Internal Revenue Bulletin 1999-51 (PDF rendition): IRS Revenue Rulings

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INCOME TAX
Rev. Rul. 99–54, page 675.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period October through De-
cember 1999. This ruling announces the monthly bond fac-
tor amounts to be used by taxpayers who dispose of quali-
fied low-income buildings or interests therein during the
period October through December 1999.
Rev. Rul. 99–55, page 675.
LIFO; price indexes; department stores. The October
1999 Bureau of Labor Statistics price indexes are accepted
for use by department stores employing the retail inventory
and last-in, first-out inventory methods for valuing inventories
for tax years ended on, or with reference to, October 31,
1999.
Rev. Rul. 99–56, page 676.
Timber casualty losses.The decisions in Westvaco Corp.
v. United States andWeyerhaueser v. United Statespertain
to single, identifiable property (SIP) in relation to casualty
losses. Rev. Ruls. 66–9 and 73–51 revoked.
Rev. Rul. 99–57, page 678.
Applying section 1032 to partnership transaction.
This ruling explains the tax consequences to a partnership
and a corporate partner where the corporate partner con-
tributes its own stock to the partnership, and the partner-
ship later exchanges the stock with a third party in a tax-
able transaction.
Notice 99–57, page 692.
Guidance is provided under section 705 of the Code relating
to certain situations where gain or loss may be improperly
created by adjusting the basis of a partnership interest for
partnership income that is not subject to tax, or for partner-
ship losses or deductions that are permanently denied, with
respect to a partner.
Notice 99–58, page 693.
Authorized IRS e-file providers, Form 1040 on-line transmit-
ters, and financial institutions may apply to obtain a Debt In-
dicator for their customer/client taxpayers in exchange for
screening individual income tax returns for potential abuse
and reporting the findings to the IRS.
ESTATE TAX
T.D. 8846, page 679.
Final regulations under sections 2055 and 2056 of the Code
relate to the effect of certain Administration expenses on the
valuation of property that qualifies for the estate tax charita-
ble or marital deduction. Rev. Ruls. 66–233, 73–98,
80–159, 93–48 obsoleted.
GIFT TAX
T.D. 8845, page 683.
Final regulations under sections 2001, 2504, and 6501(c)
of the Code relate to the valuation of prior gifts in determin-
ing estate and gift tax liability, and to the commencement of
the period of limitations for assessing and collecting gift tax.
Internal Revenue
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Bulletin No. 1999–51
December 20, 1999
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page ii.
Announcement of Declatory Judgement Proceedings Under Section 7428 on page 699.

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

1999–51 I.R.B.675December 20, 1999
Section 42.—Low-Income
Housing Credit
Low-income housing credit; satisfac-
tory bond; “bond factor” amounts for
the period October through December
1999. This ruling announces the monthly
bond factor amounts to be used by tax-
payers who dispose of qualified low-in-
come buildings or interests therein during
the period October through December
1999.
Rev. Rul. 99–54
In Rev. Rul. 90–60, 1990–2 C.B. 3, the
Internal Revenue Service provided guid-
ance to taxpayers concerning the general
methodology used by the Treasury De-
partment in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Sec-
retary under § 42(j)(6) of the Internal
Revenue Code. It further announced that
the Secretary would publish in the Inter-
nal Revenue Bulletin a table of “bond fac-
tor” amounts for dispositions occurring
during each calendar month.
This revenue ruling provides in Table 1
the bond factor amounts for calculating
the amount of bond considered satisfac-
tory under § 42(j)(6) for dispositions of
qualified low-income buildings or inter-
ests therein during the period October
through December 1999, and includes
bond factor amounts previously published
for dispositions occurring during the pe-
riod January through September 1999.
Table 1
Rev. Rul. 99–54
Monthly Bond Factor Amounts for Dispositions Expressed As a Percentage of Total Credits
Calendar Year Building Placed in Service or, if Section 42(f)(1) Election Was Made, the Succeeding Calendar Year
Month of 1987198819891990199119921993199419951996199719981999
Disposition
Jan ‘99 44.1057.4870.9872.5674.6777.0979.5481.8784.1886.7089.3392.3392.81
Feb ‘9944.1057.4870.9872.3574.4576.8579.2981.6083.9086.4089.0091.9292.81
Mar ‘9944.1057.4870.9872.1474.2476.6279.0581.3583.6386.1188.6991.5692.81
Apr ‘9945.7160.1875.0676.8279.8383.2286.7090.1193.5597.27 101.15 105.33 107.43
May ‘9945.7160.1875.0676.6079.6082.9786.4489.8393.2696.96 100.81 104.97 107.43
Jun ‘9945.7160.1875.0676.3979.3882.7386.1889.5692.9796.66 100.51 104.65 107.43
Jul ‘9945.7160.1875.0676.1879.1682.5085.9389.3092.7096.38 100.22 104.36 107.43
Aug ‘9945.7160.1875.0675.9778.9482.2785.6989.0492.4496.1199.95 104.10 107.43
Sep ‘9945.7160.1875.0675.7778.7382.0585.4588.8092.1995.8599.69 103.86 107.43
Oct ‘99 45.7160.1875.0675.5778.5281.8385.2288.5691.9495.6099.45 103.65 107.43
Nov ‘9945.7160.1875.0675.3778.3281.6185.0088.3291.7195.3799.23 103.46 107.43
Dec ‘9945.7160.1875.0675.1878.1281.4084.7888.1091.4895.1499.01 103.28 107.43
For a list of bond factor amounts ap-
plicable to dispositions occurring dur-
ing other calendar years, see the fol-
lowing revenue rulings: Rev.
Rul.98–3, 1998–2 I.R.B. 4, for disposi-
tions occurring during the calendar
years 1996 and 1997; Rev. Rul. 98–13,
1998–11 I.R.B. 4, for dispositions oc-
curring during the period January
through March 1998; Rev. Rul. 98–31,
1998–25 I.R.B. 4, for dispositions oc-
curring during the period April through
June 1998; Rev. Rul. 98–45, 1998–38
I.R.B. 4, for dispositions occurring dur-
ing the period July through September
1998; and Rev. Rul. 99–1, 1999–2
I.R.B. 4, for dispositions occurring dur-
ing the period October through Decem-
ber 1998.
DRAFTING INFORMATION
The principal author of this revenue ruling
is Gregory N. Doran of the Office of Assistant
Chief Counsel (Passthroughs and Special In-
dustries). For further information regarding
this revenue ruling, contact Mr. Doran on
(202) 622-3040 (not a toll-free call).
Section 165.—Losses
26 CFR 1.165–7: Casualty losses.
If a taxpayer suffers a timber casualty
loss, what is the single, identifiable prop-
erty that the taxpayer will use to compute
the amount of the casualty loss? See Rev.
Rul. 99–56, page 676.
Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The October 1999 Bureau of
Labor Statistics price indexes are ac-
cepted for use by department stores em-
ploying the retail inventory and last-in,
first-out inventory methods for valuing
inventories for tax years ended on, or with
reference to, October 31, 1999.
Rev. Rul. 99–55
The following Department Store Inven-
tory Price Indexes for October 1999 were
issued by the Bureau of Labor Statistics.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsOct.Oct.from Oct. 1998
19981999to Oct. 1999
1
1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .548.9545.8-0.6
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .637.5625.6-1.9
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . .679.2653.3-3.8
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .921.6881.2-4.4
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .640.2645.20.8
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .572.6571.7-0.2
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .308.9328.9 6.5
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . .551.6536.7-2.7
9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . .423.5416.9-1.6
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .620.1627.51.2
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .607.8631.13.8
12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . .521.0508.8 -2.3
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .982.7969.2-1.4
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .757.6771.71.9
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .946.4985.64.1
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .673.7692.32.8
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .601.0603.30.4
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .817.1792.9-3.0
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .238.3234.8-1.5
20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70.664.2-9.1
21. Recreation and Education
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102.896.5-6.1
22. Home Improvements
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129.5128.8-0.5
23. Auto Accessories
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107.9106.8-1.0
Groups 1 - 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .612.7612.3-0.1
Groups 16 - 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .460.5448.6-2.6
Groups 21 - 23: Misc. Goods
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107.3102.7-4.3
Store Total
3
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .556.9550.9-1.1
1
Absence of a minus sign before percentage change in this column
signifies price increase.
2
Indexes on a January 1986=100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food,
liquor, tobacco, and contract departments.
December 20, 19996761999–51 I.R.B.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Alan J. Tomsic of the Office of
Assistant Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, con-
tact Mr. Tomsic on (202) 622-4970 (not
a toll-free call).
Section 611.—Allowance of
Deduction for Depletion
26 CFR 1.611–3: Rules applicable to timber. (Also,
section 165; 1.165–7.)
Timber casualty losses. The decisions
in Westvaco Corp. v. United Statesand
Weyerhaueser v. United Statespertain to
single, identifiable property (SIP) in rela-
tion to casualty losses. Rev. Ruls. 66–9
and 73–51 revoked.
Rev. Rul. 99–56
ISSUE
The Internal Revenue Service has re-
considered Rev. Rul. 66–9, 1966–1 C.B.
39, and Rev. Rul. 73–51, 1973–1 C.B. 75,
The indexes are accepted by the Inter-
nal Revenue Service, under §
1.472–1(k) of the Income Tax Regula-
tions and Rev. Proc. 86–46, 1986–2
C.B. 739, for appropriate application to
inventories of department stores em-
ploying the retail inventory and last-in,
first-out inventory methods for tax
years ended on, or with reference to,
October 31, 1999.
The Department Store Inventory
Price Indexes are prepared on a na-
tional basis and include (a) 23 major
groups of departments, (b) three special
combinations of the major groups - soft
goods, durable goods, and miscella-
neous goods, and (c) a store total,
which covers all departments, includ-
ing some not listed separately, except
for the following: candy, food, liquor,
tobacco, and contract departments.

in light of the decisions in Westvaco Corp.
v. United States, 639 F.2d 700 (Ct. Cl.
1980), and Weyerhaeuser v. United States,
92 F.3d 1148 (1996), rev’g in part and
aff ’g in part, 32 Fed. Cl. 80 (1994), cert.
denied, 519 U.S. 1091 (1997).
LAW AND ANALYSIS
Section 1.165–7(b)(2) of the Income
Tax Regulations provides that a casualty
loss must be determined by reference to a
single, identifiable property (SIP) dam-
aged or destroyed by casualty. Rev. Rul.
66–9 holds that, in the case of a casualty
loss to timber, the SIP damaged or de-
stroyed by casualty is the quantity of tim-
ber—the units (board feet, log scale,
cords, or other units) of wood in standing
trees that are available and suitable for ex-
ploitation and use by forest industries—
rendered unfit for use by casualty (in that
case, a hurricane). Rev. Rul. 66–9 articu-
lates two interrelated concepts. One is the
definition of SIP; the other is the suffi-
ciency of damage giving rise to a casualty
loss. It defines SIP to be the quantity of
timber destroyed by the casualty. It re-
gards only total destruction of the timber
to be legally sufficient to trigger a casu-
alty loss. The revenue ruling holds that
the loss from the sale or other disposition
of the timber that was not destroyed by
the hurricane should be determined at the
time of sale or other disposition by sub-
tracting the adjusted basis of the quantity
of timber disposed of from the amount re-
ceived for that timber.
Rev. Rul. 73–51, in considering the al-
lowance of a section 165 casualty loss on
account of an ice storm, repeats the SIP
definition of Rev. Rul. 66–9 and holds
that the physical damage (in that case,
broken crowns or root damage that
stunted tree growth) to the merchantable
trees did not result in any of the existing
timber being rendered unfit for use.
The Court of Claims, in Westvaco,
decided that the SIP damaged or
destroyed by storms and fires included all
of the taxpayer’s standing timber in the
district (block) directly affected by each
casualty and not just the units of timber
contained in the trees suffering mortal
injury. The court enunciated the standard
that the appropriate SIP is any unit of
property that has an identifiable adjusted
basis and that is reasonable and logical
and identifiable in relation to the area
affected by the casualty. The court also
held that the allowable loss for casualty is
not limited to merchantable units of tim-
ber totally destroyed.
In Weyerhaeuser, the United States Court
of Appeals for the Federal Circuit held that
the SIP damaged or destroyed by several for-
est fires and a volcanic eruption affecting
taxpayer’s timber property was the block,
that subdivision of a taxpayer’s forest hold-
ings selected by the taxpayer as a means of
tracking the adjusted basis in the timber pur-
suant to section 1.611–(3)(d)(1). Consistent
with Westvaco, a casualty loss was allowed
for trees that were damaged but not rendered
worthless.
HOLDING
In light of the court decisions in
Westvacoand Weyerhaeuserthe Service is
revoking Rev. Rul. 66–9 and Rev. Rul.
73–51.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 66–9, 1966–1 C.B. 39, and
Rev. Rul. 73–51, 1973–1 C.B. 75, are
revoked.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Richard T. Probst of the Office of
Assistant Chief Counsel (Passthroughs and
Special Industries). For further information
regarding this revenue ruling, contact
Richard T. Probst on (202) 622-3120 (not a
toll-free call).
Section 701.—Partners, not
Partnership, Subject to Tax
26 CFR 1.701–2: Anti-abuse rule.
Is the partnership viewed as an entity or
as an aggregate of its partners when deter-
mining whether a corporate partner must
recognize any gain or loss that the part-
nership allocates to it upon the sale or ex-
change in a taxable transaction of the
partner’s stock contributed by the partner
to the partnership? See Rev. Rul. 99–57,
page 678.
Section 704.—Partner’s
Distributive Share
26 CFR 1.704.3: Contributed property.
What is a partner’s correct amount of
gain or loss from a partnership’s sale or
exchange in a taxable transaction of stock
in the partner contributed to the partner-
ship by the partner? See Rev. Rul. 99–57,
page 678.
Section 705.—Determination of
Basis of Partner’s Interest
What basis adjustment should be made
to reflect that amount of gain or loss allo-
cated to a partner that contributes its own
stock to a partnership upon the partner-
ship’s sale or exchange in a taxable trans-
action of that stock when the partner may
not recognize that gain or loss under §
1032 of the Internal Revenue Code? See
Rev. Rul. 99–57, page 678.
Section 721.—Nonrecognition of
Gain or Loss on Contribution
Does a partner that contributes shares
of its own stock to a partnership in ex-
change for a partnership interest recog-
nize gain or loss on that contribution? See
Rev. Rul. 99–57, page 678.
Section 722.—Basis of
Contributing Partner’s Interest
What basis does a partner that con-
tributes shares of its own stock to a part-
nership in exchange for a partnership in-
terest have in its partnership interest? See
Rev. Rul. 99–57, page 678.
Section 723.—Basis of Property
Contributed to Partnership
What basis does a partnership have
in the stock of one of its partners con-
tributed by that partner in exchange for
a partnership interest? See Rev. Rul.
99–57, page 678.
1999–51 I.R.B.677December 20, 1999

