Internal Revenue Bulletin 2000-16 (PDF rendition): IRS Revenue Rulings

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

INCOME TAX
Rev. Rul. 2000–21, page 881.
LIFO; price indexes; department stores.The February
2000 Bureau of Labor Statistics price indexes are accepted for
use by department stores employing the retail inventory and
last-in, first-out inventory methods for valuing inventories for tax
years ended on, or with reference to, February 29, 2000.
Rev. Rul. 2000–22, page 880.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period January through March
2000.This ruling announces the monthly bond factor
amounts to be used by taxpayers who dispose of qualified
low-income buildings or interests therein during the period
January through March 2000.
REG–100291–00, page 917.
Proposed regulations under section 170 of the Code relate
to the definitions of a guaranteed annuity interest and a uni-
trust interest for purposes of the income, gift, and estate tax
charitable deductions. A public hearing is scheduled for June
29, 2000.
REG–107872–99, page 911.
Proposed regulations under section 755 of the Code provide
guidance to partnerships and their partners concerning the
allocation of basis adjustments among partnership assets. A
public hearing is scheduled for July 12, 2000.
EMPLOYEE PLANS
Rev. Rul. 2000–20, page 880.
Amortization bases; Taxpayer Relief Act of 1997.This
ruling provides questions and answers relating to the estab-
lishment and maintenance of certain amortization bases
under section 412 of the Code as amended by section
1521(c) of the Taxpayer Relief Act of 1997.
REG–109101–98, page 903.
Proposed regulations would permit qualified defined contri-
bution plans to be amended to eliminate some alternative
forms in which an account balance can be paid, and would
permit certain transfers between defined contribution plans
that are not permitted under current regulations. A public
hearing is scheduled for June 27, 2000.
Internal Revenue
bbuulllleettiinn
Bulletin No. 2000–16
April 17, 2000
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page ii.
(Continued on the next page)

April 17, 20002000–16 I.R.B.
ESTATE TAX
REG–100291–00, page 917.
Proposed regulations under section 170 of the Code relate
to the definitions of a guaranteed annuity interest and a uni-
trust interest for purposes of the income, gift, and estate tax
charitable deductions. A public hearing is scheduled for June
29, 2000.
EXEMPT ORGANIZATIONS
Announcement 2000–39, page 948.
A list is provided of organizations that no longer qualify as
organizations to which contributions are deductible under
section 170 of the Code.
GIFT TAX
REG–100291–00, page 917.
Proposed regulations under section 170 of the Code relate
to the definitions of a guaranteed annuity interest and a uni-
trust interest for purposes of the income, gift, and estate tax
charitable deductions. A public hearing is scheduled for June
29, 2000.
EXCISE TAX
T.D. 8879, page 882.
Final regulations under section 4081 of the Code relate to
kerosene tax. Rev. Ruls. 57-259, 57-499, 73-292, 78-218,
and 86-62 obsolete. Announcement 99-40 obsolete.
ADMINISTRATIVE
Notice 2000–22, page 902.
Information returns; discharges of indebtedness; penal-
ties. The Service will not impose penalties under sections
6721 and 6722 of the Code on certain taxpayers for failure to
file information returns or furnish payee statements under sec-
tion 6050P for discharges of indebtedness occurring before
January 1, 2001. This notice applies only to taxpayers who
were made subject to section 6050P by section 533(a) of the
Ticket to Work and Work Incentives Improvement Act of 1999.
Announcement 2000–35, page 922.
This document contains the annual report to the public con-
cerning Advance Pricing Agreements (APAs) and the APA
program under section 521(b) of the Ticket to Work and
Work Incentives Improvement Act of 1999.
Announcement 2000–36, page 947.
This document contains corrections to final regulations (T.D.
8869, 2000–6 I.R.B. 498) relating to the treatment of cor-
porate subsidiaries of S corporations and interpreting the
rules added to the Code by section 1308 of the Small Busi-
ness Job Protection Act of 1996.
Announcement 2000–37, page 947.
This document contains corrections to final regulations (T.D.
8865, 2000–7 I.R.B. 589) relating to the amortization of
certain intangible property.
Announcement 2000–38, page 948.
This document contains a correction to proposed regula-
tions (REG–100276–97, 2000–8 I.R.B. 682) relating to fi-
nancial asset securitization investment trusts (FASITs) and
real estate mortgage investment conduits (REMICs).
Announcement 2000–40, page 948.
This document contains corrections to proposed regulations
(REG–209601–92, 2000–12 I.R.B. 829) relating to the tax
treatment of sponsorship payments received by exempt or-
ganizations.
Announcement 2000–41, page 949.
This document contains corrections to proposed regulations
(REG–113572–99, 2000–7 I.R.B. 624) relating to qualified
transportation fringe benefits.
Announcement 2000–42, page 949.
This document contains a partial withdrawal of the notice of
proposed rulemaking (PS–6–95 [1996–1 C.B. 859];
REG–209753–95) as it relates to diesel fuel dye injection
systems.

2000–16 I.R.B.April 17, 2000
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Section 42.—Low-Income
Housing Credit
Low-income housing credit; satisfac-
tory bond; “bond factor” amounts for
the period January through March
2000.This ruling announces the monthly
bond factor amounts to be used by tax-
payers who dispose of qualified low-in-
come buildings or interests therein during
the period January through March 2000.
Rev. Rul. 2000–22
In Rev. Rul. 90–60, 1990–2 C.B. 3, the
Internal Revenue Service provided guid-
ance to taxpayers concerning the general
methodology used by the Treasury De-
partment in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Sec-
retary under § 42(j)(6) of the Internal
Revenue Code. It further announced that
the Secretary would publish in the Inter-
nal Revenue Bulletin a table of “bond fac-
tor” amounts for dispositions occurring
during each calendar month.
This revenue ruling provides in Table 1
the bond factor amounts for calculating
the amount of bond considered satisfac-
tory under § 42(j)(6) for dispositions of
qualified low-income buildings or inter-
ests therein during the period January
through March 2000.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
April 17, 20008802000–16 I.R.B.
Table 1
Rev. Rul. 2000–22
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of 1987 1988198919901991199219931994199519961997199819992000
Disposition
Jan’00 30.47 45.13 60.0575.18 77.8881.14 84.5087.8091.1694.7998.62102.80106.78107.43
Feb’0030.47 45.13 60.0575.18 77.6580.89 84.2387.5190.8594.4598.24102.37106.23107.43
Mar’0030.47 45.13 60.0575.18 77.4280.65 83.9787.2390.5594.1397.89101.97105.76107.43
For a list of bond factor amounts ap-
plicable to dispositions occurring during
other calendar years, see the following
revenue rulings: Rev. Rul.98–3, 1998–1
C.B. 248, for dispositions occurring dur-
ing the calendar years 1996 and 1997;
Rev. Rul. 98–13, 1998–1 C.B. 686, for
dispositions occurring during the period
January through March 1998; Rev. Rul.
98–31, 1998–1 C.B. 1269, for disposi-
tions occurring during the period April
through June 1998; Rev. Rul. 98–45,
1998–2 C.B. 364, for dispositions occur-
ring during the period July through Sep-
tember 1998; Rev. Rul. 99–1, 1999–2
I.R.B. 4, for dispositions occurring during
the period October through December
1998; and Rev. Rul. 99–54, 1999–51
I.R.B. 675, for dispositions occurring dur-
ing the calendar year 1999.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Gregory N. Doran of the Office
of Assistant Chief Counsel (Passthroughs
and Special Industries). For further infor-
mation regarding this revenue ruling, con-
tact Mr. Doran on (202) 622-3040 (not a
toll-free call).
Section 412.—Minimum Funding
Standards
Amortization bases; Taxpayer Relief
Act of 1997. This revenue ruling provides
questions and answers relating to the es-
tablishment and maintenance of certain
amortization bases under section 412 of
the Code as amended by section 1521(c)
of the Taxpayer Relief Act of 1997.
Rev. Rul. 2000–20
PURPOSE
This revenue ruling provides questions
and answers relating to the establishment
and maintenance of certain amortization
bases under § 412(b) of the Internal Rev-
enue Code (the “Code”), as amended by §
1521(c) of the Taxpayer Relief Act of
1997 (“TRA ’97”).
BACKGROUND
Section 412 of the Code imposes mini-
mum funding requirements with respect to
defined benefit and money purchase pen-
sion plans. Under § 412(a), a plan will
have satisfied the minimum funding re-
quirements for a plan year if as of the end
of the plan year, the plan does not have an
accumulated funding deficiency in the
funding standard account. Section
412(b)(1) provides that each plan to which
§ 412 applies shall establish and maintain a
funding standard account. Sections
412(b)(2) and (3) provide for charges and
credits to the funding standard account.
Section 412(c)(7) provides a full fund-
ing limitation for defined benefit plans for
purposes of the minimum funding re-
quirements. Section 412(c)(7)(A)(i)(I)
provides that one component of the full
funding limitation is the applicable per-

centage of current liability (including the
expected increase in current liability due
to benefits accruing during the plan year).
Section 412(c)(6)(A) provides for a credit
to the funding standard account for contri-
butions that would be required but for the
full funding limitation.
Prior to TRA ’97, the current liability
component of the full funding limitation
was 150 percent of current liability (in-
cluding the expected increase in current
liability due to benefits accruing during
the plan year), and § 412(c)(7)(D)(iii)
provided that the Secretary may provide
for the treatment under § 412 of contribu-
tions that would be required to be made
under the plan but for the provisions of §
412(c)(7)(A)(i)(I).
Section 1521(c)(1) of TRA ’97 added §
412(b)(2)(E) to the Code to provide that
contributions that would have been re-
quired under § 412 but for the provisions
of § 412(c)(7)(A)(i)(I) are to be amortized
over a 20 year period. Section 1521(c)(3)
of TRA ’97 repealed § 412(c)(7)(D)(iii)
of the Code. Section 1521(d)(1) of TRA
’97 provides that the amendments made
by § 1521 apply to plan years beginning
after December 31, 1998.
Section 1521(d)(2) of TRA ’97 provides
that the unamortized balance (as of the
close of the plan year preceding the plan’s
first plan year beginning in 1999) of any
amortization base established under §
412(c)(7)(D)(iii) of the Code (prior to its
repeal by § 1521(c)(3) of TRA ’97) is
amortized in equal annual installments
(until fully amortized) over a period of
years equal to the excess of (A) 20 years,
over (B) the number of years since the
amortization base was established.
QUESTIONS AND ANSWERS
RELATING TO § 412(b)(2)(E) OF THE
CODE
Q-1. How are contributions that would
have been required under § 412 but for the
provisions of § 412(c)(7)(A)(i)(I) treated?
A-1. In general, for purposes of § 412, an
amortization base is established for con-
tributions that would have been required
under § 412 but for the provisions of §
412(c)(7)(A)(i)(I). The amortization base
is established for the plan year following
the plan year for which the contributions
would have been required under § 412 but
for the provisions of §412(c)(7)(A)(i)(I).
For amortization bases that were estab-
lished for plan years beginning before
January 1, 1999, the amortization period
is 10 years. For amortization bases estab-
lished for plan years beginning after De-
cember 31, 1998, the amortization period
is 20 years. Any such amortization base
is maintained in the same manner as other
amortization bases established under §
412. No corresponding amortization base
is established for purposes of § 404.
Q-2. How are amortization bases de-
scribed in Q&A-1 that were established
for plan years beginning before January 1,
1999, treated for the first plan year begin-
ning after December 31, 1998?
A-2. In general, under § 1521(d)(2) of
TRA ’97, the remaining amortization pe-
riod for any amortization base described in
Q&A-1 that was established for plan years
beginning before January 1, 1999, (“exist-
ing 10-year base”) is increased as of the
first plan year beginning after December
31, 1998, by adding 10 to the number of
years that was otherwise remaining in the
amortization period, provided that the
amortization base has not been combined
with other amortization bases. For the first
plan year beginning after December 31,
1998, the amortization charge for such ex-
isting 10-year base is redetermined as the
amount necessary to amortize the unamor-
tized balance (as of the close of the plan
year preceding the plan’s first plan year be-
ginning in 1999) in equal annual install-
ments (until fully amortized) over this in-
creased amortization period. Thereafter,
these amortization bases are maintained in
the same manner as other amortization
bases established under § 412 of the Code.
Q-3. Are there any special rules with re-
spect to funding methods that do not pro-
vide for amortization bases?
A-3. Yes. If the funding method does not
provide for amortization bases, no amorti-
zation base is established for plan years
beginning after December 31, 1998, for
contributions that would have been re-
quired under § 412 but for the provisions
of § 412(c)(7)(A)(i)(I). Also, except as
provided in Q&A-4, existing 10-year
bases are treated as fully amortized for the
first plan year beginning after December
31, 1998. For purposes of this revenue
ruling, a funding method does not provide
for amortization bases if the funding
method is a spread gain method that does
not use an unfunded liability in determin-
ing the normal cost. A spread gain
method is any funding method that does
not directly calculate an accrued liability.
See Rev. Rul. 81–13, 1981–1 C.B. 229,
for whether a funding method directly
calculates an accrued liability.
Q-4. Is there a transition rule for the first
plan year beginning after December 31,
1998, for plans using a funding method that
does not provide for amortization bases?
A-4. Yes, as an optional transition rule, for
plans using a funding method described in
Q&A-3, any existing 10-year bases may be
continued for the first plan year beginning
after December 31, 1998, but the amortiza-
tion period is increased as described in
Q&A-2. Furthermore, in such a case, a
new 20-year amortization base as described
in Q&A-1 is permitted to be established for
that plan year. However, in any event, if
the transition rule described in this Q&A-4
is used for the first plan year beginning
after December 31, 1998, the existing 10-
year bases (and any amortization base de-
scribed in Q&A-1 established for that plan
year) are treated as fully amortized pur-
suant to Q&A-3 for the next plan year.
DRAFTING INFORMATION
The principal author of this revenue
ruling is James Holland of the Tax Ex-
empt and Government Entities Division.
For further information concerning this
revenue ruling, call (202) 622-6076 be-
tween 2:30 and 3:30 Eastern time (not a
toll free number) Monday through Thurs-
day. Mr. Holland’s number is (202) 622-
6730 (also not a toll free number).
Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes, department
stores. The February 2000 Bureau of
Labor Statistics price indexes are ac-
cepted for use by department stores em-
ploying the retail inventory and last-in,
first-out inventory methods for valuing
inventories for tax years ended on, or with
reference to, February 29, 2000.
Rev. Rul. 2000–21
The following Department Store Inven-
tory Price Indexes for February 2000
were issued by the Bureau of Labor Sta-
2000–16 I.R.B.881April 17, 2000

April 17, 20008822000–16 I.R.B.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsFeb.Feb.from Feb. 1999
19992000to Feb. 2000
1
1. Piece Goods - - - - - - - - - - - - - - - - - - - -496.2502.61.3
2. Domestics and Draperies - - - - - - - - - - - -643.1611.8-4.9
3. Women’s and Children’s Shoes - - - - - - -632.3612.7-3.1
4. Men’s Shoes - - - - - - - - - - - - - - - - - - - -889.8893.00.4
5. Infants’ Wear - - - - - - - - - - - - - - - - - - -619.6648.84.7
6. Women’s Underwear - - - - - - - - - - - - - -565.8577.02.0
7. Women’s Hosiery - - - - - - - - - - - - - - - -320.0330.8 3.4
8. Women’s and Girls’ Accessories - - - - - - -549.6542.1-1.4
9. Women’s Outerwear and Girls’ Wear - - - -380.3381.70.4
10. Men’s Clothing - - - - - - - - - - - - - - - - - -617.4622.60.8
11. Men’s Furnishings - - - - - - - - - - - - - - - -592.2619.24.6
12. Boys’ Clothing and Furnishings - - - - - - -478.3496.2 3.7
13. Jewelry - - - - - - - - - - - - - - - - - - - - - - -983.3973.4-1.0
14. Notions - - - - - - - - - - - - - - - - - - - - - - -741.9763.62.9
15. Toilet Articles and Drugs - - - - - - - - - - - -951.6967.01.6
16. Furniture and Bedding - - - - - - - - - - - - -679.2700.03.1
17. Floor Coverings - - - - - - - - - - - - - - - - -602.7604.00.2
18. Housewares - - - - - - - - - - - - - - - - - - - -808.2787.3-2.6
19. Major Appliances - - - - - - - - - - - - - - - -233.8233.90.0
20. Radio and Television - - - - - - - - - - - - - -69.061.5-10.9
21. Recreation and Education
2
- - - - - - - - - -100.194.2-5.9
22. Home Improvements
2
- - - - - - - - - - - - - -129.8128.1-1.3
23. Auto Accessories
2
- - - - - - - - - - - - - - - -107.7107.3-0.4
Groups 1 - 15: Soft Goods - - - - - - - - - - - - - -590.3593.90.6
Groups 16 - 20: Durable Goods - - - - - - - - - - -455.6444.9-2.3
Groups 21 - 23: Misc. Goods
2
- - - - - - - - - - - -105.5101.3-4.0
Store Total
3
- - - - - - - - - - - - - - - - - - -540.7537.7-0.6
1
Absence of a minus sign before the percentage change in this column
signifies a price increase.
2
Indexes on a January 1986=100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract depart-
ments.
tistics. The indexes are accepted by the
Internal Revenue Service, under
§ 1.472–1(k) of the Income Tax Regula-
tions and Rev. Proc. 86–46, 1986–2 C.B.
739, for appropriate application to inven-
tories of department stores employing the
retail inventory and last-in, first-out in-
ventory methods for tax years ended on,
or with reference to, February 29, 2000.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups - soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food,
liquor, tobacco, and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Alan J. Tomsic of the Office of
Assistant Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue ruling, contact Mr.
Tomsic on (202) 622-4970 (not a toll-free
call).
Section 4081.—Imposition of
Ta x
26 CFR 48.4081–1: Taxable fuel; definitions.
T.D. 8879
Kerosene Tax; Aviation Fuel Tax;
Taxable Fuel Measurement and
Reporting; Tax on Heavy Trucks
and Trailers; Highway Vehicle
Use Tax
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations; conforming
amendments to temporary regulations;
and removal of temporary regulations.

2000–16 I.R.B.883April 17, 2000
SUMMARY: This document contains
final regulations relating to the kerosene
and aviation fuel excise taxes, the tax on
the use of certain highway vehicles, and
the tax on the first retail sale of certain
tractors and truck, trailer, and semitrailer
chassis and bodies (highway vehicles).
The regulations relating to kerosene affect
the tax liability of certain refiners, termi-
nal operators, and persons that sell, buy,
or use kerosene. The regulations relating
to aviation fuel affect certain producers
and retailers of aviation fuel. The regula-
tions relating to the taxes on highway ve-
hicles affect vehicle manufacturers, deal-
ers, and owners.
DATES: Effective Dates: These regula-
tions are effective March 31, 2000.
Applicability Dates: For dates of applic-
ability of these regulations, see
§§48.4052–1(c), 48.4081–1(f),
48.4081–2(f), 48.4081–3(j), 48.4082–2(c),
48.4082–4(d), 48.4082–5(h), 48.4082–6(f),
48.4082–7(f), 48.4101–1(l), 48.4101–2(b),
48.6427–8(f), 48.6427–9(g),
48.6427–10(h), and 48.6427–11(g).
FOR FURTHER INFORMATION CON-
TACT: Frank Boland (202) 622-3130
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information in these
final regulations have been reviewed in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)) and,
pending receipt and evaluation of public
comments, approved by the Office of
Management and Budget under control
number 1545-1418.
The collections of information in these
regulations are in §§48.4052–1,
48.4081–2, 48.4081–3, 48.4081–7,
48.4082–2, 48.4082–6, 48.4082–7,
48.4091–3, 48.4101–1, 48.4101–2,
48.6427–8, 48.6427–9, 48.6427–10, and
48.6427–11. This information is required
to support exempt transactions, claims for
credits and refunds, and to inform con-
sumers of the type of fuel that is being
purchased. The likely respondents are
businesses and other for-profit organiza-
tions.
Comments on the collections of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224.
Comments on the collections of informa-
tion should be received by May 30, 2000.
Comments are specifically requested con-
cerning:
Whether the collections of information
are necessary for the proper performance
of the functions of the Internal Revenue
Service, including whether the informa-
tion will have practical utility;
The accuracy of the estimated burden
associated with the collections of infor-
mation (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
collections of information may be mini-
mized, including through the application
of automated collection techniques or
other forms of information technology;
and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of service to provide informa-
tion.
Estimated total annual reporting and/or
recordkeeping burden: 97,583 hours.
The estimated annual burden per re-
spondent is 17 minutes.
Estimated number of respondents: 346,
080.
Estimated annual frequency of re-
sponses: On occasion.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number assigned by the Office of
Management and Budget.
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
Section 4081 imposes a tax on certain
removals, entries, and sales of taxable
fuel. Before July 1, 1998, taxable fuel
meant gasoline and diesel fuel. As of that
date, however, the definition of taxable
fuel was expanded by the Taxpayer Relief
Act of 1997 (Public Law 105-34, 111
Stat. 788 (the 1997 Act)) to include
kerosene.
Temporary regulations (T.D. 8774,
1998–2 C.B. 90) relating to this change
were published in the Federal Register
on July 1, 1998 (63 F.R. 35799) along
with a notice of proposed rulemaking
(REG–119227–97, 1998–2 C.B. 98)
cross-referencing the temporary regula-
tions (63 F.R. 35893). Written comments
responding to these proposed regulations
were received and a public hearing was
held on November 4, 1998.
Proposed regulations (REG–209753–
95; PS–6–95, 1996–1 C.B. 859) were
published in the Federal Register(61
F.R. 10490) on March 14, 1996, relating
to, among other things, the measurement
of taxable fuel. Written comments re-
sponding to these proposed regulations
were received and a public hearing was
held on June 20, 1996.
After consideration of written comments
and comments made at the public hearings,
the proposed regulations are adopted as re-
vised by this Treasury decision. Comments
and revisions are discussed below. Also, a
partial withdrawal of the March 14, 1996,
proposed regulations (REG–209753–95;
PS–6–95) is published in Announcement
2000–42 on page 949.
Explanation of Provisions
Definition of Kerosene. The temporary
regulations define kerosene as the two
grades of kerosene (No. 1-K and No. 2-K)
described in ASTM specification D 3699
and certain kerosene-type jet fuel. This
ASTM specification describes kerosene
in terms of several properties including
distillation range, sulfur content, and
color. For example, No. 1-K kerosene has
a sulfur content not greater than 400 parts
per million.
Several commentators noted, however,
that there are many liquids that are never
commercially known or sold as kerosene
but that nevertheless might meet the
broad specifications of ASTM specifica-
tion D 3699. These liquids, which are
used in the production of products such as
paints and coatings, usually cost more to
produce than kerosene that is sold for fuel
uses. Because of these differences, the
commentators concluded that it is highly

