Internal Revenue Bulletin 2001-34 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

INCOME TAX
T.D. 8960, page 176.
Temporary regulations under section 355(e) of the Code
generally require corporations to recognize gain on certain
distributions of stock or securities of a subsidiary corpora-
tion if the distribution is part of a plan that also involves one
or more persons acquiring a 50-percent or greater interest
in the distributing corporation or any controlled corporation.
Rev. Proc. 2001–43, page 191.
Partnership profits interests. This procedure clarifies
Rev. Proc. 93–27 (1993–2 C.B. 343) by providing guidance
on the treatment of the grant of a partnership profits interest
that is substantially nonvested for the provision of services
to or for the benefit of the partnership. Rev. Proc. 93–27
clarified.
EMPLOYMENT TAX
T.D. 8959, page 185.
Final regulations under section 6205 of the Code provide
guidance on interest-free adjustments of certain underpay-
ments of employment taxes.
ESTATE TAX
Notice 2001–50, page 189.
This notice provides guidance regarding requests for an
extension of time to make an allocation of generation-skip-
ping transfer (GST) exemption under sections 2642(b)(1)
and (2) of the Code. It also provides guidance regarding
requests for an extension of time to make GST elections
under sections 2632(b)(3) and 2632(c)(5).
GIFT TAX
Notice 2001–50, page 189.
This notice provides guidance regarding requests for an
extension of time to make an allocation of generation-skip-
ping transfer (GST) exemption under sections 2642(b)(1)
and (2) of the Code. It also provides guidance regarding
requests for an extension of time to make GST elections
under sections 2632(b)(3) and 2632(c)(5).
ADMINISTRATIVE
T.D. 8958, page 183.
Final regulations under section 6103 of the Code authorize
the Service to disclose return information to the Department
of Agriculture to structure, prepare, and conduct the Census
of Agriculture.
Notice 2001–49, page 188.
This notice proposes a revenue procedure that sets forth a
safe harbor under which an issue of tax or revenue anticipa-
tion bonds will not be treated as outstanding longer than is
reasonably necessary to accomplish the governmental pur-
poses of the bonds under section 1.148–10(a)(4) of the reg-
ulations. The proposed procedure will apply to bonds sold
after the date the procedure is published in the Internal
Revenue Bulletin in final form. However, issuers may rely on
the proposed procedure with respect to any issue of tax or
revenue anticipation bonds that is sold before the effective
Internal Revenue
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Bulletin No. 2001–34
August 20, 2001
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Actions Relating to Court Decisions is on the page following the Introduction.
Finding Lists begin on page ii.
(Continued on the next page)

August 20, 20012001–34 I.R.B.
date of the proposed revenue procedure and on or after
August 3, 2001.
Notice 2001–51, page 190.
Listed transactions. This notice updates a listing of certain
transactions that the Service has determined are tax avoid-
ance transactions and identifies them as “listed transac-
tions” for purposes of sections 1.6011–4T(b)(2) and
301.6111–2T(b)(2) of the temporary regulations. Notice
2000–15 supplemented and superseded.

2001–34 I.R.B.August 20, 2001
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
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It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
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Revenue rulings represent the conclusions of the Service on
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Rulings and procedures reported in the Bulletin do not have
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The Bulletin is divided into four parts as follows:
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This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
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Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
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Part IV.—Items of General Interest.
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annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

August 20, 20012001–34 I.R.B.
It is the policy of the Internal Revenue
Service to announce at an early date
whether it will follow the holdings in cer-
tain cases. An Action on Decision is the
document making such an announcement.
An Action on Decision will be issued at
the discretion of the Service only on un-
appealed issues decided adverse to the
government. Generally, an Action on De-
cision is issued where its guidance would
be helpful to Service personnel working
with the same or similar issues. Unlike a
Treasury Regulation or a Revenue Ruling,
an Action on Decision is not an affirma-
tive statement of Service position. It is not
intended to serve as public guidance and
may not be cited as precedent.
Actions on Decisions shall be relied
upon within the Service only as conclu-
sions applying the law to the facts in the
particular case at the time the Action on
Decision was issued. Caution should be
exercised in extending the recommenda-
tion of the Action on Decision to similar
cases where the facts are different. More-
over, the recommendation in the Action
on Decision may be superseded by new
legislation, regulations, rulings, cases, or
Actions on Decisions.
Prior to 1991, the Service published ac-
quiescence or nonacquiescence only in
certain regular Tax Court opinions. The
Service has expanded its acquiescence
program to include other civil tax cases
where guidance is determined to be help-
ful. Accordingly, the Service now may ac-
quiesce or nonacquiesce in the holdings
of memorandum Tax Court opinions, as
well as those of the United States District
Courts, Claims Court, and Circuit Courts
of Appeal. Regardless of the court decid-
ing the case, the recommendation of any
Action on Decision will be published in
the Internal Revenue Bulletin.
The recommendation in every Action
on Decision will be summarized as ac-
quiescence, acquiescence in result only,
or nonacquiescence. Both “acquies-
cence” and “acquiescence in result only”
mean that the Service accepts the holding
of the court in a case and that the Service
will follow it in disposing of cases with
the same controlling facts. However, “ac-
quiescence” indicates neither approval
nor disapproval of the reasons assigned
by the court for its conclusions; whereas,
“acquiescence in result only” indicates
disagreement or concern with some or all
of those reasons. “Nonacquiescence” sig-
nifies that, although no further review
was sought, the Service does not agree
with the holding of the court and, gener-
ally, will not follow the decision in dis-
posing of cases involving other taxpay-
ers. In reference to an opinion of a circuit
court of appeals, a “nonacquiescence” in-
dicates that the Service will not follow
the holding on a nationwide basis. How-
ever, the Service will recognize the
precedential impact of the opinion on
cases arising within the venue of the de-
ciding circuit.
The Actions on Decisions published in
the weekly Internal Revenue Bulletin are
consolidated semiannually and appear in
the first Bulletin for July and the Cumu-
lative Bulletin for the first half of the
year. A semiannual consolidation also ap-
pears in the first Bulletin for the follow-
ing January and in the Cumulative Bul-
letin for the last half of the year.
The Commissioner does NOT ACQUI-
ESCE in the following decision:
Mesa Oil, Inc. v. United States,
1
86 A.F.T.R.2d (RIA) 7312
(D. Colo. 2000)
Actions Relating to Decisions of the Tax Court
1
Nonacquiescence relating to whether a verbatim recording of a Collection Due Process (CDP) hearing is required under I.R.C. sections 6320 and 6330 to create a
judicially reviewable administrative record.

Section 355.—Distribution of
Stock and Securities of a
Controlled Corporation
26 CFR 1.355–7T: Recognition of gain on certain
distributions of stock or securities in connection
with an acquisition.
T.D. 8960
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Under Section 355(e);
Recognition of Gain on Certain
Distributions of Stock or
Securities in Connection With an
Acquisition
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains tem-
porary regulations relating to recognition of
gain on certain distributions of stock or se-
curities of a controlled corporation in con-
nection with an acquisition. Changes to the
applicable law were made by the Taxpayer
Relief Act of 1997. These temporary regu-
lations affect corporations and are neces-
sary to provide them with guidance needed
to comply with these changes.
EFFECTIVE DATES: These temporary
regulations are effective August 3, 2001.
FOR FURTHER INFORMATION CON-
TACT: Megan R. Fitzsimmons of the Of-
fice of Associate Chief Counsel (Corpo-
rate), (202) 622-7790 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
On January 2, 2001, the IRS and Trea-
sury published in the Federal Register
(66 FR 66) a notice of proposed rulemak-
ing (REG–107566–00, 2001–3 I.R.B.
346) (the Proposed Regulations) under
section 355(e) of the Internal Revenue
Code of 1986. Section 355(e) provides
that the stock of a controlled corporation
will not be qualified property under sec-
tion 355(c)(2) or 361(c)(2) if the stock is
distributed as “part of a plan (or series of
related transactions) pursuant to which 1
or more persons acquire directly or indi-
rectly stock representing a 50-percent or
greater interest in the distributing corpo-
ration or any controlled corporation.”
The Proposed Regulations provide
guidance concerning the interpretation of
the phrase “plan (or series of related
transactions).” The Proposed Regulations
generally provide that whether a distribu-
tion and an acquisition are part of a plan is
determined based on all the facts and cir-
cumstances. They also set forth six safe
harbors, the satisfaction of which would
confirm that a distribution and an acquisi-
tion are not part of a plan.
A public hearing regarding the Pro-
posed Regulations was held on May 15,
2001. In addition, written comments
were received. A number of commenta-
tors have indicated that the lack of guid-
ance under section 355(e) is hindering the
ability to undertake acquisitions and di-
vestitures. These commentators have re-
quested that the IRS and Treasury provide
immediate guidance pending the finaliza-
tion of those regulations. In response to
these requests, the IRS and Treasury are
promulgating the Proposed Regulations
as temporary regulations in this Treasury
Decision. The temporary regulations are
identical to the Proposed Regulations, ex-
cept that the temporary regulations re-
serve section 1.355–7(e)(6) (suspending
the running of any time period prescribed
in the Proposed Regulations during which
there is a substantial diminution of risk of
loss under the principles of section
355(d)(6)(B)) and Example 7 of the Pro-
posed Regulations (interpreting the term
“similar acquisition” in the context of a
situation involving multiple acquisitions).
The IRS and Treasury continue to study
all of the comments received regarding
the Proposed Regulations. The IRS and
Treasury will continue to devote signifi-
cant resources to analyzing the comments
and, in the near future, expect to issue ad-
ditional guidance regarding the interpreta-
tion of the phrase “plan (or series of re-
lated transactions).”
Special Analyses
It has been determined that these tem-
porary regulations are not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these tempo-
rary regulations, and, because the tempo-
rary regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue
Code, these temporary regulations will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
business.
Drafting Information
The principal author of these temporary
regulations is Brendan P. O’Hara, Office
of the Associate Chief Counsel (Corpo-
rate). However, other personnel from the
Department of the Treasury and the IRS
participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.355–7T also issued under 26
U.S.C. 355(e)(5). * * *
Par. 2. Section 1.355–0 is amended by
revising the section heading and the intro-
ductory text and adding an entry for
§1.355–7T to read in part as follows:
§1.355–0 Outline of sections.
In order to facilitate the use of
§§1.355–1 through 1.355–7T, this section
lists the major paragraphs in those sec-
tions as follows:
* * * * *
§1.355–7T Recognition of gain on
certain distributions of stock or securities
in connection with an acquisition.
August 20, 20011762001–34 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

