Internal Revenue Bulletin 1996-3 (PDF rendition): IRS Revenue Rulings

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

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Bulletin No. 1996–3
January 16, 1996
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 96–4, page 16.
Section 1274A inflation-adjusted numbers for 1996. This
ruling provides the dollar amounts, increased by the
1996 inflation-adjustment, for section 1274A of the
Code. Rev. Rul. 95–10 supplemented and superseded.
Rev. Rul. 96–5, page 29.
CPI adjustment for below-market loans–1996. The
amount that section 7872(g) of the Code permits a
taxpayer to lend to a qualified continuing care facility
without incurring imputed interest is published and
adjusted for inflation for years 1987–1996. Rev. Rul.
95–11 supplemented and superseded.
T.D. 8631, page 7.
EE–34–95, page 49.
Temporary and proposed regulations under section 411
of the Code relating to the requirements of section
204(h) of the Employee Retirement Income Security
Act of 1974, as amended, relating to defined benefit
plans and to individual account plans that are subject
to the funding standards of section 302 of ERISA.
T.D. 8635, page 5.
Final and temporary regulations under sections 401
and 408 that provide guidance to nonbank trustees
with respect to the adequacy of net worth requirements
that must be satisfied in order to be or remain an
approved nonbank trustee.
EMPLOYEE PLANS
Rev. Rul. 96–7, page 12.
Disability mortality tables. This ruling provides mortality
tables for use under section 412(1) for plan years after
1995 to calculate current liability for individuals entitled
to benefits on account of disability.
Announcement 96–4, page 50.
An announcement discusses the publication of mortality
tables for use under section 412(1) for individuals
entitled to benefits on account of disability. The
announcement requests comments on the tables pub-
lished in Rev. Rul. 96–7.
EMPLOYMENT TAX
T.D. 8634, page 17.
Final regulations relating to the income tax withholding
requirement on distribution of profits from certain
gaming activities made to members of Indian tribes
under section 3402(r) of the Code.
ADMINISTRATIVE
Notice 96–1, page 30.
Notice of intention to issue regulations under section
1396 of the Code. The Service will clarify the relevant
period under section 1396(d)(1)(A) during which sub-
stantially all of the services performed by an employee
for his or her employer must be performed within an
empowerment zone in a trade or business of the
employer.
Rev. Proc. 96–12, page 30.
Life insurance partnerships. The Service will not rule on
certain issues raised in connection with the transfer of a
life insurance policy to an unincorporated organization.
Rev. Proc. 96–3 amplified.
Rev. Proc. 96–13, page 31.
Updated competent authority procedure. This procedure
sets forth the procedures concerning requests by
taxpayers for assistance of the U.S. competent authority
(Continued on page 4)
Finding Lists begin on page 52.

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

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

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HIGHLIGHTS
OF THIS ISSUE—Continued
ADMINISTRATIVE—Continued
under the provisions of an income, estate or gift tax
treaty to which the United States is a party. Rev. Procs.
91–23 and 91–26 superseded; Rev. Proc. 91–22
amplified; Rev. Rul. 72–437 modified; Rev. Rul 92–75
clarified.
Rev. Proc. 96–14, page 41.
Obtaining relief. This procedure prescribes additional
conditions associated with obtaining relief otherwise
available under Rev. Proc. 65–17, 1965–1 C.B. 833.
Rev. Rul. 82–80 and Rev. Proc. 65–17 modified; Rev.
Proc. 91–24 superseded.
Rev. Proc. 96–15, page 41.
Advance valuation of art. Donors of art appraised at
$50,000 or more and executors or administrators of
estates including art appraised at $50,000 or more
may request that the Service issue a statement of value
for the art. Rev. Proc. 66–49 modified.
Rev. Proc. 96–16, page 45.
Letter rulings; tax-exempt obligations. Revised procedures
are provided for obtaining a letter ruling under sections
103, 141–150, 1394, and 7871(c) of the Code. Rev.
Procs. 88–32 and 88–33 obsoleted.
T.D. 8630, page 19.
Final income, estate, and gift regulations relating to
actuarial tables exceptions.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 101.—Certain Death Benefits
The Service will not rule on certain issues
raised in connection with the transfer of a life
insurance policy to an unincorporated organiza-
tion. See Rev. Proc. 96–12, page 30.
Section 103.—Interest on State and
Local Bonds
A revenue procedure sets forth procedures for
requesting a ruling under §§103, 141–150, 1395,
and 7871(c) of the Code. See Rev. Proc. 96–16,
page 45.
Section 170.—Charitable, etc.,
Contributions and Gifts
26 CFR 1.170A–13: Recordkeeping and return
requirements for deductions for charitable
contributions.
The contributor of art appraised at $50,000 or
more may request that the Service issue a
Statement of Value for the art. See Rev. Proc.
96–15, page 41.
Section 401.—Qualified Pension,
Profit-sharing, and Stock Bonus
Plans
26 CFR 1.401(f)–1: Certain custodial accounts
on annuity contracts.
T.D. 8635
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Nonbank Trustee Net Worth
Requirements
AGENCY:Internal Revenue Service
(IRS), Treasury.
A C T I O N : F i n a l a n d t e m p o r a r y
regulations.
SUMMARY: This document contains
regulations that provide guidance to
nonbank trustees with respect to the
adequacy of net worth requirements
that must be satisfied in order to be or
remain an approved nonbank trustee.
These regulations affect nonbank
trustees and custodians of individual
retirement accounts, and nonbank
custodians of qualified plans and tax-
sheltered annuities.
EFFECTIVE DATE: These regulations
are effective December 20, 1995.
FOR FURTHER INFORMATION
CONTACT: Marjorie Hoffman, (202)
622-6030 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 6, 1994, temporary
regulations (TD 8570 [1994–2 C.B.
49]) under section 401 were published
in the Federal Register (59 FR 62570).
A notice of proposed rulemaking (EE–
38–94 [1994–2 C.B. 49]), cross-
referencing the temporary regulations,
was published in the Federal Register
(59 FR 62644) on the same day. The
temporary regulations provide guidance
on the adequacy of net worth require-
ments for nonbank trustees and custo-
dians of individual retirement plans,
and for nonbank custodians of custodial
accounts of qualified plans and tax-
sheltered annuities.
After consideration of all of the
comments, the temporary regulations
are replaced and the proposed regula-
tions are adopted as revised by this
Treasury decision. Because section
401(d)(1), under which §1.401–12 was
originally issued, was repealed by
section 237(a) of the Tax Equity and
Fiscal Responsibility Act of 1982,
Public Law 97–248 (1982), these final
regulations also move all the rules for
nonbank trustees and custodians that
were previously in §1.401–12(n) to
§ 1.408–2.
Explanation of Provisions
The fiduciary conduct rules for non-
bank trustees and custodians under
longstanding Treasury regulations re-
quire nonbank trustees and custodians
to maintain a minimum amount of net
worth in order to qualify as an
approved nonbank trustee or custodian.
Under this requirement, the nonbank
trustee or custodian’s net worth must
exceed the greater of a specified dollar
amount or a percentage of the value of
all assets held in fiduciary accounts of
retirement plans. A primary objective
of this adequacy-of-net-worth require-
ment has been to ensure that nonbank
trustees and custodians maintain a level
of solvency commensurate with their
financial and fiduciary responsibilities.
Under the general net worth require-
ment, nonbank trustees and custodians
may not accept new accounts unless
their net worth exceeds the greater of
$100,000 or four percent of the value
of all assets held in fiduciary accounts.
Additionally, nonbank trustees and
custodians must take whatever steps are
necessary (including the relinquishment
of fiduciary accounts) to ensure that
their net worth exceeds the greater of
$50,000 or two percent of the value of
all assets held by them in fiduciary
accounts.
For passive nonbank trustees and
custodians (qualified nonbank entities
that have no discretion to direct the
investment of assets), the percentage
requirements are lower. Specifically,
passive nonbank trustees and custo-
dians may not accept new accounts
unless their net worth exceeds the
greater of $100,000 or two percent of
the value of all assets held in fiduciary
accounts. Additionally, they must take
appropriate action (including the relin-
quishment of fiduciary accounts) to
ensure that their net worth exceeds the
greater of $50,000 or one percent of
the value of assets held in their
fiduciary accounts.
The proposed and temporary regula-
tions provide a special rule for passive
nonbank trustees and custodians that
are broker-dealers and members of the
Securities Investor Protection Corpora-
tion (SIPC). The proposed and tempo-
rary regulations provide that, to the
extent that assets held in any fiduciary
accounts are insured by SIPC in the
event of the member’s liquidation
($500,000 per account, $100,000 of
which may be cash), the assets will be
disregarded in determining the value of
assets held in fiduciary accounts by the
trustee or custodian for purposes of the
percentage part of the net worth
requirement.
The final regulations adopt the provi-
sions of the proposed and temporary
regulations. In addition, in response to
comments, the final regulations extend
the SIPC-related relief to all nonbank
trustees and custodians that are broker-
dealers and members of SIPC rather
than limiting the relief to passive
nonbank trustees and custodians. The
final regulations provide that the

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amount of the minimum net worth
requirement for nonbank trustees and
custodians that are SIPC members is
reduced by either two percent of assets
insured by SIPC (in the case of the
minimum net worth requirement that
applies to a trustee or custodian accept-
ing additional accounts) or one percent
of assets insured by SIPC (in the case
of the minimum net worth requirement
that must be satisfied to avoid a
mandatory relinquishment of accounts).
An example in the regulations illus-
trates this rule.
The final regulations also retain the
rule in the proposed and temporary
regulations that increased the initial net
worth requirement for all nonbank
trustees and custodians. The purpose of
the rule is to better assure that the
enterprises are sound and well-funded
during their start-up period. This initial
net worth requirement requires all new
entities applying for nonbank trustee or
custodian status to have a net worth of
not less than $250,000 for the most
recent taxable year preceding the appli-
cant’s initial application.
This new initial net worth require-
ment applies only to applications re-
ceived after January 5, 1995. Pre-
viously approved nonbank trustees and
custodians need only satisfy the ongo-
ing net worth requirement.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Small Business Administra-
tion for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Marjorie Hoffman, Office of
t h e A s s o c i a t e C h i e f C o u n s e l ,
(Employee Benefits and Exempt Orga-
nizations) IRS. However, other person-
nel from the IRS and Treasury Depart-
ment participated 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 adding an
entry in numerical order to read as
follows:
Authority: 26 U.S.C. 7805. * * *
§ 1.401–12 also issued under 26
U.S.C. 401(d)(1). * * *
§§1.401–12 and 1.408–2 [Amended]
Par. 2. Paragraph (n) of §1.401–12
is redesignated as paragraph (e) of
§ 1.408–2 and the authority citation
immediately following §1.401–12 is
removed.
§ 1.401–12T [Removed]
Par. 3. Section 1.401–12T is
removed.
§ 1.401(f)–1 [Amended]
Par. 4. Section 1.401(f)–1 is
amended by:
1.Removing the language ‘‘section
401(d)(1) and the regulations there-
under’’ and adding ‘‘§1.408–2(e)’’ in
its place in the last sentence of
paragraph (b)(1)(ii).
2.Removing the language ‘‘401(d)-
(1) and adding ‘‘408(n)’’ in its place in
paragraph (d)(1).
Par. 5. Section 1.408–2 is amended
by:
1.Removing the language ‘‘401(d)-
(1)’’ and adding ‘‘408(n)’’ in its place
in paragraph (b)(2)(i).
2.Removing the language ‘‘(b)(2)-
(ii)’’ and adding ‘‘(e)’’ in its place in
paragraph (b)(2)(i).
3.Removing paragraph (b)(2)(ii).
4.Redesignating (b)(2)(iii) as (b)(2)-
(ii)
5. Removing newly redesignated
paragraphs (e)(1) and (e)(9).
6.Further redesignating paragraphs
(e)(2) through (e)(8) as paragraphs
(e)(1) through (e)(7), respectively.
7.Removing the language ‘‘For the
plan years to which this paragraph
applies, the’’ and adding ‘‘The’’ in its
place, and removing the language ‘‘(c)-
(1)(i)’’ and adding ‘‘(b)’’ in its place,
in the first sentence of newly desig-
nated paragraph (e)(1).
8.Removing the language ‘‘401’’
and adding ‘‘408’’ in its place, and
removing the language ‘‘(n)(3) to
(n)(7)’’ and adding ‘‘(e)(2) to (e)(6)’’
in its place, in the second sentence of
newly designated paragraph (e)(1).
9.Removing the language ‘‘Com-
missioner of Internal Revenue, Atten-
tion: E:EP, Internal Revenue Service,
Washington, D.C. 20224’’ and adding
‘‘the address prescribed by the Com-
missioner in revenue rulings, notices,
and other guidance published in the
I n t e r n a l R e v e n u e B u l l e t i n ( s e e
§ 601.601(d)(2)(ii)(b) of this chapter)’’
in its place in the third sentence of
newly designated paragraph (e)(1), in
the last sentence of newly designated
(e)(6)(9)(iv), and in the first sentence
of newly designated (e)(6)(v)(B).
10.Removing the language ‘‘(n)(8)’’
and adding ‘‘(e)(7)’’ in its place in the
last sentence of newly designated para-
graph (e)(1).
11.Removing the language ‘‘(n)(6)’’
and adding ‘‘(e)(5)’’ in its place in
newly designated paragraph (e)(2)(iv).
12.Redesignating newly designated
paragraph (e)(5)(ii)(A) as paragraph
(e)(5)(ii)(E).
13.Removing the language ‘‘(n)(7)-
(i)(A)’’ and adding ‘‘(e)(6)(i)(A)’’ in
its place in newly designated paragraph
(e)(5)(ii)(B)(2) and in newly designated
paragraph (e)(5)(ii)(C)(2).
14.Removing the language ‘‘(n)(6)-
(iii)(A)’’ and adding ‘‘(e)(5)(iii)(A)’’ in
its place in newly designated paragraph
(e)(5)(iii)(B).
15.Removing the language ‘‘(n)(6)-
(vi)’’ and adding ‘‘(e)(5)(vi)’’ in its
place in newly designated paragraph
(e)(5)(v)(A).
16.Removing the language ‘‘(n)(6)-
(viii)(C)’’ and adding ‘‘(e)(5)(viii)(C)’’
in its place in newly designated para-
graph (e)(5)(vi).
17.Removing the language ‘‘(n)(3)-
(v)’’ and adding ‘‘(e)(2)(v)’’ in its
place, and removing the language
‘‘(n)(8)’’ and adding ‘‘(e)(7)’’ in its
place, in newly designated paragraph
(e)(5)(viii).
18.Removing the language ‘‘(n)(6)-
(i)(A)(3)’’ and adding ‘‘(e)(5)(i)(A)-

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(3)’’ in its place, and removing the
language ‘‘(n)(5)(ii)(E)’’ and adding
‘‘(e)(4)(ii)(E)’’ in its place, in the third
sentence of newly designated paragraph
(e)(6)(i)(A).
19.Removing the language ‘‘(n)(7)-
(iii)(A)(3)’’ and adding ‘‘(e)(6)(iii)(A)-
(3)’’ in its place in newly designated
paragraph (e)(6)(iii)(C).
20. Revising newly redesignated
paragraphs (e)(5)(ii)(A) and adding
(e)(5)(ii)(D).
21.The revisions and addition read
as follows:
§ 1.408–2 Individual retirement
accounts
******
(e) * * *
******
(5) * * *
(ii)Adequacy of net worth—(A) Ini-
tial net worth requirement. In the case
of applications received after January
5, 1995, no initial application will be
accepted by the Commissioner unless
the applicant has a net worth of not
less than $250,000 (determined as of
the end of the most recent taxable
year). Thereafter, the applicant must
satisfy the adequacy of net worth
requirements of paragraph (e)(6)(ii)(B)
and (C) of this section.
******
(D)Assets held by members of
SIPC—1) For purposes of satisfying
the adequacy-of-net worth requirement
of this paragraph, a special rule is
provided for nonbank trustees that are
members of the Securities Investor
Protection Corporation (SIPC) created
under the Securities Investor Protection
Act of 1970 (SIPA)(15 U.S.C. §78aaa
et seq, as amended). The amount that
the net worth of a nonbank trustee that
is a member of SIPC must exceed is
reduced by two percent for purposes of
paragraph (e)(5)(ii)(B)(2), and one per-
cent for purposes of paragraph (e)(5)-
(ii)(C)(2), of the value of assets (deter-
mined on an account-by-account basis)
held for the benefit of customers (as
defined in 15 U.S.C. §78fff–2(e)(4)) in
fiduciary accounts by the nonbank
trustee to the extent of the portion of
each account that does not exceed the
dollar limit on advances described in
15 U.S.C. §78fff–3(a), as amended,
that would apply to the assets in that
account in the event of a liquidation
proceeding under the SIPA.
(2) The provisions of this special
rule for assets held in fiduciary ac-
counts by members of SIPC are illus-
trated in the following example.
Example—(a) Trustee X is a broker-dealer and
is a member of the Securities Investment
Protection Corporation. Trustee X also has been
approved as a nonbank trustee for individual
retirement accounts (IRAs) by the Commissioner
but not as a passive nonbank trustee. Trustee X
is the trustee for four IRAs. The total assets of
each IRA (for which Trustee X is the trustee) as
of the most recent valuation date before the last
day of Trustee X’s taxable year ending in 1995
are as follows: the total assets for IRA–1 is
$3,000,000 (all of which is invested in se-
curities); the value of the total assets for IRA–2
is $500,000 ($200,000 of which is cash and
$300,000 of which is invested in securities), the
value of the total assets for IRA–3 is $400,000
(all of which is invested in securities); and the
value of the total assets of IRA–4 is $200,000
(all of which is cash). The value of all assets
held in fiduciary accounts, as defined in §1.408–
2(e)(6)(viii)(A), is $4,100,000.
(b)The dollar limit on advances described in
15 U.S.C. §78fff–3(a) that would apply to the
assets in each account in the event of a
liquidation proceeding under the Securities In-
vestor Protection Act of 1970 in effect as of the
last day of Trustee X’s taxable year ending in
1995 is $500,000 per account (no more that
$100,000 of which is permitted to be cash).
Thus, the dollar limit that would apply to IRA–1
is $500,000; the dollar limit for IRA–2 is
$400,000 ($100,000 of the cash and the $300,000
of the value of the securities); the dollar limit for
IRA–3 is $400,000 (the full value of the account
because the value of the account is less than
$500,000 and no portion of the account is cash);
and the dollar limit for IRA–4 is $100,000 (the
entire account is cash and the dollar limit per
account for cash is $100,000). The aggregate
dollar limits of the four IRAs is $1,400,000.
(c)For 1996, the amount determined under
§ 1.408–2(e)(6)(ii)(B) is determined as follows
for Trustee X: (1) four percent of $4,100,000
equals $164,000; (2) two percent of $1,400,000
equals $28,000; and (3) $164,000 minus $28,000
equals $136,000. Thus, because $136,000 ex-
ceeds $100,000, the minimum net worth neces-
sary for Trustee X to accept new accounts for
1996 is $136,000.
(d)For 1996, the amount determined under
§ 1.408–2(e)(6)(ii)(C) for Trustee X is deter-
mined as follows: (1) two percent of $4,100,000
equals $82,000; (2) one percent of $1,400,000
equals $14,000; and (3) $82,000 minus $14,000
equals $68,000. Thus, because $68,000 exceeds
$50,000, the minimum net worth necessary for
Trustee X to avoid a mandatory relinquishment
of accounts for 1996 is $68,000.
******
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
Approved December 12, 1995.
Leslie Samuels,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 19, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 20, 1995, 60 F.R. 65547)
Section 411.—Minimum Vesting
Standards
26 CFR 1.411(d)–6T: Section 204(h) notice.
T.D. 8631
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Notice of Significant Reduction in
the Rate of Future Benefit Accrual
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations that provide
guidance concerning the requirements
of section 204(h) of the Employee
Retirement Income Security Act of
1974, as amended (ERISA), relating to
defined benefit plans and to individual
account plans that are subject to the
funding standards of section 302 of
ERISA. It requires the plan administra-
tor to give notice of certain plan
amendments to participants in the plan
and certain other parties. The text of
these temporary regulations also serves
as the text of the proposed regulations
set forth in the notice of proposed
rulemaking on this subject published in
* * * [EE–34–95, page 49, this
Bulletin.]
EFFECTIVE DATE: December 15,
1995.
FOR FURTHER INFORMATION
CONTACT: Betty J. Clary, (202)
622-6070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued
without prior notice and public proce-

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dure pursuant to the Administrative
Procedure Act (5 U.S.C. 553). For this
reason, the collection of information
contained in these regulations has been
reviewed and, pending receipt and
evaluation of public comments, ap-
proved by the Office of Management
and Budget under control number
1545–1477. Responses to this collec-
tion of information are required under
section 204(h) of ERISA upon the
adoption of certain amendments to
pension plans.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
For further information concerning
this collection of information, and
where to submit comments on the
collection of information and the ac-
curacy of the estimated burden and
suggestions for reducing this burden,
please refer to the preamble to the
cross-referencing notice of proposed
rulemaking published in *** [EE–
34–95, page 00, this Bulletin].
The regulations do not involve any
issue of confidentiality.
Background
This document contains temporary
regulations that provide guidance on
section 204(h) of the Employee Retire-
ment Income Security Act of 1974, as
amended (ERISA), 29 U.S.C. 1054(h).
Section 204(h) of ERISA was added by
section 11006(a) of the Single-
Employer Pension Plan Amendments
Act of 1986 (Title XI of Public Law
99–272), and was amended by section
1879(u)(1) of the Tax Reform Act of
1986, Public Law 99–514. Pursuant to
section 101(a) of the Reorganization
Plan No. 4 of 1978, 29 U.S.C. 1001nt,
the Secretary of the Treasury has
authority to issue regulations under
parts 2 and 3 of subtitle B of title I of
ERISA (including section 204 of
ERISA). Under section 104 of Re-
organization Plan No. 4, the Secretary
of Labor retains enforcement authority
with respect to parts 2 and 3 of subtitle
B of title I of ERISA, but, in
exercising such authority, is bound by
the regulations issued by the Secretary
of the Treasury.
Prior guidance relating to the re-
quirements of section 204(h) has been
provided in Rev. Proc. 89–65 (1989–2
C.B. 786) and Rev. Proc. 94–13 (1994–
1 C.B. 566), and under Notice 87–21
(1987–1 C.B. 458), Notice 88–131
(1988–2 C.B. 546), Notice 89–92
(1989–2 C.B. 410), and Notice 90–73
(1990–2 C.B. 353). These temporary
regulations provide further guidance, in
the form of Questions and Answers.
The provisions in this Treasury
Decision are needed immediately to
provide guidance to the public with
respect to the notice requirements of
section 204(h) of ERISA. Issues related
to section 204(h) arise in connection
with a broad range of plan amend-
ments, including amendments prompted
by recent changes in the law. There-
fore, it is found impracticable and
contrary to the public interest to issue
this Treasury decision with prior notice
under 5 U.S.C. 553(b).
Explanation of Provisions
Section 204(h) of ERISA applies if a
defined benefit plan or an individual
account plan that is subject to the
funding standards of section 302 of
ERISA is amended to provide for a
significant reduction in the rate of
future benefit accrual. It requires the
plan administrator to give written
notice of the amendment to participants
in the plan, alternate payees, and
employee organizations representing
participants in the plan (or to a person
designated, in writing, to receive the
notice on behalf of a participant,
alternate payee, or employee organiza-
tion). The notice must set forth the plan
amendment and its effective date and
must be provided after adoption of the
amendment and not less than 15 days
before the effective date of the
amendment.
A plan amendment that is subject to
the notice requirements of section
204(h) of ERISA may also be subject
to additional reporting and disclosure
requirements under title I of ERISA,
such as the requirement to provide a
summary of material modifications. See
sections 102(a) and 104(a) of ERISA,
29 U.S.C. 1022 and 1024, and the
regulations thereunder for guidance on
when a summary of material modifica-
tions must be provided. Section 204(h)
notice must be provided at least 15
days in advance of the effective date of
an amendment significantly reducing
the future rate of benefit accrual, even
though a summary of material modi-
fications describing the amendment is
provided at a later date.
Section 204(h) of ERISA does not
apply to an amendment that does not
affect the rate of future benefit accrual.
These regulations clarify that an
amendment to a defined benefit plan
that does not affect the annual benefit
commencing at normal retirement age
does not affect the rate of future
benefit accrual for purposes of section
204(h). Accordingly, the regulations
provide that the plan administrator of a
defined benefit plan is not required to
provide section 204(h) notice with
respect to an amendment that does not
affect the future annual benefit payable
at normal retirement age, even if the
amendment affects other forms of pay-
ment (such as a single sum distribu-
tion) or benefits commencing at a date
other than normal retirement age (such
as an early retirement benefit).
The regulations also clarify that an
amendment to an individual account
plan that does not change the amount
of future allocations to participants’
accounts does not affect the rate of
future benefit accrual for purposes of
section 204(h) of ERISA. Accordingly,
section 204(h) notice is not required
with respect to any such amendment.
Even if an amendment affects the
rate of future benefit accrual, section
204(h) notice is required only if the
amendment significantly reduces the
rate of future benefit accrual. Under the
regulations, whether an amendment
significantly reduces the rate of future
benefit accrual is to be determined
based on reasonable expectations taking
into account all relevant facts and
circumstances.
The regulations delegate to the Com-
missioner of Internal Revenue the
authority to provide that section 204(h)
notice need not be provided with
respect to plan amendments that the
Commissioner determines are necessary
or appropriate, as a result of a change
in federal law, to maintain compliance
with the law. The Commissioner may
exercise this authority only through the
publication of revenue rulings, notices,
and other guidance in the Internal
Revenue Bulletin.
In situations in which section 204(h)
notice is required with respect to an
amendment, the regulations provide
guidance on the participants, alternate
payees, and employee organizations to
whom the notice must be provided.
Specifically, the regulations provide
that the plan administrator is not
required to provide notice to a partici-

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pant or alternate payee whose rate of
future benefit accrual is reasonably
expected not to be reduced by the
amendment. For example, notice need
not be provided to participants (such as
former employees with a vested benefit
under the plan) who, prior to the
amendment, were not entitled to accrue
future benefits under the plan. More-
over, under the regulations, section
204(h) notice is not required to be
provided to an employee organization
unless it represents one or more partici-
pants to whom section 204(h) notice is
required to be provided. Finally, the
regulations clarify that employees who
have not yet become participants in the
plan are not taken into account for any
purpose under section 204(h) of
ERISA.
1
Thus, the plan administrator is
not required to provide section 204(h)
notice to such employees.
The regulations provide that a plan
that is terminated in accordance with
title IV of ERISA is deemed to satisfy
section 204(h) not later than the date of
termination established under section
4048 of ERISA. Accordingly, section
204(h) does not require that any further
benefits accrue under the plan after that
date. However, if that date of termina-
tion is deferred, benefits continue to
accrue until the deferred date of
termination absent an effective cessa-
tion of accruals as of an earlier
specified date.
If the plan is not amended to
significantly reduce the rate of future
benefit accrual prior to the termination,
section 204(h) notice is not required.
However, the regulations also affirm
that section 204(h) applies to an
amendment that is effective prior to the
termination date and clarify that, if
section 204(h) notice is required, it can
be provided either with or as part of
the notice of intent to terminate or
separately.
The regulations also provide two
rules applicable in situations in which a
plan administrator was required to
provide section 204(h) notice with
respect to an amendment but failed to
provide timely notice to some of the
parties to whom notice was required to
be provided. The first rule applies
when the plan administrator fails to
provide timely notice with respect to
more than a de minimis percentage of
the parties to whom section 204(h)
1
This is not intended to affect the rights of
employees under other provisions of ERISA.
notice was required. In such a situation,
the amendment becomes effective in
accordance with its terms with respect
to a participant to whom notice was
required if the participant was provided
with timely notice and any employee
organization representing the partici-
pant was also provided with timely
notice. The amendment also becomes
effective in accordance with its terms
with respect to an alternate payee to
whom notice was required if the
alternate payee was provided with
timely notice.
The second rule applies in a situation
in which the plan administrator made a
good faith effort to comply with
section 204(h) of ERISA with respect
to an amendment, failed to provide
timely section 204(h) notice to no more
than a de minimis percentage of the
parties to whom notice was required,
and provided timely notice to all
employee organizations with respect to
whom section 204(h) notice was re-
quired. In such a situation, if the plan
administrator, promptly upon discovery
of the omission, provides section
204(h) notice to all parties who were
required to be provided such notice but
were omitted, the plan amendment
becomes effective in accordance with
its terms with respect to all parties to
whom section 204(h) notice was re-
quired, including those who did not
receive notice prior to discovery of the
omission.
Effective Dates
These temporary regulations are
effective for amendments adopted on or
after December 15, 1995, and amend-
ments effective by their terms on or
after December 30, 1995.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
these temporary regulations will be
submitted to the Chief Counsel for
Advocacy of the Small Business Ad-
ministration for comment on their
impact on small business.
Drafting Information
The principal author of these regula-
tions is Betty J. Clary, Office of the
Associate Chief Counsel (Employee
Benefits and Exempt Organizations),
IRS. However, other personnel from
the IRS and Treasury Department
participated in their development.
******
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and
602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding an
entry for section 1.411(d)–6T to read as
follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.411(d)–6T also issued under
Reorganization Plan No. 4 of 1978, 29
U.S.C. 1001nt. * * *
Par. 2. 1.411(d)–6T is added to read
as follows:
1.411(d)–6T Section 204(h) notice.
Q–1: What are the requirements of
section 204(h) of the Employee Retire-
ment Income Security Act of 1974, as
amended (ERISA)?
A–1: (a) Requirements of section
204(h). Section 204(h) of ERISA gen-
erally requires written notice of an
amendment to certain plans that prov-
ides for a significant reduction in the
rate of future benefit accrual. Section
204(h) generally requires the notice to
be provided to plan participants, alter-
nate payees, and employee organiza-
tions. The plan administrator must
provide the notice after adoption of the
plan amendment and not less than 15
days before the effective date of the
plan amendment.
(b)Other notice requirements. Other
provisions of law may require that cer-
tain parties be notified of a plan amend-
ment. See, for example, sections 102
and 104 of ERISA, and the regulations
thereunder, for the requirements relating
to summary plan descriptions and sum-
maries of material modifications.

