Internal Revenue Bulletin 1999-5 (PDF rendition): IRS Notices

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

INCOME TAX
Rev. Rul. 99–7, page 4.
Deductibility of daily transportation expenses.This rul-
ing provides the rules for determining whether daily trans-
portation expenses incurred by a taxpayer in going between
the taxpayer’s residence and a work location are deductible
business expenses under section 162(a) of the Code.
T.D. 8791, page 7.
Final regulations under section 664 of the Code relate to
charitable remainder trusts and to special valuation rules for
transfers of interests in trusts.
T.D. 8797, page 5.
Final regulations relate to start-up expenditures for active
trades or businesses under section 195 of the Code.
T.D. 8805, page 14.
Final regulations and temporary regulations under sections
865 and 904 of the Code relate to the allocation of loss rec-
ognized on the disposition of stock and other personal prop-
erty and the computation of the foreign tax credit limitation.
EMPLOYEE PLANS
Rev. Proc. 99–13, page 52.
Tax-sheltered annuities; operational defects; closing
agreements.A program whereby tax-sheltered annuities
within the meaning of section 403(b) of the Code may cor-
rect certain operational defects or enter into closing agree-
ments with the Service is set forth. Rev. Proc. 98–22 modi-
fied and amplified.
EXEMPT ORGANIZATIONS
Announcement 99–10, page 63.
A list is given of organizations now classified as private foun-
dations.
ADMINISTRATIVE
Rev. Proc. 99–14, page 56.
Automobile owners and lessees.This procedure pro-
vides owners and lessees of passenger automobiles (includ-
ing electric automobiles) with tables detailing the limitations
on depreciation deductions for automobiles first placed in
service during calendar year 1999 and the amounts to be
included in income for automobiles first leased during calen-
dar year 1999. In addition, this procedure provides the max-
imum allowable value of employer-provided automobiles first
made available to employees for personal use in calendar
year 1999 for which the vehicle cents-per-mile valuation rule
provided under section 1.61–21(e) of the Income Tax
Regulations may be applicable.
Notice 99–8, page 26.
This notice announces that the Service will make certain
changes to the section 1441 withholding regulations, and
provides the text of a model qualified intermediary withhold-
ing agreement.
Announcement 99–11, page 64.
This announcement provides guidance for 1997–1998 fiscal
year filers of the 1997 Schedule D for Forms 1040, 1041,
1065, and 1120S.
Announcement 99–12, page 65.
Rev. Proc. 98–44, 1998–32 I.R.B. 11, Specifications for Fil-
ing Forms 1042–S, Foreign Person’s U.S. Source Income
Subject to Withholding, Magnetically/Electronically, is cor-
rected.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1999–5
February 1, 1999
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page 67.
Index for January begins on page 69.
IRB 1999-5 1/27/99 3:26 PM Page 1

Mission of the Service
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
2
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to adminis-
ter 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 provi-
sions 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 “protect-
ing the revenue.” The revenue is properly protected only
when we ascertain 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 hesi-
tate 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, howev-
er, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.
IRB 1999-5 1/27/99 3:26 PM Page 2

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consoli-
dated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform 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 other-
wise indicated. Procedures relating solely to matters of in-
ternal 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 Service 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 unwarranted 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 pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions 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 Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumu-
lative Bulletins.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin of the
succeeding quarterly and semiannual period, respectively.
3
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
IRB 1999-5 1/27/99 3:26 PM Page 3

Section 162.—Trade or
Business Expenses
26 CFR 1.162–2: Traveling expenses.
(Also sections 262; 1.262–1.)
Deductibility of daily transportation
expenses.This ruling provides the rules
for determining whether daily transporta-
tion expenses incurred by a taxpayer in
going between the taxpayer’s residence
and a work location are deductible busi-
ness expenses under section 162(a) of the
Code.
Rev. Rul. 99–7
ISSUE
Under what circumstances are daily
transportation expenses incurred by a tax-
payer in going between the taxpayer’s
residence and a work location deductible
under § 162(a) of the Internal Revenue
Code?
LAW AND ANALYSIS
Section 162(a) allows a deduction for
all the ordinary and necessary expenses
paid or incurred during the taxable year in
carrying on any trade or business. Sec-
tion 262, however, provides that no de-
duction is allowed for personal, living, or
family expenses.
A taxpayer’s costs of commuting be-
tween the taxpayer’s residence and the
taxpayer’s place of business or employ-
ment generally are nondeductible per-
sonal expenses under §§ 1.162–2(e) and
1.262–1(b)(5) of the Income Tax Regula-
tions. However, the costs of going be-
tween one business location and another
business location generally are deductible
under § 162(a). Rev. Rul. 55–109,
1955–1 C.B. 261.
Section 280A(c)(1)(A) (as amended by
§ 932 of the Taxpayer Relief Act of 1997,
Pub. L. No. 105–34, 111 Stat. 881, effec-
tive for taxable years beginning after De-
cember 31, 1998) provides, in part, that a
taxpayer may deduct expenses for the
business use of the portion of the tax-
payer’s personal residence that is exclu-
sively used on a regular basis as the prin-
cipal place of business for any trade or
business of the taxpayer. (In the case of
an employee, however, such expenses are
deductible only if the exclusive and regu-
lar use of the portion of the residence is
for the convenience of the employer.) In
Curphey v. Commissioner,73 T.C. 766
(1980), the Tax Court held that daily
transportation expenses incurred in going
between an office in a taxpayer’s resi-
dence and other work locations were de-
ductible where the home office was the
taxpayer’s principal place of business
within the meaning of § 280A(c)(1)(A)
for the trade or business conducted by the
taxpayer at those other work locations.
The court stated that “[w]e see no reason
why the rule that local transportation ex-
penses incurred in travel between one
business location and another are de-
ductible should not be equally applicable
where the taxpayer’s principal place of
business with respect to the activities in-
volved is his residence.” 73 T.C. at 777–
778 (emphasis in original). Implicit in the
court’s analysis in Curpheyis that the de-
ductibility of daily transportation ex-
penses is determined on a business-by-
business basis.
Rev. Rul. 190, 1953–2 C.B. 303, pro-
vides a limited exception to the general
rule that the expenses of going between a
taxpayer’s residence and a work location
are nondeductible commuting expenses.
Rev. Rul. 190 deals with a taxpayer who
lives and ordinarily works in a particular
metropolitan area but who is not regularly
employed at any specific work location.
In such a case, the general rule is that
daily transportation expenses are not de-
ductible when paid or incurred by the tax-
payer in going between the taxpayer’s
residence and a temporarywork site in-
sidethat metropolitan area because that
area is considered the taxpayer’s regular
place of business. However, Rev. Rul.
190 holds that daily transportation ex-
penses are deductible business expenses
when paid or incurred in going between
the taxpayer’s residence and a temporary
work site outsidethat metropolitan area.
Rev. Rul. 90–23, 1990–1 C.B. 28, dis-
tinguishes Rev. Rul. 190 and holds, in
part, that, for a taxpayer who has one or
more regular places of business, daily
transportation expenses paid or incurred
in going between the taxpayer’s residence
and temporarywork locations are de-
ductible business expenses under
§ 162(a), regardless of the distance.
Rev. Rul. 94–47, 1994–2 C.B. 18, am-
plifies and clarifies Rev. Rul. 190 and
Rev. Rul. 90–23, and provides several
rules for determining whether daily trans-
portation expenses are deductible busi-
ness expenses under § 162(a). Under
Rev. Rul. 94–47, a taxpayer generally
may not deduct daily transportation ex-
penses incurred in going between the tax-
payer’s residence and a work location. A
taxpayer, however, may deduct daily
transportation expenses incurred in going
between the taxpayer’s residence and a
temporarywork location outside the met-
ropolitan area where the taxpayer lives
and normally works. In addition, Rev.
Rul. 94–47 clarifies Rev. Rul. 90–23 to
provide that a taxpayer must have at least
one regular place of business located
“away from the taxpayer’s residence” in
order to deduct daily transportation ex-
penses incurred in going between the tax-
payer’s residence and a temporarywork
location in the same trade or business, re-
gardless of the distance. In this regard,
Rev. Rul. 94–47 also states that the Ser-
vice will not follow the decision in
Walker v. Commissioner,101 T.C. 537
(1993). Finally, Rev. Rul. 94–47 ampli-
fies Rev. Rul. 190 and Rev. Rul. 90–23 to
provide that, if the taxpayer’s residence is
the taxpayer’s principal place of business
within the meaning of § 280A(c)(1)(A),
the taxpayer may deduct daily transporta-
tion expenses incurred in going between
the taxpayer’s residence and another work
location in the same trade or business, re-
gardless of whether the other work loca-
tion is regular or temporaryand regard-
less of the distance.
For purposes of both Rev. Rul. 90–23
and Rev. Rul. 94–47, a temporary work
location is defined as any location at
which the taxpayer performs services on
an irregular or short-term (i.e.,generally a
matter of days or weeks) basis. However,
for purposes of determining whether daily
transportation expense allowances and
per diem travel allowances for meal and
lodging expenses are subject to income
tax withholding under § 3402, Rev. Rul.
59–371, 1959–2 C.B. 236, provides a 1-
year standard to determine whether a
February 1, 199941999–5 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
IRB 1999-5 1/27/99 3:26 PM Page 4

work location is temporary.Similarly, for
purposes of determining the deductibility
of travel away-from-home expenses under
§ 162(a)(2), Rev. Rul. 93–86, 1993–2 C.B.
71, generally provides a 1-year standard to
determine whether a work location will be
treated as temporary.
The Service has reconsidered the defin-
ition of a temporarywork location in Rev.
Rul. 90–23 and Rev. Rul. 94–47, and will
replace the “irregular or short-term (i.e.,
generally a matter of days or weeks)
basis” standard in those rulings with a 1-
year standard similar to the rules set forth
in Rev. Rul. 59–371 and Rev. Rul. 93–86.
If an office in the taxpayer’s residence
satisfies the principal place of business re-
quirements of § 280A(c)(1)(A), then the
residence is considered a business loca-
tion for purposes of Rev. Rul. 90–23 or
Rev. Rul. 94–47. In these circumstances,
the daily transportation expenses incurred
in going between the residence and other
work locations in the same trade or busi-
ness are ordinary and necessary business
expenses (deductible under § 162(a)). See
Curphey; see also Wisconsin Psychiatric
Services v. Commissioner,76 T.C. 839
(1981). In contrast, if an office in the
taxpayer’s residence does not satisfy the
principal place of business requirements
of § 280A(c)(1)(A), then the business ac-
tivity there (if any) is not sufficient to
overcome the inherently personal nature
of the residence and the daily transporta-
tion expenses incurred in going between
the residence and regular work locations.
In these circumstances, the residence is
not considered a business location for pur-
poses of Rev. Rul. 90–23 or Rev. Rul.
94–47, and the daily transportation ex-
penses incurred in going between the resi-
dence and regular work locations are per-
sonal expenses (nondeductible under
§§ 1.162–2(e) and 1.262–1(b)(5)). See
Green v. Commissioner, 59 T.C. 456
(1972); Fryer v. Commissioner,T.C. M.
1974–77.
For purposes of determining the de-
ductibility of travel-away-from-home ex-
penses under §162(a)(2), Rev. Rul. 93–86
defines “home” as the “taxpayer’s regular
or principal (if more than one regular)
place of business.” See Daly v. Commis-
sioner,72 T.C. 190 (1979), aff’d, 662 F.2d
253 (4th Cir. 1981); Flowers v. Commis-
sioner,326 U.S. 465 (1946), 1946–1 C.B.
57.
HOLDING
In general, daily transportation ex-
penses incurred in going between a tax-
payer’s residence and a work location are
nondeductible commuting expenses.
However, such expenses are deductible
under the circumstances described in
paragraph (1), (2), or (3) below.
(1) A taxpayer may deduct daily trans-
portation expenses incurred in going be-
tween the taxpayer’s residence and a tem-
porarywork location outsidethe
metropolitan area where the taxpayer
lives and normally works. However, un-
less paragraph (2) or (3) below applies,
daily transportation expenses incurred in
going between the taxpayer’s residence
and a temporarywork location withinthat
metropolitan area are nondeductible com-
muting expenses.
(2) If a taxpayer has one or more regu-
lar work locations away from the tax-
payer’s residence, the taxpayer may
deduct daily transportation expenses in-
curred in going between the taxpayer’s
residence and a temporarywork location
in the same trade or business, regardless
of the distance. (The Service will con-
tinue not to follow the Walkerdecision.)
(3) If a taxpayer’s residence is the tax-
payer’s principal place of business within
the meaning of § 280A(c)(1)(A), the tax-
payer may deduct daily transportation ex-
penses incurred in going between the resi-
dence and another work location in the
same trade or business, regardless of
whether the other work location is regular
or temporaryand regardless of the dis-
tance.
For purposes of paragraphs (1), (2), and
(3), the following rules apply in determin-
ing whether a work location is temporary.
If employment at a work location is real-
istically expected to last (and does in fact
last) for 1 year or less, the employment is
temporaryin the absence of facts and cir-
cumstances indicating otherwise. If em-
ployment at a work location is realisti-
cally expected to last for more than 1 year
or there is no realistic expectation that the
employment will last for 1 year or less,
the employment is not temporary,regard-
less of whether it actually exceeds 1 year.
If employment at a work location initially
is realistically expected to last for 1 year
or less, but at some later date the employ-
ment is realistically expected to exceed 1
year, that employment will be treated as
temporary (in the absence of facts and cir-
cumstances indicating otherwise) until the
date that the taxpayer’s realistic expecta-
tion changes, and will be treated as not
temporaryafter that date.
The determination that a taxpayer’s
residence is the taxpayer’s principal place
of business within the meaning of
§ 280A(c)(1)(A) is not necessarily deter-
minative of whether the residence is the
taxpayer’s tax home for other purposes,
including the travel-away-from-home de-
duction under § 162(a)(2).
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 190 and Rev. Rul. 59–371 are
obsoleted. Rev. Rul. 90–23 and Rev. Rul
94–47 are modified (regarding the defini-
tion of temporarywork location) and su-
perseded. With respect to issues (2) and
(3) in Rev. Rul. 90–23 (regarding the gross
income and employment tax treatment of
reimbursements for employee daily trans-
portation expenses), see § 1.62–2 regard-
ing reimbursements in general, and Rev.
Proc. 97-58 (particularly sections 3, 9, and
10), 1997–2 C.B. 587 (or any successor),
regarding reimbursements using the op-
tional business standard mileage rate.
Rev. Rul. 93–86 is distinguished.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Edwin B. Cleverdon of the Of-
fice of Assistant Chief Counsel (Income
Tax and Accounting). For further infor-
mation regarding this revenue ruling, con-
tact Mr. Cleverdon at (202) 622-4920 (not
a toll-free call).
Section 195.—Start-up
Expenditures
26 CFR 1.195–1: Election to amortize start-up
expenditures.
T.D. 8797
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Election to Amortize Start-Up
Expenditures for Active Trades
or Businesses
1999–5 I.R.B5February 1, 1999
IRB 1999-5 1/27/99 3:26 PM Page 5

AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations concerning start-up ex-
penditures for active trades or businesses
under section 195. These regulations are
necessary to provide rules and procedures
for electing to amortize start-up expendi-
tures under section 195. They affect all
taxpayers wishing to amortize start-up ex-
penditures under section 195.
DATES: Effective Date:These regula-
tions are effective December 17, 1998.
Applicability Date:For the date of ap-
plicability of these regulations, see
§1.195–1(d).
FOR FURTHER INFORMATION CON-
TACT: David Selig, (202) 622-3040 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–1582.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
The estimated annual burden per re-
spondent varies from .10 hours to .50
hours, depending on individual circum-
stances, with an estimated average of .25
hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service,Attn: IRS
Reports Clearance Officer, PC:FP, Wash-
ington, DC 20224, and to the Office of
Management and Budget,Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503.
Books or records relating to this collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
Section 195 was added to the Internal
Revenue Code of 1954 by section 102 of
the Miscellaneous Revenue Act of 1980,
and was amended by section 94 of the Tax
Reform Act of 1984.
Section 195 generally provides that no
deduction is allowed for start-up expendi-
tures unless the taxpayer elects to amor-
tize the expenditures. Under section
195(b)(1), if the taxpayer elects to amor-
tize start-up expenditures, the expendi-
tures are amortizable over a period of not
less than 60 months beginning with the
month in which the active trade or busi-
ness begins. Section 195(d) provides that
an election to amortize start-up expendi-
tures must be made not later than the time
prescribed by law for filing the return for
the taxable year in which the active trade
or business begins (including extensions
thereof).
On January 13, 1998, the IRS pub-
lished a notice of proposed rulemaking
[REG–209373–81, 1998–14 I.R.B. 26] in
the Federal Register(63 F.R. 1933)
proposing amendments to the Income Tax
Regulations (26 CFR part 1) concerning
the election to amortize start-up expendi-
tures under section 195 of the Internal
Revenue Code. A public hearing was
scheduled for June 2, 1998, pursuant to a
notice of public hearing published simul-
taneously with the notice of proposed
rulemaking. No one requested to speak at
the public hearing, therefore, no public
hearing was held. Written comments re-
sponding to the notice were received.
After consideration of all of the com-
ments, the proposed regulations are
adopted as revised by this Treasury deci-
sion.
Explanation of Revisions and Discussion
of Comments
The proposed regulations provide that
an election to amortize start-up expendi-
tures is made by attaching a statement to
the taxpayer’s income tax return. The in-
come tax return and statement must be
filed not later than the date prescribed by
law for filing the income tax return (in-
cluding any extensions of time) for the
taxable year in which the active trade or
business begins. Thus, a taxpayer may
file an election for any taxable year prior
to the year in which the taxpayer’s active
trade or business begins, and such elec-
tion will become effective in the month of
the year in which the taxpayer’s active
trade or business begins.
One commentator suggested that the
provision in the proposed regulations per-
mitting the filing of a revised statement to
include any start-up expenditures not in-
cluded in the taxpayer’s original election
statement appears to endorse the practice
of those taxpayers who file elections list-
ing token or zero start-up expenditures on
the election statement and subsequently
attempt to increase the amount subject to
amortization by expenditures that taxpay-
ers have been unsuccessful in maintaining
as expansion costs. The provision is not
designed to permit a taxpayer to revise the
election statement to include start-up ex-
penditures omitted by reason of the tax-
payer’s claim on the taxpayer’s return that
the expenditures are expansion costs. Ac-
cordingly, the regulations have been clari-
fied to provide that the election statement
may not be revised to include expendi-
tures that a taxpayer has treated on the
taxpayer’s tax return in a manner incon-
sistent with their treatment as start-up ex-
penditures.
Another commentator suggested that a
separate statement to make the election
under section 195 should not be required
for small businesses, but rather a check-
the-box election should be provided. A
separate statement is necessary to ensure
that the expenses listed therein are prop-
erly characterized as start-up expendi-
tures, and that amortization of the start-up
expenditures will begin and end at the
proper times. The statement is simple to
complete and the time to prepare the
statement is minimal. Accordingly, the
final regulations retain the requirement
that a separate statement with the requi-
site information be attached to the tax-
payer’s return.
Special Analyses
has been determined that this Treasury
decision is not a significant regulatory ac-
tion as defined in EO 12866. Therefore, a
regulatory assessment is not required. It
February 1, 199961999–5 I.R.B.
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1999–5 I.R.B7February 1, 1999
is hereby certified that these regulations
do not have a significant impact on a sub-
stantial number of small entities. This
certification is based upon the fact that the
time required to prepare and file the elec-
tion statement is minimal and will not
have a significant impact on those small
entities that choose to make the election.
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 Inter-
nal Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is David Selig, Office of the Assis-
tant Chief Counsel (Passthroughs and
Special Industries), IRS. However, other
personnel from the IRS and Treasury De-
partment participated in their develop-
ment.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.195–1 is added to
read as follows:
§1.195–1 Election to amortize start-up
expenditures.
(a) In general.Under section 195(b), a
taxpayer may elect to amortize start-up
expenditures (as defined in section
195(c)(1)). A taxpayer who elects to
amortize start-up expenditures must, at
the time of the election, select an amorti-
zation period of not less than 60 months,
beginning with the month in which the ac-
tive trade or business begins. The elec-
tion applies to all of the taxpayer’s start-
up expenditures with respect to the trade
or business. The election to amortize
start-up expenditures is irrevocable, and
the amortization period selected by the
taxpayer in making the election may not
subsequently be changed.
(b) Time and manner of making elec-
tion. The election to amortize start-up ex-
penditures under section 195 shall be
made by attaching a statement containing
the information described in paragraph (c)
of this section to the taxpayer’s return.
The statement must be filed no later than
the date prescribed by law for filing the
return (including any extensions of time)
for the taxable year in which the active
trade or business begins. The statement
may be filed with a return for any taxable
year prior to the year in which the tax-
payer’s active trade or business begins,
but no later than the date prescribed in the
preceding sentence. Accordingly, an elec-
tion under section 195 filed for any tax-
able year prior to the year in which the
taxpayer’s active trade or business begins
(and pursuant to which the taxpayer com-
menced amortizing start-up expenditures
in that prior year) will become effective in
the month of the year in which the tax-
payer’s active trade or business begins.
(c) Information required. The state-
ment shall set forth a description of the
trade or business to which it relates with
sufficient detail so that expenses relating
to the trade or business can be identified
properly for the taxable year in which the
statement is filed and for all future taxable
years to which it relates. The statement
also shall include the number of months
(not less than 60) over which the expendi-
tures are to be amortized, and to the ex-
tent known at the time the statement is
filed, a description of each start-up expen-
diture incurred (whether or not paid) and
the month in which the active trade or
business began (or was acquired). A re-
vised statement may be filed to include
any start-up expenditures not included in
the taxpayer’s original election statement,
but the revised statement may not include
any expenditures for which the taxpayer
had previously taken a position on a re-
turn inconsistent with their treatment as
start-up expenditures. The revised state-
ment may be filed with a return filed after
the return that contained the election.
(d) Effective date.This section applies
to elections filed on or after December 17,
1998.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 4. In §602.101, paragraph (c) is
amended by adding an entry to the table
in numerical order to read as follows:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section Current OMB
where identified control No.
and described
* * * * *
1.195–1 . . . . . . . . . . . . . . . . . 1545–1582
* * * * *
Bob Wenzel,
Deputy Commissioner of
Internal Revenue.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on De-
cember 16, 1998, 8:45 a.m., and published in the
issue of the Federal Register for December 17, 1998,
63 F.R. 69554)
Section 262.—Personal, Living,
and Family Expenses
26 CFR 1.262–1: Personal, living, and family
expenses.
For the rules to determine whether daily trans-
portation expenses incurred by a taxpayer are de-
ductible business expenses under § 162(a), see Rev.
Rul. 99–7, page 4.
Section 664.—Charitable
Remainder Trusts
26 CFR 1.664–1: Charitable remainder trusts.
T.D. 8791
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 25, and 602
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Guidance Regarding Charitable
Remainder Trusts and Special
Valuation Rules for Transfers of
Interests in Trusts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to charitable re-
mainder trusts and to special valuation
rules for transfers of interests in trusts.
The final regulations provide additional
guidance regarding charitable remainder
trusts. The final regulations affect chari-
table remainder trusts and their beneficia-
ries.
DATES: Effective date:These regula-
tions are effective December 10, 1998.
Applicability dates:For dates of ap-
plicability of these regulations, see the ex-
planations under SUPPLEMENTARY
INFORMATION.
FOR FURTHER INFORMATION CON-
TACT: Mary Beth Collins or Jeff Erick-
son, (202) 622-3080 (not a toll-free num-
ber).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 1545-
1536. Responses to this collection of in-
formation are required to allow taxpayers
alternative means of valuing a charitable
remainder trust’s unmarketable assets.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
The estimated annual burden per re-
spondent varies from .25 to .75 hours, de-
pending on individual circumstances,
with an estimated average of .5 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service,Attn: IRS
Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and to the Office
of Management and Budget,Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503.
Books or records relating to this collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On April 18, 1997, the IRS published in
the Federal Register(62 F.R. 19072) a
notice of proposed rulemaking (REG–
209823–96, 1997–1 C.B. 763) regarding
sections 664 and 2702. Comments re-
sponding to the proposed regulations
were received, and a public hearing was
held on November 18, 1997. After con-
sidering the comments received and the
statements made at the public hearing, the
proposed regulations are adopted as re-
vised by this Treasury decision.
Explanation of Provisions
This document amends 26 CFR parts 1
and 25 to provide additional rules under
sections 664 and 2702. Section 664 con-
tains the rules for charitable remainder
trusts (CRTs). In general, a CRT provides
for a specified periodic distribution to one
or more beneficiaries (at least one of
whom is a noncharitable beneficiary) for
life or for a term of years with an irrevo-
cable remainder interest held for the bene-
fit of charity.
There are two types of CRTs: a charita-
ble remainder annuity trust (CRAT) and a
charitable remainder unitrust (CRUT). A
CRAT pays a sum certain at least annually
to the beneficiaries (the annuity amount).
A CRUT pays a unitrust amount at least
annually to the beneficiaries. Generally,
the unitrust amount is a fixed percentage
of the net fair market value of the CRUT’s
assets valued annually (fixed percentage
CRUT). The unitrust amount can instead
be calculated under one of two income
exception methods (income exception
CRUT). Under the first method, the uni-
trust amount is the lesser of the fixed per-
centage amount or the trust’s annual net
income (net income method). Under the
second method, the unitrust amount is de-
termined 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
payments from prior years when the trust
income was less than the fixed percentage
amount (NIMCRUT method). The short-
fall in payments from prior years is com-
monly referred to as the “make-up
amount.”
The revisions to the proposed regula-
tions are discussed below.
I. Flip Unitrusts
A. Triggering Events
The proposed regulations provide spe-
cific rules for when a trust may convert
from one of the income exception meth-
ods of computing the unitrust amount to
the fixed percentage method (flip uni-
trust). The proposed rule was designed
for taxpayers who ultimately wanted the
unitrust amount to be computed on the
fixed percentage method but funded the
trust with unmarketable assets that gener-
ate little annual income. A number of
commentators agreed with the policy un-
derlying the proposed rule. Some com-
mentators requested that we permit flip
unitrusts for all income exception CRUTs
regardless of the marketability of the trust
assets. Other commentators suggested
that the final regulations clarify whether
the proposed rule was a safe harbor or the
exclusive circumstance for which a flip
unitrust would be permitted.
In response, the final regulations ex-
pand the availability of the flip unitrust to
certain other situations that the IRS and
Treasury believe are consistent with the
legislative history indicating that a trustee
should not have discretion to change the
method used to calculate the unitrust
amount. H.R. Conf. Rep. No. 782, 91st
Cong., 1st Sess. 296 (1969), 1969–3 C.B.
644, 655.
The final regulations allow the govern-
ing instrument of a CRUT to provide that
the CRUT will convert once from one of
the income exception methods to the
fixed percentage method for calculating
the unitrust amount if the date or event
triggering the conversion is outside the
control of the trustees or any other per-
sons. The final regulations include exam-
ples of permissible and impermissible
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triggering events. For example, permissi-
ble triggering events with respect to any
individual include marriage, divorce,
death, or birth of a child. Also, the sale of
an unmarketable asset such as real estate
is a permissible triggering event. Exam-
ples of impermissible triggering events
include the sale of marketable assets and a
request from the unitrust recipient or the
unitrust recipient’s financial advisor that
the trust convert to the fixed percentage
method.
The final regulations also provide that
the conversion to the fixed percentage
method occurs at the beginning of the tax-
able year that immediately follows the
taxable year in which the triggering date
or event occurs. Any make-up amount
described in section 664(d)(3)(B) is for-
feited when the trust converts to the fixed
percentage method.
The proposed regulations define un-
marketable assets as assets other than
cash, cash equivalents, or marketable se-
curities (within the meaning of section
731(c)). Commentators asked for clarifi-
cation of the term unmarketable assets
and recommended changing the scope of
this class of assets. In response, the final
regulations define unmarketable assets as
assets other than cash, cash equivalents,
or assets that can be readily sold or ex-
changed for cash or cash equivalents. For
example, unmarketable assets include real
property, closely-held stock, and unregis-
tered securities for which there is no
available exemption permitting public
sale.
Commentators requested that the final
regulations permit conversions from the
fixed percentage method to one of the in-
come exception methods and conversions
from a CRAT to a CRUT. The flip uni-
trust allowed in the final regulations is the
only type of permissible conversion.
Thus, a CRAT cannot convert to a CRUT
without losing its status as a CRT. Simi-
larly, a CRUT using the fixed percentage
method cannot convert to an income ex-
ception method without losing its status
as a CRT.
B. Effective Date and Transitional Rules
The rules for flip unitrusts are effective
for CRUTs created on or after December
10, 1998. The proposed regulations al-
lowed reformations in limited circum-
stances. In response to comments, the
final regulations expand the circum-
stances in which reformation is available.
The final regulations allow income excep-
tion CRUTs to be reformed to add provi-
sions allowing a conversion to the fixed
percentage method provided the trigger-
ing event does not occur in a year prior to
the year in which the court issues the
order reforming the trust. Adding the
conversion provisions will not cause the
CRUT to fail to function exclusively as a
CRT and will not be an act of self-dealing
under section 4941 if the trustee initiates
legal proceedings to reform the trust by
June 8, 1999.
II. Time for Paying the Annuity Amount
or the Unitrust Amount
The proposed regulations provide that
the payment 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. The rules were proposed in response
to abuses associated with the use of accel-
erated CRTs described in Notice 94–78
(1994–2 C.B. 555). After receiving a sig-
nificant number of comments on the pro-
posed rules, the IRS issued Notice 97–68
(1997–48 I.R.B. 11), which provided
guidance on complying with the proposed
rules for the 1997 taxable year.
One commentator recommended ap-
plying the proposed rules only to trusts
created after the date the final regulations
are published. Another commentator sug-
gested adopting the rules in Notice 97–68
for all trusts created after a certain date.
Although recent legislative changes have
reduced the potential tax benefits of ac-
celerated CRTs, the IRS and Treasury
continue to be concerned about the poten-
tial abuse of the post-year-end grace pe-
riod to produce a tax-free return of appre-
ciation in the assets contributed to a
CRAT or a fixed percentage CRUT.
Therefore, the final regulations adopt
rules similar to those in Notice 97–68
with certain modifications. The rules are
effective for taxable years ending after
April 18, 1997.
For CRATs and fixed percentage
CRUTs, the annuity or unitrust amount
may be paid within a reasonable time
after the close of the year for which it is
due if (a) the character of the annuity or
unitrust amount in the recipient’s hands is
income under section 664(b)(1), (2), or
(3); and/or (b) the trust distributes prop-
erty (other than cash) that it owned as of
the close of the taxable year to pay the an-
nuity or unitrust amount and the trustee
elects on Form 5227, “Split-Interest Trust
Information Return,” to treat any income
generated by the distribution as occurring
on the last day of the taxable year for
which the amount is due. In addition, for
CRATs and fixed percentage CRUTs that
were created before December 10, 1998,
the annuity or unitrust amount may be
paid within a reasonable time after the
close of the taxable year for which it is
due if the percentage used to calculate the
annuity or unitrust amount is 15 percent
or less.
III. Appraising Unmarketable Assets
Under section 664(d)(2)(A), a CRUT
must value its assets annually. The pro-
posed regulations provide that, if a CRT
holds unmarketable assets and the only
trustee is the grantor, a noncharitable ben-
eficiary, or a related or subordinate party
to the grantor or the noncharitable benefi-
ciary within the meaning of section
672(c) and the applicable regulations, the
trustee must value those assets using 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).
The final regulations follow the pro-
posed regulations and provide that the
trust’s unmarketable assets must be val-
ued by an independent trustee, or by a
qualified appraisal from a qualified ap-
praiser. The proposed regulations define
an independent trustee as a person who is
not the grantor, a noncharitable benefi-
ciary or a related or subordinate party to
the grantor, or the noncharitable benefi-
ciary within the meaning of section
672(c) and the applicable regulations.
The final regulations add the grantor’s
spouse to the list of persons to whom an
independent trustee cannot be related or
subordinate. A co- trustee who is an inde-
pendent trustee may value the trust’s un-
marketable assets.
Finally, in response to comments, the
final regulations define unmarketable as-
sets as assets other than cash, cash equiv-
alents, or assets that can be readily sold or
exchanged for cash or cash equivalents.
For example, unmarketable assets include
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real property, closely-held stock, and un-
registered securities for which there is no
available exemption permitting public
sale.
The rules for valuing unmarketable as-
sets are effective for trusts created on or
after December 10, 1998.
IV. Application of Section 2702 to
Certain CRUTs
Under the proposed regulations, uni-
trust interests in an income exception
CRUT that are retained by the donor or
any applicable family member will be val-
ued at zero when a noncharitable benefi-
ciary of the trust is someone other than (1)
the donor, (2) the donor’s U.S. citizen
spouse, or (3) both the donor and the
donor’s U.S. citizen spouse. Commenta-
tors stated that income exception CRUTs
without a make-up provision should be
exempt from section 2702. The IRS and
Treasury believe that, in addition to the
NIMCRUT method, the net income
method can be used to circumvent the in-
tent of section 2702. Therefore, the final
regulations do not exempt from section
2702 CRUTs that use only the net income
method.
Commentators also stated that the pro-
posed rule encompassed other transfers
that section 2702 was not intended to in-
clude. A commentator noted that the pro-
posed rule would value a transferor’s in-
terest at zero even though the transferor
merely retained a secondary life estate.
The final regulations clarify that section
2702 will not apply when there are only
two consecutive noncharitable beneficial
interests and the transferor holds the sec-
ond of the two interests.
Commentators also asked whether sec-
tion 2702 may apply to flip unitrusts. The
potential abuse associated with income
exception CRUTs also exists with flip
unitrusts. Therefore, under the final regu-
lations, section 2702 applies to a flip uni-
trust if the CRUT does not fall within one
of the exemptions.
V. Prohibition on Allocating
Precontribution Gain to Trust Income
and Make-up Amount as a Liability
The proposed 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 as-
sets when contributed to the trust, must be
allocated to trust principal. Some com-
mentators stated that the rule is inconsis-
tent with the rule concerning income
under section 643(b). Other commenta-
tors questioned whether the make-up
amount under the NIMCRUT method
should be treated as a liability when valu-
ing the trust’s assets.
The final regulations maintain the pro-
hibition on allocating precontribution
gain to trust income for an income excep-
tion CRUT. However, the governing in-
strument, if permitted under applicable
local law, may allow the allocation of
post-contribution capital gains to trust in-
come. Taxpayers do not have to treat the
make-up amount as a liability when valu-
ing the assets of a NIMCRUT.
VI. Example Illustrating Rule for
Characterizing Distributions from
CRUTs
The proposed regulations contain an
example of how the ordering rule under
section 664(b) operates when the unitrust
amount is computed under an income ex-
ception method. No comments were re-
ceived on this example. Thus, the final
regulations adopt the example without
any changes.
Effect on Other Documents
Notice 97–68 (1997–48 I.R.B. 11) is
obsolete as of December 10, 1998.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
the regulation does not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a
Regulatory Flexibility Analysis is not re-
quired. Pursuant to section 7805(f), the
notice of proposed rulemaking preceding
these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal authors of these regula-
tions are Mary Beth Collins and Jeff Er-
ickson, Office of the Assistant Chief
Counsel (Passthroughs and Special Indus-
tries), IRS. However, other personnel
from offices of the IRS and Treasury De-
partment participated in their develop-
ment.
*****
Adoption of Amendments to the
Regulations
Accordingly, CFR parts 1, 25, and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation 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)
and (d)(1)(iii) are added, and paragraph
(f)(4) is added following the concluding
text of paragraph (f)(3) to read as follows:
§1.664–1 Charitable remainder trusts.
(a) * * *
(7) Valuation of unmarketable assets—
(i) In general.If unmarketable assets are
transferred to or held by a trust, the trust
will not be a trust with respect to which a
deduction is available under section 170,
2055, 2106, or 2522, or will be treated as
failing to function exclusively as a chari-
table remainder trust unless, whenever the
trust is required to value such assets, the
valuation is—
(a) Performed exclusively by an inde-
pendent trustee; or
(b) Determined by a current qualified
appraisal,as defined in §1.170A–13(c)-
(3), from a qualified appraiser,as defined
in §1.170A–13(c)(5).
(ii) Unmarketable assets. Unmarket-
able assets are assets that are not cash,
cash equivalents, or other assets that can
be readily sold or exchanged for cash or
cash equivalents. For example, unmar-
ketable assets include real property,
closely-held stock, and an unregistered
security for which there is no available
exemption permitting public sale.
(iii) Independent trustee.An indepen-
dent trustee is a person who is not the
grantor of the trust, a noncharitable bene-
February 1, 1999101999–5 I.R.B.
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ficiary, or a related or subordinate party to
the grantor, the grantor’s spouse, or a non-
charitable beneficiary (within the mean-
ing of section 672(c) and the applicable
regulations).
* * * * *
(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 section 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), 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 of X’s income for
1996 is tax-exempt income. At the end of 1996, X’s
ordinary income for the current taxable year and
undistributed 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; and X’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 undis-
tributed 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 undis-
tributed capital gain for prior years is reduced to
$22,500, and X’s undistributed tax-exempt income is
increased to $10,000.
* * * * *
(f) * * *
(4) Valuation of unmarketable assets.
The rules contained in paragraph (a)(7) of
this section are applicable for trusts cre-
ated on or after December 10, 1998. A
trust in existence as of December 10,
1998, whose governing instrument re-
quires that an independent trustee value
the trust’s unmarketable assets may be
amended or reformed to permit a valua-
tion method that satisfies the require-
ments of paragraph (a)(7) of this section
for taxable years beginning on or after
December 10, 1998.
* * * * *
Par. 3. In §1.664–2, paragraph (a)(1)(i)
is revised to read as follows:
§1.664–2 Charitable remainder annuity
trust.
(a) * * *
(1) * * * (i) Payment of sum certain at
least annually. The governing instrument
provides that the trust will pay a sum cer-
tain not less often than annually to a per-
son 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.
(a) General rule applicable to all
trusts. A trust will not be deemed to have
engaged in an act of self-dealing (within
the meaning of section 4941), to have un-
related 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 function exclusively
as a charitable remainder trust (within the
meaning of §1.664–1(a)(4)) merely be-
cause the annuity amount is paid after the
close of the taxable year if such payment
is made within a reasonable time after the
close of such taxable year and the entire
annuity amount in the hands of the recipi-
ent is characterized only as income from
the categories described in section
664(b)(1), (2), or (3), except to the extent
it is characterized as corpus described in
section 664(b)(4) because—
(1) The trust distributes property (other
than cash) that it owned at the close of the
taxable year to pay the annuity amount;
and
(2) The trustee elects to treat any in-
come generated by the distribution as oc-
curring on the last day of the taxable year
in which the annuity amount is due.
(b) Special rule for trusts created be-
fore December 10, 1998. In addition, to
the circumstances described in paragraph
(a)(1)(i)(a) of this section, a trust created
before December 10, 1998, will not be
deemed to have engaged in an act of self-
dealing (within the meaning of section
4941), to have unrelated debt-financed in-
come (within the meaning of section
514), to have received an additional con-
tribution (within the meaning of para-
graph (b) of this section), or to have failed
to function exclusively as a charitable re-
mainder trust (within the meaning of
§1.664–1(a)(4)) merely because the annu-
ity amount is paid after the close of the
taxable year if such payment is made
within a reasonable time after the close of
such taxable year and the sum certain to
be paid each year as the annuity amount is
15 percent or less of the initial net fair
market value of the property irrevocably
passing in trust as determined for federal
tax purposes.
(c) Reasonable time.For this para-
graph (a)(1)(i), a reasonable time will not
ordinarily extend beyond the date by
which the trustee is required to file Form
5227, “Split-Interest Trust Information
Return,” (including extensions) for the
taxable year.
(d) Example.The following example
illustrates the rules in paragraph (a)(1)-
(i)(a) of this section:
Example. Xis a charitable remainder annuity
trust described in section 664(d)(1) that was created
after December 10, 1998. The prorated annuity
amount payable from Xfor Year 1 is $100. The
trustee does not pay the annuity amount to the recip-
ient by the close of Year 1. At the end of Year 1, X
has only $95 in the ordinary income category under
section 664(b)(1) and no income in the capital gain
or tax-exempt income categories under section
664(b)(2) or (3), respectively. By April 15 of Year 2,
in addition to $95 in cash, the trustee distributes to
the recipient of the annuity a capital asset with a $5
fair market value and a $2 adjusted basis to pay the
$100 annuity amount due for Year 1. The trust
owned the asset at the end of Year 1. Under §1.664–
1(d)(5), the distribution is treated as a sale by X, re-
sulting in Xrecognizing a $3 capital gain. The
trustee elects to treat the capital gain as occurring on
the last day of Year 1. Under §1.664–1(d)(1), the
character of the annuity amount for Year 1 in the re-
cipient’s hands is $95 of ordinary income, $3 of cap-
ital gain income, and $2 of trust corpus. For Year 1,
Xsatisfied paragraph (a)(1)(i)(a) of this section.
(e) Effective date.This paragraph
(a)(1)(i) is applicable 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)-
(b)(4), (a)(1)(i)(b)(5), and (a)(1)(i)(c)
through (a)(1)(i)(l) are added.
3. The third sentence of paragraph
(a)(1)(iv) is revised.
The added and revised provisions read
as follows:
§1.664–3 Charitable remainder unitrust.
(a) * * *
(1) * * * (i) * * * (a) General rule. The
governing instrument provides that the
trust will pay not less often than annually
a fixed percentage of the net fair market
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value of the trust assets determined annu-
ally 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. This
paragraph (a)(1)(i)(a) is applicable for
taxable years ending after April 18, 1997.
(b) * * *
(1) The amount of trust income for a
taxable year to the extent that such
amount is not more than the amount re-
quired to be distributed under paragraph
(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
paragraph (a)(1)(i)(a) of this section for
such year to the extent that (by reason of
paragraph (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 regula-
tions.
(4) For this paragraph (a)(1)(i)(b), pro-
ceeds from the sale or exchange of any as-
sets 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.
(5) The rules in paragraphs (a)(1)(i)(b)-
(1), (2), and (3) of this section are applica-
ble for taxable years ending after
April 18, 1997, and the rule in para-
graph (a)(1)(i)(b)(4) of this section is ap-
plicable for sales or exchanges that occur
after April 18, 1997.
(c) Combination of methods. Instead
of the amount described in paragraph
(a)(1)(i)(a) or (b) of this section, the gov-
erning instrument may provide that the
trust will pay not less often than annually
the amount described in paragraph
(a)(1)(i)(b) of this section for an initial pe-
riod and then pay the amount described in
paragraph (a)(1)(i)(a) of this section (cal-
culated using the same fixed percentage)
for the remaining years of the trust only if
the governing instrument provides that—
(1) The change from the method pre-
scribed in paragraph (a)(1)(i)(b) of this
section to the method prescribed in para-
graph (a)(1)(i)(a) of this section is trig-
gered on a specific date or by a single
event whose occurrence is not discre-
tionary with, or within the control of, the
trustees or any other persons;
(2) The change from the method pre-
scribed in paragraph (a)(1)(i)(b) of this
section to the method prescribed in para-
graph (a)(1)(i)(a) of this section occurs at
the beginning of the taxable year that im-
mediately follows the taxable year during
which the date or event specified under
paragraph (a)(1)(i)(c)(1) of this section
occurs; and
(3) 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 re-
cipients 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.
(d) Triggering event.For purposes of
paragraph (a)(1)(i)(c)(1) of this section, a
triggering event based on the sale of un-
marketable assets as defined in §1.664–
1(a)(7)(ii), or the marriage, divorce,
death, or birth of a child with respect to
any individual will not be considered dis-
cretionary with, or within the control of,
the trustees or any other persons.
(e) Examples.The following examples
illustrate the rules in paragraph (a)(1)-
(i)(c) of this section. For each example,
assume that the governing instrument of
charitable remainder unitrust Yprovides
that Ywill initially pay not less often than
annually the amount described in para-
graph (a)(1)(i)(b) of this section 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 and that the
requirements of paragraphs (a)(1)(i)(c)(2)
and (3) of this section are satisfied. The
examples are as follows:
Example 1. Yis funded with the donor’s former
personal residence. The governing instrument of Y
provides for the change in method for computing the
annual unitrust amount as of the first day of the year
following the year in which the trust sells the resi-
dence. Yprovides for a combination of methods that
satisfies paragraph (a)(1)(i)(c) of this section.
Example 2. Yis funded with cash and an unregis-
tered security for which there is no available exemp-
tion permitting public sale under the Securities and
Exchange Commission rules. The governing instru-
ment of Yprovides that the change in method for
computing the annual unitrust amount is triggered on
the earlier of the date when the stock is sold or at the
time the restrictions on its public sale lapse or are oth-
erwise lifted. Y provides for a combination of meth-
ods that satisfies paragraph (a)(1)(i)(c) of this section.
Example 3. Yis funded with cash and with a se-
curity that may be publicly traded under the Securi-
ties and Exchange Commission rules. The govern-
ing instrument of Yprovides that the change in
method for computing the annual unitrust amount is
triggered when the stock is sold. Ydoes not provide
for a combination of methods that satisfies the re-
quirements of paragraph (a)(1)(i)(c) of this section
because the sale of the publicly-traded stock is
within the discretion of the trustee.
Example 4. S establishes Y for her granddaughter,
G,when G is 10 years old. The governing instrument
of Y provides for the change in method for computing
the annual unitrust amount as of the first day of the
year following the year in which G turns 18 years old.
Y provides for a combination of methods that satisfies
paragraph (a)(1)(i)(c) of this section.
Example 5. The governing instrument of Y pro-
vides for the change in method for computing the
annual unitrust amount as of the first day of the year
following the year in which the donor is married. Y
provides for a combination of methods that satisfies
paragraph (a)(1)(i)(c) of this section.
Example 6. The governing instrument of Y pro-
vides that if the donor divorces, the change in
method for computing the annual unitrust amount
will occur as of the first day of the year following
the year of the divorce. Y provides for a combina-
tion of methods that satisfies paragraph (a)(1)(i)(c)
of this section.
Example 7. The governing instrument of Y pro-
vides for the change in method for computing the
annual unitrust amount as of the first day of the year
following the year in which the noncharitable bene-
ficiary’s first child is born. Y provides for a combi-
nation of methods that satisfies paragraph
(a)(1)(i)(c) of this section.
Example 8.The governing instrument of Y pro-
vides for the change in method for computing the
annual unitrust amount as of the first day of the year
following the year in which the noncharitable bene-
ficiary’s father dies. Y provides for a combination of
methods that satisfies paragraph (a)(1)(i)(c) of this
section.
Example 9.The governing instrument of Y pro-
vides for the change in method for computing the an-
nual unitrust amount as of the first day of the year
following the year in which the noncharitable benefi-
ciary’s financial advisor determines that the benefi-
ciary should begin receiving payments under the sec-
ond prescribed payment method. Because the
change in methods for paying the unitrust amount is
triggered by an event that is within a person’s con-
trol, Y does not provide for a combination of methods
that satisfies paragraph (a)(1)(i)(c) of this section.
Example 10.The governing instrument of Ypro-
vides for the change in method for computing the
annual unitrust amount as of the first day of the year
following the year in which the noncharitable bene-
ficiary submits a request to the trustee that the trust
convert to the second prescribed payment method.
Because the change in methods for paying the uni-
trust amount is triggered by an event that is within a
person’s control, Ydoes not provide for a combina-
tion of methods that satisfies paragraph (a)(1)(i)(c)
of this section.
(f) Effective date—(1) General rule.
Paragraphs (a)(1)(i)(c), (d), and (e) of this
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section are applicable for charitable re-
mainder trusts created on or after Decem-
ber 10, 1998.
(2) General rule regarding reforma-
tions of combination of method unitrusts.
If a trust is created on or after December
10, 1998, and contains a provision allow-
ing a change in calculating the unitrust
amount that does not comply with the
provisions of paragraph (a)(1)(i)(c) of this
section, the trust will qualify as a charita-
ble remainder unitrust only if it is
amended or reformed to use the initial
method for computing the unitrust
amount throughout the term of the trust,
or is reformed in accordance with para-
graph (a)(1)(i)(f)(3) of this section. If a
trust was created before December 10,
1998, and contains a provision allowing a
change in calculating the unitrust amount
that does not comply with the provisions
of paragraph (a)(1)(i)(c) of this section,
the trust may be reformed to use the initial
method for computing the unitrust
amount throughout the term of the trust
without causing the trust to fail to func-
tion exclusively as a charitable remainder
unitrust under §1.664–1(a)(4), or may be
reformed in accordance with paragraph
(a)(1)(i)(f)(3) of this section. Except as
provided in paragraph (a)(1)(i)(f)(3) of
this section, a qualified charitable remain-
der unitrust will not continue to qualify as
a charitable remainder unitrust if it is
amended or reformed to add a provision
allowing a change in the method for cal-
culating the unitrust amount.
(3) Special rule for reformations of
trusts that begin by June 8, 1999. Not-
withstanding paragraph (a)(1)(i)(f)(2) of
this section, if a trust either provides for
payment of the unitrust amount under a
combination of methods that is not per-
mitted under paragraph (a)(1)(i)(c) of this
section, or provides for payment of the
unitrust amount under only the method
prescribed in paragraph (a)(1)(i)(b) of this
section, then the trust may be reformed to
allow for a combination of methods per-
mitted under paragraph (a)(1)(i)(c) of this
section without causing the trust to fail to
function exclusively as a charitable re-
mainder unitrust under §1.664–1(a)(4) or
to engage in an act of self-dealing under
section 4941 if the trustee begins legal
proceedings to reform by June 8, 1999.
The triggering event under the reformed
governing instrument may not occur in a
year prior to the year in which the court
issues the order reforming the trust, except
for situations in which the governing in-
strument prior to reformation already pro-
vided for payment of the unitrust amount
under a combination of methods that is not
permitted under paragraph (a)(1)(i)(c) of
this section and the triggering event oc-
curred prior to the reformation.
(g) Payment under general rule for
fixed percentage trusts.When the uni-
trust amount is computed under paragraph
(a)(1)(i)(a) of this section, a trust will not
be deemed to have engaged in an act of
self-dealing (within the meaning of sec-
tion 4941), to have unrelated debt-fi-
nanced income (within the meaning of
section 514), to have received an addi-
tional contribution (within the meaning of
paragraph (b) of this section), or to have
failed to function exclusively as a charita-
ble remainder trust (within the meaning of
§1.664–1(a)(4)) merely because the uni-
trust amount is paid after the close of the
taxable year if such payment is made
within a reasonable time after the close of
such taxable year and the entire unitrust
amount in the hands of the recipient is
characterized only as income from the
categories described in section 664(b)(1),
(2), or (3), except to the extent it is char-
acterized as corpus described in section
664(b)(4) because—
(1) The trust distributes property (other
than cash) that it owned at the close of the
taxable year to pay the unitrust amount;
and
(2) The trustee elects to treat any in-
come generated by the distribution as oc-
curring on the last day of the taxable year
for which the unitrust amount is due.
(h) Special rule for fixed percentage
trusts created before December 10, 1998.
When the unitrust amount is computed
under paragraph (a)(1)(i)(a) of this sec-
tion, a trust created before December 10,
1998, will not be deemed to have engaged
in an act of self-dealing (within the mean-
ing of section 4941), to have unrelated
debt-financed income (within the mean-
ing of section 514), to have received an
additional contribution (within the mean-
ing of paragraph (b) of this section), or to
have failed to function exclusively as a
charitable remainder trust (within the
meaning of §1.664–1(a)(4)) merely be-
cause the unitrust amount is paid after the
close of the taxable year if such payment
is made within a reasonable time after the
close of such taxable year and the fixed
percentage to be paid each year as the uni-
trust amount is 15 percent or less of the
net fair market value of the trust assets as
determined under paragraph (a)(1)(iv) of
this section.
(i) Example.The following example il-
lustrates the rules in paragraph (a)(1)(i)(g)
of this section:
Example. Xis a charitable remainder unitrust that
calculates the unitrust amount under paragraph
(a)(1)(i)(a) of this section. X was created after De-
cember 10, 1998. The prorated unitrust amount
payable from X for Year 1 is $100. The trustee does
not pay the unitrust amount to the recipient by the
end of the Year 1. At the end of Year 1, X has only
$95 in the ordinary income category under section
664(b)(1) and no income in the capital gain or tax-
exempt income categories under section 664(b)(2)
or (3), respectively. By April 15 of Year 2, in addi-
tion to $95 in cash, the trustee distributes to the uni-
trust recipient a capital asset with a $5 fair market
value and a $2 adjusted basis to pay the $100 uni-
trust amount due for Year 1. The trust owned the
asset at the end of Year 1. Under §1.664–1(d)(5),
the distribution is treated as a sale by X, resulting in
X recognizing a $3 capital gain. The trustee elects to
treat the capital gain as occurring on the last day of
Year 1. Under §1.664–1(d)(1), the character of the
unitrust amount for Year 1 in the recipient’s hands is
$95 of ordinary income, $3 of capital gain income,
and $2 of trust corpus. For Year 1, X satisfied para-
graph (a)(1)(i)(g) of this section.
(j) Payment under income exception.
When the unitrust amount is computed
under paragraph (a)(1)(i)(b) of this sec-
tion, a trust will not be deemed to have
engaged in an act of self-dealing (within
the meaning of section 4941), to have un-
related 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 function exclusively
as a charitable remainder trust (within the
meaning of §1.664–1(a)(4)) merely be-
cause 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.
(k) Reasonable time.For paragraphs
(a)(1)(i)(g), (h), and (j) of this section, a
reasonable time will not ordinarily extend
beyond the date by which the trustee is re-
quired to file Form 5227, “Split-Interest
Trust Information Return,” (including ex-
tensions) for the taxable year.
(l) Effective date.Paragraphs (a)(1)(i)-
(g), (h), (i), (j), and (k) of this section are
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applicable for taxable years ending after
April 18, 1997.
* * * * *
(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. * * *
* * * * *
PART 25—GIFT TAX; GIFTS MADE
AFTER DECEMBER 31, 1954
Par. 5. The authority citation 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 de-
scribed in section 642(c)(5); a transfer to
a charitable remainder annuity trust de-
scribed in section 664(d)(1); a transfer to
a charitable remainder unitrust described
in section 664(d)(2) if under the terms of
the governing instrument the unitrust
amount can be computed only under sec-
tion 664(d)(2)(A); and a transfer to a
charitable remainder unitrust if under the
terms of the governing instrument the uni-
trust amount can be computed under sec-
tion 664(d)(2) and (3) and either there are
only two consecutive noncharitable bene-
ficial interests and the transferor holds the
second of the two interests, or the only
permissible recipients of the unitrust
amount are the transferor, the transferor’s
U.S. citizen spouse, or both the transferor
and the transferor’s U.S. citizen spouse.
(ii) For transfers made before May 19,
1997, a transfer in trust if the remainder
interest in the trust qualifies for a deduc-
tion under section 2522.
* * * * *
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 7. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 8. In §602.101, paragraph (c) is
amended by revising the entry for §1.664-
1 to read as follows:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section Current OMB
where identified control No.
and described
* * * * *
1.664–1 . . . . . . . . . . . . . . . . . 1545–1536
* * * * *
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 1, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury,
(Tax Policy).
(Filed by the Office of the Federal Register on De-
cember 9, 1998, 8:45 a.m., and published in the
issue of the Federal Register for December 10, 1998,
63 F.R. 68188)
Section 865.—Source Rules for
Personal Property Sales
26 CFR 1.865–1T: Loss with respect to personal
property other than stock (Temporary).
T.D. 8805
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Allocation of Loss with Respect
to Stock and Other Personal
Property; Application of Section
904 to Income Subject to
Separate Limitations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
final and temporary Income Tax Regula-
tions relating to the allocation of loss rec-
ognized on the disposition of stock and
other personal property and the computa-
tion of the foreign tax credit limitation.
The loss allocation regulations primarily
will affect taxpayers that claim the foreign
tax credit and that incur losses with respect
to personal property and are necessary to
modify existing guidance with respect to
loss allocation. The foreign tax credit limi-
tation regulations will affect taxpayers
claiming foreign tax credits that have pas-
sive income or losses and are necessary to
modify existing guidance with respect to
the computation of the limitation.
DATES: Effective dates:These regula-
tions are effective January 11, 1999, except
that §1.904–4(c)(2)(ii)(A) and (B) are ef-
fective March 12, 1999 and §1.904–
4(c)(3)(iv) is effective December 31, 1998.
Dates of applicability: For dates of ap-
plicability of §§1.865–1T, 1.865–2, and
1.865–2T, see §§1.865–1T(f), 1.865–2(e),
and 1.865–2T(e), respectively. For dates
of applicability of §1.904–4(c), see
§1.904–4(c)(2)(i).
FOR FURTHER INFORMATION CON-
TACT: Seth B. Goldstein, (202) 622-
3810, regarding section 865(j); and Re-
becca Rosenberg, (202) 622-3850,
regarding section 904(d) (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
On May 14, 1992, the IRS published a
notice of proposed rulemaking in the Fed-
eral Register(REG–209527–92, for-
merly INTL–1–92 (1992–1 C.B. 1209),
57 F.R. 20660), proposing amendments to
the Income Tax Regulations (26 CFR part
1) under section 904(d). The regulations
included proposed amendments to the
grouping rules under §1.904–4(c)(3) for
purposes of determining whether passive
income is high taxed. The amendments
were proposed to be effective for taxable
years beginning after December 31, 1991.
A public hearing was held on September
24, 1992, but no written or oral comments
February 1, 1999141999–5 I.R.B.
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were received with respect to these provi-
sions. These regulations are finalized as
proposed. However, as described below,
the effective date of the regulations has
been modified.
On July 8, 1996, the IRS published pro-
posed amendments (REG–209750–95,
formerly INTL–4–95 (1996–2 C.B. 484),
61 F.R. 35696) to the Income Tax Regula-
tions (26 CFR part 1) under sections 861,
865, and 904 of the Internal Revenue
Code in the Federal Register. The regu-
lations addressed the allocation of loss on
the disposition of stock (§1.865–2) and
other personal property (§1.865–1) and
also contained proposed amendments to
the grouping rules under §1.904–4(c).
The proposed regulations generally allo-
cate loss with respect to stock based upon
the residence of the seller (reciprocal to
gain), but allocate loss on other personal
property based upon the income gener-
ated by the property. A public hearing
was held on November 6, 1996, and sev-
eral written comments were received.
The written comments endorsed the regu-
lations’ general approach with respect to
the allocation of stock loss. In addition,
on June 18, 1997, the Tax Court held in
International Multifoods Corporation v.
Commissioner,108 T.C. 579 (1997), that
loss on the disposition of stock is gener-
ally allocated based on the residence of
the seller, consistent with the approach of
the proposed regulations. After consider-
ation of all the comments, the regulations
proposed by INTL–4–95 with respect to
stock loss and with respect to the group-
ing rules are adopted as amended by this
Treasury decision. The principal changes
to these regulations, as well as the major
comments and suggestions, are discussed
below. An additional anti-abuse rule, not
previously proposed, is issued as a pro-
posed and temporary regulation.
The written comments criticized the
proposed regulation concerning the allo-
cation of loss on other personal property
(§1.865–1). This proposed regulation is
withdrawn and replaced with a new pro-
posed and temporary regulation that is
more consistent with the approach of the
stock loss allocation rules. The new rules
are issued as a temporary regulation be-
cause of the need for immediate guidance
following the International Multifoods
opinion.
Explanation of Provisions
Section 1.861-8T(e)(8): Net Operating
Loss
Section 1.861–8T(e)(8) clarifies that a
net operating loss deduction allowed
under section 172 is allocated and appor-
tioned in the same manner as the deduc-
tions giving rise to the net operating loss
deduction.
Section 1.865–1T: Loss With Respect to
Personal Property Other Than Stock
Section 1.865–1T(a) provides the gen-
eral rule that loss with respect to personal
property is allocated in the same manner
in which gain on the sale of the property
would be sourced. Thus, for example, loss
on the sale or worthlessness of a foreign
bond held by a U.S. resident generally
would be allocated against U.S. source in-
come. Notice 89–58 (1989–1 C.B. 699),
which addressed the allocation of loss
with respect to certain bank loans, is re-
voked as inconsistent with this approach.
Taxpayers may rely on the Notice for loss
recognized prior to the effective date of
the temporary regulations (see discussion
of effective dates, below). Following the
general rule, loss attributable to a foreign
office of a U.S. resident is allocated
against foreign source income where gain
would be foreign source under the foreign
branch rule of section 865(e)(1).
Section 1.865–1T(b) provides special
rules of application. Loss on depreciable
property generally is allocated based upon
the allocation of depreciation deductions
taken with respect to the property, consis-
tent with the depreciation-recapture
source rule of section 865(c)(1). Simi-
larly, loss with respect to a contingent
payment debt instrument subject to Reg.
§1.1275–4(b) is allocated against interest
income because gain on the instrument
generally is treated as interest income.
Section 1.865–1T(c) provides excep-
tions from the reciprocal-to-gain rule. The
regulations do not apply to certain finan-
cial products (to be addressed in a future
guidance project), loss governed by sec-
tion 988, inventory (which is not governed
by section 865), or trade receivables and
certain interest equivalents (which are
governed by §1.861–9T(b)). When Prop.
§1.863–3(h) (the global dealing sourcing
regulation) is finalized, §1.865–1T will
not apply to any loss sourced under that
regulation. Loss attributable to accrued-
but-unpaid interest income is allocated
against interest income. Also, loss on a
debt instrument is allocated against inter-
est income to the extent the taxpayer did
not amortize bond premium to the full ex-
tent permitted by the Code. Anti-abuse
exceptions are also provided. Section
1.865–1T(c)(6)(i), which prevents taxpay-
ers from manipulating loss allocation
through related-party transfers, reorgani-
zations, or similar transactions, and
§1.865–1T(c)(6)(ii), which addresses off-
setting positions, are similar to the anti-
abuse rules previously proposed with re-
spect to stock losses. In addition, section
1.865–1T(c)(6)(iii) has been included to
prevent taxpayers from accelerating for-
eign source income with respect to prop-
erty and claiming an offsetting U.S. loss.
The temporary regulations are effective
for loss recognized on or after January 11,
1999. A taxpayer may apply the regula-
tions, however, to loss recognized in any
taxable year beginning on or after January
1, 1987, subject to certain conditions.
Section 1.865–2: Stock Loss
The proposed regulations issued in
1996 provide that generally loss with re-
spect to stock is allocated to the residence
of the seller, but contain three major ex-
ceptions: an exclusion for dispositions of
portfolio stock and stock in regulated in-
vestment companies (RICs) and S corpo-
rations, a dividend recapture rule, and a
consistency rule for certain dispositions
of foreign affiliates. The final regulations
modify these exceptions. The principal
comments and changes to the regulations
are discussed below.
Section 1.865–2(a): General Rule for
Allocation of Stock Loss
Commentators criticized the exclusion
of portfolio stock and RIC stock from the
general residence-based rule, arguing that
the rationale for residence-based allocation
applies equally to these classes of stock.
The final regulations eliminate the excep-
tion for portfolio stock and RIC stock.
In response to a comment, the final reg-
ulations clarify that §1.865–2 does not
apply to stock that constitutes inventory.
The proposed regulations allocate loss
recognized on the “sale or other disposi-
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tion” of stock. Proposed §1.865–2(c)(2)
provides that worthlessness giving rise to
a deduction under section 165(g)(3) with
respect to stock is treated as a disposition.
Questions have been raised as to whether
the regulations apply to other recognized
losses that are not the result of a sale or
disposition (for example, loss recognized
under the mark-to-market rules of section
475). The final regulations are intended
to apply to all recognized stock losses. To
avoid confusion, the reference to sales or
other dispositions has been deleted in the
final regulations. The special reference to
worthlessness deductions is therefore un-
necessary and also has been deleted.
Section 1.865–2(b)(1): Dividend
Recapture Exception
Some commentators questioned the
dividend recapture rule of §1.865–2(b)(1)
and suggested that the rule should be lim-
ited to cases in which the dividends were
fully sheltered from U.S. tax by foreign
tax credits or the taxpayer did not meet a
minimum holding period. Others sug-
gested that the two-year recapture period
defined in §1.865–2(d)(5) of the proposed
regulations should be shortened. Sections
1.865–2(b)(1)(i) and 1.865–2(d)(3) of the
final regulations retain the two-year rule.
Section 1.865–2(b)(1)(iii) of the final
regulations provides an exception from
dividend recapture for passive-basket div-
idends. This new exception will exempt
most portfolio investors (other than finan-
cial services entities) from the dividend
recapture rule. The rule, which will re-
duce administrative burdens, reflects the
fact that passive income is generally sub-
ject to residual U.S. tax and the high-tax
kick-out of section 904(d)(2)(A)(iii)(III)
limits the potential for cross-crediting in
the passive basket, thus reducing the need
for recapture. In addition, allocation of
loss to the passive basket may lead to in-
vestment incentives that violate the poli-
cies underlying the passive basket. For
example, where a loss allocated to the
passive basket creates a separate limita-
tion loss under section 904(f)(5) that re-
duces high-taxed income in other baskets,
this creates an incentive in subsequent
years for the taxpayer to earn low-taxed
foreign passive income to utilize the for-
eign tax credits in the high-taxed basket
(due to the recharacterization rules of sec-
tion 904(f)(5)(C)).
Commentators also suggested alterna-
tives to the de minimis rule of §1.865–
2(b)(1)(ii), which exempts from recapture
dividends that are less than 10 percent of
the recognized loss. The proposed de
minimis rule is retained in the final regu-
lations. The de minimis rule is intended
to exempt from recapture, as a matter of
administrative convenience, dividends
that are relatively insignificant in compar-
ison to the loss.
Two commentators questioned why the
dividend recapture rule and the definition
of the recapture period in §1.865–2(d)(5)
of the proposed regulations refer to real-
ized, rather than recognized, loss. The
wording was intended to avoid confusion
over the application of the rule to loss that
is deferred under section 267(f). The final
regulation refers to “recognized” loss, but
examples have been added in §1.865–
2(b)(1)(iv) of the final regulations to illus-
trate the application of the dividend re-
capture rule in the context of section
267(f) and how the result differs in the
context of a consolidated group.
Proposed §1.865–2(b)(2): Consistency
Rule
Proposed §1.865–2(b)(2) requires a tax-
payer to allocate loss on the sale of a for-
eign affiliate to passive-basket foreign
source income if the taxpayer recognized
foreign source gain under section 865(f) at
any time during the 5-year period preced-
ing the loss sale. Commentators criticized
this rule as producing disproportionate re-
sults where the foreign source gain is small
in comparison to the subsequent loss. Fur-
thermore, even where the gain and loss are
of similar magnitude, the results may be
disproportionate because sourcing the gain
foreign may provide the taxpayer with
minimal tax benefits (because the gain is
assigned to the passive basket) but the loss
may reduce (sometimes as a separate limi-
tation loss) income that is otherwise shel-
tered by foreign tax credits. In addition, al-
locating loss to the passive basket raises
the policy concerns described above with
respect to passive-basket dividend recap-
ture. After consideration of the comments,
the consistency rule has been eliminated
from the final regulations.
Section 1.865–2(b)(2): Anti-abuse Rules
The anti-abuse rules of §1.865–2(b)(3)
of the proposed regulations, finalized as
§1.865–2(b)(4), have been refined and
modified. One commentator requested
examples illustrating the anti-abuse rules.
Examples have been provided. An addi-
tional rule is provided in §1.865–2T, dis-
cussed below.
Section 1.865–2(e): Effective Date and
Retroactive Election
The proposed regulations are proposed
to be effective for taxable years beginning
61 days after final regulations are promul-
gated. Because of the immediate need for
guidance following the International
Multifoods opinion, the final regulations
are effective for losses recognized on or
after January 11, 1999.
Several commentators requested that
the regulations clarify the scope of the
retroactive election and reduce the admin-
istrative burden of making the election.
In response to these comments, §1.865–
2(e)(2) is amended to provide that a tax-
payer need not make a formal election to
retroactively apply the regulations to
losses recognized in any post-1986 year
and all subsequent pre-effective date
years. An amended return will be re-
quired only if retroactive application re-
sults in a change in tax liability.
One commentator urged that the overall
foreign loss transition rule in §1.904(f)–12
be modified to provide that an overall for-
eign loss account attributable to a stock
loss recognized in a pre-1987 year be re-
computed under the new regulations in the
first election year. This suggestion was re-
jected because the allocation of a stock
loss is governed by the rules in effect in
the year the loss is recognized, and the
retroactive election is available only with
respect to post-1986 years. Section
1.865–2(e)(3) provides examples to illus-
trate the effect of the retroactive applica-
tion of the regulations on overall foreign
loss accounts, capital loss carryovers, and
foreign tax credit carryovers.
Section 1.865–2T: Stock Loss Matching
Rule
Section 1.865–2T(b)(4)(iii) provides a
rule intended to prevent taxpayers from
avoiding the dividend recapture rule of
§1.865–2(b)(1) or from accelerating for-
eign source income and recognizing an
offsetting U.S. loss. This rule is substan-
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tially the same as the matching rule of
§1.865–1T(c)(6)(iii). The rule is promul-
gated as a temporary regulation because it
is necessary to prevent abuse of the resi-
dence-based general allocation rule.
Section 1.904–4(c): Grouping Rules
The high-tax kick-out grouping rules of
§1.904–4(c) provide rules for determining
when particular groups of passive income
are high-taxed and, therefore, treated as
general limitation income under sections
904(d)(2)(A)(iii)(III) and 904(d)(2)(F).
As described above, the proposed amend-
ments to these rules that were proposed in
1992 are finalized as proposed, but tax-
payers are afforded some flexibility with
respect to the effective date. The amend-
ments were proposed to be effective for
taxable years beginning after December
31, 1991. The final regulations are effec-
tive for taxable years ending on or after
December 31, 1998, but taxpayers may
apply the amended regulations to any tax-
able year beginning after December 31,
1991 and all subsequent years. An exam-
ple is also added to clarify that foreign
taxes that are not creditable (e.g., under
section 901(k)) are not withholding taxes
for purposes of the grouping rules.
The proposed amendments to the
grouping rules that were proposed in 1996
are finalized with two clarifications. Pro-
posed §1.904–4(c)(2)(ii)(B) provides
guidance where deductions allocated to a
group of passive income exceed the in-
come in that group (i.e., a loss group). A
question has been raised as to the proper
treatment of foreign taxes in a group that
has no taxable income or loss (either be-
cause the deductions allocated to the
group exactly equal the income in the
group or because the foreign taxes as-
signed to the group are imposed on U.S.
source income or income that is not cur-
rently taken into account under U.S. tax
principles). Consistent with the approach
taken in the proposed regulations with re-
spect to loss groups, the final regulations
clarify that foreign taxes allocated to a
group with no foreign source income are
“kicked out” and treated as related to gen-
eral limitation income.
Proposed §1.904–4(c)(2)(ii)(A) pro-
vides that foreign tax imposed on sales
that result in loss for U.S. tax purposes is
allocated to the group of passive income
to which the loss is allocated. While this
correctly states the result where loss on
the disposition of property is allocated to
passive income under a reciprocal-to-gain
rule, under the temporary and final regu-
lations loss may be allocated to reduce the
group of passive income where income
from the property was assigned (for ex-
ample, dividends or interest under the
anti-abuse rules or the accrued-but-unpaid
interest rule) or a separate category of in-
come other than passive income. Accord-
ingly, §1.904–4(c)(2)(ii)(A) of the final
regulations is clarified to state that foreign
tax imposed on a loss sale is allocated to
the group of passive income to which a
gain would have been assigned. The ex-
amples in §1.904–4(c)(8) of the final reg-
ulations are modified to reflect the fact
that the consistency rule of §1.865–
2(b)(2) of the proposed regulations has
been deleted.
One commentator inquired whether the
rule of §1.904–4(c)(2)(ii)(A) allocating
foreign tax on a loss sale to a group of
passive income is consistent with the tax
allocation rule of §1.904–6(a)(1)(iv). The
latter rule provides that a foreign tax im-
posed on an item of income that does not
constitute income under U.S. tax princi-
ples (a base difference) shall be treated as
imposed with respect to general limitation
income, whereas a foreign tax imposed on
an item that would be income under U.S.
tax principles in another year (a timing
difference) will be allocated to the appro-
priate separate category as if the U.S. rec-
ognized the income in the same year.
Treasury and the Service believe that a
base difference exists within the meaning
of §1.904–6(a)(1)(iv) only when a foreign
country taxes items that the United States
would never treat as taxable income, for
example, gifts or life insurance proceeds.
A sale that results in gain under foreign
law but in loss for U.S. tax purposes is at-
tributable to differences in basis calcula-
tions rather than to a difference in the
concept of taxable income and, therefore,
does not constitute a base difference. The
tax allocation rule of §1.904–4(c)(2)-
(ii)(A), allocating foreign taxes on a loss
sale to the same group of passive income
to which gain would have been assigned
had the United States recognized gain on
the sale, is conceptually consistent with
the treatment of timing differences in
§1.904–6(a)(1)(iv).
Effect on Other Documents
The following document is obsolete as
of January 11, 1999:
Notice 89–58, 1989–1 C.B. 699.
Special Analyses
It has been determined that this Trea-
sury Decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required.
This Treasury Decision finalizes no-
tices of proposed rulemaking published
May 14, 1992 (57 F.R. 20660) and July 8,
1996 (61 F.R. 35696). It has been deter-
mined that section 553(b) of the Adminis-
trative Procedure Act (5 U.S.C. chapter 5)
does not apply to the final regulations is-
sued pursuant to the notice of proposed
rulemaking published on May 14, 1992.
Furthermore, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply to
those regulations, because the notice of
proposed rulemaking was issued prior to
March 29, 1996.
It also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
the portion of the notice of proposed rule-
making published on July 8, 1996, relat-
ing to section 904 of the Internal Revenue
Code. Because the regulation does not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
A final regulatory flexibility analysis
under 5 U.S.C. § 604 has been prepared
for the final regulations portion of this
Treasury Decision with respect to the reg-
ulations issued under section 865 of the
Internal Revenue Code. A summary of
the analysis is set forth below under the
heading ‘Summary of Regulatory Flexi-
bility Analysis.’ Because no preceding
notice of proposed rulemaking is required
for the temporary regulations portion of
this Treasury Decision relating to sections
861 and 865 of the Code, the provisions
of the Regulatory Flexibility Act do not
apply. However, an initial Regulatory
Flexibility Analysis was prepared for the
proposed regulations published elsewhere
in this issue of the Federal Register.
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, the notices of pro-
posed rulemaking preceding these regula-
tions were submitted to the Small
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Business Administration for comment on
their impact on small business.
Summary of Regulatory Flexibility
Analysis
It has been determined that a final regu-
latory flexibility analysis is required
under 5 U.S.C. § 604 with respect to the
final regulations portion of this Treasury
Decision with respect to the regulations
issued under section 865 of the Internal
Revenue Code. These regulations will af-
fect small entities such as small busi-
nesses but not other small entities, such as
local government or tax exempt organiza-
tions, which do not pay taxes. The IRS
and Treasury Department are not aware of
any federal rules that duplicate, overlap or
conflict with these regulations. The final
regulations address the allocation of loss
with respect to stock. These regulations
are necessary primarily for the proper
computation of the foreign tax credit limi-
tation under section 904 of the Internal
Revenue Code. With respect to U.S. resi-
dent taxpayers, the regulations generally
allocate losses against U.S. source in-
come. Generally, this allocation simpli-
fies the computation of the foreign tax
credit limitation. None of the significant
alternatives considered in drafting the
regulations would have significantly al-
tered the economic impact of the regula-
tions on small entities. There are no alter-
native rules that are less burdensome to
small entities but that accomplish the pur-
poses of the statute.
Drafting Information
The principal author of these regula-
tions is Seth B. Goldstein, of the Office of
the Associate Chief Counsel (Interna-
tional), IRS. However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.865–1T also issued under 26
U.S.C. 865(j)(1).
Section 1.865–2 also issued under 26
U.S.C. 865(j)(1).
Section 1.865–2T also issued under 26
U.S.C. 865(j)(1). * * *
Par. 2. Section 1.861–8 is amended by
adding paragraph (e)(7)(iii) and revising
paragraph (e)(8) to read as follows:
§1.861–8 Computation of taxable
income from sources within the United
States and from other sources and
activities.
* * * * *
(e) * * *
(7) * * *
(iii) Allocation of loss recognized in
taxable years after 1986.See §§1.865–
1T, 1.865–2, and 1.865–2T for rules re-
garding the allocation of certain loss rec-
ognized in taxable years beginning after
December 31, 1986.
(8) Net operating loss deduction. [Re-
served.] For guidance, see §1.861–
8T(e)(8).
* * * * *
Par. 3. Section 1.861–8T is amended
by adding paragraph (e)(8) and a sentence
at the end of paragraph (h) to read as fol-
lows:
§1.861–8T Computation of taxable
income from sources within the United
States and from other sources and
activities (Temporary).
* * * * *
(e) * * *
(8) Net operating loss deduction. A net
operating loss deduction allowed under
section 172 shall be allocated and appor-
tioned in the same manner as the deduc-
tions giving rise to the net operating loss
deduction.
* * * * *
(h) * * * Paragraph (e)(8) of this sec-
tion shall cease to be effective January 8,
2002.
Par. 4. Section 1.865–1T is added im-
mediately following §1.864–8T, to read
as follows:
§1.865–1T Loss with respect to personal
property other than stock (Temporary).
(a) General rules for allocation of
loss—(1) Allocation against gain.Except
as otherwise provided in §§1.865–2 and
1.865–2T and paragraph (c) of this sec-
tion, loss recognized with respect to per-
sonal property shall be allocated to the
class of gross income and, if necessary,
apportioned between the statutory group-
ing of gross income (or among the statu-
tory groupings) and the residual grouping
of gross income, with respect to which
gain from a sale of such property would
give rise in the hands of the seller. Thus,
for example, loss recognized by a United
States resident on the sale of a bond gen-
erally is allocated to reduce United States
source income.
(2) Loss attributable to foreign office.
Except as otherwise provided in §§1.865–
2 and 1.865–2T and paragraph (c) of this
section, and except with respect to loss
subject to paragraph (b) of this section, in
the case of loss recognized by a United
States resident with respect to property
that is attributable to an office or other
fixed place of business in a foreign coun-
try within the meaning of section
865(e)(3), the loss shall be allocated to re-
duce foreign source income if a gain on
the sale of the property would have been
taxable by the foreign country and the
highest marginal rate of tax imposed on
such gains in the foreign country is at
least 10 percent. However, paragraph
(a)(1) of this section and not this para-
graph (a)(2) will apply if gain on the sale
of such property would be sourced under
section 865(c), (d)(1)(B), or (d)(3).
(3) Loss recognized by United States
citizen or resident alien with foreign tax
home.Except as otherwise provided in
§§1.865–2 and 1.865–2T and paragraph
(c) of this section, and except with respect
to loss subject to paragraph (b) of this sec-
tion, in the case of loss with respect to
property recognized by a United States
citizen or resident alien that has a tax
home (as defined in section 911(d)(3)) in
a foreign country, the loss shall be allo-
cated to reduce foreign source income if a
gain on the sale of such property would
have been taxable by a foreign country
and the highest marginal rate of tax im-
posed on such gains in the foreign country
is at least 10 percent.
(4) Allocation for purposes of section
904. For purposes of section 904, loss
recognized with respect to property that is
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allocated to foreign source income under
this paragraph (a) shall be allocated to the
separate category under section 904(d) to
which gain on the sale of the property
would have been assigned (without regard
to section 904(d)(2)(A)(iii)(III)). For pur-
poses of §1.904–4(c)(2)(ii)(A), any such
loss allocated to passive income shall be
allocated (prior to the application of
§1.904–4(c)(2)(ii)(B)) to the group of pas-
sive income to which gain on a sale of the
property would have been assigned had a
sale of the property resulted in the recog-
nition of a gain under the law of the rele-
vant foreign jurisdiction or jurisdictions.
(5) Loss recognized by partnership.A
partner’s distributive share of loss recog-
nized by a partnership with respect to per-
sonal property shall be allocated and ap-
portioned in accordance with this section
as if the partner had recognized the loss.
If loss is attributable to an office or other
fixed place of business of the partnership
within the meaning of section 865(e)(3),
such office or fixed place of business
shall be considered to be an office of the
partner for purposes of this section.
(b) Special rules of application—(1)
Depreciable property.In the case of a
loss recognized with respect to deprecia-
ble personal property, the gain referred to
in paragraph (a)(1) of this section is the
gain that would be sourced under section
865(c)(1) (depreciation recapture).
(2) Contingent payment debt instru-
ment.Except to the extent provided in
§1.1275–4(b)(9)(iv), loss recognized with
respect to a contingent payment debt in-
strument to which §1.1275–4(b) applies
(instruments issued for money or publicly
traded property) shall be allocated to the
class of gross income and, if necessary,
apportioned between the statutory group-
ing of gross income (or among the statu-
tory groupings) and the residual grouping
of gross income, with respect to which in-
terest income from the instrument (in the
amount of the loss subject to this para-
graph (b)(2)) would give rise.
(c) Exceptions—(1) Foreign currency
and certain financial instruments.This
section does not apply to loss governed by
section 988 and loss recognized with re-
spect to options contracts or derivative fi-
nancial instruments, including futures
contracts, forward contracts, notional
principal contracts, or evidence of an in-
terest in any of the foregoing.
(2) Inventory.This section does not
apply to loss recognized with respect to
property described in section 1221(1).
(3) Interest equivalents and trade re-
ceivables.Loss subject to §1.861–9T(b)
(loss equivalent to interest expense and
loss on trade receivables) shall be allo-
cated and apportioned under the rules of
§1.861–9T and not under the rules of this
section.
(4) Unamortized bond premium.To the
extent a taxpayer recognizing loss with
respect to a bond (within the meaning of
§1.171–1(b)) did not amortize bond pre-
mium to the full extent permitted by
§§1.171–2 or 1.171–3 (or §1.171–1, as
contained in the 26 CFR part 1 edition re-
vised as of April 1, 1997)(as applicable),
loss recognized with respect to the bond
shall be allocated to the class of gross in-
come and, if necessary, apportioned be-
tween the statutory grouping of gross in-
come (or among the statutory groupings)
and the residual grouping of gross in-
come, with respect to which interest in-
come from the bond was assigned.
(5) Accrued interest.Loss attributable
to accrued but unpaid interest on a debt
obligation shall be allocated to the class
of gross income and, if necessary, appor-
tioned between the statutory grouping of
gross income (or among the statutory
groupings) and the residual grouping of
gross income, with respect to which inter-
est income from the obligation was as-
signed. For purposes of this section,
whether loss is attributable to accrued but
unpaid interest (rather than to principal)
shall be determined under the principles
of §§1.61–7(d) and 1.446–2(e).
(6) Anti-abuse rules—(i) Transactions
involving built-in losses. If one of the
principal purposes of a transaction is to
change the allocation of a built-in loss
with respect to personal property by trans-
ferring the property to another person,
qualified business unit, office or other
fixed place of business, or branch that
subsequently recognizes the loss, the loss
shall be allocated by the transferee as if it
were recognized by the transferor imme-
diately prior to the transaction. If one of
the principal purposes of a change of resi-
dence is to change the allocation of a
built-in loss with respect to personal prop-
erty, the loss shall be allocated as if the
change of residence had not occurred. If
one of the principal purposes of a transac-
tion is to change the allocation of a built-
in loss on the disposition of personal
property by converting the original prop-
erty into other property and subsequently
recognizing loss with respect to such
other property, the loss shall be allocated
as if it were recognized with respect to the
original property immediately prior to the
transaction. Transactions subject to this
paragraph shall include, without limita-
tion, reorganizations within the meaning
of section 368(a), liquidations under sec-
tion 332, transfers to a corporation under
section 351, transfers to a partnership
under section 721, transfers to a trust, dis-
tributions by a partnership, distributions
by a trust, transfers to or from a qualified
business unit, office or other fixed place
of business, or branch, or exchanges
under section 1031. A person may have a
principal purpose of affecting loss alloca-
tion even though this purpose is out-
weighed by other purposes (taken to-
gether or separately).
(ii) Offsetting positions.If a taxpayer
recognizes loss with respect to personal
property and the taxpayer (or any person
described in section 267(b) (after applica-
tion of section 267(c)), 267(e), 318 or 482
with respect to the taxpayer) holds (or
held) offsetting positions with respect to
such property with a principal purpose of
recognizing foreign source income and
United States source loss, the loss shall be
allocated and apportioned against such
foreign source income. For purposes of
this paragraph (c)(6)(ii), positions are off-
setting if the risk of loss of holding one or
more positions is substantially diminished
by holding one or more other positions.
(iii) Matching rule.To the extent a tax-
payer (or a person described in section
1059(c)(3)(C) with respect to the tax-
payer) recognizes foreign source income
for tax purposes that results in the cre-
ation of a corresponding loss with respect
to personal property, the loss shall be allo-
cated and apportioned against such in-
come. For examples illustrating a similar
rule with respect to stock loss, see Exam-
ples 3 through 6 of §1.865–2T(b)(4)(iv).
(d) Definitions—(1) Contingent pay-
ment debt instrument. A contingent pay-
ment debt instrument is any debt instru-
ment that is subject to §1.1275–4.
(2) Depreciable personal property. De-
preciable personal property is any prop-
erty described in section 865(c)(4)(A).
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(3) Terms defined in §1.861–8.See
§1.861–8 for the meaning of class of
gross income, statutory grouping of gross
income, and residual grouping of gross
income.
(e) Examples.The application of this
section may be illustrated by the follow-
ing examples:
Example 1.On January 1, 1997, A, a domestic
corporation, purchases for $1,000 a machine that
produces widgets, which Asells in the United States
and throughout the world. Throughout A’s holding
period, the machine is located and used in Country
X. During A’s holding period, Aincurs depreciation
deductions of $400 with respect to the machine.
Under §1.861–8, Aallocates and apportions depreci-
ation deductions of $250 against foreign source gen-
eral limitation income and $150 against U.S. source
income. On December 12, 1999, Asells the ma-
chine and recognizes a loss of $500. Because the
machine was used predominantly outside the United
States, under section 865(c)(1)(B) and (c)(3)(B)(ii),
gain on the disposition of the machine would be for-
eign source general limitation income to the extent
of the depreciation adjustments. Therefore, under
paragraph (b)(1) of this section, the entire $500 loss
is allocated against foreign source general limitation
income.
Example 2.On January 1, 1997, A, a domestic
corporation, loans $2,000 to N, its wholly-owned
controlled foreign corporation, in exchange for a
contingent payment debt instrument subject to
§1.1275–4(b). During 1997 through 1999, Aac-
crues and receives interest income of $630, $150 of
which is foreign source general limitation income
and $480 of which is foreign source passive income
under section 904(d)(3). Assume there are no posi-
tive or negative adjustments pursuant to §1.1275–
4(b)(6) in 1997 through 1999. On January 1, 2000,
A disposes of the debt instrument and recognizes a
$770 loss. Under §1.1275–4(b)(8)(ii), $630 of the
loss is treated as ordinary loss and $140 is treated as
capital loss. Assume that $140 of interest income
earned in 2000 with respect to the debt instrument
would be foreign source passive income under sec-
tion 904(d)(3). Under §1.1275–4(b)(9)(iv), $150 of
the ordinary loss is allocated against foreign source
general limitation income and $480 of the ordinary
loss is allocated against foreign source passive in-
come. Under paragraph (b)(2) of this section, the
$140 capital loss is allocated against foreign source
passive income.
Example 3.On January 1, 1997, A, a domestic
corporation, purchases for $1,000 a bond maturing
January 1, 2009, with a stated principal amount of
$1,000, payable at maturity. The bond provides for
unconditional payments of interest of $100, payable
December 31 of each year. The issuer of the bond is
a foreign corporation and interest on the bond is thus
foreign source. Between 1997 and 2001, Aaccrues
and receives foreign source interest income of $500
with respect to the bond. On January 1, 2002, A
sells the bond and recognizes a $500 loss. Under
paragraph (a)(1) of this section, the $500 loss is allo-
cated against U.S. source income. Paragraph
(c)(6)(iii) of this section is not applicable because
A’s recognition of the foreign source income did not
result in the creation of a corresponding loss with re-
spect to the bond.
Example 4. On January 1, 1999, A, a domestic
corporation on the accrual method of accounting,
purchases for $1,000 a bond maturing January 1,
2009, with a stated principal amount of $1,000,
payable at maturity. The bond provides for uncondi-
tional payments of interest of $100, payable Decem-
ber 31 of each year. The issuer of the bond is a for-
eign corporation and interest on the bond is thus
foreign source. On June 10, 1999, after Ahas ac-
crued $44 of interest income, but before any interest
has been paid, the issuer suddenly becomes insol-
vent and declares bankruptcy. Asells the bond (in-
cluding the accrued interest) for $20. Assuming that
Aproperly accrued $44 interest income, Atreats the
$20 proceeds from the sale of the bond as payment
of interest previously accrued and recognizes a
$1000 loss with respect to the bond principal and a
$24 loss with respect to the accrued interest. See
§1.61–7(d). Under paragraph (a)(1) of this section,
the $1000 loss with respect to the principal is allo-
cated against U.S. source income. Under paragraph
(c)(5) of this section, the $24 loss with respect to ac-
crued but unpaid interest is allocated against foreign
source interest income.
(f) Effective date—(1) In general.Ex-
cept as provided in paragraph (f)(2) of this
section, this section is effective for loss
recognized on or after January 11, 1999.
For purposes of this paragraph (f), loss
that is recognized but deferred (for exam-
ple, under section 267 or 1092) shall be
treated as recognized at the time the loss is
taken into account. This section shall
cease to be effective January 8, 2002.
(2) Application to prior periods.A tax-
payer may apply the rules of this section
to losses recognized in any taxable year
beginning on or after January 1, 1987, and
all subsequent years, provided that—
(i) The taxpayer’s tax liability as shown
on an original or amended tax return is
consistent with the rules of this section for
each such year for which the statute of
limitations does not preclude the filing of
an amended return on June 30, 1999; and
(ii) The taxpayer makes appropriate ad-
justments to eliminate any double benefit
arising from the application of this section
to years that are not open for assessment.
(3) Examples.See §1.865–2(e)(3) for
examples illustrating an effective date
provision similar to the effective date pro-
vided in this paragraph (f).
Par. 5. Section 1.865–2 is added imme-
diately after §1.865–1T, to read as fol-
lows:
§1.865–2 Loss with respect to stock.
(a) General rules for allocation of loss
with respect to stock—(1) Allocation
against gain.Except as otherwise pro-
vided in paragraph (b) of this section, loss
recognized with respect to stock shall be
allocated to the class of gross income and,
if necessary, apportioned between the
statutory grouping of gross income (or
among the statutory groupings) and the
residual grouping of gross income, with
respect to which gain (other than gain
treated as a dividend under section
964(e)(1) or 1248) from a sale of such
stock would give rise in the hands of the
seller (without regard to section 865(f)).
Thus, for example, loss recognized by a
United States resident on the sale of stock
generally is allocated to reduce United
States source income.
(2) Stock attributable to foreign office.
Except as otherwise provided in para-
graph (b) of this section, in the case of
loss recognized by a United States resi-
dent with respect to stock that is attribut-
able to an office or other fixed place of
business in a foreign country within the
meaning of section 865(e)(3), the loss
shall be allocated to reduce foreign source
income if a gain on the sale of the stock
would have been taxable by the foreign
country and the highest marginal rate of
tax imposed on such gains in the foreign
country is at least 10 percent.
(3) Loss recognized by United States
citizen or resident alien with foreign tax
home—(i) In general. Except as other-
wise provided in paragraph (b) of this sec-
tion, in the case of loss with respect to
stock that is recognized by a United States
citizen or resident alien that has a tax
home (as defined in section 911(d)(3)) in
a foreign country, the loss shall be allo-
cated to reduce foreign source income if a
gain on the sale of the stock would have
been taxable by a foreign country and the
highest marginal rate of tax imposed on
such gains in the foreign country is at
least 10 percent.
(ii) Bona fide residents of Puerto Rico.
Except as otherwise provided in para-
graph (b) of this section, in the case of
loss with respect to stock in a corporation
described in section 865(g)(3) recognized
by a United States citizen or resident alien
that is a bona fide resident of Puerto Rico
during the entire taxable year, the loss
shall be allocated to reduce foreign source
income.
(4) Stock constituting a United States
real property interest. Loss recognized
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by a nonresident alien individual or a for-
eign corporation with respect to stock that
constitutes a United States real property
interest shall be allocated to reduce
United States source income. For addi-
tional rules governing the treatment of
such loss, see section 897 and the regula-
tions thereunder.
(5) Allocation for purposes of section
904. For purposes of section 904, loss
recognized with respect to stock that is al-
located to foreign source income under
this paragraph (a) shall be allocated to the
separate category under section 904(d) to
which gain on a sale of the stock would
have been assigned (without regard to
section 904(d)(2)(A)(iii)(III)). For pur-
poses of §1.904–4(c)(2)(ii)(A), any such
loss allocated to passive income shall be
allocated (prior to the application of
§1.904–4(c)(2)(ii)(B)) to the group of
passive income to which gain on a sale of
the stock would have been assigned had a
sale of the stock resulted in the recogni-
tion of a gain under the law of the relevant
foreign jurisdiction or jurisdictions.
(b) Exceptions—(1) Dividend recap-
ture exception—(i) In general.If a tax-
payer recognizes a loss with respect to
shares of stock, and the taxpayer (or a
person described in section 1059(c)(3)(C)
with respect to such shares) included in
income a dividend recapture amount (or
amounts) with respect to such shares at
any time during the recapture period,
then, to the extent of the dividend recap-
ture amount (or amounts), the loss shall
be allocated and apportioned on a propor-
tionate basis to the class or classes of
gross income or the statutory or residual
grouping or groupings of gross income to
which the dividend recapture amount was
assigned.
(ii) Exception for de minimis amounts.
Paragraph (b)(1)(i) of this section shall
not apply to a loss recognized by a tax-
payer on the disposition of stock if the
sum of all dividend recapture amounts
(other than dividend recapture amounts
eligible for the exception described in
paragraph (b)(1)(iii) of this section (pas-
sive limitation dividends)) included in in-
come by the taxpayer (or a person de-
scribed in section 1059(c)(3)(C)) with
respect to such stock during the recapture
period is less than 10 percent of the recog-
nized loss.
(iii) Exception for passive limitation
dividends.Paragraph (b)(1)(i) of this sec-
tion shall not apply to the extent of a divi-
dend recapture amount that is treated as
income in the separate category for pas-
sive income described in section
904(d)(2)(A) (without regard to section
904(d)(2)(A)(iii)(III)). The exception
provided for in this paragraph (b)(1)(iii)
shall not apply to any dividend recapture
amount that is treated as income in the
separate category for financial services
income described in section 904(d)(2)(C).
(iv) Examples.The application of this
paragraph (b)(1) may be illustrated by the
following examples:
Example 1.(i) P, a domestic corporation, is a
United States shareholder of N, a controlled foreign
corporation. Nhas never had any subpart Fincome
and all of its earnings and profits are described in
section 959(c)(3). On May 5, 1998, Ndistributes a
dividend to Pin the amount of $100. The dividend
gives rise to a $5 foreign withholding tax, and Pis
deemed to have paid an additional $45 of foreign in-
come tax with respect to the dividend under section
902. Under the look-through rules of section
904(d)(3) the dividend is general limitation income
described in section 904(d)(1)(I).
(ii) On February 6, 2000, Psells its shares of N
and recognizes a $110 loss. In 2000, Phas the fol-
lowing taxable income, excluding the loss on the
sale of N:
(A) $1,000 of foreign source income that is gen-
eral limitation income described in section
904(d)(1)(I);
(B) $1,000 of foreign source capital gain from
the sale of stock in a foreign affiliate that is sourced
under section 865(f) and is passive income de-
scribed in section 904(d)(1)(A); and
(C) $1,000 of U.S. source income.
(iii) The $100 dividend paid in 1998 is a dividend
recapture amount that was included in P’s income
within the recapture period preceding the disposition
of the Nstock. The de minimis exception of para-
graph (b)(1)(ii) of this section does not apply be-
cause the $100 dividend recapture amount exceeds
10 percent of the $110 loss. Therefore, to the extent
of the $100 dividend recapture amount, the loss
must be allocated under paragraph (b)(1)(i) of this
section to the separate limitation category to which
the dividend was assigned (general limitation in-
come).
(iv) P’s remaining $10 loss on the disposition of
the N stock is allocated to U.S. source income under
paragraph (a)(1) of this section.
(v) After allocation of the stock loss, P’s foreign
source taxable income in 2000 consists of $900 of
foreign source general limitation income and $1,000
of foreign source passive income.
Example 2.(i) P, a domestic corporation, owns
all of the stock of N1, which owns all of the stock of
N2,which owns all of the stock of N3. N1, N2,and
N3 are controlled foreign corporations. All of the
corporations use the calendar year as their taxable
year. On February 5, 1997, N3distributes a divi-
dend to N2. The dividend is foreign personal hold-
ing company income of N2under section
954(c)(1)(A) that results in an inclusion of $100 in
P’s income under section 951(a)(1)(A)(i) as of De-
cember 31, 1997. Under section 904(d)(3)(B) the
inclusion is general limitation income described in
section 904(d)(1)(I). The income inclusion to Pre-
sults in a corresponding increase in P’s basis in the
stock of N1under section 961(a).
(ii) On March 5, 1999, Psells its shares of N1
and recognizes a $110 loss. The $100 1997 subpart
Finclusion is a dividend recapture amount that was
included in P’s income within the recapture period
preceding the disposition of the N1stock. The de
minimis exception of paragraph (b)(1)(ii) of this
section does not apply because the $100 dividend re-
capture amount exceeds 10 percent of the $110 loss.
Therefore, to the extent of the $100 dividend recap-
ture amount, the loss must be allocated under para-
graph (b)(1)(i) of this section to the separate limita-
tion category to which the dividend recapture
amount was assigned (general limitation income).
The remaining $10 loss is allocated to U.S. source
income under paragraph (a)(1) of this section.
Example 3. (i) P, a domestic corporation, owns
all of the stock of N1, which owns all of the stock of
N2. N1and N2are controlled foreign corporations.
All the corporations use the calendar year as their
taxable year and the U.S. dollar as their functional
currency. On May 5, 1998, N2pays a dividend of
$100 to N1out of general limitation earnings and
profits.
(ii) On February 5, 2000, N1sells its N2stock to
an unrelated purchaser. The sale results in a loss to
N1of $110 for U.S. tax purposes. In 2000, N1has
the following current earnings and profits, excluding
the loss on the sale of N2:
(A) $1,000 of non-subpart Fforeign source gen-
eral limitation earnings and profits described in sec-
tion 904(d)(1)(I);
(B) $1,000 of foreign source gain from the sale of
stock that is taken into account in determining for-
eign personal holding company income under sec-
tion 954(c)(1)(B)(i) and which is passive limitation
earnings and profits described in section
904(d)(1)(A);
(C) $1,000 of foreign source interest income re-
ceived from an unrelated person that is foreign per-
sonal holding company income under section
954(c)(1)(A) and which is passive limitation earn-
ings and profits described in section 904(d)(1)(A).
(iii) The $100 dividend paid in 1998 is a dividend
recapture amount that was included in N1’s income
within the recapture period preceding the disposition
of the N2stock. The de minimis exception of para-
graph (b)(1)(ii) of this section does not apply be-
cause the $100 dividend recapture amount exceeds
10 percent of the $110 loss. Therefore, to the extent
of the $100 dividend recapture amount, the loss
must be allocated under paragraph (b)(1)(i) of this
section to the separate limitation category to which
the dividend was assigned (general limitation earn-
ings and profits).
(iv) N1’s remaining $10 loss on the disposition of
the N2stock is allocated to foreign source passive
limitation earnings and profits under paragraph
(a)(1) of this section.
(v) After allocation of the stock loss, N1’s current
earnings and profits for 1998 consist of $900 of for-
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eign source general limitation earnings and profits
and $1,990 of foreign source passive limitation earn-
ings and profits.
(vi) After allocation of the stock loss, N1’s sub-
part F income for 2000 consists of $1,000 of foreign
source interest income that is foreign personal hold-
ing company income under section 954(c)(1)(A) and
$890 of foreign source net gain that is foreign per-
sonal holding company income under section
954(c)(1)(B)(i). P includes $1,890 in income under
section 951(a)(1)(A)(i) as passive income under sec-
tions 904(d)(1)(A) and 904(d)(3)(B).
Example 4. P, a foreign corporation, has two
wholly-owned subsidiaries, S, a domestic corpora-
tion, and B, a foreign corporation. On January 1,
2000, S purchases a one-percent interest in N, a for-
eign corporation, for $100. On January 2, 2000, N
distributes a $20 dividend to S. The $20 dividend is
foreign source financial services income. On Janu-
ary 3, 2000, S sells its Nstock to Bfor $80 and rec-
ognizes a $20 loss that is deferred under section
267(f). On June 10, 2008, Bsells its Nstock to an
unrelated person for $55. Under section 267(f) and
§1.267(f)–1(c)(1), S’s $20 loss is deferred until
2008. Under this paragraph (b)(1), the $20 loss is
allocated to reduce foreign source financial services
income in 2008 because the loss was recognized (al-
beit deferred) within the 24-month recapture period
following the receipt of the dividend. See
§§1.267(f)–1(a)(2)(i)(B) and 1.267(f)–1(c)(2).
Example 5. The facts are the same as in Example
4,except P, S ,and Bare domestic corporations and
members of the Pconsolidated group. Under the
matching rule of §1.1502–13(c)(1), the separate en-
tity attributes of S’s intercompany items and B’s cor-
responding items are redetermined to the extent nec-
essary to produce the same effect on consolidated
taxable income as if Sand Bwere divisions of a sin-
gle corporation and the intercompany transaction
was a transaction between divisions. If Sand B were
divisions of a single corporation, the transfer of N
stock on January 3, 2000 would be ignored for tax
purposes, and the corporation would be treated as
selling that stock only in 2008. Thus, the corpora-
tion’s entire $45 loss would have been allocated
against U.S. source income under paragraph (a)(1)
of this section because a dividend recapture amount
was not received during the corporation’s recapture
period. Accordingly, S’s $20 loss and B’s $25 loss
are allocated to reduce U.S. source income.
(2) Exception for inventory.This sec-
tion does not apply to loss recognized
with respect to stock described in section
1221(1).
(3) Exception for stock in an S corpora-
tion. This section does not apply to loss
recognized with respect to stock in an S
corporation (as defined in section 1361).
(4) Anti-abuse rules—(i) Transactions
involving built-in losses. If one of the
principal purposes of a transaction is to
change the allocation of a built-in loss
with respect to stock by transferring the
stock to another person, qualified busi-
ness unit (within the meaning of section
989(a)), office or other fixed place of
business, or branch that subsequently rec-
ognizes the loss, the loss shall be allo-
cated by the transferee as if it were recog-
nized with respect to the stock by the
transferor immediately prior to the trans-
action. If one of the principal purposes of
a change of residence is to change the al-
location of a built-in loss with respect to
stock, the loss shall be allocated as if the
change of residence had not occurred. If
one of the principal purposes of a transac-
tion is to change the allocation of a built-
in loss with respect to stock (or other per-
sonal property) by converting the original
property into other property and subse-
quently recognizing loss with respect to
such other property, the loss shall be allo-
cated as if it were recognized with respect
to the original property immediately prior
to the transaction. Transactions subject to
this paragraph shall include, without limi-
tation, reorganizations within the meaning
of section 368(a), liquidations under sec-
tion 332, transfers to a corporation under
section 351, transfers to a partnership
under section 721, transfers to a trust, dis-
tributions by a partnership, distributions
by a trust, or transfers to or from a quali-
fied business unit, office or other fixed
place of business. A person may have a
principal purpose of affecting loss alloca-
tion even though this purpose is out-
weighed by other purposes (taken to-
gether or separately).
(ii) Offsetting positions.If a taxpayer
recognizes loss with respect to stock and
the taxpayer (or any person described in
section 267(b) (after application of sec-
tion 267(c)), 267(e), 318 or 482 with re-
spect to the taxpayer) holds (or held) off-
setting positions with respect to such
stock with a principal purpose of recog-
nizing foreign source income and United
States source loss, the loss will be allo-
cated and apportioned against such for-
eign source income. For purposes of this
paragraph (b)(4)(ii), positions are offset-
ting if the risk of loss of holding one or
more positions is substantially diminished
by holding one or more other positions.
(iii) Matching rule.[Reserved] For fur-
ther guidance, see §1.865–2T(b)(4)(iii).
(iv) Examples.The application of this
paragraph (b)(4) may be illustrated by the
following examples. No inference is in-
tended regarding the application of any
other Internal Revenue Code section or
judicial doctrine that may apply to disal-
low or defer the recognition of loss. The
examples are as follows:
Example 1. (i) Facts.On January 1, 2000, P, a
domestic corporation, owns all of the stock of N1, a
controlled foreign corporation, which owns all of the
stock of N2, a controlled foreign corporation. N1’s
basis in the stock of N2exceeds its fair market
value, and any loss recognized by N1on the sale of
N2would be allocated under paragraph (a)(1) of this
section to reduce foreign source passive limitation
earnings and profits of N1. In contemplation of the
sale of N2to an unrelated purchaser, Pcauses N1 to
liquidate with principal purposes of recognizing the
loss on the N2stock and allocating the loss against
U.S. source income. Psells the N2stock and P rec-
ognizes a loss.
(ii) Loss allocation.Because one of the principal
purposes of the liquidation was to transfer the stock
to Pin order to change the allocation of the built-in
loss on the N2stock, under paragraph (b)(4)(i) of
this section the loss is allocated against P’s foreign
source passive limitation income.
Example 2. (i) Facts. On January 1, 2000, P, a
domestic corporation, forms Nand F, foreign corpo-
rations, and contributes $1,000 to the capital of each.
Nand F enter into offsetting positions in financial
instruments that produce financial services income.
Holding the Nstock substantially diminishes P’s
risk of loss with respect to the F stock (and vice
versa). Pholds Nand Fwith a principal purpose of
recognizing foreign source income and U.S. source
loss. On March 31, 2000, when the financial instru-
ment held by Nis worth $1,200 and the financial in-
strument held by Fis worth $800, Psells its Fstock
and recognizes a $200 loss.
(ii) Loss allocation. Because Pheld an offsetting
position with respect to the Fstock with a principal
purpose of recognizing foreign source income and
U.S. source loss, the $200 loss is allocated against
foreign source financial services income under para-
graph (b)(4)(ii) of this section.
(c) Loss recognized by partnership.A
partner’s distributive share of loss recog-
nized by a partnership shall be allocated
and apportioned in accordance with this
section as if the partner had recognized
the loss. If loss is attributable to an office
or other fixed place of business of the
partnership within the meaning of section
865(e)(3), such office or fixed place of
business shall be considered to be an of-
fice of the partner for purposes of this sec-
tion.
(d) Definitions—(1) Terms defined in
§1.861–8.See §1.861–8 for the meaning
of class of gross income, statutory group-
ing of gross income,and residual group-
ing of gross income.
(2) Dividend recapture amount. A divi-
dend recapture amount is a dividend (ex-
cept for an amount treated as a dividend
under section 78), an inclusion described
in section 951(a)(1)(A)(i) (but only to the
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extent attributable to a dividend (includ-
ing a dividend under section 964(e)(1))
included in the earnings of a controlled
foreign corporation (held directly or indi-
rectly by the person recognizing the loss)
that is included in foreign personal hold-
ing company income under section
954(c)(1)(A)) and an inclusion described
in section 951(a)(1)(B).
(3) Recapture period.A recapture pe-
riod is the 24-month period preceding the
date on which a taxpayer recognizes a loss
with respect to stock, increased by any pe-
riod of time in which the taxpayer has di-
minished its risk of loss in a manner de-
scribed in section 246(c)(4) and the
regulations thereunder and by any period
in which the assets of the corporation are
hedged against risk of loss with a principal
purpose of enabling the taxpayer to hold
the stock without significant risk of loss
until the recapture period has expired.
(4) United States resident.See section
865(g) and the regulations thereunder for
the definition of United States resident.
(e) Effective date—(1) In general.
This section is effective for loss recog-
nized on or after January 11, 1999. For
purposes of this paragraph (e), loss that is
recognized but deferred (for example,
under section 267 or 1092) shall be
treated as recognized at the time the loss
is taken into account.
(2) Application to prior periods.A tax-
payer may apply the rules of this section
to losses recognized in any taxable year
beginning on or after January 1, 1987, and
all subsequent years, provided that—
(i) The taxpayer’s tax liability as shown
on an original or amended tax return is
consistent with the rules of this section
and §1.865–2T for each such year for
which the statute of limitations does not
preclude the filing of an amended return
on June 30, 1999; and
(ii) The taxpayer makes appropriate ad-
justments to eliminate any double benefit
arising from the application of this section
to years that are not open for assessment.
(3) Examples. The rules of this para-
graph (e) may be illustrated by the follow-
ing examples:
Example 1.(i) P, a domestic corporation, has a
calendar taxable year. On March 10, 1985, P recog-
nizes a $100 capital loss on the sale of N, a foreign
corporation. Pursuant to sections 1211(a) and
1212(a), the loss is not allowed in 1985 and is car-
ried over to the 1990 taxable year. The loss is allo-
cated against foreign source income under §1.861–
8(e)(7). In 1999, P chooses to apply this section to
all losses recognized in its 1987 taxable year and in
all subsequent years.
(ii) Allocation of the loss on the sale of Nis not
affected by the rules of this section because the loss
was recognized in a taxable year that did not begin
after December 31, 1986.
Example 2. (i) P, a domestic corporation, has a
calendar taxable year. On March 10, 1988, Precog-
nizes a $100 capital loss on the sale of N, a foreign
corporation. Pursuant to sections 1211(a) and
1212(a), the loss is not allowed in 1988 and is car-
ried back to the 1985 taxable year. The loss is allo-
cated against foreign source income under §1.861–
8(e)(7) on P’s federal income tax return for 1985
and increases an overall foreign loss account under
§1.904(f)–1.
(ii) In 1999, Pchooses to apply this section to all
losses recognized in its 1987 taxable year and in all
subsequent years. Consequently, the loss on the sale
of Nis allocated against U.S. source income under
paragraph (a)(1) of this section. Allocation of the
loss against U.S. source income reduces P’s overall
foreign loss account and increases P’s tax liability in
2 years: 1990, a year that will not be open for assess-
ment on June 30, 1999, and 1997, a year that will be
open for assessment on June 30, 1999. Pursuant to
paragraph (e)(2)(i) of this section, Pmust file an
amended federal income tax return that reflects the
rules of this section for 1997, but not for 1990.
Example 3.(i) P, a domestic corporation, has a
calendar taxable year. On March 10, 1989, Precog-
nizes a $100 capital loss on the sale of N,a foreign
corporation. The loss is allocated against foreign
source income under §1.861–8(e)(7) on P’s federal
income tax return for 1989 and results in excess for-
eign tax credits for that year. The excess credit is
carried back to 1988, pursuant to section 904(c). In
1999, Pchooses to apply this section to all losses
recognized in its 1989 taxable year and in all subse-
quent years. On June 30, 1999, P’s 1988 taxable
year is closed for assessment, but P’s 1989 taxable
year is open with respect to claims for refund.
(ii) Because Pchooses to apply this section to its
1989 taxable year, the loss on the sale of Nis allo-
cated against U.S. source income under paragraph
(a)(1) of this section. Allocation of the loss against
U.S. source income would have permitted the for-
eign tax credit to be used in 1989, reducing P’s tax
liability in 1989. Nevertheless, under paragraph
(e)(2)(ii) of this section, because the credit was car-
ried back to 1988, Pmay not claim the foreign tax
credit in 1989.
Par. 6. Section 1.865–2T is added im-
mediately after §1.865–2, to read as fol-
lows:
§1.865–2T Loss with respect to stock
(Temporary).
(a) through (b)(4)(ii) [Reserved] For
further guidance, see §1.865–2(a) through
(b)(4)(ii).
(b)(4)(iii) Matching rule.To the extent
a taxpayer (or a person described in sec-
tion 1059(c)(3)(C) with respect to the tax-
payer) recognizes foreign source income
for tax purposes that results in the cre-
ation of a corresponding loss with respect
to stock, the loss shall be allocated and
apportioned against such income. This
paragraph (b)(4)(iii) shall not apply to the
extent a loss is related to a dividend re-
capture amount and §1.865–2(b)(1)(ii)
(de minimis exception) or (b)(1)(iii) (pas-
sive dividend exception) exempts the loss
from §1.865–2(b)(1)(i) (dividend recap-
ture rule), unless the stock is held with a
principal purpose of producing foreign
source income and corresponding loss.
(iv) Examples.The application of this
paragraph (b)(4) may be illustrated by the
following examples. No inference is in-
tended regarding the application of any
other Internal Revenue Code section or
judicial doctrine that may apply to disal-
low or defer the recognition of loss. The
examples are as follows:
Examples 1 and 2. [Reserved] For fur-
ther guidance, see §1.865–2(b)(4)(iv).
Example 3.(i) Facts.On January 1, 1999, Pand
Q, domestic corporations, form R, a domestic part-
nership. The corporations and partnership use the
calendar year as their taxable year. Pcontributes
$900 to Rin exchange for a 90- percent partnership
interest and Qcontributes $100 to Rin exchange for
a 10-percent partnership interest. Rpurchases a
dance studio in country Xfor $1,000. On January 2,
1999, Renters into contracts to provide dance
lessons in Country Xfor a 5-year period beginning
January 1, 2000. These contracts are prepaid by the
dance studio customers on December 31, 1999, and
Rrecognizes foreign source taxable income of $500
from the prepayments (R’s only income in 1999). P
takes into income its $450 distributive share of part-
nership taxable income. On January 1, 2000, P’s
basis in its partnership interest is $1,350 ($900 from
its contribution under section 722, increased by its
$450 distributive share of partnership income under
section 705). On September 22, 2000, Pcontributes
its Rpartnership interest to S, a newly-formed do-
mestic corporation, in exchange for all the stock of
S.Under section 358, P’s basis in Sis $1,350. On
December 1, 2000, Psells Sto an unrelated party for
$1050 and recognizes a $300 loss.
(ii) Loss allocation. Because Precognized for-
eign source income for tax purposes that resulted in
the creation of a corresponding loss with respect to
the Sstock, the $300 loss is allocated against foreign
source income under paragraph (b)(4)(iii) of this
section.
Example 4.(i) Facts.On January 1, 2000, P, a
domestic corporation that uses the calendar year as
its taxable year forms N, a foreign corporation. P
contributes $1,000 to the capital of Nin exchange
for 100 shares of common stock. Pcontributes an
additional $1,000 to the capital of Nin exchange for
100 shares of preferred stock. Each preferred share
is entitled to 15- percent dividend but is redeemable
by Non or after January 1, 2010, for $1. Prior to
1999–5 I.R.B23February 1, 1999
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January 10, 2005, P receives a total of $750 of distri-
butions from Nwith respect to its preferred shares,
which Ptreats as foreign source general limitation
dividends. On January 10, 2005, Psells its 100 pre-
ferred shares in Nto an unrelated purchaser for
$600. Assume that this arrangement is not recharac-
terized under Notice 97–21 (1997–1 C.B. 407).
(ii) Loss allocation.Because Precognized for-
eign source income for tax purposes that resulted in
the creation of a corresponding loss with respect to
the Nstock, the $400 loss is allocated against for-
eign source general limitation income under para-
graph (b)(4)(iii) of this section.
Example 5.(i) Facts. On January 1, 2000, P, a
domestic corporation that uses the calendar year as
its taxable year, and F, a newly-formed controlled
foreign corporation wholly-owned by P, form N, a
foreign corporation. Pcontributes $1,000 to the
capital of N in exchange for 100 shares of common
stock and $1,000 to the capital of Fin exchange for
100 shares of common stock. Fcontributes
LC1,000 to the capital of Nin exchange for 100
shares of preferred stock. Each preferred share is
entitled to a 65-percent LC dividend. At the time of
the contributions, $1=LC1. The LC is expected to
depreciate significantly in relation to the U.S. dollar.
Prior to June 10, 2005, P receives a total of $1,900
of distributions from F, which it treats as foreign
source general limitation dividends. On June 10,
2005, the Npreferred stock has a fair market value
of $25 and Psells Ffor $25 to an unrelated person.
Assume that this arrangement is not recharacterized
under Notice 97–21 (1997–1 C.B. 407).
(ii) Loss allocation.Because Precognized for-
eign source income for tax purposes that resulted in
the creation of a corresponding loss with respect to
the Fstock, the $975 loss is allocated against foreign
source general limitation income under paragraph
(b)(4)(iii) of this section.
Example 6. (i) Facts. On January 1, 1998, P, a
domestic corporation, purchases N, a foreign corpo-
ration, for $1000. On March 1, 1998, Nsells its op-
erating assets, distributes a $400 general limitation
dividend to P, and invests its remaining $600 in
short term government securities. Nearns interest
income from the securities. The income constitutes
subpart Fincome that is included in P’s income
under section 951, increasing P’s basis in the N
stock under section 961(a). On March 1, 2002, P
sells Nand recognizes a $400 loss.
(ii) Loss allocation.The $400 dividend received
by Presulted in a $400 built-in loss in the Nstock,
which was locked in for P’s four-year holding period.
Because Precognized foreign source income for tax
purposes that resulted in the creation of a correspond-
ing loss with respect to the Nstock, under paragraph
(b)(4)(iii) of this section the $400 loss is allocated
against foreign source general limitation income.
(e) Effective date—(1) In general.
This section is effective for loss recog-
nized on or after January 11, 1999. For
purposes of this paragraph (e), loss that is
recognized but deferred (for example,
under section 267 or 1092) shall be
treated as recognized at the time the loss
is taken into account. This section shall
cease to be effective January 8, 2002.
(2) Application to prior periods.A tax-
payer may apply the rules of this section
to losses recognized in any taxable year
beginning on or after January 1, 1987, and
all subsequent years, provided that—
(i) The taxpayer’s tax liability as shown
on an original or amended tax return is
consistent with the rules of this section
and §1.865–2 for each such year for
which the statute of limitations does not
preclude the filing of an amended return
on June 30, 1999; and
(ii) The taxpayer makes appropriate ad-
justments to eliminate any double benefit
arising from the application of this section
to years that are not open for assessment.
Par. 7. Section 1.904–0 is amended by
revising the entry for §1.904–4(c)(2)(i)
and (ii) and adding entries for paragraphs
(c)(2)(i)(A), (c)(2)(i)(B), (c)(2)(ii)(A) and
(c)(2)(ii)(B) to read as follows:
§1.904–0 Outline of regulation
provisions for section 904.
* * * * *
§1.904–4 Separate application of section
904 with respect to certain categories of
income.
* * * * *
(c)* * *
(2)* * *
(i)Effective dates.
(A)In general.
(B)Application to prior periods.
(ii)Grouping rules.
(A)Initial allocation and apportionment
of deductions and taxes.
(B)Reallocation of loss groups.
* * * * *
Par. 8. Section 1.904–4 is amended by:
1. Revising paragraphs (c)(1) and
(c)(2),
2. Revising paragraph (c)(3)(iii),
3. Adding paragraph (c)(3)(iv), and
4. Amending paragraph (c)(8) by
adding Example 11, Example 12and Ex-
ample 13.
5. The additions and revisions read as
follows:
§1.904–4 Separate application of section
904 with respect to certain categories of
income.
* * * * *
(c) High-taxed income—(1) In general.
Income received or accrued by a United
States person that would otherwise be
passive income shall not be treated as pas-
sive income if the income is determined
to be high-taxed income. Income shall be
considered to be high-taxed income if,
after allocating expenses, losses and other
deductions of the United States person to
that income under paragraph (c)(2)(ii) of
this section, the sum of the foreign in-
come taxes paid or accrued by the United
States person with respect to such income
and the foreign taxes deemed paid or ac-
crued by the United States person with re-
spect to such income under section 902 or
section 960 exceeds the highest rate of tax
specified in section 1 or 11, whichever ap-
plies (and with reference to section 15 if
applicable), multiplied by the amount of
such income (including the amount
treated as a dividend under section 78).
If, after application of this paragraph (c),
income that would otherwise be passive
income is determined to be high-taxed in-
come, such income shall be treated as
general limitation income, and any taxes
imposed on that income shall be consid-
ered related to general limitation income
under §1.904–6. If, after application of
this paragraph (c), passive income is zero
or less than zero, any taxes imposed on
the passive income shall be considered re-
lated to general limitation income. For
additional rules regarding losses related to
passive income, see paragraph (c)(2) of
this section. Income and taxes shall be
translated at the appropriate rates, as de-
termined under sections 986, 987 and 989
and the regulations under those sections,
before application of this paragraph (c).
For purposes of allocating taxes to groups
of income, United States source passive
income is treated as any other passive in-
come. In making the determination
whether income is high-taxed, however,
only foreign source income, as deter-
mined under United States tax principles,
is relevant. See paragraph (c)(8) Exam-
ples10 through 13 of this section for ex-
amples illustrating the application of this
paragraph (c)(1) and paragraph (c)(2) of
this section.
(2) Grouping of items of income in
order to determine whether passive in-
come is high-taxed income—(i) Effective
dates—(A) In general.For purposes of
determining whether passive income is
February 1, 1999241999–5 I.R.B.
IRB 1999-5 1/27/99 3:27 PM Page 24

