Internal Revenue Bulletin 1996-52 (PDF rendition): IRS Revenue Rulings

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INCOME TAX
Rev. Rul. 96–61, page 24.
Interest rates; underpayments and overpayments.
The rate of interest determined under section 6621 of
the Code for the calendar quarter beginning January 1,
1997, will be 8 percent for overpayments, 9 percent for
underpayments, and 11 percent for large corporate
underpayments. The rate of interest paid on the portion
of a corporate overpayment exceeding $10,000 is 6.5
percent.
T.D. 8687, page 4.
Final regulations under section 863 of the Code governs
the source of income from sales of natural resources or
other inventory produced in and sold outside the United
States.
Notice 96–68, page 30.
Definitions relating to application of exclusion under
section 127.This notice provides guidance regarding
the definitions of the terms “graduate level course” and
“courses beginning.”
EXEMPT ORGANIZATIONS
Announcement 96–131, page 32.
A list is given of organizations now classified as private
foundations.
ESTATE TAX
T.D. 8686, page 14.
Final regulations provide guidance relating to the addi-
tional requirements necessary to ensure the collection
of estate taxes imposed under section 2056A of the
Code with respect to taxable events involving qualified
domestic trusts (QDOTs).
EXCISE TAX
Announcement 96–130, page 32.
Effective after December 31, 1996, the tax rates for
aviation gasoline and aviation fuel taxes have changed.
The rate and base amount imposed on luxury passenger
vehicles have also changed. Ozone-depleting chemical
rates for 1997 are included in this announcement. Also,
excise taxes on transportation expire December 31,
1996.
ADMINISTRATIVE
Notice 96–65, page 28.
This notice provides guidance for certain provisions of
the Small Business Job Protection Act of 1996 (the
“Act”) dealing with the status of a trust as domestic or
foreign under sections 7701(a)(30) and 7701(a)(31) of
the Code. This notice grants taxpayers additional time to
comply with the new domestic trust criteria contained in
the Act and announces the time and manner for making
an election to apply the new trust criteria retroactively.
Also, guidance regarding the application of sections
1491 through 1494 of the Code is provided if the status
of a trust changes from domestic to foreign.
Announcement 96–132, page 33.
Orthopaedic Development Foundation, Hilton Head, SC,
no longer qualifies as an organization to which contribu-
tions are deductible under section 170 of the Code.
Finding Lists begin on page 36.
Announcement of Disbarments and Suspensions begins on page 34.
Bulletin No. 1996–52
December 23, 1996
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be relied
upon as authoritative interpretations.

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

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

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 863.—Special Rules for
Determining Source
26 CFR 1.863–3: Allocation and apportionment of
income from certain sales of inventory.
T.D. 8687
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Source of Income From Sales of
Inventory and Natural Resources
Produced in One Jurisdiction and
Sold in Another Jurisdiction
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
regulations governing the source of in-
come from sales of natural resources or
other inventory produced in the United
States and sold outside the United States
or produced outside the United States
and sold in the United States. This
document affects persons who produce
natural resources or other inventory in
the United States and sell outside the
United States, or produce natural re-
sources or other inventory outside the
United States and sell in the United
States.
EFFECTIVE DATE: December 30,
1996.
Applicability: Taxpayers may apply
these regulations for taxable years be-
ginning after July 11, 1995, and on or
before December 30, 1996.
FOR FURTHER INFORMATION CON-
TACT: Anne Shelburne, (202) 622–3880
(not a toll free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this final regulation has been
reviewed and approved by the Office of
Management and Budget in accordance
with the requirements of the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–1476. Responses
to this collection of information are
mandatory.
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 estimated average annual burden
per respondent is approximately 2.6
hours.
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 theOffice
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 this col-
lection of information must be retained
as long as their contents may become
material in the administration of any
internal revenue law. Generally, tax re-
turns and tax return information are
confidential, as required by 26 U.S.C.
6103.
Background
This document contains final regula-
tions to be added to the Income Tax
Regulations (26 CFR part 1) under
section 863 of the Internal Revenue
Code (Code). The final regulations pro-
vide rules for allocating and apportion-
ing income between U.S. and foreign
sources from natural resources and other
inventory produced in the United States
and sold outside the United States, or
produced outside the United States and
sold in the United States.
On December 11, 1995, proposed
regulations [INTL–0003–95 (1996–1
C.B. 831)] were published in theFed-
eral Register(60 FR 63478). The IRS
received written comments on the pro-
posed regulations and held a public
hearing on April 10, 1996. Having con-
sidered the comments and the statements
made at the hearing, the IRS and the
Treasury Department adopt the proposed
regulations as modified by this Treasury
decision. The comments and revisions
are discussed below.
Explanation of Provisions
I. Allocation of gross income from sales
of natural resources under section 863(a)
Section 1.863–1(b) of the proposed
regulations relate to the rules governing
natural resources. The proposed regula-
tions provide three methods for deter-
mining the amount of United States or
foreign source income from sales of
natural resources. One method (derived
from the existing regulations) sources
income in its entirety to the location of
the natural resources, and applies where
the taxpayer does not engage in substan-
tial additional production beyond pro-
duction of the natural resources. The
second method, the export terminal rule,
splits sales income at the export termi-
nal, sourcing gross receipts equal to the
fair market value at the export terminal
to the location of the natural resources,
and gross receipts in excess of that
amount either to the place of sale or
according to the rules in § 1.863–3,
depending on the circumstances. The
third method requires taxpayers per-
forming additional production in the
country where the natural resources are
located, to split gross receipts at the
point of the additional production,
sourcing gross receipts equal to the fair
market value prior to that point to the
location of the natural resources and
gross receipts in excess of that amount
according to the rules in § 1.863–3.
1. Implications of the Tenth Circuit’s
Order inPhillips
Section 1.863–1(b)(1)(i) of the pro-
posed regulations sources certain income
from natural resources in its entirety to
the location of the resources. The pre-
amble to the proposed regulations states
that Treasury and the IRS would con-
sider the Tenth Circuit’s unpublished
opinion in its Order and Judgment in
Phillips Petroleum v. Comm’r, 97 T.C.
30 (1991), 101 T.C. 78 (1993),aff’d.
without published opinion, 70 F.3d 1282
(10th Cir., 1995), in finalizing the regu-
lations. InPhillips, the Tax Court ruled
§ 1.863–1(b)’s natural resource regula-
tion, generally sourcing income from
U.S. natural resources in its entirety to
the United States, invalid to the extent it
conflicted with the Court’s interpretation
of section 863(b)(2). That section pro-
vides that gains, profits and income
from the sale of inventory property
produced within and sold without the
United States (or vice versa) shall be
treated as derived partly from sources
within and partly from sources without
the United States. The Tenth Circuit
affirmed the Tax Court.
In view ofPhillips, the final regula-
tions modify the proposed regulations to
eliminate the 100 percent allocation rule,
making the determination of the source
of income subject instead to the export
terminal rule. Thus, gross receipts equal
4

to the fair market value of the product
at the export terminal are allocated to
the location of the farm, mine, well,
deposit or uncut timber, with the source
of gross receipts from such sales in
excess of the product’s fair market value
at the export terminal allocated to the
country of sale.
Several commentators requested that
any change to the natural resource rules
made in light ofPhillipsbe done in
proposed form, providing opportunity to
comment on the regulations. However,
because the final regulations merely
eliminate the rule which required a
single source of income for sales of
natural resources, and because Treasury
and the IRS believe that there has been
adequate opportunity to comment on the
proposed regulations’ export terminal
rule, the natural resources rules are
issued in final form.
2. Availability of the 50/50 method for
natural resources
Several commentators wrote that there
is no basis for treating natural resources
differently than other inventory. There-
fore, producers of natural resources
should be permitted to determine the
source of their income under the 50/50
method described in § 1.863–3(b)(1).
They point to legislation enacted in the
Tax Reform Act of 1986, arguing that
Congress, in enacting section 865 to
govern personal property sales, drew no
distinction between sales of natural re-
sources and sales of other inventory.
Commentators have also pointed to sec-
tion 865(b), enacted in 1993, providing
that income from sales of U.S. softwood
must be U.S. source in its entirety. They
conclude that Congress was aware of
the Tax Court’s decision inPhillips,
overrulingPhillipsonly for softwood,
but intending that all other natural re-
sources be sourced under the 50/50
method.
Treasury and the IRS do not believe
that Congress in the 1986 Act evidenced
an intent to source all income from sales
of natural resources under the 50/50
method. Rather, Congress merely re-
ferred to the 50/50 method to generally
describe the methods for sourcing in-
come from certain types of inventory
sales. In addition, the legislative history
to the 1993 Act, requiring income from
softwood sales to be allocated in its
entirety to the United States, does not
suggest that Congress intended to over-
turn the longstanding regime governing
sales of other natural resources. More-
over, the Small Business Job Protection
Act of 1996, Public Law 104–188 (Au-
gust 20, 1996) (the 1996 Act), further
clarifies that the Service is not required
to apply the 50/50 method. Prior to the
1996 Act, section 865(b) provided that
income from inventory sales was to be
sourced under sections 861(a)(6),
862(a)(6), and 863(b). The 1996 Act, in
section 1704(f)(4)(A), amended Code
section 865(b)(2) by striking 863(b) and
inserting 863. The Act makes this
amendment effective as if included in
amendments made by section 1211 of
the Tax Reform Act of 1986 (Public
Law 99–514). This technical correction
to the 1986 Act clarifies that Treasury
has broad authority to provide rules
sourcing income from sales of inventory
under section 863, and is not restricted
to any particular method.
Treasury and the IRS also believe
longstanding distinctions have been
made in the tax treatment of natural
resources and other property, both in our
tax laws and in our tax treaties. Most
treaties, for example, grant primary or
exclusive taxing jurisdiction to the coun-
try where natural resources are located.
Thus, income from sales of natural
resources is treated differently than in-
come derived from sales of other inven-
tory, which is normally subject to the
business profits article of a treaty. See,
e.g., Article 6 of the United States
Model Income Tax Convention (Septem-
ber 20, 1996), which provides that in-
come from real property, ‘‘including
income from agriculture and forestry’’
may be taxed by the country where the
resources are located.
The legislative history to section
863’s predecessor, section 217(e) of the
Revenue Act of 1921, also reflects an
intention that natural resources be
treated differently from other property.
The House version of section 217 (H.R.
8245, 67th Cong., 1st Sess. (Aug.20,
1921)) included a provision sourcing
income from natural resources in its
entirety to the location of the resources.
However, based on testimony raising the
possibility of a case where such a single
source rule should not apply, the Senate
struck the provision that allocated all of
the income from natural resources to a
single country. (H.R. 8245 (67th Cong.,
1st Sess. (November 4, 1921)); Hearings
Before The Committee on Finance,
United States Senate, H.R. 8245, 67th
Cong., 1st Sess. (September 1 to Octo-
ber 1, 1921), at 309–310. A provision
similar to that considered by the House,
but with flexibility available for unusual
cases, was then added to the regulations
promulgated in 1922.
Thus, Treasury and the IRS believe
that income from natural resources
should be sourced differently than in-
come from other sales of inventory.
3. Clarification of language in
§ 1.863–2
In response to a comment, the final
regulations are modified to clarify that
the source of income from sales of
natural resources must be determined
solely under the rules set forth in
§ 1.863–1(b) of the final regulations.
Treasury and the IRS clarified this point
in corrections to the proposed regula-
tions, published on August 27, 1996, in
theFederal Register(61 FR 44023).
4. Additional production activities
The proposed regulations define addi-
tional production activities in § 1.863–
1(b)(3)(ii) as substantial production ac-
tivities performed by the taxpayer in
addition to activities relating to the
ownership or operation of any farm,
mine, oil or gas well, other natural
deposit, or timber. The proposed regula-
tions provide that generally the prin-
ciples of § 1.954–3(a)(4) apply in deter-
mining whether an activity qualifies as
such additional production. However, in
no case will activities that prepare the
natural resource itself for export, includ-
ing those that are designed to facilitate
transportation of the natural resource to
or from the export terminal, be consid-
ered additional production. Thus, the
proposed regulations in an example indi-
cate liquefaction of natural gas would
not constitute additional production ac-
tivities.
Liquefaction is the process of liquefy-
ing natural gas so that it can be trans-
ported by tanker for sales abroad. Sev-
eral commentators urged us to
reconsider our position, arguing that
liquefaction is an expensive, complex
activity. Treasury and the IRS, however,
continue to believe that liquefaction is
an activity preparing the natural re-
source itself for export within the mean-
ing of § 1.863–1(b)(3)(ii) of the final
regulations, and that it is appropriate to
exclude such activities from the defini-
tion of additional production. Even
though liquefaction may be an expen-
sive, complex process, liquefied natural
gas retains its character as a natural
resource, so that liquefaction should be
treated no differently than other pro-
cesses that prepare natural resources for
export.
5

Several commentators requested that
the regulations more precisely define the
processes that constitute production of
natural resources, to better differentiate
those activities described in § 1.863–
1(b)(1) of the proposed regulations, as
being from the ownership or operation
of any farm, mine, oil or gas well, other
natural deposit, or timber, from those
that qualify as additional production
activities within the meaning of
§ 1.863–1(b)(3)(ii) of the proposed
regulations. In particular, a commentator
requested that the final regulations spe-
cifically address this issue in the case of
mining. In response to this comment,
the final regulations include an example
describing certain mining processes that
would not qualify as additional produc-
tion activities in the case of copper.
5. Treatment of partnerships
The proposed regulations provide that,
in applying the rules in § 1.863–3 of
the proposed regulations, a partner
would be treated as engaged in the
production activity of its partnership.
However, that provision was not ex-
tended to § 1.863–1 of the proposed
regulations, which generally provides
rules for determining the source of in-
come from sales of natural resources.
The final regulations provide rules for
transactions involving partners and part-
nerships, which apply in the same man-
ner to sales of natural resources and to
sales of other inventory. See II. 3. of
this preamble for a discussion of those
rules.
6. Genetically-engineered agricultural
products
One commentator requested that final
regulations state that natural resources
do not include products, such as certain
seeds, where the premium value of the
product is derived from genetic traits
produced by biotechnology or traditional
methods, and the seeds themselves are
not grown for consumption. The inher-
ent nature of products as agricultural
products, however, does not change be-
cause they may be subject to research
and development. Because they remain
natural resources, Treasury and the IRS
rejected this comment.
II. Allocation and apportionment of
income from sales of inventory other
than natural resources
Section 1.863–3 of the proposed regu-
lations provides rules for allocating and
apportioning income from inventory
sales other than natural resources where
the taxpayer produces property in the
United States and sells outside the
United States, or produces property out-
side the United States and sells in the
United States (Section 863 Sales). The
proposed regulations provide three
methods: the 50/50 method, the indepen-
dent factory price method, and the
books and records method.
1. Sales in international waters or in
space
Consistent with the existing regula-
tions, the proposed regulations limit the
methods in § 1.863–3 to sales within a
foreign country. The preamble, however,
requests comments on whether the regu-
lation should be expanded to cover sales
made in international waters or in space.
Although the statute refers to sales out-
side the United States, Treasury and the
IRS expressed concern in that preamble
that expanding the scope of the regula-
tions to include all such sales could lead
to abuses where, for example, a tax-
payer produced goods in the United
States, passed title to those goods out-
side the United States, and then sold the
goods to U.S. customers. In considering
whether to expand the scope of the final
regulations to include such sales, Trea-
sury and the IRS requested comments
on whether to include an exception to
the title passage rule for sales of goods
produced in the United States and des-
tined for the U.S. market.
In response to comments and consis-
tent with the preamble to the proposed
regulations, the final regulations expand
the scope of the existing and proposed
regulations to include sales outside the
United States. Moreover, to prevent
abuse from this expanded rule, the final
regulations provide that sales of goods
wholly produced in the United States
and sold for use, consumption, or dispo-
sition in the United States, will be
considered to take place in the United
States. Income from such sales will be
treated as from U.S. sources. The final
regulations rely on rules in § 1.864–
6(b)(3)(ii) (relating to the determination
of whether foreign source income is
effectively connected with a U.S. trade
or business under section 864(c)(4)(iii)),
for determining the country of use,
consumption, or disposition. Also, prop-
erty will be treated as wholly produced
in the United States for this purpose if it
is subject to no more than packaging,
repackaging, labeling, or other minor
assembly operations outside the United
States. See also § 1.861–7(c) to deter-
mine the source of income in any case
in which the sales transaction is ar-
ranged in a particular manner for the
primary purpose of tax avoidance.
Treasury and the IRS are considering
whether the rules of the final regulations
are appropriate where a product is pro-
duced in one country but is destined for
use either on the high seas or in space.
Until additional guidance is provided,
taxpayers may rely upon the general
rules of the final regulations for these
cases.
2. Segregation and aggregation of sales
Once a taxpayer selects a method
under § 1.863–3(b) for dividing gross
income derived from Section 863 Sales
between production activity and sales
activity, § 1.863–3(a) of the proposed
regulations provide that a taxpayer must
separately apply that method to Section
863 Sales in the United States and to
Section 863 Sales outside the United
States. The proposed regulations also
provide in § 1.863–3(a) that taxpayers
must determine the source of gross
income under paragraph (c) and taxable
income under paragraph (d) by aggre-
gating all Section 863 Sales to which a
method described in paragraph (b) ap-
plies.
The final regulations clarify that the
rules of paragraphs (c) and (d) apply
separately to Section 863 Sales in the
United States and to Section 863 Sales
outside the United States, so that tax-
payers are required to aggregate all
Section 863 Sales under paragraphs (c)
and (d) after the taxpayer has first
separately applied the method under
paragraph (b) to Section 863 Sales in
the United States and to Section 863
Sales outside the United States.
3. Transactions with partnerships
The proposed regulations provide in
§ 1.863–3(a) that a taxpayer’s produc-
tion activity includes production activi-
ties conducted through a partnership of
which the taxpayer is a partner either
directly or through one or more partner-
ships. One commentator recommended
that final regulations extend the partner-
ship rules to natural resources. However,
the commentator suggested that an ag-
gregate approach to partnerships should
apply only in cases where the partner-
ship, instead of selling the property and
distributing the proceeds to the partner,
distributes the property to a partner. In
response to the comments, the final
regulations modify the proposed regula-
tions. Under the final regulations, the
6

aggregate approach applies to a partner-
ship’s production or sales activity only
for two purposes. First, the aggregate
approach applies for purposes of deter-
mining the source of a partner’s dis-
tributive share of partnership income.
Thus, if a partnership engages in the
production of inventory property in the
United States and sells such property
outside the United States, a partner will
be considered to have produced and sold
that inventory property in the same
manner as the partnership when deter-
mining the source of its distributive
share of such sales income. Second, the
aggregate approach applies for purposes
of sourcing income from the sale of
inventory property that is transferred in
kind from or to a partnership. Thus, for
example, where the partnership makes
an in kind distribution of inventory
property to its partners, the source of the
partner’s income from the sale of such
property is determined based on both its
own activity and on the partnership’s
activity. Similarly, the aggregate ap-
proach applies in cases where a partner
contributes inventory produced by it to
its partnership, if the partnership then
sells the inventory (e.g., as a distributor
or after further processing).
The entity approach applies for all
other purposes. For example, where a
partnership manufactures inventory
property and sells the property to one of
its partners, the source of that partner’s
income from the resale of the property
is determined without regard to the
partnership’s manufacturing activity.
Consistent with this modification, the
final regulations also specify that assets
owned by a partnership (or a partner)
are not deemed owned by the partner
(or the partnership) unless the aggregate
approach applies to the transaction at
issue.
4. Taxable income method
In response to comments, § 1.863–
2(b) of the proposed regulations is clari-
fied to provide that taxpayers may elect
the principles of § 1.863–3(b)(1) and (c)
to determine the source of taxable in-
come (rather than gross income) from
sales of inventory property.
5. Independent factory price (IFP)
method
One commentator requested clarifica-
tion that the sale establishing an IFP
must be sourced under the IFP method
only if a taxpayer elects the IFP method.
The proposed and final regulations in-
tend this result. The IFP method applies
to either the sale establishing the IFP or
to a sale applying the IFP only if the
taxpayer elects the IFP method.
The proposed regulations eliminated
the provision in existing regulations per-
mitting taxpayers to establish an IFP by
methods other than by sales to indepen-
dent distributors. The preamble, how-
ever, requested comments on the contin-
ued utility of such a provision. Two
commentators recommended that the
provision be retained and expanded to
permit taxpayers to establish an IFP by
any method that is appropriate under
section 482. The commentators stated
that any evidence acceptable for proving
an arm’s length price under section 482
should be acceptable as an IFP. The
commentators also stated that taxpayers
who cannot use the IFP method must
use the 50/50 method, and that the
50/50 method may not produce an equi-
table result for nonresidents importing
goods into the United States.
After further consideration, Treasury
and the IRS have decided to finalize the
regulations on this point as proposed.
No convincing evidence has been pre-
sented for the need of a broad-based
rule permitting taxpayers to establish an
IFP by any method that would otherwise
be appropriate under section 482 when
they can use books and records to
demonstrate a more appropriate sourcing
result. In view of the absence of a
clearly identified benefit for taxpayers
and the availability of the books and
records method, Treasury and the IRS
believe that expansion of the IFP rule is
not justified.
6. Books and records
Under both the existing and proposed
regulations, taxpayers can request per-
mission from the District Director to use
a taxpayer’s books and records to allo-
cate or apportion income between U.S.
and foreign sources if this method more
clearly reflects the taxpayer’s income.
The preamble to the proposed regula-
tions requests comments on retaining the
books and records method. Two com-
mentators asked for retention of this
method because instances may arise
where a taxpayer does not have third
party sales, thereby making the IFP
method unavailable. In such cases, a
taxpayer may find it advantageous to
determine the source of its income on
the basis of its books and records. These
comments were accepted. The final
regulations retain the books and records
method, subject to an election and prior
approval of the method by the District
Director.
7. Determination of source of gross in-
come from production activities
a. Definition of production assets
i. Contract manufacturing
Under the proposed regulations, pro-
duction assets are limited to those
owned directly by the taxpayer that are
directly used by the taxpayer to produce
the relevant inventory. These rules are
intended to insure that taxpayers do not
attribute the assets or activities of re-
lated or unrelated parties manufacturing
under contract with the taxpayer. One
commentator asked that the definition of
production assets be expanded to in-
clude production assets owned by re-
lated or unrelated contract manufactur-
ers. The commentator contends that by
limiting production assets to those
owned by the taxpayer, the regulations
source income differently depending
upon the form in which the taxpayer
conducts business. Treasury and the
IRS, however, believe it is appropriate
to limit production assets in the appor-
tionment formula to assets owned by the
taxpayer and used by the taxpayer to
produce the inventory. In addition, tax-
payers generally do not know the con-
tract manufacturer’s basis in its produc-
tion assets. Further, it would be very
difficult to draw a clear line between
contract manufacturers and other suppli-
ers. Thus, Treasury and the IRS do not
believe the source of a taxpayer’s in-
come should take into account activities
of others or assets owned by others with
whom the taxpayer has manufacturing
arrangements. The final regulations
clarify, however, that this rule does not
override the single entity rules set forth
under § 1.1502–13 (dealing with mem-
bers of an affiliated group filing on a
consolidated basis), or the rules under
§ 1.863–3(g) dealing with partnerships.
ii. Accounts receivable
One commentator also asserted that
accounts receivable should be included
as a production asset. This comment
was rejected. The production formula is
intended to approximate the location of
the taxpayer’s production activity. Thus,
assets not directly involved in produc-
tion should not be included.
b. Anti-abuse rule
The preamble to the proposed regula-
tions indicated that the purpose of the
property fraction is to attribute the
source of production income to the
7