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Q–2: To which plans does section
204(h) of ERISA apply?
A–2: Section 204(h) of ERISA ap-
plies to defined benefit plans subject to
part 2 of subtitle B of title I of ERISA
and to individual account plans subject
to such part 2 and to the funding
standards of section 302 of ERISA.
Accordingly, individual account plans
that are not subject to the funding
standards of section 302, such as
profit-sharing and stock bonus plans,
are not subject to section 204(h).
Q–3: What is section 204(h) notice?
A–3: Section 204(h) notice is notice
that complies with section 204(h) of
ERISA and the rules in this section.
Q–4: For which amendments is
section 204(h) notice required?
A–4: (a) In general. Section 204(h)
notice is required for an amendment to
a plan described in Q&A–2 of this
section that provides for a significant
reduction in the rate of future benefit
accrual.
(b)Delegation of authority to Com-
missioner. The Commissioner of Inter-
nal Revenue may provide through
publication in the Internal Revenue
Bulletin of revenue rulings, notices, or
other documents (see 601.601(d)(2) of
this chapter) that section 204(h) notice
need not be provided for plan amend-
ments otherwise described in paragraph
(a) of this Q&A–4 that the Commis-
sioner determines to be necessary or
appropriate, as a result of changes in
the law, to maintain compliance with
the requirements of the Internal Reve-
nue Code of 1986, as amended (Code)
( i n c l u d i n g r e q u i r e m e n t s f o r t a x
qualification), ERISA, or other applica-
ble federal law.
Q–5: What is an amendment that
affects the rate of future benefit accrual
for purposes of section 204(h) of
ERISA?
A–5: (a) In general—(1) Defined
benefit plans. For purposes of section
204(h) of ERISA, an amendment to a
defined benefit plan affects the rate of
future benefit accrual only if it is
reasonably expected to change the
amount of the future annual benefit
commencing at normal retirement age.
(2)Individual account plans. For
purposes of section 204(h), an amend-
ment to an individual account plan
affects the rate of future benefit accrual
only if it is reasonably expected to
change the amounts allocated in the
future to participants’ accounts.
Changes in the investments or invest-
ment options under an individual ac-
count plan are not taken into account
for this purpose.
(b)Determination of rate of future
benefit accrual. In accordance with
paragraph (a) of this Q&A–5, the rate
of future benefit accrual is determined
without regard to optional forms of
benefit (other than the annual benefit
described in paragraph (a) of this
Q&A–5), early retirement benefits, or
retirement-type subsidies, within the
meaning of such terms as used in
section 411(d)(6) of the Code (section
204(g) of ERISA). The rate of future
benefit accrual is also determined with-
out regard to ancillary benefits and
other rights or features as defined in
1.401(a)(4)–4(e).
(c)Examples. These examples illus-
trate the rules in this Q&A–5:
Example 1. A plan is amended with respect to
future benefit accruals to eliminate a right to
commencement of a benefit prior to normal
retirement age. Because the amendment does not
affect the annual benefit commencing at normal
retirement age, it does not reduce the rate of
future benefit accrual for purposes of section
204(h).
Example 2. A plan is amended to modify the
assumptions used in converting an annuity form
of distribution to a single sum form of distribu-
tion. The use of these modified assumptions
results in a lower single sum. Because the
amendment does not affect the annual benefit
commencing at normal retirement age, it does
not reduce the rate of future benefit accrual for
purposes of section 204(h).
Q–6: What plan provisions are taken
into account in determining whether
there has been a reduction in the rate
of future benefit accrual?
A–6: (a) Plan provisions taken into
account. All plan provisions that may
affect the rate of future benefit accrual
of participants or alternate payees must
be taken into account in determining
whether an amendment provides for a
significant reduction in the rate of
future benefit accrual. Such provisions
include, for example, the dollar amount
or percentage of compensation on
which benefit accruals are based; in the
case of a plan using the permitted
disparity under section 401(l) of the
Code, the amount of disparity between
the excess benefit percentage or excess
contribution percentage and the base
benefit percentage or base contribution
percentage (all as defined in section
401(l)); the definition of service or
compensation taken into account in
determining an employee’s benefit ac-
crual; the method of determining aver-
age compensation for calculating bene-
fit accruals; the definition of normal
retirement age in a defined benefit
plan; the exclusion of current partici-
pants from future participation; benefit
offset provisions; minimum benefit
provisions; the formula for determining
the amount of contributions and forfei-
tures allocated to participants’ accounts
in an individual account plan; and the
actuarial assumptions used to determine
contributions under a target benefit
plan (as defined in 1.401(a)(4)–
8(b)(3)(i)).
(b)Plan provisions not taken into
account. Plan provisions that do not
affect the rate of future benefit accrual
of participants or alternate payees are
not taken into account in determining
whether there has been a reduction in
the rate of future benefit accrual. For
example, provisions such as vesting
schedules or optional forms of benefit
(other than the annual benefit described
in Q&A–5(a) of this section) are not
taken into account.
(c)Examples. The following exam-
ple illustrates the rules in this Q&A–6:
Example. A defined benefit plan provides a
normal retirement benefit equal to 50% of final
average compensation times a fraction (not in
excess of one), the numerator of which equals
the number of years of participation in the plan
and the denominator of which equals 20. A plan
amendment that changes the numerator or
denominator of that fraction must be taken into
account in determining whether there has been a
reduction in the rate of future benefit accrual.
Q–7: What is the basic principle
used in determining whether an amend-
ment provides for a significant reduc-
tion in the rate of future benefit accrual
for purposes of section 204(h) of
ERISA?
A–7: Whether an amendment pro-
vides for a significant reduction in the
rate of future benefit accrual for
purposes of section 204(h) of ERISA is
determined based on reasonable expec-
tations taking into account the relevant
facts and circumstances at the time the
amendment is adopted.
Q–8: Are employees who have not
yet become participants in a plan at the
time an amendment to the plan is
adopted taken into account for any
purpose in applying section 204(h) of
ERISA with respect to the amendment?
A–8: No. Employees who have not
yet become participants in a plan at the
time an amendment to the plan is
adopted are not taken into account for

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adopted taken into account for any
purpose in applying section 204(h) of
ERISA with respect to the amendment?
A–8: No. Employees who have not
yet become participants in a plan at the
time an amendment to the plan is
adopted are not taken into account for
any purpose in applying section 204(h)
of ERISA with respect to the amend-
ment. Thus, if section 204(h) notice is
required with respect to an amendment,
the plan administrator need not provide
s e c t i o n 2 0 4 ( h ) n o t i c e t o s u c h
employees.
Q–9: If section 204(h) notice is
required with respect to an amendment,
must such notice be provided to partici-
pants or alternate payees whose rate of
future benefit accrual is not reduced by
the amendment?
A–9: (a) In general. A plan admin-
istrator need not provide section 204(h)
notice to any participant whose rate of
future benefit accrual is reasonably
expected not to be reduced by the
amendment, nor to any alternate payee
under an applicable qualified domestic
relations order whose rate of future
benefit accrual is reasonably expected
not to be reduced by the amendment. A
plan administrator need not provide
section 204(h) notice to an employee
organization unless the employee orga-
nization represents a participant to
whom section 204(h) notice is required
to be provided.
(b)Facts and circumstances test.
Whether a participant or alternate
payee is described in paragraph (a) of
this Q&A–9 is determined based on all
relevant facts and circumstances at the
time the amendment is adopted.
(c)Examples. The following exam-
ples illustrate the rules in this Q&A–9:
Example 1. Plan A is amended to reduce
significantly the rate of future benefit accrual of
all current employees who are participants in the
plan. It is reasonable to expect based on the facts
and circumstances that the amendment will not
reduce the rate of future benefit accrual of
former employees who are currently receiving
benefits or that of former employees who are
entitled to vested benefits. Accordingly, the plan
administrator is not required to provide section
204(h) notice to such former employees.
Example 2. Assume in Example 1 that Plan A
also covers two groups of alternate payees. The
alternate payees in the first group are entitled to
a certain percentage or portion of the former
spouse’s accrued benefit, and for this purpose the
accrued benefit is determined at the time the
former spouse begins receiving retirement bene-
fits under the plan. The alternate payees in the
second group are entitled to a certain percentage
or portion of the former spouse’s accrued
benefit, and for this purpose the accrued benefit
was determined at the time the qualified
domestic relations order was issued by the court.
It is reasonable to expect that the benefits to be
received by the second group of alternate payees
will not be affected by any reduction in a former
spouse’s rate of future benefit accrual. Accord-
ingly, the plan administrator is not required to
provide section 204(h) notice to the alternate
payees in the second group.
Example 3. Plan B covers hourly employees
and salaried employees. Plan B provides the
same rate of benefit accrual for both groups. The
employer amends Plan B to reduce significantly
the rate of future benefit accrual of the salaried
employees only. At that time, it is reasonable to
expect that only a small percentage of hourly
employees will become salaried in the future.
Accordingly, the plan administrator is not re-
quired to provide section 204(h) notice to the
participants who are currently hourly employees.
Example 4. Plan C covers employees in
Division M and employees in Division N. Plan C
provides the same rate of benefit accrual for both
groups. The employer amends Plan C to reduce
significantly the rate of future benefit accrual of
employees in Division M. At that time, it is
reasonable to expect that in the future only a
small percentage of employees in Division N
will be transferred to Division M. Accordingly,
the plan administrator is not required to provide
section 204(h) notice to the participants who are
employees in Division N.
Example 5. Assume the same facts as in
Example 4, except that at the time the amend-
ment is adopted, it is expected that soon
thereafter Division N will be merged into
Division M in connection with a corporate
reorganization (and the employees in Division N
will become subject to the plan’s amended
benefit formula applicable to the employees in
Division M). In this instance, the plan admin-
istrator must provide section 204(h) notice to the
participants who are employees in Division M
and to the participants who are employees in
Division N.
Q–10: Does a notice fail to comply
with section 204(h) of ERISA if it
contains a summary of the amendment
and the effective date, without the text
of the amendment itself?
A–10: No, the notice does not fail to
comply with section 204(h) of ERISA
merely because the notice contains a
summary of the amendment, rather than
the text of the amendment, if the
summary is written in a manner calcu-
lated to be understood by the average
plan participant and contains the effec-
tive date. The summary need not
explain how the individual benefit of
each participant or alternate payee will
be affected by the amendment.
Q–11: How may section 204(h)
notice be provided?
A–11: A plan administrator may use
any method reasonably calculated to
ensure actual receipt of the section
204(h) notice. First class mail to the
last known address of the party is an
acceptable delivery method. Likewise,
hand delivery is acceptable. Section
204(h) notice may be enclosed along
with other notice provided by the
employer or plan administrator.
Q–12: If a plan administrator fails to
provide section 204(h) notice to more
than a de minimis percentage of partici-
pants and alternate payees to whom
section 204(h) notice is required to be
provided, will the plan administrator be
considered to have complied with
section 204(h) of ERISA with respect
to participants and alternate payees
who were provided with timely section
204(h) notice?
A–12: The plan administrator will be
considered to have complied with
section 204(h) of ERISA with respect
to a participant to whom section 204(h)
notice is required to be provided if the
participant and any employee organiza-
tion representing the participant were
provided with timely section 204(h)
notice. The plan administrator will be
considered to have complied with
section 204(h) with respect to an
alternate payee to whom section 204(h)
notice is required to be provided if the
alternate payee was provided with
timely section 204(h) notice. Accord-
ingly, the amendment will become
effective in accordance with its terms
with respect to those participants and
alternate payees.
Q–13: Will a plan be considered to
have complied with section 204(h) of
ERISA if the plan administrator
provides section 204(h) notice to all
but a de minimis percentage of partici-
pants and alternate payees to whom
s e c t i o n 2 0 4 ( h ) n o t i c e m u s t b e
provided?
A–13: The plan will be considered to
have complied with section 204(h) of
ERISA and the amendment will be-
come effective in accordance with its
terms with respect to all parties to
whom section 204(h) notice was re-
quired to be provided (including those
who did not receive notice prior to
discovery of the omission), if the plan
administrator—
(a)Has made a good faith effort to
comply with the requirements of sec-
tion 204(h);
(b) Has provided section 204(h)
notice to each employee organization
that represents any participant to whom
section 204(h) notice is required to be
provided;

SEQ 0101 JOB A02-005-008 PAGE-0012 PART 1 PAGE 11
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12
(c)Has failed to provide section
204(h) notice to no more than a de
minimis percentage of participants and
alternate payees to whom section
204(h) notice is required to be
provided; and
(d)Provides section 204(h) notice to
those participants and alternate payees
p r o m p t l y u p o n d i s c o v e r i n g t h e
oversight.
Q–14: How does section 204(h) of
ERISA apply to a plan that is termi-
nated in accordance with title IV of
ERISA?
A–14: (a) On and after termination
date. Notwithstanding paragraph (b) of
this Q&A–14 or any other provisions
of this section, a plan that is terminated
in accordance with title IV of ERISA is
deemed to have satisfied section 204(h)
of ERISA not later than the termination
date (or date of termination, as applica-
ble) established under section 4048 of
ERISA. Accordingly, section 204(h)
would not require that any additional
benefits accrue after such date.
(b)Amendment effective before ter-
mination date. An amendment that is
effective before the termination date (or
date of termination, as applicable)
established under section 4048 of
ERISA is subject to section 204(h).
Accordingly, if such amendment pro-
vides for a significant reduction in the
rate of future benefit accrual, the plan
administrator must provide section
204(h) notice (either separately or with
or as part of the notice of intent to
terminate) with respect to the amend-
ment. However, if a plan is not
amended to reduce significantly the
rate of future benefit accrual before the
termination date (for example, the plan
continues existing benefit accruals until
the termination date), section 204(h)
notice is not required.
Q–15: When does section 204(h) of
ERISA become effective?
A–15: (a) Statutory effective date.
With respect to defined benefit plans,
section 204(h) of ERISA generally
applies to plan amendments adopted on
or after January 1, 1986. With respect
to individual account plans, section
204(h) applies to plan amendments
adopted on or after October 22, 1986.
(b)Regulatory effective date. This
section applies to amendments adopted
on or after December 15, 1995, and
amendments effective by their terms on
or after December 30, 1995.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 6. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 7. In 602.101, paragraph (c) is
amended by adding to the table in
numerical order the entry ‘‘1.411(d)–
6T .. . 1545–1477’’.
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
Approved December 5, 1995.
Leslie Samuels,
Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
December 12, 1995, 1:23 p.m., and published
in the issue of the Federal Register for
December 15, 1995, 60 F.R. 64401)
Section 412.—Minimum Funding
Standards
Disability mortality tables. This rul-
ing provides mortality tables for use
under section 412(1) for plan years
after 1995 to calculate current liability
for individuals entitled to benefits on
account of disability.
Rev. Rul. 96–7
ISSUE
What alternative mortality tables
may be used to calculate a plan’s
current liability under §412(l) of the
Internal Revenue Code for individuals
who are entitled to benefits under the
plan on account of disability?
LAW AND ANALYSIS
Section 412(l) provides additional
funding requirements for certain under-
funded defined benefit pension plans
that have more than 100 participants
and that are not multiemployer plans.
In general, the additional funding re-
quirements are determined based on a
plan’s unfunded current liability.
Section 751(a) of the Retirement
Protection Act of 1994 added §412(l)-
(7)(C)(ii) to the Code, effective for
plan years beginning after December
31, 1994. Section 412(l)(7)(C)(ii)
provides that, for purposes of determin-
ing current liability, the mortality table
used shall be the table prescribed by
the Secretary, and sets forth the basis
for establishing a table. For plan years
beginning before the effective date of
the first tables prescribed under
§ 412(l)(7)(C)(ii)(II), the table must be
based on the prevailing commissioners’
standard table (described in §807(d)-
(5)(A)) used to determine reserves for
group annuity contracts issued on Janu-
ary 1, 1993. Rev. Rul. 95–28, 1995–1
C.B. 74, sets forth this mortality table.
Section 412(l)(7)(C)(iii)(I) provides
that, for plan years beginning after
December 31, 1995, the Secretary shall
establish mortality tables that may be
used, in lieu of the tables under
§ 412(l)(7)(C)(ii), to determine current
liability under §412(l) for individuals
who are entitled to benefits under the
plan on account of disability. The
Secretary must establish separate tables
for individuals whose disabilities oc-
curred in plan years beginning before
January 1, 1995, and for individuals
whose disabilities occur in plan years
beginning after December 31, 1994.
Under §412(l)(7)(C)(iii)(II), the mor-
tality table for individuals whose dis-
abilities occur in plan years beginning
after December 31, 1994, applies only
with respect to individuals who are
disabled within the meaning of title II
of the Social Security Act and the
regulations thereunder.
The alternative mortality tables
provided for under §412(l)(7)(C)(iii)
are permitted to be used in the
specified circumstances, but are not
required to be used. For any individual
for whom these alternative mortality
tables are not used, the mortality table
prescribed under §412(l)(7)(C)(ii) must
be used.
The alternative mortality tables
provided under §412(l)(7)(C)(iii) may
be used only for individuals who are
entitled to benefits under the plan on
account of disability. For this purpose,
an individual is entitled to benefits
under a plan on account of disability if,
because of the occurrence of a dis-
ability, the individual is entitled to
receive a benefit to which the individ-
ual would not be entitled in the
absence of the disability. For example,
an individual is entitled to benefits
under a plan on account of disability if,
upon the occurrence of a disability at a
time before the individual would have
been entitled to receive an unreduced
normal retirement benefit upon retire-

SEQ 0102 JOB A02-005-008 PAGE-0013 PART 1 PAGE 11
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13
ment, the individual is entitled to
receive the same annuity that would
have been payable to the individual
upon retirement at normal retirement
age. As a further example, an individ-
ual is entitled to benefits under a plan
on account of disability if the individ-
ual, who would not otherwise be
earning service credits, is credited with
years of service for the period of
disability. On the other hand, an
individual is not entitled to benefits on
account of disability if the individual
separates from the service of the
employer because of a disability, but
merely receives the same benefit that
would have been payable if the individ-
ual had separated from service without
the occurrence of the disability.
For purposes of §412(l)(7)(C)(iii),
any individual who has become entitled
to benefits under a plan on account of
disability continues to be considered
entitled to benefits under the plan on
account of disability until the individ-
ual recovers from disability and be-
comes entitled to different benefits
under the plan than the individual
would have been entitled to if the
individual had not recovered.
Under §412(l), nothing prohibits the
use of an additional actuarial assump-
tion that meets the requirements of
§ 412(c) regarding the probability of
recovery from disability.
HOLDING
The mortality tables provided below,
as applicable, may be used for plan
years beginning after December 31,
1995, in lieu of the mortality table
required to be used under §412(l)(7)-
(C)(ii), for purposes of determining
current liability. The first mortality
table provided below may be used for
plan years beginning after December
31, 1995, in lieu of the mortality table
required to be used under §412(l)(7)-
(C)(ii), for purposes of determining
current liability for individuals entitled
to benefits under the plan on account
of disability, whose disabilities oc-
curred in plan years beginning before
January 1, 1995. The second mortality
table provided below may be used for
plan years beginning after December
31, 1995, in lieu of the mortality table
required to be used under §412(l)(7)-
(C)(ii), for purposes of determining
current liability for individuals entitled
to benefits under the plan on account
of disability, whose disabilities occur in
plan years beginning after December
31, 1994. This second mortality table
may be used only for individuals who
are disabled within the meaning of title
II of the Social Security Act and the
regulations thereunder. The mortality
table required to be used under
§ 412(l)(7)(C)(ii) must be used for
individuals whose disabilities occur in
plan years beginning after December
31, 1994, but who are not disabled
within the meaning of title II of the
Social Security Act and the regulations
thereunder.
MORTALITY TABLE FOR
DISABILITIES OCCURRING IN
PLAN YEARS BEGINNING
BEFORE JANUARY 1, 1995
The following mortality table is the
mortality table that is permitted to be
used for individuals entitled to benefits
under the plan on account of disability,
whose disabilities occurred in plan
years beginning before January 1,
1995. The table sets forth the number
living based upon a starting population
of one million lives at age 15 (l
x
), and
the annual rate of mortality (q
x
), to be
used for each age and each gender.
Agel
x
maleq
x
male
151,000,000.000.006245
16993,755.000.006493
17987,302.550.006749
18980,639.240.007018
19973,757.120.007297
20966,651.610.007586
21959,318.590.007887
22951,752.450.008201
23943,947.130.008526
24935,899.030.008864
25927,603.220.009216
26919,054.430.009581
27910,248.970.009964
28901,179.250.010358
29891,844.840.010768
30882,241.450.011190
31872,369.170.011624
32862,228.750.012071
33851,820.790.012531
34841,146.620.013022
35830,193.210.013421
36819,051.190.013892
37807,672.930.014380
38796,058.590.014889
39784,206.070.015420
40772,113.620.015976
41759,778.330.016562
42747,194.880.017179
43734,358.820.017831
Agel
x
maleq
x
male
44721,264.470.018521
45707,905.930.019251
46694,278.030.020025
47680,375.110.020846
48666,192.010.021716
49651,724.990.022639
50636,970.590.023624
51621,922.790.024617
52606,612.920.025865
53590,922.880.027076
54574,923.050.028263
55558,674.000.029451
56542,220.490.030667
57525,592.210.031937
58508,806.380.033281
59491,872.790.034700
60474,804.810.036185
61457,623.990.037729
62440,358.300.039325
63423,041.210.040976
64405,706.670.042720
65388,374.880.044607
66371,050.640.046684
67353,728.520.049000
68336,395.820.051594
69319,039.810.054468
70301,662.350.057612
71284,282.980.061019
72266,936.320.064679
73249,671.140.068604
74232,542.700.072881
75215,594.760.076965
76199,001.510.081027
77182,877.010.085222
78167,291.870.089592
79152,303.860.094182
80137,959.570.099034
81124,296.890.104194
82111,345.900.109705
8399,130.690.115609
8487,670.290.121952
8576,978.730.128777
8667,065.640.136128
8757,936.130.144048
8849,590.540.152581
8942,023.970.161771
9035,225.710.171662
9129,178.790.182297
9223,859.590.193720
9319,237.510.205975
9415,275.060.219106
9511,928.200.234086
969,135.980.248436
976,866.270.263954
985,053.890.280803
993,634.740.299154
1002,547.400.319185
1011,734.310.341086
1021,142.760.365052
103725.590.393102
104440.360.427255
105252.210.469531

SEQ 0103 JOB A02-005-008 PAGE-0014 PART 1 PAGE 11
REVISED 28MAY96 AT 09:49 BY LR DEPTH: 65.01 PICAS WIDTH 44.10 PICAS
COMPOSITE COLOR
778/20049/28MAY96/A02-005
14
Agel
x
maleq
x
male
106133.790.521945
10763.960.586518
10826.450.665268
1098.850.760215
1102.121.000000
Agel
x
femaleq
x
female
151,000,000.000.004667
16995,333.000.004873
17990,482.740.005086
18985,445.150.005312
19980,210.460.005546
20974,774.220.005790
21969,130.270.006046
22963,270.910.006313
23957,189.780.006591
24950,880.940.006881
25944,337.930.007185
26937,552.860.007502
27930,519.340.007834
28923,229.650.008179
29915,678.560.008537
30907,861.410.008905
31899,776.900.009282
32891,425.180.009666
33882,808.660.010061
34873,926.720.010489
35864,760.100.010885
36855,347.190.011246
37845,727.960.011599
38835,918.360.011947
39825,931.640.012292
40815,779.290.012636
41805,471.100.012981
42795,015.280.013330
43784,417.730.013684
44773,683.760.014045
45762,817.370.014417
46751,819.830.014800
47740,692.900.015197
48729,436.590.015611
49718,049.350.016043
50706,529.690.016495
51694,875.480.016970
52683,083.440.017470
53671,149.970.017997
54659,071.290.018553
55646,843.540.019140
56634,462.950.019761
57621,925.330.020417
58609,227.480.021111
59596,366.080.021845
60583,338.460.022621
61570,142.760.023441
62556,778.050.024307
63543,244.440.025222
64529,542.730.026187
65515,675.600.027205
66501,646.640.028278
67487,461.080.029408
68473,125.820.030598
Agel
x
femaleq
x
female
69458,649.120.031848
70444,042.060.033123
71429,334.060.034916
72414,343.430.036986
73399,018.520.039352
74383,316.350.042033
75367,204.410.044540
76350,849.130.047104
77334,322.730.049840
78317,660.080.052794
79300,889.540.056017
80284,034.610.059556
81267,118.640.063460
82250,167.290.067777
83233,211.700.072556
84216,290.800.077845
85199,453.640.083693
86182,760.770.090148
87166,285.250.097260
88150,112.350.105075
89134,339.290.113643
90119,072.570.123012
91104,425.220.133216
9290,514.110.143634
9377,513.200.155581
9465,453.620.169181
9554,380.110.184537
9644,344.970.201757
9735,398.060.222043
9827,538.170.243899
9920,821.640.268185
10015,237.590.295187
10110,739.650.325225
1027,246.850.358897
1034,645.980.395842
1042,806.900.438360
1051,576.470.487816
106807.440.545886
107366.670.614309
108141.420.694884
10943.150.789474
1109.081.000000
MORTALITY TABLE FOR
DISABILITIES OCCURRING IN
PLAN YEARS BEGINNING AFTER
DECEMBER 31, 1994
The following mortality table is the
mortality table that is permitted to be
used for individuals entitled to benefits
under the plan on account of disability,
whose disabilities occur in plan years
beginning after December 31, 1994.
This mortality table may be used only
for individuals who are disabled within
the meaning of title II of the Social
Security Act and the regulations there-
under. The table sets forth the number
living based upon a starting population
of one million lives at age 15 (l
x
), and
the annual rate of mortality (q
x
), to be
used for each age and each gender.
Agel
x
maleq
x
male
151,000,000.000.022010
16977,990.000.022502
17955,983.270.023001
18933,994.700.023519
19912,028.080.024045
20890,098.360.024583
21868,217.070.025133
22846,396.170.025697
23824,646.330.026269
24802,983.700.026857
25781,417.960.027457
26759,962.570.028071
27738,629.660.028704
28717,428.040.029345
29696,375.110.029999
30675,484.550.030661
31654,773.520.031331
32634,258.810.032006
33613,958.720.032689
34593,889.030.033405
35574,050.160.034184
36554,426.830.034981
37535,032.430.035796
38515,880.410.036634
39496,981.640.037493
40478,348.310.038373
41459,992.650.039272
42441,927.820.040189
43424,167.180.041122
44406,724.580.042071
45389,613.270.043033
46372,847.040.044007
47356,439.160.044993
48340,401.900.045989
49324,747.150.046993
50309,486.310.048004
51294,629.730.049021
52280,186.690.050042
53266,165.580.051067
54252,573.310.052093
55239,416.000.053120
56226,698.230.054144
57214,423.880.055089
58202,611.480.056068
59191,251.460.057080
60180,334.830.058118
61169,854.130.059172
62159,803.520.060232
63150,178.230.061303
64140,971.860.062429
65132,171.120.063669
66123,755.920.065082
67115,701.640.066724
68107,981.560.068642
69100,569.490.070834
7093,445.750.073284
7186,597.670.075979
7280,018.070.078903
7373,704.400.082070
7467,655.480.085606
7561,863.770.088918
7656,362.970.092208

SEQ 0104 JOB A02-006-009 PAGE-0015 PART 1 PAGE 15
REVISED 28MAY96 AT 09:50 BY LR DEPTH: 65.01 PICAS WIDTH 46 PICAS
COMPOSITE COLOR
778/20049/28MAY96/A02-006
15
Agel
x
maleq
x
male
7751,165.850.095625
7846,273.110.099216
7941,682.080.103030
8037,387.580.107113
8133,382.880.111515
8229,660.190.116283
8326,211.210.121464
8423,027.490.127108
8520,100.520.133262
8617,421.880.139974
8714,983.270.147292
8812,776.350.155265
8910,792.630.163939
909,023.300.173363
917,458.990.183585
926,089.630.194653
934,904.270.206615
943,890.970.219519
953,036.830.234086
962,325.950.248436
971,748.100.263954
981,286.680.280803
99925.380.299154
100648.550.319185
101441.540.341086
102290.940.365052
103184.730.393102
104112.110.427255
10564.210.469531
10634.060.521945
10716.280.586518
1086.730.665268
1092.250.760215
1100.541.000000
Agel
x
femaleq
x
female
151,000,000.000.007777
16992,223.000.008120
17984,166.150.008476
18975,824.360.008852
19967,186.360.009243
20958,246.660.009650
21948,999.580.010076
22939,437.460.010521
23929,553.630.010984
24919,343.420.011468
25908,800.390.011974
26897,918.410.012502
27886,692.640.013057
28875,115.090.013632
29863,185.520.014229
30850,903.250.014843
31838,273.300.015473
32825,302.690.016103
33812,012.850.016604
34798,530.180.017121
Agel
x
femaleq
x
female
35784,858.550.017654
36771,002.660.018204
37756,967.320.018770
38742,759.050.019355
39728,382.950.019957
40713,846.610.020579
41699,156.360.021219
42684,320.960.021880
43669,348.020.022561
44654,246.860.023263
45639,027.110.023988
46623,698.130.024734
47608,271.580.025504
48592,758.220.026298
49577,169.870.027117
50561,518.750.027961
51545,818.120.028832
52530,081.100.029730
53514,321.790.030655
54498,555.250.031609
55482,796.420.032594
56467,060.150.033608
57451,363.190.034655
58435,721.200.035733
59420,151.580.036846
60404,670.670.037993
61389,296.020.039176
62374,044.960.040395
63358,935.410.041653
64343,984.680.042950
65329,210.530.044287
66314,630.790.045666
67300,262.860.046828
68286,202.150.048070
69272,444.410.049584
70258,935.530.051331
71245,644.110.053268
72232,559.140.055356
73219,685.590.057573
74207,037.630.059979
75194,619.720.062574
76182,441.590.065480
77170,495.310.068690
78158,783.990.072237
79147,313.910.076156
80136,095.070.080480
81125,142.140.085243
82114,474.650.090480
83104,116.980.096224
8494,098.430.102508
8584,452.590.109368
8675,216.180.116837
8766,428.150.124948
8858,128.080.133736
8950,354.260.143234
9043,141.820.153477
9136,520.540.164498
Agel
x
femaleq
x
female
9230,512.990.176332
9325,132.570.189011
9420,382.240.202571
9516,253.390.217045
9612,725.670.232467
979,767.370.248870
987,336.570.266289
995,382.920.284758
1003,850.090.303433
1012,681.850.327385
1021,803.850.359020
1031,156.230.395842
104698.550.438360
105392.330.487816
106200.950.545886
10791.250.614309
10835.200.694884
10910.740.789474
1102.261.000000
EFFECTIVE DATE
This revenue ruling is effective for
plan years beginning after December
31, 1995.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Edward Sypher of the
Employee Plans Division. For further
information regarding this revenue rul-
ing, please contact the Employee Plans
Division’s taxpayer assistance tele-
phone service at (202) 622-6076 be-
tween 2:30 and 4:00 Eastern time (not
a toll-free number) Monday through
Thursday. Mr. Sypher’s number is
(202) 622-6245 (also not a toll-free
number).
Section 483. Interest on Certain
Deferred Payments
26 CFR 1.483–1: Computation of interest on
certain deferred payments.
As defined by section 1274A, the definitions
for both ‘‘qualified debt instruments’’ and ‘‘cash
method debt instruments’’ have dollar ceilings on
the stated principal amount. The limits to the
stated principal amount are adjusted for inflation
for sales or exchanges occurring in the 1996
calendar year. See Rev. Rul. 96–4, page 16.
Section 761.—Definitions
The Service will not rule on certain issues
raised in connection with the transfer of a life

