Internal Revenue Bulletin 2001-15 (PDF rendition): IRS Revenue Rulings

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IINCOME TAX
Rev. Rul. 2001–17, page 1052.
Federal rates; adjusted federal rates; adjusted feder-
al long-term rate, and the long-term exempt rate.For
purposes of sections 382, 1274, 1288, and other sections
of the Code, tables set forth the rates for April 2001.
T.D. 8940, page 1016.
Final regulations under sections 338 and 1060 of the Code
revise the rules relating to deemed and actual asset acquisi-
tions.
EMPLOYMENT TAX
Page 1054.
Railroad retirement; rate determination; quarterly.
The Railroad Retirement Board has determined that the rate
of tax imposed by section 3221 of the Code shall be 26
cents for the quarter beginning April 1, 2001.
EXCISE TAX
REG–106892–00, page 1060.
Proposed regulations under section 6302 of the Code relate
to tax returns, payments, and deposits of excise tax.
ADMINISTRATIVE
T.D. 8943, page 1054.
REG–121109–00, page 1064.
Temporary and proposed regulations under section 6103 of
the Code authorize the IRS to disclose return information to
the Bureau of the Census.
REG–101520–97, page 1057.
Proposed regulations under section 6343 of the Code pro-
vide circumstances under which levied upon property will be
returned and the procedures for requesting a return of prop-
erty.
Announcement 2001–30, page 1065.
This document contains a change of date for the public hear-
ing on proposed regulations (REG–106030–98, 2001–11
I.R.B. 820) and extends the time to submit outlines of oral
comments. A public hearing is scheduled for May 23, 2001.
Internal Revenue
bbuulllleettiinn
Bulletin No. 2001–15
April 9, 2001
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page ii.

April 9, 20012001–15 I.R.B.
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
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Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2001. See Rev. Rul. 2001–17, page 1052.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of April 2001. See
Rev. Rul. 2001–17, page 1052.
Section 338.—Certain Stock
Purchases Treated as Asset
Acquisitions
26 CFR 1.338–1: General principles; status of old
target and new target.
T.D. 8940
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Purchase Price Allocations in
Deemed and Actual Asset
Acquisitions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final
regulations relating to deemed and actual
asset acquisitions under sections 338 and
1060. The final regulations affect sellers
and buyers of corporate stock that are eligi-
ble to elect to treat the transaction as a
deemed asset acquisition. The final regula-
tions also affect sellers and buyers of assets
that constitute a trade or business.
DATES: Effective Date:These regula-
tions are effective March 16, 2001.
Applicability Dates: For dates of ap-
plicability of these regulations, see
§§1.338(i)–1 and 1.1060–1(a)(2).
FOR FURTHER INFORMATION CON-
TACT: Richard Starke of the Office of
Associate Chief Counsel (Corporate),
(202) 622–7790 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under the con-
trol number 1545–1658.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
The collections of information in these
regulations are in §§1.338–2(d),
1.338–2(e)(4), 1.338–5(d)(3), 1.338–
10(a)(4), 1.338(h)(10)–1(d)(2), and
1.1060–1(e)(ii)(A) and (B). The collec-
tions of information are necessary to
make an election to treat a sale of stock as
a sale of assets, to calculate and collect
the appropriate amount of tax in a deemed
or actual asset acquisition, and to deter-
mine the bases of assets acquired in a
deemed or actual asset acquisition.
These collections of information are re-
quired to obtain a benefit. The likely re-
spondents and/or recordkeepers are small
businesses or organizations, businesses,
or other for-profit institutions, and farms.
The regulations provide that a section
338 election is made by filing Form 8023.
The burden for this requirement is re-
flected in the burden of Form 8023. The
regulations also provide that both a seller
and a purchaser must each file an asset ac-
quisition statement on Form 8594. The
burden for this requirement is reflected in
the burden of Form 8594. With respect to
Form 8023, the IRS estimated that 201
forms would be filed each year and that
each taxpayer would require 12.98 hours
to comply. With respect to Form 8594,
the IRS estimated that 20,000 forms
would be filed each year and that each
taxpayer would require 12.25 hours to
comply. These estimates have been made
available for public comment and no pub-
lic comments have been received.
The burden for the collection of infor-
mation in §1.338–2(e)(4) is as follows:
Estimated total annual reporting/
recordkeeping burden: 25 hours
Estimated average annual burden per
respondent/recordkeeper: 0.56 hours
Estimated number of respondents/
recordkeepers: 45
Estimated annual frequency of re-
sponses: On occasion
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS
Reports Clearance Officer, W:CAR:MP:
FP:S:O, Washington, DC 20224, and to
the Office of Management and Budget,
Attn: Desk Officer for the Department of
the Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On August 10, 1999, the IRS and the
Department of Treasury (Treasury) pub-
lished a notice of proposed rulemaking in
the Federal Register(REG–107069–97,
1999–2 C.B. 346 [64 FR 43462]) contain-
ing proposed regulations under sections
338 and 1060 of the Internal Revenue
Code of 1986. On January 7, 2000, the
IRS and Treasury published temporary
regulations in the Federal Register(T. D.
8858, 2000–4 I.R.B. 333 [65 FR 1236])
that are virtually the same as the proposed
regulations published on August 10, 1999.
The preamble to the temporary regula-
tions notes that the proposed regulations
generally were favorably received and
that the IRS and Treasury believe that the
proposed regulations provided clearer
guidance and better rules than the prior
regulations under sections 338 and 1060.
However, the preamble also notes that the
comments received warranted further
consideration.
Explanation of Provisions
In general, the final regulations
adopted herein are very similar to the pro-
posed and temporary regulations in their
organization and substance. However,
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
April 9, 200110162001–15 I.R.B.

2001–15 I.R.B.1017April 9, 2001
changes have been made in several areas,
largely in response to the comments re-
ceived. The principal changes are dis-
cussed below, in the order in which they
appear in the regulations.
Insurance Transactions
Although section 338 treats a target as
having sold all its assets in the deemed
asset sale, proposed §1.338–1(a)(2) pro-
vides that other rules of law may charac-
terize the transaction as something other
than or in addition to a sale and purchase
of assets. Proposed §1.338–1(a)(2) states:
“[f]or example, if target is an insurance
company for which a section 338 election
is made, the deemed asset sale would be
characterized and taxed as an assum-
tion–reinsurance transaction under applic-
able Federal income tax law.” Several
comments urged removal of the quoted
sentence in the final regulations and rec-
ommended that the treatment of transac-
tions involving insurance companies
under section 338 be reserved pending
more complete analysis and guidance.
The IRS and Treasury believe that gener-
ally it is appropriate to view the deemed
asset sale by an insurance company as in-
volving an assumption-reinsurance trans-
action and, therefore, have retained the
sentence in the final regulations. The IRS
and Treasury, however, intend to provide
additional guidance in a separate project.
Residual Method Anti-abuse Rule
The proposed regulations include a
new anti-abuse rule intended to prevent
taxpayers from changing the results of ap-
plying the residual method by engaging in
transactions that have a transitory eco-
nomic effect with respect to the owner-
ship or use of assets. The anti-abuse rule
is intended to apply only to an asset trans-
fer exhibiting objective characteristics
suggesting the transfer was engaged in to
manipulate the operation of the residual
method.
Notwithstanding the limited scope of
the anti-abuse rule, several commentators
suggested further limiting or eliminating
the rule. After studying the comments,
the IRS and Treasury continue to believe
that the anti-abuse rule serves a useful
purpose in protecting the operation of the
residual method. Several changes have
been made, however, to clarify the in-
tended scope of the rule. Thus, the phrase
“to more than an insignificant extent” is
changed in the final regulation to “primar-
ily.” This change is meant to clarify that
some continuing use in its original loca-
tion of an asset transferred to or from the
target is permitted.
A comment requested that the final reg-
ulations elaborate further on the statement
that the Commissioner has the authority
to make appropriate correlative adjust-
ments and that the final regulations in-
clude an example. The final regulations
do not do so, because the nature of any
correlative adjustments would depend on
the particular factual circumstances in
which the rule is applied. Thus, any addi-
tional guidance would provide only lim-
ited assistance. However, the final regu-
lations state that correlative adjustments
should avoid duplication or omission of
any item of income, gain, loss, deduction,
or basis. See §1.338–1(c).
Closing Date Issues
Concerns have been raised about the
possibility that buyers can effectuate
transactions outside the ordinary course
of business after acquiring target stock
that, to the detriment of an unsuspecting
seller, must be reported by the seller on its
return, which normally covers the entire
day on which the acquisition occurs.
Some of these concerns derive from a
reading of §1.1502–76(b) to preclude op-
eration of the “next day rule” whenever a
section 338 election is made for a target.
The “next day rule” of §1.1502–76(b)
provides that if, on the day of a group
member’s change in status as a member, a
transaction occurs that is properly alloca-
ble to the portion of the member’s day
after the event resulting in the change, the
member and all related persons must treat
the transaction as occurring at the begin-
ning of the following day.
Commentators have suggested that a
purchaser acquiring stock of a subsidiary
member of a consolidated group could,
after acquiring the target stock, cause the
target to sell all of its assets to another
person later on the closing date and then
make a unilateral section 338(g) election.
It is suggested that the effect of the elec-
tion is to preclude the operation of the
next day rule, causing the results of the
actual asset sale to fall onto the selling
consolidated group’s tax return. The IRS
and Treasury do not believe that
§1.1502–76(b), as written, automatically
precludes the operation of the next day
rule in a section 338 context, but never-
theless have provided a new rule in these
final regulations that requires the applica-
tion of the next day rule in a section 338
context where the target engages in a
transaction outside the ordinary course of
business on the acquisition date after the
event resulting in the qualified stock pur-
chase (QSP). See §1.338–1(d).
Purchase Definition
Proposed §1.338–3(b)(2) provides
rules concerning the definition of a “pur-
chase” that require more than a nominal
amount to be paid for the stock of the tar-
get. Several comments requested recon-
sideration of the proposed rule. Accord-
ingly, in the temporary regulations, at
§1.338–3T(b)(2), a definition is given for
the term purchase of target affiliate, while
the definition of the term purchase of tar-
getis reserved. The final regulations in-
clude a single definition of purchaseap-
plicable to both targets and target
affiliates, which definition generally con-
forms to the definition of purchase of tar-
get affiliatein the temporary regulations.
Under this definition, stock in a target (or
target affiliate) may be considered pur-
chased if, under general principles of tax
law, the purchasing corporation is consid-
ered to own stock of the target (or target
affiliate) meeting the requirements of sec-
tion 1504(a)(2), notwithstanding that no
amount may be paid for (or allocated to)
the stock.
Transactions After QSPs
Since 1995, the regulations under sec-
tion 338 have provided special rules that
apply, by virtue of section 338, to certain
transfers of target assets following a QSP
of the target’s stock if a section 338 elec-
tion is not made for the target. These pro-
visions modify the normal operation of
the continuity of interest requirement
under section 368 and the interpretation
of the term shareholder for purposes of
section 368(a)(1)(D), as applied to certain
taxpayers. These rules were adopted to
effectuate Congressional intent, in replac-
ing former section 334(b)(2) with section
338, that the deemed sale results provided
by section 338 not be available through
transactions within the purchasing group
after the acquisition. In the final regula-

April 9, 200110182001–15 I.R.B.
tions, these rules are located at
§1.338–3(d).
The 1995 amendments did not provide
any special rule to modify the application
of the statutory requirements for reorgani-
zations under section 368(a)(1)(C). How-
ever, the considerations that justify the
modified application of the continuity of
interest rule and the shareholder defini-
tion for “D” reorganizations also justify
an analogous modification of the “solely
for voting stock” requirement for post-ac-
quisition “C” reorganizations. Accord-
ingly, the final regulations provide that
consideration other than voting stock is-
sued in connection with a QSP is ignored
in determining whether a subsequent
transfer of assets by the target corporation
to a member of its new affiliated group
satisfies the solely for voting stock re-
quirement of a “C” reorganization. See
§1.338–3(d)(4).
Treatment of Liabilities
The proposed regulations eliminate the
prior distinction between “modified ag-
gregate deemed sale price” (or MADSP)
and “aggregate deemed sale price” (or
ADSP), a distinction that appeared to
have been based on the premise that the
new target generally will not bear the tax
liability for the deemed sale where a sec-
tion 338(h)(10) election is made, but that
it generally will bear the liability where a
section 338 (but not section 338(h)(10))
election is made. However, these gener-
alizations were not universally correct in
either situation. Proposed §§1.338–4 and
1.338–5 clarify the treatment of taxes as
liabilities in computing ADSP and “ad-
justed grossed-up basis” (or AGUB).
Commentators asked for further clarifica-
tion of the standards for taking certain
taxes into account. Rather than providing
more specific guidance, which would be
inconsistent with the overall philosophy
of deferring to general tax principles gov-
erning actual transactions, the final regu-
lations further simplify the discussion of
liabilities. Except for the fact that new
target remains liable for old target’s tax li-
abilities (see §1.338–1(b)(3)(i)) and that a
buyer’s assumption of a seller’s income
tax liability with respect to the sale causes
the consideration to “gross up” or “pyra-
mid,” a tax liability is like any other type
of liability and the status of any particular
type of tax liability as a liability includi-
ble in ADSP or AGUB should be deter-
mined under general principles as applied
to the facts relating to the incidence of the
tax liability.
Valuation Rules
Proposed §1.338–6(a)(2)(iii) retains a
statement from prior versions of the regu-
lations that “[i]n certain cases the IRS may
make an independent showing of the value
of goodwill and going concern value as a
means of calling into question the validity
of the taxpayer’s valuation of other as-
sets.” This authority was intended to pro-
vide a means of ensuring that taxpayers do
not overvalue assets in higher classes that
are allocated consideration before the
residual class. As a factual matter, the IRS
and Treasury understand that a low (or no)
allocation to goodwill and going concern
value may result from causes other than a
taxpayer’s overvaluation of assets in
higher classes. Moreover, the IRS and
Treasury accept the soundness of the fun-
damental premise of the residual method
—- that goodwill and going concern value
are the most difficult assets to value inde-
pendently and that their value should be
computed as the residue after all other as-
sets are valued. The final regulations
delete the sentence about valuing goodwill
and going concern value. Under the final
regulations, the IRS retains the ability to
challenge a taxpayer’s valuation of assets
in Classes I through VI, but will do so on
grounds consistent with the residual
method of allocation.
Top-Down Allocation
Changes to the rules for allocating pur-
chase price to the stock and assets of
lower tier subsidiaries were not proposed,
although, as noted in the preamble to the
proposed regulations, considerable study
was given to alternative approaches.
Comments were requested, but none was
received, and the IRS and Treasury to
date have been unable to develop a fully
successful alternative. Accordingly, the
final regulations continue to apply the
“top-down” allocation system, under
which the stock of a lower tier subsidiary
is allocated purchase price in the general
asset category (now Class V) and the
deemed purchase price of its assets is in
turn computed from that stock price and
then allocated within the subsidiary.
In the final regulations, the scope of
Class II assets described in §1.338–
6(b)(2)(ii) is modified to provide that
Class II assets do not include stock of tar-
get affiliates, other than actively traded
stock described in section 1504(a)(4)
(certain preferred stock). Instead, stock
of target affiliates is included in Class V.
This would exclude target affiliate stock
from Class II where the target holds an 80
percent or greater interest in the target af-
filiate but a minority interest in target af-
filiate stock of the same class is actively
traded. It is not clear that the trading
price for shares of a class of stock less
than 20 percent of which is in the hands of
the public, and which consequently may
experience thinner trading volumes, nec-
essarily is indicative of the fair market
value of the 80 percent or greater majority
interest.
Class III Assets
Proposed §1.338–6(b)(2) provides that
Class III assets consist of “accounts re-
ceivable, mortgages, and credit card re-
ceivables from customers which arise in
the ordinary course of business.” Com-
ments suggested that these categories
were too limited. Under the rationales ex-
pressed in the preamble to the proposed
regulations, the IRS and Treasury believe
that other types of debt instruments, and
even other types of assets, should be in-
cluded in Class III. As revised in the final
regulations, Class III assets generally
consist of assets that the taxpayer marks
to market at least annually and debt in-
struments (including receivables). How-
ever, debt instruments issued by related
parties, and certain contingent payment
and convertible debt instruments, are not
included in Class III.
First Year Price Adjustments
Proposed §1.338–7 provides rules for
allocating the ADSP or AGUB when in-
creases or decreases are required after the
close of new target’s first taxable year.
For increases or decreases required before
the end of new target’s first taxable year,
proposed §1.338–4(b)(2)(ii) provides that
“[i]ncreases or decreases with respect to
the elements of ADSP that are taken into
account before the close of new target’s
first taxable year are taken into account
for purposes of determining ADSP and
the deemed sale tax consequences as if
they had been taken into account at the

2001–15 I.R.B.1019April 9, 2001
beginning of the day after the acquisition
date.” Proposed §1.338–5(b)(2)(ii) con-
tains a similar rule for redeterminations of
AGUB. These rules originated in prede-
cessor versions of the regulations under
section 338.
Although no commentator requested
removal of these rules, one comment
highlighted the difficulties posed for the
seller in section 338(h)(10) transactions in
applying a rule based on new target’s
year-end, and requested relief. After re-
viewing this comment, the final regula-
tions remove the rules providing special
treatment for changes in ADSP or AGUB
occurring before the close of new target’s
first taxable year. Instead, the general
rule in §1.338–7 governs the allocation of
all changes in ADSP or AGUB after the
acquisition date. This change is consis-
tent with the IRS’s and Treasury’s ex-
pressed intent in drafting the proposed
regulations to eliminate, to the extent pos-
sible, any special accounting rules in the
section 338 regulations, as it should result
in treatment more consistent with that of
an actual asset sale.
Like-kind Exchanges
A commentator suggested that the final
regulations should apply section 1031 to
old target in its deemed asset sale if the
purchaser pays for target stock with prop-
erty of like kind to old target’s assets or
with cash put in escrow for a successor to
old target to designate for purchase of as-
sets of like kind. This rule would be an
exception to the requirement in
§1.338–1(a)(2) that the transaction be-
tween old target and new target must be a
taxable transaction, and inconsistent with
the requirement of section 338(a)(1) that
target “shall be treated as having sold all
of its assets at the close of the acquisition
date at fair market value . . . .” After con-
sidering the policy concerns and the ad-
ministrative difficulties in creating and
administering an exception for section
1031 exchanges, the IRS and Treasury
have not adopted this suggestion.
S Corporations
A purchaser may agree to compensate
the sellers of an S corporation target for
adverse tax consequences resulting from a
section 338(h)(10) election. When more
than one shareholder in an S corporation
sells stock in the same transaction, the
different shareholders may negotiate dif-
ferent prices for their stock based on vary-
ing Federal and state tax liabilities they
will bear as a result of the transaction.
Some commentators have noted that, in
other cases, different prices may be paid
for control premiums or other reasons.
Under section 1361(b)(1)(D), an S corpo-
ration is permitted to have only one class
of stock. A potential second class of stock
issue arises because the fiction of a sec-
tion 338(h)(10) election is that the target
sells its assets to a new target and then liq-
uidates. Applying that fiction, if the
shareholders are treated as receiving dif-
fering amounts per share in the deemed
liquidation, a second class of stock could
result.
Some commentators have recom-
mended that the final regulations clarify
that the payment of varying amounts per
share to S corporation shareholders will
not cause the S corporation to violate the
single class of stock requirement. The
final regulations respond to these com-
ments by including a statement in
§1.1361–1(l)(2)(v) that the payment of
varying amounts to S corporation share-
holders in a transaction for which a sec-
tion 338(h)(10) election is made will not
cause the S corporation to violate the sin-
gle class of stock requirement of section
1361(b)(1)(D) and §1.1361–1(l), pro-
vided that the varying amounts are negoti-
ated in arm’s length negotiations with the
purchaser.
One commentator requested clarifica-
tion regarding the calculation and alloca-
tion of the purchaser’s AGUB for a target
that was an S corporation that owned a
qualified subchapter S subsidiary (QSub),
where the QSub status does not continue
after the acquisition date and the QSub is
treated as becoming a separate subsidiary
of new target. Although the regulations
require allocation of the AGUB among
the target’s assets held at the beginning of
the day after the acquisition date, they
also require results consistent with those
that would occur if the parties had actu-
ally engaged in the transactions deemed
to occur because of section 338(h)(10),
and taking into account other transactions
that actually occurred or are deemed to
occur. See §1.338(h)(10)–1(d)(9). An ac-
tual sale of the assets of the S corporation
target, including the stock of the QSub, to
a corporation would be treated as a sale
by the S corporation of all of its assets, in-
cluding those of the QSub. If the QSub
status does not continue after the acqui-
sition, the buyer would be treated as
forming a new subsidiary containing the
assets held by the former QSub. See
§1.1361–5(b)(3) Example 9. Accordingly,
the AGUB for the former S corporation
target would be allocated among the as-
sets of the former QSub as though they
were assets of the target, and then the tar-
get would be treated as having formed a
new subsidiary containing the assets of
the former QSub.
Clarification was also requested
regarding the possibility of making a
section 338(h)(10) election for the sale by
an S corporation of stock of a QSub.
As noted above, Example 9of
§1.1361–5(b)(3) indicates that the sale by
an S corporation of all of the stock of a
QSub is treated as an asset sale by the S
corporation to the purchaser of the QSub
stock. No further guidance is provided in
these regulations. The sale of an 80 per-
cent or greater (but less than 100 percent)
interest in the stock of a QSub is not ex-
pected to be a common transaction be-
cause it generally will result in a taxable
transaction with respect to all the assets of
the QSub.
Forms 8023 and 8594
The current temporary regulations pro-
vide that a section 338(h)(10) election for
an S corporation target must be made
jointly by the purchaser and the S corpo-
ration shareholders. These regulations
specifically require nonselling S corpora-
tion shareholders to consent to the elec-
tion. See §1.338(h)(10)–1T(c)(2). How-
ever, the instructions for the election form
(Form 8023) do not clearly require the
nonselling shareholders to sign the elec-
tion form. Moreover, the prior regula-
tions were less clear in requiring non-
selling S corporation shareholders to
consent to the election. Commentators
have requested that the IRS recognize the
validity of section 338(h)(10) elections
for S corporation targets even if not
signed by nonselling shareholders. The
IRS will revise Form 8023 to make clear
that nonselling S corporation shareholders
must also sign. The IRS will recognize
the validity of otherwise valid elections
made on the current version of the form
even if not signed by the nonselling share-

April 9, 200110202001–15 I.R.B.
holders, provided that the S corporation
and all of its shareholders (including non-
selling shareholders) report the tax conse-
quences consistently with the results
under section 338(h)(10). See §1.338(i)
–1(b).
The preamble to the proposed regula-
tions indicates that the IRS and Treasury
were considering requiring that the infor-
mation about the allocation of ADSP and
AGUB currently submitted on the elec-
tion form (Form 8023) instead be submit-
ted by the purchaser and seller(s) sepa-
rately on their income tax returns. Such a
change will be effectuated when Form
8023 is revised. The information about
ADSP and AGUB will be reported by
each party separately on Form 8594,
which also will be revised. With respect
to a transaction subject to a section 338
election, Form 8594 will be filed with the
income tax returns of the old and new tar-
get for the tax periods including the
deemed sale and purchase. Where an
election under section 338(g) is made for
a controlled foreign corporation (CFC),
the purchaser and seller (or their U.S.
shareholder(s)) will be required to submit
separately, on Form 8594, information
about ADSP and AGUB. The Form 8594
will be required to be attached to the last
Form 5471 filed by the seller for old tar-
get, and to the first Form 5471 filed by the
purchaser for new target.
Special Analyses
It has been determined that these final
regulations are not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It has been deter-
mined that a final regulatory flexibility
analysis is required for the collection of
information in this Treasury decision
under 5 U.S.C. 604. This analysis is set
forth below under the heading “Final
Regulatory Flexibility Act Analysis.”
Pursuant to section 7805(f) of the Internal
Revenue Code, these final regulations
will be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their impact on
small business.
Final Regulatory Flexibility Act
Analysis
This analysis is required under the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6). This regulatory action is intended to
simplify and clarify the current rules re-
lating to both deemed and actual asset ac-
quisitions. The current rules were devel-
oped over a long period of time and have
been repeatedly amended. The IRS and
Treasury believe these final regulations
will significantly improve the clarity of
the rules relating to both deemed and ac-
tual asset acquisitions.
The major objective of these final regu-
lations is to modify the rules for allocat-
ing purchase price in both deemed and ac-
tual asset acquisitions. In addition, these
final regulations replace the general rules
for electing to treat a stock sale as an asset
sale.
These collections of information may
affect small businesses if the stock of a
corporation which is a small entity is ac-
quired in a qualified stock purchase or if a
trade or business which is also a small
business is transferred in a taxable trans-
action. Form 8023 (on which an election
to treat a stock sale as an asset sale is
filed) has been submitted to and approved
by the Office of Management and Budget.
With respect to Form 8023, the IRS esti-
mated that 201 forms would be filed each
year and that each taxpayer would require
12.98 hours to comply. Form 8594 (on
which a sale or acquisition of assets con-
stituting a trade or business is reported)
has also been submitted to and approved
by the Office of Management and Budget.
With respect to Form 8594, the IRS esti-
mated that 20,000 forms would be filed
each year and that each taxpayer would
require 12.25 hours to comply. These es-
timates have been made available for pub-
lic comment and no public comments
have been received. The regulations do
not impose new requirements on small
businesses and, in fact, should lessen any
difficulties associated with the existing
reporting requirements by clarifying the
rules associated with deemed and actual
asset acquisitions.
The collections of information require
taxpayers to file an election in order to
treat a stock sale as an asset sale. In addi-
tion, taxpayers must file a statement re-
garding the amount of consideration allo-
cated to each class of assets under the
residual method. The professional skills
that would be necessary to make the elec-
tion or allocate the consideration would
be the same as those required to prepare a
return for the small business.
Drafting Information
The principal author of these regula-
tions is Richard Starke, Office of the As-
sociate Chief Counsel (Corporate). How-
ever, other personnel from the IRS and
Treasury Department participated exten-
sively in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entries
for Sections 1.338–6T, 1.338–7T,
1.338–10T and 1.1060–1T and by adding
entries in numerical order to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.338–6 also issued under 26
U.S.C. 337(d), 338, and 1502.
Section 1.338–7 also issued under 26
U.S.C. 337(d), 338, and 1502.
Section 1.338–10 also issued under 26
U.S.C. 337(d), 338, and 1502.* * *
Section 1.1060–1 also issued under 26
U.S.C. 1060.* * *
Par. 2. In the list below, for each sec-
tion indicated in the left column, remove
the language in the middle column and
add the language in the right column:

2001–15 I.R.B.1021April 9, 2001
SectionRemoveAdd
1.56(g)–1(k)(1), second sentenceof §1.338–6T(b), if otherwiseof §1.338–6(b), if otherwise
1.56(g)–1(k)(1), last sentenceof §1.338–6T(c)(1) and (2) alsoof §1.338–6(c)(1) and (2) also
1.197–2(e)(1), second sentenceSee §1.1060–1T(b)(2)See §1.1060–1(b)(2)
1.197–2(k), Example 6, See §1.338–6T(b)See §1.338–6(b)
paragraph (i), last sentence
1.197–2(k), Example 6,Under §§1.1060–1T(c)(2)Under §§1.1060–1(c)(2) and
paragraph (ii), second sentenceand 1.338–6T(c)(1),1.338–6(c)(1)
1.197–2(k), Example 6, paragraphSee §§1.1060–1T(c)(2)See §§1.1060–1(c)(2)
(ii), last sentenceand 1.338–6T(b)and 1.338–6(b)
1.197–2(k), Example 23(as these terms are (as these terms are
paragraph (iv), first sentencedefined in §1.338–1(c)(13))defined in §1.338–2(c)(17))
1.338–8(h)(1), last sentencenomenclature of §1.338–1(b)nomenclature of §1.338–2(b)
and (c) andand (c) and
1.338–9(a), penultimate sentenceprovided in §1.338–1(c)(14),provided in §1.338–2(c)(18),
1.338–9(b)(1), first sentencethe deemed sale gain, as definedthe deemed sale tax consequences, as
in §1.338–3(b)(4),defined in §1.338–2(c)(7),
1.338–9(b)(1), last sentencethe deemed sale gain.the deemed sale tax consequences.
1.338–9(b)(3)(i)(B)under §1.338(b)–1(e)(2).under §1.338–5(d).
1.338–9(b)(3)(ii)reflect deemed sale gain)reflect deemed sale tax consequences)
1.338–9(b)(4)under §1.338(b)–1(e)(2),under §1.338–5(d),
1.338–9(f)(2), Example 1,and §1.338(b)–1(e)(2).and §1.338–5(d).
paragraph (a), last sentence
1.368–1(a), third sentence(k) and 1.338–3T(c)(3).(k) and 1.338–3(d).
1.368–1(e)(6), Example 4,see §1.338–3T(c)(3) (whichsee §1.338–3(d) (which
paragraph (ii), last sentence
1.597–2(d)(5)(iii)(B)(see §1.338–7T)(see §1.338–7)
1.597–5(c)(3)(i)under §1.338–6T(b), (c)(1) and (2).under §1.338–6(b), (c)(1) and (2).
1.597–5(d)(2)(i)under §1.338–6T(b), (c)(1) and (2).under §1.338–6(b), (c)(1) and (2).
1.921–1T(b)(1), A–1, immediatelyand §1.338–2T(d).and §1.338–2(d).
preceding the penultimate sentence
1.1031(d)–1T last sentencesee §1.1060–1T(b), (c),see §1.1060–1(b), (c),
and (d) Example 1.and (d) Example 1.
1.1031(j)–1(b)(2)(iii),in §1.338–6T(b), to which referencein §1.338–6(b), to which reference is
penultimate sentenceis made by §1.1060–1T(c)(2).made by §1.1060–1(c)(2).
1.1361–4(d), Example 3,Under section 338(a) and Under section 338(a) and
third sentence§1.338(h)(10)–1T(d)(3)§1.338(h)(10)–1(d)(3)
1.1502–75(k)See §1.338(h)(10)–1T(d)(7) forSee §1.338(h)(10)–1(d)(7) for
1.1502–76(b)(1)(ii)(A)(1),See §1.338–10T(a)(5) (deemedSee §1.338–10(a)(5) (deemed
last sentence

Par. 3. Sections 1.338–0 through
1.338–7 are added to read as follows:
§1.338–0 Outline of topics.
This section lists the captions contained
in the regulations under section 338 as
follows:
§1.338–1 General principles; status of
old target and new target.
(a) In general.
(1) Deemed transaction.
(2) Application of other rules of law.
(3) Overview.
(b) Treatment of target under other provi-
sions of the Internal Revenue Code.
(1) General rule for subtitle A.
(2) Exceptions for subtitle A.
(3) General rule for other provisions of
the Internal Revenue Code.
(c) Anti-abuse rule.
(1) In general.
(2) Examples.
(d) Next day rule for post-closing transac-
tions.
§1.338–2 Nomenclature and definitions;
mechanics of the section 338 election.
(a) Scope.
(b) Nomenclature.
(c) Definitions.
(1) Acquisition date.
(2) Acquisition date assets.
(3) Affiliated group.
(4) Common parent.
(5) Consistency period.
(6) Deemed asset sale.
(7) Deemed sale tax consequences.
(8) Deemed sale return.
(9) Domestic corporation.
(10) Old target’s final return.
(11) Purchasing corporation.
(12) Qualified stock purchase.
(13) Related persons.
(14) Section 338 election.
(15) Section 338(h)(10) election.
(16) Selling group.
(17) Target; old target; new target.
(18) Target affiliate.
(19) 12-month acquisition period.
(d) Time and manner of making election.
(e) Special rules for foreign corporations
or DISCs.
(1) Elections by certain foreign purchas-
ing corporations.
(i) General rule.
(ii) Qualifying foreign purchasing corpo-
ration.
(iii) Qualifying foreign target.
(iv) Triggering event.
(v) Subject to United States tax.
(2) Acquisition period.
(3) Statement of section 338 may be filed
by United States shareholders in cer-
tain cases.
(4) Notice requirement for U.S. persons
holding stock in foreign target.
(i) General rule.
(ii) Limitation.
(iii) Form of notice.
(iv) Timing of notice.
(v) Consequence of failure to comply.
(vi) Good faith effort to comply.
§1.338–3 Qualification for the section
338 election.
(a) Scope.
(b) Rules relating to qualified stock pur-
chases.
(1) Purchasing corporation requirement.
(2) Purchase.
(3) Acquisitions of stock from related
corporations.
(i) In general.
(ii) Time for testing relationship.
(iii) Cases where section 338(h)(3)(C)
applies—acquisitions treated as
purchases.
(iv) Examples.
(4) Acquisition date for tiered targets.
(i) Stock sold in deemed asset sale.
(ii) Examples.
(5) Effect of redemptions.
(i) General rule.
(ii) Redemptions from persons unrelated
to the purchasing corporation.
(iii) Redemptions from the purchasing
corporation or related persons during
12-month acquisition period.
(A) General rule.
(B) Exception for certain redemptions
from related corporations.
(iv) Examples.
(c) Effect of post-acquisition events on el-
igibility for section 338 election.
(1) Post-acquisition elimination of tar-
get.
(2) Post-acquisition elimination of the
purchasing corporation.
(d) Consequences of post-acquisition
elimination of target where section
338 election not made.
(1) Scope.
(2) Continuity of interest.
(3) Control requirement.
(4) Solely for voting stock requirement.
(5) Example.
§1.338–4 Aggregate deemed sale price;
various aspects of taxation of the deemed
asset sale.
(a) Scope.
(b) Determination of ADSP.
(1) General rule.
(2) Time and amount of ADSP.
(i) Original determination.
(ii) Redetermination of ADSP.
(iii) Example.
(c) Grossed-up amount realized on the
sale to the purchasing corporation of
the purchasing corporation’s recently
purchased target stock.
(1) Determination of amount.
(2) Example.
(d) Liabilities of old target.
(1) In general.
(2) Time and amount of liabilities.
(e) Deemed sale tax consequences.
(f) Other rules apply in determining
ADSP.
(g) Examples.
(h) Deemed sale of target affiliate stock.
(1) Scope.
(2) In general.
(3) Deemed sale of foreign target affiliate
by a domestic target.
(4) Deemed sale producing effectively
connected income.
(5) Deemed sale of insurance company
target affiliate electing under section
953(d).
(6) Deemed sale of DISC target affiliate.
(7) Anti-stuffing rule.
(8) Examples.
§1.338–5 Adjusted grossed-up basis.
(a) Scope.
(b) Determination of AGUB.
(1) General rule.
(2) Time and amount of AGUB.
(i) Original determination.
(ii) Redetermination of AGUB.
(iii) Examples.
(c) Grossed-up basis of recently pur-
chased stock.
(d) Basis of nonrecently purchased stock;
gain recognition election.
(1) No gain recognition election.
(2) Procedure for making gain recogni-
tion election.
(3) Effect of gain recognition election.
(i) In general.
(ii) Basis amount.
(iii) Losses not recognized.
April 9, 200110222001–15 I.R.B.