location of production activity. Treasury
and the IRS, however, were concerned
that taxpayers would attempt to artifi-
cially affect the location of assets to
manipulate the rules, and so solicited
comments on whether an anti-abuse rule
was needed. No comments were re-
ceived that objected to such anti-abuse
rule. After further considering the issue,
Treasury and the IRS have included an
anti-abuse rule in the final regulations to
prevent taxpayers from manipulating the
property formula to achieve inappropri-
ate results. Therefore, the anti-abuse rule
provides that if a taxpayer has entered
into or structured one or more transac-
tions with a principal purpose of reduc-
ing its U.S. tax liability by affecting the
formula in a manner inconsistent with
the purpose of the regulation, the Dis-
trict Director may make appropriate ad-
justments so that the source of the
taxpayer’s income from production ac-
tivity more clearly reflects the source of
that income. An example in the regula-
tions demonstrates circumstances where
the anti-abuse rule may apply. In that
example, with a principal purpose of
reducing its U.S. tax liability, the tax-
payer leases all of its U.S. property so
that it owns only property located in a
foreign country. The example concludes
that the District Director may ignore a
sale-leaseback transaction to more
clearly reflect the source of the taxpay-
er’s production income.
8. Determination of taxable income
One commentator requested that the
calculation of taxable income, when ap-
plying the 50/50 method along with the
research and experimental (R&E) ex-
pense allocation rules in § 1.861–17, be
clarified. The commentator suggests that
the last sentence of § 1.863–3(d) of the
proposed regulations can be read to
conflict with the R&E set aside in
§ 1.861–17. The final regulations clarify
that the R&E set aside remains available
to taxpayers using the 50/50 method.
9. Reporting requirements
The proposed regulations, in § 1.863–
3(e), require a taxpayer to fully explain
the methodology used to determine the
source of income, the circumstances
justifying use of that method, the extent
that sales are aggregated, and the
amount of income so allocated. One
commentator wrote that the reporting
requirements in § 1.863–3(e) of the pro-
posed regulations are unnecessary and
excessively burdensome. The regulations
clarify that the requirement is limited to
a statement attached to the tax return,
explaining the methodology used, the
circumstances justifying that use, the
aggregation of sales, and the amount of
income allocated. Treasury and the IRS
believe the reporting requirements in
§ 1.863–3(e) of the proposed regula-
tions are reasonable, and serve legiti-
mate administrative purposes.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It is hereby certified that these
regulations will not have a significant
economic impact on a substantial num-
ber of small entities. This certification is
based on the fact that the rules of this
section principally impact large multina-
tionals who pay foreign taxes on sub-
stantial foreign operations and therefore
the rules will impact very few small
entities. Moreover, in those few in-
stances where the rules of this section
impact small entities, the economic im-
pact on such entities is not likely to be
significant. Accordingly, a regulatory
flexibility analysis is not required. Pur-
suant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Small Business
Administration for comment on its im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Anne Shelburne, Office of Asso-
ciate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.863–2 also issued under 26
U.S.C. 863.
Section 1.863–3 also issued under 26
U.S.C. 863.
Section 1.863–4 also issued under 26
U.S.C. 863.
Section 1.863–6 also issued under 26
U.S.C. 863. * * *
Par. 2. Sections 1.863–3 and
1.863–3T are redesignated as §§ 1.863–
3A and 1.863–3AT, respectively, and an
undesignated center heading is added
preceding the redesignated sections to
read as follows:
Regulations Applicable to Taxable
Years Prior to December 30, 1996
Par. 3. Section 1.863–0 is added to
read as follows:
§ 1.863–0 Table of contents.
This section lists captions contained
in §§ 1.863–1, 1.863–2, and 1.863–3.
§ 1.863–1 Allocation of gross income.
(a) In general.
(b) Natural resources.
(1) In general.
(2) Additional production prior to ex-
port terminal.
(3) Definitions.
(i) Production activity.
(ii) Additional production activities.
(iii) Export terminal.
(4) Determination of fair market
value.
(5) Determination of gross income.
(6) Tax return disclosure.
(7) Examples.
(c) Determination of taxable income.
(e) Effective dates.
§ 1.863–2 Allocation and apportionment
of taxable income.
(a) Determination of taxable income.
(b) Determination of source of tax-
able income.
(c) Effective dates.
§ 1.863–3 Allocation and apportionment
of income from certain sales of inven-
tory.
(a) In general.
(1) Scope
(2) Special rules
(b) Methods to determine income at-
tributable to production activity and
sales activity.
(1) 50/50 method.
(i) Determination of gross income.
(ii) Example.
(2) IFP method.
(i) Establishing an IFP.
(ii) Applying the IFP method.
(iii) Determination of gross income.
(iv) Examples.
8

(3) Books and records method.
(c) Determination of the source of
gross income from production activity
and sales activity.
(1) Income attributable to production
activity.
(i) Production only within the United
States or only within foreign countries.
(A) Source of income.
(B) Definition of production assets.
(C) Location of production assets.
(ii) Production both within the United
States and within foreign countries.
(A) Source of income.
(B) Adjusted basis of production as-
sets.
(iii) Anti-abuse rule.
(iv) Examples.
(2) Income attributable to sales activ-
ity.
(d) Determination of source of tax-
able income.
(e) Election and reporting rules.
(1) Elections under paragraph (b) of
this section.
(2) Disclosure on tax return.
(f) Income partly from sources within
a possession of the United States.
(g) Special rules for partnerships.
(h) Effective dates.
Par. 4. In § 1.863–1, paragraphs (a),
(b) and (c) are revised and paragraph (e)
is added to read as follows:
§ 1.863–1 Allocation of gross income.
(a)In general. Items of gross income
other than those specified in section
861(a) and section 862(a) will generally
be separately allocated to sources within
or without the United States. See
§ 1.863–2 for alternate methods to de-
termine the income from sources within
or without the United States in the case
of items specified in § 1.863–2(a). See
also sections 865(b) and (e)(2). In the
case of sales of property involving part-
ners and partnerships, the rules of
§ 1.863–3(g) apply.
(b)Natural resources—(1)In gen-
eral. Notwithstanding any other provi-
sion, except to the extent provided in
paragraph (b)(2) of this section, gross
receipts from the sale outside the United
States of products derived from the
ownership or operation of any farm,
mine, oil or gas well, other natural
deposit, or timber within the United
States, must be allocated between
sources within and without the United
States based on the fair market value of
the product at the export terminal (as
defined in paragraph (b)(3)(iii) of this
section). Notwithstanding any other pro-
vision, except to the extent provided in
paragraph (b)(2) of this section, gross
receipts from the sale within the United
States of products derived from the
ownership or operation of any farm,
mine, oil or gas well, other natural
deposit, or timber outside the United
States must be allocated between
sources within and without the United
States based on the fair market value of
the product at the export terminal. For
place of sale, see §§ 1.861–7(c) and
1.863–3(c)(2). The source of gross re-
ceipts equal to the fair market value of
the product at the export terminal will
be from sources where the farm, mine,
well, deposit, or uncut timber is located.
The source of gross receipts from the
sale of the product in excess of its fair
market value at the export terminal
(excess gross receipts) will be deter-
mined as follows—
(i) If the taxpayer engages in addi-
tional production activities subsequent to
shipment from the export terminal and
outside the country of sale, the source of
excess gross receipts must be deter-
mined under § 1.863–3. For purposes of
applying § 1.863–3, only production as-
sets used in additional production activ-
ity subsequent to the export terminal are
taken into account.
(ii) In all other cases, excess gross
receipts will be from sources within the
country of sale. This paragraph (b)(1)(ii)
applies to a taxpayer that engages in
additional production activities in the
country of sale, as well as to a taxpayer
that does not engage in additional pro-
duction activities at all.
(2)Additional production prior to ex-
port terminal. Notwithstanding any other
provision of this section, gross receipts
from the sale of products derived by a
taxpayer who performs additional pro-
duction activities as defined in para-
graph (b)(3)(ii) of this section before the
relevant product is shipped from the
export terminal are allocated between
sources within and without the United
States based on the fair market value of
the product immediately prior to the
additional production activities. The
source of gross receipts equal to the fair
market value of the product immediately
prior to the additional production activi-
ties will be from sources where the
farm, mine, well, deposit, or uncut tim-
ber is located. The source of gross
receipts from the sale of the product in
excess of the fair market value immedi-
ately prior to the additional production
activities must be determined under
§ 1.863–3. For purposes of applying
§ 1.863–3, only production assets used
in the additional production activities
are taken into account.
(3)Definitions—(i)Production activ-
ity. For purposes of this section, produc-
tion activity means an activity that cre-
ates, fabricates, manufactures, extracts,
processes, cures, or ages inventory. See
§ 1.864–1. Except as otherwise pro-
vided in §§ 1.1502–13 or 1.863–(g)(2),
only production activities conducted di-
rectly by the taxpayer are taken into
account.
(ii)Additional production activities.
For purposes of this section, additional
production activities are substantial pro-
duction activities performed directly by
the taxpayer in addition to activities
from the ownership or operation of any
farm, mine, oil or gas well, other natural
deposit, or timber. Whether a taxpayer’s
activities constitute additional produc-
tion activities will be determined under
the principles of § 1.954–3(a)(4). How-
ever, in no case will activities that
prepare the natural resource itself for
export, including those that are designed
to facilitate the transportation of the
natural resource to or from the export
terminal, be considered additional pro-
duction activities for purposes of this
section.
(iii)Export terminal. Where the farm,
mine, well, deposit, or uncut timber is
located without the United States, the
export terminal will be the final point in
a foreign country from which goods are
shipped to the United States. If there is
no such final point in a foreign country
(e.g., the property is extracted and pro-
duced on the high seas), the export
terminal will be the place of production.
Where the farm, mine, well, deposit, or
uncut timber is located within the
United States, the export terminal will
be the final point in the United States
from which goods are shipped from the
United States to a foreign country. The
location of the export terminal is deter-
mined without regard to any contractual
terms agreed to by the taxpayer and
without regard to whether there is an
actual sale of the products at the export
terminal.
(4)Determination of fair market
value. For purposes of this section, fair
market value depends on all of the facts
and circumstances as they exist relative
to a party in any particular case. Where
the products are sold to a related party
in a transaction subject to section 482,
the determination of fair market value
9

under this section must be consistent
with the arm’s length price determined
under section 482.
(5)Determination of gross income.
To determine the amount of a taxpayer’s
gross income from sources within or
without the United States, the taxpayer’s
gross receipts from sources within or
without the United States determined
under this paragraph (b) must be re-
duced by the cost of goods sold prop-
erly attributable to gross receipts from
sources within or without the United
States.
(6)Tax return disclosure. A taxpayer
that determines the source of its income
under this paragraph (b) shall attach a
statement to its return explaining the
methodology used to determine fair
market value under paragraph (b)(4) of
this section, and explaining any addi-
tional production activities (as defined
in paragraph (b)(3)(ii) of this section)
performed by the taxpayer. In addition,
the taxpayer must provide such other
information as is required by § 1.863–3.
(7)Examples. The following ex-
amples illustrate the rules of this para-
graph (b):
Example 1. No additional production.U.S.
Mines, a U.S. corporation, operates a copper mine
and mill in country X. U.S. Mines extracts
copper-bearing rocks from the ground and trans-
ports the rocks to the mill where the rocks are
ground and processed to produce copper-bearing
concentrate. The concentrate is transported to a
port where it is dried in preparation for export,
stored and then shipped to purchasers in the
United States. Because title to the property is
passed in the United States and, under the facts
and circumstances, none of U.S. Mine’s activities
constitutes additional production prior to the ex-
port terminal within the meaning of § 1.863–
1(b)(3)(ii), under § 1.863–1(b)(1) and (b)(1)(ii),
gross receipts equal to the fair market value of the
concentrate at the export terminal will be from
sources without the United States, and excess
gross receipts will be from sources within the
United States.
Example 2. No additional production.US Gas, a
U.S. corporation, extracts natural gas within the
United States, and transports the natural gas to a
U.S. port where it is liquified in preparation for
shipment. The liquified natural gas is then trans-
ported via freighter and sold without additional
production activities in a foreign country. Lique-
faction of natural gas is not an additional produc-
tion activity because liquefaction prepares the
natural gas for transportation from the export
terminal. Therefore, under § 1.863–1(b)(1) and
(b)(1)(ii), gross receipts equal to the fair market
value of the liquefied natural gas at the export
terminal will be from sources within the United
States, and excess gross receipts will be from
sources without the United States.
Example 3. Sale in third country.US Gold, a
U.S. corporation, mines gold in country X, pro-
duces gold jewelry in the United States, and sells
the jewelry in country Y. Assume that the fair
market value of the gold at the export terminal in
country X is $40, and that US Gold ultimately
sells the gold jewelry in country Y for $100.
Under § 1.863–1(b), $40 of US Gold’s gross
receipts will be allocated to sources without the
United States. Under § 1.863–1(b)(1)(i), the
source of the remaining $60 of gross receipts will
be determined under § 1.863–3. If US Gold
applies the 50/50 method described in § 1.863–3,
$20 of cost of goods sold is properly attributable
to activities subsequent to the export terminal, and
all of US Gold’s production assets subsequent to
the export terminal are located in the United
States, then $20 of gross income will be allocated
to sources within the United States and $20 of
gross income will be allocated to sources without
the United States.
Example 4. Production in country of sale.US
Oil, a U.S. corporation, extracts oil in country X,
transports the oil via pipeline to the export
terminal in country Y, refines the oil in the United
States, and sells the refined product in the United
States to unrelated persons. Assume that the fair
market value of the oil at the export terminal in
country Y is $80, and that US Oil ultimately sells
the refined product for $100. Under § 1.863–
1(b)(1), $80 of US Oil’s gross receipts will be
allocated to sources without the United States, and
under § 1.863–1(b)(1)(ii) the remaining $20 of
gross receipts will be allocated to sources within
the United States.
Example 5. Additional production prior to ex-
port.The facts are the same as inExample 1,
except that U.S. Mines also operates a smelter in
country X. The concentrate output from the mill is
transported to the smelter where it is transformed
into smelted copper. The smelted copper is ex-
ported to purchasers in the United States. Under
the facts and circumstances, all of the processes
applied to make copper concentrate are considered
mining. Therefore, under § 1.863–1(b)(2), gross
receipts equal to the fair market value of the
concentrate at the smelter will be from sources
without the United States. Under the facts and
circumstances, the conversion of the concentrate
into smelted copper is an additional production
activity in a foreign country within the meaning of
§ 1.863–1(b)(3)(ii). Therefore, the source of U.S.
Mine’s excess gross receipts will be determined
pursuant to § 1.863–1(b)(2).
(c)Determination of taxable income.
The taxpayer’s taxable income from
sources within or without the United
States will be determined under the
rules of §§ 1.861–8 through 1.861–14T
for determining taxable income from
sources within the United States.
* * * * *
(e)Effective dates. The rules of para-
graphs (a), (b) and (c) of this section
will apply to taxable years beginning
December 30, 1996. However, taxpayers
may apply the rules of this section for
taxable years beginning after July 11,
1995, and before December 30, 1996.
For years beginning before December
30, 1996, see § 1.863–1 (as contained
in 26 CFR part 1 revised as of April 1,
1996).
Par. 5. Section 1.863–2 is revised to
read as follows:
§ 1.863–2 Allocation and apportionment
of taxable income.
(a)Determination of taxable income.
Section 863(b) provides an alternate
method for determining taxable income
from sources within the United States in
the case of gross income derived from
sources partly within and partly without
the United States. Under this method,
taxable income is determined by deduct-
ing from such gross income the ex-
penses, losses, or other deductions prop-
erly apportioned or allocated thereto and
a ratable part of any other expenses,
losses, or deductions that cannot defi-
nitely be allocated to some item or class
of gross income. The income to which
this section applies (and that is treated
as derived partly from sources within
and partly from sources without the
United States) will consist of gains,
profits, and income
(1) From certain transportation or
other services rendered partly within and
partly without the United States to the
extent not within the scope of section
863(c) or other specific provisions of
this title;
(2) From the sale of inventory prop-
erty (within the meaning of section
865(i)) produced (in whole or in part)
by the taxpayer in the United States and
sold outside the United States or pro-
duced (in whole or in part) by the
taxpayer outside the United States and
sold in the United States; or
(3) Derived from the purchase of per-
sonal property within a possession of
the United States and its sale within the
United States, to the extent not excluded
from the scope of these regulations
under § 1.936–6(a)(5), Q&A 7.
(b)Determination of source of tax-
able income.Income treated as derived
from sources partly within and partly
without the United States under para-
graph (a) of this section may be allo-
cated to sources within and without the
United States pursuant to § 1.863–1 or
apportioned to such sources in accor-
dance with the methods described in
other regulations under section 863. To
determine the source of certain types of
income described in paragraph (a)(1) of
this section, see § 1.863–4. To deter-
mine the source of gross income de-
scribed in paragraph (a)(2) of this sec-
tion, see § 1.863–1 for natural resources
and see § 1.863–3 for other inventory.
Taxpayers, at their election, may apply
the principles of § 1.863–3(b)(1) and (c)
to determine the source of taxable in-
come (rather than gross income) from
10

sales of inventory property (other than
natural resources). To determine the
source of income partly from sources
within a possession of the United States,
including income described in paragraph
(a)(3) of this section, see § 1.863–3(f).
(c)Effective dates.This section will
apply to taxable years beginning De-
cember 30, 1996. However, taxpayers
may apply the rules of this section for
taxable years beginning after July 11,
1995, and before December 30, 1996.
For years beginning before December
30, 1996, see § 1.863–2 (as contained
in 26 CFR part 1 revised as of April 1,
1996).
Par. 6. Section 1.863–3 is added to
read as follows:
§ 1.863–3 Allocation and apportionment
of income from certain sales of inven-
tory.
(a)In general—(1)Scope. Para-
graphs (a) through (e) of this section
apply to determine the source of income
derived from the sale of inventory prop-
erty (inventory), which a taxpayer pro-
duces (in whole or in part) within the
United States and sells outside the
United States, or which a taxpayer pro-
duces (in whole or in part) outside the
United States and sells within the
United States (Section 863 Sales). A
taxpayer must divide gross income from
Section 863 Sales between production
activity and sales activity using one of
the methods described in paragraph (b)
of this section. The source of gross
income from production activity and
from sales activity must then be deter-
mined under paragraph (c) of this sec-
tion. Taxable income from Section 863
Sales is determined under paragraph (d)
of this section. Paragraph (e) of this
section describes the rules for electing
the methods described in paragraph (b)
of this section and the information that a
taxpayer must disclose on a tax return.
Paragraph (f) of this section applies to
determine the source of certain income
derived from a possession of the United
States. Paragraph (g) of this section
provides special rules for partnerships
for all sales subject to §§ 1.863–1
through 1.863–3. Paragraph (h) of this
section provides effective dates for the
rules in this section.
(2)Rules of application for Section
863 Sales. Once a taxpayer has elected a
method described in paragraph (b) of
this section, the taxpayer must sepa-
rately apply that method to Section 863
Sales in the United States and to Section
863 Sales outside the United States. In
addition, the taxpayer must apply the
rules of paragraphs (c) and (d) of this
section by aggregating all Section 863
Sales to which a method described in
paragraph (b) of this section applies,
after separately applying that method to
Section 863 Sales in the United States
and to Section 863 Sales outside the
United States. See section 865(i)(1) for
the definition of inventory property. See
also section 865(e)(2). See § 1.861–7(c)
and paragraph (c)(2) of this section for
the time and place of sale.
(b)Methods to determine income at-
tributable to production activity and
sales activity—(1)50/50 method—
(i)Determination of gross income.Gen-
erally, gross income from Section 863
Sales will be apportioned between pro-
duction activity and sales activity under
the 50/50 method as described in this
paragraph (b)(1). Under the 50/50
method, one-half of the taxpayer’s gross
income will be considered income at-
tributable to production activity and the
source of that income will be deter-
mined under the rules of paragraph
(c)(1) of this section. The remaining
one-half of such gross income will be
considered income attributable to sales
activity and the source of that income
will be determined under the rules of
paragraph (c)(2) of this section. In lieu
of the 50/50 method, the taxpayer may
elect to determine the source of income
from Section 863 Sales under the IFP
method described in paragraph (b)(2) of
this section or, with the consent of the
District Director, the books and records
method described in paragraph (b)(3) of
this section.
(ii)Example. The following example
illustrates the rules of this paragraph
(b)(1):
Example. 50/50 method.(i) P, a U.S. corpora-
tion, produces widgets in the United States. P sells
the widgets for $100 to D, an unrelated foreign
distributor, in another country. P’s cost of goods
sold is $40. Thus, P’s gross income is $60.
(ii) Pursuant to the 50/50 method, one-half of
P’s gross income, or $30, is considered income
attributable to production activity, and one-half of
P’s gross income, or $30, is considered income
attributable to sales activity.
(2)IFP method—(i)Establishing an
IFP.A taxpayer may elect to allocate
gross income earned from production
activity and sales activity using the
independent factory price (IFP) method
described in this paragraph (b)(2) if an
IFP is fairly established. An IFP is fairly
established based on a sale by the
taxpayer only if the taxpayer regularly
sells part of its output to wholly inde-
pendent distributors or other selling con-
cerns in such a way as to reasonably
reflect the income earned from produc-
tion activity. A sale will not be consid-
ered to fairly establish an IFP if sales
activity by the taxpayer with respect to
that sale is significant in relation to all
of the activities with respect to that
product.
(ii)Applying the IFP method.If the
taxpayer elects to use the IFP method,
the amount of the gross sales price
equal to the IFP will be treated as
attributable to production activity, and
the excess of the gross sales price over
the IFP will be treated as attributable to
sales activity. If a taxpayer elects to use
the IFP method, the IFP must be applied
to all Section 863 Sales of inventory
that are substantially similar in physical
characteristics and function, and are sold
at a similar level of distribution as the
inventory sold in the sale fairly estab-
lishing an IFP. The IFP will only be
applied to sales that are reasonably
contemporaneous with the sale fairly
establishing the IFP. An IFP cannot be
applied to sales in other geographic
markets if the markets are substantially
different. If the taxpayer elects the IFP
method, the rules of this paragraph will
also apply to determine the division of
gross receipts between production activ-
ity and sales activity in a Section 863
Sale that itself fairly establishes an IFP.
If the taxpayer elects to apply the IFP
method, the IFP method must be applied
to all sales for which an IFP may be
fairly established and applied for that
taxable year and each subsequent tax-
able year. The taxpayer will apply either
the 50/50 method described in paragraph
(b)(1) of this section or the books and
records method described in paragraph
(b)(3) of this section to any other Sec-
tion 863 Sale for which an IFP cannot
be established or applied for each tax-
able year.
(iii)Determination of gross income.
The amount of a taxpayer’s gross in-
come from production activity is deter-
mined by reducing the amount of gross
receipts from production activity by the
cost of goods sold properly attributable
to production activity. The amount of a
taxpayer’s gross income from sales ac-
tivity is determined by reducing the
amount of gross receipts from sales
activity by the cost of goods sold (if
any) properly attributable to sales activ-
ity. The source of gross income from
production activity is determined under
the rules of paragraph (c)(1) of this
section, and the source of gross income
11

