Internal Revenue Bulletin 1999-9 (PDF rendition): IRS Notices

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INCOME TAX
T.D. 8807, page 33.
REG–115433–98, page 54.
Temporary and final regulations relate to timely mailing
treated as timely filing and paying under section 7502 of the
Code.
T.D. 8813, page 34.
Final regulations under section 7701 of the Code provide
guidance regarding the definition of a trust as a United
States person (domestic trust) or a foreign trust.
EMPLOYEE PLANS
REG–245562–96, page 45.
This amendment to the proposed regulations under section
401 of the Code provides guidance on the qualification of re-
tirement plans which accept rollover contributions from em-
ployees.
EMPLOYMENT TAX
T.D. 8814, page 4.
Final regulations under section 3121(v)(2) of the Code pro-
vide guidance as to when amounts deferred under or paid
from a nonqualified deferred compensation plan are taken
into account as wages for purposes of the employment
taxes imposed by the federal Insurance Contribution Act
(FICA).
T.D. 8815, page 31.
Final regulations under section 3306(r)(2) of the Code pro-
vide guidance as to when amounts deferred under or paid
from a nonqualified deferred compensation plan are taken
into account as wages for purposes of the employment
taxes imposed by the Federal Unemployment Tax Act
(FUTA).
EXCISE TAX
REG–118620–97, page 46.
Proposed regulations under section 4251 of the Code pro-
vide rules for the application of the communications excise
tax to prepaid telephone cards (PTCs). A public hearing will
be held on May 5, 1999.
ADMINISTRATIVE
REG–106219–98, page 51.
Proposed regulations under section 1502 of the Code pro-
vide specific rules that apply to the acquisition of the stock
of an S corporation by an affiliated group of corporations
that joins in the filing of a consolidated return. A public hear-
ing on the proposed regulations will be held on March 31,
1999.
Notice 99–12, page 44.
Electronic funds transfer; failure to deposit penalty. This no-
tice provides guidance relating to the waiver of the failure to
deposit penalty under section 6656 of the Code for certain
taxpayers first required to make federal tax deposits by
electronic funds transfers beginning on or after July 1,
1996.
Announcement 99–17, page 59.
The Announcement Relating to Court Decisions in 1999–4
I.R.B. 4 is corrected.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1999–9
March 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 61.
Index for January and February begins on page 63.

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

The Internal Revenue Bulletin is the authoritative instrument
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cial rulings and procedures of the Internal Revenue Service
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Conventions, legislation, court decisions, and other items of
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stantive rulings necessary to promote a uniform application
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modify, or amend any of those previously published in the
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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
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Rulings and procedures reported in the Bulletin do not have
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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.
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To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
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Part IV.—Items of General Interest.
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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.

Section 3121.—Definitions
26 CFR 31.3121(v)(20–1: Treatment of amounts
deferred under certain nonqualified deferred
compensation plans.
T.D. 8814
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 31 and 602
Federal Insurance Contributions
Act (FICA) Taxation of Amounts
Under Employee Benefit Plans
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations under section 3121(v)(2)
of the Internal Revenue Code (Code) that
provide guidance as to when amounts de-
ferred under or paid from a nonqualified
deferred compensation plan are taken into
account as wages for purposes of the em-
ployment taxes imposed by the Federal
Insurance Contributions Act (FICA).
Section 3121(v)(2), relating to treatment
of certain nonqualified deferred compen-
sation, was added to the Code by section
324 of the Social Security Amendments
of 1983. These regulations provide guid-
ance to employers who maintain nonqual-
ified deferred compensation plans and to
participants in those plans.
DATES: Effective Date:These regula-
tions are effective January 29, 1999.
Applicability Date: These regulations
are applicable on and after January 1,
2000. In addition, these regulations pro-
vide certain transition rules for amounts
deferred and benefits paid before January
1, 2000, including allowing employers to
use a reasonable, good faith interpretation
of section 3121(v)(2).
FOR FURTHER INFORMATION CON-
TACT: Janine Cook, Linda E. Alsalihi, or
Margaret A. Owens, (202) 622-6040 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this final rule has been reviewed
and, pending receipt and evaluation of
public comments, approved by the Office
of Management and Budget (OMB) under
44 U.S.C. 3507 and assigned control
number 1545–1643.
The collection of information in this
regulation is in §31.3121(v)(2)–1(b)(2).
This information is required to implement
Code section 3121(v). This information
will be used to identify the material terms
of a plan. The collection of information is
required to obtain a benefit. The likely
recordkeepers are business or other for-
profit institutions.
Comments on the collection of infor-
mation should be sent 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, with
copies to the Internal Revenue Service
Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224. Com-
ments on the collection of information
should be received by March 30, 1999.
Comments are specifically requested con-
cerning:
Whether the collection of information is
necessary for the proper performance of
the functions of the IRS, including
whether the information will have practi-
cal utility;
The accuracy of the estimated burden as-
sociated with the collection of informa-
tion (see below);
How the quality, utility, and clarity of the
information to be collected may be en-
hanced;
How the burden of complying with the col-
lection of information may be minimized,
including through the application of auto-
mated collection techniques or other forms
of information technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of services to provide information.
The estimated total annual recordkeep-
ing burden for §31.3121(v)(2)–1(b)(2) is
12,500 hours. The annual estimated bur-
den per recordkeeper varies from 2 hours
to 10 hours, depending on the individual
circumstances, with an estimated average
of 5 hours. The estimated number of
recordkeepers is 2,500.
Estimates of the reporting burden in
§31.3121(v)(2)–1(f) and (g) are reflected
in the burden estimates of Form 941, Em-
ployer’s Quarterly Federal Tax Return,
Form 941c, Supporting Statement To Cor-
rect Information, Form W-2, Wage and
Tax Statement, and Form W-2c, Cor-
rected Wage and Tax Statement.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
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
These regulations amend the Employ-
ment Tax Regulations (26 CFR part 31)
under section 3121(v)(2). Section
3121(v)(2) was added to the Internal Rev-
enue Code (Code) by section 324 of the
Social Security Amendments of 1983
(1983 Amendments). Section 2662(f)(2)
of the Deficit Reduction Act of 1984
(DEFRA) amended section 324 of the
1983 Amendments.
Notice 94–96 (1994–2 C.B. 564) pro-
vides that until final regulations are is-
sued, the IRS will not challenge an em-
ployer’s determination of FICA tax
liability with respect to a nonqualified de-
ferred compensation plan for periods be-
fore the effective date of any final regula-
tions if the determination is based on a
reasonable, good faith interpretation of
section 3121(v)(2). On January 25, 1996,
a notice of proposed rulemaking (EE–
142–87) under section 3121(v)(2) was
published in the Federal Register(61
F.R. 2194), providing guidance related to
the Federal Insurance Contributions Act
March 1, 199941999–9 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

(FICA) tax treatment of amounts deferred
under or paid from certain nonqualified
deferred compensation plans. On Decem-
ber 24, 1997, a notice of proposed rule-
making (REG–209484–87 and REG–
209807–95) under section 3121(v)(2) ex-
tending the proposed general effective
date of the regulations to January 1, 1998,
was published in the Federal Register
(62 F.R. 67304).
Comments regarding the 1996 pro-
posed regulations were received from the
public, and on June 24, 1996, the IRS
held a public hearing concerning the pro-
posed amendments. After consideration
of the public 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
Sections 3101 and 3111 impose FICA
tax on employees and employers, respec-
tively. FICA tax consists of the Old-Age,
Survivors, and Disability Insurance
(OASDI) tax and the Hospital Insurance
(HI) tax. Generally, FICA tax is com-
puted as a percentage of wages (as de-
fined in section 3121(a)) with respect to
employment. Subject to specific excep-
tions, section 3121(a) defines wages as all
remuneration for employment. Section
31.3121(a)–2(a) provides that FICA tax is
imposed at the time the remuneration is
actually or constructively paid.
1983 Amendments
Prior to the 1983 Amendments, bene-
fits under a nonqualified deferred com-
pensation plan generally were wages sub-
ject to FICA tax at the time they were
actually or constructively paid, unless
certain retirement-related exclusions ap-
plied. These exclusions (former section
3121(a)(2)(A), (a)(3), and (a)(13)(A)(iii))
were repealed by the 1983 Amendments.
Thus, under the 1983 Amendments,
which generally apply to remuneration
paid after December 31, 1983, retirement
payments are no longer excluded from
wages. Instead, the 1983 Amendments
added section 3121(v)(2), which provides
a special timing rule for wages (within the
meaning of section 3121(a)) that consti-
tute an amount deferred under a nonquali-
fied deferred compensation plan.
1
Under section 3121(v)(2)(A), any
amount deferred under a nonqualified de-
ferred compensation plan must be taken
into account as wages for FICA tax pur-
poses as of the later of (1) when the ser-
vices are performed or (2) when there is
no substantial risk of forfeiture of the
rights to such amount. This special tim-
ing rule may result in imposition of FICA
tax before the benefit payments under the
plan begin.
Section 3121(v)(2)(B) provides a spe-
cial exclusion (the nonduplication rule)
that prevents double taxation. Once an
amount deferred under a nonqualified de-
ferred compensation plan is taken into ac-
count as wages under the special timing
rule, the nonduplication rule provides that
neither that amount nor the income attrib-
utable to that amount is again treated as
FICA wages. Thus, benefit payments
under a nonqualified deferred compensa-
tion plan are not subject to FICA tax when
actually or constructively paid (i.e., under
the general timing rule for wage inclu-
sion) if the benefit payments consist of
amounts deferred under the plan that were
previously taken into account as FICA
wages under the special timing rule plus
attributable income. Conversely, benefits
under a nonqualified deferred compensa-
tion plan are subject to FICA tax when ac-
tually or constructively paid to the extent
the benefits relate to an amount deferred
that was not previously taken into account
under the special timing rule.
Repeal of Wage Based Limitation
Section 3121(a)(1) imposes a dollar
limit on the annual amount of wages sub-
ject to the OASDI portion of FICA tax.
Section 13207 of the Omnibus Budget
Reconciliation Act of 1993 repealed the
dollar limit on the annual amount of
wages subject to the HI portion of FICA
tax, effective for 1994 and later years.
Application of these Regulations to Taxes
Imposed by the Railroad Retirement Tax
Act
In accordance with the cross-reference
in section 3231(e)(8)(B), the provisions
of section 3121(v)(2) and these final regu-
lations also apply for purposes of the
taxes imposed by the Railroad Retirement
Tax Act under sections 3201 through
3231.
Overview of Final Regulations
In general, comments received on the
proposed regulations were favorable and,
accordingly, the final regulations retain
the general structure and substance of the
proposed regulations, including a wide
variety of examples illustrating the sub-
stance of the final regulations. However,
commentators made a number of specific
recommendations for modifications and
clarifications of the regulations. In re-
sponse to these comments, the final regu-
lations incorporate the modifications and
clarifications described below.
• The proposed regulations provided that
certain types of benefits do not result
from the deferral of compensation and,
accordingly, are not subject to the spe-
cial timing rule under section
3121(v)(2). The final regulations gen-
erally retain these rules. However, in
response to comments, the final regula-
tions allow certain cost-of-living adjust-
ments provided to former employees to
be treated as deferred compensation for
purposes of section 3121(v)(2) and pro-
vide transition relief for window pro-
grams that begin before the effective
date of the final regulations. The final
regulations also clarify the rules under
which stock options, death benefits, dis-
ability benefits, and severance pay are
excluded from the special timing rule.
• The final regulations retain the distinc-
tion between the method of calculating
the amount deferred (and the income on
that amount) for account balance plans
and the method for nonaccount balance
plans, but provide additional guidance
simplifying those calculations. The
final regulations provide that a plan that
1999–9 I.R.B.5March 1, 1999
1
1 The 1983 Amendments did not amend the de-
finition of net earnings from self- employment under
section 1402(a) or the timing of the tax on self-em-
ployment income under section 1401. Accordingly,
the special timing rule under section 3121(v)(2)
does not apply to nonqualified deferred compensa-
tion that constitutes net earnings from self-employ-
ment.

bases benefits on an account balance
but permits optional forms (such as an-
nuities) can use the simple methodol-
ogy that applies to account balance
plans if the plan terms preclude a subsi-
dized optional form. Also, a nonac-
count balance plan that provides multi-
ple benefit distribution options or
commencement dates under plan terms
that preclude subsidized optional forms
and commencement dates can deter-
mine the amount deferred by assuming
that a participant elects to receive the
normal form of payment (regardless of
which option is actually elected).
• The final regulations clarify the rules
governing when income under an ac-
count balance plan is excluded from
FICA wages. The final regulations also
provide that, while the determination of
whether an account balance plan is
using a reasonable interest rate gener-
ally is made annually, a rate that is
specified for a fixed period of up to five
years is treated as reasonable for that
period if it was reasonable when it was
specified (even if it ceases to be reason-
able during the period for which it is
specified).
• The final regulations retain the structure
of the rules in the proposed regulations
under which FICA tax payments are not
required to be made on amounts that are
not reasonably ascertainable until cer-
tain uncertainties related to benefit pay-
ments are resolved. Those rules permit
earlier inclusion with a true-up at the
resolution date, when those uncertain-
ties are resolved. However, the final
regulations modify the calculation of
the true-up to eliminate the risk that ad-
ditional amounts will have to be taken
into account at the resolution date be-
cause of changes in interest rates be-
tween the early inclusion date and the
resolution date.
• The final regulations permit an em-
ployer to choose how the amounts de-
ferred under a plan over a series of
years can be allocated among those
years when the plan formula does not
do so by its terms (for example, where
the plan has a benefit formula that in-
cludes an offset of another plan’s bene-
fit).
• The final regulations retain the flexibil-
ity provided in the proposed regulations
permitting an employer to delay the
date on which amounts deferred are
taken into account to a later date within
the year, and also broaden and simplify
two options that provide additional time
to calculate the amount deferred. The
first option permits an employer to esti-
mate the amount deferred and then ad-
just it at any time within three months.
Alternatively, FICA tax payment can be
postponed by treating the entire amount
deferred as if it were deferred on a date
that is within three months of the date
the amount is otherwise required to be
taken into account, provided that the
amount deferred is increased by interest
at the applicable federal rate
2
(AFR)
until it is included in wages.
• The final regulations include a number
of special transition rules that provide
relief to employers that, prior to the ef-
fective date of the regulations, followed
a reasonable, good faith interpretation
of section 3121(v)(2). Under the final
regulations, amounts deferred for 1994
and 1995 can be taken into account,
without interest, as late as March 31,
2000. Further, the final regulations re-
flect the transition rule in the proposed
regulations under which amounts de-
ferred that would have been required or
permitted to be taken into account be-
fore 1994 are treated as having been
correctly taken into account before
1994.
Summary of Comments Received and
Changes Made
a. Application of the Special Timing
Rule
The special timing rule provided under
section 3121(v)(2) is set forth in para-
graph (a) of the regulations. The special
timing rule imposes FICA tax on amounts
deferred under nonqualified deferred
compensation plans at the later of the date
when the services creating the right to the
amount deferred are performed and the
date on which the right to that amount is
no longer subject to a substantial risk of
forfeiture. This date usually is earlier than
when any benefit is paid. Several com-
mentators requested clarification as to
whether the special timing rule is elective
and whether failure to comply with the
special timing rule may lead to the impo-
sition of interest or penalties. The special
timing rule is not elective and, if an em-
ployer does not take an amount deferred
into account (including payment of any
resulting FICA tax) when required by sec-
tion 3121(v)(2), interest and penalties
may be imposed. Moreover, to the extent
that the amount deferred is not taken into
account in accordance with the special
timing rule, the nonduplication rule,
under which amounts deferred that are
properly taken into account under the spe-
cial timing rule are excluded from FICA
wages upon payment, does not apply.
b. Amounts or Benefits that Do Not
Result from the Deferral of
Compensation
The definition of a nonqualified de-
ferred compensation plan for purposes of
section 3121(v)(2) is set forth in para-
graph (b) of the regulations. A number of
comments were received on the rules in
the proposed regulations for determining
whether an amount or benefit results from
the deferral of compensation subject to
the special timing rule of section
3121(v)(2). The final regulations make
several clarifications and changes to re-
flect these comments. The regulations
clarify that the grant (as well as the exer-
cise) of stock options, stock appreciation
rights, and other stock value rights gener-
ally is not subject to section 3121(v)(2).
Thus, FICA tax is not imposed at the time
of grant, but is generally imposed at the
time of exercise. No inference is intended
as to whether or not these options and
rights are deferred compensation for any
tax purposes other than section
3121(v)(2).
The final regulations retain the rule in
the proposed regulations that benefits es-
tablished after termination of employment
are not subject to section 3121(v)(2).
However, in response to comments, the
final regulations provide an exception
under which certain payments to which
the employee obtains a legally binding
right after termination of employment that
are in the nature of cost-of-living adjust-
ments are nonetheless subject to section
3121(v)(2).
The final regulations retain the rule in
the proposed regulations that window
March 1, 199961999–9 I.R.B.
2
The regulations define the applicable federal
rate as the mid-term applicable federal rate, as de-
fined pursuant to section 1274(d), for January 1 of
the calendar year, compounded annually.

1999–9 I.R.B.7March 1, 1999
benefits do not result from the deferral of
compensation. However, the final regula-
tions include a transition rule under which
window benefits can be treated as subject
to section 3121(v)(2) if the window pro-
gram commences prior to January 1, 2000
(the general effective date of the final reg-
ulations). Payments made pursuant to a
window program that qualifies for the
transition rule are not subject to FICA tax
under the general timing rule at the time
payment is made, provided that the pre-
sent value of the window benefits has
been taken into account under section
3121(v)(2) on a timely basis.
c. Account Balance Plans
Paragraph (c) of the regulations defines
account balance plan and provides that,
for purposes of section 3121(v)(2), the
amount deferred under an account bal-
ance plan generally is based on the
amount of principal credited to the ac-
count. Commentators asked whether a
plan that permits optional forms of benefit
can be treated as an account balance plan.
The final regulations provide that if the
plan’s terms preclude subsidies of op-
tional forms of benefit (for example, if,
under the terms of the plan at the time the
amount is deferred, alternative forms of
payment will be actuarially equivalent to
the account balance based on a rate of in-
terest that will be reasonable at the time
the optional form is elected), the plan
does not fail to be an account balance plan
merely because of the availability of op-
tional forms of benefit.
d. Income and Reasonable Rate of
Interest
Under paragraph (d) of the proposed
regulations, if an account balance plan
credits income based on a reasonable rate
of interest or a rate of return that does not
exceed the rate of return on a predeter-
mined actual investment specified under
the plan, FICA tax would not be imposed
on that income. A number of commenta-
tors requested clarification as to whether a
rate of interest that was fixed for an ex-
tended period could be reasonable for this
purpose. The final regulations clarify that
the determination of whether interest
credited under an account balance plan is
reasonable is generally made annually.
However, a rate that is specified for a
fixed period of up to five years and that
was reasonable when it was specified is
treated as continuing to be reasonable
(even if it subsequently ceases to be rea-
sonable during the period for which it is
specified).
The final regulations also clarify what
constitutes a predetermined actual invest-
ment and provide rules for determining
the amount deferred in cases in which in-
come is credited under a plan that uses
neither a predetermined actual investment
nor a reasonable interest rate. In these
cases, the final regulations generally pro-
vide for the income credited in excess of
AFR to be treated as an additional amount
deferred. However, the final regulations
provide that if the employer takes into ac-
count as an additional amount deferred
the income credited to the extent it ex-
ceeds a reasonable rate of interest calcu-
lated by the employer, the remaining in-
come (which is no greater than a
reasonable rate of interest) is excluded
from FICA wages.
Some commentators suggested that the
employer’s creditworthiness should be
permitted to be considered in determining
whether the interest rate credited under a
plan of the employer is reasonable. The
final regulations, like the proposed regu-
lations, permit the amount deferred to be
calculated after application of a discount
to reflect the time value of money and the
risk that benefits will not be paid due to
death. However, no discount is permitted
for the risk that the amount deferred will
not be paid by the employer. Permitting
employers to implicitly achieve the same
result through the interest rate credited
under an account balance plan would be
inconsistent with this restriction. Accord-
ingly, the final regulations do not permit
the employer’s creditworthiness to be
considered in determining whether the in-
terest rate credited under a plan of the em-
ployer is reasonable.
e. Treatment of Amounts Deferred that
are not Reasonably Ascertainable
Paragraph (e) of the final regulations
retains the rule in the proposed regula-
tions that the amount deferred need not be
taken into account until it is reasonably
ascertainable. This rule addresses the dif-
ficulty of determining the appropriate
amount to be taken into account for a plan
that provides benefits that are not fixed
until certain future events occur, such as a
nonaccount balance plan with subsidized
optional forms or a long-term incentive
plan that depends on subsequent corpo-
rate performance. The final regulations
retain the rule in the proposed regulations
that allows optional inclusion of these
amounts at an earlier date with a true-up
at the resolution date when the amount
deferred becomes reasonably ascertain-
able.
Under the proposed regulations, the
early inclusion amount was to be accumu-
lated to the resolution date at an interest
rate (and with a mortality assumption, if
appropriate) that was reasonable at the
early inclusion date. That accumulated
amount was then compared to the present
value of payments using actuarial as-
sumptions that were reasonable at the res-
olution date. This methodology exposes
the employer to the risk that an additional
amount could be required to be taken into
account at the resolution date solely as a
result of changes in interest rates between
the early inclusion date and the resolution
date. In response to comments, this true-
up methodology has been modified.
Under the final regulations, in perform-
ing the true-up, the amount taken into ac-
count at the early inclusion date is con-
verted to an actuarially equivalent benefit
payment stream in the form, and with the
commencement date, in which benefits
are actually paid. The conversion is done
using actuarial assumptions that were rea-
sonable as of the early inclusion date.
The benefit payment stream thus derived
is compared to the benefits actually
payable. To the extent the benefit pay-
ment stream actually payable exceeds the
benefit payment stream that is actuarially
equivalent to the amount taken into ac-
count at the early inclusion date, the pre-
sent value of the excess (determined using
actuarial assumptions that are reasonable
as of the resolution date) must be taken
into account on the resolution date. If the
benefit payment stream that is actuarially
equivalent to the amount taken into ac-
count at the early inclusion date equals (or
exceeds) the actual benefit payment
stream, no additional amount is required
to be taken into account at the resolution
date, regardless of any changes in interest
rates between the early inclusion date and
the resolution date. This method—an an-

nuity purchase model—eliminates the
risk that the employer will be required to
take additional amounts into account
merely because of interest rate changes
between the early inclusion date and the
resolution date.
In addition, the final regulations pro-
vide that an amount deferred under cer-
tain nonaccount balance plans that permit
optional forms of benefit or alternative
commencement dates will not fail to be
reasonably ascertainable merely because
the form or commencement date has not
been selected. If the terms of a nonac-
count balance plan, at the time an amount
is deferred, provide that the amount
payable under each optional form and
commencement date will be equivalent
using actuarial assumptions that are rea-
sonable at the resolution date (generally,
the time the optional form and com-
mencement date are selected) the amount
deferred can be calculated based solely on
the normal form of payment commencing
at normal commencement date (regard-
less of which optional form or com-
mencement date is ultimately selected).
For this purpose, the normal form of ben-
efit commencing at normal commence-
ment date is the form and date of com-
mencement under which the payments
due to an employee under the plan are ex-
pressed, before adjustments for form or
timing of commencement of payments.
The final regulations clarify how to al-
locate amounts deferred among periods
for purposes of the early inclusion rules,
including a rule requested by commenta-
tors concerning plan offsets. For exam-
ple, the final regulations provide a rule to
determine how amounts deferred are to be
allocated among years in cases in which
an employee obtains a legally binding
right in each of several years to receive
payments from a nonqualified deferred
compensation plan that provides a speci-
fied gross benefit for the years which is to
be offset by the benefits payable under a
qualified plan. Under this rule, the
amount deferred in the first year may be
treated as equal to the gross benefit for the
year, reduced by the offset applicable at
the end of the first year (even if the offset
increases after the end of that year). The
same method applies to subsequent years,
with adjustments for amounts allocated to
an earlier year.
The regulations also retain the rule of
administrative convenience that was in
the proposed regulations under which the
amount deferred during a year can be
treated as required to be taken into ac-
count at any later date during the year,
provided that income attributable to the
amount deferred through that date is in-
cluded. Thus, in a nonaccount balance
plan this rule permits the present value of
amounts deferred throughout a year to be
determined as of the end of the year based
on the employee’s age and appropriate ac-
tuarial assumptions at the end of the year.
f. Withholding Rules
For purposes of withholding and de-
positing FICA tax, paragraph (f) of the
final regulations provides that an amount
deferred under a nonqualified deferred
compensation plan generally is treated as
wages paid by the employer and received
by the employee at the time it is taken into
account under section 3121(v)(2) and
these regulations. However, in certain sit-
uations, the employer may be unable to
readily calculate the amount deferred for
a given year by December 31 of that year.
The proposed regulations provided relief
in these situations by allowing employers
to use either of two alternative methods,
the estimated method and the lag method,
for withholding and depositing FICA tax.
The final regulations provide broader
relief by permitting these methods to be
used as of any date during the year and for
the methods to be available without re-
gard to whether the amount deferred can
be readily calculated. Thus, the final reg-
ulations provide that, under the estimated
method, an employer may make a reason-
able estimate of the amount deferred as of
the date the amount deferred is required to
be taken into account. If the employer
underestimates the amount deferred that
should have been taken into account and,
therefore, deposits less FICA tax than the
amount due, the employer may treat the
shortfall as wages either on the estimate
date or on any date that is within three
months thereafter. If the employer over-
estimates the amount deferred that should
have been taken into account as wages on
the estimate date, the employer may claim
a refund or credit in accordance with sec-
tions 6402, 6413, and 6511. If the em-
ployer treats any shortfall as wages on the
estimate date or overestimates the amount
deferred on the estimate date, the em-
ployer must correct any previously-re-
ported wage information.
Further, the final regulations provide
that, under the second alternative method,
the lag method, an employer may treat the
amount deferred on any date as wages
paid on any date that is no later than three
months following the date the amount de-
ferred is required to be taken into account.
In addition, in response to comments, the
final regulations simplify use of the lag
method by permitting the FICA tax due to
be calculated using a fixed rate of interest,
not less than AFR, rather than on the basis
of income under the plan.
Effective Dates
These final regulations are applicable
on and after January 1, 2000. However,
the final regulations include certain spe-
cial transition provisions for periods be-
fore January 1, 2000.
For amounts deferred and benefits paid
before the January 1, 2000 general effec-
tive date, an employer may rely on a rea-
sonable, good faith interpretation of sec-
tion 3121(v)(2), taking into account Notice
94–96. The final regulations specifically
provide that an employer will be deemed
to have determined FICA tax liability and
satisfied FICA tax withholding require-
ments in accordance with a reasonable,
good faith interpretation of section
3121(v)(2) if that liability is determined in
accordance with the final regulations and
the withholding method and timing com-
ply with the final regulations. An em-
ployer will also be deemed to have deter-
mined FICA tax liability and satisfied
FICA tax withholding requirements in ac-
cordance with a reasonable, good faith in-
terpretation of section 3121(v)(2) if that li-
ability is determined in accordance with
the proposed regulations and the withhold-
ing method and timing comply with the
proposed regulations. Whether an em-
ployer has made a reasonable, good faith
interpretation of section 3121(v)(2) will be
determined based on the relevant facts and
circumstances, including consistency of
treatment by the employer and the extent
to which the employer has resolved un-
clear issues in its favor.
The regulations address consistency in
the treatment of stock options, stock ap-
March 1, 199981999–9 I.R.B.

preciation rights, or other stock value
rights that are exercised before the Janu-
ary 1, 2000 general effective date. Under
the final regulations, the grant of these
options and rights cannot be treated as
subject to section 3121(v)(2) after De-
cember 31, 1999, and FICA tax generally
applies at exercise. For periods before
January 1, 2000, an employer that treats
the grant of such an option or right as sub-
ject to section 3121(v)(2) has not acted in
accordance with a reasonable, good faith
interpretation of section 3121(v)(2) if the
employer has not treated that grant and all
earlier grants as subject to section
3121(v)(2).
The final regulations include a transi-
tion rule for periods
3
before 1994 that ap-
plies if the employer acted in accordance
with a reasonable, good faith interpreta-
tion of section 3121(v)(2). Under this
rule, an amount deferred that would be re-
quired or permitted to be taken into ac-
count in any period that ends prior to Jan-
uary 1, 1994, under the final regulations,
is treated as if it had been taken into ac-
count in accordance with the final regula-
tions.
4
For example, in the case of an
amount deferred before 1994 that was not
reasonably ascertainable, the employer is
treated as having taken the amount de-
ferred into account at an early inclusion
date before 1994 using a method permit-
ted in the final regulations, including an-
ticipation of the actual form in which the
benefit payments attributable to the
amount deferred are paid and the actual
date of commencement. Thus, the em-
ployer is not required to pay any addi-
tional FICA tax when the amount deferred
becomes reasonably ascertainable or
when the benefit payments attributable to
the amount deferred are actually or con-
structively paid.
The final regulations include a new
transition rule for amounts deferred that
were required to be taken into account in
1994 or 1995. Under the final regula-
tions, an employer will be treated as tak-
ing the amount deferred into account
under the final regulations to the extent
the employer takes the amount into ac-
count by treating it as wages paid by the
employer and received by the employee
as of any date prior to April 1, 2000. The
amount taken into account before April 1,
2000, is not required to be increased by
attributable income or interest.
These and the other transition provi-
sions of the final regulations are in addi-
tion to the interest-free adjustment proce-
dures that are available under section
6205 at any time before the period of lim-
itations has expired. Thus, for example,
with respect to a FICA tax return (Form
941) for a period before the effective date,
an employer may make an adjustment to
take an amount deferred under a nonqual-
ified deferred compensation plan into ac-
count in accordance with the final regula-
tions if the period is still open.
Section 31.3121(v)(2)–2 of the final
regulations provides special rules relating
to a March 24, 1983 agreement and cer-
tain agreements adopted after March 24,
1983, and before January 1, 1984. The
final regulations also include certain clari-
fications to the transition rules that have
been made in response to comments on
the proposed regulations, including clari-
fication of the effect of post-1983 amend-
ments.
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 notice of proposed rulemaking was is-
sued prior to March 29, 1996, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding
these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal authors of these regula-
tions are Janine Cook, Linda E. Alsalihi,
and Margaret A. Owens, Office of the As-
sociate Chief Counsel (Employee Bene-
fits and Exempt Organizations). How-
ever, other personnel from the IRS and
Treasury Department participated in their
development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 31 and 602
are amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph 1. The authority citation for
part 31 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Sections 31.3121(v)(2)–1 and
31.3121(v)(2)–2 are added to read as fol-
lows:
§31.3121(v)(2)–1 Treatment of amounts
deferred under certain nonqualified
deferred compensation plans.
(a) Timing of wage inclusion—(1)
General timing rule for wages. Remuner-
ation for employment that constitutes
wages within the meaning of section
3121(a) generally is taken into account
for purposes of the Federal Insurance
Contributions Act (FICA) taxes imposed
under sections 3101 and 3111 at the time
the remuneration is actually or construc-
tively paid. See §31.3121(a)–2(a).
(2) Special timing rule for an amount
deferred under a nonqualified deferred
compensation plan—(i) In general.To
the extent that remuneration deferred
under a nonqualified deferred compensa-
tion plan constitutes wages within the
meaning of section 3121(a), the remuner-
ation is subject to the special timing rule
described in this paragraph (a)(2). Remu-
neration is considered deferred under a
nonqualified deferred compensation plan
within the meaning of section 3121(v)(2)
and this section only if it is provided pur-
suant to a plan described in paragraph (b)
of this section. The amount deferred
under a nonqualified deferred compensa-
1999–9 I.R.B.9March 1, 1999
3
For purposes of FICA tax, the period of limita-
tions is generally based on calendar quarters
(whereas, for purposes of the Federal Unemploy-
ment Tax Act (FUTA) tax, the period of limitations
is based on calendar years). See section 6501.
4
The proposed regulations (as amended in 1997)
included a similar rule applicable to periods that
were closed as of January 1, 1998 (which generally
would have been periods before 1994). Commenta-
tors recommended that this rule apply even if the pe-
riod is kept open beyond the normal period of limi-
tations, such as by agreement with the IRS or by a
claim for refund. In response to those comments,
the final regulations provide that this rule applies to
all periods prior to 1994 regardless of whether the
period remains

tion plan is determined under paragraph
(c) of this section.
(ii) Special timing rule.Except as oth-
erwise provided in this section, an amount
deferred under a nonqualified deferred
compensation plan is required to be taken
into account as wages for FICA tax pur-
poses as of the later of—
(A) The date on which the services
creating the right to that amount are per-
formed (within the meaning of paragraph
(e)(2) of this section); or
(B) The date on which the right to that
amount is no longer subject to a substan-
tial risk of forfeiture (within the meaning
of paragraph (e)(3) of this section).
(iii) Inclusion in wages only once
(nonduplication rule).Once an amount
deferred under a nonqualified deferred
compensation plan is taken into account
(within the meaning of paragraph (d)(1)
of this section), then neither the amount
taken into account nor the income attrib-
utable to the amount taken into account
(within the meaning of paragraph (d)(2)
of this section) is treated as wages for
FICA tax purposes at any time thereafter.
(iv) Benefits that do not result from a
deferral of compensation.If a nonquali-
fied deferred compensation plan (within
the meaning of paragraph (b)(1) of this
section) provides both a benefit that re-
sults from the deferral of compensation
(within the meaning of paragraph (b)(3)
of this section) and a benefit that does not
result from the deferral of compensation,
the benefit that does not result from the
deferral of compensation is not subject to
the special timing rule described in this
paragraph (a)(2). For example, if a non-
qualified deferred compensation plan pro-
vides retirement benefits which result
from the deferral of compensation and
disability pay (within the meaning of
paragraph (b)(4)(iv)(C) of this section)
which does not result from the deferral of
compensation, the retirement benefits
provided under the plan are subject to the
special timing rule in this paragraph (a)(2)
and the disability pay is not.
(v) Remuneration that does not consti-
tute wages.If remuneration under a non-
qualified deferred compensation plan
does not constitute wages within the
meaning of section 3121(a), then that re-
muneration is not taken into account as
wages for FICA tax purposes under either
the general timing rule described in para-
graph (a)(1) of this section or the special
timing rule described in this paragraph
(a)(2). For example, benefits under a
death benefit plan described in section
3121(a)(13) do not constitute wages for
FICA tax purposes. Therefore, these ben-
efits are not included as wages under the
general timing rule described in para-
graph (a)(1) of this section or the special
timing rule described in this paragraph
(a)(2), even if the death benefit plan
would otherwise be considered a nonqual-
ified deferred compensation plan within
the meaning of paragraph (b)(1) of this
section.
(b) Nonqualified deferred compensa-
tion plan—(1) In general. For purposes
of this section, the term nonqualified de-
ferred compensation planmeans any plan
or other arrangement, other than a plan
described in section 3121(a)(5), that is es-
tablished (within the meaning of para-
graph (b)(2) of this section) by an em-
ployer for one or more of its employees,
and that provides for the deferral of com-
pensation (within the meaning of para-
graph (b)(3) of this section). A nonquali-
fied deferred compensation plan may be
adopted unilaterally by the employer or
may be negotiated among or agreed to by
the employer and one or more employees
or employee representatives. A plan may
constitute a nonqualified deferred com-
pensation plan under this section without
regard to whether the deferrals under the
plan are made pursuant to an election by
the employee or whether the amounts de-
ferred are treated as deferred compensa-
tion for income tax purposes (e.g.,
whether the amounts are subject to the de-
duction rules of section 404). In addition,
a plan may constitute a nonqualified de-
ferred compensation plan under this sec-
tion whether or not it is an employee ben-
efit plan under section 3(3) of the
Employee Retirement Income Security
Act of 1974 (ERISA), as amended (29
U.S.C. 1002(3)). For purposes of this
section, except where the context indi-
cates otherwise, the term plan includes a
plan or other arrangement.
(2) Plan establishment—(i) Date plan
is established.For purposes of this sec-
tion, a plan is established on the latest of
the date on which it is adopted, the date
on which it is effective, and the date on
which the material terms of the plan are
set forth in writing. For purposes of this
section, a plan will be deemed to be set
forth in writing if it is set forth in any
other form that is approved by the Com-
missioner. The material terms of the plan
include the amount (or the method or for-
mula for determining the amount) of de-
ferred compensation to be provided under
the plan and the time when it may or will
be provided.
(ii) Plan amendments.In the case of
an amendment that increases the amount
deferred under a nonqualified deferred
compensation plan, the plan is not consid-
ered established with respect to the addi-
tional amount deferred until the plan, as
amended, is established in accordance
with paragraph (b)(2)(i) of this section.
(iii) Transition rule for written plan re-
quirement.For purposes of this section,
an unwritten plan that was adopted and
effective before March 25, 1996, is
treated as established under this section as
of the later of the date on which it was
adopted or became effective, provided
that the material terms of the plan are set
forth in writing before January 1, 2000.
(3) Plan must provide for the deferral
of compensation—(i) Deferral of com-
pensation defined.A plan provides for
the deferral of compensationwith respect
to an employee only if, under the terms of
the plan and the relevant facts and cir-
cumstances, the employee has a legally
binding right during a calendar year to
compensation that has not been actually
or constructively received and that, pur-
suant to the terms of the plan, is payable
to (or on behalf of) the employee in a later
year. An employee does not have a
legally binding right to compensation if
that compensation may be unilaterally re-
duced or eliminated by the employer after
the services creating the right to the com-
pensation have been performed. For this
purpose, compensation is not considered
subject to unilateral reduction or elimina-
tion merely because it may be reduced or
eliminated by operation of the objective
terms of the plan, such as the application
of an objective provision creating a sub-
stantial risk of forfeiture (within the
meaning of section 83). Similarly, an em-
ployee does not fail to have a legally
binding right to compensation merely be-
cause the amount of compensation is de-
March 1, 1999101999–9 I.R.B.

