Internal Revenue Bulletin 2001-12 (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.

INCOME TAX
Rev. Rul. 2001–13, page 898.
Fringe benefits aircraft valuation formula. The Standard
Industry Fare Level (SIFL) cents-per-mile rates and terminal
charges in effect for the first half of 2001 are set forth for pur-
poses of determining the value of noncommercial flights on
employer-provided aircraft under section 1.61-21(g) of the regu-
lations.
Rev. Rul. 2001–14, page 898.
LIFO; price indexes; department stores. The January 2001
Bureau of Labor Statistics price indexes are accepted for use by
department stores employing the retail inventory and last-in, first-
out inventory methods for valuing inventories for tax years
ended on, or with reference to, January 31, 2001.
T.D. 8934, page 904.
Final regulations under section 1275 of the Code determine
when debt instruments, including Treasury securities, sold in
a reopening are part of the same issue as an issue of previ-
ously sold debt instruments.
REG–125237–00, page 919.
Proposed regulations under section 1275 of the Code pro-
vide guidance on the treatment of annuity contracts issued
by an insurance company subject to tax under subchapter L.
A public hearing is scheduled for May 30, 2001.
Notice 2001–24, page 912.
The “differential earnings rate” under section 809 of the
Code is tentatively determined for 2000 together with the
“recomputed differential earnings rate” for 1999.
EMPLOYMENT TAX
REG–110374–00, page 915.
Proposed regulations under section 6205 of the Code
provide guidance on when employers that have paid less
than the correct amount of employment taxes are entitled
to interest free adjustments when the underpayment is
discovered during an IRS examination involving a deter-
mination by the Service that workers are employees
under subtitle C or that the employer is not entitled to
relief under section 530 of the Revenue Act of 1978.
ADMINISTRATIVE
T.D. 8939, page 899.
Final regulations under section 6212 of the Code define a
taxpayer’s last known address as the address on the tax-
payer’s most recently filed and properly processed federal
tax return, unless the taxpayer provides clear and concise
notification of a different address to the IRS. The final regu-
lations also authorize the Commissioner to use an address
obtained from the United States Postal Service National
Change of Address database as a taxpayer’s last known
address.
REG–110659–00, page 917.
Proposed regulations address the adoption of a plan of
liquidation requirement under section 332 of the Code
when an association makes an entity classification elec-
tion to be treated as a partnership or disregarded as an
entity separate from its owner.
Internal Revenue
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Bulletin No. 2001–12
March 19, 2001
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page ii.
(Continued on the next page)

March 19, 20012001–12 I.R.B.
Notice 2001–22, page 911.
Installment sales; changes in method of accounting.This
notice provides that an accrual method taxpayer that entered
into an installment sale on or after December 17, 1999, and
filed a federal income tax return by April 16, 2001, reporting the
sale on an accrual method has the consent of the Secretary to
revoke its effective election out of the installment method. The
taxpayer must file, within the applicable period of limitations,
amended federal income tax returns for the taxable year in
which the installment sale occurred, and for any other affected
taxable year, reporting the gain on the installment method.
Notice 2000–26 modified.
Notice 2001–23, page 911.
Business expenses; changes in method of accounting.
This notice modifies Rev. Rul. 2001–4, 2001–3 I.R.B. 295,
which holds, in part, that costs incurred by a taxpayer to
perform work on its aircraft airframe as part of a heavy
maintenance visit generally are deductible as ordinary and
necessary business expenses under section 162 of the
Code. Rev. Rul. 2001–4 is modified by extending the appli-
cation of the automatic consent for change in accounting
method provisions of Rev. Proc. 99–49, 1999–2 C.B. 725,
to the taxpayer’s first or second taxable year ending after
December 21, 2000. Rev. Proc. 99–49 and Rev. Rul.
2001–4 modified.
Rev. Proc. 2001–25, page 913.
Automatic accounting method change for stated inter-
est on short-term loans.This procedure modifies section
13.02 of the Appendix to Rev. Proc. 99–49, 1999–2 C.B.
725, 757, to allow any bank that uses the cash receipts and
disbursements method of accounting to change automati-
cally its method of accounting for stated interest on short-
term loans made in the ordinary course of its business. Rev.
Proc. 99–49 modified.

2001–12 I.R.B.March 19, 2001
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

March 19, 20018982001–12 I.R.B.
Section 61.—Gross Income
Defined
26 CFR 1.61–21: Taxation of fringe benefits.
Fringe benefits aircraft valuation for-
mula.For purposes of section 1.61–21(g)
of the regulations, relating to the rule for
valuing noncommercial flights on em-
ployer-provided aircraft, the Standard In-
dustry Fare Level (SIFL) cents-per-mile
rates and terminal charges in effect for the
first half of 2001 are set forth.
Rev. Rul. 2001–13
For purposes of the taxation of fringe
benefits under section 61 of the Internal
Revenue Code, section 1.61–21(g) of the
Income Tax Regulations provides a rule for
valuing noncommercial flights on em-
ployer-provided aircraft. Section
1.61–21(g)(5) provides an aircraft valua-
tion formula to determine the value of such
flights. The value of a flight is determined
under the base aircraft valuation formula
(also known as the Standard Industry Fare
Level formula or SIFL) by multiplying the
SIFL cents-per-mile rates applicable for the
period during which the flight was taken by
the appropriate aircraft multiple provided in
section 1.61–21(g)(7) and then adding the
applicable terminal charge. The SIFL
cents-per-mile rates in the formula and the
terminal charge are calculated by the De-
partment of Transportation and are re-
viewed semi-annually.
The following chart sets forth the ter-
minal charges and SIFL mileage rates:
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsJan.Jan.from Jan. 2000
20002001to Jan. 2001
1
1. Piece Goods ----------------------------------------------493.8490.8-0.6
2. Domestics and Draperies -------------------------------622.0614.6-1.2
3. Women’s and Children’s Shoes------------------------613.3628.82.5
Period During WhichTerminalSIFL Mileage
the Flight Is Taken ChargeRates
1/1/01 - 6/30/01$35.84Up to 500 miles
= $.1961 per mile
501-1500 miles
= $.1495 per mile
Over 1500 miles
= $.1437 per mile
DRAFTING INFORMATION
The principle author of this revenue
ruling is Kathleen Edmondson of the Of-
fice of Division Counsel/Associate Chief
Counsel (Tax Exempt & Government En-
tities). For further information regarding
this revenue ruling, contact Ms. Edmond-
son at (202) 622-6040 (not a toll-free
call).
Section 446.—General Rule for
Methods of Accounting
26 CFR 1.446–1: General rule for methods of
accounting.
The revenue procedure, which modifies section
13.02 of the Appendix to Rev. Proc. 99–49, allows
any bank that uses the cash receipts and disburse-
ments method of accounting to change automati-
cally its method of accounting for stated interest on
short-term loans made in the ordinary course of its
business. See Rev. Proc. 2001–25, page 913.
Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The January 2001 Bureau of
Labor Statistics price indexes are ac-
cepted for use by department stores em-
ploying the retail inventory and last-in,
first-out inventory methods for valuing
inventories for tax years ended on, or with
reference to, January 31, 2001.
Rev. Rul. 2001–14
The following Department Store Inven-
tory Price Indexes for January 2001 were
issued by the Bureau of Labor Statistics.
The indexes are accepted by the Internal
Revenue Service, under § 1.472–1(k) of
the Income Tax Regulations and Rev.
Proc. 86–46, 1986–2 C.B. 739, for appro-
priate application to inventories of depart-
ment stores employing the retail inven-
tory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, January 31, 2001.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups - soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food,
liquor, tobacco, and contract departments.

2001–12 I.R.B.899March 19, 2001
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS—Continued
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsJan.Jan.from Jan. 2000
20002001to Jan. 2001
1
4. Men’s Shoes ----------------------------------------------887.2886.80.0
5. Infants’ Wear ---------------------------------------------650.8609.2-6.4
6. Women’s Underwear ------------------------------------571.4556.3-2.6
7. Women’s Hosiery ----------------------------------------327.6343.8 4.9
8. Women’s and Girls’ Accessories ----------------------530.3526.9-0.6
9. Women’s Outerwear and Girls’ Wear -----------------369.1369.70.2
10. Men’s Clothing ------------------------------------------612.9586.1-4.4
11. Men’s Furnishings ---------------------------------------618.0603.2-2.4
12. Boys’ Clothing and Furnishings -----------------------497.1484.6 -2.5
13. Jewelry ----------------------------------------------------962.0956.1-0.6
14. Notions ----------------------------------------------------764.5784.32.6
15. Toilet Articles and Drugs -------------------------------970.9987.11.7
16. Furniture and Bedding ----------------------------------697.0685.2-1.7
17. Floor Coverings------------------------------------------603.2630.14.5
18. Housewares-----------------------------------------------789.9769.4-2.6
19. Major Appliances ----------------------------------------233.3229.9-1.5
20. Radio and Television------------------------------------62.756.8-9.4
21. Recreation and Education
2
-----------------------------95.291.0-4.4
22. Home Improvements
2
-----------------------------------129.8127.7-1.6
23. Auto Accessories
2
---------------------------------------107.6108.71.0
Groups 1 - 15: Soft Goods ----------------------------------588.6583.7-0.8
Groups 16 - 20: Durable Goods------------------------------446.2432.9-3.0
Groups 21 - 23: Misc. Goods
2
-------------------------------102.299.4-2.7
Store Total
3
-----------------------------------------------535.4527.4-1.5
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
Indexes on a January 1986=100 base.
3 The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Alan J. Tomsic of the Office of
Associate Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue ruling, contact Mr.
Tomsic at (202) 622-4970 (not a toll-free
call).
Section 503.—Requirements for
Exemption
26 CFR 1.503(a)–1: Denial of exemption to certain
organizations engaged in prohibited transactions.
T.D. 8939
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
Definition of Last Known
Address
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains
final regulations defining last known ad-
dressin relation to the mailing of notices
of deficiency and other notices, state-
ments, and documents sent to a taxpayer’s
last known address. The final regulations
affect taxpayers who receive notices of
deficiency and other notices, statements,
and documents sent to taxpayers’ last
known addresses.
DATES: Effective date: These regulations
are effective January 12, 2001.
Applicability date: For dates of applic-
ability, see §301.6212–2(d).
FOR FURTHER INFORMATION CON-
TACT: Charles A. Hall, (202) 622-4940
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
the Regulations on Procedure and Adminis-
tration (26 CFR part 301) under section
6212(b) relating to the sufficiency of a no-
tice of deficiency if it is mailed to the last
known address of a taxpayer. This docu-
ment also contains amendments to the In-
come Tax Regulations (26 CFR part 1) and
the Regulations on Procedure and Adminis-
tration (26 CFR part 301) to provide cross-
references to the last known address rules
under section 6212(b) in order to apply
those rules to other notices, statements, and
documents required to be sent to the last
known address of a taxpayer.

March 19, 20019002001–12 I.R.B.
A notice of proposed rulemaking
(REG–104939–99, 1999–2 C.B. 643) was
published in the Federal Register(64 FR
63768) on November 22, 1999. No pub-
lic hearing was requested or held. Three
written comments were received. After
consideration of the comments, the pro-
posed regulations are adopted as modified
by this Treasury decision. The comments
are discussed below.
Explanation of Revisions
Under the proposed regulations, the
IRS would have accessed the United
States Postal Service (USPS) National
Change of Address database (NCOA data-
base) annually to update all taxpayer ad-
dress records maintained in the IRS’s au-
tomated masterfile for purposes of
updating the IRS’s mailing list. The
IRS’s mailing list contains the last known
address for each taxpayer. In addition,
prior to mailing correspondence to any
particular taxpayer from an IRS Service
Center, the IRS would have accessed the
NCOA database to update the taxpayer’s
last known address. Employees mailing
correspondence from one of the district
offices would have accessed an updated
address by virtue of the annual update of
the entire masterfile. Except in the case of
certain joint filers, the annual update was
scheduled to occur in May 2000, Novem-
ber 2000, and every November thereafter.
The update based on correspondence
mailed from an IRS Service Center was
scheduled to begin May 2000. All steps
necessary to implement the proposed reg-
ulations were not completed by May
2000. Therefore, the IRS delayed use of
the NCOA database to update a tax-
payer’s last known address. See An-
nouncement 2000–49 (2000–19 I.R.B.
998 (May 8, 2000)).
The procedures for updating taxpayer
address records maintained in the IRS’s
automated masterfile are modified by
these regulations. Implementing the pro-
posed procedures for updating a tax-
payer’s last known address upon the mail-
ing of correspondence from a Service
Center required complicated program-
ming that resulted in the delay in finaliz-
ing the proposed regulations. In addition,
one commentator on the proposed regula-
tions noted that the difference in treat-
ment for Service Center mailings and dis-
trict office mailings might cause
confusion for taxpayers. The IRS, in
conjunction with the USPS, has devel-
oped an improved system for updating
taxpayer addresses that is intended to be
easier to implement and operate and mini-
mize confusion.
To gain access to the NCOA database,
the IRS has become a limited licensee of
the NCOA database. The NCOA database
is a computerized record of changes of
address maintained by the USPS. This
database retains address changes for a
thirty-six month period. As a limited li-
censee, the IRS will receive from the
USPS a copy of the entire thirty-six
month NCOA database. The IRS’s copy
of the NCOA database will be retained at
the Martinsburg Computing Center
(MCC) in Martinsburg, West Virginia.
Additionally, the IRS will receive weekly
updates to the NCOA database. The up-
dates will contain the most recent changes
of address submitted to the USPS. The
IRS will update its copy of the full NCOA
database with the most recent changes of
address in the weekly update.
Beginning in January 2001, the IRS
will access the NCOA database to update
taxpayer address records maintained in
the IRS’s automated masterfile for pur-
poses of updating the IRS’s mailing list.
The IRS plans to undertake two different
procedures in order to assure the most
comprehensive update of taxpayer ad-
dresses.
First, the IRS will compare taxpayer
addresses in IRS’s records to the most re-
cent changes of address contained in the
weekly updates to the NCOA database re-
ceived from the USPS. To accomplish
this, the IRS will use the USPS’s
FASTCheck system. The FASTCheck
System works by comparing key elements
of existing taxpayer address information
maintained in IRS records to an extract of
the same elements from the weekly up-
dates to the NCOA. The key address ele-
ments used by IRS to detect possible
matches include primary house number,
secondary number, secondary designator,
and nine digit zip code. If there is a
match between the key address elements
from IRS records and the key address ele-
ments from the weekly update to the
NCOA database, the IRS will then com-
pare the taxpayer’s complete address in-
formation in IRS records to the full
NCOA database to determine if there is a
change of address for a taxpayer. If the
taxpayer’s name and last known address
in IRS records match the taxpayer’s name
and old mailing address contained in the
NCOA database, the new address in the
NCOA database is the taxpayer’s last
known address, unless the IRS is given
clear and concise notification of a differ-
ent address. A match will only be made if
the taxpayer’s name in IRS records is the
same, within certain tolerances, as is
found in the NCOA database. There may
be a delay of up to two to three weeks
from the date a taxpayer notifies the
USPS that his or her change of address is
effective and the time the new address is
posted to the IRS’s automated masterfile.
In addition, the IRS plans to annually
compare all taxpayer address records
maintained in the IRS’s automated mas-
terfile with the full thirty-six month
NCOA database for purposes of updating
the IRS’s mailing list. The IRS will begin
comparing all taxpayer address records
with the full NCOA database for the first
time in January 2001. If the taxpayer’s
name and last known address in IRS
records match the taxpayer’s name and
old mailing address contained in the
NCOA database, the new address in the
NCOA database is the taxpayer’s last
known address, unless the IRS is given
clear and concise notification of a differ-
ent address. As with the weekly updates,
the names must be the same, within cer-
tain tolerances, in both the IRS’s records
and the NCOA database. Matching all
taxpayer address records to the full
NCOA database will take several months.
The next annual update will be completed
by September 30, 2002, and every Sep-
tember 30th thereafter if the IRS deter-
mines that subsequent annual updates are
necessary in addition to the weekly up-
dates.
For taxpayers who file joint income tax
returns under section 6013, the IRS’s au-
tomated masterfile is currently only able
to retain one address. Beginning with the
processing of tax year 2000 joint income
tax returns, the IRS’s automated master-
file will be able to retain a second ad-
dress. Therefore, if the NCOA database
contains change of address information
for only one spouse from a joint return,
the rules of this regulation will not apply
to notices, statements, and other docu-
ments mailed before the processing of the