April 17, 20008842000–16 I.R.B.
unlikely that these liquids would be di-
verted for use in highway vehicles. Thus,
the commentators suggested that these
liquids should not be treated as kerosene.
The final regulations adopt the sugges-
tion of the commentators by excluding
liquids with certain described properties
from the definition of kerosene.
Exemption for Aviation-grade
Kerosene. The 1997 Act provides that
undyed aviation-grade kerosene may be
removed from a terminal tax free if the
kerosene is received by a person that is
registered for purposes of the aviation
fuel tax imposed by section 4091. As a
transitional rule, the temporary regula-
tions provide that tax does not apply to a
removal of aviation-grade kerosene that
will be used as a fuel in an aircraft, even if
the person receiving the kerosene is not
registered.
The IRS Restructuring and Reform Act
of 1998 (Public Law 105-206, 112 Stat.
685 (the 1998 Act)), which was enacted
after publication of the temporary regula-
tions, revised the exemption for aviation-
grade kerosene. Under the 1998 Act, tax
is not imposed on aviation-grade kerosene
that the Secretary determines is destined
for use as a fuel in an aircraft.
Under the final regulations, existing
rules relating to tax-free transactions
within the bulk transfer/terminal system
will continue to apply to aviation-grade
kerosene even if the kerosene will be used
as a fuel in an aircraft. Thus, a sale of avi-
ation-grade kerosene within a pipeline to
an airline for aircraft use may be made tax
free only if the airline is a taxable fuel
registrant. In this regard, the final regula-
tions also reflect Announcement 99–40
(1999–16 I.R.B. 10), which provides a
transitional registration rule for certain
throughputters and kerosene terminal op-
erators.
Removals and entries of undyed avia-
tion-grade kerosene may be made tax free
under the final regulations if (1) the per-
son otherwise liable for tax (such as the
position holder) delivers the kerosene into
the fuel supply tank of its own aircraft or
(2) the kerosene is sold and the buyer cer-
tifies to the person otherwise liable for tax
that the kerosene will be used by the
buyer as a fuel in an aircraft or resold for
such use. Any later sale of the aviation-
grade kerosene will be subject to tax un-
less the subsequent seller receives a simi-
lar certificate from its buyer or delivers
the kerosene into the fuel supply tank of
the buyer’s aircraft. In addition, the IRS
may withdraw the right of a buyer to pro-
vide a certificate in the future if the buyer
uses the aviation-grade kerosene other
than as a fuel in an aircraft.
A commentator noted that airlines often
use a small percentage of their purchases
of aviation-grade kerosene as a fuel in air-
port ground equipment, thus making it
impossible for them to certify that all of
this fuel will be for aircraft use. The
commentator suggested that a buyer
should be allowed to certify that only a
percentage of its purchases will be used as
a fuel in an aircraft. The final regulations
adopt this suggestion. Thus, if an airline
certifies to a position holder that 99 per-
cent of all of its purchases of aviation-
grade kerosene from a certain terminal
will be for use as a fuel in an aircraft, then
the position holder will the liable for the
section 4081 tax on one percent of all its
sales to the airline at that terminal.
A commentator suggested that tax
should not be imposed on the nonbulk re-
moval of aviation-grade kerosene from an
approved terminal if the kerosene is re-
ceived at another approved terminal or is
sold for use in an aircraft outside the
United States. Under the final regula-
tions, both removals may be made tax
free if the proper certification regarding
aircraft use is given by the buyer or the
person otherwise liable for tax delivers
the aviation-grade kerosene into the fuel
supply tank of its own aircraft.
A commentator noted that aviation-
grade kerosene is aviation fuel and thus is
subject to tax under section 4091 when it
is sold by its producer. Section 4092 ex-
empts a sale from the aviation fuel tax if
the buyer is a registered producer or certi-
fies that it will use the fuel in a nontaxable
use such as use other than as a fuel in an
aircraft.
The commentator suggested that if the
section 4081 tax is imposed on the re-
moval of any aviation-grade kerosene be-
cause the buyer of the kerosene does not
certify that it will be used in an aircraft,
then an exemption from the section 4091
tax automatically should apply regardless
of the status of the buyer. Thus, for exam-
ple, if the section 4081 tax is imposed on
a removal of aviation-grade kerosene at
the terminal rack, the section 4091 tax
should not be imposed on any subsequent
sale to an unregistered person that buys
the kerosene for resale for nonaircraft use,
such as in highway vehicles or as heating
oil. The commentator contends that this
suggestion would ease compliance and
administrative burdens by eliminating the
need to certify for section 4091 purposes.
The final regulations do not adopt this
suggestion because section 4092 allows
tax-free sales of aviation fuel only to reg-
istered producers and persons buying for
their own nontaxable use. This sugges-
tion, in contrast, would allow tax-free
sales to resellers that are not producers.
The IRS has published guidance regard-
ing the aviation fuel tax imposed by sec-
tion 4091 in Notice 88–30 (1988–1 C.B.
497), Notice 88–132 (1988–2 C.B. 552),
and Notice 89–38 (1989–1 C.B. 678).
Exemption for Feedstock Purpose.
Under the 1997 Act and the temporary
regulations, tax is not imposed on undyed
kerosene that is received from a pipeline
or vessel by a registered person for the
person’s use as a feedstock; that is, use in
the manufacture or production of any sub-
stance other than gasoline, diesel fuel, or
special fuels referred to in section 4041.
The 1997 Act also provides that, to the
extent provided in regulations, undyed
kerosene may be removed from a terminal
tax free if the kerosene is removed for use
as a feedstock. The temporary regulations
do not implement this latter provision.
However, several commentators sug-
gested that, without the application of this
provision, small feedstock users that buy
kerosene at a terminal rack bear the bur-
den of the tax and then must claim a credit
or refund. This puts the small users at a
competitive disadvantage compared to
larger users that may buy bulk quantities
of kerosene tax free for their facilities that
are connected to a pipeline.
The final regulations adopt the sugges-
tion of the commentators by generally al-
lowing tax-free removals of kerosene
from a terminal if the person receiving the
kerosene is registered and certifies that it
will use the kerosene for a feedstock pur-
pose. The IRS may revoke this person’s
registration if the person uses the
kerosene other than for a feedstock pur-
pose, such as to power machinery in a
factory where paint is produced.
A commentator suggested that the
packaging of kerosene into any container

that is less than 55 gallons should be
treated as a feedstock purpose. This sug-
gestion is not adopted in the final regula-
tions because this activity is not the man-
ufacture or production of a nonfuel
substance.
Exemption for Certain Wholesale Dis-
tributors. The 1997 Act provides that, to
the extent provided in regulations, undyed
kerosene may be removed from a terminal
tax free if the kerosene is received by a
registered wholesale distributor that sells
kerosene exclusively to ultimate vendors
that sell kerosene from a pump that is not
suitable for use in fueling any diesel-pow-
ered highway vehicle or train (a blocked
pump). The temporary regulations do not
provide rules for this provision.
A commentator suggested that the final
regulations should implement this provi-
sion because it would reduce the number
of refund claims that are filed by ultimate
vendors and reduce the costs of the fuel
for these vendors, many of whom are
small businesses. Another commentator
suggested, on the other hand, that the pro-
vision would increase the availability of
untaxed, undyed kerosene and thus in-
crease opportunities for diversion of this
fuel for taxable purposes.
The final regulations do not implement
this provision because Treasury and the
IRS share the concern of the latter com-
mentator. Treasury and the IRS will,
however, continue to monitor the matter
to determine if it is appropriate to provide
rules for the provision at a later date.
Claims Relating to Sales of Kerosene
from Blocked Pumps. Under the 1997
Act, a credit or refund is allowed to a reg-
istered ultimate vendor that sells taxed,
undyed kerosene from a blocked pump.
The temporary regulations define a
blocked pump as a retail fuel pump at a
fixed location that is used to dispense
undyed kerosene for use by the buyer in a
nontaxable use and cannot be used to dis-
pense kerosene directly into the fuel sup-
ply tank of a diesel-powered highway ve-
hicle or train (because, for example, of its
distance from a road surface or train track
or the length of its delivery hose). In ad-
dition, blocked pumps must display a pre-
scribed notice.
Treasury and the IRS received many
comments relating to the definition of
blocked pump. Several commentators
noted that many kerosene pumps are on
an island next to gasoline pumps so that
vehicular access cannot be restricted. Re-
quiring blocked pumps to be on a separate
island would not be practical because
many service stations do not have the
physical space for such an arrangement.
Shortening the delivery hose on these
pumps would not be practical because
doing so would prevent a container from
resting on the ground while it is being
filled, as safety rules require.
Several commentators suggested ex-
panding the definition to include pumps
that are activated by an on-site attendant
before each use and are within the direct
line of sight of the attendant authorizing
the sale to the customer. Other commen-
tators noted that many people who use
kerosene for heating purposes do not buy
it from a retail pump. So that these cus-
tomers could obtain undyed kerosene at a
tax-excluded price, these commentators
suggested that a credit or refund should be
allowed to registered ultimate vendors
that make home deliveries of undyed
kerosene for heating purposes and that
sell kerosene in small containers.
Under the final regulations, a blocked
pump is a pump that, because of the
pump’s physical limitations (for example,
a short hose), cannot be used to fuel a ve-
hicle, or a pump that is locked by the ven-
dor after each sale and unlocked by the
vendor in response to a request by a buyer
for undyed kerosene for use other than as
a fuel in a diesel-powered highway vehi-
cle or train. As a condition to making a
claim with regard to kerosene sold from
this latter type of blocked pump, the ven-
dor must obtain the name and address of
anyone who buys more than five gallons
of kerosene in a single sale. A vendor’s
registration may be revoked if it allows
anyone to fuel a highway vehicle from a
blocked pump.
There is no authority in the Internal
Revenue Code (Code) to allow ultimate
vendor refunds for kerosene solely be-
cause the kerosene is delivered to homes
for heating purposes or is sold in small
containers. Thus, the final regulations do
not contain such a provision.
Claims Relating to Sales of Kerosene
for Blending During Periods of Extreme
Cold. The 1997 Act provides that, to the
extent provided in regulations, a credit or
refund is allowed to a registered ultimate
vendor that sells kerosene for blending
with heating oil to be used during periods
of extreme or unseasonable cold. The
temporary regulations do not provide
rules for this provision.
A commentator suggested that the final
regulations should implement this provision
and define the phrase “period of extreme or
unseasonable cold” as including “all the
days in November through February.”
Under the final regulations, if the IRS
declares an area to be affected by ex-
tremely cold weather conditions, a credit
or refund generally will be allowed to a
registered ultimate vendor that sells
undyed kerosene for blending with diesel
fuel in that affected area if the blended
fuel is to be used for heating purposes. It
is expected that the periods during which
any declaration of extreme cold issued
under this provision will be in effect will
be limited.
Registration of Heavy Vehicle Manu-
facturers and Retailers. The tax on the
sale of heavy vehicles imposed by section
4051 applies to the first retail sale by the
manufacturer, importer, or retailer of a ve-
hicle. The tax is not imposed if a vehicle
is sold for resale or for leasing on a long-
term basis. Under regulations issued in
1988, this tax-free treatment applied only
if both the seller and the buyer were regis-
tered by the IRS. The 1997 Act provides,
however, that the Secretary shall pre-
scribe regulations so that sales between
unregistered parties may be made tax-free
if the buyer states under penalties of per-
jury that the vehicle will be resold. This
provision of the 1997 Act is effective Jan-
uary 1, 1998. The temporary regulations
implementing the provision are effective
on July 1, 1998, the publication date of
the temporary regulations.
Several commentators suggested that the
final regulations should be effective on Jan-
uary 1, 1998, because the commentators
believe that the 1997 Act eliminated the
registration requirement as of that date.
The IRS and Treasury are concerned
that the suggested change might disqual-
ify sales that would have been tax free
under the 1988 regulations. Accordingly,
the final regulations retain the July 1,
1998, effective date. They provide, how-
ever, that sales (including sales between
unregistered parties) that occurred after
December 31, 1997, and before July 1,
1998, and otherwise satisfy the require-
ments of the final regulations may be
2000–16 I.R.B.885April 17, 2000

made tax free.
Measurement of Taxable Fuel. Exist-
ing regulations provide that gallons of
taxable fuel may be measured on the basis
of actual volumetric gallons, gallons ad-
justed to 60 degrees Fahrenheit, or any
other temperature adjustment method ap-
proved by the Commissioner.
The March 14, 1996, proposed regula-
tions proposed to modify this rule so that
taxable fuel would be measured on the
basis of actual volumetric gallons or gal-
lons adjusted to 60 degrees Fahrenheit,
whichever is the basis for measurement
under the position holder’s terminaling
agreement with the terminal operator. A
commentator suggested that measurement
at a particular terminal should be applied
consistently on an annual basis.
Under the final regulations, annual
consistency is required, on a terminal-by-
terminal basis, within each one year pe-
riod beginning on July 1. Thus, a position
holder may use only one of the above de-
scribed bases of measurement with re-
spect to all taxable fuel removed from any
particular terminal during each one year
period.
Highway Use Tax. Section 4481 im-
poses a tax on the use of certain highway
vehicles. A State to which an application
is made to register a highway vehicle gen-
erally must receive from the applicant
proof of payment of this tax. Proof of
payment consists of a receipted Schedule
1 of Form 2290, “Heavy Highway Vehicle
Use Tax Return,” that is returned to the
taxpayer by the IRS after the taxpayer has
paid tax on the vehicle. In most cases, the
Schedule 1 must include the vehicle iden-
tification number (VIN) of each vehicle
for which the taxpayer is reporting tax.
However, existing regulations provide
that a taxpayer reporting tax on more than
21 vehicles need not list the VIN of any
vehicle.
Effective July 1, 2000, the final regula-
tions remove this provision. In addition,
the instructions for Form 2290 will be
changed to require the listing of the VIN
of each vehicle reported. The final regu-
lations also remove several obsolete pro-
visions relating to the highway use tax.
Information Reporting. Section
4101(d) allows the IRS to require infor-
mation reporting by (1) any person regis-
tered under section 4101 and (2) such
other persons as the IRS deems necessary
to administer the taxes on taxable fuel and
aviation fuel.
The IRS is developing an information
reporting program (Excise Summary Ter-
minal Activity Reporting System (ExS-
TARS)) for terminal operators and
pipeline and vessel operators. The IRS
anticipates that ExSTARS will begin later
in 2000.
Under the final regulations, informa-
tion reports to be required by the IRS
under section 4101(d) will cover a one
month period and a report will be due by
the end of the month following the month
to which it relates. As a transitional rule,
reports under the new rules relating to any
month in 2000 will not be due until Feb-
ruary 28, 2001.
Registration of pipeline and vessel op-
erators. Effective April 1, 2001, opera-
tors of pipelines and vessels in the bulk
transfer/terminal system will be required
to be registered by the IRS.
Effect on Other Documents
The following publications are obsolete
as of March 31, 2000:
Rev. Rul. 57–259, 1957–1 C.B. 423.
Rev. Rul. 57–499, 1957–2 C.B. 788.
Rev. Rul. 73–292, 1973–2 C.B. 376.
Rev. Rul. 78–218, 1978–1 C.B. 367.
Rev. Rul. 86–62, 1986–1 C.B. 325.
Announcement 99–40, 1999–16 I.R.B.
10.
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.
It is hereby certified that the collection
of information in these regulations will
not have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that the time required to prepare and sub-
mit the exemption certificates described
in these regulations (many of which are
similar to certificates that are already in
use) is minimal and will not have a signif-
icant impact on those small entities that
choose to provide the certificates. There-
fore, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the
Code, the notices of proposed rulemaking
preceding these regulations were submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on their impact on small busi-
ness.
Drafting Information
The principal author of these regula-
tions is Frank Boland, Office of Assistant
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, under the authority of 26
U.S.C. 7805, 26 CFR Chapter I is
amended as follows:
PART 40–EXCISE TAX PROCEDURAL
REGULATIONS
Paragraph 1. The authority citation for
part 40 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
§40.6011(a)–1 [Amended]
Par. 2. Section 40.6011(a)–1 is
amended as follows:
1. In paragraph (b)(2) introductory
text, the language “Effective January 1,
1994, the” is removed and “The” is added
in its place.
2. In paragraph (b)(2)(v), the language
“and kerosene” is added after “diesel
fuel”.
PART 41–EXCISE TAX ON USE OF
CERTAIN HIGHWAY MOTOR
VEHICLES
Par. 3. The authority citation for part
41 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. Section 41.0–1 is revised to
read as follows:
§41.0–1 Introduction.
The regulations in this part are desig-
nated “Highway Use Tax Regulations.”
The regulations in this part relate to the
tax on the use of certain highway vehicles
imposed by section 4481 and to certain
April 17, 20008862000–16 I.R.B.

associated administrative provisions.
§§41.0–2 and 41.0–3 [Removed]
Par. 5. Sections 41.0–2 and 41.0–3 are
removed.
Par. 6. Section 41.4481–1 is amended
as follows:
1. Paragraphs (a) and (b) are revised.
2. Paragraph (c)(1) introductory text, is
amended by removing the language “tax-
able periods beginning after June 30,
1984,” and adding “a taxable period” in
its place.
3. Paragraph (c)(3) is amended by re-
vising the introductory text.
4. Paragraph (d)(1) is amended by re-
moving from the last sentence the language
“Form 843 (Claim)” and adding “Form
8849 (or such other form as the Commis-
sioner may designate)” in its place.
5. Paragraph (e) introductory text, is
amended by adding the language “section
4481 and” after “The application of”.
The revisions read as follows:
§41.4481–1 Imposition of tax.
(a) In general. Tax is imposed on the use
during a taxable period of any registered
highway motor vehicle that (together with
the semitrailers and trailers customarily
used in connection with highway motor ve-
hicles of the same type as such highway
motor vehicle) has a taxable gross weight
of at least 55,000 pounds.
(b) Rate of tax. For the rate of tax gen-
erally, see section 4481(a). For the rate of
tax for certain vehicles used in logging,
see section 4483(e). For the rate of tax
for certain vehicles base-plated in Canada
or Mexico, see section 4483(f). For a spe-
cial rule for the taxable period in which
the tax terminates, see section 4482(d).
(c) * * *
(3) If the taxable gross weight of a ve-
hicle increases during the month in which
the vehicle is first used in a taxable pe-
riod, the tax for the vehicle for the taxable
period is computed on the basis of the in-
creased weight. If the taxable gross
weight of a vehicle increases after the
month in which the vehicle was first used
in a taxable period, the additional tax lia-
bility, if any, that results from the in-
creased weight is calculated according to
the following formula:
* * * * *
§41.4481–1T [Removed]
Par. 7. Section 41.4481–1T is removed.
Par. 8. In §41.4481–2, paragraph (a)(1)
is revised to read as follows:
§41.4481–2 Persons liable for tax.
(a) * * * (1)(i) A person is liable for the
tax imposed by section 4481 with respect
to the use of a highway motor vehicle in a
taxable period if the vehicle is registered
in the person’s name—
(A) At the time of the first use of the
vehicle in the taxable period;
(B) In the case of a vehicle under a sus-
pension of tax described in
§41.4483–3(a), at the time the use on the
public highways during the taxable period
exceeds 5,000 miles (7,500 miles for agri-
cultural vehicles);
(C) At the time that an increase in the
taxable gross weight of the vehicle results
in an additional tax liability (as computed
under §41.4481–1(c)(3)) if the increase
occurs after the month in which the vehi-
cle was first used in the taxable period; or
(D) At the time of any use during the
taxable period that is after the first use
during the period, but only to the extent
that the tax or any installment payment of
the tax has not previously been paid.
(ii) In any case in which more than one
person is liable for the tax for a taxable
period, the liability of all persons is satis-
fied to the extent that the tax is paid by
any person liable for the tax.
* * * * *
§41.4482(a)–1 [Amended]
Par. 9. Section 41.4482(a)–1 is
amended as follows:
1. Paragraph (a)(2) is amended by re-
moving the language “paragraph (c) of this
section” and adding “§48.4061(a)–1(d) of
this chapter” in its place.
2. Paragraph (c) is removed.
Par. 10. Section 41.4482(b)–1 is
amended as follows:
1. Paragraph (a) is revised.
2. Paragraphs (b), (c), and (d) are re-
moved.
3. Paragraph (e) is redesignated as
paragraph (b) and amended as follows:
a. The heading is revised.
b. In newly designated paragraph
(b)(1), the first sentence is revised and the
second sentence is removed.
c. In newly designated paragraph
(b)(2), the language “paragraph (a)” is re-
moved and “paragraph (b)(1)” is added in
its place.
4. Paragraph (f) is redesignated as
paragraph (c).
5. The undesignated authority citation
at the end of the section is removed.
The revisions read as follows:
§41.4482(b)–1 Definition of taxable gross
weight.
(a) Actual unloaded weight—(1) In
general. Actual unloaded weightmeans
the empty (or tare) weight of the truck,
truck-tractor, or bus, fully equipped for
service.
(2) Trucks and truck-tractors. A truck
or truck-tractor fully equipped for service
includes the body (whether or not de-
signed and adapted primarily for trans-
porting cargo, as for example, concrete
mixers); all accessories; all equipment at-
tached to or carried on such truck or
truck-tractor for use in connection with
the movement of the vehicle by means of
its own motor or for use in the mainte-
nance of the vehicle; and a full comple-
ment of lubricants, fuel, and water. It
does not include the driver, any equip-
ment (not including the body) attached to
or carried on the vehicle for use in han-
dling, protecting, or preserving cargo, or
any special equipment (such as an air
compressor, crane, specialized oilfield
machinery, etc.) mounted on the vehicle
for use on construction jobs, in oilfield
operations, etc.
(3) Buses. A bus fully equipped for ser-
vice includes the body; all accessories; all
equipment attached to or carried on such
bus for use in connection with the move-
ment of the vehicle by means of its own
motor, for use in the maintenance of the
vehicle, or for the accommodation of pas-
sengers or others (such as air conditioning
equipment and sanitation facilities, etc.);
and a full complement of lubricants, fuel,
and water. It does not include the driver.
(b) Determination of taxable gross
weight—(1) In general.The taxable
gross weight of a highway motor vehicle
is the sum of the actual unloaded weight
of the vehicle fully equipped for service,
the actual unloaded weight of any semi-
trailers or trailers fully equipped for ser-
vice customarily used in combination
with the vehicle, and the weight of the
maximum load customarily carried on the
vehicle and on any semitrailers or trailers
customarily used in combination with the
vehicle. * * *
* * * * *
§41.4482(b)–1T [Removed]
2000–16 I.R.B.887April 17, 2000