(iv) Stock subject to election.
(e) Liabilities of new target.
(1) In general.
(2) Time and amount of liabilities.
(3) Interaction with deemed sale tax con-
sequences.
(f) Adjustments by the Internal Revenue
Service.
(g) Examples.
§1.338–6 Allocation of ADSP and AGUB
among target assets.
(a) Scope.
(1) In general.
(2) Fair market value.
(i) In general.
(ii) Transaction costs.
(iii) Internal Revenue Service authority.
(b) General rule for allocating ADSP and
AGUB.
(1) Reduction in the amount of considera-
tion for Class I assets.
(2) Other assets.
(i) In general.
(ii) Class II assets.
(iii) Class III assets.
(iv) Class IV assets.
(v) Class V assets.
(vi) Class VI assets.
(vii) Class VII assets.
(3) Other items designated by the Internal
Revenue Service.
(c) Certain limitations and other rules for
allocation to an asset.
(1) Allocation not to exceed fair market
value.
(2) Allocation subject to other rules.
(3) Special rule for allocating AGUB
when purchasing corporation has non-
recently purchased stock.
(i) Scope.
(ii) Determination of hypothetical pur-
chase price.
(iii) Allocation of AGUB.
(4) Liabilities taken into account in deter-
mining amount realized on subsequent
disposition.
(d) Examples.
§1.338–7 Allocation of redetermined
ADSP and AGUB among target assets.
(a) Scope.
(b) Allocation of redetermined ADSP and
AGUB.
(c) Special rules for ADSP.
(1) Increases or decreases in deemed sale
tax consequences taxable notwith-
standing old target ceases to exist.
(2) Procedure for transactions in which
section 338(h)(10) is not elected.
(i) Deemed sale tax consequences in-
cluded in new target’s return.
(ii) Carryovers and carrybacks.
(A) Loss carryovers to new target taxable
years.
(B) Loss carrybacks to taxable years of
old target.
(C) Credit carryovers and carrybacks.
(3) Procedure for transactions in which
section 338(h)(10) is elected.
(d) Special rules for AGUB.
(1) Effect of disposition or depreciation of
acquisition date assets.
(2) Section 38 property.
(e) Examples.
§1.338–8 Asset and stock consistency.
(a) Introduction.
(1) Overview.
(2) General application.
(3) Extension of the general rules.
(4) Application where certain dividends
are paid.
(5) Application to foreign target affiliates.
(6) Stock consistency.
(b) Consistency for direct acquisitions.
(1) General rule.
(2) Section 338(h)(10) elections.
(c) Gain from disposition reflected in
basis of target stock.
(1) General rule.
(2) Gain not reflected if section 338 elec-
tion made for target.
(3) Gain reflected by reason of distribu-
tions.
(4) Controlled foreign corporations.
(5) Gain recognized outside the consoli-
dated group.
(d) Basis of acquired assets.
(1) Carryover basis rule.
(2) Exceptions to carryover basis rule for
certain assets.
(3) Exception to carryover basis rule for
de minimisassets.
(4) Mitigation rule.
(i) General rule.
(ii) Time for transfer.
(e) Examples.
(1) In general.
(2) Direct acquisitions.
(f) Extension of consistency to indirect
acquisitions.
(1) Introduction.
(2) General rule.
(3) Basis of acquired assets.
(4) Examples.
(g) Extension of consistency if dividends
qualifying for 100 percent dividends
received deduction are paid.
(1) General rule for direct acquisitions
from target.
(2) Other direct acquisitions having same
effect.
(3) Indirect acquisitions.
(4) Examples.
(h) Consistency for target affiliates that
are controlled foreign corporations.
(1) In general.
(2) Income or gain resulting from asset
dispositions.
(i) General rule.
(ii) Basis of controlled foreign corpora-
tion stock.
(iii) Operating rule.
(iv) Increase in asset or stock basis.
(3) Stock issued by target affiliate that is a
controlled foreign corporation.
(4) Certain distributions.
(i) General rule.
(ii) Basis of controlled foreign corpora-
tion stock.
(iii) Increase in asset or stock basis.
(5) Examples.
(i) [Reserved]
(j) Anti-avoidance rules.
(1) Extension of consistency period.
(2) Qualified stock purchase and 12-
month acquisition period.
(3) Acquisitions by conduits.
(i) Asset ownership.
(A) General rule.
(B) Application of carryover basis rule.
(ii) Stock acquisitions.
(A) Purchase by conduit.
(B) Purchase of conduit by corporation.
(C) Purchase of conduit by conduit.
(4) Conduit.
(5) Existence of arrangement.
(6) Predecessor and successor.
(i) Persons.
(ii) Assets.
(7) Examples.
§1.338–9 International aspects of
section 338.
(a) Scope.
(b) Application of section 338 to foreign
targets.
(1) In general.
(2) Ownership of FT stock on the acquisi-
tion date.
(3) Carryover FT stock.
(i) Definition.
(ii) Carryover of earnings and profits.
2001–15 I.R.B.1023April 9, 2001

(iii) Cap on carryover of earnings and
profits.
(iv) Post-acquisition date distribution of
old FT earnings and profits.
(v) Old FT earnings and profits unaf-
fected by post-acquisition date
deficits.
(vi) Character of FT stock as carryover
FT stock eliminated upon disposition.
(4) Passive foreign investment company
stock.
(c) Dividend treatment under section 1248(e).
(d) Allocation of foreign taxes.
(e) Operation of section 338(h)(16). [Re-
served]
(f) Examples.
§1.338–10 Filing of returns.
(a) Returns including tax liability from
deemed asset sale.
(1) In general.
(2) Old target’s final taxable year other-
wise included in consolidated return
of selling group.
(i) General rule.
(ii) Separate taxable year.
(iii) Carryover and carryback of tax attrib-
utes.
(iv) Old target is a component member of
purchasing corporation’s controlled
group.
(3) Old target is an S corporation.
(4) Combined deemed sale return.
(i) General rule.
(ii) Gain and loss offsets.
(iii) Procedure for filing a combined return.
(iv) Consequences of filing a combined
return.
(5) Deemed sale excluded from purchas-
ing corporation’s consolidated return.
(6) Due date for old target’s final return.
(i) General rule.
(ii) Application of §1.1502–76(c).
(A) In general.
(B) Deemed extension.
(C) Erroneous filing of deemed sale re-
turn.
(D) Erroneous filing of return for regular
tax year.
(E) Last date for payment of tax.
(7) Examples.
(b) Waiver.
(1) Certain additions to tax.
(2) Notification.
(3) Elections or other actions required to
be specified on a timely filed return.
(i) In general.
(ii) New target in purchasing corpora-
tion’s consolidated return.
(4) Examples.
§1.338(h)(10)–1 Deemed asset sale and
liquidation.
(a) Scope.
(b) Definitions.
(1) Consolidated target.
(2) Selling consolidated group.
(3) Selling affiliate; affiliated target.
(4) S corporation target.
(5) S corporation shareholders.
(6) Liquidation.
(c) Section 338(h)(10) election.
(1) In general.
(2) Simultaneous joint election requirement.
(3) Irrevocability.
(4) Effect of invalid election.
(d) Certain consequences of section
338(h)(10) election.
(1) P.
(2) New T.
(3) Old T—deemed sale.
(i) In general.
(ii) Tiered targets.
(4) Old T and selling consolidated group,
selling affiliate, or S corporation
shareholders—deemed liquidation;
tax characterization.
(i) In general.
(ii) Tiered targets.
(5) Selling consolidated group, selling af-
filiate, or S corporation shareholders.
(i) In general.
(ii) Basis and holding period of T stock
not acquired.
(iii) T stock sale.
(6) Nonselling minority shareholders
other than nonselling S corporation
shareholders.
(i) In general.
(ii) T stock sale.
(iii) T stock not acquired.
(7) Consolidated return of selling consoli-
dated group.
(8) Availability of the section 453 install-
ment method.
(i) In deemed asset sale.
(ii) In deemed liquidation.
(9) Treatment consistent with an actual
asset sale.
(e) Examples.
(f) Inapplicability of provisions.
(g) Required information.
§1.338(i)–1 Effective dates.
§1.338–1 General principles; status of
old target and new target.
(a) In general—(1) Deemed transac-
tion. Elections are available under sec-
tion 338 when a purchasing corporation
acquires the stock of another corporation
(the target) in a qualified stock purchase.
One type of election, under section
338(g), is available to the purchasing cor-
poration. Another type of election, under
section 338(h)(10), is, in more limited cir-
cumstances, available jointly to the pur-
chasing corporation and the sellers of the
stock. (Rules concerning eligibility for
these elections are contained in
§§1.338–2, 1.338–3, and 1.338(h)(10)–1.)
Although target is a single corporation
under corporate law, if a section 338 elec-
tion is made, then two separate corpora-
tions, old target and new target, generally
are considered to exist for purposes of
subtitle A of the Internal Revenue Code.
Old target is treated as transferring all of
its assets to an unrelated person in
exchange for consideration that includes
the discharge of its liabilities (see
§1.1001–2(a)), and new target is treated
as acquiring all of its assets from an unre-
lated person in exchange for considera-
tion that includes the assumption of those
liabilities. (Such transaction is, without
regard to its characterization for Federal
income tax purposes, referred to as the
deemed asset sale and the income tax con-
sequences thereof as the deemed sale tax
consequences.) If a section 338(h)(10)
election is made, old target is deemed to
liquidate following the deemed asset sale.
(2) Application of other rules of law.
Other rules of law apply to determine the
tax consequences to the parties as if they
had actually engaged in the transactions
deemed to occur under section 338 and
the regulations thereunder except to the
extent otherwise provided in those regula-
tions. See also §1.338–6(c)(2). Other
rules of law may characterize the transac-
tion as something other than or in addition
to a sale and purchase of assets; however,
the transaction between old and new tar-
get must be a taxable transaction. For ex-
ample, if target is an insurance company
for which a section 338 election is made,
the deemed asset sale would be character-
ized and taxed as an assumption-reinsur-
ance transaction under applicable Federal
income tax law. See §1.817–4(d).
(3) Overview. Definitions and special
nomenclature and rules for making the
section 338 election are provided in
April 9, 200110242001–15 I.R.B.

§1.338–2. Qualification for the section
338 election is addressed in §1.338–3.
The amount for which old target is treated
as selling all of its assets (the aggregate
deemed sale price, or ADSP) is addressed
in §1.338–4. The amount for which new
target is deemed to have purchased all its
assets (the adjusted grossed-up basis, or
AGUB) is addressed in §1.338–5. Sec-
tion 1.338–6 addresses allocation both of
ADSP among the assets old target is
deemed to have sold and of AGUB among
the assets new target is deemed to have
purchased. Section 1.338–7 addresses al-
location of ADSP or AGUB when those
amounts subsequently change. Asset and
stock consistency are addressed in
§1.338–8. International aspects of section
338 are covered in §1.338–9. Rules for
the filing of returns are provided in
§1.338–10. Eligibility for and treatment
of section 338(h)(10) elections is ad-
dressed in §1.338(h)(10)–1.
(b) Treatment of target under other pro-
visions of the Internal Revenue Code—(1)
General rule for subtitle A. Except as
provided in this section, new target is
treated as a new corporation that is unre-
lated to old target for purposes of subtitle
A of the Internal Revenue Code. Thus—
(i) New target is not considered related
to old target for purposes of section 168
and may make new elections under sec-
tion 168 without taking into account the
elections made by old target; and
(ii) New target may adopt, without ob-
taining prior approval from the Commis-
sioner, any taxable year that meets the re-
quirements of section 441 and any
method of accounting that meets the re-
quirements of section 446. Notwithstand-
ing §1.441–1T(b)(2), a new target may
adopt a taxable year on or before the last
day for making the election under section
338 by filing its first return for the desired
taxable year on or before that date.
(2) Exceptions for subtitle A. New tar-
get and old target are treated as the same
corporation for purposes of—
(i) The rules applicable to employee
benefit plans (including those plans de-
scribed in sections 79, 104, 105, 106, 125,
127, 129, 132, 137, and 220), qualified
pension, profit-sharing, stock bonus and
annuity plans (sections 401(a) and
403(a)), simplified employee pensions
(section 408(k)), tax qualified stock op-
tion plans (sections 422 and 423), welfare
benefit funds (sections 419, 419A,
512(a)(3), and 4976), and voluntary em-
ployee benefit associations (section
501(c)(9) and the regulations thereunder);
(ii) Sections 1311 through 1314 (relat-
ing to the mitigation of the effect of limi-
tations), if a section 338(h)(10) election is
not made for target;
(iii) Section 108(e)(5) (relating to the
reduction of purchase money debt);
(iv) Section 45A (relating to the Indian
Employment Credit), section 51 (relating
to the Work Opportunity Credit), section
51A (relating to the Welfare to Work
Credit), and section 1396 (relating to the
Empowerment Zone Act);
(v) Sections 401(h) and 420 (relating to
medical benefits for retirees);
(vi) Section 414 (relating to definitions
and special rules); and
(vii) Any other provision designated in
the Internal Revenue Bulletin by the
Internal Revenue Service. See
§601.601(d)(2)(ii) of this chapter. See,
for example, §1.1001–3(e)(4)(i)(F) pro-
viding that an election under section 338
does not result in the substitution of a new
obligor on target’s debt.
(3) General rule for other provisions of
the Internal Revenue Code. Except as pro-
vided in the regulations under section 338
or in the Internal Revenue Bulletin by the
Internal Revenue Service (see
§601.601(d)(2)(ii) of this chapter), new
target is treated as a continuation of old tar-
get for purposes other than subtitle A of the
Internal Revenue Code. For example—
(i) New target is liable for old target’s
Federal income tax liabilities, including
the tax liability for the deemed sale tax
consequences and those tax liabilities of
the other members of any consolidated
group that included old target that are at-
tributable to taxable years in which those
corporations and old target joined in
the same consolidated return (see
§1.1502–6(a));
(ii) Wages earned by the employees of
old target are considered wages earned by
such employees from new target for pur-
poses of sections 3101 and 3111 (Federal
Insurance Contributions Act) and section
3301 (Federal Unemployment Tax Act);
and
(iii) Old target and new target must use
the same employer identification number
(c) Anti-abuse rule—(1) In general.
The rules of this paragraph (c) apply for
purposes of applying the residual method
as provided for under the regulations
under sections 338 and 1060. The Com-
missioner is authorized to treat any prop-
erty (including cash) transferred by old
target in connection with the transactions
resulting in the application of the residual
method (and not held by target at the close
of the acquisition date) as, nonetheless,
property of target at the close of the acqui-
sition date if the property so transferred is,
within 24 months after the deemed asset
sale, owned by new target, or is owned, di-
rectly or indirectly, by a member of the af-
filiated group of which new target is a
member and continues after the acquisi-
tion date to be held or used primarily in
connection with one or more of the activi-
ties of new target. In addition, the Com-
missioner is authorized to treat any prop-
erty (including cash) transferred to old
target in connection with the transactions
resulting in the application of the residual
method (and held by target at the close of
the acquisition date) as, nonetheless, not
being property of target at the close of the
acquisition date if the property so trans-
ferred is, within 24 months after the
deemed asset sale, not owned by new tar-
get but owned, directly or indirectly, by a
member of the affiliated group of which
new target is a member, or owned by new
target but held or used primarily in con-
nection with an activity conducted, di-
rectly or indirectly, by another member of
the affiliated group of which new target is
a member in combination with other prop-
erty retained by or acquired, directly or in-
directly, from the transferor of the prop-
erty (or a member of the same affiliated
group) to old target. For purposes of this
paragraph (c)(1), an interest in an entity is
considered held or used in connection
with an activity if property of the entity is
so held or used. The authority of the
Commissioner under this paragraph (c)(1)
includes the making of any appropriate
correlative adjustments (avoiding, to the
extent possible, the duplication or omis-
sion of any item of income, gain, loss, de-
duction, or basis).
(2) Examples. The following examples
illustrate this paragraph (c):
Example 1. Prior to a qualified stock purchase
under section 338, target transfers one of its assets to
a related party. The purchasing corporation then
purchases the target stock and also purchases the
transferred asset from the related party. After its
purchase of target, the purchasing corporation and
2001–15 I.R.B.1025April 9, 2001

target are members of the same affiliated group. A
section 338 election is made. Under an arrangement
with the purchaser, the separately transferred asset is
used primarily in connection with target’s activities.
Applying the anti-abuse rule of this paragraph (c),
the Commissioner may consider target to own the
transferred asset for purposes of applying the resid-
ual method under section 338.
Example 2. T owns all the stock of T1. T1 leases
intellectual property to T, which T uses in connec-
tion with its own activities. P, a purchasing corpora-
tion, wishes to buy the T–T1 chain of corporations.
P, in connection with its planned purchase of the T
stock, contracts to consummate a purchase of all the
stock of T1 on March 1 and of all the stock of T on
March 2. Section 338 elections are thereafter made
for both T and T1. Immediately after the purchases,
P, T and T1 are members of the same affiliated
group. T continues to lease the intellectual property
from T1 and that is the primary use of the intellec-
tual property. Thus, an asset of T, the T1 stock, was
removed from T ‘s own assets prior to the qualified
stock purchase of the T stock, T1’s own assets are
used after the deemed asset sale in connection with
T’s own activities, and the T1 stock is after the
deemed asset sale owned by P, a member of the
same affiliated group of which T is a member. Ap-
plying the anti-abuse rule of this paragraph (c), the
Commissioner may, for purposes of application of
the residual method under section 338 both to T and
to T1, consider P to have bought only the stock of T,
with T at the time of the qualified stock purchases of
both T and T1 (the qualified stock purchase of T1
being triggered by the deemed sale under section
338 of T’s assets) owning T1. The Commissioner
accordingly would allocate consideration to T’s as-
sets as though the T1 stock were one of those assets,
and then allocate consideration within T1 based on
the amount allocated to the T1 stock at the T level.
(d) Next day rule for post-closing
transactions. If a target corporation for
which an election under section 338 is
made engages in a transaction outside the
ordinary course of business on the acqui-
sition date after the event resulting in the
qualified stock purchase of the target or a
higher tier corporation, the target and all
persons related thereto (either before or
after the qualified stock purchase) under
section 267(b) or section 707 must treat
the transaction for all Federal income tax
purposes as occurring at the beginning of
the day following the transaction and after
the deemed purchase by new target.
§1.338–2 Nomenclature and definitions;
mechanics of the section 338 election.
(a) Scope. This section prescribes rules
relating to elections under section 338.
(b)Nomenclature. For purposes of the
regulations under section 338 (except as
otherwise provided):
(1) T is a domestic target corporation
that has only one class of stock outstand-
ing. Old T refers to T for periods ending
on or before the close of T’s acquisition
date; new T refers to T for subsequent pe-
riods.
(2) P is the purchasing corporation.
(3) The P group is an affiliated group of
which P is a member.
(4) P1, P2, etc., are domestic corpora-
tions that are members of the P group.
(5) T1, T2, etc., are domestic corpora-
tions that are target affiliates of T. These
corporations (T1, T2, etc.) have only one
class of stock outstanding and may also
be targets.
(6) S is a domestic corporation (unre-
lated to P and B) that owns T prior to the
purchase of T by P. (S is referred to in
cases in which it is appropriate to con-
sider the effects of having all of the out-
standing stock of T owned by a domestic
corporation.)
(7) A, a U.S. citizen or resident, is an
individual (unrelated to P and B) who
owns T prior to the purchase of T by P.
(A is referred to in cases in which it is ap-
propriate to consider the effects of having
all of the outstanding stock of T owned by
an individual who is a U.S. citizen or resi-
dent. Ownership of T by A and ownership
of T by S are mutually exclusive circum-
stances.)
(8) B, a U.S. citizen or resident, is an
individual (unrelated to T, S, and A) who
owns the stock of P.
(9) F, used as a prefix with the other terms
in this paragraph (b), connotes foreign,
rather than domestic, status. For example,
FT is a foreign corporation (as defined in
section 7701(a)(5)) and FA is an individual
other than a U.S. citizen or resident.
(10) CFC, used as a prefix with the
other terms in this paragraph (b) referring
to a corporation, connotes a controlled
foreign corporation (as defined in section
957, taking into account section 953(c)).
A corporation identified with the prefix F
may be a controlled foreign corporation.
(The prefix CFC is used when the corpo-
ration’s status as a controlled foreign cor-
poration is significant.)
(c) Definitions. For purposes of the
regulations under section 338 (except as
otherwise provided)
(1) Acquisition date. The term acquisi-
tion datehas the same meaning as in sec-
tion 338(h)(2).
(2) Acquisition date assets.Acquisition
date assetsare the assets of the target held
at the beginning of the day after the acqui-
sition date (but see §1.338–1(d) (regard-
ing certain transactions on the acquisition
date)).
(3) Affiliated group. The termaffili-
ated grouphas the same meaning as in
section 338(h)(5). Corporations are affili-
ated on any day they are members of the
same affiliated group.
(4)Common parent. The term common
parenthas the same meaning as in section
1504.
(5) Consistency period. The consis-
tency periodis the period described in
section 338(h)(4)(A) unless extended pur-
suant to §1.338–8(j)(1).
(6) Deemed asset sale. The deemed
asset saleis the transaction described in
§1.338–1(a)(1) that is deemed to occur
for purposes of subtitle A of the Internal
Revenue Code if a section 338 election is
made.
(7) Deemed sale tax consequences.
Deemed sale tax consequencesrefers to,
in the aggregate, the Federal income tax
consequences (generally, the income,
gain, deduction, and loss) of the deemed
asset sale. Deemed sale tax consequences
also refers to the Federal income tax con-
sequences of the transfer of a particular
asset in the deemed asset sale.
(8) Deemed sale return. The deemed
sale returnis the return on which target’s
deemed sale tax consequences are re-
ported that does not include any other
items of target. Target files a deemed sale
return when a section 338 election (but
not a section 338(h)(10) election) is filed
for target and target is a member of a sell-
ing group (defined in paragraph (c)(16) of
this section) that files a consolidated re-
turn for the period that includes the acqui-
sition date. See §1.338–10. If target is an
S corporation for the period that ends on
the day before the acquisition date and a
section 338 election (but not a section
338(h)(10) election) is filed for target, see
§1.338–10(a)(3).
(9) Domestic corporation. Adomestic
corporation is a corporation—
(i) That is domestic within the meaning
of section 7701(a)(4) or that is treated as
domestic for purposes of subtitle A of the
Internal Revenue Code (e.g., to which an
election under section 953(d) or 1504(d)
applies); and
(ii) That is not a DISC, a corporation
described in section 1248(e), or a corpo-
April 9, 200110262001–15 I.R.B.

ration to which an election under section
936 applies.
(10) Old target’s final return. Old tar-
get’s final returnis the income tax return
of old target for the taxable year ending at
the close of the acquisition date that in-
cludes the deemed sale tax consequences.
However, if a deemed sale return is filed
for old target, the deemed sale return is
considered old target’s final return.
(11) Purchasing corporation. The term
purchasing corporationhas the same
meaning as in section 338(d)(1). The pur-
chasing corporation may also be referred
to as purchaser. Unless otherwise pro-
vided, any reference to the purchasing
corporation is a reference to all members
of the affiliated group of which the pur-
chasing corporation is a member. See
sections 338(h)(5) and (8). Also, unless
otherwise provided, any reference to the
purchasing corporation is, with respect to
a deemed purchase of stock under section
338(a)(2), a reference to new target with
respect to its own deemed purchase of
stock in another target.
(12) Qualified stock purchase. The
term qualified stock purchasehas the
same meaning as in section 338(d)(3).
(13) Related persons. Two persons are
related if stock in a corporation owned by
one of the persons would be attributed
under section 318(a) (other than section
318(a)(4)) to the other.
(14) Section 338 election. Asection
338 electionis an election to apply sec-
tion 338(a) to target. A section 338 elec-
tion is made by filing a statement of sec-
tion 338 election pursuant to paragraph
(d) of this section. The form on which
this statement is filed is referred to in the
regulations under section 338 as the Form
8023, “Elections Under Section 338 for
Corporations Making Qualified Stock
Purchases.”
(15)Section 338(h)(10) election. A
section 338(h)(10) electionis an election
to apply section 338(h)(10) to target. A
section 338(h)(10) election is made by
making a joint election for target under
§1.338(h)(10)–1 on Form 8023.
(16) Selling group. The selling group
is the affiliated group (as defined in sec-
tion 1504) eligible to file a consolidated
return that includes target for the taxable
period in which the acquisition date oc-
curs. However, a selling group is not an
affiliated group of which target is the
common parent on the acquisition date.
(17) Target; old target; new target.
Targetis the target corporation as defined
in section 338(d)(2). Old targetrefers to
target for periods ending on or before the
close of target’s acquisition date. New
target refers to target for subsequent peri-
ods.
(18) Target affiliate. The term target
affiliatehas the same meaning as in sec-
tion 338(h)(6) (applied without section
338(h)(6)(B)(i)). Thus, a corporation de-
scribed in section 338(h)(6)(B)(i) is con-
sidered a target affiliate for all purposes
of section 338. If a target affiliate is ac-
quired in a qualified stock purchase, it is
also a target.
(19) 12-month acquisition period. The
12-month acquisition period is the period
described in section 338(h)(1), unless ex-
tended pursuant to §1.338–8(j)(2).
(d) Time and manner of making elec-
tion. The purchasing corporation makes a
section 338 election for target by filing a
statement of section 338 election on Form
8023 in accordance with the instructions
to the form. The section 338 election
must be made not later than the 15th day
of the 9th month beginning after the
month in which the acquisition date oc-
curs. A section 338 election is irrevoca-
ble. See §1.338(h)(10)–1(c)(2) for sec-
tion 338(h)(10) elections.
(e) Special rules for foreign corpora-
tions or DISCs—(1) Elections by certain
foreign purchasing corporations—(i)
General rule. A qualifying foreign pur-
chasing corporation is not required to file
a statement of section 338 election for a
qualifying foreign target before the earlier
of 3 years after the acquisition date and
the 180th day after the close of the pur-
chasing corporation’s taxable year within
which a triggering event occurs.
(ii) Qualifying foreign purchasing cor-
poration. A purchasing corporation is a
qualifying foreign purchasing corpora-
tiononly if, during the acquisition period
of a qualifying foreign target, all the cor-
porations in the purchasing corporation’s
affiliated group are foreign corporations
that are not subject to United States tax.
(iii) Qualifying foreign target.A target
is a qualifying foreign target only if target
and its target affiliates are foreign corpo-
rations that, during target’s acquisition pe-
riod, are not subject to United States tax
(and will not become subject to United
States tax during such period because of a
section 338 election). A target affiliate is
taken into account for purposes of the pre-
ceding sentence only if, during target’s
12-month acquisition period, it is or be-
comes a member of the affiliated group
that includes the purchasing corporation.
(iv) Triggering event. Atriggering
eventoccurs in the taxable year of the
qualifying foreign purchasing corporation
in which either that corporation or any
corporation in its affiliated group be-
comes subject to United States tax.
(v) Subject to United States tax. For
purposes of this paragraph (e)(1), a for-
eign corporation is considered subject to
United States tax—
(A) For the taxable year for which that
corporation is required under
§1.6012–2(g) (other than §1.6012–2(g)
(2)(i)(B)(2)) to file a United States in-
come tax return; or
(B) For the period during which that
corporation is a controlled foreign corpo-
ration, a passive foreign investment com-
pany for which an election under section
1295 is in effect, a foreign investment
company, or a foreign corporation the
stock ownership of which is described in
section 552(a)(2).
(2) Acquisition period. For purposes of
this paragraph (e), the term acquisition
periodmeans the period beginning on the
first day of the 12-month acquisition pe-
riod and ending on the acquisition date.
(3) Statement of section 338 election
may be filed by United States sharehold-
ers in certain cases. The United States
shareholders (as defined in section
951(b)) of a foreign purchasing corpora-
tion that is a controlled foreign corpora-
tion (as defined in section 957 (taking into
account section 953(c))) may file a state-
ment of section 338 election on behalf of
the purchasing corporation if the purchas-
ing corporation is not required under
§1.6012–2(g) (other than §1.6012–2(g)
(2)(i)(B)(2)) to file a United States in-
come tax return for its taxable year that
includes the acquisition date. Form 8023
must be filed as described in the form and
its instructions and also must be attached
to the Form 5471, “Information Return of
U.S. Persons With Respect To Certain
Foreign Corporations,” filed with respect
to the purchasing corporation by each
United States shareholder for the purchas-
ing corporation’s taxable year that in-
2001–15 I.R.B.1027April 9, 2001

cludes the acquisition date (or, if para-
graph (e)(1)(i) of this section applies to
the election, for the purchasing corpora-
tion’s taxable year within which it be-
comes a controlled foreign corporation).
The provisions of §1.964–1(c) (including
§1.964–1(c)(7)) do not apply to an elec-
tion made by the United States sharehold-
ers.
(4) Notice requirement for U.S. persons
holding stock in foreign target—(i) Gen-
eral rule. If a target subject to a section
338 election was a controlled foreign cor-
poration, a passive foreign investment
company, or a foreign personal holding
company at any time during the portion of
its taxable year that ends on its acquisition
date, the purchasing corporation must de-
liver written notice of the election (and a
copy of Form 8023, its attachments and
instructions) to—
(A) Each U.S. person (other than a
member of the affiliated group of which
the purchasing corporation is a member
(the purchasing group member)) that, on
the acquisition date of the foreign target,
holds stock in the foreign target; and
(B) Each U.S. person (other than a pur-
chasing group member) that sells stock in
the foreign target to a purchasing group
member during the foreign target’s 12-
month acquisition period.
(ii) Limitation. The notice requirement
of this paragraph (e)(4) applies only where
the section 338 election for the foreign tar-
get affects income, gain, loss, deduction,
or credit of the U.S. person described in
paragraph (e)(4)(i) of this section under
section 551, 951, 1248, or 1293.
(iii) Form of notice. The notice to U.S.
persons must be identified prominently as
a notice of section 338 election and
must—
(A) Contain the name, address, and em-
ployer identification number (if any) of,
and the country (and, if relevant, the
lesser political subdivision) under the
laws of which are organized the purchas-
ing corporation and the relevant target
(i.e., the target the stock of which the par-
ticular U.S. person held or sold under the
circumstances described in paragraph
(e)(4)(i) of this section);
(B) Identify those corporations as the
purchasing corporation and the foreign
target, respectively; and
(C) Contain the following declaration
(or a substantially similar declaration):
THIS DOCUMENT SERVES AS
NOTICE OF AN ELECTION
UNDER SECTION 338 FOR THE
ABOVE CITED FOREIGN TAR-
GET THE STOCK OF WHICH YOU
EITHER HELD OR SOLD UNDER
THE CIRCUMSTANCES DE-
SCRIBED IN TREASURY REGU-
LATIONS SECTION 1.338–2(e)(4).
FOR POSSIBLE UNITED STATES
FEDERAL INCOME TAX CONSE-
QUENCES UNDER SECTION 551,
951, 1248, OR 1293 OF THE INTER-
NAL REVENUE CODE OF 1986
THAT MAY APPLY TO YOU, SEE
TREASURY REGULATIONS SEC-
TION 1.338–9(b). YOU MAY BE
REQUIRED TO ATTACH THE IN-
FORMATION ATTACHED TO THIS
NOTICE TO CERTAIN RETURNS.
(iv) Timing of notice. The notice re-
quired by this paragraph (e)(4) must be
delivered to the U.S. person on or before
the later of the 120th day after the acquisi-
tion date of the particular target or the day
on which Form 8023 is filed. The notice
is considered delivered on the date it is
mailed to the proper address (or an ad-
dress similar enough to complete deliv-
ery), unless the date it is mailed cannot be
reasonably determined. The date of mail-
ing will be determined under the rules of
section 7502. For example, the date of
mailing is the date of U.S. postmark or the
applicable date recorded or marked by a
designated delivery service.
(v) Consequence of failure to comply.
A statement of section 338 election is not
valid if timely notice is not given to one
or more U.S. persons described in this
paragraph (e)(4). If the form of notice
fails to comply with all requirements of
this paragraph (e)(4), the section 338
election is valid, but the waiver rule of
§1.338–10(b)(1) does not apply.
(vi) Good faith effort to comply. The
purchasing corporation will be considered
to have complied with this paragraph
(e)(4), even though it failed to provide no-
tice or provide timely notice to each per-
son described in this paragraph (e)(4), if
the Commissioner determines that the
purchasing corporation made a good faith
effort to identify and provide timely no-
tice to those U.S. persons.
§1.338–3 Qualification for the section
338 election.
(a) Scope. This section provides rules
on whether certain acquisitions of stock
are qualified stock purchases and on other
miscellaneous issues under section 338.
(b) Rules relating to qualified stock pur-
chases—(1) Purchasing corporation re-
quirement. An individual cannot make a
qualified stock purchase of target. Section
338(d)(3) requires, as a condition of a qual-
ified stock purchase, that a corporation pur-
chase the stock of target. If an individual
forms a corporation (new P) to acquire tar-
get stock, new P can make a qualified stock
purchase of target if new P is considered for
tax purposes to purchase the target stock.
Facts that may indicate that new P does not
purchase the target stock include new P’s
merging downstream into target, liquidat-
ing, or otherwise disposing of the target
stock following the purported qualified
stock purchase.
(2) Purchase. The term purchasehas
the same meaning as in section 338(h)(3).
Stock in a target (or target affiliate) may
be considered purchased if, under general
principles of tax law, the purchasing cor-
poration is considered to own stock of the
target (or target affiliate) meeting the re-
quirements of section 1504(a)(2),
notwithstanding that no amount may be
paid for (or allocated to) the stock.
(3) Acquisitions of stock from related
corporations—(i) In general. Stock ac-
quired by a purchasing corporation from a
related corporation (R) is generally not
considered acquired by purchase. See
section 338(h)(3)(A)(iii).
(ii) Time for testing relationship. For
purposes of section 338(h)(3)(A)(iii), a
purchasing corporation is treated as re-
lated to another person if the relationship
specified in section 338(h)(3)(A)(iii) ex-
ists—
(A) In the case of a single transaction,
immediately after the purchase of target
stock;
(B) In the case of a series of acquisi-
tions otherwise constituting a qualified
stock purchase within the meaning of sec-
tion 338(d)(3), immediately after the last
acquisition in such series; and
(C) In the case of a series of transac-
tions effected pursuant to an integrated
plan to dispose of target stock, immedi-
ately after the last transaction in such se-
ries.
(iii) Cases where section 338(h)(3)(C)
applies—acquisitions treated as pur-
April 9, 200110282001–15 I.R.B.

