Internal Revenue Bulletin 2002-15 (PDF rendition): IRS Announcements

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

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.
SPECIAL ANNOUNCEMENT
Announcement 2002–40, page 747.
This announcement concerns Advance Pricing Agreements
(APAs) and the experience of the APA Program during calendar
year 2001.
TAX CONVENTIONS
Rev. Rul. 2002–16, page 740.
This ruling confirms that the Netherlands investment yield tax is
a tax for which a credit may be allowed under Article 25(4) of
the U.S.–Netherlands income tax convention because, under
Article 2(2), it is substantially similar to a prior Dutch tax that
was a covered tax under the convention.
Rev. Proc. 2002–23, page 744.
This document describes new procedures under Article XVIII(7)
of the U.S. – Canada income tax convention whereby U.S. tax-
payers may elect to defer U.S. income taxation on income
accruing in certain Canadian pension plans until a distribution is
made from such plans. Rev. Proc. 89–45 superseded.
EMPLOYEE PLANS
Notice 2002–23, page 742.
Form 5500; DOL delinquent filer program.This notice pro-
vides relief from certain penalties under sections 6652 and
6692 of the Code for late filers of Form 5500 who are eligible
for and satisfy the requirements of the Department of Labor’s
(DOL’s) Delinquent Filer Voluntary Compliance (DFVC) program.
Notice 2002–26, page 743.
Weighted average interest rate update. The weighted aver-
age interest rate for the first quarter of 2002 and the resulting
permissible range of interest rates used to calculate current
liability for purposes of the full funding limitation of section
412(c)(7) of the Code are set forth.
Announcement 2002–31, page 747.
Proposed class exemption; non-enforcement policy. This
announcement describes the Service’s position on the imposi-
tion of the prohibited transaction excise taxes during the pen-
dency of a class exemption from the prohibited transaction
rules (Application No. D–10933) proposed by the U.S. Depart-
ment of Labor.
ADMINISTRATIVE
Notice 2002–25, page 743.
Charitable contributions, substantiation, relief.Due to the
unique circumstances of the September 11
th
tragedy, taxpay-
ers who made charitable contributions of $250 or more after
September 10, 2001, and before January 1, 2002, are pro-
vided with partial relief from the “contemporaneous written
acknowledgement” requirement of section 170(f)(8) of the
Code with respect to those contributions.
(Continued on the next page)
Finding Lists begin on page ii.
Bulletin No. 2002–15
April 15, 2002

Rev. Proc. 2002–23, page 744.
This document describes new procedures under Article XVIII(7)
of the U.S.–Canada income tax convention whereby U.S. tax-
payers may elect to defer U.S. income taxation on income
accruing in certain Canadian pension plans until a distribution is
made from such plans. Rev. Proc. 89–45 superseded.
Rev. Proc. 2002–26, page 746.
This procedure provides updated information about how the
Service applies partial undesignated payments against
assessed tax, penalty, and interest. Rev. Ruls. 73–304,
73–305, and 79–284 superseded.
April 15, 20022002–15 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, 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 Bulle-
tins, 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 Bul-
letin. All published rulings apply retroactively unless otherwise
indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal 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 rev-
enue ruling. In those based on positions taken in rulings to tax-
payers 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 published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and
Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (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 semiannual
period, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
2002–15 I.R.B.April 15, 2002

This page is reserved for missing children Alicia Stathes and Kalil Smith-Nuevelle
April 15, 20022002–15 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
United States—Kingdom of
the Netherlands Income Tax
Convention
This ruling confirms that the Nether-
lands investment yield tax is a tax for
which a credit may be allowed under
Article 25(4) of the U.S.-Netherlands
income tax convention because, under
Article 2(2), it is substantially similar to a
prior Dutch tax that was a covered tax
under the convention.
Rev. Rul. 2002–16
ISSUE
Whether the newly enacted Dutch tax
on an individual’s imputed income from
savings and investment in the Nether-
lands, Box 3 of the Netherlands Indi-
vidual Income Tax Act of 2001, is a tax
for which a credit may be allowed against
U.S. income tax liability under the Con-
vention Between the United States of
America and the Kingdom of the Nether-
lands for the Avoidance of Double Taxa-
tion and the Prevention of Fiscal Evasion
with Respect to Taxes on Income, effec-
tive December 31, 1993 (the “Treaty”).
FACTS
Prior to January 1, 2001, the Nether-
lands individual income tax (de inkoms-
tenbelasting) was imposed on a single
taxable income base, which comprised all
the income that a taxpayer received in a
year. Various deductions were allowed
against this income. Additionally, a divi-
dend and interest allowance could be used
against income from savings and invest-
ments.
Effective January 1, 2001, the Nether-
lands introduced a schedular system of
individual taxation that applies to both
residents and nonresidents. Under the
new system, instead of a single taxable
income base there are three separate
bases. These are referred to as “Boxes,”
and are organized as follows:
Box 1 includes taxable income from
work (including profits and losses
from business and professions and
sales of business property, wages,
pensions, and income from partner-
ships), dividends received by security
dealers, and imputed income from an
owner-occupied home. Expenses
related to business profits are deduct-
ible. Nonresidents are subject to tax
on the income in this box from Dutch
sources, including imputed income
from a home within the Netherlands.
Box 2 includes taxable income
derived from a substantial business
interest in corporations. Substantial is
defined as a 5% or more interest.
Two types of income are taxed: divi-
dends and capital gain realized on
selling assets that form a substantial
holding. Acquisition (margin) interest
is deductible. Nonresidents are sub-
ject to tax on the income in this box
with regard to substantial interests in
Dutch companies.
Box 3 includes taxable income from
savings and investments. Taxable
income is the fixed yield (imputed
income) set at 4% of the value of the
investment assets reduced by certain
liabilities. Taxpayers cannot reduce
their tax burden by proving that their
actual rate of return on investments
was in fact less than 4%. If income
imputed from investment assets is
subject to tax under Box 3, any
actual interest, dividend, and rental
income will not be taxed. The invest-
ment yield tax applies to assets such
as real estate (other than the taxpay-
er’s personal residence), stocks and
shares, savings deposits, and non-
exempt endowment insurance. If
income from an asset is subject to tax
under Box 1 or 2, income will not be
imputed with respect to that asset for
purposes of Box 3. Also, income is
not imputed with respect to assets
without yield capacity (such as per-
sonal use property). Interest paid and
other expenses relating to imputed
income taxed under Box 3 are not
deductible. However, debt that
exceeds 2,500 EUR and that is not
related to the assets included within
Box 1 and Box 2 can be deducted
from the tax base on which the
imputed income of 4% is computed;
in addition, all taxpayers are entitled
to a tax-free asset allowance of
17,600 EUR. Nonresidents are sub-
ject to tax on the income in this box
from assets within the Netherlands
minus related debt. Assets within the
Netherlands include only immovable
property, rights in immovable prop-
erty, and rights in the profits of a
company with a registered office
within the Netherlands provided that
the rights are not in the form of
stock.
Under the new system, each form of
income may be included in only one box.
If there is a loss in one box, it may not
offset positive income in the other two
boxes. The loss may, however, be carried
over and deducted against income in that
box in a later year. In addition, if a tax-
payer incurs a loss on the complete termi-
nation of his or her substantial interest
that is subject to tax in Box 2, as much as
25% of that loss may be applied against
the Box 1 tax.
Box 1 taxable income comprises
approximately 95% of the total income
tax base. Boxes 2 and 3 comprise
approximately 1.5% and 3.5% respec-
tively of the total income tax base.
Taxable income within the three boxes
is reduced by personal deductions, such
as medical expenses, educational
expenses, donations, and alimony. Per-
sonal deductions are used to offset first
income in Box 1, then income in Box 3,
and finally income in Box 2. Any excess
personal deductions may be carried for-
ward.
After reduction by personal deduc-
tions, taxable income is subject to the fol-
lowing income tax rates in the three
boxes as follows:
Box 1Progressive rates of up to 52%
Box 225%
Box 330%
Various credits are allowed against the
taxes of the three boxes combined. Some
of these credits, such as the general tax
credit, child credit, old-age credit, and the
handicapped credit, are nonrefundable.
Two additional credits, a wage credit and
a credit for the dividend tax, also are
allowed, and may, in some cases, lead to
a refund.
2002–15 I.R.B.740April 15, 2002

LAW AND ANALYSIS
Under Article 25(4) of the Treaty, a
credit may be allowed against U.S. tax
liability for the Box 3 tax if, under Article
2(2), the Box 3 tax is a substantially simi-
lar tax imposed in place of a tax that was
in force at the time the Treaty was signed.
Under the general rule of Article 25(4) of
the Treaty, Methods of Elimination of
Double Taxation, the United States treats
as an income tax, for which a credit may
be allowed under Article 25, the appropri-
ate amount of income tax paid or accrued
to the Netherlands by or on behalf of a
resident or national of the United States.
For purposes of Article 25(4), the taxes
referred to in paragraphs 1(a) and 2 of
Article 2, Taxes Covered, are considered
income taxes.
Article 2(1)(a) lists the Netherlands
taxes that were in force at the time the
Treaty was signed and that were covered
under the Treaty. These included the
Dutch individual income tax,de inkoms-
tenbelasting.
Under Article 2(2), Netherlands taxes
that were not in force at the time the
Treaty was signed are nonetheless cov-
ered taxes, and thus taxes for which a
credit may be allowed under Article
25(4), if they are identical or substantially
similar taxes imposed after the date of
signature of the Treaty in addition to, or
in place of, the existing taxes.
In general, the purpose of a Taxes
Covered Article is to ensure that tax trea-
ties do not become obsolete due to
changes in the tax systems of the parties
to a treaty. Thus, if identical or substan-
tially similar taxes are imposed in addi-
tion to, or in place of, the taxes that were
in force and covered at the time a treaty
was signed, it is appropriate to give effect
to the intent of the Contracting States,
and allow the treaty to continue to apply
to the basic income tax structures of Con-
tracting States. There is no definitive test
for whether a tax is substantially similar
to a covered tax; rather, the outcome rests
on the facts and circumstances of each
particular case. If it is concluded that a
newly enacted tax is substantially similar
to a covered tax, it also becomes a cov-
ered tax, but remains so only until such
time as it is amended. When that occurs,
a separate analysis must be made in order
to determine whether the amended tax is
substantially similar to the taxes in force
at the time the treaty was signed.
HOLDINGS
Considered in its entirety, the Nether-
lands Individual Income Tax Act of 2001
imposes taxes that are substantially simi-
lar to the income tax referred to in Article
2(1)(a) of the Treaty. Because the taxes
imposed pursuant to the Netherlands Indi-
vidual Income Tax Act of 2001 are sub-
stantially similar to the income tax
referred to in Article 2(1)(a) of the Treaty,
those taxes are covered under Article
2(2), and therefore treated as income
taxes for which a credit may be allowed
under Article 25(4). Accordingly, the tax
imposed under Box 3, which forms a part
of the Netherlands Individual Income Tax
Act of 2001, is treated as an income tax
for which a credit may be allowed under
Article 25(4).
Taxpayers generally may rely upon
Revenue Rulings to determine the tax
treatment of their own transactions, and
need not request a ruling that would apply
the principles of a published Revenue
Ruling to their own particular cases.
However, because each Revenue Ruling
represents the conclusion of the Service
as to the application of the law to the
specific facts involved, taxpayers, Service
personnel, and others concerned are cau-
tioned against reaching the same conclu-
sions in other cases unless those cases
present facts and circumstances that are
substantially the same as those in the
Revenue Ruling. Treas. Reg.§601.601
(d)(2)(v)(e). Accordingly, because the
provisions of the Netherlands Individual
Income Tax Act of 2001 described in this
Revenue Ruling are facts on which this
Ruling bases its holding, a taxpayer must
verify that the description is still accurate
before relying on the Ruling. A taxpayer
may not rely on the Ruling if the Nether-
lands Individual Income Tax Act of 2001
has been altered or changed in any mate-
rial respect by subsequent Dutch law.
EFFECTIVE DATE
This Revenue Ruling is effective with
respect to taxable years beginning on or
after January 1, 2001. This Revenue Rul-
ing will cease to be effective if the Neth-
erlands Individual Income Tax Act of
2001 is modified in any material respect
for tax years that are affected by such
change. Taxpayers are responsible for
determining whether any such modifica-
tions have occurred.
DRAFTING INFORMATION
The principal author of this Revenue
Ruling is Nina Chowdhry of the Office of
the Associate Chief Counsel (Interna-
tional) (CC:INTL:Br1). For further infor-
mation regarding this Revenue Ruling,
contact Ms. Chowdhry at (202) 622–3880
(not a toll-free call).
April 15, 20027412002–15 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Relief From Internal Revenue
Code Late Filer Penalties
Notice 2002–23
PURPOSE
This notice provides administrative
relief from the penalties under§§6652
(c)(1), (d), (e), and 6692 of the Internal
Revenue Code (the“Code”) for failure to
timely comply with the annual reporting
requirements under§§6033(a), 6057,
6058, 6047, and 6059 of the Code. This
administrative relief applies to late filers
who both are eligible for and satisfy the
requirements of the Delinquent Filer Vol-
untary Compliance Program (“DFVC
Program”), which is administered by the
Department of Labor’s(“DOL”) Pension
and Welfare Benefits Administration
(“PWBA”). The DFVC Program was
published on April 27, 1995, in the Fed-
eral Register (60 FR 20874). A modifica-
tion of the DFVC Program was published
on March 28, 2002 (67 FR 15051).
BACKGROUND
Plan administrators who fail to file
Form 5500 annual returns/reports on a
timely basis can be subject to civil penal-
ties under both Title I of the Employee
Retirement Income Security Act of 1974
(“ERISA”) and the Code. The Secretary
of Labor has the authority under section
502(c)(2) of ERISA and 29 CFR
2575.502c–2 to assess civil penalties of
up to $1,100 per day against plan admin-
istrators who fail or refuse to file com-
plete and timely annual reports.
Pursuant to 29 CFR 2560.502c–2 and
29 CFR 2570.60et seq., PWBA main-
tains an administrative program for the
assessment of civil penalties for noncom-
pliance with the annual reporting require-
ments. Under this program, plan adminis-
trators filing late annual reports may be
assessed a penalty of $50 per day for each
day of noncompliance. Plan administra-
tors who fail to file an annual report may
be assessed a penalty of $300 per day, up
to $30,000 per year, until a complete
annual report is filed.
In addition to the civil penalties that
may be assessed by DOL under section
502(c)(2) of ERISA, the Internal Revenue
Service (the“Service”) may assess penal-
ties under§§6652(c)(1), (d), (e) and
6692 of the Code for the failure to satisfy
the annual reporting requirements. Sec-
tion 6652(c)(1) generally provides that in
the case of any failure to file a return
under§6033(a), the exempt organization
shall pay an amount equal to $20 for each
day during which the failure continues,
not to exceed the maximum amount
specified under the Code. Section
6652(d)(1) generally provides that in the
case of any failure to file an annual regis-
tration statement under§6057(a), the late
filer shall pay, upon notice and demand, a
penalty of $1 for each participant with
respect to whom there is a failure to file
for each day the failure continues, up to
$5,000 for any plan year. Section
6652(d)(2) generally provides that in the
case of any failure to file a notification of
change of status, the late filer shall pay,
upon notice and demand, a penalty of $1
for each day the failure continues, up to
$1,000. Section 6652(e) generally pro-
vides, in part, that in the case of any fail-
ure to file a return or statement required
under§§6058 or 6047(e), the late filer
shall pay, upon notice and demand, a pen-
alty of $25 for each day the failure con-
tinues, up to $15,000 per return or state-
ment. Section 6692 generally provides
that in the case of any failure to file a
report required by§6059, the late filer
shall pay a penalty of $1,000 for each
failure.
DOL ADMINISTRATIVE RELIEF
FROM PENALTY
In order to encourage voluntary com-
pliance with the annual reporting require-
ments by late filers, DOL implemented
the DFVC Program. Plan administrators
who are subject to the assessment of civil
penalties for failing to file a timely annual
report and who are eligible for the DFVC
program may pay reduced civil penalties
by voluntarily complying with the terms
of the DFVC Program.
ADMINISTRATIVE RELIEF FROM
CERTAIN INTERNAL REVENUE
CODE PENALTIES FOR DFVC
PROGRAM PARTICIPANTS
The Service will not impose the penal-
ties under§§6652(c)(1), (d), (e), and
6692 (as these sections relate to the filing
of a Form 5500) on a person who is eli-
gible for and satisfies the requirements of
the DFVC Program with respect to the
filing of a Form 5500. Once the late filer
satisfies the requirements of the DFVC
Program, including paying the reduced
civil penalty under section 502(c)(2) of
ERISA, the relief under this notice will
apply. The late filer need not file a sepa-
rate application for relief with the Ser-
vice. The Service will coordinate with
DOL in determining which late filers are
eligible for the relief under this notice.
INAPPLICABILITY OF THE ABOVE
RELIEF FOR CERTAIN FILERS
The relief under this notice is available
only to the extent that a Form 5500 is
required under Title I of ERISA. There-
fore, for example, Form 5500–EZ filers
and Form 5500 filers for plans without
employees (as described in 29 CFR
2510.3–3(b) and (c)) are not eligible for
the relief in this notice. Because such
plans are not subject to Title I of ERISA,
they are ineligible to participate in the
DFVC Program.
DRAFTING INFORMATION
The principal drafters of this notice are
Steven J. Linder of the Employee Plans,
Tax Exempt and Government Entities
Division and Pamela Kinard of the Office
of the Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). For further information regard-
ing this notice, please contact Employee
Plans’taxpayer assistance telephone ser-
vice at 1–877–829–5500 (a toll-free num-
ber) between the hours of 8:00 a.m. and
6:30 p.m. Eastern Time, Monday through
Friday. Mr. Linder may be reached at
(202) 283–9888; Ms. Kinard may be
reached at (202) 622–6060. The tele-
phone numbers in the preceding sentence
are not toll-free.
2002–15 I.R.B.742April 15, 2002