Par. 11. Section 41.4482(b)–1T is re-
moved.
Par. 12. Section 41.4482(c)–1 is
amended as follows:
1. The section heading is revised.
2. Paragraphs (a), (b), and (d) are re-
vised.
The revisions read as follows:
§41.4482(c)–1 Definition of State, taxable
period, use, and customarily used.
(a) State. Stateincludes any State, any
political subdivision of a State, the Dis-
trict of Columbia, and, to the extent pro-
vided by section 7871, any Indian tribal
government.
(b) Taxable period. For the definition
of taxable period, see section 4482(c).
* * * * *
(d) Customarily used. A semitrailer or
trailer is treated as customarily usedin
connection with a highway motor vehicle
if the vehicle is equipped to tow the semi-
trailer or trailer.
Par. 13. Section 41.4483–1 is revised
to read as follows:
§41.4483–1 State exemption.
Use of a highway motor vehicle by a
State is exempt from the tax imposed by
section 4481. For this purpose, the term
use by a Statemeans the operation by a
State on the public highways in the
United States of any highway motor vehi-
cle, whether or not such highway motor
vehicle is owned by the State.
Par. 14. Section 41.4483–2 is amended
as follows:
1. Paragraph (a) is amended by remov-
ing the language “section 6421(b)(2), as
set forth in”.
2. Paragraph (e) is amended as fol-
lows:
a. Paragraph (e) introductory text, is
amended by removing the language “set
forth in section 6421(b)(2)”.
b. Paragraph (e)(1) is amended by re-
moving the language “(rather than any
different period prescribed in section
6421(b)(2))”.
c. Paragraph (e)(2), first sentence, is
amended by removing the language “(see
section 4263(a))”.
d. Paragraph (e)(2), last sentence, is re-
vised.
3. Paragraph (f) Example (1), penulti-
mate sentence, is amended by removing
the language “(not including any tax on
the transportation of persons imposed by
section 4261)”.
The revision reads as follows:
§41.4483–2 Exemption for certain tran-
sit-type buses.
* * * * *
(e) * * *
(2) * * * In determining the total of
such passenger fare revenue, revenue
from sources such as charter fees, rentals
of property, advertising receipts, etc., is
not taken into account.
* * * * *
§41.4483–3 [Amended]
Par. 15. Section 41.4483–3 is amended
as follows:
1. Paragraph (a)(2) is amended by re-
moving the language “(Federal Heavy Ve-
hicle Use Tax Return)”.
2. Paragraph (b) is amended as fol-
lows:
a. The first sentence is amended by re-
moving the language “shall pay” and
adding “is liable for” in its place.
b. The last two sentences are removed.
3. Paragraph (f) is amended as follows:
a. The second sentence is removed.
b. The last sentence is amended by
adding the language “and
§41.6011(a)–1(a)(3) for a requirement
that certain transferees described in this
paragraph (f) must file a return” after
“suspension from tax”.
§41.4483–5 [Removed]
Par. 16. Section 41.4483–5 is removed.
§41.4484–1 [Removed]
Par. 17. Section 41.4484–1 is removed.
§41.6001–1 [Amended]
Par. 18. Section 41.6001–1 is amended
as follows:
1. Paragraph (a)(6) is amended by re-
moving the language “for taxable periods
after June 30, 1984”.
2. Paragraph (a)(7) is amended as fol-
lows:
a. The first sentence is amended by re-
moving the language “or, for taxable peri-
ods after June 30, 1984,” and adding “or”
in its place.
b. The last sentence is removed.
3. Paragraph (b) is amended by remov-
ing the language “whether he meets” and
adding “whether it meets” in its place.
§41.6001–2 [Amended]
Par. 19. Section 41.6001–2 is amended
as follows:
1. Paragraph (a), second sentence, is
amended by removing the language
“104(b)(5)” and adding “104(b)(4)” in its
place.
2. Paragraph (c)(1)(ii) introductory
text, is amended by removing the lan-
guage “If a receipted” and adding “With
respect to taxable periods beginning be-
fore July 1, 2000, if a receipted” in its
place.
3. Paragraph (c)(1)(iii), first sentence,
is amended by removing the language “If
a Schedule 1” and adding “With respect
to taxable periods beginning before July
1, 2000, if a Schedule 1” in its place.
4. Paragraph (d) is amended as fol-
lows:
a. Example (1), seventh sentence, is
amended by removing the language
“§41.4482(b)–1(e)” and adding
”§41.4482(b)–1” in its place.
5. Example (2), second sentence, is
amended by removing the language
“§41.4482(b)–1(e)” and adding
”§41.4482(b)–1” in its place.
6. Example (4)is removed.
Par. 20. Section 41.6011(a)–1 is re-
vised to read as follows:
§41.6011(a)–1 Returns.
(a) In general. (1) A person that is liable
for tax under §41.4481–2(a)(1)(i)(A), (B),
or (C) must file a return for the taxable pe-
riod with respect to the tax imposed by sec-
tion 4481.
(2) A person that is liable for tax under
§41.4481–2(a)(1)(i)(D) must file a return
for a taxable period with respect to the tax
imposed by section 4481 if the Commis-
sioner notifies the person that the tax for
the taxable period has not been paid in
full.
(3) A transferee of a vehicle that re-
ceives a statement described in the first
sentence of §41.4483–3(f) must file a re-
turn with the statement attached.
(b) Form 2290. The return required
under paragraph (a) of this section is
Form 2290, “Heavy Highway Vehicle Use
Tax Return,” or such other return as the
Commissioner may prescribe. The return
is made in accordance with the instruc-
tions applicable to the form.
Par. 21. Section 41.6071(a)–1 is
amended as follows:
1. Paragraph (a) is revised.
2. Paragraph (b) is removed.
April 17, 20008882000–16 I.R.B.

3. Paragraph (c) is redesignated as
paragraph (b).
4. Newly designated paragraph (b) is
amended by removing the language “(but
in no event earlier than the time pre-
scribed in paragraph (a)(1) of this section
for filing a return)”.
5. Paragraphs (d), (e), and (f) are re-
moved.
The revision reads as follows.
§41.6071(a)–1 Time for filing returns.
(a) In general. Except as provided in
paragraph (b) of this section, a return de-
scribed in §41.6011(a)–1 must be filed by
the last day of the month following the
month in which—
(1) A person becomes liable for tax
under §41.4481–2(a)(1)(i)(A), (B), or (C);
(2) A person that is liable for tax under
§41.4481–2(a)(1)(i)(D) is notified by the
Commissioner that the tax has not been
paid in full; or
(3) A transferee described in
§41.4483–3(f) acquires the vehicle.
* * * * *
§41.6081(a)–1 [Removed]
Par. 22. Section 41.6081(a)–1 is re-
moved.
Par. 23. Section 41.6091–1 is revised
to read as follows:
§41.6091–1 Place for filing returns.
(a) In general. Except as provided in
paragraph (b) of this section, returns must
be filed in accordance with the instruc-
tions applicable to the form on which the
return is made.
(b) Hand-carried returns—(1) Persons
other than corporations. Returns of per-
sons other than corporations that are filed
by hand carrying must be filed with the
Commissioner in the internal revenue dis-
trict in which is located the principal
place of business or legal residence of the
person.
(2) Corporations. Returns of corpora-
tions that are filed by hand carrying must
be filed with the Commissioner in the in-
ternal revenue district in which is located
the principal place of business or princi-
pal office or agency of the corporation.
Par. 24. Section 41.6101–1 is revised
to read as follows:
§41.6101–1 Period covered by returns.
Each return is for a taxable period as
defined in section 4482.
Par. 25. Section 41.6109–1 is revised
to read as follows:
§41.6109–1 Identifying numbers.
Every person required under
§41.6011(a)–1 to make a return must pro-
vide the identifying number required by
the instructions to the form on which the
return is made.
Par. 26. Section 41.6151(a)–1 is re-
vised to read as follows:
§41.6151(a)–1 Time and place for paying
tax.
The tax must be paid at the time pre-
scribed in §41.6071(a)–1 for filing the re-
turn and at the place prescribed in
§41.6091–1 for filing the return.
§§41.6161(a)(1)–1, 41.6302(b)–1, and
41.7805–1 [Removed]
Par. 27. Sections 41.6161(a)(1)–1,
41.6302(b)–1, and 41.7805–1 are re-
moved.
PART 47— [REMOVED]
Par. 28. Part 47 is removed.
PART 48–MANUFACTURERS AND
RETAILERS EXCISE TAXES
Par. 29. The authority citation for part
48 is amended by removing the entries for
sections 48.4081–7 and 48.4081–9(e);
48.4082–6T, 48.4082–7T, and 4082–8T;
48.4101–2; 48.4101–3T; 48.6427–8;
48.6427–9; and 48.6427–10T and
48.6427–11T and adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 48.4052–1 also issued under 26
U.S.C. 4052(g). * * *
Section 48.4081–7 also issued under 26
U.S.C. 4081(e). * * *
Section 48.4082–6 also issued under 26
U.S.C. 4082(d).
Section 48.4082–7 also issued under 26
U.S.C. 4082(d). * * *
Section 48.4101–2 also issued under 26
U.S.C. 6071(a). * * *
Section 48.6427–8 also issued under 26
U.S.C. 6427(m).
Section 48.6427–9 also issued under 26
U.S.C. 6427(m).
Section 48.6427–10 also issued under
26 U.S.C. 6427(m).
Section 48.6427–11 also issued under
26 U.S.C. 6427(m).
Par. 30. The undesignated editorial
note and its authority citation at the end of
the authority citation are removed.
§48.0–2 [Amended]
Par. 31 In §48.0–2, paragraph (a)(2) is
removed and reserved.
§48.4041–21 [Amended]
Par. 32. Section 48.4041–21, paragraph
(c)(1), first sentence, is amended by remov-
ing the language “§48.4082–4(c)(1)
through (c)(4)(i) or (c)(5) through (c)(10).”
and adding “section 4041(a)(3)(B), (b)(1),
(f), (g), or (h).” in its place.
Par. 33. In Subpart H, §48.4052–1 is
added under the undesignated center
heading “Motor Vehicles” to read as fol-
lows:
§48.4052–1 Heavy trucks and trailers;
certification requirement.
(a) In general. Tax is not imposed by
section 4051 on the sale of an article for
resale or leasing in a long-term lease if,
by the time of sale, the seller has in good
faith accepted from the buyer a state-
ment that the buyer executed in good
faith and that is in substantially the same
form, and subject to the same condi-
tions, as the certificate described in
§145.4052–1(a)(6) of this chapter, ex-
cept that the certificate must be signed
under penalties of perjury and need not
refer to Form 637 or include a registra-
tion number.
(b) References to §145.4052–1(a)(2) of
this chapter. References to §145.4052–
1(a)(2) of this chapter appearing in
§145.4052–1 of this chapter apply also to
paragraph (a) of this section.
(c) Effective date. This section is ap-
plicable after June 30, 1998. In addition,
tax is not imposed on a sale occurring
after December 31, 1997, and before July
1, 1998, if the conditions of paragraph (a)
of this section are satisfied.
Par. 34. Section 48.4081–1 is amended
as follows:
1. Paragraph (b) is amended by:
a. Revising the definition of Aviation
gasoline.
b. Removing the definition of Diesel-
powered boat.
c. Adding the definition of Excluded
liquid in alphabetical order.
d. Adding the definition of Kerosene in
alphabetical order.
e. Revising the definition of Rack.
f. Removing the language “(as defined
in §48.4041–8(f))” in the definition of
Removal, first sentence.
g. Removing the language “subject to
the limitations of section 7871, any Indian
2000–16 I.R.B.889April 17, 2000

tribal government.” and adding “to the
extent provided by section 7871, any In-
dian tribal government.” in its place in the
definition of State.
h. Revising the definition of Taxable
fuel.
i. Adding the language “as such” after
“is registered” in the definition of Taxable
fuel registrant.
j. Removing the language “operated by
a taxable fuel registrant if all of the fin-
ished gasoline and diesel fuel (other than
diesel fuel dyed in accordance with
§48.4082–1(b))” and adding “where fin-
ished gasoline, undyed diesel fuel, or
undyed kerosene is stored if the facility is
operated by a taxable fuel registrant and
all such taxable fuel” in its place in the
definition of Terminal, last sentence.
2. Paragraph (c)(1)(i) introductory
text, is amended by removing the lan-
guage “and (c)(iii)” and adding “and
(c)(1)(iii)” in its place.
3. Paragraph (c)(1)(i)(A) is amended
by adding the language “(other than tax-
able fuel for which a credit or payment
has been allowed)” after “4081(a)”.
4. Paragraphs (c)(2) and (d) are re-
vised.
5. Paragraphs (e) and (f) are added.
The revisions and additions read as fol-
lows:
§48.4081–1 Taxable fuel; definitions.
* * * * *
(b) * * *
Aviation gasolinemeans all special
grades of gasoline that are suitable for use
in aviation reciprocating engines and cov-
ered by ASTM specification D 910 or
military specification MIL-G-5572. For
availability of ASTM and military specifi-
cations, see paragraph (d) of this section.
* * * * *
Excluded liquidmeans any liquid
that—
(1) Contains less than four percent nor-
mal paraffins; or
(2) Has a—
(i) Distillation range of 125% F. or less;
(ii) Sulfur content of 10 ppm or less;
and
(iii) Minimum color of +27 Saybolt.
* * * * *
Kerosenemeans any liquid that meets
the specifications for kerosene or would
meet those specifications but for the pres-
ence in the liquid of a dye of the type de-
scribed in §48.4082–1(b). A liquid meets
the specifications for kerosene if it is one
of the two grades of kerosene (No. 1-K
and No. 2-K) covered by ASTM specifi-
cation D 3699, or kerosene-type jet fuel
covered by ASTM specification D 1655
or military specification MIL-DTL-
5624T (Grade JP-5) or MIL-DTL-83133E
(Grade JP-8). For availability of ASTM
and military specifications, see paragraph
(d) of this section. However, the term
does not include excluded liquid.
* * * * *
Rackmeans a mechanism capable of
delivering taxable fuel into a means of
transport other than a pipeline or vessel.
* * * * *
Taxable fuelmeans gasoline, diesel
fuel, and kerosene.
* * * * *
(c) * * *
(2) Diesel fuel—(i) In general. Except
as provided in paragraph (c)(2)(ii) of this
section, diesel fuelmeans any liquid that,
without further processing or blending, is
suitable for use as a fuel in a diesel-pow-
ered highway vehicle or diesel-powered
train.
(ii) Exclusion. Diesel fueldoes not in-
clude gasoline, kerosene, excluded liquid,
No. 5 and No. 6 fuel oils covered by
ASTM specification D 396, or F-76 (Fuel
Naval Distillate) covered by military
specification MIL-F-16884. For avail-
ability of ASTM and military specifica-
tions, see paragraph (d) of this section.
* * * * *
(d) ASTM and military specifications.
ASTM specifications may be obtained
from the American Society for Testing
and Materials, 100 Barr Harbor Drive,
West Conshohocken, PA 19428. Military
specifications may be obtained from the
Standardization Document Order Desk,
Building 4, Section D, 700 Robbins Av-
enue, Philadelphia, PA 19111.
(e) Other definitions. For other defini-
tions relating to taxable fuel, see
§§48.4081–6(b), 48.4082–5(b), 48.4082–
6(b), 48.4082–7(b), 48.4101–1(b),
48.6427–9(b), 48.6427–10(b), and
48.6427–11(b).
(f) Effective date. (1) Except as pro-
vided in paragraph (f)(2) of this section,
this section is applicable after December
31, 1993.
(2) In paragraph (b) of this section, the
definition of aviation gasoline and the
third sentence in the definition of terminal
are applicable after January 1, 1998, and
the definitions of kerosene, excluded liq-
uid, and taxable fuel are applicable after
June 30, 1998. Paragraph (c)(2) of this
section is applicable after December 31,
1997.
§48.4081–1T [Removed]
Par. 35. Section 48.4081-1T is re-
moved.
Par. 36. Section 48.4081-2 is amended
as follows:
1. Paragraph (b) is amended by remov-
ing the language “Except as provided in
§48.4081-4 (relating to gasoline blend-
stocks) and §48.4082-1 (relating to dyed
diesel fuel), tax” and adding “Tax” in its
place.
2. Paragraph (c)(3) is amended by
adding the language “or kerosene” after
“diesel fuel” each place it appears.
3. Paragraph (e) is revised.
4. Paragraph (f) is added.
The addition and revision read as fol-
lows:
§48.4081-2 Taxable fuel; tax on removal
at a terminal rack.
* * * * *
(e) Exemptions. For exemptions from
the tax imposed under this section, see
§§48.4081-4 (relating to gasoline blend-
stocks), 48.4082-1 (relating to dyed diesel
fuel and dyed kerosene), 48.4082-5 (relat-
ing to diesel fuel and kerosene used in
Alaska), 48.4082-6 (relating to aviation-
grade kerosene), and 48.4082-7 (relating
to kerosene used for a feedstock purpose).
(f) Effective date. This section is ap-
plicable after December 31, 1993.
Par. 37. Section 48.4081-3 is amended
as follows:
1. Paragraph (a) is amended by remov-
ing the last sentence.
2. Paragraph (b)(1) is amended as fol-
lows:
a. In the introductory text, the lan-
guage “Except as provided in paragraph
(b)(2) of this section (relating to an ex-
emption for certain refineries), §48.4081-
4 (relating to gasoline blendstocks), and
§48.4082-1 (relating to dyed diesel fuel),
tax” is removed and “Tax” is added in its
place.
b. In paragraph (b)(1)(i), the language
“of taxable fuel” is added after “A re-
moval”.
c. In paragraph (b)(1)(ii), the language
“of taxable fuel” is added after “A re-
April 17, 20008902000–16 I.R.B.

