowledge that A is a U.S. person that is not an exempt 
recipient. X is also required to separately report the accrued interest 
(see paragraph (d)(3) of this section) on Form 1099 under section 6049 
because A is also presumed to be a U.S. person who is not an exempt 
recipient under the presumption rule in Sec.  1.6049-5(d)(2) and Sec.  
1.1441-1(b)(3)(iii) since accrued interest is not an amount subject to 
reporting and therefore the presumption of foreign status for offshore 
accounts under Sec.  1.1441-1(b)(3)(iii)(D) does not apply.
    Example 8. The facts are the same as in Example 7, except that 
instead of U.S. corporate bonds that carry stated interest, A owns 
original issue discount instruments described in section 871(g)(1)(B)(i) 
(i.e., obligations payable 183 days or less from the date of original 
issue). In addition, the sale is in a transaction other than a 
redemption.
    (i) Y's obligations to withhold and report. Y is not required to 
report the sales proceeds under the multiple broker exception under

[[Page 253]]

paragraph (c)(3)(iii) of this section, because X is an exempt recipient.
    (ii) X's obligations to withhold and report. Although X has 
effected, within the meaning of paragraph (a)(1) of this section, the 
sale of a security at an office outside the United States under 
paragraph (g)(3)(iii) of this section, X is treated as a broker, under 
paragraph (a)(1) of this section, because as a wholly-owned subsidiary 
of a U.S. corporation, X is a U.S. payor. See Sec.  1.6049-5(c)(5). 
Under the presumptions described in Sec.  1.6049-5(d)(2), X must presume 
that, with respect to the sales proceeds, A is a U.S. person who is not 
an exempt recipient. Therefore the payment of sales proceeds to A by X 
is reportable on a Form 1099 under paragraph (c)(2) of this section. X 
has no obligation to backup withhold on the payment based on the 
exemption under Sec.  31.3406(g)-1(e) of this chapter, unless X has 
actual knowledge that A is a U.S. person that is not an exempt 
recipient. X is not required to separately report the amount of accrued 
original issue discount. See paragraph (d)(3) of this section.
    Example 9. The facts are the same as in Example 8, except that X is 
a foreign corporation that is not a U.S. payor under Sec.  1.6049-5(c).
    (i) Y's obligations to withhold and report. Y is not required to 
report the sales proceeds under the multiple broker exception under 
paragraph (c)(3)(iii) of this section, because X is the person 
responsible for paying the proceeds from the sale to A.
    (ii) X's obligations to withhold and report. Although A is presumed 
to be a U.S. payee under the presumptions of Sec.  1.6049-5(d)(2), X is 
not considered to be a broker under paragraph (a)(1) of this section 
because it is a not a U.S. payor under Sec.  1.6049-5(c)(5). Therefore X 
is not required to report the sale under paragraph (c)(2) of this 
section.

    (i) Y's obligations to withhold and report. Y is not required to 
report the sales proceeds under the multiple broker exception under 
Sec.  5f.6045-1(c)(3)(ii), because X is the person responsible for 
paying the proceeds from the sale to A. However, the portion of the 
payment that represents interest accrued on the obligation since the 
last payment date and that is received as part of the total sales 
proceeds from the transaction is reportable under Sec.  1.1461-1 (b) and 
(c)(2)(i)(E), as an amount paid to a foreign person that is subject to 
withholding under chapter 3 of the Code within the meaning of Sec.  
1.1441-2(a) (even though no withholding is required under chapter 3 of 
the Code based on Sec.  1.1441-3(b)(2)(i), unless Sec.  1.1441-
3(b)(2)(ii) applies). The multiple broker exception under the 
regulations under section 6045 does not affect a withholding agent's 
obligation to report an amount otherwise required to be reported under 
Sec.  1.1461-1 (b) and (c). Under Sec.  1.1461-1(c)(3), Y must file Form 
1042-S in the name of X who, under Sec.  1.1441-1(b)(3)(v)(A), is 
presumed to be acting for its own account because Y cannot associate the 
payment of interest with a valid intermediary Form W-8 described in 
Sec.  1.1441-1(e)(3) (ii) or (iii) from X.
    (ii) X's obligations to withhold and report. X may also have 
reporting and withholding obligations when it credits A's account with 
the sales proceeds. Although the sale is considered to be effected at an 
office outside the United States under paragraph (g)(3)(iii)(A) of this 
section, X is a broker with respect to the sale because, as a wholly-
owned subsidiary of a U.S. company, it meets the definition of a broker 
under paragraph (a)(1) of this section. Under the presumptions described 
in Sec.  1.6049-5(d)(2), X, as a U.S. payor, must presume that, with 
respect to the sales proceeds, A is a U.S. person who is not an exempt 
recipient. Therefore, the payment of sales proceeds to A by X is 
reportable on a Form 1099 under paragraph (c)(2) of this section. X has 
no obligation to backup withhold on the payment, based on the exemption 
under Sec.  31.3406(g)-1(e), unless X has actual knowledge that A is a 
U.S. person who is not an exempt recipient. X is also a withholding 
agent with respect to the portion of the sales proceeds that represents 
accrued interest on the bonds. Based on the presumptions under 
Sec. Sec.  1.6049-5(d)(2) and 1.1441-1(b)(3)(iii)(D), X must presume 
that A is a foreign person with respect to the interest portion of the 
payment, because the interest amount is an amount subject to 
withholding, within the meaning of Sec.  1.1441-2(a) (even though a 
withholding agent is not required to withhold on such amounts). Thus, X 
is required to file a Form 1042 and 1042-S with respect to the interest 
portion of the payment. Y's filing of a Form 1042-S with respect to that 
portion of the payment to X does not meet the conditions for the 
multiple withholding agent exception under Sec.  1.1461-1(c)(4)(i) 
because Y did not report the payment to X as a payment to an 
intermediary.

    (5) Effective date--(i) General rule. The provisions of this 
paragraph (g) apply to payments made after December 31, 2000.
    (ii) Transition rules. The validity of a withholding certificate 
(namely, Form W-8 or other form upon which the payor is permitted to 
rely to hold the payee as a foreign person) that was valid on January 1, 
1998, under the regulations in effect prior to January 1, 2001 (see 26 
CFR parts 1 and 35a, revised April 1, 1999) and expired, or will expire, 
at any time during 1998, is extended until December 31, 1998. The 
validity of a withholding certificate that is valid on or after January 
1, 1999, remains valid until its validity expires

[[Page 254]]

under the regulations in effect prior to January 1, 2001 (see 26 CFR 
parts 1 and 35a, revised April 1, 1999) but in no event shall such a 
withholding certificate remain valid after December 31, 2000. The rule 
in this paragraph (g)(5)(ii), however, does not apply to extend the 
validity period of a form that expires in 1998 solely by reason of 
changes in the circumstances of the person whose name is on the 
certificate. Notwithstanding the first three sentences of this paragraph 
(g)(5)(ii), a payor may choose not to take advantage of the transition 
rule in this paragraph (g)(5)(ii) with respect to one or more 
withholding certificates valid under the regulations in effect prior to 
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and, 
therefore, to require withholding certificates conforming to the 
requirements described in this section (new withholding certificates). 
For purposes of this section, a new withholding certificate is deemed to 
satisfy the documentation requirement under the regulations in effect 
prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 
1999). Further, a new withholding certificate remains valid for the 
period specified in Sec.  1.1441-1(e)(4)(ii), regardless of when the 
certificate is obtained.
    (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 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; cross-reference to penalty. 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 February 28 of the following calendar year 
with the appropriate Internal Revenue Service Center, the address of 
which is listed in the instructions for Form 1096. See paragraph (l) of 
this section for the requirement to file certain returns on magnetic 
media. For provisions relating to the penalty provided for the failure 
to file timely a correct information return under section 6045(a), see 
Sec.  301.6721-1 of this chapter. See Sec.  301.6724-1 of this chapter 
for the waiver of a penalty if the failure is due to reasonable cause 
and is not due to willful neglect.
    (k) Requirement and time for furnishing statement; cross-reference 
to penalty--(1) General requirements. 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.
    (3) Cross-reference to penalty. For provisions for failure to 
furnish timely a correct payee statement, see Sec.  301.6724-

[[Page 255]]

1 of this chapter (Procedure and Administration Regulations). See Sec.  
301.6724-1 of this chapter for the waiver of a penalty if the failure is 
due to reasonable cause and is not due to willful neglect.
    (l) Use of magnetic media. For information returns filed after 
December 31, 1996, see Sec.  301.6011-2 of this chapter for rules 
relating to filing information returns on magnetic media and for rules 
relating to waivers granted for undue hardship. A broker or barter 
exchange that fails to file a Form 1099 on magnetic media, when 
required, may be subject to a penalty under section 6721 for each such 
failure. See paragraph (j) of this section.
    (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 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 paragraph (l) of this section for 
information returns required to be filed after December 31, 1996.
    (r) Electronic filing. Notwithstanding the time prescribed for 
filing in paragraph (j) of this section, Forms 1096 and 1099 required 
under this section for reporting periods ending during a calendar year 
shall, if filed electronically, be filed after the last calendar day of 
the reporting period elected by the broker or barter exchange and on or 
before March 31 of the following calendar year.

[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; T.D. 8734, 
62 FR 53476, Oct. 14, 1997; T.D. 8445, 63 FR 12410, Mar. 13, 1998; T.D. 
8770, 63 FR 35519, June 30, 1998; T.D. 8804, 63 FR 72186, 72188, Dec. 
31, 1998; T.D. 8856, 64 FR 73411, 73412, Dec. 30, 1999; T.D. 8881, 65 FR 
32206, 32212, May 22, 2000; T.D. 8895, 65 FR 50407, Aug. 18, 2000; 66 FR 
18189, Apr. 6, 2001; T.D. 9010, 67 FR 48758, July 26, 2002]



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

[[Page 256]]

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 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 in paragraph (a)(3)(ii) of this section, for taxable 
years beginning before January 1, 2003, 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) Reporting 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.

[[Page 257]]

    (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.
    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$100x200 
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;
    (F) An international organization; or
    (G) A foreign central bank of issue, as defined in Sec.  1.6049-
4(c)(1)(ii)(H), or the Bank for International Settlements.
    (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.  1.6045-1(c)(3)(i)(B).
    (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

[[Page 258]]

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 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

[[Page 259]]

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):

    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\x150 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\x150 
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

[[Page 260]]

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. For information returns filed after 
December 31, 1996, see Sec.  301.6011-2 of this chapter for rules 
relating to filing information returns on magnetic media and for rules 
relating to waivers granted for undue hardship. A broker or barter 
exchange that fails to file a Form 1099 on magnetic media, when 
required, may be subject to a penalty under section 6721 for each such 
failure. See paragraph (g)(4) of this section.
    (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 for the year is 
received by the broker, and on or before February 28 (March 31 if filed 
electronically) of the following year with any of the Internal Revenue 
Service Centers, the addresses of which are listed in the instructions 
for Form 1096.
    (4) Cross-reference to penalties. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6045(d) and Sec.  1.6045-2(g)(1), including a 
failure to file on magnetic media, see Sec.  301.6721-1 of this chapter. 
For provisions relating to the penalty provided for failure to furnish 
timely a correct payee statement required under section 6045(d) and 
Sec.  1.6045-2(a), see Sec.  301.6722-1 of this chapter. See Sec.  
301.6724-1 of this chapter for the waiver of a penalty if the failure is 
due to reasonable cause and is not due to willful neglect.
    (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 paragraph (g)(2) of this section 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; T.D. 8734, 62 FR 53480, Oct. 14, 1997; T.D. 8770, 
63 FR 35519, June 30, 1998; T.D. 8895, 65 FR 50407, Aug. 18, 2000; T.D. 
9010, 67 FR 48758, July 26, 2002; T.D. 9103, 68 FR 74848, Dec. 29, 2003]



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, 62 FR 53060, Oct. 10, 1996]



Sec.  1.6045-3T  Information reporting for an acquisition of control 
or a substantial change in capital structure (temporary).

    (a) In general. Any broker (as defined in Sec.  1.6045-1(a)(1)) that 
holds shares on behalf of a customer in a corporation that the broker 
knows or has reason to

[[Page 261]]

know based on readily available information (including, for example, 
information from a clearing organization or from information published 
by the Internal Revenue Service (see Sec.  601.601(d)(2) of this 
chapter)) has engaged in a transaction described in Sec.  1.6043-4T(c) 
(acquisition of control) or Sec.  1.6043-4T(d) (substantial change in 
capital structure), shall file a return of information with respect to 
the customer, unless the customer is an exempt recipient as defined in 
paragraph (b) of this section.
    (b) Exempt recipients. A broker is not required to file a return of 
information under this section with respect to the following customers:
    (1) Any customer who receives only cash in exchange for its stock in 
the corporation, which must be reported by the broker pursuant to Sec.  
1.6045-1(a).
    (2) Any customer who is an exempt recipient as defined in Sec.  
1.6043-4T(b)(5) or Sec.  1.6045-1(c)(3)(i).
    (c) Form, manner and time for making information returns. The return 
required by paragraph (a) of this section must be on Forms 1096, 
``Annual Summary and Transmittal of U.S. Information Returns'', and 
1099-B, ``Proceeds from Broker and Barter Exchange Transactions,'' or on 
an acceptable substitute statement. Such forms must be filed on or 
before February 28 (March 31 if filed electronically) of the year 
following the calendar year in which the acquisition of control or the 
substantial change in capital structure occurs.
    (d) Contents of return. A separate Form 1099-B must be prepared for 
each customer showing--
    (1) The name, address and taxpayer identification number (TIN) of 
the customer;
    (2) The name and address of the corporation which engaged in the 
transaction described in Sec.  1.6043-4T(c) or (d);
    (3) The number and class of shares in the corporation exchanged by 
the customer;
    (4) The aggregate amount of cash and the fair market value of any 
stock (other than stock described in 1.6043-4T(a)(1)(v)(C)) or other 
property provided to the customer in exchange for its stock; and
    (5) Such other information as may be required by Form 1099-B.
    (e) Furnishing of forms to customers. The Form 1099-B prepared for 
each customer must be furnished to the customer on or before January 31 
of the year following the calendar year in which the customer receives 
stock, cash or other property.
    (f) Single Form 1099. If a broker is required to file a Form 1099-B 
with respect to a customer under both this Sec.  1.6045-3T and Sec.  
1.6045-1(b) with respect to the same transaction, the broker may satisfy 
the requirements of both sections by filing and furnishing one Form 
1099-B that contains all the relevant information, as provided in the 
instructions to Form 1099-B.
    (g) Effective date. (1) This section applies with respect to any 
acquisition of control and any substantial change in capital structure 
occurring after December 31, 2001, if the reporting corporation or any 
shareholder is required to recognize gain (if any) as a result of the 
application of section 367(a) as a result of the transaction. However, 
paragraphs (a) through (f) of this section apply to acquisitions of 
control and substantial changes in capital structure occurring after 
December 31, 2002, if the reporting corporation or any shareholder is 
required to recognize gain (if any) as a result of the application of 
section 367(a) as a result of the transaction. For transactions prior to 
that date, see Sec.  1.6045-3T as published in 26 CFR Part 1 (revised as 
of April 1, 2003). This section expires on November 14, 2005.
    (2) For any acquisition of control or any substantial change in 
capital structure occurring during the 2003 calendar year, a broker may 
elect to satisfy the requirements of this section by using Form 1099-CAP 
in lieu of Form 1099-B.

[T.D. 9101, 68 FR 75125, Dec. 30, 2003; 69 FR 7351, Feb. 17, 2004]



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

[[Page 262]]

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 ``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

[[Page 263]]

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;
    (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

[[Page 264]]

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 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

[[Page 265]]

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 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

[[Page 266]]

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.
    (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);

[[Page 267]]

    (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.
    (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

[[Page 268]]

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.
    (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

[[Page 269]]

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 (March 31 if filed electronically) 
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 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

[[Page 270]]

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 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

[[Page 271]]

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 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,

[[Page 272]]

$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; T.D. 8895, 65 FR 50407, Aug. 18, 2000]



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, 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,

[[Page 273]]

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, 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

[[Page 274]]

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 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

[[Page 275]]

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 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

[[Page 276]]

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.
    (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

[[Page 277]]

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 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

[[Page 278]]

    (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 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. 
If an individual who is a United States person required to make a return 
with respect to a foreign corporation under section 6046 is entitled 
under a treaty to be treated as a nonresident of the United States, and 
if the individual claims this treaty benefit, and if there are no other 
United States persons that are required to furnish information under 
section 6046 with respect to the foreign corporation, then the 
individual may satisfy the requirements of paragraphs (b)(10), (11) and 
(12), (c)(3)(ii)(d), and (g) of this section by filing the audited 
foreign financial statements of the foreign corporation with the 
individual's return required under section 6046.
    (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

[[Page 279]]

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; T.D. 
8733, 62 FR 53385, Oct. 14, 1997]



Sec.  1.6046A-1  Return requirement for United States persons who acquire 

or dispose of an interest in a foreign partnership, or whose proportional 
interest in a foreign partnership changes substantially.

    (a) Return requirement--(1) General rule. If a United States person 
has a reportable event (as defined in paragraph (b)(1) of this section) 
during the person's tax year, then, except as provided in paragraph (f) 
of this section, the United States person is required to complete and 
file Form 8865, ``Return of U.S. Persons With Respect To Certain Foreign 
Partnerships,'' containing the information described in paragraph (c) of 
this section.
    (2) Separate return for each partnership. If a United States person 
has a reportable event with respect to an interest in more than one 
foreign partnership, the United States person must file a separate Form 
8865 for each foreign partnership.
    (b) Definitions--(1) Reportable event. There are three categories of 
reportable events under section 6046A: acquisitions, dispositions, and 
changes in proportional interests.
    (i) Acquisitions. A United States person that acquires a foreign 
partnership interest has a reportable event if--
    (A) The person did not own a ten-percent or greater direct interest 
in the partnership and as a result of the acquisition the person owns a 
ten-percent or greater direct interest in the partnership. For purposes 
of this paragraph (b)(1)(i)(A), an acquisition includes an increase in a 
person's direct proportional interest; or
    (B) Subject to paragraph (b)(2) of this section, compared to the 
person's direct interest when the person last had a reportable event, 
after the acquisition the person's direct interest has increased by at 
least a ten-percent interest.
    (ii) Dispositions. A United States person that disposes of a foreign 
partnership interest has a reportable event if--
    (A) The person owned a ten-percent or greater direct interest in the 
partnership before the disposition and as a result of the disposition 
the person owns less than a ten-percent direct interest. For purposes of 
this paragraph

[[Page 280]]

(b)(1)(ii)(A), a disposition includes a decrease in a person's direct 
proportional interest; or
    (B) Subject to paragraph (b)(2) of this section, compared to the 
person's direct interest when the person last had a reportable event, 
after the disposition the person's direct interest has decreased by at 
least a ten-percent interest.
    (iii) Changes in proportional interests not otherwise reportable as 
acquisitions or dispositions under paragraph (b)(1)(i)(A) or 
(b)(1)(ii)(A) of this section. A United States person has a reportable 
event if, subject to paragraph (b)(2) of this section, compared to the 
person's direct proportional interest the last time the person had a 
reportable event, the person's direct proportional interest has 
increased or decreased by at least the equivalent of a ten-percent 
interest.
    (2) Special rule for foreign partnership interests owned on December 
31, 1999. If a United States person owned a ten-percent or greater 
direct interest in a foreign partnership on December 31, 1999, then to 
determine whether the person has a reportable event under paragraph 
(b)(1)(i)(B), (b)(1)(ii)(B), or (b)(1)(iii) of this section, the 
comparison should be made to the person's direct interest on December 
31, 1999. Once the person has a reportable event after December 31, 
1999, future comparisons should be made by reference to the last 
reportable event.
    (3) Change in a proportional interest. A partner's proportional 
interest in a foreign partnership may change for a number of reasons, 
for example, the change may be caused by changes in other partners' 
interests resulting from a partner withdrawing from the partnership. A 
proportional change may also occur by operation of the partnership 
agreement, for example, if the partnership agreement provides that a 
partner's interest in profits will change on a set date or when the 
partnership has earned a specified amount of profits and one of those 
events occurs.
    (4) Ten-percent interest. Under section 6046A(d) and this section, a 
ten-percent interest in a foreign partnership, as described in section 
6038(e)(3)(C) and the regulations thereunder, means an interest equal to 
ten percent of the capital interest in such partnership, an interest 
equal to ten percent of the profits interest in such partnership, or an 
interest to which ten percent of the deductions or losses of such 
partnership are allocated.
    (5) United States person. United States person means a person 
described in section 7701(a)(30).
    (6) Foreign partnership. Foreign partnership means any partnership 
that is a foreign partnership under sections 7701(a)(2) and (5).
    (7) Examples. The rules of paragraph (a) of this section and this 
paragraph (b) are illustrated by the following examples:

    Example 1. Acquisition of an indirect interest. FP, a foreign 
partnership, has two partners, FC1 and FC2, both foreign corporations. 
FC1 owns a 40% interest in FP, and FC2 owns a 60% interest in FP. No 
United States person owns an interest in FP, either directly, or 
constructively under section 6038(e)(3)(C) and section 267(c). On 
January 1, 2001, US, a United States person and calendar year taxpayer, 
acquires by purchase 100% of FC2's stock. US has acquired an indirect 
interest of 60% in FP. See sections 6038(e)(3)(C) and 267(c)(1). 
However, US is not required to report the January 1, 2001 indirect 
acquisition under section 6046A. US did not own a 10% or greater direct 
interest in FP before the acquisition, and US does not own a 10% or 
greater direct interest as a result of the acquisition. (US must, 
however, comply with the reporting requirements under section 6038 
(controlled foreign corporation and controlled foreign partnership 
reporting) with respect to FC2 and FP.)
    Example 2. Acquisition of direct interests. (i) Assume the same 
facts as Example 1. In addition, on June 1, 2001, US purchases a 5% 
direct interest in FP from FC1. US did not own a 10% or greater direct 
interest in FP before the acquisition. After the acquisition, US does 
not own a direct interest of 10% or more. US owns a 10% or greater total 
interest (direct and indirect), but only a 5% direct interest. 
Therefore, US is not required to report the June 1, 2001, acquisition 
under section 6046A.
    (ii) On September 1, 2001, US purchases a 7% direct interest in FP 
from FC1. The September 1, 2001 acquisition constitutes a reportable 
event under paragraph (b)(1)(i)(A) of this section. Before the September 
1 acquisition, US did not own a 10% or greater direct interest in FP. 
After the September 1 acquisition, US owns a 12% direct interest, and 
therefore, as a result of the September 1 acquisition, US now owns a 10% 
or greater direct interest in FP. Consequently, US must

[[Page 281]]

report its September 1 acquisition under section 6046A on Form 8865 
filed with US's 2001 income tax return.
    (iii) On December 1, 2001, US acquires an additional 4% direct 
interest in FP from FC1, so that US's total direct interest has 
increased from 12% to 16%. This acquisition does not constitute a 
reportable event. Compared to US's direct interest when US last had a 
reportable event (12% on September 1, 2001), after acquiring the 4% 
interest US's direct interest has not increased by at least a 10% direct 
interest (i.e., its direct interest increased by only 4%). Therefore, US 
does not have to report the December 1, 2001, acquisition under section 
6046A. On April 1, 2002, FC2 distributes a 6% direct interest in FP to 
US. US now owns a 22% direct interest in FP. Compared to US's direct 
interest when US last had a reportable event (12% on September 1, 2001), 
after the April 1 acquisition US's direct interest has increased by at 
least a 10% interest (12% to 22%). US must report the April 1, 2002 
acquisition on a Form 8865 attached to US's 2002 income tax return.
    Example 3. Change in proportional interest resulting from withdrawal 
of a partner. Assume the same facts as Example 3. In addition, on 
January 5, 2003, FC2 withdraws entirely from FP. As a result, the direct 
interests of US and FC1 in FP each increase by at least the equivalent 
of 10% interests. Compared to US's direct interest the last time US had 
a reportable event (22% on April 1, 2002), US's direct interest has 
increased by at least the equivalent of a ten percent interest. 
Therefore, US has had a reportable event pursuant to paragraph 
(b)(1)(iii) of this section, and US must report the change in its 
interest resulting from FC2's withdrawal from the partnership on US's 
Form 8865 filed with US's 2003 tax year income tax return.
    Example 4. Change in proportional interest constituting an 
acquisition. FP is a foreign partnership that has no United States 
persons as direct or constructive partners. US is a United States person 
and a calendar year taxpayer. On January 1, 2001, US purchases an 8% 
direct interest in FP. US is not required to report this acquisition. US 
did not own a 10% or greater direct interest in FP, and US does not own 
a 10% or greater direct interest as a result of the acquisition. On 
March 1, 2001, FC, a foreign partner of FP, withdraws from FP, and as 
result, US's direct interest in FP increases by a 7% interest. The 
increase in US's direct interest is considered an acquisition of an 
interest under paragraph (b)(1)(i)(A) of this section. US did not own a 
10% or greater direct interest in FP before FC withdrew, and as a result 
of the increase in US's direct interest because of FC's withdrawal from 
FP, US now owns a 10% or greater direct interest in FP. Therefore, US 
must report under section 6046A the increase in US's direct interest 
resulting from the withdrawal of FC from FP on Form 8865 filed with US's 
tax return for US's 2001 tax year.

    (c) Content of return. The Form 8865 that must be filed under 
paragraph (a)(1) of this section must contain the following information 
in such form and manner and to the extent that Form 8865 and its 
instructions prescribe--
    (1) The name, address, and taxpayer identification number of the 
United States person required to file the return;
    (2) Information about other persons (foreign or domestic) whose 
interests in the foreign partnership the person reporting under section 
6046A is considered to own under section 6038(e)(3)(C) and section 
267(c);
    (3) Information about all foreign entities that were disregarded as 
entities separate from their owners under Sec. Sec.  301.7701-2 and 
301.7701-3 of this chapter that were owned by the foreign partnership 
during the partnership's tax year ending with or within the tax year of 
the person filing Form 8865 pursuant to section 6046A;
    (4) For each reportable event, the date of the event, the type of 
event (acquisition, disposition, or change in proportional interest), 
and the United States person's direct percentage interest in the foreign 
partnership immediately before and immediately after the event;
    (5) The fair market value of the interest acquired or disposed of;
    (6) Information about partnerships (foreign and domestic) in which 
the foreign partnership owned a direct interest, or a constructive 
interest of ten percent or more under sections 267(c)(1) and (5) and the 
regulations thereunder, during the partnership's tax year ending with or 
within the tax year of the person filing Form 8865 pursuant to section 
6046A; and
    (7) Any other information required to be submitted by Form 8865 and 
its instructions.
    (d) Time and manner for filing returns. The Form 8865 must be filed 
with the timely filed (including extensions) income tax return of the 
United States person for the tax year in which the reportable event 
occurs. If the United States person is not required to file an income 
tax return for its tax year in which the reportable event occurs, but

[[Page 282]]

is required to file an information return for that year (for example, 
Form 1065, ``U.S. Partnership Return of Income,'' or Form 990, ``Return 
of Organization Exempt from Income Tax''), the United States person 
should attach the Form 8865 to its information return filed for that tax 
year.
    (e) Duplicate returns. If required by the instructions to Form 8865, 
a duplicate Form 8865 (including attachments and schedules) must also be 
filed.
    (f) Persons excepted from filing return--(1) Section 6038B overlap. 
If a United States person acquires an interest in a foreign partnership 
as a result of a section 721 contribution required to be reported under 
section 6038B, and the person properly reports the contribution under 
section 6038B, then the United States person is not required to report 
the acquisition of the partnership interest under section 6046A(a) 
should it constitute a reportable event under paragraph (b)(1) of this 
section. The acquisition will still constitute a reportable event for 
purposes of making future comparisons pursuant to paragraphs 
(b)(1)(i)(B), (b)(1)(ii)(B) and (b)(1)(iii) of this section. A person 
that fails to properly report the section 721 contribution under section 
6038B and the regulations thereunder and that fails to properly report 
the acquisition of the partnership interest under section 6046A may be 
subject to the penalties applicable to a failure to comply with the 
requirements of section 6038B, as well as the penalties applicable for a 
failure to comply with the requirements of section 6046A. See paragraph 
(h) of this section for more information about the penalties for failure 
to comply with the requirements of section 6046A.
    (2) Trusts relating to state and local government employee 
retirement plans. The return requirement of section 6046A does not apply 
to trusts relating to state and local government employee retirement 
plans, unless the instructions to Form 8865 provide otherwise.
    (3) Reporting under this section not required of partnerships 
excluded from the application of subchapter K. The reporting 
requirements of this section will not apply to any United States person 
in respect of an eligible partnership as described in Sec.  1.761-2(a) 
in which that United States person is a partner, if such partnership has 
validly elected to be excluded from all of the provisions of subchapter 
K of chapter 1 of the Internal Revenue Code in the manner specified in 
Sec.  1.761-2(b)(2)(i), or is deemed to have elected to be excluded from 
all of the provisions of subchapter K of chapter 1 of the Internal 
Revenue Code in accordance with the provisions of Sec.  1.761-
2(b)(2)(ii).
    (4) Exclusion for satellite organizations. The return requirement of 
section 6046A does not apply to the International Telecommunications 
Satellite Organization (or a successor organization) or the 
International Maritime Satellite Organization (or a successor 
organization).
    (g) Method of reporting. Except as otherwise provided on Form 8865, 
or the accompanying instructions, any amounts required to be reported 
under section 6046A and this section must be expressed in United States 
dollars, with a statement of the exchange rates used. All statements 
required on or with Form 8865 pursuant to this section must be in 
English.
    (h) Penalties for violating section 6046A. For penalties for 
violating section 6046A, see sections 6679 and 7203.
    (i) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6046A, see section 6501(c)(8).
    (j) Effective date. This section applies to reportable events 
occurring after December 31, 1999. No reporting under section 6046A is 
required for reportable events occurring on or before December 31, 1999.

[T.D. 8851, 64 FR 72556, Dec. 28, 1999]



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

[[Page 283]]

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, 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

[[Page 284]]

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;
    (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

[[Page 285]]

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 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.

[[Page 286]]

    (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 (March 31 if filed electronically) 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 under this section, see Sec. Sec.  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

[[Page 287]]

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; T.D. 8895, 65 
FR 50407, Aug. 18, 2000]



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 
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

[[Page 288]]

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 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

[[Page 289]]

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;
    (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;

[[Page 290]]

    (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 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

[[Page 291]]

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 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.

[[Page 292]]

    (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 Sec. Sec.  
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 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

[[Page 293]]

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 Sec. Sec.  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 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

[[Page 294]]

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 on or before the date prescribed in subparagraph (1) of this 
paragraph for furnishing the statements required by this section.

[[Page 295]]

    (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 a 
payor, as defined in paragraph (a)(2) of this section, of amounts of 
interest and original issue discount paid after December 31, 1982. Such 
return shall contain the information described in paragraph (b) of this 
section.
    (2) Payor. For payments made after December 31, 2002, a payor is a 
person described in paragraph (a)(2)(i) or (ii) of this section.
    (i) Every person who makes a payment of the type and of the amount 
subject to reporting under this section (or under an applicable section 
under this chapter) to any other person during a calendar year.
    (ii) Every person who collects on behalf of another person payments 
of the type and of the amount subject to reporting under this section 
(or under an applicable section under this chapter), or who otherwise 
acts as a middleman (as defined in paragraph (f)(4) of this section) 
with respect to such payment.
    (b) Information to be reported--(1) Interest payments. Except as 
provided in paragraphs (b) (3) and (5) of this section, in the case of 
interest other than original issue discount treated as interest under 
Sec.  1.6049-5(f), an information return on Form 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 3406 from 
the payments, if any, and such other information as required by the 
forms. An information return is generally not required if the amount of 
interest paid to a person aggregates less than $10 or if the payment is 
made to a person who is an exempt recipient described in paragraph 
(c)(1)(ii) of this section, unless the payor backup withholds under 
section 3406 on such payment (because, for example, the payee (i.e., 
exempt recipient) has failed to furnish a Form W-9 on request), in which 
case the payor must make a return under this section, unless the payor 
refunds the amount withheld pursuant to Sec.  31.6413(a)-3 of this 
chapter (Employment Tax Regulations). For reporting interest paid to a 
Canadian nonresident alien individual, see Sec.  1.6049-8.
    (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 3406. 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

[[Page 296]]

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 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 3406, 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--(i) In general. 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 for the calendar year. In the case of interest payments (other 
than original issue discount and other than interest described in Sec.  
1.6049-8), the information return shall be made on Form 1099 and shall 
show the aggregate amount of the interest, the name, address, and 
taxpayer identification number of the person on whose behalf received, 
the amount of tax withheld under section 3406, if any, and such other 
information as required by the forms. In the case of original issue 
discount, the information return shall show the information required to 
be shown for the person on whose behalf received, as described in 
paragraph (b)(2) of this section. See Sec.  1.6049-5(f) to determine 
whether a middleman is required to make an information return with 
respect to original issue discount. 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 payment of interest aggregates less than $10 or if the payment is 
made to an exempt recipient described in paragraph (c)(1)(ii) of this 
section, unless the payor backup withholds under section 3406 on such 
payment (because, for example, the payee has failed to furnish a Form W-
9 on request), in which case the payor must make a return under this 
section, unless the payor refunds the amount withheld pursuant to Sec.  
31.6413(a)-3 of this chapter (Employment Tax Regulations).
    (ii) Forwarding of interest coupons and original issue discount 
obligations. In the case of a middleman who, from within the United 
States, forwards an interest coupon or discount obligation on behalf of 
a payee for presentation, collection or payment outside the United 
States, the middleman shall make an information return on Form 1099 for 
the calendar year showing, in the case of an interest coupon, the 
information required under paragraph (b)(3)(i) of this section and, in 
the case of a discount obligation, information required under paragraph 
(b)(2) of this section. For purposes of this paragraph (b)(3)(ii), a 
middleman is considered to forward an interest coupon or discount 
obligation on behalf of a payee for presentation, collection or payment 
outside the United States if the middleman forwards the coupon or 
obligations outside the United States on or after the date when the 
payee is entitled to be paid or at an earlier date that is within 90 
days of such date or if the middleman has actual knowledge that the

[[Page 297]]

coupon or obligation is being forwarded outside the United States for 
presentation, collection, or payment outside the United States. However, 
the transfer, although subject to information reporting under this 
section, is not subject to backup withholding under section 3406.
    (iii) Example. The following example illustrates the provisions of 
paragraph (b)(3)(ii) of this section:

    Example. Individual F, who is entitled to payment on an interest 
coupon, instructs an office of Bank M in the United States to forward 
the coupon to Bank N for collection by Bank N outside the United States. 
Bank M in the United States forwards the interest coupon to Bank N 
outside the United States. Bank M is required to make an information 
return for the calendar year under paragraph (b)(3)(ii) of this section 
showing the aggregate amount of the interest coupon forwarded, the name, 
address of the permanent residence, and the taxpayer identification 
number, if any, of Individual F and such other information as the form 
requires.
    (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 3406, 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 
Sec. Sec.  1.6049-5(f) 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 general. No information return is required with 
respect to any payment made to an exempt recipient described in 
paragraph (c)(1)(ii) of this section, except to the extent otherwise 
provided in Sec.  1.6049-5(d)(3) (ii) and (iii). However, if the payor 
backup withholds under section 3406 on such payment (because, for 
example, the payee has failed to furnish a Form W-9 on request), then 
the payor is required to make a return under this section, unless the 
payor refunds the amount withheld in accordance with Sec.  31.6413(a)-3 
of this chapter (Employment Tax Regulations).
    (ii) Exempt recipient defined. The term exempt recipient means any 
person described in paragraphs (c)(1)(ii)(A) through (Q) of this 
section. An exempt recipient is generally exempt from information 
reporting without filing a certificate claiming exempt status unless the 
provisions of this paragraph (c)(1)(ii) require a payee to file a 
certificate.

A payor may, in any case, require a payee that is a U.S. person not 
otherwise required to file a certificate under this paragraph (c)(1)(ii) 
to file a certificate in order to qualify as an exempt recipient. See 
Sec.  31.3406(h)-3(a)(1)(iii) and (c)(2) of this chapter for the 
certificate that a payee that is a U.S. person must provide when a payor 
requires the certificate to treat the payee as an exempt recipient under 
this paragraph (c)(1)(ii). A payor may treat a payee as an exempt 
recipient based upon a properly completed form as described in Sec.  
31.3406(h)-3(e)(2) of this chapter, its actual knowledge that the payee 
is a person described in this paragraph (c)(1)(ii), or the indicators 
described in this paragraph (c)(1)(ii).
    (A) Corporation. A corporation, as defined in section 7701(a)(3), 
whether domestic or foreign, is an exempt recipient. In addition, for 
purposes of this paragraph (c)(1), the term corporation

[[Page 298]]

includes a partnership all of whose members are corporations described 
in this paragraph (c)(1), but only if the partnership files with the 
payor a certificate stating that each member of the partnership meets 
one of the requirements of paragraph (c)(1)(ii)(A) (1) through (4) of 
this section. Absent actual knowledge otherwise, a payor may treat a 
payee as a corporation (and, therefore, as an exempt recipient) if one 
of the requirements of paragraph (c)(1)(ii)(A) (1), (2), (3), or (4), of 
this section are met before a payment is made.
    (1) The name of the payee contains an unambiguous expression of 
corporate status that is Incorporated, Inc., Corporation, Corp., P.C., 
(but not Company or Co.) or contains the term insurance company, 
indemnity company, reinsurance company, or assurance company, or its 
name indicates that it is an entity listed as a per se corporation under 
Sec.  301.7701-2(b)(8)(i) of this chapter.
    (2) The payor has on file a corporate resolution or similar document 
clearly indicating corporate status. For this purpose, a similar 
document includes a copy of Form 8832, filed by the entity to elect 
classification as an association under Sec.  301.7701-3(b) of this 
chapter.
    (3) The payor receives a Form W-9 which includes an EIN and a 
statement from the payee that it is a domestic corporation.
    (4) The payor receives a withholding certificate described in Sec.  
1.1441-1(e)(2)(i), that includes a certification that the person whose 
name is on the certificate is a foreign corporation.
    (B) Tax exempt organization--(1) In general. Any organization that 
is exempt from taxation under section 501(a) is an exempt recipient. A 
custodial account under section 403(b)(7) shall be considered an exempt 
recipient under this paragraph. A payor may treat an organization as an 
exempt recipient under this paragraph (c)(1)(ii)(B) without requiring a 
certificate if the organization's name is listed in the compilation by 
the Commissioner of organizations for which a deduction for charitable 
contributions is allowed, if the name of the organization contains an 
unambiguous indication that it is a tax-exempt organization, or if the 
organization is known to the payor to be a tax-exempt organization.
    (2) Examples. The application of the provisions of this paragraph 
(c)(1)(ii)(B) may be illustrated by the following examples:

    Example 1. The following persons maintain accounts at M Bank: N 
College, O University, and P Church. M may treat N, O, and P as exempt 
recipients even though such persons have not filed an exemption 
certificate with M because the names of the organizations contain an 
unambiguous indication that they are tax exempt organizations.
    Example 2. Q is listed in the current edition of Internal Revenue 
Service Publication 78 as an organization for which deductions are 
permitted for charitable contributions under section 170(c). Such 
listing has not been revoked by an announcement published in the 
Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this chapter). A 
payor may treat Q as an exempt recipient even though Q has not filed an 
exemption certificate with the payor.
    Example 3. Employer R maintains a section 403(b)(7) custodial 
account with Regulated Investment Company S on behalf of R's employees. 
S may treat the account as an exempt recipient even though R or its 
employees have not filed an exemption certificate with S.

    (C) Individual retirement plan. An individual retirement plan as 
defined in section 7701(a)(37) is an exempt recipient. A payor may treat 
any such plan of which it is the trustee or custodian as an exempt 
recipient under this paragraph (c)(1) without requiring a certificate.
    (D) United States. The United States Government and any wholly-owned 
agency or instrumentality thereof are exempt recipients. A payor may 
treat a person as an exempt recipient under this paragraph (c)(1) 
without requiring a certificate if the name of such person reasonably 
indicates it is described in this paragraph (c)(1).
    (E) State. A State, the District of Columbia, a possession of the 
United States, a political subdivision of any of the foregoing, wholly-
owned agency or instrumentality of any one or more of the foregoing, and 
a pool or partnership composed exclusively of any of the foregoing are 
exempt recipients. A payor may treat a person as an exempt recipient 
under this paragraph (c)(1) without requiring a certificate if the

[[Page 299]]

name of such person reasonably indicates it is described in this 
paragraph (c)(1) or if such person is known generally in the community 
to be 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 (for example, an 
account held in the name of ``Town of S'' or ``County of T'' may be 
treated as held by an exempt recipient under this paragraph 
(c)(1)(ii)(E)).
    (F) Foreign government. A foreign government, a political 
subdivision of a foreign government, and any wholly-owned agency or 
instrumentality of either of the foregoing are exempt recipients. A 
payor may treat a foreign government or a political subdivision thereof 
as an exempt recipient under this paragraph (c)(1) without requiring a 
certificate provided that its name reasonably indicates that it is a 
foreign government or provided that it is known to the payor to be a 
foreign government or a political subdivision thereof (for example, an 
account held in the name of the ``Government of V'' may be treated as 
held by a foreign government).
    (G) International organization. An international organization and 
any wholly-owned agency or instrumentality thereof are exempt 
recipients. The term international organization shall have the meaning 
ascribed to it in section 7701(a)(18). A payor may treat a payee as an 
international organization without requiring a certificate if the payee 
is designated as an international organization by executive order 
(pursuant to 22 U.S.C. 288 through 288(f)).
    (H) Foreign central bank of issue. A foreign central bank of issue 
is an exempt recipient. A foreign central bank of issue is a bank which 
is by law or government sanction the principal authority, other than the 
government itself, issuing instruments intended to circulate as 
currency. See Sec.  1.895-1(b)(1). A payor may treat a person as a 
foreign central bank of issue (and, therefore, as an exempt recipient) 
without requiring a certificate provided that such person is known 
generally in the financial community as a foreign central bank of issue 
or if its name reasonably indicates that it is a foreign central bank of 
issue.
    (I) Securities or commodities dealer. A dealer in securities, 
commodities, or notional principal contracts, that is registered as such 
under the laws of the United States or a State or under the laws of a 
foreign country is an exempt recipient. A payor may treat a dealer as an 
exempt recipient under this paragraph (c)(1) without requiring a 
certificate if the person is known generally in the investment community 
to be a dealer meeting the requirements set forth in this paragraph 
(c)(1) (for example, a registered broker-dealer or a person listed as a 
member firm in the most recent publication of members of the National 
Association of Securities Dealers, Inc.).
    (J) Real estate investment trust. A real estate investment trust, as 
defined in section 856 and Sec.  1.856-1, is an exempt recipient. A 
payor may treat a person as a real estate investment trust (and, 
therefore, as an exempt recipient) without requiring a certificate if 
the person is known generally in the investment community as a real 
estate investment trust.
    (K) Entity registered under the Investment Company Act of 1940. An 
entity registered at all times during the taxable year under the 
Investment Company Act of 1940, as amended (15 U.S.C. 80a-1), (or during 
such portion of the taxable year that it is in existence), is an exempt 
recipient. An entity that is created during the taxable year will be 
treated as meeting the registration requirement of the preceding 
sentence provided that such entity is so registered at all times during 
the taxable year for which such entity is in existence. A payor may 
treat such an entity as an exempt recipient under this paragraph (c)(1) 
without requiring a certificate if the entity is known generally in the 
investment community to meet the requirements of the preceding sentence.
    (L) Common trust fund. A common trust fund, as defined in section 
584(a), is an exempt recipient. A payor may treat the fund as an exempt 
recipient without requiring a certificate provided that its name 
reasonably indicates that it is a common trust fund or

[[Page 300]]

provided that it is known to the payor to be a common trust fund.
    (M) Financial institution. 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, 
whether organized in the United States or under the laws of a foreign 
country is an exempt recipient. A financial institution also includes a 
clearing organization defined in Sec.  1.163-5(c)(2)(i)(D)(8) and the 
Bank for International Settlements. A payor may treat any person 
described in the preceding sentence as an exempt recipient without 
requiring a certificate if the person's name (including a foreign name, 
such as ``Banco'' or ``Banque'') reasonably indicates the payee is a 
financial institution described in the preceding sentence. In the case 
of a foreign person, a payor may also treat a person on such list as the 
Internal Revenue Service may publish or approve (such as in the Thomson 
Bank Directory or a list approved by the Federal Reserve Board).
    (N) Trust. A trust which is exempt from tax under section 664(c) 
(i.e., a charitable remainder annuity trust or a charitable remainder 
unitrust) or is described in section 4947(a)(1) (relating to certain 
charitable trusts) is an exempt recipient. A payor which is a trustee of 
the trust may treat the trust as an exempt recipient without requiring a 
certificate.
    (O) Nominees or custodians. A nominee or custodian.
    (P) Brokers. A broker as defined in section 6045(c) and Sec.  
1.6045-1(a)(1).
    (Q) Swap dealers. A dealer in notional principal contracts as 
defined in Sec.  1.446-3(c)(4)(iii).
    (iii) Exempt recipient no longer exempt. Any person who ceases to be 
an exempt recipient shall, no later than 10 days after such cessation, 
notify the payor in writing when it ceases to be an exempt recipient 
unless it reasonably appears that the person formerly qualifying as an 
exempt recipient will not thereafter receive a reportable payment from 
the payor. If a payor treats a person as an exempt recipient by 
requiring the exempt recipient to file a certificate claiming exempt 
status, that person shall revoke the certificate as provided in the 
preceding sentence. If the exempt recipient terminates its relationship 
with the payor prior to the time that the notice of change in status is 
otherwise required, the exempt recipient is not required to notify the 
payor. If, however, the person who formerly qualified as an exempt 
recipient later reinstates the relationship with the payor, the person 
must, prior to receiving a reportable payment from such relationship, 
notify the payor that it no longer qualifies as an exempt recipient in 
case the payor relies upon the previous treatment.
    (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 3406;
    (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 3406;
    (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 Commissioner 
determines that it is

[[Page 301]]

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(f).
    (3) Conversion into United States dollars of amounts paid in foreign 
currency--(i) Conversion rules. When a payment is made in foreign 
currency, the U.S. dollar amount of the payment shall be determined by 
converting such foreign currency into U.S. dollars on the date of 
payment at the spot rate (as defined in Sec.  1.988-1(d)(1)) or pursuant 
to a reasonable spot rate convention. For example, a withholding agent 
may use a month-end spot rate or a monthly average spot rate. A spot 
rate convention must be used consistently with respect to all non-dollar 
amounts withheld and from year to year. Such convention cannot be 
changed without the consent of the Commissioner or the Commissioner's 
delegate.
    (ii) Special rule for Sec.  1.988-5(a) transactions where the payor 
on both components of a qualified hedging transaction is the same 
person--(A) In general. Interest or original issue discount on a 
qualified debt instrument that is part of a qualified hedging 
transaction under Sec.  1.988-5(a) shall be computed for section 6049 
reporting purposes under the rules described in Sec.  1.988-5(a)(9)(ii) 
if--
    (1) The payor on the qualified debt instrument and the counterparty 
to the Sec.  1.988-5(a) hedge are the same person; and
    (2) The payee complies with the requirements of Sec.  1.988-5(a) and 
so notifies its payor prior to the date required for filing Form 1099 as 
required by this section.
    (B) Effective date. The provisions of this paragraph (d)(3)(ii) 
apply to transactions entered into after December 31, 2000.
    (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) Magnetic media requirement. For rules relating to permission to 
submit the information required by Form 1099 on magnetic tape or other 
media, see Sec.  1.9101-1. For the requirement to submit the information 
required by Form 1099 on magnetic media for payments after December 31, 
1983, see section 6011(e) and Sec.  301.6011-2 of this chapter 
(Regulations on Procedure and Administration).

[[Page 302]]

    (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)(2), 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 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)(9)(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-

[[Page 303]]

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:
    (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 
3406 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 3406.
    (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 3406, if any; and
    (v) Such other information as is required by the form.
    (f) Definitions. For purposes of section 6049, this section, and 
Sec. Sec.  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)(ii)(M) 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 3406. A person shall be considered to be a middleman as to 
any portion of an interest payment made to such person which portion is 
actually owned by another person, whether or not the other person's name 
is also shown on the information return filed with respect to such 
interest payment, except that a husband or

[[Page 304]]

wife will not be considered as acting in the capacity of a middleman 
with respect to his or her spouse. A person who, from within the United 
States, forwards an interest coupon or discount obligation on behalf of 
a payee for presentation, collection or payment outside the United 
States is also a middleman for purposes of this section (but the 
transfer, although subject to information reporting under this section, 
does not make the payment subject to backup withholding under section 
3406).
    (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. Broker B is required to make an information return 
showing the amount of original issue discount treated as paid to A under 
Sec.  1.6049-5(f).

    (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 (March 31 if filed electronically) 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 
(March 31 if filed electronically) 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.
    (3) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6049(a) and Sec.  1.6049-4(a)(1), see Sec.  
301.6721-1 of this chapter (Procedure and Administration Regulations). 
See Sec.  301.6724-1 of this chapter for the waiver of a penalty if the 
failure is due to reasonable cause and is not due to willful neglect.