2001–34 I.R.B.177August 20, 2001
(a) In general.
(b) Plan.
(c) Multiple acquisitions.
(d) Facts and circumstances.
(e) Operating rules.
(1) Reasonable certainty evidence of
business purpose to facilitate an ac-
quisition.
(2) Internal discussion evidence of busi-
ness purpose.
(3) Hostile takeover defense.
(4) Effect of distribution on trading in
stock.
(5) Consequences of section 355(e) disre-
garded for certain purposes.
(6) Substantial diminution of risk. [Re-
served]
(f) Safe harbors.
(1) Safe Harbor I.
(2) Safe Harbor II.
(3) Safe Harbor III.
(4) Safe Harbor IV.
(5) Safe Harbor V.
(i) In general.
(ii) Special rules.
(6) Safe Harbor VI.
(g) Stock acquired by exercise of options,
warrants, convertible obligations, and
other similar interests.
(1) Treatment of options.
(i) General rule.
(ii) Agreement, understanding, arrange-
ment, or substantial negotiations to
write an option.
(2) Instruments treated as options.
(3) Instruments generally not treated as
options.
(i) Escrow, pledge, or other security
agreements.
(ii) Compensatory options.
(iii) Options exercisable only upon death,
disability, mental incompetency, or
separation from service.
(iv) Rights of first refusal.
(v) Other enumerated instruments.
(h) Multiple controlled corporations.
(i) [Reserved]
(j) Valuation.
(k) Definitions.
(1) Agreement, understanding, arrange-
ment, or substantial negotiations.
(2) Controlled corporation.
(3) Controlling shareholder.
(4) Established market.
(5) Five-percent shareholder.
(l) [Reserved]
(m) Examples.
(n) Effective date.
Par. 3. Section 1.355–7T is added to
read as follows:
§1.355–7T Recognition of gain on certain
distributions of stock or securities in
connection with an acquisition.
(a) In general. Except as provided in
section 355(e) and in this section, section
355(e) applies to any distribution—
(1) To which section 355 (or so much
of section 356 as relates to section 355)
applies; and
(2) That is part of a plan (or series of
related transactions) (referred to else-
where in this section as “plan”) pursuant
to which 1 or more persons acquire di-
rectly or indirectly stock representing a
50-percent or greater interest in the dis-
tributing corporation (Distributing) or any
controlled corporation (Controlled).
(b) Plan. (1) Whether a distribution
and an acquisition are part of a plan is de-
termined based on all the facts and cir-
cumstances. In general, in the case of an
acquisition after a distribution, the distrib-
ution and the acquisition are considered
part of a plan if Distributing, Controlled,
or any of their respective controlling
shareholders intended, on the date of the
distribution, that the acquisition or a simi-
lar acquisition occur in connection with
the distribution. In general, in the case of
an acquisition before a distribution, the
acquisition and the distribution are con-
sidered part of a plan if Distributing, Con-
trolled, or any of their respective control-
ling shareholders intended, on the date of
the acquisition, that a distribution occur in
connection with the acquisition.
(2) For purposes of paragraph (b)(1) of
this section, the actual acquisition and the
intended acquisition may be similar even
though the identity of the person acquir-
ing stock of Distributing or Controlled
(acquirer), the timing of the acquisition or
the terms of the actual acquisition are dif-
ferent from the intended acquisition. For
example, in the case of a public offering
or auction, the actual acquisition and the
intended acquisition may be similar even
though there are changes in the terms of
the stock, the class of stock being offered,
the size of the offering, the timing of the
offering, the price of the stock, or the par-
ticipants in the public offering or auction.
(c) Multiple acquisitions. All acquisi-
tions of stock of Distributing or Con-
trolled that are considered to be part of a
plan with a distribution pursuant to para-
graph (b) of this section will be aggre-
gated for purposes of the 50-percent test
of paragraph (a)(2) of this section.
(d) Facts and circumstances. (1) The
facts and circumstances to be considered
in demonstrating whether a distribution
and an acquisition are part of a plan in-
clude, but are not limited to, the facts and
circumstances specified in paragraphs
(d)(2) and (3) of this section. The weight
to be given each of the facts and circum-
stances depends on the particular case.
Therefore, whether a distribution and an
acquisition are part of a plan does not de-
pend on the relative number of facts and
circumstances present under paragraph
(d)(2) of this section as compared to para-
graph (d)(3) of this section.
(2) Among the facts and circumstances
tending to show that a distribution and an
acquisition are part of a plan are the fol-
lowing:
(i) In the case of an acquisition (other
than involving a public offering or auc-
tion) after a distribution, Distributing or
Controlled and the acquirer (or any of
their respective controlling shareholders)
discussed the acquisition or a similar ac-
quisition by the acquirer before the distri-
bution. The weight to be accorded the
discussions depends on the nature, extent,
and timing of the discussions. The exis-
tence of an agreement, understanding,
arrangement or substantial negotiations at
the time of the distribution is given sub-
stantial weight.
(ii) In the case of an acquisition (other
than involving a public offering or auc-
tion) after a distribution, Distributing or
Controlled and a potential acquirer (or
any of their respective controlling share-
holders) discussed an acquisition before
the distribution and a similar acquisition
by a different person occurred after the
distribution. The weight to be accorded
the discussions depends on the nature, ex-
tent, and timing of the discussions and the
similarity of the acquisition actually oc-
curring to the acquisition discussed before
the distribution.
(iii) In the case of an acquisition in-
volving a public offering or auction after
a distribution, Distributing or Controlled
(or any of their respective controlling
shareholders) discussed the acquisition
with an investment banker or other out-
side adviser before the distribution. The

August 20, 20011782001–34 I.R.B.
weight to be accorded the discussions de-
pends on the nature, extent, and timing of
the discussions.
(iv) In the case of an acquisition before
a distribution, Distributing or Controlled
and the acquirer (or any of their respec-
tive controlling shareholders) discussed a
distribution before the acquisition. The
weight to be accorded the discussions de-
pends on the nature, extent, and timing of
the discussions.
(v) In the case of an acquisition before
a distribution, Distributing or Controlled
and a potential acquirer (or any of their
respective controlling shareholders) dis-
cussed a distribution before the acquisi-
tion and a similar acquisition by a differ-
ent person occurred before the
distribution. The weight to be accorded
the discussions depends on the nature, ex-
tent, and timing of the discussions and the
similarity of the acquisition actually oc-
curring to the potential acquisition that
was discussed.
(vi) In the case of an acquisition in-
volving a public offering or auction be-
fore a distribution, Distributing or Con-
trolled (or any of their respective
controlling shareholders) discussed a dis-
tribution with an investment banker or
other outside adviser before the acquisi-
tion. The weight to be accorded the dis-
cussions depends on the nature, extent,
and timing of the discussions.
(vii) In the case of an acquisition either
before or after a distribution, the distribu-
tion was motivated by a business purpose
to facilitate the acquisition or a similar ac-
quisition of Distributing or Controlled.
(viii) In the case of an acquisition either
before or after a distribution, the acquisi-
tion and the distribution occurred within 6
months of each other or there was an
agreement, understanding, arrangement,
or substantial negotiations regarding the
second transaction within 6 months after
the first transaction. Also, in the case of
an acquisition occurring after a distribu-
tion, there was an agreement, understand-
ing, arrangement, or substantial negotia-
tions regarding a similar acquisition at the
time of the distribution or within 6
months thereafter.
(ix) In the case of an acquisition either
before or after a distribution, the debt allo-
cation between Distributing and Controlled
made an acquisition of Distributing or Con-
trolled likely in order to service the debt.
(3) Among the facts and circumstances
tending to show that a distribution and an
acquisition are not part of a plan are the
following:
(i) In the case of an acquisition (other
than involving a public offering or auc-
tion) after a distribution, neither Distrib-
uting nor Controlled and the acquirer or
any potential acquirer (nor any of their re-
spective controlling shareholders) dis-
cussed the acquisition or a similar acqui-
sition before the distribution.
(ii) In the case of an acquisition involv-
ing a public offering or auction after a dis-
tribution, neither Distributing nor Con-
trolled (nor any of their respective
controlling shareholders) discussed the
acquisition with an investment banker or
other outside adviser before the distribu-
tion.
(iii) In the case of an acquisition after a
distribution, there was an identifiable, un-
expected change in market or business
conditions occurring after the distribution
that resulted in the acquisition that was
otherwise unexpected at the time of the
distribution.
(iv) In the case of an acquisition (other
than involving a public offering or auc-
tion) before a distribution, neither Distrib-
uting nor Controlled and the acquirer (nor
any of their respective controlling share-
holders) discussed a distribution before
the acquisition. This paragraph (d)(3)(iv)
does not apply if the acquisition occurred
after the date of the public announcement
of the planned distribution.
(v) In the case of an acquisition before
a distribution, there was an identifiable,
unexpected change in market or business
conditions occurring after the acquisition
that resulted in a distribution that was oth-
erwise unexpected.
(vi) In the case of an acquisition either
before or after a distribution, the distribu-
tion was motivated in whole or substantial
part by a corporate business purpose
(within the meaning of §1.355–2(b))
other than a business purpose to facilitate
the acquisition or a similar acquisition of
Distributing or Controlled. The presence
of a business purpose to facilitate the ac-
quisition or a similar acquisition of Dis-
tributing or Controlled is relevant in de-
termining the extent to which the
distribution was motivated by a corporate
business purpose (within the meaning of
§1.355–2(b)) other than a business pur-
pose to facilitate the acquisition or a simi-
lar acquisition of Distributing or Con-
trolled.
(vii) In the case of an acquisition either
before or after a distribution, the distribu-
tion would have occurred at approxi-
mately the same time and in similar form
regardless of the acquisition or a similar
acquisition (including a previously pro-
posed similar acquisition that did not
occur).
(e) Operating rules. The operating
rules contained in this paragraph (e) apply
for all purposes of this section.
(1) Reasonable certainty evidence of
business purpose to facilitate an acquisi-
tion. (i) In the case of an acquisition after
a distribution, if, at the time of the distrib-
ution, it was reasonably certain that be-
fore a date that is 6 months after the distri-
bution an acquisition would occur, an
agreement, understanding, or arrange-
ment would exist, or substantial negotia-
tions would occur regarding an acquisi-
tion of Distributing or Controlled, the
reasonable certainty is evidence of a busi-
ness purpose to facilitate an acquisition of
Distributing or Controlled.
(ii) In the case of an acquisition before
a distribution, if the acquisition occurred
after the date of the public announcement
of the planned distribution, or if, at the
time of the acquisition, it was reasonably
certain that before a date that is 6 months
after the acquisition the distribution
would occur, an agreement, understand-
ing, or arrangement would exist, or sub-
stantial negotiations would occur regard-
ing the distribution, the public
announcement or reasonable certainty is
evidence of a business purpose to facili-
tate an acquisition of Distributing or Con-
trolled.
(2) Internal discussions evidence of
business purpose.The fact that internal
discussions regarding an acquisition oc-
curred may be indicative of the business
purpose that motivated the distribution.
(3) Hostile takeover defense.If Dis-
tributing distributes Controlled stock in-
tending, in whole or substantial part, to
decrease the likelihood of the acquisition
of Distributing or Controlled by separat-
ing it from another corporation that is
likely to be acquired, Distributing will be
treated as having a business purpose to fa-
cilitate the acquisition of the corporation
that was likely to be acquired.

2001–34 I.R.B.179August 20, 2001
(4) Effect of distribution on trading in
stock. The fact that the distribution made
all or a part of the stock of Controlled
available for trading or made Distributing
or Controlled’s stock trade more actively
is not taken into account in determining
whether the distribution and an acquisi-
tion of Distributing or Controlled stock
were part of a plan.
(5) Consequences of section 355(e) dis-
regarded for certain purposes. For pur-
poses of determining the intentions of the
relevant parties under this section, the
consequences of the application of section
355(e), and the existence of any contrac-
tual indemnity by Controlled for tax re-
sulting from the application of section
355(e) caused by an acquisition of Con-
trolled, are disregarded.
(6) Substantial diminution of risk. [Re-
served]
(f) Safe harbors—(1)Safe Harbor I.
(i) A distribution and an acquisition oc-
curring after the distribution will not be
considered part of a plan if—
(A) The acquisition occurred more than
6 months after the distribution and there
was no agreement, understanding,
arrangement, or substantial negotiations
concerning the acquisition before a date
that is 6 months after the distribution; and
(B) The distribution was motivated in
whole or substantial part by a corporate
business purpose (within the meaning of
§1.355–2(b)) other than a business pur-
pose to facilitate an acquisition of Distrib-
uting or Controlled.
(ii) For purposes of paragraph
(f)(1)(i)(B) of this section, the presence of
a business purpose to facilitate an acquisi-
tion of Distributing or Controlled is rele-
vant in determining the extent to which
the distribution was motivated by a corpo-
rate business purpose (within the meaning
of §1.355–2(b)) other than a business pur-
pose to facilitate an acquisition of Distrib-
uting or Controlled.
(2) Safe Harbor II. A distribution and
an acquisition occurring after the distribu-
tion will not be considered part of a plan
if—
(i) The acquisition occurred more than
6 months after the distribution and there
was no agreement, understanding,
arrangement, or substantial negotiations
concerning the acquisition before a date
that is 6 months after the distribution;
and
(ii) The distribution was motivated in
whole or substantial part by a corporate
business purpose (within the meaning of
§1.355–2(b)) to facilitate an acquisition
or acquisitions of no more than 33 percent
of the stock of Distributing or Controlled,
and no more than 20 percent of the stock
of the corporation (whose stock was ac-
quired in the acquisition or acquisitions
that motivated the distribution) was either
acquired or the subject of an agreement,
understanding, arrangement, or substan-
tial negotiations before a date that is 6
months after the distribution.
(3) Safe Harbor III. If an acquisition
occurs more than 2 years after a distribu-
tion and there was no agreement, under-
standing, arrangement, or substantial ne-
gotiations concerning the acquisition at
the time of the distribution or within 6
months thereafter, the acquisition and the
distribution are not part of a plan.
(4) Safe Harbor IV. If an acquisition
occurs more than 2 years before a distrib-
ution, and there was no agreement, under-
standing, arrangement, or substantial ne-
gotiations concerning the distribution at
the time of the acquisition or within 6
months thereafter, the acquisition and the
distribution are not part of a plan.
(5) Safe Harbor V—(i) In general.An
acquisition of Distributing or Controlled
stock that is listed on an established mar-
ket is not part of a plan if the acquisition
is pursuant to a transfer between share-
holders of Distributing or Controlled, nei-
ther of whom is a 5-percent shareholder.
For purposes of the preceding sentence,
the term 5-percent shareholder is defined
in paragraph (k)(5) of this section, except
that the corporation can rely on Schedules
13D and 13G (or any similar schedules)
filed with the Securities and Exchange
Commission to identify its 5-percent
shareholders.
(ii) Special rules. (A) This paragraph
(f)(5) does not apply to public offerings or
redemptions.
(B) This paragraph (f)(5) does not
apply to a transfer of stock by or to a per-
son who, pursuant to a formal or informal
understanding with other persons (the co-
ordinating group), has joined in coordi-
nated transfers of stock if, at any time
during the period the understanding ex-
ists, the coordinating group owns, in the
aggregate, 5 percent or more of the stock
of the corporation whose stock is trans-
ferred (determined by vote or value) im-
mediately before or after each transfer or
at the time of the distribution. A principal
element in determining if such an under-
standing exists is whether the investment
decision of each person is based on the in-
vestment decision of 1 or more other ex-
isting or prospective shareholders.
(C) This paragraph (f)(5) does not
apply to a transfer of stock by or to a per-
son if the corporation the stock of which
is being transferred knows, or has reason
to know, that the person (or a coordinat-
ing group, treating it as a single person)
intends to become a 5-percent shareholder
at any time during the 4-year period be-
ginning 2 years before the distribution.
(6) Safe Harbor VI. If stock of Distrib-
uting or Controlled is acquired by an em-
ployee or director of Distributing, Con-
trolled, or a person related to Distributing
or Controlled under section 355(d)(7)(A),
in connection with the performance of
services as an employee or director for the
corporation or a person related to it under
section 355(d)(7)(A) (and that is not ex-
cessive by reference to the services per-
formed) in a transaction to which section
83 applies, the acquisition is not an acqui-
sition that is part of a plan as described in
paragraph (b)(1) of this section.
(g) Stock acquired by exercise of op-
tions, warrants, convertible obligations,
and other similar interests—(1)Treatment
of options—(i) General rule. For purposes
of this section, if stock of Distributing or
Controlled is acquired pursuant to an op-
tion, the option will be treated as an agree-
ment to acquire the stock on the date the
option is written unless Distributing estab-
lishes that on the later of the date of the
stock distribution or the writing of the op-
tion, the option was not more likely than
not to be exercised. The determination of
whether an option was more likely than not
to be exercised is based on all the facts and
circumstances, taking control premiums
and minority and blockage discounts into
account in determining the fair market
value of stock underlying an option.
(ii) Agreement, understanding,
arrangement, or substantial negotiations
to write an option. If there is an agree-
ment, understanding, or arrangement to
write an option, the option will be treated
as written on the date of the agreement,
understanding, or arrangement. If an
agreement, understanding, or arrange-

