Internal Revenue Bulletin 1997-18 (PDF rendition): IRS Announcements

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
Rev. Rul. 97–19, page 11.
Federal rates; adjusted federal rates; adjusted fed-
eral long-term rate, and the long-term exempt rate.
For purposes of sections 1274, 1288, 382, and other
sections of the Code, tables set forth the rates for May
1997.
T.D. 8715, page 5.
REG–209785–95, page 46.
Final, temporary, and proposed regulations under sec-
tion 274 of the Code relate to the requirement that
business expenses for travel, entertainment, gifts, or
listed property be substantiated by documentary evi-
dence (such as a receipt).
EXEMPT ORGANIZATIONS
Rev. Rul. 97–21, page 8.
Tax consequences of physician recruitment incen-
tives provided by hospitals described in section
501(c)(3) of the Code.This ruling provides examples
illustrating whether nonprofit hospitals that provide in-
centives to physicians to join their medical staffs or to
provide medical services in the community violate the
requirements for exemption as organizations described
in section 501(c)(3) of the Code.
Announcement 97–46, page 53.
A list is given of organizations now classified as private
foundations.
EXCISE TAX
P.L. 105–2, page 14.
An Act to amend the Internal Revenue Code of 1986 to
reinstate the Airport and Airway Trust Fund excise taxes,
and other purposes.
ADMINISTRATIVE
REG–209823–96, page 47.
Proposed regulations under sections 664 and 2707 of
the Code relate to guidance regarding charitable remain-
der trusts and transfers of interests in trusts. A public
hearing will be held on September 9, 1997.
Notice 97–28, page 45.
Credit for producing fuel from a nonconventional
source, section 29 inflation adjustment factor, and
section 29 reference price.This notice publishes the
section 29 inflation adjustment factor, the
nonconventional source fuel credit, and the section 29
reference price for calendar year 1996.
Finding Lists begin on page 58.
Index for January—April begins on page 60.
Announcements of Disbarments and Suspensions begin on page 56.
Announcement Relating to Court Decisions on page 4.
Announcement of Declaratory Judgment Proceedings Under Section 7428 on page 53.
Bulletin No. 1997–18
May 5, 1997
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.

Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the
quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we as-
certain and apply the true meaning of the statute.
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining officers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.
Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great courtesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.
2

Introduction
The Internal Revenue Bulletin is the authoritative instru-
ment of the Commissioner of Internal Revenue for
announcing official rulings and procedures of the Inter-
nal Revenue Service and for publishing Treasury Deci-
sions, Executive Orders, Tax Conventions, legislation,
court decisions, and other items of general interest. It is
published weekly and may be obtained from the Superin-
tendent of Documents on a subscription basis. Bulletin
contents of a permanent nature are consolidated semi-
annually into Cumulative Bulletins, which are sold on a
single-copy basis.
It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published rulings
apply retroactively unless otherwise indicated. Proce-
dures relating solely to matters of internal management
are not published; however, statements of internal
practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Ser-
vice on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on positions
taken in rulings to taxpayers or technical advice to
Service field offices, identifying details and information
of a confidential nature are deleted to prevent unwar-
ranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasury Department
Regulations, but they may be used as precedents.
Unpublished rulings will not be relied on, used, or cited
as precedents by Service personnel in the disposition of
other cases. In applying published rulings and proce-
dures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be consid-
ered, and Service personnel and others concerned are
cautioned against reaching the same conclusions in
other cases unless the facts and circumstances are
substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
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 Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Administra-
tive Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary (Enforce-
ment).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemak-
ing and the disbarment and suspension list included in
this part, none of these announcements are consoli-
dated in the Cumulative Bulletins.
The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin
of the succeeding quarterly and semi-annual period,
respectively.
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, D.C. 20402.
3

Announcement Relating to Court Decisions
It is the policy of the Internal Rev-
enue Service to announce at an early
date whether it will follow the holdings
in certain cases. An Action on Decision
is the document making such an an-
nouncement. An Action on Decision will
be issued at the discretion of the Service
only on unappealed issues decided ad-
verse to the government. Generally, an
Action on Decision is issued where its
guidance would be helpful to Service
personnel working with the same or
similar issues. Unlike a Treasury Regu-
lation or a Revenue Ruling, an Action
on Decision is not an affirmative state-
ment 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.
Moreover, 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
acquiescence 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
helpful. Accordingly, the Service now
may acquiesce 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 deciding the case, the recom-
mendation of any Action on Decision
will be published in the Internal Rev-
enue Bulletin.
The recommendation in every Action
on Decision will be summarized as
acquiescence, acquiescence in result
only, or nonacquiescence. Both ‘‘acqui-
escence’’ 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, ‘‘acquiescence’’ indicates nei-
ther 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 signifies that,
although no further review was sought,
the Service does not agree with the
holding of the court and, generally, will
not follow the decision in disposing of
cases involving other taxpayers. In refer-
ence to an opinion of a circuit court of
appeals, a nonacquiescence indicates
that the Service will not follow the
holding on a nationwide basis. However,
the Service will recognize the
precedential impact of the opinion on
cases arising within the venue of the
deciding circuit.
The announcements published in the
weekly Internal Revenue Bulletins are
consolidated semiannually and annually.
The semiannual consolidation appears in
the first Bulletin for July and in the
Cumulative Bulletin for the first half of
the year, and the annual consolidation
appears in the first Bulletin for the
following January and in the Cumulative
Bulletin for the last half of the year.
The Commissioner ACQUIESCES in
the following decisions:
Buckeye Countrymark v. Commis-
sioner,
1
103 T.C. 547 (1994)
Robert E. and Geneva U. Duncan v.
United States,
2
Docket No. 95–338
Cheng C. and Susan L. Kao v. United
States,
3
81 F.3d 114 (9th Cir. 1996)
The Commissioner does NOT AC-
QUIESCE in the following decisions:
Xerox Corporation v. United States,
4
41 F.3d 647 (Fed. Cir. 1994)
Charles E. Hurt v. United States,
5
70 F.3d 1261, 76 AFTR2d 95–7815 (4th
Cir. 1995)
Robert B. and Eleanor Risman v.
Commissioner,
6
100 T.C. 191 (1993)
1
Acquiescence relating to whether section 277 of
the Internal Revenue Code applies to nonexempt
cooperatives subject to subchapter T of the Code.
2
Acquiescence relating to whether disability ben-
efits paid to taxpayer from the Policemen and
Firefighter’s Retirement Fund of the Lexington-
Fayette Urban County Government can be ex-
cluded from gross income under Internal Revenue
Code section 104(a)(1) as benefits paid under a
statute in the nature of a workmen’s compensation
act.
3
Acquiescence in result only relating to whether
the Service can issue summonses to compel a
taxpayer to sign consent directives which authorize
the release of records from unidentified domestic
and foreign banks, consistent with the require-
ments of Internal Revenue Code section 7609.
4
Nonacquiescence relating to whether, under Ar-
ticle 23(1)(c) of the U.S.–U.K. Income Tax Treaty,
a U.S. corporation is entitled to continue to treat
U.K. Advance Corporation Tax (ACT) as a credit-
able tax paid by a U.K. subsidiary in computing
the allowable credit for foreign taxes deemed paid
under section 902(a) of the Internal Revenue Code
for the year in which the ACT was paid, when the
subsidiary subsequently surrenders all or part of
the ACT to lower-tier U.K. subsidiaries for use to
satisfy their U.K. corporate tax liabilities.
5
Nonacquiescence relating to whether the Service
was entitled to assess and collect statutory interest
on the amount of tax and additions to tax
embodied in a Tax Court decision that resulted
from a settlement agreement entered into by the
taxpayers and the Service.
6
Continued nonacquiescence, but that this action
on decision be substituted for the action on
decision reported atRisman v. Commissioner,
AOD CC–1996–003 (March 4, 1996), relating to
whether a remittance forwarded to the Service
with a Form 4868,Application for Automatic
Extension of Time to File U.S. Individual Income
Tax Return, constitutes a payment of tax or a
deposit in the nature of a cash bond for purposes
of the period of limitations for seeking a refund of
such remittance.
4

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income Housing
Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of May 1997. See Rev. Rul. 97–19,
page 11.
Section 274.—Disallowance of
Certain Entertainment, Etc.,
Expenses
26 CFR 1.274–5T: Substantiation requirements
(temporary).
T.D. 8715
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Substantiation of business
expenses for travel, entertainment,
gifts and listed property
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
amendments to temporary regulations
relating to the requirement that business
expenses for travel, entertainment, gifts,
or listed property be substantiated by
documentary evidence (such as a re-
ceipt). The regulations affect persons
making or receiving reimbursements for
travel, entertainment, gifts, or listed
property. The text of these temporary
regulations also serves as the text of
REG–209785–95, page 46.
DATES: These temporary regulations
are effective March 25, 1997. Applica-
bility: These temporary regulations are
applicable to expenses paid or incurred
after September 30, 1995.
FOR FURTHER INFORMATION CON-
TACT: Donna M. Crisalli at (202) 622–
4920 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued
without prior notice and public comment
pursuant to the Administrative Procedure
Act (5 U.S.C. 553). For this reason, the
collection of information contained in
these regulations has been reviewed and,
pending receipt and evaluation of public
comments, approved by the Office of
Management and Budget (OMB) under
control number 1545–0771. Responses
to this collection of information are
required for a taxpayer to deduct certain
business expenses or to substantiate cer-
tain reimbursements of business ex-
penses.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
For further information concerning
this collection of information, and where
to submit comments on the collection of
information and the accuracy of the
estimated burden, and suggestions for
reducing the burden, please refer to the
preamble in the cross-reference notice of
proposed rulemaking published in the
Proposed Rules section of this issue of
the Federal Register.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any inter-
nal revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
Background and Explanation of
Provisions
Receipt threshold
Section 274(d) disallows a trade or
business deduction under section 162 for
any traveling (including meals and lodg-
ing), entertainment, gift, or listed prop-
erty expense, unless the taxpayer sub-
stantiates the elements of the expense by
adequate records or by sufficient evi-
dence. Under § 1.274–5T(c) of the tem-
porary Income Tax Regulations, a tax-
payer must maintain two types of
records to satisfy the ‘‘adequate records’’
requirement: (1) a summary of expenses
(account book, diary, log, statement of
expense, trip sheets, or other similar
record), sometimes called an expense
account or expense voucher, and (2)
documentary evidence (such as receipts
or paid bills). Together, these records
must establish the elements of amount,
time, place, and business purpose (and
for gifts and entertainment, business re-
lationship of recipient or persons enter-
tained) for each expenditure or use.
Section 1.274–5T(c)(2)(iii) generally
requires that a taxpayer have a receipt
or other documentary evidence to sub-
stantiate (A) any expenditure for lodging
and (B) any other expenditure of $25 or
more. In Notice 95–50 (1995–2 C.B.
333), the IRS announced that it would
raise the receipt threshold of § 1.274–
5T(c)(2)(iii)(B) from $25 to $75, effec-
tive for expenses incurred on or after
October 1, 1995. The temporary regula-
tions effect this amendment by changing
‘‘$25’’ in § 1.274–5T(c)(2)(iii)(B) to
‘‘$75.’’ This change is applicable to both
deductions and reimbursement arrange-
ments and is expected to reduce the
recordkeeping burden on affected tax-
payers, including individuals and small
businesses.
Definition of an ‘‘adequate accounting’’
to the employer
An employee who is reimbursed un-
der a reimbursement or other expense
allowance arrangement for expenses
covered by section 274(d) must make an
‘‘adequate accounting’’ to the employer
for the reimbursed expenses. Section
1.274–5T(f)(4) specifies that, as part of
an adequate accounting, the employee
must submit substantiation to the em-
ployer that satisfies the requirements of
§ 1.274–5T(c). Notice 95–50 also solic-
ited comments on whether changes
should be made to the substantiation
requirements of the adequate accounting
rules in § 1.274–5T. Comments re-
ceived related primarily to the adequate
accounting rules and the substantiation
requirements in general.
1. Submission and retention of docu-
mentary evidence
A number of commentators, particu-
larly federal government agencies, com-
plained of the administrative burden and
cost of storing large quantities of paper
receipts. Some comments proposed that
the employer should be allowed to dis-
pose of the documentary evidence after
an employee has made an adequate
accounting, or return the documentary
evidence to the employee for retention.
Other comments suggested that submis-
sion by an employee of an expense
voucher alone, without documentary evi-
dence, should be considered an adequate
accounting.
With the increase in the receipt
threshold to $75, and the use of elec-
tronic document transmission and reten-
tion (discussed below), the necessity for
storing large quantities of paper records
is significantly reduced. Nonetheless, the
temporary regulations respond to the
concerns expressed by these comments
by amending § 1.274–5T(f)(4) to autho-
rize the Commissioner to prescribe rules
5

modifying the substantiation require-
ments for an adequate accounting by an
employee to an employer. Under the
amendment, the Commissioner could
publish rules defining the circumstances
(including the use of specified internal
controls) under which an employee may
make an adequate accounting to his
employer by submitting an expense ac-
count alone, without the necessity of
submitting documentary evidence (such
as receipts). This change is expected to
reduce the recordkeeping burden for
employers and employees. These rules
would not change the substantiation re-
quirements of § 1.274–5T(c) for deduc-
tions.
2. Maintenance of adequate records in
electronic form
Some commentators suggested that
taxpayers should be permitted to obtain
and maintain records substantiating ex-
penses under section 274(d) in elec-
tronic form. The temporary regulations
make no change to the current regula-
tions, which do not require that the
records be in paper form. Rev. Proc.
91–59 (1991–2 C.B. 841), provides pro-
cedures for maintaining tax records in
electronic form. Section 3.08 of Rev.
Proc. 91–59 states that the procedures
apply to documentation required by sec-
tion 274(d).
3. Types of records that constitute ac-
ceptable documentary evidence
Some commentators suggested that
credit card charge records should be
considered acceptable documentary evi-
dence of travel expenses, including
lodging. They noted, however, that
§ 1.274–5T(c)(2)(iii) requires that docu-
mentary evidence of lodging must show
separate amounts for charges such as
lodging, meals, and telephone calls. A
credit card statement or record of
charge, unlike a hotel bill, normally will
not segregate lodging and other ex-
penses, such as meals and entertainment
subject to the section 274(n) partial
deduction disallowance, or personal ex-
penses (such as personal phone calls or
gift purchases) that may not be de-
ducted. Therefore, such a credit card
statement or record of charge alone will
not constitute acceptable documentary
evidence of a lodging expense.
The commentators proposed address-
ing this problem by using statistical
sampling, conducted either by the IRS
or by taxpayers, to establish a break-
down of expenses on hotel bills. One
comment suggested that sampling could
form a basis for a ‘‘safe harbor’’ per-
centage or percentages (e.g., by industry
or size of company) of hotel bills that
would be deemed to represent the vari-
ous types of possible expenses. Another
comment suggested that the IRS adopt a
mechanical test based on statistical sam-
pling to make a reasonable allocation of
the total hotel charge to meals.
The temporary regulations make no
change to the current documentary evi-
dence requirements for lodging ex-
penses. Because of the large number of
expenses that can be charged to hotel
bills, and extensive variation from trav-
eler to traveler in the types of expenses
charged to hotel bills, any attempt to
establish percentages for allocating hotel
bills to lodging and other fully deduct-
ible business expenses, meals and enter-
tainment, and personal expenses is con-
sidered impracticable.
A comment requested that the IRS
clarify whether statements provided to
travelers by airlines in lieu of tickets
can constitute documentary evidence of
travel. The current regulations are suffi-
ciently flexible to permit use of a vari-
ety of forms of documentary evidence.
Other Comments in Response to Notice
95–50
1. Substantiation of business purpose
A commentator suggested that the
regulations be revised to permit an em-
ployee to initially substantiate business
purpose to the employer orally, for later
entry into the expense processing sys-
tem. The current regulations do not
preclude an initial oral substantiation of
business purpose which is reduced to
writing no later than the time of the
employee’s final accounting to the em-
ployer.
2. Post-expenditure verification proce-
dures
A comment suggested that the regula-
tions be revised to permit an employer
to conduct a post-expenditure review of
only a statistical sampling, as opposed
to 100%, of expense vouchers.
Section 1.274–5T(f)(5)(iii) states that
an employee who makes an adequate
accounting to his employer will not
again be required to substantiate such
expenses, unless the employer’s ac-
counting procedures are not adequate or
it cannot be determined that such proce-
dures are adequate. The district director
will determine whether the employer’s
accounting procedures are adequate by
considering all the facts and circum-
stances, including the employer’s use of
internal controls. The employer’s ac-
counting procedures should include a
requirement that an expense account be
verified and approved by a reasonable
person other than the person incurring
the expense. To the extent the employer
fails to maintain adequate accounting
procedures, the district director may re-
quire the employee to separately sub-
stantiate his expense account informa-
tion.
Section 1.274–5T(f)(5)(iii) cites post-
expenditure review of employees’ ex-
pense accounts as an internal control
that should normally be employed.
However, whether the employer’s post-
expenditure review procedures are ap-
propriate is a matter within the discre-
tion of the district director, based on a
review of all the facts and circum-
stances.
3. De minimis exception to substantia-
tion requirements
A comment proposed that employees
receiving $1000 or less per year in
reimbursed expenses be exempted from
the requirement to substantiate the ele-
ments of the expenses, other than busi-
ness purpose, to the employer. In view
of the other changes made by the tem-
porary regulations that will lessen a
taxpayer’s recordkeeping burden, such
as the increase in the receipt threshold,
the temporary regulations do not incor-
porate this suggestion.
4. Department of Labor substantiation
requirements for plan trustees
A comment requested the IRS to
coordinate with the Department of La-
bor to establish common substantiation
requirements under ERISA for travel by
multi-employer plan trustees. Modifica-
tions to conform the substantiation re-
quirements under ERISA to those pro-
vided in the temporary regulations are
outside the scope of the section 274(d)
regulations.
5. Increase in limit on deduction for
gifts
A comment requested that the $25
limit on the deduction for gifts con-
tained in section 274(b) be increased to
$75. The IRS has no discretion to raise
this statutory limit.
6. Use of full federal per diem method
to substantiate travel for deduction pur-
poses
A comment suggested that self-
employed individuals and unreimbursed
6