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insurance policy to an unincorporated organiza-
tion. See Rev. Proc. 96–12, page 30.
Section 1274. Determination of Issue
Price in the Case of Certain Debt
Instruments Issued for Property
26 CFR 1.1274A–1: Special rules for certain
transactions where stated principal amount does
not exceed $2,800,000.
As defined by section 1274A, the definitions
for both ‘‘qualified debt instruments’’ and ‘‘cash
method debt instruments’’ have dollar ceilings on
the stated principal amount. The limits to the
stated principal amount are adjusted for inflation
for sales or exchanges occurring in the 1996
calendar year. See Rev. Rul. 96–4, this page.
Section 1274A.—Special Rules for
Certain Transactions Where Stated
Principal Amount Does Not Exceed
$2,800,000
(Also §§1274, 483; 1.483–1, 1.1274A–1.)
Section 1274A inflation-adjusted num-
bers for 1996. This ruling provides the
dollar amounts, increased by the 1996
inflation-adjustment, for section 1274A
of the Code. Rev. Rul. 95–10 supple-
mented and superseded.
Rev. Rul. 96–4
This revenue ruling provides the
dollar amounts, increased by the 1996
inflation adjustment, for §1274A of
the Internal Revenue Code.
BACKGROUND
In general, §§483 and 1274 of the
Code determine the principal amount of
a debt instrument given in considera-
tion for the sale or exchange of
nonpublicly traded property. In addi-
tion, any interest on a debt instrument
subject to §1274 is taken into account
under the original issue discount provi-
sions of the Code. Section 1274A,
however, modifies the rules under
§§483 and 1274 for certain types of
debt instruments.
In the case of a ‘‘qualified debt
instrument,’’ the discount rate used for
purposes of §§483 and 1274 of the
Code may not exceed 9 percent,
compounded semiannually. Section
1274A(b) defines a qualified debt
instrument as any debt instrument
given in consideration for the sale or
exchange of property (other than new
§ 38 property within the meaning of
§ 48(b), as in effect on the day before
the date of enactment of the Revenue
Reconciliation Act of 1990) if the
stated principal amount of the instru-
ment does not exceed the amount
specified in §1274A(b). For debt in-
struments arising out of sales or
exchanges before January 1, 1990, this
amount is $2,800,000.
In the case of a ‘‘cash method debt
instrument,’’ as defined in §1274A(c)
of the Code, the borrower and lender
may elect to use the cash receipts and
disbursements method of accounting. In
particular, for any cash method debt
instrument, §1274 does not apply, and
interest on the instrument is accounted
for by both the borrower and the lender
under the cash method of accounting.
A cash method debt instrument is a
qualified debt instrument that meets the
following additional requirements: (A)
In the case of instruments arising out
of sales or exchanges before January 1,
1990, the stated principal amount does
not exceed $2,000,000, (B) The lender
does not use an accrual method of
accounting and is not a dealer with
respect to the property sold or ex-
changed, (C) Section 1274 would have
applied to the debt instrument but for
an election under §1274A(c); and (D)
An election under §1274A(c) is jointly
made with respect to the debt instru-
ment by the borrower and lender.
Section 1.1274A–1(c)(1) of the Income
Tax Regulations provides rules con-
cerning the time for, and manner of,
making this election.
Section 1274A(d)(2) of the Code
provides that, for any debt instrument
arising out of a sale or exchange during
any calendar year after 1989, the dollar
amounts stated in §1274A(b) and
§ 1274A(c)(2)(A) are increased by the
inflation adjustment for the calendar
year. Any increase due to the inflation
adjustment is rounded to the nearest
multiple of $100 (or, if the increase is
a multiple of $50 and not of $100, the
increase is increased to the nearest
multiple of $100). The inflation adjust-
ment for any calendar year is the
percentage (if any) by which the CPI
for the preceding calendar year exceeds
the CPI for calendar year 1988. Section
1274A(d)(2)(B) defines the CPI for any
calendar year as the average of the
Consumer Price Index as of the close
of the 12-month period ending on
September 30 of that calendar year.
INFLATION-ADJUSTED
AMOUNTS
For debt instruments arising out of
sales or exchanges after December 31,
1989, the inflation-adjusted amounts
under §1274A are shown in Table 1.

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TABLE 1
REV. RUL. 96–4
Inflation-Adjusted Amounts Under §1274A
Calendar Year
of Sale
or Exchange
1274A(b) Amount
(qualified debt
instrument
1274A(c) (2) (A) Amount
(cash method debt
instrument)
1990$2,933,200$2,095,100
1991$3,079,600$2,199,700
1992$3,234,900$2,310,600
1993$3,332,400$2,380,300
1994$3,433,500$2,452,500
1995$3,523,600$2,516,900
1996$3,622,500$2,587,500
Note: These inflation adjustments were computed using the All-Urban, Consumer Price Index, 1982-1984 base,
published by the Bureau of Labor Statistics.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 95–10, 1995–1 C.B. 168,
is supplemented and superseded.
DRAFTING INFORMATION
The principal author of this revenue
ruling is David B. Silber of the Office
of the Assistant Chief Counsel (Finan-
cial Institutions and Products). For
further information regarding this reve-
nue ruling contact Mr. Silber on (202)
622-3930 (not a toll-free call).
Section 2031.—Definition of Gross
Estate
26 CFR 20.2031–6: Valuation of household
and personal effects.
Executors and administrators of estates includ-
ing art appraised at $50,000 or more may request
that the Service issue a Statement of Value for
the art. See Rev. Proc. 96–15, page 41.
Section 2512.—Valuation of Gifts
26 CFR 25.2512–1: Valuation of property, in
general.
The donor of a gift of art appraised at $50,000
or more may request that the Service issue a
Statement of Value for the art. See Rev. Proc.
96–15, page 41.
Section 3402.—Income Tax Collected
at Source
26 CFR 31.3402(r)–1: Withholding on
distributions of Indian gaming profits to tribal
members.
T.D. 8634
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
Withholding on Distributions of Indian
Gaming Profits to Tribal Members
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the income
tax withholding requirement on dis-
tributions of profits from certain gam-
ing activities made to members of
Indian tribes under section 3402(r) of
the Internal Revenue Code of 1986.
Those affected by the regulations are
persons, including Indian tribes, mak-
ing payments to members of Indian
tribes from net revenues of certain
gaming activities conducted or licensed
by the tribes. Also affected are mem-
bers of Indian tribes who receive the
payments.
DATES: These regulations are effective
December 19, 1995. For the date of
applicability, see §31.3402(r)–1(b).
FOR FURTHER INFORMATION
CONTACT: Rebecca Wilson (202)
622-6040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Employment Tax Regulations
(26 CFR part 31) under section
3402(r). Section 3402(r) was added by
section 701 of the Uruguay Round
Agreements Act, which approved the
trade agreements resulting from the
Uruguay Round of multilateral trade
negotiations under the auspices of the
General Agreement on Tariffs and
Trade (GATT) and the Statement of
Administrative Action to implement the
Agreements.
On December 22, 1994, temporary
regulations (TD 8574 [1995–1 C.B.
194]) relating to withholding on dis-
tributions of Indian gaming profits to
tribal members under section 3402(r)
were published in the Federal Register
(59 FR 65939). A notice of proposed
rulemaking (EE–60–94 [1995–1 C.B.
857]) cross-referencing the temporary
regulations was published in the Fed-
eral Register for the same day (59 FR
65982). No public hearing was re-
quested or held.
Also on December 22, 1994, the IRS
mailed a copy of Notice 1026, provid-
ing withholding tables for use in 1995,
to Indian tribes and gaming establish-
ments listed with the National Indian
Gaming Commission. For 1996 and

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subsequent years, tables will be printed
in a supplement to Circular E.
The IRS received written comments
responding to the notice of proposed
rulemaking. After consideration of the
comments, the regulations proposed by
EE–60–94 are adopted as revised by
this Treasury decision, and the corre-
sponding temporary regulations are
withdrawn. The regulations contain no
substantive changes.
Explanation of Provisions
1.Indian Gaming Regulatory Act.
Net revenue from certain gaming ac-
tivities conducted or licensed by an
Indian tribe may be used to make
taxable distributions to members of the
Indian tribe. The tribe must notify its
members of the tax liability at the time
the payments are made. 25 U.S.C.
2710(b)(3) and (d)(1).
2.Prior law. Prior to the addition of
section 3402(r) in 1994, a tribe was not
required to withhold on these distribu-
tions to tribal members except to the
extent backup withholding rules applied
under section 3406.
3.Code section 3402(r). Section
3402(r) generally requires that, for
payments made after December 31,
1994, persons, including Indian tribes,
making payments to members of Indian
tribes from the net revenues of certain
gaming activities conducted or licensed
by the tribes deduct and withhold
income taxes from those payments.
Section 3402(r) provides that the with-
holding amount be calculated assuming
that the taxpayer is single and has one
exemption.
4.Legislative history. The legislative
history of section 3402(r) indicates that
the goal of the new withholding re-
quirement was to make it easier for
tribal members who receive gaming
d i s t r i b u t i o n s t o m e e t t h e i r t a x
responsibilities:
Distributions of net revenues from
gaming activity by an Indian tribe may
result in significant tax liability to the
tribe’s members. Establishing withhold-
ing on such payments will more closely
match estimated tax payments to ulti-
mate tax liability. For some tribal
members, this change may eliminate
the need to make quarterly estimated
tax payments. For others, it will reduce
the likelihood that they will face
penalties for underpayment of tax at
the time of tax filing.
H.R. Rep. No. 826, 103d Cong., 2d
Sess., pt.1, at 170–171 (1994).
5.Proposed regulations. The pro-
posed regulations implement the with-
holding method prescribed by section
3402(r). They also permit additional
withholding by agreement between the
tribal member and the tribe.
6.Comments and final regulations.
The IRS received only two written
comments on the proposed regulations.
After consideration of both comments,
the proposed regulations are adopted
with no substantive changes.
No comments were received from
the Chief Counsel for Advocacy of the
Small Business Administration.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Small Business Administra-
tion for comment on its impact on
small business.
Drafting Information
The principal author of the regula-
tions is Rebecca Wilson, Office of the
Associate Chief Counsel (Employee
Benefits and Exempt Organizations),
IRS. However, other personnel from
the IRS and Treasury Department
participated in their development.
******
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 31 is
amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME
TAX AT SOURCE
Paragraph 1. The authority citation
for part 31 is amended by removing the
entry for section 31.3402(r)–1T and
adding an entry in numerical order to
read as follows:
Authority: 26 U.S.C. 7805 ** *
Section 31.3402(r)–1 also issued under
26 U.S.C. 3402(p) and (r),* * *
Par. 2. Section 31.3402(r)–1 is added
to read as follows:
§ 31.3402(r)–1 Withholding on
distributions of Indian gaming profits
to tribal members.
( a ) ( 1 ) G e n e r a l r u l e . S e c t i o n
3402(r)(1) requires every person, in-
cluding an Indian tribe, making a
payment to a member of an Indian tribe
from the net revenues of any class II or
class III gaming activity, as defined in
25 U.S.C. 2703, conducted or licensed
by such tribe to deduct and withhold
from such payment a tax in an amount
equal to such payment’s proportionate
share of the annualized tax, as that
term is defined in section 3402(r)(3).
(2)Withholding tables. Except as
provided in paragraph (a)(4) of this
section, the amount of a payment’s
proportionate share of the annualized
tax shall be determined under the
applicable table provided by the
Commissioner.
(3)Annualized amount of payment.
Section 3402(r)(5) provides that pay-
ments shall be placed on an annualized
basis under regulations prescribed by
the Secretary. A payment may be
placed on an annualized basis by
multiplying the amount of the payment
by the total number of payments to be
made in a calendar year. For example,
a monthly payment may be annualized
by multiplying the amount of the
payment by 12. Similarly, a quarterly
payment may be annualized by multi-
plying the amount of the payment by 4.
( 4 )A l t e r n a t e w i t h h o l d i n g p r o -
cedures—(i) In general. Any procedure
for determining the amount to be
deducted and withheld under section
3402(r) may be used, provided that the
amount of tax deducted and withheld is
substantially the same as it would be
using the tables provided by the
Commissioner under paragraph (a)(2)
of this section. At the election of an
Indian tribe, the amount to be deducted
and withheld under section 3402(r)
shall be determined in accordance with
this alternate procedure.
(ii)Method of election. It is suffi-
cient for purposes of making an elec-
tion under this paragraph (a)(4) that an
Indian tribe evidence the election in
any reasonable way, including use of a
particular method. Thus, no written
election is required.

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5.Additional withholding permitted.
Consistent with the provisions of sec-
tion 3402(p), a tribal member and a
tribe may enter into an agreement to
provide for the deduction and withhold-
ing of additional amounts from pay-
ments in order to satisfy the anticipated
tax liability of the tribal member. The
agreement may be made in a manner
s i m i l a r t o t h a t d e s c r i b e d i n
§ 31.3402(p)–1 (with respect to volun-
tary withholding agreements between
employees and employers).
(b)Effective date. This section ap-
plies to payments made after December
31, 1994.
§ 31.3402(r)–1T [Removed]
Par. 3. Section 31.3402(r)–1T is
removed.
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
Approved November 28, 1995.
Leslie Samuels,
Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
December 18, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 19, 1995, 60 F.R. 65237)
Section 7478.—Declaratory
Judgements Relating to Status of
Certain Governmental Obligations
A revenue procedure sets forth procedures for
requesting a ruling under §§103, 141–150, 1395,
and 7871(c) of the Code. See Rev. Proc. 96–16,
page 45.
Section 7520.—Valuation Tables
26 CFR 1.7520–3: Limitation on the
application of section 7520.
T.D. 8630
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 20, and 25
Actuarial Tables Exceptions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final income, estate, and gift tax
regulations relating to exceptions to the
use of the valuation tables in the
regulations for valuing annuities, inter-
ests for life or a term of years, and
remainder or reversionary interests, the
valuation of which was the subject of
final regulations published on June 10,
1994. These regulations are necessary
in order to provide guidance consistent
with court decisions concluding that the
valuation tables are not to be used in
certain situations.
EFFECTIVE DATE: These regulations
are effective December 13, 1995.
FOR FURTHER INFORMATION
CONTACT: William L. Blodgett, tele-
phone (202) 622-3090 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
On June 10, 1994, the IRS published
in the Federal Register (59 FR 30100)
final income tax regulations under
sections 170, 642, 664 and 7520 of the
Internal Revenue Code (Code), and
final estate and gift tax regulations
under sections 2031, 2512 and 7520 of
the Code providing actuarial tables to
be used in valuing annuities, interests
for life or a term of years, and
remainder or reversionary interests un-
der section 7520. On June 10, 1994,
the IRS also published in the Federal
Register (59 FR 30180) proposed
amendments to the income, estate, and
gift tax regulations prescribing circum-
stances when the published actuarial
tables cannot be used to value interests.
T h i s r e g u l a t i o n f i n a l i z e s t h o s e
amendments.
Written comments responding to the
notice of proposed rulemaking were
received. Requests for a public hearing
were also received but were subse-
quently withdrawn. After consideration
of all the comments received, those
amendments are revised and adopted by
this Treasury decision.
Explanation of Provisions
Section 7520(a), which is effective
for transfers after April 30, 1989,
provides that the value of annuities,
interests for life or a term of years, and
remainder or reversionary interests is to
be determined under tables published
by the IRS. Section 7520(e) provides
that, for purposes of section 7520, the
term tables includes formulas. Section
7520(b) provides that section 7520
shall not apply for purposes of any
provision specified in regulations. The
Conference Report accompanying the
Technical and Miscellaneous Revenue
Act of 1988, H.R. Conf. Rep. No.
1104, 100th Cong., 2d Sess. 113 (1988)
(1988–3 C.B. 603), states that section
7520 does not apply in ‘‘situations
specified in Treasury regulations.’’ A
summary of the principal comments
received and revisions made in the
final regulations in response to those
comments is provided below.
1.Valuation of Annuities, Income
Interests, etc.
Under the proposed regulations, the
tables cannot be used if the instrument
of transfer does not provide the bene-
ficiary of the annuity, income interest,
or remainder interest with the degree of
beneficial enjoyment that is consistent
with the traditional character of that
property interest under applicable local
law. One comment letter suggested
that, as a result of enactment of section
2702, it may no longer be necessary to
prescribe special rules in the case of a
trust corpus consisting of nonproduc-
tive property. It was decided to retain
these rules because this issue will
continue to arise in certain situations
where section 2702 does not apply;
e.g., the valuation of a gift of an
income interest for purposes of deter-
mining the section 2503(b) gift tax
exclusion; the valuation of the bequest
of an income interest for purposes of
the section 2013 estate tax credit.
In response to comments, the final
regulations provide additional guidance
for determining under what circum-
stances a life tenant or term certain
beneficiary of tangible property pos-
sesses adequate beneficial use such that
the tables would be used to value the
interest.
A number of comments were re-
ceived on the valuation of an annuity
that is payable from a trust corpus that
will exhaust prior to the annuitant
reaching the presumed terminal age
prescribed by the tables (age 110).
Under the proposed regulations, the

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interest would be valued, not as a right
to receive the annuity for the life of the
annuitant, but rather as the right to
receive the annuity for the shorter of
the life of the annuitant or the date on
which the corpus will exhaust. One
commentator agreed that the possibility
of exhaustion of corpus should be
taken into account in cases of relatively
severe underfunding of the trust. How-
ever, it was suggested that, if the
underfunding was relatively less severe,
it should be disregarded. After further
consideration of this issue, the IRS has
concluded that the method described in
the proposed regulations for determin-
ing the value of the annuity is consis-
tent with fundamental principles for
determining present value and long-
standing IRS position. See, Rev. Rul.
77–454 (1977–2 C.B. 351); Rev. Rul.
70–452 (1970–2 C.B. 199); Moffett v.
Commissioner, 269 F.2d 738 (4th Cir.
1959); United States v. Dean, 224 F.2d
26 (1st Cir. 1955). However, in re-
sponse to requests, the explanation of
the methodology and computation has
been amplified.
2.Terminal Illness
Under the proposed regulations, the
tables cannot be used if the individual,
who is the measuring life with respect
to the property interest, is terminally
ill. Under the proposed regulations, the
individual is terminally ill if that
individual was known to have an
incurable illness or deteriorating physi-
cal condition such that there is at least
a 50 percent probability that the
individual will die within one year.
One commentator suggested that the
value of a property interest that is
dependent upon a measuring life should
be determined in all events based on
the mortality component contained in
Table 80CNSMT (which is based on
the life experience of the general
population), rather than a mortality
component that reflects the actual
terminally ill condition of the individ-
ual. The commentator also suggested
that if departure from the actuarial
tables is deemed appropriate in the case
of terminally ill individuals, then the
standard in Rev. Rul. 80–80 (1980–1
C.B. 194), which is not explicitly
expressed in the form of a percentage
probability of survival (as is the
standard in the proposed regulations),
adequately differentiates between indi-
viduals that should not be considered
terminally ill and those that should.
This commentator also questioned
whether a percentage probability stand-
ard, such as the one used in the
proposed regulations, would be feasible
to administer.
The IRS continues to believe that
mortality tables such as Table
80CNSMT should not be used to
predict the survival probabilities of an
individual whose time of death is
reasonably predictable based on the
facts presented. To determine whether
the proposed test for classifying an
individual as terminally ill would be
feasible, the IRS consulted with a
number of medical specialists. Medical
experts called upon to assess the
probability of survival of a terminally
ill individual base their assessment on
statistical compilations of the percent-
age of individuals who survive for a
specified period of time when suffering
with a particular disease. Thus, the IRS
believes that a test for classifying an
individual as terminally ill can reason-
ably be based upon the probability of
survival for a specified period of time.
One commentator suggested that the
mortality test should take into account
the actual period of survival after the
transfer. For example, if the individual
actually survived for one year, that
individual should not be deemed to
have been terminally ill. Although
post-transaction events are not or-
dinarily determinative for valuation
purposes, such events may provide
evidence of value as of the valuation
date. Accordingly, the final regulations
provide a presumption that if the
individual who is the measuring life
survives for eighteen months or longer
after the transfer, that individual shall
be presumed to have not been termi-
nally ill on the date of the transfer
unless the contrary is established by
clear and convincing evidence.
The commentator also questioned
whether the proposed test for classify-
ing an individual as terminally ill
would result in the classification of
elderly people suffering from the gen-
eral infirmities of old age as ‘‘termi-
nally ill.’’ The IRS continues to believe
that the test should be consistently
applied to people of all ages. Under the
regulations, the individual must be
inflicted with an incurable illness or
other deteriorating physical condition
that is life threatening. Thus, elderly
people suffering from the general infir-
mities of old age, but not from a
specific incurable life-threatening ill-
ness, would not be considered termi-
nally ill under the test. Consequently, if
an elderly person has one or more
illnesses, none of which, standing alone
or considered together, is life-
threatening, that person would not be
considered to be terminally ill.
The same commentator suggested
that ‘‘knowledge’’ of the terminal
illness should be limited to actual
knowledge by the taxpayer or the
decedent, rather than to ‘‘knowledge’’
by any of the parties involved. How-
ever, limitation of the requisite
‘‘knowledge’’ to the taxpayer or dece-
dent would present a significant burden
to the IRS regarding proof and would
present opportunities for easy circum-
vention. Thus, the IRS believes that the
requirement that the condition of the
individual be ‘‘known,’’ although not
necessarily by the taxpayer or dece-
dent, is reasonable.
Commentators suggested that the
regulations should make it clear that a
special actuarial factor taking into
account a transferor’s terminal illness
may be used in valuing a transfer to a
pooled income fund. The final regula-
tions incorporate that suggestion.
Comments were received that the
language in §20.7520–3(b)(3)(ii) of
the proposed regulations regarding the
valuation of a property interest that is
based upon a terminally ill measuring
life, for purposes of determining the
applicable credit for tax on prior
transfers under section 2013, was am-
biguous. Generally, if the final deter-
mination of the estate tax liability in
the transferor’s estate was dependent
on the valuation of the life interest
received by the transferee, then the
value of the property transferred, for
purposes of determining the credit
allowable for the transferee’s estate, is
the value determined previously for the
transferor’s estate. Section 20.7520–
3(b)(3)(ii) of the final regulations clar-
ifies this rule. The IRS invites com-
ments on whether the value of a
reversionary interest under section 673
should be determined without regard to
the physical condition of the decedent
immediately before death, a related
issue that was raised by commentators.
3.Application of Actuarial Tables
One commentator suggested that the
tables prescribed by the regulations
must be used for valuing all interests
transferred between April 30, 1989 (the
effective date of section 7520) and

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December December 13, 1995 (the ef-
fective date of the regulations). How-
ever, these regulations generally adopt
principles established in case law and
published IRS positions. See, e.g.,
O’Reilly v. Commissioner, 973 F.2d
1403 (8th Cir. 1992), rem’d, T.C.M.
1994–61 (underproductive income in-
terest); Estate of McLendon v. Commis-
sioner, T.C.M. 1993–459; Rev. Rul.
80–80 (1980–1 C.B. 194) (terminal
illness of measuring life); Moffett v.
Commissioner, 269 F.2d 738 (4th Cir.
1959); Rev. Rul. 77–454 (1977–2 C.B.
351) (exhausting corpus). There is no
indication that Congress intended to
supersede this well-established case law
and administrative ruling position when
it enacted section 7520. Consequently,
in the case of transfers prior to the
effective date of these regulations, the
question of whether a particular interest
must be valued based on the tables will
be resolved based on applicable case
law and revenue rulings.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Small Business Administra-
tion for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is William L. Blodgett, Office of
Assistant Chief Counsel (Passthroughs
and Special Industries), IRS. However,
other personnel from the IRS and
Treasury Department participated in
their development.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 20 and
25 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. Section 1.7520–3 is amended
by revising paragraph (b) and adding a
sentence at the end of paragraph (c) to
read as follows:
§ 1.7520–3 Limitation on the
application of section 7520.
******
(b)Other limitations on the applica-
tion of section 7520—(1) In general—
(i) Ordinary beneficial interests. For
purposes of this section:
(A) An ordinary annuity interest is
the right to receive a fixed dollar
amount at the end of each year during
one or more measuring lives or for
some other defined period. A standard
section 7520 annuity factor for an
ordinary annuity interest represents the
present worth of the right to receive
$1.00 per year for a defined period,
using the interest rate prescribed under
section 7520 for the appropriate month.
If an annuity interest is payable more
often than annually or is payable at the
beginning of each period, a special
adjustment must be made in any com-
putation with a standard section 7520
annuity factor.
(B) An ordinary income interest is
the right to receive the income from, or
the use of, property during one or more
measuring lives or for some other
defined period. A standard section 7520
income factor for an ordinary income
interest represents the present worth of
the right to receive the use of $1.00 for
a defined period, using the interest rate
prescribed under section 7520 for the
appropriate month.
(C) An ordinary remainder or rever-
sionary interest is the right to receive
an interest in property at the end of one
or more measuring lives or some other
defined period. A standard section 7520
remainder factor for an ordinary re-
mainder or reversionary interest repre-
sents the present worth of the right to
receive $1.00 at the end of a defined
period, using the interest rate pre-
scribed under section 7520 for the
appropriate month.
(ii)Certain restricted beneficial in-
terests. A restricted beneficial interest
is an annuity, income, remainder, or
reversionary interest that is subject to a
contingency, power, or other restric-
tion, whether the restriction is provided
for by the terms of the trust, will, or
other governing instrument or is caused
by other circumstances. In general, a
standard section 7520 annuity, income,
or remainder factor may not be used to
value a restricted beneficial interest.
However, a special section 7520 an-
nuity, income, or remainder factor may
be used to value a restricted beneficial
interest under some circumstances. See
paragraph (b)(4) Example 2 of this
section, which illustrates a situation
where a special section 7520 actuarial
factor is needed to take into account
the shorter life expectancy of the
terminally ill measuring life. See
§ 1.7520–1(c) for requesting a special
factor from the Internal Revenue
Service.
(iii)Other beneficial interests. If,
under the provisions of this paragraph
(b), the interest rate and mortality
components prescribed under section
7520 are not applicable in determining
the value of any annuity, income,
remainder, or reversionary interest, the
actual fair market value of the interest
(determined without regard to section
7520) is based on all of the facts and
circumstances if and to the extent
permitted by the Internal Revenue
Code provision applicable to the prop-
erty interest.
(2)Provisions of governing instru-
ment and other limitations on source of
payment—(i) Annuities. A standard
section 7520 annuity factor may not be
used to determine the present value of
an annuity for a specified term of years
or the life of one or more individuals
unless the effect of the trust, will, or
other governing instrument is to ensure
that the annuity will be paid for the
entire defined period. In the case of an
annuity payable from a trust or other
limited fund, the annuity is not consid-
ered payable for the entire defined
period if, considering the applicable
section 7520 interest rate at the valua-
tion date of the transfer, the annuity is
expected to exhaust the fund before the
last possible annuity payment is made
in full. For this purpose, it must be
assumed that it is possible for each
measuring life to survive until age 110.
For example, for a fixed annuity
payable annually at the end of each
year, if the amount of the annuity
payment (expressed as a percentage of
the initial corpus) is less than or equal
to the applicable section 7520 interest

