Internal Revenue Bulletin 1996-12 (PDF rendition): IRS Notices

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.

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Bulletin No. 1996–12
March 18, 1996
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 8653, page 4.
Final regulations under sections 446 and 1221 of the
Code relate to the character and timing of gain or loss
from certain hedging transactions entered into by
members of a consolidated group.
T.D. 8655, page 9.
Final and temporary regulations under section 7805 of
the Code are declared obsolete as part of the
President’s Regulatory Reinvention Initiative.
EMPLOYMENT TAX
EE–55–95, page 12.
Proposed regulations under section 3306(r) of the Code
relate to when amounts deferred or paid from certain
nonqualified deferred compensation plans are taken
into account as ‘‘wages’’ for FUTA purposes.
EE–142–87, page 13.
Proposed regulations under section 3121(v)(2) of the
Code relate to when amounts deferred or paid from
certain nonqualified deferred compensation plans are
taken into account as ‘‘wages’’ for FICA purposes.
ADMINISTRATIVE
Notice 96–14, page 11.
T.D. 8650, 1996–10 I.R.B. 5, relating to the dis-
allowance of deductions for employee remuneration in
excess of $1,000,000, is corrected.
Announcement 96–13, page 33.
Test of Employment Tax Early Referral Procedures for
Appeals. This announcement describes the method by
which a taxpayer requests early referral of one or more
unagreed employment tax issues from the District to
Appeals.
Announcement 96–14, page 35.
A list is given of organizations now classified as private
foundations.
Finding Lists begin on page 39.

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

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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 Conventions, legisla-
tion, court decisions, and other items of general
interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscrip-
tion basis. Bulletin contents of a permanent nature are
consolidated semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin
all substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published
rulings apply retroactively unless otherwise indicated.
Procedures relating solely to matters of internal
management are not published; however, statements of
internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the
Service on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on
positions taken in rulings to taxpayers or technical
advice to Service field offices, identifying details and
information of a confidential nature are deleted to
prevent unwarranted invasions of privacy and to comply
with statutory requirements.
Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasury Department
Regulations, but they may be used as precedents.
Unpublished rulings will not be relied on, used, or cited
as precedents by Service personnel in the disposition of
other cases. In applying published rulings and proce-
dures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be
considered, and Service personnel and others con-
cerned are cautioned against reaching the same
conclusions in other cases unless the facts and
circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellanous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Admin-
istrative Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary
(Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemak-
ing and the disbarment and suspension list included in
this part, none of these announcements are consoli-
dated in the Cumulative Bulletins.
The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly
and semiannual basis, and are published in the first
Bulletin of the succeeding quarterly and semi-annual
period, respectively.
The Bulletin Index-Digest System, a research and
reference service supplementing the Bulletin, may be
obtained from the Superintendent of Documents on a
subscription basis. It consists of four Services: Service
No. 1, Income Tax; Service No. 2, Estate and Gift
Taxes; Service No. 3, Employment Taxes; Service No.
4, Excise Taxes. Each Service consists of a basic
volume and a cumulative supplement that provides (1)
finding lists of items published in the Bulletin, (2)
digests of revenue rulings, revenue procedures, and
other published items, and (3) indexes of Public Laws,
Treasury Decisions, and Tax Conventions.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 446.—General Rule for
Methods of Accounting
26 CFR 1.446–4: Hedging transactions
T.D. 8653
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Hedging Transactions by Members of
a Consolidated Group
AGENCY: Internal Revenue Service,
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the charac-
ter and timing of gain or loss from
certain hedging transactions entered
into by members of a consolidated
group. These regulations apply when
one member of the group hedges its
own risk, hedges the risk of another
member, or enters into a risk-shifting
transaction with another member. The
regulations are needed to provide ap-
propriate rules for these transactions.
The regulations provide guidance for
corporations that are members of con-
solidated groups.
DATES: These regulations are effective
February 7, 1996.
For dates of applicability of these
regulations, see §1.446–4(e)(9)(iv) and
§1.1221–2(g)(4), (5), and (6).
FOR FURTHER INFORMATION
CONTACT: Jo Lynn Ricks of the
Office of the Assistant Chief Counsel
(Financial Institutions and Products),
telephone (202) 622-3920 (not a toll-
free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under
control number 1545–1480. Some re-
sponses to these collections of informa-
tion are mandatory, and others are
required to obtain the benefit of the
separate-entity election or of applying
single-entity treatment in taxable years
prior to the general effective date of
the regulations.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
The estimated annual burden per
respondent or recordkeeper varies from
1.0 to 40.0 hours, depending on indi-
vidual circumstances, with an estimated
average of 5 hours.
Comments concerning the accuracy
of this burden estimate and suggestions
for reducing this burden should be sent
to the Internal Revenue Service, Attn:
IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to the
Office of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington,
DC 20503.
Books or records relating to this
collection of information must be re-
tained as long as their contents may
become material in the administration
of any Internal Revenue law. Gener-
ally, tax returns and tax return informa-
tion are confidential, as required by 26
U.S.C. 6103.
Background
On July 18, 1994, the IRS published
in the Federal Register (59 FR 36394)
a notice of proposed rulemaking (FI–
34–94 [1994–2 C.B. 863]) relating to
the character and timing of gain or loss
from certain risk-shifting transactions
entered into by members of a consoli-
dated group. Comments were received
on the proposed regulations, and a
public hearing was held on October 18,
1994. Most commentators believe that
the proposed regulations provide a
sensible and flexible set of rules to deal
with hedging operations by the mem-
bers of a consolidated group of
corporations.
The most significant comment on the
regulations relates to their effective
date. Almost all of the commentators
requested a transition rule permitting
consolidated groups to elect to apply
the proposed character rules retroac-
tively. The final regulations adopt this
suggestion, generally allowing consoli-
dated groups to elect to apply the
single-entity approach of the proposed
regulations to all open years. Section
1.1221–2, concerning the character of
hedging transactions, was made retro-
active for all open years to permit the
IRS to resolve fairly and consistently
controversies involving transactions
that were entered into prior to the
publication date of those regulations. It
is appropriate that these regulations, as
an integral part of §1.1221–2, also
apply retroactively. To prevent any
adverse consequences, however, retro-
activity is elective.
The proposed regulations, with new
effective date provisions, are adopted
as final regulations. The new provi-
sions, and several comments that were
not adopted, are discussed below.
Explanation of provisions
Character regulations
The final regulations retain the
single-entity approach of the proposed
regulations. That is, they treat the risk
of one member of the group as the risk
of the other members, as if all the
members were divisions of a single
corporation. Thus, a member of a con-
solidated group that hedges the risk of
another member by entering into a
transaction with a third party may
receive ordinary gain or loss treatment
on that transaction if the transaction
otherwise qualifies as a hedging
transaction.
Under this single-entity approach,
intercompany transactions are neither
hedging transactions nor hedged items.
Because they are treated as transactions
between divisions of a single corpora-
tion, intercompany transactions do not
reduce the risk of that single corpora-
tion and, therefore, fail to qualify as
hedging transactions.
Some commentators requested that
the IRS extend the single-entity ap-
proach to apply the hedging rules to a
taxpayer’s transactions that hedge the
risk of a related party that is not a
member of the taxpayer’s consolidated
group. The IRS and Treasury, however,
do not believe that this approach is
appropriate where the parties file dif-

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ferent tax returns. Accordingly, the
final regulations do not adopt this
suggestion.
The final regulations also retain the
separate-entity election of the proposed
regulations, permitting a consolidated
group to treat its members as separate
entities when applying the hedging
rules. The election is made by attaching
a statement to the group’s federal
income tax return.
For a group that elects separate-
entity treatment, an intercompany trans-
action is treated as a hedging transac-
tion if and only if: (1) it would qualify
as a hedging transaction if entered into
with an unrelated party; and (2) it is
entered into with a member that, under
its method of accounting, marks its
position in the intercompany transac-
tion to market. If these requirements
are satisfied, the member with respect
to which it is an intercompany hedging
transaction must account for its posi-
tion in the transaction under §1.446–4,
and, if that member properly identifies
the transaction as a hedging transac-
tion, each member treats the gain or
loss from its position in the transaction
as ordinary.
In response to comments, the final
regulations clarify that, even when
these two requirements are met, these
regulations supplant only the character
and timing rules of §1.1502–13. Other
aspects of the transaction, such as the
source of the gain or loss, are un-
affected by these regulations and thus
may be governed by §1.1502–13.
As noted above, commentators
pointed out that taxpayers frequently
enter into transactions to transfer their
business risk to related parties that do
not qualify as members of a consoli-
dated group. Some commentators ar-
gued that, even if risk reduction in
these circumstances is not analyzed
using a single-entity perspective, the
relationship between the parties to the
risk transfer justifies a rule under
which the party receiving the risk has
ordinary gain or loss on its position in
the transaction. That is, they wanted to
apply one part of the separate-entity
rules to taxpayers that are not part of
the same consolidated group.
The IRS and Treasury, however, do
not believe that additional, special
character rules are appropriate for risk-
shifting transactions outside the context
of a consolidated group. Accordingly,
the final regulations do not adopt these
comments.
The final regulations expand upon
the effective date provision of the
proposed regulations. The final regula-
tions generally apply to transactions
entered into on or after March 8, 1996.
In response to comments, the final
regulations permit a consolidated group
to apply the single-entity approach of
the regulations retroactively. The group
may elect to begin to apply the single-
entity approach for all transactions
entered into in any taxable year (the
election year) beginning prior to March
8, 1996. The election may be made,
however, only if the election year and
each subsequent taxable year are still
open for assessment under section 6501
on July 1, 1996, or such earlier date as
the Commissioner may allow. Once
made, the single-entity election applies
to all transactions entered into in the
election year and in all subsequent
consolidated return years until the date
as of which the group makes a
separate-entity election. The Service
will publish guidance on the manner,
and the time, for making the single-
entity election.
Further, the regulations also permit a
consolidated group to apply the
separate-entity approach to all transac-
tions entered into in taxable years
subject to the election. The taxpayer
may choose, as the first year under the
election, any taxable year beginning on
or after July 12, 1995. This ability to
apply the election to taxable years
beginning before March 8, 1996, al-
lows a consolidated group to apply the
separate-entity approach to all inter-
company transactions that are subject
to new §1.1502–13 (which is effective
for taxable years beginning on or after
July 12, 1995). Thus, by electing
separate-entity treatment for all transac-
tions entered into in a taxable year
beginning on or after July 12, 1995, a
consolidated group can determine the
character and timing of its intercom-
pany hedging transactions under
§1.446–4 and §1.1221–2, rather than
under §1.1502–13.
If the group makes the single-entity
election or elects to apply the separate-
entity approach retroactively, special
identification rules apply.
First, the members of the group are
required to identify transactions that
were entered into prior to March 8,
1996, that are still in existence on that
date, and that become hedging transac-
tions as a result of one of these
elections. The members are also re-
quired to identify the hedged item for
these transactions.
Second, the final regulations extend
the time period for making the addi-
tional identifications that are referred to
in the preceding paragraph.
Third, if the taxpayer’s consolidated
group has elected the single-entity
approach, the regulations nullify all
hedge identifications under §1.1221–2-
(e)(i) that had been made for intercom-
pany transactions. In this situation, the
regulations determine the character of
each intercompany transaction as if it
had never been identified as a hedging
transaction. Thus, the character and
timing of the intercompany transaction
are determined under the otherwise
applicable regulations, and the transac-
tion is not subject to the ordinary-gain,
capital-loss rule that generally applies
to transactions that are incorrectly
identified as hedging transactions. The
identification may, however, serve to
identify the hedged item.
In order to ensure that consolidated
groups do not improperly use hindsight
in making these identifications, the
regulations provide a consistency re-
quirement. Under this requirement, the
group members must treat similar or
identical transactions consistently
within the same year and from year to
year. If a member of the consolidated
group fails to identify a hedging
transaction as a hedging transaction,
but has identified similar or identical
hedging transactions in the same or a
subsequent year, then, for purposes of
§1.1221–2(f)(2)(iii), the member enter-
ing into the transaction is treated as
having no reasonable grounds for treat-
ing the transaction as other than a
hedging transaction. Thus, the member
is generally subject to the ordinary-
gain, capital-loss rules for taxpayers
who fail to identify transactions as
hedging transactions.
Timing regulations
The final regulations clarify the
general rule that was provided in the
proposed regulations for the timing of
the gain or loss from hedging transac-
tions that are entered into by members
of a consolidated group. Under the
final regulations, a member of a con-
solidated group must account for its
hedging transactions as if all the
members were separate divisions of a
single corporation (the single-entity
approach). Thus, the timing of the

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income, deduction, gain, or loss on the
hedging transaction must match the
timing of the income, deduction, gain,
or loss from the item, items, or
aggregate risk being hedged. These
regulations make clear that a member
must account for all of its hedging
transactions, not just those that hedge
the risk of another member, under the
single-entity approach.
Since all of the members are treated
as divisions of a single corporation,
intercompany transactions are neither
hedging transactions nor hedged items.
Thus, under the single-entity approach,
the timing of the gain or loss from
intercompany transactions is not deter-
mined under the rules of §1.446–4.
The final regulations also clarify the
rule in the proposed regulations on
accounting for the gain or loss on
hedging transactions by members of a
group that has made a separate-entity
election. If a group makes the separate-
entity election, the members do not
account for their hedging transactions
(including their intercompany hedging
transactions) as if they were divisions
of a single corporation. Rather, each
member accounts for its hedging trans-
actions on a member-by-member basis.
For example, if an intercompany trans-
action is treated as a hedging transac-
tion, the gain or loss on the transaction
is accounted for under the rules of
§1.446–4 rather than under the timing
rules of the intercompany transaction
regulations, §1.1503–13. As was stated
above, even when a separate-entity
election is in place, §§1.1221–2 and
1.446–4 affect only the timing and
character of intercompany hedging
transactions. Other aspects of the inter-
company hedging transaction remain
subject to the rules of §1.1502–13.
These final timing regulations are
effective for transactions entered into
on or after March 8, 1996.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It is hereby
certified that these regulations do not
have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact
that these regulations will primarily
affect affiliated groups of corporations
that have elected to file consolidated
returns, which tend to be larger busi-
nesses. The regulations do not signifi-
cantly alter the reporting or recordkeep-
ing duties of small entities. Therefore,
a Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the
Internal Revenue Code, the notice of
proposed rulemaking preceding these
regulations was submitted to the Small
Business Administration for comment
on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Jo Lynn Ricks, Office of
Assistant Chief Counsel (Financial In-
stitutions and Products), IRS. However,
other personnel from the IRS and
Treasury Department participated in
their development.
******
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and
602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by removing the
entry for §1.1221–2 and by adding
entries in numerical order to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.446–4 also issued under 26
U.S.C. 1502. * * *
Section 1.1221–2 also issued under
26 U.S.C. 1502 and 6001. * * *
Par. 2. Section 1.446–4 is amended
by adding the text of paragraph (e)(9)
to read as follows:
§1.446–4 Hedging Transactions.
******
(e)* * *
(9)Hedging by members of a con-
solidated group—(i) General rule:
single-entity approach. In general, a
member of a consolidated group must
account for its hedging transactions as
if all of the members were separate
divisions of a single corporation. Thus,
the timing of the income, deduction,
gain, or loss on a hedging transaction
must match the timing of income,
deduction, gain, or loss from the item
or items being hedged. Because all of
the members are treated as if they were
divisions of a single corporation, inter-
company transactions are neither hedg-
ing transactions nor hedged items for
these purposes.
(ii)Separate-entity election. If a
consolidated group makes an election
under §1.1221–2(d)(2), then paragraph
(e)(9)(i) of this section does not apply.
Thus, in that case, each member of the
consolidated group must account for its
hedging transactions in a manner that
meets the requirements of paragraph
(b) of this section. For example, the
income, deduction, gain, or loss from
intercompany hedging transactions (as
defined in §1.1221–2(d)(2)(ii)) is taken
into account under the timing rules of
§1.446–4 rather than under the timing
rules of §1.1502–13.
(iii)Definitions. For definitions of
consolidated group, divisions of a
single corporation, intercompany trans-
action, and member, see section 1502
and the regulations thereunder.
(iv)Effective date. This paragraph
(e)(9) applies to transactions entered
into on or after March 8, 1996.
Par. 3. Section 1.1221–2 is amended
by adding the text of paragraphs (d),
(e)(5), (f)(3), and (g)(4), and by adding
the text and headings of paragraphs
(g)(5) and (6) to read as follows:
§1.1221–2 Hedging Transactions.
******
(d)Hedging by members of a con-
solidated group—(1) General rule:
single-entity approach. For purposes of
this section, the risk of one member of
a consolidated group is treated as the
risk of the other members as if all of
the members of the group were divi-
sions of a single corporation. For
example, if any member of a consoli-
dated group hedges the risk of another
member of the group by entering into a
transaction with a third party, that
transaction may potentially qualify as a
hedging transaction. Conversely, inter-
company transactions are not hedging
transactions because, when considered
as transactions between divisions of a
single corporation, they do not reduce
the risk of that single corporation.
(2)Separate-entity election. In lieu
of the single-entity approach specified

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in paragraph (d)(1) of this section, a
consolidated group may elect separate-
entity treatment of its hedging transac-
tions. If a group makes this separate-
entity election, the following rules
apply.
(i)Risk of one member not risk of
other members. Notwithstanding para-
graph (d)(1) of this section, the risk of
one member is not treated as the risk of
other members.
(ii)Intercompany transactions. An
intercompany transaction is a hedging
transaction (an intercompany hedging
transaction) with respect to a member
of a consolidated group if and only if it
meets the following requirements—
(A)The position of the member in
the intercompany transaction would
qualify as a hedging transaction with
respect to the member (taking into
account paragraph (d)(2)(i) of this
section) if the member had entered into
the transaction with an unrelated party;
and
(B)The position of the other mem-
ber (the marking member) in the
transaction is marked to market under
the marking member’s method of
accounting.
(iii)Treatment of intercompany
hedging transactions. An intercompany
hedging transaction (that is, a transac-
tion that meets the requirements of
paragraphs (d)(2)(ii)(A) and (B) of this
section) is subject to the following
rules—
(A)The character and timing rules
of §1.1502–13 do not apply to the
income, deduction, gain, or loss from
the intercompany hedging transaction;
and
(B)Except as provided in paragraph
(f)(3) of this section, the character of
the marking member’s gain or loss
from the transaction is ordinary.
(iv)Making and revoking the elec-
tion. Unless the Commissioner other-
wise prescribes, the election described
in this paragraph (d)(2) must be made
in a separate statement saying ‘‘[Insert
Name and Employer Identification
Number of Common Parent] HEREBY
ELECTS THE APPLICATION OF
S E C T I O N 1 . 1 2 2 1 – 2 ( d ) ( 2 ) ( T H E
SEPARATE-ENTITY APPROACH).’’
The statement must also indicate the
date as of which the election is to be
effective. The election must be signed
by the common parent and filed with
the group’s federal income tax return
for the taxable year that includes the
first date for which the election is to
apply. The election applies to all
transactions entered into on or after the
date so indicated.
(3)Definitions. For definitions of
consolidated group, divisions of a
single corporation, group, intercompany
transactions, and member, see section
1502 and the regulations thereunder.
(4)Examples. The following exam-
ples illustrate this paragraph (d):
General Facts. In these examples, O and H are
members of the same consolidated group. O’s
business operations give rise to interest rate risk
‘‘A,’’ which O wishes to hedge. O enters into an
intercompany transaction with H that transfers
the risk to H. O’s position in the intercompany
transaction is ‘‘B,’’ and H’s position in the
transaction is ‘‘C.’’ H enters into position ‘‘D’’
with a third party to reduce the interest rate risk
it has with respect to its position C. D would be
a hedging transaction with respect to risk A if
O’s risk A were H’s risk.
OPERATING
MEMBER
O
intercompany
transaction
HEDGING
MEMBER
H
risk-
shifting
transaction
THIRD
PARTY
riskpositionpositionposition
ABCD
Example 1. Single-entity treatment—(i) Gen-
eral rule. Under paragraph (d)(1) of this section,
O’s risk A is treated as H’s risk, and therefore D
is a hedging transaction with respect to risk A.
Thus, the character of D is determined under the
rules of this section, and the income, deduction,
gain, or loss from D must be accounted for under
a method of accounting that satisfies §1.446–4.
The intercompany transaction B–C is not a
hedging transaction and is taken into account
under §1.1502–13.
(ii)Identification. D must be identified as a
hedging transaction under paragraph (e)(1) of
this section, and A must be identified as the
hedged item under paragraph (e)(2) of this
section. Under paragraph (e)(5) of this section,
the identification of A as the hedged item can be
accomplished by identifying the positions in the
intercompany transaction as hedges or hedged
items, as appropriate. Thus, substantially contem-
poraneous with entering into D, H may identify
C as the hedged item and O may identify B as a
hedge and A as the hedged item.
Example 2. Separate-entity election; counter-
party that does not mark to market. In addition
to the General Facts stated above, assume that
the group makes a separate-entity election under
paragraph (d)(2) of this section. If H does not
mark C to market under its method of account-
ing, then B is not a hedging transaction, and the
B–C intercompany transaction is taken into ac-
count under the rules of section 1502. D is not a
hedging transaction with respect to A, but D may
be a hedging transaction with respect to C if C is
ordinary property or an ordinary obligation and if
the other requirements of paragraph (b) of this
section are met. If D is not part of a hedging
transaction, then D may be part of a straddle for
purposes of section 1092.
Example 3. Separate-entity election; counter-
party that marks to market. The facts are the
same as in Example 2 above, except that H
marks C to market under its method of ac-
counting. Also assume that B would be a
hedging transaction with respect to risk A if O
had entered into that transaction with an un-
related party. Thus, for O, the B–C transaction is
an intercompany hedging transaction with respect
to O’s risk A, the character and timing rules of
§1.1502–13 do not apply to the B–C transaction,
and H’s income, deduction, gain, or loss
from C is ordinary. However, other attributes of
the items from the B–C transaction are deter-
mined under §1.1502–13. D is a hedging trans-
action with respect to C if it meets the
requirements of paragraph (b) of this section.
(e)* * *
(5)Identification of hedges involving
members of a consolidated group—(i)
General rule: single-entity approach. A
member of a consolidated group must
satisfy the requirements of this para-
graph (e) as if all of the members of
the group were divisions of a single
corporation. Thus, the member entering
into the hedging transaction with a
third party must identify the hedging
transaction under paragraph (e)(1) of
this section. Under paragraph (e)(2) of
this section, that member must also
identify the item, items, or aggregate
risk that is being hedged, even if the