Partial Relief From the
Substantiation Requirements
of Section 170(f)(8) of the
Internal Revenue Code for
Charitable Contributions
Made After September 10,
2001, and Before January 1,
2002
Notice 2002–25
PURPOSE
Due to the unique circumstances of the
September 11
th
tragedy, the Internal Rev-
enue Service is providing taxpayers who
made certain charitable contributions of
$250 or more with partial relief from the
“contemporaneous written acknowledg-
ment”requirement of§170(f)(8) of the
Internal Revenue Code with respect to
those contributions. Taxpayers will be
treated as satisfying the contemporaneous
written acknowledgment requirement
with respect to contributions made after
September 10, 2001, and before January
1, 2002, if, on or before October 15,
2002, they either obtain the required
acknowledgment from the donee organi-
zation, or have evidence of a good faith
effort to obtain it.
BACKGROUND
Section 170 generally allows a deduc-
tion for charitable contributions made
during the taxable year. With respect to
contributions of $250 or more, the deduc-
tion is allowable only if the donor obtains
a written acknowledgment from the
donee organization on or before the date
the donor files the return reporting the
contribution or on or before the due date
(including extensions) of the return,
whichever comes first. Section 170(f)(8).
A contemporaneous written acknowl-
edgment is a timely written statement
from the donee organization that contains
the following information: (1) the amount
of cash and a description (but not value)
of any property other than cash contrib-
uted; (2) whether the donee organization
provided any goods or services in consid-
eration for the property contributed; and
(3) a description and good faith estimate
of the value of any goods or services pro-
vided by the donee organization in con-
sideration for the property contributed.
The donee organization may provide a
paper copy of the acknowledgment to the
donor, or the donee organization may pro-
vide the acknowledgment electronically,
such as in an e-mail addressed to the
donor. See Publication 1771,“Charitable
Contributions—Substantiation and Dis-
closure Requirements.”
The Service has become aware that,
due to the overwhelming number of
charitable contributions made in the wake
of September 11
th
, many donee organiza-
tions are unable to supply donors with the
required acknowledgments in a timely
manner.
RELIEF
Under these unique circumstances, the
following partial relief is provided: A
donor that contributed $250 or more of
cash or other property after September
10, 2001, and before January 1, 2002, and
has not obtained a written acknowledg-
ment by the date specified in§170(f)(8),
will be treated as having satisfied the
requirements of that section if, on or
before October 15, 2002, the donor either
obtains the required acknowledgment, or
has evidence of a good faith effort to
obtain it. An example of a good faith
effort is sending the donee organization a
letter or e-mail requesting a written
acknowledgment that meets the require-
ments of§170(f)(8). A copy of that letter
or e-mail is evidence of a good faith
effort.
Donors are reminded that they must
comply with all of the other requirements
of§170 in order to be allowed charitable
contribution deductions. For example,
donors must comply with the requirement
that they maintain records to substantiate
the fact and amount of a transfer to a
qualified charity within the taxable year.
DRAFTING INFORMATION
The principal authors of this notice are
Patricia Zweibel and Susan Kassell of the
Office of Associate Chief Counsel
(Income Tax and Accounting). For further
information regarding this notice, contact
Ms. Zweibel or Ms. Kassell at (202) 622–
5020 (not a toll-free call).
Weighted Average Interest
Rate Update
Notice 2002–26
Sections 412(b)(5)(B) and 412(l)(7)
(C)(i) of the Internal Revenue Code pro-
vide that the interest rates used to calcu-
late current liability for purposes of deter-
mining the full funding limitation under
§412(c)(7) and the required contribution
under§412(l) must be within a permis-
sible range around the weighted average
of the rates of interest on 30-year Trea-
sury securities during the four-year period
ending on the last day before the begin-
ning of the plan year.
Notice 88–73 (1988–2 C.B. 383) pro-
vides guidelines for determining the
weighted average interest rate and the
resulting permissible range of interest
rates used to calculate current liability for
the purpose of the full funding limitation
of§412(c)(7) of the Code.
Section 417(e)(3)(A)(ii)(II) of the
Code defines the applicable interest rate,
which must be used for purposes of deter-
mining the minimum present value of a
participant’s benefit under§§417(e)(1)
and (2), as the annual rate of interest on
30-year Treasury securities for the month
before the date of distribution or such
other time as the Secretary may by regu-
lations prescribe. Section 1.417(e)–
1(d)(3) of the Income Tax Regulations
provides that the applicable interest rate
for a month is the annual interest rate on
30-year Treasury securities as specified
by the Commissioner for that month in
revenue rulings, notices or other guidance
published in the Internal Revenue Bulle-
tin.
The rate of interest on 30-year Trea-
sury Securities for February 2002 is 5.40
percent. The Service has determined this
rate as the average of the 30-year Trea-
sury Constant Maturity interest rate deter-
mined each day through February 18,
2002 (as reported in§H.15 on the Fed-
eralReservewebsite(www.federal
reserve.gov/releases)), and the yield on
the 30-year Treasury bond maturing in
February 2031, determined each day for
the balance of the month.
Effective for March 2002, the Service
will determine and publish the rate of
April 15, 20027432002–15 I.R.B.

interest on 30-year Treasury Securities
solely on the basis of the monthly average
of the daily determination of yield on the
30-year Treasury bond maturing in Febru-
ary 2031. The Service will determine and
publish the average yield on such basis
for an interim period, pending the enact-
ment of legislative changes to§§412 and
417 that address the discontinuance of the
30-year Treasury bond.
Section 405 of the Job Creation and
Worker Assistance Act of 2002
(“JCWAA”) amended§412(l)(7)(C) of
the Code to provide that for plan years
beginning in 2002 and 2003 the permis-
sible range is extended to 120 percent.
The following rates were determined
for the plan years beginning in the month
shown below.
MonthYear
Weighted
Average
90% to 120%
Permissible
Range
90% to 110%
Permissible
Range
January20025.715.14 to 6.855.14 to 6.28
February20025.705.13 to 6.845.13 to 6.27
March20025.695.12 to 6.835.12 to 6.26
Drafting Information
The principal author of this notice is
Todd Newman of the Employee Plans,
Tax Exempt and Government Entities
Division. For further information regard-
ing this notice, please contact the
Employee Plans’taxpayer assistance tele-
phone service at 1–877–829–5500 (a toll-
free number), between the hours of 8:00
a.m. and 6:30 p.m. Eastern time, Monday
through Friday. Mr. Newman may be
reached at 1–202–283–9888 (not a toll-
free number).
26 CFR 601.602: Tax forms and instructions.
(Also Part I, section 894; Part II, United States-
Canada Income Tax Convention.)
Rev. Proc. 2002–23
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance for applying Article XVIII(7) of the
United States-Canada Income Tax Con-
vention, signed on September 26, 1980,
as amended by Protocols signed on June
14, 1983, March 28, 1984, March 17,
1995, and July 29, 1997 (the“Conven-
tion”). It supersedes Revenue Procedure
89–45 (1989–2 C.B. 596), which pro-
vided guidance for applying former
Article XXIX(5) of the Convention.
Article XVIII(7), which was added to the
Convention by the Protocol that was
signed on March 17, 1995, expanded and
replaced Article XXIX(5).
SECTION 2. BACKGROUND
.01Domestic Rules. Under the domes-
tic law of the United States, an individual
who is a citizen or resident of the United
States and a beneficiary of a Canadian
retirement plan will be subject to current
United States income taxation on income
accrued in the plan even though the
income is not currently distributed to the
beneficiary, unless the plan is an employ-
ees’trust within the meaning of section
402(b) of the Internal Revenue Code and
the individual is not a highly compen-
sated employee subject to the rule of sec-
tion 402(b)(4)(A). However, if the plan
satisfies certain requirements under the
domestic law of Canada, the income
accrued in the plan will not be subject to
Canadian income taxation until it is actu-
ally distributed from the plan (or from
another plan to which it is transferred in
a tax-free rollover). Thus, there may be a
mismatch between the timing of the
United States tax and the Canadian tax,
with the result that the individual may be
subject to double taxation for which no
relief is available under Article XXIV of
the Convention.
.02Former Article XXIX(5). Former
Article XXIX(5) of the Convention
addressed the timing mismatch in respect
of a U.S. citizen who was a resident of
Canada and a beneficiary of a Canadian
registered retirement savings plan
(“RRSP”) by providing that such a U.S.
citizen could elect, under rules estab-
lished by the competent authority of the
United States, to defer United States taxa-
tion with respect to any income accrued
in the RRSP but not distributed by the
RRSP, until such time as a distribution
was made from such RRSP or any plan
substituted therefor. The rules for making
an election under former Article XXIX(5)
were set forth in Revenue Procedure
89–45. Additional guidance was set forth
in Revenue Ruling 89–95 (1989–2 C.B.
131), which provided that if the proceeds
of a RRSP were rolled over to a Canadian
registered retirement income fund
(“RRIF”), the RRIF would be treated as a
plan substituted for the RRSP, with the
result that both the proceeds that were
rolled over from the RRSP and the
income subsequently accrued in the RRIF
could qualify for deferral under former
Article XXIX(5).
.03Article XVIII(7). Article XVIII(7)
of the Convention now provides, effective
for taxable years beginning on or after
January 1, 1996, that a natural person
who is a citizen or resident of either the
United States or Canada and a beneficiary
of a trust, company, organization, or other
arrangement that is a resident of the other
country that is generally exempt from
income taxation in the other country (a
“plan”), and is operated exclusively to
provide pension, retirement, or employee
benefits, may elect to defer taxation in the
person’s country of citizenship or resi-
dence, under rules established by the
competent authority of that country, with
respect to any income accrued in the plan
but not distributed by the plan, until such
time as and to the extent that a distribu-
tion is made from the plan or any plan
substituted therefor.
2002–15 I.R.B.744April 15, 2002

SECTION 3. SCOPE
This revenue procedure applies to an
individual who is a citizen or resident of
the United States and a beneficiary of one
of the following Canadian plans (an“eli-
gible plan”): a RRSP, a RRIF, a registered
pension plan, or a deferred profit sharing
plan. This revenue procedure applies
regardless of whether the individual was a
resident of Canada at the time contribu-
tions were made to the eligible plan. For
purposes of this revenue procedure, a
“beneficiary”of an eligible plan is an
individual who would, in the absence of
an election under Article XVIII(7) of the
Convention, be subject to current United
States income taxation on income accrued
in the plan. The revenue procedure
applies only to income accrued in an eli-
gible plan and not to any contributions to
the plan.
SECTION 4. ELECTION
PROCEDURES
.01In General. If income accruing in
an eligible plan would otherwise be sub-
ject to current United States income taxa-
tion, a beneficiary of the eligible plan
may elect for the beneficiary’s taxable
year (the“current year”) and all subse-
quent years to defer United States income
tax on the beneficiary’s share of income
accrued in the plan until that income is
distributed to the beneficiary. Beneficia-
ries shall make the election by attaching
to their timely filed (including exten-
sions) United States federal income tax
return for the current year, a statement
that includes the following information:
(i) A statement that the taxpayer is
claiming the benefit of Article XVIII(7)
of the Convention under this revenue pro-
cedure;
(ii) The name of the trustee of the plan
and the plan account number, if any; and
(iii) The balance in the plan at the
beginning of the current year.
.02Reporting. Beneficiaries shall
attach a copy of the statement required in
paragraph 4.01 to their timely filed
(including extensions) United States fed-
eral income tax return for each year sub-
sequent to the current year, until the tax
year in which a final distribution is made
from the plan (or from any transferee plan
within the meaning of paragraph 4.03).
.03Rollovers. If an eligible plan for
which an election has been made pursuant
to paragraph 4.01 (“transferor plan”)is
rolled over to another eligible plan
(“transferee plan”) in a transfer that does
not result in the current imposition of
Canadian income tax (e.g., a transfer such
as that described in Revenue Ruling
89–95), the previous election is deemed
to carry over to the transferee plan.
.04Transferee Plan Reporting.Inthe
case of a transferee plan, in addition to a
copy of the statement required for the
transferor plan under paragraph 4.02, in
the tax year of the transfer (“transfer
year”), beneficiaries shall attach an addi-
tional statement that includes the follow-
ing information:
(i) A statement that the taxpayer is
claiming the benefit of Article XVIII(7)
of the Convention under this revenue pro-
cedure;
(ii) The name of the trustee of the
transferee plan and the plan account num-
ber, if any;
(iii) The name of the trustee of the
transferor plan and the plan account num-
ber, if any;
(iv) The total amount of income
accrued in the transferor plan on which
United States income tax was deferred
under either Article XVIII(7) or former
Article XXIX(5); and
(v) The initial balance in the transferee
plan.
Beneficiaries of a transferee plan shall
attach a copy of the statement required in
paragraph 4.02 (transferor plan) and a
copy of the statement required in this
paragraph 4.04 (transferee plan) to their
timely filed (including extensions) United
States federal income tax return for each
year subsequent to the transfer year, until
the tax year in which a final distribution
is made from the transferee plan.
.05Multiple Plans. An individual who
is a beneficiary of more than one eligible
plan must make a separate election and
file a separate statement for each eligible
plan.
.06Extension Of Time For Making
Elections. An extension of time for mak-
ing an election under paragraph 4.01 may
be available under the procedures appli-
cable under sections 301.9100–1 and
301.9100–3 of the Procedure and Admin-
istration Regulations.
.07Prospective Change of Election.
An election once made cannot be revoked
except with the consent of the Commis-
sioner.
SECTION 5. DISTRIBUTIONS FROM
AN ELIGIBLE PLAN
Distributions received by a beneficiary
from an eligible plan shall be included in
gross income by the beneficiary in the
manner provided under section 72 of the
Internal Revenue Code, subject to any
other applicable provision of the Conven-
tion.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
This revenue procedure supersedes
Revenue Procedure 89–45 (1989–2 C.B.
596).
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after Decem-
ber 31, 2001. For taxable years ending
before such date and beginning on or
after January 1, 1996, taxpayers may elect
to apply either this revenue procedure or
Revenue Procedure 89–45.
SECTION 8. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1773.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid OMB control number.
The collection of information in this
revenue procedure is in section 4. This
information is required to enable taxpay-
ers to claim a benefit under the Conven-
tion. This information will be used to
compute and collect the right amount of
tax. The likely respondents are individu-
als.
The estimated total annual reporting
burden is 10,000 hours. The estimated
annual burden per respondent varies from
April 15, 20027452002–15 I.R.B.