December 20, 19996781999–51 I.R.B.
Section 1001.—Determination
of Amount of and Recognition of
Gain or Loss
What is a partnership’s amount of
gain or loss on the sale or exchange in a
taxable transaction of stock of one of
its partners contributed to the partner-
ship by that partner? See Rev. Rul.
99–57, on this page.
Section 1011.—Adjusted Basis
for Determining Loss
What is a partnership’s basis in the stock
of one of its partners contributed to the
partnership by that partner when comput-
ing the amount of gain or loss on the sale
or exchange in taxable transaction of that
stock? See Rev. Rul. 99–57, on this page .
Section 1032.—Exchange of
Stock For Property
26 CFR 1.1032–1: Disposition by a corporation of
its own capital stock. (Also, sections 701, 704, 705,
721, 722, 723, 1001, 1011; 1.701–2(e), 1.704–3.)
Applying section 1032 to partnership
transaction.This ruling explains the tax
consequences to a partnership and a cor-
porate partner where the corporate partner
contributes its own stock to the partner-
ship, and the partnership later exchanges
the stock with a third party in a taxable
transaction.
Rev. Rul. 99–57
ISSUE
What are the tax consequences to a
partnership and a corporate partner where
the corporate partner contributes its own
stock to the partnership, and the partner-
ship later exchanges the stock with a third
party in a taxable transaction?
FACTS
A, a corporation taxed under subchap-
ter C of the Internal Revenue Code, and
B, an individual, form AB partnership for
bona fide business purposes. A con-
tributes 100 shares of its own stock, val-
ued at $100x, with a basis of zero, to AB
in exchange for a 50 percent partnership
interest. B contributes a parcel of real
property with a value and adjusted basis
equal to $100x in exchange for a 50 per-
cent partnership interest. Under the part-
nership agreement, A and B each will be
allocated a 50 percent share of all partner-
ship items. One year later, after the value
of the stock has increased to $120x, AB
purchases property valued at $60x from C
in exchange for 50 shares of A stock and
transfers 50 shares of A stock to D in ex-
change for services valued at $60x.
LAW
Section 701 states that the partners in a
partnership, and not the partnership, are
liable for the income tax imposed by
Chapter 1.
Sections 702(a)(1) and 702(a)(2) pro-
vide that in determining the partners’ in-
come tax, each partner shall take into ac-
count separately the partner’s distributive
share of partnership gains or losses from
sales or exchanges of capital assets.
Section 704(b) provides that a partner’s
distributive share of income, gain, loss,
deduction, or credit (or item thereof) is
determined in accordance with the part-
ner’s interest in the partnership (deter-
mined by taking into account all facts and
circumstances), if (1) the partnership
agreement does not provide as to the part-
ner’s distributive share of income, gain,
loss, deduction, or credit (or item
thereof), or (2) the allocation to a partner
under the agreement of income, gain,
loss, deduction, or credit (or item thereof)
does not have substantial economic effect.
Section 704(c)(1)(A) provides that in-
come, gain, loss, and deduction with re-
spect to property contributed to a partner-
ship by a partner is shared among the
partners so as to take account of the varia-
tion between the basis of the property to
the partnership and its fair market value at
the time of contribution (the built-in gain
or loss).
Section 1.704–3(a)(3) of the Income
Tax Regulations defines § 704(c) property
as property contributed to a partnership if,
at the time of contribution, its book value
differs from the contributing partner’s ad-
justed tax basis. Book value is equal to
the fair market value of the property at the
time of contribution.
Section 705(a)(1) provides that the ad-
justed basis of a partner’s interest in a
partnership shall be increased by the sum
of the partner’s distributive share for the
taxable year and prior taxable years of:
(A) taxable income of the partnership as
determined under § 703(a), (B) income of
the partnership exempt from income tax,
and (C) the excess of the deductions for
depletion over the basis of the property
subject to depletion.
Section 721(a) provides a general non-
recognition rule for a partner’s contribu-
tions of property to a partnership in ex-
change for a partnership interest. The rule
is subject to a limited exception in §
721(b).
Section 722 provides that the basis of
an interest in a partnership acquired by a
contribution of property, including
money, to the partnership shall be the
amount of the money and the adjusted
basis of the property to the contributing
partner at the time of the contribution in-
creased by the amount (if any) of gain
recognized under § 721(b) to the con-
tributing partner at the time.
Section 723 states that the basis of
property contributed to a partnership is
the adjusted basis of the property to the
partner at the time of contribution in-
creased by the amount (if any) of gain
recognized by the contributing partner
under § 721(b).
Section 1001 provides that the gain
from the sale or other disposition of prop-
erty shall be the excess of the amount re-
alized over the adjusted basis provided in
§ 1011. The amount realized from the
sale or other disposition of property shall
be the sum of any money received plus
the fair market value of property (other
than money) received.
Section 1011 provides that the adjusted
basis for determining gain or loss from
the sale or other disposition of property
by a partnership, whenever acquired, shall
be the basis determined under § 1012 and
other applicable sections of subchapters O
and K.
Section 1032(a) states that a corpora-
tion does not recognize gain or loss on the
receipt of money or other property in ex-
change for the corporation’s stock. Prior
to the enactment of § 1032, a corporation
potentially could recognize gain or loss
by purchasing and reselling its own
shares, even though it would not have rec-
ognized gain or loss on the disposition of
newly issued shares. This disparity,
which gave rise to tax avoidance opportu-

nities through selective loss recognition,
was eliminated by Congress with the en-
actment of § 1032. H.R. Rep. No. 1337,
83d Cong., 2d Sess. A268 (1954).
Section 1.1032–1(a) provides that a
transfer by a corporation of shares of its
own stock as compensation for services is
considered, for purposes of § 1032(a), as
a disposition by the corporation of the
shares for money or other property.
Rev. Rul. 74–503, 1974–2 C.B. 117,
considers the tax consequences of a par-
ent corporation’s transfer to its subsidiary
of its own treasury stock in a transaction
to which § 351 applies. The ruling holds
that, under certain circumstances, the
basis of the parent corporation’s treasury
stock in the hands of the parent corpora-
tion is zero. Accordingly, under the trans-
ferred basis rule of § 362(a), the sub-
sidiary corporation’s basis of the treasury
stock of the parent corporation is also
zero.
Partnership taxation is a mixture of
provisions that treat the partnership as
an aggregate of its members or as a sep-
arate entity. Under the aggregate ap-
proach, each partner is treated as the
owner of an undivided interest in part-
nership assets and operations. Under
the entity approach, the partnership is
treated as a separate entity in which
partners have no direct interest in part-
nership assets and operations. In enact-
ing subchapter K, Congress indicated
that aggregate, rather than entity, con-
cepts should be applied if the concepts
are more appropriate in applying other
provisions of the Code. S.Rep. No.
1622, 83d Cong., 2d Sess. 89 (1954) and
H.R. Conf. Rep. No. 2543, 83d Cong.,
2d Sess. 59 (1954); See alsoTreas. Reg.
§ 1.701–2(e) (1994).
ANALYSIS
When Acontributes its own stock to
AB, no gain or loss is recognized to Aor
ABunder § 721(a). AB’s basis in the
stock is zero under § 723, and A’s basis in
its partnership interest in ABis zero under
§ 722. Cf. Rev. Rul. 74–503, 1974–2
C.B. 117. When ABsubsequently pur-
chases property from Cin exchange for A
stock and pays Astock to Din exchange
for services, there is a realization of gain
by ABmeasured by the difference be-
tween the basis of the stock and the value
of the property and services received. AB
realizes $120x of gain ($60x on the ex-
change of stock for property and $60x on
the payment of stock for services). ABal-
locates $100x of gain to Aunder § 704(c),
and allocates the remaining $20x pursuant
to the partnership agreement, $10x each
to AandB.
If A’s share of the gain from the use of
its stock in these transactions was not
subject to § 1032, Awould recognize
$110x of gain. Section 1032 is intended
to prevent a corporation from recogniz-
ing gain or loss when dealing in its own
stock. Under § 704(b) and 704(c), a cor-
porate partner contributing its own stock
generally will be allocated an amount of
gain attributable to its stock that corre-
sponds to its economic interest in the
stock held by the partnership. Accord-
ingly, use of the aggregate theory of part-
nerships is appropriate in determining the
application of § 1032 with respect to gain
allocated to a corporate partner. Under §
1032, A’s share of the gain resulting from
AB’s exchange of Astock will not be sub-
ject to tax. In addition, Aincreases its
basis in its partnership interest inAB
under § 705 by $110x, the amount equal
to A’s share of the gain resulting from
AB’s exchange of Astock, thereby pre-
serving the nonrecognition result of the
transaction in accordance with the policy
underlying § 1032.
Furthermore, in keeping with the non-
recognition policy underlying § 1032, an
analysis similar to that described above
would apply to a transaction in which a
corporate partner is allocated a loss from
a transaction involving the disposition of
stock of the corporate partner held by the
partnership.
HOLDING
If a corporate partner contributes its
own stock to a partnership in exchange
for a partnership interest, and the part-
nership later exchanges the stock in a
taxable transaction, then the partnership
will realize gain that will be allocated to
the partners under § 704. Under § 1032,
however, the corporate partner will not
recognize the gain allocated to it with
respect to the sale or exchange of the
stock. Furthermore, under § 705, the
corporate partner increases its basis in
its partnership interest by an amount
equal to its share of the gain resulting
from the partnership’s sale or exchange
of the stock.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Robert Honigman of the Office
of the Assistant Chief Counsel
(Passthroughs and Special Industries).
However, other personnel from the IRS
and Treasury Department participated in
its development. For further information
regarding this revenue ruling contact
Robert Honigman at (202) 622-3050 (not
a toll-free call).
Section 2056.—Bequests, Etc.,
to Surviving Spouse
26 CFR 20.2056(b)–4: Marital deduction; valuation
of interest passing to surviving spouse.
T.D. 8846
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 20
Deductions for Transfers for Public,
Charitable, and Religious Uses; In
General
Marital Deduction; Valuation of
Interest Passing to Surviving
Spouse
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the effect of
certain administration expenses on the
valuation of property that qualifies for
either the estate tax marital deduction
under section 2056 of the Internal
Revenue Code or the estate tax charitable
deduction under section 2055. The
regulations distinguish between estate
transmission expenses, which reduce the
value of property for marital and
charitable deduction purposes, and estate
management expenses, which generally
do not reduce the value of property for
these purposes.
EFFECTIVE DATES: These regulations
are effective on December 3, 1999.
1999–51 I.R.B.679December 20, 1999

FOR FURTHER INFORMATION
CONTACT: Deborah Ryan, (202) 622-
3090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 16, 1998, the Treasury
Department and the IRS published in the
Federal Register(63 FR 69248) a notice
of proposed rulemaking (REG–114663–97,
1999-6 I.R.B. 15) relating to the effect of
certain administration expenses on the val-
uation of property which qualifies for the
estate tax marital or charitable deduction.
The proposed regulations were issued in re-
sponse to the decision of the Supreme
Court of the United States in Commissioner
v. Estate of Hubert, 520 U.S. 93 (1997)
(1997–2 C.B. 231). Written comments re-
sponding to the notice of proposed rule-
making were received, and a public hearing
was held on April 21, 1999, at which time
oral testimony was presented. This Trea-
sury decision adopts final regulations with
respect to the notice of proposed rulemak-
ing. A summary of the principal comments
received and revisions made in response to
those comments is provided below.
The proposed regulations set forth the
substantive provisions as applied to the
estate tax marital deduction in
§20.2056(b)–4(a). For the estate tax char-
itable deduction, the proposed regulations
(under §20.2055–1(d)(6)) merely cross-
reference the rules for the marital deduc-
tion.
Several commentators suggested that
the regulations under section 2055 should
contain specific rules relating to the chari-
table deduction, rather than just a cross-
reference. The Treasury and the IRS
agree with this suggestion. The final regu-
lations contain rules under §20.2055–3
specifically addressing the effect of ad-
ministration expenses on the valuation of
property when all or a portion of the inter-
ests in property qualify for the estate tax
charitable deduction.
Several commentators stated that the
distinction between estate transmission
expenses and estate management ex-
penses was not clearly made in the pro-
posed regulations and requested more
concrete definitions of each type of ex-
pense. In response to these comments,
the final regulations characterize estate
transmission expenses as those expenses
that would not have been incurred except
for the decedent’s death. Although the
amount of these expenses cannot be cal-
culated with any degree of certainty on
the date of the decedent’s death, they are
expenses that are incurred because of the
decedent’s death. Estate management ex-
penses, on the other hand, are character-
ized in the final regulations as expenses
that would be incurred with respect to the
property even if the decedent had not
died; that is, expenses incurred in invest-
ing, maintaining, and preserving the
property. These are expenses that typi-
cally would have been incurred with re-
spect to the property by the decedent be-
fore death or by the beneficiaries had
they received the property on the date of
death without any intervening period of
administration. In order to be certain
that all expenses are classified as either
transmission expenses or management
expenses, transmission expenses are de-
fined to include all expenses that are not
management expenses.
Three commentators stated that the dif-
ferent treatment accorded to estate trans-
mission expenses and estate management
expenses under the proposed regulations
creates a new federal standard for allocat-
ing expenses that may be contrary to the
manner in which the expenses must be
charged under state law. However, the
Treasury and the IRS believe that the allo-
cation of administration expenses based
on the distinction between transmission
and management expenses provides the
most accurate measure of the value of the
property which passes to the surviving
spouse or to the charity at the moment of
the decedent’s death for federal estate tax
marital and charitable deduction pur-
poses. Transmission expenses that are
charged to the property passing to the sur-
viving spouse or to the charity reduce the
amount of that property as of the date of
the decedent’s death because the ex-
penses, as well as the transfer to the sur-
viving spouse or to charity, are a conse-
quence of, and arise as a result of, the
decedent’s death. In contrast, manage-
ment expenses do not generally reduce
the amount of the property passing from
the decedent as of the date of the dece-
dent’s death because these expenses are
incurred in producing income and pre-
serving and maintaining the property be-
tween the date of the decedent’s death and
the date of distribution. These expenses
are the ongoing, year-to-year expenses in-
curred in the investment, preservation,
and maintenance of property by property
owners.
In response to other comments, the
final regulations illustrate the application
of these rules to pecuniary bequests to the
surviving spouse. If, under the terms of
the governing instrument or applicable
local law, the recipient of a pecuniary be-
quest is not entitled to income earned
until distribution, the income is not in-
cluded in the definition of the marital or
charitable share. Thus, the amount of the
property passing to the surviving spouse
or charity for which a marital or charita-
ble deduction is allowable will not be re-
duced even if estate transmission or estate
management expenses are paid out of the
income earned by assets that will be used
to satisfy the pecuniary bequest.
Two commentators requested guidance
in applying the regulations to estates that
are intended to be nontaxable. Accord-
ingly, the final regulations add two exam-
ples, one involving a formula designed to
produce zero estate taxes and the other in-
volving a pecuniary bequest designed to
utilize the applicable exclusion amount
under section 2010.
Many of the comments concerned the
special rule of §20.2056(b)–4(e)(2)(ii) of
the proposed regulations. Under the spe-
cial rule, the value of the deductible prop-
erty interest is not increased as a result of
the decrease in the federal estate tax lia-
bility that is attributable to the deduction
of estate management expenses as ex-
penses ofadministration under section
2053 on the federal estate tax return. A
similar rule would have applied for pur-
poses of the estate tax charitable deduc-
tion.
Several of these commentators argued
that the special rule is inconsistent with
sections 2056(a) and 2055(c), because
the value of the property passing to the
surviving spouse or charity should be re-
duced only by the estate taxes actually
paid. Thus, an estate should be permitted
the full benefit of deducting management
expenses on the federal estate tax return,
including an increase to the marital or
charitable deduction based on the resul-
tant decrease in tax payable from the mar-
ital or charitable share.
December 20, 19996801999–51 I.R.B.