August 20, 20011802001–34 I.R.B.
ment to write an option is reached, or an
option is written, more than 6 months but
not more than 2 years after the distribu-
tion, and there were substantial negotia-
tions regarding the writing of the option
or the acquisition of the stock underlying
the option before the end of the 6-month
period beginning on the date of the distri-
bution, the option will be treated as writ-
ten within 6 months after the distribution.
(2) Instruments treated as options. For
purposes of this paragraph (g), except to
the extent provided in paragraph (g)(3) of
this section, call options, warrants, con-
vertible obligations, the conversion fea-
ture of convertible stock, put options, re-
demption agreements (including rights to
cause the redemption of stock), any other
instruments that provide for the right or
possibility to issue, redeem, or transfer
stock (including an option on an option),
or any other similar interests are treated as
options.
(3) Instruments generally not treated as
options. For purposes of this paragraph
(g), the following are not treated as op-
tions unless (in the case of paragraphs
(g)(3)(i), (iii), and (iv) of this section)
written, transferred (directly or indi-
rectly), or listed with a principal purpose
of avoiding the application of section
355(e) or this section.
(i) Escrow, pledge, or other security
agreements. An option that is part of a se-
curity arrangement in a typical lending
transaction (including a purchase money
loan), if the arrangement is subject to cus-
tomary commercial conditions. For this
purpose, a security arrangement includes,
for example, an agreement for holding
stock in escrow or under a pledge or other
security agreement, or an option to ac-
quire stock contingent upon a default
under a loan.
(ii) Compensatory options. An option
to acquire stock in Distributing or Con-
trolled with customary terms and condi-
tions provided to an employee or director
of Distributing, Controlled, or a person
related to Distributing or Controlled
under section 355(d)(7)(A), in connection
with the performance of services as an
employee or director for the corporation
or a person related to it under section
355(d)(7)(A) (and that is not excessive by
reference to the services performed) and
that immediately after the distribution and
within 6 months thereafter—
(A) Is nontransferable within the mean-
ing of §1.83–3(d); and
(B) Does not have a readily ascertain-
able fair market value as defined in
§1.83–7(b).
(iii) Options exercisable only upon
death, disability, mental incompetency,
or separation from service. Any option
entered into between shareholders of a
corporation (or a shareholder and the
corporation) that is exercisable only
upon the death, disability, or mental in-
competency of the shareholder, or, in the
case of stock acquired in connection with
the performance of services for the cor-
poration or a person related to it under
section 355(d)(7)(A) (and that is not ex-
cessive by reference to the services per-
formed), the shareholder’s separation
from service.
(iv) Rights of first refusal. Abona fide
right of first refusal regarding the corpo-
ration’s stock with customary terms, en-
tered into between shareholders of a cor-
poration (or between the corporation and
a shareholder).
(v) Other enumerated instruments.
Any other instrument the Commissioner
may designate in revenue procedures, no-
tices, or other guidance published
in the Internal Revenue Bulletin. See
§ 601.601(d)(2) of this chapter.
(h) Multiple controlled corporations.
Only the stock or securities of a con-
trolled corporation in which 1 or more
persons acquire directly or indirectly
stock representing a 50-percent or greater
interest as part of a plan involving the dis-
tribution of that corporation will be
treated as not qualified property under
section 355(e)(1) if—
(1) The stock or securities of more than
1 controlled corporation are distributed in
distributions to which section 355 (or so
much of section 356 as relates to section
355) applies; and
(2) One or more persons do not ac-
quire, directly or indirectly, stock repre-
senting a 50-percent or greater interest in
Distributing pursuant to a plan involving
any of those distributions.
(i) [Reserved]
(j) Valuation.Except as provided in
paragraph (g)(1)(i) of this section, for
purposes of section 355(e) and this sec-
tion, all shares of stock within a single
class are considered to have the same
value. Thus, control premiums and mi-
nority and blockage discounts within a
single class are not taken into account.
(k) Definitions—(1)Agreement, under-
standing, arrangement, or substantial ne-
gotiations. Whether an agreement, under-
standing, or arrangement exists depends
on the facts and circumstances. The par-
ties do not necessarily have to have en-
tered into a binding contract or have
reached agreement on all terms to have an
agreement, understanding, or arrange-
ment. However, an agreement, under-
standing, or arrangement clearly exists if
enforceable rights to acquire stock exist.
In public offerings or auctions by Distrib-
uting or Controlled of Distributing or
Controlled’s stock, an agreement, under-
standing, arrangement, or substantial ne-
gotiations can exist even if the acquirer
has not been specifically identified. The
existence of such an agreement, under-
standing, arrangement, or substantial ne-
gotiations will be based on discussions
with an investment banker or other out-
side adviser.
(2) Controlled corporation. For pur-
poses of this section, a controlled corpo-
ration is a corporation the stock of which
is distributed in a distribution to which
section 355 (or so much of section 356 as
relates to section 355) applies.
(3) Controlling shareholder. (i) A con-
trolling shareholder of a corporation the
stock of which is not listed on an estab-
lished market is any person who, directly
or indirectly, or together with related per-
sons (as described in sections 267(b) and
707(b)), possesses voting power in Dis-
tributing or Controlled representing a
meaningful voice in the governance of the
corporation.
(ii) A controlling shareholder of a cor-
poration the stock of which is listed on an
established market is a 5-percent share-
holder who actively participates in the
management or operation of the corpora-
tion.
(iii) For purposes of this section, a per-
son is a controlling shareholder if that
person meets the definition of controlling
shareholder in this paragraph (k)(3) im-
mediately before or immediately after the
acquisition being tested.
(iv) If a distribution precedes an acqui-
sition, Controlled’s controlling sharehold-
ers immediately after the distribution are
considered Controlled’s controlling share-
holders at the time of the distribution.

(4) Established market. An established
market is—
(i) A national securities exchange regis-
tered under section 6 of the Securities Ex-
change Act of 1934 (15 U.S.C. 78f);
(ii) An interdealer quotation system
sponsored by a national securities associ-
ation registered under section 15A of the
Securities Act of 1934 (15 U.S.C. 78o–3);
or
(iii) Any additional market that the
Commissioner may designate in revenue
procedures, notices, or other guidance
published in the Internal Revenue Bul-
letin (see § 601.601(d)(2) of this chapter).
(5) Five-percent shareholder. A person
will be considered a 5-percent share-
holder of a corporation the stock of which
is listed on an established market if the
person owns, directly or indirectly, or to-
gether with related persons (as described
in sections 267(b) and 707(b)) 5 percent
or more of any class of stock of the corpo-
ration whose stock is transferred. A per-
son is a 5-percent shareholder if the per-
son meets the requirements of the
preceding sentence immediately before or
after each transfer. All options are treated
as exercised for the purpose of determin-
ing whether the shareholder is a 5-percent
shareholder.
(l) [Reserved]
(m) Examples. The following exam-
ples illustrate paragraphs (a) through (k)
of this section. Throughout these exam-
ples, assume that Distributing (D) owns
all of the stock of Controlled (C). As-
sume further that D distributes the stock
of C in a distribution to which section 355
applies and to which section 355(d) does
not apply. Unless otherwise stated, as-
sume the corporations do not have con-
trolling shareholders. No inference
should be drawn from any example con-
cerning whether any requirements of sec-
tion 355 other than those of section 355(e)
are satisfied. The examples are as fol-
lows:
Example 1. Unwanted assets. (i) D is in business
1. C is in business 2. D is relatively small in its in-
dustry. D wants to combine with X, a larger corpora-
tion also engaged in business 1. X and D begin nego-
tiating for X to acquire D, but X does not want to
acquire C. To facilitate the acquisition of D by X, D
agrees to distribute all the stock of C pro ratabefore
the acquisition. D and X enter into a binding contract
for D to merge into X subject to several conditions. D
distributes C and D merges into X one month later.
As a result of the merger, D’s former shareholders
own less than 50 percent of the stock of X.
(ii) No Safe Harbor applies to this acquisition.
(iii) The issue is whether the distribution of C and
the merger of D into X are part of a plan. To deter-
mine whether the distribution of C and the merger of
D into X are part of a plan, D must consider all the
facts and circumstances, including those described
in paragraph (d) of this section.
(iv) The following tends to show that the distrib-
ution of C and the merger of D into X are part of a
plan: X and D discussed the acquisition before the
distribution (paragraph (d)(2)(i) of this section), D
was motivated by a business purpose to facilitate the
merger (paragraph (d)(2)(vii) of this section), and
the distribution and the merger occurred within 6
months of each other (paragraph (d)(2)(viii) of this
section). Because the merger was not only dis-
cussed, but was agreed to, before the distribution,
the fact described in paragraph (d)(2)(i) of this sec-
tion is given substantial weight.
(v) None of the facts and circumstances listed in
paragraph (d)(3) of this section, tending to show that
a distribution and an acquisition are not part of a
plan, exist in this case.
(vi) The distribution of C and the merger of D
into X are part of a plan under paragraph (b)(1) of
this section.
Example 2. Substituted acquirer. (i) The facts are
the same as in Example 1, except that after D distrib-
utes C, X is unable to fulfill one of the conditions of
the merger agreement and the merger of D into X does
not occur. Y, one of X’s competitors, perceives this as
an opportunity and begins discussing with D a merger
into Y. Five months after D distributes C, D merges
into Y. As a result of the merger, the D shareholders
own less than 50 percent of the outstanding Y stock.
(ii) No Safe Harbor applies to this acquisition.
(iii) The issue is whether the distribution of C and
the merger of D into Y are part of a plan. To deter-
mine whether the distribution of C and the merger of
D into Y are part of a plan, D must consider all the
facts and circumstances, including those described
in paragraph (d) of this section.
(iv) The following tends to show that the distrib-
ution of C and the merger of D into Y are part of a
plan: X, a potential acquirer, and D discussed an ac-
quisition before the distribution and a similar acqui-
sition by Y occurred (paragraph (d)(2)(ii) of this sec-
tion), D was motivated by a business purpose to
facilitate an acquisition similar to the merger with Y
(paragraph (d)(2)(vii) of this section), and the distri-
bution and the merger occurred within 6 months of
each other (paragraph (d)(2)(viii) of this section).
(v) As in Example 1,none of the facts and cir-
cumstances listed in paragraph (d)(3) of this section
exist in this case. Although a substituted acquirer
acquired D, the merger of D into Y was similar to
the negotiated merger of D into X.
(vi) The distribution of C and the merger of D
into Y are part of a plan under paragraph (b)(1) of
this section.
Example 3. Public offering. (i) D’s managers,
directors, and investment banker discuss the possi-
bility of offering D stock to the public. They decide
a public offering of 50 percent of D’s stock with D
as a stand alone corporation would be in D’s best in-
terest. To facilitate a stock offering by D of 50 per-
cent of its stock, D distributes all the stock of C pro
ratato D’s shareholders. D issues new shares
amounting to 50 percent of its stock to the public in
a public offering 7 months after the distribution.
(ii) No Safe Harbor applies to this acquisition.
Safe Harbor V, relating to public trading, does not
apply to public offerings (paragraph (f)(5)(ii)(A) of
this section).
(iii) The issue is whether the distribution of C and
the public offering by D are part of a plan. To deter-
mine whether the distribution of C and the public of-
fering by D are part of a plan, D must consider all
the facts and circumstances, including those de-
scribed in paragraph (d) of this section.
(iv) The following tends to show that the distrib-
ution of C and the public offering by D are part of a
plan: D discussed the public offering with its invest-
ment banker before the distribution (paragraph
(d)(2)(iii) of this section), D was motivated by a
business purpose to facilitate the public offering
(paragraph (d)(2)(vii) of this section), and there
were substantial negotiations regarding the public
offering within 6 months after the distribution (para-
graph (d)(2)(viii) of this section).
(v) None of the facts and circumstances listed in
paragraph (d)(3) of this section, tending to show that
a distribution and an acquisition are not part of a
plan, exist in this case.
(vi) The distribution of C and the public offering
by D are part of a plan under paragraph (b)(1) of this
section.
Example 4. Public offering followed by unex-
pected opportunity.(i)Facts. D’s managers, di-
rectors, and investment banker discuss the possibil-
ity of offering C stock to the public. D decides to
distribute C pro ratato D’s shareholders solely to
facilitate a 20 percent stock offering by C. To take
advantage of favorable market conditions, C issues
new shares amounting to 20 percent of its stock in
a public offering 1 month before D distributes its
remaining 80 percent of the C stock. The public
offering documents disclose the intended distribu-
tion of C, which is expected to occur shortly after
the public offering. At the time of the distribution,
it is not reasonably certain that an acquisition will
occur, an agreement, understanding, or arrange-
ment concerning an acquisition will exist, or sub-
stantial negotiations concerning an acquisition will
occur within 6 months. Two months after the dis-
tribution, C is approached unexpectedly regarding
an opportunity to acquire X. Five months after the
distribution, C acquires X in exchange for 40 per-
cent of the C stock.
(ii) Public offering. (A) No Safe Harbor applies
to the public offering. Safe Harbor V, related to pub-
lic trading, does not apply to public offerings (para-
graph (f)(5)(ii)(A) of this section).
(B) The issue is whether the 20 percent public of-
fering by C and the distribution by D of the remain-
ing C stock are part of a plan. To determine whether
the distribution and the public offering are part of a
plan, D must consider all the facts and circum-
stances, including those described in paragraph (d)
of this section.
(C) Under paragraph (d)(2) of this section, the
following tends to show that the distribution of C
and the public offering are part of a plan: D dis-
cussed the distribution with its investment banker
before the public offering (paragraph (d)(2)(vi) of
this section), D was motivated by a business purpose
to facilitate the public offering (paragraph
(d)(2)(vii) of this section), and the public offering
and the distribution occurred within 6 months of
each other (paragraph (d)(2)(viii) of this section).
2001–34 I.R.B.181August 20, 2001