2001–12 I.R.B.901March 19, 2001
taxpayers’ tax year 2000 joint income tax
return.
Summary of Comments
Commentators also suggested that these
regulations refer to section 6672(b)(1) and
section 4103. Because section 6672(b)(1)
requires that the IRS mail notices to the tax-
payer’s last known address, a cross-refer-
ence under §301.6672–1 has been added to
these regulations. However, because sec-
tion 4103 does not require the IRS to mail
notices to the taxpayer’s last known ad-
dress, no cross-reference is necessary.
A third commentator suggested that the
IRS coordinate these regulations with Rev.
Proc. 90–18 (1990–1 C.B. 491). Rev. Proc.
90–18 will be updated to incorporate
changes made by these final regulations
and to provide rules for oral notification of
a change of address, additional tax forms
from which taxpayer addresses will be up-
dated, and additional Internal Revenue
Code sections that require a notice be sent
to a taxpayer’s last known address.
The commentator also asked what is the
most recently filed return for purposes of
§301.6212–2(a) of the regulations, i.e.,
whether different returns filed by the same
taxpayer will update the taxpayer’s last
known address. The rules provided in these
regulations do not in any way alter the ex-
isting rules for updating a taxpayer’s last
known address from a filed return. Section
5.01 of Rev. Proc. 90–18 provides which
returns will update a taxpayer’s last known
address under a social security number or
an employer identification number. There-
fore, an amended return filed on a Form
1040X with a different address from that
which appeared on the taxpayer’s previ-
ously filed Form 1040 will update the tax-
payer’s last known address of record with
the IRS. However, a Form 941 filed by a
Schedule C business would not update the
address for the taxpayer’s individual in-
come tax account as the Form 941 is filed
with an employer identification number
and the individual income tax account is as-
sociated with the taxpayer’s social security
number.
Finally, as mentioned above, the com-
mentator noted that accessing the NCOA
database for IRS Service Center mailings
but not for district office mailings might
cause confusion for taxpayers. As the
procedures for updating taxpayer ad-
dresses are modified by these final regula-
tions, there is no longer any difference be-
tween Service Center and other field or
area office mailings.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Charles A. Hall of the Office of
Associate Chief Counsel, Procedure and
Administration (Administrative Provi-
sions and Judicial Practice Division).
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 301
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.468A–5, paragraph
(c)(1)(ii) is amended by adding a sentence
at the end of the paragraph to read as fol-
lows:
§1.468A–5 Nuclear decommissioning fund
qualification requirements; prohibitions
against self-dealing; disqualification of
nuclear decommissioning fund;
termination of fund upon substantial
completion of decommissioning.
* * * * *
(c) * * *
(1) * * *
(ii) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2 of this chapter.
* * * * *
Par. 3. In §1.503(a)–1, paragraph (c)
concluding text is amended by adding a
sentence at the end of the paragraph to
read as follows:
§1.503(a)–1 Denial of exemption to
certain organizations engaged in
prohibited transactions.
* * * * *
(c) * * *
* * * For further guidance regarding the
definition of last known address, see
§301.6212–2 of this chapter.
* * * * *
Par. 4. In §1.547–2, paragraph
(b)(1)(v) is amended by adding a sentence
after the third sentence of the paragraph to
read as follows:
§1.547–2 Requirements for deficiency
dividends.
* * * * *
(b) * * *
(1) * * *
(v) * * * For further guidance regarding
the definition of last known address, see
§301.6212–2 of this chapter. * * *
* * * * *
Par. 5. In §1.856–6, paragraph (g)(5) is
amended by adding a sentence after the
first sentence of the paragraph to read as
follows:
§1.856–6 Foreclosure property.
* * * * *
(g) * * *
(5) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2 of this chapter. * * *
* * * * *
Par. 6. In §1.860–2, paragraph
(b)(1)(ii) is amended by adding a sentence
after the fourth sentence of the paragraph
to read as follows:
§1.860–2 Requirements for deficiency
dividends.
* * * * *
(b) * * *
(1) * * *

(ii) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2 of this chapter. * * *
* * * * *
Par. 7. In §1.963–6, paragraph (c)(5) is
amended by adding a sentence after the
second sentence of the paragraph to read
as follows:
§1.963–6 Deficiency distribution.
* * * * *
(c) * * *
(5) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2 of this chapter. * * *
* * * * *
Par. 8. In §1.992–3, paragraph
(c)(3)(iv) is amended by adding a sen-
tence after the third sentence of the para-
graph to read as follows:
§1.992–3 Deficiency distributions to
meet qualification requirements.
* * * * *
(c) * * *
(3) * * *
(iv) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2 of this chapter. * * *
* * * * *
Par. 9. In §1.6081–2, paragraph (f) is
amended by adding a sentence at the end
of the paragraph to read as follows:
§1.6081–2 Automatic extension of time
to file partnership return of income.
* * * * *
(f) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2 of this chapter.
* * * * *
Par. 10. In §1.6081–3, paragraph (d) is
amended by adding a sentence at the end
of the paragraph to read as follows:
§1.6081–3 Automatic extension of time
for filing corporation income tax returns.
* * * * *
(d) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2 of this chapter.
* * * * *
Par. 11. In §1.6081–4, paragraph (c) is
amended by adding a sentence at the end
of the paragraph to read as follows:
§1.6081–4 Automatic extension of time
for filing individual income tax returns.
* * * * *
(c) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2 of this chapter.
* * * * *
Par. 12. In §1.6081–6, paragraph (d) is
amended by adding a sentence at the end
of the paragraph to read as follows:
§1.6081–6 Automatic extension of time
to file trust income tax return.
* * * * *
(d) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2 of this chapter.
* * * * *
Par. 13. In §1.6081–7, paragraph (d) is
amended by adding a sentence at the end
of the paragraph to read as follows:
§1.6081–7 Automatic extension of time
to file Real Estate Mortgage Investment
Conduit (REMIC) income tax return.
* * * * *
(d) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2 of this chapter.
* * * * *
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 14. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 15. In §301.6110–4, paragraph
(c)(3) is amended by adding a sentence at
the end of the paragraph to read as fol-
lows:
§301.6110–4 Communications from third
parties.
* * * * *
(c) * * *
(3) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2.
* * * * *
Par. 16. In §301.6110–5, paragraph
(b)(4) is amended by adding a sentence at
the end of the paragraph to read as fol-
lows:
§301.6110–5 Notice and time
requirements; actions to restrain
disclosure; actions to obtain additional
disclosure.
* * * * *
(b) * * *
(4) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2.
* * * * *
Par. 17. In §301.6110–6, paragraph
(b)(2)(v) is amended by adding a sentence
at the end of the paragraph to read as fol-
lows:
§301.6110–6 Written determinations
issued in response to requests submitted
before November 1, 1976.
* * * * *
(b) * * *
(2) * * *
(v) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2.
* * * * *
Par. 18. Section 301.6212–2 is added
to read as follows:
§301.6212–2 Definition of last known
address.
(a) General rule. Except as provided in
paragraph (b)(2) of this section, a tax-
payer’s last known address is the address
that appears on the taxpayer’s most re-
cently filed and properly processed Fed-
eral tax return, unless the Internal Rev-
enue Service (IRS) is given clear and
concise notification of a different address.
Further information on what constitutes
clear and concise notification of a differ-
ent address and a properly processed Fed-
eral tax return can be found in Rev. Proc.
90–18 (1990–1 C.B. 491) or in proce-
dures subsequently prescribed by the
Commissioner.
(b) Address obtained from third
party—(1) In general. Except as pro-
vided in paragraph (b)(2) of this section,
change of address information that a tax-
payer provides to a third party, such as a
payor or another government agency, is
not clear and concise notification of a dif-
ferent address for purposes of determin-
ing a last known address under this sec-
tion.
(2) Exception for address obtained
from the United States Postal Service—(i)
Updating taxpayer addresses. The IRS
will update taxpayer addresses main-
tained in IRS records by referring to data
accumulated and maintained in the United
States Postal Service (USPS) National
Change of Address database that retains
March 19, 20019022001–12 I.R.B.

change of address information for thirty-
six months (NCOA database). Except as
provided in paragraph (b)(2)(ii) of this
section, if the taxpayer’s name and last
known address in IRS records match the
taxpayer’s name and old mailing address
contained in the NCOA database, the new
address in the NCOA database is the tax-
payer’s last known address, unless the
IRS is given clear and concise notification
of a different address.
(ii) Duration of address obtained from
NCOA database. The address obtained
from the NCOA database under paragraph
(b)(2)(i) of this section is the taxpayer’s
last known address until one of the fol-
lowing events occurs—
(A) The taxpayer files and the IRS
properly processes a Federal tax return
with an address different from the address
obtained from the NCOA database; or
(B) The taxpayer provides the Internal
Revenue Service with clear and concise
notification of a change of address, as de-
fined in procedures prescribed by the
Commissioner, that is different from the
address obtained from the NCOA data-
base.
(3) Examples. The following examples
illustrate the rules of paragraph (b)(2) of
this section:
Example 1. (i) A is an unmarried taxpayer. The
address on A’s 1999 Form 1040, U.S. Individual In-
come Tax Return, filed on April 14, 2000, and 2000
Form 1040 filed on April 13, 2001, is 1234 Any-
place Street, Anytown, USA 43210. On May 15,
2001, A informs the USPS of a new permanent ad-
dress (9876 Newplace Street, Newtown, USA
12345) using the USPS Form 3575, “Official Mail
Forwarding Change of Address Form.” The
change of address is included in the weekly update
of the USPS NCOA database. On May 29, 2001,
A’s address maintained in IRS records is changed
to 9876 Newplace Street, Newtown, USA 12345.
(ii) In June 2001 the IRS determines a defi-
ciency for A’s 1999 tax year and prepares to issue a
notice of deficiency. The IRS obtains A’s address
for the notice of deficiency from IRS records. On
June 15, 2001, the Internal Revenue Service mails
the notice of deficiency to A at 9876 Newplace
Street, Newtown, USA 12345. For purposes of
section 6212(b), the notice of deficiency mailed on
June 15, 2001, is mailed to A’s last known address.
Example 2. (i) The facts are the same as in Ex-
ample 1, except that instead of determining a defi-
ciency for A’s 1999 tax year in June 2001, the IRS
determines a deficiency for A’s 1999 tax year in
May 2001.
(ii) On May 21, 2001, the IRS prepares a notice
of deficiency for A and obtains A’s address from
IRS records. Because A did not inform the USPS
of the change of address in sufficient time for the
IRS to process and post the new address in Internal
Revenue Service’s records by May 21, 2001, the
notice of deficiency is mailed to 1234 Anyplace
Street, Anytown, USA 43210. For purposes of sec-
tion 6212(b), the notice of deficiency mailed on
May 21, 2001, is mailed to A’s last known address.
Example 3. (i) C and D are married taxpayers.
The address on C and D’s 2000 Form 1040, U.S.
Individual Income Tax Return, filed on April 13,
2001, and 2001 Form 1040 filed on April 15, 2002,
is 2468 Spring Street, Little City, USA 97531. On
August 15, 2002, D informs the USPS of a new
permanent address (8642 Peachtree Street, Big
City, USA 13579) using the USPS Form 3575, “Of-
ficial Mail Forwarding Change of Address Form.”
The change of address is included in the weekly
update of the USPS NCOA database. On August
29, 2002, D’s address maintained in IRS records is
changed to 8642 Peachtree Street, Big City, USA
13579.
(ii) In October 2002 the IRS determines a defi-
ciency for C and D’s 2000 tax year and prepares to
issue a notice of deficiency. The Internal Revenue
Service obtains C’s address and D’s address for the
notice of deficiency from IRS records. On October
15, 2002, the IRS mails a copy of the notice of de-
ficiency to C at 2468 Spring Street, Little City,
USA 97531, and to D at 8642 Peachtree Street, Big
City, USA 13579. For purposes of section 6212(b),
the notices of deficiency mailed on October 15,
2002, are mailed to C and D’s respective last
known addresses.
(c) Last known address for all notices,
statements, and documents. The rules in
paragraphs (a) and (b) of this section
apply for purposes of determining
whether all notices, statements, or other
documents are mailed to a taxpayer’s last
known address whenever the term last
known addressis used in the Internal
Revenue Code or the regulations thereun-
der.
(d) Effective Date—(1)In general. Ex-
cept as provided in paragraph (d)(2) of
this section, this section is effective on
January 29, 2001.
(2) Individual moves in the case of joint
filers. In the case of taxpayers who file
joint returns under section 6013, if the
NCOA database contains change of ad-
dress information for only one spouse,
paragraphs (b)(2) and (3) of this section
will not apply to notices, statements, and
other documents mailed before the pro-
cessing of the taxpayers’ 2000 joint re-
turn.
Par. 19. In §301.6303–1, paragraph (a)
is amended by adding a sentence at the
end of the paragraph to read as follows:
§301.6303–1 Notice and demand for tax.
* * * * *
(a) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2.
* * * * *
Par. 20. In §301.6305–1, paragraph
(b)(2)(ii) is revised to read as follows:
§301.6305–1 Assessment and collection
of certain liability.
* * * * *
(b) * * *
(2) * * *
(ii) The name, social security number,
and last known address of the individual
owing the assessed amount. For further
guidance regarding the definition of last
known address, see §301.6212–2;
* * * * *
Par. 21. In §301.6320–1T, paragraph
(a)(1) is amended by adding a sentence at
the end of the paragraph to read as fol-
lows:
§301.6320–1T Notice and opportunity
for hearing upon filing of notice of
Federal tax lien (temporary).
(a) * * * (1) * * * For further guidance
regarding the definition of last known ad-
dress, see §301.6212–2.
* * * * *
Par. 22. In §301.6325–1, paragraph
(f)(2)(ii)(a) is revised to read as follows:
§301.6325–1 Release of lien or
discharge of property.
* * * * *
(f) * * *
(2) * * *
(ii) * * *
(a) Mailing notice of the revocation to
the taxpayer at his last known address
(see §301.6212–2 for further guidance re-
garding the definition of last known ad-
dress); and
* * * * *
Par. 23. In §301.6330–1T, paragraph
(a)(1) is amended by adding a sentence at
the end of the paragraph to read as fol-
lows:
§301.6330–1T Notice and opportunity
for hearing prior to levy (temporary).
(a) * * * (1) * * * For further guidance
regarding the definition of last known ad-
dress, see §301.6212–2.
* * * * *
Par. 24. In §301.6331–2, paragraph
(a)(1) is amended by adding a sentence
after the second sentence of the paragraph
to read as follows:
2001–12 I.R.B.903March 19, 2001