[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; T.D. 8734, 
62 FR 53480, Oct. 14, 1997; T.D. 8804, 63 FR 72188, Dec. 31, 1998; T.D. 
8856, 64 FR 73412, Dec. 30, 1999; T.D. 8881, 65 FR 32207, 32212, May 22, 
2000; T.D. 8895, 65 FR 50407, Aug. 18, 2000; T.D. 9010, 67 FR 48759, 
July 26, 2002]



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 
Sec. Sec.  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,

[[Page 305]]

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 
he 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 
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. See Sec.  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 3406.
    (b) Interest excluded from reporting requirement. The term interest 
or original issue discount (OID) does not include--
    (1) 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.
    (2) 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 that is not in registered form 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

[[Page 306]]

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.
    (3) 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.
    (4) Interest that a governmental unit pays with respect to tax 
refunds.
    (5) Interest on deposits 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.
    (6) Amounts from sources outside the United States (determined under 
the provisions of part I, subchapter N, chapter 1 of the Internal 
Revenue Code (Code) and the regulations under those provisions) paid 
outside the United States by a non-U.S. payor or a non-U.S. middleman 
(as defined in paragraph (c)(5) of this section). See paragraph (e) of 
this section for circumstances in which a payment is considered to be 
made outside the United States.
    (7) Portfolio interest, as defined in Sec.  1.871-14(b)(1), paid 
with respect to obligations in bearer form described in section 
871(h)(2)(A) or 881(c)(2)(A) or with respect to a foreign-targeted 
registered obligation described in Sec.  1.871-14(e)(2) for which the 
documentation requirements described in Sec.  1.871-14(e)(3) and (4) 
have been satisfied (other than by a U.S. middleman (as defined in 
paragraph (c)(5) of this section) that, as a custodian or nominee of the 
payee, collects the amount for, or on behalf of, the payee, regardless 
of whether the middleman is also acting as agent of the payor).
    (8) Portfolio interest described in Sec.  1.871-14(c)(1)(ii), paid 
with respect to obligations in registered form described in section 
871(h)(2)(B) or 881(c)(2)(B) that is not described in paragraph (b)(7) 
of this section.
    (9) Any amount paid by an international organization described in 
Sec.  1.6049-4(c)(1)(ii)(G) (or its paying, transfer, or other agent 
that is not also a payee's agent) with respect to an obligation of which 
the international organization is the issuer.
    (10)(i) Amounts paid outside the United States (other than by a U.S. 
middleman (as defined in paragraph (c)(5) of this section) that, as a 
custodian or nominee or other agent of the payee, collects the amount 
for, or on behalf of, the payee, regardless of whether the middleman is 
also acting as agent of the payor) with respect to an obligation that: 
Has a face amount or principal amount of not less than $500,000 (as 
determined based on the spot rate on the date of issuance if in foreign 
currency); has a maturity (at issue) of 183 days or less; satisfies the 
requirements of sections 163(f)(2)(B)(i) and (ii)(I) and the regulations 
thereunder (as if the obligation would otherwise be a registration-
required obligation within the meaning of section 163(f)(2)(A)) 
(however, an original issue discount obligation with a maturity of 183 
days or less from the date of issuance is not required to satisfy the 
certification requirement of Sec.  1.163-5(c)(2)(i)(D)(3)) and is issued 
in accordance with the procedures of Sec.  1.163-5(c)(2)(i)(D); and has 
on its face the following statement (or a similar statement having the 
same effect):

    By accepting this obligation, the holder represents and warrants 
that it is not a United States person (other than an exempt recipient 
described in section 6049(b)(4) of the Internal Revenue Code and 
regulations thereunder) and that it is not acting for or on behalf of a 
United States person (other than an exempt recipient described in 
section 6049(b)(4) of the Internal Revenue Code and the regulations 
thereunder).

    (ii) If the obligation is in registered form, it must be registered 
in the name of an exempt recipient described in Sec.  1.6049-
4(c)(1)(ii). For purposes of this paragraph (b)(10), a middleman may 
treat an obligation as described in section 163(f)(2)(B)(i) and (ii)(I) 
and the regulations under that section if the obligation, or coupons 
detached therefrom, whichever is presented for payment, contains the 
statement described

[[Page 307]]

in this paragraph (b)(10). The exemption from reporting described in 
this paragraph (b)(10) shall not apply if the payor has actual knowledge 
that the payee is a U.S. person who is not an exempt recipient.
    (11) Amounts paid with respect to an account or deposit with a U.S. 
or foreign branch of a domestic or foreign corporation or partnership 
that is paid with respect to an obligation described in either paragraph 
(b)(11)(i) or (ii) of this section, if the branch is engaged in the 
commercial banking business; and the interest or OID is paid outside the 
United States (other than by a U.S. middleman (as defined in paragraph 
(c)(5) of this section) that acts as a custodian, nominee, or other 
agent of the payee, and collects the amount for, or on behalf of, the 
payee, regardless of whether the middleman is also acting as agent of 
the payor). The exemption from reporting described in this paragraph 
(b)(11) shall not apply if the payor has actual knowledge that the payee 
is a U.S. person who is not an exempt recipient.
    (i) An obligation is described in this paragraph (b)(11)(i) if it is 
not in registered form (within the meaning of section 163(f) and the 
regulations under that section), is described in section 163(f)(2)(B) 
and issued in accordance with the procedures of Sec.  1.163-
5(c)(2)(i)(C) or (D), and, in the case of a U.S. branch, is part of a 
larger single public offering of securities. For purposes of this 
paragraph (b)(11)(i), a middleman may treat an obligation as described 
in section 163(f)(2)(B) if the obligation, and any detachable coupons, 
contains the statement described in section 163(f)(2)(B)(ii)(II) and the 
regulations under that section.
    (ii)(A) An obligation is described in this paragraph (b)(11)(ii) if 
it produces income described in section 871(i)(2)(A); has a face amount 
or principal amount of not less than $500,000 (as determined based on 
the spot rate on the date of issuance if in foreign currency); satisfies 
the requirements of sections 163(f)(2)(B)(i) and (ii)(I) and the 
regulations thereunder (as if the obligation would otherwise be 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) (C) or (D) (however, an original issue discount 
obligation with a maturity of 183 days or less from the date of issuance 
is not required to satisfy the certification requirement of Sec.  1.163-
5(c)(2)(i)(D)(3)). For purposes of this paragraph (b)(11)(ii), a 
middleman may treat an obligation as described in sections 163(f)(2)(b) 
(i) and (ii) and the regulations under that section if the obligation, 
or any detachable coupon, contains the statement described in paragraph 
(b)(11)(ii)(b) of this section.
    (B) The obligation must have on its face, and on any detachable 
coupons, the following statement (or a similar statement having the same 
effect):

    By accepting this obligation, the holder represents and warrants 
that it is not a United States person (other than an exempt recipient 
described in section 6049(b)(4) and regulations under that section) and 
that it is not acting for or on behalf of a United States person (other 
than an exempt recipient described in section 6049(b)(4) and the 
regulations under that section).

    (C) If the obligation is in registered form, it must be registered 
in the name of an exempt recipient described in Sec.  1.6049-
4(c)(1)(ii).
    (12) Payments that a payor can, prior to payment, reliably associate 
with documentation upon which it may rely to treat the payment as made 
to a foreign beneficial owner in accordance with Sec.  1.1441-
1(e)(1)(ii) or as made to a foreign payee in accordance with paragraph 
(d)(1) of this section or presumed to be made to a foreign payee under 
paragraph (d)(2) or (3) of this section. However, such payments may be 
reportable under Sec.  1.1461-1 (b) and (c). The provisions of Sec.  
1.1441-1 shall apply by substituting the term payor for the term 
withholding agent and without regard to the fact that the provisions 
apply only to amounts subject to withholding under chapter 3 of the 
Code. In the event of a conflict between the provisions of Sec.  1.1441-
1 and paragraph (d) of this section in determining the foreign status of 
the payee, the provisions of Sec.  1.1441-1 shall govern for payments of 
amounts subject to withholding under chapter 3 of the Code and the 
provisions of paragraph (d) of this section shall govern in other cases. 
This paragraph (b)(12) does not apply to interest

[[Page 308]]

paid to a Canadian nonresident alien individual as provided in Sec.  
1.6049-8.
    (13) Amounts for the period that the debt obligation with respect to 
which the interest arises represents an asset blocked as described in 
Sec.  1.1441-2(e)(3). Payment of such amounts, including interest that 
is past due and OID on obligations that mature on or before the date 
that the assets are no longer blocked, is deemed to occur in accordance 
with the rules of Sec.  1.1441-2(e)(3).
    (14) Payments made by a foreign intermediary described in Sec.  
1.1441-1(e)(3)(i) of amounts that it has received in its capacity as an 
intermediary and that are associated with a valid withholding 
certificate described in Sec.  1.1441-1(e)(3)(ii) or (iii) and payments 
made by a U.S. branch of a foreign bank or of a foreign insurance 
company described in Sec.  1.1441-1(b)(2)(iv) (other than a U.S. branch 
that is treated as a U.S. person) that are associated with a valid 
withholding certificate described in Sec.  1.1441-1(e)(3)(v), which 
certificate the intermediary or branch has furnished to the payor or 
middleman from whom it has received the payment, unless, and to the 
extent, the intermediary or branch knows that the payments are required 
to be reported under Sec.  1.6049-4 and were not so reported. For 
example, if a foreign intermediary or U.S. branch described in Sec.  
1.1441-1(b)(2)(iv) fails to provide information regarding U.S. persons 
that are not exempt from reporting under Sec.  1.6049-4(c)(1)(ii) to the 
person from whom the intermediary or U.S. branch receives the payment, 
the amount paid by the foreign intermediary or U.S. branch to such 
person is interest or original issue discount. The exception of this 
paragraph (b)(14) shall not apply to a qualified intermediary that 
assumes reporting responsibility under chapter 61 of the Internal 
Revenue Code.
    (15) Amounts of interest as determined under the provisions of Sec.  
1.446-3(g)(4) (dealing with interest in the case of a significant non-
periodic payment with respect to a notional principal contract). Such 
amounts are governed by the provisions of section 6041. See Sec.  
1.6041-1(d)(5).
    (c) Applicable rules--(1) Documentary evidence for offshore 
accounts. A payor may rely on documentary evidence described in this 
paragraph (c)(1) instead of a beneficial owner withholding certificate 
described in Sec.  1.1441-1(e)(2)(i) in the case of a payment made 
outside the United States to an offshore account or, in the case of 
broker proceeds described in Sec.  1.6045-1(c)(2), in the case of a sale 
effected outside the United States (as defined in Sec.  1.6045-
1(g)(3)(iii)(A)). For purposes of this paragraph (c)(1), an offshore 
account means an account maintained at an office or branch of a U.S. or 
foreign bank or other financial institution at any location outside the 
United States (i.e., other than in any of the fifty States or the 
District of Columbia) and outside of U.S. possessions. Thus, for 
example, an account maintained in a foreign country at a branch of a 
U.S. bank or of a foreign subsidiary of a U.S. bank is an offshore 
account.For the definition of a payment made outside the United States, 
see paragraph (e) of this section. A payor may rely on documentary 
evidence if the payor has established procedures to obtain, review, and 
maintain documentary evidence sufficient to establish the identity of 
the payee and the status of that person as a foreign person (including, 
but not limited to, documentary evidence described in Sec.  1.1441-6(c) 
(3) or (4)); and the payor obtains, reviews, and maintains such 
documentary evidence in accordance with those procedures. A payor 
maintains the documents reviewed by retaining the original, certified 
copy, or a photocopy (or microfiche or similar means of record 
retention) of the documents reviewed and noting in its records the date 
on which and by whom the document was received and reviewed. Documentary 
evidence furnished for the payment of an amount subject to withholding 
under chapter 3 of the Code must contain all of the information that is 
necessary to complete a Form 1042-S for that payment. A payor may also 
rely on documentary evidence associated with a flow-through withholding 
certificate for payments treated as made to foreign partners of a 
nonwithholding foreign partnership, as defined in Sec.  1.1441-1(c)(28), 
the foreign beneficiaries of a foreign simple trust, as defined in Sec.  
1.1441-1(c)(24), or foreign owners of a

[[Page 309]]

foreign grantor trust, as defined in Sec.  1.1441-1(c)(26), even though 
the partnership or trust account is maintained in the United States.
    (2) Other applicable rules. The provisions of Sec.  1.1441-
1(e)(4)(i) through (ix) (regarding who may sign a certificate, validity 
period of certificates, retention of certificates, etc.) shall apply (by 
substituting the term payor for the term withholding agent and 
disregarding the fact that the provisions under Sec.  1.1441-1(e)(4) 
only apply to amounts subject to withholding under chapter 3 of the 
Code) to withholding certificates and documentary evidence furnished for 
purposes of this section. See Sec.  1.1441-1(b)(2)(vii) for provisions 
dealing reliable association of a payment with documentation.
    (3) Standards of knowledge. A payor may not rely on a withholding 
certificate or documentary evidence described in paragraph (c)(1) or (4) 
of this section if it has actual knowledge or reason to know that any 
information or certification stated in the certificate or documentary 
evidence is unreliable. A payor has reason to know that information or 
certifications are unreliable only if the payor would have reason to 
know under the provisions of Sec.  1.1441-7(b)(2)(ii) and (3) that the 
information and certifications provided on the certificate or in the 
documentary evidence are unreliable or, in the case of a Form W-9 (or an 
acceptable substitute), it cannot reasonably rely on the documentation 
as set forth in Sec.  31.3406(h)-3(e) of this chapter (see the 
information and certification described in Sec.  31.3406(h)-3(e)(2)(i) 
through (iv) of this chapter that are required in order for a payor 
reasonably to rely on a Form W-9). The provisions of Sec.  1.1441-
7(b)(2)(ii) and (3) shall apply for purposes of this paragraph (c)(3) 
irrespective of the type of income to which Sec.  1.1441-7(b)(2)(ii) is 
otherwise limited. The exemptions from reporting described in paragraphs 
(b)(10) and (11) of this section shall not apply if the payor has actual 
knowledge that the payee is a U.S. person who is not an exempt 
recipient.
    (4) Special documentation rules for certain payments. This paragraph 
(c)(4) modifies the provisions of paragraph (c)(1) of this section for 
payments to offshore accounts maintained at a bank or other financial 
institution of amounts that are not subject to withholding under chapter 
3 of the Internal Revenue Code, other than amounts described in 
paragraph (d)(3)(iii) of this section (dealing with U.S. short-term OID 
and U.S. bank deposit interest). Amounts are not subject to withholding 
under chapter 3 of the Internal Revenue Code if they are not included in 
the definition of amounts subject to withholding under Sec.  1.1441-2(a) 
(e.g., deposit interest with foreign branches of U.S. banks, foreign 
source income, or broker proceeds).
    (i) Special rule when non-renewable documentary evidence is 
customary. If it is customary in the country in which a branch or office 
of a bank or other financial institution is located to obtain 
documentary evidence described in paragraph (c)(1) of this section, but 
it is not customary for such documentary evidence to be renewed, then a 
payor may, in lieu of obtaining a withholding certificate, request such 
documentary evidence for an account maintained at such branch or office. 
The bank or other financial institution may rely on such documentary 
evidence to treat a person as a foreign person without renewing such 
documentary evidence in accordance with paragraph (c)(2) of this section 
and Sec.  1.1441-1(e)(4)(ii) if it may rely on the documentary evidence 
as sufficient to establish the person's foreign status under Sec.  
1.1441-7(b)(7) and (8). If, however, the bank or other financial 
institution may, under Sec.  1.1441-7(b)(8) treat a payee as a foreign 
person even though it has a residence or mailing address for the payee 
in the United States, or has standing instructions to pay amounts from 
its account to an address in the United States or an account maintained 
in the United States, then the payor shall rely on the documentary 
evidence only for a period of three full calendar years after the 
calendar year in which the documentary evidence is provided to the payor 
or, if earlier, until the payor is aware of a change of circumstances 
that affects the validity of the documentation as establishing the 
payee's status as a foreign person.

[[Page 310]]

    (ii) Statement in lieu of documentary evidence. If under the local 
laws, regulations, or practices applicable to a type of account or 
transaction it is not customary to obtain documentary evidence described 
in paragraph (c)(1) of this section, the bank or other financial 
institution may, instead of obtaining a beneficial owner withholding 
certificate described in Sec.  1.1441-1(e)(2)(i) or documentary evidence 
described in paragraph (c)(1) of this section, establish a payee's 
foreign status based on the statement described in this paragraph 
(4)(ii) (or such substitute statement as the Internal Revenue Service 
may prescribe) made on an account opening form. The statement shall be 
valid only if the mailing and residence addresses of the payee are 
outside the United States and there are no other indicia of U.S. status. 
If reliance is not permitted because there are indicia of U.S. status 
then the payor must obtain either documentary evidence described in 
paragraph (c)(1) of this section or a Form W-8 described in Sec.  
1.1441-1(e)(2)(i) to treat the customer as a foreign payee. In such a 
case, the form or documentary evidence must be renewed every three years 
in accordance with the renewal procedures set forth in Sec.  1.1441-
1(e)(4)(ii)(A) for as long as indicia of U.S. status continue to be 
present. The statement referred to in this paragraph (c)(4)(i) of this 
section must appear near the signature line and must read as follows:

    By opening this account and signing below, the account owner 
represents and warrants that he/she/it is not a U.S. person for purposes 
of U.S. Federal income tax and that he/she/it is not acting for, or on 
behalf of, a U.S. person. A false statement or misrepresentation of tax 
status by a U.S. person could lead to penalties under U.S. law. If your 
tax status changes and you become a U.S. citizen or a resident, you must 
notify us within 30 days.

    (iii) Continuous validity of declaration of foreign status subject 
to due diligence by financial institution. A declaration of foreign 
status described in paragraph (c)(4)(ii) of this section does not expire 
unless the bank or financial institution becomes aware of circumstances 
indicating that the customer may be a U.S. person.
    (iv) Exception for existing accounts. The rules of paragraphs 
(c)(4)(i) and (iii) of this section shall apply to accounts opened on or 
after January 1, 2001. For accounts opened before 2001, a bank or other 
financial institution may rely on the rules contained in Sec. Sec.  
35a.9999-3(ii) Q&A 34 and 35a.9999-4T Q&A 1 and 5 of this chapter in 
effect prior to January 1, 2001 (see 26 CFR Parts 30-39 revised as of 
April 1, 2000).
    (5) U.S. payor, U.S. middleman, non-U.S. payor, and non-U.S. 
middleman. The terms payor and middleman have the meanings ascribed to 
them under Sec.  1.6049-4(a). A non-U.S. payor or non-U.S. middleman 
means a payor or middleman other than a U.S. payor or U.S. middleman. 
The term U.S. payor or U.S. middleman means--
    (i) A person described in section 7701(a)(30) (including a foreign 
branch or office of such person);
    (ii) The government of the United States or the government of any 
State or political subdivision thereof (or any agency or instrumentality 
of any of the foregoing);
    (iii) A controlled foreign corporation within the meaning of section 
957(a);
    (iv) A foreign partnership, if at any time during its tax year, one 
or more of its partners are U.S. persons (as defined in Sec.  1.1441-
1(c)(2)) who, in the aggregate hold more than 50 percent of the income 
or capital interest in the partnership or if, at any time during its tax 
year, it is engaged in the conduct of a trade or business in the United 
States;
    (v) A foreign person 50 percent or more of the gross income of 
which, from all sources for the three-year period ending with the close 
of its taxable year preceding the collection or payment (or such part of 
such period as the person has been in existence), was effectively 
connected with the conduct of trade or business within the United 
States; or
    (vi) A U.S. branch of a foreign bank or a foreign insurance company 
described in Sec.  1.1441-1(b)(2)(iv).
    (6) Examples. The following examples illustrate the provisions of 
paragraphs (b) and (c) of this section:

    Example 1. FC is a foreign corporation that is not engaged in a 
trade or business in the United States during the current calendar

[[Page 311]]

year. D, an individual who is a resident and citizen of the United 
States, holds a registered obligation issued by FC in a public offering. 
Interest is paid on the obligation within the United States by DC, a 
U.S. corporation that is the designated paying agent of FC. D does not 
have an account with DC. Although interest paid on the obligation issued 
by FC is foreign source, the interest paid by DC to D is considered to 
be interest for purposes of information reporting under section 6049 
because it is paid in the United States.
    Example 2. The facts are the same as in Example 1 except that D is a 
nonresident alien individual who has furnished DC with a Form W-8 in 
accordance with the provisions of Sec.  1.1441-1(e)(1)(ii). By reason of 
paragraph (b)(12) of this section, the payment of interest by DC to D is 
not considered to be a payment of interest for purposes of information 
reporting under section 6049. Therefore, DC is not required to make an 
information return under section 6049.
    Example 3. The facts are the same as in Example 2 except that the 
obligation of FC is held in a custodial account for D by FB, a foreign 
branch of a U.S. financial institution. By reason of paragraph (c)(5) of 
this section, FB is considered to be a U.S. middleman. Therefore, FB is 
required to make an information return unless FB may treat D as a 
beneficial owner that is a foreign person in accordance with the 
provisions of Sec.  1.1441-1(e)(1)(ii).
    Example 4. The facts are the same as in Example 3 except that the FC 
obligation is held for D by NC, in a custodial account at NC's foreign 
branch. NC is a foreign corporation that is a non-U.S. middleman 
described in paragraph (c)(5) of this section. Under paragraph (b)(6) of 
this section, the payment by NC to D is not considered to be a payment 
of interest for purposes of section 6049. Therefore, NC is not required 
to make an information return under section 6049 with respect to the 
payment.

    (d) Determination of status as U.S. or foreign payee and applicable 
presumptions in the absence of documentation--(1) Identifying the payee. 
The provisions of Sec. Sec.  1.1441-1(b)(2), 1.1441-5(c)(1), (e)(2) and 
(3) shall apply (by applying the term payor instead of the term 
withholding agent) to identify the payee for purposes of this section 
(and other sections of the regulations under this chapter to which this 
paragraph (d)(1) applies), except to the extent provided in this 
paragraph (d)(1) in the case of a payment of amounts that are not 
subject to withholding under chapter 3 of the Internal Revenue Code. 
Amounts are not subject to withholding under chapter 3 of the Code if 
they are not included in the definition of amounts subject to 
withholding under Sec.  1.1441-2(a) (e.g., deposit interest with foreign 
branches of U.S. banks, foreign source income, or broker proceeds). The 
exceptions to the application of Sec.  1.1441-1(b)(2) to amounts that 
are not subject to withholding under chapter 3 of the Code are as 
follows:
    (i) The provisions of Sec.  1.1441-1(b)(2)(ii), dealing with 
payments to a U.S. agent of a foreign person, shall not apply. Thus, a 
payment to a U.S. agent of a foreign person is treated as a payment to a 
U.S. payee.
    (ii) Payments to U.S. branches of certain banks or insurance 
companies described in Sec.  1.1441-1(b)(2)(iv) shall be treated as 
payments to a foreign payee, irrespective of the fact that the U.S. 
branch may have arranged with the payor to be treated as a U.S. person 
for payments of amounts subject to withholding and irrespective of the 
fact that the branch is treated as a U.S. payor for purposes of 
paragraph (c)(5) of this section.
    (2) Presumptions of U.S. or foreign status in the absence of 
documentation--(i) In general. Except as otherwise provided in this 
paragraph (d)(2)(i), for purposes of this section (and other sections of 
regulations under this chapter to which this paragraph (d)(2) applies), 
the provisions of Sec.  1.1441-1(b)(3)(i) through (ix) and Sec.  1.1441-
5(d) and (e)(6) shall apply (by applying the term payor instead of the 
term withholding agent) to determine the classification (e.g., 
individual, corporation, partnership, trust), status (i.e., a U.S. or a 
foreign person), and other relevant characteristics (e.g., beneficial 
owner or intermediary) of a payee if a payment cannot be reliably 
associated with valid documentation under Sec.  1.1441-1(b)(2)(vii) 
irrespective of whether the payments are subject to withholding under 
chapter 3 of the Internal Revenue Code. The provisions of Sec.  1.1441-
1(b)(3)(iii)(D) and (vii)(B) shall not apply, however, to payments to 
amounts that are not subject to withholding. The rules of Sec.  1.1441-
1(b)(2)(vii) shall apply for purposes of determining when a payment can 
reliably be associated with documentation, by applying the term payor 
instead of the term

[[Page 312]]

withholding agent. For this purpose, the documentary evidence or 
statement described in paragraph (c)(4) of this section can be treated 
as documentation with which a payment can be associated.
    (ii) Grace period in the case of indicia of a foreign payee. When 
the conditions of this paragraph (d)(2)(ii) are satisfied, the 30-day 
grace period provisions under section 3406(e) shall not apply and the 
provisions of this paragraph (d)(2)(ii) shall apply instead. A payor 
that, at any time during the grace period described in this paragraph 
(d)(2)(ii), credits an account with payments described in Sec.  1.1441-
6(c)(2) (or credits an account with broker proceeds from securities 
described in Sec.  1.1441-6(c)(2)), that are reportable under sections 
6042, 6045, 6049, or 6050N may, instead of treating the account as owned 
by a U.S. person and applying backup withholding under section 3406, if 
applicable, choose to treat the account as owned by a foreign person if, 
at the beginning of the grace period, the address that the payor has in 
its records for the account holder is in a foreign country, the payor 
has been furnished the information contained in a withholding 
certificate described in Sec.  1.1441-1(e)(2)(i) or (3)(i) (by way of a 
facsimile copy of the certificate or other non-qualified electronic 
transmission of the information required to be stated on the 
certificate), or the payor holds a withholding certificate that is no 
longer reliable other than because the validity period as described in 
Sec.  1.1441-1(e)(4)(ii)(A) has expired. In the case of a newly opened 
account, the grace period begins on the date that the payor first 
credits the account.

In the case of an existing account for which the payor holds a Form W-8 
or documentary evidence of foreign status, the grace period begins on 
the date that the payor first credits the account after the existing 
documentation held with regard to the account can no longer be relied 
upon (other than because the validity period described in Sec.  1.1441-
1(e)(4)(ii)(A) has expired). A new account shall be treated as an 
existing account if the account holder already holds an account at the 
branch location at which the new account is opened. It shall also be 
treated as an existing account if an account is held at another branch 
location if the institution maintains a coordinated account information 
system described in Sec.  1.1441-1(e)(4)(ix). The grace period 
terminates on the earlier of the close of the 90th day from the date on 
which the grace period begins or the date that the documentation is 
provided. The grace period also terminates when the remaining balance in 
the account (due to withdrawals or otherwise) is equal to or less than 
31 percent of the total amounts credited since the beginning of the 
grace period that would be subject to backup withholding if the 
provisions of this paragraph (d)(2)(ii) did not apply. At the end of the 
grace period, the payor shall treat the amounts credited to the account 
during the grace period as paid to a U.S. or foreign payee depending 
upon whether documentation has been furnished and the nature of any such 
documentation furnished upon which the payor may rely to treat the 
account as owned by a U.S. or foreign payee. If the documentation has 
not been received on or before the date of expiration of the grace 
period, the payor may also apply the presumptions described in this 
paragraph (d) to amounts credited to the account after the date on which 
the grace period expires (until such time as the payor can reliably 
associate the documentation with amounts credited). See Sec.  
31.6413(a)-3(a)(1)(iv) of this chapter for treating backup withheld 
amounts under section 3406 as erroneously withheld when the 
documentation establishing foreign status is furnished prior to the end 
of the calendar year in which backup withholding occurs. If the 
provisions of this paragraph (d)(2)(ii) apply, the provisions of Sec.  
31.3406(d)-3 of this chapter shall not apply. For purposes of this 
paragraph (d)(2)(ii), an account holder's reinvestment of gross proceeds 
of a sale into other instruments constitutes a withdrawal and a non-
qualified electronic transmission of information on a withholding 
certificate is a transmission that is not in accordance with the 
provisions of Sec.  1.1441-1(e)(4)(iv). See Sec.  1.1092(d)-1 for a 
definition of the term actively traded for purposes of this paragraph 
(d)(2)(ii).

[[Page 313]]

    (iii) Joint owners. Amounts paid to accounts held jointly for which 
a certificate or documentation is required as a condition for being 
exempt from reporting under paragraph (b) of this section are presumed 
made to U.S. payees who are not exempt recipients if, prior to payment, 
the payor cannot reliably associate the payment either with a Form W-9 
furnished by one of the joint owners in the manner required in 
Sec. Sec.  31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (b)(12) of this section furnished 
by each joint owner upon which it can rely to treat each joint owner as 
a foreign payee or foreign beneficial owner. For purposes of applying 
this paragraph (d)(2)(iii), the grace period described in paragraph 
(d)(2)(ii) of this section shall apply only if each payee qualifies for 
such grace period.
    (3) Payments to foreign intermediaries or flow-through entities--(i) 
Payments of amounts subject to withholding under chapter 3 of the 
Internal Revenue Code. In the case of payments of amounts that the payor 
may treat as made to a foreign intermediary or flow-through entity in 
accordance with Sec. Sec.  1.1441-1(b)(3)(ii)(C) and (b)(3)(v)(A), 
1.1441-5(c) or (e) and that are subject to withholding under Sec.  
1.1441-2(a), the provisions of Sec. Sec.  1.1441-1(b)(2)(v) and 1.1441-
5(c)(1), (e)(2), and (3) shall apply (by applying the term payor instead 
of the term withholding agent) to identify the payee. If a payment of an 
amount subject to withholding cannot be reliably associated with valid 
documentation from a payee in accordance with Sec.  1.1441-1(b)(2)(vii) 
the presumption rules of Sec.  1.1441-1(b)(3)(v) and Sec.  1.1441-5(d) 
and (e)(6) shall apply to determine the payee's status for purposes of 
this section (and other sections of regulations under this chapter to 
which this paragraph (d)(3) applies).
    (ii) Payments of amounts not subject to withholding under chapter 3 
of the Internal Revenue Code. Except as provided in paragraph 
(d)(3)(iii) of this section, amounts that are not subject to withholding 
under chapter 3 of the Internal Revenue Code that the payor may treat as 
paid to a foreign intermediary or flow-through entity shall be treated 
as made to an exempt recipient described in Sec.  1.6049-4(c) except to 
the extent that the payor has actual knowledge that any person for whom 
the intermediary or flow-through entity is collecting the payment is a 
U.S. person who is not an exempt recipient. In the case of such actual 
knowledge, the payor shall treat the payment that it knows is allocable 
to such U.S. person as a payment to a U.S. payee who is not an exempt 
recipient and has actual knowledge of the amount allocable to such a 
person.
    (iii) Special rule for payments of certain short-term original issue 
discount and bank deposit interest--(A) General rule. A payment of U.S. 
source deposit interest described in section 871(i)(2)(A) or 881(d)(3) 
or interest or original issue discount on the redemption of an 
obligation with a maturity from the date of issue of 183 days or less 
(short-term OID) described in section 871(g)(1)(B) or 881(e) that the 
payor may treat as paid to a foreign intermediary or flow-through entity 
in accordance with the provisions of Sec.  1.1441-1(b)(3)(ii)(C), 
(v)(A), Sec.  1.1441-5(d) or (e), shall be treated as paid to an 
undocumented U.S. payee that is not an exempt recipient under paragraph 
Sec.  1.6049-4(c) unless the payor has documentation from the payees of 
the payment and the payment is allocated to foreign payees, as a group, 
and to each U.S. non-exempt recipient payee. See Sec.  1.1441-
1(e)(3)(iv)(C)(2).
    (B) Payee may be an intermediary. If a payment is made to a person 
described in Sec.  1.6049-4(c)(1)(ii) that has not provided an 
intermediary withholding certificate under Sec.  1.1441-1(e)(3)(i) but 
the payor knows or has reason to know that the payee may be an 
intermediary, the payor must apply the rules of paragraph (d)(3)(iii)(A) 
of this section. A payor has reason to know that such a person may be an 
intermediary if that person has provided documentation as an 
intermediary for another account with the same payor.
    (iv) Short-term deposits and repurchase transactions. The provisions 
of paragraph (d)(3)(ii) of this section and not paragraph (d)(3)(iii) of 
this section shall apply to deposits with banks and other financial 
institutions that remain on deposit for a period of two weeks or less, 
to amounts of original issue discount arising from a sale and

[[Page 314]]

repurchase transaction that is completed within a period of two weeks or 
less, or to amounts described in paragraphs (b)(7), (10) and (11) of 
this section (relating to certain obligations issued in bearer form).
    (4) Examples. The rules of paragraphs (d)(1) through (3) of this 
section are illustrated by the following examples:

    Example 1. (i) Facts. USP is a U.S. payor as defined in paragraph 
(c)(5) of this section. USP pays interest from sources within the United 
States to an account maintained in the United States by X. The interest 
is not deposit interest described in sections 871(i)(2)(A) or 881(d). 
USP does not have a withholding certificate from X as defined in Sec.  
1.1441-1(c)(16). Moreover, USP cannot treat X as an exempt recipient, as 
defined in Sec.  1.6049-4(c)(1)(ii), without documentation and there is 
no indication that X is an individual, trust, or estate.
    (ii) Analysis. The U.S. source interest is an amount subject to 
withholding as defined in Sec.  1.1441-2(a). Under paragraph (d)(1) of 
this section, USP must apply the provisions of Sec. Sec.  1.1441-1(b)(2) 
and 1.1441-5(c) and (e) to determine the payee of the interest. Under 
Sec.  1.1441-1(b)(2)(i), X, the person to whom the payment is made, is 
considered to be the payee, unless X is determined to be a flow-through 
entity, in which case the rules of Sec.  1.1441-5 apply to determine the 
payee. Under paragraph (d)(2)(i) of this section, the rules of Sec.  
1.1441-1(b)(3)(ii) apply to determine the classification of a payee as 
an individual, trust, estate, corporation, or partnership. Under Sec.  
1.1441-1(b)(3)(ii)(B), X is presumed to be a partnership, since X does 
not appear to be an individual, trust or estate, and X cannot be 
presumed to be an exempt recipient in the absence of documentation. 
Paragraph (d)(2)(i) of this section requires USP to apply the provisions 
of Sec. Sec.  1.1441-1(b)(3)(iii) and 1.1441-5(d) to determine whether X 
is presumed to be a U.S. or foreign partnership. Under Sec. Sec.  
1.1441-1(b)(3)(iii) and 1.1441-5(d)(2), X is presumed to be a U.S. 
partnership in absence of any indicia of foreign partnership status. The 
U.S. source interest paid to X is reportable under section 6049 on Form 
1099 and the interest is subject to backup withholding under section 
3406 because X has not provided its TIN on a valid Form W-9.
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that the interest paid by USP is from sources outside the United States.
    (ii) Analysis. Interest from sources outside the United States is 
not an amount subject to withholding, as defined in Sec.  1.1441-2(a). 
Under paragraph (d)(1) of this section, USP must apply the provisions of 
Sec. Sec.  1.1441-1(b)(2) and 1.1441-5(c) and (e) to determine the 
payee. Under Sec.  1.1441-1(b)(2)(i), X, the person to whom the payment 
is made, is considered to be the payee, unless X is determined to be a 
flow-through entity, in which case the rules of Sec.  1.1441-5(c) or (e) 
apply to determine the payee. Under paragraph (d)(2)(i) of this section, 
the rules of Sec.  1.1441-1(b)(3)(ii) apply to determine the 
classification of a payee as an individual, trust, estate, corporation, 
or partnership. These rules apply irrespective of whether the payment is 
an amount subject to withholding. Under Sec.  1.1441-1(b)(3)(ii)(B), X 
is presumed to be a partnership, since X does not appear to be an 
individual, trust or estate, and X cannot be presumed to be an exempt 
recipient in the absence of documentation. Paragraph (d)(2)(i) of this 
section requires USP to apply the provisions of Sec. Sec.  1.1441-
1(b)(3)(iii) and 1.1441-5(d) to determine whether, X is presumed to be a 
U.S. or foreign partnership. Under Sec. Sec.  1.1441-1(b)(3)(iii) and 
1.1441-5(d)(2), X is presumed to be a U.S. partnership in absence of any 
indicia of foreign partnership status. The foreign source interest is a 
payment subject to reporting on Form 1099 under Sec.  1.6049-5(a). 
Further, because X is a non-exempt recipient that has failed to provide 
its TIN on a valid Form W-9, the foreign source interest is subject to 
backup withholding under section 3406.
    Example 3. (i) Facts. USP is a U.S. payor as defined in paragraph 
(c)(5) of this section. USP makes a payment of U.S. source interest 
outside the United States to an offshore account of X. See paragraphs 
(c)(1) for a definition of offshore account and (e) for a payment 
outside the United States. USP does not have a withholding certificate 
from X as defined in Sec.  1.1441-1(c)(16) nor does it have documentary 
evidence as described in Sec.  1.1441-1(e)(1)(ii)(A)(2) and 1.6049-
5(c)(1).
    (ii) Analysis. The interest is an amount subject to withholding as 
defined in Sec.  1.1441-2(a). Under paragraph (d)(1) of this section, 
USP must apply the provisions of Sec.  1.1441-1(b)(2) and Sec.  1.1441-
5(c) and (e) to determine the payee. Under Sec.  1.1441-1(b)(2)(i), X, 
the person to whom the payment is made, is considered to be the payee, 
unless X is determined to be a flow-through entity, in which case the 
rules of Sec.  1.1441-5(c) or (e) apply to determine the payee. Under 
paragraph (d)(2)(i) of this section, the rules of Sec.  1.1441-
1(b)(3)(ii) apply to determine the classification of a payee as an 
individual, trust, estate, corporation, or partnership. Under Sec.  
1.1441-1(b)(3)(ii)(B), X is presumed to be a partnership, since X does 
not appear to be an individual, trust or estate, and X cannot be 
presumed to be an exempt recipient in the absence of documentation. 
Paragraph (d)(2)(i) of this section requires USP to apply the provisions 
of Sec. Sec.  1.1441-1(b)(3)(iii) and 1.1441-5(d) to determine whether, 
X is presumed to be a U.S. or foreign partnership. Under Sec. Sec.  
1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2), X is presumed to be a foreign 
partnership. Therefore, under paragraph (d)(1) of this section

[[Page 315]]

and Sec.  1.1441-5(c)(1)(i)(E), the payees of the interest are presumed 
to be the partners of X. Under Sec.  1.1441-5(d)(3), the partners are 
presumed to be undocumented foreign persons. Therefore, USP must 
withhold 30 percent of the interest payment under Sec.  1.1441-1(b)(1) 
and report the payment on Form 1042-S in accordance with Sec.  1.1461-
1(c).
    Example 4. (i) Facts. The facts are the same as in Example 3, except 
that the interest is paid by F, a non-U.S. payor.
    (ii) Analysis. The analysis and result are the same as in Example 3. 
F is a withholding agent under Sec.  1.1441-7 and its status as a non-
U.S. payor under paragraph (c)(5) of this section is irrelevant.
    Example 5. (i) Facts. USP is a U.S. payor as defined in paragraph 
(c)(5) of this section. USP makes a payment outside the United States of 
interest from sources outside the United States to an offshore account 
of X. USP does not have a withholding certificate from X as defined in 
Sec.  1.1441-1(c)(16) nor does it have documentary evidence as described 
in Sec. Sec.  1.1441-1(e)(1)(ii)(A)(2) and 1.6049-5(c)(1). USP does not 
have actual knowledge of an employer identification number for X. X does 
not appear to be an individual, trust, or estate and cannot be treated 
as an exempt recipient, as defined in Sec.  1.6049-4(c)(1)(ii) in the 
absence of documentation.
    (ii) Analysis. The interest is not an amount subject to withholding 
as defined in Sec.  1.1441-2(a). Under paragraph (d)(1) of this section, 
USP must apply the rules of Sec. Sec.  1.1441-1(b)(2) and 1.1441-5(c) 
and (e) to determine the payee of the interest. Under Sec.  1.1441-
1(b)(2)(i), X, the person to whom the payment is made, is considered to 
be the payee, unless X is determined to be a flow-through entity, in 
which case the rules of Sec.  1.1441-5(c) or (e) apply to determine the 
payee. Under paragraph (d)(2)(i) of this section, Sec.  1.1441-
1(b)(3)(ii) applies to determine X's classification as an individual, 
trust, estate, corporation or partnership. Under Sec.  1.1441-
1(b)(3)(ii)(B), X is treated as a partnership, since it does not appear 
to be an individual, trust, or estate and cannot be treated as an exempt 
recipient without documentation. Paragraph (d)(2)(i) of this section 
requires USP to apply the provisions of Sec. Sec.  1.1441-1(b)(3)(iii) 
and 1.1441-5(d) to determine whether, X is presumed to be a U.S. or 
foreign partnership. Paragraph (d)(2)(i) also states that the 
presumptions of foreign status for payments made to offshore accounts 
contained in Sec. Sec.  1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2) do not 
apply to amounts that are not subject to withholding. Therefore, under 
Sec. Sec.  1.1441-1(b)(3)(iii) and 1.1441-5(d)(2), X is presumed to be a 
U.S. partnership because it does not have actual knowledge that X's 
employer identification number begins with the digits ``98.'' Therefore, 
USP must treat X as a U.S. person that is not an exempt recipient and 
report the payment on Form 1099 under section 6049. Under Sec.  
31.3406(g)-1(e) of this chapter, however, USP is not required to backup 
withhold on the payment unless it has actual knowledge that X is a U.S. 
person that is not an exempt recipient.
    Example 6. (i) Facts. The facts are the same as in Example 5, except 
that the interest is paid by F, a non-U.S. payor, as defined under 
paragraph (c)(5) of this section.
    (ii) Analysis. The analysis is the same as under Example 5. However, 
because F is a non-U.S. payor paying foreign source interest outside the 
United States, paragraph (b)(6) of this section exempts the payment from 
reporting under section 6049.
    Example 7. (i) Facts. USP, a U.S. payor as defined in paragraph 
(c)(5) of this section, makes a payment of U.S. source interest to NQI, 
a foreign corporation and a nonqualified intermediary as defined in 
Sec.  1.1441-1(c)(14). The interest is not deposit interest as defined 
in sections 871(i)(2)(A) and 881(d). The interest is paid inside the 
United States to an account maintained in the United States. NQI has 
provided USP with a nonqualified intermediary withholding certificate, 
as described in Sec.  1.1441-1(e)(3)(iii), but has not attached any 
documentation from the persons on whose behalf it acts or a withholding 
statement as described in Sec.  1.1441-1(e)(3)(iv).
    (ii) Analysis. U.S. source interest is an amount subject to 
withholding under Sec.  1.1441-2(a). USP may treat the payment as made 
to a foreign intermediary under Sec.  1.1441-1(b)(3)(v)(A) because USP 
has received a nonqualified intermediary withholding certificate from 
NQI. Under paragraph (d)(3)(i) of this section, USP must apply Sec.  
1.1441-1(b)(2)(v) to determine the payees of the payment. Under Sec.  
1.1441-1(b)(2)(v)(A), USP must treat the persons on whose behalf NQI is 
acting as the payees. Paragraph (d)(3)(i) of this section also requires 
USP to apply the presumption rules of Sec.  1.1441-1(b)(3)(v) if it 
cannot reliably associate the payment with valid documentation from a 
payee. See Sec.  1.1441-1(b)(2)(vii). Under Sec.  1.1441-1(b)(3)(v)(B), 
the interest is treated as paid to an unknown foreign payee because it 
cannot be reliably associated with documentation under Sec.  1.1441-
1(b)(2)(vii). Therefore, the payment is not subject to reporting on Form 
1099 under paragraph (b)(12) of this section because the payment is 
presumed made to a foreign person. The payment is subject to 
withholding, however, under Sec.  1.1441-1(b) at a rate of 30 percent 
and is subject to reporting on Form 1042-S under Sec.  1.1461-1(c).
    Example 8. (i) Facts. The facts are the same as in Example 7, except 
that the interest is paid outside the United States, as defined in 
paragraph (e) of this section to an offshore account, as defined in 
paragraph (c)(1) of this section.
    (ii) Analysis. The analysis and results are the same as in Example 
7. The rules of

[[Page 316]]

Sec.  1.1441-1(b)(3)(v) apply irrespective of where the account is 
maintained or the payment made.
    Example 9. (i) Facts. The facts are the same as in Example 8, except 
that the interest is paid by F, a non-U.S. payor, as defined in 
paragraph (c)(5) of this section.
    (ii) Analysis. The analysis and results are the same as in Example 
7.
    Example 10. (i) USP, a U.S. payor as defined in paragraph (c)(5) of 
this section, makes a payment of foreign source interest to NQI, a 
foreign corporation and a nonqualified intermediary as defined in Sec.  
1.1441-1(c)(14). NQI has provided USP with a nonqualified intermediary 
withholding certificate, as described in Sec.  1.1441-1(e)(3)(iii), but 
has not attached any documentation from the persons on whose behalf it 
acts or a withholding statement as described in Sec.  1.1441-
1(e)(3)(iv).
    (ii) Analysis. Foreign source interest is not an amount subject to 
withholding under chapter 3 of the Internal Revenue Code. See Sec.  
1.1441-2(a). Under paragraph (d)(3)(ii)(A) of this section, amounts that 
are not subject to withholding under chapter 3 of the Internal Revenue 
Code that a payor may treat as paid to a foreign intermediary are 
treated as made to an exempt recipient described in Sec.  1.6049-4(c). 
Therefore, the foreign source interest is not subject to reporting on 
Form 1099.
    Example 11. (i) Facts. USP is a U.S. payor as defined in paragraph 
(c)(5) of this section. USP pays U.S. source original issue discount 
from the redemption of an obligation described in section 871(g)(1)(B) 
to NQI, a foreign corporation that is a nonqualified intermediary as 
defined in Sec.  1.1441-1(c)(14). The redemption proceeds are paid to an 
account NQI has with USP in the United States. NQI provides a 
nonqualified intermediary withholding certificate as described in Sec.  
1.1441-1(e)(3)(iii) but does not attach any payee documentation or a 
withholding statement described in Sec.  1.1441-1(e)(3)(iv).
    (ii) Analysis. Under paragraph (d)(3)(ii)(A) of this section, USP 
must treat the payment as made to an undocumented U.S. payee that is not 
an exempt recipient and report the payment on Form 1099. Further, 
because the payment is made inside the United States, the exception to 
backup withholding for offshore accounts contained in Sec.  31.3406(g)-
1(e) of this chapter does not apply and the payment is subject to backup 
withholding.
    Example 12. (i) Facts. P, a payor, makes a payment to NQI of U.S. 
source interest on debt obligations issued prior to July 18, 1984. 
Therefore, the interest does not qualify as portfolio interest under 
section 871(h) or 881(d). NQI is a nonqualified foreign intermediary, as 
defined in Sec.  1.1441-1(c)(14), and has furnished P a valid 
nonqualified intermediary withholding certificate described in Sec.  
1.1441-1(e)(3)(iii) to which it has attached a valid Form W-9 for A, and 
two valid beneficial owner Forms W-8, one for B and one for C. A is not 
an exempt recipient under Sec.  1.6049-4(c). NQI furnishes a withholding 
statement, described in Sec.  1.1441-1(e)(3)(iv), in which it allocates 
20 percent of the U.S. source interest to A, but does not allocate the 
remaining 80 percent of the interest between B and C. B's withholding 
certificate indicates that B is a foreign pension fund, exempt from U.S. 
tax under the U.S. income tax treaty with Country T. C's withholding 
certificate indicates that C is a foreign corporation not entitled to a 
reduced rate of withholding.
    (ii) Analysis. Under paragraph (d)(3)(i) of this section, P applies 
the rules of Sec.  1.1441-1(b)(2)(v) to determine the payees of the 
interest. Under that section, the payees are the persons on whose behalf 
NQI acts--A, B and C. Because P can reliably associate 20 percent of the 
payment with valid documentation provided by A, P must treat 20 percent 
of the interest as paid to A, a U.S. person not exempt from reporting, 
and report the payment on Form 1099. P cannot reliably associate the 
remaining 80 percent of the payment with valid documentation under Sec.  
1.1441-1(b)(2)(vii) and, therefore, under paragraph (d)(3)(i) of this 
section must apply the presumption rules of Sec.  1.1441-1(b)(3)(v). 
Under that section, the interest is presumed paid to an unknown foreign 
payee. Under paragraph (b)(12) of this section, P is not required to 
report the interest presumed paid to a foreign person on Form 1099. 
Under Sec.  1.1441-1(b), 80 percent of the interest is subject to 30 
percent withholding, however, and the interest is reportable on Form 
1042-S under Sec.  1.1461-1(c).
    Example 13. (i) Facts. The facts are the same as in Example 12, 
except that P can reliably associate 30 percent of the payment of 
interest to B, but cannot reliably associate the remaining 70 percent 
with A or C.
    (ii) Analysis. Under paragraph (d)(3)(i) of this section, P applies 
the rules of Sec.  1.1441-1(b)(2)(v) to determine the payees of the 
interest. Under that section, the payees are the persons on whose behalf 
NQI acts--A, B and C. Because P can reliably associate 30 percent of the 
payment with B, a foreign pensions fund exempt from withholding under an 
income tax treaty, P may treat that payment as paid to B and not subject 
to reporting on Form 1099 under paragraph (b)(12) of this section. P 
cannot reliably associate the remaining 70 percent of the payment with 
valid documentation under Sec.  1.1441-1(b)(2)(vii) and, therefore, 
under paragraph (d)(3)(i) of this section must apply the presumption 
rules of Sec.  1.1441-1(b)(3)(v). Under that section, the interest is 
presumed paid to an unknown foreign payee. Under paragraph (b)(12) of 
this section, P is not required to report the interest presumed paid to 
a foreign person on Form 1099. Under Sec.  1.1441-1(b), 80

[[Page 317]]

percent of the interest is subject to 30 percent withholding, however, 
and the interest is reportable on Form 1042-S under Sec.  1.1461-1(c).
    Example 14. (i) Facts. The facts are the same as in Example 12, 
except that P also makes a payment of foreign source interest to NQI.
    (ii) Analysis. Under paragraph (d)(3)(ii)(A), P may treat the 
foreign source interest as paid to an exempt recipient as defined in 
Sec.  1.6049-4(c) and not subject to reporting on Form 1099 even though 
some or all of the foreign source interest may in fact be owned by A, 
the U.S. person that is not exempt from reporting.