moval”.
d. In paragraph (b)(1)(iii), third sen-
tence, the language “§40.6302(c)-1(e)(4)”
is removed and “§40.6302(c)-1(f)(4)” is
added in its place.
3. In paragraph (c)(1) introductory
text, the language “Except as provided in
§48.4081-4 (relating to gasoline blend-
stocks) and §48.4082-1 (relating to dyed
diesel fuel), a tax” is removed and “Tax”
is added in its place.
4. In paragraph (d)(1), the language “A
tax is imposed” is removed and “Tax is
imposed” is added in its place.
5. In paragraph (e)(1) introductory
text, the language “Except as provided in
§48.4081-4 (relating to gasoline blend-
stocks) and §48.4082-1 (relating to dyed
diesel fuel), a tax” is removed and “Tax”
is added in its place.
6. In paragraph (f)(1), the language
“Except as provided in paragraph (f)(2) of
this section and §48.4082-1 (relating to
dyed diesel fuel), a tax” is removed and
“Tax” is added in its place.
7. Paragraph (i) is revised.
8. Paragraph (j) is added.
The revision and addition read as fol-
lows:
§48.4081-3 Taxable fuel; taxable events
other than removal at the terminal rack.
* * * * *
(i) Exemptions. For exemptions from
the taxes imposed under this section, see
§§48.4081-4 (relating to gasoline blend-
stocks), 48.4082-1 (relating to dyed diesel
fuel and dyed kerosene), 48.4082–5 (re-
lating to diesel fuel and kerosene used in
Alaska), 48.4082-6 (relating to aviation-
grade kerosene), and 48.4082–7 (relating
to kerosene used for a feedstock purpose).
(j) Effective date. This section is ap-
plicable January 1, 1994.
Par. 38. In §48.4081–6, paragraph
(b)(3) is revised to read as follows:
§48.4081–6 Gasoline; gasohol.
* * * * *
(b) * * *
(3) Gasohol blender. Gasohol blender
means any person that regularly produces
gasohol outside of the bulk transfer/termi-
nal system for sale or use in its trade or
business.
* * * * *
§48.4081–7 [Amended]
Par. 39. Section 48.4081–7 is amended
as follows:
1. In paragraph (c)(2), First Taxpayer’s
Report, the following language is re-
moved:
“7.
Location of IRS service center where
this report is filed”
2. In paragraph (c)(4)(v), the language
“gasoline” is removed each place it ap-
pears and “taxable fuel” is added in its
place.
3. In paragraph (f) Example 1, the lan-
guage “gasoline registrant” is removed
and “taxable fuel registrant” is added in
its place in the following locations:
a. Paragraph (i), first sentence.
b. Paragraph (i), second sentence.
c. Paragraph (ii), first sentence.
Par. 40. In §48.4081–8, paragraph (a)
is revised to read as follows:
§48.4081–8 Taxable fuel; measurement.
(a) In general. Volumes of taxable fuel
may be measured on the basis of actual
volumetric gallons or gallons adjusted to
60 degrees Fahrenheit. However, begin-
ning July 1, 2000, for each period from
July 1 through the following June 30—
(1) A person liable for the tax on re-
moval may use only one of the two bases
of measurement with respect to all taxable
fuel removed during the period from any
particular terminal, refinery, or blending
facility;
(2) A person liable for the tax on entry
may use only one of the two bases of
measurement with respect to all taxable
fuel entered into the United States during
the period at any particular point of entry;
and
(3) A person liable for the tax on sale
may use only one of the two bases of
measurement with respect to all taxable
fuel sold during the period to any particu-
lar buyer.
* * * * *
§48.4081–9 [Removed]
Par. 41. Section 48.4081–9 is removed.
Par. 42. Section 48.4082–1 is amended
as follows:
1. The section heading is revised.
2. In paragraph (a) introductory text,
the language “or kerosene” is added after
“diesel fuel”.
3. In paragraph (a)(3), the language “or
kerosene” is added after “diesel fuel”.
4. In paragraph (b), the introductory
text is revised.
5. In paragraph (b)(1), the language
“or kerosene” is added after “diesel fuel”.
The revisions read as follows:
§48.4082–1 Diesel fuel and kerosene; ex-
emption for dyed fuel.
* * * * *
(b) * * * Diesel fuel or kerosene satis-
fies the dyeing requirement of this para-
graph (b) only if the diesel fuel or
kerosene contains—
* * * * *
Par. 43. Sections 48.4082–2 and
48.4082–3 are revised to read as follows:
§48.4082–2 Diesel fuel and kerosene; no-
tice required for dyed fuel.
(a) In general. A legible and conspicu-
ous notice stating “DYED DIESEL FUEL,
NONTAXABLE USE ONLY, PENALTY
FOR TAXABLE USE“ must be posted by
a seller on any retail pump or other deliv-
ery facility where it sells dyed diesel fuel
for use by its buyer. A legible and con-
spicuous notice stating “DYED
KEROSENE, NONTAXABLE USE ONLY,
PENALTY FOR TAXABLE USE” must be
posted by a seller on any retail pump or
other delivery facility where it sells dyed
kerosene for use by its buyer. Any seller
that fails to post the required notice on
any retail pump or other delivery facility
where it sells dyed fuel is, for purposes of
the penalty imposed by section 6715, pre-
sumed to know that the fuel will not be
used for a nontaxable use.
(b) Cross reference; terminal
operators. For the requirement that ter-
minal operators provide a notice with re-
spect to dyed fuel, see §48.4101–1(h)(3)
(relating to terms and conditions of regis-
tration for terminal operators).
(c) Effective date. This section is ap-
plicable with respect to diesel fuel after
December 31, 1993, and with respect to
kerosene after June 30, 1998.
§48.4082–3 Diesel fuel and kerosene; vi-
sual inspection devices.[Reserved]
Par. 44. Section 48.4082–4 is amended
as follows:
1. The section heading is revised.
2. Paragraph (a)(1) is revised.
3. Paragraph (a)(2)(i) is amended by
removing the language “or boat”.
4. Paragraphs (b) heading and (b)(1)
are revised.
5. Paragraph (c) is amended by:
a. Removing paragraphs (c)(4) and
(c)(10);
b. Redesignating paragraphs (c)(5),
(c)(6), (c)(7), (c)(8), and (c)(9) as para-
2000–16 I.R.B.891April 17, 2000

graphs (c)(4), (c)(5), (c)(6), (c)(7), and
(c)(8), respectively.
c. Adding the language “or” at the end
of newly designated paragraph (c)(7).
d. Removing the language “highway;
or” at the end of newly designated para-
graph (c)(8) and adding “highway.” in its
place.
6. Paragraph (d) is revised.
The revisions read as follows:
§48.4082–4 Diesel fuel and kerosene;
back-up tax.
(a) Imposition of tax—(1) In general.
Tax is imposed by section 4041 on the de-
livery into the fuel supply tank of the
propulsion engine of a diesel-powered
highway vehicle (other than a diesel-pow-
ered bus) of—
(i) Any diesel fuel or kerosene on
which tax has not been imposed by sec-
tion 4081;
(ii) Any diesel fuel or kerosene for
which a credit or payment has been al-
lowed under section 6427; or
(iii) Any liquid (other than taxable fuel)
for use as fuel.
* * * * *
(b) Tax on diesel fuel and kerosene;
buses and trains—(1) In general. Tax is
imposed by section 4041 on the delivery
into the fuel supply tank of the propulsion
engine of a diesel-powered bus or a
diesel-powered train of—
(i) Any diesel fuel or kerosene on
which tax has not been imposed by sec-
tion 4081;
(ii) Any diesel fuel or kerosene for
which a credit or payment has been al-
lowed under section 6427; or
(iii) Any liquid (other than taxable fuel)
for use as fuel.
* * * * *
(d) Effective date. This section is ap-
plicable after December 31, 1993, except
that references to kerosene are applicable
after June 30, 1998.
Par. 45. Section 48.4082–5 is amended
as follows:
1. The section heading is revised.
2. Paragraph (a) is amended by adding
“or kerosene” after “diesel fuel”.
3. Paragraph (b), definition of Exempt
area of Alaska, is amended by removing
the language “Clear” and adding “Clean”
in its place.
4. Paragraphs (b), (c), (d), and (g) are
amended by adding “or kerosene” after
“diesel fuel” in the following locations:
a. Paragraph (b), definition of Quali-
fied dealer, paragraph (1).
b. Paragraph (c) introductory text.
c. Paragraph (c)(3).
d. Paragraph (d)(1) introductory text.
e. Paragraph (d)(2).
f. Paragraph (g).
5. Paragraph (h), first sentence, is re-
vised.
The revisions read as follows:
§48.4082–5 Diesel fuel and kerosene;
Alaska.
* * * * *
(h) Effective date. This section is ap-
plicable with respect to diesel fuel re-
moved or entered after December 31,
1996, and with respect to kerosene re-
moved or entered after June 30, 1998. * *
*
Par. 46. Sections 48.4082–6 and
48.4082–7 are added to read as follows:
§48.4082–6 Kerosene; exemption for avi-
ation-grade kerosene.
(a) Overview.This section prescribes
the conditions under which tax does not
apply to the removal or entry of aviation-
grade kerosene that is destined for use as
a fuel in an aircraft.
(b) Definition. For purposes of this
section, aviation-grade kerosenemeans
kerosene-type jet fuel covered by ASTM
specification D 1655 or military specifi-
cation MIL-DTL-5624T (Grade JP-5) or
MIL-DTL-83133E (Grade JP-8). For
availability of ASTM and military specifi-
cations, see §48.4081–1(d).
(c) Exemption for certain removals and
entries. Tax is not imposed under
§48.4081–2(b), 48.4081–3(b)(1)(ii), or
48.4081–3(c)(1)(ii) on the removal or
entry of aviation-grade kerosene if—
(1) The person otherwise liable for tax
is a taxable fuel registrant;
(2) In the case of a removal from a ter-
minal, the terminal is an approved termi-
nal; and
(3)(i) The person otherwise liable for
tax delivers the kerosene into the fuel sup-
ply tank of an aircraft and this delivery is
not in connection with a sale; or
(ii) The kerosene is sold for use as a
fuel in an aircraft and, at the time of the
sale, the person otherwise liable for tax
has an unexpired certificate (described in
paragraph (e) of this section) from the
buyer and has no reason to believe any in-
formation in the certificate is false.
(d) Certain later sales—(1) In general.
Paragraph (c) of this section does not
apply with respect to kerosene that is sold
as described in paragraph (c)(3)(ii) of this
section if there is a later disqualifying sale
of the kerosene. A later disqualifying sale
is any later sale other than a later sale—
(i) By a person that, at the time of the
sale, has an unexpired certificate (de-
scribed in paragraph (e) of this section)
from the buyer and has no reason to be-
lieve that any information in the certifi-
cate is false; or
(ii) In connection with the delivery of
the kerosene into the fuel supply tank of
an aircraft.
(2) Imposition of tax; liability for tax.
Notwithstanding §§48.4081–2 and
48.4081–3, in any case in which para-
graph (d)(1) of this section applies, tax is
imposed with respect to that kerosene at
the time of the first later disqualifying
sale and the seller in that sale is liable for
the tax.
(3) Rate of tax. For the rate of tax, see
section 4081.
(e) Certificate—(1) In general. The
certificate described in this paragraph (e)
is a statement by a buyer that is signed
under penalties of perjury by a person
with authority to bind the buyer, is in sub-
stantially the same form as the model cer-
tificate provided in paragraph (e)(3) of
this section, and contains all information
necessary to complete the model certifi-
cate. A new certificate or notice that the
current certificate is invalid must be given
if any information in the current certifi-
cate changes. The certificate may be in-
cluded as part of any business records
normally used to document a sale. The
certificate expires on the earliest of the
following dates:
(i) The date one year after the effective
date of the certificate (which may be no
earlier than the date it is signed).
(ii) The date the buyer provides the
seller a new certificate or notice that the
current certificate is invalid.
(iii) The date the Internal Revenue Ser-
vice or the buyer notifies the seller that
the buyer’s right to provide a certificate
has been withdrawn.
(2) Withdrawal of the right to provide a
certificate. The Internal Revenue Service
may withdraw the right of a buyer of avia-
tion-grade kerosene to provide a certifi-
cate under this section if the buyer uses
the aviation–grade kerosene to which a
April 17, 20008922000–16 I.R.B.

certificate relates other than as a fuel in an
aircraft or sells the kerosene without first
obtaining a certificate from its buyer. The
Internal Revenue Service may notify any
seller to whom the buyer has provided a
certificate that the buyer’s right to provide
a certificate has been withdrawn.
(3)Model certificate.
2000–16 I.R.B.893April 17, 2000
CERTIFICATE OF PERSON BUYING AVIATION-GRADE KEROSENE FOR USE AS A FUEL IN AN AIRCRAFT
(To support tax-free removals and entries of aviation-grade kerosene under section 4082 of the Internal Revenue Code.)
(Buyer) certifies the following under penalties of perjury:
Name of Buyer
The aviation-grade kerosene to which this certificate applies will be used by Buyer as a fuel in an aircraft or resold by Buyer for
that use.
This certificate applies to percent of Buyer’s purchases from (name, address, and em-
ployer identification number of seller) as follows (complete as applicable):
1. A single purchase on invoice or delivery ticket number .
2. All purchases between (effective date) and (expiration date) (period not to exceed one year
after the effective date) under account or order number(s) . If this certificate applies only to Buyer’s purchases
for certain locations, check here and list the locations.
Buyer is buying the kerosene for (check either or both as applicable):
Buyer’s use as a fuel in an aircraft.
Resale for use as a fuel in an aircraft.
Buyer will provide a new certificate to the seller if any information in this certificate changes.
If Buyer sells the aviation-grade kerosene to which this certificate relates and does not deliver it into the fuel supply tank of an air-
craft, Buyer will be liable for tax unless Buyer obtains a certificate from its buyer stating that the aviation-grade kerosene will be
used as a fuel in an aircraft.
If Buyer violates the terms of this certificate, the Internal Revenue Service may withdraw Buyer’s right to provide a certificate.
Buyer has not been notified by the Internal Revenue Service that its right to provide a certificate has been withdrawn.
The fraudulent use of this certificate may subject Buyer and all parties making any fraudulent use of this certificate to a fine or
imprisonment, or both, together with the costs of prosecution.
Printed or typed name of person signing
Title of person signing
Employer identification number
Address of Buyer
Signature and date signed
(f) Effective date. This section is ap-
plicable after March 30, 2000, except that
paragraph (d) of this section is applicable
after June 30, 2000.
§48.4082–7 Kerosene; exemption for
feedstock purposes.
(a) Overview. This section prescribes
the conditions under which tax does not
apply to the removal or entry of kerosene
for use for a feedstock purpose.
(b) Definitions. The following defini-
tions apply to this section:
Feedstock purposemeans the use of
kerosene for nonfuel purposes in the man-
ufacture or production of any substance
other than gasoline, diesel fuel, or special
fuels referred to in section 4041. Thus,
for example, kerosene is used for a feed-
stock purpose when it is used as an ingre-
dient in the production of paint and is not
used for a feedstock purpose when it is
used to power machinery at a factory
where paint is produced.
Feedstock usermeans a person that
uses kerosene for a feedstock purpose.
Registered feedstock user means a
feedstock user that is—
(1) Registered under section 4101 as a
feedstock user; or
(2) With respect to removals and en-
tries before October 1, 2000, a taxable
fuel registrant.
(c) Exemption for removals and entries.
Tax is not imposed on the removal or
entry of kerosene if—
(1) The person otherwise liable for tax
is a taxable fuel registrant;
(2) In the case of a removal from a ter-
minal, the terminal is an approved termi-
nal; and
(3)(i) The person otherwise liable for
tax uses the kerosene for a feedstock pur-
pose; or
(ii) The kerosene is sold for use by the
buyer for a feedstock purpose and, at the

time of the sale, the person otherwise liable
for tax has an unexpired certificate (de-
scribed in paragraph (e) of this section)
from the buyer and has no reason to believe
any information in the certificate is false.
(d) Later sale—(1) In general. Para-
graph (c) of this section does not apply
with respect to kerosene that is sold as de-
scribed in paragraph (c)(3)(ii) of this sec-
tion if the buyer in that sale (the certifying
buyer) sells the kerosene.
(2)Imposition of tax; liability for tax.
Notwithstanding §§48.4081–2 and
48.4081–3, in any case in which paragraph
(d)(1) of this section applies, tax with re-
spect to that kerosene is imposed at the
time of the sale by the certifying buyer and
the certifying buyer is liable for the tax.
(3) Rate of tax. For the rate of tax, see
section 4081.
(e) Certificate—(1) In general. The
certificate described in this paragraph (e)
is a statement by a buyer that is signed
under penalties of perjury by a person
with authority to bind the buyer, is in sub-
stantially the same form as the model cer-
tificate provided in paragraph (e)(2) of
this section, and contains all information
necessary to complete the model certifi-
cate. A new certificate or notice that the
current certificate is invalid must be given
if any information in the current certifi-
cate changes. The certificate may be in-
cluded as part of any business records
normally used to document a sale. The
certificate expires on the earliest of the
following dates:
(i) The date one year after the effective
date of the certificate (which may be no
earlier than the date it is signed).
(ii) The date the buyer provides the
seller a new certificate or notice that the
current certificate is invalid.
(iii) The date the seller is notified by
the Internal Revenue Service or the buyer
that the buyer’s registration has been re-
voked or suspended.
(2) Model certificate.
April 17, 20008942000–16 I.R.B.
CERTIFICATE OF REGISTERED
FEEDSTOCK USER
(To support tax-free removals and entries of kerosene under section 4082 of the Internal Revenue Code.)
(Buyer) certifies the following under penalties of perjury:
Name of Buyer
Buyer is a registered feedstock user with registration number . Buyer’s registration has not been revoked or
suspended.
The kerosene to which this certificate applies will be used by Buyer for a feedstock purpose.
This certificate applies to percent of Buyer’s purchases from (name, address, and
employer identification number of seller as follows (complete as applicable):
1. A single purchase on invoice or delivery ticket number .
2. All purchases between (effective date) and (expiration date) (period not to exceed one
year after the effective date) under account or order number(s) . If this certificate applies only to Buyer’s pur-
chases for certain locations, check here and list the locations.
If Buyer sells the kerosene to which this certificate relates, Buyer will be liable for tax on that sale.
Buyer will provide a new certificate to the seller if any information in this certificate changes.
If Buyer violates the terms of this certificate, the Internal Revenue Service may revoke Buyer’s registration.
Buyer understands that the fraudulent use of this certificate may subject Buyer and all parties making any fraudulent use of this
certificate to a fine or imprisonment, or both, together with the costs of prosecution.
Printed or typed name of person signing
Title of person signing
Employer identification number
Address of Buyer
Signature and date signed

(f) Effective date. This section is ap-
plicable after March 30, 2000, except that
paragraph (d) of this section is applicable
after June 30, 2000.
§§48.4082–6T, 48.4082–7T, 48.4082–8T,
48.4082–9T, and 48.4082–10T
[Removed]
Par. 47. Sections 48.4082–6T, 48.4082–
7T, 48.4082–8T, 48.4082–9T, and
48.4082–10T are removed.
Par. 48. Section 48.4083–1 is amended
as follows:
1. In paragraph (c)(2), first sentence,
the language “vehicle, train, or boat” is
removed and “vehicle or train” is added in
its place.
2. Paragraph (d) is revised.
The revision reads as follows:
§48.4083–1 Taxable fuel; administrative
authority.
* * * * *
(d) Refusal to submit to inspection. For
the penalty for any refusal to permit an
entry or inspection authorized by this sec-
tion, see section 4083(c)(3). This penalty
is in addition to any tax that may be im-
posed by section 4041 or 4081 and any
penalty that may be imposed by section
6715.
* * * * *
§48.4091–3T [Redesignated as §48.4091
–3] §48.4091–3 [Amended]
Par. 49. Section 48.4091–3T is redes-
ignated as §48.4091–3 and the language
“(temporary)” is removed from the sec-
tion heading.
Par. 50. Section 48.4101–1 is amended
as follows:
1. The section heading is revised.
2. Paragraph (a)(1) is amended by re-
moving the language “registered ultimate
vendors of diesel fuel” and adding “cer-
tain ultimate vendors of diesel fuel and
kerosene” in its place.
3. Paragraph (a)(2) is amended by
adding a sentence to the end of the para-
graph.
4. Paragraph (a)(6) is added.
5. Paragraphs (b)(7), (b)(8), and (b)(9)
are added.
6. Paragraph (c)(1) is revised.
7. Paragraph (d) is revised.
8. Paragraph (f)(1)(i) heading is re-
vised.
9. Paragraph (f)(1)(ii) heading and in-
troductory text are revised.
10. Paragraph (h)(1)(iii) is amended by
removing the language “and
§48.4101–2”.
11. Paragraph (h)(2)(iii) is revised.
12. Paragraph (h)(2)(iv) is added.
13. Paragraph (h)(3)(i) is revised.
14. Paragraph (h)(3)(ii) is amended by
adding “or kerosene” after “diesel fuel” in
the heading and the introductory text.
15. Paragraph (h)(3)(v) is amended by
adding “or kerosene” after “diesel fuel”
each place it appears.
16. Paragraphs (i)(2)(ii) and (i)(2)(iii)
are amended by removing the language
“vendor” and adding “vendor or an ulti-
mate vendor (blocked pump)” in its
place.
17. Paragraph (k) is amended by
adding a sentence to the end of the para-
graph.
18. Paragraph (l)(2) is amended by
adding the language “,except that para-
graphs (c)(1)(iii) and (c)(1)(vi) of this
section are applicable after March 31,
2001” after “January 1, 1995”.
19. Paragraph (l)(4) is added.
The revisions and additions read as fol-
lows:
§48.4101–1 Taxable fuel; registration.
(a) * * *
(2) * * * However, the United States is
treated as registered under section 4101.
* * * * *
(6)(i) A person is treated as a taxable
fuel registrant if on June 30, 1998, the
person—
(A) Is an enterer, refiner, terminal oper-
ator, or throughputter with respect to
kerosene and is registered under section
4101 as a producer or importer of aviation
fuel;
(B) Operates one or more terminals that
store kerosene (and no other type of tax-
able fuel); or
(C) Is a commercial airline, an operator
of aircraft in noncommercial aviation, or
a fixed base operator and is also a position
holder with respect to kerosene.
(ii) A person treated as registered under
paragraph (a)(6)(i) of this section is
treated as registered from July 1, 1998,
until the earlier of—
(A) The date of a subsequent denial of
an application for registration under para-
graph (g)(2) of this section;
(B) The effective date of a subsequent
registration issued under paragraph (g)(3)
of this section;
(C) The effective date of a subsequent
revocation or suspension of registration
under paragraph (i) of this section; or
(D) July 1, 1999.
(b) * * *
(7) Pipeline operator.Apipeline oper-
atoris any person that operates a pipeline
within the bulk transfer/terminal system.
(8) Vessel operator. Avessel operator
is any person that operates a vessel within
the bulk transfer/terminal system. How-
ever, for purposes of this definition, ves-
seldoes not include a deep draft ocean-
going vessel (as defined in
§48.4042–3(a)).
(9) Other definitions. For other defini-
tions relating to taxable fuel, see
§§48.4081–1, 48.4081–6(b), 48.4082–5(b),
48.4082–6(b), 48.4082–7(b), 48.6427–
9(b), 48.6427–10(b), and 48.6427–11(b).
(c) * * * (1) In general. A person is re-
quired to be registered under section 4101
if the person is–
(i) A blender;
(ii) An enterer;
(iii) A pipeline operator;
(iv) A position holder;
(v) A terminal operator; or
(vi) A vessel operator.
* * * * *
(d) Persons that may, but are not re-
quired to, be registered. A person may,
but is not required to, be registered under
section 4101 if the person is—
(1) A feedstock user;
(2) A gasohol blender;
(3) An industrial user;
(4) A throughputter that is not a posi-
tion holder;
(5) An ultimate vendor; or
(6) An ultimate vendor (blocked
pump).
* * * * *
(f) * * * (1) * * * (i) Persons other than
ultimate vendors, pipeline operators, and
vessel operators. * * *
* * * * *
(ii) Ultimate vendors, pipeline opera-
tors, and vessel operators. The district
director will register an applicant as an
ultimate vendor, ultimate vendor
(blocked pump), pipeline operator, or
vessel operator only if the district direc-
tor—
* * * * *
(h) * * *
(2) * * *
(iii) Make any false statement on, or vi-
olate the terms of, any certificate given to
2000–16 I.R.B.895April 17, 2000

