Internal Revenue Bulletin 1997-2 (PDF rendition): IRS Revenue Procedures

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

INCOME TAX
Rev. Rul. 97–1, page 10.
Federal rates; adjusted federal rates; adjusted fed-
eral long-term rate, and the long-term exempt rate.
For purposes of sections 1274, 1288, 382, and other
sections of the Code, tables set forth the rates for
January 1997.
Rev. Rul. 97–2, page 8.
Insurance companies; interest rate tables.Prevailing
state assumed interest rates are provided for the
determination of reserves under section 807 of the
Code for contracts issued in 1996 and 1997. Rev. Rul.
92–19 supplemented in part.
Rev. Rul. 97–3, page 5.
SBA guaranteed payment rights; participating securi-
ties.The Small Business Administration (SBA) is the
primary obligor of the guaranteed payment rights that
are created under its participating security program and
investors in those rights are treated as owning SBA
debt.
T.D. 8697, page 11.
Final regulations under section 7701 of the Code
classify certain business organizations under an elective
regime.
Notice 97–1, page 22.
Revenue rulings and revenue procedures under T.D.
8697 obsoleted.Revenue rulings and revenue proce-
dures that use the prior classification regulations to
differentiate between partnerships and associations are
obsolete to the extent that they rely on those prior
regulations.
Notice 97–4, page 24.
S corporation subsidiaries.This notice requests com-
ments concerning issues raised by section 1308 of the
Small Business Job Protection Act of 1996 which
permits an S corporation (1) to own 80 percent or more
of the stock of a C corporation, and (2) to elect to own a
qualified subchapter S subsidiary (QSSS). This notice
also provides temporary guidance on the manner in
which a QSSS election must be made and the effective
date of the election.
Notice 97–5, page 25.
Electing small business corporations and banks.This
notice provides guidance on the effect of the qualified
subchapter S subsidiary (QSSS) election under section
1361(b)(3) on banks affiliated with nonbanks; the appli-
cation of the S corporation passive investment income
rule of section 1362(d)(3); the application of the interest
expense disallowance rules of section 265; and an
automatic change in method of accounting for bad debts.
EMPLOYEE PLANS
Rev. Proc. 97–9, page 55.
Cash or deferred arrangements; amendments;
SIMPLEs.This procedure describes how an employer
that maintains a qualified cash or deferred arrangement
may make the necessary amendment for its qualified
cash or deferred arrangement to meet the provision for
a savings incentive match plan pursuant to section
1422 of the Small Business Job Protection Act of 1996.
Announcement 97–2, page 62.
Schedule Q; determination letter requests; section
401(a)(26).The instructions for completing Schedule Q
for plan years beginning after December 31, 1996, are
being changed.
Notice 97–2, page 22.
Cash or deferred arrangements; nondiscrimination.
With respect to cash or deferred arrangements, the notice
gives transitional relief for certain nondiscrimination tests
for the 1997 plan year and describes methods for the
determination and distribution of excess contributions.
(Continued on page 4)
Finding Lists begin on page 63.
Bulletin No. 1997–2
January 13, 1997
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be relied
upon as authoritative interpretations.

HIGHLIGHTS
OF THIS ISSUE—Continued
EMPLOYEE PLANS—Continued
Notice 97–6, page 26.
Questions and answers; SIMPLE IRAs.A notice, in
question and answer format, pertaining to simple IRAs
described in section 408(p) of the Code as added by the
Small Business Job Protection Act of 1996, is set forth.
Notice 97–10, page 41.
Spousal consent; qualified joint and survivor annu-
ities, etc.; sample language.
The Service has devel-
oped sample language for inclusion in a form providing
spousal consent to a participant’s election to waive a
qualified joint and survivor annuity or a qualified preretire-
ment survivor annuity, in accordance with section 1457 of
the Small Business Job Protection Act of 1996.
Notice 97–11, page 49.
Qualified domestic relations orders; sample lan-
guage.The Service has developed sample language for
qualified domestic relations orders within the meaning of
section 414(p) of the Code in accordance with section
1457 of the Small Business Job Protection Act of 1996.
ADMINISTRATIVE
Rev. Proc. 97–10, page 59.
Change in computing depreciation for retail motor
fuels outlets.This procedure is provided for making the
election under section 1120 of the Small Business Job
Protection Act of 1996 to treat retail motor fuels outlets
placed in service before August 20, 1996, as 15-year
property under section 168 of the Code. Rev. Proc.
92–20 modified.
Notice 97–9, page 35.
Adoption assistance.This notice provides general guid-
ance concerning the tax credit under section 23 for
“qualified adoption expenses” paid or incurred by an
individual and the exclusion from gross income under
section 137 for amounts paid or expenses incurred by
an employer for “qualified adoption expenses” under an
adoption assistance program.
Announcement 97–1, page 62.
Extension of test of mediation procedure for appeals.
This announcement extends the test of the mediation
procedure set forth in Announcement 95–86, 1995–44
I.R.B. 27, for an additional one-year period beginning on
January 13, 1997. The procedure will allow taxpayers,
whose cases are not docketed in any court and already
in the Appeals administrative process, to request media-
tion as a dispute resolution technique.
Announcement 97–3, page 62.
A list is provided of organizations that no longer qualify
as organizations to which contributions are deductible
under section 170 of the Code.
4

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

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

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income Housing
Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.
Section 56.—Adjustments in
Computing Alternative Minimum
Taxable Income
If a taxpayer elects to treat a retail motor fuels
outlet placed in service before August 20, 1996, as
15-year property for computing depreciation for
regular tax purposes, how is the depreciation
computed for alternative minimum taxable income
purposes? See Rev. Proc. 97–10, page 59.
Section 61.—Gross Income Defined
26 C.F.R. 1.61–1: Gross Income. (Also §§ 851,
856, 895, 7701; 1.851–2, 1.856–2, 1.895–1,
301.7701–13A.)
SBA guaranteed payment rights; par-
ticipating securities.The Small Busi-
ness Administration (SBA) is the pri-
mary obligor of the guaranteed payment
rights that are created under its partici-
pating security program and investors in
those rights are treated as owning SBA
debt.
Rev. Rul. 97–3
ISSUE
For federal tax purposes, is the Small
Business Administration (SBA) the pri-
mary obligor of certain guaranteed pay-
ment rights that are created under its
participating security program?
FACTS
The SBA is an independent agency of
the United States. Its activities include
regulating and providing financial assis-
tance to small business investment com-
panies (SBICs), which furnish venture
capital to small business concerns. One
way SBICs raise money for investment
is by issuing participating securities to
the SBA.See15 U.S.C. §§ 683 and
687(l) (1994). Participating securities
may take the form of preferred stock,
preferred limited partnership interests, or
similar instruments. 15 U.S.C. § 683(g)
(1994).
Regardless of their form, or the rights
they may provide under state and local
law, all participating securities share the
following characteristics. Every partici-
pating security entitles the SBA to both
a return of capital (Redemption Pay-
ments) and priority distributions that
equal a fixed percentage of the
unreturned capital (Prioritized Pay-
ments). Redemption Payments have to
be made by the final due date, which in
most cases, is approximately 10 years
from the day the participating security is
issued. Before the final due date, a
SBIC may make Redemption Payments
at its discretion, or may be required to
make Redemption Payments for reasons
such as its insolvency. Prioritized Pay-
ments are scheduled to be made at least
annually, but are due only to the extent
that the SBIC has sufficient profits. Any
scheduled amount that goes unpaid ac-
cumulates. Every participating security
also entitles the SBA to receive a por-
tion of the SBIC’s remaining profits
(Profit Participation Payments) and
gives the SBA the right to bar any
changes affecting its interests.
Once every quarter, the SBA acquires
new participating securities and as-
sembles them into a pool to be
securitized. Every security in a newly
formed pool has the same final due date
for making Redemption Payments and
uses the same percentage for calculating
Prioritized Payments. The percentage
used to calculate the Prioritized Pay-
ments is established with reference to
current interest rates.
To securitize a pool, the SBA assigns
the Redemption Payments and Priori-
tized Payments to a group of underwrit-
ers and simultaneously enters into a
guarantee relating to the assigned pay-
ments (the Payment Guarantee). All
rights in the participating securities,
other than the Redemption Payments
and Prioritized Payments, are retained
by the SBA, and the SBA has no duty
to exercise them for anyone else’s ben-
efit. The underwriters transfer the as-
signed payments and the Payment Guar-
antee to a trust. In exchange, the
underwriters receive a single class of
marketable trust certificates that in form
evidence beneficial ownership of the
transferred assets. Proceeds from the
underwriters’ sale of the trust certificates
are paid to the SBICs whose participat-
ing securities make up the pool.
Under the Payment Guarantee, the
SBA must disburse quarterly the amount
by which (1) the Prioritized Payments
made by the SBICs and available to the
trust fall short of (2) the Prioritized
Payments that would be due if Priori-
tized Payments had to be made regard-
less of financial condition and were paid
in quarterly installments rather than an-
nually. 15 U.S.C. § 683(g) (1994).
Thus, if a SBIC’s profits are so low that
the SBIC has no obligation to make a
Prioritized Payment, the SBA neverthe-
less has to pay, in quarterly installments,
the amount that would be owed if the
SBIC’s profits were unlimited. Making a
payment in this case does not entitle the
SBA to seek immediate restitution from
the SBIC. Instead, the SBA has to
recover the payment from whatever fu-
ture Prioritized Payments the SBIC may
generate.
The Payment Guarantee also obligates
the SBA to pay any shortfall in a pool’s
Redemption Payments. The SBA, there-
fore, has to make up any Redemption
Payment that a SBIC fails to pay on the
final due date or cannot pay when
forced to redeem a participating security
(for instance, in the case of insolvency
or commencement of receivership pro-
ceedings). Under these circumstances,
the right to receive the Redemption
Payment from the SBIC is released by
the trust in favor of the SBA.
By the terms of the Payment Guaran-
tee, the obligations of the SBA are
unconditional and must be performed
despite any legal or equitable defense.
Each time a new pool is created, the
SBA will reasonably expect to disburse
and not recover, during the pool’s first
three years, an amount exceeding 15
percent of the Prioritized Payments that
would be due on the participating secu-
rities in the pool if Prioritized Payments
had to be made regardless of financial
condition and were paid in quarterly
installments rather than annually. The
Payment Guarantee cannot be trans-
ferred separately from the rights to the
Redemption Payments and Prioritized
Payments.
The trust that holds the Payment
Guarantee and the rights to the Redemp-
tion Payments and Prioritized Payments
is authorized by statute, 15 U.S.C.
§ 687l(a) (1994), and governed by an
agreement among the SBA, the SBA’s
fiscal agent, and an independent trustee.
These parties may amend the agreement
without the consent of the certificate
holders, provided the amendment does
not adversely affect payments on the
certificates.
In form, each trust certificate repre-
sents a fractional undivided ownership
interest in the transferred assets. The
SBA guarantees (the Passthrough Guar-
antee) that the certificate holders will
5

receive timely an amount equal to their
proportionate share of all amounts re-
ceived by the trust. 15 U.S.C. § 687l(b)
(1994). The Passthrough Guarantee is
enforceable regardless of the defenses
available to the SBICs or the trustee.
Although the certificate holders can en-
force the Passthrough Guarantee, they
cannot enforce any obligation of the
SBICs. Specifically, the certificate hold-
ers have no right to enforce the Priori-
tized Payments or Redemption Pay-
ments, and the underlying SBICs owe
no duty to the certificate holders.
The trustee has no duty or authority
to enforce collection of the trust assets
other than the Payment Guarantee. In-
stead, the SBA services (at its expense)
the Redemption Payments and Priori-
tized Payments and has the sole right to
take action and assert claims with re-
spect to the Redemption Payments and
Prioritized Payments. As servicer, the
SBA can waive or agree to amend any
term of any participating security; those
modifications, however, cannot decrease
or defer the aggregate payments to the
trust. No federal or state law may limit
the exercise by the SBA of its owner-
ship rights in the participating securities.
15 U.S.C. § 687l(e)(2) (1994).
Because the SBA forms a new pool
of participating securities each quarter,
several pools may exist at any time. The
SBA has the right (but not the obliga-
tion) to replace Redemption Payments
and Prioritized Payments due on one
pool with Redemption Payments and
Prioritized Payments due on another.
Specifically, if the SBA believes a par-
ticipating security in a pool is about to
make a Redemption Payment, the SBA
can exchange the rights to all or part of
that Redemption Payment (and related
Prioritized Payments) for the rights to
all or part of the Redemption Payments
and Prioritized Payments due on partici-
pating securities in other pools.
The SBA can exercise the right of
substitution at any time provided three
conditions are met. These conditions en-
sure an adequate match between the
payments relinquished on a redeeming
security and the payments to be received
in exchange from any ‘‘replacement’’
securities. First, the sum of the Redemp-
tion Payments to be received with re-
spect to the replacement securities must
equal the amount of the Redemption
Payment relinquished with respect to the
redeeming security. Second, the final due
date for each replacement security must
be no later than the final due date for the
redeeming security. Third, the percentage
used for calculating the Prioritized Pay-
ments on each replacement security must
be no less than the percentage used for
calculating the Prioritized Payments on
the redeeming security.
There are common situations in which
the SBA can benefit from using the
substitution power. For example, if a
pool holds a 6 percent security that is
about to be redeemed, the SBA can
replace it with an 8 percent security
from an older pool. Certificate holders
in the older pool, after receiving the
Redemption Payment from the 6 percent
security, will no longer be entitled to
Prioritized Payments on the redeemed
amount. Certificate holders in the 6
percent pool will receive Prioritized
Payments from the 8 percent security,
but only at a 6 percent rate. Conse-
quently, the exchange will advance the
termination of the older, higher interest
rate pool, and allow the SBA to retain
the extra 2 percent of Prioritized Pay-
ments that are not required to service
the 6 percent pool.
LAW
The economic substance of a transac-
tion generally governs its federal tax
consequences.Gregory v. Helvering, 293
U.S. 465 (1935), XIV–1 C.B. 193. Af-
fixing a label to an undertaking (for
example, referring to an arrangement as
a ‘‘guarantee’’) does not alone decide its
character.Sun Oil Co. v. Commissioner,
562 F. 2d 258, 263 (3d Cir. 1977);
Oesterreich v. Commissioner, 226 F. 2d
798, 801–02 (9th Cir. 1955);Boulez v.
Commissioner, 83 T.C. 584, 591 (1984);
see also Commissioner v. P.G. Lake,
Inc., 356 U.S. 260 (1958), 1958–1 C.B.
516.
A guarantee of an instrument is a
secondary and collateral promise to pay
the amounts due under the instrument in
the event the primary obligor (ordinarily
the issuer) defaults.Zappo v. Commis-
sioner, 81 T.C. 87–88 (1983);Perry v.
Commissioner, 47 T.C. 159, 163 (1966).
The Commissioner may recharacterize
any transaction that has the preceding
attributes in appearance but not in sub-
stance.See Estate of Durkin v. Commis-
sioner, 99 T.C. 561, 571 (1992). How
the transaction may be rechacterized de-
pends on the facts, including the terms
of the ‘‘guarantee’’ and any related
agreements and the circumstances exist-
ing at the time the ‘‘guarantee’’ is made.
For example, at the time a taxpayer
‘‘guarantees’’ an instrument, the finances
of the issuer may be so precarious that
the taxpayer (rather than the issuer) is
expected to pay the instrument. Under
such facts, the taxpayer may be, in
substance, accepting primary (rather
than secondary) responsibility for the
instrument.Lang v. Commissioner, 32
B.T.A. 522 (1935);seeRev. Rul. 94–42,
1994–2 C.B. 15. As another example,
under the terms of a ‘‘guarantee’’ and
any related agreements, a taxpayer may
have to pay regardless of any default on
the ‘‘guaranteed’’ instrument and may
enjoy beneficial ownership of the instru-
ment. Beneficial ownership may be evi-
denced by, among other things, a power
in the taxpayer to replace the instrument
or to exercise for its own advantage any
privileges inherent in the instrument.See
Schoellkopf v. Commissioner, 32 B.T.A.
88 (1935);cf.Rev. Rul. 77–137, 1977–1
C.B. 178. Under such facts, the taxpayer
may be, in substance, issuing its own
primary obligation and using the ‘‘guar-
anteed’’ instrument to secure that obliga-
tion. Rev. Rul. 78–118, 1978–1 C.B.
219;see Schoellkopf v. Commissioner.
Different facts may support other char-
acterizations. No single fact is conclu-
sive, and all aspects of a transaction
must be considered to determine its
substance.
ANALYSIS
The trust holds a group of inseparable
rights consisting of the rights to the
Redemption Payments, the Prioritized
Payments, and the amounts paid under
the Payment Guarantee. Based on all of
the facts and circumstances, this group
of rights (the Guaranteed Payment
Rights) constitutes, in substance, a pri-
mary obligation of the SBA. It does not
represent an ownership interest in SBIC
securities backed by an SBA guarantee.
Among the reasons for this conclusion
are not only the differences between the
payment obligations of the SBA and the
payment obligations of the SBICs but
also the continuing interest of the SBA
in the participating securities.
The payment obligations of the SBA
and the SBICs differ in that the SBA
has to make payments even if the SBICs
are not in default. A SBIC has to make
a Prioritized Payment only if it has
sufficient profits, but the SBA must
disburse an amount equivalent to that
Prioritized Payment in all events. Also,
a SBIC has to make Prioritized Pay-
ments only on an annual basis, but the
SBA must make payments quarterly.
These differences are more than a mat-
ter of form. Each time a new pool is
6

created, the SBA will reasonably expect
to disburse and not recover, during the
pool’s first three years, an amount ex-
ceeding 15 percent of the Prioritized
Payments that would be due on the
participating securities in the pool if
Prioritized Payments had to be made
regardless of financial condition and
were paid in quarterly installments
rather than annually.
In addition, the SBA retains beneficial
ownership of the participating securities.
Although, in form, the rights to the
Redemption Payments and Prioritized
Payments are transferred to the trust,
neither the trust nor the certificate hold-
ers enjoy any rights of beneficial owner-
ship in the participating securities. No
federal or state law can limit the exer-
cise of the SBA’s ownership rights in
the participating securities, and the SBA
makes no promise to exercise these
rights for the trust’s benefit. 15 U.S.C.
§ 687l(e)(2) (1994). The SBA never
transfers its interests in the Profit Par-
ticipation Payments and continues to
service (at its expense) the Redemption
Payments and Prioritized Payments.
Moreover, neither the trustee nor the
certificate holders can force the SBICs
to make these payments. The SBA en-
joys a right to replace Redemption Pay-
ments and Prioritized Payments due on
one pool with Redemption Payments
and Prioritized Payments due on an-
other. This right allows the SBA to
exercise control over a participating se-
curity for its own rather than the certifi-
cate holders’ benefit. It also demon-
strates that a certificate does not
represent an interest in any identifiable
participating security.
HOLDING
For federal tax purposes, the SBA is
the primary obligor of the Guaranteed
Payment Rights created under its partici-
pating security program, and the trust
certificate holders are treated as owning
indebtedness of the SBA.
This revenue ruling is predicated on
the law governing the SBA participating
security program as of December 24,
1996. Therefore, before relying on this
revenue ruling, taxpayers, Service per-
sonnel, and others are cautioned to de-
termine whether the law referred to has
materially changed since that date. See
§ 7.01(6), Rev. Proc. 89–14, 1989–1
C.B. 814.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Kenneth Christman of the
Office of Assistant Chief Counsel (Fi-
nancial Institutions & Products). For
further information regarding this rev-
enue ruling contact Mr. Christman on
(202) 622–3950 (not a toll-free call).
Section 168.—Accelerated Cost
Recovery System
How does a taxpayer elect to treat a retail motor
fuels outlet placed in service before August 20,
1996, as 15-year property for depreciation pur-
poses? See Rev. Proc. 97–10, page 59.
Section 265.—Expenses and
Interest Relating to Tax-exempt
Income
26 CFR 1.265–2: Interest relating to tax-exempt
income.
In an S corporation context, to the extent
indebtedness and tax-exempt obligations are taken
into account in applying § 265(b) at the bank
level, are they taken into account again in apply-
ing § 265(a) at the shareholder level? See Notice
97–5, page 25.
Section 280G.—Golden Parachute
Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of January 1997.
See Rev. Rul. 97–1, page 10.
Section 382.—Limitation on Net
Operating Loss Carryforwards and
Certain Built-In Losses Following
Ownership Change
The adjusted federal long-term rate is set forth
for the month of January 1997. See Rev. Rul.
97–1, page 10.
Section 412.—Minimum Funding
Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.
Section 446.—General Rule for
Methods of Accounting
If a taxpayer elects to treat a retail motor fuels
outlet placed in service before August 20, 1996, as
15-year property for depreciation purposes, is this
election a change in method of accounting? See
Rev. Proc. 97–10, page 59.
Section 446.—General Rule for
Methods of Accounting
26 CFR 1.446–1: General rule for methods of
accounting.
If a taxpayer elects to treat a retail motor fuels
outlet place in service before August 20, 1996, as
15-year property for depreciation purposes, is this
election a change in method of accounting? See
Rev. Proc. 97–10, page 59.
Section 467.—Certain Payments
for the Use of Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.
Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.
Section 481.—Adjustments
Required by Changes in Methods of
Accounting
If a taxpayer elects to treat a retail motor fuels
outlet placed in service before August 20, 1996, as
15-year property for depreciation purposes, is an
adjustment to taxable income required by this
change in method of accounting? See Rev. Proc.
97–10, page 59.
Section 483.—Interest on Certain
Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.
Insurance companies; interest rate
tables.Prevailing state assumed interest
rates are provided for the determination
of reserves under section 807 of the
Code for contracts issued in 1996 and
1997. Rev. Rul. 92–19 supplemented in
part. See Rev. Rul. 97–2 on page 8.
7

Rev. Rul. 97–2
For purposes of § 807(d)(4) of the
Internal Revenue Code, for taxable years
beginning after December 31, 1995, this
ruling supplements the schedules of pre-
vailing state assumed interest rates set
forth in Rev. Rul. 92–19, 1992–1 C.B.
227. This information is to be used by
insurance companies in computing their
reserves for (1) life insurance and
supplementary total and permanent dis-
ability benefits, (2) individual annuities
and pure endowments, and (3) group
annuities and pure endowments. As
§ 807(d)(2)(B) requires that the interest
rate used to compute these reserves be
the greater of (1) the applicable federal
interest rate, or (2) the prevailing state
assumed interest rate, the table of appli-
cable federal interest rates in Rev. Rul.
92–19 is also supplemented.
Following are supplements to sched-
ules A, B, C, and D to Part III of Rev.
Rul. 92–19, providing prevailing state
assumed interest rates for insurance
products with different features issued in
1996 and 1997, and a supplement to the
table in Part IV of Rev. Rul. 92–19,
providing the applicable federal interest
rate under § 807(d) for 1996 and 1997.
This ruling does not supplement Parts I
and II of Rev. Rul. 92–19.
This is the fifth supplement to the
interest rates provided in Rev. Rul.
92–19. Earlier supplements were pub-
lished in Rev. Rul. 93–58, 1993–2 C.B.
241 (interest rates for insurance products
issued in 1992 and 1993), Rev. Rul.
94–11, 1994–1 C.B. 196 (1993 and
1994), Rev. Rul. 95–4, 1995–1 C.B. 141
(1994 and 1995), and Rev. Rul. 96–2,
1996–1 C.B. 141 (1995 and 1996).
Part III. Prevailing State Assumed
Interest Rates — Products Issued in
Years After 1982.*
Schedule A
STATUTORY VALUATION INTEREST
RATES BASED ON THE 1980
AMENDMENTS TO THE
NAIC STANDARD VALUATION LAW
A. Life insurance valuation:
Guarantee
Duration
(years)
Calendar Year
of Issue
1997
10 or fewer5.50**
More than 105.25**
but not more
than 20
More than 204.50**
Source: Rates calculated from the
monthly averages, ending June 30, 1996,
of Moody’s Corporate Bond Yield Aver-
age — Monthly Average Corporates.
** As the applicable federal interest rate
for 1997 of 6.33 percent exceeds this
prevailing state assumed interest rate,
the interest rate to be used for this
product under § 807 is 6.33 percent.
* The terms used in the schedules in
this ruling and in Part III of Rev. Rul.
92–19 are those used in the Standard
Valuation Law; the terms are defined in
Rev. Rul. 92–19.
Part III, Schedule B
STATUTORY VALUATION INTEREST
RATES BASED ON THE 1980
AMENDMENTS TO THE
NAIC STANDARD VALUATION LAW
B. Single premium immediate annuities
and annuity benefits involving life con-
tingencies arising from other annuities
with cash settlement options and from
guaranteed interest contracts with cash
settlement options:
Calendar Year of
Issue
Valuation Interest
Rate
19966.75*
Source: Rates calculated from the
monthly averages, ending June 30, 1996,
of Moody’s Corporate Bond Yield Aver-
age — Monthly Average Corporates.
The terms used in this schedule are
those used in the Standard Valuation
Law as defined in Rev. Rul. 92–19.
*As this prevailing state assumed inter-
est rate exceeds the applicable federal
interest rate for 1996 of 6.63 percent,
the interest rate to be used for this
product under § 807 is 6.75 percent.
Part III, Schedule C14—1996
STATUTORY VALUATION INTEREST RATES
BASED ON NAIC STANDARD VALUATION LAW
FOR1996CALENDAR YEAR BUSINESS
GOVERNED BY THE 1980 AMENDMENTS
C. Valuation interest rates for other annuities and guaranteed interest contracts that are valued on an issue year basis:
Valuation Interest Rate
For Plan Type
Cash
Settlement
Options?
Future
Interest
Guarantee?
Guarantee Duration
(years)ABC
YesYes5 or fewer6.755.75*5.25*
More than 5, but not6.50*5.75*5.25*
more than 10
More than 10, but not6.00*5.25*5.00*
more than 20
More than 205.00*4.50*4.50*
YesNo5 or fewer6.756.00*5.50*
More than 5, but not6.756.00*5.50*
more than 10
More than 10, but not6.25*5.50*5.25*
more than 20
8

Valuation Interest Rate
For Plan Type
More than 205.25*4.75*4.75*
NoYes or No 5 or fewer6.75
More than 5, but not6.50*
more than 10NOT APPLICABLE
More than 10, but not6.00*
more than 20
More than 205.00*
Source: Rates calculated from the monthly averages, ending June 30, 1996 of Moody’s Corporate Bond Yield Average —
Monthly Average Corporates.
*As the applicable federal interest rate for 1996 of 6.63 percent exceeds this prevailing state assumed interest rate, the interest
rate to be used for this product under § 807 is 6.63 percent.
Part III, Schedule D14—1996
STATUTORY VALUATION INTEREST RATES
BASED ON NAIC STANDARD VALUATION LAW
FOR1996CALENDAR YEAR BUSINESS
GOVERNED BY THE 1980 AMENDMENTS
D. Valuation interest rates for other annuities and guaranteed interest contracts that are contracts with cash settlement options
and that are valued on a change in fund basis:
Valuation Interest Rate
For Plan Type
Cash
Settlement
Options?
Future
Interest
Guarantee?
Guarantee Duration
(years)ABC
YesYes5 or fewer7.256.755.50*
More than 5, but not7.006.755.50*
more than 10
More than 10, but not6.756.50*5.25*
more than 20
More than 205.75*5.75*4.75*
YesNo5 or fewer7.507.005.75*
More than 5, but not7.257.005.75*
more than 10
More than 10, but not6.756.755.50*
more than 20
More than 206.00*6.00*5.00*
Source: Rates calculated from the monthly averages, ending June 30, 1996, of Moody’s Corporate Bond Yield Average —
Monthly Average Corporates.
*As the applicable federal interest rate for 1996 of 6.63 percent exceeds this prevailing state assumed interest rate, the interest
rate to be used for this product under § 807 is 6.63 percent.
Part IV. Applicable Federal
Interest Rates.
TABLE OF APPLICABLE
FEDERAL INTEREST RATES
FOR PURPOSES OF § 807
YearInterest Rate
19966.63
19976.33
Sources: Rev. Rul. 95–79, 1995–2 C.B.
134 for the 1996 rate and Rev. Rul.
96–57, 1996–50 I.R.B. C.B. 5 for the
1997 rate.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 92–19 is supplemented by
the addition to Part III of that ruling of
prevailing state assumed interest rates
under § 807 for certain insurance prod-
ucts issued in 1996 and 1997 and is
further supplemented by an addition to
the table in Part IV of Rev. Rul. 92–19
listing applicable federal interest rates.
Parts I and II of Rev. Rul. 92–19 are not
affected by this ruling.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Ann H. Logan of the Office of
Assistant Chief Counsel (Financial Insti-
tutions and Products). For further infor-
mation regarding this revenue ruling
contact her on (202) 622–3970 (not a
toll-free call).
9

Section 846.—Discounted Unpaid
Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, this
page.
Section 851.—Definition of
Regulated Investment Company
26 CFR 1.851–2: Limitations.
Are holders of the guaranteed payment rights
that are created by the Small Business Administra-
tion (SBA) under its participating security program
treated as owning SBA debt? See Rev. Rul. 97–3,
page 5.
Section 856.—Definition of Real
Estate Investment Trusts
26 CFR 1.856–2: Limitations.
Are holders of the guaranteed payment rights
that are created by the Small Business Administra-
tion (SBA) under its participating security program
treated as owning SBA debt? See Rev. Rul. 97–3,
page 5.
Section 895.—Income Derived by a
Foreign Central Bank of Issue From
Obligations of the United States or
From Bank Deposits
26 CFR 1.895–1: Income derived by a foreign
central bank of issue, or by Bank for International
Settlements, from obligations of the United States
or from bank deposits.
Are holders of the guaranteed payment rights
that are created by the Small Business Administra-
tion (SBA) under its participating security program
treated as owning SBA debt? See Rev. Rul. 97–3,
page 5.
Section 1274.—Determination of
Issue Price in the Case of Certain
Debt Instruments Issued for
Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal
rates; adjusted federal long-term rate,
and the long-term exempt rate.For
purposes of sections 1274, 1288, 382,
and other sections of the Code, tables
set forth the rates for January 1997.
Rev. Rul. 97–1
This revenue ruling provides various
prescribed rates for federal income tax
purposes for January 1997 (the current
month.) Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (ad-
justed AFR) for the current month for
purposes of section 1288(b). Table 3
sets forth the adjusted federal long-term
rate and the long-term tax-exempt rate
described in section 382(f). Table 4
contains the appropriate percentages for
determining the low-income housing
credit described in section 42(b)(2) for
buildings placed in service during the
current month. Table 5 contains the
federal rate for determining the present
value of an annuity, an interest for life
or for a term of years, or a remainder or
a reversionary interest for purposes of
section 7520. Finally, Table 6 contains
the deemed rate of return for transfers
made during calendar year 1997 to
pooled income funds described in sec-
tion 642(c)(5) that have been in exist-
ence for less than 3 taxable years imme-
diately preceding the taxable year in
which the transfer is made.
REV. RUL. 97–1 TABLE 1
Applicable Federal Rates (AFR) for January 1997
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR5.63%5.55%5.51%5.49%
110% AFR6.20%6.11%6.06%6.03%
120% AFR6.77%6.66%6.61%6.57%
130% AFR7.35%7.22%7.16%7.11%
Mid-Term
AFR6.10%6.01%5.97%5.94%
110% AFR6.72%6.61%6.56%6.52%
120% AFR7.34%7.21%7.15%7.10%
130% AFR7.96%7.81%7.74%7.69%
150% AFR9.22%9.02%8.92%8.86%
175% AFR10.80%10.52%10.39%10.30%
Long-Term
AFR6.54%6.44%6.39%6.36%
110% AFR7.21%7.08%7.02%6.98%
120% AFR7.88%7.73%7.66%7.61%
130% AFR8.55%8.37%8.28%8.23%
10

REV. RUL. 97–1 TABLE 2
Adjusted AFR for January 1997
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjusted AFR3.64%3.61%3.59%3.58%
Mid-term
adjusted AFR4.45%4.40%4.38%4.36%
Long-term
adjusted AFR5.35%5.28%5.25%5.22%
REV. RUL. 97–1 TABLE 3
Rates Under Section 382 for January 1997
Adjusted federal long-term rate for the current month5.35%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)5.60%
REV. RUL. 97–1 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for January 1997
Appropriate percentage for the 70% present value low-income housing credit8.48%
Appropriate percentage for the 30% present value low-income housing credit3.64%
REV. RUL. 97–1 TABLE 5
Rate Under Section 7520 for January 1997
Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest7.4%
REV. RUL. 97–1 TABLE 6
Deemed Rate for Transfers to New Pooled Income Funds During 1997
Deemed rate of return for transfers during 1997 to pooled income funds that have been in ex-
istence for less than 3 taxable years.7.2%
Section 1288.—Treatment of
Original Issue Discount on
Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.
Section 7701.—Definitions
26 CFR 301.7701–13A: Post-1969 domestic build-
ing and loan association.
Are holders of the guaranteed payment rights
that are created by the Small Business Administra-
tion (SBA) under its participating security program
treated as owning SBA debt? See Rev. Rul. 97–3,
page 5.
26 CFR 301.7701–3: Classification of certain
business entities.
T.D. 8697
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
Simplification of Entity
Classification Rules
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations that classify certain busi-
ness organizations under an elective re-
gime. These regulations replace the
existing classification rules.
DATES: These regulations are effective
as of January 1, 1997. For dates of
applicability of these regulations, see
Effective Dates under Supplementary In-
formation.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Mark D. Harris, (202) 622–3050; con-
cerning foreign organizations, William
H. Morris or Ronald M. Gootzeit, (202)
622–3880 (not toll-free numbers).
11

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 in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under control
number 1545–1486. Responses to these
collections of information are required
to obtain a benefit (to choose an entity’s
classification by election).
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
The estimates of the reporting burden
in these final regulations are reflected in
the burden estimates in Form 8832
(Entity Classification Election).
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
theInternal Revenue Service, Attn:
IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to theOf-
fice of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503.
Books or records relating to these
collections of information must be re-
tained as long as their contents may
become material in the administration of
any internal revenue law. Generally, tax
returns and tax return information are
confidential, as required by 26 U.S.C.
6103.
Background
On April 3, 1995, Notice 95–14
(1995–1 C.B. 297), relating to classifica-
tion of business organizations under sec-
tion 7701 of the Code, was published in
the Internal Revenue Bulletin. A notice
of public hearing was published in the
Federal Register on May 10, 1995 (60
FR 24813). Written comments were re-
ceived and a public hearing was held on
July 20, 1995.
On May 13, 1996, the IRS and Trea-
sury issued a notice of proposed
rulemaking (61 FR 21989 [PS–43–95,
1996–24 I.R.B. 20]) under section 7701.
The regulations proposed to replace the
existing regulations for classifying cer-
tain business organizations with an elec-
tive regime. Comments responding to
the notice were received, and a public
hearing was held on August 21, 1996.
After considering the comments that
were received in response to the notice
of proposed rulemaking and the state-
ments made at the public hearing, the
proposed regulations are adopted as re-
vised by this Treasury decision. The
revisions are discussed below.
Explanation of Provisions
Section 7701(a)(2) of the Code de-
fines a partnership to include a syndi-
cate, group, pool, joint venture, or other
unincorporated organization, through or
by means of which any business, finan-
cial operation, or venture is carried on,
and that is not a trust or estate or a
corporation. Section 7701(a)(3) defines a
corporation to include associations,
joint-stock companies, and insurance
companies.
The existing regulations for classify-
ing business organizations as associa-
tions (which are taxable as corporations
under section 7701(a)(3)) or as partner-
ships under section 7701(a)(2) are based
on the historical differences under local
law between partnerships and corpora-
tions. Treasury and the IRS believe that
those rules have become increasingly
formalistic. This document replaces
those rules with a much simpler ap-
proach that generally is elective.
As stated in the preamble to the
proposed regulations, in light of the
increased flexibility under an elective
regime for the creation of organizations
classified as partnerships, Treasury and
the IRS will continue to monitor care-
fully the uses of partnerships in the
international context and will take ap-
propriate action when partnerships are
used to achieve results that are inconsis-
tent with the policies and rules of
particular Code provisions or of U.S. tax
treaties.
A. Summary of the Regulations
Section 301.7701–1 provides an over-
view of the rules applicable in determin-
ing an organization’s classification for
federal tax purposes. The first step in
the classification process is to determine
whether there is a separate entity for
federal tax purposes. The regulations
explain that certain joint undertakings
that are not entities under local law may
nonetheless constitute separate entities
for federal tax purposes; however, not
all entities formed under local law are
recognized as separate entities for fed-
eral tax purposes. Whether an organiza-
tion is treated as an entity for federal
tax purposes is a matter of federal tax
law, and does not affect the rights and
obligations of its owners under local
law. For example, if a domestic limited
liability company with a single indi-
vidual owner is disregarded as an entity
separate from its owner under
§ 301.7701–3, its individual owner is
subject to federal income tax as if the
company’s business was operated as a
sole proprietorship.
An organization that is recognized as
a separate entity for federal tax purposes
is either a trust or a business entity
(unless a provision of the Code ex-
pressly provides for special treatment,
such as the Qualified Settlement Fund
rules (§ 1.468B) or the Real Estate
Mortgage Investment Conduit (REMIC)
rules, see section 860A(a)). The regula-
tions provide that trusts generally do not
have associates or an objective to carry
on business for profit. The distinctions
between trusts and business entities, al-
though restated, are not changed by
these regulations.
Section 301.7701–2 clarifies that busi-
ness entities that are classified as corpo-
rations for federal tax purposes include
corporations denominated as such under
applicable law, as well as associations,
joint-stock companies, insurance compa-
nies, organizations that conduct certain
banking activities, organizations wholly
owned by a State, organizations that are
taxable as corporations under a provi-
sion of the Code other than section
7701(a)(3), and certain organizations
formed under the laws of a foreign
jurisdiction (including a U.S. possession,
territory, or commonwealth).
The regulations in § 301.7701–2 in-
clude a special grandfather rule, under
which an entity described in the list of
foreign entities treated as per se corpo-
rations will nevertheless be classified as
other than a corporation. The regulations
also list certain situations where a
grandfathered entity would lose its
grandfathered status.
Any business entity that is not re-
quired to be treated as a corporation for
federal tax purposes (referred to in the
regulation as aneligible entity) may
choose its classification under the rules
of § 301.7701–3. Those rules provide
that an eligible entity with at least two
members can be classified as either a
partnership or an association, and that
an eligible entity with a single member
can be classified as an association or
can be disregarded as an entity separate
from its owner. However, if the single
owner of a business entity is a bank (as
12