    (e) Determination of whether amounts are considered paid outside the 
United States--(1) In general. For purposes of section 6049 and this 
section, an amount is considered to be paid by a payor or middleman 
outside the United States if the payor or middleman completes the acts 
necessary to effect payment outside the United States. See paragraphs 
(e)(2), (3), and (4) of this section for further clarification of where 
amounts are considered paid. A payment shall not be considered to be 
made within the United States for purposes of section 6049 merely by 
reason of the fact that it is made on a draft drawn on a United States 
bank account or by a wire or other electronic transfer from a United 
States account. However, without regard to the location of the account 
from which the amount is drawn, an amount that is described in paragraph 
(e)(1) (i) or (ii) of this section and paid by transfer to an account 
maintained by the payee in the United States or by mail to a United 
States address is not considered to be paid outside the United States.
    (i) An amount is described in this paragraph (e)(1)(i) if it is paid 
by an issuer or the paying agent of the issuer and the obligation is 
either--
    (A) Issued by a U.S. payor, as defined in paragraph (c)(5) of this 
section;
    (B) Registered under the Securities Act of 1933 (15 U.S.C. 77a); or
    (C) Listed on an exchange that is registered as a national 
securities exchange in the United States or included in an interdealer 
quotation system in the United States.
    (ii) An amount is described in this paragraph (e)(1)(ii) if it is 
paid by a U.S. middleman (as defined in paragraph (c)(5) of this 
section) that, as a custodian, nominee, or other agent of a payee, 
collects the amount for or on behalf of the payee.
    (2) Amounts paid with respect to deposits or accounts with banks and 
other financial institutions. Notwithstanding paragraph (e)(1) of this 
section, an amount paid by a bank or other financial institution with 
respect to a deposit or with respect to an account with the institution 
is considered paid at the branch or office at which the amount is 
credited unless the amount is collected by the financial institution as 
the agent of the payee. However, an amount will not be considered to be 
paid at the branch or office where the amount is considered to be 
credited unless 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; 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 business hours; and the branch or office 
receives deposits and engages in one or more of the other activities 
described in Sec.  1.864-4(c)(5)(i). In addition, an amount paid by a 
bank or other financial institution with respect to a deposit or an 
account with the institution is not considered paid at a branch or 
office outside the United States if the customer has transmitted 
instructions to an agent, branch, or office of the institution from 
inside the United States by mail, telephone, electronic transmission, or 
otherwise concerning the deposit or account (unless the transmission 
from the United States has taken place in isolated and infrequent 
circumstances).
    (3) Coupon bonds and discount obligations in bearer form. 
Notwithstanding paragraph (e)(1) of this section, an amount paid with 
respect to a bond with coupons attached (including a certificate of 
deposit with detachable interest coupons) or a discount obligation that 
is not in registered form (within the meaning of section 163(f) and the 
regulations thereunder) is considered to be paid where the coupon or the 
discount obligation is presented to the payor or its paying agent for 
payment. However, without regard to

[[Page 318]]

where the coupon or discount obligation is presented for payment, an 
amount paid with respect to either a bond with coupons attached or a 
discount obligation by transfer to an account maintained by the payee in 
the United States or by mail to the United States is considered paid in 
the United States if the payment is described in paragraphs (e)(3) (i) 
and (ii) of this section.
    (i) The amount is paid by an issuer or the paying agent of the 
issuer and the obligation is either--
    (A) Issued by a U.S. payor, as defined in paragraph (c)(5) of this 
section;
    (B) Registered under the Securities Act of 1933 (15 U.S.C. 77a); or
    (C) Listed on an exchange that is registered as a national 
securities exchange in the United States or included in a interdealer 
quotation system in the United States.
    (ii) The amount is paid by a U.S. middleman (as defined in paragraph 
(c)(5) of this section) that, as a custodian, nominee, or other agent of 
payee, collects the amount for or on behalf of the payee.
    (4) Foreign-targeted registered obligations. Notwithstanding 
paragraph (e)(1) of this section, where the payor is the issuer or the 
issuer's agent, an amount is considered paid outside the United States 
with respect to a foreign-targeted registered obligation, as described 
in Sec.  1.871-14(e)(2), if either the amount is paid by transfer to an 
account maintained by the registered owner outside the United States, or 
by mail to an address of the registered owner outside the United States, 
or by credit to an international account. For purposes of this paragraph 
(e)(4), the term international account means the book-entry account of a 
financial institution (within the meaning of section 871(h)(4)(B)) or of 
an international financial organization with the Federal Reserve Bank of 
New York for which the Federal Reserve Bank of New York maintains 
records that specifically identify an international financial 
organization or a financial institution (within the meaning of section 
871(h)(4)(B)) as either a non-United States person or a foreign branch 
of a United States person as registered owner. An international 
financial organization is a central bank or monetary authority of a 
foreign government or a public international organization of which the 
United States is a member to the extent that such central bank, 
authority, or organization holds obligations solely for its own account 
and is exempt from tax under section 892 or 895.
    (5) Examples. The application of the provisions of this paragraph 
(e) are illustrated by the following examples:

    Example 1. FC is a foreign corporation that is not a U.S. payor or 
U.S. middleman, as defined in paragraph (c)(5) of this section. A holds 
FC coupon bonds that are not in registered form under section 163(f) and 
the regulations thereunder, that were issued by FC in a public offering 
outside the United States, that are not registered under the Securities 
Act of 1933 (15 U.S.C. 77a), and that are neither listed on an exchange 
that is registered as a national securities exchange in the United 
States nor included in an interdealer quotation system. DC, a U.S. 
corporation that is engaged in a commercial banking business, is the 
designated fiscal agent for FC. FB, a foreign branch of DC, is the 
designated paying agent with respect to the bonds issued by FC. A does 
not have an account with FB. A presents a coupon from a FC bond for 
payment to FB at its office outside the United States. FB pays A with a 
check drawn against a bank account maintained in the United States. For 
purposes of section 6049, the place of payment of interest on the FC 
bond by FB to A is considered to be outside the United States under 
paragraph (e)(3) of this section.
    Example 2. The facts are the same as in Example 1 except that A 
presents the coupon to FB at its office outside the United States with 
instructions to transfer funds in payment to a bank account maintained 
by A in the United States. FB transfers the funds in accordance with A's 
instructions. Even though the amount is credited to an account in the 
United States, the place of payment of interest on the FC bonds is 
considered to be outside the United States under paragraph (e)(3) of 
this section because the coupon is presented for payment outside the 
United States; because FC is a foreign person that is not a U.S. payor 
or U.S. middleman, as defined in paragraph (d)(1) of this section; 
because FB is not acting as A's agent; and because the obligation is not 
registered under the Securities Act of 1933 (15 U.S.C. 77a), listed on a 
securities exchange that is registered as a national securities exchange 
in the United States, or included in an interdealer quotation system.
    Example 3. FC is a foreign corporation that is not a U.S. payor or 
U.S. middleman, as defined in paragraph (d)(1) of this section. B, a

[[Page 319]]

United States citizen, holds a bond issued by FC in registered form 
under section 163(f) and the regulations thereunder and registered under 
the Securities Act of 1933 (15 U.S.C. 77a). The bond is not a foreign-
targeted registered obligation as defined in Sec.  1.871-14(e)(2). DB, a 
United States branch of a foreign corporation engaged in the commercial 
banking business, is the registrar of the bonds issued by FC. DB 
supplies FC with a list of the holders of the FC bonds. Interest on the 
FC bonds is paid to B and other bondholders by checks prepared by FC at 
its principal office outside the United States, and B's check is mailed 
from there to his designated address in the United States. The bond is 
described in paragraph (e)(1)(i)(B) of this section. The place of 
payment to B by FC of the interest on the FC bonds is considered to be 
inside the United States under paragraph (e)(1) of this section.
    Example 4. The facts are the same as in Example 3 except that the 
checks are prepared and mailed in the United States by DC, a U.S. 
corporation engaged in the commercial banking business that is the 
designated paying agent with respect to the bonds issued by FC, and B's 
check is mailed to his designated address outside the United States. For 
purposes of section 6049, the place of payment by DC of the interest on 
the FC bonds is considered to be within the United States under 
paragraph (e)(1) of this section.
    Example 5. Individual C deposits funds in an account with FB, a 
foreign country X branch of DB, a U.S. corporation engaged in the 
commercial banking business. FB maintains an office and employees in 
foreign country X, accepts deposits, and conducts one or more of the 
other activities listed in Sec.  1.864-4(c)(5)(i). The terms of C's 
deposit provide that it will be payable in six months with accrued 
interest. On the day that the interest is credited to C's account with 
FB, C telephones DB from inside the United States and asks DB to direct 
FB to transfer the funds in his account with FB to an account C 
maintains in the United States with DB. Transmissions from the United 
States concerning this account have taken place in isolated and 
infrequent circumstances. Under paragraph (e)(2) of this section, FB is 
considered to have paid the interest on C's deposit outside the United 
States.
    Example 6. The facts are the same as in Example 5 except that C has 
placed his deposit with FB for an indefinite period of time. Interest 
will be credited to C's account daily. C has instructed FB to wire the 
interest at 90-day intervals to C's account with DB within the United 
States. FB is considered to have paid the interest credited to A's 
account within the United States under paragraph (e)(2) of this section 
because the regular crediting of the account disqualifies the 
transmission from being isolated or infrequent.
    Example 7. DC, a U.S. corporation engaged in the commercial banking 
business, maintains FB, a branch in foreign country X. FB has an office 
and employees in foreign country X, accepts deposits, and engages in one 
or more of the other activities listed in Sec.  1.864-4(c)(5)(i). D, a 
United States citizen, purchases a certificate of deposit issued in 1980 
by FB. The certificate of deposit has a maturity of 20 years and has 
detachable interest coupons payable at six-month intervals. D presents 
some of the coupons at the U.S. office of DC and receives payment in 
cash. Because the coupon is presented to DC for payment within the 
United States, DC is considered to have made the payment within the 
United States under paragraph (e)(3) of this section.
    Example 8. FB is recognized by both foreign country X and by the 
Federal Reserve Bank as a foreign country X branch of DC, a U.S. 
corporation engaged in the commercial banking business. A local foreign 
country X bank serves as FB's resident agent in Country X. FB maintains 
no physical office or employees in foreign country X. All the records, 
accounts, and transactions of FB are handled at the United States office 
of DC. E deposits funds in an amount maintained with FB. Interest earned 
on the deposit is periodically credited to E's account with FB by 
employees of DC. For purposes of section 6049, the place of payment of 
the interest on E's deposit with FB is considered to be within the 
United States by reason of paragraphs (e)(1) and (2) of this section.
    Example 9. DC is a U.S. corporation. A holds bonds that were issued 
by DC in registered form under section 163(f) and the regulations 
thereunder and that are foreign-targeted registered obligations as 
defined in Sec.  1.871-14(e)(2). DB, a commercial banking business, is 
the registrar of bonds issued by DC. Interest on the DC bonds is paid to 
A and other bondholders by check prepared by DB at its principal office 
inside the United States and mailed from there to A's address outside 
the United States. The check is drawn on a United States account 
maintained by DC with DB within the United States. The place of payment 
to A by DB of the interest on the DC bonds is considered to be outside 
the United States under paragraph (e)(4) of this section.
    (f) 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

[[Page 320]]

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 
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).
    (g) Effective date--(1) General rule. The provisions of paragraphs 
(b)(6) through (15), (c), (d), and (e) of this section apply to payments 
made after December 31, 2000.
    (2) Transition rules. The validity of a withholding certificate 
(namely, Form W-8 or other form upon which the payor is permitted to 
rely to hold the payee as a foreign person) that was valid on January 1, 
1998, under the regulations in effect prior to January 1, 2001 (see 26 
CFR parts 1 and 35a, revised April 1, 1999) and expired, or will expire, 
at any time during 1998, is extended until December 31, 1998. The 
validity of a withholding certificate that is valid on or after January 
1, 1999, remains valid until its validity expires under the regulations 
in effect prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised 
April 1, 1999) but in no event shall such a withholding certificate 
remain valid after December 31, 2000. The rule in this paragraph (g)(2), 
however, does not apply to extend the validity period of a withholding 
certificate that expires solely by reason of changes in the 
circumstances of the person whose name is on the certificate. 
Notwithstanding the first three sentences of this paragraph (g)(2), a 
payor may choose not to take advantage of the transition rule in this 
paragraph (g)(2) with respect to one or more withholding certificates 
valid under the regulations in effect prior to January 1, 2001 (see 26 
CFR parts 1 and 35a, revised April 1, 1999) and, therefore,

[[Page 321]]

may require withholding certificates conforming to the requirements 
described in this section (new withholding certificates). For purposes 
of this section, a new withholding certificate is deemed to satisfy the 
documentation requirement under the regulations in effect prior to 
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999). 
Further, a new withholding certificate remains valid for the period 
specified in Sec.  1.1441-1(e)(4)(ii), regardless of when the 
certificate is obtained.

[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; T.D. 8734, 62 FR 53483, Oct. 14, 1997; T.D. 
8804, 63 FR 72186, 72188, Dec. 31, 1998; T.D. 8856, 64 FR 73411, 73412, 
Dec. 30, 1999; T.D. 8881, 65 FR 32207, May 22, 2000; 66 FR 18189, Apr. 
6, 2001]



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 322]]

    (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 an acceptable substitute, 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) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to furnish timely a correct payee statement 
required under section 6049(c) and Sec.  1.6049-6(a), see Sec.  
301.6722-1

[[Page 323]]

of this chapter (Procedure and Administration Regulations). See Sec.  
301.6724-1 of this chapter for the waiver of a penalty if the failure is 
due to reasonable cause and is not due to willful neglect.
    (4) Special rule for amounts described in Sec.  1.6049-8(a) paid 
after December 31, 1996. 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; T.D. 8734, 
62 FR 53491, Oct. 14, 1997]



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;

[[Page 324]]

    (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.
    (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

[[Page 325]]

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 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 this paragraph (b)(2) 
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 (March 31 if filed electronically) 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)) or the Bank for International Settlements;
    (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.

[[Page 326]]

    (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.
    (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,

[[Page 327]]

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--
    (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

[[Page 328]]

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 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:

[[Page 329]]

    (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
    (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

[[Page 330]]

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 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.

[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; T.D. 8734, 62 FR 53491, Oct. 14, 1997; T.D. 8888, 65 FR 
37702, June 16, 2000; T.D. 8895, 65 FR 50407, Aug. 18, 2000]

[[Page 331]]



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 
Sec. Sec.  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. The payor or 
middleman may rely upon the permanent residence address (as defined in 
Sec.  1.1441-1(e)(2)(ii)) as stated on the Form W-8 described in Sec.  
1.1441-1(e)(2)(i) in order to determine whether the payment is made to a 
Canadian nonresident alien individual. If the permanent residence 
address stated on the certificate is in Canada, or if the payor has 
actual knowledge of the individual's residence address in Canada, the 
payor must presume that the individual resides in Canada. 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 $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

[[Page 332]]

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, as amended by T.D. 8734, 62 FR 
53491, Oct. 14, 1997]



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 1099-
MISC 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 
1099-MISC 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 1099-MISC shall be filed with the Internal Revenue 
Service Center, designated in the instructions for Form 1099-MISC, on or 
before February 28 (March 31 if filed electronically) of the year 
following the calendar 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 1099-
MISC 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 1099-MISC or a reasonable 
facsimile of Form 1099-MISC 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.
    (d) Cross-reference to penalties. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6050A(a) and Sec.  1.6050A-1(a), see Sec.  
301.6721-1 of this chapter (Procedure and Administration Regulations). 
For provisions relating to the penalty provided for failure to furnish 
timely a correct payee statement required under section 6050A(b) and 
Sec.  1.6050A-1(c), see Sec.  301.6722-1 of this chapter. See Sec.  
301.6724-1 of this chapter for the waiver of a penalty if the failure is 
due to reasonable cause and is not due to willful neglect.

[T.D. 7716, 45 FR 57123, Aug. 27, 1980, as amended by T.D. 8734, 62 FR 
53492, Oct. 14, 1997; T.D. 8895, 65 FR 50407, Aug. 18, 2000]

[[Page 333]]



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 on or before the 
last day of February (March 31 if filed electronically) of the year 
following the calendar year for which the return is made.


(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; T.D. 8895, 65 FR 50407, Aug. 18, 2000]



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:

[[Page 334]]

    (i) Applied against an existing liability of the taxpayer,
    (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 (March 31 if filed electronically) 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

[[Page 335]]

and use a form which contains provisions identical with those of Form 
1099 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

[[Page 336]]

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 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, as amended by T.D. 8895, 65 FR 
50408, Aug. 18, 2000]



Sec.  1.6050H-0  Table of contents.

    This section lists the major captions that appear in Sec. Sec.  
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.

[[Page 337]]

    (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.

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

[[Page 338]]

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 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

[[Page 339]]

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 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 340]]

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.  1.6049-5(c) with respect to the payor of record; and

[[Page 341]]

    (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.  1.1441-1(e)(1).

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 342]]

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 343]]

    (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 344]]

    (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; T.D. 8734, 62 FR 53492, Oct. 14, 1997]



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 345]]

    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 346]]

    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 347]]

                             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 348]]

    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 349]]

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 this paragraph (a) on or before February 28 
(March 31 if filed electronically) 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 this paragraph (a) must be 
filed on or before February 28 (March 31 if filed electronically) 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 350]]

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 351]]

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 352]]

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; T.D. 8895, 
65 FR 50408, Aug. 18, 2000]



Sec.  1.6050I-0  Table of contents.

    This section lists the major captions that appear in Sec. Sec.  
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) Reportable transaction.
    (i) In general.
    (ii) Certain financial transactions.
    (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.

[[Page 353]]

    (c) Time, form, and manner of reporting.
    (1) Time of reporting.
    (i) In general.
    (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, as amended by T.D. 8974, 66 FR 67687, 
Dec. 31, 2001]



Sec.  1.6050I-1  Returns relating to cash in excess of $10,000 received 
in a trade or business.

    (a) Reporting requirement--(1) Reportable transaction--(i) 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.
    (ii) Certain financial transactions. Section 6050I of title 26 of 
the United States Code requires persons to report information about 
financial transactions to the Internal Revenue Service, and section 5331 
of title 31 of the United States Code requires persons to report similar 
information about certain transactions to the Financial Crimes 
Enforcement Network. This information shall be reported on the same form 
as prescribed by the Secretary.
    (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.


[[Page 354]]


    (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 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.

[[Page 355]]

    (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 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

[[Page 356]]

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.

    (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

[[Page 357]]

(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 
(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.

[[Page 358]]

    (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 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

[[Page 359]]

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.
    (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; T.D. 8974, 66 FR 
67687, Dec. 31, 2001]



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,

[[Page 360]]

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, 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.

[[Page 361]]

    (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 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

[[Page 362]]

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 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 toretain 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 4A-15 for rules governing reporting when a party other than the 
lender acquires property securing indebtedness at a foreclosure, 
execution or similar sale.

[[Page 363]]

    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 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

[[Page 364]]

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 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).

[[Page 365]]

                        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:
    (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.

[[Page 366]]

                            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 28 
(March 31 if filed electronically) of the year following the calendar 
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.

                            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

[[Page 367]]

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, 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, as amended by T.D. 8895, 65 FR 
50408, Aug. 18, 2000]



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

[[Page 368]]

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.
    (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.

[[Page 369]]

    (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:
    (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

[[Page 370]]

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 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

[[Page 371]]

    (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
    (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.

[[Page 372]]

    (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;
    (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

[[Page 373]]

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 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.

[[Page 374]]

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 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,

[[Page 375]]

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 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

[[Page 376]]

    (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]



Sec.  1.6050N-1  Statements to recipients of royalties paid after 
December 31, 1986.

    (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) Exempted foreign-related items--(1) In general. No return shall 
be required under paragraph (a) of this section for payments of the 
items described in paragraphs (c)(1)(i) through (iv ) of this section.
    (i) Returns of information are not required for payments of 
royalties that a payor can, prior to payment, associate with 
documentation upon which it may rely to treat as made to a foreign 
beneficial owner in accordance with Sec.  1.1441-1(e)(1)(ii) or as made 
to a foreign payee in accordance with Sec.  1.6049-5(d)(1) or presumed 
to be made to a foreign payee under Sec.  1.6049-5(d)(2), (3), (4), or 
(5). However, such payments may be reportable under Sec.  1.1461-1(b) 
and (c).
    For purposes of this paragraph (c)(1)(i), the provisions in Sec.  
1.6049-5(c) (regarding rules applicable to documentation of foreign 
status and definition of U.S. payor and non-U.S. payor) shall apply. See 
Sec.  1.1441-1(b)(3)(iii)(B) and (C) for special payee rules regarding 
scholarships, grants, pensions, annuities, etc. The provisions of Sec.  
1.1441-1 shall apply by substituting the term payor for the term 
withholding agent and without regard to the fact that the provisions 
apply only to amounts subject to withholding under chapter 3 of the 
Internal Revenue Code.
    (ii) Returns of information are not required for payments of 
royalties from sources outside the United States (determined under Part 
I of subchapter N and the regulations under these provisions) made 
outside the United States by a non-U.S. payor or non-U.S. middleman. For 
a definition of non-U.S. payor or non-U.S. middleman, see Sec.  1.6049-
5(c)(5). For circumstances in which a payment is considered to be made 
outside the United States, see Sec.  1.6049-5(e).
    (iii) Returns of information are not required for payments made by a 
foreign intermediary described in Sec.  1.1441-1(e)(3)(i) that it has 
received in its capacity as an intermediary and that are associated with 
a valid withholding certificate described in Sec.  1.1441-1(e)(3)(ii) or 
(iii) and payments made by a U.S. branch of a foreign bank or of a 
foreign insurance company described in Sec.  1.1441-1(b)(2)(iv) that are 
associated with a valid withholding certificate described in Sec.  
1.1441-1(e)(3)(v), which certificate the intermediary or branch has 
furnished to the payor or middleman from whom it has received the 
payment, unless, and to the extent, the intermediary or branch knows 
that the payments are required to be reported and were not so reported.
    (2) Definitions--(i) Payor. For purposes of this section, the term 
payor

[[Page 377]]

shall have the meaning ascribed to it under Sec.  1.6049-4(a).
    (ii) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under this paragraph (c) of this section are presumed 
made to U.S. payees who are not exempt recipients if, prior to payment, 
the payor cannot reliably associate the payment either with a Form W-9 
furnished by one of the joint owners in the manner required in 
Sec. Sec.  31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (c)(1)(i) of this section furnished 
by each joint owner upon which it can rely to treat each joint owner as 
a foreign payee or foreign beneficial owner. For purposes of applying 
this paragraph (c)(2)(ii), the grace period described in Sec.  1.6049-
5(d)(2)(ii) shall apply only if each payee qualifies for such grace 
period.
    (d) Cross-reference to penalties. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6050N(a), see Sec.  301.6721-1 of this chapter 
(Procedure and Administration Regulations). For provisions relating to 
the penalty provided for failure to furnish timely a correct payee 
statement required under section 6050N(b) and Sec.  1.6050N-1(a), see 
Sec.  301.6722-1 of this chapter. See Sec.  301.6724-1 of this chapter 
for the waiver of a penalty if the failure is due to reasonable cause 
and is not due to willful neglect.
    (e) Effective date--This section, except paragraph (c), applies to 
payee statements due after December 31, 1995, without regard to 
extensions. For further guidance regarding 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) and Sec.  601.601(d)(2) of this chapter). 
The provisions of paragraph (c) of this section apply to payments made 
after December 31, 2000.

[T.D. 8637, 60 FR 66111, Dec. 21, 1995, as amended by T.D. 8734, 62 FR 
53492, Oct. 14, 1997; T.D. 8804, 63 FR 72188, Dec. 31, 1998; T.D. 8856, 
64 FR 73412, Dec. 30, 1999]



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.

[[Page 378]]

(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 
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 
(March 31 if filed electronically) 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

[[Page 379]]

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.
    (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

[[Page 380]]

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 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

[[Page 381]]

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 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

[[Page 382]]

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.
    (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, as amended by T.D. 8895, 65 FR 
50408, Aug. 18, 2000]



Sec.  1.6050S-0  Table of contents.

    This section lists captions contained in Sec. Sec.  1.6050S-1, 
1.6050S-2T, 1.6050S-3, and 1.6050S-4T.

Sec.  1.6050S-1 Information reporting for qualified tuition and related 
                                expenses.

(a) Information reporting requirement.
(1) In general.
(2) Exceptions.
(i) No reporting by institutions or insurers for nonresident alien 
individuals.
(ii) No reporting by institutions for noncredit courses.
(A) In general.
(B) Academic credit defined.
(C) Example.
(iii) No reporting by institutions for individuals whose qualified 
tuition and related expenses are waived or are paid with scholarships.
(iv) No reporting by institutions for individuals whose qualified 
tuition and related expenses are covered by a formal billing 
arrangement.
(A) In general.
(B) Formal billing arrangement defined.
(b) Requirement to file return.
(1) In general.
(2) Information reporting requirements for institutions that elect to 
report payments received for qualified tuition and related expenses.
(i) In general.

[[Page 383]]

(ii) Information included on return.
(iii) Reportable amount of payments received for qualified tuition and 
related expenses during calendar year determined.
(iv) Separate reporting of reimbursements or refunds of payments of 
qualified tuition and related expenses that were reported for a prior 
calendar year.
(v) Payments received for qualified tuition and related expenses 
determined.
(vi) Reimbursements or refunds of payments for qualified tuition and 
related expenses determined.
(vii) Examples.
(3) Information reporting requirements for institutions that elect to 
report amounts billed for qualified tuition and related expenses.
(i) In general.
(ii) Information included on return.
(iii) Reportable amounts billed for qualified tuition and related 
expenses during calendar year determined.
(iv) Separate reporting of reductions made to amounts billed for 
qualified tuition and related expenses that were reported for a prior 
calendar year.
(v) Examples.
(4) Requirements for insurers.
(i) In general.
(ii) Information included on return.
(5) Time and place for filing return.
(i) In general.
(ii) Return for nonresident alien individual.
(iii) Extensions of time.
(6) Use of magnetic media.
(c) Requirement to furnish statement.
(1) In general.
(2) Time and manner for furnishing statement.
(i) In general.
(ii) Statement to nonresident alien individual.
(iii) Extensions of time.
(3) Copy of Form 1098-T.
(d) Special rules.
(1) Enrollment determined.
(2) Payments of qualified tuition and related expenses received or 
collected by one or more persons.
(i) In general.
(ii) Exception.
(3) Governmental units.
(e) Penalty provisions.
(1) Failure to file correct returns.
(2) Failure to furnish correct information statements.
(3) Waiver of penalties for failures to include a correct TIN.
(i) In general.
(ii) Acting in a responsible manner.
(iii) Manner of soliciting TIN.
(4) Failure to furnish TIN.
(f) Effective date.

  Sec.  1.6050S-2T Electronic furnishing of information statements for 
                 qualified tuition and related expenses.

(a) Electronic furnishing of statements.
(1) In general.
(2) Consent.
(i) In general.
(ii) Change in hardware or software requirements.
(iii) Example.
(3) Required disclosures.
(i) In general.
(ii) Paper statement.
(iii) Scope and duration of consent.
(iv) Post-consent request for a paper statement.
(v) Withdrawal of consent.
(vi) Notice of termination.
(vii) Updating information.
(viii) Hardware and software requirements.
(4) Format.
(5) Posting.
(6) Notice.
(i) In general.
(ii) Undeliverable electronic address.
(iii) Corrected statements.
(7) Retention.
(b) Effective date.

   Sec.  1.6050S-3 Information reporting for payments of interest on 
                       qualified education loans.

(a) Information reporting requirement in general.
(b) Definitions.
(1) Interest.
(2) Payor.
(c) Requirement to file return.
(1) Form of return.
(2) Information included on return.
(3) Time and place for filing return.
(i) In general.
(ii) Extensions of time.
(4) Use of magnetic media.
(d) Requirement to furnish statement.
(1) In general.
(2) Time and manner for furnishing statement.
(i) In general.
(ii) Extensions of time.
(3) Copy of Form 1098-E.
(e) Special rules.
(1) Transitional rule for reporting of loan origination fees and 
capitalized interest.
(2) Qualified education loan certification.
(3) Payments of interest received or collected by one or more persons.
(i) In general.
(ii) Exception.
(4) Reporting by foreign persons.
(5) Governmental units.
(f) Penalty provisions.
(1) Failure to file correct returns.
(2) Failure to furnish correct information statements.
(3) Waiver of penalties for failures to include a correct TIN.

[[Page 384]]

(i) In general.
(ii) Acting in a responsible manner.
(iii) Manner of soliciting TIN.
(4) Failure to furnish TIN.
(g) Effective date.

  Sec.  1.6050S-4T Electronic furnishing of information statements for 
           payments of interest on qualified education loans.

(a) Electronic furnishing of statements.
(1) In general.
(2) Consent.
(i) In general.
(ii) Change in hardware or software requirements.
(iii) Example.
(3) Required disclosures.
(i) In general.
(ii) Paper statement.
(iii) Scope and duration of consent.
(iv) Post-consent request for a paper statement.
(v) Withdrawal of consent.
(vi) Notice of termination.
(vii) Updating information.
(viii) Hardware and software requirements.
(4) Format.
(5) Posting.
(6) Notice.
(i) In general.
(ii) Undeliverable electronic address.
(iii) Corrected statements.
(7) Retention.
(b) Effective date.

[T.D. 8992, 67 FR 20904, Apr. 29, 2002, as amended by T.D. 9029, 67 FR 
77681, Dec. 19, 2002]



Sec.  1.6050S-1  Information reporting for qualified tuition and related 
expenses.

    (a) Information reporting requirement--(1) In general. Except as 
provided in paragraph (a)(2) of this section, any eligible educational 
institution (as defined in section 25A(f)(2) and the regulations 
thereunder) (an institution) that enrolls (as determined under paragraph 
(d)(1) of this section) any individual for any academic period (as 
defined in the regulations under section 25A), and any person that is 
engaged in a trade or business of making payments under an insurance 
arrangement as reimbursements or refunds (or other similar amounts) of 
qualified tuition and related expenses (as defined in section 25A(f)(1) 
and the regulations thereunder) (an insurer) must--
    (i) File an information return, as described in paragraph (b) of 
this section, with the Internal Revenue Service (IRS) with respect to 
each individual described in paragraph (b) of this section; and
    (ii) Furnish a statement, as described in paragraph (c) of this 
section, to each individual described in paragraph (c) of this section.
    (2) Exceptions--(i) No reporting by institution or insurer for 
nonresident alien individuals. The information reporting requirements of 
this section do not apply with respect to any individual who is a 
nonresident alien (as defined in section 7701(b) and Sec.  301.7701(b)-3 
of this chapter) during the calendar year, unless the individual 
requests the institution or insurer to report. If a nonresident alien 
individual requests an institution or insurer to report, the institution 
or insurer must comply with the requirements of this section for the 
calendar year with respect to which the request is made.
    (ii) No reporting by institutions for noncredit courses--(A) In 
general. The information reporting requirements of this section do not 
apply with respect to any course for which no academic credit is offered 
by the institution.
    (B) Academic credit defined. Academic credit means credit offered by 
an institution for the completion of course work leading toward a post-
secondary degree, certificate, or other recognized post-secondary 
educational credential.
    (C) Example. The following example illustrates the rules of this 
paragraph (a)(2)(ii):

    Example. Student A, a medical doctor, takes a course at University 
X's medical school. Student A takes the course to fulfill State Y's 
licensing requirement that medical doctors attend continuing medical 
education courses each year. Student A is not enrolled in a degree 
program at University X and takes the medical course through University 
X's continuing professional education division. University X does not 
offer credit toward a post-secondary degree on an academic transcript 
for the completion of the course but gives Student A a certificate of 
attendance upon completion. Under this paragraph (a)(2)(ii), University 
X is not subject to the information reporting requirements of section 
6050S and this section for the medical education course taken by Student 
A.

    (iii) No reporting by institutions for individuals whose qualified 
tuition and related expenses are waived or are paid with scholarships. 
The information reporting requirements of this section do

[[Page 385]]

not apply with respect to any individual whose qualified tuition and 
related expenses are waived in their entirety or are paid entirely with 
scholarships.
    (iv) No reporting by institutions for individuals whose qualified 
tuition and related expenses are covered by a formal billing 
arrangement--(A) In general. The information reporting requirements of 
this section do not apply with respect to any individual whose qualified 
tuition and related expenses are covered by a formal billing arrangement 
as defined in paragraph (a)(2)(iv)(B) of this section.
    (B) Formal billing arrangement defined. A formal billing arrangement 
means--
    (1) An arrangement in which the institution bills only an employer 
for education furnished by the institution to an individual who is the 
employer's employee and does not maintain a separate financial account 
for that individual;
    (2) An arrangement in which the institution bills only a 
governmental entity for education furnished by the institution to an 
individual and does not maintain a separate financial account for that 
individual; or
    (3) Any other similar arrangement in which the institution bills 
only an institutional third party for education furnished to an 
individual and does not maintain a separate financial account for that 
individual, but only if designated as a formal billing arrangement by 
the Commissioner in published guidance of general applicability or in 
guidance directed to participants in specific arrangements.
    (b) Requirement to file return--(1) In general. Institutions may 
elect to report either the information described in paragraph (b)(2) of 
this section, or the information described in paragraph (b)(3) of this 
section. Once an institution elects to report under either paragraph 
(b)(2) or (3) of this section, the institution must use the same 
reporting method for all calendar years in which it is required to file 
returns, unless permission is granted to change reporting methods. 
Paragraph (b)(2) of this section requires institutions to report, among 
other information, the amount of payments received during the calendar 
year for qualified tuition and related expenses. Institutions must 
report separately adjustments made during the calendar year that relate 
to payments received for qualified tuition and related expenses that 
were reported for a prior calendar year. For purposes of paragraph 
(b)(2) of this section, an adjustment made to payments received means a 
reimbursement or refund. Paragraph (b)(3) requires institutions to 
report, among other information, the amounts billed during the calendar 
year for qualified tuition and related expenses. Institutions must 
report separately adjustments made during the calendar year that relate 
to amounts billed for qualified tuition and related expenses that were 
reported for a prior calendar year. For purposes of paragraph (b)(3) of 
this section, an adjustment made to amounts billed means a reduction in 
charges. Insurers must report the information described in paragraph 
(b)(4) of this section.
    (2) Information reporting requirements for institutions that elect 
to report payments received for qualified tuition and related expenses--
(i) In general. Except as provided in paragraph (a)(2) of this section, 
an institution reporting payments received for qualified tuition and 
related expenses must file an information return with the IRS on Form 
1098-T, ``Tuition Statement,'' with respect to each individual enrolled 
(as determined in paragraph (d)(1) of this section) for an academic 
period beginning during the calendar year or during a prior calendar 
year and for whom a transaction described in paragraphs (b)(2)(ii)(C), 
(E), (F) or (G) of this section is made during the calendar year. An 
institution may use a substitute Form 1098-T if the substitute form 
complies with applicable revenue procedures relating to substitute forms 
(see Sec.  601.601(d)(2) of this chapter).
    (ii) Information included on return. An institution reporting 
payments received for qualified tuition and related expenses must 
include on Form 1098-T--
    (A) The name, address, and taxpayer identification number (TIN)(as 
defined in section 7701(a)(41)) of the institution;
    (B) The name, address, and TIN of the individual who is, or has 
been, enrolled by the institution;

[[Page 386]]

    (C) The amount of payments of qualified tuition and related expenses 
that the institution received from any source with respect to the 
individual during the calendar year;
    (D) An indication by the institution whether any payments received 
for qualified tuition and related expenses reported for the calendar 
year relate to an academic period that begins during the first three 
months of the next calendar year;
    (E) The amount of any scholarships or grants for the payment of the 
individual's costs of attendance that the institution administered and 
processed during the calendar year;
    (F) The amount of any reimbursements or refunds of qualified tuition 
and related expenses made during the calendar year with respect to the 
individual that relate to payments of qualified tuition and related 
expenses that were reported by the institution for a prior calendar 
year;
    (G) The amount of any reductions to the amount of scholarships or 
grants for the payment of the individual's costs of attendance that were 
reported by the institution with respect to the individual for a prior 
calendar year;
    (H) A statement or other indication showing whether the individual 
was enrolled for at least half of the normal full-time work load for the 
course of study the individual is pursuing for at least one academic 
period that begins during the calendar year (see section 25A and the 
regulations thereunder);
    (I) A statement or other indication showing whether the individual 
was enrolled in a program leading to a graduate-level degree, graduate-
level certificate, or other recognized graduate-level educational 
credential; and
    (J) Any other information required by Form 1098-T and its 
instructions.
    (iii) Reportable amount of payments received for qualified tuition 
and related expenses during calendar year determined. The amount of 
payments received for qualified tuition and related expenses with 
respect to an individual during the calendar year that is reportable on 
Form 1098-T is determined by netting the amount of payments received (as 
defined in paragraph (b)(2)(v) of this section) for qualified tuition 
and related expenses during the calendar year against any reimbursements 
or refunds (as defined in paragraph (b)(2)(vi) of this section) made 
during the calendar year that relate to payments received for qualified 
tuition and related expenses during the same calendar year.
    (iv) Separate reporting of reimbursements or refunds of payments of 
qualified tuition and related expenses that were reported for a prior 
calendar year. An institution must separately report on Form 1098-T any 
reimbursements or refunds (as defined in paragraph (b)(2)(vi) of this 
section) made during the current calendar year that relate to payments 
of qualified tuition and related expenses that were reported by the 
institution for a prior calendar year. Such reimbursements or refunds 
shall not be netted against the payments received for qualified tuition 
and related expenses during the current calendar year.
    (v) Payments received for qualified tuition and related expenses 
determined. For purposes of determining the amount of payments received 
for qualified tuition and related expenses during a calendar year, 
payments received with respect to an individual during the calendar year 
from any source (except for any scholarship or grant that, by its terms, 
must be applied to expenses other than qualified tuition and related 
expenses, such as room and board) are treated as payments of qualified 
tuition and related expenses up to the total amount billed by the 
institution for such expenses. For purposes of this section, a payment 
includes any positive account balance (such as any reimbursement or 
refund credited to an individual's account) that an institution applies 
toward current charges.
    (vi) Reimbursements or refunds of payments for qualified tuition and 
related expenses determined. For purposes of determining the amount of 
reimbursements or refunds made of payments received for qualified 
tuition and related expenses, any reimbursement or refund made with 
respect to an individual during a calendar year (except for any refund 
of a scholarship or grant that, by its terms, was required to be applied 
to expenses other than qualified tuition and related expenses, such as 
room and board) is treated as a reimbursement or

[[Page 387]]

refund of payments for qualified tuition and related expenses up to the 
amount of any reduction in charges for such expenses. For purposes of 
this section, a reimbursement or refund includes amounts that an 
institution credits to an individual's account, as well as amounts 
disbursed to, or on behalf of, the individual.
    (vii) Examples. The following examples illustrate the rules in this 
paragraph (b)(2):

    Example 1. (i) In early August 2003, University X bills enrolled 
Student A $10,000 for qualified tuition and related expenses and $6,000 
for room and board for the 2003 Fall semester. In late August 2003, 
Student A pays $11,000 to University X. In early September 2003, Student 
A drops to half-time enrollment for the 2003 Fall semester. In late 
September 2003, University X credits $5,000 to Student A's account, 
reflecting a $5,000 reduction in charges for qualified tuition and 
related expenses. In late September 2003, University X applies the 
$5,000 positive account balance toward current charges.
    (ii) Under paragraph (b)(2)(v) of this section, the $11,000 payment 
is treated as a payment of qualified tuition and related expenses up to 
the $10,000 billed for qualified tuition and related expenses. Under 
paragraph (b)(2)(vi) of this section, the $5,000 credited to the 
student's account is treated as a reimbursement or refund of payments 
for qualified tuition and related expenses, because the current year 
charges for qualified tuition and related expenses were reduced by 
$5,000. Under paragraph (b)(2)(iii) of this section, University X is 
required to net the $10,000 payment received for qualified tuition and 
related expenses during 2003 against the $5,000 reimbursement or refund 
of payments received for qualified tuition and related expenses during 
2003. Therefore, Institution X is required to report $5,000 of payments 
received for qualified tuition and related expenses during 2003.
    Example 2. (i) The facts are the same as in Example 1, except that 
Student A pays the full $16,000 in late August 2003. In late September 
2003, University X reduces the tuition charges by $5,000 and issues a 
$5,000 refund to Student A.
    (ii) Under paragraph (b)(2)(v) of this section, the $16,000 payment 
is treated as a payment of qualified tuition and related expenses up to 
the $10,000 billed for qualified tuition and related expenses. Under 
paragraph (b)(2)(vi) of this section, the $5,000 refund is treated as 
reimbursement or refund of payments for qualified tuition and related 
expenses, because the current year charges for qualified tuition and 
related expenses were reduced by $5,000. Under paragraph (b)(2)(iii) of 
this section, University X is required to net the $10,000 payment 
received for qualified tuition and related expenses during 2003 against 
the $5,000 reimbursement or refund of payments received for qualified 
tuition and related expenses during 2003. Therefore, Institution X is 
required to report $5,000 of payments received for qualified tuition and 
related expenses during 2003.
    Example 3. (i) The facts are the same as in Example 1, except that 
Student A is enrolled full-time, and, in early September 2003, Student A 
decides to live at home with her parents. In late September 2003, 
University X adjusts Student A's account to eliminate room and board 
charges and issues a $1,000 refund to Student A.
    (ii) Under paragraph (b)(2)(v) of this section, the $11,000 payment 
is treated as a payment of qualified tuition and related expenses up to 
the $10,000 billed for qualified tuition and related expenses. Under 
paragraph (b)(2)(vi) of this section, the $1,000 refund is not treated 
as reimbursement or refund of payments for qualified tuition and related 
expenses, because there is no reduction in charges for qualified tuition 
and related expenses. Therefore, under paragraph (b)(2)(iii) of this 
section, University X is required to report $10,000 of payments received 
for qualified tuition and related expenses during 2003.
    Example 4. (i) In early December 2003, College Y bills enrolled 
Student B $10,000 for qualified tuition and related expenses and $6,000 
for room and board for the 2004 Spring semester. In late December 2003, 
Student B pays $16,000. In mid-January 2004, after the 2004 Spring 
semester classes begin, Student B drops to half-time enrollment. In mid-
January 2004, College Y credits Student B's account with $5,000, 
reflecting a $5,000 reduction in charges for qualified tuition and 
related expenses, but does not issue a refund to Student B. In early 
August 2004, College Y bills Student B $10,000 for qualified tuition and 
related expenses and $6,000 for room and board for the 2004 Fall 
semester. In early September 2004, College Y applies the $5,000 positive 
account balance toward Student B's $16,000 bill for the 2004 Fall 
semester. In late September 2004, Student B pays $6,000 towards the 
charges.
    (ii) In the reporting for calendar year 2003, under paragraph 
(b)(2)(v) of this section, the $16,000 payment in December 2003 is 
treated as a payment of qualified tuition and related expenses up to the 
$10,000 billed for qualified tuition and related expenses. Under 
paragraph (b)(2)(iii) of this section, College Y is required to report 
$10,000 of payments received for qualified tuition and related expenses 
during 2003. In addition, College Y is required to indicate that the 
payments reported for 2003 relate to an academic period that begins 
during the first three months of the next calendar year.

[[Page 388]]

    (iii) In the reporting for calendar year 2004, under paragraph 
(b)(2)(vi) of this section, the $5,000 credited to Student B's account 
is treated as a reimbursement or refund of qualified tuition and related 
expenses, because the charges for qualified tuition and related expenses 
were reduced by $5,000. Under paragraph (b)(2)(iv) of this section, the 
$5,000 reimbursement or refund of qualified tuition and related expenses 
must be separately reported on Form 1098-T because it relates to 
payments of qualified tuition and related expenses reported by College Y 
for 2003. Under paragraph (b)(2)(v) of this section, the $5,000 positive 
account balance that is applied toward charges for the 2004 Fall 
semester is treated as a payment. Therefore, College Y received total 
payments of $11,000 during 2004 (the $5,000 credit plus the $6,000 
payment). Under paragraph (b)(2)(v) of this section, the $11,000 of 
total payments are treated as a payment of qualified tuition and related 
expenses up to the $10,000 billed for such expenses. Therefore, for 
2004, College Y is required to report $10,000 of payments received for 
qualified tuition and related expenses during 2004 and a $5,000 refund 
of payments of qualified tuition and related expenses reported for 2003.

    (3) Information reporting requirements for institutions that elect 
to report amounts billed for qualified tuition and related expenses--(i) 
In general. Except as provided in paragraph (a)(2) of this section, an 
institution reporting amounts billed for qualified tuition and related 
expenses must file an information return on Form 1098-T with respect to 
each individual enrolled (as determined in paragraph (d)(1) of this 
section) for an academic period beginning during the calendar year or 
during a prior calendar year and for whom a transaction described in 
paragraphs (b)(3)(ii)(C), (E), (F) or (G) of this section is made during 
the calendar year. An institution may use a substitute Form 1098-T if 
the substitute form complies with applicable revenue procedures relating 
to substitute forms (see Sec.  601.601(d)(2) of this chapter).
    (ii) Information included on return. An institution reporting 
amounts billed for qualified tuition and related expenses must include 
on Form 1098-T--
    (A) The name, address, and taxpayer identification number (TIN)(as 
defined in section 7701(a)(41)) of the institution;
    (B) The name, address, and TIN of the individual who is, or has 
been, enrolled by the institution;
    (C) The amount billed for qualified tuition and related expenses 
with respect to the individual during the calendar year;
    (D) An indication by the institution whether any amounts billed for 
qualified tuition and related expenses reported for the calendar year 
relate to an academic period that begins during the first three months 
of the next calendar year;
    (E) The amount of any scholarships or grants for the payment of the 
individual's costs of attendance that the institution administered and 
processed during the calendar year;
    (F) The amount of any reductions in charges made during the calendar 
year with respect to the individual that relate to amounts billed for 
qualified tuition and related expenses that were reported by the 
institution for a prior calendar year;
    (G) The amount of any reductions to the amount of scholarships or 
grants for the payment of the individual's costs of attendance that were 
reported by the institution with respect to the individual for a prior 
calendar year;
    (H) A statement or other indication showing whether the individual 
was enrolled for at least half of the normal full-time work load for the 
course of study the individual is pursuing for at least one academic 
period that begins during the calendar year (see section 25A and the 
regulations thereunder);
    (I) A statement or other indication showing whether the individual 
was enrolled in a program leading to a graduate-level degree, graduate-
level certificate, or other recognized graduate-level educational 
credential; and
    (J) Any other information required by Form 1098-T and its 
instructions.
    (iii) Reportable amounts billed for qualified tuition and related 
expenses during calendar year determined. The amount billed for 
qualified tuition and related expenses with respect to an individual 
during the calendar year that is reportable on Form 1098-T is determined 
by netting the amounts billed for qualified tuition and related expenses 
during the calendar year against any reductions in charges for qualified 
tuition and related expenses

[[Page 389]]

made during the calendar year that relate to amounts billed for 
qualified tuition and related expenses during the same calendar year.
    (iv) Separate reporting of reductions made to amounts billed for 
qualified tuition and related expenses that were reported for a prior 
calendar year. An institution must separately report on Form 1098-T any 
reductions in charges made during the current calendar year that relate 
to amounts billed for qualified tuition and related expenses that were 
reported by the institution for a prior calendar year. Such reductions 
shall not be netted against amounts billed for qualified tuition and 
related expenses during the current calendar year.
    (v) Examples. The following examples illustrate the rules in this 
paragraph (b)(3):

    Example 1. (i) In early August 2003, University X bills enrolled 
Student A $10,000 for qualified tuition and related expenses and $6,000 
for room and board for the 2003 Fall semester. In late August 2003, 
Student A pays $11,000 to University X. In early September 2003, Student 
A drops to half-time enrollment for the 2003 Fall semester. In late 
September 2003, University X adjusts Student A's account and reduces the 
charges for qualified tuition and related expenses by $5,000 to reflect 
half-time enrollment. In late September 2003, University X applies the 
$5,000 account balance toward current charges.
    (ii) Under paragraph (b)(3)(iii) of this section, University X is 
required to net the $10,000 amount of qualified tuition and related 
expenses billed during 2003 against the $5,000 reduction in charges for 
qualified tuition and related expenses during 2003. Therefore, 
Institution X is required to report $5,000 in amounts billed for 
qualified tuition and related expenses during 2003.
    Example 2. (i) The facts are the same as in Example 1, except that, 
in addition, in early December 2003, College X bills Student A $10,000 
for qualified tuition and related expenses and $6,000 for room and board 
for the 2004 Spring semester. In early January 2004, Student A pays 
$16,000. In mid-January 2004, after the 2004 Spring semester classes 
begin, Student A drops to half-time enrollment. In mid-January 2004, 
College X credits $5,000 to Student A's account, reflecting a $5,000 
reduction in charges for qualified tuition and related expenses, but 
does not issue a refund check to Student A. In early August 2004, 
College X bills Student A $10,000 for qualified tuition and related 
expenses and $6,000 for room and board for the 2004 Fall semester. In 
early September 2004, College X applies the $5,000 positive account 
balance toward Student A's $16,000 bill for the 2004 Fall semester. In 
late September 2004, Student A pays $6,000 toward the charges.
    (ii) In the reporting for calendar year 2003, under paragraph 
(b)(3)(iii) of this section, College X is required to report $15,000 
amounts billed for qualified tuition and related expenses during 2003 
($5,000 for the 2003 Fall semester and $10,000 for the 2004 Spring 
semester). In addition, College X is required to indicate that some of 
the amounts billed for qualified tuition and related expenses reported 
for 2003 relate to an academic period that begins during the first three 
months of the next calendar year.
    (iii) In the reporting for calendar year 2004, under paragraph 
(b)(3)(iv) of this section, the $5,000 reduction in charges for 
qualified tuition and related expenses must be separately reported on 
Form 1098-T because it relates to amounts billed for qualified tuition 
and related expenses that were reported by College X for 2003. Under 
paragraph (b)(3)(iii) of this section, College X is required to report 
$10,000 in amounts billed for qualified tuition and related expenses 
during 2004.