§301.6331–2 Procedures and
restrictions on levies.
(a) * * * (1) * * * For further guidance
regarding the definition of last known ad-
dress, see §301.6212–2. * * *
* * * * *
Par. 25. Section 301.6332–2 is
amended as follows:
1. Paragraphs (b)(1) introductory text,
(b)(1)(i), and (b)(1)(ii) are redesignated as
paragraphs (b)(1)(i) introductory text,
(b)(1)(i)(A), and (b)(1)(i)(B), respectively.
2. In newly designated paragraph
(b)(1)(i)(B), the text beginning with the
second sentence is redesignated as para-
graph (b)(1)(ii).
3. Newly designated paragraph (b)(1)(ii)
is amended by adding a sentence after the
second sentence of the paragraph.
The addition reads as follows:
§301.6332–2 Surrender of property
subject to levy in the case of life
insurance and endowment contracts.
* * * * *
(b) * * * (1) In general.
(ii) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2. * * *
* * * * *
Par. 26. In §301.6335–1, paragraph
(b)(1) is amended by adding a sentence
after the third sentence of the paragraph to
read as follows:
§301.6335–1 Sale of seized property.
* * * * *
(b) * * * (1) * * * For further guidance
regarding the definition of last known ad-
dress, see §301.6212–2. * * *
* * * * *
Par. 27. In §301.6503(c)–1, paragraph
(a) is amended by adding a sentence at the
end of the paragraph to read as follows:
§301.6503(c)–1 Suspension of running
of period of limitation; location of
property outside the United States or
removal of property from the United
States; taxpayer outside of United States.
(a) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2.
* * * * *
Par. 28. Section 301.6672–1 is
amended by adding a sentence at the end
of the section to read as follows:
§301.6672–1 Failure to collect and pay
over tax, or attempt to evade or defeat
tax.
* * * For further guidance regarding
the determination of the proper address
for mailing the notice required under sec-
tion 6672(b)(1), see §301.6212–2.
Par. 29. In §301.6903–1, paragraph (c)
is amended by adding a sentence after the
first sentence of the paragraph to read as
follows:
§301.6903–1 Notice of fiduciary
relationship.
* * * * *
(c) * * * For further guidance regard-
ing the definition of last known address,
see §301.6212–2. * * *
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved December 11, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on January
11, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 12, 2001, 66 F.R. 2817)
Section 1275.— Other
Definitions and Special Rules
26 CFR 1.1275–2: Special rules relating to debt
instruments.
T.D. 8934
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Reopenings of Treasury
Securities and Other Debt
Instruments; Original Issue
Discount
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the federal in-
come tax treatment of debt instruments is-
sued in certain reopenings. The final reg-
ulations provide guidance to holders and
issuers of these debt instruments .
DATES: Effective Date: These regula-
tions are effective March 13, 2001.
Applicability Dates: For dates of ap-
plicability, see §§1.163–7(f), 1.1275–1(f),
1.1275–2(d), and 1.1275–2(k)(5).
FOR FURTHER INFORMATION CON-
TACT: William E. Blanchard, (202) 622-
3950 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On November 5, 1999, temporary regu-
lations were published in the Federal
Register(64 FR 60342) that revised the
rules for when a reopening of Treasury se-
curities is a qualified reopening. The tem-
porary regulations eliminated the acute,
protracted shortage requirement that was
in §1.1275–2(d). See §1.1275–2T(d) of
the temporary Income Tax Regulations.
As a result, additional Treasury securities
issued in a reopening are part of the same
issue as the original Treasury securities if
(1) the additional Treasury securities have
the same terms as the original Treasury
securities, and (2) the additional Treasury
securities are issued not more than one
year after the original Treasury securities
were first issued to the public.
On November 5, 1999, proposed regu-
lations (REG–115932–99, 1999-2 C.B.
583) also were published in the Federal
Register(64 FR 60395) that, for the first
time, provided rules for reopenings of
debt instruments other than Treasury se-
curities. See §1.1275–2(k) of the pro-
posed Income Tax Regulations.
Although a public hearing on the pro-
posed regulations was held on March 22,
2000, no one testified at the hearing.
Eight comment letters, however, were re-
ceived on the proposed regulations. The
proposed regulations, with certain
changes to respond to the comments, are
adopted as final regulations.
Explanation of Provisions
Reopenings
A. General description
In certain circumstances, an issuer
would like to reopen an existing issue of
debt instruments (that is, sell additional
amounts of debt instruments with terms
March 19, 20019042001–12 I.R.B.

that are identical to the terms of the origi-
nal debt instruments and with the same
CUSIP number and tax characteristics as
the original debt instruments). In most
cases, the purpose of the reopening is to
create a large, liquid issue of debt instru-
ments. However, during periods of rising
market interest rates, the original issue
discount (OID) provisions of the Code
can effectively prohibit reopenings, espe-
cially if the additional debt instruments
are not considered part of the same issue
as the original debt instruments.
If the debt instruments sold in the re-
opening are considered part of the origi-
nal issue, they have OID only to the ex-
tent the debt instruments in the original
issue have OID. Thus, if the original debt
instruments were issued without OID, the
subsequently sold debt instruments also
do not have OID. In this case, any dis-
count on the subsequently sold debt in-
struments generally is market discount,
not OID. Conversely, if the subsequently
sold debt instruments are a separate issue
for tax purposes, any discount that arises
as part of their issuance is OID if it equals
or exceeds the OID de minimis amount
for the debt instruments.
The holder and issuer have different
consequences depending upon whether
the discount is characterized as OID or
market discount. For a holder, the pri-
mary difference is whether the holder has
to include the discount in income on a
current basis as it accrues. If it is OID,
the holder must include the accruals in in-
come currently; if it is market discount,
the holder generally does not have to in-
clude discount in income until the debt in-
strument is disposed of or redeemed. In
general, an issuer’s interest deduction
does not depend on whether the discount
is OID or market discount. However, the
issuer’s reporting obligations depend on
whether the discount is OID or market
discount. If the subsequently sold debt
instruments are part of a separate issue
and if the discount is OID, the issuer (or a
broker or middleman) generally is re-
quired under section 6049 to make OID
information reports for these debt instru-
ments. To comply with this reporting
obligation, the issuer must be able to dis-
tinguish the subsequently sold debt instru-
ments (which require OID information re-
ports) from the originally sold debt
instruments. As a practical matter, the
only way the subsequently sold debt in-
struments can be distinguished is if they
are assigned new CUSIP numbers. The
different tax treatment and the assignment
of new CUSIP numbers prevents the debt
instruments from being fungible and,
thereby, defeats the purpose of the re-
opening.
B. Proposed regulations
In an attempt to strike a balance be-
tween the tax policy concern about the
conversion of OID into market discount
and the need to have the tax rules reflect
current capital market practices, the pro-
posed regulations specified when debt in-
struments issued in a reopening are con-
sidered part of the same issue as the
original debt instruments (a qualified re-
opening). (As noted above, §1.1275–
2T(d) provides rules to determine when a
reopening of Treasury securities is a qual-
ified reopening.)
Under §1.1275–2(k) of the proposed
regulations, a reopening of debt instru-
ments is a qualified reopening if: (1) the
original debt instruments are publicly
traded; (2) the issue date of the additional
debt instruments (treated as if they were a
separate issue) is not more than six
months after the issue date of the original
debt instruments; (3) seven days before
the date on which the price of the addi-
tional debt instruments is established, the
yield of the original debt instruments
(based on their fair market value) is not
more than 107.5 percent of the yield of
the original debt instruments on their
issue date; and (4) the yield of the addi-
tional debt instruments (based on the sales
price of the additional debt instruments) is
no more than 115 percent of the yield of
the original debt instruments on their
issue date. For purposes of the yield tests,
if the original debt instruments were is-
sued with no more than a de minimis
amount of OID, the coupon rate of the
original debt instruments is used rather
than the yield. A qualified reopening also
includes a reopening of original debt in-
struments if the first two conditions de-
scribed above are met and the additional
debt instruments (treated as a separate
issue) are issued with no more than a de
minimisamount of OID. A qualified re-
opening, however, does not include a re-
opening of tax-exempt obligations or con-
tingent payment debt instruments.
The 107.5 percent test was designed to
give some relief to the reopening of rela-
tively short-term issues (that is, issues
with a remaining term of ten years or
less), which tend to be the most impacted
by the OID de minimisrules. In addition,
the 107.5 percent test, which is tested
seven days before the anticipated pricing
date, would give the issuer an indication
as to whether the reopening would be a
qualified reopening. The 115 percent test
was designed to prevent, in a situation in
which interest rates were to move sharply
upward in the period between the an-
nouncement date and the issue date, a
conversion of a significant amount of
OID into market discount.
C. Final regulations
(1) Fixed Reopening Period
Commentators suggested that the final
regulations extend the one-year rule for
reopenings of Treasury securities to other
issuers. In support of this change, com-
mentators stated that different rules will
impede the ability of U.S. issuers to com-
pete with foreign issuers for investors’
funds and will affect the ability of non-
Treasury issuers to make their dollar-de-
nominated issues attractive alternatives to
U.S. Treasury securities as benchmarks
for prevailing market interest rates. They
also stated that an extended period (from
six to twelve months) is often required in
order to aggregate sufficient debt is-
suances to create a large liquid issue and
that many holders of reopened debt in-
struments are tax-indifferent parties.
If the one-year rule is not adopted in
the final regulations, some commentators
suggested that the final regulations pro-
vide a fixed period of less than one year in
which there would be no restrictions on
reopenings (for example, a period of six
months for non-Treasury securities with
an original maturity of less than ten years
and nine months for non-Treasury securi-
ties with an original maturity of at least
ten years). In addition, other commenta-
tors suggested that the final regulations
extend the one-year rule to reopenings of
issuers whose securities are treated as
government securities for U.S. securities
law purposes.
After careful consideration of these
comments, the IRS and the Treasury De-
partment have decided not to adopt these
2001–12 I.R.B.905March 19, 2001

suggestions. Congress adopted different
statutory regimes for OID and market dis-
count. The IRS and the Treasury Depart-
ment believe that adopting the commenta-
tors’ suggestions would not strike the
appropriate balance between the statutory
scheme and providing some flexibility for
issuers. Additionally, the reopening of
Treasury securities does not produce a po-
tential mismatch between the issuer’s in-
terest deductions and the holder’s income
inclusions.
(2) Yield Test
Commentators suggested that the two-
part yield test be replaced with a single
yield test. According to the commenta-
tors, by the time a reopening is priced,
dealers, traders, and investors have
arranged their affairs in reliance on the
issue coming to market, and the issuer has
earmarked the proceeds for use in its busi-
ness. In addition, many of the partici-
pants have arranged hedges and other
transactions around the reopening. In
those cases in which the second-yield test
would not be met (which would be caused
by unexpected market volatility), a can-
celled reopening could generate lost eco-
nomic costs for these capital market par-
ticipants. In addition, the second test
would create marketing and credibility
concerns for issuers.
Most of the commentators suggested
that any yield test should be applied either
on the pricing date or the announcement
date. According to one commentator, the
yield test should be applied by an issuer
on a single date that is the announcement
date for the reopening transaction, pro-
vided the pricing date for the transaction
occurs thereafter within a period consis-
tent with customary commercial practice.
Although customary commercial practice
may vary somewhat by issuer and market,
the period between the announcement
date and the pricing date is usually five
business days or less. The yield test
should allow issuers to presume that a
transaction is consistent with customary
commercial practice if the period between
the announcement date and the pricing
date is five business days or less.
For public transactions, the commenta-
tors suggested that the announcement date
can be defined as the date that the reopen-
ing transaction is publicly announced
through one or more media, including a
press release, a news item posted on a
public messaging service such as Reuters,
Telerate, or Bloomberg, or a posting on
the issuer’s public web site. (Because the
transaction is a reopening, the payment
terms of the securities to be issued will be
known in advance based on the prior
issue.) A test based on a public announce-
ment date would be fairly easy to admin-
ister for both issuers and the government.
Moreover, if an announced reopening
transaction is not priced within a custom-
ary commercial time frame, it is likely
that the transaction will be re-evaluated
and subsequently re-announced on a later
date that could serve as the appropriate
announcement date for the yield test.
According to another commentator,
each reopening should be tested on the
earlier of the pricing date or the an-
nouncement date of a reopening. The
term announcement datecould be defined
as the later of seven days before pricing or
the date on which an issuer’s intent to re-
open a security is reported on the standard
electronic news services used by security
broker-dealers. This rule would accom-
modate issuers who announce and price
reopenings on the same day as well as
Treasury and non-Treasury issuers who
announce reopenings up to 7 days before
pricing.
According to a third commentator, an
issuer should be permitted to satisfy any
yield test by demonstrating that the test
was satisfied on any one of the seven days
prior to the date on which the price of the
additional debt instruments was estab-
lished.
Based on historical evidence, the com-
mentators stated that the 107.5 percent
test in the proposed regulations would not
have been met in a number of cases in
which a reopening would be economi-
cally desirable. Therefore, the commen-
tators suggested that any yield test should
be based on 115 percent of the yield
rather than 107.5 percent of the yield.
While a 115 percent test also would not
be met in a number of cases, the commen-
tators stated that the 115 percent figure
used in the proposed regulations repre-
sents an acceptable middle ground.
(However, some commentators stated that
a 115 percent test would be too low to
qualify many reopenings of sovereign
debt issued by emerging market govern-
ments.)
In response to the comments, the final
regulations adopt a single yield test to de-
termine if the reopening is a qualified re-
opening. Under the final regulations, the
yield test is satisfied if, on the date on
which the price of the additional debt in-
struments is established (or, if earlier, the
announcement date), the yield of the orig-
inal debt instruments (based on their fair
market value) is not more than 110 per-
cent of the yield of the original debt in-
struments on their issue date (or, if the
original debt instruments were issued
with no more than a de minimisamount of
OID, the coupon rate). For purposes of
the yield test, the announcement date is
the later of seven days before the date on
which the price of the additional debt in-
struments is established or the date on
which the issuer’s intent to reopen a secu-
rity is publicly announced through one or
more media, including an announcement
reported on the standard electronic news
services used by security broker-dealers
(for example, Reuters, Telerate, or
Bloomberg). The test rate of 110 percent
in the final regulations reflects a compro-
mise between the 107.5 percent test rate
in the proposed regulations and the 115
percent test rate suggested by the com-
mentators.
(3) Six-Month Period
Some of the commentators suggested
that the six-month period be extended to
one year. According to the commentators,
many issuers have specific funding needs
that arise sporadically over the course of a
year or, in the case of foreign sovereign
issuers, are often fiscally constrained
from reopening issues within a six-month
period. Therefore, an extended period
(from six to twelve months) is required in
order to aggregate sufficient debt is-
suances to create a large, liquid issue. Be-
cause the extension of the six-month pe-
riod would increase the likelihood of the
conversion of OID into market discount,
the final regulations do not adopt this sug-
gestion.
(4) De MinimisTest
Some of the commentators suggested
that the final regulations clarify the treat-
ment of reopened debt instruments that
are issued with no more than a de minimis
amount of OID after the expiration of the
six-month period (a de factoqualified re-
March 19, 20019062001–12 I.R.B.