another person to support an exemption
from, or a reduced rate of, the tax im-
posed by section 4081; or
(iv) In the case of an ultimate vendor
(blocked pump), deliver kerosene (or
allow kerosene to be delivered) into the
fuel supply tank of a diesel-powered high-
way vehicle or diesel-powered train from
a blocked pump.
(3) * * * (i) Notice required with re-
spect to dyed diesel fuel and dyed
kerosene. A legible and conspicuous no-
tice stating “DYED DIESEL FUEL,
NONTAXABLE USE ONLY, PENALTY
FOR TAXABLE USE”must be provided
by each terminal operator to any person
that receives dyed diesel fuel at a terminal
rack of that operator. A legible and con-
spicuous notice stating “DYED
KEROSENE, NONTAXABLE USE ONLY,
PENALTY FOR TAXABLE USE” must be
provided by each terminal operator to any
person that receives dyed kerosene at a
terminal rack of that operator. These no-
tices must be provided by the time of the
removal and must appear on all shipping
papers, bills of lading, and similar docu-
ments that are provided by the terminal
operator to accompany the removal of the
fuel.
* * * * *
(k) * * * For rules relating to claims by
registered ultimate vendors (blocked
pump), see §48.6427–10.
(l) * * *
(4) References in this section to
kerosene are applicable after June 30,
1998.
Par. 51. Section 48.4101–2 is revised
to read as follows:
§48.4101–2 Information reporting.
(a)In general. Each information report
under section 4101(d) must be—
(1) Made in the form required by the
Commissioner;
(2) Made for a period of one calendar
month; and
(3) Filed by the last day of the first
month following the month for which the
report is made, except that a report relat-
ing to any month during 2000 must be
filed by February 28, 2001.
(b) Effective date. This section is ap-
plicable after March 30, 2000.
§§48.4102–2T and 48.4101–3T
[Removed]
Par. 52. Sections 48.4102–2T and
48.4101–3T are removed.
§48.4221–1 [Amended]
Par. 53. In §48.4221–1, paragraph
(a)(2)(ii) is amended by removing the lan-
guage “(gasoline and diesel fuel tax)” and
adding “(taxable fuel tax)” in its place.
§48.4222(b)–1 [Amended]
Par. 54. In §48.4222(b)–1, paragraph
(c), first sentence, is amended by remov-
ing the language “paragraph (f)” and
adding “paragraph (b)” in its place.
§48.6416(b)(2)–1 [Amended]
Par. 55. Section 48.6416(b)(2)–1 is
amended by removing the third sentence.
Par. 56. In §48.6416(b)(2)–2, para-
graph (a) is revised to read as follows:
§48.6416(b)(2)–2 Exportations, uses,
sales, and resales included.
(a) In general. The tax paid under
chapter 32 (or under section 4041(a) or
(d) in respect of sales or under section
4051) with respect to any article is con-
sidered to be an overpayment in the case
of any exportation, use, sale, or resale de-
scribed in this section. This section ap-
plies only in those cases in which the ex-
portation, use, sale, or resale (or any
combination thereof) referred to in this
section occurs before any other use. In
addition, the following restrictions must
be taken into account in applying the reg-
ulations under section 6416(b)(2):
(1) Sections 6416(b)(2)(C) and (D) do
not apply to any tax paid under section
4064 (gas guzzler tax).
(2) Sections 6416(b)(2)(B), (C), and (D)
do not apply to any tax paid under section
4131 (vaccine tax) and section
6416(b)(2)(A) applies only to the extent pre-
scribed in paragraph (b)(2) of this section.
(3) Section 6416(b)(2) does not apply
to any tax paid under section 4041(a)(1)
or 4081 on diesel fuel or kerosene, section
4091 (aviation fuel tax), or section 4121
(coal tax).
* * * * *
§48.6420–7 [Removed]
Par. 57. Section 48.6420–7 is removed.
§48.6420(c)–2 [Removed]
Par. 58. Section 48.6420(c)–2 is re-
moved.
§48.6421–2 [Amended]
Par. 59. In §48.6421–2, paragraph (a)
is amended by removing the last sentence.
Par. 60. Section 48.6427–8 is amended
as follows:
1. The section heading and paragraphs
(a) and (b)(1) are revised.
2. Paragraph (b)(2) Example 1, para-
graph (i) is amended as follows:
a. In the first and second sentences, the
language “1996” is removed and “2000”
is added in its place.
b. In the fourth sentence, the language
“§48.4081–1(h)” is removed and
“§48.4081–1(b)” is added in its place.
3. Paragraph (b)(2) Example 1, para-
graph (ii) is amended by removing the
language “(b)(1)(vi)(C)” and adding
“(b)(1)(vii)(C)” in its place.
4. Paragraph (b)(2) Example 2, para-
graph (i) is amended as follows:
a. In the first sentence, the language
“1996” is removed and “2000” is added in
its place.
b. In the third sentence, the language
“or diesel–powered boat” is removed.
5. Paragraph (d) is amended as fol-
lows:
a. By removing from paragraph (d)(1)
the language “covered by the claim”
b. By revising paragraphs (d)(2) and
(d)(3).
c. By adding the language “or
kerosene” after “diesel fuel” in para-
graphs (d)(4) and (d)(5).
6. Paragraph (f) is revised.
The revisions read as follows:
§48.6427–8 Diesel fuel and kerosene;
claims by ultimate purchasers.
(a) Overview. This section provides
rules under which ultimate purchasers of
taxed diesel fuel and kerosene may claim
the income tax credits or payments allowed
by section 6427(l). Generally, these claims
relate to diesel fuel and kerosene used in
nontaxable uses. Claims relating to diesel
fuel and kerosene sold for use on a farm for
farming purposes and by a State are made
by registered ultimate vendors under
§48.6427–9; claims relating to kerosene
sold from a blocked pump are made by reg-
istered ultimate vendors (blocked pump)
under §48.6427–10; and claims relating to
kerosene sold during certain periods of ex-
treme cold for blending with diesel fuel to
be used for heating purposes are made by
registered ultimate vendors (blending)
under §48.6427–11.
April 17, 20008962000–16 I.R.B.

(b) Conditions to allowance of credit or
payment—(1) In general.Except as pro-
vided in section 6427(l)(5), a claim for an
income tax credit or payment with respect
to diesel fuel or kerosene is allowed under
section 6427(l) only if—
(i) Tax was imposed by section 4081 on
the diesel fuel or kerosene to which the
claim relates;
(ii) The claimant produced or bought
the diesel fuel or kerosene and did not sell
it in the United States;
(iii) The claimant has filed a timely
claim for a credit or payment that contains
the information required under paragraph
(d) of this section;
(iv) The diesel fuel or kerosene was not
bought under a certificate described in
§48.6427–9(e)(2) (relating to Certificate
of Farming Use or State Use);
(v) The diesel fuel or kerosene was not
used on a farm for farming purposes (as
defined in §48.6420–4) or by a State;
(vi) With respect to kerosene, the
kerosene was not sold from a blocked
pump or sold for blending with diesel fuel
under the conditions described in
§48.6427–11; and
(vii) The diesel fuel or kerosene was ei-
ther—
(A) Used in a use described in
§48.4082–4(c)(3) through (c)(8);
(B) Exported;
(C) Used other than as a fuel in a
propulsion engine of a diesel–powered
highway vehicle; or
(D) Used as a fuel in the propulsion en-
gine of a diesel-powered bus if the bus
was engaged in a use described in section
6427(b)(1) (after the application of sec-
tion 6427(b)(3)).
* * * * *
(d) * * *
(2) A statement by the claimant that—
(i) The diesel fuel or kerosene did not
contain visible evidence of dye; or
(ii) In the case of diesel fuel or
kerosene that contains visible evidence of
dye, explains the circumstances under
which tax was imposed on that fuel.
(3) The use made of the diesel fuel or
kerosene covered by the claim described
by reference to specific categories listed
in paragraph (b)(1)(vii) of this section
(such as use in a qualified local bus or the
exclusive use of a nonprofit educational
organization).
* * * * *
(f) Effective date. This section is ap-
plicable with respect to diesel fuel after
December 31, 1993, except for paragraph
(b)(1)(iv) of this section, which is applic-
able to diesel fuel bought by ultimate pur-
chasers after June 30, 1994. This section
is applicable with respect to kerosene
after June 30, 1998.
Par. 61. Section 48.6427–9 is amended
as follows:
1. The section heading and paragraph
(a) are revised.
2. Paragraph (b) is amended by:
a. Adding the language “or undyed
kerosene” after “diesel fuel” in the intro-
ductory text.
b. Revising paragraph (b)(2).
3. Paragraph (c) is amended by revis-
ing the introductory text, paragraph
(c)(1), and paragraph (c)(2) introductory
text.
4. Paragraph (e) is amended by adding
“or kerosene” after “diesel fuel” in the
following locations:
a. Paragraph (e)(1) introductory text.
b. Paragraph (e)(1)(iv).
c. Paragraph (e)(1)(v)(A).
5. Paragraphs (e)(1)(i) and (e)(1)(ii)
are revised.
6. Paragraph (e)(1)(vi) is amended by
removing the language “For claims relat-
ing to sales by the claimant after March
31, 1994, a statement” and adding “A
statement” in its place.
7. Paragraph (e)(1)(vii) is removed.
8. Paragraph (e)(2)(ii), Certificate of
Farming Use or State Use, is amended by
adding or “or kerosene” after “diesel fuel”
in each place it appears:
9. Paragraph (g) is revised.
The revisions read as follows:
§48.6427–9 Diesel fuel and kerosene;
claims by registered ultimate vendors
(farming and State use).
(a) Overview. This section provides
rules under which certain registered ulti-
mate vendors of taxed diesel fuel and
kerosene may claim the income tax cred-
its or payments allowed by section
6427(l)(5)(A). These claims relate to
diesel fuel and kerosene sold for use on a
farm for farming purposes and by a State.
Claims relating to diesel fuel and
kerosene used for other nontaxable pur-
poses are made by ultimate purchasers
under §48.6427–8; claims relating to
kerosene sold from a blocked pump are
made by registered ultimate vendors
(blocked pump) under §48.6427–10; and
claims relating to kerosene sold during
certain periods of extreme cold for blend-
ing with diesel fuel to be used for heating
purposes are made by registered ultimate
vendors (blending) under §48.6427–11.
(b) * * *
(2) Aregistered ultimate vendoris an
ultimate vendor that is registered under
section 4101 as an ultimate vendor.
(c) * * * A claim for an income tax
credit or payment with respect to diesel
fuel or kerosene is allowed by section
6427(l)(5)(A) only if–
(1) Tax was imposed by section 4081
on the diesel fuel or kerosene to which the
claim relates;
(2) The claimant sold the diesel fuel or
kerosene to—
* * * * *
(e) * * *(1) * * *
(i) The total number of gallons.
(ii) A statement by the claimant that—
(A) The diesel fuel or kerosene did not
contain visible evidence of dye; or
(B) In the case of diesel fuel or
kerosene that contains visible evidence of
dye, explains the circumstances under
which tax was imposed on that fuel.
* * * * *
(g) Effective date. This section is ap-
plicable with respect to diesel fuel after
December 31, 1993, and with respect to
kerosene after June 30, 1998.
Par. 62. Sections 48.6427–10 and
48.6427–11 are added to read as follows:
§48.6427–10 Kerosene; claims by regis-
tered ultimate vendors (blocked pumps).
(a) Overview. This section provides
rules under which certain registered ulti-
mate vendors of taxed kerosene may claim
the income tax credits or payments allowed
by section 6427(l)(5)(B)(i). These claims
relate to kerosene sold from a blocked
pump. Claims relating to kerosene sold for
use on a farm for farming purposes and by
a State are made by registered ultimate ven-
dors under §48.6427–9; claims relating to
kerosene sold during certain periods of ex-
treme cold for blending with diesel fuel to
be used for heating purposes are made by
registered ultimate vendors (blending)
under §48.6427–11; and claims relating to
kerosene used for nontaxable purposes are
made by ultimate purchasers under
§48.6427–8.
(b) Definitions. The following defini-
tions apply to this section:
2000–16 I.R.B.897April 17, 2000

(1) Ablocked pumpis a fuel pump
that—
(i) Is used to dispense undyed kerosene
that is sold at retail for use by the buyer in
any nontaxable use;
(ii) Is at a fixed location;
(iii) Is identified with a legible and con-
spicuous notice stating “UNDYED UN-
TAXED KEROSENE, NONTAXABLE USE
ONLY”; and
(iv)(A) Cannot reasonably be used to dis-
pense fuel directly into the fuel supply tank
of a diesel-powered highway vehicle or
diesel-powered train (because, for example,
of its distance from a road surface or train
track or the length of its delivery hose); or
(B) Is locked by the vendor after each
sale and unlocked by the vendor only in re-
sponse to a request by a buyer for undyed
kerosene for use other than as a fuel in a
diesel-powered highway vehicle or diesel-
powered train.
(2) Aregistered ultimate vendor
(blocked pump)is a person that is registered
under section 4101 as an ultimate vendor
(blocked pump).
(3) An ultimate vendor (blocked pump)
is a person that sells undyed kerosene from
a blocked pump.
(c) Conditions to allowance of credit or
payment. A claim for an income tax credit
or payment with respect to undyed
kerosene is allowed by section
6427(l)(5)(B)(i) only if—
(1) Tax was imposed by section 4081 on
the kerosene to which the claim relates;
(2) The claimant sold the kerosene from
a blocked pump for its buyer’s use other
than as a fuel in a diesel-powered highway
vehicle or diesel-powered train and the
claimant has no reason to believe that the
kerosene will not be so used;
(3) The claimant is a registered ultimate
vendor (blocked pump);
(4) With respect to each sale of more
than five gallons of kerosene from a
blocked pump that does not meet the condi-
tions of paragraph (b)(1)(iv)(A) of this sec-
tion, the claimant has in its possession the
date of the sale, name and address of the
buyer, and the number of gallons sold to the
buyer; and
(5) The claimant has filed a timely claim
for a credit or payment that contains the in-
formation required under paragraph (e) of
this section.
(d) Form of claim. Each claim for an
income tax credit under this section must
be made on Form 4136 (or such other
form as the Commissioner may designate)
in accordance with the instructions for
that form. Each claim for a payment
under this section must be made on Form
8849 (or such other form as the Commis-
sioner may designate) in accordance with
the instructions for that form.
(e) Content of claim. Each claim for a
credit or payment under this section must
contain the following information with re-
spect to all of the kerosene covered by the
claim:
(1) The claimant’s ultimate vendor
(blocked pump) registration number.
(2) The total number of gallons.
(3) A statement by the claimant that—
(i) The kerosene did not contain visible
evidence of dye; or
(ii) In the case of kerosene that contains
visible evidence of dye, explains the cir-
cumstances under which tax was imposed
on that kerosene.
(4) With respect to each sale of more
than five gallons of kerosene from a
blocked pump that does not meet the condi-
tions of paragraph (b)(1)(iv)(A) of this sec-
tion, a statement by the claimant that it has
in its possession the date of the sale, name
and address of the buyer, and the number of
gallons sold to the buyer.
(5) A statement by the claimant that it—
(i) Has not included the amount of the
tax in its sales price of the kerosene and has
not collected the amount of the tax from its
buyer;
(ii) Has repaid the amount of the tax to
its buyer; or
(iii) Has obtained the written consent of
its buyer to the allowance of the claim.
(f) Time and place for filing claim. For
rules relating to the time for filing a claim
under section 6427, see section 6427(i). A
claim under this section is not filed unless it
contains all the information required by
paragraph (e) of this section and is filed at
the place required by the form.
(g) Cross reference. For a rule prohibit-
ing a registered ultimate vendor (blocked
pump) from delivering kerosene from a
blocked pump into the fuel supply tank of a
diesel-powered highway vehicle or diesel-
powered train, see §48.4101–1(h)(2)(iv).
(h) Effective date. This section is applic-
able after March 30, 2000.
§48.6427–11 Kerosene; claims by regis-
tered ultimate vendors (blending).
(a) Overview. This section provides
rules under which certain registered ulti-
mate vendors of taxed kerosene may claim
the income tax credits or payments allowed
by section 6427(l)(5)(B)(ii). These claims
relate to kerosene sold during certain peri-
ods of extreme cold for blending with
diesel fuel to be used for heating purposes.
Claims relating to kerosene sold for use on
a farm for farming purposes and by a State
are made by registered ultimate vendors
under §48.6427–9; claims relating to
kerosene sold from a blocked pump for
nontaxable uses are made by registered ul-
timate vendors (blocked pump) under
§48.6427–10; and other claims relating to
kerosene used for nontaxable purposes are
made by ultimate purchasers under
§48.6427–8.
(b) Definitions. The following defini-
tions apply to this section:
(1) Adeclaration of extreme coldis a de-
claration by the Commissioner that a spe-
cific geographic area (such as a state or a
county within a state) is affected by ex-
tremely or unseasonably cold weather con-
ditions. A declaration will be in effect dur-
ing the period determined by the
Commissioner.
(2) Acold weather blendis a blend of
kerosene and diesel fuel that is produced in
an area described in a declaration of ex-
treme cold and that is sold for use or used
for heating purposes.
(3) Aregistered ultimate vendor (blend-
ing)is a taxable fuel registrant, a registered
ultimate vendor, or a registered ultimate
vendor (blocked pump).
(c) Conditions to allowance of credit or
payment. A claim for an income tax credit
or payment with respect to kerosene is al-
lowed by section 6427(l)(5)(B)(ii) only
if—
(1) Tax was imposed by section 4081 on
the kerosene to which the claim relates;
(2) The claimant sold the kerosene in an
area described in a declaration of extreme
cold for the production of a cold weather
blend;
(3) The claimant is a registered ultimate
vendor (blending); and
(4) The claimant has filed a timely claim
for an income tax credit or payment that
contains the information required under
paragraph (e) of this section.
(d) Form of claim. Each claim for an
income tax credit under this section must
be made on Form 4136 (or such other
form as the Commissioner may designate)
April 17, 20008982000–16 I.R.B.

in accordance with the instructions for
that form. Each claim for a payment
under this section must be made on Form
8849 (or such other form as the Commis-
sioner may designate) in accordance with
the instructions for that form.
(e) Content of claim—(1) In general.
Each claim for credit or payment under this
section must contain the following infor-
mation with respect to all of the kerosene
covered by the claim:
(i) The claimant’s registration number.
(ii) The total number of gallons.
(iii) A statement by the claimant that—
(A) The kerosene did not contain visible
evidence of dye; or
(B) In the case of kerosene that contains
visible evidence of dye, explains the cir-
cumstances under which tax was imposed
on that kerosene.
(iv) A statement by the claimant that it—
(A) Has not included the amount of the
tax in its sales price of the kerosene and
has not collected the amount of the tax
from its buyer;
(B) Has repaid the amount of the tax to
its buyer; or
(C) Has obtained the written consent of
its buyer to the allowance of the claim.
(v) A statement that the claimant has in
its possession an unexpired certificate de-
scribed in paragraph (e)(2) of this section
and the claimant has no reason to believe
any information in the certificate is false.
(2) Certificate—(i) In general. The cer-
tificate described in this paragraph (e) is a
statement by a buyer that is signed under
penalties of perjury by a person with au-
thority to bind the buyer, is in substantially
the same form as the model certificate pro-
vided in paragraph (e)(2)(iii) of this section,
and contains all information necessary to
complete the model certificate. A certifi-
cate must be given for each purchase of
kerosene. The certificate may be included
as part of any business records normally
used to document a sale.
(ii) Withdrawal of the right to provide a
certificate. The Internal Revenue Service
may withdraw the right of a buyer of
kerosene to provide a certificate under this
section if the buyer uses the kerosene to
which a certificate relates other than for
producing a cold weather blend. The Inter-
nal Revenue Service may notify any seller
to whom the buyer has provided a certifi-
cate that the buyer’s right to provide a cer-
tificate has been withdrawn.
(iii) Model certificate.
2000–16 I.R.B.899April 17, 2000
CERTIFICATE OF BUYER FOR PRODUCTION
OF A COLD WEATHER BLEND
(To support vendor’s claim for a credit or payment under section 6427 of the Internal Revenue Code.)
(Buyer) certifies the following under penalties of perjury:
Name of Buyer
The kerosene to which this certificate applies will be used by Buyer to produce a blend of kerosene and diesel fuel in an area de-
scribed in a declaration of extreme cold and the blend will be sold for use or used for heating purposes.
This certificate applies to percent of Buyer’s purchases from (name,
address, and employer identification number of seller) as follows (complete as applicable):
1. A single purchase on invoice or delivery ticket number .
2. All purchases between (effective date) and (expiration date) (period not to exceed one year after
the effective date) under account or order number(s) . If this certificate applies only to Buyer’s purchases for cer-
tain locations, check here and list the locations.
If Buyer violates the terms of this certificate, the Internal Revenue Service may withdraw Buyer’s right to provide a certificate.
Buyer has not been notified by the Internal Revenue Service that its right to provide a certificate has been withdrawn.
Buyer understands that the fraudulent use of this certificate may subject Buyer and all parties making such fraudulent use of this
certificate to a fine or imprisonment, or both, together with the costs of prosecution.
Printed or typed name of person signing
Title of person signing
Name of Buyer
Employer identification number
Address of Buyer
Signature and date signed
(f) Time and place for filing claim. For
rules relating to the time for filing a claim
under section 6427, see section 6427(i).
A claim under this section is not filed un-
less it contains all the information re-
quired by paragraph (e) of this section and
is filed at the place required by the form.
(g) Effective date. This section is ap-
plicable after March 30, 2000.
§§48.6427–10T and 48.6427–11T
[Removed]
Par. 63. Sections 48.6427–10T and
48.6427–11T are removed.