1999–51 I.R.B.681December 20, 1999
Conversely, other commentators as-
serted that the special rule does not con-
form with section 2056(b)(9). Section
2056(b)(9) provides that nothing in sec-
tion 2056 or any other estate tax provision
shall allow the value of any interest in
property to be deducted for federal estate
tax purposes more than once with respect
to the same decedent. These commenta-
tors pointed out that if estate management
expenses paid from the marital or charita-
ble share are deducted on the federal es-
tate tax return, and no reduction is made
to the allowable amount of the marital or
charitable deduction, then the same prop-
erty interest is deducted twice in violation
of section 2056(b)(9).
After considering these comments, the
Treasury and the IRS have eliminated the
special rule of the proposed regulations.
The final regulations provide that estate
management expenses attributable to, and
payable from, the property interest pass-
ing to the surviving spouse or charity do
not reduce the value of the property inter-
est. However, pursuant to section
2056(b)(9), the allowable amount of the
marital or charitable deduction is reduced
by the amount of these management ex-
penses if they are deducted on the Federal
estate tax return.
The Treasury and the IRS believe that
the principles which apply for determin-
ing the value of the marital and charitable
deductions should also apply for deter-
mining the value of property that passes
from one decedent to another when calcu-
lating the amount of the credit for tax on
prior transfers under section 2013.
Therefore, the final regulations amend
§20.2013–4(b) by adding a cross refer-
ence to §20.2056(b)–4(d).
Effective Dates
The regulations under sections 2055 and
2056 are applicable to estates of dece-
dents dying on or after December 3,
1999. The regulations under section
2013 are applicable to transfers from
estates of decedents dying on or after
December 3, 1999.
Effect on Other Documents
The following publications are obsolete
as of December 3, 1999:
Rev. Rul. 66–233 (1996–2 C.B. 428)
Rev. Rul. 73–98 (1973–1 C.B. 407)
Rev. Rul. 80–159 (1980–1 C.B. 206)
Rev. Rul. 93–48 (1993–2 C.B. 270)
Special Analyses
This rule is not a significant regulatory
action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and, because the regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, these regulations were
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on their impact on small
business.
Drafting Information
The principal author of these regula-
tions is Deborah Ryan, Office of the As-
sistant Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.
* * * * *
Amendments to the Regulations
Accordingly, 26 CFR part 20 is
amended as follows:
PART 20—ESTATE TAX; ESTATES OF
DECEDENTS DYING AFTER
AUGUST 16, 1954
Paragraph 1. The authority citation for
part 20 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 20.2013–4 is amended
by:
1. Removing “and” at the end of para-
graph (b)(2).
2. Redesignating paragraph (b)(3) as
paragraph (b)(4).
3. Adding a new paragraph (b)(3).
The addition reads as follows:
§20.2013–4 Valuation of property
transferred.
* * * * *
(b) * * *
(3)(i) By the amount of administration
expenses in accordance with the princi-
ples of §20.2056(b)–4(d).
(ii) This paragraph (b)(3) applies to
transfers from estates of decedents dying
on or after December 3, 1999; and
* * * * *
Par. 3. Section 20.2055–3 is amended
by:
1. Revising the section heading.
2. Adding a paragraph heading for
paragraph (a).
3. Redesignating the text of paragraph
(a) following the heading and paragraphs
(b) and (c) as paragraph (a)(1), and
paragraphs (a)(2) and (a)(3), respectively.
4. Adding a new paragraph (b).
The revision and additions read as fol-
lows:
§20.2055–3 Effect of death taxes and
administration expenses.
(a) Death taxes. * * *
(b) Administration expenses—(1) Defi-
nitions—(i) Management expenses. Es-
tate management expenses are expenses
that are incurred in connection with the
investment of estate assets or with their
preservation or maintenance during a rea-
sonable period of administration. Exam-
ples of these expenses could include in-
vestment advisory fees, stock brokerage
commissions, custodial fees, and interest.
(ii) Transmission expenses. Estate
transmission expenses are expenses that
would not have been incurred but for the
decedent’s death and the consequent ne-
cessity of collecting the decedent’s assets,
paying the decedent’s debts and death
taxes, and distributing the decedent’s
property to those who are entitled to re-
ceive it. Estate transmission expenses in-
clude any administration expense that is
not a management expense. Examples of
these expenses could include executor
commissions and attorney fees (except to
the extent of commissions or fees specifi-
cally related to investment, preservation,
and maintenance of the assets), probate
fees, expenses incurred in construction
proceedings and defending against will
contests, and appraisal fees
.
(iii) Charitable share. The charitable
share is the property or interest in prop-
erty that passed from the decedent for
which a deduction is allowable under sec-
tion 2055(a) with respect to all or part of
the property interest. The charitable share
includes, for example, bequests to charita-
ble organizations and bequests to a chari-
table lead unitrust or annuity trust, a char-
itable remainder unitrust or annuity trust,

December 20, 19996821999–51 I.R.B.
and a pooled income fund, described in
section 2055(e)(2). The charitable share
also includes the income produced by the
property or interest in property during the
period of administration if the income,
under the terms of the governing instru-
ment or applicable local law, is payable to
the charitable organization or is to be
added to the principal of the property in-
terest passing in whole or in part to the
charitable organization.
(2) Effect of transmission expenses.
For purposes of determining the charita-
ble deduction, the value of the charitable
share shall be reduced by the amount of
the estate transmission expenses paid
from the charitable share.
(3) Effect of management expenses at-
tributable to the charitable share. For
purposes of determining the charitable de-
duction, the value of the charitable share
shall not be reduced by the amount of the
estate management expenses attributable
to and paid from the charitable share.
Pursuant to section 2056(b)(9), however,
the amount of the allowable charitable de-
duction shall be reduced by the amount of
any such management expenses that are
deducted under section 2053 on the dece-
dent’s federal estate tax return.
(4) Effect of management expenses not
attributable to the charitable share.For
purposes of determining the charitable de-
duction, the value of the charitable share
shall be reduced by the amount of the es-
tate management expenses paid from the
charitable share but attributable to a prop-
erty interest not included in the charitable
share.
(5) Example.The following example
illustrates the application of this para-
graph (b):
Example. The decedent, who dies in 2000,
leaves his residuary estate, after the payment of
debts, expenses, and estate taxes, to a charitable re-
mainder unitrust that satisfies the requirements of
section 664(d). During the period of administration,
the estate incurs estate transmission expenses of
$400,000. The residue of the estate (the charitable
share) must be reduced by the $400,000 of transmis-
sion expenses and by the Federal and State estate
taxes before the present value of the remainder inter-
est passing to charity can be determined in accor-
dance with the provisions of §1.664–4 of this chap-
ter. Because the estate taxes are payable out of the
residue, the computation of the estate taxes and the
allowable charitable deduction are interrelated. See
paragraph (a)(2) of this section.
(6) Cross reference. See
§20.2056(b)–4(d) for additional examples
applicable to the treatment of administra-
tion expenses under this paragraph (b).
(7) Effective date. The provisions of
this paragraph (b) apply to estates of
decedents dying on or after December 3,
1999.
Par. 4. Section 20.2056(b)–4 is
amended by:
1. Removing the last two sentences of
paragraph (a).
2. Redesignating paragraph (d) as
paragraph (e).
3. Adding a new paragraph (d).
The addition reads as follows:
§20.2056(b)–4 Marital deduction; val-
uation of interest passing to surviving
spouse.
* * * * *
(d) Effect of administration expenses—
(1) Definitions—(i) Management ex-
penses.Estate management expenses are
expenses that are incurred in connection
with the investment of estate assets or
with their preservation or maintenance
during a reasonable period of administra-
tion. Examples of these expenses could
include investment advisory fees, stock
brokerage commissions, custodial fees,
and interest.
(ii) Transmission expenses. Estate
transmission expenses are expenses that
would not have been incurred but for the
decedent’s death and the consequent ne-
cessity of collecting the decedent’s assets,
paying the decedent’s debts and death
taxes, and distributing the decedent’s
property to those who are entitled to re-
ceive it. Estate transmission expenses in-
clude any administration expense that is
not a management expense. Examples of
these expenses could include executor
commissions and attorney fees (except to
the extent of commissions or fees specifi-
cally related to investment, preservation,
and maintenance of the assets), probate
fees, expenses incurred in construction
proceedings and defending against will
contests, and appraisal fees.
(iii) Marital share. The marital share
is the property or interest in property that
passed from the decedent for which a de-
duction is allowable under section
2056(a). The marital share includes the
income produced by the property or inter-
est in property during the period of ad-
ministration if the income, under the
terms of the governing instrument or ap-
plicable local law, is payable to the sur-
viving spouse or is to be added to the
principal of the property interest passing
to, or for the benefit of, the surviving
spouse.
(2) Effect of transmission expenses.
For purposes of determining the marital
deduction, the value of the marital share
shall be reduced by the amount of the es-
tate transmission expenses paid from the
marital share.
(3) Effect of management expenses at-
tributable to the marital share. For pur-
poses of determining the marital deduc-
tion, the value of the marital share shall
not be reduced by the amount of the estate
management expenses attributable to and
paid from the marital share. Pursuant to
section 2056(b)(9), however, the amount
of the allowable marital deduction shall
be reduced by the amount of any such
management expenses that are deducted
under section 2053 on the decedent’s Fed-
eral estate tax return.
(4) Effect of management expenses not
attributable to the marital share. For pur-
poses of determining the marital deduc-
tion, the value of the marital share shall
be reduced by the amount of the estate
management expenses paid from the mar-
ital share but attributable to a property in-
terest not included in the marital share.
(5) Examples.The following examples
illustrate the application of this paragraph
(d):
Example 1. The decedent dies after 2006 having
made no lifetime gifts. The decedent makes a be-
quest of shares of ABC Corporation stock to the
decedent’s child. The bequest provides that the
child is to receive the income from the shares from
the date of the decedent’s death. The value of the
bequeathed shares on the decedent’s date of death is
$3,000,000. The residue of the estate is bequeathed
to a trust for which the executor properly makes an
election under section 2056(b)(7) to treat as quali-
fied terminable interest property. The value of the
residue on the decedent’s date of death, before the
payment of administration expenses and Federal and
State estate taxes, is $6,000,000. Under applicable
local law, the executor has the discretion to pay ad-
ministration expenses from the income or principal
of the residuary estate. All estate taxes are to be paid
from the residue. The State estate tax equals the
State death tax credit available under section 2011.
During the period of administration, the estate incurs
estate transmission expenses of $400,000, which the
executor charges to the residue. For purposes of de-
termining the marital deduction, the value of the

1999–51 I.R.B.683December 20, 1999
residue is reduced by the Federal and State estate
taxes and by the estate transmission expenses. If the
transmission expenses are deducted on the Federal
estate tax return, the marital deduction is $3,500,000
($6,000,000 minus $400,000 transmission expenses
and minus $2,100,000 Federal and State estate
taxes). If the transmission expenses are deducted on
the estate’s Federal income tax return rather than on
the estate tax return, the marital deduction is
$3,011,111 ($6,000,000 minus $400,000 transmis-
sion expenses and minus $2,588,889 Federal and
State estate taxes).
Example 2. The facts are the same as in Example
1, except that, instead of incurring estate transmis-
sion expenses, the estate incurs estate management
expenses of $400,000 in connection with the residue
property passing for the benefit of the spouse. The
executor charges these management expenses to the
residue. In determining the value of the residue
passing to the spouse for marital deduction pur-
poses, a reduction is made for Federal and State es-
tate taxes payable from the residue but no reduction
is made for the estate management expenses. If the
management expenses are deducted on the estate’s
income tax return, the net value of the property pass-
ing to the spouse is $3,900,000 ($6,000,000 minus
$2,100,000 Federal and State estate taxes). A mari-
tal deduction is claimed for that amount, and the tax-
able estate is $5,100,000.
Example 3. The facts are the same as in Example
1, except that the estate management expenses of
$400,000 are incurred in connection with the be-
quest of ABC Corporation stock to the decedent’s
child. The executor charges these management ex-
penses to the residue. For purposes of determining
the marital deduction, the value of the residue is re-
duced by the Federal and State estate taxes and by
the management expenses. The management ex-
penses reduce the value of the residue because they
are charged to the property passing to the spouse
even though they were incurred with respect to stock
passing to the child. If the management expenses
are deducted on the estate’s Federal income tax re-
turn, the marital deduction is $3,011,111
($6,000,000 minus $400,000 management expenses
and minus $2,588,889 Federal and State estate
taxes). If the management expenses are deducted on
the estate’s Federal estate tax return, rather than on
the estate’s Federal income tax return, the marital
deduction is $3,500,000 ($6,000,000 minus
$400,000 management expenses and minus
$2,100,000 in Federal and State estate taxes).
Example 4. The decedent, who dies in 2000, has
a gross estate of $3,000,000.
Included in the gross estate are proceeds of
$150,000 from a policy insuring the decedent’s life
and payable to the decedent’s child as beneficiary.
The applicable credit amount against the tax was fully
consumed by the decedent’s lifetime gifts. Applica-
ble State law requires the child to pay any estate taxes
attributable to the life insurance policy. Pursuant to
the decedent’s will, the rest of the decedent’s estate
passes outright to the surviving spouse. During the
period of administration, the estate incurs estate man-
agement expenses of $150,000 in connection with the
property passing to the spouse. The value of the prop-
erty passing to the spouse is $2,850,000 ($3,000,000
less the insurance proceeds of $150,000 passing to the
child). For purposes of determining the marital de-
duction, if the management expenses are deducted on
the estate’s income tax return, the marital deduction is
$2,850,000 ($3,000,000 less $150,000) and there is a
resulting taxable estate of $150,000 ($3,000,000 less
a marital deduction of $2,850,000). Suppose, instead,
the management expenses of $150,000 are deducted
on the estate’s estate tax return under section 2053 as
expenses of administration. In such a situation,
claiming a marital deduction of $2,850,000 would be
taking a deduction for the same $150,000 in property
under both sections 2053 and 2056 and would shield
from estate taxes the $150,000 in insurance proceeds
passing to the decedent’s child. Therefore, in accor-
dance with section 2056(b)(9), the marital deduction
is limited to $2,700,000, and the resulting taxable es-
tate is $150,000.
Example 5. The decedent dies after 2006 having
made no lifetime gifts. The value of the decedent’s
residuary estate on the decedent’s date of death is
$3,000,000, before the payment of administration ex-
penses and Federal and State estate taxes. The dece-
dent’s will provides a formula for dividing the dece-
dent’s residuary estate between two trusts to reduce
the estate’s Federal estate taxes to zero. Under the
formula, one trust, for the benefit of the decedent’s
child, is to be funded with that amount of property
equal in value to so much of the applicable exclusion
amount under section 2010 that would reduce the es-
tate’s Federal estate tax to zero. The other trust, for
the benefit of the surviving spouse, satisfies the re-
quirements of section 2056(b)(7) and is to be funded
with the remaining property in the estate. The State
estate tax equals the State death tax credit available
under section 2011. During the period of administra-
tion, the estate incurs transmission expenses of
$200,000. The transmission expenses of $200,000 re-
duce the value of the residue to $2,800,000. If the
transmission expenses are deducted on the Federal es-
tate tax return, then the formula divides the residue so
that the value of the property passing to the child’s
trust is $1,000,000 and the value of the property pass-
ing to the marital trust is $1,800,000. The allowable
marital deduction is $1,800,000. The applicable ex-
clusion amount shields from Federal estate tax the en-
tire $1,000,000 passing to the child’s trust so that the
amount of Federal and State estate taxes is zero. Al-
ternatively, if the transmission expenses are deducted
on the estate’s Federal income tax return, the formula
divides the residue so that the value of the property
passing to the child’s trust is $800,000 and the value
of the property passing to the marital trust is
$2,000,000. The allowable marital deduction remains
$1,800,000. The applicable exclusion amount shields
from Federal estate tax the entire $800,000 passing to
the child’s trust and $200,000 of the $2,000,000 pass-
ing to the marital trust so that the amount of Federal
and State estate taxes remains zero.
Example 6. The facts are the same as in Exam-
ple 5, except that the decedent’s will provides that
the child’s trust is to be funded with that amount of
property equal in value to the applicable exclusion
amount under section 2010 allowable to the dece-
dent’s estate. The residue of the estate, after the
payment of any debts, expenses, and Federal and
State estate taxes, is to pass to the marital trust.
The applicable exclusion amount in this case is
$1,000,000, so the value of the property passing to
the child’s trust is $1,000,000. After deducting the
$200,000 of transmission expenses, the residue of
the estate is $1,800,000 less any estate taxes. If
the transmission expenses are deducted on the
Federal estate tax return, the allowable marital de-
duction is $1,800,000, the taxable estate is zero,
and the Federal and State estate taxes are zero. Al-
ternatively, if the transmission expenses are de-
ducted on the estate’s Federal income tax return,
the net value of the property passing to the spouse
is $1,657,874 ($1,800,000 minus $142,106 estate
taxes). A marital deduction is claimed for that
amount, the taxable estate is $1,342,106, and the
Federal and State estate taxes total $142,106.
Example 7. The decedent, who dies in 2000,
makes an outright pecuniary bequest of
$3,000,000 to the decedent’s surviving spouse, and
the residue of the estate, after the payment of all
debts, expenses, and Federal and State estate
taxes, passes to the decedent’s child. Under the
terms of the applicable local law, a beneficiary of a
pecuniary bequest is not entitled to any income on
the bequest. During the period of administration,
the estate pays estate transmission expenses from
the income earned by the property that will be dis-
tributed to the surviving spouse in satisfaction of
the pecuniary bequest. The income earned on this
property is not part of the marital share. There-
fore, the allowable marital deduction is
$3,000,000, unreduced by the amount of the estate
transmission expenses.
(6) Effective date. The provisions of
this paragraph (d) apply to estates of
decedents dying on or after December 3,
1999.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved November 22, 1999.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on De-
cember 2, 1999, 8:45 a.m., and published in the
issue of the Federal Register for December 3, 1999,
64 F.R. 67763)
Section 6501.—Limitations on
Assessment and Collection
26 CFR 301.6501(c)–1: Exceptions to general period
of limitations on assessment and collection.
T.D. 8845
DEPARTMENT OF THE TREASURY
Internal Revenue Service