opening). According to the commenta-
tors, the proposed regulations apparently
are stricter than current law in limiting a
de factoqualified reopening to one in
which the reopened securities are issued
within six months after the issue date of
the original debt instruments. As a result,
there is uncertainty in the debt markets
where none existed for these securities.
The final regulations provide that a re-
opening (including a reopening of Trea-
sury securities) is a qualified reopening if
the original debt instruments are publicly
traded and the additional debt instruments
are issued with no more than a de minimis
amount of OID (determined without the
application of §1.1275–2(k)). As a result,
the de minimistest is no longer limited to
the six-month period after the issue date
of the original debt instruments.
(5) Reopenings after the Six-Month
Period
Some of the commentators suggested
that the final regulations allow a reopen-
ing occurring after the expiration of the
fixed reopening period to be a qualified
reopening if the reopening satisfies a
yield test that would limit the amount of
OID converted into market discount. In
the experience of the commentators, as
longer-term debt securities progress in
age, they become less liquid as compared
with shorter-term debt securities of equal
remaining life. (For example, a thirty-
year debt issue with five years of remain-
ing life generally can be expected to be
less liquid than an otherwise identical
new five-year issue.) The ability to re-
open a security throughout its life would
help issuers increase the liquidity of their
longer-term issues as needed to address
such competitive concerns. This ability
would be highly valuable to private sector
and government-sponsored enterprise is-
suers; therefore, it would be appropriate
to allow it so long as a yield test ulti-
mately limits the amount of OID that can
be converted into market discount. For
example, the final regulations could per-
mit an issuer (including the Treasury De-
partment) to reopen a security after the
fixed reopening period if a 10 percent
yield-change test is met.
The final regulations do not adopt this
suggestion. The IRS and the Treasury
Department believe that the changes to
the de minimistest described above pro-
vide the appropriate relief for debt instru-
ments reopened after the six-month pe-
riod.
D. Treasury securities
The final regulations concerning re-
openings of Treasury securities are gener-
ally the same as the temporary regula-
tions. See §1.1275–2(d)(2). In addition,
under the final regulations, if a reopening
of Treasury securities is not a qualified re-
opening under §1.1275–2(d)(2) (for ex-
ample, because the reopening date is
more than one year after the issue date of
the original Treasury securities), the re-
opening is a qualified reopening under
§1.1275–2(k) if the additional Treasury
securities are issued with no more than a
de minimisamount of OID (determined
without the application of §1.1275–2(k)).
E. Issuer’s treatment
The proposed regulations require the
issuer to take into account, as an adjust-
ment to its interest expense, any differ-
ence between the amounts paid by the
holders to acquire the additional debt in-
struments issued in a qualified reopening
and the adjusted issue price of the original
debt instruments. This difference would
either increase or decrease the adjusted
issue prices of all of the debt instruments
in the issue (both original and additional)
with respect to the issuer (but not the
holder). The issuer would then, as of the
reopening date, recompute the yield of the
debt instruments in the issue based on this
aggregate adjusted issue price and the re-
maining payment schedule of the debt in-
struments. The issuer would use this re-
computed yield for purposes of applying
the constant yield method to determine its
accruals of interest expense over the re-
maining term of the debt instruments in
the issue.
One commentator suggested that the
adjusted issue price of the combined debt
instruments simply should be the sum of
the issuer’s adjusted issue price in the
original debt instruments on the reopen-
ing date and the issue price of the addi-
tional debt instruments determined as if
they were a separate issue. The final reg-
ulations do not adopt this suggestion; the
rule in the proposed regulations is more
accurate than the rule suggested by the
commentator. The same commentator
also suggested that the final regulations
state that, for purposes of determining the
adjusted issue price of the combined debt
instruments, pre-issuance accrued interest
on the additional debt instruments for
which the issuer is compensated at is-
suance is not treated as part of the issue
price of the additional debt instruments.
In effect, this suggestion would make the
rule in §1.1273–2(m) mandatory for debt
instruments issued in a qualified reopen-
ing. Under § 1.1273–2(m), a taxpayer
can choose to determine the issue price of
a debt instrument by excluding pre-is-
suance accrued interest. There does not
seem to be a compelling reason to make
this rule mandatory for debt instruments
issued in a qualified reopening when it is
not mandatory for other debt instruments.
As a result, the final regulations do not
adopt this suggestion.
F. Effective date
The rules in the final regulations for
qualified reopenings (other than for Trea-
sury reopenings subject to §1.1275–2(d))
apply to debt instruments that are part of a
reopening where the reopening date is on
or after March 13, 2001.
Definition of Issue
The proposed regulations define the
term issue as two or more debt instru-
ments that (1) have the same credit and
payment terms, (2) are issued either pur-
suant to a common plan or as part of a sin-
gle transaction or a series of related trans-
actions, and (3) are issued within a period
of 13 days beginning with the date on
which the first debt instrument that would
be part of the issue is issued to a person
other than a bond house, broker, or similar
person acting in the capacity of an under-
writer, placement agent, or wholesaler.
The final regulations generally are the
same as the proposed regulations but for
the additional requirement that the debt in-
struments be issued on or after March 13,
2001. The final regulations also provide
certain transition rules if the debt instru-
ments are issued prior to March 13, 2001.
Issue Price of Treasury Securities
Under §1.1275–2T(d)(1), the issue
price of an issue of Treasury securities
auctioned before November 2, 1998, is
the average price of the securities sold,
2001–12 I.R.B.907March 19, 2001

and the issue price of an issue of Treasury
securities auctioned on or after November
2, 1998, is the price of the securities sold
at auction. The change to the definition
of issue price for Treasury securities in
the temporary regulations reflected the
Treasury Department’s switch on Novem-
ber 2, 1998, from an average price auction
to a single price auction for selling Trea-
sury securities. However, in order to ac-
commodate all types of auction tech-
niques and because the rule for an average
price auction, when applied to a single
price auction, produces the same result as
the rule for a single price auction, the
final regulations provide that the issue
price of an issue of Treasury securities is
the average price of the securities sold.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions and, because the regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking pre-
ceding these regulations was submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Drafting Information
The principal author of the regulations is
William E. Blanchard, Office of the Associ-
ate Chief Counsel (Financial Institutions
and Products). However, other personnel
from the IRS and Treasury Department par-
ticipated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
Part 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for §1.1275–2T to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.163–7 is amended by:
1. Revising paragraph (e).
2. Adding a new paragraph (f).
The revision and addition read as fol-
lows:
§1.163–7 Deduction for OID on certain
debt instruments.
* * * * *
(e) Qualified reopening—(1) In gen-
eral. In a qualified reopening of an issue
of debt instruments, if a holder pays more
or less than the adjusted issue price of the
original debt instruments to acquire an ad-
ditional debt instrument, the issuer treats
this difference as an adjustment to the is-
suer’s interest expense for the original
and additional debt instruments. As pro-
vided by paragraphs (e)(2) through (5) of
this section, the adjustment is taken into
account over the term of the instrument
using constant yield principles.
(2) Positive adjustment. If the difference
is positive (that is, the holder pays more
than the adjusted issue price of the original
debt instrument), then, with respect to the
issuer but not the holder, the difference in-
creases the aggregate adjusted issue prices
of all of the debt instruments in the issue,
both original and additional.
(3) Negative adjustment. If the differ-
ence is negative (that is, the holder pays
less than the adjusted issue price of the
original debt instrument), then, with re-
spect to the issuer but not the holder, the
difference reduces the aggregate adjusted
issue prices of all of the debt instruments
in the issue, both original and additional.
(4) Determination of issuer’s interest
accruals. As of the reopening date, the is-
suer must redetermine the yield of the
debt instruments in the issue for purposes
of applying the constant yield method de-
scribed in §1.1272–1(b) to determine the
issuer’s accruals of interest expense over
the remaining term of the debt instru-
ments in the issue. This redetermined
yield is based on the aggregate adjusted
issue prices of the debt instruments in the
issue (as determined under this paragraph
(e)) and the remaining payment schedule
of the debt instruments in the issue. If the
aggregate adjusted issue prices of the debt
instruments in the issue (as determined
under this paragraph (e)) are less than the
aggregate stated redemption price at ma-
turity of the instruments (determined as of
the reopening date) by a de minimis
amount (within the meaning of
§1.1273–1(d)), the issuer may use the
rules in paragraph (b) of this section to
determine the issuer’s accruals of interest
expense.
(5) Effect of adjustments on issuer’s ad-
justed issue price. The adjustments made
under this paragraph (e) are taken into ac-
count for purposes of determining the is-
suer’s adjusted issue price under
§1.1275–1(b).
(6) Definitions. The terms additional
debt instrument, original debt instrument,
qualified reopening, and reopening date
have the same meanings as in
§1.1275–2(k).
(f) Effective dates. This section (other
than paragraph (e) of this section) applies
to debt instruments issued on or after
April 4, 1994. Taxpayers, however, may
rely on this section (other than paragraph
(e) of this section) for debt instruments is-
sued after December 21, 1992, and before
April 4, 1994. Paragraph (e) of this sec-
tion applies to qualified reopenings where
the reopening date is on or after March
13, 2001.
Par. 3. In §1.1271-0, paragraph (b) is
amended by:
1. Adding entries for paragraphs (f)(1),
(f)(2), (f)(3), and (f)(4) of §1.1275–1.
2. Removing the language “[Re-
served]” from the entry for paragraph (d)
and adding entries for paragraph (d) of
§1.1275–2.
3. Adding entries for paragraph (k) of
§1.1275–2.
4. Removing the entries for
§1.1275–2T.
5. Removing the language “[Re-
served]” from the entry for paragraph (g)
and adding an entry for paragraph (g) of
§1.1275–7.
The revisions and additions read as fol-
lows:
§1.1271–0 Original issue discount;
effective date; table of contents.
* * * * *
(b) * * *
* * * * *
§1.1275–1 Definitions.
* * * * *
(f) Issue.
(1) Debt instruments issued on or after
March 13, 2001.
March 19, 20019082001–12 I.R.B.

2001–12 I.R.B.909March 19, 2001
(2) Debt instruments issued before March
13, 2001.
(3) Transition rule.
(4) Cross-references for reopening and
aggregation rules.
* * * * *
§1.1275–2 Special rules relating to debt
instruments.
* * * * *
(d) Special rules for Treasury securities.
(1) Issue price and issue date.
(2) Reopenings of Treasury securities.
* * * * *
(k) Reopenings.
(1) In general.
(2) Definitions.
(3) Qualified reopening.
(4) Issuer’s treatment of a qualified re-
opening.
(5) Effective date.
* * * * *
§1.1275–7 Inflation-indexed debt
instruments.
* * * * *
(g) Reopenings.
* * * * *
Par. 4. In §1.1275–1, paragraph (f) is
revised to read as follows:
§1.1275–1 Definitions.
* * * * *
(f) Issue—(1) Debt instruments issued
on or after March 13, 2001. Except as
provided in paragraph (f)(3) of this sec-
tion, two or more debt instruments are
part of the same issue if the debt instru-
ments—
(i) Have the same credit and payment
terms;
(ii) Are issued either pursuant to a com-
mon plan or as part of a single transaction
or a series of related transactions;
(iii) Are issued within a period of thir-
teen days beginning with the date on
which the first debt instrument that would
be part of the issue is issued to a person
other than a bond house, broker, or simi-
lar person or organization acting in the ca-
pacity of an underwriter, placement agent,
or wholesaler; and
(iv) Are issued on or after March 13,
2001.
(2) Debt instruments issued before
March 13, 2001. Except as provided in
paragraph (f)(3) of this section, two or
more debt instruments are part of the
same issue if the debt instruments—
(i) Have the same credit and payment
terms;
(ii) Are sold reasonably close in time
either pursuant to a common plan or as
part of a single transaction or a series of
related transactions; and
(iii) Are issued on or after April 4,
1994, and before March 13, 2001.
(3) Transition rule. If the issue date of
any of the debt instruments that would be
part of the same issue (determined as if
each debt instrument were part of a sepa-
rate issue) is on or after March 13, 2001,
then the definition of the term issuein
paragraph (f)(1) of this section applies
rather than the definition in paragraph
(f)(2) of this section to determine if the
debt instruments are part of the same
issue.
(4) Cross-references for reopening and
aggregation rules. See §1.1275–2(d) and
(k) for rules that treat debt instruments is-
sued in certain reopenings as part of an
issue of original (outstanding) debt instru-
ments. See §1.1275–2(c) for rules that
treat two or more debt instruments as a
single debt instrument.
* * * * *
Par. 5. In §1.1275–2, paragraph (d) is
revised and paragraph (k) is added to read
as follows:
§1.1275–2 Special rules relating to debt
instruments.
* * * * *
(d) Special rules for Treasury securi-
ties—(1) Issue price and issue date. The
issue price of an issue of Treasury securi-
ties is the average price of the securities
sold. The issue date of an issue of Trea-
sury securities is the first settlement date
on which a substantial amount of the se-
curities in the issue is sold. For an issue
of Treasury securities sold from Novem-
ber 1, 1998, to March 13, 2001, the issue
price of the issue is the price of the securi-
ties sold at auction.
(2) Reopenings of Treasury
securities—(i) Treatment of additional
Treasury securities. Notwithstanding
§1.1275–1(f), additional Treasury securi-
ties issued in a qualified reopening are
part of the same issue as the original Trea-
sury securities. As a result, the additional
Treasury securities have the same issue
price, issue date, and (with respect to
holders) the same adjusted issue price as
the original Treasury securities. This
paragraph (d)(2) applies to qualified re-
openings that occur on or after March 25,
1992.
(ii) Definitions—(A) Additional Trea-
sury securities. Additional Treasury secu-
rities are Treasury securities with terms
that are in all respects identical to the
terms of the original Treasury securities.
(B) Original Treasury securities. Orig-
inal Treasury securities are securities
comprising any issue of outstanding Trea-
sury securities.
(C) Qualified reopening—reopenings
on or after March 13, 2001. For a re-
opening of Treasury securities that occurs
on or after March 13, 2001, a qualified re-
opening is a reopening that occurs not
more than one year after the original Trea-
sury securities were first issued to the
public or, under paragraph (k)(3)(iii) of
this section, a reopening in which the ad-
ditional Treasury securities are issued
with no more than a de minimisamount of
OID.
(D) Qualified reopening—reopenings
before March 13, 2001. For a reopening
of Treasury securities that occurs before
March 13, 2001, a qualified reopening is a
reopening that occurs not more than one
year after the original Treasury securities
were first issued to the public. However,
for a reopening of Treasury securities
(other than Treasury Inflation-Indexed
Securities) that occurred prior to Novem-
ber 5, 1999, a qualified reopening is a re-
opening of Treasury securities that satis-
fied the preceding sentence and that was
intended to alleviate an acute, protracted
shortage of the original Treasury securi-
ties.
* * * * *
(k) Reopenings—(1) In general.
Notwithstanding §1.1275–1(f), additional
debt instruments issued in a qualified re-
opening are part of the same issue as the
original debt instruments. As a result, the
additional debt instruments have the same
issue date, the same issue price, and (with
respect to holders) the same adjusted
issue price as the original debt instru-
ments.
(2) Definitions—(i) Original debt in-
struments. Original debt instruments are
debt instruments comprising any single
issue of outstanding debt instruments. For
purposes of determining whether a particu-

lar reopening is a qualified reopening, debt
instruments issued in prior qualified re-
openings are treated as original debt instru-
ments and debt instruments issued in the
particular reopening are not so treated.
(ii) Additional debt instruments. Addi-
tional debt instruments are debt instru-
ments that, without the application of this
paragraph (k)—
(A) Are part of a single issue of debt in-
struments;
(B) Are not part of the same issue as the
original debt instruments; and
(C) Have terms that are in all respects
identical to the terms of the original debt
instruments as of the reopening date.
(iii) Reopening date. The reopening
date is the issue date of the additional debt
instruments (determined without the ap-
plication of this paragraph (k)).
(iv) Announcement date. The an-
nouncement date is the later of seven days
before the date on which the price of the
additional debt instruments is established
or the date on which the issuer’s intent to
reopen a security is publicly announced
through one or more media, including an
announcement reported on the standard
electronic news services used by security
broker-dealers (for example, Reuters, Tel-
erate, or Bloomberg).
(3) Qualified reopening—(i)
Definition. A qualified reopening is a re-
opening of original debt instruments that
is described in paragraph (k)(3)(ii) or (iii)
of this section. In addition, see paragraph
(d)(2) of this section to determine if a re-
opening of Treasury securities is a quali-
fied reopening.
(ii) Reopening within six months. A re-
opening is described in this paragraph
(k)(3)(ii) if—
(A) The original debt instruments are
publicly traded (within the meaning of
§1.1273–2(f));
(B) The reopening date of the addi-
tional debt instruments is not more than
six months after the issue date of the orig-
inal debt instruments; and
(C) On the date on which the price of
the additional debt instruments is estab-
lished (or, if earlier, the announcement
date), the yield of the original debt instru-
ments (based on their fair market value) is
not more than 110 percent of the yield of
the original debt instruments on their
issue date (or, if the original debt instru-
ments were issued with no more than a de
minimisamount of OID, the coupon rate).
(iii) Reopening with de minimis OID.
A reopening (including a reopening of
Treasury securities) is described in this
paragraph (k)(3)(iii) if—
(A) The original debt instruments are
publicly traded (within the meaning of
§1.1273–2(f)); and
(B) The additional debt instruments are
issued with no more than a de minimis
amount of OID (determined without the
application of this paragraph (k)).
(iv) Exceptions. This paragraph (k)(3)
does not apply to a reopening of tax-ex-
empt obligations (as defined in section
1275(a)(3)) or contingent payment debt
instruments (within the meaning of
§1.1275–4).
(4) Issuer’s treatment of a qualified re-
opening. See §1.163–7(e) for the issuer’s
treatment of the debt instruments that are
part of a qualified reopening.
(5) Effective date. This paragraph (k)
applies to debt instruments that are part of
a reopening where the reopening date is
on or after March 13, 2001.
§1.1275–2T [Removed]
Par. 6. Section 1.1275–2T is removed.
Par. 7. In §1.1275–7, paragraph (g) is
added to read as follows:
§1.1275–7 Inflation-indexed debt
instruments.
* * * * *
(g) Reopenings. For rules concerning a
reopening of Treasury Inflation-Indexed
Securities, see paragraphs (d)(2) and
(k)(3)(iii) of §1.1275–2.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved December 29, 2000.
Jonathan Talisman,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on January
11, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 12, 2001, 66 FR 2811)
Section 1281.—Current
Inclusion in Income of Discount
on Certain Short-Term
Obligations
The revenue procedure, which modifies section
13.02 of the Appendix to Rev. Proc. 99–49, allows
any bank that uses the cash receipts and disburse-
ments method of accounting to change automati-
cally its method of accounting for stated interest on
short-term loans made in the ordinary course of its
business. See Rev. Proc. 2001–25, page 913.
March 19, 20019102001–12 I.R.B.