(D) None of the facts and circumstances listed in
paragraph (d)(3) of this section, tending to show that
a distribution and an acquisition are not part of a
plan, exist in this case.
(E) The public offering of C and the distribution
of C are part of a plan under paragraph (b)(1) of this
section.
(iii) X acquisition. (A) No Safe Harbor applies to
the X acquisition.
(B) The issue is whether the distribution of C and
the acquisition by C of X are part of a plan. To de-
termine whether the distribution of C and the acqui-
sition by C of X are part of a plan, D must consider
all the facts and circumstances, including those de-
scribed in paragraph (d) of this section.
(C) Under paragraph (d)(2) of this section, the
following tends to show that the distribution of C
and acquisition by C of X are part of a plan: The dis-
tribution and the acquisition occurred within 6
months of each other (paragraph (d)(2)(viii) of this
section). The fact described in paragraph (d)(2)(vii)
of this section does not exist in this case because D’s
business purpose was to facilitate the public offering
and C’s acquisition of X is not similar to that acqui-
sition.
(D) Under paragraph (d)(3) of this section, the
following tends to show that the distribution of C
and the acquisition by C of X are not part of a plan:
Neither D, C, nor their respective controlling share-
holders discussed the acquisition of X or a similar
acquisition with potential acquirers before the distri-
bution (paragraph (d)(3)(i) of this section), D had a
substantial business purpose for the distribution
other than a business purpose to facilitate the acqui-
sition of X or a similar acquisition (paragraph
(d)(3)(vi) of this section), and the distribution would
have occurred at approximately the same time and in
similar form regardless of the acquisition of X (para-
graph (d)(3)(vii) of this section). The distribution
was announced and accomplished to facilitate the 20
percent public offering by C. D and C were unaware
of the opportunity to acquire X at the time of the dis-
tribution.
(E) Weighing the facts and circumstances, the ac-
quisition by C of X and the distribution of C by D
are not part of a plan under paragraph (b)(1) of this
section.
(F) If C’s acquisition of X had occurred more
than 6 months after the distribution and had not been
the subject of an agreement, understanding, arrange-
ment, or substantial negotiations before the date that
is 6 months after the distribution, Safe Harbor II
would have applied to C’s acquisition of X.
Example 5. Hot market.(i) D is a widely held
corporation the stock of which is listed on an estab-
lished market. D announces a distribution of C and
distributes C pro ratato D’s shareholders. By con-
tract, C agrees to indemnify D for any imposition of
tax under section 355(e) caused by the acts of C.
The distribution is motivated by a desire to improve
D’s access to financing at preferred customer inter-
est rates, which will be more readily available if D
separates from C. At the time of the distribution, al-
though D has not been approached by any potential
acquirer of C, it is reasonably certain that within 6
months after the distribution either an acquisition of
C will occur or there will be an agreement, under-
standing, arrangement, or substantial negotiations
regarding an acquisition of C. Corporation Y ac-
quires C in a merger described in section
368(a)(2)(E) within 6 months after the distribution.
The C shareholders receive less than 50 percent of
the stock of Y in the exchange.
(ii) No Safe Harbor applies to this acquisition.
(iii) The issue is whether the distribution of C and
the acquisition of C by Y are part of a plan. To de-
termine whether the distribution of C and the acqui-
sition of C by Y are part of a plan, D must consider
all the facts and circumstances, including those de-
scribed in paragraph (d) of this section.
(iv) Under paragraph (d)(2) of this section, the
following tends to show that the distribution of C
and the acquisition of C by Y are part of a plan: The
acquisition and the distribution occurred within 6
months of each other (paragraph (d)(2)(viii) of this
section). In addition, the distribution may be moti-
vated by a business purpose to facilitate the acquisi-
tion or a similar acquisition because there is evi-
dence of a business purpose to facilitate an
acquisition by reason of the fact that at the time of
the distribution it was reasonably certain that an ac-
quisition of C would occur or there would be an
agreement, understanding, arrangement, or substan-
tial negotiations regarding an acquisition of C within
6 months after the distribution (paragraphs
(d)(2)(vii) and (e)(1)(i) of this section).
(v) Under paragraph (d)(3) of this section, the
following tends to show that the distribution of C
and the acquisition of C by Y are not part of a plan:
Neither D, C, nor their respective controlling share-
holders discussed the acquisition or a similar acqui-
sition with Y or any other potential acquirers before
the distribution (paragraph (d)(3)(i) of this section).
Furthermore, D may be able to demonstrate that the
distribution was motivated in whole or substantial
part by a corporate business purpose other than a
business purpose to facilitate the acquisition or a
similar acquisition (paragraph (d)(3)(vi) of this sec-
tion). D’s stated purpose for the distribution (facili-
tating D’s access to favorable financing) must be
evaluated in light of the evidence of a business pur-
pose to facilitate an acquisition. D also may be able
to demonstrate that the distribution would have oc-
curred at approximately the same time and in similar
form regardless of the acquisition (paragraph
(d)(3)(vii) of this section).
(vi) Under paragraph (e)(5) of this section, the
existence of the indemnity is irrelevant in analyzing
whether the distribution and acquisition of C are part
of a plan.
(vii) In determining whether the distribution of C
and the acquisition of C by Y are part of a plan, one
should consider the importance of D’s stated business
purpose for the distribution in light of the reasonable
certainty that C would be acquired or there would be
an agreement, understanding, arrangement, or sub-
stantial negotiations regarding an acquisition of C
within 6 months after the distribution. If D’s stated
business purpose for the distribution is substantial
even though the reasonable certainty that C would be
acquired is evidence of a business purpose to facili-
tate an acquisition, and if D would have distributed C
regardless of Y’s acquisition of C, Y’s acquisition of
C and D’s distribution of C are not part of a plan.
Example 6. Unexpected opportunity. (i) D, the
stock of which is listed on an established market, an-
nounces that it will distribute all the stock of C pro
ratato D’s shareholders. At the time of the an-
nouncement, the distribution is motivated wholly by
a corporate business purpose (within the meaning of
§1.355–2(b)) other than a business purpose to facili-
tate an acquisition. After the announcement but be-
fore the distribution, widely held X becomes avail-
able as an acquisition target. There were no
discussions between D and X before the announce-
ment. D negotiates with and acquires X before the
distribution. After the acquisition, X’s former share-
holders own 55 percent of D’s stock. D distributes
the stock of C pro ratawithin 6 months after the ac-
quisition of X.
(ii) No Safe Harbor applies to this acquisition.
(iii) The issue is whether the acquisition of X by
D and the distribution of C are part of a plan. To de-
termine whether the distribution of C and the acqui-
sition of X by D are part of a plan, D must consider
all the facts and circumstances, including those de-
scribed in paragraph (d) of this section.
(iv) Under paragraph (d)(2) of this section, the
following tends to show that the acquisition of X by
D and the distribution of C are part of a plan: The
acquisition and the distribution occurred within 6
months of each other (paragraph (d)(2)(viii) of this
section). Also, the distribution may be motivated by
a business purpose to facilitate the acquisition or a
similar acquisition because there is evidence of a
business purpose to facilitate an acquisition by rea-
son of the fact that the acquisition occurred after the
public announcement of the planned distribution
(paragraphs (d)(2)(vii) and (e)(1)(ii) of this section).
(v) Under paragraph (d)(3) of this section, D
would assert that the following tends to show that
the distribution of C and the acquisition of X by D
are not part of a plan: The distribution was moti-
vated by a corporate business purpose other than a
business purpose to facilitate the acquisition or a
similar acquisition (paragraph (d)(3)(vi) of this sec-
tion), and the distribution would have occurred at
approximately the same time and in similar form re-
gardless of the acquisition (paragraph (d)(3)(vii) of
this section). That D decided to distribute C and an-
nounced that decision before it became aware of the
opportunity to acquire X suggests that the distribu-
tion would have occurred at approximately the same
time and in similar form regardless of D’s acquisi-
tion of X. X’s lack of participation in the decision
also helps establish that fact.
(vi) In determining whether the distribution of C
and acquisition of X by D are part of a plan, one
should consider the importance of D’s business pur-
pose for the distribution in light of D’s opportunity
to acquire X. If D can establish that the distribution
continued to be motivated by the stated business
purpose, and if D would have distributed C regard-
less of D’s acquisition of X, then D’s acquisition of
X and D’s distribution of C are not part of a plan.
Example 7. Multiple acquisitions. [Reserved]
(n) Effective date. This section applies
to distributions occurring after August 3,
2001.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved July 26, 2001.
Mark A. Weinberger,
Assistant Secretary
of the Treasury.
August 20, 20011822001–34 I.R.B.