employees should be entitled to substan-
tiate lodging expenses for deduction
purposes by means of the ‘‘high-low’’
per diem method. Rev. Proc. 96–64
(1996–53 I.R.B. 52), permits this sub-
stantiation method for employee reim-
bursements only. This suggestion is out-
side the scope of this revision to the
temporary regulations.
Special Analyses
It has been determined that these
temporary regulations are not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certi-
fied that these regulations do not have a
significant economic impact on a sub-
stantial number of small entities. This
certification is based on the fact that, by
increasing the receipt threshold from
$25 to $75, these regulations reduce the
existing recordkeeping requirements of
taxpayers, including small entities. The
regulations do not otherwise signifi-
cantly alter the reporting or recordkeep-
ing duties of small entities. Therefore, a
Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, these temporary regulations will
be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their impact on
small business.
Drafting Information
The principal author of these regula-
tions is Donna M. Crisalli, Office of the
Assistant Chief Counsel (Income Tax
and Accounting). However, other per-
sonnel from the IRS and Treasury De-
partment participated in their develop-
ment.
* * * * *
Adoption of Amendments to the Regula-
tions
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 as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.274–5T also issued under 26
U.S.C. 274(d). * * *
Par. 2. An undesignated centerheading
is added immediately following
§ 1.280H–1T to read as follows:
Taxable Years Beginning Prior to
January 1, 1986
§ 1.274–5 redesignated as § 1.274–5A
Par. 3. Section 1.274–5 is redesig-
nated as § 1.274–5A and added immedi-
ately following the undesignated
centerheading ‘‘Taxable Years Beginning
Prior to January 1, 1986’’.
Par. 4. Section 1.274–5T is amended
by:
1. Revising the first sentence of para-
graph (c)(2)(iii)(B).
2. Redesignating the text of para-
graph (f)(4) as paragraph (f)(4)(i).
3. Adding a paragraph heading for
paragraph (f)(4)(i).
4. Adding paragraphs (f)(4)(ii) and
(f)(4)(iii).
The revisions and additions read as
follows:
§ 1.274–5T Substantiation requirements
(temporary).
* * * * *
(c) * * *
(2) * * *
(iii) * * *
(B) Any other expenditure of $75 or
more ($25 or more for expenditures
incurred before October 1, 1995) except,
for transportation charges, documentary
evidence will not be required if not
readily available, provided, however,
that the Commissioner, in his discretion,
may prescribe rules waiving such re-
quirements in circumstances where he
determines it is impracticable for such
documentary evidence to be required. *
* *
* * * * *
(f) * * *
(4) * * * (i)In general.* * *
(ii)Procedures for adequate ac-
counting without documentary evidence.
The Commissioner may, in his discre-
tion, prescribe rules under which an
employee may make an adequate ac-
counting to his employer by submitting
an account book, log, diary, etc., alone,
without submitting documentary evi-
dence.
(iii)Employer.For purposes of this
section, the termemployerincludes an
agent of the employer or a third party
payor who pays amounts to an em-
ployee under a reimbursement or other
expense allowance arrangement.
* * * * *
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 5. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 6. In § 602.101, paragraph (c) is
amended by:
1. Removing the following entry
from the table:
CFR part or section
where identified and
described
Current OMB
control No.
* * * * *
1.274–5 . . . . . . . . . .1545–0139
1545–0771
* * * * *
2. Adding an entry in numerical order
to the table to read as follows:
CFR part or section
where identified and
described
Current OMB
control No.
* * * * *
1.274–5A. . . . . . . . .1545–0139
1545–0771
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved February 14, 1997.
Donald C. Lubick,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
March 24, 1997, 8:45 a.m., and published in the
issue of the Federal Register for March 25, 1997,
62 F.R. 13988)
Section 280G.—Golden Parachute
Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of May 1997. See
Rev. Rul. 97–19, page 11.
Section 382.—Limitation on Net
Operating Loss Carryforwards and
Certain Built-In Losses Following
Ownership Change
The adjusted federal long-term rate is set forth
for the month of May 1997. See Rev. Rul. 97–19,
page 11.
7

Section 412.—Minimum Funding
Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of May 1997. See Rev. Rul. 97–19,
page 11.
Section 467.—Certain Payments
for the Use of Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of May 1997. See Rev. Rul. 97–19,
page 11.
Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of May 1997. See Rev. Rul. 97–19,
page 11.
Section 483.—Interest on Certain
Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of May 1997. See Rev. Rul. 97–19,
page 11.
Section 501.—Exemption From Tax
on Corporations, Certain Trusts,
Etc.
26 CFR 1.501(c)(3)–1: Organizations organized
and operated for religious, charitable, scientific,
testing for public safety, literary, or educational
purposes, or for the prevention of cruelty to
children or animals.
Tax consequences of physician re-
cruitment incentives provided by hos-
pitals described in section 501(c)(3) of
the Code.This ruling provides ex-
amples illustrating whether nonprofit
hospitals that provide incentives to phy-
sicians to join their medical staffs or to
provide medical services in the commu-
nity violate the requirements for exemp-
tion as organizations described in sec-
tion 501(c)(3) of the Code.
Rev. Rul. 97–21
ISSUE
Whether, under the facts described
below, a hospital violates the require-
ments for exemption from federal in-
come tax as an organization described in
§ 501(c)(3) of the Internal Revenue
Code when it provides incentives to
recruit private practice physicians to join
its medical staff or to provide medical
services in the community.
FACTS
All of the hospitals in the situations
described below have been recognized
as exempt from federal income tax
under § 501(a) as organizations de-
scribed in § 501(c)(3) and operate in
accordance with the standards for ex-
emption set forth in Revenue Ruling
69–545, 1969–2 C.B. 117. The physi-
cians described in the following recruit-
ing transactions do not have substantial
influence over the affairs of the hospi-
tals that are recruiting them. Therefore,
they are not disqualified persons as
defined in § 4958, nor do they have any
personal or private interest in the activi-
ties of the organizations that would
subject them to the inurement proscrip-
tion of § 501(c)(3). Furthermore, in
Situations 1, 2, and 4, the physicians
have no pre-existing relationship with
the hospital or the members of its board.
For purposes of this revenue ruling, the
physician recruiting activities described
in Situations 1, 2, 3, and 4 are assumed
to be lawful. However, because the
Internal Revenue Service does not have
jurisdiction regarding whether the activi-
ties described in Situations 1, 2, 3, and
4 are lawful under the Medicare and
Medicaid anti-kickback statute, 42
U.S.C. § 1320a–7b(b), taxpayers may
not rely upon the facts or assumptions
described in this ruling for purposes
relating to that statute.
Situation 1
Hospital A is located in County V, a
rural area, and is the only hospital
within a 100 mile radius. County V has
been designated by the U.S. Public
Health Service as a Health Professional
Shortage Area for primary medical care
professionals (a category that includes
obstetricians and gynecologists). Physi-
cian M recently completed an ob/gyn
residency and is not on Hospital A’s
medical staff. Hospital A recruits Physi-
cian M to establish and maintain a
full-time private ob/gyn practice in its
service area and become a member of
its medical staff. Hospital A provides
Physician M a recruitment incentive
package pursuant to a written agreement
negotiated at arm’s-length. The agree-
ment is in accordance with guidelines
for physician recruitment that Hospital
A’s Board of Directors establishes,
monitors, and reviews regularly to en-
sure that recruiting practices are consis-
tent with Hospital A’s exempt purposes.
The agreement was approved by the
committee appointed by Hospital A’s
Board of Directors to approve contracts
with hospital medical staff. Hospital A
does not provide any recruiting incen-
tives to Physician M other than those set
forth in the written agreement.
In accordance with the agreement,
Hospital A pays Physician M a signing
bonus, Physician M’s professional liabil-
ity insurance premium for a limited
period, provides office space in a build-
ing owned by Hospital A for a limited
number of years at a below market rent
(after which the rental will be at fair
market value), and guarantees Physician
M’s mortgage on a residence in County
V. Hospital A also lends Physician M
practice start-up financial assistance pur-
suant to an agreement that is properly
documented and bears reasonable terms.
Situation 2
Hospital B is located in an economi-
cally depressed inner-city area of City
W. Hospital B has conducted a commu-
nity needs assessment that indicates both
a shortage of pediatricians in Hospital
B’s service area and difficulties Medic-
aid patients are having obtaining pediat-
ric services. Physician N is a pediatri-
cian currently practicing outside of
Hospital B’s service area and is not on
Hospital B’s medical staff. Hospital B
recruits Physician N to relocate to City
W, establish and maintain a full-time
pediatric practice in Hospital B’s service
area, become a member of Hospital B’s
medical staff, and treat a reasonable
number of Medicaid patients. Hospital B
offers Physician N a recruitment incen-
tive package pursuant to a written agree-
ment negotiated at arm’s-length and ap-
proved by Hospital B’s Board of
Directors. Hospital B does not provide
any recruiting incentives to Physician N
other than those set forth in the written
agreement.
Under the agreement, Hospital B re-
imburses Physician N for moving ex-
penses as defined in § 217(b), reim-
burses Physician N for professional
liability ‘‘tail’’ coverage for Physician
N’s former practice, and guarantees Phy-
sician N’s private practice income for a
limited number of years. The private
practice income guarantee, which is
properly documented, provides that Hos-
pital B will make up the difference to
the extent Physician N practices full-
time in its service area and the private
practice does not generate a certain level
of net income (after reasonable expenses
of the practice). The amount guaranteed
falls within the range reflected in re-
8

gional or national surveys regarding in-
come earned by physicians in the same
specialty.
Situation 3
Hospital C is located in an economi-
cally depressed inner city area of City
X. Hospital C has conducted a commu-
nity needs assessment that indicates in-
digent patients are having difficulty get-
ting access to care because of a shortage
of obstetricians in Hospital C’s service
area willing to treat Medicaid and char-
ity care patients. Hospital C recruits
Physician O, an obstetrician who is
currently a member of Hospital C’s
medical staff, to provide these services
and enters into a written agreement with
Physician O. The agreement is in accor-
dance with guidelines for physician re-
cruitment that Hospital C’s Board of
Directors establishes, monitors, and re-
views regularly to ensure that recruiting
practices are consistent with Hospital
C’s exempt purpose. The agreement was
approved by the officer designated by
Hospital C’s Board of Directors to enter
into contracts with hospital medical
staff. Hospital C does not provide any
recruiting incentives to Physician O
other than those set forth in the written
agreement. Pursuant to the agreement,
Hospital C agrees to reimburse Physi-
cian O for the cost of one year’s
professional liability insurance in return
for an agreement by Physician O to treat
a reasonable number of Medicaid and
charity care patients for that year.
Situation 4
Hospital D is located in City Y, a
medium to large size metropolitan area.
Hospital D requires a minimum of four
diagnostic radiologists to ensure ad-
equate coverage and a high quality of
care for its radiology department. Two
of the four diagnostic radiologists cur-
rently providing coverage for Hospital D
are relocating to other areas. Hospital D
initiates a search for diagnostic radiolo-
gists and determines that one of the two
most qualified candidates is Physician P.
Physician P currently is practicing in
City Y as a member of the medical staff
of Hospital E (which is also located in
City Y). As a diagnostic radiologist,
Physician P provides services for pa-
tients receiving care at Hospital E, but
does not refer patients to Hospital E or
any other hospital in City Y. Physician P
is not on Hospital D’s medical staff.
Hospital D recruits Physician P to join
its medical staff and to provide coverage
for its radiology department. Hospital D
offers Physician P a recruitment incen-
tive package pursuant to a written agree-
ment, negotiated at arm’s-length and
approved by Hospital D’s Board of
Directors. Hospital D does not provide
any recruiting incentives to Physician P
other than those set forth in the written
agreement.
Pursuant to the agreement, Hospital D
guarantees Physician P’s private practice
income for the first few years that
Physician P is a member of its medical
staff and provides coverage for its radi-
ology department. The private practice
income guarantee, which is properly
documented, provides that Hospital D
will make up the difference to Physician
P to the extent the private practice does
not generate a certain level of net
income (after reasonable expenses of the
practice). The net income amount guar-
anteed falls within the range reflected in
regional or national surveys regarding
income earned by physicians in the
same specialty.
Situation 5
Hospital F is located in City Z, a
medium to large size metropolitan area.
Because of its physician recruitment
practices, Hospital F has been found
guilty in a court of law of knowingly
and willfully violating the Medicare and
Medicaid anti-kickback statute, 42
U.S.C. § 1320a–7b(b), for providing re-
cruitment incentives that constituted
payments for referrals. The activities
resulting in the violations were substan-
tial.
LAW
Section 501(c)(3) provides, in part,
for the exemption from federal income
tax of corporations organized and oper-
ated exclusively for charitable, scien-
tific, or educational purposes, provided
no part of the organization’s net earn-
ings inures to the benefit of any private
shareholder or individual.
Section 1.501(c)(3)–1(d)(2) of the In-
come Tax Regulations provides that the
term ‘‘charitable’’ is used in § 501(c)(3)
in its generally accepted legal sense.
The promotion of health has long been
recognized as a charitable purpose.See
Restatement (Second) of Trusts, §§ 368,
372 (1959); 4A Austin W. Scott and
William F. Fratcher,The Law of Trusts
§§ 368, 372 (4th ed. 1989); and Rev.
Rul. 69–545, 1969–2 C.B. 117. Under
the common law of charitable trusts, all
such organizations are subject to the
requirement that their purposes may not
be illegal.See Restatement (Second) of
Trusts§ 377 (1959); 4A Austin W.
Scott and William F. Fratcher,The Law
of Trusts§ 377 (4th ed. 1989);Bob
Jones University v. U.S., 461 U.S. 574,
591 (1983); Rev. Rul. 80–278, 1980–2
C.B. 175; Rev. Rul. 80–279, 1980–2
C.B. 176.
Section 1.501(c)(3)–1(c)(2) states that
an organization is not operated exclu-
sively for charitable purposes if its net
earnings inure in whole or in part to the
benefit of private shareholders or indi-
viduals.
Section 1.501(a)–1(c) defines ‘‘private
shareholder or individual’’ as referring
to persons having a personal and private
interest in the activities of the organiza-
tion.
Section 1.501(c)(3)–1(d)(1)(ii) states
that an organization is not organized
exclusively for any of the purposes
specified in § 501(c)(3) unless it serves
public, rather than private interests.
Thus, an organization applying for tax
exemption under § 501(c)(3) must es-
tablish that it is not organized or oper-
ated for the benefit of private interests.
Rev. Rul. 69–545, 1969–2 C.B. 117,
holds that a non-profit hospital that
benefits a broad cross section of its
community by having an open medical
staff and a board of trustees broadly
representative of the community, operat-
ing a full-time emergency room open to
all regardless of ability to pay, and
otherwise admitting all patients able to
pay (either themselves, or through third
party payers such as private health in-
surance or government programs such as
Medicare) may qualify as an organiza-
tion described in § 501(c)(3). The same
standard has been used by the courts as
the basis for evaluating whether health
maintenance organizations qualify for
exemption as organizations described in
§ 501(c)(3).Sound Health Association
v. Commissioner, 71 T.C. 158 (1978),
acq. 1981–2 C.B. 2;Geisinger Health
Plan v. Commissioner, 985 F.2d 1210
(3rd Cir. 1993),rev’g62 T.C.M. (CCH)
1656 (1991).
Rev. Rul. 72–559, 1972–2 C.B. 247,
holds that an organization that provides
subsidies to recent law school graduates
during the first three years of their
practice to enable them to establish legal
practices in economically depressed
communities that have a shortage of
available legal services and to provide
free legal service to needy members of
the community may qualify as an orga-
nization described in § 501(c)(3).
9