high-taxed income, the grouping rules of
paragraphs (c)(3)(i) and (ii), (c)(4), and
(c)(5) of this section apply to taxable
years beginning after December 31, 1987.
Except as provided in paragraph
(c)(2)(i)(B) of this section, the rules of
paragraph (c)(3)(iii) apply to taxable
years beginning after December 31, 1987,
and ending before December 31, 1998,
and the rules of paragraph (c)(3)(iv) apply
to taxable years ending on or after De-
cember 31, 1998. See Notice 87–6 (1987-
1 C.B.417) for the grouping rules applica-
ble to taxable years beginning after
December 31, 1986 and before January 1,
1988. The fourth sentence of paragraph
(c)(2)(ii)(A) and paragraph (c)(2)(ii)(B)
of this section are effective for taxable
years beginning after March 12, 1999.
(B) Application to prior periods.A
taxpayer may apply the rules of paragraph
(c)(3)(iv) to any taxable year beginning
after December 31, 1991, and all subse-
quent years, provided that—
(1) The taxpayer’s tax liability as
shown on an original or amended tax re-
turn is consistent with the rules of this
section for each such year for which the
statute of limitations does not preclude
the filing of an amended return on June
30, 1999; and
(2) The taxpayer makes appropriate ad-
justments to eliminate any double benefit
arising from the application of this section
to years that are not open for assessment.
(ii) Grouping rules—(A) Initial alloca-
tion and apportionment of deductions and
taxes.For purposes of determining
whether passive income is high-taxed, ex-
penses, losses and other deductions shall
be allocated and apportioned initially to
each of the groups of passive income (de-
scribed in paragraphs (c)(3), (4), and (5)
of this section) under the rules of
§§1.861–8 through 1.861–14T and 1.865–
1T through 1.865–2T. Taxpayers that al-
locate and apportion interest expense on
an asset basis may nevertheless apportion
passive interest expense among the
groups of passive income on a gross in-
come basis. Foreign taxes are allocated to
groups under the rules of §1.904–6(a)(iii).
If a loss on a disposition of property gives
rise to foreign tax (i.e., the transaction
giving rise to the loss is treated under for-
eign law as having given rise to a gain),
the foreign tax shall be allocated to the
group of passive income to which gain on
the sale would have been assigned under
paragraph (c)(3) or (4) of this section. A
determination of whether passive income
is high-taxed shall be made only after ap-
plication of paragraph (c)(2)(ii)(B) of this
section (if applicable).
(B) Reallocation of loss groups.If,
after allocation and apportionment of ex-
penses, losses and other deductions under
paragraph (c)(2)(ii)(A) of this section, the
sum of the allocable deductions exceeds
the gross income in one or more groups,
the excess deductions shall proportion-
ately reduce income in the other groups
(but not below zero).
(3) * * *
(iii) For taxable years ending before
December 31, 1998 (except as provided
in paragraph (c)(2)(i)(B) of this section),
all passive income received during the
taxable year that is subject to no with-
holding tax shall be treated as one item of
income.
(iv) For taxable years ending on or after
December 31, 1998, all passive income
received during the taxable year that is
subject to no withholding tax or other for-
eign tax shall be treated as one item of in-
come, and all passive income received
during the taxable year that is subject to
no withholding tax but is subject to a for-
eign tax other than a withholding tax shall
be treated as one item of income.
* * * * *
(8) * * *
Example 11.In 2001, P, a U.S. citizen with a tax
home in Country X, earns the following items of
gross income: $400 of foreign source, passive limi-
tation interest income not subject to foreign with-
holding tax but subject to Country Xincome tax of
$100, $200 of foreign source, passive limitation roy-
alty income subject to a 5 percent foreign withhold-
ing tax (foreign tax paid is $10), $1,300 of foreign
source, passive limitation rental income subject to a
25 percent foreign withholding tax (foreign tax paid
is $325), $500 of foreign source, general limitation
income that gives rise to a $250 foreign tax, and
$2,000 of U.S. source capital gain that is not subject
to any foreign tax. Phas a $900 deduction allocable
to its passive rental income. P’s only other deduc-
tion is a $700 capital loss on the sale of stock that is
allocated to foreign source passive limitation in-
come under §1.865–2(a)(3)(i). The $700 capital loss
is initially allocated to the group of passive income
subject to no withholding tax but subject to foreign
tax other than withholding tax. The $300 amount by
which the capital loss exceeds the income in the
group must be reapportioned to the other groups
under paragraph (c)(2)(ii)(B) of this section. The
royalty income is thus reduced by $100 to $100
($200 – ($300 3(200/600))) and the rental income
is thus reduced by $200 to $200 ($400 – ($300 3
(400/600))). The $100 royalty income is not high-
taxed and remains passive income because the for-
eign taxes do not exceed the highest United States
rate of tax on that income. Under the high-tax kick-
out, the $200 of rental income and the $325 of asso-
ciated foreign tax are assigned to the general limita-
tion category.
Example 12. The facts are the same as in Exam-
ple 11except the amount of the capital loss that is al-
located under §1.865–2(a)(3)(i) and paragraph (c)(2)
of this section to the group of foreign source passive
income subject to no withholding tax but subject to
foreign tax other than withholding tax is $1,200.
Under paragraph (c)(2)(ii)(B) of this section, the ex-
cess deductions of $800 must be reapportioned to
the $200 of net royalty income subject to a 5 percent
withholding tax and the $400 of net rental income
subject to a 15 percent or greater withholding tax.
The income in each of these groups is reduced to
zero, and the foreign taxes imposed on the rental and
royalty income are considered related to general
limitation income. The remaining loss of $200 con-
stitutes a separate limitation loss with respect to pas-
sive income.
Example 13.In 2001, P, a domestic corporation,
earns a $100 dividend that is foreign source passive
limitation income subject to a 30-percent withhold-
ing tax. A foreign tax credit for the withholding tax
on the dividend is disallowed under section 901(k).
Adeduction for the tax is allowed, however, under
sections 164 and 901(k)(7). In determining whether
P’s passive income is high-taxed, the $100 dividend
and the $30 deduction are allocated to the first group
of income described in paragraph (c)(3)(iv) of this
section (passive income subject to no withholding
tax or other foreign tax).
* * * * *
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 15, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on Janu-
ary 8, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 11, 1999, 64 F.R.
1505)
1999–5 I.R.B25February 1, 1999
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Proposed Changes to Final
Withholding Regulations Under
Section 1441; Proposed Model
Qualified Intermediary
Withholding Agreement
NOTICE 99–8
Background and Scope
On October 14, 1997, the Department
of the Treasury (the “Treasury”) and the
Internal Revenue Service (the “IRS”) is-
sued final Income Tax Regulations (the
“final withholding regulations”) under
chapter 3 (sections 1441-1464) and sub-
part G of subchapter A of chapter 61 (sec-
tions 6041-6050S) of the Internal Rev-
enue Code (the “Code”). Those
regulations were published in the Federal
Register as T.D. 8734 and, as modified by
T.D. 8804, will generally be effective for
payments made after December 31, 1999.
Section I of this notice announces some
of the changes that Treasury and the IRS
will make to those regulations. The
changes covered by this notice are those
that affect a withholding agent or payor’s
information systems and the type of bene-
ficial owner or payee documentation that
a withholding agent or payor must obtain
before January 1, 2000.
Section II of this notice provides a pro-
posed model qualified intermediary (QI)
withholding agreement. In Rev. Proc.
98–27, 1998–15 I.R.B. 15, the IRS pro-
vided guidance on the provisions to be
contained in a QI withholding agreement.
In Notice 98–16, 1998–15 I.R.B. 12, is-
sued simultaneously with Rev. Proc. 98–
27, the IRS announced that it intended to
issue a series of model agreements of
broad applicability to make qualified in-
termediary agreements as widely avail-
able as possible. Under these model
agreements, a person would be able to ac-
cept, sign, and submit the agreement to
the IRS without the need for individual
negotiations. Notice 98–16 stated that the
IRS contemplated that each model agree-
ment would be specific to a particular
country or group of countries with similar
laws and practices. The IRS invited sub-
missions of proposed model agreements
by groups or associations of potential
qualified intermediaries.
The IRS has developed a proposed
model QI withholding agreement that ap-
pears in Section II of this notice. This
model will be adapted to reflect the
“know-your-customer” rules applicable to
each country. Other specific adaptations
may be made if the IRS concludes that
they are necessary to implement QI with-
holding agreements in that country, will
not result in a competitive advantage for
qualified intermediaries in that country,
and do not violate principles that are fun-
damental to sound tax administration.
Once the IRS is satisfied that a particular
country’s know-your-customer rules can
be relied upon, or adapted, to provide reli-
able information, a final model QI with-
holding agreement will be issued for that
country.
The IRS invites comments on the pro-
posed regulation changes and the model
QI withholding agreement set forth in
Sections I and II of this notice. Written
comments (8 copies) must be received by
March 16, 1999. Send submissions to
CC:DOM:CORP:R (OGI–118203–98),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20004. In the alternative, sub-
missions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (OGI–118203–98),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue NW,
Washington, DC.
Section I. Proposed Changes to the Final
Withholding Regulations
A. Withholding and Information
Reporting When There Is Unreliable
Allocation Information.
Under §1.1441–1(e)(3)(iii), a nonquali-
fied intermediary is required to provide a
withholding agent with a withholding cer-
tificate (Form W-8IMY) to which it at-
taches the withholding certificates (Forms
W-8) and other appropriate documenta-
tion of the beneficial owners and payees
for whom it acts. The nonqualified inter-
mediary must also provide a statement
that the account holder documentation at-
tached to the Form W-8IMY represents all
of the persons to whom the Form W-
8IMY relates. If the nonqualified inter-
mediary has not attached documentation
for all of the persons to whom the Form
W-8IMY relates, the nonqualified inter-
mediary must separately identify the
amounts allocable to persons for whom a
withholding certificate or other appropri-
ate documentation are lacking or unreli-
able. Further, under §1.1441–1(e)(3)(iv),
a nonqualified intermediary must provide
information sufficient for a withholding
agent to determine the proportion of each
payment of reportable amounts, as de-
fined in §1.1441–1(e)(3)(iv), that is allo-
cable to each person to whom the Form
W-8IMY relates, including persons for
whom the intermediary has not attached a
withholding certificate or other appropri-
ate documentation. The information for
persons for whom documentation is lack-
ing or unreliable may be provided in the
aggregate and need not be provided sepa-
rately for each such person. Section
1.1441–5(c)(3)(iii) provides similar rules
for foreign partnerships. The allocation
information required by §§1.1441–1(e)-
(3)(iv) and 1.1441–5(c)(3)(iii) is neces-
sary so that the withholding agent may
file Forms 1042-S for each beneficial
owner. See §1.1461–1(c)(1).
Sections 1.1441–1(b)(3)(v)(C) and
1.1441–5(d)(3)(ii) contain reporting and
withholding rules that apply if a withhold-
ing agent receives from a nonqualified in-
termediary or a foreign partnership the
Forms W-8 or other appropriate docu-
mentation from all the beneficial owners
or payees in a group of beneficial owners
or payees, but the withholding agent does
not have information that permits it to al-
locate a payment of an amount subject to
chapter 3 withholding to each beneficial
owner or payee. In that case, the payment
is presumed to be allocable entirely to the
beneficial owner or payee in the group
with the highest withholding rate or, if the
rates are equal, to the beneficial owner or
payee in the group with the highest U.S.
tax liability.
Section 1.6049–5(d)(3)(ii) contains
similar rules that apply for purposes of
Form 1099 reporting of amounts that are
not subject to chapter 3 withholding
(other than short-term OID and deposit
interest). These amounts include foreign
source income and broker proceeds.
February 1, 1999261999–5 I.R.B.
Part III. Administrative, Procedural, and Miscellaneous
IRB 1999-5 1/27/99 3:27 PM Page 26