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item, items, or aggregate risk relates
primarily or entirely to other members
of the group. If the members of a
group use intercompany transactions to
transfer risk within the group, the
requirements of paragraph (e)(2) of this
section may be met by identifying the
intercompany transactions, and the
risks hedged by the intercompany
transactions, as hedges or hedged
items, as appropriate. Because identi-
fication of the intercompany transaction
as a hedge serves solely to identify the
hedged item, the identification is timely
if made within the period required by
paragraph (e)(2) of this section. For
example, if a member transfers risk in
an intercompany transaction, it may
identify under the rules of this para-
graph (e) both its position in that
transaction and the item, items, or
aggregate risk being hedged. The mem-
ber that hedges the risk outside the
group may identify under the rules of
this paragraph (e) both its position with
the third party and its position in the
intercompany transaction. Paragraph
(d)(4) Example 1 of this section illus-
trates this identification.
(ii)Rule for consolidated groups
making the separate-entity election. If a
consolidated group makes the separate-
entity election under paragraph (d)(2)
of this section, each member of the
group must satisfy the requirements of
this paragraph (e) as though it were not
a member of a consolidated group.
******
(f)* * *
(3)Transactions by members of a
consolidated group—(i) Single-entity
approach. If a consolidated group is
under the general rule of paragraph
(d)(1) of this section (the single-entity
approach), the rules of this paragraph
(f) apply only to transactions that are
not intercompany transactions.
(ii)Separate-entity election. If a
consolidated group has made the elec-
tion under paragraph (d)(2) of this
section, then, in addition to the rules of
paragraphs (f)(1) and (2) of this sec-
tion, the following rules apply.
(A)If an intercompany transaction is
identified as a hedging transaction but
does not meet the requirements of
paragraphs (d)(2)(ii)(A) and (B) of this
section, then, notwithstanding any con-
trary provision in §1.1502–13, each
party to the transaction is subject to the
rules of paragraph (f)(1) of this section
with respect to the transaction as
though it had incorrectly identified its
position in the transaction as a hedging
transaction.
(B)If a transaction meets the re-
quirements of paragraphs (d)(2)(ii)(A)
and (B) of this section but the transac-
tion is not identified as a hedging
transaction, each party to the transac-
tion is subject to the rules of paragraph
(f)(2) of this section. (Because the
transaction is an intercompany hedging
transaction, the character and timing
rules of §1.1502–13 do not apply. See
paragraph (d)(2)(iii)(A) of this section.)
(g)* * *
(4)Effective date and transition
rules for hedges by members of a con-
solidated group. Paragraphs (d), (e)(5),
and (f)(3) of this section apply to
transactions entered into on or after
March 8, 1996.
(5)Elections to accelerate the effec-
tive date of the regulations—(i) Elec-
tion to apply the single-entity approach
retroactively. A consolidated group
may elect to begin to apply paragraphs
(d)(1) and (3), (e)(5)(i), and (f)(3)(i) of
this section to all transactions entered
into in any taxable year (the election
year) beginning prior to March 8, 1996.
This election must be made in the
manner, and at the time, prescribed by
the Commissioner. A group may make
the election only if the election year,
and each subsequent taxable year, are
still open for assessment under section
6501 on July 1, 1996 (or such earlier
date as the Commissioner may allow).
The election applies to all transactions
entered into in the election year and in
all subsequent consolidated return years
until the date, if any, as of which the
group makes a separate-entity election
under paragraph (d)(2) of this section.
The rules of paragraph (g)(6) of this
section apply to all transactions that
were entered into before March 8,
1996, in taxable years subject to an
election under this paragraph (g)(5)(i).
The election may be revoked only with
the consent of the Commissioner.
(ii)Ability to apply the separate-
entity approach retroactively. Notwith-
standing paragraph (g)(4) of this sec-
tion, the separate-entity election
described in paragraph (d)(2) of this
section may be made for any taxable
year beginning on or after July 12,
1995. If that election is made for a
taxable year beginning before March 8,
1996, then paragraphs (d)(2) and (3),
(e)(5)(ii), and (f)(3)(ii) of this section
apply to all transactions entered into on
or after the beginning of that taxable
year and while the election is in effect,
and the rules of paragraph (g)(6) of this
section (other than paragraph (g)(6)(i))
apply to all transactions that were
entered into on or after the first day of
the first year for which the election is
made and before March 8, 1996.
(6)Transitional identification rules.
To allow a consolidated group to con-
form to paragraphs (g)(5)(i) and (ii) of
this section, this paragraph (g)(6) nul-
lifies certain hedge identifications and
permits a member of a consolidated
group to add certain hedge identifica-
tions. This paragraph (g)(6) applies
only to the extent provided in para-
graph (g)(5) of this section.
(i)Intercompany transactions pre-
viously identified. Notwithstanding
paragraph (f)(1)(i) of this section, if,
for purposes of paragraph (e)(1) of this
section, a member identified as a
hedging transaction an intercompany
transaction (or a transaction that would
qualify as an intercompany transaction
under §1.1502–13(b)(1) if the taxable
year in which the transaction was
entered into were described in
§1.1502–13(l)), the character of the
gain on the intercompany transaction is
determined as if it had not been
identified as a hedging transaction. The
identification may, however, serve to
identify the hedged item under para-
graph (e)(5)(i) of this section.
(ii)Additional identifications of
hedging transactions. A member of a
consolidated group must identify under
paragraph (e)(5) of this section a
transaction that—
(A)Was entered into before March
8, 1996,
(B)When entered into was not a
hedging transaction (as defined in
paragraph (b) of this section),
(C)Solely as a result of the group’s
election under paragraph (g)(5)(i) or
(ii) of this section, is a hedging
transaction (as defined in paragraph (b)
of this section), and
(D)Remains in existence on March
8, 1996.
(iii)Additional identification of
hedged items. In the case of transac-
tions described in paragraph (g)(6)(ii)
of this section, the hedging member
must identify under paragraph (e)(5) of

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this section the item, items, or aggre-
gate risk being hedged.
(iv)Consistency requirement for
hedge identifications. In identifying
transactions as hedging transactions
under paragraph (g)(6)(ii) of this sec-
tion, all of the members of the group
must treat similar or identical transac-
tions consistently within the same year
and from year to year. If paragraph
(g)(6)(ii) of this section requires a
member to identify a transaction, and
the member fails to identify a transac-
tion as a hedging transaction, but it or
another member of the group identifies
similar or identical hedging transactions
in the same or a subsequent year, then
for purposes of paragraphs (f)(2)(iii)
and (3) of this section, the member
entering into the transaction is treated
as having no reasonable grounds for
treating the transaction as other than a
hedging transaction.
(v)Extension of time for making
additional identifications. If an identi-
fication of a hedging transaction would
not be required but for the rules of
paragraph (g)(6)(ii) of this section, the
identification is timely for purposes of
paragraph (e)(1) of this section if made
before the close of business on May 8,
1996. If an identification of a hedged
item would not be required but for the
rules of paragraph (g)(6)(iii) of this
section, it is timely for purposes of
paragraph (e)(2) of this section if made
before the close of business on the later
of May 8, 1996, or the last day of the
period specified in paragraph (e)(2)(ii)
of this section.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (c) is
amended by adding entries in numeri-
cal order to the table to read as
follows:
§602.101 OMB Control numbers.
******
(c)* * *
CFR part or sectionCurrent OMB
where identifiedcontrol number
and described
******
1.1221–2(d)(2)(iv)........ 1545–1480
1.1221–2(e)(5)........... 1545–1480
1.1221–2(g)(5)(ii)........ 1545–1480
1.1221–2(g)(6)(ii)........ 1545–1480
1.1221–2(g)(6)(iii)........ 1545–1480
******
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 20, 1995.
Cynthia G. Beerbower,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
January 5, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 8,
1996, 61 F.R. 517)
Section 7121.—Closing agreements
26 CFR 301.7121–1: Closing agreements.
What is the method by which a taxpayer
requests early referral of one or more unagreed
employment tax issues from the District to
Appeals? See Announcement 96–13, page 33.
Section 7805.—Rules and
Regulations
26 CFR 301.7805–1: Rules and regulations.
T.D. 8655
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 20, 23, 24, 25,
27, 33, 38, 301, and 602
Removal of Final and Temporary
Regulations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Removal of final and tempo-
rary regulations.
SUMMARY: This document removes
final and temporary regulations as part
of the President’s Regulatory Reinven-
tion Initiative.
EFFECTIVE DATE: January 8, 1996.
FOR FURTHER INFORMATION
CONTACT: Philip Bennet, (202) 622–
3926.
SUPPLEMENTARY INFORMATION:
Background
As part of the President’s Regulatory
Reinvention Initiative, the Treasury
Department and the IRS identified
obsolete regulations that relate to prior
law, provide elections for prior years,
or are otherwise outdated due to
changes in the underlying statutory
provisions.
******
Amendments to the Regulations
Accordingly, under the authority of
26 U.S.C. 7805, 26 CFR parts 1, 20,
23, 24, 25, 27, 33, 38, 301, and 602 are
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. Part 1 is amended as
follows:
1.The authority citation for part 1 is
amended by removing the entry for
§1.1303–1.
2.Section 1.32–1 is removed.
3.Section 1.103–12 is removed.
4.Section 1.110–1 is removed.
5.Section 1.114–1 is removed.
6.Section 1.115–1 is removed.
7.Section 1.116–1 is removed.
8.Section 1.116–2 is removed.
9 – 1 0 . S e c t i o n 1 . 3 6 7 ( a ) – 7 T i s
removed.
11.The undesignated center heading
preceding §1.383–1A is removed.
12.Section 1.383–1A is removed.
13.Section 1.383–2A is removed.
1 4 – 1 5 . S e c t i o n 1 . 3 8 3 – 3 A i s
removed.
16.Section 1.804–1 is removed.
17–18.Section 1.804–2 is removed.
19.Section 1.805–1 is removed.
20.Section 1.805–2 is removed.
21.Section 1.805–3 is removed.
22.Section 1.805–4 is removed.
23.Section 1.805–5 is removed.

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24.Section 1.805–6 is removed.
25–26.Section 1.805–7 is removed.
27.Section 1.805–8 is removed.
28.Section 1.820–1 is removed.
29.Section 1.820–2 is removed.
30.Section 1.820–3 is removed.
31.Section 1.824–1 is removed.
32.Section 1.824–2 is removed.
33.Section 1.824–3 is removed.
34.Section 1.907–0 is amended as
follows:
a.The introductory text is revised to
read as follows:
§1.907–0 Outline of regulation
provisions for section 907.
This section lists the paragraphs
contained in §§1.907(a)–0 through
1.907(f)–1.
******
b.The undesignated center heading
preceding the entry for §1.907(a)–0 is
removed and the entry for §1.907(e)–1
is removed.
c.The undesignated center heading
preceding the entry for §1.907(a)–0A is
removed.
d.The entry for §1.907(a)–0A is
removed.
e.The entry for §1.907(a)–1A is
removed.
f.The entry for §1.907(b)–1A is
removed.
g.The entry for §1.907(b)–2A is
removed.
h.The entry for §1.907(c)–1A is
removed.
i.The entry for §1.907(c)–2A is
removed.
j.The entry for §1.907(c)–3A is
removed.
k.The entry for §1.907(d)–1A is
removed.
l.The entry for §1.907(e)–1A is
removed.
m.The entry for §1.907(f)–1A is
removed.
35.Section 1.907(e)–1 is removed.
36.The undesignated center heading
preceding §1.907(a)–0A is removed.
37.Section 1.907(a)–0A is removed.
38.Section 1.907(a)–1A is removed.
39.Section 1.907(b)–1A is removed.
40.Section 1.907(b)–2A is removed.
41.Section 1.907(c)–1A is removed.
42.Section 1.907(c)–2A is removed.
43.Section 1.907(c)–3A is removed.
44.Section 1.907(d)–1A is removed.
45.Section 1.907(e)–1A is removed.
46.Section 1.907(f)–1A is removed.
47–48.Section 1.995–7 is removed.
49.The undesignated center heading
‘‘INCOME AVERAGING’’ preceding
§1.1301–0 is removed.
50.Section 1.1301–0 is removed.
51.Section 1.1301–1 is removed.
52.Section 1.1302–1 is removed.
53.Section 1.1302–2 is removed.
54.Section 1.1302–3 is removed.
55–56.Section 1.1303–1 is removed.
57.Section 1.1304–1 is removed.
58.Section 1.1304–2 is removed.
59.Section 1.1304–3 is removed.
60.Section 1.1304–4 is removed.
61.Section 1.1304–5 is removed.
62.Section 1.1304–6 is removed.
PART 20—ESTATE TAX;
ESTATES OF DECEDENTS
DYING AFTER AUGUST 16, 1954
P a r . 2 . S e c t i o n 2 0 . 2 0 3 5 – 1 i s
removed.
PART 23—[REMOVED]
Par. 3. Part 23 is removed.
PART 24—[REMOVED]
Par. 4. Part 24 is removed.
PART 25—GIFT TAX; GIFTS
MADE AFTER DECEMBER 31,
1954
P a r . 5 . S e c t i o n 2 5 . 2 5 1 7 – 1 i s
removed.
PART 27—[REMOVED]
Par. 6. Part 27 is removed.
PART 33—[REMOVED]
Par. 7. Part 33 is removed.
PART 38—[REMOVED]
Par. 8. Part 38 is removed.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 9. Part 301 is amended as
follows:
1.Section 301.6676–1 is removed.
2.Section 301.7424–1 is removed.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 10. In §602.101, paragraph (c) is
amended by removing the following
entries from the table:
§602.101 OMB Control numbers.
******
(c)* * *
CFR part or sectionCurrent OMB
where identifiedcontrol number
and described
******
1.820–2................ 1545–0128
******
1.824–1................ 1545–1027
1.824–3................ 1545–1027
******
1.1304–1............... 1545–0074
1.1304–3............... 1545–0074
1.1304–5............... 1545–0074
20.2035–1.............. 1545–0015
******
27.642–1............... 1545–0020
******
38.6302–1.............. 1545–0257
******
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 18, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
January 5, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 8,
1996, 61 F.R. 515)

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Part III.Administrative, Procedural, and Miscellaneous
Notice 96–14
Disallowance of Deductions for
Employee Remuneration in Excess of
$1,000,000; Correction
AGENCY: Internal Revenue Service,
Treasury.
A C T I O N : C o r r e c t i o n t o f i n a l
regulations.
SUMMARY: This document contains
corrections to final regulations (TD
8650) [1996–10 I.R.B. 5] which were
published in the Federal Register on
Wednesday, December 20, 1995 (60
FR 65534), and relates to the dis-
allowance of deductions for employee
remuneration in excess of $1,000,000.
EFFECTIVE DATE: December 20,
1995.
FOR FURTHER INFORMATION
CONTACT: Robert Misner or Charles
T. Deliee at (202) 622-6060 (not a toll-
free number).
SUPPLEMENTARY
INFORMATION:
Background
The final regulations that are the
subject of these corrections are under
section 162(m) of the Internal Revenue
Code.
Need for Correction
As published, the final regulations
(TD 8650) contain errors that are
misleading and in need of clarification.
Correction of Publication
Accordingly, the publication of the
final regulations (TD 8650), which was
the subject of FR Doc. 95-30869, is
corrected as follows:
§ 1.162–27 [Corrected]
1. On page 65538, column 1,
§ 1.162–27 (c)(3)(ii)(A), line 2, the
language ‘‘3121(a)(1) through section
3121(a)(5)(D)’’ is corrected to read
‘ ‘ 3 1 2 1 ( a ) ( 5 ) ( A ) t h r o u g h s e c t i o n
3121(a)(5)(D)’’.
2. On page 65543, column 2,
§ 1.162–27 (e)(4)(i), the last sentence
is corrected to read as follows:
******
(e)* * *
(4)* * * (i) * * * The material
terms include the employees eligible to
receive compensation; a description of
the business criteria on which the
performance goal is based; and either
the maximum amount of compensation
that could be paid to any employee or
the formula used to calculate the
amount of compensation to be paid to
the employee if the performance goal is
attained (except that, in the case of a
formula based, in whole or in part, on a
percentage of salary or base pay, the
maximum dollar amount of compensa-
tion that could be paid to the employee
must be disclosed).
******
3. On page 65544, column 3,
§ 1.162–27 (e)(5), second line from the
bottom of the paragraph, the language
‘‘to the increase in the stock of the’’ is
corrected to read ‘‘to the increase in
the value of the stock of the’’.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
January 5, 1996, 8:45 a.m., and published in
the issue of the Federal Register for February
6, 1996, 61 F.R. 4349)

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Part IV. Items of General Interest
Notice of Proposed Rulemaking
FUTA Taxation of Amounts Under
Employee Benefit Plans
EE–55–95
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rule-
making.
SUMMARY: This document contains
proposed regulations under section
3306(r)(2) of the Internal Revenue
Code, relating to when amounts de-
ferred under or paid from certain
nonqualified deferred compensation
plans are taken into account as
‘‘wages’’ for purposes of the employ-
ment taxes imposed by the Federal
Unemployment Tax Act (FUTA). The
regulations provide guidance to tax-
payers who must comply with section
3306(r)(2), which was added to the
Code by section 324 of the Social
Security Amendments of 1983.
DATES: Written comments and re-
quests for a public hearing must be
received by April 24, 1996.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (EE–55–95), Room
5228, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative,
submissions may be hand delivered
between the hours of 8 a.m. and 5 p.m.
to CC:DOM:CORP:R (EE–55–95),
Courier’s Desk, Internal Revenue Serv-
ice, 1111 Constitution Avenue NW,
Washington, DC.
FOR FURTHER INFORMATION
CONTACT: David N. Pardys, (202)
622-4606 (not a toll-free number),
concerning the regulations, and Mi-
chael Slaughter, (202) 622-7190 (not a
t o l l - f r e e n u m b e r ) , c o n c e r n i n g
submissions.
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Employment Tax
Regulations (26 CFR part 31) under
section 3306(r)(2) of the Internal Reve-
nue Code of 1986 (the ‘‘Code’’) re-
lating to the employment tax treatment
of amounts deferred under or paid from
certain nonqualified compensation
plans. These amendments are proposed
to reflect the statutory changes made
by section 324 of the Social Security
Amendments of 1983 (the ‘‘1983
Amendments’’), which added section
3306(r)(2) to the Code, and section
2662(f)(2) of the Deficit Reduction Act
of 1984 (DEFRA), which amended sec-
tion 324 of the 1983 Amendments.
Explanation of Provisions
These proposed regulations provide
guidance under section 3306(r)(2), re-
lating to when amounts deferred under
or paid from certain nonqualified de-
ferred compensation plans are taken
into account as wages for FUTA pur-
poses. These rules are substantially
similar to the rules applicable to the
FICA (Federal Insurance Contributions
Act) tax treatment of such amounts
deferred under section 3121(v)(2).
Thus, these regulations cross-reference
the proposed regulations under section
3121(v)(2).
Special Analyses
It has been determined that this
notice of proposed rulemaking is not a
significant regulatory action as defined
in EO 12866. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and,
therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemak-
ing will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations
are adopted as final regulations, consid-
eration will be given to any written
comments (a signed original and eight
(8) copies) that are submitted timely to
the IRS. All comments will be avail-
able for public inspection and copying.
A public hearing may be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of
the date, time, and place for the
hearing will be published in the Federal
Register.
Drafting Information
The principal author of these regula-
tions is David N. Pardys, Office of the
Associate Chief Counsel (Employee
Benefits and Exempt Organizations),
IRS. However, other personnel from
the IRS and Treasury Department
participated in their development.
******
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 31 is
proposed to be amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME
TAX AT SOURCE
Paragraph 1. The authority citation
for part 31 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 31.3306(r)(2)–1 is
added to read as follows:
§ 31.3306(r)(2)–1 Treatment of
amounts deferred under certain
nonqualified deferred compensation
plans.
(a)In general. Section 3306(r)(2)
provides a special timing rule for the
tax imposed by section 3301 with re-
spect to any amount deferred under a
nonqualified deferred compensation
plan. Section 31.3121(v)(2)–1
1
contains
rules relating to when amounts deferred
under certain nonqualified deferred
compensation plans are wages for
purposes of sections 3121(v)(2), 3101,
1
This section appears as a notice of proposed
rulemaking published elsewhere in this issue of
the Federal Register.

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and 3111. Those rules also apply to the
s p e c i a l t i m i n g r u l e o f s e c t i o n
3306(r)(2). For purposes of applying
those rules to section 3306(r)(2) and
this paragraph (a), references in those
rules to the Federal Insurance Contribu-
tions Act are considered references to
the Federal Unemployment Tax Act (26
U.S.C. 3301 et seq.), references to
FICA are considered references to
FUTA, references to section 3101 or
3111 are considered references to sec-
tion 3301, references to section
3121(v)(2) are considered references to
section 3306(r)(2), references to section
3121(a), 3121(a)(5), and 3121(a)(13)
are considered references to sections
3306(b), 3306(b)(5), and 3306(b)(10),
r e s p e c t i v e l y , a n d r e f e r e n c e s t o
§31.3121(a)–2(a) are considered refer-
ences to §31.3301–4.
(b)Effective dates and transition
rules.Except as otherwise provided,
section 3306(r)(2) applies to remunera-
tion paid after December 31, 1984.
Section 31.3121(v)(2)–2
2
contains
effective date rules for certain re-
muneration paid after December 31,
1 9 8 3 , f o r p u r p o s e s o f s e c t i o n
3121(v)(2). Those rules also apply to
section 3306(r)(2). For purposes of
applying those rules to section
3306(r)(2) and this paragraph (b),
references to section 3121(v)(2) are
considered references to section
3306(r)(2), and references to section
3121(a)(2), 3121(a)(3), or 3121(a)(13)
are considered references to section
3306(b)(2), 3306(b)(3), or 3306(b)(10),
respectively. In addition, references to
section 324(d)(1) of the Social Security
Amendments of 1983 are considered
references to section 324(d)(2) of the
Social Security Amendments of 1983,
and references to §31.3121(v)(2)–1 are
considered references to paragraph (a)
of this section. In addition, the rules of
§31.3121(v)(2)–2 shall apply to this
paragraph by—
(1)References to ‘‘December 31,
1983’’ are considered references to
‘‘December 31, 1984’’;
(2)References to ‘‘before 1984’’ are
considered references to ‘‘before
1985’’;
(3)References to ‘‘Federal Insur-
ance Contributions Act’’ are considered
2
This section appears as a notice of proposed
rulemaking published elsewhere in this issue of
the Federal Register.
references to ‘‘Federal Unemployment
Tax Act’’; and
(4)References to ‘‘FICA’’ are con-
sidered references to ‘‘FUTA’’.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
January 19, 1996, 12:52 p.m., and published in
the issue of the Federal Register for January
25, 1996, 61 F.R. 2214)
Notice of Proposed Rulemaking
FICA Taxation of Amounts Under
Employee Benefit Plans
EE–142–87
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rule-
making.
SUMMARY: This document contains
proposed regulations under section
3121(v)(2) of the Internal Revenue
Code of 1986, relating to when
amounts deferred under or paid from
certain nonqualified deferred compen-
sation plans are taken into account as
‘‘wages’’ for purposes of the employ-
ment taxes imposed by the Federal
Insurance Contributions Act (FICA).
The regulations provide guidance to
taxpayers who must comply with sec-
tion 3121(v)(2), which was added to
the Code by section 324 of the Social
Security Amendments of 1983.
DATES: Written comments and re-
quests for a public hearing must be
received by April 24, 1996.
ADDRESSES: Send submissions to:
C C : D O M : C O R P : R ( E E – 1 4 2 – 8 7 ) ,
Room 5228, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. In the alterna-
tive, submissions may be hand deliv-
ered between the hours of 8 a.m. and 5
p.m. to: CC:DOM:CORP:R (EE–142–
87), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW, Washington, DC.
FOR FURTHER INFORMATION
CONTACT: David N. Pardys, (202)
622-4606 (not a toll-free number),
concerning the regulations, and Mi-
chael Slaughter, (202) 622-7190 (not a
toll-free number), concerning sub-
missions.
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Employment Tax
Regulations (26 CFR part 31) under
section 3121(v)(2) of the Internal Reve-
nue Code of 1986 (the ‘‘Code’’) relating
to the employment tax treatment of
amounts deferred under or paid from
certain nonqualified deferred compensa-
tion plans. These amendments are pro-
posed to reflect the statutory changes
made by section 324 of the Social
Security Amendments of 1983 (the
‘‘1983 Amendments’’), which added
section 3121(v)(2) to the Code, and sec-
tion 2662(f)(2) of the Deficit Reduction
Act of 1984 (DEFRA), which amended
section 324 of the 1983 Amendments.
Explanation of Provisions
Sections 3101 and 3111 of the Code
impose FICA tax on employees and
employers, respectively. FICA tax con-
sists of the Old-Age, Survivors, and
Disability Insurance (OASDI) tax and
the Hospital Insurance (HI) tax, and
generally is computed as a percentage
of wages (as defined in section
3121(a)) with respect to employment.
Subject to specific exceptions, section
3121(a) defines ‘‘wages’’ as all re-
muneration for employment. Existing
regulations (§31.3121(a)–2(a)) provide
that FICA tax is imposed at the time
the remuneration is actually or con-
structively paid.
Prior to the 1983 Amendments,
benefits under a nonqualified deferred
compensation plan generally were
wages subject to FICA tax at the time
they were actually or constructively
paid, unless certain retirement-related
exclusions applied. These exceptions
(former section 3121(a)(2)(A), (a)(3),
and (a)(13)(A)(iii)) were repealed by
the 1983 Amendments. Thus, under the
1983 Amendments, which generally
apply to remuneration paid after De-
cember 31, 1983, ‘‘retirement’’ pay-
ments are no longer excluded from
wages. Instead, the 1983 Amendments
added section 3121(v)(2), which pro-
vides a special timing rule for wages
(within the meaning of section 3121(a))
that constitute an amount deferred