Repeal of the Modification of the
Installment Method for Accrual
Method Taxpayers
Notice 2001–22
PURPOSE
This notice provides guidance on the
application of the Installment Tax Cor-
rection Act of 2000, Pub. L. No. 106-
573, 114 Stat. 3061 (2000) (the “Install-
ment Tax Correction Act”), to an accrual
method taxpayer that disposed of prop-
erty in an installment sale on or after
December 17, 1999, and filed by April
16, 2001, a Federal income tax return re-
porting the gain on the disposition using
an accrual method of accounting rather
than the installment method.
BACKGROUND
An installment sale generally is de-
fined in § 453(b) as a disposition of
property where at least one payment is
to be received after the close of the tax-
able year in which the disposition
occurs. Section 453(a) provides the
general rule that income from an install-
ment sale must be taken into account
under the installment method. How-
ever, § 536(a) of the Ticket to Work and
Work Incentives Improvement Act of
1999, Pub. L. No. 106-170, 113 Stat.
1860 (1999), added former § 453(a)(2)
to the Code, which provided that the in-
stallment method did not apply to in-
come from an installment sale if the in-
come would be reported under an
accrual method of accounting without
regard to § 453. Former § 453(a)(2)
was effective for sales or other disposi-
tions occurring on or after December 17,
1999, the date of enactment.
On December 28, 2000, the Install-
ment Tax Correction Act repealed
§ 453(a)(2) with respect to sales and
other dispositions occurring on or after
December 17, 1999. Section 2(b) of the
Installment Tax Correction Act provides
that the Code (including § 453) should
be applied and administered as if
§ 453(a)(2) had not been enacted.
The installment method does not
apply to any disposition for which the
taxpayer elects out of the installment
method. Section 453(d)(1). A taxpayer
that reports an amount realized equal to
the selling price on the tax return filed
for the taxable year in which the install-
ment sale occurs is considered to have
made an effective election out of the in-
stallment method. Section 15a.453–
1(d)(3)(i) of the temporary Income Tax
Regulations. An election out of the in-
stallment method with respect to a dis-
position may be revoked only with the
consent of the Secretary. Section
453(d)(3). A revocation is retroactive.
Section 15a.453–1(d)(4).
APPLICATION
Consistent with the change in law ef-
fected by the Installment Tax Correction
Act, an accrual method taxpayer that en-
tered into an installment sale on or after
December 17, 1999, and filed a Federal
income tax return by April 16, 2001, re-
porting the sale on an accrual method
(and, thus, an amount realized equal to
the selling price) has the consent of the
Secretary to revoke its effective election
out of the installment method, provided
the taxpayer files, within the applicable
period of limitations, amended Federal
income tax return(s) for the taxable year
in which the installment sale occurred,
and for any other affected taxable year,
reporting the gain on the installment
method. Thus, a taxpayer may not re-
voke its effective election out of the in-
stallment method if the taxable year in
which any payment on the installment
obligation was received has closed.
EFFECT ON OTHER DOCUMENTS
Notice 2000–26, 2000–17 I.R.B. 954,
is modified to remove Q&As 1 through
9.
DRAFTING INFORMATION
The principal author of this notice is
Merrill D. Feldstein of the Office of As-
sociate Chief Counsel (Income Tax &
Accounting). For further information
regarding this notice, contact Ms. Feld-
stein at (202) 622-4950 (not a toll-free
call).
Modification of Rev. Rul. 2001–4
Notice 2001–23
PURPOSE
This notice modifies Rev. Rul. 2001–4,
2001–3 I.R.B. 295, by extending the ap-
plication of the automatic consent for
change in accounting method provisions
of Rev. Proc. 99–49, 1999–2 C.B. 725, to
the taxpayer’s first or second taxable year
ending after December 21, 2000.
BACKGROUND
On December 21, 2000, the Internal
Revenue Service issued Rev. Rul.
2001–4, which holds, in part, that costs
incurred by a taxpayer to perform work
on its aircraft airframe as part of a heavy
maintenance visit generally are deductible
as ordinary and necessary business ex-
penses under § 162 of the Internal Rev-
enue Code. The APPLICATION section
of Rev. Rul. 2001–4 provides that a tax-
payer wanting to change its method of ac-
counting to conform to the holding must
follow the automatic change in account-
ing method provisions of Rev. Proc.
99–49, provided the change is made for
the first taxable year ending after January
16, 2001. Thus, for example, a taxpayer
using a calendar year may apply for auto-
matic consent to change its method of ac-
counting to conform to Rev. Rul. 2001–4
for the year 2001. The Service recognizes
that the revenue ruling precludes a calen-
dar year taxpayer from applying for auto-
matic consent for the change for the year
2000, and greatly limits its ability to
apply for consent for that year under the
general procedures of Rev. Proc. 97–27,
1997–1 C.B. 680, due to the requirement
that the application must have been sub-
mitted by December 31, 2000.
EXTENSION OF AUTOMATIC
METHOD CHANGE PROCEDURES
FOR 2000
To facilitate changes in method of ac-
counting by taxpayers to conform to the
holding of Rev. Rul. 2001–4 for the year
2000, the revenue ruling is modified to
allow a taxpayer to apply for the change
by following the automatic change in ac-
2001–12 I.R.B.911March 19, 2001
Part III. Administrative, Procedural, and Miscellaneous

counting method provisions of Rev. Proc.
99–49, provided the change is for the first
or second taxable year ending after De-
cember 21, 2000.
If a taxpayer filed an application with
the national office under Rev. Proc. 97–27
to change its method of accounting to
conform to Rev. Rul. 2001–4, and the ap-
plication is pending with the national of-
fice on February 16, 2001, the taxpayer
may change its method under Rev. Proc.
99–49. However, the national office will
process the application in accordance
with the procedure under which it was
filed unless, prior to the later of April 1,
2001, or the issuance of the letter ruling
granting or denying consent to the
change, the taxpayer notifies the national
office that it wants to change its method
under Rev. Proc. 99–49. If the taxpayer
timely notifies the national office that it
wants to change its method under Rev.
Proc. 99–49, the taxpayer must make ap-
propriate modifications to the application
to comply with the applicable provisions
of Rev. Proc. 99–49. In addition, any user
fee that was submitted with the applica-
tion will be returned to the taxpayer.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 2001–4 and Rev. Proc. 99–49
are modified.
DRAFTING INFORMATION
The principal author of this notice is
Merrill Feldstein of the Office of Associ-
ate Chief Counsel (Income Tax & Ac-
counting). For further information re-
garding this notice contact Ms. Feldstein
at (202) 622-4950 (not a toll-free call).
Differential Earnings Rate for
Mutual Life Insurance
Companies
Notice 2001–24
This notice publishes a tentative deter-
mination under § 809 of the Internal Rev-
enue Code of the “differential earnings
rate” for 2000 and the rate that is used to
calculate the “recomputed differential
earnings amount” for 1999. (The latter
rate is referred to in this notice as the “re-
computed differential earnings rate” for
1999.) These rates are used by mutual
life insurance companies to calculate their
federal income tax liability for taxable
years beginning in 2000.
BACKGROUND
Section 809(a) provides that, in the
case of any mutual life insurance com-
pany, the amount of the deduction allow-
able under § 808 for policyholder divi-
dends is reduced (but not below zero) by
the “differential earnings amount.” Any
excess of the differential earnings amount
over the amount of the deduction allow-
able under § 808 is taken into account as a
reduction in the closing balance of re-
serves under subsections (a) and (b) of
§ 807. The “differential earnings
amount” for any taxable year is the
amount equal to the product of (a) the life
insurance company’s average equity base
for the taxable year multiplied by (b) the
“differential earnings rate” for that tax-
able year. The “differential earnings rate”
for the taxable year is the excess of (a) the
“imputed earnings rate” for the taxable
year over (b) the “average mutual earn-
ings rate” for the second calendar year
preceding the calendar year in which the
taxable year begins. The “imputed earn-
ings rate” for any taxable year is the
amount that bears the same ratio to 16.5
percent as the “current stock earnings
rate” for the taxable year bears to the
“base period stock earnings rate.”
Section 809(f) provides that, in the case
of any mutual life insurance company, if
the “recomputed differential earnings
amount” for any taxable year exceeds the
differential earnings amount for that tax-
able year, the excess is included in life in-
surance gross income for the succeeding
taxable year. If the differential earnings
amount for any taxable year exceeds the
recomputed differential earnings amount
for that taxable year, the excess is allowed
as a life insurance deduction for the suc-
ceeding taxable year. The “recomputed
differential earnings amount” for any tax-
able year is an amount calculated in the
same manner as the differential earnings
amount for that taxable year, except that
the average mutual earnings rate for the
calendar year in which the taxable year
begins is substituted for the average mu-
tual earnings rate for the second calendar
year preceding the calendar year in which
the taxable year begins.
The stock earnings rates and mutual
earnings rates taken into account under
§ 809 generally are determined by divid-
ing statement gain from operations by the
average equity base. For this purpose, the
term “statement gain from operations”
means “the net gain or loss from opera-
tions required to be set forth in the annual
statement, determined without regard to
Federal income taxes, and ... properly ad-
justed for realized capital gains and
losses....” See§ 809(g)(1). The term “eq-
uity base” is defined as an amount deter-
mined in the manner prescribed by regu-
lations equal to surplus and capital
increased by the amount of nonadmitted
financial assets, the excess of statutory re-
serves over the amount of tax reserves,
the sum of certain other reserves, and 50
percent of any policyholder dividends (or
other similar liability) payable in the fol-
lowing taxable year. See§ 809(b)(2), (3),
(4), (5) and (6). Section 1.809–10 of the
Income Tax Regulations provides that the
equity base includes both the asset valua-
tion reserve and the interest maintenance
reserve for taxable years ending after De-
cember 31, 1991.
Section 1.809–9(a) of the regulations
provides that neither the differential earn-
ings rate under § 809(c) nor the recom-
puted differential earnings rate that is
used in computing the recomputed differ-
ential earnings amount under § 809(f)(3)
may be less than zero.
Rev. Rul. 99–3, 1999–1 C.B. 313, pro-
vides that a life insurance subsidiary of a
mutual holding company is not a mutual
life insurance company for which the de-
duction for policyholder dividends is re-
duced pursuant to §§ 808(c)(2) and 809.
As described above, the differential
earnings rate for 2000 and the recomputed
differential earnings rate for 1999 affect
the income and deductions reported by
mutual life insurance companies on their
federal income tax returns for the 2000
taxable year.
Data necessary to determine the tenta-
tive differential earnings rate for 2000 and
the tentative recomputed differential earn-
ings rate for 1999 have been compiled
from returns filed by mutual life insur-
ance companies and certain stock life in-
surance companies. The Internal Rev-
enue Service is currently examining these
returns. This examination will not be
completed before the March 15, 2001,
due date for filing 2000 calendar year re-
turns.
March 19, 20019122001–12 I.R.B.

NOTICE OF TENTATIVE RATES
This notice publishes a tentative deter-
mination of the differential earnings rate
for 2000 and of the recomputed differen-
tial earnings rate for 1999. This notice
also publishes a tentative determination of
the rates on which the calculation of the
differential earnings rate for 2000 and the
recomputed differential earnings rate for
1999 are based. The final determination
of these rates is expected to be published
before September 1, 2001.
The tentative determination of the dif-
ferential earnings rate for 2000 and the
tentative determination of the recomputed
differential earnings rate for 1999 that are
published in this notice should be used by
mutual life insurance companies to calcu-
late the amount of tax liability for taxable
years beginning in 2000 (in the case of
companies that file returns before publi-
cation of the final determination of these
rates) or to calculate the amount of esti-
mated unpaid tax liability for taxable
years beginning in 2000 (in the case of
companies that are allowed an extension
of time to file returns). Companies that
file returns before publication of the final
determination of these rates should file
amended returns after the final determina-
tion of these rates is published. If there is
a failure to pay tax for a taxable year be-
ginning in 2000 and the failure is attribut-
able to a difference between (a) the tenta-
tive determination of the differential
earnings rate for 2000 and recomputed
differential earnings rate for 1999 and (b)
the final determination of these rates, then
any such failure through September 17,
2001, will be treated as due to reasonable
cause and will not give rise to any addi-
tion to tax under § 6651.
The tentative determination of the rates
is set forth in Table 1.
2001–12 I.R.B.913March 19, 2001
Notice 2001–24 Table 1
Tentative Determination of Rates To Be Used For Taxable Years Beginning in 2000
Differential earnings rate for 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0
Recomputed differential earnings rate for 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0
Imputed earnings rate for 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15.815
Imputed earnings rate for 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15.358
Base period stock earnings rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18.221
Current stock earnings rate for 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16.960
Stock earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19.321
Stock earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15.836
Stock earnings rate for 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15.724
Average mutual earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16.011
Average mutual earnings rate for 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16.164
DRAFTING INFORMATION
The principal author of this notice is
Katherine A. Hossofsky of the Office of
the Associate Chief Counsel (Financial
Institutions and Products). For further in-
formation regardingthis notice, contact
Ms. Hossofsky at (202) 622-3477 (not a
toll-free call).
26 CFR 601. 204: Changes in accounting periods
and in methods of accounting.
(Also Part I, sections 446, 1281; 1.446–1.)
Rev. Proc. 2001–25
SECTION 1. PURPOSE
This revenue procedure modifies sec-
tion 13.02 of the Appendix to Rev. Proc.
99–49, 1999–2 C.B. 725, 757, to allow
any bank that uses the cash receipts and
disbursements method of accounting
(cash method) to change automatically its
method of accounting for stated interest
on short-term loans made in the ordinary
course of business.
SECTION 2. BACKGROUND
.01 Rev. Proc. 99–49 provides the pro-
cedures by which a taxpayer may obtain
automatic consent to change a method of
accounting described in the Appendix to
Rev. Proc. 99–49. Under section 13.02 of
the Appendix to Rev. Proc. 99–49, a cash
method bank in the Eighth Circuit can au-
tomatically change its method of account-
ing for stated interest on short-term loans
made in the ordinary course of business
from an accrual method under § 1281 of
the Internal Revenue Code to the cash re-
ceipts and disbursements method of ac-
counting. In Security Bank Minnesota v.
Commissioner, 994 F.2d 432 (8th Cir.
1993), aff ’g98 T.C. 33 (1992), the U.S.
Circuit Court of Appeals for the Eighth
Circuit held that § 1281 does not require a
cash method bank to include in gross in-
come stated interest on short-term loans
made in the ordinary course of business as
that interest accrues. Because the Internal
Revenue Service was litigating the § 1281
issue in other circuits, section 13.02 of the
Appendix was limited to cash method
banks in the Eighth Circuit.
.02 In Security State Bank v. Commis-
sioner, 214 F.3d 1254 (10th Cir. 2000),
aff ’g111 T.C. 210 (1998), acq., 2001–5
I.R.B., and U.S. Bancorp v. Commis-
sioner, T.C.M. 1998–381, the courts simi-
larly held that § 1281 does not require a
cash method bank to include in gross in-
come stated interest on short-term loans
made in the ordinary course of business as
that interest accrues. In light of the deci-
sions in Security Bank Minnesota, Secu-
rity State Bank, and U.S. Bancorp, the
Service will no longer litigate the § 1281
issue in the context of short-term loans