termined under a formula that provides
for benefits to be offset by benefits pro-
vided under a plan that is qualified under
section 401(a), or because benefits are re-
duced due to investment losses or, in a
final average pay plan, subsequent de-
creases in compensation.
(ii) Compensation payable pursuant to
the employer’s customary payment timing
arrangement.There is no deferral of
compensation (within the meaning of this
paragraph (b)(3)) merely because com-
pensation is paid after the last day of a
calendar year pursuant to the timing
arrangement under which the employer
ordinarily compensates employees for
services performed during a payroll pe-
riod described in section 3401(b).
(iii) Short-term deferrals.If, under a
nonqualified deferred compensation plan,
there is a deferral of compensation
(within the meaning of this paragraph
(b)(3)) that causes an amount to be de-
ferred from a calendar year to a date that
is not more than a brief period of time
after the end of that calendar year, then, at
the employer’s option, that amount may
be treated as if it were not subject to the
special timing rule described in paragraph
(a)(2) of this section. An employer may
apply this option only if the employer
does so for all employees covered by the
plan and all substantially similar nonqual-
ified deferred compensation plans. For
purposes of this paragraph (b)(3)(iii),
whether compensation is deferred to a
date that is not more than a brief period of
time after the end of a calendar year is de-
termined in accordance with §1.404(b)-
1T, Q&A-2, of this chapter.
(4) Plans, arrangements, and benefits
that do not provide for the deferral of
compensation—(i) In general.Notwith-
standing paragraph (b)(3)(i) of this sec-
tion, an amount or benefit described in
any of paragraphs (b)(4)(ii) through (viii)
of this section is not treated as resulting
from the deferral of compensation for
purposes of section 3121(v)(2) and this
section and, thus, is not subject to the spe-
cial timing rule of paragraph (a)(2) of this
section.
(ii) Stock options, stock appreciation
rights, and other stock value rights.The
grant of a stock option, stock appreciation
right, or other stock value right does not
constitute the deferral of compensation
for purposes of section 3121(v)(2). In ad-
dition, amounts received as a result of the
exercise of a stock option, stock apprecia-
tion right, or other stock value right do
not result from the deferral of compensa-
tion for purposes of section 3121(v)(2) if
such amounts are actually or construc-
tively received in the calendar year of the
exercise. For purposes of this paragraph
(b)(4)(ii), a stock value right is a right
granted to an employee with respect to
one or more shares of employer stock
that, to the extent exercised, entitles the
employee to a payment for each share of
stock equal to the excess, or a percentage
of the excess, of the value of a share of
the employer’s stock on the date of exer-
cise over a specified price (greater than
zero). Thus, for example, the term stock
value right does not include a phantom
stock or other arrangement under which
an employee is awarded the right to re-
ceive a fixed payment equal to the value
of a specified number of shares of em-
ployer stock.
(iii) Restricted property.If an em-
ployee receives property from, or pur-
suant to, a plan maintained by an em-
ployer, there is no deferral of
compensation (within the meaning of sec-
tion 3121(v)(2)) merely because the value
of the property is not includible in income
(under section 83) in the year of receipt
by reason of the property being nontrans-
ferable and subject to a substantial risk of
forfeiture. However, a plan under which
an employee obtains a legally binding
right to receive property (whether or not
the property is restricted property) in a fu-
ture year may provide for the deferral of
compensation within the meaning of para-
graph (b)(3) of this section and, accord-
ingly, may constitute a nonqualified de-
ferred compensation plan, even though
benefits under the plan are or may be paid
in the form of property.
(iv) Certain welfare benefits—(A) In
general.Vacation benefits, sick leave,
compensatory time, disability pay, sever-
ance pay, and death benefits do not result
from the deferral of compensation for
purposes of section 3121(v)(2), even if
those benefits constitute wages within the
meaning of section 3121(a).
(B) Severance pay. Benefits that are
provided under a severance pay arrange-
ment (within the meaning of section
3(2)(B)(i) of ERISA) that satisfies the
conditions in 29 CFR 2510.3–2(b)(1)(i)
through (iii) are considered severance pay
for purposes of this paragraph (b)(4)(iv).
If benefits are provided under a severance
pay arrangement (within the meaning of
section 3(2)(B)(i) of ERISA), but do not
satisfy one or more of the conditions in 29
CFR 2510.3–2(b)(1)(i) through (iii), then
whether those benefits are severance pay
within the meaning of this paragraph
(b)(4)(iv) depends upon the relevant facts
and circumstances. For this purpose, rele-
vant facts and circumstances include
whether the benefits are provided over a
short period of time commencing imme-
diately after (or shortly after) termination
of employment or for a substantial period
of time following termination of employ-
ment and whether the benefits are pro-
vided after any termination or only after
retirement (or another specified type of
termination). Benefits provided under a
severance pay arrangement (within the
meaning of section 3(2)(B)(i) of ERISA)
are in all cases severance pay within the
meaning of this paragraph (b)(4)(iv) if the
benefits payable under the plan upon an
employee’s termination of employment
are payable only if that termination is in-
voluntary.
(C) Death benefits and disability
pay—(1) General definition.Payments
made under a nonqualified deferred com-
pensation plan in the event of death are
death benefits within the meaning of this
paragraph (b)(4)(iv), but only to the ex-
tent the total benefits payable under the
plan exceed the lifetime benefits payable
under the plan. Similarly, payments made
under a nonqualified deferred compensa-
tion plan in the event of disability are dis-
ability pay within the meaning of this
paragraph (b)(4)(iv), but only to the ex-
tent the disability benefits payable under
the plan exceed the lifetime benefits
payable under the plan. Accordingly, any
benefits that a nonqualified deferred com-
pensation plan provides in the event of
death or disability that are associated with
an amount deferred under this section are
disregarded in applying this section to the
extent the benefits payable under the plan
in the event of death or in the event of dis-
ability have a value in excess of the life-
time benefits payable under the plan.
(2) Total benefits payable defined. For
purposes of paragraph (b)(4)(iv)(C)(1) of
this section, the term total benefits
payable under a plan means the present
1999–9 I.R.B.11March 1, 1999

value of the total benefits payableto or on
behalf of the employee (including bene-
fits payable in the event of the employee’s
death) under the plan, disregarding any
benefits that are payable only in the event
of disability and determined separately
with respect to each form of distribution
or other election that may apply with re-
spect to the employee.
(3) Disability benefits payable defined.
For purposes of paragraph (b)(4)(iv)-
(C)(1) of this section, the term disability
benefits payableunder a plan means the
present value of the benefits payable to or
on behalf of the employee under the plan,
including benefits payable in the event of
the employee’s disability but excluding
death benefits within the meaning of this
paragraph (b)(4)(iv).
(4) Lifetime benefits payable defined.
For purposes of paragraph (b)(4)(iv)-
(C)(1) of this section, the term lifetime
benefits payableunder a plan means the
present value of the benefits that could be
payable to the employee under the plan
during the employee’s lifetime, deter-
mined under the plan’s optional form of
distribution or other election that is or was
available to the employee at any time with
respect to the amount deferred and that
provides the largest present value to the
employee during the employee’s lifetime
of any such form or election so available.
(5) Rules of application.For purposes
of determining present value under this
paragraph (b)(4)(iv)(C), present value is
determined as of the time immediately
preceding the time the amount deferred
under a nonqualified deferred compensa-
tion plan is required to be taken into ac-
count under paragraph (e) of this section,
using actuarial assumptions that are rea-
sonable as of that date but taking into con-
sideration only benefits that result from
the deferral of compensation, as deter-
mined under this paragraph (b), and bene-
fits payable in the event of death or dis-
ability. In addition, for purposes of
paragraph (b)(4)(iv)(C)(4) of this section,
present value must be determined without
any discount for the probability that the
employee may die before benefit pay-
ments commence and without regard to
any benefits payable solely in the event of
disability.
(v) Certain benefits provided in con-
nection with impending termination—(A)
In general.Benefits provided in connec-
tion with impending termination of em-
ployment under paragraph (b)(4)(v)(B) or
(C) of this section do not result from the
deferral of compensation within the
meaning of section 3121(v)(2).
(B) Window benefits—(1) In general.
For purposes of this paragraph (b)(4)(v),
except as provided in paragraph
(b)(4)(v)(B)(3) of this section, a window
benefit is provided in connection with im-
pending termination of employment. For
this purpose, a window benefit is an early
retirement benefit, retirement-type sub-
sidy, social security supplement, or other
form of benefit made available by an em-
ployer for a limited period of time (no
greater than one year) to employees who
terminate employment during that period
or to employees who terminate employ-
ment during that period under specified
circumstances.
(2) Special rule for recurring window
benefits. A benefit will not be considered
a window benefit if an employer estab-
lishes a pattern of repeatedly providing
for similar benefits in similar situations
for substantially consecutive, limited pe-
riods of time. Whether the recurrence of
these benefits constitutes a pattern of
amendments is determined based on the
facts and circumstances. Although no one
factor is determinative, relevant factors
include whether the benefits are on ac-
count of a specific business event or con-
dition, the degree to which the benefits re-
late to the event or condition, and whether
the event or condition is temporary or dis-
crete or is a permanent aspect of the em-
ployer’s business.
(3) Transition rule for window bene-
fits. In the case of a window benefit that
is made available for a period of time that
begins before January 1, 2000, an em-
ployer may choose to treat the window
benefit as a benefit that results from the
deferral of compensation if the sole rea-
son the window benefit would otherwise
fail to be provided pursuant to a nonquali-
fied deferred compensation plan is the ap-
plication of paragraph (b)(4)(v)(B)(1) of
this section.
(C) Termination within 12 months of
establishment of a benefit or plan.For
purposes of this paragraph (b)(4)(v), a
benefit is provided in connection with im-
pending termination of employment,
without regard to whether it constitutes a
window benefit, if—
(1) An employee’s termination of em-
ployment occurs within 12 months of the
establishment of the plan (or amendment)
providing the benefit; and
(2) The facts and circumstances indi-
cate that the plan (or amendment) is es-
tablished in contemplation of the em-
ployee’s impending termination of
employment.
(vi) Benefits established after termina-
tion. Benefits established with respect to
an employee after the employee’s termina-
tion of employment do not result from a
deferral of compensation within the mean-
ing of section 3121(v)(2). However, cost-
of-living adjustments on benefit payments
under a nonqualified deferred compensa-
tion plan (within the meaning of paragraph
(b) of this section) shall not be considered
benefits established after the employee’s
termination of employment for purposes of
this paragraph (b)(4)(vi) merely because
the employee does not obtain the right to
the adjustment until after the employee’s
termination of employment. For purposes
of the preceding sentence, cost-of-living
adjustmentsare payments that satisfy con-
ditions similar to those of 29 CFR
2510.3–2(g)(1)(ii) and (iii).
(vii) Excess parachute payments.An
excess parachute payment (as defined in
section 280G(b)) under an agreement en-
tered into or renewed after June 14, 1984,
in taxable years ending after such date,
does not result from the deferral of com-
pensation within the meaning of section
3121(v)(2). For this purpose, any con-
tract entered into before June 15, 1984,
that is amended after June 14, 1984, in
any relevant significant aspect, is treated
as a contract entered into after June 14,
1984.
(viii) Compensation for current ser-
vices. A plan does not provide for the de-
ferral of compensation within the mean-
ing of section 3121(v)(2) if, based on the
relevant facts and circumstances, the
compensation is paid for current services.
(5) Examples.This paragraph (b) is il-
lustrated by the following examples:
Example 1.(i) In December of 2001, Employer
L tells Employee A that, if specified goals are satis-
fied for 2002, Employee A will receive a bonus on
July 1, 2003, equal to a specified percentage of 2002
compensation. Because Employee A meets the
specified goals, Employer L pays the bonus to Em-
ployee A on July 1, 2003, consistent with its oral
commitment.
(ii) This arrangement is not a nonqualified de-
March 1, 1999121999–9 I.R.B.

ferred compensation plan under this section because
its terms were not set forth in writing and, therefore,
it was not established in accordance with paragraph
(b)(2) of this section.
Example 2. (i) In 2004, Employer M establishes
a compensation arrangement for Employee B under
which Employer M agrees to pay Employee B a
specified amount based on a percentage of his salary
for 2004. The amount due is to be paid out of the
general assets of Employer M and is payable in 2008.
(ii) Employee B has a legally binding right dur-
ing 2004 to an amount of compensation that has not
been actually or constructively received and that,
pursuant to the terms of the arrangement, is payable
in a later year. Therefore, the arrangement provides
for the deferral of compensation.
Example 3. (i) Employer N establishes a non-
qualified deferred compensation plan (within the
meaning of paragraph (b)(1) of this section) for Em-
ployee C in 1984. The plan is amended on January
1, 2001, to increase benefits, and the amendment
provides that the increase in benefits is on account
of Employee C’s performance of services for Em-
ployer N from 1985 through 2000.
(ii) The additional benefits that resulted from the
plan amendment cannot be taken into account as
amounts deferred for 1985 through 2000, even
though the plan was established before then. Pur-
suant to paragraphs (b)(2)(ii) and (e)(1) of this sec-
tion, the additional benefits cannot be taken into ac-
count before the latest of the date on which the
amendment is adopted, the date on which the
amendment is effective, or the date on which the
material terms of the plan, as amended, are set forth
in writing.
Example 4.(i) In 2002, Employer O, a state or
local government, establishes a plan for certain em-
ployees that provides for the deferral of compensa-
tion and that is subject to section 457(a).
(ii) Paragraph (b)(1) of this section provides that
nonqualified deferred compensation plan means
any plan that is established by an employer and that
provides for the deferral of compensation, other
than a plan described in section 3121(a)(5). Section
3121(a)(5) lists, among other plans, an exempt gov-
ernmental deferred compensation plan as defined in
section 3121(v)(3). Under section 3121(v)(3)(A),
this definition does not include any plan to which
section 457(a) applies. Thus, the plan established
by Employer O is not an exempt governmental de-
ferred compensation plan described in section
3121(v)(3) and, consequently, is not a plan de-
scribed in section 3121(a)(5). Accordingly, the plan
is a nonqualified deferred compensation plan within
the meaning of section 3121(v)(2) and paragraph
(b)(1) of this section.
(iii) However, the general timing rule of para-
graph (a)(1) of this section and the special timing
rule of paragraph (a)(2) of this section apply only to
remuneration for employment that constitutes
wages. Under section 3121(b)(7), certain service
performed in the employ of a state, or any political
subdivision of a state, is not employment. Thus,
even though the plan is a nonqualified deferred com-
pensation plan, the extent to which section
3121(v)(2) applies to a participating employee will
depend on whether or not the service performed for
Employer O is excluded from the definition of em-
ployment under section 3121(b)(7).
Example 5. (i) In 2000, Employer P establishes
a plan that provides for bonuses to be paid to em-
ployees based on an objective formula that takes
into account the employees’ performance for the
year. Employer P does not have the discretion to re-
duce the amount of any employee’s bonus after the
end of the year. The bonus is not actually calculated
until March 1 of the following year, and is paid on
March 15 of that following year.
(ii) The plan provides for the deferral of com-
pensation because the employees have a legally
binding right, as of the last day of a calendar year, to
an amount of compensation that has not been actu-
ally or constructively received and, pursuant to the
terms of the plan, that compensation is payable in a
later year. However, because the bonuses under the
plan are paid within a brief period of time after the
end of the calendar year from which they are de-
ferred, Employer P may choose, pursuant to para-
graph (b)(3)(iii) of this section, to treat all the
bonuses as if they are not subject to the special tim-
ing rule of paragraph (a)(2) of this section.
(iii) If the employer uses the special timing rule,
the amount deferred would be taken into account as
wages on December 31, 2000. If the employer
chooses not to use the special timing rule, the
amount of the bonus is wages on the date it is actu-
ally or constructively paid, March 15, 2000.
Example 6.(i) Employer Q establishes a plan
under which bonuses based on performance in one
year may be paid on February 1 of the following
year at the discretion of the board of directors. The
board of directors meets in January of each year to
determine the amount, if any, of the bonuses to be
paid based on performance in the prior year.
(ii) Because an employee does not have a legally
binding right to any bonus until January of the year
in which the bonus is paid, any bonus paid under the
plan in that year is not deferred from the preceding
calendar year, and the plan does not provide for the
deferral of compensation within the meaning of
paragraph (b)(3)(i) of this section.
Example 7.(i) Employer R maintains a plan for
employees that provides nonqualified stock options
described in §1.83-7(a) of this chapter. Under the
plan, employees are granted in 2001 the option to
acquire shares of employer stock at the fair market
value of the shares on the date of grant ($50 per
share). The options can be exercised at any time
from the date of grant through 2010. The options do
not have a readily ascertainable fair market value for
purposes of section 83 at the date of grant, and
shares are issued upon the exercise of the options
without being subject to a substantial risk of forfei-
ture within the meaning of section 83. In 2005,
when the fair market value of a share of employer
stock is $80, Employee D exercises an option to ac-
quire 1,000 shares.
(ii) Under paragraph (b)(4)(ii) of this section,
neither the grant of a stock option nor amounts re-
ceived currently as a result of the exercise of a stock
option result from the deferral of compensation for
purposes of section 3121(v)(2). Thus, under the
general timing rule of paragraph (a)(1) of this sec-
tion, the $30,000 spread between the amount paid
for the shares ($50,000) and the fair market value of
the shares on the date of exercise ($80,000) is taken
into account as wages for FICA tax purposes in the
year of exercise.
(iii) If the options had been granted at $45 per
share, $5 per share below the fair market value on
date of grant, the $35,000 spread between the
amount paid for the shares ($45,000) and the fair
market value of the shares on the date of exercise
($80,000) would similarly be taken into account as
wages for FICA tax purposes in the year of exercise.
Example 8.(i) Employer T establishes a phan-
tom stock plan for certain employees. Under the
plan, an employee is credited on the last day of each
calendar year with a dollar amount equal to the fair
market value of 1,000 shares of employer stock.
Upon termination of employment for any reason,
each employee is entitled to receive the value on the
date of termination, in cash or employer stock, of the
shares with which he or she has been credited.
(ii) Because compensation to which the em-
ployee has a legally binding right as of the last day
of one year is paid in a subsequent year, the phantom
stock plan provides for the deferral of compensation.
The phantom stock plan does not provide stock
value rights within the meaning of paragraph
(b)(4)(ii) of this section because it provides for
awards equal in value to the full fair market value of
a specified number of shares of Employer T stock,
rather than the excess of that fair market value over
a specified price.
Example 9.(i) Employer U establishes a sever-
ance pay arrangement (within the meaning of sec-
tion 3(2)(b)(i) of ERISA) which provides for pay-
ments solely upon an employee’s death, disability,
or dismissal from employment. The amount of the
payments to an employee is based on the length of
continuous active service with Employer U at the
time of dismissal, and is paid in monthly install-
ments over a period of three years.
(ii) Because benefits payable under the plan
upon termination of employment are payable only
upon an employee’s involuntary termination, the
plan is a severance pay plan within the meaning of
paragraph (b)(4)(iv)(B) of this section. Thus, the
benefits are not treated as resulting from the deferral
of compensation for purposes of section 3121(v)(2).
Example 10. (i) Employer V establishes a non-
qualified deferred compensation plan under which
employees will receive benefit payments commenc-
ing at age 65 as a life annuity or in one of several ac-
tuarially equivalent annuity forms. If an employee
dies before benefit payments commence under the
plan, a benefit is payable to the employee’s desig-
nated beneficiary in a single sum payment equal to
the present value of the employee’s annuity benefit.
This benefit (sometimes called a full reserve death
benefit) is calculated using the applicable interest
rate specified in section 417(e) and, for the period
after age 65, the applicable mortality table specified
in section 417(e), both of which are reasonable actu-
arial assumptions. During 2002, Employee E ob-
tains a legally binding right to an annuity benefit
under the plan, payable at age 65. This annuity ben-
efit has a present value of $10,000 at the end of
2002, determined using the same assumptions as are
used under the plan to calculate the full reserve
death benefit.
(ii) The present value, at the end of 2002, of the
total benefits payable to or on behalf of Employee E
(i.e., the sum of the present value of the annuity ben-
efit commencing at age 65, and the present value of
the full reserve death benefit, with both determined
1999–9 I.R.B.13March 1, 1999

using the actuarial assumptions described in para-
graph (i) of this Example 10,except also taking into
account the probability of death prior to age 65) is
$10,000. This present value does not exceed the
present value of the annuity benefits that could be
payable to Employee E under the plan during Em-
ployee E’s lifetime determined without a discount
for the possibility that Employee E might die before
age 65 (also $10,000). Thus, the benefit payable in
the event of the Employee E’s death is not a death
benefit for purposes of paragraph (b)(4)(iv) of this
section.
(iii) The same result would apply in the case of a
plan that bases benefits on an interest bearing ac-
count balance and pays the account balance at termi-
nation of employment or death (because the sum of
the deferred benefits payable in the future if the em-
ployee terminates employment before death with a
discount for the probability of death before that date
plus the present value of the benefit payable in the
event of death necessarily equals the present value
of the deferred benefits payable with no discount for
the probability of death).
Example 11.(i) The facts are the same as in Ex-
ample 10,except that, in lieu of the full reserve
death benefit, the plan provides a monthly life annu-
ity benefit to an employee’s spouse in the event of
the employee’s death before benefit payments com-
mence equal to 100 percent of the monthly annuity
that would be payable to the employee at age 65
under the life annuity form. Employee E is age 63
and has a spouse who is age 51. The sum of the pre-
sent value of Employee E’s annuity benefit com-
mencing at age 65 determined with a discount for
the possibility that Employee E might die before age
65 and the present value of the 100 percent annuity
death benefit for Employee E’s spouse exceeds
$10,000.
(ii) The amount deferred for 2002 is $10,000
(because the 100 percent annuity death benefit for
Employee E’s spouse is disregarded to the extent
that the total benefits payable to or on behalf of Em-
ployee E exceeds the present value of the annuity
benefits that could be payable to Employee E under
the plan during the Employee E’s lifetime without a
discount for the probability of Employee E’s death
before benefit payments commence).
Example 12.(i) On January 1, 2001, Employer
W establishes a plan that covers only Employee F,
who owns a significant portion of the business and
who has 30 years of service as of that date. The plan
provides that, upon Employee F’s termination of
employment at any time, he will receive $200,000
per year for each of the immediately succeeding five
years. Employee F terminates employment on
March 1, 2001.
(ii) Because Employee F terminates employment
within 12 months of the establishment of the plan
and the facts and circumstances set forth above indi-
cate that the plan was established in contemplation
of impending termination of employment, the plan is
considered to be established in connection with im-
pending termination within the meaning of para-
graph (b)(4)(v) of this section. Therefore, the bene-
fits provided under the plan are not treated as
resulting from the deferral of compensation for pur-
poses of section 3121(v)(2).
Example 13. (i) Employer X establishes a plan
on January 1, 2004, to supplement the qualified re-
tirement benefits of recently hired 55-year old Em-
ployee G, who forfeited retirement benefits with her
former employer in order to accept employment
with Employer X. The plan provides that Employee
G will receive $50,000 per year for life beginning at
age 65, regardless of when she terminates employ-
ment. On April 15, 2004, Employee G unexpectedly
terminates employment.
(ii) The facts and circumstances indicate that the
plan was not established in contemplation of im-
pending termination. Thus, even though Employee
G terminated employment within 12 months of the
establishment of the plan, the plan is not considered
to be established in connection with impending ter-
mination within the meaning of paragraph (b)(4)(v)
of this section. Benefits provided under the plan are
treated as resulting from the deferral of compensa-
tion for purposes of section 3121(v)(2).
Example 14.(i) Employer Y establishes a plan
to provide supplemental retirement benefits to a
group of management employees who are at various
stages of their careers. All employees covered by
the plan are subject to the same benefit formula.
Employee H is planning to (and actually does) retire
within six months of the date on which the plan is
established.
(ii) Even though Employee H terminated em-
ployment within 12 months of the establishment of
the plan, the plan is not considered to have been es-
tablished in connection with Employee H’s impend-
ing termination within the meaning of paragraph
(b)(4)(v) of this section because the facts and cir-
cumstances indicate otherwise.
Example 15. (i) Employee J owns 100 percent
of Employer Z, a corporation that provides consult-
ing services. Substantially all of Employer Z’s rev-
enue is derived as a result of the services performed
by Employee J. In each of 2001, 2002, and 2003,
Employer Z has gross receipts of $180,000 and ex-
penses (other than salary) of $80,000. In each of
2001 and 2002, Employer Z pays Employee J a
salary of $100,000 for services performed in each of
those years. On December 31, 2002, Employer Z
establishes a plan to pay Employee J $80,000 in
2003. The plan recites that the payment is in recog-
nition of prior services. In 2003, Employer Z pays
Employee J a salary of $20,000 and the $80,000 due
under the plan.
(ii) The facts and circumstances described above
indicate that the $80,000 paid pursuant to the plan is
based on services performed by Employee J in 2003
and, thus, is paid for current services within the
meaning of paragraph (b)(4)(viii) of this section.
Accordingly, the plan does not provide for the defer-
ral of compensation within the meaning of section
3121(v)(2), and the $80,000 payment is included as
wages in 2003 under the general timing rule of para-
graph (a)(1) of this section.
(c) Determination of the amount de-
ferred—(1) Account balance plans—(i)
General rule.For purposes of this sec-
tion, if benefits for an employee are pro-
vided under a nonqualified deferred com-
pensation plan that is an account balance
plan, the amount deferred for a period
equals the principal amount credited to
the employee’s account for the period, in-
creased or decreased by any income at-
tributable to the principal amount through
the date the principal amount is required
to be taken into account as wages under
paragraph (e) of this section.
(ii) Definitions—(A) Account balance
plan.For purposes of this section, an ac-
count balance plan is a nonqualified de-
ferred compensation plan under the terms
of which a principal amount (or amounts)
is credited to an individual account for an
employee, the income attributable to each
principal amount is credited (or debited)
to the individual account, and the benefits
payable to the employee are based solely
on the balance credited to the individual
account.
(B) Income.For purposes of this sec-
tion, incomemeans any increase or de-
crease in the amount credited to an em-
ployee’s account that is attributable to
amounts previously credited to the em-
ployee’s account, regardless of whether
the plan denominates that increase or de-
crease as income.
(iii) Additional rules—(A) Commin-
gled accounts.A plan does not fail to be
an account balance plan merely because,
under the terms of the plan, benefits
payable to an employee are based solely
on a specified percentage of an account
maintained for all (or a portion of) plan
participants under which principal
amounts and income are credited (or deb-
ited) to such account.
(B) Bifurcation permitted.An em-
ployer may treat a portion of a nonquali-
fied deferred compensation plan as a sep-
arate account balance plan if that portion
satisfies the requirements of this para-
graph (c)(1) and the amount payable to
employees under that portion is deter-
mined independently of the amount
payable under the other portion of the
plan.
(C) Actuarial equivalents.A plan does
not fail to be an account balance plan
merely because the plan permits employ-
ees to elect to receive their benefits under
the plan in a form of benefit other than
payment of the account balance, provided
the amount of benefit payable in that
other form is actuarially equivalent to
payment of the account balance using ac-
tuarial assumptions that are reasonable.
Conversely, a plan is not an account bal-
March 1, 1999141999–9 I.R.B.

ance plan if it provides an optional form
of benefit that is not actuarially equivalent
to the account balance using actuarial as-
sumptions that are reasonable. For this
purpose, the determination of whether
forms are actuarially equivalent using ac-
tuarial assumptions that are reasonable is
determined under the rules applicable to
nonaccount balance plans under para-
graph (c)(2)(iii) of this section.
(2) Nonaccount balance plans—(i)
General rule.For purposes of this sec-
tion, if benefits for an employee are pro-
vided under a nonqualified deferred com-
pensation plan that is not an account
balance plan (a nonaccount balance plan),
the amount deferred for a period equals
the present value of the additional future
payment or payments to which the em-
ployee has obtained a legally binding
right (as described in paragraph (b)(3)(i)
of this section) under the plan during that
period.
(ii) Present value defined.For pur-
poses of this section, present value means
the value as of a specified date of an
amount or series of amounts due there-
after, where each amount is multiplied by
the probability that the condition or con-
ditions on which payment of the amount
is contingent will be satisfied, and is dis-
counted according to an assumed rate of
interest to reflect the time value of money.
For purposes of this section, the present
value must be determined as of the date
the amount deferred is required to be
taken into account as wages under para-
graph (e) of this section using actuarial
assumptions and methods that are reason-
able as of that date. For this purpose, a
discount for the probability that an em-
ployee will die before commencement of
benefit payments is permitted, but only to
the extent that benefits will be forfeited
upon death. In addition, the present value
cannot be discounted for the probability
that payments will not be made (or will be
reduced) because of the unfunded status
of the plan, the risk associated with any
deemed or actual investment of amounts
deferred under the plan, the risk that the
employer, the trustee, or another party
will be unwilling or unable to pay, the
possibility of future plan amendments, the
possibility of a future change in the law,
or similar risks or contingencies. Nor is
the present value affected by the possibil-
ity that some of the payments due under
the plan will be eligible for one of the ex-
clusions from wages in section 3121(a).
(iii) Treatment of actuarially equiva-
lent benefits—(A) In general.In the case
of a nonaccount balance plan that permits
employees to receive their benefits in
more than one form or commencing at
more than one date, the amount deferred
is determined by assuming that payments
are made in the normal form of benefit
commencing at normal commencement
date if the requirements of paragraph
(c)(2)(iii)(B) of this section are satisfied.
Accordingly, in the case of a nonaccount
balance plan that permits employees to re-
ceive their benefits in more than one form
or commencing at more than one date, un-
less the requirements of paragraph
(c)(2)(iii)(B) of this section are satisfied,
the amount deferred is treated as not rea-
sonably ascertainable under the rules of
paragraph (e)(4)(i)(B) of this section until
a form of benefit and a time of com-
mencement are selected.
(B) Use of normal form commencing
at normal commencement date. The re-
quirements of this paragraph (c)(2)(iii)(B)
are satisfied by a nonaccount balance plan
if the plan has a single normal form of
benefit commencing at normal com-
mencement date for the amount deferred
and each other optional form is actuarially
equivalent to the normal form of benefit
commencing at normal commencement
date using actuarial assumptions that are
reasonable. For this purpose, each form
of benefit for payment of the amount de-
ferred commencing at a date is a separate
optional form. For purposes of this para-
graph (c)(2)(iii)(B), each optional form is
actuarially equivalent to the normal form
of benefit commencing at normal com-
mencement date only if the terms of the
plan in effect when the amount is deferred
provide for every optional form to be ac-
tuarially equivalent and further provide
for actuarial assumptions to determine ac-
tuarial equivalency that will be reasonable
at the time the optional form is selected,
without regard to whether market interest
rates are higher or lower at the time the
optional form is selected than at the time
the amount is deferred. Thus, a plan that
provides for every optional form to be ac-
tuarially equivalent satisfies this para-
graph (c)(2)(iii)(B) if it provides for actu-
arial equivalence to be determined—
(1) When an optional form is selected
or when benefit payments under the op-
tional form commence, based on assump-
tions that are reasonable then;
(2) Based on an index that reflects
market rates of interest from time to time
(for example, the plan specifies that all
benefits will be actuarially equivalent
using the applicable interest rate and ap-
plicable mortality table specified in sec-
tion 417(e)); or
(3) Based on actuarial assumptions
specified in the plan and provides for
those assumptions to be revised to be rea-
sonable assumptions if they cease to be
reasonable assumptions.
(C) Fixed mortality assumptions per-
mitted.A plan does not fail to satisfy
paragraph (c)(2)(iii)(B) of this section
merely because the plan specifies a fixed
mortality assumption that is reasonable at
the time the amount is deferred, even if
that assumption is not reasonable at the
time the optional form is selected. (But
see paragraph (c)(2)(iii)(E) of this section
for additional rules that apply if the mor-
tality assumption is not reasonable at the
time the optional form is selected.)
(D) Normal form of benefit commenc-
ing at normal commencement date de-
fined.For purposes of this paragraph
(c)(2)(iii), the normal form of benefit
commencing at normal commencement
date under the plan is the form, and date
of commencement, under which the pay-
ments due to the employee under the plan
are expressed, prior to adjustments for
form or timing of commencement of pay-
ments.
(E) Rule applicable if actuarial as-
sumptions cease to be reasonable.If the
terms of the plan in effect when an
amount is deferred provide for actuarial
assumptions to determine actuarial equiv-
alency that will be reasonable at the time
the optional form is selected or payments
commence as provided in paragraph
(c)(2)(iii)(B) of this section, but, at that
time, the actuarial assumptions used
under the plan are not reasonable, the em-
ployee will be treated as obtaining a
legally binding right at that time (or, if
earlier, at the date on which the plan is
amended to provide actuarial assumptions
that are not reasonable) to any additional
benefits that result from the use of an un-
reasonable actuarial assumption. This
might occur, for example, if the plan
1999–9 I.R.B.15March 1, 1999

specifies that the actuarial assumptions
will be reasonable assumptions to be set
at the time the optional form is selected
and the assumptions used are in fact not
reasonable at that time.
(3) Separate determination for each
period. The amount deferred under this
paragraph (c) is determined separately for
each period for which there is an amount
deferred under the plan. In addition, para-
graphs (d) and (e) of this section are ap-
plied separately with respect to the
amount deferred for each such period.
Thus, for example, the fraction described
in paragraph (d)(1)(ii)(B) of this section
and the amount of the true-up at the reso-
lution date described in paragraph
(e)(4)(ii)(B) of this section are determined
separately with respect to each amount
deferred. See paragraph (e)(4)(ii)(D) of
this section for special rules for allocating
amounts deferred over more than one
year.
(4) Examples. This paragraph (c) is il-
lustrated by the following examples.
(The examples illustrate the rules in this
paragraph (c) and include various interest
rate and mortality table assumptions, in-
cluding the applicable section 417(e)
mortality table, the GAM 83 (male) mor-
tality table, and UP-84 mortality table.
These tables can be obtained from the So-
ciety of Actuaries at its internet site at
http://www.soa.org.) The examples are as
follows:
Example 1.(i) Employer M establishes a non-
qualified deferred compensation plan for Employee
A. Under the plan, 10 percent of annual compensa-
tion is credited on behalf of Employee A on Decem-
ber 31 of each year. In addition, a reasonable rate of
interest is credited quarterly on the balance credited
to Employee A as of the last day of the preceding
quarter. All amounts credited under the plan are 100
percent vested and the benefits payable to Employee
A are based solely on the balance credited to Em-
ployee A’s account.
(ii) The plan is an account balance plan. Thus,
pursuant to paragraph (c)(1) of this section, the
amount deferred for a calendar year is equal to 10
percent of annual compensation.
Example 2. (i) Employer N establishes a non-
qualified deferred compensation plan for Employee
B. Under the plan, 2.5 percent of annual compensa-
tion is credited quarterly on behalf of Employee B.
In addition, a reasonable rate of interest is credited
quarterly on the balance credited to Employee B’s
account as of the last day of the preceding quarter.
All amounts credited under the plan are 100 percent
vested, and the benefits payable to Employee B are
based solely on the balance credited to Employee
B’s account. As permitted by paragraph (e)(5) of
this section, any amount deferred under the plan for
the calendar year is taken into account as wages on
the last day of the year.
(ii) The plan is an account balance plan. Thus,
pursuant to paragraph (c)(1) of this section, the
amount deferred for a calendar year equals 10 per-
cent of annual compensation (i.e., the sum of the
principal amounts credited to Employee B’s account
for the year) plus the interest credited with respect to
that 10 percent principal amount through the last day
of the calendar year. If Employer N had not chosen
to apply paragraph (e)(5) of this section and, thus,
had taken into account 2.5 percent of compensation
quarterly, the interest credited with respect to those
quarterly amounts would not have been treated as
part of the amount deferred for the year.
Example 3.(i) Employer O establishes a non-
qualified deferred compensation plan for a group of
five employees. Under the plan, a specified sum is
credited to an account for the benefit of the group of
employees on July 31 of each year. Income on the
balance of the account is credited annually at a rate
that is reasonable for each year. The benefit payable
to an employee is equal to one-fifth of the account
balance and is payable, at the employee’s option, in
a lump sum or in 10 annual installments that reflect
income on the balance.
(ii) The plan is an account balance plan notwith-
standing the fact that the employee’s benefit is equal
to a specified percentage of an account maintained
for a group of employees.
Example 4. (i) The facts are the same as in Ex-
ample 3,except that the plan also permits an em-
ployee to elect a life annuity that is actuarially
equivalent to the account balance based on the ap-
plicable interest rate and applicable mortality table
specified in section 417(e) at the time the benefit is
elected by the employee.
(ii) Under paragraphs (c)(1)(iii)(C) and
(c)(2)(iii) of this section, the plan does not fail to be
an account balance plan merely because the plan
permits employees to elect to receive their benefits
under the plan in a form that is actuarially equivalent
to payment of the account balance using actuarial
assumptions that are reasonable at the time the form
is selected.
Example 5. (i) Employer P establishes a non-
qualified deferred compensation plan for a group of
employees. Under the plan, each participating em-
ployee has a fully vested right to receive a life annu-
ity, payable monthly beginning at age 65, equal to
the product of 2 percent for each year of service and
the employee’s highest average annual compensa-
tion for any 3-year period. The plan also provides
that, if an employee dies before age 65, the present
value of the future payments will be paid to his or
her beneficiary. As permitted under paragraph (e)(5)
of this section, any amount deferred under the plan
for a calendar year is taken into account as FICA
wages as of the last day of the year. As of December
31, 2002, Employee C is age 60, has 25 years of ser-
vice, and high 3-year average compensation of
$100,000 (the average for the years 2000 through
2002). As of December 31, 2003, Employee C is
age 61, has 26 years of service, and has high 3-year
average compensation of $104,000. As of Decem-
ber 31, 2004, Employee C is age 62, has 27 years of
service, and has high 3-year average compensation
of $105,000. The assumptions that Employer P uses
to determine the amount deferred for 2003 (a 7 per-
cent interest rate and, for the period after com-
mencement of benefit payments, the GAM 83
(male) mortality table) and for 2004 (a 7.5 percent
interest rate and, for the period after commencement
of benefit payments, the GAM 83 (male) mortality
table) are assumed, solely for purposes of this exam-
ple, to be reasonable actuarial assumptions.
(ii) As of December 31, 2002, Employee C has a
legally binding right to receive lifetime payments of
$50,000 (2 percent 325 years 3$100,000) per
year. As of December 31, 2003, Employee C has a
legally binding right to receive lifetime payments of
$54,080 (2 percent 326 years 3 $104,000) per
year. Thus, during 2003, Employee C has earned a
legally binding right to additional lifetime payments
of $4,080 ($54,080 – $50,000) per year beginning at
age 65. The amount deferred for 2003 is the present
value, as of December 31, 2003, of these additional
payments, which is $28,767 ($4,080 3the present
value factor for a deferred annuity payable at age 65,
using the specified actuarial assumptions for 2003).
Similarly, during 2004, Employee C has earned a
legally binding right to additional lifetime payments
of $2,620 (2 percent 327 years 3$105,000, minus
$54,080) per year beginning at age 65. The amount
deferred for 2004 is the present value, as of Decem-
ber 31, 2004, of these additional payments, which is
$18,845 ($2,620 3the present value factor for a de-
ferred annuity payable at age 65, using the specified
actuarial assumptions for 2004).
Example 6. (i) Employer Q establishes a non-
qualified deferred compensation plan for Employee
D on January 1, 2001, when Employee D is age 63.
During 2001, Employee D obtains a fully vested
right to receive a life annuity under the nonqualified
deferred compensation plan equal to the excess of
$200,000 over the life annuity benefits payable to
Employee D under a qualified defined benefit pen-
sion plan sponsored by Employer Q. The life annu-
ity benefit payable annually under the qualified plan
is the lesser of $200,000 and the section
415(b)(1)(A) limitation in effect for the year, where
the section 415(b)(1)(A) limitation is automatically
adjusted to reflect changes in the cost of living.
Benefits under both the qualified and nonqualified
plan are payable monthly beginning at age 65. For
purposes of this example, the section 415(b)(1)(A)
limit for 2001 is assumed to be $140,000. The non-
qualified plan provides no benefits in the event Em-
ployee D dies prior to commencement of benefit
payments. As permitted under paragraph (e)(5) of
this section, any amount deferred under the plan for
a calendar year is taken into account as FICA wages
as of the last day of the year. The assumptions that
Employer Q uses to determine the amount deferred
for 2001 (a 7 percent interest rate, a 3 percent in-
crease in the cost of living and the GAM 83 (male)
mortality table) are assumed, solely for purposes of
this example, to be reasonable actuarial assump-
tions. As of December 31, 2001, Employee D has a
legally binding right to receive lifetime payments as
set forth in the following table:
March 1, 1999161999–9 I.R.B.