defined in section 581), then the special
rules applicable to banks will continue
to apply to the single owner as if the
wholly owned entity were a separate
entity.
In order to provide most eligible
entities with the classification they
would choose without requiring them to
file an election, the regulations provide
default classification rules that aim to
match taxpayers’ expectations (and thus
reduce the number of elections that will
be needed). The regulations adopt a
passthrough default for domestic enti-
ties, under which a newly formed eli-
gible entity will be classified as a
partnership if it has at least two mem-
bers, or will be disregarded as an entity
separate from its owner if it has a single
owner. The default for foreign entities is
based on whether the members have
limited liability. Thus a foreign eligible
entity will be classified as an association
if all members have limited liability. A
foreign eligible entity will be classified
as a partnership if it has two or more
members and at least one member does
not have limited liability; the entity will
be disregarded as an entity separate
from its owner if it has a single owner
and that owner does not have limited
liability. Finally, the default classifica-
tion for an existing entity is the classifi-
cation that the entity claimed immedi-
ately prior to the effective date of these
regulations. An entity’s default classifi-
cation continues until the entity elects to
change its classification by means of an
affirmative election.
An eligible entity may affirmatively
elect its classification on Form 8832,
Entity Classification Election. The regu-
lations require that the election be
signed by each member of the entity or
any officer, manager, or member of the
entity who is authorized to make the
election and who represents to having
such authorization under penalties of
perjury. An election will not be accepted
unless it includes all of the required
information, including the entity’s tax-
payer identifying number (TIN).
Taxpayers are reminded that a change
in classification, no matter how
achieved, will have certain tax conse-
quences that must be reported. For ex-
ample, if an organization classified as an
association elects to be classified as a
partnership, the organization and its
owners must recognize gain, if any,
under the rules applicable to liquidations
of corporations.a
B. Discussion of Comments on the
General Approach and Scope of the
Regulations
Several comments requested clarifica-
tion with regard to the rules for deter-
mining when an owner of an interest in
an organization will be respected as a
bona fide owner for federal tax pur-
poses. Some commentators were con-
cerned, for example, that certain owners
would be required to maintain certain
net worth requirements. Other commen-
tators, relying on Rev. Rul. 93–4,
1993–1 C.B. 225, suggested that if two
wholly-owned subsidiaries of a common
parent were the owners of an organiza-
tion, those owners would not be re-
spected as bona fide owners and the
organization would be treated as having
only one owner (the common parent).
Although the determination of whether
an organization has more than one
owner is based on all the facts and
circumstances, the fact that some or all
of the owners of an organization are
under common control does not require
the common parent to be treated as the
sole owner. Consistent with this ap-
proach, Rev. Rul. 93–4 treated two
wholly owned subsidiaries as associates
and then classified the foreign entity
based on the four corporate characteris-
tics under section 7701. While these
four factors will no longer apply with
the adoption of the regulations, deter-
mining whether the subsidiaries are as-
sociates continues to be an issue.
The IRS has received a number of
comments asking for clarification of the
tax treatment of entities that are wholly
owned by an Indian tribe and incorpo-
rated under tribal law. Treasury and the
IRS are currently studying this issue and
will, if necessary, issue separate guid-
ance regarding this issue.
Most commentators agreed that inclu-
sion of the list of foreign business
entities treated as corporations per se
was appropriate. However, several com-
mentators requested clarification about
certain foreign business entities on the
per se list. Other commentators re-
quested clarification whether and how
the list of such corporations might be
updated in the future. The regulations
are clarified with respect to entities
formed in the following jurisdictions:
Aruba, Canada, People’s Republic of
China, Republic of China (Taiwan), In-
dia, Indonesia, Netherlands Antilles, and
Sweden. Any further modifications will
be announced in a notice of proposed
rulemaking and will be prospective only.
Commentators also raised the issue of
how to determine if a joint venture or
other contractual arrangement that is
considered a separate entity under these
regulations is considered a foreign or
domestic entity. This issue is outside the
scope of these regulations and thus is
not addressed in the final regulations.
Some commentators raised issues re-
lating to the application of the grandfa-
ther rule for certain existing entities
organized under foreign statutes in-
cluded on the list of per se corporations.
In particular, commentators requested
clarification regarding existing entities
that would be listed on the per se list.
Commentators have asked whether an
existing entity on the per se list which
had claimed non-corporate status could
retain that status, and, if so, whether it
could subsequently elect to be treated as
a corporation. Commentators also asked
for clarification as to the effect of a
deemed termination under section
708(b)(1)(B) or a division under section
708(b)(2)(B) on a grandfathered per se
entity.
In response to these comments, the
grandfather rules clarify that an entity
on the list which was previously disre-
garded as a separate entity (i.e., treated
as a branch) or was treated as a partner-
ship may continue to be treated as such
when the regulations become effective.
Moreover, entities on the list which
continue to treat themselves as branches
or partnerships after the effective date of
the regulations may subsequently elect
to be treated as corporations. However,
after such election they may not subse-
quently elect to be treated as a partner-
ship or a branch. Finally, any termina-
tion under section 708(b)(1)(B) (except
in the case of a sale or exchange of
interests in an entity described in
§ 301.7701–2(d)(2) where the sale or
exchange is to a related person within
the meaning of sections 267(b) and
707(b) and occurs no later than 12
months after the date the entity is
formed) or division under section
708(b)(2)(B) will end the grandfathered
status of any entity on the per se list,
and therefore the successor entity (or
entities) will thereafter be permanently
treated as a corporation.
Other commentators suggested that
the requirement that an existing entity
included on the per se list must have
claimed passthrough treatment for all
prior periods is burdensome and pre-
cludes grandfather treatment for entities
that restructured in the past and recog-
nized the resulting tax consequences. In
13

response to these comments, the regula-
tions are modified to indicate that an
existing entity can continue to be treated
as a non-corporate entity if it was in
existence on May 8, 1996, and was
reasonably treated as a non-corporate
entity on that date (or formed thereafter
pursuant to a written binding contract in
effect on May 8, 1996, in which the
parties agreed to engage (directly or
indirectly) in an active and substantial
business operation in the jurisdiction in
which the entity is formed, and which
would otherwise meet the grandfather
rules if the date the entity is formed is
substituted for May 8, 1996). If the
entity changed its claimed tax status
within the sixty months prior to May 8,
1996, the entity and its members must
have recognized the tax consequences
that resulted from that change in tax
status. Moreover, the regulations clarify
that the grandfather treatment applies if
no person for whom the entity’s classifi-
cation was relevant on May 8, 1996,
treats the entity as a corporation for
purposes of filing such person’s federal
income tax returns, information returns,
and withholding documents for the pe-
riod including May 8, 1996.
One commentator suggested that it
was unclear when the classification of a
foreign entity is ‘‘relevant’’ for federal
tax purposes. This determination is im-
portant, as it affects whether the grand-
father rule, the default rule for existing
entities, or the default rule for a newly
formed foreign entity applies. In gen-
eral, an entity’s classification is relevant
when its classification affects the liabil-
ity of any person for federal tax or
information purposes. The date that the
classification of a foreign entity is rel-
evant is the date an event occurs that
causes an obligation to file a return or
statement for which the classification of
the entity must be determined.
C. Discussion of Comments Relating to
the Elective Regime
Most of the commentators agreed that
the default rules included in the pro-
posed regulations generally would match
taxpayers’ expectations. However, some
commentators expressed concern over
the application of the default rule for
newly formed foreign eligible entities
which would treat such entities as asso-
ciations if no member had unlimited
liability. Specifically, certain commenta-
tors noted that under the definition of
unlimited liability in the proposed regu-
lations, certain contractual joint ventures
which, under current law, would gener-
ally be classified as partnerships, would
be treated as associations under the
default rule. The members of these
contractual joint ventures are not jointly
and severally liable for all debts of the
entity; rather, each member has unlim-
ited liability for a certain proportion of
the debts of the entity. To simplify the
default rules, the regulations are modi-
fied to provide that a newly formed
foreign eligible entity will— (1) be
treated as a partnership if it has at least
two members and at least one member
does not have limited liability; (2) be
treated as an association if all members
of the entity have limited liability; and
(3) be disregarded as an entity separate
from its owner if it has a single owner
that does not have limited liability.
The regulations are modified to pro-
vide that a member does not have
limited liability if the member, by virtue
of being a member, has personal liabil-
ity for all or any portion of the debts of
the entity.
Certain commentators asked for clari-
fication of the default rule in the case
where the relevant statute or law of a
particular country provides for limited
or unlimited liability. Generally, the
regulations specify that only the statute
or law is relevant. Where, however, the
underlying statute allows the entity to
specify in its organizational documents
whether the members will have limited
liability, the organizational documents
may be relevant.
Some commentators requested that
taxpayers be allowed to make classifica-
tion elections with their first tax returns.
The regulations retain the requirement
that elections be made at the beginning
of the taxable year. Treasury and the
IRS continue to believe that it is appro-
priate to determine an entity’s classifica-
tion at the time that it begins its opera-
tions. Taxpayers can specify the date on
which an election will be effective,
provided that date is not more than 75
days prior to the date on which the
election is filed (irrespective of when
the interest was acquired) and not more
than 12 months after the date the elec-
tion was filed. If a taxpayer specifies an
effective date more than 75 days prior
to the date on which the election is
filed, the election will be effective 75
days prior to the date on which the
election was filed. If a taxpayer speci-
fies an effective date more than 12
months from the filing date, the election
will be effective 12 months after the
date the election was filed. No election,
whenever filed, will be effective before
January 1, 1997.
One commentator expressed concern
about the ability to make protective
elections where there is uncertainty, for
example, about an entity’s status as a
business entity. Such protective elections
are not prohibited under the regulations.
The regulations limit the ability of an
entity to make multiple classification
elections by prohibiting more than one
election to change an entity’s classifica-
tion during any sixty month period. One
commentator suggested that the regula-
tions be amended to waive application
of this rule in certain circumstances,
particularly when there has been a sub-
stantial change in ownership of the
entity. In response to this comment, the
regulations permit the Commissioner to
waive the application of the sixty month
limitation by letter ruling. However,
waivers will not be granted unless there
has been more than a fifty percent
ownership change. The sixty month
limitation only applies to a change in
classification by election; the limitation
does not apply if the organization’s
business is actually transferred to an-
other entity.
Several commentators requested clari-
fication concerning the classification of
a foreign entity when the classification
of the entity becomes relevant for fed-
eral tax purposes after a period during
which the classification of the entity
was not relevant. Generally, such an
entity will retain its prior classification.
However, if the classification of a for-
eign eligible entity which was previ-
ously relevant for federal tax purposes
ceases to be relevant for sixty consecu-
tive months, the entity’s classification
will be determined initially under the
default classification when the classifi-
cation of the foreign eligible entity
again becomes relevant.
Some commentators requested clarifi-
cation regarding the rule permitting
elections to be signed by any authorized
officer, manager, or member of the
electing entity. The regulations retain
this rule, as it provides taxpayers with
flexibility in complying with the elec-
tion requirements. The determination of
whether a person is authorized to make
an election is based on local law. Thus,
the election can be made by anyone
authorized to act on behalf of the entity.
Several commentators asked for guid-
ance regarding the necessary signatures
on the classification election. The regu-
lations are modified to provide that if
14

the election is made by all of the
members, each person who is an owner
at the time the election is made must
consent to the election. However, if an
election is to be effective for any period
prior to the date it is filed, each person
who was an owner between the date the
election is to be effective and the date
the election is filed (even if by an
authorized person), and who is not an
owner at the time the election is filed,
must also consent to the election.
Several commentators requested that
the classification election be coordinated
with the election under section 856(c)(1)
to be a real estate investment trust
(REIT). Because the latter election is
required to be made with the REIT’s
first tax return, the regulations are modi-
fied to provide that an election by an
eligible entity to be a REIT will be
treated as a deemed election to be
classified as an association, effective for
the entire period during which REIT
status is claimed.
Some commentators suggested that
the regulations should not require an
entity or its direct or indirect owners to
attach a copy of the entity’s election to
their federal tax returns. Specifically,
some commentators were concerned that
the failure of one owner to attach a
copy of the election to the owner’s
return would void an otherwise valid
election. The regulations retain the re-
quirement that taxpayers must attach a
copy of the election to their returns, but
clarify that failure to do so will not
invalidate an otherwise valid election.
Although the failure to attach a copy
will not adversely affect an otherwise
valid election, taxpayers are reminded
that each member of the entity is re-
quired to file returns that are consistent
with the entity’s election. Failure to
attach the election form to a federal tax
or information return as directed in the
regulations may give rise to penalties
against the non-filing party. Other appli-
cable penalties may also apply to parties
who file federal tax or information re-
turns inconsistent with the entity’s elec-
tion.
One commentator asked for guidance
on the treatment of conversions by elec-
tion from partnership to corporation and
from corporation to partnership. This
issue is outside the scope of these
classification rules and thus is not ad-
dressed in these regulations. Treasury
and the IRS, however, are actively con-
sidering issuing guidance on the treat-
ment of such conversions.
D. Effective Dates
The regulations are effective as of
January 1, 1997.
The regulations provide a special
transition rule for existing entities. The
IRS will not challenge the prior classifi-
cation of an existing eligible entity, or
an existing entity described on the per
se list, for periods prior to January 1,
1997, if— (1) the entity had a reason-
able basis (within the meaning of sec-
tion 6662) for its claimed classification;
(2) the entity and all members of the
entity recognized the federal tax conse-
quences of any change in the entity’s
classification within the sixty months
prior to January 1, 1997; and (3) neither
the entity nor any member had been
notified in writing on or before May 8,
1996, that the classification of the entity
was under examination (in which case
the entity’s classification will be deter-
mined in the examination).
Some commentators were concerned
that an entity organized after May 8,
1996, would be excluded from this
transition rule for existing entities. Be-
cause § 301.7701–3(f)(2) applies to en-
tities that were in existence prior to
January 1, 1997, no change is necessary
to provide relief for entities organized
after May 8, 1996.
Some commentators were concerned
about entities that claimed to be trusts
for the period prior to January 1, 1997,
but are subsequently determined to be
business entities. In that case, the enti-
ty’s claimed classification for purposes
of applying the provisions of the special
transition rule will be the business entity
classification claimed by the entity after
it has been determined to be a business
entity.
Effect on other documents
The Service has published a number
of revenue rulings and revenue proce-
dures interpreting the section 7701 regu-
lations. The Service is currently review-
ing these revenue rulings and revenue
procedures to determine which are af-
fected by the publication of these regu-
lations. See accompanying Notice 97–1.
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
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations. It is
hereby certified that these regulations do
not have a significant economic impact
on a substantial number of small enti-
ties. This certification is based upon the
fact that the automatic classification
rules of § 301.7701–2(b) and the default
classification rules of § 301.7701–3(b)
will operate in such a manner that only
a limited number of entities will need to
make an election under § 301.7701–3(c)
to determine their classification. There-
fore, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pursu-
ant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these final regula-
tions has been submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal authors of these regula-
tions are Armando Gomez and Mark D.
Harris of the Office of Assistant Chief
Counsel (Passthroughs and Special In-
dustries) and William H. Morris and
Ronald M. Gootzeit of the Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Adoption of Amendments to the Regula-
tions
Accordingly, 26 CFR parts 1, 301,
and 602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.581–1 is revised to
read as follows:
§ 1.581–1 Banks.
(a) In order to be a bank as defined
in section 581, an institution must be a
corporation for federal tax purposes. See
§ 301.7701–2(b) of this chapter for the
definition of a corporation.
(b) This section is effective as of
January 1, 1997.
Par. 3. Section 1.581–2 is amended as
follows:
1. Paragraph (a) is removed.
2. Paragraphs (b) and (c) are redesig-
nated as paragraphs (a) and (b), respec-
tively.
15

3. Newly designated paragraph (a) is
amended by revising the second and last
sentences.
The revisions read as follows:
§ 1.581–2 Mutual savings banks, build-
ing and loan associations, and coopera-
tive banks.
(a) * * * See section 593 for special
rules concerning reserves for bad debts.
* * * See also section 594 and
§ 1.594–1 for special rules governing
the taxation of a mutual savings bank
conducting a life insurance business.
* * * * *
Par. 4. In § 1.761–1, paragraph (a) is
revised to read as follows:
§ 1.761–1 Terms defined.
(a)Partnership.The termpartnership
means a partnership as determined under
§§ 301.7701–1, 301.7701–2, and
301.7701–3 of this chapter.
* * * * *
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 5. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 6. Section 301.6109–1 is
amended as follows:
1. Paragraph (b)(2)(iii) is amended by
removing the language ‘‘and’’ at the end
of the paragraph.
2. Paragraph (b)(2)(iv) is amended by
removing the period at the end of the
paragraph, and replacing it with the
language ‘‘; and’’.
3. Paragraph (b)(2)(v) is added.
4. The text of paragraph (d)(2) is
redesignated as paragraph (d)(2)(i).
5. A paragraph heading is added for
newly designated paragraph (d)(2)(i).
6. Paragraph (d)(2)(ii) is added.
The revisions and additions read as
follows:
§ 301.6109–1 Identifying numbers.
* * * * *
(b) * * *
(2) * * *
(v) A foreign person that makes an
election under § 301.7701–3(c).
* * * * *
(d) * * *
(2)Employer identification number—
(i)In general. * * *
(ii)Special rule for entities electing
to change their federal tax classification
under § 301.7701–3(c).Any entity that
has an employer identification number
and then elects under § 301.7701–3(c)
to change its federal tax classification
will retain that employer identification
number.
* * * * *
Par. 7. Sections 301.7701–1,
301.7701–2, and 301.7701–3 are revised
to read as follows:
§ 301.7701–1 Classification of organi-
zations for federal tax purposes.
(a)Organizations for federal tax pur-
poses—(1)In general. The Internal Rev-
enue Code prescribes the classification
of various organizations for federal tax
purposes. Whether an organization is an
entity separate from its owners for fed-
eral tax purposes is a matter of federal
tax law and does not depend on whether
the organization is recognized as an
entity under local law.
(2)Certain joint undertakings give
rise to entities for federal tax purposes.
A joint venture or other contractual
arrangement may create a separate entity
for federal tax purposes if the partici-
pants carry on a trade, business, finan-
cial operation, or venture and divide the
profits therefrom. For example, a sepa-
rate entity exists for federal tax purposes
if co-owners of an apartment building
lease space and in addition provide
services to the occupants either directly
or through an agent. Nevertheless, a
joint undertaking merely to share ex-
penses does not create a separate entity
for federal tax purposes. For example, if
two or more persons jointly construct a
ditch merely to drain surface water from
their properties, they have not created a
separate entity for federal tax purposes.
Similarly, mere co-ownership of prop-
erty that is maintained, kept in repair,
and rented or leased does not constitute
a separate entity for federal tax pur-
poses. For example, if an individual
owner, or tenants in common, of farm
property lease it to a farmer for a cash
rental or a share of the crops, they do
not necessarily create a separate entity
for federal tax purposes.
(3)Certain local law entities not rec-
ognized. An entity formed under local
law is not always recognized as a
separate entity for federal tax purposes.
For example, an organization wholly
owned by a State is not recognized as a
separate entity for federal tax purposes
if it is an integral part of the State.
Similarly, tribes incorporated under sec-
tion 17 of the Indian Reorganization Act
of 1934, as amended, 25 U.S.C. 477, or
under section 3 of the Oklahoma Indian
Welfare Act, as amended, 25 U.S.C.
503, are not recognized as separate
entities for federal tax purposes.
(4)Single owner organizations. Un-
der §§ 301.7701–2 and 301.7701–3,
certain organizations that have a single
owner can choose to be recognized or
disregarded as entities separate from
their owners.
(b)Classification of organizations.
The classification of organizations that
are recognized as separate entities is
determined under §§ 301.7701–2,
301.7701–3, and 301.7701–4 unless a
provision of the Internal Revenue Code
(such as section 860A addressing Real
Estate Mortgage Investment Conduits
(REMICs)) provides for special treat-
ment of that organization. For the classi-
fication of organizations as trusts, see
§ 301.7701–4. That section provides
that trusts generally do not have associ-
ates or an objective to carry on business
for profit. Sections 301.7701–2 and
301.7701–3 provide rules for classifying
organizations that are not classified as
trusts.
(c)Qualified cost sharing arrange-
ments. A qualified cost sharing arrange-
ment that is described in § 1.482–7 of
this chapter and any arrangement that is
treated by the Commissioner as a quali-
fied cost sharing arrangement under
§ 1.482–7 of this chapter is not recog-
nized as a separate entity for purposes
of the Internal Revenue Code. See
§ 1.482–7 of this chapter for the proper
treatment of qualified cost sharing ar-
rangements.
(d)Domestic and foreign entities. For
purposes of this section and
§§ 301.7701–2 and 301.7701–3, an en-
tity is a domestic entity if it is created
or organized in the United States or
under the law of the United States or of
any State; an entity is foreign if it is not
domestic. See sections 7701(a)(4) and
(a)(5).
(e)State. For purposes of this section
and § 301.7701–2, the termStatein-
cludes the District of Columbia.
(f)Effective date. The rules of this
section are effective as of January 1,
1997.
§ 301.7701–2 Business entities; defini-
tions.
(a)Business entities. For purposes of
this section and § 301.7701–3, abusi-
ness entityis any entity recognized for
federal tax purposes (including an entity
with a single owner that may be disre-
garded as an entity separate from its
owner under § 301.7701–3) that is not
16

properly classified as a trust under
§ 301.7701–4 or otherwise subject to
special treatment under the Internal Rev-
enue Code. A business entity with two
or more members is classified for fed-
eral tax purposes as either a corporation
or a partnership. A business entity with
only one owner is classified as a corpo-
ration or is disregarded; if the entity is
disregarded, its activities are treated in
the same manner as a sole proprietor-
ship, branch, or division of the owner.
(b)Corporations. For federal tax pur-
poses, the termcorporationmeans—
(1) A business entity organized under
a Federal or State statute, or under a
statute of a federally recognized Indian
tribe, if the statute describes or refers to
the entity as incorporated or as a corpo-
ration, body corporate, or body politic;
(2) An association (as determined un-
der § 301.7701–3);
(3) A business entity organized under
a State statute, if the statute describes or
refers to the entity as a joint-stock
company or joint-stock association;
(4) An insurance company;
(5) A State-chartered business entity
conducting banking activities, if any of
its deposits are insured under the Fed-
eral Deposit Insurance Act, as amended,
12 U.S.C. 1811 et seq., or a similar
federal statute;
(6) A business entity wholly owned
by a State or any political subdivision
thereof;
(7) A business entity that is taxable
as a corporation under a provision of the
Internal Revenue Code other than sec-
tion 7701(a)(3); and
(8)Certain foreign entities—(i)In
general. Except as provided in para-
graphs (b)(8)(ii) and (d) of this section,
the following business entities formed in
the following jurisdictions:
American Samoa, Corporation
Argentina, Sociedad Anonima
Australia, Public Limited Company
Austria, Aktiengesellschaft
Barbados, Limited Company
Belgium, Societe Anonyme
Belize, Public Limited Company
Bolivia, Sociedad Anonima
Brazil, Sociedade Anonima
Canada, Corporation and Company
Chile, Sociedad Anonima
People’s Republic of China, Gufen
Youxian Gongsi
Republic of China (Taiwan), Ku-fen
Yu-hsien Kung-szu
Colombia, Sociedad Anonima
Costa Rica, Sociedad Anonima
Cyprus, Public Limited Company
Czech Republic, Akciova Spolecnost
Denmark, Aktieselskab
Ecuador, Sociedad Anonima or
Compania Anonima
Egypt, Sharikat Al-Mossahamah
El Salvador, Sociedad Anonima
Finland, Osakeyhtio/Aktiebolag
France, Societe Anonyme
Germany, Aktiengesellschaft
Greece, Anonymos Etairia
Guam, Corporation
Guatemala, Sociedad Anonima
Guyana, Public Limited Company
Honduras, Sociedad Anonima
Hong Kong, Public Limited Company
Hungary, Reszvenytarsasag
Iceland, Hlutafelag
India, Public Limited Company
Indonesia, Perseroan Terbuka
Ireland, Public Limited Company
Israel, Public Limited Company
Italy, Societa per Azioni
Jamaica, Public Limited Company
Japan, Kabushiki Kaisha
Kazakstan, Ashyk Aktsionerlik
Kogham
Republic of Korea, Chusik Hoesa
Liberia, Corporation
Luxembourg, Societe Anonyme
Malaysia, Berhad
Malta, Partnership Anonyme
Mexico, Sociedad Anonima
Morocco, Societe Anonyme
Netherlands, Naamloze Vennootschap
New Zealand, Limited Company
Nicaragua, Compania Anonima
Nigeria, Public Limited Company
Northern Mariana Islands, Corpora-
tion
Norway, Aksjeselskap
Pakistan, Public Limited Company
Panama, Sociedad Anonima
Paraguay, Sociedad Anonima
Peru, Sociedad Anonima
Philippines, Stock Corporation
Poland, Spolka Akcyjna
Portugal, Sociedade Anonima
Puerto Rico, Corporation
Romania, Societe pe Actiuni
Russia, Otkrytoye Aktsionernoy
Obshchestvo
Saudi Arabia, Sharikat Al-
Mossahamah
Singapore, Public Limited Company
Slovak Republic, Akciova Spolocnost
South Africa, Public Limited Com-
pany
Spain, Sociedad Anonima
Surinam, Naamloze Vennootschap
Sweden, Publika Aktiebolag
Switzerland, Aktiengesellschaft
Thailand, Borisat Chamkad
(Mahachon)
Trinidad and Tobago, Public Limited
Company
Tunisia, Societe Anonyme
Turkey, Anonim Sirket
Ukraine, Aktsionerne Tovaristvo
Vidkritogo Tipu
United Kingdom, Public Limited
Company
United States Virgin Islands, Corpora-
tion
Uruguay, Sociedad Anonima
Venezuela, Sociedad Anonima or
Compania Anonima
(ii)Exceptions in certain cases. The
following entities will not be treated as
corporations under paragraph (b)(8)(i) of
this section:
(A) With regard to Canada, any cor-
poration or company formed under any
federal or provincial law which provides
that the liability of all of the members
of such corporation or company will be
unlimited; and
(B) With regard to India, a company
deemed to be a public limited company
solely by operation of Section 43A(1)
(relating to corporate ownership of the
company), section 43A(1A) (relating to
annual average turnover), or section
43A(1B) (relating to ownership interests
in other companies) of the Companies
Act, 1956 (or any combination of these),
provided that the organizational docu-
ments of such deemed public limited
company continue to meet the require-
ments of section 3(1)(iii) of the Compa-
nies Act, 1956.
(iii)Public companies. With regard to
Cyprus, Hong Kong, Jamaica, and
Trinidad and Tobago, the term public
limited company includes any limited
company which is not a private limited
company under the laws of those juris-
dictions.
(iv)Limited companies. Any refer-
ence to a limited company (whether
public or private) in paragraph (b)(8)(i)
of this section includes, as the case may
be, companies limited by shares and
companies limited by guarantee.
(v)Multilingual countries. Different
linguistic renderings of the name of an
entity listed in paragraph (b)(8)(i) of this
section shall be disregarded. For ex-
ample, an entity formed under the laws
of Switzerland as a Societe Anonyme
will be a corporation and treated in the
same manner as an Aktiengesellschaft.
(c)Other business entities. For fed-
eral tax purposes—
(1) The termpartnershipmeans a
business entity that is not a corporation
under paragraph (b) of this section and
that has at least two members.
(2)Wholly owned entities—(i)In
general. A business entity that has a
17

single owner and is not a corporation
under paragraph (b) of this section is
disregarded as an entity separate from
its owner.
(ii)Special rule for certain business
entities. If the single owner of a busi-
ness entity is a bank (as defined in
section 581), then the special rules ap-
plicable to banks will continue to apply
to the single owner as if the wholly
owned entity were a separate entity.
(d)Special rule for certain foreign
business entities—(1)In general. Except
as provided in paragraph (d)(3) of this
section, a foreign business entity de-
scribed in paragraph (b)(8)(i) of this
section will not be treated as a corpora-
tion under paragraph (b)(8)(i) of this
section if—
(i) The entity was in existence on
May 8, 1996;
(ii) The entity’s classification was rel-
evant (as defined in § 301.7701–3(d))
on May 8, 1996;
(iii) No person (including the entity)
for whom the entity’s classification was
relevant on May 8, 1996, treats the
entity as a corporation for purposes of
filing such person’s federal income tax
returns, information returns, and with-
holding documents for the taxable year
including May 8, 1996;
(iv) Any change in the entity’s
claimed classification within the sixty
months prior to May 8, 1996, occurred
solely as a result of a change in the
organizational documents of the entity,
and the entity and all members of the
entity recognized the federal tax conse-
quences of any change in the entity’s
classification within the sixty months
prior to May 8, 1996;
(v) A reasonable basis (within the
meaning of section 6662) existed on
May 8, 1996, for treating the entity as
other than a corporation; and
(vi) Neither the entity nor any mem-
ber was notified in writing on or before
May 8, 1996, that the classification of
the entity was under examination (in
which case the entity’s classification
will be determined in the examination).
(2)Binding contract rule. If a foreign
business entity described in paragraph
(b)(8)(i) of this section is formed after
May 8, 1996, pursuant to a written
binding contract (including an accepted
bid to develop a project) in effect on
May 8, 1996, and all times thereafter, in
which the parties agreed to engage (di-
rectly or indirectly) in an active and
substantial business operation in the ju-
risdiction in which the entity is formed,
paragraph (d)(1) of this section will be
applied to that entity by substituting the
date of the entity’s formation for May 8,
1996.
(3)Termination of grandfather sta-
tus—(i)In general. An entity that is not
treated as a corporation under paragraph
(b)(8)(i) of this section by reason of
paragraph (d)(1) or (d)(2) of this section
will be treated permanently as a corpo-
ration under paragraph (b)(8)(i) of this
section from the earliest of:
(A) The effective date of an election
to be treated as an association under
§ 301.7701–3;
(B) A termination of the partnership
under section 708(b)(1)(B) (regarding
sale or exchange of 50 percent or more
of the total interest in an entity’s capital
or profits within a twelve month pe-
riod); or
(C) A division of the partnership un-
der section 708(b)(2)(B).
(ii)Special rule for certain entities.
For purposes of paragraph (d)(2) of this
section, paragraph (d)(3)(i)(B) of this
section shall not apply if the sale or
exchange of interests in the entity is to a
related person (within the meaning of
sections 267(b) and 707(b)) and occurs
no later than twelve months after the
date of the formation of the entity.
(e)Effective date. The rules of this
section are effective as of January 1,
1997.
§ 301.7701–3 Classification of certain
business entities.
(a)In general. A business entity that
is not classified as a corporation under
§ 301.7701–2(b)(1), (3), (4), (5), (6),
(7), or (8) (aneligible entity) can elect
its classification for federal tax purposes
as provided in this section. An eligible
entity with at least two members can
elect to be classified as either an asso-
ciation (and thus a corporation under
§ 301.7701–2(b)(2)) or a partnership,
and an eligible entity with a single
owner can elect to be classified as an
association or to be disregarded as an
entity separate from its owner. Para-
graph (b) of this section provides a
default classification for an eligible en-
tity that does not make an election.
Thus, elections are necessary only when
an eligible entity chooses to be classi-
fied initially as other than the default
classification or when an eligible entity
chooses to change its classification. An
entity whose classification is determined
under the default classification retains
that classification (regardless of any
changes in the members’ liability that
occurs at any time during the time that
the entity’s classification is relevant as
defined in paragraph (d) of this section)
until the entity makes an election to
change that classification under para-
graph (c)(1) of this section. Paragraph
(c) of this section provides rules for
making express elections. Paragraph (d)
of this section provides special rules for
foreign eligible entities. Paragraph (e) of
this section provides special rules for
classifying entities resulting from part-
nership terminations and divisions under
section 708(b). Paragraph (f) of this
section sets forth the effective date of
this section and a special rule relating to
prior periods.
(b)Classification of eligible entities
that do not file an election—(1)Domes-
tic eligible entities. Except as provided
in paragraph (b)(3) of this section, un-
less the entity elects otherwise, a domes-
tic eligible entity is—
(i) A partnership if it has two or
more members; or
(ii) Disregarded as an entity separate
from its owner if it has a single owner.
(2)Foreign eligible entities—(i)In
general. Except as provided in para-
graph (b)(3) of this section, unless the
entity elects otherwise, a foreign eligible
entity is—
(A) A partnership if it has two or
more members and at least one member
does not have limited liability;
(B) An association if all members
have limited liability; or
(C) Disregarded as an entity separate
from its owner if it has a single owner
that does not have limited liability.
(ii)Definition of limited liability. For
purposes of paragraph (b)(2)(i) of this
section, a member of a foreign eligible
entity has limited liability if the member
has no personal liability for the debts of
or claims against the entity by reason of
being a member. This determination is
based solely on the statute or law pursu-
ant to which the entity is organized,
except that if the underlying statute or
law allows the entity to specify in its
organizational documents whether the
members will have limited liability, the
organizational documents may also be
relevant. For purposes of this section, a
member has personal liability if the
creditors of the entity may seek satisfac-
tion of all or any portion of the debts or
claims against the entity from the mem-
ber as such. A member has personal
liability for purposes of this paragraph
even if the member makes an agreement
under which another person (whether or
not a member of the entity) assumes
18

such liability or agrees to indemnify that
member for any such liability.
(3)Existing eligible entities—(i)In
general. Unless the entity elects other-
wise, an eligible entity in existence prior
to the effective date of this section will
have the same classification that the
entity claimed under §§ 301.7701–1
through 301.7701–3 as in effect on the
date prior to the effective date of this
section; except that if an eligible entity
with a single owner claimed to be a
partnership under those regulations, the
entity will be disregarded as an entity
separate from its owner under this para-
graph (b)(3)(i). For special rules regard-
ing the classification of such entities for
periods prior to the effective date of this
section, see paragraph (f)(2) of this
section.
(ii)Special rules. For purposes of
paragraph (b)(3)(i) of this section, a
foreign eligible entity is treated as being
in existence prior to the effective date of
this section only if the entity’s classifi-
cation was relevant (as defined in para-
graph (d) of this section) at any time
during the sixty months prior to the
effective date of this section. If an entity
claimed different classifications prior to
the effective date of this section, the
entity’s classification for purposes of
paragraph (b)(3)(i) of this section is the
last classification claimed by the entity.
If a foreign eligible entity’s classifica-
tion is relevant prior to the effective
date of this section, but no federal tax or
information return is filed or the federal
tax or information return does not indi-
cate the classification of the entity, the
entity’s classification for the period prior
to the effective date of this section is
determined under the regulations in ef-
fect on the date prior to the effective
date of this section.
(c)Elections—(1)Time and place for
filing—(i)In general. Except as pro-
vided in paragraphs (c)(1)(iv) and (v) of
this section, an eligible entity may elect
to be classified other than as provided
under paragraph (b) of this section, or to
change its classification, by filing Form
8832, Entity Classification Election,
with the service center designated on
Form 8832. An election will not be
accepted unless all of the information
required by the form and instructions,
including the taxpayer identifying num-
ber of the entity, is provided on Form
8832. See § 301.6109–1 for rules on
applying for and displaying Employer
Identification Numbers.
(ii)Further notification of elections.
An eligible entity required to file a
federal tax or information return for the
taxable year for which an election is
made under paragraph (c)(1)(i) of this
section must attach a copy of its Form
8832 to its federal tax or information
return for that year. If the entity is not
required to file a return for that year, a
copy of its Form 8832 must be attached
to the federal income tax or information
return of any direct or indirect owner of
the entity for the taxable year of the
owner that includes the date on which
the election was effective. An indirect
owner of the entity does not have to
attach a copy of the Form 8832 to its
return if an entity in which it has an
interest is already filing a copy of the
Form 8832 with its return. If an entity,
or one of its direct or indirect owners,
fails to attach a copy of a Form 8832 to
its return as directed in this section, an
otherwise valid election under paragraph
(c)(1)(i) of this section will not be
invalidated, but the non-filing party may
be subject to penalties, including any
applicable penalties if the federal tax or
information returns are inconsistent with
the entity’s election under paragraph
(c)(1)(i) of this section.
(iii)Effective date of election. An
election made under paragraph (c)(1)(i)
of this section will be effective on the
date specified by the entity on Form
8832 or on the date filed if no such date
is specified on the election form. The
effective date specified on Form 8832
can not be more than 75 days prior to
the date on which the election is filed
and can not be more than 12 months
after the date on which the election is
filed. If an election specifies an effective
date more than 75 days prior to the date
on which the election is filed, it will be
effective 75 days prior to the date it was
filed. If an election specifies an effective
date more than 12 months from the date
on which the election is filed, it will be
effective 12 months after the date it was
filed. If an election specifies an effective
date before January 1, 1997, it will be
effective as of January 1, 1997.
(iv)Limitation. If an eligible entity
makes an election under paragraph
(c)(1)(i) of this section to change its
classification (other than an election
made by an existing entity to change its
classification as of the effective date of
this section), the entity cannot change its
classification by election again during
the sixty months succeeding the effec-
tive date of the election. However, the
Commissioner may permit the entity to
change its classification by election
within the sixty months if more than
fifty percent of the ownership interests
in the entity as of the effective date of
the subsequent election are owned by
persons that did not own any interests in
the entity on the filing date or on the
effective date of the entity’s prior elec-
tion.
(v)Deemed elections—(A)Exempt
organizations. An eligible entity that has
been determined to be, or claims to be,
exempt from taxation under section
501(a) is treated as having made an
election under this section to be classi-
fied as an association. Such election will
be effective as of the first day for which
exemption is claimed or determined to
apply, regardless of when the claim or
determination is made, and will remain
in effect unless an election is made
under paragraph (c)(1)(i) of this section
after the date the claim for exempt
status is withdrawn or rejected or the
date the determination of exempt status
is revoked.
(B)Real estate investment trusts. An
eligible entity that files an election un-
der section 856(c)(1) to be treated as a
real estate investment trust is treated as
having made an election under this
section to be classified as an association.
Such election will be effective as of the
first day the entity is treated as a real
estate investment trust.
(vi)Examples. The following ex-
amples illustrate the rules of this para-
graph (c)(1):
Example 1. On July 1, 1998, X, a domestic
corporation, purchases a 10% interest in Y, an
eligible entity formed under Country A law in
1990. The entity’s classification was not relevant
to any person for federal tax or information
purposes prior to X’s acquisition of an interest in
Y. Thus, Y is not considered to be in existence on
the effective date of this section for purposes of
paragraph (b)(3) of this section. Under the appli-
cable Country A statute, all members of Y have
limited liability as defined in paragraph (b)(2)(ii)
of this section. Accordingly, Y is classified as an
association under paragraph (b)(2)(i)(B) of this
section unless it elects under this paragraph (c) to
be classified as a partnership. To be classified as a
partnership as of July 1, 1998, Y must file a Form
8832 by September 13, 1998. See paragraph
(c)(1)(i) of this section. Because an election
cannot be effective more than 75 days prior to the
date on which it is filed, if Y files its Form 8832
after September 13, 1998, it will be classified as
an association from July 1, 1998, until the effec-
tive date of the election. In that case, it could not
change its classification by election under this
paragraph (c) during the sixty months succeeding
the effective date of the election.
Example 2. (i) Z is an eligible entity formed
under Country B law and is in existence on the
effective date of this section within the meaning of
paragraph (b)(3) of this section. Prior to the
effective date of this section, Z claimed to be
classified as an association. Unless Z files an
19

election under this paragraph (c), it will continue
to be classified as an association under paragraph
(b)(3) of this section.
(ii) Z files a Form 8832 pursuant to this
paragraph (c) to be classified as a partnership,
effective as of the effective date of this section. Z
can file an election to be classified as an associa-
tion at any time thereafter, but then would not be
permitted to change its classification by election
during the sixty months succeeding the effective
date of that subsequent election.
(2)Authorized signatures—(i)In gen-
eral. An election made under paragraph
(c)(1)(i) of this section must be signed
by—
(A) Each member of the electing en-
tity who is an owner at the time the
election is filed; or
(B) Any officer, manager, or member
of the electing entity who is authorized
(under local law or the entity’s organiza-
tional documents) to make the election
and who represents to having such au-
thorization under penalties of perjury.
(ii)Retroactive elections. For pur-
poses of paragraph (c)(2)(i) of this sec-
tion, if an election under paragraph
(c)(1)(i) of this section is to be effective
for any period prior to the time that it is
filed, each person who was an owner
between the date the election is to be
effective and the date the election is
filed, and who is not an owner at the
time the election is filed, must also sign
the election.
(d)Special rules for foreign eligible
entities—(1) For purposes of this sec-
tion, a foreign eligible entity’s classifica-
tion is relevant when its classification
affects the liability of any person for
federal tax or information purposes. For
example, a foreign entity’s classification
would be relevant if U.S. income was
paid to the entity and the determination
by the withholding agent of the amount
to be withheld under chapter 3 of the
Internal Revenue Code (if any) would
vary depending upon whether the entity
is classified as a partnership or as an
association. Thus, the classification
might affect the documentation that the
withholding agent must receive from the
entity, the type of tax or information
return to file, or how the return must be
prepared. The date that the classification
of a foreign eligible entity is relevant is
the date an event occurs that creates an
obligation to file a federal tax return,
information return, or statement for
which the classification of the entity
must be determined. Thus, the classifi-
cation of a foreign entity is relevant, for
example, on the date that an interest in
the entity is acquired which will require
a U.S. person to file an information
return on Form 5471.
(2)Special rule when classification is
no longer relevant. If the classification
of a foreign eligible entity which was
previously relevant for federal tax pur-
poses ceases to be relevant for sixty
consecutive months, the entity’s classifi-
cation will initially be determined under
the default classification when the clas-
sification of the foreign eligible entity
again becomes relevant. The date that
the classification of a foreign entity
ceases to be relevant is the date an
event occurs that causes the classifica-
tion to no longer be relevant, or, if no
event occurs in a taxable year that
causes the classification to be relevant,
then the date is the first day of that
taxable year.
(e)Coordination with section 708(b).
Except as provided in § 301.7701–
2(d)(3) (regarding termination of grand-
father status for certain foreign business
entities), an entity resulting from a
transaction described in section
708(b)(1)(B) (partnership termination
due to sales or exchanges) or section
708(b)(2)(B) (partnership division) is a
partnership.
(f)Effective date—(1)In general.
The rules of this section are effective as
of January 1, 1997.
(2)Prior treatment of existing enti-
ties. In the case of a business entity that
is not described in § 301.7701–2(b)(1),
(3), (4), (5), (6), or (7), and that was in
existence prior to January 1, 1997, the
entity’s claimed classification(s) will be
respected for all periods prior to January
1, 1997, if—
(i) The entity had a reasonable basis
(within the meaning of section 6662) for
its claimed classification;
(ii) The entity and all members of the
entity recognized the federal tax conse-
quences of any change in the entity’s
classification within the sixty months
prior to January 1, 1997; and
(iii) Neither the entity nor any mem-
ber was notified in writing on or before
May 8, 1996, that the classification of
the entity was under examination (in
which case the entity’s classification
will be determined in the examination).
Par. 8. Section 301.7701–4 is
amended as follows:
1. The last sentence of paragraphs
(b), (c)(1), (c)(2)Example 1, and (c)(2)
Example 3are revised.
2. Paragraph (f) is added.
The revisions and addition read as
follows:
§ 301.7701–4 Trusts.
* * * * *
(b)Business trusts. * * * The fact
that any organization is technically cast
in the trust form, by conveying title to
property to trustees for the benefit of
persons designated as beneficiaries, will
not change the real character of the
organization if the organization is more
properly classified as a business entity
under § 301.7701–2.
(c) * * * (1) * * * An investment
trust with multiple classes of ownership
interests ordinarily will be classified as
a business entity under § 301.7701–2;
however, an investment trust with mul-
tiple classes of ownership interests, in
which there is no power under the trust
agreement to vary the investment of the
certificate holders, will be classified as a
trust if the trust is formed to facilitate
direct investment in the assets of the
trust and the existence of multiple
classes of ownership interests is inciden-
tal to that purpose.
(2) * * *
Example 1. * * * As a consequence,
the existence of multiple classes of trust
ownership is not incidental to any pur-
pose of the trust to facilitate direct
investment, and, accordingly, the trust is
classified as a business entity under
§ 301.7701–2.
* * * * *
Example 3. * * * Accordingly, the
trust is classified as a business entity
under § 301.7701–2.
* * * * *
(f)Effective date. The rules of this
section generally apply to taxable years
beginning after December 31, 1960.
Paragraph (e)(5) of this section contains
rules of applicability for paragraph (e)
of this section. In addition, the last
sentences of paragraphs (b), (c)(1), and
(c)(2)Example 1andExample 3of this
section are effective as of January 1,
1997.
Par. 9. Section 301.7701–6 is revised
to read as follows:
§ 301.7701–6 Definitions; person, fidu-
ciary.
(a)Person. The termpersonincludes
an individual, a corporation, a partner-
ship, a trust or estate, a joint-stock
company, an association, or a syndicate,
group, pool, joint venture, or other unin-
corporated organization or group. The
term also includes a guardian, commit-
20

tee, trustee, executor, administrator,
trustee in bankruptcy, receiver, assignee
for the benefit of creditors, conservator,
or any person acting in a fiduciary
capacity.
(b)Fiduciary—(1)In general. Fidu-
ciary is a term that applies to persons
who occupy positions of peculiar confi-
dence toward others, such as trustees,
executors, and administrators. A fidu-
ciary is a person who holds in trust an
estate to which another has a beneficial
interest, or receives and controls income
of another, as in the case of receivers. A
committee or guardian of the property
of an incompetent person is a fiduciary.
(2)Fiduciary distinguished from
agent. There may be a fiduciary rela-
tionship between an agent and a princi-
pal, but the word agent does not denote
a fiduciary. An agent having entire
charge of property, with authority to
effect and execute leases with tenants
entirely on his own responsibility and
without consulting his principal, merely
turning over the net profits from the
property periodically to his principal by
virtue of authority conferred upon him
by a power of attorney, is not a fidu-
ciary within the meaning of the Internal
Revenue Code. In cases when no legal
trust has been created in the estate
controlled by the agent and attorney, the
liability to make a return rests with the
principal. (c)Effective date. The rules
of this section are effective as of Janu-
ary 1, 1997.
§ 301.7701–7 [Removed]
Par. 10. Section 301.7701–7 is re-
moved.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 11. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
§ 602.101 [Amended]
Par. 12. In § 602.101, paragraph (c)
is amended by adding a new entry in
numerical order to the table to read as
follows:
§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section where
identified or described
Current OMB
control No.
* * * * *
301.7701–3 . . . . . . . . . . . . . . . . 1545–1486
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 10, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
December 17, 1996, 8:45 a.m., and published in
the issue of the Federal Register for December 18,
1996, 61 F.R. 66584)
Section 7520.—Valuation Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.
Section 7872.—Treatment of Loans
With Below-Market Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.
21