26 CFR Part 20
Adequate Disclosure of Gifts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to changes
made to Internal Revenue Code sections
2001, 2504, and 6501 by the Taxpayer
Relief Act of 1997 and the Internal Rev-
enue Service Restructuring and Reform
Act of 1998 regarding the valuation of
prior gifts in determining estate and gift
tax liability, and the period of limita-
tions for assessing and collecting gift
tax. These regulations are necessary be-
cause section 6501(c)(9) now requires
that a gift must be adequately disclosed
on a gift tax return in order to com-
mence the running of the period of limi-
tations on assessment with respect to the
gift. Once the period of limitations ex-
pires, the amount of that gift as reported
on the return may not be adjusted for
purposes of determining future gift and
estate tax liability. The regulations pro-
vide guidance on what constitutes ade-
quate disclosure for purposes of the
statute.
DATES: These regulations are effective
December 3, 1999.
FOR FURTHER INFORMATION
CONTACT:William L. Blodgett, (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
1545–1637. Responses to this collection
of information are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
OMB control number.
The reporting burden contained in
§301.6501(c)–1(f) is reflected in the
burden for Form 709, “U.S. Gift (and
Generation-Skipping Transfer) Tax Re-
turn.”
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS Re-
ports Clearance Officer, OP:FS:FP, Wash-
ington, DC 20224, and to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503.
Books or records relating to this collec-
tion of information must be retained as
long as their contents may be material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
On December 22, 1998, the IRS pub-
lished in the Federal Register(63 FR
70701) a notice of proposed rulemaking
(REG–106177–98, 1998–2 C.B. 344)
under sections 2001 and 2504 relating to
the value of prior gifts for purposes of
computing the estate and gift tax, and
under section 6501 relating to the period
for assessment and collection of gift tax.
Written comments responding to the no-
tice of proposed rulemaking were re-
ceived and a hearing was held on April
28, 1999, at which time oral testimony
was presented. This document adopts
final regulations with respect to this no-
tice of proposed rulemaking. A summary
of the principal comments received and
the revisions made in response to those
comments is provided below.
1. Requirements for Adequate Disclo-
sure
Under section 6501(c)(9), the period of
limitations on the assessment of gift tax
with respect to a gift will commence to
run only if the gift is adequately disclosed
on the gift tax return. The proposed regu-
lations provide a list of information re-
quired to satisfy the adequate disclosure
standard.
In general, the comments objected to
the quantity, detail, and nature of the in-
formation required under the proposed
regulations. In some cases, information
required in the proposed regulations is not
required in the final regulations. How-
ever, Treasury and the IRS continue to be-
lieve that the adequate disclosure rule was
intended to afford the IRS a viable means
to identify the returns that should be ex-
amined, with a minimum expenditure of
resources. Further, the more complete
and comprehensive the information filed
with the return is, the more readily the
IRS will be able to identify the returns
that should not be examined, thus saving
taxpayers needless expenditures of time
and money.
Several commentators suggested that
the language in §301.6501–1(f)(2) of the
proposed regulations imposed two re-
quirements for adequate disclosure. That
is, the taxpayer had to provide informa-
tion adequate to apprise the IRS of the na-
ture of the gift, etc. and in addition, the
taxpayer had to provide the information
listed in the regulation. In response to
these comments, the final regulations
clarify that the adequate disclosure re-
quirement is satisfied if the information
listed in the regulation is provided.
Some commentators argued that Con-
gress intended that the new adequate dis-
closure requirements be the same as the
existing disclosure requirements under
prior section 6501(c)(9) for pre-August 5,
1997 gifts of property subject to the spe-
cial valuation rules of sections 2701 and
2702. Therefore, the commentators sug-
gested that the IRS adopt the disclosure
requirements under §301.6501(c)–1(e)(2)
for transfers of those interests. This sug-
gestion was not adopted. The IRS and
Treasury believe it is necessary to expand
on those disclosure requirements to ad-
dress the broader range of transfers cov-
ered by the new legislation, as well as
transactions and entities that may not
have been prevalent when the prior regu-
lations were promulgated.
Under the proposed regulations, if
property is transferred in trust, taxpayers
are required to provide a brief description
of the terms of the trust. In response to
comments, the final regulations provide
that taxpayers may submit a complete
copy of the trust document in lieu of a de-
scription of the trust terms.
The proposed regulations require the
submission of a detailed description of the
method used in determining the fair mar-
ket value of the property, including “any
relevant financial data.” Commentators
contended that “any relevant financial
data” is a subjective concept that lacks
specificity. Rather, the regulations should
specify exactly what financial data must
December 20, 19996841999–51 I.R.B.

1999–51 I.R.B.685December 20, 1999
be submitted, such as balance sheets, net
earnings statements, etc. In response to
these comments, the final regulations re-
quire that any financial data that was used
in valuing the interest must be submitted.
This ensures that the information re-
quested is available and was deemed rele-
vant by the person valuing the interest.
Several commentators expressed con-
cern over the requirement in the proposed
regulations that, if a less-than-100-per-
cent interest in a non-actively traded en-
tity is transferred, the taxpayer must sub-
mit a statement regarding the fair market
value of 100 percent of the entity deter-
mined without regard to any discounts. It
was contended that a less-than-100-per-
cent interest in an operating company
may not be valued based on a pro rata
portion of the value of 100 percent of the
entity; rather the appraiser often will de-
termine the value based on indicia other
than the value of the entire entity, such as
the price/earnings ratio of stock in compa-
rable publicly-traded entities. Because
the entire entity is not valued in these situ-
ations, valuing 100 percent of the entity
would not be relevant. One comment
stated that this requirement would be rea-
sonable in valuing an interest in nonac-
tively-traded entities, such as entities
holding securities or real estate, since in
those cases the value of an interest in the
entity would be determined based on a
pro rata portion of the value of 100 per-
cent of the entity. In response to these
comments, the final regulations do not re-
quire a statement of the fair market value
of 100 percent of the entity (without re-
gard to any discounts), if the value of the
interest in the entity is properly deter-
mined without using the net asset value of
the entire entity. If 100 percent of the
value of the entity is not disclosed, the
taxpayer bears the burden of demonstrat-
ing that the fair market value of the entity
is properly determined by a method other
than a method based on the net value of
the assets held by the entity.
The proposed regulations also require
valuation information for each entity (and
its assets) that is owned or controlled by
the entity subject to the transfer. Com-
ments indicated that this requirement
would be difficult to satisfy, because in
some cases the information would not be
within the control of the taxpayer and the
entity subject to the transfer would not
normally be required to maintain the fi-
nancial records with respect to lower-
tiered entities. The comments suggested
that information on the lower-tiered enti-
ties should be required only to the extent
such information is essential to a reason-
able appraisal of the interest transferred
and is in the personal control of the tax-
payer. Many commentators suggested
that the regulations require the submis-
sion of only that information that a quali-
fied and competent appraiser would use in
valuing the interest. In response to these
comments, the final regulations provide
that the information on the lower-tiered
entities must be submitted if the informa-
tion is relevant and material in determin-
ing the value of the interest in the entity.
Finally, comments suggested that a
properly completed appraisal would con-
tain all the information that is material
and relevant to the valuation of the trans-
ferred property and, therefore, should be
sufficient to satisfy any disclosure re-
quirement. Accordingly, under the final
regulations, an appraisal satisfying spe-
cific requirements may be submitted in
lieu of a detailed description of the
method used to determine the fair market
value and in lieu of information regarding
tiered entities.
The proposed regulations require a
statement of relevant facts that would ap-
prise the IRS of the nature of any poten-
tial gift tax controversy concerning the
transfer, or instead of that statement, a
concise description of the legal issue pre-
sented by the facts. This requirement is
similar to the disclosure required to avoid
the accuracy-related penalty under sec-
tion 6662. It was intended to enable the
IRS to easily identify issues presented so
that the IRS could evaluate whether an
examination is warranted during the ini-
tial review of the gift tax return. Com-
mentators indicated that the requirement
was too subjective and open-ended, since
it would be difficult for a practitioner to
identify or anticipate “any” potential con-
troversy. In response to these comments,
that requirement has been eliminated
from the final regulations. The proposed
regulations also require that the taxpayer
submit a statement describing any posi-
tion taken that is contrary to any tempo-
rary or final regulations or any revenue
ruling. Commentators were concerned
that this requirement could be interpreted
as including both regulations and revenue
rulings that are published after the gift tax
return is filed that interpret earlier IRS po-
sitions. In response to these comments,
the final regulations limit the required
statement to positions taken that are con-
trary to any proposed, temporary or final
regulation, and any revenue ruling pub-
lished at the time the transfer occurred.
Commentators also noted that, under
the proposed regulations, if a taxpayer
failed to provide, for example, one item of
information, the adequate disclosure re-
quirement would not be satisfied, regard-
less of the significance of the item. The
comments suggested that “substantial
compliance” with the requirements of the
regulations or a good-faith effort to com-
ply should be deemed actual compliance.
This suggestion was not adopted in view
of the difficulty in defining and illustrat-
ing what would constitute substantial
compliance. However, it is not intended
that the absence of any particular item or
items would necessarily preclude satisfac-
tion of the regulatory requirements, de-
pending on the nature of the item omitted
and the overall adequacy of the informa-
tion provided.
In response to comments, a rule was
added regarding the application of the ad-
equate disclosure rules in the case of
“split gifts” under section 2513. Under
this rule, gifts attributed to the non-donor
spouse are deemed to be adequately dis-
closed if the gifts are adequately disclosed
on the return filed by the donor spouse.
2. Finality with Respect to Adequately
Disclosed Gifts
Under the proposed regulations, if a
transfer is adequately disclosed on the gift
tax return, and the period for assessment
of gift tax has expired, then the IRS is
foreclosed from adjusting the value of the
gift under section 2504(c) (for purposes
of determining the current gift tax liabil-
ity) and under section 2001(f) (for pur-
poses of determining the estate tax liabil-
ity). However, the IRS is not precluded
from making adjustments involving legal
issues, even if the gift was adequately dis-
closed. This position was based on long-
standing regulations applying section
2504(c) and relevant case law.
Comments suggested that this rule is
contrary to Congressional intent in enact-
ing section 2001(f) and amending section
2504(c) to provide a greater degree of fi-

nality with respect to the gift and estate
tax statutory scheme. In response to these
comments, the final regulations preclude
adjustments with respect to all issues re-
lated to a gift once the gift tax statute of
limitations expires with respect to that
gift.
3. Non-gift Transactions
Under the proposed regulations, a com-
pleted transfer that did not constitute a
gift would be considered adequately dis-
closed if the taxpayer submitted the infor-
mation required for adequate disclosure
and an explanation describing why the
transfer was not subject to the gift tax.
One commentator suggested that the ade-
quate disclosure requirement should be
waived if the taxpayer reasonably, in
good faith, believes the transfer is not a
gift (for example, a salary payment made
to a child employed in a family business).
Another commentator noted that the stan-
dard for adequate disclosure is higher for
a “non-gift” than it is for a gift transaction
since, in the non-gift situation, the donor
must provide all the information required
by the regulation and a statement why the
transaction is not a gift. Another com-
ment requested more guidance for report-
ing non-gift business transactions. In re-
sponse to the comments, the final
regulations limit the information required
in a non-gift situation. In addition, the
final regulations provide that completed
transfers to members of the transferor’s
family (as defined in section
2032A(e)(2)) in the ordinary course of
operating a business are deemed to be ad-
equately disclosed, even if not reported
on a gift tax return, if the item is properly
reported by all parties for income tax pur-
poses. For example, in the case of a
salary payment made to a child of the
donor employed in the donor’s business,
the transaction will be treated as ade-
quately disclosed for gift tax purposes if
the salary payment is properly reported by
the business and the child on their income
tax returns. This exception only applies
to transactions conducted in the ordinary
course of operating a business. It does
not apply, for example, in the case of a
sale of property (including a business) by
a parent to a child.
4. Effective Date Provisions
Several comments were received re-
garding clarification of the statutory ef-
fective date rules.
One comment requested clarification of
the effective date of section 6501(c)(9), as
amended. The Taxpayer Relief Act of
1997 provides that the amendments to
section 6501(c)(9) (commencing the run-
ning of the period of limitations only if
the gift is adequately disclosed) apply to
gifts made in calendar years ending after
August 5, 1997 (that is, all gifts made in
calendar year 1997 and thereafter). How-
ever, the underlying legislative history in-
dicates that the amendment to section
6501(c)(9) applies “to gifts made in cal-
endar years after the date of enactment
[August 5, 1997]”. H.R. Conf. Rep. No.
220, 105
th
Cong., 1
st
Sess. 408 (1997).
Notwithstanding this statement in the leg-
islative history, the statutory language is
clear that the section as amended applies
to all gifts made during the 1997 calendar
year, and thereafter. In the final regula-
tions, the statutory effective date lan-
guage is restated in a manner that makes it
clear that section 6501(c)(9) as amended
applies to all gifts made after December
31, 1996.
Another comment suggested clarifica-
tion of the application of the adequate dis-
closure rules and the interaction between
sections 2504(c) and 6501(c)(9) with re-
spect to gifts made between January 1,
1997, and August 6, 1997, since section
2504(c) as amended applies only to gifts
made after August 5, 1997, but section
6501(c)(9) as amended applies to all gifts
made in 1997. In response to this com-
ment, an example has been added under
§25.2504–2(c) involving a situation
where a gift is made prior to August 6,
1997, that is not adequately disclosed on
the return filed for 1997. The example
clarifies that the period for assessment
with respect to the pre-August 6, 1997
gift does not commence to run because
the gift is not adequately disclosed. Ac-
cordingly, a gift tax may be assessed with
respect to the gift at any time, and
notwithstanding the effective date for sec-
tion 2504(c), that 1997 gift can be ad-
justed as a part of prior taxable gifts in de-
termining subsequent gift tax liability.
Further, the 1997 gift can be adjusted as
part of taxable gifts under section 2001 in
determining estate tax liability.
Finally, in response to another com-
ment, an example has been added illus-
trating the application of the effective
date rules in a similar fact pattern, where
the gifts are made in a calendar year prior
to 1997. The example illustrates that the
IRS may not revalue the gifts, for pur-
poses of determining prior taxable gifts
for gift tax purposes, if a gift tax was paid
and assessed with respect to the calendar
year, and the period for assessment has
expired. Since the gifts were made prior
to 1997, the rules of section 2504(c) and
section 6501 prior to amendment apply.
However, the IRS may adjust the gifts for
purposes of determining adjusted taxable
gifts for estate tax purposes.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Small Business Administration
for comment on their impact on small
business.
Drafting Information
The principal author of these regula-
tions is William L. Blodgett, Office of As-
sistant Chief Counsel (Passthroughs and
Special Industries), IRS. However, other
personnel from the IRS and Treasury De-
partment participated in their develop-
ment.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 20, 25, 301
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 fol-
lows:
December 20, 19996861999–51 I.R.B.

Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 20.2001–1 is revised to
read as follows:
§20.2001–1 Valuation of adjusted tax-
able gifts and section 2701(d) taxable
events.
(a) Adjusted taxable gifts made prior to
August 6, 1997.For purposes of deter-
mining the value of adjusted taxable gifts
as defined in section 2001(b), if the gift
was made prior to August 6, 1997, the
value of the gift may be adjusted at any
time, even if the time within which a gift
tax may be assessed has expired under
section 6501. This paragraph (a) also ap-
plies to adjustments involving issues
other than valuation for gifts made prior
to August 6, 1997.
(b) Adjusted taxable gifts and section
2701(d) taxable events occurring after
August 5, 1997.For purposes of deter-
mining the amount of adjusted taxable
gifts as defined in section 2001(b), if,
under section 6501, the time has expired
within which a gift tax may be assessed
under chapter 12 of the Internal Revenue
Code (or under corresponding provisions
of prior laws) with respect to a gift made
after August 5, 1997, or with respect to an
increase in taxable gifts required under
section 2701(d) and §25.2701–4 of this
chapter, then the amount of the taxable
gift will be the amount as finally deter-
mined for gift tax purposes under chapter
12 of the Internal Revenue Code and the
amount of the taxable gift may not there-
after be adjusted. The rule of this para-
graph (b) applies to adjustments involving
all issues relating to the gift, including
valuation issues and legal issues involv-
ing the interpretation of the gift tax law.
(c) Finally determined. For purposes
of paragraph (b) of this section, the
amount of a taxable gift as finally deter-
mined for gift tax purposes is—
(1) The amount of the taxable gift as
shown on a gift tax return, or on a state-
ment attached to the return, if the Internal
Revenue Service does not contest such
amount before the time has expired under
section 6501 within which gift taxes may
be assessed;
(2) The amount as specified by the In-
ternal Revenue Service before the time
has expired under section 6501 within
which gift taxes may be assessed on the
gift, if such specified amount is not timely
contested by the taxpayer;
(3) The amount as finally determined
by a court of competent jurisdiction; or
(4) The amount as determined pursuant
to a settlement agreement entered into be-
tween the taxpayer and the Internal Rev-
enue Service.
(d) Definitions. For purposes of para-
graph (b) of this section, the amount is fi-
nally determined by a court of competent
jurisdiction when the court enters a final
decision, judgment, decree or other order
with respect to the amount of the taxable
gift that is not subject to appeal. See, for
example, section 7481 regarding the fi-
nality of a decision by the U.S. Tax Court.
Also, for purposes of paragraph (b) of this
section, a settlement agreement means
any agreement entered into by the Internal
Revenue Service and the taxpayer that is
binding on both. The term includes a
closing agreement under section 7121, a
compromise under section 7122, and an
agreement entered into in settlement of
litigation involving the amount of the tax-
able gift.
(e) Expiration of period of assessment.
For purposes of determining if the time
has expired within which a tax may be as-
sessed under chapter 12 of the Internal
Revenue Code, see §301.6501(c)–1(e)
and (f) of this chapter.
(f) Effective dates. Paragraph (a) of
this section applies to transfers of prop-
erty by gift made prior to August 6, 1997,
if the estate tax return for the donor/dece-
dent’s estate is filed after December 3,
1999. Paragraphs (b) through (e) of this
section apply to transfers of property by
gift made after August 5, 1997, if the gift
tax return for the calendar period in which
the gift is made is filed after December 3,
1999.
PART 25—GIFT TAX; GIFTS MADE
AFTER DECEMBER 31, 1954
Par. 3. The authority citation for part
25 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 4. In §25.2504–1, a sentence is
added at the end of paragraph (d) to read
as follows:
§25.2504–1 Taxable gifts for preceding
calendar periods.
* * * * *
(d) * * * However, see §25.2504–2(b)
regarding certain gifts made after August
5, 1997.
Par. 5. Section 25.2504–2 is revised to
read as follows:
§25.2504–2 Determination of gifts for
preceding calendar periods.
(a) Gifts made before August 6, 1997.
If the time has expired within which a tax
may be assessed under chapter 12 of the
Internal Revenue Code (or under corre-
sponding provisions of prior laws) on the
transfer of property by gift made during a
preceding calendar period, as defined in
§25.2502–1(c)(2), the gift was made prior
to August 6, 1997, and a tax has been as-
sessed or paid for such prior calendar pe-
riod, the value of the gift, for purposes of
arriving at the correct amount of the tax-
able gifts for the preceding calendar peri-
ods (as defined under §25.2504–1(a)), is
the value used in computing the tax for
the last preceding calendar period for
which a tax was assessed or paid under
chapter 12 of the Internal Revenue Code
or the corresponding provisions of prior
laws. However, this rule does not apply
where no tax was paid or assessed for the
prior calendar period. Furthermore, this
rule does not apply to adjustments involv-
ing issues other than valuation. See
§25.2504–1(d).
(b) Gifts made or section 2701(d) tax-
able events occurring after August 5,
1997.If the time has expired under sec-
tion 6501 within which a gift tax may be
assessed under chapter 12 of the Internal
Revenue Code (or under corresponding
provisions of prior laws) on the transfer of
property by gift made during a preceding
calendar period, as defined in
§25.2502–1(c)(2), or with respect to an
increase in taxable gifts required under
section 2701(d) and §25.2701–4, and the
gift was made, or the section 2701(d) tax-
able event occurred, after August 5, 1997,
the amount of the taxable gift or the
amount of the increase in taxable gifts, for
purposes of determining the correct
amount of taxable gifts for the preceding
calendar periods (as defined in
§25.2504–1(a)), is the amount that is fi-
nally determined for gift tax purposes
(within the meaning of §20.2001–1(c) of
this chapter) and such amount may not be
thereafter adjusted. The rule of this para-
graph (b) applies to adjustments involving
all issues relating to the gift including val-
uation issues and legal issues involving
the interpretation of the gift tax law. For
purposes of determining if the time has
1999–51 I.R.B.687December 20, 1999

expired within which a gift tax may be as-
sessed, see §301.6501(c)–1(e) and (f) of
this chapter.
(c) Examples. The following examples
illustrate the rules of paragraphs (a) and
(b) of this section:
Example 1. (i) Facts. In 1996, A trans-
ferred closely-held stock in trust for the
benefit of B, A’s child. A timely filed a
Federal gift tax return reporting the 1996
transfer to B. No gift tax was assessed or
paid as a result of the gift tax annual ex-
clusion and the application of A’s avail-
able unified credit. In 2001, A transferred
additional closely-held stock to the trust.
A’s Federal gift tax return reporting the
2001 transfer was timely filed and the
transfer was adequately disclosed under
§301.6501(c)–1(f)(2) of this chapter. In
computing the amount of taxable gifts, A
claimed annual exclusions with respect to
the transfers in 1996 and 2001. In 2003,
A transfers additional property to B and
timely files a Federal gift tax return re-
porting the gift.
(ii) Application of the rule limiting ad-
justments to prior gifts.Under section
2504(c), in determining A’s 2003 gift tax
liability, the amount of A’s 1996 gift can
be adjusted for purposes of computing
prior taxable gifts, since that gift was
made prior to August 6, 1997, and there-
fore, the provisions of paragraph (a) of
this section apply. Adjustments can be
made with respect to the valuation of the
gift and legal issues presented (for exam-
ple, the availability of the annual exclu-
sion with respect to the gift). However,
A’s 2001 transfer was adequately dis-
closed on a timely filed gift tax return
and, thus, under paragraph (b) of this sec-
tion, the amount of the 2001 taxable gift
by A may not be adjusted (either with re-
spect to the valuation of the gift or any
legal issue) for purposes of computing
prior taxable gifts in determining A’s 2003
gift tax liability.
Example 2. (i) Facts. In 1996, A trans-
ferred closely-held stock to B, A’s child.
A timely filed a Federal gift tax return re-
porting the 1996 transfer to B and paid
gift tax on the value of the gift reported on
the return. On August 1, 1997, A trans-
ferred additional closely-held stock to B
in exchange for a promissory note signed
by B. Also, on September 10, 1997, A
transferred closely-held stock to C, A’s
other child. On April 15, 1998, A timely
filed a gift tax return for 1997 reporting
the September 10, 1997, transfer to C and,
under §301.6501(c)–1(f)(2) of this chap-
ter, adequately disclosed that transfer and
paid gift tax with respect to the transfer.
However, A believed that the transfer to B
on August 1, 1997, was for full and ade-
quate consideration and A did not report
the transfer to B on the 1997 Federal gift
tax return. In 2002, A transfers additional
property to B and timely files a Federal
gift tax return reporting the gift.
(ii) Application of the rule limiting ad-
justments to prior gifts.Under section
2504(c), in determining A’s 2002 gift tax
liability, the value of A’s 1996 gift cannot
be adjusted for purposes of computing the
value of prior taxable gifts, since that gift
was made prior to August 6, 1997, and a
timely filed Federal gift tax return was
filed on which a gift tax was assessed and
paid. However, A’s prior taxable gifts can
be adjusted to reflect the August 1, 1997,
transfer because, although a gift tax return
for 1997 was timely filed and gift tax was
paid, under §301.6501(c)–1(f) of this
chapter the period for assessing gift tax
with respect to the August 1, 1997, trans-
fer did not commence to run since that
transfer was not adequately disclosed on
the 1997 gift tax return. Accordingly, a
gift tax may be assessed with respect to
the August 1, 1997, transfer and the
amount of the gift would be reflected in
prior taxable gifts for purposes of com-
puting A’s gift tax liability for 2002. A’s
September 10, 1997, transfer to C was ad-
equately disclosed on a timely filed gift
tax return and, thus, under paragraph (b)
of this section, the amount of the Septem-
ber 10, 1997, taxable gift by A may not be
adjusted for purposes of computing prior
taxable gifts in determining A’s 2002 gift
tax liability.
Example 3. (i) Facts. In 1994, A trans-
ferred closely-held stock to B and C, A’s
children. A timely filed a Federal gift tax
return reporting the 1994 transfers to B
and C and paid gift tax on the value of
the gifts reported on the return. Also in
1994, A transferred closely-held stock to
B in exchange for a bona fide promissory
note signed by B. A believed that the
transfer to B in exchange for the promis-
sory note was for full and adequate con-
sideration and A did not report that trans-
fer to B on the 1994 Federal gift tax
return. In 2002, A transfers additional
property to B and timely files a Federal
gift tax return reporting the gift.
(ii) Application of the rule limiting ad-
justments to prior gifts.Under section
2504(c), in determining A’s 2002 gift tax
liability, the value of A’s 1994 gifts cannot
be adjusted for purposes of computing
prior taxable gifts because those gifts
were made prior to August 6, 1997, and a
timely filed Federal gift tax return was
filed with respect to which a gift tax was
assessed and paid, and the period of limi-
tations on assessment has expired. The
provisions of paragraph (a) of this section
apply to the 1994 transfers. However, for
purposes of determining A’s adjusted tax-
able gifts in computing A’s estate tax lia-
bility, the gifts may be adjusted. See
§20.2001–1(a) of this chapter.
(d) Effective dates. Paragraph (a) of
this section applies to transfers of prop-
erty by gift made prior to August 6, 1997.
Paragraphs (b) and (c) of this section
apply to transfers of property by gift made
after August 5, 1997, if the gift tax return
for the calendar period in which the trans-
fer is reported is filed after December 3,
1999.
Par. 6. In §25.2511–2, paragraph (j) is
revised to read as follows:
§25.2511–2 Cessation of donor’s do-
minion and control.
* * * * *
(j) If the donor contends that a power is
of such nature as to render the gift incom-
plete, and hence not subject to the tax as
of the calendar period (as defined in
§25.2502–1(c)(1)) of the initial transfer,
see §301.6501(c)–1(f)(5) of this chapter.
PART 301—PROCEDURE AND AD-
MINISTRATION
Par. 7. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 8. Section 301.6501(c)–1 is
amended by:
1. Revising the heading to paragraph
(e).
2. Adding paragraph (f).
The revision and addition reads as fol-
lows:
§301.6501(c)–1 Exceptions to general
period of limitations on assessment and
collection.
* * * * *
(e) Gifts subject to chapter 14 of the In-
December 20, 19996881999–51 I.R.B.

ternal Revenue Code not adequately dis-
closed on the return. * * *
(f) Gifts made after December 31,
1996, not adequately disclosed on the re-
turn— (1) In general. If a transfer of
property, other than a transfer described
in paragraph (e) of this section, is not ade-
quately disclosed on a gift tax return
(Form 709, “United States Gift (and Gen-
eration-Skipping Transfer) Tax Return”),
or in a statement attached to the return,
filed for the calendar period in which the
transfer occurs, then any gift tax imposed
by chapter 12 of subtitle B of the Internal
Revenue Code on the transfer may be as-
sessed, or a proceeding in court for the
collection of the appropriate tax may be
begun without assessment, at any time.
2) Adequate disclosure of transfers of
property reported as gifts. A transfer will
be adequately disclosed on the return only
if it is reported in a manner adequate to
apprise the Internal Revenue Service of
the nature of the gift and the basis for the
value so reported. Transfers reported on
the gift tax return as transfers of property
by gift will be considered adequately dis-
closed under this paragraph (f)(2) if the
return (or a statement attached to the re-
turn) provides the following informa-
tion—
(i) A description of the transferred
property and any consideration received
by the transferor;
(ii) The identity of, and relationship
between, the transferor and each trans-
feree;
(iii) If the property is transferred in
trust, the trust’s tax identification number
and a brief description of the terms of the
trust, or in lieu of a brief description of
the trust terms, a copy of the trust instru-
ment;
(iv) Except as provided in
§301.6501–1(f)(3), a detailed description
of the method used to determine the fair
market value of property transferred, in-
cluding any financial data (for example,
balance sheets, etc. with explanations of
any adjustments) that were utilized in de-
termining the value of the interest, any re-
strictions on the transferred property that
were considered in determining the fair
market value of the property, and a de-
scription of any discounts, such as dis-
counts for blockage, minority or frac-
tional interests, and lack of marketability,
claimed in valuing the property. In the
case of a transfer of an interest that is ac-
tively traded on an established exchange,
such as the New York Stock Exchange,
the American Stock Exchange, the NAS-
DAQ National Market, or a regional ex-
change in which quotations are published
on a daily basis, including recognized for-
eign exchanges, recitation of the ex-
change where the interest is listed, the
CUSIP number of the security, and the
mean between the highest and lowest
quoted selling prices on the applicable
valuation date will satisfy all of the re-
quirements of this paragraph (f)(2)(iv). In
the case of the transfer of an interest in an
entity (for example, a corporation or part-
nership) that is not actively traded, a de-
scription must be provided of any dis-
count claimed in valuing the interests in
the entity or any assets owned by such en-
tity. In addition, if the value of the entity
or of the interests in the entity is properly
determined based on the net value of the
assets held by the entity, a statement must
be provided regarding the fair market
value of 100 percent of the entity (deter-
mined without regard to any discounts in
valuing the entity or any assets owned by
the entity), the pro rata portion of the en-
tity subject to the transfer, and the fair
market value of the transferred interest as
reported on the return. If 100 percent of
the value of the entity is not disclosed, the
taxpayer bears the burden of demonstrat-
ing that the fair market value of the entity
is properly determined by a method other
than a method based on the net value of
the assets held by the entity. If the entity
that is the subject of the transfer owns an
interest in another non-actively traded en-
tity (either directly or through ownership
of an entity), the information required in
this paragraph (f)(2)(iv) must be provided
for each entity if the information is rele-
vant and material in determining the value
of the interest; and
(v) A statement describing any position
taken that is contrary to any proposed,
temporary or final Treasury regulations or
revenue rulings published at the time of
the transfer (see §601.601(d)(2) of this
chapter).
(3) Submission of appraisals in lieu of
the information required under para-
graph (f)(2)(iv) of this section. The re-
quirements of paragraph (f)(2)(iv) of this
section will be satisfied if the donor sub-
mits an appraisal of the transferred prop-
erty that meets the following require-
ments—
(i) The appraisal is prepared by an ap-
praiser who satisfies all of the following
requirements:
(A) The appraiser is an individual who
holds himself or herself out to the public
as an appraiser or performs appraisals on
a regular basis.
(B) Because of the appraiser’s qualifi-
cations, as described in the appraisal that
details the appraiser’s background, expe-
rience, education, and membership, if
any, in professional appraisal associa-
tions, the appraiser is qualified to make
appraisals of the type of property being
valued.
(C) The appraiser is not the donor or
the donee of the property or a member of
the family of the donor or donee, as de-
fined in section 2032A(e)(2), or any per-
son employed by the donor, the donee, or
a member of the family of either; and
(ii) The appraisal contains all of the fol-
lowing:
(A) The date of the transfer, the date on
which the transferred property was ap-
praised, and the purpose of the appraisal.
(B) A description of the property.
(C) A description of the appraisal
process employed.
(D) A description of the assumptions,
hypothetical conditions, and any limiting
conditions and restrictions on the trans-
ferred property that affect the analyses,
opinions, and conclusions.
(E) The information considered in de-
termining the appraised value, including
in the case of an ownership interest in a
business, all financial data that was used
in determining the value of the interest
that is sufficiently detailed so that another
person can replicate the process and ar-
rive at the appraised value.
(F) The appraisal procedures followed,
and the reasoning that supports the analy-
ses, opinions, and conclusions.
(G) The valuation method utilized, the
rationale for the valuation method, and
the procedure used in determining the fair
market value of the asset transferred.
(H) The specific basis for the valuation,
such as specific comparable sales or
transactions, sales of similar interests,
asset-based approaches, merger-acquisi-
tion transactions, etc.
(4) Adequate disclosure of non-gift
completed transfers or transactions.
1999–51 I.R.B.689December 20, 1999