(ii) The amount deferred for 2001 is the present
value, as of December 31, 2001, of the net lifetime
payments under the nonqualified plan, or $223,753.
(d) Amounts taken into account and in-
come attributable thereto—(1) Amounts
taken into account—(i) In general.For
purposes of this section, an amount de-
ferred under a nonqualified deferred com-
pensation plan is taken into account as of
the date it is included in computing the
amount of wagesas defined in section
3121(a), but only to the extent that any
additional FICA tax that results from such
inclusion (including any interest and
penalties for late payment) is actually
paid before the expiration of the applica-
ble period of limitations for the period in
which the amount deferred was required
to be taken into account under paragraph
(e) of this section. Because an amount
deferred for a calendar year is combined
with the employee’s other wages for the
year for purposes of computing FICA
taxes with respect to the employee for the
year, if the employee has other wages that
equal or exceed the wage base limitations
for the Old-Age, Survivors, and Disability
Insurance (OASDI) portion (or, in the
case of years before 1994, the Hospital
Insurance (HI) portion) of FICA for the
year, no portion of the amount deferred
will actually result in additional OASDI
(or HI) tax. However, because there is no
wage base limitation for the HI portion of
FICA for years after 1993, the entire
amount deferred (in addition to all other
wages) is subject to the HI tax for the year
and, thus, will not be considered taken
into account for purposes of this section
unless the HI tax relating to the amount
deferred is actually paid. In determining
whether any additional FICA tax relating
to the amount deferred is actually paid,
any FICA tax paid in a year is treated as
paid with respect to an amount deferred
only after FICA tax is paid on all other
wages for the year.
(ii) Amounts not taken into account—
(A) Failure to take an amount deferred
into account under the special timing
rule. If an amount deferred for a period
(as determined under paragraph (c) of this
section) is not taken into account, then the
nonduplication rule of paragraph
(a)(2)(iii) of this section does not apply,
and benefit payments attributable to that
amount deferred are included as wages in
accordance with the general timing rule of
paragraph (a)(1) of this section. For ex-
ample, if an amount deferred is required
to be taken into account in a particular
year under paragraph (e) of this section,
but the employer fails to pay the addi-
tional FICA tax resulting from that
amount, then the amount deferred and the
income attributable to that amount must
be included as wages when actually or
constructively paid.
(B) Failure to take a portion of an
amount deferred into account under the
special timing rule. If, as of the date an
amount deferred is required to be taken
into account, only a portion of the amount
deferred (as determined under paragraph
(c) of this section) has been taken into ac-
count, then a portion of each subsequent
benefit payment that is attributable to that
amount is excluded from wages pursuant
to the nonduplication rule of paragraph
(a)(2)(iii) of this section and the balance
is subject to the general timing rule of
paragraph (a)(1) of this section. The por-
tion that is excluded from wages is fixed
immediately before the attributable bene-
fit payments commence (or, if later, the
date the amount deferred is required to be
taken into account) and is determined by
multiplying each such payment by a frac-
tion, the numerator of which is the
1999–9 I.R.B.17March 1, 1999
YearAnnual Gross Assumed Qualified Net Annual
AmountPlan AnnualPayment under
Payment (based on Nonqualified Plan
cost of living)
2003$200,000$145,000$55,000
2004$200,000$150,000$50,000
2005$200,000$155,000$45,000
2006$200,000$160,000$40,000
2007$200,000$165,000$35,000
2008$200,000$170,000$30,000
2009$200,000$175,000$25,000
2010$200,000$180,000$20,000
2011$200,000$185,000$15,000
2012$200,000$190,000$10,000
2013$200,000$195,000$5,000
2014 and thereafter$200,000$205,000 or greater$0

amount that was taken into account (plus
income attributable to that amount deter-
mined under paragraph (d)(2) of this sec-
tion through the date the portion is fixed)
and the denominator of which is the pre-
sent value of the future benefit payments
attributable to the amount deferred, deter-
mined as of the date the portion is fixed.
For this purpose, if the requirements of
paragraph (c)(2)(iii)(B) of this section are
satisfied, the present value is determined
by assuming that payments are made in
the normal form of benefit commencing
at normal commencement date. In addi-
tion, if the employer demonstrates that the
amount deferred was determined using
reasonable actuarial assumptions as deter-
mined by the Commissioner, the present
value of the future benefit payments at-
tributable to the amount deferred is deter-
mined using those assumptions. In any
other case, see paragraph (d)(2)(iii) of this
section.
(2) Income attributable to the amount
taken into account—(i) Account balance
plans—(A) In general. For purposes of
the nonduplication rule of paragraph
(a)(2)(iii) of this section, in the case of an
account balance plan, the income attribut-
able to the amount taken into account
means any amount credited on behalf of
an employee under the terms of the plan
that is income (within the meaning of
paragraph (c)(1)(ii)(B) of this section) at-
tributable to an amount previously taken
into account (within the meaning of para-
graph (d)(1) of this section), but only if
the income reflects a rate of return that
does not exceed either the rate of return
on a predetermined actual investment (as
determined in accordance with paragraph
(d)(2)(i)(B) of this section) or, if the in-
come does not reflect the rate of return on
a predetermined actual investment (as so
determined), a reasonable rate of interest
(as determined in accordance with para-
graph (d)(2)(i)(C) of this section).
(B) Rules relating to actual invest-
ment—(1) In general.For purposes of
this paragraph (d)(2)(i), the rate of return
on a predetermined actual investment for
any period means the rate of total return
(including increases or decreases in fair
market value) that would apply if the ac-
count balance were, during the applicable
period, actually invested in one or more
investments that are identified in accor-
dance with the plan before the beginning
of the period. For this purpose, an ac-
count balance plan can determine income
based on the rate of return of a predeter-
mined actual investment regardless of
whether assets associated with the plan or
the employer are actually invested therein
and regardless of whether that investment
is generally available to the public. For
example, an account balance plan could
provide that income on the account bal-
ance is determined based on an em-
ployee’s prospective election among vari-
ous investment alternatives that are
available under the employer’s section
401(k) plan, even if one of those invest-
ment alternatives is not generally avail-
able to the public. In addition, an actual
investment includes an investment identi-
fied by reference to any stock index with
respect to which there are positions traded
on a national securities exchange de-
scribed in section 1256(g)(7)(A).
(2) Certain rates of return not based
on predetermined actual investment.A
rate of return will not be treated as the rate
of return on a predetermined actual in-
vestment within the meaning of this para-
graph (d)(2)(i)(B) if the rate of return (to
any extent or under any conditions) is
based on the greater of the rate of return
of two or more actual investments, is
based on the greater of the rate of return
on an actual investment and a rate of in-
terest (whether or not the rate of interest
would otherwise be reasonable under
paragraph (d)(2)(i)(C) of this section), or
is based on the rate of return on an actual
investment that is not predetermined. For
example, if a plan bases the rate of return
on the greater of the rate of return on a
predetermined actual investment (such as
the value of the employer’s stock), and a
0 percent interest rate (i.e., without regard
to decreases in the value of that invest-
ment), the plan is using a rate of return
that is not a rate of return on a predeter-
mined actual investment within the mean-
ing of this paragraph (d)(2)(i)(B).
(C) Rules relating to reasonable inter-
est rates—(1) In general.If income for a
period is credited to an account balance
plan on a basis other than the rate of re-
turn on a predetermined actual investment
(as determined in accordance with para-
graph (d)(2)(i)(B) of this section), then,
except as otherwise provided in this para-
graph (d)(2)(i)(C), the determination of
whether the income for the period is
based on a reasonable rate of interest will
be made at the time the amount deferred
is required to be taken into account and
annually thereafter.
(2) Fixed rates permitted.If, with re-
spect to an amount deferred for a period,
an account balance plan provides for a
fixed rate of interest to be credited, and
the rate is to be reset under the plan at a
specified future date that is not later than
the end of the fifth calendar year that be-
gins after the beginning of the period, the
rate is reasonable at the beginning of the
period, and the rate is not changed before
the reset date, then the rate will be treated
as reasonable in all future periods before
the reset date.
(ii) Nonaccount balance plans.For
purposes of the nonduplication rule of
paragraph (a)(2)(iii) of this section, in the
case of a nonaccount balance plan, the in-
come attributable to the amount taken
into account means the increase, due
solely to the passage of time, in the pre-
sent value of the future payments to
which the employee has obtained a
legally binding right, the present value of
which constituted the amount taken into
account (determined as of the date such
amount was taken into account), but only
if the amount taken into account was de-
termined using reasonable actuarial as-
sumptions and methods. Thus, for each
year, there will be an increase (deter-
mined using the same interest rate used to
determine the amount taken into account)
resulting from the shortening of the dis-
count period before the future payments
are made, plus, if applicable, an increase
in the present value resulting from the
employee’s survivorship during the year.
As a result, if the amount deferred for a
period is determined using a reasonable
interest rate and other reasonable actuarial
assumptions and methods, and the
amount is taken into account when re-
quired under paragraph (e) of this section,
then, under the nonduplication rule of
paragraph (a)(2)(iii) of this section, none
of the future payments attributable to that
amount will be subject to FICA tax when
paid.
(iii) Unreasonable rates of return—
(A) Account balance plans.This para-
graph (d)(2)(iii)(A) applies to an account
balance plan under which the income
credited is based on neither a predeter-
mined actual investment, within the
March 1, 1999181999–9 I.R.B.

meaning of paragraph (d)(2)(i)(B) of this
section, nor a rate of interest that is rea-
sonable, within the meaning of paragraph
(d)(2)(i)(C) of this section, as determined
by the Commissioner. In that event, the
employer must calculate the amount that
would be credited as income under a rea-
sonable rate of interest, determine the ex-
cess (if any) of the amount credited under
the plan over the income that would be
credited using the reasonable rate of inter-
est, and take that excess into account as
an additional amount deferred in the year
the income is credited. If the employer
fails to calculate the amount that would be
credited as income under a reasonable
rate of interest and to take the excess into
account as an additional amount deferred
in the year the income is credited, or the
employer otherwise fails to take the full
amount deferred into account, then the
excess of the income credited under the
plan over the income that would be cred-
ited using AFRwill be treated as an
amount deferred in the year the income is
credited. For purposes of this section,
AFR means the mid-term applicable fed-
eral rate (as defined pursuant to section
1274(d)) for January 1 of the calendar
year, compounded annually. In addition,
pursuant to paragraph (d)(1)(ii) of this
section, the excess over the income that
would result from the application of AFR
and any income attributable to that excess
are subject to the general timing rule of
paragraph (a)(1) of this section.
(B) Nonaccount balance plans. If any
actuarial assumption or method used to
determine the amount taken into account
under a nonaccount balance plan is not
reasonable, as determined by the Com-
missioner, then the income attributable to
the amount taken into account is limited
to the income that would result from the
application of the AFR and, if applicable,
the applicable mortality table under sec-
tion 417(e)(3)(A)(ii)(I) (the 417(e) mor-
tality table), both determined as of the
January 1 of the calendar year in which
the amount was taken into account. In ad-
dition, paragraph (d)(1)(ii)(B) of this sec-
tion applies and, in calculating the frac-
tion described in paragraph (d)(1)(ii)(B)
of this section (at the date specified in
paragraph (d)(1)(ii)(B) of this section),
the numerator is the amount taken into ac-
count plus income (as limited under this
paragraph (d)(2)(iii)(B)), and the present
value in the denominator is determined
using the AFR, the 417(e) mortality table,
and reasonable assumptions as to cost of
living, each determined as of the time the
amount deferred was required to be taken
into account.
(3) Examples. This paragraph (d) is il-
lustrated by the following examples:
Example 1.(i) In 2001, Employer M establishes
a nonqualified deferred compensation plan for Em-
ployee A under which all benefits are 100 percent
vested. In 2002, Employee A has $200,000 of cur-
rent annual compensation from Employer M that is
subject to FICA tax. The amount deferred under the
plan on behalf of Employee A for 2002 is $20,000.
Thus, Employee A has total wages for FICA tax pur-
poses of $220,000. Because Employee A has other
wages that exceed the OASDI wage base for 2002,
no additional OASDI tax is due as a result of the
$20,000 amount deferred. Because there is no wage
base limitation for the HI portion of FICA, addi-
tional HI tax liability results from the $20,000
amount deferred. However, Employer M fails to
pay the additional HI tax.
(ii) Under paragraph (d)(1)(i) of this section, an
amount deferred is considered taken into account as
wages for FICA tax purposes as of the date it is in-
cluded in computing FICA wages, but only if any
additional FICA tax liability that results from inclu-
sion of the amount deferred is actually paid. Be-
cause the HI tax resulting from the $20,000 amount
deferred was not paid, that amount deferred was not
taken into account within the meaning of paragraph
(d)(1) of this section. Thus, pursuant to paragraph
(d)(1)(ii) of this section, benefit payments attribut-
able to the $20,000 amount deferred will be included
as wages in accordance with the general timing rule
of paragraph (a)(1) of this section and will be sub-
ject to the HI portion of FICA tax when actually or
constructively paid (and the OASDI portion of
FICA tax to the extent Employee A’s wages do not
exceed the OASDI wage base limitation).
Example 2. (i) The facts are the same as in Ex-
ample 1,except that Employer M takes all actions
necessary to correct its failure to pay the additional
tax before the applicable period of limitations ex-
pires for 2002 (including payment of any applicable
interest and penalties).
(ii) Because the HI tax resulting from the
$20,000 amount deferred is paid, that amount de-
ferred is considered taken into account for 2002.
Thus, in accordance with paragraph (a)(2)(iii) of this
section, neither the amount deferred nor the income
attributable to the amount taken into account will be
treated as wages for FICA tax purposes at any time
thereafter.
Example 3.(i) Employer N establishes a non-
qualified deferred compensation plan under which
all benefits are 100 percent vested. Under the plan,
an employee’s account is credited with a contribu-
tion equal to 10 percent of salary on December 31 of
each year. The employee’s account balance also is
increased each December 31 by intereston the total
amounts credited to the employee’s account as of the
preceding December 31. The interest rate specified
in the plan results in income credits that are not
based on the rate of return on a predetermined actual
investment within the meaning of paragraph
(d)(2)(i)(B) of this section, and that are greater than
the income that would result from application of a
reasonable rate of interest within the meaning of
paragraph (d)(2)(i)(C) of this section. Employer N
fails to take into account an additional amount for
the excess of the income credited under the plan
over a reasonable rate of interest.
(ii) Pursuant to paragraph (d)(2)(iii)(A) of this
section, the income credits in excess of the income
that would be credited using the AFR are considered
additional amounts deferred in the year credited.
Example 4. (i) The facts are the same as in Ex-
ample 3,except that the annual increase is based on
Moody’s Average Corporate Bond Yield.
(ii) Because this index reflects a reasonable rate
of interest, the income credited under the plan is
considered income attributable to the amount taken
into account within the meaning of paragraph
(d)(2)(i) of this section.
Example 5. (i) The facts are the same as in Ex-
ample 3,except that the annual increase (or de-
crease) is based on the rate of total return on Em-
ployer N’s publicly traded common stock.
(ii) Because the income credited under the plan
does not exceed the actual rate of return on a prede-
termined actual investment, the income credited is
considered income attributable to the amount taken
into account within the meaning of paragraph
(d)(2)(i) of this section.
Example 6. (i) The facts are the same as in Ex-
ample 3,except that the annual rate of increase or
decrease is equal to the greater of the rate of total re-
turn on a specified aggressive growth mutual fund or
the rate of return on a specified income-oriented mu-
tual fund. Employer N fails to take into account an
additional amount for the excess of the income cred-
ited under the plan over a reasonable rate of interest.
(ii) Because the rate of increase or decrease is
based on the greater of two rates of returns, the in-
crease is not based on the return on a predetermined
actual investment within the meaning of paragraph
(d)(2)(i)(B) of this section. Thus, if the rate of return
credited under the plan (i.e., the greater of the rates
of return of the two mutual funds) exceeds the in-
come that would be credited using the AFR, the ex-
cess is not considered income attributable to the
amount taken into account within the meaning of
paragraph (d)(2)(i) of this section and, pursuant to
paragraph (d)(2)(iii)(A) of this section, is considered
an additional amount deferred.
Example 7.(i) The facts are the same as in Ex-
ample 6, except that the annual increase or decrease
with respect to 50 percent of the employee’s account
is equal to the rate of total return on the specified ag-
gressive growth mutual fund and the annual increase
or decrease with respect to the other 50 percent of
the employee’s account is equal to the increase or
decrease in the Standard & Poor’s 500 Index.
(ii) Because the increase or decrease attributable
to any portion of the employee’s account is based on
the return on a predetermined actual investment, the
entire increase or decrease is considered income at-
tributable to the amount taken into account within
the meaning of paragraph (d)(2)(i) of this section.
Example 8.(i) The facts are the same as in Ex-
ample 3,except that, pursuant to the terms of the
1999–9 I.R.B.19March 1, 1999

plan, before the beginning of each year, the board of
directors of Employer N designates a specific in-
vestment on which the following year’s annual in-
crease or decrease will be based. The board is au-
thorized to switch investments more frequently on a
prospective basis. Before the beginning of 2004, the
board designates Company A stock as the invest-
ment for 2004. Before the beginning of 2005, the
board designates Company B stock as the invest-
ment for 2005. At the end of 2005, the board deter-
mines that the return on Company B stock was
lower than expected and changes its designation for
2005 to the rate of return on Company C stock,
which had a higher return during 2005. Employer N
fails to take into account an additional amount for
the excess of the income credited under the plan
over a reasonable rate of interest.
(ii) The annual increase or decrease for 2004 is
based on the return of a predetermined actual invest-
ment. Although the annual increase or decrease for
2005 is based on an actual investment, the actual in-
vestment is not predetermined since it was not des-
ignated before the beginning of 2005. Pursuant to
paragraph (d)(2)(iii)(A) of this section, the excess of
the income credited under the plan over the income
determined using AFR is an additional amount de-
ferred for 2005.
Example 9. (i) Employer O establishes a non-
qualified deferred compensation plan for Employee
B. Under the plan, if Employee B survives until age
65, he has a fully vested right to receive a lump sum
payment at that age, equal to the product of 10 per-
cent per year of service and Employee B’s highest
average annual compensation for any 3-year period,
but no benefits are payable in the event Employee B
dies prior to age 65. As permitted under paragraph
(e)(5) of this section, any amount deferred under the
plan for the calendar year is taken into account as
wages as of the last day of the year. As of December
31, 2002, Employee B has 25 years of service and
Employee B’s high 3-year average compensation is
$100,000 (the average for the years 2000 through
2002). As of December 31, 2002, Employee B has a
legally binding right to receive a payment at age 65
of $250,000 (10 percent x 25 years x $100,000). As
of December 31, 2003, Employee B is age 63, has
26 years of service, and has high 3-year average
compensation of $104,000. As of December 31,
2003, Employee B has a legally binding right to re-
ceive a payment at age 65 of $270,400 (10 percent x
26 years x $104,000). Thus, during 2003, Employee
B has earned a legally binding right to an additional
payment at age 65 of $20,400 ($270,400 -
$250,000). The assumptions that Employer O uses
to determine the amount deferred for 2003 are a 7
percent interest rate and the GAM 83 (male) mortal-
ity table, which, solely for purposes of this example,
are assumed to be reasonable actuarial assumptions.
The amount deferred for 2003 is the present value,
as of December 31, 2003, of the $20,400 payment,
which is $17,353. Employer O takes this amount
into account by including it in Employee B’s FICA
wages for 2003 and paying the additional FICA tax.
(ii) Under paragraph (d)(2)(ii) of this section, the
income attributable to the amount that was taken
into account is the increase in the present value of
the future payment due solely to the passage of time,
because the amount deferred was determined using
reasonable actuarial assumptions and methods. As
of the payment date at age 65, the present value of
the future payment earned during 2003 is $20,400.
The entire difference between the $20,400 and the
$17,353 amount deferred ($3,047) is the increase in
the present value of the future payment due solely to
the passage of time, and thus constitutes income at-
tributable to the amount taken into account. Be-
cause the amount deferred was taken into account,
the entire payment of $20,400 represents either an
amount deferred that was previously taken into ac-
count ($17,353) or income attributable to that
amount ($3,047). Accordingly, pursuant to the
nonduplication rule of paragraph (a)(2)(iii) of this
section, none of the payment is included in wages.
Example 10. (i) The facts are the same as in Ex-
ample 9,except that, instead of providing a lump
sum equal to 10 percent of average compensation
per year of service, the plan provides Employee B
with a fully vested right to receive a life annuity,
payable monthly beginning at age 65, equal to the
product of 2 percent for each year of service and
Employee B’s highest average annual compensation
for any 3-year period. The plan also provides that, if
Employee B dies before age 65, the present value of
the future payments will be paid to his or her benefi-
ciary. As of December 31, 2002, Employee B has a
legally binding right to receive lifetime payments of
$50,000 (2 percent 325 years 3$100,000) per
year. As of December 31, 2003, Employee B has a
legally binding right to receive lifetime payments of
$54,080 (2 percent 326 years 3$104,000) per
year. Thus, during 2003, Employee B has earned a
legally binding right to additional lifetime payments
of $4,080 ($54,080 – $50,000) per year beginning at
age 65. The amount deferred for 2003 is $32,935,
which is the present value, as of December 31, 2003,
of these additional payments, determined using the
same actuarial assumptions and methods used in Ex-
ample 9, except that there is no discount for the
probability of death prior to age 65. Employer O
takes this amount into account by including it in
Employee B’s FICA wages for 2003 and paying the
additional FICA tax.
(ii) Under paragraph (d)(2)(ii) of this section, the
income attributable to the amount that was taken
into account is the increase in the present value of
the future payments due solely to the passage of
time, because the amount deferred was determined
using reasonable actuarial assumptions and meth-
ods. Because the amount deferred was taken into
account, each annual payment of $4,080 attributable
to the amount deferred in 2003 represents either an
amount deferred that was previously taken into ac-
count or income attributable to that amount. Ac-
cordingly, pursuant to the nonduplication rule of
paragraph (a)(2)(iii) of this section, none of the pay-
ments are included in wages.
Example 11.(i) The facts are the same as in Ex-
ample 10,except that no amount is taken into ac-
count for 2003 because Employer O fails to pay the
additional FICA tax.
(ii) Under paragraph (d)(1)(ii)(A) of this section,
if an amount deferred for a period is not taken into
account, then the benefit payments attributable to
that amount deferred are included as wages in accor-
dance with the general timing rule of paragraph
(a)(1) of this section. In this case, assuming that the
amounts deferred in other periods were taken into
account, $4,080 of each year’s total benefit pay-
ments will be included in wages when actually or
constructively paid, in accordance with the general
timing rule.
Example 12.(i) Employer P establishes an ac-
count balance plan on January 1, 2002, under which
all benefits are 100 percent vested. The plan pro-
vides that amounts deferred will be credited annu-
ally with interest beginning in 2002 at a rate that is
greater than a reasonable rate of interest. Employer
P treats the excess over the applicable interest rate in
section 417(e) as an additional amount deferred for
2002 and in each year thereafter, and takes the addi-
tional amount into account by including it in FICA
wages and paying the additional FICA tax for the
year.
(ii) Under the nonduplication rule in paragraph
(a)(2)(iii) of this section, the benefits paid under the
plan will be excluded from wages for FICA tax pur-
poses.
Example 13.(i) The facts are the same as in Ex-
ample 9, except that, in determining the amount de-
ferred, Employer O uses a 15 percent interest rate,
which, solely for purposes of this example, is as-
sumed not to be a reasonable interest rate. Employer
O determines that the amount deferred for 2003 is
the present value, as of December 31, 2003, of the
$20,400 payment, which is $15,023. Employer O
includes $15,023 in wages and pays any resulting
FICA tax. Solely for purposes of this example, it is
assumed that the AFR as of January 1, 2003, is 7
percent.
(ii) Under paragraph (d)(2)(iii)(B) of this sec-
tion, if any actuarial assumption or method is not
reasonable, then the income attributable to the
amount taken into account is limited to the income
that would result from application of the AFR and, if
applicable, the 417(e) mortality table. Because the
15 percent interest rate is unreasonable, the income
attributable to the amount taken into account is lim-
ited to the income that would result from using a 7
percent interest rate and, in this case, an increase for
survivorship using the 417(e) mortality table. Under
these assumptions, the income attributable to the
$15,023 amount taken into account for 2003 is
$1,199 in 2004 and $1,313 in 2005. Under para-
graph (d)(1)(ii) of this section, the sum of these
amounts ($17,535) is excluded from Employee B’s
wages pursuant to the nonduplication rule of para-
graph (a)(2)(iii) of this section, and the balance of
the payment ($2,865) is subject to the general timing
rule of paragraph (a)(1) of this section and, thus, is
included in Employee B’s wages when actually or
constructively paid.
(iii) The same result can be reached by multiply-
ing the attributable benefit payments by a fraction,
the numerator of which is the amount taken into ac-
count, and the denominator of which is the amount
deferred that would have been taken into account at
the same time had the amount deferred been calcu-
lated using the AFR and the 417(e) mortality table.
These assumptions are determined as of January 1 of
the calendar year in which the amount was taken
into account. In this Example 13,the fraction would
be $15,023 divided by $17,478, which equals
.85954. The $20,400 payment is multiplied by this
fraction to determine the amount of the payment that
is excluded from wages pursuant to the nonduplica-
tion rule of paragraph (a)(2)(iii) of this section.
Thus, $17,535 ($20,400 3.85954) is excluded from
March 1, 1999201999–9 I.R.B.

wages and the balance ($2,865) is subject to FICA
tax when actually or constructively paid.
Example 14. (i) The facts are the same as Exam-
ple 10, except that Employer O calculates the
amount deferred for 2003 as $18,252 and takes that
amount into account by including that amount in
wages and paying any resulting FICA tax. The as-
sumptions that Employer O uses to determine the
amount deferred are a 15 percent interest rate and,
for the period after commencement of benefit pay-
ments, the GAM 83 (male) mortality table. The 15
percent interest rate is assumed, solely for purposes
of this example, not to be a reasonable actuarial as-
sumption. Solely for purposes of this example, it is
assumed that the AFR as of January 1, 2003, is 7
percent.
(ii) Under paragraph (d)(2)(iii)(B) of this sec-
tion, if any actuarial assumption or method used is
not reasonable, then the income attributable to the
amount taken into account is limited to the income
that would result from application of the AFR and, if
applicable, the 417(e) mortality table. Because the
15 percent interest rate is not reasonable, the income
attributable to the amount taken into account is
equal to the income that would result from using a 7
percent interest rate and the amount taken into ac-
count is treated as if it represented a portion of the
amount deferred for purposes of applying paragraph
(d)(1)(ii)(B) of this section. Under these assump-
tions, the income attributable to the $18,252 amount
taken into account for 2003 is $1,278 in 2004 and
$1,367 in 2005. Under paragraph (d)(1)(ii)(B) of
this section, the portion of each benefit payment at-
tributable to the amount deferred that is excluded
from wages pursuant to the nonduplication rule of
paragraph (a)(2)(iii) of this section is determined at
benefit commencement by multiplying each benefit
payment by a fraction, the numerator of which is the
amount taken into account (plus income attributable
to that amount) and the denominator of which is the
present value of future benefit payments attributable
to the amount deferred. Because the interest rate as-
sumption is not reasonable, not only is the income
limited to the application of the AFR, but the present
value in the denominator must be determined using
the AFR and (if applicable) the 417(e) mortality
table. In this case, the present value is $40,283 and
thus the fraction is $20,897 divided by $40,283, or
.51875. Thus, $2,116 (.51875 3$4,080) of each
year’s benefit payment is excluded from wages and
the balance of each year’s payment ($1,964) is sub-
ject to the general timing rule of paragraph (a)(1) of
this section and is included in wages when actually
or constructively paid.
(iii) The same result can be reached by multiply-
ing the attributable benefit payments by a fraction
the numerator of which is the amount taken into ac-
count, and the denominator of which is the amount
deferred that would have been taken into account at
the same time had the amount deferred been calcu-
lated using the AFR and the 417(e) mortality table.
These assumptions are determined as of January 1 of
the calendar year in which the amount was taken
into account. In this Example 14, the fraction would
be $18,252 divided by $35,185, which equals
.51875. The $4,080 annual payment is multiplied by
this fraction to determine the amount of the payment
that is excluded from wages pursuant to the nondu-
plication rule of paragraph (a)(2)(iii) of this section.
Thus, $2,116 ($4,080 3.51875) is excluded from
wages and the balance ($1,964) is subject to FICA
tax when actually or constructively paid.
(e) Time amounts deferred are re-
quired to be taken into account—(1) In
general.Except as otherwise provided in
this paragraph (e), an amount deferred
under a nonqualified deferred compensa-
tion plan must be taken into account as
wages for FICA tax purposes as of the
later of the date on which services creat-
ing the right to the amount deferred are
performed (within the meaning of para-
graph (e)(2) of this section) or the date on
which the right to the amount deferred is
no longer subject to a substantial risk of
forfeiture (within the meaning of para-
graph (e)(3) of this section). However, in
no event may any amount deferred under
a nonqualified deferred compensation
plan be taken into account as wages for
FICA tax purposes prior to the establish-
ment of the plan providing for the amount
deferred (or, if later, the plan amendment
providing for the amount deferred).
Therefore, if an amount is deferred pur-
suant to the terms of a legally binding
agreement that is not put in writing until
after the amount would otherwise be
taken into account under this paragraph
(e)(1), the amount deferred (including any
attributable income) must be taken into
account as wages for FICA tax purposes
as of the date the material terms of the
plan are put in writing.
(2) Services creating the right to an
amount deferred.For purposes of this
section, services creating the right to an
amount deferred under a nonqualified de-
ferred compensation plan are considered
to be performed as of the date on which,
under the terms of the plan and all the
facts and circumstances, the employee
has performed all of the services neces-
sary to obtain a legally binding right (as
described in paragraph (b)(3)(i) of this
section) to the amount deferred.
(3) Substantial risk of forfeiture.For
purposes of this section, the determina-
tion of whether a substantial risk of forfei-
ture exists must be made in accordance
with the principles of section 83 and the
regulations thereunder.
(4) Amount deferred that is not reason-
ably ascertainable under a nonaccount
balance plan—(i) In general—(A) Date
required to be taken into account.
Notwithstanding any other provision of
this paragraph (e), an amount deferred
under a nonaccount balance plan is not re-
quired to be taken into account as wages
under the special timing rule of paragraph
(a)(2) of this section until the first date on
which all of the amount deferred is rea-
sonably ascertainable (the resolution
date). In this case, the amount required to
be taken into account as of the resolution
date is determined in accordance with
paragraph (c)(2) of this section.
(B) Definition of reasonably ascertain-
able.For purposes of this paragraph
(e)(4), an amount deferred is considered
reasonably ascertainable on the first date
on which the amount, form, and com-
mencement date of the benefit payments
attributable to the amount deferred are
known, and the only actuarial or other as-
sumptions regarding future events or cir-
cumstances needed to determine the
amount deferred are interest and mortal-
ity. For this purpose, the form and com-
mencement date of the benefit payments
attributable to the amount deferred are
treated as known if the requirements of
paragraph (c)(2)(iii)(B) of this section
(under which payments are treated as
being made in the normal form of benefit
commencing at normal commencement
date) are satisfied. In addition, an amount
deferred does not fail to be reasonably as-
certainable on a date merely because the
exact amount of the benefit payable can-
not readily be calculated on that date or
merely because the exact amount of the
benefit payable depends on future
changes in the cost of living. If the exact
amount of the benefit payable depends on
future changes in the cost of living, the
amount deferred must be determined
using a reasonable assumption as to the
future changes in the cost of living. For
example, the amount of a benefit is
treated as known even if the exact amount
of the benefit payable cannot be deter-
mined until future changes in the cost of
living are reflected in the section 415 lim-
itation on benefits payable under a quali-
fied retirement plan.
(ii) Earlier inclusion permitted—(A)
In general.With respect to an amount de-
ferred that is not reasonably ascertainable,
an employer may choose to take an
amount into account at any date or dates
(an early inclusion date or dates) before
the resolution date (but not before the date
described in paragraph (e)(1) of this sec-
tion with respect to the amount deferred).
1999–9 I.R.B.21March 1, 1999

Thus, for example, with respect to an
amount deferred under a nonaccount bal-
ance plan that is not reasonably ascertain-
able because the plan permits employees
to receive their benefits in more than one
form or commencing at more than one
date (and the requirements of paragraph
(c)(2)(iii) of this section are not satisfied),
an employer may choose to take an
amount into account on the date otherwise
described in paragraph (e)(1) of this sec-
tion before the form and commencement
date are selected (based on assumptions
as to the form and commencement date
for the benefit payments) or may choose
to wait until the form and commencement
date of the benefit payments are selected.
An employer that chooses to take an
amount into account at an early inclusion
date under this paragraph (e)(4)(ii) for an
employee under a plan is not required
until the resolution date to identify the pe-
riod to which the amount taken into ac-
count relates.
(B) True-up at resolution date.If, with
respect to an amount deferred for a pe-
riod, an employer chooses to take an
amount into account as of an early inclu-
sion date in accordance with this para-
graph (e)(4)(ii) and the benefit payments
attributable to the amount deferred exceed
the benefit payments that are actuarially
equivalent to the amount taken into ac-
count at the early inclusion date (payable
in the same form and using the same com-
mencement date as the benefit payments
attributable to the amount deferred), then
the present value of the difference in the
benefits, determined in accordance with
paragraph (c)(2) of this section, must be
taken into account as of the resolution
date.
(C) Actuarial assumptions.For pur-
poses of determining the benefits that are
actuarially equivalent to the amount taken
into account as of an early inclusion date,
the amount taken into account is con-
verted to an actuarially equivalent benefit
payable in the same form and commenc-
ing on the same date as the actual benefit
payments attributable to the amount de-
ferred using an interest rate, and, if ap-
plicable, mortality and cost-of-living as-
sumptions, that were reasonable as of the
early inclusion date. Thus, with respect to
an amount deferred for a period, the
amount required to be taken into account
as of the resolution date is the present
value (determined using an interest rate,
and, if applicable, mortality and cost-of-
living assumptions, that are reasonable as
of the resolution date) of the excess, if
any, of the future benefit payments attrib-
utable to the amount deferred over the fu-
ture benefits payable in the same form
and commencing on the same date that
are actuarially equivalent to the portion of
the amount deferred that was taken into
account as of the early inclusion date
(where actuarial equivalence is deter-
mined using an interest rate, and, if ap-
plicable, mortality and cost-of-living as-
sumptions, that were reasonable as of the
early inclusion date).
(D) Allocation rules for amounts de-
ferred over more than one period—(1)
General rule.The rules of this paragraph
(e)(4)(ii)(D) apply for purposes of deter-
mining whether an amount has been in-
cluded under this paragraph (e)(4) before
the earliest date permitted under para-
graph (e)(1) of this section.
(2) Future compensation increases.
Increases in an employee’s compensation
after the early inclusion date must be dis-
regarded.
(3) Early retirement subsidies.An
early retirement subsidy that the em-
ployee ultimately receives may be taken
into account at an early inclusion date if
the employee would have a legally bind-
ing right to the subsidy at the early inclu-
sion date but for any condition that the
employee continue to render services.
Accordingly, an employer may take into
account at an early inclusion date any
early retirement subsidy that the em-
ployee ultimately receives to the extent
that elimination or reduction of that sub-
sidy would violate section 411(d)(6)(B)(i)
if that section applied to the plan.
(4) Allocation with respect to offsets.
In any case in which a series of amounts
are deferred over more than one period,
the amounts deferred are not reasonably
ascertainable until a single resolution date
and the benefit payments attributable to
the entire series are determined under a
formula that provides a gross benefit that
in the aggregate is subject to an objective
reduction for future events under the
terms of the plan, such as an offset for the
aggregate benefits payable under a plan
qualified under section 401(a), the attri-
bution of benefit payments to the amount
deferred in each period is determined
under the rules of this paragraph (e)(4)ii)-
(D)(4). In a case described in the preced-
ing sentence, the benefit payments made
as a result of the series of amounts de-
ferred may be treated as attributable to the
amount deferred as of the earliest period
in which the employee obtained a legally
binding right to a benefit under the plan
equal to the excess, if any, of the amount
of the gross benefit attributable to that pe-
riod (determined at the resolution date),
over the amount of the reduction deter-
mined as of the end of that period. Thus,
for example, if an employee obtains a
legally binding right in each of several
years to benefit payments from a nonqual-
ified deferred compensation plan that pro-
vides for a specified gross benefit for the
years to be offset by the benefits payable
under a qualified plan, the amount de-
ferred in the first year may be treated as
equal to the gross benefit for the year, re-
duced by the offset applicable at the end
of the year (even if the offset increases
after the end of the year).
(E) Treatment of benefits paid before
the resolution date.If a benefit payment
is attributable to an amount deferred that
is not reasonably ascertainable at the time
of payment (or is paid before the date se-
lected under paragraph (e)(5) of this sec-
tion), and the employer has previously
taken an amount into account with respect
to the amount deferred under the early in-
clusion rule of this paragraph (e)(4), then,
in lieu of the pro rata rule provided in
paragraph (d)(1)(ii)(B) of this section, a
first-in-first-out rule applies in determin-
ing the portion of the benefit payment at-
tributable to the amount taken into ac-
count. Under this first-in-first-out rule,
the benefit payment is compared to the
sum of the amount taken into account at
the early inclusion date and the income at-
tributable to that amount. If the benefit
payment equals or exceeds the amount
taken into account at the early inclusion
date and the income attributable to that
amount as of the date of the benefit pay-
ment, the benefit payment is included as
wages under the general timing rule of
paragraph (a)(1) of this section to the ex-
tent of any excess, and the amount taken
into account at the early inclusion date
(and income attributable to that amount)
is disregarded thereafter with respect to
the amount deferred. If the amount taken
into account at the early inclusion date
March 1, 1999221999–9 I.R.B.

and the income attributable to that amount
as of the date of the benefit payment ex-
ceeds the benefit payment, the benefit
payment is not included as wages under
the general timing rule of paragraph (a)(1)
of this section and, in determining the
amount that must be taken into account
thereafter with respect to the amount de-
ferred, the amount taken into account at
the early inclusion date, plus attributable
income as of the date of the benefit pay-
ment, is reduced by the amount of the
benefit payment, and only the excess plus
future income attributable to the excess
(credited using assumptions that were rea-
sonable on the early inclusion date) is
taken into consideration. If amounts have
been taken into account at more than one
early inclusion date, this paragraph
(e)(4)(ii)(E) applies on a first-in-first-out
basis, beginning with the amount taken
into account at the earliest early inclusion
date (including income attributable
thereto).
(5) Rule of administrative conve-
nience.For purposes of this section, an
employer may treat an amount deferred as
required to be taken into account under
this paragraph (e) on any date that is later
than, but within the same calendar year
as, the actual date on which the amount
deferred is otherwise required to be taken
into account under this paragraph (e). For
example, if services creating the right to
an amount deferred are considered per-
formed under paragraph (e)(2) of this sec-
tion periodically throughout a year, the
employer may nevertheless treat the ser-
vices creating the right to that amount de-
ferred as performed on December 31 of
that year. If an employer uses the rule of
administrative convenience described in
this paragraph (e)(5), any determination
of whether the income attributable to an
amount deferred under an account bal-
ance plan is based on a reasonable rate of
interest or whether the actuarial assump-
tions used to determine the present value
of an amount deferred in a nonaccount
balance plan are reasonable will be made
as of the date the employer selects to take
the amount into account.
(6) Portions of an amount deferred re-
quired to be taken into account on more
than one date. If different portions of an
amount deferred are required to be taken
into account under paragraph (e)(1) of
this section on more than one date (e.g.,
on account of a graded vesting schedule),
then each such portion is considered a
separate amount deferred for purposes of
this section.
(7) Examples. This paragraph (e) is il-
lustrated by the following examples:
Example 1.(i) Employer M establishes a non-
qualified deferred compensation plan for Employee
A on November 1, 2005. Under the plan, which is
an account balance plan, Employee A obtains a
legally binding right on the last day of each calendar
year (if Employee A is employed on that date) to be
credited with a principal amount equal to 5 percent
of compensation for the year. In addition, a reason-
able rate of interest is credited quarterly. Employee
A’s account balance is nonforfeitable and is payable
upon Employee A’s termination of employment. For
2006, the principal amount credited to Employee A
under the plan (which, in this case, is also the
amount deferred within the meaning of paragraph
(c) of this section) is $25,000.
(ii) Under paragraph (e)(2) of this section, the
services creating the right to the $25,000 amount de-
ferred are considered performed as of December 31,
2006, the date on which Employee A has performed
all of the services necessary to obtain a legally bind-
ing right to the amount deferred. Thus, in accor-
dance with paragraph (e)(1) of this section, the
$25,000 amount deferred must be taken into account
as of December 31, 2006, which is the later of the
date on which services creating the right to the
amount deferred are performed or the date on which
the right to the amount deferred is no longer subject
to a substantial risk of forfeiture.
Example 2. (i) The facts are the same as in Ex-
ample 1,except that the principal amount credited
under the plan on the last day of each year (and at-
tributable interest) is forfeited if the employee termi-
nates employment within five years of that date.
(ii) Under paragraph (e)(3) of this section, the
determination of whether the right to an amount de-
ferred is subject to a substantial risk of forfeiture is
made in accordance with the principles of section
83. Under §1.83–3(c) of this chapter, a substantial
risk of forfeiture generally exists where rights in
property that are transferred are conditioned, di-
rectly or indirectly, upon the future performance of
substantial services. Because Employee A’s right to
receive the $25,000 principal amount (and attribut-
able interest) is conditioned on the performance of
services for five years, a substantial risk of forfeiture
exists with respect to that amount deferred until De-
cember 31, 2011.
(iii) December 31, 2011, is the later of the date
on which services creating the right to the amount
deferred are performed or the date on which the
right to the amount deferred is no longer subject to a
substantial risk of forfeiture. Thus, in accordance
with paragraph (e)(1) of this section, the amount de-
ferred (which, pursuant to paragraph (c)(1) of this
section, is equal to the $25,000 principal amount
credited to Employee A’s account on December 31,
2006, plus the interest credited with respect to that
principal amount through December 31, 2011) must
be taken into account as of December 31, 2011.
Example 3. (i) The facts are the same as in Ex-
ample 2,except that the principal amount credited
under the plan on the last day of each year (and at-
tributable interest) becomes nonforfeitable accord-
ing to a graded vesting schedule under which 20 per-
cent is vested as of December 31, 2007; 40 percent
is vested as of December 31, 2008; 60 percent is
vested as of December 31, 2009; 80 percent is
vested as of December 31, 2010; and 100 percent is
vested as of December 31, 2011. Because these
dates are later than the date on which the services
creating the right to the amount deferred are consid-
ered performed (December 31, 2006), the amount
deferred is required to be taken into account as of
these dates that fall in five different years.
(ii) Paragraph (e)(6) of this section provides that,
if different portions of an amount deferred are re-
quired to be taken into account under paragraph
(e)(1) of this section on more than one date, then
each such portion is considered a separate amount
deferred for purposes of this section. Thus, $5,000 of
the principal amount, plus interest credited through
December 31, 2007, is taken into account as an
amount deferred on December 31, 2007; $5,000 of
the principal amount, plus interest credited through
December 31, 2008, is taken into account as a sepa-
rate amount deferred on December 31, 2008; etc.
Example 4.(i) On November 21, 2001, Em-
ployer N establishes a nonqualified deferred com-
pensation plan under which all benefits are 100 per-
cent vested. The plan provides for Employee B
(who is age 45) to receive a lump sum benefit of
$500,000 at age 65. This benefit will be forfeited if
Employee B dies before age 65.
(ii) Because the amount, form, and commence-
ment date of the benefit are known, and the only as-
sumptions needed to determine the amount deferred
are interest and mortality, the amount deferred is
reasonably ascertainable within the meaning of
paragraph (e)(4)(i) of this section on November 21,
2001.
Example 5(i) The facts are the same as in Exam-
ple 4,except that plan provides that the lump sum
will be paid at the later of age 65 or termination of
employment and provides that the $500,000 payable
to Employee B is increased by 5 percent per year for
each year that payment is deferred beyond age 65.
(ii) Because the commencement date of the ben-
efit payment is contingent on when Employee B ter-
minates employment, the commencement date of the
benefit payment is not known. Thus, the amount de-
ferred is not reasonably ascertainable within the
meaning of paragraph (e)(4)(i) of this section, unless
the plan satisfies the requirements of paragraph
(c)(2)(iii)(B) of this section. Because the fixed 5
percent factor may not be reasonable at the time
benefit payments commence (i.e., 5 percent might
be higher or lower than a reasonable interest rate
when payments commence), the plan fails to satisfy
paragraph (c)(2)(iii)(B) of this section and accord-
ingly the amount deferred is not reasonably ascer-
tainable until termination of employment,
Example 6.(i) The facts are the same as in Ex-
ample 4,except that the $500,000 is payable to Em-
ployee B at the later of age 55 or termination of em-
ployment.
(ii) Because the commencement date of the ben-
efit payment is contingent on when Employee B ter-
minates employment, the commencement date of the
benefit payment is not known. Thus, the amount de-
ferred is not reasonably ascertainable until termina-
tion of employment.
1999–9 I.R.B.23March 1, 1999