from sales activity will be determined
under the rules of paragraph (c)(2) of
this section.
(iv)Examples. The following ex-
amples illustrate the rules of this para-
graph (b)(2):
Example 1. IFP method.(i) P, a U.S. producer,
purchases cotton and produces cloth in the United
States. P sells cloth in country X to D, an
unrelated foreign clothing manufacturer, for $100.
Cost of goods sold for cloth is $80, entirely
attributable to production activity. P does not
engage in significant sales activity in relation to its
other activities in the sales to D. Under these
facts, the sale to D fairly establishes an IFP of
$100. Assume that P elects to use the IFP method.
Accordingly, $100 of the gross sales price is
treated as attributable to production activity, and
no amount of income from this sale is attributable
to sales activity. After reducing the gross sales
price by cost of goods sold, $20 of the gross
income is treated as attributable to production
activity ($100–$80).
(ii) P also sells cloth in country X to A, a
unrelated foreign retail outlet, for $110. Because P
elected the IFP method and the cloth is substan-
tially similar to the cloth sold to D, the IFP fairly
established in the sales to D must be used to
determine the amount attributable to production
activity in the sale to A. Accordingly, $100 of the
gross sales price is treated as attributable to
production activity and $10 ($110–$100) is attrib-
utable to sales activity. After reducing the gross
sales price by cost of goods sold, $20 of the gross
income is treated as attributable to production
activity ($100–$80) and $10 is attributable to sales
activity.
Example 2. Scope of IFP Method.(i) USCo
manufactures three dissimilar products. USCo
elects to apply the IFP method. In year 1, an IFP
can be established for sales of product X, but not
for products Y and Z. In year 2, an IFP cannot be
established for any of USCo’s products. In year 3,
an IFP can be established for products X and Y,
but not for product Z.
(ii) In year 1, USCo must apply the IFP method
to sales of product X. In year 2, although USCo’s
IFP election remains in effect, USCo is not
required to apply the IFP election to any products.
In year 3, USCo is required to apply the IFP
method to sales of products X and Y.
(3)Books and records method.A tax-
payer may elect to determine the
amount of its gross income from Section
863 Sales that is attributable to produc-
tion and sales activities for the taxable
year based upon its books of account if
it has received in advance the permis-
sion of the District Director having audit
responsibility over its tax return. The
taxpayer must establish to the satisfac-
tion of the District Director that the
taxpayer, in good faith and unaffected
by considerations of tax liability, will
regularly employ in its books of account
a detailed allocation of receipts and
expenditures which clearly reflects the
amount of the taxpayer’s income from
production and sales activities. If a
taxpayer receives permission to apply
the books and records method, but does
not comply with a material condition set
forth by the District Director, the Dis-
trict Director may, in its discretion,
revoke permission to use the books and
records method. The source of gross
income treated as attributable to produc-
tion activity under this method may be
determined under the rules of paragraph
(c)(1) of this section, and the source of
gross income attributable to sales activ-
ity will be determined under the rules of
paragraph (c)(2) of this section.
(c)Determination of the source of
gross income from production activity
and sales activity—(1)Income attribut-
able to production activity—(i)Produc-
tion only within the United States or
only within foreign countries—
(A)Source of income.For purposes of
this section, production activity means
an activity that creates, fabricates,
manufactures, extracts, processes, cures,
or ages inventory. See § 1.864–1. Sub-
ject to the provisions in § 1.1502–13 or
paragraph (g)(2)(ii) of this section, the
only production activities that are taken
into account for purposes of §§ 1.863–
1, 1.863–2, and this section are those
conducted directly by the taxpayer.
Where the taxpayer’s production assets
are located only within the United States
or only outside the United States, the
income attributable to production activ-
ity is sourced where the taxpayer’s
production assets are located. For rules
regarding the source of income when
production assets are located both within
the United States and without the United
States, see paragraph (c)(1)(ii) of this
section.
(B)
Definition of production assets.
Subject to the provisions of § 1.1502–13
and paragraph (g)(2)(ii) of this section,
production assets include only tangible
and intangible assets owned directly by
the taxpayer that are directly used by the
taxpayer to produce inventory described
in paragraph (a) of this section. Produc-
tion assets do not include assets that are
not directly used to produce inventory
described in paragraph (a) of this sec-
tion. Thus, production assets do not
include such assets as accounts receiv-
ables, intangibles not related to produc-
tion of inventory (e.g., marketing intan-
gibles, including trademarks and
customer lists), transportation assets,
warehouses, the inventory itself, raw
materials, or work-in-process. In addi-
tion, production assets do not include
cash or other liquid assets (including
working capital), investment assets, pre-
paid expenses, or stock of a subsidiary.
(C)Location of production assets.
For purposes of this section, a tangible
production asset will be considered lo-
cated where the asset is physically lo-
cated. An intangible production asset
will be considered located where the
tangible production assets owned by the
taxpayer to which it relates are located.
(ii)Production both within the United
States and within foreign countries—
(A)Source of income.Where the tax-
payer’s production assets are located
both within and without the United
States, income from sources without the
United States will be determined by
multiplying the income attributable to
the taxpayer’s production activity by a
fraction, the numerator of which is the
average adjusted basis of production
assets that are located outside the United
States and the denominator of which is
the average adjusted basis of all produc-
tion assets within and without the
United States. The remaining income is
treated as from sources within the
United States.
(B)Adjusted basis of production as-
sets.For purposes of paragraph
(c)(1)(ii)(A) of this section, the adjusted
basis of an asset is determined under
section 1011. The average adjusted basis
is computed by averaging the adjusted
basis of the asset at the beginning and
end of the taxable year, unless by reason
of material changes during the taxable
year such average does not fairly repre-
sent the average for such year. In this
event, the average adjusted basis will be
determined upon a more appropriate
basis. If production assets are used to
produce inventory sold in Section 863
Sales and are also used to produce other
property during the taxable year, the
portion of its adjusted basis that is
included in the fraction described in
paragraph (c)(1)(ii)(A) of this section
will be determined under any method
that reasonably reflects the portion of
the assets that produces inventory sold
in Section 863 Sales. For example, the
portion of such an asset that is included
in the formula may be determined by
multiplying the asset’s average adjusted
basis by a fraction, the numerator of
which is the gross receipts from sales of
inventory from Section 863 Sales pro-
duced by the asset, and the denominator
of which is the gross receipts from all
property produced by that asset.
(iii)Anti-abuse rule.The purpose of
this paragraph (c)(1) is to attribute the
source of the taxpayer’s production in-
come to the location of the taxpayer’s
production activity. Therefore, if the
taxpayer has entered into or structured
one or more transactions with a princi-
12

pal purpose of reducing its U.S. tax
liability by manipulating the formula
described in paragraph (c)(1)(ii)(A) of
this section in a manner inconsistent
with the purpose of this paragraph
(c)(1), the District Director may make
appropriate adjustments so that the
source of the taxpayer’s income from
production activity more clearly reflects
the source of that income.
(iv)Examples.The following ex-
amples illustrate the rules of this para-
graph (c)(1):
Example 1. Source of production income.(i) A,
a U.S. corporation, produces widgets that are sold
both within the United States and within a foreign
country. The initial manufacture of all widgets
occurs in the United States. The second stage of
production of widgets that are sold within a
foreign country is completed within the country of
sale. A’s U.S. plant and machinery which is
involved in the initial manufacture of the widgets
has an average adjusted basis of $200. A also
owns warehouses used to store work-in-process. A
owns foreign equipment with an average adjusted
basis of $25. A’s gross receipts from all sales of
widgets is $100, and its gross receipts from export
sales of widgets is $25. Assume that apportioning
average adjusted basis using gross receipts is
reasonable. Assume A’s cost of goods sold from
the sale of widgets in the foreign countries is $13
and thus, its gross income from widgets sold in
foreign countries is $12. A uses the 50/50 method
to divide its gross income between production
activity and sales activity.
(ii) A determines its production gross income
from sources without the United States by multi-
plying one-half of A’s $12 of gross income from
sales of widgets in foreign countries, or $6, by a
fraction, the numerator of which is all relevant
foreign production assets, or $25, and the denomi-
nator of which is all relevant production assets, or
$75 ($25 foreign assets + ($200 U.S. assets X $25
gross receipts from export sales/$100 gross re-
ceipts from all sales)). Therefore, A’s gross pro-
duction income from sources without the United
States is $2 ($6 X ($25/$75)).
Example 2. Location of intangible property.
Assume the same facts asExample 1, except that
A employs a patented process that applies only to
the initial production of widgets. In computing the
formula used to determine the source of income
from production activity, A’s patent, if it has an
average adjusted basis, would be located in the
United States.
Example 3. Anti-abuse rule.(i) Assume the
same facts asExample 1. A sells its U.S. assets to
B, an unrelated U.S. corporation, with a principal
purpose of reducing its U.S. tax liability by
manipulating the property fraction. A then leases
these assets from B. After this transaction, under
the general rule of paragraph (c)(1)(ii) of this
section, all of A’s production income would be
considered from sources without the United States,
because all of A’s relevant production assets are
located within a foreign country. Since the leased
property is not owned by the taxpayer, it is not
included in the fraction.
(ii) Because A has entered into a transaction
with a principal purpose of reducing its U.S. tax
liability by manipulating the formula described in
paragraph (c)(1)(ii)(A) of this section, A’s income
must be adjusted to more clearly reflect the source
of that income. In this case, the District Director
may redetermine the source of A’s production
income by ignoring the sale-leaseback transac-
tions.
(2)Income attributable to sales activ-
ity.The source of the taxpayer’s income
that is attributable to sales activity will
be determined under the provisions of
§ 1.861–7(c). However, notwithstanding
any other provision, for purposes of
section 863, the place of sale will be
presumed to be the United States if
personal property is wholly produced in
the United States and the property is
sold for use, consumption, or disposition
in the United States. See § 1.864–
6(b)(3)(ii) to determine the country of
use, consumption, or disposition. Also,
in applying this paragraph, property will
be treated as wholly produced in the
United States if it is subject to no more
than packaging, repackaging, labeling,
or other minor assembly operations out-
side the United States, within the mean-
ing of § 1.954–3(a)(4)(iii)(property
manufactured or produced by a con-
trolled foreign corporation).
(d)Determination of source of tax-
able income.Once the source of gross
income has been determined under para-
graph (c) of this section, the taxpayer
must properly allocate and apportion
separately under §§ 1.861–8 through
1.861–14T the amounts of its expenses,
losses, and other deductions to its re-
spective amounts of gross income from
Section 863 Sales determined separately
under each method described in para-
graph (b) of this section. In addition, if
the taxpayer deducts expenses for re-
search and development under section
174 that may be attributed to its Section
863 Sales under § 1.861–8(e)(3), the
taxpayer must separately allocate or ap-
portion expenses, losses, and other de-
ductions to its respective amounts of
gross income from each relevant product
category that the taxpayer uses in apply-
ing the rules of § 1.861–8(e)(3)(i)(A).
In the case of gross income from Sec-
tion 863 Sales determined under the IFP
method or the books and records
method, the rules of §§ 1.861–8 through
1.861–14T must apply to properly allo-
cate or apportion amounts of expenses,
losses and other deductions allocated
and apportioned to such gross income
between gross income from sources
within and without the United States. In
the case of gross income from Section
863 Sales determined under the 50/50
method, the amounts of expenses,
losses, and other deductions allocated
and apportioned to such gross income
must be apportioned between sources
within and without the United States pro
rata based on the relative amounts of
gross income from sources within and
without the United States determined
under the 50/50 method. Research and
experimental expenditures qualifying un-
der § 1.861–17 are allocated under that
section, and are not allocated and appor-
tioned pro rata under the 50/50 method.
(e)Election and reporting rules—
(1)Elections under paragraph (b) of
this section.If a taxpayer does not elect
a method specified in paragraph (b)(2)
or (3) of this section, the taxpayer must
apply the method specified in paragraph
(b)(1) of this section. The taxpayer may
elect to apply the method specified in
paragraph (b)(2) of this section by using
the method on a timely filed original
return (including extensions). A taxpayer
may elect to apply the method specified
in paragraph (b)(3) of this section by
using the method on a timely filed
original return (including extensions),
but only if the taxpayer has received
permission from the District Director to
apply that method. Once a method under
paragraph (b) of this section has been
used, that method must be used in later
taxable years unless the Commissioner
consents to a change. However, if a
taxpayer elects to change to or from the
method specified in paragraph (b)(3) of
this section, the taxpayer must obtain
permission from the District Director
instead of the Commissioner. Permission
to change methods from one year to
another year will not be withheld unless
the change would result in a substantial
distortion of the source of the taxpayer’s
income.
(2)Disclosure on tax return. A tax-
payer who uses one of the methods
described in paragraph (b) of this sec-
tion must fully explain in a statement
attached to the return the methodology
used, the circumstances justifying use of
that methodology, the extent that sales
are aggregated, and the amount of in-
come so allocated.
(f)Income partly from sources within
a possession of the United States. Tax-
payers with income partly from sources
within a possession of the United States
must apply the rules of § 1.863–3A(c).
(g)Special rules for partnerships—
(1)General rule.For purposes of
§ 1.863–1 and this section, a taxpayer’s
production or sales activity does not
include production and sales activities
conducted by a partnership of which the
taxpayer is a partner either directly or
through one or more partnerships, ex-
13

cept as otherwise provided in paragraph
(g)(2) of this section.
(2)Exceptions—(i)In general. For
purposes of determining the source of
the partner’s distributive share of part-
nership income or determining the
source of the partner’s income from the
sale of inventory property which the
partnership distributes to the partner in
kind, the partner’s production or sales
activity includes an activity conducted
by the partnership. In addition, the pro-
duction activity of a partnership includes
the production activity of a taxpayer that
is a partner either directly or through
one or more partnerships, to the extent
that the partner’s production activity is
related to inventory that the partner
contributes to the partnership in a trans-
action described under section 721.
(ii)Attribution of production assets to
or from a partnership.A partner will be
treated as owning its proportionate share
of the partnership’s production assets
only to the extent that, under paragraph
(g)(2)(i) of this section, the partner’s
activity includes production activity con-
ducted through a partnership. A partner’s
share of partnership assets will be deter-
mined by reference to the partner’s
distributive share of partnership income
for the year attributable to such produc-
tion assets. Similarly, to the extent a
partnership’s activities include the pro-
duction activities of a partner, the part-
nership will be treated as owning the
partner’s production assets related to the
inventory that is contributed in kind to
the partnership. See paragraph
(c)(1)(ii)(B) of this section for rules
apportioning the basis of assets to Sec-
tion 863 Sales.
(iii)Basis. For purposes of this sec-
tion, in those cases where the partner is
treated as owning its proportionate share
of the partnership’s production assets,
the partner’s basis in production assets
held through a partnership shall be de-
termined by reference to the partner-
ship’s adjusted basis in its assets (in-
cluding a partner’s special basis
adjustment, if any, under section 743).
Similarly, a partnership’s basis in a
partner’s production assets is determined
with reference to the partner’s adjusted
basis in its assets.
(iv)Separate application of methods.
If, under paragraph (g)(2) of this sec-
tion, a partner is treated as conducting
the activity of a partnership, and is
treated as owning its proportionate share
of a partnership’s production assets, a
partner must apply the method it has
elected under paragraph (b) of this sec-
tion separately to Section 863 Sales
described in this paragraph (g) and all
other Section 863 Sales.
(3)Examples. The following ex-
amples illustrate the rules of this para-
graph (g):
Example 1. Distributive share of partnership
income.A, a U.S. corporation, forms a partnership
in the United States with B, a country X corpora-
tion. A and B each have a 50 percent interest in
the income, gains, losses, deductions and credits
of the partnership. The partnership is engaged in
the manufacture and sale of widgets. The widgets
are manufactured in the partnership’s plant located
in the United States and are sold by the partner-
ship outside the United States. The partnership
owns the manufacturing facility and all other
production assets used to produce the widgets. A’s
distributive share of partnership income includes
50 percent of the sales income from these sales. In
applying the rules of section 863 to determine the
source of its distributive share of partnership
income from the export sales of widgets, A is
treated as carrying on the activity of the partner-
ship related to production of these widgets and as
owning a proportionate share of the partnership’s
assets related to production of the widgets, based
upon its distributive share of partnership income.
Example 2. Distribution in kind.Assume the
same facts as inExample 1except that the
partnership, instead of selling the widgets, distrib-
utes the widgets to A and B. A then further
processes the widgets and then sells them outside
the United States. In determining the source of the
income earned by A on the sales outside the
United States, A is treated as conducting the
activities of the partnership related to production
of the distributed widgets. Thus, the source of
gross income on the sale of the widgets is
determined under section 863 and these regula-
tions. A applies the 50/50 method described in
paragraph (b)(1) of this section to determine the
source of income from the sales. In applying
paragraph (c)(1) of this section, A is treated as
owning its proportionate share of the partnership’s
production assets based upon its distributive share
of partnership income.
(h)Effective dates. The rules of this
section apply to taxable years beginning
December 30, 1996. However, taxpayers
may apply these regulations for taxable
years beginning after July 11, 1995, and
before December 30, 1996. For years
beginning before December 30, 1996,
see §§ 1.863–3A and 1.863–3AT.
Par. 7. Section 1.863–4 is amended by
revising the section heading and para-
graph (a) to read as follows:
§ 1.863–4 Certain transportation ser-
vices.
(a)General. A taxpayer carrying on
the business of transportation service
(other than an activity giving rise to
transportation income described in sec-
tion 863(c) or to income subject to other
specific provisions of this title) between
points in the United States and points
outside the United States derives income
partly from sources within and partly
from sources without the United States.
* * * * *
§ 1.863–5 [Removed]
Par. 8. Section 1.863–5 is removed.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 9. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 10. In § 602.101, paragraph (c)
is amended by adding entries for
1.863–1 and 1.863–3A, and revising the
entry for 1.863–3 to read as follows:
§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section
where identified and
described
Current OMB
control No.
* * * * *
1.863–1 . . . . . . . . . . . . . . 1545–1476
1.863–3 . . . . . . . . . . . . . . 1545–1476
* * * * *
1.863–3A. . . . . . . . . . . . . 1545–0126
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved November 25, 1996.
Donald C. Lubick,
Acting Assistant Secretary
of Tax Policy.
(Filed by the Office of the Federal Register on
November 27, 1996, 8:45 a.m., and published in
the issue of the Federal Register for November 29,
1996, 61 F.R. 60540)
Section 1491.—Imposition of Tax
If the status of a trust changes from domestic to
foreign, what are the consequences for purposes of
the section 1491 excise tax? See Notice 96–65,
page 28.
Section 2056A.—Qualified
Domestic Trust
26 CFR 20.2056A–2: Requirements for qualified
domestic trusts.
T.D. 8686
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 20 and 602
Requirements to Ensure Collection
of Section 2056A Estate Tax
AGENCY: Internal Revenue Service
(IRS), Treasury.
14