Rev. Rul. 73–313, 1973–2 C.B. 174,
holds that attracting a physician to a
community that had no available medi-
cal services furthered the charitable pur-
pose of promoting the health of the
community. In Rev. Rul. 73–313, resi-
dents of an isolated rural community
had to travel a considerable distance to
obtain care. Faced with the total lack of
local services, the community formed an
organization to raise funds and build a
medical office building to attract a doc-
tor to the locality. (No hospitals or
existing medical practices were in-
volved.) The ruling states that certain
facts are particularly relevant: (1) the
demonstrated need for a physician to
avert a real and substantial threat to the
community; (2) evidence that the lack of
a suitable office had impeded efforts to
attract a physician; (3) the arrangements
were completely at arm’s-length; and (4)
there was no relationship between any
person connected with the organization
and the recruited physician. The ruling
states that, under all the circumstances,
the arrangement used to induce the
doctor to locate a practice in the area
‘‘bear[s] a reasonable relationship to
promotion and protection of the health
of the community’’ and any private
benefit to the physician is incidental to
the public purpose achieved. It con-
cludes that the activity furthers a chari-
table purpose and the organization quali-
fies for exemption as an organization
described in § 501(c)(3).
Rev. Rul. 75–384, 1975–2 C.B. 204,
holds that an organization whose pri-
mary activity is sponsoring antiwar pro-
test demonstrations in which demonstra-
tors are urged to commit violations of
local ordinances and breaches of the
public order does not qualify as an
organization described in § 501(c)(3)
because its activities demonstrate an
illegal purpose that is inconsistent with
charitable purposes.
Rev. Rul. 80–278, 1980–2 C.B. 175,
and Rev. Rul. 80–279, 1980–2 C.B. 176,
discuss the qualification as organizations
described in § 501(c)(3) of organiza-
tions that conduct environmental litiga-
tion and environmental dispute media-
tion. In holding that these organizations
may qualify, the rulings state that, in
determining whether an organization
meets the operational test, the issue is
whether the particular activity under-
taken by the organization appropriately
furthers the organization’s exempt pur-
pose. The rulings state that an organiza-
tion’s activities will be considered per-
missible under § 501(c)(3) if the
following conditions are met: (1) the
purpose of the organization is charitable;
(2) the activities are not illegal, contrary
to a clearly defined and established
public policy, or in conflict with express
statutory restrictions; and (3) the activi-
ties are in furtherance of the organiza-
tion’s exempt purpose and are reason-
ably related to the accomplishment of
that purpose.
ANALYSIS
In order to meet the requirements of
§ 501(c)(3), a hospital that provides
recruitment incentives to physicians
must provide those incentives in a man-
ner that does not cause the organization
to violate the operational test of
§ 1.501(c)(3)–1. Whether the recruit-
ment incentives cause the organization
to violate the operational test is deter-
mined based on all relevant facts and
circumstances. When a § 501(c)(3) hos-
pital recruits a physician for its medical
staff who is to perform services for or
on behalf of the organization, the orga-
nization meets the operational test by
showing that, taking into account all of
the benefits provided the physician by
the organization, the organization is pay-
ing reasonable compensation for the
services the physician is providing in
return. A somewhat different analysis
must be applied when a § 501(c)(3)
hospital recruits a physician for its
medical staff to provide services to
members of the surrounding community
but not necessarily for or on behalf of
the organization. In these cases, a viola-
tion will result from a failure to comply
with any of the following four require-
ments:
First, the organization may not engage
in substantial activities that do not fur-
ther the hospital’s exempt purposes or
that do not bear a reasonable relation-
ship to the accomplishment of those
purposes. As discussed in Rev. Rul.
80–278 and Rev. Rul. 80–279, in deter-
mining whether an organization meets
the operational test, the issue is whether
the particular activity undertaken by the
organization is appropriately in further-
ance of the organization’s exempt pur-
pose.
Second, the organization must not
engage in activities that result in inure-
ment of the hospital’s net earnings to a
private shareholder or individual. An
activity may result in inurement if it is
structured as a device to distribute the
net earnings of the hospital.See Lorain
Avenue Clinic v. Commissioner, 31 T.C.
141 (1958);Birmingham Business Col-
lege, Inc. v. Commissioner, 276 F.2d
476 (5th Cir. 1960).
Third, the organization may not en-
gage in substantial activities that cause
the hospital to be operated for the
benefit of a private interest rather than
public interest so that it has a substantial
non-exemptpurpose.Section
1.501(c)(3)–1(d)(1)(ii).
Finally, the organization may not en-
gage in substantial unlawful activities.
As discussed in Rev. Rul. 75–384, Rev.
Rul. 80–278, and Rev. Rul. 80–279, the
conduct of an unlawful activity is incon-
sistent with charitable purposes. An or-
ganization conducts an activity that is
unlawful, and therefore not in further-
ance of a charitable purpose, if the
organization’s property is to be used for
an objective that is in violation of the
criminal law. Activities can accomplish
an unlawful purpose through either di-
rect or indirect means.
Situation 1
Like the organization described in
Rev. Rul. 73–313, Hospital A has objec-
tive evidence demonstrating a need for
obstetricians and gynecologists in its
service area and has engaged in physi-
cian recruitment activity bearing a rea-
sonable relationship to promoting and
protecting the health of the community
in accordance with Rev. Rul. 69–545.
As with the subsidies provided to the
recent law school graduates in Rev. Rul.
72–559, the payment of a bonus, the
guarantee of a mortgage, the reimburse-
ment of professional liability insurance
and provision of subsidized office space
for a limited time, and the lending of
start-up financial assistance as recruit-
ment incentives are reasonably related to
causing Physician M to become a mem-
ber of Hospital A’s medical staff and to
establish and maintain a full-time pri-
vate ob/gyn practice in Hospital A’s
service area. The provision of the incen-
tives under the circumstances described
furthers the charitable purposes served
by the hospital and is consistent with
the requirements for exemption as an
organization described in § 501(c)(3).
Situation 2
Like Hospital A in Situation 1, Hospi-
tal B has objective evidence demonstrat-
ing a need for pediatricians in its service
area and has engaged in physician re-
cruitment activity bearing a reasonable
10

relationship to promoting and protecting
the health of the community in much
the same manner as the organization
described in Rev. Rul. 73–313. As with
the recruitment incentive package pro-
vided by Hospital A, the payment of
moving expenses, the reimbursement of
professional liability ‘‘tail’’ coverage,
and the provision of a reasonable private
practice income guarantee as recruitment
incentives are reasonably related to
causing Physician N to become a mem-
ber of Hospital B’s medical staff and to
establish and maintain a full-time pri-
vate pediatric practice in Hospital B’s
service area. Thus, the recruitment activ-
ity described furthers the charitable pur-
poses served by the hospital and is
consistent with the requirements for ex-
emption as an organization described in
§ 501(c)(3).
Situation 3
In accordance with the standards for
exemption set forth in Rev. Rul. 69–545,
Hospital C admits and treats Medicaid
patients on a non-discriminatory basis.
Hospital C has identified a shortage of
obstetricians willing to treat Medicaid
patients. The payment of Physician O’s
professional liability insurance premi-
ums in return for Physician O’s agree-
ment to treat a reasonable number of
Medicaid and charity care patients is
reasonably related to the accomplish-
ment of Hospital C’s exempt purposes.
Because the amount paid by Hospital C
is reasonable and any private benefit to
Physician O is outweighed by the public
purpose served by the agreement, the
recruitment activity described is consis-
tent with the requirements for exemption
as an organization described in
§ 501(c)(3).
Situation 4
Hospital D has objective evidence
demonstrating a need for diagnostic ra-
diologists to provide coverage for its
radiology department so that it can
promote the health of the community.
The provision of a reasonable private
practice income guarantee as a recruit-
ment incentive that is conditioned upon
Physician P obtaining medical staff
privileges and providing coverage for
the radiology department is reasonably
related to the accomplishment of the
charitable purposes served by the hospi-
tal. A significant fact in determining that
the community benefit provided by the
activity outweighs the private benefit
provided to Physician P is the determi-
nation by the Board of Directors of
Hospital D that it needs additional diag-
nostic radiologists to provide adequate
coverage and to ensure a high quality of
medical care. The recruitment activity
described is consistent with the require-
ments for exemption as an organization
described in § 501(c)(3).
Situation 5
Hospital F has engaged in physician
recruiting practices resulting in a crimi-
nal conviction. As in Rev. Rul. 75–384,
the recruiting activities were intentional
and criminal, not isolated or inadvertent
violations of a regulatory statute. An
organization that engages in substantial
unlawful activities, including activities
involving the use of the organization’s
property for an objective that is in
violation of criminal law, does not
qualify as an organization described in
§ 501(c)(3). Because Hospital F has
knowingly and willfully conducted sub-
stantial activities that are inconsistent
with charitable purposes, it does not
comply with the requirements of
§ 501(c)(3) and § 1.501(c)(3)–1.
HOLDING
The hospitals in Situations 1, 2, 3,
and 4 have not violated the requirements
for exemption from federal income tax
as organizations described in
§ 501(c)(3) as a result of the physician
recruitment incentive agreements they
have made because the transactions fur-
ther charitable purposes, do not result in
inurement, do not result in the hospitals
serving a private rather than a public
purpose, and are assumed to be lawful
for purposes of this revenue ruling.
Hospital F in Situation 5 does not
qualify as an organization described in
§ 501(c)(3) because its unlawful physi-
cian recruitment activities are inconsis-
tent with charitable purposes.
SCOPE
This ruling addresses only issues un-
der § 501(c)(3) in the described situa-
tions. No inference is intended as to any
other issue under any other provision of
law, including any issue involving
worker classification, income tax conse-
quences to the physicians, and applica-
tion of the Medicare and Medicaid anti-
kickback statute, 42 U.S.C. § 1320a–
7b(b).
DRAFTING INFORMATION
The principal author of this revenue
ruling is Judith E. Kindell of the Ex-
empt Organizations Division. For further
information regarding this revenue rul-
ing contact Judith E. Kindell on (202)
622–6494 (not a toll-free call).
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of May 1997. See Rev. Rul. 97–19,
on this page.
Section 846.—Discounted Unpaid
Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of May 1997. See Rev. Rul. 97–19,
on this page.
Section 1274.—Determination of
Issue Price in the Case of Certain
Debt Instruments Issued for
Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal
rates; adjusted federal long-term rate,
and the long-term exempt rate.For
purposes of sections 1274, 1288, 382,
and other sections of the Code, tables
set forth the rates for May 1997.
Rev. Rul. 97–19
This revenue ruling provides various
prescribed rates for federal income tax
purposes for May 1997 (the current
month.) Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (ad-
justed AFR) for the current month for
purposes of section 1288(b). Table 3
sets forth the adjusted federal long-term
rate and the long-term tax-exempt rate
described in section 382(f). Table 4
contains the appropriate percentages for
determining the low-income housing
credit described in section 42(b)(2) for
buildings placed in service during the
current month. Finally, Table 5 contains
the federal rate for determining the
present value of an annuity, an interest
for life or for a term of years, or a
remainder or a reversionary interest for
purposes of section 7520.
11

REV. RUL. 97–19 TABLE 1
Applicable Federal Rates (AFR) for May 1997
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR6.23%6.14%6.09%6.06%
110% AFR6.86%6.75%6.69%6.66%
120% AFR7.51%7.37%7.30%7.26%
130% AFR8.14%7.98%7.90%7.85%
Mid-Term
AFR6.85%6.74%6.68%6.65%
110% AFR7.55%7.41%7.34%7.30%
120% AFR8.25%8.09%8.01%7.96%
130% AFR8.95%8.76%8.67%8.60%
150% AFR10.37%10.11%9.99%9.90%
175% AFR12.15%11.80%11.63%11.52%
Long-Term
AFR7.18%7.06%7.00%6.96%
110% AFR7.92%7.77%7.70%7.65%
120% AFR8.65%8.47%8.38%8.32%
130% AFR9.39%9.18%9.08%9.01%
REV. RUL. 97–19 TABLE 2
Adjusted AFR for May 1997
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjusted AFR3.97%3.93%3.91%3.90%
Mid-term
adjusted AFR4.84%4.78%4.75%4.73%
Long-term
adjusted AFR5.64%5.56%5.52%5.50%
REV. RUL. 97–19 TABLE 3
Rates Under Section 382 for May 1997
Adjusted federal long-term rate for the current month5.64%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)5.64%
REV. RUL. 97–19 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for May 1997
Appropriate percentage for the 70% present value low-income housing credit8.65%
Appropriate percentage for the 30% present value low-income housing credit3.71%
12

REV. RUL. 97–19 TABLE 5
Rate Under Section 7520 for May 1997
Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest8.2%
Section 1288.—Treatment of
Original Issue Discount on
Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of May 1997. See Rev. Rul. 97–19,
page 11.
Section 7520.—Valuation Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of May 1997. See Rev. Rul. 97–19,
page 11.
Section 7872.—Treatment of Loans
With Below-Market Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of May 1997. See Rev. Rul. 97–19,
page 11.
13

Part II. Treaties and Tax Legislation
Subpart B.—Legislation and Related Committee Reports
Public Law 105–2
105th Congress, H.R. 668
February 28, 1997
An Act to amend the Internal Revenue Code of 1986 to reinstate the Airport and Airway
Trust Fund excise taxes, and other purposes.
14