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rate at the date of the transfer, the
corpus is assumed to be sufficient to
make all payments. If the percentage
exceeds the applicable section 7520
interest rate and the annuity is for a
definite term of years, multiply the
annual annuity amount by the Table B
term certain annuity factor, as de-
scribed in §1.7520–1(c)(1), for the
number of years of the defined period.
If the percentage exceeds the applicable
section 7520 interest rate and the
annuity is payable for the life of one or
more individuals, multiply the annual
annuity amount by the Table B annuity
factor for 110 years minus the age of
the youngest individual. If the result
exceeds the limited fund, the annuity
may exhaust the fund, and it will be
necessary to calculate a special section
7520 annuity factor that takes into
account the exhaustion of the trust or
fund. This computation would be modi-
fied, if appropriate, to take into account
annuities with different payment terms.
See §25.7520–3(b)(2)(v) Example 5 of
this chapter, which provides an illustra-
tion involving an annuity trust that is
subject to exhaustion.
(ii)Income and similar interests—
(A) Beneficial enjoyment. A standard
section 7520 income factor for an
ordinary income interest may not be
used to determine the present value of
an income or similar interest in trust
for a term of years or for the life of
one or more individuals unless the
effect of the trust, will, or other
governing instrument is to provide the
income beneficiary with that degree of
beneficial enjoyment of the property
during the term of the income interest
that the principles of the law of trusts
accord to a person who is unqualifiedly
designated as the income beneficiary of
a trust for a similar period of time.
This degree of beneficial enjoyment is
provided only if it was the transferor’s
intent, as manifested by the provisions
of the governing instrument and the
surrounding circumstances, that the
trust provide an income interest for the
income beneficiary during the specified
period of time that is consistent with
the value of the trust corpus and with
its preservation. In determining whether
a trust arrangement evidences that
intention, the treatment required or
permitted with respect to individual
items must be considered in relation to
the entire system provided for in the
administration of the subject trust.
Similarly, in determining the present
value of the right to use tangible
property (whether or not in trust) for
one or more measuring lives or for
some other specified period of time, the
interest rate component prescribed un-
der section 7520 and §1.7520–1 may
not be used unless, during the specified
period, the effect of the trust, will or
other governing instrument is to
provide the beneficiary with that degree
of use, possession, and enjoyment of
the property during the term of interest
that applicable state law accords to a
person who is unqualifiedly designated
as a life tenant or term holder for a
similar period of time.
(B)Diversions of income and
corpus. A standard section 7520 in-
come factor for an ordinary income
interest may not be used to value an
income interest or similar interest in
property for a term of years or for one
or more measuring lives if—
(1) The trust, will, or other govern-
ing instrument requires or permits the
beneficiary’s income or other enjoy-
ment to be withheld, diverted, or
accumulated for another person’s bene-
fit without the consent of the income
beneficiary; or
(2) The governing instrument re-
quires or permits trust corpus to be
withdrawn from the trust for another
person’s benefit during the income
beneficiary’s term of enjoyment with-
out the consent of and accountability to
the income beneficiary for such
diversion.
(iii) Remainder and reversionary
interests. A standard section 7520
remainder interest factor for an ordi-
nary remainder or reversionary interest
may not be used to determine the
present value of a remainder or rever-
sionary interest (whether in trust or
otherwise) unless, consistent with the
preservation and protection that the law
of trusts would provide for a person
who is unqualifiedly designated as the
remainder beneficiary of a trust for a
similar duration, the effect of the
administrative and dispositive provi-
sions for the interest or interests that
precede the remainder or reversionary
interest is to assure that the property
will be adequately preserved and pro-
tected (e.g., from erosion, invasion,
depletion, or damage) until the re-
mainder or reversionary interest takes
effect in possession and enjoyment.
This degree of preservation and protec-
tion is provided only if it was the
transferor’s intent, as manifested by the
provisions of the arrangement and the
surrounding circumstances, that the
entire disposition provide the remainder
or reversionary beneficiary with an
undiminished interest in the property
transferred at the time of the termina-
tion of the prior interest.
(iv) Pooled income fund interests. In
general, pooled income funds are cre-
ated and administered to achieve a
special rate of return. A beneficial
interest in a pooled income fund is not
ordinarily valued using a standard
section 7520 income or remainder
interest factor. The present value of a
beneficial interest in a pooled income
fund is determined according to rules
and special remainder factors pre-
scribed in §1.642(c)–6 and, when
applicable, the rules set forth in para-
graph (b)(3) of this section, if the
individual who is the measuring life is
terminally ill at the time of the transfer.
(3) Mortality component. The mor-
tality component prescribed under sec-
tion 7520 may not be used to determine
the present value of an annuity, income
interest, remainder interest, or rever-
sionary interest if an individual who is
a measuring life is terminally ill at the
time of the transaction. For purposes of
this paragraph (b)(3), an individual
who is known to have an incurable
illness or other deteriorating physical
condition is considered terminally ill if
there is at least a 50 percent probability
that the individual will die within 1
year. However, if the individual sur-
vives for eighteen months or longer
after the date of the transaction, that
individual shall be presumed to have
not been terminally ill at the time of
the transaction unless the contrary is
established by clear and convincing
evidence.
(4)Examples. The provisions of this
paragraph (b) are illustrated by the
following examples:
Example 1. Annuity funded with unproductive
property. The taxpayer transfers corporation
stock worth $1,000,000 to a trust. The trust
provides for a 6 percent ($60,000 per year)
annuity in cash or other property to be paid to a
charitable organization for 25 years and for the
remainder to be distributed to the donor’s child.
The trust specifically authorizes, but does not
require, the trustee to retain the shares of stock.
The section 7520 interest rate for the month of
the transfer is 8.2 percent. The corporation has
paid no dividends on this stock during the past 5
years, and there is no indication that this policy
will change in the near future. Under applicable
state law, the corporation is considered to be a
sound investment that satisfies fiduciary stand-
ards. Therefore, the trust’s sole investment in
this corporation is not expected to adversely
affect the interest of either the annuitant or the

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remainder beneficiary. Considering the 6 percent
annuity payout rate and the 8.2 percent section
7520 interest rate, the trust corpus is considered
sufficient to pay this annuity for the entire 25-
year term of the trust, or even indefinitely.
Although it appears that neither beneficiary
would be able to compel the trustee to make the
trust corpus produce investment income, the
annuity interest in this case is considered to be
an ordinary annuity interest, and the standard
section 7520 annuity factor may be used to
determine the present value of the annuity. In
this case, the section 7520 annuity factor would
represent the right to receive $1.00 per year for a
term of 25 years.
Example 2. Terminal illness. The taxpayer
transfers property worth $1,000,000 to a chari-
table remainder unitrust described in section
664(d)(2) and §1.664–3. The trust provides for a
fixed-percentage 7 percent unitrust benefit (each
annual payment is equal to 7 percent of the trust
assets as valued at the beginning of each year) to
be paid quarterly to an individual beneficiary for
life and for the remainder to be distributed to a
charitable organization. At the time the trust is
created, the individual beneficiary is age 60 and
has been diagnosed with an incurable illness and
there is at least a 50 percent probability of the
individual dying within 1 year. Assuming the
presumption in paragraph (b)(3) of this section
does not apply, because there is at least a 50
percent probability that this beneficiary will die
within 1 year, the standard section 7520 unitrust
remainder factor for a person age 60 from the
valuation tables may not be used to determine
the present value of the charitable remainder
interest. Instead, a special unitrust remainder
factor must be computed that is based on the
section 7520 interest rate and that takes into
account the projection of the individual benefici-
ary’s actual life expectancy.
(5) Additional limitations. Section
7520 does not apply to the extent as
may otherwise be provided by the
Commissioner.
(c)* * * The provisions of para-
graph (b) of this section are effective
with respect to transactions after De-
cember 13, 1995.
PART 20—ESTATE TAX; ESTATES
OF DECEDENTS DYING AFTER
AUGUST 16, 1954
Par. 3. The authority citation for part
20 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. Section 20.7520–3 is
amended by revising paragraph (b) and
adding a sentence at the end of
paragraph (c) to read as follows:
§ 20.7520–3 Limitation on the
application of section 7520.
******
(b)Other limitations on the applica-
tion of section 7520—(1) In general—
(i) Ordinary beneficial interests. For
purposes of this section:
(A) An ordinary annuity interest is
the right to receive a fixed dollar
amount at the end of each year during
one or more measuring lives or for
some other defined period. A standard
section 7520 annuity factor for an
ordinary annuity interest represents the
present worth of the right to receive
$1.00 per year for a defined period,
using the interest rate prescribed under
section 7520 for the appropriate month.
If an annuity interest is payable more
often than annually or is payable at the
beginning of each period, a special
adjustment must be made in any
computation with a standard section
7520 annuity factor.
(B) An ordinary income interest is
the right to receive the income from or
the use of property during one or more
measuring lives or for some other
defined period. A standard section 7520
income factor for an ordinary income
interest represents the present worth of
the right to receive the use of $1.00 for
a defined period, using the interest rate
prescribed under section 7520 for the
appropriate month.
(C) An ordinary remainder or rever-
sionary interest is the right to receive
an interest in property at the end of one
or more measuring lives or some other
defined period. A standard section 7520
remainder factor for an ordinary re-
mainder or reversionary interest repre-
sents the present worth of the right to
receive $1.00 at the end of a defined
period, using the interest rate pre-
scribed under section 7520 for the
appropriate month.
(ii) Certain restricted beneficial in-
terests. A restricted beneficial interest
is an annuity, income, remainder, or
reversionary interest that is subject to
any contingency, power, or other
restriction, whether the restriction is
provided for by the terms of the trust,
will, or other governing instrument or
is caused by other circumstances. In
general, a standard section 7520 an-
nuity, income, or remainder factor may
not be used to value a restricted
beneficial interest. However, a special
section 7520 annuity, income, or re-
mainder factor may be used to value a
restricted beneficial interest under some
circumstances. See paragraphs (b)(2)(v)
Example 4 and (b)(4) Example 1 of this
section, which illustrate situations
where special section 7520 actuarial
factors are needed to take into account
limitations on beneficial interests. See
§ 20.7520–1(c) for requesting a special
factor from the Internal Revenue
Service.
(iii) Other beneficial interests. If,
under the provisions of this paragraph
(b), the interest rate and mortality
components prescribed under section
7520 are not applicable in determining
the value of any annuity, income,
remainder, or reversionary interest, the
actual fair market value of the interest
(determined without regard to section
7520) is based on all of the facts and
circumstances if and to the extent
permitted by the Internal Revenue
Code provision applicable to the prop-
erty interest.
(2) Provisions of governing instru-
ment and other limitations on source of
payment—(i) Annuities. A standard
section 7520 annuity factor may not be
used to determine the present value of
an annuity for a specified term of years
or the life of one or more individuals
unless the effect of the trust, will, or
other governing instrument is to ensure
that the annuity will be paid for the
entire defined period. In the case of an
annuity payable from a trust or other
limited fund, the annuity is not consid-
ered payable for the entire defined
period if, considering the applicable
section 7520 interest rate at the valua-
tion date of the transfer, the annuity is
expected to exhaust the fund before the
last possible annuity payment is made
in full. For this purpose, it must be
assumed that it is possible for each
measuring life to survive until age 110.
For example, for a fixed annuity
payable annually at the end of each
year, if the amount of the annuity
payment (expressed as a percentage of
the initial corpus) is less than or equal
to the applicable section 7520 interest
rate at the date of the transfer, the
corpus is assumed to be sufficient to
make all payments. If the percentage
exceeds the applicable section 7520
interest rate and the annuity is for a
definite term of years, multiply the
annual annuity amount by the Table B
term certain annuity factor, as de-
scribed in §20.7520–1(c)(1), for the
number of years of the defined period.
If the percentage exceeds the applicable
section 7520 interest rate and the
annuity is payable for the life of one or
more individuals, multiply the annual
annuity amount by the Table B annuity
factor for 110 years minus the age of
the youngest individual. If the result
exceeds the limited fund, the annuity
may exhaust the fund, and it will be
necessary to calculate a special section
7520 annuity factor that takes into
account the exhaustion of the trust or

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fund. This computation would be modi-
fied, if appropriate, to take into account
annuities with different payment terms.
See §25.7520–3(b)(2)(v) Example 5 of
this chapter, which provides an illustra-
tion involving an annuity trust that is
subject to exhaustion.
(ii) Income and similar interests—
(A) Beneficial enjoyment. A standard
section 7520 income factor for an
ordinary income interest may not be
used to determine the present value of
an income or similar interest in trust
for a term of years, or for the life of
one or more individuals, unless the
effect of the trust, will, or other
governing instrument is to provide the
income beneficiary with that degree of
beneficial enjoyment of the property
during the term of the income interest
that the principles of the law of trusts
accord to a person who is unqualifiedly
designated as the income beneficiary of
a trust for a similar period of time.
This degree of beneficial enjoyment is
provided only if it was the transferor’s
intent, as manifested by the provisions
of the governing instrument and the
surrounding circumstances, that the
trust provide an income interest for the
income beneficiary during the specified
period of time that is consistent with
the value of the trust corpus and with
its preservation. In determining whether
a trust arrangement evidences that
intention, the treatment required or
permitted with respect to individual
items must be considered in relation to
the entire system provided for in the
administration of the subject trust.
Similarly, in determining the present
value of the right to use tangible
property (whether or not in trust) for
one or more measuring lives or for
some other specified period of time, the
interest rate component prescribed un-
der section 7520 and §1.7520–1 of this
chapter may not be used unless, during
the specified period, the effect of the
trust, will or other governing instru-
ment is to provide the beneficiary with
that degree of use, possession, and
enjoyment of the property during the
term of interest that applicable state
law accords to a person who is
unqualifiedly designated as a life tenant
or term holder for a similar period of
time.
(B) Diversions of income and
corpus. A standard section 7520 in-
come factor for an ordinary income
interest may not be used to value an
income interest or similar interest in
property for a term of years, or for one
or more measuring lives, if—
(1) The trust, will, or other govern-
ing instrument requires or permits the
beneficiary’s income or other enjoy-
ment to be withheld, diverted, or
accumulated for another person’s bene-
fit without the consent of the income
beneficiary; or
(2) The governing instrument re-
quires or permits trust corpus to be
withdrawn from the trust for another
person’s benefit without the consent of
the income beneficiary during the
income beneficiary’s term of enjoyment
and without accountability to the in-
come beneficiary for such diversion.
(iii) Remainder and reversionary
interests. A standard section 7520
remainder interest factor for an ordi-
nary remainder or reversionary interest
may not be used to determine the
present value of a remainder or rever-
sionary interest (whether in trust or
otherwise) unless, consistent with the
preservation and protection that the law
of trusts would provide for a person
who is unqualifiedly designated as the
remainder beneficiary of a trust for a
similar duration, the effect of the
administrative and dispositive provi-
sions for the interest or interests that
precede the remainder or reversionary
interest is to assure that the property
will be adequately preserved and pro-
tected (e.g., from erosion, invasion,
depletion, or damage) until the re-
mainder or reversionary interest takes
effect in possession and enjoyment.
This degree of preservation and protec-
tion is provided only if it was the
transferor’s intent, as manifested by the
provisions of the arrangement and the
surrounding circumstances, that the
entire disposition provide the remainder
or reversionary beneficiary with an
undiminished interest in the property
transferred at the time of the termina-
tion of the prior interest.
(iv) Pooled income fund interests. In
general, pooled income funds are cre-
ated and administered to achieve a
special rate of return. A beneficial
interest in a pooled income fund is not
ordinarily valued using a standard
section 7520 income or remainder
interest factor. The present value of a
beneficial interest in a pooled income
fund is determined according to rules
and special remainder factors pre-
scribed in §1.642(c)–6 of this chapter
and, when applicable, the rules set
forth under paragraph (b)(3) of this
section if the individual who is the
measuring life is terminally ill at the
time of the transfer.
(v) Examples. The provisions of this
paragraph (b)(2) are illustrated by the
following examples:
Example 1. Unproductive property. A died,
survived by B and C. B died two years after A.
A’s will provided for a bequest of corporation
stock in trust under the terms of which all of the
trust income was paid to B for life. After the
death of B, the trust terminated and the trust
property was distributed to C. The trust specifi-
cally authorized, but did not require, the trustee
to retain the shares of stock. The corporation
paid no dividends on this stock during the 5
years before A’s death and the 2 years before
B’s death. There was no indication that this
policy would change after A’s death. Under
applicable state law, the corporation is consid-
ered to be a sound investment that satisfies
fiduciary standards. The facts and circumstances,
including applicable state law, indicate that B did
not have the legal right to compel the trustee to
make the trust corpus productive in conformity
with the requirements for a lifetime trust income
interest under applicable local law. Therefore,
B’s life income interest in this case is considered
nonproductive. Consequently, B’s income interest
may not be valued actuarially under this section.
Example 2. Beneficiary’s right to make trust
productive. The facts are the same as in Example
1, except that the trustee is not specifically
authorized to retain the shares of stock. Further,
the terms of the trust specifically provide that B,
the life income beneficiary, may require the
trustee to make the trust corpus productive
consistent with income yield standards for trusts
under applicable state law. Under that law, the
minimum rate of income that a productive trust
may produce is substantially below the section
7520 interest rate for the month of A’s death. In
this case, because B has the right to compel the
trustee to make the trust productive for purposes
of applicable local law during the beneficiary’s
lifetime, the income interest is considered an
ordinary income interest for purposes of this
paragraph, and the standard section 7520 life
income interest factor may be used to determine
the present value of B’s income interest.
Example 3. Discretionary invasion of corpus.
The decedent, A, transferred property to a trust
under the terms of which all of the trust income
is to be paid to A’s child for life and the
remainder of the trust is to be distributed to a
grandchild. The trust authorizes the trustee
without restriction to distribute corpus to A’s
surviving spouse for the spouse’s comfort and
happiness. In this case, because the trustee’s
power to invade trust corpus is unrestricted, the
exercise of the power could result in the
termination of the income interest at any time.
Consequently, the income interest is not consid-
ered an ordinary income interest for purposes of
this paragraph, and may not be valued actuarially
under this section.
Example 4. Limited invasion of corpus. The
decedent, A, bequeathed property to a trust under
the terms of which all of the trust income is to
be paid to A’s child for life and the remainder is
to be distributed to A’s grandchild. The trust
authorizes the child to withdraw up to $5,000 per
year from the trust corpus. In this case, the
child’s power to invade trust corpus is limited to
an ascertainable amount each year. Annual
invasions of any amount would be expected to
progressively diminish the property from which
the child’s income is paid. Consequently, the

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income interest is not considered an ordinary
income interest for purposes of this paragraph,
and the standard section 7520 income interest
factor may not be used to determine the present
value of the income interest. Nevertheless, the
present value of the child’s income interest is
ascertainable by making a special actuarial
calculation that would take into account not only
the initial value of the trust corpus, the section
7520 interest rate for the month of the transfer,
and the mortality component for the child’s age,
but also the assumption that the trust corpus will
decline at the rate of $5,000 each year during the
child’s lifetime. The child’s right to receive an
amount not in excess of $5,000 per year may be
separately valued in this instance and, assuming
the trust corpus would not exhaust before the
child would attain age 110, would be considered
an ordinary annuity interest.
Example 5. Power to consume. The decedent,
A, devised a life estate in 3 parcels of real estate
to A’s surviving spouse with the remainder to a
child, or, if the child doesn’t survive, to the
child’s estate. A also conferred upon the spouse
an unrestricted power to consume the property,
which includes the right to sell part or all of the
property and to use the proceeds for the spouse’s
support, comfort, happiness, and other purposes.
Any portion of the property or its sale proceeds
remaining at the death of the surviving spouse is
to vest by operation of law in the child at that
time. The child predeceased the surviving
spouse. In this case, the surviving spouse’s
power to consume the corpus is unrestricted, and
the exercise of the power could entirely exhaust
the remainder interest during the life of the
spouse. Consequently, the remainder interest that
is includible in the child’s estate is not
considered an ordinary remainder interest for
purposes of this paragraph and may not be
valued actuarially under this section.
(3) Mortality component—(i) Termi-
nal illness. Except as provided in
paragraph (b)(3)(ii) of this section, the
mortality component prescribed under
section 7520 may not be used to
determine the present value of an
annuity, income interest, remainder
interest, or reversionary interest if an
individual who is a measuring life is
terminally ill at the time of the
decedent’s death. For purposes of this
paragraph (b)(3), an individual who is
known to have an incurable illness or
other deteriorating physical condition is
considered terminally ill if there is at
least a 50 percent probability that the
individual will die within 1 year.
However, if the individual survives for
eighteen months or longer after the
date of the decedent’s death, that
individual shall be presumed to have
not been terminally ill at the date of
death unless the contrary is established
by clear and convincing evidence.
(ii) Terminal illness exceptions. In
the case of the allowance of the credit
for tax on a prior transfer under section
2013, if a final determination of the
federal estate tax liability of the trans-
feror’s estate has been made under
circumstances that required valuation of
the life interest received by the trans-
feree, the value of the property trans-
ferred, for purposes of the credit
allowable to the transferee’s estate,
shall be the value determined pre-
viously in the transferor’s estate. Other-
wise, for purposes of section 2013, the
provisions of paragraph (b)(3)(i) of this
section shall govern in valuing the
property transferred. The value of a
decedent’s reversionary interest under
sections 2037(b) and 2042(2) shall be
determined without regard to the physi-
cal condition, immediately before the
decedent’s death, of the individual who
is the measuring life.
(iii) Death resulting from common
accidents. The mortality component
prescribed under section 7520 may not
be used to determine the present value
of an annuity, income interest, re-
mainder interest, or reversionary inter-
est if the decedent, and the individual
who is the measuring life, die as a
result of a common accident or other
occurrence.
(4) Examples. The provisions of
paragraph (b)(3) of this section are
illustrated by the following examples:
Example 1. Terminal illness. The decedent
bequeaths $1,000,000 to a trust under the terms
of which the trustee is to pay $103,000 per year
to a charitable organization during the life of the
decedent’s child. Upon the death of the child, the
remainder in the trust is to be distributed to the
decedent’s grandchild. The child, who is age 60,
has been diagnosed with an incurable illness, and
there is at least a 50 percent probability of the
child dying within 1 year. Assuming the
presumption provided for in paragraph (b)(3)(i)
of this section does not apply, the standard life
annuity factor for a person age 60 may not be
used to determine the present value of the
charitable organization’s annuity interest because
there is at least a 50 percent probability that the
child, who is the measuring life, will die within
1 year. Instead, a special section 7520 annuity
factor must be computed that takes into account
the projection of the child’s actual life
expectancy.
Example 2. Deaths resulting from common
accidents, etc. The decedent’s will establishes a
trust to pay income to the decedent’s surviving
spouse for life. The will provides that, upon the
spouse’s death or, if the spouse fails to survive
the decedent, upon the decedent’s death the trust
property is to pass to the decedent’s children.
The decedent and the decedent’s spouse die
simultaneously in an accident under circum-
stances in which it was impossible to determine
who survived the other. Even if the terms of the
will and applicable state law presume that the
decedent died first with the result that the
property interest is considered to have passed in
trust for the benefit of the spouse for life, after
which the remainder is to be distributed to the
decedent’s children, the spouse’s life income
interest may not be valued by use of the
mortality component described under section
7520. The result would be the same even if it
was established that the spouse survived the
decedent.
(5) Additional limitations. Section
7520 does not apply to the extent as
may otherwise be provided by the
Commissioner.
(c) * * * The provisions of para-
graph (b) of this section are effective
with respect to estates of decedents
dying after December 13, 1995.
PART 25—GIFT TAX; GIFTS
MADE AFTER DECEMBER 31,
1954
Par. 5. The authority citation for part
25 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 6. In the list below, for each
section indicated in the left column,
remove the language in the middle
column and add the language in the
right column:

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SectionRemoveAdd
25.2522(c)–3(c)(2)(i)
6th sentence
(e)(2)(ii), (iii), and (iv)(c)(2)(ii), (iii), and (iv)
25.2522 (c)–3(c)(2)(vi)(a) 2nd
sentence
subdivision (v)paragraph (c)(2)(vi)
25.2522 (c)–3(c)(2)(vii)(a) sentencesubdivision (vi)paragraph (c)(2)(vii)
25.2522 (c)–3(d)(2) introductory textsubdivision (iv), (V), or (vi) of
paragraph (c)(2)
paragraph (c)(2)(v), (vi), or (vii)
25.2522 (c)–3(d)(2)(iv) 1st sentenceparagraph (c)(2)(v)paragraph (c)(2)(vi)
25.2522 (c)–3(d)(2)(iv), Example (1)
1st sentence
paragraph (c)(2)(v)paragraph (c)(2)(vi)
25.2522 (c)–3(d)(2)(iv), Example (2)
1st sentence
paragraph (c)(2)(v)paragraph (c)(2)(vi)
25.2522 (c)–3(d)(2)(iv), Example (3)
1st sentence (in each place it
appears)
paragraph (c)(2)(v)paragraph (c)(2)(vi)
25.2522 (c)–3(d)(2)(iv), Example (4)
last sentence
paragraph (c)(2)(V)(e)paragraph (c)(2)(vi)(e)
25.2522(c)–3(d)(2)(v)paragraph (c)(2)(vi)paragraph (c)(2)(vii)
Par. 7. Section 25.7520–3 is
amended by revising paragraph (b) and
adding a sentence at the end of
paragraph (c) to read as follows:
§ 25.7520–3 Limitation on the
application of section 7520.
(b) Other limitations on the applica-
tion of section 7520— (1) In general—
(i) Ordinary beneficial interests. For
purposes of this section:
(A) An ordinary annuity interest is
the right to receive a fixed dollar
amount at the end of each year during
one or more measuring lives or for
some other defined period. A standard
section 7520 annuity factor for an
ordinary annuity interest represents the
present worth of the right to receive
$1.00 per year for a defined period,
using the interest rate prescribed under
section 7520 for the appropriate month.
If an annuity interest is payable more
often than annually or is payable at the
beginning of each period, a special
adjustment must be made in any
computation with a standard section
7520 annuity factor.
(B) An ordinary income interest is
the right to receive the income from or
the use of property during one or more
measuring lives or for some other
defined period. A standard section 7520
income factor for an ordinary income
interest represents the present worth of
the right to receive the use of $1.00 for
a defined period, using the interest rate
prescribed under section 7520 for the
appropriate month. However, in the
case of certain gifts made after October
8, 1990, if the donor does not retain a
qualified annuity, unitrust, or reversion-
ary interest, the value of any interest
retained by the donor is considered to
be zero if the remainder beneficiary is
a member of the donor’s family. See
§ 25.2702–2.
(C) An ordinary remainder or rever-
sionary interest is the right to receive
an interest in property at the end of one
or more measuring lives or some other
defined period. A standard section 7520
remainder factor for an ordinary re-
mainder or reversionary interest repre-
sents the present worth of the right to
receive $1.00 at the end of a defined
period, using the interest rate pre-
scribed under section 7520 for the
appropriate month.
(ii) Certain restricted beneficial in-
terests. A restricted beneficial interest
is an annuity, income, remainder, or
reversionary interest that is subject to
any contingency, power, or other
restriction, whether the restriction is
provided for by the terms of the trust,
will, or other governing instrument or
is caused by other circumstances. In
general, a standard section 7520 an-
nuity, income, or remainder factor may
not be used to value a restricted
beneficial interest. However, a special
section 7520 annuity, income, or re-
mainder factor may be used to value a
restricted beneficial interest under some
circumstances. See paragraphs (b)(2)(v)
Example 5 and (b)(4) of this section,
which illustrate situations in which
special section 7520 actuarial factors
are needed to take into account limita-
tions on beneficial interests. See
§ 25.7520–1(c) for requesting a special
factor from the Internal Revenue
Service.
(iii) Other beneficial interests. If,
under the provisions of this paragraph
(b), the interest rate and mortality
components prescribed under section
7520 are not applicable in determining
the value of any annuity, income,
remainder, or reversionary interest, the
actual fair market value of the interest
(determined without regard to section
7520) is based on all of the facts and
circumstances if and to the extent
permitted by the Internal Revenue
Code provision applicable to the prop-
erty interest.
(2) Provisions of governing instru-
ment and other limitations on source of
payment—(i) Annuities. A standard
section 7520 annuity factor may not be
used to determine the present value of
an annuity for a specified term of years
or the life of one or more individuals
unless the effect of the trust, will, or