made in the ordinary course of a cash
method bank’s business. Accordingly,
section 13.02 of the Appendix to Rev.
Proc. 99–49 is modified to apply to all
cash method banks.
SECTION 3. APPLICATION
Section 13.02 of the Appendix to Rev.
Proc. 99–49 is modified to read as fol-
lows:
.02 Stated interest on short-term loans
of cash method banks.
(1) Description of change and scope.
(a) Applicability. This change ap-
plies to a bank that uses the cash receipts
and disbursements method of accounting
as its overall accounting method and that
wants to change its method of accounting
from accruing stated interest on short-
term loans made in the ordinary course of
business to using the cash method for that
interest. For example, see Security State
Bank v. Commissioner, 214 F.3d 1254
(10th Cir. 2000), aff ’g111 T.C. 210
(1998), acq., 2001–5 I.R.B., and Security
Bank Minnesota v. Commissioner, 994
F.2d 432 (8th Cir. 1993), aff ’g98 T.C. 33
(1992), in which the courts held that
§ 1281 does not apply to short-term loans
made by a cash method bank in the ordi-
nary course of its business.
(b) Scope limitations inapplicable.
A taxpayer that wants to make this change
is not subject to the scope limitations in
section 4.02 of this revenue procedure.
However, if the taxpayer is under exami-
nation, before an appeals office, or before
a federal court, the taxpayer must provide
a copy of the application to the examining
agent(s), appeals officer, or counsel for
the government, as appropriate, at the
same time that it files the copy of the ap-
plication with the national office. The ap-
plication must contain the name(s) and
telephone number(s) of the examining
agent(s), appeals officer, or counsel for
the government, as appropriate.
(2) Change for prior taxable years.
A taxpayer is permitted to make the
change in accounting method described in
section 13.02(1)(a) of this Appendix for
any taxable year ending before December
31, 2000, provided the year is not barred
by the statute of limitations, there is no
closed taxable year after the year of
change, and the taxpayer complies with
the following requirements:
(a) the taxpayer must attach a
completed Form 3115 to an amended re-
turn for the year of change, and must file,
on or before December 31, 2001, that
amended return and amended returns for
all subsequent affected taxable years, if
any; and
(b) the taxpayer must file a copy
of the Form 3115 with the national office
no later than when the original Form 3115
is filed with the amended return.
(3) Section 481(a) adjustment
period. A taxpayer making this change
must take the entire § 481(a) adjustment
into account in computing taxable income
for the year of change.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 99–49 is modified.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective on
February 20, 2001.
DRAFTING INFORMATION
The principal author of this revenue
procedure is William E. Blanchard of the
Office of the Associate Chief Counsel (Fi-
nancial Institutions and Products). For
further information regarding this revenue
procedure, contact either Mr. Blanchard
or Marsha A. Sabin of the Office of the
Associate Chief Counsel (Financial Insti-
tutions and Products) at (202) 622–3950
(not a toll-free call).
March 19, 20019142001–12 I.R.B.

Notice of Proposed Rulemaking
Interest-Free Adjustments with
Respect to Underpayments of
Employment Taxes
REG–110374–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains a
proposed amendment to the regulations
relating to interest-free adjustments with
respect to underpayments of employment
taxes. The proposed amendment reflects
changes to the law made by the Taxpayer
Relief Act of 1997. The proposed amend-
ment affects employers that are the sub-
ject of IRS examinations involving deter-
minations by the IRS that workers are
employees for purposes of subtitle C or
that the employers are not entitled to re-
lief from employment taxes under section
530 of the Revenue Act of 1978 (section
530).
DATES: Written and electronic comments
and requests for a public hearing must be
received by April 17, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–110374–00), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 5 p.m. to: Unit
CC:M&SP:RU (REG–110374–00),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Washing-
ton, DC. Alternatively, taxpayers may sub-
mit comments electronically via the Inter-
net by selecting the “Tax Regs” option on
the IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at
http://www.irs.gov/tax_regs/reglist.html.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Lynne Camillo of the Office
of Associate Chief Counsel (Tax Exempt
and Government Entities), (202) 622-
6040.
SUPPLEMENTARY INFORMATION:
Background
This document contains a proposed
amendment to the Employment Tax Reg-
ulations (26 CFR part 31) under section
6205. Section 6205 allows employers
that have paid less than the correct
amount of employment taxes to make ad-
justments without interest, provided the
error is reported and the taxes are paid by
the last day for filing the return for the
quarter in which the error was ascer-
tained. However, no interest-free adjust-
ments are permitted pursuant to section
6205 after receipt of notice and demand
for payment thereof based upon an assess-
ment. §31.6205–1(a)(6).
The Taxpayer Relief Act of 1997, Pub-
lic Law 105-34 (111 Stat. 788), effective
August 5, 1997, created new section 7436
of the Internal Revenue Code (Code),
which provides the Tax Court with juris-
diction to review determinations by the
IRS that workers are employees for pur-
poses of subtitle C, or that the employer is
not entitled to relief from employment
taxes under section 530. Section 7436 re-
sulted in a change in the way employment
tax examinations involving worker classi-
fication and section 530 issues are con-
ducted insofar as notice and demand for
payment of an employment tax underpay-
ment based upon an assessment cannot be
made until after the taxpayer under exam-
ination receives notice of the IRS’s deter-
mination and has been given an opportu-
nity to file a petition in the Tax Court
contesting such determination.
Explanation of Provisions
This document contains a proposed
amendment to the regulations under sec-
tion 6205. The proposed amendment
clarifies the period for adjustments of em-
ployment tax underpayments without in-
terest under section 6205 following the
expansion of Tax Court review to certain
employment tax determinations.
As a general rule, under section 6601,
all taxpayers who fail to pay the full
amount of a tax due under the Code must
pay interest at the applicable rate on the
unpaid amount from the last date pre-
scribed for payment of the tax until the
date the tax is paid. However, section
6205 allows employers that have paid less
than the correct amount of certain em-
ployment taxes
1
with respect to any pay-
ment of wages or compensation to make
adjustments to returns without interest
pursuant to the regulations. The employ-
ment tax regulations under section 6205
generally allow employers to make ad-
justments to returns without interest until
the last day for filing the return for the
quarter in which the error was ascer-
tained. An error is ascertained when the
employer has sufficient knowledge of the
error to be able to correct it.
§31.6205–1(a)(4). Section 31.6205–
1(a)(6) provides that no interest-free ad-
justments can be made after receipt of a
statement of notice and demand for pay-
ment based upon an assessment.
In Revenue Ruling 75–464 (1975–2
C.B. 474), the IRS further clarified the
time for adjustments under section 6205.
The ruling clarifies that employers can
still make interest-free adjustments where
the underpayment is discovered during an
audit or examination (i.e., where the em-
ployer has not independently ascertained
the underpayment). The ruling sets forth
situations illustrating when an error is as-
certained with respect to returns under
audit by the IRS. Under the facts in the
revenue ruling, an error is ascertained
when the employer signs an “Agreement
to Adjustment and Collection of Addi-
tional Tax,” Form 2504, either at the ex-
amination level or the appeals level, when
the taxpayer pays the full amount due so
as to file a refund claim (if paid prior to
notice and demand), or at the conclusion
of internal IRS appeal rights if no agree-
ment is reached. Under the factual situa-
tions in Revenue Ruling 75–464, the em-
ployment taxes can be paid free of interest
at the time the employer signs Agreement
Form 2504 or at the time it pays the tax
preparatory to filing a claim to contest the
liability in court, after having exhausted
all appeal rights within the IRS, provided
2001–12 I.R.B.915March 19, 2001
1
Section 6205 applies to underpayments of taxes
under the Federal Insurance Contributions Act
(FICA), the Railroad Retirement Tax Act (RRTA),
and income tax withholding. Section 6205 does not
apply to underpayments of taxes under Federal
Unemployment Tax Act (FUTA), as such underpay-
ments are not subject to interest under section
6601(i).
Part IV. Items of General Interest

the payment is made before the taxpayer
receives notice and demand for payment.
The Taxpayer Relief Act of 1997, Pub-
lic Law 105-34 (111 Stat. 788), created
new section 7436 of the Code which pro-
vides the Tax Court with jurisdiction to
review determinations by the IRS that
workers are employees for purposes of
subtitle C of the Code, or that the organi-
zation for which services are performed is
not entitled to relief from employment
taxes under section 530. Section 7436(a)
requires that the determination involve an
actual controversy and that it be made as
part of an examination. Subsequent to en-
actment of section 7436 of the Code, the
IRS created a standard notice, the “Notice
of Determination Concerning Worker
Classification Under Section 7436” (no-
tice of determination) to serve as the “de-
termination” that is a prerequisite to in-
voking the Tax Court’s jurisdiction under
section 7436. Notice 98–43 (1998–33
I.R.B. 13).
Section 7436(d)(1) provides that the
suspension of the limitations period for
assessment in section 6503(a) applies in
the same manner as if a notice of defi-
ciency had been issued. Thus, pursuant to
section 6503(a), the mailing of the notice
of determination by certified or registered
mail will suspend the statute of limita-
tions for assessment of taxes attributable
to the worker classification and section
530 issues. Generally, the statute of limi-
tations for assessment of taxes attribut-
able to the worker classification and sec-
tion 530 issues is suspended for the
90-day period during which the taxpayer
can begin a suit in Tax Court, plus an ad-
ditional 60 days thereafter. Moreover, if
the taxpayer does file a timely petition in
the Tax Court, the statute of limitations
for assessment of taxes attributable to the
worker classification and section 530 is-
sues is suspended under section 6503(a)
during the Tax Court proceedings, and for
sixty days after the Tax Court decision be-
comes final.
Current IRS guidance provides for in-
terest-free adjustments under section
6205 prior to assessment and notice and
demand. Because of the prohibition on
assessment for cases pending in the Tax
Court, this creates a potential for incon-
sistent application of interest depending
upon whether an employer files a claim in
the Tax Court or in another court of Fed-
eral jurisdiction. The legislative history
of section 7436 shows no intent to create
an advantage for taxpayers who choose to
litigate their cases in Tax Court as op-
posed to another court of Federal jurisdic-
tion. H.R. No. 105-148, 105
th
Cong., 1
st
Sess., at 639-640 (1997). Taxpayers who
choose to petition the Tax Court under
section 7436 still have the benefit of all of
the inherent advantages of litigating in the
Tax Court, including the ability to obtain
judicial review without prior payment of
the additional tax the IRS has determined
to be due.
Judicial and administrative precedents
provide that an error is ascertained for
purposes of section 6205 (ending the pe-
riod for interest-free adjustments) when
the taxpayer has exhausted all internal ap-
peal rights with the Service. Eastern In-
vestment Corp. v. United States, 49 F.3d
651 (10th Cir. 1995); Rev. Rul. 75–464
(1975–2 C.B. 474). In the context of re-
fund litigation, where a taxpayer whose
erroneous underpayment of employment
taxes is discovered during an examination
pays only the required divisible portion of
employment tax prior to filing a claim for
refund in order to satisfy the jurisdictional
requirements for filing suit in district
court, interest continues to accrue on the
unpaid portion of employment tax from
the date upon which the tax is assessed
after the taxpayer has exhausted all appeal
rights within the IRS until the date such
tax is paid. See Eastern Investment
Corp., supra(rejecting taxpayer’s argu-
ment that the error could not have been
“ascertained” until a decision was made
by the court and the liability was no
longer being contested). Moreover, in
Tax Court deficiency proceedings that do
not involve employment taxes, unless the
taxpayer makes a deposit to stop the run-
ning of interest, interest continues to ac-
crue on the deficiency during the course
of the Tax Court proceeding. Rev. Rul.
56–501 (1956–2 C.B. 954).
In employment tax examinations that
do not involve worker classification or
section 530 issues, the taxpayer has ex-
hausted all internal appeal rights by the
time a notice and demand for payment
thereof based upon an assessment is re-
ceived. Similarly, in employment tax ex-
aminations involving worker classifica-
tion or section 530 issues, the taxpayer
has already had the benefit of all of the
same internal appeal rights by the time a
notice of determination is received.
These proposed regulations provide
that, in employment tax examinations in-
volving worker classification or section
530 issues, as in other types of employ-
ment tax examinations, the error is ascer-
tained for purposes of section 6205 when
the employer has exhausted all internal
appeals within the IRS. The fact that no-
tice and demand for payment based upon
an assessment cannot be made in cases in-
volving worker classification and section
530 issues until the suspension of the
statute of limitations is lifted, following
issuance of a notice of determination,
does not result in an extension of the pe-
riod during which interest-free adjust-
ments can be made under section 6205.
Accordingly, in order to clarify that the
error is ascertained for purposes of sec-
tion 6205 once a taxpayer has exhausted
all internal appeal rights with the IRS, the
existing regulations would be modified by
prohibiting interest-free adjustments after
receipt of the notice of determination.
However, if, prior to receipt of a notice
of determination, a taxpayer makes a re-
mittance which is equal to the amount of
the proposed liability, the IRS considers
the remittance a payment and assesses it.
Rev. Proc. 84–58 (1984–2 C.B. 501). In
such a situation, no notice of determina-
tion would be sent to the taxpayer. If a
taxpayer wants to stop the running of in-
terest and contest the adjustment in the
Tax Court, the taxpayer may make a re-
mittance, designating it in writing as a de-
posit in the nature of a cash bond. If the
taxpayer makes such a deposit, the IRS
does not consider the remittance a pay-
ment. Id. at §4.02. The deposit stops the
running of interest and, if the taxpayer
does not waive the restrictions on assess-
ment, the IRS will send the taxpayer a no-
tice of determination, thus permitting the
taxpayer the option of Tax Court review.
In order to provide a mechanism for
taxpayers to make a remittance to stop
the accrual of interest, yet still receive a
notice of determination and retain the
right to petition the Tax Court, these pro-
posed regulations would further modify
the existing regulations to provide that,
prior to receipt of a notice of determina-
tion, the taxpayer may, in lieu of making a
payment, make a cash bond deposit which
would have the effect of stopping the ac-
March 19, 20019162001–12 I.R.B.