0.1 hour to 1 hour, depending on indi-
vidual circumstances, with an estimated
average of 0.5. The estimated number of
respondents is 20,000.
The estimated annual frequency of
responses is once per respondent.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are M. Grace Fleeman and
Amanda A. Ehrlich of the Office of the
Associate Chief Counsel (International).
For further information regarding this
revenue procedure, contact Amanda A.
Ehrlich at (202) 622–3880 (not a toll-free
call).
26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of
correct tax liability.
(Also Part I, §§ 163, 6601, 7122; 1.163–9T,
301.6601–1, 301.7122–1)
Rev. Proc. 2002–26
SECTION 1. PURPOSE
The purpose of this revenue procedure
is to update and restate the Internal Rev-
enue Service’s position regarding the
application, by the Service, of a partial
payment of tax, penalty, and interest for
one or more taxable periods. This revenue
procedure supersedes Rev. Rul. 73–304
(1973–2 C.B. 42); Rev. Rul. 73–305
(1973–2 C.B. 43); and Rev. Rul. 79–284
(1979–2 C.B. 83).
SECTION 2. SCOPE
This revenue procedure applies to all
taxes under the Internal Revenue Code,
except alcohol, tobacco, and firearms
taxes and the harbor maintenance tax. For
purposes of this revenue procedure, the
term“penalty”includes any additional
amount, addition to tax, or assessable
penalty.
SECTION 3. PROCEDURE
.01 If additional taxes, penalty, and
interest for one or more taxable periods
have been assessed against a taxpayer (or
have been mutually agreed to as to the
amount and liability but are unassessed)
at the time the taxpayer voluntarily ten-
ders a partial payment that is accepted by
the Service and the taxpayer provides
specific written directions as to the appli-
cation of the payment, the Service will
apply the payment in accordance with
those directions.
.02 If additional taxes, penalty, and
interest for one or more taxable periods
have been assessed against a taxpayer (or
have been mutually agreed to as to the
amount and liability but are unassessed)
at the time the taxpayer voluntarily ten-
ders a partial payment that is accepted by
the Service and the taxpayer does not pro-
vide specific written directions as to the
application of payment, the Service will
apply the payment to periods in the order
of priority that the Service determines
will serve its best interest. The payment
will be applied to satisfy the liability for
successive periods in descending order of
priority until the payment is absorbed. If
the amount applied to a period is less than
the liability for the period, the amount
will be applied to tax, penalty, and inter-
est, in that order, until the amount is
absorbed.
.03 Payments made pursuant to the
terms of offers in compromise (or offers
in compromise and collateral agreements)
that have been accepted by the Govern-
ment in compromise of outstanding tax
liabilities, in accordance with§7122 of
the Internal Revenue Code, will be
applied as follows:
(1) If an offer in compromise and col-
lateral agreement have been accepted by
the Government in compromise of an out-
standing liability and the offer in compro-
mise and collateral agreement provide for
the allocation of payments made pursuant
thereto, payments made pursuant to the
agreements will be applied by the Service
in accordance with the terms of the agree-
ments.
(2) In all other cases, the Service will
apply payments, whether paid in install-
ments or in a lump sum and whether paid
pursuant to the offer or a collateral agree-
ment, to periods in the order of priority
that the Service determines will serve its
best interest. The payment will be applied
to satisfy the liability for successive peri-
ods in descending order of priority until
the payment is absorbed. If the amount
applied to a period is less than the liabil-
ity for the period, the amount will be
applied to tax, penalty, and interest, in
that order, until the amount is absorbed.
.04 If any part of a payment is applied
to interest under the rules set forth in this
revenue procedure, the amount applied to
interest is treated for purposes of§163 of
the Code as interest paid in the year in
which the payment is made. Under§163,
interest paid or accrued in a taxable year
may be deducted in calculating taxable
income for the year except to the extent
such interest is personal interest as
defined in§163(h) and§1.163–9T(b)(2)
of the Income Tax Regulations or is oth-
erwise disallowed under applicable provi-
sions of the Internal Revenue Code and
Income Tax Regulations.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
Rev. Rul. 73–304, Rev. Rul. 73–305,
and Rev. Rul. 79–284 are hereby super-
seded.
SECTION 5. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Inga Plucinski of the Office
of Associate Chief Counsel (Procedure
and Administration), Administrative Pro-
visions and Judicial Practice. For further
information regarding this revenue proce-
dure, contact Emly Berndt at (202) 622–
4940 (not a toll-free call).
2002–15 I.R.B.746April 15, 2002

Part IV. Items of General Interest
Prohibited Transactions—
Proposed Class Exemption
and the Voluntary Fiduciary
Correction Program
Announcement 2002–31
On March 15, 2000, the U.S. Depart-
ment of Labor (the“DOL”) published at
65Fed. Reg. 14164, its interim Voluntary
Fiduciary Correction (“VFC”) program.
On March 28, 2002, the DOL adopted its
permanent VFC program. In conjunction
with that program, the DOL, which, gen-
erally, has the authority to determine
whether a transaction is prohibited under
§4975 of the Internal Revenue Code,
published a notice of a proposed class
exemption (Application No. D–10933)
from the prohibited transaction rules per-
taining to four of the enumerated transac-
tions that come under the VFC program.
The proposed class exemption when
finalized will provide relief from the
sanctions of§4975 (a) and (b) of the
Internal Revenue Code,i.e., the applica-
tion of the excise taxes described therein
applied as a result of§4975(c)(1)(A)
through (E),
1
with respect to the four enu-
merated transactions. Among the condi-
tions for an applicant to be eligible for the
proposed class exemption are the follow-
ing: (1) meeting the requirements of the
VFC program pertaining to the particular
transaction, (2) receiving a no action let-
ter from the DOL regarding the transac-
tion, and (3) providing notice to all inter-
ested persons.
The Service recognizes that a disquali-
fied person who meets the conditions
described in the proposed class exemp-
tion could nevertheless be subject to the
sanctions of§4975 during the pendency
of the proposed class exemption despite
the fact that the proposed class exemption
when finalized will cause those sanctions
not to apply with respect to the transac-
tions enumerated in the class exemption
(assuming all of the conditions of the
class exemption are met). In order to
encourage fiduciaries that meet the terms
of the proposed class exemption to par-
ticipate in the DOL’s VFC program and
to remove a significant disincentive from
participating in that program, the Service
will not seek to impose the§4975 (a) and
(b) excise taxes with respect to any pro-
hibited transaction that is covered by the
proposed class exemption notwithstand-
ing any subsequent changes to the pro-
posed class exemption when it is final-
ized, provided that all of the requirements
specified in the proposed class exemption
are met.
Drafting Information
The principal author of this announce-
ment is Michael Rubin of the Tax Exempt
and Government Entities Division,
Employee Plans. For further information
regarding this announcement, please con-
tact the Employee Plans’taxpayer assis-
tance telephone service at 1–877–829–
5500 (a toll-free number), between the
hours of 8:00 a.m. and 6:30 p.m. Eastern
Time, Monday through Friday. Mr. Rubin
can be contacted at 202–283–9888 (not a
toll-free number).
1
The prohibited transactions described in§4975(c)(1)(F),i.e., the receipt of any consideration for his of her own personal account by any disqualified person who is a fiduciary from
any party dealing with the plan in connection with a transaction involving the income or assets of the plan, does not come within the framework of the DOL’s proposed class exemption
or this announcement.
Announcement and Report Concerning Advance Pricing Agreements
Announcement 2002–40
March 29, 2002
This Announcement is issued pursuant to§521(b) of Pub. L. 106–170, the Ticket to Work and Work Incentives Improvement Act
of 1999, requiring that the Secretary of the Treasury annually report to the public concerning Advance Pricing Agreements (APAs)
and the APA Program. The first report, in Announcement 2000–35 (2000–1 C.B. 922), covered calendar years 1991 through 1999.
The second report, in Announcement 2001–32 (2001–17 I.R.B. 1113), described the experience of the APA Program during calen-
dar year 2000. This third report describes the experience of the APA Program during calendar year 2001 consistent with the man-
date of§521(b). This document does not provide general guidance regarding the application of the arm’s length standard; rather,
it reports on the structure and activities of the APA program.
Sean F. Foley
Director, Advance Pricing Agreement Program
Background
IRC§482 provides that the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances
between or among two or more commonly controlled businesses if necessary to reflect clearly the income of such businesses. Under
the regulations, the standard to be applied in determining the true taxable income of a controlled business is that of a business deal-
ing at arm’s length with an unrelated business. The arm’s length standard also has been adopted by the international community
April 15, 20027472002–15 I.R.B.

and is incorporated into the transfer pricing guidelines issued by the Organization for Economic Cooperation and Development
(OECD). OECD, T
RANSFERPRICINGGUIDELINES FORMULTINATIONALENTERPRISES ANDTAXADMINISTRATORS(1995). Transfer pricing
issues by their nature are highly factual and have traditionally been one of largest issues identified by the IRS in its audits of mul-
tinational corporations. The Advance Pricing Agreement (APA) Program is designed to resolve actual or potential transfer pricing
disputes in a principled, cooperative manner, as an alternative to the traditional examination process. An APA is a binding contract
between the IRS and a taxpayer by which the IRS agrees not to seek a transfer pricing adjustment under IRC§482 for a covered
transaction if the taxpayer files its tax return for a covered year consistent with the agreed transfer pricing method. In year 2001,
the IRS and taxpayers executed 55 APAs and amended 7 APAs.
Since 1991, with the issuance of Rev. Proc. 91–22 (1991–1 C.B. 526), the IRS has offered taxpayers through the APA Program the
opportunity to reach an agreement in advance of filing a tax return on the appropriate transfer pricing methodology (TPM) to be
applied to related party transactions. In 1996, the IRS issued internal procedures for processing APA requests. Chief Counsel Direc-
tives Manual (CCDM),¶¶(42)(10)10–(42)(10)(16)0 (November 15, 1996). Also in 1996, the IRS updated Rev. Proc. 91–22 with
the release of Rev. Proc. 96–53 (1996–2 C.B. 375). The APA Program continues to operate under the provisions of Rev. Proc.
96–53, which provides taxpayers with instructions of how to apply for an APA, and what to expect in the processing of the case.
1
In addition, in 1998, the IRS published Notice 98–65 (1998–2 C.B. 803), which set forth streamlined APA procedures for Small
Business Taxpayers (SBTs). That Notice also expanded the availability of the lowest APA user fee in an effort to attract taxpayers
who may not have the resources to do the sophisticated economic studies normally required in APA submissions.
Advance Pricing Agreements
An APA generally combines an agreement between a taxpayer and the IRS on an appropriate transfer pricing methodology (TPM)
for the transactions at issue (Covered Transactions) with an agreement between the U.S. and one or more foreign tax authorities
(under the authority of the mutual agreement process of our income tax treaties) that the TPM is correct. With such a“bilateral”
APA, the taxpayer ordinarily is assured that the income associated with the Covered Transactions will not be subject to double
taxation by the IRS and the foreign tax authority. It is the policy of the United States, as reflected in§7 of Rev. Proc. 96–53 to
encourage taxpayers that enter the APA program to seek bilateral or multilateral APAs when competent authority procedures are
available with respect to the foreign country or countries involved. However, the IRS may execute an APA with a taxpayer without
reaching a competent authority agreement (a“unilateral”APA).
A unilateral APA is an agreement between a taxpayer and the IRS establishing an approved transfer pricing methodology for U.S.
tax purposes. A unilateral APA binds the taxpayer and the IRS, but obviously does not prevent foreign tax administrations from
taking different positions on the appropriate transfer pricing methodology for a transaction. As stated in Rev. Proc. 96–53, should
a transaction covered by a unilateral APA be subject to double taxation as the result of an adjustment by a foreign tax administra-
tion, the taxpayer may seek relief by requesting that the U.S. competent authority consider initiating a mutual agreement proceed-
ing, provided there is an applicable income tax treaty in force with the other country.
When a unilateral APA involves taxpayers operating in a country that is a treaty partner, information relevant to the APA (including
a copy of the APA and APA annual reports) may be provided to the treaty partner under normal rules and principles governing the
exchange of information under income tax treaties.
The APA Program
APAs are negotiated with the taxpayer by an IRS team headed by an APA team leader. As of December 31, 2001, the APA program
had 22 team leaders, of whom 21 were attorneys and 1 was a former international examiner. The team leader is responsible for
organizing the IRS APA team, arranging meetings with the taxpayer, securing whatever information is necessary from the taxpayer
to analyze the taxpayer’s related party transactions, analyzing the available facts under the arm’s length standard of§482 and the
regulations, and negotiating with the taxpayer.
The APA team generally includes an economist, an international examiner and, in a bilateral case, a competent authority analyst
who leads the discussions with the treaty partner. The economist may be from the APA Program or from the IRS field organization.
The APA team may include LMSB field counsel, other LMSB exam personnel, and an appeals officer.
1
In an effort to encourage taxpayers to utilize the APA process, in 1997 the IRS instituted an Early Referral Program by which, in appropriate cases, field examination teams may suggest
to taxpayers that APAs be pursued before substantial time is spent examining transfer pricing issues. Since the reorganization of the IRS in 2000 intoseparate business units, the Large &
Midsize Business (LMSB) Division has encouraged taxpayers to resolve their issues through a variety of pre-filing programs, including APAs. As a result, the IRS is no longer separately
tracking APA cases under the 1997 Early Referral Program.
2002–15 I.R.B.748April 15, 2002

The APA Process
The APA process is voluntary. Taxpayers submit an application for an APA, together with a user fee as set forth in Rev. Proc. 96–53.
The APA process can be broken into five phases: (1) application; (2) due diligence; (3) analysis; (4) discussion and agreement; and
(5) drafting and execution.
(1)The APA Application
In many APA cases, the taxpayer’s application is preceded by a pre-file conference with the APA staff in which the taxpayer can
solicit the informal views of the APA Program. Pre-file conferences can occur on an anonymous basis, although a taxpayer must
disclose its identity when it applies for an APA. Taxpayers must file the appropriate user fee on or before the due date of the tax
return for the first taxable year that the taxpayer proposes to be covered by the APA. Many taxpayers file a user fee first and then
follow up with a full application later. The procedures for pre-file conferences, user fees, and delayed applications can be found in
Rev. Proc. 96–53.
The APA application can be a relatively modest document for a small business taxpayer. Notice 98–65 describes the special APA
procedures for small businesses. For most taxpayers, however, the APA application is a substantial document filling several bind-
ers. The APA Program makes every effort to reach agreement on the basis of the information provided in the taxpayer’s applica-
tion.
The application is assigned to an APA team leader who will be responsible for the case. The APA team leader’s first responsibility
is to organize the APA team. This involves contacting the appropriate LMSB International Territory Manager to secure the assign-
ment of an international examiner to the APA case and the LMSB Counsel’s office to secure a field counsel lawyer. In a bilateral
case, the U.S. Competent Authority will assign a competent authority analyst to the team. In a large APA case, the international
examiner may invite his or her manager and other LMSB personnel familiar with the taxpayer to join the team. When the APA may
affect taxable years in Appeals, the appropriate appellate conferee will be invited to join the team. The APA team leader will then
distribute copies of the APA application to all team members and will set up an opening conference with the taxpayer. The APA
office strives to hold this opening conference within 45 days of the receipt of the complete application. At the opening conference,
the APA team leader will propose a schedule designed to complete the recommended U.S. negotiating position for a bilateral APA
within 9 months from the date the full application was filed and to complete a unilateral APA within 12 months from the applica-
tion date. In 2001, the median for completing negotiating positions was 22.9 months (average 25.6), and the median for completing
unilateral APAs was 16.0 months (average 16.8).
(2)Due Diligence
The APA team must satisfy itself that the relevant facts submitted by the taxpayer are complete and accurate. This due diligence
aspect of the APA is vital to the process. It is because of this due diligence that the IRS can reach advance agreements with tax-
payers in the highly factual setting of transfer pricing. Due diligence can proceed in a number of ways, but in a large case the tax-
payer and the APA team typically will agree to a meeting, or more often to a series of meetings on dates, established in the opening
conference. In advance of the meeting, the APA team leader will submit a list of questions to the taxpayer for discussion at the
meeting. The meeting may result in a second set of questions. These questions from the IRS are developed jointly by the APA team
leader and the IRS field. It is important to note that this due diligence is not an audit and is focused only on the transfer pricing
issues associated with the transactions in the taxpayer’s application, or such other transactions that the taxpayer and the IRS may
agree to add.
(3)Analysis
A significant part of the analytical work associated with an APA is done typically by the APA or IRS field economist assigned to
the case. The analysis may result in the need for additional information. Once the APA team has completed its due diligence and
analysis, the APA team leader will begin negotiations with the taxpayer over the various aspects of the APA including the selection
of comparable transactions, asset intensity and other adjustments, the transfer pricing methodology, which transactions to cover, the
appropriate critical assumptions, the APA term, and other key issues. The APA team leader will discuss particularly difficult issues
with his or her managers, but in the main the APA team leader is empowered to negotiate the APA.
(4)Discussion and Agreement
This phase differs for bilateral and unilateral cases. In a bilateral case, the discussions proceed in two parts and involve two IRS
offices—the APA Program and the U.S. Competent Authority. In the first part, the APA team will attempt to reach a consensus
with the taxpayer regarding the recommended position that the U.S. Competent Authority should take in negotiations with its treaty
partner. This recommended U.S. negotiating position is a paper drafted by the APA team leader and signed by the APA Director
that provides the APA Program’s view of the best transfer pricing methodology for the covered transaction, taking into account the
IRC, the Treasury regulations, the relevant tax treaty, and the U.S. Competent Authority’s experience with the treaty partner.
April 15, 20027492002–15 I.R.B.