Part III. Administrative, Procedural, and Miscellaneous
Credit for Producing Fuel From a
Nonconventional Source, Section
29 Inflation Adjustment Factor, and
Section 29 Reference Price
Notice 97–28
This notice publishes the § 29 infla-
tion adjustment factor, the
nonconventional source fuel credit, and
the § 29 reference price for calendar
year 1996. These are used to determine
the credit allowable on fuel produced
from a nonconventional source under
§ 29 of the Internal Revenue Code. The
calendar year 1996 inflation-adjusted
credit applies to the sales of barrel-of-oil
equivalent of qualified fuels sold by a
taxpayer to an unrelated person during
the 1996 calendar year, the domestic
production of which is attributable to
the taxpayer.
BACKGROUND
Section 29(a) provides for a credit for
producing fuel from a nonconventional
source, measured in barrel-of-oil equiva-
lent of qualified fuels, the production of
which is attributable to the taxpayer and
sold by the taxpayer to an unrelated
person during the tax year. The credit is
equal to the product of $3.00 and the
appropriate inflation adjustment factor.
Section 29(b)(1) and (2) provides for
a phaseout of the credit. The credit
allowable under § 29(a) must be re-
duced by an amount which bears the
same ratio to the amount of the credit
(determined without regard to
§ 29(b)(1)) as the amount by which the
reference price for the calendar year in
which the sale occurs exceeds $23.50
bears to $6.00. The $3.00 in § 29(a)
and the $23.50 and $6.00 must each be
adjusted by multiplying these amounts
by the 1996 inflation adjustment factor.
In the case of gas from a tight forma-
tion, the $3.00 amount in § 29(a) must
not be adjusted.
Section 29(c)(1) defines the term
‘‘qualified fuels’’ to include oil produced
from shale and tar sands; gas produced
from geopressurized brine, Devonian
shale, coal seams, or a tight formation,
or biomass; and liquid, gaseous, or solid
synthetic fuels produced from coal (in-
cluding lignite), including such fuels
when used as feedstocks.
Section 29(d)(1) provides that the
credit is to be applied only for sale of
qualified fuels the production of which
is within the United States (within the
meaning of § 638(1)) or a possession of
the United States (within the meaning of
§ 638(2)).
Section 29(d)(2)(A) requires that the
Secretary, not later than April 1 of each
calendar year, determine and publish in
the Federal Register the inflation adjust-
ment factor and the reference price for
the preceding calendar year.
Section 29(d)(2)(B) defines ‘‘inflation
adjustment factor’’ for a calendar year
as the fraction the numerator of which is
the GNP implicit price deflator for the
calendar year and the denominator of
which is the GNP implicit price deflator
for calendar year 1979. The term ‘‘GNP
implicit price deflator’’ means the first
version of the implicit price deflator for
the gross national product as computed
and published by the Department of
Commerce.
Section 29(d)(2)(C) defines ‘‘refer-
ence price’’ to mean with respect to a
calendar year the Secretary’s estimate of
the annual average wellhead price per
barrel of all domestic crude oil the price
of which is not subject to regulation by
the United States.
Section 29(d)(3) provides that in the
case of a property or facility in which
more than one person has an interest,
except to the extent provided by regula-
tions prepared by the Secretary, produc-
tion from the property or facility (as the
case may be) must be allocated among
the persons in proportion to their respec-
tive interests in the gross sales from the
property or facility.
Section 29(d)(5) and (6) provides that
the term ‘‘barrel-of-oil equivalent’’ with
respect to any fuel generally means that
amount of the fuel which has a Btu
content of 5.8 million.
INFLATION ADJUSTMENT FACTOR
AND REFERENCE PRICE
The inflation adjustment factor for
calendar year 1996 is 1.9837. The refer-
ence price for calendar year 1996 is
$18.46. As required by § 29(d)(2)(A),
the inflation adjustment factor and refer-
ence price for calendar year 1996 were
published in the Federal Register on
April 4, 1997 (62 Fed. Reg. 16216).
PHASE-OUT CALCULATION
Because the calendar year 1996 refer-
ence price does not exceed $23.50 mul-
tiplied by the inflation adjustment factor,
the phaseout of the credit provided for
in § 29(b)(1) does not occur for any
qualified fuel sold in calendar year
1996.
CREDIT AMOUNT
The nonconventional source fuel
credit under § 29(a) is $5.95 per barrel-
of-oil equivalent of qualified fuels
($3.00 x 1.9837). This amount was
published in the Federal Register on
April 4, 1997 (62 Fed. Reg. 16216).
DRAFTING INFORMATION CON-
TACT
The principal author of this notice is
David G. McMunn of the Office of
Assistant Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this notice contact
Mr. McMunn on (202)622–3110 (not a
toll-free call).
45

Part IV. Items of General Interest
Notice of Proposed Rulemaking
Substantiation of Business
Expenses for Travel, Entertainment,
Gifts and Listed Property
REG–209785–95
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary
regulations.
SUMMARY: In T.D. 8715, page 5, the
IRS is issuing temporary regulations
relating to the substantiation require-
ments for business expenses for travel,
entertainment, gifts, or listed property.
The text of those temporary regulations
also serves as the text of these proposed
regulations.
DATES: Written or electronically gener-
ated comments and requests for a public
hearing must be received by June 23,
1997.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–209795–95),
room 5228, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. In the alterna-
tive, submissions may be hand delivered
between the hours of 8 a.m. and 5 p.m.
to CC:DOM:CORP:R (REG–209785–
95), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW,
Washington, DC, or electronically, via
the IRS Internet site at: http://
www.irs.ustreas.gov/prod/tax_regs/
comments.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, con-
tact Donna M. Crisalli, (202) 622–4920;
concerning submissions, contact Chris-
tina Vasquez, (202) 622–7190 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507). Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury,Office of Information and Regu-
latory Affairs, Washington, DC 20503,
with copies to theInternal Revenue
Service, Attn: IRS Reports Clearance
Officer, T:FP, Washington, DC 20224.
Comments on the collection of informa-
tion should be received by May 27,
1997.
Comments are specifically requested
concerning:
Whether the proposed collection of in-
formation is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have prac-
tical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the
application of automated collection tech-
niques or other forms of information
technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and
purchase of service to provide informa-
tion.
The collection of information in this
notice of proposed rulemaking is in
§ 1.274–5T(c)(2) and (f)(4). This infor-
mation is required by the IRS as a
condition for a taxpayer to deduct cer-
tain business expenses or exclude from
income certain reimbursed business ex-
penses of employees. This information
will be used to determine whether a
taxpayer properly qualifies for a deduc-
tion or exclusion. The collection of
information is required in order to de-
duct certain business expenses or ex-
clude from income certain reimbursed
business expenses of employees. The
likely respondents and recordkeepers are
individuals, business or other for-profit
institutions, state or local governments,
federal agencies, and nonprofit institu-
tions. Estimated total annual reporting
and recordkeeping burden: 36,920,000
hours.
The estimated annual burden per re-
spondent or recordkeeper varies from 10
minutes to 20 hours, depending on indi-
vidual circumstances, with an estimated
average of 1.3 hours.
Estimated number of respondents and
recordkeepers: 28,400,000.
Estimated annual frequency of re-
sponses: On occasion.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any inter-
nal revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certi-
fied that these regulations do not have a
significant economic impact on a sub-
stantial number of small entities. This
certification is based on the fact that, by
increasing the receipt threshold from
$25 to $75, these regulations are ex-
pected to reduce the existing
recordkeeping requirements of taxpay-
ers, including small entities, from
49,375,000 hours to 36,920,000 hours.
The regulations do not otherwise signifi-
cantly alter the reporting or recordkeep-
ing duties of small entities. Therefore, a
Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemak-
ing will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Requests for a Public
Hearing
Before adopting these proposed regu-
lations as final regulations, consideration
will be given to any comments that are
submitted timely (and in the manner
described in ADDRESSES portion of
this preamble) to the IRS. The IRS is
considering publishing a revenue proce-
dure implementing § 1.274–5T(f)(4)(ii)
of the temporary regulations (that is,
prescribing rules under which an em-
ployee may make an adequate account-
ing to his employer by submitting an
expense voucher or equivalent without
submitting documentary evidence such
as receipts) for federal government
461997–18 I.R.B.

agencies that use the published proce-
dures. In addition, the IRS is consider-
ing whether there are circumstances or
conditions under which the IRS could
extend these procedures beyond federal
government agencies, and requests com-
ments in this regard. The IRS also
requests comments on what procedures
(such as internal controls) should be
required in any rules that permit a
taxpayer to satisfy the substantiation
requirements of section 274(d) for pur-
poses of deducting business expenses
reimbursed to employees who have ac-
counted for their expenses only by
means of an expense voucher or equiva-
lent without documentary evidence such
as receipts. All comments will be avail-
able for public inspection and copying.
A public hearing will be scheduled and
held upon written request by any person
who submits written comments on the
proposed rules. Notice of the time and
place for the hearing will be published
in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Donna M. Crisalli, Office of the
Assistant Chief Counsel (Income Tax
and Accounting). However, personnel
from other offices of the IRS and Trea-
sury Department participated in their
development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.274–5 also issued under 26
U.S.C. 274(d). * * *
Par. 2. Section 1.274–5 is added to
read as follows:
§ 1.274–5 Substantiation requirements.
(a) through (c)(2)(iii)(A) [Reserved].
For further guidance, see § 1.274–5T.
(c)(2)(iii)(B) [The text of paragraph
(c)(2)(iii)(B) is the same as the text in
§ 1.274–5T published in T.D. 8715].
(c)(2)(iv) through (f)(3) [Reserved].
For further guidance, see § 1.274–5T.
(f)(4) through (f)(4)(iii) [The text of
paragraphs (f)(4) through (f)(4)(iii) is
the same as the text in T.D. 8715,
page 5.
(f)(5) through (l) [Reserved]. For fur-
ther guidance, see § 1.274–5T.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
March 24, 1997, 8:45 a.m., and published in the
issue of the Federal Register for March 25, 1997,
62 F.R. 14051)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Guidance Regarding Charitable
Remainder Trusts
REG–209823–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed amendments to the regulations
under section 664 of the Internal Rev-
enue Code of 1986 relating to charitable
remainder trusts and under section 2702
relating to special valuation rules for
transfers of interests in trusts. The pro-
posed amendments contain rules on the
conditions under which the governing
instrument may provide for a change in
the method of calculating the unitrust
amount, the date by which the annuity
amount or the unitrust amount under the
fixed percentage method must be paid to
the recipient, who is required to value
unmarketable assets, and when section
2702 applies to certain charitable re-
mainder unitrusts. The proposed regula-
tions clarify existing law that prohibits
allocating precontribution capital gain to
trust income. The proposed amendments
also contain an example illustrating how
the ordering rule of section 664(b) ap-
plies to distributions from a charitable
remainder unitrust using an income ex-
ception method to calculate the unitrust
amount. This document also provides
notice of a public hearing on these
proposed regulations.
DATES: Comments and outlines of top-
ics to be discussed at the public hearing
scheduled for September 9, 1997, at 10
a.m. must be received by August 19,
1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209823–96),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may
also be hand delivered between the
hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–209823–96),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue NW,
Washington, DC. Alternatively, taxpay-
ers may submit comments electronically
via the internet by selecting the ‘‘Tax
Regs’’ option on the IRS Home Page, or
by submitting comments directly to the
IRS internet site at http://www.irs.
ustreas.gov/prod/tax_regs/com-
ments.html. The public hearing will be
held in the IRS Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Jef-
frey A. Erickson or Mary Beth Collins,
(202) 622–3070; concerning submissions
and the hearing, Evangelista Lee, (202)
622–7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collection of
information should be sent to theOffice
of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to theInternal Rev-
enue Service, Attn: IRS Reports Clear-
ance Officer, T:FP, Washington, DC
20224. Comments on the collection of
information should be received by July
17, 1997. Comments are specifically
requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have prac-
tical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through
471997–18 I.R.B.

the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of service to provide informa-
tion.
The collection of information in this
proposed regulation is in § 1.664–
1(a)(7). This information is required to
allow taxpayers alternative means of
valuing a charitable remainder trust’s
hard-to-value assets. This information
will be used to determine if a taxpayer
properly claimed a charitable deduction
for a contribution to a charitable remain-
der trust and if assets in the charitable
remainder trust are properly valued each
year. The collection of information is
voluntary. The likely respondents are
for-profit entities.
Estimated total annual recordkeeping
burden: 75 hours.
Estimated average annual burden
hours per respondent: .5 hours.
Estimated number of respondents:
150.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any inter-
nal revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
Background
This document proposes amendments
to 26 CFR parts 1 and 25 to provide
additional rules under sections 664 and
2702. Section 664, added to the Internal
Revenue Code by section 201 of the Tax
Reform Act of 1969 (Public Law 91–
172), contains the rules for charitable
remainder trusts. In general, a charitable
remainder trust provides for a specified
periodic distribution to one or more
noncharitable beneficiaries for life or for
a term of years with an irrevocable
remainder interest held for the benefit of
charity. Section 664(c) provides that a
charitable remainder trust is exempt
from all taxes under subtitle A of the
Code for any taxable year except a
taxable year in which the trust has
unrelated business taxable income under
section 512.
There are two types of charitable
remainder trusts. A charitable remainder
annuity trust (a CRAT) pays a sum
certain at least annually to one or more
noncharitable beneficiaries. A charitable
remainder unitrust (a CRUT) pays a
unitrust amount at least annually to one
or more noncharitable beneficiaries. The
unitrust amount is generally a fixed
percentage of the net fair market value
of the CRUT’s assets valued annually
(the fixed percentage method). The
unitrust amount can instead be the lesser
of the fixed percentage amount or the
trust’s net income (the net income
method). Alternatively, the unitrust
amount can be the amount determined
under the net income method plus any
amount of income that exceeds the
current year’s fixed percentage amount
to ‘‘make up’’ for any shortfall in distri-
butions in prior years when the trust
income was less than the fixed percent-
age amount (the NIMCRUT method).
Explanation of
Provisions
I.Flip Unitrusts
A. General Explanation
The governing instrument of a CRUT
must specify the method of computing
the unitrust payments. Section 664(d)(3)
provides that the income exception
methods (either the net income method
or the NIMCRUT method) may be used
to pay the unitrust amount ‘‘for any
year.’’ The legislative history, however,
provides that the method used to deter-
mine the unitrust amount may not be
discretionary with the trustee. H.R.
Conf. Rep. No. 782, 91st Cong., 1st
Sess. 296 (1969), 1969–3 C.B. 644, 655.
Some donors may fund a CRUT with
unmarketable assets that produce little
or no income. These donors often want
the income beneficiary or beneficiaries
of the CRUT to receive a steady stream
of payments based on the total return
available from the value of the assets.
The donors recognize, however, that the
CRUT cannot make these payments un-
til it can convert the unmarketable assets
into liquid assets that can be used to pay
the fixed percentage amount. These do-
nors establish CRUTs that use one of
the income exception methods to calcu-
late the unitrust amount until the unmar-
ketable assets are sold. Following the
sale, the donors may prefer that the
CRUT use the fixed percentage method
to calculate the unitrust amount. A trust
using such a combination of methods
would be a ‘‘flip unitrust.’’
The proposed regulations provide that
a donor may establish a flip unitrust that
qualifies as a CRUT if the following
conditions are satisfied. First, to ensure
that the CRUT has substantially all
unmarketable assets prior to the switch
in methods, at least 90 percent of the
fair market value of the assets held in
the trust immediately after the initial
contribution or any subsequent contribu-
tion (prior to the switch in methods)
must consist of unmarketable assets.
Unmarketable assets are assets that are
not cash, cash equivalents, or market-
able securities (within the meaning of
section 731(c)).
Second, because the legislative history
indicates that a trustee should not have
discretion to change the method used to
calculate the unitrust amount, the gov-
erning instrument must provide that the
CRUT will use an income exception
method until the earlier of (a) the sale
of a specified unmarketable asset or
group of unmarketable assets contrib-
uted at the time the trust was created or
(b) the sale of unmarketable assets such
that immediately following the sale, any
remaining unmarketable assets total 50
percent or less of the fair market value
of the trust’s assets. For making this
determination, the remaining unmarket-
able assets are valued as of the most
recent valuation date.
Third, to ensure that the CRUT will
use the fixed percentage method after
the unmarketable assets are sold, the
CRUT must switch exclusively to the
fixed percentage method for calculating
all remaining unitrust amounts payable
to any income beneficiary at the begin-
ning of the first taxable year following
the year in which the earlier of the
above events occurs.
Finally, because the fixed percentage
method does not provide for a makeup
amount, any makeup amount described
in section 664(d)(3)(B) is forfeited when
the trust switches to the fixed percent-
age method.
The IRS and Treasury request com-
ments on whether there are additional
circumstances under which a combina-
tion of methods should be addressed in
regulations.
B. Proposed Effective Date and Transi-
tional Rules
The amendments allowing a flip
unitrust are proposed to be effective for
CRUTs created on or after the date the
final regulations are published in the
Federal Register.
481997–18 I.R.B.