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other governing instrument is to ensure
that the annuity will be paid for the
entire defined period. In the case of an
annuity payable from a trust or other
limited fund, the annuity is not consid-
ered payable for the entire defined
period if, considering the applicable
section 7520 interest rate on the
valuation date of the transfer, the
annuity is expected to exhaust the fund
before the last possible annuity pay-
ment is made in full. For this purpose,
it must be assumed that it is possible
for each measuring life to survive until
age 110. For example, for a fixed
annuity payable annually at the end of
each year, if the amount of the annuity
payment (expressed as a percentage of
the initial corpus) is less than or equal
to the applicable section 7520 interest
rate at the date of the transfer, the
corpus is assumed to be sufficient to
make all payments. If the percentage
exceeds the applicable section 7520
interest rate and the annuity is for a
definite term of years, multiply the
annual annuity amount by the Table B
term certain annuity factor, as de-
scribed in §25.7520–1(c)(1), for the
number of years of the defined period.
If the percentage exceeds the applicable
section 7520 interest rate and the
annuity is payable for the life of one or
more individuals, multiply the annual
annuity amount by the Table B annuity
factor for 110 years minus the age of
the youngest individual. If the result
exceeds the limited fund, the annuity
may exhaust the fund, and it will be
necessary to calculate a special section
7520 annuity factor that takes into
account the exhaustion of the trust or
fund. This computation would be modi-
fied, if appropriate, to take into account
annuities with different payment terms.
(ii) Income and similar interests—
(A) Beneficial enjoyment. A standard
section 7520 income factor for an
ordinary income interest is not to be
used to determine the present value of
an income or similar interest in trust
for a term of years or for the life of
one or more individuals unless the
effect of the trust, will, or other
governing instrument is to provide the
income beneficiary with that degree of
beneficial enjoyment of the property
during the term of the income interest
that the principles of the law of trusts
accord to a person who is unqualifiedly
designated as the income beneficiary of
a trust for a similar period of time.
This degree of beneficial enjoyment is
provided only if it was the transferor’s
intent, as manifested by the provisions
of the governing instrument and the
surrounding circumstances, that the
trust provide an income interest for the
income beneficiary during the specified
period of time that is consistent with
the value of the trust corpus and with
its preservation. In determining whether
a trust arrangement evidences that
intention, the treatment required or
permitted with respect to individual
items must be considered in relation to
the entire system provided for in the
administration of the subject trust.
Similarly, in determining the present
value of the right to use tangible
property (whether or not in trust) for
one or more measuring lives or for
some other specified period of time, the
interest rate component prescribed un-
der section 7520 and §1.7520–1 of this
chapter may not be used unless, during
the specified period, the effect of the
trust, will or other governing instru-
ment is to provide the beneficiary with
that degree of use, possession, and
enjoyment of the property during the
term of interest that applicable state
law accords to a person who is un-
qualifiedly designated as a life tenant
or term holder for a similar period of
time.
(B) Diversions of income and
corpus. A standard section 7520 in-
come factor for an ordinary income
interest may not be used to value an
income interest or similar interest in
property for a term of years, or for one
or more measuring lives, if—
(1) The trust, will, or other govern-
ing instrument requires or permits the
beneficiary’s income or other enjoy-
ment to be withheld, diverted, or
accumulated for another person’s bene-
fit without the consent of the income
beneficiary; or
(2) The governing instrument re-
quires or permits trust corpus to be
withdrawn from the trust for another
person’s benefit without the consent of
the income beneficiary during the
income beneficiary’s term of enjoyment
and without accountability to the in-
come beneficiary for such diversion.
(iii) Remainder and reversionary
interests. A standard section 7520
remainder interest factor for an ordi-
nary remainder or reversionary interest
may not be used to determine the
present value of a remainder or rever-
sionary interest (whether in trust or
otherwise) unless, consistent with the
preservation and protection that the law
of trusts would provide for a person
who is unqualifiedly designated as the
remainder beneficiary of a trust for a
similar duration, the effect of the
administrative and dispositive provi-
sions for the interest or interests that
precede the remainder or reversionary
interest is to assure that the property
will be adequately preserved and pro-
tected (e.g., from erosion, invasion,
depletion, or damage) until the re-
mainder or reversionary interest takes
effect in possession and enjoyment.
This degree of preservation and protec-
tion is provided only if it was the
transferor’s intent, as manifested by the
provisions of the arrangement and the
surrounding circumstances, that the
entire disposition provide the remainder
or reversionary beneficiary with an
undiminished interest in the property
transferred at the time of the termina-
tion of the prior interest.
(iv) Pooled income fund interests. In
general, pooled income funds are cre-
ated and administered to achieve a
special rate of return. A beneficial
interest in a pooled income fund is not
ordinarily valued using a standard
section 7520 income or remainder
interest factor. The present value of a
beneficial interest in a pooled income
fund is determined according to rules
and special remainder factors pre-
scribed in §1.642(c)–6 of this chapter
and, when applicable, the rules set
forth under paragraph (b)(3) of this
section if the individual who is the
measuring life is terminally ill at the
time of the transfer.
(v) Examples. The provisions of this
paragraph (b)(2) are illustrated by the
following examples:
Example 1. Unproductive property. The donor
transfers corporation stock to a trust under the
terms of which all of the trust income is payable
to A for life. Considering the applicable federal
rate under section 7520 and the appropriate life
estate factor for a person A’s age, the value of
A’s income interest, if valued under this section,
would be $10,000. After A’s death, the trust is to
terminate and the trust property is to be
distributed to B. The trust specifically authorizes,
but does not require, the trustee to retain the
shares of stock. The corporation has paid no
dividends on this stock during the past 5 years,
and there is no indication that this policy will
change in the near future. Under applicable state
law, the corporation is considered to be a sound
investment that satisfies fiduciary standards. The
facts and circumstances, including applicable
state law, indicate that the income beneficiary
would not have the legal right to compel the
trustee to make the trust corpus productive in
conformity with the requirements for a lifetime
trust income interest under applicable local law.
Therefore, the life income interest in this case is

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considered nonproductive. Consequently, A’s
income interest may not be valued actuarially
under this section.
Example 2. Beneficiary’s right to make trust
productive. The facts are the same as in Example
1, except that the trustee is not specifically
authorized to retain the shares of corporation
stock. Further, the terms of the trust specifically
provide that the life income beneficiary may
require the trustee to make the trust corpus
productive consistent with income yield stand-
ards for trusts under applicable state law. Under
that law, the minimum rate of income that a
productive trust may produce is substantially
below the section 7520 interest rate on the
valuation date. In this case, because A, the
income beneficiary, has the right to compel the
trustee to make the trust productive for purposes
of applicable local law during A’s lifetime, the
income interest is considered an ordinary income
interest for purposes of this paragraph, and the
standard section 7520 life income factor may be
used to determine the value of A’s income
interest. However, in the case of gifts made after
October 8, 1990, if the donor was the life income
beneficiary, the value of the income interest
would be considered to be zero in this situation.
See §25.2702–2.
Example 3. Annuity trust funded with unpro-
ductive property. The donor, who is age 60,
transfers corporation stock worth $1,000,000 to a
trust. The trust will pay a 6 percent ($60,000 per
year) annuity in cash or other property to the
donor for 10 years or until the donor’s prior
death. Upon the termination of the trust, the trust
property is to be distributed to the donor’s child.
The section 7520 rate for the month of the
transfer is 8.2 percent. The corporation has paid
no dividends on the stock during the past 5
years, and there is no indication that this policy
will change in the near future. Under applicable
state law, the corporation is considered to be a
sound investment that satisfies fiduciary stand-
ards. Therefore, the trust’s sole investment in
this corporation is not expected to adversely
affect the interest of either the annuity benefici-
ary or the remainder beneficiary. Considering the
6 percent annuity payout rate and the 8.2 percent
section 7520 interest rate, the trust corpus is
considered sufficient to pay this annuity for the
entire 10-year term of the trust, or even
indefinitely. The trust specifically authorizes, but
does not require, the trustee to retain the shares
of stock. Although it appears that neither
beneficiary would be able to compel the trustee
to make the trust corpus produce investment
income, the annuity interest in this case is
considered to be an ordinary annuity interest, and
a section 7520 annuity factor may be used to
determine the present value of the annuity. In
this case, the section 7520 annuity factor would
represent the right to receive $1.00 per year for a
term of 10 years or the prior death of a person
age 60.
Example 4. Unitrust funded with unproductive
property. The facts are the same as in Example
3, except that the donor has retained a unitrust
interest equal to 7 percent of the value of the
trust property, valued as of the beginning of each
year. Although the trust corpus is nonincome-
producing, the present value of the donor’s
retained unitrust interest may be determined by
using the section 7520 unitrust factor for a term
of years or a prior death.
Example 5. Eroding corpus in an annuity trust.
(i) The donor, who is age 60 and in normal
health, transfers property worth $1,000,000 to a
trust. The trust will pay a 10 percent ($100,000
per year) annuity to a charitable organization for
the life of the donor, payable annually, and the
remainder will be distributed to the donor’s
child. The section 7520 rate for the month of the
transfer is 6.8 percent. First, it is necessary to
determine whether the annuity may exhaust the
corpus before all annuity payments are made.
Because it is assumed that any measuring life
may survive until age 110, any life annuity could
require payments until the measuring life reaches
age 110. Based on a section 7520 interest rate of
6.8 percent, the determination of whether the
annuity may exhaust the corpus before the
annuity payments are made is computed as
follows:
Age to which life annuity may continue 110
less: Age of measuring life at date
of transfer.........................60
N u m b e r o f y e a r s a n n u i t y m a y
continue.........................50
Annual annuity payment........$100,000.00
times: Table B annuity factor for 50
years...........................14.1577
P r e s e n t v a l u e o f t e r m c e r t a i n
annuity..................$1,415,770.00
(ii) Since the present value of an annuity for a
term of 50 years exceeds the corpus, the annuity
may exhaust the trust before all payments are
made. Consequently, the annuity must be valued
as an annuity payable for a term of years or until
the prior death of the annuitant, with the term of
years determined by when the fund will be
exhausted by the annuity payments.
(iii) Using factors based on Table 80CNSMT
at 6.8 percent, it is determined that the fund will
be sufficient to make 17 annual payments, but
not to make the entire 18th payment. Specifi-
cally, the initial corpus will be able to make
payments of $67,287.26 per year for 17 years
plus payments of $32,712.74 per year for 18
years. The annuity is valued by adding the value
of the two separate temporary annuities.
(iv) Based on Table H of Publication 1457 (a
copy of this publication may be purchased from
the Superintendent of Documents, United States
Government Printing Office, Washington, DC
20402), the present value of an annuity of
$67,287.26 per year payable for 17 years or until
the prior death of a person aged 60 is
$579,484.61 ($67,287.26 3 8.6121). The present
value of an annuity of $32,712.74 per year
payable for 18 years or until the prior death of a
person aged 60 is $287,731.45 ($32,712.74 3
8.7957). Thus, the present value of the charitable
annuity interest is $867,216.06 ($579,484.61 +
$287,731.45).
(3) Mortality component. The mor-
tality component prescribed under sec-
tion 7520 may not be used to determine
the present value of an annuity, income
interest, remainder interest, or rever-
sionary interest if an individual who is
a measuring life dies or is terminally ill
at the time the gift is completed. For
purposes of this paragraph (b)(3), an
individual who is known to have an
incurable illness or other deteriorating
physical condition is considered termi-
nally ill if there is at least a 50 percent
probability that the individual will die
within 1 year. However, if the individ-
ual survives for eighteen months or
longer after the date the gift is
completed, that individual shall be
presumed to have not been terminally
ill at the date the gift was completed
unless the contrary is established by
clear and convincing evidence.
(4) Example. The provisions of para-
graph (b)(3) of this section are illus-
trated by the following example:
Example. Terminal illness. The donor transfers
property worth $1,000,000 to a child in exchange
for the child’s promise to pay the donor
$103,000 per year for the donor’s life. The donor
is age 60 but has been diagnosed with an
incurable illness and has at least a 50 percent
probability of dying within 1 year. The section
7520 interest rate for the month of the transfer is
10.6 percent, and the standard annuity factor at
that interest rate for a person age 60 in normal
health is 7.4230. Thus, if the donor were not
terminally ill, the present value of the annuity
would be $764,569 ($103,000 3 7.4230). As-
suming the presumption provided in paragraph
(b)(3) of this section does not apply, because
there is at least a 50 percent probability that the
donor will die within 1 year, the standard section
7520 annuity factor may not be used to
determine the present value of the donor’s
annuity interest. Instead, a special section 7520
annuity factor must be computed that takes into
account the projection of the donor’s actual life
expectancy.
(5) Additional limitations. Section
7520 does not apply to the extent as
may otherwise be provided by the
Commissioner.
(c) * * * The provisions of para-
graph (b) of this section are effective
with respect to gifts made after Decem-
ber 13, 1995.
Michael P. Dolan,
Acting Commissioner of
Internal Revenue.
Approved October 29, 1995.
Leslie Samuels,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 12, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 13, 1995, 60 F.R. 63913)
Section 7701.—Definitions
The Service will not rule on certain issues
raised in connection with the transfer of a life

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insurance policy to an unincorporated organiza-
tion. See Rev. Proc. 96–12, page 30.
Section 7872.—Treatment of Loans
with Below-Market Interest Rates
CPI adjustment for below-market
loans—1996. The amount that section
7872(g) of the Code permits a taxpayer
to lend to a qualified continuing care
facility without incurring imputed inter-
est is published and adjusted for
inflation for years 1987–1996. Rev.
R u l . 9 5 – 1 1 s u p p l e m e n t e d a n d
superseded.
Rev. Rul. 96–5
This revenue ruling publishes the
amount that §7872(g) of the Internal
Revenue Code permits a taxpayer to
lend to a qualifying continuing care
facility without incurring imputed inter-
est. The amount is adjusted for infla-
tion for the years after 1986.
Section 7872 of the Code generally
treats loans bearing a below-market
interest rate as if they bore interest at
the market rate.
Section 7872(g)(1) of the Code
provides that, in general, §7872 does
not apply for any calendar year to any
below-market loan made by a lender to
a qualified continuing care facility
pursuant to a continuing care contract
if the lender (or the lender’s spouse)
attains age 65 before the close of the
year.
Section 7872(g)(2) of the Code
provides that, in the case of loans made
after October 11, 1985, and before
1987, §7872(g)(1) applies only to the
extent that the aggregate outstanding
amount of any loan to which §7872(g)
applies (determined without regard to
§ 7872(g)(2)), when added to the ag-
gregate outstanding amount of all other
previous loans between the lender (or
the lender’s spouse) and any qualified
continuing care facility to which
§ 7872(g)(1) applies, does not exceed
$90,000.
Section 7872(g)(5) of the Code
provides that, for loans made during
any calendar year after 1986 to which
§ 7872(g)(1) applies, the $90,000 limit
specified in §7872(g)(2) is increased
by an inflation adjustment. The infla-
tion adjustment for any calendar year is
the percentage (if any) by which the
Consumer Price Index (CPI) for the
preceding calendar year exceeds the
CPI for calendar year 1985. Section
7872(g)(5) states that the CPI for any
calendar year is the average of the CPI
as of the close of the 12-month period
ending on September 30 of that calen-
dar year.
Rev. Rul. 95–11, 1995–1 C.B. 224,
publishes the amount specified in
§ 7872(g)(2) of the Code, increased by
the inflation adjustment, for the years
1987–95.
Table 1 sets forth the amount spec-
ified in §7872(g)(2) of the Code. The
amount is increased by the inflation
adjustment for the years 1987–96.
TABLE 1
REV. RUL. 96–5
Limit under 7872(g)(2) 3
YearAmount
Before 1987$90,000
1987$92,200
1988$94,800
1989$98,800
1990$103,500
1991$108,600
1992$114,100
1993$117,500
1994$121,100
1995$124,300
1996$127,800
Note: These inflation adjustments
were computed using the All-
Urban, Consumer Price Index
1982-1984 base, published by the
Bureau of Labor Statistics.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 95–11, 1995–1 C.B. 224,
is supplemented and superseded.
DRAFTING INFORMATION
The author of this revenue ruling is
David B. Silber of the Office of
Assistant Chief Counsel (Financial In-
stitutions and Products). For further
information regarding this revenue rul-
ing, contact Mr. Silber on (202)
622-3930 (not a toll-free call).

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Part III. Administrative, Procedural, and Miscellaneous
Empowerment Zone Employment
Credit
Notice 96–1
The Omnibus Budget Reconciliation
Act of 1993, Pub. L. No. 103–66
(OBRA’93) added sections 1391
through 1397D (relating to empower-
ment zones and enterprise commu-
nities) to the Internal Revenue Code.
See sections 13301 through 13303 of
OBRA’93. Section 1397D of the Code
authorizes the Secretary of the Treasury
to prescribe such regulations as may be
necessary or appropriate to carry out
the purposes of sections 1394 through
1397C.
The empowerment zone employment
credit is set forth in section 1396 of the
Code. The amount of the credit is equal
to a specified percentage of qualified
zone wages, which are certain wages
paid or incurred by an employer for
services performed by a qualified zone
employee. Certain questions have
arisen about the definition of a
‘qualified zone employee‘ in section
1396(d). In particular, questions have
been raised about the appropriate
period under section 1396(d)(1)(A) dur-
ing which substantially all of the
services performed by an employee for
his or her employer must be performed
within an empowerment zone in a trade
or business of the employer.
The Internal Revenue Service intends
to issue a notice of proposed rulemak-
ing, pursuant to the authority provided
by sections 1397D and 7805(a), clarify-
ing the relevant period for this purpose.
The proposed regulations will provide
that an employer may elect either of
the following two approaches with
respect to each calendar year. The
employer must use the same approach
with respect to all of its employees in
computing the credit for the year.
Under the first alternative, the rele-
vant period for an employee is each
pay period in which the employee
provides services to the employer. If an
employer has one pay period for
certain employees and a different pay
period for other employees (e.g., a
weekly pay period for hourly wage
employees and a bi-weekly pay period
for salaried employees), the pay period
actually applicable to a particular
employee is the relevant pay period for
that employee under this alternative.
The credit may be claimed with respect
to qualified zone wages (within the
meaning of section 1396(c)) for serv-
ices provided during each pay period in
which substantially all of the services
performed by the employee for the
employer are performed within an
empowerment zone in a trade or
business of the employer.
Under the second alternative, the
relevant period for an employee is the
entire calendar year with respect to
which the credit is being claimed by
that employer (or, for any employee
who is employed by the employer for
less than the entire calendar year, the
portion of that calendar year during
which the employee is employed by the
employer). Under this alternative, an
employee is not a qualified zone
employee within the meaning of sec-
tion 1396(d)(1) unless substantially all
of the services performed by the
employee for the employer during the
calendar year are performed within an
empowerment zone in a trade or
business of the employer. If the
employee is a qualified zone employee,
the credit may be claimed with respect
to qualified zone wages (within the
meaning of section 1396(c)) for all
services performed by the employee for
the employer during the calendar year.
While the Service does not anticipate
imposing specific record-keeping re-
quirements in the regulations, under
either alternative an employer would be
expected to have and maintain records
sufficient to establish, for each
employee with respect to whom the
empowerment zone employment credit
is claimed, where the employee actu-
ally worked during the relevant period.
The nine empowerment zones are lo-
cated in portions of Atlanta, Baltimore,
C h i c a g o , D e t r o i t , N e w Y o r k ,
Philadelphia/Camden, and the Kentucky
Highlands (Clinton, Jackson, and
Wayne Counties, Kentucky), Mid-Delta
(Bolivar, Sunflower, Leflore, Wash-
ington, Humphreys, and Holmes
Counties, Mississippi), and Rio Grande
Valley (Starr, Cameron, Hidalgo, and
Willacy Counties, Texas) regions.
These regulations will be proposed to
be effective December 21, 1994, the
date on which the nine empowerment
zones authorized by OBRA’93 were
designated by the Secretaries of Hous-
ing and Urban Development and
Agriculture.
The Service requests comments re-
garding these alternative approaches, as
well as comments on other issues
relating to the empowerment zone
employment credit with respect to
which guidance may be helpful to
employers. These comments should be
submitted in writing by March 29,
1996, to Internal Revenue Service,
Office of the Associate Chief Counsel
(Employee Benefits and Exempt Orga-
nizations), CC:EBEO:4, Room 5203,
1111 Constitution Avenue, N.W.,
Washington, DC 20224, Attn: Robert
G. Wheeler.
The principal author of this notice is
Robert Wheeler of the Office of the
Associate Chief Counsel (Employee
Benefits and Exempt Organizations).
For further information regarding this
notice contact Mr. Wheeler on (202)
622-6060 (not a toll-free call).
26 CFR 601.201: Rulings and determination
letters.
(Also Part I, §§101, 761, 7701.)
Rev. Proc. 96–12
SECTION 1. BACKGROUND
Rev. Proc. 96–3, 1996–1 I.R.B. 82,
sets forth areas of the Internal Revenue
Code under the jurisdiction of the
Associate Chief Counsel (Domestic) in
which the Internal Revenue Service
will not issue advance rulings or
determination letters.
SECTION 2. PROCEDURE
Rev. Proc. 96–3 is amplified by
adding to section 5 the following:
Sections 101, 761 and 7701.—
Definitions.—Whether, in connection
with the transfer of a life insurance
policy to an unincorporated organiza-
tion, (i) the organization will be treated
as a partnership under §§761 and 7701
of the Internal Revenue Code, or (ii)
the transfer of the life insurance policy
to the organization will be exempt from
the transfer for value rules of §101,
when substantially all of the organiza-
tion’s assets consist or will consist of
life insurance policies on the lives of
the members.

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SECTION 3. EFFECTIVE DATE
This revenue procedure applies to all
ruling requests pending in the National
Office as of January 16, 1996, and
ruling requests received after that
date.
SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
Rev. Proc. 96–3 is amplified.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Brian M. Blum of the Office
of Assistant Chief Counsel (Pass-
throughs and Special Industries). For
further information regarding this reve-
nue ruling, contact Mr. Blum on (202)
622-3050 (not a toll-free call).
26 CFR 601.201: Rulings and determination letters.
Rev. Proc. 96–13
OUTLINE
SECTION 1. PURPOSE OF MUTUAL AGREEMENT PROCESS
SEC. 2. SCOPE
.01 General
Suspension .02 Requests for Assistance
.03 U.S. Competent Authority
.04 General Process
.05 Failure to Request Assistance
SEC. 3. GENERAL CONDITIONS UNDER WHICH THIS PROCEDURE APPLIES
.01 General
.02 Requirements of a Treaty
.03 Applicable Standards in Allocation Cases
.04 Who Can File Requests for Assistance
.05 Closed Cases
.06 Foreign Initiated Competent Authority Request
.07 Requests Relating to Residence Issues
.08 Determinations Regarding Limitation on Benefits
SEC. 4. PROCEDURES FOR REQUESTING COMPETENT AUTHORITY ASSISTANCE
.01 Time for Filing
.02 Place of Filing
.03 Additional Filing
.04 Form of Request
.05 Information Required
.06 APAs
.07 Other Documentation
.08 Updates
.09 Conferences
SEC. 5. SMALL CASE PROCEDURE FOR REQUESTING COMPETENT AUTHORITY ASSISTANCE
.01 General
.02 Small Case Standards
.03 Small Case Filing Procedure
SEC. 6. RELIEF REQUESTED FOR FOREIGN INITIATED ADJUSTMENT WITHOUT COMPETENT AUTHORITY
INVOLVEMENT
SEC. 7. COORDINATION WITH OTHER ADMINISTRATIVE OR JUDICIAL PROCEEDINGS
.01 Suspension of Administrative Action with Respect to U.S. Adjustments

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.02 Coordination with Appeals
.03 Coordination with Litigation
.04 Coordination with the APA Procedure
.05 Effect of Agreements or Judicial Determinations on Competent Authority Proceedings
.06 Accelerated Competent Authority Procedure
SEC. 8. SIMULTANEOUS APPEALS PROCEDURE
.01 General
.02 Time for Requesting the Simultaneous Appeals Procedure
(a) When Filing For Competent Authority Assistance
(b) After Filing For Competent Authority Assistance
.03 Cases Pending in Court
.04 Request for Simultaneous Appeals Procedure
.05 Role of Appeals in the Competent Authority Process
(a) Appeals Process
(b) Assistance to U.S. Competent Authority
.06 Denial or Termination of Simultaneous Appeals Procedure
(a) Taxpayer’s Termination
(b) Service’s Denial or Termination
.07 Returning to Appeals
.08 Appeals Consideration of Non-Competent Authority Issues
SEC. 9. PROTECTIVE MEASURES
.01 General
.02 Filing of Amended Tax Return in the United States
.03 Filing a Protective Claim in the United States
(a) In General
(b) Filing of Protective Claim
(c) Notification Requirement
(d) No Consultation between Competent Authorities until Formal Request is Filed
.04 Effect of an Amended Tax Return
.05 Treaty Provisions Waiving Procedural Barriers
SEC. 10. APPLICATION OF REV. PROC. 65–17
SEC. 11. DETERMINATION OF CREDITABLE FOREIGN TAXES
SEC. 12. ACTION BY U.S. COMPETENT AUTHORITY
.01 Notification of Taxpayer
.02 Denial of Assistance
.03 Extending Period of Limitations for Assessment
.04 No Review of Denial of Request for Assistance
.05 Notification
.06 Closing Agreement
.07 Unilateral Withdrawal or Reduction of U.S. Initiated Adjustments
SEC. 13. REQUESTS FOR RULINGS
.01 General
.02 Foreign Tax Rulings
SEC. 14. FEES
SEC. 15. EFFECT ON OTHER DOCUMENTS
SEC. 16. EFFECTIVE DATE
DRAFTING INFORMATION

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SECTION 1. PURPOSE OF MUTUAL
AGREEMENT PROCESS
This revenue procedure sets forth the
procedures concerning requests by tax-
payers for assistance of the U.S.
competent authority under the provi-
sions of an income, estate or gift tax
treaty to which the United States is a
party. Rev. Proc. 91–23, 1991–1 C.B.
534, and Rev. Proc. 91–26, 1991–1
C.B. 543, are superseded by this
revenue procedure.
SEC. 2. SCOPE
.01 General. The U.S. competent
authority assists taxpayers with respect
to matters covered in the mutual
agreement procedure provisions of tax
treaties in the manner specified in those
provisions. A tax treaty generally per-
mits taxpayers to request competent
authority assistance when they consider
that actions of the United States, the
treaty country, or both, result or will
result in taxation that is contrary to the
provisions of a treaty. For example, tax
treaties generally permit taxpayers to
request assistance in order to relieve
economic double taxation arising from
an allocation under §482 of the
Internal Revenue Code or an equivalent
provision under the laws of a treaty
country. Competent authority assistance
may also be available with respect to
issues specifically dealt with in other
provisions of a treaty. For example,
Article XIII(8) of the U.S.-Canada
income tax treaty permits taxpayers to
request the competent authority to defer
the recognition of profit, gain or
income with respect to property alien-
ated in the course of a corporate
organization, reorganization or similar
transaction. In addition, many tax
treaties contain provisions concerning
fiscal residence or concerning whether
a taxpayer is entitled to the benefits of
a treaty under specific limitation on
benefits provisions. See section 3.07
and 3.08 of this revenue procedure.
Taxpayers are urged to examine the
specific mutual agreement procedure
provisions or other specific provisions
of the treaty under which they seek
relief, in order to determine whether
relief is available in their particular
case. This revenue procedure is not
intended to limit or expand any specific
treaty provisions relating to competent
authority matters.
.02 Requests for Assistance. In gen-
eral, all requests for competent au-
thority assistance must be submitted in
accordance with this revenue proce-
dure. However, where a treaty provides
specific procedures for requests for
competent authority assistance, those
procedures shall apply, and the provi-
sions of this revenue procedure shall
not apply to the extent inconsistent
with such treaty procedures. See also
Rev. Proc. 91–22, 1991–1 C.B. 526,
concerning requests for competent au-
thority assistance with respect to an
Advance Pricing Agreement (‘‘APA’’).
.03 U.S. Competent Authority. The
Assistant Commissioner (International)
acts as the U.S. competent authority in
administering the operating provisions
of tax treaties (including entering into a
competent authority settlement in a
specific case) and in interpreting and
applying these treaties. The Tax Treaty
Division assists the Assistant Commis-
sioner (International) in these matters.
In interpreting or applying tax treaties,
the Assistant Commissioner (Interna-
tional) acts only with the concurrence
of the Associate Chief Counsel (Inter-
national). See Delegation Order No.
114 (Rev. 10).
.04 General Process. If a taxpayer’s
request for competent authority assist-
ance is accepted, the U.S. competent
authority generally will consult with
the appropriate foreign competent au-
thority and attempt to reach a mutual
agreement that is acceptable to all
parties. The U.S. competent authority
also may initiate competent authority
negotiations in any situation deemed
necessary to protect U.S. interests.
Such a situation may arise, for exam-
ple, when a taxpayer fails to request
competent authority assistance after
agreeing to a U.S. or foreign tax
assessment that is contrary to the
provisions of an applicable tax treaty or
for which correlative relief may be
available.
.05 Failure to Request Assistance.
Failure to request competent authority
assistance or to take appropriate steps
to maintain availability of the remedy
may cause a denial of part or all of
any foreign tax credits claimed. See
§ 1.901–2(e)(5)(i) of the Income Tax
Regulations. See also section 11 of this
revenue procedure concerning the de-
termination of creditable foreign taxes.
SEC. 3. GENERAL CONDITIONS
UNDER WHICH THIS PROCEDURE
APPLIES
.01 General. The exclusions, exemp-
tions, deductions, credits, reductions in
rate, and other benefits and safeguards
provided by treaties are subject to
conditions and restrictions that may
vary in different treaties. Taxpayers
should examine carefully the specific
treaty provisions applicable in their
cases to determine the nature and
extent of treaty benefits or safeguards
they are entitled to and the conditions
under which such benefits or safe-
guards are available. In particular,
taxpayers should be aware of statutes
of limitations and other procedural
barriers under U.S. or foreign law that
may preclude or limit the extent of the
assistance under this revenue proce-
dure. See section 9 of this revenue
procedure which prescribes protective
measures to be taken by the taxpayer
and any concerned related person with
respect to U.S. and foreign tax au-
thorities. See also section 12.02 of this
revenue procedure for circumstances in
which competent authority assistance
may be denied.
.02 Requirements of a Treaty. There
is no authority for the U.S. competent
authority to provide relief from U.S.
tax or to provide other assistance due
to taxation arising under the tax laws
of the foreign country or the United
States, unless such authority is granted
by a treaty. See Rev. Proc. 89–8, 1989–
1 C.B. 778, for procedures for request-
ing the assistance of the Internal
Revenue Service (‘‘the Service’’) when
a taxpayer is or may be subject to
inconsistent tax treatment by the Serv-
ice and a U.S. possession tax agency.
.03 Applicable Standards in Alloca-
tion Cases. With respect to requests for
competent authority assistance involv-
ing the allocation of income and
deductions between a U.S. taxpayer
and a related person, the U.S. compe-
tent authority, in seeking to arrive at an
agreement with a treaty country, will
be guided by the arm’s length standard,
as reflected in the regulations under
§ 482 of the Code. When negotiating
mutual agreements on the allocation of
income and deductions, the U.S. com-
petent authority will take into account
all of the facts and circumstances of
the particular case and the purpose of
the treaty to avoid double taxation.
.04 Who Can File Requests for
Assistance. Unless otherwise permitted
under an applicable tax treaty, the U.S.
competent authority will only consider
requests for assistance from U.S. per-
sons, as defined in §7701(a)(30) of the
Code. For purposes of this revenue
procedure, a U.S. person is referred to