2001–15 I.R.B.1029April 9, 2001
chases. If section 338(h)(3)(C) applies
and the purchasing corporation is treated
as acquiring stock by purchase from R,
solely for purposes of determining when
the stock is considered acquired, target
stock acquired from R is considered to
have been acquired by the purchasing cor-
poration on the day on which the purchas-
ing corporation is first considered to own
that stock under section 318(a) (other than
section 318(a)(4)).
(iv) Examples. The following exam-
ples illustrate this paragraph (b)(3):
Example 1. (i) S is the parent of a group of cor-
porations that are engaged in various businesses.
Prior to January 1, Year 1, S decided to discontinue
its involvement in one line of business. To accom-
plish this, S forms a new corporation, Newco, with a
nominal amount of cash. Shortly thereafter, on Jan-
uary 1, Year 1, S transfers all the stock of the sub-
sidiary conducting the unwanted business (T) to
Newco in exchange for 100 shares of Newco com-
mon stock and a Newco promissory note. Prior to
January 1, Year 1, S and Underwriter (U) had en-
tered into a binding agreement pursuant to which U
would purchase 60 shares of Newco common stock
from S and then sell those shares in an Initial Public
Offering (IPO). On January 6, Year 1, the IPO
closes.
(ii) Newco’s acquisition of T stock is one of a se-
ries of transactions undertaken pursuant to one inte-
grated plan. The series of transactions ends with the
closing of the IPO and the transfer of all the shares
of stock in accordance with the agreements. Imme-
diately after the last transaction effected pursuant to
the plan, S owns 40 percent of Newco, which does
not give rise to a relationship described in section
338(h)(3)(A)(iii). See §1.338–3(b)(3)(ii)(C). Ac-
cordingly, S and Newco are not related for purposes
of section 338(h)(3)(A)(iii).
(iii) Further, because Newco’s basis in the T
stock is not determined by reference to S’s basis in
the T stock and because the transaction is not an ex-
change to which section 351, 354, 355, or 356 ap-
plies, Newco’s acquisition of the T stock is a pur-
chase within the meaning of section 338(h)(3).
Example 2. (i) On January 1 of Year 1, P pur-
chases 75 percent in value of the R stock. On that
date, R owns 4 of the 100 shares of T stock. On June
1 of Year 1, R acquires an additional 16 shares of T
stock. On December 1 of Year 1, P purchases 70
shares of T stock from an unrelated person and 12 of
the 20 shares of T stock held by R.
(ii) Of the 12 shares of T stock purchased by P
from R on December 1 of Year 1, 3 of those shares
are deemed to have been acquired by P on January 1
of Year 1, the date on which 3 of the 4 shares of T
stock held by R on that date were first considered
owned by P under section 318(a)(2)(C) (i.e., 4 x
.75). The remaining 9 shares of T stock purchased
by P from R on December 1 of Year 1 are deemed to
have been acquired by P on June 1 of Year 1, the
date on which an additional 12 of the 20 shares of T
stock owned by R on that date were first considered
owned by P under section 318(a)(2)(C) (i.e., (20 x
.75) –3). Because stock acquisitions by P sufficient
for a qualified stock purchase of T occur within a
12-month period (i.e., 3 shares constructively on
January 1 of Year 1, 9 shares constructively on June
1 of Year 1, and 70 shares actually on December 1 of
Year 1), a qualified stock purchase is made on De-
cember 1 of Year 1.
Example 3. (i) On February 1 of Year 1, P acquires
25 percent in value of the R stock from B (the sole
shareholder of P). That R stock is not acquired by
purchase. See section 338(h)(3)(A)(iii). On that date,
R owns 4 of the 100 shares of T stock. On June 1 of
Year 1, P purchases an additional 25 percent in value
of the R stock, and on January 1 of Year 2, P pur-
chases another 25 percent in value of the R stock. On
June 1 of Year 2, R acquires an additional 16 shares of
the T stock. On December 1 of Year 2, P purchases
68 shares of the T stock from an unrelated person and
12 of the 20 shares of the T stock held by R.
(ii) Of the 12 shares of the T stock purchased by
P from R on December 1 of Year 2, 2 of those shares
are deemed to have been acquired by P on June 1 of
Year 1, the date on which 2 of the 4 shares of the T
stock held by R on that date were first considered
owned by P under section 318(a)(2)(C) (i.e., 4 x .5).
For purposes of this attribution, the R stock need not
be acquired by P by purchase. See section
338(h)(1). (By contrast, the acquisition of the T
stock by P from R does not qualify as a purchase un-
less P has acquired at least 50 percent in value of the
R stock by purchase. Section 338(h)(3)(C)(i). Of
the remaining 10 shares of the T stock purchased by
P from R on December 1 of Year 2, 1 of those shares
is deemed to have been acquired by P on January 1
of Year 2, the date on which an additional 1 share of
the 4 shares of the T stock held by R on that date was
first considered owned by P under section
318(a)(2)(C) (i.e., (4 x .75) –2). The remaining 9
shares of the T stock purchased by P from R on De-
cember 1 of Year 2, are deemed to have been ac-
quired by P on June 1 of Year 2, the date on which an
additional 12 shares of the T stock held by R on that
date were first considered owned by P under section
318(a)(2)(C) (i.e., (20 x .75) –3). Because a quali-
fied stock purchase of T by P is made on December
1 of Year 2 only if all 12 shares of the T stock pur-
chased by P from R on that date are considered ac-
quired during a 12-month period ending on that date
(so that, in conjunction with the 68 shares of the T
stock P purchased on that date from the unrelated
person, 80 of T’s 100 shares are acquired by P dur-
ing a 12-month period) and because 2 of those 12
shares are considered to have been acquired by P
more than 12 months before December 1 of Year 2
(i.e., on June 1 of Year 1), a qualified stock purchase
is not made. (Under §1.338–8(j)(2), for purposes of
applying the consistency rules, P is treated as mak-
ing a qualified stock purchase of T if, pursuant to an
arrangement, P purchases T stock satisfying the re-
quirements of section 1504(a)(2) over a period of
more than 12 months.)
Example 4. Assume the same facts as in Example
3, except that on February 1 of Year 1, P acquires 25
percent in value of the R stock by purchase. The re-
sult is the same as in Example 3.
(4) Acquisition date for tiered targets—
(i) Stock sold in deemed asset sale. If an
election under section 338 is made for tar-
get, old target is deemed to sell target’s
assets and new target is deemed to acquire
those assets. Under section 338(h)(3)(B),
new target’s deemed purchase of stock of
another corporation is a purchase for pur-
poses of section 338(d)(3) on the acquisi-
tion date of target. If new target’s deemed
purchase causes a qualified stock pur-
chase of the other corporation and if a
section 338 election is made for the other
corporation, the acquisition date for the
other corporation is the same as the acqui-
sition date of target. However, the
deemed sale and purchase of the other
corporation’s assets is considered to take
place after the deemed sale and purchase
of target’s assets.
(ii) Example. The following example
illustrates this paragraph (b)(4):
Example. A owns all of the T stock. T owns 50 of
the 100 shares of X stock. The other 50 shares of X
stock are owned by corporation Y, which is unrelated
to A, T, or P. On January 1 of Year 1, P makes a qual-
ified stock purchase of T from A and makes a section
338 election for T. On December 1 of Year 1, P pur-
chases the 50 shares of X stock held by Y. A quali-
fied stock purchase of X is made on December 1 of
Year 1, because the deemed purchase of 50 shares of
X stock by new T because of the section 338 election
for T and the actual purchase of 50 shares of X stock
by P are treated as purchases made by one corpora-
tion. Section 338(h)(8). For purposes of determin-
ing whether those purchases occur within a 12-month
acquisition period as required by section 338(d)(3), T
is deemed to purchase its X stock on T’s acquisition
date, i.e., January 1 of Year 1.
(5) Effect of redemptions—(i) General
rule. Except as provided in this para-
graph (b)(5), a qualified stock purchase is
made on the first day on which the per-
centage ownership requirements of sec-
tion 338(d)(3) are satisfied by reference to
target stock that is both—
(A) Held on that day by the purchasing
corporation; and
(B) Purchased by the purchasing corpo-
ration during the 12–month period ending
on that day.
(ii) Redemptions from persons unre-
lated to the purchasing corporation. Tar-
get stock redemptions from persons unre-
lated to the purchasing corporation that
occur during the 12-month acquisition pe-
riod are taken into account as reductions
in target’s outstanding stock for purposes
of determining whether target stock pur-
chased by the purchasing corporation in
the 12-month acquisition period satisfies
the percentage ownership requirements of
section 338(d)(3).
(iii) Redemptions from the purchasing
corporation or related persons during 12-
month acquisition period—(A) General

rule. For purposes of the percentage
ownership requirements of section
338(d)(3), a redemption of target stock
during the 12-month acquisition period
from the purchasing corporation or from
any person related to the purchasing cor-
poration is not taken into account as a re-
duction in target’s outstanding stock.
(B) Exception for certain redemptions
from related corporations. A redemption
of target stock during the 12-month acqui-
sition period from a corporation related to
the purchasing corporation is taken into
account as a reduction in target’s out-
standing stock to the extent that the re-
deemed stock would have been consid-
ered purchased by the purchasing
corporation (because of section
338(h)(3)(C)) during the 12-month acqui-
sition period if the redeemed stock had
been acquired by the purchasing corpora-
tion from the related corporation on the
day of the redemption. See paragraph
(b)(3) of this section.
(iv) Examples. The following exam-
ples illustrate this paragraph (b)(5):
Example 1. QSP on stock purchase date; re-
demption from unrelated person during 12-month
period.A owns all 100 shares of T stock. On Janu-
ary 1 of Year 1, P purchases 40 shares of the T stock
from A. On July 1 of Year 1, T redeems 25 shares
from A. On December 1 of Year 1, P purchases 20
shares of the T stock from A. P makes a qualified
stock purchase of T on December 1 of Year 1, be-
cause the 60 shares of T stock purchased by P within
the 12-month period ending on that date satisfy the
80-percent ownership requirements of section
338(d)(3) (i.e., 60/75 shares), determined by taking
into account the redemption of 25 shares.
Example 2. QSP on stock redemption date; re-
demption from unrelated person during 12-month
period. The facts are the same as in Example 1, ex-
cept that P purchases 60 shares of T stock on Janu-
ary 1 of Year 1 and none on December 1 of Year 1.
P makes a qualified stock purchase of T on July 1 of
Year 1, because that is the first day on which the T
stock purchased by P within the preceding 12-month
period satisfies the 80-percent ownership require-
ments of section 338(d)(3) (i.e., 60/75 shares), deter-
mined by taking into account the redemption of 25
shares.
Example 3. Redemption from purchasing corpo-
ration not taken into account. On December 15 of
Year 1, T redeems 30 percent of its stock from P.
The redeemed stock was held by P for several years
and constituted P’s total interest in T. On December
1 of Year 2, P purchases the remaining T stock from
A. P does not make a qualified stock purchase of T
on December 1 of Year 2. For purposes of the
80–percent ownership requirements of section
338(d)(3), the redemption of P’s T stock on Decem-
ber 15 of Year 1 is not taken into account as a reduc-
tion in T’s outstanding stock.
Example 4. Redemption from related person
taken into account. On January 1 of Year 1, P pur-
chases 60 of the 100 shares of X stock. On that date,
X owns 40 of the 100 shares of T stock. On April 1
of Year 1, T redeems X’s T stock and P purchases the
remaining 60 shares of T stock from an unrelated
person. For purposes of the 80-percent ownership
requirements of section 338(d)(3), the redemption of
the T stock from X (a person related to P) is taken
into account as a reduction in T’s outstanding stock.
If P had purchased the 40 redeemed shares from X
on April 1 of Year 1, all 40 of the shares would have
been considered purchased (because of section
338(h)(3)(C)(i)) during the 12- month period ending
on April 1 of Year 1 (24 of the 40 shares would have
been considered purchased by P on January 1 of
Year 1 and the remaining 16 shares would have been
considered purchased by P on April 1 of Year 1).
See paragraph (b)(3) of this section. Accordingly, P
makes a qualified stock purchase of T on April 1 of
Year 1, because the 60 shares of T stock purchased
by P on that date satisfy the 80-percent ownership
requirements of section 338(d)(3) (i.e., 60/60
shares), determined by taking into account the re-
demption of 40 shares.
(c) Effect of post-acquisition events on
eligibility for section 338 election—(1)
Post-acquisition elimination of target. (i)
The purchasing corporation may make an
election under section 338 for target even
though target is liquidated on or after the
acquisition date. If target liquidates on
the acquisition date, the liquidation is
considered to occur on the following day
and immediately after new target’s
deemed purchase of assets. The purchas-
ing corporation may also make an elec-
tion under section 338 for target even
though target is merged into another cor-
poration, or otherwise disposed of by the
purchasing corporation provided that,
under the facts and circumstances, the
purchasing corporation is considered for
tax purposes as the purchaser of the target
stock.
(ii) The following examples illustrate
this paragraph (c)(1):
Example 1. On January 1 of Year 1, P purchases
100 percent of the outstanding common stock of T.
On June 1 of Year 1, P sells the T stock to an unre-
lated person. Assuming that P is considered for tax
purposes as the purchaser of the T stock, P remains
eligible, after June 1 of Year 1, to make a section 338
election for T that results in a deemed asset sale of
T’s assets on January 1 of Year 1.
Example 2. On January 1 of Year 1, P makes a
qualified stock purchase of T. On that date, T owns
the stock of T1. On March 1 of Year 1, T sells the
T1 stock to an unrelated person. On April 1 of Year
1, P makes a section 338 election for T. Notwith-
standing that the T1 stock was sold on March 1 of
Year 1, the section 338 election for T on April 1 of
Year 1 results in a qualified stock purchase by T of
T1 on January 1 of Year 1. See paragraph (b)(4)(i)
of this section.
(2) Post-acquisition elimination of the
purchasing corporation. An election
under section 338 may be made for target
after the acquisition of assets of the pur-
chasing corporation by another corpora-
tion in a transaction described in section
381(a), provided that the purchasing cor-
poration is considered for tax purposes as
the purchaser of the target stock. The ac-
quiring corporation in the section 381(a)
transaction may make an election under
section 338 for target.
(d) Consequences of post-acquisition
elimination of target where section 338
election not made—(1) Scope. The rules
of this paragraph (d) apply to the transfer
of target assets to the purchasing corpora-
tion (or another member of the same affil-
iated group as the purchasing corporation)
(the transferee) following a qualified
stock purchase of target stock, if the pur-
chasing corporation does not make a sec-
tion 338 election for target. Notwith-
standing the rules of this paragraph (d),
section 354(a) (and so much of section
356 as relates to section 354) cannot
apply to any person other than the pur-
chasing corporation or another member of
the same affiliated group as the purchas-
ing corporation unless the transfer of tar-
get assets is pursuant to a reorganization
as determined without regard to this para-
graph (d).
(2) Continuity of interest. By virtue of
section 338, in determining whether the
continuity of interest requirement of
§1.368–1(b) is satisfied on the transfer of
assets from target to the transferee, the
purchasing corporation’s target stock ac-
quired in the qualified stock purchase rep-
resents an interest on the part of a person
who was an owner of the target’s business
enterprise prior to the transfer that can be
continued in a reorganization.
(3) Control requirement. By virtue of
section 338, the acquisition of target stock
in the qualified stock purchase will not
prevent the purchasing corporation from
qualifying as a shareholder of the target
transferor for the purpose of determining
whether, immediately after the transfer of
target assets, a shareholder of the trans-
feror is in control of the corporation to
which the assets are transferred within the
meaning of section 368(a)(1)(D).
(4) Solely for voting stock requirement.
By virtue of section 338, the acquisition
of target stock in the qualified stock pur-
chase for consideration other than voting
stock will not prevent the subsequent
April 9, 200110302001–15 I.R.B.

transfer of target assets from satisfying
the solely for voting stock requirement for
purposes of determining if the transfer of
target assets qualifies as a reorganization
under section 368(a)(1)(C).
(5) Example. The following example
illustrates this paragraph (d):
Example. (i) Facts. P, T, and X are domestic cor-
porations. T and X each operate a trade or business.
A and K, individuals unrelated to P, own 85 and 15
percent, respectively, of the stock of T. P owns all of
the stock of X. The total adjusted basis of T’s prop-
erty exceeds the sum of T’s liabilities plus the
amount of liabilities to which T’s property is subject.
P purchases all of A’s T stock for cash in a qualified
stock purchase. P does not make an election under
section 338(g) with respect to its acquisition of T
stock. Shortly after the acquisition date, and as part
of the same plan, T merges under applicable state
law into X in a transaction that, but for the question
of continuity of interest, satisfies all the require-
ments of section 368(a)(1)(A). In the merger, all of
T’s assets are transferred to X. P and K receive X
stock in exchange for their T stock. P intends to re-
tain the stock of X indefinitely.
(ii) Status of transfer as a reorganization. By
virtue of section 338, for the purpose of determining
whether the continuity of interest requirement of
§1.368–1(b) is satisfied, P’s T stock acquired in the
qualified stock purchase represents an interest on the
part of a person who was an owner of T’s business
enterprise prior to the transfer that can be continued
in a reorganization through P’s continuing owner-
ship of X. Thus, the continuity of interest require-
ment is satisfied and the merger of T into X is a reor-
ganization within the meaning of section
368(a)(1)(A). Moreover, by virtue of section 338,
the requirement of section 368(a)(1)(D) that a target
shareholder control the transferee immediately after
the transfer is satisfied because P controls X imme-
diately after the transfer. In addition, all of T’s as-
sets are transferred to X in the merger and P and K
receive the X stock exchanged therefor in pursuance
of the plan of reorganization. Thus, the merger of T
into X is also a reorganization within the meaning of
section 368(a)(1)(D).
(iii) Treatment of T and X. Under section 361(a),
T recognizes no gain or loss in the merger. Under
section 362(b), X’s basis in the assets received in the
merger is the same as the basis of the assets in T’s
hands. X succeeds to and takes into account the
items of T as provided in section 381.
(iv) Treatment of P. By virtue of section 338, the
transfer of T assets to X is a reorganization. Pur-
suant to that reorganization, P exchanges its T stock
solely for stock of X, a party to the reorganization.
Because P is the purchasing corporation, section 354
applies to P’s exchange of T stock for X stock in the
merger of T into X. Thus, P recognizes no gain or
loss on the exchange. Under section 358, P’s basis
in the X stock received in the exchange is the same
as the basis of P’s T stock exchanged therefor.
(v) Treatment of K. Because K is not the pur-
chasing corporation (or an affiliate thereof), section
354 cannot apply to K’s exchange of T stock for X
stock in the merger of T into X unless the transfer of
T’s assets is pursuant to a reorganization as deter-
mined without regard to this paragraph (d). Under
general principles of tax law applicable to reorgani-
zations, the continuity of interest requirement is not
satisfied because P’s stock purchase and the merger
of T into X are pursuant to an integrated transaction
in which A, the owner of 85 percent of the stock of
T, received solely cash in exchange for A’s T stock.
See, e.g., §1.368–1(e)(1)(i); Yoc Heating v. Commis-
sioner, 61 T.C. 168 (1973); Kass v. Commissioner,
60 T.C. 218 (1973), aff’d, 491 F.2d 749 (3d Cir.
1974). Thus, the requisite continuity of interest
under §1.368–1(b) is lacking and section 354 does
not apply to K’s exchange of T stock for X stock. K
recognizes gain or loss, if any, pursuant to section
1001(c) with respect to its T stock.
§1.338–4 Aggregate deemed sale price;
various aspects of taxation of the deemed
asset sale.
(a) Scope. This section provides rules
under section 338(a)(1) to determine the
aggregate deemed sale price (ADSP) for
target. ADSP is the amount for which old
target is deemed to have sold all of its as-
sets in the deemed asset sale. ADSP is al-
located among target’s assets in accor-
dance with §1.338–6 to determine the
amount for which each asset is deemed to
have been sold. When a subsequent in-
crease or decrease is required under gen-
eral principles of tax law with respect to
an element of ADSP, the redetermined
ADSP is allocated among target’s assets
in accordance with §1.338–7. This
§1.338–4 also provides rules regarding
the recognition of gain or loss on the
deemed sale of target affiliate stock.
Notwithstanding section 338(h)(6)(B)(ii),
stock held by a target affiliate in a foreign
corporation or in a corporation that is a
DISC or that is described in section
1248(e) is not excluded from the opera-
tion of section 338.
(b) Determination of ADSP—(1) Gen-
eral rule. ADSP is the sum of—
(i) The grossed-up amount realized on
the sale to the purchasing corporation of
the purchasing corporation’s recently pur-
chased target stock (as defined in section
338(b)(6)(A)); and
(ii) The liabilities of old target.
(2) Time and amount of ADSP—(i)
Original determination. ADSP is initially
determined at the beginning of the day
after the acquisition date of target. Gen-
eral principles of tax law apply in deter-
mining the timing and amount of the ele-
ments of ADSP.
(ii) Redetermination of ADSP. ADSP
is redetermined at such time and in such
amount as an increase or decrease would
be required, under general principles of
tax law, for the elements of ADSP. For
example, ADSP is redetermined because
of an increase or decrease in the amount
realized for recently purchased stock or
because liabilities not originally taken
into account in determining ADSP are
subsequently taken into account. In-
creases or decreases with respect to the el-
ements of ADSP result in the reallocation
of ADSP among target’s assets under
§1.338–7.
(iii) Example. The following example
illustrates this paragraph (b)(2):
Example. In Year 1, T, a manufacturer, purchases
a customized delivery truck from X with purchase
money indebtedness having a stated principal
amount of $100,000. P acquires all of the stock of T
in Year 3 for $700,000 and makes a section 338 elec-
tion for T. Assume T has no liabilities other than its
purchase money indebtedness to X. In Year 4, when
T is neither insolvent nor in a title 11 case, T and X
agree to reduce the amount of the purchase money
indebtedness to $80,000. Assume further that the re-
duction would be a purchase price reduction under
section 108(e)(5). T and X’s agreement to reduce
the amount of the purchase money indebtedness
would not, under general principles of tax law that
would apply if the deemed asset sale had actually
occurred, change the amount of liabilities of old tar-
get taken into account in determining its amount re-
alized. Accordingly, ADSP is not redetermined at
the time of the reduction. See §1.338–5(b)(2)(iii)
Example 1for the effect on AGUB.
(c) Grossed-up amount realized on the
sale to the purchasing corporation of the
purchasing corporation’s recently pur-
chased target stock—(1) Determination
of amount. The grossed-up amount real-
ized on the sale to the purchasing corpora-
tion of the purchasing corporation’s re-
cently purchased target stock is an
amount equal to—
(i) The amount realized on the sale to
the purchasing corporation of the pur-
chasing corporation’s recently purchased
target stock determined as if the selling
shareholder(s) were required to use old
target’s accounting methods and charac-
teristics and the installment method were
not available and determined without re-
gard to the selling costs taken into ac-
count under paragraph (c)(1)(iii) of this
section;
(ii) Divided by the percentage of target
stock (by value, determined on the acqui-
sition date) attributable to that recently
purchased target stock;
(iii) Less the selling costs incurred by
the selling shareholders in connection
with the sale to the purchasing corpora-
tion of the purchasing corporation’s re-
cently purchased target stock that reduce
2001–15 I.R.B.1031April 9, 2001

their amount realized on the sale of the
stock (e.g., brokerage commissions and
any similar costs to sell the stock).
(2) Example. The following example
illustrates this paragraph (c):
Example. T has two classes of stock outstanding,
voting common stock and preferred stock described
in section 1504(a)(4). On March 1 of Year 1, P pur-
chases 40 percent of the outstanding T stock from S1
for $500, 20 percent of the outstanding T stock from
S2 for $225, and 20 percent of the outstanding T
stock from S3 for $275. On that date, the fair mar-
ket value of all the T voting common stock is $1,250
and the preferred stock $750. S1, S2, and S3 incur
$40, $35, and $25 respectively of selling costs. S1
continues to own the remaining 20 percent of the
outstanding T stock. The grossed-up amount real-
ized on the sale to P of P’s recently purchased T
stock is calculated as follows: The total amount re-
alized (without regard to selling costs) is $1,000
(500 + 225 + 275). The percentage of T stock by
value on the acquisition date attributable to the re-
cently purchased T stock is 50% (1,000/(1,250 +
750)). The selling costs are $100 (40 + 35 + 25).
The grossed-up amount realized is $1,900 (1,000/.5
-100).
(d) Liabilities of old target—(1) In gen-
eral. In general, the liabilities of old tar-
get are measured as of the beginning of
the day after the acquisition date. (But
see §1.338–1(d) (regarding certain trans-
actions on the acquisition date).) In order
to be taken into account in ADSP, a liabil-
ity must be a liability of target that is
properly taken into account in amount re-
alized under general principles of tax law
that would apply if old target had sold its
assets to an unrelated person for consider-
ation that included the discharge of its lia-
bilities. See §1.1001–2(a). Such liabili-
ties may include liabilities for the tax
consequences resulting from the deemed
sale.
(2) Time and amount of liabilities. The
time for taking into account liabilities of
old target in determining ADSP and the
amount of the liabilities taken into ac-
count is determined as if old target had
sold its assets to an unrelated person for
consideration that included the discharge
of the liabilities by the unrelated person.
For example, if no amount of a target lia-
bility is properly taken into account in
amount realized as of the beginning of the
day after the acquisition date, the liability
is not initially taken into account in deter-
mining ADSP (although it may be taken
into account at some later date).
(e) Deemed sale tax consequences.
Gain or loss on each asset in the deemed
sale is computed by reference to the
ADSP allocated to that asset. ADSP is al-
located under the rules of §1.338–6.
Though deemed sale tax consequences
may increase or decrease ADSP by creat-
ing or reducing a tax liability, the amount
of the tax liability itself may be a function
of the size of the deemed sale tax conse-
quences. Thus, these determinations may
require trial and error computations.
(f) Other rules apply in determining
ADSP. ADSP may not be applied in such
a way as to contravene other applicable
rules. For example, a capital loss cannot
be applied to reduce ordinary income in
calculating the tax liability on the deemed
sale for purposes of determining ADSP.
(g) Examples. The following examples
illustrate this section. For purposes of the
examples in this paragraph (g), unless
otherwise stated, T is a calendar year tax-
payer that files separate returns and that
has no loss, tax credit, or other carryovers
to Year 1. Depreciation for Year 1 is not
taken into account. T has no liabilities
other than the Federal income tax liability
resulting from the deemed asset sale, and
the T shareholders have no selling costs.
Assume that T’s tax rate for any ordinary
income or net capital gain resulting from
the deemed sale of assets is 34 percent
and that any capital loss is offset by capi-
tal gain. On July 1 of Year 1, P purchases
all of the stock of T and makes a section
338 election for T. The examples are as
follows:
Example 1. One class. (i) On July 1 of Year 1,
T’s only asset is an item of section 1245 property
with an adjusted basis to T of $50,400, a recomputed
basis of $80,000, and a fair market value of
$100,000. P purchases all of the T stock for
$75,000, which also equals the amount realized for
the stock determined as if the selling shareholder(s)
were required to use old target’s accounting methods
and characteristics.
(ii) ADSP is determined as follows (for purposes
of this section (g), G is the grossed-up amount real-
ized on the sale to P of P’s recently purchased T
stock, L is T’s liabilities other than T’s tax liability
for the deemed sale tax consequences, T
R
is the ap-
plicable tax rate, and B is the adjusted basis of the
asset deemed sold):
ADSP = G + L + T
R
x (ADSP - B)
ADSP = ($75,000/1) + $0 + .34 x (ADSP -
$50,400)
ADSP = $75,000 + .34ADSP - $17,136
.66ADSP = $57,864
ADSP = $87,672.72
(iii) Because ADSP for T ($87,672.72) does not
exceed the fair market value of T’s asset ($100,000),
a Class V asset, T’s entire ADSP is allocated to that
asset. Thus, T’s deemed sale results in $37,272.72
of taxable income (consisting of $29,600 of ordinary
income and $7,672.72 of capital gain).
(iv) The facts are the same as in paragraph (i) of
this Example 1, except that on July 1 of Year 1, P
purchases only 80 of the 100 shares of T stock for
$60,000. The grossed-up amount realized on the
sale to P of P’s recently purchased T stock (G) is
$75,000 ($60,000/.8). Consequently, ADSP and the
deemed sale tax consequences are the same as in
paragraphs (ii) and (iii) of this Example 1.
(v) The facts are the same as in paragraph (i) of
this Example 1, except that T also has goodwill (a
Class VII asset) with an appraised value of $10,000.
The results are the same as in paragraphs (ii) and
(iii) of this Example 1. Because ADSP does not ex-
ceed the fair market value of the Class V asset, no
amount is allocated to the Class VII asset (good-
will).
Example 2. More than one class. (i) P purchases
all of the T stock for $140,000, which also equals the
amount realized for the stock determined as if the
selling shareholder(s) were required to use old tar-
get’s accounting methods and characteristics. On
July 1 of Year 1, T has liabilities (not including the
tax liability for the deemed sale tax consequences)
of $50,000, cash (a Class I asset) of $10,000, ac-
tively traded securities (a Class II asset) with a basis
of $4,000 and a fair market value of $10,000, good-
will (a Class VII asset) with a basis of $3,000, and
the following Class V assets:
April 9, 200110322001–15 I.R.B.
AssetBasisFMVRatio of asset
FMV to total
Class V FMV
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000$ 35,000.14
Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,00050,000.20
Equipment A (Recomputed basis $80,000) . . . . . . . . . . . . . . . . 5,00090,000.36
Equipment B (Recomputed basis $20,000). . . . . . . . . . . . . . . . 10,00075,000.30
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000$ 250,0001.00

2001–15 I.R.B.1033April 9, 2001
(ii) ADSP exceeds $20,000. Thus, $10,000 of
ADSP is allocated to the cash and $10,000 to the
actively traded securities. The amount allocated to
an asset (other than a Class VII asset) cannot ex-
ceed its fair market value (however, the fair market
value of any property subject to nonrecourse in-
debtedness is treated as being not less than the
amount of such indebtedness; see §1.338–6(a)(2)).
See §1.338–6(c)(1) (relating to fair market value
limitation).
(iii) The portion of ADSP allocable to the Class V
assets is preliminarily determined as follows (in the
formula, the amount allocated to the Class I assets is
referred to as I and the amount allocated to the Class
II assets as II):
ADSP
V
= (G - (I + II)) + L + T
R
x [(II - B
II
) +
(ADSP
V
- B
V
)]
ADSP
V
= ($140,000 - ($10,000 + $10,000)) +
$50,000 + .34 x [($10,000 - $4,000) + (ADSP
V
- ($5,000 + $10,000 + $5,000 + $10,000))]
ADSP
V
= $161,840 + .34 ADSP
V
.66 ADSP
V
= $161,840
ADSP
V
= $245,212.12
(iv) Because, under the preliminary calculations
of ADSP, the amount to be allocated to the Class I,
II, III, IV, V, and VI assets does not exceed their ag-
gregate fair market value, no ADSP amount is allo-
cated to goodwill. Accordingly, the deemed sale of
the goodwill results in a capital loss of $3,000. The
portion of ADSP allocable to the Class V assets is fi-
nally determined by taking into account this loss as
follows:
ADSP
V
= (G - (I + II)) + L + T
R
x [(II - B
II
) +
(ADSP
V
- B
V
) + (ADSP
VII
- B
VII
)]
ADSP
V
= ($140,000 - ($10,000 + $10,000)) +
$50,000 + .34 x [($10,000 - $4,000) +
(ADSP
V
- $30,000) + ($0 - $3,000)]
ADSP
V
= $160,820 + .34 ADSP
V
.66 ADSP
V
= $160,820
ADSP
V
= $243,666.67
(v) The allocation of ADSP
V
among the Class V
assets is in proportion to their fair market values, as
follows:
AssetADSPGain
Land .......................................................$ 34,113.33$ 29,113.33
(capital gain)
Building .................................................48,733.3438,733.34
(capital gain)
Equipment A ..........................................87,720.0082,720.00
(75,000 ordinary
income
7,720 capital gain)
Equipment B ..........................................73,100.0063,100.00
(10,000 ordinary
income
53,100 capital gain)
Totals ................................................$ 243,666.67$ 213,666.67
Example 3. More than one class. (i) The facts
are the same as in Example 2, except that P pur-
chases the T stock for $150,000, rather than
$140,000. The amount realized for the stock deter-
mined as if the selling shareholder(s) were required
to use old target’s accounting methods and charac-
teristics is also $150,000.
(ii) As in Example 2, ADSP exceeds $20,000.
Thus, $10,000 of ADSP is allocated to the cash and
$10,000 to the actively traded securities.
(iii) The portion of ADSP allocable to the Class V
assets as preliminarily determined under the formula
set forth in paragraph (iii) of Example 2is
$260,363.64. The amount allocated to the Class V
assets cannot exceed their aggregate fair market
value ($250,000). Thus, preliminarily, the ADSP
amount allocated to Class V assets is $250,000.
(iv) Based on the preliminary allocation, the
ADSP is determined as follows (in the formula, the
amount allocated to the Class I assets is referred to
as I, the amount allocated to the Class II assets as II,
and the amount allocated to the Class V assets as V):
ADSP = G + L + T
R
x [(II - B
II
) + (V - B
V
) +
(ADSP - (I + II + V+ B
VII
))]
ADSP = $150,000 + $50,000 + .34 x [($10,000 -
$4,000) + ($250,000 - $30,000) + (ADSP -
($10,000 + $10,000 + $250,000 + $3,000))]
ADSP = $200,000 + .34ADSP - $15,980
.66ADSP = $184,020
ADSP = $278,818.18
(v) Because ADSP as determined exceeds the ag-
gregate fair market value of the Class I, II, III, IV, V,
and VI assets, the $250,000 amount preliminarily al-
located to the Class V assets is appropriate. Thus,
the amount of ADSP allocated to Class V assets
equals their aggregate fair market value ($250,000),
and the allocated ADSP amount for each Class V
asset is its fair market value. Further, because there
are no Class VI assets, the allocable ADSP amount
for the Class VII asset (goodwill) is $8,818.18 (the
excess of ADSP over the aggregate ADSP amounts
for the Class I, II, III, IV, V and VI assets).
Example 4. Amount allocated to T1 stock. (i)
The facts are the same as in Example 2, except that T
owns all of the T1 stock (instead of the building),
and T1’s only asset is the building. The T1 stock
and the building each have a fair market value of
$50,000, and the building has a basis of $10,000. A
section 338 election is made for T1 (as well as T),
and T1 has no liabilities other than the tax liability
for the deemed sale tax consequences. T is the com-
mon parent of a consolidated group filing a final
consolidated return described in §1.338–10(a)(1).
(ii) ADSP exceeds $20,000. Thus, $10,000 of
ADSP is allocated to the cash and $10,000 to the ac-
tively traded securities.
(iii) Because T does not recognize any gain on
the deemed sale of the T1 stock under paragraph
(h)(2) of this section, appropriate adjustments must
be made to reflect accurately the fair market value of
the T and T1 assets in determining the allocation of
ADSP among T’s Class V assets (including the T1
stock). In preliminarily calculating ADSP
V
in this
case, the T1 stock can be disregarded and, because T
owns all of the T1 stock, the T1 asset can be treated
as a T asset. Under this assumption, ADSP
V
is
$243,666.67. See paragraph (iv) of Example 2.
(iv) Because the portion of the preliminary ADSP
allocable to Class V assets ($243,666.67) does not ex-
ceed their fair market value ($250,000), no amount is
allocated to Class VII assets for T. Further, this
amount ($243,666.67) is allocated among T’s Class V
assets in proportion to their fair market values. See
paragraph (v) of Example 2. Tentatively, $48,733.34
of this amount is allocated to the T1 stock.
(v) The amount tentatively allocated to the T1
stock, however, reflects the tax incurred on the
deemed sale of the T1 asset equal to $13,169.34 (.34
x ($48,733.34 - $10,000)). Thus, the ADSP alloca-
ble to the Class V assets of T, and the ADSP alloca-
ble to the T1 stock, as preliminarily calculated, each
must be reduced by $13,169.34. Consequently,
these amounts, respectively, are $230,497.33 and
$35,564.00. In determining ADSP for T1, the
grossed-up amount realized on the deemed sale to
new T of new T’s recently purchased T1 stock is
$35,564.00.
(vi) The facts are the same as in paragraph (i) of
this Example 4, except that the T1 building has a
$12,500 basis and a $62,500 value, all of the out-
standing T1 stock has a $62,500 value, and T owns
80 percent of the T1 stock. In preliminarily calculat-
ing ADSP
V
, the T1 stock can be disregarded but, be-
cause T owns only 80 percent of the T1 stock, only
80 percent of T1 asset basis and value should be
taken into account in calculating T’s ADSP. By tak-
ing into account 80 percent of these amounts, the re-
maining calculations and results are the same as in
paragraphs (ii), (iii), (iv), and (v) of this Example 4,
except that the grossed-up amount realized on the
sale of the recently purchased T1 stock is
$44,455.00 ($35,564.00/0.8).
(h)Deemed sale of target affiliate
stock—(1) Scope. This paragraph (h) pre-
scribes rules relating to the treatment of gain
or loss realized on the deemed sale of stock
of a target affiliate when a section 338 elec-
tion (but not a section 338(h)(10) election)
is made for the target affiliate. For purposes
of this paragraph (h), the definition of do-
mestic corporation in §1.338–2(c)(9) is ap-

plied without the exclusion therein for
DISCs, corporations described in section
1248(e), and corporations to which an elec-
tion under section 936 applies.
(2) In general. Except as otherwise
provided in this paragraph (h), if a section
338 election is made for target, target rec-
ognizes no gain or loss on the deemed
sale of stock of a target affiliate having
the same acquisition date and for which a
section 338 election is made if—
(i) Target directly owns stock in the tar-
get affiliate satisfying the requirements of
section 1504(a)(2);
(ii) Target and the target affiliate are
members of a consolidated group filing a
final consolidated return described in
§1.338–10(a)(1); or
(iii) Target and the target affiliate file a
combined return under §1.338–10(a)(4).
(3) Deemed sale of foreign target affili-
ate by a domestic target. A domestic tar-
get recognizes gain or loss on the deemed
sale of stock of a foreign target affiliate.
For the proper treatment of such gain or
loss, see, e.g., sections 1246, 1248, 1291
et seq., and 338(h)(16) and §1.338–9.
(4) Deemed sale producing effectively
connected income. A foreign target rec-
ognizes gain or loss on the deemed sale of
stock of a foreign target affiliate to the ex-
tent that such gain or loss is effectively
connected (or treated as effectively con-
nected) with the conduct of a trade or
business in the United States.
(5) Deemed sale of insurance company
target affiliate electing under section
953(d).A domestic target recognizes gain
(but not loss) on the deemed sale of stock
of a target affiliate that has in effect an
election under section 953(d) in an
amount equal to the lesser of the gain re-
alized or the earnings and profits de-
scribed in section 953(d)(4)(B).
(6) Deemed sale of DISC target affili-
ate. A foreign or domestic target recog-
nizes gain (but not loss) on the deemed
sale of stock of a target affiliate that is a
DISC or a former DISC (as defined in
section 992(a)) in an amount equal to the
lesser of the gain realized or the amount
of accumulated DISC income determined
with respect to such stock under section
995(c). Such gain is included in gross in-
come as a dividend as provided in sec-
tions 995(c)(2) and 996(g).
(7) Anti-stuffing rule. If an asset the
adjusted basis of which exceeds its fair
market value is contributed or transferred
to a target affiliate as transferred basis
property (within the meaning of section
7701(a)(43)) and a purpose of such trans-
action is to reduce the gain (or increase
the loss) recognized on the deemed sale of
such target affiliate’s stock, the gain or
loss recognized by target on the deemed
sale of stock of the target affiliate is deter-
mined as if such asset had not been con-
tributed or transferred.
(8) Examples. The following examples
illustrate this paragraph (h):
Example 1. (i) P makes a qualified stock pur-
chase of T and makes a section 338 election for T.
T’s sole asset, all of the T1 stock, has a basis of $50
and a fair market value of $150. T’s deemed pur-
chase of the T1 stock results in a qualified stock pur-
chase of T1 and a section 338 election is made for
T1. T1’s assets have a basis of $50 and a fair market
value of $150.
(ii) T realizes $100 of gain on the deemed sale of
the T1 stock, but the gain is not recognized because
T directly owns stock in T1 satisfying the require-
ments of section 1504(a)(2) and a section 338 elec-
tion is made for T1.
(iii) T1 recognizes gain of $100 on the deemed
sale of its assets.
Example 2. The facts are the same as in Example
1, except that P does not make a section 338 election
for T1. Because a section 338 election is not made
for T1, the $100 gain realized by T on the deemed
sale of the T1 stock is recognized.
Example 3. (i) P makes a qualified stock pur-
chase of T and makes a section 338 election for T. T
owns all of the stock of T1 and T2. T’s deemed pur-
chase of the T1 and T2 stock results in a qualified
stock purchase of T1 and T2 and section 338 elec-
tions are made for T1 and T2. T1 and T2 each own
50 percent of the vote and value of T3 stock. The
deemed purchases by T1 and T2 of the T3 stock re-
sult in a qualified stock purchase of T3 and a section
338 election is made for T3. T is the common parent
of a consolidated group and all of the deemed asset
sales are reported on the T group’s final consolidated
return. See §1.338–10(a)(1).
(ii) Because T, T1, T2 and T3 are members of a
consolidated group filing a final consolidated return,
no gain or loss is recognized by T, T1 or T2 on their
respective deemed sales of target affiliate stock.
Example 4. (i) T’s sole asset, all of the FT1 stock,
has a basis of $25 and a fair market value of $150.
FT1’s sole asset, all of the FT2 stock, has a basis of
$75 and a fair market value of $150. FT1 and FT2
each have $50 of accumulated earnings and profits for
purposes of section 1248(c) and (d). FT2’s assets
have a basis of $125 and a fair market value of $150,
and their sale would not generate subpart F income
under section 951. The sale of the FT2 stock or assets
would not generate income effectively connected
with the conduct of a trade or business within the
United States. FT1 does not have an election in effect
under section 953(d) and neither FT1 nor FT2 is a
passive foreign investment company.
(ii) P makes a qualified stock purchase of T and
makes a section 338 election for T. T’s deemed pur-
chase of the FT1 stock results in a qualified stock
purchase of FT1 and a section 338 election is made
for FT1. Similarly, FT1’s deemed purchase of the
FT2 stock results in a qualified stock purchase of
FT2 and a section 338 election is made for FT2.
(iii) T recognizes $125 of gain on the deemed
sale of the FT1 stock under paragraph (h)(3) of this
section. FT1 does not recognize $75 of gain on the
deemed sale of the FT2 stock under paragraph (h)(2)
of this section. FT2 recognizes $25 of gain on the
deemed sale of its assets. The $125 gain T recog-
nizes on the deemed sale of the FT1 stock is in-
cluded in T’s income as a dividend under section
1248, because FT1 and FT2 have sufficient earnings
and profits for full recharacterization ($50 of accu-
mulated earnings and profits in FT1, $50 of accumu-
lated earnings and profits in FT2, and $25 of deemed
sale earnings and profits in FT2). Section
1.338–9(b). For purposes of sections 901 through
908, the source and foreign tax credit limitation bas-
ket of $25 of the recharacterized gain on the deemed
sale of the FT1 stock is determined under section
338(h)(16).
§1.338–5 Adjusted grossed-up basis.
(a) Scope. This section provides rules
under section 338(b) to determine the ad-
justed grossed-up basis (AGUB) for tar-
get. AGUB is the amount for which new
target is deemed to have purchased all of
its assets in the deemed purchase under
section 338(a)(2). AGUB is allocated
among target’s assets in accordance with
§1.338–6 to determine the price at which
the assets are deemed to have been pur-
chased. When a subsequent increase or
decrease with respect to an element of
AGUB is required under general princi-
ples of tax law, redetermined AGUB is al-
located among target’s assets in accor-
dance with §1.338–7.
(b) Determination of AGUB—(1) Gen-
eral rule. AGUB is the sum of—
(i) The grossed-up basis in the purchas-
ing corporation’s recently purchased tar-
get stock;
(ii) The purchasing corporation’s basis
in nonrecently purchased target stock; and
(iii) The liabilities of new target.
(2) Time and amount of AGUB—(i)
Original determination. AGUB is ini-
tially determined at the beginning of the
day after the acquisition date of target.
General principles of tax law apply in de-
termining the timing and amount of the
elements of AGUB.
(ii) Redetermination of AGUB. AGUB
is redetermined at such time and in such
amount as an increase or decrease would
be required, under general principles of
tax law, with respect to an element of
AGUB. For example, AGUB is redeter-
mined because of an increase or decrease
April 9, 200110342001–15 I.R.B.