The experience of the APA office and the U.S. Competent Authority is that APA negotiations are likely to proceed more rapidly
with a foreign competent authority if the taxpayer fully supports the U.S. negotiating position. Consequently, the APA Office works
together with the taxpayer in developing the recommended U.S. position. On occasion, the APA team will agree to disagree with
a taxpayer. In these cases, the APA office will send a recommended U.S. negotiating position to the U.S. Competent Authority that
includes elements with which the taxpayer does not agree. This disagreement is noted in the paper. The APA team leader also solic-
its the views of the field members of the APA team, and, in the vast majority of APA cases, the international examiner, LMSB field
counsel, and other IRS field team members concur in the position prepared by the APA team leader.
Once the APA Program completes the recommended U.S. negotiating position, the APA process shifts from the APA Program to the
U.S. Competent Authority. The U.S. Competent Authority analyst assigned to the APA will take the recommended U.S. negotiating
position and prepare the final U.S. negotiating position, which is then transmitted to the foreign competent authority. The negotia-
tions with the foreign competent authority are conducted by the U.S. Competent Authority analyst, most often in face-to-face nego-
tiating sessions conducted periodically throughout the year. At the request of the U.S. Competent Authority analyst, the APA team
leader may continue to assist the negotiations.
In unilateral APA cases, the discussions proceed solely between the APA Program and the taxpayer. In a unilateral case, the tax-
payer and the APA Program must reach agreement to conclude an APA. Like the bilateral cases, the APA team leader almost always
will achieve a consensus with the IRS field personnel assigned to the APA team regarding the final APA. The APA Program has a
procedure in which the IRS field personnel are solicited formally for their concurrence in the final APA. This concurrence, or any
items in disagreement, is noted in a cover memorandum prepared by the APA team leader that accompanies the final APA sent for-
ward for review and execution.
(5)Drafting, Review, and Execution
Once the IRS and the taxpayer reach agreement, the drafting of the final APA generally takes little time because the APA Program
has developed standard language that is incorporated into every APA. The current version of this language is found in Attachment
A. APAs are reviewed by the Branch Chief and the APA Director. In addition, the substance of each APA is briefed to the Associate
Chief Counsel (International) (ACC(I)). On March 1, 2001, the ACC(I) delegated to the APA Director the authority to execute APAs
on behalf of the IRS.SeeChief Counsel Notice CC–2001–016. The APA is executed for the taxpayer by an appropriate corporate
officer.
The Current APA Office Structure, Composition, and Operation
In 2001, the APA Office was restructured into four branches. Branches 1 and 3 are staffed with APA team leaders. Branch 2 is a
new economist branch and also includes the team leader with the principle responsibility for annual report review. Branch 4 is the
new APA West Coast office, located in San Francisco and staffed with a mix of APA team leaders and an economist. Also new in
2000 is a Special Counsel to the Director. As of December 31, 2001, the APA staff was as follows:
Director’s Office
1 Director
1 Special Counsel to the Director
1 Secretary to the Director
Branch 1
1 Branch Chief
1 Secretary
9 Team Leaders
Branch 2
1 Branch Chief
1 Team Leader
6 Economists
Branch 3
1 Branch Chief
1 Secretary
9 Team Leaders
Branch 4
1 Branch Chief
3 Team Leaders
1 Economist
The APA staffing grew dramatically in 2001, rising from 25 persons at the end of 2000 to 38 as of December 31, 2001. The APA
Office also continued to experience relatively high turnover in the past year, although lower than the turnover experienced in 2000.
Of the 25 people on the APA staff at the end of 2000, 6 were no longer on the staff at the end of 2001. The hiring and turnover
combined to create a significant training challenge in 2001. As of December 31, 2001, 10 of the 22 team leaders and 5 of the 7
economists had been with the program less than a year. In addition, 3 of the 4 branch chiefs were new.
2002–15 I.R.B.750April 15, 2002

The number of team leaders grew from 16 to 22, while the number of economists increased from 3 to 7. Thus the relative number
of economists increased substantially, from a ratio of 5 team leaders per economist, to almost 3 team leaders per economist. This
increase in the relative number of APA economists is expected to have a salutary affect on APA case processing time. Historically,
APA team leaders have reported that lack of economist support is one of the major impediments to timely case processing. Average
caseloads fell from 13 APAs per team leader as of December 31, 2000, to 10 per team leader as of December 31, 2001. This should
also help in case timeliness as relatively high case loads in prior years had made it difficult for APA team leaders to give adequate
attention to all pending cases. As set forth in Table 1 below, new APA filings declined by 15% to 77 as compared to 91 in the prior
year.
APA New Hire Training
In 2001, the APA Office greatly increased the size of its professional staff. To ensure the most immediate benefits from its new
staff, provide the highest quality service to the program’s customers, and increase the program’s efficient use of its new resources,
the APA Program worked with the Training and Communications Division of the Office of Associated Chief Counsel (Finance &
Management) to develop an APA New Hire Training Program. The APA managers, senior Team Leaders and APA Economists par-
ticipated in the training by developing a list of topics, preparing and reviewing course materials, and serving as class presenters.
The APA New Hire Training consisted of 19 three to four hour sessions presented throughout June, July, August, and September.
The session topics included the history of the APA Program, general administrative matters, APA case management procedures, and
substantive transfer pricing/APA topics.
The APA Office has released the written course materials to the public. These training materials and other APA related documents
can be found at the IRS website,www.irs.gov, under an APA hyperlink under the Business/Corporate webpage. The APA Office
will periodically update these training materials as appropriate.
APA West Coast Branch
In September 2001, the APA Program opened its new Branch 4 in California, implementing its plan to be more easily accessible
to taxpayers located west of the Mississippi. Approximately 25% of APA caseload comes from such taxpayers, with the majority
of these in California, divided almost evenly between Northern and Southern California. The APA Program determined that having
Western cases serviced from California would benefit both taxpayers and APA staff by reductions in travel time, costs, and time
zone complications, and by closer relations with Western taxpayers and taxpayer organizations.
The first of Branch 4’s two planned offices is located in San Francisco and is already fully functional, staffed with a branch man-
ager, three team leaders, and an economist. Numerous taxpayer representatives have contacted the office from its first days of
operation; after six months, Branch 4 is handling a significant inventory of APA submissions and pre-filing conferences for West-
ern cases. Plans for the second Branch 4 office are in the final stages. The office is expected to open during the first half of 2002
in Laguna Niguel in Orange County, about one hour south of Los Angeles. After hiring is complete, this office, like the San Fran-
cisco office, will have three team leaders and an economist. In addition, the branch chief of Branch 4 will be resident at the South-
ern California office, while continuing to manage the San Francisco office. The APA Program expects that its office in Southern
California will meet with the same positive reaction among Western taxpayers, taxpayer organizations and their representatives that
Branch 4’s Northern California office is enjoying.
Model APA at Attachment A
[§521(b)(2)(B)]
Once the IRS and the Taxpayer reach agreement, the drafting of the final APA generally takes little time because the APA Program
has developed model language. Attachment A contains the current version of this language. As part of its continuing effort to
improve its work products, the APA Program has revised the model language to reflect the program’s collective experience with
substantive and drafting issues.
APA Program Statistical Data
[§521(b)(2)(C) and (E)]
The statistical information required under§521(b)(2)(C) is contained in Tables 1 and 9 below; the information required under
§521(b)(2)(E) is contained in Tables 2 and 3 below:
April 15, 20027512002–15 I.R.B.

TABLE 1: APA APPLICATIONS, EXECUTED APAs, and PENDING APAs
UnilateralBilateralMultilateral
Year
Total
Cumulative
Total
APA applications filed
during year 2001
314677569
APAs executed
•Year 2001
•1991–2000
36
143
19
144
2
7
55
294
349
APA renewals executed
during year 2001
1421670
Revised or Amended
APAs executed during
year 2001
3
61712
Pending requests for APAs40177217
Pending requests
for new APAs
34132166
Pending requests
for renewal APAs
64551
APAs canceled
4
3145
APAs withdrawn14554
TABLE 2: MONTHS TO COMPLETE APAs
Months to Complete Advance Pricing Agreements in Year 2001
Combined Unilateral, Bilateral, Multilateral: Average23.3
Combined Unilateral, Bilateral, Multilateral: Median18.0
Unilateral NewUnilateral RenewalUnilateral Combined
Average16.0Average18.1Average16.8
Median15.5Median17.0Median16.0
Bilateral/Multilateral NewBilateral/Multilateral
Renewal
Bilateral/Multilateral
Combined
5
Average37.2Average21.0Average35.5
Median42.0Median21.0Median42.0
2
One 1996 APA involving a US Possession is counted as a bilateral APA.
3
In 2001, the APA Office and taxpayers agreed to amend 7 APAs (i.e., six unilateral and one bilateral). Generally, the APA Office and taxpayers amended APAs to clarify the agreement.
For example, five APA amendments related to: conforming the language of the APA to reflect the parties’agreement; conforming the language of the APA to the language of the mutual
agreement letter; clarifying the definition of a term; clarifying non-covered transactions; and clarifying the length of the APA term. Failure to meet a critical assumption precipitated the
amendment of two other APAs. In one of the APAs, the taxpayer failed to have minimum annual gross sales. In the other APA, the taxpayer reorganized its business.
4
In the history of the APA Program, no APAs have been revoked. In 2001, the APA Office and taxpayers agreed to cancel 4 APAs (i.e., three unilateral and one bilateral). The circum-
stances of these cancellations were the sale of the taxpayer’s covered business operations, the failure of the taxpayer to have minimum covered transaction-related revenue, and the tax-
payer’s inability to operate due to equipment failure, and the takeover of the taxpayer resulting in a material change of its accounting systems.
5
The average time required to conclude a bilateral APA has historically been split roughly equally between the APA and Competent Authority Offices.
2002–15 I.R.B.752April 15, 2002

TABLE 3: APA COMPLETION TIME – MONTHS PER APA
MonthsNumber of APAsMonthsNumber of APAsMonthsNumber of APAsMonths
Number of
APAs
12164310463
20172322472
31183330481
40190340490
50201350500
62210360510
71220370520
83234380530
93242390540
101250400550
112260410562
121272425570
132280430580
141291441590
151300450600
TABLE 4: RECOMMENDED NEGOTIATING POSITIONS
Recommended Negotiating Positions Completed in Year 200143
TABLE 5: MONTHS TO COMPLETE RECOMMENDED NEGOTIATING POSITIONS
CombinedNewRenewal
Average25.6Average22.2Average30.0
Median22.9Median17.8Median23.3
April 15, 20027532002–15 I.R.B.

TABLE 6: RECOMMENDED NEGOTIATING POSITIONS COMPLETION TIME–
MONTHS PER APA
MonthsNumberMonthsNumberMonthsNumberMonthsNumber
10260510760
20272521770
30280530780
42290540790
50300550800
60310560810
70320570820
80331580830
91341590840
101350601850
112360610860
121371620870
131380630880
147391640890
152400650900
160410660910
170420670920
181431680931
190441690940
201450700950
210460710960
224471720970
234481730980
241490740990
2525007501000
TABLE 7: SMALL BUSINESS TAXPAYER APAs
6
Small Business Taxpayer APAs Completed in Year 200111
Renewals1
New10
Unilateral10
Bilateral1
TABLE 8: MONTHS TO COMPLETE SMALL BUSINESS TAXPAYER APAs
Months to Complete Small Business Taxpayer APAs in Year 2001
NewRenewalCombined
Average15.4Average9.0Average14.8
Median17.0Median9.0Median17.0
6
A“small business taxpayer”is a U.S. taxpayer with a total gross income of $200 million or less, and the APA is processed under the special procedures set forth in Notice 98–65.
2002–15 I.R.B.754April 15, 2002

TABLE 9: INDUSTRIES COVERED
Industry Involved—NAICS Codes
7
Number
Computer and electronic product manufacturing–33413–15
Machinery manufacturing–3334–6
Electrical equipment, appliance and component manufacturing–3354–6
Transportation equipment manufacturing–3364–6
Chemical manufacturing–3254–6
Wholesale trade, durable goods–4211–3
Securities, commodity contracts and other intermediary and related activities–5231–3
Apparel manufacturing–3151–3
Motor vehicle and parts dealers–4411–3
Air transportation–4811–3
Publishing industries–5111–3
Information service and data processing services–5141–3
Beverage and tobacco manufacturing–3121–3
Furniture and related products manufacturing–3371–3
Miscellaneous manufacturing–3391–3
Wholesale trade, nondurable goods–4221–3
Health and personal care stores–4461–3
Broadcasting and telecommunications–5131–3
Professional, scientific and technical services–5411–3
Trades or Businesses
[§521(b)(2)(D)(i)]
The nature of the relationship between the related organizations, trades, or businesses covered by APAs executed in Year 2001 are
set forth in Table 10 below:
TABLE 10: NATURE OF RELATIONSHIPS BETWEEN RELATED ENTITIES
RelationshipNumber of APAs
Foreign Parent–U.S. Subsidiary (-ies)34
U.S. Parent–Foreign Subsidiary (-ies)12
Foreign company and U.S. Branch (-es)6
U.S. Company and Non-U.S. Branch (-es)2
Partnership1
Covered Transactions
[§521(b)(2)(D)(ii)]
The controlled transactions covered by APAs executed in Year 2001 are set forth in Table 11 and Table 12 below:
7
The categories in this table are drawn from the North American Industry Classification System (NAICS), which has replaced the U.S. Standard Industrial Classification (SIC) system.
NAICS was developed jointly by the U.S., Canada, and Mexico to provide new comparability in statistics about business activity across North America.
April 15, 20027552002–15 I.R.B.