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as ‘‘the taxpayer.’’ Thus, non-U.S.
persons generally must present their
initial request for assistance to the
relevant foreign competent authority.
.05 Closed Cases. A case previously
closed after examination shall not be
reopened in order to make an adjust-
ment unfavorable to the taxpayer unless
the exceptional circumstances described
in Rev. Proc. 94–68, 1994–2 C.B. 803,
are present. The U.S. competent au-
thority may, but is not required to,
accept a taxpayer’s request for compe-
tent authority consideration that will
require the reopening of a case closed
after examination.
.06 Foreign Initiated Competent Au-
thority Request. When a foreign com-
petent authority refers a request from a
foreign taxpayer to the U.S. competent
authority for consultation under the
mutual agreement procedure, the U.S.
competent authority generally will re-
quire the U.S. related taxpayer (in the
case of an allocation of income or
deductions between related persons) or
may require the foreign taxpayer (in
other cases) to file a request for
competent authority assistance under
this revenue procedure.
.07 Requests Relating to Residence
Issues. U.S. competent authority assist-
ance may be available to taxpayers
seeking to establish their residency
status in the United States. Examples
include cases in which taxpayers be-
lieve that they are erroneously treated
as non-U.S. residents by treaty coun-
tries or cases where taxpayers are
treated as dual residents despite the
objective tie-breaker provisions con-
tained in the applicable treaties. Gener-
ally, competent authority assistance is
limited to situations where resolution of
a residency issue is necessary in order
to avoid double taxation or to deter-
mine the applicability of a benefit
under the treaty. Further, a request for
assistance regarding a residency issue
will be accepted only if it is established
that the issue requires consultation with
the foreign competent authority in
order to ensure consistent treatment by
the United States and the applicable
treaty country. The U.S. competent
authority does not issue unilateral
determinations with respect to whether
an individual is a resident of the United
States or of a treaty country.
.08 Determinations Regarding Lim-
itation on Benefits. Many treaties con-
tain a limitation on benefits article that
enumerates prescribed requirements
that must be met to qualify as a
resident eligible for benefits under the
treaty. The U.S. competent authority
will not issue determinations regarding
a taxpayer’s status under one of the
prescribed requirements in a limitation
on benefits provision. However, certain
treaties provide that the competent
authority may, as a matter of discre-
tion, determine the availability of treaty
benefits where the prescribed require-
ments are not met. See, e.g., Article
26(7) of the U.S.-Netherlands income
tax treaty. Requests for assistance in
such cases should comply with this
revenue procedure and any other spe-
cific procedures that may be issued
from time to time.
SEC. 4. PROCEDURES FOR
REQUESTING COMPETENT
AUTHORITY ASSISTANCE
.01 Time for Filing. A request for
competent authority assistance gener-
ally may be filed at any time after an
action occurs which would give rise to
a claim for competent authority assist-
ance. In a case involving a U.S.
initiated adjustment of tax or income
resulting from a tax examination, a
request for competent authority assist-
ance may be submitted as soon as
practicable after the amount of the
proposed adjustment is communicated
in writing to the taxpayer. Where a
U.S. initiated adjustment has not yet
been communicated in writing (e.g., a
notice of proposed adjustment) to the
taxpayer, the U.S. competent authority
generally will deny the request as
premature. In the case of a foreign
examination, a request may be submit-
ted as soon as the taxpayer believes
such filing is warranted based on the
actions of the country proposing the
adjustment. In a case involving the re-
allocation of income or deductions
between related entities, the request
should not be filed until such time that
the taxpayer can establish that there is
the probability of double taxation. In
cases not involving an examination, a
request can be made when the taxpayer
believes that an action or potential
action warrants the assistance of the
U.S. competent authority. Examples of
such action include a ruling or pro-
mulgation by a foreign tax authority
concerning a taxation matter, or the
withholding of tax by a withholding
agent. Except where otherwise provided
in an applicable treaty, taxpayers have
discretion over the time for filing a
request; however, delays in filing may
preclude effective relief. See section 9
of this revenue procedure concerning
protective measures for taxpayers that
need or wish to delay the filing of a
request for assistance. See also section
7.06 of this revenue procedure for rules
relating to accelerated issue resolution
and competent authority assistance.
.02 Place of Filing. The taxpayer
must send all written requests for, or
any inquiries regarding, competent au-
thority assistance to the Assistant Com-
missioner (International), Attn: Tax
Treaty Division, Internal Revenue
Service, P.O. Box 23598, Washington
D.C. 20026–3598.
.03 Additional Filing. In the case of
U.S. initiated adjustments, the taxpayer
also must file a copy of the request
with the office of the Service where the
taxpayer’s case is pending. If the
request is filed after the matter has
been designated for litigation or while
a suit contesting the relevant tax
liability of the taxpayer is pending in a
U.S. court, a copy of the request also
must be filed with the Chief Counsel,
Attention: Associate Chief Counsel (In-
ternational), Internal Revenue Service,
Washington, D.C. 20224, with a sepa-
rate statement attached identifying the
court where the suit is pending and the
docket number of the action.
.04 Form of Request. A request for
competent authority assistance must be
in the form of a letter addressed to the
Assistant Commissioner (International).
It must be dated and signed by a
person having the authority to sign the
taxpayer’s federal tax returns. The
request must contain a statement that
competent authority assistance is being
requested and must include the infor-
mation described in section 4.05 of this
revenue procedure. See section 5 of this
revenue procedure for requests involv-
ing small cases.
.05 Information Required. The fol-
lowing information shall be included in
the request for competent authority
assistance:
(a) a reference to the specific treaty
and the provisions therein pursuant to
which the request is made;
(b) the names, addresses, U.S. tax-
payer identification number and foreign
taxpayer identification number (if any)
of the taxpayer and, if applicable, all
related persons involved in the matter;
(c) if applicable, a description of the
control and business relationships be-
tween the taxpayer and any relevant

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related person for the years in issue,
including any changes in such relation-
ship to the date of filing the request;
(d) a brief description of the issues
for which competent authority assist-
ance is requested, including a brief
description of the relevant transactions,
activities or other circumstances in-
volved in the issues raised and the
basis for the adjustment, if any;
(e) the years and amounts involved
with respect to the issues in both U.S.
dollars and foreign currency;
(f) if applicable, the district office
which has made or is proposing to
make the adjustment;
(g) an explanation of the nature of
the relief sought or the action requested
in the United States or in the treaty
country with respect to the issues
raised, including a statement as to
whether the taxpayer wishes to avail
itself of the relief provided under Rev.
Proc. 65–17, 1965–1 C.B. 833, as
amplified, amended, clarified and mod-
ified by Rev. Proc. 65–31, 1965–2 C.B.
1024, Rev. Proc. 65–17 Amendment I,
1966–2 C.B. 1211, Rev. Proc. 65–17
Amendment II, 1974–1 C.B. 411, Rev.
Proc. 70–23, 1970–2 C.B. 505, Rev.
Proc. 71–35, 1971–2 C.B. 573, Rev.
Proc. 72–48, 1972–2 C.B. 829, Rev.
Proc. 72–53, 1972–2 C.B. 833, and
Rev. Proc. 91–24, 1991–1 C.B. 542,
(hereinafter referred to as ‘‘Rev. Proc.
65–17’’), as indicated in section 10 of
this revenue procedure;
(h) a statement whether the period of
limitations for the years for which
relief is sought has expired in the
United States or in the treaty country;
(i) a statement whether the request
for competent authority assistance in-
volves issues that are currently, or were
previously, considered as part of an
APA proceeding in the United States or
in a similar proceeding in the foreign
country;
(j) if applicable, powers of attorney
with respect to the taxpayer;
(k) a statement whether the taxpayer
is requesting the Simultaneous Appeals
procedure as provided in section 8 of
this revenue procedure;
(l) an amended return, if required
under section 9.02 of this revenue
procedure;
(m) on a separate document, a
statement that the taxpayer consents to
the disclosure to the competent au-
thority of the treaty country (with the
name of the treaty country specifically
stated) and the competent authority’s
staff of any or all of the items of
information set forth or enclosed in the
request for U.S. competent authority
assistance within the limits contained in
the tax treaty under which the taxpayer
is seeking relief. This statement must
be dated and signed by a person having
authority to sign the taxpayer’s federal
tax returns and is required to facilitate
the administrative handling of the
request by the U.S. competent authority
for purposes of the record-keeping
requirements of §6103(p) of the Code.
Failure to provide such a statement will
not prevent the U.S. competent au-
thority from disclosing information un-
der the terms of a treaty. See
§ 6103(k)(4) of the Code; and
(n) a penalties of perjury statement
in the following form: ‘‘Under penal-
ties of perjury, I declare that I have
examined this request, including ac-
companying documents, and, to the
best of my knowledge and belief, the
facts presented in support of the
request for competent authority assist-
ance are true, correct and complete.’’
The declaration must be signed by the
person or persons on whose behalf the
request is being made and not by the
taxpayer’s representative. The person
signing for a corporate taxpayer must
be an authorized officer of the taxpayer
who has personal knowledge of the
facts. The person signing for a trust, an
estate or a partnership must be respec-
tively, a trustee, an executor or a
partner who has personal knowledge of
the facts.
.06 APAs. Requests for competent
authority assistance that involve an
APA request must include the informa-
tion required under Rev. Proc. 91–22,
1991–1 C.B. 526, as well as the
applicable information under section
4.05 of this revenue procedure.
.07 Other Documentation. In addi-
tion, the taxpayer shall, on request,
submit any other information or docu-
mentation deemed necessary by the
U.S. or foreign competent authority for
purposes of reaching an agreement.
This includes English translations of
any documentation required in connec-
tion with the competent authority
request.
.08 Updates. The taxpayer must keep
the U.S. competent authority informed
of all material changes in the informa-
tion or documentation previously sub-
mitted as part of, or in connection with,
the request for competent authority
assistance. The taxpayer also must
provide any updated information or
new documentation that becomes
known or is created after the request is
filed and which is relevant to the
r e s o l u t i o n o f t h e i s s u e s u n d e r
consideration.
.09 Conferences. The taxpayer may,
at any time, request a pre-filing con-
ference with the U.S. competent au-
thority to discuss the mutual agreement
process with respect to matters covered
under a treaty, including discussion of
the proper time for filing, the practical
aspects of obtaining relief and actions
necessary to facilitate the proceedings.
Similarly, after a matter is resolved by
the competent authorities, a taxpayer
may also request a conference with the
U.S. competent authority to discuss the
resolution.
SEC. 5. SMALL CASE
PROCEDURE FOR REQUESTING
COMPETENT AUTHORITY
ASSISTANCE
.01 General. To facilitate requests for
assistance involving small cases, this
section provides a special procedure
simplifying the form of a request for
assistance and, in particular, the
amount of information that initially
must be submitted. All other require-
ments of this revenue procedure con-
tinue to apply to requests for assistance
made pursuant to this section.
.02 Small Case Standards. Eligible
taxpayers may file an abbreviated
request for competent authority assist-
ance in accordance with this section if
the total proposed adjustment involved
in the matter is not greater than the
following:
Taxpayer
Proposed
Adjustment
Individual$100,000
Corporation$200,000
Other$200,000
.03 Small Case Filing Procedure.
The abbreviated request for competent
authority assistance under the small
case procedure must be dated and
signed by a person having the authority
to sign the taxpayer’s federal tax
returns. Although other information and
documentation may be requested at a
later date, the initial request for assist-
ance should include the following
information and materials:

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(a) a statement indicating that this is
a matter subject to the small case
procedure;
(b) the name, address, U.S. taxpayer
identification number and foreign tax-
payer identification number (if any) of
the taxpayer and if applicable, all
related persons involved;
(c) a description of the issue and the
nature of the relief sought;
(d) the taxable years and amounts
involved with respect to the issues in
both U.S. and foreign currency;
(e) the name of the treaty country;
(f) an amended return, if required
under section 9.02 of this revenue
procedure; and
(g) the statements described in sec-
tion 4.05(m) and (n) of this revenue
procedure.
SEC. 6. RELIEF REQUESTED FOR
FOREIGN INITIATED
ADJUSTMENT WITHOUT
COMPETENT AUTHORITY
INVOLVEMENT
Taxpayers seeking correlative relief
with respect to a foreign initiated
adjustment involving a treaty matter
should present their request to the U.S.
competent authority. However, when
the adjustment involves years under the
jurisdiction of the District Director or
Appeals, taxpayers sometimes try to
obtain relief from these offices. This
may occur, for example, if the adjust-
ment involves a re-allocation of income
or deductions involving a related per-
son in a country with which the United
States has an income tax treaty. In
these cases, taxpayers will be advised
to contact the U.S. competent authority
office. In appropriate cases, the U.S.
competent authority will advise the
District or Appeals office on appropri-
ate action. The U.S. competent au-
thority may request the taxpayer to
provide the information described un-
der sections 4.05 and 4.07 of this
revenue procedure. Failure to request
competent authority assistance may
result in denial of correlative relief
with respect to the issue, including
applicable foreign tax credits.
SEC. 7. COORDINATION WITH
OTHER ADMINISTRATIVE OR
JUDICIAL PROCEEDINGS
.01 Suspension of Administrative Ac-
tion with Respect to U.S. Adjustments.
When a request for competent authority
assistance is accepted with respect to a
U.S. initiated adjustment, the Service
will postpone further administrative
action with respect to the issues under
competent authority consideration, ex-
cept (a) in situations in which the
Service may be requested otherwise by
the U.S. competent authority, or (b) in
situations involving cases pending in
court and in other instances in which
action must be taken to avoid prejudic-
ing the U.S. Government’s interest. The
normal administrative procedures con-
tinue to apply, however, to all other
issues not under U.S. competent au-
thority consideration. For example, if
there are other issues raised during the
examination and the taxpayer is not in
agreement with these issues, the usual
procedures for completing the examina-
tion with respect to these issues apply.
If the taxpayer is issued a thirty day
letter with respect to these issues and
prepares a protest of the unagreed
issues, the taxpayer need not include
any unagreed issue under consideration
by the competent authority. Following
the receipt of a taxpayer’s protest,
normal Appeals procedures shall be
initiated with respect to those issues
not subject to competent authority
consideration.
.02 Coordination with Appeals. Tax-
payers that disagree with a proposed
U.S. adjustment may either pursue their
right of administrative review with
Appeals before requesting competent
authority assistance or may request
competent authority assistance imme-
diately. See, however, section 8 of this
revenue procedure for Simultaneous
Appeals procedures. Appeals’ consid-
eration of potential competent authority
matters will be made without regard to
other issues or considerations that do
not involve potential competent au-
thority matters.
.03 Coordination with Litigation.
The U.S. competent authority will not,
without the consent of the Chief
Counsel, accept (or continue to con-
sider) a taxpayer’s request for assist-
ance if the request involves a taxable
period pending in a U.S. court or
involves a matter pending in a U.S.
court or designated for litigation for
any taxable period. If the case is
pending in the United States Tax Court,
the taxpayer may, in appropriate cases,
be asked to join the Service in a
motion to sever issues or delay trial
pending completion of the competent
authority proceedings. If the case is
pending in any other court, the Chief
Counsel will consult with the Depart-
ment of Justice about appropriate ac-
tion, and the taxpayer may, in appropri-
ate cases, be asked to join the U.S.
Government in a motion to sever issues
or delay trial pending completion of the
competent authority proceedings. Final
decision on severing issues or delaying
trial rests with the court. The filing of
a competent authority request does not,
however, relieve the taxpayer from
taking any action that may be neces-
sary or required with respect to litiga-
tion.
.04 Coordination with the APA Pro-
cedure. Rev. Proc. 91–22, 1991–1 C.B.
526, informs taxpayers how to request
an APA from the office of the Associ-
ate Chief Counsel (International). If an
APA request involves a treaty country,
taxpayers are encouraged to seek a
competent authority agreement with
respect to the matters that are the
subject of the APA. The purpose of a
competent authority agreement in this
case is to avoid double taxation that
otherwise may occur. Further, where
the taxpayer requests that, as part of
the APA process, consideration be
given to resolving an issue raised by
the Service for earlier taxable periods,
the taxpayer is encouraged to seek
competent authority consideration of
the issue for these periods.
.05 Effect of Agreements or Judicial
Determinations on Competent Authority
Proceedings. If a taxpayer either ex-
ecutes a closing agreement with the
District (whether or not contingent
upon competent authority relief) with
respect to a potential competent au-
thority issue or reaches a settlement on
the issue with Appeals or Counsel
pursuant to a closing agreement or
other written agreement, the U.S. com-
petent authority will endeavor only to
obtain a correlative adjustment from
the treaty country and will not under-
take any actions that would otherwise
change such agreements. However, the
U.S. competent authority will, in appro-
priate cases, consider actions necessary
for the purpose of providing relief
pursuant to Rev. Proc. 65–17. Once a
taxpayer’s tax liability for the taxable
periods in issue has been determined
by a U.S. court (including settlement of
the proceedings before or during trial),
the U.S. competent authority similarly
will endeavor only to obtain correlative
relief from the treaty country and will
not undertake any action that would
otherwise reduce the taxpayer’s federal

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tax liability for the taxable periods in
issue as determined by a U.S. court.
Taxpayers therefore should be aware
that in these situations, as well as in
situations where a treaty country takes
a similar position with respect to issues
resolved under its domestic laws, relief
from double taxation may be jeopard-
ized.
.06 Accelerated Competent Authority
Procedure. A taxpayer requesting com-
petent authority assistance with respect
to an issue raised by the Service also
may request that the competent au-
thorities attempt to resolve the issue for
subsequent taxable periods ending prior
to the date of the request for assistance
if the same issue continues in those
periods. See also Rev. Proc. 94–67,
1994–2 C.B. 800, concerning the Ac-
celerated Issue Resolution (‘‘AIR’’)
process. The U.S. competent authority
will consider the request and will
contact the appropriate District to con-
sult on whether the issue should be
resolved for subsequent taxable peri-
ods. If the District consents to this
procedure, the U.S. competent authority
will present to the foreign competent
authority the request to consider such
taxable periods. For purposes of resolv-
ing the issue, the taxpayer must furnish
all relevant information and statements
that may be requested by the U.S.
competent authority pursuant to this
revenue procedure. In addition, if the
case involves a Coordinated Examina-
tion Program (‘‘CEP’’) taxpayer, the
taxpayer must furnish all relevant infor-
mation and statements requested by the
District Director, as described in Rev.
Proc. 94–67, 1994–2 C.B. 800. If the
case involves a non-CEP taxpayer, the
taxpayer must furnish all relevant infor-
mation and statements that may be
requested by the District Director. A
request for the accelerated competent
authority procedure may be made at the
time of filing a request for competent
authority assistance or at any time
thereafter, but generally before conclu-
sion of the mutual agreement in the
case; however, taxpayers are en-
couraged to request the procedure as
early as practicable. The application of
the accelerated procedure may require
the prior consent of the Chief Counsel.
See section 7.03 of this revenue proce-
dure. A request for the accelerated
competent authority procedure must
contain a statement that the taxpayer
agrees that: (1) the inspection of books
of account or records under the acceler-
ated competent authority procedure will
not preclude or impede (under §
7605(b) or any administrative provision
adopted by the Service) a later ex-
amination of a return or inspection of
books of account or records for any
taxable period covered in the acceler-
ated competent authority assistance
request and (2) the Service need not
comply with any applicable procedural
restrictions (for example, providing
notice under §7605(b)) before begin-
ning such examination or inspection.
For competent authority assistance with
respect to prospective periods, see Rev.
Proc. 91–22, 1991–1 C.B. 526. The
accelerated competent authority proce-
dure is not subject to the AIR process
limitations.
SEC. 8. SIMULTANEOUS APPEALS
PROCEDURE
.01 General. A taxpayer filing a
request for competent authority assist-
ance under this revenue procedure may,
at the same time or at a later date,
request Appeals’ consideration of the
competent authority issue under the
procedures and conditions provided in
this section. The U.S. competent au-
thority also may request Appeals’
involvement if it is determined that
such involvement would facilitate the
negotiation of a mutual agreement in
the case or otherwise would serve the
interest of the Service. The taxpayer
may, at any time, request a pre-filing
conference with the offices of the
National Director of Appeals and the
U.S. competent authority to discuss the
Simultaneous Appeals procedure.
.02 Time for Requesting the Simul-
taneous Appeals Procedure.
(a) When Filing For Competent
Authority Assistance.
The Simultaneous Appeals procedure
may be invoked at any of the following
times:
(1) When the taxpayer applies for
competent authority assistance with
respect to an issue for which the
District has proposed an adjustment
and before the protest is filed;
(2) When the taxpayer files a protest
with Appeals and decides to sever the
competent authority issue and seek
competent authority assistance while
other issues are referred to Appeals;
and
(3) When the case is in Appeals and
the taxpayer later decides to request
competent authority assistance with
respect to the competent authority
issue. The taxpayer may sever the
competent authority issue for referral to
the U.S. competent authority and in-
voke the Simultaneous Appeals proce-
dure at any time when the case is in
Appeals but before settlement of the
issue. Taxpayers, however, are en-
couraged to invoke the Simultaneous
Appeals procedure as soon as possible,
preferably as soon as practicable after
the first Appeals conference.
(b) After Filing For Competent Au-
thority Assistance. The taxpayer may
request the Simultaneous Appeals pro-
cedure at any time after requesting
competent authority assistance. How-
ever, a taxpayer’s request for the
Simultaneous Appeals procedure gener-
ally will be denied if made after the
date the U.S. position paper is commu-
nicated to the foreign competent au-
thority, unless the U.S. competent
authority determines that the procedure
would facilitate an early resolution of
the competent authority issue or other-
wise is in the best interest of the
Service.
.03 Cases Pending in Court. If the
matter is pending before a U.S. court
or has been designated for litigation
and jurisdiction has been released to
the U.S. competent authority, a request
for the Simultaneous Appeals proce-
dure may be granted only with the
consent of the Chief Counsel.
.04 Request for Simultaneous Ap-
peals Procedure. The taxpayer’s re-
quest for the Simultaneous Appeals
procedure should be addressed to the
U.S. competent authority either as part
of the initial competent authority assist-
ance request or, if made later, as a
separate letter to the U.S. competent
authority. The request should state
whether the issue was previously pro-
tested to Appeals for the periods in
competent authority or for prior periods
(in which case a copy of the relevant
portions of the protest and an explana-
tion of the outcome, if any, should be
provided). The U.S. competent au-
thority will send a copy of the request
to the National Director of Appeals,
who, in turn, will forward a copy to the
appropriate Regional Director of Ap-
peals. When the U.S. competent au-
thority invokes the Simultaneous Ap-
peals procedure, the taxpayer will be
notified. The U.S. competent authority
has jurisdiction of the issue when the
Simultaneous Appeals procedure is
invoked.
.05 Role of Appeals in the Competent
Authority Process.

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(a) Appeals Process. The Appeals
representative assigned to the case will
consult with the taxpayer and the U.S.
competent authority for the purpose of
reaching a resolution of the unagreed
issue under competent authority juris-
diction before the issue is presented to
the foreign competent authority. For
this purpose, established Appeals pro-
cedures apply. The Appeals representa-
tive will consult with the U.S. compe-
tent authority during this process to
ensure appropriate coordination of the
Appeals process with the competent
authority procedure, so that the terms
of a tentative resolution and the princi-
ples and facts upon which it is based
are compatible with the position that
the U.S. competent authority intends to
present to the foreign competent au-
thority with respect to the issue. Any
resolution reached with the Service
under this procedure is subject to the
competent authority process and, there-
fore, is tentative and not binding on the
Service or the taxpayer. The Service
will not request the taxpayer to con-
clude the Appeals process with a
written agreement. The conclusions of
the tentative resolution, however, gen-
erally will be reflected in the U.S.
position paper used for negotiating a
mutual agreement with the foreign
competent authority. The procedures
under this section do not give taxpayers
the right to receive a fresh considera-
tion of the issue by Appeals where the
taxpayer applied for competent au-
thority assistance after having received
substantial Appeals consideration.
Rather, the Service shall rely upon such
previous consideration by Appeals
when considering the case under the
Simultaneous Appeals procedure.
(b) Assistance to U.S. Competent
Authority. The U.S. competent au-
thority is responsible for developing a
U.S. position paper with respect to the
issue and for conducting the mutual
agreement procedure. Generally, re-
questing Appeals’ consideration of an
issue under competent authority juris-
diction will not affect the manner in
which taxpayers normally are involved
in the competent authority process.
.06 Denial or Termination of Simul-
taneous Appeals Procedure. (a) Tax-
payer’s Termination. The taxpayer
may, at any time, withdraw its request
for the Simultaneous Appeals proce-
dure.
(b) Service’s Denial or Termination.
The U.S. competent authority, the
National Director of Appeals, or the
appropriate Regional Director of Ap-
peals may decide to deny or terminate
the Simultaneous Appeals procedure if
the procedure is determined to be
prejudicial to the mutual agreement
procedure or to the administrative
appeals process. For example, a tax-
payer that received Appeals considera-
tion before requesting competent au-
thority assistance, but was unable to
reach a settlement in Appeals, may be
denied the Simultaneous Appeals pro-
cedure. A taxpayer may request a
conference with the offices of the U.S.
competent authority and the National
Director of Appeals to discuss the
denial or termination of the procedure.
.07 Returning to Appeals. If the
competent authorities fail to agree or if
the taxpayer does not accept the mutual
agreement reached by the competent
authorities, the taxpayer will be permit-
ted to refer the issue to Appeals for
further consideration.
.08 Appeals Consideration of Non-
Competent Authority Issues. The Simul-
taneous Appeals procedure does not
affect the taxpayer’s rights to Appeals’
consideration of other unresolved is-
sues. The taxpayer may pursue settle-
ment discussions with respect to the
other issues without waiting for resolu-
tion of the issues under competent
authority jurisdiction.
SEC. 9. PROTECTIVE MEASURES
.01 General. In any matter subject to
this revenue procedure, the taxpayer
must take (or, if necessary, advise a
related person to take) such protective
measures as may be necessary with the
U.S. and foreign tax authorities so that
the implementation of any agreement
reached by the competent authorities is
not barred by administrative, legal or
procedural barriers. Such barriers may
arise either before or after a competent
authority request is filed. Protective
measures include, but are not limited
to: (a) filing amended returns or
protective claims for refund or credit;
(b) staying the expiration of any period
of limitations on the making of a
refund or other tax adjustment; (c)
avoiding the lapse or termination of the
taxpayer’s right to appeal any tax
determination; (d) complying with all
applicable procedures for invoking
competent authority consideration, in-
cluding applicable treaty provisions
dealing with time limits within which
to invoke such remedy; and (e) contest-
ing an adjustment or seeking an appro-
priate correlative adjustment with re-
spect to the U.S. or treaty country tax.
A taxpayer should take protective
measures in a timely manner, that is, in
a manner that allows sufficient time for
appropriate procedures to be completed
and effective before barriers arise.
Generally, a taxpayer should consider,
at the time an adjustment is first
proposed, which protective measures
may be necessary and when such
measures should be taken. However,
earlier consideration of appropriate ac-
tions may be desirable, for example, in
the case of a recurring adjustment or
where the taxpayer otherwise is on
notice that an adjustment is likely to be
proposed. See section 9.05 of this
revenue procedure regarding treaty
provisions waiving procedural and
other barriers. Taxpayers may consult
with the U.S. competent authority to
determine the need for and timing of
protective measures in their particular
case.
.02 Filing of Amended Tax Return in
the United States. At the time the
request for competent authority assist-
ance is filed, the taxpayer also must
file, in cases involving an adjustment
proposed by a treaty country, an
amended federal tax return (for exam-
ple, a Form 1120X, Amended U.S.
Corporation Income Tax Return, if a
Form 1120 was originally filed) in the
manner provided in the regulations
under § 6402 of the Code. The
amended tax return shall be limited to
a claim for credit or refund of the taxes
attributable to the matters under com-
petent authority consideration. The
amended tax return shall be filed by
attaching it to the request for compe-
tent authority assistance. An amended
return filed in accordance with this
section should not be filed with any
other office of the Service, notwith-
standing any instructions concerning
the place for filing on such forms or in
such regulations. Final disposition of
the amended return will be deferred by
the Service until the U.S. competent
authority disposes of the issues under
consideration.
.03 Filing a Protective Claim in the
United States.
(a) In General. There may be situa-
tions where a taxpayer is unable to file
a formal competent authority assistance
request before the statute of limitations
expires with respect to the affected
U.S. return. In this situation, before the
statute of limitations expires, the tax-