2001–15 I.R.B.1035April 9, 2001
in the amount paid or incurred for recently
purchased stock or nonrecently purchased
stock or because liabilities not originally
taken into account in determining AGUB
are subsequently taken into account. An in-
crease or decrease to one element of AGUB
also may cause an increase or decrease to
another element of AGUB. For example, if
there is an increase in the amount paid or
incurred for recently purchased stock after
the acquisition date, any increase in the
basis of nonrecently purchased stock be-
cause a gain recognition election was made
is also taken into account when AGUB is
redetermined. Increases or decreases with
respect to the elements of AGUB result in
the reallocation of AGUB among target’s
assets under §1.338–7.
(iii) Examples. The following examples
illustrate this paragraph (b)(2):
Example 1. In Year 1, T, a manufacturer, purchases a
customized delivery truck from X with purchase money
indebtedness having a stated principal amount of
$100,000 . P acquires all of the stock of T in Year 3 for
$700,000 and makes a section 338 election for T. As-
sume T has no liabilities other than its purchase money
indebtedness to X. In Year 4, when T is neither insolvent
nor in a title 11 case, T and X agree to reduce the amount
of the purchase money indebtedness to $80,000. As-
sume that the reduction would be a purchase price reduc-
tion under section 108(e)(5). T and X’s agreement to re-
duce the amount of the purchase money indebtedness
would, under general principles of tax law that would
apply if the deemed asset sale had actually occurred,
change the amount of liabilities of old target taken into
account in determining its basis. Accordingly, AGUB is
redetermined at the time of the reduction. See paragraph
(e)(2) of this section. Thus the purchase price reduction
affects the basis of the truck only indirectly, through the
mechanism of §§1.338–6 and 1.338–7. See
§1.338–4(b)(2)(iii) Examplefor the effect on ADSP.
Example 2. T, an accrual basis taxpayer, is a chemical
manufacturer. In Year 1, T is obligated to remediate envi-
ronmental contamination at the site of one of its plants.
Assume that all the events have occurred that establish
the fact of the liability and the amount of the liability can
be determined with reasonable accuracy but economic
performance has not occurred with respect to the liability
within the meaning of section 461(h). P acquires all of
the stock of T in Year 1 and makes a section 338 election
for T. Assume that, if a corporation unrelated to T had ac-
tually purchased T’s assets and assumed T’s obligation to
remediate the contamination, the corporation would not
satisfy the economic performance requirements until
Year 5. Under section 461(h), the assumed liability
would not be treated as incurred and taken into account in
basis until that time. The incurrence of the liability in
Year 5 under the economic performance rules is an in-
crease in the amount of liabilities properly taken into ac-
count in basis and results in the redetermination of
AGUB. (Respecting ADSP, compare §1.461–4(d)(5),
which provides that economic performance occurs for
old T as the amount of the liability is properly taken into
account in amount realized on the deemed asset sale.
Thus ADSP is not redetermined when new T satisfies the
economic performance requirements.)
(c) Grossed-up basis of recently pur-
chased stock. The purchasing corpora-
tion’s grossed-up basis of recently pur-
chased target stock (as defined in section
338(b)(6)(A)) is an amount equal to—
(1) The purchasing corporation’s basis
in recently purchased target stock at the
beginning of the day after the acquisition
date determined without regard to the ac-
quisition costs taken into account in para-
graph (c)(3) of this section;
(2) Multiplied by a fraction, the numer-
ator of which is 100 minus the number
that is the percentage of target stock (by
value, determined on the acquisition date)
attributable to the purchasing corpora-
tion’s nonrecently purchased target stock,
and the denominator of which is the num-
ber equal to the percentage of target stock
(by value, determined on the acquisition
date) attributable to the purchasing corpo-
ration’s recently purchased target stock;
(3) Plus the acquisition costs the pur-
chasing corporation incurred in connec-
tion with its purchase of the recently pur-
chased stock that are capitalized in the
basis of such stock (e.g., brokerage com-
missions and any similar costs incurred
by the purchasing corporation to acquire
the stock).
(d) Basis of nonrecently purchased
stock; gain recognition election—(1) No
gain recognition election. In the absence
of a gain recognition election under sec-
tion 338(b)(3) and this section, the pur-
chasing corporation retains its basis in the
nonrecently purchased stock.
(2) Procedure for making gain recogni-
tion election. A gain recognition election
may be made for nonrecently purchased
stock of target (or a target affiliate) only if
a section 338 election is made for target
(or the target affiliate). The gain recogni-
tion election is made by attaching a gain
recognition statement to a timely filed
Form 8023 for target. The gain recogni-
tion statement must contain the informa-
tion specified in the form and its instruc-
tions. The gain recognition election is
irrevocable. If a section 338(h)(10) elec-
tion is made for target, see §1.338(h)(10)–
1(d)(1) (providing that the purchasing
corporation is automatically deemed to
have made a gain recognition election for
its nonrecently purchased T stock).
(3) Effect of gain recognition
election—(i) In general. If the purchas-
ing corporation makes a gain recognition
election, then for all purposes of the Inter-
nal Revenue Code—
(A) The purchasing corporation is
treated as if it sold on the acquisition date
the nonrecently purchased target stock for
the basis amount determined under para-
graph (d)(3)(ii) of this section; and
(B) The purchasing corporation’s basis
on the acquisition date in nonrecently pur-
chased target stock immediately follow-
ing the deemed sale in paragraph
(d)(3)(i)(A) of this section is the basis
amount.
(ii) Basis amount. The basis amount is
equal to the amount in paragraph (c)(1) of
this section (the purchasing corporation’s
basis in recently purchased target stock at
the beginning of the day after the acquisi-
tion date determined without regard to the
acquisition costs taken into account in
paragraph (c)(3) of this section) multi-
plied by a fraction the numerator of which
is the percentage of target stock (by value,
determined on the acquisition date) attrib-
utable to the purchasing corporation’s
nonrecently purchased target stock and
the denominator of which is 100 percent
minus the numerator amount. Thus, if
target has a single class of outstanding
stock, the purchasing corporation’s basis
in each share of nonrecently purchased
target stock after the gain recognition
election is equal to the average price per
share of the purchasing corporation’s re-
cently purchased target stock.
(iii) Losses not recognized. Only gains
(unreduced by losses) on the nonrecently
purchased target stock are recognized.
(iv) Stock subject to election. The gain
recognition election applies to—
(A) All nonrecently purchased target
stock; and
(B) Any nonrecently purchased stock in
a target affiliate having the same acquisi-
tion date as target if such target affiliate
stock is held by the purchasing corpora-
tion on such date.
(e) Liabilities of new target—(1) In
general. The liabilities of new target are
the liabilities of target as of the beginning
of the day after the acquisition date (but
see §1.338–1(d) (regarding certain trans-
actions on the acquisition date)). In order
to be taken into account in AGUB, a lia-
bility must be a liability of target that is
properly taken into account in basis under
general principles of tax law that would
apply if new target had acquired its assets

from an unrelated person for considera-
tion that included discharge of the liabili-
ties of that unrelated person. Such liabili-
ties may include liabilities for the tax
consequences resulting from the deemed
sale.
(2) Time and amount of liabilities. The
time for taking into account liabilities of
old target in determining AGUB and the
amount of the liabilities taken into ac-
count is determined as if new target had
acquired its assets from an unrelated per-
son for consideration that included the
discharge of its liabilities.
(3) Interaction with deemed sale tax
consequences. In general, see §1.338
–4(e). Although ADSP and AGUB are
not necessarily linked, if an increase in
the amount realized for recently pur-
chased stock of target is taken into ac-
count after the acquisition date, and if the
tax on the deemed sale tax consequences
is a liability of target, any increase in that
liability is also taken into account in rede-
termining AGUB.
(f) Adjustments by the Internal Revenue
Service. In connection with the examina-
tion of a return, the Commissioner may
increase (or decrease) AGUB under the
authority of section 338(b)(2) and allocate
such amounts to target’s assets under the
authority of section 338(b)(5) so that
AGUB and the basis of target’s assets
properly reflect the cost to the purchasing
corporation of its interest in target’s as-
sets. Such items may include distribu-
tions from target to the purchasing corpo-
ration, capital contributions from the
purchasing corporation to target during
the 12-month acquisition period, or acqui-
sitions of target stock by the purchasing
corporation after the acquisition date from
minority shareholders. See also
§1.338–1(d) (regarding certain transac-
tions on the acquisition date).
(g) Examples. The following examples
illustrate this section. For purposes of the
examples in this paragraph (g), T has no
liabilities other than the tax liability for
the deemed sale tax consequences, T
shareholders incur no costs in selling the
T stock, and P incurs no costs in acquiring
the T stock. The examples are as follows:
Example 1. (i) Before July 1 of Year 1, P purchases
10 of the 100 shares of T stock for $5,000. On July 1
of Year 2, P purchases 80 shares of T stock for $60,000
and makes a section 338 election for T. As of July 1 of
Year 2, T’s only asset is raw land with an adjusted
basis to T of $50,400 and a fair market value of
$100,000. T has no loss or tax credit carryovers to
Year 2. T’s marginal tax rate for any ordinary income
or net capital gain resulting from the deemed asset sale
is 34 percent. The 10 shares purchased before July 1
of Year 1 constitute nonrecently purchased T stock
with respect to P’s qualified stock purchase of T stock
on July 1 of Year 2.
(ii) The ADSP formula as applied to these facts is
the same as in §1.338–4(g)Example 1. Accordingly,
the ADSP for T is $87,672.72. The existence of
nonrecently purchased T stock is irrelevant for pur-
poses of the ADSP formula, because that formula
treats P’s nonrecently purchased T stock in the same
manner as T stock not held by P.
(iii) The total tax liability resulting from T’s
deemed asset sale, as calculated under the ADSP
formula, is $12,672.72.
(iv) If P does not make a gain recognition elec-
tion, the AGUB of new T’s assets is $85,172.72, de-
termined as follows (In the following formula
below, GRP is the grossed-up basis in P’s recently
purchased T stock, BNP is P’s basis in nonrecently
purchased T stock, L is T’s liabilities, and X is P’s
acquisition costs for the recently purchased T stock):
AGUB = GRP + BNP + L + X
AGUB = $60,000 x [(1 - .1)/.8] + $5,000 +
$12,672.72 + 0
AGUB = $85,172.72
(v) If P makes a gain recognition election, the
AGUB of new T’s assets is $87,672.72, determined
as follows:
AGUB = $60,000 x [(1 - .1)/.8] + $60,000 x [(1 -
.1)/.8] x [.1/(1 - .1)] + $12,672.72
AGUB = $87,672.72
(vi) The calculation of AGUB if P makes a gain
recognition election may be simplified as follows:
AGUB = $60,000/.8 + $12,672.72
AGUB = $87,672.72
(vii) As a result of the gain recognition election,
P’s basis in its nonrecently purchased T stock is in-
creased from $5,000 to $7,500 (i.e., $60,000 x [(1 -
.1)/.8] x [.1/(1 - .1)]). Thus, P recognizes a gain in
Year 2 with respect to its nonrecently purchased T
stock of $2,500 (i.e., $7,500 - $5,000).
Example 2. On January 1 of Year 1, P purchases
one-third of the T stock. On March 1 of Year 1, T
distributes a dividend to all of its shareholders. On
April 15 of Year 1, P purchases the remaining T
stock and makes a section 338 election for T. In ap-
propriate circumstances, the Commissioner may de-
crease the AGUB of T to take into account the pay-
ment of the dividend and properly reflect the fair
market value of T’s assets deemed purchased.
Example 3. (i) T’s sole asset is a building worth
$100,000. At this time, T has 100 shares of stock
outstanding. On August 1 of Year 1, P purchases 10
of the 100 shares of T stock for $8,000. On June 1
of Year 2, P purchases 50 shares of T stock for
$50,000. On June 15 of Year 2, P contributes a tract
of land to the capital of T and receives 10 additional
shares of T stock as a result of the contribution.
Both the basis and fair market value of the land at
that time are $10,800. On June 30 of Year 2, P pur-
chases the remaining 40 shares of T stock for
$40,000 and makes a section 338 election for T. The
AGUB of T is $108,800.
(ii) To prevent the shifting of basis from the con-
tributed property to other assets of T, the Commis-
sioner may allocate $10,800 of the AGUB to the
land, leaving $98,000 to be allocated to the building.
See paragraph (f) of this section. Otherwise, apply-
ing the allocation rules of §1.338–6 would, on these
facts, result in an allocation to the recently con-
tributed land of an amount less than its value of
$10,800, with the difference being allocated to the
building already held by T.
§1.338–6 Allocation of ADSP and AGUB
among target assets.
(a) Scope—(1) In general. This section
prescribes rules for allocating ADSP and
AGUB among the acquisition date assets
of a target for which a section 338 elec-
tion is made.
(2) Fair market value—(i) In general.
Generally, the fair market value of an
asset is its gross fair market value (i.e.,
fair market value determined without re-
gard to mortgages, liens, pledges, or other
liabilities). However, for purposes of de-
termining the amount of old target’s
deemed sale tax consequences, the fair
market value of any property subject to a
nonrecourse indebtedness will be treated
as being not less than the amount of such
indebtedness. (For purposes of the pre-
ceding sentence, a liability that was in-
curred because of the acquisition of the
property is disregarded to the extent that
such liability was not taken into account
in determining old target’s basis in such
property.)
(ii) Transaction costs. Transaction
costs are not taken into account in allocat-
ing ADSP or AGUB to assets in the
deemed sale (except indirectly through
their effect on the total ADSP or AGUB to
be allocated).
(iii) Internal Revenue Service
authority. In connection with the exami-
nation of a return, the Internal Revenue
Service may challenge the taxpayer’s de-
termination of the fair market value of
any asset by any appropriate method and
take into account all factors, including
any lack of adverse tax interests between
the parties.
(b) General rule for allocating ADSP
and AGUB—(1) Reduction in the amount
of consideration for Class I assets. Both
ADSP and AGUB, in the respective allo-
cation of each, are first reduced by the
amount of Class I assets. Class I assets
are cash and general deposit accounts (in-
cluding savings and checking accounts)
April 9, 200110362001–15 I.R.B.

other than certificates of deposit held in
banks, savings and loan associations, and
other depository institutions. If the
amount of Class I assets exceeds AGUB,
new target will immediately realize ordi-
nary income in an amount equal to such
excess. The amount of ADSP or AGUB
remaining after the reduction is to be allo-
cated to the remaining acquisition date as-
sets.
(2) Other assets—(i) In general. Sub-
ject to the limitations and other rules of
paragraph (c) of this section, ADSP and
AGUB (as reduced by the amount of
Class I assets) are allocated among Class
II acquisition date assets of target in pro-
portion to the fair market values of such
Class II assets at such time, then among
Class III assets so held in such proportion,
then among Class IV assets so held in
such proportion, then among Class V as-
sets so held in such proportion, then
among Class VI assets so held in such
proportion, and finally to Class VII assets.
If an asset is described below as includi-
ble in more than one class, then it is in-
cluded in such class with the lower or
lowest class number (for instance, Class
III has a lower class number than Class
IV).
(ii) Class II assets. Class II assets are
actively traded personal property within
the meaning of section 1092(d)(1) and
§1.1092(d)–1 (determined without regard
to section 1092(d)(3)). In addition, Class
II assets include certificates of deposit
and foreign currency even if they are not
actively traded personal property. Class
II assets do not include stock of target af-
filiates, whether or not of a class that is
actively traded, other than actively traded
stock described in section 1504(a)(4).
Examples of Class II assets include U.S.
government securities and publicly traded
stock.
(iii) Class III assets. Class III assets are
assets that the taxpayer marks to market at
least annually for Federal income tax pur-
poses and debt instruments (including ac-
counts receivable). However, Class III
assets do not include —-
(A) Debt instruments issued by persons
related at the beginning of the day follow-
ing the acquisition date to the target under
section 267(b) or 707;
(B) Contingent debt instruments sub-
ject to §1.1275–4, §1.483–4, or section
988, unless the instrument is subject to
the non-contingent bond method of
§1.1275–4(b) or is described in
§1.988–2(b)(2)(i)(B)(2); and
(C) Debt instruments convertible into
the stock of the issuer or other property.
(iv) Class IV assets. Class IV assets are
stock in trade of the taxpayer or other
property of a kind that would properly be
included in the inventory of taxpayer if on
hand at the close of the taxable year, or
property held by the taxpayer primarily
for sale to customers in the ordinary
course of its trade or business.
(v) Class V assets.Class V assets are
all assets other than Class I, II, III, IV, VI,
and VII assets.
(vi) Class VI assets.Class VI assets
are all section 197 intangibles, as defined
in section 197, except goodwill and going
concern value.
(vii) Class VII assets. Class VII assets
are goodwill and going concern value
(whether or not the goodwill or going
concern value qualifies as a section 197
intangible).
(3) Other items designated by the Inter-
nal Revenue Service. Similar items may
be added to any class described in this
paragraph (b) by designation in the Inter-
nal Revenue Bulletin by the Internal Rev-
enue Service (see §601.601(d)(2) of this
chapter).
(c) Certain limitations and other rules
for allocation to an asset—(1) Allocation
not to exceed fair market value. The
amount of ADSP or AGUB allocated to
an asset (other than Class VII assets) can-
not exceed the fair market value of that
asset at the beginning of the day after the
acquisition date.
(2) Allocation subject to other rules.
The amount of ADSP or AGUB allocated
to an asset is subject to other provisions of
the Internal Revenue Code or general
principles of tax law in the same manner
as if such asset were transferred to or ac-
quired from an unrelated person in a sale
or exchange. For example, if the deemed
asset sale is a transaction described in sec-
tion 1056(a) (relating to basis limitation
for player contracts transferred in connec-
tion with the sale of a franchise), the
amount of AGUB allocated to a contract
for the services of an athlete cannot ex-
ceed the limitation imposed by that sec-
tion. As another example, section
197(f)(5) applies in determining the
amount of AGUB allocated to an amortiz-
able section 197 intangible resulting from
an assumption-reinsurance transaction.
(3) Special rule for allocating AGUB
when purchasing corporation has nonre-
cently purchased stock—(i) Scope. This
paragraph (c)(3) applies if at the begin-
ning of the day after the acquisition
date—
(A) The purchasing corporation holds
nonrecently purchased stock for which a
gain recognition election under section
338(b)(3) and §1.338–5(d) is not made;
and
(B) The hypothetical purchase price de-
termined under paragraph (c)(3)(ii) of this
section exceeds the AGUB determined
under §1.338–5(b).
(ii) Determination of hypothetical pur-
chase price. Hypothetical purchase price
is the AGUB that would result if a gain
recognition election were made.
(iii) Allocation of AGUB. Subject to
the limitations in paragraphs (c)(1) and
(2) of this section, the portion of AGUB
(after reduction by the amount of Class I
assets) to be allocated to each Class II, III,
IV, V, VI, and VII asset of target held at
the beginning of the day after the acquisi-
tion date is determined by multiplying—
(A) The amount that would be allo-
cated to such asset under the general rules
of this section were AGUB equal to the
hypothetical purchase price; by
(B) A fraction, the numerator of which
is actual AGUB (after reduction by the
amount of Class I assets) and the denomi-
nator of which is the hypothetical pur-
chase price (after reduction by the amount
of Class I assets).
(4) Liabilities taken into account in de-
termining amount realized on subsequent
disposition. In determining the amount
realized on a subsequent sale or other dis-
position of property deemed purchased by
new target, §1.1001–2(a)(3) shall not
apply to any liability that was taken into
account in AGUB.
(d)Examples. The following examples
illustrate §§1.338–4, 1.338–5, and this
section:
Example 1. (i) T owns 90 percent of the outstand-
ing T1 stock. P purchases 100 percent of the out-
standing T stock for $2,000. There are no acquisi-
tion costs. P makes a section 338 election for T and,
as a result, T1 is considered acquired in a qualified
stock purchase. A section 338 election is made for
T1. The grossed-up basis of the T stock is $2,000
(i.e., $2,000 x 1/1).
(ii) The liabilities of T as of the beginning of the
day after the acquisition date (including the tax lia-
2001–15 I.R.B.1037April 9, 2001

bility for the deemed sale tax consequences) that
would, under general principles of tax law, properly
be taken into account at that time, are as follows:
Liabilities (nonrecourse mortgage
plus unsecured liabilities) . . . . .$ 700
Taxes Payable . . . . . . . . . . . . . . . . 300
Total . . . . . . . . . . . . . . . . . . . . .$ 1,000
(iii) The AGUB of T is determined as follows:
Grossed-up basis . . . . . . . . . . . . .$2,000
Total liabilities . . . . . . . . . . . . . . .1,000
AGUB . . . . . . . . . . . . . . . . . . . .$ 3,000
(iv) Assume that ADSP is also $3,000.
(v) Assume that, at the beginning of the day after
the acquisition date, T’s cash and the fair market val-
ues of T’s Class II, III, IV, and V assets are as fol-
lows:
AssetAssetFair
Classmarket
value
ICash . . . . . . . . . . . . . . . . . .$ 200*
IIPortfolio of actively
traded securities . . . . . . .300
IIIAccounts receivable . . . . . .600
IVInventory . . . . . . . . . . . . . .300
VBuilding . . . . . . . . . . . . . . .800
VLand . . . . . . . . . . . . . . . . . .200
VInvestment in T1 . . . . . . . . 450
Total . . . . . . . . . . . . . . . .$ 2,850
*Amount.
(vi) Under paragraph (b)(1) of this section, the
amount of ADSP and AGUB allocable to T’s Class II,
III, IV, and V assets is reduced by the amount of cash
to $2,800, i.e., $3,000 - $200. $300 of ADSP and of
AGUB is then allocated to actively traded securities.
$600 of ADSP and of AGUB is then allocated to ac-
counts receivable. $300 of ADSP and of AGUB is
then allocated to the inventory. Since the remaining
amount of ADSP and of AGUB is $1,600 (i.e., $3,000
- ($200 + $300 + $600 + $300)), an amount which ex-
ceeds the sum of the fair market values of T’s Class V
assets, the amount of ADSP and of AGUB allocated to
each Class V asset is its fair market value:
Building . . . . . . . . . . . . . . . . . . . .800
Land . . . . . . . . . . . . . . . . . . . . . . .200
Investment in T1 . . . . . . . . . . . . . 450
Total . . . . . . . . . . . . . . . . . . . . .$ 1,450
(vii) T has no Class VI assets. The amount of
ADSP and of AGUB allocated to T’s Class VII as-
sets (goodwill and going concern value) is $150, i.e.,
$1,600 - $1,450.
(viii) The grossed-up basis of the T1 stock is
$500, i.e., $450 x 1/.9.
(ix) The liabilities of T1 as of the beginning of
the day after the acquisition date (including the tax
liability for the deemed sale tax consequences) that
would, under general principles of tax law, properly
be taken into account at that time, are as follows:
General Liabilities . . . . . . . . . . . .$ 100
Taxes Payable . . . . . . . . . . . . . . . . 20
Total . . . . . . . . . . . . . . . . . . . . .$ 120
(x) The AGUB of T1 is determined as follows:
Grossed-up basis of T1 Stock . . .$ 500
Liabilities . . . . . . . . . . . . . . . . . . . 120
AGUB . . . . . . . . . . . . . . . . . . . .$ 620
(xi) Assume that ADSP is also $620.
(xii) Assume that at the beginning of the day after
the acquisition date, T1’s cash and the fair market
values of its Class IV and VI assets are as follows:
AssetAssetFair
ClassMarket
Value
ICash . . . . . . . . . . . . . . . . . .$ 50*
IVInventory . . . . . . . . . . . . . .200
VIPatent . . . . . . . . . . . . . . . . . 350
Total . . . . . . . . . . . . . . . .$ 600
* Amount.
(xiii) The amount of ADSP and of AGUB alloca-
ble to T1’s Class IV and VI assets is first reduced by
the $50 of cash.
(xiv) Because the remaining amount of ADSP
and of AGUB ($570) is an amount which exceeds
the fair market value of T1’s only Class IV asset, the
inventory, the amount allocated to the inventory is
its fair market value ($200). After that, the remain-
ing amount of ADSP and of AGUB ($370) exceeds
the fair market value of T1’s only Class VI asset, the
patent. Thus, the amount of ADSP and of AGUB al-
located to the patent is its fair market value ($350).
(xv) The amount of ADSP and of AGUB allo-
cated to T1’s Class VII assets (goodwill and going
concern value) is $20, i.e., $570 - $550.
Example 2. (i) Assume that the facts are the same
as in Example 1except that P has, for five years,
owned 20 percent of T’s stock, which has a basis in
P’s hands at the beginning of the day after the acqui-
sition date of $100, and P purchases the remaining
80 percent of T’s stock for $1,600. P does not make
a gain recognition election under section 338(b)(3).
(ii) Under §1.338–5(c), the grossed-up basis of
recently purchased T stock is $1,600, i.e., $1,600 x
(1 - .2)/.8.
(iii) The AGUB of T is determined as follows:
April 9, 200110382001–15 I.R.B.
Grossed-up basis of recently purchased stock as determined
under §1.338–5(c) ($1,600 x (1 - .2)/.8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,600
Basis of nonrecently purchased stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
AGUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 2,700
(iv) Since P holds nonrecently purchased stock, the hypothetical purchase price of the T stock must be computed and is determined as follows:
Grossed-up basis of recently purchased stock as determined
under §1.338–5(c) ($1,600 x (1 - .2)/.8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,600
Basis of nonrecently purchased stock as if the gain recognition election
under §1.338–5(d)(2) had been made ($1,600 x .2/(1 - .2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .400
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,000
(v) Since the hypothetical purchase price ($3,000)
exceeds the AGUB ($2,700) and no gain recognition
election is made under section 338(b)(3), AGUB is al-
located under paragraph (c)(3) of this section.
(vi) First, an AGUB amount equal to the hypo-
thetical purchase price ($3,000) is allocated among
the assets under the general rules of this section.
The allocation is set forth in the column below enti-
tled Original Allocation. Next, the allocation to
each asset in Class II through Class VII is multiplied
by a fraction having a numerator equal to the actual
AGUB reduced by the amount of Class I assets
($2,700 - $200 = $2,500) and a denominator equal to
the hypothetical purchase price reduced by the
amount of Class I assets ($3,000 - $200 = $2,800),
or 2,500/2,800. This produces the Final Allocation:

§1.338–7 Allocation of redetermined
ADSP and AGUB among target assets.
(a) Scope. ADSP and AGUB are rede-
termined at such time and in such amount
as an increase or decrease would be re-
quired under general principles of tax law
for the elements of ADSP or AGUB. This
section provides rules for allocating rede-
termined ADSP or AGUB.
(b) Allocation of redetermined ADSP
and AGUB. When ADSP or AGUB is re-
determined, a new allocation of ADSP or
AGUB is made by allocating the redeter-
mined ADSP or AGUB amount under the
rules of §1.338–6. If the allocation of the
redetermined ADSP or AGUB amount
under §1.338–6 to a given asset is differ-
ent from the original allocation to it, the
difference is added to or subtracted from
the original allocation to the asset, as ap-
propriate. (See paragraph (d) of this sec-
tion for new target’s treatment of the
amount so allocated.) Amounts allocable
to an acquisition date asset (or with re-
spect to a disposed–of acquisition date
asset) are subject to all the asset allocation
rules (for example, the fair market value
limitation in §1.338–6(c)(1)) as if the re-
determined ADSP or AGUB were the
ADSP or AGUB on the acquisition date.
(c) Special rules for ADSP—(1) In-
creases or decreases in deemed sale tax
consequences taxable notwithstanding
old target ceases to exist. To the extent
general principles of tax law would re-
quire a seller in an actual asset sale to ac-
count for events relating to the sale that
occur after the sale date, target must make
such an accounting. Target is not pre-
cluded from realizing additional deemed
sale tax consequences because the target
is treated as a new corporation after the
acquisition date.
(2) Procedure for transactions in which
section 338(h)(10) is not elected—(i)
Deemed sale tax consequences included
in new target’s return. If an election
under section 338(h)(10) is not made, any
additional deemed sale tax consequences
of old target resulting from an increase or
decrease in the ADSP are included in new
target’s income tax return for new target’s
taxable year in which the increase or de-
crease is taken into account. For exam-
ple, if after the acquisition date there is an
increase in the allocable ADSP of section
1245 property for which the recomputed
basis (but not the adjusted basis) exceeds
the portion of the ADSP allocable to that
particular asset on the acquisition date,
the additional gain is treated as ordinary
income to the extent it does not exceed
such excess amount. See paragraph
(c)(2)(ii) of this section for the special
treatment of old target’s carryovers and
carrybacks. Although included in new
target’s income tax return, the deemed
sale tax consequences are separately ac-
counted for as an item of old target and
may not be offset by income, gain, deduc-
tion, loss, credit, or other amount of new
target. The amount of tax on income of
old target resulting from an increase or
decrease in the ADSP is determined as if
such deemed sale tax consequences had
been recognized in old target’s taxable
year ending at the close of the acquisition
date. However, because the income re-
sulting from the increase or decrease in
ADSP is reportable in new target’s tax-
able year of the increase or decrease, not
in old target’s taxable year ending at the
close of the acquisition date, there is not a
resulting underpayment of tax in that past
taxable year of old target for purposes of
calculation of interest due.
(ii) Carryovers and carrybacks—(A)
Loss carryovers to new target taxable
years. A net operating loss or net capital
loss of old target may be carried forward
to a taxable year of new target, under the
principles of section 172 or 1212, as ap-
plicable, but is allowed as a deduction
only to the extent of any recognized in-
come of old target for such taxable year,
as described in paragraph (c)(2)(i) of this
section. For this purpose, however, tax-
able years of new target are not taken into
account in applying the limitations in sec-
tion 172(b)(1) or 1212(a)(1)(B) (or other
similar limitations). In applying sections
172(b) and 1212(a)(1), only income, gain,
loss, deduction, credit, and other amounts
of old target are taken into account. Thus,
if old target has an unexpired net operat-
ing loss at the close of its taxable year in
which the deemed asset sale occurred that
could be carried forward to a subsequent
taxable year, such loss may be carried for-
ward until it is absorbed by old target’s in-
come.
(B) Loss carrybacks to taxable years of
old target. An ordinary loss or capital
loss accounted for as a separate item of
old target under paragraph (c)(2)(i) of this
section may be carried back to a taxable
year of old target under the principles of
section 172 or 1212, as applicable. For
this purpose, taxable years of new target
are not taken into account in applying the
limitations in section 172(b) or 1212(a)
(or other similar limitations).
(C) Credit carryovers and carrybacks.
The principles described in paragraphs
(c)(2)(ii)(A) and (B) of this section apply
to carryovers and carrybacks of amounts
for purposes of determining the amount of
a credit allowable under part IV, subchap-
ter A, chapter 1 of the Internal Revenue
Code. Thus, for example, credit carry-
overs of old target may offset only in-
come tax attributable to items described
in paragraph (c)(2)(i) of this section.
(3) Procedure for transactions in which
section 338(h)(10) is elected. If an elec-
tion under section 338(h)(10) is made, any
changes in the deemed sale tax conse-
2001–15 I.R.B.1039April 9, 2001
ClassAssetOriginalFinal
AllocationAllocation
ICash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200$ 200
IIPortfolio of actively traded securities . . . . . . . . . 300268*
IIIAccounts receivable . . . . . . . . . . . . . . . . . . . . . . 600536
IVInventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300268
VBuilding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800714
VLand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200178
VInvestment in T1 . . . . . . . . . . . . . . . . . . . . . . . . . 450402
VIIGoodwill and going concern value . . . . . . . . . . . 150 134
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000$ 2,700
* All numbers rounded for convenience.