Completed transfers to members of the
transferor’s family, as defined in section
2032A(e)(2), that are made in the ordi-
nary course of operating a business are
deemed to be adequately disclosed under
paragraph (f)(2) of this section, even if
the transfer is not reported on a gift tax re-
turn, provided the transfer is properly re-
ported by all parties for income tax pur-
poses. For example, in the case of salary
paid to a family member employed in a
family owned business, the transfer will
be treated as adequately disclosed for gift
tax purposes if the item is properly re-
ported by the business and the family
member on their income tax returns. For
purposes of this paragraph (f)(4), any
other completed transfer that is reported,
in its entirety, as not constituting a trans-
fer by gift will be considered adequately
disclosed under paragraph (f)(2) of this
section only if the following information
is provided on, or attached to, the re-
turn—
(i) The information required for ade-
quate disclosure under paragraphs
(f)(2)(i), (ii), (iii) and (v) of this section;
and
(ii) An explanation as to why the trans-
fer is not a transfer by gift under chapter
12 of the Internal Revenue Code.
(5) Adequate disclosure of incomplete
transfers.Adequate disclosure of a trans-
fer that is reported as a completed gift on
the gift tax return will commence the run-
ning of the period of limitations for as-
sessment of gift tax on the transfer, even
if the transfer is ultimately determined to
be an incomplete gift for purposes of
§25.2511–2 of this chapter. For example,
if an incomplete gift is reported as a com-
pleted gift on the gift tax return and is ad-
equately disclosed, the period for assess-
ment of the gift tax will begin to run when
the return is filed, as determined under
section 6501(b). Further, once the period
of assessment for gift tax expires, the
transfer will not be subject to inclusion in
the donor’s gross estate for estate tax pur-
poses. On the other hand, if the transfer is
reported as an incomplete gift whether or
not adequately disclosed, the period for
assessing a gift tax with respect to the
transfer will not commence to run even if
the transfer is ultimately determined to be
a completed gift. In that situation, the gift
tax with respect to the transfer may be as-
sessed at any time, up until three years
after the donor files a return reporting the
transfer as a completed gift with adequate
disclosure.
(6) Treatment of split gifts.If a hus-
band and wife elect under section 2513 to
treat a gift made to a third party as made
one-half by each spouse, the requirements
of this paragraph (f) will be satisfied with
respect to the gift deemed made by the
consenting spouse if the return filed by
the donor spouse (the spouse that trans-
ferred the property) satisfies the require-
ments of this paragraph (f) with respect to
that gift.
(7) Examples. The following examples
illustrate the rules of this paragraph (f):
Example 1. (i) Facts. In 2001, A transfers 100
shares of common stock of XYZ Corporation to A’s
child. The common stock of XYZ Corporation is
actively traded on a major stock exchange. For gift
tax purposes, the fair market value of one share of
XYZ common stock on the date of the transfer, de-
termined in accordance with §25.2512–2(b) of this
chapter (based on the mean between the highest and
lowest quoted selling prices), is $150.00. On A’s
Federal gift tax return, Form 709, for the 2001 cal-
endar year, A reports the gift to A’s child of 100
shares of common stock of XYZ Corporation with a
value for gift tax purposes of $15,000. A specifies
the date of the transfer, recites that the stock is pub-
licly traded, identifies the stock exchange on which
the stock is traded, lists the stock’s CUSIP number,
and lists the mean between the highest and lowest
quoted selling prices for the date of transfer.
(ii) Application of the adequate disclosure stan-
dard.A has adequately disclosed the transfer.
Therefore, the period of assessment for the transfer
under section 6501 will run from the time the return
is filed (as determined under section 6501(b)).
Example 2. (i) Facts. On December 30, 2001, A
transfers closely-held stock to B, A’s child. A deter-
mined that the value of the transferred stock, on De-
cember 30, 2001, was $9,000. A made no other
transfers to B, or any other donee, during 2001. On
A’s Federal gift tax return, Form 709, for the 2001
calendar year, A provides the information required
under paragraph (f)(2) of this section such that the
transfer is adequately disclosed. A claims an annual
exclusion under section 2503(b) for the transfer.
(ii) Application of the adequate disclosure stan-
dard.Because the transfer is adequately disclosed
under paragraph (f)(2) of this section, the period of
assessment for the transfer will expire as prescribed
by section 6501(b), notwithstanding that if A’s valu-
ation of the closely-held stock was correct, A was
not required to file a gift tax return reporting the
transfer under section 6019. After the period of as-
sessment has expired on the transfer, the Internal
Revenue Service is precluded from redetermining
the amount of the gift for purposes of assessing gift
tax or for purposes of determining the estate tax lia-
bility. Therefore, the amount of the gift as reported
on A’s 2001 Federal gift tax return may not be rede-
termined for purposes of determining A’s prior tax-
able gifts (for gift tax purposes) or A’s adjusted tax-
able gifts (for estate tax purposes).
Example 3. (i) Facts. A owns 100 percent of the
common stock of X, a closely- held corporation. X
does not hold an interest in any other entity that is
not actively traded. In 2001, A transfers 20 percent
of the X stock to B and C, A’s children, in a transfer
that is not subject to the special valuation rules of
section 2701. The transfer is made outright with no
restrictions on ownership rights, including voting
rights and the right to transfer the stock. Based on
generally applicable valuation principles, the value
of X would be determined based on the net value of
the assets owned by X. The reported value of the
transferred stock incorporates the use of minority
discounts and lack of marketability discounts. No
other discounts were used in arriving at the fair mar-
ket value of the transferred stock or any assets
owned by X. On A’s Federal gift tax return, Form
709, for the 2001 calendar year, A provides the in-
formation required under paragraph (f)(2) of this
section including a statement reporting the fair mar-
ket value of 100 percent of X (before taking into ac-
count any discounts), the pro rata portion of X sub-
ject to the transfer, and the reported value of the
transfer. A also attaches a statement regarding the
determination of value that includes a discussion of
the discounts claimed and how the discounts were
determined.
(ii) Application of the adequate disclosure stan-
dard.A has provided sufficient information such
that the transfer will be considered adequately dis-
closed and the period of assessment for the transfer
under section 6501 will run from the time the return
is filed (as determined under section 6501(b)).
Example 4. (i) Facts.A owns a 70 percent lim-
ited partnership interest in PS. PS owns 40 percent
of the stock in X, a closely-held corporation. The
assets of X include a 50 percent general partnership
interest in PB. PB owns an interest in commercial
real property. None of the entities (PS, X, or PB) is
actively traded and, based on generally applicable
valuation principles, the value of each entity would
be determined based on the net value of the assets
owned by each entity. In 2001, A transfers a 25 per-
cent limited partnership interest in PS to B, A’s
child. On the Federal gift tax return, Form 709, for
the 2001 calendar year, A reports the transfer of the
25 percent limited partnership interest in PS and that
the fair market value of 100 percent of PS is $y and
that the value of 25 percent of PS is $z, reflecting
marketability and minority discounts with respect to
the 25 percent interest. However, A does not dis-
close that PS owns 40 percent of X, and that X owns
50 percent of PB and that, in arriving at the $y fair
market value of 100 percent of PS, discounts were
claimed in valuing PS’s interest in X, X’s interest in
PB, and PB’s interest in the commercial real prop-
erty.
(ii) Application of the adequate disclosure stan-
dard. The information on the lower tiered entities is
relevant and material in determining the value of the
transferred interest in PS. Accordingly, because A
has failed to comply with requirements of paragraph
(f)(2)(iv) of this section regarding PS’s interest in X,
X’s interest in PB, and PB’s interest in the commer-
cial real property, the transfer will not be considered
adequately disclosed and the period of assessment
for the transfer under section 6501 will remain open
indefinitely.
Example 5.The facts are the same as in Example
4except that A submits, with the Federal tax return,
an appraisal of the 25 percent limited partnership in-
December 20, 19996901999–51 I.R.B.

terest in PS that satisfies the requirements of para-
graph (f)(3) of this section in lieu of the information
required in paragraph (f)(2)(iv) of this section. As-
suming the other requirements of paragraph (f)(2) of
this section are satisfied, the transfer is considered
adequately disclosed and the period for assessment
for the transfer under section 6501 will run from the
time the return is filed (as determined under section
6501(b) of this chapter).
Example 6. A owns 100 percent of the stock of X
Corporation, a company actively engaged in a man-
ufacturing business. B, A’s child, is an employee of
X and receives an annual salary paid in the ordinary
course of operating X Corporation. B reports the an-
nual salary as income on B’s income tax returns. In
2001, A transfers property to family members and
files a Federal gift tax return reporting the transfers.
However, A does not disclose the 2001 salary pay-
ments made to B. Because the salary payments were
reported as income on B’s income tax return, the
salary payments are deemed to be adequately dis-
closed. The transfer of property to family members,
other than the salary payments to B, reported on the
gift tax return must satisfy the adequate disclosure re-
quirements under paragraph (f)(2) of this section in
order for the period of assessment under section 6501
to commence to run with respect to those transfers.
(8) Effective date. This paragraph (f)
is applicable to gifts made after December
31, 1996, for which the gift tax return for
such calendar year is filed after December
3, 1999.
PART 602—OMB CONTROL
NUMBERS 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 (b) is
amended in the table by revising the entry
for 301.6501(c)–1 to read as follows:
§602.101 OMB Control numbers.
* * * * *
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved November 18, 1999
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on Decem-
ber 2, 1999, 8:45 a.m., and published in the issue of
the Federal Register for December 3, 1999, 64 F.R.
67767)
1999–51 I.R.B.691December 20, 1999
(b) * * *
CFR part or section whereCurrent OMB
identified and describedcontrol No.
* * * * *
301.6501(c)–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–1241
1545–1637
* * * * *

December 20, 19996921999–51 I.R.B.
Section 705 Special Basis Rules
Notice 99–57
The Internal Revenue Service intends
to promulgate regulations under § 705 of
the Internal Revenue Code to address cer-
tain situations where gain or loss may be
improperly created by adjusting the basis
of a partnership interest for partnership
income that is not subject to tax, or for
partnership losses or deductions that are
permanently denied, with respect to a
partner.
BACKGROUND
Section 705(a) provides that the ad-
justed basis of a partner’s interest in a
partnership generally shall be increased
by the partner’s distributive share of (i)
taxable income of the partnership as de-
termined under § 703(a), (ii) income of
the partnership exempt from tax, and (iii)
the excess of the deduction for depletion
over the basis of the property subject to
depletion. Conversely, the adjusted basis
of a partner’s interest in a partnership
generally shall be decreased by the part-
ner’s distributive share of (i) losses of the
partnership, (ii) nondeductible expendi-
tures not properly chargeable to capital
account, and (iii) in certain cases, deduc-
tions for depletion.
The legislative history describing §
705(a) states that adjusting the basis of a
partner’s interest is necessary to prevent
unintended benefit or detriment to the
partners. Thus, a partner should add to
the basis of the partner’s partnership in-
terest the partner’s distributive share of
nontaxable income so that the partner
does not lose the benefit of that type of
tax-exempt income. Otherwise, the part-
ner could eventually incur a capital gain
with respect to such amounts. H.R. Rep.
No. 1337, 83d Cong., 2d Sess. A225
(1954); S. Rep. No. 1622, 83d Cong., 2d
Sess. 384 (1954).
Rev. Rul. 96–11, 1996–1 C.B. 140,
provides an example of how § 705 has
been interpreted to carry out the purposes
of this legislative history. There, a part-
nership made a charitable contribution of
property with a basis of $60x and fair
market value of $100x in a transaction
that qualified under § 170(c). The ruling
states that “[i]n determining whether a
transaction results in exempt income
within the meaning of § 705(a)(1)(B), or a
nondeductible, noncapital expenditure
within the meaning of § 705(a)(2)(B), the
proper inquiry is whether the transaction
has a permanent effect on the partner-
ship’s basis in its assets, without a corre-
sponding current or future effect on its
taxable income.” The ruling explains that
the partners’ bases in their partnership in-
terests should be reduced only by their re-
spective shares of the permanent decrease
in the partnership’s asset basis. This pre-
serves the deduction for the fair market
value of appreciated property without the
recognition of the appreciation. Reducing
the partners’ bases in their partnership in-
terests by the fair market value of the
property contributed to the charity would
subsequently cause the partners to recog-
nize gain (or a reduced loss) upon a dispo-
sition of their interests in the partnership
attributable to the unrecognized apprecia-
tion in the property at the time of the con-
tribution. See also Rev. Rul. 96–10,
1996–1 C.B. 138, which discusses adjust-
ments to basis in partnership interests
where loss on sale of partnership property
is denied under § 707(b)(1) and subse-
quent gain is not recognized under §§
267(d) and 707(b)(1).
Section 743(a) provides that the basis
of partnership property shall not be ad-
justed as the result of the transfer of a
partnership interest by sale or exchange or
on the death of a partner unless an elec-
tion under § 754 is in effect with respect
to the partnership.
Section 743(b) provides that, in the case
of a transfer of an interest in a partnership
by sale or exchange or upon the death of a
partner, a partnership with respect to which
an election under § 754 is in effect shall (i)
increase the basis of the partnership prop-
erty by the excess of the basis to the trans-
feree partner of the transferee partner’s in-
terest in the partnership over the transferee
partner’s proportionate share of the ad-
justed basis of the partnership property, or
(ii) decrease the adjusted basis of the part-
nership property by the excess of the trans-
feree partner’s proportionate share of the
adjusted basis of the partnership property
over the basis of the transferee partner’s in-
terest in the partnership.
The partnership rules generally attempt
to preserve equality between a partner’s
basis in the partnership interest and the
partner’s share of inside basis in the assets
of the partnership. In order to promote
administrative convenience, however, §
743(a) departs from this general rule, al-
lowing a partner’s basis in its partnership
interest to diverge from the partner’s
share of basis in partnership assets in situ-
ations where the partnership has not made
an election under § 754.
The failure to make a § 754 election
generally will result in a timing benefit or
detriment to the partner or partners with
divergent inside and outside bases. For
instance, consider the situation where a
person (A) purchases a 50 percent interest
in a partnership for $100x. The partner-
ship owns one asset with a basis of $100x
and a value of $200x. If the partnership
had made a § 754 election, Awould have
a $50x special basis adjustment in the
property, so that when the partnership dis-
posed of the property for $200x, A’s spe-
cial basis adjustment would exactly offset
A’s allocated share of the gain. A’s basis
in the partnership interest would remain at
$100x after the sale. Accordingly, A
would not recognize any gain upon the
sale of the partnership interest immedi-
ately thereafter.
If the partnership had not made a § 754
election, Awould have no special basis
adjustment, so that when the partnership
disposed of the property for $200x, A
would be allocated $50x of gain. A’s
basis in the partnership interest would in-
crease to $150x under § 705(a)(1)(A), so
that Awould recognize an offsetting $50x
loss (or reduced gain) upon a subsequent
sale of the partnership interest. Thus,
without the § 754 election, there may be a
timing detriment to A, but the correct
amount of cumulative income or loss (al-
beit possibly of a different character) is
ultimately reported by A.
The correct amount of cumulative in-
come may not be reported, however, in
certain situations in which Ais not subject
to tax on the gain that results from the
failure to make the § 754 election. For in-
stance, in the example discussed immedi-
ately above, if Awas a corporation and
the property held by the partnership was A
stock, under § 1032, the gain allocated to
Part III. Administrative, Procedural, and Miscellaneous