§48.6715–1 [Amended]
Par. 64. Section 48.6715–1 is amended
as follows:
1. The section heading is amended by
removing the language “diesel”.
2. Paragraph (a) is amended by adding
“or kerosene” after “diesel fuel” in the
following locations:
a. Paragraph (a)(1).
b. Paragraph (a)(2), each place it appears.
c. Paragraph (a)(4), each place it appears.
3. Paragraph (a)(4) is amended by re-
moving the language
“§48.6427–8(b)(vi)(C), (D), or (E)” and
adding “§48.6427–8(b)(1)(vii)(C) or (D)”
in its place.
PART 145–TEMPORARY EXCISE TAX
REGULATIONS UNDER THE HIGH-
WAY REVENUE ACT OF 1982 (PUB.
L. 97-424)
Par. 65. The authority citation for part
145 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§145.4051–1 [Amended]
Par. 66. In §145.4051–1, paragraph (f),
the first sentence is removed.
Par. 67. Section 145.4052–1 is
amended as follows:
1. Paragraph (a)(2)(ii) is revised.
2. Paragraph (a)(7) is removed.
The revision reads as follows:
§145.4052–1 Special rules and defini-
tions.
(a) * * *
(2) * * *
(ii) [Reserved]. For sales after June 30,
1998, see §48.4052–1 of this chapter,
* * * * *
PART 602–OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 68. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 69. In §602.101, paragraph (b) is
amended by:
1. Removing the following entries
from the table:
41.4481–1T
41.4482(b)–1T
48.4081–2(c)(3)
48.4081–3(d)(2)(ii)
48.4081–3(e)(2)(ii)
48.4081–3(f)(2)(ii)
48.4081–9
48.4082–7T
48.4082–8T
48.4091–3T
48.4101–2T
48.4101–3T
48.6420(c)–2
48.6420–7
48.6427–11T
2. Revising the entries for 48.4081–7
and 145.4052–1 and adding entries in nu-
merical order to the table to read as fol-
lows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved March 15, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
March 30, 2000, 8:45 a.m., and published in the
issue of the Federal Register for March 31, 2000, 65
F.R. 17149)
April 17, 20009002000–16 I.R.B.
CFR Part or Section WhereCurrent OMB
Identified and DescribedControl No.
* * * * *
48.4052–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1418
* * * * *
48.4081–2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1270
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1418
48.4081–3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1270
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1418
* * * * *
48.4081–7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1270
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1418
* * * * *
48.4082–6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1418
48.4082–7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1418
48.4091–3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1418
* * * * *
48.6427–10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1418
48.6427–11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1418
* * * * *
145.4052–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-0120
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-0745
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1076
* * * * *

Section 6721.—Failure to File
Correct Information Returns
26 CFR 301.6721–1: Failure to file correct
information returns.
Will the Service impose penalties under §§ 6721
and 6722 of the Code on certain taxpayers newly
subject to § 6050P for failure to file information re-
turns or furnish payee statements under § 6050P for
discharges of indebtedness occurring before January
1, 2001. See Notice 2000–22, page 902.
Section 6722.—Failure to
Furnish Correct Payee
Statements
26 CFR 301.6722–1: Failure to furnish correct
payee statements.
Will the Service impose penalties under §§ 6721
and 6722 of the Code on certain taxpayers newly
subject to § 6050P for failure to file information re-
turns or furnish payee statements under § 6050P for
discharges of indebtedness occurring before January
1, 2001. See Notice 2000–22, page 902.
2000–16 I.R.B.901April 17, 2000

Information Reporting for
Discharges of Indebtedness
Notice 2000–22
PURPOSE
This notice provides that the Internal
Revenue Service will not impose penal-
ties under §§ 6721 and 6722 of the Inter-
nal Revenue Code on certain taxpayers
for failure to file information returns or
furnish payee statements under § 6050P
for discharges of indebtedness occurring
before January 1, 2001. This notice ap-
plies only to taxpayers who were made
subject to § 6050P by § 533(a) of the
Ticket to Work and Work Incentives Im-
provement Act of 1999, Pub. L. No.
106–170, 113 Stat. 1860, 1931 (1999)
(“the Act”).
BACKGROUND
Generally, § 6050P(a) requires applica-
ble entities that are subject to that section
to file returns with the Service, and to
provide statements to persons whose
names are required to be shown on the re-
turns (“payees”), setting forth certain in-
formation regarding discharges of indebt-
edness of $600 or more. Sections 6721
and 6722 impose penalties for failure to
file correct information returns or to pro-
vide correct payee statements, respec-
tively, including those required under
§ 6050P.
Section 533(a) of the Act amended
§ 6050P of the Code by expanding the
types of entities that are required to report
discharges of indebtedness to include any
organization “a significant trade or busi-
ness of which is the lending of money.”
The Act was signed into law on December
17, 1999. Section 533(a) was made effec-
tive for discharges of indebtedness occur-
ring after December 31, 1999.
PENALTY SUSPENSION
The Service recognizes that many tax-
payers that were made subject to § 6050P
by the Act did not have sufficient time to
make the necessary changes to their
record keeping systems to capture the in-
formation required to be reported under
§ 6050P. In addition to the fact that
§ 533(a) of the Act became effective very
shortly after enactment, many taxpayers
were, at the time of enactment, focused on
implementing computer system changes
in preparation for Year 2000. To give
these taxpayers additional time to make
the changes necessary to comply with §
6050P, the Service will not impose penal-
ties on these taxpayers for failing to com-
ply with the requirements of § 6050P for
discharges of indebtedness occurring be-
fore January 1, 2001.
This notice does not affect the report-
ing obligations of any entity that was al-
ready subject to § 6050P prior to its
amendment by the Act.
DRAFTING INFORMATION
The principal author of this notice is
Christopher F. Kane of the Office of As-
sistant Chief Counsel, Income Tax and
Accounting. For further information re-
garding this notice, contact Mr. Kane at
(202) 622-4930 (not a toll-free call).
April 17, 20009022000–16 I.R.B.
Part III. Administrative, Procedural, and Miscellaneous

2000–16 I.R.B.903April 17, 2000
Notice of Proposed Rulemaking
and Notice of Public Hearing
Special Rules Regarding
Optional Forms of Benefit Under
Qualified Retirement Plans
REG–109101–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations that would permit
qualified defined contribution plans to
be amended to eliminate some alterna-
tive forms in which an account balance
can be paid under certain circumstances,
and would permit certain transfers be-
tween defined contribution plans that
are not permitted under regulations now
in effect. These proposed regulations
affect qualified retirement plan spon-
sors, administrators, and participants.
This document also provides notice of a
public hearing on these proposed regula-
tions.
DATES: Written comments must be re-
ceived by June 27, 2000. Requests to
speak and outlines of oral comments to be
discussed at the public hearing scheduled
for June 27, 2000, at 10 a.m., must be re-
ceived by June 6, 2000.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–109101–98),
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:DOM:CORP:R (REG–109101–98),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW., Washing-
ton, DC. Alternatively, taxpayers may sub-
mit comments electronically via the Inter-
net by selecting the “Tax Regs” option of
the IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at:
http://www.irs.gov/tax_regs/reglist.html.
The public hearing will be held in room
6718, Internal Revenue Building, 1111
Constitution Avenue NW., Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Linda
S. F. Marshall, 202-622-6030; concerning
submissions and the hearing, and/or to be
placed on the building access list to attend
the hearing, LaNita VanDyke, 202-622-
7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR part 1 under sec-
tion 411(d)(6) of the Internal Revenue
Code of 1986 (Code).
Section 411(d)(6) generally provides
that a plan will not be treated as satisfying
the requirements of section 411 if the ac-
crued benefit of a participant is decreased
by a plan amendment. Section
411(d)(6)(B), which was added by the Re-
tirement Equity Act of 1984 (REA), Pub-
lic Law 98-397 (98 Stat. 1426), provides
that a plan amendment that eliminates an
optional form of benefit is treated as re-
ducing accrued benefits to the extent that
the amendment applies to benefits ac-
crued as of the later of the adoption date
or the effective date of the amendment.
However, section 411(d)(6)(B) authorizes
the Secretary of the Treasury to provide
exceptions to this requirement. This au-
thority does not extend to a plan amend-
ment that would have the effect of elimi-
nating or reducing an early retirement
benefit or a retirement-type subsidy.
Final regulations regarding section
411(d)(6)(B) were published in the Fed-
eral Registeron July 8, 1988. Those
final regulations, and subsequent amend-
ments to the regulations, define the op-
tional forms of benefit that are protected
under section 411(d)(6)(B) and provide
for certain exceptions to the general rule
of section 411(d)(6)(B). In general, exist-
ing regulatory exceptions to the applica-
tion of section 411(d)(6)(B) to optional
forms of benefit have been developed to
address certain specific practical prob-
lems. For example, §1.411(d)–4, Q&A-
3(b) permits a transfer between plans of a
participant’s entire nonforfeitable benefit
to be made at the election of the partici-
pant, without a requirement that the trans-
feree plan preserve all section 411(d)(6)
protected benefits, but only if the partici-
pant is eligible to receive an immediate
distribution and certain other conditions
are satisfied. In addition, some regulatory
exceptions to the application of section
411(d)(6)(B) to optional forms of benefit
address plan amendments that are related
to statutory changes. See Q&A-2(b) and
Q&A-10 of §1.411(d)–4.
The IRS and Treasury recognize that
the accumulation of a variety of payment
choices in a plan may increase the cost
and complexity of plan operations. For
example, an employer that initially
adopted a plan for which the plan docu-
ment was prepared by a prototype sponsor
may now be using a different prototype
plan that offers a different array of distrib-
ution forms. The requirement to preserve
virtually all preexisting optional forms for
benefits accrued up to the date of change
in the prototype plan may present signifi-
cant practical problems in certain cases.
Similar issues arise where employers
merge with or acquire other businesses.
These employers often face issues of
whether to maintain separate plans, termi-
nate one or more of the plans, or merge
the plans. If the employer chooses to
merge the plans, the resulting plan may
accumulate a wide variety of optional
forms, some of which may differ in in-
significant ways or may entail special ad-
ministrative costs. Because the existing
elective transfer rule of §1.411(d)–4,
Q&A-3(b) applies only to situations in
which a participant’s benefits have be-
come distributable, its applicability is
limited.
In recent years, it has become easier for
individuals to replicate the various pay-
ment choices available from qualified
plans through other means. The Unem-
ployment Compensation Amendments of
1992, Public Law 102-318 (106 Stat.
290), substantially expanded participants’
ability to transfer distributions from quali-
fied plans to individual retirement
arrangements (IRAs) on a tax-deferred
basis. Individuals who receive single-
sum distributions from qualified plans
frequently roll those distributions over di-
rectly to IRAs, under which distributions
can be made in a wide variety of payment
forms. There are also indications that the
vast majority of participants in defined
contribution plans who are given a choice
Part IV. Items of General Interest

of distribution forms that includes a sin-
gle-sum distribution elect the single-sum
distribution.
The IRS and Treasury have been
weighing these considerations as they
apply to various circumstances and vari-
ous benefit forms. As a result, the IRS
and Treasury have been considering the
appropriateness of exercising the regula-
tory authority under section 411(d)(6)(B)
to provide additional exceptions under
that provision, in order to allow greater
flexibility for sponsors to modify alterna-
tive forms of payment and simplify plan
provisions and plan administration.
Notice 98–29 (1998–1 C.B. 1163) re-
quested public comment on several ways
of providing regulatory relief from the re-
quirements of section 411(d)(6)(B) for
defined contribution plans. Most of the
public comments received in response to
Notice 98–29 indicate that, particularly
for defined contribution plans, the section
411(d)(6)(B) requirement that a plan con-
tinue to offer all existing payment options
often imposes significant administrative
burdens that are disproportionate to any
corresponding benefit to participants. Ac-
cordingly, after considering the comments
received in response to Notice 98–29, the
IRS and Treasury are issuing these pro-
posed regulations, which would provide
relief from the requirements of section
411(d)(6)(B) in a wide range of circum-
stances.
As anticipated in Notice 98–29, the pri-
mary focus of these regulations is on de-
fined contribution plans, and the provi-
sions of these regulations relating to
elimination of alternative forms of pay-
ment are limited to defined contribution
plans. Defined benefit plans have special
characteristics, including benefit payment
calculation specifications, early retire-
ment benefits, and other retirement-type
subsidies (for which section 411(d)(6)(B)
does not authorize the issuance of regula-
tory relief). Features such as these are not
characteristic of defined contribution
plans and provide important protections
to participants. While limited comments
relating to defined benefit plans were re-
ceived in response to Notice 98–29, the
IRS and Treasury remain open to further
comment in this area. As discussed
below, the provisions of these proposed
regulations relating to elimination of in-
kind distributions extend to both defined
contribution plans and defined benefit
plans, and the provisions of these pro-
posed regulations relating to transfers be-
tween plans apply to defined contribution
plans and, to some extent, to defined ben-
efit plans.
These proposed regulations would not
affect other requirements of the Code.
For example, a money purchase pension
plan (or a plan otherwise described in sec-
tion 401(a)(11)(B)) generally must satisfy
certain requirements relating to qualified
joint and survivor annuities and qualified
preretirement survivor annuities. Simi-
larly, these proposed regulations would
not affect the requirements of section
401(a)(31) relating to direct rollovers.
Explanation of Provisions
A. Permitted Amendments to Alternative
Forms of Payment Under a Defined
Contribution Plan
The proposed regulations would sim-
plify plan administration and allow
greater flexibility by significantly ex-
panding the permitted changes that may
be made to alternative forms of payment
under a defined contribution plan. In-
stead of requiring defined contribution
plans to continue to maintain nearly all
existing alternative forms of payment
with only limited exceptions, these pro-
posed regulations would permit defined
contribution plans to be amended to elim-
inate nearly all existing forms of payment
if certain specified forms of payment are
available. Under the proposed regula-
tions, a defined contribution plan would
not violate the requirements of section
411(d)(6) merely because the plan was
amended to eliminate or restrict the abil-
ity of a participant to receive payment of
the participant’s accrued benefit under a
particular optional form of benefit if, after
the plan amendment became effective
with respect to the participant, the distrib-
ution choices available to the participant
included both payment of the accrued
benefit in a single-sum distribution form
and payment of the accrued benefit in an
extended distribution form, each of which
is otherwise identical to the eliminated or
restricted optional form of benefit.
Under the proposed regulations, a dis-
tribution form is an otherwise identical
distribution form with respect to an op-
tional form of benefit that is eliminated or
restricted only if the distribution form is
identical in all respects to the eliminated
or restricted optional form of benefit ex-
cept with respect to the timing of pay-
ments after commencement. For exam-
ple, a single-sum distribution form is not
an otherwise identical distribution form
with respect to a specified installment
form of benefit if the single-sum distribu-
tion form is not available for distribution
on any date on which the installment form
would have been available for com-
mencement, is not available in the same
medium of distribution as the installment
form, does not apply to the benefit to
which the installment form applied, im-
poses any condition of eligibility that did
not apply to the installment form, or lacks
any related election rights that were avail-
able with respect to the installment form.
However, a distribution form does not fail
to be identical just because it provides
greater rights to the participant. Further,
an otherwise identical distribution form
need not retain rights or features of the
optional form of benefit that is eliminated
or restricted to the extent that those rights
or features are not otherwise protected
under section 411(d)(6). Moreover, in the
case of an optional form of benefit that is
in the form of an annuity and that pro-
vides for distribution of an annuity con-
tract, a distribution form that is not in the
form of an annuity would not fail to be an
otherwise identical distribution form with
respect to that optional form of benefit
merely because the non-annuity distribu-
tion form does not provide for distribution
of an annuity contract.
The requirement under the proposed
regulations that an extended distribution
form be retained would be satisfied if the
plan provided either (1) a life annuity or
(2) periodic payments over the partici-
pant’s life expectancy (or, at the election
of the participant, over the joint life ex-
pectancy of the participant and the partici-
pant’s spouse). Thus, a defined contribu-
tion plan would not violate section
411(d)(6) merely because of a plan
amendment that replaced an optional
form of benefit payable under the plan
with either of these two extended distribu-
tion forms, together with a single-sum
distribution form, provided that the sin-
gle-sum distribution form and the ex-
tended distribution form are each other-
wise identical to the replaced optional
April 17, 20009042000–16 I.R.B.

form of benefit. A plan providing for pe-
riodic payments over life expectancy
could provide for the life expectancy to be
fixed when payments begin or, alterna-
tively, could provide for the life ex-
pectancy to be redetermined annually as
described in section 401(a)(9)(D).
As noted above, the proposed regula-
tions would not affect the survivor annu-
ity requirements of sections 401(a)(11)
and 417. Thus, for example, as required
under sections 401(a)(11) and 417, any
profit-sharing plan that provides for pay-
ment in the form of a life annuity
(whether or not the life annuity was added
to the plan in lieu of some other optional
form) would also be required to offer pay-
ment in the form of a qualified joint and
survivor annuity.
A third extended distribution form
would generally be permitted under the
proposed regulations for a plan amend-
ment that did not eliminate any optional
form of benefit that is an extended distrib-
ution form described above. For such an
amendment, the requirement to provide
an extended distribution form would be
satisfied if the plan offered a distribution
in the form of substantially equal periodic
payments made (not less frequently than
annually) over a period at least as long as
the longest period over which the partici-
pant is entitled to receive a distribution
under the plan before the plan amendment
under any of the optional forms of benefit
that are eliminated by the plan amend-
ment. Thus, for example, a defined con-
tribution plan that offers distributions in
the form of a single-sum distribution, 5-
year installment payments, 10-year in-
stallment payments, 15-year installment
payments, and 20-year installment pay-
ments could be amended to offer only a
single-sum distribution and 20-year in-
stallment payments, each of which is oth-
erwise identical to the formerly available
5-year, 10-year, and 15-year distribution
forms.
The provisions of the proposed regula-
tions permitting payment forms to be
eliminated if the defined contribution plan
retains a single-sum distribution form and
an extended distribution form are similar
to one of the proposals outlined in Notice
98–29. In response to Notice 98–29,
commentators generally stated that imple-
menting this relief would be very helpful
for plan sponsors, but there was also sub-
stantial comment urging further relief, so
that a defined contribution plan with a
single-sum distribution option would not
also be required to continue to offer an
extended distribution form. These com-
mentators took the position that, in light
of a participant’s ability to roll over distri-
butions to IRAs, which may offer multi-
ple payment forms, there is only a mar-
ginal advantage to the participant in
requiring the retention of an option to re-
ceive extended payments from a qualified
defined contribution plan.
Some of these comments described
plans that have been preserving a variety
of payment options because the regula-
tions require it, even though certain of the
options have not been selected by a single
participant for years. Commentators as-
serted that ultimately, employee demand
would tend to shape the array of payment
options offered by plan sponsors, and that
plan sponsors generally would feel more
free to offer or “test market” various pay-
ment form alternatives to participants if
the sponsors were not legally prohibited
from ever removing any option, once of-
fered, even when participants in the plan
have evidenced little or no interest in the
option. Commentators observed that par-
ticipants would in all events continue to
have the option to leave their account bal-
ance in the plan (if above the $5,000
cashout threshold) until they were ready
to begin receiving distributions. It was
argued that the vast majority of partici-
pants are not ready to begin drawing life-
time retirement benefits at the time their
employment with a particular plan spon-
sor terminates, and that, accordingly, a
participant’s rollover to a single IRA of
the participant’s benefits from a series of
employer-sponsored plans over the course
of the participant’s working life is an ef-
fective and common means of achieving
portability, consolidation, and preserva-
tion of retirement savings.
Commentators also asserted that the
protections of section 411(d)(6)(B) may
have adversely affected participants in-
volved in corporate sale transactions.
Specifically, some sellers and buyers that
might otherwise have merged their plans,
or transferred benefits under the seller’s
plan to the buyer’s plan, instead have ter-
minated the seller’s plan or made distribu-
tions in order to avoid being required to
preserve all of the distribution forms in
the seller’s plan.
Although the comments received in re-
sponse to Notice 98–29 made a strong
case that only a single sum distribution
should be required to be retained, these
proposed regulations reflect the view that
the advantages to participants from retain-
ing an extended distribution form may be
worth the plan administration costs of re-
taining this additional option. These ad-
vantages include the benefits that partici-
pants, especially less sophisticated
participants, can derive from employer in-
volvement, which is subject to the fidu-
ciary standards, in selecting and monitor-
ing investment options under the plan
after retirement distributions have begun.
The IRS and Treasury are open to further
comments on whether or not an extended
distribution form should be required to be
preserved, including comments that iden-
tify circumstances in which it may be ac-
ceptable for a plan not to preserve an ex-
tended distribution form. In particular,
comments are requested on whether the
final regulations should provide any of
the following further relief:
•Should an extended distribution form
be required to be retained only for
participants who have reached a
specified age, such as age 55, age 62,
or normal retirement age, at the time
of the distribution?
•Should there be an exception from
this requirement for small businesses
(e.g., employers with fewer than 100
employees or fewer than 25 employ-
ees)?
•Should a plan be treated as satisfying
the requirement that it retain an ex-
tended distribution form if the plan
allows a participant to elect to re-
ceive distribution by transfer of his or
her vested account to a defined bene-
fit plan for distribution in an ex-
tended distribution form?
•Should a plan be treated as satisfying
the requirement that it retain an ex-
tended distribution form if the plan
offers installment payments over a
fixed period, such as 20 years?
•Should there be an exception from
the requirement that an extended dis-
tribution form be retained if a plan
with an extended distribution form is
merged into another plan that does
not offer an extended distribution
form (for example, if the plan with-
2000–16 I.R.B.905April 17, 2000