quences caused by an increase or decrease
in the ADSP are accounted for in deter-
mining the taxable income (or other
amount) of the member of the selling con-
solidated group, the selling affiliate, or the
S corporation shareholders to which such
income, loss, or other amount is attribut-
able for the taxable year in which such in-
crease or decrease is taken into account.
(d) Special rules for AGUB—(1) Effect
of disposition or depreciation of acquisi-
tion date assets. If an acquisition date
asset has been disposed of, depreciated,
amortized, or depleted by new target be-
fore an amount is added to the original al-
location to the asset, the increased amount
otherwise allocable to such asset is taken
into account under general principles of
tax law that apply when part of the cost of
an asset not previously taken into account
in basis is paid or incurred after the asset
has been disposed of, depreciated, amor-
tized, or depleted. A similar rule applies
when an amount is subtracted from the
original allocation to the asset. For pur-
poses of the preceding sentence, an asset
is considered to have been disposed of to
the extent that its allocable portion of the
decrease in AGUB would reduce its basis
below zero.
(2) Section 38 property. Section
1.47–2(c) applies to a reduction in basis
of section 38 property under this section.
(e) Examples. The following examples
illustrate this section. Any amount de-
scribed in the following examples is ex-
clusive of interest. For rules characteriz-
ing deferred contingent payments as
principal or interest, see §§1.483–4,
1.1274–2(g), and 1.1275–4(c). The ex-
amples are as follows:
Example 1. (i)(A) T’s assets other than goodwill
and going concern value, and their fair market val-
ues at the beginning of the day after the acquisition
date, are as follows:
AssetAssetFair
ClassMarket
Value
VBuilding . . . . . . . . . . . . . . .$ 100
VStock of X (not a target) . . 200
Total . . . . . . . . . . . . . . . .$ 300
(B) T has no liabilities other than a contingent li-
ability that would not be taken into account under
general principles of tax law in an asset sale between
unrelated parties when the buyer assumed the liabil-
ity or took property subject to it.
(ii)(A) On September 1, 2000, P purchases all of
the outstanding stock of T for $270 and makes a sec-
tion 338 election for T. The grossed-up basis of the
T stock and T’s AGUB are both $270. The AGUB is
ratably allocated among T’s Class V assets in pro-
portion to their fair market values as follows:
AssetBasis
Building ($270 x 100/300) . . . . . . . $ 90
Stock ($270 x 200/300) . . . . . . . . . 180
Total . . . . . . . . . . . . . . . . . . . . . . . $270
(B) No amount is allocated to the Class VII as-
sets. New T is a calendar year taxpayer. Assume
that the X stock is a capital asset in the hands of new
T.
(iii) On January 1, 2001, new T sells the X stock
and uses the proceeds to purchase inventory.
(iv) Pursuant to events on June 30, 2002, the
contingent liability of old T is at that time properly
taken into account under general principles of tax
law. The amount of the liability is $60.
(v) T’s AGUB increases by $60 from $270 to
$330. This $60 increase in AGUB is first allocated
among T’s acquisition date assets in accordance with
the provisions of §1.338–6. Because the redeter-
mined AGUB for T ($330) exceeds the sum of the
fair market values at the beginning of the day after
the acquisition date of the Class V acquisition date
assets ($300), AGUB allocated to those assets is lim-
ited to those fair market values under
§1.338–6(c)(1). As there are no Class VI assets, the
remaining AGUB of $30 is allocated to goodwill
and going concern value (Class VII assets). The
amount of increase in AGUB allocated to each ac-
quisition date asset is determined as follows:
April 9, 200110402001–15 I.R.B.
(vi) Since the X stock was disposed of before the
contingent liability was properly taken into account
for tax purposes, no amount of the increase in
AGUB attributable to such stock may be allocated to
any T asset. Rather, such amount ($20) is allowed
as a capital loss to T for the taxable year 2002 under
the principles of Arrowsmith v. Commissioner, 344
U.S. 6 (1952). In addition, the $10 increase in
AGUB allocated to the building and the $30 in-
crease in AGUB allocated to the goodwill and going
concern value are treated as basis redeterminations
in 2002. See paragraph (d)(1) of this section.
Example 2. (i) On January 1, 2002, P purchases
all of the outstanding stock of T and makes a section
338 election for T. Assume that ADSP and AGUB
of T are both $500 and are allocated among T’s ac-
quisition date assets as follows:
Asset
ClassAssetBasis
VMachinery . . . . . . . . . . . . .$ 150
VLand . . . . . . . . . . . . . . . . . .250
VIIGoodwill and going
concern value . . . . . . . . . 100
Total . . . . . . . . . . . . . .$ 500
(ii) On September 30, 2004, P filed a claim
against the selling shareholders of T in a court of ap-
propriate jurisdiction alleging fraud in the sale of the
T stock.
(iii) On January 1, 2007, the former shareholders
refund $140 of the purchase price to P in a settle-
ment of the lawsuit. Assume that, under general
principles of tax law, both the seller and the buyer
properly take into account such refund when paid.
Assume also that the refund has no effect on the tax
liability for the deemed sale tax consequences. This
refund results in a decrease of T’s ADSP and AGUB
of $140, from $500 to $360.
(iv) The redetermined ADSP and AGUB of $360
is allocated among T’s acquisition date assets. Be-
cause ADSP and AGUB do not exceed the fair mar-
ket value of the Class V assets, the ADSP and
AGUB amounts are allocated to the Class V assets
in proportion to their fair market values at the begin-
ning of the day after the acquisition date. Thus,
$135 ($150 x ($360/($150 + $250))) is allocated to
the machinery and $225 ($250 x ($360/($150 +
$250))) is allocated to the land. Accordingly, the
basis of the machinery is reduced by $15 ($150 orig-
inal allocation - $135 redetermined allocation) and
the basis of the land is reduced by $25 ($250 origi-
nal allocation - $225 redetermined allocation). No
amount is allocated to the Class VII assets. Accord-
ingly, the basis of the goodwill and going concern
value is reduced by $100 ($100 original allocation -
$0 redetermined allocation).
(v) Assume that, as a result of deductions under
section 168, the adjusted basis of the machinery im-
mediately before the decrease in AGUB is zero. The
machinery is treated as if it were disposed of before
the decrease is taken into account. In 2007, T recog-
nizes income of $15, the character of which is deter-
mined under the principles of Arrowsmith v. Com-
missionerand the tax benefit rule. No adjustment to
the basis of T’s assets is made for any tax paid on
this amount. Assume also that, as a result of amorti-
zation deductions, the adjusted basis of the goodwill
and going concern value immediately before the de-
crease in AGUB is $40. A similar adjustment to in-
come is made in 2007 with respect to the $60 of pre-
viously amortized goodwill and going concern
value.
(vi) In summary, the basis of T’s acquisition date
assets, as of January 1, 2007, is as follows:
AssetOriginalRedeterminedIncrease
AGUBAGUB
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 90$ 100$ 10
X Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18020020
Goodwill and going concern value . . . . . . . . . . . . . . . . . . . . . . . . . . 0 30 30
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 270$ 330$ 60

AssetBasis
Machinery . . . . . . . . . . . . . . . . . . . . $ 0
Land . . . . . . . . . . . . . . . . . . . . . . . . 225
Goodwill and going
concern value . . . . . . . . . . . . . . . . 0
Example 3. (i) Assume that the facts are the same
as §1.338–6(d) Example 2except that the recently
purchased stock is acquired for $1,600 plus addi-
tional payments that are contingent upon T’s future
earnings. Assume that, under general principles of
tax law, such later payments are properly taken into
account when paid. Thus, T’s AGUB, determined as
of the beginning of the day after the acquisition date
(after reduction by T’s cash of $200), is $2,500 and
is allocated among T’s acquisition date assets under
§1.338–6(c)(3)(iii) as follows:
ClassAssetFinal
Allocation
ICash . . . . . . . . . . . . . . . .$ 200
IIPortfolio of actively traded
securities . . . . . . . . . .268*
IIIAccounts receivable . . . .536
IVInventory . . . . . . . . . . . .268
VBuilding . . . . . . . . . . . . .714
VLand . . . . . . . . . . . . . . . .178
VInvestment in T1 . . . . . .402
VIIGoodwill and going
concern value . . . . . . . . . 134
Total . . . . . . . . . . . . . . . . . . $ 2,700
* All numbers rounded for convenience.
(ii) At a later point in time, P pays an additional
$200 for its recently purchased T stock. Assume
that the additional consideration paid would not in-
crease T’s tax liability for the deemed sale tax conse-
quences.
(iii) T’s AGUB increases by $200, from $2,700 to
$2,900. This $200 increase in AGUB is accounted
for in accordance with the provisions of
§1.338–6(c)(3)(iii).
(iv) The hypothetical purchase price of the T
stock is redetermined as follows:
2001–15 I.R.B.1041April 9, 2001
Grossed–up basis of recently purchased stock as determined
under §1.338–5(c) ($1,800 x (1 - .2)/.8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,800
Basis of nonrecently purchased stock as if the gain recognition
election under §1.338–5(d)(2) had been made ($1,800 x .2/(1 - .2)) . . . . . . . . . . . . . . . . . . . . . . . .450
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,250
(v) Since the redetermined hypothetical purchase price ($3,250) exceeds the redetermined AGUB ($2,900) and no gain recognition election was made under sec-
tion 338(b)(3), the rules of §1.338–6(c)(3)(iii) are reapplied using the redetermined hypothetical purchase price and the redetermined AGUB.
(vi) First, an AGUB amount equal to the redetermined hypothetical purchase price ($3,250) is allocated among the assets under the general rules of §1.338–6. The
allocation is set forth in the column below entitled Hypothetical Allocation. Next, the allocation to each asset in Class II through Class VII is multiplied by a fraction
with a numerator equal to the actual redetermined AGUB reduced by the amount of Class I assets ($2,900 - $200 = $2,700) and a denominator equal to the redeter-
mined hypothetical purchase price reduced by the amount of Class I assets ($3,250 - $200 = $3,050), or 2,700/3,050. This produces the Final Allocation:
ClassAssetHypotheticalFinal
AllocationAllocation
ICash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200$ 200
IIPortfolio of actively traded securities . . . . . . . . . 300266*
IIIAccounts receivable . . . . . . . . . . . . . . . . . . . . . . 600531
IVInventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300266
VBuilding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800708
VLand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200177
VInvestment in T1 . . . . . . . . . . . . . . . . . . . . . . . . . 450398
VIIGoodwill and going concern value . . . . . . . . . . . 400 354
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,250$ 2900
* All numbers rounded for convenience.
(vii) As illustrated by this example, reapplying §1.338–6(c)(3) results in a basis increase for some assets and a basis decrease for other assets. The amount of re-
determined AGUB allocated to each acquisition date asset is determined as follows:
AssetOriginalRedeterminedIncrease
(c)(3) allocation(c)(3) allocation(decrease)
Portfolio of actively traded securities . . . . . . . . . . . . . . . . . . . . . . . .$ 268$ 266$ (2)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .536531(5)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .268266(2)
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .714708(6)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .178177(1)
Investment in T1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .402398(4)
Goodwill and going concern value . . . . . . . . . . . . . . . . . . . . . . . . . . 134 354 220
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 2,500$ 2,700$ 200
Example 4.(i) On January 1, 2001, P purchases
all of the outstanding T stock and makes a section
338 election for T. P pays $700 of cash and
promises also to pay a maximum $300 of contingent
consideration at various times in the future. Assume
that, under general principles of tax law, such later
payments are properly taken into account by P when
paid. Assume also, however, that the current fair
market value of the contingent payments is reason-
ably ascertainable. The fair market value of T’s as-
sets (other than goodwill and going concern value)
as of the beginning of the following day is as fol-
lows:
AssetAssetsFair
Classmarket
value
VEquipment . . . . . . . . . . . . .$ 200
VNon-actively traded
securities . . . . . . . . . . .100
VBuilding . . . . . . . . . . . . . . . 500
Total . . . . . . . . . . . . . . .800
(ii) T has no liabilities. The AGUB is $700. In
calculating ADSP, assume that, under §1.1001–1,
the current amount realized attributable to the con-
tingent consideration is $200. ADSP is therefore
$900 ($700 cash plus $200).
(iii) (A) The AGUB of $700 is ratably allocated
among T’s Class V acquisition date assets in propor-
tion to their fair market values as follows:
AssetBasis
Equipment ($700 x 200/800) . . . . . $175.00
Non-actively traded
securities ($700 x 100/800) . . . . 87.50
Building ($700 x 500/800) . . . . . . . 437.50
Total . . . . . . . . . . . . . . . . . . . . . . $700.00

(B) No amount is allocated to goodwill or going
concern value.
(iv) (A) The ADSP of $900 is ratably allocated
among T’s Class V acquisition date assets in propor-
tion to their fair market values as follows:
AssetBasis
Equipment. . . . . . . . . . . . . . . . . . . . $200
Non-actively traded securities . . . . 100
Building . . . . . . . . . . . . . . . . . . . . . 500
Total . . . . . . . . . . . . . . . . . . . . . $800
(B) The remaining ADSP, $100, is allocated to
goodwill and going concern value (Class VII).
(v) P and T file a consolidated return for 2001
and each following year with P as the common par-
ent of the affiliated group.
(vi) In 2004, a contingent amount of $120 is paid
by P. For old T, this payment has no effect on ADSP,
because the payment is accounted for as a separate
transaction. We have assumed that, under general
principles of tax law, the payment is properly taken
into account by P at the time made. Therefore, in
2004, there is an increase in new T’s AGUB of $120.
The amount of the increase allocated to each acqui-
sition date asset is determined as follows:
April 9, 200110422001–15 I.R.B.
AssetOriginalRedeterminedIncrease
AGUBAGUB
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 175.00$ 200.00$ 25.00
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87.50100.0012.50
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .437.50500.0062.50
Goodwill and going concern value . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00 20.00 20.00
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 700.00$ 820.00$ 120.00
§§1.338–0T through 1.338–7T
[Removed]
Par. 4. Sections 1.338–0T through
1.338–7T are removed.
Par. 5. Section 1.338–10 is added to
read as follows:
§1.338–10 Filing of returns.
(a) Returns including tax liability from
deemed asset sale—(1) In general. Ex-
cept as provided in paragraphs (a)(2) and
(3) of this section, any deemed sale tax
consequences are reported on the final re-
turn of old target filed for old target’s tax-
able year that ends at the close of the ac-
quisition date. Paragraphs (a)(2), (3) and
(4) of this section do not apply to elec-
tions under section 338(h)(10). If old tar-
get is the common parent of an affiliated
group, the final return may be a consoli-
dated return (any such consolidated return
must also include any deemed sale tax
consequences of any members of the con-
solidated group that are acquired by the
purchasing corporation on the same ac-
quisition date as old target).
(2) Old target’s final taxable year oth-
erwise included in consolidated return of
selling group—(i) General rule. If the
selling group files a consolidated return
for the period that includes the acquisition
date, old target is disaffiliated from that
group immediately before the deemed
asset sale and must file a deemed sale re-
turn separate from the group, which in-
cludes only the deemed sale tax conse-
quences and the carryover items specified
in paragraph (a)(2)(iii) of this section.
The deemed asset sale occurs at the close
of the acquisition date and is the last
transaction of old target and the only
transaction reported on the separate re-
turn. Except as provided in §1.338–1(d)
(regarding certain transactions on the ac-
quisition date), any transactions of old
target occurring on the acquisition date
other than the deemed asset sale are in-
cluded in the selling group’s consolidated
return. A deemed sale return includes a
combined deemed sale return as defined
in paragraph (a)(4) of this section.
(ii) Separate taxable year. The deemed
asset sale included in the deemed sale re-
turn under this paragraph (a)(2) occurs in
a separate taxable year, except that old
target’s taxable year of the sale and the
consolidated year of the selling group that
includes the acquisition date are treated as
the same year for purposes of determining
the number of years in a carryover or car-
ryback period.
(iii) Carryover and carryback of tax at-
tributes. Target’s attributes may be car-
ried over to, and carried back from, the
deemed sale return under the rules applic-
able to a corporation that ceases to be a
member of a consolidated group.
(iv) Old target is a component member
of purchasing corporation’s controlled
group. For purposes of its deemed sale
return, target is a component member of
the controlled group of corporations in-
cluding the purchasing corporation unless
target is treated as an excluded member
under section 1563(b)(2).
(3) Old target is an S corporation. If
target is an S corporation for the period
that ends on the day before the acquisition
date and a section 338 election (but not a
section 338(h)(10) election) is filed for
target, old target files a return as a C cor-
poration reflecting its activities on the ac-
quisition date, including target’s deemed
sale. See section 1362(d)(2). For pur-
poses of this return, target is a component
member of the controlled group of corpo-
rations including the purchasing corpora-
tion unless target is treated as an excluded
member under section 1563(b)(2).
(4) Combined deemed sale return—(i)
General rule. Under section 338(h)(15),
a combined deemed sale return (com-
bined return) may be filed for all targets
from a single selling consolidated group
(as defined in §1.338(h)(10)–1(b)(3)) that
are acquired by the purchasing corpora-
tion on the same acquisition date and that
otherwise would be required to file sepa-
rate deemed sale returns. The combined
return must include all such targets. For
example, T and T1 may be included in a
combined return if—
(A) T and T1 are directly owned sub-
sidiaries of S;
(B) S is the common parent of a consol-
idated group; and
(C) P makes qualified stock purchases
of T and T1 on the same acquisition date.
(ii) Gain and loss offsets. Gains and
losses recognized on the deemed asset sales
by targets included in a combined return are
treated as the gains and losses of a single
target. In addition, loss carryovers of a tar-
get that were not subject to the separate re-
turn limitation year restrictions (SRLY re-
strictions) of the consolidated return
regulations while that target was a member
of the selling consolidated group may be
applied without limitation to the gains of
other targets included in the combined re-
turn. If, however, a target has loss carry-
overs that were subject to the SRLY restric-

tions while that target was a member of the
selling consolidated group, the use of those
losses in the combined return continues to
be subject to those restrictions, applied in
the same manner as if the combined return
were a consolidated return. A similar rule
applies, when appropriate, to other tax at-
tributes.
(iii) Procedure for filing a combined re-
turn. A combined return is made by filing
a single corporation income tax return in
lieu of separate deemed sale returns for all
targets required to be included in the com-
bined return. The combined return re-
flects the deemed asset sales of all targets
required to be included in the combined
return. If the targets included in the com-
bined return constitute a single affiliated
group within the meaning of section
1504(a), the income tax return is signed
by an officer of the common parent of that
group. Otherwise, the return must be
signed by an officer of each target in-
cluded in the combined return. Rules
similar to the rules in §1.1502–75(j) apply
for purposes of preparing the combined
return. The combined return must include
an attachment prominently identified as
an “ELECTION TO FILE A COMBINED
RETURN UNDER SECTION 338(h)
(15).” The attachment must—
(A) Contain the name, address, and em-
ployer identification number of each tar-
get required to be included in the com-
bined return;
(B) Contain the following declaration
(or a substantially similar declaration):
EACH TARGET IDENTIFIED IN THIS
ELECTION TO FILE A COMBINED
RETURN CONSENTS TO THE FILING
OF A COMBINED RETURN;
(C) For each target, be signed by a per-
son who states under penalties of perjury
that he or she is authorized to act on be-
half of such target.
(iv) Consequences of filing a combined
return. Each target included in a com-
bined return is severally liable for any tax
associated with the combined return. See
§1.338–1(b)(3).
(5) Deemed sale excluded from pur-
chasing corporation’s consolidated re-
turn. Old target may not be considered a
member of any affiliated group that in-
cludes the purchasing corporation with re-
spect to its deemed asset sale.
(6) Due date for old target’s final re-
turn—(i) General rule. Old target’s final
return is generally due on the 15th day of
the third calendar month following the
month in which the acquisition date oc-
curs. See section 6072 (time for filing in-
come tax returns).
(ii) Application of §1.1502–76(c)—(A)
In general. Section 1.1502–76(c) applies
to old target’s final return if old target was
a member of a selling group that did not
file consolidated returns for the taxable
year of the common parent that precedes
the year that includes old target’s acquisi-
tion date. If the selling group has not
filed a consolidated return that includes
old target’s taxable period that ends on the
acquisition date, target may, on or before
the final return due date (including exten-
sions), either—
(1) File a deemed sale return on the as-
sumption that the selling group will file
the consolidated return; or
(2) File a return for so much of old tar-
get’s taxable period as ends at the close of
the acquisition date on the assumption
that the consolidated return will not be
filed.
(B) Deemed extension. For purposes of
applying §1.1502–76(c)(2), an extension
of time to file old target’s final return is
considered to be in effect until the last
date for making the election under section
338.
(C) Erroneous filing of deemed sale re-
turn. If, under this paragraph (a)(6)(ii),
target files a deemed sale return but the
selling group does not file a consolidated
return, target must file a substituted return
for old target not later than the due date
(including extensions) for the return of
the common parent with which old target
would have been included in the consoli-
dated return. The substituted return is for
so much of old target’s taxable year as
ends at the close of the acquisition date.
Under §1.1502–76(c)(2), the deemed sale
return is not considered a return for pur-
poses of section 6011 (relating to the gen-
eral requirement of filing a return) if a
substituted return must be filed.
(D) Erroneous filing of return for regu-
lar tax year.If, under this paragraph
(a)(6)(ii), target files a return for so much
of old target’s regular taxable year as ends
at the close of the acquisition date but the
selling group files a consolidated return,
target must file an amended return for old
target not later than the due date (includ-
ing extensions) for the selling group’s
consolidated return. (The amended return
is a deemed sale return.)
(E) Last date for payment of tax. If ei-
ther a substituted or amended final return
of old target is filed under this paragraph
(a)(6)(ii), the last date prescribed for pay-
ment of tax is the final return due date (as
defined in paragraph (a)(6)(i) of this sec-
tion).
(7) Examples. The following examples
illustrate this paragraph (a):
Example 1. (i) S is the common parent of a con-
solidated group that includes T. The S group files
calendar year consolidated returns. At the close of
June 30 of Year 1, P makes a qualified stock pur-
chase of T from S. P makes a section 338 election
for T, and T’s deemed asset sale occurs as of the
close of T’s acquisition date (June 30).
(ii) T is considered disaffiliated for purposes of
reporting the deemed sale tax consequences. Ac-
cordingly, T is included in the S group’s consoli-
dated return through T’s acquisition date except that
the tax liability for the deemed sale tax conse-
quences is reported in a separate deemed sale return
of T. Provided that T is not treated as an excluded
member under section 1563(b)(2), T is a component
member of P’s controlled group for the taxable year
of the deemed asset sale, and the taxable income
bracket amounts available in calculating tax on the
deemed sale return must be limited accordingly.
(iii) If P purchased the stock of T at 10 a.m. on
June 30 of Year 1, the results would be the same.
See paragraph (a)(2)(i) of this section.
Example 2. The facts are the same as in Example
1, except that the S group does not file consolidated
returns. T must file a separate return for its taxable
year ending on June 30 of Year 1, which return in-
cludes the deemed asset sale.
(b) Waiver—(1) Certain additions to
tax. An addition to tax or additional
amount (addition) under subchapter A of
chapter 68 of the Internal Revenue Code
arising on or before the last day for mak-
ing the election under section 338 because
of circumstances that would not exist but
for an election under section 338 is
waived if—
(i) Under the particular statute the addi-
tion is excusable upon a showing of rea-
sonable cause; and
(ii) Corrective action is taken on or be-
fore the last day.
(2) Notification. The Internal Revenue
Service should be notified at the time of
correction (e.g., by attaching a statement
to a return that constitutes corrective ac-
tion) that the waiver rule of this paragraph
(b) is being asserted.
(3) Elections or other actions required
to be specified on a timely filed return—
(i) In general.If paragraph (b)(1) of this
section applies or would apply if there
2001–15 I.R.B.1043April 9, 2001

were an underpayment, any election or
other action that must be specified on a
timely filed return for the taxable period
covered by the late filed return described
in paragraph (b)(1) of this section is con-
sidered timely if specified on a late-filed
return filed on or before the last day for
making the election under section 338.
(ii) New target in purchasing corpora-
tion’s consolidated return. If new target
is includible for its first taxable year in a
consolidated return filed by the affiliated
group of which the purchasing corpora-
tion is a member on or before the last day
for making the election under section 338,
any election or other action that must be
specified in a timely filed return for new
target’s first taxable year (but which is not
specified in the consolidated return) is
considered timely if specified in an
amended return filed on or before such
last day, at the place where the consoli-
dated return was filed.
(4) Examples. The following examples
illustrate this paragraph (b):
Example 1. T is an unaffiliated corporation with
a tax year ending March 31. At the close of Septem-
ber 20 of Year 1, P makes a qualified stock purchase
of T. P does not join in filing a consolidated return.
P makes a section 338 election for T on or before
June 15 of Year 2, which causes T’s taxable year to
end as of the close of September 20 of Year 1. An
income tax return for T’s taxable period ending on
September 20 of Year 1 was due on December 15 of
Year 1. Additions to tax for failure to file a return
and to pay tax shown on a return will not be imposed
if T’s return is filed and the tax paid on or before
June 15 of Year 2. (This waiver applies even if the
acquisition date coincides with the last day of T’s
former taxable year, i.e., March 31 of Year 2.) Inter-
est on any underpayment of tax for old T’s short tax-
able year ending September 20 of Year 1 runs from
December 15 of Year 1. A statement indicating that
the waiver rule of this paragraph is being asserted
should be attached to T’s return.
Example 2. Assume the same facts as in Example
1. Assume further that new T adopts the calendar
year by filing, on or before June 15 of Year 2, its first
return (for the period beginning on September 21 of
Year 1 and ending on December 31 of Year 1) indi-
cating that a calendar year is chosen. See
§1.338–1(b)(1). Any additions to tax or amounts de-
scribed in this paragraph (b) that arise because of the
late filing of a return for the period ending on De-
cember 31 of Year 1 are waived, because they are
based on circumstances that would not exist but for
the section 338 election. Notwithstanding this
waiver, however, the return is still considered due
March 15 of Year 2, and interest on any underpay-
ment runs from that date.
Example 3. Assume the same facts as in Example
2, except that T’s former taxable year ends on Octo-
ber 31. Although prior to the election old T had a re-
turn due on January 15 of Year 2 for its year ending
October 31 of Year 1, that return need not be filed
because a timely election under section 338 was
made. Instead, old T must file a final return for the
period ending on September 20 of Year 1, which is
due on December 15 of Year 1.
§1.338–10T [Removed]
Par. 6. Section 1.338–10T is removed.
Par. 7. Section 1.338(h)(10)–1 is added
to read as follows:
§1.338(h)(10)–1 Deemed asset sale and
liquidation.
(a) Scope. This section prescribes rules
for qualification for a section 338(h)(10)
election and for making a section
338(h)(10) election. This section also pre-
scribes the consequences of such election.
The rules of this section are in addition to
the rules of §§1.338–1 through 1.338–10
and, in appropriate cases, apply instead of
the rules of §§1.338–1 through 1.338–10.
(b) Definitions—(1) Consolidated tar-
get. Aconsolidated targetis a target that
is a member of a consolidated group
within the meaning of §1.1502–1(h) on
the acquisition date and is not the com-
mon parent of the group on that date.
(2) Selling consolidated group. A sell-
ing consolidated groupis the consoli-
dated group of which the consolidated tar-
get is a member on the acquisition date.
(3) Selling affiliate; affiliated target. A
selling affiliateis a domestic corporation
that owns on the acquisition date an
amount of stock in a domestic target,
which amount of stock is described in
section 1504(a)(2), and does not join in
filing a consolidated return with the tar-
get. In such case, the target is an affili-
ated target.
(4) S corporation target. An S corpora-
tion targetis a target that is an S corporation
immediately before the acquisition date.
(5) S corporation shareholders. S cor-
poration shareholdersare the S corpora-
tion target’s shareholders. Unless other-
wise indicated, a reference to S
corporation shareholders refers both to S
corporation shareholders who do and
those who do not sell their target stock.
(6) Liquidation. Any reference in this
section to a liquidationis treated as a ref-
erence to the transfer described in para-
graph (d)(4) of this section notwithstand-
ing its ultimate characterization for
Federal income tax purposes.
(c) Section 338(h)(10) election—(1)In
general. A section 338(h)(10) election
may be made for T if P acquires stock
meeting the requirements of section
1504(a)(2) from a selling consolidated
group, a selling affiliate, or the S corpora-
tion shareholders in a qualified stock pur-
chase.
(2) Simultaneous joint election require-
ment. A section 338(h)(10) election is
made jointly by P and the selling consoli-
dated group (or the selling affiliate or the
S corporation shareholders) on Form
8023 in accordance with the instructions
to the form. S corporation shareholders
who do not sell their stock must also con-
sent to the election. The section
338(h)(10) election must be made not
later than the 15th day of the 9th month
beginning after the month in which the
acquisition date occurs.
(3) Irrevocability. A section 338(h)(10)
election is irrevocable. If a section
338(h)(10) election is made for T, a sec-
tion 338 election is deemed made for T.
(4) Effect of invalid election. If a sec-
tion 338(h)(10) election for T is not valid,
the section 338 election for T is also not
valid.
(d) Certain consequences of section
338(h)(10) election. For purposes of sub-
title A of the Internal Revenue Code (ex-
cept as provided in §1.338–1(b)(2)), the
consequences to the parties of making a
section 338(h)(10) election for T are as
follows:
(1) P. P is automatically deemed to
have made a gain recognition election for
its nonrecently purchased T stock, if any.
The effect of a gain recognition election
includes a taxable deemed sale by P on
the acquisition date of any nonrecently
purchased target stock. See §1.338–5(d).
(2) New T. The AGUB for new T’s as-
sets is determined under §1.338–5 and is
allocated among the acquisition date as-
sets under §§1.338–6 and 1.338–7.
Notwithstanding paragraph (d)(4) of this
section (deemed liquidation of old T),
new T remains liable for the tax liabilities
of old T (including the tax liability for the
deemed sale tax consequences). For ex-
ample, new T remains liable for the tax li-
abilities of the members of any consoli-
dated group that are attributable to taxable
years in which those corporations and old
T joined in the same consolidated return.
See §1.1502–6(a).
(3) Old T—deemed sale—(i) In gen-
eral. Old T is treated as transferring all of
April 9, 200110442001–15 I.R.B.

its assets to an unrelated person in ex-
change for consideration that includes the
discharge of its liabilities in a single trans-
action at the close of the acquisition date
(but before the deemed liquidation). See
§1.338–1(a) regarding the tax characteri-
zation of the deemed asset sale. Except as
provided in §1.338(h)(10)–1(d)(8) (re-
garding the installment method), old T
recognizes all of the gain realized on the
deemed transfer of its assets in considera-
tion for the ADSP. ADSP for old T is de-
termined under §1.338–4 and allocated
among the acquisition date assets under
§§1.338–6 and 1.338–7. Old T realizes
the deemed sale tax consequences from
the deemed asset sale before the close of
the acquisition date while old T is a mem-
ber of the selling consolidated group (or
owned by the selling affiliate or owned by
the S corporation shareholders). If T is an
affiliated target, or an S corporation tar-
get, the principles of §§1.338–2(c)(10)
and 1.338–10(a)(1), (5), and (6)(i) apply
to the return on which the deemed sale tax
consequences are reported. When T is an
S corporation target, T’s S election con-
tinues in effect through the close of the
acquisition date (including the time of the
deemed asset sale and the deemed liqui-
dation) notwithstanding section
1362(d)(2)(B). Also, when T is an S cor-
poration target (but not a qualified sub-
chapter S subsidiary), any direct and indi-
rect subsidiaries of T which T has elected
to treat as qualified subchapter S sub-
sidiaries under section 1361(b)(3) remain
qualified subchapter S subsidiaries
through the close of the acquisition date.
(ii) Tiered targets. In the case of par-
ent-subsidiary chains of corporations
making elections under section
338(h)(10), the deemed asset sale of a
parent corporation is considered to pre-
cede that of its subsidiary. See
§1.338–3(b)(4)(i).
(4) Old T and selling consolidated
group, selling affiliate, or S corporation
shareholders—deemed liquidation; tax
characterization—(i) In general. Old T is
treated as if, before the close of the acqui-
sition date, after the deemed asset sale in
paragraph (d)(3) of this section, and while
old T is a member of the selling consoli-
dated group (or owned by the selling affil-
iate or owned by the S corporation share-
holders), it transferred all of its assets to
members of the selling consolidated
group, the selling affiliate, or S corpora-
tion shareholders and ceased to exist. The
transfer from old T is characterized for
Federal income tax purposes in the same
manner as if the parties had actually en-
gaged in the transactions deemed to occur
because of this section and taking into ac-
count other transactions that actually oc-
curred or are deemed to occur. For exam-
ple, the transfer may be treated as a
distribution in pursuance of a plan of reor-
ganization, a distribution in complete can-
cellation or redemption of all its stock,
one of a series of distributions in com-
plete cancellation or redemption of all its
stock in accordance with a plan of liqui-
dation, or part of a circular flow of cash.
In most cases, the transfer will be treated
as a distribution in complete liquidation to
which section 336 or 337 applies.
(ii) Tiered targets. In the case of par-
ent-subsidiary chains of corporations
making elections under section
338(h)(10), the deemed liquidation of a
subsidiary corporation is considered to
precede the deemed liquidation of its par-
ent.
(5) Selling consolidated group, selling
affiliate, or S corporation shareholders—
(i) In general. If T is an S corporation tar-
get, S corporation shareholders (whether
or not they sell their stock) take their pro
ratashare of the deemed sale tax conse-
quences into account under section 1366
and increase or decrease their basis in T
stock under section 1367. Members of
the selling consolidated group, the selling
affiliate, or S corporation shareholders are
treated as if, after the deemed asset sale in
paragraph (d)(3) of this section and before
the close of the acquisition date, they re-
ceived the assets transferred by old T in
the transaction described in paragraph
(d)(4)(i) of this section. In most cases, the
transfer will be treated as a distribution in
complete liquidation to which section 331
or 332 applies.
(ii)Basis and holding period of T stock
not acquired. A member of the selling
consolidated group (or the selling affiliate
or an S corporation shareholder) retaining
T stock is treated as acquiring the stock so
retained on the day after the acquisition
date for its fair market value. The holding
period for the retained stock starts on the
day after the acquisition date. For pur-
poses of this paragraph, the fair market
value of all of the T stock equals the
grossed-up amount realized on the sale to
P of P’s recently purchased target stock.
See §1.338–4(c).
(iii) T stock sale. Members of the sell-
ing consolidated group (or the selling af-
filiate or S corporation shareholders) rec-
ognize no gain or loss on the sale or
exchange of T stock included in the quali-
fied stock purchase (although they may
recognize gain or loss on the T stock in
the deemed liquidation).
(6) Nonselling minority shareholders
other than nonselling S corporation
shareholders—(i) In general. This para-
graph (d)(6) describes the treatment of
shareholders of old T other than the fol-
lowing: members of the selling consoli-
dated group, the selling affiliate, S corpo-
ration shareholders (whether or not they
sell their stock), and P. For a description
of the treatment of S corporation share-
holders, see paragraph (d)(5) of this sec-
tion. A shareholder to which this para-
graph (d)(6) applies is called a minority
shareholder.
(ii) T stock sale. A minority share-
holder recognizes gain or loss on the
shareholder’s sale or exchange of T stock
included in the qualified stock purchase.
(iii) T stock not acquired. A minority
shareholder does not recognize gain or
loss under this section with respect to
shares of T stock retained by the share-
holder. The shareholder’s basis and hold-
ing period for that T stock is not affected
by the section 338(h)(10) election.
(7) Consolidated return of selling con-
solidated group. If P acquires T in a qual-
ified stock purchase from a selling con-
solidated group—
(i) The selling consolidated group must
file a consolidated return for the taxable
period that includes the acquisition date;
(ii) A consolidated return for the selling
consolidated group for that period may
not be withdrawn on or after the day that a
section 338(h)(10) election is made for T;
and
(iii) Permission to discontinue filing
consolidated returns cannot be granted
for, and cannot apply to, that period or
any of the immediately preceding taxable
periods during which consolidated returns
continuously have been filed.
(8)Availability of the section 453 in-
stallment method. Solely for purposes of
applying sections 453, 453A, and 453B,
and the regulations thereunder (the in-
2001–15 I.R.B.1045April 9, 2001