Example 7. (i) The facts are the same as in Ex-
ample 4,except that Employee B may elect to take
the benefit in the form of a life annuity of $50,000
per year (commencing at age 65).
(ii) Because the plan permits employees to elect
to receive benefits in more than one form and the al-
ternative forms may not have the same value when
Employee B makes his election, the plan fails to sat-
isfy the requirements of paragraph (c)(2)(iii)(B) of
this section until a form of benefit is selected. Thus,
the amount deferred is not reasonably ascertainable
until then.
Example 8.(i) Employer O establishes a non-
qualified deferred compensation plan. The plan is a
supplemental executive retirement plan (SERP) that
provides Employee C with a fully vested right to re-
ceive a pension, in the form of a life annuity payable
monthly, beginning at age 65, equal to the excess of
3 percent of Employee C’s final 3-year average pay
for each year of participation up to 15 years, over the
amount payable to Employee C from Employer O’s
qualified pension plan. The amount payable under
the qualified pension plan is a life annuity payable
monthly, beginning at age 65, equal to 1.5 percent of
final 3-year average pay for each year of employ-
ment, excluding pay in excess of the section
401(a)(17) compensation limit. No benefits are
payable under the SERP if Employee C dies before
age 65. Employee C becomes a participant in the
SERP on January 1, 2001, at age 44. The amount
deferred under the SERP for any year is not reason-
ably ascertainable prior to termination of employ-
ment because the amount of the benefit is not known
and the determination of the amount deferred re-
quires assumptions other than interest and mortality
(e.g., an assumption as to Employee C’s average pay
for the final three years of employment). As permit-
ted by paragraph (e)(4)(i) of this section, Employer
O chooses not to take any amount into account for
any year before the resolution date. Employee C ter-
minates employment on December 31, 2018 when
he is age 62.
(ii) As of the date Employee C terminates em-
ployment, the amount of the benefit is known and
the only actuarial or other assumptions needed to de-
termine the amount deferred are an interest rate as-
sumption and a mortality assumption. At that time,
the amount deferred in each past year becomes rea-
sonably ascertainable, and Employer O is able to de-
termine that during 2001 Employee C earned a
legally binding right to a life annuity of $4,000 per
year beginning in 2021 when Employee C is age 65.
Employer O determines the present value of Em-
ployee C’s future benefit payments under the SERP
as of this resolution date (December 31, 2018),
using a 7 percent interest rate and the UP-84 mortal-
ity table, which, solely for purposes of this example,
are assumed to be reasonable actuarial assumptions
for December 31, 2018. The special timing rule will
be satisfied if the resulting present value, $26,950, is
taken into account on that date in accordance with
paragraph (d)(1) of this section.
Example 9.(i) The facts are the same as in Ex-
ample 8,except that the plan provides that Em-
ployee C may choose to receive early retirement
benefits on an unreduced basis at any time after age
60 if Employee C has completed 15 years of service
by that date.
(ii) As of the date Employee C terminates em-
ployment, the amount of the benefit is known and
the only actuarial or other assumptions needed to de-
termine the amount deferred are an interest rate as-
sumption and a mortality assumption. At that time,
the amount deferred in each past year becomes rea-
sonably ascertainable, and Employer O is able to de-
termine that during 2001 Employee C earned a
legally binding right to a life annuity of $4,000 per
year beginning on December 31, 2018 when Em-
ployee C is age 62. Employer O determines the pre-
sent value of Employee C’s future benefit payments
under the SERP as of this resolution date (December
31, 2018), using a 7 percent interest rate and the UP-
84 mortality table, which, solely for purposes of this
example, are assumed to be reasonable actuarial as-
sumptions for December 31, 2018. The special tim-
ing rule will be satisfied if the resulting present
value, $37,576, is taken into account on that date in
accordance with paragraph (d)(1) of this section.
Example 10.(i) The facts are the same as in Ex-
ample 9,except that, as permitted under paragraph
(e)(4)(ii) of this section, Employer O chooses to take
an amount into account before the amount deferred
for 2001 is reasonably ascertainable. The amount
that Employer O takes into account on December
31, 2001, is $13,043 (the present value of a life an-
nuity of $4,000 per year, payable at age 62, using a 6
percent interest rate and the UP-84 mortality table).
Employer O does not take any other amount into ac-
count before the resolution date.
(ii) In accordance with paragraph (e)(4)(ii)(B) of
this section, Employer O must determine any addi-
tional amount required to be taken into account in
2018. If the $4,000 payable in the form of a life an-
nuity beginning at age 62 exceeds the life annuity
which is actuarially equivalent to the $13,043 previ-
ously taken into account, the present value of the ex-
cess must be taken into account. In this Example 10,
the $13,043 previously taken into account is actuari-
ally equivalent to a $4,000 annuity commencing at
age 62 using a 6 percent interest rate and the UP-84
mortality table ( which, solely for purposes of this
example, are assumed to be reasonable actuarial as-
sumptions for December 31, 2001). Accordingly, no
additional amount need be taken into account in
2018, regardless of any changes in market rates of
interest between 2001 and 2018.
Example 11. (i) The facts are the same as in Ex-
ample 9,except that, as permitted under paragraph
(e)(4)(ii) of this section, Employer O chooses to take
an amount into account before the amount deferred
for 2001 is reasonably ascertainable. The amount
that Employer O takes into account on December
31, 2001, is $9,569 (the present value of a life annu-
ity of $4,000 per year, payable at age 65, using a 6
percent interest rate and the UP-84 mortality table).
Employer O does not take any other amount into ac-
count before the resolution date.
(ii) In accordance with paragraph (e)(4)(ii)(B) of
this section, Employer O must determine any addi-
tional amount required to be taken into account in
2018. If the $4,000 payable in the form of a life an-
nuity beginning in 2018 at age 62 exceeds the life
annuity which is actuarially equivalent to the $9,569
previously taken into account, the present value of
the excess must be taken into account. In this case,
the $9,569 previously taken into account is actuari-
ally equivalent to a $2,935 annuity commencing at
age 62 using a 6 percent interest rate and the UP-84
mortality table (which, solely for purposes of this
example, are assumed to be reasonable actuarial as-
sumptions for December 31, 2001). Accordingly, an
additional amount needs to be taken into account in
2018 equal to the present value of the excess of the
$4,000 annual stream of benefit payments to which
Employee C obtained a legally binding right during
2001 over the $2,935 annual stream of benefit pay-
ments which is actuarially equivalent to the amount
previously taken into account. This present value
(i.e., the present value of a life annuity equal to
$4,000 minus $2,935, or $1,065 annually) is deter-
mined by Employer O to be $10,005 as of the reso-
lution date using a 7 percent interest rate and the
UP-84 mortality table (which, solely for purposes of
this example, are assumed to be reasonable actuarial
assumptions for December 31, 2018).
Example 12. (i) The facts are the same as in Ex-
ample 9,except that the amount that Employer O
takes into account on December 31, 2001, is
$15,834 (the present value of $4,000, payable at age
60, using a 6 percent interest rate and the UP-84
mortality table). Employer O does not take any
other amount into account before the resolution date.
(ii) In accordance with paragraph (e)(4)(ii)(B) of
this section, Employer O must determine any addi-
tional amount required to be taken into account in
2018. If the $4,000 payable in the form of a life an-
nuity beginning at age 62 exceeds the life annuity
which is actuarially equivalent to the $15,834 previ-
ously taken into account, the present value of the ex-
cess must be taken into account. In this case, the
$15,834 previously taken into account is actuarially
equivalent to a $4,856 annuity commencing at age
62 using a 6 percent interest rate and the UP-84 mor-
tality table (which, solely for purposes of this exam-
ple, are assumed to be reasonable actuarial assump-
tions for December 31, 2001). Because the life
annuity of $4,856 per year (which is equivalent to
the amount taken into account at the early inclusion
date) exceeds the $4,000 annuity attributable to the
amount deferred in 2001, no additional amount is re-
quired to be taken into account for that amount de-
ferred as of the resolution date. Employer O may
claim a refund or credit for the overpayment of
FICA tax with respect to amounts taken into account
prior to the resolution date to the extent permitted by
sections 6402, 6413, and 6511.
Example 13.(i) The facts are the same as in Ex-
ample 12,except that Employee C became a partici-
pant in the SERP on January 1, 2000. In addition,
Employer O determines in 2018 that during 2000
Employee C earned a legally binding right to a life
annuity of $1,500 per year beginning on December
31, 2018.
(ii) Employer O may allocate the $15,834 previ-
ously taken into account among any amounts de-
ferred on or before the early inclusion date. At the
resolution date, Employer O will have to take into
account the present value of an annuity equal to the
excess of the life annuity attributable to the amounts
deferred for 2000 and 2001 over a life annuity of
$4,856 per year.
Example 14.(i) In 2003, Employer P establishes
a nonqualified deferred compensation plan for Em-
ployee D. The plan provides that, in consideration
March 1, 1999241999–9 I.R.B.

of Employee D’s services to be performed on Pro-
ject X in 2004, Employee D will have a nonfor-
feitable right to receive 1 percent per year of Em-
ployer P’s net profits associated with Project X for
each of the immediately succeeding three years. No
services beyond 2004 are required. The 1 percent of
net profits payable each year will be paid on March
31 of the immediately succeeding year. One percent
of net profits associated with Project X is $750,000
in 2005, $400,000 in 2006, and $90,000 in 2007.
Employee D receives $750,000 on March 31, 2006,
$400,000 on March 31, 2007, and $90,000 on March
31, 2008.
(ii) Because the services creating the right to all
of the amount deferred are performed in 2004, the
benefit payments based on the 2005, 2006, and 2007
net profits are all attributable to the amount deferred
in 2004. However, because the present value of Em-
ployee D’s future benefit is contingent on future
profits, the determination of the amount deferred re-
quires the use of assumptions other than interest,
mortality, and cost of living. Thus, all of the amount
deferred in 2004 will not be reasonably ascertain-
able within the meaning of paragraph (e)(4)(i) of
this section until December 31, 2007 (which is the
resolution date). Employer P does not choose to
take any amount into account prior to the amount
deferred becoming reasonably ascertainable.
(iii) However, paragraph (d)(1)(ii)(A) of this
section provides that a benefit payment attributable
to an amount deferred under a nonqualified deferred
compensation plan must be included as wages when
actually or constructively paid if the amount de-
ferred has not been taken into account as wages
under the special timing rule of paragraph (a)(2) of
this section. Thus, the benefit payments in 2006 and
2007 must be included as wages when paid.
(iv) As of December 31, 2007, all of the amount
deferred under the plan becomes reasonably ascer-
tainable because the amount of the benefit payable
attributable to the amount deferred is treated as
known under paragraph (e)(4)(i)(B) of this section,
and the only assumption needed to determine the
present value of the future benefits is interest. How-
ever, since Employer P was required to treat the pay-
ments in 2006 and 2007 as wages when paid under
the general timing rule of paragraph (a)(1) of this
section, only the present value of the payment to be
made in 2008 is required to be taken into account as
of the resolution date (December 31, 2007) under
the special timing rule of paragraph (a)(2) of this
section. Using an interest rate of 10 percent per year
(which, solely for purposes of this Example 14, is
assumed to be reasonable), Employer P determines
that on December 31, 2007, the present value of the
future benefits is $87,881, and Employer P includes
that additional amount in wages for 2007. (Note that
Employer P can choose to use the lag method of
withholding described in paragraph (f)(3) of this
section, which allows the resolution date amount to
be taken into account no later than March 31, 2008,
provided that the amount deferred is increased by in-
terest using the AFR for January of 2008.)
Example 15. (i) The facts are the same as in Ex-
ample 14,except that Employer P chooses the early
inclusion option permitted by paragraph (e)(4)(ii) of
this section to take $1,000,000 into account on De-
cember 31, 2004, before the amount deferred for
2004 is reasonably ascertainable.
(ii) Pursuant to paragraph (e)(4)(ii)(E) of this
section, in applying the nonduplication rule of para-
graph (a)(2)(iii) of this section, a first-in-first-out
rule applies in determining the benefit payments that
are attributable to amounts previously taken into ac-
count. Using the 10 percent interest rate, Employer
P determines that the $750,000 benefit payment on
March 31, 2006, and the March 31, 2007, benefit
payment of $400,000 are less than the $1,000,000
taken into account at the early inclusion date, plus
attributable income, and, therefore, are not included
in wages when paid.
(iii) Under paragraph (e)(4)(ii)(E) of this section,
if an employer chooses to take an amount into ac-
count before the resolution date, the amount taken
into account (plus income attributable to that
amount) is disregarded to the extent the amount is
attributed to benefit payments made before the reso-
lution date. Thus, Employer P must reduce the
$1,000,000 taken into account in 2004 (plus income
attributable to that amount) based upon the two ben-
efit payments ($750,000 and $400,000) that were
excluded from wages. Using an interest rate of 10
percent, Employer P determines that the amount
taken into account in 2004 plus interest to the reso-
lution date and reduced based upon the two benefit
payments is $15,228 and the additional amount that
is required to be taken into account as of December
31, 2007, is $72,653 ($87,881 – $15,228).
Example 16.(i) Employee E obtains a fully
vested, legally binding right during 2002, 2003, and
2004 to payments from a nonqualified deferred
compensation plan of Employer Q under which the
benefits are based on a formula that includes an ac-
tuarial offset by the account balance under a quali-
fied defined contribution plan of Employer Q as of
December 31, 2004. The payments from the non-
qualified deferred compensation plan are to com-
mence on December 31, 2005. At the resolution
date for the amounts earned during 2002, 2003, and
2004, which is December 31, 2004, Employee E has
a legally binding right to a net annual benefit of
$100,000 payable for life to commence on Decem-
ber 31, 2005. On the resolution date, Employer Q
determines that on December 31, 2002, Employee E
had a legally binding right to receive $100,000 an-
nually for life beginning on December 31, 2005 (as a
result of the gross benefit under the nonqualified
plan being $120,000 annually for life, and the offset
being $20,000 annually for life, as of December 31,
2002). On December 31, 2003, Employee E had a
legally binding right to receive $95,000 annually for
life beginning on December 31, 2005 (as a result of
the gross benefit under the nonqualified plan being
$135,000 annually for life, and the offset being
$40,000 annually for life, as of December 31, 2003).
On December 31, 2004, Employee E had a legally
binding right to receive $100,000 annually for life
beginning on December 31, 2005 (as a result of the
gross benefit under the nonqualified plan being
$145,000 annually for life, and the offset being
$45,000 annually for life, as of December 31, 2004).
(ii) In this case, pursuant to paragraph
(e)(4)(ii)(D)(4) of this section, Employer Q can at-
tribute the entire $100,000 life annuity to the amount
deferred for 2002, even though Employee E’s bene-
fit under the nonqualified deferred compensation
plan is reduced to $95,000 in 2003.
Example 17.(i) In 2010, Employee F performs
services for which she earns a right to 10 percent of
the proceeds from the sale of a motion picture. In
2011, Employee F performs services for which she
earns a right to 10 percent of the proceeds from the
sale of another motion picture. These proceeds are
calculated by subtracting the total advertising ex-
penses for both movies. Payment is to be made in
the year following the date on which both pictures
have been sold, but not later than 2018. At the end
of 2010, the advertising expenses for both pictures
totaled $300,000. The first motion picture is sold
for $10,000,000 in 2014. The second motion picture
is sold for $17,000,000 in 2017. At the end of 2017,
the advertising expenses totaled $1,700,000. In
2018, Employee F is paid $2,530,000 (10 percent of
the sum of $10,000,000 and $17,000,000 minus
$1,700,000).
(ii) Pursuant to paragraph (e)(4)(ii)(D)(4) of this
section, $970,000 (10 percent of the excess of the
gross proceeds from the sale of the first motion pic-
ture at the resolution date in 2017 over the advertis-
ing expenses incurred at the end of 2010) of the pay-
ment made in 2018 can be attributed to the amount
deferred in 2010 (and with the remaining payment
of $1,560,000 to be attributed to the amount de-
ferred in 2011).
(f) Withholding—(1) In general.Un-
less an employer applies an alternative
method described in paragraph (f)(2) or
(3) of this section, an amount deferred
under a nonqualified deferred compensa-
tion plan for any employee is treated, for
purposes of withholding and depositing
FICA tax, as wages paid by the employer
and received by the employee at the time
it is taken into account in accordance with
paragraph (e) of this section. However,
paragraphs (f)(2) and (3) of this section
provide alternative methods which may
be used with respect to an amount de-
ferred for an employee. An employer is
not required to be consistent in applying
the alternatives described in this para-
graph (f) with respect to different employ-
ees or amounts deferred.
(2) Estimated method—(i) In general.
Under the alternative method provided in
this paragraph (f)(2), the employer may
make a reasonable estimate of the amount
deferred on the date on which the amount
is taken into account in accordance with
paragraph (e) of this section and take that
estimated amount into account as wages
paid by the employer and received by the
employee on that date (the estimate date),
for purposes of withholding and deposit-
ing FICA tax.
(ii) Underestimate of the amount de-
ferred—(A) General rule. If the em-
ployer underestimates the amount de-
1999–9 I.R.B.25March 1, 1999

ferred (as determined after calculating the
actual amount deferred that should have
been taken into account as of the date on
which the amount was taken into account
in accordance with paragraph (e) of this
section, using an interest rate and other
actuarial assumptions that are reasonable
as of that date), the employer may treat
the shortfall as wages paid as of the esti-
mate date or as of any date that is no later
than three months after the estimate date.
In either case, the shortfall does not in-
clude the income credited to the amount
deferred after the amount is taken into ac-
count in accordance with paragraph (e) of
this section.
(B) Shortfall is treated as wages paid
on a date after the estimate date.If the
employer chooses to treat the shortfall as
wages paid on a date that is no later than
three months after the estimate date, the
employer must take that shortfall into ac-
count as wages paid by the employer and
received by the employee on that date, for
purposes of withholding and depositing
FICA tax.
(C) Shortfall is treated as wages paid
on the estimate date. If the employer
chooses to treat the shortfall as wages
paid as of the estimate date, the shortfall
is treated as an error for purposes of with-
holding and depositing FICA tax. Appro-
priate adjustments may be made in accor-
dance with section 6205(a) and the
regulations thereunder; however, for pur-
poses of §31.6205–1(b), the error need
not be treated as ascertained before the
date that is three months after the estimate
date.
(D) Reporting.The employer must re-
port the shortfall as wages on Form 941,
Employer’s Quarterly Federal Tax Return
(and, if applicable, Form 941c, Supporting
Statement to Correct Information) and
Form W-2, Wage and Tax Statement (or, if
applicable, Form W-2c, Corrected Wage
and Tax Statement) in accordance with its
treatment of the shortfall under paragraph
(f)(2)(ii)(B) or (C) of this section.
(iii) Overestimate of the amount de-
ferred. If the employer overestimates the
amount deferred (as determined after cal-
culating the actual amount deferred that
should have been taken into account as of
the date on which the amount was taken
into account in accordance with para-
graph (e) of this section, using an interest
rate and actuarial assumptions that are
reasonable as of that date) and deposits
more than the amount required, the em-
ployer may claim a refund or credit in ac-
cordance with sections 6402, 6413, and
6511. A Form 941c, or an equivalent
statement, must accompany each claim
for refund. In addition, Form W-2 or, if
applicable, Form W-2c must also reflect
the actual amount deferred that should
have been taken into account.
(3) Lag method.Under the alternative
method provided in this paragraph (f)(3),
an amount deferred, plus interest, may be
treated as wages paid by the employer and
received by the employee, for purposes of
withholding and depositing FICA tax, on
any date that is no later than three months
after the date the amount is required to be
taken into account in accordance with
paragraph (e) of this section. For pur-
poses of this paragraph (f)(3), the amount
deferred must be increased by interest
through the date on which the wages are
treated as paid, at a rate that is not less
than AFR. If the employer withholds and
deposits FICA tax in accordance with this
paragraph (f)(3), the employer will be
treated as having taken into account the
amount deferred plus income to the date
on which the wages are treated as paid.
(4) Examples.This paragraph (f) is il-
lustrated by the following examples:
Example 1. (i) Employer M maintains a non-
qualified deferred compensation plan that is an ac-
count balance plan. The plan provides for annual
bonuses based on current year profits to be deferred
until termination of employment. Employer M’s
profits for 2003, and thus the amount deferred, is
reasonably ascertainable, but Employer M calculates
the amount deferred on March 3, 2004, when the rel-
evant data is available.
(ii) In accordance with the alternative method
described in paragraph (f)(2) of this section, Em-
ployer M makes a reasonable estimate that the
amount deferred that must be taken into account as
of December 31, 2003, for Employee A is $20,000,
and withholds and deposits FICA tax on that amount
as if it were wages paid by Employer M and re-
ceived by Employee A on that date. In January of
2004, Employer M files and furnishes Form W-2 for
Employee A including the $20,000 in FICA wages.
On March 3, 2004, Employer M determines that the
actual amount deferred that should have been taken
into account on December 31, 2003, was $22,000.
(iii) In accordance with the alternative method
described in paragraph (f)(2)(ii) of this section, Em-
ployer M may treat the additional $2,000 as wages
paid to and received by Employee A on December
31, 2003, the estimate date. Employer M may treat
the $2,000 shortfall as an error ascertained on March
3, 2004, and withhold and deposit FICA tax on that
amount. Form W-2c for Employee A for 2003 must
include the $2,000 shortfall in FICA wages. Em-
ployer M must also correct the information on Form
941 for the last quarter of 2003, reporting the adjust-
ment on Form 941 for the first quarter of 2004, ac-
companied by Form 941c for the last quarter of 2003.
(iv) Instead, Employer M may treat the $2,000
shortfall as wages paid on March 31, 2004, and with-
hold and deposit FICA tax on that amount as if it
were wages paid by Employer M and received by
Employee A on that date. Form W-2 for Employee A
for 2004 and Form 941 for the first quarter of 2004
must include the $2,000 shortfall in FICA wages.
Example 2. (i) The facts are the same as in Ex-
ample 1,except that on March 3, 2004, Employer M
determines that the actual amount deferred that
should have been taken into account on December
31, 2003, was $19,000.
(ii) Under paragraph (f)(2)(iii) of this section,
Employer M may, in accordance with sections 6402,
6413, and 6511, claim a refund or credit for the
overpayment of tax resulting from the overestimate.
In addition, Employer M must file and furnish a
Form W-2c for Employee A and must correct the in-
formation on Form 941 for the last quarter of 2003.
Example 3. (i) The facts are the same as in Ex-
ample 1,except that Employer M does not make a
reasonable estimate of the amount deferred that
must be taken into account as of December 31,
2003. Instead, Employer M withholds and deposits
FICA tax on the amount deferred plus interest on
that amount using AFR (for January 2004) as if it
were wages paid by Employer M and received by
Employee A on March 15, 2004.
(ii) Under the alternative method described in
paragraph (f)(3) of this section, the amount taken
into account on March 15, 2004 (including the inter-
est), will be treated as FICA wages paid to and re-
ceived by Employee A on March 15, 2004.
Example 4.(i) The facts are the same as in Ex-
ample 1,except that an amount is also deferred for
Employee B which is required to be taken into ac-
count on October 15, 2003, and Employer M
chooses to use the lag method in paragraph (f)(3) of
this section in order to provide time to calculate the
amount deferred.
(ii) Employer M may use any date not later than
January 15, 2004, to take the amount deferred into
account (provided that the amount deferred includes
interest, at AFR for January 1, 2003, through De-
cember 31, 2003, and at AFR for January 1, 2004,
through January 15, 2004).
(g) Effective date and transition
rules—(1) General effective date.Ex-
cept for paragraphs (g)(2) through (4) of
this section, this section is applicable on
and after January 1, 2000. Thus, para-
graphs (a) through (f) of this section apply
to amounts deferred on or after January 1,
2000; to amounts deferred before January
1, 2000, which cease to be subject to a
substantial risk of forfeiture on or after
January 1, 2000, or for which a resolution
date occurs on or after January 1, 2000;
and to benefits actually or constructively
paid on or after January 1, 2000.
March 1, 1999261999–9 I.R.B.

(2) Reasonable, good faith interpreta-
tion for amounts deferred and benefits
paid before January 1, 2000—(i) In gen-
eral. For periods before January 1, 2000
(including amounts deferred before Janu-
ary 1, 2000, and any benefits actually or
constructively paid before January 1,
2000, that are attributable to those
amounts deferred), an employer may rely
on a reasonable, good faith interpretation
of section 3121(v)(2), taking into account
pre-existing guidance. An employer will
be deemed to have determined FICA tax
liability and satisfied FICA withholding
requirements in accordance with a reason-
able, good faith interpretation of section
3121(v)(2) if the employer has complied
with paragraphs (a) through (f) of this
section. For purposes of paragraphs
(g)(2) through (4) of this section, and sub-
ject to paragraphs (g)(2)(ii) and (iii) of
this section, whether an employer that has
not complied with paragraphs (a) through
(f) of this section has determined FICA
tax liability and satisfied FICA withhold-
ing requirements in accordance with a
reasonable, good faith interpretation of
section 3121(v)(2) will be determined
based on the relevant facts and circum-
stances, including consistency of treat-
ment by the employer and the extent to
which the employer has resolved unclear
issues in its favor.
(ii) Plan must be established or
adopted.If an amount is deferred under a
plan before January 1, 2000, and benefit
payments attributable to that amount are
actually or constructively paid on or after
January 1, 2000, then in no event will an
employer’s treatment of the amount de-
ferred be considered to be in accordance
with a reasonable, good faith interpreta-
tion of section 3121(v)(2) if the employer
treats that amount as taken into account as
wages for FICA tax purposes prior to the
establishment of the plan (within the
meaning of paragraph (b)(2) of this sec-
tion) providing for the deferred compen-
sation (or, if later, the establishment of the
plan as amended to provide for the de-
ferred compensation, as provided in para-
graph (b)(2)(ii) of this section). If an
amount is deferred under a plan before
January 1, 2000, and benefit payments at-
tributable to that amount are actually or
constructively paid before January 1,
2000, then in no event will the employer’s
treatment of that amount deferred be con-
sidered to be in accordance with a reason-
able, good faith interpretation of section
3121(v)(2) if the employer treats that
amount as taken into account as wages for
FICA tax purposes prior to the adoption
of the plan providing for the deferred
compensation (or, if later, the adoption of
the plan amendment providing the de-
ferred compensation). For example,
awards, bonuses, raises, incentive pay-
ments, and other similar amounts granted
under a plan as compensation for past ser-
vices may not be taken into account under
section 3121(v)(2) prior to the establish-
ment (or, if applicable, the adoption) of
the plan.
(iii) Certain changes in position for
stock options, stock appreciation rights,
and other stock value rights not reason-
able, good faith interpretation.In the case
of a stock option, stock appreciation right,
or other stock value right (as defined in
paragraph (b)(4)(ii) of this section) that is
exercised before January 1, 2000, an em-
ployer that treats the exercise as not sub-
ject to FICA tax as a result of the nondu-
plication rule of section 3121(v)(2)(B) is
not acting in accordance with a reason-
able, good faith interpretation of section
3121(v)(2) if the employer has not treated
that grant and all earlier grants as subject
to section 3121(v)(2) by reporting the cur-
rent value of such options and rights as
FICA wages on Form 941 filed for the
quarter during which each grant was made
(or, if later, for the quarter during which
each grant ceased to be subject to a sub-
stantial risk of forfeiture).
(3) Optional adjustments to conform
with this section for pre-effective-date
open periods–(i) General rule.If an em-
ployer determined FICA tax liability with
respect to section 3121(v)(2) in any pe-
riod ending before January 1, 2000, for
which the applicable period of limitations
has not expired on January 1, 2000 (pre-
effective-date open periods), in a manner
that was not in accordance with this sec-
tion, the employer may adjust its FICA
tax determination for that period to con-
form to this section. Thus, if an amount
deferred was taken into account in a pre-
effective-date open period when it was
not required to be taken into account (e.g.,
an amount taken into account before it be-
came reasonably ascertainable), the em-
ployer may claim a refund or credit for
any FICA tax paid on that amount to the
extent permitted by sections 6402, 6413,
and 6511.
(ii) Consistency required.In the case
of a plan that is not a nonqualified de-
ferred compensation plan (within the
meaning of paragraph (b)(1) of this sec-
tion), if any payment was actually or con-
structively paid to an employee under the
plan in a pre-effective-date open period
and that payment was not included in
FICA wages by reason of the employer’s
treatment of the plan as a nonqualified de-
ferred compensation plan, then the em-
ployer may claim a refund or credit for
FICA tax paid on amounts treated as
amounts deferred under the plan (in ac-
cordance with the employer’s treatment
of the plan as a nonqualified deferred
compensation plan) for that employee for
pre-effective-date open periods only to
the extent that the FICA tax paid on all
amounts treated as amounts deferred for
the employee in all pre-effective-date
open periods under the plan exceeds the
FICA tax that would have been due on the
benefits actually or constructively paid to
the employee in those periods under the
plan if those benefits were included in
FICA wages when paid. If any benefit
payments attributable to amounts deferred
after December 31, 1993, were actually or
constructively paid to an employee under
a nonqualified deferred compensation
plan (within the meaning of paragraph
(b)(1) of this section) in a pre-effective-
date open period, but these payments
were treated as subject to FICA tax be-
cause the employer treated the plan as not
being a nonqualified deferred compensa-
tion plan, then the employer may claim a
refund or credit for the FICA tax paid on
those benefit payments only to the extent
that the FICA tax paid on those benefit
payments exceeds the FICA tax that
would have been due on the amounts de-
ferred to which those benefit payments
are attributable if those amounts deferred
had been taken into account when they
would have been required to have been
taken into account under this section (if
this section had been in effect then).
(iii) Reporting.Any employer that ad-
justs its FICA tax determination in accor-
dance with paragraphs (g)(3)(i) and (ii) of
this section must make appropriate adjust-
ments on Form 941 and Form 941c for the
affected periods, and, in addition, must
file and furnish Form W-2, or, if applica-
1999–9 I.R.B.27March 1, 1999

ble, Form W-2c, for any affected em-
ployee so that the Social Security Admin-
istration may correctly post the amount
deferred to the employee’s earnings
record. The adjustments may be made in
accordance with section 6205(a) and the
regulations thereunder; however, for pur-
poses of §31.6205-1(b), the error is not
required to be treated as ascertained be-
fore March 31, 2000.
(4) Application of reasonable, good
faith standard—(i) Plans that are not
subject to section 3121(v)(2).If a plan is
not a nonqualified deferred compensation
plan within the meaning of paragraph
(b)(1) of this section, but, for a period
ending prior to January 1, 2000, and, pur-
suant to a reasonable, good faith interpre-
tation of section 3121(v)(2), an amount
under the plan was taken into account
(within the meaning of paragraph (d)(1)
of this section) as an amount deferred
under a nonqualified deferred compensa-
tion plan, then, pursuant to paragraph
(g)(2) of this section, the following rules
shall apply—
(A) With respect to benefit payments
actually or constructively paid before Jan-
uary 1, 2000, that are attributable to
amounts previously taken into account
under the plan, no additional FICA tax
will be due;
(B) On or after January 1, 2000, bene-
fit payments under the plan must be taken
into account as wages when actually or
constructively paid in accordance with
paragraph (a)(1) of this section; and
(C) To the extent permitted by para-
graph (g)(3) of this section, the employer
may claim a refund or credit for FICA tax
actually paid on amounts taken into ac-
count prior to January 1, 2000.
(ii) Plans that are subject to section
3121(v)(2) for which the amount deferred
has not been fully taken into account—
(A) In general.The rules of paragraphs
(g)(4)(ii)(B) through (E) of this section
apply if a plan is a nonqualified deferred
compensation plan (within the meaning of
paragraph (b)(1) of this section) and, with
respect to an amount deferred under the
plan for an employee prior to January 1,
2000, the employer, in accordance with a
reasonable, good faith interpretation of
section 3121(v)(2), either took into ac-
count an amount that is less than the
amount that would have been required to
be taken into account if paragraphs (a)
through (f) of this section had been in ef-
fect for that period or took no amount into
account. Thus, paragraphs (g)(4)(ii)(B)
through (E) of this section apply both to
an employer that treated the plan as if it
were not a nonqualified deferred compen-
sation plan within the meaning of section
3121(v)(2) (by withholding and paying
FICA tax due on benefits actually or con-
structively paid under the plan during that
period, if any) and to an employer that
treated the plan as a nonqualified deferred
compensation plan within the meaning of
section 3121(v)(2).
(B) No additional tax required.Pur-
suant to paragraph (g)(2) of this section,
no additional FICA tax will be due for any
period ending prior to January 1, 2000.
(C) General timing rule applicable.In
accordance with paragraph (d)(1)(ii) of
this section, except as provided in para-
graphs (g)(4)(ii)(D) and (E), the general
timing rule described in paragraph (a)(1)
of this section applies to benefits actually
or constructively paid on or after January
1, 2000, attributable to an amount de-
ferred in a period before January 1, 2000,
to the extent the amount taken into ac-
count was less than the amount that would
have been required to be taken into ac-
count if paragraphs (a) through (f) of this
section had been in effect before January
1, 2000.
(D) Special rule for amounts deferred
before 1994.The difference between the
amount that was taken into account in any
period ending prior to January 1, 1994,
and the amount that would have been re-
quired or permitted to be taken into ac-
count in that period if paragraphs (a)
through (f) of this section had been in ef-
fect is treated as if it had been taken into
account within the meaning of paragraph
(d)(1) of this section. For example, in the
case of an amount deferred before 1994
that was not reasonably ascertainable (and
which was not subject to a substantial risk
of forfeiture), the employer is treated as if
it had anticipated the actual amount, form,
and commencement date for the benefit
payments attributable to the amount de-
ferred and had taken the amount deferred
into account at an early inclusion date be-
fore 1994 using a method permitted under
this section. Thus, with respect to such an
amount deferred, the employer is not re-
quired to take any additional amount into
account when the amount deferred be-
comes reasonably ascertainable, and no
additional FICA tax will be due when the
benefit payments attributable to the
amount deferred are actually or construc-
tively paid.
(E) Special rule for amounts required
to be taken into account in 1994 or 1995.
In the case of an amount deferred that
would have been required to be taken into
account in 1994 or 1995 if paragraphs (a)
through (f) of this section had been in ef-
fect, an employer will be treated as taking
the amount deferred into account under
paragraph (d)(1) of this section to the ex-
tent the employer takes the amount into
account by treating it as wages paid by the
employer and received by the employee
as of any date prior to April 1, 2000.
(iii) Plans that are subject to section
3121(v)(2) for which more than the
amount deferred has been taken into ac-
count. If a plan is a nonqualified deferred
compensation plan (within the meaning of
paragraph (b)(1) of this section ) and an
amount was taken into account under the
plan for an employee before January 1,
2000, in accordance with a reasonable,
good faith interpretation of section
3121(v)(2), but that amount could not
have been taken into account before Janu-
ary 1, 2000, if paragraphs (a) through (f)
of this section had been in effect then, the
following rules apply—
(A) The determination of the amount
deferred for any period beginning on or
after January 1, 2000, must be made in ac-
cordance with paragraph (c) of this sec-
tion, and the time when amounts deferred
under the plan are required to be taken
into account must be determined in accor-
dance with paragraph (e) of this section,
without regard to any such amount that
was taken into account for any period
ending before January 1, 2000; and
(B) To the extent permitted by sections
6402, 6413, and 6511, the employer may
claim a refund or credit for an overpay-
ment of tax caused by the overinclusion
of wages that occurred before January 1,
2000.
(5) Examples.This paragraph (g) is il-
lustrated by the following examples:
Example 1. (i) In 1996, Employer M establishes
a nonqualified deferred compensation plan that is a
nonaccount balance plan for Employee A. All bene-
fits under the plan are 100 percent vested. In order
to determine the amount deferred on behalf of Em-
ployee A under the plan for 1996 and 1997, Em-
March 1, 1999281999–9 I.R.B.