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under a nonqualified deferred compen-
sation plan.
1
Under section 3121(v)(2)(A), any
‘‘amount deferred’’ under a non-
qualified deferred compensation plan
must be taken into account as wages
for FICA purposes as of the later of (1)
when the services are performed, or (2)
when there is no substantial risk of
forfeiture of the rights to such amount.
This special timing rule may result in
imposition of FICA tax before the
benefit payments under the plan begin,
thus accelerating the imposition of
FICA tax on benefits under a non-
qualified deferred compensation plan.
Section 3121(v)(2)(B) provides a
special exclusion (the ‘‘nonduplication
rule’’) that prevents double taxation.
Once an amount deferred under a non-
qualified deferred compensation plan is
‘‘taken into account’’ as wages under
the special timing rule, the nonduplica-
tion rule provides that neither that
amount nor the ‘‘income attributable to
that amount’’ is again treated as FICA
wages. Thus, benefit payments under a
nonqualified deferred compensation
plan are not subject to FICA tax when
actually or constructively paid (i.e.,
under the general timing rule for wage
inclusion) if the benefit payments con-
sist of amounts deferred under the plan
that were previously taken into account
as FICA wages under the special tim-
ing rule plus the attributable income.
Conversely, benefits under a non-
qualified plan are subject to FICA tax
when actually or constructively paid to
the extent the benefits relate to an
amount deferred that was not pre-
viously taken into account under the
special timing rule.
Section 3121(a)(1) imposes a dollar
limit on the annual amount of wages
that is subject to the OASDI portion of
FICA tax. Section 13207 of the Om-
nibus Budget Reconciliation Act of
1993 repealed the dollar limit on
annual wages subject to the HI portion
of FICA tax, effective for 1994 and
later years.
1
The 1983 Amendments did not amend the
definition of net earnings from self-employment
under section 1402(a) of the Code or the timing
of the tax on self-employment income under
section 1401 of the Code. Accordingly, the
special timing rule under section 3121(v)(2) does
not apply to nonqualified deferred compensation
that constitutes net earnings from self-
employment.
Overview of Regulations
In contrast to most FICA wages,
nonqualified deferred compensation is
subject to FICA tax not when paid, but
earlier—generally when the related
services are performed. (FICA taxation
is deferred if the compensation is
subject to a substantial risk of forfei-
ture.) A benefit that was subject to
FICA tax at this earlier date generally
is not subject to tax again when paid to
the participant. Applying these statu-
tory rules often requires difficult valua-
tions of future benefits.
Recognizing the practical administra-
tive problems that can be encountered
by taxpayers in this area, the proposed
regulations are designed to be work-
able, to minimize complexity, and to
provide appropriate flexibility for tax-
payers. For example, the regulations:
●Permit use of any reasonable
assumptions. For the purpose of cal-
culating the present value of a benefit
earned in a given year (an ‘‘amount
deferred’’ under the statute), the reg-
ulations do not prescribe specific actu-
arial assumptions or methods that must
be used. Instead, the regulations simply
allow taxpayers to determine present
value using any reasonable actuarial
assumptions and methods.
●Establish a reasonably ascertain-
able rule. In some cases, uncertainties
pertaining to future benefits make it
especially difficult to determine the
present value of a benefit (for example,
where a benefit can fluctuate depending
on the varying amount of a qualified
plan benefit). In such cases, under the
regulations, the present value of the
benefit need not be included in FICA
wages (‘‘taken into account’’) until it
becomes reasonably ascertainable.
●Provide flexibility with respect to
withholding. The regulations ease the
administrative burdens of withholding
by permitting payors to delay the
inclusion of any deferred compensation
in wages until the end of the year. In
addition, where amounts deferred can-
not be readily calculated by year-end,
the payor may either estimate the
amounts (and make later adjustments
without interest or penalties) or
postpone the inclusion in wages until
the first quarter of the following year.
●Provide reasonable, good faith
transition relief. The regulations
provide transition relief for actions
taken before the effective date of the
regulations based on a reasonable, good
faith interpretation of the statute.
Structure of the Regulations
The regulations generally consist of
three parts. The first part of the
regulations, paragraphs (a) and (b),
describes the special timing rule and
the related nonduplication rule of sec-
tion 3121(v)(2), defines a nonqualified
deferred compensation plan, and spec-
ifies the types of benefits that are
subject to the special timing rule. The
second part of the regulations, para-
graphs (c), (d), and (e), describes how
the special timing rule and the non-
duplication rule operate. In the re-
mainder of the regulations, paragraph
(f) provides withholding rules, para-
graph (g) contains the regulatory effec-
tive date and the transition rules, and
§31.3121(v)–2 sets forth the statutory
effective dates.
The most significant items included
in these regulations are discussed
below.
Definition of Nonqualified Deferred
Compensation Plan
In general. Section 3121(v)(2)(C) of
the Code defines a ‘‘nonqualified de-
ferred compensation plan’’ as any plan
or arrangement established and main-
tained by an employer for one or more
of its employees that provides for the
deferral of compensation, other than a
plan described in section 3121(a)(5)
(such as qualified plans and certain
other plans and arrangements). The
regulations provide that a ‘‘non-
qualified deferred compensation plan’’
is a plan that is ‘‘established’’ by an
employer for one or more of its
employees, and that provides for the
‘‘deferral of compensation.’’ A plan
may constitute a nonqualified deferred
compensation plan under section
3121(v)(2), regardless of whether it is
an employee benefit plan under section
3(3) of the Employee Retirement In-
come Security Act of 1974, as
amended (ERISA), whether deferrals
under the plan are made pursuant to the
employee’s election, or whether the
amounts deferred are treated as de-
ferred for income tax purposes.
Requirement that the plan be estab-
lished. The regulations provide that an
amount deferred may not be taken into
account as FICA wages before the plan
is established, and that a plan is
considered ‘‘established’’ on the latest
of the date on which the plan is
adopted, the date on which it is

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effective, or the date on which its
material terms are set forth in writing.
Transition relief is provided for unwrit-
ten plans that were adopted and effec-
tive before March 25, 1996. Such a
plan is treated as established with
respect to an employee as of the later
of the date on which it was adopted or
became effective, provided that it is set
forth in writing within six months after
publication of the final regulations.
Requirement that the plan provide
for the deferral of compensation. In
general, the regulations specify that a
plan provides for the ‘‘deferral of
compensation’’ only if an employee
has a legally binding right to compen-
sation that has not been actually or
constructively received and that is
payable in a later year. However, the
regulations provide that there is no
‘‘deferral of compensation’’ merely
because compensation is paid after the
last day of a calendar year pursuant to
the employer’s customary payment
scheme for compensation. Thus, if one
week of an employer’s customary two-
week payroll period falls in one year
and the second week of the period falls
in the next year, the compensation paid
at the end of the two-week period on
account of the services rendered in the
first week is not considered deferred
compensation and is not subject to the
special timing rule.
The regulations also provide a rule
of administrative convenience for
‘‘short-term’’ deferrals. Under this rule,
an employer may choose to treat an
amount that is deferred from one
calendar year to a date that is no more
than a brief period of time after the end
of that calendar year as if it were
subject to the general timing rule (i.e.,
treated as FICA wages when actually
or constructively paid) instead of the
special timing rule.
Plans, arrangements, and benefits
that do not provide for the deferral of
compensation. Consistent with the leg-
islative history relating to section
3121(v)(2), certain types of plans,
arrangements, and benefits are not
covered by the special timing rule of
section 3121(v)(2), even though they
may be viewed in other contexts as
p r o v i d i n g f o r t h e d e f e r r a l o f
compensation.
The regulations provide that stock
options, stock appreciation rights (de-
scribed in Revenue Ruling 80–300,
1980–2 C.B. 165), and certain other
stock-related rights do not provide for
the deferral of compensation for FICA
tax purposes, even though there may be
no amount recognized for income tax
purposes until after the calendar year of
grant. In contrast, the regulations spec-
ify that a ‘‘phantom’’ stock plan that
awards a right to a fixed payment equal
to the value of a specified number of
shares of employer stock may be
treated as providing benefits that result
from the deferral of compensation for
purposes of section 3121(v)(2). Such a
plan typically involves the employer’s
unfunded, unsecured promise to pay
compensation in the future that is
measured by the value of a specified
number of shares of stock on the date
of payment. A phantom stock plan is a
nonqualified deferred compensation
plan under which the earnings portion
of the future compensation is based on
the change in the value of the
employer’s stock, rather than, for ex-
ample, an equity mutual fund or a
specified rate of interest.
The regulations provide that certain
welfare benefits, including vacation
benefits, sick leave, compensatory time,
disability pay, severance pay, and death
benefits, do not result from the deferral
of compensation for FICA purposes.
Neither section 3121(v) nor the legisla-
tive history relating to section 3121(v)
indicates that Congress intended to
modify the long-established FICA tax
treatment of such benefits.
Nothing in the regulations is in-
tended to determine the amount or the
timing of an employer’s deduction for
contributions to any type of welfare
benefit plan, including a plan that
provides severance benefits. Similarly,
although the regulations include a
severance pay plan under a heading
titled ‘‘certain welfare benefits,’’ no
inference is intended that a severance
plan is treated as a welfare benefit plan
under any other section of the Code.
The regulations provide that certain
other payments are not subject to the
s p e c i a l t i m i n g r u l e o f s e c t i o n
3121(v)(2). In describing the Senate
Finance Committee proposal on golden
parachutes, the Conference Report to
DEFRA states that ‘‘payments under
golden parachute contracts, like termi-
nation pay, are to be subject to FICA
taxes when paid.’’ (Emphasis added.)
Conf. Rpt. 98–861, p. 85. Consistent
with this legislative history, the regula-
tions provide that excess golden para-
chute payments and window benefits
do not result from the deferral of
compensation and, thus, are not subject
to the special timing rule.
Similarly, certain benefits established
within 12 months prior to an em-
ployee’s termination of employment are
treated as termination pay that is not
subject to the special timing rule. This
provision is intended to ensure that
termination pay is subject to FICA tax
when it is paid, even where there is no
explicit agreement to terminate employ-
ment. The regulations provide that a
benefit established within 12 months
prior to an employee’s termination of
employment is treated as termination
pay only if the facts and circumstances
indicate that the benefit was provided
in contemplation of the employee’s
impending termination of employment.
Benefits established after termination
of employment also do not result from
the deferral of compensation. In addi-
tion, there is no deferral of compensa-
tion where the facts and circumstances
indicate that the compensation is paid
for current services.
Determination of the Amount
Deferred
The ‘‘amount deferred’’ under a
nonqualified deferred compensation
plan for a period is the amount that
must be taken into account as wages
for that period under the special timing
rule of section 3121(v)(2)(A). Under
the regulations, the manner in which
the amount deferred for a period is
determined depends upon whether the
nonqualified deferred compensation
plan is an account balance plan or a
nonaccount balance plan.
Account balance plans. The regula-
tions provide that, if benefits for an
employee are provided under an ac-
count balance plan, the amount de-
ferred equals the principal amount
credited to the employee’s account for
the period, increased or decreased by
any income attributable to that amount
through the date such amount is re-
quired to be taken into account as
FICA wages. For purposes of the
regulations, a nonqualified deferred
compensation plan is an ‘‘account
balance plan’’ only if, under the terms
of the plan, (1) principal amounts are
credited to an individual account for an
employee, (2) the income attributable
to the principal amounts is credited (or
debited) to the individual account, and
(3) the benefits payable to the
employee are based solely on the

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balance credited to the individual
account.
Nonaccount balance plans. If a
nonqualified deferred compensation
plan is not an account balance plan, the
regulations provide that the amount
deferred for a period equals the present
value of the additional future payments
to which the employee has obtained a
legally binding right during that period.
For purposes of determining present
value, the regulations give employers
the flexibility to use any reasonable
actuarial assumptions and methods.
‘‘Taken Into Account’’ Defined
An amount deferred is treated as
‘‘taken into account’’ when it is
included in computing the amount of
FICA wages, but only if any additional
FICA tax for the year (including any
interest and penalties due if the pay-
ment is late) that results from the
inclusion is actually paid before the
period of limitations is closed for the
year. For years before 1994, the
amount deferred is treated as taken into
account even if its inclusion does not
result in any additional FICA tax
liability. For example, if, in 1993, an
employee participating in a non-
qualified deferred compensation plan
had other wages that were at least
equal to the applicable OASDI and HI
wage bases for 1993, the inclusion in
wages of an amount deferred would not
have resulted in any additional FICA
tax liability for that year. Nonetheless,
the amount deferred would have been
considered taken into account as wages
for purposes of section 3121(v)(2).
Nonduplication Rule
As noted above, under the non-
duplication rule of section 3121(v)-
(2)(B), if an amount deferred is taken
into account as wages under the special
timing rule, neither the amount de-
ferred nor the related income is in-
cluded in FICA wages when benefits
attributable to that amount are paid.
If an amount deferred is not taken
into account as wages under the special
timing rule, then benefits attributable to
that amount are required to be included
as wages when actually or con-
structively paid in accordance with the
general timing rule. For this purpose, a
Form W–2 (Wage and Tax Statement)
for an earlier (post-1993) year showing
FICA wages in excess of taxable in-
come for the year and an explanation
showing that the payment is attributa-
ble to the excess could, for example, be
used by a taxpayer to demonstrate that
the payment is attributable to an
amount deferred that was previously
taken into account as wages under the
special timing rule. If a payment is
attributable to an amount deferred only
a portion of which was previously
taken into account, the portion of the
payment that is excluded from wages
pursuant to the nonduplication rule and
the portion that is included in wages
under the general timing rule are
generally determined on a pro rata
basis.
Income Attributable to an Amount
Deferred
Account balance plans. In the case
of an account balance plan, the regula-
tions define ‘‘income attributable to the
amount taken into account’’ as any in-
crease or decrease in the amount
credited to an employee’s account that,
under the terms of the plan, is attribu-
table to an amount previously taken
into account, but only if the income is
based on a rate of return that does not
exceed either (1) the actual rate of
return on a predetermined actual invest-
ment, or (2) if no predetermined actual
investment has been specified, a rea-
sonable rate of interest. If the rate of
return credited under the plan is not
reasonable, the income attributable to
the amount taken into account is
limited to the mid-term applicable
federal rate (as defined in section
1274(d)) for the first day of the
calendar year (the ‘‘AFR’’). However,
in the case of a predetermined actual
investment, if the actual rate of return
on that investment is lower than the
AFR, the income attributable to the
amount taken into account is limited to
the that actual rate of return. Any
excess of the income credited under the
plan over the income determined using
the AFR (or the actual rate of return, if
applicable) is considered an additional
amount deferred in the year credited,
and is required to be taken into account
in that year under the special timing
rule.
Nonaccount balance plans. In the
case of a nonaccount balance plan, the
regulations define the ‘‘income attribu-
table to the amount taken into ac-
count’’ as the increase, due solely to
the passage of time, in the present
value of any future payments to which
the employee has obtained a legally
binding right, determined using reason-
a b l e a c t u a r i a l a s s u m p t i o n s a n d
methods. Thus, if an amount deferred
for a period is determined using a
reasonable interest rate and other rea-
sonable actuarial assumptions and
methods, and that amount is taken into
account when required under the spe-
cial timing rule, none of the future
payments attributable to that amount
will be subject to FICA tax when paid.
If any actuarial assumption or
method is not reasonable, then the
income attributable to the amount taken
into account is limited to the income
that would result from the application
of the AFR and, if applicable, the
applicable mortality table under section
417(e) of the Code, both determined as
of January 1 of the calendar year in
which the amount was taken into
account. If the present value of the
future benefit payments (determined
using the AFR and the section 417(e)
mortality table) exceeds the amount
taken into account plus attributable
income (as limited by using those same
assumptions), a portion of each benefit
payment will be excluded from wages
under the nonduplication rule and a
portion will be included in wages under
the general timing rule.
Time Amounts Deferred Are Taken
Into Account
Under the special timing rule, an
amount deferred is required to be taken
into account as FICA wages as of the
later of when (1) the services are per-
formed or (2) the right to the amount
deferred is no longer subject to a
substantial risk of forfeiture. However,
the regulations allow an amount de-
ferred to be taken into account at a later
date if all or a portion of the amount
deferred is not ‘‘reasonably as-
certainable’’ until that later date. In
addition, consistent with Notice 94–96,
1994–2 C.B. 564, the regulations pro-
vide that no amount deferred under a
nonqualified deferred compensation plan
may be taken into account as FICA
wages before the plan is established.
Services creating the right to an
amount deferred. The regulations
provide that services creating the right
to an amount deferred are considered
performed when, under the terms of the
plan and the relevant facts and circum-
stances, the employee has performed all

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of the services necessary to obtain a
legally binding right to the amount
deferred, disregarding any substantial
risk of forfeiture.
Substantial risk of forfeiture. In ac-
cordance with the legislative history
relating to section 3121(v)(2), the regu-
lations define a substantial risk of for-
feiture for purposes of the special timing
rule of section 3121(v)(2) in accordance
with the principles of section 83. Thus,
in general, whether or not a substantial
risk of forfeiture exists will depend on
the facts and circumstances. See §1.83–
3(c) of the regulations.
Amounts deferred that are not rea-
sonably ascertainable. A number of
commentators have emphasized the
problems that would arise if certain
amounts deferred were required to be
taken into account while still highly
uncertain and subject to fluctuation.
For example, under a nonaccount bal-
ance plan, an amount deferred (and
taken into account as wages) for a year
might decrease, or even be eliminated,
in a later year on account of changes in
the limitations on contributions and
benefits imposed on qualified plans
under section 401(a)(17) or 415, the
amount of an employee’s future com-
pensation, the date on which payments
commence, or the form of benefit
elected by an employee. (The pos-
sibility that benefits may decrease
because of these contingencies does
not, however, generally cause the bene-
fits to be subject to a substantial risk of
forfeiture within the meaning of section
83 or, therefore, section 3121(v)(2).)
Because these types of contingencies
generally cannot be predicted with a
high degree of certainty for an individ-
ual employee, the regulations provide
that an amount deferred under a nonac-
count balance plan is not required to be
taken into account as wages until the
earliest date on which the amount de-
ferred is reasonably ascertainable (the
‘‘resolution date’’). An amount deferred
is ‘‘reasonably ascertainable’’ when
there are no actuarial or other as-
sumptions needed to determine the
amount deferred, other than interest,
mortality, or cost-of-living assumptions.
Thus, for example, if assumptions
relating to qualified plan offset vari-
ables, future pay, or the time or form
of benefit payments are needed to de-
termine the amount deferred at the time
the services are performed (or, if
applicable, when the benefit is no
longer subject to a substantial risk of
forfeiture), the employer may choose to
delay taking the amount deferred into
account until the only assumptions
needed to determine the amount de-
ferred are those relating to interest,
mortality, and cost of living. An
employer may choose to use this rule
for all of an amount deferred, even if
only a portion of the amount deferred
is not reasonably ascertainable. For
example, if the only portion of an
amount deferred that is not reasonably
ascertainable is an early retirement
subsidy, no portion of the amount
deferred is required to be taken into
account until the contingency relating
to early retirement has been resolved.
On the resolution date, the amount
deferred and the related income must
be determined in accordance with the
rules that generally apply to determine
those amounts under a nonaccount
balance plan. The rules that generally
apply to determine whether an amount
deferred is actually taken into account
as wages, and the consequences if it is
not so taken into account, also apply.
An employer may choose to take an
amount into account on a date (the
‘‘early inclusion date’’) that precedes
the resolution date. However, if the
amount taken into account at the early
inclusion date (plus related income
through the resolution date) is less than
the resolution date amount, then the
employer must ‘‘true up’’ by taking the
balance of the resolution date amount
into account as of the resolution date.
If the amount taken into account at the
early inclusion date (plus related in-
come) exceeds the resolution date
amount, the taxpayer may claim a re-
fund or credit, in accordance with
sections 6402 and 6413, for any over-
payment of FICA tax in open years.
Rule of administrative convenience.
The regulations provide that an em-
ployer may treat an amount deferred as
required to be taken into account on a
date that is later than, but within the
same calendar year as, the actual date
on which the amount deferred is other-
wise required to be taken into account.
Thus, for example, if an employee
obtains a legally binding right to an
amount deferred mid-year, the employer
may take the amount deferred into
account on any later date within the
same year (e.g., December 31).
Withholding
For purposes of withholding and
depositing FICA tax, an amount de-
ferred under a nonqualified deferred
compensation plan generally is treated
as wages paid by the employer and
received by the employee at the time it
is taken into account under section
3121(v)(2) and these regulations. How-
ever, in certain situations, the employer
may be unable to readily calculate the
amount deferred for a year by Decem-
ber 31 of that year. The regulations
provide two alternative methods for
withholding and depositing FICA tax in
these situations.
Under the ‘‘estimated method,’’ an
employer may treat a reasonably esti-
mated amount as wages paid on the last
day of the calendar year (the ‘‘first
year’’). If the employer underestimates
the amount deferred that should have
been taken into account and, therefore,
deposits less FICA tax than the amount
due, the employer may choose to treat
the shortfall as wages either in the first
year or in the first quarter of the next
year. If the employer treats the shortfall
as wages in the first year and the
shortfall was not included on the
employee’s Form W–2, the employer
must issue Form W–2c. In addition, the
employer must correct the information
on the Form 941 for the last quarter of
the first year. In such a case, the
shortfall will not be considered a late
deposit subject to penalty if it is
deposited by the employer’s first regu-
lar deposit date following the first
quarter of the next year. Conversely, if
the employer overestimates the amount
deferred that should have been taken
into account as wages on the last day
of the year, the employer may claim a
refund or credit in accordance with
sections 6402 and 6413.
Under the second alternative method,
the ‘‘lag method,’’ an employer may
calculate the end-of-year amount de-
ferred on any date in the first quarter
of the next calendar year. The amount
deferred will be treated as wages on
that date, and the amount deferred that
would otherwise have been taken into
account on the last day of the year
must be increased by income through
the date on which the amount is taken
into account.
Effective Date of the Regulations
Proposed effective date. These regula-
tions generally are proposed to be
effective for amounts deferred and bene-
fits paid on or after January 1, 1997.

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Comments and Requests for a Public
Hearing
Before these proposed regulations
are adopted as final regulations, consid-
eration will be given to any written
comments (a signed original and eight
(8) copies) that are submitted timely to
the IRS. All comments will be avail-
able for public inspection and copying.
A public hearing may be scheduled if
requested in writing by a person that
timely submits written comments. If a
public hearing is scheduled, notice of
the date, time, and place for the
hearing will be published in the Federal
Register.
Drafting Information
The principal author of these regula-
tions is David N. Pardys, Office of the
Associate Chief Counsel (Employee
Benefits and Exempt Organizations),
IRS. However, other personnel from
the IRS and Treasury Department
participated in their development.
******
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 31 is
proposed to be amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME
TAX AT SOURCE
Paragraph 1. The authority citation
for part 31 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Sections 31.3121(v)(2)–1 and
31.3121(v)(2)–2 are added to read as
follows:
§ 31.3121(v)(2)–1 Treatment of
amounts deferred under certain
nonqualified deferred compensation
plans.
(a)Timing of wage inclusion—(1)
General timing rule for wages. Re-
muneration for employment that con-
stitutes wages within the meaning of
section 3121(a) of the Internal Revenue
Code generally is taken into account
for purposes of the Federal Insurance
Contributions Act (FICA) taxes im-
posed under sections 3101 and 3111 of
the Internal Revenue Code at the time
the remuneration is actually or con-
structively paid. See §31.3121(a)–2(a).
(2)Special timing rule for an
amount deferred under a nonqualified
deferred compensation plan—(i) In
general. To the extent that remunera-
tion deferred under a nonqualified
deferred compensation plan constitutes
wages within the meaning of section
3121(a), the remuneration is subject to
the special timing rule described in this
paragraph (a)(2). Remuneration is con-
sidered deferred under a nonqualified
deferred compensation plan within the
meaning of section 3121(v)(2) and this
section only if it is provided pursuant
to a plan described in paragraph (b) of
this section. The amount deferred under
a nonqualified deferred compensation
plan is determined under paragraph (c)
of this section.
(ii)Special timing rule. Except as
otherwise provided in this section, an
amount deferred under a nonqualified
deferred compensation plan is required
to be taken into account as wages for
FICA purposes as of the later of—
(A)The date on which the services
creating the right to that amount are
performed (within the meaning of
paragraph (e)(2) of this section); or
(B)The date on which the right to
that amount is no longer subject to a
substantial risk of forfeiture (within the
meaning of paragraph (e)(3) of this
section).
(iii)Inclusion in wages only once
(nonduplication rule). Once an amount
deferred under a nonqualified deferred
compensation plan is taken into ac-
count (within the meaning of paragraph
(d)(1) of this section), then neither the
amount taken into account nor the in-
come attributable to the amount taken
into account (within the meaning of
paragraph (d)(2) of this section) is
treated as wages for FICA purposes at
any time thereafter.
(iv)Benefits that do not result from
a deferral of compensation. If a non-
qualified deferred compensation plan
(within the meaning of paragraph (b)(1)
of this section) provides both a benefit
that results from the deferral of com-
pensation (within the meaning of para-
graph (b)(3) of this section) and a
benefit that does not result from the
deferral of compensation, the benefit
that does not result from the deferral of
compensation is not subject to the
special timing rule described in this
paragraph (a)(2).
(v)Remuneration that does not con-
stitute wages. If remuneration deferred
under a nonqualified deferred compen-
sation plan does not constitute wages
within the meaning of section 3121(a),
then that remuneration is not taken into
account as wages for FICA purposes
under either the general timing rule
described in paragraph (a)(1) of this
section or the special timing rule
described in this paragraph (a)(2). For
example, benefits under a death benefit
plan described in section 3121(a)(13)
of the Internal Revenue Code do not
constitute wages for FICA purposes.
Therefore, these benefits are not in-
cluded as wages under the general
timing rule described in paragraph
(a)(1) of this section or the special
timing rule described in this paragraph
(a)(2), even if the death benefit plan
would otherwise be considered a non-
qualified deferred compensation plan
within the meaning of paragraph (b)(1)
of this section.
(b)Nonqualified deferred compensa-
tion plan—(l) In general—(i) Defined.
For purposes of this section, the term
‘‘nonqualified deferred compensation
plan’’ means any plan or other arrange-
ment that is established (within the
meaning of paragraph (b)(2) of this
section) by an employer for one or
more of its employees, and that
provides for the deferral of compensa-
tion (within the meaning of paragraph
(b)(3) of this section), other than a plan
described in section 3121(a)(5). A
nonqualified deferred compensation
plan may be adopted unilaterally by the
employer or may be negotiated between
or agreed to by the employer and one
or more employees or employee repre-
sentatives. A plan may constitute a
nonqualified deferred compensation
plan under this section without regard
to whether the deferrals under the plan
are made pursuant to an election by the
employee or whether the amounts
deferred are treated as deferred com-
pensation for income tax purposes (e.g.,
whether the amounts are subject to the
deduction rules of section 404). In
addition, a plan may constitute a
nonqualified deferred compensation
plan under this section whether or not
it is an employee benefit plan under
section 3(3) of the Employee Retire-
ment Income Security Act of 1974, as
amended.
(ii)Plan includes plan or other ar-
rangement. For purposes of this sec-
tion, except where the context indicates