ACTION: Final regulations.
SUMMARY: This document contains
final regulations that provide guidance
relating to the additional requirements
necessary to ensure the collection of the
estate tax imposed under section
2056A(b) with respect to taxable events
involving qualified domestic trusts
(QDOTs) described in section 2056A(a).
DATES: These regulations are effective
November 29, 1996.
For dates of applicability, see
§ 20.2056A–2(d).
FOR FURTHER INFORMATION CON-
TACT: Susan Hurwitz (202) 622–3090
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1443. Responses to this collection
of information are required in order for
an estate to be eligible for the estate tax
marital deduction in cases where the
surviving spouse is not a United States
citizen.
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 estimated annual burden per re-
spondent varies from 30 minutes to 3
hours, depending on individual circum-
stances, with an estimated average of
1.39 hours.
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, At-
tention: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC
20503.
Books or records relating to this col-
lection of information must be retained
as long as their contents may become
material in the administration of any
internal revenue law. Generally, tax re-
turns and tax return information are
confidential, as required by 26 U.S.C.
6103.
Background
A notice of proposed rulemaking was
published in the Federal Register on
January 5, 1993 (58 FR 305), reflecting
amendments to the Internal Revenue
Code by the Technical and Miscella-
neous Revenue Act of 1988 (Public Law
100–647), the Revenue Reconciliation
Act of 1989 (Public Law 101–239), and
the Revenue Reconciliation Act of 1990
(Public Law 101–508). The amendments
generally relate to sections 2056 and
2523, and affect the availability of the
estate and gift tax marital deduction
when the surviving spouse or the donee
spouse is not a United States citizen.
Part of the NPRM was published in the
Federal Register as final regulations, in
TD 8612, on August 22, 1995 (60 FR
43531 [1995–2 C.B. 192]). That part of
the NPRM that addressed the regulatory
requirements to ensure the collection of
the estate tax imposed by section
2056A(b)(1)(A) and (B) was published
in the Federal Register on August 22,
1995, in the form of temporary and
proposed regulations, (60 FR 43554 and
60 FR 43575, respectively) in order to
afford the public a further opportunity to
comment on these security arrangements.
On January 16, 1996, the IRS held a
hearing on the temporary and proposed
regulations. These final regulations re-
flect the comments received in response
to the temporary and proposed regula-
tions.
Explanation of Provisions
The following is a summary of the
significant comments received and the
reasons for accepting or rejecting those
comments in the final regulations.
Under the temporary regulations, a
qualified domestic trust (QDOT) that
has assets in excess of $2 million, may
alternate among the three security ar-
rangements provided in the regulations
(U.S. bank trustee, bond or letter of
credit), provided that at all times, at
least one of the three arrangements is in
effect. A QDOT with assets of $2
million or less need not satisfy these
requirements, if, in general, the trust
holdings of foreign situs real property
are limited to 35 percent of the fair
market value of the trust corpus.
Comments were received that trusts in
actual compliance with these regulatory
requirements, but which do not explic-
itly include the required language, will
not qualify as a QDOT. In addition,
comments suggested that the imposition
of numerous governing instrument re-
quirements will increase the difficulty of
drafting a QDOT and result in a trust
document that will have to include de-
tailed provisions, many of which are not
likely to be applicable. A suggestion was
made that if the governing instrument
requirement is retained in the regula-
tions, then the required security provi-
sions should be permitted to be incorpo-
rated by reference in a trust document.
This suggestion was adopted. However,
in order to assist taxpayers who may
wish to specify the required provisions
in the governing instrument, the IRS has
published guidance in the Internal Rev-
enue Bulletin (see § 602.101(d)(2) of
this chapter) providing sample language
that may be used in a QDOT instrument
to satisfy the additional security require-
ments contained in the final regulations.
In response to comments, the lan-
guage of the regulations has been modi-
fied to clarify that the QDOT may
alternate among the three arrangements
provided in the regulations as long as, at
any given time, one of the three ar-
rangements is required to be operative.
Comments suggested that the tempo-
rary regulations may be viewed as re-
quiring that a QDOT that initially em-
ploys the bank trustee security
alternative must, irrespective of whether
the QDOT has switched to another
security option, continue to have at least
one U.S. Bank acting as a trustee. In
response to this comment, the final
regulations clarify that, if the QDOT
changes to a different security arrange-
ment, a U.S. bank need not continue to
act as trustee.
Under the temporary regulations, in
determining whether the value of the
assets passing to a QDOT are in excess
of, or less than, $2 million, indebtedness
with respect to the assets is not taken
into account to reduce value. Similarly,
under the temporary regulations, the
amount of the bond or letter of credit
that is furnished to the IRS must be
equal to 65 percent of the fair market
value of the trust assets determined
‘‘without regard to any indebtedness
thereon.’’ Comments suggested that in-
debtedness should be taken into account
in determining whether the $2 million
dollar threshold has been exceeded and
the amount of the bond or letter of
credit required. This change has not
been made. The IRS and Treasury be-
lieve that the retention of the rule that
indebtedness on the property is not
taken into account to reduce value most
effectively ensures collection of the es-
tate tax imposed under section
15

2056A(b). For the limited purpose under
this section (i.e., to determine whether
the $2 million threshold is exceeded and
the amount of the bond or letter of
credit to be furnished to the IRS) the
complexity that would be involved in
drafting rules to determine which debts
qualify to be taken into account and
which do not is not warranted.
Under the temporary regulations, with
regard to the bond and letter of credit
security options, if the fair market value
of the trust assets, is ‘‘finally deter-
mined’’ to be in excess of the value of
the trust assets as originally reported,
the trustee has a reasonable period of
time (not exceeding sixty days from the
date of the final determination) to adjust
the amount of the bond or letter of
credit. The temporary regulations also
use the term ‘‘finally determined’’ in
addressing substantial undervaluations of
property passing to a QDOT and the
grace period provided to meet the secu-
rity requirements when a QDOT is
determined to contain assets in excess of
$2 million. Comments were received
suggesting that the regulations provide a
definition of ‘‘finally determined’’.
Accordingly, the final regulations pro-
vide that the value of the assets will be
finally determined on the earliest to
occur of—
1. The entry of a decision, judgment,
decree, or other order by any court of
competent jurisdiction that has become
final;
2. The execution of a closing agree-
ment made under section 7121;
3. Any final disposition by the IRS of
a claim for refund;
4. The issuance of an estate tax clos-
ing letter (if no claim for refund is
filed); or
5. The expiration of the statute of
limitations for assessment with respect
to the decedent’s estate tax liability.
In response to comments, the regula-
tion addressing the required duration of
the bond or letter of credit has been
clarified to provide that the security
arrangement must remain in effect until
the trust ceases to function as a QDOT.
Comments have been received regard-
ing the amount of the bond or letter of
credit that must be furnished to the IRS.
One commentator stated that, since the
purpose of the bond or letter of credit
requirement is to provide a source of
funds for the payment of the section
2056A(b) estate tax, the amount of the
required bond or letter of credit should
be based on either the maximum federal
estate tax rate, or the amount of estate
tax deferred, rather than 65% of the
value of the QDOT, as provided in the
regulations. This suggestion has not
been adopted. Generally, the regulation
requires a bond of 65 percent of the
initial fair market value of the trust
assets to ensure that the potential estate
tax liability is adequately secured if the
trust property appreciates in value.
The temporary regulations providing
that notice of failure to renew a bond or
letter of credit must be ‘‘received by the
IRS at least 60 days prior to the end of
the term of the bond or letter of credit’’
has been changed to reference the date
the notice is ‘‘mailed to’’ the IRS.
Further, under the final regulations, the
notice must also be mailed to the U.S.
Trustee of the QDOT.
Under the regulations, in the case of a
QDOT of less than $2 million, if on the
last day of a taxable year of the QDOT,
the value of foreign real property owned
by the QDOT exceeds 35 percent of the
QDOT assets because of distributions of
principal during that year, or because of
fluctuations in the value of the foreign
currency in the jurisdiction where the
real property is located, a grace period
of one year is provided to allow the
trustee to comply with the 35 percent
limit. Comments suggested that changes
in the relative value of the trust assets
would also cause the trust to fail to
satisfy the 35 percent limit, and failure
to comply due to such changes that are
beyond the control of the trustee should
also be eligible for the grace period.
Accordingly, under the final regulations,
the trustee will also be accorded the
grace period to satisfy the 35 percent
limit if, as a result of changes in the
relative values of the trust assets, more
than 35 percent of the value of the trust
consists of foreign real estate.
Under the temporary regulations, for
purposes of determining whether the $2
million threshold has been exceeded,
and for purposes of determining the
amount of the bond or letter of credit,
the executor of the decedent’s estate
may exclude up to $600,000 in value
attributable to real property wherever
situated (and related furnishings) owned
directly by the QDOT that is used by
the surviving spouse as the spouse’s
principal residence. Comments were re-
ceived that the regulations should be
expanded to allow the exclusion of all
residential real property that is actually
used by the surviving spouse. Thus, a
vacation home or second home would
qualify for the exclusion. It was also
suggested that all personally used resi-
dential real property, regardless of value,
should be eligible for the exclusion. The
final regulations do not change the mon-
etary limit of $600,000 for the exclu-
sion. The $600,000 limit for the exclu-
sion facilitates the reduction of the costs
associated with providing security while
adequately ensuring the collection of the
section 2056A(b) tax. This is especially
the case in situations where the residen-
tial real property is situated outside the
United States so that a significant col-
lection risk is presented. However, under
the final regulations the exclusion has
been redesignated as a ‘‘personal resi-
dence’’ exclusion. The exclusion is now
available for the principal residence of
the surviving spouse and one additional
residence, to the extent the combined
value excluded does not exceed
$600,000. The second residence will be
eligible for the exclusion only if the
residence is used by the surviving
spouse as a personal residence and not
subject to any rental arrangement with
any person.
Under the temporary regulations, the
residence exclusion election is made by
attaching a written statement to the
estate tax return on which the QDOT
election is made. Commentators sug-
gested that the final regulations allow
the election to be made at any time
during the term of the QDOT, and not
necessarily at the time of filing of the
decedent’s estate tax return. For ex-
ample, if the bank trustee alternative is
selected by the trustee of the QDOT, but
at some future date the trustee desires to
change to the bond or letter of credit
security arrangement, the trustee should
be given the opportunity to make a
delayed election of the exclusion. In
response to these comments, the final
regulations provide that the election may
be made at any time during the term of
the QDOT. In addition, the final regula-
tion provides for the cancellation of a
prior election.
Under the temporary regulations, the
U.S. Trustee of a QDOT is required to
file an annual statement with the IRS
containing specified items of informa-
tion (including a list of all assets held
by the QDOT together with the fair
market value of each asset determined
as of the last day of the taxable year) if
the residence exclusion applies during
the taxable year. Comments were re-
ceived suggesting that the cost of com-
pliance with this annual reporting re-
quirement will limit the utility of the
residence exclusion. In response to these
comments, annual reporting is no longer
16

required solely because the personal
residence exclusion was elected. How-
ever, the regulations retain the annual
reporting requirement where the resi-
dence previously subject to the exclu-
sion is sold, or where the residence
ceases to be used as a personal resi-
dence during the taxable or calendar
year.
Under the temporary regulations, if a
residence that is subject to the exclusion
is sold during the term of the QDOT,
the exclusion will continue to apply if,
within 12 months of the date of sale, the
amount of the adjusted sales price (as
defined in section 1034(d)(1)) is used to
purchase a new residence for the spouse.
In response to comments, this provision
has been amended to provide that if a
residence ceases to be used as the
personal residence of the spouse, or if
the residence is sold during the term of
the QDOT, the exclusion may be ap-
plied to another residence that is held in
either the same QDOT or in another
QDOT, if the other residence is used as
a personal residence of the spouse. The
amount of exclusion that may be applied
to the new personal residence under
these circumstances can be up to
$600,000 (less that amount previously
allocated to a residence that continues to
qualify for the exclusion) even if the
entire $600,000 exclusion was not previ-
ously used for the initial personal resi-
dence(s).
Also, under the temporary regulations,
on the sale of a residence, if less than
the entire adjusted sales price is rein-
vested in a new residence, then the
amount of the exclusion initially
claimed by the QDOT is reduced pro-
portionately. For example, if a residence
is sold for an adjusted sales price of
$1,000,000 and a new residence is ac-
quired for $800,000, then, the original
exclusion would be reduced by
$120,000 to $480,000: $200,000 (ad-
justed sales price not reinvested)/
$1,000,000 (adjusted sales price) x
$600,000. Comments were received sug-
gesting that this rule be changed to
provide that the amount of the exclusion
as adjusted not be reduced below the
amount actually reinvested (up to
$600,000). This suggestion was adopted
in the final regulations, reflecting that
two residences can now qualify for the
$600,000 exclusion.
Special Analyses
It has also been determined that sec-
tion 553(b) of the Administrative Proce-
dure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
the notice of proposed rulemaking pre-
ceding the regulations was issued prior
to March 29, 1996, the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) does not
apply.
Drafting Information
The principal author of these regula-
tions is Susan Hurwitz, Office of Assis-
tant Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the IRS and Treasury De-
partment participated in their develop-
ment.
* * * * *
Adoption of Amendments to the Regula-
tions
Accordingly, 26 CFR parts 20 and
602 are amended as follows:
PART 20—ESTATE TAX; ESTATES
OF DECEDENTS DYING AFTER AU-
GUST 16, 1954
Paragraph 1. The authority citation for
part 20 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In § 20.2056A–0, the table of
contents is amended by revising the
entry for § 20.2056A–2(d) to read as
follows:
§ 20.2056A–0 Table of contents.
* * * * *
§ 20.2056A–2 Requirements for quali-
fied domestic trust.
* * * * *
(d) Additional requirements to ensure
collection of the section 2056A estate
tax.
(1) Security and other arrangements
for payment of estate tax imposed under
section 2056A(b)(1).
(2) Individual trustees.
(3) Annual reporting requirements.
(4) Request for alternate arrangement
or waiver.
(5) Adjustment of dollar threshold
and exclusion.
(6) Effective date and special rules.
* * * * *
Par. 3. In § 20.2056A–2, paragraph
(d) is added to read as follows:
§ 20.2056A–2 Requirements for quali-
fied domestic trust.
* * * * *
(d)Additional requirements to ensure
collection of the section 2056A estate
tax—(1)Security and other arrange-
ments for payment of estate tax imposed
under section 2056A(b)(1)—(i)QDOTs
with assets in excess of $2 million.If
the fair market value of the assets
passing, treated, or deemed to have
passed to the QDOT (or in the form of
a QDOT), determined without reduction
for any indebtedness with respect to the
assets, as finally determined for federal
estate tax purposes, exceeds $2 million
as of the date of the decedent’s death or,
if applicable, the alternate valuation date
(adjusted as provided in paragraph
(d)(1)(iii) of this section), the trust in-
strument must meet the requirements of
either paragraph (d)(1)(i)(A), (B), or (C)
of this section at all times during the
term of the QDOT. The QDOT may
alternate between any of the arrange-
ments provided in paragraphs (d)(1)(i)-
(A), (B), and (C) of this section pro-
vided that, at any given time, one of the
arrangements must be operative. See
paragraph (d)(1)(iii) of this section for
the definition of finally determined. The
QDOT may provide that the trustee has
the discretion to use any one of the
security arrangements or may provide
that the trustee is limited to using only
one or two of the arrangements speci-
fied in the trust instrument. A trust
instrument that specifically states that
the trust must be administered in com-
pliance with paragraph (d)(1)(i)(A), (B),
or (C) of this section is treated as
meeting the requirements of paragraphs
(d)(1)(i)(A), (B), or (C) for purposes of
paragraphs (d)(1)(i) and, if applicable,
(d)(1)(ii) of this section.
(A)Bank Trustee.Except as other-
wise provided in paragraph (d)(6)(ii) or
(iii) of this section, the trust instrument
must provide that whenever the Bank
Trustee security alternative is used for
the QDOT, at least one U.S. Trustee
must be a bank as defined in section
581. Alternatively, except as otherwise
provided in paragraph (d)(6)(ii) or (iii)
of this section, at least one trustee must
be a United States branch of a foreign
bank, provided that, in such cases, dur-
ing the entire term of the QDOT a U.S.
Trustee must act as a trustee with the
foreign bank trustee.
(B)Bond.Except as otherwise pro-
vided in paragraph (d)(6)(ii) or (iii) of
this section, the trust instrument must
provide that whenever the bond security
arrangement alternative is used for the
QDOT, the U.S. Trustee must furnish a
bond in favor of the Internal Revenue
Service in an amount equal to 65 per-
cent of the fair market value of the trust
assets (determined without regard to any
17

indebtedness with respect to the assets)
as of the date of the decedent’s death
(or alternate valuation date, if appli-
cable), as finally determined for federal
estate tax purposes (and as further ad-
justed as provided in paragraph
(d)(1)(iv) of this section). If, after ex-
amination of the estate tax return, the
fair market value of the trust assets, as
originally reported on the estate tax
return, is adjusted (pursuant to a judicial
proceeding or otherwise) resulting in a
final determination of the value of the
assets as reported on the return, the U.S.
Trustee has a reasonable period of time
(not exceeding sixty days after the con-
clusion of the proceeding or other action
resulting in a final determination of the
value of the assets) to adjust the amount
of the bond accordingly. But see, para-
graph (d)(1)(i)(D) of this section for a
special rule in the case of a substantial
undervaluation of QDOT assets. Unless
an alternate arrangement under para-
graph (d)(1)(i)(A), (B), or (C) of this
section, or an arrangement prescribed
under paragraph (d)(4) of this section, is
provided, or the trust is otherwise no
longer subject to the requirements of
section 2056A pursuant to section
2056A(b)(12), the bond must remain in
effect until the trust ceases to function
as a QDOT and any tax liability finally
determined to be due under section
2056A(b) is paid, or is finally deter-
mined to be zero.
(1)Requirements for the bond.The
bond must be with a satisfactory surety,
as prescribed under section 7101 and
§ 301.7101–1 of this chapter (Regula-
tions on Procedure and Administration),
and is subject to Internal Revenue Ser-
vice review as may be prescribed by the
Commissioner. The bond may not be
cancelled. The bond must be for a term
of at least one year and must be auto-
matically renewable at the end of that
term, on an annual basis thereafter,
unless notice of failure to renew is
mailed to the U.S. Trustee and the
Internal Revenue Service at least 60
days prior to the end of the term,
including periods of automatic exten-
sions. Any notice of failure to renew
required to be sent to the Internal Rev-
enue Service must be sent to the Estate
and Gift Tax Group in the District
Office of the Internal Revenue Service
that has examination jurisdiction over
the decedent’s estate (Internal Revenue
Service, District Director, [specify loca-
tion] District Office, Estate and Gift Tax
Examination Group, [specify Street Ad-
dress, City, State, Zip Code]) (or in the
case of noncitizen decedents and United
States citizens who die domiciled out-
side the United States, Estate Tax
Group, Assistant Commissioner (Interna-
tional), 950 L’Enfant Plaza, CP:IN:D:C:-
EX:HQ:1114, Washington, DC 20024).
The Internal Revenue Service will not
draw on the bond if, within 30 days of
receipt of the notice of failure to renew,
the U.S. Trustee notifies the Internal
Revenue Service (at the same address to
which notice of failure to renew is to be
sent) that an alternate arrangement under
paragraph (d)(1)(i)(A), (B), or (C) or
(d)(4) of this section, has been secured
and that the arrangement will take effect
immediately prior to or upon expiration
of the bond.
(2)Form of bond.The bond must be
in the following form (or in a form that
is the same as the following form in all
material respects), or in such alternative
form as the Commissioner may pre-
scribe by guidance published in the
Internal Revenue Bulletin (see
§ 601.601(d)(2) of this chapter):
Bond in Favor of the Internal Rev-
enue Service To Secure Payment of
Section 2056A Estate Tax Imposed Un-
der Section 2056A(b) of the Internal
Revenue Code.
KNOW ALL PERSONS BY
THESE PRESENTS, That the under-
signed,
, the SURETY,
and
, the PRINCIPAL,
are irrevocably held and firmly bound to
pay the Internal Revenue Service upon
written demand that amount of any tax
up to$[amount determined under para-
graph (d)(1)(i)(B) of this section], im-
posed under section 2056A(b)(1) of the
Internal Revenue Code (including penal-
ties and interest on said tax) determined
by the Internal Revenue Service to be
payable with respect to the principal as
trustee for:[Identify trust and governing
instrument, name and address of
trustee], a qualified domestic trust as
defined in section 2056A(a) of the Inter-
nal Revenue Code, for the payment of
which the said Principal and said Surety,
bind themselves, their heirs, executors,
administrators, successors and assigns,
jointly and severally, firmly by these
presents.
WHEREAS, The Internal Revenue
Service may demand payment under this
bond at any time if the Internal Revenue
Service in its sole discretion determines
that a taxable event with respect to the
trust has occurred; the trust no longer
qualifies as a qualified domestic trust as
described in section 2056A(a) of the
Internal Revenue Code and the regula-
tions promulgated thereunder, or a dis-
tribution subject to the tax imposed
under section 2056A(b)(1) has been
made. Demand by the Internal Revenue
Service for payment may be made
whether or not the tax and tax return
(Form 706–QDT) with respect to the
taxable event is due at the time of such
demand, or an assessment has been
made by the Internal Revenue Service
with respect to the tax.
NOW THEREFORE, The condition
of this obligation is such that it must not
be cancelled and, if payment of all tax
liability finally determined to be im-
posed under section 2056A(b) is made,
then this obligation is null and void;
otherwise, this obligation is to remain in
full force and effect for one year from
its effective date and is to be automati-
cally renewable on an annual basis
unless, at least 60 days prior to the
expiration date, including periods of
automatic renewals, the surety mails to
the U.S. Trustee and the Internal Rev-
enue Service by Registered or Certified
Mail, return receipt requested, notice of
the failure to renew. Receipt of this
notice of failure to renew by the Internal
Revenue Service may be considered a
taxable event. The Internal Revenue Ser-
vice will not draw upon the bond if,
within 30 days of receipt of the notice
of failure to renew, the trustee notifies
the Internal Revenue Service that an
alternate security arrangement has been
secured and that the arrangement will
take effect immediately prior to or upon
expiration of the bond. The surety re-
mains liable for all taxable events oc-
curring prior to the date of expiration.
All notices required to be sent to the
Internal Revenue Service under this
instrument should be sent to District
Director,[specify location]District Of-
fice, Estate and Gift Tax Examination
Group, Street Address, City, State, Zip
Code. (In the case of nonresident non-
citizen decedents and United States citi-
zens who die domiciled outside the
United States, all notices should be sent
to Estate Tax Group, Assistant Commis-
sioner (International), 950 L’Enfant
Plaza,
CP:IN:D:C:EX:HQ:1114, Wash-
ington, DC 20024).
This bond shall be effective as of
. Principal
DateSurety
Date
(3)Additional governing instrument
requirements.The trust instrument must
provide that in the event the Internal
Revenue Service draws on the bond, in
18