Under §1.6049–5(d)(3)(ii), if a payor
pays an amount to a foreign intermediary
and has actual knowledge that the foreign
intermediary is acting on behalf of a U.S.
nonexempt recipient but the payor cannot
determine the portion of the payment that
is allocable to the U.S. nonexempt recipi-
ent, the payor must treat the entire unallo-
cated portion of a payment as allocable to
the U.S. nonexempt recipient.
The rules of §§1.1441–1(b)(3)(v)(C),
1.1441–5(d)(3)(ii), and 1.6049–5(d)(3)(ii)
permit the account holders of a nonquali-
fied intermediary or partners of a foreign
partnership to obtain a reduced rate of
withholding under sections 1441 or 1442
(or to avoid imposition of backup with-
holding) even though the nonqualified in-
termediary or foreign partnership has not
provided a withholding agent with infor-
mation that allocates the payment to each
account holder or partner. For example, a
nonqualified intermediary could provide
Forms W-8 for all of its beneficial owner
account holders and obtain the portfolio
interest exemption for those account hold-
ers without providing the withholding
agent with any allocation information.
Similarly, if a nonqualified intermediary
provides a payor with a Form W-9 from a
U.S. nonexempt payee, the unallocated
portion of a payment of an amount not
subject to chapter 3 withholding will be
reported as if it were made to that U.S.
nonexempt recipient, although no backup
withholding will be imposed since the
U.S. payee has provided a Form W-9.
The Treasury and the IRS have deter-
mined that the ability to obtain a reduced
rate of withholding, or to avoid imposi-
tion of backup withholding, in the ab-
sence of information that allocates the
payment to each beneficial owner or
payee of a nonqualified intermediary or
partner of a foreign partnership under-
mines the general rules of §§1.1441–
1(e)(3)(iii) and (iv), 1.1441–5(c)(3)(iii)
and (iv), chapter 61, and section 3406,
which require allocation information.
Further, allocation information is essen-
tial for a withholding agent to do benefi-
cial owner reporting on Form 1042-S and
payee reporting on Form 1099. There-
fore, the regulations will be amended to
require a withholding agent that has insuf-
ficient information to allocate a payment
to treat that payment as made to an undoc-
umented payee, unless the allocation in-
formation is received before the withhold-
ing agent is required to file (without re-
gard to extensions) Forms 1042-S or
Forms 1099. Therefore, if an unallocated
payment paid to a foreign intermediary or
foreign partnership (other than a with-
holding foreign partnership) is an amount
subject to chapter 3 withholding, it will be
treated as if it were paid to an undocu-
mented foreign payee and will be subject
to 30 percent withholding. If the unallo-
cated payment paid to a foreign interme-
diary or foreign partnership (other than a
withholding foreign partnership) is de-
posit interest under section 871(i)(2)(A)
or short-term OID under section 871(g)-
(1)(B), it will be treated as if paid to a
U.S. nonexempt recipient and subject to
31 percent withholding. If the unallo-
cated payment paid to a foreign interme-
diary or foreign partnership (other than a
withholding foreign partnership) is an
amount not subject to chapter 3 withhold-
ing (other than deposit interest and short-
term OID), and the payor knows that at
least one payee of the foreign intermedi-
ary or foreign partnership is a U.S. nonex-
empt recipient, then the unallocated por-
tion of the payment will be treated as paid
to a nonexempt recipient and subject to 31
percent withholding. If the withholding
agent has no amounts from which to
withhold, because, for example, it has al-
ready paid the amounts to a payee, the
withholding agent must satisfy its liabil-
ity for the 30 or 31 percent amount either
from other amounts it holds on behalf of
the payee or from its own funds.
The Treasury and the IRS have also de-
termined that it is inappropriate to report
an unallocated payment as if it were made
in its entirety to a person who may or may
not be entitled to receive the entire
amount. Therefore, the regulations will
also be amended so that an unallocated
payment will be reported on a Form 1042-
S or Form 1099, as appropriate, sent to
the nonqualified intermediary or foreign
partnership in the name of an unknown
recipient. Further, §§1.1441–1(b)(6) and
1.1441–5(c)(3)(v) of the regulations will
be amended so that an intermediary or
partnership that fails to provide allocation
information is not relieved of its responsi-
bility to file Forms 1042-S even if it has
provided a withholding agent with a Form
W-8IMY that has documentation from all
of its account holders or partners attached
and the withholding agent has withheld
the appropriate amount. An intermediary
or partnership that fails to provide alloca-
tion information for a U.S. nonexempt re-
cipient that receives a reportable amount
will also be required to file a Form 1099
with regard to reportable payments made
to that U.S. nonexempt recipient.
B. Accrued Interest and Original Issue
Discount
Under §1.1441–3(b)(2) of the final
withholding regulations, a withholding
agent is not required to withhold on inter-
est that has accrued up to the date of a sale
of a debt obligation when the sale occurs
between two interest payment dates. This
exception to withholding applies even if
the amount is taxable under sections 871
or 881 because, for example, it does not
qualify as portfolio interest. Moreover,
the exception applies even though there is
no documentation establishing that the
beneficial owner of the obligation is a for-
eign person. Documentation may be re-
quired, however, for Form 1099 reporting
or backup withholding under sections
6045, 6049, and 3406. The exception
from withholding does not relieve the
withholding agent from reporting on
Form 1042-S under section 1.1461–1(c).
Withholding is required, however, under
§1.1441–3(b)(1) on the gross amount of
interest payable on an interest payment
date, regardless of whether the payment
constitutes a return of capital or the pay-
ment of income, unless an exception to
withholding, such as the portfolio interest
exemption, applies.
By contrast, under §1.1441–2(b)(3),
the accrued amount of original issue dis-
count is subject to withholding when a
foreign person sells, exchanges, or re-
ceives a payment on an original issue dis-
count obligation unless an exemption
from withholding applies. A withholding
agent is required to withhold on OID,
however, only if it has actual knowledge
of the proportion of the payment that is
taxable to the beneficial owner of the OID
obligation. A withholding agent has ac-
tual knowledge of the taxable portion of
the OID if it knows how long the benefi-
cial owner has held the obligation, the
terms of the obligation, and the extent to
which the beneficial owner purchased the
obligation at a premium. A withholding
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agent is treated as having knowledge if
such information is reasonably available.
The information is considered to be rea-
sonably available to a withholding agent
if the withholding agent maintains a direct
account relationship with the beneficial
owner of the obligation. However, a
withholding agent must withhold,
notwithstanding lack of knowledge, if the
withholding agent must treat the payment
as made to a foreign payee under the ap-
plicable presumption rules because the
withholding agent cannot reliably associ-
ate the payment with documentation and
the amount would qualify as portfolio in-
terest if the withholding agent held such
documentation.
Because of the similarities between
OID and accrued interest on an obligation
sold between interest payment dates, the
IRS and Treasury believe that they should
be treated similarly. Further, the IRS and
Treasury are concerned that a withholding
exemption for the sale of debt obligations
between interest payment dates even in
the absence of a beneficial owner Form
W-8 provides an easy avenue for the
avoidance of the documentation require-
ments imposed under the portfolio inter-
est provisions of sections 871(h) and
881(c). As a result, the IRS and Treasury
issued proposed regulation §1.1441–
3(b)(2) (REG–114000–97, 62 F.R. 53503)
which would change the accrued interest
rule to conform to the OID rule. Under
the proposed regulation, a withholding
agent would be required to withhold on
the accrued interest portion of the pur-
chase price if it knows the amount of ac-
crued interest. A withholding agent
would be deemed to have knowledge of
the amount of accrued interest if it had a
direct account relationship with the holder
of the security. Further, withholding
would be required on accrued interest if
the interest would qualify as portfolio in-
terest but the withholding agent does not
have the beneficial owner documentation
required under the portfolio interest rules.
Commentors have raised objections to
both the proposed accrued interest rules
and to the final OID rules. Regarding the
proposed accrued interest rules, they note
that most sales of debt obligations of U.S.
issuers occur as delivery versus payment
(DVP) transactions. DVP transactions are
settled quickly and the need to obtain doc-
umentation would prohibit quick settle-
ment of transactions. Moreover, sales of
debt obligations often take place through
several tiers of intermediaries. Since the
portfolio interest rules require beneficial
owner documentation, each intermediary
involved in a transaction, including those
with no direct relationship to the benefi-
cial owner, would need to obtain benefi-
cial owner documentation.
Commentors also criticized the pre-
sumption that a withholding agent has the
information to determine the amount of
OID or accrued interest if it has a direct
account relationship with the beneficial
owner of an obligation. They contend that
a direct account relationship does not en-
sure that a withholding agent will have the
information necessary to determine the
amount of withholding. For example, if
securities were not acquired by the with-
holding agent for the beneficial owner but
were transferred by the beneficial owner
to an account with the withholding agent,
the withholding agent may not know the
holding period of the security or whether it
was acquired at a premium.
In response to these comments, the IRS
and Treasury intend to revise the regula-
tions governing the treatment of OID and
accrued interest on obligations sold be-
tween interest payment dates. Under the
revised regulations, only a withholding
agent that is required to obtain Form W-8
or other documentary evidence will be re-
quired to withhold and report on OID or
accrued interest on obligations sold be-
tween interest payment dates. No with-
holding or reporting of OID and accrued
interest will be required, however, pro-
vided that (1) a withholding agent that is
required to obtain a Form W-8 or other
documentary evidence obtains the Form
W-8 or other documentary evidence and
(2) the interest qualifies as portfolio inter-
est or qualifies for a complete exemption
from taxation under an income tax treaty.
Further, if a withholding agent that is re-
quired to obtain Form W-8 or other docu-
mentary evidence obtains the Form W-8
or other documentary evidence, but the
interest or OID does not qualify for the
portfolio interest exemption or a complete
exemption from taxation under an income
tax treaty, withholding and reporting on
accrued interest or OID will be required,
but only if the withholding agent knows
the amount of accrued interest or OID
paid or the withholding agent knows, or
has reason to know, that the person selling
the obligation has a principal purpose to
avoid U.S. tax.
A withholding agent will be required to
obtain a Form W-8 or other documentation
from a beneficial owner only if the with-
holding agent is the person who receives
the proceeds from the sale or exchange of
the obligation against delivery of the
obligation or, if the obligation is being re-
tired, the withholding agent is the person
responsible for paying the holder, or cred-
iting the holder’s account, with the pro-
ceeds from the retirement. Notwithstand-
ing the preceding sentence, a withholding
agent will not be required to obtain a Form
W-8 or other documentation if it is effect-
ing the sale of an obligation for a broker,
as defined in §1.6045–1(a)(1), and the
withholding agent does not know, and
does not have reason to know, that the
broker is the beneficial owner of the oblig-
ation. In that case, only the broker will be
required to obtain a Form W-8 or other
documentary evidence.
A withholding agent will be treated as
knowing the amount of accrued interest or
OID only if it actually knows the seller’s
holding period of the obligation, the terms
of the obligation, and the extent to which
the obligation was acquired by the seller
at a premium. A withholding agent will
not be treated as having knowledge of
these facts merely because it has a direct
account relationship with the beneficial
owner.
If a withholding agent that is required
to obtain a Form W-8 or other documenta-
tion fails to do so or the withholding agent
knows, or has reason to know, that the
sale of an obligation is part of a plan to
avoid withholding, it must withhold on
the amount of accrued interest or OID de-
termined under the following rules. If the
amount subject to withholding is accrued
interest, the amount of income subject to
withholding is determined as if the
seller’s income is equal to the amount of
interest due as of the next interest pay-
ment date pro rated to the date of sale. If
the obligation is an original issue discount
obligation, the amount of OID is deter-
mined by assuming that the seller has held
the instrument since its original issuance.
A withholding agent may rely on the most
recently published “List of Original Issue
Discount Instruments” (IRS Publication
1212) to determine the amount of OID in
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any particular transaction. If a withhold-
ing agent cannot determine the amount of
OID subject to withholding under these
rules, it must withhold an amount, based
on the entire amount paid, that is neces-
sary to assure that the tax withheld is not
less than 30 percent of the amount that
will subsequently be determined to be in-
come subject to tax. See §1.1441–
3(c)(4)(i)(A).
Finally, no change will be made to the
rule under §1.1441–3(b)(1) that requires
withholding on the gross amount of inter-
est payable on an interest payment date,
regardless of whether the payment consti-
tutes a return of capital or the payment of
income.
C. Delayed Implementation of IRS-
Certified TIN
Under §1.1441–6(b), a withholding
agent may rely on a claim that a beneficial
owner is entitled to a reduced rate of with-
holding based on an income tax treaty
only if the withholding agent can reliably
associate the payment with a valid with-
holding certificate (Form W-8BEN). A
withholding certificate is valid only if it
contains a taxpayer identification number
(“TIN”). Further, a TIN is valid to estab-
lish proof of residence in a treaty country
only if the TIN is certified by the IRS.
Under §1.1441–6(b)(2), a TIN is not re-
quired to appear on a withholding certifi-
cate if treaty benefits are claimed with re-
spect to income from certain types of
instruments, which, generally, are pub-
licly traded. The procedures for obtaining
a certified TIN are set forth in §1.1441–
6(c)(2)(ii).
The IRS will not implement the proce-
dure for obtaining certified TINs under
§1.1441–6(c)(2)(ii) until January 1, 2002.
Until the IRS begins to issue certified
TINs, a withholding agent may treat a
beneficial owner as a resident of a treaty
country in situations in which a certified
TIN would otherwise be required if the
withholding agent has a Form W-8BEN
from the beneficial owner that contains a
TIN, the form contains a statement that
the beneficial owner is a resident of a par-
ticular treaty country, the beneficial
owner’s permanent residence address on
the form is in that treaty country, and the
form is otherwise valid. If a beneficial
owner provides a permanent residence ad-
dress on the Form W-8BEN that is outside
the applicable treaty country, the with-
holding agent may rely on the beneficial
owner’s claim for benefits under a partic-
ular treaty only if the withholding agent
obtains, and may rely on, either a certifi-
cate of residence as described in §1.1441–
6(c)(3) or the documentary evidence as
described in §1.1441–6(c)(4) that estab-
lishes the beneficial owner’s residence in
the particular treaty country.
D. Trusts and Estates.
Sections 1.1441–1(c)(6)(i) and (ii)(A)
generally treat the beneficial owner of in-
come as the person that is the owner of
the income under U.S. tax principles. For
flow-through entities, which are defined
to be partnerships, trusts, and estates, the
beneficial owners are the persons who,
under U.S. tax principles, are the owners
of the income in their separate or individ-
ual capacities. Section 1.1441–1(e)(3)(i)
states that a trust or estate is required to
use a flow-through certificate, as defined
in §1.1441–5(e), to provide the certifi-
cates or documentation on the status of
the beneficiaries of a trust or estate. Sec-
tion 1.1441–5(e), however, is reserved.
These rules imply that, at least in some
cases, the beneficial owners of income
paid to a trust or estate are the beneficia-
ries of the trust or estate. Section 1.1441–
1(c)(6)(ii)(B), however, states that the
provisions of §1.1441–1(c)(6)(i) and
(ii)(A) shall not apply to trusts or estates.
Instead, the beneficial owner of income
paid to a trust or estate is determined
under §1.1441–3(f) and (g) of the regula-
tions in effect prior to January 1, 1999
(see those sections as contained in 26
CFR part 1, revised April 1, 1997). Sec-
tions 1.1441–3(f) and (g), however, do
not make beneficial owner determina-
tions. Rather, they generally require
withholding under section 1441 if the
fiduciary of a trust or estate is a foreign
person or, in the case of income taxable to
a grantor under sections 671 through 679
of the Code, the trust is created by a non-
resident alien individual.
Treasury and the IRS intend to issue
regulations that will clarify the withhold-
ing obligations of income paid to trusts
and estates. Under these rules, a foreign
trustee or foreign executor of a U.S. or
foreign trust or estate must furnish a with-
holding agent with a Form W-8IMY (Cer-
tificate of Foreign Intermediary, Foreign
Partnership, or Certain U.S. Branches for
United States Tax Withholding). If the
foreign person is considered a nonquali-
fied intermediary and is the trustee of a
trust described in section 651(a) or a trust,
all or a portion of which is treated as
owned by the grantor or other persons
under sections 671 through 679, the
trustee must attach the Forms W-8BEN,
Forms W-8EXP, or, if required, Forms W-
9, of the beneficiaries or grantors of the
trust. In all other cases, the foreign
trustee or executor must attach a Form W-
8BEN, Form W-8EXP, or if required,
Form W-9, completed on behalf of the
trust or estate.
E. Application of Negative Confirmation
Rules to Existing Accounts.
Section 1.6049–5(c)(4)(i) provides an
exception from the normal documentation
requirements for payments of amounts
not subject to chapter 3 withholding
(other than U.S. source OID on certain
short-term obligations or U.S. source de-
posit interest) to an offshore account by a
bank or other financial institution. Under
that exception, if it is not customary to
obtain documentary evidence, a payor
may, instead of obtaining a withholding
certificate or documentary evidence, rely
on an account holder’s declaration of for-
eign status made on an account opening
statement if certain conditions are met.
Under §1.6049–5(c)(4)(iv), if it is cus-
tomary to obtain documentary evidence
but it is not customary to renew it, then a
payor must request such documentary ev-
idence in lieu of a declaration of foreign
status. For both the §§1.6049–5(c)(4)(i)
and (iv) exceptions, the bank or financial
institution must include a “negative con-
firmation” in a year-end statement mailed
to the payee in which the bank or finan-
cial institution states that the payee is
being treated as a non-U.S. person and
that the payee has an obligation to notify
the bank or financial institution if the
payee becomes a U.S. citizen or resident.
Section 1.6049–5(c)(4)(v) states that
the exceptions of §§1.6049–5(c)(4)(i) and
(iv) do not apply to an account opened be-
fore January 1, 2000. Prior to January 1,
2000, the rules in §§35a.9999–3(ii) Q&A
34 and 35a.9999–4 Q&A 1 and 5 apply.
Under those rules certain foreign payors
may treat a payee as a foreign person if
the payor has evidence in its records that
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the payee is a foreign person, including a
written indication from the payee that the
payee is not a U.S. person. By stating that
the rules of §§1.6049–5(c)(4)(i) and (iv)
do not apply to accounts opened before
January 1, 2000, the regulations inadver-
tently exclude banks or financial institu-
tions with accounts that have declarations
of foreign status, or other documentary
evidence of foreign status, from continu-
ing to rely on those statements or docu-
mentation provided the bank or financial
institution sends the negative confirma-
tion required under §1.6049–5(c)(4)(iii).
The rule of §1.6049–5(c)(4)(v) will be
changed so that payors who relied on the
rules contained in §§35a.9999–3(ii) Q&A
34 and 35a.9999–4 Q&A 1 and 5, as in ef-
fect prior to January 1, 2000, with regard
to payments of foreign source interest or
broker proceeds from sales effected out-
side the United States may continue to
treat the payee as a foreign person under
the rules of §1.6049–5(c)(4), provided
that the payor sends a negative confirma-
tion to the payee each year as required
under §1.6049–5(c)(4)(iii) and does not
know, or have reason to know, that the
payee is a U.S. person.
F. Expansion of Master Agreement/ Con-
firmation Exception for Notional Princi-
pal Contracts.Under §1.1441– 4(a)(3) a
withholding agent must treat a payment of
income on a notional principal contract
made to a foreign person as income effec-
tively connected with the conduct of a
trade or business within the United States
unless the withholding agent can reliably
associate the payment with a withholding
certificate (Form W-8BEN) on which it
can rely to treat the payment as an amount
that is not effectively connected. An ex-
ception to the Form W-8BEN requirement
is provided under §1.1441–4(a)(3)(ii).
Under that section, a payment to a finan-
cial institution is not treated as effectively
connected with the conduct of a trade or
business within the United States if the
foreign financial institution provides a
representation in a master agreement that
governs transactions in notional principal
contracts between the parties (for exam-
ple an International Swaps and Deriva-
tives Association (ISDA) Agreement) or
in the confirmation the particular notional
principal contract transaction that the
counterparty is a U.S. person or a non-
U.S. branch of a foreign person.
Commentors have asked that the mas-
ter agreement and confirmation excep-
tions be expanded to apply to persons
other than financial institutions. The reg-
ulations will be changed so that persons
other than financial institutions can use
the master agreement and confirmation
exceptions.
G. Use of Documentary Evidence by
Foreign Partnerships with U.S.
Accounts.
Under §1.6049–5(c)(1) a withholding
agent or payor may generally rely on doc-
umentary evidence instead of a beneficial
owner withholding certificate if an
amount is paid outside the United States
to an offshore account. An offshore ac-
count is an account maintained at an of-
fice or branch of a U.S. or foreign bank or
other financial institution at any location
outside the United States and outside of a
U.S. possession. Under §1.6049-5(e), an
amount is considered paid outside the
United States if the payor completes the
acts necessary to effect payment outside
the United States.
The regulations do not specifically ad-
dress whether partners of a foreign part-
nership that has an account in the United
States can use documentary evidence to
establish their foreign status. Under
§1.1441–5(c)(1) it is the partners, and not
the partnership, that are considered to be
the payees on the amounts credited to an
account. Thus, the regulations as cur-
rently drafted appear to preclude the use
of documentary evidence by the foreign
partners of a foreign partnership.
The regulations will be amended to
permit foreign partners of a foreign part-
nership that has an account in the United
States to use documentary evidence. As a
result, such partners will be treated the
same as foreign account holders of a fi-
nancial institution that has an account in
the United States.
H. Withholding on Capital Gain
Distributions of a Domestic Real
Estate Investment Trust (“REIT”).
Section 1.1441–3(c)(4)(i)(C) requires
withholding under section 1441 on the
portion of a distribution from a REIT that
is not designated as a capital gain divi-
dend or a return of basis. Under section
1.1445–8(c), withholding is required
under section 1445 on the portion of the
distribution designated by a REIT as a
capital gain dividend.
By stating that withholding is required
on amounts not designated as a capital
gain dividend or a return of basis,
§1.1441–3(c)(4)(i)(C) requires withhold-
ing on a distribution in excess of basis,
which under section 301(c)(3) is treated
as capital gain from the sale or exchange
of stock. The final withholding regula-
tions will be amended to state that with-
holding under section 1441 is not required
on a distribution in excess of basis (which
under section 301(c)(3) is treated as a
capital gain). However, a distribution in
excess of basis is subject to withholding
under section 1445 unless the interest in
the REIT is not a U.S. real property inter-
est (e.g. an interest in a domestically con-
trolled REIT under section 897(h)(2)).
I. Validity period for documentary
evidence.
Under §1.1441–1(e)(4)(ii), the docu-
mentary evidence that may be provided
under §§1.1441–6(c)(4) and 1.6049–
5(c)(1) remains valid until “the earlier of
the last day of the third calendar year fol-
lowing the year in which the documentary
evidence is created. . . .” Commentors
have stated that it is not clear when docu-
mentary evidence is created. To clarify
the rule, §1.1441–1(e)(4)(ii) will be
amended to permit the validity period to
be measured from the date documentation
is provided to a withholding agent.
Section II. Model Qualified Intermediary
Withholding Agreement.
A. Submission of Know-Your-Customer
Information. Before a model QI with-
holding agreement will be concluded for
any country, the Internal Revenue Service
must receive certain information regard-
ing that country’s “know-your-customer”
rules. This information is necessary to
evaluate whether those rules are sufficient
to establish an account holder’s status as a
beneficial owner or intermediary and the
account holder’s nationality and resi-
dence. If the “know-your-customer” rules
are sufficient for these purposes, they will
be incorporated, with any necessary mod-
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ifications, into the Attachments to the
qualified intermediary agreement. The
information the IRS must receive is the
following:
1.An English translation of the laws
and regulations (“know-your-cus-
tomer” rules) governing the require-
ments of QI to obtain documenta-
tion confirming the identity of QI’s
account holders. The translation
must include the name of the law,
and the appropriate citations to the
law and regulations.
2.The name of the organization
(whether a governmental entity or
private association) responsible for
enforcing the know-your customer
rules. Specify how those rules are
enforced (e.g., through audit) and
the frequency of compliance
checks.
3.The penalties that apply for failure
to obtain, or evaluate, documenta-
tion under the know-your-customer
rules.
4.The definition of customer or ac-
count holder that is used under the
know-your-customer rules. Specify
whether the definition encompasses
direct and indirect beneficiaries of
an account if the activity in the ac-
count involves the receipt or disbur-
sal of funds. Specify whether the
definition of customer or account
holder includes a trust beneficiary, a
company whose assets are managed
by an asset manager, a controlling
shareholder of a closely held corpo-
ration or the grantor of a trust.
5. A statement regarding whether the
documentation required under the
know-your-customer rules requires
QI to determine if its account holder
is acting as an intermediary for an-
other person.
6. A statement regarding whether the
documentation required under the
know-your-customer rules requires
QI to identify the account holder as
a beneficial owner of income cred-
ited to an account.
7. A list of the specific documentation
required to be used under the know-
your-customer rules, or if those
rules do not require use of specific
documentation, the documentation
that is generally accepted by the au-
thorities responsible for enforcing
those rules.
8. A statement regarding whether the
know-your-customer rules require
that an account holder provide a
permanent residence address.
9. A summary of the rules that apply if
an account is not opened in person
(e.g., correspondence, telephone,
Internet).
10. Whether an account holder’s iden-
tity may be established, in whole or
in part, by introductions or referrals.
11. The circumstances under which
new documentation must be ob-
tained, or existing documentation
verified, under the know-your-cus-
tomer rules.
12. A list of all the exceptions, if any, to
the documentation requirements
under the know-your-customer
rules.
13. A statement regarding whether the
know-your-customer rules do not
require documentation from an ac-
count holder if a payment to or
from that account holder is cleared
by another financial institution.
1
14. A statement regarding how long the
documentation remains valid under
the know-your customer rules.
15. A statement regarding how long the
documentation obtained under the
know-your-customer rules must be
retained and the manner for main-
taining that documentation.
16. Specify whether the rules require
the maintenance of wire transfer
records, the form of the wire trans-
fer records and how long those
records must be maintained. State
whether the wire transfer records
require information as to both the
original source of the funds and the
final destination of the funds.
17. A list of any payments or types of
accounts that are not subject to the
know-your-customer rules.
18. Specify whether there are special
rules that apply for purposes of pri-
vate banking activities.
1999–5 I.R.B31February 1, 1999
1
The IRS will not permit a QI to establish the
identity of an account holder without obtaining doc-
umentation directly from the account holder.
B. Proposed Qualified Intermediary Agreement
SECTION 1. PURPOSE AND SCOPE
Sec. 1.01. General Obligations.
Sec. 1.02. Parties to the Agreement.
Sec. 1.03. Documentation Retention
Sec. 1.04. Qualified Intermediary Withholding Certificate
Sec. 1.05. Disclosure of Account Holders.
Sec. 1.06. Classes of Assets.
Sec. 1.07. Withholding Obligations
Sec. 1.08. Return Obligations
Sec. 1.09. Information Reporting Obligations
Sec. 1.10. Adjustments for Over- and Under- Withholding and Refunds
Sec. 1.11. External Audit
SECTION 2. DEFINITIONS
Sec. 2.01. Account Holder
Sec. 2.02. Agreement
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Sec. 2.03. Assumption of Withholding Responsibility
Sec. 2.04. Bank Deposit Interest
Sec. 2.05. Beneficial Owner
Sec. 2.06. Chapter 3 of the Code.
Sec. 2.07. Chapter 61 of the Code
Sec. 2.08. Class of Assets.
Sec. 2.09. Documentary Evidence
Sec. 2.10. Documentation
Sec. 2.11. Documented Account Holder/Payee
Sec. 2.12. Exempt Recipient
Sec. 2.13. External Auditor
Sec. 2.14. Foreign Person
Sec. 2.15. Form W-8
Sec. 2.16. Form W-9
Sec. 2.17. Form 945
Sec. 2.18. Form 1042.
Sec. 2.19. Form 1042-S.
Sec. 2.20. Form 1042-S Reporting
Sec. 2.21. Form 1096
Sec. 2.22. Form 1099
Sec. 2.23. Form 1099 Reporting
Sec. 2.24. Intermediary
Sec. 2.25. Non-Exempt Recipient.
Sec. 2.26. Nonqualified Intermediary
Sec. 2.27. Payee
Sec. 2.28. Payment
Sec. 2.29. Payor
Sec. 2.30. Presume.
Sec. 2.31. Private Arrangement Intermediary
Sec. 2.32. Qualified Intermediary
Sec. 2.33. Qualified Intermediary (QI) EIN
Sec. 2.34. Reduced Rate of Withholding
Sec. 2.35. Reportable Amount
Sec. 2.36. Reportable Payment
Sec. 2.37. Short-Term Obligation
Sec. 2.38. U.S. Person
Sec. 2.39. Undocumented Account Holder/Payee
Sec. 2.40. Withholding Agent
Sec. 2.41. Other Terms
SECTION 3. WITHHOLDING RESPONSIBILITY UNDER SECTION 1441, 1442, AND 1443
Sec. 3.01. Withholding Responsibility
Sec. 3.02. Assumption of Chapter 3 Primary Withholding Responsibility
Sec. 3.03. No Assumption of Form 1099 Reporting and Backup Withholding Responsibility.
Sec. 3.03. Assumption of Form 1099 Reporting and Backup Withholding Responsibility
Sec. 3.04. Requirements of QI Assuming Reporting and Withholding Responsibility Under Sections 3.02 and/or 3.03.
SECTION 4. PRIVATE ARRANGEMENT INTERMEDIARIES
Sec. 4.01. In General
Sec. 4.02. Modification of Obligations for PAI Agreements
Sec. 4.03. Termination of Arrangement.
SECTION 5. DOCUMENTATION REQUIREMENTS
Sec. 5.01. Documentation Required For Withholding Rate Reduction
Sec. 5.02. Reliance on Forms W-8 or W-9
Sec. 5.03. Documentary Evidence
Sec. 5.04. Limitation on Benefits and Section 894 Representations
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Sec. 5.05. TIN Requirement
Sec. 5.06. Documentation for International Organizations
Sec. 5.07. Documentation for Foreign Governments
Sec. 5.08. Documentation for Foreign Tax-Exempt Organizations
Sec. 5.09. Documentation From Intermediaries
(A) Nonqualified Intermediaries and Foreign Partnerships (Other Than Withholding Foreign Partnerships)
(B) Qualified Intermediaries and Withholding Foreign Partnerships
(C) Private Arrangement Intermediaries
Sec. 5.10. Documentation Validity Period
Sec. 5.11. Due Diligence Requirements.
(A) In General
(B) Reason to know
(C) Limitation on Reason to Know
Sec. 5.12. Maintenance, and Retention of Documentation.
(A) Maintaining Documentation
(B) Retention Period
Sec. 5.13. Application of Presumption Rules.
SECTION 6. QUALIFIED INTERMEDIARY WITHHOLDING CERTIFICATE AND DISCLOSURE OF ACCOUNT
HOLDERS TO WITHHOLDING AGENT
Sec. 6.01. Certification to Withholding Agent
Sec. 6.02. Disclosure of Certain Account Holder Documentation
SECTION 7. DETERMINATION OF ASSET CATEGORIES AND CLASSES FOR QI’S WITHHOLDING
CERTIFICATE
Sec. 7.01. Statement of Asset Classes
Sec. 7.02. Categories of Assets
Sec. 7.03. Class of Assets
SECTION 8. WITHHOLDING OBLIGATIONS
Sec. 8.01. Primary Withholding Responsibility Under Chapter 3 Not Assumed
Sec. 8.02. Primary Withholding Responsibility Under Chapter 3 Assumed
Sec. 8.03. Backup Withholding Responsibility Not Assumed
Sec. 8.04. Backup Withholding Responsibility Assumed
Sec. 8.05. Deposit Requirements
SECTION 9. TAX RETURN OBLIGATIONS
Sec. 9.01. Form 1042 Filing Requirement.
(A) In general.
(B) Extensions For Filing Returns
Sec. 9.02. Form 945 Filing Requirement
Sec. 9.03. Retention of Returns
SECTION 10. INFORMATION REPORTING OBLIGATIONS
Sec. 10.01. Form 1042-S Reporting.
Sec. 10.02. Beneficial Owner Reporting
Sec. 10.03. Categories of Assets For Form 1042-S Reporting
Sec. 10.04. Classes of Assets for Form 1042-S Reporting
Sec. 10.05. Form 1099 Reporting Responsibility.
SECTION 11. ADJUSTMENTS FOR OVER- AND UNDER-WITHHOLDING; REFUNDS
Sec. 11.01. Adjustments for Overwithholding by Withholding Agent
(A) Reimbursement Procedure
(B) Set-off Procedure
Sec. 11.02. Adjustments for Chapter 3 Overwithholding by QI
(A) Reimbursement Procedure
1999–5 I.R.B33February 1, 1999
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(B) Set-Off Procedure
Sec. 11.03. Repayment of Backup Withholding.
Sec. 11.04. Collective Refund or Credit Procedures for Chapter 3 Overwithholding
Sec. 11.05. Adjustments for Chapter 3 Underwithholding
Sec. 11.06. Underwithholding After Form 1042 Filed
SECTION 12. EXTERNAL AUDIT PROCEDURES.
Sec. 12.01. In General
Sec. 12.02. Designation of External Auditor
Sec. 12.03. Timing and Scope of External Audits
Sec. 12.04. External Auditor’s Report
Sec. 12.05. Expanding Scope and Timing of External Audit
SECTION 13. EXPIRATION, TERMINATION AND DEFAULT
Sec. 13.01. Term of Agreement
Sec. 13.02. Termination of Agreement
Sec. 13.03. Significant Change in Circumstances
Sec. 13.04. Events of Default
Sec. 13.05. Notice and Cure
Sec. 13.06. Renewal
SECTION 14. MISCELLANEOUS PROVISIONS.
THIS AGREEMENTis made in duplicate under and in pursuance of section 1441 of the Internal Revenue Code of 1986, as
amended, (the “Code”) and Treasury Regulation §1.1441–1(e)(5) by and between [name of QI], any affiliated entities of QI desig-
nated in Appendix A of this Agreement that are signatories to this Agreement (collectively referred to as “QI”), and the INTERNAL
REVENUE SERVICE (the “IRS”):
WHEREAS, QI has submitted an application in accordance with Revenue Procedure 98–27 to be a qualified intermediary for
purposes of Treas. Reg. §1.1441–1(e)(5);
WHEREAS,QI and the IRS desire to enter into an agreement to establish the documentation, withholding, information report-
ing, tax return filing, deposit obligations, and refund procedures of QI under sections 1441, 1442, 1443, 1461, 3406, 6041, 6042,
6044, 6045, 6049, 6050N, 6302, 6402, 6413, and 6414 of the Code with respect to certain types of payments;
NOW, THEREFORE,in consideration of the following terms, representations, and conditions, the parties agree as follows:
SECTION 1. PURPOSE AND SCOPE
Sec. 1.01. General Obligations. QI is a withholding agent under chapter 3 of the Code and a payor under chapter 61 and section
3406 of the Code for amounts that it pays to its account holders. Except as otherwise provided in this Agreement, QI’s obligations
with respect to amounts it pays to account holders are governed by chapter 3, chapter 61, and section 3406 of the Code and the regu-
lations thereunder. QI shall act in its capacity as a qualified intermediary pursuant to this Agreement only for those accounts QI has
with a withholding agent that QI has designated as accounts for which it acts as a qualified intermediary. QI is not required to act as
a qualified intermediary for all accounts that it has with a withholding agent. However, if QI designates an account as one for which
it will act as a qualified intermediary, it must act as a qualified intermediary for all payments made to that account.
Sec. 1.02. Parties to the Agreement. This Agreement applies to:
(a) All offices of QI located in the countries described in Appendix A of this Agreement;
(b) All of the offices of the affiliated entities of QI that are signatories to this Agreement that are located in the countries described
in Appendix A of this Agreement; and
(c) The Internal Revenue Service.
Appendix A may be amended, in writing, with the agreement of the IRS. Such amendments shall become part of this Agreement.
Sec. 1.03. Documentation Retention.QI agrees to obtain documentation from its account holders, and maintain and retain such
documentation, as provided in section 5 of this Agreement.
Sec. 1.04. Qualified Intermediary Withholding Certificate.QI agrees to provide each withholding agent from which QI receives
reportable amounts as a qualified intermediary with a qualified intermediary withholding certificate in accordance with section 6 of
this Agreement. A qualified intermediary withholding certificate is a Form W-8IMY.
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Sec. 1.05. Disclosure of Account Holders.Except as specifically required under section 6 of this Agreement, QI is not required to
disclose the identities of its account holders to a withholding agent to whom it provides a Form W-8IMY. Therefore, the documen-
tation given by an account holder to QI does not have to be attached to QI’s Form W-8IMY, except as specifically provided in sec-
tion 6 of this Agreement.
Sec. 1.06. Classes of Assets. QI agrees to provide each withholding agent information regarding the classes of assets determined in
accordance with section 7 of this Agreement.
Sec. 1.07. Withholding Obligations. QI agrees to withhold under sections 1441, 1442, 1443, 1461, and 3406 of the Code to the ex-
tent provided in sections 3 and 8 of this Agreement.
Sec. 1.08. Return Obligations.QI agrees to file Forms 945 and 1042 as provided in section 9 of this Agreement.
Sec. 1.09. Information Reporting Obligations. QI agrees to file Forms 1042-S, 1096, and 1099 as provided in section 10 of this
Agreement.
Sec. 1.10. Adjustments for Over- and Under-Withholding and Refunds.QI agrees to follow the procedures for over- and under-
withholding and for claiming refunds, as provided in section 11 of this Agreement.
Sec. 1.11. External Audit. QI agrees to the external audit procedures provided in section 12 of this Agreement.
SECTION 2. DEFINITIONS
For purposes of this Agreement, the terms listed below are defined as follows:
Sec. 2.01. Account Holder.An “account holder” means any person that has an account with a qualified or nonqualified intermedi-
ary. Unless the context otherwise requires, an account holder includes another intermediary (e.g., custodian, nominee or other agent)
that has an account with the qualified or nonqualified intermediary (whether the other intermediary is acting as a qualified interme-
diary, nonqualified intermediary, or private arrangement intermediary) and any person who has an account with the other intermedi-
ary. The term includes both beneficial owners as defined in Treas. Reg. §1.1441–1(c)(6) and payees as determined under chapters 3
and 61 of the Code. Thus, for example, an account holder may include the owners of an entity classified as a partnership under U.S.
tax principles that holds an account with a qualified or nonqualified intermediary.
Sec. 2.02. Agreement. “Agreement” means this agreement, all appendices and attachments to this agreement, and QI’s application
to be a qualified intermediary. All such appendices, attachments, and QI’s application are incorporated into this Agreement by refer-
ence.
Sec. 2.03. Assumption of Withholding Responsibility.A QI that assumes primary withholding responsibility under chapter 3, or
assumes reporting and withholding responsibility under chapter 61 and section 3406 of the Code, assumes the primary responsibility
for deducting, withholding, and depositing the appropriate amount from a payment. Generally, a qualified intermediary’s assump-
tion of primary withholding responsibility under chapter 3 of the Code, or the assumption of backup withholding responsibility
under section 3406 of the Code, relieves the person who makes a payment to the qualified intermediary from the responsibility to
withhold.
Sec. 2.04. Bank Deposit Interest. “Bank deposit interest” means interest described in section 871(i)(2)(A) of the Code.
Sec. 2.05. Beneficial Owner.A “beneficial owner” has the meaning given to that term in Treas. Reg. §1.1441-1(c)(6) and, if treaty
benefits are claimed, Treas. Reg. §1.894–1T(d)(2)(ii).
Sec. 2.06. Chapter 3 of the Code. Any reference to “chapter 3 of the Code” means sections 1441, 1442, 1443, 1461, 1463, and
1464 of the Code.
Sec. 2.07. Chapter 61 of the Code.Any reference to “chapter 61 of the Code” means sections 6041, 6041A, 6042, 6044, 6045,
6050N, and 6050P of the Code.
Sec. 2.08. Class of Assets. “Class of assets” has the meanings given to the terms in sections 7 and 10 of this Agreement.
Sec. 2.09. Documentary Evidence.“Documentary evidence” means any documentation obtained pursuant to section 5 of this
Agreement other than a Form W-8 or Form W-9.
Sec. 2.10. Documentation. “Documentation” means any valid Form W-8, Form W-9, or documentary evidence obtained pursuant
to section 5 of this Agreement.
Sec. 2.11. Documented Account Holder/Payee.A “documented account holder” or “documented payee” is an account holder or
payee for whom QI has obtained documentation pursuant to section 5 of this Agreement.
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Sec. 2.12. Exempt Recipient.An “exempt recipient” means, for interest, dividends, and royalties, a person described in Treas. Reg.
§1.6049–4(c)(1)(ii). For broker proceeds, an exempt recipient is a person described in Treas. Reg. §§5f.6045-1(c)(3)(i)(B) or
1.6045–2(b)(2)(i).
Sec. 2.13. External Auditor.An “external auditor” is the auditor designated as QI’s (or any private arrangement intermediary’s)
external auditor in Appendix B of this Agreement.
Sec. 2.14. Foreign Person.A “foreign person” is any person that is not a “United States person” and includes a “nonresident alien
individual,” a “foreign corporation,” a “foreign partnership,” a “foreign trust,” and a “foreign estate,” as those terms are defined in
section 7701 of the Code. Notwithstanding the preceding sentence, the term foreign person also includes a foreign branch of a U.S.
person that provides QI with a qualified intermediary Form W-8IMY.
Sec. 2.15. Form W-8. “Form W-8” means IRS Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States
Tax Withholding; IRS Form W-8ECI, Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively
Connected With the Conduct of a Trade or Business in the United States; IRS Form W-8EXP, Certificate of Foreign Governments
and Other Foreign Organizations for United States Tax Withholding; and Form W-8IMY, Certificate of Foreign Intermediary, For-
eign Partnership, and Certain U.S. Branches for United States Tax Withholding, as appropriate, or any acceptable substitute form.
Sec. 2.16. Form W-9. “Form W-9” means IRS Form W-9, Request for Taxpayer Identification Number and Certification, or any
acceptable substitute.
Sec. 2.17. Form 945. “Form 945” means IRS Form 945, Annual Return of Withheld Federal Income Tax.
Sec. 2.18. Form 1042.“Form 1042” means an IRS Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign
Persons.
Sec. 2.19. Form 1042-S. “Form 1042-S” means an IRS Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withhold-
ing.
Sec. 2.20. Form 1042-S Reporting. “Form 1042-S reporting” means the reporting required on Form 1042-S.
Sec. 2.21. Form 1096. “Form 1096” means IRS Form 1096, Annual Summary and Transmittal of U.S. Information Returns.
Sec. 2.22. Form 1099. “Form 1099” means IRS Form 1099-B, Proceeds From Broker and Barter Exchange Transactions; IRS
Form 1099-DIV, Dividends and Distributions; IRS Form 1099-INT, Interest Income; IRS Form 1099-MISC, Miscellaneous Income;
IRS Form 1099-OID, Original Issue Discount, and any other form in the IRS Form 1099 series appropriate to the type of payment
required to be reported.
Sec. 2.23. Form 1099 Reporting.“Form 1099 reporting” means the reporting required on Form 1099.
Sec. 2.24. Intermediary.An “intermediary” means any person that acts on behalf of another person such as a custodian, broker,
nominee, or other agent.
Sec. 2.25. Non-Exempt Recipient.A “non-exempt recipient” or “non-exempt payee” means a person that is not an exempt recipi-
ent under the definition in paragraph 2.12 of this section.
Sec. 2.26. Nonqualified Intermediary.A “nonqualified intermediary” is any intermediary that is not a qualified intermediary.
Sec. 2.27. Payee. A “payee” is the person described in Treas. Reg. §§1.1441–1(b)(2) and b(3); 1.1441–5(c), (d) and (e); and
1.6049–5(d).
Sec. 2.28. Payment.A “payment” is considered made to a person if that person realizes income whether or not such income results
from an actual transfer of cash or other property. See Treas. Reg. §1.1441–2(e). For example, a payment includes crediting an
amount to an account.
Sec. 2.29. Payor.A “payor” means a person, including a middleman treated as a payor, required to make an information return
under chapter 61 of the Code. See Treas. Reg. §§1.6049–4(a)(2) and 31.3406(a)–2.
Sec. 2.30. Presume.“Presume” means the presumptions that a person must make under Treas. Reg. §§1.1441–1(b)(3),
1.1441–4(a), 1.1441–5(d), 1.1441–5(e), 1.1441–9(b)(3) and 1.6049–5(d).
Sec. 2.31. Private Arrangement Intermediary.A “private arrangement intermediary” or “PAI” is an intermediary described in
section 4 of this Agreement.
Sec. 2.32. Qualified Intermediary.A “qualified intermediary” is a person, described in Treas. Reg. §1.1441-1(e)(5)(ii), that enters
into a withholding agreement with the IRS to be treated as a qualified intermediary.
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Sec. 2.33. Qualified Intermediary (QI) EIN.A “qualified intermediary EIN” or “QI-EIN” means the employer identification
number assigned by the IRS to a qualified intermediary to be used solely in its capacity as a qualified intermediary.
Sec. 2.34. Reduced Rate of Withholding. A “reduced rate of withholding” means a rate of withholding under chapter 3 of the
Code that is less than 30% and includes an exemption from withholding.
Sec. 2.35. Reportable Amount.A “reportable amount” means an amount subject to withholding under chapter 3 of the Code
(within the meaning of Treas. Reg. §1.1441–2(a)), U.S. source deposit interest (including original issue discount) described in sec-
tion 871(i)(2)(A) of the Code, and U.S. source interest or original issue discount on short-term obligations described in section
871(g)(1)(B) of the Code. The term does not include payments on deposits with banks and other financial institutions that remain on
deposit for two weeks or less. It also does not include amounts of original issue discount arising from a sale and repurchase transac-
tion completed within a period of two weeks or less, or amounts described in Treas. Reg. §1.6049–5(b)(7), (10), or (11) (relating to
certain obligations issued in bearer form). See Treas. Reg. §1.1441–1(e)(3)(vi).
Sec. 2.36. Reportable Payment. A “reportable payment” means any payment described in section 3406(b) of the Code. For exam-
ple, reportable payments include reportable amounts, as defined in section 2.35 of this Agreement, and, in addition, broker proceeds,
foreign source interest, foreign source dividends, and foreign source royalties unless an exception to reporting applies under chapter
61 of the Code.
Sec. 2.37. Short-Term Obligation.A “short-term obligation” is any obligation described in section 871(g)(1)(B)(i) of the Code.
Sec. 2.38. U.S. Person. A “United States (or U.S.) person” is a person described in section 7701(a)(30) of the Code, the U.S. gov-
ernment (including an agency or instrumentality thereof), a State of the United States (including an agency or instrumentality
thereof), or the District of Columbia (including an agency or instrumentality thereof).
Sec. 2.39. Undocumented Account Holder/Payee.An “undocumented account holder” or “undocumented payee” is an account
holder or payee for whom QI has not obtained documentation in accordance with section 5 of this Agreement.
Sec. 2.40. Withholding Agent. A “withholding agent” has the same meaning as set forth in Treas. Reg. §1.1441-7(a) and includes
a payor, as defined in section 2.29 of this Agreement. As used in this Agreement, the term generally refers to the person making a
payment to a qualified intermediary.
Sec. 2.41. Other Terms. Any term not defined in this section has the same meaning that it has under the Code, the Income Tax Reg-
ulations, or any applicable income tax treaty.
SECTION 3. WITHHOLDING RESPONSIBILITY UNDER SECTION 1441, 1442, AND 1443
Sec. 3.01. Withholding Responsibility.QI is subject to the withholding and reporting provisions applicable to withholding agents
and payors under chapters 3, 61, and section 3406 of the Code. QI shall not, however, be required to withhold tax under sections
1441, 1442, and 1443 from any payment of a reportable amount received from a withholding agent, provided that the withholding
agent withheld the proper amount of tax.
Sec. 3.02. Assumption of Chapter 3 Primary Withholding Responsibility.QI, upon agreement with a withholding agent, may
assume primary withholding responsibility under chapter 3 of the Code for a reportable amount paid by the withholding agent to an
account QI has with the withholding agent by providing the withholding agent a Form W-8IMY on which QI designates the account
to which the amount is paid as one for which it assumes primary withholding responsibility. QI is not required to assume primary
withholding responsibility for all accounts it has with the withholding agent. However, if QI assumes primary withholding responsi-
bility under chapter 3 of the Code for any account, it must assume that responsibility for all payments of reportable amounts made by
the withholding agent to that account. QI may assume primary withholding responsibility under chapter 3 of the Code without in-
forming the IRS. See section 8.04 of this Agreement for QI’s responsibilities to the extent it has assumed Form 1099 reporting re-
sponsibility and backup withholding.
[Use section 3.03, below, if QI is not eligible or does not assume backup withholding and Form 1099 reporting responsibility. AQI
is not eligible to assume primary backup withholding and chapter 61 reporting responsibility if it is a foreign person that does not
have a branch in the U.S. capable of adequately fulfilling the obligations imposed under chapter 61 and section 3406 of the Code. ]
Sec. 3.03. No Assumption of Form 1099 Reporting and Backup Withholding Responsibility.Notwithstanding section 3.01 of
this Agreement, QI may not assume Form 1099 reporting responsibility or backup withholding responsibility under section 3406 of
the Code in lieu of furnishing a withholding agent with a U.S. non-exempt recipient account holder’s Form W-9, or other informa-
tion regarding the account holder. Therefore, QI must furnish the withholding agent with a U.S. non-exempt recipient’s Form W-9,
or other information in accordance with section 6 of this Agreement, and separately identify the assets associated with such recipient
as required under section 7 of this Agreement.
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[Use section 3.03, below, if QI does assumes Form 1099 reporting and backup withholding responsibility.]
Sec. 3.03. Assumption of Form 1099 Reporting and Backup Withholding Responsibility.
[QI maintains the following branch [name and U.S. address] in the United States and represents that the branch can fulfill the Form
1099 reporting obligations and backup withholding obligations of a payor under chapter 61 and section 3406 of the Code].
2
or
[QI is a foreign branch of a U.S. financial institution].
3
QI assumes Form 1099 reporting responsibility under chapter 61 of the Code and backup withholding responsibility under section
3406 of the Code for reportable payments made to an account QI has with the withholding agent in lieu of furnishing the withhold-
ing agent with a U.S. non-exempt recipient account holder’s Form W-9, or, in absence of a Form W-9, information regarding the ac-
count holder’s name, address, and taxpayer identification number, if any. QI shall assume such reporting and withholding obliga-
tions by attaching a statement to a Form W-8IMY on which QI designates the account it has with the withholding agent for which it
assumes such obligations. QI is not required to assume Form 1099 reporting and backup withholding responsibility for all accounts
it has with the withholding agent. However, if QI assumes Form 1099 reporting and backup withholding responsibility for any ac-
count, it must assume that responsibility for all reportable payments made by the withholding agent to that account. See section 8.04
of this Agreement for QI’s responsibilities to the extent it has assumed Form 1099 reporting responsibility and backup withholding.
Sec. 3.04. Requirements of QI Assuming Reporting and Withholding Responsibility Under Sections 3.02 and/or 3.03. If QI
assumes primary withholding responsibility under chapter 3 of the Code or assumes Form 1099 reporting and backup withholding
responsibility for payments received from a withholding agent in accordance with sections 3.02 and/or 3.03 of this Agreement, then–
(A) QI shall assume that responsibility for all other intermediaries (whether qualified or nonqualified) that may precede QI in the
chain of payment, but
(B) QI shall not be required to withhold on any payment made to another qualified intermediary that follows QI in the chain of pay-
ment and that has assumed primary withholding responsibility for that payment.
SECTION 4. PRIVATE ARRANGEMENT INTERMEDIARIES
Sec. 4.01. In General. QI may enter into a private arrangement with another intermediary under which the other intermediary
agrees to perform all of the obligations of QI under this Agreement, except as provided in section 4.02 of this Agreement. Such
agreement shall be between the QI and all the offices of the other intermediary located in a specified country. The specified country
must be one for which there is a model qualified intermediary agreement available. Such an intermediary is referred to in this Agree-
ment as a private arrangement intermediary (“PAI”). By entering into a PAI agreement, QI is not assigning its liability for the per-
formance of any of its obligations under this Agreement. Therefore, QI shall remain liable for any tax, penalties, interest, and any
other sanction that may result from the failure of the PAI to meet any of the obligations imposed by its agreement with QI. QI shall
assert no defenses against the IRS for the failures of the PAI that the PAI may assert against QI. For purposes of this Agreement, the
PAI’s actual knowledge or reason to know of facts relevant to withholding or reporting shall be imputed to QI. QI’s liability for the
failures of the PAI shall apply even though the PAI is itself a withholding agent under chapter 3 of the Code and a payor under chap-
ter 61 and section 3406 and is itself separately liable for its failure to meet its obligations under the Internal Revenue Code. The PAI
is not required to enter into an agreement with the IRS. For purposes of this Agreement, an intermediary shall be considered a PA I
only if the following conditions are met:
(A)The PAI is, pursuant to a written agreement between QI and the PAI, subject to all the obligations of QI under this Agreement,
except to the extent modified by section 4.02 of this Agreement;
(B)QI files a notice with the Assistant Commissioner (International), at the address set forth in section 14.06 of this Agreement, be-
fore the first payment for which the intermediary acts as a PAI giving the name, address, taxpayer identification number, if any, of
the intermediary, and the name of the country or countries in which the offices of the PAI are located;
(C) The PAI is subject to the identical external audit procedures that apply to QI under this Agreement and the PAI uses the same ex-
ternal auditor designated as QI’s external auditor in Appendix B of this Agreement, or another auditor approved by the IRS for that
PAI, before the agreement between QI and the PAI is executed; and
(D)The PAI furnishes QI with a Form W-8IMY described in paragraph (C) of section 5.09 of this Agreement.
Sec. 4.02. Modification of Obligations for PAI Agreements.The agreement between QI and the PAI must provide that QI shall
include in its Forms 945, 1042, 1099, and 1042-S all payments made by QI to designated accounts the PAI has with QI as if QI had
February 1, 1999381999–5 I.R.B.
2
This language is to be used by a foreign QI with a U.S. branch.
3
This language is to be used by a QI that is a foreign branch of a U.S. person.
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made those payments directly to the PAI’s account holders. QI shall require the PAI to provide QI with all the information necessary
for QI to meet its withholding and reporting obligations under chapters 3, 61, and section 3406 of the Code. No provisions shall be
contained in the agreement between QI and a PAI that preclude, and no provisions of this Agreement shall be construed to preclude,
the PAI’s joint and several liability for tax, penalties, and interest under chapters 3, 61, and section 3406 to the extent that under-
withholding, penalties, and interest have not been collected from QI. QI’s agreement with the PAI must require the PAI to disclose
any beneficial owner or payee information that QI is required to disclose to the IRS or a withholding agent under this Agreement.
Nothing in the agreement between QI and the PAI shall permit the PAI to assume primary withholding responsibility under chapter 3
or assume Form 1099 reporting and section 3406 withholding obligations.
Sec. 4.03. Termination of Arrangement.QI shall cease to treat an intermediary as a PAI within 90 days of learning that the PAI is
in default of its agreement with QI unless the PAI has cured the event of default prior to the expiration of such 90 day period. QI
must provide the IRS with notice of any PAI agreement that has been terminated within 30 days of the termination.
SECTION 5. DOCUMENTATION REQUIREMENTS
Sec. 5.01. Documentation Required For Withholding Rate Reduction. QI shall not reduce the rate of withholding, or instruct a
withholding agent to reduce the rate of withholding, that applies under the presumption rules to a payment of a reportable amount
unless QI can reliably associate the payment, within the meaning of Treas. Reg. §1.1441–1(b)(2)(vii), with valid documentation de-
scribed in this section 5. QI shall obtain, review, and maintain documentation in accordance with this section 5 and, for documen-
tary evidence, in accordance with the laws and procedures set forth in the Attachments to this Agreement. QI shall make Forms W-
8, Forms W-9, and documentary evidence (together with any attachments to those documents) available upon request for inspection
by the external auditor designated in Appendix B of this Agreement. See section 5.13 of this Agreement if documentation for an ac-
count holder is lacking or unreliable.
Sec. 5.02. Reliance on Forms W-8 or W-9. Subject to the due diligence procedures described in section 5.11 of this Agreement, QI
may rely upon a valid Form W-8 or Form W-9 furnished by an account holder to determine whether the account holder is a foreign
or U.S. person, and, if appropriate, whether the account holder is entitled to a reduced rate of withholding.
Sec. 5.03. Documentary Evidence. In lieu of relying on a Form W-8, QI may determine whether an account holder that is a bene-
ficial owner is a foreign person on the basis of documentary evidence of the type described in the Attachments to this Agreement. QI
may not, however, rely on documentary evidence for those persons described in sections 5.06, 5.07, 5.08, and 5.09 of this Agree-
ment. Reliance on documentary evidence is subject to the due diligence requirements of section 5.11 of this Agreement. Documen-
tary evidence may also form the basis for a foreign beneficial owner’s claim to a reduced rate of withholding under an income tax
treaty, provided that the documentation is supplemented with a statement described in section 5.04 of this Agreement, and provided
that a taxpayer identification number is obtained when required pursuant to section 5.05 of this Agreement. Documentary evidence
need not be obtained under penalties of perjury. QI shall notify the IRS of any changes (whether or not material) in the laws and pro-
cedures set forth in the Attachments to this Agreement. QI may also rely upon documentary evidence to determine if an account
holder is a U.S. exempt recipient. Nothing in this section 5.03, however, shall relieve QI of the responsibility for obtaining Form W-
9 from account holders that are U.S. non-exempt recipients.
Sec. 5.04. Limitation on Benefits and Section 894 Representations.If an account holder that is a beneficial owner (other than an
individual) claims, based on documentary evidence, entitlement to a reduced rate of withholding under an income tax treaty, QI must
obtain a statement that the account holder meets the Limitation on Benefits article, if any, contained in the applicable income tax
treaty. In addition, the account holder must state that it derives the income within the meaning of Treas. Reg. §1.894-1T(d) for
which it claims a treaty benefit as a resident of the applicable treaty country, it is the beneficial owner of that payment, and that it
meets all other applicable requirements for the benefits claimed. The statements need not be made under penalties of perjury and
may be made as part of an account opening statement.
Sec. 5.05. TIN Requirement. Notwithstanding Treas. Reg. §1.1441–6(b)(1), providing that a withholding agent must require a tax-
payer identification number before reducing the rate of withholding on certain payments, QI shall require a taxpayer identification
number only for those account holders who meet the criteria for disclosure as set forth in section 10.02(D) of this Agreement.
Sec. 5.06. Documentation for International Organizations.QI shall treat an account holder as an international organization (as
defined under section 7701(a)(18) of the Code), exempt from taxation under section 892 of the Code only if it obtains a Form W-
8EXP or if the account holder’s name is one that is designated as an international organization by executive order pursuant to 22
United States Code 288 through 288(f) and other facts surrounding the transaction reasonably indicate that the international organi-
zation is the beneficial owner of the payment.
Sec. 5.07. Documentation for Foreign Governments. QI shall treat an account holder as a foreign government or foreign central
bank of issue exempt from taxation under section 892 or 895 of the Code, only if it has obtained a Form W-8EXP from the account
holder.
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Sec. 5.08. Documentation for Foreign Tax-Exempt Organizations.QI shall treat an account holder as a foreign organization ex-
empt from tax under section 501(c) of the Code or, if a foreign private foundation, subject to withholding at a 4 percent rate under
section 1443(b) of the Code, only if QI obtains a Form W-8EXP from the account holder. Further, QI shall treat a foreign organiza-
tion as tax-exempt pursuant to a treaty only if QI obtains a Form W-8BEN from the organization.
Sec. 5.09. Documentation From Intermediaries. QI shall obtain the following documentation from any person that is an interme-
diary or foreign partnership:
(A) Nonqualified Intermediaries and Foreign Partnerships (Other Than Withholding Foreign Partnerships).If the account
holder is a nonqualified intermediary or a foreign partnership (other than a withholding foreign partnership), QI shall obtain from the
nonqualified intermediary or foreign partnership a Form W-8IMY (as required under Treas. Reg. § 1.1441–1(e)(3)(iii)). QI may rely
on the Form W-8IMY, and the attachments to that form, received from the nonqualified intermediary or foreign partnership as the
basis for the information that QI furnishes to a withholding agent under section 7 of this Agreement.
(B) Qualified Intermediaries and Withholding Foreign Partnerships.If the account holder is a qualified intermediary or with-
holding foreign partnership, QI shall obtain from the qualified intermediary or withholding foreign partnership a Form W-8-IMY (as
required under Treas. Reg. §1.1441–1(e)(3)(ii) or §1.1441–5(c)(2)(iv)). QI may rely upon the Form W-8IMY, and the attachments to
that form, received from the qualified intermediary or withholding foreign partnership as the basis for the information that QI fur-
nishes to a withholding agent under section 7 of this Agreement. QI is not required to obtain documentation from the qualified in-
termediary or withholding foreign partnership’s account holders.
(C) Private Arrangement Intermediaries. If QI has an agreement with a PAI, the PAI shall furnish QI a Form W-8IMY completed
as if it were a qualified intermediary, with the exception that the PAI must not provide a QI-EIN on the Form W-8IMY. Further, the
PAI must attach to its Form W-8IMY a statement that provides the information required under section 10 rather than section 7 of this
Agreement. QI may rely on the Form W-8IMY, and the attachments to that form, received from the PAI as the basis for the informa-
tion that QI furnishes to a withholding agent under section 7 of this Agreement. QI is not required to obtain documentation from the
PAI’s account holders.
Sec. 5.10. Documentation Validity Period.QI may rely on a Form W-8 until its validity expires under Treas. Reg. §1.1441-
1(e)(4)(ii). QI may rely on a Form W-9 as long as it may reasonably rely on the form under the rules of Treas. Reg. §31.3406(h)-
3(e). QI may rely on documentary evidence obtained in accordance with this section 5 for as long as the documentary evidence re-
mains valid under the laws and procedures set forth in the Attachments to this Agreement, or until QI knows, or has reason to know,
that the information contained in the documentary evidence is incorrect.
Sec. 5.11. Due Diligence Requirements. (A) In General.QI may rely on documentation provided to it by an account holder un-
less and until QI has actual knowledge or reason to know that the information or statements contained in the documentation are un-
reliable or incorrect. If QI discovers that information contained in documentation is unreliable or incorrect, or if QI discovers it has
not conveyed information contained in documentation accurately to a withholding agent, QI must provide the corrected information
to the withholding agent, to the extent necessary for the withholding agent to make any changes to QI’s classes of assets, within 30
days after QI discovers that the information or statement is unreliable or incorrect. See section 8.01 of this Agreement for QI’s re-
sponsibility to withhold on amounts for which QI knows, or has reason to know, that the withholding agent underwithheld. If QI re-
ceives notification from the IRS that claim of U.S. or foreign status, or, if applicable, a reduced rate of withholding, is incorrect, QI
is treated as having actual knowledge on the date that is 30 calendar days after the date it receives the notice.
(B) Reason to know. QI shall be considered to have reason to know that relevant facts or statements contained in documentation are
unreliable or incorrect if a reasonably prudent person in the position of a withholding agent would question the claims made.
(C) Limitation on Reason to Know. For payments described in this section 5.11(C), QI has reason to know that documentation is
not reliable only if any one or more of the circumstances described in Treas. Reg. §1.1441–7(b)(2)(ii) exist. QI may rely upon the
documentation, however, if additional documentation is provided that supports the account holder’s claims. This paragraph (C) ap-
plies to the following types payments:
• Dividends and interest from stocks and debt obligations that are actively traded within the meaning of section 1092(d) of the Code;
• Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940
(15 United States Code 80a-1);
• Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly
offered and are registered with the Securities and Exchange Commission under the Securities Act of 1933 (15 United States Code
77a); and
• Amounts paid with respect to loans of the securities described above.
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Sec. 5.12. Maintenance, and Retention of Documentation.
(A) Maintaining Documentation. QI shall maintain documentation by retaining the original, certified copy, photocopy, or micro-
fiche or similar means of record retention of the documentation and noting in its records the date on which, and by whom, the docu-
ment was received and reviewed.
(B) Retention Period.QI shall retain an account holder’s documentation obtained under this section 5 (other than Form W-9) until
the expiration of the statute of limitations for the assessment of tax under section 6501 of the Code has expired for the Form 1042
that includes a payment made to that account holder. QI shall retain an account holder’s Form W-9 for the period specified in Treas.
Reg. §31.3406(h)–3(g).
Sec. 5.13. Application of Presumption Rules.QI shall apply the presumption rules of Treas. Reg. §§ 1.1441-1(b)(3), 1.1441-4(a),
1.1441–5(d) and (e), 1.1441–9(b)(3) and 1.6049–5(d) to payments made to an account holder for whom it holds no documentation or
holds documentation on which it can not rely.
SECTION 6. QUALIFIED INTERMEDIARY WITHHOLDING CERTIFICATE AND DISCLOSURE OF ACCOUNT
HOLDERS TO WITHHOLDING AGENT
Sec. 6.01. Certification to Withholding Agent.QI shall furnish a qualified intermediary withholding certificate to each withhold-
ing agent from which it receives a reportable amount from an account for which it acts as a qualified intermediary. The qualified in-
termediary withholding certificate is a Form W-8IMY that certifies QI is acting as a qualified intermediary and that contains QI’s
qualified intermediary EIN. QI shall provide the withholding agent a statement associated with Form W-8IMY that designates those
accounts for which QI acts as a qualified intermediary and sufficient information regarding classes of assets as determined under
section 7 of this Agreement for the withholding agent to determine the correct withholding and reporting on amounts paid to those
accounts. The attached statement shall also clearly identify those accounts for which QI assumes primary withholding responsibility
under chapter 3 of the Code and/or those accounts for which QI assumes Form 1099 reporting and backup withholding responsibil-
ity. The statement shall be updated as often as necessary for the withholding agent to meet its reporting and withholding obligations
under chapters 3, 61, and section 3406 of the Code.
Sec. 6.02. Disclosure of Certain Account Holder Documentation.QI shall be required to disclose to the withholding agent the
Form W-9 obtained from each U.S. non-exempt recipient account holder that receives reportable amounts to the extent QI does not
assume Form 1099 reporting and backup withholding responsibility for the account. If QI has not obtained a Form W-9 from the ac-
count holder but actually knows that an account holder is a U.S. non-exempt recipient, QI shall disclose to the withholding agent any
information QI has in its possession regarding the name, address, and taxpayer identification number of such person. The Form W-
9 (or name, address, and taxpayer identification number) of the U.S. non-exempt recipient must be sent to the withholding agent
with instructions to associate it with the appropriate account for which QI is acting as a qualified intermediary. QI need not disclose
to the withholding agent any other account holder documentation.
SECTION 7. DETERMINATION OF ASSET CATEGORIES AND CLASSES FOR QI’S WITHHOLDING
CERTIFICATE
Sec. 7.01. Statement of Asset Classes.QI shall furnish to the withholding agent a written statement described in this section 7.
The statement forms an integral part of the Form W-8IMY. The statement shall separate those assets that generate, or could generate,
reportable amounts into the three overall categories described in section 7.02 of this Agreement and into the classes of assets de-
scribed in section 7.03 of this Agreement. The written statement may be provided in any form and in any manner the QI and with-
holding agent choose. QI shall use the documentation obtained under section 5 of this Agreement, or the presumption rules under
section 5.13 of this Agreement, as the basis for determining categories and classes of assets. QI shall update the statement as often
as necessary so that the withholding agent has the information necessary to satisfy its reporting and withholding obligations. All
such updates form an integral part of QI’s Form W-8IMY.
Sec. 7.02. Categories of Assets. QI must separate assets into the following three overall categories of assets:
(A)Assets associated with documented foreign account holders;
(B) Assets associated with documented U.S. account holders; and
(C) Assets associated with undocumented account holders.
Sec. 7.03. Class of Assets. A class of assets is a group of assets within a category of assets that produces the same type of income,
is subject to the same rate of withholding, and is associated with the same type of account holders as specified in paragraphs (A)
through (G) of this section 7.03. A type of income is any item of income subject to the same income code and, unless the income is
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allocable to U.S. account holders, the same exemption code on Form 1042-S. Notwithstanding the preceding two sentences, assets
that generate a specific type of income and that are allocable to each U.S. non-exempt recipient are a separate class of assets, unless
QI assumes Form 1099 reporting and backup withholding responsibility for reportable payments allocable to U.S. non-exempt re-
cipient account holders. If QI has an account holder that is another intermediary (whether a qualified intermediary, a nonqualified
intermediary, or a private arrangement intermediary) or a foreign partnership (whether or not a withholding foreign partnership), QI
shall combine the asset information provided by the intermediary or partnership to QI’s own classes of assets. Thus, QI shall iden-
tify classes of assets as follows:
(A) Assets that are associated with documented foreign account holders and that generate a specific type of income (as determined
by reference to the income and exemption codes on Form 1042-S) subject to a single withholding rate. If QI assumes primary with-
holding responsibility for assets in an account, the income from those assets is considered subject to a zero rate of withholding;
(B) Assets that are associated with all documented U.S. exempt recipient account holders and that generate a specific type of income
(as determined by reference to the income, but not exemption, codes on Form 1042-S);
(C) Assets that are associated with each documented U.S. non-exempt recipient account holder for which QI does not assume Form
1099 reporting and backup withholding responsibility. In addition, for any U.S. non-exempt recipient account holder that receives a
reportable amount from a withholding agent, QI shall inform the withholding agent of the assets associated with such U.S. non-ex-
empt recipient account holder that generate, or could generate, reportable payments that are not included in reportable amounts (e.g.,
broker proceeds, foreign source interest, or foreign source dividends);
(D)Assets that are associated with all documented U.S. non-exempt recipient account holders for which QI does assume Form 1099
reporting and backup withholding responsibility and that generate a specific type of income (as determined by reference to the in-
come, but not exemption, codes on Form 1042-S);
(E)Assets that are associated with each undocumented account holder that QI actually knows is a U.S. non-exempt recipient;
(F)Assets that are associated with undocumented account holders that generate reportable amounts (other than U.S. source bank de-
posit interest or interest and OID on short-term obligations) that a withholding agent must presume is paid to an undocumented
payee that is a foreign person (30 percent withholding applies); and
(G) Assets that are associated with undocumented account holders that generate bank deposit interest or interest and OID on short-
term obligations that a withholding agent must presume are made to a payee that is a U.S. non-exempt recipient (31percent backup
withholding applies).
SECTION 8. WITHHOLDING OBLIGATIONS
Sec. 8.01. Primary Withholding Responsibility Under Chapter 3 Not Assumed. QI shall withhold the difference between the
amount of tax required to be withheld under chapter 3 of the Code and the amount actually withheld by any other withholding agent
to the extent that QI knows, or has reason to know, that the appropriate amount has not been withheld. In addition, if QI has insuffi-
cient information to allocate the reportable amounts (other than bank deposit interest and short-term interest or OID) to each of a
nonqualified intermediary’s account holders (or partners of a foreign partnership that is not a withholding foreign partnership) then
QI must withhold the difference between 30 percent of the amount paid to those account holders (or partners) for whom QI does not
hold allocation information and the amount, if any, actually withheld by the withholding agent. Notwithstanding the preceding sen-
tence, QI shall not have any liability for tax under section 1461 of the Code if QI obtains the allocation information by the time that
QI is required to file Forms 1042 and 1042-S for the calendar year. The amounts so withheld shall be deposited in accordance with
section 8.05 of this Agreement and shall be reported on Forms 1042 and 1042-S in accordance with sections 9 and 10 of this Agree-
ment. QI is not required, however, to withhold on amounts it pays to another qualified intermediary or withholding foreign partner-
ship that has certified to QI on Form W-8IMY that it has assumed primary withholding responsibility.
Sec. 8.02. Primary Withholding Responsibility Under Chapter 3 Assumed.To the extent that QI has assumed primary with-
holding responsibility for reportable amounts it receives from a withholding agent, QI shall withhold the amount of tax required to
be withheld under chapter 3 of the Code. The amounts withheld shall be deposited in accordance with section 8.05 of this Agree-
ment and shall be reported on Forms 1042 and 1042-S in accordance with sections 9 and 10 of this Agreement. QI is not required,
however, to withhold on amounts it pays to another qualified intermediary or withholding foreign partnership that has certified to QI
on Form W-8IMY that it has assumed primary withholding responsibility.
Sec. 8.03. Backup Withholding Responsibility Not Assumed. Notwithstanding its ineligibility to assume backup withholding or
its election not to assume backup withholding, QI shall withhold under section 3406 on any reportable payments that it pays to an ac-
count holder only if it has actual knowledge that the account holder is a U.S. non-exempt recipient on whose behalf QI has received
a reportable amount and QI cannot reliably associate the reportable payment with a valid Form W-9 and another payor has not with-
held under chapter 3 or section 3406 of the Code. That is, in accordance with Treas. Reg. §31.3406(g)-1(e), QI shall not be required
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to withhold under section 3406 on a reportable payment that QI makes outside the United States to an offshore account (or, in the
case of broker proceeds, effects a sale outside the United States) unless QI has actual knowledge that the account holder is a United
States non-exempt recipient who has not provided a valid Form W-9. An offshore account means an account maintained at an office
or branch of QI at any location outside the United States and outside possessions of the United States. Whether a payment is made
outside the United States is determined under the rules of Treas. Reg. §1.6049-5(e). QI is not required to withhold under section
3406 on any reportable payment that was subject to 30 percent withholding under chapter 3 of the Code by another payor. The
amounts withheld shall be deposited in accordance with section 8.05 of this Agreement and shall be reported on Forms 945 and 1099
filed in accordance with sections 9 and 10 of this Agreement. QI is not required, however, to withhold on amounts it pays to another
qualified intermediary if that other qualified intermediary has certified to QI on Form W-8IMY that it has assumed primary backup
withholding responsibility.
Sec. 8.04. Backup Withholding Responsibility Assumed.To the extent that QI has assumed Form 1099 reporting and backup with-
holding responsibility for reportable payments it receives from a withholding agent, QI shall report and withhold in accordance with
chapter 61 and section 3406 of the Code. Notwithstanding the preceding sentence, the exceptions to Form 1099 reporting under chap-
ter 61 that apply to a foreign source amount paid outside the United States by a non-U.S. payor or non-U.S. middleman shall not apply
to QI to the extent those amounts are received from an account for which QI is acting as a qualified intermediary. In addition, the ex-
ception from backup withholding under Treas. Reg. §31.3406(g)-1(e) shall not apply. That is, QI must backup withhold on amounts it
actually knows, or must presume, to be paid to a U.S. non-exempt recipient. The amounts withheld shall be deposited in accordance
with section 8.05 of this Agreement and shall be reported on Forms 945 and 1099 filed in accordance with sections 9 and 10 of this
Agreement. QI is not required, however, to withhold on amounts it pays to another qualified intermediary if that other qualified inter-
mediary has certified to QI on Form W-8IMY that it has assumed primary backup withholding responsibility.
Sec. 8.05. Deposit Requirements. QI must deposit amounts withheld under sections 1441, 1442, 1443, or 3406 of the Code with a
Federal Reserve bank or authorized financial institution as provided in Treas. Reg. §1.6302-2(a) or §31.6302-1.
SECTION 9. TAX RETURN OBLIGATIONS
Sec. 9.01. Form 1042 Filing Requirement. (A) In general. QI shall file a return on Form 1042 on or before March 15 of the year
following the calendar year in which QI acts as a qualified intermediary. Form 1042 shall be filed with the Internal Revenue Service
Center, Philadelphia, PA 19255. In addition to the information specifically requested on Form 1042 and the accompanying instruc-
tions, QI shall attach to the form the following information:
(i) A schedule setting forth the reportable amounts that QI received in its capacity as a qualified intermediary during the calendar
year, and the name, address, and employer identification number of each withholding agent from whom the reportable amounts were
received; and
(ii)A statement setting forth the amounts of any overwithholding (overpayment) or underwithholding (balance due) adjustments
made under Treas. Reg. §1.1461-2 and sections 11.02 and 11.05 of this Agreement, and an explanation of the circumstances that re-
sulted in the over- or under- withholding.
(B) Extensions For Filing Returns.QI may request an extension of the time for filing Form 1042, or any of the information re-
quired to be attached to the form, by submitting Form 2758, Application for Extension of Time to File Certain Excise, Income, In-
formation, and Other Returns on or before the due date of the return. The application must be in writing, properly signed by a duly
authorized agent of QI, and shall clearly set forth the following:
(i) The calendar year for which the extension is requested;
(ii) Whether the extension request is for the return, information required to be attached to the return, or both; and
(iii) A full explanation of the reasons for requesting the extension to assist the IRS in determining the period of extension, if any, that
will be granted.
Sec. 9.02. Form 945 Filing Requirement.QI shall file a return on Form 945 on or before January 31 following the calendar year
in which QI withholds any amount under section 3406 of the Code. The form must be filed at the address specified in the instructions
for Form 945.
Sec. 9.03. Retention of Returns. QI shall retain Forms 945 and 1042 for the applicable statute of limitations on assessments and
collection for the amount reported on the form.
SECTION 10. INFORMATION REPORTING OBLIGATIONS
Sec. 10.01. Form 1042-S Reporting.Except as otherwise provided in section 10.02 of this Agreement, QI is not required to file
Forms 1042-S for amounts paid to each beneficial owner account holder or payee for whom such reporting would otherwise be re-
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quired. In place of such Forms 1042-S, QI shall file a Form 1042-S reporting the income from classes of assets as determined in sec-
tions 10.03 and 10.04 of this Agreement. QI must file its Forms 1042-S in the same manner as required by the instructions to the
form. Any Form 1042-S required by this section 10 shall be filed on or before March 15 following the calendar year in which the
payment reported on the form was made. QI may request an extension of time to file Forms 1042-S by submitting Form 8809, Re-
quest for Extension of Time to File Information Returns, by the due date of Forms 1042-S in the manner required by Form 8809.
Sec. 10.02. Beneficial Owner Reporting. QI is required to file Forms 1042-S for amounts paid to each beneficial owner account
holder or other payee as described in this section 10.02.
(A)QI must file Forms 1042-S, by income type, exemption code, and withholding rate, for each qualified intermediary or withhold-
ing foreign partnership from whom it receives a Form W-8IMY;
(B)QI must file a Form 1042-S for each of the account holders of a nonqualified intermediary (other than the account holders of a
PAI) or foreign partnership (other than a withholding foreign partnership) for which the nonqualified intermediary or foreign part-
nership has provided documentation and allocation information sufficient to determine the amount of income paid to such account
holder of the nonqualified intermediary or foreign partnership;
(C) QI must file a Form 1042-S made out to an unknown person for income paid to account holders of a nonqualified intermediary
or foreign partnership (other than a withholding foreign partnership) that are undocumented and presumed to be foreign persons;
(D) QI must file a Form 1042-S made out to an unknown person for income paid to documented foreign account holders of the non-
qualified intermediary or foreign partnership (other than a withholding foreign partnership) for which QI does not have allocation in-
formation sufficient to determine the amount of income paid to such account holders; and
(E) Upon request by the IRS, QI must provide, in the manner requested, the names, addresses, taxpayer identification number, if any,
and the amounts paid to those account holders who receive annually $100,000 or more of income for which the account holder
claimed a reduced rate of withholding under an income tax treaty and who certify in accordance with section 5.04 of this Agreement
that they meet the Limitation on Benefits provision of an income tax treaty and that they derive the income within the meaning of
Treas. Reg. §1.894-1T(d). The $100,000 threshold is determined by aggregating all the accounts of an account holder. The thresh-
old shall be determined separately for QI and for each of the affiliated entities of QI described in Appendix A; however, accounts of
an account holder at all the branches of any one entity must be aggregated. Notwithstanding the preceding sentence, accounts of an
account holder with QI and affiliates of QI must be aggregated if QI, or any of its affiliates, knows, or has reason to know, that the
account holder is attempting to avoid disclosure by opening separate accounts. Further, QI, and any of its affiliated entities, must ag-
gregate the accounts of an account holder, and any persons having the relationship described in section 267(b) of the Code with the
account holder if QI, or any of its affiliates, actually know that the account holder is attempting to avoid disclosure by having such
persons open accounts in their names.
Sec. 10.03. Categories of Assets For Form 1042-S Reporting.For purposes of determining amounts to be reported on Form
1042-S, QI shall determine classes of assets by first dividing all of the assets for which it acts as a qualified intermediary into the
three overall categories described in this section 10.03 and then dividing each of those categories into classes of assets as described
in section 10.04 of this Agreement. Income from each class of assets shall be reported on a separate Form 1042-S. QI must separate
its assets into the following 3 overall categories:
(A) Assets associated with documented foreign account holders;
(B) Assets associated with documented U.S. account holders; and
(C) Assets associated with undocumented account holders.
Sec. 10.04. Classes of Assets for Form 1042-S Reporting. A class of assets is a group of assets within a category of assets that
produces the same type of income, is subject to the same rate of withholding, and is associated with the same type of account hold-
ers located in the same country. A type of income is determined by reference to the income and exemption codes on Form 1042-S.
A type of account holder is determined by reference to the recipient codes to be used solely by a qualified intermediary on Form
1042-S. Thus, QI shall report on a separate Form 1042-S income from each of the following classes of assets:
(A) Assets that are associated with documented foreign beneficial owners that are the same type of account holder, are located in the
same foreign country, receive the same type of income, and are subject to the same rate of withholding;
(B) Assets associated with all documented U.S. exempt recipients who receive the same type of income;
(C) Assets that are associated with all undocumented account holders that generate reportable amounts (other than U.S. source bank
deposit interest or U.S. source interest and OID on short-term obligations); and
(D) Assets associated with a PAI whose account holders are of the same type, located in the same foreign country, receive the same
type of income, and are subject to the same rate of withholding.
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Sec. 10.05. Form 1099 Reporting Responsibility.QI shall file Forms 1099 and, unless filing magnetically, Form 1096, for re-
portable payments paid to the persons specified in this section 10.05. Forms 1099 shall be filed on or before the date prescribed for
the particular Form 1099 under chapter 61 of the Code. Extensions on the time to file Forms 1099 may be requested by submitting
Form 8809, Request for Extension of Time to File Information Returns, in the manner required by the form.
(A) QI must file a Form 1099 for each U.S. non-exempt recipient receiving payments for which QI has assumed Form 1099 report-
ing responsibility;
(B) If QI assumes Form 1099 reporting and backup withholding responsibility, QI must file a Form 1099 made out to an unknown
person for income that is paid to a nonqualified intermediary or foreign partnership that QI must presume is made to a nonexempt re-
cipient (e.g., short-term OID or bank deposit interest for which QI does not hold Forms W-8, W-9 or documentary evidence or re-
portable payments (other than reportable amounts) for which a nonqualified intermediary or foreign partnership has failed to provide
allocation information;
(C) QI must file a Form 1099 for each U.S. non-exempt recipient for whom QI has failed to provide a Form W-9 in its possession to
a withholding agent or failed to provide sufficient information to the withholding agent for the withholding agent to report the
amount on Form 1099;
(C) QI must file a Form 1099 for each person QI actually knows to be a U.S. non-exempt recipient who has not provided QI with a
Form W-9 if QI has not given that person’s name, address, taxpayer identification number, if any, and asset allocation information to
another payor; and
(D) QI must file a Form 1099 for each person to whom QI has made a payment on which QI withheld an amount under section 3406
of the Code.
SECTION 11. ADJUSTMENTS FOR OVER- AND UNDER-WITHHOLDING; REFUNDS
Sec. 11.01. Adjustments for Overwithholding by Withholding Agent.QI may request a withholding agent to make an adjust-
ment for amounts paid to QI on which the withholding agent has overwithheld under chapter 3 of the Code by applying either the re-
imbursement or set-off procedures described in this section within the time period prescribed for those procedures.
(A) Reimbursement Procedure.QI may request a withholding agent to repay QI for any amount overwithheld under chapter 3 of
the Code and for the withholding agent to reimburse itself under the reimbursement procedures of Treas. Reg. §1.1461-2(a)(2)(i) by
making the request to the withholding agent prior to the due date for filing the Form 1042 and Form 1042-S (without regard to ex-
tensions) for the calendar year of overwithholding. Nothing in this section shall be interpreted to require a withholding agent to re-
imburse QI under Treas. Reg. §1.1461–2(a)(2)(i).
(B) Set-off Procedure. QI may request a withholding agent to repay QI by applying the amount overwithheld against any amount
which otherwise would be required under chapter 3 of the Code to be withheld from income paid by the withholding agent to QI. QI
must make the request before the earlier of the due date (without regard to extensions) for the withholding agent to file Form 1042-S
for the calendar year of overwithholding or the date that the Form 1042-S is actually filed with the IRS.
Sec. 11.02. Adjustments for Chapter 3 Overwithholding by QI. QI may make an adjustment for amounts paid to its account hold-
ers that it has overwithheld under chapter 3 of the Code by applying either the reimbursement or set-off procedures described in this
section within the time period prescribed for those procedures.
(A) Reimbursement Procedure. QI may repay its account holder for an amount overwithheld and reimburse itself by reducing, by
the amount of tax actually repaid to the beneficial owner or payee, the amount of any deposit of tax made by the withholding agent
under section 6302 of the Code and Treas. Reg. §1.6302–2(a)(1)(iii) for any subsequent payment period occurring before the end of
the calendar year following the calendar year of overwithholding. Any such reduction that occurs for a payment period in the calen-
dar year following the calendar year of overwithholding shall be allowed only if:
(i) QI states on a timely filed (not including extensions) Form 1042-S for the calendar year of withholding issued to the recipient of
the income or, if appropriate, the Form 1042-S reporting income from a class of assets as described in section 10.04 of this Agree-
ment, the amount of tax withheld and the amount of any actual repayments; and
(ii) QI states on a timely filed (not including extensions) Form 1042 for the calendar year of overwithholding, that the filing of the
Form 1042 constitutes a claim for credit in accordance with Treas. Reg. §1.6414–1.
(B) Set-Off Procedure. QI may repay its account holder by applying the amount overwithheld against any amount which otherwise
would be required under chapter 3 of the Code or the regulations thereunder to be withheld from income paid by QI to the account
holder before the earlier of the due date (without regard to extensions) for filing the Form 1042-S for the account holder or the with-
holding pool, as appropriate, for the calendar year of overwithholding or the date that the Form 1042-S is actually filed with the IRS.
For purposes of making a return on Form 1042 or 1042-S (or an amended form) for the calendar year of overwithholding, and for
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purposes of making a deposit of the amount withheld, the reduced amount shall be considered the amount required to be withheld
from such income under chapter 3 of the Code.
Sec. 11.03. Repayment of Backup Withholding.If QI erroneously withholds, as defined under Treas. Reg. §31.6413(a)-3, an
amount under section 3406 of the Code from a payee, QI may refund the amount erroneously withheld as provided in Treas. Reg.
§31.6413(a)–3.
Sec. 11.04. Collective Refund or Credit Procedures for Chapter 3 Overwithholding.If there has been overwithholding under
chapter 3 of the Code on the total amount of reportable payments paid to QI’s account holders during a calendar year and the amount
has not been recovered under the reimbursement or set-off procedures under sections 11.02 or 11.03 of this Agreement, QI may re-
quest a refund or credit of the total amount overwithheld for account holders for whom QI acts as a qualified intermediary by fol-
lowing the procedures of this section 11.04. QI shall not include in its collective refund claim payments made to another qualified
intermediary, a withholding foreign partnership, a nonqualified intermediary, or the account holders of a nonqualified intermediary.
QI shall follow the procedures set forth under sections 6402 and 6414 of the Code, and the regulations thereunder, to claim the credit
or refund. No credit or refund will be allowed after the expiration of the statutory period of limitation for refunds under section 6511
of the Code. QI may use the collective refund procedures under this section 11.04 only if the following conditions are met:
(A) QI must not have issued a Form 1042-S to the account holders from whose payment the amount has been overwithheld;
(B) QI must submit together with its amended return on which it claims a credit or refund a statement that QI has repaid the tax to the
account holder prior to filing the claim for refund or credit; and
(C) QI must retain a record that it paid, or credited the account of, the account holder the amount of the overwithholding.
Sec. 11.05. Adjustments for Chapter 3 Underwithholding.If QI knows that an amount should have been withheld under chapter
3 of the Code from a previous payment to an account holder but was not withheld, QI may either withhold from future payments
made to the same account holder or satisfy the tax from property that it holds in custody for the account holder or property over
which it has control. The additional withholding or satisfaction of the tax owed may only be made before the due date of the Form
1042 (not including extensions) for the calendar year in which the underwithholding occurred.
Sec. 11.06. Underwithholding After Form 1042 Filed.If, after a Form 1042 has been filed for a calendar year, QI, the external au-
ditor designated in Appendix B of this Agreement, or the IRS determines that QI has underwithheld tax for such year, QI shall file an
amended Form 1042 to report and pay the underwithheld tax for such year. QI shall pay the underwithheld tax, the interest due on
the underwithheld tax, and any applicable penalties, at the time of filing the amended Form 1042. If QI fails to file an amended re-
turn, the IRS shall make such return under section 6020 of the Code.
SECTION 12. EXTERNAL AUDIT PROCEDURES.
Sec. 12.01. In General. The IRS shall not conduct an on-site audit of QI, or any PAI with which QI has an agreement, provided that
the external auditor designated in Appendix B of this Agreement conducts an audit of QI, and any PAI, in accordance with this sec-
tion 12. QI shall permit the external auditor to have access to all relevant records of QI for purposes of performing the external
audit. QI shall permit the IRS to communicate directly with the external auditor in regard to the audit and to review the audit proce-
dures followed by the external auditor. QI shall permit the IRS to examine the external auditor’s work papers and reports prepared
by the external auditor. However, the external auditor is not required to divulge the identity of QI’s account holders to the IRS.
Sec. 12.02. Designation of External Auditor. QI’s external auditor must be approved by the IRS before this Agreement is exe-
cuted. The IRS and QI agree that the auditor designated in Appendix B of this Agreement shall be the external auditor, unless QI and
the IRS agree to substitute another auditor. QI shall not propose an external auditor to the IRS unless the auditor is subject to regu-
latory supervision under the laws of the country, or countries, designated in Appendix A of this Agreement.
Sec. 12.03. Timing and Scope of External Audits.QI shall have the external auditor conduct an audit of the second calendar year
and the fifth calendar year that this Agreement is in effect, subject to section 12.05 of this Agreement. The external auditor shall ver-
ify whether QI is in compliance with this Agreement by conducting an audit that meets the requirements of this section 12.03. The
external auditor shall verify whether QI has complied with its obligations under all provisions of sections 4 through 11 of this Agree-
ment by:
(A) Verifying that QI has in place adequate procedures to comply with QI’s obligations under sections 5 through 11 of this Agree-
ment;
(B) Interviewing employees responsible for complying with QI’s obligations under sections 5 through 11 of this Agreement to deter-
mine if they are knowledgeable and adequately trained with regard to such obligations; and
(C) Reviewing account holder information using valid sampling techniques (including, if appropriate, a statistical sampling) to de-
termine if QI has complied with its obligations under sections 5, 6, 7, 8, 10, and 11 of this Agreement; and
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(D) With respect to QI’s obligations under sections 9, 10, and 11, obtaining copies of original and amended Forms 1042, 945, 1042-
S, 1096, and 1099, and any schedules or statements required to be filed with those returns, and reviewing those forms for accuracy.
(E) Reviewing QI’s agreements with PAIs, if any, to verify that PAI has agreed to perform all of the obligations of QI under this
Agreement, except as provided in section 4.02 of this Agreement.
Sec. 12.04. External Auditor’s Report.Upon completion of the audit of QI and any PAI, the external auditor shall issue a report,
or reports, of audit findings directly to the IRS by sending the original report to the IRS at the address set forth in section 14.06 of
this Agreement by June 30 following the calendar year being audited, or if that date falls on a Saturday or Sunday, the next U.S. busi-
ness day. The report must be in writing, in English, and currency amounts must be stated in U.S. dollars. The report must fully de-
scribe the scope of the audit, the methodologies (including sampling techniques) used to determine whether QI is in compliance with
each provision of section 5 through 11 of this Agreement, and the result of each such determination.
Sec. 12.05. Expanding Scope and Timing of External Audit.Upon review of the external auditor’s report, the IRS may request,
and QI must permit, the external auditor to perform additional audit procedures, or to expand the external audit to cover some or all
of the calendar years for which the period of limitations for assessment of taxes has not expired. In addition, the IRS may request,
and QI must permit, that the external auditor perform an audit for one or more calendar years not scheduled for audit pursuant to sec-
tion 12.03 of this Agreement.
SECTION 13. EXPIRATION, TERMINATION AND DEFAULT
Sec. 13.01. Term of Agreement.This Agreement shall be in effect on January 1 of the calendar year following the year in which
this agreement is executed and shall expire on December 31, of the sixth calendar year for which this Agreement is in effect. This
Agreement may be renewed as provided in section 13.06 of this Agreement.
Sec. 13.02. Termination of Agreement. This Agreement may be terminated by either the IRS or QI prior to the end of its term by
delivery of a notice to the other party in accordance with section 14.06 of this Agreement. The IRS, however, shall not terminate the
Agreement unless there has been a significant change in circumstances, as defined in section 13.03 of this Agreement, or an event of
default has occurred, as defined in section 13.04 of this Agreement, and the IRS determines, in its sole discretion, that the significant
change of circumstances or the event of default warrants termination of this Agreement. In addition, the IRS shall not terminate this
Agreement in the event of default if QI can establish to the satisfaction of the IRS that all events of default for which it has received
notice have been cured within the time period agreed upon. The IRS shall notify QI, in writing, that an event of default has occurred
and that the IRS intends to terminate the Agreement unless QI cures the default in accordance with section 13.05 of this Agreement.
A notice of termination sent by either party shall take effect on the date specified in the notice.
Sec. 13.03. Significant Change in Circumstances. For purposes of this Agreement, a significant change in circumstances means:
(A) An acquisition of all, or substantially all, of QI’s assets in any transaction in which QI is not the surviving legal entity;
(B) A change in U.S. federal law that affects the validity of, or materially affects, the procedures contained in this Agreement;
(C) A ruling of any court that affects the validity of any provision of this Agreement;
(D) A change in the laws and procedures set forth in any Attachment to this Agreement; or
(E) A significant change in QI’s business practices that affects QI’s ability to meet its obligations under this Agreement.
Sec. 13.04. Events of Default. For purposes of this Agreement, an event of default occurs if QI fails to perform any material duty
or obligation required under this Agreement, and includes, but is not limited to, the occurrence of any of the following:
(A) QI fails to implement adequate procedures, accounting systems, and internal controls to ensure compliance with this Agreement;
(B)QI underwithholds the amount required to be withheld under chapter 3 of the Code and fails to correct the underwithholding or
file an amended Form 1042 reporting, and paying, the appropriate tax under sections 11.05 and 11.06 of this Agreement;
(C) QI underwithholds the amount required to be withheld under section 3406 of the Code;
(D) QI makes a misrepresentation on Forms W-8IMY or attaches to the form information regarding classes of assets that results in
underwithholding by the withholding agent;
(E) QI makes excessive refund claims;
(F) QI knows or has reason to know that the documentation required under section 5 of this Agreement is lacking, incorrect, or unre-
liable for a significant number of account holders;
(G) QI fails to timely file Forms 945, 1042, 1042-S, or 1099 or files forms that are materially incorrect or fraudulent;
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(H) QI fails to have an external audit performed when required, fails provide an external auditor’s report directly to the IRS on a
timely basis, or QI or its external auditor fails to cooperate with the IRS;
(I) QI fails to disclose to a withholding agent or to the IRS those account holders required to be disclosed under sections 6 and 10 of
this Agreement;
(J) QI fails to inform the IRS of any change in the laws and procedures described in any Attachment to this Agreement within 90
days of the change becoming effective;
(K) QI fails to inform the IRS within 90 days of any significant change in its business practices to the extent that change affects QI’s
obligations under this Agreement;
(L) QI fails to inform the IRS of any private arrangement, as described in section 4 of this Agreement;
(M) QI fails to cure a defect identified in an external audit report;
(N) QI makes any fraudulent statement or a misrepresentation of material fact with regard to this Agreement to the IRS, a withhold-
ing agent, or its external auditor;
(O) The IRS determines that the external auditor is not sufficiently independent to adequately perform its audit function; or
(P) An intermediary with which QI has a PAI agreement is in default with that agreement and QI fails to meet its obligation to ter-
minate that agreement within the time period specified in section 4.03 of this Agreement.
Sec. 13.05. Notice and Cure. Upon the occurrence of an event of default, the IRS may deliver to QI a notice of default specifying
the event of default that has occurred. QI shall respond to the notice of default within 60 days from the date of the notice. The re-
sponse shall contain an offer to cure the event of default, and the time period in which the cure will be accomplished, or shall state
the reasons why QI does not agree that an event of default has occurred. If QI does not respond within 60 days of the notice of de-
fault, the IRS may deliver a notice of termination as provided in section 13.02 of this Agreement. The IRS shall respond to QI’s re-
sponse, by either accepting or rejecting the offer of cure, or by setting forth a counter-proposal for cure of the event of default. If QI
has stated that it does not agree that an event of default has occurred, or if the IRS rejects an offer of cure by QI and QI does not ac-
cept the IRS’s counterproposal within 30 days of receiving that counterproposal, the parties shall seek to resolve their disagreement
within 30 days of the IRS’s receipt of QI’s response. At the end of this latter 30-day period, or, to the extent QI failed to reply to the
IRS’s rejection or counter-proposal within 30 days, at the end of the earlier 30 day period, the IRS may terminate this Agreement in
accordance with section 13.02 of this Agreement. If QI receives a notice of termination from the IRS, it may appeal the determina-
tion to terminate this Agreement by sending a written notice to the Director, International District, OP:IN:D, 950, L’Enfant Plaza
South, SW, Washington DC, 20024.
Sec. 13.06. Renewal.If QI intends to renew this Agreement, it shall submit an application for renewal to the IRS no earlier than
one year and no later than six months prior to the expiration of this Agreement. Any such application for renewal must contain an
update of the information provided by QI to the IRS in connection with the application to enter into this Agreement, and any other
information the IRS may request in connection with the renewal process. This Agreement shall be renewed only upon the signatures
of both QI and the IRS. Either the IRS or QI may seek to negotiate a new qualified intermediary agreement rather than renew this
Agreement.
SECTION 14. MISCELLANEOUS PROVISIONS.
Sec. 14.01. QI’s application to become a qualified intermediary and all the Appendices and Attachments to this Agreement are
hereby incorporated into and made an integral part of this Agreement. This Agreement, QI’s application, and the Appendices and At-
tachments to this Agreement constitute the complete agreement between the parties.
Sec. 14.02.This Agreement may not be amended, modified, or superceded other than by written agreement of QI and the IRS.
Sec. 14.03.Any waiver of a provision of this Agreement is a waiver solely of that provision. The waiver does not obligate the IRS
to waive other provisions of this Agreement or the same provision at a later date.
Sec. 14.04.This Agreement shall be governed by the laws of the United States. Any legal action brought under this Agreement shall
be brought only in a United States court with jurisdiction to hear and resolve matters under the internal revenue laws of the United
States.
Sec. 14.05. QI’s rights and responsibilities under this Agreement can not be assigned to another person.
Sec. 14.06. Notices provided under this Agreement shall be directed as follows:
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To the IRS
Office of the Assistant Commissioner (International)
Foreign Payments Branch
OP:IN:D:WT
950 L’Enfant Plaza South, SW
Washington D.C. 20024
To QI:
________________________________
________________________________
________________________________
________________________________
Notices shall be mailed registered, first class air mail.
Sec. 14.08. QI, acting in its capacity as a qualified intermediary or any other capacity, does not act as an agent of the IRS, nor does
it have the authority to hold itself out as an agent of the IRS.
IN WITNESS WHEREOF,the above parties have subscribed their names to these presents, in triplicate.
Signed this day of , 1998
__________________________________
(name and title of person signing for QI)
Internal Revenue Service
By________________________________
Assistant Commissioner (International)
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Appendix A
[Name of QI]
[Name of country] (see Attachment 1, for description of know-your customer rules).
[Name of country] (see Attachment 2, for description of know-your customer rules).
.
.
.
.
[Name of entity affiliated with QI]
[Name of country] (see Attachment ____, for description of know-your customer rules).
[Name of country] (see Attachment ____, for description of know-your customer rules).
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ATTACHMENT
4
1. QI is subject to the following laws and regulations of [name of country] governing the requirements of QI to obtain documenta-
tion confirming the identity of QI’s account holders.
2. QI represents that [name and citations to laws and regulations identified in item 1, above] are enforced by [name of enforcement
body] and QI shall provide the IRS with an English translation of any reports or other documentation issued by [name of enforce-
ment body] that relates to QI’s compliance with [laws and regulations identified in 1, above].
3. QI represents that the following penalties apply for failure to obtain, maintain, and evaluate documentation obtained under [name
and citations to laws and regulations identified in item 1].
4. QI shall use the following documentary evidence to comply with section 5.03 of this Agreement:
a. For natural persons:
b. For legal persons:
5. QI shall follow the procedures set forth below to establish a person’s permanent residency address.
6. QI shall follow the procedures set forth below to confirm the identity of account holders that do not open accounts in person.
7. QI represents that it will follow the procedures set forth below to determine whether an account holder is acting as an intermedi-
ary, and, if it is, to identify the beneficial owners for whom the intermediary is acting.
8. QI shall follow the procedures set forth below to obtain new documentation, or renew existing documentation, in accordance with
[name and citations to laws and regulations identified in item 1].
8. QI shall retain the documentary evidence obtained under [name and citations to laws and regulations identified in item 1] for the
following period.
Section 3. Contact Information
The principal authors of this notice are Kate Y. Hwa and Laurie Hatten-Boyd of the Office of the Associate Chief Counsel (Inter-
national). For further information regarding Section I of this notice, contact Ms. Hwa at 202-622-3840 (not a toll-free number). For
further information regarding Section II of this notice, contact Ms. Hatten-Boyd at (202) 622-3840 (not a toll-free call) or Tom
Logan at 202-874-1800 (not a toll-free number).
4
A separate attachment will be created for each country in which QI, or an entity affiliated with QI, operates.
1999–5 I.R.B.51February 1, 1999
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26 CFR 601.202: Closing agreements.
Rev. Proc. 99–13
SECTION 1. PURPOSE AND
OVERVIEW
.01 Application of EPCRS to 403(b)
Plans. This revenue procedure provides a
comprehensive system of correction pro-
grams and procedures for an employer
that offers a plan that is intended to satisfy
the requirements of § 403(b) of the Inter-
nal Revenue Code (the “Code”), but that
has failed to satisfy those requirements
because of Operational, Demographic, or
Eligibility Failures. This system permits
an employer to correct these failures, and
thereby provide its employees with retire-
ment benefits on a tax-favored basis.
This revenue procedure modifies and am-
plifies the Employee Plans Compliance
Resolution System (EPCRS), set forth in
Rev. Proc. 98–22, 1998–12 I.R.B. 11, to
include specific programs and procedures
relating to 403(b) Plans. In addition, this
revenue procedure replaces the program
described in Rev. Proc. 95–24, 1995–1
C.B. 694, which established the Tax Shel-
tered Annuity Voluntary Correction
(TVC) program, and which was extended
by Rev. Proc. 96–50, 1996–2 C.B. 370.
Except as otherwise indicated in this rev-
enue procedure, the specific provisions of
EPCRS apply to 403(b) Plans.
.02 Overview of EPCRS.Pursuant to
Rev. Proc. 98–22, as modified by this rev-
enue procedure, the following programs
comprise EPCRS for correction of fail-
ures with respect to a 403(b) Plan.
(1) APRSC: Self-correction. The Ad-
ministrative Policy Regarding Self-Cor-
rection (APRSC), as described in Rev.
Proc. 98–22, is a voluntary employer-ini-
tiated program that does not involve Ser-
vice approval. Under APRSC, an em-
ployer that has compliance practices and
procedures may correct Operational Fail-
ures, without paying any fee or sanction,
including Operational Failures relating to
contributions to a 403(b) Plan that are in
excess of the § 415 limit or the
§ 403(b)(2) limit (the exclusion al-
lowance). APRSC is described in Section
7 of Rev. Proc. 98–22, as modified by
sections 4 and 5 below.
(2) TVC: Voluntary correction with
Service approval. Under TVC, an em-
ployer or plan that is not Under Examina-
tion (as defined in Section 5.06 of Rev.
Proc. 98–22) may pay a limited fee and
receive the Service’s approval for the cor-
rection in the form of a closing agreement
with the appropriate Key District Office.
TVC allows correction of Operational
Failures, Demographic Failures, and Eli-
gibility Failures that are within the juris-
diction of the EP/EO Division of the Key
District Office, including a Plan of an In-
eligible Employer. TVC is described in
sections 4, 6, 7, and 8 below.
(3) Audit CAP for 403(b) Plans: Cor-
rection on audit. Audit CAP as described
in Rev. Proc. 98–22 is expanded by this
revenue procedure to cover closing agree-
ments in connection with a 403(b) Plan
that is Under Examination. Under Audit
CAP for 403(b) Plans, if an Operational
Failure that is not eligible for APRSC, a
Demographic Failure, or an Eligibility
Failure is identified with respect to a
403(b) Plan that is Under Examination,
and the failure is corrected, the sanction
imposed will bear a reasonable relation-
ship to the nature, extent, and severity of
the failure. Audit CAP for 403(b) Plans is
described in section 9 below (extending
the program described in Sections 14 and
15 of Rev. Proc. 98–22).
.03 Request for comments.The Ser-
vice specifically solicits comments or
suggestions relating to the guidance pro-
vided in this revenue procedure. It is re-
quested that comments or suggestions be
submitted by May 2, 1999, addressed to
CC:DOM:CORP:R (Rev. Proc. 99–13),
Room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative,
comments may be hand-delivered be-
tween the hours of 8 a.m. and 5 p.m. to
CC:DOM:CORP:R (Rev. Proc. 99–13),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may transmit comments electronically via
the Service’s Internet site at “http://www.
irs.ustreas.gov/prod/tax_regs/comments.
html”.
SECTION 2. EFFECT OF EPCRS;
RELIANCE
.01 Income taxes.If the applicable eli-
gibility requirements are satisfied and the
employer corrects a failure in accordance
with the requirements of APRSC, TVC,
or Audit CAP for 403(b) Plans, the Ser-
vice will not pursue income inclusion for
affected participants, or liability for in-
come tax withholding, on account of the
failure. However, the correction of a fail-
ure may itself result in income tax conse-
quences to participants (for example, par-
ticipants may be required to include in
gross income distributions of Excess
Amounts in the year of distribution).
.02 Excise and employment taxes.Ex-
cise taxes, FICA taxes, and FUTA taxes
(and corresponding withholding obliga-
tions), if applicable, that result from a
failure are not waived merely because the
failure has been corrected.
.03 Other taxes and penalties. See
Section 6.04 of Rev. Proc. 98–22 for rules
relating to other taxes and penalties.
.04 Reliance.Taxpayers may rely on
this revenue procedure, including the re-
lief described in section 2.01.
SECTION 3. DEFINITIONS
The following definitions apply for
purposes of this revenue procedure.
.01 403(b) Plan.The term “403(b)
Plan” means a plan or program intended
to satisfy the requirements of § 403(b), in-
cluding a Plan of an Ineligible Employer.
.02 Demographic Failure.The term
“Demographic Failure” means, with re-
spect to a 403(b) Plan, a failure to satisfy
the requirements of § 401(a)(4), § 401(a)-
(26), or § 410(b) (as applied to 403(b)
Plans pursuant to § 403(b)(12)(A)(i)).
.03 Eligibility Failure.The term “Eli-
gibility Failure” means, with respect to a
403(b) Plan, any of the following:
(1) A Plan of an Ineligible Employer;
(2) A failure to satisfy the nontransfer-
ability requirement of § 401(g);
(3) A failure to initially establish or
maintain a custodial account as required
by § 403(b)(7); or
(4) A failure to purchase (initially or
subsequently) either an annuity contract
from an insurance company (unless
grandfathered under Rev. Rul. 82–102,
1982–1 C.B. 62) or a custodial account
from a regulated investment company uti-
lizing a bank or an approved non-bank
trustee/custodian.
.04 Excess Amounts.The term “Ex-
cess Amounts” means any contributions
or allocations to a 403(b) Plan that are in
excess of the limits under § 415 or
§ 403(b)(2) (the exclusion allowance
limit) for the year.
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.05 Operational Failure.The term
“Operational Failure” means, with respect
to a 403(b) Plan, any of the following:
(1) A failure to satisfy the requirements
in § 403(b)(12)(A)(ii) (relating to the
availability of salary reduction contribu-
tions);
(2) A failure to satisfy the requirements
of § 401(m) (as applied to 403(b) Plans
pursuant to § 403(b)(12)(A)(i));
(3) A failure to satisfy the requirements
of § 401(a)(17) (as applied to 403(b)
Plans pursuant to § 403(b)(12)(A)(i));
(4) A failure to satisfy the distribution
restrictions of § 403(b)(7) or § 403(b)(11);
(5) A failure to satisfy the incidental
death benefit rules of § 403(b)(10);
(6) A failure to pay minimum required
distributions under § 403(b)(10);
(7) A failure to give employees the
right to elect a direct rollover under
§ 403(b)(10), including the failure to give
meaningful notice of such right;
(8) A failure to satisfy the limit on
elective deferrals under § 403(b)(1)(E);
(9) A failure involving contributions or
allocations of Excess Amounts; or
(10) Any other failure to satisfy applic-
able requirements under § 403(b) that (a)
results in the loss of § 403(b) status for
the plan or the loss of § 403(b) status for
the custodial account(s) or annuity con-
tract(s) under the plan and (b) is not a De-
mographic Failure, an Eligibility Failure,
or a failure related to the purchase of an-
nuity contracts, or contributions to custo-
dial accounts, on behalf of individuals
who are not employees of the employer.
.06 Plan of an Ineligible Employer.
The term “Plan of an Ineligible Employer”
means a plan intended to satisfy the re-
quirements of § 403(b) but which is not el-
igible for favorable tax treatment under
§ 403(b) because the employer is not a
tax-exempt organization described in
§ 501(c)(3) or a public educational organi-
zation described in § 170(b)(1)(A)(ii).
.07 Total Sanction Amount. The term
“Total Sanction Amount” means a mone-
tary amount that is approximately equal to
the income tax the Service could collect
as a result of the failure.
SECTION 4. CORRECTION
METHODS
.01 In general.The correction princi-
ples and rules of general applicability de-
scribed in Section 6 of Rev. Proc. 98–22
apply to 403(b) Plans, except as provided
in sections 4.02 and 4.03 below. Thus, a
failure with respect to a 403(b) Plan is
generally not corrected unless correction
is made with respect to all participants
and beneficiaries for all taxable years pur-
suant to this revenue procedure.
.02 Correction of Excess Amounts.
Excess Amounts may be corrected only
pursuant to paragraph (1) or (2) of this
section 4.02.
(1) Distribution of Excess Amounts. In
order to correct under this paragraph (1),
Excess Amounts for a year, adjusted for
earnings through the date of distribution,
must be distributed to affected partici-
pants and beneficiaries and are includible
in their gross income in the year distrib-
uted. A distribution of Excess Amounts is
generally treated in the manner described
in Section 3 of Rev. Proc. 92–93, 1992–2
C.B. 505, relating to the corrective dis-
bursement of elective deferrals. The dis-
tribution must be reported on Forms
1099-R for the year of distribution with
respect to each participant or beneficiary
receiving such a distribution. The distrib-
ution of Excess Amounts is not an eligible
rollover distribution within the meaning
of § 403(b)(8). In addition, the employer
must inform affected participants and
beneficiaries that the distribution of Ex-
cess Amounts is not eligible for rollover.
Excess Amounts distributed pursuant to
this paragraph (1) are not treated as
amounts previously excludable under
§ 403(b)(2)(A)(ii) for purposes of calcu-
lating the maximum exclusion allowance
for the taxable year of the distribution and
for subsequent taxable years.
(2) Retention of Excess Amounts. Al-
ternatively, only under TVC and Audit
CAP for 403(b) Plans, Excess Amounts
will be treated as corrected (even though
the Excess Amounts are retained in the
403(b) Plan) if the requirements of this
paragraph (2) are satisfied. Excess
Amounts arising from a § 415 failure, ad-
justed for earnings through the date of
correction, must reduce affected partici-
pants’ applicable § 415 limit for the year
following the year of correction (or for
the year of correction if the employer so
chooses), and subsequent years, until the
excess is eliminated. Excess Amounts
(whether arising from a § 415 failure or a
§ 403(b)(2) failure), adjusted for earnings
through the date of correction, must also
reduce participants’ exclusion allowances
by being treated as amounts previously
excludable under § 403(b)(2)(A)(ii) be-
ginning with the year following the year
of correction (or the year of correction if
the employer so chooses). The correction
described in this paragraph (2) must gen-
erally be used for all participants who
have Excess Amounts. See section 8.03
below for the correction compliance fee
that is generally applicable to Excess
Amounts corrected pursuant to this para-
graph (2).
.03 Correction of a Plan of an Ineligi-
ble Employer.The permitted correction
of a Plan of an Ineligible Employer under
TVC is the cessation of all contributions
(including salary reduction and after-tax
contributions) beginning no later than the
date the application under TVC is filed.
Pursuant to TVC correction, the assets in
such a plan are to remain in the annuity
contract or custodial account and are to be
distributed no earlier than the occurrence
of one of the distribution events described
in § 403(b)(7) (to the extent the assets are
held in custodial accounts) or § 403(b)-
(11) (for those assets invested in annuity
contracts that would be subject to
§ 403(b)(11) restrictions if the employer
were eligible). A Plan of an Ineligible
Employer that is corrected through TVC
will be treated as subject to all of the re-
quirements and provisions of § 403(b), in-
cluding the provisions of § 403(b)(8) (re-
lating to rollovers). Because a Plan of an
Ineligible Employer will be treated as
subject to all of the requirements of
§ 403(b), the plan must, as part of TVC
correction, also correct all other Opera-
tional, Demographic, and Eligibility Fail-
ures in accordance with this revenue pro-
cedure. The correction of a Plan of an
Ineligible Employer is subject to the fee
described in section 8.04 below (or, with
respect to the correction of multiple fail-
ures, section 8.05 below).
SECTION 5. SELF-CORRECTION
(APRSC)
.01 In general.Except as provided in
section 5.02 below, the provisions of Sec-
tions 7, 8, and 9 of Rev. Proc. 98-22 gen-
erally apply for purposes of self-correct-
ing a 403(b) Plan.
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.02 Special rules for APRSC.
(1) APRSC is available to correct Op-
erational Failures, but is not available to
correct Demographic Failures or Eligibil-
ity Failures.
(2) A plan document is neither neces-
sary nor sufficient to demonstrate that the
employer, plan administrator, or insurer
has in place established practices and pro-
cedures reasonably designed to facilitate
overall compliance.
(3) To be eligible for APRSC, there is
no requirement that the employer obtain a
private letter ruling from the Service cov-
ering its 403(b) Plan. Section 4.03 of
Rev. Proc. 98–22 does not apply.
(4) APRSC is available to correct Ex-
cess Amounts using the method described
in section 4.02(1) above, but not the
method described in section 4.02(2)
above.
(5) To be eligible for APRSC, an em-
ployer must have (either directly or,
where appropriate, through the insurer or
custodian of the annuity contracts or cus-
todial accounts under the 403(b) Plan)
compliance practices and procedures in
accordance with Section 4.04 of Rev.
Proc. 98–22.
(6) APRSC is not available to correct
Operational Failures that are egregious,
Operational Failures relating to a diver-
sion or misuse of plan assets, or other Op-
erational Failures that are not eligible for
correction under APRSC in accordance
with Rev. Proc. 98–22.
SECTION 6. TVC PROGRAM
.01 In general. TVC generally allows
employers to submit an application re-
questing correction of one or more Opera-
tional Failures, Demographic Failures, or
Eligibility Failures. Under TVC, the em-
ployer pays a compliance correction fee,
as described in section 8 below, and cor-
rects the failures identified in accordance
with the terms of a closing agreement en-
tered into by the Service and the em-
ployer. Payment of the compliance cor-
rection fee is generally required at the
time the closing agreement is signed. De-
pending on the nature of the failure and
the plan’s existing administrative proce-
dures, the closing agreement may be con-
ditioned on the implementation of stated
administrative procedures.
.02 TVC requirements.The provisions
of Rev. Proc. 98–22 relating to Walk-in
CAP generally apply to TVC except that
TVC applies to Operational Failures, De-
mographic Failures, and Eligibility Fail-
ures in a 403(b) Plan. In addition, there is
no requirement that the employer obtain a
private letter ruling from the Service cov-
ering its 403(b) Plan. Section 4.03 of
Rev. Proc. 98–22 does not apply.
.03 Eligibility for TVC.TVC is not
available if the 403(b) Plan or the em-
ployer is Under Examination.
.04 Failures covered by TVC. TVC is
expanded to cover all Operational Fail-
ures, Demographic Failures, and Eligibil-
ity Failures that are within the jurisdiction
of the EP/EO Division of the Key District
Office, including Plans of Ineligible Em-
ployers. TVC is available to correct egre-
gious failures; however, these failures are
subject to the fee described in section
8.06 below. TVC is not available with re-
spect to failures relating to the diversion
or misuse of plan assets.
.05 Correction of Excess Amounts.
Failures related to Excess Amounts may
be corrected under TVC in the manner de-
scribed in paragraph (1) or (2) of section
4.02 above, and are subject to the fee de-
scribed in section 8.02 or 8.03, respec-
tively.
SECTION 7. APPLICATION
PROCEDURES FOR TVC
.01 In general.The procedures and
submission requirements of Section 12 of
Rev. Proc. 98–22 apply for purposes of
TVC.
.02 Submission requirements.In addi-
tion to the submission requirements pro-
vided in Section 12.03 of Rev. Proc. 98–
22, an application under TVC must con-
tain a statement that the employer has
contacted all other entities involved with
the plan and has been assured of coopera-
tion in implementing the applicable cor-
rection, to the extent necessary. For ex-
ample, if the plan’s failure is the failure to
satisfy the requirements of § 403(b)(1)(E)
on elective deferrals, the employer must,
prior to making the TVC application, con-
tact the insurance company or custodian
with control over the plan’s assets to as-
sure cooperation in effecting a distribu-
tion of the excess deferrals and the earn-
ings thereon.
.03 Required documents.A TVC sub-
mission must be accompanied by the fol-
lowing documents:
(1) If applicable, the first two pages of
the most recently filed Form 5500, or if
inapplicable, the information generally
included on the first two pages, including
the name and number of the plan, and the
employer’s Employer Identification
Number.
(2) A statement as to the type of em-
ployer (e.g., a tax- exempt organization
described in § 501(c)(3)) submitting the
TVC application.
(3) A copy of the pertinent portions of
any relevant § 403(b) documents such as
plan documents, written descriptions of
the plan, and sample salary reduction
agreements.
(4) The letter to the Service requesting
consideration under TVC must be desig-
nated “TVC PROGRAM.”
(5) TVC submissions must be mailed
to the Closing Agreement Coordinator in
the appropriate Key District Office as
provided in Section 12.12 of Rev. Proc.
98–22.
.04 Checklist.A checklist in Appendix
B of Rev. Proc. 98–22 is provided for use
by an employer in preparing a TVC re-
quest.
SECTION 8. FEES FOR TVC
.01 TVC compliance correction fee.
The applicable TVC compliance correc-
tion fee depends on the type of failure
and, generally, the number of employees
of the employer.
.02 Fee for Operational Failures.
Subject to section 8.05 below, the compli-
ance correction fees for Operational Fail-
ures are as follows:
(1) The fee for an employer with fewer
than 25 employees is $500.
(2) The fee for an employer with at
least 25 and no more than 1,000 employ-
ees is $1,250.
(3) The fee for an employer with more
than 1,000 employees but less than
10,000 is $5,000.
(4) The fee for an employer with
10,000 or more employees is $10,000.
.03 Fee for certain Excess Amounts.
Subject to section 8.05 below, the compli-
ance correction fee for Excess Amounts
that are corrected pursuant to section
4.02(2) above is equal to the sum of (1)
the applicable fee described in section
8.02 above and (2) two percent of the Ex-
cess Amounts, adjusted for earnings
through the date of the TVC application,
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contributed or allocated in the calendar
year of the TVC application and in the
three calendar years prior thereto. For
purposes of determining the fee described
in this section 8.03, where there is a fail-
ure to satisfy both the § 403(b)(2) and §
415 limits with respect to a single em-
ployee for a year, the fee will take into ac-
count only the greater Excess Amount.
.04 Fee for Demographic and Eligibil-
ity Failures.(1) Subject to section 8.05
below, the compliance correction fee for a
403(b) Plan with failures that include De-
mographic or Eligibility Failures is deter-
mined in accordance with the table set
forth below. It is expected that in most in-
stances the compliance correction fee im-
posed will be at or near the presumptive
amount in each range; however, the fee
may be a higher or lower amount within
the range, depending on the factors in
paragraph (2) below. This table is the
same as the table provided in Section
13.05 of Rev. Proc. 98–22, except that (a)
the reference to the “VCR fee” is changed
to refer to the TVC compliance correction
fee for Operational Failures set forth in
section 8.02 above, and (b) the fee is de-
termined with reference to the number of
employees rather than participants.
1999–5 I.R.B55February 1, 1999
# of employeesFee rangePresumptive Amount
10 or fewerTVC fee for Operational Failures to $4,000$2,000
11 to 50TVC fee for Operational Failures to $8,000$4,000
51 to 100TVC fee for Operational Failures to $12,000$6,000
101 to 300TVC fee for Operational Failures to $16,000$8,000
301 to 1,000TVC fee for Operational Failures to $30,000$15,000
Over 1,000TVC fee for Operational Failures to $70,000$35,000
(2) Consideration of whether the com-
pliance correction fee for a 403(b) Plan
with failures that include Demographic or
Eligibility Failures should be equal to,
greater than, or less than the presumptive
amount set forth in section 8.04(1) above
will depend on factors relating to the na-
ture, extent, and severity of the failure.
These factors include: (a) whether the
failure is a failure to satisfy the require-
ments of § 401(a)(4), § 401(a)(26), or
§ 410(b) (pursuant to § 403(b)(12)(A)(i));
(b) whether the plan is a Plan of an Ineli-
gible Employer; (c) whether the 403(b)
Plan has a combination of Operational,
Demographic, and Eligibility failures;
and (d) the period of time over which the
failure occurred.
.05 Fee for multiple failures.If correc-
tion is requested for multiple failures, the
compliance correction fee will be deter-
mined in accordance with the table set
forth below.
FEES FOR DEMOGRAPHIC AND ELIGIBILITY FAILURES
Multiple Operational FailuresFee described in section 8.02
Multiple Demographic/Eligibility FailuresFee described in section 8.04
Combination of Operational and Fee described in section 8.04
Demographic/Eligibility Failures
Operational Failure(s) with section Fee described in section 8.03
4.02(2) correction of Excess Amounts
Demographic/Eligibility Failures and Fee described in section 8.03, sub-
Operational Failures including section stituting section 8.04 fee for section
4.02(2) correction of Excess Amounts8.02 fee
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.06 Fee for egregious failures.Consis-
tent with section 13.05(3) of Rev. Proc.
98–22, in cases involving failures that are
egregious, the maximum compliance cor-
rection fee applicable to the plan is in-
creased to 40 percent of the Total Sanc-
tion Amount and no presumptive amount
applies.
SECTION 9. AUDIT CAP FOR
403(B) PLANS
.01 Audit CAP requirements. The pro-
visions of Sections 14 and 15 of Rev.
Proc. 98–22 are expanded to cover 403(b)
Plans. Thus, in the event the Service
identifies an Operational Failure, Demo-
graphic Failure, or an Eligibility Failure
upon an Employee Plans or Exempt Orga-
nizations examination (other than a fail-
ure that has been corrected under APRSC
or TVC or that is eligible for correction
under APRSC), the requirements of Sec-
tion 14 of Rev. Proc. 98–22 are satisfied
with respect to the failure if the employer
corrects the failure, pays a sanction in ac-
cordance with section 9.02 below, adopts
appropriate administrative procedures,
and enters into a closing agreement with
the Service. Audit CAP for 403(b) Plans
is not available for failures relating to a
misuse or diversion of plan assets.
.02 Payment of sanction. The sanction
under Audit CAP for 403(b) Plans is a ne-
gotiated percentage of the Total Sanction
Amount. Sanctions will not be excessive
and will bear a reasonable relationship to
the nature, extent, and severity of the fail-
ures. The amount of the sanction will de-
pend on factors relating to the nature, ex-
tent, and severity of the failures, including
the extent to which correction had pro-
gressed before the examination was initi-
ated. Other factors relating to the nature,
extent, and severity of the failures in-
clude: (1) the number and type of em-
ployees affected by the failure; (2) the
number of nonhighly compensated em-
ployees who would be adversely affected
if the plan were not treated as a plan de-
scribed in § 403(b); (3) whether the fail-
ure is a failure to satisfy the requirements
of § 401(a)(4), § 401(a)(26), or § 410(b)
(pursuant to § 403(b)(12)(A)(i)); (4) the
extent to which the failure relates to Ex-
cess Amounts; (5) whether the plan is a
Plan of an Ineligible Employer; (6)
whether the plan has a combination of
Operational, Demographic, or Eligibility
Failures; (7) the period over which the
failure occurred; and (8) the reason for the
failure (for example, data errors such as
errors in transcription of data, the transpo-
sition of numbers, or minor arithmetic
errors).
SECTION 10. EFFECT ON OTHER
DOCUMENTS
.01 Except as provided in section 11
below, the TVC program described in
Rev. Procs. 95-24 and 96-50 is modified
and superseded by this revenue proce-
dure.
.02 Rev. Proc. 99–8, 1999–1 I.R.B.
229, is modified as provided in section 8
of this revenue procedure.
.03 Rev. Proc. 98–22 is modified and
amplified by this revenue procedure.
SECTION 11. EFFECTIVE DATE
The effective date of this revenue pro-
cedure is January 1, 1999. However, a
TVC application made on or after January
1, 1999 and prior to July 1, 1999 will be
reviewed under the guidance provided in
Rev. Procs. 95–24 and 96–50, unless the
applicant indicates that the TVC applica-
tion should be reviewed under the guid-
ance provided in this revenue procedure.
TVC applications made on and after July
1, 1999 will in all cases be reviewed in
accordance with the guidance provided in
this revenue procedure.
SECTION 12. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1645.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
The collection of information in this
revenue procedure is in sections 1.01,
4.02, 4.03, 6.01, 6.02, 6.04, 6.05, 7.01–
7.04, and 9.01 of this revenue procedure.
This information is required to enable the
Office of Assistant Commissioner (Em-
ployee Plans and Exempt Organizations)
of the Internal Revenue Service to make
determinations regarding the issuance of
various types of closing agreements. This
information will be used to issue closing
agreements to allow individual plans to
continue to maintain their tax qualified
status. As a result, favorable tax treat-
ment of the benefits of the eligible em-
ployees is retained. The likely respon-
dents are state or local governments and
nonprofit institutions.
The estimated total annual reporting
and/or recordkeeping burden is 1,899
hours.
The estimated annual burden per re-
spondent/recordkeeper varies from .5 to
12 hours, depending on individual cir-
cumstances, with an estimated average of
3.8 hours. The estimated number of re-
spondents and/or recordkeepers is 500.
The estimated frequency of responses
is occasionally.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Rosamond S. Ferber of the
Employee Plans Division. For more in-
formation concerning this revenue proce-
dure, call the Employee Plans Division
Telephone Number, (202) 622-6074 or
(202) 622-6075 (not a toll-free number)
between the hours of 1:30 and 4:00 pm,
Monday through Thursday. Ms. Ferber
may be reached at (202) 622-6214 (also
not a toll-free number).
26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability.
(Also Part I, § 280F; 1.280F–7, 1.61–21.)
Rev. Proc. 99–14
SECTION 1. PURPOSE
This revenue procedure provides: (1)
limitations on depreciation deductions for
owners of passenger automobiles first
placed in service during calendar year
1999, including separate limitations on
passenger automobiles designed to be
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propelled primarily by electricity and
built by an original equipment manufac-
turer (electric automobiles); (2) the
amounts to be included in income by
lessees of passenger automobiles first
leased during calendar year 1999, includ-
ing separate inclusion amounts for elec-
tric automobiles; and (3) the maximum al-
lowable value of employer-provided
automobiles first made available to em-
ployees for personal use in calendar year
1999 for which the vehicle cents-per-mile
valuation rule provided under § 1.61-
21(e) of the Income Tax Regulations may
be applicable. The tables detailing these
depreciation limitations and lessee inclu-
sion amounts reflect the automobile price
inflation adjustments required by
§ 280F(d)(7) of the Internal Revenue
Code. The maximum allowable automo-
bile value for applying the vehicle cents-
per-mile valuation rule reflects the auto-
mobile price inflation adjustment of
§ 280F(d)(7) as required by § 1.61–21(e)-
(1)(iii)(A).
SECTION 2. BACKGROUND
For owners of automobiles, § 280F(a)
imposes dollar limitations on the depreci-
ation deduction for the year that the auto-
mobile is placed in service and each suc-
ceeding year. In the case of electric
automobiles placed in service after Au-
gust 5, 1997, and before January 1, 2005,
§ 280F(a)(1)(C) requires tripling of these
limitation amounts. Section 280F(d)(7)
requires the amounts allowable as depre-
ciation deductions to be increased by a
price inflation adjustment amount for pas-
senger automobiles placed in service after
calendar year 1988.
For leased automobiles, § 280F(c) re-
quires a reduction in the deduction al-
lowed to the lessee of the automobile.
The reduction must be substantially
equivalent to the limitations on the depre-
ciation deductions imposed on owners of
automobiles. Under § 1.280F–7(a), this
reduction requires the lessees to include
in gross income an inclusion amount
determined by applying a formula to
the amount obtained from a table. There
is a table for lessees of electric automo-
biles and a table for all other passenger
automobiles. Each table shows inclusion
amounts for a range of fair market values
for each tax year after the automobile is
first leased.
For automobiles first provided by em-
ployers to employees that meet the re-
quirements of § 1.61–21(e)(1), the value
to the employee of the use of the automo-
bile may be determined under the vehicle
cents-per-mile valuation rule of § 1.61–
21(e). Section 1.61–21(e)(1)(iii)(A) pro-
vides that for an automobile first made
available after 1988 to any employee of
the employer for personal use, the value
of the use of the automobile may not be
determined under the vehicle cents-per-
mile valuation rule for a calendar year if
the fair market value of the automobile
(determined pursuant to § 1.61–21(d)-
(5)(i) through (iv)) on the first date the au-
tomobile is made available to the em-
ployee exceeds $12,800 as adjusted by
§ 280F(d)(7).
SECTION 3. SCOPE AND OBJECTIVE
01. The limitations on depreciation de-
ductions in section 4.02 of this revenue
procedure apply to automobiles (other
than leased automobiles) that are placed
in service in calendar year 1999 and con-
tinue to apply for each tax year that the
automobile remains in service.
02. The tables in section 4.03 of this
revenue procedure apply to leased auto-
mobiles for which the lease term begins in
calendar year 1999. Lessees of such auto-
mobiles must use these tables to deter-
mine the inclusion amount for each tax
year during which the automobile is
leased.
03. SeeRev. Proc. 96–25, 1996–1 C.B.
681, for information on determining in-
clusion amounts for automobiles first
leased before January 1, 1997; Rev. Proc.
97–20, 1997–1 C.B. 647, for automobiles
first leased during calendar year 1997, in-
cluding electric automobiles first leased
on or after January 1, 1997, and before
August 6, 1997; Rev. Proc. 98–24, 1998–
10 I.R.B. 31, for electric automobiles first
leased after August 5, 1997, and before
January 1, 1998; and Rev. Proc. 98–30,
1998–17 I.R.B. 6, for all automobiles first
leased in calendar year 1998.
04. The maximum fair market value
figure in section 4.04(2) of this revenue
procedure applies to employer-provided
automobiles first made available to any
employee for personal use in calendar
year 1999. SeeRev. Proc. 97–20, for the
maximum fair market value figure for au-
tomobiles first made available in calendar
year 1997; and Rev. Proc. 98–30, for the
maximum fair market value figure for au-
tomobiles first made available in calendar
year 1998.
SECTION 4. APPLICATION
01. A taxpayer placing an automobile
in service for the first time during calen-
dar year 1999 is limited to the deprecia-
tion deduction shown in Table 1 of sec-
tion 4.02(2) or, in the case of an electric
automobile, Table 2. A taxpayer first
leasing an automobile in calendar year
1999 must determine the inclusion
amount that is added to gross income
using Table 3 of section 4.03 or, in the
case of an electric automobile, Table 4.
Otherwise, the procedures of § 1.280F–
7(a) must be followed. An employer pro-
viding an automobile for the first time in
calendar year 1999 for the personal use of
any employee may determine the value of
the use of the automobile by using the
cents-per-mile valuation rule in § 1.61-
21(e) if the fair market value of the auto-
mobile does not exceed the amount speci-
fied in section 4.04(2). If the fair market
value of the automobile exceeds the
amount specified in section 4.04(2), the
employer may determine the value of the
use of the automobile under the general
valuation rules of § 1.61–21(b) or under
the special valuation rules of § 1.61-21(d)
(Automobile lease valuation) or § 1.61–
21(f) (Commuting valuation) if the ap-
plicable requirements are met.
02. Limitations on Depreciation De-
ductions for Certain Automobiles.
(1) Amount of the Inflation Adjust-
ment. Under § 280F(d)(7)(B)(i), the auto-
mobile price inflation adjustment for any
calendar year is the percentage (if any) by
which the CPI automobile component for
October of the preceding calendar year ex-
ceeds the CPI automobile component for
October 1987. The term “CPI automobile
component” is defined in § 280F(d)-
(7)(B)(ii) as the “automobile component”
of the Consumer Price Index for all Urban
Consumers published by the Department
of Labor (the CPI). The new car compo-
nent of the CPI was 115.2 for October
1987 and 139.7 for October 1998. The
October 1998 index exceeded the October
1987 index by 24.5. The Internal Rev-
enue Service has, therefore, determined
that the automobile price inflation adjust-
ment for 1999 is 21.27 percent
1999–5 I.R.B57February 1, 1999
IRB 1999-5 1/27/99 3:27 PM Page 57