2001–12 I.R.B.917March 19, 2001
crual of any interest, but would not de-
prive the taxpayer of its right to receive a
notice of determination and to petition the
Tax Court under section 7436.
Proposed Effective Date
These regulations are proposed to be ap-
plicable with respect to notices of determi-
nation issued on or after March 19, 2001.
Interest will be computed under the rule in
this regulation on any claims for refund of
interest pending on January 17, 2001. No
inference is intended that the rule set forth
in these proposed regulations is not current
law. Taxpayers may rely on these proposed
regulations for guidance pending the is-
suance of final regulations. If, and to the
extent, future guidance is more restrictive
than the guidance in the proposed regula-
tions, the future guidance will be applied
without retroactive effect.
Special Analyses
It has been determined that this notice of
proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations
and, because these regulations do not im-
pose on small entities a collection of infor-
mation requirement, the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6) does not
apply. Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic and written
comments that are submitted timely to the
IRS. The IRS and Treasury Department
specifically request comments on the clar-
ity of the proposed regulations and how
they may be made easier to understand. All
comments will be available for public in-
spection 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 sched-
uled, notice of the date, time, and place for
the hearing will be published in the Federal
Register.
Drafting Information
The principal author of these proposed
regulations is Lynne Camillo, Office of the
Associate Chief Counsel (Tax Exempt and
Government Entities). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 31 is pro-
posed to be amended as follows:
PART 31 — EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT THE SOURCE
Paragraph 1. The authority for part 31
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §31.6205–1, paragraph (a)(6)
is revised to read as follows:
§31.6205–1 Adjustments of
underpayments.
(a) * * *
(6) No underpayment shall be reported
pursuant to this section after the earlier of
the following—
(i) Receipt from the Commissioner of
notice and demand for payment thereof
based upon an assessment; or
(ii) Receipt from the Commissioner of
a Notice of Determination Concerning
Worker Classification Under Section
7436 (Notice of Determination). (Prior to
receipt of a Notice of Determination, the
taxpayer may, in lieu of making a pay-
ment, make a cash bond deposit which
would have the effect of stopping the ac-
crual of any interest, but would not de-
prive the taxpayer of its right to receive a
Notice of Determination and to petition
the Tax Court under section 7436).
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on January
16, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 17, 2001, 66 F.R. 3956)
Notice of Proposed Rulemaking
Amendment, Check the Box
Regulations
REG–110659–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations that provide guid-
ance relating to elective changes in entity
classification. The proposed regulations
apply to subsidiary corporations that elect
to change their classification for Federal
tax purposes from a corporation to either
a partnership or disregarded entity.
DATES: Written or electronic comments,
or requests for a public hearing must be
received by February 2, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–110659–00), room
5226, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 5 p.m. to:
CC:M&SP:RU (REG–110659–00),
Courier’s desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Washing-
ton, DC. Alternatively, taxpayers may sub-
mit comments electronically via the Inter-
net by selecting the “Tax Regs” option on
the IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at
http://www.irs.ustreas.gov/tax_regs/regslist
.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, David J. Sotos, (202) 622-3050;
concerning submissions of comments, or
to request a hearing, Sonya Cruse, (202)
622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
On November 29, 1999, Treasury and
the IRS published final regulations (T.D.
8844, 1999–2 C.B. 661) describing the
transactions that are deemed to occur
when an entity elects to change its classi-
fication for Federal tax purposes. Those
regulations did not address certain re-

quirements of section 332 as applied to
the deemed liquidation incident to an as-
sociation’s election to be classified as a
partnership or to be disregarded as an en-
tity separate from its owner. This amend-
ment to the final regulations addresses
those requirements.
On January 20, 2000, Treasury and the
IRS issued final regulations relating to
qualified subchapter S subsidiaries. In
order to permit the deemed transaction re-
sulting from a QSub election to comply
with the requirement of section 332 that a
plan of liquidation have been adopted at
the time of a liquidating distribution, the
final regulations provide that a plan of liq-
uidation is deemed adopted immediately
before the deemed liquidation incident to
the QSub election, unless a formal plan of
liquidation that contemplates the filing of
a QSub election is adopted on an earlier
date. The preamble to the QSub regula-
tions provided that Treasury and the IRS
intend to amend the section 7701 regula-
tions regarding elective changes in entity
classification to provide a similar rule
concerning the timing of the plan of liqui-
dation.
Explanation of Provisions
A. In General
Section 301.7701–3(g)(1) describes
how elective changes in the classifica-
tion of an entity will be treated for tax
purposes. Section 301.7701–3(g)(1)(ii)
provides that an elective conversion of
an association to a partnership is
deemed to have the following form: the
association distributes all of its assets
and liabilities to its shareholders in liq-
uidation of the association, and immedi-
ately thereafter, the shareholders con-
tribute all of the distributed assets and
liabilities to a newly formed partnership.
Section 301.7701–3(g)(1)(iii) provides
that an elective conversion of an associ-
ation to an entity that is disregarded as
an entity separate from its owner is
deemed to have the following form: the
association distributes all of its assets
and liabilities to its single owner in liq-
uidation of the association.
Section 332 may be relevant to the
deemed liquidation of an association if it
has a corporate owner. Under section
332, no gain or loss is recognized on the
receipt by a corporation of property dis-
tributed in complete liquidation of an-
other corporation if the requirements of
section 332(b) are satisfied. Those re-
quirements include the adoption of a
plan of liquidation at a time when the
corporation receiving the distribution
owns stock of the liquidating corpora-
tion meeting the requirements of section
1504(a)(2) (i.e., 80 percent of vote and
value). The elective changes from asso-
ciation to a partnership and to a disre-
garded entity result in a constructive liq-
uidation of the association for Federal
tax purposes. Formally adopting a plan
of liquidation for the entity, however, is
potentially incompatible with an elec-
tive change under §301.7701–3, which
allows the local law entity to remain in
existence while liquidating only for Fed-
eral tax purposes. Accordingly, to pro-
vide tax treatment of an association’s
deemed liquidation that is compatible
with the requirements of section 332,
the proposed regulations state that, for
purposes of satisfying the requirement
of adoption of a plan of liquidation
under section 332(b), a plan of liquida-
tion is deemed adopted immediately be-
fore the deemed liquidation incident to
an elective change in entity classifica-
tion, unless a formal plan of liquidation
that contemplates the filing of the elec-
tive change in entity classification is
adopted on an earlier date.
B. Proposed Effective Dates
These regulations are proposed to
apply to elections occurring on or after
the date final regulations are published
in the Federal Register; however, it is
also proposed that taxpayers may elect
to apply the amendments retroactively.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. It also has been
determined that section 533(b) of the
Administrative Procedures Act (5
U.S.C. chapter 5) does not apply to
these regulations, and because these reg-
ulations do not impose a collection of
information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter
6) does not apply. Pursuant to section
7805(f) of the Internal Revenue Code,
this notice of proposed rulemaking will
be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. Alternatively, taxpayers may submit
comments electronically via the Internet
by selecting the “Tax Regs” option on the
IRS Home Page, or by submitting com-
ments directly to the IRS Internet Site at
http://www.irs.ustreas.gov/tax_regs/com-
ments.html.All comments will be avail-
able for public inspection and copying.
The Treasury Department and IRS specif-
ically request comments on the clarity of
the proposed regulations and how they
may be made easier to understand. A
public hearing may be scheduled if re-
quested 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 authors of these pro-
posed regulations are David J. Sotos,
and Jeanne M. Sullivan of Associate
Chief Counsel (Passthroughs & Special
Industries). However, other personnel
from the Treasury Department and IRS
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:
PART 301–PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.7701–3 is
amended as follows:
1. Redesignating the text of paragraph
(g)(2) as paragraph (g)(2)(i) and adding a
heading for paragraph (g)(2)(i).
March 19, 20019182001–12 I.R.B.

2. Adding a new paragraph (g)(2)(ii).
3. Revising the first sentence of para-
graph (g)(4).
The addition and revision read as fol-
lows:
§301.7701–3 Classification of certain
business entities.
* * * * *
(g) * * *
* * * * *
(2) Effect of elective changes—(i) In
general. * * *
(ii) Adoption of plan of liquidation.
For purposes of satisfying the require-
ment of adoption of a plan of liquidation
under section 332, unless a formal plan
of liquidation that contemplates the
election to be classified as a partnership
or to be disregarded as an entity separate
from its owner is adopted on an earlier
date, the making, by an association, of
an election under paragraph (c)(1)(i) of
this section to be classified as a partner-
ship or to be disregarded as an entity
separate from its owner is considered to
be the adoption of a plan of liquidation
immediately before the deemed liquida-
tion described in paragraph (g)(1)(ii) or
(iii) of this section. This paragraph
(g)(2)(ii) applies to elections effective
on or after the date these regulations are
published as final regulations in the
Federal Register. Taxpayers may apply
this paragraph (g)(2)(ii) retroactively to
elections filed before these regulations
are published as final regulations in the
Federal Registerif the corporate owner
claiming treatment under section 332
and its subsidiary making the election
take consistent positions with respect to
the Federal tax consequences of the
election.
* * * * *
(4) Effective date. Except as otherwise
provided in paragraph (g)(2)(ii) of this
section, this paragraph (g) applies to elec-
tions that are filed on or after November
29, 1999.***
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on January
16, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 17, 2001, 66 F.R. 3959)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Debt Instruments With Original
Issue Discount; Annuity
Contracts
REG–125237–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the feder-
al income tax treatment of annuity con-
tracts issued by certain insurance compa-
nies. These proposed regulations provide
guidance on whether certain annuity con-
tracts are excluded from the definition of
a debt instrument under the original issue
discount provisions of the Internal
Revenue Code. This document also pro-
vides a notice of public hearing on the
proposed regulations.
DATES: Written or electronically generat-
ed comments must be received by April
12, 2001. Requests to speak (with out-
lines of oral comments to be discussed) at
the public hearing scheduled for May 30,
2001, at 10 a.m. must be submitted by
May 9, 2001.
ADDRESSES: Send submission to:
CC:M&SP:RU (REG–125237–00), room
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may be hand deliv-
ered between the hours of 8 a.m. and 5 p.m.
to: CC:M&SP:RU (REG–125237–00),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Ave., NW., Washington,
DC. Alternatively, taxpayers may submit
comments electronically via the Internet by
selecting the “Tax Regs” option on the IRS
Home Page, or by submitting comments
directly to the IRS internet site at
http://www.irs.gov/tax_regs/regslist.html.
The public hearing will be held in room
4718, 1111 Constitution Ave., NW.,
Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Patrick E. White, (202) 622-3920; con-
cerning submissions of comments, the
hearing, and/or to be placed on the build-
ing access list to attend the hearing, con-
tact LaNita VanDyke, (202) 622-7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Sections 163(e) and 1271 through 1275
of the Internal Revenue Code (Code) pro-
vide rules for the treatment of debt instru-
ments with original issue discount (OID).
Section 1275(a)(1)(A) defines the term
“debt instrument” to include a bond,
debenture, note or certificate or other evi-
dence of indebtedness. Sections
1275(a)(1)(B)(i) and (ii), however,
exclude certain annuity contracts from the
definition of a debt instrument.
On February 2, 1994, the IRS and
Treasury published in the Federal
Register(59 FR 4799) final regulations
concerning a variety of issues under the
OID provisions. On January 8, 1998, the
IRS and Treasury published in the
Federal Register(63 FR 1054) final reg-
ulations concerning the life annuity
exception of section 1275(a)(1)(B)(i).
This document contains proposed rules
concerning the exception for annuities
described in section 1275(a)(1)(B)(ii).
Explanation of Provisions
In general, the OID provisions apply to
issuers and holders of debt instruments.
The term debt instrument generally means
any instrument or contractual arrange-
ment that constitutes indebtedness under
general principles of income tax law. See
section 1275(a)(1)(A) and §1.1275–1(d).
If a contract is a debt instrument with
OID, section 1272 generally requires the
holder of the contract to include OID in
income currently on a constant yield
basis, regardless of the holder’s overall
method of accounting. By contrast, the
holder of an annuity contract to which
section 72 applies generally is allowed to
defer recognizing economically earned
income until distributions are made on the
contract.
Section 1275(a)(1)(B) excepts two
types of annuity contracts from the defin-
ition of a debt instrument. First, section
1275(a)(1)(B)(i) excepts an annuity con-
tract to which section 72 applies if the
contract “depends (in whole or in substan-
tial part) on the life expectancy of 1 or
more individuals.” Second, section
1275(a)(1)(B)(ii) excepts an annuity con-
2001–12 I.R.B.919March 19, 2001

tract to which section 72 applies under
certain circumstances if the contract “is
issued by an insurance company subject
to tax under subchapter L (or by an entity
described in section 501(c) and exempt
from tax under section 501(a) which
would be subject to tax under subchapter
L were it not so exempt).”
The legislative history of section
1275(a)(1)(B)(ii) is limited. This excep-
tion to the OID rules first appeared when
the bill emerged from the Conference
Committee in 1984. H.R. 4170, 98th
Cong., 2d Sess. § 41 (1984). At that time,
section 1275(a)(1)(B)(ii) applied to cer-
tain annuity contracts issued by an insur-
ance company subject to tax under sub-
chapter L. The 1984 Conference Report
does not elaborate on the meaning of the
phrase “an insurance company subject to
tax under subchapter L,” nor does it
explain the purpose of the provision. H.R.
Conf. Rep. No. 861, 98th Cong., 2d Sess.
802–05 (1984), 1984–3 (Vol. 2) C.B.
56–59. In 2000, a technical correction to
section 1275(a)(1)(B)(ii) was enacted.
The technical correction clarified that sec-
tion 1275(a)(1)(B)(ii) also applied to
annuity contracts issued by “an entity
described in section 501(c) and exempt
from tax under section 501(a) which
would be subject to tax under subchapter
L were it not so exempt.” Consolidated
Appropriations Act, 2001, Public Law
106–554 (114 Stat. 2763).
In 1998, the IRS and Treasury promul-
gated §1.1275–1(j), interpreting the life
annuity exception of section 1275(a)
(1)(B)(i). Commentators had also request-
ed guidance on the scope of the section
1275(a)(1)(B)(ii) exception, particularly
with regard to foreign insurers not engaged
in a trade or business in the U.S.
The proposed regulations provide that
an annuity contract issued by a foreign
insurance company is treated as issued by
an insurance company subject to tax
under subchapter L if the insurance com-
pany is subject to tax under subchapter L
with respect to income earned on the
annuity contract. The IRS and Treasury
believe that this is the most natural appli-
cation of the language of section
1275(a)(1)(B)(ii) and is consistent with
the use of that phrase elsewhere in the
Code and regulations. See, e.g., sections
953(e)(3)(C) and 1297(b)(2)(B);
§1.848–2(h). The IRS and Treasury also
believe that the exception from the OID
rules was intended to preserve a balance
between the tax treatment of holders of
annuity contracts under section 72 and the
tax treatment of issuers of such contracts.
This balance does not exist when the
annuity contract is issued by a foreign
person that is not required to calculate its
income with respect to the contract under
subchapter L.
Proposed Effective Date
The proposed regulations are proposed
to apply for interest accruals on or after
the date that is 30 days after final regula-
tions are published in the Federal
Registeron annuity contracts held on or
after that date. The regulations will not
apply to an annuity contract that was pur-
chased before January 12, 2001. Special
rules are provided for additional invest-
ments after January 12, 2001, with respect
to an annuity contract held as of that date.
This effective date framework is similar
to that provided in §1.1275–1(j)(8) with
respect to the life annuity exception of
section 1275(a)(1)(B)(i).
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a reg-
ulatory assessment is not required. It also
has been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because these regulations
do not impose a collection of information
on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of
proposed rulemaking will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic or written
comments (a signed original and eight (8)
copies of written comments) that are sub-
mitted timely (in the manner described in
the “ADDRESSES” portion of this pre-
amble) to the IRS. The IRS and Treasury
request comments on the clarity of the
proposed rules and how they may be
made easier to understand. All comments
will be available for public inspection and
copying.
A public hearing has been scheduled
for May 30, 2001, beginning at 10 a.m. in
room 4718, Internal Revenue Building,
1111 Constitution Avenue, NW.,
Washington, DC. Due to building securi-
ty procedures, visitors must enter at the
10th Street entrance, located between
Constitution and Pennsylvania Avenues,
NW. In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
before the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see “FOR FURTHER INFORMATION
CONTACT.”
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written comments and an outline
of topics to be discussed and the time to
be devoted to each topic (signed original
and eight (8) copies) by May 9, 2001. A
period of 10 minutes will be allotted to
each person making comments. An agen-
da showing the scheduling of the speakers
will be prepared after the deadline for
receiving outlines has passed. Copies of
the agenda will be available free of charge
at the hearing.
Drafting Information
The principal author of these regula-
tions is Patrick E. White, Office of the
Associate Chief Counsel (Financial
Institutions & Products). However, other
personnel from the IRS and Treasury
Department participated in their develop-
ment.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
March 19, 20019202001–12 I.R.B.