TABLE 11: TYPES OF COVERED TRANSACTIONS
Transaction TypeNumber
Sale of tangible property into the US29
Performance of services by US entity19
Performance of services by Non-US entity11
Sale of tangible property from the US10
Use of intangible property by US entity8
Use of intangible property by Non-US entity7
Financial products—US branch of foreign company3
R&D cost sharing—Non-US parent2
Other4
TABLE 12: TYPES OF COVERED TRANSACTIONS–SERVICES
Intercompany Services Involved in the Covered TransactionsNumber
Distribution16
Marketing9
Headquarters costs8
Assembly7
Product support7
Sales support6
Warranty services6
Accounting5
Administrative5
Research and development5
Technical support services5
Billing services3
Contract research & development3
Purchasing3
Testing and installation services3
Communication service2
Legal2
Management2
Logistical support1
Other4
Business Functions Performed and Risks Assumed
[§521(b)(2)(D)(ii)]
The general descriptions of the business functions performed and risks assumed by the organizations, trades, or businesses whose
results are tested in the covered transactions in the APAs executed in Year 2001 are set forth in Tables 13 and 14 below:
2002–15 I.R.B.756April 15, 2002

TABLE 13: FUNCTIONS PERFORMED BY THE TESTED PARTY
Functions PerformedNumber
Marketing and distribution functions49
Manufacturing20
Product assembly and/or packaging14
Research and development12
Transportation and warehousing12
Product service (repairs, etc.)12
Product design and engineering10
Managerial, legal, accounting, finance, personnel, and other support services10
Technical training and tech support for sales staff (including sub-distributors)9
Process engineering8
Product testing and quality control7
Purchasing and materials management6
Engineering and construction related services3
Licensing of intangibles2
Trading and risk management of financial products2
Consulting services1
Telecom services1
Other3
TABLE 14: RISKS ASSUMED BY THE TESTED PARTY
Risks AssumedNumber
Market risks, including fluctuations in costs, demand, pricing, & inventory43
General business risks (e.g., related to ownership of PP&E)36
Credit and collection risks29
Financial risks, including interest rates & currency27
R&D risks7
Product liability risks7
Warranty replacement risk1
Discussion
The vast majority of APAs have covered transactions that involve numerous business functions and risks. For instance, with respect
to functions, companies that manufacture products have typically conducted research and development, engaged in product design
and engineering, manufactured the product, marketed and distributed the product, and performed support functions such as legal,
finance, and human resources services. Regarding risks, companies have been subject to market risks, R&D risks, financial risks,
credit and collection risks, product liability risks, and general business risks. In the APA evaluation process a significant amount of
time and effort is devoted to understanding how the functions and risks are allocated amongst the controlled group of companies
that are party to the covered transactions.
In their APA proposals taxpayers are required to provide a functional analysis. The functional analysis identifies the economic
activities performed, the assets employed, the economic costs incurred, and the risks assumed by each of the controlled parties. The
importance of the functional analysis derives from the fact that economic theory posits that there is a positive relationship between
risk and expected return and that different functions provide different value and have different opportunity costs associated with
them. It is important that the functional analysis go beyond simply categorizing the tested party as, say, a distributor. It should pro-
vide more specific information since, in the example of distributors, not all distributors undertake similar functions and risks.
April 15, 20027572002–15 I.R.B.

Thus, the functional analysis has been critical in determining the TPM (including the selection of comparables). Although func-
tional comparability has been an essential factor in evaluating the reliability of the TPM (including the selection of comparables),
the APA evaluation process has also involved consideration of economic conditions such as the economic condition of the particu-
lar industry.
In evaluating the functional analysis, the APA program has considered contractual terms between the controlled parties and the con-
sistency of the conduct of the parties with respect to the allocation of risk. Per the§482 regulations, the APA program also has
given consideration to the ability of controlled parties to fund losses that might be expected to occur as the result of the assumption
of a risk. Another relevant factor considered in evaluating the functional analysis is the extent to which each controlled party exer-
cises managerial or operational control over the business activities that directly influence the amount of income or loss realized.
The§482 Regulations posit that parties at arm’s length will ordinarily bear a greater share of those risks over which they have
relatively more control.
Related Organizations, Trades, or Businesses Whose Prices or Results
are Tested to Determine Compliance with APA Transfer Pricing Methods
[§521(b)(2)(D)(iii)]
The related organizations, trades, or businesses whose prices or results are tested to determine compliance with TPMs prescribed
in APAs executed in Year 2001 are set forth in Table 15 below:
TABLE 15: RELATED ORGANIZATIONS, TRADES, OR BUSINESSES WHOSE
PRICES OR RESULTS ARE TESTED
Type of OrganizationNumber
8
US distributor31
US provider of services11
Non-US distributor9
Non-US manufacturer6
Non-US provider of services6
US licensee of intangible property6
US manufacturer5
Non-US licensee of intangible property5
US licensor of intangible property4
US dealer in financial products2
US participant in cost sharing agreement2
Non-US participant in cost sharing agreement2
Non-US licensor of intangible property1
Non-US dealer in financial products1
Transfer Pricing Methods and the Circumstances Leading to the Use of Those Methods
[§521(b)(2)(D)(iv)]
The TPMs used in APAs executed in Year 2001 are set forth in Tables 16–20 below:
8
For purposes of this report, both sides are counted as tested parties for certain transactions, such as those involving the use of the Comparable Uncontrollod Price, Comparable Uncon-
trolled Transaction, profit split methods, as well as cost sharing agreements.
2002–15 I.R.B.758April 15, 2002

TABLE 16: TRANSFER PRICING METHODS USED FOR TRANSFERS OF TANGIBLE
AND INTANGIBLE PROPERTY
TPM usedNumber
9
Comparable Profits Method (CPM): PLI is operating margin22
Comparable Profits Method (CPM): PLI is Berry ratio7
CUT (intangibles only)6
Comparable Profits Method (CPM): PLI is markup on total costs6
Transactional Cost Plus Method (tangibles only)5
Royalty implementing a CUT TPM5
Royalty implementing a residual profit split TPM5
Transactional Resale Price Method (tangibles only)4
Royalty implementing a profit split TPM3
Comparable Profits Method (CPM): PLI is Other3
Unspecified method (except unspecified profit split)2
Residual profit split2
CUP (tangibles only) not based on published market data1
Other profit split1
Comparable Profits Method (CPM): PLI is return on assets or capital employed1
Comparable Profits Method (CPM): PLI is gross margin1
Comparable Profits Method (CPM): PLI is markup on other costs1
TABLE 17: TRANSFER PRICING METHODS USED FOR SERVICES
TPM usedNumber
10
Cost plus a markup13
CPM: PLI is operating margin5
CPM: PLI is markup on total costs4
Cost with no markup4
TABLE 18: TRANSFER PRICING METHODS USED FOR FINANCIAL PRODUCTS
TPM usedNumber
Interbranch allocation (e.g., foreign exchange separate enterprise with statistical test of interbranch trades)3
TABLE 19: TRANSFER PRICING METHODS USED FOR CONTRIBUTIONS TO COST SHARING
ARRANGEMENTS
TPM usedNumber
Costs allocated based on units produced, used, or sold1
Cost allocated based on cost of raw materials1
9
Profit Level Indicators (“PLIs”) used with the Comparable Profit Method of Treas. Reg.§1.482–5, and as used in these TPM tables, are as follows: (1) rate of return on assets or capital
employed is the ratio of operating profit to operating assets, (2) operating margin is the ratio of operating profit to sales, (3) gross margin is the ratio of gross profit to sales, (4) Berry
ratio is the ratio of gross profit to operating expenses, and (5) markup on total costs is generally a comparative markup on total costs involved.
10
Some of the service transactions were covered by the transfer pricing methods used in tangible/intangible property transactions.
April 15, 20027592002–15 I.R.B.

TABLE 20: TRANSFER PRICING METHODS USED FOR COST SHARING BUY-IN PAYMENTS
TPM usedNumber
Buy-in based on residual profit split1
Buy-in based on capitalized R&D1
Discussion
The transfer pricing methods used in APAs completed during Year 2001 were based on those in the§482 Treasury Regulations.
Under§1.482–3, the arm’s length amount for controlled transfers of tangible property are determined using the Comparable
Uncontrolled Price (CUP) method, the Resale Price Method, the Cost Plus Method, the Comparable Profits Method (CPM), and
the Profit Split method. Under§1.482–4, the arm’s length amount for controlled transfers of intangible property are determined
using the Comparable Uncontrolled Transaction (CUT) method, CPM, and the Profit Split Method. An“Unspecified Method”may
be used for both tangible and intangible property if it provides a more reliable result than the enumerated methods under the best
method rule of§1.482–1(c). For transfers involving the provision of services,§1.482–2(b) provides that services performed for
the benefit of another member of a controlled group should ordinarily bear an arm’s length charge, either deemed to be equal to
the cost of providing the services (when non-integral) or which should be an amount that would have been charged between inde-
pendent parties.
In addition,§1.482–2(a) provides rules concerning the proper treatment of loans or advances, and§1.482–7 provides rules for
qualified cost sharing arrangements under which the parties agree to share the costs of development of intangibles in proportion to
their shares of reasonably anticipated benefits. APAs involving cost sharing arrangements generally address both the method of
allocating costs among the parties as well as determining the appropriate amount of the“buy-in”payment due for the transfer of
intangibles to the controlled participants.
In reviewing the TPMs applicable to transfers of tangible and intangible property reflected in Table 16, it is clear that the majority
of the APAs followed the specified methods. However, there are several distinguishing points that should be made. The Regulations
note that for transfers of tangible property, the Comparable Uncontrolled Price (CUP) method will generally be the most direct and
reliable measure of an arm’s length price for the controlled transaction when sufficiently reliable comparable transactions can be
identified.§1.482–3(b)(2)(ii)(A). It was the experience of the APA Program in Year 2001 that in the cases that come into the APA
Program, sufficiently reliable CUP transactions are difficult to find. In APAs executed in Year 2001, there was only one APA that
used the CUP method; it did not look to published market data in setting the arm’s length price.
Similar to the CUP method, for transfers of intangible property, the CUT method will generally provide the most reliable measure
of an arm’s length result when sufficiently reliable comparables may be found.§1.482–4(c)(2)(ii). It has generally been difficult
to identify external comparables, and APAs using the CUT method tend to rely on internal transactions between the taxpayer and
unrelated parties. In Year 2001, there were six APAs that utilized the CUT method, and four of those also used one or more other
methods for different covered transactions by the same taxpayer in the same APA.
The transactional Cost Plus Method (tangibles only) and Resale Price Method were applied in Year 2001 in five and four APAs
respectively. See§1.482–3(c), (d). The transactional nature of these methods distinguishes them from the CPM method using either
a gross margin PLI (as compared to the Resale Price Method) or a markup on total costs PLI (as compared to the Cost Plus
Method). A strict transactional method focuses on prices for individual or narrow groups of transactions, while a CPM looks at
profits from broader groups of transactions or all of a company’s transactions. In Year 2001, only two of the Cost Plus Method
APAs used that method alone. The other three APAs using this method were supplemented by a CPM. In Year 2001, only two of
the Resale Price Method APAs used that method alone. The other two APAs using this method were supplemented by a CPM.
The CPM is frequently applied in APAs. This is because reliable public data on comparable business activities of independent com-
panies may be more readily available than potential CUP data, and comparability of resources employed, functions, risks, and other
relevant considerations is more likely to exist than comparability of product. The CPM also tends to be less sensitive than other
methods to differences in accounting practices between the tested party and comparable companies,e.g.classification of expenses
as cost of goods sold or operating expenses.§1.482–3(c)(3)(iii)(B), and–3(d)(3)(iii)(B). In addition, the degree of functional com-
parability required to obtain a reliable result under the CPM is generally less than required under the resale price or cost plus meth-
ods, because differences in functions performed often are reflected in operating expenses, and thus taxpayers performing different
functions may have very different gross profit margins but earn similar levels of operating profit.§1.482–5(c)(2).
There were 39 covered transactions involving tangible or intangible property that used some form of the CPM (with varying PLIs).
The CPM was also used in some APAs concurrently with other methods. For example, the CPM was used with two out of the four
APAs that used the resale price method.
2002–15 I.R.B.760April 15, 2002

The CPM has proven to be versatile in part because of the various PLIs that can be used in connection with the method. Reaching
agreement on the appropriate PLI has been the subject of much discussion in many of the cases, and it depends heavily on the facts
and circumstances. Some APAs have called for different PLIs to apply to different parts of the covered transactions or with one PLI
used as a check against the primary PLI. In two covered transactions, an operating margin PLI was used in conjunction with another
PLI, the markup on total costs.
The CPM also was used regularly with services as the covered transactions in APAs executed in Year 2001. There were a total of
nine services covered transactions using the CPM method with various PLIs according to the specific facts of the taxpayers
involved. Table 17 reflects the methods used to determine the arm’s length results for APAs involving services transactions.
In Year 2001, there were two APAs involving tangible or intangible property that used some form of a profit split. Both APAs used
the Residual Profit Split,§1.482–6(c)(3), in which routine contributions by the controlled parties are allocated routine market
returns, and the residual income is allocated among the controlled taxpayers based upon the relative value of their contributions of
intangible property to the relevant business activity. One of those APAs also used a second type of profit split. Profit splits are gen-
erally considered in cases in which the parties to the controlled transaction own valuable, non-routine, intangible property.
There were three financial product APAs involving interbranch allocations. These involve a single taxpayer with branches that act
autonomously with respect to the covered transactions, generally involving foreign currency exchanges. These particular APAs
determine the appropriate amount of profits attributable to each branch from the activity by reference to the branches’internal
accounting methods. The results take into account all trades, and test the arms length results using statistical tests to verify that
controlled trades are priced the same as uncontrolled trades.
There were two cost sharing APAs during Year 2001. Cost sharing APAs under§1.482–7 generally address the methods used for
determining each participant’s share of costs (consistent with the reasonably anticipated benefits) for the development of intan-
gibles. When there is also the transfer of existing intangibles, the APA will also generally address the appropriate buy-in amount.
Tables 19 and 20 reflect the methods applied in cost sharing APAs executed in Year 2001.
Critical Assumptions
[§521(b)(2)(D)(v)]
Critical Assumptions used in APAs executed in Year 2001 are described in Table 21 below:
April 15, 20027612002–15 I.R.B.

TABLE 21: CRITICAL ASSUMPTIONS
Critical Assumptions involving the following:Number of APAs
Material changes to the business55
Material changes to tax and/or financial accounting practices55
Assets will remain substantially same17
Changes in affiliated companies14
Catastrophic events5
Major regulatory changes4
Use of Mark-to-Market method3
Minimum sales volume3
Changes in market shares3
Major contract remains in force3
Other financial ratio3
Changes in sharing of risks of currency fluctuations2
Interest rate changes2
Material sales fluctuations2
Marketing conditions substantially same2
New import/ export non-tariff barriers2
Ratio of R&D to sales2
Currency fluctuations1
Sales territories substantially same1
Changes involving anti-dumping/ countervailing duties1
Changes in other duties or tariffs1
Major technological changes1
Licensing agreements remain in effect1
Other11
Discussion
APAs include critical assumptions upon which their respective TPMs depend. Critical assumptions are objective business and eco-
nomic criteria that form the basis of a taxpayer’s proposed TPM. A critical assumption is any fact (whether or not within the con-
trol of the taxpayer) related to the taxpayer, a third party, an industry, or business and economic conditions, the continued existence
of which is material to the taxpayer’s proposed TPM. Critical assumptions might include, for example, a particular mode of con-
ducting business operations, a particular corporate or business structure, or a range of expected business volume. Rev. Proc. 96–53,
§5.07. Failure to meet a critical assumption may render an APA inappropriate or unworkable.
A critical assumption may change (and/or fail to materialize) due to uncontrollable changes in economic circumstances, such as a
fundamental and dramatic change in the economic conditions of a particular industry. In addition, a critical assumption may change
(and/or fail to materialize) due to a taxpayer’s actions that are initiated for good faith business reasons, such as a change in busi-
ness strategy, mode of conducting operations, or the cessation or transfer of a business segment or entity covered by the APA.
If a critical assumption has not been met, the APA may be revised by agreement of the parties. If such agreement cannot be
achieved, the APA may be canceled. If a critical assumption has not been met, it requires taxpayer’s notice to and discussion with
the Service, and, in the case of a bilateral APA, Competent Authority consideration. Rev. Proc. 96–53,§11.07.
Sources of Comparables, Selection Criteria, and the Nature of Adjustments to Comparables and Tested Parties
[§521(b)(2)(D)(v), (vi), and (vii)]
The sources of comparables, selection criteria, and rationale used in determining the selection criteria for APAs executed in Year
2001 are described in Tables 22 through 24 below. Various formulas for making adjustments to comparables are included as
Attachment B.
2002–15 I.R.B.762April 15, 2002

TABLE 22: SOURCES OF COMPARABLES
Comparable SourcesNumber of Times
This Source Used
11
Compustat39
Disclosure13
Moody’s2
Japan Company Handbook1
Global Vantage1
Taxpayer’s information on competition1
Other9
TABLE 23: COMPARABLE SELECTION CRITERIA
Selection Criteria ConsideredNumber of Times
This
Criterion Used
Comparable functions46
Comparable industry36
Comparable risks31
Comparable products27
Comparable geographic market13
Comparable intangibles11
Contractual terms3
Other4
TABLE 24: ADJUSTMENTS TO COMPARABLES OR TESTED PARTIES
AdjustmentNumber of Times
This
Adjustment Used
Asset intensity adjustments34
Receivables34
Inventory33
Payables33
Property, plant, equipment6
Other2
Accounting adjustments8
LIFO to FIFO inventory accounting7
Accounting reclassifications (e.g., from COGS to operating expenses)2
Other1
Profit level indicator adjustments (used to“back into”one PLI from another)7
Operating expense5
Other2
Miscellaneous adjustments3
Advertising1
Other2
11
Although still guided by the arm’s length standard, some APAs do not use comparables, for example, when there is a residual profit or in the case of certain financial products.
April 15, 20027632002–15 I.R.B.