    (4) Requirements for insurers--(i) In general. Except as otherwise 
provided in this section, an insurer must file an information return for 
each individual with respect to whom reimbursements or refunds of 
qualified tuition and related expenses are made during the calendar year 
on Form 1098-T. An insurer may use a substitute Form 1098-T if the 
substitute form complies with applicable revenue procedures relating to 
substitute forms (see Sec.  601.601(d)(2) of this chapter).
    (ii) Information included on return. An insurer must include on Form 
1098-T--
    (A) The name, address, and taxpayer identification number (TIN) (as 
defined in section 7701(a)(41)) of the insurer;
    (B) The name, address, and TIN of the individual with respect to 
whom reimbursements or refunds of qualified tuition and related expenses 
were made;
    (C) The aggregate amount of reimbursements or refunds of qualified 
tuition and related expenses that the insurer made with respect to the 
individual during the calendar year; and
    (D) Any other information required by Form 1098-T and its 
instructions.
    (5) Time and place for filing return--(i) In general. Except as 
provided in paragraphs (b)(5)(ii) and (iii) of this section, Form 1098-T 
must be filed on or before

[[Page 390]]

February 28 (March 31 if filed electronically) of the year following the 
calendar year in which payments were received, or amounts were billed, 
for qualified tuition or related expenses, or reimbursements, refunds, 
or reductions of such amounts were made. An institution or insurer must 
file Form 1098-T with the IRS according to the instructions to Form 
1098-T.
    (ii) Return for nonresident alien individual. In general, an 
institution or insurer is not required to file a return on behalf of a 
nonresident alien individual. However, if a nonresident alien individual 
requests an institution or insurer to report, the institution or insurer 
must file a return described in paragraph (b) of this section with the 
IRS on or before the date prescribed in paragraph (b)(5)(i) of this 
section, or on or before the thirtieth day after the request, whichever 
is later.
    (iii) Extensions of time. The IRS may grant an institution or 
insurer an extension of time to file returns required in this section 
upon a showing of good cause. See General Instructions for Forms 1099 
series, 1098 series, 5498 series, and W-2G, ``Certain Gambling 
Winnings,'' and applicable revenue procedures for rules relating to 
extensions of time to file (see Sec.  601.601(d)(2) of this chapter).
    (6) Use of magnetic media. See section 6011(e) and Sec.  301.6011-2 
of this chapter for rules relating to the requirement to file Forms 
1098-T on magnetic media.
    (c) Requirement to furnish statement--(1) In general. An institution 
or insurer must furnish a statement to each individual for whom it is 
required to file a Form 1098-T. The statement must include--
    (i) The information required under paragraph (b) of this section;
    (ii) A legend that identifies the statement as important tax 
information that is being furnished to the IRS;
    (iii) Instructions that--
    (A) State that the statement reports either total payments received 
by the institution for qualified tuition and related expenses during the 
calendar year, or total amounts billed by the institution for qualified 
tuition and related expenses during the calendar year, or the total 
reimbursements or refunds made by the insurer;
    (B) State that, under section 25A and the regulations thereunder, 
the taxpayer may claim an education tax credit only with respect to 
qualified tuition and related expenses actually paid during the calendar 
year; and that the taxpayer may not be able to claim an education tax 
credit with respect to the entire amount of payments received, or 
amounts billed, for qualified tuition and related expenses reported for 
the calendar year;
    (C) State that the amount of any scholarships or grants reported for 
the calendar year and other similar amounts not reported (because they 
are not administered and processed by the institution) may reduce the 
amount of any allowable education tax credit for the taxable year;
    (D) State that the amount of any reimbursements or refunds of 
payments received, or reductions in charges, for qualified tuition and 
related expenses, or any reductions to the amount of scholarships or 
grants, reported by the institution with respect to the individual for a 
prior calendar year may affect the amount of any allowable education tax 
credit for the prior calendar year (and may result in an increase in tax 
liability for the year of the refund);
    (E) State that the amount of any reimbursements or refunds of 
qualified tuition and related expenses reported by an insurer may reduce 
the amount of an allowable education tax credit for a taxable year (and 
may result in an increase in tax liability for the year of the refund);
    (F) State that the taxpayer should refer to relevant IRS forms and 
publications, and should not refer to the institution or the insurer, 
for explanations relating to the eligibility requirements for, and 
calculation of, any allowable education tax credit; and
    (G) Include the name, address, and phone number of the information 
contact of the institution or insurer that filed the Form 1098-T.
    (2) Time and manner for furnishing statement--(i) In general. Except 
as provided in paragraphs (c)(2)(ii) and (iii) of this section, an 
institution or insurer must furnish the statement described in paragraph 
(c)(1) of this section to each individual for whom it is required to 
file a return, on or before January 31

[[Page 391]]

of the year following the calendar year in which payments were received, 
or amounts were billed, for qualified tuition and related expenses, or 
reimbursements, refunds, or reductions of such amounts were made. If 
mailed, the statement must be sent to the individual's permanent 
address, or the individual's temporary address if the institution or 
insurer does not know the individual's permanent address. If furnished 
electronically, the statement must be furnished in accordance with the 
applicable regulations.
    (ii) Statement to nonresident alien individual. If an information 
return is filed for a nonresident alien individual, the institution or 
insurer must furnish a statement described in paragraph (c)(1) of this 
section to the individual in the manner prescribed in paragraph 
(c)(2)(i) of this section. The statement must be furnished on or before 
the later of the date prescribed in paragraph (c)(2)(i) of this section 
or the thirtieth day after the nonresident alien's request to report.
    (iii) Extensions of time. The IRS may grant an institution or 
insurer an extension of time to furnish the statements required in this 
section upon a showing of good cause. See General Instructions for Forms 
1099 series, 1098 series, 5498 series, and W-2G, ``Certain Gambling 
Winnings,'' and applicable revenue procedures for rules relating to 
extensions of time to furnish statements (see Sec.  601.601(d)(2) of 
this chapter).
    (3) Copy of Form 1098-T. An institution or insurer may satisfy the 
requirement of this paragraph (c) by furnishing either a copy of Form 
1098-T and its instructions or another document that contains all of the 
information filed with the IRS and the information required by paragraph 
(c)(1) of this section if the document complies with applicable revenue 
procedures relating to substitute statements (see Sec.  601.601(d)(2) of 
this chapter).
    (d) Special rules--(1) Enrollment determined. An institution may 
determine its enrollment for each academic period under its own rules 
and policies for determining enrollment or as of any of the following 
dates--
    (i) 30 days after the first day of the academic period;
    (ii) A date during the academic period on which enrollment data must 
be collected for purposes of the Integrated Post Secondary Education 
Data System administered by the Department of Education; or
    (iii) A date during the academic period on which the institution 
must report enrollment data to the State, the institution's governing 
body, or some other external governing body.
    (2) Payments of qualified tuition and related expenses received or 
collected by one or more persons--(i) In general. Except as otherwise 
provided in paragraph (d)(2)(ii) of this section, if a person collects 
or receives payments of qualified tuition and related expenses on behalf 
of another person (e.g., an institution), the person collecting or 
receiving payments must satisfy the requirements of paragraphs (b) and 
(c) of this section. In this case, those requirements do not apply to 
the transfer of the payments to the institution.
    (ii) Exception. If the person collecting or receiving payments of 
qualified tuition and related expenses on behalf of another person 
(e.g., an institution) does not possess the information needed to comply 
with the requirements of paragraphs (b) and (c) of this section, the 
other person must satisfy those requirements.
    (3) Governmental units. An institution or insurer that is a 
governmental unit, or an agency or instrumentality of a governmental 
unit, is subject to the requirements of paragraphs (b) and (c) of this 
section and an appropriately designated officer or employee of the 
governmental entity must satisfy those requirements.
    (e) Penalty provisions--(1) Failure to file correct returns. The 
section 6721 penalty may apply to an institution or insurer that fails 
to file information returns required by section 6050S and this section 
on or before the required filing date; that fails to include all of the 
required information on the return; or that includes incorrect 
information on the return. See section 6721, and the regulations 
thereunder, for rules relating to penalties for failure to file correct 
returns. See section 6724, and the regulations thereunder, for rules 
relating to waivers of penalties for certain failures due to reasonable 
cause.

[[Page 392]]

    (2) Failure to furnish correct information statements. The section 
6722 penalty may apply to an institution or insurer that fails to 
furnish statements required by section 6050S and this section on or 
before the prescribed date; that fails to include all the required 
information on the statement; or that includes incorrect information on 
the statement. See section 6722, and the regulations thereunder, for 
rules relating to penalties for failure to furnish correct statements. 
See section 6724, and the regulations thereunder, for rules relating to 
waivers of penalties for certain failures due to reasonable cause.
    (3) Waiver of penalties for failures to include a correct TIN--(i) 
In general. In the case of a failure to include a correct TIN on Form 
1098-T or a related information statement, penalties may be waived if 
the failure is due to reasonable cause. Reasonable cause may be 
established if the failure arose from events beyond the institution's or 
insurer's control, such as a failure of the individual to furnish a 
correct TIN. However, the institution or insurer must establish that it 
acted in a responsible manner both before and after the failure.
    (ii) Acting in a responsible manner. An institution or insurer must 
request the TIN of each individual for whom it is required to file a 
return if it does not already have a record of the individual's correct 
TIN. If the institution or insurer does not have a record of the 
individual's correct TIN, then it must solicit the TIN in the manner 
described in paragraph (e)(3)(iii) of this section on or before December 
31 of each year during which it receives payments, or bills amounts, for 
qualified tuition and related expenses or makes reimbursements, refunds, 
or reductions of such amounts with respect to the individual. If an 
individual refuses to provide his or her TIN upon request, the 
institution or insurer must file the return and furnish the statement 
required by this section without the individual's TIN, but with all 
other required information. The specific solicitation requirements of 
paragraph (e)(3)(iii) of this section apply in lieu of the solicitation 
requirements of Sec.  301.6724-1(e) and (f) of this chapter for the 
purpose of determining whether an institution or insurer acted in a 
responsible manner in attempting to obtain a correct TIN. An institution 
or insurer that complies with the requirements of this paragraph (e)(3) 
will be considered to have acted in a responsible manner within the 
meaning of Sec.  301.6724-1(d) of this chapter with respect to any 
failure to include the correct TIN of an individual on a return or 
statement required by section 6050S and this section.
    (iii) Manner of soliciting TIN. An institution or insurer must 
request the individual's TIN in writing and must clearly notify the 
individual that the law requires the individual to furnish a TIN so that 
it may be included on an information return filed by the institution or 
insurer. A request for a TIN made on Form W-9S, ``Request for Student's 
or Borrower's Taxpayer Identification Number and Certification,'' 
satisfies the requirements of this paragraph (e)(3)(iii). An institution 
or insurer may establish a system for individuals to submit Forms W-9S 
electronically as described in applicable forms and instructions. An 
institution or insurer may also develop a separate form to request the 
individual's TIN or incorporate the request into other forms customarily 
used by the institution or insurer, such as admission or enrollment 
forms or financial aid applications.
    (4) Failure to furnish TIN. The section 6723 penalty may apply to 
any individual who is required (but fails) to furnish his or her TIN to 
an institution or insurer. See section 6723, and the regulations 
thereunder, for rules relating to the penalty for failure to furnish a 
TIN.
    (f) Effective date. The rules in this section apply to information 
returns required to be filed, and information statements required to be 
furnished, after December 31, 2003.

[T.D. 9029, 67 FR 77682, Dec. 19, 2002; 68 FR 6350, Feb. 7, 2003]



Sec.  1.6050S-2  Information reporting for payments and reimbursements 
or refunds of qualified tuition and related expenses.

    (a) Electronic furnishing of statements--(1) In general. A person 
required

[[Page 393]]

by section 6050S(d) to furnish a written statement regarding payments 
and reimbursements or refunds of qualified tuition and related expenses 
(furnisher) to the individual to whom it is required to be furnished 
(recipient) may furnish the statement in an electronic format in lieu of 
a paper format. A furnisher who meets the requirements of paragraphs 
(a)(2) through (6) of this section is treated as furnishing the required 
statement.
    (2) Consent--(i) In general. The recipient must have affirmatively 
consented to receive the statement in an electronic format. The consent 
may be made electronically in any manner that reasonably demonstrates 
that the recipient can access the statement in the electronic format in 
which it will be furnished to the recipient. Alternatively, the consent 
may be made in a paper document if it is confirmed electronically.
    (ii) Withdrawal of consent. The consent requirement of this 
paragraph (a)(2) is not satisfied if the recipient withdraws the consent 
and the withdrawal takes effect before the statement is furnished. The 
furnisher may provide that a withdrawal of consent takes effect either 
on the date it is received by the furnisher or on a subsequent date. The 
furnisher may also provide that a request for a paper statement will be 
treated as a withdrawal of consent.
    (iii) Change in hardware or software requirements. If a change in 
the hardware or software required to access the statement creates a 
material risk that the recipient will not be able to access the 
statement, the furnisher must, prior to changing the hardware or 
software, provide the recipient with a notice. The notice must describe 
the revised hardware and software required to access the statement and 
inform the recipient that a new consent to receive the statement in the 
revised electronic format must be provided to the furnisher. After 
implementing the revised hardware and software, the furnisher must 
obtain from the recipient, in the manner described in paragraph 
(a)(2)(i) of this section, a new consent or confirmation of consent to 
receive the statement electronically.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (a)(2):

    Example 1. Furnisher F sends Recipient R a letter stating that R may 
consent to receive statements required by section 6050S(d) 
electronically on a Web site instead of in a paper format. The letter 
contains instructions explaining how to consent to receive the 
statements electronically by accessing the Web site, downloading the 
consent document, completing the consent document and e-mailing the 
completed consent back to F. The consent document posted on the Web site 
uses the same electronic format that F will use for the electronically 
furnished statements. R reads the instructions and submits the consent 
in the manner provided in the instructions. R has consented to receive 
the statements electronically in the manner described in paragraph 
(a)(2)(i) of this section.
    Example 2. Furnisher F sends Recipient R an e-mail stating that R 
may consent to receive statements required by section 6050S(d) 
electronically instead of in a paper format. The e-mail contains an 
attachment instructing R how to consent to receive the statements 
electronically. The e-mail attachment uses the same electronic format 
that F will use for the electronically furnished statements. R opens the 
attachment, reads the instructions, and submits the consent in the 
manner provided in the instructions. R has consented to receive the 
statements electronically in the manner described in paragraph (a)(2)(i) 
of this section.
    Example 3. Furnisher F posts a notice on its Web site stating that 
Recipient R may receive statements required by section 6050S(d) 
electronically instead of in a paper format. The Web site contains 
instructions on how R may access a secure Web page and consent to 
receive the statements electronically. By accessing the secure Web page 
and giving consent, R has consented to receive the statements 
electronically in the manner described in paragraph (a)(2)(i) of this 
section.

    (3) Required disclosures--(i) In general. Prior to, or at the time 
of, a recipient's consent, the furnisher must provide to the recipient a 
clear and conspicuous disclosure statement containing each of the 
disclosures described in paragraphs (a)(3)(ii) through (viii) of this 
section.
    (ii) Paper statement. The recipient must be informed that the 
statement will be furnished on paper if the recipient does not consent 
to receive it electronically.
    (iii) Scope and duration of consent. The recipient must be informed 
of the scope

[[Page 394]]

and duration of the consent. For example, the recipient must be informed 
whether the consent applies to statements furnished every year after the 
consent is given until it is withdrawn in the manner described in 
paragraph (a)(3)(v)(A) of this section or only to the statement required 
to be furnished on or before the January 31 immediately following the 
date on which the consent is given.
    (iv) Post-consent request for a paper statement. The recipient must 
be informed of any procedure for obtaining a paper copy of the 
recipient's statement after giving the consent described in paragraph 
(a)(2)(i) of this section and whether a request for a paper statement 
will be treated as a withdrawal of consent.
    (v) Withdrawal of consent. The recipient must be informed that--
    (A) The recipient may withdraw a consent by writing (electronically 
or on paper) to the person or department whose name, mailing address, 
telephone number, and e-mail address is provided in the disclosure 
statement;
    (B) The furnisher will confirm the withdrawal and the date on which 
it takes effect in writing (either electronically or on paper); and
    (C) A withdrawal of consent does not apply to a statement that was 
furnished electronically in the manner described in this paragraph (a) 
before the date on which the withdrawal of consent takes effect.
    (vi) Notice of termination. The recipient must be informed of the 
conditions under which a furnisher will cease furnishing statements 
electronically to the recipient.
    (vii) Updating information. The recipient must be informed of the 
procedures for updating the information needed by the furnisher to 
contact the recipient. The furnisher must inform the recipient of any 
change in the furnisher's contact information.
    (viii) Hardware and software requirements. The recipient must be 
provided with a description of the hardware and software required to 
access, print, and retain the statement, and the date when the statement 
will no longer be available on the Web site.
    (4) Format. The electronic version of the statement must contain all 
required information and comply with applicable revenue procedures 
relating to substitute statements to recipients.
    (5) Notice--(i) In general. If the statement is furnished on a Web 
site, the furnisher must notify the recipient that the statement is 
posted on a Web site. The notice may be delivered by mail, electronic 
mail, or in person. The notice must provide instructions on how to 
access and print the statement. The notice must include the following 
statement in capital letters, ``IMPORTANT TAX RETURN DOCUMENT 
AVAILABLE.'' If the notice is provided by electronic mail, the foregoing 
statement must be on the subject line of the electronic mail.
    (ii) Undeliverable electronic address. If an electronic notice 
described in paragraph (a)(5)(i) of this section is returned as 
undeliverable, and the correct electronic address cannot be obtained 
from the furnisher's records or from the recipient, then the furnisher 
must furnish the notice by mail or in person within 30 days after the 
electronic notice is returned.
    (iii) Corrected statements. If the furnisher has corrected a 
recipient's statement that was furnished electronically, the furnisher 
must furnish the corrected statement to the recipient electronically. If 
the recipient's statement was furnished through a Web site posting and 
the furnisher has corrected the statement, the furnisher must notify the 
recipient that it has posted the corrected statement on the Web site 
within 30 days of such posting in the manner described in paragraph 
(a)(5)(i) of this section. The corrected statement or the notice must be 
furnished by mail or in person if--
    (A) An electronic notice of the Web site posting of an original 
statement was returned as undeliverable; and
    (B) The recipient has not provided a new e-mail address.
    (6) Access period. Statements furnished on a Web site must be 
retained on the Web site through October 15 of the year following the 
calendar year to which the statements relate (or the first business day 
after such October 15, if October 15 falls on a Saturday, Sunday, or 
legal holiday). The furnisher must maintain access to corrected 
statements that are posted on

[[Page 395]]

the Web site through October 15 of the year following the calendar year 
to which the statements relate (or the first business day after such 
October 15, if October 15 falls on a Saturday, Sunday, or legal holiday) 
or the date 90 days after the corrected statements are posted, whichever 
is later.
    (b) Paper statements after withdrawal of consent. If a recipient 
withdraws consent to receive a statement electronically and the 
withdrawal takes effect before the statement is furnished 
electronically, a paper statement must be furnished. A paper statement 
furnished after the statement due date under this paragraph (b) will be 
considered timely if furnished within 30 days after the date the 
withdrawal of consent is received by the furnisher.
    (c) Effective date. This section applies to statements required to 
be furnished after February 13, 2004. Paragraph (a)(6) of this section 
also applies to statements required to be furnished after December 31, 
2004.

[T.D. 9114, 69 FR 7570, Feb. 18, 2004]



Sec.  1.6050S-3  Information reporting for payments of interest on 
qualified education loans.

    (a) Information reporting requirement in general. Except as 
otherwise provided in this section, any person engaged in a trade or 
business that, in the course of that trade or business, receives from 
any payor (as defined in paragraph (b)(2) of this section) interest 
payments that aggregate $600 or more for any calendar year on one or 
more qualified education loans (as defined in section 221(e)(1) and the 
regulations thereunder) (a payee) must--
    (1) File an information return, as described in paragraph (c) of 
this section, with the Internal Revenue Service with respect to the 
payor; and
    (2) Furnish a statement, as described in paragraph (d) of this 
section, to the payor.
    (b) Definitions. The following definitions apply for purposes of 
this section:
    (1) Interest. Interest includes stated interest, loan origination 
fees (other than fees for services), and capitalized interest as 
described in the regulations under section 221. See paragraph (e)(1) of 
this section for a special transitional rule relating to reporting of 
loan origination fees and capitalized interest.
    (2) Payor. Payor means the individual who is carried on the books 
and records of the payee as the borrower on a qualified education loan. 
If there are multiple borrowers, the principal borrower on the payee's 
books and records is treated as the payor for purposes of section 6050S 
and this section.
    (c) Requirement to file return--(1) Form of return. A payee must 
file an information return for the payor on Form 1098-E, ``Student Loan 
Interest Statement.'' A payee may use a substitute for Form 1098-E if 
the substitute form complies with the applicable revenue procedures 
relating to substitute forms.
    (2) Information included on return. A payee must include on Form 
1098-E--
    (i) The name, address, and taxpayer identification number (TIN) (as 
defined in section 7701(a)(41)) of the payee;
    (ii) The name, address, and TIN of the payor;
    (iii) The aggregate amount of interest payments received during the 
calendar year from the payor; and
    (iv) Any other information required by Form 1098-E and its 
instructions.
    (3) Time and place for filing return--(i) In general. Except as 
provided in paragraph (c)(3)(ii) of this section, the Form 1098-E must 
be filed on or before February 28 (March 31 if filed electronically) of 
the year following the calendar year in which interest payments were 
received. A payee must file Form 1098-E with the Internal Revenue 
Service according to the instructions to Form 1098-E.
    (ii) Extensions of time. The Internal Revenue Service may grant a 
payee an extension of time to file returns required in this section upon 
a showing of good cause. See the instructions to Form 1098-E and 
applicable revenue procedures for rules relating to extensions of time 
to file.
    (4) Use of magnetic media. See section 6011(e) and Sec.  301.6011-2 
of this chapter for rules relating to the requirement to file Forms 
1098-E on magnetic media.
    (d) Requirement to furnish statement--(1) In general. A payee must 
furnish a statement to each payor for whom it is required to file a Form 
1098-E. The statement must include--

[[Page 396]]

    (i) The information required under paragraph (c)(2) of this section;
    (ii) A legend that identifies the statement as important tax 
information that is being furnished to the Internal Revenue Service;
    (iii) Instructions that--
    (A) State that, under section 221 and the regulations thereunder, 
the payor may not be able to deduct the full amount of interest reported 
on the statement;
    (B) In the case of qualified education loans made before January 1, 
2004, for which the payee does not report payments of interest other 
than stated interest, state that the payor may be able to deduct 
additional amounts (such as certain loan origination fees and 
capitalized interest) not reported on the statement;
    (C) State that the payor should refer to relevant Internal Revenue 
Service forms and publications, and should not refer to the payee, for 
explanations relating to the eligibility requirements for, and 
calculation of, any allowable deduction for interest paid on a qualified 
education loan; and
    (D) Include the name, address, and phone number of the office or 
department of the payee that is the information contact for the payee 
that filed the Form 1098-E.
    (2) Time and manner for furnishing statement--(i) In general. Except 
as provided in paragraph (d)(2)(ii) of this section, a payee must 
furnish the statement described in paragraph (d)(1) of this section to 
the payor on or before January 31 of the year following the calendar 
year in which payments of interest on a qualified education loan were 
received. If mailed, the statement must be sent to the payor's last 
known address. If furnished electronically, the statement must be 
furnished in accordance with the applicable regulations.
    (ii) Extensions of time. The Internal Revenue Service may grant a 
payee an extension of time to furnish statements required in this 
section upon a showing of good cause. See the instructions to Form 1098-
E and applicable revenue procedures for rules relating to extensions of 
time to furnish statements.
    (3) Copy of Form 1098-E. A payee may satisfy the requirement of this 
paragraph (d) by furnishing either a copy of Form 1098-E and its 
instructions or another document that contains all the information filed 
with the Internal Revenue Service and the information required by 
paragraph (d)(1) of this section if the document complies with 
applicable revenue procedures relating to substitute statements.
    (e) Special rules--(1) Transitional rule for reporting of loan 
origination fees and capitalized interest. For qualified education loans 
made before January 1, 2004, a payee is not required to report payments 
of loan origination fees and capitalized interest as interest under 
section 6050S and this section.
    (2) Qualified education loan certification. If a loan is not 
subsidized, guaranteed, financed, or is not otherwise treated as a 
student loan under a program of the Federal, state, or local government 
or an eligible educational institution, a payee must request a 
certification from the payor that the loan will be used solely to pay 
for qualified higher education expenses. A payee may use Form W-9S, 
``Request for Student's or Borrower's Social Security Number and 
Certification,'' to obtain the certification. A payee may establish an 
electronic system for payors to submit Forms W-9S electronically as 
described in applicable forms and instructions. A payee may also develop 
a separate form to obtain the payor certification or may incorporate the 
certification into other forms customarily used by the payee, such as 
loan applications, provided the certification is clearly set forth. If 
the certification is not received, the loan is not a qualified education 
loan for purposes of section 6050S and this section.
    (3) Payments of interest received or collected by one or more 
persons--(i) In general. Except as otherwise provided in paragraph 
(e)(3)(ii) of this section, if a person collects or receives payments of 
interest on a qualified education loan on behalf of another person 
(e.g., a lender), the person collecting or receiving the interest must 
satisfy the information reporting requirements of this section. In this 
case, the reporting requirements do not apply to the transfer of 
interest to the other person.
    (ii) Exception. If the person collecting or receiving payments of 
interest on a

[[Page 397]]

qualified education loan on behalf of another person (e.g., a lender) 
does not possess the information needed to comply with the information 
reporting requirements of this section, the other person must satisfy 
the information reporting requirements of this section.
    (4) Reporting by foreign persons. A payee that is not a United 
States person (as defined in section 7701(a)(30)) must report payments 
of interest it receives on a qualified education loan only if it 
receives the payment--
    (i) At a location in the United States; or
    (ii) At a location outside the United States if the payee 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 taxable year in which interest payments were 
received (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.
    (5) Governmental units. A governmental unit, or an agency or 
instrumentality of a governmental unit, that receives from any payor 
interest payments that aggregate $600 or more for any calendar year on 
one or more qualified education loans is a payee, without regard to the 
requirement of paragraph (a) of this section that the interest be 
received in the course of a trade or business.
    (f) Penalty provisions--(1) Failure to file correct returns. The 
section 6721 penalty may apply to a payee that fails to file information 
returns required by section 6050S and this section on or before the 
required filing date; that fails to include all of the required 
information on the return; or that includes incorrect information on the 
return. See section 6721, and the regulations thereunder, for rules 
relating to penalties for failure to file correct returns. See section 
6724, and the regulations thereunder, for rules relating to waivers of 
penalties for certain failures due to reasonable cause.
    (2) Failure to furnish correct information statements. The section 
6722 penalty may apply to a payee that fails to furnish statements 
required by section 6050S and this section on or before the prescribed 
date; that fails to include all the required information on the 
statement; or that includes incorrect information on the statement. See 
section 6722, and the regulations thereunder, for rules relating to 
penalties for failure to furnish correct statements. See section 6724, 
and the regulations thereunder, for rules relating to waivers of 
penalties for certain failures due to reasonable cause.
    (3) Waiver of penalties for failures to include a correct TIN--(i) 
In general. In the case of a failure to include a correct TIN on Form 
1098-E or a related information statement, penalties may be waived if 
the failure is due to reasonable cause. Reasonable cause may be 
established if the failure arose from events beyond the payee's control, 
such as a failure of the payor to furnish a correct TIN. However, the 
payee must establish that it acted in a responsible manner both before 
and after the failure.
    (ii) Acting in a responsible manner. A payee must request the TIN of 
each payor if it does not already have a record of the payor's correct 
TIN. If the payee does not have a record of the payor's correct TIN, 
then it must solicit the TIN in the manner described in paragraph 
(f)(3)(iii) of this section on or before December 31 of each year during 
which it receives payments of interest. If a payor refuses to provide 
his or her TIN upon request, the payee must file the return and furnish 
the statement required by this section without the payor's TIN, but with 
all other required information. The specific solicitation requirements 
of paragraph (f)(3)(iii) of this section apply in lieu of the 
solicitation requirements of Sec.  301.6724-1(e) and (f) of this chapter 
for the purpose of determining whether a payee acted in a responsible 
manner in attempting to obtain a correct TIN. A payee that complies with 
the requirements of this paragraph (f)(3) will be considered to have 
acted in a responsible manner within the meaning of Sec.  301.6724-1(d) 
of this chapter with respect to any failure to include the correct TIN 
of a payor on a return or

[[Page 398]]

statement required by section 6050S and this section.
    (iii) Manner of soliciting TIN. A payee must request the payor's TIN 
in writing and must clearly notify the payor that the law requires the 
payor to furnish a TIN so that it may be included on an information 
return filed by the payee. A request for a TIN made on Form W-9S, 
``Request for Student's or Borrower's Social Security Number and 
Certification,'' satisfies the requirements of this paragraph 
(f)(3)(iii). A payee may establish a system for payors to submit Forms 
W-9S electronically as described in applicable forms and instructions. A 
payee may also develop a separate form to request the payor's TIN or 
incorporate the request into other forms customarily used by the payee, 
such as loan applications.
    (4) Failure to furnish TIN. The section 6723 penalty may apply to 
any payor who is required (but fails) to furnish his or her TIN to a 
payee. See section 6723, and the regulations thereunder, for rules 
relating to the penalty for failure to furnish a TIN.
    (g) Effective date. The rules in this section apply to information 
returns required to be filed, and information statements required to be 
furnished, after December 31, 2003.

[T.D. 8992, 67 FR 20904, Apr. 29, 2002]



Sec.  1.6050S-4  Information reporting for payments of interest on 
qualified education loans.

    (a) Electronic furnishing of statements--(1) In general. A person 
required by section 6050S(d) to furnish a written statement regarding 
payments of interest on qualified education loans (furnisher) to the 
individual to whom it is required to be furnished (recipient) may 
furnish the statement in an electronic format in lieu of a paper format. 
A furnisher who meets the requirements of paragraphs (a)(2) through (6) 
of this section is treated as furnishing the required statement.
    (2) Consent--(i) In general. The recipient must have affirmatively 
consented to receive the statement in an electronic format. The consent 
may be made electronically in any manner that reasonably demonstrates 
that the recipient can access the statement in the electronic format in 
which it will be furnished to the recipient. Alternatively, the consent 
may be made in a paper document if it is confirmed electronically.
    (ii) Withdrawal of consent. The consent requirement of this 
paragraph (a)(2) is not satisfied if the recipient withdraws the consent 
and the withdrawal takes effect before the statement is furnished. The 
furnisher may provide that a withdrawal of consent takes effect either 
on the date it is received by the furnisher or on a subsequent date. The 
furnisher may also provide that a request for a paper statement will be 
treated as a withdrawal of consent.
    (iii) Change in hardware or software requirements. If a change in 
the hardware or software required to access the statement creates a 
material risk that the recipient will not be able to access the 
statement, the furnisher must, prior to changing the hardware or 
software, provide the recipient with a notice. The notice must describe 
the revised hardware and software required to access the statement and 
inform the recipient that a new consent to receive the statement in the 
revised electronic format must be provided to the furnisher. After 
implementing the revised hardware and software, the furnisher must 
obtain from the recipient, in the manner described in paragraph 
(a)(2)(i) of this section, a new consent or confirmation of consent to 
receive the statement electronically.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (a)(2):

    Example 1. Furnisher F sends Recipient R a letter stating that R may 
consent to receive statements required by section 6050S(d) 
electronically on a Web site instead of in a paper format. The letter 
contains instructions explaining how to consent to receive the 
statements electronically by accessing the Web site, downloading the 
consent document, completing the consent document and e-mailing the 
completed consent back to F. The consent document posted on the Web site 
uses the same electronic format that F will use for the electronically 
furnished statements. R reads the instructions and submits the consent 
in the manner provided in the instructions. R has consented to receive 
the statements electronically in the manner described in paragraph 
(a)(2)(i) of this section.

[[Page 399]]

    Example 2. Furnisher F sends Recipient R an e-mail stating that R 
may consent to receive statements required by section 6050S(d) 
electronically instead of in a paper format. The e-mail contains an 
attachment instructing R how to consent to receive the statements 
electronically. The e-mail attachment uses the same electronic format 
that F will use for the electronically furnished statements. R opens the 
attachment, reads the instructions, and submits the consent in the 
manner provided in the instructions. R has consented to receive the 
statements electronically in the manner described in paragraph (a)(2)(i) 
of this section.
    Example 3. Furnisher F posts a notice on its Web site stating that 
Recipient R may receive statements required by section 6050S(d) 
electronically instead of in a paper format. The Web site contains 
instructions on how R may access a secure Web page and consent to 
receive the statements electronically. By accessing the secure Web page 
and giving consent, R has consented to receive the statements 
electronically in the manner described in paragraph (a)(2)(i) of this 
section.

    (3) Required disclosures--(i) In general. Prior to, or at the time 
of, a recipient's consent, the furnisher must provide to the recipient a 
clear and conspicuous disclosure statement containing each of the 
disclosures described in paragraphs (a)(3)(ii) through (viii) of this 
section.
    (ii) Paper statement. The recipient must be informed that the 
statement will be furnished on paper if the recipient does not consent 
to receive it electronically.
    (iii) Scope and duration of consent. The recipient must be informed 
of the scope and duration of the consent. For example, the recipient 
must be informed whether the consent applies to statements furnished 
every year after the consent is given until it is withdrawn in the 
manner described in paragraph (a)(3)(v)(A) of this section or only to 
the statement required to be furnished on or before the January 31 
immediately following the date on which the consent is given.
    (iv) Post-consent request for a paper statement. The recipient must 
be informed of any procedure for obtaining a paper copy of the 
recipient's statement after giving the consent described in paragraph 
(a)(2)(i) of this section and whether a request for a paper statement 
will be treated as a withdrawal of consent.
    (v) Withdrawal of consent. The recipient must be informed that--
    (A) The recipient may withdraw a consent by writing (electronically 
or on paper) to the person or department whose name, mailing address, 
telephone number, and e-mail address is provided in the disclosure 
statement;
    (B) The furnisher will confirm the withdrawal and the date on which 
it takes effect in writing (either electronically or on paper); and
    (C) A withdrawal of consent does not apply to a statement that was 
furnished electronically in the manner described in this paragraph (a) 
before the date on which the withdrawal of consent takes effect.
    (vi) Notice of termination. The recipient must be informed of the 
conditions under which a furnisher will cease furnishing statements 
electronically to the recipient.
    (vii) Updating information. The recipient must be informed of the 
procedures for updating the information needed by the furnisher to 
contact the recipient. The furnisher must inform the recipient of any 
change in the furnisher's contact information.
    (viii) Hardware and software requirements. The recipient must be 
provided with a description of the hardware and software required to 
access, print, and retain the statement, and the date when the statement 
will no longer be available on the Web site.
    (4) Format. The electronic version of the statement must contain all 
required information and comply with applicable revenue procedures 
relating to substitute statements to recipients.
    (5) Notice--(i) In general. If the statement is furnished on a Web 
site, the furnisher must notify the recipient that the statement is 
posted on a Web site. The notice may be delivered by mail, electronic 
mail, or in person. The notice must provide instructions on how to 
access and print the statement. The notice must include the following 
statement in capital letters, ``IMPORTANT TAX RETURN DOCUMENT 
AVAILABLE.'' If the notice is provided by electronic mail, the foregoing 
statement must be on the subject line of the electronic mail.

[[Page 400]]

    (ii) Undeliverable electronic address. If an electronic notice 
described in paragraph (a)(5)(i) of this section is returned as 
undeliverable, and the correct electronic address cannot be obtained 
from the furnisher's records or from the recipient, then the furnisher 
must furnish the notice by mail or in person within 30 days after the 
electronic notice is returned.
    (iii) Corrected statements. If the furnisher has corrected a 
recipient's statement that was furnished electronically, the furnisher 
must furnish the corrected statement to the recipient electronically. If 
the recipient's statement was furnished though a Web site posting and 
the furnisher has corrected the statement, the furnisher must notify the 
recipient that it has posted the corrected statement on the Web site 
within 30 days of such posting in the manner described in paragraph 
(a)(5)(i) of this section. The corrected statement or the notice must be 
furnished by mail or in person if--
    (A) An electronic notice of the Web site posting of an original 
statement or the corrected statement was returned as undeliverable; and
    (B) The recipient has not provided a new e-mail address.
    (6) Access period. Statements furnished on a Web site must be 
retained on the Web site through October 15 of the year following the 
calendar year to which the statements relate (or the first business day 
after such October 15, if October 15 falls on a Saturday, Sunday, or 
legal holiday). The furnisher must maintain access to corrected 
statements that are posted on the Web site through October 15 of the 
year following the calendar year to which the statements relate (or the 
first business day after such October 15, if October 15 falls on a 
Saturday, Sunday, or legal holiday) or the date 90 days after the 
corrected statements are posted, whichever is later.
    (b) Effective date. This section applies to statements required to 
be furnished after February 13, 2004. Paragraph (a)(6) of this section 
also applies to statements required to be furnished after December 31, 
2003.

[T.D. 9114, 69 FR 7570, Feb. 18, 2004]



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 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

[[Page 401]]

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, 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 (March 31 if filed electronically) 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; T.D. 8895, 65 FR 50408, Aug. 18, 2000]



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 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

[[Page 402]]

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 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.

[[Page 403]]

    (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 Sec. Sec.  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.  1.6062-1  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 
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]

[[Page 404]]



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.
    (c) Certain partnership elections--(1) In general. For rules 
regarding the authority of a partner to sign a partnership return filed 
solely for the purpose of making certain partnership level elections, 
see Sec.  1.6031(a)-1(b)(5)(ii).
    (2) Effective date. Paragraph (c) of this section applies to taxable 
years of a partnership beginning after December 31, 1999.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 8841, 64 FR 
61502, Nov. 12, 1999]



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.

[T.D. 6364, 24 FR 1196, Feb. 17, 1959]

               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

[[Page 405]]

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 Sec. Sec.  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 Sec.  1.6041-2(a)(3) and 
Sec.  1.6041-6.
    (8) For provisions relating to the time for filing information 
returns regarding payments of dividends, see Sec.  1.6042-2(c).
    (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 Sec.  
1.6044-2(d).
    (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 Sec.  1.6049-4(g).
    (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 the annual 
information return on Form 1042-S of the tax withheld under chapter 3 of 
the Code (relating to withholding of tax nonresident aliens and foreign 
corporations and tax-free covenant bonds), see Sec.  1.1461-1(c).
    (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; T.D. 
8734, 62 FR 53492, Oct. 14, 1997]



Sec.  1.6072-1  Time for filing returns of individuals, estates, and trusts.

    (a) In general--(1) Returns of income for individuals, estates and 
trusts. 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.
    (2) Return of trust, or portion of a trust, treated as owned by a 
decedent--(i) In general. In the case of a return of a trust, or portion 
of a trust, that was treated as owned by a decedent under subpart E 
(section 671 and following), part I, subchapter J, chapter 1 of the 
Internal Revenue Code as of the date of

[[Page 406]]

the decedent's death that is filed in accordance with Sec.  1.671-4(a) 
for the fractional part of the year ending with the date of the 
decedent's death, 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 the decedent's taxable year.
    (ii) Effective date. This paragraph (a)(2) applies to taxable years 
ending on or after December 24, 2002.
    (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; T.D. 9032, 67 
FR 78382, Dec. 24, 2002]



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.
    (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.

[[Page 407]]

For the rule that a DISC may not have an extension of time in which to 
file such return, see Sec. Sec.  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 Sec. Sec.  
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.



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

[[Page 408]]

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 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,

[[Page 409]]

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.
    (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

[[Page 410]]

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 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

[[Page 411]]

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 
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.

[[Page 412]]

    (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 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.

[[Page 413]]

    (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 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

[[Page 414]]

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.  1.6081-2  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

[[Page 415]]

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. For further guidance regarding the definition of last known 
address, see Sec.  301.6212-2 of this chapter.
    (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, as amended by T.D. 8939, 66 FR 
2819, Jan. 12, 2001]



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.
    (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

[[Page 416]]

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. For further guidance regarding the 
definition of last known address, see Sec.  301.6212-2 of this chapter.
    (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; T.D. 8939, 66 FR 2819, Jan. 12, 2001]



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 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

[[Page 417]]

be mailed to the taxpayer at the address shown on Form 4868 or to the 
taxpayer's last known address. For further guidance regarding the 
definition of last known address, see Sec.  301.6212-2 of this chapter.
    (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; T.D. 8939, 66 FR 2819, Jan. 12, 2001]



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 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

[[Page 418]]

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. For further guidance 
regarding the definition of last known address, see Sec.  301.6212-2 of 
this chapter.
    (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 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, as amended by T.D. 8939, 66 FR 
2819, Jan. 12, 2001]



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

[[Page 419]]

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. For further guidance 
regarding the definition of last known address, see Sec.  301.6212-2 of 
this chapter.
    (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, as amended by T.D. 8939, 66 FR 
2819, Jan. 12, 2001]



Sec.  1.6081-8T  Automatic extension of time to file certain information 
returns (temporary).

    (a) In general. A person required to file an information return (the 
filer) on Form W-2 series, W-2G, 1042-S, 1098 series, 1099 series, 5498 
series, or 8027 will be allowed an automatic 30-day extension of time to 
file the return after the date prescribed for filing the return if the 
filer or the person transmitting the return for the filer (the 
transmitter) files an application in accordance with paragraph (b) of 
this section.
    (b) Requirements. To satisfy this paragraph (b), an application 
must--
    (1) Be submitted on Form 8809, ``Request for Extension of Time To 
File Information Returns,'' or in any other manner as may be prescribed 
by the Commissioner; and
    (2) Be filed with the Internal Revenue Service office designated in 
the application's instructions on or before the date prescribed for 
filing the information return.
    (c) Penalties. See sections 6652, 6693, 6721, 6722, and 6723 for 
failure to file an information return.
    (d) Additional 30-day extension of time to file--(1) In general. 
This paragraph (d) provides procedures for obtaining an additional 
extension of time for filing an information return on a form listed in 
paragraph (a) of this section. No extension of time will be granted 
under this paragraph (d) unless the filer or transmitter has first 
obtained an automatic extension.
    (2) Procedures. In the case of an information return on a form 
listed in paragraph (a) of this section, one additional 30-day extension 
of time to file the return may be allowed if the filer or transmitter 
submits a request for the additional extension before the expiration of 
the automatic 30-day extension. The request must--
    (i) Be submitted on Form 8809 or in any other manner as may be 
prescribed by the Commissioner;
    (ii) Explain in detail why the additional time is needed;
    (iii) Be signed by the filer or transmitter; and
    (iv) Otherwise satisfy the requirements of Sec.  1.6081-1.
    (e) No effect on time to provide statement to recipients. An 
extension under this section of time to file an information return does 
not extend the due date for providing a statement to the person with 
respect to whom the information is required to be reported.
    (f) Effective date. This section applies to requests for extension 
of time to file information returns due after June 11, 2003. The 
applicability of this section expires on June 12, 2006.

[T.D. 9061, 68 FR 34798, June 11, 2003]

[[Page 420]]



Sec.  1.6081-9T  Automatic extension of time to file exempt organization 
returns (temporary).

    (a) In general. An exempt organization required to file a return on 
Form 990 (series), 1041-A, 4720, 5227, 6069, or 8870 will be allowed an 
automatic three-month extension of time to file the return after the 
date prescribed for filing if the exempt organization files an 
application in accordance with paragraph (b) of this section. For 
guidance on extensions of time for an exempt organization to file Form 
1120-POL, U.S. Income Tax Return for Certain Political Organizations, 
see Sec.  1.6081-3.
    (b) Requirements. To satisfy this paragraph (b), an application for 
an automatic extension under this section must--
    (1) Be submitted on Form 8868, ``Application for Extension of Time 
To File an Exempt Organization Return,'' or in any other manner as may 
be prescribed by the Commissioner;
    (2) Be filed with the Internal Revenue Service office designated in 
the application's instructions on or before the date prescribed for 
filing the information return;
    (3) Show the full amount properly estimated as tentative tax for the 
exempt organization for the taxable year; and
    (4) Be accompanied by the full remittance of the amount properly 
estimated as tentative tax which is unpaid as of the date prescribed for 
the filing of the return.
    (c) Termination of automatic extension. The Commissioner may 
terminate an automatic extension at any time by mailing to the exempt 
organization 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 the 
application for extension or to the exempt organization's last known 
address. For further guidance regarding the definition of last known 
address, see Sec.  301.6212-2 of this chapter.
    (d) Penalties. See sections 6651 and 6652(c) for failure to file an 
exempt organization return or failure to pay the amount shown as tax on 
the return.
    (e) Coordination with Sec.  1.6081-1. No extension of time will be 
granted under Sec.  1.6081-1 for filing an exempt organization return 
listed in paragraph (a) of this section until an automatic extension has 
been allowed pursuant to this section.
    (f) Effective date. This section applies to requests for extensions 
of time to file an exempt organization return due after June 11, 2003. 
The applicability of this section expires on June 12, 2006.

[T.D. 9061, 68 FR 34799, June 11, 2003]

               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.
    (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

[[Page 421]]

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 Forms 1042-S 
with respect to certain amounts paid to foreign persons, see 
instructions to the form.
    (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; T.D. 
8734, 62 FR 53493, Oct. 14, 1997]



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 (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.

[[Page 422]]


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 Sec. Sec.  301.6316-1 to 301.6316-6 
inclusive, and Sec. Sec.  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.
    (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.

[[Page 423]]

    (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 Sec. Sec.  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 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

[[Page 424]]

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 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

[[Page 425]]

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 or 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.  1.6107-2  Form and manner of furnishing copy of return and 
retaining copy or record.

    (a) In general. The Commissioner may prescribe the form and manner 
of satisfying the requirements imposed by section 6107(a) and (b) and 
Sec.  1.6107-1(a) and (b) in forms, instructions, or other appropriate 
guidance (see Sec.  601.601(d)(2) of this chapter).
    (b) Effective date. To the extent this section relates to section 
6107(a) and Sec.  1.6107-1(a), it applies to income tax returns and 
claims for refund presented to a taxpayer for signature after December 
31, 2002. To the extent this section relates to section 6107(b) and 
Sec.  1.6107-1(b), it applies after December 31, 2002, to returns and 
claims for refund for which the 3-year period described in section 
6107(b) expires after December 31, 2002.

[T.D. 9119, 69 FR 15249, Mar. 25, 2004]



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,

[[Page 426]]

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  Income tax return preparers furnishing identifying numbers 
for returns or claims for refund filed after December 31, 1999.

    (a) Furnishing identifying number--(1) Each return of tax, or claim 
for refund of tax, under subtitle A of the Internal Revenue Code 
prepared by one or more income tax return preparers must include the 
identifying number of the preparer required by Sec.  1.6695-1(b) to sign 
the return or claim for refund. In addition, if there is a partnership 
or employment arrangement between two or more preparers, the identifying 
number of the partnership or employer must also appear on the return or 
claim for refund. For the definition of the term ``income tax return 
preparer'' (or ``preparer'') see section 7701(a)(36) and Sec.  301.7701-
15 of this chapter.
    (2) The identifying number of a preparer who is an individual (not 
described in paragraph (a)(3) of this section) is that individual's 
social security account number, or such alternative number as may be 
prescribed by the Internal Revenue Service in forms, instructions, or 
other appropriate guidance.
    (3) The identifying number of a preparer (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 preparer) 
is that preparer's employer identification number.
    (b) and (c) [Reserved]. For further guidance, see Sec.  1.6109-2A(b) 
and (c).
    (d) Effective date. Paragraph (a) of this section and this paragraph 
(d) apply to returns or claims for refund filed after December 31, 1999. 
For returns or claims for refund filed prior to January 1, 2000, see 
Sec.  1.6109-2A(a).

[T.D. 9014, 67 FR 52863, Aug. 14, 2002]



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 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.

[[Page 427]]

    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]

 Regulations Applicable to Returns or Claims for Refund Filed Prior to 
                             January 1, 2000



Sec.  1.6109-2A  Furnishing identifying number of income tax return preparer.

    (a) Furnishing identifying number. For returns or claims for refund 
filed prior to January 1, 2000, each 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 prepared by one or more income tax return 
preparers must 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

[[Page 428]]

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).

    (d) Effective date. Paragraph (a) of this section and this paragraph 
(d) apply to returns or claims for refund filed prior to January 1, 
2000. For returns or claims for refund filed after December 31, 1999, 
see Sec.  1.6109-2(a).