If a trust was created before the
effective date of this amendment and its
governing instrument contains a flip
provision other than the one permitted
by the regulations, the trust may be
amended or reformed to comply with
the final regulations. If a trust is created
after the effective date of this amend-
ment and has a flip provision not ex-
pressly permitted by the regulations, the
trust will qualify as a CRUT if it is
amended or reformed to use the initial
method for computing the unitrust
amount throughout the term of the trust.
If a qualified CRUT is created before or
after the effective date of this amend-
ment and its governing instrument does
not contain a flip provision, the trust
will not continue to qualify as a CRUT
if it is amended or reformed to add a
flip provision.
The IRS and Treasury invite com-
ments on the least burdensome methods
of changing the terms of a trust’s gov-
erning instrument.
II.Time for Paying the Annuity Amount
or the Unitrust Amount
A. General Explanation
The regulatory provisions permitting a
trustee of a charitable remainder trust to
pay the annuity or unitrust amount
within a reasonable period of time fol-
lowing the close of the trust’s taxable
year were intended as an administrative
convenience for trustees. Under the in-
come exception methods, the trustee
may not be able to determine the
amount of trust income and, thus, the
amount to be distributed for a trust’s
taxable year until after the close of that
year. Therefore, a trustee may need the
additional time to pay the unitrust
amount if a CRUT uses one of the
income exception methods.
In contrast, a trustee of a CRAT or a
CRUT using the fixed percentage
method can easily determine the annuity
or unitrust amount and pay it before the
close of the taxable year to which it
relates. The annuity amount is fixed and
determinable as of the date the trust is
created. The fixed percentage unitrust
amount is fixed and determinable as of
the annual valuation date, which is
specified in the governing instrument or
on the initial Form 5227, Split-Interest
Trust Information Return. The valuation
date can be set well before the end of
the taxable year.
The IRS and Treasury believe that
certain trustees of charitable remainder
trusts have attempted to abuse the provi-
sions in the current regulations that
permit a trustee to pay the annuity or
unitrust amount within a reasonable time
after the close of the taxable year for
which the payment is due. The IRS and
Treasury are especially concerned about
accelerated charitable remainder trusts
described in Notice 94–78 (1994–2 C.B.
555). Therefore, the regulations propose
to amend §§ 1.664–2(a)(1)(i) and
1.664–3(a)(1)(i) to provide that the pay-
ment of the annuity amount or the
unitrust amount determined under the
fixed percentage method must be made
by the close of the taxable year in
which it is due. These proposed amend-
ments should not require the amendment
or reformation of governing instruments
of existing charitable remainder trusts
that allow a trustee to pay the unitrust
or annuity amount after the close of the
taxable year. The trustees of such trusts
can comply with the proposed regula-
tions by actually paying the annuity or
unitrust amount within the time permit-
ted by the proposed amendments.
For CRUTs using an income excep-
tion method, the regulations continue to
provide that if the CRUT pays the
unitrust amount within a reasonable time
after the close of the trust’s taxable year,
the trust is not deemed to have engaged
in an act of self-dealing, to have unre-
lated debt-financed income, to have re-
ceived an additional contribution, or to
have failed to function exclusively as a
charitable remainder trust.
B. Proposed Effective Date
These amendments are proposed to be
effective for taxable years ending after
April 18, 1997.
The IRS will continue to challenge
the purported tax consequences of accel-
erated charitable remainder trusts as de-
scribed in Notice 94–78.
III.Appraising Unmarketable Assets
A. General Explanation
Under § 1.664–1(a)(1)(iii)(a), a trust
may qualify as a charitable remainder
trust only if a deduction is allowable
under sections 170, 2055, 2106, or 2522
for transfers to the trust. The legislative
history of section 664 indicates that
Congress contemplated denying a chari-
table contribution deduction to a donor
who transferred unmarketable assets to a
charitable remainder trust unless an in-
dependent trustee valued the assets. H.R.
Rep. No. 413, 91st Cong., 1st Sess. 60
(1969), 1969–3 C.B. 200, 239. Because
the statute does not contain a corre-
sponding provision, many practitioners
have asked whether a charitable remain-
der trust that holds unmarketable assets
must have an independent trustee value
the assets.
The proposed regulations provide that
if a charitable remainder trust holds
unmarketable assets and the trustee is
the grantor of the charitable remainder
trust, a noncharitable beneficiary, or a
related or subordinate party to the
grantor or the noncharitable beneficiary
within the meaning of section 672(c)
and the applicable regulations, the
trustee must use a current qualified
appraisal, as defined in § 1.170A–
13(c)(3), from a qualified appraiser, as
defined in § 1.170A–13(c)(5), to value
those assets. A trustee who is not the
grantor, a noncharitable beneficiary, or a
related or subordinate party does not
have to use a qualified appraisal from a
qualified appraiser to value the unmar-
ketable assets. Therefore, the grantor, a
noncharitable beneficiary, or a related or
subordinate party may be the sole
trustee of a charitable remainder trust if
the trustee uses a current qualified ap-
praisal from a qualified appraiser to
compute the fair market value of the
trust’s unmarketable assets.
B. Proposed Effective Date
The amendments are proposed to be
effective for trusts created on or after
the date on which the final regulations
are published in theFederal Register.
If the governing instrument of an exist-
ing trust created before the effective
date of this amendment already requires
an independent trustee to value the
trust’s unmarketable assets, the govern-
ing instrument may be amended or
reformed to conform with this provision.
IV.Application of Section 2702 to Cer-
tain Charitable Remainder Unitrusts
A. General Explanation
Section 2702 provides special rules to
determine the amount of the gift when
an individual makes a transfer in trust to
or for the benefit of a family member
and the individual or an applicable fam-
ily member retains an interest in the
trust. Under section 2702(a), the re-
tained interest in these situations is
generally valued at zero unless the inter-
est is a qualified interest. Under section
2702(b), a qualified interest includes the
right to receive fixed payments at least
annually and the right to receive
amounts at least annually that are a
491997–18 I.R.B.

fixed percentage of the annual fair mar-
ket value of the property in the trust.
Section 2702(a)(3)(A)(iii) was added
by section 1702(f)(11)(A)(iv) of the
Small Business Job Protection Act of
1996 (Public Law 104–188) as a techni-
cal correction to the Revenue Reconcili-
ation Act of 1990 (Public Law 101–
508). Section 2702(a)(3)(A)(iii) provides
that section 2702(a) shall not apply to
any transfer to the extent regulations
provide that such transfer is not incon-
sistent with the purposes of the section.
According to the legislative history, the
regulatory authority could be used to
create an exception from the application
of section 2702 for a qualified charitable
remainder trust that does not otherwise
create an opportunity for transferring
property to a family member free of
transfer tax. H.R. Rep. No. 586, 104th
Cong., 2d Sess. 155–56 (1996). Under
§ 25.2702–1(c)(3) of the Gift Tax Regu-
lations, section 2702 does not apply to
CRUTs or CRATs.
Some taxpayers have created CRUTs
using an income exception method to
take advantage of the section 2702 ex-
clusion granted to charitable remainder
trusts in the regulations. These taxpayers
attempt to use this exclusion and the
income exception feature of a CRUT to
pass substantial assets to family mem-
bers with minimal transfer tax conse-
quences.
For example, a donor establishes a
NIMCRUT to pay the lesser of trust
income or a fixed percentage to the
donor for a term of 15 years or his life,
whichever is shorter, and then to the
donor’s daughter for her life. If the
tables under section 7520 are used to
value the donor’s retained interest and
the donor’s gift to the daughter, the
amount of the donor’s gift to the daugh-
ter is relatively small compared to the
amount the daughter may actually re-
ceive. To illustrate, the trustee may
invest in assets that produce little or no
trust income while the donor retains the
unitrust interest, creating a substantial
makeup amount. At the end of the
donor’s interest, the trustee alters the
NIMCRUT’s investments to generate
significant amounts of trust income. The
trustee then uses the income to pay to
the donor’s daughter the current fixed
percentage amount and the makeup
amount, which includes the makeup
amount accumulated while the donor
was the unitrust recipient.
The use of a CRUT as described in
the above example permits the shifting
of a beneficial interest in the trust from
the donor to another family member
and, thus, creates an opportunity for
transferring property to a family mem-
ber free of transfer tax that is contrary
to section 2702(a)(3)(A)(iii). Therefore,
the proposed regulations will amend
§ 25.2702–1(c)(3) to provide that the
unitrust interests in a CRUT using an
income exception method retained by
the donor or any applicable family
member will be valued at zero when
someone other than (1) the donor, (2)
the donor’s spouse, or (3) both the
donor and the donor’s spouse (who is a
citizen of the U.S.) is a noncharitable
beneficiary of the trust. In these situa-
tions, the value of the donor’s gift is the
fair market value of all the property
transferred to the CRUT. The present
value of the remainder interest passing
to the charitable organization will
qualify for the deduction under section
2522. Accordingly, the amount used to
calculate the donor’s gift tax liability is
the value of the property transferred to
the trust less the value of the interest
passing to charity.
Section 25.2702–1(c)(3) will continue
to exclude from the application of sec-
tion 2702 transfers to pooled income
funds described in section 642(c)(5) and
to CRATs and CRUTs that pay the
unitrust amount under the fixed percent-
age method.
B. Proposed Effective Date
This amendment is proposed to be
effective for transfers in trust made on
or after May 19, 1997.
V.Prohibition on Allocating Pre-
contribution Gain to Trust Income
A. General Explanation
When assets are transferred to a
charitable remainder trust, the amount of
the donor’s charitable deduction is gen-
erally based in part on the fair market
value of the property transferred to the
trust. Although an income exception
CRUT provides a different method for
calculating the unitrust amount than a
fixed percentage CRUT, any charitable
deduction for an income exception
CRUT is calculated as if the fixed
percentage is distributed each year. Allo-
cating amounts to trust income that are
part of the fair market value of the
contributed property on which the chari-
table deduction was based would be
inconsistent with Congress’s intent to
assure that the amount claimed as a
charitable deduction for the contribution
to the trust relates to the projected
growth of the assets contributed less the
expected distributions to the income
beneficiaries. H.R. Rep. No. 413, 91st
Cong., 1st Sess. 58–59 (1969), 1969–3
C.B. 200, 237–38; S. Rep. No. 552, 91st
Cong., 1st Sess. 87 (1969), 1969–3 C.B.
423, 479. Therefore, the regulations
clarify that the proceeds from the sale of
an income exception CRUT’s assets, at
least to the extent of the fair market
value of the asset when contributed to
the trust, must be allocated to principal.
B. Proposed Effective Date
This amendment is proposed to be
effective for sales or exchanges after
April 18, 1997. For sales or exchanges
on or before the effective date of this
amendment, the Service will continue to
challenge any attempt to allocate
precontribution gain to trust income as
being fundamentally inconsistent with
applicable local law and with the
amount of the charitable deduction
claimed.
VI.Example Illustrating Rule for Char-
acterizing Distributions from CRUTs
Section 664(b) contains the ordering
rule used to determine the character of
the annuity or unitrust amount in the
hands of the recipient. The legislative
history states that the ordering rule
applies to both CRATs and CRUTs. S.
Rep. No. 552, 91st Cong., 1st Sess. 90
(1969), 1969–3 C.B. 423, 481. The
ordering rule applies to the unitrust
amounts received from all CRUTs re-
gardless of the method used by the
CRUT to determine the unitrust amount.
Although the current regulations
clearly provide that the ordering rule of
section 664(b) and § 1.664–1(d)(1)(i)
applies to all unitrust amounts received
from CRUTs, some practitioners have
asked whether the ordering rule applies
to unitrust amounts paid under the in-
come exception methods. To provide
taxpayers with additional guidance, the
proposed regulations add an example of
how the ordering rule operates when the
unitrust amount is computed under an
income exception method.
VII.Request for Comments on Income
Exception CRUTs Holding Certain In-
vestments
The IRS and Treasury are aware that
taxpayers are using income exception
CRUTs to take advantage of the timing
difference between the receipt of trust
income (as defined in section 643(b))
and income for federal income tax pur-
poses. For example, an income excep-
501997–18 I.R.B.

tion CRUT may hold an interest in a
partnership controlled by a trustee of the
trust, a grantor, a beneficiary, or a party
related or subordinate to the trustee, the
grantor, or a beneficiary. In such a case,
an interested party controls when the
trust will receive the earnings from its
partnership interest and, accordingly,
when the unitrust recipient will receive
distributions from the trust. Although
the income exception CRUT has taxable
income on its distributive share of part-
nership items, the trust does not have
trust income until it actually receives a
distribution of its share of the partner-
ship’s earnings.
The IRS and Treasury are studying
whether investing the assets of an in-
come exception CRUT to take advan-
tage of the timing difference between
the receipt of trust income and income
for federal tax purposes causes the trust
to fail to function exclusively as a
charitable remainder trust. Therefore, the
IRS and Treasury request comments on
drafting future guidance on this issue.
Revenue Procedure 97–23, to be pub-
lished on April 28, 1997, in Internal
Revenue Bulletin 1997–17, provides that
the IRS will not issue letter rulings on
whether a trust that will calculate the
unitrust amount under section 664(d)(3)
qualifies as a section 664 charitable
remainder trust when a grantor, a
trustee, a beneficiary, or a person related
or subordinate to a grantor, a trustee, or
a beneficiary can control the timing of
the trust’s receipt of trust income from a
partnership or a deferred annuity con-
tract to take advantage of the difference
between trust income under section
643(b) and income for federal income
tax purposes for the benefit of the
unitrust recipient.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certi-
fied that these regulations do not have a
significant economic impact on a sub-
stantial number of small entities. This
certification is based upon the fact that
the recordkeeping requirement in these
regulations does not affect small entities.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice
of proposed rulemaking will be submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any comments
that are submitted timely to the IRS. All
comments will be available for public
inspection and copying.
A public hearing has been scheduled
for September 9, 1997, at 10 a.m. in the
IRS Auditorium, Internal Revenue
Building, 1111 Constitution Ave, NW.,
Washington DC. Because of access re-
strictions, visitors will not be admitted
beyond the Internal Revenue Building
lobby more than 15 minutes before the
hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral
comments at the hearing must submit
comments by August 19, 1997, and
submit an outline of the topics to be
discussed and the time to be devoted to
each topic by August 19, 1997.
A period of 10 minutes will be allot-
ted to each person for making com-
ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal authors of these pro-
posed regulations are Mary Beth Collins
and Jeffrey A. Erickson, Office of the
Assistant Chief Counsel (Passthroughs
and Special Industries), IRS. However,
personnel from other offices of the IRS
and Treasury Department participated in
their development.
* * * * *
26 CFR Part 25
Gift taxes, Reporting and recordkeep-
ing requirements.
Proposed Amendments to the Regula-
tions
Accordingly, CFR parts 1 and 25 are
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In § 1.664–1, paragraphs
(a)(7), (d)(1)(iii), and (f)(4) are added to
read as follows (paragraph (f)(4) follows
the concluding text of paragraph (f)(3)):
§ 1.664–1 Charitable remainder trusts.
(a) * * *
(7)Valuation of unmarketable assets.
If a trust has assets that are not cash,
cash equivalents, or marketable securi-
ties (within the meaning of section
731(c) and the applicable regulations)
and the trustee is the grantor of the
charitable remainder trust, a
noncharitable beneficiary, or a related or
subordinate party to the grantor or
noncharitable beneficiary within the
meaning of section 672(c) and the appli-
cable regulations, the trustee must use a
current qualified appraisal, as defined in
§ 1.170A–13(c)(3), from a qualified ap-
praiser, as defined in § 1.170A–
13(c)(5), to value those assets. A trustee
who is not the grantor of the charitable
remainder trust, a noncharitable benefi-
ciary, or a related or subordinate party
to the grantor or noncharitable benefi-
ciary does not have to use a current
qualified appraisal from a qualified ap-
praiser to value the trust’s assets.
* * * * *
(d) * * *
(1) * * *
(iii)Example.The following example
illustrates the application of this para-
graph (d)(1):
Example.(i)Xis a charitable remainder unitrust
described in sections 664(d)(2) and (3). The
annual unitrust amount is the lesser of the amount
of trust income, as defined in § 1.664–
3(a)(1)(i)(b)(3), or six percent of the net fair
market value of the trust assets valued annually.
The net fair market value of the trust assets on the
valuation date in 1996 is $150,000. During 1996,
Xhas $7,500 of income after allocating all
expenses. All ofX’s income for 1996 is tax-
exempt income. At the end of 1996,X’s ordinary
income for the current taxable year and undistrib-
uted ordinary income for prior years are both zero;
X’s capital gain for the current taxable year is zero
and undistributed capital gain for prior years is
$30,000; andX’s tax-exempt income for the
current year is $7,500 and undistributed tax-
exempt income for prior years is $2,500.
(ii) Because the trust income of $7,500 is less
than the fixed percentage amount of $9,000, the
unitrust amount for 1996 is $7,500. The character
of that amount in the hands of the recipient of the
unitrust amount is determined under section
664(b). Because the unitrust amount is less than
X’s undistributed capital gain income, the recipient
of the unitrust amount treats the distribution of
$7,500 as capital gain. At the beginning of 1997,
X’s undistributed capital gain for prior years is
reduced to $22,500, andX’s undistributed tax-
exempt income is increased to $10,000.
* * * * *
(f) * * *
511997–18 I.R.B.