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otherwise, the term ‘‘plan’’ includes a
plan or other arrangement.
(2)Plan establishment—(i) Date
plan is established. For purposes of
this section, a plan is ‘‘established’’ on
the latest of the date on which it is
adopted, the date on which it is
effective, or the date on which the
material terms of the plan are set forth
in writing. For purposes of this section,
a plan also will be deemed to be set
forth in writing if it is set forth in any
other form that is approved by the
Commissioner. The material terms of
the plan include the amount (or the
method or formula for determining the
amount) of deferred compensation to
be provided under the plan and the
time when it may or will be provided.
(ii)Plan amendments. In the case of
an amendment that increases the
amount deferred under a nonqualified
deferred compensation plan, the plan is
not considered established with respect
to the additional amount deferred until
the plan, as amended, satisfies the
requirements of paragraph (b)(2)(i) of
this section.
(iii)Transition rule. For purposes of
this section, an unwritten plan that is
adopted and effective before March 25,
1996, is treated as established under
this section as of the later of the date
on which it was adopted or became
effective, provided that it is set forth in
writing not later than [Date that is six
months after the date of publication of
final regulations in the Federal
Register].
(3)Plan must provide for the defer-
ral of compensation—(i) Deferral of
compensation defined. A plan provides
for the ‘‘deferral of compensation’’
with respect to an employee only if,
under the terms of the plan and the
relevant facts and circumstances, the
employee has a legally binding right
during a calendar year to compensation
that has not been actually or con-
structively received and that, pursuant
to the terms of the plan, is payable in a
later year. An employee does not have
a legally binding right to compensation
if that compensation may be uni-
laterally reduced or eliminated by the
employer. For this purpose, compensa-
tion is not considered subject to uni-
lateral reduction or elimination merely
because it may be reduced or elimi-
nated by operation of the objective
terms of the plan, such as the applica-
tion of a provision creating a substan-
tial risk of forfeiture (within the
meaning of section 83). Similarly, an
employee does not fail to have a
legally binding right to compensation
merely because the amount of compen-
sation is determined under a formula
that provides for benefits to be offset
by benefits provided under a plan that
is qualified under section 401(a) of the
Internal Revenue Code.
(ii)Compensation payable pursuant
to the employer’s customary payment
timing arrangement. There is no defer-
ral of compensation (within the mean-
ing of this paragraph (b)(3)) merely
because compensation is paid after the
last day of a calendar year pursuant to
the timing arrangement under which
the employer ordinarily compensates
employees for services performed dur-
ing a payroll period described in
section 3401(b).
(iii)Short-term deferrals. If, under a
nonqualified deferred compensation
plan, there is a deferral of compensa-
tion (within the meaning of this para-
graph (b)(3)) that causes an amount to
be deferred from a calendar year to a
date that is no more than a brief period
of time after the end of that calendar
year, then, at the employer’s option,
that amount may be treated as if it
were not subject to the special timing
rule described in paragraph (a)(2) of
this section. An employer may apply
this option only if the employer does
so for all employees covered by the
plan and all substantially similar non-
qualified deferred compensation plans.
For purposes of this paragraph (b)(3)-
(iii), whether compensation is deferred
to a date that is not more than a ‘‘brief
period of time’’ after the end of a
calendar year is determined in accord-
ance with §1.404(b)–1T, Q&A–2, of
this chapter.
(4)Plans, arrangements, and bene-
fits that do not provide for the deferral
of compensation—(i) In general. Not-
withstanding paragraph (b)(3)(i) of this
section, an amount or benefit described
in any of paragraphs (b)(4)(ii) through
(viii) of this section is not treated as
resulting from the deferral of compen-
sation for purposes of section 3121(v)-
(2) and this section and, thus, is not
subject to the special timing rule of
paragraph (a)(2) of this section.
(ii)Stock options, stock appreciation
rights and other stock value rights.
Amounts received as a result of a stock
option, or as a result of a stock
appreciation right or other stock value
right, do not result from the deferral of
compensation for purposes of section
3121(v)(2). For purposes of this para-
graph (b)(4)(ii), a ‘‘stock value right’’
is a right granted to an employee with
respect to one or more shares of
employer stock that, to the extent
exercised, entitles the employee to a
payment for each share of stock equal
to the excess, or a percentage of the
excess, of the value of a share of the
employer’s stock on the date of ex-
ercise over a specified price (greater
than zero). Thus, for example, the term
‘‘stock value right’’ does not include a
phantom stock or other arrangement
under which an employee is awarded
the right to receive a fixed payment
equal to the value of a specified
number of shares of employer stock.
(iii)Restricted property. If an
employee receives property from, or
pursuant to a plan maintained by, an
employer, there is no deferral of
compensation (within the meaning of
section 3121(v)(2)) merely because the
value of the property is not includible
in income (under section 83) in the
year of receipt by reason of the
property being nontransferable and sub-
ject to a substantial risk of forfeiture.
However, a plan under which an
employee obtains a legally binding
right to receive property (whether or
not the property is restricted property)
in the future may provide for the
deferral of compensation within the
meaning of paragraph (b)(3) of this
section and, accordingly, may con-
stitute a nonqualified deferred compen-
sation plan, even though benefits under
the plan are or may be paid in the form
of property.
(iv)Certain welfare benefits. Vaca-
tion benefits, sick leave, compensatory
time, disability pay, severance pay, and
death benefits do not result from the
deferral of compensation for purposes
of section 3121(v)(2), even if those
benefits constitute wages within the
meaning of section 3121(a). Benefits
provided under a severance pay plan
that is not an employee pension benefit
plan pursuant to 29 CFR 2510.3–2(b)
are considered ‘‘severance pay’’ for
purposes of this paragraph (b)(4)(iv). If
a plan is an employee pension benefit
plan pursuant to 29 CFR 2510.3–2(b),
then whether benefits payable upon an
employee’s termination of employment
are considered severance pay for pur-
poses of this paragraph (b)(4)(iv) de-
pends upon the relevant facts and
circumstances. Notwithstanding the

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preceding sentence, a plan that is an
employee pension benefit plan pursuant
to 29 CFR 2510.3–2(b) is in all cases
considered to provide severance pay for
purposes of this paragraph (b)(4)(iv) if
benefits payable under the plan upon
an employee’s termination of employ-
ment are payable only if that termina-
tion is involuntary.
(v)Certain benefits provided in con-
nection with impending termination—
(A) In general. Benefits provided in
connection with impending termination
of employment under paragraph (b)(4)-
(v)(B) or (b)(4)(v)(C) of this section do
not result from a deferral of compensa-
tion within the meaning of section
3121(v)(2).
(B)Window benefits—(1) In gen-
eral. For purposes of this paragraph
(b)(4)(v), a window benefit is provided
in connection with impending termina-
tion of employment. For this purpose, a
‘‘window benefit’’ is an early retire-
ment benefit, retirement-type subsidy,
social security supplement, or other
form of benefit made available by an
employer for a limited period of time
(no greater than one year) to employees
who terminate employment during that
period or to employees who terminate
employment during that period under
specified circumstances.
(2)Special rule for recurring win-
dow benefits. A benefit will not be
considered a window benefit if an
employer establishes a pattern of re-
peatedly providing for similar benefits
in similar situations for substantially
consecutive, limited periods of time.
Whether the recurrence of these bene-
fits constitutes a pattern of amendments
is determined based on the facts and
circumstances. Although no one factor
is determinative, relevant factors in-
clude whether the benefits are on
account of a specific business event or
condition, the degree to which the
benefits relate to the event or condi-
tion, and whether the event or condi-
tion is temporary or discrete or is a
permanent aspect of the employer’s
business.
(C)Termination within 12 months of
establishment of a benefit or plan. For
purposes of this paragraph (b)(4)(v), a
benefit is provided in connection with
impending termination of employment,
without regard to whether it constitutes
a window benefit, if—
(1) An employee’s termination of
employment occurs within 12 months
of the establishment of the benefit or
the plan providing the benefit; and
(2) The facts and circumstances indi-
cate that the benefit or plan is
established in contemplation of the
employee’s impending termination of
employment.
(vi)Benefits established after termi-
nation of employment. Benefits estab-
lished with respect to an employee
after the employee’s termination of
employment do not result from a
deferral of compensation within the
meaning of section 3121(v)(2).
(vii)Excess parachute payments. An
excess parachute payment (as defined
in section 280G(b)) under an agreement
entered into or renewed after June 14,
1984, in taxable years ending after such
date, does not result from the deferral
of compensation within the meaning of
section 3121(v)(2). For this purpose,
any contract entered into before June
15, 1984, that is amended after June
14, 1984 in any relevant significant
aspect, is treated as a contract entered
into after June 14, 1984.
(viii)Compensation for current serv-
ices. A plan does not provide for the
deferral of compensation within the
meaning of section 3121(v)(2) if, based
on the relevant facts and circumstances,
the compensation is paid for current
services.
(5)Examples. This paragraph (b)
may be illustrated by the following
examples:
Example 1. (i) In December of 1997,
Employer M tells Employee A that, if specified
goals are satisfied for 1998, Employee A will
receive a bonus on July 1, 1999 equal to a
specified percentage of 1998 compensation.
Because Employee A meets the specified goals,
Employer M pays the bonus to Employee A on
July 1, 1999, consistent with its oral
commitment.
(ii)This arrangement is not a nonqualified
deferred compensation plan under this section
because its terms were not set forth in writing
and, therefore, it was not established in accord-
ance with paragraph (b)(2) of this section.
Example 2. (i) Employer N establishes a
compensation arrangement for Employee B in
1997. Before the beginning of 1998, Employee B
and Employer N enter into a legally binding
salary reduction agreement to defer a specified
percentage of Employee B’s salary that would
otherwise be payable in 1998. The amounts
deferred remain a general asset of Employer N,
and are payable in 2008.
(ii)Employee B has a legally binding right
during 1998 to an amount of compensation that
has not been actually or constructively received
and that, pursuant to the terms of the arrange-
ment, is payable in a later year. Therefore, the
arrangement provides for the deferral of
compensation.
Example 3. (i) Employer O establishes a
nonqualified deferred compensation plan (within
the meaning of paragraph (b)(1) of this section)
for Employee C in 1984. The plan is amended on
January 1, 1999 to increase benefits, and the
amendment provides that the increase in benefits
is on account of Employee C’s performance of
services for Employer O from 1985 through
1998.
(ii)The additional benefits that resulted from
the plan amendment cannot be taken into account
as amounts deferred for 1985 through 1998, even
though the plan was established before then.
Pursuant to paragraphs (b)(2)(ii) and (e)(1) of
this section, the additional benefits cannot be
taken into account before the latest of the date
on which the amendment is adopted, the date on
which the amendment is effective, or the date on
which the plan, as amended, is set forth in
writing.
Example 4. (i) In 1997, Employer P, a state or
local government, establishes a plan for certain
employees that provides for the deferral of
compensation and that is subject to section
457(a).
(ii)Paragraph (b)(1)(i) of this section provides
that ‘‘nonqualified deferred compensation plan’’
means any plan that is established by an
employer and that provides for the deferral of
compensation, other than a plan described in
section 3121(a)(5). Section 3121(a)(5) lists,
among other plans, an exempt governmental
deferred compensation plan as defined in section
3121(v)(3). Under section 3121(v)(3)(A), this
definition does not include any plan to which
section 457(a) applies. Thus, the plan established
by Employer P is not an exempt governmental
deferred compensation plan described in section
3121(v)(3) and, consequently,is not a plan
described in section 3121(a)(5). Accordingly, the
plan is a nonqualified deferred compensation
plan within the meaning of section 3121(v)(2)
and paragraph (b)(1) of this section.
(iii)However, the general timing rule of
paragraph (a)(1) of this section and the special
timing rule of paragraph (a)(2) of this section
apply only to remuneration for ‘‘employment’’
that constitutes wages. Under section 3121(b)(7),
certain service performed in the employ of a
state, or any political subdivision of a state is not
‘‘employment.’’ Thus, even though the plan is a
nonqualified deferred compensation plan, the
extent to which section 3121(v)(2) applies to a
participating employee will depend on whether
or not the service performed for Employer P is
excluded from the definition of employment
under section 3121(b)(7).
Example 5. (i) In 1997, Employer Q estab-
lishes a plan that provides for bonuses to be paid
to employees based on a specified formula that
takes into account the employees’ performance
for the year. The bonus is not actually calculated
until March 1 of the following year, and is paid
on March 15 of that following year.
(ii)The plan provides for the deferral of
compensation because the employees have a
legally binding right, as of the last day of a
calendar year, to an amount of compensation that
has not been actually or constructively received
and, pursuant to the terms of the plan, that
compensation is payable in a later year. How-
ever, because the bonuses under the plan are paid
within a brief period of time after the end of the
calendar year from which they are deferred,
Employer Q may choose, pursuant to paragraph
(b)(3)(iii) of this section, to treat the bonuses as
if they are not subject to the special timing rule
of paragraph (a)(2)(ii) of this section.

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Example 6. (i) Employer R establishes a plan
under which bonuses based on performance in
one year may be paid on February 1 of the
following year at the discretion of the board of
directors. The board of directors meets in
January of each year to determine the amount, if
any, of the bonuses to be paid based on
performance in the prior year.
(ii)Because an employee does not have a
legally binding right to a bonus until January of
the year in which the bonus is paid, any bonus
paid under the plan in that year will not be
considered deferred from the preceding calendar
year, and the plan will not be treated as pro-
viding for the deferral of compensation within
the meaning of paragraph (b)(3)(i) of this
section.
Example 7. (i) Employer S maintains a plan
for employees that provides nonqualified stock
options described in §1.83–7(a) of this chapter.
Under the plan, employees are granted in 1997
the option to acquire shares of employer stock at
the fair market value of the shares on the date of
grant ($50 per share). The options can be
exercised at any time from the date of grant
through 2006. The options do not have a readily
ascertainable fair market value for purposes of
section 83 at the date of grant, and shares issued
upon the exercise of the options are not subject
to a substantial risk of forfeiture within the
meaning of section 83. In 2002, when the fair
market value of a share of employer stock is
$100, Employee D exercises an option to acquire
1,000 shares.
(ii)Under paragraph (b)(4)(ii) of this section,
amounts received as a result of a stock option do
not result from the deferral of compensation for
purposes of section 3121(v)(2). Thus, the
$50,000 spread between the amount paid for the
shares ($50,000) and the fair market value of the
shares on the date of exercise ($100,000) is taken
into account as wages for FICA purposes in the
year of exercise.
(iii)If the options had been granted at $45 per
share, $5 per share below the fair market value
on date of grant, the $55,000 spread between the
amount paid for the shares ($45,000) and the fair
market value of the shares on the date of
exercise ($100,000) would similarly be taken
into account as wages for FICA purposes in the
year of exercise.
Example 8. (i) Employer T establishes a
‘‘phantom stock’’ plan for certain employees.
Under the plan, an employee is credited on the
last day of each calendar year with a dollar
amount equal to the fair market value of 1,000
shares of employer stock. Upon termination of
employment for any reason, each employee is
entitled to receive the value, in cash or employer
stock, of the shares with which he or she has
been credited.
(ii) Because compensation to which the
employee has a legally binding right as of the
last day of one year is paid in a subsequent year,
the phantom stock plan provides for the deferral
of compensation. The phantom stock plan does
not provide stock value rights within the mean-
ing of paragraph (b)(4)(ii) of this section because
it provides for awards equal in value to the full
fair market value of a specified number of shares
of Employer T stock, rather than the excess of
that fair market value over a specified price.
Example 9. (i) Employer U establishes a plan
which provides for payments solely upon an
employee’s dismissal from employment, death,
or disability. The amount of the payments to an
employee is based on the length of continuous
active service with Employer U at the time of
dismissal, and is paid in monthly installments
over a period of three years.
(ii)Because benefits payable under the plan
upon termination of employment are payable
only upon an employee’s involuntary termina-
tion, the plan is a severance pay plan within the
meaning of paragraph (b)(4)(iv) of this section.
Thus, the benefits are not treated as resulting
from the deferral of compensation for purposes
of section 3121(v)(2).
Example 10. (i) On January 1, 1997, Employer
V establishes a plan that covers only Employee
E, who owns a significant portion of the business
and who has 30 years of service as of that date.
The plan provides that, upon Employee E’s
termination of employment at any time, he will
receive $200,000 per year for each of the
immediately succeeding five years. Employee E
terminates employment on March 1, 1997.
(ii)Because Employee E terminates employ-
ment within 12 months of the establishment of
the plan and the facts and circumstances set forth
above indicate that the plan was established in
contemplation of impending termination of
employment, the plan is considered to be
established in connection with impending termi-
nation within the meaning of paragraph (b)(4)(v)
of this section. Therefore, the benefits provided
under the plan are not treated as resulting from
the deferral of compensation for purposes of
section 3121(v)(2).
Example 11. (i) Employer W establishes a plan
on January 1, 1998 to supplement the qualified
retirement benefits of recently hired 55-year old
Employee F who forfeited retirement benefits
with her former employer in order to accept
employment with Employer W. The plan
provides that Employee F will receive $50,000
per year for life beginning at age 65, regardless
of when she terminates employment. On April
15, 1998, Employee F unexpectedly terminates
employment.
(ii)The facts and circumstances indicate that
the plan was not established in contemplation of
impending termination. Thus, even though
Employee F terminated employment within 12
months of the establishment of the plan, the plan
is not considered to be established in connection
with impending termination within the meaning
of paragraph (b)(4)(v) of this section. Benefits
provided under the plan are treated as resulting
from the deferral of compensation for purposes
of section 3121(v)(2).
Example 12. (i) Employer X establishes a plan
to provide supplemental retirement benefits to a
group of management employees who are at
various stages of their careers. All employees
covered by the plan are subject to the same
benefit formula. Employee G is planning to (and
actually does) retire within six months of the
date on which the plan is established.
(ii)Even though Employee G terminated
employment within 12 months of the establish-
ment of the plan, the plan is not considered to
have been established in connection with
Employee G’s impending termination within the
meaning of paragraph (b)(4)(v) of this section
because the facts and circumstances indicate
otherwise.
Example 13. (i) Employee H owns 100 percent
of Employer Y, a corporation that provides
consulting services. Substantially all of Employer
Y’s revenue is derived as a result of the services
performed by Employee H. In each of 1997,
1998, and 1999, Employer Y has gross receipts
of $180,000 and expenses (other than salary) of
$80,000. In each of 1997 and 1998, Employer Y
pays Employee H a salary of $100,000 for
services performed in each of those years. On
December 31, 1998, Employer Y establishes a
plan to pay Employee H $80,000 in 1999. The
plan recites that the payment is in recognition of
prior services. In 1999, Employer Y pays
Employee H a salary of $20,000 and the $80,000
due under the plan.
(ii)The facts and circumstances described
above indicate that the $80,000 paid pursuant to
the plan is based on services performed by
Employee H in 1999 and, thus, is paid for
current services within the meaning of paragraph
(b)(4)(viii) of this section. Accordingly, the plan
does not provide for the deferral of compensation
within the meaning of section 3121(v)(2), and
the $80,000 payment is included as wages in
1999 under the general timing rule of paragraph
(a)(1) of this section.
(c)Determination of the amount
deferred—(1) Account balance plans—
(i) General rule. For purposes of this
section, if benefits for an employee are
provided under a nonqualified deferred
compensation plan that is an account
balance plan, the ‘‘amount deferred’’
for a period equals the principal
amount credited to the employee’s
account for the period, increased or
decreased by any income attributable to
the principal amount through the date
the principal amount is required to be
taken into account as wages under
paragraph (e) of this section. A non-
qualified deferred compensation plan is
an account balance plan for purposes of
this section only if, under the terms of
the plan, a principal amount (or
amounts) is credited to an individual
account for an employee, the income
attributable to each principal amount is
credited (or debited) to the individual
account, and the benefits payable to the
employee are based solely on the
balance credited to the individual ac-
count. A plan does not fail to be an
account balance plan merely because,
under the terms of the plan, benefits
payable to an employee are based
solely on a specified percentage of an
account maintained for all (or a portion
of) plan participants, under which
principal amounts and income are
credited (or debited) to such account.
(ii)Income defined. For purposes of
this section, ‘‘income’’ means any
increase or decrease in the amount
credited to an employee’s account that
is attributable to amounts previously
credited to the employee’s account,
regardless of whether the plan denomi-
nates that increase or decrease as
income.

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(2)Nonaccount balance plans—(i)
General rule. For purposes of this
section, if benefits for an employee are
provided under a nonqualified deferred
compensation plan that is not an
account balance plan (a ‘‘nonaccount
balance plan’’), the ‘‘amount deferred’’
for a period equals the present value of
the additional future payment or pay-
ments to which the employee has ob-
tained a legally binding right (as
described in paragraph (b)(3)(i) of this
section) under the plan during that
period.
( i i )B i f u r c a t i o n p e r m i t t e d. A n
employer may treat a portion of a
nonaccount balance plan as a separate
account balance plan if that portion
satisfies the requirements of paragraph
(c)(1) of this section and the amount
payable to employees under that por-
tion is determined independently of the
amount payable under the other portion
of the plan.
(iii)Present value defined. For pur-
poses of this section, ‘‘present value’’
means the value as of a specified date
of an amount or series of amounts due
thereafter, where each amount is multi-
plied by the probability that the condi-
tion or conditions on which payment of
the amount is contingent will be satis-
fied, and is discounted according to an
assumed rate of interest to reflect the
time value of money. For purposes of
this section, the present value must be
determined as of the date the amount
deferred is required to be taken into
account as wages under paragraph
(e)(1) of this section using actuarial
assumptions and methods that are
reasonable as of that date. For this
purpose, a discount for pre-retirement
mortality is permitted, but only to the
extent that benefits will be forfeited
upon death. In addition, the present
value cannot be discounted for the risk
that payments will not be made (or will
be reduced) because of the unfunded
status of the plan, the risk associated
with any deemed or actual investment
of amounts deferred under the plan, the
risk that the employer, the trustee, or
another party will be unwilling or
unable to pay, the possibility of future
plan amendments, the possibility of a
future change in the law, or similar
risks or contingencies.
(3)Separate determination for each
period. The amount deferred under this
paragraph (c) is determined separately
for each period for which there is an
amount deferred under the plan. In
addition, paragraphs (d) and (e) of this
section are applied separately with
respect to the amount deferred for each
such period. Thus, for example, the
f r a c t i o n d e s c r i b e d i n p a r a g r a p h
(d)(1)(ii)(A) of this section and the
resolution date amount described in
paragraph (e)(4)(ii) of this section are
determined separately with respect to
each amount deferred.
(4)Examples. This paragraph (c)
may be illustrated by the following
examples:
Example 1. (i) Employer M establishes a
nonqualified deferred compensation plan for
Employee A. Under the plan, 10 percent of
annual compensation is credited on behalf of
Employee A on December 31 of each year. In
addition, a reasonable rate of interest is credited
quarterly on the balance credited to Employee A
as of the last day of the preceding quarter. All
amounts credited under the plan are 100 percent
vested, and the benefits payable to Employee A
are based solely on the balance credited to
Employee A’s account.
(ii)The plan is an account balance plan. Thus,
pursuant to paragraph (c)(1) of this section, the
amount deferred for a calendar year is equal to
10 percent of annual compensation.
Example 2. (i) Employer N establishes a
nonqualified deferred compensation plan for
Employee B. Under the plan, 2.5 percent of
annual compensation is credited quarterly on
behalf of Employee B. In addition, a reasonable
rate of interest is credited quarterly on the
balance credited to Employee B’s account as of
the last day of the preceding quarter. All
amounts credited under the plan are 100 percent
vested, and the benefits payable to Employee B
are based solely on the balance credited to
Employee B’s account. As permitted by para-
graph (e)(5) of this section, any amount deferred
under the plan for the calendar year is taken into
account as wages on the last day of the year.
(ii)The plan is an account balance plan. Thus,
pursuant to paragraph (c)(1) of this section, the
amount deferred for a calendar year equals 10
percent of annual compensation (i.e., the sum of
the principal amounts credited to Employee B’s
account for the year) plus the interest credited
with respect to that 10 percent principal amount
through the last day of the calendar year. If
Employer N had not chosen to apply paragraph
(e)(5) of this section and, thus, had taken into
account 2.5 percent of compensation quarterly,
the interest credited with respect to those
quarterly amounts would not have been treated
as part of the amount deferred for the year.
Example 3. (i) Employer O establishes a
nonqualified deferred compensation plan for a
group of employees. Under the plan, each
participating employee has a fully vested right to
receive a life annuity, payable monthly beginning
at age 65, equal to the product of (a) 2 percent
for each year of service and (b) Employee C’s
highest average annual compensation for a three-
year period. The plan also provides that, if
Employee C dies before age 65, the present
value of the future payments will be paid to his
or her beneficiary. As permitted under paragraph
(e)(5) of this section, any amount deferred under
the plan for a calendar year is taken into account
as FICA wages as of the last day of the year. As
of December 31, 1998, Employee C has 25 years
of service and high three-year average compensa-
tion of $100,000 (the average for the years
1996-98). As of December 31, 1999, Employee
C is age 61, has 26 years of service, and has
high three-year average compensation of
$104,000. As of December 31, 2000, Employee
C is age 62, has 27 years of service, and has
high three-year average compensation of
$105,000. The assumptions that Employer O uses
to determine the amount deferred for 1999 (a 7
percent interest rate and, for the period after
commencement of benefits, the GAM 83 (male)
mortality table) and for 2000 (a 7.5 percent
interest rate and, for the period after commence-
ment of benefits, the GAM 83 (male) mortality
table) are assumed, solely for purposes of this
example, to be reasonable actuarial assumptions.
(ii)As of December 31, 1998, Employee C
has a legally binding right to receive lifetime
payments of $50,000 (2 percent 3 25 years 3
$100,000) per year. As of December 31, 1999,
Employee C has a legally binding right to
receive lifetime payments of $54,080 (2 percent
3 26 years 3 $104,000) per year. Thus, during
1999, Employee C has earned a legally binding
right to additional lifetime payments of $4,080
($54,080 – $50,000) per year beginning at age
65. The amount deferred for 1999 is the present
value, as of December 31, 1999, of these
additional payments, which is $27,426 ($4,080 3
the present value factor for a deferred annuity
payable at age 65, using the specified actuarial
assumptions). Similarly, during 2000, Employee
C has earned a legally binding right to additional
lifetime payments of $2,620 (2 percent 3 27
years 3 $105,000 – $54,080) per year beginning
at age 65. The amount deferred for 2000 is the
present value, as of December 31, 2000, of these
additional payments, which is $18,149 ($2,620 3
the present value factor for a deferred annuity
payable at age 65, using the specified actuarial
assumptions).
(d)Amounts taken into account and
income attributable thereto—(1) Taken
into account—(i) Taken into account
defined. For purposes of this section,
an amount deferred under a non-
qualified deferred compensation plan is
‘‘taken into account’’ as of the date it
is included in computing the amount of
‘‘wages’’ as defined in section 3121(a),
but only to the extent that any addi-
tional FICA tax that results from such
inclusion (including any interest and
penalties for late payment) is actually
paid no later than the expiration of the
applicable period of limitation for the
year in which the amount deferred was
required to be taken into account under
paragraph (e) of this section. Because
an amount deferred for a calendar year
is combined with the employee’s other
wages for the year for purposes of
computing FICA taxes with respect to
the employee for the year, if the
employee has other wages that equal or
exceed the wage base limitations for
the Old-Age, Survivors, and Disability