[T.D. 7519, 42 FR 59967, Nov. 23, 1977, as amended by T.D. 8835, 64 FR 
43911, Aug. 12, 1999. Redesignated and amended by T.D. 9014, 67 FR 
52863, Aug. 14, 2002]

                      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 Sec. Sec.  1.6072-1 to 1.6072-4, 
inclusive. For provisions relating to the place for filing income tax 
returns, see section 6091 and Sec. Sec.  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).

[[Page 429]]

    (d) Use of Government depositaries. (1) For provisions relating to 
the use of 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; T.D. 8952, 
66 FR 33831, June 26, 2001]



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 makeshis 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 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

[[Page 430]]

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 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 Sec. Sec.  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

[[Page 431]]

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.                            10
 31, 1956..................................
On or after Dec. 31, 1956, and before Dec.                            20
 31, 1957..................................
On or after Dec. 31, 1957, and before Dec.                            30
 31, 1958..................................
On or after Dec. 31, 1958, and before Dec.                            40
 31, 1959..................................
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           $3,000
 calendar year 1955 (10% of $30,000)........................
Amount paid with original estimate (5% of $20,000)..........       1,000
                                                             -----------
Balance to accompany amended declaration....................       2,000
 


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

[[Page 432]]

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) (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

[[Page 433]]

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      $28,000
 declaration before date of filing of amendment (14% of
 $100,000 is $14,000x2).....................................
Installment payments which would have been required to be         42,000
 made before date of filing of amendment if the original
 declaration were in the amount of the amended declaration
 (14% of $150,000 is $21,000x2).............................
                                                             -----------
Difference..................................................      14,000
                                                             -----------
Amount of each installment payment due on September 15,          $37,500
 1967, and December 15, 1967, computed as if the original
 declaration were in the amount of the amended declaration
 (25% of $150,000)..........................................
Add: Amount of difference divided by number of remaining           7,000
 installments ($14,000/2)...................................
                                                             -----------
Amount of each remaining installment (September 15, 1967,         44,500
 and December 15, 1967).....................................
                                                             ===========
 

    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       $14,000
 declaration before the date of filing of amendment (14% of
 $100,000)..................................................
Installment payment which would have been required to be           9,800
 made before date of filing of amendment if the original
 declaration were in the amount of the amended declaration
 (14% of $70,000)...........................................
                                                             -----------
Difference..................................................       4,200
                                                             ===========
June 15, 1967, installment computation:
Installment payment due on June 15, 1967, computed as if the       9,800
 original declaration were in the amount of the amended
 declaration (14% of $70,000)...............................
Less: Amount of difference divided by number of remaining          1,400
 installments ($4,200/3)....................................
                                                             -----------
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,           17,500
 1967, and December 15, 1967, computed as if the original
 declaration were in the amount of the amended declaration
 (25% of $70,000)...........................................
Less: Amount of difference divided by number of remaining          1,400
 installments ($4,200/3)....................................
                                                             -----------
Amount of each remaining installment (September 15, 1967,         16,100
 and December 15, 1967).....................................
                                                             ===========
 


    (c) Installments paid in advance. A corporation may, at its 
election, pay any 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

[[Page 434]]

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 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

[[Page 435]]

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 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

[[Page 436]]

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 Sec. Sec.  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]



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

[[Page 437]]

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 
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

[[Page 438]]

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]



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

[[Page 439]]

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 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.

[[Page 440]]

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 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).

[[Page 441]]

                               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) Manner of deposit--(1) Deposit by Federal tax deposit coupon. 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 203. 
The timeliness of the deposit will be determined by the date stamped on 
the Federal Tax Deposit form by 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.
    (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.  
31.6302-1(h) of this chapter. A taxpayer not required to deposit by 
electronic funds transfer pursuant to Sec.  31.6302-1(h) of this chapter 
remains subject to the rules of paragraph (b)(1) of this section.
    (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 section 6656.

[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; T.D. 
8723, 62 FR 37492, July 14, 1997, T.D. 8947, 66 FR 32542, June 15, 2001; 
T.D. 8952, 66 FR 33831, June 26, 2001]



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 an 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

[[Page 442]]

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 an 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 an authorized financial institution on or before 
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) Deposits by Federal tax deposit coupon--(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 203. The timeliness of the 
deposit will be determined by the date stamped on the Federal Tax 
Deposit form by 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

[[Page 443]]

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.
    (6) 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.
    (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.  31.6302-1(h) of this chapter. A 
taxpayer not required to deposit by electronic funds transfer pursuant 
to Sec.  31.6302-1(h) of this chapter remains subject to the rules of 
paragraph (b) of this section.
    (d) Penalties for failure to make deposits. For provisions relating 
to the penalty for failure to make a deposit within the prescribed time, 
see section 6656.
    (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 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.

[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; T.D. 8723, 62 FR 37492, July 14, 1997; T.D. 8947, 
66 FR 32542, June 15, 2001; T.D. 8952, 66 FR 33831, June 26, 2001]



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 described in 31 CFR 203 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

[[Page 444]]

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 further guidance and instructions for 
certain banks and financial institutions acting as fiduciaries with 
respect to taxable trusts, see Rev. Proc. 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.  31.6302-1(h) of this chapter.

[T.D. 8192, 53 FR 12008, Apr. 12, 1988; T.D. 8192, 53 FR 13464, Apr. 25, 
1988, as amended by T.D. 8723, 62 FR 37492, July 14, 1997; T.D. 8952, 66 
FR 33831, June 26, 2001]



Sec.  1.6302-4  Use of financial institutions in connection with income 
taxes; voluntary payments by electronic funds transfer.

    Any person may voluntarily remit by electronic funds transfer any 
payment of tax imposed by subtitle A of the Internal Revenue Code, 
including any payment of estimated tax. Such payment must be made in 
accordance with procedures prescribed by the Commissioner.

[T.D. 8828, 64 FR 37676, July 13, 1999]



Sec.  1.6361-1  Collection and administration of qualified State 
individual income taxes.

    Except as otherwise provided in Sec. Sec.  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 Sec. Sec.  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

[[Page 445]]

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.
    (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,

[[Page 446]]

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 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

[[Page 447]]

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 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

[[Page 448]]

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,


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

[[Page 449]]

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 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 Sec. Sec.  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

[[Page 450]]

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 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,

[[Page 451]]

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 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

[[Page 452]]

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 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               1,000
 (item (3) minus item (4))..............................
                                                         ===============
(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         1,000
 (3) minus item (4)).......................................
(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

[[Page 453]]

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:
    (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 
annual ized 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

[[Page 454]]

    (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
    (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 Sec.  1.441-
2(c) 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)

[[Page 455]]

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,
    (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

[[Page 456]]

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 ($2,000x12/8)).    3,600
(3) Lesser of (1) or (2).......................................    3,600
 


The tax on C's adjusted self-employment income would be $230.40 
($3,600x6.4 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-
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 
($4,600x6.4 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        $13,050.00
     (without deduction for personal exemptions) on an
     annual basis ($8,700x12/8).............................
  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    2,550.00
     wages ($2,700x12/8))...................................
    Tax on adjusted self-employment income ($2,550x6.4            163.20
     percent)...............................................
(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

[[Page 457]]

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 ($3,900x6.4 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 ($9,200x12/8)..............   13,800.00
Taxable income annualized ($13,800 minus $1,200 for two        11,600.00
 personal exemptions and $1,000 for the standard deduction).
Tax on $11,600 (on basis of joint return)...................    2,172.00
Self-employment tax on adjusted self-employment income            163.20
 ($2,550x6.4 percent)
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 $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 ($600x4), 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   $14,100.00
 deduction for personal exemptions) on an annual basis
 ($9,400x12/8)..............................................
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 ($2,000x12/8)....................    3,000.00
Dividends received credit under section 34 (4 percent of          120.00
 $3,000)....................................................
                                                             -----------
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          240.00
 $1,200)....................................................
                                                             -----------
Tax less credits under section 34 and section 37............    2,282.00
Amount determined under the exception described in paragraph    1,198.05
 (a)(2) of this section (\3/4\ of 70 percent of $2,282).....
 

    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,           $6,000.00
 1977, on an annual basis ($4,000 x 12/8)............
Itemized deductions for the period ending Aug. 31,                450.00
 1977, on an annual basis ($300 x 12/8)..............
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             $454.20
 (\3/4\ x 80 pct. x $757)............................
 

    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

[[Page 458]]

(a)(2) of this section applies, the following computations are 
necessary:

Adjusted gross income for the period ending Aug. 31, 1977,       $24,000
 on an annual basis ($16,000 x 12/8).......................
Itemized deductions for the period ending Aug. 31, 1977, on        3,000
 an annual basis ($2,000 x 12/8)...........................
    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\        3,087
 x 80 pct. x $5,145).......................................
 

    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 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 Sec. Sec.  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

[[Page 459]]

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 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 Sec. Sec.  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).

[[Page 460]]

    (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             4,960
 to H (6200/6600x5280)..................................
 

    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 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           $19,400
 personal exemption for 1956................................
Tax on 1955 income based on joint return rate for 1956......       5,076
Portion of 1955 tax attributable to H (computed as in          5900/6300
 example (1) but allowing benefit of additional exemption to
 H).........................................................
Portion of tax attributable to H based on tax rates and           $4,754
 personal exemptions for 1956 but otherwise on facts on 1955
 return ($5900/6300x$5,076).................................
 


    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           5,170
 basis of separate return)..............................
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              310
 basis of separate return)..............................
                                                         ---------------
Aggregate tax on H and W (on basis of separate returns).          $6,155
Portion of 1972 tax shown on joint return attributable         $4,800.40
 to H (5845/6155x$5,055)................................
 


    (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

[[Page 461]]

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; T.D. 8996, 67 FR 
35012, May 17, 2002]



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 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

[[Page 462]]

    (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 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

[[Page 463]]

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             $100,000
 ($200,000-$100,000 (no credits allowable under sections
 32 and 33))............................................
(2) 70% of item (1).....................................          70,000
(3) Amount of estimated tax required to be paid on each            3,500
 installment date (5% of $70,000).......................
(4) Deduct amount paid on each installment date.........           2,500
                                                         ---------------
(5) Amount of underpayment for each installment date               1,000
 (item (3) minus item (4))..............................
                                                         ---------------
(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
 


[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 
Sec.  1.441-2(c) 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

[[Page 464]]

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 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+(19x28,000 /
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.

[[Page 465]]

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           $75,900.00
 ($175,900-$100,000)....................................
(2) 70% of item (1).....................................       53,130.00
(3) 4% of item (2)......................................        2,125.20
(4) Deduct amount paid on each of the first and second          1,884.00
 installment dates......................................
                                                         ---------------
(5) Amount of underpayment at each of the first and               241.20
 second installment dates (item (3) minus item (4)).....
                                                         ===============
(6) 25% of item (2).....................................       13,282.50
(7) Deduct amount paid on each of the last two                 11,775.00
 installment dates......................................
                                                         ---------------
(8) Amount of underpayment at each of the third and             1,507.50
 fourth installment dates (item (6) minus item (7)).....
                                                         ===============
 

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:
$87,500x12/3=$350,000
$155,000x12/5=$372,000
$185,000x12/6=$370,000
$246,000x12/8=$369,000
$288,000x12/9=$384,000
$341,000x12/11=$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-

[[Page 466]]

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                61,500.00        72,060.00
 $100,000.............................
(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                71,100.00        70,620.00
 $100,000.............................
(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:

------------------------------------------------------------------------
                                            9 months        11 months
------------------------------------------------------------------------
(1) Annualized income.................      $384,000.00      $372,000.00
(2) Tax on item (1) reduced by                77,820.00        72,060.00
 $100,000.............................
(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; T.D. 8996, 67 FR 35012, May 17, 2002]



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

[[Page 467]]

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 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.

[[Page 468]]

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--
    (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          $10,000,000
 ending on January 31, 1987............................
(2) Annualized taxable income for taxable year ending       $12,000,000
 January 31, 1988, determined pursuant to paragraph
 (b)(1) of this section (Item (1)x120%)................
(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           $4,612,603
 rates under section 11 and 1201, taking into account
 section 15, applicable to the taxable year ending
 January 31, 1988......................................
(4) Amount described in section 6655(d)(3)(A)(i) (Item        $1,037,836
 (3)x22.5%)............................................
 

    (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

[[Page 469]]

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

[[Page 470]]

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 
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 ($10,000x6 percentx\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 ($20,000x6 
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 Sec. Sec.  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

[[Page 471]]

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 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

[[Page 472]]

(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.
    (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

[[Page 473]]

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).
    (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

[[Page 474]]

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 ($17,068x.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 (.10x$12,231).
    Example (2). Corporation X was formed on January 1, 1982. In 1983, X 
adopts a calendar 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

[[Page 475]]

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 $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 ($4,910x.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

[[Page 476]]

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 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

[[Page 477]]

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 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:

[[Page 478]]

    (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--
    (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

[[Page 479]]

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--
    (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

[[Page 480]]

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 
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 Sec. Sec.  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.

[[Page 481]]

    (1) Returns due before January 1, 1994.
    (2) Returns due after December 31, 1993.
    (3) Special rules for tax shelter items.
    (4) Special rule for reasonable basis.
    (5) Returns filed after December 31, 2002.

     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.
    (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.
    (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.
    (3) Restriction for corporations.
    (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.

[[Page 482]]

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.
    (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) Reasonable basis.

[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; T.D. 8790, 63 FR 66434, Dec. 2, 
1998; T.D. 9109, 68 FR 75127, Dec. 30, 2003]



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 Sec. Sec.  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]

[[Page 483]]



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 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 Sec. Sec.  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), (3), and (4) of this section, Sec. Sec.  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 
paragraphs (d)(3), (4) and (5) of this section and the last sentence of 
this paragraph (d)(2), the

[[Page 484]]

provisions of Sec. Sec.  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 Sec. Sec.  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.
    (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), 
Sec. Sec.  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, Sec. Sec.  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).
    (4) Special rules for reasonable basis. Section 1.6662-3(b)(3) 
applies to returns filed on or after December 2, 1998.
    (5) For returns filed after December 31, 2002. Sections 1.6662-3(a), 
1.6662-3(b)(2) and 1.6662-3(c)(1) (relating to adequate disclosure) 
apply to returns filed after December 31, 2002, with respect to 
transactions entered into on or after January 1, 2003. Except as 
provided in paragraph (d)(1) of this section, Sec. Sec.  1.6662-3(a), 
1.6662-3(b)(2) and 1.6662-3(c)(1) (as contained in 26 CFR part 1 revised 
April 1, 2003) apply to returns filed with respect to transactions 
entered into prior to January 1, 2003.

[T.D. 8381, 56 FR 67498, Dec. 31, 1991, as amended by T.D. 8617, 60 FR 
45664, Sept. 1, 1995; T.D. 8790, 63 FR 66434, Dec. 2, 1998; T.D. 9109, 
68 FR 75127, Dec. 30, 2003]



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 Internal Revenue 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 paragraph (c)(1) of this section 
are satisfied and the position in question is adequately disclosed as 
provided in paragraph (c)(2) of this section (and, if the position 
relates to a reportable transaction as defined in Sec.  1.6011-4(b) (or 
Sec.  1.6011-4T(b), as applicable), the transaction is disclosed in 
accordance with Sec.  1.6011-4 (or Sec.  1.6011-4T, as applicable)), 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 (other than with respect to a reportable 
transaction, as defined in Sec.  1.6011-4(b) or Sec.  1.6011-4T(b), as 
applicable) 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 (see Sec.  601.601(d)(2) 
of this chapter), 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 income tax return preparer penalty regulations for a 
description of the realistic possibility standard.
    (b) Definitions and rules--(1) Negligence. The term negligence 
includes

[[Page 485]]

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 return position that has a reasonable 
basis as defined in paragraph (b)(3) of this section is not attributable 
to negligence. 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 ``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 (other than with respect to a reportable transaction, 
as defined in Sec.  1.6011-4(b) or Sec.  1.6011-4T(b), as applicable) 
contrary to a revenue ruling or 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. Reasonable basis is a relatively high standard 
of tax reporting, that is, significantly higher than not frivolous or 
not patently improper. The reasonable basis standard is not satisfied by 
a return position that is merely arguable or that is merely a colorable 
claim. If a return position is reasonably based on one or more of the 
authorities set forth in Sec.  1.6662-4(d)(3)(iii) (taking into account 
the relevance and persuasiveness of the authorities, and subsequent 
developments), the return position will generally satisfy the reasonable 
basis standard even though it may not satisfy the substantial authority 
standard as defined in Sec.  1.6662-4(d)(2). (See Sec.  1.6662-
4(d)(3)(ii) for rules with respect to relevance, persuasiveness, 
subsequent developments, and use of a well-reasoned construction of an 
applicable statutory provision for purposes of the substantial 
understatement penalty.) In addition, the reasonable cause and good 
faith exception in Sec.  1.6664-4 may provide relief from the penalty 
for negligence or disregard of rules or regulations, even if a return 
position does not satisfy the reasonable basis standard.
    (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, if the position relates to a 
reportable transaction as defined in Sec.  1.6011-4(b) (or Sec.  1.6011-
4T(b), as applicable), the transaction is disclosed in accordance

[[Page 486]]

with Sec.  1.6011-4 (or Sec.  1.6011-4T, as applicable)) 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 Sec. 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 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. 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; T.D. 8790, 63 FR 66434, Dec. 2, 1998; T.D. 9109, 
68 FR 75127, Dec. 30, 2003]



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

[[Page 487]]

(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 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

[[Page 488]]

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 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:

[[Page 489]]



                                                  [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 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 as defined in Sec.  1.6662-3(b)(3).

[[Page 490]]

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 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

[[Page 491]]

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 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

[[Page 492]]

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.
    (3) Restriction for corporations. For purposes of paragraph 
(e)(2)(i) of this section, a corporation will not be treated as having a 
reasonable basis for its tax treatment of an item attributable to a 
multi-party financing transaction entered into after August 5, 1997, if 
the treatment does not clearly reflect the income of the corporation.
    (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 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

[[Page 493]]

(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(f) 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 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

[[Page 494]]

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; T.D. 8790, 63 
FR 66435, Dec. 2, 1998; T.D. 9109, 68 FR 75128, Dec. 30, 2003]



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 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

[[Page 495]]

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 
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.

[[Page 496]]

    (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 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

[[Page 497]]

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 
(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

[[Page 498]]

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 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

[[Page 499]]

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    6
 in the profit margin of a related buyer.............................  ,
                                                                       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/
$15,000,000x$5,000,000=$3,000,000) and the six million dollar adjustment 
($6,000,000/$15,000,000x$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 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:


[[Page 500]]


    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    $2,000,000
 an increase in royalty payments...........................
(2) Attributable to an increase in sales proceeds due to a     2,500,000
 decrease in the profit margin of a related buyer..........
(3) Attributable to a decrease in the cost of goods sold       2,000,000
 because of a decrease in the cost plus mark-up of a
 related seller............................................
                                                            ------------
    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    2
 in the profit margin of a related buyer.............................  ,
                                                                       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 millionx10%=$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. 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

[[Page 501]]

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 Sec. Sec.  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 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

[[Page 502]]

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)(iii)(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 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

[[Page 503]]

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 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.

[[Page 504]]

    (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    $9,000,000
 an increase in royalty payments...........................
(2) Not a 200 percent or 400 percent adjustment............    2,000,000
(3) Attributable to a decrease in the cost of goods sold       9,000,000
 because of a decrease in the cost plus mark-up of a
 related seller............................................
                                                            ------------
    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 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    $9,000,000
 an increase in royalty payments...........................
(2) Attributable to an adjustment that is 200 percent or       2,000,000
 more of the correct section 482 price.....................

[[Page 505]]

 
(3) Attributable to a decrease in the cost of goods sold       9,000,000
 because of a decrease in the cost plus mark-up of a
 related seller............................................
                                                            ------------
    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 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.

[[Page 506]]

    (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      $2,000,000
 more of the correct section 482 arm's length result.......
(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      $6,000,000
 more of the correct section 482 arm's length result.......
(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; 62 FR 46877, Sept. 5, 1997]



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 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 
Sec. Sec.  1.6662-4(e) and (f) for other applicable disclosure rules.
    (d) Reasonable basis. For purposes of Sec. Sec.  1.6662-3(c) and 
1.6662-4(e) and (f) (relating to methods of making adequate disclosure), 
the provisions of Sec.  1.6662-3(b)(3) apply in determining whether a 
return position has a reasonable basis.

[T.D. 8617, 60 FR 45665, Sept. 1, 1995, as amended by T.D. 8790, 63 FR 
66435, Dec. 2, 1998]

[[Page 507]]



Sec.  1.6664-0  Table of contents.

    This section lists the captions in Sec. Sec.  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.
    (i) For returns due after September 1, 1995.
    (ii) For returns filed after December 31, 2002.

                      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) Reliance on the invalidity of a regulation.
    (2) Advice defined.
    (3) Cross-reference.
    (d) Underpayments attributable to reportable transactions.
    (e) Pass-through items.
    (f) 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.
    (g) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. [Reserved]
    (h) Valuation misstatements of charitable deduction property.
    (1) In general.
    (2) Definitions.
    (i) Charitable deduction property.
    (ii) Qualified appraisal.
    (iii) Qualified appraiser.
    (3) Special rules.

  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; T.D. 8790, 63 FR 66435, Dec. 2, 1998; T.D. 9109, 
68 FR 75128, Dec. 30, 2003]



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 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. (i) For returns due after September 1, 1995. Section 1.6664-4 
applies to returns the due

[[Page 508]]

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).
    (ii) For returns filed after December 31, 2002. Sections 1.6664-4(c) 
(relating to relying on opinion or advice) and (d) (relating to 
underpayments attributable to reportable transactions) apply to returns 
filed after December 31, 2002, with respect to transactions entered into 
on or after January 1, 2003. Except as provided in paragraph (b)(2)(i) 
of this section, Sec.  1.6664-4 (as contained in 26 CFR part 1 revised 
April 1, 2003) applies to returns filed with respect to transactions 
entered into before January 1, 2003.

[T.D. 8381, 56 FR 67506, Dec. 31, 1991, as amended by T.D. 8617, 60 FR 
45666, Sept. 1, 1995; T.D. 9109, 68 FR 75128, Dec. 30, 2003]



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 509]]

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 510]]

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           None  ..........
 assessment)....................................
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          1,500  ..........
 assessment)....................................
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           None  ..........
 assessment)....................................
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 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

[[Page 511]]

(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                ..........      40,000
 understatement penalty imposed)................
Adjustment 3 (Civil fraud penalty        ..........      45,000
 imposed).......................................
                                                 -------------
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      $9,356
       imposed..............................................
 

    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         ..........     $13,948
       percent penalty is imposed...............
 

    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 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

[[Page 512]]

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 (h) 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 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.

[[Page 513]]

    (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. For example, the taxpayer's education, 
sophistication and business experience will be relevant in determining 
whether the taxpayer's reliance on tax advice was reasonable and made in 
good faith. In no event will a taxpayer be considered to have reasonably 
relied in good faith on advice (including an opinion) unless the 
requirements of this paragraph (c)(1) are satisfied. The fact that these 
requirements are satisfied, however, will not necessarily establish that 
the taxpayer reasonably relied on the advice (including the opinion of a 
tax advisor) in good faith. For example, reliance may not be reasonable 
or in good faith if the taxpayer knew, or reasonably 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 reasonably should know, to be relevant 
to the proper tax treatment of an item.

[[Page 514]]

    (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.
    (iii) Reliance on the invalidity of a regulation. A taxpayer may not 
rely on an opinion or advice that a regulation is invalid to establish 
that the taxpayer acted with reasonable cause and good faith unless the 
taxpayer adequately disclosed, in accordance with Sec.  1.6662-3(c)(2), 
the position that the regulation in question is invalid.
    (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., 
Sec. Sec.  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) Underpayments attributable to reportable transactions. If any 
portion of an underpayment is attributable to a reportable transaction, 
as defined in Sec.  1.6011-4(b) (or Sec.  1.6011-4T(b), as applicable), 
then failure by the taxpayer to disclose the transaction in accordance 
with Sec.  1.6011-4 (or Sec.  1.6011-4T, as applicable) is a strong 
indication that the taxpayer did not act in good faith with respect to 
the portion of the underpayment attributable to the reportable 
transaction.
    (e) 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.
    (f) 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 (f)(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 (f)(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 (f)(2)(i)(A) of this section and 
the belief requirement of paragraph (f)(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

[[Page 515]]

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 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 (f)(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 (f)(2) of 
this section are satisfied.
    (g) Tranactions between persons described in section 482 and net 
section 482 transfer price adjustments. [Reserved]
    (h) 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 (h)(2) of this section) only if--
    (i) The claimed value of the property was based on a qualified 
appraisal (as defined in paragraph (h)(2) of this section) by a 
qualified appraiser (as defined in paragraph (h)(2) 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.
    (2) Definitions. For purposes of this paragraph (h):
    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.
    Qualified appraisal means a qualified appraisal as defined in Sec.  
1.170A-13(c)(3).
    Qualified appraiser means a qualified appraiser as defined in Sec.  
1.170A-13(c)(5).
    (3) Special rules. The rules of this paragraph (h) apply regardless 
of whether Sec.  1.170A-13 permits a taxpayer

[[Page 516]]

to claim a charitable contribution deduction for the property without 
obtaining a qualified appraisal. The rules of this paragraph (h) apply 
in addition to the generally applicable rules concerning reasonable 
cause and good faith.

[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; T.D. 8790, 63 
FR 66435, Dec. 2, 1998; T.D. 9109, 68 FR 75128, Dec. 30, 2003]



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 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 Sec. Sec.  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]

[[Page 517]]



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 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

[[Page 518]]

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.
    (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

[[Page 519]]

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.
    (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.

[[Page 520]]

    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 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.

[[Page 521]]

    (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 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

[[Page 522]]

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 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--

[[Page 523]]

    (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,


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:


[[Page 524]]


    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.
    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

[[Page 525]]

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 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

[[Page 526]]

    (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) 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:

[[Page 527]]

    (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) An individual who is an income tax 
return preparer with respect 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 shall sign the return or claim for refund after it 
is completed and before it is presented to the taxpayer (or nontaxable 
entity) for signature. If the preparer is unavailable for signature, 
another preparer shall review the entire preparation of the return or 
claim for refund, and then shall sign the return or claim for refund. 
The preparer shall sign the return in the manner prescribed by the 
Commissioner in forms, instructions, or other appropriate guidance.
    (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 (b).
    (3) The application of this paragraph (b) 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 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 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 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

[[Page 528]]

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 C reviews the 
information obtained by A relative to the taxpayer, and C reviews the 
preparation of each return prepared by A. C may not sign the returns 
prepared by B because B is available.

    (4) 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. If the preparer asserts 
reasonable cause for failure to sign, the Internal Revenue Service will 
require a written statement in substantiation of the preparer's claim of 
reasonable cause. 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) of this chapter on account of 
having given advice on specific issues of law; or
    (ii) Section 301.7701-15(b)(3) of this chapter on account of having 
prepared the return solely because of having prepared another return 
which affects amounts reported on the return.
    (5) Effective date. This paragraph (b) applies to income tax returns 
and claims for refund presented to a taxpayer for signature after 
December 31, 2002.
    (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.
    (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

[[Page 529]]

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.
    (g) Effective date. This section applies to income tax returns and 
claims for refund presented to a taxpayer for signature after December 
31, 1998, and for returns or claims for refund retained on or before 
that date.

[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; T.D. 8803, 63 FR 72182, Dec. 31, 1998; T.D. 
8893, 65 FR 44437, July 18, 2000; T.D. 9053, 68 FR 20069, Apr. 24, 2003; 
T.D. 9119, 69 FR 15249, Mar. 25, 2004]



Sec.  1.6695-2  Preparer due diligence requirements for determining 
earned income credit eligibility.

    (a) Penalty for failure to meet due diligence requirements. A person 
who is an income tax return preparer (preparer) of an income tax return 
or claim for refund under subtitle A of the Internal Revenue Code with 
respect to determining the eligibility for, or the amount of, the earned 
income credit (EIC) under section 32 and who fails to satisfy the due 
diligence requirements of paragraph (b) of this section will be subject 
to a penalty of $100 for each such failure. However, no penalty will be 
imposed under section 6695(g) on a person who is an income tax return 
preparer solely by reason of--
    (1) Section 301.7701-15(a)(2) and (b) of this chapter, on account of 
having given advice on specific issues of law; or
    (2) Section 301.7701-15(b)(3) of this chapter, on account of having 
prepared the return solely because of having prepared another return 
that affects amounts reported on the return.
    (b) Due diligence requirements. A preparer must satisfy the 
following due diligence requirements:
    (1) Completion of eligibility checklist. (i) The preparer must 
either--
    (A) Complete Form 8867, ``Paid Preparer's Earned Income Credit 
Checklist,'' or such other form and such

[[Page 530]]

other information as may be prescribed by the Internal Revenue Service 
(IRS) (Eligibility Checklist); or
    (B) Otherwise record in the preparer's paper or electronic files the 
information necessary to complete the Eligibility Checklist (Alternative 
Eligibility Record). The Alternative Eligibility Record may consist of 
one or more documents containing the required information.
    (ii) The preparer's completion of the Eligibility Checklist or 
Alternative Eligibility Record must be based on information provided by 
the taxpayer to the preparer or otherwise reasonably obtained by the 
preparer.
    (2) Computation of credit. (i) The preparer must either--
    (A) Complete the Earned Income Credit Worksheet in the Form 1040 
instructions or such other form and such other information as may be 
prescribed by the IRS (Computation Worksheet); or
    (B) Otherwise record in the preparer's paper or electronic files the 
preparer's EIC computation, including the method and information used to 
make the computation (Alternative Computation Record). The Alternative 
Computation Record may consist of one or more documents containing the 
required information.
    (ii) The preparer's completion of the Computation Worksheet or 
Alternative Computation Record must be based on information provided by 
the taxpayer to the preparer or otherwise reasonably obtained by the 
preparer.
    (3) Knowledge. The preparer must not know, or have reason to know, 
that any information used by the preparer in determining the taxpayer's 
eligibility for, or the amount of, the EIC is incorrect. The preparer 
may not ignore the implications of information furnished to, or known 
by, the preparer, and must make reasonable inquiries if the information 
furnished to, or known by, the preparer appears to be incorrect, 
inconsistent, or incomplete.
    (4) Retention of records. (i) The preparer must retain--
    (A) A copy of the completed Eligibility Checklist or Alternative 
Eligibility Record;
    (B) A copy of the Computation Worksheet or Alternative Computation 
Record; and
    (C) A record of how and when the information used to complete the 
Eligibility Checklist or Alternative Eligibility Record and the 
Computation Worksheet or Alternative Computation Record was obtained by 
the preparer, including the identity of any person furnishing the 
information.
    (ii) The items in paragraph (b)(4)(i) of this section must be 
retained for three years after the June 30th following the date the 
return or claim for refund was presented to the taxpayer for signature, 
and may be retained on paper or electronically in the manner prescribed 
in applicable regulations, revenue rulings, revenue procedures, or other 
appropriate guidance (see Sec.  601.601(d)(2) of this chapter).
    (c) Exception to penalty. The section 6695(g) penalty will not be 
applied with respect to a particular income tax return or claim for 
refund if the preparer can demonstrate to the satisfaction of the IRS 
that, considering all the facts and circumstances, the preparer's normal 
office procedures are reasonably designed and routinely followed to 
ensure compliance with the due diligence requirements of paragraph (b) 
of this section, and the failure to meet the due diligence requirements 
of paragraph (b) of this section with respect to the particular return 
or claim for refund was isolated and inadvertent.
    (d) Effective date. This section applies to income tax returns and 
claims for refund due on or after October 17, 2000.

[T.D. 8905, 65 FR 61269, Oct. 17, 2000]



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 531]]

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 532]]

    (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 533]]

    (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 534]]

    (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 Sec. Sec.  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 535]]

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

[[Page 536]]

any of its possessions of an alien hereinafter described in this 
subdivision, 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.

[[Page 537]]

    (2) Alien having no taxable income and resident alien whose taxable 
period is not terminated. A statement on Form 2063 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

[[Page 538]]

    (c) Any other income tax returns which have not been filed as 
required.

Upon compliance with the foregoing requirements of this subdivision, and 
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

[[Page 539]]

405(a). This procedure is available only to the employer, the plan 
administrator as defined in section 414(g), an 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.

[[Page 540]]

    (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 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.

[[Page 541]]

    (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 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.
    (e) Effective date. The provisions of this section apply to 
applications referred to in paragraph (a) of this section made on or 
after June 21, 1976.

[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; T.D. 9006, 67 FR 47456, 
July 19, 2002]



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--
    (1) Contain the information and be given within the time period 
prescribed in Sec.  601.201(o)(3) of this chapter; and
    (2) Be given in a manner prescribed in paragraph (c) of this 
section.
    (c) Method of giving notice. (1) In the case of a present employee, 
former employee, or beneficiary who is an interested party, the notice 
may be provided by any method reasonably calculated to ensure that each 
interested party is notified of the application for a determination. 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 to 
the collective-bargaining representative of such interested party by any 
method that satisfies this paragraph. Whether the notice is provided in 
a manner that satisfies the requirements of this paragraph is determined 
on the basis of all the relevant facts and circumstances. Because the 
facts and circumstances differ depending on the interested party, it may 
be necessary to use more than one method of delivery in order to ensure 
timely and adequate notice to all interested parties.
    (2) If the notice to interested parties is delivered using an 
electronic medium under a system that satisfies the requirements of 
Sec.  1.402(f)-1 Q&A-5, the notice is deemed to be provided in a manner 
that satisfies the requirements of paragraph (c)(1).
    (d) Examples. The principles of this section are illustrated by the 
following examples:
    Example 1. (i) Employer A is amending Plan C and applying for a 
determination letter. Plan C is not maintained pursuant to one or more 
collective bargaining agreements and is not being terminated. As part of 
the determination letter application process, Employer A provides the 
notice required under this section to interested parties. For present 
employees, Employer A provides the notice by posting the notice 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 employment and employee benefit matters.

[[Page 542]]

    (ii) In this Example 1, Employer A satisfies the notice to 
interested parties requirement described in this section.
    Example 2. (i) Employer B is amending Plan D and applying for a 
determination letter. As part of the determination letter application 
process, Employer B provides the notice required under this section to 
interested parties.
    (ii) Employer B has multiple worksites. Employer B's employees 
located at worksites 1 through 4 have reasonable access to computers at 
their workplace. However, Employer B's employees located at worksite 5 
do not have access to computers.
    (iii) For present employees with reasonable access to computers 
(worksites 1 through 4), Employer B provides the notice by posting the 
notice on Employer B's web site (Internet or intranet). Employees at 
worksites 1 through 4 customarily receive employer notification with 
regard to employment and employee benefit matters from the Employer B's 
web site. For present employees without access to computers (worksite 
5), Employer B provides the notice by posting the notice at worksite 5 
in a location that is customarily used for employer notices to employees 
with regard to employment and employee benefit matters.
    (iv) Employer B also sends the notice by e-mail to each collective-
bargaining representative of interested parties who are present 
employees of Employer B covered by a collective-bargaining agreement 
between employee representatives and Employer B, using the e-mail 
address previously provided to Employer B by such collective-bargaining 
representative.
    (v) In this Example 2, Employer B satisfies the notice to interested 
parties requirement described in this section.
    Example 3. (i) Employer C is terminating Plan E and applying for a 
determination letter as to whether the plan termination affects the 
continuing qualification of Plan E. As part of the determination letter 
application process, Employer C provides the notice required under this 
section to interested parties.
    (ii) All of Employer C's employees have reasonable access to 
computers. Each employee has an e-mail address where he or she can 
receive messages from Employer C. Employees of Employer C customarily 
receive employer notices regarding employment and employee benefit 
matters by e-mail.
    (iii) For present employees, Employer C provides the notice by 
sending the notice by e-mail.
    (iv) Employer C also sends the notice by e-mail to each collective-
bargaining representative of interested parties who are present 
employees of Employer C covered by a collective-bargaining agreement 
between employee representatives and Employer C, using the e-mail 
address previously provided to Employer C by such collective-bargaining 
representative.
    (v) In addition, Employer C sends the notice by e-mail to each 
interested party who is a former employee or beneficiary, using the e-
mail address previously provided to Employer C by such interested party. 
For any former employee or beneficiary who did not provide an e-mail 
address, Employer C sends the notice by regular mail to the last known 
address of such former employee or beneficiary.
    (vi) In this Example 3, Employer C satisfies the notice to 
interested parties requirement described in this section.

    (e) Effective date. (1) The provisions of this section shall apply 
to applications referred to in Sec.  1.7476-1(a) made on or after 
January 1, 2003.
    (2) For applications made on or after June 21, 1976 and before 
January 1, 2003, Sec.  1.7476-2 (as it appeared in the April 1, 2002 
edition of 26 CFR part 1) applies.

[T.D. 7421, 41 FR 20876, May 21, 1976, as amended at T.D. 9006, 67 FR 
47456, July 19, 2002]



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.

[[Page 543]]

    (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) 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.

[[Page 544]]

    (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.
    (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

[[Page 545]]

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 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

[[Page 546]]

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 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

[[Page 547]]

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 (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.

[[Page 548]]

    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 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      $60,000
 payments multiplied by deferral ratio.
                                           x \3/12\
                                        ------------
                                         ..........    $15,000
Over aggregate amount of applicable      ..........    $15,000         0
 payments deductible during deferral
 period of base year...................
                                                               ---------
  Net base year income.................  ..........  .........   $35,000
                                                               =========
------------------------------------------------------------------------

    Example (3). The facts are the same as in example (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

[[Page 549]]

 
                                             x 3/12
                                        ------------
                                         ..........  .........   $35,000
Plus the excess, if any, of applicable      $60,000
 payments multiplied by deferral ratio.
                                             x 3/12
                                        ------------
                                         ..........    $15,000  ........
Over aggregate amount of applicable      ..........    $10,000
 payments deductible during deferral
 period of base year...................
                                         ..........  .........    $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 $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              $120,000
 deferral ratio...............
                                       x 11/12
                               ----------------
                                ..............  ...........     $110,000
Plus the excess, if any, of            $90,000
 applicable payments
 multiplied by the deferral
 ratio........................
                                        x11/12
                               ----------------
                                ..............      $82,500  ...........
Over aggregate amount of        ..............      $55,000      $27,500
 applicable payments
 deductible during deferral
 period of base year..........
                                                            ------------
  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       $390,000
 by deferral ratio............................
                                                     x 3/12
                                               -------------

[[Page 550]]

 
                                                ...........      $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, 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 ($300,000x6/12). 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

[[Page 551]]

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 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,

[[Page 552]]

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.
    (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 Sec. Sec.  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, 1999, 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 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, 1999, the mortality component table 
(Table 90CM) is contained in Sec.  20.2031-7(d)(7) of this chapter. See 
Sec.  20.2031-7A of this chapter for

[[Page 553]]

mortality component tables applicable to transactions for which the 
valuation date falls before May 1, 1999.
    (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 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 Sec. Sec.  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 for valuation dates after April 30, 1999. 
Section 1.642(c)-6(e)(6) 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. See Sec.  1.642(c)-6A for actuarial 
factors for one life applicable to valuation dates before May 1, 1999. 
Section 1.664-4(e)(6) contains Table F (payout factors) and Table D 
(actuarial factors used in determining the present value of a remainder 
interest postponed for a term of years). Section 1.664-4(e)(7) contains 
Table U(1) (unitrust single life remainder factors). These tables are 
used in determining the present value of a remainder interest in a 
charitable remainder unitrust as defined in Sec.  1.664-3. See Sec.  
1.664-4A for unitrust single life remainder factors applicable to 
valuation dates before May 1, 1999. Section 20.2031-7(d)(6) of this 
chapter contains 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), and Table J (term certain annuity 
beginning-of-interval adjustment factors). Section 20.2031-7(d)(7) of 
this chapter contains Table S (single life remainder factors), and Table 
90CM (mortality components). These tables are used in determining the 
present value of annuities, life estates, remainders, and reversions. 
See Sec.  20.2031-7A of this chapter for single life remainder factors 
and mortality components applicable to valuation dates before May 1, 
1999.
    (2) Internal Revenue Service publications containing tables with 
interest rates between 2.2 and 22 percent for valuation dates after 
April 30, 1999. The following documents are available for purchase from 
the Superintendent of Documents, United States Government Printing 
Office, Washington, DC 20402:
    (i) Internal Revenue Service Publication 1457, ``Actuarial Values, 
Book Aleph,'' (7-1999). 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 and a 
pooled income fund as defined in Sec.  1.642(c)-5. See Sec.  20.2031-7A 
of this chapter for publications containing tables for valuation dates 
before May 1, 1999.
    (ii) Internal Revenue Service Publication 1458, ``Actuarial Values, 
Book Beth,'' (7-1999). 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. See Sec.  1.664-4A for publications containing 
tables for valuation dates before May 1, 1999.
    (iii) Internal Revenue Service Publication 1459, ``Actuarial Values, 
Book Gimel,'' (7-1999). This publication includes tables for computing 
depreciation adjustment factors. See Sec.  1.170A-12.

[[Page 554]]

    (d) Effective date. This section applies after April 30, 1989.

[T.D. 8540, 59 FR 30149, June 10, 1994, as amended by T.D. 8819, 64 FR 
23210, 23229, Apr. 30, 1999; T.D. 8886, 65 FR 36928, 36943, June 12, 
2000]



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 
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

[[Page 555]]

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--
    (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, Sec. Sec.  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 Sec. Sec.  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

[[Page 556]]

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), 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

[[Page 557]]

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 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

[[Page 558]]

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 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)-0  Table of contents.

    This section lists captions that appear in Sec. Sec.  1.7701(l)-1 
and 1.7701(l)-3:

            Sec.  1.7701(l)-1 Conduit financing arrangements.

  Sec.  1.7701(l)-3 Recharacterizing financing arrangements involving 
                             fast-pay stock.

    (a) Purpose and scope.
    (b) Definitions.
    (1) Fast-pay arrangement.
    (2) Fast-pay stock.
    (i) Defined.
    (ii) Determination.
    (3) Benefited stock.
    (c) Recharacterization of certain fast-pay arrangements.
    (1) Scope.
    (2) Recharacterization.
    (i) Relationship between benefited shareholders and fast-pay 
shareholders.
    (ii) Relationship between benefited shareholders and corporation.

[[Page 559]]

    (iii) Relationship between fast-pay shareholders and corporation.
    (3) Other rules.
    (i) Character of the financing instruments.
    (ii) Multiple types of benefited stock.
    (iii) Transactions affecting benefited stock.
    (A) Sale of benefited stock.
    (B) Transactions other than sales.
    (iv) Adjustment to basis for amounts accrued or paid in taxable 
years ending before February 27, 1997.
    (d) Prohibition against affirmative use of recharacterization by 
taxpayers.
    (e) Examples.
    (f) Reporting requirement.
    (1) Filing requirements.
    (i) In general.
    (ii) Controlled foreign corporation.
    (iii) Foreign personal holding company.
    (iv) Passive foreign investment company.
    (2) Statement.
    (g) Effective date.
    (1) In general.
    (2) Election to limit taxable income attributable to a 
recharacterized fast-pay arrangement for periods before April 1, 2000.
    (i) Limit.
    (ii) Adjustment and statement.
    (iii) Examples.
    (3) Rule to comply with this section.
    (4) Reporting requirements.

[T.D. 8853, 65 FR 1313, Jan. 10, 2000]



Sec.  1.7701(l)-1  Conduit financing arrangements.

    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.

[T.D. 8611, 60 FR 41015, Aug. 11, 1995, as amended by T.D. 8735, 62 FR 
53502, Oct. 14, 1997]



Sec.  1.7701(l)-3  Recharacterizing financing arrangements involving 
fast-pay stock.

    (a) Purpose and scope. This section is intended to prevent the 
avoidance of tax by persons participating in fast-pay arrangements (as 
defined in paragraph (b)(1) of this section) and should be interpreted 
in a manner consistent with this purpose. This section applies to all 
fast-pay arrangements. Paragraph (c) of this section recharacterizes 
certain fast-pay arrangements to ensure the participants are taxed in a 
manner reflecting the economic substance of the arrangements. Paragraph 
(f) of this section imposes reporting requirements on certain 
participants.
    (b) Definitions--(1) Fast-pay arrangement. A fast-pay arrangement is 
any arrangement in which a corporation has fast-pay stock outstanding 
for any part of its taxable year.
    (2) Fast-pay stock--(i) Defined. Stock is fast-pay stock if it is 
structured so that dividends (as defined in section 316) paid by the 
corporation with respect to the stock are economically (in whole or in 
part) a return of the holder's investment (as opposed to only a return 
on the holder's investment). Unless clearly demonstrated otherwise, 
stock is presumed to be fast-pay stock if--
    (A) It is structured to have a dividend rate that is reasonably 
expected to decline (as opposed to a dividend rate that is reasonably 
expected to fluctuate or remain constant); or
    (B) It is issued for an amount that exceeds (by more than a de 
minimis amount, as determined under the principles of Sec.  1.1273-1(d)) 
the amount at which the holder can be compelled to dispose of the stock.
    (ii) Determination. The determination of whether stock is fast-pay 
stock is based on all the facts and circumstances, including any related 
agreements such as options or forward contracts. A related agreement 
includes any direct or indirect agreement or understanding, oral or 
written, between the holder of the stock and the issuing corporation, or 
between the holder of the stock and one or more other shareholders in 
the corporation. To determine if it is fast-pay stock, stock is examined 
when issued, and, for stock that is not fast-pay stock when issued, when 
there is a significant modification in the terms of the stock or the 
related agreements or a significant change in the relevant facts and 
circumstances. Stock is not fast-pay stock solely because a redemption 
is treated as a dividend as a result of section 302(d) unless there is a 
principal purpose of achieving the same economic and tax effect as a 
fast-pay arrangement.