ployer M must make assumptions as to the date on
which Employee A will retire and the form of bene-
fit Employee A will elect, in addition to interest,
mortality, and cost-of-living assumptions. Based on
assumptions made with respect to all of these con-
tingencies, Employer M determines that the amount
deferred for 1996 is $50,000 and the amount de-
ferred for 1997 is $55,000. In 1996 and 1997, Em-
ployee A’s total wages (without regard to the
amounts deferred) exceed the OASDI wage bases.
Employer M withholds and deposits HI tax on the
$50,000 and $55,000 amounts. Employee A does
not retire before January 1, 2000. Employer M
chooses under paragraph (g)(3) of this section to
apply this section to 1996 and 1997 before the Janu-
ary 1, 2000, general effective date.
(ii) Under this section, the amounts deferred in
1996 and 1997 are not reasonably ascertainable
(within the meaning of paragraph (e)(4)(i) of this
section) before January 1, 2000. Thus, as long as the
applicable period of limitations has not expired for
the periods in 1996 and 1997, Employer M may, to
the extent permitted under paragraph (g)(3) of this
section, apply for a refund or credit for the HI tax
paid on the amounts deferred for 1996 and 1997 and,
in accordance with paragraph (e)(4) of this section,
take into account the amounts deferred when they
become reasonably ascertainable.
Example 2. (i) Employer N adopts a plan on
January 1, 1994, that covers Employee B, who has
10 years of service as of that date. The plan pro-
vides that, in consideration of Employee B’s out-
standing services over the past 10 years, Employee
B will be paid a $500,000 lump sum distribution
upon termination of employment at any time. On
January 15, 1996, Employee B terminates employ-
ment with Employer N. Employer N determines,
based on a reasonable, good faith interpretation of
section 3121(v)(2), that the plan is a nonqualified
deferred compensation plan under that section. Em-
ployer N treats the $500,000 as having been taken
into account as an amount deferred in 1993 and ear-
lier years.
(ii) Under paragraph (g)(2)(ii) of this section, if
all amounts are deferred and all benefits are paid
under a plan before January 1, 2000, then in no
event will an employer’s treatment of amounts de-
ferred under the plan be considered to be in accor-
dance with a reasonable, good faith interpretation of
section 3121(v)(2) if the employer treats these
amounts as taken into account as wages for FICA
tax purposes prior to the adoption of the plan. Ac-
cordingly, Employer N’s treatment is not in accor-
dance with a reasonable, good faith interpretation of
section 3121(v)(2) because Employer N treated
amounts as taken into account in years before the
adoption of the plan. As a result, the payment made
to Employee B in 1996 was subject to both the
OASDI and HI portions of FICA tax when paid.
Example 3. (i) Employer O adopts a bonus plan
on December 1, 1993, that becomes effective and
legally binding on January 1, 1994. Under the plan,
which is not set forth in writing, a specified bonus
amount (which is 100 percent vested) is credited to
Employee C’s account each December 31. A rea-
sonable rate of interest on Employee C’s account
balance is credited quarterly. Employee C’s account
balance will begin to be paid in equal annual install-
ments over 10 years beginning on January 1, 2000.
Employer O determines, based on a reasonable,
good faith interpretation of section 3121(v)(2), that
the bonus plan is a nonqualified deferred compensa-
tion plan under that section and, therefore, treats the
amounts credited from January 1, 1994, through De-
cember 31, 1999, as amounts deferred and, in accor-
dance with a reasonable, good faith interpretation of
section 3121(v)(2), takes those amounts deferred
into account as wages for FICA tax purposes as of
those dates. The bonus plan is set forth in writing on
May 1, 1999, and, thus, is treated as established as
of January 1, 1994.
(ii) Under paragraph (g)(2)(ii) of this section, if
an amount is deferred before January 1, 2000, and
the attributable benefit is paid on or after January 1,
2000, then in no event will an employer’s treatment
of the amount deferred under a plan be considered to
be in accordance with a reasonable, good faith inter-
pretation of section 3121(v)(2) if the employer treats
the amount deferred as taken into account as wages
for FICA tax purposes prior to the establishment of
the plan (within the meaning of paragraph (b)(2) of
this section). Because the bonus plan is treated as
established on January 1, 1994 (pursuant to the tran-
sition rule for unwritten plans in paragraph
(b)(2)(iii) of this section), and because Employer O,
in accordance with a reasonable, good faith interpre-
tation of section 3121(v)(2), took amounts deferred
into account in 1994 through 1999, the amounts paid
to Employee C attributable to those amounts de-
ferred will not be subject to FICA tax when paid.
Example 4. (i) In 1985, Employer P establishes
a compensation arrangement for Employee D that
provides for a lump sum payment to be made after
termination of employment but the arrangement is
not a nonqualified deferred compensation plan
(within the meaning of paragraph (b)(1) of this sec-
tion). However, prior to January 1, 2000, and in ac-
cordance with a reasonable, good faith interpretation
of section 3121(v)(2), Employer P treats the arrange-
ment as a nonqualified deferred compensation plan
under section 3121(v)(2). Employer P determines
that Employee D’s total wages (without regard to the
amount deferred) for each year from 1985 through
1993 exceed the applicable OASDI and HI wage
bases for each of those years and, consequently,
there is no FICA tax liability with respect to the
amounts deferred for those years. In 1994, Em-
ployee D’s total wages (without regard to the
amount deferred) exceed the OASDI wage base.
However, because there is no limit on the HI wage
base, the amount deferred for 1994 results in addi-
tional HI tax liability of $290, which is timely paid
by Employer P.
(ii) Employee D terminates employment with
Employer P in 1995 and receives a plan payment of
$50,000. In that year, Employee D also receives
wages of $60,000 from Employer P. In accordance
with its treatment of the plan as a nonqualified de-
ferred compensation plan under section 3121(v)(2),
Employer P does not treat the $50,000 payment in
1995 as wages for FICA tax purposes in that year.
(iii) Because amounts under a plan were taken
into account (within the meaning of paragraph (d)(1)
of this section) as amounts deferred under a non-
qualified deferred compensation plan pursuant to a
reasonable, good faith interpretation of section
3121(v)(2)(A), but that plan is not a nonqualified de-
ferred compensation plan within the meaning of
paragraph (b)(1) of this section, the transition rules
provided in paragraph (g)(4)(i) of this section apply.
Thus, no additional FICA tax will be due on the ben-
efits paid in 1995.
(iv) Because $290 of HI tax was paid on the
amount deferred in 1994, Employer P is entitled to a
refund or credit for that amount to the extent permit-
ted under sections 6402, 6413, and 6511 — but only
to the extent that $290 exceeds the FICA tax that
would have been due on the $50,000 payment in
1995 if that payment had been subject to FICA tax
when paid (i.e., if paragraphs (a) through (f) of this
section had been effective for those years). In 1995,
Employee D had other wages of $60,000. Thus,
only $1,200 (the $61,200 OASDI wage base, less
the $60,000 of other wages) of the $50,000 payment
would have been subject to OASDI; the full $50,000
would have been subject to HI. This would have re-
sulted in $148.80 of OASDI tax ($1,200 312.4 per-
cent) and $1,450 of HI tax ($50,000 32.9 percent).
Employer P is not entitled to a refund or credit under
the consistency rule of paragraph (g)(3)(ii) because
the $290 of HI tax paid in 1994 is less than the total
$1,598.80 of FICA tax liability that would have re-
sulted if this section had applied for 1995.
(v) However, if the benefit payment is instead
actually or constructively paid on or after January 1,
2000, the benefit payment must be taken into ac-
count as wages when actually or constructively paid
in accordance with the general timing rule of para-
graph (a)(1) of this section (and paragraph
(g)(4)(i)(B) of this section).
Example 5.(i) In 1985, Employer Q establishes
a compensation arrangement for Employee E that is
a nonqualified deferred compensation plan within
the meaning of paragraph (b)(1) of this section.
However, prior to January 1, 2000, Employer Q de-
termines, based on a reasonable, good faith interpre-
tation of section 3121(v)(2), that the arrangement is
not a nonqualified deferred compensation plan
within the meaning of that section. Thus, when Em-
ployee E retires at the end of 1996 and benefit pay-
ments under the arrangement begin in 1997, Em-
ployer Q withholds and deposits FICA tax on the
amounts paid to Employee E. Payments under the
arrangement continue on or after January 1, 2000.
Employer Q does not choose (under paragraph
(g)(3) of this section) to adjust its FICA tax determi-
nation for a pre-effective-date open period by treat-
ing this section as in effect for all amounts deferred
and benefits actually or constructively paid for any
such period. The periods in 1994 and 1995 are not
pre-effective-date open periods for Employer Q.
(ii) Under paragraph (g)(4)(ii) of this section, for
purposes of determining whether benefits actually or
constructively paid on or after January 1, 2000, were
previously taken into account for purposes of apply-
ing the nonduplication rule of section 3121(v)(2)(B),
any amount that would have been required to have
been taken into account before 1994 will be treated
as if it had been taken into account within the mean-
ing of paragraph (d)(1) of this section. Under the
nonduplication rule, benefit payments attributable to
an amount that has been so treated as taken into ac-
count is not treated as wages for FICA tax purposes
at any later time (such as upon payment).
(iii) Because Employer Q does not adjust its
FICA tax determination by treating this section as in
effect for all amounts deferred for periods ending
after December 31, 1993, any benefit payments at-
tributable to amounts deferred in periods ending
after December 31, 1993, will be included in wages
1999–9 I.R.B.29March 1, 1999

when actually or constructively paid in accordance
with the general timing rule of paragraph (a)(1) of
this section.
Example 6. (i) The facts are the same as in Ex-
ample 5,except that Employer Q chooses (in accor-
dance with paragraph (g)(3) of this section) to adjust
its FICA tax determination for all pre-effective-date
open periods by treating this section as in effect for
all amounts deferred for those periods. In addition,
Employer Q chooses (in accordance with paragraph
(g)(4)(ii)(E) of this section) to take the amounts de-
ferred for 1994 and 1995 into account by treating
these amounts as FICA wages paid and received by
Employee E on January 15, 2000.
(ii) In accordance with the nonduplication rule of
paragraph (a)(2)(iii) of this section, because all
amounts deferred for Employee E under the plan
were taken into account (or treated as taken into ac-
count), any benefit payments made to Employee E
under the plan will not be included as FICA wages
when actually or constructively paid.
Example 7.(i) The facts are the same as in Ex-
ample 5,except that Employer Q does not withhold
and deposit the FICA tax due on benefits actually or
constructively paid before January 1, 2000.
(ii) Because Employer Q did not withhold and
deposit the FICA tax due on benefits actually or con-
structively paid before January 1, 2000, Employer Q
did not determine FICA tax liability and satisfy
FICA tax withholding requirements in accordance
with a reasonable, good faith interpretation of sec-
tion 3121(v)(2). Thus, the transition rules provided
in paragraphs (g)(3) and (4) of this section do not
apply. As a result, any amount that would have been
required to have been taken into account under this
section before 1994 is not treated as if it had been so
taken into account under paragraph (g)(4)(ii)(D) of
this section, and benefit payments attributable to
amounts deferred before January 1, 2000, are treated
as FICA wages when actually or constructively paid
in accordance with the general timing rule of para-
graph (a)(1) of this section.
Example 8. (i) In 1993, Employer R establishes
a nonqualified deferred compensation plan for Em-
ployee F under which Employee F will have a fully
vested right to receive a lump sum payment in 2000
equal to 50 percent of Employee F’s highest rate of
salary. On December 31, 1993, Employee F’s high-
est salary is $1 million. In accordance with a rea-
sonable, good faith interpretation of section
3121(v)(2), Employer R determines that, for 1993,
there is an amount deferred that must be taken into
account as wages for FICA tax purposes. Based
Employer R’s estimate that Employee F’s highest
salary will be $3 million in 2000, Employer R deter-
mines that the amount deferred is equal to the pre-
sent value in 1993 of $1.5 million payable in 2000.
However, because Employee F has other wages in
1993 that exceed the applicable OASDI and HI
wage bases for that year, no additional FICA tax is
paid as a result of that amount deferred being taken
into account for 1993. In addition, Employer R
takes no amounts into account under the plan after
1993 for Employee F. Under paragraphs (e)(1) and
(4)(ii)(D)(2) of this section, the largest amount that
could have been taken into account in 1993 is the
present value of a lump sum payment of $500,000,
payable in 2000, because that is the maximum
amount to which Employee R has a legally binding
right as of December 31, 1993. Employee F’s high-
est salary is, in fact, $3 million in 2000 and Em-
ployee F receives $1.5 million under the plan on De-
cember 31, 2000.
(ii) In accordance with paragraphs (g)(1) and
(4)(iii)(A) of this section, the determination of the
amount deferred under the plan for any period be-
ginning on or after January 1, 2000, and the time
when that amount deferred is required to be taken
into account must be determined in accordance with
this section. In addition, these determinations must
be made without regard to any amount deferred that
was taken into account for any period ending before
January 1, 2000, that could not be taken into account
before January 1, 2000, if paragraphs (a) through (f)
of this section had been in effect. Because no FICA
tax was actually paid on that $1 million in 1993, no
overpayment of tax was caused by the overinclusion
of wages in 1993 and, thus, Employer R is not enti-
tled to a refund or credit (even assuming that the pe-
riod of limitations has been kept open for periods in
1993). In addition, because the difference between
the present value of the $1.5 million payment and
the present value of a $500,000 payment was not
taken into account for periods beginning on or after
January 1, 1994, $1 million must be included in
FICA wages under the general timing rule when
paid.
§31.3121(v)(2)–2 Effective dates and
transition rules.
(a) General statutory effective date.
Except as otherwise provided in para-
graphs (b) through (e) of this section, sec-
tion 3121(v)(2) and the amendments
made to section 3121(a)(2), (a)(3), and
(a)(13) by the Social Security Amend-
ments of 1983 (Public Law 98-21, 97
Stat. 65), as amended by section
2662(f)(2) of the Deficit Reduction Act of
1984 (Public Law 98-369, 98 Stat. 494),
apply to amounts deferred and benefits
paid after December 31, 1983.
(b) Definitions.For purposes of
§31.3121(v)(2)–1 and this section, the
following definitions apply:
(1) FICA. FICAmeans the Federal In-
surance Contributions Act (26 U.S.C.
3101 et seq.).
(2) 457(a) plan. A457(a) planmeans
an eligible deferred compensation plan of
a State or local government or of a tax-ex-
empt organization to which section 457(a)
applies.
(3) Gap agreement. Gap agreement
means an agreement adopted after March
24, 1983, and on or before December 31,
1983, between an individual and a non-
qualified deferred compensation plan
within the meaning of §31.3121(v)(2)–
1(b). Such an agreement does not fail to
be a gap agreement merely because the
terms of the plan are changed after De-
cember 31,1983.
(4) Individual party to a gap agree-
ment. Individual party to a gap agreement
means an individual who was eligible to
participate in a gap agreement on Decem-
ber 31, 1983, under the terms of the agree-
ment on that date. An individual will be
treated as an individual party to a gap
agreement even if the individual has not
accrued any benefits under the plan by
December 31, 1983, and regardless of
whether the individual has taken any spe-
cific action to become a party to the agree-
ment. However, an individual who be-
comes eligible to participate in a gap
agreement after December 31, 1983, is not
an individual party to a gap agreement.
(5) Individual party to a March 24,
1983 agreement. Individual party to a
March 24, 1983 agreementmeans an indi-
vidual who was eligible to participate in a
March 24, 1983 agreement under the
terms of the agreement on March 24,
1983. An individual will be treated as an
individual party to a March 24, 1983
agreement even if the individual has not
accrued any benefits under the plan by
March 24, 1983, and regardless of
whether the individual has taken any spe-
cific action to become a party to the
agreement. However, an individual who
becomes eligible to participate in a March
24, 1983 agreement after March 24, 1983,
is not an individual party to a March 24,
1983 agreement.
(6) March 24, 1983 agreement. March
24, 1983 agreementmeans an agreement
in existence on March 24, 1983, between
an individual and a nonqualified deferred
compensation plan within the meaning of
§31.3121(v)(2)–1(b). Such an agreement
does not fail to be a March 24, 1983
agreement merely because the terms of
the plan are changed after March 24,
1983. In addition, for purposes of this
paragraph (b)(6) only, any plan (or agree-
ment) that provides for payments that
qualify for one of the retirement payment
exclusions is treated as a nonqualified de-
ferred compensation plan. For example,
§31.3121(v)(2)–1(b)(4)(v) provides that
certain benefits established in connection
with impending termination do not result
from the deferral of compensation and
thus are not considered deferred under a
nonqualified deferred compensation plan.
However, a plan that provides such bene-
March 1, 1999301999–9 I.R.B.

fits and that was in existence on March
24, 1983, is treated as a nonqualified de-
ferred compensation plan for purposes of
this paragraph (b) to the extent it provides
benefits that would have satisfied one of
the retirement payment exclusions.
(7) Retirement payment exclusions.
Retirement payment exclusionsare the
exclusions from wages (for FICA tax pur-
poses) for retirement payments under sec-
tion 3121(a)(2)(A), (a)(3), and (a)(13)-
(A)(iii), as in effect on April 19, 1983 (the
day before enactment of the Social Secu-
rity Amendments of 1983).
(8) Transition benefits. Transition
benefitsare payments made after Decem-
ber 31, 1983, attributable to services ren-
dered before January 1, 1984. For this
purpose, transition benefits are deter-
mined without regard to any changes
made in the terms of the plan after March
24, 1983, in the case of a March 24, 1983
agreement or after December 31, 1983, in
the case of a gap agreement.
(c) Transition rules—(1) In general.
Except as provided in paragraph (c)(2) or
(3) of this section, the general statutory
effective date described in paragraph (a)
of this section applies to benefit payments
after December 31, 1983. Thus, except as
provided in paragraph (c)(2) or (3) of this
section, section 3121(v)(2) applies, and
the retirement payment exclusions do not
apply, to benefit payments made after De-
cember 31, 1983, even if the benefit pay-
ments are made under a March 24, 1983
agreement or a gap agreement.
(2) Transition benefits under a March
24, 1983 agreement.With respect to an
individual party to a March 24, 1983
agreement, transition benefits paid under
that March 24, 1983 agreement (except
for those paid under a 457(a) plan) are not
subject to the special timing rule of sec-
tion 3121(v)(2) and are subject to section
3121(a) as in effect on April 19, 1983.
Thus, transition benefits under a March
24, 1983 agreement (except for those
under a 457(a) plan) to an individual party
to a March 24, 1983 agreement are ex-
cluded from wages (for FICA tax pur-
poses) only if they qualify for any of the
retirement payment exclusions (or any
other exclusion provided under section
3121(a) as in effect on April 19, 1983).
(3) Transition benefits under a gap
agreement.With respect to an individual
party to a gap agreement, the payor of
transition benefits under the gap agree-
ment must choose to either—
(i) Take the transition benefits into ac-
count as wages when paid; or
(ii) Take the amount deferred (within
the meaning of §31.3121(v)(2)–1(c)) with
respect to the transition benefits into ac-
count as wages under section 3121(v)(2)
(as if section 3121(v)(2) had applied be-
fore its general statutory effective date).
(d) Determining transition benefit por-
tion. For purposes of determining the
portion of total benefits under a nonquali-
fied deferred compensation plan that rep-
resents transition benefits, if, under the
terms of the plan, benefit payments are
not attributed to specific years of service,
the employer may use any reasonable
method. For example, if a plan provides
that the employee will receive benefits
equal to 2 percent of high 3-year average
compensation multiplied by years of ser-
vice, and the employee retires after 25
years of service, 9 of which are before
1984, the employer may determine that
9/25 of the total benefit payments to be
received beginning in 2000 are transition
benefits attributable to services performed
before 1984.
(e) Order of payment.If an employer
determines, in accordance with paragraph
(d) of this section, that a portion of the
total benefits under a nonqualified de-
ferred compensation plan constitutes tran-
sition benefits, then, for purposes of de-
termining the portion of each benefit
payment that constitutes transition bene-
fits, the employer must treat each benefit
payment as consisting of transition bene-
fits in the same proportion as the transi-
tion benefits that have not been paid (as of
January 1, 2000) bear to total benefits that
have not been paid (as of January 1,
2000), unless such allocation is inconsis-
tent with the terms of the plan. However,
for a benefit payment made before Janu-
ary 1, 2000, the employer may use any
reasonable allocation method to deter-
mine the portion of a payment that con-
sists of transition benefits, provided that
the allocation method is consistent with
the terms of the plan.
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 the following entry in
the table in numerical order to read as fol-
lows:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or sectionCurrent OMB
where identifiedcontrol No.
and described
* * * * *
31.3121(v)(2)–1 . . . . . . . . . . 1545–1643
* * * * *
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 23, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Tax Policy)
(Filed by the Office of the Federal Register on Janu-
ary 28, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 29, 1999, 64 F.R.
4542)
Section 3306.—Definitions
26 CFR 31.3306(r)(2)–1: Treatment of amounts
deferred under certain non-qualified deferred
compensation plans.
T.D. 8815
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
Federal Unemployment Tax Act
(FUTA) Taxation of Amounts
Under Employee Benefit Plans
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations under section 3306(r)(2)
1999–9 I.R.B.31March 1, 1999

of the Internal Revenue Code (Code), that
provide guidance as to when amounts de-
ferred under or paid from a nonqualified
deferred compensation plan are taken into
account as wages for purposes of the em-
ployment taxes imposed by the Federal
Unemployment Tax Act (FUTA). Section
3306(r)(2), relating to treatment of certain
nonqualified deferred compensation, was
added to the Code by section 324 of the
Social Security Amendments of 1983.
These regulations provide guidance to
employers who maintain nonqualified de-
ferred compensation plans.
DATES: Effective Date:These regula-
tions are effective January 29, 1999.
Applicability Date:These regulations
are applicable on and after January 1,
2000. In addition, these regulations pro-
vide certain transition rules for amounts
deferred and benefits paid before January
1, 2000, including allowing employers to
use a reasonable, good faith interpretation
of section 3306(r)(2).
FOR FURTHER INFORMATION CON-
TACT: Janine Cook, Linda E. Alsalihi, or
Margaret A. Owens, (202) 622-6040 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These final regulations amend the Em-
ployment Tax Regulations (26 CFR part
31) under section 3306(r)(2). Section
3306(r)(2) was added to the Internal Rev-
enue Code (Code) by section 324 of the
Social Security Amendments of 1983
(1983 Amendments). Section 2662(f)(2)
of the Deficit Reduction Act of 1984
(DEFRA) amended section 324 of the
1983 Amendments.
Notice 94–96 (1994–2 C.B. 564) pro-
vides that until final regulations are is-
sued, the IRS will not challenge an em-
ployer’s determination of FUTA tax
liability with respect to a nonqualified de-
ferred compensation plan for periods be-
fore the effective date of any final regula-
tions if the determination is based on a
reasonable, good faith interpretation of
section 3306(r)(2). On January 25, 1996,
a notice of proposed rulemaking (EE–55–
95), under section 3306(r)(2) was pub-
lished in the Federal Register(61 F.R.
2214), providing guidance related to the
FUTA tax treatment of amounts deferred
under or paid from certain nonqualified
deferred compensation plans. On Decem-
ber 24, 1997, a notice of proposed rule-
making (REG–209484–87 and REG–
209807–95), under section 3306(r)(2), ex-
tending the proposed general effective
date of the regulations to January 1, 1998,
was published in the Federal Register
(62 F.R. 67304).
Comments regarding the proposed reg-
ulations were received from the public,
and on June 24, 1996, the IRS held a pub-
lic hearing concerning the proposed
amendments. After consideration of the
public comments received and the state-
ments made at the public hearing, the pro-
posed regulations are adopted as revised
by this Treasury decision.
Explanation of Provisions
These final regulations provide guid-
ance under section 3306(r)(2), relating to
when amounts deferred under or paid
from nonqualified deferred compensation
plans are taken into account as wages for
FUTA purposes. These rules are substan-
tially similar to the rules applicable to the
FICA (Federal Insurance Contributions
Act) tax treatment of such amounts de-
ferred under section 3121(v)(2). Thus,
these final regulations cross-reference the
final regulations under section
3121(v)(2) (FICA tax treatment of non-
qualified deferred compensation), pub-
lished elsewhere in this issue of the Fed-
eral Register.
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 notice of proposed rulemaking was is-
sued prior to March 29, 1996, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding
these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal authors of these regula-
tions are Janine Cook, Linda E. Alsalihi,
and Margaret A. Owens, Office of the As-
sociate Chief Counsel (Employee Bene-
fits and Exempt Organizations). How-
ever, other personnel from the IRS and
Treasury Department participated in their
development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 31 is
amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph 1. The authority citation for
part 31 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 31.3306(r)(2)-1 is
added to read as follows:
§31.3306(r)(2)–1 Treatment of amounts
deferred under certain nonqualified
deferred compensation plans.
(a) In general.Section 3306(r)(2) pro-
vides a special timing rule for the tax im-
posed by section 3301 with respect to any
amount deferred under a nonqualified de-
ferred compensation plan. Section
31.3121(v)(2)–1 contains rules relating to
when amounts deferred under certain
nonqualified deferred compensation plans
are wages for purposes of sections
3121(v)(2), 3101, and 3111. The rules in
§31.3121(v)(2)–1 also apply to the spe-
cial timing rule of section 3306(r)(2). For
purposes of applying the rules in
§31.3121(v)(2)–1 to section 3306(r)(2)
and this paragraph (a), references to the
Federal Insurance Contributions Act are
considered references to the Federal Un-
employment Tax Act (26 U.S.C. 3301 et
seq.), references to FICA are considered
references to FUTA, references to section
3101 or 3111 are considered references to
section 3301, references to section
3121(v)(2) are considered references to
section 3306(r)(2), references to section
3121(a), (a)(5), and (a)(13) are considered
references to section 3306(b), (b)(5), and
March 1, 1999321999–9 I.R.B.

(b)(10), respectively, and references to
§31.3121(a)–2(a) are considered refer-
ences to §31.3301–4.
(b) Effective dates and transition rules.
Except as otherwise provided, section
3306(r)(2) applies to remuneration paid
after December 31, 1984. Section
31.3121(v)(2)–2 contains effective date
rules for certain remuneration paid after
December 31, 1983, for purposes of section
3121(v)(2). The rules in §31.3121(v)(2)–2
also apply to section 3306(r)(2). For pur-
poses of applying the rules in
§31.3121(v)(2)–2 to section 3306(r)(2) and
this paragraph (b), references to section
3121(v)(2) are considered references to
section 3306(r)(2), and references to sec-
tion 3121(a)(2), (a)(3), or (a)(13) are con-
sidered references to section 3306(b)(2),
(b)(3), or (b)(10), respectively. In addition,
references to §31.3121(v)(2)–1 are consid-
ered references to paragraph (a) of this sec-
tion. For purposes of applying the rules of
§31.3121(v)(2)–2 to this paragraph (b) –
(1) References to “December 31,
1983” are considered references to “De-
cember 31, 1984”;
(2) References to “before 1984” are
considered references to “before 1985”;
(3) References to “Federal Insurance
Contributions Act” are considered refer-
ences to “Federal Unemployment Tax
Act”; and
(4) References to “FICA” are consid-
ered references to “FUTA”.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 23, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Tax Policy)
(Filed by the Office of the Federal Register on Janu-
ary 28, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 29, 1999, 64 F.R.
4540)
Section 7502.—Timely Mailing
Treated as Timely Filing and
Paying
26 CFR 301.7502–1: Timely mailing treated as
timely filing.
T.D. 8807
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
Timely Mailing Treated as
Timely Filing/Electronic
Postmark
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
temporary and final regulations relating to
timely mailing treated as timely filing and
paying under section 7502. The tempo-
rary regulations generally reflect changes
to the law made by the Internal Revenue
Service Restructuring and Reform Act
of 1998.The temporary regulations affect
taxpayers that file documents or make
payments or deposits. The text of the
temporary regulations is also set forth in
the notice of proposed rulemaking on this
subject in the Proposed Rules section of
this issue of the Federal Register.
DATES: Effective date:These regula-
tions are effective January 15, 1999.
Applicability date:For dates of applic-
ability, see §301.7502–1T(f)(3).
FOR FURTHER INFORMATION CON-
TACT: Charles A. Hall (202) 622- 4940
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
the Regulations on Procedure and Admin-
istration (26 CFR part 301) under section
7502 relating to timely mailing treated as
timely filing and paying. Section
7502(c)(2) was amended by section
2003(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998,
Public Law 105–206 (112 Stat. 725
(1998)), to authorize the Secretary to
provide the extent to which the prima
facie evidence of delivery and postmark
date rules apply to electronic filing.
Explanation of Provisions
These temporary regulations add
§301.7502–1T(d) to provide that the date
of an electronic postmark given by an au-
thorized electronic return transmitter will
be deemed the filing date if the date of the
electronic postmark is on or before the fil-
ing due date. It also permits the Commis-
sioner to enter into an agreement with an
electronic return transmitter or to pre-
scribe in forms, instructions, or other ap-
propriate guidance the procedures under
which the electronic return transmitter is
authorized to provide taxpayers with an
electronic postmark to acknowledge the
date and time that the electronic return
transmitter received the electronically
filed document.
An electronic return transmitter is de-
fined for purposes of the regulation the
same as in the revenue procedures gov-
erning the Electronic Filing Program, cur-
rently Rev. Proc. 98–50 (1998–38 I.R.B.
8 (September 21, 1998)), and the On-Line
Filing Program, currently Rev. Proc. 98–
51 (1998–38 I.R.B. 20 (September 21,
1998)). An electronic postmark is a
record of the date and time that an autho-
rized electronic return transmitter re-
ceives the transmission of the taxpayer’s
electronically filed document on its host
system.
For tax year 1998, the rules on elec-
tronic postmarks are effective for in-
come tax returns filed through elec-
tronic return transmitters authorized
to provide an electronic postmark pur-
suant to an agreement under the Elec-
tronic Tax Administration’s Request
for Agreement released on November
26, 1997. Fortaxable years beginning
after 1998, the rules on electronic post-
marks are effective for documents sub-
mitted to electronic return transmitters
that are authorized to provide an elec-
tronic postmark pursuant to §301.7502–
1T(d)(2).
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
these regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
1999–9 I.R.B.33March 1, 1999

chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue
Code, these regulations will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
Drafting Information
The principal author of these regula-
tions is Charles A. Hall, Office of Assis-
tant Chief Counsel (Income Tax & Ac-
counting). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.7502–1T also issued under
26 U.S.C. 7502(c) * * *
Par. 2. Section 301.7502–1 is amended
by:
1. Redesignating paragraphs (d) and
(e) as paragraphs (e) and (f) respectively.
2. Adding new paragraph (d).
The addition reads as follows:
§301.7502–1 Timely mailing treated as
timely filing.
* * * * *
(d) [Reserved]. For further guidance
regarding timely filing of electronically
filed documents for taxable years begin-
ning after December 31, 1997, see
§301.7502–1T(d).
* * * * *
Par. 3. Section 301.7502–1T is added
to read as follows:
§301.7502–1T Timely mailing treated as
timely filing (temporary).
(a) through (c) [Reserved]. For further
guidance, see §301.7502–1(a) through
(c).
(d) Electronically filed documents—(1)
In general.A document filed electroni-
cally with an electronic return transmitter
(as defined in paragraph (d)(3)(i) of this
section and authorized pursuant to para-
graph (d)(2) of this section) in the manner
and time prescribed by the Commissioner
is deemed to be filed on the date of the
electronic postmark (as defined in para-
graph (d)(3)(ii) of this section) given by
the authorized electronic return transmit-
ter. Thus, if the electronic postmark is
timely, the document is considered filed
timely although it is received by the
agency, officer, or office after the last
date, or the last day of the period, pre-
scribed for filing such document.
(2) Authorized electronic return trans-
mitters.The Commissioner may enter
into an agreement with an electronic re-
turn transmitter or prescribe in forms, in-
structions, or other appropriate guidance
the procedures under which the electronic
return transmitter is authorized to provide
taxpayers with an electronic postmark to
acknowledge the date and time that the
electronic return transmitter received the
electronically filed document.
(3) Definitions—(i) Electronic return
transmitter.For purposes of this para-
graph (d), the term electronic return trans-
mitter has the same meaning as contained
in section 3.02(4) of Rev. Proc. 98–50
(1998–38 I.R.B. 8 (September 21, 1998)),
and section 3.02(3) of Rev. Proc. 98–51
(1998–38 I.R.B. 20 (September 21,
1998))(See §601.601(d)(2) of this chap-
ter.), or in procedures subsequently pre-
scribed by the Commissioner.
(ii) Electronic postmark.For purposes
of this paragraph (d), the term electronic
postmarkmeans a record of the date and
time (in a particular time zone) that an au-
thorized electronic return transmitter re-
ceives the transmission of a taxpayer’s
electronically filed document on its host
system. However, if the taxpayer and the
electronic return transmitter are located in
different time zones, it is the time in the
taxpayer’s time zone that controls the time-
liness of the electronically filed document.
(e) through (f)(2) [Reserved]. For fur-
ther guidance, see §301.7502–1(e)
through (f)(2)
(f)(3) Electronically filed documents—
(i) For taxable year 1998.For taxable
year 1998, paragraph (d) of this section
only applies to electronically filed income
tax returns transmitted to an electronic re-
turn transmitter that was authorized to
provide an electronic postmark pursuant
to an agreement entered into in response
to submissions received in reply to the
Electronic Tax Administration’s Request
for Agreement released on November 26,
1997.
(ii) For taxable years after 1998.For
taxable years after 1998, paragraph (d) of
this section applies to any electronically
filed return, claim, statement, or other
document transmitted to an electronic re-
turn transmitter that is authorized to pro-
vide an electronic postmark pursuant to
paragraph (d)(2) of this section. This sec-
tion expires on January 14, 2002 .
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 30, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on Janu-
ary 14, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 15, 1999, 64 F.R.
2568)
Section 7701.—Definitions
26 CFR 301.7701–7: Trusts-domestic and foreign.
T.D. 8813
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301 and 602
Residence of Trusts and
Estates—7701
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations providing guidance re-
garding the definition of a trust as a
United States person (domestic trust) or a
foreign trust. This document also pro-
vides guidance regarding the election for
certain trusts to remain domestic trusts for
taxable years beginning after December
March 1, 1999341999–9 I.R.B.

31, 1996. The regulations incorporate
changes to the law made by the Small
Business Job Protection Act of 1996 and
by the Taxpayer Relief Act of 1997. The
final regulations affect the determination
of the residency of trusts as foreign or do-
mestic for federal tax purposes.
DATES: Effective Date:These regula-
tions are effective February 2, 1999.
Dates of Applicability:See §301.7701–
7(e).
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
James A. Quinn at (202) 622-3060 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget for review in ac-
cordance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control num-
ber 1545-1600.
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 collections of information in these
final regulations are in §301.7701–7(d)-
(2)(ii) and (f). This information is re-
quired by the IRS to assure compliance
with the provisions of the Small Business
Job Protection Act of 1996 and by the Tax-
payer Relief Act of 1997 for trusts seeking
to retain their residency as domestic or
foreign trusts in the event of an inadver-
tent change and for trusts electing to re-
main domestic trusts. The likely respon-
dents are trusts. The estimated average
annual burden per respondent is 0.5 hours.
Comments concerning the accuracy of
this burden estimate 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 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.
Background
On June 5, 1997, the IRS published in
the Federal Registera notice of proposed
rulemaking (62 F.R. 30796 [REG.–
251703–96, 1997–1 C.B. 795]) to provide
guidance on the definition of a foreign
trust and a domestic trust under section
7701(a)(30) and (31), as amended by sec-
tion 1907 of the Small Business Job Pro-
tection Act of 1996 (SBJP Act), Public
Law 104-188, 110 Stat. 1755 (August 20,
1996).
Written comments responding to the
notice of proposed rulemaking were re-
ceived, and a public hearing was held on
September 16, 1997. After consideration
of the comments received, the proposed
regulations are adopted as revised by this
Treasury decision.
Section 1161(a) of the Taxpayer Relief
Act of 1997 (TRA 1997), Public Law
105-34, 111 Stat. 788 (August 5, 1997),
provides that, to the extent prescribed in
regulations by the Secretary of the Trea-
sury or his delegate, a trust that was in ex-
istence on August 20, 1996 (other than a
trust treated as owned by the grantor
under subpart E of part I of subchapter J
of chapter 1 of the Internal Revenue Code
of 1986 (Code)), and that was treated as a
United States person on August 19, 1996,
may elect to continue to be treated as a
United States person notwithstanding the
enactment of section 7701(a)(30)(E). No-
tice 98–25 (1998–18 I.R.B. 11) provides
guidance regarding the election to remain
a domestic trust. The IRS and the Trea-
sury Department are incorporating the
guidance contained in Notice 98–25 con-
cerning the election to remain a domestic
trust in these final regulations. The final
regulations also provide guidance regard-
ing the circumstances that cause a termi-
nation of the election and guidance con-
cerning revocation of the election to
remain a domestic trust.
In addition, section 1601(i)(3)(A) of
TRA 1997 amended section 7701(a)(30)-
(E)(ii) by striking the word “fiduciaries”
and inserting “persons” in its place. The
final regulations have been drafted con-
sistent with this change.
Explanation of Provisions
A. Court Test and Safe Harbor Issues
1. Foreign classification bias and safe
harbor. Some commentators point out
generally that the Code and the proposed
regulations are biased in favor of trusts
being treated as foreign trusts. The com-
mentators recommend that the regulations
should reduce the bias in favor of foreign
treatment. The safe harbor in the pro-
posed regulations provides that a trust is a
domestic trust if, pursuant to the terms of
a trust instrument, the trust has only
United States fiduciaries, such fiduciaries
are administering the trust exclusively in
the United States, and the trust is not sub-
ject to an automatic migration provision.
One commentator recommends that the
safe harbor be made clearly applicable in
the case of any trust if a majority of the
trustees are United States persons and the
other requirements are met.
The IRS and the Treasury Department
agree with the commentator that the safe
harbor should not be limited to trusts with
only United States fiduciaries. Since the
primary concern addressed by the safe
harbor is the difficulty in determining
whether the court of a particular state
would assert primary supervision over the
administration of a trust if that trust had
never appeared before a court, the final
regulations provide a safe harbor only for
the court test. A trust that satisfies the
safe harbor, therefore, would also need to
meet the control test in order to be a do-
mestic trust. In addition, an example has
been added to the control test illustrating
that the control test is satisfied if United
States persons control all substantial deci-
sions by a majority vote.
Commentators note that many trust in-
struments do not direct where the trust is
to be administered. Therefore, they sug-
gest that a trust should satisfy the safe har-
bor if the trust is in fact administered in
the United States (regardless of whether
this is mandated by the trust document).
The IRS and the Treasury Department
believe that, if a trust is administered ex-
clusively in the United States, it is not
necessary that the trust instrument actu-
ally direct that the trust be administered in
the United States. Accordingly, the final
regulations provide that a trust satisfies
the safe harbor if the trust instrument does
1999–9 I.R.B.35March 1, 1999

not direct that the trust be administered in
a jurisdiction outside the United States,
and the trust is in fact administered in the
United States.
These changes in the final regulations
will allow more trusts to fall within the
safe harbor.
2. Automatic migration or flee clauses.
The proposed regulations provide that a
trust will not satisfy the court test if the
trust instrument contains an automatic mi-
gration clause that would cause the trust
to migrate from the United States if a
United States court attempts to assert ju-
risdiction or otherwise supervise the ad-
ministration of the trust. Commentators
argue that the rule in the proposed regula-
tions concerning automatic migration
clauses is too broad. They argue that an
automatic migration clause should not
cause a trust to be treated as a foreign
trust if migration is triggered only by
events that are not particular to a given
trust, its trustees, beneficiaries, or
grantors. For example, if a trust will mi-
grate because of foreign invasion of the
United States, the residency of the trust
should not be affected.
The final regulations adopt the sugges-
tion and provide that a trust will not fail
the court test if the trust instrument pro-
vides that the trust will migrate from the
United States only in the case of foreign
invasion of the United States or wide-
spread confiscation or nationalization of
property in the United States.
3. Clarify that the list of specific situa-
tions for meeting the court test is not an
exclusive list.Commentators recommend
that the regulations be clarified to provide
that the situations set forth in §301.7701-
7(d)(2) of the proposed regulations that
meet the court test are not the exclusive
ways to meet the court test.
The purpose of setting forth specific
situations that meet the court test was to
provide bright-line rules that would give
taxpayers certainty of treatment to the ex-
tent possible. These rules, however, are
not exclusive. The court test will also be
satisfied by meeting the requirements set
forth in the final regulations in
§301.7701–7(c).
4. Disregard state law.A commentator
recommends that the regulations should
establish bright-line rules for the court
test without reference to state law.
The IRS and the Treasury Department
believe that the proper interpretation of
section 7701(a)(30)(E) requires that state
law be applied under the court test. In ad-
dition, the proposed regulations provide
bright-line rules for both the court test and
the control test to the extent permitted by
the statute. For example, the regulations
provide a safe harbor and provide for spe-
cific cases where the court test is satis-
fied. Therefore, the final regulations re-
main unchanged in this regard.
5. Court test excessively broad. One
commentator argues that the court test is
excessively broad because many trusts
that are, in the commentator’s view, for-
eign trusts will potentially be deemed do-
mestic trusts. Specifically, the commen-
tator is concerned about a trust in which
the only domestic aspect is a single
United States trustee who controls all sub-
stantial decisions of the trust. Another
commentator recommends that the regu-
lations should make clear that trustee
meetings and other trustee activities in the
United States will not cause the court test
to be met.
The IRS and the Treasury Department
do not believe that there is statutory au-
thority for modifying the court test as sug-
gested and, therefore, the final regulations
remain unchanged. Furthermore, trustee
meetings and activities in the United
States may be a relevant factor to be taken
into account in determining whether the
court test has been met.
6. Petition of court by a single benefi-
ciary. A commentator recommends that
§301.7701–7(d)(2)(iii) of the proposed
regulations should be clarified to provide
that the court test is met only if either (i) a
court within the United States actually ex-
ercises primary supervision over the trust,
or (ii) a majority of beneficiaries take steps
to cause a United States court to exercise
primary supervision. The commentator
expresses concern about a possible situa-
tion where, under the commentator’s inter-
pretation of the regulations, a single bene-
ficiary of a foreign trust takes steps with a
United States court petitioning it to assume
primary supervision of the trust and, re-
gardless of whether the court does in fact
exercise primary supervision of the trust,
the foreign trust becomes a domestic trust.
While §301.7701–7(d)(2)(iii) of the
proposed regulations permits the trustees
and/or beneficiaries of a trust to take steps
to ensure that the court test is satisfied,
taking preliminary steps with a United
States court without in fact causing the
administration of the trust to be subject to
the primary supervision of the United
States court would not satisfy the court
test. Thus, the concern about a single
beneficiary altering the residence of the
trust by merely taking preliminary steps is
unwarranted.
B. Control Test Issues
1. Who counts for purposes of the con-
trol test. The proposed regulations pro-
vide that substantial decisions do not in-
clude decisions exercisable by a grantor
or by a beneficiary of the trust that affect
solely the beneficiary’s interest in the
trust, unless the grantor or beneficiary is
acting in a fiduciary capacity. The pro-
posed regulations provide this rule be-
cause the statute prior to amendment by
TRA 1997 provided that United States
fiduciariesmust control all substantial de-
cisions of a domestic trust. Therefore, the
proposed regulations exclude decisions
by those who are not holding powers in a
fiduciary capacity.
As noted, TRA 1997 substituted “per-
sons” for “fiduciaries” in the control test.
In light of the change in the statute, com-
mentators point out that there is no statu-
tory basis for ignoring the powers held by
grantors and beneficiaries for purposes of
the control test.
Therefore, the final regulations change
the rule set forth in the proposed regula-
tions and, for purposes of the control test,
count all powers held by grantors and
powers held by beneficiaries including
those that affect solely the portion of the
trust in which the beneficiary has an inter-
est. Accordingly, all persons with any
power over substantial decisions of the
trust, whether acting in a fiduciary capac-
ity or not, must be counted for purposes
of the control test.
Under the proposed regulations, ex-
cluding grantors (and beneficiaries) from
the control test would have allowed cer-
tain individual retirement accounts
(IRAs) and other tax-exempt trusts to
continue to be treated as domestic trusts
and thus retain their tax-exempt status
even if the grantor/beneficiary of the trust
is a foreign person. The IRS and the
March 1, 1999361999–9 I.R.B.