Part III. Administrative, Procedural, and Miscellaneous
Obsolescence of Revenue Rulings
and Revenue Procedures Under TD
8697, Simplification of Entity
Classification Regulations (Check
the Box)
Notice 97–1
This notice accompanies TD 8697,
Simplification of Entity Classification
Regulations (published in the Federal
Register on December 18, 1996). The
purpose of this notice is to alert taxpay-
ers to the effect of the regulations on
existing revenue rulings and revenue
procedures that apply the prior classifi-
cation regulations under § 7701 of the
Internal Revenue Code. Effective Janu-
ary 1, 1997, such revenue rulings and
revenue procedures are obsolete to the
extent that they use the prior classifica-
tion regulations to distinguish between
partnerships and associations.
The Internal Revenue Service is com-
piling a list of these obsolete documents
that will be published in the Internal
Revenue Bulletin.
The principal author of this notice is
Mark D. Harris of the Office of Assis-
tant Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this notice contact Mr.
Harris at (202) 622-3050 (not a toll-free
call).
Cash or Deferred Arrangements;
Nondiscrimination
Notice 97–2
This notice provides guidance and
transition relief relating to the revised
nondiscrimination rules under § 401(k)
and § 401(m) of the Internal Revenue
Code. The rules applicable to qualified
cash or deferred arrangements under
§ 401(k) and matching and employee
contributions under § 401(m) were
changed by the Small Business Job
Protection Act of 1996 (SBJPA), Pub. L.
104–188.
Under § 401(k) and § 401(m) of the
Code, the actual deferral percentage
(ADP) and the actual contribution per-
centage (ACP) of highly compensated
employees (HCEs) are compared with
those of nonhighly compensated em-
ployees (NHCEs). Section 1433(c) of
the SBJPA amends § 401(k)(3)(A) and
§ 401(m)(2)(A), effective for plan years
beginning after December 31, 1996, to
provide for the use of prior year data in
determining the ADP and ACP of
NHCEs, while current year data is used
for HCEs. Alternatively, an employer
may elect to use current year data for
determining the ADP and ACP for both
HCEs and NHCEs, but this election may
only be changed as provided by the
Secretary. Prior to the effective date of
these amendments, plans must use cur-
rent year data in determining the ADP
and ACP for both HCEs and NHCEs.
Section 1433(e) of the SBJPA amends
§ 401(k)(8)(C) and § 401(m)(6)(C), ef-
fective for plan years beginning after
December 31, 1996, to provide that the
distribution of excess contributions and
excess aggregate contributions will be
made on the basis of the amount of
contributions by, or on behalf of, each
HCE. Prior to the effective date of these
amendments, plans must distribute ex-
cess contributions and excess aggregate
contributions using a method based on
the actual deferral ratio or actual contri-
bution ratio of each HCE.
This notice provides guidance regard-
ing the determination of the ADP and
ACP for NHCEs under § 401(k)(3)-
(A)(ii) and § 401(m)(2)(A) for plan
years beginning after December 31,
1996; transition relief for plans that
elect to use current year ADP or ACP
data for the 1997 plan year; and guid-
ance regarding the distribution of excess
contributions and excess aggregate con-
tributions under § 401(k)(8)(C) and
§ 401(m)(6)(C) for plan years beginning
after December 31, 1996.
I. DETERMINATION OF ADP AND
ACP FOR NHCEs USING PRIOR
YEAR DATA
Section 401(k)(3)(A)(ii), as amended,
provides that a cash or deferred arrange-
ment will not be treated as a qualified
cash or deferred arrangement unless the
actual deferral percentage for eligible
HCEs for the plan year meets a nondis-
crimination test when compared to the
actual deferral percentage for all other
eligible employees for the preceding
plan year. Thus, as amended,
§ 401(k)(3)(A)(ii) generally requires the
comparison of the current year’s ADP
for HCEs to the prior year’s ADP for
NHCEs.
For purposes of § 401(k)(3)(A)(ii),
the actual deferral percentage for all
other eligible employees for the preced-
ing plan year is the ADP for the preced-
ing plan year for the group of employ-
ees who were NHCEs in the preceding
plan year, using the definition of HCE
in effect for the preceding plan year.
Thus, for purposes of § 401(k)(3)-
(A)(ii), the individuals taken into ac-
count in determining the prior year’s
ADP for NHCEs are those individuals
who were NHCEs during the preceding
year, without regard to the individuals’
status in the current year. For example,
an individual who was an NHCE for the
preceding plan year is included in this
calculation even if the individual is no
longer employed by the employer or has
become an HCE in the current plan
year.
As a result, the prior year’s ADP for
NHCEs can be calculated as soon as the
necessary data on prior year status,
contributions and compensation become
available. For example, for the 1997
plan year, if a plan does not provide for
matching contributions described in
§ 401(m)(4)(A) or qualified nonelective
contributions described in § 401(m)-
(4)(C), the ADP for the 1997 plan year
of HCEs will be compared with the
ADP for the 1996 plan year of NHCEs
in 1996, i.e., with the same ADP used in
nondiscrimination testing for the 1996
plan year under prior law. Future guid-
ance will address the conditions under
which and the extent to which matching
contributions described in § 401(m)-
(4)(A) and qualified nonelective contri-
butions described in § 401(m)(4)(C)
may be taken into account in determin-
ing the current or prior year’s ADP or
ACP for NHCEs in nondiscrimination
testing for the 1997 plan year and future
plan years.
For purposes of determining the prior
year’s ACP for NHCEs under
§ 401(m)(2)(A), as amended, rules simi-
lar to those used in determining the
prior year’s ADP for NHCEs under
§ 401(k)(3)(A)(ii) will apply.
II. TRANSITION RELIEF FOR PLANS
USING CURRENT YEAR ADP OR
ACP DATA FOR THE 1997 PLAN
YEAR
Under § 401(k)(3)(A)(ii) and
§ 401(m)(2)(A), as amended, an em-
ployer that elects to use current year
data in determining the ADP or ACP of
NHCEs for the 1997 plan year or for
later plan years must continue to use
current year data for all future plan
years, unless the election is changed in a
manner provided by the Secretary.
Under the transition relief provided
by this notice, a plan that uses current
22

year data in determining the ADP or
ACP of NHCEs for the 1997 plan year
will be permitted to use prior year data
for the 1998 plan year without receiving
approval from the Service. For the 1997
plan year, no plan amendment or formal
election is required to be made in 1996
or 1997 in order to continue to use
current year data in determining the
ADP of NHCEs. The Treasury and the
Service intend to issue guidance regard-
ing the conditions under which employ-
ers that elect to use current year data for
the 1998 or a later plan year may switch
to using prior year data for subsequent
plan years.
III. DISTRIBUTION OF EXCESS
CONTRIBUTIONS AND EXCESS AG-
GREGATE CONTRIBUTIONS
Section 401(k)(8), as amended, pro-
vides a new procedure for correcting a
plan’s failure to meet the nondiscrimina-
tion test of § 401(k)(3). Under
§ 401(k)(8)(B), which was not amended
by the SBJPA, an excess contribution is
determined for each HCE. Section
401(k)(8)(C), prior to amendment, and
§ 1.401(k)-1(f)(2) of the Income Tax
Regulations provided for the distribution
of this amount to each HCE. Parallel
rules applied to correction of failure to
satisfy the nondiscrimination test of
§ 401(m).
The SBJPA amended § 401(k)(8)(C)
to provide that distributions of excess
contributions for any plan year are made
to HCEs on the basis of the amount of
contributions by, or on behalf of, each
HCE. This amendment does not affect
the total amount of the excess contribu-
tions to be distributed, but merely real-
locates the distributions among the
HCEs.
Accordingly, in order to distribute
excess contributions under § 401(k)(8),
as amended, the following procedure is
used:
1. Calculate the dollar amount of
excess contributions for each af-
fected HCE in a manner described
in § 401(k)(8)(B) and § 1.401(k)-
1(f)(2). However, in applying these
rules, rather than distributing the
amount necessary to reduce the
actual deferral ratio (ADR) of each
affected HCE in order of these
employees’ ADRs, beginning with
the highest ADR, the plan uses
these amounts in step 2.
2. Determine the total of the dollar
amounts calculated in step 1.
This total amount in step 2 (total
excess contributions) should be distrib-
uted in accordance with steps 3 and 4
below:
3. The elective contributions of the
HCE with the highest dollar
amount of elective contributions are
reduced by the amount required to
cause that HCE’s elective contribu-
tions to equal the dollar amount of
the elective contributions of the
HCE with the next highest dollar
amount of elective contributions.
This amount is then distributed to
the HCE with the highest dollar
amount. However, if a lesser reduc-
tion, when added to the total dollar
amount already distributed under
this step, would equal the total
excess contributions, the lesser re-
duction amount is distributed.
4. If the total amount distributed is
less than the total excess contribu-
tions, step 3 is repeated.
If these distributions are made, the
cash or deferred arrangement is treated
as meeting the nondiscrimination test of
§ 401(k)(3) regardless of whether the
ADP, if recalculated after distributions,
would satisfy § 401(k)(3).
A parallel method is used for the
purpose of recharacterizing excess con-
tributions under § 401(k)(8)(A)(ii) and
for distributing excess aggregate contri-
butions under § 401(m)(6)(C), as
amended.
After excess and excess aggregate
contributions, if any, have been distrib-
uted using the method described above,
the multiple use test of § 401(m)(9) is
applied. For purposes of § 401(m)(9), if
a corrective distribution of excess con-
tributions has been made, or a
recharacterization has occurred, the ADP
for HCEs is deemed to be the largest
amount permitted under § 401(k)(3).
Similarly, if a corrective distribution of
excess aggregate contributions has been
made, the ACP for HCEs is deemed to
be the largest amount permitted under
§ 401(m)(2).
The method described above for dis-
tributing excess contributions is illus-
trated by the following example:
For the 1997 plan year, HCE 1 has
elective contributions of $8,500 and
$85,000 in compensation, for an ADR
of 10%, and HCE 2 has elective contri-
butions of $9,500 and compensation of
$158,333, for an ADR of 6%. As a
result, the ADP for the 2 HCEs under
the plan (HCE 1 and HCE 2) is 8%.
The ADP for the NHCEs is 3%. Under
the ADP test of § 401(k)(3)(A)(ii), the
ADP of the two HCEs under the plan
may not exceed 5% (i.e., 2 percentage
points more than the ADP of the
NHCEs under the plan).
Pursuant to § 401(k)(8)(B), § 1.401-
(k)-1(f)(2), and this notice, the total
excess contributions for the HCEs is
determined as follows:
Step 1. The elective contributions of
HCE 1 (the HCE with the highest
ADR) are reduced by $3,400 in order
to reduce the ADR of HCE 1 to 6%
($5,100/$85,000), which is the ADR
of HCE 2. Because the ADP of the
HCEs still exceeds 5%, the ADP test
of § 401(k)(3)(A)(ii) is not satisfied
and further reductions in elective con-
tributions are necessary. The elective
contributions of HCE 1 and HCE 2
are each reduced by one percent of
compensation ($850 and $1,583 re-
spectively). Because the ADP of the
HCEs now equals 5%, the ADP test
of § 401(k)(3)(A)(ii) is satisfied, and
no further reductions in elective con-
tributions are necessary.
Step 2. The total excess contributions
for the HCEs that must be distributed
equal $5,833, the total reductions in
elective contributions under step 1
($3,400 + $850 + $1,583).
Pursuant to § 401(k)(8)(C), the $5,833
in total excess contributions for the 1997
plan year would then be distributed as
follows:
Step 3. The plan distributes $1,000 in
elective contributions to HCE 2 (the
HCE with the highest dollar amount
of elective contributions) in order to
reduce the dollar amount of the elec-
tive contributions of HCE 2 to
$8,500, which is the dollar amount of
the elective contributions of HCE 1.
Step 4. Because the total amount distrib-
uted ($1,000) is less than the total
excess contributions ($5,833), step 3
must be repeated. As the dollar
amounts of remaining elective contri-
butions for both HCE 1 and HCE 2
are equal, the remaining $4,833 of
excess contributions is then distrib-
uted equally to HCE 1 and HCE 2 in
the amount of $2,416.50 each.
Under this example, HCE 1 must
receive a total distribution of $2,416.50
of excess contributions, and HCE 2
must receive a total distribution of
$3,416.50 of excess contributions. This
is true even though the ADR of HCE 1
exceeded the ADR of HCE 2. The plan
is now treated as satisfying the nondis-
crimination test of § 401(k)(3) even
23

though the ADP would fail to satisfy
§ 401(k)(3), if recalculated after distri-
butions.
COMMENTS REQUESTED
The Treasury and the Service invite
comments and suggestions regarding the
matters discussed in this notice. Com-
ments are specifically requested con-
cerning:
—The use of qualified matching and
qualified nonelective contributions in
computing the prior year’s ADP for
NHCEs, including methods of prevent-
ing inappropriate double counting.
—The appropriate determination of
the prior year’s ADP for NHCEs when
the group of employees tested is signifi-
cantly different in the current year than
in the prior year.
Comments can be addressed to
CC:DOM:CORP:R (Notice 97–2), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, comments
may be hand delivered between the
hours of 8 a.m. and 5 p.m. to
CC:DOM:CORP:R (Notice 97–2), Cou-
rier’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW., Wash-
ington, DC. Alternatively, taxpayers may
transmit comments electronically
via the IRS Internet site at http://
www.irs.ustreas.gov/prod/tax_regs/
comments/html.
DRAFTING INFORMATION
The principal authors of this notice
are Kenneth Conn of the Employee
Plans Division and Catherine Fernandez
of the Office of the Associate Chief
Counsel (Employee Benefits and Ex-
empt Organizations). For further infor-
mation regarding this notice, contact the
Employee Plans Division’s telephone as-
sistance service between 1:30 and 4:00
p.m., Eastern Time, Monday through
Thursday at (202) 622–6074/75 or Ken-
neth Conn at (202) 622–6214. (These
telephone numbers are not toll-free
numbers.)
Subchapter S Corporation
Subsidiaries
Notice 97–4
PURPOSE
Section 1308 of the Small Business
Job Protection Act of 1996, Pub. L. No.
104–188, 110 Stat. 1755 (the Act) modi-
fied § 1361 of the Internal Revenue
Code to permit an S corporation (1) to
own 80 percent or more of the stock of
a C corporation, and (2) to elect to own
a qualified subchapter S subsidiary
(QSSS).
To help taxpayers comply with the
law, the Department of the Treasury and
the Internal Revenue Service intend to
issue regulations interpreting § 1308 of
the Act. This notice solicits comments
from taxpayers and practitioners regard-
ing the issues listed below. However,
any other comments concerning the
changes made by § 1308 of the Act will
be considered in developing regulatory
guidance. This notice also provides tem-
porary guidance on the manner in which
a QSSS election must be made and the
effective date of the election.
BACKGROUND
Prior law prohibited a subchapter S
corporation from owning 80 percent or
more of the stock of another corpora-
tion. Furthermore, an S corporation
could not have a corporation as a share-
holder. Congress modified these con-
straints by enacting § 1308 of the Act,
effective for taxable years beginning
after December 31, 1996. The Act added
new §§ 1361(b)(3), 1362(d)(3)(F), and
1504(b)(8) to the Code, while removing
§ 1361(b)(2)(A) and 1361(c)(6).
By removing § 1361(b)(2)(A), the
Act permits an S corporation to own 80
percent or more of a C corporation. At
the same time, new § 1504(b)(8) pre-
vents an S corporation from joining in
the filing of a consolidated return with
its affiliated C corporations, but does
not prevent the C corporation subsidiary
from filing a consolidated return with its
affiliated C corporations.SeeH.R. Conf.
Rep. No. 737, 104th Cong., 2d Sess.
224 (1996).
Under prior law, the S election of a
corporation with C earnings and profits
terminated if that S corporation received
passive income, including dividends, in
excess of 25 percent of gross receipts
for 3 consecutive years. Section
1363(d)(3)(F) modifies that general rule
by excluding dividends from passive
investment income to the extent that the
dividends are attributable to the active
conduct of a trade or business of a C
corporation in which the S corporation
has an 80 percent or greater ownership
interest. However, neither the Act nor
the legislative history provides rules for
determining the attribution of dividends
to an active trade or business.
New § 1361(b)(3)(B) defines the
term ‘‘qualified subchapter S subsid-
iary’’ as a domestic corporation that is
not an ineligible corporation, if (1) an S
corporation holds 100 percent of the
stock of the corporation, and (2) that S
corporation elects to treat the subsidiary
as a QSSS. Section 1361(b)(3)(A) pro-
vides that a corporation that is a QSSS
is not treated as a separate corporation,
and all assets, liabilities, and items of
income, deduction, and credit of the
QSSS are treated as assets, liabilities,
and items of income, deduction, and
credit of the parent S corporation.
The statutory provisions do not pro-
vide guidance on how the corporation
makes the election, the effective date of
the election, or how the commingling of
assets, liabilities, and other items occurs
after the election is made. The legisla-
tive history, however, indicates that
when the parent corporation makes the
election, the subsidiary will be deemed
to have liquidated under §§ 332 and
337 immediately before the election is
effective.SeeS. Rep. No. 281, 104th
Cong., 2d Sess. 53 (1996)(Senate Re-
port); H.R. Rep. No. 586, 104th Cong.,
2d Sess. 89 (1996)(House Report).
Where the S corporation acquires the
stock of the subsidiary in a qualified
stock purchase, the corporation may
make an election under § 338 with
respect to the subsidiary.
Section 1361(b)(3)(C) provides that
any QSSS that ceases to meet the
requirements of § 1361(b)(3)(B) will be
treated as a new corporation acquiring
all of its assets (and assuming all of its
liabilities) immediately before the cessa-
tion from its S corporation parent in a
deemed exchange for the subsidiary’s
stock. Upon the termination,
§ 1361(b)(3)(D) provides that the
former QSSS (and any successor corpo-
ration) is not eligible to make either a
QSSS election or an election to be
treated as an S corporation before its
fifth taxable year that begins after the
first taxable year for which the termina-
tion is effective, unless the Secretary
consents to the election.
REQUEST FOR COMMENTS
The Service and Treasury invite com-
ments from the public on issues that
should be addressed in proposed regula-
tions implementing § 1308 of the Act.
The Service is particularly interested in
receiving comments on the following:
1) The attribution of dividends re-
ceived by an S corporation from an 80
24

percent or greater owned C corporation
between earnings and profits attributable
to the active conduct of a trade or
business or to passive investments of the
C corporation, particularly in situations
where the C corporation is a member of
an affiliated group that files a consoli-
dated return;
2) Issues arising upon the formation
of a QSSS, including those arising from
the operation of §§ 332 and 337 or
§ 338;
3) Issues arising upon the termination
of a QSSS; and
4) Issues arising when a QSSS elec-
tion is made for a subsidiary that is a
member of a consolidated group. Writ-
ten comments should be sent to the
following address:
Internal Revenue Service
CC:DOM:CORP (NT 97–4;
CC:DOM:P&SI:1)
P.O. Box 7604, Ben Franklin Station
Washington, DC 20044
In the alternative, comments may be
hand delivered between the hours of
8:00 a.m. and 5:00 p.m. to the courier’s
desk at 1111 Constitution Avenue, NW.,
Washington, DC, or submitted electroni-
cally via the IRS internet site at http://
www.irs.ustreas.gov/prod/tax_regs/
comments.html.
TEMPORARY QSSS ELECTION
PROCEDURE
The legislative history supporting
§ 1308 of the Act indicates that when a
parent corporation makes an election to
treat a subsidiary as a QSSS, the subsid-
iary will be deemed to have liquidated
under §§ 332 and 337 immediately be-
fore the election is effective.SeeSenate
Report at 53; House Report at 89. When
a corporation liquidates under § 332,
that corporation must file a Corporate
Dissolution or Liquidation Form 966
within 30 days of the adoption of a
liquidating plan or resolution. In addi-
tion, that corporation must file a return
for the short period ending on the date
that it goes out of existence.
The Service and Treasury intend to
issue regulations describing the manner
in which a QSSS election must be made
and the effective date of the election.
Until regulations are issued, however,
taxpayers should follow the procedures
listed in this notice to satisfy the elec-
tion requirements.
To make the QSSS election, the par-
ent corporation should file a Form 966
with the Service Center. When complet-
ing the form, the parent corporation
should follow the instructions applicable
to that form with the following modifi-
cations:
1. At the top of the Form 966, print
‘‘FILED PURSUANT TO NO-
TICE 97–4.’’
2. In the box labeled ‘‘Employer
identification number’’ (EIN), enter
the subsidiary’s EIN (if appli-
cable). If the subsidiary was not in
existence prior to the time of elec-
tion and does not have an EIN,
there will be no need to obtain a
taxpayer identification number for
the subsidiary. In this case, insert
‘‘QSSS’’ in the box. (If the parent
corporation chooses to obtain an
EIN for the newly-formed QSSS,
the parent should check ‘‘Other’’
when asked the ‘‘Type of entity’’
on the SS–4, and specify that the
entity is a QSSS.)
3. In Box 4 on Form 966, enter the
desired effective date for the elec-
tion. The election may be effective
on the date Form 966 is filed or up
to 75 days prior to the filing of
Form 966, provided that date is
not before the effective date of
§ 1308 of the Act and that the
subsidiary otherwise qualified as a
QSSS for the entire period for
which the retroactive election is in
effect. For these purposes, the re-
quirement that Form 966 be filed
within 30 days of the date in Box
4 is ignored.
4. In Box 7c on Form 966, enter the
name of the parent. The parent’s
EIN should be included in Box 7d.
5. In Box 10 on Form 966, enter
‘‘§ 1361(b)(3)(B).’’
6. Form 966 must be signed by a
corporate officer authorized to sign
the PARENT’s tax return.
Banks and bank holding companies
should consult Notice 97–5, 1997–2
I.R.B., before filing an election under
the procedures listed above.
DRAFTING INFORMATION
The principal author of this notice is
Deanna L. Walton of the Office of
Assistant Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this notice contact
Ms. Walton at (202) 622–3050 (not a
toll-free call).
Subchapter S Banks — Sections
1362 and 265
Notice 97–5
BACKGROUND
Section 1315 of the Small Business
Job Protection Act of 1996 (the Act),
P.L. 104–188, amended § 1361(b)(2) of
the Internal Revenue Code to allow
banks (as defined in § 581) that do not
use the reserve method of accounting
for bad debts to qualify as small busi-
ness corporations (and therefore qualify
to elect S corporation status), effective
for tax years beginning after December
31, 1996.
Section 1308(b) of the Act added new
§ 1361(b)(3) to allow an S corporation
to own a qualified subchapter S subsid-
iary (QSSS). A subsidiary qualifies as a
QSSS if (1) the subsidiary would be
eligible to elect subchapter S status if its
stock were owned directly by the share-
holders of its S corporation parent; (2)
the S corporation parent owns 100 per-
cent of the subsidiary’s stock; and (3)
the parent elects to treat the subsidiary
as a QSSS. If the QSSS election is
made, the subsidiary is not treated as a
separate corporation, and all the assets,
liabilities, and items of income, deduc-
tion, and credit of the subsidiary are
treated as the assets, liabilities, and
items of income, deduction, and credit
of the parent S corporation.
This notice provides guidance on the
effect of the QSSS election under
§ 1361(b)(3) on banks affiliated with
nonbanks; the application of the S cor-
poration passive investment income
rules of § 1362(d)(3); the application of
the interest expense disallowance rules
of § 265; and an automatic change in
method of accounting for bad debts.
BANKS AFFILIATED WITH
NONBANKS
The Department of the Treasury and
the Internal Revenue Service are con-
cerned that the interaction of § 1315
and § 1308(b) of the Act creates unin-
tended and inappropriate results for
banks that are affiliated with nonbank
entities. Treasury and the IRS believe
that the special provisions of the Code
that apply to banks should apply only to
the specific state-law entity that quali-
fies as a bank under § 581 of the Code;
such special bank treatment should not
apply to nonbanks, even if the nonbank
is affiliated with a bank and the parent
elects to treat the subsidiary as a QSSS.
25

Treasury intends to work with Congress
on appropriate technical corrections to
the Act to clarify the tax treatment of
banks affiliated with nonbanks. It is
anticipated that any technical corrections
will be effective as of the effective date
of the Act. In the interim, banks (includ-
ing banks for which QSSS elections are
made) should continue to comply with
applicable information reporting and fil-
ing requirements of the Code (e.g.,
§ 6049 (Returns Regarding Payments of
Interest)).
PASSIVE INVESTMENT INCOME
Under § 1362(d)(3)(A), the S election
of a corporation with accumulated earn-
ings and profits terminates if the passive
investment income of the corporation
constitutes more than 25 percent of its
gross receipts for each of three consecu-
tive tax years. In general, § 1362(d)(3)
defines ‘‘passive investment income’’ as
gross receipts derived from royalties,
rents, dividends, interest, annuities, and
sales or exchanges of stock or securities.
Passive investment income does not in-
clude gross receipts directly derived
from the active and regular conduct of a
lending or finance business, provided
the corporation meets the requirements
of § 542(c)(6) (lending or finance com-
pany excluded from the definition of
personal holding company).
Similarly, § 1.1362–2(c)(5)(iii)(B)(1)-
(i) provides that passive investment in-
come does not include gross receipts
directly derived in the ordinary course
of a trade or business of lending or
financing. Under § 1.1362–2(c)(5)(iii)-
(B)(2), gross receipts directly derived in
the ordinary course of a trade or busi-
ness of lending or financing include
gain (as well as interest income) from
loans originated in a lending business;
however, interest earned from the in-
vestment of idle funds in short-term
securities does not constitute gross re-
ceipts directly derived in the ordinary
course of business.
The Service will treat income earned
by an S corporation on the following
banking assets as gross receipts directly
derived from the active and regular
conduct of a banking business—
* All loans and REMIC regular inter-
ests owned, or considered to be
owned, by the bank regardless of
whether the loan originated in the
bank’s business. For these pur-
poses, securities described in
§ 165(g)(2)(C) are not considered
loans.
* Assets required to be held to con-
duct a banking business (such as
Federal Reserve Bank, Federal
Home Loan Bank, or Federal Agri-
cultural Mortgage Bank stock or
participation certificates issued by a
Federal Intermediate Credit Bank
which represent nonvoting stock in
the bank).
* Assets pledged to a third party to
secure deposits or business for the
bank (such as assets pledged to
qualify as a depository for federal
taxes or state funds).
* Investment assets (other than assets
specified in the preceding para-
graphs) that are held by the bank to
satisfy reasonable liquidity needs
(including funds needed to meet
anticipated loan demands).
As a result, income and gain from
these assets will not be considered sub-
ject to the passive investment income
limitation applicable to S corporations.
INTEREST EXPENSE
DISALLOWANCE
Section 265(a)(2) denies taxpayers
(including banks) a deduction for inter-
est on indebtedness incurred or contin-
ued to purchase or carry obligations the
interest on which is wholly exempt from
federal income taxes.
Section 265(b) denies banks and other
financial institutions a deduction for the
portion of a bank’s interest expense that
is allocable to tax-exempt interest and
not otherwise disallowed by § 265(a).
The portion of a bank’s interest expense
that is allocable to tax-exempt interest is
an amount that bears the same ratio to
the interest expense as (1) the bank’s
average adjusted bases of tax-exempt
obligations acquired after August 7,
1986, bears to (2) the average adjusted
bases for all assets of the bank.
Section 1366(a)(1) requires S corpora-
tion shareholders to determine their tax
liability by taking into account their pro
rata share of the corporation’s
nonseparately computed income or loss
and their share of the items of income
(including tax-exempt income), loss, de-
duction, or credit the separate treatment
of which could affect the liability for
tax of any shareholder.
Because § 265(b) provides a special
disallowance rule for banks, the Service
will apply § 265(b) only at the bank
level in determining the amount, if any,
of the bank’s interest expense that is
disallowed. To the extent indebtedness
and tax-exempt obligations are taken
into account in applying § 265(b) at the
bank level, they are not taken into
account again in applying § 265(a) at
the shareholder level.
AUTOMATIC CHANGE IN METHOD
OF ACCOUNTING
The Service will issue further guid-
ance granting permission for an auto-
matic change in method of accounting
for banks that change from the reserve
method of accounting for bad debts.
This guidance will permit changes to be
effective as of the bank’s first taxable
year beginning after December 31,
1996. A bank that wishes to be an S
corporation effective January 1, 1997,
must file the change in method of
accounting and the S election by March
15, 1997.
The principal authors of this notice
are Martin Scha ̈ffer and Deane Burke of
the Office of Assistant Chief Counsel
(Passthroughs and Special Industries).
For further information regarding this
notice, contact Martin Scha ̈ffer or Deane
Burke at (202) 622–3080 (not a toll-free
call).
SIMPLE IRAs; Questions and
Answers
Notice 97–6
PURPOSE
The purpose of this notice is to
provide guidance, in the form of ques-
tions and answers, with respect to the
SIMPLE plan provisions that are part of
the Small Business Job Protection Act
of 1996 (‘‘SBJPA’’), Pub. Law. 104–
188.
Section 1421 of the SBJPA estab-
lished a simplified tax-favored retire-
ment plan for small employers
(‘‘SIMPLE plan’’) under section 408(p)
of the Internal Revenue Code. Contribu-
tions under a SIMPLE plan are made to
individual retirement accounts or annu-
ities (‘‘SIMPLE IRAs’’) that are estab-
lished pursuant to the SIMPLE plan
adopted by the employer.
This notice provides guidance solely
with respect to certain issues relating to
SIMPLE plans under section 1421 of
the SBJPA. No inference should be
drawn, however, regarding issues not
specifically addressed in this notice that
may be suggested by a particular ques-
tion and answer or as to why certain
questions, and not others, are included.
This notice does not provide guidance
with respect to section 1422 of the
26