[[Page 560]]

    (3) Benefited stock. With respect to any fast-pay stock, all other 
stock in the corporation (including other fast-pay stock having any 
significantly different characteristics) is benefited stock.
    (c) Recharacterization of certain fast-pay arrangements--(1) Scope. 
This paragraph (c) applies to any fast-pay arrangement--
    (i) In which the corporation that has outstanding fast-pay stock is 
a regulated investment company (RIC) (as defined in section 851) or a 
real estate investment trust (REIT) (as defined in section 856); or
    (ii) If the Commissioner determines that a principal purpose for the 
structure of the fast-pay arrangement is the avoidance of any tax 
imposed by the Internal Revenue Code. Application of this paragraph 
(c)(1)(ii) is at the Commissioner's discretion, and a determination 
under this paragraph (c)(1)(ii) applies to all parties to the fast-pay 
arrangement, including transferees.
    (2) Recharacterization. A fast-pay arrangement described in 
paragraph (c)(1) of this section is recharacterized as an arrangement 
directly between the benefited shareholders and the fast-pay 
shareholders. The inception and resulting relationships of the 
recharacterized arrangement are deemed to be as follows:
    (i) Relationship between benefited shareholders and fast-pay 
shareholders. The benefited shareholders issue financial instruments 
(the financing instruments) directly to the fast-pay shareholders in 
exchange for cash equal to the fair market value of the fast-pay stock 
at the time of issuance (taking into account any related agreements). 
The financing instruments have the same terms (other than issuer) as the 
fast-pay stock. Thus, for example, the timing and amount of the payments 
made with respect to the financing instruments always match the timing 
and amount of the distributions made with respect to the fast-pay stock.
    (ii) Relationship between benefited shareholders and corporation. 
The benefited shareholders contribute to the corporation the cash they 
receive for issuing the financing instruments. Distributions made with 
respect to the fast-pay stock are distributions made by the corporation 
with respect to the benefited shareholders' benefited stock.
    (iii) Relationship between fast-pay shareholders and corporation. 
For purposes of determining the relationship between the fast-pay 
shareholders and the corporation, the fast-pay stock is ignored. The 
corporation is the paying agent of the benefited shareholders with 
respect to the financing instruments.
    (3) Other rules--(i) Character of the financing instruments. The 
character of a financing instrument (for example, stock or debt) is 
determined under general tax principles and depends on all the facts and 
circumstances.
    (ii) Multiple types of benefited stock. If any benefited stock has 
any significantly different characteristics from any other benefited 
stock, the recharacterization rules of this paragraph (c) apply among 
the different types of benefited stock as appropriate to match the 
economic substance of the fast-pay arrangement.
    (iii) Transactions affecting benefited stock--(A) Sale of benefited 
stock. If one person sells benefited stock to another--
    (1) In addition to any consideration actually paid and received for 
the benefited stock, the buyer is deemed to pay and the seller is deemed 
to receive the amount necessary to terminate the seller's position in 
the financing instruments at fair market value; and
    (2) The buyer is deemed to issue financing instruments to the fast-
pay shareholders in exchange for the amount necessary to terminate the 
seller's position in the financing instruments.
    (B) Transactions other than sales. Except for transactions subject 
to paragraph (c)(3)(iii)(A) of this section, in the case of any 
transaction affecting benefited stock, the parties to the transaction 
must make appropriate adjustments to properly take into account the 
fast-pay arrangement as characterized under paragraph (c)(2) of this 
section.
    (iv) Adjustment to basis for amounts accrued or paid in taxable 
years ending before February 27, 1997. In the case of a fast-pay 
arrangement involving amounts accrued or paid in taxable

[[Page 561]]

years ending before February 27, 1997, and recharacterized under this 
paragraph (c), a benefited shareholder must decrease its basis in any 
benefited stock (as determined under paragraph (c)(2)(ii) of this 
section) by the amount (if any) that--
    (A) Its income attributable to the benefited stock (reduced by 
deductions attributable to the financing instruments) for taxable years 
ending before February 27, 1997, computed by recharacterizing the fast-
pay arrangement under this paragraph (c) and by treating the financing 
instruments as debt; exceeds
    (B) Its income attributable to such stock for taxable years ending 
before February 27, 1997, computed without applying the rules of this 
paragraph (c).
    (d) Prohibition against affirmative use of recharacterization by 
taxpayers. A taxpayer may not use the rules of paragraph (c) of this 
section if a principal purpose for using such rules is the avoidance of 
any tax imposed by the Internal Revenue Code. Thus, with respect to such 
taxpayer, the Commissioner may depart from the rules of this section and 
recharacterize (for all purposes of the Internal Revenue Code) the fast-
pay arrangement in accordance with its form or its economic substance. 
For example, if a foreign person acquires fast-pay stock in a REIT and a 
principal purpose for acquiring such stock is to reduce United States 
withholding taxes by applying the rules of paragraph (c) of this 
section, the Commissioner may, for purposes of determining the foreign 
person's United States tax consequences (including withholding tax), 
depart from the rules of paragraph (c) of this section and treat the 
foreign person as holding fast-pay stock in the REIT.
    (e) Examples. The following examples illustrate the rules of 
paragraph (c) of this section:

    Example 1. Decline in dividend rate--(i) Facts. Corporation X issues 
100 shares of A Stock and 100 shares of B Stock for $1,000 per share. By 
its terms, a share of B Stock is reasonably expected to pay a $110 
dividend in years 1 through 10 and a $30 dividend each year thereafter. 
If X liquidates, the holder of a share of B Stock is entitled to a 
preference equal to the share's issue price. Otherwise, the B Stock 
cannot be redeemed at either X's or the shareholder's option.
    (ii) Analysis. When issued, the B Stock has a dividend rate that is 
reasonably expected to decline from an annual rate of 11 percent of its 
issue price to an annual rate of 3 percent of its issue price. Since the 
B Stock is structured to have a declining dividend rate, the B Stock is 
fast-pay stock, and the A Stock is benefited stock.
    Example 2. Issued at a premium--(i) Facts. The facts are the same as 
in Example 1 of this paragraph (e) except that a share of B Stock is 
reasonably expected to pay an annual $110 dividend as long as it is 
outstanding, and Corporation X has the right to redeem the B Stock for 
$400 a share at the end of year 10.
    (ii) Analysis. The B Stock is structured so that the issue price of 
the B Stock ($1,000) exceeds (by more than a de minimis amount) the 
price at which the holder can be compelled to dispose of the stock 
($400). Thus, the B Stock is fast-pay stock, and the A Stock is 
benefited stock.
    Example 3. Planned section 302(d) redemptions--(i) Facts. 
Corporation L, a subchapter C corporation, issues 220 shares of common 
stock for $1,000 per share. No other stock is authorized, but L can 
issue warrants entitling the holder to acquire L common stock for $3,000 
per share until such time as L adopts a plan of liquidation. L can adopt 
a plan of liquidation if approved by 90 percent of its shareholders. 
Half of L's stock is purchased by Corporation M, and half by 
Organization N, which is tax exempt. At the time of purchase, M and N 
agree that for a period of ten years L will annually redeem (and N will 
tender) ten shares of stock in exchange for $12,100 and ten warrants. It 
is anticipated that, under sections 302 and 301, the annual payment to N 
will be a distribution of property that is a dividend.
    (ii) Analysis. Considering all the facts and circumstances, 
including the agreement between M and N, L's redemption of N's stock is 
undertaken with a principal purpose of achieving the same economic and 
tax effect as a fast-pay arrangement. Thus, N's stock is fast-pay stock, 
M's stock is benefited stock, and the parties have entered into a fast-
pay arrangement. Because L is neither a RIC nor a REIT, whether this 
fast-pay arrangement is recharacterized under paragraph (c) of this 
section depends on whether the Commissioner determines, under paragraph 
(c)(1)(ii) of this section, that a principal purpose for the structure 
of the fast-pay arrangement is the avoidance of any tax imposed by the 
Internal Revenue Code.

    Example 4. Recharacterization illustrated--(i) Facts. On formation, 
REIT Y issues 100 shares of C Stock and 100 shares of D Stock for $1,000 
per share. By its terms, a share of D Stock is reasonably expected to 
pay a $110

[[Page 562]]

dividend in years 1 through 10 and a $30 dividend each year thereafter. 
In years 1 through 10, persons holding a majority of the D Stock must 
consent before Y may take any action that would result in Y liquidating 
or dissolving, merging or consolidating, losing its REIT status, or 
selling substantially all of its assets. Thereafter, Y may take these 
actions without consent so long as the D Stock shareholders receive $400 
in exchange for their D Stock.
    (ii) Analysis. When issued, the D Stock has a dividend rate that is 
reasonably expected to decline from an annual rate of 11 percent of its 
issue price to an annual rate of 3 percent of its issue price. In 
addition, the $1,000 issue price of a share of D Stock exceeds the price 
at which the shareholder can be compelled to dispose of the stock 
($400). Thus, the D Stock is fast-pay stock, and the C Stock is 
benefited stock. Because Y is a REIT, the fast-pay arrangement is 
recharacterized under paragraph (c) of this section.
    (iii) Recharacterization. The fast-pay arrangement is 
recharacterized as follows:
    (A) Under paragraph (c)(2)(i) of this section, the C Stock 
shareholders are treated as issuing financing instruments to the D Stock 
shareholders in exchange for $100,000 ($1,000, the fair market value of 
each share of D Stock, multiplied by 100, the number of shares).
    (B) Under paragraph (c)(2)(ii) of this section, the C Stock 
shareholders are treated as contributing $200,000 to Y (the $100,000 
received for the financing instruments, plus the $100,000 actually paid 
for the C Stock) in exchange for the C Stock.
    (C) Under paragraph (c)(2)(ii) of this section, each distribution 
with respect to the D Stock is treated as a distribution with respect to 
the C Stock.
    (D) Under paragraph (c)(2)(iii) of this section, the C Stock 
shareholders are treated as making payments with respect to the 
financing instruments, and Y is treated as the paying agent of the 
financing instruments for the C Stock shareholders.

    Example 5. Transfer of benefited stock illustrated--(i) Facts. The 
facts are the same as in Example 4 of this paragraph (e). Near the end 
of year 5, a person holding one share of C Stock sells it for $1,300. 
The buyer is unrelated to REIT Y or to any of the D Stock shareholders. 
At the time of the sale, the amount needed to terminate the seller's 
position in the financing instruments at fair market value is $747.
    (ii) Benefited shareholder's treatment on sale. Under paragraph 
(c)(3)(iii)(A) of this section, the seller's amount realized is $2,047 
($1,300, the amount actually received, plus $747, the amount necessary 
to terminate the seller's position in the financing instruments at fair 
market value). The seller's gain on the sale of the common stock is $47 
($2,047, the amount realized, minus $2,000, the seller's basis in the 
common stock). The seller has no income or deduction with respect to 
terminating its position in the financing instruments.
    (iii) Buyer's treatment on purchase. Under paragraph (c)(3)(iii)(A) 
of this section, the buyer's basis in the share of D Stock is $2,047 
($1,300, the amount actually paid, plus $747, the amount needed to 
terminate the seller's position in the financing instruments at fair 
market value). Under paragraph (c)(3)(iii)(B) of this section, 
simultaneous with the sale, the buyer is treated as issuing financing 
instruments to the fast-pay shareholders in exchange for $747, the 
amount necessary to terminate the seller's position in the financing 
instruments at fair market value.

    Example 6. Fast-pay arrangement involving amounts accrued or paid in 
a taxable year ending before February 27, 1997--(i) Facts. Y is a 
calendar year taxpayer. In June 1996, Y acquires shares of REIT T 
benefited stock for $15,000. In December 1996, Y receives dividends of 
$100. Under the recharacterization rules of paragraph (c)(2) of this 
section, Y's 1996 income attributable to the benefited stock is $1,200, 
Y's 1996 deduction attributable to the financing instruments is $500, 
and Y's basis in the benefited stock is $25,000.
    (ii) Analysis. Under paragraph (c)(3)(iv) of this section, Y's basis 
in the benefited stock is reduced by $600. This is the amount by which 
Y's 1996 income from the fast-pay arrangement as recharacterized under 
this section ($1,200 of income attributable to the benefited stock less 
$500 of deductions attributable to the financing instruments), exceeds 
Y's 1996 income from the fast-pay arrangement as not recharacterized 
under this section ($100 of income attributable to the benefited stock). 
Thus, in 1997 when the fast-pay arrangement is recharacterized, Y's 
basis in the benefited stock is $24,400.

    (f) Reporting requirement--(1) Filing requirements--(i) In general. 
A corporation that has fast-pay stock outstanding at any time during the 
taxable year must attach the statement described in paragraph (f)(2) of 
this section to its federal income tax return for such taxable year. 
This paragraph (f)(1)(i) does not apply to a corporation described in 
paragraphs (f)(1)(ii), (iii), or (iv) of this section.
    (ii) Controlled foreign corporation. In the case of a controlled 
foreign corporation (CFC), as defined in section 957, that has fast-pay 
stock outstanding at any time during its taxable year (during which time 
it was a CFC),

[[Page 563]]

each controlling United States shareholder (within the meaning of Sec.  
1.964-1(c)(5)) must attach the statement described in paragraph (f)(2) 
of this section to the shareholder's Form 5471 for the CFC's taxable 
year. The provisions of section 6038 and the regulations under section 
6038 apply to any statement required by this paragraph (f)(1)(ii).
    (iii) Foreign personal holding company. In the case of a foreign 
personal holding company (FPHC), as defined in section 552, that has 
fast-pay stock outstanding at any time during its taxable year (during 
which time it was a FPHC), each United States citizen or resident who is 
an officer, director, or 10-percent shareholder (within the meaning of 
section 6035(e)(1)) of such FPHC must attach the statement described in 
paragraph (f)(2) of this section to his or her Form 5471 for the FPHC's 
taxable year. The provisions of sections 6035 and 6679 and the 
regulations under sections 6035 and 6679 apply to any statement required 
by this paragraph (f)(1)(iii).
    (iv) Passive foreign investment company. In the case of a passive 
foreign investment company (PFIC), as defined in section 1297, that has 
fast-pay stock outstanding at any time during its taxable year (during 
which time it was a PFIC), each shareholder that has elected (under 
section 1295) to treat the PFIC as a qualified electing fund and knows 
or has reason to know that the PFIC has outstanding fast-pay stock must 
attach the statement described in paragraph (f)(2) of this section to 
the shareholder's Form 8621 for the PFIC's taxable year. Each 
shareholder owning 10 percent or more of the shares of the PFIC (by vote 
or value) is presumed to know that the PFIC has issued fast-pay stock. 
The provisions of sections 1295(a)(2) and 1298(f) and the regulations 
under those sections (including Sec.  1.1295-1T(f)(2)) apply to any 
statement required by this paragraph (f)(1)(iv).
    (2) Statement. The statement required under this paragraph (f) must 
say, ``This fast-pay stock disclosure statement is required by Sec.  
1.7701(l)-3(f) of the income tax regulations.'' The statement must also 
identify the corporation that has outstanding fast-pay stock and must 
contain the date on which the fast-pay stock was issued, the terms of 
the fast-pay stock, and (to the extent the filing person knows or has 
reason to know such information) the names and taxpayer identification 
numbers of the shareholders of any stock that is not traded on an 
established securities market (as described in Sec.  1.7704-1(b)).
    (g) Effective date--(1) In general. Except as provided in paragraph 
(g)(4) of this section (relating to reporting requirements), this 
section applies to taxable years ending after February 26, 1997. Thus, 
all amounts accrued or paid during the first taxable year ending after 
February 26, 1997, are subject to this section.
    (2) Election to limit taxable income attributable to a 
recharacterized fast-pay arrangement for periods before April 1, 2000--
(i) Limit. For periods before April 1, 2000, provided the shareholder 
recharacterizes the fast-pay arrangement consistently for all such 
periods, a shareholder may limit its taxable income attributable to a 
fast-pay arrangement recharacterized under paragraph (c) of this section 
to the taxable income that results if the fast-pay arrangement is 
recharacterized under either--
    (A) Notice 97-21, 1997-1 C.B. 407, see Sec.  601.601(d)(2) of this 
chapter; or
    (B) Paragraph (c) of this section, computed by assuming the 
financing instruments are debt.
    (ii) Adjustment and statement. A shareholder that limits its taxable 
income to the amount determined under paragraph (g)(2)(i)(A) of this 
section must include as an adjustment to taxable income the excess, if 
any, of the amount determined under paragraph (g)(2)(i)(B) of this 
section, over the amount determined under paragraph (g)(2)(i)(A) of this 
section. This adjustment to taxable income must be made in the 
shareholder's first taxable year that includes April 1, 2000. A 
shareholder to which this paragraph (g)(2)(ii) applies must include a 
statement in its books and records identifying each fast-pay arrangement 
for which an adjustment must be made and providing the amount of the 
adjustment for each such fast-pay arrangement.

[[Page 564]]

    (iii) Examples. The following examples illustrate the rules of this 
paragraph (g)(2). For purposes of these examples, assume that a 
shareholder may limit its taxable income under this paragraph (g)(2) for 
periods before January 1, 2000.

    Example 1. Fast-pay arrangement recharacterized under Notice 97-21; 
REIT holds third-party debt--(i) Facts. (A) REIT Y is formed on January 
1, 1997, at which time it issues 1,000 shares of fast-pay stock and 
1,000 shares of benefited stock for $100 per share. Y and all of its 
shareholders are U.S. persons and have calendar taxable years. All 
shareholders of Y have elected to accrue market discount based on a 
constant interest rate, to include the market discount in income as it 
accrues, and to amortize bond premium.
    (B) For years 1 through 5, the fast-pay stock has an annual dividend 
rate of $17 per share ($17,000 for all fast-pay stock); in later years, 
the fast-pay stock has an annual dividend rate of $1 per share ($1,000 
for all fast-pay stock). At the end of year 5, and thereafter, a share 
of fast-pay stock can be acquired by Y in exchange for $50 ($50,000 for 
all fast-pay stock).
    (C) On the day Y is formed, it acquires a five-year mortgage note 
(the note) issued by an unrelated third party for $200,000. The note 
provides for annual interest payments on December 31 of $18,000 (a 
coupon interest rate of 9.00 percent, compounded annually), and one 
payment of principal at the end of 5 years. The note can be prepaid, in 
whole or in part, at any time.
    (ii) Recharacterization under Notice 97-21--(A) In general. One way 
to recharacterize the fast-pay arrangement under Notice 97-21 is to 
treat the fast-pay shareholders and the benefited shareholders as if 
they jointly purchased the note from the issuer with the understanding 
that over the five-year term of the note the benefited shareholders 
would use their share of the interest to buy (on a dollar-for-dollar 
basis) the fast-pay shareholders' portion of the note. The benefited 
shareholders' and the fast-pay shareholders' yearly taxable income under 
Notice 97-21 can then be calculated after determining their initial 
portions of the note and whether those initial portions are purchased at 
a discount or premium.
    (B) Determining initial portions of the debt instrument. The fast-
pay shareholders' and the benefited shareholders' initial portions of 
the note can be determined by comparing the present values of their 
expected cash flows. As a group, the fast-pay shareholders expect to 
receive cash flows of $135,000 (five annual payments of $17,000, plus a 
final payment of $50,000). As a group, the benefited shareholders expect 
to receive cash flows of $155,000 (five annual payments of $1,000, plus 
a final payment of $150,000). Using a discount rate equal to the yield 
to maturity (as determined under Sec.  1.1272-1(b)(1)(i)) of the 
mortgage note (9.00 percent, compounded annually), the present value of 
the fast-pay shareholders' cash flows is $98,620, and the present value 
of the benefited shareholders' cash flows is $101,380. Thus, the fast-
pay shareholders initially acquire 49 percent of the note at a $1,380 
premium (that is, they paid $100,000 for $98,620 of principal in the 
note). The benefited shareholders initially acquire 51 percent of the 
note at a $1,380 discount (that is, they paid $100,000 for $101,380 of 
principal in the note). Under section 171, the fast-pay shareholders' 
premium is amortizable based on their yield in their initial portion of 
the note (8.574 percent, compounded annually). The benefited 
shareholders' discount accrues based on the yield in their initial 
portion of the note (9.353 percent, compounded annually).
    (C) Taxable income under Notice 97-21--(1) Fast-pay shareholders. 
Under Notice 97-21, the fast-pay shareholders compute their taxable 
income attributable to the fast-pay arrangement for periods before 
January 1, 2000, by subtracting the amortizable premium from the accrued 
interest on the fast-pay shareholders' portion of the note. For purposes 
of paragraph (g)(2)(i)(A) of this section, the fast-pay shareholders' 
taxable income as a group is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                   Interest       Amortizable
                        Taxable period                              income          premium      Taxable  income
----------------------------------------------------------------------------------------------------------------
1/1/97-12/31/97..............................................           $8,876           ($302)           $8,574
1/1/98-12/31/98..............................................            8,145            (293)            7,852
1/1/99-12/31/99..............................................            7,348            (281)            7,067
                                                              ------------------
    Total....................................................           24,369            (876)           23,493
----------------------------------------------------------------------------------------------------------------

    (2) Benefited shareholders. Under Notice 97-21, the benefited 
shareholders compute their taxable income attributable to the fast-pay 
arrangement for periods before January 1, 2000, by adding the accrued 
discount to the accrued interest on the benefited shareholders' portion 
of the note. For purposes of paragraph (g)(2)(i)(A) of this section, the 
benefited shareholders' taxable income as a group is as follows:

[[Page 565]]



----------------------------------------------------------------------------------------------------------------
                                                                   Interest         Accrued
                        Taxable period                              income          discount     Taxable  income
----------------------------------------------------------------------------------------------------------------
1/1/97-12/31/97..............................................           $9,124             $229           $9,353
1/1/98-12/31/98..............................................            9,855              251           10,106
1/1/99-12/31/99..............................................           10,652              274           10,926
                                                              ------------------
    Total....................................................           29,631              754           30,385
----------------------------------------------------------------------------------------------------------------

    (iii) Taxable income under the recharacterization of this section--
(A) Fast-pay shareholders. Under paragraphs (c) and (g)(2)(i)(B) of this 
section, the fast-pay shareholders' taxable income attributable to the 
fast-pay arrangement for periods before January 1, 2000, is the interest 
deemed paid on the financing instruments. For purposes of paragraph 
(g)(2)(i)(B) of this section, the fast-pay shareholders' taxable income 
as a group is as follows:

------------------------------------------------------------------------
                                                                 Taxable
                        Taxable period                           income
------------------------------------------------------------------------
1/1/97-12/31/97...............................................    $8,574
1/1/98-12/31/98...............................................     7,852
1/1/99-12/31/99...............................................     7,067
 
------------------------------------------------------------------------

    (B) Benefited shareholders. Under paragraphs (c) and (g)(2)(i)(B) of 
this section, the benefited shareholders compute their taxable income 
attributable to the fast-pay arrangement for periods before January 1, 
2000, by subtracting the interest deemed paid on the financing 
instruments from the dividends actually and deemed paid on the benefited 
stock. For purposes of paragraph (g)(2)(i)(B) of this section, the 
benefited shareholders' taxable income as a group is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                Dividends paid   Interest paid
                        Taxable period                           on benefited     on financing   Taxable  income
                                                                    stock         instruments
----------------------------------------------------------------------------------------------------------------
1/1/97-12/31/97..............................................          $18,000         ($8,574)           $9,426
1/1/98-12/31/98..............................................           18,000          (7,852)           10,148
1/1/99-12/31/99..............................................           18,000          (7,067)           10,933
                                                              ------------------
    Total....................................................           54,000         (23,493)           30,507
----------------------------------------------------------------------------------------------------------------

    (iv) Limit on taxable income under paragraph (g)(2)(i) of this 
section--(A) Fast-pay shareholders. For periods before January 1, 2000, 
the fast-pay shareholders have the same taxable income under the 
recharacterization of Notice 97-21 and paragraph (g)(2)(i)(A) of this 
section ($23,493) as they have under the recharacterization of 
paragraphs (c) and (g)(2)(i)(B) of this section ($23,493). Thus, under 
paragraph (g)(2)(i) of this section, the fast-pay shareholders may limit 
their taxable income attributable to the fast-pay arrangement for 
periods before January 1, 2000, to $23,493 (as a group).
    (B) Benefited shareholders. For periods before January 1, 2000, the 
benefited shareholders have taxable income attributable to the fast-pay 
arrangement of $30,385 under the recharacterization of Notice 97-21 and 
paragraph (g)(2)(i)(A) of this section, and taxable income of $30,507 
under the recharacterization of paragraphs (c) and (g)(2)(i)(B) of this 
section. Thus, under paragraph (g)(2)(i) of this section, the benefited 
shareholders may limit their taxable income attributable to the fast-pay 
arrangement for periods before January 1, 2000, to either $30,385 (as a 
group) or $30,507 (as a group).
    (v) Adjustment to taxable income under paragraph (g)(2)(ii) of this 
section. Under paragraph (g)(2)(ii) of this section, any benefited 
shareholder that limited its taxable income to the amount determined 
under paragraph (g)(2)(i)(A) of this section must include as an 
adjustment to taxable income the excess, if any, of the amount 
determined under paragraph (g)(2)(i)(B) of this section, over the amount 
determined under paragraph (g)(2)(i)(A) of this section. If all 
benefited shareholders limited their taxable income to the amount 
determined under paragraph (g)(2)(i)(A) of this section, then as a group 
their adjustment to income is $122 ($30,507, minus $30,385). Each 
shareholder must include its adjustment in income for the taxable year 
that includes January 1, 2000.
    Example 2. REIT holds debt issued by a benefited shareholder--(i) 
Facts. The facts are the same as in Example 1 of this paragraph (g)(2) 
except that corporation Z holds 800 shares (80 percent) of the benefited 
stock, and Z, instead of a third party, issues the mortgage note 
acquired by Y.
    (ii) Recharacterization under Notice 97-21. Because Y holds a debt 
instrument issued by

[[Page 566]]

Z, the fast-pay arrangement is recharacterized under Notice 97-21 as an 
arrangement in which Z issued one or more instruments directly to the 
fast-pay shareholders and the other benefited shareholders.
    (A) Fast-pay shareholders. Consistent with this recharacterization, 
Z is treated as issuing a debt instrument to the fast-pay shareholders 
for $100,000. The debt instrument provides for five annual payments of 
$17,000 and an additional payment of $50,000 in year five. Thus, the 
debt instrument's yield to maturity is 8.574 percent per annum, 
compounded annually.
    (B) Benefited shareholders. Z is also treated as issuing a debt 
instrument to the other benefited shareholders for $20,000 (200 shares 
multiplied by $100, or 20 percent of the $100,000 paid to Y by the 
benefited shareholders as a group). This debt instrument provides for 
five annual payments of $200 and an additional payment of $30,000 in 
year five. The debt instrument's yield to maturity is 9.304 percent per 
annum, compounded annually.
    (C) Issuer's interest expense under Notice 97-21. Under Notice 97-
21, Z's interest expense attributable to the fast-pay arrangement for 
periods before January 1, 2000, equals the interest accrued on the debt 
instrument held by the fast-pay shareholders, plus the interest accrued 
on the debt instrument held by the benefited shareholders other than Z. 
For purposes of paragraph (g)(2)(i)(A) of this section, Z's interest 
expense is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                   Accrued           Accrued
                                                                interest fast-   interest other   Total interest
                        Taxable period                               pay           benefited         expense
                                                                 shareholders     shareholders
----------------------------------------------------------------------------------------------------------------
1/1/97-12/31/97..............................................         ($8,574)         ($1,861)        ($10,435)
1/1/98-12/31/98..............................................          (7,852)          (2,015)          (9,867)
1/1/99-12/31/99..............................................          (7,067)          (2,184)          (9,251)
                                                              ------------------
    Total....................................................         (23,493)          (6,060)         (29,553)
----------------------------------------------------------------------------------------------------------------

    (iii) Recharacterization under this section. Under paragraphs (c) 
and (g)(2)(i)(B) of this section, Z's taxable income attributable to the 
fast-pay arrangement for periods before January 1, 2000, equals Z's 
share of the dividends actually and deemed paid on the benefited stock 
(80 percent of the outstanding benefited stock), reduced by the sum of 
the interest accrued on the note held by Y and the interest accrued on 
the financing instruments deemed to have been issued by Z. For purposes 
of paragraph (g)(2)(i)(B) of this section, Z's taxable income is as 
follows:

----------------------------------------------------------------------------------------------------------------
                                                                                      Accrued
                                                     Dividends        Accrued        interest         Taxable
                 Taxable period                      benefited      interest on      financing        expense
                                                       stock      debt held by Y    instruments
----------------------------------------------------------------------------------------------------------------
1/1/97-12/31/97.................................         $14,400       ($18,000)        ($6,859)       ($10,459)
1/1/98-12/31/98.................................          14,400        (18,000)         (6,281)         (9,881)
1/1/99-12/31/99.................................          14,400        (18,000)        ( 5,654)         (9,254)
                                                 -----------------
    Total.......................................          43,200        (54,000)        (18,794)        (29,594)
----------------------------------------------------------------------------------------------------------------

    (iv) Limit on taxable income under this paragraph (g)(2). For 
periods before January 1, 2000, Z has a taxable loss attributable to the 
fast-pay arrangement of $29,553 under the recharacterization of Notice 
97-21 and paragraph (g)(2)(i)(A) of this section, and a taxable loss of 
$29,594 under the recharacterization of paragraphs (c) and (g)(2)(i)(B) 
of this section. Thus, under paragraph (g)(2)(i) of this section, Z may 
report a taxable loss attributable to the fast-pay arrangement for 
periods before January 1, 2000, of either $29,553 or $29,594. Under 
paragraph (g)(2)(ii), Z has no adjustment to its taxable income for its 
taxable year that includes January 1, 2000.

    (3) Rule to comply with this section. To comply with this section 
for each taxable year in which it failed to do so, a taxpayer should 
file an amended return. For taxable years ending before Janaury 10, 
2000, a taxpayer that has complied with Notice 97-21, 1997-1 C.B. 407 
(see Sec.  601.601(d)(2) of this chapter), for all such taxable years is 
considered to have complied with this section and limited its taxable 
income under paragraph (g)(2)(i)(A) of this section.
    (4) Reporting requirements. The reporting requirements of paragraph 
(f) of this section apply to taxable years (of

[[Page 567]]

the person required to file the statement) ending after Janaury 10, 
2000.

[T.D. 8853, 65 FR 1313, Jan. 10, 2000; 65 FR 16317, Mar. 28, 2000]



Sec.  1.7702B-1  Consumer protection provisions.

    (a) In general. Under sections 7702B(b)(1)(F), 7702B(g), and 4980C, 
qualified long-term care insurance contracts and issuers of those 
contracts are required to satisfy certain provisions of the Long-Term 
Care Insurance Model Act (Model Act) and Long-Term Care Insurance Model 
Regulation (Model Regulation) promulgated by the National Association of 
Insurance Commissioners (NAIC), as adopted as of January 1993. The 
requirements for qualified long-term care insurance contracts under 
section 7702B(b)(1)(F) and (g) relate to guaranteed renewal or 
noncancellability, prohibitions on limitations and exclusions, extension 
of benefits, continuation or conversion of coverage, discontinuance and 
replacement of policies, unintentional lapse, disclosure, prohibitions 
against post-claims underwriting, minimum standards, inflation 
protection, prohibitions against pre-existing conditions exclusions and 
probationary periods, and prior hospitalization. The requirements for 
qualified long-term care insurance contracts under section 4980C relate 
to application forms and replacement coverage, reporting requirements, 
filing requirements for marketing, standards for marketing, 
appropriateness of recommended purchase, standard format outline of 
coverage, delivery of a shopper's guide, right to return, outline of 
coverage, certificates under group plans, policy summary, monthly 
reports on accelerated death benefits, and incontestability period.
    (b) Coordination with State requirements--(1) Contracts issued in a 
State that imposes more stringent requirements. If a State imposes a 
requirement that is more stringent than the analogous requirement 
imposed by section 7702B(g) or 4980C, then, under section 4980C(f), 
compliance with the more stringent requirement of State law is 
considered compliance with the parallel requirement of section 7702B(g) 
or 4980C. The principles of paragraph (b)(3) of this section apply to 
any case in which a State imposes a requirement that is more stringent 
than the analogous requirement imposed by section 7702B(g) or 4980C (as 
described in this paragraph (b)(1)), but in which there has been a 
failure to comply with that State requirement.
    (2) Contracts issued in a State that has adopted the model 
provisions. If a State imposes a requirement that is the same as the 
parallel requirement imposed by section 7702B(g) or 4980C, compliance 
with that requirement of State law is considered compliance with the 
parallel requirement of section 7702B(g) or 4980C, and failure to comply 
with that requirement of State law is considered failure to comply with 
the parallel requirement of section 7702B(g) or 4980C.
    (3) Contracts issued in a State that has not adopted the model 
provisions or more stringent requirements. If a State has not adopted 
the Model Act, the Model Regulation, or a requirement that is the same 
as or more stringent than the analogous requirement imposed by section 
7702B(g) or 4980C, then the language, caption, format, and content 
requirements imposed by sections 7702B(g) and 4980C with respect to 
contracts, applications, outlines of coverage, policy summaries, and 
notices will be considered satisfied for a contract subject to the law 
of that State if the language, caption, format, and content are 
substantially similar to those required under the parallel provision of 
the Model Act or Model Regulation. Only nonsubstantive deviations are 
permitted in order for language, caption, format, and content to be 
considered substantially similar to the requirements of the Model Act or 
Model Regulation.
    (c) Effective date. This section applies with respect to contracts 
issued after December 10, 1999.

[T.D. 8792, 63 FR 68186, Dec. 10, 1998]



Sec.  1.7702B-2  Special rules for pre-1997 long-term care insurance 
contracts.

    (a) Scope. The definitions and special provisions of this section 
apply solely for purposes of determining whether an insurance contract 
(other than a qualified long-term care insurance contract described in 
section 7702B(b) and any

[[Page 568]]

regulations issued thereunder) is treated as a qualified long-term care 
insurance contract for purposes of the Internal Revenue Code under 
section 321(f)(2) of the Health Insurance Portability and Accountability 
Act of 1996 (Public Law 104-191).
    (b) Pre-1997 long-term care insurance contracts--(1) In general. A 
pre-1997 long-term care insurance contract is treated as a qualified 
long-term care insurance contract, regardless of whether the contract 
satisfies section 7702B(b) and any regulations issued thereunder.
    (2) Pre-1997 long-term care insurance contract defined. A pre-1997 
long-term care insurance contract is any insurance contract with an 
issue date before January 1, 1997, that met the long-term care insurance 
requirements of the State in which the contract was sitused on the issue 
date. For this purpose, the long-term care insurance requirements of the 
State are the State laws (including statutory and administrative law) 
that are intended to regulate insurance coverage that constitutes 
``long-term care insurance'' (as defined in section 4 of the National 
Association of Insurance Commissioners (NAIC) Long-Term Care Insurance 
Model Act, as in effect on August 21, 1996), regardless of the 
terminology used by the State in describing the insurance coverage.
    (3) Issue date of a contract--(i) In general. Except as otherwise 
provided in this paragraph (b)(3), the issue date of a contract is the 
issue date assigned to the contract by the insurance company. In no 
event is the issue date earlier than the date the policyholder submitted 
a signed application for coverage to the insurance company. If the 
period between the date the signed application is submitted to the 
insurance company and the date coverage under which the contract 
actually becomes effective is substantially longer than under the 
insurance company's usual business practice, then the issue date is the 
later of the date coverage under which the contract becomes effective or 
the issue date assigned to the contract by the insurance company. A 
policyholder's right to return a contract within a free-look period 
following delivery for a full refund of any premiums paid is not taken 
into account in determining the contract's issue date.
    (ii) Special rule for group contracts. The issue date of a group 
contract (including any certificate issued thereunder) is the date on 
which coverage under the group contract becomes effective.
    (iii) Exchange of contract or certain changes in a contract treated 
as a new issuance. For purposes of this paragraph (b)(3)--
    (A) A contract issued in exchange for an existing contract after 
December 31, 1996, is considered a contract issued after that date;
    (B) Any change described in paragraph (b)(4) of this section is 
treated as the issuance of a new contract with an issue date no earlier 
than the date the change goes into effect; and
    (C) If a change described in paragraph (b)(4) of this section occurs 
with regard to one or more, but fewer than all, of the certificates 
evidencing coverage under a group contract, then the insurance coverage 
under the changed certificates is treated as coverage under a newly 
issued group contract (and the insurance coverage provided by any 
unchanged certificate continues to be treated as coverage under the 
original group contract).
    (4) Changes treated as the issuance of a new contract--(i) In 
general. For purposes of paragraph (b)(3) of this section, except as 
provided in paragraph (b)(4)(ii) of this section, the following changes 
are treated as the issuance of a new contract--
    (A) A change in the terms of a contract that alters the amount or 
timing of an item payable by either the policyholder (or certificate 
holder), the insured, or the insurance company;
    (B) A substitution of the insured under an individual contract; or
    (C) A change (other than an immaterial change) in the contractual 
terms, or in the plan under which the contract was issued, relating to 
eligibility for membership in the group covered under a group contract.
    (ii) Exceptions. For purposes of this paragraph (b)(4), the 
following changes are not treated as the issuance of a new contract--

[[Page 569]]

    (A) A policyholder's exercise of any right provided under the terms 
of the contract as in effect on December 31, 1996, or a right required 
by applicable State law to be provided to the policyholder;
    (B) A change in the mode of premium payment (for example, a change 
from monthly to quarterly premiums);
    (C) In the case of a policy that is guaranteed renewable or 
noncancellable, a classwide increase or decrease in premiums;
    (D) A reduction in premiums due to the purchase of a long-term care 
insurance contract by a family member of the policyholder;
    (E) A reduction in coverage (with a corresponding reduction in 
premiums) made at the request of a policyholder;
    (F) A reduction in premiums as a result of extending to an 
individual policyholder a discount applicable to similar categories of 
individuals pursuant to a premium rate structure that was in effect on 
December 31, 1996, for the issuer's pre-1997 long-term care insurance 
contracts of the same type;
    (G) The addition, without an increase in premiums, of alternative 
forms of benefits that may be selected by the policyholder;
    (H) The addition of a rider (including any similarly identifiable 
amendment) to a pre-1997 long-term care insurance contract in any case 
in which the rider, if issued as a separate contract of insurance, would 
itself be a qualified long-term care insurance contract under section 
7702B and any regulations issued thereunder (including the consumer 
protection provisions in section 7702B(g) to the extent applicable to 
the addition of a rider);
    (I) The deletion of a rider or provision of a contract that 
prohibited coordination of benefits with Medicare (often referred to as 
an HHS (Health and Human Services) rider);
    (J) The effectuation of a continuation or conversion of coverage 
right that is provided under a pre-1997 group contract and that, in 
accordance with the terms of the contract as in effect on December 31, 
1996, provides for coverage under an individual contract following an 
individual's ineligibility for continued coverage under the group 
contract; and
    (K) The substitution of one insurer for another insurer in an 
assumption reinsurance transaction.
    (5) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. (i) On December 3, 1996, A, an individual, submits a 
signed application to an insurance company to purchase a nursing home 
contract that meets the long-term care insurance requirements of the 
State in which the contract is sitused. The insurance company decides on 
December 20, 1996, that it will issue the contract, and assigns December 
20, 1996, as the issue date for the contract. Under the terms of the 
contract, A's insurance coverage becomes effective on January 1, 1997. 
The company delivers the contract to A on January 3, 1997. A has the 
right to return the contract within 15 days following delivery for a 
refund of all premiums paid.
    (ii) Under paragraph (b)(3)(i) of this section, the issue date of 
the contract is December 20, 1996. Thus, the contract is a pre-1997 
long-term care insurance contract that is treated as a qualified long-
term care insurance contract.
    Example 2. (i) The facts are the same as in Example 1, except that 
the insurance coverage under the contract does not become effective 
until March 1, 1997. Under the insurance company's usual business 
practice, the period between the date of the application and the date 
the contract becomes effective is 30 days or less.
    (ii) Under paragraph (b)(3)(i) of this section, the issue date of 
the contract is March 1, 1997. Thus, the contract is not a pre-1997 
long-term care insurance contract, and, accordingly, the contract must 
meet the requirements of section 7702B(b) and any regulations issued 
thereunder to be a qualified long-term care insurance contract.
    Example 3. (i) B, an individual, is the policyholder under a long-
term care insurance contract purchased in 1995. On June 15, 2000, the 
insurance coverage and premiums under the contract are increased by 
agreement between B and the insurance company.
    (ii) Under paragraph (b)(4)(i)(A) of this section, a change in the 
terms of a contract that alters the amount or timing of an item payable 
by the policyholder or the insurance company is treated as the issuance 
of a new contract. Thus, B's coverage is treated as coverage under a 
contract issued on June 15, 2000, and, accordingly, the contract must 
meet the requirements of section 7702B(b) and any regulations issued 
thereunder in order to be a qualified long-term care insurance contract.
    Example 4. (i) C, an individual, is the policyholder under a long-
term care insurance contract purchased in 1994. At that time and

[[Page 570]]

through December 31, 1996, the contract met the long-term care insurance 
requirements of the State in which the contract was sitused. In 1996, 
the policy was amended to add a provision requiring the policyholder to 
be offered the right to increase dollar limits for inflation every three 
years (without the policyholder being required to pass a physical or 
satisfy any other underwriting requirements). During 2002, C elects to 
increase the amount of insurance coverage (with a resulting premium 
increase) pursuant to the inflation provision.
    (ii) Under paragraph (b)(4)(ii)(A) of this section, an increase in 
the amount of insurance coverage at the election of the policyholder 
(without the insurance company's consent and without underwriting or 
other limitations on the policyholder's rights) pursuant to a pre-1997 
inflation provision is not treated as the issuance of a new contract. 
Thus, C's contract continues to be a pre-1997 long-term care insurance 
contract that is treated as a qualified long-term care insurance 
contract.

    (c) Effective date. This section is applicable January 1, 1999.

[T.D. 8792, 63 FR 68187, Dec. 10, 1998]



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.
    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.

[[Page 571]]

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, 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]

[[Page 572]]



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.
    (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

[[Page 573]]

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--
    (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

[[Page 574]]

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 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

[[Page 575]]

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 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.

[[Page 576]]

    (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;
    (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

[[Page 577]]

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 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

[[Page 578]]

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 
(l)(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 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

[[Page 579]]

    (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. 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

[[Page 580]]

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 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 ($15,000x500,000/500,000). 
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

[[Page 581]]

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 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

[[Page 582]]

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 
December 31, 1987, in which PTP's new line of business became 
substantial.

[T.D. 8450, 57 FR 58708, Dec. 11, 1992]



Sec.  1.7704-3  Qualifying income.

    (a) Certain investment income--(1) In general. For purposes of 
section 7704(d)(1), qualifying income includes capital gain from the 
sale of stock, income from holding annuities, income from notional 
principal contracts (as defined in Sec.  1.446-3), and other 
substantially similar income from ordinary and routine investments to 
the extent determined by the Commissioner. Income from a notional 
principal contract is included in qualifying income only if the 
property, income, or cash flow that measures the amounts to which the 
partnership is entitled under the contract would give rise to qualifying 
income if held or received directly by the partnership.
    (2) Limitations. Qualifying income described in paragraph (a)(1) of 
this section does not include income derived in the ordinary course of a 
trade or business. For purposes of the preceding sentence, income 
derived from an asset with respect to which the partnership is a broker, 
market maker, or dealer is income derived in the ordinary course of a 
trade or business; income derived from an asset with respect to which 
the taxpayer is a trader or investor is not income derived in the 
ordinary course of a trade or business.
    (b) Calculation of gross income and qualifying income--(1) Treatment 
of losses. Except as otherwise provided in this section, in computing 
the gross income and qualifying income of a partnership for purposes of 
section 7704(c)(2) and this section, losses do not enter into the 
computation.
    (2) Certain positions that are marked to market. Gain recognized 
with respect to a position that is marked to market (for example, under 
section 475(f), 1256, 1259, or 1296) shall not fail to be qualifying 
income solely because there is no sale or disposition of the position.
    (3) Certain items of ordinary income. Gain recognized with respect 
to a capital asset shall not fail to be qualifying income solely because 
it is characterized as ordinary income under section 475(f), 988, 1258, 
or 1296.
    (4) Straddles. In computing the gross income and qualifying income 
of a partnership for purposes of section 7704(c)(2) and this section, a 
straddle (as defined in section 1092(c)) shall be treated as set forth 
in this paragraph (b)(4). For purposes of the preceding sentence, two or 
more straddles that are part of a larger straddle shall be

[[Page 583]]

treated as a single straddle. The amount of the gain from any straddle 
to be taken into account shall be computed as follows:
    (i) Straddles other than mixed straddle accounts. With respect to 
each straddle (whether or not a straddle during the taxable year) other 
than a mixed straddle account, the amount of gain taken into account 
shall be the excess, if any, of gain recognized during the taxable year 
with respect to property that was at any time a position in that 
straddle over any loss recognized during the taxable year with respect 
to property that was at any time a position in that straddle (including 
loss realized in an earlier taxable year).
    (ii) Mixed straddle accounts. With respect to each mixed straddle 
account (as defined in Sec.  1.1092(b)-4T(b)), the amount of gain taken 
into account shall be the annual account gain for that mixed straddle 
account, computed pursuant to Sec.  1.1092(b)-4T(c)(2).
    (5) Certain transactions similar to straddles. In computing the 
gross income and qualifying income of a partnership for purposes of 
section 7704(c)(2) and this section, related interests in property 
(whether or not personal property as defined in section 1092(d)(1)) that 
produce a substantial diminution of the partnership's risk of loss 
similar to that of a straddle (as defined in section 1092(c)) shall be 
combined so that the amount of gain taken into account by the 
partnership in computing its gross income shall be the excess, if any, 
of gain recognized during the taxable year with respect to such 
interests over any loss recognized during the taxable year with respect 
to such interests.
    (6) Wash sale rule--(i) Gain not taken into account. Solely for 
purposes of section 7704(c)(2) and this section, if a partnership 
recognizes gain in a section 7704 wash sale transaction with respect to 
one or more positions in either a straddle (as defined in section 
1092(c)) or an arrangement described in paragraph (b)(5) of this 
section, then the gain shall not be taken into account to the extent of 
the amount of unrecognized loss (as of the close of the taxable year) in 
one or more offsetting positions of the straddle or arrangement 
described in paragraph (b)(5) of this section.
    (ii) Section 7704 wash sale transaction. For purposes of this 
paragraph (b)(6), a section 7704 wash sale transaction is a transaction 
in which--
    (A) A partnership disposes of one or more positions of a straddle 
(as defined in section 1092(c)) or one or more related positions 
described in paragraph (b)(5) of this section; and
    (B) The partnership acquires a substantially similar position or 
positions within a period beginning 30 days before the date of the 
disposition and ending 30 days after such date.
    (c) Effective date. This section applies to taxable years of a 
partnership beginning on or after December 17, 1998. However, a 
partnership may apply this section in its entirety for all of the 
partnership's open taxable years beginning after any earlier date 
selected by the partnership.

[T.D. 8799, 63 FR 69553, Dec. 17, 1998]



Sec. Sec.  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

[[Page 584]]

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, 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:

[[Page 585]]

    (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.
    (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]



Sec.  1.7872-15  Split-dollar loans.

    (a) General rules--(1) Introduction. This section applies to split-
dollar loans as defined in paragraph (b)(1) of this section. If a split-
dollar loan is not

[[Page 586]]

a below-market loan, then, except as provided in this section, the loan 
is governed by the general rules for debt instruments (including the 
rules for original issue discount (OID) under sections 1271 through 1275 
and the regulations thereunder). If a split-dollar loan is a below-
market loan, then, except as provided in this section, the loan is 
governed by section 7872. The timing, amount, and characterization of 
the imputed transfers between the lender and borrower of a below-market 
split-dollar loan depend upon the relationship between the parties and 
upon whether the loan is a demand loan or a term loan. For additional 
rules relating to the treatment of split-dollar life insurance 
arrangements, see Sec.  1.61-22.
    (2) Loan treatment--(i) General rule. A payment made pursuant to a 
split-dollar life insurance arrangement is treated as a loan for Federal 
tax purposes, and the owner and non-owner are treated, respectively, as 
the borrower and the lender, if--
    (A) The payment is made either directly or indirectly by the non-
owner to the owner (including a premium payment made by the non-owner 
directly or indirectly to the insurance company with respect to the 
policy held by the owner);
    (B) The payment is a loan under general principles of Federal tax 
law or, if it is not a loan under general principles of Federal tax law 
(for example, because of the nonrecourse nature of the obligation or 
otherwise), a reasonable person nevertheless would expect the payment to 
be repaid in full to the non-owner (whether with or without interest); 
and
    (C) The repayment is to be made from, or is secured by, the policy's 
death benefit proceeds, the policy's cash surrender value, or both.
    (ii) Payments that are only partially repayable. For purposes of 
Sec.  1.61-22 and this section, if a non-owner makes a payment pursuant 
to a split-dollar life insurance arrangement and the non-owner is 
entitled to repayment of some but not all of the payment, the payment is 
treated as two payments: One that is repayable and one that is not. 
Thus, paragraph (a)(2)(i) of this section refers to the repayable 
payment.
    (iii) Treatment of payments that are not split-dollar loans. See 
Sec.  1.61-22(b)(5) for the treatment of payments by a non-owner that 
are not split-dollar loans.
    (iv) Examples. The provisions of this paragraph (a)(2) are 
illustrated by the following examples:

    Example 1. Assume an employee owns a life insurance policy under a 
split-dollar life insurance arrangement, the employer makes premium 
payments on this policy, there is a reasonable expectation that the 
payments will be repaid, and the repayments are secured by the policy. 
Under paragraph (a)(2)(i) of this section, each premium payment is a 
loan for Federal tax purposes.
    Example 2. (i) Assume an employee owns a life insurance policy under 
a split-dollar life insurance arrangement and the employer makes premium 
payments on this policy. The employer is entitled to be repaid 80 
percent of each premium payment, and the repayments are secured by the 
policy. Under paragraph (a)(2)(ii) of this section, the taxation of 20 
percent of each premium payment is governed by Sec.  1.61-22(b)(5). If 
there is a reasonable expectation that the remaining 80 percent of a 
payment will be repaid in full, then, under paragraph (a)(2)(i) of this 
section, the 80 percent is a loan for Federal tax purposes.
    (ii) If less than 80 percent of a premium payment is reasonably 
expected to be repaid, then this paragraph (a)(2) does not cause any of 
the payment to be a loan for Federal tax purposes. If the payment is not 
a loan under general principles of Federal tax law, the taxation of the 
entire premium payment is governed by Sec.  1.61-22(b)(5).

    (3) No de minimis exceptions. For purposes of this section, section 
7872 is applied to a split-dollar loan without regard to the de minimis 
exceptions in section 7872(c)(2) and (3).
    (4) Certain interest provisions disregarded--(i) In general. If a 
split-dollar loan provides for the payment of interest and all or a 
portion of the interest is to be paid directly or indirectly by the 
lender (or a person related to the lender), then the requirement to pay 
the interest (or portion thereof) is disregarded for purposes of this 
section. All of the facts and circumstances determine whether a payment 
to be made by the lender (or a person related to the lender) is 
sufficiently independent from the split-dollar loan for the payment to 
not be an indirect payment of the interest (or a portion thereof) by the 
lender (or a person related to the lender).

[[Page 587]]

    (ii) Examples. The provisions of this paragraph (a)(4) are 
illustrated by the following examples:

    Example 1-- (i) On January 1, 2009, Employee B issues a split-dollar 
term loan to Employer Y. The split-dollar term loan provides for five 
percent interest, compounded annually. Interest and principal on the 
split-dollar term loan are due at maturity. On January 1, 2009, B and Y 
also enter into a fully vested non-qualified deferred compensation 
arrangement that will provide a payment to B in an amount equal to the 
accrued but unpaid interest due at the maturity of the split-dollar term 
loan.
    (ii) Under paragraph (a)(4)(i) of this section, B's requirement to 
pay interest on the split-dollar term loan is disregarded for purposes 
of this section, and the split-dollar term loan is treated as a loan 
that does not provide for interest for purposes of this section.
    Example 2-- (i) On January 1, 2004, Employee B and Employer Y enter 
into a fully vested non-qualified deferred compensation arrangement that 
will provide a payment to B equal to B's salary in the three years 
preceding the retirement of B. On January 1, 2009, B and Y enter into a 
split-dollar life insurance arrangement and, under the arrangement, B 
issues a split-dollar term loan to Y on that date. The split-dollar term 
loan provides for five percent interest, compounded annually. Interest 
and principal on the split-dollar term loan are due at maturity. Over 
the period in which the non-qualified deferred compensation arrangement 
is effective, the terms and conditions of B's non-qualified deferred 
compensation arrangement do not change in a way that indicates that the 
payment of the non-qualified deferred compensation is related to B's 
requirement to pay interest on the split-dollar term loan. No other 
facts and circumstances exist to indicate that the payment of the non-
qualified deferred compensation is related to B's requirement to pay 
interest on the split-dollar term loan.
    (ii) The facts and circumstances indicate that the payment by Y of 
non-qualified deferred compensation is independent from B's requirement 
to pay interest under the split-dollar term loan. Under paragraph 
(a)(4)(i) of this section, the fully vested non-qualified deferred 
compensation does not cause B's requirement to pay interest on the 
split-dollar term loan to be disregarded for purposes of this section. 
For purposes of this section, the split-dollar term loan is treated as a 
loan that provides for stated interest of five percent, compounded 
annually.