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Insurance (OASDI) or Hospital Insur-
ance (HI) portions of FICA for the
year, no portion of the amount deferred
will actually result in additional
OASDI or HI tax, respectively. How-
ever, because there is no wage base
limitation for the HI portion of FICA
for years after 1993, the entire amount
deferred (in addition to all other wages)
is subject to the HI tax for the year
and, thus, will not be considered taken
into account for purposes of this
section unless the HI tax relating to the
amount deferred is actually paid. In
determining whether any additional
FICA tax relating to the amount
deferred is actually paid, any FICA tax
paid in a year is treated as paid with
respect to an amount deferred only
after FICA tax is paid on all other
wages for the year.
(ii)Amounts not taken into ac-
count—(A) Failure to take an amount
deferred into account under the special
timing rule. If an amount deferred for a
period (as determined under paragraph
(c) of this section) is not taken into
account, then the nonduplication rule of
paragraph (a)(2)(iii) of this section does
not apply, and benefits attributable to
that amount deferred are included as
wages in accordance with the general
timing rule of paragraph (a)(1) of this
section. For example, if an amount
deferred is required to be taken into
account in a particular year under
paragraph (e) of this section, but the
employer fails to pay the additional
FICA tax on that amount, then the
amount deferred and the income at-
tributable to that amount must be
included as wages when actually or
constructively paid.
(B)Failure to take a portion of an
amount deferred into account under the
special timing rule. If only a portion of
an amount deferred (as determined
under paragraph (c) of this section) is
taken into account, then a portion of
each benefit payment attributable to
that amount deferred is excluded from
wages pursuant to the nonduplication
rule of paragraph (a)(2)(iii) of this
section and the balance is subject to the
general timing rule of paragraph (a)(1)
of this section. The portion that is
excluded from wages is fixed when the
attributable benefits commence and is
determined by multiplying each such
payment by a fraction, the numerator of
which is the amount that was taken into
account (plus income attributable to
that amount) and denominator of which
is the present value of the future
benefit payments attributable to the
amount deferred. If the amount de-
ferred was determined using reasonable
actuarial assumptions, the present value
is determined using those assumptions.
(2)Income attributable to the
amount taken into account—(i) Ac-
count balance plans. For purposes of
the nonduplication rule of paragraph
(a)(2)(iii) of this section, in the case of
an account balance plan, the ‘‘income
attributable to the amount taken into
account’’ means any amount credited
on behalf of an employee under the
terms of the plan that is income (within
the meaning of paragraph (c)(1) of this
section) attributable to an amount pre-
viously taken into account (within the
meaning of paragraph (d)(1) of this
section), but only if the income is
based on a rate of return that does not
exceed either the actual rate of return
on a predetermined actual investment
(whether or not assets associated with
the plan or the employer are actually
invested therein) or, if no predeter-
mined actual investment has been
specified for the period, a reasonable
rate of interest. For purposes of this
paragraph (d)(2)(i), an actual invest-
ment includes an investment identified
by reference to any stock index with
respect to which there are positions
traded on a national securities exchange
described in section 1256(g)(7)(A). The
actual rate of return includes any
decrease as well as any increase in the
value of the investment.
(ii)Nonaccount balance plans. For
purposes of the nonduplication rule of
paragraph (a)(2)(iii) of this section, in
the case of a nonaccount balance plan,
the ‘‘income attributable to the amount
taken into account’’ means the in-
crease, due solely to the passage of
time, in the present value of the future
payments to which the employee has
obtained a legally binding right, the
present value of which constituted the
amount taken into account (determined
as of the date such amount was taken
into account), but only if the amount
taken into account was determined
using reasonable actuarial assumptions
and methods. Thus, each year there
will be an increase (determined using
the same interest rate used to determine
the amount taken into account) result-
ing from the shortening of the discount
period before the future payments are
made, plus, if applicable, an increase in
the present value resulting from the
employee’s survivorship during the cur-
rent year. As a result, if the amount
deferred for a period is determined
using a reasonable interest rate and
other reasonable actuarial assumptions
and methods, and the amount is taken
into account when required under para-
graph (e) of this section, then, under
the nonduplication rule of paragraph
(a)(2)(iii) of this section, none of the
future payments attributable to that
amount will be subject to FICA tax
when paid.
(iii)Unreasonable rates of return—
(A) Account balance plans. If, under an
account balance plan, the rate of
interest credited is not reasonable, as
determined by the Commissioner, or
the rate of return credited otherwise
exceeds the applicable limitation in
paragraph (d)(2)(i) of this section, then
the income attributable to the amount
taken into account is limited to the
income that would result from applica-
tion of the mid-term applicable federal
rate (as defined pursuant to section
1274(d)) for January 1 of the calendar
year, compounded annually (the
‘‘AFR’’). However, in the case of a
predetermined actual investment, if the
actual rate of return on that investment
is lower than the AFR, then the income
attributable to the amount taken into
account is limited to the income that
would result from application of that
actual rate of return. Any excess of the
income credited under the plan over the
income determined using the AFR (or,
if applicable, the actual rate of return)
is considered an additional amount
deferred in the year the income is
credited, and is required to be taken
into account under the special timing
rule of paragraph (a)(2) of this section.
If the excess is not taken into account
as an additional amount deferred in the
year credited, then, pursuant to para-
graph (d)(1)(ii) of this section, the
excess and any income attributable to
the excess are subject to the general
timing rule of paragraph (a)(1) of this
section.
(B)Nonaccount balance plans. If
any actuarial assumption or method
used to determine the amount taken
into account under a nonaccount bal-
ance plan is not reasonable, as deter-
mined by the Commissioner, then the
income attributable to the amount taken
into account is limited to the income
that would result from the application
of the AFR and, if applicable, the
applicable mortality table under section

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417(e)(3)(A)(ii)(I) (the ‘‘417(e) mor-
tality table’’), both determined as of
the January 1 of the calendar year in
which the amount was taken into ac-
count. In addition, paragraph (d)(1)-
(ii)(B) of this section applies and, in
calculating the fraction described in
that paragraph, the numerator is the
amount taken into account plus income
(as limited under this paragraph
(d)(2)(iii)(B)), and the present value in
the denominator is determined using
the AFR, the 417(e) mortality table,
and reasonable assumptions as to cost
of living, each determined as of the
time the amount deferred was taken
into account.
(3)Examples. This paragraph (d)
may be illustrated by the following
examples:
Example 1. (i) In 1997, Employer M
establishes a nonqualified deferred compensation
plan for Employee A under which all benefits are
100 percent vested. In 1998, Employee A has
$200,000 of current annual compensation from
Employer M that is subject to FICA tax. The
amount deferred under the plan on behalf of
Employee A for 1998 is $20,000. Thus,
Employee A has total wages for FICA purposes
of $220,000. Because Employee A has other
wages that exceed the OASDI wage base for
1998, no additional OASDI tax is owed as a
result of the $20,000 amount deferred. Because
there is no wage base limitation for the HI
portion of FICA, additional HI tax liability
results from the $20,000 amount deferred.
However, Employer M fails to pay the additional
tax.
(ii)Under paragraph (d)(1)(i) of this section,
an amount deferred is considered taken into
account as wages for FICA purposes as of the
date it is included in computing FICA wages, but
only if any additional FICA tax liability that
results from inclusion of the amount deferred is
actually paid. Because the HI tax resulting from
the $20,000 amount deferred was not paid, that
amount deferred was not taken into account
within the meaning of paragraph (d)(1) of this
section. Thus, pursuant to paragraph (d)(1)(ii) of
this section, benefits attributable to the $20,000
amount deferred will be included as wages in
accordance with the general timing rule of
paragraph (a)(1) of this section.
Example 2. (i) The facts are the same as in
Example 1, except that Employer M takes all
actions necessary to correct its failure to pay the
additional tax before the applicable period of
limitation expires for 1998 (including payment of
any applicable interest and penalties).
(ii)Because the HI tax resulting from the
$20,000 amount deferred is paid, that amount
deferred is considered taken into account for
1998. Thus, in accordance with paragraph
(a)(2)(iii) of this section, neither the amount
deferred nor the income attributable to the
amount taken into account will be treated as
wages for FICA purposes at any time thereafter.
Example 3. (i) Employer N establishes a
nonqualified deferred compensation plan under
which all benefits are 100 percent vested. Under
the plan, an employee’s account is credited with
a contribution equal to 10 percent of salary on
December 31 of each year. The employee’s
account balance also is increased each December
31 by ‘‘interest’’ on the total amounts credited to
the executive’s account as of the preceding
December 31. The interest rate specified in the
plan results in an increase that is not based on
the return on a predetermined actual investment
within the meaning of paragraph (d)(2)(i) of this
section, and that is greater than the increase that
would result from application of a reasonable
rate of interest within the meaning of paragraph
(d)(2)(i) of this section.
(ii)Pursuant to paragraph (d)(2)(iii)(A) of this
section, the excess over the AFR is considered
an additional amount deferred in the year
credited and is required to be taken into account
in the year credited.
Example 4. (i) The facts are the same as in
Example 3, except that the annual increase is
based on Moody’s Average Corporate Bond
Yield.
(ii)Because this index reflects a reasonable
rate of interest, it is considered income attributa-
ble to the amount taken into account within the
meaning of paragraph (d)(2)(i) of this section.
Example 5. (i) The facts are the same as in
Example 3, except that the annual increase or
decrease is equal to the greater of the rate of
return on a specified aggressive growth mutual
fund or the rate of return on a specified income-
oriented mutual fund.
(ii)Because the increase or decrease is based
on the greater of the two investment returns and,
thus, is not based on the actual rate of return on
either specific investment, the increase is not
based on the return on a predetermined actual
investment within the meaning of paragraph
(d)(2)(i) of this section. Thus, if the resulting
increase exceeds the AFR, the excess is not
considered income attributable to the amount
taken into account within the meaning of
paragraph (d)(2)(i) of this section and, pursuant
to paragraph (d)(2)(iii)(A) of this section, is
considered an additional amount deferred.
Example 6. (i) The facts are the same as in
Example 5, except that the annual increase or
decrease with respect to 50 percent of the
employee’s account is equal to the rate of return
on a specified aggressive growth mutual fund
and the annual increase or decrease with respect
to the other 50 percent of the employee’s
account is equal to the increase or decrease in
the Standard & Poor’s 500 Index.
(ii)Because the increase or decrease attributa-
ble to any portion of the employee’s account is
based on the return on a predetermined actual
investment, the increase or decrease does not
exceed a reasonable rate of return within the
meaning of paragraph (d)(2)(i) of this section.
Thus, the entire increase or decrease is consid-
ered income attributable to the amount taken into
account within the meaning of paragraph
(d)(2)(i) of this section.
Example 7. (i) The facts are the same as in
Example 3, except that, pursuant to the terms of
the plan, before the beginning of each year, the
board of directors of Employer N designates a
specific investment on which the following
year’s annual increase or decrease will be based.
The board is authorized to switch investments
more frequently on a prospective basis. Before
the beginning of 1998, the board designates
Company A stock as the investment for 1998.
Before the beginning of 1999, the board desig-
nates Company B stock as the investment for
1999. At the end of 1999, the board determines
that the return on Company B stock was lower
than expected and changes its designation for
1999 to a stock that had a higher return during
1999.
(ii)The annual increase or decrease for 1998
is based on the return of a predetermined actual
investment. Although the annual increase or
decrease for 1999 is based on an actual
investment, the actual investment is not predeter-
mined since it was designated after its return was
known. In addition, the increase or decrease for
1999 is greater than the actual rate of return on
the actual investment that was predetermined.
Thus, pursuant to paragraph (d)(2)(iii)(A) of this
section, the income attributable to the amount
taken into account is limited to the AFR or, if
lower, the actual rate of return on the predeter-
mined actual investment that was designated for
1999.
Example 8. (i) Employer O establishes a
nonqualified deferred compensation plan for
Employee B. Under the plan, if Employee B
survives until payment is to be made, he has a
fully vested right to receive a lump sum payment
at age 65, equal to the product of (a) 10 percent
per year of service and (b) Employee B’s highest
average annual compensation for a three-year
period. As permitted under paragraph (e)(5) of
this section, any amount deferred under the plan
for the calendar year is taken into account as
wages as of the last day of the year. As of
December 31, 1998, Employee B has 25 years of
service and Employee B’s high three-year
average compensation is $100,000 (the average
for the years 1996-98). As of December 31,
1998, Employee B has a legally binding right to
receive a payment at age 65 of $250,000 (10
percent 3 25 years 3 $100,000). As of
December 31, 1999, Employee B is age 63, has
26 years of service, and has high three-year
average compensation of $104,000. As of De-
cember 31, 1999, Employer O has a legally
binding right to receive a payment at age 65 of
$270,400 (10 percent 3 26 years 3 $104,000).
Thus, during 1999, Employee B has earned a
legally binding right to an additional payment at
age 65 of $20,400 ($270,400 – $250,000). The
assumptions that Employer O uses to determine
the amount deferred for 1999 are a 7 percent
interest rate and the GAM 83 (male) mortality
table, which, solely for purposes of this example,
are assumed to be reasonable actuarial assump-
tions. The amount deferred for 1999 is the
present value, as of December 31, 1999, of the
$20,400 payment, which is $17,353. Employer O
takes this amount into account by including it in
Employee B’s FICA wages for 1999 and paying
the additional FICA tax.
(ii)Under paragraph (d)(2)(ii) of this section,
the income attributable to the amount that was
taken into account is the increase in the present
value of the future payment due solely to the
passage of time, because the amount deferred
was determined using reasonable actuarial as-
sumptions and methods. As of the payment date
at age 65, the present value of the future
payments earned during 1999 is $20,400. The
entire difference between the $20,400 and the
$17,353 amount deferred ($3,047) is the increase
in the present value of the future payment due
solely to the passage of time, and thus falls
within the definition of ‘‘income attributable to
the amount taken into account.’’ Because the
amount deferred was taken into account, the
entire payment of $20,400 represents either an
amount deferred that was previously taken into

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account ($17,353) or income attributable to that
amount ($3,047). Accordingly, pursuant to the
nonduplication rule of paragraph (a)(2)(iii) of
this section, none of the payment is included in
wages.
Example 9. (i) The facts are the same as in
Example 8, except that, instead of providing a
lump sum equal to 10 percent of average
compensation per year of service, the plan
provides Employee B with a fully vested right to
receive a life annuity, payable monthly beginning
at age 65, equal to the product of (a) 2 percent
for each year of service and (b) Employee B’s
highest average annual compensation for a three-
year period. The plan also provides that, if
Employee B dies before age 65, the present
value of the future payments will be paid to his
or her beneficiary. As of December 31, 1998,
Employee B has a legally binding right to
receive lifetime payments of $50,000 (2 percent
3 25 years 3 $100,000) per year. As of
December 31, 1999, Employee B has a legally
binding right to receive lifetime payments of
$54,080 (2 percent 3 26 years 3 $104,000) per
year. Thus, during 1999, Employee B has earned
a legally binding right to additional lifetime
payments of $4,080 ($54,080 – $50,000) per year
beginning at age 65. The amount deferred for
1999 is the present value, as of December 31,
1999, of these additional payments, determined
using reasonable actuarial assumptions and
methods. Employer O takes this amount into
account by including it in Employee B’s FICA
wages for 1999 and paying the additional FICA
tax.
(ii)Under paragraph (d)(2)(ii) of this section,
the income attributable to the amount that was
taken into account is the increase in the present
value of the future payment due solely to the
passage of time, because the amount deferred
was determined using reasonable actuarial as-
sumptions and methods. Because the amount
deferred was taken into account, the entire
benefit stream of $4,080 attributable to the
amount deferred in 1999 represents either an
amount deferred that was previously taken into
account or income attributable to that amount.
Accordingly, pursuant to the nonduplication rule
of paragraph (a)(2)(iii) of this section, none of
the payments are included in wages.
Example 10. (i) The facts are the same as in
Example 9, except that no amount is taken into
account for 1999 because Employer O fails to
pay the additional FICA tax.
(ii)Under paragraph (d)(1)(ii)(A) of this sec-
tion, if an amount deferred for a period is not
taken into account, then the benefits attributable
to that amount deferred are included as wages in
accordance with the general timing rule of
paragraph (a)(1) of this section. In this case,
assuming that the amounts deferred in other
periods were taken into account, $4,080 of each
year’s total benefit payment will be included in
wages when paid.
Example 11. (i) Employer P establishes a
nonqualified deferred compensation plan on
January 1, 1998 under which all benefits are 100
percent vested. The plan provides that amounts
deferred will be credited annually with interest
beginning in 1999 at a rate that is greater than a
reasonable rate of interest. Pursuant to paragraph
(d)(2)(iii)(A) of this section, Employer P treats
the excess over the AFR as an additional amount
deferred for 1999 and in each year thereafter,
and takes the additional amount into account by
including it in FICA wages and paying the
additional FICA tax for the year.
(ii)Consequently, in accordance with para-
graph (a)(2)(iii) of this section, the excess over
the AFR and any income (at the AFR) attributa-
ble to the excess will not be treated as wages for
FICA purposes in any subsequent year.
Example 12. (i) The facts are the same as in
Example 11, except that Employer P does not
treat the excess over the AFR as an additional
amount deferred and, accordingly, does not take
the excess into account as FICA wages for 1999
and years thereafter.
(ii)Because this excess was not taken into
account as an additional amount deferred for
1999 and years thereafter, the excess and any
amount attributable to the excess are subject to
the general timing rule of paragraph (a)(1) of this
section and will be included as wages for FICA
purposes when actually or constructively paid.
Example 13. (i) The facts are the same as in
Example 8, except that, in determining the
amount deferred, Employer P uses a 15 percent
interest rate, which, solely for purposes of this
example, is assumed not to be a reasonable
interest rate. Employer P determines that the
amount deferred is the present value, as of
December 31, 1999, of this payment, which is
$15,023. Employer P includes this amount in
wages and pays any resulting FICA tax. Assume
that the AFR as of January 1, 1999, is 7 percent.
(ii)Under paragraph (d)(2)(iii)(B) of this
section, if any actuarial assumption or method is
not reasonable, then the income attributable to
the amount taken into account is limited to the
income that would result from application of the
AFR and, if applicable, the 417(e) mortality
table. Because the 15 percent interest rate is
unreasonable, the income attributable to the
amount taken into account is limited to the
income that would result from using a 7 percent
interest rate and, in this case, an increase for
survivorship using the 417(e) mortality table.
Under these assumptions, the income attributable
to the $15,023 amount deferred is $1,199 in the
year 2000 and $1,313 in the year 2001. Under
paragraph (d)(1)(ii) of this section, the sum of
these amounts ($17,535) is excluded from
Employee B’s wages pursuant to the nonduplica-
tion rule of paragraph (a)(2)(iii) of this section,
and the balance of the payment ($2,865) is
subject to the general timing rule of paragraph
(a)(1) of this section and, thus, is included in
Employee B’s wages when actually or con-
structively paid.
(iii)The same result can be reached by
multiplying the attributable benefits by a frac-
tion, the numerator of which is the amount taken
into account, and the denominator of which is
the amount deferred that would have been taken
into account at the same time had the amount
deferred been calculated using the AFR, the
417(e) mortality table, and a reasonable assump-
tion as to cost of living. All three assumptions
are determined as of January 1 of the calendar
year in which the amount was taken into
account. In this Example 13, the fraction would
be $15,023 divided by $17,478, which equals
.85954. The $20,400 payment is multiplied by
this fraction to determine the amount of the
payment that is excluded from wages pursuant to
the nonduplication rule of paragraph (a)(2)(iii) of
this section. Thus, $17,535 ($20,400 3 .85954)
is excluded from wages and the balance ($2,865)
is subject to FICA tax when actually or
constructively paid.
Example 14. (i) The facts are the same as
Example 9, except that Employer O calculates
the amount deferred for 1999 as $18,252 and
takes that amount into account by including this
amount in wages and paying any resulting FICA
tax. The assumptions that Employer O uses to
determine the amount deferred are a 15 percent
interest rate and, for the period after commence-
ment of benefits, the GAM 83 (male) mortality
table. The 15 percent interest rate is assumed,
solely for purposes of this example, not to be a
reasonable actuarial assumption. Assume that the
AFR as of January 1, 1999, is 7 percent.
(ii)Under paragraph (d)(2)(iii)(B) of this
section, if any actuarial assumption or method
used is not reasonable, then the income attributa-
ble to the amount taken into account is limited to
the income that would result from application of
the AFR and, if applicable, the 417(e) mortality
table. Because the 15 percent interest rate is not
reasonable, the income attributable to the amount
taken into account is equal to the income that
would result from using a 7 percent interest rate
and the amount taken into account is treated as if
it represented a portion of the amount deferred
for purposes of applying paragraph (d)(1)(ii)(B)
of this section. Under these assumptions, the
income attributable to the $18,252 amount
deferred is $1,278 in the year 2000 and $1,367 in
the year 2001. Under paragraph (d)(1)(ii)(B) of
this section, the portion of each of benefit
payment attributable to the amount deferred that
is excluded from wages pursuant to the non-
duplication rule of paragraph (a)(2)(iii) of this
section is determined at benefit commencement
by multiplying each benefit payment by a
fraction, the numerator of which is the amount
taken into account (plus income attributable to
that amount) and the denominator of which is the
present value of future benefit payments attribu-
table to the amount deferred. Because the interest
rate assumption is not reasonable, not only is the
income limited to the application of the AFR, but
the present value in the denominator must be
determined using the AFR and (if applicable) the
417(e) mortality table. In this case, the present
value is $40,283 and thus the fraction is
$20,897/$40283, or .51875. Thus, $2,116 (.51875
3 $4,080) of each year’s benefit payment is
excluded from wages and the balance of each
year’s payment ($1,964) is subject to the general
timing rule of paragraph (a)(1) of this section
and is included in wages when actually or
constructively paid.
(iii)The same result can be reached by
multiplying the attributable benefits by a fraction
the numerator of which is the amount taken into
account, and the denominator of which is the
amount deferred that would have been taken into
account at the same time had the amount
deferred been calculated using the AFR, the
417(e) mortality table, and a reasonable assump-
tion as to cost of living. All three assumptions
are determined as of January 1 of the calendar
year in which the amount was taken into
account. In this Example 14, the fraction would
be $18,252 divided by $35,165, which equals
.51875. The $4,080 annual payment is multiplied
by this fraction to determine the amount of the
payment that is excluded from wages pursuant to
the nonduplication rule of paragraph (a)(2)(iii) of
this section. Thus, $2,116 ($4,080 x .51875) is
excluded from wages and the balance ($1,964) is
subject to FICA tax when actually or con-
structively paid.
(e)Time amounts deferred are taken
into account—(1) In general. Except as
otherwise provided in this paragraph