SBJPA, which provides for a simplified
401(k) arrangement within a qualified
plan that shares many characteristics
with the SIMPLE plans described in this
notice.
TABLE OF CONTENTS
A. SIMPLE PLANS IN GENERAL
B. EMPLOYERS THAT CAN ESTAB-
LISH SIMPLE PLANS
C. EMPLOYEE ELIGIBILITY TO
PARTICIPATE IN A SIMPLE PLAN
D. SIMPLE PLAN CONTRIBUTIONS
E. EMPLOYEE ELECTIONS
F. VESTING REQUIREMENTS
G. EMPLOYER ADMINISTRATIVE
AND NOTIFICATION REQUIRE-
MENTS
H. TRUSTEE ADMINISTRATIVE RE-
QUIREMENTS
I. TAX TREATMENT OF SIMPLE
PLANS
J. EXCEPTION FOR USE OF DESIG-
NATED FINANCIAL INSTITUTION
K. SIMPLE PLAN ESTABLISHMENT
QUESTIONS AND ANSWERS
A. SIMPLE PLANS IN GENERAL
Q. A–1: What is a SIMPLE plan?
A. A–1: A SIMPLE plan is a written
arrangement established under section
408(p) of the Code that provides a
simplified tax-favored retirement plan
for small employers. If an employer
establishes a SIMPLE plan, each em-
ployee may choose whether to have the
employer make payments as contribu-
tions under the SIMPLE plan or to
receive these payments directly in cash.
An employer that chooses to establish a
SIMPLE plan must make either match-
ing contributions or nonelective contri-
butions. All contributions under a
SIMPLE plan are made to SIMPLE
IRAs.
Q. A–2: Can contributions made un-
der a SIMPLE plan be made to any type
of IRA?
A. A–2: Contributions under a
SIMPLE plan may only be made to a
SIMPLE IRA, not to any other type of
IRA. A SIMPLE IRA is an individual
retirement account described in section
408(a), or an individual retirement annu-
ity described in section 408(b), to which
the only contributions that can be made
are contributions under a SIMPLE plan
and rollovers or transfers from another
SIMPLE IRA.
Q. A–3: Can a SIMPLE plan be
maintained on a fiscal year basis?
A. A–3: A SIMPLE plan may only
be maintained on a calendar year basis.
Thus, for example, employer eligibility
to establish a SIMPLE plan (see Q&As
B–1 through B–5) and SIMPLE plan
contributions (see Q&As D–1 through
D–6) are determined on a calendar year
basis.
B. EMPLOYERS THAT CAN
ESTABLISH SIMPLE PLANS
Q. B–1: Can any employer establish
a SIMPLE plan?
A. B–1: SIMPLE plans may be estab-
lished only by employers that had no
more than 100 employees who earned
$5,000 or more in compensation during
the preceding calendar year (the ‘‘100–
employee limitation’’). See Q&As C–4
and C–5 for the definition of compensa-
tion. For purposes of the 100-employee
limitation, all employees employed at
any time during the calendar year are
taken into account, regardless of
whether they are eligible to participate
in the SIMPLE plan. Thus, employees
who are excludable under the rules of
section 410(b)(3) or who have not met
the plan’s minimum eligibility require-
ments must be taken into account. Em-
ployees also include self-employed indi-
viduals described in section 401(c)(1)
who received earned income from the
employer during the year.
Q. B–2: Is there a grace period that
can be used by an employer that ceases
to satisfy the 100-employee limitation?
A. B–2: An employer that previously
maintained a SIMPLE plan is treated as
satisfying the 100-employee limitation
for the two calendar years immediately
following the calendar year for which it
last satisfied the 100-employee limita-
tion. However, if the failure to satisfy
the 100-employee limitation is due to an
acquisition, disposition or similar trans-
action involving the employer, then the
two-year grace period will apply only in
accordance with rules similar to the
rules of section 410(b)(6)(C)(i).
Q. B–3: Can an employer make con-
tributions under a SIMPLE plan for a
calendar year if it maintains another
qualified plan?
A. B–3: An employer cannot make
contributions under a SIMPLE plan for
a calendar year if the employer, or a
predecessor employer, maintains a quali-
fied plan under which any of its em-
ployees receives an allocation of contri-
butions (in the case of a defined
contribution plan) or has an increase in
a benefit accrued or treated as an ac-
crued benefit under section 411(d)(6) (in
the case of a defined benefit plan) for
any plan year beginning or ending in
that calendar year. For this purpose, a
‘‘qualified plan’’ means a plan, contract,
pension or trust described in section
219(g)(5) and includes a qualified plan
(described in section 401(a)), a qualified
annuity plan (described in section
403(a)), an annuity contract (described
in section 403(b)), a plan established for
employees of a state, a political subdivi-
sion or by an agency or instrumentality
of any state or political subdivision
(other than an eligible deferred compen-
sation plan described in section 457(b)),
a simplified employee pension (‘‘SEP’’)
(described in section 408(k)) and a trust
described in section 501(c)(18). In ap-
plying these rules, transfers, rollovers or
forfeitures are disregarded, except to the
extent forfeitures replace otherwise re-
quired contributions.
Q. B–4: Are tax-exempt employers
and governmental entities permitted to
maintain SIMPLE plans?
A. B–4: Yes. Excludable contribu-
tions may be made to the SIMPLE IRA
of employees of tax-exempt employers
and governmental entities on the same
basis as contributions may be made to
employees of other eligible employers.
Q. B–5: Do the employer aggregation
and leased employee rules apply for
purposes of the SIMPLE plan rules
under section 408(p)?
A. B–5: For purposes of applying the
SIMPLE plan rules under section
408(p), certain related employers (trades
or businesses under common control)
are treated as a single employer. These
related employers include controlled
groups of corporations under section
414(b), partnerships or sole proprietor-
ships under common control under sec-
tion 414(c), and affiliated service groups
under section 414(m). In addition,
leased employees described in section
414(n) are treated as employed by the
employer.
Example:Individual P owns Business
A, a computer rental agency, that has
80 employees who received more
than $5,000 in compensation in 1996.
Individual P also owns Business B,
which repairs computers and has 60
employees who received more than
$5,000 in compensation in 1996. Indi-
vidual P is the sole proprietor of both
businesses. Section 414(c) provides
that the employees of partnerships
and sole proprietorships that are under
common control are treated as em-
ployees of a single employer. Thus,
27

for purposes of the SIMPLE plan
rules, all 140 employees are treated as
employed by Individual P. Therefore,
neither Business A nor Business B is
eligible to establish a SIMPLE plan
for 1997.
C. EMPLOYEE ELIGIBILITY TO
PARTICIPATE IN A SIMPLE PLAN
Q. C–1: Which employees of an em-
ployer must be eligible to participate
under the SIMPLE plan?
A. C–1: If an employer establishes a
SIMPLE plan, all employees of the
employer who received at least $5,000
in compensation from the employer dur-
ing any 2 preceding calendar years
(whether or not consecutive) and who
are reasonably expected to receive at
least $5,000 in compensation during the
calendar year, must be eligible to par-
ticipate in the SIMPLE plan for the
calendar year.
An employer, at its option, may ex-
clude from eligibility employees de-
scribed in section 410(b)(3). These em-
ployees are:
(1) Employees who are included in a
unit of employees covered by an
agreement that the Secretary of Labor
finds to be a collective bargaining
agreement between employee repre-
sentatives and one or more employers,
if there is evidence that retirement
benefits were the subject of good
faith bargaining between such em-
ployee representatives and such em-
ployer or employers;
(2) In the case of a trust established
or maintained pursuant to an agree-
ment that the Secretary of Labor finds
to be a collective bargaining agree-
ment between air pilots represented in
accordance with Title II of the Rail-
way Labor Act and one or more
employees, all employees not covered
by that agreement; and
(3) Employees who are nonresident
aliens and who received no earned
income (within the meaning of sec-
tion 911(d)(2)) from the employer that
constitutes income from sources
within the United States (within the
meaning of section 861(a)(3)).
As noted in Q&A B–5, the employer
aggregation and leased employee rules
apply for purposes of section 408(p).
Thus, for example, if two related em-
ployers must be aggregated under the
rules of section 414(b), all employees of
either employer who satisfy the eligibil-
ity criteria must be allowed to partici-
pate in the SIMPLE plan.
Q. C–2: May an employer impose
less restrictive eligibility requirements?
A. C–2: An employer may impose
less restrictive eligibility requirements
by eliminating or reducing the prior year
compensation requirements, the current
year compensation requirements, or
both, under its SIMPLE plan. For ex-
ample, the employer could allow partici-
pation for employees who received
$3,000 in compensation during any pre-
ceding calendar year. However, the em-
ployer cannot impose any other condi-
tions on participating in a SIMPLE plan.
Q. C–3: May an employee participate
in a SIMPLE plan if he or she also
participates in a plan of a different
employer for the same year?
A. C–3: An employee may participate
in a SIMPLE plan even if he or she also
participates in a plan of a different
employer for the same year. However,
the employee’s salary reduction contri-
butions are subject to the limitations of
section 402(g), which provides an aggre-
gate limit on the exclusion for elective
deferrals for any individual. Similarly,
an employee who participates in a
SIMPLE plan and an eligible deferred
compensation plan described in section
457(b) is subject to the limitations de-
scribed in section 457(c). An employer
that establishes a SIMPLE plan is not
responsible for monitoring compliance
with either of these limitations.
Q. C–4: What definition of compen-
sation applies for purposes of the
SIMPLE plan rules in the case of an
individual who is not a self-employed
individual?
A.
C–4: For purposes of the SIMPLE
plan rules, in the case of an individual
who is not a self-employed individual,
compensation means the amount de-
scribed in section 6051(a)(3) (wages,
tips, and other compensation from the
employer subject to income tax with-
holding under section 3401(a)), and
amounts described in section 6051(a)(8),
including elective contributions made
under a SIMPLE plan, and compensation
deferred under a section 457 plan. For
purposes of applying the 100-employee
limitation, and in determining whether
an employee is eligible to participate in
a SIMPLE plan (i.e., whether the em-
ployee had $5,000 in compensation for
any 2 preceding years), an employee’s
compensation also includes the employ-
ee’s elective deferrals under a section
401(k) plan, a salary reduction SEP and
a section 403(b) annuity contract.
Q. C–5: What definition of compen-
sation applies for purposes of the
SIMPLE plan rules in the case of a
self-employed individual?
A. C–5: For purposes of the SIMPLE
plan rules, in the case of a self-
employed individual, compensation
means net earnings from self-
employment determined under section
1402(a), prior to subtracting any contri-
butions made under the SIMPLE plan
on behalf of the individual.
D. SIMPLE PLAN CONTRIBUTIONS
Q. D–1: What contributions must an
employer make under a SIMPLE plan?
A. D–1: If an employer establishes a
SIMPLE plan, it must make salary re-
duction contributions, as described in
Q&A D–2, to the extent elected by
employees. In addition, the employer
must make employer matching contribu-
tions, as described in Q&As D–4 and
D–5, or employer nonelective contribu-
tions, as described in Q&A D–6. These
are the only contributions that may be
made under a SIMPLE plan.
Q. D–2: What is a salary reduction
contribution?
A. D–2: A salary reduction contribu-
tion is a contribution made pursuant to
an employee’s election to have an
amount contributed to his or her
SIMPLE IRA, rather than have the
amount paid directly to the employee in
cash. An employee must be permitted to
elect to have salary reduction contribu-
tions made at the level specified by the
employee, expressed as a percentage of
compensation for the year. Additionally,
an employer may permit an employee to
express the level of salary reduction
contributions as a specific dollar
amount. An employer may not place any
restrictions on the amount of an employ-
ee’s salary reduction contributions (e.g.,
by limiting the contribution percentage),
except to the extent needed to comply
with the annual limit on the amount of
salary reduction contributions described
in Q&A D–3.
Q. D–3: What is the annual limit on
the amount of salary reduction contribu-
tions under a SIMPLE plan?
A. D–3: For 1997, the maximum an-
nual amount of salary reduction contri-
butions that can be made on behalf of
any employee under a SIMPLE plan is
$6,000. This amount will be adjusted by
the Service to reflect any changes in the
cost of living.
Q. D–4: What employer matching
contribution is generally required under
a SIMPLE plan?
28

A. D–4: Under a SIMPLE plan, an
employer is generally required to make
a contribution on behalf of each eligible
employee in an amount equal to the
employee’s salary reduction contribu-
tions, up to a limit of 3 percent of the
employee’s compensation for the entire
calendar year.
Q. D–5: Can the 3-percent limit on
matching contributions be reduced?
A. D–5: The 3-percent limit on
matching contributions is permitted to
be reduced for a calendar year at the
election of the employer, but only if:
(1) The limit is not reduced below 1
percent;
(2) The limit is not reduced for more
than 2 years out of the 5-year period
that ends with (and includes) the year
for which the election is effective;
and
(3) Employees are notified of the
reduced limit within a reasonable pe-
riod of time before the 60-day elec-
tion period during which employees
can enter into salary reduction agree-
ments. See Q&A E–1.
For purposes of applying the rule
described in paragraph (2) of this Q&A
D–5, in determining whether the limit
was reduced below 3 percent for a year,
any year before the first year in which
an employer (or a predecessor em-
ployer) maintains a SIMPLE plan will
be treated as a year for which the limit
was 3 percent. If an employer chooses
to make nonelective contributions for a
year (see Q&A D–6), that year also will
be treated as a year for which the limit
was 3 percent.
Q. D–6: May an employer make non-
elective contributions instead of match-
ing contributions?
A. D–6: As an alternative to making
matching contributions under a SIMPLE
plan (as described in Q&A D–4 and
D–5), an employer may make nonelec-
tive contributions equal to 2 percent of
each eligible employee’s compensation
for the entire calendar year. The em-
ployer’s nonelective contributions must
be made for each eligible employee
regardless of whether the employee
elects to make salary reduction contribu-
tions for the calendar year. The em-
ployer may, but is not required to, limit
nonelective contributions to eligible em-
ployees who have at least $5,000 (or
some lower amount selected by the
employer) of compensation for the year.
For purposes of the 2-percent non-
elective contribution, the compensation
taken into account must be limited to
the amount of compensation that may be
taken into account under section
401(a)(17) for the year. The section
401(a)(17) limit for 1997 is $160,000.
This amount will be adjusted by the
Service for subsequent years to reflect
changes in the cost of living.
An employer may substitute the
2-percent nonelective contribution for
the matching contribution for a year,
only if:
(1) Eligible employees are notified
that a 2-percent nonelective contribu-
tion will be made instead of a match-
ing contribution; and
(2) This notice is provided within a
reasonable period of time before the
60-day election period during which
employees can enter into salary re-
duction agreements. See Q&A E–1.
E. EMPLOYEE ELECTIONS
Q. E–1: When must an employee be
given the right to enter into a salary
reduction agreement?
A. E–1: During the 60-day period
immediately preceding January 1 of a
calendar year (i.e., November 2 to De-
cember 31 of the preceding calendar
year), an eligible employee must be
given the right to enter into a salary
reduction agreement for the calendar
year, or to modify a prior agreement
(including reducing the amount subject
to this agreement to $0). However, for
the year in which the employee becomes
eligible to make salary reduction contri-
butions, the period during which the
employee may enter into a salary reduc-
tion agreement or modify a prior agree-
ment is a 60-day period that includes
either the date the employee becomes
eligible or the day before that date. For
example, if an employer establishes a
SIMPLE plan effective as of July 1,
1997, each eligible employee becomes
eligible to make salary reduction contri-
butions on that date and the 60-day
period must begin no later than July 1
and cannot end before June 30, 1997.
During these 60-day periods, employ-
ees have the right to modify their salary
reduction agreements without restric-
tions. In addition, for the year in which
an employee becomes eligible to make
salary reduction contributions, the em-
ployee must be able to commence these
contributions as soon as the employee
becomes eligible, regardless of whether
the 60-day period has ended.
Q. E–2: Can a SIMPLE plan provide
additional or longer election periods?
A. E–2: Nothing precludes a SIMPLE
plan from providing additional or longer
periods for permitting employees to en-
ter into salary reduction agreements or
to modify prior agreements. For ex-
ample, a SIMPLE plan can provide a
90-day election period instead of the
60-day period described in Q&A E–1.
Similarly, in addition to the 60-day
period described in Q&A E–1, a
SIMPLE plan can provide quarterly
election periods during the 30 days
before each calendar quarter.
Q. E–3: Does an employee have the
right to terminate a salary reduction
agreement outside a SIMPLE plan’s nor-
mal election period?
A. E–3: An employee must be given
the right to terminate a salary reduction
agreement for a calendar year at any
time during the year. A SIMPLE plan
may provide that an employee who
terminates a salary reduction agreement
at any time other than the periods
described in Q&A E–1 or E–2 is not
eligible to resume participation until the
beginning of the next calendar year.
Q. E–4: Must an employer allow an
employee to select the financial institu-
tion to which the employer will make
all SIMPLE plan contributions on behalf
of the employee?
A. E–4: Generally, under section
408(p), an employer must permit an
employee to select the financial institu-
tion for the SIMPLE IRA to which the
employer will make all contributions on
behalf of the employee. If an employer
uses Form 5305-SIMPLE as modified in
Q&A K–3, the employer may modify
page 3 of Form 5305–SIMPLE (October
1996) (Model Salary Reduction Agree-
ment) to include a section for employees
to indicate the financial institution they
have selected and any additional infor-
mation necessary to facilitate transmittal
of the contribution to that institution.
Alternatively, under the exception de-
scribed in Q&A J–1, an employer may
require that all contributions be made to
a designated financial institution.
F. VESTING REQUIREMENTS
Q. F–1: Must contributions under a
SIMPLE plan be nonforfeitable?
A. F–1: Yes. All contributions under
a SIMPLE plan must be fully vested
and nonforfeitable when made.
Q. F–2: May amounts held in a
SIMPLE IRA be withdrawn at any
time?
A. F–2: Yes. An employer may not
require an employee to retain any por-
tion of the contributions in his or her
29

SIMPLE IRA or otherwise impose any
withdrawal restrictions.
G. EMPLOYER ADMINISTRATIVE
AND NOTIFICATION
REQUIREMENTS
Q. G–1: What notification require-
ments apply to employers?
A. G–1: An employer must notify
each employee, immediately before the
employee’s 60-day election period de-
scribed in Q&A E–1, of the employee’s
opportunity to enter into a salary reduc-
tion agreement or to modify a prior
agreement. If applicable, this notifica-
tion must disclose an employee‘‘s ability
to select the financial institution that
will serve as the trustee of the employ-
ee’’s SIMPLE IRA as described in Q&A
E–4. If an employer uses Form 5305–
SIMPLE as modified in Q&A K–3, the
employer may modify page 3 of Form
5305–SIMPLE (October 1996) (Model
Notification to Eligible Employees) to
disclose an employee‘‘s ability to select
the financial institution that will serve as
the trustee of the employee’’s SIMPLE
IRA as described in Q&A E–4. The
notification must also include the sum-
mary description described in Q&A
H–1. In the case of a SIMPLE plan
established using Form 5305–SIMPLE,
the summary description requirement
may be satisfied by providing a com-
pleted copy of pages one and two of
Form 5305–SIMPLE that reflects the
terms of the employer’s plan (including
the materials provided by the trustee for
completion of Article VI).
Q. G–2: May the notifications regard-
ing a reduced matching contribution
(described in Q&A D–5) and a nonelec-
tive contribution in lieu of a matching
contribution (described in Q&A D–6) be
provided at the same time as the notifi-
cation of an employee’s opportunity to
enter into a salary reduction agreement
and the summary description?
A. G–2: Yes. An employer is deemed
to provide the notification regarding a
reduced matching contribution or a non-
elective contribution in lieu of a match-
ing contribution within a reasonable pe-
riod of time before the 60-day election
period if, immediately before the 60-day
election period, this notification is in-
cluded with the notification of an em-
ployee’s opportunity to enter into a
salary reduction agreement.
Q. G–3: What reporting penalties un-
der the Code apply if an employer fails
to provide one or more of the required
notices?
A. G–3: If the employer fails to pro-
vide one or more of the required notices
described in Q&A G–1, the employer
will be liable, under the Code, for a
penalty of $50 per day until the notices
are provided. If the employer shows that
the failure was due to reasonable cause,
the penalty will not be imposed. To the
extent that each employee is permitted
to select the trustee for his or her
SIMPLE IRA pursuant to Q&A E–4,
and is so notified in accordance with
Q&A G–1, and the information with
respect to the trustee (the name and
address of the trustee and its withdrawal
procedures) is not available at the time
the employer is required to provide the
summary description, the employer is
deemed to have shown reasonable cause
for failure to provide this information to
eligible employees, but only if the em-
ployer sees to it that this information is
provided to the employee as soon as
administratively feasible once the trustee
has been selected.
Q. G–4: What if an eligible employee
is unwilling or unable to establish a
SIMPLE IRA?
A. G–4: If an eligible employee who
is entitled to a contribution under a
SIMPLE plan is unwilling or unable to
establish a SIMPLE IRA with any finan-
cial institution prior to the date on
which the contribution is required to be
made to the SIMPLE IRA of the em-
ployee under Q&A G–5 or G–6, an
employer may execute the necessary
documents to establish a SIMPLE IRA
on the employee‘‘s behalf with a finan-
cial institution selected by the employer.
Q. G–5: When must an employer
make salary reduction contributions un-
der a SIMPLE plan?
A. G–5: The employer must make
salary reduction contributions to the fi-
nancial institution maintaining the
SIMPLE IRA no later than the close of
the 30-day period following the last day
of the month in which amounts would
otherwise have been payable to the
employee in cash. The Department of
Labor has indicated that most SIMPLE
plans are also subject to Title I of the
Employee Retirement Income Security
Act of 1974 (ERISA). The Department
of Labor has informed the Treasury
Department and the Service that, as a
matter of enforcement policy, for these
plans, salary reduction contributions
must be made to the SIMPLE IRA as of
the earliest date on which the contribu-
tions can reasonably be segregated from
the employer’s general assets, but in no
event later than the 30-day deadline
described above.
Q. G–6: When must an employer
make matching and nonelective contri-
butions under a SIMPLE plan?
A. G–6: Matching and nonelective
employer contributions must be made to
the financial institution maintaining the
SIMPLE IRA no later than the due date
for filing the employer’s income tax
return, including extensions, for the tax-
able year that includes the last day of
the calendar year for which the contri-
butions are made.
H. TRUSTEE ADMINISTRATIVE
REQUIREMENTS
Q. H–1: What information must a
SIMPLE IRA trustee provide to an
employer?
A. H–1: Each year, a SIMPLE IRA
trustee must provide the employer spon-
soring the SIMPLE plan with a sum-
mary description containing the follow-
ing information:
(1) The name and address of the
employer and the trustee.
(2) The requirements for eligibility
for participation.
(3) The benefits provided with re-
spect to the arrangement.
(4) The time and method of making
elections with respect to the arrange-
ment.
(5) The procedures for, and effects
of, withdrawals (including rollovers)
from the arrangement.
The trustee must provide the summary
description to the employer early
enough to allow the employer to meet
its notification obligation described in
Q&A G–1. However, a trustee is not
required to provide the summary de-
scription prior to agreeing to be the
trustee of a SIMPLE IRA for the
SIMPLE plan.
A trustee that fails to provide the
employer with a summary plan descrip-
tion incurs a $50 penalty, under the
Code, for each day the failure continues,
unless the trustee shows that the failure
is due to reasonable cause. To the extent
that the employer or trustee provides the
information described in paragraphs (1)
through (5) of this Q&A H–1 within the
time period prescribed in Q&A G–1 to
the employee for whom the SIMPLE
IRA is established, the trustee of that
SIMPLE IRA is deemed to have shown
reasonable cause for failure to provide
that information to the employer. For
example, if the employer provides its
30

name and address and the information
described in paragraphs (2) through (4)
of this Q&A H–1, and the effects of
withdrawal to all eligible employees in a
SIMPLE plan in accordance with Q&A
G–1, and the trustee provides its name
and address and its procedures for with-
drawal to each eligible employee for
whom a SIMPLE IRA is established
with the trustee under the SIMPLE plan,
the trustee will be deemed to have
shown reasonable cause for failing to
provide the employer the information
described in paragraphs (1) through (5)
of this Q&A H–1.
In the case of a SIMPLE plan estab-
lished using Form 5305–SIMPLE, a
trustee may satisfy this obligation by
providing an employer with a current
copy of Form 5305–SIMPLE, with in-
structions, the information required for
completion of Article VI, and the name
and address of the financial institution.
The trustee should provide guidance to
the employer concerning the need to
complete the first two pages of Form
5305–SIMPLE in accordance with its
plan’s terms and to distribute completed
copies to eligible employees.
The trustee of a transfer SIMPLE IRA
is not required to provide the summary
description described in the preceding
paragraph. A SIMPLE IRA is a transfer
SIMPLE IRA if it is not a SIMPLE IRA
to which the employer has made contri-
butions under the SIMPLE plan.
Q. H–2: What information must a
SIMPLE IRA trustee provide to partici-
pants in the SIMPLE plan?
A. H–2: Within 30 days after the
close of each calendar year, a SIMPLE
IRA trustee must provide each indi-
vidual on whose behalf an account is
maintained with a statement of the indi-
vidual’’s account balance as of the close
of that calendar year and the account
activity during that calendar year. A
trustee who fails to provide individuals
with this statement incurs a $50 penalty,
under the Code, for each day the failure
continues, unless the trustee shows that
the failure is due to reasonable cause.
However, no penalty will apply if a
trustee provides this statement not later
than January 31 following the calendar
year to which the statement relates. The
trustee must also provide any other
information required to be furnished to
IRA holders (e.g., disclosure statements
for individual retirement plans as re-
ferred to in section 1.408–6 of the
regulations).
Q. H–3: What information must a
SIMPLE IRA trustee provide to the
Service?
A. H–3: Section 408(i) requires the
trustee of an individual retirement ac-
count to make reports regarding these
accounts to the Service. The Service
intends to modify Form 5498,Individual
Retirement Arrangement Information, to
require that the amount of contributions
to a SIMPLE IRA, rollover contribu-
tions, and the fair market value of the
account be reported, and that contribu-
tions to a SIMPLE IRA be identified as
such. A trustee who fails to file these
reports incurs a $50 penalty under the
Code for each failure, unless it is shown
that the failure is due to reasonable
cause.
Q. H–4: Are distributions from a
SIMPLE IRA required to be reported on
Form 1099–R?
A. H–4: Pursuant to section 6047 of
the Code and section 35.3405–1 of the
regulations, the payor of a designated
distribution from an IRA must report the
distribution on Form 1099–R. A distri-
bution from a SIMPLE IRA is a desig-
nated distribution from an IRA and thus
must be reported on Form 1099–R. The
IRS intends to revise Form 1099–R,
Distributions From Pensions, Annuities,
Retirement or Profit-sharing Plans,
IRAs, Insurance Contracts, Etc., to re-
flect the requirements that apply to
SIMPLE IRAs. The penalty, under the
Code, for failure to report a designated
distribution from an IRA (including a
SIMPLE IRA) is determined under sec-
tions 6721–6724.
Q. H–5: Is a SIMPLE IRA trustee
responsible for reporting whether a dis-
tribution to a participant occurred during
the two-year period described in Q&A
I–2?
A. H–5: Yes. A SIMPLE IRA trustee
is required to report on Form 1099–R
whether a distribution to a participant
occurred during the two-year period de-
scribed in Q&A I–2. A trustee is permit-
ted to prepare this report on the basis of
its own records with respect to the
SIMPLE IRA account. A trustee may,
but is not required to, take into account
other adequately substantiated informa-
tion regarding the date on which an
individual first participated in any
SIMPLE plan maintained by the indi-
vidual’s employer. See Q&A I–2 on the
effect of distributions within this two-
year period.
I. TAX TREATMENT OF SIMPLE
PLANS
Q. I–1: What are the tax conse-
quences of SIMPLE plan contributions?
A. I–1: Contributions to a SIMPLE
IRA are excludable from federal income
tax and not subject to federal income
tax withholding. Salary reduction contri-
butions to a SIMPLE IRA are subject to
tax under the Federal Insurance Contri-
butions Act (‘‘FICA’’), the Federal Un-
employment Tax Act (‘‘FUTA’’), and the
Railroad Retirement Act (‘‘RRTA’’), and
must be reported on Form W–2, Wage
and Tax Statement. Matching and non-
elective contributions to a SIMPLE IRA
are not subject to FICA, FUTA, or
RRTA taxes, and are not required to be
reported on Form W–2.
Q. I–2: What are the tax conse-
quences when amounts are distributed
from a SIMPLE IRA?
A. I–2: Generally, the same tax re-
sults apply to distributions from a
SIMPLE IRA as to distributions from a
regular IRA (i.e., an IRA described in
section 408(a) or (b)). However, a spe-
cial rule applies to a payment or distri-
bution received from a SIMPLE IRA
during the two-year period beginning on
the date on which the individual first
participated in any SIMPLE plan main-
tained by the individual’s employer (the
‘‘two-year period’’).
Under this special rule, if the addi-
tional income tax on early distributions
under section 72(t) applies to a distribu-
tion within this two-year period, section
72(t)(6) provides that the rate of addi-
tional tax under this special rule is
increased from 10 percent to 25 percent.
If one of the exceptions to application
of the tax under section 72(t) applies
(e.g., for amounts paid after age 59 1/2,
after death, or as part of a series of
substantially equal payments), the ex-
ception also applies to distributions
within the two-year period and the 25-
percent additional tax does not apply.
Q. I–3: Are there any special rollover
rules that apply to a distribution from a
SIMPLE IRA?
A. I–3: Section 408(d)(3)(G) provides
that the rollover provisions of section
408(d)(3) apply to a distribution from a
SIMPLE IRA during the two-year pe-
riod described in Q&A I–2 only if the
distribution is paid into another SIMPLE
IRA. Thus, a distribution from a
SIMPLE IRA during that two-year pe-
riod qualifies as a rollover contribution
(and thus is not includable in gross
income) only if the distribution is paid
31

into another SIMPLE IRA and satisfies
the other requirements of section
408(d)(3) for treatment as a rollover
contribution.
Q. I–4: Can an amount be transferred
from a SIMPLE IRA to another IRA in
a tax-free trustee-to-trustee transfer?
A. I–4: During the two-year period
described in Q&A I–2, an amount in a
SIMPLE IRA can be transferred to
another SIMPLE IRA in a tax-free
trustee-to-trustee transfer. If, during this
two-year period, an amount is paid from
a SIMPLE IRA directly to the trustee of
an IRA that is not a SIMPLE IRA, the
payment is neither a tax-free trustee-to-
trustee transfer nor a rollover contribu-
tion; the payment is a distribution from
the SIMPLE IRA and a contribution to
the other IRA that does not qualify as a
rollover contribution. After the expira-
tion of the two-year period, an amount
in a SIMPLE IRA can be transferred in
a tax-free trustee-to-trustee transfer to an
IRA that is not a SIMPLE IRA.
Q. I–5: When does the two-year pe-
riod described in Q&A I–2 begin?
A. I–5: The two-year period de-
scribed in Q&A I–2 begins on the first
day on which contributions made by the
individual‘‘s employer are deposited in
the individual’’s SIMPLE IRA.
Q. I–6: Do the qualification rules of
section 401(a) apply to contributions
under a SIMPLE plan?
A. I–6: None of the qualification
rules of section 401(a) apply to SIMPLE
plans. For example, the section 415 and
416 rules do not apply to contributions
under a SIMPLE plan. Similarly, the
section 401(a)(17) limit does not apply
to salary reduction contributions and
matching contributions. However, as
noted in Q&A D–6, the amount of
compensation that may be taken into
account for purposes of the 2-percent
nonelective contribution is limited to the
amount that may be taken into account
under section 401(a)(17) for the year.
Q. I–7: What rules apply to an em-
ployer’s ability to deduct contributions
under a SIMPLE plan?
A. I–7: Pursuant to section 404(m),
contributions under a SIMPLE plan are
deductible in the taxable year of the
employer with or within which the cal-
endar year for which contributions were
made ends (without regard to the limita-
tions of section 404(a)). For example, if
an employer has a June 30 taxable year
end, contributions under the SIMPLE
plan for the calendar year 1997 (includ-
ing contributions made in 1997 before
June 30, 1997) are deductible in the
taxable year ending June 30, 1998.
Contributions will be treated as made
for a particular taxable year if they are
made on account of that taxable year
and are made by the due date (including
extensions) prescribed by law for filing
the return for the taxable year.
J. EXCEPTION FOR USE OF
DESIGNATED FINANCIAL
INSTITUTION
Q. J–1: Can an employer designate a
particular financial institution to which
all contributions under the SIMPLE plan
will be made?
A. J–1: Yes. In accordance with sec-
tion 408(p)(7), instead of making
SIMPLE plan contributions to the finan-
cial institution selected by each eligible
employee (see Q&A E–4), an employer
may require that all contributions on
behalf of all eligible employees under
the SIMPLE plan be made to SIMPLE
IRAs at a particular financial institution
if the following requirements are met:
(1) the employer and the financial insti-
tution agree that the financial institution
will be a designated financial institution
under section 408(p)(7) (‘‘DFI’’) for the
SIMPLE plan; (2) the financial institu-
tion agrees that, if a participant so
requests, the participant’s balance will
be transferred without cost or penalty to
another SIMPLE IRA (or, after the
two-year period described in Q&A I–2,
to any IRA) at a financial institution
selected by the participant; and (3) each
participant is given written notification
describing the procedures under which,
if a participant so requests, the partici-
pant’s balance will be transferred with-
out cost or penalty to another SIMPLE
IRA (or, after the two-year period de-
scribed in Q&A I–2, to any IRA) at a
financial institution selected by the par-
ticipant.
This Q&A J–1 is illustrated by the
following examples:
Example 1:A representative of Finan-
cial Institution L approaches Employer
B concerning the establishment of a
SIMPLE plan. Employer B agrees to
establish a SIMPLE plan for its eli-
gible employees. Employer B would
prefer to avoid writing checks to more
than one financial institution on behalf
of employees, and is interested in
making all contributions under the
SIMPLE plan to a single financial
institution. Employer B and Financial
Institution L agree that Financial Insti-
tution L will be a DFI and Financial
Institution L agrees that, if a partici-
pant so requests, it will transfer the
participant’s balance, without cost or
penalty, to another SIMPLE IRA (or,
after the two-year period described in
Q&A I–2, to any IRA) at a financial
institution selected by the participant.
A SIMPLE IRA is established for each
participating employee of Employer B
at Financial Institution L. Each partici-
pant is provided with a written de-
scription of how and when the partici-
pant may direct that the participant’s
balance attributable to contributions
made to Financial Institution L be
transferred without cost or penalty to a
SIMPLE IRA (or, after the two-year
period described in Q&A I–2, to any
IRA) at another financial institution
selected by the participant. Financial
Institution L is a DFI, and Employer B
may require that all contributions on
behalf of all eligible employees be
made to SIMPLE IRAs at Financial
Institution L.
Example 2:A representative of Finan-
cial Institution M approaches Em-
ployer C concerning the establishment
of a SIMPLE plan. Employer C in-
vites Financial Institution M to make
a presentation on its investment op-
tions for SIMPLE IRAs to Employer
C’s employees. Each eligible em-
ployee receives notification that the
employer must permit the employee
to select which financial institution
will serve as the trustee of the em-
ployee’s SIMPLE IRA (see Q&A
G–1). All eligible employees of Em-
ployer C voluntarily select Financial
Institution M to serve as the trustee of
the SIMPLE IRAs to which Employer
C will make all contributions on
behalf of the employees. Financial
Institution M is not a DFI merely
because all eligible employees of Em-
ployer C selected Financial Institution
M to serve as the trustee of their
SIMPLE IRAs and Employer C con-
sequently makes all contributions to
Financial Institution M. Therefore, Fi-
nancial Institution M is not required
to transfer SIMPLE IRA balances
without cost or penalty.
Example 3:Assume the same facts as
Example 2, except that Employee X
and Employee Y, who made salary
reduction elections, failed to establish
SIMPLE IRAs to receive SIMPLE
plan contributions on their behalf be-
fore the first date on which Employer
C is required to make a contribution
to their SIMPLE IRAs. Employer C
establishes SIMPLE IRAs at Financial
32

Institution M for these employees and
contributes the amount required to
their accounts. Financial Institution M
is not a DFI merely because Em-
ployer C establishes SIMPLE IRAs
on behalf of Employee X and Em-
ployee Y while all other employees
voluntarily select Financial Institution
M to serve as the trustee of the
SIMPLE IRAs to which Employer C
will make contributions on their be-
half.
Q. J–2: May the time and manner in
which a participant may transfer his or
her balance without cost or penalty be
limited without violating the require-
ments of section 408(p)(7)?
A. J–2: Yes. Section 408(p)(7) will
not be violated merely because a partici-
pant is given only a reasonable period
of time each year in which to transfer
his or her balance without cost or
penalty. A participant will be deemed to
have been given a reasonable period of
time in which to transfer his or her
balance without cost or penalty if, for
each calendar year, the participant has
until the end of the 60-day period
described in Q&A E–1 to request to
transfer, without cost or penalty, his or
her balance attributable to SIMPLE plan
contributions for the calendar year fol-
lowing that 60-day period (or, for the
year in which an employee becomes
eligible to make salary reduction contri-
butions, for the balance of that year) and
subsequent calendar years.
If the time or manner in which a
participant may transfer his or her bal-
ance without cost or penalty is limited,
any such limitation must be disclosed as
part of the written notification described
in Q&A J–1. In the case of a SIMPLE
plan established using Form 5305–
SIMPLE, if the summary description
requirement is being satisfied by provid-
ing a completed copy of pages one and
two of Form 5305–SIMPLE, Article VI
(Procedures for Withdrawal) must con-
tain a clear explanation of any such
limitation.
This Q&A J–2 is illustrated by the
following examples:
Example 1:Employer A first estab-
lishes a SIMPLE plan effective Janu-
ary 1, 1998, and intends to make all
contributions to Financial Institution
M, which has agreed to serve as a
DFI. For the 1998 calendar year,
Employer A provides the 60-day elec-
tion period described in Q&A E–1
beginning November 2, 1997, and
notifies each participant that he or she
may request that his or her balance
attributable to future contributions be
transferred from Financial Institution
M to a SIMPLE IRA at a financial
institution that the participant selects.
The notification states that the trans-
fer will be made without cost or
penalty if the participant contacts Fi-
nancial Institution M prior to January
1, 1998. For the 1998 calendar year,
the requirements of section 408(p)(7)
will not be violated merely because
participants are given only a 60-day
period in which to request to transfer
their balances without cost or penalty.
Example 2:Assume the same facts as
Example 1. Participant X does not
request a transfer of her balance by
December 31, 1997, but requests a
transfer of her current balance to
another SIMPLE IRA on July 1,
1998. Participant X‘‘s current balance
would not be required to be trans-
ferred without cost or penalty because
Participant X did not request such a
transfer prior to January 1, 1998.
However, during the 60-day period
preceding the 1999 calendar year,
Participant X may request a transfer,
without cost or penalty, of her balance
attributable to contributions made for
the 1999 calendar year and, if she so
elects, for all future calendar years
(but not her balance attributable to
contributions for the 1998 calendar
year).
Example 3:Assume the same facts as
Example 1. Under the terms of the
SIMPLE plan, Participant Y becomes
an eligible employee on June 1, 1998,
and, for Participant Y, the 60-day
period described in Q&A E–1 begins
on that date. For the 1998 calendar
year, Participant Y will be deemed to
have been given a reasonable amount
of time in which to request to trans-
fer, without cost or penalty, his bal-
ance attributable to contributions for
the balance of the 1998 calendar year
if Financial Institution M allows such
a request to be made prior to July 31,
1998.
Q. J–3: Is there a limit on the fre-
quency with which a participant’s bal-
ance must be transferred without cost or
penalty?
A. J–3: In order to satisfy Section
408(p)(7), if a participant acts, within
applicable reasonable time limits, if any,
to request a transfer of his or her
balance, the participant’s balance must
be transferred on a reasonably frequent
basis. A participant’s balance will be
deemed to be transferred on a reason-
ably frequent basis if it is transferred on
a monthly basis.
Q. J–4: How does a DFI transfer a
participant’s balance without cost or
penalty?
A. J–4: In order to satisfy section
408(p)(7), a participant’s balance must
be transferred in a trustee-to-trustee
transfer directly to a SIMPLE IRA (or,
after the two-year period described in
Q&A I–2, to any IRA) at the financial
institution specified by the participant.
A transfer is deemed to be made
without cost or penalty if no liquidation,
transaction, redemption or termination
fee, or any commission, load (whether
front-end or back-end) or surrender
charge, or similar fee or charge is
imposed with respect to the balance
being transferred. A transfer will not fail
to be made without cost or penalty
merely because contributions that a par-
ticipant has elected to have transferred
without cost or penalty are required to
be invested in one specified investment
option until transferred, even though a
variety of investment options are avail-
able with respect to contributions that
participants have not elected to transfer.
This Q&A J–4 is illustrated by the
following examples:
Example 1:Financial Institution Q
agrees to be a DFI for the SIMPLE
plan maintained by Employer D. Em-
ployer D provides the 60-day election
period described in Q&A E–1 begin-
ning on November 2 of each year and
each participant is notified that he or
she may request, before the end of the
60-day period, a transfer of his or her
future contributions from Financial
Institution Q without cost or penalty
to a SIMPLE IRA (or, after the
two-year period described in Q&A
I–2, to any IRA) at a financial institu-
tion selected by the participant. The
notification states that a participant’s
contributions that are to be transferred
without cost or penalty will be in-
vested in a specified investment op-
tion and will be transferred to the
financial institution selected by the
participant on a monthly basis.
Financial Institution Q offers various
investment options to account holders
of IRA SIMPLE accounts, including
investment options with a sales
charge. Any participant who does not
elect to have his or her balance
transferred to another financial institu-
tion may invest the contributions
made on his or her behalf in any
investment option available to account
33

holders of SIMPLE IRA accounts at
Financial Institution Q. However,
contributions that a participant has
elected to have transferred are auto-
matically invested, prior to transfer, in
a specified investment option that has
no sales charge. The requirement that
a participant’s balance be transferred
without cost or penalty will not be
violated merely because contributions
that have been designated to be trans-
ferred pursuant to a participant’’s
election are automatically invested in
one specified investment option and
transferred on a monthly basis to the
financial institution selected by the
participant.
Example 2:Assume the same facts as
in Example 1. Financial Institution Q
generally charges its IRA accounts a
reasonable annual administration fee.
Financial Institution Q also charges
this annual administration fee with
respect to SIMPLE IRA accounts,
including SIMPLE IRA accounts from
which balances must be transferred in
accordance with participants’ transfer
elections. The requirement that par-
ticipants‘‘ balances be transferred
without cost or penalty will not be
violated merely because a reasonable
annual administration fee is charged
to SIMPLE IRA accounts from which
balances must be transferred in accor-
dance with participants’’ transfer elec-
tions.
Q. J–5: Is the ‘‘without cost or pen-
alty’’ requirement violated if a DFI
charges an employer for a participant‘‘s
transfer of his or her balance?
A. J–5: The ’’without cost or pen-
alty‘‘ requirement of section 408(p)(7) is
not violated merely because a DFI
charges an employer an amount that
takes into account the financial institu-
tion’s responsibility to transfer balances
upon participants’ requests or otherwise
charges an employer for transfers re-
quested participants, provided that the
charge is not passed through to the
participants who request the transfer.
K. SIMPLE PLAN ESTABLISHMENT
Q. K–1: Must an employer establish
a SIMPLE plan on January 1?
A. K–1: An existing employer may
establish a SIMPLE plan effective on
any date between January 1 and October
1 of a year beginning after December
31, 1996, provided that the employer (or
any predecessor employer) did not pre-
viously maintain a SIMPLE plan. This
requirement does not apply to a new
employer that comes into existence after
October 1 of the year the SIMPLE plan
is established if the employer establishes
the SIMPLE plan as soon as administra-
tively feasible after the employer comes
into existence. If an employer (or prede-
cessor employer) previously maintained
a SIMPLE plan, the employer may
establish a SIMPLE plan effective only
on January 1 of a year.
Q. K–2: When must a SIMPLE IRA
be established for an employee?
A. K–2: A SIMPLE IRA is required
to be established for an employee prior
to the first date by which a contribution
is required to be deposited into the
employee’’s SIMPLE IRA (see Q&As
G–5 and G–6).
Q. K–3: Will the Service issue model
forms employers can use to establish
SIMPLE plans?
A. K–3: Yes. On October 31, 1996,
the Service issued Form 5305–SIMPLE,
which is a form that may be used by an
employer establishing a SIMPLE plan
with a financial institution that is a DFI.
The Service also intends to issue a
model form that may be used by an
employer establishing a SIMPLE plan
that does not use a DFI. (The Service
issued Form 5304–SIMPLE on Decem-
ber 30, 1996.) Until the Service issues
this model form, an employer establish-
ing a SIMPLE plan that does not use a
DFI and wishes to use a model form
may use Form 5305–SIMPLE (October
1996), subject to the following modifi-
cations:
A. Modifications to the Form:
(1) Form Title: strike the parentheti-
cal ‘‘(for Use With a Designated
Financial Institution)’’;
(2) Item 1 of Article I: strike
‘‘SIMPLE individual retirement ac-
count or annuity established at the
designated financial institution
(SIMPLE IRA) for’’ and substitute
‘‘SIMPLE IRA established by’’;
(3) Item 3 of Article III: strike ‘‘to
the designated financial institution for
the IRAs established under this
SIMPLE plan’’ each time it appears
and substitute ‘‘for each eligible em-
ployee to the SIMPLE IRA estab-
lished at the financial institution se-
lected by that employee’’;
(4) Item 4 of Article IV: strike this
Item and substitute ‘‘Selection of
IRA Trustee. The employer must per-
mit each eligible employee to select
the financial institution that will serve
as trustee, custodian or issuer of the
SIMPLE IRA to which the employer
will make all contributions on behalf
of that employee.’’;
(5) Item 4 of Article V: strike this
Item; substitute ‘‘SIMPLE IRA. A
SIMPLE IRA is an individual retire-
ment account described in section
408(a), or an individual retirement
annuity described in section 408(b), to
which the only contributions that can
be made are contributions under a
SIMPLE plan and rollovers or trans-
fers from another SIMPLE IRA.’’;
(6) Article VI, heading: strike every-
thing after the title and substitute
‘‘(The employer will provide each
employee with the procedures for
withdrawals of contributions received
by the financial institution selected by
that employee unless that financial
institution provides the procedures di-
rectly to the employee.)’’; and
(7) Article VII: strike the paragraph
pertaining to the agreement to be a
designated financial institution (i.e.,
the paragraph that begins ‘‘The under-
signed agrees . . .’’) and the related
name, address, and signature block.
B. Modifications to the Instructions:
(1) Under heading ‘‘What is a
SIMPLE Plan?’’: strike ‘‘designated
financial institution named in Article
VII’’ and substitute ‘‘financial institu-
tion selected by each eligible em-
ployee’’;
(2) Under heading ‘‘When to Use
Form 5305–SIMPLE’’: strike Item 1
and renumber Items 2 and 3 accord-
ingly;
(3) Under heading ‘‘Completing
Form 5305–SIMPLE’’: strike ‘‘and
the designated financial institution’’;
(4) Under heading ‘‘Contributions
(Article III)’’, subheading ‘‘Salary
Reduction Contributions’’: strike
‘‘designated financial institution for
the employee’s SIMPLE IRA’’ and
substitute ‘‘financial institution se-
lected by each eligible employee’’;
(5) Under heading ‘‘Other Important
Information About Your SIMPLE
Plan’’, subheading ‘‘Timing of Sal-
ary Reduction Contributions’’:
(a) Strike ‘‘designated financial in-
stitution for the SIMPLE IRAs of
all eligible employees’’ and substi-
tute ‘‘financial institution selected
by each eligible employee for his
or her SIMPLE IRA’’; and
34