    (b) Definitions. For purposes of this section, the terms split-
dollar life insurance arrangement, owner, and non-owner have the same 
meanings as provided in Sec.  1.61-22(b) and (c). In addition, the 
following definitions apply for purposes of this section:
    (1) A split-dollar loan is a loan described in paragraph (a)(2)(i) 
of this section.
    (2) A split-dollar demand loan is any split-dollar loan that is 
payable in full at any time on the demand of the lender (or within a 
reasonable time after the lender's demand).
    (3) A split-dollar term loan is any split-dollar loan other than a 
split-dollar demand loan. See paragraph (e)(5) of this section for 
special rules regarding certain split-dollar term loans payable on the 
death of an individual, certain split-dollar term loans conditioned on 
the future performance of substantial services by an individual, and 
gift split-dollar term loans.
    (c) Interest deductions for split-dollar loans. The borrower may not 
deduct any qualified stated interest, OID, or imputed interest on a 
split-dollar loan. See sections 163(h) and 264(a). In certain 
circumstances, an indirect participant may be allowed to deduct 
qualified stated interest, OID, or imputed interest on a deemed loan. 
See paragraph (e)(2)(iii) of this section (relating to indirect loans).
    (d) Treatment of split-dollar loans providing for nonrecourse 
payments--(1) In general. Except as provided in paragraph (d)(2) of this 
section, if a payment on a split-dollar loan is nonrecourse to the 
borrower, the payment is a contingent payment for purposes of this 
section. See paragraph (j) of this section for the treatment of a split-
dollar loan that provides for one or more contingent payments.
    (2) Exception for certain loans with respect to which the parties to 
the split-dollar life insurance arrangement make a representation--(i) 
Requirement. An otherwise noncontingent payment on a split-dollar loan 
that is nonrecourse to the borrower is not a contingent payment under 
this section if the parties to the split-dollar life insurance 
arrangement represent in writing that a reasonable person would expect 
that all payments under the loan will be made.
    (ii) Time and manner for providing written representation. The 
Commissioner may prescribe the time and

[[Page 588]]

manner for providing the written representation required by paragraph 
(d)(2)(i) of this section. Until the Commissioner prescribes otherwise, 
the written representation that is required by paragraph (d)(2)(i) of 
this section must meet the requirements of this paragraph (d)(2)(ii). 
Both the borrower and the lender must sign the representation not later 
than the last day (including extensions) for filing the Federal income 
tax return of the borrower or lender, whichever is earlier, for the 
taxable year in which the lender makes the first split-dollar loan under 
the split-dollar life insurance arrangement. This representation must 
include the names, addresses, and taxpayer identification numbers of the 
borrower, lender, and any indirect participants. Unless otherwise stated 
therein, this representation applies to all subsequent split-dollar 
loans made pursuant to the split-dollar life insurance arrangement. Each 
party should retain an original of the representation as part of its 
books and records and should attach a copy of this representation to its 
Federal income tax return for any taxable year in which the lender makes 
a loan to which the representation applies.
    (e) Below-market split-dollar loans--(1) Scope--(i) In general. This 
paragraph (e) applies to below-market split-dollar loans enumerated 
under section 7872(c)(1), which include gift loans, compensation-related 
loans, and corporation-shareholder loans. The characterization of a 
split-dollar loan under section 7872(c)(1) and of the imputed transfers 
under section 7872(a)(1) and (b)(1) depends upon the relationship 
between the lender and the borrower or the lender, borrower, and any 
indirect participant. For example, if the lender is the borrower's 
employer, the split-dollar loan is generally a compensation-related 
loan, and any imputed transfer from the lender to the borrower is 
generally a payment of compensation. The loans covered by this paragraph 
(e) include indirect loans between the parties. See paragraph (e)(2) of 
this section for the treatment of certain indirect split-dollar loans. 
See paragraph (f) of this section for the treatment of any stated 
interest or OID on split-dollar loans. See paragraph (j) of this section 
for additional rules that apply to a split-dollar loan that provides for 
one or more contingent payments.
    (ii) Significant-effect split-dollar loans. If a direct or indirect 
below-market split-dollar loan is not enumerated in section 
7872(c)(1)(A), (B), or (C), the loan is a significant-effect loan under 
section 7872(c)(1)(E).
    (2) Indirect split-dollar loans--(i) In general. If, based on all 
the facts and circumstances, including the relationship between the 
borrower or lender and some third person (the indirect participant), the 
effect of a below-market split-dollar loan is to transfer value from the 
lender to the indirect participant and from the indirect participant to 
the borrower, then the below-market split-dollar loan is restructured as 
two or more successive below-market loans (the deemed loans) as provided 
in this paragraph (e)(2). The transfers of value described in the 
preceding sentence include (but are not limited to) a gift, 
compensation, a capital contribution, and a distribution under section 
301 (or, in the case of an S corporation, under section 1368). The 
deemed loans are--
    (A) A deemed below-market split-dollar loan made by the lender to 
the indirect participant; and
    (B) A deemed below-market split-dollar loan made by the indirect 
participant to the borrower.
    (ii) Application. Each deemed loan is treated as having the same 
provisions as the original loan between the lender and borrower, and 
section 7872 is applied to each deemed loan. Thus, for example, if, 
under a split-dollar life insurance arrangement, an employer (lender) 
makes an interest-free split-dollar loan to an employee's child 
(borrower), the loan is restructured as a deemed compensation-related 
below-market split-dollar loan from the lender to the employee (the 
indirect participant) and a second deemed gift below-market split-dollar 
loan from the employee to the employee's child. In appropriate 
circumstances, section 7872(d)(1) may limit the interest that accrues on 
a deemed loan for Federal income tax purposes. For loan arrangements 
between husband and wife, see section 7872(f)(7).

[[Page 589]]

    (iii) Limitations on investment interest for purposes of section 
163(d). For purposes of section 163(d), the imputed interest from the 
indirect participant to the lender that is taken into account by the 
indirect participant under this paragraph (e)(2) is not investment 
interest to the extent of the excess, if any, of--
    (A) The imputed interest from the indirect participant to the lender 
that is taken into account by the indirect participant; over
    (B) The imputed interest to the indirect participant from the 
borrower that is recognized by the indirect participant.
    (iv) Examples. The provisions of this paragraph (e)(2) are 
illustrated by the following examples:

    Example 1. (i) On January 1, 2009, Employer X and Individual A enter 
into a split-dollar life insurance arrangement under which A is named as 
the policy owner. A is the child of B, an employee of X. On January 1, 
2009, X makes a $30,000 premium payment, repayable upon demand without 
interest. Repayment of the premium payment is fully recourse to A. The 
payment is a below-market split-dollar demand loan. A's net investment 
income for 2009 is $1,100, and there are no other outstanding loans 
between A and B. Assume that the blended annual rate for 2009 is 5 
percent, compounded annually.
    (ii) Based on the relationships among the parties, the effect of the 
below-market split-dollar loan from X to A is to transfer value from X 
to B and then to transfer value from B to A. Under paragraph (e)(2) of 
this section, the below-market split-dollar loan from X to A is 
restructured as two deemed below-market split-dollar demand loans: a 
compensation-related below-market split-dollar loan between X and B and 
a gift below-market split-dollar loan between B and A. Each of the 
deemed loans has the same terms and conditions as the original loan.
    (iii) Under paragraph (e)(3) of this section, the amount of forgone 
interest deemed paid to B by A in 2009 is $1,500 ([$30,000 x 0.05]--0). 
Under section 7872(d)(1), however, the amount of forgone interest deemed 
paid to B by A is limited to $1,100 (A's net investment income for the 
year). Under paragraph (e)(2)(iii) of this section, B's deduction under 
section 163(d) in 2009 for interest deemed paid on B's deemed loan from 
X is limited to $1,100 (the interest deemed received from A).

    Example 2. (i) The facts are the same as the facts in Example 1, 
except that T, an irrevocable life insurance trust established for the 
benefit of A (B's child), is named as the policy owner. T is not a 
grantor trust.
    (ii) Based on the relationships among the parties, the effect of the 
below-market split-dollar loan from X to T is to transfer value from X 
to B and then to transfer value from B to T. Under paragraph (e)(2) of 
this section, the below-market split-dollar loan from X to T is 
restructured as two deemed below-market split-dollar demand loans: a 
compensation-related below-market split-dollar loan between X and B and 
a gift below-market split-dollar loan between B and T. Each of the 
deemed loans has the same terms and conditions as the original loan.
    (iii) Under paragraph (e)(3) of this section, the amount of forgone 
interest deemed paid to B by T in 2009 is $1,500 ([$30,000 x 0.05]--0). 
Section 7872(d)(1) does not apply because T is not an individual. The 
amount of forgone interest deemed paid to B by T is $1,500. Under 
paragraph (e)(2)(iii) of this section, B's deduction under section 
163(d) in 2009 for interest deemed paid on B's deemed loan from X is 
$1,500 (the interest deemed received from T).

    (3) Split-dollar demand loans--(i) In general. This paragraph (e)(3) 
provides rules for testing split-dollar demand loans for sufficient 
interest, and, if the loans do not provide for sufficient interest, 
rules for the calculation and treatment of forgone interest on these 
loans. See paragraph (g) of this section for additional rules that apply 
to a split-dollar loan providing for certain variable rates of interest.
    (ii) Testing for sufficient interest. Each calendar year that a 
split-dollar demand loan is outstanding, the loan is tested to determine 
if the loan provides for sufficient interest. A split-dollar demand loan 
provides for sufficient interest for the calendar year if the rate 
(based on annual compounding) at which interest accrues on the loan's 
adjusted issue price during the year is no lower than the blended annual 
rate for the year. (The Internal Revenue Service publishes the blended 
annual rate in the Internal Revenue Bulletin in July of each year (see 
Sec.  601.601(d)(2)(ii) of this chapter).) If the loan does not provide 
for sufficient interest, the loan is a below-market split-dollar demand 
loan for that calendar year. See paragraph (e)(3)(iii) of this section 
to determine the amount and treatment of forgone interest for each 
calendar year the loan is below-market.
    (iii) Imputations--(A) Amount of forgone interest. For each calendar 
year,

[[Page 590]]

the amount of forgone interest on a split-dollar demand loan is treated 
as transferred by the lender to the borrower and as retransferred as 
interest by the borrower to the lender. This amount is the excess of--
    (1) The amount of interest that would have been payable on the loan 
for the calendar year if interest accrued on the loan's adjusted issue 
price at the blended annual rate (determined in paragraph (e)(3)(ii) of 
this section) and were payable annually on the day referred to in 
paragraph (e)(3)(iii)(B) of this section; over
    (2) Any interest that accrues on the loan during the year.
    (B) Timing of transfers of forgone interest--(1) In general. Except 
as provided in paragraphs (e)(3)(iii)(B)(2) and (3) of this section, the 
forgone interest (as determined under paragraph (e)(3)(iii)(A) of this 
section) that is attributable to a calendar year is treated as 
transferred by the lender to the borrower (and retransferred as interest 
by the borrower to the lender) on the last day of the calendar year and 
is accounted for by each party to the split-dollar loan in a manner 
consistent with that party's method of accounting.
    (2) Exception for death, liquidation, or termination of the 
borrower. In the taxable year in which the borrower dies (in the case of 
a borrower who is a natural person) or is liquidated or otherwise 
terminated (in the case of a borrower other than a natural person), any 
forgone interest is treated, for both the lender and the borrower, as 
transferred and retransferred on the last day of the borrower's final 
taxable year.
    (3) Exception for repayment of below-market split-dollar loan. Any 
forgone interest is treated, for both the lender and the borrower, as 
transferred and retransferred on the day the split-dollar loan is repaid 
in full.
    (4) Split-dollar term loans--(i) In general. Except as provided in 
paragraph (e)(5) of this section, this paragraph (e)(4) provides rules 
for testing split-dollar term loans for sufficient interest and, if the 
loans do not provide for sufficient interest, rules for imputing 
payments on these loans. See paragraph (g) of this section for 
additional rules that apply to a split-dollar loan providing for certain 
variable rates of interest.
    (ii) Testing a split-dollar term loan for sufficient interest. A 
split-dollar term loan is tested on the day the loan is made to 
determine if the loan provides for sufficient interest. A split-dollar 
term loan provides for sufficient interest if the imputed loan amount 
equals or exceeds the amount loaned. The imputed loan amount is the 
present value of all payments due under the loan, determined as of the 
date the loan is made, using a discount rate equal to the AFR in effect 
on that date. The AFR used for purposes of the preceding sentence must 
be appropriate for the loan's term (short-term, mid-term, or long-term) 
and for the compounding period used in computing the present value. See 
section 1274(d)(1). If the split-dollar loan does not provide for 
sufficient interest, the loan is a below-market split-dollar term loan 
subject to paragraph (e)(4)(iv) of this section.
    (iii) Determining loan term. This paragraph (e)(4)(iii) provides 
rules to determine the term of a split-dollar term loan for purposes of 
paragraph (e)(4)(ii) of this section. The term of the loan determined 
under this paragraph (e)(4)(iii) (other than paragraph (e)(4)(iii)(C) of 
this section) applies to determine the split-dollar loan's term, payment 
schedule, and yield for all purposes of this section.
    (A) In general. Except as provided in paragraph (e)(4)(iii)(B), (C), 
(D) or (E) of this section, the term of a split-dollar term loan is 
based on the period from the date the loan is made until the loan's 
stated maturity date.
    (B) Special rules for certain options--(1) Payment schedule that 
minimizes yield. If a split-dollar term loan is subject to one or more 
unconditional options that are exercisable at one or more times during 
the term of the loan and that, if exercised, require payments to be made 
on the split-dollar loan on an alternative payment schedule (for 
example, an option to extend or an option to call a split-dollar loan), 
then the rules of this paragraph (e)(4)(iii)(B)(1) determine the term of 
the loan. However, this paragraph (e)(4)(iii)(B)(1) applies only if the 
timing and amounts of the payments that comprise each payment schedule 
are known as of the issue date. For purposes of determining a split-
dollar loan's term, the borrower is

[[Page 591]]

projected to exercise or not exercise an option or combination of 
options in a manner that minimizes the loan's overall yield. Similarly, 
the lender is projected to exercise or not exercise an option or 
combination of options in a manner that minimizes the loan's overall 
yield. If different projected patterns of exercise or non-exercise 
produce the same minimum yield, the parties are projected to exercise or 
not exercise an option or combination of options in a manner that 
produces the longest term.
    (2) Change in circumstances. If the borrower (or lender) does or 
does not exercise the option as projected under paragraph 
(e)(4)(iii)(B)(1) of this section, the split-dollar loan is treated for 
purposes of this section as retired and reissued on the date the option 
is or is not exercised for an amount of cash equal to the loan's 
adjusted issue price on that date. The reissued loan must be retested 
using the appropriate AFR in effect on the date of reissuance to 
determine whether it is a below-market loan.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (e)(4)(iii)(B):

    Example 1. Employee B issues a 10-year split-dollar term loan to 
Employer Y. B has the right to prepay the loan at the end of year 5. 
Interest is payable on the split-dollar loan at 1 percent for the first 
5 years and at 10 percent for the remaining 5 years. Under paragraph 
(e)(4)(iii)(B)(1) of this section, this arrangement is treated as a 5-
year split-dollar term loan from Y to B, with interest payable at 1 
percent.
    Example 2. The facts are the same as the facts in Example 1, except 
that B does not in fact prepay the split-dollar loan at the end of year 
5. Under paragraph (e)(4)(iii)(B)(2) of this section, the first loan is 
treated as retired at the end of year 5 and a new 5-year split-dollar 
term loan is issued at that time, with interest payable at 10 percent.
    Example 3. Employee A issues a 10-year split-dollar term loan on 
which the lender, Employer X, has the right to demand payment at the end 
of year 2. Interest is payable on the split-dollar loan at 7 percent 
each year that the loan is outstanding. Under paragraph 
(e)(4)(iii)(B)(1) of this section, this arrangement is treated as a 10-
year split-dollar term loan because the exercise of X's put option would 
not reduce the yield of the loan (the yield of the loan is 7 percent, 
compounded annually, whether or not X demands payment).

    (C) Split-dollar term loans providing for certain variable rates of 
interest. If a split-dollar term loan is subject to paragraph (g) of 
this section (a split-dollar loan that provides for certain variable 
rates of interest), the term of the loan for purposes of paragraph 
(e)(4)(ii) of this section is determined under paragraph (g)(3)(ii) of 
this section.
    (D) Split-dollar loans payable upon the death of an individual. If a 
split-dollar term loan is described in paragraph (e)(5)(ii)(A) or (v)(A) 
of this section, the term of the loan for purposes of paragraph 
(e)(4)(ii) of this section is determined under paragraph (e)(5)(ii)(C) 
or (v)(B)(2) of this section, whichever is applicable.
    (E) Split-dollar loans conditioned on the future performance of 
substantial services by an individual. If a split-dollar term loan is 
described in paragraph (e)(5)(iii)(A)(1) or (v)(A) of this section, the 
term of the loan for purposes of paragraph (e)(4)(ii) of this section is 
determined under paragraph (e)(5)(iii)(C) or (v)(B)(2) of this section, 
whichever is applicable.
    (iv) Timing and amount of imputed transfer in connection with below-
market split-dollar term loans. If a split-dollar term loan is a below-
market loan, then the rules applicable to below-market term loans under 
section 7872 apply. In general, the loan is recharacterized as 
consisting of two portions: an imputed loan amount (as defined in 
paragraph (e)(4)(ii) of this section) and an imputed transfer from the 
lender to the borrower. The imputed transfer occurs at the time the loan 
is made (for example, when the lender makes a premium payment on a life 
insurance policy) and is equal to the excess of the amount loaned over 
the imputed loan amount.
    (v) Amount treated as OID. In the case of any below-market split-
dollar term loan described in this paragraph (e)(4), for purposes of 
applying sections 1271 through 1275 and the regulations thereunder, the 
issue price of the loan is the amount determined under Sec.  1.1273-2, 
reduced by the amount of the imputed transfer described in paragraph 
(e)(4)(iv) of this section. Thus, the loan is generally treated as 
having OID in an amount equal to the amount of the

[[Page 592]]

imputed transfer described in paragraph (e)(4)(iv) of this section, in 
addition to any other OID on the loan (determined without regard to 
section 7872(b)(2)(A) or this paragraph (e)(4)).
    (vi) Example. The provisions of this paragraph (e)(4) are 
illustrated by the following example:

    Example. (i) On July 1, 2009, Corporation Z and Shareholder A enter 
into a split-dollar life insurance arrangement under which A is named as 
the policy owner. On July 1, 2009, Z makes a $100,000 premium payment, 
repayable without interest in 15 years. Repayment of the premium payment 
is fully recourse to A. The premium payment is a split-dollar term loan. 
Assume the long-term AFR (based on annual compounding) at the time the 
loan is made is 7 percent.
    (ii) Based on a 15-year term and a discount rate of 7 percent, 
compounded annually (the long-term AFR), the present value of the 
payments under the loan is $36,244.60, determined as follows: $100,000/
[1+(0.07/1)] \15\. This loan is a below-market split-dollar term loan 
because the imputed loan amount of $36,244.60 (the present value of the 
amount required to be repaid to Z) is less than the amount loaned 
($100,000).
    (iii) In accordance with section 7872(b)(1) and paragraph (e)(4)(iv) 
of this section, on the date that the loan is made, Z is treated as 
transferring to A $63,755.40 (the excess of $100,000 (amount loaned) 
over $36,244.60 (imputed loan amount)). Under section 7872 and paragraph 
(e)(1)(i) of this section, Z is treated as making a section 301 
distribution to A on July 1, 2009, of $63,755.40. Z must take into 
account as OID an amount equal to the imputed transfer. See Sec.  
1.1272-1 for the treatment of OID.

    (5) Special rules for certain split-dollar term loans--(i) In 
general. This paragraph (e)(5) provides rules for split-dollar loans 
payable on the death of an individual, split-dollar loans conditioned on 
the future performance of substantial services by an individual, and 
gift term loans. These split-dollar loans are split-dollar term loans 
for purposes of determining whether the loan provides for sufficient 
interest. If, however, the loan is a below-market split-dollar loan, 
then, except as provided in paragraph (e)(5)(v) of this section, forgone 
interest is determined annually, similar to a demand loan, but using an 
AFR that is appropriate for the loan's term and that is determined when 
the loan is issued.
    (ii) Split-dollar loans payable not later than the death of an 
individual--(A) Applicability. This paragraph (e)(5)(ii) applies to a 
split-dollar term loan payable not later than the death of an 
individual.
    (B) Treatment of loan. A split-dollar loan described in paragraph 
(e)(5)(ii)(A) of this section is tested under paragraph (e)(4)(ii) of 
this section to determine if the loan provides for sufficient interest. 
If the loan provides for sufficient interest, then section 7872 does not 
apply to the loan, and the interest on the loan is taken into account 
under paragraph (f) of this section. If the loan does not provide for 
sufficient interest, then section 7872 applies to the loan, and the loan 
is treated as a below-market demand loan subject to paragraph 
(e)(3)(iii) of this section. For each year that the loan is outstanding, 
however, the rate used in the determination of forgone interest under 
paragraph (e)(3)(iii) of this section is not the blended annual rate but 
rather is the AFR (based on annual compounding) appropriate for the 
loan's term as of the month in which the loan is made. See paragraph 
(e)(5)(ii)(C) of this section to determine the loan's term.
    (C) Term of loan. For purposes of paragraph (e)(5)(ii)(B) of this 
section, the term of a split-dollar loan payable on the death of an 
individual (including the death of the last survivor of a group of 
individuals) is the individual's life expectancy as determined under the 
appropriate table in Sec.  1.72-9 on the day the loan is made. If a 
split-dollar loan is payable on the earlier of the individual's death or 
another term determined under paragraph (e)(4)(iii) of this section, the 
term of the loan is whichever term is shorter.
    (D) Retirement and reissuance of loan. If a split-dollar loan 
described in paragraph (e)(5)(ii)(A) of this section remains outstanding 
longer than the term determined under paragraph (e)(5)(ii)(C) of this 
section because the individual outlived his or her life expectancy, the 
split-dollar loan is treated for purposes of this section as retired and 
reissued as a split-dollar demand loan at that time for an amount of 
cash equal to the loan's adjusted issue price on that date. However, the 
loan is not retested at that time to determine whether the loan provides 
for

[[Page 593]]

sufficient interest. For purposes of determining forgone interest under 
paragraph (e)(5)(ii)(B) of this section, the appropriate AFR for the 
reissued loan is the AFR determined under paragraph (e)(5)(ii)(B) of 
this section on the day the loan was originally made.
    (iii) Split-dollar loans conditioned on the future performance of 
substantial services by an individual--(A) Applicability--(1) In 
general. This paragraph (e)(5)(iii) applies to a split-dollar term loan 
if the benefits of the interest arrangements of the loan are not 
transferable and are conditioned on the future performance of 
substantial services (within the meaning of section 83) by an 
individual.
    (2) Exception. Notwithstanding paragraph (e)(5)(iii)(A)(1) of this 
section, this paragraph (e)(5)(iii) does not apply to a split-dollar 
loan described in paragraph (e)(5)(v)(A) of this section (regarding a 
split-dollar loan that is payable on the later of a term certain and the 
date on which the condition to perform substantial future services by an 
individual ends).
    (B) Treatment of loan. A split-dollar loan described in paragraph 
(e)(5)(iii)(A)(1) of this section is tested under paragraph (e)(4)(ii) 
of this section to determine if the loan provides for sufficient 
interest. Except as provided in paragraph (e)(5)(iii)(D) of this 
section, if the loan provides for sufficient interest, then section 7872 
does not apply to the loan and the interest on the loan is taken into 
account under paragraph (f) of this section. If the loan does not 
provide for sufficient interest, then section 7872 applies to the loan 
and the loan is treated as a below-market demand loan subject to 
paragraph (e)(3)(iii) of this section. For each year that the loan is 
outstanding, however, the rate used in the determination of forgone 
interest under paragraph (e)(3)(iii) of this section is not the blended 
annual rate but rather is the AFR (based on annual compounding) 
appropriate for the loan's term as of the month in which the loan is 
made. See paragraph (e)(5)(iii)(C) of this section to determine the 
loan's term.
    (C) Term of loan. The term of a split-dollar loan described in 
paragraph (e)(5)(iii)(A)(1) of this section is based on the period from 
the date the loan is made until the loan's stated maturity date. 
However, if a split-dollar loan described in paragraph (e)(5)(iii)(A)(1) 
of this section does not have a stated maturity date, the term of the 
loan is presumed to be seven years.
    (D) Retirement and reissuance of loan. If a split-dollar loan 
described in paragraph (e)(5)(iii)(A)(1) of this section remains 
outstanding longer than the term determined under paragraph 
(e)(5)(iii)(C) of this section because of the continued performance of 
substantial services, the split-dollar loan is treated for purposes of 
this section as retired and reissued as a split-dollar demand loan at 
that time for an amount of cash equal to the loan's adjusted issue price 
on that date. The loan is retested at that time to determine whether the 
loan provides for sufficient interest.
    (iv) Gift split-dollar term loans--(A) Applicability. This paragraph 
(e)(5)(iv) applies to gift split-dollar term loans.
    (B) Treatment of loan. A split-dollar loan described in paragraph 
(e)(5)(iv)(A) of this section is tested under paragraph (e)(4)(ii) of 
this section to determine if the loan provides for sufficient interest. 
If the loan provides for sufficient interest, then section 7872 does not 
apply to the loan and the interest on the loan is taken into account 
under paragraph (f) of this section. If the loan does not provide for 
sufficient interest, then section 7872 applies to the loan and the loan 
is treated as a below-market demand loan subject to paragraph 
(e)(3)(iii) of this section. For each year that the loan is outstanding, 
however, the rate used in the determination of forgone interest under 
paragraph (e)(3)(iii) of this section is not the blended annual rate but 
rather is the AFR (based on annual compounding) appropriate for the 
loan's term as of the month in which the loan is made. See paragraph 
(e)(5)(iv)(C) of this section to determine the loan's term.
    (C) Term of loan. For purposes of paragraph (e)(5)(iv)(B) of this 
section, the term of a gift split-dollar term loan is the term 
determined under paragraph (e)(4)(iii) of this section.
    (D) Limited application for gift split-dollar term loans. The rules 
of paragraph (e)(5)(iv)(B) of this section apply

[[Page 594]]

to a gift split-dollar term loan only for Federal income tax purposes. 
For purposes of Chapter 12 of the Internal Revenue Code (relating to the 
gift tax), gift below-market split-dollar term loans are treated as term 
loans under section 7872(b) and paragraph (e)(4) of this section. See 
section 7872(d)(2).
    (v) Split-dollar loans payable on the later of a term certain and 
another specified date--(A) Applicability. This paragraph (e)(5)(v) 
applies to any split-dollar term loan payable upon the later of a term 
certain or--
    (1) The death of an individual; or
    (2) For a loan described in paragraph (e)(5)(iii)(A)(1) of this 
section, the date on which the condition to perform substantial future 
services by an individual ends.
    (B) Treatment of loan--(1) In general. A split-dollar loan described 
in paragraph (e)(5)(v)(A) of this section is a split-dollar term loan, 
subject to paragraph (e)(4) of this section.
    (2) Term of the loan. The term of a split-dollar loan described in 
paragraph (e)(5)(v)(A) of this section is the term certain.
    (3) Appropriate AFR. The appropriate AFR for a split-dollar loan 
described in paragraph (e)(5)(v)(A) of this section is based on a term 
of the longer of the term certain or the loan's expected term as 
determined under either paragraph (e)(5) (ii) or (iii) of this section, 
whichever is applicable.
    (C) Retirement and reissuance. If a split-dollar loan described in 
paragraph (e)(5)(v)(A) of this section remains outstanding longer than 
the term certain, the split-dollar loan is treated for purposes of this 
section as retired and reissued at the end of the term certain for an 
amount of cash equal to the loan's adjusted issue price on that date. 
The reissued loan is subject to paragraph (e)(5) (ii) or (iii) of this 
section, whichever is applicable. However, the loan is not retested at 
that time to determine whether the loan provides for sufficient 
interest. For purposes of paragraph (e)(3)(iii) of this section, the 
appropriate AFR for the reissued loan is the AFR determined under 
paragraph (e)(5)(v)(B)(3) of this section on the day the loan was 
originally made.
    (vi) Example. The provisions of this paragraph (e)(5) are 
illustrated by the following example:

    Example. (i) On January 1, 2009, Corporation Y and Shareholder B, a 
65 year-old male, enter into a split-dollar life insurance arrangement 
under which B is named as the policy owner. On January 1, 2009, Y makes 
a $100,000 premium payment, repayable, without interest, from the death 
benefits of the underlying contract upon B's death. The premium payment 
is a split-dollar term loan. Repayment of the premium payment is fully 
recourse to B. Assume the long-term AFR (based on annual compounding) at 
the time of the loan is 7 percent. Both Y and B use the calendar year as 
their taxable years.
    (ii) Based on Table 1 in Sec.  1.72-9, the expected term of the loan 
is 15 years. Under paragraph (e)(5)(ii)(C) of this section, the long-
term AFR (based on annual compounding) is the appropriate test rate. 
Based on a 15-year term and a discount rate of 7 percent, compounded 
annually (the long-term AFR), the present value of the payments under 
the loan is $36,244.60, determined as follows: $100,000/[1+(0.07/
1)]\15\. Under paragraph (e)(5)(ii)(B) of this section, this loan is a 
below-market split-dollar term loan because the imputed loan amount of 
$36,244.60 (the present value of the amount required to be repaid to Y) 
is less than the amount loaned ($100,000).
    (iii) Under paragraph (e)(5)(ii)(B) of this section, the amount of 
forgone interest for 2009 (and each subsequent full calendar year that 
the loan remains outstanding) is $7,000, which is the amount of interest 
that would have been payable on the loan for the calendar year if 
interest accrued on the loan's adjusted issue price ($100,000) at the 
long-term AFR (7 percent, compounded annually). Under section 7872 and 
paragraph (e)(1)(i) of this section, on December 31, 2009, Y is treated 
as making a section 301 distribution to B of $7,000. In addition, Y has 
$7,000 of imputed interest income for 2009.

    (f) Treatment of stated interest and OID for split-dollar loans--(1) 
In general. If a split-dollar loan provides for stated interest or OID, 
the loan is subject to this paragraph (f), regardless of whether the 
split-dollar loan has sufficient interest. Except as otherwise provided 
in this section, split-dollar loans are subject to the same Internal 
Revenue Code and regulatory provisions for stated interest and OID as 
other loans. For example, the lender of a split-dollar loan that 
provides for stated interest must account for any qualified stated 
interest (as defined in Sec.  1.1273-

[[Page 595]]

1(c)) under its regular method of accounting (for example, an accrual 
method or the cash receipts and disbursements method). See Sec.  1.446-2 
to determine the amount of qualified stated interest that accrues during 
an accrual period. In addition, the lender must account under Sec.  
1.1272-1 for any OID on a split-dollar loan. However, Sec.  1.1272-1(c) 
does not apply to any split-dollar loan. See paragraph (h) of this 
section for a subsequent waiver, cancellation, or forgiveness of stated 
interest on a split-dollar loan.
    (2) Term, payment schedule, and yield. The term of a split-dollar 
term loan determined under paragraph (e)(4)(iii) of this section (other 
than paragraph (e)(4)(iii)(C) of this section) applies to determine the 
split-dollar loan's term, payment schedule, and yield for all purposes 
of this section.
    (g) Certain variable rates of interest--(1) In general. This 
paragraph (g) provides rules for a split-dollar loan that provides for 
certain variable rates of interest. If this paragraph (g) does not apply 
to a variable rate split-dollar loan, the loan is subject to the rules 
in paragraph (j) of this section for split-dollar loans that provide for 
one or more contingent payments.
    (2) Applicability--(i) In general. Except as provided in paragraph 
(g)(2)(ii) of this section, this paragraph (g) applies to a split-dollar 
loan that is a variable rate debt instrument (within the meaning of 
Sec.  1.1275-5) and that provides for stated interest at a qualified 
floating rate (or rates).
    (ii) Interest rate restrictions. This paragraph (g) does not apply 
to a split-dollar loan if, as a result of interest rate restrictions 
(such as an interest rate cap), the expected yield of the loan taking 
the restrictions into account is significantly less than the expected 
yield of the loan without regard to the restrictions. Conversely, if 
reasonably symmetric interest rate caps and floors or reasonably 
symmetric governors are fixed throughout the term of the loan, these 
restrictions generally do not prevent this paragraph (g) from applying 
to the loan.
    (3) Testing for sufficient interest--(i) Demand loan. For purposes 
of paragraph (e)(3)(ii) of this section (regarding testing a split-
dollar demand loan for sufficient interest), a split-dollar demand loan 
is treated as if it provided for a fixed rate of interest for each 
accrual period to which a qualified floating rate applies. The projected 
fixed rate for each accrual period is the value of the qualified 
floating rate as of the beginning of the calendar year that contains the 
last day of the accrual period.
    (ii) Term loan. For purposes of paragraph (e)(4)(ii) of this section 
(regarding testing a split-dollar term loan for sufficient interest), a 
split-dollar term loan subject to this paragraph (g) is treated as if it 
provided for a fixed rate of interest for each accrual period to which a 
qualified floating rate applies. The projected fixed rate for each 
accrual period is the value of the qualified floating rate on the date 
the split-dollar term loan is made. The term of a split-dollar loan that 
is subject to this paragraph (g)(3)(ii) is determined using the rules in 
Sec.  1.1274-4(c)(2). For example, if the loan provides for interest at 
a qualified floating rate that adjusts at varying intervals, the term of 
the loan is determined by reference to the longest interval between 
interest adjustment dates. See paragraph (e)(5) of this section for 
special rules relating to certain split-dollar term loans, such as a 
split-dollar term loan payable not later than the death of an 
individual.
    (4) Interest accruals and imputed transfers. For purposes of 
paragraphs (e) and (f) of this section, the projected fixed rate or 
rates determined under paragraph (g)(3) of this section are used for 
purposes of determining the accrual of interest each period and the 
amount of any imputed transfers. Appropriate adjustments are made to the 
interest accruals and any imputed transfers to take into account any 
difference between the projected fixed rate and the actual rate.
    (5) Example. The provisions of this paragraph (g) are illustrated by 
the following example:

    Example. (i) On January 1, 2010, Employer V and Employee F enter 
into a split-dollar life insurance arrangement under which F is named as 
the policy owner. On January 1, 2010, V makes a $100,000 premium 
payment, repayable in 15 years. The premium payment is a split-dollar 
term loan. Under the arrangement between the parties, interest is 
payable on the split-dollar loan each year on

[[Page 596]]

January 1, starting January 1, 2011, at a rate equal to the value of 1-
year LIBOR as of the payment date. The short-term AFR (based on annual 
compounding) at the time of the loan is 7 percent. Repayment of both the 
premium payment and the interest due thereon is nonrecourse to F. 
However, the parties made a representation under paragraph (d)(2) of 
this section. Assume that the value of 1-year LIBOR on January 1, 2010, 
is 8 percent, compounded annually.
    (ii) The loan is subject to this paragraph (g) because the loan is a 
variable rate debt instrument that bears interest at a qualified 
floating rate. Because the interest rate is reset each year, under 
paragraph (g)(3)(ii) of this section, the short-term AFR (based on 
annual compounding) is the appropriate test rate used to determine 
whether the loan provides for sufficient interest. Moreover, under 
paragraph (g)(3)(ii) of this section, to determine whether the loan 
provides for sufficient interest, the loan is treated as if it provided 
for a fixed rate of interest equal to 8 percent, compounded annually. 
Based on a discount rate of 7 percent, compounded annually (the short-
term AFR), the present value of the payments under the loan is 
$109,107.91. The loan provides for sufficient interest because the 
loan's imputed loan amount of $109,107.91 (the present value of the 
payments) is more than the amount loaned of $100,000. Therefore, the 
loan is not a below-market split-dollar term loan, and interest on the 
loan is taken into account under paragraph (f) of this section.

    (h) Adjustments for interest paid at less than the stated rate--(1) 
Application--(i) In general. To the extent required by this paragraph 
(h), if accrued but unpaid interest on a split-dollar loan is 
subsequently waived, cancelled, or forgiven by the lender, then the 
waiver, cancellation, or forgiveness is treated as if, on that date, the 
interest had in fact been paid to the lender and retransferred by the 
lender to the borrower. The amount deemed transferred and retransferred 
is determined under paragraph (h) (2) or (3) of this section. Except as 
provided in paragraph (h)(1)(iv) of this section, the amount treated as 
retransferred by the lender to the borrower under paragraph (h) (2) or 
(3) of this section is increased by the deferral charge determined under 
paragraph (h)(4) of this section. To determine the character of any 
retransferred amount, see paragraph (e)(1)(i) of this section. See Sec.  
1.61-22(b)(6) for the treatment of amounts other than interest on a 
split-dollar loan that are waived, cancelled, or forgiven by the lender.
    (ii) Certain split-dollar term loans. For purposes of this paragraph 
(h), a split-dollar term loan described in paragraph (e)(5) of this 
section (for example, a split-dollar term loan payable not later than 
the death of an individual) is subject to the rules of paragraph (h)(3) 
of this section.
    (iii) Payments treated as a waiver, cancellation, or forgiveness. 
For purposes of this paragraph (h), if a payment by the lender (or a 
person related to the lender) to the borrower is, in substance, a 
waiver, cancellation, or forgiveness of accrued but unpaid interest, the 
payment by the lender (or person related to the lender) is treated as an 
amount retransferred to the borrower by the lender under this paragraph 
(h) and is subject to the deferral charge in paragraph (h)(4) of this 
section to the extent that the payment is, in substance, a waiver, 
cancellation, or forgiveness of accrued but unpaid interest.
    (iv) Treatment of certain nonrecourse split-dollar loans. For 
purposes of this paragraph (h), if the parties to a split-dollar life 
insurance arrangement make the representation described in paragraph 
(d)(2) of this section and the interest actually paid on the split-
dollar loan is less than the interest required to be accrued on the 
split-dollar loan, the excess of the interest required to be accrued 
over the interest actually paid is treated as waived, cancelled, or 
forgiven by the lender under this paragraph (h). However, the amount 
treated as retransferred under paragraph (h)(1)(i) of this section is 
not increased by the deferral charge in paragraph (h)(4) of this 
section.
    (2) Split-dollar term loans. In the case of a split-dollar term 
loan, the amount of interest deemed transferred and retransferred for 
purposes of paragraph (h)(1) of this section is determined as follows:
    (i) If the loan's stated rate is less than or equal to the 
appropriate AFR (the AFR used to test the loan for sufficient interest 
under paragraph (e) of this section), the amount of interest deemed 
transferred and retransferred pursuant to this paragraph (h) is the

[[Page 597]]

excess of the amount of interest payable at the stated rate over the 
interest actually paid.
    (ii) If the loan's stated rate is greater than the appropriate AFR 
(the AFR used to test the loan for sufficient interest under paragraph 
(e) of this section), the amount of interest deemed transferred and 
retransferred pursuant to this paragraph (h) is the excess, if any, of 
the amount of interest payable at the AFR over the interest actually 
paid.
    (3) Split-dollar demand loans. In the case of a split-dollar demand 
loan, the amount of interest deemed transferred and retransferred for 
purposes of paragraph (h)(1) of this section is equal to the aggregate 
of--
    (i) For each year that the split-dollar demand loan was outstanding 
in which the loan was a below-market split-dollar demand loan, the 
excess of the amount of interest payable at the stated rate over the 
interest actually paid allocable to that year; plus
    (ii) For each year that the split-dollar demand loan was outstanding 
in which the loan was not a below-market split-dollar demand loan, the 
excess, if any, of the amount of interest payable at the appropriate 
rate used for purposes of imputation for that year over the interest 
actually paid allocable to that year.
    (4) Deferral charge. The Commissioner may prescribe the method for 
determining the deferral charge treated as retransferred by the lender 
to the borrower under paragraph (h)(1) of this section. Until the 
Commissioner prescribes otherwise, the deferral charge is determined 
under paragraph (h)(4)(i) of this section for a split-dollar term loan 
subject to paragraph (h)(2) of this section and under paragraph 
(h)(4)(ii) of this section for a split-dollar demand loan subject to 
paragraph (h)(3) of this section.
    (i) Split-dollar term loan. The deferral charge for a split-dollar 
term loan subject to paragraph (h)(2) of this section is determined by 
multiplying the hypothetical underpayment by the applicable underpayment 
rate, compounded daily, for the period from the date the split-dollar 
loan was made to the date the interest is waived, cancelled, or 
forgiven. The hypothetical underpayment is equal to the amount 
determined under paragraph (h)(2) of this section, multiplied by the 
highest rate of income tax applicable to the borrower (for example, the 
highest rate in effect under section 1 for individuals) for the taxable 
year in which the split-dollar term loan was made. The applicable 
underpayment rate is the average of the quarterly underpayment rates in 
effect under section 6621(a)(2) for the period from the date the split-
dollar loan was made to the date the interest is waived, cancelled, or 
forgiven.
    (ii) Split-dollar demand loan. The deferral charge for a split-
dollar demand loan subject to paragraph (h)(3) of this section is the 
sum of the following amounts determined for each year the loan was 
outstanding (other than the year in which the waiver, cancellation, or 
forgiveness occurs): For each year the loan was outstanding, multiply 
the hypothetical underpayment for the year by the applicable 
underpayment rate, compounded daily, for the applicable period. The 
hypothetical underpayment is equal to the amount determined under 
paragraph (h)(3) of this section for each year, multiplied by the 
highest rate of income tax applicable to the borrower for that year (for 
example, the highest rate in effect under section 1 for individuals). 
The applicable underpayment rate is the average of the quarterly 
underpayment rates in effect under section 6621(a)(2) for the applicable 
period. The applicable period for a year is the period of time from the 
last day of that year until the date the interest is waived, cancelled, 
or forgiven.
    (5) Examples. The provisions of this paragraph (h) are illustrated 
by the following examples:

    Example 1. (i) On January 1, 2009, Employer Y and Employee B entered 
into a split-dollar life insurance arrangement under which B is named as 
the policy owner. On January 1, 2009, Y made a $100,000 premium payment, 
repayable on December 31, 2011, with interest of 5 percent, compounded 
annually. The premium payment is a split-dollar term loan. Assume the 
short-term AFR (based on annual compounding) at the time the loan was 
made was 5 percent. Repayment of both the premium payment and the 
interest due thereon was fully recourse to B. On December 31, 2011, Y is 
repaid $100,000 but Y waives the remainder due on the loan ($15,762.50).

[[Page 598]]

Both Y and B use the calendar year as their taxable years.
    (ii) When the split-dollar term loan was made, the loan was not a 
below-market loan under paragraph (e)(4)(ii) of this section. Under 
paragraph (f) of this section, Y was required to accrue compound 
interest of 5 percent each year the loan remained outstanding. B, 
however, was not entitled to any deduction for this interest under 
paragraph (c) of this section.
    (iii) Under paragraph (h)(1) of this section, the waived amount is 
treated as if, on December 31, 2011, it had in fact been paid to Y and 
was then retransferred by Y to B. The amount deemed transferred to Y and 
retransferred to B equals the excess of the amount of interest payable 
at the stated rate ($15,762.50) over the interest actually paid ($0), or 
$15,762.50. In addition, the amount deemed retransferred to B is 
increased by the deferral charge determined under paragraph (h)(4) of 
this section. Because of the employment relationship between Y and B, 
the total retransferred amount is treated as compensation paid by Y to 
B.

    Example 2. (i) On January 1, 2009, Employer Y and Employee B entered 
into a split-dollar life insurance arrangement under which B is named as 
the policy owner. On January 1, 2009, Y made a $100,000 premium payment, 
repayable on the demand of Y, with interest of 7 percent, compounded 
annually. The premium payment is a split-dollar demand loan. Assume the 
blended annual rate (based on annual compounding) in 2009 was 5 percent 
and in 2010 was 6 percent. Repayment of both the premium payment and the 
interest due thereon was fully recourse to B. On December 31, 2010, Y 
demands repayment and is repaid its $100,000 premium payment in full; 
however, Y waives all interest due on the loan. Both Y and B use the 
calendar year as their taxable years.
    (ii) For each year that the split-dollar demand loan was 
outstanding, the loan was not a below-market loan under paragraph 
(e)(3)(ii) of this section. Under paragraph (f) of this section, Y was 
required to accrue compound interest of 7 percent each year the loan 
remained outstanding. B, however, was not entitled to any deduction for 
this interest under paragraph (c) of this section.
    (iii) Under paragraph (h)(1) of this section, a portion of the 
waived interest is treated as if, on December 31, 2010, it had in fact 
been paid to Y and was then retransferred by Y to B. The amount of 
interest deemed transferred to Y and retransferred to B equals the 
excess, if any, of the amount of interest payable at the blended annual 
rate for each year the loan is outstanding over the interest actually 
paid with respect to that year. For 2009, the interest payable at the 
blended annual rate is $5,000 ($100,000 x 0.05). For 2010, the interest 
payable at the blended annual rate is $6,000 ($100,000 x 0.06). 
Therefore, the amount of interest deemed transferred to Y and 
retransferred to B equals $11,000. In addition, the amount deemed 
retransferred to B is increased by the deferral charge determined under 
paragraph (h)(4) of this section. Because of the employment relationship 
between Y and B, the total retransferred amount is treated as 
compensation paid by Y to B.