accordance with its terms, neither the
U.S. Trustee nor any other person will
seek a return of any part of the remit-
tance until after April 15th of the calen-
dar year following the year in which the
bond is drawn upon. After that date, any
such remittance will be treated as a
deposit and returned (without interest)
upon request of the U.S. Trustee, unless
it is determined that assessment or col-
lection of the tax imposed by section
2056A(b)(1) is in jeopardy, within the
meaning of section 6861. If an assess-
ment under section 6861 is made, the
remittance will first be credited to any
tax liability reported on the Form 706–
QDT, then to any unpaid balance of a
section 2056A(b)(1)(A) tax liability
(plus interest and penalties) for any
prior taxable years, and any balance will
then be returned to the U.S. Trustee.
(4)Procedure.The bond is to be
filed with the decedent’s federal estate
tax return, Form 706 or 706NA (unless
an extension for filing the bond is
granted under § 301.9100 of this chap-
ter). The U.S. Trustee must provide a
written statement with the bond that
provides a list of the assets that will be
used to fund the QDOT and the respec-
tive values of the assets. The written
statement must also indicate whether
any exclusions under paragraph
(d)(1)(iv) of this section are claimed.
(C)Letter of credit.Except as other-
wise provided in paragraph (d)(6)(ii) or
(iii) of this section, the trust instrument
must provide that whenever the letter of
credit security arrangement is used for
the QDOT, the U.S. Trustee must fur-
nish an irrevocable letter of credit issued
by a bank as defined in section 581, a
United States branch of a foreign bank,
or a foreign bank with a confirmation
by a bank as defined in section 581. The
letter of credit must be for an amount
equal to 65 percent of the fair market
value of the trust assets (determined
without regard to any indebtedness with
respect to the assets) as of the date of
the decedent’s death (or alternate valua-
tion date, if applicable), as finally deter-
mined for federal estate tax purposes
(and as further adjusted as provided in
paragraph (d)(1)(iv) of this section). If,
after examination of the estate tax re-
turn, the fair market value of the trust
assets, as originally reported on the
estate tax return, is adjusted (pursuant to
a judicial proceeding or otherwise) re-
sulting in a final determination of the
value of the assets as reported on the
return, the U.S. Trustee has a reasonable
period of time (not exceeding 60 days
after the conclusion of the proceeding or
other action resulting in a final determi-
nation of the value of the assets) to
adjust the amount of the letter of credit
accordingly. But see, paragraph
(d)(1)(i)(D) of this section for a special
rule in the case of a substantial under-
valuation of QDOT assets. Unless an
alternate arrangement under paragraph
(d)(1)(i)(A), (B), or (C) of this section,
or an arrangement prescribed under
paragraph (d)(4) of this section, is pro-
vided, or the trust is otherwise no longer
subject to the requirements of section
2056A pursuant to section
2056A(b)(12), the letter of credit must
remain in effect until the trust ceases to
function as a QDOT and any tax liabil-
ity finally determined to be due under
section 2056A(b) is paid or is finally
determined to be zero.
(1)
Requirements for the letter of
credit.The letter of credit must be
irrevocable and provide for sight pay-
ment. The letter of credit must have a
term of at least one year and must be
automatically renewable at the end of
the term, at least on an annual basis,
unless notice of failure to renew is
mailed to the U.S. Trustee and the
Internal Revenue Service at least sixty
days prior to the end of the term,
including periods of automatic renewals.
If the letter of credit is issued by the
U.S. branch of a foreign bank and the
U.S. branch is closing, the branch (or
foreign bank) must notify the U.S.
Trustee and the Internal Revenue Service
of the closure and the notice of closure
must be mailed at least 60 days prior to
the date of closure. Any notice of failure
to renew or closure of a U.S. branch of
a foreign bank required to be sent to the
Internal Revenue Service must be sent to
the Estate and Gift Tax Group in the
District Office of the Internal Revenue
Service that has examination jurisdiction
over the decedent’s estate (Internal Rev-
enue Service, District Director,[specify
location]District Office, Estate and Gift
Tax Examination Group, [Street Address,
City State, Zip Code]) (or in the case of
noncitizen decedents and United States
citizens who die domiciled outside the
United States, Estate Tax, Assistant
Commissioner (International), 950
L’Enfant Plaza, CP:IN:D:C:EX:HQ:1114,
Washington, DC 20024). The Internal
Revenue Service will not draw on the
letter of credit if, within 30 days of
receipt of the notice of failure to renew
or closure of the U.S. branch of a
foreign bank, the U.S. Trustee notifies
the Internal Revenue Service (at the
same address to which notice is to be
sent) that an alternate arrangement under
paragraph (d)(1)(i)(A), (B), or (C), or
(d)(4) of this section, has been secured
and that the arrangement will take effect
immediately prior to or upon expiration
of the letter of credit or closure of the
U.S. branch of the foreign bank.
(2)Form of letter of credit.The letter
of credit must be made in the following
form (or in a form that is the same as
the following form in all material re-
spects), or an alternative form that the
Commissioner prescribes by guidance
published in the Internal Revenue Bulle-
tin (see § 601.601(d)(2) of this chapter):
[Issue Date]
To: Internal Revenue Service
Attention: District Director,[specify
location]District Office
Estate and Gift Tax Examination
Group
[Street Address, City, State,
ZIP Code]
[Or in the case of nonresident noncitizen
decedents and United States citizens
who die domiciled outside the United
States,
To: Estate Tax Group,
Assistant Commissioner
(International)
950 L’Enfant Plaza
CP:IN:D:C:EX:HQ:1114
Washington, DC 20024].
Dear Sirs:
We hereby establish our irrevocable
Letter of Credit No.
in your favor
for drawings up to U.S. $ [Applicant
should provide bank with amount which
Applicant determined under paragraph
(d)(1)(i)(C)] effective immediately. This
Letter of Credit is issued, presentable
and payable at our office at
and expires at 3:00 p.m.
[EDT, EST, CDT, CST, MDT, MST,
PDT, PST] on
at said office.
For information and reference only,
we are informed that this Letter of
Credit relates to [Applicant should pro-
vide bank with the identity of qualified
domestic trust and governing instru-
ment], and the name, address, and iden-
tifying number of the trustee is [Appli-
cant should provide bank with the
trustee name, address and the QDOT’s
TIN number, if any].
Drawings on this Letter of Credit are
available upon presentation of the fol-
lowing documents:
1. Your draft drawn at sight on us
bearing our Letter of Credit No.
; and
19

2. Your signed statement as follows:
The amount of the accompanying
draft is payable under [identify bank]
irrevocable Letter of Credit No.
pursuant to section
2056A of the Internal Revenue Code
and the regulations promulgated
thereunder, because the Internal Rev-
enue Service in its sole discretion has
determined that a ‘‘taxable event’’
with respect to the trust has occurred;
e.g., the trust no longer qualifies as a
qualified domestic trust as described
in section 2056A of the Internal Rev-
enue Code and regulations promul-
gated thereunder, or a distribution
subject to the tax imposed under
section 2056A(b)(1) of the Internal
Revenue Code has been made.
Except as expressly stated herein, this
undertaking is not subject to any agree-
ment, requirement or qualification. The
obligation of [Name of Issuing Bank]
under this Letter of Credit is the indi-
vidual obligation of [Name of Issuing
Bank] and is in no way contingent upon
reimbursement with respect thereto.
It is a condition of this Letter of
Credit that it is deemed to be automati-
cally extended without amendment for a
period of one year from the expiration
date hereof, or any future expiration
date, unless at least 60 days prior to any
expiration date, we mail to you and to
the U.S. Trustee notice by Registered
Mail or Certified Mail, return receipt
requested, or by courier to your and the
trustee’s address indicated above, that
we elect not to consider this Letter of
Credit renewed for any such additional
period. Upon receipt of this notice, you
may draw hereunder on or before the
then current expiration date, by presen-
tation of your draft and statement as
stipulated above.
[In the case of a letter of credit issued
by a U.S. branch of a foreign bank the
following language must be added]. It is
a further condition of this Letter of
Credit that if the U.S. branch of[name
of foreign bank]is to be closed, that at
least sixty days prior to closing, we mail
to you and the U.S. Trustee notice by
Registered Mail or Certified Mail, return
receipt requested, or by courier to your
and the U.S. Trustee’s address indicated
above, that this branch will be closing.
This notice will specify the actual date of
closing. Upon receipt of the notice, you
may draw hereunder on or before the
date of closure, by presentation of your
draft and statement as stipulated above.
Except where otherwise stated herein,
this Letter of Credit is subject to the
Uniform Customs and Practice for
Documentary Credits, 1993 Revision,
ICC Publication No. 500. If we notify
you of our election not to consider this
Letter of Credit renewed and the expira-
tion date occurs during an interruption
of business described in Article 17 of
said Publication 500, unless you had
consented to cancellation prior to the
expiration date, the bank hereby specifi-
cally agrees to effect payment if this
Letter of Credit is drawn against within
30 days after the resumption of busi-
ness.
Except as stated herein, this Letter of
Credit cannot be modified or revoked
without your consent.
Authorized Signature
Date
(3)Form of confirmation.If the require-
ments of this paragraph (d)(1)(i)(C) are
satisfied by the issuance of a letter of
credit by a foreign bank with confirma-
tion by a bank as defined in section 581,
the confirmation must be made in the
following form (or in a form that is the
same as the following form in all mate-
rial respects), or an alternative form as
the Commissioner prescribes by guid-
ance published in the Internal Revenue
Bulletin (see § 602.101(d)(2) of this
chapter):
[Issue Date]
To: Internal Revenue Service
Attention: District Director,
[specify location]
District Office
Estate and Gift Tax
Examination Group
[State Address, City,
State, ZIP Code]
[or in the case of nonresident noncitizen
decedents and United States citizens
who die domiciled outside the United
States,
To: Estate Tax Group,
Assistant Commissioner
(International)
950 L’Enfant Plaza
CP:IN:D:C:EX:HQ:1114
Washington, DC 20024].
Dear Sirs:
We hereby confirm the enclosed irre-
vocable Letter of Credit No.
,
and amendments thereto, if any, in your
favor by
[Issuing Bank]
for drawings up to U.S. $
[same amount as in initial Letter of
Credit] effective immediately. This con-
firmation is issued, presentable and pay-
able at our office at
and
expires at 3:00 p.m. [EDT, EST,
CDT, CST, MDT, MST, PDT, PST] on
at said office.
For information and reference only,
we are informed that this Confirmation
relates to [Applicant should provide
bank with the identity of qualified do-
mestic trust and governing instrument],
and the name, address, and identifying
number of the trustee is [Applicant
should provide bank with the trustee
name, address and the QDOT’s TIN
number, if any].
We hereby undertake to honor your
sight draft(s) drawn as specified in the
Letter of Credit.
Except as expressly stated herein, this
undertaking is not subject to any agree-
ment, condition or qualification. The
obligation of [Name of Confirming
Bank] under this Confirmation is the
individual obligation of [Name of Con-
firming Bank] and is in no way contin-
gent upon reimbursement with respect
thereto.
It is a condition of this Confirmation
that it is deemed to be automatically
extended without amendment for a pe-
riod of one year from the expiry date
hereof, or any future expiration date,
unless at least sixty days prior to the
expiration date, we send to you and to
the U.S. Trustee notice by Registered
Mail or Certified Mail, return receipt
requested, or by courier to your and the
trustee’s addresses, respectively, indi-
cated above, that we elect not to con-
sider this Confirmation renewed for any
additional period. Upon receipt of this
notice by you, you may draw hereunder
on or before the then current expiration
date, by presentation of your draft and
statement as stipulated above.
Except where otherwise stated herein,
this Confirmation is subject to the Uni-
form Customs and Practice for Docu-
mentary Credits, 1993 Revision, ICC
Publication No. 500. If we notify you of
our election not to consider this Confir-
mation renewed and the expiration date
occurs during an interruption of business
described in Article 17 of said Publica-
tion 500, unless you had consented to
cancellation prior to the expiration date,
the bank hereby specifically agrees to
effect payment if this Confirmation is
drawn against within 30 days after the
resumption of business.
Except as stated herein, this Confir-
mation cannot be modified or revoked
without your consent.
Authorized Signature
Date
20

(4)Additional governing instrument
requirements.The trust instrument must
provide that if the Internal Revenue
Service draws on the letter of credit (or
confirmation) in accordance with its
terms, neither the U.S. Trustee nor any
other person will seek a return of any
part of the remittance until April 15th of
the calendar year following the year in
which the letter of credit (or confirma-
tion) is drawn upon. After that date, any
such remittance will be treated as a
deposit and returned (without interest)
upon request of the U.S. Trustee after
the date specified above, unless it is
determined that assessment or collection
of the tax imposed by section
2056A(b)(1) is in jeopardy, within the
meaning of section 6861. If an assess-
ment under section 6861 is made, the
remittance will first be credited to any
tax liability reported on the Form 706–
QDT, then to any unpaid balance of a
section 2056A(b)(1)(A) tax liability
(plus interest and penalties) for any
prior taxable years, and any balance will
then be returned to the U.S. Trustee.
(5)Procedure.The letter of credit
(and confirmation, if applicable) is to be
filed with the decedent’s federal estate
tax return, Form 706 or 706NA (unless
an extension for filing the letter of
credit is granted under § 301.9100 of
this chapter). The U.S. Trustee must
provide a written statement with the
letter of credit that provides a list of the
assets that will be used to fund the
QDOT and the respective values of the
assets. The written statement must also
indicate whether any exclusions under
paragraph (d)(1)(iv) of this section are
claimed.
(D)Disallowance of marital deduc-
tion for substantial undervaluation of
QDOT property in certain situations.(1)
If either—
(i) The bond or letter of credit secu-
rity arrangement under paragraph
(d)(1)(i)(B) or (C) of this section is
chosen by the U.S. Trustee; or
(ii) The QDOT property as originally
reported on the decedent’s estate tax
return is valued at $2 million or less
but, as finally determined for federal
estate tax purposes, the QDOT property
is determined to be in excess of $2
million, then the marital deduction will
be disallowed in its entirety for failure
to comply with the requirements of
section 2056A if the value of the QDOT
property reported on the estate tax re-
turn is 50 percent or less of the amount
finally determined to be the correct
value of the property for federal estate
tax purposes.
(2) The preceding sentence does not
apply if—
(i) There was reasonable cause for
the undervaluation; and
(ii) The fiduciary of the estate acted
in good faith with respect to the under-
valuation. For this purpose, § 1.6664–
4(b) of this chapter applies, to the extent
applicable, with respect to the facts and
circumstances to be taken into account
in making this determination.
(ii)QDOTs with assets of $2 million
or less.If the fair market value of the
assets passing, treated, or deemed to
have passed to the QDOT (or in the
form of a QDOT), determined without
reduction for any indebtedness with re-
spect to the assets, as finally determined
for federal estate tax purposes, is $2
million or less as of the date of the
decedent’s death or, if applicable, the
alternate valuation date (adjusted as pro-
vided in paragraph (d)(1)(iv) of this
section), the trust instrument must pro-
vide that either no more than 35 percent
of the fair market value of the trust
assets, determined annually on the last
day of the taxable year of the trust (or
on the last day of the calendar year if
the QDOT does not have a taxable
year), will consist of real property lo-
cated outside of the United States, or the
trust will meet the requirements pre-
scribed by paragraph (d)(1)(i)(A), (B),
or (C) of this section. See paragraph
(d)(1)(ii)(D) of this section for special
rules in the case of principal distribu-
tions from a QDOT, fluctuations in the
value of foreign real property held by a
QDOT due to changes in value of
foreign currency, and fluctuations in the
fair market value of assets held by the
QDOT. See paragraph (d)(1)(iv) of this
section for a special rule for personal
residences. If the fair market value, as
originally reported on the decedent’s
estate tax return, of the assets passing or
deemed to have passed to the QDOT
(determined without reduction for any
indebtedness with respect to the assets)
is $2 million or less, but the fair market
value of the assets as finally determined
for federal estate tax purposes is more
than $2 million, the U.S. Trustee has a
reasonable period of time (not exceeding
sixty days after the conclusion of the
proceeding or other action resulting in a
final determination of the value of the
assets) to meet the requirements pre-
scribed by paragraph (d)(1)(i)(A), (B),
or (C) of this section. However, see
paragraph (d)(1)(i)(D) of this section in
the case of a substantial undervaluation
of QDOT assets. See § 20.2056A–
2(d)(1)(iii) for the definition of finally
determined.
(A)Multiple QDOTs.For purposes of
this paragraph (d)(1)(ii), if more than
one QDOT is established for the benefit
of the surviving spouse, the fair market
value of all the QDOTs are aggregated
in determining whether the $2 million
threshold under this paragraph (d)(1)(ii)
is exceeded.
(B)Look-through rule.For purposes
of determining whether no more than 35
percent of the fair market value of the
QDOT assets consists of foreign real
property, if the QDOT owns more than
20% of the voting stock or value in a
corporation with 15 or fewer sharehold-
ers, or more than 20% of the capital
interest of a partnership with 15 or
fewer partners, then all assets owned by
the corporation or partnership are
deemed to be owned directly by the
QDOT to the extent of the QDOT’s pro
rata share of the assets of that corpora-
tion or partnership. For a partnership,
the QDOT partner’s pro rata share is
based on the greater of its interest in the
capital or profits of the partnership. For
purposes of this paragraph, all stock in
the corporation, or interests in the part-
nership, as the case may be, owned by
or held for the benefit of the surviving
spouse, or any members of the surviving
spouse’s family (within the meaning of
section 267(c)(4)), are treated as owned
by the QDOT solely for purposes of
determining the number of partners or
shareholders in the entity and the
QDOT’s percentage voting interest or
value in the corporation or capital inter-
est in the partnership, but not for the
purpose of determining the QDOT’s pro
rata share of the assets of the entity.
(C)Interests in other entities.Inter-
ests owned by the QDOT in other
entities (such as an interest in a trust)
are accorded treatment consistent with
that described in paragraph (d)(1)(ii)(B)
of this section.
(D)Special rule for foreign real
property.For purposes of this paragraph
(d)(1)(ii), if, on the last day of any
taxable year during the term of the
QDOT (or the last day of the calendar
year if the QDOT does not have a
taxable year), the value of foreign real
property owned by the QDOT exceeds
35 percent of the fair market value of
the trust assets due to: distributions of
QDOT principal during that year; fluc-
tuations in the value of the foreign
21

currency in the jurisdiction where the
real estate is located; or fluctuations in
the fair market value of any assets held
in the QDOT, then the QDOT will not
be treated as failing to meet the require-
ments of this paragraph (d)(1). Accord-
ingly, the QDOT will not cease to be a
QDOT within the meaning of
§ 20.2056A–5(b)(3) if, by the end of
the taxable year (or the last day of the
calendar year if the QDOT does not
have a taxable year) of the QDOT
immediately following the year in which
the 35 percent limit was exceeded, the
value of the foreign real property held
by the QDOT does not exceed 35
percent of the fair market value of the
trust assets or, alternatively, the QDOT
meets the requirements of either para-
graph (d)(1)(i)(A), (B), or (C) of this
section on or before the close of that
succeeding year.
(iii)Definition of finally determined.
For purposes of § 20.2056A–2(d)(1)(i)
and (ii), the fair market value of assets
will be treated as finally determined on
the earliest to occur of—
(A) The entry of a decision, judg-
ment, decree, or other order by any
court of competent jurisdiction that has
become final;
(B) The execution of a closing agree-
ment made under section 7121;
(C) Any final disposition by the In-
ternal Revenue Service of a claim for
refund;
(D) The issuance of an estate tax
closing letter (Form L–154 or equiva-
lent) if no claim for refund is filed; or
(E) The expiration of the period of
assessment.
(iv)Special rules for personal resi-
dence and related personal effects—(A)
Two million dollar threshold.For pur-
poses of determining whether the $2
million threshold under paragraphs
(d)(1)(i) and (ii) of this section has been
exceeded, the executor of the estate may
elect to exclude up to $600,000 in value
attributable to real property (and related
furnishings) owned directly by the
QDOT that is used by, or held for the
use of the surviving spouse as a per-
sonal residence and that passes, or is
treated as passing, to the QDOT under
section 2056(d). The election may be
made regardless of whether the real
property is situated within or without
the United States. The election is made
by attaching to the estate tax return on
which the QDOT election is made a
written statement claiming the exclusion.
The statement must clearly identify the
property or properties (i.e. address and
location) for which the election is being
made.
(B)Security requirement.For pur-
poses of determining the amount of the
bond or letter of credit required when
paragraph (d)(1)(i)(B) or (C) of this
section applies, the executor of the es-
tate may elect to exclude, during the
term of the QDOT, up to $600,000 in
value attributable to real property (and
related furnishings) owned directly by
the QDOT that is used by, or held for
the use of the surviving spouse as a
personal residence and that passes, or is
treated as passing, to the QDOT under
section 2056(d). The election may be
made regardless of whether the real
property is situated within or without
the United States. The election is made
by attaching to the estate tax return on
which the QDOT election is made a
written statement claiming the exclusion.
If an election is not made on the
decedent’s estate tax return, the election
may be made, prospectively, at any
time, during the term of the QDOT, by
attaching to the Form 706–QDT a writ-
ten statement claiming the exclusion. A
statement may also be attached to the
Form 706–QDT that cancels a prior
election of the personal residence exclu-
sion that was made under this para-
graph, either on the decedent’s estate tax
return or on a Form 706–QDT.
(C)Foreign real property limitation.
The special rules of this paragraph
(d)(1)(iv) do not apply for purposes of
determining whether more than 35 per-
cent of the QDOT assets consist of
foreign real property under paragraph
(d)(1)(ii) of this section.
(D)Personal residence.For purposes
of this paragraph (d)(1)(iv), apersonal
residenceis either the principal resi-
dence of the surviving spouse within the
meaning of section 1034 or one other
residence of the surviving spouse. In
order to be used by or held for the use
of the spouse as a personal residence,
the residence must be available at all
times for use by the surviving spouse.
The residence may not be rented to
another party, even when not occupied
by the spouse. A personal residence may
include appurtenant structures used by
the surviving spouse for residential pur-
poses and adjacent land not in excess of
that which is reasonably appropriate for
residential purposes (taking into account
the residence’s size and location).
(E)Related furnishings.The termre-
lated furnishingsmeans furniture and
commonly included items such as appli-
ances, fixtures, decorative items and
china, that are not beyond the value
associated with normal household and
decorative use. Rare artwork, valuable
antiques, and automobiles of any kind or
class are not within the meaning of this
term.
(F)Required statement.If one or
both of the exclusions provided in para-
graph (d)(1)(iv)(A) or (B) of this section
are elected by the executor of the estate
and the personal residence is later sold
or ceases to be used, or held for use as
a personal residence, the U.S. Trustee
must file the statement that is required
under paragraph (d)(3) of this section at
the time and in the manner provided in
paragraphs (d)(3)(ii) and (iii) of this
section.
(G)Cessation of use.Except as pro-
vided in this paragraph (d)(1)(iv)(G), if
the residence ceases to be used by, or
held for the use of, the spouse as a
personal residence of the spouse, or if
the residence is sold during the term of
the QDOT, the exclusions provided in
paragraphs (d)(1)(iv)(A) and (B) of this
section cease to apply. However, if the
residence is sold, the exclusion contin-
ues to apply if, within 12 months of the
date of sale, the amount of the adjusted
sales price (as defined in section
1034(b)(1)) is reinvested to purchase a
new personal residence for the spouse.
If less than the amount of the adjusted
sales price is reinvested, the amount of
the exclusion equals the amount rein-
vested in the new residence plus any
amount previously allocated to a resi-
dence that continues to qualify for the
exclusion, up to a total of $600,000. If
the QDOT ceases to qualify for all or
any portion of the initially claimed
exclusions, paragraph (d)(1)(i) of this
section, if applicable (determined as if
the portion of the exclusions disallowed
had not been initially claimed by the
QDOT), must be complied with no later
than 120 days after the effective date of
the cessation. In addition, if a residence
ceases to be used by, or held for the use
of the spouse as a personal residence of
the spouse or if the personal residence is
sold during the term of the QDOT, the
personal residence exclusion may be
allocated to another residence that is
held in either the same QDOT or in
another QDOT that is established for the
surviving spouse, if the other residence
qualifies as being used by, or held for
the use of the spouse as a personal
residence. The trustee may allocate up
to $600,000 to the new personal resi-
dence (less the amount previously allo-
22