(24.5/115.2 3100%). This adjustment is
applicable to all automobiles that are first
placed in service in calendar year 1999.
The dollar limitations in § 280F(a) must
therefore be multiplied by a factor of
0.2127, and the resulting increases, after
rounding to the nearest $100, are added to
the 1988 limitations to give the deprecia-
tion limitations applicable to passenger
automobiles (other than electric automo-
biles) for 1999. To determine the dollar
limitations applicable to an electric auto-
mobile first placed in service during cal-
endar year 1999, the dollar limitations in
§ 280F(a) are tripled in accordance with §
280F(a)(1)(C) and are then multiplied by
a factor of 0.2127; the resulting increases,
after rounding to the nearest $100, are
added to the tripled 1988 limitations to
give the depreciation limitations for 1999.
(2) Amount of the Limitation. For
automobiles (other than electric automo-
biles) placed in service in calendar year
1999, Table 1 contains the dollar amount
of the depreciation limitations for each
tax year. For electric automobiles placed
in service in calendar year 1999, Table 2
contains these amounts.
February 1, 1999581999–5 I.R.B.
REV. PROC. 99–14 TABLE 1
DEPRECIATION LIMITATIONS FOR AUTOMOBILES
(OTHER THAN ELECTRIC AUTOMOBILES)
FIRST PLACED IN SERVICE IN CALENDAR YEAR 1999
Tax YearAmount
1st Tax Year$3,060
2nd Tax Year $5,000
3rd Tax Year $2,950
Each Succeeding Year$1,775
REV. PROC. 99–14 TABLE 2
DEPRECIATION LIMITATIONS FOR ELECTRIC AUTOMOBILES
FIRST PLACED IN SERVICE IN CALENDAR YEAR 1999
Tax YearAmount
1st Tax Year$9,280
2nd Tax Year $14,900
3rd Tax Year $8,950
Each Succeeding Year$5,325
03. Inclusions in Income of Lessees of
Automobiles.
The inclusion amounts for automobiles
first leased in calendar year 1999 are cal-
culated under the procedures described in
§ 1.280F–7(a). Lessees of automobiles
other than electric automobiles should use
Table 3 in applying these procedures,
while lessees of electric automobiles
should use Table 4.
$ 15,50015,80023446
15,80016,10047101314
16,10016,400611172023
16,40016,700815232832
16,70017,0001020293541
17,00017,5001325384553
REV. PROC. 99–14 TABLE 3
DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN ELECTRIC AUTOMOBILES)
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1999
Fair Market Value Tax Year During Lease
of Automobile
OverNot Over1st2nd3rd4th5th and Later
IRB 1999-5 1/27/99 3:27 PM Page 58