    (i) [Reserved]
    (j) Split-dollar loans that provide for contingent payments--(1) In 
general. Except as provided in paragraph (j)(2) of this section, this 
paragraph (j) provides rules for a split-dollar loan that provides for 
one or more contingent payments. This paragraph (j), rather than Sec.  
1.1275-4, applies to split-dollar loans that provide for one or more 
contingent payments.
    (2) Exceptions--(i) Certain contingencies. For purposes of this 
section, a split-dollar loan does not provide for contingent payments 
merely because--
    (A) The loan provides for options described in paragraph 
(e)(4)(iii)(B) of this section (for example, certain call options, put 
options, and options to extend); or
    (B) The loan is described in paragraph (e)(5) of this section 
(relating to certain split-dollar term loans, such as a split-dollar 
term loan payable not later than the death of an individual).
    (ii) Insolvency and default. For purposes of this section, a payment 
is not contingent merely because of the possibility of impairment by 
insolvency, default, or similar circumstances. However, if any payment 
on a split-dollar loan is nonrecourse to the borrower, the payment is a 
contingent payment for purposes of this paragraph (j) unless the parties 
to the arrangement make the written representation provided for in 
paragraph (d)(2) of this section.
    (iii) Remote and incidental contingencies. For purposes of this 
section, a payment is not a contingent payment merely because of a 
contingency that, as of the date the split-dollar loan is made, is 
either remote or incidental (within the meaning of Sec.  1.1275-2(h)).
    (iv) Exceptions for certain split-dollar loans. This paragraph (j) 
does not apply to a split-dollar loan described in Sec.  1.1272-1(d) 
(certain debt instruments that provide for a fixed yield) or a split-
dollar loan described in paragraph

[[Page 599]]

(g) of this section (relating to split-dollar loans providing for 
certain variable rates of interest).
    (3) Contingent split-dollar method--(i) In general. If a split-
dollar loan provides for one or more contingent payments, then the 
parties account for the loan under the contingent split-dollar method. 
In general, except as provided in this paragraph (j), this method is the 
same as the noncontingent bond method described in Sec.  1.1275-4(b).
    (ii) Projected payment schedule--(A) Determination of schedule. No 
comparable yield is required to be determined. The projected payment 
schedule for the loan includes all noncontingent payments and a 
projected payment for each contingent payment. The projected payment for 
a contingent payment is the lowest possible value of the payment. The 
projected payment schedule, however, must produce a yield that is not 
less than zero. If the projected payment schedule produces a negative 
yield, the schedule must be reasonably adjusted to produce a yield of 
zero.
    (B) Split-dollar term loans payable upon the death of an individual. 
If a split-dollar term loan described in paragraph (e)(5)(ii)(A) or 
(v)(A)(1) of this section provides for one or more contingent payments, 
the projected payment schedule is determined based on the term of the 
loan as determined under paragraph (e)(5)(ii)(C) or (v)(B)(2) of this 
section, whichever is applicable.
    (C) Certain split-dollar term loans conditioned on the future 
performance of substantial services by an individual. If a split-dollar 
term loan described in paragraph (e)(5)(iii)(A)(1) or (v)(A)(2) of this 
section provides for one or more contingent payments, the projected 
payment schedule is determined based on the term of the loan as 
determined under paragraph (e)(5)(iii)(C) or (v)(B)(2) of this section, 
whichever is applicable.
    (D) Demand loans. If a split-dollar demand loan provides for one or 
more contingent payments, the projected payment schedule is determined 
based on a reasonable assumption as to when the lender will demand 
repayment.
    (E) Borrower/lender consistency. Contrary to Sec.  1.1275-
4(b)(4)(iv), the lender rather than the borrower is required to 
determine the projected payment schedule and to provide the schedule to 
the borrower and to any indirect participant as described in paragraph 
(e)(2) of this section. The lender's projected payment schedule is used 
by the lender, the borrower, and any indirect participant to compute 
interest accruals and adjustments.
    (iii) Negative adjustments. If the issuer of a split-dollar loan is 
not allowed to deduct interest or OID (for example, because of section 
163(h) or 264), then the issuer is not required to include in income any 
negative adjustment carryforward determined under Sec.  1.1275-
4(b)(6)(iii)(C) on the loan, except to the extent that at maturity the 
total payments made over the life of the loan are less than the issue 
price of the loan.
    (4) Application of section 7872--(i) Determination of below-market 
status. The yield based on the projected payment schedule determined 
under paragraph (j)(3) of this section is used to determine whether the 
loan is a below-market split-dollar loan under paragraph (e) of this 
section.
    (ii) Adjustment upon the resolution of a contingent payment. To the 
extent that interest has accrued under section 7872 on a split-dollar 
loan and the interest would not have accrued under this paragraph (j) in 
the absence of section 7872, the lender is not required to recognize 
income under Sec.  1.1275-4(b) for a positive adjustment and the 
borrower is not treated as having interest expense for a positive 
adjustment. To the same extent, there is a reversal of the tax 
consequences imposed under paragraph (e) of this section for the prior 
imputed transfer from the lender to the borrower. This reversal is taken 
into account in determining adjusted gross income.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (j). For purposes of this paragraph (j)(5), assume that the 
contingent payments are neither remote nor incidental. The examples are 
as follows:

    Example 1. (i) On January 1, 2010, Employer T and Employee G enter 
into a split-dollar life insurance arrangement under which G is named as 
the policy owner. On January 1, 2010, T makes a $100,000 premium 
payment. On December 31, 2013, T will be repaid an

[[Page 600]]

amount equal to the premium payment plus an amount based on the 
increase, if any, in the price of a specified commodity for the period 
the loan is outstanding. The premium payment is a split-dollar term 
loan. Repayment of both the premium payment and the interest due thereon 
is recourse to G. Assume that the appropriate AFR for this loan, based 
on annual compounding, is 7 percent. Both T and G use the calendar year 
as their taxable years.
    (ii) Under this paragraph (j), the split-dollar term loan between T 
and G provides for a contingent payment. Therefore, the loan is subject 
to the contingent split-dollar method. Under this method, the projected 
payment schedule for the loan provides for a noncontingent payment of 
$100,000 and a projected payment of $0 for the contingent payment 
(because it is the lowest possible value of the payment) on December 31, 
2013.
    (iii) Based on the projected payment schedule and a discount rate of 
7 percent, compounded annually (the appropriate AFR), the present value 
of the payments under the loan is $76,289.52. Under paragraphs (e)(4) 
and (j)(4)(i) of this section, the loan does not provide for sufficient 
interest because the loan's imputed loan amount of $76,289.52 (the 
present value of the payments) is less than the amount loaned of 
$100,000. Therefore, the loan is a below-market split-dollar term loan 
and the loan is recharacterized as consisting of two portions: an 
imputed loan amount of $76,289.52 and an imputed transfer of $23,710.48 
(amount loaned of $100,000 minus the imputed loan amount of $76,289.52).
    (iv) In accordance with section 7872(b)(1) and paragraph (e)(4)(iv) 
of this section, on the date the loan is made, T is treated as 
transferring to G $23,710.48 (the imputed transfer) as compensation. In 
addition, T must take into account as OID an amount equal to the imputed 
transfer. See Sec.  1.1272-1 for the treatment of OID.
    Example 2. (i) Assume, in addition to the facts in Example 1, that 
on December 31, 2013, T receives $115,000 (its premium payment of 
$100,000 plus $15,000).
    (ii) Under the contingent split-dollar method, when the loan is 
repaid, there is a $15,000 positive adjustment ($15,000 actual payment 
minus $0 projected payment). Under paragraph (j)(4) of this section, 
because T accrued imputed interest under section 7872 on this split-
dollar loan to G and this interest would not have accrued in the absence 
of section 7872, T is not required to include the positive adjustment in 
income, and G is not treated as having interest expense for the positive 
adjustment. To the same extent, T must include in income, and G is 
entitled to deduct, $15,000 to reverse their respective prior tax 
consequences imposed under paragraph (e) of this section (T's prior 
deduction for imputed compensation deemed paid to G and G's prior 
inclusion of this amount). G takes the reversal into account in 
determining adjusted gross income. That is, the $15,000 is an ``above-
the-line'' deduction, whether or not G itemizes deductions.
    Example 3. (i) Assume the same facts as in Example 2, except that on 
December 31, 2013, T receives $127,000 (its premium payment of $100,000 
plus $27,000).
    (ii) Under the contingent split-dollar method, when the loan is 
repaid, there is a $27,000 positive adjustment ($27,000 actual payment 
minus $0 projected payment). Under paragraph (j)(4) of this section, 
because T accrued imputed interest of $23,710.48 under section 7872 on 
this split-dollar loan to G and this interest would not have accrued in 
the absence of section 7872, T is not required to include $23,710.48 of 
the positive adjustment in income, and G is not treated as having 
interest expense for the positive adjustment. To the same extent, in 
2013, T must include in income, and G is entitled to deduct, $23,710.48 
to reverse their respective prior tax consequences imposed under 
paragraph (e) of this section (T's prior deduction for imputed 
compensation deemed paid to G and G's prior inclusion of this amount). G 
and T take these reversals into account in determining adjusted gross 
income. Under the contingent split-dollar method, T must include in 
income $3,289.52 upon resolution of the contingency ($27,000 positive 
adjustment minus $23,710.48).

    (k) Payment ordering rule. For purposes of this section, a payment 
made by the borrower to or for the benefit of the lender pursuant to a 
split-dollar life insurance arrangement is applied to all direct and 
indirect split-dollar loans in the following order--
    (1) A payment of interest to the extent of accrued but unpaid 
interest (including any OID) on all outstanding split-dollar loans in 
the order the interest accrued;
    (2) A payment of principal on the outstanding split-dollar loans in 
the order in which the loans were made;
    (3) A payment of amounts previously paid by a non-owner pursuant to 
a split-dollar life insurance arrangement that were not reasonably 
expected to be repaid by the owner; and
    (4) Any other payment with respect to a split-dollar life insurance 
arrangement, other than a payment taken into account under paragraphs 
(k)(1), (2), and (3) of this section.
    (l) [Reserved]
    (m) Repayments received by a lender. Any amount received by a lender 
under a life insurance contract that is part of

[[Page 601]]

a split-dollar life insurance arrangement is treated as though the 
amount had been paid to the borrower and then paid by the borrower to 
the lender. Any amount treated as received by the borrower under this 
paragraph (m) is subject to other provisions of the Internal Revenue 
Code as applicable (for example, sections 72 and 101(a)). The lender 
must take the amount into account as a payment received with respect to 
a split-dollar loan, in accordance with paragraph (k) of this section. 
No amount received by a lender with respect to a split-dollar loan is 
treated as an amount received by reason of the death of the insured.
    (n) Effective date--(1) General rule. This section applies to any 
split-dollar life insurance arrangement entered into after September 17, 
2003. For purposes of this section, an arrangement is entered into as 
determined under Sec.  1.61-22(j)(1)(ii).
    (2) Modified arrangements treated as new arrangements. If an 
arrangement entered into on or before September 17, 2003 is materially 
modified (within the meaning of Sec.  1.61-22(j)(2)) after September 17, 
2003, the arrangement is treated as a new arrangement entered into on 
the date of the modification.

[T.D. 9092, 68 FR 54352, Sept. 17, 2003]

                      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

[[Page 602]]

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 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 Sec. Sec.  
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

[[Page 603]]

tax liability is increased by reason of the enactment of Public Law 74, 
and since the last 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,

[[Page 604]]

    (5) The taxable income and the tax liability of the taxpayer 
computed without the application of sections 452 and 462,
    (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 Sec. Sec.  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

[[Page 605]]

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 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,

[[Page 606]]

1955, if the tax for the preceding taxable year is increased as the 
result of 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 Sec. Sec.  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

[[Page 607]]

of the accumulated earnings tax or the personal holding company tax, if:
    (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 Sec. Sec.  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

[[Page 608]]

property held by the taxpayer or a predecessor on such date for which 
cost was or is claimed as basis and which either:
    (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.

[[Page 609]]

    (7) The term ``Commissioner'' means the Commissioner of Internal 
Revenue.



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 Sec. Sec.  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 Sec. Sec.  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

[[Page 610]]

the straight-line method of computing 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

[[Page 611]]

not be determined, then such other 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

[[Page 612]]

all retirement-straight line property 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,        2,155
   1943, to December 31, 1955...............................
                                                 -------------
  Balance...................................................       5,155
(ii) Charges to reserve:
  Part of terms-letter reserve applicable to            $450
   property abnormally retired..................
  Depreciation applicable to property abnormally         345
   retired and allowable from January 1, 1943,
   to December 31, 1954.........................
  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           120
       on property abnormally retired on
       December 31, 1954........................
                                                 ------------
                                                  ..........         480
  Part of terms-letter reserve applicable to property                450
   abnormally retired on December 31, 1954 (including $120
   depreciation sustained before March 1, 1913).............

[[Page 613]]

 
  Depreciation allowable under terms-letter from January 1,        2,155
   1943, to December 31, 1955...............................
                                                 -------------
      Total Credits.........................................       3,285
                                                 =============
(iii) Charges to reserve for depreciation:
  Part of terms-letter reserve applicable to property                450
   abnormally retired.......................................
  Depreciation applicable to property abnormally retired and         345
   allowable from January 1, 1943, to December 31, 1954.....
  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                $3,360
 subparagraph (2) of this paragraph.........................
(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             450
   property abnormally retired on December 31,
   1954.........................................
                                                 ============
                                                  ..........       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                1,490
 subparagraph (3)(iv) of this paragraph.....................
                                                 =============
 

    (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 614]]

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,        2,100
   1943, to December 31, 1954..............................
                                                   ----------
      Total credits........................................        5,100
                                                   ==========
(iii) Charges to reserve for depreciation:
  Part of terms-letter reserve applicable to property                450
   abnormally retired on December 31, 1954.................
  Depreciation applicable to property abnormally retired             345
   and allowable from January 1, 1943, to December 31, 1954
    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 615]]

    (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
    (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.


[[Page 616]]


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.
    (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:

[[Page 617]]

    (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
    (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

[[Page 618]]

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 Sec. Sec.  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 Sec. Sec.  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 
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

[[Page 619]]

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 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

[[Page 620]]

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 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.

[[Page 621]]

    (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 
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

[[Page 622]]

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 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

[[Page 623]]

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 Sec. Sec.  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 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

[[Page 624]]

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:
    (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

[[Page 625]]

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;
    (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

[[Page 626]]

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]



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

[[Page 627]]

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 
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]

[[Page 628]]



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 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 Sec. Sec.  1.9003-1 to 
1.9003-4, inclusive, the term ``Act'' means the Public Debt and Tax Rate

[[Page 629]]

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), 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.

[[Page 630]]

    (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]



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

[[Page 631]]

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 limitations. For purposes of this 
section and Sec. Sec.  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]

[[Page 632]]

 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]



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,

[[Page 633]]

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 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.

[[Page 634]]

    (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 $13.75x273/365 
plus $14.40x92/365.

    (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 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]

[[Page 635]]



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 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

[[Page 636]]

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 Sec. Sec.  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 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

[[Page 637]]

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,          200
   determined without regard to Act for October 15, 1969 and
   December 15, 1969 ($100+$100).................................
                                                                  ------
  (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 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,

[[Page 638]]

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 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.

[[Page 639]]

    (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 
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

[[Page 640]]

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 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

[[Page 641]]

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 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.

[[Page 642]]

    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.

[[Page 643]]

    (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 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 645]]



                              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 647]]



                    Table of CFR Titles and Chapters




                      (Revised as of April 1, 2004)

                      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)

                   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)
         V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
        VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
      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)
      XXIV  Federal Energy Regulatory Commission (Part 3401)
       XXV  Department of the Interior (Part 3501)
      XXVI  Department of Defense (Part 3601)

[[Page 648]]

    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)
        LV  National Endowment for the Arts (Part 6501)
       LVI  National Endowment for the Humanities (Part 6601)
      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)
     LXVII  Institute of Museum and Library Services (Part 7701)
      LXIX  Tennessee Valley Authority (Part 7901)
      LXXI  Consumer Product Safety Commission (Part 8101)
    LXXIII  Department of Agriculture (Part 8301)
     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--Homeland Security

         I  Department of Homeland Security, Office of the 
                Secretary (Parts 0--99)

[[Page 649]]

                         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 Nutrition Service, Department of Agriculture 
                (Parts 210--299)
       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)
        XX  Local Television Loan Guarantee Board (Parts 2200--
                2299)
      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 the Chief Financial Officer, Department of 
                Agriculture (Parts 3000--3099)

[[Page 650]]

      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
     XXXII  Office of Procurement and Property Management, 
                Department of Agriculture (Parts 3200--3299)
    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)
     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  Department of Homeland Security (Immigration and 
                Naturalization) (Parts 1--499)
         V  Executive Office for Immigration Review, Department of 
                Justice (Parts 1000--1399)

                 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, 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)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Part 1800)

[[Page 651]]

                      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)
       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  Department of the Treasury (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)
        IV  Emergency Steel Guarantee Loan Board, Department of 
                Commerce (Parts 400--499)
         V  Emergency Oil and Gas Guaranteed Loan Board, 
                Department of Commerce (Parts 500--599)

                    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)
        VI  Air Transportation System Stabilization (Parts 1300--
                1399)

[[Page 652]]

                 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 Industry and Security, 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)
       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)

[[Page 653]]

      VIII  Susquehanna River Basin Commission (Parts 800--899)
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

         I  Bureau of Customs and Border Protection, Department of 
                Homeland Security; Department of the Treasury 
                (Parts 0--199)
        II  United States International Trade Commission (Parts 
                200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Bureau of Immigration and Customs Enforcement, 
                Department of Homeland Security (Parts 400--599)

                     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)
      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 (Parts 200--299)
       III  Peace Corps (Parts 300--399)
        IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
         V  Broadcasting Board of Governors (Parts 500--599)
       VII  Overseas Private Investment Corporation (Parts 700--
                799)
        IX  Foreign Service Grievance Board Regulations (Parts 
                900--999)

[[Page 654]]

         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)
       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)

                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)
        IV  Office of Housing and Office of Multifamily Housing 
                Assistance Restructuring, Department of Housing 
                and Urban Development (Parts 400--499)
         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)

[[Page 655]]

      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs, Section 202 Direct Loan Program, Section 
                202 Supportive Housing for the Elderly Program and 
                Section 811 Supportive Housing for Persons With 
                Disabilities Program) (Parts 800--899)
        IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--1699)
         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 (Parts 1000--1199)
       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Part 1200)

                      Title 26--Internal Revenue

         I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--899)

           Title 27--Alcohol, Tobacco Products and Firearms

         I  Alcohol and Tobacco Tax and Trade Bureau, Department 
                of the Treasury (Parts 1--399)
        II  Bureau of Alcohol, Tobacco, Firearms, and Explosives, 
                Department of Justice (Parts 400--699)

                   Title 28--Judicial Administration

         I  Department of Justice (Parts 0--299)

[[Page 656]]

       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)
      VIII  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 800--899)
        IX  National Crime Prevention and Privacy Compact Council 
                (Parts 900--999)
        XI  Department of Justice and Department of State (Parts 
                1100--1199)

                            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  Employee Benefits Security 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)

                      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)

[[Page 657]]

       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)
        IX  Federal Claims Collection Standards (Department of the 
                Treasury--Department of Justice) (Parts 900--999)

                      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)
     XVIII  National Counterintelligence Center (Parts 1800--1899)
       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)

               Title 33--Navigation and Navigable Waters

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Corps of Engineers, Department of the Army (Parts 
                200--399)

[[Page 658]]

        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)
        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)
         X  Presidio Trust (Parts 1000--1099)
        XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
       XII  National Archives and Records Administration (Parts 
                1200--1299)
        XV  Oklahoma City National Memorial Trust (Part 1501)
       XVI  Morris K. Udall Scholarship and Excellence in National 
                Environmental Policy Foundation (Parts 1600--1699)

[[Page 659]]

             Title 37--Patents, Trademarks, and Copyrights

         I  United States 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--1099)
        IV  Environmental Protection Agency and Department of 
                Justice (Parts 1400--1499)
         V  Council on Environmental Quality (Parts 1500--1599)
        VI  Chemical Safety and Hazard Investigation Board (Parts 
                1600--1699)
       VII  Environmental Protection Agency and Department of 
                Defense; Uniform National Discharge Standards for 
                Vessels of the Armed Forces (Parts 1700--1799)

          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 Service, 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)
       102  Federal Management Regulation (Parts 102-1--102-299)
       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)

[[Page 660]]

       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
       300  General (Parts 300-1--300-99)
       301  Temporary Duty (TDY) Travel Allowances (Parts 301-1--
                301-99)
       302  Relocation Allowances (Parts 302-1--302-99)
       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Part 303-70)
       304  Payment of Travel Expenses from a Non-Federal Source 
                (Parts 304-1--304-99)

                        Title 42--Public Health

         I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
        IV  Centers for Medicare & Medicaid Services, 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--10010)

             Title 44--Emergency Management and Assistance

         I  Federal Emergency Management Agency, Department of 
                Homeland Security (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 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Welfare

[[Page 661]]

        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)
         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  Corporation for National and Community Service (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)
     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 Homeland Security (Parts 
                1--199)
        II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
       III  Coast Guard (Great Lakes Pilotage), Department of 
                Homeland Security (Parts 400--499)
        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)

[[Page 662]]

       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  United States 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)
        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  Broadcasting Board of Governors (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)
        30  Department of Homeland Security, Homeland Security 
                Acquisition Regulation (HSAR) (Parts 3000--3099)
        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)

[[Page 663]]

        54  Defense Logistics Agency, Department of Defense (Parts 
                5400--5499)
        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)
       III  Federal Motor Carrier Safety Administration, 
                Department of Transportation (Parts 300--399)
        IV  Coast Guard, Department of Homeland Security (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)
        XI  Bureau of Transportation Statistics, Department of 
                Transportation (Parts 1400--1499)
       XII  Transportation Security Administration, Department of 
                Homeland Security (Parts 1500--1599)

                   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)

[[Page 664]]

         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
            List of CFR Titles, Chapters, Subchapters, and Parts
            Alphabetical List of Agencies Appearing in the CFR

[[Page 665]]





           Alphabetical List of Agencies Appearing in the CFR




                      (Revised as of April 1, 2004)

                                                  CFR Title, Subtitle or 
                     Agency                               Chapter

Administrative Committee of the Federal Register  1, I
Advanced Research Projects Agency                 32, I
Advisory Council on Historic Preservation         36, VIII
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development, United      22, II
     States
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, IX, X, XI
Agricultural Research Service                     7, V
Agriculture Department                            5, LXXIII
  Agricultural Marketing Service                  7, I, IX, X, XI
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Chief Financial Officer, Office of              7, XXX
  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
  Food and Nutrition 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
  Procurement and Property Management, Office of  7, XXXII
  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
Air Transportation Stabilization Board            14, VI
Alcohol and Tobacco Tax and Trade Bureau          27, I
Alcohol, Tobacco, Firearms, and Explosives,       27, II
     Bureau of
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
American Indians, Office of the Special Trustee   25, VII
Animal and Plant Health Inspection Service        7, III; 9, I
Appalachian Regional Commission                   5, IX

[[Page 666]]

Architectural and Transportation Barriers         36, XI
     Compliance Board
Arctic Research Commission                        45, XXIII
Armed Forces Retirement Home                      5, XI
Army Department                                   32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
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
Broadcasting Board of Governors                   22, V
  Federal Acquisition Regulation                  48, 19
Census Bureau                                     15, I
Centers for Medicare & Medicaid Services          42, IV
Central Intelligence Agency                       32, XIX
Chief Financial Officer, Office of                7, XXX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X
Civil Rights, Commission on                       45, VII
Civil Rights, Office for                          34, I
Coast Guard                                       33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage)                46, III
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
  Federal Acquisition Regulation                  48, 13
  Fishery Conservation and Management             50, VI
  Foreign-Trade Zones Board                       15, IV
  Industry and Security, Bureau of                15, VII
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II
  National Marine Fisheries Service               50, II, IV, VI
  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, United States      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
Corporation for National and Community Service    45, XII, XXV
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Court Services and Offender Supervision Agency    28, VIII
     for the District of Columbia
Customs and Border Protection Bureau              19, I
Defense Contract Audit Agency                     32, I
Defense Department                                5, XXVI; 32, Subtitle A; 
                                                  40, VII

[[Page 667]]

  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
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 2
  National Imagery and Mapping Agency             32, I
  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 Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
District of Columbia, Court Services and          28, VIII
     Offender Supervision Agency for the
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
Emergency Oil and Gas Guaranteed Loan Board       13, V
Emergency Steel Guarantee Loan Board              13, IV
Employee Benefits Security Administration         29, XXV
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
Environmental Protection Agency                   5, LIV; 40, I, IV, VII
  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                5, III, LXXVII; 14, VI; 
                                                  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

[[Page 668]]

  Trade Representative, Office of the United      15, XX
       States
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
Federal Claims Collection Standards               31, IX
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
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Board                     12, IX
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 Management Regulation                     41, 102
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration       49, III
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
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
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 Nutrition 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
General Services Administration                   5, LVII; 41, 105
  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5

[[Page 669]]

  Federal Management Regulation                   41, 102
  Federal Property Management Regulations         41, 101
  Federal Travel Regulation System                41, Subtitle F
  General                                         41, 300
  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
  Temporary Duty (TDY) Travel Allowances          41, 301
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
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          5, XLV; 45, Subtitle A
  Centers for Medicare & Medicaid Services        42, IV
  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
  Human Development Services, Office of           45, XIII
  Indian Health Service                           25, V; 42, I
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Homeland Security, Department of                  6, I
  Coast Guard                                     33, I; 46, I; 49, IV
  Coast Guard (Great Lakes Pilotage)              46, III
  Customs and Border Protection Bureau            19, I
  Federal Emergency Management Agency             44, I
  Immigration and Customs Enforcement Bureau      19, IV
  Immigration and Naturalization                  8, I
  Transportation Security Administration          49, XII
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
  Housing, Office of, and Multifamily Housing     24, IV
       Assistance Restructuring, Office of
  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
Housing, Office of, and Multifamily Housing       24, IV
     Assistance Restructuring, Office of
Human Development Services, Office of             45, XIII
Immigration and Customs Enforcement Bureau        19, IV
Immigration and Naturalization                    8, I
Immigration Review, Executive Office for          8, V
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; 42, I
Industry and Security, Bureau of                  15, VII
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General

[[Page 670]]

  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
Interior Department
  American Indians, Office of the Special         25, VII
       Trustee
  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
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Reclamation, Bureau of                          43, I
  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, United States Agency   22, II
     for
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
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, XI; 40, 
                                                  IV
  Alcohol, Tobacco, Firearms, and Explosives,     27, II
       Bureau of
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             31, IX
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration Review, Executive Office for        8, V
  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
  Employee Benefits Security Administration       29, XXV
  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 Standards, Office of           29, II, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A

[[Page 671]]

  Veterans' Employment and Training Service,      41, 61; 20, IX
       Office of the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I
Labor-Management Standards, Office of             29, II, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Library of Congress                               36, VII
  Copyright Office                                37, II
Local Television Loan Guarantee Board             7, XX
Management and Budget, Office of                  5, III, LXXVII; 14, VI; 
                                                  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
Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
Morris K. Udall Scholarship and Excellence in     36, XVI
     National Environmental Policy Foundation
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 and Community Service, Corporation for   45, XII, XXV
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 Council on Disability                    34, XII
National Counterintelligence Center               32, XVIII
National Credit Union Administration              12, VII
National Crime Prevention and Privacy Compact     28, IX
     Council
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 Imagery and Mapping Agency               32, I
National Indian Gaming Commission                 25, III
National Institute for Literacy                   34, XI
National Institute of Standards and Technology    15, II
National Labor Relations Board                    5, LXI; 29, I
National Marine Fisheries Service                 50, II, IV, VI
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
Northeast Interstate Low-Level Radioactive Waste  10, XVIII
   Commission
[[Page 672]]

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
Oklahoma City National Memorial Trust             36, XV
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, United States        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 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
President's Commission on White House             1, IV
     Fellowships
Presidential Documents                            3
Presidio Trust                                    36, X
Prisons, Bureau of                                28, V
Procurement and Property Management, Office of    7, XXXII
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
State Department                                  22, I; 28, XI
  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

[[Page 673]]

Technology, Under Secretary for                   37, V
Tennessee Valley Authority                        5, LXIX; 18, XIII
Thrift Supervision Office, Department of the      12, V
     Treasury
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     5, L
  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
  Federal Motor Carrier Safety Administration     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 Statistics Bureau                49, XI
Transportation, Office of                         7, XXXIII
Transportation Security Administration            49, XII
Transportation Statistics Bureau                  49, XI
Travel Allowances, Temporary Duty (TDY)           41, 301
Treasury Department                               5, XXI; 12, XV; 17, IV; 
                                                  31, IX
  Alcohol and Tobacco Tax and Trade Bureau        27, I
  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs and Border Protection Bureau            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
Utah Reclamation Mitigation and Conservation      43, III
     Commission
Veterans Affairs Department                       38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the 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 675]]







                      Table Of OMB Control Numbers



The OMB control numbers for chapter I of title 26 were consolidated into 
Sec.  Sec.  601.9000 and 602.101 at 50 FR 10221, Mar. 14, 1985. At 61 FR 
58008, Nov. 12, 1996, Sec.  601.9000 was removed. Section 602.101 is 
reprinted below for the convenience of the user.

     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 comply with the requirements of Sec. Sec.  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) Display.

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
1.1(h)-1(e)................................................    1545-1654
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
1.25A-1....................................................    1545-1630
1.28-1.....................................................    1545-0619
1.31-2.....................................................    1545-0074
1.32-2.....................................................    1545-0074
1.32-3.....................................................    1545-1575
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(b)..................................................    1545-1625
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.....................................................    1545-1357
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
1.42-17....................................................    1545-1357
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
1.45D-1T...................................................    1545-1765
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
                                                               1545-1783
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
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

[[Page 676]]

 
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
1.66-4.....................................................    1545-1770
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
1.108-4....................................................    1545-1539
1.108-5....................................................    1545-1421
1.110-1....................................................    1545-1661
1.117-5....................................................    1545-0869
1.118-2....................................................    1545-1639
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
1.132-9(b).................................................    1545-1676
1.141-1....................................................    1545-1451
1.141-12...................................................    1545-1451
1.142-2....................................................    1545-1451
1.142(f)(4)-1..............................................    1545-1730
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
                                                               1545-1490
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
1.150-1....................................................    1545-1347
1.151-1....................................................    1545-0074
1.152-3....................................................    1545-0071
                                                               1545-1783
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
1.163-13...................................................    1545-1491
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

[[Page 677]]

 
1.166-4....................................................    1545-0123
1.166-10...................................................    1545-0123
1.167(a)-5T................................................    1545-1021
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-11T.................................................    1545-1868
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
1.171-4....................................................    1545-1491
1.171-5....................................................    1545-1491
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
1.195-1....................................................    1545-1582
1.197-1T...................................................    1545-1425
1.197-2....................................................    1545-1671
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(a)-5.................................................    1545-1870
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
1.274-5....................................................    1545-0771
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
1.280G-1...................................................    1545-1851
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
1.337(d)-2T................................................    1545-1774
1.337(d)-4.................................................    1545-1633
1.337(d)-5.................................................    1545-1672
1.337(d)-6.................................................    1545-1672
1.337(d)-7.................................................    1545-1672
1.338-2....................................................    1545-1658
1.338-5....................................................    1545-1658
1.338-10...................................................    1545-1658
1.338(h)(10)-1.............................................    1545-1658
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)-6T................................................    1545-0026
1.367(a)-8.................................................    1545-1271
1.367(b)-1.................................................    1545-1271
1.367(b)-3T................................................    1545-1666
1.367(d)-1T................................................    1545-0026
1.367(e)-1.................................................    1545-1487
1.367(e)-2.................................................    1545-1487
1.368-1....................................................    1545-1691

[[Page 678]]

 
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
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
1.382-8....................................................    1545-1434
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(a)(9)-1..............................................    1545-1573
1.401(a)(9)-3..............................................    1545-1466
1.401(a)(9)-4..............................................    1545-1573
1.401-12(n)................................................    1545-0806
1.401-14...................................................    1545-0710
1.402(c)-2.................................................    1545-1341
1.402(f)-1.................................................    1545-1341
                                                               1545-1632
1.403(b)-1.................................................    1545-0710
1.403(b)-2.................................................    1545-1341
1.403(b)-3.................................................    1545-0996
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
1.408A-2...................................................    1545-1616
1.408A-4...................................................    1545-1616
1.408A-5...................................................    1545-1616
1.408A-7...................................................    1545-1616
1.410(a)-2.................................................    1545-0710
1.410(d)-1.................................................    1545-0710
1.411(a)-11................................................    1545-1471
                                                               1545-1632
1.411(d)-4.................................................    1545-1545
1.411(d)-6.................................................    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(a)(3)-1..............................................    1545-0928
1.417(e)-1.................................................    1545-1471
                                                               1545-1724
1.417(e)-1T................................................    1545-1471
1.419A(f)(6)-1.............................................    1545-1795
1.441-2....................................................    1545-1748
1.442-1....................................................    1545-0074
                                                               1545-0123
                                                               1545-0134
                                                               1545-0152
                                                               1545-1748
1.443-1....................................................    1545-0123
1.444-3T...................................................    1545-1036
1.444-4....................................................    1545-1591
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
                                                               1545-1855
1.451-1....................................................    1545-0091
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
1.457-8....................................................    1545-1580
1.458-1....................................................    1545-0879
1.458-2....................................................    1545-0152
1.460-1....................................................    1545-1650
1.460-6....................................................    1545-1031
                                                               1545-1572
                                                               1545-1732
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

[[Page 679]]

 
1.468A-3...................................................    1545-1269
                                                               1545-1378
                                                               1545-1511
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
1.469-7....................................................    1545-1244
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
                                                               1545-1767
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
                                                               1545-1794
1.501(a)-1.................................................    1545-0056
                                                               1545-0057
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
                                                               1545-1784
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
1.645-1....................................................    1545-1578
1.663(b)-2.................................................    1545-0092
1.664-1....................................................    1545-0196
1.664-1(a)(7)..............................................    1545-1536
1.664-2....................................................    1545-0196
1.664-3....................................................    1545-0196
1.664-4....................................................    1545-0020
                                                               1545-0196

[[Page 680]]

 
1.665(a)-0A through1.665(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
                                                               1545-1588
1.736-1....................................................    1545-0074
1.743-1....................................................    1545-0074
                                                               1545-1588
1.751-1....................................................    1545-0074
                                                               1545-0099
                                                               1545-0941
1.752-5....................................................    1545-1090
1.754-1....................................................    1545-0099
1.755-1....................................................    1545-0099
1.761-2....................................................    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
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
                                                               1545-1783
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-1...................................................    1545-1675
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
1.861-18...................................................    1545-1594
1.863-1....................................................    1545-1476
1.863-3....................................................    1545-1476
                                                               1545-1556
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
1.883-1....................................................    1545-1677
1.883-2....................................................    1545-1677
1.883-3....................................................    1545-1677
1.883-4....................................................    1545-1677
1.883-5....................................................    1545-1677
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

[[Page 681]]

 
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
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
1.1017-1...................................................    1545-1539
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
1.1041-2...................................................    1545-1751
1.1042-1T..................................................    1545-0916
1.1044(a)-1................................................    1545-1421
1.1060-1...................................................    1545-1658
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

[[Page 682]]

 
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...................................................    1545-1480
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
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
1.1295-1...................................................    1545-1555
1.1295-3...................................................    1545-1555
1.1297-3T..................................................    1545-1028
1.1301-1...................................................    1545-1662
1.1311(a)-1................................................    1545-0074
1.1361-1...................................................    1545-0731
                                                               1545-1591
1.1361-3...................................................    1545-1590
1.1361-5...................................................    1545-1590
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
1.1362-8...................................................    1545-1590
1.1366-1...................................................    1545-1613
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
1.1378-1...................................................    1545-1748
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
1.1441-1...................................................    1545-1484
1.1441-2...................................................    1545-0795
1.1441-3...................................................    1545-0165
                                                               1545-0795
1.1441-4...................................................    1545-1484
1.1441-5...................................................    1545-0096
                                                               1545-0795
                                                               1545-1484
1.1441-6...................................................    1545-0055
                                                               1545-0795
                                                               1545-1484
1.1441-7...................................................    1545-0795
1.1441-8...................................................    1545-1053
                                                               1545-1484
1.1441-9...................................................    1545-1484
1.1443-1...................................................    1545-0096
1.1445-1...................................................    1545-0902
1.1445-2...................................................    1545-0902
                                                               1545-1060
                                                               1545-1797
1.1445-3...................................................    1545-0902
                                                               1545-1060
                                                               1545-1797
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

[[Page 683]]

 
1.1451-2...................................................    1545-0054
1.1461-1...................................................    1545-0054
                                                               1545-0055
                                                               1545-0795
                                                               1545-1484
1.1461-2...................................................    1545-0054
                                                               1545-0055
                                                               1545-0096
                                                               1545-0795
1.1462-1...................................................    1545-0795
1.1492-1...................................................    1545-0026
1.1494-1...................................................    1545-0026
1.1502-5...................................................    1545-0257
1.1502-9...................................................    1545-1634
1.1502-9A..................................................    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
                                                               1545-1218
1.1502-20T.................................................    1545-1774
1.1502-21..................................................    1545-1237
1.1502-21T.................................................    1545-1790
1.1502-31..................................................    1545-1344
1.1502-32..................................................    1545-1344
1.1502-32T.................................................    1545-1774
1.1502-33..................................................    1545-1344
1.1502-35T.................................................    1545-1828
1.1502-47..................................................    1545-0123
1.1502-75..................................................    1545-0025
                                                               1545-0123
                                                               1545-0133
                                                               1545-0152
1.1502-76..................................................    1545-1344
1.1502-77..................................................    1545-1699
1.1502-77A.................................................    1545-0123
                                                               1545-1046
1.1502-78..................................................    1545-0582
1.1502-95..................................................    1545-1218
1.1502-95A.................................................    1545-1218
1.1502-96..................................................    1545-1218
1.1503-2...................................................    1545-1583
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
                                                               1545-0675
                                                               1545-0908
1.6011-2...................................................    1545-0055
                                                               1545-0938
1.6011-3...................................................    1545-0238
                                                               1545-0239
1.6011-4...................................................    1545-1685
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
                                                               1545-0089
                                                               1545-0129
1.6013-1...................................................    1545-0074
1.6013-2...................................................    1545-0091
1.6013-6...................................................    1545-0074
1.6013-7...................................................    1545-0074
1.6015-5...................................................    1545-1719
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(a)-1................................................    1545-1583
1.6031(b)-1T...............................................    1545-0099
1.6031(c)-1T...............................................    1545-0099
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...................................................    1545-1617
1.6038-3...................................................    1545-1617

[[Page 684]]

 
1.6038A-2..................................................    1545-1191
1.6038A-3..................................................    1545-1191
                                                               1545-1440
1.6038B-1..................................................    1545-1617
1.6038B-1T.................................................    1545-0026
1.6038B-2..................................................    1545-1617
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
                                                               1545-1705
1.6041-2...................................................    1545-0008
                                                               1545-0119
                                                               1545-0350
                                                               1545-0441
                                                               1545-1729
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
                                                               1545-1705
1.6045-2...................................................    1545-0115
1.6045-4...................................................    1545-1085
1.6046-1...................................................    1545-0704
                                                               1545-0794
                                                               1545-1317
1.6046-2...................................................    1545-0704
1.6046-3...................................................    1545-0704
1.6046A....................................................    1545-1646
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
1.6050S-1..................................................    1545-1678
1.6050S-2..................................................    1545-1729
1.6050S-3..................................................    1545-1678
1.6050S-4..................................................    1545-1729
1.6052-1...................................................    1545-0008
1.6052-2...................................................    1545-0008
1.6060-1...................................................    1545-0074
1.6061-1...................................................    1545-0123
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

[[Page 685]]

 
                                                               1545-1054
                                                               1545-1036
1.6081-3...................................................    1545-0233
1.6081-4...................................................    1545-0188
                                                               1545-1479
1.6081-6...................................................    1545-0148
                                                               1545-1054
1.6081-7...................................................    1545-0148
                                                               1545-1054
1.6081-8T..................................................    1545-1840
1.6081-9T..................................................    1545-1840
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
1.6153-1...................................................    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
1.6695-2...................................................    1545-1570
1.6696-1...................................................    1545-0074
                                                               1545-0240
1.6851-1...................................................    1545-0086
                                                               1545-0138
1.6851-2...................................................    1545-0086
                                                               1545-0138
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
1.7701(l)-3................................................    1545-1642
1.7872-15..................................................    1545-1792
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
7.465-1....................................................    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

[[Page 686]]

 
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
                                                               1545-1612
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
                                                               1545-1707
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
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
25.2702-5..................................................    1545-1485
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
31.3121(v)(2)-1............................................    1545-1643
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)..............................................    1545-1484
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

[[Page 687]]

 
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
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
                                                               1545-1729
31.6051-2..................................................    1545-0008
31.6051-3..................................................    1545-0008
31.6053-1..................................................    1545-0029
                                                               1545-0062
                                                               1545-0064
                                                               1545-0065
                                                               1545-1603
31.6053-2..................................................    1545-0008
31.6053-3..................................................    1545-0065
                                                               1545-0714
31.6053-4..................................................    1545-0065
                                                               1545-1603
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

[[Page 688]]

 
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
41.4481-2..................................................    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
48.4052-1..................................................    1545-1418
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..................................................    1545-1270
                                                               1545-1418
48.4081-3..................................................    1545-1270
                                                               1545-1418
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
                                                               1545-1418
48.4082-2..................................................    1545-1418
48.4082-6..................................................    1545-1418
48.4082-7..................................................    1545-1418
48.4091-3..................................................    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
48.4223-1..................................................    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

[[Page 689]]

 
                                                               1545-0723
48.6420-5..................................................    1545-0162
                                                               1545-0723
48.6420-6..................................................    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
48.6427-10.................................................    1545-1418
48.6427-11.................................................    1545-1418
49.4251-1..................................................    1545-1075
49.4251-2..................................................    1545-1075
49.4251-4(d)(2)............................................    1545-1628
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
53.4948-1..................................................    1545-0052
53.4958-6..................................................    1545-1623
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
54.4980B-6.................................................    1545-1581
54.4980B-7.................................................    1545-1581
54.4980B-8.................................................    1545-1581
54.4980F-1.................................................    1545-1780
54.4981A-1T................................................    1545-0203
54.6011-1..................................................    1545-0575
54.6011-1T.................................................    1545-0575
54.9801-3T.................................................    1545-1537
54.9801-4T.................................................    1545-1537
54.9801-5T.................................................    1545-1537
54.9801-6T.................................................    1545-1537
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
                                                               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
157.6001-1T................................................    1545-1824
157.6011-1T................................................    1545-1824
157.6081-1T................................................    1545-1824
157.6161-1T................................................    1545-1824
301.6011-2.................................................    1545-0225
                                                               1545-0350

[[Page 690]]

 
                                                               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..............................................    1545-1816
301.6103(n)-1..............................................    1545-1841
301.6103(p)(2)(B)-1........................................    1545-1757
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..............................................    1545-1655
301.6104(d)-2..............................................    1545-1655
301.6104(d)-3..............................................    1545-1655
301.6109-1.................................................    1545-0003
                                                               1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0957
                                                               1545-1461
301.6109-3.................................................    1545-1564
301.6110-3.................................................    1545-0074
301.6110-5.................................................    1545-0074
301.6111-1T................................................    1545-0865
                                                               1545-0881
301.6111-2.................................................    1545-0865
                                                               1545-1687
301.6112-1.................................................    1545-0865
                                                               1545-1686
301.6112-1T................................................    1545-0865
                                                               1545-1686
301.6114-1.................................................    1545-1126
                                                               1545-1484
301.6222(a)-2..............................................    1545-0790
301.6222(b)-1..............................................    1545-0790
301.6222(b)-2..............................................    1545-0790
301.6222(b)-3..............................................    1545-0790
301.6223(b)-1..............................................    1545-0790
301.6223(c)-1..............................................    1545-0790
301.6223(e)-2..............................................    1545-0790
301.6223(g)-1..............................................    1545-0790
301.6223(h)-1..............................................    1545-0790
301.6224(b)-1..............................................    1545-0790
301.6224(c)-1..............................................    1545-0790
301.6224(c)-3..............................................    1545-0790
301.6227(c)-1..............................................    1545-0790
301.6227(d)-1..............................................    1545-0790
301.6229(b)-2..............................................    1545-0790
301.6230(b)-1..............................................    1545-0790
301.6230(e)-1..............................................    1545-0790
301.6231(a)(1)-1...........................................    1545-0790
301.6231(a)(7)-1...........................................    1545-0790
301.6231(c)-1..............................................    1545-0790
301.6231(c)-2..............................................    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
                                                               1545-1484
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
                                                               1545-1637
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
301.6685-1.................................................    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
                                                               1545-1783
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
                                                               1545-1534
301.7654-1.................................................    1545-0803
301.7701-3.................................................    1545-1486
301.7701-4.................................................    1545-1465
301.7701-7.................................................    1545-1600
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
                                                               1545-1126
301.7701(b)-9..............................................    1545-0089
301.7805-1.................................................    1545-0805
301.9001-1.................................................    1545-0220
301.9100-2.................................................    1545-1488
301.9100-3.................................................    1545-1488
301.9100-4T................................................    1545-0016
                                                               1545-0042

[[Page 691]]

 
                                                               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
301.9100-14T...............................................    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 509...................................................    1545-0846
Part 513...................................................    1545-0834
Part 514...................................................    1545-0845
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, which appears in the 
Findings Aids section of the printed volume and on GPO Access.

[[Page 693]]



List of CFR Sections Affected



All changes in sections of part 1, Sec.  1.1551-1 to end of Title 26 of 
the Code of Federal Regulations which were made by documents published 
in the Federal Register since January 1, 2001, 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, 2001, see the ``List of CFR Sections 
Affected, 1949-1963, 1964-1972, 1973-1985, 1986-2000'' published in 11 
separate volumes.

                                  2001

26 CFR
                                                                   66 FR
                                                                    Page
Chapter I
1.6011-4T (b)(3)(i)(F) removed; (b)(3)(ii)(B) and (C) and (g) 
        revised; (b)(5) amended....................................41135
1.6041-2T Added....................................................10193
1.6045-1 (g)(1)(i) and (3)(iv) corrected...........................18189
1.6049-5 (b)(12), (c)(4) introductory text, (d)(2)(i), (ii), 
        (3)(i), (ii), (iii)(A) and (B) corrected...................18189
1.6050I-0 Amended..................................................67687
1.6050I-1 (a)(1) redesignated as (a)(1)(i); new (a)(1) heading and 
        (ii) added.................................................67687
1.6050S-1T Added...................................................10193
1.6050S-2T Added...................................................10193
1.6081-2 (f) amended................................................2819
1.6081-3 (d) amended................................................2819
1.6081-4 (c) amended................................................2819
1.6081-6 (d) amended................................................2819
1.6081-7 (d) amended................................................2819
1.6151-1 (d)(1) amended............................................33831
1.6302-1 (d) revised...............................................32542
    (b)(1) amended.................................................33831
1.6302-2 (d) revised...............................................32542
    (a)(1)(i), (ii), (iv) and (b)(1) amended.......................33831
1.6302-3 (a) amended...............................................33831

                                  2002

26 CFR
                                                                   67 FR
                                                                    Page
Chapter I
1.1561-1 (c)(2) amended............................................35012
1.6011-4T Heading, (a)(1), (b)(1), (4)(i), (5) Example 3, (c)(2) 
        Example and (e) amended; (a) heading, (c)(1)(iii), (v), 
        (d)(1) and (g) revised; (a)(2), (3), (b)(1)(i) and (ii) 
        added......................................................41327
    Revised........................................................64802
1.6012-3 (a)(1)(iv) added..........................................78382
1.6013-4 (d) added.................................................47285
1.6013-5 Removed...................................................47285
1.6015-0 Added.....................................................47285
1.6015-1 Added.....................................................47285
1.6015-2 Added.....................................................47285
1.6015-3 Added.....................................................47285
1.6015-4 Added.....................................................47285
1.6015-5 Added.....................................................47285
    (b)(3) corrected...............................................54735
1.6015-6 Added.....................................................47285
1.6015-7 Added.....................................................47285
1.6015-8 Added.....................................................47285
1.6015-9 Added.....................................................47285
1.6031(a)-1 (a)(1) amended.........................................41328
1.6037-1 (c) amended...............................................41328
1.6038-3 (b)(9) Example 1 amended; (g)(1)(i) through (v) 
        redesignated as (g)(1)(ii) through (vi); new (g)(1)(i) 
        added; (j) and (l) revised.................................78175
1.6038-3T Added....................................................78176
1.6041-1 (b)(1) and (c) amended; (e), (f) and (g) redesignated as 
        (g), (h) and (i); new (e), (f) and (j) added...............48756
1.6041-3 (d) revised; (n) removed; (o), (p) and (q) redesignated 
        as (n), (o) and (p)........................................48758
1.6043-4T Added....................................................69469

[[Page 694]]

1.6045-1 (a) introductory text and (c)(3) revised; (g)(3)(iv) and 
        (4) Examples 1, 4, 5, 6, 7(i), 8(i) and 9(i) amended.......48758
1.6045-2 (b)(2)(ii) amended........................................48759
1.6045-3T Added....................................................69472
1.6049-4 (a)(2) revised............................................48759
1.6050S-0 Added....................................................20904
    Amended........................................................77681
1.6050S-1 Added....................................................77682
1.6050S-1T Redesignated as 1.6050S-2T..............................20904
1.6050S-2T Redesignated as 1.6050S-4T; new 1.6050S-2T redesignated 
        from 1.6050S-1T............................................20904
1.6050S-3 Added....................................................20904
1.6050S-4T Redesignated from 1.6050S-2T............................20904
1.6072-1 (a) text redesignated as (a)(1); new (a)(1) heading and 
        (2) added..................................................78382
1.6115-1 Undesignated center heading added.........................52863
1.6109-2 Redesignated as 1.6109-2A; new 1.6109-2 added.............52863
1.6109-2A Redesignated from 1.6109-2; (d) amended..................52863
1.6109-2T Removed..................................................52863
1.6654-2 (a) amended...............................................35012
1.6655-2 (a)(4) amended............................................35012
1.7476-1 (e) added.................................................47456
1.7476-2 (b), (c) and (d) revised; (e) added.......................47456

                                  2003

26 CFR
                                                                   68 FR
                                                                    Page
Chapter I
1.6011-4 Added.....................................................10163
    (b)(3), (e)(2)(i) and (h) revised; (e)(1) amended..............75130
1.6011-4T Removed..................................................10169
1.6031(a)-1 (a)(1) amended; (a)(3) redesignated as (a)(3)(i); 
        (a)(3)(ii) added; (f) revised..............................63734
    (f) corrected..................................................70584
1.6031(a)-1T Added (temporary).....................................63734
    (a)(3)(ii) corrected...........................................70584
1.6038-3 (j) and (l) revised.......................................39012
1.6038-3T Removed..................................................39013
1.6038B-1 (b)(1)(i) and (ii) revised...............................70708
1.6038B-1T (a) through (b)(3) revised..............................70708
1.6043-4T (a)(5) and (h) corrected..................................6081
    Revised........................................................75122
1.6045-2 (a)(3)(i) revised; (a)(3)(ii) heading revised.............74848
1.6045-3T (d) corrected.............................................6081
1.6045-3T Revised..................................................75125
1.6050S-1 (b)(2)(vii) correctly amended.............................6350
1.6081-1T Removed..................................................34798
1.6081-8T Added....................................................34798
1.6081-9T Added....................................................34799
1.6107-2T Added....................................................20069
1.6152-1 Removed...................................................67595
1.6662-0 Amended...................................................75127
1.6662-2 (d)(2) amended; (d)(5) added..............................75127
1.6662-3 (a) revised; (b)(2) and (c)(1) amended....................75127
1.6662-4 (g)(1)(iv) amended........................................75128
1.6664-0 Amended...................................................75128
1.6664-1 (b)(2) redesignated as (b)(2)(i); (b)(2)(i) heading and 
        (ii) added.................................................75128
1.6664-4 (d) through (g) redesignated as (e) through (h); (a), 
        (c)(1)(i), new (f)(1), (2)(i), (ii), (3), (4), (h)(1) 
        introductory text, (i), (2) and (3) amended; (c)(1) 
        introductory text revised; (c)(1)(iii) and new (d) added 
                                                                   75128
1.6695-1 (b) revised...............................................20069
1.6695-1T Added....................................................20069
1.7872-15 Added....................................................54352

                                  2004

   (Regulations published from January 1, 2004, through April 1, 2004)

26 CFR
                                                                   69 FR
                                                                    Page
Chapter I
1.6011-4 Technical correction.......................................4557
1.6038A-2 (d) revised...............................................5932
1.6038A-2T Added....................................................5932
1.6038B-1T Corrected................................................5017
1.6041-2 (a)(5) added...............................................7570
1.6041-2T Removed...................................................7570
1.6045-3T (e) corrected.............................................7351
1.6050S-2 Added.....................................................7570
1.6050S-2T Removed..................................................7572
1.6050S-4 Added.....................................................7571
1.6050S-4T Removed..................................................7571
1.6107-2 Added.....................................................15249
1.6107-2T Removed..................................................15249
1.6695-1 (b) revised...............................................15249

[[Page 695]]

1.6695-1T Removed..................................................15250


                                  [all]