(b) Strike ‘‘the SIMPLE IRA at the
designated financial institution’’ and
substitute ‘‘each participant’s
SIMPLE IRA’’;
(6) Under heading ‘‘Other Impor-
tant Information About Your
SIMPLE Plan’’, subheading ‘‘Em-
ployee Notification’’: strike every-
thing after the title and substitute
‘‘You must notify each eligible em-
ployee prior to the employee’s 60-day
election period described above that
he or she can make or change salary
reduction elections and select the fi-
nancial institution that will serve as
the trustee, custodian, or issuer of the
employee’s SIMPLE IRA. In this no-
tification, you must indicate whether
you will provide:
1. A matching contribution equal
to your employees’ salary reduction
contributions up to a limit of 3% of
their compensation;
2. A matching contribution equal
to your employees’ salary reduction
contributions subject to a percentage
limit that is between 1% and 3% of
their compensation; or
3. A nonelective contribution equal
to 2% of your employees’ compensa-
tion.
You can use theModel Notifica-
tion to Eligible Employeeson page 3
to satisfy these employee notification
requirements for this SIMPLE plan,
provided you either: (1) modify the
model to disclose employees’ ability
to select the financial institution that
will serve as the trustee, custodian, or
issuer of the employee’s SIMPLE
IRA or (2) provide this same disclo-
sure in a separate document. ASum-
mary Descriptionmust also be pro-
vided to eligible employees at this
time. This summary description re-
quirement may be satisfied by provid-
ing a completed copy of pages 1 and
2 of Form 5305–SIMPLE (including
the Article VI Procedures for With-
drawals).
If you fail to provide the employee
notification (including the summary
description) described above, you will
be liable for a penalty of $50 per day
until the notification is provided. If
you can show that the failure was due
to reasonable cause, the penalty will
not be imposed.
If the summary description infor-
mation with respect to the financial
institution (i.e., the name and address
of the financial institution and its
withdrawal procedures) is not avail-
able at the time the employee must be
given the summary description, you
must provide the summary description
without this information. In such a
case, you will have reasonable cause
for not including this information
with respect to the financial institu-
tion in the summary description.’’;
(7) Under heading ‘‘Other Impor-
tant Information About Your
SIMPLE Plan’’: strike subheading
‘‘Choosing the Designated Financial
Institution’’ and the following three
paragraphs;
(8) Strike the heading ‘‘Instructions
for the Designated Financial Insti-
tution’’ and the subheading ‘‘Com-
pleting Form 5305–SIMPLE’’ and
the following paragraph; and
(9) Under the subheading ‘‘Summary
Description’’:
(a) In the first paragraph, strike
‘‘you’’ and substitute ‘‘the financial
institution for the SIMPLE IRA of
each eligible employee’’;
(b)
In the first paragraph, strike
‘‘your procedures for withdrawals
and transfers from the SIMPLE
IRAs established under this
SIMPLE plan’’ and substitute ‘‘that
financial institution’’s procedures for
withdrawals from SIMPLE IRAs es-
tablished at that financial institution,
including the financial institution‘‘s
name and address’’; and
(c) Strike the second paragraph and
substitute ‘‘There is a penalty of
$50 per day for each failure to
provide the summary description
described above. However, if the
failure was due to reasonable cause,
the penalty will not be imposed.’’
REQUEST FOR COMMENTS
The Service and Treasury request
comments on the guidance provided in
these questions and answers for use in
developing any future guidance on
SIMPLE plans.
Comments can be addressed to
CC:DOM:CORP:R (Notice 97–6), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, comments
may be hand delivered between the
hours of 8 a.m. and 5 p.m. to
CC:DOM:CORP:R (Notice 97–6), Cou-
rier’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW., Wash-
ington, DC. Alternatively, taxpayers may
transmit comments electronically via the
IRS Internet site at http://
www.irs.ustreas.gov/prod/tax_regs/
comments.html
PAPERWORK REDUCTION ACT
The collections of information con-
tained in this notice have been reviewed
and approved by the Office of Manage-
ment and Budget for review in accor-
dance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control
number 1545–1502.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
The collections of information in this
notice are in the sections headed:Em-
ployee Elections,Employer Administra-
tive And Notification Requirements,
Trustee Administrative Requirements,
andSIMPLE Plan Establishments. This
information is required by the IRS to
assure compliance with the new provi-
sions of the Small Business Job Protec-
tion Act of 1996. The likely respondents
are individuals, business or other for-
profit institutions, and not-for-profit in-
stitutions.
The estimated total annual reporting
burden is 769,000 hours. The estimated
average annual burden per respondent is
2 hours and 34 minutes. The estimated
number of respondents is 300,000.
The estimated annual frequency of
responses is annually.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any inter-
nal revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this notice is
Carlton Watkins of the Employee Plans
Division. For further information regard-
ing this notice, please contact the Em-
ployee Plans Division’s taxpayer assis-
tance telephone service at (202) 622–
6074/6075 (not a toll-free number),
between the hours of 1:30 and 4:00 p.m.
Eastern Time, Monday through Thurs-
day.
Adoption Assistance
Notice 97–9
Sections 23 and 137, relating to cer-
tain adoption expenses, were added to
the Internal Revenue Code by the Small
Business Job Protection Act of 1996,
Pub. L. 104–188. This notice provides
general guidance concerning the tax
35

credit under § 23 for qualified adoption
expenses paid or incurred by an indi-
vidual, and the exclusion from gross
income under § 137 for amounts paid
or expenses incurred by an employer for
qualified adoption expenses under an
adoption assistance program. Both the
credit and the exclusion are effective for
taxable years beginning after December
31, 1996. They both generally terminate
after December 31, 2001 (except for the
credit with respect to a child with
special needs).
This notice is divided into six sec-
tions. Section I explains the adoption
credit. Section II explains the exclusion
from gross income under an adoption
assistance program. Section III describes
the coordination of the credit and the
exclusion. Sections IV and V cover
filing and reporting requirements and
the effective dates of the credit and the
exclusion, respectively. Section VI in-
vites comments on future guidance re-
garding the credit and the exclusion.
I. Adoption Credit.
A. In General.
Section 23 provides an income tax
credit for qualified adoption expenses
paid or incurred by an individual in
connection with the adoption of an
eligible child. The phrase ‘‘paid or in-
curred’’ refers to the method of account-
ing (i.e., cash or accrual) of the indi-
vidual. Under a dollar limitation, the
maximum credit is $5,000 ($6,000 in
the case of an adoption of a child with
special needs). See section I.D.1. The
credit is also subject to an income
limitation which may reduce or elimi-
nate the credit for any particular year.
See section I.D.2. For the effective date
and partial expiration date of the credit,
see section V.
B. Eligible Child and Child with Special
Needs.
1. In general.
An eligible child is any individual
who, at the time a qualified adoption
expense is paid or incurred, is under the
age of 18, or is physically or mentally
incapable of caring for himself or her-
self. For qualified adoption expenses
paid or incurred after December 31,
2001, an eligible child must also be a
child with special needs.
2. Child with Special Needs.
A child with special needs is an
otherwise eligible child who meets two
additional requirements. First, a state
must have determined that (1) the child
cannot or should not be returned to the
parents’ home, and (2) it is reasonable
to conclude the child cannot be placed
with adoptive parents without adoption
assistance because of a specific factor or
condition. Examples of a specific factor
or condition include a child’s ethnic
background, age, membership in a mi-
nority or sibling group, medical condi-
tion, or handicap. Second, a child with
special needs must be a citizen or
resident of the United States. The term
‘‘United States’’ includes any possession
of the United States.
C. Qualified Adoption Expenses.
‘‘Qualified adoption expenses’’ in-
clude the reasonable and necessary
adoption fees, court costs, attorney’s
fees, traveling expenses (including
amounts expended for meals and lodg-
ing) while away from home, and other
expenses that are directly related to, and
the principal purpose of which is for,
the legal adoption of an eligible child by
the taxpayer. Qualified adoption ex-
penses do not include any expense (1)
for which a deduction or credit is al-
lowed under any other provision of the
Code, (2) to the extent that funds for the
expense are received under any federal,
state, or local program, (3) that is
incurred in violation of federal or state
law, (4) that is incurred in carrying out
any surrogate parenting arrangement, (5)
that is incurred in connection with the
adoption of a child of the taxpayer’s
spouse, or (6) for which reimbursement
is made under an employer program or
otherwise. In addition, an expense paid
(by a cash basis taxpayer) or incurred
(by an accrual basis taxpayer) in a
taxable year beginning before 1997 is
not a qualified adoption expense eligible
for the credit.
D. Limitations on the Credit.
The credit for qualified adoption ex-
penses is subject to a dollar limitation
and an income limitation.
1. Dollar Limitation.
The maximum amount of qualified
adoption expenses that may be taken
into account for the credit is $5,000
($6,000 in the case of an adoption of a
child with special needs). The legislative
history to this provision clarifies that the
$5,000 (or $6,000) limitation is with
respect to the adoption of each child and
is cumulative over all taxable years
(rather than an annual limitation). See
section I.G., Examples 1 and 2. There-
fore, the maximum amount that may be
taken into account in connection with a
taxpayer’s effort to adopt an eligible
child is $5,000 (or $6,000), including
qualified adoption expenses paid or in-
curred in any unsuccessful attempt to
adopt an eligible child before success-
fully finalizing the adoption of another
eligible child. See section I.G., Example
3. The $5,000 (or $6,000) limitation on
qualified adoption expenses applies both
to married individuals and to unmarried
individuals adopting an eligible child.
Therefore, an unmarried couple that
seeks to adopt an eligible child must
apply the $5,000 (or $6,000) limitation
to the couple’s combined qualified adop-
tion expenses.
2. Income Limitation.
If a taxpayer’s modified adjusted
gross income (modified AGI, as defined
in section I.D.3. below) is $75,000 or
less, the income limitation does not
apply and the taxpayer’s allowable
credit is not reduced. If a taxpayer’s
modified AGI is $115,000 or more, no
credit is available. If a taxpayer’s modi-
fied AGI is between $75,000 and
$115,000, the allowable credit is ratably
reduced (but not below zero) as follows:
ALLOWABLE CREDIT = QAE(YR)2[QAE(YR) ×(
modified AGI2$75,000
)]
$40,000
‘‘QAE(YR)’’ is the amount of qualified
adoption expenses taken into account for
the taxable year after applying the dollar
limitation.
For example, assume that in 1997 an
unmarried individual has modified AGI
of $85,000 and pays $5,000 for quali-
fied adoption expenses. The adoption
becomes final in 1997. The individual’s
reduction percentage is 25% ($85,000
minus $75,000 equals $10,000; $10,000
divided by $40,000 equals 25%). The
maximum credit available is $3,750
($5,000 times 25% equals $1,250;
$5,000 minus $1,250 equals $3,750) and
is claimed in 1997. In addition, see
section I.G., Example 4.
3. Modified Adjusted Gross Income.
Modified AGI for the taxable year in
which qualified adoption expenses are
36

taken into account is adjusted gross
income for that year determined after
applying the income exclusion under
§ 137, but without applying § 911 (the
foreign earned income exclusion or the
foreign housing exclusion), § 931 (the
exclusion for income from Guam,
American Samoa, and the Northern
Mariana Islands), and § 933 (the exclu-
sion for income from Puerto Rico).
E. Year of Credit.
1. Domestic adoptions.
The credit for qualified adoption ex-
penses paid or incurred in connection
with the adoption of an eligible child
who is a citizen or resident of the
United States at the time the adoption
commenced (including such amounts
paid or incurred in an unsuccessful
effort to adopt such a child) is allowed
in the next taxable year unless the
expenses are paid or incurred in the
taxable year the adoption becomes final.
The credit for expenses paid or incurred
in the taxable year an adoption becomes
final is allowed in that year.
2. Foreign adoptions.
A special rule applies in the case of
the adoption of an eligible child who is
not a citizen or resident of the United
States at the time the adoption com-
menced. The credit is only available for
adoptions that become final. Qualified
adoption expenses paid or incurred in
any taxable year before the taxable year
in which the adoption becomes final are
treated as paid or incurred in the taxable
year in which the adoption becomes
final. Therefore, the credit for qualified
adoption expenses paid or incurred in
the taxable year in which the adoption
becomes final, or in any earlier taxable
year, is allowed in the taxable year the
adoption becomes final.
For example, assume that in 1997 and
1998 an unmarried individual pays
$1,000 and $3,000, respectively, of
qualified adoption expenses in connec-
tion with the adoption of an eligible
child who is not a citizen or resident of
the United States. In 1999, the year the
adoption becomes final, the individual
pays an additional $4,000 of such ex-
penses. The individual’s modified ad-
justed gross income for 1999 is less
than $75,000 (and thus the income limi-
tation does not apply). The individual
may claim a credit of $5,000 (the maxi-
mum credit permitted) on his or her
1999 federal income tax return (the year
the adoption becomes final).
3. Pre-1997 Expenses.
An expense paid (by a cash basis
taxpayer) or incurred (by an accrual
basis taxpayer) in a taxable year begin-
ning before 1997 in connection with the
adoption (either domestic or foreign) of
an eligible child does not qualify for the
credit. See section V.A.
F. Carryforward of Unused Credit.
The adoption credit allowable under
§ 23 is a nonrefundable credit that,
along with credits allowable under § 21
(relating to dependent care), § 22 (relat-
ing to the elderly and the disabled), and
§ 25 (relating to interest on home mort-
gages), is limited under § 26 to the
excess of the taxpayer’s regular tax
liability for the taxable year over the
tentative minimum tax for the taxable
year (determined without regard to the
alternative minimum tax foreign tax
credit). If § 26 limits the amount of an
adoption credit otherwise allowable in a
particular year, the excess may be car-
ried forward to the succeeding taxable
year, but not beyond the fifth taxable
year following the taxable year in which
the credit arose.
G. Examples.
The following examples illustrate the
rules described in section I. For pur-
poses of these examples, except as oth-
erwise provided, assume that each eli-
gible child is a citizen of the United
States who is not a child with special
needs, and that H andWare a married
couple who file a joint federal income
tax return on the cash basis and seek to
adopt one child.
Example 1. Dollar limitation.In an effort to adopt
an eligible child,HandWpay $4,000 of qualified
adoption expenses in 1997 and an additional
$2,000 of qualified adoption expenses in 1998.
The adoption becomes final in 1998. For 1998,H
andWhave modified AGI of $75,000 or less (and
thus the income limitation does not apply).Hand
Wmay not claim any qualified adoption expenses
as a credit in 1997 because of the 1-year delay
rule in section I.E.1.HandW, on their joint
federal income tax return for 1998, may claim
$5,000 of qualified adoption expenses as a credit.
The remaining $1,000 of qualified adoption ex-
pensesHandWpaid may never be claimed as a
credit.
Example 2. Dollar Limitation.Assume the same
facts as in Example 1, except that the child is a
child with special needs. H and W, on their joint
federal income tax return for 1998, may claim
$6,000 of qualified adoption expenses as a credit.
Example 3. Dollar limitation.In an effort to adopt
an eligible child,HandWpay $3,000 of qualified
adoption expenses in January 1997 to Agency1.
Although Agency1was able to identify an
eligible child forHandWto adopt, the adoption
ultimately was unsuccessful.HandWthen paid
$4,000 of qualified adoption expenses to Agency2
in September 1997 in a further effort to adopt a
child. This time, the effort was successful andH
andWfinalized the adoption ofA, an eligible
child, in December 1997.HandWhave modified
AGI of $75,000 or less (and thus the income
limitation does not apply). The total amount that
HandWmay take into account in connection with
the adoption of an eligible child is limited to
$5,000. See section I.D.1. Thus,HandW, on their
1997 joint federal income tax return, may claim
$5,000 of qualified adoption expenses as a credit.
The remaining $2,000 of qualified adoption ex-
pensesHandWpaid may never be claimed as a
credit.
Example 4. Income limitation.In an effort to adopt
an eligible child,HandWpay $1,000 of qualified
adoption expenses in 1997, an additional $2,000 of
those expenses in 1998, and $4,000 of those
expenses in 1999 when the adoption becomes
final.HandWhave modified AGI of $85,000 for
all taxable years and thus the income limitation
applies.HandWmay not claim any qualified
adoption expenses as a credit in 1997 because of
the 1-year delay rule in section I.E.1.HandW, on
their 1998 joint federal income tax return, may
take into account the $1,000 of qualified adoption
expenses paid in 1997, subject to any reduction
under the income limitation.HandW’s reduction
percentage for 1998 under the income limitation is
25% ($85,000 minus $75,000 equals $10,000;
$10,000 divided by $40,000 equals 25%).Hand
W’s allowable credit for 1998 is $750 ($1,000
times 25% equals $250; $1,000 minus $250 equals
$750).
HandW, on their joint federal income tax return
for 1999, first reduce the dollar limitation ($5,000)
by the amount of qualified adoption expenses
taken into account in all prior years ($5,000 minus
$1,000 equals $4,000) before applying the income
limitation. Thus,HandWmay take into account
only $4,000 of the $6,000 of qualified adoption
expenses paid in 1998 and 1999 on their 1999
joint federal income tax return before applying the
income limitation.HandW’s reduction percentage
for 1999 under the income limitation is 25% and
their allowable credit for 1999 is $3,000 ($4,000
times 25% equals $1,000; $4,000 minus $1,000
equals $3,000). The remaining $2,000 of qualified
adoption expenses thatHandWpaid in 1998 and
1999 ($6,000 minus $4,000 equals $2,000) may
never be claimed as a credit.
II. Adoption Assistance Program.
A. In General.
Section 137 provides an exclusion
from an employee’s gross income for
amounts paid or expenses incurred by
an employer for qualified adoption ex-
penses in connection with the adoption
of an eligible child by an employee if
such amounts are furnished pursuant to
an adoption assistance program. See
section II.D., which describes the re-
quirements of an adoption assistance
program. Under a dollar limitation, the
maximum exclusion from gross income
is $5,000 ($6,000 in the case of an
adoption of a child with special needs).
See section II.F.1. The exclusion is also
subject to an income limitation, which
may reduce or eliminate the exclusion
for any particular year. See section
II.F.2. For the effective date and expira-
tion date of the exclusion, see section V.
37

B. Eligible Child and Child with Spe-
cial Needs.
1. In General.
An eligible child is any individual
who, at the time a qualified adoption
expense is paid or incurred, is under the
age of 18, or is physically or mentally
incapable of caring for himself or her-
self.
2. Child with Special Needs.
A child with special needs is an
otherwise eligible child who meets two
additional requirements. First, a state
must have determined that (1) the child
cannot or should not be returned to the
parents’ home, and (2) it is reasonable
to conclude the child cannot be placed
with adoptive parents without adoption
assistance because of a specific factor or
condition. Examples of a specific factor
or condition include a child’s ethnic
background, age, membership in a mi-
nority or sibling group, medical condi-
tion, or handicap. Second, a child with
special needs must be a citizen or
resident of the United States. The term
‘‘United States’’ includes any possession
of the United States.
C. Qualified Adoption Expenses.
‘‘Qualified adoption expenses’’ in-
clude the reasonable and necessary
adoption fees, court costs, attorney’s
fees, traveling expenses (including
amounts expended for meals and lodg-
ing) while away from home, and other
expenses that are directly related to, and
the principal purpose of which is for,
the legal adoption of an eligible child by
the taxpayer. Qualified adoption ex-
penses do not include any expense (1)
that is incurred in violation of federal or
state law, (2) that is incurred in carrying
out any surrogate parenting arrangement,
(3) that is incurred in connection with
the adoption of a child of the taxpayer’s
spouse, or (4) that is reimbursed other
than under an adoption assistance pro-
gram that satisfies the requirements of
§ 137.
D. Adoption Assistance Program Re-
quirements.
1. In General.
An adoption assistance program is a
separate written plan of an employer for
the exclusive benefit of its employees
under which the employer provides
adoption assistance and which meets the
requirements described below. The ex-
clusion is not available unless, before
adoption expenses are incurred by either
the employer or employee, the written
plan is in existence and the employee
receives notification of the existence of
the plan. An adoption assistance pro-
gram may be part of a more comprehen-
sive benefit plan and is not required to
be funded. In addition, an employer is
not required to apply to the Internal
Revenue Service for a determination
that the plan is a qualified program.
2. Plan Requirements.
A brief description of the plan re-
quirements follows:
(a) all employees who are eligible to
participate in the program are required
to be given reasonable notice of the
terms and availability of the program;
(b) an adoption assistance program
must benefit the employer’s employees
generally and eligibility requirements
may not discriminate in favor of highly
compensated employees or their depen-
dents;
(c) shareholders or owners (or their
spouses or dependents) may receive no
more than five percent of all the adop-
tion assistance reimbursements or ex-
penses paid by the employer during the
year (for this purpose, a shareholder or
owner is someone who owns on any day
of the year more than five percent of the
stock, or capital or profits interest of the
employer); and
(d) an employee receiving payments
under an adoption assistance program
must provide the employer reasonable
substantiation that payments or reim-
bursements made under the program
constitute qualified adoption expenses.
Without regard to whether the forego-
ing requirements are satisfied, adoption
reimbursement programs under § 1052
of title 10, United States Code (relating
to the armed forces) or § 514 of title
14, United States Code (relating to
members of the Coast Guard) are treated
as adoption assistance programs for pur-
poses of the exclusion.
E. Cafeteria Plans.
An adoption assistance program that
meets the requirements of § 137 (de-
scribed in section II.D.) constitutes a
qualified benefit under § 125 of the
Code. Consequently, the program may
be offered through a cafeteria plan.
F. Limitations on the Exclusion.
The exclusion from gross income for
qualified adoption expenses under an
adoption assistance program is subject
to a dollar limitation and an income
limitation.
1. Dollar Limitation.
The maximum amount of qualified
adoption expenses that may be taken
into account is $5,000 ($6,000 in the
case of an adoption of a child with
special needs). The $5,000 (or $6,000)
limitation is with respect to the adoption
of each child and is cumulative over all
taxable years (rather than an annual
limitation). See section II.J., Examples 1
and 2. Therefore, the maximum amount
that may be taken into account in con-
nection with a taxpayer’s effort to adopt
an eligible child is $5,000 (or $6,000),
including amounts paid or expenses in-
curred for qualified adoption expenses
in connection with any unsuccessful
attempt to adopt an eligible child before
successfully finalizing the adoption of
another eligible child. See section II.J.,
Example 3. The $5,000 (or $6,000)
limitation on qualified adoption ex-
penses applies both to married individu-
als and to unmarried individuals adopt-
ing an eligible child. Therefore, an
unmarried couple that seeks to adopt an
eligible child must apply the $5,000 (or
$6,000) limitation to the couple’s com-
bined qualified adoption expenses.
2. Income Limitation.
If a taxpayer’s modified adjusted
gross income (modified AGI) (as de-
fined in section II.F.3. below) is $75,000
or less, the income limitation does not
apply and the taxpayer’s allowable ex-
clusion is not reduced. If a taxpayer’s
modified AGI is $115,000 or more, no
exclusion is available. If a taxpayer’s
modified AGI is between $75,000 and
$115,000, the allowable exclusion is
ratably reduced (but not below zero) as
follows:
ALLOWABLE EXCLUSION = QAE(YR)2[QAE(YR) ×(
modified AGI2$75,000
)]
$40,000
38

‘‘QAE(YR)’’ is the amount of qualified
adoption expenses taken into account for
the taxable year after applying the dollar
limitation.
For example, assume that in 1997 an
unmarried employee has modified AGI
of $85,000 and is reimbursed $5,000 by
his or her employer under an adoption
assistance program for qualified adop-
tion expenses. The employee’s reduction
percentage is 25% ($85,000 minus
$75,000 equals $10,000; $10,000 di-
vided by $40,000 equals 25%). The
maximum amount of the exclusion from
the employee’s gross income in 1997 is
$3,750 ($5,000 times 25% equals
$1,250; $5,000 minus $1,250 equals
$3,750). The remaining $1,250 is in-
cluded in the employee’s gross income
for 1997. In addition, see section II.J.,
Example 4. For the employee’s tax
filing obligations and responsibilities,
see section II.G.2.
3. Modified adjusted gross income.
Modified AGI for the taxable year in
which the exclusion may be claimed is
adjusted gross income for that year, but
without applying § 137 (the exclusion
for adoption assistance program pay-
ments), § 911 (the foreign earned in-
come exclusion or the foreign housing
exclusion), § 931 (the exclusion for in-
come from Guam, American Samoa, and
the Northern Mariana Islands), and
§ 933 (the exclusion for income from
Puerto Rico). Modified AGI as defined
for the exclusion is different from modi-
fied AGI as defined for the credit.
G. Tax Withholding, Reporting, and Fil-
ing Obligations.
1. Employer’s Withholding and Re-
porting Obligations.
Amounts paid or expenses incurred
by an employer for qualified adoption
expenses under an adoption assistance
program are not subject to income tax
withholding. However, these amounts
are subject to social security and Medi-
care taxes (FICA), federal unemploy-
ment tax (FUTA), and railroad retire-
ment tax withholding. Employers are to
report amounts paid or expenses in-
curred for qualified adoption expenses
in accordance with appropriate forms
(for example, Form W–2) and instruc-
tions or other guidance issued by the
Internal Revenue Service. See An-
nouncement 96–134, 1996–53 I.R.B. 1,
for instructions relating to reporting
adoption assistance program payments
on Form W–2.
2. Employee’s Tax Filing Obligations
and Responsibilities.
As described above, amounts paid or
expenses incurred for qualified adoption
expenses by an employer under an
adoption assistance program are not sub-
ject to income tax withholding. There-
fore, an employee who receives reim-
bursements or payments that do not
qualify, or only partially qualify, for the
exclusion from gross income (see sec-
tions II.F.2. and II.H.2.) must make an
appropriate adjustment on Form 1040
(in accordance with the form and its
instructions) to include in gross income
the taxable portion of the reimburse-
ment. In addition, the employee may
need to make an adjustment to his or
her income tax withholding (on Form
W–4) or make estimated tax payments
(see Publication 505, Tax Withholding
and Estimated Tax) to avoid potential
penalties for underpayment of tax on the
taxable portion of a reimbursement.
H. Year of Exclusion.
1. Domestic Adoptions.
In general, amounts are excludable
from the employee’s gross income for
the year in which the employer pays the
qualified adoption expense in connection
with the adoption of an eligible child
who is a citizen or resident of the
United States at the time the adoption
commenced.
2. Foreign Adoptions.
A special rule applies in the case of
the adoption of an eligible child who is
not a citizen or resident of the United
States at the time the adoption com-
menced. The exclusion is only available
for adoptions that become final.
Amounts paid or expenses incurred by
the employer for qualified adoption ex-
penses before the taxable year in which
the adoption becomes final are exclud-
able from the employee’s gross income
in the taxable year in which the adop-
tion becomes final. Therefore, amounts
paid or expenses incurred by the em-
ployer under an adoption assistance pro-
gram in a taxable year prior to a final
adoption are includible in the employ-
ee’s gross income in that year. The
employee must make an appropriate
adjustment on the employee’s Form
1040. Provided the adoption becomes
final before January 1, 2002, the em-
ployee may claim the exclusion in the
taxable year in which the adoption be-
comes final by making an appropriate
adjustment on the employee’s Form
1040 for that year. See section II.J.,
Example 5. See also section II.G. for
employer and employee tax withholding,
reporting, and filing obligations.
I. Reserved.
J. Examples.
The following examples illustrate the
rules described in section II. For pur-
poses of these examples, except as oth-
erwise provided, assume that each eli-
gible child is a citizen of the United
States who is not a child with special
needs, that EmployeeYis married, is a
cash method taxpayer, and files a joint
federal income tax return withY’s
spouse.YandY’s spouse seek to adopt
one child. Also assume that EmployerX
establishes an adoption assistance pro-
gram that meets the requirements of
§ 137 on January 1, 1997, and thatYis
a plan participant.
Example 1. Dollar limitation.In 1997, pursuant to
the adoption assistance program,Xpays $5,000 of
qualified adoption expenses on behalf ofYin
connection withY’s effort to adopt an eligible
child.YandY’s spouse have modified AGI of
$75,000 or less for 1997 and 1998 (and thus the
income limitation does not apply). In 1997,Ycan
exclude $5,000 from gross income. In 1998,X
pays an additional $2,000 of qualified adoption
expenses on behalf ofY.Ymust include the
additional amounts in gross income in 1998. See
section II.G. forXandY’s tax withholding,
reporting, and filing obligations.
Example 2. Dollar limitation.Assume the same
facts as in Example 1, except that the child is a
child with special needs. In 1997,Ycan exclude
$5,000 from gross income. In 1998,Ycan exclude
an additional $1,000 from gross income.Ymust
include the remaining $1,000 in gross income in
1998. See section II.G. forXandY’s tax withhold-
ing, reporting, and filing obligations.
Example 3. Dollar limitation.In 1997, pursuant to
the adoption assistance program,Xpays $7,000 of
qualified adoption expenses on behalf ofYin
connection withY’s effort to adopt an eligible
child ($3,000 of qualified adoption expenses to
Agency1 for an unsuccessful attempt to adopt A
and $4,000 of qualified adoption expenses to
Agency2for the final adoption ofB).YandY’s
spouse have modified AGI of $75,000 or less for
1997 (and thus the income limitation does not
apply). The total amount thatYmay take into
account in connection with the adoption of an
eligible child is limited to $5,000. Thus, in 1997,
Ycan exclude $5,000 from gross income. See
section II.F.1. The remaining $2,000 of qualified
adoption expensesXpaid on behalf ofYare
includible inY’s gross income in 1997. See
section II.G. forXandY’s tax withholding,
reporting, and filing obligations.
Example 4. Income limitation.Pursuant to the
adoption assistance program,Xpays $3,000 of
qualified adoption expenses in 1997, and $4,000
of those expenses in 1998 on behalf ofYin
connection withY’s effort to adopt an eligible
child.YandY’s spouse have modified AGI of
$85,000 for all taxable years (and thus the income
limitation applies). In 1997,Ycan exclude $2,250
from income. The income limitation reduces the
maximum exclusion as follows:Y’s reduction
percentage is 25% [$85,000 minus $75,000 equals
$10,000; $10,000 divided by $40,000 equals
25%]; $3,000 times 25% equals $750; $3,000
39

minus $750 equals $2,250. In 1998, the income
limitation reduces the maximum exclusion as
follows: the dollar limitation ($5,000) is reduced
by the amount of qualified adoption expenses
taken into account for the exclusion in all prior
years ($3,000 in 1997). Thus, of the $4,000 of
qualified adoption expenses paid in 1998,Ymay
take into account only $2,000 ($5,000 minus
$3,000 equals $2,000) before applying the income
limitation.Y’s reduction percentage is 25% andY
can exclude $1,500 from income in 1998 ($2,000
times 25% equals $500; $2,000 minus $500 equals
$1,500). See section II.G. forXandY’s tax
withholding, reporting, and filing obligations.
Example 5. Cafeteria Plan.Assume that for 1997,
Yelects $2,400 in adoption assistance offered
under a calendar year cafeteria plan maintained by
X. In December 1997,Ysubmits, andXreim-
burses, a claim of $2,400 for qualified adoption
expenses incurred byYfor services provided in
1997 in connection with a foreign adoption. The
adoption becomes final in 1998.YandY’s spouse
have modified adjusted gross income of $75,000
or less in 1998 (and thus the income limitation
does not apply).Yis required to include the
$2,400 reimbursement in gross income for the
1997 tax year (because of the rules in section
II.H.2.). However,Yis entitled to exclude $2,400
(the reimbursement received in 1997) from gross
income for the 1998 tax year (the year the
adoption becomes final) by making an appropriate
adjustment toY’s Form 1040 for 1998. See section
II.G. forXandY’s tax withholding, reporting, and
filing obligations.
III. Coordination of Credit and Exclu-
sion.
A. Credit or Exclusion.
An individual may claim both a credit
and an exclusion in connection with the
adoption of an eligible child. An indi-
vidual may not, however, claim both a
credit and an exclusion for the same
expense. For example, assume that in
1997 an unmarried individual pays
$6,500 in qualified adoption expenses to
an adoption agency for the final adop-
tion of an eligible child who is not a
child with special needs. In that same
year, the individual’s employer, under an
adoption assistance program that satis-
fies the requirements of § 137, pays an
additional $5,000 for other qualified
adoption expenses to a private attorney
on behalf of the employee for the
adoption of the child. In 1997, assuming
the individual’s modified AGI is
$75,000 or less, the individual may
exclude $5,000 from gross income, and
may claim a credit of $5,000, because
the exclusion and credit are not for the
same expenses. The remaining $1,500 of
qualified adoption expenses may never
be claimed as a credit or excluded from
gross income.
B. No Credit for Employer Payments.
An individual may not claim a credit
for any expense reimbursed by the indi-
vidual’s employer, whether or not reim-
bursed under an adoption assistance pro-
gram. See section I.C. For example,
assume that in 1997 an unmarried indi-
vidual pays $1,000 in qualified adoption
expenses to a private attorney for the
final adoption in that year of an eligible
child who is not a child with special
needs. In the same year, the individual’s
employer, under an adoption assistance
program that satisfies the requirements
of § 137, pays an additional $7,000 in
qualified adoption expenses to an adop-
tion agency on behalf of the employee.
Assuming the individual’s modified AGI
for 1997 is $75,000 or less, the indi-
vidual may exclude $5,000 (of the
$7,000 paid by the employer) from
gross income, and may claim a credit
for the $1,000 paid by the individual.
The remaining $2,000 of adoption ex-
penses paid by the employer may never
be claimed as a credit (nor excluded),
and must be included in the individual’s
gross income in 1997.
IV. Filing and Reporting.
A. In General.
Taxpayers will be required to provide
(on a form to be published by the
Internal Revenue Service) available in-
formation about the name, age, and
taxpayer identification number (TIN) of
each eligible child for whom qualified
adoption expenses are taken into ac-
count for purposes of the credit or
exclusion. In lieu of such information,
taxpayers may be required to furnish
other information, including identifica-
tion of the agent assisting with the
adoption. Taxpayers should maintain
records to support any adoption credit or
exclusion claimed.
B. Married Individuals.
Individuals who are married at the
end of the taxable year must file a joint
federal income tax return to claim the
credit or the exclusion unless they lived
apart from each other for the last six
months of the taxable year and the
individual claiming the credit or the
exclusion (1) maintained as his or her
home a household for the eligible child
for more than one-half of the taxable
year, and (2) furnished over one-half of
the cost of maintaining that household
in that taxable year. For this purpose, an
individual legally separated from his or
her spouse under a decree of divorce or
separate maintenance will not be consid-
ered married.
C. Forms and Instructions.
The Service will publish forms and
instructions with respect to the filing
requirements for individuals and the
reporting requirements for employers.
V. Effective Dates of the Credit and the
Exclusion.
A. Effective Date.
Both the credit and the exclusion are
effective for taxable years beginning
after December 31, 1996.
B. Expiration Date.
The credit under § 23 for qualified
adoption expenses in connection with
the adoption of an eligible child who is
not a child with special needs expires
for expenses paid or incurred after De-
cember 31, 2001. Therefore, no credit is
available for those expenses paid (by a
cash method taxpayer) or incurred (by
an accrual method taxpayer) after De-
cember 31, 2001. The credit for quali-
fied adoption expenses paid or incurred
in connection with an adoption of an
eligible child with special needs does
not expire.
The exclusion under § 137 for adop-
tion assistance expires after December 31,
2001. Therefore, no exclusion from gross
income applies to amounts paid or ex-
penses incurred under an adoption assis-
tance program after December 31, 2001.
In the case of a foreign adoption that
becomes final after December 31, 2001,
taxpayers cannot receive either a credit
or an exclusion.
VI. Comments on Future Guidance In-
vited.
The Service invites comments on fu-
ture guidance concerning §§ 23 and
137. The Service requests that written
comments be submitted by [INSERT
DATE THAT IS [90] DAYS AFTER
DATE OF PUBLICATION OF THIS
DOCUMENT IN THE INTERNAL
REVENUE BULLETIN]. Send submis-
sions to: CC:DOM:CORP:R (Notice 97–
9), Room 5226, Internal Revenue Ser-
vice, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand delivered between the
hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (Notice 97–9), Cou-
rier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Alternatively, taxpayers may
submit comments electronically via the
internet directly to the IRS internet site
at http://www.irs.ustreas.gov/prod/tax
regs/comments.html.
The principal authors of this notice
are Marilyn E. Brookens of the Office
of the Assistant Chief Counsel (Income
Tax and Accounting), and Sharon Cohen
and Catherine Fuller of the Office of the
40