(Filed by the Office of the Federal Register on Au-
gust 2, 2001, 8:45 a.m., and published in the issue of
the Federal Register for August 3, 2001, 66 F.R.
40590)
Section 2632.—Special Rules
for Allocation of GST Exemption
26 CFR 26.2632–1: Allocation of GST exemption.
If a taxpayer does not elect on a timely filed gift
tax return under section 2632(b) to have the auto-
matic allocation of GST exemption rules not apply
to direct skips, what procedure must the taxpayer
follow to request an extension of time to make an
election that the automatic allocation rules not
apply? See Notice 2001–50, page 189.
26 CFR 26.2632–1: Allocation of GST exemption.
If a taxpayer does not elect on a timely filed gift
tax return under section 2632(c) to have the auto-
matic allocation of GST exemption rules not apply
to indirect skips made after December 31, 2000,
what procedure must the taxpayer follow to request
an extension of time to make an election that the au-
tomatic allocation rules not apply? If a taxpayer
does not elect on a timely filed gift tax return under
section 2632(c)(5)(A)(ii) to treat a trust as a GST
trust described in section 2632(c)(3)(B), what proce-
dure must the taxpayer follow to request an exten-
sion of time to treat the trust as a GST trust? See No-
tice 2001–50, page 189.
Section 2642.—Inclusion Ratio
26 CFR 26.2642–2: Valuation.
If a taxpayer does not allocate generation-skip-
ping transfer exemption on a timely filed gift tax re-
turn with respect to a lifetime transfer under
§ 2642(b)(1) or on a timely filed estate tax return
with respect to transfers at death under § 2642(b)(2),
what procedure must the taxpayer follow to request
an extension of time to make an allocation of the
generation-skipping transfer exemption? See Notice
2001–50, page 189.
Section 6103.—Confidentiality
and Disclosure of Returns and
Return Information
26 CFR 301.6103(j)(5)–1: Disclosures of return
information to officers and employees of the
Department of Agriculture for certain statistical
purposes and related activities.
T.D. 8958
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
Disclosures of Return
Information to Officers and
Employees of the Department of
Agriculture for Certain
Statistical Purposes and Related
Activities
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This document provides a
final regulation relating to the disclosure
of return information to officers and em-
ployees of the Department of Agriculture
for certain statistical purposes and related
activities. This regulation permits the IRS
to disclose return information to the De-
partment of Agriculture to structure, pre-
pare, and conduct the Census of Agricul-
ture.
DATES: Effective Date: This regulation
is effective July 31, 2001.
Applicability Date: For dates of applic-
ability of this regulation, see §301.6103
(j)(5)–1(d).
FOR FURTHER INFORMATION CON-
TACT: Stuart Murray, (202) 622-4580
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On January 4, 2000, a temporary regu-
lation (T.D. 8854, 2000–3 I.R.B. 306) re-
lating to disclosure of return information
to the Department of Agriculture was
published in the Federal Register(65 FR
215). A notice of proposed rulemaking
(REG–116704–99, 2000–3 I.R.B. 325)
cross-referencing the temporary regula-
tion was published in the Federal Regis-
terfor the same day (65 FR 215). No
public hearing was requested or held. No
written or electronic comments respond-
ing to the notice of proposed rulemaking
were received. Accordingly, the regula-
tion proposed by REG–116704–99 is
adopted by this Treasury decision without
revision, and the corresponding tempo-
rary regulation is removed.
Explanation of Provisions
This regulation allows the IRS to dis-
close return information to the Depart-
ment of Agriculture for purposes of the
Census of Agriculture.
The disclosure of the specific items of
return information identified in this regu-
lation is necessary in order for the Depart-
ment of Agriculture to accurately identify,
locate, and classify, as well as properly
process, information from agricultural
businesses to be surveyed for the statuto-
rily mandated Census of Agriculture.
Special Analyses
It has been determined that this Treasury
decision is not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to this regulation.
It is hereby certified that this regulation
will not have a significant impact on a sub-
stantial number of small entities. This cer-
tification is based upon the fact that this
regulation concerns the disclosure of return
information by the IRS to the Department
of Agriculture for purposes of the Census
of Agriculture and does not require any ac-
tion by or otherwise affect small entities.
Therefore, a Regulatory Flexibility Analy-
sis under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the
Code, the temporary regulation and the
notice of proposed rulemaking preceding
this regulation were submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small businesses.
Drafting Information
The principal author of this regulation is
Jennifer S. McGinty, formerly of the Of-
fice of the Associate Chief Counsel (Proce-
dure & Administration), Disclosure & Pri-
vacy Law Division, IRS. However, other
personnel from the IRS and Treasury De-
partment participated in its development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by removing the
2001–34 I.R.B.183August 20, 2001

entry for 301.6103(j)(5)–1T and adding
an entry in numerical order to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(j)(5)–1 also issued
under 26 U.S.C. 6103(j)(5);* * *
Par. 2. Section 301.6103(j)(5)–1 is
added to read as follows:
§301.6103(j)(5)–1 Disclosures of return
information to officers and employees of
the Department of Agriculture for
certain statistical purposes and related
activities.
(a) General rule.Pursuant to the provi-
sions of section 6103(j)(5) of the Internal
Revenue Code and subject to the require-
ments of paragraph (c) of this section, of-
ficers or employees of the Internal Rev-
enue Service (IRS) will disclose return
information to officers and employees of
the Department of Agriculture to the ex-
tent, and for such purposes as may be,
provided by paragraph (b) of this section.
(b) Disclosure of return information to
officers and employees of the Department
of Agriculture.(1) Officers or employees
of the IRS will disclose the following re-
turn information for individuals, partner-
ships, and corporations with agricultural
activity, as determined generally by in-
dustry code classification or the filing of
returns for such activity, to officers and
employees of the Department of Agricul-
ture for purposes of, but only to the extent
necessary in, structuring, preparing, and
conducting, as authorized by chapter 55
of title 7, United States Code, the Census
of Agriculture.
(2) From Form 1040/Schedule F—
(i) Taxpayer Identity Information (as
defined in section 6103(b)(6) of the
Internal Revenue Code);
(ii) Spouse’s SSN;
(iii) Annual Accounting Period;
(iv) Principal Business Activity (PBA)
Code;
(v) Sales of livestock and produce
raised;
(vi) Taxable cooperative distributions;
(vii) Income from custom hire and ma-
chine work;
(viii) Gross income;
(ix) Master File Tax (MFT) Code;
(x) Document Locator Number (DLN);
(xi) Cycle Posted;
(xii) Final return indicator; and
(xiii) Part year return indicator.
(3) From Form 943—
(i) Taxpayer Identity Information;
(ii) Annual Accounting Period;
(iii) Total wages subject to Medicare
taxes;
(iv) Master File Tax (MFT) Code;
(v) Document Locator Number (DLN);
(vi) Cycle Posted;
(vii) Final return indicator; and
(viii) Part year return indicator.
(4) From Form 1120 series—
(i) Taxpayer Identity Information;
(ii) Annual Accounting Period;
(iii) Gross receipts less returns and al-
lowances;
(iv) PBA Code;
(v) Parent corporation Employer Iden-
tification Number, and related
Name and PBA Code for entities
with agricultural activity;
(vi) Master File Tax (MFT) Code;
(vii) Document Locator Number
(DLN);
(viii) Cycle posted;
(ix) Final return indicator;
(x) Part year return indicator; and
(xi) Consolidated return indicator.
(5) From Form 851—
(i) Subsidiary Taxpayer Identity Infor-
mation;
(ii) Annual Accounting Period;
(iii) Subsidiary PBA Code;
(iv) Parent Taxpayer Identity Informa-
tion;
(v) Parent PBA Code;
(vi) Master File Tax (MFT) Code;
(vii) Document Locator Number
(DLN); and
(viii) Cycle Posted.
(6) From Form 1065 series—
(i) Taxpayer Identity Information;
(ii) Annual Accounting Period;
(iii) PBA Code;
(iv) Gross receipts less returns and al-
lowances;
(v) Net farm profit (loss);
(vi) Master File Tax (MFT) Code;
(vii) Document Locator Number
(DLN);
(viii) Cycle Posted;
(ix) Final return indicator; and
(x) Part year return indicator.
(c) Procedures and restrictions.(1)
Disclosure of return information by offi-
cers or employees of the IRS as provided
by paragraph (b) of this section shall be
made only upon written request desig-
nating, by name and title, the officers
and employees of the Department of
Agriculture to whom such disclosure is
authorized, to the Commissioner of In-
ternal Revenue by the Secretary of the
Department of Agriculture and describ-
ing—
(i) The particular return information to
be disclosed;
(ii) The taxable period or date to which
such return information relates; and
(iii) The particular purpose for which
the return information is to be
used.
(2) No such officer or employee to
whom return information is disclosed
pursuant to the provisions of paragraph
(b) of this section shall disclose such re-
turn information to any person, other
than the taxpayer to whom such return
information relates or other officers or
employees of the Department of Agri-
culture whose duties or responsibilities
require such disclosure for a purpose de-
scribed in paragraph (b) of this section,
except in a form that cannot be associ-
ated with, or otherwise identify, directly
or indirectly, a particular taxpayer. If
the IRS determines that the Department
of Agriculture, or any officer or em-
ployee thereof, has failed to, or does not,
satisfy the requirements of section
6103(p)(4) of the Internal Revenue Code
or regulations or published procedures
thereunder, the IRS may take such ac-
tions as are deemed necessary to ensure
that such requirements are or shall be
satisfied, including suspension of dis-
closures of return information otherwise
authorized by section 6103(j)(5) and
paragraph (b) of this section, until the
IRS determines that such requirements
have been or will be satisfied.
(d) Effective date.This section is ap-
plicable on July 31, 2001.
§301.6103(j)(5)–1T [Removed]
Par. 3. Section 301.6103(j)(5)–1T is
removed.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved July 20, 2001.
Mark Weinberger,
Assistant Secretary
of the Treasury (Tax Policy).
August 20, 20011842001–34 I.R.B.

(Filed by the Office of the Federal Register on July
30, 2001, 8:45 a.m., and published in the issue of the
Federal Register for July 31, 2001, 66 F.R. 39437)
Section 6112.—Organizers and
Sellers of Potentially Abusive
Tax Shelters Must Keep Lists of
Investors
26 CFR 301.6112–1T: Requirements to maintain list
of investors in potentially abusive tax shelters.
Which transactions have been determined by the
Internal Revenue Service to be tax avoidance trans-
actions for purposes of § 6111(d)(1)(A) and are
transactions for which promoters must maintain lists
of investors pursuant to § 301.6112–1T? See Notice
2001–51, page 190.
Section 6205.—Special Rules
Applicable to Certain
Employment Taxes
26 CFR 31.6205–1: Adjustments of underpayments.
T.D. 8959
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
Interest-Free Adjustments With
Respect to Underpayments of
Employment Taxes
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to interest-free
adjustments with respect to underpay-
ments of employment taxes. These final
regulations reflect changes to the law
made by the Taxpayer Relief Act of 1997.
The final regulations affect employers
that are the subject of IRS examinations
involving determinations by the IRS that
workers are employees for purposes of
subtitle C or that the employers are not
entitled to relief from employment taxes
under section 530 of the Revenue Act of
1978.
DATES:Effective Date: These regula-
tions are effective August 1, 2001.
Applicability Date: These regulations
are applicable with respect to notices of
determination issued on or after March
19, 2001. Interest will be computed under
the rule in this regulation on any claims
for refund of interest pending on January
17, 2001. No inference is intended that
the rule set forth in these final regulations
is not current law.
FOR FURTHER INFORMATION CON-
TACT: Lynne Camillo (202) 622-6040
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains an amendment
to the Employment Tax Regulations (26
CFR part 31) under section 6205. On
January 17, 2001, the IRS published in
the Federal Register(66 FR 3956) a no-
tice of proposed rulemaking (REG–
110374–00, 2001–12 I.R.B. 915) under
section 6205 of the Internal Revenue
Code relating to interest-free adjustments
of employment tax underpayments. The
notice proposed to amend §31.6205–1 of
the employment tax regulations.
No written comments responding to the
notice of proposed rulemaking were re-
ceived. No public hearing was requested
or held. Accordingly, the proposed regu-
lations are adopted as final regulations.
Section 6205 allows employers that
have paid less than the correct amount of
employment taxes to make adjustments
without interest, provided the error is re-
ported and the taxes are paid by the last
day for filing the return for the quarter in
which the error was ascertained. How-
ever, no interest-free adjustments are per-
mitted pursuant to section 6205 after re-
ceipt of notice and demand for payment
thereof based upon an assessment.
§31.6205–1(a)(6).
The Taxpayer Relief Act of 1997, Pub-
lic Law 105–34 (111 Stat. 788), effective
August 5, 1997, created new section 7436
of the Internal Revenue Code (Code),
which provides the Tax Court with juris-
diction to review determinations by the
IRS that workers are employees for pur-
poses of subtitle C, or that the employer is
not entitled to relief from employment
taxes under section 530. Section 7436 re-
sulted in a change in the way employment
tax examinations involving worker classi-
fication and section 530 issues are con-
ducted insofar as notice and demand for
payment of an employment tax underpay-
ment based upon an assessment cannot be
made until after the taxpayer under exam-
ination receives notice of the IRS’s deter-
mination and has been given an opportu-
nity to file a petition in the Tax Court
contesting such determination.
Explanation of Provisions
This document contains an amendment
to the regulations under section 6205.
The amendment clarifies the period for
adjustments of employment tax underpay-
ments without interest under section 6205
following the expansion of Tax Court re-
view to certain employment tax determi-
nations.
As a general rule, under section 6601,
all taxpayers who fail to pay the full
amount of a tax due under the Code must
pay interest at the applicable rate on the
unpaid amount from the last date pre-
scribed for payment of the tax until the
date the tax is paid. However, section
6205 allows employers that have paid less
than the correct amount of certain em-
ployment taxes
1
with respect to any pay-
ment of wages or compensation to make
adjustments to returns without interest
pursuant to the regulations. The employ-
ment tax regulations under section 6205
generally allow employers to make ad-
justments to returns without interest until
the last day for filing the return for the
quarter in which the error was ascer-
tained. An error is ascertained when the
employer has sufficient knowledge of the
error to be able to correct it.
§31.6205–1(a)(4). Section 31.6205–
1(a)(6) provides that no interest-free ad-
justments can be made after receipt of a
statement of notice and demand for pay-
ment based upon an assessment.
In Revenue Ruling 75–464 (1975–2
C.B. 474), the IRS further clarified the
time for adjustments under section 6205.
The ruling clarifies that employers can
still make interest-free adjustments where
the underpayment is discovered during an
audit or examination (i.e., where the em-
ployer has not independently ascertained
2001–34 I.R.B.185August 20, 2001
1
Section 6205 applies to underpayments of taxes
under the Federal Insurance Contributions Act
(FICA), the Railroad Retirement Tax Act (RRTA),
and income tax withholding. Section 6205 does not
apply to underpayments of taxes under the Federal
Unemployment Tax Act (FUTA), as such underpay-
ments are not subject to interest under section
6601(i).