17,50018,0001632485868
18,00018,5001939597182
18,50019,0002247698396
19,00019,50026538096111
19,50020,000296190108126
20,00020,5003268101121 140
20,50021,0003575111134155
21,00021,5003982122146169
21,50022,0004289132160183
22,00023,00047100148178206
23,00024,00053114169204235
24,00025,00060128190229264
25,00026,00066142212254293
26,00027,00073156233279322
27,00028,00079171253305351
28,00029,00085185275330380
29,00030,00092199296355410
30,00031,00098214316381439
31,00032,000105227338406468
32,00033,000111242359431497
33,00034,000118256380456527
34,00035,000124270402481556
35,00036,000131284423506585
36,00037,000137299443532614
37,00038,000144313464557643
38,00039,000150327486582672
39,00040,000157341507607702
40,00041,000163355528633731
41,00042,000170369549658760
42,00043,000176384570683789
43,00044,000183398591708819
44,00045,000189412612734848
45,00046,000196426633759877
46,00047,000202441654784906
47,00048,000208455675810935
48,00049,000215469696835964
49,00050,000221483718860993
50,00051,0002284977398851,023
51,00052,0002345127599111,052
52,00053,0002415267809361,081
53,00054,0002475408029611,110
54,00055,0002545548239861,140
55,00056,0002605698431,0121,169
56,00057,0002675828651,0371,198
57,00058,0002735978861,0621,227
58,00059,0002806119071,0871,256
59,00060,0002866259281,1131,285
60,00062,0002966469601,1511,329
62,00064,0003096751,0021,2011,387
1999–5 I.R.B59February 1, 1999
REV. PROC. 99–14 TABLE 3
DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN ELECTRIC AUTOMOBILES)
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1999
Fair Market Value Tax Year During Lease
of Automobile
OverNot Over1st2nd3rd4th5th and Later
IRB 1999-5 1/27/99 3:27 PM Page 59