Associate Chief Counsel (Employee
Benefits and Exempt Organizations). For
further information regarding the tax
credit portion of the notice, contact Ms.
Brookens at (202) 622–4920 (not a
toll-free call). For further information
regarding the adoption assistance pro-
gram portion of the notice, contact Ms.
Cohen or Ms. Fuller on (202) 622–6080
(not a toll-free call).
Sample Language for a Spouse’s
Waiver to a QJSA or a QPSA
Notice 97–10
I. PURPOSE
This Notice provides sample language
designed to make it easier for spouses
of plan participants to understand their
rights to survivor annuities under quali-
fied plans. The sample language can be
included in a form used for a spouse to
consent to a participant’s waiver of a
qualified joint and survivor annuity
(QJSA) or qualified preretirement survi-
vor annuity (QPSA), or to a participant’s
choice of a non-spouse beneficiary in a
defined contribution plan not subject to
the QJSA and QPSA requirements.
The language is designed to assist
plan administrators in preparing spousal
consent forms that meet the statutory
requirements. No one is required to use
the sample language, and plan adminis-
trators that choose to use it are free to
incorporate all or any part of it in their
spousal consent forms.
II. BACKGROUND
Section 401(a)(11) of the Internal
Revenue Code of 1986 provides that, in
order to be qualified under section
401(a), all defined benefit plans and
certain defined contribution plans must
provide benefits in the form of a QJSA
and in the form of a QPSA. Section 417
permits a participant to waive the QJSA
and to elect another form of retirement
benefit, or to waive the right to a
QPSA, if the participant’s spouse signs a
consent form.
Section 417(a)(3) requires that the
plan provide an explanation to the par-
ticipant of the QJSA and of his or her
right to waive the QJSA within a rea-
sonable time before the participant’s
annuity starting date. However, effective
for plan years beginning after December
31, 1996, section 417(a)(7)(A) provides
that a plan can provide the explanation
after the annuity starting date, but the
required election period must not end
earlier than 30 days after notice was
given to the participant. Section
417(a)(3)(B) requires the plan to provide
an explanation to the participant of the
QPSA and of his or her right to waive
the QPSA within the applicable period,
as defined in section 417(a)(3)(B)(ii).
Section 417(a)(2)(A)(i) provides that,
in order for a participant to elect to
waive the QJSA or QPSA, the spouse of
the participant must consent in writing to
the election. Section 417(a)(2)(A)(ii)
provides that, in general, the waiver of,
and the consent to a waiver of, a QJSA
must state the specific nonspouse benefi-
ciary who will receive the benefit and
the particular optional form of benefit.
The waiver of, and the consent to a
waiver of, a QPSA must state the spe-
cific nonspouse beneficiary who will
receive the benefit but is not required to
state the form of benefit selected (if
any). However, a plan may permit a
spouse to execute a general consent that
allows the participant to waive the QJSA
or the QPSA, and change the designated
beneficiary or the optional form of ben-
efit payment, without obtaining further
consent of the spouse. Section 1.401(a)–
20, Q&A–31(c), of the Regulations pro-
vides that a general consent must ac-
knowledge that the spouse has the right
to limit his or her consent to a specific
beneficiary and a specific form of pay-
ment (where applicable) and that the
spouse elects to relinquish both of these
rights. Section 417(a)(2)(A)(iii) requires
that the spouse’s consent acknowledge
the effect of the participant’s waiver of
the QJSA or QPSA and requires that the
consent be witnessed by a plan represen-
tative or a notary public.
Under section 401(a)(11), to the extent
a defined contribution plan that is not
subject to the QJSA and QPSA require-
ments, the plan must provide that the
participant’s nonforfeitable account bal-
ance be paid in full to the participant’s
surviving spouse upon the participant’s
death. The account balance can be paid
to another beneficiary if the participant
so elects and the spouse consents to the
election. In general, the spousal consent
must meet the same conditions as a
consent to the waiver of a QPSA.
Section 1457 of the Small Business
Job Protection Act of 1996, Pub. L. No.
104–188, directs the Secretary of the
Treasury (‘‘Secretary’’) to develop
sample language, written in a manner
calculated to be understood by the aver-
age person, that can be included in a
form used for a spouse to consent to a
participant’s waiver of a QJSA or a
QPSA. This Notice contains the sample
language for the spousal consent forms.
Section 1457 also directs the Secretary
to publish sample language that can be
included in a qualified domestic rela-
tions order (QDRO). The QDRO sample
language is contained in Notice 97–11
in this Bulletin.
III. SAMPLE LANGUAGE
The Appendices to this Notice contain
four sets of sample language:
•Appendix A contains sample lan-
guage that can be included in a
spouse’s consent to a participant’s
waiver of a QJSA. This language
can be used for a defined benefit
plan and for a defined contribution
plan to the extent that it is subject
to section 401(a)(11).
•Appendix B contains sample lan-
guage that can be included in a
spouse’s consent to a participant’s
waiver of a QPSA, and, if the plan
so provides, to the participant’s
choice of a beneficiary other than
the spouse to receive any survivor
benefit. This language can be used
for a defined benefit plan.
•Appendix C contains sample lan-
guage that can be included in a
spouse’s consent to a participant’s
waiver of a QPSA, and, if the plan
so provides, to the participant’s
choice of a beneficiary other than
the spouse to receive any survivor
benefit. This language can be used
for a defined contribution plan to
the extent that it is subject to
section 401(a)(11).
•Appendix D contains sample lan-
guage that can be included in a
spouse’s consent to a participant’s
choice of a beneficiary other than
the spouse for a participant’s ac-
count balance. This language can
be used for a defined contribution
plan to the extent that it is not
subject to section 401(a)(11).
If the plan administrator chooses to
use the sample language provided in an
Appendix, the sample language should
be conformed to the terms of the plan.
The plan administrator should read the
sample language carefully and select
only those portions of the sample lan-
guage that apply to the particular plan.
For example, the sample language in
Appendix A refers to certain optional
forms of benefits under the plan, includ-
ing a lump sum payment. If a plan
administrator decides to include this
sample language in the plan’s spousal
consent form, the sample language
41

should be compared to the optional
forms of benefit payments available un-
der the plan and modified, if necessary,
to reflect the plan’s optional forms.
Further, spousal consent forms for some
plans will need additional language dis-
cussing issues specific to the plan.
In order for a spouse’s consent to be
valid, the spousal consent form is not
required to include the specific language
contained in the Appendices. In all
cases, however, spousal consent forms
should be written clearly to ensure that
the spouse both understands and ac-
knowledges the effect of the partici-
pant’s waiver of rights.
The Appendix provides sample lan-
guage for incorporation in a spousal
consent form only. The Appendix does
not provide sample language for the
explanation of the QJSA or QPSA that
is required to be provided to the partici-
pant or the agreement in which the
participant waives the QJSA or QPSA.
IV. COMMENTS
Notice 94–23, 1994–1 C.B. 340, re-
quested comments from the public to aid
in the development of additional guid-
ance concerning spousal consent forms.
The comments that were made in re-
sponse to Notice 94–23 have been taken
into consideration in drafting the sample
language accompanying this Notice.
The Service invites the public to
comment on the sample language ac-
companying this Notice as well as to
suggest possible additional sample lan-
guage. Comments can be addressed to
CC:DOM:CORP:R (Notice 97–10),
Room 5228, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. In the alterna-
tive, comments may be hand delivered
between the hours of 8 a.m. and 5 p.m.
to CC:DOM:CORP:R (Notice 97–10),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, N.W.,
Washington, DC. Alternatively, taxpay-
ers may transmit comments electroni-
cally via the IRS Internet site at ‘http://
www.irs.ustreas.gov/prod/tax_regs/
comments.html’.
DRAFTING INFORMATION
The principal authors of this Notice
are Susan Lennon of the Office of the
Associate Chief Counsel (Employee
Benefits and Exempt Organizations) and
Steven Linder of the Employee Plans
Division. For further information regard-
ing this Notice, please contact the Em-
ployee Plans Division’s taxpayer assis-
tance telephone service at (202) 622–
6074/6075, between the hours of 1:30
p.m. and 4 p.m. Eastern Time, Monday
through Thursday. Alternatively, please
call Ms. Lennon at (202) 622–4606 or
Mr. Linder at (202) 622–6214. These
telephone numbers are not toll-free.
APPENDIX A
SAMPLE LANGUAGE THAT MAY
BE INCLUDED IN A SPOUSE’S
AGREEMENT TO GIVE UP THE
RIGHT TO THE QUALIFIED
JOINT AND SURVIVOR ANNUITY
(UNDER A DEFINED BENEFIT
PLAN OR A DEFINED CONTRIBU-
TION PLAN)
Instruction:The sample language does
not address the one-year-of-marriage
rule under section 417(d); if a plan
applies the one-year rule, the sample
language should be modified to explain
this rule.
The sample language contains language
in brackets that pertains to a partici-
pant’s selection of a non-spouse benefi-
ciary to receive death benefits. The
bracketed language should be deleted if
the plan provides death benefits only to
the participant’s surviving spouse.
1. What is a Qualified Joint and Sur-
vivor Annuity (QJSA)?
Federal law requires the(name of
plan)to pay retirement benefits in a
special payment form unless your spouse
chooses a different payment form and
you agree to that choice. This special
payment form is often called a ‘‘quali-
fied joint and survivor annuity’’ or
‘‘QJSA’’ payment form. The QJSA pay-
ment form gives your spouse a(insert
period of QJSA payment, e.g., monthly)
retirement payment for the rest of his or
her life. This is often called an ‘‘annu-
ity.’’ Under the QJSA payment form,
after your spouse dies, each(insert pe-
riod of QJSA payment, e.g., month)the
plan will pay you(insert survivor per-
centage for the QJSA form under the
plan)percent of the retirement benefit
that was paid to your spouse. The ben-
efit paid to you after your spouse dies is
often called a ‘‘survivor annuity’’ or a
‘‘survivor benefit.’’ You will receive this
survivor benefit for the rest of your life.
Example
Pat Doe and Pat’s spouse, Robin, re-
ceive payments from the plan under
the QJSA payment form. Beginning
after Pat retires, Pat receives $600 each
month from the plan. Pat then dies.
The plan will pay Robin $(insert ap-
plicable dollar amount for the QJSA)a
month for the rest of Robin’s life.
2. How Can Your Spouse Change the
Way Benefits Are Paid?
Your spouse and you will receive
benefits from the plan in the special
QJSA payment form required by federal
law unless your spouse chooses a differ-
ent payment form and you agree to the
choice. If you agree to change the way
the plan’s retirement benefits are paid,
you give up your right to the special
QJSA payments.
3. Do You Have to Give Up Your
Right to the QJSA Benefit?
Your choice must be voluntary. It is
your personal decision whether you
want to give up your right to the special
QJSA payment form.
4. What Other Benefit Forms Can
My Spouse Choose?
Instruction:The plan administrator
may make additions to the paragraph
below to explain the plan’s optional
forms of benefits. For example, the
plan administrator could list all op-
tional forms of benefits or provide a
cross-reference to a description of ben-
efit options provided to participants.
The examples following the paragraph
are common optional forms of benefits.
The examples should be modified to be
consistent with the plan’s optional
forms of benefits. The plan administra-
tor may give additional examples to
explain other available optional forms.
If you agree, your spouse can choose
to have the retirement benefits paid in a
different form. Other payment forms
may give your spouse larger retirement
benefits while he or she is alive, but
might not pay you any benefits after
your spouse dies.
Example of Single Life Annuity Pay-
ment Form
If Pat and Robin Doe receive retire-
ment benefits in the special QJSA
payment form, Pat would receive re-
tirement benefits of $600 each month
from the plan until Pat dies and
Robin would receive $ (insert appli-
cable dollar amount for the QJSA) a
month for the rest of Robin’s life. Pat
and Robin Doe agree not to receive
retirement benefits in the special
QJSA payment form and decide in-
stead to receive payments only during
Pat’s life. After Pat retires, Pat will
receive more than $600 each month
from the plan until Pat’s death. Robin
42

will not receive any payments from
the plan after Pat’s death.
Example of Lump Sum Payment Form
Pat and Robin Doe agree not to
receive the special QJSA payments
and decide instead that Pat will re-
ceive a single payment equal to the
value of all of Pat’s retirement ben-
efits. In this case, no further payments
will be made to Pat or Robin.
[If you agree, your spouse can name
someone other than you to receive all or
a part of the survivor benefits from the
plan after your spouse dies. The person
your spouse selects to receive all or part
of the survivor benefits is often called a
‘‘beneficiary.’’ If you agree to let your
spouse name someone else as the benefi-
ciary for all of the survivor benefits, you
will not receive any payments from the
plan after your spouse dies. If you agree
to let your spouse name someone else as
the beneficiary for a part of the survivor
benefits, your survivor benefits will be
less than you would have received under
the special QJSA payment form.
Example of Naming a Beneficiary
Who Is Not the Spouse
Pat and Robin Doe select a payment
form that has a survivor benefit of
$200 a month payable after Pat dies.
Pat and Robin agree that 1/2 of the
survivor benefit will be paid to Robin
and 1/2 will be paid to Pat and
Robin’s child, Chris. After Pat dies,
the plan will pay $100 a month to
Robin for the rest of Robin’s life.
Chris will also receive payments from
the plan as long as Chris lives. Chris
will receive less than $100 a month
because Chris, being younger than
Robin, is expected to receive pay-
ments over a longer period.
]
5. Can Your Spouse Make Future
Changes if You Sign this Agreement?
Instruction:The plan administrator
should select Option A if the agreement
is a ‘‘specific consent,’’ that is, the
spouse agrees to the participant’s
choice of a particular form of benefit
and beneficiary. The plan administra-
tor should select Option B if the agree-
ment is a ‘‘general consent,’’ that is,
the spouse agrees to allow the partici-
pant to choose any form of benefit and
any beneficiary without telling the
spouse the selection.
Option A
If you sign this agreement, you agree
that benefits under the plan will be paid
in the form stated in this agreement.
[You also agree that the beneficiary
named in this agreement will receive all
or a part of the survivor benefits from
the plan after your spouse has died
].
Your spouse cannot change the payment
form
[or the beneficiary]unless you
agree to the change by signing a new
agreement. However, your spouse can
change to the special QJSA payment
form without getting your agreement.
Option B
If you sign this agreement, you agree
that your spouse can choose the form of
payments that he or she will receive
from the plan without telling you and
without getting your agreement.
[Your
spouse can also choose the beneficiary
who will receive any survivor benefits
from the plan after your spouse dies
without telling you and without getting
your agreement.
]Your spouse does not
need to tell you or get your agreement
to any future changes in the form of
payments
[or the beneficiary].
You may limit your agreement to a
particular payment form
[and a particu-
lar beneficiary
]. If you want to allow
your spouse to select only a particular
payment form [and a particular benefi-
ciary], do not sign this form. In that
case, contact the plan administrator for
more information and to get a new
agreement that lets you state the particu-
lar payment form
[and the particular
beneficiary
]that you will allow your
spouse to select.
6. Can You Change Your Mind After
You Sign this Agreement?
Instruction:The plan administrator
should select Option A if the plan does
not allow a spouse to revoke his or her
consent. The plan administrator should
select Option B if the plan allows a
spouse to revoke his or her consent.
The language in double brackets in
Options A and B applies only to general
consent forms. For an explanation of a
specific consent and a general consent,
see the Instruction to section 5.
Option A
You cannot change this agreement
after you sign it. Your decision is final
[even if your spouse later chooses a
different type of retirement benefit or
beneficiary
].
Option B
You can change this agreement until
(date). After that date, you cannot
change the agreement[even if your
spouse later chooses a different type of
retirement benefit or beneficiary
]. If
you change your mind, you must notify
the plan administrator by (insert the plan
procedure for revoking consent) .
7. What Happens to this Agreement if
You Become Separated or Divorced?
Legal separation or divorce may end
your right to survivor benefits from the
plan even if you do not sign this
agreement. However, if you become
legally separated or divorced, you might
be able to get a special court order
(which is called a qualified domestic
relations order or ‘‘QDRO’’) that would
give you rights to receive retirement
benefits even if you sign this agreement.
If you are thinking about separating or
getting a divorce, you should get legal
advice on your rights to benefits from
the plan.
8. What Should You Know Before
Signing this Agreement?
Instruction:The plan administrator
should modify the language below to
reflect the plan’s administrative proce-
dures and insert the appropriate ad-
dress or telephone number.
This is a very important decision. You
should think very carefully about
whether you want to sign this agree-
ment. Before signing, be sure that you
understand what retirement benefits you
may get and what benefits you will no
longer be able to receive.
Your spouse should have received
information on the types of retirement
benefits available from the plan. If you
have not seen this information, you
should get it and read it before you sign
this agreement. For additional informa-
tion, you can contact (name of person or
department, such as the Human Re-
sources Department) at the following
address (or telephone number).
9. Your Agreement
Instruction:The plan administrator
should select Option A if the agreement
is a specific consent. The plan adminis-
trator should select Option B if the
agreement is a general consent. For an
explanation of a specific consent and a
general consent, see the Instruction to
section 5.
43

Option A
I,(name of participant’s spouse), am
the spouse of(name of participant). I
understand that I have the right to have
(name of plan)pay my spouse’s retire-
ment benefits in the special QJSA pay-
ment form and I agree to give up that
right. I understand that by signing this
agreement, I may receive less money
than I would have received under the
special QJSA payment form and I may
receive nothing after my spouse dies,
depending on the payment form [or
beneficiary] that my spouse chooses.
I agree that my spouse can receive
retirement benefits in the form of a
(insert form of benefit selected).
[I also
agree to my spouse’s choice of(name of
beneficiary)as the beneficiary who will
receive(insert percentage of survivor
benefit that will be paid to the benefi-
ciary)of the survivor benefits from the
plan after my spouse dies.]I understand
that my spouse cannot choose a differ-
ent form of retirement benefits
[or a
different beneficiary
]unless I agree to
the change.
I understand that I do not have to
sign this agreement. I am signing this
agreement voluntarily.
I understand that if I do not sign this
agreement, then my spouse and I will
receive payments from the plan in the
special QJSA payment form.
Instruction:The plan administrator
should add a line for the spouse’s
signature and a place for the witness’
acknowledgment.
Option B
I,(name of participant’s spouse), am
the spouse of(name of participant). I
understand that I have the right to have
(name of plan)pay my spouse’s retire-
ment benefits in the special QJSA pay-
ment form, and I agree to give up that
right. I understand that by signing this
agreement, I may receive less money
than I would have received under the
special QJSA payment form and I may
receive nothing after my spouse dies
depending on the payment form
[or
beneficiary
]that my spouse chooses.
I understand that by signing this
agreement, my spouse can choose any
retirement benefit form
[and any ben-
eficiary]that is allowed by the plan
without telling me and without getting
my agreement. I also understand that my
spouse can change the retirement benefit
form selected
[or the name of a benefi-
ciary
]at any time before retirement
benefits begin without telling me and
without getting my agreement.
I understand that I can limit my
spouse’s choice to a particular retire-
ment benefit form
[and a particular
beneficiary who will receive payments
from the plan after the death of my
spouse
]and that I am giving up that
right.
I understand that I do not have to
sign this agreement. I am signing this
agreement voluntarily.
I understand that if I do not sign this
agreement, then my spouse and I will
receive payments from the plan in the
special QJSA payment form.
Instruction:The plan administrator
should add a line for the spouse’s
signature and a place for the witness’
acknowledgment.
APPENDIX B
SAMPLE LANGUAGE THAT MAY
BE INCLUDED IN A SPOUSE’S
AGREEMENT TO GIVE UP THE
RIGHT TO THE QUALIFIED
PRERETIREMENT SURVIVOR AN-
NUITY UNDER A DEFINED BEN-
EFIT PLAN
Instruction:The sample language does
not address the one-year-of-marriage
rule under section 417(d); if a plan
applies the one-year rule, the sample
language should be modified to explain
this rule.
1. What is a Qualified Preretirement
Survivor Annuity (QPSA)?
Instruction:The final sentence in the
sample language before the example
addresses situations where a plan pays
the survivor benefit in a lump sum if
the value of the survivor benefit is
$3,500 or less. That sentence should be
deleted if the plan pays survivor ben-
efits with a value of $3,500 or less as
an annuity.
Federal law gives you the right to
receive a special death benefit from
(name of plan)if your spouse dies
before you, unless your spouse chooses
to give up this benefit and you agree to
that choice. You have this right if your
spouse has earned retirement benefits
under the plan and dies before he or she
begins receiving those benefits (or, if
earlier, before the beginning of the pe-
riod for which the retirement benefits
are paid). You have the right to receive
this special(insert period of QPSA
payment, e.g., monthly)death benefit for
the rest of your life beginning no later
than when your spouse could have be-
gun receiving retirement benefits. The
special death benefit is(insert a percent-
age that is no less than the survivor
percentage for the QJSA form under the
plan)percent of the retirement benefit
your spouse earns before death. The
special death benefit is often called a
‘‘qualified preretirement survivor annu-
ity’’ or ‘‘QPSA’’ benefit. (The plan will
pay this death benefit in a lump sum,
rather than as a QPSA, if the value of
the death benefit is $3,500 or less.)
Example
Pat Doe dies at age 45 after earning a
retirement benefit. The value of Pat’s
death benefit is more than $3,500. If
Pat had lived, Pat could have retired
and begun receiving payments as
early as age 55 under the plan’s
terms. The plan will pay a monthly
benefit to Pat’s spouse, Robin Doe,
for the rest of Robin’s life. Robin has
the right to begin receiving the ben-
efit no later than when Pat would
have been 55 years old.
There is a cost for the QPSA benefit.
Your spouse’s retirement benefits will be
reduced for this cost.
Instruction:The paragraph above
should be deleted if the plan does not
reduce a participant’s benefit because
of the QPSA coverage and does not
impose a charge for the QPSA. If the
plan imposes the QPSA charge other
than by reducing the participant’s re-
tirement benefit, this paragraph should
be modified accordingly.
2. What Are Your Rights if You Sign
this Agreement?
Your right to the QPSA benefit pro-
vided by federal law cannot be taken
away unless you agree to give up that
benefit.
Instruction:The plan administrator
should select Option A if the agreement
is intended to waive the QPSA in a
plan that imposes a charge for the
QPSA. The plan administrator should
select Option B if the participant’s
spouse is agreeing to allow someone
else to receive any death benefits,
regardless of whether the plan imposes
a charge for the QPSA.
Option A
If you sign this agreement, you will
not receive the QPSA benefit and your
spouse’s retirement benefits will not be
reduced for the cost of the QPSA ben-
efit you give up.
44

Option B
You can agree to give up all or part
of the QPSA benefit. If you agree to
give up all of the QPSA benefit, the
plan will pay this benefit to another
person selected by your spouse. The
person your spouse selects to receive
this benefit is often called a ‘‘benefi-
ciary’’. If you agree to give up part of
the QPSA benefit, that part will be paid
to the beneficiary named by your
spouse, and you will receive the rest of
the QPSA benefit. For example, if you
agree, your spouse can have the death
benefits paid to his or her children
instead of you.
Example of Naming a Beneficiary
Who is Not the Spouse
Pat and Robin Doe agree that Robin
will not receive the QPSA benefit. Pat
and Robin also decide that 1/2 of the
death benefits under the plan will be
paid to Robin and 1/2 of the death
benefits will be paid to Pat and
Robin’s child, Chris. The total death
benefits are $200 per month. After Pat
dies, the plan will pay $100 a month
to Robin for the rest of Robin’s life.
Chris will also receive payments from
the plan as long as Chris lives. Chris
will receive less than $100 a month
because Chris, being younger than
Robin, is expected to receive pay-
ments over a longer period.
3. Do You Have to Give Up Your
Right to the QPSA Benefit?
Your choice must be voluntary. It is
your personal decision whether you
want to give up your right to the QPSA
benefit.
4. Can Your Spouse Make Future
Changes if You Sign this Agreement?
Instruction:Option A is for use if the
plan does not allow a non-spouse
beneficiary to receive death benefits.
Option B is for use in a ‘‘specific
consent agreement,’’ that is, where the
spouse agrees to the participant’s
waiver of the QPSA and to the partici-
pant’s choice of a specific beneficiary
to receive death benefits. Option C is
for use in a ‘‘general consent agree-
ment,’’ that is, where the spouse agrees
to the participant’s waiver of the QPSA
and to allow the participant to select
any other beneficiary to receive the
death benefits.
Option A
Even if you sign this agreement, your
spouse can later select the QPSA benefit
for you without having you sign a new
agreement.
Option B
If you sign this agreement, your
spouse cannot change the beneficiary
named in this agreement unless you
agree to the new beneficiary by signing
a new agreement. If you agree, your
spouse can change the beneficiary at
any time before your spouse begins
receiving benefits or dies. You do not
have to agree to let your spouse change
the beneficiary. However, your spouse
can later select the QPSA benefit for
you without having you sign a new
agreement.
Option C
If you sign this agreement, your
spouse can choose the beneficiary who
will receive the QPSA benefit without
telling you and without getting your
agreement. Your spouse can change the
beneficiary at any time before your
spouse begins receiving benefits or dies.
You have the right to agree to allow
your spouse to select only a particular
beneficiary. If you want to allow your
spouse to select only a particular benefi-
ciary, do not sign this form. In that case,
contact the plan administrator for more
information and to get a new agreement
that lets you state the particular benefi-
ciary that you will allow your spouse to
select.
5. Can You Change Your Mind After
You Sign this Agreement?
Instruction:The plan administrator
should select Option A if the plan does
not allow a spouse to revoke his or her
consent. The plan administrator should
select Option B if the plan allows a
spouse to revoke his or her consent.
The bracketed language in Options A
and B applies only to general consent
forms. For an explanation of a specific
consent and a general consent, see the
Instruction to section 4.
Option A
You cannot change this agreement
after you sign it. Your decision is final
[even if your spouse later chooses a
different beneficiary
].
Option B
You can change this agreement until
(date). After that date, you cannot
change the agreement[even if your
spouse later chooses a different benefi-
ciary
]. If you change your mind, you
must notify the plan administrator by
(the plan procedure for revoking con-
sent).
6. What Happens to this Agreement if
You Become Separated or Divorced?
You may lose your right to the QPSA
benefit if your spouse and you become
legally separated or divorced, even if
you do not sign this agreement. How-
ever, if you become legally separated or
divorced, you might be able to get a
special court order (which is called a
qualified domestic relations order or
‘‘QDRO’’) that specifically protects your
rights to receive the QPSA benefit or
that gives you other benefits under this
plan. If you are thinking about separat-
ing or getting a divorce, you should get
legal advice on your rights to benefits
from the plan.
7. Your Agreement
Instruction:The plan administrator
should select Option A if the agreement
is a waiver of the QPSA and the plan
does not allow a non-spouse benefi-
ciary to receive a QPSA benefit. The
plan administrator should select Op-
tion B if the agreement is a specific
consent to have a different beneficiary
receive a QPSA benefit. The plan ad-
ministrator should select Option C if
the agreement is a general consent to
have any beneficiary chosen by the
participant receive a QPSA benefit.
For an explanation of a specific con-
sent and a general consent, see the
Instruction to section 4.
The final sentence in the first and last
paragraphs of the sample language in
this section address situations where a
plan pays the survivor benefit in a
lump sum if the value of the death
benefit is $3,500 or less. These sen-
tences should be deleted if the plan
pays death benefits with a value of
$3,500 or less as an annuity.
Option A
I,(name of participant’s spouse), am
the spouse of(name of participant). I
understand that I have a right to the
QPSA benefit from(name of plan)if
my spouse dies before he or she begins
receiving retirement benefits (or, if ear-
lier, before the beginning of the period
for which the retirement benefits are
paid). I also understand that if the value
of the QPSA benefit is $3,500 or less,
45

the plan will pay the benefit to me in
one lump sum payment.
I agree to give up my right to the
QPSA benefits.
I understand that by signing this
agreement, I may receive less money
than I would have received under the
special QPSA payment form and I may
receive nothing from the plan after my
spouse dies.
I understand that I do not have to
sign this agreement. I am signing this
agreement voluntarily.
I understand that if I do not sign this
agreement, then I will receive the QPSA
benefit if my spouse dies before he or
she begins to receive retirement benefits
(or, if earlier, before the beginning of
the period for which the retirement
benefits are paid). I also understand that
if the value of the QPSA benefit is
$3,500 or less, the plan will pay the
benefit to me in one lump sum payment.
Instruction:The plan administrator
should add a line for the spouse’s
signature and a place for the witness’
acknowledgment.
Option B
I,(name of participant’s spouse), am
the spouse of(name of participant). I
understand that I have a right to the
QPSA benefit from(name of plan)if
my spouse dies before he or she begins
receiving retirement benefits (or, if ear-
lier, before the beginning of the period
for which the retirement benefits are
paid). I also understand that if the value
of the QPSA benefit is $3,500 or less,
the plan will pay the benefit to me in
one lump sum payment.
I agree to give up my right to(insert
percentage)percent of the QPSA benefit
and instead to have that benefit paid to
the following beneficiaries:
Name of Beneficiary Percent of QPSA
I understand that my spouse cannot
select a different beneficiary unless I
agree to the change.
I understand that by signing this
agreement, I may receive less money
than I would have received under the
special QPSA payment form and I may
receive nothing from the plan after my
spouse dies.
I understand that I do not have to
sign this agreement. I am signing this
agreement voluntarily.
I understand that if I do not sign this
agreement, then I will receive the QPSA
benefit if my spouse dies before he or
she begins to receive retirement benefits
(or, if earlier, before the beginning of
the period for which the retirement
benefits are paid). I also understand that
if the value of the QPSA benefit is
$3,500 or less, the plan will pay the
benefit to me in one lump sum payment.
Instruction:The plan administrator
should add a line for the spouse’s
signature and a place for the witness’
acknowledgment.
Option C
I,(name of participant’s spouse), am
the spouse of(name of participant). I
understand that I have a right to the
QPSA benefit from(name of plan)if
my spouse dies before he or she begins
receiving retirement benefits (or, if ear-
lier, before the beginning of the period
for which the retirement benefits are
paid). I also understand that if the value
of the QPSA benefit is $3,500 or less,
the plan will pay the benefit to me in
one lump sum payment.
I agree to give up my right to(insert
percentage)percent of the QPSA benefit
and to allow my spouse to choose any
beneficiary to receive that benefit. I
understand by signing this agreement,
my spouse can choose the beneficiary
without telling me and without getting
my agreement. I also understand that my
spouse can change the beneficiary at
any time before retirement benefits be-
gin without telling me and without get-
ting my agreement.
I understand that I can limit my
spouse’s choice to a particular benefi-
ciary who will receive payments from
the plan after the death of my spouse
and that I am giving up that right.
I understand that by signing this
agreement, I may receive less money
than I would have received under the
special QPSA payment form and I may
receive nothing from the plan after my
spouse dies.
I understand that I do not have to
sign this agreement. I am signing this
agreement voluntarily.
I understand that if I do not sign this
agreement, then I will receive the QPSA
benefit from the plan if my spouse dies
before he or she begins to receive
retirement benefits (or, if earlier, before
the beginning of the period for which
the retirement benefits are paid). I also
understand that if the value of the QPSA
benefit is $3,500 or less, the plan will
pay the benefit to me in one lump sum
payment.
Instruction:The plan administrator
should add a line for the spouse’s
signature and a place for the witness’
acknowledgment.
Note to plan administrator:A partici-
pant in a plan subject to the survivor
annuity requirements of section
401(a)(11) generally may waive the
QPSA benefit with spousal consent
only on or after the first day of the
plan year in which the participant
attains age 35. However, a plan may
provide for an earlier waiver with
spousal consent, provided that a writ-
ten explanation of the QPSA is given
to the participant and that the waiver
executed prior to age 35 becomes
invalid upon the beginning of the plan
year in which the participant’s thirty-
fifth birthday occurs. If a new waiver
and spousal consent is not executed on
or after that date, the QPSA benefit
must be provided.
APPENDIX C
SAMPLE LANGUAGE THAT MAY
BE INCLUDED IN A SPOUSE’S
AGREEMENT TO GIVE UP THE
RIGHT TO A QUALIFIED
PRERETIREMENT SURVIVOR AN-
NUITY WITH RESPECT TO A PAR-
TICIPANT IN A DEFINED CON-
TRIBUTION PLAN TO THE
EXTENT THE PLAN IS SUBJECT
TO SECTION 401(a)(11)
Instruction:The sample language does
not address the one-year-of-marriage
rule under section 417(d); if a plan
applies the one-year rule, the sample
language should be modified to explain
this rule.
1. What is a Qualified Preretirement
Survivor Annuity (QPSA)?
Instruction:The final sentence of the
sample language before the example
addresses situations where a plan pays
the survivor benefit in a lump sum if
the value of the survivor benefit is
$3,500 or less. That sentence should be
deleted if the plan pays survivor ben-
efits with a value of $3,500 or less as
an annuity.
Your spouse has an account in(name
of plan). The money in the account that
46

your spouse will be entitled to receive is
called the vested account. Federal law
states that you will receive a special
death benefit that is paid from the
vested account if your spouse dies be-
fore he or she begins receiving retire-
ment benefits (or, if earlier, before the
beginning of the period for which the
retirement benefits are paid). You have
the right to receive this(insert period of
QPSA payment, e.g., monthly)payment
for your life beginning after your spouse
dies. The special death benefit is often
called a ‘‘qualified preretirement survi-
vor annuity’’ or ‘‘QPSA’’ benefit. (The
plan will pay this death benefit in a
lump sum, rather than as a QPSA, if the
value of the death benefit is $3,500 or
less.)
2. Can Your Spouse Choose Other
Beneficiaries to Receive the Account?
Your right to the QPSA benefit pro-
vided by federal law cannot be taken
away unless you agree to give up that
benefit. If you agree, your spouse can
choose to have all or a part of the death
benefits paid to someone else. The per-
son your spouse chooses to receive the
death benefits is usually called the
‘‘beneficiary.’’ For example, if you
agree, your spouse can have the death
benefits paid to his or her children
instead of you.
Example
Pat and Robin Doe agree that Robin
will not receive the QPSA benefit. Pat
and Robin also decide that 1/2 of the
death benefits that are paid from Pat’s
vested account will be paid to Robin
and 1/2 of the death benefits will be
paid to Pat and Robin’s child, Chris.
The total death benefits are $200 per
month. After Pat dies, the plan will
pay $100 a month to Robin for the
rest of Robin’s life. Chris will also
receive payments from the plan as
long as Chris lives. Chris will receive
less than $100 a month because Chris,
being younger than Robin, is expected
to receive payments over a longer
period.
3. Do You Have to Give Up Your
Right to the QPSA Benefit?
Your choice must be voluntary. It is
your personal decision whether you
want to give up your right to the special
QPSA payment form.
4. Can Your Spouse Change the Ben-
eficiary in the Future if You Sign this
Agreement?
Instruction:Option A is for use in a
‘‘specific consent agreement,’’ that is,
where the spouse agrees to the partici-
pant’s waiver of the QPSA and to the
participant’s choice of a specific ben-
eficiary to receive death benefits. Op-
tion B is for use in a ‘‘general consent
agreement,’’ that is, where the spouse
agrees to the participant’s waiver of
the QPSA and to allow the participant
to select any other beneficiary to re-
ceive the death benefits.
Option A
If you sign this agreement, your
spouse cannot change the beneficiary
named in this agreement unless you
agree to the new beneficiary by signing
a new agreement. If you agree, your
spouse can change the beneficiary at
any time before your spouse begins
receiving benefits or dies. You do not
have to agree to let your spouse change
the beneficiary. However, your spouse
can select the QPSA benefit for you
without getting your agreement.
Option B
If you sign this agreement, your
spouse can choose the beneficiary who
will receive the death benefits without
telling you and without getting your
agreement. Your spouse can change the
beneficiary at any time before he or she
begins receiving benefits or dies.
You have the right to agree to allow
your spouse to select only a particular
beneficiary. If you want to allow your
spouse to select only a particular benefi-
ciary, do not sign this form. In that case,
contact the plan administrator for more
information and to get a new agreement
that lets you state the particular benefi-
ciary that you will allow your spouse to
select.
5. Can You Change Your Mind After
You Sign this Agreement?
Instruction:The plan administrator
should select Option A if the plan does
not allow a spouse to revoke his or her
consent. The plan administrator should
select Option B if the plan allows a
spouse to revoke his or her consent.
The bracketed language in Options A
and B applies only to general consent
forms. For an explanation of a specific
consent and a general consent, see the
Instruction to section 4.
Option A
You cannot change this agreement
after you sign it. Your decision is final
[even if your spouse later chooses a
different beneficiary
].
Option B
You can change this agreement until
(date). After that date, you cannot
change the agreement[even if your
spouse later chooses a different benefi-
ciary
]. If you change your mind, you
must notify the plan administrator by
(the plan procedure for revoking con-
sent).
6. What Happens to this Agreement if
You Become Separated or Divorced?
You may lose your right to the QPSA
benefit if your spouse and you become
legally separated or divorced even if
you do not sign this agreement. How-
ever, if you become legally separated or
divorced, you might be able to get a
special court order (which is called a
qualified domestic relations order or
‘‘QDRO’’) that specifically protects your
rights to receive the QPSA benefit or
that gives you other benefits under this
plan. If you are thinking about separat-
ing or getting a divorce, you should get
legal advice on your rights to benefits
from the plan.
7. Your Agreement
Instruction:The plan administrator
should select Option A if the agreement
is a specific consent. The plan adminis-
trator should select Option B if the
agreement is a general consent. For an
explanation of a specific consent and a
general consent, see the Instruction to
section 4.
The final sentence in the first and last
paragraphs of the sample language in
this section address situations where a
plan pays the survivor benefit in a
lump sum if the value of the death
benefit is $3,500 or less. These sen-
tences should be deleted if the plan
pays death benefits with a value of
$3,500 or less as an annuity.
Option A
I,(name of participant’s spouse), am
the spouse of(name of participant). I
understand that I have a right to the
QPSA benefit from(name of plan)if
my spouse dies before he or she begins
receiving retirement benefits (or, if ear-
lier, before the beginning of the period
for which the retirement benefits are
paid). I also understand that if the value
of the QPSA benefit is $3,500 or less,
the plan will pay the benefit to me in
one lump sum payment.
I agree to give up my right to(insert
percentage)percent of the QPSA benefit
and instead to have that benefit paid to
the following beneficiaries:
47

Name of Beneficiary Percent of QPSA
I understand that my spouse cannot
select a different beneficiary unless I
agree to the change.
I understand that by signing this
agreement, I may receive less money
than I would have received under the
special QPSA payment form and I may
receive nothing from the plan after my
spouse dies.
I understand that I do not have to
sign this agreement. I am signing this
agreement voluntarily.
I understand that if I do not sign this
agreement, then I will receive the QPSA
benefit if my spouse dies before he or
she begins to receive retirement benefits
(or, if earlier, before the beginning of
the period for which the retirement
benefits are paid). I also understand that
if the value of the QPSA benefit is
$3,500 or less, the plan will pay the
benefit to me in one lump sum payment.
Instruction:The plan administrator
should add a line for the spouse’s
signature and a place for the witness’
acknowledgment.
Option B
I,(name of participant’s spouse), am
the spouse of(name of participant). I
understand that I have a right to the
QPSA benefit from(name of plan)if
my spouse dies before he or she begins
receiving retirement benefits (or, if ear-
lier, before the beginning of the period
for which the retirement benefits are
paid). I also understand that if the value
of the QPSA benefit is $3,500 or less,
the plan will pay the benefit to me in
one lump sum payment.
I agree to give up my right to(insert
percentage)percent of the QPSA benefit
and to allow my spouse to choose any
beneficiary to receive that benefit. I
understand that by signing this agree-
ment, my spouse can choose the benefi-
ciary without telling me and without
getting my agreement. I also understand
that my spouse can change the benefi-
ciary at any time before retirement ben-
efits begin without telling me and with-
out getting my agreement.
I understand that I can limit my
spouse’s choice to a particular benefi-
ciary who will receive payments from
the plan after the death of my spouse
and that I am giving up that right.
I understand that by signing this
agreement, I may receive less money
than I would have received under the
special QPSA payment form and I may
receive nothing from the plan after my
spouse dies.
I understand that I do not have to
sign this agreement. I am signing this
agreement voluntarily.
I understand that if I do not sign this
agreement, then I will receive the QPSA
benefit if my spouse dies before he or
she begins to receive retirement benefits
(or, if earlier, before the beginning of
the period for which the retirement
benefits are paid). I also understand that
if the value of the QPSA benefit is
$3,500 or less, the plan will pay the
benefit to me in one lump sum payment.
Instruction:The plan administrator
should add a line for the spouse’s
signature and a place for the witness’
acknowledgment.
Note to plan administrator:A partici-
pant in a plan subject to the survivor
annuity requirements of section
401(a)(11) generally may waive the
QPSA benefit with spousal consent
only on or after the first day of the
plan year in which the participant
attains age 35. However, a plan may
provide for an earlier waiver with
spousal consent, provided that a writ-
ten explanation of the QPSA is given
to the participant and that the waiver
executed prior to age 35 becomes
invalid upon the beginning of the plan
year in which the participant’s thirty-
fifth birthday occurs. If a new waiver
and spousal consent is not executed on
or after that date, QPSA benefit must
be provided.
APPENDIX D
SAMPLE LANGUAGE THAT MAY
BE INCLUDED IN A SPOUSE’S
AGREEMENT TO GIVE UP THE
RIGHT TO BE THE BENEFICIARY
OF A PARTICIPANT IN A DEFINED
CONTRIBUTION PLAN TO THE
EXTENT THE PLAN IS NOT SUB-
JECT TO SECTION 401(a)(11)
Instruction:The sample language does
not address the one-year-of-marriage
rule under section 417(d); if a plan
applies the one-year rule, the sample
language should be modified to explain
this rule.
1. What Rights Do You Have to Ben-
efits After Your Spouse Dies?
Your spouse has an account in(name
of plan). The money in the account that
your spouse will be entitled to receive is
called the vested account. Federal law
states that you will receive the vested
account after your spouse dies.
Example
Pat Doe dies at age 45 and Pat’s
vested account in the (name of plan)
was $10,000 at the time of Pat’s
death. The plan will pay the $10,000
to Pat’s spouse, Robin Doe (adjusted
for gains and losses after Pat’s death).
2. Can Your Spouse Choose Other
Beneficiaries to Receive the Account?
Your right to your spouse’s vested
account provided by federal law cannot
be taken away unless you agree. If you
agree, your spouse can elect to have all
or part of the vested account paid to
someone else. Each person your spouse
chooses to receive a part of the vested
account is called a ‘‘beneficiary.’’ For
example, if you agree, your spouse can
have the vested account paid to his or
her children instead of you.
Example
Pat and Robin Doe agree that 1/2 of
the Pat’s vested account will be paid
to Robin and 1/2 of the vested ac-
count will be paid to Pat’s child,
Chris. If Pat’s vested account at the
time of his death is $10,000, the plan
will pay $5,000 to Robin and $5,000
to Chris (each amount adjusted for
gains and losses after Pat’s death).
Your spouse cannot have the vested
account paid to someone else unless you
agree and sign this agreement.
3. Do You Have to Give Up Your
Right to Your Spouse’s Vested Ac-
count?
Your choice must be voluntary. It is
your personal decision whether you
want to give up your right to your
spouse’s vested account.
4. Can Your Spouse Change the Ben-
eficiary in the Future if You Sign this
Agreement?
Instruction:The plan administrator
should select Option A if the agreement
is a ‘‘specific consent,’’ that is, where
the spouse agrees to the beneficiary
selected by the participant. The plan
administrator should select Option B if
the agreement is a ‘‘general consent,’’
that is, where the spouse agrees to
allow the participant to select any
beneficiary even if the spouse does not
know the identity of the beneficiary.
48