stallment method) to determine the conse-
quences to old T in the deemed asset sale
and to old T (and its shareholders, if rele-
vant) in the deemed liquidation, the rules
in paragraphs (d)(1) through (7) of this
section are modified as follows:
(i) In deemed asset sale. Old T is
treated as receiving in the deemed asset
sale new T installment obligations, the
terms of which are identical (except as to
the obligor) to P installment obligations
issued in exchange for recently purchased
stock of T. Old T is treated as receiving in
cash all other consideration in the deemed
asset sale other than the assumption of, or
taking subject to, old T liabilities. For ex-
ample, old T is treated as receiving in
cash any amounts attributable to the
grossing-up of amount realized under
§1.338–4(c). The amount realized for re-
cently purchased stock taken into account
in determining ADSP is adjusted (and,
thus, ADSP is redetermined) to reflect the
amounts paid under an installment obliga-
tion for the stock when the total payments
under the installment obligation are
greater or less than the amount realized.
(ii) In deemed liquidation. Old T is
treated as distributing in the deemed liqui-
dation the new T installment obligations
that it is treated as receiving in the
deemed asset sale. The members of the
selling consolidated group, the selling af-
filiate, or the S corporation shareholders
are treated as receiving in the deemed liq-
uidation the new T installment obligations
that correspond to the P installment oblig-
ations they actually received individually
in exchange for their recently purchased
stock. The new T installment obligations
may be recharacterized under other rules.
See for example §1.453–11(a)(2) which,
in certain circumstances, treats the new T
installment obligations deemed distrib-
uted by old T as if they were issued by
new T in exchange for the stock in old T
owned by members of the selling consoli-
dated group, the selling affiliate, or the S
corporation shareholders. The members
of the selling consolidated group, the sell-
ing affiliate, or the S corporation share-
holders are treated as receiving all other
consideration in the deemed liquidation in
cash.
(9) Treatment consistent with an actual
asset sale. No provision in section
338(h)(10) or this section shall produce a
Federal income tax result under subtitle A
of the Internal Revenue Code that would
not occur if the parties had actually en-
gaged in the transactions deemed to occur
because of this section and taking into
account other transactions that actually
occurred or are deemed to occur. See,
however, §1.338–1(b)(2) for certain ex-
ceptions to this rule.
(e) Examples. The following examples
illustrate the provisions of this section:
Example 1. (i) S1 owns all of the T stock and T
owns all of the stock of T1 and T2. S1 is the com-
mon parent of a consolidated group that includes T,
T1, and T2. P makes a qualified stock purchase of
all of the T stock from S1. S1 joins with P in making
a section 338(h)(10) election for T and for the
deemed purchase of T1. A section 338 election is
not made for T2.
(ii) S1 does not recognize gain or loss on the sale
of the T stock and T does not recognize gain or loss
on the sale of the T1 stock because section
338(h)(10) elections are made for T and T1. Thus,
for example, gain or loss realized on the sale of the T
or T1 stock is not taken into account in earnings and
profits. However, because a section 338 election is
not made for T2, T must recognize any gain or loss
realized on the deemed sale of the T2 stock. See
§1.338–4(h).
(iii) The results would be the same if S1, T, T1,
and T2 are not members of any consolidated group,
because S1 and T are selling affiliates.
Example 2. (i) S and T are solvent corporations.
S owns all of the outstanding stock of T. S and P
agree to undertake the following transaction: T will
distribute half its assets to S, and S will assume half
of T’s liabilities. Then, P will purchase the stock of
T from S. S and P will jointly make a section
338(h)(10) election with respect to the sale of T.
The corporations then complete the transaction as
agreed.
(ii) Under section 338(a), the assets present in T
at the close of the acquisition date are deemed sold
by old T to new T. Under paragraph (d)(4) of this
section, the transactions described in paragraph (d)
of this section are treated in the same manner as if
they had actually occurred. Because S and P had
agreed that, after T’s actual distribution to S of part
of its assets, S would sell T to P pursuant to an elec-
tion under section 338(h)(10), and because para-
graph (d)(4) of this section deems T subsequently to
have transferred all its assets to its shareholder, T is
deemed to have adopted a plan of complete liquida-
tion under section 332. T’s actual transfer of assets
to S is treated as a distribution pursuant to that plan
of complete liquidation.
Example 3. (i) S1 owns all of the outstanding
stock of both T and S2. All three are corporations.
S1 and P agree to undertake the following transac-
tion. T will transfer substantially all of its assets and
liabilities to S2, with S2 issuing no stock in ex-
change therefor, and retaining its other assets and li-
abilities. Then, P will purchase the stock of T from
S1. S1 and P will jointly make a section 338(h)(10)
election with respect to the sale of T. The corpora-
tions then complete the transaction as agreed.
(ii) Under section 338(a), the remaining assets
present in T at the close of the acquisition date are
deemed sold by old T to new T. Under paragraph
(d)(4) of this section, the transactions described in
this section are treated in the same manner as if they
had actually occurred. Because old T transferred
substantially all of its assets to S2, and is deemed to
have distributed all its remaining assets and gone out
of existence, the transfer of assets to S2, taking into
account the related transfers, deemed and actual,
qualifies as a reorganization under section
368(a)(1)(D). Section 361(c)(1) and not section 332
applies to T’s deemed liquidation.
Example 4. (i) T owns two assets: an actively
traded security (Class II) with a fair market value of
$100 and an adjusted basis of $100, and inventory
(Class IV) with a fair market value of $100 and an
adjusted basis of $100. T has no liabilities. S is ne-
gotiating to sell all the stock in T to P for $100 cash
and contingent consideration. Assume that under
generally applicable tax accounting rules, P’s ad-
justed basis in the T stock immediately after the pur-
chase would be $100, because the contingent con-
sideration is not taken into account. Thus, under the
rules of §1.338–5, AGUB would be $100. Under the
allocation rules of §1.338–6, the entire $100 would
be allocated to the Class II asset, the actively traded
security, and no amount would be allocated to the in-
ventory. P, however, plans immediately to cause T
to sell the inventory, but not the actively traded secu-
rity, so it requests that, prior to the stock sale, S
cause T to create a new subsidiary, Newco, and con-
tribute the actively traded security to the capital of
Newco. Because the stock in Newco, which would
not be actively traded, is a Class V asset, under the
rules of §1.338–6 $100 of AGUB would be allocated
to the inventory and no amount of AGUB would be
allocated to the Newco stock. Newco’s own AGUB,
$0 under the rules of §1.338–5, would be allocated
to the actively traded security. When P subsequently
causes T to sell the inventory, T would realize no
gain or loss instead of realizing gain of $100.
(ii) Assume that, if the T stock had not itself been
sold but T had instead sold both its inventory and the
Newco stock to P, T would for tax purposes be
deemed instead to have sold both its inventory and
actively traded security directly to P, with P deemed
then to have created Newco and contributed the ac-
tively traded security to the capital of Newco. Sec-
tion 338, if elected, generally recharacterizes a stock
sale as a deemed sale of assets. However, paragraph
(d)(9) of this section states, in general, that no provi-
sion of section 338(h)(10) or the regulations there-
under shall produce a Federal income tax result
under subtitle A of the Internal Revenue Code that
would not occur if the parties had actually engaged
in the transactions deemed to occur by virtue of the
section 338(h)(10) election, taking into account
other transactions that actually occurred or are
deemed to occur. Hence, the deemed sale of assets
under section 338(h)(10) should be treated as one of
the inventory and actively traded security them-
selves, not of the inventory and Newco stock. The
anti-abuse rule of §1.338–1(c) does not apply, be-
cause the substance of the deemed sale of assets is a
sale of the inventory and the actively traded security
themselves, not of the inventory and the Newco
stock. Otherwise, the anti-abuse rule might apply.
Example 5. (i) T, a member of a selling consoli-
dated group, has only one class of stock, all of which is
owned by S1. On March 1 of Year 2, S1 sells its T
stock to P for $80,000, and joins with P in making a
section 338(h)(10) election for T. There are no selling
April 9, 200110462001–15 I.R.B.

costs or acquisition costs. On March 1 of Year 2, T
owns land with a $50,000 basis and $75,000 fair mar-
ket value and equipment with a $30,000 adjusted basis,
$70,000 recomputed basis, and $60,000 fair market
value. T also has a $40,000 liability. S1 pays old T’s
allocable share of the selling group’s consolidated tax
μ liability for Year 2 including the tax liability for the
deemed sale tax consequences (a total of $13,600).
(ii) ADSP of $120,000 ($80,000 + $40,000 + 0)
is allocated to each asset as follows:
2001–15 I.R.B.1047April 9, 2001
AssetsBasisFMVFractionAllocable
ADSP
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 50,000$ 75,0005/9$ 66,667
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30,00060,0004/9 53,333
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 80,000$ 135,0001$ 120,000
(iii) Under paragraph (d)(3) of this section, old T
has gain on the deemed sale of $40,000 (consisting
of $16,667 of capital gain and $23,333 of ordinary
income).
(iv) Under paragraph (d)(5)(iii) of this section,
S1 recognizes no gain or loss upon its sale of the old
T stock to P. S1 also recognizes no gain or loss upon
the deemed liquidation of T. See paragraph (d)(4) of
this section and section 332.
(v) P’s basis in new T stock is P’s cost for the
stock, $80,000. See section 1012.
(vi) Under §1.338–5, the AGUB for new T is
$120,000, i.e., P’s cost for the old T stock ($80,000)
plus T’s liability ($40,000). This AGUB is allocated
as basis among the new T assets under §§1.338–6
and 1.338–7.
Example 6. (i) The facts are the same as in Ex-
ample 5, except that S1 sells 80 percent of the old T
stock to P for $64,000, rather than 100 percent of the
old T stock for $80,000.
(ii) The consequences to P, T, and S1 are the same
as in Example 5, except that:
(A) P’s basis for its 80-percent interest in the new
T stock is P’s $64,000 cost for the stock. See section
1012.
(B) Under §1.338–5, the AGUB for new T is
$120,000 (i.e., $64,000/.8 + $40,000 + $0).
(C) Under paragraph (d)(4) of this section, S1
recognizes no gain or loss with respect to the re-
tained stock in T. See section 332.
(D) Under paragraph (d)(5)(ii) of this section, the
basis of the T stock retained by S1 is $16,000 (i.e.,
$120,000 - $40,000 (the ADSP amount for the old T
assets over the sum of new T’s liabilities immedi-
ately after the acquisition date) x .20 (the proportion
of T stock retained by S1)).
Example 7. (i) The facts are the same as in Ex-
ample 6, except that K, a shareholder unrelated to T
or P, owns the 20 percent of the T stock that is not
acquired by P in the qualified stock purchase. K’s
basis in its T stock is $5,000.
(ii) The consequences to P, T, and S1 are the same
as in Example 6.
(iii) Under paragraph (d)(6)(iii) of this section, K
recognizes no gain or loss, and K’s basis in its T
stock remains at $5,000.
Example 8. (i) The facts are the same as in Ex-
ample 5, except that the equipment is held by T1, a
wholly-owned subsidiary of T, and a section
338(h)(10) election is also made for T1. The T1
stock has a fair market value of $60,000. T1 has no
assets other than the equipment and no liabilities.
S1 pays old T’s and old T1’s allocable shares of the
selling group’s consolidated tax liability for Year 2
including the tax liability for T and T1’s deemed sale
tax consequences.
(ii) ADSP for T is $120,000, allocated $66,667 to
the land and $53,333 to the stock. Old T’s deemed
sale results in $16,667 of capital gain on its deemed
sale of the land. Under paragraph (d)(5)(iii) of this
section, old T does not recognize gain or loss on its
deemed sale of the T1 stock. See section 332.
(iii) ADSP for T1 is $53,333 (i.e., $53,333 + $0 +
$0). On the deemed sale of the equipment, T1 rec-
ognizes ordinary income of $23,333.
(iv) Under paragraph (d)(5)(iii) of this section,
S1 does not recognize gain or loss upon its sale of
the old T stock to P.
Example 9. (i) The facts are the same as in Ex-
ample 8,except that P already owns 20 percent of
the T stock, which is nonrecently purchased stock
with a basis of $6,000, and that P purchases the re-
maining 80 percent of the T stock from S1 for
$64,000.
(ii) The results are the same as in Example 8, ex-
cept that under paragraph (d)(1) of this section and
§1.338–5(d), P is deemed to have made a gain
recognition election for its nonrecently purchased T
stock. As a result, P recognizes gain of $10,000 and
its basis in the nonrecently purchased T stock is in-
creased from $6,000 to $16,000. P’s basis in all the
T stock is $80,000 (i.e., $64,000 + $16,000). The
computations are as follows:
(A) P’s grossed-up basis for the recently pur-
chased T stock is $64,000 (i.e., $64,000 (the basis of
the recently purchased T stock) x (1 - .2)/(.8) (the
fraction in section 338(b)(4))).
(B) P’s basis amount for the nonrecently pur-
chased T stock is $16,000 (i.e., $64,000 (the
grossed-up basis in the recently purchased T stock) x
(.2)/(1.0 - .2) (the fraction in section 338(b)(3)(B))).
(C) The gain recognized on the nonrecently pur-
chased stock is $10,000 (i.e., $16,000 - $6,000).
Example 10. (i) T is an S corporation whose sole
class of stock is owned 40 percent each by A and B
and 20 percent by C. T, A, B, and C all use the cash
method of accounting. A and B each has an adjusted
basis of $10,000 in the stock. C has an adjusted
basis of $5,000 in the stock. A, B, and C hold no in-
stallment obligations to which section 453A applies.
On March 1 of Year 1, A sells its stock to P for
$40,000 in cash and B sells its stock to P for a
$25,000 note issued by P and real estate having a
fair market value of $15,000. The $25,000 note, due
in full in Year 7, is not publicly traded and bears ad-
equate stated interest. A and B have no selling ex-
penses. T’s sole asset is real estate, which has a
value of $110,000 and an adjusted basis of $35,000.
Also, T’s real estate is encumbered by long-out-
standing purchase-money indebtedness of $10,000.
The real estate does not have built-in gain subject to
section 1374. A, B, and C join with P in making a
section 338(h)(10) election for T.
(ii) Solely for purposes of application of sections
453, 453A, and 453B, old T is considered in its
deemed asset sale to receive back from new T the
$25,000 note (considered issued by new T) and
$75,000 of cash (total consideration of $80,000 paid
for all the stock sold, which is then divided by .80 in
the grossing-up, with the resulting figure of
$100,000 then reduced by the amount of the install-
ment note). Absent an election under section
453(d), gain is reported by old T under the install-
ment method.
(iii) In applying the installment method to old T’s
deemed asset sale, the contract price for old T’s as-
sets deemed sold is $100,000, the $110,000 selling
price reduced by the indebtedness of $10,000 to
which the assets are subject. (The $110,000 selling
price is itself the sum of the $80,000 grossed-up in
paragraph (ii) above to $100,000 and the $10,000 li-
ability.) Gross profit is $75,000 ($110,000 selling
price - old T’s basis of $35,000). Old T’s gross
profit ratio is 0.75 (gross profit of $75,000 4
$100,000 contract price). Thus, $56,250 (0.75 x the
$75,000 cash old T is deemed to receive in Year 1) is
Year 1 gain attributable to the sale, and $18,750
($75,000 - $56,250) is recovery of basis.
(iv) In its liquidation, old T is deemed to distrib-
ute the $25,000 note to B, since B actually sold the
stock partly for that consideration. To the extent of
the remaining liquidating distribution to B, it is
deemed to receive, along with A and C, the balance
of old T’s liquidating assets in the form of cash.
Under section 453(h), B, unless it makes an election
under section 453(d), is not required to treat the re-
ceipt of the note as a payment for the T stock; P’s
payment of the $25,000 note in Year 7 to B is a pay-
ment for the T stock. Because section 453(h) ap-
plies to B, old T’s deemed liquidating distribution of
the note is, under section 453B(h), not treated as a
taxable disposition by old T.
(v) Under section 1366, A reports 40 percent, or
$22,500, of old T’s $56,250 gain recognized in Year
1. Under section 1367, this increases A’s $10,000
adjusted basis in the T stock to $32,500. Next, in
old T’s deemed liquidation, A is considered to re-
ceive $40,000 for its old T shares, causing it to rec-
ognize an additional $7,500 gain in Year 1.
(vi) Under section 1366, B reports 40 percent, or
$22,500, of old T’s $56,250 gain recognized in Year 1.
Under section 1367, this increases B’s $10,000 ad-
justed basis in its T stock to $32,500. Next, in old T’s
deemed liquidation, B is considered to receive the
$25,000 note and $15,000 of other consideration. Ap-
plying section 453, including section 453(h), to the
deemed liquidation, B’s selling price and contract
price are both $40,000. Gross profit is $7,500
($40,000 selling price - B’s basis of $32,500). B’s
gross profit ratio is 0.1875 (gross profit of $7,500 4
$40,000 contract price). Thus, $2,812.50 (0.1875 x
$15,000) is Year 1 gain attributable to the deemed liq-
uidation. In Year 7, when the $25,000 note is paid, B
has $4,687.50 (0.1875 x $25,000) of additional gain.

(vii) Under section 1366, C reports 20 percent, or
$11,250, of old T’s $56,250 gain recognized in Year
1. Under section 1367, this increases C’s $5,000 ad-
justed basis in its T stock to $16,250. Next, in old
T’s deemed liquidation, C is considered to receive
$20,000 for its old T shares, causing it to recognize
an additional $3,750 gain in Year 1. Finally, under
paragraph (d)(5)(ii) of this section, C is considered
to acquire its stock in T on the day after the acquisi-
tion date for $20,000 (fair market value = grossed-
up amount realized of $100,000 x 20%). C’s hold-
ing period in the stock deemed received in new T
begins at that time.
(f)Inapplicability of provisions. The
provisions of section 6043, §1.331–1(d),
and §1.332–6 (relating to information re-
turns and recordkeeping requirements for
corporate liquidations) do not apply to the
deemed liquidation of old T under para-
graph (d)(4) of this section.
(g) Required information. The Com-
missioner may exercise the authority
granted in section 338(h)(10)(C)(iii) to re-
quire provision of any information
deemed necessary to carry out the provi-
sions of section 338(h)(10) by requiring
submission of information on any tax re-
porting form.
§1.338(h)(10)–1T [Removed]
Par. 8. Section 1.338(h)(10)–1T is re-
moved.
Par. 9. Section 1.338(i)–1 is added to
read as follows:
§1.338(i)–1 Effective dates.
(a) In general. The provisions of
§§1.338–1 through 1.338–7, 1.338–10
and 1.338(h)(10)–1 apply to any qualified
stock purchase occurring after March 15,
2001. For rules applicable to qualified
stock purchases on or before March 15,
2001, see §§1.338–1T through 1.338–7T,
1.338–10T, 1.338(h)(10)–1Tand
1.338(i)–1T in effect prior to March 16,
2001 (see 26 CFR part 1 revised April 1,
2000).
(b) Section 338(h)(10) elections for S
corporation targets. The requirements of
§§1.338(h)(10)–1T(c)(2) and 1.338(h)
(10)–1(c)(2) that S corporation sharehold-
ers who do not sell their stock must also
consent to an election under section
338(h)(10) will not invalidate an other-
wise valid election made on the Septem-
ber 1997 revision of Form 8023, “Elec-
tions Under Section 338 For Corporations
Making Qualified Stock Purchases,” not
signed by the nonselling shareholders,
provided that the S corporation and all of
its shareholders (including nonselling
shareholders) report the tax consequences
consistently with the results under section
338(h)(10).
§1.338(i)–1T [Removed]
Par. 10. Section 1.338(i)–1T is re-
moved.
Par. 11. Section 1.1060–1 is added to
read as follows:
§1.1060–1 Special allocation rules for
certain asset acquisitions.
(a)Scope—(1)In general. This section
prescribes rules relating to the requirements
of section 1060, which, in the case of an ap-
plicable asset acquisition, requires the
transferor (the seller) and the transferee (the
purchaser) each to allocate the considera-
tion paid or received in the transaction
among the assets transferred in the same
manner as amounts are allocated under sec-
tion 338(b)(5) (relating to the allocation of
adjusted grossed-up basis among the assets
of the target corporation when a section 338
election is made). In the case of an applica-
ble asset acquisition described in paragraph
(b)(1) of this section, sellers and purchasers
must allocate the consideration under the
residual method as described in §§1.338–6
and 1.338–7 in order to determine, respec-
tively, the amount realized from, and the
basis in, each of the transferred assets. For
rules relating to distributions of partnership
property or transfers of partnership interests
which are subject to section 1060(d), see
§1.755–2T.
(2) Effective date. The provisions of
this section apply to any asset acquisition
occurring after March 15, 2001. For rules
applicable to asset acquisitions on or be-
fore March 15, 2001, see §1.1060–1T in
effect prior to March 16, 2001 (see 26
CFR part 1 revised April 1, 2000).
(3) Outline of topics. In order to facili-
tate the use of this section, this paragraph
(a)(3) lists the major paragraphs in this
section as follows:
(a) Scope.
(1) In general.
(2) Effective date.
(3) Outline of topics.
(b) Applicable asset acquisition.
(1) In general.
(2) Assets constituting a trade or busi-
ness.
(i) In general.
(ii) Goodwill or going concern value.
(iii) Factors indicating goodwill or
going concern value.
(3) Examples.
(4) Asymmetrical transfers of assets.
(5) Related transactions.
(6) More than a single trade or busi-
ness.
(7) Covenant entered into by the seller.
(8) Partial non-recognition exchanges.
(c) Allocation of consideration among
assets under the residual method.
(1) Consideration.
(2) Allocation of consideration among
assets.
(3) Certain costs.
(4) Effect of agreement between par-
ties.
(d) Examples.
(e) Reporting requirements.
(1) Applicable asset acquisitions.
(i) In general.
(ii) Time and manner of reporting.
(A) In general.
(B) Additional reporting requirement.
(2) Transfers of interests in partner-
ships.
(b) Applicable asset acquisition—(1)
In general. An applicable asset acquisi-
tion is any transfer, whether direct or indi-
rect, of a group of assets if the assets
transferred constitute a trade or business
in the hands of either the seller or the pur-
chaser and, except as provided in para-
graph (b)(8) of this section, the pur-
chaser’s basis in the transferred assets is
determined wholly by reference to the
purchaser’s consideration.
(2) Assets constituting a trade or busi-
ness—(i) In general. For purposes of this
section, a group of assets constitutes a
trade or business if—
(A) The use of such assets would con-
stitute an active trade or business under
section 355; or
(B) Its character is such that goodwill
or going concern value could under any
circumstances attach to such group.
(ii) Goodwill or going concern value.
Goodwill is the value of a trade or busi-
ness attributable to the expectancy of con-
tinued customer patronage. This ex-
pectancy may be due to the name or
reputation of a trade or business or any
other factor. Going concern value is the
additional value that attaches to property
because of its existence as an integral part
April 9, 200110482001–15 I.R.B.

of an ongoing business activity. Going
concern value includes the value attribut-
able to the ability of a trade or business
(or a part of a trade or business) to con-
tinue functioning or generating income
without interruption notwithstanding a
change in ownership. It also includes the
value that is attributable to the immediate
use or availability of an acquired trade or
business, such as, for example, the use of
the revenues or net earnings that other-
wise would not be received during any
period if the acquired trade or business
were not available or operational.
(iii) Factors indicating goodwill or
going concern value. In making the de-
termination in this paragraph (b)(2), all
the facts and circumstances surrounding
the transaction are taken into account.
Whether sufficient consideration is avail-
able to allocate to goodwill or going con-
cern value after the residual method is ap-
plied is not relevant in determining
whether goodwill or going concern value
could attach to a group of assets. Factors
to be considered include—
(A) The presence of any intangible as-
sets (whether or not those assets are sec-
tion 197 intangibles), provided, however,
that the transfer of such an asset in the ab-
sence of other assets will not be a trade or
business for purposes of section 1060;
(B) The existence of an excess of the
total consideration over the aggregate
book value of the tangible and intangible
assets purchased (other than goodwill and
going concern value) as shown in the fi-
nancial accounting books and records of
the purchaser; and
(C) Related transactions, including
lease agreements, licenses, or other simi-
lar agreements between the purchaser and
seller (or managers, directors, owners, or
employees of the seller) in connection
with the transfer.
(3) Examples. The following examples
illustrate paragraphs (b)(1) and (2) of this
section:
Example 1. S is a high grade machine shop that
manufactures microwave connectors in limited
quantities. It is a successful company with a reputa-
tion within the industry and among its customers for
manufacturing unique, high quality products. Its
tangible assets consist primarily of ordinary machin-
ery for working metal and plating. It has no secret
formulas or patented drawings of value. P is a com-
pany that designs, manufactures, and markets elec-
tronic components. It wants to establish an immedi-
ate presence in the microwave industry, an area in
which it previously has not been engaged. P is ac-
quiring assets of a number of smaller companies and
hopes that these assets will collectively allow it to
offer a broad product mix. P acquires the assets of S
in order to augment its product mix and to promote
its presence in the microwave industry. P will not
use the assets acquired from S to manufacture mi-
crowave connectors. The assets transferred are as-
sets that constitute a trade or business in the hands of
the seller. Thus, P’s purchase of S’s assets is an ap-
plicable asset acquisition. The fact that P will not
use the assets acquired from S to continue the busi-
ness of S does not affect this conclusion.
Example 2.S, a sole proprietor who operates a
car wash, both leases the building housing the car
wash and sells all of the car wash equipment to P.
S’s use of the building and the car wash equipment
constitute a trade or business. P begins operating a
car wash in the building it leases from S. Because
the assets transferred together with the asset leased
are assets which constitute a trade or business, P’s
purchase of S’s assets is an applicable asset acquisi-
tion.
Example 3. S, a corporation, owns a retail store
business in State X and conducts activities in con-
nection with that business enterprise that meet the
active trade or business requirement of section 355.
P is a minority shareholder of S. S distributes to P
all the assets of S used in S’s retail business in State
X in complete redemption of P’s stock in S held by
P. The distribution of S’s assets in redemption of P’s
stock is treated as a sale or exchange under sections
302(a) and 302(b)(3), and P’s basis in the assets dis-
tributed to it is determined wholly by reference to
the consideration paid, the S stock. Thus, S’s distri-
bution of assets constituting a trade or business to P
is an applicable asset acquisition.
Example 4. S is a manufacturing company with
an internal financial bookkeeping department. P is
in the business of providing a financial bookkeeping
service on a contract basis. As part of an agreement
for P to begin providing financial bookkeeping ser-
vices to S, P agrees to buy all of the assets associated
with S’s internal bookkeeping operations and pro-
vide employment to any of S’s bookkeeping depart-
ment employees who choose to accept a position
with P. In addition to selling P the assets associated
with its bookkeeping operation, S will enter into a
long term contract with P for bookkeeping services.
Because assets transferred from S to P, along with
the related contract for bookkeeping services, are a
trade or business in the hands of P, the sale of the
bookkeeping assets from S to P is an applicable asset
acquisition.
(4) Asymmetrical transfers of assets. A
purchaser is subject to section 1060 if—
(i) Under general principles of tax law,
the seller is not treated as transferring the
same assets as the purchaser is treated as
acquiring;
(ii) The assets acquired by the pur-
chaser constitute a trade or business; and
(iii) Except as provided in paragraph
(b)(8) of this section, the purchaser’s
basis in the transferred assets is deter-
mined wholly by reference to the pur-
chaser’s consideration.
(5) Related transactions. Whether the
assets transferred constitute a trade or
business is determined by aggregating all
transfers from the seller to the purchaser
in a series of related transactions. Except
as provided in paragraph (b)(8) of this
section, all assets transferred from the
seller to the purchaser in a series of re-
lated transactions are included in the
group of assets among which the consid-
eration paid or received in such series is
allocated under the residual method. The
principles of §1.338–1(c) are also applied
in determining which assets are included
in the group of assets among which the
consideration paid or received is allocated
under the residual method.
(6) More than a single trade or busi-
ness. If the assets transferred from a
seller to a purchaser include more than
one trade or business, then, in applying
this section, all of the assets transferred
(whether or not transferred in one transac-
tion or a series of related transactions and
whether or not part of a trade or business)
are treated as a single trade or business.
(7) Covenant entered into by the seller.
If, in connection with an applicable asset
acquisition, the seller enters into a
covenant (e.g., a covenant not to com-
pete) with the purchaser, that covenant is
treated as an asset transferred as part of a
trade or business.
(8) Partial non-recognition exchanges.
A transfer may constitute an applicable
asset acquisition notwithstanding the fact
that no gain or loss is recognized with re-
spect to a portion of the group of assets
transferred. All of the assets transferred,
including the non-recognition assets, are
taken into account in determining whether
the group of assets constitutes a trade or
business. The allocation of consideration
under paragraph (c) of this section is done
without taking into account either the
non-recognition assets or the amount of
money or other property that is treated as
transferred in exchange for the non-recog-
nition assets (together, the non-recogni-
tion exchange property). The basis in and
gain or loss recognized with respect to the
non-recognition exchange property are
determined under such rules as would
otherwise apply to an exchange of such
property. The amount of the money and
other property treated as exchanged for
non-recognition assets is the amount by
which the fair market value of the non-
2001–15 I.R.B.1049April 9, 2001

recognition assets transferred by one
party exceeds the fair market value of the
non-recognition assets transferred by the
other (to the extent of the money and the
fair market value of property transferred
in the exchange). The money and other
property that are treated as transferred in
exchange for the non-recognition assets
(and which are not included among the
assets to which section 1060 applies) are
considered to come from the following
assets in the following order: first from
Class I assets, then from Class II assets,
then from Class III assets, then from
Class IV assets, then from Class V assets,
then from Class VI assets, and then from
Class VII assets. For this purpose, liabili-
ties assumed (or to which a non-recogni-
tion exchange property is subject) are
treated as Class I assets. See Example 1
in paragraph (d) of this section for an ex-
ample of the application of section 1060
to a single transaction which is, in part, a
non-recognition exchange.
(c) Allocation of consideration among
assets under the residual method—(1)
Consideration. The seller’s consideration
is the amount, in the aggregate, realized
from selling the assets in the applicable
asset acquisition under section 1001(b).
The purchaser’s consideration is the
amount, in the aggregate, of its cost of
purchasing the assets in the applicable
asset acquisition that is properly taken
into account in basis.
(2) Allocation of consideration among
assets. For purposes of determining the
seller’s amount realized for each of the
assets sold in an applicable asset acquisi-
tion, the seller allocates consideration to
all the assets sold by using the residual
method under §§1.338–6 and 1.338–7,
substituting consideration for ADSP. For
purposes of determining the purchaser’s
basis in each of the assets purchased in an
applicable asset acquisition, the purchaser
allocates consideration to all the assets
purchased by using the residual method
under §§1.338–6 and 1.338–7, substitut-
ing consideration for AGUB. In allocat-
ing consideration, the rules set forth in
paragraphs (c)(3) and (4) of this section
apply in addition to the rules in
§§1.338–6 and 1.338–7.
(3) Certain costs. The seller and pur-
chaser each adjusts the amount allocated
to an individual asset to take into account
the specific identifiable costs incurred in
transferring that asset in connection with
the applicable asset acquisition (e.g., real
estate transfer costs or security interest
perfection costs). Costs so allocated in-
crease, or decrease, as appropriate, the
total consideration that is allocated under
the residual method. No adjustment is
made to the amount allocated to an indi-
vidual asset for general costs associated
with the applicable asset acquisition as a
whole or with groups of assets included
therein (e.g., non-specific appraisal fees
or accounting fees). These latter amounts
are taken into account only indirectly
through their effect on the total considera-
tion to be allocated.
(4) Effect of agreement between parties.
If, in connection with an applicable asset
acquisition, the seller and purchaser agree
in writing as to the allocation of any
amount of consideration to, or as to the fair
market value of, any of the assets, such
agreement is binding on them to the extent
provided in this paragraph (c)(4). Nothing
in this paragraph (c)(4) restricts the Com-
missioner’s authority to challenge the allo-
cations or values arrived at in an allocation
agreement. This paragraph (c)(4) does not
apply if the parties are able to refute the al-
location or valuation under the standards
set forth in Commissioner v. Danielson,
378 F.2d 771 (3d Cir.), cert. denied, 389
U.S. 858 (1967) (a party wishing to chal-
lenge the tax consequences of an agreement
as construed by the Commissioner must
offer proof that, in an action between the
parties to the agreement, would be admissi-
ble to alter that construction or show its un-
enforceability because of mistake, undue
influence, fraud, duress, etc.).
(d) Examples. The following examples
illustrate this section:
Example 1. (i) On January 1, 2001, A transfers
assets X, Y, and Z to B in exchange for assets D, E,
and F plus $1,000 cash.
(ii) Assume the exchange of assets constitutes an
exchange of like-kind property to which section
1031 applies. Assume also that goodwill or going
concern value could under any circumstances attach
to each of the DEF and XYZ groups of assets and,
therefore, each group constitutes a trade or business
under section 1060.
(iii) Assume the fair market values of the assets
and the amount of money transferred are as follows:
April 9, 200110502001–15 I.R.B.
By ABy B
AssetFair AssetFair
MarketMarket
ValueValue
X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 400D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 40
Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .400E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,000Cash (amount) . . . . . . . . . . . . . . . . . . . . . . . . . . .1,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,100
(iv) Under paragraph (b)(8) of this section, for
purposes of allocating consideration under para-
graph (c) of this section, the like-kind assets ex-
changed and any money or other property that are
treated as transferred in exchange for the like-kind
property are excluded from the application of sec-
tion 1060.
(v) Since assets X, Y, and Z are like-kind prop-
erty, they are excluded from the application of the
section 1060 allocation rules.
(vi) Since assets D, E, and F are like-kind property,
they are excluded from the application of the section
1060 allocation rules. Thus, the allocation rules of
section 1060 do not apply in determining B’s gain or
loss with respect to the disposition of assets D, E, and
F, and the allocation rules of section 1060 and para-
graph (c) of this section are not applied to determine
A’s bases of assets D, E, and F. In addition, $900 of
the $1,000 cash B gave to A for A’s like-kind assets (X,
Y, and Z) is treated as transferred in exchange for the
like-kind property in order to equalize the fair market
values of the like-kind assets. Therefore, $900 of the
cash is excluded from the application of the section
1060 allocation rules.
(vii) $100 of the cash is allocated under section 1060
and paragraph (c) of this section.
(viii) A received $100 that must be allocated
under section 1060 and paragraph (c) of this section.
Since A transferred no Class I, II, III, IV, V, or VI as-
sets to which section 1060 applies, in determining its
amount realized for the part of the exchange to
which section 1031 does not apply, the $100 is allo-
cated to Class VII assets (goodwill and going con-
cern value).
(ix) B gave A $100 that must be allocated under
section 1060 and paragraph (c) of this section. Since
B received from A no Class I, II, III, IV, V, or VI as-
sets to which section 1060 applies, the $100 consid-
eration is allocated by B to Class VII assets (good-
will and going concern value).
Example 2. (i) On January 1, 2001, S, a sole pro-
prietor, sells to P, a corporation, a group of assets

that constitutes a trade or business under paragraph
(b)(2) of this section. S, who plans to retire immedi-
ately, also executes in P’s favor a covenant not to
compete. P pays S $3,000 in cash and assumes
$1,000 in liabilities. Thus, the total consideration is
$4,000.
(ii) On the purchase date, P and S also execute a
separate agreement that states that the fair market
values of the Class II, Class III, Class V, and Class
VI assets S sold to P are as follows:
AssetAssetFair
ClassMarket
Value
IIActively traded
securities . . . . . . . . . . . . .$ 500
Total Class II . . . . . . . . .500
IIIAccounts receivable . . . . . .200
Total Class III . . . . . . . .200
VFurniture and fixtures . . . .800
Building . . . . . . . . . . . . . . .800
Land . . . . . . . . . . . . . . . . . .200
Equipment . . . . . . . . . . . . .400
Total Class V . . . . . . . . . . .2,200
VICovenant not to compete . .900
Total Class VI . . . . . . . .900
(iii) P and S each allocate the consideration in the
transaction among the assets transferred under para-
graph (c) of this section in accordance with the
agreed upon fair market values of the assets, so that
$500 is allocated to Class II assets, $200 is allocated
to the Class III asset, $2,200 is allocated to Class V
assets, $900 is allocated to Class VI assets, and $200
($4,000 total consideration less $3,800 allocated to
assets in Classes II, III, V, and VI) is allocated to the
Class VII assets (goodwill and going concern value).
(iv) In connection with the examination of P’s re-
turn, the Commissioner, in determining the fair mar-
ket values of the assets transferred, may disregard
the parties’ agreement. Assume that the Commis-
sioner correctly determines that the fair market
value of the covenant not to compete was $500.
Since the allocation of consideration among Class II,
III, V, and VI assets results in allocation up to the
fair market value limitation, the $600 of unallocated
consideration resulting from the Commissioner’s re-
determination of the value of the covenant not to
compete is allocated to Class VII assets (goodwill
and going concern value).
(e)Reporting requirements—(1)Applic-
able asset acquisitions—(i) In general.
Unless otherwise excluded from this re-
quirement by the Commissioner, the seller
and the purchaser in an applicable asset ac-
quisition each must report information con-
cerning the amount of consideration in the
transaction and its allocation among the as-
sets transferred. They also must report in-
formation concerning subsequent adjust-
ments to consideration.
(ii) Time and manner of reporting—(A)
In general. The seller and the purchaser
each must file asset acquisition statements
on Form 8594, “Asset Allocation State-
ment,” with their income tax returns or re-
turns of income for the taxable year that in-
cludes the first date assets are sold pursuant
to an applicable asset acquisition. This re-
porting requirement applies to all asset ac-
quisitions described in this section. For re-
porting requirements relating to asset
acquisitions occurring before March 16,
2001, as described in paragraph (a)(2) of
this section, see the temporary regulations
under section 1060 in effect prior to March
16, 2001 (see 26 CFR part 1 revised April
1, 2000).
(B) Additional reporting requirement.
When an increase or decrease in considera-
tion is taken into account after the close of
the first taxable year that includes the first
date assets are sold in an applicable asset
acquisition, the seller and the purchaser
each must file a supplemental asset acquisi-
tion statement on Form 8594 with the in-
come tax return or return of income for the
taxable year in which the increase (or de-
crease) is properly taken into account.
(2) Transfers of interests in partner-
ships. For reporting requirements relating
to the transfer of a partnership interest,
see §1.755–2T(c).
§1.1060–1T [Removed]
Par. 12. Section 1.1060–1T is re-
moved.
Par. 13. Section 1.1361–1 is amended
as follows:
1. Redesignate paragraph (l)(2)(v) as
paragraph (l)(2)(vi).
2. Add a new paragraph (l)(2)(v).
The addition reads as follows:
§1.1361–1 S corporation defined.
* * * * *
(l) * * *
(2) * * *
(v) Special rule for section 338(h)(10)
elections. If the shareholders of an S cor-
poration sell their stock in a transaction
for which an election is made under sec-
tion 338(h)(10) and §1.338(h)(10)–1, the
receipt of varying amounts per share by
the shareholders will not cause the S cor-
poration to have more than one class of
stock, provided that the varying amounts
are determined in arm’s length negotia-
tions with the purchaser.
* * * * *
Par. 14. Section 1.1361–4 is amended
by removing the last two sentences of
paragraph (b)(4) and adding three sen-
tences to read as follows:
§1.1361–4 Effect of QSub election.
* * * * *
(b) * * *
(4) Coordination with section 338 elec-
tion. * * * If an S corporation makes an
election under section 338 (without a sec-
tion 338(h)(10) election) with respect to a
target, the target must file a final return as
a C corporation reflecting the deemed
sale. See §1.338–10(a). If the target was
an S corporation on the day before the ac-
quisition date, the final return as a C cor-
poration must reflect the activities of the
target for the acquisition date, including
the deemed sale. See §1.338–10(a)(3).
* * * * *
Par. 15. Section 1.1502–76 is amended
by adding a parenthetical at the end of
paragraph (b)(1)(ii)(B)(3) and before the
semicolon to read as follows:
§1.1502–76 Taxable year of members of
group.
* * * * *
(b) * * *
(1) * * *
(ii) * * *
(B) * * *
(3) * * * (but see §1.338–1(d)) * * *
* * * * *
PART 602—OMB CONTROL NUM-
BERS UNDER PAPERWORK REDUC-
TION ACT
Par. 16. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 17. In §602.101, paragraph (b) is
amended by removing the entries for
§§1.338–2T, 1.338–5T, 1.338–10T,
1.338(h)(10)–1T, and 1.1060–1T from the
table and adding new entries to the table
in numerical order to read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved January 4, 2001.
Jonathan Talisman,
Assistant Secretary
of the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on February
12, 2001, 8:45 a.m., and published in the issue of the
Federal Register for February 13, 2001, 66 F.R. 9925)
2001–15 I.R.B.1051April 9, 2001

April 9, 200110522001–15 I.R.B.
CFR part or section whereCurrent OMB
identified and describedcontrol No.
* * * * *
1.338-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1658
1.338-5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1658
1.338-10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1658
1.338(h)(10)-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1658
* * * * *
1.1060-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1658
* * * * *
Section 382.—Limitation on Net
Operating Loss Carryforwards
and Certain Built-In Losses
Following Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of April 2001. See Rev. Rul.
2001–17, on this page.
Section 467.—Certain Payments
for the Use of Property or
Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2001. See Rev. Rul. 2001–17, on this page.
Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2001. See Rev. Rul. 2001–17, on this page.
Section 482.—Allocation of
Income and Deductions Among
Taxpayers
Federal short-term, mid-term, and long-term
rates are set forth for the month of April 2001. See
Rev. Rul. 2001–17, on this page.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2001. See Rev. Rul. 2001–17, on this page.
Section 642.—Special Rules for
Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of April 2001. See
Rev. Rul. 2001–17, on this page.
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2001. See Rev. Rul. 2001–17, on this page.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2001. See Rev. Rul. 2001–17, on this page.
Section 1274.—Determination
of Issue Price in the Case of
Certain Debt Instruments Issued
for Property
(Also sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate, and
the long-term exempt rate.For pur-
poses of sections 382, 1274, 1288, and
other sections of the Code, tables set forth
the rates for April 2001.
Rev. Rul. 2001–17
This revenue ruling provides various
prescribed rates for federal income tax
purposes for April 2001 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Inter-
nal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term ad-
justed applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Finally,
Table 5 contains the federal rate for deter-
mining the present value of an annuity, an
interest for life or for a term of years, or a
remainder or a reversionary interest for
purposes of section 7520.