64,00066,0003227031,0441,2521,446
66,00068,0003357321,0861,3021,504
68,00070,0003487601,1281,3531,563
70,00072,0003617881,1711,4031,621
72,00074,0003748171,2121,4541,679
74,00076,0003878451,2551,5041,738
76,00078,0003998741,2971,5551,796
78,00080,0004129021,3391,6061,854
80,00085,0004359521,4131,6941,956
85,00090,0004671,0231,5181,8212,102
90,00095,0005001,0941,6231,9472,248
95,000 100,0005321,1651,7292,0732,394
100,000 110,0005811,2711,8872,2632,612
110,000 120,0006451,4142,0972,5162,904
120,000 130,0007101,5562,3082,7683,196
130,000 140,0007751,6972,5193,0213,488
140,000 150,0008401,8392,7303,2743,779
150,000 160,0009041,9822,9403,5264,072
160,000 170,0009692,1243,1513,7794,363
170,000 180,0001,0342,2653,3624,0324,655
180,000 190,0001,0992,4073,5734,2844,947
190,000 200,0001,1632,5503,7834,5375,238
200,000 210,0001,2282,6923,9944,7895,530
210,000 220,0001,2932,8334,2055,0435,822
220,000 230,0001,3582,9754,4165,2956,114
230,000 240,0001,4223,1184,6265,5486,405
240,000 250,0001,4873,2604,8375,8006,697
February 1, 1999601999–5 I.R.B.
REV. PROC. 99–14 TABLE 3
DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN ELECTRIC AUTOMOBILES)
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1999
Fair Market Value Tax Year During Lease
of Automobile
OverNot Over1st2nd3rd4th5th and Later
IRB 1999-5 1/27/99 3:27 PM Page 60