the underpayment). The ruling sets forth
situations illustrating when an error is as-
certained with respect to returns under
audit by the IRS. Under the facts in the
revenue ruling, an error is ascertained
when the employer signs an “Agreement
to Adjustment and Collection of Addi-
tional Tax”, Form 2504, either at the ex-
amination level or the appeals level, when
the taxpayer pays the full amount due so
as to file a refund claim (if paid prior to
notice and demand), or at the conclusion
of internal IRS appeal rights if no agree-
ment is reached. Under the factual situa-
tions in Revenue Ruling 75–464, the em-
ployment taxes can be paid free of interest
at the time the employer signs Agreement
Form 2504 or at the time it pays the tax
preparatory to filing a claim to contest the
liability in court, after having exhausted
all appeal rights within the IRS, provided
the payment is made before the taxpayer
receives notice and demand for payment.
The Taxpayer Relief Act of 1997, Pub-
lic Law 105–34 (111 Stat. 788), created
new section 7436 of the Code which pro-
vides the Tax Court with jurisdiction to
review determinations by the IRS that
workers are employees for purposes of
subtitle C of the Code, or that the organi-
zation for which services are performed is
not entitled to relief from employment
taxes under section 530. Section 7436(a)
requires that the determination involve an
actual controversy and that it be made as
part of an examination. Subsequent to en-
actment of section 7436 of the Code, the
IRS created a standard notice, the “Notice
of Determination Concerning Worker
Classification Under Section 7436” (no-
tice of determination) to serve as the “de-
termination” that is a prerequisite to in-
voking the Tax Court’s jurisdiction under
section 7436. Notice 98–43 (1998–2 C.B.
211).
Section 7436(d)(1) provides that the
suspension of the limitations period for
assessment in section 6503(a) applies in
the same manner as if a notice of defi-
ciency had been issued. Thus, pursuant to
section 6503(a), the mailing of the notice
of determination by certified or registered
mail will suspend the statute of limita-
tions for assessment of taxes attributable
to the worker classification and section
530 issues. Generally, the statute of limi-
tations for assessment of taxes attribut-
able to the worker classification and sec-
tion 530 issues is suspended for the 90-
day period during which the taxpayer can
begin a suit in Tax Court, plus an addi-
tional 60 days thereafter. Moreover, if the
taxpayer does file a timely petition in the
Tax Court, the statute of limitations for
assessment of taxes attributable to the
worker classification and section 530 is-
sues is suspended under section 6503(a)
during the Tax Court proceedings, and for
sixty days after the Tax Court decision be-
comes final.
Current IRS guidance provides for in-
terest-free adjustments under section
6205 prior to assessment and notice and
demand. Because of the prohibition on
assessment for cases pending in the Tax
Court, this creates a potential for incon-
sistent application of interest depending
upon whether an employer files a claim in
the Tax Court or in another court of Fed-
eral jurisdiction. The legislative history
of section 7436 shows no intent to create
an advantage for taxpayers who choose to
litigate their cases in Tax Court as op-
posed to another court of Federal jurisdic-
tion. H.R. No. 105–148, 105th Cong., 1st
Sess., at 639–640 (1997). Taxpayers who
choose to petition the Tax Court under
section 7436 still have the benefit of all of
the inherent advantages of litigating in the
Tax Court, including the ability to obtain
judicial review without prior payment of
the additional tax the IRS has determined
to be due.
Judicial and administrative precedents
provide that an error is ascertained for
purposes of section 6205 (ending the pe-
riod for interest-free adjustments) when
the taxpayer has exhausted all internal ap-
peal rights with the IRS. Eastern Invest-
ment Corp. v. United States, 49 F.3d 651
(10th Cir. 1995); Rev. Rul. 75–464
(1975–2 C.B. 474). In the context of re-
fund litigation, where a taxpayer whose
erroneous underpayment of employment
taxes is discovered during an examination
pays only the required divisible portion of
employment tax prior to filing a claim for
refund in order to satisfy the jurisdictional
requirements for filing suit in district
court, interest continues to accrue on the
unpaid portion of employment tax from
the date upon which the tax is assessed
after the taxpayer has exhausted all appeal
rights within the IRS until the date such
tax is paid. See Eastern Investment
Corp., supra(rejecting taxpayer’s argu-
ment that the error could not have been
“ascertained” until a decision was made
by the court and the liability was no
longer being contested). Moreover, in
Tax Court deficiency proceedings that do
not involve employment taxes, unless the
taxpayer makes a deposit to stop the run-
ning of interest, interest continues to ac-
crue on the deficiency during the course
of the Tax Court proceeding. Rev. Rul.
56–501 (1956–2 C.B. 954).
In employment tax examinations that
do not involve worker classification or
section 530 issues, the taxpayer has ex-
hausted all internal appeal rights by the
time a notice and demand for payment
thereof based upon an assessment is re-
ceived. Similarly, in employment tax ex-
aminations involving worker classifica-
tion or section 530 issues, the taxpayer
has already had the benefit of all of the
same internal appeal rights by the time a
notice of determination is received.
These final regulations provide that, in
employment tax examinations involving
worker classification or section 530 is-
sues, as in other types of employment tax
examinations, the error is ascertained for
purposes of section 6205 when the em-
ployer has exhausted all internal appeals
within the IRS. The fact that notice and
demand for payment based upon an as-
sessment cannot be made in cases involv-
ing worker classification and section 530
issues until the suspension of the statute
of limitations is lifted, following issuance
of a notice of determination, does not re-
sult in an extension of the period during
which interest-free adjustments can be
made under section 6205. Accordingly, in
order to clarify that the error is ascer-
tained for purposes of section 6205 once a
taxpayer has exhausted all internal appeal
rights with the IRS, the existing regula-
tions are hereby modified by prohibiting
interest-free adjustments after receipt of
the notice of determination.
However, if, prior to receipt of a notice
of determination, a taxpayer makes a re-
mittance which is equal to the amount of
the proposed liability, the IRS considers
the remittance a payment and assesses it.
Rev. Proc. 84–58 (1984–2 C.B. 501). In
such a situation, no notice of determina-
tion would be sent to the taxpayer. If a
taxpayer wants to stop the running of in-
terest and contest the adjustment in the
Tax Court, the taxpayer may make a re-
August 20, 20011862001–34 I.R.B.

mittance, designating it in writing as a de-
posit in the nature of a cash bond. If the
taxpayer makes such a deposit, the IRS
does not consider the remittance a pay-
ment. Id. at §4.02. The deposit stops the
running of interest and, if the taxpayer
does not waive the restrictions on assess-
ment, the IRS will send the taxpayer a no-
tice of determination, thus permitting the
taxpayer the option of Tax Court review.
In order to provide a mechanism for
taxpayers to make a remittance to stop the
accrual of interest, yet still receive a no-
tice of determination and retain the right
to petition the Tax Court, these final regu-
lations further modify the existing regula-
tions to provide that, prior to receipt of a
notice of determination, the taxpayer may,
in lieu of making a payment, make a cash
bond deposit which would have the effect
of stopping the accrual of any interest, but
would not deprive the taxpayer of its right
to receive a notice of determination and to
petition the Tax Court under section 7436.
Special Analyses
It has been determined that this final
regulation is not a significant regulatory
action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions and, because these regulations do
not impose on small entities a collection
of information requirement, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Therefore, a Regulatory
Flexibility Analysis is not required. Pur-
suant to section 7805(f) of the Code, the
notice of proposed rulemaking preceding
this regulation was submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Drafting Information
The principal author of this final regu-
lation is Lynne Camillo, Office of the As-
sistant Chief Counsel (Exempt Organiza-
tions/Employment Tax/Government
Entities). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
* * * * *
Amendments to the Regulations
Accordingly, 26 CFR part 31 is pro-
posed to be amended as follows:
PART 31 — EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT THE SOURCE
Paragraph 1. The authority for part 31
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §31.6205–1, paragraph (a)(6)
is revised to read as follows:
§31.6205–1 Adjustments of
underpayments.
(a) * * *
(6) No underpayment shall be reported
pursuant to this section after the earlier of
the following—
(i) Receipt from the Director of notice
and demand for payment thereof based
upon an assessment; or
(ii) Receipt from the Director of a No-
tice of Determination Concerning Worker
Classification Under Section 7436 (No-
tice of Determination). (Prior to receipt
of a Notice of Determination, the tax-
payer may, in lieu of making a payment,
make a cash bond deposit which would
have the effect of stopping the accrual of
any interest, but would not deprive the
taxpayer of its right to receive a Notice of
Determination and to petition the Tax
Court under section 7436).
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved July 20, 2001.
Mark A. Weinberger,
Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on July
31, 2001, 8:45 a.m., and published in the issue of the
Federal Register for August 1, 2001, 66 F.R. 39638)
2001–34 I.R.B.187August 20, 2001

Safe Harbor Under Which an
Issue of Tax or Revenue
Anticipation Bonds Will Not Be
Treated as Outstanding Longer
Than Is Reasonably Necessary
to Accomplish the Governmental
Purposes of the Bonds for
Purposes of § 1.148–10(a)(4) of
the Income Tax Regulations
Notice 2001–49
Recent Internal Revenue Service exam-
inations have identified a lack of clarity in
regulations concerning when tax or rev-
enue anticipation bonds will be treated as
outstanding longer than is reasonably nec-
essary to accomplish the governmental
purposes of the bonds for purposes of
§ 1.148–10(a)(4) of the Income Tax Reg-
ulations. Because of this lack of clarity in
the regulations, the Internal Revenue Ser-
vice announces that the issue of whether a
tax or revenue anticipation bond is out-
standing longer than necessary for pur-
poses of § 1.148–10(a)(4) will be closed
in any current examination, and will not
be raised in any future examination, with
respect to any issue of tax or revenue an-
ticipation bonds that has a term of 2 years
or less and was sold prior to August 3,
2001. This announcement has no effect
on any other issue that may be identified
in any current or future examination.
In addition, the Internal Revenue Ser-
vice has determined that it is appropriate
to provide a prospective safe harbor re-
garding the term of tax or revenue antici-
pation bonds. Therefore, attached is a
proposed revenue procedure that sets
forth a safe harbor under which an issue
of tax or revenue anticipation bonds will
not be treated as outstanding longer than
is reasonably necessary to accomplish the
governmental purposes of the bonds for
purposes of § 1.148–10(a)(4).
Section 3 of the proposed revenue pro-
cedure provides that the safe harbor ap-
plies to an issue of tax or revenue antici-
pation bonds the proceeds of which
qualify for a temporary period for re-
stricted working capital expenditures
under § 1.148–2(e)(3). Section 4 of the
proposed revenue procedure provides
that, for purposes of § 1.148–10(a)(4), an
issue of tax or revenue anticipation bonds
will not be treated as outstanding longer
than is reasonably necessary to accom-
plish the governmental purposes of those
bonds if the final maturity date of the
issue is not later than the end of the ap-
plicable temporary period under
§ 1.148–2(e)(3)(i) or § 1.148–2(e)(3)(ii)
for which proceeds of the issue qualify.
The proposed revenue procedure will
apply to bonds sold after the date the rev-
enue procedure is published in the Inter-
nal Revenue Bulletin in final form. How-
ever, issuers may rely on the proposed
revenue procedure with respect to any
issue of tax or revenue anticipation bonds
that is sold before the effective date of the
proposed revenue procedure and on or
after August 3, 2001.
Comments are requested on the pro-
posed revenue procedure. Comments may
be submitted on or before November 18,
2001, to Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station, Washing-
ton, DC 20224, Attn: CC:ITA:RU (Notice
2001–49), Room 5226. Submissions may
also be hand delivered Monday through
Friday between the hours of 8 a.m. and 5
p.m. to the Courier’s Desk at 1111 Consti-
tution Avenue, NW, Washington, DC
20224, Attn: CC:ITA:RU (Notice
2001–49), Room 5226. Submissions may
also be sent electronically via the Internet
to the following e-mail address:
notice.comments@m1.irscounsel.treas.gov.
The principal authors of this notice are
Rose M. Weber and Timothy L. Jones of
the Office of Division Counsel/Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). However, other personnel
from the IRS and Treasury Department
participated in the development of this
notice. For further information regarding
this notice, contact either Rose M. Weber
or Timothy L. Jones at (202) 622-3980
(not a toll-free call).
26 CFR 1.148–10: Anti-abuse rules and Authority
of Commissioner.
(Also Part I, §§ 103, 148, 1.148–1, 148–2, 148–6)
Rev. Proc. 2001–XX
SECTION 1. PURPOSE
This revenue procedure sets forth a safe
harbor under which an issue of tax or rev-
enue anticipation bonds will not be
treated as outstanding longer than is rea-
sonably necessary to accomplish the gov-
ernmental purposes of the bonds for pur-
poses of § 1.148–10(a)(4) of the Income
Tax Regulations.
SECTION 2. BACKGROUND
01. Section 103(a) of the Internal Rev-
enue Code of 1986 provides that, except
as provided in section 103(b), gross in-
come does not include interest on any
state or local bond.
02. Section 103(b) provides that the
exclusion described in section 103(a)
does not apply to any arbitrage bond.
03. Section 148(a) provides that an ar-
bitrage bond is any bond issued as part of
an issue any portion of the proceeds of
which are to be used directly or indi-
rectly–
(1) to acquire higher yielding invest-
ments, or
(2) to replace funds which were used
directly or indirectly to acquire higher
yielding investments.
04. Section 148(c)(1) provides that a
bond will not be treated as an arbitrage
bond solely by reason of the fact that the
proceeds of the issue of which such bond
is a part may be invested in higher yield-
ing investments for a reasonable tempo-
rary period until such proceeds are needed
for the purpose for which such issue was
issued.
05. Section 1.148–2(e)(3)(i) of the In-
come Tax Regulations provides that the
proceeds of an issue that are reasonably
expected to be allocated to restricted
working capital expenditures within 13
months after the issue date qualify for a
temporary period of 13 months beginning
on the issue date.
06. Section 1.148–2(e)(3)(ii) provides
that if an issuer reasonably expects to use
tax revenues arising from tax levies for a
single fiscal year to redeem or retire an
issue, and the issue matures by the earlier
of 2 years after the issue date or 60 days
after the last date for payment of those
taxes without interest or penalty, the tem-
porary period under § 1.148–2(e)(3)(i) is
extended until the maturity date of the
issue.
07. Section 1.148–1(b) provides that
restricted working capital expenditures
August 20, 20011882001–34 I.R.B.
Part III. Administrative, Procedural, and Miscellaneous