Discussion
At the core of most APAs are comparables. The APA program works closely with taxpayers to find the best and most reliable com-
parables for each covered transaction. In some cases, CUPs or CUTs can be identified. In other cases, comparable business activi-
ties of independent companies are utilized in applying the CPM or residual profit split methods. Generally, in the APA Program’s
experience since 1991, CUPs and CUTs have been most often derived from the internal transactions of the taxpayer.
For profit-based methods in which comparable business activities or functions of independent companies are sought, the APA Pro-
gram typically has applied a three-part process. First, a pool of potential comparables has been identified through broad searches.
From this pool, companies having transactions that are clearly not comparable to those of the tested party have been eliminated
through the use of quantitative and qualitative analyses,i.e., quantitative screens and business descriptions. Then, based on a review
of available descriptive and financial data, a set of comparable companies or transactions has been finalized. The comparability of
the finalized set has then been enhanced through the application of adjustments.
Sources of Comparables
Comparables used in APAs can be U.S. or foreign companies. This depends on the relevant market, the type of transaction being
evaluated, and the results of the functional and risk analyses. In general, comparables have been located by searching a variety of
databases that provide data on U.S. publicly traded companies and on a combination of public and private non-U.S. companies.
Table 22 shows the various databases and other sources used in selecting comparables for the APAs executed in Year 2001.
Although comparables were most often identified from the databases cited in Table 22, in some cases comparables were found from
other sources, such as comparables derived internally from taxpayer transactions with third parties and comparables derived from
taxpayer information on competitors.
Selecting Comparables
Initial pools of potential comparables generally have been derived from the databases using a combination of industry and keyword
identifiers. Then, the pool has been refined using a variety of selection criteria specific to the transaction or entity being tested and
the transfer pricing method being used.
The listed databases allow for searches by industrial classification (generally, U.S. Standard Industrial Classification (SIC)), by
keywords, or by both. These searches can yield a number of companies whose business activities may or may not be comparable
to those of the entity being tested. Therefore, comparables based solely on SIC or keyword searches are rarely used in APAs.
Instead, the pool of comparables is examined closely, and companies are selected based on a combination of screens, business
descriptions, and other information found in the companies’Annual Reports to shareholders and filings with the U.S. Securities
and Exchange Commission (SEC).
Business activities are required to meet certain basic comparability criteria to be considered comparables. Functions, risks, eco-
nomic conditions, and the property (product or intangible) and services associated with the transaction must be comparable. Deter-
mining comparability can be difficult—the goal has been to use comparability criteria restrictive enough to eliminate companies
that are not comparable, but yet not so restrictive as to have no comparables remaining. The APA Program normally has begun
with relatively strict comparability criteria and then has relaxed them slightly if necessary to derive a pool of reliable comparables.
A determination on the appropriate size of the comparables set, as well as the companies that comprise the set, is highly fact spe-
cific and depends on the reliability of the results.
In addition, the APA Program, consistent with the regulations, generally has looked at the results of comparable companies over a
multi-year period. Sometimes this has been three years, but it has been more or less, depending on the circumstances of the con-
trolled transaction. Using a shorter period might result in the inclusion of companies in different stages of economic development
or use of atypical years of a company subject to cyclical fluctuations in business conditions.
Many covered transactions have been tested with comparables that have been chosen using additional criteria and/or screens. These
include sales level criteria and tests for financial distress and product comparability. These common selection criteria and screens
have been used to increase the overall comparability of a group of companies and as a basis for further research. The sales level
screen, for example, has been used to remove companies that, due to their size, might face fundamentally different economic con-
ditions from those of the entity or transaction being tested. In addition, some APA analyses have incorporated selection criteria
related to removing companies experiencing“financial distress”due to concerns that companies in financial distress often have
experienced unusual circumstances that would render them not comparable to the entity being tested. These criteria include: an
unfavorable auditor’s opinion, bankruptcy, and in certain circumstances, operating losses in a given number of years.
2002–15 I.R.B.764April 15, 2002

An additional important class of selection criteria is the development and ownership of intangible property. In some cases in which
the entity being tested is a manufacturer, several criteria have been used to ensure, for example, that if the controlled entity does
not own significant manufacturing intangibles or conduct research and development (R&D), neither will the comparables. These
selection criteria have included determining the importance of patents to a company or screening for R&D expenditures as a per-
centage of sales or costs. Another criterion used in some cases has been a comparison of the book and market values of a company;
this can be another indicator of intangible value. Again, quantitative screens related to identifying comparables with significant
intangible property generally have been used in conjunction with an understanding of the comparable derived from publicly avail-
able business information.
Selection criteria relating to asset comparability and operating expense comparability have also been used at times. A screen of
property, plant, and equipment (PP&E) as a percentage of sales or assets, combined with a reading of a company’s SEC filings, has
been used to help ensure that distributors (generally lower PP&E) were not compared with manufacturers (generally higher PP&E),
regardless of their SIC classification. Similarly, a test involving the ratio of operating expenses to sales or total costs has helped to
determine whether a company undertakes a significant marketing and distribution function.
Table 25 shows the number of times various screens were used in APAs executed in Year 2001:
TABLE 25: COMPARABILITY SCREENS
Comparability Screen UsedNumber of Times
Used
Comparability screens used—
Sales18
Operating expenses/ sales12
Non-startup or start-up12
R&D/ sales8
Foreign sales/ total sales3
Financial distress—
Bankruptcy15
SG&A/ sales7
Unfavorable auditor’s opinion7
Losses in Three Years5
Losses in Two Years3
PP&E/ sales1
Adjusting Comparables
After the comparables have been selected, the regulations require that“[i]f there are material differences between the controlled
and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained
with sufficient accuracy to improve the reliability of the results.”Treas. Reg.§1.482–1(d)(2). In almost all cases involving
income-statement-based profit level indicators (PLIs), certain“asset intensity”or“balance sheet”adjustments for factors that have
generally agreed-upon effects on profits have been carried out. In addition, in specific cases, additional adjustments have been per-
formed to improve reliability.
The most common asset intensity adjustments used in APAs are adjustments for differences in accounts receivable, inventories, and
accounts payable. The APA Program generally has required adjustments for receivables, inventory, and payables based on the prin-
ciple that holding assets such as receivables benefits customers in a way that increases the entity’s operating profit. Such adjust-
ments are based on the assumption that the increase in operating profit is equal to the carrying cost of the assets. Conversely, the
holding of accounts payable is considered to burden suppliers in a way that decreases the entity’s profit. The decrease in operating
profit has generally been assumed to be equal to the cost of funds implicitly borrowed from suppliers.
To compare the profits of two entities with different relative levels of receivables, inventory, or payables, the APA Program has
estimated the carrying costs of each item and adjusted profits accordingly. Although different formulas have been used in specific
APA cases, Attachment B presents one set of formulas used in many APAs. Underlying these formulas are the notions that (1) bal-
ance sheet items should be expressed as mid-year averages, (2) formulas should try to avoid using data items that are being tested
April 15, 20027652002–15 I.R.B.

by the transfer pricing method (for example, if sales are controlled, then the denominator of the balance sheet ratio should not be
sales), (3) a short term interest rate should be used, and (4) an interest factor should recognize the average holding period of the
relevant asset.
The APA Program has also required that data must be compared on a first-in first-out (FIFO) accounting basis. Although financial
statements may be prepared on a last-in first-out (LIFO) basis, cross-company comparisons are less meaningful when one or more
companies use LIFO inventory accounting methods. This adjustment directly affects costs of goods sold and inventories, and there-
fore affects both profitability measures and inventory adjustments.
Less commonly used but still important in some cases is the adjustment for differences in relative levels of PP&E between a tested
entity and the comparables. Ideally, comparables and the entity being tested will have fairly similar relative levels of PP&E, since
major differences can be a sign of fundamentally different functions and risks. Typically, the PP&E adjustment is made using a
medium term interest rate, while short-term interest rates are used for receivables, inventories, and payables.
Additional adjustments used less infrequently include those for differences in other balance sheet items, operating expenses, R&D,
or currency risk. Accounting adjustments, such as reclassifying items from cost of goods sold to operating expenses, for example,
have also been made when warranted to increase reliability. Often, data has not been available for both the controlled and uncon-
trolled transactions in sufficient detail to allow for these types of adjustments.
The adjustments made to comparables or tested parties in APAs executed in Year 2001 are reflected in table 24 above.
Nature of Ranges and Adjustment Mechanisms
[§521(b)(2)(D)(viii)–(ix)]
The types of ranges used in APAs executed in Year 2001 are described in Tables 26 and 27 below.
TABLE 26: TYPES OF RANGES
Type of RangeNumber
12
Interquartile range23
Floor (i.e., result must be no less than x)8
Specific point within CPM range7
Specific point (royalty)6
Financial products–statistical confidence interval to test against internal cups3
Ceiling (i.e., result must be no more than x)3
Full range1
Specific point (CUP)1
Other1
TABLE 27: ADJUSTMENTS WHEN OUTSIDE OF THE RANGE
Adjustment MechanismNumber
Taxpayer makes an adjustment: to closest edge15
Taxpayer makes an adjustment: to specified point14
Competent Authority process invoked if results are outside the range5
Taxpayer makes an adjustment: to median4
Other7
12
Numbers do not include TPMs with cost or cost-plus methodologies.
2002–15 I.R.B.766April 15, 2002

Discussion
Treas. Reg.§1.482–1(e)(1) states that sometimes a pricing method will yield“a single result that is the most reliable measure of
an arm’s length result.”Sometimes, however, a method may yield“a range of reliable results,”called the“arm’s length range.”A
taxpayer whose results fall within the arm’s length range will not be subject to adjustment.
Under§1.482–1(e)(2)(i), such a range is normally derived by considering a set of more than one comparable uncontrolled trans-
action of similar comparability and reliability. If these comparables are of very high quality, as defined in the Regulations, then
under§1.482–1(e)(2)(iii)(A), the arm’s length range includes the results of all of the comparables (from the least to the greatest).
However, the APA Program has only rarely identified cases meeting the requirements for the full range. There was one APA
executed in Year 2001 that used a full range. If the comparables are of lesser quality, then under§1.482–1(e)(2)(iii)(B),“the reli-
ability of the analysis must be increased, when it is possible to do so, by adjusting the range through application of a valid statis-
tical method to the results of all of the uncontrolled comparables.”One such method, the“interquartile range,”is“ordinarily...
acceptable,”although a different statistical method“may be applied if it provides a more reliable measure.”The“interquartile
range”is defined as, roughly, the range from the 25th to the 75th percentile of the comparables’results. See§1.482–1(e)(2)(iii)(C).
The interquartile range was used 23 times in Year 2001.
In fourteen APAs executed in Year 2001, the APA specified a single, specific result, or“point.”Seven of these APAs involved a
CPM in which the taxpayer agreed to a specific result. Some APAs specify not a point or a range, but a“floor”or a“ceiling”.
When a floor is used, the tested party’s result must be greater than or equal to some particular value. When a ceiling is used, the
tested party’s result must be less than or equal to some particular value. Eight APAs executed in Year 2001 used a floor and three
used a ceiling.
Some APAs involving financial products have employed a statistical confidence interval to compare pricing of a large set of con-
trolled transactions with a comparable set of uncontrolled transactions. A statistical confidence interval is typically applied to a
financial institution with autonomous branches in several countries. Pursuant to the business profits article of the applicable income
tax treaties and Prop. Reg.§1.482–8(b), APAs have been executed allowing the taxpayer to allocate profits between branches with
reference to the branches’internal accounting methods, taking into account all trades, including interbranch and/or interdesk trades.
In order for this method to provide a reliable result, however, it is necessary to ensure that all such controlled trades be priced on
the same market basis as uncontrolled trades. To test whether this is so, a branch’s controlled trades are matched with that branch’s
comparable uncontrolled trades made at times close to the controlled trades. A statistical test is performed to detect pricing bias,
by which the controlled trades might as a whole be priced higher or lower than the uncontrolled trades. This has been accomplished
by construction of a statistical confidence interval (typically 95%), with the tested hypothesis being that controlled trades are priced
on the same basis as uncontrolled trades. An adjustment is necessary if the results of the controlled trades fall outside of this con-
fidence interval. During Year 2001, there were three APAs executed that employed the statistical confidence interval.
Some APAs look to a tested party’s results over a period of years (multi-year averaging) to determine whether a taxpayer has com-
plied with the APA. In 2001, rolling multi-year averaging was used for 11 covered transactions. Three of those used two-year aver-
ages, and the other eight used three-year averages. Cumulative multi-year averages were used for 18 covered transactions. Of those
18 transactions, four used two-year averages, three used three-year averages,
13
two used four-year averages, four used five-year
averages, one used a six-year average, one used a seven-year average, two used nine-year averages, and one used a ten-year aver-
age.
Adjustments
Under§1.482–1(e)(3), if a taxpayer’s results fall outside the arm’s length range, the Service may adjust the result“to any point
within the arm’s length range.”Accordingly, an APA may permit or require a taxpayer and its related parties to make an adjustment
after the year’s end to put the year’s results within the range, or at the point, specified by the APA. Similarly, to enforce the terms
of an APA, the Service may make such an adjustment. When the APA specifies a range, the adjustment is sometimes to the closest
edge of the range, and sometimes to another point such as the median of the interquartile range. Depending on the facts of each
case, such automatic adjustments are not always permitted. Some bilateral APAs specify that in such a case there will be a nego-
tiation between the Competent Authorities involved to determine whether and to what extent an adjustment should be made. Some
APAs permit automatic adjustments unless the result is far outside the range specified in the APA. Thus they provide flexibility and
efficiency (permitting adjustments when normal business fluctuations and uncertainties push the result somewhat outside the range).
13
One of the three-year cumulative averages applied a three-year cumulative average twice, once at the end of year three and once at the end of year six. A second covered transaction
that used a three-year cumulative average also used a five-year cumulative average at the end of five years. To avoid double counting, that covered transaction is not included in the count
of covered transactions using five-year averages.
April 15, 20027672002–15 I.R.B.