Option A
If you sign this agreement, your
spouse cannot change the beneficiary
named in this agreement to anyone other
than you, unless you agree to the new
beneficiary by signing a new agreement.
If you agree, your spouse can change
the beneficiary at any time before your
spouse dies.
Option B
If you sign this agreement, your
spouse can choose the beneficiary who
will receive all or part of the vested
account without telling you and without
getting your agreement. Your spouse can
change the beneficiary at any time be-
fore the account is paid out.
You have the right to agree to allow
your spouse to select only a particular
beneficiary. If you want to allow your
spouse to select only a particular benefi-
ciary, do not sign this form. In that case,
contact the plan administrator for more
information and to get a new agreement
that lets you state the particular benefi-
ciary that you will allow your spouse to
select.
5. Can You Change Your Mind After
You Sign this Agreement?
Instruction:The plan administrator
should select Option A if the plan does
not allow a spouse to revoke his or her
consent. The plan administrator should
select Option B if the plan allows a
spouse to revoke his or her consent.
The bracketed language in Options A
and B applies only to general consent
forms. For an explanation of a specific
consent and a general consent, see the
Instruction to section 4.
Option A
You cannot change this agreement
after you sign it. Your decision is final
[even if your spouse later chooses a
different beneficiary
].
Option B
You can change this agreement until
(date). After that date, you cannot
change the agreement[even if your
spouse later chooses a different benefi-
ciary
]. If you change your mind, you
must notify the plan administrator by
(insert the plan procedure for revoking
consent). The plan administrator must
receive this information before(date).
6. What Happens to this Agreement if
You Become Separated or Divorced?
Legal separation or divorce may end
your right to the vested account even if
you do not sign this agreement. How-
ever, if you become legally separated or
divorced, you might be able to get a
special court order (which is called a
qualified domestic relations order or
‘‘QDRO’’) that specifically protects your
rights to the vested account. If you are
thinking about separating or getting a
divorce, you should get legal advice on
your rights to benefits from the plan.
7. Your Agreement
Instruction:The plan administrator
should select Option A if the agreement
is a specific consent. The plan adminis-
trator should select Option B if the
agreement is a general consent. For an
explanation of a specific consent and a
general consent, see the Instruction to
section 4.
Option A
I,(name of participant’s spouse), am
the spouse of(name of participant). I
understand that I have the right to all of
my spouse’s vested account in the
(name of plan)after my spouse dies. I
agree to give up the right to(insert
percentage)of the account and to have
that amount paid to the following ben-
eficiaries:
Name of Beneficiary Percent of QPSA
I understand that my spouse cannot
change the name of any beneficiary in
the future unless I agree to the change.
I understand that by signing this
agreement, I may receive less money
than I would have received if I had not
signed this agreement and I may receive
nothing from the plan after my spouse
dies.
I understand that I do not have to
sign this agreement. I am signing this
agreement voluntarily.
I understand that if I do not sign this
agreement, then I will receive my
spouse’s vested account under the plan
when my spouse dies.
Instruction:The plan administrator
should add a line for the spouse’s
signature and a place for the witness’
acknowledgment.
Option B
I,(name of participant’s spouse), am
the spouse of(name of participant). I
understand that I have the right to all of
my spouse’s vested account in the
(name of plan)after my spouse dies.
I agree to give up(insert percentage)
percent of the account and to have that
amount paid to someone else as the
beneficiary. I understand that by signing
this agreement, my spouse can choose
the beneficiary of the vested account
without telling me and without getting
my agreement. I also understand that by
signing this agreement, my spouse can
change the beneficiary of the vested
account in the future without telling me
and without getting my agreement again.
I understand that by signing this
agreement, I may receive less money
than I would have received if I had not
signed this agreement and I may receive
nothing from the plan after my spouse
dies.
I understand that I can limit my
spouse’s choice to a particular benefi-
ciary who will receive the vested ac-
count balance and that I am giving up
that right.
I understand that I do not have to
sign this agreement. I am signing this
agreement voluntarily.
I understand that if I do not sign this
agreement, then I will receive my
spouse’s account under the plan when
my spouse dies.
Instruction:The plan administrator
should add a line for the spouse’s
signature and a place for the witness’
acknowledgment.
Sample Language for a Qualified
Domestic Relations Order
Notice 97–11
I. PURPOSE
This Notice provides information in-
tended to assist domestic relations attor-
neys, plan participants, spouses and
former spouses of participants, and plan
administrators in drafting and reviewing
a qualified domestic relations order
(‘‘QDRO’’). The Notice provides sample
language that may be included in a
QDRO relating to a plan that is quali-
fied under § 401(a) or § 403(a) of the
Internal Revenue Code of 1986 (‘‘quali-
fied plan’’ or ‘‘plan’’) and that is subject
to § 401(a)(13). The Notice also dis-
cusses a number of issues that should be
considered in drafting a QDRO. A
QDRO is a domestic relations order that
provides for payment of benefits from a
qualified plan to a spouse, former
spouse, child or other dependent of a
plan participant and that meets certain
requirements.
49

A. Statutory QDRO Requirements
Section 401(a)(13)(A) of the Code
provides that benefits under a qualified
plan may not be assigned or alienated.
Section 401(a)(13)(B) establishes an ex-
ception to the antialienation rule for
assignments made pursuant to domestic
relations orders that constitute QDROs
within the meaning of § 414(p). A ‘‘do-
mestic relations order’’ is defined in
§ 414(p)(1)(B) as any judgment, decree,
or order (including approval of a prop-
erty settlement agreement) that (i) re-
lates to the provision of child support,
alimony payments, or marital property
rights to a spouse, former spouse, child,
or other dependent of a participant, and
(ii) is made pursuant to a State domestic
relations law (including a community
property law). There is no exception to
the § 401(a)(13)(A) antialienation rule
for assignments made pursuant to do-
mestic relations orders that are not
QDROs.
Section 414(p)(1)(A) provides, in gen-
eral, that a QDRO is a domestic rela-
tions order that creates or recognizes the
existence of an alternate payee’s right,
or assigns to an alternate payee the
right, to receive all or a portion of the
benefits payable with respect to a par-
ticipant under a plan, and that meets the
requirements of paragraphs (2) and (3)
of § 414(p). Section 414(p)(2) requires
that a QDRO clearly specify: (A) the
name and last known mailing address (if
any) of the participant and of each
alternate payee covered by the order,
(B) the amount or percentage of the
participant’s benefits to be paid by the
plan to each alternate payee, or the
manner in which that amount or per-
centage is to be determined, (C) the
number of payments or period to which
the order applies, and (D) each plan to
which the order applies.
Section 414(p)(3) provides that a
QDRO cannot require a plan to provide
any type or form of benefit, or any
option, not otherwise provided under the
plan; cannot require a plan to provide
increased benefits (determined on the
basis of actuarial value); and cannot
require the payment of benefits to an
alternate payee that are required to be
paid to another alternate payee under
another order previously determined to
be a QDRO. Section 414(p)(4)(A)(i)
provides that a domestic relations order
shall not be treated as failing to meet
the requirements of § 414(p)(3)(A) (and
thus will not fail to be a QDRO) solely
because the order requires payment of
benefits to an alternate payee on or after
the participant’s earliest retirement age,
even if the participant has not separated
from service at that time. Section
414(p)(4)(B) defines earliest retirement
age as the earlier of (i) the date on
which the participant is entitled to a
distribution under the plan, or (ii) the
later of (I) the date the participant
attains age 50, or (II) the earliest date
on which the participant could begin
receiving benefits under the plan if the
participant separated from service.
Section 414(p)(5) permits a QDRO to
provide that the participant’s former
spouse shall be treated as the partici-
pant’s surviving spouse for purposes of
§§ 401(a)(11) and 417 (relating to the
right to receive survivor benefits and
requirements concerning consent to dis-
tributions), and that any other spouse of
the participant shall not be treated as a
spouse of the participant for these pur-
poses. An alternate payee is defined
under § 414(p)(8) as any spouse, former
spouse, child or other dependent of a
participant who is recognized by a do-
mestic relations order as having a right
to receive all, or a portion of, the
benefits payable under a plan with re-
spect to the participant. Section
414(p)(10) provides that a plan shall not
fail to satisfy the requirements of
§ 401(a), 401(k) or 403(b) solely by
reason of payments made to an alternate
payee pursuant to a QDRO.
B. Small Business Job Protection
Act of 1996
Section 1457(a)(2) of the Small Busi-
ness Job Protection Act of 1996
(‘‘SBJPA’’) directs the Secretary of the
Treasury (‘‘Secretary’’) to develop
sample language for inclusion in a form
for a QDRO described in
§ 414(p)(1)(A) of the Code and
§ 206(d)(3)(B)(i) of the Employee Re-
tirement Income Security Act of 1974
(‘‘ERISA’’) that meets the requirements
contained in those sections, and the
provisions of which focus attention on
the need to consider the treatment of
any lump sum payment, qualified joint
and survivor annuity (‘‘QJSA’’), or
qualified preretirement survivor annuity
(‘‘QPSA’’). Accordingly, the Service and
Treasury are publishing the discussion
and sample QDRO language set forth in
the Appendix to this Notice.
Section 1457(a)(1) of the SBJPA di-
rects the Secretary to publish sample
language that can be included in a form
that is used for a spouse to consent to a
participant’s waiver of a QJSA or
QPSA. This sample language for use in
spousal consent forms is contained in
Notice 97–10 in this Bulletin.
C. Department of Labor Interpre-
tive Authority
Section 206(d)(3) of ERISA (29
U.S.C. § 1056(d)(3)) contains QDRO
provisions that are substantially parallel
to those of § 414(p) of the Code. The
Department of Labor has jurisdiction to
interpret these provisions (except to the
extent provided in § 401(n) of the
Code) and the provisions governing the
fiduciary duties owed with respect to
domestic relations orders and QDROs.
Section 401(n) gives the Secretary of
the Treasury the authority to prescribe
rules or regulations necessary to coordi-
nate the requirements of §§ 401(a)(13)
and 414(p), and the regulations issued
by the Department of Labor thereunder,
with other Code provisions. The Depart-
ment of Labor has reviewed this Notice,
including its Appendix, and has advised
the Service and Treasury that the discus-
sion and sample language are consistent
with the views of the Department of
Labor concerning the statutory require-
ments for QDROs. This Notice, includ-
ing its Appendix, is not intended by the
Service or Treasury to convey interpre-
tations of the statutory requirements ap-
plicable to QDROs, but only to provide
examples of language that may be (but
are not required to be) used in drafting a
QDRO that satisfies these requirements.
II. SAMPLE LANGUAGE
The Appendix to this Notice has two
parts. Part I discusses certain issues that
should be considered when drafting a
QDRO. Part II contains sample language
that will assist in drafting a QDRO.
Drafters who use the sample language
will need to conform it to the terms of
the retirement plan to which the QDRO
applies, and to specify the amounts
assigned and other terms of the QDRO
so as to achieve an appropriate division
of marital property or level of family
support. A domestic relations order is
not required to incorporate the sample
language in order to satisfy the require-
ments for a QDRO, and a domestic
relations order that incorporates part of
the sample language may omit or
modify other parts.
The sample language addresses a va-
riety of matters, but is not designed to
address all retirement benefit issues that
may arise in each domestic relations
matter or QDRO. Further, some of the
sample language, while helpful in facili-
50

tating the administration of a QDRO, is
not necessarily required for the order to
satisfy the requirements for a QDRO.
Alternative formulations would be per-
missible for use in drafting orders that
meet the statutory requirements for a
QDRO.
III. OTHER SOURCES OF INFOR-
MATION
The Pension Benefit Guaranty Corpo-
ration (‘‘PBGC’’) recently published a
booklet entitled ‘‘Divorce Orders &
PBGC,’’ which discusses the special
QDRO rules that apply for plans that
have been terminated and are trusteed
by PBGC, and provides model QDROs
for use with those plans. This publica-
tion may be obtained by calling PBGC’s
Customer Service Center at 1–800–400–
PBGC or electronically via the PBGC
internet site at ‘‘http://www.pbgc.gov’’.
Additional information on the rights
of participants and spouses to plan ben-
efits can be found in a two-booklet set
published by the Service, entitled
‘‘Looking Out for #2.’’ These booklets
discuss retirement benefit choices under
a defined contribution or a defined ben-
efit plan, and may be obtained by
calling the Internal Revenue Service at
1–800–TAX–FORM, and asking for
Publication 1565 (defined contribution
plans) or Publication 1566 (defined ben-
efit plans).
IV. COMMENTS
The Service invites the public to
comment on the QDRO discussion and
sample language included in the Appen-
dix to this Notice, and welcomes sug-
gestions concerning possible additional
sample language. Comments may be
submitted to the Internal Revenue Ser-
vice at CC:DOM:CORP:R (Notice 97–
11), Room 5226, Internal Revenue Ser-
vice, POB 7604, Ben Franklin Station,
Washington, D.C. 20044. Alternatively,
taxpayers may hand-deliver comments
between the hours of 8 a.m. and 5 p.m.
to CC:DOM:CORP:R (Notice 97–11),
Courier’s desk, Internal Revenue Ser-
vice, 1111 Constitution Ave., N.W.,
Washington, D.C., or may submit com-
ments electronically via the IRS internet
site at ‘‘http://www.irs.ustreas.gov/prod/
tax_regs/comments.html’’.
DRAFTING INFORMATION
The principal authors of this Notice
are Diane S. Bloom of the Employee
Plans Division and Susan M. Lennon of
the Office of the Associate Chief Coun-
sel (Employee Benefits and Exempt Or-
ganizations); however, other personnel
from the Service and Treasury contrib-
uted to its development. For further
information regarding this Notice, please
contact the Employee Plans Division’s
taxpayer assistance telephone service at
(202) 622–6074/6075, between the hours
of 1:30 p.m. and 4 p.m. Eastern Time,
Monday through Thursday. Alternatively,
please call Ms. Bloom at (202) 622–
6214 or Ms. Lennon at (202) 622–4606.
Questions concerning QDROs may be
addressed to Susan G. Lahne of the
Pension and Welfare Benefits Adminis-
tration, Department of Labor, at (202)
219–7461. These telephone numbers are
not toll-free.
APPENDIX
Part I of this Appendix discusses
certain issues that are relevant in draft-
ing a qualified domestic relations order
(‘‘QDRO’’). Part II of this Appendix
contains sample language that can be
used in a QDRO. However, the discus-
sion and sample language do not at-
tempt to address every issue that may
arise in drafting a QDRO. Also, some
parts of the discussion are not relevant
to all situations and some parts of the
sample language are not appropriate for
all QDROs. In formulating a particular
QDRO, it is important that the drafters
tailor the QDRO to the needs of the
parties and ensure that the QDRO is
consistent with the terms of the retire-
ment plan to which the QDRO applies.
PART I. DISCUSSION OF QDRO
REQUIREMENTS AND RELATED
ISSUES
In order to be recognized as a QDRO,
an order must first be a ‘‘domestic
relations order.’’ A domestic relations
order is any judgment, decree or order
(including approval of a property settle-
ment) which (i) relates to the provision
of child support, alimony payments or
marital property rights to a spouse,
former spouse, child or other dependent
of the plan participant, and (ii) is made
pursuant to a State domestic relations
law (including a community property
law). A State authority must actually
issue an order or formally approve a
proposed property settlement before it
can be a domestic relations order. A
property settlement signed by a partici-
pant and the participant’s former spouse
or a draft order to which both parties
consent is not a domestic relations order
until the State authority has adopted it
as an order or formally approved it and
made it part of the domestic relations
proceeding.
The sample language in Part II as-
sumes that the QDRO applies to one
qualified plan and one alternate payee. If
a QDRO is intended to cover more than
one qualified plan or alternate payee, the
QDRO should clearly state which quali-
fied plan and which alternate payee each
provision is intended to address.
The terms of a qualified plan must be
set forth in a written document. The
plan must also establish written QDRO
procedures to be used by the plan
administrator in determining whether a
domestic relations order is a QDRO and
in administering QDROs. The plan ad-
ministrator maintains copies of the plan
document and the plan’s QDRO proce-
dures. If the plan is required under
federal law to have a summary plan
description, or ‘‘SPD,’’ the plan admin-
istrator will also have a copy of the
SPD. The information in these docu-
ments is helpful in drafting a QDRO.
The drafter of a QDRO may wish to
obtain copies of these documents before
drafting a QDRO.
A. IDENTIFICATION OF PARTICI-
PANT AND ALTERNATE PAYEE
A QDRO must clearly specify the
name and last known mailing address (if
any) of the participant and of each
alternate payee covered by the QDRO.
In the event that an alternate payee is a
minor or legally incompetent, the
QDRO should also include the name
and address of the alternate payee’s
legal representative. A QDRO can have
more than one alternate payee, such as a
former spouse and a child.
The ‘‘participant’’ is the individual
whose benefits under the plan are being
divided by the QDRO. The participant’s
spouse (or former spouse, child, or other
dependent) who receives some or all of
the plan’s benefits with respect to the
participant under the terms of the
QDRO is the ‘‘alternate payee.’’
B. IDENTIFICATION OF RETIRE-
MENT PLAN
A QDRO must clearly identify each
plan to which the QDRO applies. A
QDRO can satisfy this requirement by
stating the full name of the plan as
provided in the plan document.
C. AMOUNT OF BENEFITS TO BE
PAID TO ALTERNATE PAYEE
A QDRO must clearly specify the
amount or percentage of the partici-
51

pant’s benefits in the plan that is as-
signed to each alternate payee, or the
manner in which the amount or percent-
age is to be determined. Many factors
should be taken into account in deter-
mining which benefits to assign to an
alternate payee and how these benefits
are to be assigned. The following dis-
cussion highlights some of these factors.
Because of the complexity and variety
of the factors that should be considered,
and the need to tailor the assignment of
benefits under a QDRO to the individual
circumstances of the parties, specific
sample language regarding the assign-
ment of benefits has not been provided
in Part II of this Appendix.
1. Types of Benefits
In order to decide how to divide
benefits under a QDRO, the drafter first
should determine the types of benefits
the plan provides. Most benefits pro-
vided by qualified plans can be classi-
fied as (1) retirement benefits that are
paid during the participant’s life and (2)
survivor benefits that are paid to benefi-
ciaries after the participant’s death. Gen-
erally, a QDRO can assign all or a
portion of each of these types of ben-
efits to an alternate payee. The drafters
of a QDRO should coordinate the as-
signment of these types of benefits.
QDRO drafters should also consider
how the benefits divided under the
QDRO may be affected, under the plan,
by the death of either the participant or
the alternate payee.
2. Types of Qualified Plans
Another important factor to consider
in the drafting of a QDRO is the type of
plan to which the QDRO will apply. As
discussed below, the type of plan may
affect the types of benefits available for
assignment, how the parties choose to
assign the benefits, and other matters.
There are two basic types of qualified
plans to which QDROs apply: defined
benefit plans and defined contribution
plans.
a. Defined Benefit Plans
A ‘‘defined benefit plan’’ promises to
pay each participant a specific benefit at
retirement. The basic retirement benefits
are usually based on a formula that
takes into account factors such as the
number of years a participant has
worked for the employer and the partici-
pant’s salary. The basic retirement ben-
efits are generally expressed in the form
of periodic payments for the partici-
pant’s life beginning at the plan’s nor-
mal retirement age. This stream of peri-
odic payments is generally known as an
‘‘annuity.’’ There are special rules that
apply if the participant is married; these
rules are discussed in greater detail in
section E below. A plan may also pro-
vide that these retirement benefits may
be paid in other forms, such as a lump
sum payment.
b. Defined Contribution Plans
A ‘‘defined contribution plan’’ is a
retirement plan that provides for an
individual account for each participant.
The participant’s benefits are based
solely on the amount contributed to the
participant’s account, and any income,
expenses, gains and losses, and any
forfeitures of accounts of other partici-
pants which may be allocated to such
participant’s account. Examples of de-
fined contribution plans include a profit
sharing plan (including a ‘‘401(k)’’
plan), an employee stock ownership plan
(an ‘‘ESOP’’) and a money purchase
pension plan. Defined contribution plans
commonly permit retirement benefits to
be paid in the form of a lump sum
payment of the participant’s entire ac-
count balance.
3. Approaches to Dividing Retire-
ment Benefits
There are two common approaches to
dividing retirement benefits in a QDRO:
one awards a separate interest in the
retirement benefits to the alternate
payee, and the other allows the alternate
payee to share in the payment of the
retirement benefits. In drafting a QDRO
using either of these approaches, consid-
eration should be given to factors such
as whether the plan is a defined benefit
plan or defined contribution plan, and
the purpose of the QDRO (such as
whether the QDRO is meant to provide
spousal support or child support, or to
divide marital property).
a. Separate Interest Approach
A QDRO that creates a ‘‘separate
interest’’ divides the participant’s ben-
efits into two separate parts: one for the
participant and one for the alternate
payee. Subject to the terms of the plan
and as discussed in more detail below, a
QDRO may provide that the alternate
payee can determine the form in which
his or her benefits are paid and when
benefit payments commence. If benefits
are allocated under the separate interest
approach, the drafters of a QDRO
should take into account certain issues
depending on the type of plan.
(1) Issues Relevant to Defined Ben-
efit Plans
The treatment of subsidies provided
by a plan and the treatment of future
increases in benefits due to increases in
the participant’s compensation, addi-
tional years of service, or changes in the
plan’s provisions are among the matters
that should be considered when drafting
a QDRO that uses the separate interest
approach to allocate benefits under a
defined benefit plan.
Subsidies.Defined benefit plans may
promise to pay benefits at various times
and in alternative forms. Benefits paid at
certain times or in certain forms may
have a greater actuarial value than the
basic retirement benefits payable at nor-
mal retirement age. When one form of
benefit has a greater actuarial value than
another form, the difference in value is
often called a subsidy. Plans usually
provide that a participant must meet
specific eligibility requirements, such as
working for a minimum number of
years for the employer that maintains
the plan, in order to receive the subsidy.
For example, a defined benefit plan
may offer an ‘‘early retirement subsidy’’
to employees who retire before the
plan’s normal retirement age but after
having worked for a specific number of
years for the employer maintaining the
plan. In some cases, this subsidized
benefit provides payments in the form
of an annuity that pays the same annual
amount as would be paid if the pay-
ments commenced instead at the normal
retirement age. Because these benefits
are not reduced for early commence-
ment, they have a greater actuarial value
than benefits payable at normal retire-
ment age. This subsidy may be available
only for certain forms of benefit.
A QDRO may award to the alternate
payee all or part of the participant’s
basic retirement benefits. A QDRO can
also address the disposition of any sub-
sidy to which the participant may be-
come entitled after the QDRO has been
entered.
Future Increases in the Participant’s
Benefits.A participant’s basic retirement
benefits may increase due to circum-
stances that occur after a QDRO has
been entered, such as increases in salary,
crediting of additional years of service,
or amendments to the plan’s provisions,
including amendments to provide cost of
living adjustments. The treatment of
such benefit increases should be consid-
ered when drafting a QDRO using the
separate interest approach.
52

(2) Issues Relevant to Defined Con-
tribution Plans
Investment of the amount assigned to
the alternate payee when the account is
invested in more than one investment
vehicle and division of any future allo-
cation of contributions or forfeitures to
the participant’s account are among the
matters that should be considered when
drafting a QDRO that allocates the
alternate payee a separate interest under
a defined contribution plan. Investment
Choices. The participant’s account may
be invested in more than one investment
fund. If the plan provides for
participant-directed investment of the
participant’s account, consideration
should be given to how the alternate
payee’s interest will be invested.
Future Allocations.A participant’s ac-
count balance may later increase due to
the allocation of contributions or forfei-
tures after the QDRO has been entered.
A QDRO may provide that the amounts
assigned to the alternate payee will
include a portion of such future alloca-
tions.
b. Shared Payment Approach
A QDRO may use the ‘‘shared pay-
ment’’ approach, under which benefit
payments from the plan are split be-
tween the participant and the alternate
payee. The alternate payee receives pay-
ments under this approach only when
the participant receives payments. A
QDRO may provide that the alternate
payee will commence receiving benefit
payments when the participant begins
receiving payments or at a later stated
date, and that the alternate payee will
cease to share in the benefit payments at
a stated date (or upon a stated event,
provided that adequate notice is given to
the plan). In splitting the benefit pay-
ments, the QDRO may award the alter-
nate payee either a percentage or a
dollar amount of each of the partici-
pant’s benefit payments; in either case,
the amount awarded cannot exceed the
amount of each payment to which the
participant is entitled under the plan. If
a QDRO awards a percentage of the
participant’s benefit payments (rather
than a dollar amount), then, unless the
QDRO provides otherwise, the alternate
payee generally will automatically re-
ceive a share of any future subsidy or
other increase in the participant’s ben-
efits.
D. FORM AND COMMENCEMENT
OF PAYMENT TO ALTERNATE
PAYEE
QDRO drafters should take into ac-
count certain issues that may arise in
connection with the alternate payee’s
choice of a form of benefit payments
and the date on which payment will
commence.
1. Separate Interest Approach
a. Form of Alternate Payee’s Ben-
efit Payments
A QDRO either may specify a par-
ticular form in which payments are to
be made to the alternate payee or may
provide that the alternate payee may
choose a form of benefit from among
the options available to the participant.
However, federal law provides that the
alternate payee cannot receive payments
in the form of a joint and survivor
annuity with respect to the alternate
payee and his or her subsequent spouse.
The choice of the form of benefits
should take into account the period over
which payments will be made. For ex-
ample, if the alternate payee elects to
receive a lump sum payment, no further
payments will be made by the plan with
respect to the alternate payee’s interest.
Any decision concerning the form of
benefit should take into account the
difference, if any, in the actuarial value
of different benefit forms available un-
der the plan. For example, as discussed
above, a plan might provide an early
retirement subsidy that is available only
for payment in certain forms.
In addition, the forms of benefit avail-
able to the alternate payee may be
limited by § 401(a)(9) of the Code,
which specifies the date by which ben-
efit payments from a qualified plan must
commence and limits the period over
which the benefit payments may be
made. Section 1.401(a)(9)–1, Q&A H–4,
of the Proposed Income Tax Regulations
addresses the application of the required
minimum distribution rules of
§ 401(a)(9) to payments to an alternate
payee. The proposed regulation limits
the period over which benefits may be
paid with respect to the alternate payee’s
interest. For example, the proposed
regulation provides that distribution of
the alternate payee’s separate interest
will not satisfy § 401(a)(9)(A)(ii) of the
Code if the separate interest is distrib-
uted over the joint lives of the alternate
payee and a designated beneficiary
(other than the participant).
b. Commencement of Benefit Pay-
ments to Alternate Payee
Under the separate interest approach,
the alternate payee may begin receiving
benefits at a different time than the
participant. A QDRO either may specify
a time at which payments are to com-
mence to the alternate payee or may
provide that the alternate payee can
elect a time when benefits will com-
mence in accordance with the terms of
the plan. In two circumstances, an alter-
nate payee who is given a separate
interest may begin receiving his or her
separate benefit before the participant is
eligible to begin receiving payments.
First, federal law provides that benefit
payments to the alternate payee may
begin as soon as the participant attains
his or her earliest retirement age. Fed-
eral law defines ‘‘earliest retirement
age’’ as the earlier of (i) the date on
which the participant is entitled to a
distribution under the plan, or (ii) the
later of (I) the date the participant
attains age 50, or (II) the earliest date
on which the participant could begin
receiving benefits under the plan if the
participant separated from service. Sec-
ond, the retirement plan may (but is not
required to) allow payments to begin to
an alternate payee at a date before the
earliest retirement date.
2. Shared Payment Approach
As indicated above, under the shared
payment approach, benefit payments are
split between the participant and the
alternate payee. The alternate payee re-
ceives payments in the same form as the
participant. Further, payments to the
alternate payee do not commence before
the participant has begun to receive
benefits. Payments to the alternate payee
can cease at any time stated in the
QDRO but do not continue after pay-
ments with respect to the participant
cease. As noted above, a QDRO must
state the number of payments or the
period to which the order applies.
E. SURVIVOR BENEFITS AND
TREATMENT OF FORMER
SPOUSE AS PARTICIPANT’S
SPOUSE
Survivor benefits include both ben-
efits payable to surviving spouses and
other benefits that are payable after the
participant’s death. These benefits can
be awarded to an alternate payee. In
determining the assignment of survivor
benefits, QDRO drafters should take
into account that benefits awarded to the
53

alternate payee under a QDRO will not
be available to a subsequent spouse of
the participant or to another beneficiary.
QDRO drafters may consult with the
plan administrator for information on
the survivor benefits provided under the
plan.
A QDRO may provide for treatment
of a former spouse of a participant as
the participant’s spouse with respect to
all or a portion of the spousal survivor
benefits that must be provided under
federal law. The following discussion
explains the spousal survivor benefits
that must be offered under a plan, and
identifies issues that should be consid-
ered in determining whether to treat the
alternate payee as the participant’s
spouse.
Only a spouse or former spouse of
the participant can be treated as a
spouse under a QDRO. A child or other
dependent who is an alternate payee
under a QDRO cannot be treated as the
spouse of a participant.
Retirement plans generally need not
provide the special survivor benefits to
the participant’s surviving spouse unless
the participant is married for at least one
year. If the retirement plan to which the
QDRO relates contains such a one-year
marriage requirement, then the QDRO
cannot require that the alternate payee
be treated as the participant’s spouse if
the marriage lasted for less than one
year.
1. Qualified Joint and Survivor An-
nuity
Federal law generally requires that
defined benefit plans and certain defined
contribution plans pay retirement ben-
efits to participants who were married
on the participant’s annuity starting date
(this is the first day of the first period
for which an amount is payable to the
participant) in a special form called a
qualified joint and survivor annuity, or
QJSA. Under a QJSA, retirement pay-
ments are made monthly (or at other
regular intervals) to the participant for
his or her lifetime; after the participant
dies, the plan pays the participant’s
surviving spouse an amount each month
(or other regular interval) that is at least
one half of the retirement benefit that
was paid to the participant. At any time
that benefits are permitted to commence
under the plan, a QJSA must be offered
that commences at the same time and
that has an actuarial value that is at least
as great as any other form of benefit
payable under the plan at the same time.
A married participant can choose to
receive retirement benefits in a form
other than a QJSA if the participant’s
spouse agrees in writing to that choice.
2. Qualified Preretirement Survivor
Annuity
Federal law generally requires that
defined benefit plans and certain defined
contribution plans pay a monthly survi-
vor benefit to a surviving spouse for the
spouse’s life when a married participant
dies prior to the participant’s annuity
starting date, to the extent the partici-
pant’s benefit is nonforfeitable under the
terms of the plan at the time of his or
her death. This benefit is called a quali-
fied preretirement survivor annuity, or
QPSA. As a general rule, an individual
loses the right to the QPSA survivor
benefits when he or she is divorced
from the participant. However, if a
former spouse is treated as the partici-
pant’s surviving spouse under a QDRO,
the former spouse is eligible to receive
the QPSA unless the former spouse
consents to the waiver of the QPSA. If
the spouse does not waive the QPSA,
the plan may allow the spouse to re-
ceive the value of the QPSA in a form
other than an annuity.
3. Defined Contribution Plans Not
Subject to the QJSA or QPSA Re-
quirements
Those defined contribution plans that
are not required to pay benefits to
married participants in the form of a
QJSA or a QPSA are required by federal
law to pay the balance remaining in the
participant’s account after the participant
dies to the participant’s surviving
spouse. If the spouse gives written con-
sent, the participant can direct that upon
his or her death the account will be paid
to a beneficiary other than the spouse,
for example, the couple’s children.
4. Alternate Payee Treated as
Spouse
A QDRO may provide that an alter-
nate payee who is a former spouse of
the participant will be treated as the
participant’s spouse for some or all of
the benefits payable upon the partici-
pant’s death, so that the alternate payee
will receive benefits provided to a
spouse under the plan. To the extent that
a former spouse is to be treated under
the plan as the participant’s spouse
pursuant to a QDRO, any subsequent
spouse of the participant cannot be
treated as the participant’s surviving
spouse. Thus, QDRO drafters should
consider the potential impact of desig-
nating a former spouse as the partici-
pant’s spouse on the disposition of sur-
vivor benefits among the former spouse
and any subsequent spouse of the par-
ticipant, as well as the impact on chil-
dren or any other beneficiaries desig-
nated by the participant in accordance
with the terms of the plan.
In determining the portion of the
participant’s benefits for which the alter-
nate payee is treated as the spouse, the
drafters should take into account the
manner in which benefits are otherwise
divided under the QDRO. In particular,
consideration should be given to
whether the formula for dividing the
participant’s benefits for this purpose
should be coordinated with the formula
otherwise used for dividing the benefits.
Under a defined benefit plan, or a
defined contribution plan that is subject
to the QJSA and QPSA requirements, to
the extent the former spouse is treated
as the current spouse, the former spouse
must consent to payment of retirement
benefits in a form other than a QJSA or
to the participant’s waiver of the QPSA.
For example, in a defined benefit plan,
the participant would not be able to
elect to receive a lump sum payment of
the retirement benefits for which the
alternate payee is treated as the partici-
pant’s spouse unless the alternate payee
consents. Similarly, the former spouse’s
consent might be required for any loan
to the participant from the plan that is
secured by his or her retirement ben-
efits. In a defined contribution plan that
is not subject to the QJSA and QPSA
requirements, to the extent the QDRO
treats the former spouse as the partici-
pant’s spouse under the plan, the survi-
vor benefits under the plan must be paid
to the former spouse unless he or she
consents to have those benefits paid to
someone else.
F. TAX TREATMENT OF BENEFIT
PAYMENTS MADE PURSUANT TO
A QDRO
The federal income tax treatment of
retirement benefits is governed by fed-
eral law, and a QDRO cannot designate
who will be liable for the taxes owed
when retirement benefits are paid. For a
description of the tax consequences of
payments to an alternate payee pursuant
to a QDRO, see Internal Revenue Ser-
vice Publication 575, ‘‘Pension and An-
nuity Income.’’ A local IRS office can
provide this publication, or it may be
obtained by calling 1–800–TAX–FORM.
54

PART II. SAMPLE LANGUAGE
FOR INCLUSION IN QDRO
A. SAMPLE LANGUAGE FOR
IDENTIFICATION OF PARTICI-
PANT AND ALTERNATE PAYEE
The ‘‘Participant’’ is[insert name of
Participant]. The Participant’s address is
[insert Participant’s address]. The Par-
ticipant’s social security number is[in-
sert Participant’s social security num-
ber].
The ‘‘Alternate Payee’’ is[insert
name of Alternate Payee]. The Alter-
nate Payee’s address is[insert Alter-
nate Payee’s address]. The Alternate
Payee’s social security number is[insert
Alternate Payee’s social security num-
ber]. The Alternate Payee is the[de-
scribe the Alternate Payee’s relation-
ship to Participant]of the Participant.
B. SAMPLE LANGUAGE FOR
IDENTIFICATION OF RETIRE-
MENT PLAN
This order applies to benefits under
the[insert formal name of retirement
plan](‘‘Plan’’).
C. AMOUNT OF BENEFITS TO BE
PAID TO ALTERNATE PAYEE
Instruction:The QDRO should clearly
specify the amount or percentage of
benefits assigned to the Alternate Payee
or the manner in which the amount or
percentage is to be determined, and the
number of payments or period to which
the Order applies. There are many
different forms in which benefits may
be paid from a qualified plan. Because
of the diversity of factors that should
be considered, and the need to tailor
the assignment of benefits under a
QDRO to meet the needs of the parties
involved, specific sample language re-
garding the assignment of benefits has
not been provided. See the discussion
in Part I for further information.
D. SAMPLE LANGUAGE FOR
FORM AND COMMENCEMENT OF
PAYMENT TO ALTERNATE PAYEE
Instruction:Drafters using the separate
interest approach may use paragraph 1.
Drafters using the shared payment ap-
proach may use paragraph 2. Drafters
using the separate interest approach for
a portion of the benefits allocated to the
alternate payee and the shared payment
approach for the remainder should
modify the sample language to specify
the benefits to which each paragraph
provided below applies.
1. Separate Interest Approach
The Alternate Payee may elect to
receive payment from the Plan of the
benefits assigned to the Alternate Payee
under this Order in any form in which
such benefits may be paid under the
Plan to the Participant (other than in the
form of a joint and survivor annuity
with respect to the Alternate Payee and
his or her subsequent spouse), but only
if the form elected complies with the
minimum distribution requirements of
§ 401(a)(9) of the Internal Revenue
Code. Payments to the Alternate Payee
pursuant to this Order shall commence
on any date elected by the Alternate
Payee (and such election shall be made
in accordance with the terms of the
Plan), but not earlier than the Partici-
pant’s earliest retirement age (or such
earlier date as allowed under the terms
of the Plan), and not later than the
earlier of (A) the date the Participant
would be required to commence benefits
under the terms of the Plan or (B) the
latest date permitted by § 401(a)(9) of
the Internal Revenue Code. For purposes
of this Order, the Participant’s earliest
retirement age shall be the earlier of (i)
the date on which the participant is
entitled to a distribution under the Plan,
or (ii) the later of (I) the date the
Participant attains age 50, or (II) the
earliest date on which the Participant
could begin receiving benefits under the
plan if the Participant separated from
service.
2. Shared Payment Approach
The Alternate Payee shall receive
payments from the Plan of the benefits
assigned to the Alternate Payee under
this Order (including payments attribut-
able to the period in which the issue of
whether this Order is a qualified domes-
tic relations order is being determined)
commencing as soon as practicable after
this Order has been determined to be a
qualified domestic relations order or, if
later, on the date the Participant com-
mences receiving benefit payments from
the Plan. Payment to the Alternate Payee
shall cease on the earlier of:[insert
date or future event, such as the
Alternate Payee’s remarriage], or the
date that payments from the Plan with
respect to the Participant cease.
E. SAMPLE LANGUAGE FOR
TREATMENT OF FORMER
SPOUSE AS PARTICIPANT’S
SPOUSE
Instruction:The Alternate Payee may
be treated as the Participant’s spouse
only if the Alternate Payee is the
Participant’s spouse or former spouse,
and not if the Alternate Payee is a
child or other dependent of the Partici-
pant. If the Alternate Payee is the
Participant’s spouse or former spouse,
drafters may select sample paragraph
1, sample paragraph 2, or sample
paragraph 3. Sample paragraph 1 ap-
plies if the Alternate Payee is treated
as the Participant’s spouse for all of
the spousal survivor benefits payable
with respect to the Participant’s ben-
efits under the Plan. Sample paragraph
2 applies if the Alternate Payee is
treated as the Participant’s spouse for
a portion of the spousal survivor ben-
efits payable with respect to the Par-
ticipant’s benefits under the Plan.
Sample paragraph 3 applies if the
Alternate Payee is not treated as the
Participant’s spouse for any of the
spousal survivor benefits payable with
respect to the Participant’s benefits
under the Plan.
1. Alternate Payee Treated as
Spouse For All Spousal Survivor Ben-
efits
The Alternate Payee shall be treated
as the Participant’s spouse under the
Plan for purposes of §§ 401(a)(11) and
417 of the Code.
2. Alternate Payee Treated as
Spouse For a Portion of the Spousal
Survivor Benefits
The Alternate Payee shall be treated
as the Participant’s spouse under the
Plan for purposes of §§ 401(a)(11) and
417 of the Code with respect to[insert
percentage of benefit or a formula,
such as a formula describing the ben-
efit earned under the plan during
marriage].
3. Alternate Payee not Treated as
Spouse
The Alternate Payee shall not be
treated as the Participant’s spouse under
the Plan.
Rev. Proc. 97–9
SECTION 1. PURPOSE
.01 This revenue procedure provides
a model amendment that may be used to
assist employers in adopting a plan that
contains 401(k) SIMPLE provisions.
55