2001–34 I.R.B.189August 20, 2001
are working capital expenditures that are
subject to the proceeds-spent-last rule in
§ 1.148–6(d)(3)(i) and are ineligible for
any exception to that rule.
08. Section 1.148–10(a)(1) provides
that bonds of an issue are arbitrage bonds
if an abusive arbitrage device under
§ 1.148–10(a)(2) is used in connection
with the issue.
09. Section 1.148–10(a)(2) provides
that any action is an abusive arbitrage de-
vice if the action has the effect of (i) en-
abling the issuer to exploit the difference
between tax-exempt and taxable interest
rates to obtain a material financial advan-
tage and (ii) overburdening the tax-ex-
empt bond market.
10. Section 1.148–10(a)(4) provides
that an action overburdens the tax-exempt
bond market if it results in issuing more
bonds, issuing bonds earlier, or allowing
bonds to remain outstanding longer than
is otherwise reasonably necessary to ac-
complish the governmental purposes of
the bonds, based on all the facts and cir-
cumstances.
11. Under § 1.148–10(a)(4), one factor
evidencing that bonds may remain out-
standing longer than necessary is a term
that exceeds the safe harbors against the
creation of replacement proceeds under
§ 1.148–1(c)(4)(i)(B). This factor may be
outweighed by other factors, however,
such as long-term financial distress.
12. Section 1.148–1(c)(4)(i)(A) pro-
vides that certain replacement proceeds
arise to the extent that the issuer reason-
ably expects as of the issue date that the
term of the issue will be longer than is
reasonably necessary for the governmen-
tal purposes of the issue and that there
will be available amounts during the pe-
riod that the issue remains outstanding
longer than necessary. Whether an issue
is outstanding longer than necessary is de-
termined under § 1.148–10.
13. Section 1.148–1(c)(4)(i)(B)(1) pro-
vides a safe harbor against the creation of
replacement proceeds under § 1.148–1
(c)(4)(i)(A) for the portion of an issue that
finances restricted working capital expen-
ditures. This safe harbor is met if that
portion is not outstanding longer than 2
years.
14. Section 1.148–1(c)(4)(i)(B)(2) pro-
vides a safe harbor against the
creation of replacement proceeds under
§ 1.148–1(c)(4)(i)(A) for the portion of an
issue (including a refunding issue) that fi-
nances or refinances capital projects.
This safe harbor is met if that portion has
a weighted average maturity that does not
exceed 120 percent of the average reason-
ably expected economic life of the fi-
nanced capital projects.
15. Section 1.148–10(d) contains ex-
amples illustrating the application of the
anti-abuse rules of § 1.148–10. Example
2(i) describes a particular transaction in
which an issue is deemed to have a longer
weighted average maturity than neces-
sary, notwithstanding that the issue satis-
fies the safe harbor against the creation of
replacement proceeds in § 1.148–1(c)
(4)(i)(B)(2).
SECTION 3. SCOPE
This revenue procedure applies to an
issue of tax or revenue anticipation bonds
the proceeds of which qualify for a tem-
porary period for restricted working capi-
tal expenditures under § 1.148–2(e)(3).
SECTION 4. SAFE HARBOR
For purposes of § 1.148–10(a)(4), an
issue of tax or revenue anticipation bonds
within the scope of this revenue proce-
dure will not be treated as outstanding
longer than is reasonably necessary to ac-
complish the governmental purposes of
those bonds if the final maturity date of
the issue is not later than the end of the
applicable temporary period under
§ 1.148–2(e)(3)(i) or § 1.148–2(e)(3)(ii)
for which proceeds of the issue qualify.
This revenue procedure does not apply to
determine whether an issue of tax or rev-
enue anticipation bonds meets the other
requirements of section 148.
SECTION 5. ADVANCE RULINGS
The Service will consider requests for
rulings on proposed issues of tax or rev-
enue anticipation bonds that do not satisfy
the safe harbor provided in section 4.
SECTION 6. EFFECTIVE DATE
This revenue procedure applies to tax
or revenue anticipation bonds sold after
August 20, 2001.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Rose M. Weber and Timo-
thy L. Jones of Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). How-
ever, other personnel from the IRS and
Treasury Department participated in the
development of this revenue procedure.
For further information regarding this
revenue procedure, contact Rose M.
Weber or Timothy L. Jones at (202) 622-
3980 (not a toll-free call).
Relief From Late Allocation of
GST Exemption
Notice 2001–50
PURPOSE
This notice provides guidance regard-
ing requests for an extension of time to
make an allocation of generation-skipping
transfer (GST) exemption under
§ 2642(b)(1) and (2) of the Internal Rev-
enue Code in view of the enactment of
§ 2642(g) by The Economic Growth and
Tax Relief Reconciliation Act of 2001
(the Act). Pub. L. 107–16, § 564, 115
Stat. 91. This notice also provides guid-
ance regarding requests for an extension
of time to make elections under
§ 2632(b)(3) and § 2632(c)(5) as added
by § 561(a) of the Act.
BACKGROUND
Section 2601 imposes a tax on every
GST. Each individual is allowed a GST
exemption that may be allocated to
transfers that would be subject to the
GST tax. In general, an individual’s
GST exemption may be allocated to
transfers at any time on or before the
due date for filing the federal estate tax
return for the individual’s estate under
§ 2632(a)(1).
For lifetime transfers, available GST
exemption is automatically allocated to a
direct skip under § 2632(b), and to indi-
rect skips made after December 31,
2000, under § 2632(c), unless the indi-
vidual elects out of the automatic
allocation under § 2632(b)(3) and
§ 2632(c)(5), respectively. Under
§ 2632(c)(3)(A), an indirect skip is a
transfer of property, subject to gift tax, to
a GST trust as defined in § 2632(c)
(3)(B). An individual may elect to treat
any trust as a GST trust under
§ 2632(c)(5)(A)(ii).

Under § 26.2632–1(b)(1)(i) of the Gen-
eration-Skipping Transfer Tax Regula-
tions, the election out of the automatic al-
location for direct skips must be made on
a timely filed federal gift tax return. The
Treasury Department and the Internal
Revenue Service will issue regulations
providing that the election out of the auto-
matic allocation for indirect skips and the
election to treat any trust as a GST trust
must also be made on a timely filed fed-
eral gift tax return.
Under § 2642(b)(1) and § 26.2642–
2(a)(1), with respect to lifetime transfers,
the value of the property to which the
GST exemption is allocated is its value at
the date of the transfer if the GST exemp-
tion is automatically allocated or is allo-
cated on a timely filed federal gift tax re-
turn. Under § 2642(b)(3), if the allocation
is not made on a timely filed gift tax re-
turn, the value of the property to which
the exemption is allocated is its value on
the effective date of the allocation as de-
scribed in § 26.2642–2(a)(2).
Section 2642(b)(2) describes alloca-
tions with respect to transfers at death and
provides that the value of property to
which the GST exemption is allocated is
its value as determined for estate tax pur-
poses. The allocation of the GST exemp-
tion to transfers at death may be made by
the executor at any time prior to the due
date of the federal estate tax return under
§ 26.2632–1(a). Unused GST exemption
that has not been allocated by the execu-
tor is automatically allocated to transfers
at death and lifetime transfers for which
no allocation had previously been made
as prescribed in § 2632(e)(1).
Section 2642(g)(1)(A), added by
§ 564(a) of the Act, authorizes the Trea-
sury Department to issue regulations pre-
scribing the circumstances and proce-
dures under which extensions of time will
be granted to make an allocation of the
GST exemption described in § 2642(b)(1)
and (2) or to make an election under
§ 2632(b)(3) and (c)(5). Section 2642(g)
(1)(B) provides that in determining
whether to grant relief, the time for mak-
ing the allocation or election is to be
treated as if not expressly prescribed by
statute. If an extension of time is granted
to make the allocation, then the gift or es-
tate tax value of the transfer to the trust is
used to determine the allocation of the
GST exemption. H.R. Conf. Rep. No. 84,
107
th
Cong., 1
st
Sess. 202 (2001). Under
§ 564(b) of the Act, the provisions of
§ 2642(g)(1) apply to requests for relief
pending on, or filed after, December 31,
2000.
REQUESTS FOR RELIEF UNDER
§ 2642(g)(1)
Section 301.9100–3 of the Procedure
and Administration Regulations provides
the standards used to determine whether
to grant an extension of time to make an
election whose due date is prescribed by a
regulation (and not expressly provided by
statute). Under § 301.9100–1(b), a regu-
latory election includes an election whose
due date is prescribed by a notice pub-
lished in the Internal Revenue Bulletin.
In accordance with § 2642(g)(1)(B), the
time for allocating the GST exemption to
lifetime transfers and transfers at death,
the time for electing out of the automatic
allocation rules, and the time for electing
to treat any trust as a GST trust are to be
treated as if not expressly prescribed by
statute. Therefore, taxpayers may seek an
extension of time to make an allocation
described in § 2642(b)(1) or (b)(2) or an
election described in § 2632(b)(3)
or (c)(5) under the provisions of
§ 301.9100–3.
In general, under § 301.9100–3, relief
will be granted if the taxpayer establishes to
the satisfaction of the Commissioner that
the taxpayer acted reasonably and in good
faith and that the grant of relief will not
prejudice the interests of the government.
Taxpayers requesting relief should follow
the procedures for requesting a private let-
ter ruling under § 301.9100 contained in
section 5.02 of Rev. Proc. 2001–1 (or its
successor), 2001–1 I.R.B. 1, 13.
EFFECTIVE DATE
This notice is effective with respect to
requests for relief pending on, or filed
after, December 31, 2000.
DRAFTING INFORMATION
The principal author of this notice is
William L. Blodgett of the Office of As-
sociate Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this notice, contact Mr.
Blodgett at (202) 622-3090 (not a toll-free
call).
Listed Transactions Update
Notice 2001–51
On February 28, 2000, the Internal
Revenue Service issued Notice 2000–15,
2000–12 I.R.B. 826, identifying certain
transactions as “listed transactions” for
purposes of § 1.6011–4T(b)(2) of the tem-
porary Income Tax Regulations and
§ 301.6111–2T(b)(2) of the temporary
Procedure and Administration Regula-
tions. This notice restates the list of trans-
actions identified in Notice 2000–15 as
“listed transactions” effective February
28, 2000, and updates the list by adding
transactions identified in notices released
subsequent to February 28, 2000.
Transactions that are the same as or
substantially similar to transactions de-
scribed in the list below have been deter-
mined by the Service to be tax avoidance
transactions and are identified as “listed
transactions” for purposes of § 1.6011–
4T(b)(2) and § 301.6111–2T(b)(2). As a
result, corporate taxpayers may need to
disclose their participation in these listed
transactions as prescribed in § 1.6011–4T,
and promoters (or other persons responsi-
ble for registering tax shelter transactions)
may need to register these transactions
under § 301.6111–2T. In addition, pro-
moters must maintain lists of investors
and other information with respect to
these listed transactions pursuant to
§ 301.6112–1T.
(1) Rev. Rul. 90–105, 1990–2 C.B. 69
(transactions in which taxpayers claim de-
ductions for contributions to a qualified
cash or deferred arrangement or matching
contributions to a defined contribution
plan where the contributions are attribut-
able to compensation earned by plan par-
ticipants after the end of the taxable year
(identified as “listed transactions” on Feb-
ruary 28, 2000));
(2) Notice 95–34, 1995–1 C.B. 309
(certain trust arrangements purported to
qualify as multiple employer welfare ben-
efit funds exempt from the limits of
§§ 419 and 419A of the Internal Revenue
Code (identified as “listed transactions”
on February 28, 2000));
(3) Notice 95–53, 1995–2 C.B. 334
(certain multiple-party transactions in-
tended to allow one party to realize rental
or other income from property or service
contracts and to allow another party to re-
port deductions related to that income
August 20, 20011902001–34 I.R.B.