In order to conform the taxpayer’s books to these tax adjustments, the APA usually permits a“compensating adjustment”as long
as certain requirements are met. Such compensating adjustments may be paid between the related parties with no interest, and the
amount transferred will not be considered for purposes of penalties for failure to pay estimated tax. See§11.02, Rev. Proc. 96–53.
APA Term and Rollback Lengths
[§521(b)(2)(D)(x)]
The various term lengths for APAs executed in Year 2001 are set forth in Table 28 below:
TABLE 28: TERMS OF APAs
APA Term in YearsNumber of APAs
11
21
35
47
530
65
70
82
93
101
Number of rollback years to which an APA TPM was applied in Year 2001 are set forth in Table 29 below:
TABLE 29: NUMBER OF YEARS COVERED BY ROLLBACK OF APA TPM
Number of Rollback YearsNumber of APAs
12
27
33
41
5 or more2
Nature of Documentation Required
[§521(b)(2)(D)(xi)]
APAs executed in Year 2001 required that various documents be provided with the Annual Reports filed by the taxpayers. These
documents are described in Table 30 below:
2002–15 I.R.B.768April 15, 2002

TABLE 30: NATURE OF DOCUMENTATION REQUIRED
DocumentationNumber of Times
This Documenta-
tion Required
14
Statement identifying all material differences between Taxpayer’s business operations during APA Year
and description of Taxpayer’s business operations contained in Taxpayer’s request for APA, or if there
have been no such material differences, a statement to that effect
55
Statement identifying all material changes in Taxpayer’s accounting methods and classifications, and
methods of estimation, from those described or used in Taxpayer’s request for APA, or if there have
been none, statement to that effect
55
Financial analysis demonstrating Taxpayer’s compliance with TPM55
Description of any failure to meet Critical Assumptions or, if there have been none, a statement to that
effect
55
Description of, reason for, and financial analysis of, any Compensating Adjustments with respect to
APA Year, including means by which any Compensating Adjustment has been or will be satisfied
53
Financial statements as prepared in accordance with US GAAP47
Certified public accountant’s opinion that financial statements present fairly financial position of Tax-
payer and the results of its operations, in accordance with US GAAP
47
United States income tax return14
Financial statements as prepared in accordance with foreign GAAP8
Certified public accountant’s opinion that financial statements present fairly financial position of Tax-
payer and the results of its perations, in accordance with foreign GAAP
8
Profit & Loss statement8
Schedule of costs and expenses (e.g., intercompany allocations)8
Various workpapers6
Certified public accountant’s review of financial statements6
Book to tax reconciliations6
Form 5471 or 54724
Organizational chart4
Description of any matters economically or substantively related to the covered transactions, but that
are not subject to the APA
4
Cash Flow statement3
Pertinent intercompany agreements2
Narrative description of taxpayer’s business1
Other17
Approaches for Sharing of Currency or Other Risks
[§521(b)(2)(D)(xii)]
During Year 2001, there were 27 tested parties that faced financial risks, including interest rate and currency risks. One case that
explicitly addressed currency risk adjusted a resale price interquartile range by a currency adjustment factor.
Efforts to Ensure Compliance with APAs
[§521(b)(2)(F)]
As described in Rev. Proc. 96–53, section 11, APA taxpayers are required to file annual reports to demonstrate compliance with the
terms and conditions of the APA. The filing and review of annual reports is a critical part of the APA process. Through annual
report review, the APA program monitors taxpayer compliance with the APA on a contemporaneous basis. Annual report review
provides current information on the success or problems associated with the various TPMs adopted in the APA process.
14
The first seven categories of documentation listed in this table were drawn from the standard APA language used in 2001. In some financial product APAs, the taxpayer agrees to main-
tain certain records, but the compliance with the TPM is determined by a later audit under an agreed statistical methodology. In these cases, some of the standard documentation require-
ments may not be appropriate.
April 15, 20027692002–15 I.R.B.

All reports received by the APA Office are tracked by one designated APA team leader who also has the prime responsibility for
annual report review. Other APA team leaders also assist in this review, especially when the team leader who negotiated the case
is available, since that person will already be familiar with the relevant facts and terms of the agreement. Once received by the
APA Office, the annual report is sent out to the district personnel with exam jurisdiction over the taxpayer. This process changed
in November 2001; previously reports were held until reviewed by an APA team leader. This change has facilitated simultaneous
review of the reports and allowed the APA office to eliminate much of the backlog of annual reports.
The statistics for the review of APA annual reports are reflected in Table 31 below. As of December 31, 2001, there were 187 pend-
ing annual reports. In Year 2001, there were 320 reports closed.
TABLE 31: STATISTICS OF ANNUAL REPORTS
Number of APA annual reports pending as of December 31, 2001187
Number of APA annual reports closed in Year 2001320
Number of APA annual reports requiring adjustment in Year 20017
Number of taxpayers involved in adjustments3
Number of APA annual reports required to be filed in Year 2001252
Number of APA annual reports actually filed in Year 2001207
15
Number of APA annual report cases over one year old84
15
Many of the reports that were due in Year 2001, but not received by Dec. 31, 2001, were timely filed but held up as a result of the new screening procedures of the mail.
2002–15 I.R.B.770April 15, 2002

ATTACHMENT A
ADVANCE PRICING AGREEMENT
between
[Insert Taxpayer’s Name]
and
THE INTERNAL REVENUE SERVICE
PARTIES
The Parties to this Advance Pricing Agreement (APA) are the Internal Revenue Service (IRS) and [Insert Taxpayer’s Name],
EIN
(Taxpayer).
RECITALS
Taxpayer’s principal place of business is [City, State]. [Insert general description of taxpayer and other relevant parties.]
This APA contains the Parties’agreement on the best method for determining arm’s-length prices of the Covered Transactions
under I.R.C. section 482 and the Treasury Regulations.
Unless otherwise specified, terms in the plural include the singular and vice versa. Appendix D contains definitions for capital-
ized terms not elsewhere defined in this APA.
{If renewal, add} [Taxpayer and IRS previously entered into an APA covering taxable years ending
to,
executed on
.]
AGREEMENT
The Parties agree as follows:
1.Covered Transactions. This APA applies to the Covered Transactions, as defined in Appendix A.
2.Transfer Pricing Method. Appendix A sets forth the Transfer Pricing Method (TPM) for the Covered Transactions.
3.Term. This APA applies to Taxpayer’s taxable years endingthrough(APA Term).
4.Operation.
a. Revenue Procedure 96–53 governs the interpretation, legal effect, and administration of this APA.
b. Nonfactual oral and written representations, within the meaning of sections 10.04 and 10.05 of Rev. Proc. 96–53 (including
any proposals to use particular TPMs), made in conjunction with this request constitute statements made in compromise negotia-
tions within the meaning of Rule 408 of the Federal Rules of Evidence.
5.Compliance.
a. For each taxable year covered by this APA (APA Year), if Taxpayer complies with the terms and conditions of this APA,
then the IRS will not make or propose any allocation or adjustment under I.R.C. section 482 to the Covered Transactions.
b. If Taxpayer does not comply, then the IRS may:
i. enforce the terms and conditions of this APA and make or propose allocations or adjustments under I.R.C. section 482
consistent with this APA;
ii. cancel or revoke this APA under Revenue Procedure 96–53, section 11.05 or 11.06; or
iii. revise this APA, if the Parties agree.
c. Taxpayer must timely file an Annual Report for each APA Year in accordance with Appendix C and section 11.01 of Rev.
Proc. 96–53. The IRS may request additional information reasonably necessary to clarify the Annual Report or verify compliance
with the APA. Taxpayer will provide all requested information within a reasonable time.
d. The IRS will determine whether Taxpayer has complied with this APA based on Taxpayer’s U.S. Returns, Financial State-
ments, and other APA Records, for the APA Term and any other year necessary to verify compliance. For Taxpayer to comply with
this APA, an independent certified public accountant must{use the following or an alternative}render an opinion that the Taxpay-
er’s Financial Statements present fairly, in all material respects, Taxpayer’s financial position under U.S. GAAP.
April 15, 20027712002–15 I.R.B.

e. In accordance with section 11.04 of Rev. Proc. 96–53, Taxpayer will (1) maintain its APA Records, and (2) make them avail-
able to IRS in connection with an examination under section 11.03. Compliance with this subparagraph constitutes compliance with
the record-maintenance provisions of I.R.C. sections 6038A and 6038C for the Covered Transactions for any taxable year during
the APA Term.
f. If Taxpayer’s actual transactions do not result in compliance with the TPM, Taxpayer:
i. Must report its taxable income in an amount that is consistent with the TPM and all other requirements of this APA on
its timely filed U.S. Return. However, for any APA Year, if Taxpayer’s timely filed U.S. Return is filed no later than 60
days after the effective date of this APA, then Taxpayer may instead report its taxable income in an amount that is con-
sistent with the TPM and all other requirements of this APA on an amended U.S. Return filed no later than 120 days after
the effective date of this APA.
ii. May make compensating adjustments under Revenue Procedure 96–53, section 11.02, subject to any modifications or
restrictions in Appendix A or elsewhere in this APA.
g.{Insert when U.S. Group or Foreign Group contains more than one member.}[This APA addresses the arm’s-length nature
of prices charged or received in the aggregate between Taxpayer[s] and Foreign Participants. Except as explicitly provided, this
APA does not address and does not bind the IRS with respect to prices charged or received, or the relative amounts of income or
loss realized, by particular legal entities that are members of U.S. Group or that are members of Foreign Group.]
h. The True Taxable Income within the meaning of Treasury Regulations section 1.482–1(a)(1) of a member of an affiliated
group filing a U.S. consolidated return will be determined under the I.R.C. section 1502 Treasury Regulations.
i.{Optional for US Parent Signatories}To the extent that Taxpayer’s compliance with this APA depends on certain acts of
Foreign Group members, Taxpayer will ensure that each Foreign Group member will perform such acts.
6.Critical Assumptions. This APA’s critical assumptions, within the meaning of Revenue Procedure 96–53, section 5.07, appear in
Appendix B. Revenue Procedure 96–53, section 11.07, governs if any critical assumption has not been met.
7.Disclosure. This APA, and any background information related to this APA or the APA Request, are: (1) considered“return infor-
mation”under I.R.C. section 6103(b)(2)(C); and (2) not subject to public inspection as a“written determination”under I.R.C. sec-
tion 6110(b)(1). Section 521(b) of Pub. L. 106–170 provides that the Secretary of the Treasury must prepare a report for public
disclosure that includes certain specifically designated information concerning all APAs, including this APA, in a form that does
not reveal taxpayers’identities, trade secrets, and proprietary or confidential business or financial information.
8.Disputes. If a dispute arises concerning the interpretation of this APA, the Parties will seek a resolution by the IRS Associate
Chief Counsel (International), to the extent reasonably practicable, before seeking alternative remedies. If any dispute arises that is
not related to interpreting this APA, the Parties will seek to resolve the dispute in a manner consistent with Revenue Procedure
96–53, section 11.03(4).
9.Materiality. In this APA the terms“material”and“materially”will be interpreted consistently with the definition of“material
facts”in Revenue Procedure 96–53, section 11.05(1).
10.Section Captions. This APA’s section captions, which appear initalics, are for convenience and reference only. The captions do
not affect in any way the interpretation or application of this APA.
11.Entire Agreement and Severability. This APA is the complete statement of the Parties’agreement. The Parties will sever, delete,
or reform any invalid or unenforceable provision in this APA to approximate the Parties’intent as nearly as possible.
12.Successor in Interest. This contract binds, and inures to the benefit of, any successor in interest to Taxpayer.
13.Notice. Any notices required by this APA or Revenue Procedure 96–53 must be in writing. Taxpayer will send notices to the
IRS at the address and in the manner set forth in Revenue Procedure 96–53, section 5.13(2). The IRS will send notices to:
Taxpayer Corporation
1000 Road
Any City, USA 10000
Attn: Jane Doe,
Sr. Vice President (Taxes)
14.Effective date and Counterparts. This APA is effective starting on the date, or later date of the dates, upon which all Parties
execute this APA. The Parties may execute this APA in counterparts, with each counterpart constituting an original.
2002–15 I.R.B.772April 15, 2002

WITNESS,
The Parties have executed this APA on the dates below.
[Taxpayer Name in all caps]
By:
Date:,20
Jane Doe
Sr. Vice President (Taxes)
IRS
By:
Date:,20
Sean F. Foley
Director, Advance Pricing Agreement Program
April 15, 20027732002–15 I.R.B.

APPENDIX A
COVERED TRANSACTIONS AND TRANSFER PRICING METHOD (TPM)
1.Covered Transactions.
[Define the Covered Transactions.]
2.TPM.
{Note: If appropriate, adapt language from the following examples.}
•CUP Method
The TPM is the comparable uncontrolled price (CUP) method. The price charged for
must equal between
and(the Arm’s Length Range). Taxpayer must realize, recognize, and report results on its U.S.
Returns that clearly reflect such pricing.
•Resale Price Method (RPM)
The TPM is the resale price method (RPM). Taxpayer must realize, recognize, and report results on its U.S. Returns that
clearly reflect a gross margin (defined as gross profit divided by sales revenue as those terms are defined in Treasury Regulations
sections 1.482–5(d)(1) and (2)) of between
% and% (the Arm’s Length Range) for the Covered Transactions.
•Cost Plus Method
The TPM is the cost plus method. Taxpayer must realize, recognize, and report results on its U.S. Returns that clearly
reflect a ratio of gross profit to production costs (within the meaning of Treasury Regulations sections 1.482–3(d)(1) and (2)) of
between
% and% (the Arm’s Length Range) for the Covered Transactions.
•CPM with Berry Ratio PLI
The TPM is the comparable profits method (CPM). Taxpayer must realize, recognize, and report results on its U.S. Returns
that clearly reflect a gross profit to operating expenses ratio (as those terms are defined in Treasury Regulations sections 1.482–
5(d)(1) and (2)) of between
and(the Arm’s Length Range) for the Covered Transactions.
•CPM using an Operating Margin PLI
The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. Taxpayer’s reported
operating profit (within the meaning of Treasury Regulations sections 1.482–5(d)(5)) must clearly reflect an operating margin
(defined as the ratio of operating profit to sales revenue as those terms are defined in Treasury Regulations section 1.482–5(d)(1)
and (4)) of between
% and% (the Arm’s Length Range) for the Covered Transactions.
•CPM using a Three-year Rolling Average Operating Margin PLI
The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. Taxpayer’s Three-
Year Rolling Average operating margin is defined as follows for any APA Year: the sum of Taxpayer’s reported operating profit
(within the meaning of Treasury Regulations section 1.482–5(d)(5)) for that APA Year and the two preceding years, divided by the
sum of Taxpayer’s sales revenue (within the meaning of Treasury Regulations section 1.482–5(d)(1)) for that APA Year and the two
preceding years. Taxpayer’s Three-Year Rolling Average operating margin must be between
% and(the Arm’s
Length Range).
•Residual Profit Split Method
The TPM is the residual profit split method. Taxpayer must realize, recognize, and report results on its U.S. Returns that
clearly reflect the following: [insert description of profit-split mechanism].
[Insert additional provisions as needed.]
3.Adjustments
{For use with a CPM}
For each APA Year, if Taxpayer’s year-end [Three-Year Rolling Average]{specify PLI used}for the Covered Transactions is
not in compliance with the TPM, Taxpayer will make an adjustment that brings its [Three-Year Rolling Average]{specify PLI used}
to{if the TPM specifies a point value, use that; if the TPM specifies an Arm’s Length Range, use the nearest edge of the Arm’s
Length Range or a point such as the median within the Arm’s Length Range}.
[Insert additional provisions as needed.]
2002–15 I.R.B.774April 15, 2002

APPENDIX B
CRITICAL ASSUMPTIONS
This APA’s critical assumptions are:
1. The business activities, functions performed, risks assumed, assets employed, and financial and tax accounting methods
and classifications [and methods of estimation] of Taxpayer in relation to the Covered Transactions will remain materially the same
as described or used in Taxpayer’s APA Request. A mere change in business results will not be a material change.
[Insert additional provisions as needed.]
APPENDIX C
APA RECORDS AND ANNUAL REPORT
APA RECORDS
The APA Records will consist of:
1. All documents listed below for inclusion in the Annual Report, as well as all documents, notes, work papers, records, or other
writings that support the information provided in such documents.
2. [Insert here other records as required.]
ANNUAL REPORT
Taxpayer must include the following items in its Annual Report for each APA Year:
1. Statements that fully identify, describe, analyze, and explain:
a. All material differences between any of Taxpayer’s business operations (including functions, risks, markets, contractual
terms, economic conditions, property or services, and assets employed) during the APA Year and the description of the business
operations contained in the APA Request. If there have been no material differences, the Annual Report will include a statement to
that effect.
b. All material changes in Taxpayer’s accounting methods and classifications, and methods of estimation, from those described
or used in Taxpayer’s request for this APA. If there have been no such material changes, the Annual Report will include a statement
to that effect.
c. Any failure to meet any critical assumption. If there have been no failures, the Annual Report will include a statement to
that effect.
d. Any change to any entity classification for federal income tax purposes of any Worldwide Group member that is a party to
the Covered Transactions or otherwise relevant to the TPM.
e. Any changes to Taxpayer’s financial accounting methods that were made to conform to GAAP changes and that affect the
Covered Transactions.
f. The amount, reason for, and financial analysis of any compensating adjustments under paragraph 5(e)(2) of this APA for the
APA Year, including the means by which any such compensating adjustment has been or will be satisfied.
g. The amounts, description, reason for, and financial analysis of any book-tax differences relevant to the TPM for the APA
Year, as reflected on Schedule M–1 of the U.S. Return for the APA Year.
2. The Financial Statements with a copy of each independent certified public accountant’s opinion required by paragraph 5(c) of
this APA.
3. A financial analysis that reflects Taxpayer’s TPM calculations for the APA Year in sufficient detail to allow the IRS to determine
whether Taxpayer has complied with the TPM.
4. An organizational chart for the Worldwide Group, revised annually to reflect all ownership or structural changes of entities that
are parties to the Covered Transactions or otherwise relevant to the TPM.
April 15, 20027752002–15 I.R.B.