Par. 2. Section 1.1271–0 is amended by
adding entries for paragraphs (k) through
(k)(3) to §1.1275–1 to read as follows:
§1.1271–0 Original issue discount;
effective dates; table of contents.
* * * * *
§1.1275–1 Definitions.
* * * * *
(k) Exception under section
1275(a)(1)(B)(ii) for annuities issued by
an insurance company subject to tax
under subchapter L .
(1) Rule.
(2) Examples.
(3) Effective date.
* * * * *
Par. 3. Section 1.1275–1 is amended by
adding paragraph (k) to read as follows:
§1.1275–1 Definitions.
* * * * *
(k) Exception under section
1275(a)(1)(B)(ii) for annuities issued by
an insurance company subject to tax
under subchapter L—(1) Rule. For pur-
poses of section 1275(a)(1)(B)(ii), an
annuity contract issued by a foreign insur-
ance company is considered as issued by
an insurance company subject to tax
under subchapter L if the insurance com-
pany is subject to tax under subchapter L
with respect to income earned on the
annuity contract.
(2) Examples. The following examples
illustrate the rule of paragraph (k)(1) of
this section. Each example assumes that
the annuity contract is a contract to which
section 72 applies and was issued in a
transaction where there is no considera-
tion other than cash or another qualifying
annuity contract, pursuant to the exercise
of an election under an insurance contract
by a beneficiary thereof on the death of
the insured party, or in a transaction
involving a qualified pension or employee
benefit plan. The examples are as fol-
lows:
Example 1. Company X is an insurance com-
pany that is organized, licensed and doing business
in Country Y. Company X does not have a U.S.
trade or business and is not, under section 842, sub-
ject to U.S. income tax under subchapter L with re-
spect to income earned on annuity contracts. A, a
U.S. taxpayer, purchases an annuity contract from
Company X in Country Y. The annuity contract is
not excepted from the definition of a debt instru-
ment by section 1275(a)(1)(B)(ii).
Example 2. The facts are the same as in Exam-
ple 1, except that Company X has a U.S. trade or
business. A purchased the annuity from Company
X’s U.S. trade or business. Under section 842(a),
Company X is subject to tax under subchapter L
with respect to income earned on the annuity con-
tract. Under these facts, the annuity contract is ex-
cepted from the definition of a debt instrument by
section 1275(a)(1)(B)(ii).
Example 3. The facts are the same as in Exam-
ple 2, except that there is a tax treaty between
Country Y and the United States. Company X is a
resident of Country Y for purposes of the U.S.-
Country Y tax treaty. Company X’s activities in the
U.S. do not constitute a permanent establishment
under the U.S.-Country Y tax treaty. Because Com-
pany X does not have a U.S. permanent establish-
ment, Company X is not subject to tax under sub-
chapter L with respect to income earned on the
annuity contract. Thus, the annuity contract is not
excepted from the definition of a debt instrument
by section 1275(a)(1)(B)(ii).
Example 4. The facts are the same as in Exam-
ple 1, except that Company X is a foreign insurance
corporation controlled by a U.S. shareholder. Com-
pany X does not make an election under section
953(d) to be treated as a domestic corporation. The
controlling U.S. shareholder is required under sec-
tions 953 and 954 to include income earned on the
annuity contract in its taxable income under subpart
F. However, Company X is not subject to tax under
subchapter L with respect to income earned on the
annuity contract. Thus, the annuity contract is not
excepted from the definition of a debt instrument
by section 1275(a)(1)(B)(ii).
Example 5. The facts are the same as in Exam-
ple 4, except that Company X properly elects under
section 953(d) to be treated as a domestic corpora-
tion. By reason of its election, Company X is sub-
ject to tax under subchapter L with respect to in-
come earned on the annuity contract. Thus, the
annuity contract is excepted from the definition of a
debt instrument by section 1275(a)(1)(B)(ii).
(3) Effective date. This paragraph (k) is
applicable for interest accruals on or after
the date that is 30 days after final regula-
tions are published in the Federal
Register. This paragraph (k) does not
apply to an annuity contract that was pur-
chased before January 12, 2001. For pur-
poses of this paragraph (k), if any addi-
tional investment in a contract purchased
before January 12, 2001, is made on or
after January 12, 2001, and the additional
investment is not required to be made
under a binding written contractual oblig-
ation that was entered into before that
date, then the additional investment is
treated as the purchase of a contract after
January 12, 2001.
David A. Mader,
Acting Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on January
11, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 12, 2001, 66 F.R. 2852)
2001–12 I.R.B.921March 19, 2001

March 19, 2001i2001–12 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security
Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—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.
Definition of Terms

2001–12 I.R.B.iiMarch 19, 2001
Numerical Finding List
1
Bulletins 2001–1 through 2001–11
Announcements:
2001–1, 2001–2 I.R.B. 277
2001–2, 2001–2 I.R.B. 277
2001–3, 2001–2 I.R.B. 278
2001–4, 2001–2 I.R.B. 286
2001–5, 2001–2 I.R.B. 286
2001–6, 2001–3 I.R.B. 357
2001–7, 2001–3 I.R.B. 357
2001–8, 2001–3 I.R.B. 357
2001–9, 2001–3 I.R.B. 357
2001–10, 2001–4 I.R.B. 431
2001–11, 2001–4 I.R.B. 432
2001–12, 2001–6 I.R.B. 526
2001–13, 2001–96 I.R.B. 752
2001–14, 2001–7 I.R.B. 648
2001–15, 2001–8 I.R.B. 715
2001–16, 2001–8 I.R.B. 715
2001–17, 2001–8 I.R.B. 716
2001–18, 2001–10 I.R.B. 791
2001–19, 2001–10 I.R.B. 791
2001–20, 2001–8 I.R.B. 716
2001–21, 2001–9 I.R.B. 752
2001–22, 2001–11 I.R.B. 895
2001–23, 2001–10 I.R.B. 791
2001–24, 2001–10 I.R.B. 793
2001–25, 2001–11 I.R.B. 895
2001–26, 2001–11 I.R.B. 896
2001–27, 2001–11 I.R.B. 897
Notices:
2001–1, 2001–2 I.R.B. 261
2001–2, 2001–2 I.R.B. 265
2001–3, 2001–2 I.R.B. 267
2001–4, 2001–2 I.R.B. 267
2001–5, 2001–3 I.R.B. 327
2001–6, 2001–3 I.R.B. 327
2001–7, 2001–4 I.R.B. 374
2001–8, 2001–4 I.R.B. 374
2001–9, 2001–4 I.R.B. 375
2001–10, 2001–5 I.R.B. 459
2001–11, 2001–5 I.R.B. 464
2001–12, 2001–3 I.R.B. 328
2001–13, 2001–6 I.R.B. 514
2001–14, 2001–6 I.R.B. 516
2001–15, 2001–7 I.R.B. 589
2001–16, 2001–9 I.R.B. 730
2001–17, 2001–9 I.R.B. 730
2001–18, 2001–9 I.R.B. 731
2001–19, 2001–10 I.R.B. 784
2001–20, 2001–11 I.R.B. 818
2001–21, 2001–11 I.R.B. 818
Proposed Regulations:
REG–209461–79, 2001–8, I.R.B. 712
REG–246256–96, 2001–8, I.R.B. 713
REG–251701–96, 2001–4, I.R.B. 396
REG–106030–98, 2001–11, I.R.B. 820
REG–106542–98, 2001–5, I.R.B. 473
REG–121928–98, 2001–6, I.R.B. 520
REG–111835–99, 2001–11, I.R.B. 834
REG–103320–00, 2001–8, I.R.B. 714
REG–104683–00, 2001–4, I.R.B. 407
REG–106702–00, 2001–4, I.R.B. 424
REG–106791–00, 2001–6, I.R.B. 521
REG–107176–00, 2001–4, I.R.B. 428
Proposed Regulations—Continued:
REG–107566–00, 2001–3, I.R.B. 346
REG–114082–00, 2001–7, I.R.B. 629
REG–114083–00, 2001–7, I.R.B. 630
REG–114084–00, 2001–7, I.R.B. 633
REG–116468–00, 2001–6, I.R.B. 522
REG–119352–00, 2001–6, I.R.B. 525
REG–126100–00, 2001–11, I.R.B. 862
REG–130477–00, 2001–11, I.R.B. 865
REG–130481–00, 2001–11, I.R.B. 865
Railroad Retirement Quarterly Rates:
2001–2, I.R.B. 258
Revenue Procedures:
2001–1, 2001–1 I.R.B. 1
2001–2, 2001–1 I.R.B. 79
2001–3, 2001–1 I.R.B. 111
2001–4, 2001–1 I.R.B. 121
2001–5, 2001–1 I.R.B. 164
2001–6, 2001–1 I.R.B. 194
2001–7, 2001–1 I.R.B. 236
2001–8, 2001–1 I.R.B. 239
2001–9, 2001–3 I.R.B. 328
2001–10, 2001–2 I.R.B. 272
2001–11, 2001–2 I.R.B. 275
2001–12, 2001–3 I.R.B. 335
2001–13, 2001–3 I.R.B. 337
2001–14, 2001–3 I.R.B. 343
2001–15, 2001–5 I.R.B. 465
2001–16, 2001–4 I.R.B. 376
2001–17, 2001–7 I.R.B. 589
2001–18, 2001–8 I.R.B. 708
2001–19, 2001–9 I.R.B. 732
2001–20, 2001–9 I.R.B. 738
2001–21, 2001–9 I.R.B. 742
2001–22, 2001–9 I.R.B. 745
2001–23, 2001–10 I.R.B. 784
2001–24, 2001–10 I.R.B. 788
Revenue Rulings:
2001–1, 2001–9 I.R.B. 726
2001–2, 2001–2 I.R.B. 255
2001–3, 2001–3 I.R.B. 319
2001–4, 2001–3 I.R.B. 295
2001–5, 2001–5 I.R.B. 451
2001–6, 2001–6 I.R.B. 491
2001–7, 2001–7 I.R.B. 541
2001–8, 2001–9 I.R.B. 726
2001–9, 2001–8 I.R.B. 652
2001–10, 2001–10 I.R.B. 755
2001–11, 2001–10 I.R.B. 780
2001–12, 2001–11 I.R.B. 811
Treasury Decisions:
8910, 2001–2 I.R.B. 258
8911, 2001–3 I.R.B. 321
8912, 2001–5 I.R.B. 452
8913, 2001–3 I.R.B. 300
8914, 2001–8 I.R.B. 653
8915, 2001–4 I.R.B. 359
8916, 2001–4 I.R.B. 360
8917, 2001–7 I.R.B. 538
8918, 2001–4 I.R.B. 372
8919, 2001–6 I.R.B. 505
8920, 2001–8 I.R.B. 654
8921, 2001–7 I.R.B. 532
8922, 2001–6 I.R.B. 508
8923, 2001–6 I.R.B. 485
Treasury Decisions—Continued:
8924, 2001–6 I.R.B. 489
8925, 2001–6 I.R.B. 496
8926, 2001–6 I.R.B. 492
8927, 2001–11 I.R.B. 807
8928, 2001–8 I.R.B. 685
8929, 2001–10 I.R.B. 756
8930, 2001–5 I.R.B. 433
8931, 2001–7 I.R.B. 542
8932, 2001–11 I.R.B. 813
8933, 2001–11 I.R.B. 794
8935, 2001–8 I.R.B. 702
8937, 2001–11 I.R.B. 806
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2000–27 through
2000–52 is in Internal Revenue Bulletin 2001–1,
dated January 2, 2001.

March 19, 2001iii2001–12 I.R.B.
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2001–1 through 2001–11
Announcement:
98–99
Modified by
Ann. 2001–9, 2001–3 I.R.B. 357
99–79
Superseded by
Ann. 2001–3, 2001–2 I.R.B. 278
2000–78
Obsoleted by
T.D. 8933, 2001–11 I.R.B. 794
2000–97
Corrected by
Ann. 2001–7, 2001–3 I.R.B. 357
Cumulative Bulletin:
1998–2
Corrected by
Ann. 2001–5, 2001–2 I.R.B. 286
Notices:
94–3
Modified by
T.D. 8933, 2001–11 I.R.B. 794
98–39
Modified by
Notice 2001–9, 2001–4 I.R.B. 375
98–40
Modified by
Notice 2001–9, 2001–4 I.R.B. 375
99–53
Modified and superseded by
Notice 2001–7, 2001–4 I.R.B. 374
2000–21
Superseded by
Notice 2001–1, 2001–2 I.R.B. 261
2000–22
Modified and superseded by
Notice 2001–8, 2001–4 I.R.B. 374
2000–43
Extended by
Notice 2001–13, 2001–6 I.R.B. 514
Proposed Regulations:
EE–130–86
Partially withdrawn by
REG–209461–79, 2001–8 I.R.B. 712
REG–116733–98
Withdrawn by
Ann. 2001–11, 2001–4 I.R.B. 432
REG–116048–99
Withdrawn by
Ann. 2001–27, 2001–11 I.R.B. 897
Revenue Procedures:
83–87
Superseded by
Rev. Proc. 2001–15, 2001–5 I.R.B. 465
Revenue Procedures—Continued:
90–18
Amplified and superseded by
Rev. Proc. 2001–18, 2001–8 I.R.B. 708
92–19
Superseded by
Rev. Proc. 2001–15, 2001–5 I.R.B. 465
96–15
Modified by
Ann. 2001–22, 2001–11 I.R.B. 895
96–17
Modified by
Rev. Proc. 2001–9, 2001–3 I.R.B. 328
99–18
Modified and superseded by
Rev. Proc. 2001–21, 2001–9 I.R.B. 742
99–47
Superseded by
Rev. Proc. 2001–16, 2001–4 I.R.B. 376
99–49
Modified and amplified by
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
Rev. Proc. 2001–23, 2001–10 I.R.B. 784
Rev. Proc. 2001–24, 2001–10 I.R.B. 788
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
2000–1
Superseded by
Rev. Proc. 2001–1, 2001–1 I.R.B. 1
2000–2
Superseded by
Rev. Proc. 2001–2, 2001–1 I.R.B. 79
2000–3
Superseded by
Rev. Proc. 2001–3, 2001–1 I.R.B. 111
2000–4
Superseded by
Rev. Proc. 2001–4, 2001–1 I.R.B. 121
2000–5
Superseded by
Rev. Proc. 2001–5, 2001–1 I.R.B. 164
2000–6
Superseded by
Rev. Proc. 2001–6, 2001–1 I.R.B. 194
2000–7
Superseded by
Rev. Proc. 2001–7, 2001–1 I.R.B. 236
2000–8
Superseded by
Rev. Proc. 2001–8, 2001–1 I.R.B. 239
2000–16
Modified and superseded by
Rev. Proc. 2001–17, 2001–7 I.R.B. 589
2000–22
Modified and superseded by
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
2001–3
Corrected by
Ann. 2001–25, 2001–11 I.R.B. 895
2001–13
Clarified by
Notice 2001–12, 2001–3 I.R.B. 328
Revenue Rulings:
64–328
Modified by
Notice 2001–10, 2001–5 I.R.B. 459
66–110
Modified by
Notice 2001–10, 2001–5 I.R.B. 459
85–30
Clarified by
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
88–95
Clarified by
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
92–19
Supplemented in part by
Rev. Rul. 2001–11, 2001–10 I.R.B. 780
2000–56
Corrected by
Ann. 2001–19, 2001–10 I.R.B. 791
Treasury Decisions:
8889
Corrected by
Ann. 2001–14, 2001–2 I.R.B. 286
8913
Corrected by
Ann. 2001–26, 2001–11 I.R.B. 896
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2000–27 through 2000–52 is in Internal Revenue
Bulletin 2001–1, dated January 2, 2001.

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