(4)Valuation of unmarketable assets.
The rules contained in paragraph (a)(7)
of this section are effective for trusts
created on or after the date the final
regulations are published in theFederal
Register. A trust whose governing in-
strument requires that an independent
trustee value the trust’s unmarketable
assets may be amended or reformed to
permit any trustee to value those assets
if the trustee uses a current qualified
appraisal, as defined in § 1.170A–
13(c)(3), from a qualified appraiser, as
defined in § 1.170A–13(c)(5), in the
taxable years beginning on or after the
date the final regulations are published
in theFederal Register.
* * * * *
Par. 3. In § 1.664–2, paragraph
(a)(1)(i) is revised to read as follows:
§ 1.664–2 Charitable remainder annu-
ity trust.
(a) * * *
(1) * * * (i)Payment of sum certain
at least annually.The governing instru-
ment provides that the trust will pay a
sum certain not less often than annually
to a person or persons described in
paragraph (a)(3) of this section for each
taxable year of the period specified in
paragraph (a)(5) of this section. The
annuity amount must be paid to the
recipient no later than the close of the
taxable year for which the payment is
due. The rules contained in this para-
graph (a)(1)(i) are effective for taxable
years ending after April 18, 1997.
* * * * *
Par. 4. Section 1.664–3 is amended as
follows:
1. Paragraphs (a)(1)(i)(a), (a)(1)(i)(
b)(1), and (a)(1)(i)(b)(2) are revised.
2. Paragraphs(a)(1)(i)(b)(3),
(a)(1)(i)(c), (a)(1)(i)(d), (a)(1)(i)(e), and
(a)(1)(i)(f) are added.
3. The third sentence of paragraph
(a)(1)(iv) is revised.
4. Paragraph (a)(1)(vi) is added.
The added and revised provisions
read as follows:
§ 1.664–3 Charitable remainder
unitrust.
(a) * * *
(1) * * *
(i) * * * (a)General rule.The gov-
erning instrument provides that the trust
will pay not less often than annually a
fixed percentage of the net fair market
value of the trust assets determined
annually to a person or persons de-
scribed in paragraph (a)(3) of this sec-
tion for each taxable year of the period
specified in paragraph (a)(5) of this
section.
(b) * * *
(1) The amount of trust income for a
taxable year to the extent that such
amount is not more than the amount
required to be distributed under para-
graph (a)(1)(i)(a) of this section.
(2) An amount of trust income for a
taxable year that is in excess of the
amount required to be distributed under
(a)(1)(i)(a) of this section for such year
to the extent that (by reason of para-
graph (a)(1)(i)(b)(1) of this section) the
aggregate of the amounts paid in prior
years was less than the aggregate of
such required amounts.
(3) For this paragraph (a)(1)(i)(b),
trust income means income as defined
under section 643(b) and the applicable
regulations. Proceeds from the sale or
exchange of any assets contributed to
the trust by the donor must be allocated
to principal and not to trust income at
least to the extent of the fair market
value of those assets on the date of
contribution.
(c)Combination of methods.Instead
of the amount described in paragraph
(a)(1)(i)(a) or (b) of this section, the
governing instrument may provide that
the trust will pay the amount described
in paragraph (a)(1)(i)(b) of this section
for an initial period and then pay the
amount described in paragraph
(a)(1)(i)(a) of this section (calculated
using the same fixed percentage) for the
remaining years of the trust if—
(1) At least 90 percent of the fair
market value of the assets held in the
trust immediately after either the initial
contribution or any subsequent contribu-
tion (prior to the change in methods) to
the trust consists of unmarketable assets;
(2) The governing instrument pro-
vides that the change of method de-
scribed in this paragraph (a)(1)(i)(c) will
be triggered by the earlier of—
(i) The sale or exchange of a speci-
fied asset or group of assets that was
contributed to the trust on its creation;
or
(ii) The sale or exchange of unmar-
ketable assets if immediately following
the sale or exchange, the fair market
value of any remaining unmarketable
assets total 50 percent or less of the
total fair market value of the trust’s
assets. For making this determination,
the remaining unmarketable assets must
be valued as of the most recent valua-
tion date;
(3) The change of method described
in this paragraph (a)(1)(i)(c) takes effect
at the beginning of the first taxable year
following the year in which the earlier
of paragraph (a)(1)(i)(c)(2)(i) or (ii) of
this section occurs; and
(4) Following the trust’s conversion
to the method described in paragraph
(a)(1)(i)(a) of this section, the trust will
pay at least annually to the permissible
recipients the amount described only in
paragraph (a)(1)(i)(a) of this section and
not any amount described in paragraph
(a)(1)(i)(b) of this section.
(5) For this paragraph (a)(1)(i)(c), un-
marketable assets are assets that are not
cash, cash equivalents, or marketable
securities as defined in section 731(c)
and the applicable regulations.
(d)Example.The following example
illustrates the rules in paragraph
(a)(1)(i)(c) of this section:
Example.(i) On the creation of charitable
remainder unitrustY,Scontributes four assets—A,
B,C, andD. A is a marketable security under
section 731(c) and the applicable regulations.B,
C, andDare unmarketable assets. The fair market
value ofB,C, andDis at least 90 percent of the
fair market value of all four assets at the time of
contribution.
(ii) The governing instrument of Y provides for
calculating the unitrust amount under the combina-
tion of methods described in paragraph (a)(1)(i)(c)
of this section. The initial method for calculating
the unitrust amount is the lesser of the amount of
trust income, as defined in paragraph
(a)(1)(i)(b)(3) of this section, or six percent of the
net fair market value of the trust assets valued
annually. The unitrust amount also includes any
amount of trust income for any taxable year that
exceeds six percent of the net fair market value of
the trust’s assets valued annually to the extent the
total of the amounts paid in prior years was less
than the total of the amounts computed as six
percent of the net fair market value ofY’s assets
on the valuation dates. After the change in
method, the unitrust amount will equal six percent
of the net fair market value of Y’s assets on the
valuation dates.
(iii) The governing instrument provides that the
change in method will occur for the first taxable
year beginning after bothBandCare sold or the
year in which the trust has sold or exchanged
enough unmarketable assets so that the remaining
unmarketable assets total 50 percent or less of the
fair market value of the trust’s assets, whichever
occurs first.
(iv) In Year 3, the trustee ofYsellsB, one of
the three unmarketable assets. After the sale ofB,
the fair market value of all ofY’s unmarketable
assets is greater than 50 percent of the fair market
value ofY’s assets. Therefore, in Year 3, the
method used to calculate the unitrust amount
remains the initial method.
(v) In Year 4, the trustee sellsD. After the sale
of bothBandD, the fair market value ofY’s
unmarketable assets is 50 percent or less of the
fair market value ofY’s assets. In Year 4, however,
the method used to calculate the unitrust amount
remains the initial method.
(vi) In Year 5 and for all subsequent years, the
trust must pay a unitrust amount equal only to six
percent of the net fair market value ofY’s assets
determined annually. The change in method occurs
521997–18 I.R.B.

in Year 5 because the fair market value ofY’s
unmarketable assets totaled 50 percent or less of
the fair market value ofY’s assets after the sale of
bothBandD. The change in method occurs even
thoughYstill ownsC, the other unmarketable
asset specified in the governing instrument.
(vii) By the end of Year 4,Y’s total trust
income had been less than the sum of the unitrust
amounts based on six percent of the net fair
market value ofY’s assets determined annually,
leaving a balance of $1,000. The $1,000 balance
can never be distributed to the unitrust recipient
after the change to the fixed percentage method.
(e)Payment under general rule.
When the unitrust amount is computed
under paragraph (a)(1)(i)(a) of this sec-
tion, the unitrust amount must be paid to
the recipient no later than the close of
the taxable year of the trust for which
the payment is due.
(f)Payment under income exception.
When the unitrust amount is computed
under paragraph (a)(1)(i)(b) of this sec-
tion, the unitrust amount may be paid to
the recipient after the close of the
taxable year of the trust for which the
payment is due if paid within a reason-
able time after the close of such taxable
year. The trust will not be deemed to
have engaged in an act of self-dealing
(within the meaning of section 4941), to
have unrelated debt-financed income
(within the meaning of section 514), to
have received an additional contribution
(within the meaning of paragraph (b) of
this section), or to have failed to func-
tion exclusively as a charitable remain-
der trust (within the meaning of para-
graph (a)(4) of this section) merely
because payment of the unitrust amount
is made after the close of the taxable
year if such payment is made within a
reasonable time after the close of such
taxable year. For this paragraph
(a)(1)(i)(f), a reasonable time will not
ordinarily extend beyond the date by
which the trustee is required to file
Form 5227, Split-Interest Trust Informa-
tion Return, (including extensions) for
the taxable year.
* * * * *
(iv) * * * If the governing instrument
does not specify the valuation date or
dates, the trustee must select such date
or dates and indicate the selection on
the first return on Form 5227, Split-
Interest Trust Information Return, that
the trust must file. * * *
* * * * *
(vi)Effective date and reformations.
(a) The rules in paragraph (a)(1)(i)(a) of
this section are effective for taxable
years ending after April 18,1997.
(b) The rules in paragraphs
(a)(1)(i)(c) and (d) of this section are
effective for charitable remainder
unitrusts created on or after the date the
final regulations are published in the
Federal Register. If a trust was created
before the effective date of paragraph
(a)(1)(i)(c) of this section and contains a
provision allowing a change in calculat-
ing the unitrust method, the trust may be
amended or reformed to comply with
the provisions of paragraph (a)(1)(i)(c)
of this section. If a trust is created after
the effective date of paragraph
(a)(1)(i)(c) of this section and contains a
provision allowing a change in calculat-
ing the unitrust method that does not
comply with the provisions of paragraph
(a)(1)(i)(c) of this section, the trust will
continue to qualify as a charitable re-
mainder unitrust if it is amended or
reformed to use the initial method for
computing the unitrust amount through-
out the term of the trust. A qualified
charitable remainder unitrust created be-
fore or after the effective date of para-
graph (a)(1)(i)(c) of this section will not
continue to qualify as a charitable re-
mainder unitrust if its governing instru-
ment is amended or reformed to add a
provision allowing a change in the
method for calculating the unitrust
amount.
(c) The rules in paragraphs
(a)(1)(i)(b)(1), (2), and (3) of this sec-
tion are effective for taxable years end-
ing after April 18, 1997, and for sales or
exchanges described in paragraph
(a)(1)(i)(b)(3) of this section that occur
after April 18, 1997.
(d) The rules in paragraphs
(a)(1)(i)(e) and (f) of this section are
effective for taxable years ending after
April 18, 1997.
* * * * *
PART 25—GIFT TAX; GIFTS MADE
AFTER DECEMBER 31, 1954
Par. 5. The authority for part 25
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 6. In § 25.2702–1, paragraph
(c)(3) is revised to read as follows:
§ 25.2702–1 Special valuation rules in
the case of transfers of interests in trust.
* * * * *
(c) * * *
(3)Charitable remainder trust.(i)
For transfers made on or after May 19,
1997, a transfer to a pooled income fund
described in section 642(c)(5); a transfer
to a charitable remainder annuity trust
described in section 664(d)(1); a transfer
to a charitable remainder unitrust de-
scribed in section 664(d)(2) if under the
terms of the governing instrument the
unitrust amount is computed only under
section 664(d)(2)(A); and a transfer to a
charitable remainder unitrust described
in sections 664(d)(2) and (3) if the only
permitted recipients of the unitrust
amount are the donor, the donor’s
spouse, or both the donor and the do-
nor’s spouse who is a citizen of the
United States.
(ii) For transfers made before May
19, 1997, a transfer in trust if the
remainder interest in the trust qualifies
for a deduction under section 2522.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
April 17, 1997, 8:45 a.m., and published in the
issue of the Federal Register for April 18, 1998,
62 F.R. 19072)
Notice of Disposition of Declaratory
Judgment Proceedings Under
Section 7428
This announcement serves notice to
donors that by agreement of the parties,
the organization listed below is an orga-
nization exempt from taxes under Inter-
nal Revenue Code section 501(a) as an
organization described in IRC section
501(c)(3).
Jack Rehburg Ministries a/k/a Total
Christian Television
Snow Camp, NC
Foundations Status of Certain
Organizations
Announcement 97–46
The following organizations have
failed to establish or have been unable
to maintain their status as public chari-
ties or as operating foundations. Accord-
ingly, grantors and contributors may not,
after this date, rely on previous rulings
or designations in the Cumulative List
of Organizations (Publication 78), or on
the presumption arising from the filing
of notices under section 508(b) of the
Code. This listing doesnotindicate that
the organizations have lost their status
as organizations described in section
501(c)(3), eligible to receive deductible
contributions.
Former Public Charities. The follow-
ing organizations (which have been
treated as organizations that are not
private foundations described in section
509(a) of the Code) are now classified
as private foundations:
531997–18 I.R.B.

African Connection, Inc., Cambridge,
MA
Alcohol and Drug Abuse Recovery
Environment, Inc., Houston, TX
American Friends of the Imperial War
Museum, St. Louis, MO
Americas Business Conscience Corp.,
Scarsdale, NY
Arts for Life, Albuquerque, NM
Asanteman Association of Greater
Houston, Missouri City, TX
Association for Christian Public School
Teachers and Administrators,
Stillwater, OK
Association for Recreation as an
Alternative, Inc., New York, NY
Association of Hispanic Educators of
Massachusetts, Inc., Springfield, MA
BAA & Company, San Antonio, TX
Ballet, Inc., New York, NY
Barbara Oneglia Alvarez Tycienski
Christmas Fund for Needy Children,
Torrington, CT
Becket Land Trust, Inc., Becket, MA
Bellevue Avalon Girls Association,
Bellevue, PA
Bethany Center Inc., Lakeland, FL
Birthright of Encinitas, Encinitas, CA
Black Transplants Action Committee,
Denver, CO
Choices Inc., A Cancer Survivor
Advocate Group, Prairie Village, KS
Christian Medical Missions, Inc.,
Woodward, OK
Christian Medical Relief International,
Inc., Tulsa, OK
Christian Mission Resident Ministry
Corp., St. Petersburg, FL
Christian Support Ministries, Houston,
TX
Christian United Enterprise Non-Profit
Housing Corporation, Flint, MI
Christians United Productions, Littleton,
CO
Christine Historical Society, Christine,
TX
Circle S. Rodeo Ministries, Inc., Trinity,
TX
Citadel Gymnastics Association, Tulsa,
OK
Citizens Crime Line of Gaines County,
Inc., Seagraves, TX
City of Deer Park Texas Senior Citizens
Foundation Trust, Deer Park, TX
Clayton Community Center, Inc.,
Clayton, KS
Clear Thinking, Inc., Scottsdale, AZ
Cliff Haven Adult Day Health Care,
Inc., Dallas, TX
Clinton Crimestoppers, Clinton, OK
C. N. Linscott Memorial Childrens
Foundation, Austin, TX
Colorado Coaches of Girls Sports,
Broomfield, CO
Colorado Health Policy Council,
Denver, CO
Colorado Operation Lifesaver, Inc.,
Denver, CO
Colorado Springs Parents of Prematures,
Colorado Springs, CO
Colorado Yale Association, Denver, CO
Colors of Life, Inc., Lawton, OK
Colquitt-Miller County Historic and
Economic Revitalization Organization,
Inc., Colquitt, GA
Columbus Community Foundation,
Columbus, KS
Contemporary Housing Alternatives Inc.,
Topeka, KS
Cross Country Ministries, Buckeye, AZ
Dinosaurland Resource Conservation &
Development Area, Vernal, UT
Disadvantaged Business Development
Association, Youngstown, OH
Firecon Institute for Research and
Education, Inc., East Earl, PA
Five Moons Theatre, Inc., New York,
NY
For the Record, Inc., Los Angeles, CA
Friends of Father Joseph Inc., Baltimore,
MD
Give One Day Inc., Austin, TX
Gospel for India, Dallas, TX
Heavens Gate Ministries, Inc., Nowata,
OK
Heber Overgaard Economic
Development Corporation, Overgaard,
AZ
Helping Hands Community Resource
Center, Beckley, WV
Helping Horse Therapeutic Riding
Center, Thermopolis, WY
Henderson Junior High School Parent,
Inc., China, TX
Hendrick Academy of Honor Inc.,
Plano, TX
High Frequency Wavelengths, Virginia
Beach, VA
Holdenville General Hospital
Foundation, Holdenville, OK
Johnston-Mitchell Preservation
Foundation, Inc., Plano, TX
John Wesley White Franklin Graham
Desert Southwest Crusade, Yuma, AZ
Little Britches Rodeo Association of
Texas, Bandera, TX
Littlefield Arts and Heritage Committee,
Inc., Lubbock, TX
Living Improvements for Elderly, Port
Neches, TX
MGA Golf Foundation, Jefferson City,
MO
Mile by Mile Inc., Mesa, AZ
Missouri City Girls Softball Association,
Missouri City, TX
Mohave County Trails Association Inc.,
Kingman, AZ
Mojave Native Plant Society, Las Vegas,
NV
Montebello-El Rosario Sister City
Association, Montebello, CA
Montgomery County Master Gardener
Association, Conroe, TX
Northeastern Connecticut Aids Project,
Inc., Pomfret Center, CT
Our Lady of Fatima Sanctuary Inc.,
Anchorage, AK
Pend’Orelle County District 3 Firemans
Fund, Newport, WA
Permian Basin Aids Coalition, Midland,
TX
Permian Choir Booster Club, Odessa,
TX
Poltava Center, Inc., Beachwood, OH
Prairie Preservation Incorporated,
Fennimore, WI
Rio Grande Dispute Resolution Center,
Inc., El Paso, TX
River of Light Christian Ministries,
Phoenix, AZ
Riverside Recover Center, Inc., Houston,
TX
Sagebrush Bible Chapel Inc., Sparks,
NV
Southwestern Native American Art
Foundation, Albuquerque, NM
Space Science Educational Foundation
for Tomorrow, Inc., Sugarland, TX
Sparta-White County Main Street,
Sparta, TN
Sports for Life, Inc., Oklahoma City,
OK
Sports Turf Managers Benevolent
Foundation, Aurora, CO
Stinesville Renaissance Group,
Stinesville, IN
Stop Six Community Services, Inc., Fort
Worth, TX
Sunshine House Foundation, Denver,
CO
Upper Valley Foundation, White River
Jct., VT
Vivid Theater Ensemble, Dallas, TX
Vore Buffalo Jump Foundation,
Sundance, WY
West Allegheny Chorus Boosters,
Imperial, PA
West Coast Dance Project Inc., Sarasota,
FL
Women Against Violence Everywhere,
Westminster, CA
Woodstock Academy Inc., Woodstock,
MD
Working Theatre, Cleveland, OH
Wyoming Pioneer Woman, Worland,
WY
If an organization listed above sub-
mits information that warrants the re-
newal of its classification as a public
charity or as a private operating founda-
tion, the Internal Revenue Service will
541997–18 I.R.B.