out the extended distribution form
has a larger number of participants)
in connection with an asset or stock
acquisition, merger, or similar trans-
action involving a change in em-
ployer of the employees of a trade or
business?
•If extended distribution forms are
permitted to be eliminated, should
there be additional protections, such
as requiring that the amendment not
go into effect for a specified period
(such as two, four, or five years) or
that the amendment not apply to par-
ticipants who have reached a speci-
fied age (such as age 55, age 62, or
normal retirement age) at the time of
the amendment, or both?
Approaches such as these may be con-
sidered either independently of each
other, as a series of coordinated alterna-
tives, or in combination (such as permit-
ting small businesses to limit the avail-
ability of extended distribution forms to
participants who receive distributions
after attaining a specified age, or such as
permitting plan amendments that make
extended distribution forms available
only to participants who reach a speci-
fied age before a specified date, such as
five years after the amendment). Com-
mentators are requested to identify the
burdens in plan administration that may
be reduced by any of these approaches
and the extent to which the approaches
involve elimination of distribution alter-
natives that may be important to a partic-
ipant.
B.Voluntary Direct Transfers Between
Plans
The proposed regulations would make
a number of changes in the existing regu-
lations relating to elective transfers be-
tween qualified plans. Under certain cir-
cumstances, the existing regulations
permit elimination of optional forms of
benefit in connection with plan transfers
with a participant’s consent. The pro-
posed regulations would significantly
liberalize the application of these elec-
tive transfer provisions.
The existing regulations do not permit
an elective transfer from one qualified
plan to another unless the participant’s
benefit under the transferring plan is im-
mediately distributable. This condition
has precluded use of the elective transfer
provision in the existing regulations in
connection with merger and acquisition
transactions involving plans with a cash
or deferred arrangement under section
401(k) in cases in which benefits under
the cash or deferred arrangement are not
distributable because section 401(k)(10)
is not applicable. Many commentators
have stated that permitting elective trans-
fers from the former employer’s section
401(k) plan to the new employer’s sec-
tion 401(k) plan under these circum-
stances would allow employers to permit
employees to keep their old retirement
benefits in a qualified plan together with
their newly earned retirement benefits,
particularly in cases where the new em-
ployer chooses not to maintain the for-
mer employer’s plan.
The proposed regulations would
grant broad section 411(d)(6) relief for
many types of elective transfers of a
participant’s entire benefit, without re-
gard to whether the participant’s benefit
is immediately distributable. The elec-
tive transfer provision would be avail-
able for transfers made in connection
with certain corporate transactions
(such as a merger or acquisition), or in
connection with the transfer of a partic-
ipant to a different job (for example, to
a different subsidiary or division of the
employer) that is not covered by the
transferor plan, even if the event is not
one that allows a distribution. Insofar
as the immediately distributable re-
quirement of the existing regulations
would be eliminated, the proposed reg-
ulations would permit an elective trans-
fer even if the participant’s benefit is
not fully vested, provided that the re-
quirements of section 411(a)(10) are
satisfied. The proposed regulations
would not restrict the permissible types
of elective transfers to transfers be-
tween plans of the same employer. Ac-
cordingly, elective transfers could be
made to plans that are within the em-
ployer’s controlled group or to plans
that are outside the employer’s con-
trolled group.
The proposed regulations would pro-
vide section 411(d)(6) relief for elective
transfers involving corporate transac-
tions or employee job transfers gener-
ally where the defined contribution
plans are of the same type (e.g., from a
qualified cash or deferred arrangement
under section 401(k) to another quali-
fied cash or deferred arrangement).
The restrictions on the types of plans
between which transfers would be per-
mitted would ensure that amounts
transferred to the receiving plan will be
subject to similar legal restrictions with
respect to in-service distributions. See
Rev. Rul. 94–76 (1994–2 C.B. 46). In
the case of transfers from plans that are
subject to the survivor annuity require-
ments under sections 401(a)(11) and
417, those survivor annuity require-
ments would apply to the receiving plan
with respect to the transferred amount
in accordance with the transferee plan
rules of section 401(a)(11)(B)(iii)(III).
The existing regulations relating to
elective transfers were issued in 1988.
Since then, section 401(a)(31) has been
enacted. Under section 401(a)(31), any
eligible rollover distribution may be di-
rectly rolled over to an IRA or to another
eligible retirement plan. The section
411(d)(6) requirements do not apply to
amounts that have been distributed, such
as distributions that are directly rolled
over to another plan under section
401(a)(31). Accordingly, the elective
transfer rules of the existing regulations
have largely been duplicated by the en-
actment of section 401(a)(31) because
the same result generally is available
through a direct rollover. The proposed
regulations would eliminate this duplica-
tion by replacing the elective transfer
rules of the existing regulations that
apply to immediately distributable
amounts, except for certain transfers of
amounts that are not eligible rollover dis-
tributions (such as amounts attributable
to after-tax employee contributions).
Specifically, an elective transfer of an
immediately distributable amount would
be permitted to the extent the amount is
not an eligible rollover distribution, if the
participant’s entire nonforfeitable ac-
crued benefit is transferred by means of a
combination of a section 401(a)(31)
transfer and the elective transfer. This
rule would apply to transfers between de-
fined benefit plans, as well as transfers
between defined contribution plans.
Comments are requested regarding
whether there are other situations (where
direct rollovers are unavailable) to which
the elective transfer approach should
apply.
April 17, 20009062000–16 I.R.B.

C.Rules Regarding In-Kind
Distributions
The proposed regulations clarify and
modify the rules regarding the applica-
tion of the protections of section
411(d)(6)(B) to a right to receive benefit
distributions in kind with respect to de-
fined contribution plans and defined ben-
efit plans. Provisions for distribution in
kind are sometimes found in plans in-
vested in annuity contracts or in mar-
ketable mutual funds. The right to a par-
ticular form of investment is not a
protected optional form of benefit. How-
ever, the investments made by a plan
generally are subject to fiduciary require-
ments, including the prudence require-
ment of section 404(a)(1)(B) of the Em-
ployee Retirement Income Security Act
of 1974, Public Law 93-406 (88 Stat.
829). The existing regulations state that
the right to a medium of distribution,
such as cash or in-kind payments, is an
optional form of benefit to which section
411(d)(6)(B) applies.
Under the proposed regulations, if a
defined benefit plan includes an optional
form of benefit under which benefits are
distributed in the medium of an annuity
contract, that optional form of benefit
could be modified by substituting cash
for the annuity contract. Thus, a defined
benefit plan that provides for distribution
of an annuity contract could be amended
to substitute cash payments from the plan
that are identical in all respects protected
by section 411(d)(6) to the payments
available from the annuity contract ex-
cept with respect to the source of the
payments. Comments are requested re-
garding whether any additional section
411(d)(6)(B) relief for non-cash distribu-
tions is appropriate for defined benefit
plans.
The proposed regulations would per-
mit a defined contribution plan to be
amended to replace the ability to receive
a distribution in the form of marketable
securities (other than employer securi-
ties) with the ability to receive a distribu-
tion in the form of cash. The right to dis-
tributions from a defined contribution
plan in the form of cash, employer secu-
rities or other property that is not mar-
ketable securities would generally be
protected. However, the proposed regu-
lations would also permit a defined con-
tribution plan that gives a participant the
right to an in-kind distribution (including
employer securities and property that is
not marketable securities) to be amended
to limit the types of property in which
distributions could be made to the partic-
ipant to specific types of property in
which the participant’s account is in-
vested at the time of the amendment (and
with respect to which the participant had
the right to receive an in-kind distribu-
tion before the plan amendment). In ad-
dition, the proposed regulations would
permit a defined contribution plan giving
a participant the right to a distribution in
a type of property to be amended to spec-
ify that the participant is permitted to re-
ceive a distribution in that type of prop-
erty only to the extent that the plan assets
held in the participant’s account at the
time of the distribution include that type
of property. These provisions of the pro-
posed regulations would not permit a
plan to be amended in a way that would
affect protected features of optional
forms of benefit other than the medium
of distribution. Thus, for example, a plan
could not be amended to eliminate a par-
ticipant’s right to payments over a period
of years, regardless of the plan’s current
investments, except as permitted under
other provisions of the current or pro-
posed regulations (such as the provisions
described above relating to permitted
plan amendments affecting alternative
forms of payment under defined contri-
bution plans).
Comments are requested on whether
section 411(d)(6) protection for in-kind
distributions of employer securities and
property that is not marketable securities
from defined contribution plans should
be preserved or eliminated. Commenta-
tors are requested to address the extent to
which these may be important rights for
participants. For example, in a defined
contribution plan that does not give par-
ticipants the right to payment in kind, it
is possible that a distribution made in
cash for a particular asset may be in an
amount that is less than the value that the
participant assigns to the asset. Com-
mentators are further requested to ad-
dress the potential administrative burden
if, as proposed, plans are prohibited from
eliminating these media of distribution.
Comments are also requested on whether
section 411(d)(6)(B) protection should
be retained for any form of in-kind distri-
bution from a defined contribution plan
other than employer securities and prop-
erty that is not marketable securities.
Proposed Effective Date
The proposed regulations are proposed
to be effective upon publication of final
regulations in the Federal Registerand
cannot be relied upon before finalization.
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 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 Code, these proposed regulations will
be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their impact on
small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (preferably a signed original and
eight (8) copies) that are submitted
timely to the IRS. In addition to the
other requests for comments set forth in
this document, the IRS and Treasury also
request comments on the clarity of the
proposed rule and how it may be made
easier to understand. All comments will
be available for public inspection and
copying.
A public hearing has been scheduled
for June 27, 2000, at 10 a.m., in room
6718, Internal Revenue Building, 1111
Constitution Avenue NW., Washington,
DC. Due to building security proce-
dures, visitors must enter at the 10
th
street entrance, located between Consti-
tution and Pennsylvania Avenues, NW.
In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
2000–16 I.R.B.907April 17, 2000

April 17, 20009082000–16 I.R.B.
before the hearing starts. For informa-
tion about having your name placed on
the building access list to attend the hear-
ing, see the “FOR FURTHER INFOR-
MATION CONTACT” section of this
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit written
comments by June 6, 2000, and submit
an outline of the topics to be discussed
and the time to be devoted to each topic
(signed original and eight (8) copies) by
June 6, 2000.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Linda S. F. Marshall of the Office
of the Associate Chief Counsel (Em-
ployee Benefits and Exempt Organiza-
tions). However, other personnel from
the IRS and Treasury participated in their
development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
Paragraph 1. The authority citation for
part 1 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.411(d)–4 is amended
as follows:
1. In Q&A-1, paragraph (b)(1), the last
sentence is amended by removing the lan-
guage “§1.401(a)(4)–4(d)” and adding
“§1.401(a)(4)–4(e)(1)” in its place.
2. Q&A-2 is amended by:
a. Revising paragraph (b)(2)(iii).
b. Adding paragraph (e).
3. Q&A-3 is amended by:
a. Revising paragraph (a)(3).
b. Adding paragraph (a)(4).
c. Revising paragraphs (b), (c), and
(d).
d. Adding paragraph (e).
The additions and revisions read as
follows:
§1.411(d)–4 Section 411(d)(6) protected
benefits.
* * * * *
A-2: * * *
(b) * * *
(2) * * *
(iii) In-kind distributions–(A) Distrib-
utions of annuity contracts payable
under defined benefit plans.If a defined
benefit plan includes an optional form of
benefit under which benefits are distrib-
uted in the medium of an annuity con-
tract, that optional form of benefit may
be modified by substituting cash for the
annuity contract.
(B) In-kind distributions payable
under defined contribution plans in the
form of marketable securities other than
employer securities. If a defined contri-
bution plan includes an optional form of
benefit under which benefits are distrib-
uted in the form of marketable securities,
other than securities of the employer, that
optional form of benefit may be modified
by substituting cash for the marketable
securities. For purposes of this para-
graph (b)(2)(iii), the term marketable se-
curitiesmeans marketable securities as
defined in section 731(c)(2), and the term
securities of the employermeans securi-
ties of the employer as defined in section
402(e)(4)(E)(ii).
(C) Amendments to defined contribu-
tion plans to specify medium of distribu-
tion. If a defined contribution plan in-
cludes an optional form of benefit under
which benefits are distributable to a par-
ticipant in a medium other than cash, the
plan may be amended to limit the types
of property in which distributions may be
made to the participant to the types of
property specified in the amendment.
For this purpose, the types of property
specified in the amendment must include
all types of property (other than types of
property for which the plan may be
amended to substitute cash under para-
graph (b)(2)(iii)(B) of this Q&A-2) that
are held in the participant’s account on
the effective date of the amendment and
in which the participant would be able to
receive a distribution immediately before
the effective date of the amendment. In
addition, a plan amendment may provide
that the participant’s right to receive a
distribution in the form of specified types
of property is limited to the property held
in the participant’s account at the time of
distribution that consists of property of
those specified types.
(D) In-kind distributions after plan
termination. If a plan includes an op-
tional form of benefit under which bene-
fits are distributed in specified property,
that optional form of benefit may be
modified for distributions after plan ter-
mination by substituting cash for the
specified property to the extent that, on
plan termination, an employee has the
opportunity to receive the optional form
of benefit in the form of the specified
property. This exception is not available,
however, if the employer that maintains
the terminating plan also maintains an-
other plan that provides an optional form
of benefit under which benefits are dis-
tributed in the specified property.
(E) Examples. The following exam-
ples illustrate the application of this para-
graph (b)(2)(iii):
Example 1. (i) An employer maintains a profit-
sharing plan under which participants may direct
the investment of their accounts. One investment
option available to participants is a fund invested in
common stock of the employer. The plan provides
that the participant has the right to a distribution in
the form of cash upon termination of employment.
In addition, the plan provides that, to the extent a
participant’s account is invested in the employer
stock fund, the participant may receive an in-kind
distribution of employer stock upon termination of
employment. On September 1, 2000, the plan is
amended, effective on January 1, 2001, to remove
the fund invested in employer common stock as an
investment option under the plan and to provide for
the stock held in the fund to be sold. The amend-
ment permits participants to elect how the sale pro-
ceeds are to be reallocated among the remaining in-
vestment options, and provides for amounts not so
reallocated as of January 1, 2001, to be allocated to
a specified investment option.
(ii) The plan does not fail to satisfy section
411(d)(6) solely on account of the plan amendment
relating to the elimination of the employer stock in-
vestment option, which is not a section 411(d)(6) pro-
tected benefit. See paragraph (d)(7) of Q&A-1 of this
section. Moreover, because the plan did not provide
for distributions of employer securities except to the
extent participants’ accounts were invested in the em-
ployer stock fund, the plan is not required opera-
tionally to offer distributions of employer securities
following the amendment. In addition, the plan
would not fail to satisfy section 411(d)(6) on account
of a further plan amendment, effective after the plan
has ceased to provide for an employer stock fund in-
vestment option, to eliminate the right to a distribu-
tion in the form of employer stock. See paragraph
(b)(2)(iii)(C) of this Q&A-2.
Example 2. (i) An employer maintains a profit-
sharing plan under which a participant, upon termi-
nation of employment, may elect to receive benefits
in a single-sum distribution either in cash or in
kind. The plan’s investments are limited to a fund
invested in employer stock, a fund invested in XYZ

mutual funds (which are marketable securities), and
a fund invested in shares of PQR limited partner-
ship (which are not marketable securities).
(ii) The following alternative plan amendments
would not cause the plan to fail to satisfy section
411(d)(6):
(A) A plan amendment that limits non-cash dis-
tributions to a participant on termination of em-
ployment to a distribution of employer stock and
shares of PQR limited partnership. See paragraph
(b)(2)(iii)(B) of this Q&A-2.
(B) A plan amendment that limits non-cash distri-
butions to a participant on termination of employ-
ment to a distribution of employer stock and shares of
PQR limited partnership, and that also lists the partic-
ipants that hold employer stock in their accounts as of
the effective date of the amendment and provides that
only those participants have the right to distributions
in the form of employer stock, and lists the partici-
pants that hold shares of PQR limited partnership in
their accounts as of the effective date of the amend-
ment and provides that only those participants have
the right to distributions in the form of shares of PQR
limited partnership. See paragraphs (b)(2)(iii)(B) and
(C) of this Q&A-2.
(C) A plan amendment that limits non-cash dis-
tributions to a participant on termination of em-
ployment to a distribution of employer stock and
shares of PQR limited partnership to the extent that
the participant’s account is invested in those assets
at the time of the distribution. See paragraphs
(b)(2)(iii)(B) and (C) of this Q&A-2.
(D) A plan amendment that limits non-cash dis-
tributions to a participant on termination of em-
ployment to a distribution of employer stock and
shares of PQR limited partnership, and that lists the
participants that hold employer stock in their ac-
counts as of the effective date of the amendment
and provides that only those participants have the
right to distributions in the form of employer stock,
and lists the participants that hold shares of PQR
limited partnership in their accounts as of the effec-
tive date of the amendment and provides that only
those participants have the right to distributions in
the form of shares of PQR limited partnership, and
further provides that the distribution of that stock or
those shares is available only to the extent that the
participants’ accounts are invested in those assets at
the time of the distribution. See paragraphs
(b)(2)(iii)(B) and (C) of this Q&A-2.
Example 3. (i) An employer maintains a stock
bonus plan under which a participant, upon termi-
nation of employment, may elect to receive benefits
in a single-sum distribution in employer stock.
This is the only plan maintained by the employer
under which distributions in employer stock are
available. The employer decides to terminate the
stock bonus plan.
(ii) If the plan makes available a single-sum dis-
tribution in employer stock on plan termination, the
plan will not fail to satisfy section 411(d)(6) solely
because the optional form of benefit providing a
single-sum distribution in employer stock on termi-
nation of employment is modified to provide that
such distribution is available only in cash. See
paragraph (b)(2)(iii)(D) of this Q&A-2.
* * * * *
(e) Permitted plan amendments affect-
ing alternative forms of payment under
defined contribution plans—(1) General
rule. A defined contribution plan does
not violate the requirements of section
411(d)(6) merely because the plan is
amended to eliminate or restrict the abil-
ity of a participant to receive payment of
accrued benefits under a particular op-
tional form of benefit if, after the plan
amendment is effective with respect to
the participant, the alternative forms of
payment available to the participant in-
clude payment in both a single-sum dis-
tribution form and an extended distribu-
tion form described in paragraph (e)(3)
of this Q&A-2, each of which is an other-
wise identical distribution form with re-
spect to the optional form of benefit that
is being eliminated or restricted.
(2) Otherwise identical distribution
form. For purposes of this paragraph (e),
a distribution form is an otherwise identi-
cal distribution form with respect to an
optional form of benefit that is elimi-
nated or restricted pursuant to paragraph
(e)(1) of this Q&A-2 only if the distribu-
tion form is identical in all respects to the
eliminated or restricted optional form of
benefit (or would be identical except that
it provides greater rights to the partici-
pant) except with respect to the timing of
payments after commencement. For ex-
ample, a single-sum distribution form is
not an otherwise identical distribution
form with respect to a specified install-
ment form of benefit if the single-sum
distribution form is not available for dis-
tribution on the date on which the install-
ment form would have been available for
commencement, is not available in the
same medium of distribution as the in-
stallment form, does not apply to the
benefit (or any portion of the benefit) to
which the installment form applied, im-
poses any condition of eligibility that did
not apply to the installment form, or
lacks any related election rights that were
available with respect to the installment
form. However, the single-sum distribu-
tion form would not fail to be an other-
wise identical distribution form with re-
spect to the installment form merely
because the single-sum distribution form
is available for distribution on a date on
which the installment form would not
have been available for commencement,
is available in media of distribution that
the installment form was not, applies (if
the participant so chooses) to a larger
portion of the benefit than the installment
form, has fewer or less stringent condi-
tions of eligibility than the installment
form, or has election rights that the in-
stallment form lacked. In addition, an
otherwise identical distribution form
need not retain rights or features of the
optional form of benefit that is elimi-
nated or restricted to the extent that those
rights or features are not otherwise pro-
tected under section 411(d)(6). More-
over, in the case of an optional form of
benefit that is in the form of an annuity
and that provides for distribution of an
annuity contract, a distribution form that
is not in the form of an annuity does not
fail to be an otherwise identical distribu-
tion form with respect to that optional
form of benefit merely because the non-
annuity distribution form does not pro-
vide for distribution of an annuity con-
tract.
(3) Extended distribution form–(i) In
general. For purposes of this paragraph
(e), a distribution form is an extended
distribution form if it is—
(A) An annuity payable for the life of
the participant;
(B) Substantially equal periodic pay-
ments made (not less frequently than an-
nually), at the election of the participant,
over either the life expectancy of the par-
ticipant or the joint life expectancy of the
participant and the participant’s spouse
(with or without redetermination of those
life expectancies, as described in section
401(a)(9)(D)); or
(C) For a plan amendment that does
not eliminate any optional form of bene-
fit that is an extended distribution form
described in paragraph (e)(3)(i)(A) or
(B) of this Q&A-2, substantially equal
periodic payments made (not less fre-
quently than annually) over a period at
least as long as the longest period over
which the participant is entitled to re-
ceive a distribution under the plan before
the plan amendment under any of the op-
tional forms of benefit that are elimi-
nated by the plan amendment.
(ii) Substantially equal periodic pay-
ments. For purposes of this paragraph
(e)(3), the rules of section
402(c)(4)(A)(ii) and §1.402(c)–2, Q&A-
5, apply in determining whether pay-
ments are substantially equal periodic
payments (but without regard to the 10-
year minimum period for payments and
2000–16 I.R.B.909April 17, 2000