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payer should file a protective claim for
refund or credit of the taxes attributable
to the potential competent authority
issue to ensure that assistance will not
be barred. Situations for which a
protective filing may be appropriate
include: (i) the treaty country is consid-
ering but has not yet proposed an
adjustment; (ii) the treaty country has
proposed an adjustment but the related
taxpayer in the treaty country decides
to pursue administrative or judicial
remedies in the foreign country; or (iii)
the terms of the applicable treaty
require notification to be made to the
competent authority within a certain
time period. In considering whether to
accept a taxpayer’s request for compe-
tent authority assistance, the U.S. com-
petent authority will consider whether
the taxpayer has filed a protective
c l a i m i n a c c o r d a n c e w i t h t h i s
subsection.
(b) Filing of Protective Claim. A
protective claim is made by filing an
appropriate amended federal tax return,
as provided in section 9.02 of this
revenue procedure. The amended tax
return is filed with the U.S. competent
authority at the address indicated in
section 4.02 of this revenue procedure
and before the expiration of any
applicable time limitations. The
amended return shall indicate that the
taxpayer is filing a protective claim and
shall set forth, to the extent available,
the information required under section
4.05 (a) through (j) or under section
5.03 (a) through (e) of this revenue
procedure. An amended tax return filed
in this manner will be considered a
properly filed amended tax return,
notwithstanding any other instruction
on the form or in regulations concern-
ing the place for filing.
(c) Notification Requirement. After
filing a protective claim, the taxpayer
periodically must notify the U.S. com-
petent authority whether the taxpayer
still is considering filing for competent
authority assistance. The notification
must be filed every six months until
the formal request for competent au-
thority assistance is filed. The U.S.
competent authority may deny compe-
tent authority assistance if the taxpayer
fails to file this semi-annual notifica-
tion.
(d) No Consultation between Compe-
tent Authorities until Formal Request is
Filed. The U.S. competent authority
generally will not undertake any con-
sultation with the treaty country’s
competent authority with respect to a
protective claim. The U.S. competent
authority shall place the protective
claim in suspense until either a formal
request for competent authority assist-
ance is filed or the taxpayer notifies the
U.S. competent authority that compe-
tent authority consideration is no longer
needed.
.04 Effect of an Amended Tax
Return. An amended tax return filed
under either sections 9.02 and 9.03 of
this revenue procedure only allows a
credit or a refund to the extent agreed
to by the U.S. and foreign competent
authorities or to the extent unilaterally
allowed by the U.S. competent au-
thority. This revenue procedure does
not grant a taxpayer the right to invoke
§ 482 of the Code in its favor or
compel the Service to allocate income
or deductions or grant a tax credit or
refund.
.05 Treaty Provisions Waiving Pro-
cedural Barriers. In those cases where
the mutual agreement procedure provi-
sion of a tax treaty waives or removes
procedural barriers to the credit or
refund of tax, taxpayers may be al-
lowed a credit or refund of U.S. or
foreign tax even though the otherwise
applicable period of limitations has
expired, prior closing agreements have
been entered into, or other actions have
been taken or omitted that ordinarily
would foreclose relief in the form of a
credit or refund of tax. However,
because of differences in interpreting
these waiver provisions or other diffi-
culties that may arise in their applica-
tion, taxpayers nonetheless should take
appropriate protective measures as de-
scribed under this revenue procedure or
under applicable foreign procedures. In
considering whether to accept a tax-
payer’s request for competent authority
assistance, the U.S. competent authority
will consider whether the taxpayer took
protective measures in accordance with
this section.
SEC. 10. APPLICATION OF REV.
PROC. 65–17
Rev. Proc. 65–17 generally provides
for the tax-free repatriation of certain
amounts following an allocation of
income between related U.S. and for-
eign corporations under § 482 of the
Code. If a taxpayer intends to request
competent authority assistance to re-
solve the underlying double taxation
matter with the treaty country, the
taxpayer should file for Rev. Proc. 65–
17 relief in conjunction with its request
for competent authority assistance. See
Rev. Proc. 96–14, page 00, this Bul-
letin, which also sets forth the proce-
dures for securing relief under Rev.
Proc. 65–17 when a taxpayer does not
intend to request competent authority
assistance.
SEC. 11. DETERMINATION OF
CREDITABLE FOREIGN TAXES
For purposes of determining the
amount of foreign tax creditable under
§§901 and 902 of the Code, any
amounts paid to foreign tax authorities
that would not have been due if the
treaty country had made a correlative
adjustment may not constitute a credi-
table foreign tax. See §1.901–2(e)(5)(i)
of the regulations and Rev. Rul. 92–75,
1992–2 C.B. 197. Acts or omissions by
the taxpayer that preclude effective
competent authority assistance, includ-
ing failure to take protective measures
as described in section 9 of this
revenue procedure or failure to seek
competent authority assistance, may
constitute failure to exhaust all effec-
tive and practical remedies for purposes
of §1.901–2(e)(5)(i). Further, the fact
that the taxpayer has sought competent
authority assistance but obtained no
relief, either because the competent
authorities failed to reach an agreement
or because the taxpayer rejected an
agreement reached by the competent
authorities, generally will not, in and
of itself, demonstrate for purposes of
§ 1.901–2(e)(5)(i) that the taxpayer has
exhausted all effective and practical
remedies to reduce the taxpayer’s lia-
bility for foreign tax (including liability
pursuant to a foreign tax audit adjust-
ment). Any determination within the
Service of whether a taxpayer has
exhausted the competent authority rem-
edy must be made in consultation with
the U.S. competent authority.
SEC. 12. ACTION BY U.S.
COMPETENT AUTHORITY
.01 Notification of Taxpayer. Upon
receiving a request for assistance pur-
suant to this revenue procedure, the
U.S. competent authority will notify the
taxpayer whether the facts provide a
basis for assistance.
.02 Denial of Assistance. The U.S.
competent authority generally will not
accept a request for competent au-
thority assistance or will cease provid-
ing assistance to the taxpayer if:

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(a) the taxpayer is not entitled to the
treaty benefit or safeguard in question
or to the assistance requested;
(b) the taxpayer is willing only to
accept a competent authority agreement
under conditions that are unreasonable
or prejudicial to the interests of the
U.S. Government;
(c) the taxpayer rejected the compe-
tent authority resolution of the same or
similar issue in a prior case;
(d) the taxpayer does not agree that
competent authority negotiations are a
government-to-government activity that
does not include the taxpayer’s par-
ticipation in the negotiation pro-
ceedings;
(e) the taxpayer does not furnish
upon request sufficient information to
determine whether the treaty applies to
the taxpayer’s facts and circumstances;
(f) the taxpayer was found to have
acquiesced in a foreign initiated adjust-
ment that involved significant legal or
factual issues that otherwise would be
properly handled through the competent
authority process and then unilaterally
made a corresponding correlative ad-
justment or claimed an increased for-
eign tax credit, without initially seeking
U.S. competent authority assistance; or
(g) the taxpayer: (i) fails to comply
with this revenue procedure; (ii) fails to
cooperate with the U.S. competent
authority (including failing to provide
sufficient facts and documentation to
support its claim of double taxation or
taxation contrary to the treaty); or (iii)
failed to cooperate with the Service
during the examination of the periods
in issue and such failure significantly
impedes the ability of the U.S compe-
tent authority to negotiate and conclude
an agreement (e.g., the period of
limitations for assessment in the for-
eign country has expired or significant
factual development is required that
cannot effectively be completed outside
the examination process).
.03 Extending Period of Limitations
for Assessment. If the U.S. competent
authority accepts a request for assist-
ance, the taxpayer may be requested to
execute a consent extending the period
of limitations for assessment of tax for
the taxable periods in issue. Failure to
comply with the provisions of this
subsection can result in denial of
assistance by the U.S. competent au-
thority with respect to the request.
.04 No Review of Denial of Request
for Assistance. The U.S. competent
authority’s denial of a taxpayer’s re-
quest for assistance or dismissal of a
matter previously accepted for consid-
eration pursuant to this revenue proce-
dure is final and not subject to
administrative review.
.05 Notification. The U.S. competent
authority will notify a taxpayer request-
ing assistance under this revenue proce-
dure of any agreement that the U.S.
and the foreign competent authorities
reach with respect to the request. If the
taxpayer accepts the resolution reached
by the competent authorities, the agree-
ment shall provide that it is final and is
not subject to further administrative or
judicial review. If the competent au-
thorities fail to agree, or if the agree-
ment reached is not acceptable to the
taxpayer, the taxpayer may withdraw
the request for competent authority
assistance and may then pursue all
rights to review otherwise available
under the laws of the United States and
the treaty country. Where the compe-
tent authorities fail to agree, no further
competent authority remedies generally
are available, except with respect to
treaties that provide for arbitration of
the dispute. See, e.g., Article 25(5) of
the U.S.- German income tax treaty. A
request for arbitration shall be made in
accordance with the procedures pre-
scribed under the applicable treaty and
related documents, including proce-
dures which the Service may promul-
gate from time to time.
.06 Closing Agreement. When appro-
priate, the taxpayer will be requested to
reflect the terms of the mutual agree-
ment and of the competent authority
assistance provided in a closing agree-
ment, in accordance with section 6.07
and 6.17 of Rev. Proc. 68–16, 1968–1
C.B. 770.
.07 Unilateral Withdrawal or Reduc-
tion of U.S. Initiated Adjustments. With
respect to U.S. initiated adjustments
under §482 of the Code, the primary
goal of the mutual agreement procedure
is to obtain a correlative adjustment
from the treaty country. For other types
of U.S. initiated adjustments, the pri-
mary goal of the U.S. competent
authority is the avoidance of taxation in
contravention of an applicable treaty.
Unilateral withdrawal or reduction of
U.S. initiated adjustments, therefore,
generally will not be considered. For
example, the U.S. competent authority
will not withdraw or reduce an adjust-
ment to income, deductions, credits or
other items solely because the period of
limitations has expired in the foreign
country and the foreign competent
authority has declined to grant any
relief. If the period provided by the
foreign statute of limitations has ex-
pired, the U.S. competent authority
may take into account other relevant
facts to determine whether such with-
drawal or reduction is appropriate and
may, in extraordinary circumstances
and as a matter of discretion, provide
such relief with respect to the adjust-
ment to avoid actual or economic
double taxation. In no event, however,
will relief be granted where there is
fraud or negligence with respect to the
relevant transactions. In keeping with
the U.S. Government’s view that tax
treaties should be applied in a balanced
and reciprocal manner, the United
States normally will not withdraw or
reduce an adjustment where the treaty
country does not grant similar relief in
equivalent cases.
SEC. 13. REQUESTS FOR RULINGS
.01 General. Requests for advance
rulings regarding the interpretation or
application of a tax treaty, as dis-
tinguished from requests for assistance
from the U.S. competent authority
pursuant to this revenue procedure,
must be submitted to the Associate
Chief Counsel (International) in accord-
ance with Rev. Proc. 96–1, 1996–1
I.R.B. 8.
.02 Foreign Tax Rulings. The Serv-
ice does not issue advance rulings on
the effect of a tax treaty on the tax
laws of a treaty country for purposes of
determining the tax of the treaty
country.
SEC. 14. FEES
Rev. Proc. 96–1, 1996–1 I.R.B. 8, sec.
14, requires the payment of user fees
for requests to the Service for rulings,
opinion letters, determination letters
and similar requests. No user fees are
required for requests for competent
authority assistance pursuant to this
revenue procedure.
SEC. 15. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 91–23 and Rev. Proc. 91–
26 are superseded by this revenue
procedure. Rev. Proc. 91–22 is ampli-
fied. Rev. Rul. 72–437, 1972–2 C.B.
660, is modified. Rev. Rul. 92–75 is
clarified.

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SEC. 16. EFFECTIVE DATE
This revenue procedure is effective
for requests for competent authority
assistance filed after January 16, 1996.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Edward G. Turco of the
Office of International Programs, Tax
Treaty Division and Judith Cavell
Cohen of the Office of the Associate
Chief Counsel (International). For fur-
ther information regarding this revenue
procedure, contact either Mr. Turco on
(202) 874-1570 or Ms. Cohen on (202)
622-3880 (not toll-free calls).
26 CFR 601.201: Rulings and determination
letters.
Rev. Proc. 96–14
SECTION 1. PURPOSE
This revenue procedure prescribes
additional conditions associated with
obtaining relief otherwise available un-
der Rev. Proc. 65–17, 1965–1 C.B.
833.
SEC. 2. BACKGROUND
Rev. Rul. 82–80, 1982–1 C.B. 89,
and Rev. Proc. 65–17, 1965–1 C.B.
833, as amplified, amended, clarified
and modified by Rev. Proc. 65–31,
1965–2 C.B. 1024, Rev. Proc. 65–17
Amendment I, 1966–2 C.B. 1211, Rev.
Proc. 65–17 Amendment II, 1974–1
C.B. 411, Rev. Proc. 70–23, 1970–2
C.B. 505, Rev. Proc. 71–35, 1971–2
C.B. 573, Rev. Proc. 72–48, 1972–2
C.B. 829, Rev. Proc. 72–53, 1972–2
C.B. 833, and Rev. Proc. 91–24, 1991–
1 C.B. 542, (hereinafter referred to as
‘‘Rev. Proc. 65–17’’) provide for the
tax-free repatriation of certain amounts
following an allocation of income
between related U.S. and foreign cor-
porations under section 482 of the
Code. Generally, in order to obtain the
treatment provided by Rev. Proc. 65–
17, the taxpayer must file a written
statement requesting such relief with
the appropriate District Director. How-
ever, in situations involving a country
with which the United States has an
income tax convention in force which
contains a mutual agreement procedure
article (‘‘treaty cases’’), Rev. Proc. 91–
24 provides that the relief provided
under Rev. Proc. 65–17 is available
only in conjunction with a request for
assistance from the U.S. competent
authority. This revenue procedure su-
persedes Rev. Proc. 91–24.
SEC. 3. PROCEDURES FOR
OBTAINING REV. PROC. 65–17
RELIEF IN TREATY CASES
If a taxpayer intends to request
competent authority assistance pursuant
to Rev. Proc. 96–13, page 31, this
Bulletin, to resolve a double taxation
matter in a treaty case, the taxpayer
should request relief under Rev. Proc.
65–17 in conjunction with its request
for competent authority assistance un-
der the provisions of Rev. Proc. 96–13,
sec. 4 and sec. 10. In addition, where a
request for relief under Rev. Proc. 65–
17 is already pending before the
Service at the time a request for
competent authority assistance is made,
the taxpayer must forward a copy of
the pending Rev. Proc. 6–17 request to
the U.S. competent authority. The U.S.
competent authority will consider relief
under Rev. Proc. 65–17 in conjunction
with consideration of the competent
authority matter. If a taxpayer does not
intend to request competent authority
assistance in a treaty case, the taxpayer
must follow the procedures under Rev.
Proc. 65–17 to request relief provided
thereunder; however, the closing agree-
ment required in that revenue proce-
dure cannot be entered into except with
the concurrence of the Assistant Com-
missioner (International).
SEC. 4. EFFECT ON OTHER
DOCUMENTS
Rev. Rul. 82–80, 1982–1 C.B. 89,
and Rev. Proc. 65–17, 1965–1 C.B.
833, as amplified, amended, clarified
and modified by Rev. Proc. 65–31,
1965–2 C.B. 1024, Rev. Proc. 65–17
Amendment I, 1966–2 C.B. 1211, Rev.
Proc. 65–17 Amendment II, 1974–1
C.B. 411, Rev. Proc. 70–23, 1970–2
C.B. 505, Rev. Proc. 71–35, 1971–2
C.B. 573, Rev. Proc. 72–48, 1972–2
C.B. 829, and Rev. Proc. 72–53, 1972–
2 C.B. 833, are modified. Rev. Proc.
91–24, 1991–1 C.B. 542, is superseded.
SEC. 5. EFFECTIVE DATE
This revenue procedure is effective
for requests for Rev. Proc. 65–17 relief
filed after January 16, 1996.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Edward G. Turco of the
Office of International Programs, Tax
Treaty Division and Judith Cavell
Cohen of the Office of the Associate
Chief Counsel (International). For fur-
ther information regarding this revenue
procedure, contact either Mr. Turco on
(202) 874-1570 or Ms. Cohen on (202)
622-3880 (not toll-free calls).
26 CFR 601.201: Rulings and determination
letters.
(Also Part I, §§170, 2031, 2512; 1.170A–13;
20.2031–6; 25.2512–1.)
Rev. Proc. 96–15
SECTION 1. PURPOSE
This revenue procedure informs tax-
payers how to request from the Internal
Revenue Service a Statement of Value
that can be used to substantiate the
value of art for income, estate, or gift
tax purposes. A taxpayer that complies
with the provisions of this revenue
procedure may rely on the Statement of
Value in completing the taxpayer’s
federal income tax, estate tax, or gift
tax return that reports the transfer of
art.
SECTION 2. BACKGROUND
.01 Income Tax Charitable De-
duction.
(1) Section 170(a) of the Internal
Revenue Code allows as a deduction
any charitable contribution (as defined
in §170(c)) payment of which is made
during the taxable year.
(2) Section 1.170A–1(c)(1) of the
Income Tax Regulations provides that
if a charitable contribution is made in
property other than money, the amount
of the contribution is generally the fair
market value of the property at the
time of the contribution.
(3) Section 1.170A–1(c)(2) provides
that the fair market value is the price at
which the property would change hands
between a willing buyer and a willing
seller, neither being under any compul-
sion to buy or sell and both having
reasonable knowledge of the relevant
facts.

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(4) Section 1.170A–13 sets forth the
recordkeeping and return requirements
for deductions for charitable contribu-
tions. For a deduction for a charitable
contribution of property in excess of
$5,000, § 1.170A–13(c) requires a
qualified appraisal and an appraisal
summary.
(5)Rev. Proc. 66–49, 1966–2 C.B.
1257, provides guidelines for review of
appraisals of contributed property for
purposes of §170. Section 4.01 of Rev.
Proc. 66–49 states that the Service will
not approve valuations or appraisals
prior to the actual filing of the tax
return to which the appraisal pertains,
and will not issue advance rulings
approving or disapproving appraisals.
.02 Estate Tax.
(1) Section 2031 provides that the
value of the gross estate of a decedent
is determined by including the value at
the time of death of all property
wherever situated.
(2) Section 20.2031–1(b) of the
Estate Tax Regulations provides that
the value of property includible in a
decedent’s gross estate is its fair
market value at the time of the
decedent’s death.
(3) Section 2032(a) provides that the
executor may elect to determine the
value of all the property included in the
gross estate as of 6 months after the
decedent’s death. However, property
distributed, sold, exchanged, or other-
wise disposed of within 6 months after
death must be valued as of the date of
distribution, sale, exchange, or other
disposition.
(4) Section 20.2031–6(a) provides
that the fair market value of a dece-
dent’s household and personal effects is
the price that a willing buyer would
pay to a willing seller, neither being
under any compulsion to buy or to sell
and both having reasonable knowledge
of the relevant facts.
(5) Section 20.2031–6(b) provides
that if there are included among the
household and personal effects articles
having marked artistic or intrinsic value
of a total in excess of $3,000, the
appraisal of an expert or experts, under
oath, must be filed with the estate tax
return.
(6) Section 20.2031–6(d) provides
that if, pursuant to §20.2031–6 (a) and
(b), expert appraisers are employed,
care must be taken to see that they are
reputable and of recognized compe-
tency to appraise the particular class of
property involved. In listing paintings
having artistic value, the size, subject,
and artist’s name must be stated.
.03 Gift Tax.
(1) Section 2512(a) provides that if a
gift is made in property, the value
thereof at the date of the gift is the
amount of the gift.
(2) Section 25.2512–1 of the Gift
Tax Regulations provides that the value
of property is the price at which the
property would change hands between
a willing buyer and a willing seller,
neither being under any compulsion to
buy or to sell and both having reason-
able knowledge of the relevant facts.
.04 Legislation Authorizing User
Fees. Section 10511 of the Revenue
Act of 1987, 1987–3 C.B. 1, 166, as
amended by §11319 of the Omnibus
Budget Reconciliation Act of 1990,
1991–2 C.B. 481, 511, and by §743 of
the Uruguay Round Agreements Act,
1995–11 I.R.B. 5, 14, requires the
Secretary of the Treasury or delegate to
establish a program requiring the pay-
ment of user fees for requests to the
Service for letter rulings, opinion let-
ters, determination letters, and similar
requests. The fees apply to requests
made on or after February 1, 1988, and
before October 1, 2000. The fees
charged under the program (1) vary
according to categories or subcategories
established by the Secretary; (2) are
determined after taking into account the
average time for, and difficulty of,
complying with requests in each cate-
gory and subcategory; and (3) are
payable in advance.
SECTION 3. SCOPE
.01 Except as provided in section
3.02, this revenue procedure applies to
an item of art that has been appraised
at $50,000 or more, and has been trans-
ferred (1) as a ‘‘charitable contribu-
tion’’ within the meaning of §170(c),
(2) by reason of a decedent’s death, or
(3) by intervivos gift.
.02 The Service may issue a State-
ment of Value for items appraised at
less than $50,000 if (1) the request for
the Statement of Value includes a
request for appraisal review for at least
one item appraised at $50,000 or more,
and (2) the Service determines that
issuance of such a Statement would be
in the best interest of efficient tax
administration.
.03 The Service may decline to issue
a Statement of Value when appropriate
in the interest of efficient tax admin-
istration. If the Service declines to
issue a Statement of Value under this
section 3.03, the Service will refund
the user fee.
SECTION 4. DEFINITIONS
.01 The term ‘‘art’’ includes paint-
ings, sculpture, watercolors, prints,
drawings, ceramics, antique furniture,
decorative arts, textiles, carpets, silver,
rare manuscripts, historical memo-
rabilia, and other similar objects.
.02 The term ‘‘taxpayer’’ includes an
executor or administrator acting on
behalf of an estate, and a donor of a
gift.
.03 The term ‘‘valuation date’’ refers
to the date of death, the alternate
valuation date (as established under
§ 2032(a)), or the date of the gift.
SECTION 5. REQUESTING A
STATEMENT OF VALUE FOR
INCOME TAX CHARITABLE
DEDUCTION PURPOSES
.01 To request a Statement of Value
from the Service for an item of art
transferred as a charitable contribution
within the meaning of §170(c), a
taxpayer must submit to the Service a
request for a Statement of Value for
the item prior to filing the income tax
return that first reports the charitable
contribution. The request must include
the following:
(1) a copy of an appraisal (as
described in section 6 of this revenue
procedure) of the item of art;
(2) a check or money order payable
to the Internal Revenue Service (user
fee) in the amount of $2,500 for a
request for a Statement of Value for
one, two, or three items of art, plus
$250 for each additional item of art for
which a Statement of Value is re-
quested;
(3) a completed appraisal summary
(Section B of Form 8283, Noncash
Charitable Contributions) that meets the
requirements of §1.170A–13(c)(4); and
(4) the location of the District Office
that has or will have examination
jurisdiction over the return (not the
Service Center where the return is
filed).
.02 A taxpayer may withdraw the
request for a Statement of Value at any
time before it is issued by the Service.
The user fee will not be refunded for a

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request that is withdrawn. When a
request is withdrawn, the appropriate
District Director will be notified.
.03 If a request for a Statement of
Value lacks information essential to the
issuance of a Statement of Value for an
item of art, the Service will notify the
taxpayer that the request will not be
processed for that item unless the
Service receives the missing informa-
tion within 30 calendar days after the
date of such notification.
SECTION 6. APPRAISAL FOR
INCOME TAX CHARITABLE
DEDUCTION PURPOSES
.01 An appraisal submitted to the
Service by a taxpayer under section 5
of this revenue procedure must meet
the requirements for a qualified ap-
praisal under § 1.170A–13(c)(3)(i)–
(iii), and must also include the
following:
(1) a complete description of the
item of art, including:
(a) the name of the artist or culture,
(b) the title or subject matter,
(c) the medium, such as oil on
canvas, or watercolor on paper,
(d) the date created,
(e) the size,
(f) any marks, signatures, or labels
on the item of art, on the back of the
item of art, or affixed to the frame,
(g) the history (provenance) of the
item, including proof of authenticity, if
that information is available,
(h) a record of any exhibitions at
which the item was displayed,
(i) any reference source citing the
item, and
(j) the physical condition of the item;
(2) a professional quality photograph
of a size and quality fully showing the
item, preferably an 8 3 10 inch color
photograph or a color transparency not
smaller than 4 3 5 inches; and
(3) the specific basis for the
valuation.
.02 The appraisal must be made no
earlier than 60 days prior to the date of
the contribution of the item of art.
.03 Taxpayers are encouraged to
include in the request any additional
information that may affect the deter-
mination of the fair market value of the
item of art.
.04 The requirements of section 6 of
this revenue procedure must be met by
Subchapter C corporations, even though
they would otherwise be exempt under
§ 1.170A–13(c)(2)(ii)(B)(3) from the
appraisal requirements.
SECTION 7. REQUESTING A
STATEMENT OF VALUE FOR
ESTATE TAX OR GIFT TAX
PURPOSES
.01 To request a Statement of Value
from the Service for an item of art
transferred as part of an estate or as an
intervivos gift, a taxpayer must submit
to the Service a request for a Statement
of Value for the item prior to filing the
federal estate tax return or the federal
gift tax return that first reports the
transfer of the item. The request must
include the following:
(1) a copy of an appraisal (as
described in section 8 of this revenue
procedure) of the item of art;
(2) a check or money order payable
to the Internal Revenue Service (user
fee) in the amount of $2,500 for a re-
quest for a Statement of Value for one,
two, or three items of art, plus $250 for
each additional item of art for which a
Statement of Value is requested;
(3) a description of the item of art;
(4) the appraised fair market value;
(5) the cost, date, and manner of
acquisition;
(6) the date of death (or the alternate
valuation date, if applicable) or the
date of the gift; and
(7) the location of the District Office
that has or will have examination juris-
diction over the return (not the Service
Center where the return is filed).
.02 A taxpayer may withdraw the
request for a Statement of Value at any
time before it is issued by the Service.
The user fee will not be refunded for a
request that is withdrawn. When a
request is withdrawn, the appropriate
District Director will be notified.
.03 If a request for a Statement of
Value lacks information essential to the
issuance of a Statement of Value for an
item of art, the Service will notify the
taxpayer that the request will not be
processed for that item unless the
Service receives the missing informa-
tion within 30 calendar days after the
date of such notification.
SECTION 8. APPRAISAL FOR
ESTATE TAX OR GIFT TAX
PURPOSES
.01 An appraisal submitted to the
Service by a taxpayer under section 7
of this revenue procedure must include
the following:
(1) a complete description of the
item of art, including:
(a) the name of the artist or culture,
(b) the title or subject matter,
(c) the medium, such as oil on
canvas, or watercolor on paper,
(d) the date created,
(e) the size,
(f) any marks, signatures, or labels
on the item of art, on the back of the
item of art, or affixed to the frame,
(g) the history (provenance) of the
item, including proof of authenticity, if
such information is available,
(h) a record of any exhibitions at
which the item was displayed,
(i) any reference source citing the
item, and
(j) the physical condition of the item;
(2) a professional quality photograph
of a size and quality fully showing the
item, preferably an 8 x 10 inch color
photograph or a color transparency not
smaller than 4 x 5 inches;
(3) a statement that the appraisal was
prepared for estate tax purposes or gift
tax purposes;
(4) the date (or dates) on which the
item of art was appraised;
(5) the appraised fair market value
(within the meaning of §20.2031–6(a)
or 25.2512–1); and
(6) the specific basis for the valua-
tion.
.02 The appraisal must be made no
earlier than 60 days prior to the
valuation date.
.03 Taxpayers are encouraged to
include in the request any additional
information that may affect the deter-
mination of the fair market value of the
item of art.
.04 An appraisal must:
(1) be prepared, signed, and dated by
an appraiser, and contain a statement
by the appraiser that:
(a) the appraiser either holds himself
or herself out to the public as an
appraiser or performs appraisals on a
regular basis;
(b) the appraiser is qualified to make
appraisals of the item of art;
(c) the appraiser is not the taxpayer;
(d) the appraiser was not a party to
the transaction in which the decedent
or donor of the gift acquired the item
of art being appraised, unless the
valuation date is within 2 months of

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the date of acquisition and the ap-
praised value is not less than the
acquisition price;
(e) the appraiser is not the benefici-
ary or donee receiving the item of art;
(f) the appraiser is not a person who
was employed by the decedent or is
employed by the taxpayer;
(g) the appraiser is not related to any
of the foregoing persons under §267-
(b) or married to a person who is in a
relationship described in §267(b) with
any of the foregoing persons;
(h) the appraiser is not an appraiser
who was regularly used by the dece-
dent or who is regularly used by the
taxpayer or the beneficiary or donee;
and
(i) the appraisal fee is not based on
the appraised value of the item of art;
(2) include the name, address, and
taxpayer identification number (if a
taxpayer identification number is other-
wise required by §6109 and the
regulations thereunder) of the appraiser.
If the appraiser is acting in his or her
capacity as a partner in a partnership,
an employee of any person (whether an
individual, corporation, or partnership),
or an independent contractor engaged
by a person other than the taxpayer, the
appraiser must include the name, ad-
dress, and taxpayer identification num-
ber (if a taxpayer identification number
is otherwise required by §6109 and the
regulations thereunder) of the part-
nership or the person who employs or
engages the appraiser; and
(3) include the qualifications of the
appraiser who signs the appraisal,
including the appraiser’s background,
experience, education, and membership,
if any, in professional appraisal asso-
ciations.
.05 The appraisal will not satisfy the
requirements of this section if the
taxpayer has knowledge of facts that
would cause a reasonable person to
expect the appraiser to overstate or
understate the value of the item of art.
SECTION 9. TAXPAYER’S
DECLARATION
.01 A request to obtain a Statement
of Value, any factual representations
associated with the request, and any
amendments to the request must be
accompanied by the following declara-
tion: ‘‘Under penalties of perjury, I
declare that I have examined this
request, including the accompanying
documents, and to the best of my
knowledge and belief, the facts pre-
sented in support of this request are
true, correct, and complete.’’
.02 The declaration must be signed
by the taxpayer, and not the taxpayer’s
representative. The person signing for
an estate must be the executor or
administrator of the estate. The person
signing for a trust or partnership must
be a trustee or general partner who has
personal knowledge of the facts. The
person signing for a corporate taxpayer
must be an officer of the corporate
taxpayer who has personal knowledge
of the facts. If a corporate taxpayer is a
member of an affiliated group filing
consolidated returns, a penalties-of-
perjury statement must also be signed
and submitted by an officer of the
common parent of the group.
.03 A taxpayer that submits addi-
tional factual information on several
occasions may provide one declaration
that refers to all submissions.
SECTION 10. WHERE TO SUBMIT
REQUESTS
Requests for a Statement of Value
should be sent to the Internal Revenue
Service, POB 120, Ben Franklin Sta-
tion, Washington, DC 20044, Attn:
C:AP:AS:ART.
SECTION 11. NATIONAL OFFICE
CONSIDERATION OF REQUESTS
.01 For a completed request for a
Statement of Value received after July
15, but on or before January 15, the
Service will ordinarily issue a State-
ment of Value by the following June
30. For a completed request for a
Statement of Value received after Janu-
ary 15, but on or before July 15, the
Service will ordinarily issue a State-
ment of Value by the following De-
cember 31. It is the responsibility of
taxpayers to obtain extensions, as nec-
essary, to file the appropriate tax
returns.
.02 If the Service agrees with the
value reported on the taxpayer’s ap-
praisal, the Service will issue a State-
ment of Value approving the appraisal.
.03 If the Service disagrees with the
value reported on the taxpayer’s ap-
praisal, the Service will issue a State-
ment of Value with the Service’s
determination of value, and the basis
for its disagreement with the taxpayer’s
appraisal.
SECTION 12. ATTACHMENT OF
STATEMENT OF VALUE TO
RETURN
.01 A copy of the Statement of
Value, regardless of whether the tax-
payer agrees with it, must be attached
to and filed with the taxpayer’s income,
estate, or gift tax return that reports the
transfer of the item of art valued in the
Statement of Value. However, if, prior
to receiving a Statement of Value, the
taxpayer files an income, estate, or gift
tax return reporting the transfer of an
item of art for which a Statement of
Value was requested, the taxpayer must
indicate on the return that a Statement
of Value has been requested and attach
a copy of the request to the return.
Upon receipt of the Statement of
Value, the taxpayer must file an
amended income or gift tax return, or a
supplemental estate tax return, with the
Statement of Value attached.
.02 If a taxpayer disagrees with a
Statement of Value issued by the
Service, the taxpayer may submit with
the tax return additional information in
support of a different value.
SECTION 13. EFFECT OF
STATEMENT OF VALUE
.01 A taxpayer may rely on a
Statement of Value received from the
Service for an item of art, except as
provided in sections 13.02 and 13.03 of
this revenue procedure.
.02 A taxpayer may not rely on a
Statement of Value issued to another
taxpayer.
.03 A taxpayer may not rely on a
Statement of Value if the representa-
tions upon which the Statement of
Value was based are not accurate
statements of the material facts.
SECTION 14. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 66–49 is modified.
SECTION 15. EFFECTIVE DATE
This revenue procedure applies to a
request for a Statement of Value for an
item of art if the request is submitted
after January 15, 1996.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Jefferson K. Fox of the