1999–5 I.R.B61February 1, 1999
$ 47,000 48,000 7 14 21 26 30
48,000 49,000 14 28 42 51 59
49,000 50,000 20 43 62 77 88
50,000 51,000 27 57 83 102 118
51,000 52,000 33 71 105 127 147
52,000 53,000 39 86 126 151 177
53,000 54,000 46 100 147 177 205
54,000 55,000 52 114 168 202 235
55,000 56,000 59 128 189 228 264
56,000 57,000 65 142 211 253 292
57,000 58,000 72 156 232 278 322
58,000 59,000 78 171 252 304 351
59,000 60,000 85 185 273 329 380
60,000 62,000 95 206 305 367 424
62,000 64,000 107 235 347 417 483
64,000 66,000 120 263 389 468 541
66,000 68,000 133 291 432 518 600
68,000 70,000 146 320 473 569 658
70,000 72,000 159 348 516 619 716
72,000 74,000 172 377 558 669 775
74,000 76,000 185 405 600 720 833
76,000 78,000 198 433 643 771 891
78,000 80,000 211 462 684 822 949
80,000 85,000 234 511 758 910 1,052
85,000 90,000 266 582 864 1,036 1,198
90,000 95,000 298 654 968 1,163 1,343
95,000 100,000 331 724 1,075 1,289 1,489
100,000 110,000 379 831 1,232 1,479 1,708
110,000 120,000 444 973 1,443 1,731 2,000
120,000 130,000 509 1,115 1,654 1,984 2,291
130,000 140,000 574 1,257 1,864 2,237 2,583
140,000 150,000 638 1,399 2,075 2,490 2,875
150,000 160,000 703 1,541 2,286 2,742 3,167
160,000 170,000 768 1,683 2,497 2,994 3,459
170,000 180,000 833 1,825 2,707 3,248 3,750
180,000 190,000 897 1,967 2,918 3,500 4,042
190,000 200,000 962 2,109 3,129 3,753 4,333
200,000 210,000 1,027 2,251 3,340 4,005 4,625
210,000 220,000 1,092 2,393 3,550 4,258 4,917
220,000 230,000 1,156 2,535 3,761 4,511 5,209
230,000 240,000 1,221 2,677 3,972 4,763 5,501
240,000 250,000 1,286 2,819 4,183 5,016 5,792
REV. PROC. 99–14 TABLE 4
DOLLAR AMOUNTS FOR ELECTRIC AUTOMOBILES
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1999
Fair Market Value Tax Year During Lease
of Automobile
OverNot Over1st2nd3rd4th5th and Later
IRB 1999-5 1/27/99 3:27 PM Page 61

04. Maximum Automobile Value for
Using the Cents-per- mile Valuation Rule.
(1) Amount of Adjustment.Under
§ 1.61–21(e)(1)(iii)(A), the limitation on
the fair market value of an employer-pro-
vided automobile first made available to
any employee for personal use after 1988
is to be adjusted in accordance with §
280F(d)(7). Accordingly, the adjustment
for any calendar year is the percentage (if
any) by which the CPI automobile com-
ponent for October of the preceding cal-
endar year exceeds the CPI automobile
component for October 1987. See, section
4.02(1). The new car component of the
CPI was 115.2 for October 1987 and
139.7 for October 1998. The October
1998 index exceeded the October 1987
index by 24.5. The Internal Revenue Ser-
vice has, therefore, determined that the
adjustment for 1999 is 21.27 percent
(24.5/115.2 3100%). This adjustment is
applicable to all employer-provided auto-
mobiles first made available to any em-
ployee for personal use in calendar year
1999. The maximum fair market value
specified in § 1.61–21(e)(1)(iii)(A) must
therefore be multiplied by a factor of
0.2127, and the resulting increase, after
rounding to the nearest $100, is added to
$12,800 to give the maximum value for
1999.
(2) The Maximum Automobile Value.
For automobiles first made available in
calendar year 1999 to any employee of
the employer for personal use, the vehicle
cents-per-mile valuation rule may be ap-
plicable if the fair market value of the au-
tomobile on the date it is first made avail-
able does not exceed $15,500.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for
automobiles (other than leased automo-
biles) that are first placed in service dur-
ing calendar year 1999, to leased automo-
biles that are first leased during calendar
year 1999, and to employer-provided au-
tomobiles first made available to employ-
ees for personal use in calendar year
1999.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Bernard P. Harvey of the Of-
fice of the Assistant Chief Counsel
(Passthroughs and Special Industries).
For further information regarding the de-
preciation limitations and lessee inclusion
amounts in this revenue procedure, con-
tact Mr. Harvey at (202) 622-3110; for
further information regarding the maxi-
mum automobile value for applying the
vehicle cents-per-mile valuation rule,
contact Ms. Lynne Camillo of the Office
of the Associate Chief Counsel (Em-
ployee Benefits and Exempt Organiza-
tions) at (202) 622-6040 (not toll-free
calls).
February 1, 1999621999–5 I.R.B.
IRB 1999-5 1/27/99 3:27 PM Page 62

1999–5 I.R.B63February 1, 1999
Foundations Status of Certain
Organizations
Announcement 99–10
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or des-
ignations in the Cumulative List of Orga-
nizations (Publication 78), or on the pre-
sumption arising from the filing of notices
under section 508(b) of the Code. This
listing does notindicate that the organiza-
tions have lost their status as organiza-
tions described in section 501(c)(3), eligi-
ble to receive deductible contributions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private foun-
dations:
C and C Outreach, Marrero, LA
Cabin John Baseball Association Inc.,
Bethesda, MD
Caddo-Bossier Drop Your Guns Inc.,
Shreveport, LA
Calcasieu Chapter of the Louisiana
Council on Child Abuse, Lake Charles,
LA
Calcutta Rescue-USA, Memphis, TN
Calhoun County Crime Stoppers Inc.,
Port Lavaca, TX
California Alliance Against Domestic
Violence, Modesto, CA
California Association of Leadership
Programs, Sunnyvale, CA
California Council to Promote Self-
Esteem and Responsibility, Davis, CA
California Wellness Information
Network, Sacramento, CA
CALQED, Sacramento, CA
Calument Ecological Park Association,
Chicago, IL
Calvary Chapel of Sparks, Sparks, NV
Calvary Community Corporation,
Cincinnati, OH
Calvert County Symphonic Orchestra
Boosters Club Inc., St. Leonard, MD
Calvert Farmland Trust Inc.,
Huntingtown, MD
Cambodian Society of Houston, Houston,
TX
Cambridge Alliance Inc., Cambridge,
MA
Camden Enterprises and Associates
Incorporated, Baltimore, MD
Camp Chase Memorial Association Inc.,
Galloway, OH
Camp Excel, De Rio, TX
Camp Grandir Inc., St. Paul, MN
Camp Gruber Chapel Fund Inc.,
Oklahoma City, OK
Cancer Foundation, Spokane, WA
Campbell County Cancer Association
Inc., Lafollette, TN
Cancer Pain Relief-Utah Inc., Salt Lake
City, UT
Cancer Prevention and Treatment
Research Institute of Arizona Inc.,
Fountain Hills, AZ
Canines Assisting People Inc., Tampa,
FL
Canoeing for Kids, Columbia, SC
Canus Games Inc., Auburn, NY
Cape Cod Charities, S. Yarmouth, MA
Cape Cod Wildlife Inc., Mashpee, MA
Cape Verdean Cultural Preservation
Council Inc., Annandale, VA
Capitol Area Parent Action, Austin, TX
Capitol East Community Development
Corporation, Washington, DC
CAPON-Cincinnati Area Pediatric
Nurses, Cincinnati, OH
Cardinal Scholarship Fund, East Orange,
NJ
Care Con Foundation, Westerville, OH
Care House Inc., Detroit, MI
Care International Inc., Boston, MA
Career Education Through Role Models,
Denver, CO
Caribbean American Community
Comprehensive Center Inc., Brooklyn,
NY
Caribbean Cultural Association, Portland,
OR
Caring & Loving All Special Persons
Inc., Rexford, MT
Caring Concepts Inc., Gonzales, TX
Carlisle Center for Violence Prevention
Inc., Carlisle, MA
Carnation-Duvall ASAPTogether
Community Task Force, Carnation,
WA
Carney Classic Foundation, Thorton, IL
CAROB Foundation Inc., New York, NY
Carolyn Darch Ministries Inc., Troy, MI
Carpenters Home Improvement Inc.,
Milwaukee, WI
Carr Fork Volunteer Fire Department
Incorporated, Litt Carr, KY
Carteret AIDS Service Advocacy Inc.,
AKA CASA Inc., Beaufort, NC
Cary Educational Foundation, Cary, NC
Cassio Eastland Marrow Foundation,
Florence, AL
Castle Now and Beyond, Merced, CA
Casual Classics, Gastonia, NC
Catoosa Girls Softball Association,
Catoosa, OK
Cats Cause We Care Shelter Inc., Rising
Star, TX
Cause Action Now Inc., New York, NY
CCH Lincoln-Glenarm Housing Inc.,
Denver, CO
C E Byrd Band Booster Club,
Shreveport, LA
Cecil A Hill Memorial, Austin, TX
Cedar Ridge Resident Council Inc.,
Houston, TX
Celebration of Books, Huntsville, AL
Celebration of Women, San Diego, CA
C E Ministries Inc., Oklahoma City, OK
Center City South Town Watch,
Philadelphia, PA
Center for Asian Indian Newcomers, San
Francisco, CA
Center for Biblical Values Inc., Grand
Rapids, MI
Center for Character Education Inc.,
Skokie, IL
Center for Counseling Alcoholics and
Addicts, Phoenix, AZ
Center for D U I Rehabilitation and
Education Inc., Coral Gables, FL
Center for Effective Organization, Austin,
TX
Center for Environmental Initiatives Inc.,
Atlanta, GA
Center for Gerontology Inc., Ft.
Lauderdale, FL
Center for Human Advancement, El Paso,
TX
Center for Indonesian Studies Inc.,
Sussex, WI
Center for Investment Research, Plano,
TX
Center for Joyful Living, Thousand Oaks,
CA
Center for Personal Exploration, Cedar
Rapids, IA
Center for Rebuilding Americas Schools,
Palatine, IL
Center for Social Research, Cambridge,
MA
Part IV. Items of General Interest
IRB 1999-5 1/27/99 3:27 PM Page 63

February 1, 1999641999–5 I.R.B.
Center for Spiritual Growths &
Prosperity Corp., New York, NY
Center for the Development of Senior
Horizons, Detroit, MI
Center for the New Millennium,
Minneapolis, MN
Center for the Study of Tyranny Inc.,
Kensington, MD
Center for the Study of Harassment of
African-American Inc., Washington,
DC
Center for Unlimited Possibilities Inc.,
Valparaiso, IN
Center for Ventures in Girls Education
Inc., Wellesley, MA
Centipede Artists Cooperative, Danbury,
CT
Central Arizona Charitable Trust,
Phoenix, AZ
Central City Affordable Housing, Seattle,
WA
Central Coast Support Services Inc.,
Monterey, CA
Central Crisis Center, Melrose, MN
Central Cultural Andino Inc., Central
Falls, RI
Central High School Speech & Debate
Parents Club, Davenport, IA
Central Maine Affordable Housing, Bar
Harbor, ME
Central Maine Youth Hockey Assn.,
Greene, ME
Central Ohio Rainforest Action Group,
Columbus, OH
Central States Fair, Rapid City, SD
Central Texas Lulac Council No. 4525,
Waco, TX
Central Virginia Therapeutic Riding
Programs Inc., Lynchburg, VA
Centro Hispano Esperanza Inc., St. Croix,
VI
C F M Help A Kid, Melville, NY
Chabad Labavitch of Moscow, Brooklyn,
NY
Chace Street School Foundation
Charitable TR, Somerset, MA
Challenge Inc., Bath, ME
Challenged People Having Abilities
Needing Competitive Employment
Inc., Milwaukee, WI
Chamber Development Foundation Inc.,
Lynn, MA
Chamber Music Society of Seattle,
Seattle, WA
Chambers Foundation Incorporated,
Indianapolis, IN
Champions for Kids Incorporated,
Raleigh, NC
Champlain Rifles, Fair Haven, VT
Champlain Police Association,
Champlain, MN
Change the World Inc., Lawrenceville,
GA
Changing Direction Inc., Bronx, NY
Channel It Distribution Network Inc.,
Minneapolis, MN
Charity Family Life, Richmond, VA
Charlotte Als Research & Support
Corporation, Charlotte, NC
Charlotte County Hunger Program Inc.,
Drakes Branch, VA
Charlton Pollard Alumni Association of
Northern Calif., San Francisco, CA
Charter Educational Alternatives Inc.,
Shutesbury, MA
Chattanooga Basketball Foundation Inc.,
Chattanooga, TN
Chattanooga Hamilton County
Neighborhood Network, Chattanooga,
TN
Chattanooga Youth Corp., Chattanooga,
TN
CHBR League Inc., Gibbsboro, NJ
Cheer-Dance America Inc., Lynn, MA
Cherish Us Inc., Englewood, NH
Chernobyl Childrens Foundation Inc.,
Brooklyn, NY
Cherokee Heights Resident Management
Council Inc., Pryor, OK
Chesapeake and Albemarle Railroad
Historical Society, Virginia Beach, VA
Chesapeake Christian Marine Foundation
Inc., Baltimore, MD
Chesapeake Research Institute Inc.,
Columbia, MD
Cheshire Interfaith Housing Inc.,
Cheshire, CT
Chester AIDS Coalition, Chester, PA
Chester High School Band Booster Club,
Chester, SC
Chevra Kadisha of Providence &
Vicinity, Providence, RI
Cheyenne Indian Center, Cheyenne, WY
Chicago Area Retinoblastoma Support
Group, Harlingen, TX
Chicago Bacchanal Carnaval Inc.,
Chicago, IL
Chicago Institute of Holistic Medicine,
Chicago, IL
Chicago-Metro Bassmasters, Chicago,
IL
Chickamauga Historical Memorial Trust
Inc., Chickamauga, GA
Child Abduction Prevention Services
Inc., Pahrump, NV
Child First United Inc., Plano, TX
Child Placement Professionals Inc., Ada,
OH
Child Reach Foundation Inc., Dallas, TX
Child Support Recovery Foundation,
Mesa, AZ
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as a
private operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classi-
fication as to foundation status. Grantors
and contributors 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 clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
Long-Term Capital Gain
Treatment for Fiscal Year
1997–98 Individuals, Estates,
Partnerships, and S
Corporations
Announcement 99–11
The Internal Revenue Service Restruc-
turing and Reform Act of 1998 (Public
Law 105–206) amended section 1(h) of
the Internal Revenue Code to modify the
holding period for certain long-term capi-
tal gains. For sales, exchanges, etc., after
December 31, 1997, property held more
than 1 year (instead of more than 18
months) generally is eligible for the 10%,
20%, and 25% capital gains rates. The
28% rate will now apply only to the pre-
1998 gains, collectibles gains, and part or
all of the gain from the sale or exchange
of qualified small business stock.
The 1997 Schedules D and instructions
used by 1997-98 fiscal year filers do not
reflect the modified holding period for
certain long-term capital gains. There-
fore, fiscal year filers of the 1997 Sched-
ule D for Forms 1040, 1041, 1065, and
1120S (individuals, estates, partnerships,
and S corporations) should prepare that
schedule as if the second bulleted item in
the footnote following Part II of Schedule
D were:
• AfterJuly 28, 1997, and before Jan-
uary 1, 1998,for assets held more
than 1 year but notmore than 18
months.
IRB 1999-5 1/27/99 3:27 PM Page 64

1999–5 I.R.B65February 1, 1999
Instead of:
• AfterJuly 28, 1997, for assets held
more than 1 year but notmore than
18 months.
Fiscal year filers who have already
filed a 1997–98 fiscal year return may
need to file an amended return for that
year to reflect this change in law.
Announcement 99–12
This announcement reflects informa-
tion to be corrected in Rev. Proc. 98–44,
1998–32 I.R.B. (8/98), reprinted as Publi-
cation 1187, which describes the specifi-
cations for filing Form 1042-S, Foreign
Person’s U.S. Source Income Subject to
Withholding, Magnetically or Electroni-
cally.
A. Part B, Section 4.08(b) and Part E,
Section 2.03(c)(2) incorrectly states the
acceptable sizes of Quarter Inch Car-
tridges (QIC). Quarter Inch Cartridges
with a size of QIC-11 or QIC-1350 are
not acceptable.
B. Part B, Section 5.01(b)(2), incor-
rectly stated the save command for 5
1
⁄
4
”
diskettes recorded using EBCDIC on an
AS400 system. The correct statement
should read, “The save command for
AS400 is SAVS36F.”
C. Part B, Section 8, the last Note:
“Apply the following formula to deter-
mine U.S. Federal Tax Withheld (field po-
sitions 374–384 of the “Q” Record). All
Fields below are also in the “Q” Record:”
Under Income Codes 15 and/or 16 in
the formula, “=Net Income Amount (440-
439)” should read “=Net Income Amount
(440-449).”
IRB 1999-5 1/27/99 3:27 PM Page 65

February 1, 1999661999–5 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance 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. Proc..—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms
IRB 1999-5 1/27/99 3:27 PM Page 66

1999–5 I.R.B67February 1, 1999
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1998–1 through 1998–52
will be found in Internal Revenue Bulletin 1999–1,
dated January 4, 1999.
Numerical Finding List
1
Bulletins 1999–1 through 4
Announcements:
99–1, 1999–2 I.R.B. 41
99–2, 1999–2 I.R.B. 44
99–3, 1999–3 I.R.B. 15
99–4, 1999–3 I.R.B. 15
99–5, 1999–3 I.R.B. 16
99–6, 1999–4 I.R.B.24
99–7, 1999–2 I.R.B. 45
99–8, 1999–4 I.R.B.24
99–9, 1999–4 I.R.B. 24
Notices:
99–1, 1999–2 I.R.B. 8
99–2, 1999–2 I.R.B. 8
99–3, 1999–2 I.R.B. 10
99–4, 1999–3 I.R.B. 9
99–5, 1999–3 I.R.B. 10
99–6, 1999–3 I.R.B. 12
99–7, 1999–4 I.R.B.23
99–9, 1999–4 I.R.B. 23
Revenue Procedures:
99–1, 1999–1 I.R.B. 6
99–2, 1999–1 I.R.B. 73
99–3, 1999–1 I.R.B. 103
99–4, 1999–1 I.R.B. 115
99–5, 1999–1 I.R.B. 158
99–6, 1999–1 I.R.B. 187
99–7, 1999–1 I.R.B. 226
99–8, 1999–1 I.R.B. 229
99–9, 1999–2 I.R.B. 17
99–10, 1999–2 I.R.B. 11
99–11, 1999–2 I.R.B. 14
99–12, 1999–3 I.R.B. 13
Revenue Rulings:
99–1, 1999–2 I.R.B. 4
99–2, 1999–2 I.R.B. 5
99–3, 1999–3 I.R.B. 4
99–4, 1999–4 I.R.B.19
Treasury Decisions:
8789, 1999–3 I.R.B. 5
8796, 1999–4 I.R.B. 16
8800, 1999–4 I.R.B. 20
8801, 1999–4 I.R.B. 5
8802, 1999–4 I.R.B. 10
IRB 1999-5 1/27/99 3:27 PM Page 67

February 1, 1999681999–5 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 1999–1 through 4
Revenue Procedures:
78–10
Obsoleted by
99–12, 1999–3 I.R.B. 13
94–56
Superseded by
99–9, 1999–2 I.R.B. 17
97–23
Superseded by
99–3, 1999–1 I.R.B. 103
98–1
Superseded by
99–1, 1999–1 I.R.B. 6
98–2
Superseded by
99–2, 1999–1 I.R.B. 73
98–3
Superseded by
99–3, 1999–1 I.R.B. 103
98–4
Superseded by
99–4, 1999–1 I.R.B. 115
98–5
Superseded by
99–5, 1999–1 I.R.B. 158
98–6
Superseded by
99–6, 1999–1 I.R.B. 187
98–7
Superseded by
99–7, 1999–1 I.R.B. 226
98–8
Superseded by
99–8, 1999–1 I.R.B. 229
98–56
Superseded by
99–3, 1999–1 I.R.B. 103
98–63
Modified by announcement
99–7, 1999–2 I.R.B. 45
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1998–1 through 1998–52 will be found in Internal
Revenue Bulletin 1999–1, dated January 4, 1999.
IRB 1999-5 1/27/99 3:27 PM Page 68

1999–5 I.R.B69February 1, 1999
Index
Internal Revenue Bulletins
1999–1 Through 1999–4
For the index of items published during
1998, see I.R.B. 1999–1, dated Janu-
ary 4, 1999.
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue 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
TDOTreasury Department Order
TCTax Convention
SPRStatement of Procedural
Rules
PTEProhibited Transaction
Exemption
EMPLOYMENT TAX
Disregarded entities (Notice 6) 3, 12
INCOME TAX
Abatement of interest (TD 8789) 3, 5
Chief Counsel advice available for public
inspection (Ann. 4) 3,15
Child support enforcement program (RP
12) 3, 13
Deficiencies:
Interest abatement, Presidentially de-
clared disasters (Notice 2) 2,8
Electronic:
Filing; magnetic media; 1998 Form
8596 (RP 9) 2, 17
Submission of Form W-5 (Ann. 3) 3,
15; Forms W-4P, W-4S and W-4V
(Ann. 6) 4,24
INCOME TAX—Continued
Employee plans:
Determination letters (RP 6) 1, 187
Eligible rollover distributions; transi-
tional relief (Notice 5) 3, 10
Funding:
Full funding limitations, weighted av-
erage interest rate for January 1999
(Notice 7) 4, 23
Individual retirement arrangements:
Payroll deductions (Ann. 2) 2, 44
Recharacterizations and reconver-
sions (Ann. 5) 3,16
Letter rulings, etc. (RP 4) 1, 115
Plan administration (Notice 1) 2, 8
Regulations:
26 CFR 1.411(a)–11(c)(2)(ii), re-
vised; 1.411(a)–11(c)(2)(iii), (iv),
(v), and (c)(8), added;
1.411(a)–11T, removed; 1.417(e)–
1(b)(3), revised; (b)(4), added;
1.417(e)–1T, amended; qualified
retirement plans (TD 8796) 4, 16
Technical advice (RP 5) 1, 158
User fees (RP 8) 1, 229
Exclusions-inclusions:
Payments for Temporary Assistance for
Needy Families (Notice 3) 2, 10
Exempt Organizations:
Letter rulings, etc. (RP 4) 1, 115
Private foundations (Ann. 9) 4, 24
Technical advice (RP 5) 1, 158
User fees (RP 8) 1, 229
Failure to deposit federal tax; penalties
(RP 10) 2, 11
Form:
1040NR instructions for 1998, cor-
rected (Ann. 8) 4, 24
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for January 1999
(RR 2) 2, 5
Letter rulings, determination letters, and
information letters issued by Associate
Chief Counsel (Domestic), Associate
Chief Counsel (EBEO), Associate
Chief Counsel (Enforcement Litiga-
tion), and Associate Chief Counsel
(International) (RP 1) 1, 6
INCOME TAX—Continued
Inventory:
LIFO:
Price indexes; department stores for
November 1998 (RR 4) 4, 19
Low-income housing credit:
Alternative collateral program (RP 11)
2, 14
Satisfactory bond; “bond factor”
amounts for the period October
through December 1998 (RR 1) 2, 4
Low-income taxpayer clinics grant pro-
gram (Notice 9) 4, 23
Mutual holding company conversions
(RR 3) 3, 4
Optional standard mileage rates; effective
date (Ann. 7) 2, 45
Penalties:
Designation of Federal Tax Deposits
(RP 10) 2, 11
Penalty and interest study (Notice 4) 3, 9
Proposed update of Rev. Proc. 65–17
(Announcement 1) 2, 41
Regulations:
26 CFR 1.148–5(d)(6)(iii), revised;
1.148–5(e)(2)(iv), added; arbitrage
restrictions on tax-exempt bond (TD
8801) 4, 5
26 CFR 1.337(d)–4, added; certain
asset transfers to a tax-exempt entity
(TD 8802) 4, 10
26 CFR 1.1502–3T, –9(a), –9T(b)(1)(v)
and (vi), amended; consolidated re-
turns, limitation on recapture of
overall foreign loss accounts (TD
8800) 4, 20
Rulings:
Areas in which advance rulings will not
be issued:
Associate Chief Counsel (Domes-
tic), Associate Chief Counsel
(EBEO) (RP 3) 1, 103
Associate Chief Counsel (Interna-
tional) (RP 7) 1, 226
Technical advice to district directors and
chiefs, appeals offices, Associate Chief
Counsel (Domestic), Associate Chief
Counsel (EBEO), Associate Chief
Counsel (Enforcement Litigation), and
Associate Chief Counsel (International)
(RP 2) 1, 73
IRB 1999-5 1/27/99 3:27 PM Page 69

NOTES
February 1, 1999701999–5 I.R.B.
IRB 1999-5 1/27/99 3:27 PM Page 70

IRB 1999-5 1/27/99 3:27 PM Page 71

INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold
on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of
Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week-
ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
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HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please
allow two to six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE
INTERNAL REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
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IRB 1999-5 1/27/99 3:27 PM Page 72