(often referred to as “lease strips”) (iden-
tified as “listed transactions” on February
28, 2000));
(4) Transactions described in Part II of
Notice 98–5, 1998–1 C.B. 334 (transac-
tions in which the reasonably expected
economic profit is insubstantial in com-
parison to the value of the expected for-
eign tax credits (identified as “listed
transactions” on February 28, 2000));
(5) Transactions substantially similar to
those at issue in ASA Investerings Part-
nership v. Commissioner, 201 F.3d 505
(D.C. Cir. 2000), and ACM Partnership v.
Commissioner, 157 F.3d 231 (3d Cir.
1998) (transactions involving contingent
installment sales of securities by partner-
ships in order to accelerate and allocate
income to a tax-indifferent partner, such
as a tax-exempt entity or foreign person,
and to allocate later losses to another part-
ner (identified as “listed transactions” on
February 28, 2000));
(6) Treas. Reg. § 1.643(a)–8 (transac-
tions involving distributions described in
§ 1.643(a)–8 from charitable remainder
trusts (identified as “listed transactions”
on February 28, 2000));
(7) Rev. Rul. 99–14, 1999–1 C.B. 835
(transactions in which a taxpayer purports
to lease property and then purports to im-
mediately sublease it back to the lessor
(that is, lease-in/lease-out or LILO trans-
actions) (identified as “listed transac-
tions” on February 28, 2000));
(8) Notice 99–59, 1999–2 C.B. 761
(transactions involving the distribution of
encumbered property in which taxpayers
claim tax losses for capital outlays that
they have in fact recovered (identified as
“listed transactions” on February 28,
2000));
(9) Treas. Reg. § 1.7701(l)–3, (transac-
tions involving fast-pay arrangements as
defined in § 1.7701(l)–3(b) (identified as
“listed transactions” on February 28,
2000));
(10) Rev. Rul. 2000–12, 2000–11
I.R.B. 744 (certain transactions involving
the acquisition of two debt instruments
the values of which are expected to
change significantly at about the same
time in opposite directions (identified as
“listed transactions” on February 28,
2000));
(11) Notice 2000–44, 2000–36 I.R.B.
255 (transactions generating losses result-
ing from artificially inflating the basis of
partnership interests (identified as “listed
transactions” on August 11, 2000));
(12) Notice 2000–60, 2000–49 I.R.B.
568 (transactions involving the purchase
of a parent corporation’s stock by a sub-
sidiary, a subsequent transfer of the pur-
chased parent stock from the subsidiary to
the parent’s employees, and the eventual
liquidation or sale of the subsidiary (iden-
tified as “listed transactions” on Novem-
ber 16, 2000));
(13) Notice 2000–61, 2000–49 I.R.B.
569 (transactions purporting to apply
§ 935 to Guamanian trusts (identified as
“listed transactions” on November 21,
2000));
(14) Notice 2001–16, 2001–9 I.R.B.
730 (transactions involving the use of an
intermediary to sell the assets of a corpo-
ration (identified as “listed transactions”
on January 18, 2001));
(15) Notice 2001–17, 2001–9 I.R.B.
730 (transactions involving a loss on the
sale of stock acquired in a purported
§ 351 transfer of a high basis asset to a
corporation and the corporation’s assump-
tion of a liability that the transferor has
not yet taken into account for federal in-
come tax purposes (identified as “listed
transactions” on January 18, 2001)); and
(16) Notice 2001–45, 2001–33 I.R.B.
129 (certain redemptions of stock in
transactions not subject to U.S. tax in
which the basis of the redeemed stock is
purported to shift to a U.S. taxpayer
(identified as “listed transactions” on July
26, 2001)).
Notice 2000–15 is supplemented and
superseded.
The principal author of this notice is
David A. Shulman of the Office of Asso-
ciate Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this notice, contact Mr.
Shulman at (202) 622-3080 (not a toll-
free call).
26 CFR 601.201: Rulings and determination
letters.
(Also Part I, §§ 61, 83, 721; 1.721–1.)
Rev. Proc 2001–43
SECTION 1. PURPOSE
This revenue procedure clarifies Rev.
Proc. 93–27 (1993–2 C.B. 343) by pro-
viding guidance on the treatment of the
grant of a partnership profits interest that
is substantially nonvested for the provi-
sion of services to or for the benefit of the
partnership.
SECTION 2. BACKGROUND
Rev. Proc. 93–27 provides that (ex-
cept as otherwise provided in section
4.02 of the revenue procedure), if a per-
son receives a profits interest for the
provision of services to or for the bene-
fit of a partnership in a partner capacity
or in anticipation of being a partner, the
Internal Revenue Service will not treat
the receipt of the interest as a taxable
event for the partner or the partnership.
For this purpose, section 2.02 of Rev.
Proc. 93–27 defines a profits interest as
a partnership interest other than a capital
interest. Section 2.01 of Rev. Proc.
93–27 defines a capital interest as an in-
terest that would give the holder a share
of the proceeds if the partnership’s as-
sets were sold at fair market value and
then the proceeds were distributed in a
complete liquidation of the partnership.
Section 2.01 of Rev. Proc. 93–27 pro-
vides that the determination as to
whether an interest is a capital interest
generally is made at the time of receipt
of the partnership interest.
SECTION 3. SCOPE
This revenue procedure clarifies Rev.
Proc. 93–27 by providing that the deter-
mination under Rev. Proc. 93–27 of
whether an interest granted to a service
provider is a profits interest is, under the
circumstances described below, tested at
the time the interest is granted, even if, at
that time, the interest is substantially
nonvested (within the meaning of
§ 1.83–3(b) of the Income Tax Regula-
tions). Accordingly, where a partnership
grants a profits interest to a service
provider in a transaction meeting the re-
quirements of this revenue procedure
and Rev. Proc. 93–27, the Internal Rev-
enue Service will not treat the grant of
the interest or the event that causes the
interest to become substantially vested
(within the meaning of § 1.83–3(b) of
the Income Tax Regulations) as a taxable
event for the partner or the partnership.
Taxpayers to which this revenue proce-
dure applies need not file an election
under section 83(b) of the Code.
2001–34 I.R.B.191August 20, 2001

SECTION 4. APPLICATION
This revenue procedure clarifies that,
for purposes of Rev. Proc. 93–27, where a
partnership grants an interest in the part-
nership that is substantially nonvested to a
service provider, the service provider will
be treated as receiving the interest on the
date of its grant, provided that:
.01 The partnership and the service
provider treat the service provider as the
owner of the partnership interest from the
date of its grant and the service provider
takes into account the distributive share of
partnership income, gain, loss, deduction,
and credit associated with that interest in
computing the service provider’s income
tax liability for the entire period during
which the service provider has the inter-
est;
.02 Upon the grant of the interest or at
the time that the interest becomes sub-
stantially vested, neither the partnership
nor any of the partners deducts any
amount (as wages, compensation, or oth-
erwise) for the fair market value of the in-
terest; and
.03 All other conditions of Rev. Proc.
93–27 are satisfied.
SECTION 5. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 93–27 is clarified.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Craig Gerson of the Office
of the Associate Chief Counsel
(Passthroughs and Special Industries).
For further information regarding this
revenue procedure contact Craig Gerson
at (202) 622-3050 (not a toll-free call).
August 20, 20011922001–34 I.R.B.

2001–34 I.R.B.iAugust 20, 2001
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security
Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

August 20, 2001ii2001–34 I.R.B.
Numerical Finding List
1
Bulletins 2001–27 through 2001–33
Announcements:
2001–69, 2001–27 I.R.B. 23
2001–70, 2001–27 I.R.B. 23
2001–71, 2001–27 I.R.B. 26
2001–72, 2001–28 I.R.B. 39
2001–73, 2001–28 I.R.B. 40
2001–74, 2001–28 I.R.B. 40
2001–75, 2001–28 I.R.B. 42
2001–76, 2001–29 I.R.B. 67
2001–77, 2001–30 I.R.B. 83
2001–78, 2001–30 I.R.B. 87
2001–79, 2001–31 I.R.B. 97
2001–80, 2001–31 I.R.B. 98
2001–81, 2001–33 I.R.B. 175
2001–82, 2001–32 I.R.B. 123
Court Decisions:
2070, 2001–31 I.R.B. 90
Notices:
2001–39, 2001–27 I.R.B. 3
2001–41, 2001–27 I.R.B. 2
2001–42, 2001–30 I.R.B. 70
2001–43, 2001–30 I.R.B. 72
2001–44, 2001–30 I.R.B. 77
2001–45, 2001–33 I.R.B. 129
2001–46, 2001–32 I.R.B. 122
2001–48, 2001–33 I.R.B. 130
Proposed Regulations:
REG–106917–99, 2001–27 I.R.B. 4
REG–100548–01, 2001–29 I.R.B. 67
Railroad Retirement Quarterly Rates:
2001–27, I.R.B. 1
Revenue Procedures:
2001–30, 2001–29 I.R.B. 46
2001–39, 2001–28 I.R.B. 38
2001–40, 2001–33 I.R.B. 130
2001–41, 2001–33 I.R.B. 173
Revenue Rulings:
2001–33, 2001–32 I.R.B. 118
2001–34, 2001–28 I.R.B. 31
2001–35, 2001–29 I.R.B. 59
2001–36, 2001–32 I.R.B. 119
2001–37, 2001–32 I.R.B. 100
2001–38, 2001–33 I.R.B. 124
2001–39, 2001–33 I.R.B. 125
Treasury Decisions:
8947, 2001–28 I.R.B. 36
8948, 2001–28 I.R.B. 27
8949, 2001–28 I.R.B. 33
8950, 2001–28 I.R.B. 34
8951, 2001–29 I.R.B. 63
8952, 2001–29 I.R.B. 60
8953, 2001–29 I.R.B. 44
8954, 2001–29 I.R.B. 47
8955, 2001–32 I.R.B. 101
8956, 2001–32 I.R.B. 112
8957, 2001–33 I.R.B. 125
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2001–1 through 2001–26
is in Internal Revenue Bulletin 2001–27, dated July
2, 2001.

2001–34 I.R.B.iiiAugust 20, 2001
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2001–27 through 2001–33
Announcements:
2000–48
Modified by
Notice 2001–43, 2001–30 I.R.B. 72
Notices:
2001–4
Modified by
Notice 2001–43, 2001–30 I.R.B. 72
2001–9
Modified by
Notice 2001–46, 2001–32 I.R.B. 122
Proposed Regulations:
LR–97–79
Withdrawn by
REG–100548–01, 2001–29 I.R.B. 67
LR–107–84
Withdrawn by
REG–100548–01, 2001–29 I.R.B. 67
REG–107186–00
Corrected by
Ann. 2001–71, 2001–27 I.R.B. 26
REG–130477–00
Supplemented by
Announcement 2001–82, 2001–32 I.R.B. 123
REG–130481–00
Supplemented by
Announcement 2001–82, 2001–32 I.R.B. 123
Revenue Procedures:
97–13
Modified by
Rev. Proc. 2001–39, 2001–28 I.R.B. 38
98–44
Superseded by
Rev. Proc. 2001–40, 2001–33 I.R.B. 130
2000–20
Modified by
Notice 2001–42, 2001–30 I.R.B. 70
2000–39
Corrected by
Ann. 2001–73, 2001–28 I.R.B. 40
2001–2
Modified by
Rev. Proc. 2001–41, 2001–33 I.R.B. 173
2001–6
Modified by
Notice 2001–42, 2001–30 I.R.B. 70
Revenue Rulings:
57–589
Obsoleted by
REG–106917–99, 2001–27 I.R.B. 4
65–316
Obsoleted by
REG–106917–99, 2001–27 I.R.B. 4
Revenue Rulings–continued:
68–125
Obsoleted by
REG–106917–99, 2001–27 I.R.B. 4
69–563
Obsoleted by
REG–106917–99, 2001–27 I.R.B. 4
70–379
Obsoleted by
Rev. Rul. 2001–39, 2001–33 I.R.B. 125
74–326
Obsoleted by
REG–106917–99, 2001–27 I.R.B. 4
78–179
Obsoleted by
REG–106917–99, 2001–27 I.R.B. 4
92–19
Supplemented by
Rev. Rul. 2001–38, 2001–33 I.R.B. 124
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2001–1 through 2001–26 is in Internal Revenue
Bulletin 2001–27, dated July 2, 2001.

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