cated to a residence that continues to
qualify for the exclusion) even if the
entire $600,000 exclusion was not previ-
ously utilized with respect to the origi-
nal personal residence(s).
(v)Anti-abuse rule.Regardless of
whether the QDOT designates a bank as
the U.S. Trustee under paragraph
(d)(1)(i)(A) of this section (or otherwise
complies with paragraph (d)(1)(i)(A) of
this section by naming a foreign bank
with a United States branch as a trustee
to serve with the U.S. Trustee), complies
with paragraph (d)(1)(i)(B) or (C) of
this section, or is subject to and com-
plies with the foreign real property
requirements of paragraph (d)(1)(ii) of
this section, the trust immediately ceases
to qualify as a QDOT if the trust
utilizes any device or arrangement that
has, as a principal purpose, the avoid-
ance of liability for the estate tax im-
posed under section 2056A(b)(1), or the
prevention of the collection of the tax.
For example, the trust may become
subject to this paragraph (d)(1)(v) if the
U.S. Trustee that is selected is a domes-
tic corporation established with insub-
stantial capitalization by the surviving
spouse or members of the spouse’s
family.
(2)Individual trustees.If the U.S.
Trustee is an individual United States
citizen, the individual must have a tax
home (as defined in section 911(d)(3))
in the United States.
(3)Annual reporting requirements—
(i)In general.The U.S. Trustee must
file a written statement described in
paragraph (d)(3)(iii) of this section, if
the QDOT satisfies any one of the
following criteria for the applicable re-
porting years—
(A) The QDOT directly owns any
foreign real property on the last day of
its taxable year (or the last day of the
calendar year if it has no taxable year),
and the QDOT does not satisfy the
requirements of paragraph (d)(1)(i)(A),
(B), or (C) or (d)(4) of this section by
employing a bank as trustee or provid-
ing security; or
(B) The personal residence previously
subject to the exclusion under paragraph
(d)(1)(iv) of this section is sold, or that
personal residence ceases to be used, or
held for use, as a personal residence,
during the taxable year (or during the
calendar year if the QDOT does not
have a taxable year); or
(C) After the application of the look-
through rule contained in paragraph
(d)(1)(ii)(B) of this section, the QDOT
is treated as owning any foreign real
property on the last day of the taxable
year (or the last day of the calendar year
if the QDOT has no taxable year), and
the QDOT does not satisfy the require-
ments of paragraph (d)(1)(A), (B), (C)
or (d)(4) of this section by employing a
bank as trustee or providing security.
(ii)Time and manner of filing.The
written statement, containing the infor-
mation described in paragraph (d)(3)(iii)
of this section, is to be filed for the
taxable year of the QDOT (calendar
year if the QDOT does not have a
taxable year) for which any of the
events or conditions requiring the filing
of a statement under paragraph (d)(3)(i)
of this section have occurred or have
been satisfied. The written statement is
to be submitted to the Internal Revenue
Service by filing a Form 706–QDT, with
the statement attached, no later than
April 15th of the calendar year follow-
ing the calendar year in which or with
which the taxable year of the QDOT
ends (or by April 15th of the following
year if the QDOT has no taxable year),
unless an extension of time is obtained
under § 20.2056A–11(a). The Form
706–QDT, with attached statement, must
be filed regardless of whether the Form
706–QDT is otherwise required to be
filed under the provisions of this chap-
ter. Failure to file timely the statement
may subject the QDOT to the rules of
paragraph (d)(1)(v) of this section.
(iii)Contents of statement.The writ-
ten statement must contain the following
information—
(A) The name, address, and taxpayer
identification number, if any, of the U.S.
Trustee and the QDOT; and
(B) A list summarizing the assets
held by the QDOT, together with the
fair market value of each listed QDOT
asset, determined as of the last day of
the taxable year (December 31 if the
QDOT does not have a taxable year) for
which the written statement is filed. If
the look-through rule contained in para-
graph (d)(1)(ii)(B) of this section ap-
plies, then the partnership, corporation,
trust or other entity must be identified
and the QDOT’s pro rata share of the
foreign real property and other assets
owned by that entity must be listed on
the statement as if directly owned by the
QDOT; and
(C) If a personal residence previously
subject to the exclusion under paragraph
(d)(1)(iv) of this section is sold during
the taxable year (or during the calendar
year if the QDOT does not have a
taxable year), the statement must pro-
vide the date of sale, the adjusted sales
price (as defined in section 1034(b)(1)),
the extent to which the amount of the
adjusted sales price has been or will be
used to purchase a new personal resi-
dence and, if not timely reinvested, the
steps that will or have been taken to
comply with paragraph (d)(1)(i) of this
section, if applicable; and
(D) If the personal residence ceases
to be used, or held for use, as a personal
residence by the surviving spouse during
the taxable year (or during the calendar
year if the QDOT does not have a
taxable year), the written statement must
describe the steps that will or have been
taken to comply with paragraph (d)(1)(i)
of this section, if applicable.
(4)Request for alternate arrangement
or waiver.If the Commissioner provides
guidance published in the Internal Rev-
enue Bulletin (see § 601.601(d)(2) of
this chapter) pursuant to which a testa-
tor, executor, or the U.S. Trustee may
adopt an alternate plan or arrangement
to assure collection of the section 2056A
estate tax, and if the alternate plan or
arrangement is adopted in accordance
with the published guidance, then the
QDOT will be treated, subject to para-
graph (d)(1)(v) of this section, as meet-
ing the requirements of paragraph (d)(1)
of this section. Until this guidance is
published in the Internal Revenue Bulle-
tin (see § 601.601(d)(2) of this chapter),
taxpayers may submit a request for a
private letter ruling for the approval of
an alternate plan or arrangement pro-
posed to be adopted to assure collection
of the section 2056A estate tax in lieu
of the requirements prescribed in this
paragraph (d)(4).
(5)djustment of dollar threshold and
exclusion.The Commissioner may in-
crease or decrease the dollar amounts
referred to in paragraph (d)(1)(i), (ii) or
(iv) of this section in accordance with
guidance published in the Internal Rev-
enue Bulletin (see § 601.601(d)(2) of
this chapter).
(6)Effective date and special rules.
(i) This paragraph (d) is effective for
estates of decedents dying after Febru-
ary 19, 1996.
(ii)Special rule in the case of incom-
petency.A revocable trust or a trust
created under the terms of a will is
deemed to meet the governing instru-
ment requirements of this paragraph (d)
notwithstanding that the requirements
are not contained in the governing in-
strument (or otherwise incorporated by
reference) if the trust instrument (or
will) was executed on or before Novem-
ber 20, 1995, and—
23

(A) The testator or settlor dies after
February 19, 1996;
(B) The testator or settlor is, on No-
vember 20, 1995, and at all times
thereafter, under a legal disability to
amend the will or trust instrument;
(C) The will or trust instrument does
not provide the executor or the U.S.
Trustee with a power to amend the
instrument in order to meet the require-
ments of section 2056A; and
(D) The U.S. Trustee provides a writ-
ten statement with the federal estate tax
return (Form 706 or 706NA) that the
trust is being administered (or will be
administered) so as to be in actual
compliance with the requirements of this
paragraph (d) and will continue to be
administered so as to be in actual com-
pliance with this paragraph (d) for the
duration of the trust. This statement
must be binding on all successor trust-
ees.
(iii)Special rule in the case of cer-
tain irrevocable trusts.An irrevocable
trust is deemed to meet the governing
instrument requirements of this para-
graph (d) notwithstanding that the re-
quirements are not contained in the
governing instrument (or otherwise in-
corporated by reference) if the trust was
executed on or before November 20,
1995, and:
(A) The settlor dies after February
19, 1996;
(B) The trust instrument does not
provide the U.S. Trustee with a power
to amend the trust instrument in order to
meet the requirements of section 2056A;
and
(C) The U.S. Trustee provides a writ-
ten statement with the decedent’s federal
estate tax return (Form 706 or 706NA)
that the trust is being administered in
actual compliance with the requirements
of this paragraph (d) and will continue
to be administered so as to be in actual
compliance with this paragraph (d) for
the duration of the trust. This statement
must be binding on all successor trust-
ees.
§ 20.2056A–2T [Removed]
Par. 3a. Section 20.2056A–2T is re-
moved.
PART 602—0MB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In § 602.101, paragraph (c) is
amended by:
1. Removing the following entry
from the table:
§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section
where identified and
described
Current OMB
control No.
* * * * *
20.2056A–2T(d) . . . . . . . 1545–1443
* * * * *
2. Adding the following entry in nu-
merical order to the table to read as
follows:
§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section
where identified and
described
Current OMB
control No.
* * * * *
20.2056A–2. . . . . . . . . . . 1545–1443
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved September 19, 1996.
Donald C. Lubick,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
November 27, 1996, 8:45 a.m., and published in
the issue of the Federal Register for November 29,
1996, 61 F.R. 60551)
Section 6621.— Determination of
Interest Rate
26 CFR 301.6621–1: Interest rate
Interest rates; underpayments and
overpayments.The rate of interest de-
termined under section 6621 of the
Code for the calendar quarter beginning
October 1, 1996, will be 8 percent for
overpayments, 9 percent for underpay-
ments, and 11 percent for large corpo-
rate underpayments. The rate of interest
paid on the portion of a corporate
overpayment exceeding $10,000 is 6.5
percent.
Rev. Rul. 96–61
Section 6621 of the Internal Revenue
Code establishes different rates for inter-
est on tax overpayments and interest on
tax underpayments. Under § 6621(a)(1),
the overpayment rate is the sum of the
federal short-term rate plus 2 percentage
points, except the rate for the portion of
a corporate overpayment of tax exceed-
ing $10,000 for a taxable period is the
sum of the federal short-term rate plus
0.5 of a percentage point for interest
computations made after December 31,
1994. Under § 6621(a)(2), the under-
payment rate is the sum of the federal
short-term rate plus 3 percentage points.
Section 6621(c) provides that for pur-
poses of interest payable under § 6601
on any large corporate underpayment,
the underpayment rate under
§ 6621(a)(2) is determined by substitut-
ing ‘‘5 percentage points’’ for ‘‘3 per-
centage points.’’ See § 6621(c) and
§ 301.6621–3 of the Regulations on
Procedure and Administration for the
definition of a large corporate underpay-
ment and for the rules for determining
the applicable rate. Section 6621(c) and
§ 301.6621–3 are generally effective for
periods after December 31, 1990.
Section 6621(b)(1) provides that the
Secretary will determine the federal
short-term rate for the first month in
each calendar quarter.
Section 6621(b)(2)(A) provides that
the federal short-term rate determined
under § 6621(b)(1) for any month ap-
plies during the first calendar quarter
beginning after such month.
Section 6621(b)(2)(B) provides that in
determining the addition to tax under
§ 6654 for failure to pay estimated tax
for any taxable year, the federal short-
term rate that applies during the third
month following such taxable year also
applies during the first 15 days of the
fourth month following such taxable
year.
Section 6621(b)(3) provides that the
federal short-term rate for any month is
the federal short-term rate determined
during such month by the Secretary in
accordance with § 1274(d), rounded to
the nearest full percent (or, if a multiple
of 1/2 of 1 percent, the rate is increased
to the next highest full percent).
Notice 88–59, 1988–1 C.B. 546, an-
nounced that, in determining the quar-
terly interest rates to be used for over-
payments and underpayments of tax
under § 6621, the Internal Revenue Ser-
vice will use the federal short-term rate
based on daily compounding because
that rate is most consistent with § 6621
which, pursuant to § 6622, is subject to
daily compounding.
24

Rounded to the nearest full percent,
the federal short-term rate based on
daily compounding determined during
the month of October 1996 is 6 percent.
Accordingly, an overpayment rate of 8
percent and an underpayment rate of 9
percent are established for the calendar
quarter beginning January 1, 1997. The
overpayment rate for the portion of
corporate overpayments exceeding
$10,000 for the calendar quarter begin-
ning January 1, 1997, is 6.5 percent.
The underpayment rate for large corpo-
rate underpayments for the calendar
quarter beginning January 1, 1997, is 11
percent. These rates apply to amounts
bearing interest during that calendar
quarter.
The 9 percent rate also applies to
estimated tax underpayments for the
first calendar quarter in 1997 and for the
first 15 days in April 1997.
Interest factors for daily compound
interest for annual rates of 6.5 percent, 8
percent, 9 percent, and 11 percent are
published in Tables 18, 21, 23, and 27,
of Rev. Proc. 95–17, 1995–1 C.B. 556,
572, 575, 577, and 581.
Annual interest rates to be com-
pounded daily pursuant to § 6622 that
apply for prior periods are set forth in the
tables accompanying this revenue ruling.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Marcia Rachy of the Office of
Assistant Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue ruling, contact
Ms. Rachy on (202) 622–6232 (not a
toll-free call).
TABLE OF INTEREST RATES
PERIODS BEFORE JUL. 1, 1975—PERIODS ENDING DEC. 31, 1986
OVERPAYMENTS AND UNDERPAYMENTS
PERIODRATE
DAILY RATE TABLE
IN 1995-1 C.B.
Before Jul. 1, 19756%Table 2, pg. 557
Jul. 1, 1975—Jan. 31, 19769%Table 4, pg. 559
Feb. 1, 1976—Jan. 31, 19787%Table 3, pg. 558
Feb. 1, 1978—Jan. 31, 19806%Table 2, pg. 557
Feb. 1, 1980—Jan. 31, 198212%Table 5, pg. 560
Feb. 1, 1982—Dec. 31, 198220%Table 6, pg. 560
Jan. 1, 1983—Jun. 30, 198316%Table 37, pg. 591
Jul. 1, 1983—Dec. 31, 198311%Table 27, pg. 581
Jan. 1, 1984—Jun. 30, 198411%Table 75, pg. 629
Jul. 1, 1984—Dec. 31, 198411%Table 75, pg. 629
Jan. 1, 1985—Jun. 30, 198513%Table 31, pg. 585
Jul. 1, 1985—Dec. 31, 198511%Table 27, pg. 581
Jan. 1, 1986—Jun. 30, 198610%Table 25 pg. 579
Jul. 1, 1986—Dec. 31, 19869%Table 23, pg. 577
TABLE OF INTEREST RATES
FROM JAN. 1, 1987—PRESENT
OVERPAYMENTSUNDERPAYMENTS
RATE TABLE PG 1995-1 C.B. RATE TABLE PG 1995-1 C.B.
Jan. 1, 1987—Mar. 31, 19878%215759%23577
Apr. 1, 1987—Jun. 30, 19878%215759%23577
Jul. 1, 1987—Sep. 30, 19878%215759%23577
Oct. 1, 1987—Dec. 31, 19879%2357710%25579
Jan. 1, 1988—Mar. 31, 198810%7362711%75629
Apr. 1, 1988—Jun. 30, 19889%7162510%73627
Jul. 1, 1988—Sep. 30, 19889%7162510%73627
Oct. 1, 1988—Dec. 31, 198810%7362711%75629
Jan. 1, 1989—Mar. 31, 198910%2557911%27581
Apr. 1, 1989—Jun. 30, 198911%2758112%29583
Jul. 1, 1989—Sep. 30, 198911%2758112%29583
Oct. 1, 1989—Dec. 31, 198910%2557911%27581
Jan. 1, 1990—Mar. 31, 199010%2557911%27581
Apr. 1, 1990—Jun. 30, 199010%2557911%27581
Jul. 1, 1990—Sep. 30, 199010%2557911%27581
Oct. 1, 1990—Dec. 31, 199010%2557911%27581
Jan. 1, 1991—Mar. 31, 199110%2557911%27581
Apr. 1, 1991—Jun. 30, 19919%2357710%25579
Jul. 1, 1991—Sep. 30, 19919%2357710%25579
25

TABLE OF INTEREST RATES—Continued
FROM JAN. 1, 1987—PRESENT
OVERPAYMENTSUNDERPAYMENTS
RATE TABLE PG 1995-1 C.B. RATE TABLE PG 1995-1 C.B.
Oct. 1, 1991—Dec. 31, 19919%2357710%25579
Jan. 1, 1992—Mar. 31, 19928%696239%71625
Apr. 1, 1992—Jun. 30, 19927%676218%69623
Jul. 1, 1992—Sep. 30, 19927%676218%69623
Oct. 1, 1992—Dec. 31, 19926%656197%67621
Jan. 1, 1993—Mar. 31, 19936%175717%19573
Apr. 1, 1993—Jun. 30, 19936%175717%19573
Jul. 1, 1993—Sep. 30, 19936%175717%19573
Oct. 1, 1993—Dec. 31, 19936%175717%19573
Jan. 1, 1994—Mar. 31, 19946%175717%19573
Apr. 1, 1994—Jun. 30, 19946%175717%19573
Jul. 1, 1994—Sep. 30, 19947%195738%21575
Oct. 1, 1994—Dec. 31, 19948%215759%23577
Jan. 1, 1995—Mar. 31, 19958%215759%23577
Apr. 1, 1995—Jun. 30, 19959%2357710%25579
Jul. 1, 1995—Sep. 30, 19958%215759%23577
Oct. 1, 1995—Dec. 31, 19958%215759%23577
Jan. 1, 1996—Mar. 31, 19968%696239%71625
Apr. 1, 1996—Jun. 30, 19967%676218%69623
Jul. 1, 1996—Sep. 30, 19968%696239%71625
Oct. 1, 1996—Dec. 31, 19968%696239%71625
Jan. 1, 1997—Mar. 31, 19978%215759%23577
TABLE OF INTEREST RATES FOR
LARGE CORPORATE UNDERPAYMENTS
FROM JANUARY 1, 1991—PRESENT
RATE TABLE PG
1995-1 C.B.
Jan. 1, 1991—Mar. 31, 199113%31585
Apr. 1, 1991—Jun. 30, 199112%29583
Jul. 1, 1991—Sep. 30, 199112%29583
Oct. 1, 1991—Dec. 31, 199112%29583
Jan. 1, 1992—Mar. 31, 199211%75629
Apr. 1, 1992—Jun. 30, 199210%73627
Jul. 1, 1992—Sep. 30, 199210%73627
Oct. 1, 1992—Dec. 31, 19929%71625
Jan. 1, 1993—Mar. 31, 19939%23577
Apr. 1, 1993—Jun. 30, 19939%23577
Jul. 1, 1993—Sep. 30, 19939%23577
Oct. 1, 1993—Dec. 31, 19939%23577
Jan. 1, 1994—Mar. 31, 19949%23577
Apr. 1, 1994—Jun. 30, 19949%23577
Jul. 1, 1994—Sep. 30, 199410%25579
Oct. 1, 1994—Dec. 31, 199411%27581
Jan. 1, 1995—Mar. 31, 199511%27581
Apr. 1, 1995—Jun. 30, 199512%29583
Jul. 1, 1995—Sep. 30, 199511%27581
Oct. 1, 1995—Dec. 31, 199511%27581
Jan. 1, 1996—Mar. 31, 199611%75629
Apr. 1, 1996—Jun. 30, 199610%73627
Jul. 1, 1996—Sep. 30, 199611%75629
Oct. 1, 1996—Dec. 31, 199611%75629
Jan. 1, 1997—Mar. 31, 199711%27581
26

TABLE OF INTEREST RATES FOR CORPORATE
OVERPAYMENTS EXCEEDING $10,000
FROM JANUARY 1, 1995—PRESENT
RATE TABLE PG
1995-1 C.B.
Jan. 1, 1995—Mar. 31, 19956.5%18572
Apr. 1, 1995—Jun. 30, 19957.5%20574
Jul. 1, 1995—Sep. 30, 19956.5%18572
Oct. 1, 1995—Dec. 31, 19956.5%18572
Jan. 1, 1996—Mar. 31, 19966.5%66620
Apr. 1, 1996—Jun. 30, 19965.5%64618
Jul. 1, 1996—Sep. 30, 19966.5%66620
Oct. 1, 1996—Dec. 31, 19966.5%66620
Jan, 1, 1997—Mar. 31, 19976.5%18572
27