The model amendment gives plan spon-
sors a way to incorporate 401(k)
SIMPLE provisions in plans containing
cash or deferred arrangements
(‘‘CODAs’’) and matching contributions.
The model amendment incorporates the
alternative method of satisfying the non-
discrimination tests applicable to these
plans as contained in §§ 401(k)(11) and
401(m)(10) of the Internal Revenue
Code. Sections 401(k)(11) and
401(m)(10) were added to the Code by
§ 1422 of the Small Business Job Pro-
tection Act of 1996, Pub. L. No. 104–
188 (‘‘SBJPA’’). This revenue procedure
does not apply to § 408(p) SIMPLE
plans, as described in § 1421 of the
SBJPA, under which contributions are
made to employees’ SIMPLE IRAs.
.02 The model amendment may be
used by organizations or practitioners
with approved master and prototype
(‘‘M&P’’) plans, regional prototype
plans, or volume submitter specimen
plans to modify the existing plans they
sponsor so that employers can establish
new plans containing 401(k) SIMPLE
provisions. Employers that currently
maintain an M&P plan, a regional proto-
type plan or a volume submitter speci-
men plan may modify existing 401(k)
plans to incorporate 401(k) SIMPLE
provisions. The model amendment may
also be used by sponsors of individually
designed plans to modify existing
401(k) plans to incorporate 401(k)
SIMPLE provisions. The model amend-
ment is available only for sponsors of
plans containing provisions required to
satisfy §§ 401(k), 401(m) and
401(a)(30) that have received favorable
opinion, notification, advisory, or deter-
mination letters that take into account
the requirements of the Tax Reform Act
of 1986, Pub. L. No. 99–514 (‘‘TRA
’86’’).
SECTION 2. BACKGROUND AND
GENERAL INFORMATION
.01 New sections 401(k)(11) and
401(m)(10) of the Code (‘‘401(k)
SIMPLE provisions’’), provide an alter-
native method of satisfying the nondis-
crimination tests contained in
§§ 401(k)(3)(A)(ii) and 401(m)(2), ap-
plicable to CODAs. These 401(k)
SIMPLE provisions may only be
adopted by employers that employed
100 or fewer employees earning at least
$5,000 in compensation for the preced-
ing year. The 401(k) SIMPLE provisions
may not be adopted by an employer
who maintains another employer-spon-
sored plan covering employees who are
eligible to participate in the cash or
deferred arrangement using the 401(k)
SIMPLE provisions. Generally, no con-
tributions may be made during a year to
a plan using the 401(k) SIMPLE provi-
sions, other than those contributions de-
scribed in section 2.03 below.
.02 A 401(k) plan that includes
401(k) SIMPLE provisions does not
have to satisfy the actual deferral per-
centage and actual contribution percent-
age tests otherwise applicable to plans
containing CODAs and matching contri-
butions and is not treated as top-heavy
under § 416 of the Code.
.03 Under a plan containing the
401(k) SIMPLE provisions, each em-
ployee may elect to make salary reduc-
tion contributions for a year of up to
$6,000. The employer must make either
a matching contribution equal to the
employee’s salary reduction contribu-
tions, limited to 3% of the employee’s
compensation for the year, or a nonelec-
tive contribution for all eligible employ-
ees equal to 2% of the employee’s
compensation for the year. All amounts
contributed under 401(k) SIMPLE pro-
visions must be nonforfeitable at all
times.
.04 The plan year of a plan contain-
ing the 401(k) SIMPLE provisions must
be the calendar year. An employer main-
taining a 401(k) plan on a fiscal year
basis must convert the plan to a calen-
dar year in order to adopt the 401(k)
SIMPLE provisions.
.05 Several additional requirements
apply to plans adopting the model
amendment and include the following:
(1) a special definition of compen-
sation for purposes of the 3%
matching and 2% nonelective con-
tributions described in section 2.03;
(2) notification and election period
requirements; and
(3) transitional rules for growing
employers.
.06 Except as provided in section
2.02, all other qualification requirements
of the Code continue to apply to a plan
that contains 401(k) SIMPLE provisions
including the contribution limitations of
§ 415; the compensation limitations of
§ 401(a)(17); and the requirement that
the plan as amended continue to be
operated in accordance with its terms. In
addition, all other requirements appli-
cable to 401(k) plans continue to apply,
including, the distribution restrictions of
§ 401(k)(2)(B) and the general prohibi-
tion set forth in § 401(k)(4)(B) on State
and local governments maintaining a
401(k) plan. Contributions under a plan
containing 401(k) SIMPLE provisions
are deductible subject to the limits of
§ 404(a).
.07 The model amendment supersedes
any plan provision that is inconsistent
with the provisions of the model amend-
ment. For example, if the plan contains
a provision that limits any employee’s
salary reduction contributions for a year
to a percentage that results in an amount
less than $6,000, the salary reduction
contribution provision of the model
amendment permitting yearly contribu-
tions of up to $6,000 will govern.
.08 Employers adopting a new 401(k)
plan containing the model amendment
may make it effective as of any date on
or after January 1, 1997, but in no event
later than October 1 of the year in
which adopted. Employers amending an
existing 401(k) plan to incorporate the
model amendment must make the model
amendment effective as of the following
January 1 unless they are using the 1997
Transition Rule described in section 3.
SECTION 3. 1997 TRANSITION
RULE
.01 Employers that have maintained a
401(k) plan in 1997 may adopt the
model amendment for 1997 if the fol-
lowing conditions are satisfied:
(1) the employer adopts the 401(k)
SIMPLE provisions by July 1, 1997,
effective as of January 1, 1997;
(2) the salary reduction contributions
for the year made prior to adoption of
the model amendment do not total
more than $6,000 for each employee;
(3) the matching or nonelective con-
tributions described in section 2.03
are of inherently equal or greater
value than the contributions required
under the plan prior to the amend-
ment; and
(4) all eligible employees are pro-
vided with an election period de-
scribed in section 3.3(b)(iv) of the
model amendment.
.02 If an employer adopts 401(k)
SIMPLE provisions under this transition
rule, the model amendment applies to
the plan for the 1997 year. For example,
the cumulative salary reduction contri-
butions for the year, including those
made prior to and those made following
the adoption of the model amendment,
must not total more than $6,000 for any
employee.
56

SECTION 4. USE OF THE MODEL
AMENDMENT
.01 Sponsors described in section
4.02 may amend their plans by adopt-
ing, word-for-word, the model amend-
ment in the appendix in accordance with
the instructions in this revenue proce-
dure. If a sponsor to whom the model
amendment is available pursuant to sec-
tion 4.02 adopts the model amendment,
neither application to the Service nor a
user fee is required. The Service will
not issue new opinion, notification, ad-
visory, or determination letters for plans
that are amended solely to add the
model amendment.
.02 The only sponsors to whom the
model amendment is available are spon-
sors of M&P, regional prototype, vol-
ume submitter specimen, and individu-
ally designed plans that contain CODA
provisions and that have received favor-
able opinion, notification, advisory, or
determination letters that take into ac-
count the requirements of TRA ’86
under Rev. Proc. 89–9, 1989–1 C.B.
780, as modified; Rev. Proc. 89–13,
1989–1 C.B. 801, as modified; Rev.
Proc. 90–20, 1990–1 C.B. 495; Rev.
Proc. 91–41, 1991–2 C.B. 697; Rev.
Proc. 91–66, 1991–2 C.B. 870; Rev.
Proc. 93–39, 1993–2 C.B. 513; or Rev.
Proc. 96–6, 1996–1 I.R.B. 151.
.03 Organizations and practitioners
that have approved M&P and regional
prototype plans and volume submitter
specimen plan sponsors that use the
model language must file Form 8837,
Notice of Adoption of Revenue Proce-
dure Model Amendments.
SECTION 5. REVOCATION OF
MODEL AMENDMENT
The model amendment contains a
model revocation clause which permits
employers to revoke the 401(k) SIMPLE
provisions without terminating the plan.
The revocation clause should be ex-
ecuted only if the employer wants to
revert to the plan provisions that apply
in the absence of 401(k) SIMPLE provi-
sions. The revocation may be adopted
on any date, but may only become
effective on the first day of the calendar
year following the date of adoption.
SECTION 6. RELIANCE
Plans that are amended in accordance
with sections 4 and 5 will not lose their
otherwise applicable extended reliance
period under Rev. Procs. 89–9 and 89–
13, as modified by Rev. Proc. 93–9,
1993–1 C.B. 474, or section 13 of Rev.
Proc. 93–39. Employers entitled to rely
on an opinion, notification, advisory, or
determination letter will not lose reli-
ance on the letter merely because of
these amendments.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Maxine Terry and Roger
Kuehnle of the Employee Plans Divi-
sion. For further information regarding
this revenue procedure, contact the Em-
ployee Plans Division’s taxpayer assis-
tance telephone service between 1:30
and 4:00 p.m., Eastern Time, Monday
through Thursday at (202) 622–6074/
6075. (These telephone numbers are not
toll-free numbers.)
APPENDIX
MODEL AMENDMENT UNDER SECTIONS 401(k)(11) AND 401(m)(10)
MODEL AMENDMENT TO ADOPT SIMPLE 401(k) PROVISIONS
SECTION I. SIMPLE 401(K) PROVISIONS
1.1 This amendment adds to the plan SIMPLE 401(k) provisions that are intended to satisfy the requirements of
§§ 401(k)(11) and 401(m)(10) of the Internal Revenue Code.
1.2 The provisions of sections 3.3, IV, VI, and VII of this amendment apply for a year only if the following conditions are
met:
(a) The employer adopting this amendment is an eligible employer. An eligible employer means, with respect to any year, an
employer that had no more than 100 employees who received at least $5,000 of compensation from the employer for the
preceding year. In applying the preceding sentence, all employees of controlled groups of corporations under § 414(b), all
employees of trades or businesses (whether incorporated or not) under common control under § 414(c), all employees of
affiliated service groups under § 414(m), and leased employees required to be treated as the employer’s employees under
§ 414(n), are taken into account.
An eligible employer that adopts this amendment and that fails to be an eligible employer for any subsequent year, is treated
as an eligible employer for the 2 years following the last year the employer was an eligible employer. If the failure is due to
any acquisition, disposition, or similar transaction involving an eligible employer, the preceding sentence applies only if the
provisions of § 410(b)(6)(C)(i) are satisfied.
(b) No contributions are made, or benefits accrued for services during the year, on behalf of any eligible employee under any
other plan, contract, pension, or trust described in § 219(g)(5)(A) or (B), maintained by the employer.
1.3 To the extent that any other provision of the plan is inconsistent with the provisions of this amendment, the provisions of
this amendment govern.
SECTION II. DEFINITIONS
2.1 ‘‘Compensation’’ means, for purposes of sections 1.2(a), 3.1 and 3.2, the sum of the wages, tips, and other compensation
from the employer subject to federal income tax withholding (as described in § 6051(a)(3)) and the employee’s salary reduction
contributions made under this or any other 401(k) plan, and, if applicable, elective deferrals under a § 408(p) SIMPLE plan, a
SARSEP, or a § 403(b) annuity contract and compensation deferred under a § 457 plan, required to be reported by the
employer on Form W–2 (as described in § 6051(a)(8)). For self-employed individuals, compensation means net earnings from
57

self-employment determined under § 1402(a) prior to subtracting any contributions made under this plan on behalf of the
individual. The provisions of the plan implementing the limit on compensation under § 401(a)(17) apply to the compensation
under Section III.
2.2 ‘‘Eligible employee’’ means, for purposes of this amendment, any employee who is entitled to make elective deferrals
described in § 402(g) under the terms of the plan.
2.3 ‘‘Year’’ means the calendar year.
SECTION III. CONTRIBUTIONS
3.1 Salary Reduction Contributions
(a) Each eligible employee may make a salary reduction election to have his or her compensation reduced for the year in
any amount selected by the employee subject to the limitation in section 3.1(b). The employer will make a salary reduction
contribution to the plan, as an elective deferral, in the amount by which the employee’s compensation has been reduced.
(b) The total salary reduction contribution for the year cannot exceed $6,000 for any employee. To the extent permitted by
law, this amount will be adjusted to reflect any annual cost-of-living increases announced by the IRS.
3.2 Other Contributions
(a) Matching Contributions—Each year, the employer will contribute a matching contribution to the plan on behalf of each
employee who makes a salary reduction election under section 3.1. The amount of the matching contribution will be equal to
the employee’s salary reduction contribution up to a limit of 3% of the employee’s compensation for the full calendar year.
(b) Nonelective Contribution—For any year, instead of a matching contribution, the employer may elect to contribute a
nonelective contribution of 2% of compensation for the full calendar year for each eligible employee who received at least
$5,000 of compensation from the employer for the year. By inserting a number less than $5,000 here
, the employer
agrees to substitute this lesser amount for the $5,000 amount in the preceding sentence.
3.3 Limitation on Other Contributions
(a) General rule—No employer or employee contributions may be made to this plan for the year other than salary reduction
contributions described in section 3.1, matching or nonelective contributions described in section 3.2 and rollover contributions
described in § 1.402(c)–2, Q&A–1(a) of the Income Tax Regulations.
(b) 1997 Transition Rule—If the employer has maintained this plan during 1997 prior to adopting this amendment, then
contributions made prior to the amendment are treated as made under sections 3.1 and 3.2 provided that: (i) the employer
adopts the 401(k) SIMPLE provisions by July 1, 1997, effective as of January 1, 1997; (ii) the salary reduction contributions
for the year made prior to adoption of the amendment do not total more than $6,000 for any employee; (iii) the other
contributions set forth in section 3.2 are of inherently equal or greater value than the contributions required under the plan prior
to the amendment; and (iv) for 1997, the 60-day election period requirement described in sections 4.1(a) and (b) is deemed
satisfied if the employee may make or modify a salary reduction election during a 60-day election period that begins no later
than 30 days after the amendment is adopted but in no event later than July 1, 1997.
3.4 The provisions of the plan implementing the limitations of § 415 apply to contributions made pursuant to sections 3.1
and 3.2.
SECTION IV. ELECTION AND NOTICE REQUIREMENTS
4.1 Election Period
(a) In addition to any other election periods provided under the plan, each eligible employee may make or modify a salary
reduction election during the 60-day period immediately preceding each January 1.
(b) For the year an employee becomes eligible to make salary reduction contributions under this amendment, the 60-day
election period requirement of section 4.1(a) is deemed satisfied if the employee may make or modify a salary reduction
election during a 60-day period that includes either the date the employee becomes eligible or the day before.
(c) Each employee may terminate a salary reduction election at any time during the year.
4.2 Notice Requirements
(a) The employer will notify each eligible employee prior to the 60-day election period described in section 4.1 or 3.3(b)(iv)
that he or she can make a salary reduction election or to modify a prior election during that period.
(b) The notification described in section 4.2(a) will indicate whether the employer will provide a 3% matching contribution
described in section 3.2(a) or a 2% nonelective contribution described in section 3.2(b).
SECTION V. VESTING REQUIREMENTS
All benefits attributable to contributions made pursuant to this amendment are nonforfeitable at all times.
SECTION VI. TOP-HEAVY RULES
The plan is not treated as a top-heavy plan under § 416 for any year for which the provisions of this amendment are
effective and satisfied.
SECTION VII. NONDISCRIMINATION TESTS
The plan is treated as meeting the requirements of §§ 401(k)(3)(A)(ii) and 401(m)(2) for any year for which the provisions
of this amendment are effective and satisfied.
58

SECTION VIII. EFFECTIVE DATE
This amendment is effective on
.
Employer NameBy: Signature
Name and Title
Date
MODEL REVOCATION CLAUSE
This amendment is revoked effective as of the first day of the calendar year following
(enter the date the revocation is adopted).
Employer NameBy: Signature
Name and Title
Date
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 56, 168, 446, 481; 1.446–1.)
Rev. Proc. 97–10
SECTION 1. PURPOSE
This revenue procedure provides the
exclusive procedure for making the elec-
tion under § 1120 of the Small Business
Job Protection Act of 1996 (the Act) to
treat a retail motor fuels outlet placed in
service before August 20, 1996, as 15-
year property under § 168 of the Inter-
nal Revenue Code. The election set
forth in this revenue procedure is avail-
able only for the taxpayer’s taxable year
that includes August 20, 1996, the date
of enactment of the Act.
SECTION 2. BACKGROUND
.01 Section 1120 of the Act amended
§ 168(e)(3)(E) to provide that 15-year
property includes any § 1250 property
that is a retail motor fuels outlet
whether or not food or other conve-
nience items are sold at the outlet. The
legislative history of the Act provides
that property will qualify as a retail
motor fuels outlet if 50 percent or more
of the gross revenues generated from the
property are derived from petroleum
sales, or 50 percent or more of the floor
space in the property is devoted to
petroleum marketing sales. A motor fu-
els outlet of 1400 square feet or less
qualifies as a retail motor fuels outlet
under the Act without application of
either 50 percent test. If the property
initially meets (or fails to meet) the
50-percent test but subsequently fails to
meet (or meets) the test for more than a
temporary period, such failure (or quali-
fication) is treated as a change in the
use of property to which § 168(i)(5)
applies. S. Rep. No. 281, 104th Cong.,
2nd Sess. 14–16 (1996).
Section 1120 of the Act also amended
§ 168(g)(3)(B) to provide that the re-
covery period for a retail motor fuels
outlet is 20 years under the alternative
depreciation system of § 168(g).
.02 Section 1120 of the Act applies to
property depreciable under § 168 that is
placed in service on or after August 20,
1996. Section 1120 of the Act also
provides that a taxpayer may elect, in
the form and manner prescribed by the
Secretary of the Treasury, to apply
§ 1120 to property depreciable under
§ 168 that was placed in service before
August 20, 1996. The legislative history
of the Act provides that the Secretary
may treat the election as a change in the
taxpayer’s method of accounting for the
property and provide rules similar to
those provided in Rev. Proc. 96–31,
1996–1 C.B. 714. The legislative history
further provides that if a taxpayer has
already treated the property as 15-year
property the taxpayer will be deemed to
have made the election for that property.
.03 For certain changes in methods of
accounting for depreciation, Rev. Proc.
96–31 provides an automatic, prospec-
tive method change under which the
§ 481(a) adjustment is taken into ac-
count in computing the taxable income
in the year of change.
.04 Except as otherwise expressly
provided, a taxpayer must obtain the
consent of the Commissioner of Internal
Revenue to change a method of ac-
counting for federal income tax pur-
poses. To obtain this consent, a Form
3115, Application for Change in Ac-
counting Method, generally must be
filed within 180 days after the beginning
of the taxable year in which the pro-
posed change is to be made. Section
446(e) and § 1.446–1(e)(2)(i) and (3)(i)
of the Income Tax Regulations.
.05 The Commissioner is authorized
to prescribe administrative procedures
setting forth the limitations, terms, and
conditions the Commissioner deems
necessary to obtain consent for effecting
a change in method of accounting and
to prevent amounts from being dupli-
cated or omitted, including the taxable
year or years in which the § 481(a)
adjustment is to be taken into account.
Section 1.446–1(e)(3)(ii).
.06 In computing taxable income,
§ 481(a) requires a taxpayer to take into
account those adjustments necessary to
prevent amounts from being duplicated
or omitted when the taxpayer’s taxable
income is computed under a method of
accounting different from the method
used to compute taxable income for the
preceding taxable year.
SECTION 3. SCOPE
.01 Except as otherwise provided in
section 3.02 of this revenue procedure,
this revenue procedure applies to
§ 1250 property that: (1) qualifies as a
retail motor fuels outlet as described in
59

section 2.01 of this revenue procedure;
(2) is depreciable under § 168; (3) was
placed in service before August 20,
1996; and (4) was not treated as 15-year
property under § 168 in all taxable
years since the property was placed in
service or, if the property changed its
use from or to a retail motor fuels
outlet, in all taxable years in which the
property was a retail motor fuels outlet.
.02 This revenue procedure does not
apply to: (1) any property depreciable
under § 168 prior to its amendment by
the Tax Reform Act of 1986; or (2) any
property for which the taxpayer will be
deemed to have made the retail motor
fuels outlet election. A taxpayer will be
deemed to have made this election for:
(i) property placed in service before the
year of change (as defined in section
5.02 of this revenue procedure) that was
treated as 15-year property under § 168
in all taxable years since the property
was placed in service or, if the property
changed its use from or to a retail motor
fuels outlet, in all taxable years in which
the property was a retail motor fuels
outlet; and (ii) property placed in ser-
vice during the year of change (or the
immediately preceding taxable year) but
before August 20, 1996, that was or will
be treated as 15-year property under
§ 168 on the taxpayer’s original tax
return for the year of change (or the
immediately preceding taxable year).
SECTION 4. RETAIL MOTOR FUELS
OUTLET ELECTION
.01In general.A taxpayer may elect
to treat § 1250 property within the
scope of this revenue procedure as 15-
year property for § 168 purposes. This
election may be made separately for
each property and, once made, is irrevo-
cable.
.02Effect of election.If a taxpayer
makes the retail motor fuels outlet elec-
tion, the taxpayer must change to a
permissible depreciation method, recov-
ery period, and convention under § 168
for the property. Under the general de-
preciation system of § 168(a), 15-year
property generally is depreciated by us-
ing the 150-percent declining balance
method of depreciation and a 15-year
recovery period. Under the alternative
depreciation system of § 168(g), a retail
motor fuels outlet is depreciated by
using the straight-line method of depre-
ciation and a 20-year recovery period.
Under both depreciation systems, the
convention is the half-year convention
unless the mid-quarter convention ap-
plies. The retail motor fuels outlet elec-
tion does not revoke any elections previ-
ously made by the taxpayer under § 168
or enable the taxpayer to make a late
election to use the straight-line method
or the alternative depreciation system.
However, if the taxpayer has no other
15-year property (as defined under
§§ 168(e)(1) and 168(e)(3)(E)(i) and
(ii)) that was placed in service during
the same taxable year as the retail motor
fuels outlet, the taxpayer may elect to
use the straight-line method or the alter-
native depreciation system for the retail
motor fuels outlet.
The retail motor fuels outlet election
also requires the taxpayer to use a
20-year recovery period and the straight-
line method for the property for alterna-
tive minimum tax purposes.See
§ 168(g)(3)(B).
SECTION 5. CHANGE IN METHOD
OF ACCOUNTING
.01Consent.The retail motor fuels
outlet election for any property within
the scope of this revenue procedure is a
change in method of accounting. Under
§ 1.446–1(e)(2)(i), the consent of the
Commissioner is hereby granted to tax-
payers to make this method change for
§ 1250 property within the scope of this
revenue procedure. This consent is
granted for the taxpayer’s year of
change. The consent is conditioned,
however, on the taxpayer’s complying
with this section and section 4 of this
revenue procedure. If the taxpayer does
not comply with these sections, the
taxpayer will be deemed to have initi-
ated a change in method of accounting
without obtaining the consent of the
Commissioner required under § 446(e).
.02Year of change.The year of
change is the taxpayer’s taxable year
that includes August 20, 1996, the date
of enactment of the Act.
.03Section 481(a) adjustment.
(1)Amount of § 481(a) adjust-
ment.The § 481(a) adjustment may be
a positive § 481(a) adjustment (increase
in taxable income) or negative § 481(a)
adjustment (decrease in taxable income).
The adjustment equals the difference
between the total amount of depreciation
taken into account in computing taxable
income for the property under the tax-
payer’s present method of accounting,
and the total amount of depreciation
allowable for the property under the
taxpayer’s proposed method of account-
ing, for any taxable year prior to the
year of change. However, if the taxpay-
er’s property underwent a change in use
as described in section 2.01 of this
revenue procedure, the § 481(a) adjust-
ment must only take into account those
taxable years the property qualified as a
retail motor fuels outlet.
(2)Section 481(a) adjustment pe-
riod.In computing taxable income, a
taxpayer must take into account (a) the
entire net negative § 481(a) adjustment
in the year of change, or (b) any net
positive § 481(a) adjustment ratably
over 3 years, beginning with the year of
change.
(3)Alternative minimum tax.The
amounts of the § 481(a) adjustments for
regular tax and alternative minimum tax
purposes may differ. The § 481(a) ad-
justment relating to the alternative mini-
mum taxable income will be included in
the computation of the alternative mini-
mum taxable income over the same
§ 481(a) adjustment period applicable
under section 5.03(2) of this revenue
procedure. The difference between the
two § 481(a) adjustments will require
an adjustment to taxable income in
order to arrive at alternative minimum
taxable income. See Form 6251 (Alter-
native Minimum Tax—Individuals) and
Form 4626 (Alternative Minimum Tax—
Corporations).
.04Manner of making method
change.
(1)Complete and file a current
Form 3115.The retail motor fuels outlet
election is made on the taxpayer’s
timely filed (including extensions) origi-
nal federal income tax return for the
year of change or on an amended return
for the year of change filed no later than
* . The election is made by
attaching a completed, current Form
3115 to the taxpayer’s original or
amended return for the year of change.
The requirement to file a Form 3115
within 180 days after the beginning of
the year of change is waived in accor-
dance with § 1.446–1(e)(3)(ii). In addi-
tion, a copy of the Form 3115 must be
filed with the national office no later
than when the original Form 3115 is
filed with the federal income tax return
or the amended return. The copy should
be sent to the Commissioner of Internal
Revenue, Attention: Office of Assistant
Chief Counsel (Passthroughs and Spe-
cial Industries) CC:DOM:P&SI, P.O.
Box 7604, Benjamin Franklin Station,
Washington, D.C. 20024.
* Insert the date that is 180 days after the
publication of this revenue procedure.
60

If more than one member of a
consolidated group is making the retail
motor fuels outlet election, the parent
corporation may file a single Form 3115
on behalf of the members of the con-
solidated group making the election in
accordance with Rev. Proc. 92–90,
1992–2 C.B. 501 (or any successor). See
section 5.02 of Rev. Proc. 92–90 for the
information required to be submitted
with the Form 3115.
In completing the current Form
3115 (Rev. February 1996), the taxpayer
must complete Schedule D, Part II,
Change in Depreciation or Amortization
(page 7 of the Form 3115), and any
other applicable schedule. With respect
to Parts I through III on pages 1 and 2
of the Form 3115 the taxpayer must
provide only the information requested
on the following lines:
(a) Part I, Eligibility To Request
Change (page 1)-lines 1, 2a, 2b, 3a, 4a,
5a, and 6;
(b) Part II, Description of
Change (page 2)-lines 7, 8, and 10; and
(c) Part III, Section 481(a) Ad-
justment (page 2)-lines 20, 22, 23, and
25. Include on line 20 the amounts of
the § 481(a) adjustments for regular tax
and alternative minimum tax purposes.
The taxpayer does not have to complete
Part IV, Additional Information (page 3).
(2)No user fee.No user fee is
required for a Form 3115 filed under
this revenue procedure.
.05Basis adjustment.As of the be-
ginning of the year of change, the basis
of the property for which the retail
motor fuels outlet election is made must
reflect the reductions required by
§ 1016(a)(2) for the depreciation allow-
able for the property (as determined
under the taxpayer’s proposed method
of accounting) for all open and closed
years prior to the year of change.
.06Protection from examination
changes.
(1)In general.If a taxpayer timely
files a completed Form 3115 to change
its method of accounting in the manner
described in this revenue procedure and
otherwise complies with the provisions
of this revenue procedure, the district
director may not propose that the tax-
payer change the same method of ac-
counting as that changed by the tax-
payer under this revenue procedure for a
year prior to the year of change pre-
scribed in this revenue procedure. The
district director, however, may verify the
facts underlying the method change,
including whether the property qualifies
as a retail motor fuels outlet, the
amounts of the regular tax and alterna-
tive minimum tax § 481(a) adjustments,
the § 481(a) adjustment period, and the
§ 1016(a)(2) adjustment to the basis of
the property.
(2)Taxpayer under examination,
before an appeals office, or before a
federal court.If a change in method of
accounting under this revenue procedure
results in a positive § 481(a) adjustment
for an item of property, a taxpayer does
not receive the protection from examina-
tion changes described in section 5.06(1)
of this revenue procedure for that prop-
erty if, on** , the method of
accounting is an issue:
(a) under consideration with re-
spect to an examination of the taxpay-
er’s federal income tax return for any
taxable year. The issue is under consid-
eration if the taxpayer has received
written notification from the examining
agent(s) (e.g., by examination plan, in-
formation document request, notification
of proposed adjustments or income tax
examination changes) specifically citing
the method of accounting as an issue
under consideration for the taxable
year(s) under examination;
(b) before an appeals office of
the Internal Revenue Service with re-
spect to an examination of the taxpay-
er’s federal income tax return for any
taxable year; or
(c) before a federal court.
SECTION 6. EFFECTIVE DATE
.01In general. This revenue proce-
dure is effective for a taxpayer’s taxable
year that includes August 20, 1996, the
date of enactment of the Act.
.02Form 3115 pending with the Ser-
vice.Because this revenue procedure
provides the exclusive procedure for
making the retail motor fuels outlet
election, the national office will return
any Form 3115 filed with the national
office under Rev. Proc. 92–20, 1992–1
C.B. 685, or Rev. Proc. 96–31 for a
change in method of accounting within
the scope of this revenue procedure. A
taxpayer that has timely filed a Form
3115 with the national office prior to the
publication date of this revenue proce-
dure must use this revenue procedure
and will be so notified to this effect by
the national office. If all of the property
subject to the Form 3115 appears to be
within the scope of this revenue proce-
dure, any user fee submitted with the
Form 3115 will be returned to the
taxpayer.
.03Claim for refund pending with the
Service.Because this revenue procedure
provides the exclusive procedure for
making the retail motor fuels outlet elec-
tion provided by § 1120 of the Act, the
Service will deny any claim for refund
that is filed to make this election, except
for any amended return filed under sec-
tion 5.04(1) of this revenue procedure.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 92–20, 1992–1 C.B. 685,
is modified.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Mark Pitzer of the Office
of Assistant Chief Counsel
(Passthroughs and Special Industries).
For further information regarding this
revenue procedure, contact Mark Pitzer
at (202) 622–3110 (not a toll-free call).
** Insert the date of publication of this revenue
procedure.
61

Part IV. Items of General Interest
Extension of Test of Mediation
Procedure for Appeals
Announcement 97–1
SUMMARY: This document extends the
test of the mediation procedure set forth
in Announcement 95–86, 1995–44
I.R.B. 27, for an additional one-year
period beginning on January 13, 1997.
FOR FURTHER INFORMATION CON-
TACT: Thomas Carter Louthan, Director,
Office of Dispute Resolution and Spe-
cialty Programs, National Office Appeals,
(202) 401–4098 (not a toll-free number).
EXTENSION OF TEST OF
MEDIATION PROCEDURE FOR
APPEALS
Summary:This procedure allows tax-
payers, in certain cases that are already
in the Appeals administrative process
and that are not docketed in any court,
to request mediation of one or more
issues as a dispute resolution technique.
Under the procedure, the taxpayer and
Appeals attempt to negotiate a settle-
ment, assisted by an objective and neu-
tral third party who has no authority to
impose a decision. This document ex-
tends the test of the mediation procedure
set forth in Announcement 95–86 for an
additional one-year period.
Background:Announcement 95–86,
which contains the procedures that tax-
payers may use to request mediation,
applies to issues in Coordinated Exami-
nation Program cases assigned to Ap-
peals Team Chiefs. A one-year test of
the mediation procedure concluded on
October 30, 1996. During this period,
nine requests for mediation were made,
in which four were approved. The me-
diation program is consistent with IRS’
efforts to improve tax administration,
provide customer service and reduce
taxpayer burden. During the additional
one-year test period, Appeals will try
mediation in more cases so that the
program can be further evaluated.
Effective Date:This Announcement ex-
tends the test of the mediation procedure
set forth in Announcement 95–86 for an
additional one-year period beginning on
January 13, 1997.
For further information contact:Tho-
mas Carter Louthan, Director, Office of
Dispute Resolution and Specialty Pro-
grams, National Office Appeals, (202)
401–4098 (not a toll-free number).
Change to Schedule Q
Announcement 97–2
This announcement modifies Schedule
Q (January 1996) of the Form 5300
series applications to reflect amend-
ments to § 401(a)(26) of the Internal
Revenue Code made by § 1432 of the
Small Business Job Protection Act of
1996 (SBJPA), effective for plan years
beginning after December 31, 1996.
Beginning with the 1997 plan year,
the minimum participation requirements
of § 401(a)(26) apply only to defined
benefit plans. Therefore, until the appli-
cation form is revised, applicants re-
questing a determination letter for a
defined contribution plan for plan years
beginning after December 31, 1996,
may answer ‘‘Yes’’ to questions 2a and
2i of Part II of Schedule Q (January
1996). The additional information de-
scribed in the instruction to line 2(a)
(Demo 2) need not be submitted for
defined contribution plans.
Applicants should note that
§ 401(a)(26)(A)(ii) was amended by
SBJPA to require a plan to benefit at
least 2 employees (or 1 employee if
there is only 1 employee) for plan years
after December 31, 1996. Schedule Q
does not reflect this modification to
§ 401(a)(26)(A)(ii).
Deletions From Cumulative List of
Organizations Contributions to
Which are Deductible Under
Section 170 of the Code
Announcement 97–3
The name of an organization that no
longer qualifies as an organization de-
scribed in section 170(c)(2) of the Inter-
nal Revenue Code of 1986 is listed
below.
Generally, the Service will not disal-
low deductions for contributions made
to a listed organization on or before the
date of announcement in the Internal
Revenue Bulletin that an organization
no longer qualifies. However, the Ser-
vice is not precluded from disallowing a
deduction for any contributions made
after an organization ceases to qualify
under section 170(c)(2) if the organiza-
tion has not timely filed a suit for
declaratory judgment under section 7428
and if the contributor (1) had knowledge
of the revocation of the ruling or deter-
mination letter, (2) was aware that such
revocation was imminent, or (3) was in
part responsible for or was aware of the
activities or omissions of the organiza-
tion that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed,
contributions from individuals and orga-
nizations described in section 170(c)(2)
that are otherwise allowable will con-
tinue to be deductible. Protection under
section 7428(c) would begin on (DATE)
1997, and would end on the date the
court first determines that the organiza-
tion is not described in section 170(c)(2)
as more particularly set forth in section
7428(c)(1). For individual contributors,
the maximum deduction protected is
$1,000, with a husband and wife treated
as one contributor. This benefit is not
extended to any individual who was
responsible, in whole or in part, for the
acts or omissions of the organization that
were the basis for revocation.
H & M Home for Alternative Living
Detroit, MI
621997-2 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as ‘‘rulings’’)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplifieddescribes a situation where
no change is being made in a prior
published position, but the prior position
is being extended to apply to a variation
of the fact situation set forth therein.
Thus, if an earlier ruling held that a
principle applied to A, and the new
ruling holds that the same principle also
applies to B, the earlier ruling is ampli-
fied. (Compare withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an es-
sential difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered de-
terminative with respect to future trans-
actions. This term is most commonly
used in a ruling that lists previously
published rulings that are obsoleted be-
cause of changes in law or regulations.
A ruling may also be obsoleted because
the substance has been included in regu-
lations subsequently adopted.
Revokeddescribes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Supersededdescribes a situation
where the new ruling does nothing more
than restate the substance and situation
of a previously published ruling (or
rulings). Thus, the term is used to
republish under the 1986 Code and
regulations the same position published
under the 1939 Code and regulations.
The term is also used when it is desired
to republish in a single ruling a series of
situations, names, etc., that were previ-
ously published over a period of time in
separate rulings. If the new ruling does
more than restate the substance of a
prior ruling, a combination of terms is
used. For example,modifiedandsuper-
sededdescribes a situation where the
substance of a previously published rul-
ing is being changed in part and is
continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is su-
perseded.
Supplementedis used in situations in
which a list, such as a list of the names
of countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be
published that includes the list in the
original ruling and the additions, and
supersedes all prior rulings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and
formerly used will appear in material published in
the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
66

Numerical Finding List
1
Bulletin 1997–1
Notices:
97–3, 1997–1 I.R.B.8
97–7, 1997–1 I.R.B.8
Revenue Procedures:
97–1, 1997–1 I.R.B.11
97–2, 1997–1 I.R.B.64
97–3, 1997–1 I.R.B.84
97–4, 1997–1 I.R.B.96
97–5, 1997–1 I.R.B. 132
97–6, 1997–1 I.R.B.153
97–7, 1997–1 I.R.B.185
97–8, 1997–1 I.R.B.187
1
A cumulative list of all Revenue Rulings, Rev-
enue Procedures, Treasury Decisions, etc., pub-
lished in Internal Revenue Bulletins 1996–1
through 1996–26 will be found in Internal Rev-
enue Bulletin 1996–27, dated July 1, 1996.

Finding List of Current Action on
Previously Published Items
1
Bulletin 1997–1
*Denotes entry since last publication
Revenue Procedures:
92–20
Superseded by
97–1, 1997–1 I.R.B.11
92–90
Superseded by
97–1, 1997–1 I.R.B.11
96–1
Superseded by
97–1, 1997–1 I.R.B.11
96–2
Superseded by
97–2, 1997–1 I.R.B.64
96–3
Superseded by
97–3, 1997–1 I.R.B.84
96–4
Superseded by
97–4, 1997–1 I.R.B.96
96–5
Superseded by
97–5, 1997–1 I.R.B.132
96–6
Superseded by
97–6, 1997–1 I.R.B.153
96–7
Superseded by
97–7, 1997–1 I.R.B.185
96–8
Superseded by
97–8, 1997–1 I.R.B.187
96–12
Superseded by
97–3, 1997–1 I.R.B.84
96–22
Superseded by
97–3, 1997–1 I.R.B.84
96–34
Superseded by
97–3, 1997–1 I.R.B.84
96–39
Superseded by
97–3, 1997–1 I.R.B.84
96–43
Superseded by
97–3, 1997–1 I.R.B.84
96–56
Superseded by
97–3, 1997–1 I.R.B.84
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1996–27 through 1996–53 will be found in Inter-
nal Revenue Bulletin 1996–27, dated January 6,
1997.
64