Treasury Department believe that Con-
gress did not intend the TRA 1997
changes to affect the tax-exempt status of
IRAs and other tax-exempt trusts whose
tax-exempt status depends on their being
domestic trusts. Because these trusts are
required to be created or organized in the
United States, and are subject to other de-
tailed requirements for qualification
under the Code, the final regulations pro-
vide that these trusts satisfy the control
test, provided that United States fiducia-
ries control all of the substantial decisions
of the trust that are made by trust fiducia-
ries. This provision of the final regula-
tions generally reaches the same result as
the provision in the proposed regulations.
2. Time to correct inadvertent changes
in fiduciaries.The proposed regulations
provide that in the event of an inadvertent
change in the fiduciaries that would cause
a change in the residency of a trust, the
trust is allowed six months from the date
of change in the fiduciaries to adjust ei-
ther the fiduciaries or the residence of the
fiduciaries so as to avoid a change in the
residence of the trust.
Commentators recommend that trusts
be given more time to take corrective ac-
tion to avoid a change in residency or, al-
ternatively, the regulations should give
the IRS discretionary authority to con-
tinue treating a trust that inadvertently
fails the control test as a domestic trust
even if the control test is not met within
six months.
The final regulations extend the period
of time to 12 months from the date of the
change to complete corrective action.
The final regulations also provide that the
district director may grant an extension of
time to make the modification if the fail-
ure to make the modification within the
12-month period was due to reasonable
cause. In addition, the final regulations
define the term inadvertent changeto
mean a change with respect to a person
who has a power to make a substantial de-
cision of the trust, if such change (if not
corrected) would cause an unintended
change to the foreign or domestic resi-
dency of the trust.
3. Effect of power to veto decisions.
The proposed regulations define control
to mean having the power, by vote or oth-
erwise, to make all of the substantial deci-
sions of the trust, with no other person
having the power to veto any of the sub-
stantial decisions. Thus, if United States
fiduciaries have the power to make all the
substantial decisions of the trust, but a
foreign person could veto one of the deci-
sions, the trust would fail the control test
and would be a foreign trust. A commen-
tator disagrees with the conclusion that
the power to veto decisions may be deter-
minative of who has control.
The final regulations retain the defini-
tion of control set forth in the proposed
regulations. The effect of a veto power is
specifically noted in the legislative his-
tory. H.R. Rep. No. 542, Part 2, 104th
Cong., 2d Sess. 31 (1996). Furthermore,
control should be defined to mean full
power over the trust consistent with a
trustee’s traditional role in trust adminis-
tration. Accordingly, if a United States
person only has the power to veto the de-
cisions of a foreign trustee, the control
test is not satisfied. Likewise, if a foreign
person has the power to veto the decisions
of a United States trustee, the control test
is not satisfied. Thus, in both cases, the
trust would be a foreign trust.
4. Power to remove, add, or replace a
trustee.Some commentators disagree
with treating a decision to remove, add, or
replace a trustee as a substantial decision.
Commentators also argue that the pro-
posed regulations are not consistent with
the rules that apply for determining the
ownership of grantor trusts or with the
rules for determining whether property is
included in a decedent’s estate for estate
tax purposes. A commentator recom-
mends that the final regulations provide
that a decision to appoint a trustee to suc-
ceed a trustee who has died, resigned, or
otherwise ceased to act as a trustee, with-
out the power to remove the trustee, is not
a substantial decision.
The IRS and the Treasury Department
believe that the purpose of the control test
is to determine the residence of a trust and
therefore is different from the purpose of
the rules for grantor trusts and for estate
taxes. The final regulations continue to
treat the decision to remove, add, or re-
place a trustee as a substantial decision.
In addition, the final regulations provide
that the decision to appoint a successor
fiduciary to succeed a fiduciary who has
died, resigned, or otherwise ceased to act
as a trustee, even if it is not accompanied
by an unrestricted power to remove a
trustee, is a substantial decision, unless
this power is limited such that it cannot be
exercised in a manner that would change
the trust’s residency from foreign to do-
mestic, or vice versa.
5. Investment decisions. Commenta-
tors argue that investment decisions
should not be treated as substantial deci-
sions.
The final regulations continue to treat
investment decisions as substantial deci-
sions. However, the final regulations
provide that if a United States fiduciary
contracts for the services of an investment
advisor, and the advisor’s power to make
investment decisions can be terminated at
the will of the United States fiduciary, the
United States fiduciary will be treated as
retaining control over the investment de-
cisions made by the investment advisor,
whether the investment advisor is foreign
or domestic.
C. Transition Rule and Grandfathering
Issues
1. Pre-existing foreign trusts.Com-
mentators recommend various grandfa-
thering rules for pre-existing foreign
trusts that would allow them to remain
treated as foreign trusts. A commentator
recommends that a trust would be deemed
to be a foreign trust prior to the effective
date of section 7701(a)(30) and (31), as
amended by the SBJP Act (new law), if
the trust is treated as a foreign trust under
the new law. In particular, the commenta-
tor expresses concern that some trusts be-
lieved to be foreign trusts under section
7701(a)(30) and (31), prior to amendment
by the SBJP Act (prior law), may have in
fact been domestic trusts under prior law.
If such trusts qualify as foreign trusts
under the new law, they will be consid-
ered to have changed their classification
from domestic to foreign on January 1,
1997. Trusts that change from domestic
to foreign may be subject to tax for the
deemed transfer to a foreign trust under
section 1491 (as in effect prior to its re-
peal by TRA 1997) and subject to penal-
ties for failure to report such transfer
under section 6677 if they continue to
treat themselves as foreign trusts.
In addition, a commentator recom-
mends that trusts that were formed prior
to August 20, 1996, as group trust
arrangements exempt from tax under sec-
tions 501(a) and 408(e) and described in
1999–9 I.R.B.37March 1, 1999

Rev. Rul. 81–100 (1981–1 C.B. 326) not
be subject to section 7701(a)(30) and (31)
as amended by the SBJP Act, but should
be subject to section 7701(a)(30) and (31)
as in effect prior to August 20, 1996.
The IRS and the Treasury Department
do not believe that there is statutory au-
thority for adopting the requested grand-
fathering rules for pre-existing foreign
trusts or for applying prior law to group
trust arrangements described in Rev. Rul.
81–100. The election provision included
in TRA 1997 provides specific transition
relief only for trusts that treated them-
selves as domestic trusts prior to August
20, 1996, not for trusts that treated them-
selves as foreign trusts. Therefore, the
final regulations do not include the rec-
ommended transition rules.
2. Foreign trust safe harbor.A com-
mentator recommends that newly-created
trusts established under foreign law should
benefit from a foreign trust safe harbor.
The commentator suggests a safe harbor
that would provide that a trust established
under foreign law, which does not by its
terms provide for administration in the
United States, and which does not file
United States federal income tax returns as
a United States trust will fail the court test
and will be treated as a foreign trust unless
the trust is described in §301.7701–
7(d)(2)(i) or (ii) of the proposed regula-
tions (situations that meet the court test).
Given the statutory bias towards for-
eign trust classification, the IRS and Trea-
sury Department do not agree that a safe
harbor for foreign trusts is necessary be-
cause sufficient guidance is given as to
the circumstances that will cause a trust to
be foreign. Therefore, the final regula-
tions do not include the recommended
rules.
D. Puerto Rico Trusts
The statute uses the term the United
States in a geographical sense and thus,
for purposes of the court test, the United
States includes only the States and the
District of Columbia. See Section
7701(a)(9). Accordingly, a court within a
territory or possession of the United
States is not a court within the United
States and all trusts subject to the supervi-
sion of such a court are thereby foreign.
That rule was stated explicitly in the pro-
posed regulations.
Some commentators argue that adverse
tax consequences result from this rule.
Therefore, they recommend that the final
regulations provide, contrary to what the
statute implies, that Puerto Rico courts
are “courts within the United States” for
purposes of section 7701(a)(30)(E)(i)
and, therefore, that Puerto Rico trusts will
meet the court test.
The final regulations do not adopt the
suggestion. Rather, the final regulations
continue to provide that a trust that is sub-
ject to the primary supervision of the
Puerto Rico courts will be treated as a for-
eign trust for federal tax purposes.
E. Effective date
The proposed regulations provide that
the regulations would be applicable to
trusts for taxable years beginning after
December 31, 1996, and to trusts whose
trustees have elected to apply sections
7701(a)(30) and (31) to the trusts for tax-
able years ending after August 20, 1996,
under section 1907(a)(3)(B) of the SBJP
Act.
The final regulations modify the effec-
tive date in the proposed regulations. Ex-
cept for §301.7701–7(f) of the final regu-
lations, which applies beginning February
2, 1999, the final regulations are applica-
ble to trusts for taxable years ending after
February 2, 1999. In addition, trusts may
rely on the final regulations (i) for taxable
years of the trusts beginning after Decem-
ber 31, 1996, and (ii) for taxable years
ending after August 20, 1996, in the case
of trusts electing under section
1907(a)(3)(B) of the SBJP Act.
If a trust is created after August 19,
1996, and before April 3, 1999, and the
trust satisfies the control test set forth in
the proposed regulations published under
section 7701(a)(30) and (31) (62 F.R.
30796, June 5, 1997), but does not satisfy
the control test set forth in the final regu-
lations, the trust may be modified to sat-
isfy the control test of the final regula-
tions by December 31, 1999. If the
modification is completed by December
31, 1999, the trust will be treated as satis-
fying the control test of the final regula-
tions for taxable years beginning after De-
cember 31, 1996 (and for taxable years
ending after August 20, 1996, if the elec-
tion under section 1907(a)(3)(B) of the
SBJP Act has been made for the trust).
Effect on Other Documents
Notice 98–25 (1998–18 I.R.B. 11) is
obsolete as of February 2, 1999.
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 is hereby certified that the
collections of information in these regula-
tions will not have a significant economic
impact on a substantial number of small
entities. This certification is based upon
the fact that the estimated average burden
per trust in complying with the collection
of information in §301.7701–7(d)(2)(ii)
and (f) is 0.5 hours. In addition, each
trust will only have to file the election
statement to remain a domestic trust once.
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 Code,
the notice of proposed rulemaking pre-
ceding these regulations was submitted to
the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations
is James A. Quinn of the Office of Assis-
tant Chief Counsel (Passthroughs and Spe-
cial Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 301 and
602 are amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
§301.7701–5 [Amended]
Par. 2. The last sentence of §301.7701–
5 is removed.
Par. 3. Section 301.7701–7 is added to
read as follows:
March 1, 1999381999–9 I.R.B.

§301.7701-7 Trusts—domestic and
foreign.
(a) In general.(1) A trust is a United
States person if—
(i) A court within the United States is
able to exercise primary supervision over
the administration of the trust (court test);
and
(ii) One or more United States persons
have the authority to control all substan-
tial decisions of the trust (control test).
(2) A trust is a United States person for
purposes of the Internal Revenue Code
(Code) on any day that the trust meets
both the court test and the control test.
For purposes of the regulations in this
chapter, the term domestic trustmeans a
trust that is a United States person. The
term foreign trustmeans any trust other
than a domestic trust.
(3) Except as otherwise provided in
part I, subchapter J, chapter 1 of the Code,
the taxable income of a foreign trust is
computed in the same manner as the tax-
able income of a nonresident alien indi-
vidual who is not present in the United
States at any time. Section 641(b). Sec-
tion 7701(b) is not applicable to trusts be-
cause it only applies to individuals. In ad-
dition, a foreign trust is not considered to
be present in the United States at any time
for purposes of section 871(a)(2), which
deals with capital gains of nonresident
aliens present in the United States for 183
days or more.
(b) Applicable law. The terms of the
trust instrument and applicable law must
be applied to determine whether the court
test and the control test are met.
(c) The court test—(1) Safe harbor. A
trust satisfies the court test if–
(i) The trust instrument does not direct
that the trust be administered outside of
the United States;
(ii) The trust in fact is administered ex-
clusively in the United States; and
(iii) The trust is not subject to an auto-
matic migration provision described in
paragraph (c)(4)(ii) of this section.
(2) Example.The following example
illustrates the rule of paragraph (c)(1) of
this section:
Example. Acreates a trust for the equal benefit
of A’s two children, Band C. The trust instrument
provides that DC, a State Ycorporation, is the
trustee of the trust. State Yis a state within the
United States. DCadministers the trust exclusively
in State Yand the trust instrument is silent as to
where the trust is to be administered. The trust is not
subject to an automatic migration provision de-
scribed in paragraph (c)(4)(ii) of this section. The
trust satisfies the safe harbor of paragraph (c)(1) of
this section and the court test.
(3)Definitions.The following defini-
tions apply for purposes of this section:
(i) Court.The term court includes any
federal, state, or local court.
(ii) The United States.The term the
United Statesis used in this section in a
geographical sense. Thus, for purposes of
the court test, the United States includes
only the States and the District of Colum-
bia. See section 7701(a)(9). Accordingly,
a court within a territory or possession of
the United States or within a foreign
country is not a court within the United
States.
(iii) Is able to exercise.The term is
able to exercisemeans that a court has or
would have the authority under applicable
law to render orders or judgments resolv-
ing issues concerning administration of
the trust.
(iv) Primary supervision.The term pri-
mary supervisionmeans that a court has or
would have the authority to determine sub-
stantially all issues regarding the adminis-
tration of the entire trust. A court may
have primary supervision under this para-
graph (c)(3)(iv) notwithstanding the fact
that another court has jurisdiction over a
trustee, a beneficiary, or trust property.
(v) Administration.The term adminis-
trationof the trust means the carrying out
of the duties imposed by the terms of the
trust instrument and applicable law, in-
cluding maintaining the books and
records of the trust, filing tax returns,
managing and investing the assets of the
trust, defending the trust from suits by
creditors, and determining the amount
and timing of distributions.
(4) Situations that cause a trust to sat-
isfy or fail to satisfy the court test.(i) Ex-
cept as provided in paragraph (c)(4)(ii) of
this section, paragraphs (c)(4)(i)(A)
through (D) of this section set forth some
specific situations in which a trust satis-
fies the court test. The four situations de-
scribed are not intended to be an exclu-
sive list.
(A) Uniform Probate Code.A trust
meets the court test if the trust is regis-
tered by an authorized fiduciary or fidu-
ciaries of the trust in a court within the
United States pursuant to a state statute
that has provisions substantially similar to
Article VII, Trust Administration,of the
Uniform Probate Code, 8 Uniform Laws
Annotated 1 (West Supp. 1998), available
from the National Conference of Com-
missioners on Uniform State Laws, 676
North St. Clair Street, Suite 1700,
Chicago, Illinois 60611.
(B) Testamentary trust. In the case of a
trust created pursuant to the terms of a
will probated within the United States
(other than an ancillary probate), if all
fiduciaries of the trust have been qualified
as trustees of the trust by a court within
the United States, the trust meets the court
test.
(C) Inter vivos trust.In the case of a
trust other than a testamentary trust, if the
fiduciaries and/or beneficiaries take steps
with a court within the United States that
cause the administration of the trust to be
subject to the primary supervision of the
court, the trust meets the court test.
(D) A United States court and a foreign
court are able to exercise primary super-
vision over the administration of the trust.
If both a United States court and a foreign
court are able to exercise primary supervi-
sion over the administration of the trust,
the trust meets the court test.
(ii) Automatic migration provisions.
Notwithstanding any other provision in
this section, a court within the United
States is not considered to have primary
supervision over the administration of the
trust if the trust instrument provides that a
United States court’s attempt to assert ju-
risdiction or otherwise supervise the ad-
ministration of the trust directly or indi-
rectly would cause the trust to migrate
from the United States. However, this
paragraph (c)(4)(ii) will not apply if the
trust instrument provides that the trust
will migrate from the United States only
in the case of foreign invasion of the
United States or widespread confiscation
or nationalization of property in the
United States.
(5) Examples.The following examples
illustrate the rules of this paragraph (c):
Example 1. A,a United States citizen, creates a
trust for the equal benefit of A’s two children, both
of whom are United States citizens. The trust instru-
ment provides that DC, a domestic corporation, is to
act as trustee of the trust and that the trust is to be
administered in Country X, a foreign country. DC
maintains a branch office in Country Xwith person-
nel authorized to act as trustees in Country X. The
trust instrument provides that the law of State Y, a
1999–9 I.R.B.39March 1, 1999

state within the United States, is to govern the inter-
pretation of the trust. Under the law of Country X, a
court within Country Xis able to exercise primary
supervision over the administration of the trust. Pur-
suant to the trust instrument, the Country Xcourt ap-
plies the law of State Yto the trust. Under the terms
of the trust instrument the trust is administered in
Country X. No court within the United States is able
to exercise primary supervision over the administra-
tion of the trust. The trust fails to satisfy the court
test and therefore is a foreign trust.
Example 2. A, a United States citizen, creates a
trust forA’s own benefit and the benefit of A’s
spouse, B, a United States citizen. The trust instru-
ment provides that the trust is to be administered in
State Y, a state within the United States, by DC, a
State Ycorporation. The trust instrument further
provides that in the event that a creditor sues the
trustee in a United States court, the trust will auto-
matically migrate from State Yto Country Z, a for-
eign country, so that no United States court will have
jurisdiction over the trust. A court within the United
States is not able to exercise primary supervision
over the administration of the trust because the
United States court’s jurisdiction over the adminis-
tration of the trust is automatically terminated in the
event the court attempts to assert jurisdiction.
Therefore, the trust fails to satisfy the court test from
the time of its creation and is a foreign trust.
(d) Control test—(1) Definitions—(i)
United States person. The term United
States personmeans a United States per-
son within the meaning of section
7701(a)(30). For example, a domestic
corporation is a United States person, re-
gardless of whether its shareholders are
United States persons.
(ii) Substantial decisions. The term
substantial decisions means those deci-
sions that persons are authorized or re-
quired to make under the terms of the
trust instrument and applicable law and
that are not ministerial. Decisions that are
ministerial include decisions regarding
details such as the bookkeeping, the col-
lection of rents, and the execution of in-
vestment decisions. Substantial decisions
include, but are not limited to, decisions
concerning–
(A) Whether and when to distribute in-
come or corpus;
(B) The amount of any distributions;
(C) The selection of a beneficiary;
(D) Whether a receipt is allocable to in-
come or principal;
(E) Whether to terminate the trust;
(F) Whether to compromise, arbitrate,
or abandon claims of the trust;
(G) Whether to sue on behalf of the
trust or to defend suits against the trust;
(H) Whether to remove, add, or replace
a trustee;
(I) Whether to appoint a successor
trustee to succeed a trustee who has died,
resigned, or otherwise ceased to act as a
trustee, even if the power to make such a
decision is not accompanied by an unre-
stricted power to remove a trustee, unless
the power to make such a decision is lim-
ited such that it cannot be exercised in a
manner that would change the trust’s resi-
dency from foreign to domestic, or vice
versa; and
(J) Investment decisions; however, if a
United States person under section
7701(a)(30) hires an investment advisor
for the trust, investment decisions made
by the investment advisor will be consid-
ered substantial decisions controlled by
the United States person if the United
States person can terminate the invest-
ment advisor’s power to make investment
decisions at will.
(iii)Control. The term controlmeans
having the power, by vote or otherwise, to
make all of the substantial decisions of
the trust, with no other person having the
power to veto any of the substantial deci-
sions. To determine whether United
States persons have control, it is neces-
sary to consider all persons who have au-
thority to make a substantial decision of
the trust, not only the trust fiduciaries.
(iv) Treatment of certain employee ben-
efit trusts.Provided that United States
fiduciaries control all of the substantial
decisions made by the trustees or fiducia-
ries, the following types of trusts are
deemed to satisfy the control test set forth
in paragraph (a)(1)(ii) of this section–
(A) A qualified trust described in sec-
tion 401(a);
(B) A trust described in section 457(g);
(C) A trust that is an individual retire-
ment account described in section 408(a);
(D) A trust that is an individual retire-
ment account described in section 408(k)
or 408(p);
(E) A trust that is a Roth IRA described
in section 408A;
(F) A trust that is an education individ-
ual retirement account described in sec-
tion 530;
(G) A trust that is a voluntary employ-
ees’ beneficiary association described in
section 501(c)(9);
(H) Such additional categories of trusts
as the Commissioner may designate in
revenue procedures, notices, or other
guidance published in the Internal Rev-
enue Bulletin (see §601.601(d)(2)(ii)(b)).
(v) Examples.The following examples
illustrate the rules of paragraph (d)(1) of
this section:
Example 1. Trust has three fiduciaries, A, B, and
C. Aand Bare United States citizens and Cis a non-
resident alien. No persons except the fiduciaries
have authority to make any decisions of the trust.
The trust instrument provides that no substantial de-
cisions of the trust can be made unless there is una-
nimity among the fiduciaries. The control test is not
satisfied because United States persons do not con-
trol all the substantial decisions of the trust. No sub-
stantial decisions can be made without C’s agree-
ment.
Example 2. Assume the same facts as in Example
1,except that the trust instrument provides that all
substantial decisions of the trust are to be decided by
a majority vote among the fiduciaries. The control
test is satisfied because a majority of the fiduciaries
are United States persons and therefore United
States persons control all the substantial decisions of
the trust.
Example 3.Assume the same facts as in Example
2,except that the trust instrument directs that Cis to
make all of the trust’s investment decisions, but that
Aand Bmay veto C’s investment decisions. Aand B
cannot act to make the investment decisions on their
own. The control test is not satisfied because the
United States persons, Aand B, do not have the
power to make all of the substantial decisions of the
trust.
Example 4.Assume the same facts as in Example
3, except Aand Bmay accept or veto C’s investment
decisions and can make investments that Chas not
recommended. The control test is satisfied because
the United States persons control all substantial de-
cisions of the trust.
(2) Replacement of any person who had
authority to make a substantial decision
of the trust—(i) Replacement within 12
months. In the event of an inadvertent
change in any person that has the power
to make a substantial decision of the trust
that would cause the domestic or foreign
residency of the trust to change, the trust
is allowed 12 months from the date of the
change to make necessary changes either
with respect to the persons who control
the substantial decisions or with respect to
the residence of such persons to avoid a
change in the trust’s residency. For pur-
poses of this section, an inadvertent
change means the death, incapacity, resig-
nation, change in residency or other
change with respect to a person that has a
power to make a substantial decision of
the trust that would cause a change to the
residency of the trust but that was not in-
tended to change the residency of the
trust. If the necessary change is made
within 12 months, the trust is treated as
retaining its pre-change residency during
March 1, 1999401999–9 I.R.B.

the 12-month period. If the necessary
change is not made within 12 months, the
trust’s residency changes as of the date of
the inadvertent change.
(ii) Request for extension of time.If
reasonable actions have been taken to
make the necessary change to prevent a
change in trust residency, but due to cir-
cumstances beyond the trust’s control the
trust is unable to make the modification
within 12 months, the trust may provide a
written statement to the district director
having jurisdiction over the trust’s return
setting forth the reasons for failing to
make the necessary change within the re-
quired time period. If the district director
determines that the failure was due to rea-
sonable cause, the district director may
grant the trust an extension of time to
make the necessary change. Whether an
extension of time is granted is in the sole
discretion of the district director and, if
granted, may contain such terms with re-
spect to assessment as may be necessary
to ensure that the correct amount of tax
will be collected from the trust, its own-
ers, and its beneficiaries. If the district di-
rector does not grant an extension, the
trust’s residency changes as of the date of
the inadvertent change.
(iii) Examples.The following exam-
ples illustrate the rules of paragraphs
(d)(2)(i) and (ii) of this section:
Example 1. Atrust that satisfies the court test has
three fiduciaries, A, B,and C. Aand Bare United
States citizens and Cis a nonresident alien. All deci-
sions of the trust are made by majority vote of the
fiduciaries. The trust instrument provides that upon
the death or resignation of any of the fiduciaries, D,
is the successor fiduciary. Adies and Dautomati-
cally becomes a fiduciary of the trust. When Dbe-
comes a fiduciary of the trust, Dis a nonresident
alien. Two months after Adies, Breplaces Dwith E,
a United States person. Because Dwas replaced
with Ewithin 12 months after the date of A’s death,
during the period after A’s death and before Ebegins
to serve, the trust satisfies the control test and re-
mains a domestic trust.
Example 2.Assume the same facts as in Example
1except that at the end of the 12-month period after
A’s death, Dhas not been replaced and remains a
fiduciary of the trust. The trust becomes a foreign
trust on the date A died unless the district director
grants an extension of the time period to make the
necessary change.
(3) Automatic migration provisions.
Notwithstanding any other provision in
this section, United States persons are not
considered to control all substantial deci-
sions of the trust if an attempt by any gov-
ernmental agency or creditor to collect in-
formation from or assert a claim against
the trust would cause one or more sub-
stantial decisions of the trust to no longer
be controlled by United States persons.
(4) Examples. The following examples
illustrate the rules of this paragraph (d):
Example 1. A, a nonresident alien individual, is
the grantor and, during A’s lifetime, the sole benefi-
ciary of a trust that qualifies as an individual retire-
ment account (IRA). Ahas the exclusive power to
make decisions regarding withdrawals from the IRA
and to direct its investments. The IRA’s sole trustee
is a United States person within the meaning of sec-
tion 7701(a)(30). The control test is satisfied with
respect to this trust because the special rule of para-
graph (d)(1)(iv) of this section applies.
Example 2. A, a nonresident alien individual, is
the grantor of a trust and has the power to revoke the
trust, in whole or in part, and revest assets in A. Ais
treated as the owner of the trust under sections
672(f) and 676. Ais not a fiduciary of the trust. The
trust has one trustee, B, a United States person, and
the trust has one beneficiary, C. Bhas the discretion
to distribute corpus or income to C. In this case, de-
cisions exercisable by Ato have trust assets distrib-
uted to Aare substantial decisions. Therefore, the
trust is a foreign trust because Bdoes not control all
substantial decisions of the trust.
Example 3. Atrust, Trust T, has two fiduciaries,
Aand B. Both Aand Bare United States persons. A
and Bhire C, an investment advisor who is a foreign
person, and may terminate C’s employment at will.
The investment advisor makes the investment deci-
sions for the trust. Aand Bcontrol all other deci-
sions of the trust. Although Chas the power to make
investment decisions, Aand Bare treated as control-
ling these decisions. Therefore, the control test is
satisfied.
Example 4. G, a United States citizen, creates a
trust. The trust provides for income to Aand Bfor
life, remainder to A’s and B’s descendants. Ais a
nonresident alien and Bis a United States person.
The trustee of the trust is a United States person.
The trust instrument authorizes Ato replace the
trustee. The power to replace the trustee is a sub-
stantial decision. Because A, a nonresident alien,
controls a substantial decision, the control test is not
satisfied.
(e) Effective date—(1) General rule.
Except for the election to remain a do-
mestic trust provided in paragraph (f) of
this section, this section is applicable to
trusts for taxable years ending after Feb-
ruary 2, 1999. This section may be relied
on by trusts for taxable years beginning
after December 31, 1996, and also may be
relied on by trusts whose trustees have
elected to apply sections 7701(a)(30) and
(31) to the trusts for taxable years ending
after August 20, 1996, under section
1907(a)(3)(B) of the Small Business Job
Protection Act of 1996, (the SBJP Act)
Public Law 104-188, 110 Stat. 1755 (26
U.S.C. 7701 note).
(2) Trusts created after August 19,
1996. If a trust is created after August 19,
1996, and before April 3, 1999, and the
trust satisfies the control test set forth in
the regulations project REG–251703–96
published under section 7701(a)(30) and
(31) (1997–1 C.B. 795) (See §601.601(d)-
(2) of this chapter), but does not satisfy
the control test set forth in paragraph (d)
of this section, the trust may be modified
to satisfy the control test of paragraph (d)
by December 31, 1999. If the modifica-
tion is completed by December 31, 1999,
the trust will be treated as satisfying the
control test of paragraph (d) for taxable
years beginning after December 31, 1996,
(and for taxable years ending after August
20, 1996, if the election under section
1907(a)(3)(B) of the SBJP Act has been
made for the trust).
(f) Election to remain a domestic
trust—(1) Trusts eligible to make the
election to remain domestic.A trust that
was in existence on August 20, 1996, and
that was treated as a domestic trust on Au-
gust 19, 1996, as provided in paragraph
(f)(2) of this section, may elect to con-
tinue treatment as a domestic trust
notwithstanding section 7701(a)(30)(E).
This election is not available to a trust that
was wholly-owned by its grantor under
subpart E, part I, subchapter J, chapter 1,
of the Code on August 20, 1996. The
election is available to a trust if only a
portion of the trust was treated as owned
by the grantor under subpart E on August
20, 1996. If a partially-owned grantor
trust makes the election, the election is ef-
fective for the entire trust. Also, a trust
may not make the election if the trust has
made an election pursuant to section
1907(a)(3)(B) of the SBJP Act to apply
the new trust criteria to the first taxable
year of the trust ending after August 20,
1996, because that election, once made, is
irrevocable.
(2) Determining whether a trust was
treated as a domestic trust on August 19,
1996—(i) Trusts filing Form 1041 for the
taxable year that includes August 19,
1996.For purposes of the election, a trust
is considered to have been treated as a do-
mestic trust on August 19, 1996, if: the
trustee filed a Form 1041, “U.S. Income
Tax Return for Estates and Trusts,” for the
trust for the period that includes August
1999–9 I.R.B.41March 1, 1999

19, 1996 (and did not file a Form
1040NR, “U.S. Nonresident Alien In-
come Tax Return,” for that year); and the
trust had a reasonable basis (within the
meaning of section 6662) under section
7701(a)(30) prior to amendment by the
SBJP Act (prior law) for reporting as a
domestic trust for that period.
(ii) Trusts not filing a Form 1041.
Some domestic trusts are not required to
file Form 1041. For example, certain
group trusts described in Rev. Rul. 81–
100 (1981–1 C.B. 326) (See §601.601(d)-
(2) of this chapter) consisting of trusts
that are parts of qualified retirement plans
and individual retirement accounts are not
required to file Form 1041. Also, a do-
mestic trust whose gross income for the
taxable year is less than the amount re-
quired for filing an income tax return and
that has no taxable income is not required
to file a Form 1041. Section 6012(a)(4).
For purposes of the election, a trust that
filed neither a Form 1041 nor a Form
1040NR for the period that includes Au-
gust 19, 1996, will be considered to have
been treated as a domestic trust on August
19, 1996, if the trust had a reasonable
basis (within the meaning of section
6662) under prior law for being treated as
a domestic trust for that period and for fil-
ing neither a Form 1041 nor a Form
1040NR for that period.
(3) Procedure for making the election
to remain domestic—(i) Required State-
ment.To make the election, a statement
must be filed with the Internal Revenue
Service in the manner and time described
in this section. The statement must be en-
titled “Election to Remain a Domestic
Trust under Section 1161 of the Taxpayer
Relief Act of 1997,” be signed under
penalties of perjury by at least one trustee
of the trust, and contain the following in-
formation—
(A) A statement that the trust is elect-
ing to continue to be treated as a domestic
trust under section 1161 of the Taxpayer
Relief Act of 1997;
(B) A statement that the trustee had a
reasonable basis (within the meaning of
section 6662) under prior law for treating
the trust as a domestic trust on August 19,
1996. (The trustee need not explain the
reasonable basis on the election state-
ment.);
(C) A statement either that the trust
filed a Form 1041 treating the trust as a
domestic trust for the period that includes
August 19, 1996, (and that the trust did
not file a Form 1040NR for that period),
or that the trust was not required to file a
Form 1041 or a Form 1040NR for the pe-
riod that includes August 19, 1996, with
an accompanying brief explanation as to
why a Form 1041 was not required to be
filed; and
(D) The name, address, and employer
identification number of the trust.
(ii) Filing the required statement with
the Internal Revenue Service.(A) Except
as provided in paragraphs (f)(3)(ii)(E)
through (G) of this section, the trust must
attach the statement to a Form 1041. The
statement may be attached to either the
Form 1041 that is filed for the first tax-
able year of the trust beginning after De-
cember 31, 1996 (1997 taxable year), or
to the Form 1041 filed for the first taxable
year of the trust beginning after Decem-
ber 31, 1997 (1998 taxable year). The
statement, however, must be filed no later
than the due date for filing a Form 1041
for the 1998 taxable year, plus extensions.
The election will be effective for the 1997
taxable year, and thereafter, until revoked
or terminated. If the trust filed a Form
1041 for the 1997 taxable year without
the statement attached, the statement
should be attached to the Form 1041 filed
for the 1998 taxable year.
(B) If the trust has insufficient gross in-
come and no taxable income for its 1997
or 1998 taxable year, or both, and there-
fore is not required to file a Form 1041 for
either or both years, the trust must make
the election by filing a Form 1041 for ei-
ther the 1997 or 1998 taxable year with
the statement attached (even though not
otherwise required to file a Form 1041 for
that year). The trust should only provide
on the Form 1041 the trust’s name, name
and title of fiduciary, address, employer
identification number, date created, and
type of entity. The statement must be at-
tached to a Form 1041 that is filed no later
than October 15, 1999.
(C) If the trust files a Form 1040NR for
the 1997 taxable year based on applica-
tion of new section 7701(a)(30)(E) to the
trust, and satisfies paragraph (f)(1) of this
section, in order for the trust to make the
election the trust must file an amended
Form 1040NR return for the 1997 taxable
year. The trust must note on the amended
Form 1040NR that it is making an elec-
tion under section 1161 of the Taxpayer
Relief Act of 1997. The trust must attach
to the amended Form 1040NR the state-
ment required by paragraph (f)(3)(i) of
this section and a completed Form 1041
for the 1997 taxable year. The items of
income, deduction and credit of the trust
must be excluded from the amended Form
1040NR and reported on the Form 1041.
The amended Form 1040NR for the 1997
taxable year, with the statement and the
Form 1041 attached, must be filed with
the Philadelphia Service Center no later
than the due date, plus extensions, for fil-
ing a Form 1041 for the 1998 taxable
year.
(D) If a trust has made estimated tax
payments as a foreign trust based on ap-
plication of section 7701(a)(30)(E) to the
trust, but has not yet filed a Form 1040NR
for the 1997 taxable year, when the trust
files its Form 1041 for the 1997 taxable
year it must note on its Form 1041 that it
made estimated tax payments based on
treatment as a foreign trust. The Form
1041 must be filed with the Philadelphia
Service Center (and not with the service
center where the trust ordinarily would
file its Form 1041).
(E) If a trust forms part of a qualified
stock bonus, pension, or profit sharing
plan, the election provided by this para-
graph (f) must be made by attaching the
statement to the plan’s annual return re-
quired under section 6058 (information
return) for the first plan year beginning
after December 31, 1996, or to the plan’s
information return for the first plan year
beginning after December 31, 1997. The
statement must be attached to the plan’s
information return that is filed no later
than the due date for filing the plan’s in-
formation return for the first plan year be-
ginning after December 31, 1997, plus ex-
tensions. The election will be effective
for the first plan year beginning after De-
cember 31, 1996, and thereafter, until re-
voked or terminated.
(F) Any other type of trust that is not
required to file a Form 1041 for the tax-
able year, but that is required to file an in-
formation return (for example, Form
5227) for the 1997 or 1998 taxable year
must attach the statement to the trust’s in-
formation return for the 1997 or 1998 tax-
able year. However, the statement must
be attached to an information return that
is filed no later than the due date for filing
March 1, 1999421999–9 I.R.B.

the trust’s information return for the 1998
taxable year, plus extensions. The elec-
tion will be effective for the 1997 taxable
year, and thereafter, until revoked or ter-
minated.
(G) A group trust described in Rev. Rul.
81–100 consisting of trusts that are parts
of qualified retirement plans and individ-
ual retirement accounts (and any other
trust that is not described above and that
is not required to file a Form 1041 or an
information return) need not attach the
statement to any return and should file the
statement with the Philadelphia Service
Center. The trust must make the election
provided by this paragraph (f) by filing
the statement by October 15, 1999. The
election will be effective for the 1997 tax-
able year, and thereafter, until revoked or
terminated.
(iii) Failure to file the statement in the
required manner and time.If a trust fails
to file the statement in the manner or time
provided in paragraphs (f)(3)(i) and (ii) of
this section, the trustee may provide a
written statement to the district director
having jurisdiction over the trust setting
forth the reasons for failing to file the
statement in the required manner or time.
If the district director determines that the
failure to file the statement in the required
manner or time was due to reasonable
cause, the district director may grant the
trust an extension of time to file the state-
ment. Whether an extension of time is
granted shall be in the sole discretion of
the district director. However, the relief
provided by this paragraph (f)(3)(iii) is
not ordinarily available if the statute of
limitations for the trust’s 1997 taxable
year has expired. Additionally, if the dis-
trict director grants an extension of time,
it may contain terms with respect to as-
sessment as may be necessary to ensure
that the correct amount of tax will be col-
lected from the trust, its owners, and its
beneficiaries.
(4) Revocation or termination of the
election—(i) Revocation of election. The
election provided by this paragraph (f) to
be treated as a domestic trust may only be
revoked with the consent of the Commis-
sioner. See sections 684, 6048, and 6677
for the federal tax consequences and re-
porting requirements related to the change
in trust residence.
(ii) Termination of the election.An
election under this paragraph (f) to remain
a domestic trust terminates if changes are
made to the trust subsequent to the effec-
tive date of the election that result in the
trust no longer having any reasonable
basis (within the meaning of section
6662) for being treated as a domestic trust
under section 7701(a)(30) prior to its
amendment by the SBJP Act. The termi-
nation of the election will result in the
trust changing its residency from a do-
mestic trust to a foreign trust on the effec-
tive date of the termination of the elec-
tion. See sections 684, 6048, and 6677
for the federal tax consequences and re-
porting requirements related to the change
in trust residence.
(5) Effective date.This paragraph (f) is
applicable beginning on February 2,
1999.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (c) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part of sectionCurrent OMB
where identified control No.
and described
* * * * *
301.7701–7 . . . . . . . . . . . . . . 1545–1600
* * * * *
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved January 13, 1999.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of Federal Register on February
1, 1999, 8:45 a.m., and published in the isue of the
Federal Register for February 2, 1999, 64 F.R. 4967)
1999–9 I.R.B.43March 1, 1999

March 1, 1999441999–9 I.R.B.
Electronic Funds Transfer —
Temporary Waiver of Failure to
Deposit Penalty for Certain
Taxpayers
Notice 99–12
This notice provides guidance relating
to the waiver of penalties announced in
News Release IR–98–68, issued Novem-
ber 18, 1998. In IR–98–68, the Internal
Revenue Service announced that it will
waive the failure-to-deposit penalty under
§ 6656 of the Internal Revenue Code for
certain taxpayers first required to make
federal tax deposits by electronic funds
transfer beginning on or after July 1,
1997.
BACKGROUND
Section 6302(h)(1)(A) provides that the
Secretary will prescribe regulations nec-
essary for the development and imple-
mentation of an electronic funds transfer
system for the collection of depository
taxes. Section 6302(h)(2) provides a
phase-in schedule for the system.
Section 31.6302–1(h) of the Employ-
ment Taxes and Collection of Income Tax
at Source Regulations prescribes rules for
implementing an electronic funds transfer
system for the collection of depository
taxes. Under the regulation, taxpayers are
required to deposit taxes by electronic
funds transfer if the amount of their de-
pository taxes in a specified earlier year
exceeds the applicable threshold amount.
The regulation provides that taxpayers
with more than $50,000 of federal em-
ployment tax deposits in calendar year
1995 must use electronic funds transfer to
make deposits that are due on or after July
1, 1997, and relate to return periods be-
ginning on or after January 1, 1997. Tax-
payers with more than $50,000 in em-
ployment tax deposits in calendar year
1996 must use electronic funds transfer to
make deposits of taxes relating to return
periods beginning on or after January 1,
1998. Taxpayers with more than $50,000
in employment tax deposits in calendar
year 1997 must begin to use electronic
funds transfer to make deposits of taxes
relating to return periods beginning on or
after January 1, 1999.
In addition, under the regulations, tax-
payers with no employment tax deposits
in either 1995 or 1996, but with more than
$50,000 in other federal tax deposits in ei-
ther 1995 or 1996, must use electronic
funds transfer to make deposits of taxes
relating to return periods beginning on or
after January 1, 1998. Taxpayers with no
employment tax deposits in 1997, but
with more than $50,000 in other federal
tax deposits in 1997, must use electronic
funds transfer to make deposits of taxes
relating to return periods beginning on or
after January 1, 1999.
Section 6656(a) provides that in the
case of any failure by any person to de-
posit taxes on the prescribed date in an
authorized government depository, a
penalty applies unless the failure is due to
reasonable cause and not due to willful
neglect. Rev. Rul. 95–68, 1995–2 C.B.
272, provides that, absent reasonable
cause, a taxpayer that is required to de-
posit federal taxes by electronic funds
transfer is subject to the 10 percent fail-
ure-to-deposit penalty if the taxpayer de-
posits the taxes by means other than elec-
tronic funds transfer.
Notice 97–43, 1997–30 I.R.B. 9, pro-
vides that, in the case of taxpayers first re-
quired to deposit electronically on or after
July 1, 1997, the Internal Revenue Ser-
vice will not impose the failure-to-deposit
penalty under § 6656 solely for the failure
to make the deposit electronically, pro-
vided the deposit is otherwise made in a
timely manner. This waiver applies only
to deposit obligations incurred on or be-
fore December 31, 1997.
Section 931 of the Taxpayer Relief Act
of 1997, Pub. L. No. 105–34, 111 Stat.
881, provides that no penalty shall be im-
posed under the Internal Revenue Code
solely by reason of a failure by a person to
use the electronic fund transfer system es-
tablished under § 6302(h) of the Code if
(1) the person is a member of a class of
taxpayers first required to use such sys-
tem on or after July 1, 1997, and (2) the
failure occurs before July 1, 1998.
Notice 98–30, 1998–22 I.R.B. 9, pro-
vides that, in the case of taxpayers first re-
quired to deposit electronically on or after
July 1, 1997, the Internal Revenue Ser-
vice will not impose the failure to deposit
penalty under § 6656 solely for the failure
to make the deposit electronically pro-
vided the deposit is otherwise made in a
timely manner. This waiver applies only
to deposit obligations incurred on or be-
fore December 31, 1998.
CONTINUED TEMPORARY WAIVER
OF PENALTY FOR CERTAIN
TAXPAYERS
For taxpayers first required to make fed-
eral tax deposits electronically on or after
July 1, 1997, the Service will not impose
the 10 percent § 6656 penalty solely for the
failure to make those deposits by elec-
tronic funds transfer. However, a taxpayer
will remain liable for the failure to deposit
penalty under § 6656 (absent reasonable
cause) if the taxpayer fails to make a re-
quired deposit in a timely manner.
This waiver of the failure to deposit
penalty applies only to deposit obligations
incurred on or before June 30, 1999. The
penalty waiver includes deposits made
after June 30, 1999, provided the deposit
obligation was incurred on or before June
30, 1999.
This waiver of the failure to deposit
penalty does not apply to taxpayers that
were required to begin using electronic
funds transfer in 1995 or 1996.
DRAFTING INFORMATION
The principal author of this notice is
Vincent G. Surabian of the Office of As-
sistant Chief Counsel (Income Tax and
Accounting). For further information re-
garding the penalty waiver, contact Mr.
Surabian at (202) 622-4940 (not a toll-
free call).
Part III. Administrative, Procedural, and Miscellaneous