1999–51 I.R.B.693December 20, 1999
A(assuming that no § 754 election had
been made) would not be subject to tax.
See Rev. Rul. 99–57, published in this
issue of the Internal Revenue Bulletin. In
this situation, it would be inconsistent
with the intent of § 705 to increase the
basis of A’s partnership interest for the
non-recognized gain. To do so would cre-
ate a recognizable loss in a situation
where no offsetting gain had previously
been recognized.
DESCRIPTION OF REGULATIONS
The regulations will apply specifi-
cally to situations where a corporation
acquires an interest in a partnership that
holds stock in that corporation, and a §
754 election is not in effect with respect
to the partnership for the taxable year of
the acquisition. In those situations, a
corporate partner may increase its basis
in its partnership interest under § 705
only by the amount of its share of §
1032 gain that the partner would have
realized had a § 754 election been made.
Rules regarding tiered-entity structures
also will apply.
It is intended that the regulations also
will apply to other situations where the
price paid for a partnership interest re-
flects built-in gain or accrued income
items that will not be subject to income
tax, or built-in loss or accrued deduc-
tions that will be permanently denied,
when allocated to the transferee partner,
and the partnership has not made an
election under § 754. Comments are re-
quested as to the appropriate scope of
the regulations in this regard.
EFFECTIVE DATES
In situations where a corporate partner
is allocated gain that is subject to § 1032,
and the basis of the stock was not adjusted
upon the purchase of the partnership in-
terest by the corporate partner under §
743(b), the regulations shall apply to gain
or loss allocated with respect to sales of
partner stock occurring after December 6,
1999. In other situations, the regulations
will apply to gain or loss realized or in-
come or deductions taken into account
after the date of publication of proposed
regulations. Moreover, the Service may
challenge any transaction within the
scope of this Notice under the anti-abuse
provisions of § 1.701–2 of the Income
Tax Regulations, as appropriate.
The principal author of this notice is
Robert Honigman of the Office of Assis-
tant Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in its development. For
further information regarding this notice
contact Robert Honigman at (202) 622-
3050 (not a toll-free call).
Opportunity to Obtain a Debt
Indicator in a Pilot Program for
Tax Year 1999 Form 1040 IRS
e-fileand On-Line Returns
Notice 99–58
SUMMARY: Authorized IRS e-file
Providers, Form 1040 On-Line Transmit-
ters and financial institutions may apply
to obtain a Debt Indicator for their cus-
tomer/client taxpayers in exchange for ac-
tively screening individual income tax re-
turns and return information for potential
fraud and abuse and to reporting the find-
ings to the IRS in accordance with a pro-
posal accepted by the IRS.
ADDRESSES: Questions or concerns
should be directed to Lisa Johnson at the
IRS, Electronic Tax Administration, Elec-
tronic Program Operations Office,
OP:ETA:O:C, New Carrollton Federal
Building, ATTN: Lisa Johnson, 5000
Ellin Road C4–187, Lanham, MD 20706
or via E-mail at LJJOHN00@m1.irs.gov
or faxed to (202) 283-4786, ATTN: Lisa
Johnson.
SUPPLEMENTARY INFORMATION
Background
The Debt Indicator is useful to taxpay-
ers who wish to use their anticipated in-
dividual income tax return refunds to
apply for bank products, for example, re-
fund anticipation loans. The Debt Indi-
cator tells a taxpayer whether or not
there are any scheduled offsets against
the refund by IRS, for example, for back
taxes, or by the Financial Management
Service (FMS), for example, for out-
standing child support or federal debts,
such as student loans. These bank prod-
ucts are offered by financial institutions
in conjunction with tax practitioners that
file returns electronically. An indicator
called the Direct Deposit Indicator or
DDI was available to taxpayers seeking
bank products prior to 1994. The DDI
was discontinued because it was thought
to be a contributing factor to fraudulent
claims for the Earned Income Tax Credit.
The new Debt Indicator seeks to address
this issue through a joint fraud detection
program. Authorized IRS e-file
Providers, Form 1040 On-Line Filers,
and financial institutions will sign agree-
ments with the IRS to actively screen re-
turns and return information for potential
fraud and abuse and report findings to
the IRS. Parties to the agreements are el-
igible to obtain the Debt Indicator for
their taxpayers who apply for bank prod-
ucts and sign consents to disclose the
Debt Indicator to Authorized IRS e-file
Providers, Form 1040 On-Line Filers,
and financial institutions. The applica-
tion and instructions for applying to ob-
tain an agreement follow.
APPROVED
Terence H. Lutes,
National Director,
Electronic Program Operations Office,
Electronic Tax Administration.
(Filed by the Office of the Federal Register on De-
cember 1, 1999, 8:45 a.m., and published in the
issue of the Federal Register for December 2, 1999,
64 F.R. 67621)

December 20, 19996941999–51 I.R.B.
Name:
DBA Name:
Address:
Authorized Representative:
Phone Number:
Fax Number:
ETIN(s):
EFIN(s) Covered
By This Proposal:
(attach separate sheet if necessary)
IRS Authorized Representative: Lisa Johnson
Phone Number: (202) 283-0980
Fax Number: (202) 283-4786
E-mail: LJJOHN00@m1.irs.gov
Address: IRS
Attn: Lisa Johnson, OP:ETA:O:C
5000 Ellin Road
Lanham, MD 20706
Application for Memorandum of Agreement
Debt Indicator
1. INTRODUCTION
(A) The Internal Revenue Service
(IRS) faces the challenge of eliminating
barriers by providing incentives and using
competitive market forces to make
progress towards its goal to electronically
transact 80% of IRS business by the year
2007 and the interim goal that, to the ex-
tent practicable, all returns prepared elec-
tronically should be filed electronically
by the year 2002. One of these incentives
was the issuance of the Debt Indicator
Pilot Request For Agreement (RFA) that
was issued on June 22, 1999. This RFA
provided the opportunity for electronic re-
turn originators (EROs), transmitters and
On-line service providers to obtain a Debt
Indicator in exchange for screening the
returns they transmit for potential abuse.
Authorized e-file providers and financial
institutions that did not submit proposals
under this RFA or are not covered under
one of the announced agreements may
still apply to obtain the DI for the upcom-
ing filing season through this Memoran-
dum of Agreement (MOA).(B) The Elec-
tronic Tax Administration (ETA) MOA
between the Internal Revenue Service
(IRS) and the Participant sets forth the
complete agreement of the parties with re-
gard to participation in the Debt Indicator
Pilot for electronically filed individual
(1040 series) federal income tax returns
during the 2000 filing season which cov-
ers the 1999 tax year. The parties agree
that, except as provided below, the partic-
ipant will be treated as an ERO, On-line
service provider, transmitter, software de-
veloper or financial institution for the
2000 IRS e-file program as those terms
are defined in Revenue Procedures 98-50
and 98-51. Also, except as provided
below, the parties agree to comply with
all relevant statutory, regulatory, and ad-
ministrative requirements relating to the
electronic filing program.
(C) The IRS is looking for creative and
innovative abuse and fraud detection be-
yond what is required in Revenue Proce-
dures 98-50 and 98-51 in addition to cre-
ative and innovative ways to perform the
due diligence required by these Revenue
Procedures. Partnered proposals offer

1999–51 I.R.B.695December 20, 1999
greater opportunities for more compre-
hensive screening of returns and return in-
formation and have a greater chance of
being accepted by the IRS.
2. AUTHORITY
This Agreement is entered into pur-
suant to (1) the authority vested in the
Commissioner of the IRS by Treasury
Order 150-10 to administer and enforce
the internal revenue laws and revenue
procedures for electronic filing and (2)
the authority vested in the Secretary of the
Treasury by the IRS Restructuring and
Reform Act of 1998, implemented in Sec-
tion 6011 of the Internal Revenue Code,
to promote the benefits of and encourage
the use of ETA programs.
3. BACKGROUND AND PURPOSE
In exchange for providing the screen-
ing procedures in the accepted proposal,
the IRS will provide to the taxpayer
through the selected Participant, a debt in-
dicator for taxpayers who have entered
into an agreement with a financial institu-
tion. This indicator may show the reason
that the refund changed was because of a
debt owed to either the IRS or Financial
Management Service (FMS) or both.
The return software must also be modi-
fied to include a voluntary consent to dis-
close when the RAL indicator field is sig-
nificant. This authorizes the Service to
provide the debt indicator when financial
agreements have been made with the tax-
payer.
4. DEFINITIONS
(A) “Days” as used herein means cal-
endar days unless otherwise stated.
(B) A “fraudulent return” is a return in
which the individual is attempting to file
using someone else’s name or SSN on the
return or where the taxpayer is presenting
documents or information that have no
basis in fact. NOTE: Fraudulent returns
should not be filed with the Service.
(C) A “potentially abusive return” is a
return (1) that is not a fraudulent return;
(2) that the taxpayer is required to file; (3)
but that may contain inaccurate or unsub-
stantiated information (including, but not
limited to, the information subject to
reporting) that may lead to an understate-
ment of a liability or an overstatement of
a credit, and production of a refund to
which the taxpayer may not be entitled.
NOTE: The decision not to provide a
RAL or other bank product does not nec-
essarily make it an abusive return.
(D) Refund offset is the reduction of
the taxpayer’s claimed refund in whole or
in part for unpaid IRS tax debt or past-due
debts submitted to FMS’ Treasury Offset
Program for child support arrearages,
Federal agency non-tax debt, or state
income tax.
(E) Refund delay is the suspension of
the refund process resulting from sys-
temic reviews.
(F) Sub-Participant is an ERO, On-line
service provider, Transmitter, or Financial
Institution other than the Participant who
has entered into an Agreement with the
Participant to perform some of the duties
and responsibilities of the Participant.
5. DUTIES AND RESPONSIBILI-
TIES OF THE PARTICIPANT
(A) The Participant will perform all the
screening activities included in the check-
list submitted with, and incorporated by
reference into, this Agreement.
(B) The Participant must agree to track
and report (by SSN) to the IRS on a week-
ly basis, the potentially abusive federal
individual income tax returns electroni-
cally filed and the reason(s) the return
may be abusive. The format is as follows
and should be delivered via electronic
mail to HQ-ORF@ci.irs.gov.
Field NameField LengthFormat
Filer EFIN6Alpha/Numeric
Primary SSN9Alpha/Numeric
W21Alpha (Y or blank)
Dependents1Alpha (Y or blank)
Schedule C 1Alpha (Y or blank)
Filing Status Change1Alpha (Y or blank)
Telephone # Invalid1Alpha (Y or blank)
Duplicate SSN1Alpha (Y or blank)
Invalid SSN1Alpha (Y or blank)
Duplicate Address1Alpha (Y or blank)
Other1Alpha (Y or blank)
Return Filed1Alpha (Y or blank)
Explanation of Other250Alpha
Filer EFIN— Electronic Filer Identi-
fication Number of the ERO processing
the return.
Primary SSN— Primary SSN on the
return, which is suspected of abuse/fraud.
W2— the W2 was the reason for sus-
pecting abuse/fraud.
Dependents — questions about the de-
pendents was the reason for suspecting
fraud (i.e. last name of dependent is dif-
ferent from taxpayer).
Schedule C— no substantiation for
the Schedule C.
Filing Status Change— questions
about the filing status changes was the
reason for suspecting abuse/fraud.
Telephone # Invalid — telephone
numbers given by the taxpayer were
found to be either invalid, disconnected,
or that the taxpayer was not known by the
person answering the telephone.
Duplicate SSN— a duplicate primary,
secondary, dependent or EIC qualifying
SSN is found within the ERO’s own uni-
verse of returns.
Invalid SSN— the ERO determines
that the primary, secondary, dependent or
EIC qualifying SSN is invalid.
Duplicate Address — multiple returns
filed for the same address for seemingly

December 20, 19996961999–51 I.R.B.
unrelated taxpayers found within the
ERO’s own universe of returns.
Other— any reason, not conforming
to those previously listed, for which a re-
turn could be considered fraudulent.
Return Filed— the “Y” will indicate
that the return was filed and blank will
mean that the return was not filed.
If you have additional information,
provide it in a flat file format, comma de-
limited (e.g., SSN information on returns
that were not processed).
(C) The Participant will provide the
Service with a Final Pilot Finding report.
This report will be sent to the Authorized
IRS Representative via email no later than
May 31, 2000. The report shall include
information on each of the following
items:
• Number of RALs applied for and
1999 vs. 2000 comparison
• Average amount of RAL and 1999 vs.
2000 comparison
• Distribution of RAL applicants with
respect to adjusted gross income
(AGI)
• Range of fees charged for RALs
• Comparison of fees prior to DI pilot
• Breakdown of e-filers between RAL
applicants and non-RAL applicants
and 1999 vs. 2000 comparison
6. LIABILITY
The IRS shall not be liable for any in-
jury to the Participant’s personnel or dam-
age to the Participant’s property unless
such injury or damage is due to negli-
gence on the part of the Government and
is recoverable under the Federal Tort
Claims Act [28 U.S.C. 1346(b)], or pur-
suant to other statutory authority.
7. THIRD PARTY RIGHTS
This Agreement does not alter, change,
or eliminate any rights or responsibilities
that taxpayers have under the Internal
Revenue Code.
8. PERIOD OF PERFORMANCE
AND TERMINATION
(A) This Agreement shall be in effect
from the date of IRS’ signature for the
2000 filing season with an option to ex-
tend for the 2001 filing season subject to a
modification of the agreement.
(B) This Agreement may be terminated
by either party upon 30 days after receipt
of written notice signed by either of the
signatories to this Agreement or by their
successors or designees. The Participant
understands that in the event the IRS ter-
minates this Agreement, the Participant
has no right to any claim against the Gov-
ernment, including a claim for termina-
tion costs.
9. MODIFICATION
This Agreement may be modified by
the IRS, and the Participant may submit
requests for modifications to the IRS Au-
thorized Representative. All modifica-
tions must be in writing and signed by
both of the signatories to this Agreement
or by their successors or designees.
10. INSPECTION
(A) The IRS has the right to inspect
the work performed by the Participant or
any Sub-Participant as stated below. If
the duties and responsibilities of the Par-
ticipant or any Sub-Participant are not
being met, then the IRS may terminate
this Agreement for default, and the Partic-
ipant and any Sub-Participant may be sus-
pended from the IRS e-fileprogram.
(B) The IRS may inspect the work per-
formed by the Participant upon reason-
able notice to the Participant’s Authorized
Representative and in a manner that will
not interfere with the Participant’s perfor-
mance of this Agreement. The Participant
shall provide access for this purpose to
the IRS’ Authorized Representative(s) to
the location where the work is being per-
formed. The IRS shall also have the right
to inspect the Participant’s Report(s) of
the work performed as a result of this
Agreement. The IRS’s Authorized Repre-
sentative shall provide the results of any
inspections to the Participant’s Autho-
rized Representative for any necessary
resolution.
11. RELEASE OF INFORMATION
The Participant shall provide written
notice to the IRS and obtain consent in
advance of releasing any national press
releases for the purposes of performing
the work described in this Agreement or
publicizing this partnership with the IRS.
The text and purpose of the intended re-
lease shall be provided to the IRS’s Au-
thorized Representative for this Agree-
ment. The Service may monitor
advertising standards as authorized in
Section 12 of Revenue Procedure 98-50.
12. REMEDIES
There are no remedies other than the
termination rights described in 11(B) and
(C) of this Agreement unless provided in
a modification to this Agreement. The
Contract Disputes Act does not apply.
13. ORDER OF PRECEDENCE
In the event the terms of this Agree-
ment are inconsistent with the terms of
the checklist, the Agreement shall take
precedence.
14. GOVERNING LAW
This Agreement is subject to and gov-
erned by the laws of the United States of
America, that is, by Federal law, and not
by the laws of any State. The terms of
this Agreement are not intended to alter,
modify, or rescind any current Agreement
or provision of Federal law now in effect.
Any provision of this Agreement that con-
flicts with Federal law will be null and
void.
SIGNATURES
Participant
Terence H. Lutes
National Director, ETA
INSTRUCTIONS
The IRS is encouraging the formation
of partnerships among EROs, transmit-
ters, software developers and financial in-
stitutions to meet the requirements of this
agreement more efficiently and to cover
more participants. These partnerships
may apply as a group and the privileges
obtained through successful applications
will be extended to all member partners.
Software developers, transmitters and
financial institutions are encouraged to
initiate these partnership applications on
behalf of their customers — EROs, direct
transmitters, small banks — to ensure that
their entire customer bases have access to
the Debt Indicator. Partnered proposals
offer greater opportunities for more com-

1999–51 I.R.B.697December 20, 1999
prehensive screening of returns and return
information and have a greater chance of
being accepted by the IRS.
Individual EROs that apply will need to
negotiate changes with their software
company before they can participate.
In order to receive this indicator for
you and/or your clients, use the applica-
tion and sample checklist (Attachment 1)
as resources to formulate your submis-
sion. Include all screening procedures
currently employed by all members of the
partnership. This could include cross-
checks of all data received from EROs
that could identify improbable informa-
tion; software checks that can identify
abusive scenarios within ERO practices
and fraudulent or abusive situations;
transmitter databases that can identify du-
plicated information as well as facilitat-
ing the reporting process; and fraud
screening services and other checks.
Attachment 1
SAMPLE CHECKLIST
Current CheckWilling to Do
for 2000
ERO
-Identification
Require two forms of valid identification
(one must be a photo ID)nnnn
Verify telephone numbersnnnn
Verify residencennnn
-Social Security Card
Require a valid SSN card for
all SSNs on returnnnnn
-Maintain Previous Client Database
Document change in filing statusnnnn
Document change in number or names
of dependentsnnnn
Document multiple returns to same
address in prior yearnnnn
INCOME VERIFICATION
- Questionable W–2s
Verification of W–2s when one of the
following exist:nnnn
• Typed, handwritten or altered forms
• W–2’s with all copies attached
• Unknown companies (out of area)
• W–2s that differ from other forms
issued from the same company
- Schedule C or Other Income Reporting Forms
Documentation of incomennnn
Validation and recording of expensesnnnn
- EITC and Filing Status Verification
Complete Due Diligence worksheetnnnn
Document lack of child care expenses
where potential existsnnnn
Utilize tax package and requirements
to ensure:
• A child can be claimed as a dependentnnnn
• The taxpayer can qualify as Head of
Householdnnnn
• A child can be considered as a qualifying
child for EITC purposesnnnn

December 20, 19996981999–51 I.R.B.
Current CheckWilling to Do
for 2000
- Return Verification
Document Schedule A deductionsnnnn
Software Developer
Validate SSNs are within valid rangesnnnn
Check for Duplicate SSNsnnnn
Check for Multiple Head of Household
Returns at the same addressnnnn
Check for improbable Federal
withholding amountsnnnn
Check for incorrect Social Security or
Medicare Withholdingnnnn
Verify math computations are correctnnnn
Verify format is correctnnnn
Transmitter
Verify ERO suitabilitynnnn
Maintain databases for the following:
Duplicate SSNsnnnn
Addresses and phone numbers for jails,
drug treatment centers, health/welfare
agencies, hotels, etc.nnnn
SSNs of deceased personsnnnn
Credit card fraudnnnn
Bank
Contract with a fraud screening service
for bank products connected to tax returnsnnnn
Request Credit Reports for loan customersnnnn
Other
Feel free to add any additional screens you currently employ. Attach additional pages as necessary.
Use this space to further describe any of the above screens. Attach additional pages as necessary.