issue a ruling or determination letter
with the revised classification as to
foundation status. Grantors and con-
tributors may thereafter rely upon such
ruling or determination letter as pro-
vided in section 1.509(a)–7 of the
Income Tax Regulations. It is not
the practice of the Service to announce
such revised classification of foundation
status in the Internal Revenue Bulletin.
551997–18 I.R.B.

Announcement of the Expedited Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the
Internal Revenue Service
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Inter-
nal Revenue Service any practitioner
who, within five years, from the date
the expedited proceeding is instituted,
(1) has had a license to practice as an
attorney, certified public accountant, or
actuary suspended or revoked for cause;
or (2) has been convicted of any crime
under title 26 of the United States Code
or, of a felony under title 18 of the
United States Code involving dishonesty
or breach of trust.
Attorneys, certified public accoun-
tants, enrolled agents and enrolled actu-
aries are prohibited in any Internal Rev-
enue Service matter from directly or
indirectly employing, accepting assis-
tance from, being employed by, or shar-
ing fees with, any practitioner disbarred
or suspended from practice before the
Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents, and en-
rolled actuaries to identify practitioners
under expedited suspension from prac-
tice before the Internal Revenue Service,
the Director of Practice will announce in
the Internal Revenue Bulletin the names
and addresses of practitioners who have
been suspended from such practice, their
designation as attorney, certified public
accountant, enrolled agent, or enrolled
actuary, and date or period of suspen-
sion. This announcement will appear in
the weekly Bulletin at the earliest practi-
cable date after such action and will
continue to appear in the weekly Bulle-
tins for five successive weeks or for as
many weeks as is practicable for each
attorney, certified public accountant, en-
rolled agent, or enrolled actuary so
suspended and will be consolidated and
published in the Cumulative Bulletin.
The following individuals have been
placed under suspension from practice
before the Internal Revenue Service by
virtue of the expedited proceeding pro-
visions of the applicable regulations:
NameAddressDesignationDate of Suspension
Loberg, ThomasSt. Paul, MNCPAIndefinite from November 13, 1996
Rose Ann GalatiThousand Oaks, CACPAIndefinite from November 25, 1996
Labendeira, AnthonyFresno, CACPAIndefinite from November 25, 1996
Nation, D. MarkAlbuquerque, NMCPAIndefinite from November 25, 1996
Behren, Daryl D.Visalia, CACPAIndefinite from November 25, 1996
Murphy, Virginia T.Laurinburg, NCCPAIndefinite from November 25, 1996
Best III, James M.Monroe, NCCPAIndefinite from November 25, 1996
Rehm, AyshaTulsa, OKCPAIndefinite from November 25, 1996
Dineen, Lee M.Castle Hayne, NCCPAIndefinite from December 12, 1996
Miele, Ralph J.North Babylon, NYCPAIndefinite from February 14, 1997
56

Definition of Terms
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:
Amplifieddescribes a situation where
no change is being made in a prior
published 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 ampli-
fied. (Compare withmodified, below).
Clarifiedis 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 es-
sential difference between them.
Modifiedis 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
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered de-
terminative with respect to future trans-
actions. This term is most commonly
used in a ruling that lists previously
published rulings that are obsoleted be-
cause of changes in law or regulations.
A ruling may also be obsoleted because
the substance has been included in regu-
lations subsequently adopted.
Revokeddescribes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Supersededdescribes 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 previ-
ously published over a period 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,modifiedandsuper-
sededdescribes a situation where the
substance of a previously published rul-
ing 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 su-
perseded.
Supplementedis 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
published that includes the list in the
original ruling and the additions, and
supersedes all prior rulings in the series.
Suspendedis 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
formerly 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 Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
57

Numerical Finding List
1
Bulletin 1997–1 through 1997–17
Announcements:
97–1, 1997–2 I.R.B.63
97–2, 1997–2 I.R.B.63
97–3, 1997–2 I.R.B.63
97–4, 1997–3 I.R.B.14
97–5, 1997–3 I.R.B.15
97–6, 1997–4 I.R.B.11
97–7, 1997–4 I.R.B.12
97–8, 1997–4 I.R.B.12
97–9, 1997–5 I.R.B.27
97–10, 1997–10 I.R.B.64
97–11, 1997–6 I.R.B.19
97–12, 1997–7 I.R.B.55
97–13, 1997–8 I.R.B.38
97–14, 1997–8 I.R.B.38
97–15, 1997–9 I.R.B.23
97–16, 1997–9 I.R.B.23
97–17, 1997–9 I.R.B.23
97–18, 1997–10 I.R.B.67
97–19, 1997–10 I.R.B.68
97–20, 1997–11 I.R.B.22
97–21, 1997–11 I.R.B.23
97–22, 1997–12 I.R.B.47
97–23, 1997–11 I.R.B.23
97–24, 1997–11 I.R.B.24
97–25, 1997–12 I.R.B.47
97–26, 1997–12 I.R.B.48
97–27, 1997–13 I.R.B.30
97–28, 1997–14 I.R.B.15
97–29, 1997–14 I.R.B.16
97–30, 1997–14 I.R.B.16
97–31, 1997–14 I.R.B.16
97–32, 1997–14 I.R.B.17
97–33, 1997–15 I.R.B.8
97–34, 1997–15 I.R.B.8
97–35, 1997–15 I.R.B.9
97–36, 1997–15 I.R.B.10
97–37, 1997–15 I.R.B.10
97–38, 1997–15 I.R.B.10
97–39, 1997–16 I.R.B.27
97–40, 1997–16 I.R.B.28
97–41, 1997–16 I.R.B.28
97–42, 1997–17 I.R.B.19
97–43, 1997–17 I.R.B.19
97–44, 1997–17 I.R.B.19
97–45, 1997–17 I.R.B.20
Notices:
97–1, 1997–2 I.R.B.22
97–2, 1997–2 I.R.B.22
97–3, 1997–1 I.R.B.8
97–4, 1997–2 I.R.B.24
97–5, 1997–2 I.R.B.25
97–6, 1997–2 I.R.B.26
97–7, 1997–1 I.R.B.8
97–8, 1997–4 I.R.B.7
97–9, 1997–2 I.R.B.35
97–10, 1997–2 I.R.B.41
97–11, 1997–2 I.R.B.50
97–12, 1997–3 I.R.B.11
97–13, 1997–6 I.R.B.13
97–14, 1997–8 I.R.B.23
97–15, 1997–8 I.R.B.23
97–16, 1997–9 I.R.B.15
97–17, 1997–10 I.R.B.34
97–18, 1997–10 I.R.B.35
97–19, 1997–10 I.R.B.40
97–20, 1997–10 I.R.B.52
Notices—Continued
97–21, 1997–11 I.R.B.9
97–22, 1997–13 I.R.B.9
97–23, 1997–14 I.R.B.8
97–24, 1997–16 I.R.B.6
97–25, 1997–16 I.R.B.8
97–26, 1997–17 I.R.B.6
97–27, 1997–17 I.R.B.7
Proposed Regulations:
REG–209332–80, 1997–14 I.R.B.9
REG–209040–88, 1997–7 I.R.B.34
REG–209121–89, 1997–11 I.R.B.15
REG–208288–90, 1997–11 I.R.B.14
REG–209494–90, 1997–8 I.R.B.24
REG–208172–91, 1997–10 I.R.B.59
REG–209672–93, 1997–6 I.R.B.15
REG–209709–94 1997–13 I.R.B.12
REG–209729–94, 1997–11 I.R.B.19
REG–209762–95, 1997–3 I.R.B.12
REG–209817–96, 1997–7 I.R.B.41
REG–209824–96, 1997–11 I.R.B.19
REG–254394–96, 1997–14 I.R.B.14
REG–209828–96, 1997–6 I.R.B.15
REG–209830–96, 1997–15 I.R.B.7
REG–209834–96, 1997–4 I.R.B.9
REG–209839–96, 1997–8 I.R.B.26
REG–242996–96, 1997–9 I.R.B.18
REG–246018–96, 1997–8 I.R.B.30
REG–247678–96, 1997–6 I.R.B.17
REG–247862–96, 1997–8 I.R.B.32
REG–248770–96, 1997–8 I.R.B.33
REG–249819–96, 1997–7 I.R.B.50
REG–252231–96, 1997–7 I.R.B.52
REG–252233–96, 1997–9 I.R.B.19
REG–252665–96, 1997–12 I.R.B.46
Revenue Procedures:
97–1, 1997–1 I.R.B.11
97–2, 1997–1 I.R.B.64
97–3, 1997–1 I.R.B.84
97–4, 1997–1 I.R.B.96
97–5, 1997–1 I.R.B.132
97–6, 1997–1 I.R.B.153
97–7, 1997–1 I.R.B.185
97–8, 1997–1 I.R.B.187
97–9, 1997–2 I.R.B.56
97–10, 1997–2 I.R.B.59
97–11, 1997–6 I.R.B.13
97–12, 1997–4 I.R.B.7
97–13, 1997–5 I.R.B.18
97–14, 1997–5 I.R.B.20
97–15, 1997–5 I.R.B.21
97–16, 1997–5 I.R.B.25
97–17, 1997–9 I.R.B.15
97–18, 1997–10 I.R.B.53
97–19, 1997–10 I.R.B.55
97–20, 1997–11 I.R.B.10
97–21, 1997–12 I.R.B.44
97–22, 1997–13 I.R.B.9
97–23, 1997–17 I.R.B.7
97–24, 1997–16 I.R.B.10
97–25, 1997–17 I.R.B.8
97–26, 1997–17 I.R.B.17
Revenue Rulings:
97–1, 1997–2 I.R.B.10
97–2, 1997–2 I.R.B.7
97–3, 1997–2 I.R.B.5
97–4, 1997–3 I.R.B.6
97–5, 1997–4 I.R.B.5
97–6, 1997–4 I.R.B.4
Revenue Rulings—Continued
97–7, 1997–5 I.R.B.14
97–8, 1997–7 I.R.B.4
97–9, 1997–9 I.R.B.4
97–10, 1997–10 I.R.B.31
97–11, 1997–10 I.R.B.5
97–12, 1997–11 I.R.B.5
97–13, 1997–16 I.R.B.4
97–14, 1997–11 I.R.B.5
97–15, 1997–12 I.R.B.42
97–16, 1997–13 I.R.B.4
97–17, 1997–14 I.R.B.5
97–18, 1997–15 I.R.B.4
Social Security Domestic Coverage Threshold
1997–9, I.R.B.17
Tax Conventions:
1997–17 I.R.B.5
Treasury Decisions:
8688, 1997–3 I.R.B.7
8689, 1997–3 I.R.B.9
8690, 1997–5 I.R.B.5
8691, 1997–5 I.R.B.16
8692, 1997–3 I.R.B.4
8693, 1997–6 I.R.B.9
8694, 1997–6 I.R.B.11
8695, 1997–4 I.R.B.5
8696, 1997–6 I.R.B.4
8697, 1997–2 I.R.B.11
8698, 1997–7 I.R.B.29
8699, 1997–6 I.R.B.4
8700, 1997–7 I.R.B.5
8701, 1997–7 I.R.B.23
8702, 1997–8 I.R.B.4
8703, 1997–8 I.R.B.18
8704, 1997–8 I.R.B.12
8705, 1997–8 I.R.B.16
8706, 1997–9 I.R.B.11
8707, 1997–7 I.R.B.17
8708, 1997–10 I.R.B.14
8709, 1997–9 I.R.B.5
8710, 1997–13 I.R.B.4
8711, 1997–12 I.R.B.35
8712, 1997–12 I.R.B.4
8713, 1997–14 I.R.B.4
8714, 1997–15 I.R.B.5
1
A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1996–27
through 1996–53 will be found in Internal
Revenue Bulletin 1997–1, dated January 6, 1997.
58

Finding List of Current Action on
Previously Published Items
1
Bulletin 1997–1 through 1997–17
*Denotes entry since last publication
Revenue Procedures:
66–3
Modified by
97–11, 1997–6 I.R.B.13
87–21
Modified by
97–11, 1997–6 I.R.B.13
92–20
Modified by
97–1, 1997–1 I.R.B.11
92–20
Modified by
97–10, 1997–2 I.R.B.59
92–90
Superseded by
97–1, 1997–1 I.R.B.11
94–52
Revoked by
97–11, 1997–6 I.R.B.13
96–1
Superseded by
97–1, 1997–1 I.R.B.11
96–2
Superseded by
97–2, 1997–1 I.R.B.64
96–3
Superseded by
97–3, 1997–1 I.R.B.84
96–4
Superseded by
97–4, 1997–1 I.R.B.96
96–5
Superseded by
97–5, 1997–1 I.R.B.132
96–6
Superseded by
97–6, 1997–1 I.R.B.153
96–7
Superseded by
97–7, 1997–1 I.R.B.185
96–8
Superseded by
97–8, 1997–1 I.R.B.187
96–24
96–24A
Superseded by
97–24, 1997–16 I.R.B.10
96–37
Obsoleted by
97–26, 1997–17 I.R.B.17
97–2
Amplified by
97–21, 1997–12 I.R.B.44
Revenue Procedures—Continued
97–3
Amplified by
97–23, 1997–17 I.R.B.7
Revenue Rulings:
70–480
Revoked by
97–6, 1997–4 I.R.B.4
72–527
Obsoleted by
8704, 1997–8 I.R.B.12
74–59
Revoked by
8708, 1997–10 I.R.B.14
92–19
Supplemented in part by
97–2, 1997–2 I.R.B.7
96–12
Superseded by
97–3, 1997–1 I.R.B.84
96–13
Modified by
97–1, 1997–1 I.R.B.11
96–22
Superseded by
97–3, 1997–1 I.R.B.84
96–34
Superseded by
97–3, 1997–1 I.R.B.84
96–39
Superseded by
97–3, 1997–1 I.R.B.84
96–43
Superseded by
97–3, 1997–1 I.R.B.84
96–56
Superseded by
97–3, 1997–1 I.R.B.84
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1996–27 through 1996–53 will be found in Inter-
nal Revenue Bulletin 1997–1, dated January 6,
1997.
59