Part III. Administrative, Procedural, and Miscellaneous
Treatment of a Trust as Domestic
or Foreign—Changes Made by the
Small Business Job Protection Act
Notice 96–65
This notice provides guidance with
respect to certain provisions of the
Small Business Job Protection Act of
1996 (the ‘‘Act’’), Public Law 104–188,
110 Stat. 1755 (August 20, 1996), deal-
ing with the status of a trust as domestic
or foreign under sections 7701(a)(30)
and 7701(a)(31) of the Internal Revenue
Code (the ‘‘Code’’). The first section of
this notice grants trusts that meet the
conditions specified in this notice addi-
tional time to comply with the new
domestic trust criteria contained in the
Act and allows such trusts to continue
to file as a domestic trusts during this
period. The second section of this notice
addresses the time and manner for mak-
ing the election provided by the Act to
apply the new trust criteria retroactively.
The third section of this notice provides
guidance regarding the application of
sections 1491 through 1494 of the Code
if the status of a trust changes from
domestic to foreign.
BACKGROUND
Prior to the Act, the status of a trust
as domestic or foreign turned upon the
subjective determination of whether the
trust was more comparable to a resident
or a nonresident alien individual. See
Rev. Rul. 60–181, 1960–1 C.B. 257,
citingB.W. Jones Trust v. Commissioner,
46 B.T.A. 531 (1942),aff’d, 132 F.2d
914 (4th Cir. 1943). Section 1907(a) of
the Act amended sections 7701(a)(30)
and (31) of the Code to provide more
objective criteria for determining the
status of a trust. New section
7701(a)(30) provides that a trust will be
treated as a domestic trust if a court
within the United States is able to
exercise primary supervision over the
administration of the trust and one or
more U.S. fiduciaries have the authority
to control all substantial decisions of the
trust. New section 7701(a)(31) provides
that a foreign trust is any trust that is
not a domestic trust.
Section 1491 imposes a 35 percent
excise tax on a transfer of property by a
U.S. person, including a domestic trust,
to a foreign trust. In general, the excise
tax is imposed on the excess of the fair
market value of the property transferred
over the adjusted basis of such property
plus any gain recognized on the transfer
by the U.S. person.
If a domestic trust becomes a foreign
trust, such trust shall be treated for
purposes of section 1491 as having
transferred, upon becoming a foreign
trust, all of its assets to a foreign trust.
Act section 1907(b), amending section
1491. However, to the extent that a
grantor or another person is treated as
the owner of all or a portion of the trust
under sections 673 through 679 when
such trust becomes a foreign trust, the
portion of the trust owned by such
person is not taken into account in
determining the assets treated as trans-
ferred to the foreign trust for purposes
of section 1491.See, e.g., Rev. Rul.
87–61, 1987–2 C.B. 219.
New sections 7701(a)(30) and (31)
apply in determining the status of a trust
for taxable years beginning after De-
cember 31, 1996. A trustee of a trust
may, however, elect to have the new
criteria apply to the first taxable year of
the trust ending after August 20, 1996
(the date of enactment of the Act). Act
section 1907(a)(3).
ADDITIONAL TIME TO COMPLY
WITH NEW DOMESTIC TRUST
CRITERIA
In the first taxable year that new
section 7701(a)(30) applies, it is pos-
sible for a trust treated as a domestic
trust under prior law to become a for-
eign trust solely by operation of the new
law, notwithstanding that the trust may
prefer to remain a domestic trust for
U.S. tax purposes. In that event, the
domestic trust may be subject to the 35
percent excise tax on any built-in gain
in its assets as of the date of its change
in status.
Certain existing domestic trusts that
desire to remain domestic trusts may
have difficulty meeting the new domes-
tic trust criteria in section 7701(a)(30)
prior to the first taxable year beginning
after December 31, 1996. Treasury and
the Service believe that these trusts
should have a reasonable amount of
time to comply with the new domestic
trust criteria. Accordingly, a domestic
trust in existence on August 20, 1996
(‘‘existing trust’’), may continue to file
tax returns as a domestic trust for
taxable years of the trust beginning after
December 31, 1996, if the trust satisfies
the conditions of this notice. This relief
is not available to a trust if an election
has been made pursuant to section
1907(a)(3)(B) of the Act to apply the
new trust criteria to the first taxable
year of the trust ending after August 20,
1996.
An existing domestic trust must sat-
isfy the following conditions to qualify
for the relief provided by this section of
the notice: (1) the trustee must initiate
modification of the trust to conform
with the domestic trust criteria by the
due date (including extensions) for filing
the trust’s income tax return for its first
taxable year beginning after December
31, 1996; (2) the trustee must complete
the modification within two years of
that date (‘‘two-year period’’); and (3)
the trustee must attach a statement to
the trust’s income tax return as de-
scribed below. If an existing domestic
trust meets these conditions, it may
continue to file as a domestic trust for
taxable years of the trust beginning after
December 31, 1996. For purposes of
this notice, ‘‘modification’’ includes any
action taken (judicial or nonjudicial) to
reform, amend, modify, or alter the trust
that is effective under local law.
The statement referred to above must
be entitled ‘‘Election to Rely on Notice
96–65 to File as a Domestic Trust,’’ and
must be attached to the trust’s income
tax return for each taxable year that this
notice is relied on to file as a domestic
trust. The statement must be signed
under penalties of perjury by the trustee
and contain the following information:
(1) A statement that the trust is rely-
ing on this notice to file as a domestic
trust for the taxable year;
(2) A statement that the trustee filed
original income tax returns treating the
trust as a domestic trust for each taxable
year of the trust beginning after 1994,
and will continue to file as a domestic
trust while actions are being taken to
meet the domestic trust criteria;
(3) The date on which actions to
modify the trust to meet the domestic
trust criteria were initiated and a brief
description of both completed and forth-
coming actions necessary to meet the
domestic trust criteria;
(4) The name, taxpayer identification
number, and address of any U.S. person
who, but for the relief provided in this
notice, would be treated as the owner of
all or a portion of the trust under section
679 for any taxable year of the trust
beginning after December 31, 1996; and
28

(5) A statement that, if the trust does
not meet the domestic trust criteria in
section 7701(a)(30) by the end of the
two-year period, the trustee will file all
of the trust’s applicable returns (whether
original or amended) for taxable years
of the trust beginning after December
31, 1996, treating the trust as a foreign
trust.
If the trust satisfies the trust criteria
in section 7701(a)(30) by the end of the
two-year period, the trust will be treated
as a domestic trust during this period for
all purposes of the Code. In the case of
an existing domestic trust that fails to
meet the conditions set forth in this
notice to continue to file as a domestic
trust, such trust will be treated as a
foreign trust for all taxable years of the
trust beginning after December 31,
1996, for all purposes of the Code. In
that event, any U.S. person who is
treated as owning all or a portion of the
trust for any taxable year of the trust
beginning after December 31, 1996, and
any beneficiary whose tax liability was
affected by the change in the trust’s
status must file amended returns in
order to correctly report their income
tax liability for any taxable year that the
trust relied on this notice to file as a
domestic trust.
If reasonable actions have been taken
to meet the domestic trust criteria, but
due to circumstances beyond the trust-
ee’s control the trust is unable to meet
such criteria by the date set forth in this
notice, the trustee may provide a written
statement to the District Director having
jurisdiction over the trust’s return setting
forth the reasons for failing to meet the
domestic trust criteria in a timely man-
ner. If the District Director determines
that the failure was due to reasonable
cause, the District Director may grant
the trust an extension of time to meet
such criteria. Whether an extension of
time is granted shall be in the sole
discretion of the District Director and, if
granted, may contain such terms with
respect to assessment as may be neces-
sary to ensure that the correct amount of
tax will be collected from the trust, its
owners, and its beneficiaries. If the trust
does not obtain an extension from the
District Director before the end of the
two-year period, then the trustee must
treat the trust as a foreign trust for all
taxable years of the trust beginning after
December 31, 1996.
The following example illustrates the
relief provided by this section of the
notice. Assume a U.S. court has primary
supervision over an existing domestic
trust with a single foreign trustee. The
trust, a calendar year taxpayer, is not
treated as owned by the grantor or
another person under sections 673
through 679. On April 1, 1998, the
foreign trustee tenders his letter of resig-
nation to take effect upon appointment
of a new U.S. trustee. The trustee
attaches the statement described in this
notice to the trust’s 1997 tax return. A
new U.S. trustee is appointed on July
30, 1998, and the trustee attaches the
required statement to the trust’s 1998
tax return.
The trust may continue to file as a
domestic trust for the 1997 and 1998
taxable years because (1) the trustee
initiated modification of the trust by the
due date for filing the trust’s income tax
return for its first taxable year beginning
after December 31, 1996; (2) the modi-
fication was completed within two years
of the due date for filing the trust’s
1997 return; and (3) the trustee attached
the required statement to the trust’s
1997 and 1998 income tax returns.
If, however, a new U.S. trustee had
not been appointed by the end of the
two-year period, and an extension of
time had not been granted by the Dis-
trict Director, the trust would have been
treated as a foreign trust for all taxable
years beginning after December 31,
1996. For purposes of section 1491 such
trust would have been treated as having
transferred all of its assets to a foreign
trust upon becoming a foreign trust on
January 1, 1997.
ELECTION TO APPLY NEW
TRUST CRITERIA
RETROACTIVELY
New sections 7701(a)(30) and (31)
apply to determine whether a trust is
domestic or foreign for taxable years
beginning after December 31, 1996.
However, under section 1907(a)(3)(B) of
the Act, a trustee of a trust may elect to
apply the new trust criteria to the first
taxable year of the trust ending after
August 20, 1996 (‘‘the election year’’).
This section of the notice announces the
time and manner for making the elec-
tion.
If an election is made to apply new
sections 7701(a)(30) and (31) to the
trust’s first taxable year ending after
August 20, 1996, the new trust criteria
must be applied for the entire election
year. Thus, for example, if a domestic
trust with the calendar year as its tax-
able year has a single foreign trustee,
and that trustee elects to apply new
sections 7701(a)(30) and (31) to the
trust’s 1996 taxable year, then the trust
will be treated as a foreign trust begin-
ning on January 1, 1996.
To make the election, the trustee must
attach a statement entitled ‘‘Election
Under Section 1907(a)(3)(B) of the
Small Business Job Protection Act of
1996 to Apply New Trust Criteria Retro-
actively,’’ to the trust’s income tax re-
turn for its first taxable year ending
after August 20, 1996. The statement
must be signed under penalties of per-
jury by the trustee and contain the
following information:
(1) A statement that the trust is rely-
ing on this notice to apply the new trust
criteria for its first taxable year ending
after August 20, 1996;
(2) A declaration stating whether the
trustee has filed an original U.S. income
tax return treating the trust as a domes-
tic trust for any of the three immediately
preceding taxable years; and
(3) A declaration stating whether,
during the election year, there has been
a change in trust status.
If a trust changes status from domes-
tic to foreign as a result of this election,
the trustee must, as a condition of
making the election, attach a statement
agreeing to treat the change in trust
status as a transfer of the trust’s assets
to a foreign trust for purposes of section
1491, except to the extent the grantor or
another person is treated as the owner of
the trust under sections 673 through 679
when such trust becomes a foreign trust.
APPLICATION OF SECTIONS 1491
THROUGH 1494
If the status of a trust changes from
domestic to foreign as a result of the
new law, whether or not by reason of an
election to apply the new trust criteria
retroactively, for purposes of section
1491 the trust will be treated as having
made a transfer of all of its assets to a
foreign trust upon becoming a foreign
trust, except to the extent a grantor or
another person is treated as the owner of
the trust under sections 673 through 679
when such trust becomes a foreign trust.
Act section 1907(b);See alsoH.R.
Conf. Rep. No. 737, 104th Cong., 2d
Sess. 338 (1996). In the case of an
existing domestic trust that fails to meet
the conditions set forth earlier in this
notice to continue to file as a domestic
trust, then to the extent there is a
transfer of assets to the foreign trust for
purposes of section 1491, such transfer
will occur upon the trust becoming a
29

foreign trust at the beginning of the first
taxable year beginning after December
31, 1996.
Under section 1494(a), the excise tax
imposed by section 1491 is due and
payable at the time of the transfer.
Treasury and the Service expect to issue
regulations under section 1494 that will
provide that any excise tax due on a
transfer of assets to a foreign trust as a
result of a change in trust status may be
paid by attaching Form 926, and any
applicable excise tax, to the trust’s in-
come tax return for the taxable year in
which the transfer occurs. If the excise
tax is not paid until the trust’s income
tax return for the year is filed, interest
must be paid on the amount of excise
tax due at the rates determined under
section 6621, with respect to the period
between the date on which the transfer
occurred and the date on which the
excise tax is actually paid. Until regula-
tions are issued, the guidance provided
by this section of the notice may be
relied on by taxpayers. For penalties
applicable for failure to report a transfer
of property described in section 1491,
seeAct section 1902, adding section
1494(c) and Notice 96–60, 1996–49
I.R.B. 7.
In the case of an existing domestic
trust that has relied in good faith on the
first section of this notice to continue to
file as a domestic trust, but fails to meet
the criteria in section 7701(a)(30) by the
end of the two-year period, the trustee
must make a return on Form 926 no
later than thirty day after the end of the
two-year period to report a section 1491
transfer that occurs on the change in the
trust’s status, and to pay any excise tax
and interest due. Form 926 may be
attached to an amended return filed by
the trustee for the first taxable year of
the trust ending after December 31,
1996. If Form 926 is filed no later than
thirty days after the end of the two-year
period, no penalties will be imposed
under section 1494(c).
Under section 1492, the excise tax
imposed by section 1491 shall not apply
to: transfers to certain exempt organiza-
tions (section 1492(1)); transfers de-
scribed in section 367 (section
1492(2)(A)); transfers with respect to
which an election has been made to
apply principles similar to the principles
of section 367 (section 1492(2)(B)); or
transfers with respect to which an elec-
tion has been made under section 1057
(section 1492(3)). A transfer to a foreign
trust that occurs as a result of a change
in trust status from domestic to foreign
may be nontaxable under sections
1492(1) and (3). Such a transfer cannot
be nontaxable under section 1492(2)(A)
because the transfers described in sec-
tion 367 are limited to transfers to
foreign corporations.
Treasury and the Service are studying
whether it is appropriate to allow a
domestic trust that becomes a foreign
trust to elect to apply principles similar
to the principles of section 367 under
section 1492(2)(B) and, if so, how such
principles should be applied. Until fur-
ther guidance is provided, a domestic
trust that becomes a foreign trust may
not avoid the section 1491 excise tax by
electing principles similar to the prin-
ciples of section 367, unless the trust
obtains a private letter ruling with re-
spect to the application of the principles
of section 367 to its particular facts.
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 1545–1506.
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 headedAddi-
tional Time to Comply with New Domes-
tic Trust CriteriaandElection to Apply
New Trust Criteria Retroactively.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 550 hours.
The estimated average annual burden
per respondent is 27 minutes. The esti-
mated number of respondents is 1,200.
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
Wendy Stanley of the Office of Associ-
ate Chief Counsel (International). For
further information regarding sections
1491 through 1494 contact Ms. Stanley
on (202) 622–3860 (not a toll-free call).
For further information regarding sec-
tions 7701(a)(30) and (31) contact
James A. Quinn on (202) 622–3060 (not
a toll-free call).
26 CFR 1.127-2: Educational Assistance Pro-
grams.
Definitions Relating to Application
of Exclusion Under Section 127 of
the Internal Revenue Code
Notice 96-68
This notice provides guidance regard-
ing certain definitions affecting the
proper tax treatment of educational as-
sistance received by employees under
§ 127 of the Internal Revenue Code as
amended by the Small Business Job
Protection Act of 1996, Pub. L. 104-188
(the ‘‘Act’’).
Section 1202 of the Act restores the
exclusion from gross income for up to
$5,250 of educational assistance pro-
vided under an educational assistance
program described in § 127, effective
for an employee’s first taxable year
beginning after December 31, 1994. The
Act amends the definition of ‘‘educa-
tional assistance’’ to provide that, for
graduate level courses, the exclusion
does not apply to expenses relating to
courses ‘‘beginning after June 30,
1996.’’ For this purpose, a ‘‘graduate
level course’’ will be treated as meaning
any course taken by an employee who
has a bachelor’s degree or is receiving
credit toward a more advanced degree,
if the particular course can be taken for
credit by any individual in a program
leading to a law, business, medical, or
other advanced academic or professional
degree. Section 127(c)(1). This is the
same definition set forth in Notice 89–
33, 1989-1 C.B. 674, with respect to
amendments made by the Technical and
Miscellaneous Revenue Act of 1988,
Pub. L. 100-647, relating to graduate level
courses.
The amendment of the term ‘‘educa-
tional assistance’’ to exclude graduate
level courses applies to courses begin-
ning after June 30, 1996. Similarly, the
§ 127 exclusion only applies with re-
spect to ‘‘courses beginning’’ before a
specified date in 1997. For purposes of
30

both of these provisions, a course ordi-
narily will be considered to begin on the
first regular day of class for the course.
The first regular day of class for any
course that is offered during a regular
academic term at an educational institu-
tion will be considered to be the first
day on which regular classes generally
begin for courses offered during that
term. A regular academic term during
which a course is offered might be, for
example, a semester or, if the semester
consists of more than one session, the
session during which the course is of-
fered. The date on which an individual
registers for or enrolls in a course does
not determine when the course begins.
For example, assume an employee
registers in January 1996 for a graduate
level independent study course for the
upcoming summer term. The course
consists of working with a professor to
write a paper. Other courses offered for
the summer term hold their first regular
class during the first week of June 1996.
The first day on which regular classes
are held in the term is Monday, June 3,
1996, and classes continue until August.
The employee does not meet with the
professor until the second week of July
1996. Under the preceding paragraph,
the independent study course would be
treated as beginning on or before June
30, 1996 for purposes of § 127. This is
because regular classes for courses of-
fered during the summer term in which
this course was taken generally began
on June 3, 1996.
The amendments to § 127 do not
affect the tax treatment of educational
benefits under any other section of the
Internal Revenue Code including em-
ployment related education described in
Treas. Reg. § 1.162-5.
FURTHER INFORMATION
For further information regarding this
Notice, contact Monice Rosenbaum of
the Office of the Associate Chief Coun-
sel (Employee Benefits and Exempt Or-
ganizations) at (202) 622-6070 (not a
toll-free number).
31

Part IV. Items of General Interest
Excise Tax Changes
Announcement 96–130
The changes listed below are effective
after December 31, 1996, and will be
reflected on Form 720, Quarterly Fed-
eral Excise Tax Return for the first
quarter of 1997, as well as the 1997
revisions of Form 4136, Credit for Fed-
eral Tax Paid on Fuels, and Form 8849,
Claim for Refund of Excise Taxes. If
these rates are modified by legislation,
the IRS will issue another announce-
ment and will revise all forms accord-
ingly.
I. TAX ON AVIATION GASOLINE
Tax is imposed on aviation gasoline
(IRS No. 14) at a rate of 4.3 cents per
gallon beginning on January 1, 1997.
II. TAX ON AVIATION FUEL
(OTHER THAN GASOLINE)
Tax is imposed on aviation fuel (other
than gasoline) (IRS No. 69) at a rate of
4.3 cents per gallon beginning on Janu-
ary 1, 1997.
III. AIR TRANSPORTATION TAXES
The excise tax on transportation of
persons and property by air and use of
international air travel facilities (IRS
Nos. 26, 28, and 27) expires after
December 31, 1996. No tax applies to
amounts paid for transportation begin-
ning after December 31, 1996.
Passengers from whom tax was col-
lected on amounts paid for travel begin-
ning after December 31, 1996, may be
entitled to a refund of the tax. Refunds
may be obtained either from the airlines
or from the IRS. Direct refunds from the
IRS are claimed on Form 8849, Claim
for Refund of Excise Taxes. An original
passenger receipt must be submitted
with the passenger’s Form 8849.
IV. OZONE-DEPLETING
CHEMICALS
Tax is imposed on ozone-depleting
chemicals (IRS Nos. 98 and 19) at the
rates shown beginning on January 1,
1997. The rate is per pound.
CFC–11$ 6.25
CFC–126.25
CFC–1135.00
CFC–1146.25
CFC–1153.75
Halon–121118.75
Halon–130162.50
Halon–240237.50
Carbon tetrachloride6.875
Methyl chloroform0.625
CFC–13, CFC–111, and
CFC–112 CFC–211 through
CFC–2176.25
V. LUXURY TAX
Tax is imposed on passenger automo-
biles (IRS No. 92) at 8% of the amount
by which the sales price exceeds
$36,000 beginning January 1, 1997. For
example, if the sales price of the auto-
mobile is $38,000, the tax is $160 (8%
of $2,000).
VI. HOW TO GET FORMS
IRS Forms can be obtained by calling
1–800–829–3676 or downloaded from:
•FTP — ftp://irs.ustreas.gov
•World Wide Web—http://www.irs.-
ustreas.gov
•IRIS at FedWorld—(703) 321–8020
Foundations Status of Certain
Organizations
Announcement 96–131
The following organizations have
failed to establish or have been unable
to maintain their status as public chari-
ties or as operating foundations. Accord-
ingly, grantors and contributors may not,
after this date, rely on previous rulings
or designations in the Cumulative List
of Organizations (Publication 78), or on
the presumption arising from the filing
of notices under section 508(b) of the
Code. This listing doesnotindicate that
the organizations have lost their status
as organizations described in section
501(c)(3), eligible to receive deductible
contributions.
Former Public Charities. The follow-
ing organizations (which have been
treated as organizations that are not
private foundations described in section
509(a) of the Code) are now classified
as private foundations:
Affordable Housing Corporation,
Montgomery, AL
Aleut Foundation, Anchorage, AK
Alleghany Highlands Housing Alliance,
Covington, VA
ALS Recovery Foundation Inc., Miami,
FL
Baltimore County Literacy Works Inc.,
Baltimore, MD
Best HOUSE Inc., Oakland, CA
Big Brothers and Big Sisters of South
Big Horn Basin Inc., Worland, WY
Bloomington Blades High School
Association Incorporated,
Bloomington, IN
Blue Water Charity Sports, Inc., Port
Huron, MI
Candlelighters Childhood Cancer
Foundation, Toledo, OH
Cherokee Affiliated Services, Inc.,
Canton, GA
Children’s Visitation Program, Ann
Arbor, MI
Comprehensive Christian Counseling,
Inc., Xenia, OH
Elks No. 273 Ladies Auxiliary, Inc.,
Cold Spring, KY
Ermine Meadows, Incorporated, Elkhart,
IN
E S Haven Academy, Dallas, TX
Exodua Ministries, Grand Rapids, MI
Exodus Community Preservation
Corporation, Los Angeles, CA
Faith in Action, Inc., Columbus, OH
Family Support Network, Goldsboro,
NC
Firelands Archaeological Research
Center, Milan, OH
Flouride Commemorative Committee,
Grand Rapids, MI
F M Ministry, Grand Rapids, MI
Fort Wayne Healthly Cities Committee,
Inc., Fort Wayne, IN
Foster Parents United, Inc., Ashland,
OH
Foundation for Endowment and
Reconstruction of Noah’s Ark, Inc.,
Princeton, WV
Foundation for International
Development Inc. F I D, Washington,
DC
Foundation to Preserve Access to
Abortion, Alexandria, VA
Friends of Friends, Inc., Crawfordsville,
IN
Friends of North Florida Environment,
Inc., Jacksonville, FL
Friends of the Cotillion Club, Detroit,
MI
Friends of the Quilt Detroit Metro
Chapter, Romulus, MI
Friendship House, Inc., Louisville, KY
Future Mobility Institute, San Francisco,
CA
Generation Gap Inc., Wooster, OH
Good Shepherd Enterprises
Incorporation, Louisville, KY
Grand Rapids Job Corps Center
Community Relations Council, Inc.,
Grand Rapids, MI
321996-52 I.R.B.