REV. RUL. 2001–17 TABLE 1
Applicable Federal Rates (AFR) for April 2001
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR4.63%4.58%4.55%4.54%
110% AFR5.10%5.04%5.01%4.99%
120% AFR5.58%5.50%5.46%5.44%
130% AFR6.04%5.95%5.91%5.88%
Mid-Term
AFR4.94%4.88%4.85%4.83%
110% AFR5.44%5.37%5.33%5.31%
120% AFR5.95%5.86%5.82%5.79%
130% AFR6.44%6.34%6.29%6.26%
150% AFR7.45%7.32%7.25%7.21%
175% AFR8.72%8.54%8.45%8.39%
Long-Term
AFR5.43%5.36%5.32%5.30%
110% AFR5.99%5.90%5.86%5.83%
120% AFR6.53%6.43%6.38%6.35%
130% AFR7.09%6.97%6.91%6.87%
2001–15 I.R.B.1053April 9, 2001
REV. RUL. 2001–17 TABLE 2
Adjusted AFR for April 2001
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjusted AFR3.37%3.34%3.33%3.32%
Mid-term
adjusted AFR3.89%3.85%3.83%3.82%
Long-term
adjusted AFR4.87%4.81%4.78%4.76%
REV. RUL. 2001–17 TABLE 3
Rates Under Section 382 for April 2001
Adjusted federal long-term rate for the current month4.87%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)4.92%
REV. RUL. 2001–17 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for April 2001
Appropriate percentage for the 70% present value low-income housing credit8.21%
Appropriate percentage for the 30% present value low-income housing credit3.52%
REV. RUL. 2001–17 TABLE 5
Rate Under Section 7520 for April 2001
Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest6.0%

Section 1288.—Treatment of
Original Issue Discounts on Tax-
Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2001. See Rev. Rul. 2001–17, page 1052.
Section 3221.—Rate of Tax
Determination of Quarterly Rate
of Excise Tax for Railroad
Retirement Supplemental
Annuity Program
In accordance with directions in section
3221(c) ofthe Railroad Retirement TaxAct
(26 U.S.C., 3221(c)), the Railroad Retire-
ment Board has determined that the excise
taximposed by such section 3221(c) on
every employer, with respect to having indi-
viduals in his employ, for each work-hour
for which compensation is paid by such em-
ployer for services rendered to him during
the quarter beginning April 1, 2001, shall be
at the rate of26 cents.
In accordance with directions in section
15(a) ofthe Railroad Retirement Act of
1974, the Railroad Retirement Board has
determined that for the quarter beginning
April 1, 2001, 38.6 percent ofthe taxes col-
lected under sections 3211(b) and 3221(c)
ofthe Railroad Retirement TaxAct shall be
credited to the Railroad Retirement Account
and 61.4 percent ofthe taxes collected
under such sections 3211(b) and 3221(c)
plus 100 percent ofthe taxes collected under
section 3221(d) ofthe Railroad Retirement
TaxAct shall be credited to the Railroad Re-
tirement Supplemental Account.
Dated March 12, 2001.
By Authority ofthe Board.
Beatrice Ezerski,
Secretary to the Board.
(Filed by the Office of the Federal Register on
March 21, 2001, 8:45 a.m., and published in the
issue of the Federal Register for March 22, 2001, 66
F.R. 16073)
Section 6103.—Confidentiality
and Disclosure of Returns and
Return Information
26 CFR 301.6103(j)(1)–1T: Disclosure of return
information to officers and employees of the
Department of Commerce for certain statistical
purposes and related activities (temporary).
T.D. 8943
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
Disclosure of Return Information
to the Bureau of the Census
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations relating to addi-
tions to the list of items of information
disclosed to the Bureau of the Census for
use in the Longitudinal Employer-House-
hold Dynamics (LEHD) project and the
Survey of Income and Program Participa-
tion (SIPP) project. These regulations
provide guidance to IRS and Social Secu-
rity Administration (SSA) personnel re-
sponsible for disclosing the information.
The text of the temporary regulations also
serves as the text of the proposed regula-
tions set forth in the notice of proposed
rulemaking (REG–121109–00) on page
1064 of this Bulletin.
DATES: Effective Date: These regula-
tions are effective February 13, 2001.
Applicability Date: For dates of applic-
ability, see §301.6103(j)(1)–1T(e) of
these regulations.
FOR FURTHER INFORMATION CON-
TACT: Stuart Murray (202) 622-4580
(not a toll-free number).
Background
Under section 6103(j)(1), upon written
request from the Secretary of Commerce,
the Secretary is to furnish to the Bureau of
the Census (Bureau) tax return informa-
tion that is prescribed by Treasury regula-
tions for the purpose of, but only to the
extent necessary in, structuring censuses
and national economic accounts and con-
ducting related statistical activities autho-
rized by law. Section 301.6103(j)(1)–1 of
the regulations further defines such pur-
poses by reference to 13 U.S.C. Chapter 5
and provides an itemized description of
the return information authorized to be
disclosed for such purposes. Section
301.6103(j)(1)–1(b)(5) of the regulations
provides a list of information provided to
the Social Security Administration (SSA)
pursuant to Internal Revenue Code sec-
tion 6103(l)(1)(A) or (5) that officers or
employees of SSA may disclose to the
Bureau. Periodically, the disclosure regu-
lations are amended to reflect the chang-
ing needs of the Bureau for data for its
statutorily authorized statistical activities.
This document adopts temporary regu-
lations that authorize IRS and SSA per-
sonnel to disclose the additional items of
return information that have been re-
quested by the Secretary of Commerce for
specified purposes related to the LEHD
and SIPP projects.
Except for §301.6103(j)(1)–1T
(b)(2)(v) and (vi); (b)(3)(xxiii),
(xxiv),(xxv), (xxvi), (xxvii) and (xxviii);
and (b)(5)(iii) , (iv), and (v); the text of
the temporary regulations is the
same as 26 CFR 301.6103(j)(1)–1. The
changes made by §301.6103(j)
(1)–1T(b)(2)(v) and (vi); (b)(3)(xxiii),
(xxiv), (xxv), (xxvi), (xxvii) and (xxviii);
and (b)(5)(iii), (iv), and (v); are discussed
below.
Explanation of Provisions
By letter dated March 27, 2000, the
Secretary of Commerce requested that ad-
ditional items of return information be
disclosed to the Bureau for purposes re-
lated to the Longitudinal Employer-
Household Dynamics (LEHD) project.
The request indicates that the Bureau is
ready to begin a joint project with SSA to
develop data files that contain linked in-
formation, matching selected worker and
employer records for statistical research,
in order to improve programs at the Bu-
reau and SSA. The linked information
will come from the Bureau’s demographic
and economic censuses and surveys, the
Bureau’s Standard Statistical Establish-
ment List (SSEL), which includes busi-
ness tax information, and SSA’s adminis-
trative records. The Bureau’s component
of this project, the LEHD project, will en-
able the Bureau to conduct studies that are
intended to improve the quality of the Bu-
reau’s core demographic and economic
censuses and surveys, which are Bureau
activities authorized under 13 U.S.C.
Chapter 5.
The Bureau has specifically requested
information from SSA’s Master Earnings
File (MEF), which contains information
April 9, 200110542001–15 I.R.B.

2001–15 I.R.B.1055April 9, 2001
from IRS Form W-2 and Schedule SE
(Form 1040). The IRS information con-
tained in SSA’s MEF will permit the Bu-
reau to link employee data with employer
data. The Bureau has requested Social
Security Numbers (SSNs) and Employer
Identification Numbers (EINs) to link the
employee and employer data.
The Bureau has also requested the disclo-
sure of wages, tips, and other compensation
and deferred wages from the Form W-2.
The Bureau indicated that it wants this de-
tailed earnings record information because
it is provided separately for each employer
of the employee; it covers all persons with
wages, including nonfilers and other non-
covered employees; and it provides specific
information on deferred compensation, such
as retirement contributions.
By letter dated August 2, 2000, the Sec-
retary of Commerce requested additional
items of information for purposes related
to the Bureau’s Survey of Income and
Program Participation (SIPP) demo-
graphic survey. This request indicates
that the Bureau and SSA want to ensure
that the regulations authorize the continu-
ation of a joint project to develop data
files that contain linked information from
the SIPP with information from SSA’s
Master Earnings File. The linkage of
Census survey information on family re-
lationships with SSA’s earnings histories
allows for the study and assessment of
welfare and social security/retirement
proposals. Specifically, the Bureau in-
tends to improve the quality of the SIPP
by adding a series of projected Primary
Insurance Amounts (PIAs) to the public-
use version of each available SIPP.
In order to adjust for misreported data
related to earnings, employment, and pen-
sions from the Bureau’s SIPP, the Bureau
also requested data from Forms W-2 and
1099R or data derived from these forms.
Some of the information requested for
LEHD is also requested for SIPP, such as
the social security number; employer
identification number; wages, tips and
other compensation; and deferred wages.
As provided in the Commissioner of
Internal Revenue’s responses to the
LEHD and SIPP requests dated Septem-
ber 25, 2000, and October 27, 2000, re-
spectively, information will be furnished
under these temporary regulations only
for the purposes of conducting the LEHD
project and/or the SIPP/SSA project as
specified in the request letters and with
the understanding that the information
will be used strictly in accordance with
the provisions of the Internal Revenue
Code pertaining to confidentiality.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because no notice of proposed
rulemaking is required, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, these tempo-
rary regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal author of these regula-
tions is Jamie G. Bernstein, Office of the
Associate Chief Counsel, Procedure &
Administration (Disclosure & Privacy
Law Division) Internal Revenue Service.
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(j)(1)–1T also issued
under 26 U.S.C. 6103(j)(1);* * *
Par. 2. Section 301.6103(j)(1)–1T is
added to read as follows:
§301.6103(j)(1)–1T Disclosure of return
information to officers and employees of
the Department of Commerce for certain
statistical purposes and related activities
(temporary).
(a) through (b)(2)(iv)[Reserved]. For
further guidance, see §301.6103(j)
(1)–1(a) through (b)(2)(iv).
(b)(2)(v) Total Social Security Tax-
able Earnings;
(vi) Quarters of Social Security cov-
erage.
(b)(3)(i) through (xxii) [Reserved]. For
further guidance, see §301.6103(j)
(1)–1(b)(3)(i) through (xxii).
(xxiii) Wages, tips, and other compen-
sation;
(xxiv) Social Security Wages;
(xxv) Deferred wages;
(xxvi) Social Security Tip Income;
(xxvii) Total Social Security Taxable
Earnings;
(xxviii) Gross Distributions from Form
1099R.
(b)(4) through (b)(5)(ii) [Reserved].
For further guidance, see §301.6103(j)
(1)–1(b)(4) through (b)(5)(ii).
(b)(5)(iii) From Form W-2, and related
forms and schedules—
(A) Social Security Number;
(B) Employer Identification Num-
ber;
(C) Wages, tips, and other com-
pensation;
(D) Social Security Wages;
(E) Deferred wages.
(iv) Total Social Security Taxable
Earnings.
(v) Quarters of Social Security Cov-
erage.
* * * * *
(b)(6) through(d) [Reserved]. For fur-
ther guidance, see §301.6103(j)
(1)–1(b)(6) through (d).
(e) Effective date. This section is ap-
plicable to the Bureau of the Census on
February 13, 2001, through February 13,
2004.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved January 16, 2001.
Jonathan Talisman,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on Feb-
ruary 12, 2001, 8:45 a.m., and published in the issue
of the Federal Register for February 13, 2001, 66
F.R. 9957)

Section 7520.—Valuation Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2001. See Rev. Rul. 2001–17, page 1052.
Section 7872.—Treatment of
Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2001. See Rev. Rul. 2001–17, page 1052.
April 9, 200110562001–15 I.R.B.

Notice of Proposed Rulemaking
Return of Property in Certain
Cases
REG–101520–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations relating to the return
of property in certain cases. The pro-
posed regulations reflect changes made to
section 6343 of the Internal Revenue
Code of 1986 by the Taxpayer Bill of
Rights 2. The proposed regulations also
reflect certain changes affecting levies en-
acted by the Internal Revenue Service Re-
structuring and Reform Act of 1998. The
proposed regulations affect taxpayers
seeking the return of property from the
IRS.
DATES: Written comments and requests
for a public hearing must be received by
May 15, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–101520–97), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submis-
sions may be hand delivered to:
CC:M&S:RU (REG–101520–97), room
5226, Internal Revenue Service, 1111
Constitution Avenue NW, Washington,
DC. Taxpayers may also submit com-
ments electronically via the Internet by
selecting the “Tax Regs” option on the
IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at
http://www.irs.gov/prod/tax_regs/regslist.
html.
FOR FURTHER INFORMATION CON-
TACT: Kevin B. Connelly at (202) 622-
3630 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Procedure and Admin-
istration Regulations (26 CFR part 301)
relating to the return of property under
section 6343 of the Internal Revenue
Code (Code). Section 501(b) of the Tax-
payer Bill of Rights 2 (TBOR2), Public
Law 104-168 (110 Stat. 1452), amended
section 6343 to authorize the IRS to re-
turn property in certain cases and, to the
extent possible, but without payment of
interest, return the taxpayer to the same
position as if the levy had not been issued.
These proposed regulations reflect the
amendments made by section 501(b) of
TBOR2.
These proposed regulations also reflect
modifications made by the Internal Rev-
enue Service Restructuring and Reform
Act (RRA 1998), Public Law 105-206
(112 Stat. 685), which added new sec-
tions 6331(i) and (j) of the Code, prohibit-
ing the issuance of levies during the pen-
dency of proceedings for refund of
divisible taxes or prior to completion of
an investigation of the status of property
(effective for unpaid tax attributable to
tax periods beginning after December 31,
1998). RRA 1998 also added section
6331(k), prohibiting levies during the pe-
riod an offer-in-compromise is pending or
an installment agreement is pending or in
effect (effective for offers-in-compromise
pending on or made after December 31,
1999, and for installment agreements sub-
mitted after July 22, 1998). In addition,
the RRA 1998 added section 6330, which
provides in certain circumstances for no-
tice and an opportunity for a hearing prior
to the imposition of a levy.
Explanation of Provisions
Section 6343(b) provides for the return
of levied upon property, including levied
upon money and money received from the
sale of levied upon property, if the prop-
erty was wrongfully levied upon. Section
501(b) of TBOR2 enacted section
6343(d) of the Code authorizing the IRS
to return levied upon property to the tax-
payer in certain other prescribed circum-
stances. Property returned under new
section 6343(d) will be returned in accor-
dance with section 6343(b) of the Code as
if the property had been wrongfully levied
upon, except that no interest will be al-
lowed. The provision is designed to per-
mit the IRS, to the extent possible, to re-
store the taxpayer to a pre-levy position.
These proposed regulations provide guid-
ance on the circumstances under which
levied upon property will be returned by
the IRS and the manner in which a request
for return of property must be made.
The proposed regulations apply to the
return of (1) levied upon money that has
been applied toward the taxpayer’s liabil-
ity, (2) money received from the sale of
levied upon property under section 6335
of the Code, and (3) levied upon property
that the United States has purchased in a
sale under section 6335 of the Code. This
property may be returned if one of the
conditions enumerated in paragraph (c) of
the proposed regulations exists.
The regulations also clarify that, other
than as provided in §301.6343–1(b) and
paragraph (d) of this section, the IRS, in
its discretion, may return levied upon
property in its possession pending sale.
The return of levied upon property in the
IRS’s possession pending sale is not lim-
ited by these proposed regulations. The
IRS has the authority to determine what
property of the taxpayer to levy. As part
of that authority, the IRS may release a
levy and return levied upon property in its
possession pending sale.
Under paragraph (c) of the proposed
regulations, the Commissioner may return
levied upon property if one of the follow-
ing conditions exist: (1) the levy was pre-
mature or otherwise not in accordance
with the administrative procedures of the
IRS; (2) the taxpayer has entered into an
agreement under section 6159 of the Code
to satisfy the liability for which the levy
was imposed by means of installment
payments, unless the agreement provides
otherwise; (3) the return of property will
facilitate collection of the tax liability; or
(4) the return of property is in the best in-
terest of the taxpayer, as determined by
the National Taxpayer Advocate, and in
the best interest of the United States, as
determined by the Commissioner.
Section 6343(d)(2)(D) authorizes the
return of property if it is in the best inter-
ests of both the United States and the tax-
payer. Therefore, two distinct determina-
tions must be made before the
Commissioner may return property based
on these grounds. Under the proposed
regulations the Commissioner (or his del-
2001–15 I.R.B.1057April 9, 2001
Part IV. Items of General Interest

egate) will determine whether the return
of property is in the best interest of the
United States. The National Taxpayer
Advocate (or his delegate) generally will
determine whether the return of property
is in the best interest of the taxpayer;
however, a finding by the Commissioner
(or his delegate) that the return of prop-
erty is in the best interest of the taxpayer,
as well as the United States, will be suffi-
cient to support the return of property.
Only the National Taxpayer Advocate (or
his delegate) is authorized to determined
that the return of property is not in the
taxpayer’s best interest.
Additionally, the proposed regulations
provide that it is in the best interests of the
United States and the taxpayer to release
levies made in violation of the law. Any
property received pursuant to a levy made
in violation of the law will be returned un-
less the taxpayer gives permission to the
IRS to keep the property. For example, sec-
tion 6331(k)(2) of the Internal Revenue
Code of 1986 prohibits levies during the pe-
riod an offer to enter into an installment
agreement is pending (and for a 30-day pe-
riod after rejection of the offer or while a
timely appeal from the rejection of an offer
to enter into an installment agreement is
pending) and during the period an install-
ment agreement is in effect. If property has
been received by the IRS as the result of a
levy that is prohibited under section
6331(k)(2), the IRS will return the property
to the taxpayer pursuant to section
6343(d)(2)(D). It may, however, be advan-
tageous for a taxpayer in some circum-
stances to allow the IRS to keep the levied
upon property and apply the proceeds of
that levy to the taxpayer’s outstanding tax li-
abilities. These proposed regulations allow
the taxpayer to give permission to the IRS
to retain the levied upon property and apply
the proceeds of that levy to the taxpayer’s
outstanding tax liabilities. Absent taxpayer
consent, the IRS is required to return the
levied upon property (or the proceeds if the
property had been sold) to the taxpayer.
Pursuant to the requirement of section
6343(d) that property to be returned under
this provision be treated as if it were
wrongfully levied upon, the proposed regu-
lations also provide that if the United States
purchases property, it will be treated as hav-
ing received an amount of money equal to
the minimum price determined by the
Commissioner before the sale.
Property other than money may be re-
turned at any time. Money may be returned
any time within 9 months after the date of
the levy. In addition, when a timely request
for the return of money is filed in accor-
dance with these regulations, or a determi-
nation to return an amount of money is
made before the expiration of the 9-month
period, the money may be returned within a
reasonable period of time after the 9-month
period if additional time is necessary for in-
vestigation or processing. This will ensure
that if a timely request has been made, or
the IRS timely decides to return money on
its own initiative, the IRS will have suffi-
cient time for necessary investigation or
processing.
Under the proposed regulations a tax-
payer may request the return of property by
writing to the address on the levy form or to
the Commissioner (marked for the attention
of the Chief, Special Procedures Function)
of the IRS office in which the levy was
made. A written request for the return of
property must include: (1) the name, cur-
rent address, and taxpayer identification
number of the taxpayer requesting the re-
turn of property; (2) a description of the
property levied upon; (3) the date of the
levy; and (4) the grounds upon which the
return of property is being requested.
The Commissioner must consider each
taxpayer’s request for the return of prop-
erty, determine whether any of the condi-
tions authorizing the return of property
exist, and decide whether to return the
property. The Commissioner also may re-
turn the property based on information re-
ceived from a source other than the tax-
payer. A decision to return the property is
within the Commissioner’s discretion, un-
less the levy was in violation of law, in
which case the Commissioner must return
the property.
If the Commissioner returns property,
and the taxpayer fails to pay the previ-
ously assessed liability for which the levy
was made on the returned property, the
Commissioner may administratively col-
lect the liability. Collection may include
levying again on the returned property
provided statutory and administrative re-
quirements are followed.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also
has been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because the regulation
does not impose a collection of informa-
tion on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of
proposed rulemaking will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments that
are submitted timely (preferably a signed
original and eight (8) copies) to the IRS.
Alternatively, taxpayers may submit com-
ments electronically via the Internet by se-
lecting the “Tax Regs” option on the IRS
Home Page, or by submitting comments di-
rectly to the IRS Internet site at
http://www.irs.gov/prod/tax_regs/regslist.
html. All comments will be available 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 Kevin B. Connelly, Office of As-
sistant Chief Counsel (General Litigation)
CC:EL:GL, IRS. However, other person-
nel from the IRS and Treasury Depart-
ment participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
April 9, 200110582001–15 I.R.B.

Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6343–3 is added to
read as follows:
§301.6343–3 Return of property in
certain cases.
(a) In general. If money has been
levied upon and applied toward the tax-
payer’s liability, or property has been
levied upon and sold, and the receipts
have been applied toward the taxpayer’s
liability, or property has been levied upon
and purchased by the United States and
the United States still possesses the prop-
erty, and the Commissioner determines
that any of the conditions in paragraph (c)
of this section exist, the Commissioner
may return—
(1) An amount of money equal to the
amount of money levied upon;
(2) An amount of money equal to the
amount of money received by the United
States from a sale of the property; or
(3) The specific property levied upon
and purchased by the United States.
(b) Return of levied upon property in
possession of the Internal Revenue Service
(IRS) pending sale under section 6335.
Other than as provided in §301.6343–1(b)
or in paragraph (d) of this section, the Com-
missioner, in his or her discretion, may re-
turn levied upon property that is in the pos-
session of the United States pending sale
under section 6335.
(c) Conditions authorizing the return of
property. The Commissioner may return
property upon determining that one of the
following conditions exist:
(1) Premature or not in accordance
with administrative procedures. The levy
was premature or otherwise not in accor-
dance with the administrative procedures
of the Secretary.
(2) Installment agreement. Subsequent
to the levy, the taxpayer enters into an
agreement under section 6159 to satisfy
the liability for which the levy was made
by means of installment payments. If,
however, the agreement specifically pro-
vides that already levied upon property
will not be returned under section
6343(d), the Commissioner may not grant
a request for return of property under this
paragraph (c)(2).
(3) Facilitate collection. The return of
property will facilitate the collection of
the tax liability for which the levy was
made.
(4) Best interests of the United States
and the taxpayer—(i) In general. The
taxpayer or the National Taxpayer Advo-
cate (or his delegate) has consented to the
return of property, and the return of prop-
erty would be in the best interest of the
taxpayer, as determined by the National
Taxpayer Advocate (or his delegate), and
in the best interest of the United States, as
determined by the Commissioner.
(ii) Best interest of the taxpayer. The
National Taxpayer Advocate (or his dele-
gate) generally will determine whether
the return of property is in the best inter-
est of the taxpayer. If, however, a tax-
payer requests the Commissioner to re-
turn property and has not specifically
requested the National Taxpayer Advo-
cate (or his delegate) to determine the tax-
payer’s best interest, a finding by the
Commissioner that the return of property
is in the best interest of the taxpayer will
be sufficient to support the return of prop-
erty. Only the National Taxpayer Advo-
cate (or his or her delegate) may deter-
mine that a return of property is not in the
best interest of the taxpayer.
(5) Examples. The following examples
illustrate the provisions of this paragraph
(c):
Example 1.A owes $1,000 in Federal income
taxes. The IRS levies on a broker with respect to a
money market account belonging to the taxpayer
and receives payment from the broker which it ap-
plies to the taxpayer’s outstanding liability. How-
ever, the IRS failed to follow procedure provided by
the Internal Revenue Manual (but not required by
statute) with regard to managerial approval prior to
the making of the levy. The Commissioner may re-
turn an amount of money equal to the amount of
money the IRS levied upon and applied toward the
taxpayer’s tax liability.
Example 2. B owes $1,000 in Federal income
taxes. The IRS levies on a bank with respect to a
savings account belonging to the taxpayer and re-
ceives funds from the bank which it applies to the
taxpayer’s liability. Subsequent to the levy, B enters
into an installment agreement, under which it will
pay timely installments to satisfy the entire liability.
The installment agreement does not by its terms pre-
clude the return of levied upon property. The rev-
enue officer verifies that B is financially capable of
paying the entire liability, including accruals, in the
agreed-upon installment payments. The Commis-
sioner may return an amount of money equal to the
amount of money levied upon and applied toward
the taxpayer’s liability.
Example 3. C owns a house that is deteriorating
and in unsalable condition. C is in the process of
renovating the house for sale when the IRS levies
upon C’s bank account for the payment of a $20,000
outstanding Federal tax liability and receives funds
in the amount of $3,000, which it applies toward C’s
liability. A notice of federal tax lien is the only lien
encumbrancing the house. C requests that an
amount of money equal to the amount seized from
the bank account be returned so that C can complete
the renovations on the house. Without the funds, C
will be unable to complete the renovations and sell
the house. Upon examination, the Commissioner
determines that the IRS will be able to collect the
entire tax liability if C’s house is restored to salable
condition. If the National Taxpayer Advocate, or the
Commissioner in lieu of the National Taxpayer Ad-
vocate, determines that the return of the seized
money is in the taxpayers best interest, the Commis-
sioner may return an amount of money equal to the
amount seized from the bank account in the best in-
terest of the taxpayer and the United States.
(d) Best interests of the United States
and the taxpayer to release levy and re-
turn of property where levy made in viola-
tion of law—(1) In General. If the Inter-
nal Revenue Service (IRS) makes a levy
in violation of the law, it is in the best in-
terest of the United States and the tax-
payer to release the levy and the IRS will
return to the taxpayer any property ob-
tained pursuant to the levy. For example,
the IRS will release the levy and return
the taxpayer’s property if the levy was
made—
(i) Without giving the requisite thirty-
day notice of intent to levy under section
6330;
(ii) During the pendency of a proceed-
ing for refund of divisible tax in violation
of section 6331(i);
(iii) Before investigation of the status
of levied upon property in violation of
section 6331(j);
(iv) During the pendency of offers-in-
compromise in violation of section
6331(k)(1); or
(v) During the period an offer to enter
into an installment agreement is pending
(or for 30 days following the rejection of
an offer, or, if the rejection is timely ap-
pealed, during the period that the appeal
is pending) or during the period an install-
ment agreement is in effect (or during the
30 days following a termination or, if a
timely appeal of termination is filed, dur-
ing the period the appeal is pending) in vi-
olation of section 6331(k)(2).
(2) Property may not be credited to out-
standing liability without the taxpayer’s
permission. When the release of a levy
and the return of property are required
under this paragraph (d), the property or
the proceeds from the sale of the property
received by the IRS pursuant to the levy
must be returned to the taxpayer unless
the taxpayer requests otherwise. The
2001–15 I.R.B.1059April 9, 2001

property or proceeds of sale may not be
credited to any outstanding tax liability of
the taxpayer, including the one with re-
spect to which the IRS made the levy,
without the written permission of the tax-
payer.
(e) Time of return. Levied upon prop-
erty in possession of the IRS (other than
money) may be returned under para-
graphs (c) and (d) of this section at any
time. An amount of money equal to the
amount of money levied upon or received
from a sale of property may be returned at
any time before the expiration of 9
months from the date of the levy. When a
request for the return of money filed in
accordance with paragraph (h) of this sec-
tion is filed before the expiration of the 9-
month period, or a determination to return
an amount of money is made before the
expiration of the 9-month period, the
money may be returned within a reason-
able period of time after the expiration of
the 9-month period if additional time is
necessary for investigation or processing.
(f) Purchase by the United States. For
purposes of paragraph (a)(2) of this sec-
tion, if property is declared purchased by
the United States at a sale pursuant to sec-
tion 6335(e)(1)(C), the United States will
be treated as having received an amount
of money equal to the minimum price de-
termined by the Commissioner before the
sale.
(g) Determinations by the Commis-
sioner. The Commissioner must deter-
mine whether any of the conditions autho-
rizing the return of property exists if a
taxpayer submits a request for the return
of property in accordance with paragraph
(h) of this section. The Commissioner
also may make this determination inde-
pendently. If the Commissioner deter-
mines that conditions authorizing the re-
turn of property are not present, the
Commissioner may not authorize the re-
turn of property. If the Commissioner de-
termines that conditions authorizing the
return of property are present, the Com-
missioner may (but is not required to, un-
less the reason for the return of property is
that the levy was made in violation of law
and is governed by paragraph (d) of this
section) authorize the return of property.
If the Commissioner decides indepen-
dently to return property under paragraph
(c)(4) of this section based on the best in-
terests of the taxpayer and the United
States, the taxpayer or the National Tax-
payer Advocate (or his delegate) must
consent to the return of property.
(h) Procedures for request for the re-
turn of property—(1) Manner.A request
for the return of property must be made in
writing to the address on the levy form.
(2) Form. The written request must in-
clude the following information—
(i) The name, current address, and tax-
payer identification number of the person
requesting the return of money (or prop-
erty purchased by the United States);
(ii) A description of the property levied
upon;
(iii) The date of the levy; and
(iv) A statement of the grounds upon
which the return of money is being re-
quested (or property purchased by the
United States).
(i) No interest. No interest will be paid
on any money returned under this section.
(j) Administrative collection upon de-
fault. If the Commissioner returns prop-
erty under this section, and the taxpayer
fails to pay the previously assessed liabil-
ity for which the levy was made on the re-
turned property, the Commissioner may
administratively collect the liability. Col-
lection may include levying again on the
returned property as long as statutory and
administrative requirements are followed.
(k) Effective date. This section is ap-
plicable on the date final regulations are
published in the Federal Register.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 13, 2001, 8:45 a.m., and published in the issue
of the Federal Register for February 14, 2001, 66
F.R. 10249)
Notice of Proposed Rulemaking
Deposits of Excise Taxes
REG–106892–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations relating to the re-
quirements for excise tax returns, pay-
ments, and deposits. These regulations
affect persons required to report liability
for excise taxes on Form 720, “Quarterly
Federal Excise Tax Return.”
DATES: Written and electronic com-
ments and requests for a public hearing
must be received by May 17, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–106892–00), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 5 p.m. to:
CC:M&SP:RU (REG–106892–00),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW, Washing-
ton, DC. Alternatively, taxpayers may send
submissions electronically via the Internet
by selecting the “Tax Regs” option on the
IRS Home Page, or directly to the IRS In-
ternet site at http://www.irs.gov/
tax_regs/regslist.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning submissions, Guy
Traynor (202) 622-7180; concerning the
regulations, Susan Athy (202) 622-3130
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Excise Tax Procedural
Regulations (26 CFR part 40) relating to
the requirements for excise tax returns,
payments, and deposits. On January 7,
2000, an advance notice of proposed rule-
making was published in the Federal
Register(65 FR 1076) that invited com-
ments from the public on issues relating
to the requirements for excise tax returns
and deposits. Several written comments
were received that were considered in
drafting these proposed regulations.
The advance notice requested com-
ments on: whether there should be a sin-
gle deposit date for all excise taxes (other
than those deposited under the alternative
method), such as 14 days after the end of
the semimonthly period; whether a tax-
payer should be required to deposit only
95 percent of tax liability incurred for the
semimonthly period (in lieu of the current
requirement of 100 percent with safe har-
bor rules); and whether the amount re-
quired to be deposited for a quarter should
April 9, 200110602001–15 I.R.B.