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Office of Chief Counsel (Income Tax
and Accounting) and Deborah Ryan of
the Office of Chief Counsel (Pass-
throughs and Special Industries). For
further information regarding this reve-
nue procedure, contact Karen Carolan
of the Office of Art Appraisal Services
at (202) 401-4128 (not a toll-free call).
26 CFR 601.105: Rulings and determination
letters.
(Also Part I, §§103, 7478.)
Rev. Proc. 96–16
SECTION 1. BACKGROUND AND
PURPOSE
A prospective issuer of bonds, the
interest on which is intended to be
excludable from gross income under
§ 103(a) of the Internal Revenue Code,
can request a ruling that is subject to
the declaratory judgment procedures of
§ 7478. Section 7478 provides the
United States Tax Court with jurisdic-
tion to issue declaratory judgments
with respect to certain governmental
obligations. A prospective issuer can
file a petition under §7478 if the
Service determines that the interest on
bonds will not be excludable from
gross income under §103(a) or if the
Service fails to make a determination
with respect to the excludability of the
interest within 180 days from the time
the request for a determination is made.
In a declaratory judgment case, the Tax
Court determines whether the interest
on the bonds will be excludable under
§ 103 and thus must consider all of the
requirements for the exclusion.
A prospective issuer or holder of
bonds may also request a ruling that is
not subject to the declaratory judgment
provisions of §7478. For example, the
request may ask for a ruling about one
or more of the various requirements for
excludability under §103(a) rather than
excludability in general under §103(a).
Alternatively, the request may relate to
the effect of a proposed transaction on
an outstanding issue of bonds.
This revenue procedure updates ex-
isting procedures with respect to both
reviewable and nonreviewable rulings.
Thus, Rev. Proc. 88–32, 1988–1 C.B.
833, relating to reviewable rulings, and
Rev. Proc. 88–33, 1988–1 C.B. 835,
relating to nonreviewable rulings, are
obsolete as provided in section 7 of
this revenue procedure.
This revenue procedure provides def-
initions of the two types of ruling
requests and procedures for each. The
procedures are designed to make it
clear to both the requesting party and
the Service whether a ruling request is
reviewable under §7478. For a request
that is reviewable, the procedures are
designed to ensure that the administra-
tive record is fully developed with
respect to each requirement for exclu-
sion of interest under §103(a). In
addition, for a request that is review-
able, the procedures are designed to
ensure that all necessary information
with respect to the proposed issue of
bonds is provided in a timely manner
that will allow the Service to make its
determination within 180 days from the
date the request for a ruling is filed.
SECTION 2. SCOPE
This revenue procedure applies to
any request for a letter ruling under §§
103, 141 through 150, 1394, and
7871(c) of the Code. This revenue
procedure does not apply to a request
for a determination that an organization
meets the requirements of §501(c)(3)
as a condition to the issuance of
qualified 501(c)(3) bonds under §145.
SECTION 3. COORDINATION
WITH REV. PROC. 96–1
Unless otherwise specifically stated
in this revenue procedure, the defini-
tions and requirements set forth in Rev.
Proc. 96–1, 1996–1 I.R.B. 8, apply.
Any reference to Rev. Proc. 96–1 is
also a reference to any successor of
Rev. Proc. 96–1.
SECTION 4. PROCEDURE FOR
REVIEWABLE RULINGS
.01 Issuer Must Submit Request. A
request for a reviewable ruling must be
submitted by the prospective issuer.
The term ‘‘issuer’’ includes any state,
any political subdivision of a state, and
any corporation described in §150(d).
It also includes any ‘‘on-behalf-of’’
issuer described in Rev. Rul. 63–20,
1963–1 C.B. 24, and any constituted
authority described in Rev. Rul. 57–
187, 1957–1 C.B. 65, if the on-behalf-
of issuer or constituted authority has
been designated by a state or political
subdivision to issue the prospective
obligations. It does not include a
conduit borrower of the proceeds of the
prospective obligations.
.02 Specific Prospective Issuance of
Obligations. A request for a reviewable
ruling must address a specific, prospec-
tive issuance of obligations. A resolu-
tion must have been adopted before the
request is submitted, in accordance
with state or local law authorizing the
issuance of a specific issue of obliga-
tions. The resolution may state that the
issuance of obligations is contingent
upon a favorable ruling by the Service
or a favorable decision by the Tax
Court.
.03 Statement of Facts. The state-
ment of facts in a request for a
reviewable ruling must be complete,
accurate, and detailed. Each request
must contain all relevant facts. These
facts include but are not limited to the
following:
(1) the name, address, and taxpayer
identification number of the issuer,
each underwriter, and each conduit
borrower (except conduit borrowers of
the proceeds of bonds such as qualified
mortgage bonds, qualified veterans’
mortgage bonds, and qualified student
loan bonds);
(2) a description of all uses and users
of proceeds of the obligations;
(3) a description of the accounting
method or methods that will be used to
account for investments and expendi-
tures of gross proceeds of the
obligations;
(4) an estimate of all fees that will
be paid in connection with the issuance
of the obligations;
(5) a description of any elections
made pursuant to the regulations under
§ 148 including elections on the ap-
plication of the various versions of the
those regulations;
(6) the expected principal amount,
expected yield, expected issue price,
and expected issue date of the prospec-
tive obligations and of the expected
investments to be acquired with bond
proceeds;
(7) a statement whether proceeds are
expected to be invested at a yield that
exceeds the yield on the issue of
obligations by more than the amount
permitted in §1.148–2(d)(2) of the
Income Tax Regulations (definition of
materially higher yield) and a statement
indicating which definition the issuer
expects will apply;
(8) descriptions of any obligations
that are to be refunded by the prospec-
tive obligations and representations
whether the interest on each obligation
that is to be refunded has been treated
by the issuer as excludable from gross
income under §103; and

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(9) a representation whether the
issuer has received an appropriate
allocation of volume cap under §146
for the prospective obligations.
.04 Supporting Documentation. Rul-
ings are based on the documents that
are submitted. The initial request for a
reviewable ruling, and any additional
submission at a later date, must be
accompanied by copies of all documen-
tation that is relevant to the determina-
tion whether interest on the prospective
obligations will be excludable from
gross income under §103. If the
prospective obligations are refunding
obligations, the documentation must
also include the relevant documents
underlying the refunded obligations.
The request must include a representa-
tion that each document accompanying
the request is a complete and accurate
copy of the original document. The
documents to be submitted include—
(1) the resolution for the issuance of
the obligations;
(2) management and service con-
tracts, leases, output contracts, and
agreements that affect any facility
financed with the proceeds from the
obligations;
(3) the official statement and trust
indenture;
(4) the arbitrage certificate and other
documents containing covenants about
arbitrage rebate and about subsequent
intentional acts to earn arbitrage; and
(5) any relevant provision of state or
local law.
.05 Cross-references. Relevant provi-
sions in submitted documents must be
appropriately described, analyzed, and
cross-referenced in the request for a
reviewable ruling.
.06 Legal Analysis. A request for a
reviewable ruling must set forth a
complete and detailed analysis of the
rationale on which the requester relies
to support its request for a determina-
tion that each condition for exclusion
of interest on the prospective obliga-
tions under §103 will be satisfied. The
analysis submitted must include cita-
tions to the Code, regulations, revenue
rulings, revenue procedures, judicial
authority, and any other authority rele-
vant to the issues raised by the request.
A simple statement that a provision of
the Code is satisfied is insufficient. The
request must also describe in detail any
relevant provision of state or local law.
The following is a recommended for-
mat for the legal analysis:
(1) Whether the obligations will be
issued by or on behalf of a state or
political subdivision of a state;
(2) Whether the obligations will be
private activity bonds under §141;
(3) Whether the obligations will
satisfy each of the provisions of §§142
through 147;
(4) Whether the obligations will be
arbitrage bonds under §148;
(5) Whether the obligations will
satisfy the requirements of §149;
(6) Whether the obligations will
satisfy the requirements of §150;
(7) Whether the obligations satisfy
any other requirements for the exclu-
sion of interest under §103.
.07 Acknowledgement. The request
for a ruling must be accompanied by a
statement, signed by the issuer, ac-
knowledging that the issuer is aware
that it cannot exhaust its administrative
remedies unless it complies with sec-
tion 4 of this revenue procedure.
Appendix A sets forth a form for this
acknowledgement.
.08 Number of Copies. Three copies
must be submitted of the initial submis-
sion and of each additional submission,
including the statement of facts, legal
analysis, supporting documents, cross-
referenced documents, and acknowl-
edgement.
.09 Time Periods. The 180-day
period specified in §7478 begins as of
the date the Service receives the initial
request for a ruling. To ensure a
sufficient amount of time to properly
process a ruling request within this
180-day period, all time periods spec-
ified by Rev. Proc. 96–1 for processing
a ruling request are 14 days for
purposes of processing a ruling request
under this procedure. The Service may
grant extensions of these 14-day peri-
ods in accordance with the procedures
set forth in Rev. Proc. 96–1 for
extending the time period for additional
information.
.10 Substantial compliance of initial
request. If the initial request for a
reviewable ruling substantially com-
plies with section 4 of this revenue
procedure, the Service will send a
written notice of initial compliance. If
a request for a reviewable ruling has
only minor deficiencies, the deficien-
cies may be corrected in the same
manner that additional information is
provided under section 4.11 of this
revenue procedure. If the initial request
for a reviewable ruling does not
substantially comply with section 4 of
this revenue procedure, the Service will
immediately close the request. The
Service will also send written notice to
the issuer, or its authorized representa-
tive, stating that the request has been
closed and stating the specific nature of
the defects. If a request for a review-
able ruling is closed because it is does
not substantially comply with section 4
of this revenue procedure, the issuer
has failed to have timely taken all
reasonable steps to secure a ruling
subject to review by the Tax Court.
.11 Additional information. If addi-
tional information is not received
within 14 days of the date the Service
requests it, the request will be closed,
and the issuer will have failed to have
timely taken all reasonable steps to
secure a ruling subject to review by the
Tax Court. Once a request is closed,
the issuer must submit a new request,
and pay an additional fee, if it wishes
to request a reviewable or nonreview-
able ruling. If the new request is
submitted not later than 30 days after
the request is closed, the new request
may incorporate the information and
documents already submitted. To do so,
the issuer must clearly state in writing
that it is submitting a new request and
incorporating by reference previously
submitted materials.
.12 Taxpayer conferences.
(1) Taxpayer conference is a step in
securing a ruling. Taxpayer con-
ferences ensure that the requester fully
participates in the processing of a
request for a ruling and that the Service
fully understands the requester’s posi-
tion. Thus, if an issuer has been
notified of a tentative adverse position
by the Service and does not participate
in the conference, the issuer has failed
to have timely taken all reasonable
steps to secure a ruling subject to
review by the Tax Court. After the first
conference, the issuer need not partici-
pate in any additional conference of-
fered by the Service under Rev. Proc.
96–1.
(2) Location of conference. The
conference generally will be held at the
National Office. The issuer, however,
may request in writing that the con-
ference be held by telephone.
(3) Conference report. If the Service
prepares a conference report, a copy
will be sent to the issuer. The issuer
will have 14 calendar days to correct
any factual errors made in the report. If
the Service does not receive corrections

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within the 14-day period, it may base
its ruling on the facts stated in the
report. The Service may grant exten-
sions of the 14-day period in accord-
ance with the procedures set forth in
Rev. Proc. 96–1 for extending the
scheduling of conferences. The con-
ference report may be included in the
administrative record filed with the Tax
Court.
.13 Withdrawal of Requests. Any
withdrawal of a request for a review-
able ruling must be made in a written
statement signed by the issuer. The
statement must contain an acknowledg-
ment that the issuer has not taken all
reasonable steps to secure a reviewable
ruling. If a request is not withdrawn in
the manner described in this paragraph,
the Service will continue to process the
request and may issue a ruling.
.14 Exhaustion of Administrative
Remedies.
(1) Compliance With Procedures
Required. The issuer must comply with
the procedures described in Rev. Proc.
96–1 and in section 4 of this revenue
procedure in order to have reasonably
taken all steps necessary to obtain a
ruling that is subject to review by the
Tax Court.
(2) Each Issuer Must Exhaust Its
Remedies. An issuer that petitions the
Tax Court must itself have exhausted
administrative remedies for each re-
quest for a ruling. It may not base its
petition on the response to any other
request for a letter ruling that it
submits or that is submitted by another
issuer or other person.
SECTION 5. PROCEDURE FOR
NONREVIEWABLE RULINGS
.01 Issuer or Holder Must Submit
Request. A request for a nonreviewable
ruling must be submitted by an issuer
or holder. The term ‘‘issuer’’ includes
any state, any political subdivision of a
state, and any corporation described in
§ 150(d). It also includes any ‘‘on-
behalf-of’’ issuer described in Rev.
Rul. 63–20, 1963–1 C.B. 24, and any
constituted authority described in Rev.
Rul. 57–187, 1957–1 C.B. 65, if the
on-behalf-of issuer or constituted au-
thority has been designated by a state
or political subdivision to issue the
prospective obligations. It does not
include a conduit borrower of the
proceeds of the prospective obligations.
Other parties may join an issuer or
holder in requesting a ruling. For
example, an underwriter that is not a
holder may join an issuer in requesting
a nonreviewable ruling but may not by
itself request a ruling. However, the
Service may rule in accordance with
the methodology and procedure indi-
cated in §9(f) of the Pacific Northwest
Electric Power Planning and Conserva-
tion Act (16 U.S.C. 839).
.02 Specific Transaction. The Service
generally rules only on specific transac-
tions. Thus, a request for a nonreview-
able ruling must address a specific
proposal to issue obligations or a
specific proposed transaction that may
affect the application of §§103, 141
through 150, 1394, or 7871(c) to
obligations already issued.
.03 Prospective Obligations. The
Service may issue a nonreviewable
ruling on whether a proposed obliga-
tion meets one or more conditions for
the exclusion of interest on the obliga-
tion from gross income under §103.
Before the request is submitted, a
resolution must have been adopted in
accordance with state or local law
authorizing the issuance of the obliga-
tion that is the subject of the ruling
request. Among other things, the reso-
lution may state that the issuance of
obligations is contingent upon a favor-
able ruling by the Service.
.04 Outstanding Obligations.
(1) Whether an outstanding obliga-
tion meets conditions under §103. The
Service will not issue a nonreviewable
ruling on whether an issued and out-
standing obligation that is part of an
issue of obligations meets one or more
conditions for the exclusion of interest
on the obligation from gross income
under §103 unless the request is
received by the Service before interest
on any obligation in that issue is
required to be reported by a holder.
(2) Transactions affecting outstand-
ing obligations. The Service may issue
a nonreviewable ruling on the effect of
a proposed act or transaction on one or
more conditions for the exclusion from
gross income under §103 of interest on
an issued and outstanding obligation.
The request, however, must contain a
statement by the issuer that the out-
standing obligation has met the condi-
tions for the exclusion of interest under
§ 103 from the issue date to the date
the request is submitted.
.05 Status Rulings. The Service will
not issue a nonreviewable ruling under
this procedure on the status or classi-
fication of an issuer of obligations
unless the status or classification of the
issuer affects the exclusion of interest
under §103 on a specific, prospective
issue of obligations.
.06 Statement of Facts. Although a
request for a nonreviewable ruling may
address only one or a few of the
conditions for exclusion under §103,
the requester should describe the entire
transaction in the request. The reques-
ter should consider submitting the
following information in complying
with the procedures set forth in Rev.
Proc. 96–1 for submitting requests:
(1) the name, address, and taxpayer
identification number of the issuer,
each underwriter, each conduit bor-
rower (except conduit borrowers of the
proceeds of bonds such as qualified
mortgage bonds, qualified veterans’
mortgage bonds, and qualified student
loan bonds);
(2) a description of all uses and users
of proceeds of the obligations;
(3) a description of the accounting
method or methods that have been or
will be used to account for investments
and expenditures of gross proceeds of
the obligations, including refunding
obligations;
(4) an accounting of all fees that will
be paid in connection with the issuance
of the obligations;
(5) for outstanding obligations, in-
cluding refunded obligations, the actual
principal amount, actual issue price,
actual issue date, and actual yield of
the obligations and investments;
(6) for prospective obligations, the
expected principal amount, expected
yield, expected issue price, and ex-
pected issue date of the prospective
obligations and of the expected invest-
ments to be acquired with bond
proceeds;
(7) descriptions of any obligations
that have been or will be refunded and
representations whether the interest on
each obligation that has been or will be
refunded has been treated by the issuer
as excludable from gross income under
§ 103;

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(8) a statement whether the issuer
has received an appropriate allocation
of volume cap under §146; and
(9) a description of any elections
made pursuant to the regulations under
§ 148, including elections on the ap-
plication of the various versions of
those regulations.
.07 Supporting Documentation. The
requester should consider submitting
copies of the following documents in
complying with the procedures set forth
in Rev. Proc. 96–1 for submitting
requests:
(1) the resolution, official statement,
and trust indenture;
(2) management and service con-
tracts, leases, output contracts, and
agreements that affect any facility
financed with the proceeds from the
obligations;
(3) the arbitrage certificate and other
documents containing covenants about
arbitrage rebate and about subsequent
intentional acts to earn arbitrage; and
(4) copies of relevant provisions of
local law.
.08 Acknowledgement. The request
for a nonreviewable ruling must be
accompanied by a written statement
acknowledging that the request does
not comply with the requirements of
section 4 of this procedure and that
compliance with the provisions of
section 4 of this procedure is manda-
tory for a ruling subject to review by
the Tax Court under §7478. The
acknowledgement must be in the form
set forth in Appendix B.
SECTION 6. EFFECTIVE DATE
This revenue procedure applies to
requests for rulings received on or after
February 1, 1996. A requester of a
letter ruling submitted prior to this
effective date may also submit its
request under this revenue procedure.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Procs. 88–32 and 88–33 are
obsolete after January 31, 1996.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Timothy L. Jones of the
Office of Assistant Chief Counsel
(Financial Institutions & Products). For
further information regarding this reve-
nue procedure contact Mr. Jones on
(202) 622-3980 (not a toll-free call).
Appendix A
ACKNOWLEDGEMENT OF A
REQUEST FOR A REVIEWABLE
RULING
The undersigned acknowledges that
the request for a ruling submitted by
{insert name of issuer} to the Internal
Revenue Service on {insert date of the
request for a ruling} is governed by
section 4 of Rev. Proc. 96–16 . Section
4 of Rev. Proc. 96–16 sets forth
procedures that must be followed to
obtain a ruling that may be reviewed
by the United States Tax Court under
§ 7478 of the Internal Revenue Code.
Name of the IssuerDate
Appendix B
ACKNOWLEDGEMENT OF A
REQUEST FOR A
NONREVIEWABLE RULING
The undersigned acknowledges that
the request for a ruling submitted by
{insert name of holder or issuer} to
the Internal Revenue Service on
{insert date of the request for a
ruling} is governed by section 5 of
Rev. Proc. 96–16. Section 5 of Rev.
Proc. 96–16 sets forth procedures that
must be followed to obtain a non-
reviewable ruling. Therefore, the re-
quest for a ruling does not comply with
the requirements of section 4 of Rev.
Proc. 96–16 which sets forth the
procedures that must be satisfied to
obtain a ruling that is reviewable by
the United States Tax Court under
§ 7478 of the Internal Revenue Code.
Name of issuer or holderDate

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491996–24 I.R.B.
Part IV. Items of General Interest
Notice of Proposed Rulemaking
Notice of Significant Reduction in the
Rate of Future Benefit Accrual
EE–34–95
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary
regulations.
SUMMARY: In *** [T.D. 8631, page
7, this Bulletin], the Federal Register,
the IRS is issuing temporary regula-
tions relating to the requirements of
section 204(h) of the Employee Retire-
ment Income Security Act of 1974, as
amended (ERISA). Section 204(h) of
ERISA applies to defined benefit plans
and to individual account plans that are
subject to the funding standards of
section 302 of ERISA. It requires the
plan administrator to give notice of
certain plan amendments to participants
in the plan and certain other parties.
The text of those temporary regulations
also serves as the text of these
proposed regulations.
DATES: Written comments must be
received by March 14, 1996.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (EE–34–95), Room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative,
submissions may be hand delivered
between the hours of 8 a.m. and 5 p.m.
to CC:DOM:CORP:R (EE–34–95),
Courier’s Desk, Internal Revenue Serv-
ice, 1111 Constitution Avenue NW.,
Washington DC.
FOR FURTHER INFORMATION
CONTACT: Betty J. Clary, (202)
622-6070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with the Paper-
work Reduction Act of 1995 (44
U.S.C. 3507).
Comments on the collection of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of Treasury,
Office of Information and Regulatory
Affairs, Washington DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
T:FP, Washington, DC 20224. Com-
ments on the collection of information
should be received by February 13,
1996.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
The collection of information is in
§ 1.411(d)–6T which implements the
statutory requirement of section 204(h)
of ERISA that a plan administrator
provide notice to participants and cer-
tain other parties if certain pension
plans are amended to provide for a
significant reduction in the rate of
future benefit accrual. This collection
of information is required to assure that
the rights of participants in plans
subject to section 204(h) of ERISA are
protected. The likely respondents are
small businesses. Responses to this
collection of information are required
under section 204(h) of ERISA in order
for certain amendments to qualified
plans to become effective.
These regulations do not involve any
issues of confidentiality.
Estimated total annual reporting bur-
den: 15,000 hours.
The estimated annual burden per re-
spondent varies from 1 hour to 40
hours, depending on individual circum-
stances, with an estimated average of 5
hours.
Estimated number of respondents:
3,000.
Estimated annual frequency of re-
sponses: Once.
Background
Temporary regulations in *** [T.D.
8631, page 7, this Bulletin] amend the
Income Tax Regulations (26 CFR part
1) (relating to section 411(d)). The text
of those temporary regulations also
serves as the text of these proposed
regulations. The preamble to the tem-
porary regulations explains the tempo-
rary regulations.
Special Analyses
It has been determined that this
notice of proposed rulemaking is not a
significant regulatory action as defined
in EO 12866. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and,
therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemak-
ing will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations
are adopted as final regulations, consid-
eration will be given to any written
comments (a signed original and eight
(8) copies) that are submitted timely to
the IRS. All comments will be avail-
able for public inspection and copying.
A public hearing may be scheduled if
requested in writing by a person that
timely submits written comments. If a
public hearing is scheduled, notice of
the date, time, and place for the
hearing will be published in the Federal
Register.
Drafting Information
The principal author of these regula-
tions is Betty J. Clary, Office of the
Associate Chief Counsel (Employee
Benefits and Exempt Organizations),
IRS. However, other personnel from
the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.

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501996–24 I.R.B.
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. * * *
Section 1.411(d)–6 also issued under
Reorganization Plan No. 4 of 1978, 29
U.S.C. 1001nt. * * *
Par. 2. Section 1.411(d)–6 is added
to read as follows:
§ 1.411(d)–6 Section 204(h) notice.
[The text of this proposed section is the
same as the text of §1.411(d)–6T
published elsewhere in *** [T.D. 8631,
page 7, this Bulletin].]
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
December 12, 1995, 1:23 p.m., and published
in the issue of the Federal Register for
December 15, 1995, 60 F.R. 64401)
Mortality Assumptions Used to
Calculate an Underfunded Defined
Benefit Pension Plan’s Current
Liability for Individuals Entitled to
Benefits on Account of Disability
Announcement 96–4
The Internal Revenue Service has
issued Rev. Rul. 96–7, page 12, this
Bulletin, to provide guidance regarding
the mortality assumptions used under
§ 412(l)(7)(C)(iii) of the Internal Reve-
nue Code for plans that are subject to
the additional funding requirements of
§ 412(l), to calculate a plan’s current
liability for individuals who are entitled
to benefits under the plan on account
of disability. Section 412(l) provides
additional funding requirements for
certain underfunded defined benefit
pension plans that have more than 100
participants and that are not multi-
employer plans. In general, the addi-
tional funding requirements are deter-
mined based on a plan’s unfunded
current liability. Rev. Rul. 95–28,
1995–1 C.B. 74, sets forth the mortality
table that generally must be used to
determine current liability under
§ 412(l). Section 412(l)(7)(C)(iii)(I)
provides that the Secretary shall
establish mortality tables that may be
used, in lieu of the generally applicable
mortality tables, to determine current
liability under §412(l) for individuals
who are entitled to benefits under the
plan on account of disability.
Rev. Rul. 96–7 provides two mor-
tality tables that may be used in
calculating current liability for individ-
uals who are entitled to benefits under
the plan on account of disability. Rev.
Rul. 96–7 provides a mortality table
that may be used for plan years
beginning after December 31, 1995, in
lieu of the mortality table required to
be used under §412(l)(7)(C)(ii), for
purposes of determining current lia-
bility for individuals entitled to benefits
under the plan on account of disability,
whose disabilities occurred in plan
years beginning before January 1,
1995. The mortality table takes into
account the experience for individuals
who are entitled to benefits on account
of disability under the Railroad Retire-
ment System and the Civil Service
Retirement System. This experience
covers a large workforce over a broad
range of occupational categories and is
the best available information.
Rev. Rul. 96–7 also provides a
mortality table that may be used for
plan years beginning after December
31, 1995, in lieu of the mortality table
required to be used under §412(l)(7)-
(C)(ii), for purposes of determining
current liability for individuals entitled
to benefits under the plan on account
of disability, whose disabilities occur in
plan years beginning after December
31, 1994. This mortality table may be
used only for individuals who are
disabled within the meaning of title II
of the Social Security Act and the
regulations thereunder. The mortality
table takes into account the Social
Security Administration’s experience
for individuals who are receiving dis-
ability benefits under its program.
Rev. Rul. 96–7 is effective for plan
years beginning after December 31,
1995. The Service plans to review the
mortality tables set forth in Rev. Rul.
96–7 and, if appropriate, to issue new
guidance for plan years beginning after
December 31, 1996. Accordingly, the
Service is soliciting public comment
regarding the mortality tables in Rev.
Rul. 96–7, as well as other aspects of
Rev. Rul. 96–7, including the desir-
ability of any adjustment to these
aggregate mortality tables to reflect a
select and ultimate pattern of mortality.
Public comments should be submitted
in writing on or before July 1, 1996.
Comments should be sent to the
following address:
Internal Revenue Service
1111 Constitution Ave., NW
Washington, DC 20224
Attn: Edward Sypher
CP:E:EP:A:1, Room 2548
DRAFTING INFORMATION
The principal author of this an-
nouncement is Edward Sypher of the
Employee Plans Division. For further
information regarding this announce-
ment, please contact the Employee
Plans Division’s taxpayer assistance
telephone service at (202) 622-6076
between 2:30 and 4:00 Eastern time
(not a toll-free number) Monday
through Thursday. Mr. Sypher’s num-
ber is (202) 622-6245 (also not a toll-
free number).

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

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Numerical Finding List
1
Bulletins 1996–1 through 1996–2
Announcements:
96–1, 1996–2 I.R.B. 57
96–2, 1996–2 I.R.B. 57
96–3, 1996–2 I.R.B. 57
Notices:
96–2, 1996–2 I.R.B. 15
Revenue Procedures:
96–1, 1996–1 I.R.B. 8
96–2, 1996–1 I.R.B. 60
96–3, 1996–1 I.R.B. 82
96–4, 1996–1 I.R.B. 94
96–5, 1996–1 I.R.B. 129
96–6, 1996–1 I.R.B. 151
96–7, 1996–1 I.R.B. 185
96–8, 1996–1 I.R.B. 187
96–9, 1996–2 I.R.B. 15
96–10, 1996–2 I.R.B. 17
96–11, 1996–2 I.R.B. 18
Revenue Rulings:
96–1, 1996–1 I.R.B. 7
96–2, 1996–2 I.R.B. 5
96–3, 1996–2 I.R.B. 14
96–6, 1996–2 I.R.B. 8
Treasury Decisions:
8640, 1962–2 I.R.B. 10
1
A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1995–27
through 1995–52 will be found in Internal
Revenue Bulletin 1996–1, dated January 2, 1996.

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Finding List of Current Action on
Previously Published Items
1
Bulletins 1996–1 through 1996–2
*Denotes entry since last publication
Revenue Procedures:
91–22
Modified by
96–1, 1996–1 I.R.B. 8
92–20
Modified by
96–1, 1996–1 I.R.B. 8
92–85
Modified by
96–1, 1996–1 I.R.B. 8
93–16
Superseded by
96–11, 1996–2 I.R.B. 18*
95–1
Superseded by
96–1, 1996–1 I.R.B. 8
95–2
Superseded by
96–2, 1996–1 I.R.B. 60
95–3
Superseded by
96–3, 1996–1 I.R.B. 82
95–4
Superseded by
96–4, 1996–1 I.R.B. 94
95–5
Superseded by
96–5, 1996–1 I.R.B. 129
95–6
Superseded by
96–6, 1996–1 I.R.B. 151
95–7
Superseded by
96–7, 1996–1 I.R.B. 185
95–8
Superseded by
96–8, 1996–1 I.R.B. 187
95–50
Superseded by
96–3, 1996–1 I.R.B. 82
1
A cumulative finding list for previously
published items mentioned in Internal Revenue
Bulletins 1995–27 through 1995–52 will be
found in Internal Revenue Bulletin 1996–1, dated
January 2, 1996.
Revenue Rulings:
66–307
Obsoleted by
96–3, 1996–2 I.R.B. 14*
80–80
Obsoleted by
96–3, 1996–2 I.R.B. 14*
92–19
Supplemented in part
96–2, 1996–2 I.R.B. 5*

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NOTES

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NOTES

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NOTES