1999–9 I.R.B.45March 1, 1999
Notice of Proposed Rulemaking
Notice of Public Hearing
Relief From Disqualification for
Plans Accepting Rollovers
REG–245562–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Proposed regulations; amend-
ment.
SUMMARY: This document contains an
amendment to the proposed regulations
that implements section 1509 of the Tax-
payer Relief Act of 1997 (TRA ’97). The
proposed regulations provide guidance on
the qualification of retirement plans
which accept rollover contributions from
employees. This amendment to the pro-
posed regulations clarifies that it is not
necessary for the distributing plan to have
a favorable IRS determination letter in
order for the receiving plan administrator
to reach a reasonable conclusion that a
contribution is a valid rollover contribu-
tion. This amendment applies to any
qualified retirement plan receiving or dis-
tributing eligible rollover distributions.
DATES: Written comments must be re-
ceived by March 17, 1999.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–245562–96),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative, sub-
missions may be hand delivered Monday
through Friday between the hours of 8
a.m. and 5 p.m. to CC:DOM:CORP:R
(REG–245562–96), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
FOR FURTHER INFORMATION CON-
TACT: Marjorie Hoffman, (202) 622-
6030 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On September 22, 1995, Final Income
Tax Regulations (T.D. 8619) under sec-
tions 401(a)(31) and 402(c) were pub-
lished in the Federal Register(60 F.R.
49199). The final regulations provide
guidance for complying with the Unem-
ployment Compensation Amendments of
1992 (UCA). A proposed amendment to
the regulations under section 401(a)(31)
was published in the Federal Registeron
September 19, 1996 (REG–245562–96)
(61 F.R. 49279).
UCA expanded the types of distributions
from a qualified plan that are eligible to be
rolled over to an individual retirement ac-
count or individual retirement annuity, or
to another qualified plan that accepts
rollovers (collectively referred to as eligi-
ble retirement plans). Such distributions
are referred to as eligible rollover distribu-
tions. UCA also added a new qualification
provision under section 401(a)(31) that re-
quires qualified plans to provide employ-
ees with a direct rollover option. Under a
direct rollover option, an employee may
elect to have an eligible rollover distribu-
tion paid directly to an eligible retirement
plan. The direct rollover option is pro-
vided in addition to the pre-existing
rollover provisions under section 402.
Thus, an employee who receives an eligi-
ble rollover distribution but who does not
elect a direct rollover still has the option to
roll over the distribution to an eligible re-
tirement plan within 60 days of receipt.
The final regulations under section
401(a)(31) provide that a plan that accepts
a direct rollover from another plan will
not fail to satisfy section 401(a) or 403(a)
merely because the plan making the dis-
tribution is, in fact, not qualified under
section 401(a) or 403(a) at the time of the
distribution if, prior to accepting the
rollover, the receiving plan reasonably
concluded that the distributing plan was
qualified under section 401(a) or 403(a).
The regulations provide, by way of ex-
ample, that the receiving plan may rea-
sonably conclude that the distributing
plan was qualified under section 401(a) or
403(a) where, before the receiving plan
accepted the rollover, the plan administra-
tor of the distributing plan provided the
receiving plan with a statement that the
distributing plan had received an IRS de-
termination letter indicating that the plan
was qualified.
The relief provided in the 1996 pro-
posed regulations under section
401(a)(31) would expand and clarify the
guidance previously issued in the Final
Income Tax Regulations under sections
401(a)(31) and 402(c). First, the pro-
posed regulations would clarify and ex-
pand the relief from disqualification cur-
rently provided for plans that accept
direct rollovers. The protection would be
expanded to be available not only if the
plan administrator reasonably concludes
the distributing plan is qualified under
section 401(a) or 403(a) (even if later it is
determined that the distributing plan is
not a qualified plan), but also if the plan
administrator reasonably concludes that a
distribution meets the other requirements
to be an eligible rollover distribution (but
later it is determined that this conclusion
was incorrect). Second, the regulations
would extend this expanded relief from
disqualification to plans that accept
rollover contributions other than direct
rollover contributions.
The 1996 proposed regulations do not
mandate any particular documentation or
procedures that a plan administrator must
use in order to reach a reasonable conclu-
sion that a rollover is valid. The 1996
proposed regulations contain a series of
examples to illustrate the types of docu-
mentation and procedures that would be
sufficient to support this conclusion. In
each example, the employee making the
rollover contribution provides the plan
administrator with a letter from the plan
administrator of the distributing plan stat-
ing that the distributing plan has received
an IRS determination letter indicating that
the distributing plan is qualified under
section 401(a). In response to concerns
that the examples might be read to imply
that only a distribution from a plan with a
favorable IRS determination letter could
support a reasonable conclusion that a
rollover was valid, section 1509 of TRA
‘97 directs the IRS to issue guidance clar-
ifying that it is not necessary for the dis-
tributing plan to have a favorable IRS de-
termination letter in order for the plan
Part IV. Items of General Interest

March 1, 1999461999–9 I.R.B.
administrator of the receiving plan to rea-
sonably conclude that a contribution is a
valid rollover contribution.
Explanation of Provisions
This amendment to the 1996 proposed
regulations is being issued in response to
the congressional directive in section 1509
of TRA ’97 to clarify that it is not neces-
sary for a distributing plan to have a favor-
able IRS determination letter in order for
the receiving plan administrator to reason-
ably conclude that a contribution is a valid
rollover contribution. Accordingly, the
proposed regulations have been amended
to provide explicitly that it is not neces-
sary for the distributing plan to have a fa-
vorable IRS determination letter in order
for the plan administrator of the receiving
plan to reach a reasonable conclusion that
a contribution is a valid rollover contribu-
tion. In addition, an example has been
added in which an employee does not pro-
vide a statement from the plan administra-
tor of the distributing plan that the distrib-
uting plan has received a favorable IRS
determination letter, but provides a state-
ment from the distributing plan adminis-
trator relating to the qualification of the
distributing plan. Of course, this example
and the other examples in the 1996 pro-
posed regulations are not intended to de-
scribe the only types of information that a
plan administrator can find to be sufficient
and, thus, the examples are not intended to
preclude reliance on other types of infor-
mation, such as opinions or statements re-
garding the plan’s qualification provided
by appropriate professionals expert in plan
qualification requirements.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because 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.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) or comments transmitted via In-
ternet that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing may be scheduled if
requested in writing by a person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the hearing will
be published in the Federal Register.
Drafting Information
The principal author of these regula-
tions is Pamela R. Kinard, Office of the
Associate Chief Counsel (Employee Ben-
efits and Exempt Organizations), IRS.
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Proposed 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 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.401(a)(31)–1 as pro-
posed on September 19, 1996, at 61 F.R.
49279, is amended as follows:
1. Under Q&A-14, paragraph (a) is
amended by adding a sentence immedi-
ately after the second sentence.
2. Under Q&A-14, paragraph (c) is
amended by redesignating Example 2and
Example 3as Example 3and Example 4
respectively, and adding a new Example 2.
The additions read as follows:
§1.401(a)(31)–1 Requirement to offer
direct rollover of eligible rollover
distributions; questions and answers.
* * * * *
A-14: (a) Acceptance of Invalid
Rollover Contribution.* * * While evi-
dence that the distributing plan is the sub-
ject of a determination letter from the
Commissioner indicating that the distrib-
uting plan is qualified would be useful to
the receiving plan administrator in rea-
sonably concluding that the contribution
is a valid rollover contribution, it is not
necessary for the distributing plan to have
such a determination letter in order for the
receiving plan administrator to reach that
conclusion. * * *
* * * * *
(c) Examples.* * *
Example 2.(a) The facts are the same as Example
1,except that, instead of the letter provided in para-
graph (c) of Example 1,Employee A provides the
plan administrator of Plan M with a letter from the
plan administrator of Plan O representing that Plan
O satisfies the requirements of section 401(a) (or
representing that Plan O is intended to satisfy the re-
quirements of section 401(a) and that the adminis-
trator of Plan O is not aware of any Plan O provision
or operation that would result in the disqualification
of Plan O).
(b) Based upon such a letter, absent facts to the
contrary, a plan administrator may reasonably con-
clude that Plan O is qualified and that the amount
paid as a direct rollover is an eligible rollover distri-
bution.
* * * * *
John M. Dalrymple,
Acting Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on De-
cember 18, 1998, 8:45 a.m., and published in the
issue of the Federal Register for December 21, 1998,
63 F.R. 70356)
Notice of Proposed Rulemaking
Notice of Public Hearing
Communications Excise Tax;
Prepaid Telephone Cards
REG–118620–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed rules for the application of the
communications excise tax to prepaid
telephone cards (PTCs). The regulations

1999–9 I.R.B.47March 1, 1999
implement certain changes made by the
Taxpayer Relief Act of 1997. They affect
certain telecommunications carriers, re-
sellers, and purchasers of PTCs. This
document also provides notice of a public
hearing on these proposed regulations.
DATES: Written comments must be re-
ceived by, March 17, 1998. Outlines of
topics to be discussed at the public hear-
ing scheduled for May 5, 1999, must be
received by April 14, 1999.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–118620–97),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–118620–97),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS In-
ternet site at http://www.irs.ustreas.gov/
prod/tax_regs/comments.html. The pub-
lic hearing will be held in room 2615, In-
ternal Revenue Building, 1111 Constitu-
tion Avenue NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the hearing, submis-
sion of written comments, and to be
placed on the building access list to attend
the hearing, LaNita VanDyke, (202) 622-
7180; concerning the regulations, Bernard
H. Weberman (202) 622-3130 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget for review in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). Com-
ments on the collection of information
should be sent to the Office of Manage-
ment and Budget, Attn: Desk Officer
for the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service,Attn: IRS
Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224. Comments on
the collection of information should be re-
ceived by, February 16, 1998. Comments
are specifically requested concerning:
Whether the proposed collection of in-
formation is necessary for the proper
performance of the functions of the Inter-
nal Revenue Service,including whether
the information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of service to provide information.
The collection of information in this
proposed regulation is in §49.4251–
4(d)(2). This information is required to
document the status of certain purchasers
of PTCs. The collection of information is
required to obtain a benefit. The likely
respondents and recordkeepers are busi-
nesses and small businesses.
Estimated total annual reporting bur-
den: 24 hours.
Estimated average burden per respon-
dent: .25 hour.
Estimated number of respondents: 96.
Estimated annual frequency of re-
sponses: On occasion.
Estimated total annual recordkeeping
burden: 10 hours.
Estimated average annual burden per
recordkeeper: 1.2 hours.
Estimated number of recordkeepers: 8.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become 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 4251 imposes a 3 percent ex-
cise tax on amounts paid for three com-
munications services: local telephone
service, toll telephone service, and tele-
typewriter exchange service. The tax is
paid by the person paying for those com-
munications services and, under section
4291, is collected by the person receiving
that payment.
Section 1034 of the Taxpayer Relief
Act of 1997 added section 4251(d), effec-
tive November 1, 1997, which provides
special rules for the treatment of PTCs.
Under section 4251(d), a PTC is any card
or similar arrangement that permits its
holder to obtain communications services
and to pay for such services in advance.
The face amount of the PTC is treated as
an amount paid for communications ser-
vices and that amount is treated as paid
when the PTC is transferred by any
telecommunications carrier to any person
that is not a carrier.
Explanation of Provisions
These proposed regulations provide
rules relating to the imposition of tax, the
determination of the face amount upon
which tax is imposed, and the identifica-
tion of the person liable for tax and the
person responsible for collecting tax. The
purpose of the rules for determining the
face amount is to implement Congres-
sional intent that the tax be imposed on a
PTC’s retail value, whether a carrier sells
a PTC at retail or at wholesale to a trans-
feree reseller. In certain limited circum-
stances, these rules permit the use of a
safe harbor under which the face amount
is equal to $0.30 per minute of service
provided. Because the IRS and Treasury
expect the retail value of PTCs to change
over time and intend to review the per-
minute rate at regular intervals, this safe
harbor expires on December 31, 2001.
For purposes of determining whether a
transferor is a carrier and whether a trans-
feree is a person that is not a carrier, the
proposed regulations adopt the definition
of telecommunications carrier used by the
Federal Communications Commission.
In general, this definition treats any
provider of telecommunications service
as a telecommunications carrier. In addi-
tion, the proposed regulations provide
that a transferor carrier is not responsible

March 1, 1999481999–9 I.R.B.
for collecting the tax if it has been noti-
fied, in writing, by the purchaser of the
purchaser’s status as a carrier and has no
reason to believe otherwise. Providing
that notification does not relieve the pur-
chaser from liability for tax if the pur-
chaser is not, in fact, a carrier. Further-
more, the rules in the Excise Tax
Procedural Regulations (26 CFR part 40)
relating to collectors of tax under chapter
33 of the Internal Revenue Code do not
apply to noncarrier purchasers.
During the development of the pro-
posed regulations, the IRS and Treasury
received inquiries concerning the treat-
ment of multi-use cards and enhanced ser-
vices cards. Multi-use cards are PTCs
that can also be used to purchase items
other than communications services, such
as gas, groceries, etc. Enhanced services
cards are PTCs that can also be used to
purchase nontaxable informational ser-
vices such as stock quotations or access to
a 900 number. The proposed regulations
do not include special rules for multi-use
or enhanced services cards. However, the
IRS and Treasury request comments on
this issue.
The regulations are proposed to be ef-
fective at the beginning of the first calen-
dar quarter after they are published as
final regulations. Carriers and transferees
may, however, rely on the proposed rules
in determining the treatment of PTCs
transferred before the effective date.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. It is hereby certified that the collec-
tion of information in these regulations
will not have a significant economic im-
pact on a substantial number of small en-
tities. This certification is based on the
fact that the time required to prepare or
retain the notification is minimal and will
not have a significant impact on those
small entities that are required to provide
notification. Furthermore, notification is
provided only once to each seller. Ac-
cordingly, a Regulatory Flexibility Analy-
sis under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pur-
suant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for Wednesday, May 5, 1999, at 10 a.m. in
room 2615, Internal Revenue Building,
1111 Constitution Avenue NW, Washing-
ton, DC. Due to building security proce-
dures, visitors must enter at the 10th
Street entrance, located between Consti-
tution and Pennsylvania Avenues, NW. In
addition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate en-
trance area more than 15 minutes before
the hearing starts. For information about
having a visitor’s name placed on the
building access list to attend the hearing,
see the FOR FURTHER INFORMATION
CONTACT caption.
An outline of the topics to be discussed
and the time to be devoted to each topic (a
signed original and eight (8) copies) must
be submitted by any person that wishes to
present oral comments at the hearing.
Outlines must be received by April 14,
1999.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. A period of 10 min-
utes will be allotted to each person for
making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving requests to speak
has passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Bernard H. Weberman, Office of
Assistant Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and Treasury De-
partment participated in their develop-
ment.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 49 is pro-
posed to be amended as follows:
PART 49—FACILITIES AND
SERVICES EXCISE TAXES
Paragraph 1. The authority citation for
part 49 is revised to read as follows:
Authority: 26 U.S.C. 7805, unless oth-
erwise noted.
Section 49.4251–4 also issued under 26
U.S.C. 4251(d).
Par. 2. Section 49.4251–4 is added to
read as follows:
§49.4251–4 Prepaid telephone cards.
(a) In general. In the case of communi-
cations services acquired by means of a
prepaid telephone card (PTC), the face
amount of the PTC is treated as an
amount paid for communications services
and that amount is treated as paid when
the PTC is transferred by any carrier to
any person that is not a carrier. This sec-
tion provides rules for the application of
the section 4251 tax to PTCs.
(b) Definitions.
Carriermeans a telecommunications
carrier as defined in 47 U.S.C. 153.
Comparable PTCmeans a currently
available dollar card or tariffed unit card
(other than a PTC transferred in bulk or
under special circumstances, such as for
promotional purposes) that provides the
same type and amount of communications
services as the PTC to which it is being
compared.
Dollar cardmeans a PTC the value of
which is designated by the carrier in dol-
lars (even if also designated in units of
service), provided that the designated
value is not less than the amount for
which the PTC is expected to be sold to a
holder.
Holdermeans a person that purchases
other than for resale.
Prepaid telephone card (PTC)means a
card or similar arrangement that permits
its holder to obtain a fixed amount of
communications services by means of a
code (such as a personal identification
number (PIN)) or other access device pro-

1999–9 I.R.B.49March 1, 1999
vided by the carrier and to pay for those
services in advance.
Tariffmeans a schedule of rates and
regulations filed by a carrier with the Fed-
eral Communications Commission.
Tariffed unit cardmeans a unit card
that is transferred by a carrier—
(1) To a holder at a price that does not
exceed the designated number of units on
the PTC multiplied by the carrier’s tar-
iffed price per unit; or
(2) To a transferee reseller subject to a
contractual or other arrangement under
which the price at which the PTC is sold
to a holder will not exceed the designated
number of units on the PTC multiplied by
the carrier’s tariffed price per unit.
Transfereemeans the first person that
is not a carrier to whom a PTC is trans-
ferred by a carrier.
Transferee resellermeans a transferee
that purchases a PTC for resale.
Unit cardmeans a PTC other than a
dollar card.
Untariffed unit cardmeans a unit card
other than a tariffed unit card.
(c) Determination of face amount—(1)
Dollar card.The face amount of a dollar
card is the designated dollar value.
(2) Tariffed unit card.The face amount
of a tariffed unit card is the designated
number of units on the PTC multiplied by
the tariffed price per unit.
(3) Untariffed unit card—(i) Transfer
to holder.The face amount of an untar-
iffed unit card transferred by a carrier to a
holder is the amount for which the carrier
sells the PTC to the holder.
(ii) Transfer to transferee reseller—(A)
In general.The face amount of an untar-
iffed unit card transferred by a carrier to a
transferee reseller is, at the option of the
carrier,—
(1) The highest amount for which the
carrier sells an identical PTC to a holder
that ordinarily would not be expected to
buy more than one such PTC at a time (if
the carrier makes such sales on a regular
and arm’s-length basis) or the face
amount of a comparable PTC (if the car-
rier does not make such sales on a regular
and arm’s-length basis);
(2) 165 percent of the amount for
which the carrier sells the PTC to the
transferee reseller (including in that
amount, in addition to any sum certain
fixed at the time of the sale, any contin-
gent amount per unit multiplied by the
designated number of units on the PTC);
or
(3) If the PTC is transferred before Jan-
uary 1, 2002, and is of a type that ordinar-
ily is used entirely for domestic commu-
nications service, $0.30 multiplied by the
maximum number of minutes of domestic
communications service on the PTC.
(B) Sales not at arm’s length.In the
case of a transfer of an untariffed unit
card by a carrier to a transferee reseller
otherwise than through an arm’s-length
transaction, the fair market retail value of
the PTC shall be substituted for the
amount determined in paragraph (c)(3)-
(ii)(A)(2) of this section.
(4) Exclusion.Any separately stated
state or local tax imposed on the furnish-
ing or sale of communications services
and any separately stated section 4251 tax
are disregarded in determining, for pur-
poses of this paragraph (c), the amount
for which a PTC is sold.
(d) Liability for tax—(1) In general.
Under section 4251(d), the section
4251(a) tax is imposed on the transfer of a
PTC by a carrier to a transferee. The per-
son liable for the tax is the transferee. Ex-
cept as provided in paragraph (d)(2) of
this section, the person responsible for
collecting the tax is the carrier transfer-
ring the PTC to the transferee. If a holder
purchases a PTC from a transferee re-
seller, the amount the holder pays for the
PTC is not treated as an amount paid for
communications services and thus tax is
not imposed on that payment.
(2) Effect of statement that purchaser is
a carrier—(i) On transferor.A carrier
that transfers a PTC to a purchaser is not
responsible for collecting the tax if, at the
time of transfer, the transferor carrier has
received written notification from the pur-
chaser that the purchaser is a carrier, and
the transferor has no reason to believe
otherwise. The notification to be pro-
vided by the purchaser is a statement,
signed under penalties of perjury by a per-
son with authority to bind the purchaser,
that the purchaser is a carrier (as defined
in paragraph (b) of this section). The
statement is not required to take any par-
ticular form.
(ii) On purchaser.If a purchaser that is
not a carrier provides the notification de-
scribed in paragraph (d)(2)(i) of this sec-
tion to the carrier that transfers a PTC, the
purchaser remains liable for the tax im-
posed on the transfer of the PTC.
(3) Exemptions.Any exemptions avail-
able under section 4253 apply to the
transfer of a PTC from a carrier to a
holder. Section 4253 does not apply to
the transfer of a PTC from a carrier to a
transferee reseller.
(e) Examples.The following examples
illustrate the provisions of this section:
Example 1. Unit card; sold to individual.(i) On
February 1, 2000, A, a carrier, sells a prepaid tele-
phone cardat A’s retail store to P, an individual, for
P’s use in making telephone calls. A provides P with
a PIN. The face of the card is marked “400 min-
utes.” The sales price is $100. A tariff has not been
filed for the units on the card. The toll telephone
service acquired by purchasing the card will be ob-
tained by entering the PIN and the telephone number
to be called.
(ii) Because P purchased from a carrier other than
for resale, P is a holder. The card provides its
holder, P, with a fixed amount of communications
services (400 minutes of toll telephone service) to be
obtained by means of a PIN, for which P pays in ad-
vance of obtaining service; therefore, the card is a
PTC. Because the value of the PTC is not desig-
nated in dollars and a tariff has not been filed for the
units on the PTC, the PTC is an untariffed unit card.
Because it is transferred by the carrier to the holder,
the face amount is the sales price ($100).
(iii) The card is a PTC; thus, under section
4251(d), the face amount is treated as an amount
paid for communications services and that amount is
treated as paid when the PTC is transferred from A
to P. Accordingly, at the time of transfer, P is liable
for the 3 percent tax imposed by section 4251(a).
The tax is $3 (3% 3$100 (the face amount of the
PTC)). Thus, the total paid by P is $103, the $100
sales price plus $3 tax. A is responsible for collect-
ing the tax from P.
Example 2. Unit card; given to individual. (i)
The facts are the same as in Example 1,except that
instead of selling a card, A gives a 40 minute card to
P.
(ii) Although the card provides P with a fixed
amount of communications services (40 minutes of
toll telephone service) to be obtained by means of a
PIN, P does not pay for the service. Therefore, the
card is not a PTC, even though it is called a “prepaid
telephone card” by A.
(iii) Because the card is not a PTC, section
4251(d) does not apply. Furthermore, no tax is im-
posed by section 4251(a) because no amount is paid
for the communications services.
Example 3.Unit card; adding value. (i) After
using the card described in Example 2,P arranges
with A by telephone to have 400 minutes of toll tele-
phone service added to the card. The sales price is
$100. P is told to continue using the PIN provided
with the card.
(ii) Because P purchased from a carrier other than
for resale, P is a holder. The arrangement provides
its holder, P, with a fixed amount of communications
services (400 minutes of toll telephone service) to be

March 1, 1999501999–9 I.R.B.
obtained by means of a PIN, for which P pays in ad-
vance of obtaining service; therefore, the arrange-
ment is a PTC. Because the value of the PTC is not
designated in dollars and a tariff has not been filed
for the units on the PTC, the PTC is an untariffed
unit card. Because it is transferred by the carrier to
the holder, the face amount is the sales price ($100).
(iii) The arrangement is a PTC; thus, under sec-
tion 4251(d), the face amount is treated as an
amount paid for communications services and that
amount is treated as paid when the PTC is trans-
ferred from A to P. Accordingly, at the time of trans-
fer, P is liable for the 3 percent tax imposed by sec-
tion 4251(a). The tax is $3 (3% 3$100 (the face
amount of the PTC)). Thus, the total paid by P is
$103, the $100 sales price plus $3 tax. A is responsi-
ble for collecting the tax from P.
Example 4. Dollar card; sold other than for re-
sale. (i) On February 1, 2000, B, a carrier, sells
100,000 prepaid telephone cards to Q, an auto
dealer. Q will give away a card to each person that
visits Q’s dealership. B provides Q with a PIN for
each card. The face of each card is marked “$2.”
The sales price for the 100,000 cards is $50,000.
The toll telephone service acquired by purchasing
the card will be obtained by entering the PIN and the
telephone number to be called.
(ii) Because Q purchased from a carrier other
than for resale, Q is a holder. Each card provides its
holder, Q, with a fixed amount of communications
services ($2 of toll telephone service) to be obtained
by means of a PIN, for which Q pays in advance of
obtaining service; therefore, each card is a PTC even
though Q’s visitors do not pay for the cards. The
value of each PTC is designated in dollars; there-
fore, each PTC is a dollar card. Because the PTC is
a dollar card, the face amount is the designated dol-
lar value ($2).
(iii) The cards are PTCs; thus, under section
4251(d), the face amount is treated as an amount
paid for communications services and that amount is
treated as paid when the PTCs are transferred from
B to Q. Accordingly, at the time of transfer, Q is li-
able for the 3 percent tax imposed by section
4251(a). The amount of the tax is computed as fol-
lows: 3% 3$2 (the face amount of the PTC) =
$0.06 per PTC 3100,000 PTCs = $6,000 tax. Thus,
the total paid by Q is $56,000, the $50,000 sales
price plus $6,000 tax. B is responsible for collecting
the tax from Q.
Example 5. Unit card; sold to transferee reseller.
(i) On February 1, 2000, C, a carrier, sells 10,000
prepaid telephone cards to R, a convenience store
owner. R will sell the cards to individuals for their
own use. C provides R with a PIN for each card.
The face of each card is marked “400 minutes.” A
tariff has not been filed for the units on the card. C’s
sales price to R is $40,000 to be paid at the time of
sale, plus a contingent amount equal to $0.14 for
each minute of service used within 12 months to be
paid at the end of the 12-month period. C also sells
the identical card at its retail store for $110 to cus-
tomers purchasing one card, or for $90 each to cus-
tomers purchasing five or more cards. The toll tele-
phone service acquired by purchasing the card will
be obtained by entering the PIN and the telephone
number to be called.
(ii) Because R purchased from a carrier for re-
sale, R is a transferee reseller. Because R’s cus-
tomers will purchase other than for resale they will
be holders. Each card sold by R provides its holder,
R’s customer, with a fixed amount of communica-
tions services (400 minutes of toll telephone service)
to be obtained by means of a PIN, for which R’s cus-
tomer pays in advance of obtaining service; there-
fore, each card is a PTC. Because the value of each
PTC is not designated in dollars and a tariff has not
been filed for the units on the PTC, each PTC is an
untariffed unit card.
(iii) The PTCs are untariffed unit cards trans-
ferred by the carrier to a transferee reseller. Thus,
the face amount is determined under paragraph
(c)(3)(ii) of this section, which permits C to choose
from three alternative methods. Under paragraph
(c)(3)(ii)(A)(1) of this section, the face amount of
each PTC would be $110, the highest amount for
which C sells to customers purchasing a single PTC.
Alternatively, under paragraph (c)(3)(ii)(A)(2) of
this section, a face amount of $99 per PTC may be
used. This face amount is computed as follows:
165% 3$600,000 (the $40,000 sum certain plus the
$560,000 contingent amount (10,000 PTCs 3400
units = 4,000,000 units 3$0.14 per unit)) =
$990,000 410,000 (the total number of PTCs sold).
Finally, under paragraph (c)(3)(ii)(A)(3) of this sec-
tion (assuming the PTCs are of a type that ordinarily
is used entirely for domestic communications ser-
vices), a face amount of $120 ($0.30 per unit 3400
units) may be used.
(iv) The cards are PTCs; thus, under section
4251(d), the face amount is treated as an amount
paid for communications services and that amount is
treated as paid when the PTCs are transferred from
C to R. Accordingly, at the time of transfer, R is li-
able for the 3 percent tax imposed by section
4251(a). The amount of the tax is computed as fol-
lows (assuming that C chooses to determine the face
amount as provided in paragraph (c)(3)(ii)(A)(2) of
this section): 3% 3$99 (the face amount of the
PTC) = $2.97 per PTC 310,000 PTCs = $29,700
tax. Thus, the total paid by R at the time of transfer
is $69,700, the $40,000 sum certain plus $29,700
tax. C is responsible for collecting the tax from R.
(v) In 2000 and 2001, R sells PTCs to its cus-
tomers for varying amounts. Because any amount
paid for a PTC purchased from a transferee reseller
is not an amount paid for communications services,
no tax is imposed on R’s sale of a PTC.
(vi) On February 15, 2001, C informs R that
3,000,000 minutes were used during the 12-month
period. R pays C $420,000 ($0.14 33,000,000), the
contingent amount agreed to when R purchased the
PTCs. No tax is imposed on this payment. Tax was
imposed when the PTCs were transferred to R. The
contingent amount paid in 2001, based on the num-
ber of minutes used, does not change R’s tax liability.
Example 6. Tariffed unit card; sold to transferee
reseller. (i) On February 1, 2000, D, a carrier, sells
1,000 prepaid telephone cards to S, a convenience
store owner, for $25,000. The value of the cards is
not denominated in dollars, but the face of the card
is marked “100 minutes” and a tariff of $0.33 per
minute has been filed for the units on the card. S
agrees that it will sell the cards to individuals for
their own use and at a price that does not exceed
$0.33 per minute. S actually sells the cards for $30
each (i.e., at a price of $0.30 per minute). D pro-
vides S with a PIN for each card. The toll telephone
service acquired by purchasing the card will be ob-
tained by entering the PIN and the telephone number
to be called.
(ii) Because S purchased from a carrier for resale,
S is a transferee reseller. Because S’s customers will
purchase other than for resale they will be holders.
Each card sold by S provides its holder, S’s cus-
tomer, with a fixed amount of communications ser-
vices (100 minutes of toll telephone service) to be
obtained by means of a PIN, for which S’s customer
pays in advance of obtaining service; therefore each
card is a PTC. Because the value of each PTC is not
designated in dollars and D sells the PTCs to S sub-
ject to an arrangement under which the price at
which the PTCs are sold to holders will not exceed
the designated number of units on the PTC multi-
plied by D’s tariffed price per unit, each PTC is an
tariffed unit card. Because the PTCs are tariffed unit
cards, the face amount of each PTC is $33, the des-
ignated number of units on the PTC multiplied by
the tariffed price per unit (100 3$0.33 = $33), even
though the actual retail sale price of the cards is $30.
(iii) The cards are PTCs; thus, under section
4251(d), the face amount is treated as an amount
paid for communications services and that amount is
treated as paid when the PTC is transferred from D
to S. Accordingly, at the time of transfer, S is liable
for the 3 percent tax imposed by section 4251(a).
The tax is $990 (3% 3$33,000 (1,000 PTCs multi-
plied by the $33 face amount of each PTC)). Thus,
the total paid by S is $25,990, the $25,000 sales
price plus $990 tax. D is responsible for collecting
the tax from S.
Example 7.Transfer of card that is not a PTC. (i)
On February 1, 2000, E, a carrier, provides a tele-
phone card to T, an individual, for T’s use in making
telephone calls. E provides T with a PIN. The card
provides access to an unlimited amount of commu-
nications services. E charges T $0.25 per minute of
service, and bills T monthly for services used. The
communications services acquired by using the card
will be obtained by entering the PIN and the tele-
phone number to be called.
(ii) Although the communications services will
be obtained by means of a PIN, T does not receive a
fixed amount of communications services. Also, T
cannot pay in advance since the amount of T’s pay-
ment obligation depends upon the number of min-
utes used. Therefore, the card is not a PTC.
(iii) Because the card is not a PTC, section
4251(d) does not apply. However, the tax imposed
by section 4251(a) applies to the amounts paid by T
to E for communications services. Accordingly, at
the time an amount is paid for communications ser-
vices, T is liable for tax. E is responsible for collect-
ing the tax from T.
(f) Effective date.This section is ap-
plicable with respect to PTCs transferred
by a carrier on or after the first day of the
first calendar quarter beginning after the
date of publication of the final regulations
in the Federal Register.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.

(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. 69585)
Notice of Proposed Rulemaking
Notice of Public Hearing
Acquisition of an S Corporation
by a Member of a Consolidated
Group
REG–106219–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations under section 1502.
The proposed regulations provide specific
rules that apply to the acquisition of the
stock of an S corporation by an affiliated
group of corporations that joins in the fil-
ing of a consolidated return. These rules
eliminate the compliance burdens associ-
ated with filing a separate return for the
day that an S corporation is acquired by a
consolidated group. Additionally, the
proposed regulations clarify that
§1.1502–76(c) continues to provide rules
for the filing of the separate return for a
corporation’s items for the period not in-
cluded in the consolidated return. This
document also provides notice of a public
hearing on these proposed regulations.
DATES: Written comments must be re-
ceived by March 10, 1999. Outlines of
topics to be discussed at the public hear-
ing scheduled for March 31, 1999, at 10
a.m. must be received by March 17, 1999.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–106219–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to
CC:DOM:CORP:R (REG–106219–98),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS In-
ternet site at: http://www.irs.ustreas.gov/
prod/tax_regs/comments.html. The pub-
lic hearing will be held in room 2615, In-
ternal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Jef-
frey L. Vogel, (202) 622-7770; concern-
ing submissions, the hearing, and/or to be
placed on the building access list to attend
the hearing, LaNita Van Dyke, (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under section 1502
of the Internal Revenue Code of 1986 (the
consolidated return regulations). The
amendments apply to acquisitions by a
consolidated group of at least eighty per-
cent of the stock of an S corporation.
When a consolidated group acquires an S
corporation, the interaction of the consoli-
dated return regulations and the subchap-
ter S rules requires the filing of a separate
return for the day of the acquisition. In
most situations, complying with this re-
quirement results in an unnecessary ad-
ministrative burden for taxpayers.
The proposed regulations also clarify
the impact of the 1994 revisions to
§1.1502–76(b) (T.D. 8560, 1994–2 C.B.
200). The 1994 revisions provided tax-
payers greater certainty and prevented in-
consistent allocations of items between a
separate and a consolidated return. The
proposed regulations clarify that the due
date for the filing of the separate return
for the period not included in the consoli-
dated return continues to be governed by
the rules in §1.1502–76(c).
Acquisition of an S Corporation
Section 1.1502–76(b)(1)(i) provides
that a consolidated return must include
the common parent’s items of income,
gain, deduction, loss, and credit for the
consolidated return year and each sub-
sidiary’s items for the portion of the year
for which the subsidiary is a member.
Generally under §1.1502–76(b)(1)(ii)(A),
a subsidiary becomes a member of the
consolidated group at the end of the day
on which its status as a member changes,
and its tax year ends at that time for all
Federal income tax purposes. The sub-
sidiary’s items for the period beginning
on the day after it becomes a member of
the consolidated group are generally in-
cluded in the consolidated return of the
group. The subsidiary’s items for the pe-
riod prior to its becoming a member gen-
erally are included in a separate return.
A small business corporation’s election
under section 1362(a) to be an S corpora-
tion terminates under section 1362(d)(2)
if it ceases to be a small business corpora-
tion. A small business corporation cannot
have a corporate shareholder. Thus, an S
corporation election terminates when the
corporation has another corporation as a
shareholder. The termination is effective
on the day the corporation becomes a
shareholder. When the termination of an
S corporation election becomes effective
on any day other than the first day of the
taxable year, the taxable year in which the
termination occurs is an S termination
year under section 1362(e)(4). The S ter-
mination year is comprised of a short tax-
able year for which the corporation is an S
corporation (the portion of the S termina-
tion year ending on the day before the ter-
minating event occurs, or S short year)
and a short taxable year for which the cor-
poration is a C corporation (the remainder
of the S termination year, or C short year).
Under section 1362(e)(6)(D), if there is
a change in ownership of 50 percent or
more of the stock in a corporation during
the S termination year, items of income,
gain, loss, deduction, and credit must be
allocated between the S short year and the
C short year on the basis of the corpora-
tion’s normal method of accounting, as
determined under section 446 (also re-
ferred to as a closing of the corporation’s
books) as of the close of the S short year,
rather than a daily proration or other
method. The S short year and the C short
year are treated as two separate taxable
years for most purposes. Separate returns
are required for the S short year and the C
short year, and the due date for the S short
year return is the date by which the C
short year return must be filed.
When an S corporation becomes a
member of a consolidated group, the in-
teraction of the consolidated return regu-
lations and the subchapter S rules results
in the corporation having three taxable
periods for the year of the acquisition for
1999–9 I.R.B.51March 1, 1999

which Federal income tax returns are due:
(1) an S short year that ends on the day
before the acquisition by the consolidated
group, (2) a C short year consisting solely
of the day of the acquisition, and (3) a
short taxable year (included in the consol-
idated return) for any items occurring
after the day of the acquisition. Although
three separate taxable periods are created
when an S corporation becomes a mem-
ber of a consolidated group, existing rules
preclude an allocation of items properly
attributable to either the C short year or
the consolidated year to the S short year,
for example, through a daily proration of
the items attributable to the year of the ac-
quisition. Section 1362(e)(6)(D).
The IRS and Treasury have determined
that the compliance burdens associated
with filing a separate return for the day
that an S corporation is acquired by a con-
solidated group are not necessary to
achieve the separate goals of section
1362(e) and the consolidated return regu-
lations. The proposed regulations will
eliminate this requirement in most situa-
tions, while preserving the purpose and ef-
fect of the rules under section 1362(e).
These proposed regulations will not apply,
however, if an S corporation becomes a
member of a consolidated group in a qual-
ified stock purchase for which an election
under section 338(g) is made. If the com-
mon parent of the consolidated group and
the shareholders of the S corporation
jointly make a section 338(h)(10) election,
the administrative relief provided by these
proposed regulations is unnecessary be-
cause the S corporation election of the old
target corporation does not terminate. See
§1.338(h)(10)–1(e)(2)(iv).
Under the proposed regulations, an S
corporation will become a member of the
consolidated group at the beginning of the
day that includes the acquisition, and its
tax year will end for all Federal income
tax purposes at the end of the day preced-
ing the acquisition. Thus, instead of three
short taxable years, the corporation will
have two short taxable years as a result of
the acquisition: (1) the period ending on
the day before the S corporation joins the
consolidated group, which will be treated
as a taxable year in which the corporation
was an S corporation, and (2) the period
during which the corporation is a member
of the consolidated group. The termina-
tion of an S corporation election under
section 1362(d)(2) continues to become
effective on the day of the acquisition.
However, because the consolidated return
regulations create a separate taxable year
for the corporation, the first day of which
is the day on which the S corporation
election terminates, there is no S termina-
tion year within the meaning of section
1362(e)(4). Consequently, section
1362(e) technically does not apply to the
corporation.
Notwithstanding that there is no there is
no S termination year, the proposed regula-
tions provide rules similar to those that
would have applied under section 1362(e).
Under the proposed regulations, as under
section 1362(e)(1)(A), the S corporation’s
short taxable year ends at the end of the
day preceding the date of the acquisition.
The Federal income tax return for the final
taxable year of the S corporation will be
due at the earlier of: (1) the date the S cor-
poration return would have been due if the
taxable year of the S corporation did not
end or (2) the date the consolidated group’s
return for the taxable year that includes the
acquisition is due.
These proposed regulations also pre-
clude the availability of ratable allocation
under §1.1502–76(b)(2)(ii) and (iii) in
order to achieve the same results that
would have obtained if section 1362(e)-
(6)(D) had applied. Accordingly, if an S
corporation joins a consolidated group and
these proposed regulations apply, then
items must be allocated between the two
short taxable years that begin and end with
the corporation joining the consolidated
group on the basis of a closing of the books
rather than a ratable allocation of the type
that would have been available under sec-
tion 1362(e)(2) (in the case of the termina-
tion of an S corporation election) or
§1.1502–76(b)(2)(ii) and (iii) (in the case
of a corporation becoming or ceasing to be
a member of a consolidated group).
Due Date for Separate Return
Section 1.1502-76(b) provides guid-
ance regarding the items to be included in
a consolidated return. Items for the por-
tion of a year not included in the consoli-
dated return must be included in a sepa-
rate return.
Section 1.1502–76(b)(1)(ii)(A) pro-
vides that a subsidiary becomes (or ceases
to be) a member of the consolidated group
at the end of the day on which its status as
a member changes, and its tax year ends
at that time for all Federal income tax pur-
poses. Section 1.1502–76(b)(2)(i) gener-
ally provides that the returns that end and
begin with a subsidiary becoming (or
ceasing to be) a member of the consoli-
dated group are subject to the rules of the
Internal Revenue Code applicable to short
periods, as if the subsidiary ceased to
exist on becoming a member (or first ex-
isted on becoming a nonmember). Sec-
tion 1.1502–76(c) provides rules for the
filing of the separate return for the period
the subsidiary was not included in the
consolidated group.
The IRS and Treasury are concerned
that a broad application of the provisions
of §1.1502–76(b) could be construed to
require an accelerated filing of the sepa-
rate return by the fifteenth day of the third
month following the end of the short tax-
able year that resulted from the corpora-
tion joining or leaving the consolidated
group. This interpretation would, in ef-
fect, override the provisions in §1.1502-
76(c) concerning the due date for the fil-
ing of a separate return.
The IRS and Treasury did not intend to
modify the due date for the separate re-
turn for the period not included in the
consolidated return by the changes in
§1.1502–76(b) (as amended by T.D.
8560). This proposed regulation clarifies
that §1.1502–76(c) continues to provide
rules for the filing of the separate return.
Proposed Effective Date
The amendments relating to the acqui-
sition of a corporation that, immediately
before becoming a member, had an elec-
tion under section 1362(a) in effect, are
proposed to apply to transactions occur-
ring after the date final regulations are
published in the Federal Register.The
amendments relating to the clarification
of the due date for the separate return for
items not included in the return of a con-
solidated group are proposed to apply to
corporations that became or ceased to be
members of consolidated groups on or
after January 1, 1995, the effective date of
the 1994 amendments to §1.1502–76(b).
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
March 1, 1999521999–9 I.R.B.

cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certified
that these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certifica-
tion is based upon the fact that the pro-
posed regulations will provide adminis-
trative relief to small entities by removing
the administrative burden of filing a sepa-
rate one-day return currently required for
certain acquisitions. Therefore, a Regula-
tory Flexibility Analysis under the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any comments that
are submitted timely (a signed original
and eight (8) copies) to the IRS. All com-
ments will be made available for public
inspection and copying.
A public hearing has been scheduled
for March 31, 1999, at 10 a.m. in room
2615, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC. Due to building security procedures,
visitors must enter at the 10th Street en-
trance, located between Constitution and
Pennsylvania Avenues, NW. In addition,
all visitors must present photo identifica-
tion to enter the building. Because of ac-
cess restrictions, visitors will not be ad-
mitted beyond the immediate entrance
area more than 15 minutes before the
hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION
CONTACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral com-
ments at the hearing must submit written
comments (a signed original and eight (8)
copies) by March 10, 1999. The outline
of topics to be discussed and the time to
be devoted to each topic must be received
by March 17, 1999.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Jeffrey L. Vogel of the Office of
the Assistant Chief Counsel (Corporate),
IRS. However, other personnel from the
IRS and Treasury Department partici-
pated in their development.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502–76 also issued under 26
U.S.C. 1502. * * *
Par. 2. Section 1.1362–3 is amended
by adding a sentence to the end of para-
graph (a) to read as follows:
§1.1362–3 Treatment of S termination
year.
(a) In general.* * * See, however,
§1.1502–76(b)(1)(ii)(A)(2) for special
rules for an S election that terminates
under section 1362(d) immediately before
the S corporation becomes a member of a
consolidated group (within the meaning
of §1.1502–1(h)).
* * * * *
Par. 3. Section 1.1502–76 is amended
as follows:
1. The text of paragraph (b)(1)(ii)(A) is
redesignated as paragraph (b)(1)(ii)-
(A)(1).
2. A paragraph heading for newly des-
ignated paragraph (b)(1)(ii)(A)(1) is
added.
3. The first sentence of newly desig-
nated paragraph (b)(1)(ii)(A)(1) is re-
vised.
4. Paragraph (b)(1)(ii)(A)(2) is added.
5. Paragraph (b)(2)(v) is redesignated
as paragraph (b)(2)(vi).
6. New paragraph (b)(2)(v) is added.
7. Paragraph (b)(5) is redesignated as
paragraph (b)(6).
8. Paragraph (b)(4) is redesignated as
paragraph (b)(5).
9. New paragraph (b)(4) is added.
10. Newly designated paragraph (b)(5)
is amended as follows:
a. The first sentence of paragraph
(b)(5), Example 6(b) is revised.
b. The second sentence of paragraph
(b)(5), Example 6(c) is revised.
c. Example 7is added to paragraph
(b)(5).
11. Newly designated paragraph
(b)(6)(i) is revised.
The revisions and additions read as fol-
lows:
§1.1502–76 Taxable year of members of
group.
* * * * *
(b) * * * (1) * * *
(ii) * * *(A) * * * (1) In general.If a
corporation (S), other than one described
in paragraph (b)(1)(ii)(A)(2), becomes or
ceases to be a member during a consoli-
dated return year, it becomes or ceases to
be a member at the end of the day on
which its status as a member changes, and
its tax year ends for all Federal income
tax purposes at the end of that day. * * *
(2) Special rule for former S corpora-
tions.If S becomes a member in a trans-
action other than in a qualified stock pur-
chase for which an election under section
338(g) is made, and immediately before
becoming a member an election under
section 1362(a) was in effect, then S will
become a member at the beginning of the
day the termination of its S corporation
election is effective. S’s tax year ends for
all Federal income tax purposes at the end
of the preceding day. This paragraph
(b)(1)(ii)(A)(2) applies to transactions oc-
curring after the date that final regulations
are published in the Federal Register.
* * * * *
(2) * * *
(v) Acquisition of S corporation.If a
corporation is acquired in a transaction to
which paragraph (b)(1)(ii)(A)(2) of this
section applies, then paragraphs (b)(2)(ii)
and (iii) of this section do not apply and
items of income, gain, loss, deduction,
and credit are assigned to each short tax-
1999–9 I.R.B.53March 1, 1999

able year on the basis of the corporation’s
normal method of accounting as deter-
mined under section 446. This paragraph
(b)(2)(v) applies to transactions occurring
after the date that final regulations are
published in the Federal Register.
* * * * *
(4) Determination of due date for sepa-
rate return.Paragraph (c) of this section
contains rules for the filing of the separate
return referred to in this paragraph (b). In
applying paragraph (c) of this section, the
due date for the filing of S’s separate re-
turn shall also be determined without re-
gard to the ending of the tax year under
paragraph (b)(1)(ii) of this section or the
deemed cessation of its existence under
paragraph (b)(2)(i) of this section.
* * * * *
(5) * * *
Example 6.Allocation of partnership items. * * *
(b) Analysis. Under paragraph (b)(2)(vi)(A) of
this section, T is treated, solely for purposes of de-
termining T’s tax year in which the partnership’s
items are included, as selling or exchanging its en-
tire interest in the partnership as of P’s sale of T
stock. * * *
(c) Controlled partnership.* * * Under para-
graph (b)(2)(vi)(B) of this section, T’s distributive
share of the partnership items is treated as T’s items
for purposes of paragraph (b)(2) of this section. * * *
Example 7. Acquisition of S corporation. (a)
Facts. Z is a small business corporation for which
an election under section 1362(a) was in effect at all
times since Year 1. At all times, Z had only 100
shares of stock outstanding, all of which were
owned by individual A. On July 1 of Year 3, P ac-
quired all of the Z stock. P does not make an elec-
tion under section 338(g) with respect to its pur-
chase of the Z stock.
(b) Analysis.As a result of P’s acquisition of the
Z stock, Z’s election under section 1362(a) termi-
nates. See sections 1361(b)(1)(B) and 1362(d)(2).
Z is required to join in the filing of the P consoli-
dated return. See §1.1502-75. Z’s tax year ends for
all Federal income tax purposes on June 30 of Year
3. If no extension of time is sought, Z must file a
separate return for the period from January 1
through June 30 of Year 3 on or before March 15 of
Year 4. See paragraph (b)(4) of this section. Z will
become a member of the P consolidated group as of
July 1 of Year 3. See paragraph (b)(1)(ii)(A)(2) of
this section. P group’s Year 3 consolidated return
will include Z’s items from July 1 to December 31
of Year 3.
(6) Effective date—(i) General rule.
Except as provided in paragraphs
(b)(1)(ii)(A)(2) and (b)(2)(v) of this sec-
tion, this paragraph (b) applies to corpora-
tions becoming or ceasing to be members
of consolidated groups on or after January
1, 1995.
* * * * *
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(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. 69581.)
Notice of Proposed Rulemaking
Notice of Public Hearing
Timely Mailing Treated as
Timely Filing/Electronic
Postmark
REG–115433–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing; and, withdrawal of previous notice of
proposed rulemaking.
SUMMARY: This document contains
proposed regulations relating to timely
mailing treated as timely filing and pay-
ing under section 7502. The proposed
regulations generally reflect changes to
the law made since 1960. The proposed
regulations affect taxpayers that file docu-
ments or make payments or deposits.
This document also withdraws a previous
notice of proposed rulemaking published
in the Federal Registerof December 11,
1979.
DATES: Written comments and requests
for a public hearing must be received by
April 15, 1999. The notice of proposed
rulemaking published at 44 F.R. 71430,
December 11, 1979, is withdrawn as of
January 15, 1999.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–115433–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–115433–98),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS In-
ternet site at http://www.irs.ustreas.gov/
prod/tax_regs/comments.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning submissions, Michael
Slaughter, (202) 622-7180; concerning
the regulations, Charles A. Hall, (202)
622-4940 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Regulations on Proce-
dure and Administration (26 CFR part
301) under section 7502 relating to timely
mailing treated as timely filing and pay-
ing. As originally enacted in the Internal
Revenue Code of 1954, Public Law 591,
ch. 736 (68A Stat. 895 (1954)), section
7502 provided that if any claim, state-
ment, or other document is delivered to
the appropriate agency, officer, or office
after the filing date, the date of the United
States postmark will be deemed to be the
date of delivery if the postmark date is on
or before the filing due date. In the case
of registered mail, section 7502 provided
that the registration will be prima facie
evidence of delivery and the date of regis-
tration will be deemed the postmark date.
At the time, section 7502 did not apply to
the mailing of tax returns or payments.
The Technical Amendments Act of
1958, Public Law 85-866 (72 Stat. 1665
(1958)), amended section 7502 by autho-
rizing the Secretary to provide by regula-
tions the extent to which the provisions
with respect to prima facie evidence of
delivery and the postmark date will apply
to certified mail.
Section 5(a) of the Act of November 2,
1966, Public Law 89–713 (80 Stat. 1110
(1966)), amended section 7502 to apply
the timely mailing rules to returns and the
payment of taxes. Section 106(a) of the
Revenue and Expenditure Control Act of
1968, Public Law 90–364 (82 Stat. 266
(1968)), extended these rules to the mail-
ing of deposits of tax. The Deficit Reduc-
tion Act of 1984, Public Law 98–369 (98
March 1, 1999541999–9 I.R.B.

Stat. 695 (1984)), limited the timely mail-
ing rules to deposits of less than $20,000
in the case of any person who is required
to deposit more than once a month.
Minor changes were also made to sec-
tion 7502 by the Tax Reform Act of 1976,
Public Law 94–455 (90 Stat. 1831 and
1834 (1976)), the Act of October 28,
1977, Public Law 95–147 (91 Stat. 1228
(1977)), and the Tax Reform Act of 1986,
Public Law 99–514 (100 Stat. 2833
(1986)).
The existing regulations (T.D. 6232)
under section 7502 were last amended on
October 25, 1960 (25 F.R. 10247) to im-
plement changes made by the Technical
Amendments Act of 1958. The regula-
tions provide that the prima facie evi-
dence of delivery and postmark date rules
apply to certified mail.
A notice of proposed rulemaking
(REG–209351–71, formerly LR–1406)
was published on December 11, 1979 (44
F.R. 71430) to implement changes made
by the Act of November 2, 1966, the Rev-
enue and Expenditure Control Act of
1968, the Tax Reform Act of 1976, and the
Act of October 28, 1977. The proposed
regulations would have conformed the ex-
isting regulations to these changes. Be-
cause the proposed changes are incorpo-
rated in this document, the earlier notice
of proposed rulemaking is withdrawn.
In 1996, section 1210 of The Taxpayer
Bill of Rights 2, Public Law 104–168
(110 Stat. 1474 (1996)), added section
7502(f) to provide that the term United
States mailincludes a designated delivery
service and that the term postmark in-
cludes the date recorded or marked by a
designated delivery service. The provi-
sion allows the IRS to determine whether
a service of a private delivery service
(PDS) is a designated delivery service.
Section 7502(f) also allows the IRS to
provide a rule that equates a service pro-
vided by a PDS to United States regis-
tered or certified mail. The IRS has deter-
mined that certain delivery services of
four PDSs are designated for purposes of
section 7502(f). However, the IRS has
not yet determined that any service of a
PDS is substantially equivalent to United
States registered or certified mail. See
Notice 98–47 (1998–37 I.R.B. 8 (Septem-
ber 14, 1998)).
Finally, section 7502(c)(2) was
amended by section 2003(b) of the Inter-
nal Revenue Service Restructuring and
Reform Act of 1998, Public Law 105-206
(112 Stat. 725 (1998)), to authorize the
Secretary to provide the extent to which
the prima facie evidence of delivery and
postmark date rules apply to electronic
filing.
Explanation of Provisions
These proposed regulations propose to
add a new §301.7502–1(d) to provide that
the date of an electronic postmark given
by an authorized electronic return trans-
mitter will be deemed the filing date if the
date of the electronic postmark is on or
before the filing due date. It also permits
the Commissioner to enter into an agree-
ment with an electronic return transmitter
or to prescribe in forms, instructions, or
other appropriate guidance the procedures
under which the electronic return trans-
mitter is authorized to provide taxpayers
with an electronic postmark to acknowl-
edge the date and time that the electronic
return transmitter received the electroni-
cally filed document.
An electronic return transmitter is de-
fined for purposes of the regulation the
same as in the revenue procedures gov-
erning the Electronic Filing Program, cur-
rently Rev. Proc. 98–50 (1998–38 I.R.B.
8 (September 21, 1998)), and the On-Line
Filing Program, currently Rev. Proc. 98-
51 (1998–38 I.R.B. 20 (September 21,
1998)). An electronic postmark is a
record of the date and time that an autho-
rized electronic return transmitter re-
ceives the transmission of the taxpayer’s
electronically filed document on its host
system.
For tax year 1998, the rules on elec-
tronic postmarks are effective for income
tax returns filed through electronic return
transmitters authorized to provide an elec-
tronic postmark pursuant to an agreement
under the Electronic Tax Administration’s
Request for Agreement released on No-
vember 26, 1997. For taxable years be-
ginning after 1998, the rules on electronic
postmarks are effective for documents
submitted to electronic return transmitters
that are authorized to provide an elec-
tronic postmark pursuant to §301.7502–
1(d)(2).
The remainder of the changes con-
tained in §§301.7502–1 and 301.7502–2
conform the regulations to the expanded
scope of section 7502 as amended over
the years. For instance, §301.7502–1 pro-
vides that the timely mailing treated as
timely filing rule extends to the mailing of
tax returns and payments. Additionally,
§301.7502–2 provides guidance on the
timely mailing of deposits.
In 1980, IRS and the Treasury Depart-
ment received comments in response to
the notice of proposed rulemaking. Com-
ments have not been requested since that
time. Accordingly, the public is encour-
aged to make comments regarding this
notice of proposed rulemaking, including
comments regarding whether section
7502 should apply to claims for refunds
made on delinquent original income tax
returns or whether the prima facie evi-
dence of delivery rule for registered mail
should be extended to services of a PDS
or to electronic filing of documents.
Effect on other Documents
The notice of proposed rulemaking
published in the Federal Register for De-
cember 11, 1979 (REG–209351–71, for-
merly LR-1406, 44 F.R. 71430) is with-
drawn as of January 15, 1999.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any comments (a
signed original and eight (8) copies) that
are submitted timely to the IRS. The IRS
and Treasury Department request com-
ments on the clarity of the proposed rules
1999–9 I.R.B.55March 1, 1999

and how they can be made easier to un-
derstand. All comments will be available
for public inspection and copying. A pub-
lic hearing may be scheduled if requested
by any person that timely submits com-
ments. If a public hearing is scheduled,
notice of the date, time, and place for the
hearing will be published in the Federal
Register.
Drafting Information
The principal author of these regula-
tions is Charles A. Hall, Office of Assis-
tant Chief Counsel (Income Tax & Ac-
counting). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.7502–1 also issued under
26 U.S.C. 7502 * * *
Section 301.7502–2 also issued under
26 U.S.C. 7502 * * *
Par. 2. Section 301.7502–1 is revised
to read as follows:
§301.7502–1 Timely mailing of
documents and payments treated as
timely filing and paying.
(a) General rule.Section 7502 pro-
vides that, if the requirements of that sec-
tion are met, a document or payment
(within the meaning of paragraph (b) of
this section) is deemed to be filed or paid
on the date of the postmark stamped on
the envelope or other appropriate wrapper
(envelope) in which the document or pay-
ment was mailed. Thus, if the envelope
that contains the document or payment
has a timely postmark, the document or
payment is considered timely filed or paid
even if it is received after the last date, or
the last day of the period, prescribed for
filing the document or making the pay-
ment. However, if a document or pay-
ment is not considered timely filed or
timely paid under section 7502, the docu-
ment or payment is not deemed to be filed
or paid on the date of the postmark
stamped on the envelope in which the
document or payment was mailed. Thus,
section 7502 does not apply to determine
the period of time during which there is a
failure to file a return or pay a tax for pur-
poses of computing the penalties and ad-
ditions to tax imposed by section 6651.
Except as provided in section 7502(e) and
§301.7502–2, relating to the timely mail-
ing of deposits, and paragraph (d) of this
section, relating to electronically filed
documents, section 7502 is applicable
only to those documents or payments as
defined in paragraph (b) of this section
and only if the document or payment is
mailed in accordance with paragraph (c)
of this section and is delivered in accor-
dance with paragraph (e) of this section.
(b) Definitions—(1) Document defined.
(i) The term document,as used in this sec-
tion, means any return, claim, statement,
or other document required to be filed
within a prescribed period or on or before
a prescribed date under authority of any
provision of the internal revenue laws, ex-
cept as provided in paragraph (b)(1)(ii),
(iii), or (iv) of this section.
(ii) The term does not include returns,
claims, statements, or other documents
that are required under any provision of
the internal revenue laws or the regula-
tions thereunder to be delivered by any
method other than mailing.
(iii) The term does not include any doc-
ument filed in any court other than the
Tax Court, but the term does include any
document filed with the Tax Court, in-
cluding a petition for redetermination of a
deficiency and a petition for review of a
decision of the Tax Court.
(iv) The term does not include any doc-
ument that is required to be filed with a
bank or other depositary under section
6302. However, see §301.7502–2 for
special rules relating to the timeliness of
deposits and documents required to be
filed with deposits.
(2) Payment defined. (i) The term pay-
ment,as used in this section, means any
payment required to be made within a
prescribed period or on or before a pre-
scribed date under the authority of any
provision of the internal revenue laws, ex-
cept as provided in paragraph (b)(2)(ii),
(iii), (iv), or (v) of this section.
(ii) The term does not include any pay-
ment that is required under any provision
of the internal revenue laws or the regula-
tions thereunder to be delivered by any
method other than mailing. See, for ex-
ample, section 6302(h) and the regula-
tions thereunder regarding electronic
funds transfer.
(iii) The term does not include any pay-
ment, whether it is made in the form of
currency or other medium of payment,
unless it is actually received and ac-
counted for. For example, if a check is
used as the form of payment, this section
does not apply unless the check is hon-
ored upon presentation.
(iv) The term does not include any pay-
ment to any court other than the Tax
Court.
(v) The term does not include any de-
posit that is required to be made with a
bank or other depositary under section
6302. However, see §301.7502-2 for
rules relating to the timeliness of deposits.
(3) Last date or last date prescribed.
As used in this section, the term the last
date, or the last day of the period, pre-
scribed for filing the document or making
the payment includes any extension of
time granted for that action. When the
last date, or the last day of the period, pre-
scribed for filing the document or making
the payment falls on a Saturday, Sunday
or legal holiday, section 7503 applies.
Therefore, in applying the rules of this
paragraph (b)(3), the next succeeding day
that is not a Saturday, Sunday, or legal
holiday is treated as the last date, or the
last day of the period, prescribed for filing
the document or making the payment.
(c) Mailing requirements—(1) In gen-
eral. Section 7502 does not apply unless
the document or payment is mailed in ac-
cordance with the following requirements:
(i) Envelope and address.The docu-
ment or payment must be contained in an
envelope, properly addressed to the
agency, officer, or office with which the
document is required to be filed or to
which the payment is required to be
made.
(ii) Timely deposited in U.S. mail.The
document or payment must be deposited
within the prescribed time in the mail in
the United States with sufficient postage
prepaid. For this purpose, a document or
payment is deposited in the mail in the
United States when it is deposited with
March 1, 1999561999–9 I.R.B.

the domestic mail service of the U.S.
Postal Service. The domestic mail service
of the U.S. Postal Service, as defined by
the Domestic Mail Manual as incorpo-
rated by reference in the postal regula-
tions, includes mail transmitted within,
among, and between the United States of
America, its territories and possessions,
and Army post offices (APO), fleet post
offices (FPO), and the United Nations,
NY. (See Domestic Mail Manual, section
G011.2.1, as incorporated by reference in
39 CFR 111.1.) Section 7502 does not
apply to any document or payment that is
deposited with the mail service of any
other country.
(iii) Postmark—(A) U.S. Postal Ser-
vice postmark.If the postmark on the en-
velope is made by the U.S. Postal Service,
the postmark must bear a date on or be-
fore the last date, or the last day of the pe-
riod, prescribed for filing the document or
making the payment. If the postmark
does not bear a date on or before the last
date, or the last day of the period, pre-
scribed for filing the document or making
the payment, the document or payment is
considered not to be timely filed or paid,
regardless of when the document or pay-
ment is deposited in the mail. Accord-
ingly, the sender who relies upon the ap-
plicability of section 7502 assumes the
risk that the postmark will bear a date on
or before the last date, or the last day of
the period, prescribed for filing the docu-
ment or making the payment. See, how-
ever, paragraph (c)(2) of this section with
respect to the use of registered mail or
certified mail to avoid this risk. If the
postmark on the envelope is made by the
U.S. Postal Service but is not legible, the
person who is required to file the docu-
ment or make the payment has the burden
of proving the date that the postmark was
made. Furthermore, if the envelope that
contains a document or payment has a
timely postmark made by the U.S. Postal
Service but it is received after the time
when a document or payment postmarked
and mailed at that time would ordinarily
be received, the sender may be required to
prove that it was timely mailed.
(B) Postmark made by other than U.S.
Postal Service—(1) In general.If the
postmark on the envelope is made other
than by the U.S. Postal Service—
(i) The postmark so made must bear a
legible date on or before the last date, or
the last day of the period, prescribed for
filing the document or making the pay-
ment; and
(ii) The document or payment must be
received by the agency, officer, or office
with which it is required to be filed not
later than the time when a document or
payment contained in an envelope that is
properly addressed, mailed, and sent by
the same class of mail would ordinarily be
received if it were postmarked at the same
point of origin by the U.S. Postal Service
on the last date, or the last day of the pe-
riod, prescribed for filing the document or
making the payment.
(2) Document or payment received late.
If the document or payment is received
after the time when a document or pay-
ment so mailed and so postmarked by the
U.S. Postal Service would ordinarily be
received, the document or payment is
treated as having been received at the
time when a document or payment so
mailed and so postmarked would ordinar-
ily be received if the person who is re-
quired to file the document or make the
payment establishes–-
(i) That it was actually deposited in the
U.S. mail before the last collection of the
mail from the place of deposit which was
postmarked (except for the metered mail)
by the U.S. Postal Service on or before
the last date, or the last day of the period,
prescribed for filing the document or
making the payment;
(ii) That the delay in receiving the doc-
ument or payment was due to a delay in
the transmission of the U.S. mail; and
(iii) The cause of the delay.
(3) U.S. and non-U.S. postmarks.If the
envelope has a postmark made by the
U.S. Postal Service in addition to the
postmark not so made, the postmark that
was not made by the U.S. Postal Service
is disregarded, and whether the envelope
was mailed in accordance with this para-
graph (c)(1)(iii)(B) will be determined
solely by applying the rule of paragraph
(c)(1)(iii)(A) of this section.
(2) Registered or certified mail.If the
document or payment is sent by U.S. reg-
istered mail, the date of registration of the
document or payment is treated as the
postmark date. If the document or pay-
ment is sent by U.S. certified mail and the
sender’s receipt is postmarked by the
postal employee to whom the document
or payment is presented, the date of the
U.S. postmark on the receipt is treated as
the postmark date of the document or pay-
ment. Accordingly, the risk that the docu-
ment or payment will not be postmarked
on the day that it is deposited in the mail
may be eliminated by the use of registered
or certified mail.
(d) Electronically filed documents—(1)
In general.A document filed electroni-
cally with an electronic return transmitter
(as defined in paragraph (d)(3)(i) of this
section and authorized pursuant to para-
graph (d)(2) of this section) in the manner
and time prescribed by the Commissioner
is deemed to be filed on the date of the
electronic postmark (as defined in para-
graph (d)(3)(ii) of this section) given by
the authorized electronic return transmit-
ter. Thus, if the electronic postmark is
timely, the document is considered filed
timely although it is received by the
agency, officer, or office after the last
date, or the last day of the period, pre-
scribed for filing such document.
(2) Authorized electronic return trans-
mitters. The Commissioner may enter
into an agreement with an electronic re-
turn transmitter or prescribe in forms, in-
structions, or other appropriate guidance
the procedures under which the electronic
return transmitter is authorized to provide
taxpayers with an electronic postmark to
acknowledge the date and time that the
electronic return transmitter received the
electronically filed document.
(3) Definitions—(i) Electronic return
transmitter.For purposes of this para-
graph (d), the term electronic return
transmitterhas the same meaning as con-
tained in section 3.02(4) of Rev. Proc.
98–50 (1998–38 I.R.B. 8 (September 21,
1998)) and section 3.02(3) of Rev. Proc.
98–51 (1998–38 I.R.B. 20 (September 21,
1998))(See §601.601(d)(2) of this chap-
ter.) or in procedures subsequently pre-
scribed by the Commissioner.
(ii) Electronic postmark.For purposes
of this paragraph (d), the term electronic
postmarkmeans a record of the date and
time (in a particular time zone) that an au-
thorized electronic return transmitter re-
ceives the transmission of a taxpayer’s
electronically filed document on its host
system. However, if the taxpayer and the
1999–9 I.R.B.57March 1, 1999

electronic return transmitter are located in
different time zones, it is the time in the
taxpayer’s time zone that controls the
timeliness of the electronically filed
document.
(e) Delivery.(1) Except as provided in
section 7502(f) and paragraph (d) of this
section, section 7502 is not applicable un-
less the document or payment is delivered
by U.S. mail to the agency, officer, or of-
fice with which the document is required
to be filed or to which payment is re-
quired to be made. However, in the case
of a document (but not a payment) sent by
registered or certified mail, proof that the
document was properly registered or that
a postmarked certified mail sender’s re-
ceipt was properly issued and that the en-
velope was properly addressed to the
agency, officer, or office constitutes prima
facie evidence that the document was de-
livered to the agency, officer, or office.
(2) Section 7502 is applicable only
when the document or payment is deliv-
ered after the last date, or last day of the
period, prescribed for filing the document
or making the payment. Thus, section
7502 is applicable when a claim for credit
or refund is delivered after the last day of
the period specified in section 6511 or in
any other corresponding provision of law
relating to the limit on the amount of
credit or refund that is allowable. For ex-
ample, taxpayer A was required to file an
income tax return for 1993 on or before
April 15, 1994, but A secured an exten-
sion until August 15, 1994, to file such re-
turn. A filed the return on August 15,
1994, but no tax was paid at that time be-
cause the tax liability disclosed by the re-
turn had been completely satisfied by the
income tax that had been withheld on A’s
wages. On August 14, 1997, A mailed in
accordance with the requirements of this
section a claim for refund of a portion of
this 1993 tax. The envelope containing
the claim was postmarked on August 14,
1997, but it was not delivered to the Ser-
vice Center until August 18, 1997. Under
section 6511, A’s claim for refund is
timely if filed within three years from Au-
gust 15, 1994. Thus, since A’s claim for
refund was mailed in accordance with the
requirements of this section and was de-
livered after the last day of the period
specified in section 6511, section 7502 is
applicable and the claim is deemed to
have been filed on August 14, 1997.
(f) Effective date—(1) In general. This
section applies to any payment or docu-
ment mailed and delivered in accordance
with the requirements of this section in an
envelope bearing a postmark dated after
January 15, 1999.
(2) Electronically filed documents—(i)
For taxable year 1998. For taxable year
1998, this section only applies to elec-
tronically filed income tax returns trans-
mitted to an electronic return transmitter
that was authorized to provide an elec-
tronic postmark pursuant to an agreement
entered into in response to submissions
received in reply to the Electronic Tax
Administration’s Request for Agreement
released on November 26, 1997.
(ii) For taxable years after 1998. For
taxable years after 1998, this section ap-
plies to any electronically filed return,
claim, statement, or other document trans-
mitted to an electronic return transmitter
that is authorized to provide an electronic
postmark pursuant to paragraph (d)(2) of
this section.
Par. 3. Section 301.7502–2 is added to
read as follows:
§301.7502–2 Timely mailing of deposits.
(a) General rule—(1) Two day rule.
Section 7502(e) provides that, if the re-
quirements of that section are met, a de-
posit is deemed to be received on the date
the deposit was mailed even though it is
received after the date prescribed for
making the deposit. The requirements of
the section are met if the person required
to make the deposit establishes that the
date of mailing was on or before the sec-
ond day preceding the date prescribed for
making the deposit. If the date of mailing
was not established to be on or before the
second day preceding the date prescribed
for making the deposit, the deposit will
not be considered timely received unless
it is actually received on or before the
date prescribed for making the deposit.
Section 7502(e) only applies to a deposit
mailed to the bank, trust company, do-
mestic building and loan association, or
credit union authorized to receive that de-
posit. Thus, section 7502(e) does not
apply to any remittance mailed to an in-
ternal revenue service center.
(2) Deposits of $20,000 or more.Para-
graph (a)(1) of this section does not apply
with respect to any deposit of $20,000 or
more by any person required to deposit
any tax more than once a month. Any
such deposit must be made by the due
date for such deposit, regardless of the
method of delivery.
(b) Deposit defined.The term deposit,
as used in this section, means any deposit
of tax required to be made on or before a
prescribed date pursuant to regulations
prescribed under section 6302. For infor-
mation regarding the making of deposits
by electronic funds transfer, see section
6302(h) and the regulations thereunder.
(c) Mailing requirements—(1) In gen-
eral.Section 7502(e) does not apply un-
less the deposit is mailed in accordance
with the requirements of paragraph (c)(2)
of this section.
(2) Requirements.The date of mailing
must fall on or before the second day pre-
ceding the prescribed date for making a
deposit (including any extension of time
granted for making the deposit). For ex-
ample, if a deposit is due on or before
January 15, the date of mailing must fall
on or before January 13. The deposit
must be contained in an envelope or other
appropriate wrapper approved for use in
the mails by the U.S. Postal Service,
properly addressed to the bank, trust com-
pany, domestic building and loan associa-
tion, or credit union authorized to receive
the deposit. The deposit must be de-
posited with sufficient postage prepaid on
or before the second day in the mail in the
United States within the meaning of
§301.7502–1.
(3) Registered and certified mail.The
provisions of §301.7502–1(c)(2) apply to
a deposit sent by U.S. registered mail or
U.S. certified mail as if the deposit were a
payment, except that the date of registra-
tion or the date of the postmark on the
sender’s receipt is considered the date of
mailing of such deposit.
(d) Delivery.Section 7502(e) does not
apply unless a deposit is actually delivered
by U.S. mail to the authorized financial in-
stitution with which the deposit is required
to be made and is accepted by that finan-
cial institution. For rules relating to the
acceptance of deposits by authorized fi-
nancial institutions (see 31 CFR 203.18).
The fact that a deposit is sent by U.S. reg-
istered or U.S. certified mail does not con-
stitute prima facie evidence that the de-
posit was delivered to the financial
institution authorized to receive the de-
March 1, 1999581999–9 I.R.B.

posit. Section 7502(e) does not apply un-
less the deposit is delivered after the date
prescribed for making the deposit.
(e) Effective date. This section applies
to all deposits required to be made after
January 15, 1999.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 14, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 15, 1999, 64 F.R.
2606)
Announcement Relating to
Court Decisions; Correction
Announcement 99–17
The Announcement Relating to Court
Decisions in the 1999–4 I.R.B., dated Jan-
uary 25, 1999, contains an error. On page
4, in column 3, in the last paragraph, the
statement “The Commissioner WITH-
DRAWS the following decision” is incor-
rect. The statement should have read
“The Commissioner WITHDRAWS the
Action on Decision written in response to
the following decision:”
1999–9 I.R.B.59March 1, 1999

March 1, 1999601999–9 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. Rul.—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

1999–9 I.R.B.61March 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 1999–8
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
99–10, 1999–5 I.R.B. 63
99–11, 1999–5 I.R.B. 64
99–12, 1999–5 I.R.B. 65
99–13, 1999–6 I.R.B. 18
99–14, 1999–7 I.R.B.60
99–15, 1999–8 I.R.B.78
99–16, 1999–8 I.R.B.80
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
99–8, 1999–5 I.R.B. 26
99–9, 1999–4 I.R.B. 23
99–10, 1999–6 I.R.B. 14
99–11, 1999–8 I.R.B.56
Proposed Regulations:
REG–106902–98, 1999–8 I.R.B. 57
REG–111435–98, 1999–7 I.R.B. 55
REG–113694–98, 1999–7 I.R.B. 56
REG–114663–97, 1999–6 I.R.B. 15
REG–116824–98, 1999–7 I.R.B.57
REG–117620–98, 1999–7 I.R.B. 59
REG–121865–98, 1999–8 I.R.B.63
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
99–13, 1999–5 I.R.B. 52
99–14, 1999–5 I.R.B. 56
99–15, 1999–7 I.R.B. 42
99–16, 1999–7 I.R.B. 50
99–17, 1999–7 I.R.B. 52
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
99–5, 1999–6 I.R.B.8
Treasury Decisions:
99–6, 1999–6 I.R.B. 6
99–7, 1999–5 I.R.B. 4
99–8, 1999–6 I.R.B.8
99–9, 1999–7 I.R.B.14
8789, 1999–3 I.R.B. 5
8791, 1999–5 I.R.B. 7
8792, 1999–7 I.R.B.36
8793, 1999–7 I.R.B.15
8794, 1999–7 I.R.B.4
8795, 1999–7 I.R.B.8
8796, 1999–4 I.R.B. 16
8797, 1999–5 I.R.B. 5
8799, 1999–6 I.R.B. 10
8800, 1999–4 I.R.B. 20
8801, 1999–4 I.R.B. 5
8802, 1999–4 I.R.B. 10
8805, 1999–5 I.R.B. 14
8806, 1999–6 I.R.B.4
8809, 1999–7 I.R.B.27
8810, 1999–7 I.R.B.19
8812, 1999–8 I.R.B.19
8816, 1999–8 I.R.B. 4
8817, 1999–8 I.R.B.51

March 1, 1999621999–9 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 1999–1 through 1999–8
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
98–22
Modified and amplified by
99–13, 1999–5 I.R.B. 52
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.

1999–9 I.R.B.63March 1, 1999
Index
Internal Revenue Bulletins
1999–1 Through 1999–8
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
Automobile owners and lessees (RP 14)
5, 56
Chief Counsel advice available for public
inspection (Ann. 4) 3,15
Child support enforcement program (RP
12) 3, 13
Commodities dealers; securities or com-
modities traders; procedures for mak-
ing elections (RP 17) 7, 52
Correction of Rev. Proc. 98–44 (Ann 12)
5, 65
Daily transportation expenses; commut-
ing expenses; business expenses; per-
sonal expenses (RR 7) 5, 4
Deficiencies:
Interest abatement, Presidentially de-
clared disasters (Notice 2) 2,8
Disregarded entity to partnership (RR 5)
6, 8
INCOME TAX—Continued
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
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; February 1999
(Notice 11) 8, 56
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
Tax-sheltered annuities (RP 13) 5, 52
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
List of organizations classified as pri-
vate foundations (Ann 10) 5, 63; (Ann 13)
6, 20; (Ann 15) 8, 78
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
Federal rates; adjusted federal rates; ad-
justed federal long-term rate, long-term
exempt rate for February 1999 (RR 8)
6, 10
Form:
1040NR instructions for 1998, cor-
rected (Ann. 8) 4, 24
8866 (Ann 16) 8, 80
Insurance companies:
Discounting estimated salvage recover-
able (RP 16) 7, 50
INCOME TAX—Continued
Loss reserves; discounting unpaid
losses (RP 15) 7, 42
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for January 1999
(RR 2) 2, 5
Inventory:
LIFO:
Price indexes; department stores for
November 1998 (RR 4) 4, 19;
December 1998 (RR 9) 7, 14
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
Long-term capital gain treatment for fiscal
year individuals, estates, partnerships,
and S corporations (Ann 11) 5, 64
Low-income housing credit:
Alternative collateral program (RP 11)
2, 14
Low-income housing tax credit:
1999 calendar year resident population
estimates (Notice 10) 6, 16
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
Model qualified intermediary withholding
agreement (Notice 8) 5, 26
Mutual holding company conversions
(RR 3) 3, 4
Optional standard mileage rates; effective
date (Ann. 7) 2, 45
Partnership to disregarded entity (RR 6) 6,
6
Penalties:
Designation of Federal Tax Deposits
(RP 10) 2, 11
Penalty and interest study (Notice 4) 3, 9
Proposed regulations:
26 CFR 1.411(a)–7, –11, 1.417(e)–1,
amended; increase in cash-out limit
under sections 411(a)(7), 411(a)(11)
and 417(e)(1) for qualified retire-
ment plans (REG–113694–98) 7, 56
26 CFR 1.1502–3, amended; 1.1502–
9A, added; new 1.1502–9, added;
consolidated overall foreign losses
and separate limitation losses (REG–
106902–98) 8, 57

March 1, 1999641999–9 I.R.B.
INCOME TAX—Continued
26 CFR 20.2055–1(d)(6), added;
20.2056(b)–4, amended; marital de-
duction; valuation of interest passing
to surviving spouse (REG–114663–
97) 6, 17
26 CFR 54.4980B, amended; continua-
tion coverage requirements of group
health plans (REG–121865–98) 8, 63
26 CFR 301.6103(k)(9)–1, added;
301.6311–1(a)(1)(i), amended; pay-
ment of tax by credit card or debit
card (REG–111435–98) 7, 55
26 CFR 301.6320–1, added; notice and
opportunity for hearing upon filing
of notice of lien (REG–116824–98)
7, 57
26 CFR 301.6330–1, added; notice and
opportunity for hearing prior to levy
(REG–117620–98) 7, 59
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 1.195–1, added; election to
amortize start-up expenditures for
active trades or businesses (TD
8797)5, 5
26 CFR 1.337(d)–4, added; certain
asset transfers to a tax-exempt entity
(TD 8802) 4, 10
26 CFR 1.408A–0 through –9 and in-
termediary sections, added; Roth
IRAs (TD 8816) 8,4
26 CFR 1.411(a)–7, –11, amended;
1.411(a)–7T, –11T, added; increase
in cash-out limit under sections
411(a)(7), 411(a)(11) and 417(e)(1)
for qualified retirement plans (TD
8794) 7, 4
26 CFR 1.411(d)(4), amended;
1.411(d)–4T, removed; employee
stock ownership plans qualified re-
tirement plan benefits (TD 8806)
6, 4
26 CFR 1.411(d)–6T, removed;
1.411(d)–6, added; notice of signifi-
cant reduction in the rate of future
benefit accrual (TD 8795) 7, 8
26 CFR 1.469–10, revised; 1.7704–3,
added; certain investment income
under the qualifying income provi-
sions and the application of the pas-
sive activity loss rules to publicly
traded partnerships (TD 8799) 6, 12
26 CFR 1.664–1(a)(7), (d)(1)(iii),
(f)(4), added; 1.664–2(a)(1)(i), re-
vised; 1.664–3, amended; 25.2702–
1(c)(3), revised; charitable remain-
der trusts and special valuation rules
for transfers of interests in trusts (TD
8791) 5, 7
26 CFR 1.861–8, amended; 1.861–8T,
amended; 1.865–1T, added; 1.865–2,
added; 1.865–2T, added; 1.904–0,
amended; 1904–4, amended; alloca-
tion of loss with respect to stocks
and other personal property (TD
8805) 5, 14
26 CFR 1.881–3, corrected conduit
arrangement regulations (Ann 14) 7,
60
26 CFR 1.6038B–1, amended;
1.6038B–2, added; notice of certain
transfers to foreign partnerships and
foreign corporations (TD 8817) 8, 51
26 CFR 1.7702B–1, –2, added; quali-
fied long-term care insurance con-
tracts (TD 8792) 7, 36
26 CFR 54.4980B–0 through –8 and
intermediary sections, added; contin-
uation coverage requirements of
group health plans (TD 8812) 8, 19
26 CFR 301.6103(k)(9)–1T, –2T,
added; payment of tax by credit card
or debit card (TD 8793) 7, 15
26 CFR 301.6320–1T, added; notice
and opportunity for hearing upon fil-
ing of notice of lien (TD 8810) 7, 19
26 CFR 301.6330–1T, added; notice
and opportunity for hearing prior to
levy (TD 8809) 7, 27
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
INCOME TAX—ContinuedINCOME TAX—Continued

Notes
1999–9 I.R.B.65March 1, 1999

Notes
March 1, 1999661999–9 I.R.B.

INTERNAL REVENUE BULLETIN
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