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(e), an amount deferred under a non-
qualified deferred compensation plan
must be taken into account as wages
for FICA purposes as of the later of the
date on which services creating the
right to the amount deferred are per-
formed (within the meaning of para-
graph (e)(2) of this section), or the date
on which the right to the amount
deferred is no longer subject to a
substantial risk of forfeiture (within the
meaning of paragraph (e)(3) of this
section). However, in no event may any
amount deferred under a nonqualified
deferred compensation plan be taken
into account as wages for FICA pur-
poses prior to the establishment of the
plan providing for the amount deferred
(or, if later, the plan amendment
providing for the amount deferred).
Therefore, if an amount is deferred
pursuant to the terms of a legally
binding agreement that is not put in
writing until after the amount would
otherwise be taken into account under
this paragraph (e)(1), the amount de-
ferred (including any attributable in-
come) must be taken into account as
wages for FICA purposes as of the date
the plan is put in writing.
(2)Services creating the right to an
amount deferred. For purposes of this
section, services creating the right to an
amount deferred under a nonqualified
deferred compensation plan are consid-
ered to be performed as of the date on
which, under the terms of the plan and
all the facts and circumstances, the
employee has performed all of the
services necessary to obtain a legally
binding right (as described in paragraph
(b)(3)(i) of this section) to the amount
deferred.
(3)Substantial risk of forfeiture. For
purposes of this section, the determina-
tion of whether a substantial risk of
forfeiture exists must be made in ac-
cordance with the principles of section
83 and the regulations thereunder.
(4)Amount deferred that is not
reasonably ascertainable under a non-
account balance plan—(i) In general.
Notwithstanding any other provision of
this paragraph (e), an amount deferred
under a nonaccount balance plan is not
required to be taken into account as
wages under the special timing rule of
paragraph (a)(2) of this section until
the first date on which all of the
amount deferred is reasonably ascer-
tainable (the ‘‘resolution date’’). In this
case, the amount deferred, determined
as of the resolution date in accordance
with paragraph (c)(2) of this section
(the ‘‘resolution date amount’’), must
be taken into account as of the
resolution date. For purposes of this
paragraph (e)(4), an amount deferred is
considered reasonably ascertainable on
the first date on which the only
actuarial or other assumptions regard-
ing future events or circumstances
needed to determine the amount de-
ferred are interest, mortality, and cost-
of-living assumptions. If these assump-
tions are the only assumptions regard-
ing future events or circumstances that
are needed to determine the amount
deferred as of a particular date, then
the amount deferred will not fail to be
reasonably ascertainable merely be-
cause the exact amount deferred cannot
be readily calculated as of that date.
(ii)Earlier inclusion permitted—(A)
In general. With respect to an amount
deferred that is not reasonably ascer-
tainable, an employer may choose to
take an amount into account at a date
(the ‘‘early inclusion date’’) before the
resolution date (but not before the date
otherwise described in paragraph (e)(1)
of this section). If the amount taken
into account at the early inclusion date
with respect to an amount deferred for
a period (plus income attributable to
the amount taken into account through
the resolution date) is less than the
resolution date amount for that period,
then the balance of the resolution date
amount must be taken into account as
of the resolution date. For purposes of
determining the income attributable to
an amount taken into account as of an
early inclusion date, the employer must
use an interest rate and, if applicable, a
mortality assumption that would have
been reasonable as of the early inclu-
sion date.
(B)Treatment of benefits paid be-
fore the resolution date. If a benefit
payment is attributable to an amount
deferred that is not reasonably ascer-
tainable at the time of payment, and the
employer has previously taken an
amount into account with respect to the
amount deferred, then, in lieu of the
pro rata rule provided in paragraph
(d)(1)(ii)(B) of this section, a first-in-
first-out rule applies in determining the
portion of the payment attributable to
the amount taken into account. Under
this first-in-first-out rule, the benefit
payment is included as wages under the
general timing rule of paragraph (a)(1)
of this section only to the extent that it
exceeds the amount previously taken
into account plus income attributable to
that amount. However, in determining
the additional amount that must be
taken into account on the resolution
date (under paragraph (e)(4)(ii)(A) of
this section), to the extent benefit
payments were not included as wages
when paid pursuant to the preceding
sentence, those payments (plus income
attributable to those payments) must be
added to the resolution date amount.
For purposes of determining the in-
come attributable to such payments, the
employer must use an interest rate and,
if applicable, a mortality assumption
that would have been reasonable as of
the early inclusion date.
(5)Rule of administrative conven-
ience. For purposes of this section, an
employer may treat an amount deferred
as required to be taken into account
under this paragraph (e) on any date
that is later than, but within the same
calendar year as, the actual date on
which an amount deferred is otherwise
required to be taken into account under
this paragraph (e). For example, if
services creating the right to an amount
deferred are considered performed un-
der paragraph (e)(2) of this section
periodically throughout a year, the
employer may nevertheless treat the
services creating the right to that
amount deferred as performed on De-
cember 31 of that year.
(6)Portions of an amount deferred
required to be taken into account in
more than one year. If different por-
tions of an amount deferred are re-
quired to be taken into account under
paragraph (e)(1) of this section in more
than one year (e.g., on account of a
graded vesting schedule), then each
such portion is considered a separate
amount deferred for purposes of this
section.
(7)Examples. This paragraph (e)
may be illustrated by the following
examples:
Example 1. (i) Employer M establishes a
nonqualified deferred compensation plan for
Employee A on November 1, 1996. Under the
plan, which is an account balance plan,
Employee A obtains a legally binding right on
the last day of each calendar year (if Employee
A is employed on that date) to be credited with a
principal amount equal to 5 percent of compen-
sation for the year. In addition, a reasonable rate
of interest is credited quarterly. Employee A’s
account balance is nonforfeitable and is payable
upon Employee A’s termination of employment.
For 1997, the principal amount credited to
Employee A under the plan (which, in this case,
is also the amount deferred within the meaning
of paragraph (c) of this section) is $25,000.

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(ii)Under paragraph (e)(2) of this section, the
services creating the right to the $25,000 amount
deferred are considered performed as of Decem-
ber 31, 1997, the date on which Employee A has
performed all of the services necessary to obtain
a legally binding right to the amount deferred.
Thus, in accordance with paragraph (e)(1) of this
section, the $25,000 amount deferred must be
taken into account as of December 31, 1997,
which is the later of the date on which services
creating the right to the amount deferred are
performed, or the date on which the right to the
amount deferred is no longer subject to a
substantial risk of forfeiture.
Example 2. (i) The facts are the same as in
Example 1, except that the principal amount
credited under the plan on the last day of each
year (and the attributable interest) is forfeited if
the employee terminates employment within five
years of that date.
(ii)Under paragraph (e)(3) of this section, the
determination of whether the right to an amount
deferred is subject to a substantial risk of
forfeiture is made in accordance with the
principles of section 83. Under §1.83–3(c) of this
chapter, a substantial risk of forfeiture generally
exists where rights in property that are trans-
ferred are conditioned, directly or indirectly,
upon the future performance of substantial
services. Because Employee A’s right to receive
the $25,000 principal amount (and attributable
interest) is conditioned on the performance of
services for five years, a substantial risk of
forfeiture exists with respect to that amount
deferred until December 31, 2002.
(iii)December 31, 2002 is the later of the date
on which services creating the right to the
amount deferred are performed, or the date on
which the right to the amount deferred is no
longer subject to a substantial risk of forfeiture.
Thus, in accordance with paragraph (e)(1) of this
section, the amount deferred (which (pursuant to
paragraph (c)(1) of this section) is equal to the
$25,000 principal amount credited to Employee
A’s account on December 31, 1997, plus the
interest credited with respect to that principal
amount through December 31, 2002) must be
taken into account as of December 31, 2002.
Example 3. (i) The facts are the same as in
Example 2, except that the principal amount
credited under the plan on the last day of each
year (and the attributable interest) becomes
nonforfeitable according to a graded vesting
schedule under which 20 percent is vested as of
December 31, 1998; 40 percent is vested as of
December 31, 1999; 60 percent is vested as of
December 31, 2000; 80 percent is vested as of
December 31, 2001; and 100 percent is vested as
of December 31, 2002. Because these dates are
later than the date on which the services creating
the right to the amount deferred are considered
performed (December 31, 1997), the amount
deferred is required to be taken into account as
of these dates that fall in five different years.
(ii)Paragraph (e)(6) of this section provides
that, if different portions of an amount deferred
are required to be taken into account under
paragraph (e)(1) of this section in more than one
year, then each such portion is considered a
separate amount deferred for purposes of this
section. Thus, $5,000 of the principal amount,
plus interest credited through December 31,
1998, is taken into account as an amount
deferred on December 31, 1998; $5,000 of the
principal amount, plus interest credited through
December 31, 1999, is taken into account as a
separate amount deferred on December 31, 1999;
etc.
Example 4. (i) In 1997, Employer N
establishes a nonqualified deferred compensation
plan under which all benefits are 100 percent
vested. The plan provides for Employee B (who
is age 45) to receive a lump sum benefit of
$500,000 at age 65. This benefit will be forfeited
if Employee B dies before age 65.
(ii)Because the only assumptions needed to
determine the amount deferred are interest and
mortality, the amount deferred is reasonably
ascertainable within the meaning of paragraph
(e)(4)(i) of this section.
Example 5. (i) The facts are the same as in
Example 4, except that the $500,000 is payable
to Employee B at the later of age 55 or
termination of employment.
(ii)Because the present value of the future
benefit is contingent on when Employee B
terminates employment, the determination of the
amount deferred requires the use of assumptions
other than interest, mortality, and cost-of-living
assumptions. Thus, the amount deferred is not
reasonably ascertainable within the meaning of
paragraph (e)(4)(i) of this section.
Example 6. (i) The facts are the same as in
Example 4, except that Employee B may elect to
take the benefit in the form of a life annuity of
$50,000 per year (commencing at age 65) with a
present value that is different than the amount
payable under the lump sum option.
(ii)Because the present value of the future
benefit is contingent on the form of benefit
elected by Employee B, the determination of the
amount deferred requires the use of assumptions
other than interest, mortality, and cost-of-living
assumptions. Thus, the amount deferred is not
reasonably ascertainable within the meaning of
paragraph (e)(4)(i) of this section.
Example 7. (i) Employer O establishes a
nonqualified deferred compensation plan. The
plan is a supplemental executive retirement plan
(SERP) that provides Employee C with a fully
vested right to receive a pension, in the form of
a straight life annuity payable monthly, begin-
ning at age 65, equal to the excess of (a) 3
percent of Employee C’s final three-year average
pay for each year of participation up to 15 years,
over (b) the amount payable to Employee C from
Employer O’s qualified pension plan. The
amount payable under the qualified pension plan
is equal to 1.5 percent of final three-year average
pay for each year of employment, excluding pay
in excess of the section 401(a)(17) compensation
limit. Employee C becomes a participant in the
SERP on January 1, 2001, at age 44. As
permitted by paragraph (e)(5) of this section, any
amount deferred under the SERP for the calendar
year is taken into account as wages as of the last
day of the year. However, the amount deferred
under the SERP for any year is not reasonably
ascertainable prior to termination of employment
because the determination of such amount
requires assumptions other than interest, mor-
tality, and cost-of-living (e.g., an assumption as
to Employee C’s average pay for the final three
years of employment). As permitted by para-
graph (e)(4)(i) of this section, Employer O
chooses not to take any amount into account for
any year before the resolution date. Employee C
terminates employment on December 31, 2018.
(ii)As of the date Employee C terminates
employment, the only actuarial or other assump-
tions needed to determine the amount deferred is
an interest rate and mortality assumption. At that
time, the amount deferred in each past year
becomes reasonably ascertainable, and Employer
O is able to determine that during 2001
Employee C earned a legally binding right to a
life annuity of $4,000 per year. Employer O
determines the present value of Employee C’s
future benefit payments under the SERP as of
this resolution date (December 31, 2018), using
an 7 percent interest rate and the UP–84
mortality table, which, solely for purposes of this
example, are assumed to be reasonable actuarial
assumptions for the year 2018. The resulting
present value, $ 26,950, is taken into account in
accordance with paragraph (d)(1) of this section.
Example 8. (i) The facts are the same as in
Example 7, except that, as permitted under
paragraph (e)(4)(ii) of this section, Employer O
chooses to take an amount into account before
the amount deferred for each year is reasonably
ascertainable. For the year 2001, Employer O
chooses to assume that Employee C has earned a
legally binding right to a benefit of $1,000 per
year from the SERP. Employer O determines the
present value of this benefit stream using an 8
percent interest rate and the UP–84 mortality
table, which, solely for purposes of this example,
are assumed to be reasonable actuarial assump-
tions for the year 2001. The resulting present
value, $1,853, is taken into account for 2001.
Employer O does not take any other amount into
account before the resolution date.
(ii)In accordance with paragraph (e)(4)(ii)(B)
of this section, Employer O determines the
additional amount required to be taken into in
the year 2008 to be $20,212 (the excess of
$26,950 present value of the stream of benefit
payments to which Employee C obtained a
legally binding right during 2001, determined as
of the resolution date, over $6,738 (which is the
sum of the $1,853 that was taken into account
for 2001, and $4,885 in income attributable to
that amount through the resolution date)).
Example 9. (i) The facts are the same as in
Example 8, except that Employer O determines
that Employee C actually had obtained a legally
binding right in 2001 to payments under the
SERP that have a present value at the 2018
resolution date of $6,000.
(ii)No additional amount is required to be
taken into account as of the resolution date.
Employer O may claim a refund or credit for the
overpayment of FICA tax with respect to
amounts taken into account prior to the resolu-
tion date to the extent permitted by sections 6402
and 6413.
Example 10. (i) In 1997, Employer P
establishes a nonqualified deferred compensation
plan for Employee D. The plan provides that, in
consideration of Employee D’s services to be
performed on Project X in 1998, Employee D
will receive 1 percent per year of Employer P’s
net profits associated with Project X for each of
the immediately succeeding three years. The 1
percent amount payable for net profits each year
will be paid on March 31 of the immediately
succeeding year. One percent of net profits
associated with Project X is $750,000 in 1999,
$400,000 in 2000, and $90,000 in 2001.
(ii)Because the services creating the right to
all or the amount deferred are performed in
1998, the benefit payments based on the 1999,
2000, and 2001 net profits are all attributable to
the amount deferred in 1998. However, because
the present value of D’s future benefit is
contingent on future profits, the determination of
the amount deferred requires the use of assump-
tions other than interest, mortality, and cost-of-
living. Thus, the amount deferred in 1998 will

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not be reasonably ascertainable within the
meaning of paragraph (e)(4)(i) of this section
until December 31, 2001 (which is the resolution
date). Employer P does not choose to take any
amount into account prior to the amount deferred
becoming reasonably ascertainable.
(iii) Paragraph (d)(1)(ii) of this section
provides that a benefit attributable to an amount
deferred under a nonqualified deferred compen-
sation plan must be included as wages when
actually or constructively paid if it is so paid
before the amount deferred has been taken into
account as wages under the special timing rule of
paragraph (a)(2)(ii)of this section. Thus, the
benefit payments in 2000 and 2001(on account of
1999 and 2000 net profits) must be included as
wages when paid.
(iv)As of December 31, 2001, the amount
deferred under the plan becomes reasonably
ascertainable. This is because the $90,000 future
benefit payment is a knowable quantity, albeit
not readily calculable, and the only assumption
needed to determine the present value of the
future benefits is interest. Thus, the present value
of the payment to be made in 2002 is required to
be taken into account as of the resolution date
(December 31, 2001) under the special timing
rule of paragraph (a)(2)(ii) of this section. Using
an interest rate of 10 percent per year (which,
solely for purposes of this example, is assumed
to be reasonable), Employer P determines that
the present value of the future benefits is
$87,881, and Employer P includes that amount in
wages for 2001. (Note that Employer P can
choose to use the lag method of withholding
described in paragraph (f)(3) of this section,
which allows the resolution date amount to be
taken into account in the first quarter of 2002,
provided that an adjustment for income is made.)
Example 11. (i) The facts are the same as in
Example 10, except that Employer P chooses the
early inclusion option permitted by paragraph
(e)(4)(ii) of this section to take $1,000,000 into
account on December 31, 1998, before the
amount deferred for 1998 is reasonably
ascertainable.
(ii)Pursuant to paragraph (e)(4)(ii)(B) of this
section, in applying the nonduplication rule of
paragraph (a)(2)(iii) of this section, a first-in-
first-out rule applies in determining the benefits
that are attributable to amounts previously taken
into account. Using the 10 percent interest rate,
Employer P determines that the $750,000 benefit
payment on March 31, 2000, and the March 31,
2001 benefit payment of $400,000 are attributa-
ble to the $1,000,000 previously taken into
account and, therefore, are not included in wages
when paid.
(iii)Under paragraph (e)(4)(ii) of this section,
if an employer chooses to take an amount into
account before the resolution date, the amount
taken into account (plus income attributable to
that amount) must be compared with the
resolution date amount, and any shortfall must be
taken into account as an additional amount
deferred as of the resolution date. Pursuant to
paragraph (e)(4)(ii)(B) of this section, the bene-
fits paid in 2000 and 2001 that were excluded
from wages because they were attributable to the
amount that was taken into account (plus income
attributable to those payments) must be added to
the resolution date amount for purposes of this
computation. Thus, Employer P must compare
the $1,000,000 taken into account in 1998 (plus
income attributable to that amount) to the sum of
the $87,881 resolution date amount and the two
benefit payments ($750,000 and $400,000) ex-
cluded from wages (plus income attributable to
each of those benefit payments). Using an
interest rate of 10 percent, Employer P deter-
mines that the additional amount that is required
to be taken into account as of December 31,
2001 is $72,653 ($1,331,000 – ($87,881 +
$886,132 + $429,640)).
(f)Withholding—(1) In general. Un-
less an employer applies an alternative
method described in paragraph (f)(2) or
(f)(3) of this section, an amount de-
ferred under a nonqualified deferred
compensation plan for any employee is
treated, for purposes of withholding
and depositing FICA tax, as wages paid
by the employer and received by the
employee at the time it is taken into
account in accordance with paragraph
(e) of this section. The alternative
methods described in paragraphs (f)(2)
and (f)(3) of this section may be used
for a calendar year with respect to an
amount deferred for an employee only
if the amount deferred cannot be
readily calculated by the last day of the
year. An employer may, from year to
year, change between the alternatives
described in this paragraph (f).
(2)Estimated method—(i) In gen-
eral. Under the alternative method
provided in this paragraph (f)(2), the
employer may make a reasonable esti-
mate of the amount deferred that
cannot be readily calculated and take
that estimated amount into account as
wages paid by the employer and
received by the employee on the last
day of the calendar year (the ‘‘first
year’’).
(ii)Underestimate of the amount
deferred. If the employer underesti-
mates the amount deferred (as deter-
mined after calculating the actual
amount deferred that should have been
taken into account by the last day of
the first year), the employer may treat
the shortfall as wages in the first year
or in the first quarter of the next year
(the ‘‘second year’’). In either case, the
shortfall does not include the income
credited to the amount deferred after
the first year. If the employer chooses
to treat the shortfall as wages in the
first year, the employer must reflect the
shortfall on Form W–2 or Form W–2c
for the first year, and must correct the
information on the Form 941 for the
last quarter of the first year. In
addition, the shortfall will not be
considered a late deposit if it is
deposited no later than the employer’s
first regular deposit date after the close
of the first quarter of the second year.
(iii)Overestimate of the amount de-
ferred. If the employer overestimates
the amount deferred (as determined
after calculating the actual amount
deferred that should have been taken
into account as of the last day of the
calendar year) and deposits more than
the amount required, the employer may
claim a refund or credit in accordance
with sections 6402 and 6413.
(3)Lag method. Under the alterna-
tive method provided in this paragraph
(f)(3), the amount deferred that is
described in the last sentence of
paragraph (f)(1) of this section may be
calculated on any date in the first
quarter of the succeeding calendar year
and treated as wages paid by the
employer and received by the employee
on that date. For purposes of applying
paragraph (c)of this section, the amount
deferred includes income attributable to
the amount deferred through the date
on which that amount is taken into
account under this paragraph (f)(3).
(4)Examples. This paragraph (f)
may be illustrated by the following
examples:
Example 1. (i) Employer M maintains a
nonqualified deferred compensation plan that is
an account balance plan. The plan provides for
annual bonuses based on current year profits to
be deferred until termination of employment.
Employer M’s profits for 1998, and thus the
amount deferred, cannot be readily calculated
until February 15, 1999.
(ii)In accordance with the alternative method
described in paragraph (f)(2) of this section,
Employer M makes a reasonable estimate that
the amount deferred that must be taken into
account as of December 31, 1998 for Employee
A is $20,000, and withholds and deposits FICA
tax on that amount as if it were wages paid by
Employer M and received by Employee A on
that date. Employer M subsequently determines
that the actual amount deferred that should have
been taken into account on December 31, 1998
was $22,000.
(iii)In accordance with the alternative method
described in paragraph (f)(2)(ii) of this section,
Employer M may treat the additional $2,000 as
wages paid to and received by Employee A
either in 1998 or in the first quarter of 1999. If
Employer M chooses to treat the additional
$2,000 as wages in 1998, Employer M must pay
the FICA tax on the $2,000 difference no later
than its first regular deposit date occurring after
March 31, 1999. In addition, Employer M must
file a Form W–2c for Employee A and must
correct the information on Form 941 for the last
quarter of 1998. If Employer M complies with
these conditions, the FICA tax on the $2,000
difference is not considered a late deposit.
Example 2. (i) The facts are the same as in
Example 1, except that Employer M subsequently
determines that the actual amount deferred that
should have been taken into account on Decem-
ber 31, 1998 was $19,000.
(ii)Under paragraph (f)(2)(iii) of this section,
Employer M may, in accordance with sections

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6402 and 6413, claim a refund or credit for the
overpayment of tax resulting from the
overestimate.
Example 3. (i) The facts are the same as in
Example 1, except that Employer M does not
make a reasonable estimate of the amount
deferred that must be taken into account as of
December 31, 1998. Instead, Employer M
withholds and deposits FICA tax on the amount
deferred plus income on that amount (determined
under the terms of the plan) as if it were wages
paid by Employer M and received by Employee
A on March 15, 1999.
(ii)Under the alternative method described in
paragraph (f)(3) of this section, the amount taken
into account on March 15, 1999 (including the
income) will be treated as wages paid to and
received by Employee A in 1999.
(g)Effective date and transition
rules—(1) General effective date—(i)
Effective date. Except as otherwise
provided in this paragraph (g) or in
§31.3121(v)–2, this section is effective
for amounts deferred and benefits paid
on or after January 1, 1997.
( i i )R e a s o n a b l e , g o o d f a i t h
interpretation—(A) in general. In de-
termining FICA tax liability for
amounts deferred and benefits paid
before the effective date of this section,
an employer may rely on a reasonable,
good faith interpretation of section
3121(v)(2), taking into account pre-
existing guidance. For example, an
employer will be deemed to have
determined FICA tax liability and
satisfied FICA withholding require-
ments in accordance with a reasonable,
good faith interpretation of section
3121(v)(2) if that liability is determined
in accordance with paragraphs (a)
through (e) of this section, and the
withholding method and timing comply
with paragraph (f) of this section.
Whether an employer has made a
reasonable, good faith interpretation of
section 3121(v)(2) will be determined
based on the relevant facts and circum-
stances, including consistency of treat-
ment by the employer.
(B)Optional adjustment for open
years. If an employer determined FICA
tax liability for amounts deferred or
benefits actually or constructively paid
in any year before the effective date of
this section for which the applicable
period of limitation has not expired
(‘‘pre-effective-date open years’’), in a
manner that was not in accordance with
this section, the employer may adjust
its FICA tax determination for that
year. In this case, any amount deferred
that would have been taken into ac-
count (within the meaning of paragraph
(d)(1) of this section) in that year under
this section must actually be taken into
account as if this section were effective
for that year. Thus, for example,
appropriate adjustments for the prior
period must be reflected on Form 941,
Employer’s Quarterly Federal Tax Re-
turn, and Form 941c, Supporting State-
ment to Correct Information, and Form
W–2c must be filed for any affected
employee in order that the Social
Security Administration may correctly
post the amount deferred to the
employee’s earnings record. Similarly,
if an amount was taken into account
under a nonaccount balance plan for
any pre-effective-date open year, but
the amount deferred was not reasonably
ascertainable (within the meaning of
paragraph (e)(4)(i) of this section), the
employer may claim a refund or credit
for any FICA tax paid on that amount
in accordance with Internal Revenue
Code sections 6402 and 6413 and,
thereafter, take the amount deferred
into account when it first becomes
reasonably ascertainable.
(iii)Plan must be established or
adopted. If amounts are deferred under
a plan before the effective date of this
section and benefits are paid on or after
the effective date of this section, then
in no event will an employer’s treat-
ment of amounts deferred under the
plan be considered to be in accordance
with a reasonable, good faith inter-
pretation of section 3121(v)(2) if the
employer treats these amounts as taken
into account as wages for FICA pur-
poses prior to the establishment of the
plan (within the meaning of paragraph
(b)(2) of this section) providing for the
deferred compensation (or, if later, the
plan amendment providing for the
deferred compensation). (If all amounts
are deferred and all benefits are paid
before the effective date of this section,
‘ ‘ a d o p t i o n ’ ’ i s s u b s t i t u t e d f o r
‘‘establishment’’ in the preceding sen-
tence.) For example, awards, bonuses,
raises, incentive payments, and other
similar amounts granted under a plan
as compensation for past services may
not be taken into account under section
3121(v)(2) prior to the establishment
(or, if applicable, the adoption) of the
plan.
(2)Transition rule for plans that are
not subject to section 3121(v)(2). If a
plan is not a nonqualified deferred
compensation plan within the meaning
of paragraph (b)(1) of this section, but,
for a period prior to the effective date
of this section and pursuant to a
reasonable, good faith interpretation of
section 3121(v)(2)(A), an amount under
the plan was taken into account (within
the meaning of paragraph (d)(1) of this
section) as an amount deferred under a
nonqualified deferred compensation
plan, then, pursuant to paragraph (g)(1)
of this section, the following rules shall
apply:
(i)With respect to benefits actually
or constructively paid before the effec-
tive date of this section that are
attributable to amounts previously
taken into account under the plan, no
additional FICA tax will be owed;
(ii)On or after the effective date of
this section, benefits under the plan
must be taken into account as wages
when actually or constructively paid in
accordance with paragraph (a)(1) of
this section; and
(iii)To the extent FICA tax was
actually paid on the amount taken into
account prior to the effective date of
this section, the employer may claim a
refund or credit to the extent permitted
by sections 6402 and 6413. However, if
any benefits were actually or con-
structively paid to an employee under
the plan before the effective date of
this section and these payments were
not subject to FICA tax by reason of
the employer’s treatment of the plan as
a nonqualified deferred compensation
plan and the application of paragraph
(g)(2)(i) of this section, then the
employer may claim a refund or credit
for pre-effective-date open years only
to the extent that the FICA tax paid on
amounts deferred in those years ex-
ceeds the FICA tax that would have
been owed on the benefits actually or
constructively paid to the employee in
those years if (notwithstanding para-
graph (g)(2)(i) of this section) those
benefits had been subject to FICA tax
when paid.
(3)Transition rules for plans that
are subject to section 3121(v)(2)—(i)
Plans that were treated as not subject
to section 3121(v)(2) — closed years.
If, for a period prior to the effective
date of this section and in accordance
with a reasonable, good faith inter-
pretation of section 3121(v)(2), an
employer treated a plan as if it were
not a nonqualified deferred compensa-
tion plan within the meaning of section
3121(v)(2), but that plan is a non-
qualified deferred compensation plan
within the meaning of paragraph (b)(1)
of this section, then, for purposes of
determining whether benefits actually