Index
Internal Revenue Bulletins 1997–1
Through 1997–17
For index of items published during
the last six months of 1996, see
I.R.B. 1997–1, dated January 6,
1997.
The abbreviation and number in pa-
renthesis following the index entry
refer to the specific item; numbers in
roman and italic type following the
parenthesis refer to the Internal Rev-
enue Bulletin in which the item may
be found and the page number on
which it appears.
Key to Abbreviations:
RRRevenue Ruling
RPRevenue Procedure
TDTreasury Decision
CDCourt Decision
PLPublic Law
EOExecutive Order
DODelegation Order
TDO Treasury Department Order
TCTax Convention
SPR Statement of Procedural
Rules
PTEProhibited Transaction
Exemption
EMPLOYMENT TAX
Social Security domestic employee cov-
erage threshold amount for 1997, 9,
17
ESTATE & GIFT TAXES
ADMINISTRATIVE
Proposed regulations:
26 CFR 20.2044–1, added;
20.2056(b)–7, amended; estate and
gift tax marital deduction (REG–
209830–96) 15,7
Regulations:
26 CFR 20.2044–1T, 20.2056(b)–7T,
–10T, added; estate tax marital de-
duction (TD 8714) 15,5
EXCISE TAX
Deposits (Notice 15) 8,23
Epoxy (DGEBA) determination (Notice
22) 13,9
Proposed regulations:
26 CFR 48.4081–1, amended;
48.4082–5, 48.6715–2, added;
gasoline and diesel fuel excise tax,
special rules for Alaska, definition
of aviation gasoline and kerosene
(REG–247678–96) 6,17
EXCISE TAX—Continued
Regulations:
26 CFR 48.4082–5T, 48.6715–2T,
added; diesel fuel excise tax, spe-
cial rules for Alaska (TD 8693) 6,
9
INCOME TAX
Abusive trusts (Notice 24) 16,6
Accounting periods; small business cor-
porations (Notice 20) 10,52
Adoption assistance (Notice 9) 2,35
Advance guidance under Section 877
(Notice 19) 10,40
Alternative minimum tax, change in ac-
counting method (Notice 13) 6,13
Automobile inflation adjustment (RP 20)
11,10
Books and records; electronic storage;
imaging (RP 22) 13,9
Charitable remainder unitrusts; no rule
on CRT abuses (RP 23) 17,7
Credits against tax:
Low-income housing credit:
Building’s credit period beginning
after 1995 (RR 4) 3,6
Satisfactory bond, bond factor
amounts for January, February,
and March 1997 (RR 16) 13,4
Depreciation:
Retail motor fuels outlets (RP 10) 2,
59
Differential earnings rate (Notice 17) 10,
34
Domestic asset/liability and investment
yield percentages (RP 16) 5,25
Electing Small Business Trust (ESBT)
election (Notice 12) 3,11
Employee plans:
Cash or deferred arrangements (No-
tice 2) 2,22
Funding:
Full funding limitations, weighted
average interest rate, January
1997 (Notice 8) 4,7; February
1997 (Notice 16) 9,15; March
1997 (Notice 23) 14,8; April
1997 (Notice 27) 17,7
Qualification:
Qualified domestic relations orders
(Notice 11) 2,49
Qualified joint and survivor annu-
ities (Notice 10) 2,49
SIMPLES (RP 9) 2,55
SIMPLE–IRAs (Notice 6) 2,26
User fees (RP 8) 1,187
Exempt organizations:
Unrelated business taxable income
(RP 12) 4,7
User fees (RP 8) 1,187
INCOME TAX—Continued
Forms W–2 and W–3; general rules and
specifications for private printing (RP
24) 16,10
Form 8851; electronic and magnetic
media filing specifications (RP 25)
17,8
Fringe benefits aircraft valuation for-
mula (RR 14) 11,5
Insurance companies:
Interest rate tables (RR 2) 2,8
Premium stabilization reserves (RR 5)
4,5
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for January 1997
(RR 1) 2,10; February 1997 (RR
7) 5,14; March 1997 (RR 10)
10,31; April 1997 (RR 17) 14,5
Penalties:
Underpayment and overpayment
rates for April 1997 (RR 12) 11,
5
Inventories:
LIFO, price indexes, department
stores, November 1996 (RR 6) 4,
4; December 1996 (RR 8) 7,4;
January 1997 (RR 15) 12,42; Feb-
ruary 1997 (RR 18) 15,4
Low-income housing tax credit (Notice
14) 8,23
Major disaster areas (RR 11) 10,5
Medical and dental expenses (RR 9) 9,
4
Obsolete revenue rulings and revenue
procedures under TD 8697 (Notice 1)
2,22
Photocopy fee increase (RP 11) 6,13
Pilot pre-submission conference proce-
dure (RP 21) 12,44
Proposed regulations:
26 CFR 1.41–0, amended; 1.41–4,
revised; research activities increase,
credit, hearing (REG–209494–90)
8,24
26 CFR 1.42–16, added; low-income
housing tax credits, Federal grants
(REG–254394–96) 14,14
26 CFR 1.167(a)–3, amended;
1.167(a)–14, 1.197–0, 1.197–2,
added; amortization of intangible
property (REG–209709–94) 13,12
26 CFR 1.337(d)–4, added; certain
asset transfers to tax-exempt entity
(REG–209121–89) 11,15
26 CFR 1.338(b)–2, –3, added; intan-
gibles under sections 1060 and 338
(REG–252665–96) 12,46
60

INCOME TAX—Continued
Proposed regulations—Continued
26 CFR 1.354–1, 1.355–1, 1.356–3,
amended; reorganizations, receipt
of securities (REG–249819–96) 7,
50
26 CFR 1.368–1, amended; share-
holder interest continuity require-
ment for corporate reorganizations
(REG–252231–96) 7,52
26 CFR 1.368–1, –2, amended; conti-
nuity of interest and business re-
quirements (REG–252233–96) 9,
19
26 CFR 1.453–11, added; installment
obligations received from liquidat-
ing corporations; partial withdrawal
(REG–209332–80) 14,9
26 CFR 1.468A–2, –3, amended;
nuclear decommissioning reserve
funds; revised schedules of ruling
amounts (REG–209828–96) 6,15
26 CFR 1.704–3, 1.1245–1, amended;
depreciation allocations, recapture
among partners in a partnership
(REG–209762–95) 3,12
26 CFR 1.801–4, amended; life insur-
ance reserves, recomputation hear-
ing (REG–246018–96) 8,30
26 CFR 1.832–4, amended; insurance
companies, determination of earned
premiums (REG–209839–96) 8,26
26 CFR 1.905–2, amended; foreign
tax credit filing requirements
(REG–208288–90) 11,14
26 CFR 1.1275–7, 1.1286–2, added;
inflation-indexed debt instruments
(REG–242996–96) 9,18
26 CFR 1.1293–2, 1.1295–2, added;
qualified electing fund elections,
preferred shares, hearing (REG–
209040–88) 7,34
26 CFR 1.1396–1, added; empower-
ment zone employment credit;
qualified zone employees (REG–
209834–96) 4,9
26 CFR 1.1402(a)–18, withdrawn;
(REG–209729–94) 11,19
26 CFR 1.6013–2, 301.6334–1,
301.6601–1, 301.6651–1, 301.7430–
0, –1, –2, –4, –5, amended;
301.6656–3, added; 301.7122–1(e),
301.7430–6, revised; Taxpayer Bill
of Rights 2 and Personal Responsi-
bility and Work Opportunity Rec-
onciliation Act of 1996, miscella-
neous sections affected (REG–
248770–96) 8,33
26 CFR 1.7701(1)–1, amended;
1.7701(1)–2; obligation-shifting
transactions, multiple-party, realized
income and deductions (REG–
209817–96) 7,41
INCOME TAX—Continued
Proposed regulations—Continued
26 CFR 53.6011–1, amended; 53.6017–
1T; return and time for filing re-
quirements (REG–247862–96) 8,32
Qualified mortgage bonds; mortgage
credit certificates; national median
gross income (RP 26) 17,17
Regulations:
26 CFR 1.25–3, added; 1.25–3T,
amended; mortgage credit certifi-
cate reissuance (TD 8692) 3,4
26 CFR 1.42–16T, added; low-income
housing tax credits, Federal grants
(TD 8713) 14,4
26 CFR 1.45B–1; withdrawal of
credit for employer social security
taxes paid on employee tips (REG–
209672–93) 6,15
26 CFR 1.45B–1T, removed; credit for
employer social security taxes paid
on employee tips (TD 8699) 6,4
26 CFR 1.108(a)–1, –2, 108(b)–1,
1.1016–7, –8, 1.1017–2, removed;
1.108–4, –5, added; 1.1017–1, re-
vised; 1.301.9100–13T, removed;
basis reduction due to discharge of
indebtedness (REG–208172–91) 10,
59
26 CFR 1.108(c)–1T, 1.163(d)–1T,
1.1044(a)–1T, 1.6655(e)–1T, re-
moved; 1.108(c)–1, 1.163(d)–1,
1.1044(a)–1, 1.6655(e)–1, added;
Omnibus Budget Reconciliation
Act, elections (TD 8688) 3,7
26 CFR 1.141–1, revised; 1.143–1,
redesignated; 1.144–3, removed;
1.141–0, –2 through –16, 1.142–0,
–3, 1.144–0, 1.145–0, –1, –2,
1.147–0, –1, –2, 1.150–4, added;
1.142–1, –2, 1.144–1, –2, revised;
1.148–6, 1.150–1, amended; private
activity bonds definition (TD 8712)
12,4
26 CFR 1.170A–1, –13, amended;
charitable contributions, deductibil-
ity, substantiation, and disclosure
(TD 8690) 5,5
26 CFR 1.267(f)–1, 1.1502–11, –13,
–19, –20, –32, –43, –76, –80, cor-
rected; consolidated returns, con-
solidated and controlled groups
(Notice 25) 16,8
26 CFR 1.338(b)–2T(b)(2)(v), –2T(c)-
(4), added; 1.338–3, 1.338(b)–2T,
–3T, 1.1060–1T, amended; intan-
gibles under sections 1060 and 338
(TD 8711) 12,35
26 CFR Part 1, 1.338–0, –4,
amended; 1.338–4T, removed;
1.338(i)–1(a) and (b), revised; tar-
INCOME TAX—Continued
Regulations—Continued
get affiliates that are controlled
foreign corporations (TD 8710) 13,
4
26 CFR 1.367(a)–3, added; foreign
corporations, transfer of domestic
stock or securities by U.S. person
(TD 8702) 8,4
26 CFR 1.475(b)–1T, –2T, 1.475(c)–
1T, –2T, 1.475(d)–1T, 1.475(e)–1T,
removed; 1.475–0, 1.475(a)–3,
1.475(b)–1, –2, –4, 1.475(c)–1, –2,
1.475(d)–1, 1.475(e)–1, added; se-
curities dealers; mark-to-market ac-
counting; equity interests in related
parties and dealer-customer rela-
tionship (TD 8700) 7,5
26 CFR 1.581–1, revised; 1.581–2,
1.761–1(a), revised; 301.6109–1,
amended; 301.7701–1, –2, –3, re-
vised; 301.7701–4, amended; do-
mestic unincorporated business
organizations classified as partner-
ships or associations (TD 8697) 2,
11
26 CFR 1.731–2, added; partnerships,
distribution of marketable securities
(TD 8707) 7,17
26 CFR 1.902–0, –1, –2, added; for-
eign taxes deemed paid by domes-
tic corporate shareholder; computa-
tion (TD 8708) 10,14
26 CFR 1.952–1(e), (f), addee; 1.952–
2(c)(1), 1.954–1(d)(4)(iii), 1.954–
2(b)(3), 1.954–2(g)(2)(ii)(B)(1)(i),
–(2), revised; 1.957–1, amended;
1.960–1(i), added; controlled for-
eign corporations, foreign bas com-
pany and foreign personal holding
company income, definitions (TD
8704) 8,12
26 CFR 1.1271–0, 1.1275–4,
amended; 1.1275–7T, 1.1286–2T,
added; inflation-indexed debt in-
strument (TD 8709) 9,5
26 CFR 1.1291–0, –9, –10, added;
1.1291–0T, amended; 1.1291–9T,
–10T, removed; treatment of share-
holders of certain passive foreign
investment companies (TD 8701) 7,
23
26 CFR 1.1368–1 amended; 1.1377–
0, –1, –2, –3, added; 18.1377–1,
removed; S corporations and their
shareholders, definitions under
subchapter S (TD 8696) 6,4
26 CFR 1.1402(a)–2, amended; defi-
nition of limited partner for self-
employment tax purposes (REG–
209824–96) 11,19
26 CFR 1.6081–2, –6, added; 1.6081–
2T, –3T, –4T, removed; 1.6081–4,
61

INCOME TAX—Continued
Regulations—Continued
amended; 301.6651, amended;
301.6651–1T, removed; individual,
partnership, trust, and U.S. real
estate mortgage investment conduit
income tax returns, automatic ex-
tension of filing time (TD 8703) 8,
18
26 CFR 1.6695–1(b), amended; 1.6695–
1T, removed; 301.6061–1, revised;
301.6061–1T, removed; returns,
statements, or other documents, sign-
ing methods (TD 8689) 3,9
26 CFR 31.3402(f)(5)–1, amended;
31.3402(f)(5)–2T, removed; em-
ployment taxes and collection of
income taxes at source, Form W–4,
electronic filing (TD 8706) 9,11
26 CFR 53.6011–1, amended;
53.6071–1T; return and time for
filing requirements (TD 8705) 8,16
26 CFR 301.6103(n)–1, amended; re-
turn information disclosure; prop-
erty or services for tax administra-
tion purposes, Justice Department
(TD 8695) 4,5
26 CFR 301.6231(a)(7)–1T, removed;
301.6231(a)(7)–1, added; limited li-
ability companies; tax matters part-
ner selection (TD 8698) 7,29
26 CFR 301.6335–1, amended; sale
of seized property (TD 8691) 5,16
INCOME TAX—Continued
REIT preferred stock (Notice 21) 11,9
Rulings:
Areas in which advance rulings will
not be issued:
Associate Chief Counsel (Domes-
tic), Associate Chief Counsel
(Employee Benefits and Exempt
Organizations (RP 3) 1,85; As-
sociate Chief Counsel (Interna-
tional) (RP 7) 1,185
Determination letters, employee plans
(RP 6) 1,153
Environmental cleanup costs; letter
rulings (Notice 7) 1,8
Letter rulings, determination letter, in-
formation letter, Associate Chief
Counsel (Domestic), Associate
Chief Counsel (Employee Benefits
and Exempt Organizations), Associ-
ate Chief Counsel (Enforcement
Litigation), Associate Chief Coun-
sel (International) (RP 1) 1,11
Rulings and determination letters, is-
suance procedures (RP 4) 1,97
Technical advice; employee plans, ex-
empt organizations (RP 5) 1,132
Technical advice to district directors
and chiefs, appeals offices, Associ-
ate Chief Counsel (Domestic), As-
sociate Chief Counsel (Employee
INCOME TAX—Continued
Rulings—Continued
Benefits and Exempt Organiza-
tions), Associate Chief Counsel
(Enforcement Litigation), Associate
Chief Counsel (International) (RP
2) 1,64
SBA guaranteed payment rights; partici-
pating securities (RR 3) 2,5
Scenarios of disciplinary actions, 13,32
S corporation bank accounting method
change (RP 18) 10,53
S corporation subsidiaries (Notice 4) 2,
24
Small Business Corporations:
Accounting periods (Notice 3) 1,8
Electing small business corporations
and banks (Notice 5) 2,25
Special use value; farms; interest rates
(RR 13) 16,4
Tax conventions:
Shipping and aircraft agreements
Malta, 17,5
Tax-exempt bonds:
Private activity bonds (RP 13) 5,18;
(RP 14) 5,20; (RP 15) 5,21
Timely filing or payment; private deliv-
ery services (RP 19) 10,55; (Notice
26) 17,6
Transfers to foreign entities (Notice 18)
10,35
62

Internal Revenue Bulletin 1997-18 (PDF rendition): IRS Announcements

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