APPENDIX D
DEFINITIONS
The following definitions control for all purposes of this APA. The definitions appear alphabetically below:
TermDefinition
Annual ReportA report within the meaning of Revenue Procedure 96–53, section 11.
APAThis Advance Pricing Agreement, which is an“advance pricing agreement”within
the meaning of Revenue Procedure 96–53, section 1.
APA RecordsThe records specified in Appendix C.
APA RequestTaxpayer’s request for this APA dated
//, including any amendments or
supplemental or additional information thereto.
Covered TransactionThis term is defined in Appendix A.
Financial StatementsThe financial statements prepared in accordance with U.S. GAAP and stated in
U.S. dollars.
Foreign GroupWorldwide Group members that are not U.S. persons.
Foreign Participants[Name the foreign entities involved in Covered Transactions.]
I.R.C.The Internal Revenue Code of 1986, 26 U.S.C., as amended.
Pub. L. 106–170The Ticket to Work and Work Incentives Improvement Act of 1999.
Revenue Procedure 96–53Rev. Proc. 96–53 (1996–2 C.B. 375).
Transfer Pricing Method (TPM)A transfer pricing method within the meaning of Treasury Regulations section
1.482–1(b) and Revenue Procedure 96–53, section 3.02.
U.S. GAAPU.S. generally-accepted accounting principles.
U.S. GroupWorldwide Group members that are U.S. persons.
U.S. ReturnFor each taxable year, the“returns with respect to income taxes under subtitle A”
that Taxpayer must“make”in accordance with I.R.C. section 6012.{Or substitute
for partnership:For each taxable year, the“return”that Taxpayer must“make”in
accordance with I.R.C. section 6031.}
Worldwide GroupTaxpayer and all organizations, trades, businesses, entities, or branches (whether or
not incorporated, organized in the United States, or affiliated) owned or controlled
directly or indirectly by the same interests.
2002–15 I.R.B.776April 15, 2002

ATTACHMENT B
FORMULAS FOR BALANCE SHEET ADJUSTMENTS
Definitions of Variables:
AP=average accounts payable
AR=average trade accounts receivable, net of allowance for bad debt
cogs=cost of goods sold
INV=average inventory, stated on FIFO basis
opex=operating expenses (general, sales, administrative, and depreciation expenses)
PPE=property, plant, and equipment, net of accumulated depreciation
sales=net sales
tc=total cost (cogs + opex, as defined above)
h=average accounts payable or trade accounts receivable holding period, stated as
a fraction of a year
i=interest rate
t=entity being tested
c=comparable
Equations:
If Cost of Goods Sold is controlled (generally, sales in denominator of PLI):
Receivables Adjustment (“RA”):RA = {[AR
t
/ sales
t
) x sales
c
]-AR
c
} x {i/[1+(i x h
c
)]}
Payables Adjustment (“PA”):PA = {[AP
t
/ sales
t
) x sales
c
]-AP
c
} x {i/[1+(i x h
c
)]}
Inventory Adjustment (“IA”):IA = {[(INV
t
/ sales
t
) x sales
c
} - INV
c
}xi
PP&E Adjustment (“PPEA”):PPEA = {[(PPE
t
/ sales
t
) x sales
c
] - PPE
c
}xi
If Sales are controlled (generally, costs in the denominator of PLI):
16
Receivables Adjustment (“RA”):RA = {[(AR
t
/tc
t
)xtc
c
]-AR
c
} x {i/[1+(i x h
c
)]}
Payables Adjustment (“PA”):PA = {[(AP
t
/tc
t
)xtc
c
]-AP
c
} x {i/[1+(i x h
c
)]}
Inventory Adjustment (“IA”):IA = {[(INV
t
/tc
t
)xtc
c
] - INV
c
}xi
PP&E Adjustment (“PPEA”):PPEA = {[(PPE
t
/tc
t
)xtc
c
] - PPE
c
]xi
Then Adjust Comparables as Follows:
adjusted sales
c
=sales
c
+RA
adjusted cogs
c
=cogs
c
+PA-IA
adjusted opex
c
=opex
c
- PPEA
16
Depending on the specific facts, the equations below may use total costs (“tc”) or cost of goods sold (“cogs”).
April 15, 20027772002–15 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes 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
withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered 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.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
andsupersededdescribes 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.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions 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.—Intemal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
2002–15 I.R.B.iApril 15, 2002

Numerical Finding List
1
Bulletins 2002–1 through 2002–14
Announcements:
2002–1, 2002–2 I.R.B.304
2002–2, 2002–2 I.R.B.304
2002–3, 2002–2 I.R.B.305
2002–4, 2002–2 I.R.B.306
2002–5, 2002–4 I.R.B.420
2002–6, 2002–5 I.R.B.458
2002–7, 2002–5 I.R.B.459
2002–8, 2002–6 I.R.B.494
2002–9, 2002–7 I.R.B.536
2002–10, 2002–7 I.R.B.539
2002–11, 2002–6 I.R.B.494
2002–12, 2002–8 I.R.B.553
2002–13, 2002–7 I.R.B.540
2002–14, 2002–7 I.R.B.540
2002–15, 2002–7 I.R.B.540
2002–16, 2002–7 I.R.B.541
2002–17, 2002–8 I.R.B.561
2002–18, 2002–10 I.R.B.621
2002–19, 2002–8 I.R.B.561
2002–20, 2002–8 I.R.B.561
2002–21, 2002–8 I.R.B.562
2002–22, 2002–8 I.R.B.562
2002–23, 2002–8 I.R.B.563
2002–24, 2002–9 I.R.B.606
2002–25, 2002–10 I.R.B.621
2002–26, 2002–11 I.R.B.629
2002–27, 2002–11 I.R.B.629
2002–28, 2002–11 I.R.B.630
2002–29, 2002–11 I.R.B.631
2002–30, 2002–11 I.R.B.632
2002–32, 2002–12 I.R.B.664
2002–33, 2002–12 I.R.B.666
2002–34, 2002–13 I.R.B.702
2002–35, 2002–12 I.R.B.667
2002–36, 2002–13 I.R.B.703
2002–37, 2002–13 I.R.B.703
2002–38, 2002–14 I.R.B.738
2002–39, 2002–14 I.R.B.738
2002–41, 2002–14 I.R.B.739
2002–42, 2002–14 I.R.B.739
Court Decisions:
2073, 2002–14 I.R.B.718
Notices:
2002–1, 2002–2 I.R.B.283
2002–2, 2002–2 I.R.B.285
2002–3, 2002–2 I.R.B.289
2002–4, 2002–2 I.R.B.298
2002–5, 2002–3 I.R.B.320
2002–6, 2002–3 I.R.B.326
2002–7, 2002–6 I.R.B.489
2002–8, 2002–4 I.R.B.398
2002–9, 2002–5 I.R.B.450
2002–10, 2002–6 I.R.B.490
2002–11, 2002–7 I.R.B.526
Notices:—Continued
2002–12, 2002–7 I.R.B.526
2002–13, 2002–8 I.R.B.547
2002–14, 2002–8 I.R.B.548
2002–15, 2002–8 I.R.B.548
2002–16, 2002–9 I.R.B.567
2002–17, 2002–9 I.R.B.567
2002–18, 2002–12 I.R.B.644
2002–19, 2002–10 I.R.B.619
2002–21, 2002–14 I.R.B.730
2002–22, 2002–14 I.R.B.731
Proposed Regulations:
REG–209135–88, 2002–4 I.R.B.418
REG–209114–90, 2002–9 I.R.B.576
REG–107100–00, 2002–7 I.R.B.529
REG–107366–00, 2002–12 I.R.B.645
REG–118861–00, 2002–12 I.R.B.651
REG–105344–01, 2002–2 I.R.B.302
REG–112991–01, 2002–4 I.R.B.404
REG–115054–01, 2002–7 I.R.B.530
REG–119436–01, 2002–3 I.R.B.377
REG–120135–01, 2002–8 I.R.B.552
REG–125450–01, 2002–5 I.R.B.457
REG–125626–01, 2002–9 I.R.B.604
REG–142299–01, 2002–4 I.R.B.418
REG–159079–01, 2002–6 I.R.B.493
REG–102740–02, 2002–13 I.R.B.701
Revenue Procedures:
2002–1, 2002–1 I.R.B.1
2002–2, 2002–1 I.R.B.82
2002–3, 2002–1 I.R.B.117
2002–4, 2002–1 I.R.B.127
2002–5, 2002–1 I.R.B.173
2002–6, 2002–1 I.R.B.203
2002–7, 2002–1 I.R.B.249
2002–8, 2002–1 I.R.B.252
2002–9, 2002–3 I.R.B.327
2002–10, 2002–4 I.R.B.401
2002–11, 2002–7 I.R.B.526
2002–12, 2002–3 I.R.B.374
2002–13, 2002–8 I.R.B.549
2002–14, 2002–5 I.R.B.450
2002–15, 2002–6 I.R.B.490
2002–16, 2002–9 I.R.B.572
2002–17, 2002–13 I.R.B.676
2002–18, 2002–13 I.R.B.678
2002–19, 2002–13 I.R.B.696
2002–20, 2002–14 I.R.B.732
2002–22, 2002–14 I.R.B.733
Revenue Rulings:
2002–1, 2002–2 I.R.B.268
2002–2, 2002–2 I.R.B.271
2002–3, 2002–3 I.R.B.316
Revenue Rulings:—Continued
2002–4, 2002–4 I.R.B.389
2002–5, 2002–6 I.R.B.461
2002–6, 2002–6 I.R.B.460
2002–7, 2002–8 I.R.B.543
2002–8, 2002–9 I.R.B.564
2002–9, 2002–10 I.R.B.614
2002–10, 2002–10 I.R.B.616
2002–11, 2002–10 I.R.B.608
2002–12, 2002–11 I.R.B.624
2002–13, 2002–12 I.R.B.637
2002–14, 2002–12 I.R.B.636
2002–15, 2002–13 I.R.B.668
2002–17, 2002–14 I.R.B.716
Tax Conventions:
2002–14 I.R.B.725
Treasury Decisions:
8968, 2002–2 I.R.B.274
8969, 2002–2 I.R.B.276
8970, 2002–2 I.R.B.281
8971, 2002–3 I.R.B.308
8972, 2002–5 I.R.B.443
8973, 2002–4 I.R.B.391
8974, 2002–3 I.R.B.318
8975, 2002–4 I.R.B.379
8976, 2002–5 I.R.B.421
8977, 2002–6 I.R.B.463
8978, 2002–7 I.R.B.500
8979, 2002–6 I.R.B.466
8980, 2002–6 I.R.B.477
8981, 2002–7 I.R.B.496
8982, 2002–8 I.R.B.544
8983, 2002–9 I.R.B.565
8984, 2002–13 I.R.B.668
8985, 2002–14 I.R.B.707
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
April 15, 2002ii2002–15 I.R.B.

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2002–1 through 2002–14
Announcements:
2001–83
Modified by
Ann. 2002–36, 2002–13 I.R.B.703
2002–9
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Ann. 2002–35, 2002–12 I.R.B.667
Notices:
98–31
Supplemented by
Ann. 2002–37, 2002–13 I.R.B.703
98–43
Modified and superseded by
Notice 2002–5, 2002–3 I.R.B.320
2000–11
Obsoleted by
Notice 2002–3, 2002–2 I.R.B.289
2001–10
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
2001–61
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
2001–68
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
Proposed Regulations:
REG–209135–88
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Ann. 2002–30, 2002–11 I.R.B.632
REG–251502–96
Withdrawn by
Ann. 2002–33, 2002–12 I.R.B.666
REG–107100–00
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–105344–01
Corrected by
Ann. 2002–7, 2002–5 I.R.B.459
REG–112991–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Ann. 2002–38, 2002–14 I.R.B.738
Proposed Regulations:—Continued
REG–115054–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–119436–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–120135–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–125450–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–125626–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–126485–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–137519–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–142299–01
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Ann. 2002–30, 2002–11 I.R.B.632
REG–142686–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–159079–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Revenue Procedures:
84–37
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
84–57
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
87–50
Modified by
Rev. Proc. 2002–10, 2002–4 I.R.B.401
96–13
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
97–27
Modified and amplified by
Rev. Proc. 2002–19, 2002–13 I.R.B.696
98–49
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
Revenue Procedures:—Continued
99–49
Modified and superseded by
Rev. Proc. 2002–9, 2002–3 I.R.B.327
2000–20
Modified by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2000–46
Superseded by
Rev. Proc. 2002–22, 2002–14 I.R.B.733
2001–1
Superseded by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
2001–2
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–3
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–4
Superseded by
Rev. Proc. 2002–4, 2002–1 I.R.B.127
2001–5
Superseded by
Rev. Proc. 2002–5, 2002–1 I.R.B.173
2001–6
Superseded by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2001–7
Superseded by
Rev. Proc. 2002–7, 2002–1 I.R.B.249
2001–8
Superseded by
Rev. Proc. 2002–8, 2002–1 I.R.B.252
2001–13
Corrected by
Ann. 2002–5, 2002–4 I.R.B.420
2001–16
Modified by
Ann. 2002–26, 2002–11 I.R.B.629
2001–27
Supplemented by
Rev. Proc. 2002–20, 2002–14 I.R.B.732
2001–36
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–41
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
2002–15 I.R.B.iiiApril 15, 2002

Revenue Procedures:—Continued
2001–51
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2002–3
Modified by
Rev. Proc. 2002–22 I.R.B.733
2002–6
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2002–8
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2002–9
Modified and clarified by
Ann. 2002–17, 2002–8 I.R.B.561
Modified and amplified by
Rev. Rul. 2002–9, 2002–10 I.R.B.614
Rev. Proc. 2002–17, 2002–13 I.R.B.676
Rev. Proc. 2002–19, 2002–13 I.R.B.696
Revenue Rulings:
55–747
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
61–146
Distinguished by
Rev. Rul. 2002–3, 2002–3 I.R.B.316
64–328
Modified by
Notice 2002–8, 2002–4 I.R.B.398
66–110
Modified by
Notice 2002–8, 2002–4 I.R.B.398
89–29
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
92–19
Supplemented in part by
Rev. Rul. 2002–12, 2002–11 I.R.B.624
2002–7
Corrected by
Ann. 2002–13, 2002–7 I.R.B.540
Treasury Decisions:
8971
Corrected by
Ann. 2002–20, 2002–8 I.R.B.561
8972
Corrected by
Ann. 2002–23, 2002–8 I.R.B.563
8973
Corrected by
Ann. 2002–14, 2002–7 I.R.B.540
Treasury Decisions:—Continued
8975
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
8976
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
8978
Corrected by
Ann. 2002–39, 2002–14 I.R.B.738
April 15, 2002iv2002–15 I.R.B.