Green Local Schools Foundation,
Greensburg, OH
Gary Urban Enterprise Association, Inc.,
Gary, IN
Grimes Memorial, Inc., Columbus, OH
Halhul Alms Committee, Westerville,
OH
Hands on Battle Creek Museum, Battle
Creek, MI
Harrison County Young Peoples
Orchestras, Inc., Bridgeport, WV
Heartfelt Ministries, Inc., Louisville, KY
Hellenic Preservation Society of
Northeastern Ohio, Cleveland, OH
Hillcrest Christian Center, Inc.,
Sylvania, OH
Histiocytosis Association of Indiana,
Indianapolis, IN
HIV AIDS Housing Coalition, Inc.,
Grand Rapids, MI
Homes for the Homeless Foundation,
Inc., Owensboro, KY
Hope Senior Nonprofit Housing
Corporation, Oxford, MI
Huron Village, Inc., Milford, MI
In Defense of Endangered Species,
Columbus, OH
Indiana Association for Social Work
Education, Inc., Evansville, IN
Indiana Korean Association of Retired
Persons, Inc., Indianapolis, IN
Innovation Alliance, Inc., Worthington,
OH
Institute of New Construction
Achievements, Inc., Gary IN
Intercessors International, Flint, MI
Intercultural Scholarship Foundation
Incorporated, Perrysburg, OH
Isabella Community Soup Kitchen, Mt.
Pleasant, MI
Isabelle Ridgway Community Service
Agency, Columbus, OH
Jackson County Christians, Jackson, MI
Jeff Lisath Summer Basketball League,
Portsmouth, OH
Jesus Bridges the Gap After Care
Ministry, Inc., Indianapolis, IN
Joe Sparma Community Center,
Massillon, OH
Jor-Lee Inc., Mechanicstown, OH
Kalamazoo Mass Choir, Kalamazoo, MI
Kelly-Morang Center, Roseville, MI
Kentucky School Reform
Corporation/Partnership for Kentucky
School Reform, Lexington, KY
Kenwood Place II, Inc., Indianapolis, IN
Kurdish Children Emergency Fund,
Westerville, OH
Kush Empowerment Center, Inc.,
Detroit, MI
Lipscomb Family Foundation,
Columbia, SC
Main Street Gary, Gary, IN
Mary Alice Fortin Child Care
Foundation, Inc., Palm Beach, FL
Mays Lick Community Development,
Inc., Mays Lick, KY
Muncie Coalition of 100 Women
Incorporated, Muncie, IN
Namos, Inc. National Art Museum of
Sport, Indianapolis, IN
Newburg Volunteer Rescue Squad Inc.,
Newburg, MD
Northcoast Orthopaedic Research and
Educational Foundation, South Euclid,
OH
Oakland County Area Service
Committee Of Narcotics Anonymous,
Pleasant Ridge, MI
Pierson Area Fire Association, Pierson,
MI
Rotary Club of Cambria Foundation,
Cambria, CA
Skin Phototrauma Foundation Inc.,
Parsippany, NJ
T A S K Ministries Inc., Nacogdoches,
TX
West Milton Players, Milton, OH
Young Artists, Inc., Parkersburg, WV
Youth Foundation of Louisiana, Baton
Rouge, LA
If an organization listed above sub-
mits information that warrants the re-
newal of its classification as a public
charity or as a private operating founda-
tion, the Internal Revenue Service will
issue a ruling or determination letter
with the revised classification as to
foundation status. Grantors and contribu-
tors may thereafter rely upon such rul-
ing or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classi-
fication of foundation status in the Inter-
nal Revenue Bulletin.
Deletions From Cumulative List of
Organizations Contributions to
Which Are Deductible Under
Section 170 of the Code
Announcement 96–132
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 de-
claratory judgment has been timely
filed, contributions from individuals and
organizations described in section
170(c)(2) that are otherwise allowable
will continue to be deductible. Protec-
tion under section 7428(c) would begin
on December 23, 1996, and would end
on the date the court first determines
that the organization is not described in
section 170(c)(2) as more particularly
set forth in section 7428(c)(1). For indi-
vidual contributors, the maximum de-
duction protected is $1,000, with a hus-
band 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 omis-
sions of the organization that were the
basis for revocation.
Orthopaedic Development Foundation
Hilton Head, SC
331996-52 I.R.B.

Announcement of the Disbarment, Suspension, or Consent to Voluntary
Suspension of Attorneys, Certified Public Accountants, Enrolled Agents, and
Enrolled Actuaries From Practice Before the Internal Revenue Service
Under 31 Code of Federal Regula-
tions, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or en-
rolled actuary, in order to avoid the
institution or conclusion of a proceeding
for his disbarment or suspension from
practice before the Internal Revenue Ser-
vice, may offer his consent to suspension
from such practice. The Director of
Practice, in his discretion, may suspend
an attorney, certified public accountant,
enrolled agent, or enrolled actuary in
accordance with the consent offered.
Attorneys, certified public accoun-
tants, enrolled agents, and enrolled actu-
aries are prohibited in any Internal Rev-
enue Service matter from directly or
indirectly employing, accepting assis-
tance from, being employed by or shar-
ing fees with, any practitioner disbarred
or suspended from practice before the
Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents, and en-
rolled actuaries to identify practitioners
under consent suspension from practice
before the Internal Revenue Service, the
Director of Practice will announce in the
Internal Revenue Bulletin the names and
addresses of practitioners who have
been suspended from such practice, their
designation as attorney, certified public
accountant, enrolled agent, or enrolled
actuary, and date or period of suspen-
sion. This announcement will appear in
the weekly Bulletin at the earliest practi-
cable date after such action and will
continue to appear in the weekly Bulle-
tins for five successive weeks or for as
many weeks as is practicable for each
attorney, certified public accountant, en-
rolled agent, or enrolled actuary so
suspended and will be consolidated and
published in the Cumulative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue
Service:
NameAddressDesignationDate of Suspension
Sherman, Richard M.Crystal Lake, ILCPAOctober 18, 1996 to July 17, 1997
Hunter, LewisJacksonville, FLCPAOctober 25, 1996 to January 24, 1997
Hisken, DonaldRed Bluff, CACPANovember 1, 1996 to March 31, 1997
Byrne, Steven P.Arcadia, CAAttorneyNovember 1, 1996 to January 31, 1997
Mulrey, Robert M.Milton, MACPANovember 1, 1996 to October 31, 1997
Edwards, Ronald A.Plymouth, MICPANovember 1, 1996 to April 30, 1998
Hart Jr., Charles E.Wilmington, OHAttorneyNovember 1, 1996 to October 31, 1998
Willner, Peter D.Stowe, VTCPANovember 1, 1996 to April 30, 1997
May, GaryMadison, WIAttorneyNovember 1, 1996 to October 31, 1998
Josephson, ElliottNorthbrook, ILCPANovember 1, 1996 to October 31, 1998
Capwill Jr., James A.Solon, OHCPANovember 1, 1996 to February 28, 1997
Hazel, John J.Ridgefield, CTEnrolled AgentNovember 1, 1996 to January 31, 1997
Jacobs, PatrickSt. Paul, MNCPANovember 1, 1996 to December 31, 1996
Lau, WilliamCrete, ILCPANovember 1, 1996 to June 30, 1997
Franklin, Gene L.Lees Summit, MOEnrolled AgentNovember 1, 1996 to January 31, 1997
Winterhalter, Charles L.Cincinnati, OHCPANovember 1, 1996 to April 30, 1998
Cremer, Patricia L.Roundup, MTCPANovember 5, 1996 to May 4, 1997
Gardner, Stephen A.Dallas, TXAttorneyNovember 7, 1996 to May 6, 1999
Masini, DavidWheat Ridge, COCPANovember 12, 1996 to November 11, 1997
Cunningham, MichaelLafayette, INCPANovember 12, 1996 to August 11, 1997
Smith, RobertChicago, ILCPAJanuary 1, 1997 to December 31, 1997
34

Announcement of the Expedited Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the
Internal Revenue Service
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Internal
Revenue Service any practitioner who,
within five years, from the date the
expedited proceeding is instituted, (1)
has had a license to practice as an
attorney, certified public accountant, or
actuary suspended or revoked for cause;
or (2) has been convicted of any crime
under title 26 of the United States Code
or, of a felony under title 18 of the
United States Code involving dishonesty
or breach of trust.
Attorneys, certified public accoun-
tants, enrolled agents, and enrolled actu-
aries are prohibited in any Internal Rev-
enue Service matter from directly or
indirectly employing, accepting assis-
tance from, being employed by, or shar-
ing fees with, any practitioner disbarred
or suspended from practice before the
Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents, and en-
rolled actuaries to identify practitioners
under expedited suspension from prac-
tice before the Internal Revenue Service,
the Director of Practice will announce in
the Internal Revenue Bulletin the names
and addresses of practitioners who have
been suspended from such practice, their
designation as attorney, certified public
accountant, enrolled agent, or enrolled
actuary, and date or period of suspen-
sion. This announcement will appear in
the weekly Bulletin at the earliest practi-
cable date after such action and will
continue to appear in the weekly Bulle-
tins for five successive weeks or for as
many weeks as is practicable for each
attorney, certified public accountant, en-
rolled agent, or enrolled actuary so
suspended and will be consolidated and
published in the Cumulative Bulletin.
The following individuals have been
placed under suspension from practice
before the Internal Revenue Service by
virtue of the expedited proceeding pro-
visions of the applicable regulations:
NameAddressDesignationDate of Suspension
Pacchiana, PaulChappaqua, NYAttorneyIndefinite from October 9, 1996
Rosenberger, David H.Centerville, OHEnrolled AgentIndefinite from October 21, 1996
Gudes, GeraldW. Bloomfield, MICPAIndefinite from October 22, 1996
Donnelly, Richard S.Asheville, NCCPAIndefinite from October 22, 1996
Burrows, William D.Dallas, TXAttorneyIndefinite from November 13, 1996
Klausner, JuliusScarsdale, NYCPAIndefinite from November 13, 1996
Glessner, RandyOmak, WACPAIndefinite from November 13, 1996
Aspland, Frieda R.Greenville, SCCPAIndefinite from November 13, 1996
35

Numerical Finding List
1
Bulletins 1996–27 through 1996–51
Announcements:
96–61, 1996–27 I.R.B.72
96–62, 1996–28 I.R.B.55
96–63, 1996–29 I.R.B.18
96–64, 1996–29 I.R.B.18
96–65, 1996–29 I.R.B.18
96–66, 1996–29 I.R.B.19
96–67, 1996–30 I.R.B.27
96–68, 1996–31 I.R.B.45
96–69, 1996–32 I.R.B.38
96–70, 1996–32 I.R.B.40
96–71, 1996–33 I.R.B.16
96–72, 1996–33 I.R.B.16
96–73, 1996–33 I.R.B.18
96–74, 1996–33 I.R.B.19
96–75, 1996–34 I.R.B.29
96–76, 1996–34 I.R.B.29
96–77, 1996–35 I.R.B.15
96–78, 1996–35 I.R.B.15
96–79, 1996–35 I.R.B.15
96–80, 1996–35 I.R.B.16
96–81, 1996–36 I.R.B.13
96–82, 1996–36 I.R.B.14
96–83, 1996–36 I.R.B.14
96–84, 1996–36 I.R.B.14
96–85, 1996–37 I.R.B.20
96–86, 1996–37 I.R.B.21
96–87, 1996–37 I.R.B.21
96–88, 1996–38 I.R.B.150
96–89, 1996–37 I.R.B.22
96–90, 1996–37 I.R.B.22
96–91, 1996–37 I.R.B.23
96–92, 1996–38 I.R.B.151
96–93, 1996–38 I.R.B.151
96–94, 1996–38 I.R.B.153
96–96, 1996–39 I.R.B.41
96–97, 1996–39 I.R.B.41
96–98, 1996–39 I.R.B.42
96–99, 1996–39 I.R.B.42
96–100, 1996–40 I.R.B.10
96–101, 1996–40 I.R.B.10
96–102, 1996–40 I.R.B.11
96–103, 1996–40 I.R.B.12
96–104, 1996–41 I.R.B.10
96–105, 1996–42 I.R.B.19
96–106, 1996–42 I.R.B.23
96–107, 1996–42 I.R.B.27
96–108, 1996–44 I.R.B.15
96–109, 1996–43 I.R.B.76
96–110, 1996–43 I.R.B.77
96–111, 1996–44 I.R.B.16
96–112, 1996–45 I.R.B.7
96–113, 1996–44 I.R.B.18
96–114, 1996–45 I.R.B.7
96–115, 1996–45 I.R.B.9
96–116, 1996–46 I.R.B.12
96–117, 1996–46 I.R.B.12
96–118, 1996–46 I.R.B.12
96–119, 1996–46 I.R.B.13
96–120, 1996–47 I.R.B.12
96–121, 1996–47 I.R.B.12
96–122, 1996–47 I.R.B.13
96–123, 1996–51 I.R.B.13
96–124, 1996–49 I.R.B.22
96–125, 1996–48 I.R.B.21
96–126, 1996–50 I.R.B.12
Announcements—Continued:
96–127, 1996–50 I.R.B.12
96–128, 1996–51 I.R.B.14
96–129, 1996–51 I.R.B.14
Court Decisions:
2058, 1996–34 I.R.B.13
2059, 1996–34 I.R.B.10
2060, 1996–34 I.R.B.5
Delegation Orders:
155 (Rev. 4), 1996–40 I.R.B.9
Notices:
96–36, 1996–27 I.R.B.11
96–37, 1996–31 I.R.B.29
96–38, 1996–31 I.R.B.29
96–39, 1996–32 I.R.B.8
96–40, 1996–33 I.R.B.11
96–41, 1996–35 I.R.B.6
96–42, 1996–35 I.R.B.6
96–43, 1996–36 I.R.B.7
96–44, 1996–36 I.R.B.7
96–45, 1996–39 I.R.B.7
96–46, 1996–39 I.R.B.7
96–47, 1996–39 I.R.B.8
96–48, 1996–39 I.R.B.8
96–49, 1996–41 I.R.B.6
96–50, 1996–41 I.R.B.6
96–51, 1996–42 I.R.B.6
96–52, 1996–42 I.R.B. 8
96–53, 1996–51 I.R.B.5
96–54, 1996–44 I.R.B.13
96–55, 1996–47 I.R.B.7
96–56, 1996–47 I.R.B.7
96–57, 1996–47 I.R.B.9
96–58, 1996–49 I.R.B.7
96–59, 1996–48 I.R.B.10
96–60, 1996–49 I.R.B.7
96–61, 1996–49 I.R.B.8
96–62, 1996–49 I.R.B.8
96–63, 1996–51 I.R.B.8
96–64, 1996–51 I.R.B.8
Proposed Regulations:
CO–9–96, 1996–34 I.R.B.20
CO–24–96, 1996–30 I.R.B.22
CO–25–96, 1996–31 I.R.B.30
CO–26–96, 1996–31 I.R.B.31
FI–59–94, 1996–30 I.R.B.23
FI–32–95, 1996–34 I.R.B.21
FI–48–95, 1996–31 I.R.B.36
FI–28–96, 1996–31, I.R.B.33
GL–7–96, 1996–33 I.R.B.13
IA–292–84, 1996–28 I.R.B.38
IA–26–94, 1996–30 I.R.B.24
IA–42–95, 1996–49 I.R.B.21
IA–29–96, 1996–33 I.R.B.14
INTL–4–95, 1996–36 I.R.B.8
PS–39–93, 1996–34 I.R.B.27
PS–22–96, 1996–33 I.R.B.15
REG–208215–91, 1996–38 I.R.B.145
REG–209803–95, 1996–44 I.R.B.14
REG–209826–96, 1996–42 I.R.B.10
REG–209827–96, 1996–37 I.R.B.19
REG–245562–96, 1996–41 I.R.B.8
REG–251520–96, 1996–48 I.R.B.15
Public Laws:
104–117, 1996–34 I.R.B.19
Public Laws—Continued:
104–134, 1996–38 I.R.B.7
104–168, 1996–38 I.R.B.8
104–191, 1996–43 I.R.B.7
104–193, 1996–46 I.R.B.4
Railroad Retirement Quarterly Rate
1996–29 I.R.B.14
Revenue Procedures:
96–36, 1996–27 I.R.B.11
96–37, 1996–29 I.R.B.16
96–39, 1996–33 I.R.B.11
96–40, 1996–32 I.R.B.8
96–41, 1996–32 I.R.B.9
96–42, 1996–32 I.R.B.14
96–43, 1996–35 I.R.B.6
96–44, 1996–35 I.R.B.7
96–45, 1996–35 I.R.B.12
96–46, 1996–38 I.R.B.144
96–47, 1996–39 I.R.B.10
96–48, 1996–39 I.R.B.10
96–49, 1996–43 I.R.B.74
96–50, 1996–47 I.R.B.10
96–51, 1996–47 I.R.B.10
96–52, 1996–48 I.R.B.10
96–53, 1996–49 I.R.B.9
96–54, 1996–50 I.R.B.9
96–55, 1996–50 I.R.B.10
96–56, 1996–51 I.R.B.11
Revenue Rulings:
96–33, 1996–27 I.R.B.4
96–34, 1996–28 I.R.B.4
96–35, 1996–31 I.R.B.4
96–36, 1996–30 I.R.B.6
96–37, 1996–32 I.R.B.4
96–38, 1996–33 I.R.B.4
96–39, 1996–34 I.R.B.4
96–41, 1996–45 I.R.B.4
96–42, 1996–35 I.R.B.4
96–43, 1996–36 I.R.B.4
96–44, 1996–38 I.R.B.4
96–45, 1996–39 I.R.B.5
96–46, 1996–39 I.R.B.5
96–47, 1996–40 I.R.B.7
96–48, 1996–40 I.R.B.4
96–49, 1996–41 I.R.B.4
96–50, 1996–42 I.R.B.4
96–51, 1996–43 I.R.B.5
96–52, 1996–45 I.R.B.5
96–53, 1996–47 I.R.B.4
96–54. 1996–47 I.R.B.5
96–55, 1996–49 I.R.B.4
96–56, 1996–50 I.R.B.7
96–57, 1996–50 I.R.B.5
96–58, 1996–50 I.R.B.4
96–59, 1996–50 I.R.B.4
96–60, 1996–51 I.R.B.4
Tax Conventions:
1996–28 I.R.B. 36
1996–36 I.R.B.6
1996–40 I.R.B.8
1996–50 I.R.B.8
Treasury Decisions:
8673, 1996–27 I.R.B.4
8674, 1996–28 I.R.B.7
See footnote at end of list.
36

Numerical Finding List—Continued
Bulletins 1996–27 through 1996–51
Treasury Decisions—Continued:
8675, 1996–29 I.R.B.5
8676, 1996–30 I.R.B.4
8677, 1996–30 I.R.B.7
8678, 1996–31 I.R.B.11
8679, 1996–31 I.R.B.4
8680, 1996–33 I.R.B.5
8681, 1996–37 I.R.B.17
8682, 1996–37 I.R.B.4
8683, 1996–44 I.R.B.9
8684, 1996–44 I.R.B.4
8685, 1996–48 I.R.B. 4
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.
37

Finding List of Current Action on
Previously Published Items
1
Bulletins 1996–27 through 1996–51
*Denotes entry since last publication
Revenue Procedures:
67–396
Modified by
96–56, 1996–50 I.R.B.7
80–27
Modified by
96–40, 1996–32 I.R.B.8
87–32
Modified by
TD 8680, 1996–33 I.R.B.5
91–22
Superseded by
96–53, 1996–49 I.R.B.9
92–20
Modified by
TD 8680, 1996–33 I.R.B.5
95–16
Superseded by
96–48, 1996–39 I.R.B.10
95–29
Superseded by
96–36, 1996–27 I.R.B.11
95–29A
Superseded by
96–36, 1996–27 I.R.B.11
95–30
Superseded by
96–42, 1996–32 I.R.B.14
95–46
Superseded by
96–48, 1996–39 I.R.B.10
96–3
Amplified by
96–56, 1996–51 I.R.B.11*
96–25
Modified by
96–58, 1996–50 I.R.B.4
96–41
Modified by
Notice 96–49, 1996–41 I.R.B.6
96–46
Supplemented by
96–51, 1996–47 I.R.B.10*
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1996–1 through 1996–26 will be found in Internal
Revenue Bulletin 1996–27, dated July 1, 1996.
38