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or constructively paid on or after the
effective date of this section were
previously taken into account as wages
for purposes of applying the non-
duplication rule of section 3121(v)-
(2)(B), any amount deferred that would
have been required to have been taken
into account under this section in a
year for which the applicable period of
limitation has expired as of the effec-
tive date of this section (a ‘‘section
3121(v) closed year’’) will be treated
as if it had been taken into account
within the meaning of paragraph (d)(1)
of this section. For purposes of this
paragraph (g)(3)(i), an employer will
be considered to have treated a plan as
if it were not a nonqualified deferred
compensation plan for a period prior to
the effective date of this section only if
the employer withheld and deposited
any FICA tax due on any benefits
actually or constructively paid under
the plan during that period. The rule of
this paragraph (g)(3)(i) does not apply
to any amount deferred in a year that is
not a section 3121(v) closed year that
would have been required to have been
taken into account under this section (if
this section had been in effect for that
year). Thus, such an amount deferred
will be treated as having been taken
into account for purposes of applying
the nonduplication rule to benefits paid
after the effective date of this section
only if the amount deferred was actu-
ally taken into account within the
meaning of paragraph (d)(1) of this
section.
(ii)Undervaluation of the amount
deferred. If, for a period prior to the
effective date of this section, an
employer determined the amount de-
ferred for an employee under a nonac-
count balance plan in accordance with
a reasonable, good faith interpretation
of section 3121(v)(2), but that amount
is less than the amount that would have
been considered the amount deferred
under paragraph (c) of this section, the
following rules shall apply:
(A)No additional FICA tax will be
owed for that period; and
(B) The difference between the
amount that was taken into account in a
section 3121(v) closed year and the
amount that would have been taken
into account in that year had the
amount deferred been determined under
paragraph (c) of this section is treated
as if it had been taken into account
within the meaning of paragraph (d)(1)
of this section. In the case of an
amount deferred (in a section 3121(v)
closed year) that was not reasonably
ascertainable, the difference between
the amount taken into account (if any)
and the amount that would have been
taken into account had the employer
taken an amount into account using a
method permitted in paragraph (c) of
this section and actuarial assumptions
that matched the actual experience is
treated as if it had been taken into
account within the meaning of para-
graph (d)(1) of this section. Accord-
ingly, with respect to such an amount
deferred, the employer is not required
to take any additional amount into
account when the amount deferred
becomes reasonably ascertainable, and
no additional FICA tax will be owed
when the benefits attributable to the
amount deferred are actually or con-
structively paid. The rule of this
paragraph (g)(3)(ii)(B) does not apply
to any amount deferred that would have
been required to have been taken into
account under this section in a pre-
effective-date open year.
(iii)Overinclusion of the amount de-
ferred. If an amount deferred for an
employee under a nonaccount balance
plan was taken into account before the
effective date of this section in accord-
ance with a reasonable, good faith
interpretation of section 3121(v)(2),
but, under this section, that amount
would have been taken into account on
or after the effective date of this
section, the following rules apply:
(A)The determination of an amount
deferred for any period beginning on or
after the effective date of this section
must be made in accordance with
paragraph (c) of this section, and the
time when that amount deferred is
required to be taken into account must
be determined in accordance with
paragraph (e) of this section, without
regard to any amount deferred that was
taken into account for any period
before the effective date of this section;
and
(B)The employer may claim a
refund or credit for an overpayment of
tax caused by the pre-effective-date
overinclusion of wages to the extent
permitted by sections 6402 and 6413.
(4)Examples. This paragraph (g)
may be illustrated by the following
examples:
Example 1. (i) In 1994, Employer M
establishes a nonqualified deferred compensation
plan that is a nonaccount balance plan for
Employee A. All benefits under the plan are 100
percent vested. In order to determine the amount
deferred on behalf of Employee A under the plan
for 1994 and 1995, Employer M must make
assumptions as to the date on which Employee A
will retire and the form of benefit Employee A
will elect, in addition to interest, mortality, and
cost-of-living assumptions. Based on assumptions
made with respect to all of these contingencies,
Employer M determines that the amount deferred
for 1994 is $50,000 and the amount deferred for
1995 is $55,000. No OASDI tax is owed with
respect to those amounts deferred. However,
Employer M withholds and deposits HI tax on
those amounts. Because Employee B does not
retire before the effective date of this section,
Employer R will still need to make assumptions
for the date of retirement and the form of benefit
through the effective date. Employer M chooses
to apply this section before its effective date to
1994 and 1995.
(ii)Under the regulations in this section, the
amounts deferred in 1994 and 1995 are not
reasonably ascertainable (within the meaning of
paragraph (e)(4)(i) of this section) before the
effective date of this section. Thus, assuming the
applicable period of limitation has not expired
for 1994 and 1995, Employer M may, in
accordance with paragraph (g)(1)(ii)(B) of this
section, apply for a refund or credit for the HI
tax paid on the amounts deferred for 1994 and
1995 in accordance with sections 6402 and 6413
and, in accordance with paragraph (e)(4) of this
section, take into account the amounts deferred
when they become reasonably ascertainable.
Example 2. (i) Employer N adopts a plan on
January 1, 1994 that covers Employee B, who
has 10 years of service as of that date. The plan
provides that, in consideration of Employee B’s
outstanding services over the past 10 years,
Employee B will be paid a $500,000 lump sum
distribution upon termination of employment at
any time. On January 15, 1996, Employee B
terminates employment with Employer N.
Employer N determines, based on a reasonable,
good faith interpretation of section 3121(v)(2),
that the plan is a nonqualified deferred compen-
sation plan under that section. Employer N treats
the $500,000 as having been taken into account
as an amount deferred in 1993 and earlier years.
(ii)Under paragraph (g)(1)(iii) of this section,
if all amounts are deferred and all benefits are
paid under a plan before the effective date of this
section, then in no event will an employer’s
treatment of amounts deferred under the plan be
considered to be in accordance with a reasonable,
good faith interpretation of section 3121(v)(2) if
the employer treats these amounts as taken into
account as wages for FICA purposes prior to the
adoption of the plan. Accordingly, Employer N’s
treatment is not in accordance with a reasonable,
good faith interpretation of section 3121(v)(2)
because Employer N treated amounts as taken
into account in years before the adoption of the
plan.
Example 3. (i) Employer O adopts a bonus
plan on December 1, 1993 that becomes effective
and legally binding on January 1, 1994. Under
the plan, which is not set forth in writing, a
specified bonus amount (which is 100 percent
vested) is credited to Employee C’s account each
December 31. A reasonable rate of interest on
Employee C’s account balance is credited quar-
terly. Employee C’s account balance will begin
to be paid in equal annual installments over ten
years beginning on January 1, 1999. Employer O
determines, based on a reasonable, good faith

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interpretation of section 3121(v)(2), that the
bonus plan is a nonqualified deferred compensa-
tion plan under that section and, therefore, treats
the amounts credited on December 31, 1994,
1995, and 1996 as amounts deferred and takes
those amounts deferred into account as wages for
FICA purposes as of those dates. The bonus plan
is set forth in writing on February 1, 1997,
which for purposes of this example is assumed to
be prior to the date that is six months after the
publication of the final regulations, and, thus, is
treated as established as of January 1, 1994.
(ii)Under paragraph (g)(1)(iii) of this section,
if all amounts are deferred and all benefits are
paid under a plan before the effective date of this
section, then in no event will an employer’s
treatment of amounts deferred under the plan be
considered to be in accordance with a reasonable,
good faith interpretation of section 3121(v)(2) if
the employer treats these amounts as taken into
account as wages for FICA purposes prior to the
establishment of the plan (within the meaning of
paragraph (b)(2) of this section. Because the
bonus plan is treated as established on January 1,
1994 (pursuant to the transition rule provided in
paragraph (b)(2)(iii) of this section), the amounts
deferred are not treated as having been taken into
account prior to the establishment of the plan,
even though the plan was not set forth in writing
until February 1, 1997.
Example 4. (i) In 1985, Employer P establishes
a compensation arrangement for Employee D that
provides annual payments over a number of
years after termination of employment. Prior to
the effective date of this section, and in
accordance with a reasonable, good faith inter-
pretation of section 3121(v)(2), Employer P
treats the arrangement as a nonqualified deferred
compensation plan under section 3121(v)(2).
Each year, consistent with this treatment,
Employer P determines the amount deferred that
must be taken into account as FICA wages for
the year. Employer P also determines that
Employee D’s total wages (without regard to the
amount deferred) for each year from 1985
through 1993 exceed the applicable wage base
for each of those years and, consequently, there
is no FICA tax liability with respect to the
amounts deferred for those years. In 1994,
Employee D’s total wages (without regard to the
amount deferred) exceed the OASDI wage base.
However, because there is no limit on the HI
wage base, the amount deferred for 1994 results
in additional HI tax liability of $290, which is
timely paid by Employer P.
(ii)Employee D terminates employment with
Employer P in 1995 and receives a plan payment
of $50,000. In that year, Employee D also
receives wages of $60,000 from Employer P. In
accordance with its treatment of the plan as a
nonqualified deferred compensation plan under
section 3121(v)(2), Employer P does not treat the
payment in 1995 as wages for FICA purposes in
that year. Although Employer P made a reason-
able, good faith determination that the plan is a
nonqualified deferred compensation plan under
section 3121(v)(2), the plan is not a nonqualified
deferred compensation plan within the meaning
of paragraph (b)(1) of this section. Both 1994
and 1995 are pre-effective-date open years.
(iii)Because amounts under a plan were taken
into account (within the meaning of paragraph
(d)(1) of this section) as amounts deferred under
a nonqualified deferred compensation plan pur-
suant to a reasonable, good faith interpretation of
section 3121(v)(2)(A), but that plan is not a
nonqualified deferred compensation plan within
the meaning of paragraph (b)(1) of this section,
the transition rule provided in paragraph (g)(2) of
this section applies. Thus, no additional FICA
tax will be owed on benefits paid in 1995.
However, on or after the effective date of this
section, benefits under the plan must be taken
into account as wages when actually or con-
structively paid in accordance with the general
timing rule of paragraph (a)(1) of this section.
(iv)Because $290 of HI tax was paid on the
amount deferred in 1994, Employer P is entitled
to a refund or credit for that amount – but only
to the extent that $290 exceeds the FICA tax that
would have been owed on the $50,000 annual
payment in 1995 if those benefits had been
subject to FICA tax when paid (i.e., if the
regulation had been effective for those years). In
1995, Employee D had other wages of $60,000.
Thus, only $1,200 (the $61,200 OASDI wage
base, less the $60,000 of other wages) of the
$50,000 payment would have been subject to
OASDI; the full $50,000 would have been
subject to HI. This would have resulted in
$148.80 of OASDI tax ($1,200 3 12.4 percent)
and $1,450 of HI tax ($50,000 3 2.9 percent).
Employer P is not entitled to a refund or credit
under the transition rule of paragraph (g)(2)
because the $290 of HI tax paid in 1994 is less
than the total $1,598.80 of FICA tax liability that
would have resulted if this section had applied
for 1995.
Example 5. (i) In 1985, Employer Q
establishes a compensation arrangement for
Employee E that is a nonqualified deferred
compensation plan within the meaning of para-
graph (b)(1) of this section. However, prior to
the effective date of this section, Employer Q
determines, based on a reasonable, good faith
interpretation of section 3121(v)(2), that the
arrangement is not a nonqualified deferred
compensation plan within the meaning of that
section. Thus, when payments under the arrange-
ment begin in 1995, Employer Q withholds and
deposits FICA tax on the amounts paid to
Employee E. Payments under the arrangement
continue after the effective date of this section.
Employer Q does not choose (under paragraph
(g)(1)(ii)(B) of this section) to adjust its FICA
tax determination for pre-effective-date open
years by treating this section as in effect for all
amounts deferred and benefits actually or con-
structively paid for those years.
(ii)Under paragraph (g)(3)(i) of this section,
for purposes of determining whether benefits
actually or constructively paid on or after the
effective date of this section were previously
taken into account for purposes of applying the
nonduplication rule of section 3121(v)(2)(B), any
amount that would have been required to have
been taken into account in a section 3121(v)
closed year will be treated as if it had been taken
into account within the meaning of paragraph
(d)(1) of this section. Under the nonduplication
rule, benefits attributable to an amount that has
been so taken into account is not treated as
wages for FICA purposes at any later time (such
as upon payment).
(iii)Because Employer Q does not adjust its
FICA tax determination for pre-effective-date
open years by treating this section as in effect
for all amounts deferred for those years, any
benefits attributable to those amounts will be
included in wages when actually or con-
structively paid in accordance with the general
timing rule of paragraph (a)(1) of this section.
Example 6. (i) The facts are the same as in
Example 5, except that Employer Q chooses (in
accordance with paragraph (g)(1)(ii)(B) of this
section) to adjust its FICA tax determination for
all pre-effective-date open years by treating this
section as in effect for all amounts deferred for
those years.
(ii)In accordance with the nonduplication rule
of paragraph (a)(2)(iii) of this section, any
benefits attributable to the amounts deferred that
were taken into account for pre-effective-date
open years in accordance with paragraph (d)(1)
of this section will not be included as wages
when actually or constructively paid.
Example 7. (i) The facts are the same as in
Example 5, except that Employer Q does not
withhold and deposit the FICA tax due on
benefits actually or constructively paid prior to
the effective date of this section.
(ii)Because Employer Q did not withhold and
deposit the FICA tax due on benefits actually or
constructively paid during that period, the
transition rule provided in paragraph (g)(3)(i) of
this section does not apply. Therefore, any
amount that would have been required to have
been taken into account under this section in a
pre-effective-date closed year is not treated as if
it had been so taken into account, and benefits
attributable to any such amount are treated as
FICA wages when actually or constructively paid
in accordance with the general timing rule of
paragraph (a)(1) of this section.
Example 8. (i) In 1993, Employer R
establishes a nonqualified deferred compensation
plan for Employee F. In accordance with a
reasonable, good faith interpretation of section
3121(v)(2), Employer R determines that, for
1993, there is an amount deferred of $2.5 million
that must be taken into account as wages for
FICA purposes. However, because Employee F
has other wages in 1993 that exceed the
applicable OASDI and HI wage bases for that
year, no additional FICA tax is actually owed as
a result of that amount deferred being taken into
account for 1993. Under this section, $2 million
of the amount taken into account in 1993 would
have been taken into account for years beginning
on or after the effective date of this section
because Employee F did not have a legally
binding right to that amount until after that date.
(ii)In accordance with paragraph (g)(3)(iii)(A)
of this section, the determination of the amount
deferred under the plan for any period beginning
on or after the effective date of this section must
be made in accordance with paragraph (c) of this
section, and the time when that amount deferred
is required to be taken into account must be
determined in accordance with paragraph (e) of
this section. In addition, these determinations
must be made without regard to any amount
deferred that was taken into account for any
period before the effective date of this section.
Thus, the $2 million that, under this section,
would have been taken into account for years
beginning on or after the effective date of this
section must be taken into account under this
section for those years. Because no FICA tax
was actually paid on that $2 million in 1993, no
overpayment of tax was caused by the overinclu-
sion of wages in 1993 and, thus, Employer R is
not entitled to a refund or credit.
§ 31.3121(v)(2)–2 Effective dates and
transition rules.
(a)General effective date. Except as
otherwise provided in paragraphs (b)

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through (e) of this section, section
3121(v)(2) and the amendments made
to section 3121(a)(2), (3), and (13) by
the Social Security Amendments of
1983 (Pub. L. 98–21, 97 Stat. 65
(1983)), as amended by section
2662(f)(2) of the Deficit Reduction Act
of 1984 (Pub. L. 98–369, 98 Stat. 494
(1984)), apply to amounts deferred and
benefits paid after December 31, 1983.
(b)Definitions. For purposes of
§31.3121(v)(2)–1 and paragraphs (a)
through (e) of this section, the follow-
ing definitions apply:
FICA. FICA means the Federal In-
surance Contributions Act (26 U.S.C.
§ 3101 et seq.).
457(a) plan. A 457(a) plan means an
eligible deferred compensation plan of
a State or local government or of a tax-
exempt organization to which section
457(a) of the Internal Revenue Code
applies.
Gap agreement. Gap agreement
means an agreement adopted after
March 24, 1983, and on or before
December 31, 1983.
March 24, 1983 agreement. March
24, 1983 agreement means an agree-
ment in existence on March 24, 1983
between an individual and a non-
qualified deferred compensation plan
within the meaning of §31.3121(v)–
1(b). For this purpose only, any plan
(or agreement) to make payments that
qualify for one of the retirement
payment exclusions is treated as a
nonqualified deferred compensation
plan, regardless of whether the plan (or
agreement) is treated as a nonqualified
deferred compensation plan within the
meaning of §31.3121(v)–1(b). For ex-
ample, §31.3121(v)–1(b)(4)(v) provides
that certain benefits established in
connection with impending termination
do not result from the deferral of
compensation and thus are not consid-
ered deferred under a nonqualified
deferred compensation plan. However,
a plan that provides such benefits and
that was in existence on March 24,
1983 is treated as a nonqualified
deferred compensation plan for pur-
poses of this paragraph (b) to the
extent it provides benefits that would
have satisfied one of the retirement
payment exclusions had the benefits
been paid on April 19, 1983.
Post-amendment. Post-amendment
means after December 31, 1983.
P r e - a m e n d m e n t. P r e - a m e n d m e n t
means on or before December 31,
1983.
Retirement payment exclusions. Re-
tirement payment exclusions are the
exclusions from wages (for FICA tax
purposes) for retirement payments un-
der sections 3121(a)(2)(A), (a)(3), and
(a)(13)(A)(iii), as in effect on April 19,
1983.
Transition benefits. Transition bene-
fits are post-amendment payments at-
tributable to pre-amendment services.
(c)Transition rules—(1) In general.
The general effective date described in
paragraph (a) of this section applies to
post-amendment payments attributable
solely to post-amendment services,
whether or not paid under a March 24,
1983 agreement or a gap agreement.
Thus, section 3121(v)(2) applies, and
the retirement payment exclusions do
not apply, to these benefits. Special
effective dates apply to transition bene-
fits under a March 24, 1983 agreement
and transition benefits under a gap
agreement. These special effective
dates are set forth in paragraphs (c)(2)
and (c)(3) of this section, respectively.
(2)Transition benefits under a
March 24, 1983 agreement. Transition
benefits under a March 24, 1983
agreement (except for those under a
457(a) plan) are not subject to the
s p e c i a l t i m i n g r u l e o f s e c t i o n
3121(v)(2) and remain subject to sec-
tion 3121(a) as in effect on April 19,
1983. Thus, transition benefits under a
March 24, 1983 agreement (except for
those under a 457(a) plan) are excluded
from wages (for FICA tax purposes)
only if they qualify for any of the
retirement payment exclusions (or any
other exclusion provided under section
3121(a) as in effect on April 19, 1983).
(3)Transition benefits under a gap
agreement. The payor of transition
benefits under a gap agreement must
choose to either—
(i)Take the transition benefits into
account as wages when paid; or
(ii) Take the amount deferred
(within the meaning of §31.3121(v)–
1(c)) with respect to the transition
benefits into account as wages under
section 3121(v)(2) (as if section
3121(v)(2) had applied before its gen-
eral effective date).
(d)Determining transition benefit
portion. For purposes of determining
the portion of total benefits under a
nonqualified deferred compensation
plan that represents transition benefits,
if, under the terms of the plan, benefits
are not attributed to specific years of
service, the employer may use any
reasonable method. For example, if a
plan provides that the employee will
receive benefits equal to two percent of
high three-year average compensation
multiplied by years of service, and the
employee retires after 25 years of
service, nine of which are before 1984,
the employer may determine that 9/25
of the total benefits to be received
beginning in 2000 are transition bene-
fits attributable to services performed
before 1984.
( e )O r d e r o f p a y m e n t. I f a n
employer determines, in accordance
with paragraph (d) of this section, that
a portion of the total benefits under a
nonqualified deferred compensation
plan constitutes transition benefits,
then, for purposes of determining the
portion of each benefit payment that
constitutes transition benefits—
(1)For a payment made before the
effective date of this section, the
employer may use any reasonable
allocation method to determine the
portion of a payment that consists of
transition benefits, provided that the
allocation method is consistent with the
terms of the plan; and
(2)For a payment made on or after
the effective date of this section, the
employer must treat each payment as
consisting of transition benefits in the
same proportion as the transition bene-
fits that have not been paid (as of the
effective date of this section) bear to
total benefits that have not been paid
(as of the effective date of this
section), unless such allocation is in-
consistent with the terms of the plan.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
January 19, 1996, 12:52 p.m., and published in
the issue of the Federal Register for January
25, 1996, 61 F.R. 2194)
TEST OF EMPLOYMENT TAX EARLY
REFERRAL PROCEDURES FOR APPEALS
Announcement 96–13
TABLE OF CONTENTS
SECTION. 1. SUMMARY
SECTION. 2. PURPOSE AND SCOPE
.01 In general