1999–51 I.R.B.699December 20, 1999
Section 7428(c) Validation of
Certain Contributions Made
During Pendency of Declaratory
Judgment Proceedings
This announcement serves notice to po-
tential donors that the organizations listed
below have recently filed timely declara-
tory judgment suits under section 7428 of
the Code, challenging revocation of their
status as eligible donees under section
170(c)(2).
Protection under section 7428(c) of the
Code begins on the date that the notice of
revocation is published in the Internal
Revenue Bulletin and ends on the date on
which a court first determines that an or-
ganization is not described in section
170(c)(2), as more particularly set forth in
section 7428(c)(1). In the case of individ-
ual contributors, the maximum amount of
contributions protected during this period
is limited to $1,000.00, with a husband
and wife being treated as one contributor.
This protection is not extended to any in-
dividual who was responsible, in whole or
in part, for the acts or omissions of the or-
ganization that were the basis for the re-
vocation. This protection also applies
(but without limitation as to amount) to
organizations described in section
170(c)(2) which are exempt from tax
under section 501(a). If the organization
ultimately prevails in its declaratory judg-
ment suit, deductibility of contributions
would be subject to the normal limitations
set forth under section 170.
Sta-Home Home Health Agency, Inc.
Jackson, MS
Sta-Home Home Health Agency, Inc.
of Forest, Mississippi
Jackson, MS
Part IV. Items of General Interest

December 20, 1999i1999–51 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

1999–51 I.R.B.iiDecember 20, 1999
Numerical Finding List
1
Bulletins 1999–27 through 1999–50
Announcements:
99–47, 1999–28 I.R.B. 29
99–64, 1999–27 I.R.B.7
99–65, 1999–27 I.R.B. 9
99–66, 1999–27 I.R.B. 9
99–67, 1999–28 I.R.B. 31
99–68, 1999–28 I.R.B. 31
99–69, 1999–28 I.R.B. 33
99–70, 1999–29 I.R.B. 118
99–71, 1999–31 I.R.B. 223
99–72, 1999–30 I.R.B. 132
99–73, 1999–30 I.R.B. 133
99–74, 1999–30 I.R.B. 133
99–75, 1999–30 I.R.B. 134
99–76, 1999–31 I.R.B. 223
99–77, 1999–32 I.R.B. 243
99–78, 1999–31 I.R.B. 229
99–79, 1999–31 I.R.B. 229
99–80, 1999–34 I.R.B. 310
99–81, 1999–32 I.R.B. 244
99–82, 1999–32 I.R.B. 244
99–83, 1999–32 I.R.B. 245
99–84, 1999–33 I.R.B. 248
99–85, 1999–33 I.R.B. 248
99–86, 1999–35 I.R.B. 332
99–87, 1999–35 I.R.B. 333
99–88, 1999–36 I.R.B. 407
99–89, 1999–36 I.R.B. 408
99–90, 1999–36 I.R.B. 409
99–91, 1999–37 I.R.B. 421
99–92, 1999–38 I.R.B. 433
99–93, 1999–36 I.R.B. 409
99–94, 1999–39 I.R.B. 437
99–95, 1999–42 I.R.B. 520
99–96, 1999–41 I.R.B. 504
99–97, 1999–41 I.R.B.505
99–98, 1999–42 I.R.B. 520
99–99, 1999–42 I.R.B. 522
99–100, 1999–42 I.R.B. 522
99–101, 1999–43 I.R.B. 544
99–102, 1999–43 I.R.B. 545
99–103, 1999–43 I.R.B. 546
99–104, 1999–44 I.R.B. 555
99–105, 1999–44 I.R.B. 555
99–106, 1999–45 I.R.B. 561
99–107, 1999–45 I.R.B. 561
99–108, 1999–46 I.R.B. 573
99–109, 1999–46 I.R.B. 573
99–110, 1999–46 I.R.B. 574
99–111, 1999–47 I.R.B. 587
99–112, 1999–49 I.R.B. 649
99–113, 1999–50 I.R.B. 673
99–114, 1999–50 I.R.B. 674
Notices:
99–34, 1999–35 I.R.B. 323
99–35, 1999–28 I.R.B.26
99–37, 1999–30 I.R.B. 124
99–38, 1999–31 I.R.B. 138
99–39, 1999–34 I.R.B.313
99–40, 1999–35 I.R.B. 324
99–41, 1999–35 I.R.B. 325
99–42, 1999–35 I.R.B. 325
99–43, 1999–36 I.R.B. 344
99–44, 1999–35 I.R.B. 326
Notices—Continued
99–45, 1999–37 I.R.B. 415
99–46, 1999–37 I.R.B. 415
99–47, 1999–36 I.R.B. 391
99–48, 1999–38 I.R.B. 429
99–49, 1999–39 I.R.B. 436
99–50, 1999–40 I.R.B. 444
99–51, 1999–40 I.R.B. 447
99–52, 1999–43 I.R.B. 525
99–53, 1999–46 I.R.B.565
99–54, 1999–47 I.R.B.579
99–55, 1999–49 I.R.B. 638
99–56, 1999–50 I.R.B.668
Proposed Regulations:
REG–252487–96, 1999–34 I.R.B. 303
REG–101519–97, 1999–29 I.R.B. 114
REG–107069–97, 1999–36 I.R.B. 346
REG–110385–99, 1999–50 I.R.B. 670
REG–121063–97, 1999–43 I.R.B. 540
REG–106010–98, 1999–40 I.R.B. 493
REG–106527–98, 1999–34 I.R.B. 304
REG–108287–98, 1999–28 I.R.B.27
REG–113526–98, 1999–37 I.R.B. 417
REG–113909–98, 1999–30 I.R.B. 125
REG–116733–98, 1999–36 I.R.B. 392
REG–116991–98, 1999–32 I.R.B. 242
REG–121946–98, 1999–36 I.R.B. 403
REG–103841–99, 1999–49 I.R.B. 639
REG–104939–99, 1999–49 I.R.B. 643
REG–105237–99, 1999–35 I.R.B. 331
REG–105327–99, 1999–29 I.R.B. 117
REG–105565–99, 1999–37 I.R.B. 419
REG–115932–99, 1999–47 I.R.B. 583
REG–116125–99, 1999–44 I.R.B. 552
Railroad Retirement Quarterly Rate:
1999–45 I.R.B. 560
1999–46 I.R.B.563
Revenue Procedures:
99–28, 1999–29 I.R.B.109
99–29, 1999–31 I.R.B. 138
99–30, 1999–31 I.R.B. 221
99–31, 1999–34 I.R.B. 280
99–32, 1999–34 I.R.B. 296
99–33, 1999–34 I.R.B. 301
99–34, 1999–40 I.R.B. 450
99–35, 1999–41 I.R.B. 501
99–36, 1999–42 I.R.B. 509
99–37, 1999–42 I.R.B. 517
99–38, 1999–43 I.R.B. 525
99–39, 1999–43 I.R.B. 532
99–40, 1999–46 I.R.B. 565
99–41, 1999–46 I.R.B. 566
99–42, 1999–46 I.R.B. 568
99–43, 1999–47 I.R.B.579
99–44, 1999–48 I.R.B.598
99–45, 1999–49 I.R.B.603
99–46, 1999–49 I.R.B.605
99–47, 1999–48 I.R.B.624
Revenue Rulings:
99–29, 1999–27 I.R.B.3
99–30, 1999–28 I.R.B. 24
99–31, 1999–37 I.R.B. 410
99–32, 1999–31 I.R.B. 135
99–33, 1999–34 I.R.B. 251
99–34, 1999–33 I.R.B. 247
99–35, 1999–34 I.R.B. 278
99–36, 1999–35 I.R.B. 319
99–37, 1999–36 I.R.B. 336
Revenue Rulings—Continued
99–38, 1999–36 I.R.B. 335
99–39, 1999–38 I.R.B. 424
99–40, 1999–40 I.R.B. 441
99–41, 1999–40 I.R.B. 439
99–42, 1999–41 I.R.B. 497
99–43, 1999–42 I.R.B. 506
99–44, 1999–44 I.R.B. 549
99–45, 1999–45 I.R.B. 558
99–46, 1999–45 I.R.B. 557
99–47, 1999–48 I.R.B.588
99–48, 1999–49 I.R.B.600
99–49, 1999–50 I.R.B. 667
99–50, 1999–50 I.R.B. 656
99–51, 1999–50 I.R.B. 652
99–52, 1999–50 I.R.B. 652
99–53, 1999–50 I.R.B. 657
Treasury Decisions:
8822, 1999–27 I.R.B.5
8823, 1999–29 I.R.B. 34
8824, 1999–29 I.R.B. 62
8825, 1999–28 I.R.B. 19
8826, 1999–29 I.R.B. 107
8827, 1999–30 I.R.B.120
8828, 1999–30 I.R.B.120
8829, 1999–32 I.R.B.235
8830, 1999–38 I.R.B. 430
8831, 1999–34 I.R.B.264
8832, 1999–35 I.R.B. 315
8833, 1999–36 I.R.B. 338
8834, 1999–34 I.R.B.251
8835, 1999–35 I.R.B.317
8836, 1999–37 I.R.B. 411
8837, 1999–38 I.R.B. 426
8838, 1999–38 I.R.B. 424
8839, 1999–41 I.R.B. 498
8840, 1999–47 I.R.B. 575
8841, 1999–48 I.R.B. 593
8842, 1999–47 I.R.B. 576
8843, 1999–48 I.R.B. 590
8844, 1999–50 I.R.B.661
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1999–1 through 1999–26
is in Internal Revenue Bulletin 1999–27, dated July
6, 1999.

December 20, 1999iii1999–51 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 1999–27 through 1999–50
Announcements:
99–5
Modified by
Ann. 99–106, 1999–45 I.R.B. 561
99–57
Modified by
Ann. 99–104, 1999–44 I.R.B. 555
99–59
Corrected by
Ann. 99–67, 1999–28 I.R.B. 31
Notices:
83–10
Modified by
Notice 99–44, 1999–35 I.R.B. 326
96–64
Modified by
Notice 99–40, 1999–35 I.R.B. 324
97–26
Modified by
Notice 99–41, 1999–35 I.R.B. 325
97–50
Modified and superseded by
Notice 99–41, 1999–35 I.R.B. 325
97–73
Modified by
Notice 99–37, 1999–30 I.R.B. 124
98–7
Modified by
Notice 99–37, 1999–30 I.R.B. 124
98–46
Modified by
Notice 99–37, 1999–30 I.R.B. 124
98–47
Modified and superseded by
Notice 99–41, 1999–35 I.R.B. 325
98–54
Modified by
Notice 99–37, 1999–30 I.R.B. 124
98–59
Modified by
Notice 99–37, 1999–30 I.R.B. 124
Proposed Regulations:
REG–208156–91
Corrected by
Ann. 99–65, 1999–27 I.R.B. 9
Revenue Procedures:
65–17
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
65–31
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
70–23
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
Revenue Procedures—Continued
71–35
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
72–22
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
72–46
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
72–48
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
72–53
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
89–48
Obsoleted (after Jan. 31, 2000) by
Notice 99–42, 1999–35 I.R.B. 325
89–49
Obsoleted (after Jan. 31, 2000) by
Notice 99–42, 1999–35 I.R.B. 325
96–9
Superseded by
Rev. Proc. 99–28, 1999–29 I.R.B. 109
96–17
Modified by
Rev. Proc. 99–39, 1999–43 I.R.B. 532
96–47
Amplified and superseded by
Rev. Proc. 99–40, 1999–46 I.R.B. 565
97–19
Modified by
Notice 99–41, 1999–35 I.R.B. 325
97–47
Amplified, clarified, modified, and superseded by
Rev. Proc. 99–39, 1999–43 I.R.B. 532
98–10
Modified by
Rev. Proc. 99–45, 1999–49 I.R.B. 603
98–22
Clarified and supplemented by
Rev. Proc. 99–31, 1999–34 I.R.B. 280
98–35
Superseded by
Rev. Proc. 99–29, 1999–31 I.R.B. 138
98–37
Superseded by
Rev. Proc. 99–34, 1999–40 I.R.B. 450
98–63
Modified by Ann. 99–7 and superseded by
Rev. Proc. 99–38, 1999–43 I.R.B. 525
99–19
Modified and superseded by
Rev. Proc. 99–43, 1999–47 I.R.B. 579
99–29
Corrected by
Ann. 99–112, 1999–49 I.R.B. 649
Revenue Rulings:
77–475
Modified and superseded by
Rev. Rul. 99–40, 1999–40 I.R.B. 441
82–80
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
84–58
Modified and superseded by
Rev. Rul. 99–40, 1999–40 I.R.B. 441
88–98
Modified and superseded by
Rev. Rul. 99–40, 1999–40 I.R.B. 441
88–225
Modified by
Rev. Rul. 99–44, 1999–48 I.R.B. 598
98–58
Supplemented and superseded by
Rev. Rul. 99–50, 1999–50 I.R.B. 656
98–59
Supplemented and superseded by
Rev. Rul. 99–49, 1999–50 I.R.B. 667
99–23
Corrected by
Ann. 99–89, 1999–36 I.R.B. 408
Treasury Decisions:
8476
Corrected by
Ann. 99–74, 1999–30 I.R.B. 133
8742
Corrected by
Ann. 99–73, 1999–30 I.R.B. 133
8793
Corrected by
Ann. 99–75, 1999–30 I.R.B. 134
8805
Corrected by
Ann. 99–66, 1999–27 I.R.B. 9
8806
Corrected by
Ann. 99–84, 1999–33 I.R.B. 248
8819
Corrected by
Ann. 99–47, 1999–28 I.R.B. 29
8823
Corrected by
Ann. 99–86, 1999–35 I.R.B. 332
8825
Corrected by
Ann. 99–100, 1999–42 I.R.B. 522
8827
Corrected by
Ann. 99–111, 1999–47 I.R.B. 587
1
A cumulative finding list of actions published in
Internal Revenue Bulletins 1999–1 through 1999–26
is in Internal Revenue Bulletin 1999–27, dated July
6, 1999.

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