be computed without reduction for the
amounts of any claims made on Schedule
C of the Form 720 for that quarter.
In general, commentators from the air
transportation industry requested that the
one-month filing extension provided to
those reporting communications, air
transportation, and ozone-depleting
chemical taxes be retained because air-
lines need additional time to determine
the proper amount of tax liability. The
IRS and Treasury believe the need for
additional time is adequately addressed
by the retention of the alternative
method for making deposits of commu-
nications and air transportation taxes.
Filers choosing to use the alternative
method for making deposits of these
taxes also are allowed additional time to
determine the amount of tax liability.
For example, under the alternative
method, the activity for December, Janu-
ary, and February is reported as tax lia-
bility for January, February, and March
on the Form 720 due April 30th. Thus,
even without the one-month filing exten-
sion, filers reporting under the alterna-
tive method have two months after the
last activity to determine the amount of
tax liability to be reported. In addition,
retention of an extended filing date for
certain industries would be inconsistent
with the simplification and overall fair-
ness sought to be achieved by these
changes. Accordingly, the proposed
amendments eliminate the one-month
filing extension that is now allowed for
returns related to taxes imposed by chap-
ter 33 (relating to communications and
air transportation) and section 4681 (re-
lating to ozone-depleting chemicals) and
require that all Forms 720 be filed by the
last day of the month following the quar-
ter for which the return is made.
Commentators generally supported a
single deposit date for all taxes other than
those deposited under the alternative
method (regular method taxes). The pro-
posed amendments provide that deposits
for regular method taxes for a semi-
monthly period are due by the 14th day of
the following semimonthly period. The
proposed amendments change the re-
quirement to deposit by class of tax. The
9-day rule, 14-day rule, and 30-day rule
taxes are eliminated. Instead there are
two classes: regular method and alterna-
tive method.
Commentators generally supported a
reduction in the amount of the required
deposit for a semimonthly period from
100 percent of net tax liability to 95 per-
cent of net tax liability. However, they
requested that the look-back quarter safe
harbor rule be retained. One commenta-
tor noted that the look-back quarter safe
harbor rule is easy for taxpayers to use
and provides a way for taxpayers to meet
the deposit requirements when taxpayers
have not determined their liability for the
current semimonthly period. Finally,
some commentators requested that the
provisions allowing deposits to be re-
duced by Schedule C claims be retained
to avoid economic hardship. The pro-
posed amendments adopt the suggestions
of these commentators.
The proposed amendments require the
deposit of at least 95 percent of net tax
liability incurred during the semimonthly
period. This rule replaces both the re-
quirement to deposit 100 percent of net
tax liability and the safe harbor rule for
taxpayers depositing 95 percent of their
current liability. The new requirement
is, in fact, more generous than the cur-
rent safe harbor, which applies only if
the 95-percent deposit requirement is
met for each semimonthly period in the
quarter. Under the proposed amend-
ments, a taxpayer that deposits 95 per-
cent of net tax liability for a semi-
monthly period will satisfy the deposit
requirement for that period even if less
than 95 percent of net tax liability is de-
posited for one or more of the other
semimonthly periods in the quarter.
The proposed amendments retain the
look-back quarter liability safe harbor
rule for taxpayers depositing taxes that
were in effect during the look-back quar-
ter. The proposed amendments to the de-
posit requirements and the safe harbor
rule apply to all excise tax deposits, in-
cluding deposits made under the alterna-
tive method. Finally, the proposed
amendments continue to allow deposits
to be reduced by Schedule C claims.
Proposed Effective Date
The regulations are proposed to be ap-
plicable with respect to returns and de-
posits that relate to calendar quarters be-
ginning on or after the date of
publication of the final regulations in the
Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regu-
latory assessment is not required. It also
has been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations and, because these regula-
tions do not impose on small entities a
collection of information requirement,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a
Regulatory Flexibility Analysis is not re-
quired. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of
proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any electronic and
written comments that are submitted
timely to the IRS. The IRS and Treasury
Department specifically request com-
ments on the clarity of the proposed regu-
lations and how they may be made easier
to understand. All comments will be
available for public inspection and copy-
ing. A public hearing may be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the hearing will
be published in the Federal Register.
Drafting Information
The principal author of these regula-
tions is Susan Athy, Office of Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 40 is pro-
posed to be amended as follows:
PART 40—EXCISE TAX
PROCEDURAL REGULATIONS
2001–15 I.R.B.1061April 9, 2001

Paragraph 1. The authority citation for
part 40 is amended by removing the en-
tries for Sections 40.6071(a)–1 and
40.6071(a)–2, and Sections 40.6302(c)–2,
40.6302(c)–3, and 40.6302(c)–4; and
adding entries in numerical order to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 40.6071(a)–1 also issued under
26 U.S.C. 6071(a). * * *
Section 40.6302(c)–2 also issued under
26 U.S.C. 6302(a).
Section 40.6302(c)–3 also issued under
26 U.S.C. 6302(a).
§40.0–1 [Amended]
Par. 2. Section 40.0–1 is amended as
follows:
1. Paragraphs (d) and (e) are removed.
2. Paragraph (f) is redesignated as new
paragraph (d).
§40.6011(a)–1 [Amended]
Par. 3. Section 40.6011(a)–1 is
amended by removing paragraph (c).
§40.6011(a)–2 [Amended]
Par. 4. Section 40.6011(a)–2 is
amended as follows:
1. In paragraph (b)(2), the language
“§40.6302(c)–1(f)(2)” is removed and
“§40.6302(c)–1(e)(2)” is added in its place.
2. Paragraph (d) is removed.
Par. 5. Section 40.6071(a)–1 is
amended by revising paragraphs (a),
(b)(2), and (c) to read as follows:
§40.6071(a)–1 Time for filing returns.
(a) Quarterly returns. Each quarterly
return required under §40.6011(a)–1(a)(2)
must be filed by the last day of the first
calendar month following the quarter for
which it is made.
(b) * * *
(2) Semimonthly returns. Each semi-
monthly return required under §40.6011
(a)–1(b) must be filed by the last day of
the semimonthly period (as defined in
§40.0–1(c)) following the semimonthly
period for which it is made.
(c) Effective date. This section is ap-
plicable with respect to returns that relate
to calendar quarters beginning on or after
the date of publication of the final regula-
tions in the Federal Register.
§40.6071(a)–2 [Removed]
Par. 6. Section 40.6071(a)–2 is re-
moved.
§40.6091–1 [Amended]
Par. 7. Section 40.6091–1 is amended
by removing paragraph (d).
Par. 8. Section 40.6101–1 is revised to
read as follows:
§40.6101–1 Period covered by returns.
See §40.6011(a)–1(a)(2) for the rules
relating to the period covered by the re-
turn.
Par. 9. Sections 40.6109(a)–1 and
40.6151(a)–1 are revised to read as follows:
§40.6109(a)–1 Identifying numbers.
Every person required under
§40.6011(a)–1 to make a return must pro-
vide the identifying number required by
the instructions applicable to the form on
which the return is made.
§40.6151(a)–1 Time and place for paying
tax shown on return.
Except as provided by statute, the tax
must be paid at the time prescribed in
§40.6071(a)–1 for filing the return, and at
the place prescribed in §40.6091–1 for fil-
ing the return.
Par. 10. Section 40.6302(c)–1 is re-
vised to read as follows:
§40.6302(c)–1 Use of Government
depositaries.
(a) In general—(1) Semimonthly de-
posits required. Except as provided by
statute or by paragraph (e) of this section,
each person required under §40.6011
(a)–1(a)(2) to file a quarterly return must
make a deposit of tax for each semi-
monthly period (as defined in §40.0–1(c))
in which tax liability is incurred.
(2) Treatment of taxes imposed by
chapter 33. For purposes of this part 40,
tax imposed by chapter 33 (relating to
communications and air transportation) is
treated as a tax liability incurred during
the semimonthly period—
(i) In which that tax is collected; or
(ii) In the case of the alternative
method, in which that tax is considered as
collected.
(3) Definition of net tax liability. Net
tax liability means the tax liability for the
specified period plus or minus any adjust-
ments allowable in accordance with the
instructions applicable to the form on
which the return is made.
(4) Computation of net tax liability for
a semimonthly period. The net tax liabil-
ity for a semimonthly period may be com-
puted by—
(i) Determining the net tax liability in-
curred during the semimonthly period; or
(ii) Dividing by two the net tax liability
incurred during the calendar month that
includes that semimonthly period, pro-
vided that this method of computation is
used for all semimonthly periods in the
calendar quarter.
(b) Amount of deposit—(1) In general.
The deposit of tax for each semimonthly
period must be not less than 95 percent of
the amount of net tax liability incurred
during the semimonthly period.
(2) Safe harbor rules—(i) Applicabil-
ity. The safe harbor rules of this para-
graph (b)(2) are applied separately to
taxes deposited under the alternative
method provided in §40.6302(c)–3 (al-
ternative method taxes) and to the other
taxes for which deposits are required
under this section (regular method
taxes).
(ii) Regular method taxes. Any person
that made a return of tax reporting regular
method taxes for the second preceding
calendar quarter (the look-back quarter) is
considered to have complied with the re-
quirement of this part 40 for deposit of
regular method taxes for the current cal-
endar quarter if—
(A) The deposit of regular method
taxes for each semimonthly period in the
current calendar quarter is not less than
1/6 of the net tax liability for regular
method taxes reported for the look-back
quarter;
(B) Each deposit is made on time;
(C) The amount of any underpayment
of regular method taxes is paid by the due
date of the return; and
(D) The person’s liability does not in-
clude any regular method tax that was not
imposed at all times during the look-back
quarter or a tax on a chemical not subject
to tax at all times during the look-back
quarter.
(iii) Alternative method taxes. Any
person that made a return of tax reporting
alternative method taxes for the look-back
quarter is considered to have complied
with the requirement of this part 40 for
April 9, 200110622001–15 I.R.B.

deposit of alternative method taxes for the
current calendar quarter if—
(A) The deposit of alternative method
taxes for each semimonthly period in the
current calendar quarter is not less than
1/6 of the net tax liability for alternative
method taxes reported for the look-back
quarter;
(B) Each deposit is made on time;
(C) The amount of any underpayment
of alternative method taxes is paid by the
due date of the return; and
(D) The person’s liability does not in-
clude any alternative method tax that was
not imposed at all times during the look-
back quarter and the month preceding the
look-back quarter.
(iv) Modification for tax rate increase.
The safe harbor rules of this paragraph
(b)(2) do not apply to regular method taxes
or alternative method taxes for the first and
second calendar quarters beginning on or
after the effective date of an increase in the
rate of any tax to which this part 40 applies
unless the deposit of those taxes for each
semimonthly period in the calendar quarter
is not less than 1/6 of the tax liability the
person would have had with respect to
those taxes for the look-back quarter if the
increased rate of tax had been in effect for
the look-back quarter.
(v) Failure to comply with deposit re-
quirements. If a person fails to make de-
posits as required under this part 40, that
failure may be reported to the appropriate
IRS office and the IRS may withdraw the
person’s right to use the safe harbor rules
of this paragraph (b)(2).
(c) Time to deposit—(1) In general.
The deposit of tax for any semimonthly
period must be made by the 14th day of
the following semimonthly period unless
such day is a Saturday, Sunday, or legal
holiday in the District of Columbia in
which case the immediately preceding
day which is not a Saturday, Sunday, or
legal holiday in the District of Columbia
is treated as the 14th day. Thus, generally,
the deposit of tax for the first semi-
monthly period in a month is due by the
29th day of that month and the deposit of
tax for the second semimonthly period in
a month is due by the 14th day of the fol-
lowing month.
(2) Exceptions. See §40.6302(c)–2 for
the special rules for September. See
§40.6302(c)–3 for the special rules for de-
posits under the alternative method.
(d) Remittance of deposits—(1) Deposits
by federal tax deposit coupon. A com-
pleted Form 8109, “Federal Tax Deposit
Coupon,” must accompany each deposit.
The deposit must be remitted, in accor-
dance with the instructions applicable to
the form, to a financial institution autho-
rized as a depositary for federal taxes (as
provided in 31 CFR part 203).
(2) Deposits by electronic funds trans-
fer. For the requirement to deposit excise
taxes by electronic funds transfer, see
§31.6302–1(h) of this chapter. A taxpayer
not required to deposit by electronic funds
transfer pursuant to §31.6302–1(h) of this
chapter remains subject to the rules of this
paragraph (d).
(e) Exceptions—(1) Taxes excluded.
No deposit is required in the case of the
taxes imposed by—
(i) Section 4042 (relating to fuel used
on inland waterways);
(ii) Section 4161 (relating to sport fish-
ing equipment and bows and arrow com-
ponents);
(iii) Section 4682(h) (relating to floor
stocks tax on ozone-depleting chemicals);
and
(iv) Section 48.4081–3(b)(1)(iii) of this
chapter (relating to certain removals of
gasohol from refineries).
(2) One-time filings. No deposit is re-
quired in the case of any taxes reportable
on a one-time filing (as defined in
§40.6011(a)–2(b)).
(3) De minimis exception. For any cal-
endar quarter, no deposit is required if the
net tax liability for the quarter does not
exceed $2,500.
(f) Effective date. This section is ap-
plicable with respect to deposits that re-
late to calendar quarters beginning on or
after the date of publication of the final
regulations in the Federal Register.
Par. 11. Section 40.6302(c)–2 is re-
vised to read as follows:
§40.6302(c)–2 Special rules for
September.
(a) In general—(1) Separate deposits
required for the second semimonthly pe-
riod. In the case of deposits of taxes not
deposited under the alternative method
(regular method taxes) for the second
semimonthly period in September, sepa-
rate deposits are required for the period
September 16th through 26th and for the
period September 27th through 30th.
(2) Amount of deposit—(i) In general.
The deposits of regular method taxes for
the period September 16th through 26th
and the period September 27th through
30th must be not less than 95 percent of
the net tax liability for regular method
taxes incurred during the respective peri-
ods. The net tax liability for regular
method taxes incurred during these peri-
ods may be computed by—
(A) Determining the amount of net tax
liability for regular method taxes reason-
ably expected to be incurred during the
second semimonthly period in September;
(B) Treating 11/15 of the amount deter-
mined under paragraph (a)(2)(i)(A) of this
section as the net tax liability for regular
method taxes incurred during the period
September 16th through 26th; and
(C) Treating the remainder of the
amount determined under paragraph
(a)(2)(i)(A) of this section (adjusted to re-
flect the amount of net tax liability for
regular method taxes actually incurred
through the end of September) as the net
tax liability for regular method taxes in-
curred during the period September 27th
through 30th.
(ii) Safe harbor rules. The safe harbor
rules in §40.6302(c)–1(b)(2) do not apply
for the third calendar quarter unless—
(A) The deposit of taxes for the period
September 16th through 26th is not less
than 11/90 of the net tax liability for regu-
lar method taxes reported for the look-
back quarter; and
(B) The total deposit of taxes for the
second semimonthly period in September
is not less than 1/6 of the net tax liability
for regular method taxes reported for the
look-back quarter.
(3) Time to deposit. (i) The deposit re-
quired for the period beginning Septem-
ber 16th must be made by September 29th
unless—
(A) September 29th is a Saturday, in
which case the deposit must be made by
September 28th; or
(B) September 29th is a Sunday, in
which case the deposit must be made by
September 30th.
(ii) The deposit required for the period
ending September 30th must be made at
the time prescribed in §40.6302(c)–1(c).
(b) Persons not required to use elec-
tronic funds transfer. The rules of this
section are applied with the following
modifications in the case of a person not
2001–15 I.R.B.1063April 9, 2001

required to deposit taxes by electronic
funds transfer.
(1) Periods. The deposit periods for
the separate deposits required under para-
graph (a) of this section are September
16th through 25th and September 26th
through 30th.
(2) Amount of deposit. In computing
the amount of deposit required under
paragraph (a)(2)(i)(B) of this section, the
applicable fraction is 10/15. In comput-
ing the amount of deposit required under
paragraph (a)(2)(ii)(A) of this section, the
applicable fraction is 10/90.
(3) Time to deposit. In the case of the
deposit required under paragraph (a) of
this section for the period beginning Sep-
tember 16th, the deposit must be made by
September 28th unless—
(i) September 28th is a Saturday, in
which case the deposit must be made by
September 27th; or
(ii) September 28th is a Sunday, in
which case the deposit must be made by
September 29th.
(c) Effective date. This section is ap-
plicable with respect to deposits that re-
late to calendar quarters beginning on or
after the date of publication of the final
regulations in the Federal Register.
Par. 12. Section 40.6302(c)–3 is
amended as follows:
1. In paragraph (b)(1)(ii), the language
“9-day rule of §40.6302(c)–1(b)(6)” is re-
moved and “rule of §40.6302(c)–1(c)(1)”
is added in its place.
2. In paragraph (b)(3), second sen-
tence, the language “6th” is removed and
“16th” is added in its place.
3. In paragraph (d), first sentence, the
language “not less than” is removed and
“not less than 95 percent of” is added in
its place.
4. In paragraph (f)(4), the language
“§40.6302(c)–1(c)(2)(i)” is removed and
“§40.6302(c)–1(b)(2)” is added in its
place.
5. Paragraph (f)(5) is removed.
6. Paragraphs (f)(6) and (f)(7) are re-
designated as paragraphs (f)(5) and (f)(6),
respectively.
7. Paragraph (g) is revised.
8. Paragraph (h) is removed.
The revision reads as follows:
§40.6302(c)–3 Special rules for use of
Government depositaries under chapter
33.
* * * * *
(g) Effective date. This section is ap-
plicable with respect to deposits of taxes
that are considered as collected in calen-
dar quarters beginning on or after the date
of publication of the final regulations in
the Federal Registerand to returns of tax
for calendar quarters beginning on or after
the date of publication of the final regula-
tions in the Federal Register.
§40.6302(c)–4 [Removed]
Par. 13. Section 40.6302(c)–4 is re-
moved.
§40.9999–1 [Removed]
Par. 14. Section 40.9999–1 is removed.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 15, 2001, 8:45 a.m., and published in the issue
of the Federal Register for February 16, 2001, 66
F.R. 10650)
Notice of Proposed Rulemaking
by Cross-Reference to
Temporary Regulations
Disclosure of Return Information
to the Bureau of the Census
REG–121109–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary regu-
lations.
SUMMARY: In T.D. 8943, on page 1054
of this Bulletin, the IRS is issuing tempo-
rary regulations relating to additions to
the list of items of information disclosed
to the Bureau of the Census for use in the
Longitudinal Employer-Household Dy-
namics (LEHD) project and the Survey
of Income and Program Participation
(SIPP) project. These regulations pro-
vide guidance to IRS and Social Security
Administration (SSA) personnel respon-
sible for disclosing the information. The
text of those temporary regulations also
serves as the text of these proposed regu-
lations.
DATES: Written and electronic com-
ments and requests for a public hearing
must be received by May 14, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–121109–00), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submissions
may be hand-delivered between the hours
of 8 a.m. and 5 p.m. to CC:M&SP:RU
(REG–121109–00), Courier’s Desk, Inter-
nal Revenue Service, 1111 Constitution Av-
enue, NW, Washington, DC or sent elec-
tronically, via the IRS Internet site at:
http://www.irs.ustreas.gov/tax_regs/reglist.
html.
FOR FURTHER INFORMATION CON-
TACT: Stuart Murray (202) 622-4580
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Under section 6103(j)(1), upon written
request from the Secretary of Commerce,
the Secretary is to furnish to the Bureau of
the Census (Bureau) tax return informa-
tion that is prescribed by Treasury regula-
tions for the purpose of, but only to the
extent necessary in, structuring censuses
and national economic accounts and con-
ducting related statistical activities autho-
rized by law. Section 301.6103(j)(1)–1 of
the regulations further defines such pur-
poses by reference to 13 U.S.C. Chapter 5
and provides an itemized description of
the return information authorized to be
disclosed for such purposes. Section
301.6103(j)(1)–1(b)(5) of the regulations
provides a list of information provided to
the Social Security Administration (SSA)
pursuant to Internal Revenue Code sec-
tion 6103(l)(1)(A) or (5) that officers or
employees of SSA may disclose to the
Bureau. Periodically, the disclosure regu-
lations are amended to reflect the chang-
ing needs of the Bureau for data for its
statutorily authorized statistical activities.
This document contains proposed
amendments to the regulations authoriz-
ing IRS and SSA personnel to disclose ad-
ditional items of return information that
have been requested by the Secretary of
Commerce for specified purposes related
to the LEHD and SIPP projects.
The text of the temporary regulations
also serves as the text of these proposed
April 9, 200110642001–15 I.R.B.

regulations. The preamble to the tempo-
rary regulations explains the regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also
has been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because the regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic and written
comments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. The IRS and Treasury Department
specifically request comments on the clar-
ity of the proposed regulation and how they
can be made easier to understand. All com-
ments will be available for public inspec-
tion and copying. A public hearing may be
scheduled if requested in writing by a per-
son that timely submits 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 Jamie G. Bernstein, Office of the
Associate Chief Counsel, Procedure &
Administration (Disclosure & Privacy
Law Division), Internal Revenue Service.
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR Part 301 is pro-
posed to be amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(j)(1)–1 also issued
under 26 U.S.C. 6103(j)(1);* * *
Par. 2. Section 301.6103(j)(1)–1 is
amended by:
1. Adding paragraphs (b)(2)(v) and
(vi).
2. Adding paragraphs (b)(3)(xxiii),
(xxiv), (xxv), (xxvi), (xxvii) and (xxviii).
3. Adding paragraphs (b)(5)(iii), (iv),
and (v).
4. Revising paragraph (e).
The additions and revision read as fol-
lows:
§301.6103(j)(1)–1 Disclosure of return
information to officers and employees of
the Department of Commerce for certain
statistical purposes and related
activities.
* * * * *
(b)* * *
(2)(v) and (vi)[The text of proposed
paragraphs (b)(2)(v) and (vi) is the same
as the text of §301.6103(j)(1)–1T(b)(2)(v)
and (vi) published in T.D. 8943].
(3)[The text of proposed paragraphs
(b)(3)(xxiii), (xxiv), (xxv), (xxvi), (xxvii)
and (xxviii) is the same as the text of
§301.6103(j)(1)–1T(b)(3)(xxiii), (xxiv),
(xxv), (xxvi), (xxvii) and (xxviii) pub-
lished in T.D. 8943].
* * * * *
(5)(iii), (iv), and (v) [The text of pro-
posed paragraphs (b)(5)(iii), (iv), and (v)
is the same as the text of
§301.6103(j)(1)–T(b)(5)(iii), (iv), and (v)
published in T.D. 8943].
* * * * *
(e) [The text of proposed paragraph (e)
is the same as the text of
§301.6103(j)(1)–T(e) published else-
where in T.D. 8943].
Robert E. Wenzel,
Deputy Commissioner
of the Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 12, 2001, 8:45 a.m., and published in the issue
of the Federal Register for February 13, 2001, 66
F.R. 9991)
Source of Income From Certain
Space and Ocean Activities;
Also, Source of Communications
Income; Hearing
Announcement 2001–30
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Change of date of public hear-
ing; extension of time to submit outlines
of oral comments.
SUMMARY: This document changes the
date of the public hearing on the proposed
regulations (REG–106030–98, 2000–11
I.R.B. 820) under sections 863(a), (d),
and (e) governing the source of income
from certain space and ocean activities
and certain communications activities. It
also extends the time to submit outlines of
oral comments for the hearing.
DATES: The public hearing will be held
May 23, 2001, beginning at 10 a.m. Ad-
ditional outlines of oral comments must
be received by May 2, 2001.
ADDRESSES: The public hearing will be
held in Room 2615, Internal Revenue
Building, 1111 Constitution Avenue, NW,
Washington, DC. Send submissions to:
Regulations Unit CC (REG–106030–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: Regulations Unit CC
(REG–106030–98), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue NW, Washington DC. Alterna-
tively, taxpayers may submit outlines of
oral comments electronically directly to
the IRS Internet site at http://www.irs.gov/
tax
regs/reglist.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Anne
Shelburne (202) 874-1490; concerning
submission, LaNita Van Dyke (202) 622-
7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
A notice of proposed rulemaking and
notice of public hearing, appearing in the
Federal Registeron Wednesday, January
17, 2001 (66 FR 3903), announced that a
public hearing on the proposed regula-
tions under sections 863(d) and 863(e),
2001–15 I.R.B.1065April 9, 2001

governing the source of income from cer-
tain space and ocean activities and certain
communications activities would be held
on March 28, 2001, in the Auditorium, In-
ternal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC. Sub-
sequently, the date of the public hearing
has changed to May 23, 2001, at 10 a.m.
in room 2615. Outlines of oral comments
must be received by May 2, 2001.
Cynthia Grigsby,
Chief, Regulations Unit,
Office of Special Counsel
(Modernization & Strategic Planning).
(Filed by the Office of the Federal Register on March
9, 2001, 8:45 a.m., and published in the issue of the
Federal Register for March 12, 2001, 66 F.R. 14351)
April 9, 200110662001–15 I.R.B.

2001–15 I.R.B.iApril 9, 2001
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security
Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

April 9, 2001ii2001–15 I.R.B.
Numerical Finding List
1
Bulletins 2001–1 through 2001–14
Announcements:
2001–1, 2001–2 I.R.B. 277
2001–2, 2001–2 I.R.B. 277
2001–3, 2001–2 I.R.B. 278
2001–4, 2001–2 I.R.B. 286
2001–5, 2001–2 I.R.B. 286
2001–6, 2001–3 I.R.B. 357
2001–7, 2001–3 I.R.B. 357
2001–8, 2001–3 I.R.B. 357
2001–9, 2001–3 I.R.B. 357
2001–10, 2001–4 I.R.B. 431
2001–11, 2001–4 I.R.B. 432
2001–12, 2001–6 I.R.B. 526
2001–13, 2001–96 I.R.B. 752
2001–14, 2001–7 I.R.B. 648
2001–15, 2001–8 I.R.B. 715
2001–16, 2001–8 I.R.B. 715
2001–17, 2001–8 I.R.B. 716
2001–18, 2001–10 I.R.B. 791
2001–19, 2001–10 I.R.B. 791
2001–20, 2001–8 I.R.B. 716
2001–21, 2001–9 I.R.B. 752
2001–22, 2001–11 I.R.B. 895
2001–23, 2001–10 I.R.B. 791
2001–24, 2001–10 I.R.B. 793
2001–25, 2001–11 I.R.B. 895
2001–26, 2001–11 I.R.B. 896
2001–27, 2001–11 I.R.B. 897
2001–28, 2001–13 I.R.B. 975
2001–29, 2001–14 I.R.B. 1014
Notices:
2001–1, 2001–2 I.R.B. 261
2001–2, 2001–2 I.R.B. 265
2001–3, 2001–2 I.R.B. 267
2001–4, 2001–2 I.R.B. 267
2001–5, 2001–3 I.R.B. 327
2001–6, 2001–3 I.R.B. 327
2001–7, 2001–4 I.R.B. 374
2001–8, 2001–4 I.R.B. 374
2001–9, 2001–4 I.R.B. 375
2001–10, 2001–5 I.R.B. 459
2001–11, 2001–5 I.R.B. 464
2001–12, 2001–3 I.R.B. 328
2001–13, 2001–6 I.R.B. 514
2001–14, 2001–6 I.R.B. 516
2001–15, 2001–7 I.R.B. 589
2001–16, 2001–9 I.R.B. 730
2001–17, 2001–9 I.R.B. 730
2001–18, 2001–9 I.R.B. 731
2001–19, 2001–10 I.R.B. 784
2001–20, 2001–11 I.R.B. 818
2001–21, 2001–11 I.R.B. 818
2001–22, 2001–12 I.R.B. 911
2001–23, 2001–12 I.R.B. 911
2001–24, 2001–12 I.R.B. 912
2001–25, 2001–13 I.R.B. 941
2001–26, 2001–13 I.R.B. 942
2001–27, 2001–13 I.R.B. 942
2001–28, 2001–13 I.R.B. 944
2001–29, 2001–14 I.R.B. 989
2001–30, 2001–14 I.R.B. 989
Proposed Regulations:
LR–230–76, 2001–13 I.R.B. 945
REG–209461–79, 2001–8 I.R.B. 712
REG–246256–96, 2001–8 I.R.B. 713
REG–251701–96, 2001–4 I.R.B. 396
REG–106030–98, 2001–11 I.R.B. 820
REG–106446–98, 2001–13 I.R.B. 945
REG–106542–98, 2001–5 I.R.B. 473
REG–121928–98, 2001–6 I.R.B. 520
REG–109481–99, 2001–13 I.R.B. 961
REG–111835–99, 2001–11 I.R.B. 834
REG–114998–99, 2001–14 I.R.B. 992
REG–115560–99, 2001–14 I.R.B. 993
REG–101739–00, 2001–14 I.R.B. 996
REG–103320–00, 2001–8 I.R.B. 714
REG–104683–00, 2001–4 I.R.B. 407
REG–104876–00, 2001–14 I.R.B. 998
REG–105801–00, 2001–13 I.R.B. 965
REG–106702–00, 2001–4 I.R.B. 424
REG–106791–00, 2001–6 I.R.B. 521
REG–107047–00, 2001–14 I.R.B. 1002
REG–107175–00, 2001–13 I.R.B. 971
REG–107176–00, 2001–4 I.R.B. 428
REG–107186–00, 2001–13 I.R.B. 973
REG–107566–00, 2001–3 I.R.B. 346
REG–110374–00, 2001–12 I.R.B. 915
REG–110659–00, 2001–12 I.R.B. 917
REG–114082–00, 2001–7 I.R.B. 629
REG–114083–00, 2001–7 I.R.B. 630
REG–114084–00, 2001–7 I.R.B. 633
REG–116468–00, 2001–6 I.R.B. 522
REG–119352–00, 2001–6 I.R.B. 525
REG–125237–00, 2001–12 I.R.B. 919
REG–126100–00, 2001–11 I.R.B. 862
REG–129608–00, 2001–14 I.R.B. 1011
REG–130477–00, 2001–11 I.R.B. 865
REG–130481–00, 2001–11 I.R.B. 865
Railroad Retirement Quarterly Rates:
2001–2, I.R.B. 258
Revenue Procedures:
2001–1, 2001–1 I.R.B. 1
2001–2, 2001–1 I.R.B. 79
2001–3, 2001–1 I.R.B. 111
2001–4, 2001–1 I.R.B. 121
2001–5, 2001–1 I.R.B. 164
2001–6, 2001–1 I.R.B. 194
2001–7, 2001–1 I.R.B. 236
2001–8, 2001–1 I.R.B. 239
2001–9, 2001–3 I.R.B. 328
2001–10, 2001–2 I.R.B. 272
2001–11, 2001–2 I.R.B. 275
2001–12, 2001–3 I.R.B. 335
2001–13, 2001–3 I.R.B. 337
2001–14, 2001–3 I.R.B. 343
2001–15, 2001–5 I.R.B. 465
2001–16, 2001–4 I.R.B. 376
2001–17, 2001–7 I.R.B. 589
2001–18, 2001–8 I.R.B. 708
2001–19, 2001–9 I.R.B. 732
2001–20, 2001–9 I.R.B. 738
2001–21, 2001–9 I.R.B. 742
2001–22, 2001–9 I.R.B. 745
2001–23, 2001–10 I.R.B. 784
2001–24, 2001–10 I.R.B. 788
2001–25, 2001–12 I.R.B. 913
Revenue Rulings:
2001–1, 2001–9 I.R.B. 726
2001–2, 2001–2 I.R.B. 255
2001–3, 2001–3 I.R.B. 319
2001–4, 2001–3 I.R.B. 295
2001–5, 2001–5 I.R.B. 451
2001–6, 2001–6 I.R.B. 491
2001–7, 2001–7 I.R.B. 541
2001–8, 2001–9 I.R.B. 726
2001–9, 2001–8 I.R.B. 652
2001–10, 2001–10 I.R.B. 755
2001–11, 2001–10 I.R.B. 780
2001–12, 2001–11 I.R.B. 811
2001–13, 2001–12 I.R.B. 898
2001–14, 2001–12 I.R.B. 898
2001–15, 2001–13 I.R.B. 922
2001–16, 2001–13 I.R.B. 936
Treasury Decisions:
8910, 2001–2 I.R.B. 258
8911, 2001–3 I.R.B. 321
8912, 2001–5 I.R.B. 452
8913, 2001–3 I.R.B. 300
8914, 2001–8 I.R.B. 653
8915, 2001–4 I.R.B. 359
8916, 2001–4 I.R.B. 360
8917, 2001–7 I.R.B. 538
8918, 2001–4 I.R.B. 372
8919, 2001–6 I.R.B. 505
8920, 2001–8 I.R.B. 654
8921, 2001–7 I.R.B. 532
8922, 2001–6 I.R.B. 508
8923, 2001–6 I.R.B. 485
8924, 2001–6 I.R.B. 489
8925, 2001–6 I.R.B. 496
8926, 2001–6 I.R.B. 492
8927, 2001–11 I.R.B. 807
8928, 2001–8 I.R.B. 685
8929, 2001–10 I.R.B. 756
8930, 2001–5 I.R.B. 433
8931, 2001–7 I.R.B. 542
8932, 2001–11 I.R.B. 813
8933, 2001–11 I.R.B. 794
8934, 2001–12 I.R.B. 904
8935, 2001–8 I.R.B. 702
8937, 2001–11 I.R.B. 806
8938, 2001–13 I.R.B. 929
8939, 2001–12 I.R.B. 899
8941, 2001–14 I.R.B. 977
8942, 2001–13 I.R.B. 929
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2000–27 through
2000–52 is in Internal Revenue Bulletin 2001–1,
dated January 2, 2001.

2001–15 I.R.B.iiiApril 9, 2001
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2001–1 through 2001–14
Announcement:
98–99
Modified by
Ann. 2001–9, 2001–3 I.R.B. 357
99–79
Superseded by
Ann. 2001–3, 2001–2 I.R.B. 278
2000–78
Obsoleted by
T.D. 8933, 2001–11 I.R.B. 794
2000–97
Corrected by
Ann. 2001–7, 2001–3 I.R.B. 357
Cumulative Bulletin:
1998–2
Corrected by
Ann. 2001–5, 2001–2 I.R.B. 286
Notices:
94–3
Modified by
T.D. 8933, 2001–11 I.R.B. 794
98–39
Modified by
Notice 2001–9, 2001–4 I.R.B. 375
98–40
Modified by
Notice 2001–9, 2001–4 I.R.B. 375
99–53
Modified and superseded by
Notice 2001–7, 2001–4 I.R.B. 374
2000–21
Superseded by
Notice 2001–1, 2001–2 I.R.B. 261
2000–22
Modified and superseded by
Notice 2001–8, 2001–4 I.R.B. 374
2000–26
Modified by
Notice 2001–22, 2001–12 I.R.B. 911
2000–43
Extended by
Notice 2001–13, 2001–6 I.R.B. 514
Proposed Regulations:
EE–130–86
Partially withdrawn by
REG–209461–79, 2001–8 I.R.B. 712
REG–106542–98
Corrected by
Ann. 2001–24, 2001–13 I.R.B. 793
REG–116733–98
Withdrawn by
Ann. 2001–11, 2001–4 I.R.B. 432
Proposed Regulations—Continued:
REG–116048–99
Withdrawn by
Ann. 2001–27, 2001–11 I.R.B. 897
REG–106702–00
Corrected by
Ann. 2001–28, 2001–13 I.R.B. 975
Revenue Procedures:
83–87
Superseded by
Rev. Proc. 2001–15, 2001–5 I.R.B. 465
90–18
Amplified and superseded by
Rev. Proc. 2001–18, 2001–8 I.R.B. 708
92–19
Superseded by
Rev. Proc. 2001–15, 2001–5 I.R.B. 465
96–15
Modified by
Ann. 2001–22, 2001–11 I.R.B. 895
96–17
Modified by
Rev. Proc. 2001–9, 2001–3 I.R.B. 328
99–18
Modified and superseded by
Rev. Proc. 2001–21, 2001–9 I.R.B. 742
99–47
Superseded by
Rev. Proc. 2001–16, 2001–4 I.R.B. 376
99–49
Modified and amplified by
Notice 2001–23, 2001–12 I.R.B. 911
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
Rev. Proc. 2001–23, 2001–10 I.R.B. 784
Rev. Proc. 2001–24, 2001–10 I.R.B. 788
Rev. Proc. 2001–25, 2001–12 I.R.B. 913
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
2000–1
Superseded by
Rev. Proc. 2001–1, 2001–1 I.R.B. 1
2000–2
Superseded by
Rev. Proc. 2001–2, 2001–1 I.R.B. 79
2000–3
Superseded by
Rev. Proc. 2001–3, 2001–1 I.R.B. 111
2000–4
Superseded by
Rev. Proc. 2001–4, 2001–1 I.R.B. 121
2000–5
Superseded by
Rev. Proc. 2001–5, 2001–1 I.R.B. 164
2000–6
Superseded by
Rev. Proc. 2001–6, 2001–1 I.R.B. 194
2000–7
Superseded by
Rev. Proc. 2001–7, 2001–1 I.R.B. 236
Revenue Procedures—Continued:
2000–8
Superseded by
Rev. Proc. 2001–8, 2001–1 I.R.B. 239
2000–16
Modified and superseded by
Rev. Proc. 2001–17, 2001–7 I.R.B. 589
2000–22
Modified and superseded by
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
2001–3
Corrected by
Ann. 2001–25, 2001–11 I.R.B. 895
2001–13
Clarified by
Notice 2001–12, 2001–3 I.R.B. 328
Revenue Rulings:
64–328
Modified by
Notice 2001–10, 2001–5 I.R.B. 459
66–110
Modified by
Notice 2001–10, 2001–5 I.R.B. 459
85–30
Clarified by
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
88–95
Clarified by
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
92–19
Supplemented in part by
Rev. Rul. 2001–11, 2001–10 I.R.B. 780
2000–56
Corrected by
Ann. 2001–19, 2001–10 I.R.B. 791
2001–4
Modified by
Notice 2001–23, 2001–12 I.R.B. 911
Treasury Decisions:
7530
Removed by
T.D. 8938, 2001–13 I.R.B. 929
8889
Corrected by
Ann. 2001–14, 2001–2 I.R.B. 286
8913
Corrected by
Ann. 2001–26, 2001–11 I.R.B. 896
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2000–27 through 2000–52 is in Internal Revenue
Bulletin 2001–1, dated January 2, 2001.

INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the
Superintendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week-
ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
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ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET
You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Select Tax Info for Business at the bottom of the
page. Then select Internal Revenue Bulletins.
INTERNAL REVENUE BULLETINS ON CD–ROM
Internal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD–ROM). The CD–ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders(discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.
HOW TO ORDER
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INTERNAL REVENUE BULLETIN
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