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.02 Appropriate issues for early referral
SECTION. 3. HOW TO REQUEST EARLY
REFERRAL
SECTION. 4. PROCESSING AN EARLY
REFERRAL REQUEST
SECTION. 5. TRANSFERRING THE ISSUE
FROM THE DISTRICT TO APPEALS
.01 In general
.02District issues Employment Tax
Report
.03Taxpayer response to Employment
Tax Report
.04 Early referral file sent to Appeals
SECTION. 6. RESOLVING THE EARLY
REFERRAL ISSUE(S)
.01 In general
.02 Agreement reached
.03 Agreement not reached
SECTION. 7. NO USER FEE
SECTION. 8. EFFECTIVE DATE
SECTION 1. SUMMARY
Early referral procedures were
published in Rev. Proc. 96–9, 1996–2
I.R.B. 15. This Announcement applies
the provisions of the revenue procedure
to employment tax issues, as described
below, on a one-year test basis.
Taxpayers whose returns are being
examined can request early referral of
one or more employment tax issue(s)
from district compliance functions
(‘‘the District’’) to Appeals. Early
referral of the employment tax issue(s)
does not alter the District Director’s
authority to audit the returns of a
taxpayer nor limit or expand the
District Director’s authority to resolve
any issues, including the authority in
Delegation Order No. 236, 1991–1 C.B.
313.
These procedures are effective for
requests for early referral made during
the one-year test period beginning on
March 18, 1996, the date this an-
nouncement is published in the Internal
Revenue Bulletin.
SECTION 2. PURPOSE and SCOPE
.01In general. This Announcement
is part of the Internal Revenue
Service’s strategy designed to improve
employment tax administration for all
taxpayers, including those who are
small business owners. The purpose of
early referral for employment tax issues
is to resolve them more expeditiously
through simultaneous action by the
District and Appeals. This Announce-
ment describes the method by which a
taxpayer requests early referral of one
or more unagreed employment tax is-
sues from the District to Appeals. A
taxpayer may request early referral of
any developed, unagreed employment
tax issue that is under the jurisdiction
of the District Director arising from an
audit. The District will continue to
develop other issues arising in the
audit.
Early referral for employment tax
issues is:
●optional;
●initiated by the taxpayer;
●subject to the approval of both the
District Director and the Assistant
Regional Director of Appeals (ARDA);
and
●n o t l i m i t e d t o C o o r d i n a t e d
Examination Program (CEP) taxpayers.
.02 APPROPRIATE ISSUES FOR
EARLY REFERRAL. Appropriate issues
for early referral include those that if
resolved can reasonably be expected to
result in a quicker resolution of the
entire case; and that both the taxpayer
and District Director agree should be
referred to Appeals early. Therefore,
early referral may not be available for
every employment tax issue.
Examples of appropriate employment
tax issues for early referral include:
1) Worker Classification Issues,
including whether a worker is an
employee or independent contractor
under the common law; whether a
worker is a statutory employee or
s t a t u t o r y n o n - e m p l o y e e ; w h e t h e r
Section 530 of the Revenue Act of
1978 applies; whether I.R.C. §3509
rates are appropriate; and whether the
taxpayer qualifies for an interest-free
adjustment.
2)Other Issues, including whether
certain payments are excepted from the
definition of ‘‘wages’’ (e.g., a fringe
benefit that would be excludable from
the employee’s gross income under
I.R.C. §132); and whether certain
services are excepted from the defi-
nition of ‘‘employment.’’
Because taxes under the Self-
Employment Contributions Act (I.R.C.
§§1401–1403) are income taxes, rather
than employment taxes, issues arising
under these sections are not included in
this early referral procedure.
SECTION 3. HOW TO REQUEST EARLY
REFERRAL
An early referral request must follow
the requirements set forth in section 3,
Procedures For Requesting Early Refer-
ral, in Rev. Proc. 96–9. A request for
early referral must be submitted in
writing by the taxpayer to the case
manager. The case manager may sug-
gest that a taxpayer make such a
request. For purposes of this announce-
ment, ‘‘case manager’’ includes Com-
pliance, Examination, Collection, and
EP/EO group managers. See section
3.02 regarding Statement of Issues and
Position; section 3.03, Perjury State-
ment; and section 3.04, Signatures.
SECTION 4. PROCESSING AN EARLY
REFERRAL REQUEST
An early referral request will be
processed in the manner described in
section 4 of Rev. Proc. 96–9, Process-
ing An Early Referral Request. Included
in section 4 are: section 4.01, Approv-
ing or Denying the Request for Early
Referral; section 4.02, Notification of
Action; and section 4.03, No Appeal.
SECTION 5. TRANSFERRING THE
ISSUE FROM THE DISTRICT TO
APPEALS
.01 In general. If an issue is ap-
proved for transfer from the District to
Appeals, the procedures described in
section 5 of Rev. Proc. 96–9 generally
will apply. The following specifically
apply to employment tax issues:
.02 The District issues an employ-
ment tax report. The District will
prepare an employment tax report for
each approved early referral issue. The
report must identify the amount of
employment tax(es) in dispute; fully
describe the issue(s); and explain the
District’s position. This report will be
sent to the taxpayer.
.03 Taxpayer response to District’s
report. The taxpayer must respond in
writing to the District’s report. The
response must contain an explanation
of the taxpayer’s position regarding the
issue(s), similar to that which would be
provided in an Appeals protest, and

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satisfy the declaration and signature
requirements in sections 3.03 and 3.04
of Rev. Proc. 96–9.
The taxpayer’s response must be
submitted to the case manager within
30 days of the date of the report. This
30-day requirement may be extended
by the case manager. If the taxpayer’s
response with respect to an issue is not
received within the time provided, the
taxpayer’s early referral request will be
considered withdrawn regarding that
particular issue(s) without prejudice to
the taxpayer’s right to an administrative
appeal at a later date. But see section 8
of Rev. Proc. 96–9, Withdrawal from
the Early Referral Process, regarding
withdrawal after Appeals has taken
jurisdiction over the early referral
issue(s).
.04Early referral file sent to Ap-
peals. After the taxpayer has responded
in writing to the report, the District
compliance function will send the early
referral file to Appeals. The file should
include copies of:
●applicable portions of tax returns
and workpapers;
●t h e a p p r o v e d e a r l y r e f e r r a l
request;
●the District’s report;
●the taxpayer’s written response to
the report; and
●the District’s response to the
taxpayer’s position, if any.
Appeals has jurisdiction over the
issue(s) accepted for early referral. All
other issues in the case remain in the
District’s jurisdiction.
SECTION 6. RESOLVING THE EARLY
REFERRAL ISSUE(S)
.01In general. The taxpayer’s writ-
ten response to the District’s report
generally serves the same purpose as
an Appeals protest. Established Ap-
peals procedures, including those gov-
erning submissions and taxpayer con-
ferences, apply to early referral issues.
See §601.106 et seq. of the Statement
of Procedural Rules. See generally
section 6 of Rev. Proc. 96–9. The
following specifically apply to early
referral of employment tax issues:
.02If agreement of the early refer-
ral issue(s) is reached. If an agree-
ment is reached with respect to an
early referral issue(s), an agreement
Form 2504 or 2504 AD, labelled
‘‘Partial Agreement,’’ may be used for
factual or non-complex issues that have
no features that affect subsequent
years. A closing agreement generally
will be prepared for issues where a
settlement is complex or affects subse-
quent years. See I.R.C. §7121 and also
Rev. Proc. 68–16, 1968–1 C.B. 770,
which describes the preparation of
closing agreements. Appeals will coor-
dinate effects on subsequent years with
the District and District Counsel.
.03If agreement of the early refer-
ral issue(s) is not reached. If an
agreement is not reached with respect
to an early referral issue(s), see section
6.03 of Rev. Proc. 96–9, Agreement
Not Reached. See also generally, sec-
tion 7, of Rev. Proc. 96–9, Effect of
Conclusion of Examination. The fol-
lowing specifically apply to early refer-
ral of employment tax issues: If no
issues in the case remain unagreed
except for an early referral employment
tax issue that could not be settled by
Appeals and has been returned to the
District, no 30-day letter will be issued.
Rather, the District will process the
case for assessment of tax due from the
taxpayer.
SECTION 7. NO USER FEE
There is no user fee for an early
referral employment tax request.
SECTION 8. EFFECTIVE DATE
These procedures are effective for
requests for early referral made during
the one-year test period beginning on
March 18, 1996, the date this an-
nouncement is published in the Internal
Revenue Bulletin.
DRAFTING INFORMATION
The principal author of this an-
nouncement is Thomas C. Louthan,
Director, Office of Dispute Resolution
& Specialty Programs, National Office
Appeals. For further information re-
garding this announcement, please con-
tact Mr. Louthan at (202) 401-4098
(not a toll-free number).
Foundations Status of Certain
Organizations
Announcement 96–14
The following organizations have
failed to establish or have been unable
to maintain their status as public
charities or as operating foundations.
Accordingly, grantors and contributors
may not, after this date, rely on
previous rulings or designations in the
Cumulative List of Organizations (Pub-
lication 78), or on the presumption
arising from the filing of notices under
section 508(b) of the Code. This listing
does not indicate that the organizations
have lost their status as organizations
described in section 501(c)(3), eligible
to receive deductible contributions.
Former Public Charities. The fol-
lowing organizations (which have been
treated as organizations that are not
private foundations described in section
509(a) of the Code) are now classified
as private foundations:
Academic Boosters of Breathitt
County, Jackson, KY
AIDS Research Foundation Inc.,
Toms River, NJ
Akron Youthquake Ministries Inc.,
Akron, OH
Alexandria Band Boosters Inc.,
Alexandria, IN
Arlington Elder Care Corp.,
Arlington, VA
Asbury Male Youth Project Inc.,
Washington, DC
Association for Americans Outdoors
Inc., Bloomington, IN
Atlantic Reef Builders Inc., Margate,
NJ
Berkeley County Schools Foundation,
Inc., Martinsburg, WV
Biblical Institute for Social Change,
Washington, DC
Black Hills Citizens for a Better
Community, Grand Rapids, MI
Black Managers Association Inc.,
Indianapolis, IN
Brunswick Housing Development
Corp., Medina, OH
Bryan Elementary Parent Teacher
Organization, Bryan, OH
Campbell Lodge a Home for Boys
Alumni Association Inc., Park
Hills, KY
Carolyn Steinhoff Smith, Inc., Tulsa,
OK
Center Grove High School Choir,
Greenwood, IN
Center School Association, Mayfield
Village, OH
Charles W. Bissinger & Associates
Inc., Arnold, MD
Childrens Hospice of New Jersey
Inc., Union, NJ

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Choice Recovery Center Inc.,
Circleville, OH
Chrysalis Inc., Flint, MI
Class of 2000 Inc., Freehold, NJ
Clergy Coalition Against Crack
Cocaine, Saginaw, MI
Clio Area Bank Boosters Association
Inc., Clio, MI
Community Foundation of Greater
Johnstown, Johnstown, PA
Community Health Centers of Laredo,
Inc., Lardeo, TX
Concerned Citizens of Alderson-Glen
Ray Inc., Lewisburg, WV
Construction Trades Training and
Advancement Program, Charleston,
WV
Crisis Counseling Center Inc.,
Lebanon, OH
Cumberland County 4-H FDN Inc.,
Fayetteville, NC
Damascus Development Corporation,
Baltimore, MD
Day Springs Mature Care Inc.,
Norwalk, OH
David Verbance Heart Transplant
Fund Assoc., Columbus, OH
Delaware Family Foundation Inc.,
Wilmington, DE
Encouragement Place Institute, The,
Duncansville, PA
Erlanger Historical Society Inc.,
Erlanger, KY
Eye Opener Inc., Baltimore, MD
Factory Street Studio & Moving
Parts, Inc., Athens, OH
Fathers United of Indiana Inc.,
Highland, IN
Fayette Area Community Concert
Assoc., Washington, OH
Foundation for Skeletal Health
Research, Yellow Sorings, OH
Friends of Catholic Education Inc.,
Walkersville, MD
Friends of Chimes International Inc.,
Baltimore, MD
Friends of Community Mental Health
and Counseling Center, Hermitage,
PA
Friends of the Friendless, Inc.,
Bronx, NY
Friends of the Outside Transportation
Program, Denver, CO
Gathering Center, The, Columbus,
OH
Great Waters Aquarium, Broadview
Heights, OH
Gum Springs Community
Development Foundation Inc.,
Alexandria, VA
H.O.P.E. Inc., Gary, IN
Hunter Institute, Northbrook, IL
India Association of Lehigh Valley,
The, Lehigh Valley, PA
India Classical Dance Society,
McLean, VA
Indiana Opera North Inc., South
Bend, IN
Indy Inferno Soccer Club,
Greenwood, IN
Infinity Film Productions,
Philadelphia, PA
Institute for Global Action, Norton,
OH
Inter Community Reality Corporation,
Norristown, PA
JMC Leukemia Foundation Inc., The,
Brielle, NJ
Kids Corporation, Williamsburg, VA
Korean American Food Dealers
Association of Greater Washington,
The, Washington, DC
Leukemia Fund Raising Society,
Waterford, MI
Magic Flute Productions Inc., St.
Louis, MO
Mantua Against Drugs Inc.,
Philadelphia, PA
Mantua Haverford Community Center,
Philadelphia, PA
Marie-Stephen Inc., McKeesport, PA
Mayfield Middle School Assoc.,
Mayfield Heights, OH
Mid Atlantic Association for the
Education of Young Children,
Wilmington, DE
Mill Creek Jazz and Cultural Society
Inc., Philadelphia, PA
Monday Night Musicales,
Washington, DC
Nansemond-Suffolk Academy Band
Parents Association, Suffolk, VA
National Remodeling Foundation,
Arlington, VA
Nehemiah Neighborhood Development
Corporation, Dayton, OH
Newaygo Public Schools Educational
Advancement Foundation, Newaygo,
MI
New Cumberland Library and
Cultural Foundation, New
Cumberland, PA
New Futures for Dayton Area Youth
Inc., Dayton, OH
Nightline Inc., Dearborn, MI
North Carolina Foundation for
International Commerce, Research
Triangle Park, NC
North East Community Foundation,
North East, PA
Northwest Passage Arts Center,
Philadelphia, PA
Olympia New Jersey Inc., Trenton,
NJ
Operation Something from Home
Corp., Manassas, VA
Organge Schools Educational
Foundation, Pepper Pike, OH
Otto W. Haisley School Parent-
Teacher Organization, Ann Arbor,
MI
Owings Mills Green Action Inc.,
Owings Mills, MD
Paul F. Buonodono Foundation,
Okemos, MI
Penn State Club of Greater Baltimore
Scholarship Fund, Miltersville, MD
P I E C C C S Inc., Towson, MD
Poplar Enterprise Development Corp.,
Philadelphia, PA
Port Huron Neighborhood Housing
Corporation, Port Huron, MI
Positive Tree Inc., St. Thomas, VI
Prince Georges County CPR
Awareness Foundation, Landover
Hills, MD
PTO Indiana Congress Woodbrook,
Carmel, IN
Puerto Rico Educational and
Scientific Foundation Inc.,
Bayamon, PR
R & B Productions Indianapolis
Afro-American Choral, Indianapolis,
IN
Religious Outreach Network of Ohio,
Rocky River, OH
Rescate Christian Home for Minors,
Philadelphia, PA
Richard Community Theatre Inc.,
Richmond, MI
River Valley Child Development
Services, Huntington, WV
Robert W. Depond Memorial
Foundation, St. Louis, MO
Salt Lake Community Foundation
Depository, Inc., The, Salt Lake
City, UT
Sherman Family Trust, Deming, NM
South East Community Association,
Grand Rapids, MI
Southern Kentucky Youth Basketball
Leagues Inc., Bowling Green, KY
Sunshine Child Care Center Inc.,
Lafayette, IN
Tell City Junior High Band Booster
Inc., Tell City, IN
Texans for Efficiency in Government,
Inc., Houston TX

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Trenton St. Patricks Day Parade
Committee Inc., Trenton, NJ
Tri State Office of Traffic Safety
Inc., Huntington, WV
Tuslow Parent-Teacher Organization
of Massillon Ohio Tuslaw Local,
North Lawrence, OH
United Social Action, Inc., Lawton, OK
West Virginia Federation of Parents for
Drug Free Youth Inc., Keyser, WV
Westway Gardens Housing Corp.,
Lorain, OH
What If Inc., Cincinnati, OH
Windwalker Wildlife Sanctuary,
Stockbridge, MI
Womens Learning Resource, The,
Albuquerque, NM
World War II National
Commemorative Assoc. Inc.,
Indianapolis, IN
If an organization listed above sub-
mits information that warrants the
renewal of its classification as a public
charity or as a private operating foun-
dation, the Internal Revenue Service
will issue a ruling or determination
letter with the revised classification as
to foundation status. Grantors and
contributors may thereafter rely upon
such ruling or determination letter as
provided in section 1.509(a)–7 of the
Income Tax Regulations. It is not the
practice of the Service to announce
such revised classification of founda-
tion status in the Internal Revenue
Bulletin.

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Definition of Terms
Revenue rulings and revenue proce-
dures (hereinafter referred to as ‘‘rul-
ings’’) that have an effect on previous
rulings use the following defined terms
to describe the effect:
Amplified describes a situation where
no change is being made in a prior
published position, but the prior posi-
tion 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 princi-
ple also applies to B, the earlier ruling
is amplified. (Compare with modified,
below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in
a prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an
essential difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but
not to B, and the new ruling holds that
it applies to both A and B, the prior
ruling is modified because it corrects a
published position. (Compare with am-
plified and clarified, above).
Obsoleted describes a previously
published ruling that is not considered
determinative with respect to future
transactions. This term is most com-
monly 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 substance has
been included in regulations subse-
quently adopted.
Revoked describes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Superseded describes a situation
where the new ruling does nothing
more than restate the substance and
situation of a previously published
ruling (or rulings). Thus, the term is
used to republish under the 1986 Code
and regulations the same position pub-
lished under the 1939 Code and regula-
tions. 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
If the new ruling does more than
restate the substance of a prior ruling, a
combination of terms is used. For
example, modified and superseded de-
scribes a situation where the substance
of a previously published 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
superseded.
Supplemented is used in situations in
which a list, such as a list of the names
of countries, is published in a ruling
and that list is expanded by adding
further names in subsequent rulings.
After the original ruling has been
supplemented several times, a new
ruling may be published that includes
the list in the original ruling and the
additions, and supersedes all prior
rulings in the series.
Suspended is used in rare situations
to show that the previous published
rulings will not be applied pending
some future action such as the issuance
of new or amended regulations, the
outcome of cases in litigation, or the
outcome of a Service study.
Abbreviations
The following abbreviations in current use and
formerly used will appear in material published
in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

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Numerical Finding List
1
Bulletins 1996–1 through 1996–11
Announcements:
96–1, 1996–2 I.R.B. 57
96–2, 1996–2 I.R.B. 57
96–3, 1996–2 I.R.B. 57
96–4, 1996–3 I.R.B. 50
96–5, 1996–4 I.R.B. 99
96–6, 1996–5 I.R.B. 43
96–7, 1996–5 I.R.B. 44
96–8, 1996–7 I.R.B. 56
96–9, 1996–8 I.R.B. 30
96–10, 1996–8 I.R.B. 30
96–11, 1996–9 I.R.B. 11
96–12, 1996–11 I.R.B. 30
Delegations Orders:
232 (Rev. 2), 1996–7 I.R.B. 49
239 (Rev. 1), 1996–7 I.R.B. 49
Notices:
96–2, 1996–2 I.R.B. 15
96–1, 1996–3 I.R.B. 30
96–4, 1996–4 I.R.B. 69
96–5, 1996–6 I.R.B. 22
96–6, 1996–5 I.R.B. 27
96–7, 1996–6 I.R.B. 22
96–8, 1996–6 I.R.B. 23
96–9, 1996–6 I.R.B. 26
96–10, 1996–7 I.R.B. 47
96–11, 1996–8 I.R.B. 19
96–12, 1996–10 I.R.B. 29
96–13, 1996–10 I.R.B. 29
Proposed Regulations:
DL–1–95, 1996–6 I.R.B. 28
EE–20–95, 1996–5 I.R.B. 15
EE–34–95, 1996–3 I.R.B. 49
EE–35–95, 1996–5 I.R.B. 19
EE–53–95, 1996–5 I.R.B. 23
EE–106–82, 1996–10 I.R.B. 31
EE–148–81, 1996–11 I.R.B. 29
IA–41–93, 1996–11 I.R.B. 29
IA–33–95, 1996–4 I.R.B. 99
INTL–3–95, 1996–6 I.R.B. 29
INTL–9–95, 1996–5 I.R.B. 25
PS–2–95, 1996–7 I.R.B. 50
Revenue Procedures:
96–1, 1996–1 I.R.B. 8
96–2, 1996–1 I.R.B. 60
96–3, 1996–1 I.R.B. 82
96–4, 1996–1 I.R.B. 94
96–5, 1996–1 I.R.B. 129
96–6, 1996–1 I.R.B. 151
1
A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1995–27
through 1995–52 will be found in Internal
Revenue Bulletin 1996–1, dated January 2, 1996.
Revenue Procedures—Continued
96–7, 1996–1 I.R.B. 185
96–8, 1996–1 I.R.B. 187
96–8A, 1996–9 I.R.B. 10
96–9, 1996–2 I.R.B. 15
96–10, 1996–2 I.R.B. 17
96–11, 1996–2 I.R.B. 18
96–12, 1996–3 I.R.B. 30
96–13, 1996–3 I.R.B. 31
96–14, 1996–3 I.R.B. 41
96–15, 1996–3 I.R.B. 41
96–16, 1996–3 I.R.B. 45
96–17, 1996–4 I.R.B. 69
96–18, 1996–4 I.R.B. 73
96–19, 1996–4 I.R.B. 80
96–20, 1996–4 I.R.B. 88
96–21, 1996–4 I.R.B. 96
96–22, 1996–5 I.R.B. 27
96–23, 1996–5 I.R.B. 27
96–24, 1996–5 I.R.B. 28
96–25, 1996–8 I.R.B. 19
96–26, 1996–8 I.R.B. 22
96–27, 1996–11 I.R.B. 27
Revenue Rulings:
96–1, 1996–1 I.R.B. 7
96–2, 1996–2 I.R.B. 5
96–3, 1996–2 I.R.B. 14
96–6, 1996–2 I.R.B. 8
96–4, 1996–3 I.R.B. 16
96–5, 1996–3 I.R.B. 29
96–7, 1996–3 I.R.B. 12
96–8, 1996–4 I.R.B. 62
96–9, 1996–4 I.R.B. 5
96–10, 1996–4 I.R.B. 27
96–11, 1996–4 I.R.B. 28
96–12, 1996–9 I.R.B. 4
96–13, 1996–10 I.R.B. 19
96–14, 1996–6 I.R.B. 20
96–15, 1996–11 I.R.B. 9
96–16, 1996–11 I.R.B. 4
Treasury Decisions:
8630, 1996–3 I.R.B. 19
8631, 1996–3 I.R.B. 7
8632, 1996–4 I.R.B. 6
8633, 1996–4 I.R.B. 20
8634, 1996–3 I.R.B. 17
8635, 1996–3 I.R.B. 5
8636, 1996–4 I.R.B. 64
8637, 1996–4 I.R.B. 29
8638, 1996–5 I.R.B. 5
8639, 1996–5 I.R.B. 12
8640, 1996–2 I.R.B. 10
8641, 1996–6 I.R.B. 4
8642, 1996–7 I.R.B. 4
8643, 1996–11 I.R.B. 4
Treasury Decisions—Continued
8644, 1996–7 I.R.B. 16
8645, 1996–8 I.R.B. 4
8646, 1996–8 I.R.B. 10
8647, 1996–9 I.R.B. 7
8648, 1996–10 I.R.B. 23
8649, 1996–9 I.R.B. 5
8650, 1996–10 I.R.B. 5
8651, 1996–11 I.R.B. 24
8652, 1996–11 I.R.B. 11
8654, 1996–11 I.R.B. 14

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Finding List of Current Action on
Previously Published Items
1
Bulletins 1996–1 through 1996–11
*Denotes entry since last publication
Delegation Orders:
232 (Rev. 1)
Superseded by
232 (Rev. 2), 1996–7 I.R.B. 49
239
Amended by
239 (Rev. 1), 1996–7 I.R.B. 49
Revenue Procedures:
65–17
Modified by
96–14, 1996–3 I.R.B. 41
66–49
Modified by
96–15, 1996–3 I.R.B. 41
88–32
Obsoleted by
96–15, 1996–3 I.R.B. 41
88–33
Obsoleted by
96–15, 1996–3 I.R.B. 41
89–19
Superseded by
96–17, 1996–4 I.R.B. 69
89–48
Superseded in part by
96–17, 1996–4 I.R.B. 69
91–22
Modified by
96–1, 1996–1 I.R.B. 8
91–22
Amplified by
96–13, 1996–3 I.R.B. 31
91–23
Superseded by
96–13, 1996–3 I.R.B. 31
91–24
Superseded by
96–14, 1996–3 I.R.B. 41
91–26
Superseded by
96–13, 1996–3 I.R.B. 31
92–20
Modified by
96–1, 1996–1 I.R.B. 8
1
A cumulative finding list for previously
published items mentioned in Internal Revenue
Bulletins 1995–27 through 1995–52 will be
found in Internal Revenue Bulletin 1996–1, dated
January 2, 1996.
Revenue Procedures—Continued
92–85
Modified by
96–1, 1996–1 I.R.B. 8
93–16
Superseded by
96–11, 1996–2 I.R.B. 18
93–46
Superseded in part by
96–17, 1996–4 I.R.B. 69
Superseded by
96–18, 1996–4 I.R.B. 73
94–18
Superseded in part by
96–17, 1996–4 I.R.B. 69
Superseded by
96–18, 1996–4 I.R.B. 73
94–59
Superseded in part by
96–17, 1996–4 I.R.B. 69
Superseded by
96–18, 1996–4 I.R.B. 73
95–1
Superseded by
96–1, 1996–1 I.R.B. 8
95–2
Superseded by
96–2, 1996–1 I.R.B. 60
95–3
Superseded by
96–3, 1996–1 I.R.B. 82
95–4
Superseded by
96–4, 1996–1 I.R.B. 94
95–5
Superseded by
96–5, 1996–1 I.R.B. 129
95–6
Superseded by
96–6, 1996–1 I.R.B. 151
95–7
Superseded by
96–7, 1996–1 I.R.B. 185
95–8
Superseded by
96–8, 1996–1 I.R.B. 187
95–13
Superseded by
96–20, 1996–4 I.R.B. 88
Revenue Procedures—Continued
95–20
Superseded by
96–24, 1996–5 I.R.B. 28
95–50
Superseded by
96–3, 1996–1 I.R.B. 82
96–3
Amplified by
96–12, 1996–3 I.R.B. 30
Revenue Rulings:
66–307
Obsoleted by
96–3, 1996–2 I.R.B. 14
72–437
Modified by
96–13, 1996–3 I.R.B. 31
80–80
Obsoleted by
96–3, 1996–2 I.R.B. 14
82–80
Modified by
96–14, 1996–3 I.R.B. 41
92–19
Supplemented in part
96–2, 1996–2 I.R.B. 5
92–75
Clarified by
96–13, 1996–3 I.R.B. 31
95–10
Supplemented and superseded by
96–4, 1996–3 I.R.B. 16
95–11
Supplemented and superseded by
96–5, 1996–3 I.R.B. 29

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NOTES

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NOTES