without regard to §1.402(c)–2, Q&A-
5(b), regarding certain periodic payments
that decrease upon a participant’s attain-
ment of eligibility for social security
benefits).
(4) Examples. The following exam-
ples illustrate the application of this para-
graph (e):
Example 1. (i) P is a participant in Plan M, a
qualified profit-sharing plan that is invested in mu-
tual funds. The distribution forms available to P
under Plan M include a distribution of P’s vested
account balance under Plan M in the form of distri-
bution of various annuity contract forms (including
a single life annuity and a joint and survivor annu-
ity). The annuity payments under the annuity con-
tract forms begin as of the first day of the month
following P’s termination of employment (or as of
the first day of any subsequent month, subject to
the requirements of section 401(a)(9)). P has not
previously elected payment of benefits in the form
of a life annuity, and Plan M is not a direct or indi-
rect transferee of any plan that is a defined benefit
plan or a defined contribution plan that is subject to
section 412. Plan M provides that distributions on
the death of a participant are made in accordance
with section 401(a)(11)(B)(iii)(I). Plan M is
amended so that, after the amendment is effective,
P is no longer entitled to any distribution in the
form of the distribution of an annuity contract.
However, after the amendment is effective, P is en-
titled to receive a single-sum cash distribution of
P’s vested account balance under Plan M payable as
of the first day of the month following P’s termina-
tion of employment (or as of the first day of any
subsequent month, except as required by section
401(a)(9)). In addition, P is entitled to receive P’s
vested account balance under Plan M payable in
substantially equal monthly payments made, at P’s
election, over either P’s life expectancy or the joint
life expectancies of P and P’s spouse, beginning as
of the first day of the month following P’s termina-
tion of employment (or as of the first day of any
subsequent month, except as required by section
401(a)(9)).
(ii) Plan M does not violate the requirements of
section 411(d)(6) (or section 401(a)(11)) merely be-
cause the plan amendment has eliminated P’s op-
tion to receive a distribution in any of the various
annuity contract forms previously available.
Example 2. (i) P is a participant in Plan M, a
qualified profit-sharing plan to which section
401(a)(11)(A) does not apply. Upon termination of
employment, P is entitled to receive cash distribu-
tions from Plan M, payable as of the first day of the
month following P’s termination of employment (or
as of the first day of any subsequent month, subject
to the requirements of section 401(a)(9)), in the
form of a single-sum distribution, or in substan-
tially equal monthly installment payments over ei-
ther 5, 10, 15, or 20 years. Plan M is amended so
that, after the amendment is effective, P is no
longer entitled to receive a distribution in the form
of substantially equal monthly installment pay-
ments over 5, 10, or 15 years. However, after the
amendment is effective, P continues to be entitled
to receive cash distributions from Plan M, payable
as of the first day of the month following P’s termi-
nation of employment (or as of the first day of any
subsequent month, except as required by section
401(a)(9)), in the form of a single-sum distribution
or in substantially equal monthly installment pay-
ments over 20 years.
(ii) Plan M does not violate the requirements of
section 411(d)(6) merely because the plan amend-
ment has eliminated P’s option to receive a distrib-
ution in the form of substantially equal monthly in-
stallment payments over 5, 10, or 15 years.
(5) Effective date. This paragraph (e)
applies to plan amendments that are
adopted and made effective after the date
of publication of final regulations in the
Federal Register.
* * * * *
A-3. (a) * * *
(3) Waiver prohibition. In general, ex-
cept as provided in paragraph (b) of this
Q&A-3, a participant may not elect to
waive section 411(d)(6) protected benefits.
Thus, for example, the elimination of the
defined benefit feature of a participant’s
benefit under a defined benefit plan by rea-
son of a transfer of such benefits to a de-
fined contribution plan pursuant to a par-
ticipant election, at a time when the benefit
is not distributable to the participant, vio-
lates section 411(d)(6).
(4) Direct rollovers. A direct rollover
described in Q&A-3 of §1.401(a)(31)–1
that is paid to a qualified plan is not a
transfer of assets and liabilities that must
satisfy the requirements of section
414(l), and is not a transfer of benefits
for purposes of applying the require-
ments under section 411(d)(6) and para-
graph (a)(1) of this Q&A-3. Therefore,
for example, if such a direct rollover is
made to another qualified plan, the re-
ceiving plan is not required to provide,
with respect to amounts paid to it in a di-
rect rollover, the same optional forms of
benefit that were provided under the plan
that made the direct rollover. See
§1.401(a)(31)–1, Q&A-14.
(b) Elective transfers of benefits be-
tween defined contribution plans–(1) Gen-
eral rule. A transfer of a participant’s en-
tire benefit between qualified defined con-
tribution plans (other than a direct transfer
described in section 401(a)(31)) that re-
sults in the elimination or reduction of sec-
tion 411(d)(6) protected benefits does not
violate section 411(d)(6) if the following
requirements are met:
(i) Voluntary election. The plan from
which the benefits are transferred must
provide that the transfer is conditioned
upon a voluntary, fully-informed election
by the participant to transfer the partici-
pant’s entire benefit to the other qualified
defined contribution plan. As an alterna-
tive to the transfer, the participant must
be offered the opportunity to retain the
participant’s section 411(d)(6) protected
benefits under the plan (or, if the plan is
terminating, to receive any optional form
of benefit for which the participant is eli-
gible under the plan as required by sec-
tion 411(d)(6)).
(ii) Types of plans to which transfers
may be made. To the extent the benefits
are transferred from a money purchase
pension plan, the transferee plan must be
a money purchase pension plan. To the
extent the benefits being transferred are
part of a qualified cash or deferred
arrangement under section 401(k), the
benefits must be transferred to a quali-
fied cash or deferred arrangement under
section 401(k). To the extent the benefits
being transferred are part of an employee
stock ownership plan as defined in sec-
tion 4975(e)(7), the benefits must be
transferred to another employee stock
ownership plan. Benefits transferred
from a profit-sharing plan other than
from a qualified cash or deferred
arrangement, or from a stock bonus plan
other than an employee stock ownership
plan, may be transferred to any type of
defined contribution plan.
(iii) Circumstances under which trans-
fers may be made. The transfer must be
made in connection with an asset or
stock acquisition, merger, or other simi-
lar transaction involving a change in em-
ployer of the employees of a trade or
business (i.e., an acquisition or disposi-
tion within the meaning of
§1.410(b)–2(f)) or in connection with the
participant’s transfer of employment to a
different job for which service does not
result in additional allocations under the
transferor plan.
April 17, 20009102000–16 I.R.B.

(2) Applicable qualification require-
ments. A transfer described in this para-
graph (b) is a transfer of assets or liabili-
ties within the meaning of section
414(l)(1) that must meet the require-
ments of section 414(l) and all other ap-
plicable qualification requirements.
Thus, for example, if the survivor annu-
ity requirements of sections 401(a)(11)
and 417 apply to the plan from which the
benefits are transferred, as described in
this paragraph (b), but do not otherwise
apply to the receiving plan, the require-
ments of sections 401(a)(11) and 417
must be met with respect to the trans-
ferred benefits under the receiving plan.
In addition, the vesting provisions under
the receiving plan must satisfy the re-
quirements of section 401(a)(10) with re-
spect to the amounts transferred.
(c) Elective transfers of certain dis-
tributable benefits between defined bene-
fit plans or between defined contribution
plans–(1) In general. A transfer of a
participant’s benefits that are distrib-
utable between qualified defined benefit
plans, or between defined contribution
plans (other than the portion of such a
transfer that is a direct transfer described
in section 401(a)(31)), that results in the
elimination or reduction of section
411(d)(6) protected benefits does not vi-
olate section 411(d)(6) if–
(i) The voluntary election requirement
of paragraph (b)(1)(i) of this Q&A-3 is
met; and
(ii) The amount of the benefit trans-
ferred, together with the amount of a
contemporaneous section 401(a)(31)
transfer to the transferee plan, equals the
entire nonforfeitable accrued benefit
under the plan of the participant whose
benefit is being transferred, calculated to
be at least the greater of the single-sum
distribution provided for under the plan
for which the participant is eligible (if
any) or the present value of the partici-
pant’s accrued benefit payable at normal
retirement age (calculated by using inter-
est and mortality assumptions that satisfy
the requirements of section 417(e) and
subject to the limitations imposed by sec-
tion 415).
(2) Treatment of transfer. The transfer
of benefits pursuant to this paragraph (c)
generally is treated as a distribution for
purposes of section 401(a). For example,
the transfer is subject to the cash-out
rules of section 411(a)(7), the early ter-
mination requirements of section
411(d)(2), and the survivor annuity re-
quirements of sections 401(a)(11) and
417. However, the transfer is not treated
as a distribution for purposes of the mini-
mum distribution requirements of section
401(a)(9).
(3) Distributable benefits. For pur-
poses of this paragraph (c), a partici-
pant’s benefits are distributable on a par-
ticular date if, on that date, the
participant is eligible, under the terms of
the plan from which the benefits are
transferred, to receive an immediate dis-
tribution of these benefits from that plan
under provisions of the plan not inconsis-
tent with section 401(a).
(d) Status of elective transfer as op-
tional form of benefit. A right to a trans-
fer of benefits pursuant to the elective
transfer rules of paragraph (b) or (c) of
this Q&A-3 is an optional form of bene-
fit under section 411(d)(6). The avail-
ability of such optional form is subject to
the nondiscrimination requirements of
section 401(a)(4). However, a plan will
not be treated as failing to satisfy
§1.401(a)(4)–4 merely because it re-
stricts the transfer option to benefits that
exceed the dollar limits on mandatory
distributions that can be made without
the consent of the participant under sec-
tion 411(a)(11).
(e) Effective date. This Q&A-3 is ap-
plicable for transfers made after the date
of publication of final regulations in the
Federal Register.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on
March 28, 2000, 8:45 a.m., and published in the
issue of the Federal Register for March 29, 2000, 65
F.R. 16546)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Coordination of Sections 755
and 1060 Relating to Allocation
of Basis Adjustments Among
Partnership Assets
REG–107872–99
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the allo-
cation of basis adjustments among part-
nership assets under section 755. The
proposed regulations are necessary to im-
plement section 1060(d), which applies
the residual method to certain partnership
transactions. This document also pro-
vides notice of a public hearing on these
proposed regulations.
DATES: Written comments must be re-
ceived by July 4, 2000. Outlines of topics
to be discussed at the public hearing
scheduled for July 12, 2000, must be re-
ceived by June 21, 2000.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–107872–99),
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:DOM:CORP:R (REG–107872–99),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Washing-
ton, DC. Alternatively, taxpayers may sub-
mit comments electronically via the inter-
net by selecting the “Tax Regs” option on
the IRS Home Page, or by submitting com-
ments directly to the IRS internet site at
http://www.irs.ustreas.gov/tax_regs/reglist.
html. The public hearing will be held in
room 2716, Internal Revenue Building,
1111 Constitution Avenue, NW., Washing-
ton, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Matthew Lay or Craig Gerson, (202) 622-
3050; concerning submissions, the hear-
ing, and/or to be placed on the building
access list to attend the hearing, LaNita
VanDyke, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
As part of the Tax Reform Act of
1986, Congress enacted section 1060,
which generally requires the use of the
residual method in order to allocate the
purchase price of “applicable asset ac-
2000–16 I.R.B.911April 17, 2000

quisitions” among individual assets pur-
chased. An applicable asset acquisition
is defined as any transfer of assets that
constitute a trade or business where the
transferee’s basis is determined wholly
by reference to the consideration paid for
the assets. Both direct and indirect trans-
fers of a business were intended to be
covered by the provision, including “the
sale of a partnership interest in which the
basis of the purchasing partner’s propor-
tionate share of the partnership’s assets is
adjusted to reflect the purchase price.”
See section 1060(c) and S. Rep. No.
99–313, 1986–3 C.B. Vol. 3 at 254–255.
In July of 1988, the IRS and the Trea-
sury Department issued temporary and
proposed regulations, which, among
other things, provided guidance concern-
ing the application of section 1060 and
coordinated the application of sections
755 and 1060. TD 8215 (1988–2 C.B.
305).
In 1988, shortly after the IRS and the
Treasury Department issued its tempo-
rary and proposed regulations, Congress
enacted section 1060(d), which expressly
addresses the extent to which section
1060 should apply to transactions involv-
ing partnerships. As amended in 1993,
section 1060(d)(1) applies the section
1060 residual method in the case of a dis-
tribution of partnership property or a
transfer of an interest in a partnership,
but only in determining the value of sec-
tion 197 intangibles for purposes of ap-
plying section 755. Section 1060(d)(2)
provides that if section 755 applies, such
distribution or transfer (as the case may
be) shall be treated as an applicable asset
acquisition for purposes of section
1060(b) (which imposes certain report-
ing requirements for applicable asset ac-
quisitions).
Section 755 governs the allocation of
certain adjustments to the basis of part-
nership property among partnership as-
sets. Section 1.755–2T applies the resid-
ual method to transfers and distributions
which trigger basis adjustments under
section 743(b) (involving certain trans-
fers of partnership interests) or section
732(d) (involving certain distributions
within two years of a partnership interest
transfer) if the assets of the partnership
constitute a trade or business for pur-
poses of section 1060(c). Section
1.755–2T(c) contains a cross reference to
the reporting requirements applicable to
such transfers and distributions.
Explanation of Provisions
1. Application of Proposed Regulations
The temporary regulations under sec-
tion 755 apply only if the assets of the
partnership comprise a trade or business
within the meaning of section 1060(c),
and the basis adjustments are made under
section 743(b) or section 732(d). They
do not apply the residual method in valu-
ing partnership property for the purpose
of allocating basis adjustments under
section 734(b). However, the temporary
regulations were issued prior to the en-
actment of section 1060(d)(1), which ex-
pressly refers to basis adjustments trig-
gered by partnership distributions, and
does not reference a trade or business re-
quirement.
The IRS and the Treasury Department
anticipate that the regulations under
§1.755–2, when finalized, will apply to
all transfers of partnership interests and
partnership distributions to which section
755 applies, and not just to transfers and
distributions relating to partnerships con-
ducting a trade or business. This ap-
proach is consistent with the language of
section 1060(d) and is supported by lan-
guage contained in the legislative history.
See H.R. Rep. No. 100–795, at 70 n.34
(1988) (the IRS is not precluded from ap-
plying the residual method under other
provisions of the Code).
Proposed §1.755–2(d) contains a cross
reference to the reporting requirements
applicable to such transfers and distribu-
tions.
2. Basis Adjustments Under Section
743(b) or 732(d)
In the case of a basis adjustment under
section 743(b) or section 732(d), the pro-
posed regulations determine the fair mar-
ket value of partnership assets in two
steps. In most situations, it first is neces-
sary to determine partnership gross
value. Second, partnership gross value
must be allocated among partnership
property.
(a) Partnership gross value. In general,
partnership gross value equals the
amount that, if assigned to all partnership
property, would result in a liquidating
distribution to the partner equal to the
transferee’s basis in the transferred part-
nership interest immediately following
the relevant transfer (reduced by the
amount, if any, of such basis that is at-
tributable to partnership liabilities).
Here, the amount paid for the partnership
interest provides the frame of reference
for valuing the entire partnership.
In the case of basis adjustments which
are triggered by an exchange of a part-
nership interest in which the transferee’s
basis in the interest is determined in
whole or in part by reference to the trans-
feror’s basis in the interest (transferred
basis exchange), the transferee’s basis
does not necessarily have any connection
to the value of partnership assets. Ac-
cordingly, a transferred basis exchange
provides no frame of reference for valu-
ing partnership assets. Furthermore, if
the valuation rules which apply to other
transfers were applied to transferred
basis exchanges, then partners could use
these exchanges to shift basis from capi-
tal gain assets to ordinary income assets,
or vice versa. The proposed regulations
do not provide a rule addressing trans-
ferred basis exchanges. Comments are
requested as to how the residual method
should apply if basis adjustments under
section 743(b) are triggered by trans-
ferred basis exchanges, or if basis adjust-
ments under section 732(d) relate to prior
transferred basis exchanges.
(b) Allocating partnership gross value
among partnership property. Once deter-
mined, partnership gross value is allo-
cated among five classes of property, as
follows: first among cash and general de-
posit accounts (including savings and
checking accounts) other than certifi-
cates of deposit held in banks, savings
and loan associations, and other deposi-
tory institutions (referred to hereafter as
cash); then among partnership assets
other than cash, capital assets, section
1231(b) property, and section 197 intan-
gibles (referred to hereafter as ordinary
income property); then among capital as-
sets and section 1231(b) property other
than section 197 intangibles; then among
section 197 intangibles other than good-
will and going concern value; and finally
to goodwill and going concern value (re-
ferred to hereafter as goodwill).
In determining the values to be as-
signed to assets in the third, fourth, and
April 17, 20009122000–16 I.R.B.

fifth classes, properties or potential gain
within these classes that are treated as
unrealized receivables under the flush
language in section 751(c) are not
counted as assets in the second class. To
provide otherwise would be inconsistent
with the residual method, because the
residual method is justified, at least in
part, by the fact that goodwill is not read-
ily subject to valuation. Where goodwill
is subject to amortization under section
197, the portion of the intangible that is
subject to recapture under section 1245
will be treated as an unrealized receiv-
able under the flush language of section
751(c). To assign value to this portion of
the asset in the second class would re-
quire a determination that the goodwill
has a value equal to at least the amount
of the recapture. If these assets are not
readily subject to valuation, this determi-
nation presumably could not be made.
Accordingly, in allocating value among
the five classes under the residual
method, it is appropriate to include prop-
erties or potential gain treated as unreal-
ized receivables under the flush language
of section 751(c) within the overall class
to which the underlying property belongs
rather than treating the section 751(c)
portion of such property as a separate
asset included in the second class.
Although properties or potential gain
treated as unrealized receivables under
the flush language of section 751(c) are
not included in the second class of assets
under these proposed regulations for pur-
poses of allocating value, they are treated
as separate assets that are ordinary in-
come property for purposes of allocating
basis adjustments among such assets
under §1.755–1.
With respect to allocating value within
the asset classes, in general, if the value
assigned to a class is less than the sum of
the fair market values of the assets in that
class (determined without regard to the
residual method), then the assigned value
must be allocated among the individual
assets in proportion to their fair market
values. Although, as discussed above, it
is not appropriate to treat properties or
potential gain treated as unrealized re-
ceivables under the flush language of
section 751(c) as separate ordinary in-
come assets, it is appropriate to allocate
value within each class by giving priority
to the portions of the assets that will be
taxed at higher rates as ordinary income.
Such treatment better equates the basis
adjustments of the transferee with the
higher taxed income recognized by the
transferor, thereby avoiding duplicative
recognition of ordinary income on subse-
quent transfers with respect to the same
asset. Accordingly, once values have
been assigned generally to the third,
fourth, and fifth classes of assets, such
values will be assigned within each of
these classes first to properties or poten-
tial gain treated as unrealized receivables
under the flush language in section
751(c), if any, in proportion to the in-
come that would be recognized if the un-
derlying assets were sold for their fair
market values (determined without re-
gard to the residual method), but only to
the extent of the income attributable to
the unrealized receivables. Any remain-
ing value in each class will be allocated
among the remaining portions of the as-
sets in that class in proportion to the fair
market values of such portions (deter-
mined without regard to the residual
method).
In general, the value assigned to an
asset (other than goodwill) cannot ex-
ceed the fair market value (determined
without regard to the residual method) of
that asset on the date of the relevant
transfer. Therefore, if partnership gross
value exceeds the aggregate value of the
partnership’s individual assets, the ex-
cess must be allocated entirely to the
value of goodwill. However, an excep-
tion is provided if partnership gross
value exceeds the aggregate value of the
partnership’s individual assets, and good-
will could not under any circumstances
attach to the assets. Under this excep-
tion, the excess partnership gross value
must be allocated among all partnership
assets other than cash in proportion to
their fair market values (determined
without regard to the residual method).
(c) Special situations. In general, part-
nership gross value may be determined
without reference to the value of individ-
ual partnership assets. In calculating
partnership gross value, it is only neces-
sary to determine the relevant partner’s
share of book value in partnership assets
and how much book gain or loss must be
recognized by the partnership on the dis-
position of all such assets to cause the
partner to receive the appropriate liqui-
dating distribution. The manner in which
the book gain or loss is allocated among
the partnership’s assets generally will not
affect the amount of the liquidating dis-
tribution to the partner.
In certain circumstances, however,
such as where book income or loss with
respect to particular partnership proper-
ties is allocated differently among part-
ners, partnership gross value may vary
depending on the value of particular part-
nership assets. In these situations, it is
not possible to first determine the total
value of the partnership (i.e., partnership
gross value) and then apply the residual
method to allocate that value to the part-
nership’s individual assets. Instead, it is
necessary first to determine the fair mar-
ket value of the partnership’s individual
assets (determined taking into account all
relevant facts and circumstances), and
then to assign such value among the asset
tiers described in the residual method
such that the combined value of all part-
nership assets would cause the appropri-
ate distribution to the relevant partner.
The proposed regulations include a rule
to address these special situations. In ad-
dition, under this rule, if the value deter-
mined for assets in the first four asset
classes is not sufficient to cause the ap-
propriate liquidating distribution, then,
so long as goodwill could attach to the
assets of the partnership, the value of
goodwill is presumed to be an amount
that, if assigned to such property, would
cause the appropriate liquidating distrib-
ution.
3. Basis Adjustments Under Section
734(b)
The proposed regulations do not pro-
vide a rule for valuing partnership assets
in the case of distributions that result in a
basis adjustment under section 734(b).
The IRS and the Treasury Department
have considered several alternative ap-
proaches, described below. Two of these
approaches utilize a method similar to
the one provided for basis adjustments
under sections 743(b) and 732(d); that is,
first determine partnership gross value
and then allocate such amount among the
partnership property applying the resid-
ual method. The third approach does not
rely on the concept of partnership gross
value. The IRS and the Treasury Depart-
ment request comments as to which, if
2000–16 I.R.B.913April 17, 2000

any, of these approaches should be uti-
lized in applying the residual method in
the context of basis adjustments under
section 734(b). In addition, comments
are requested concerning whether the
second or third approach should be
adopted in the context of basis adjust-
ments under sections 743(b) and 732(d)
involving transferred basis transactions.
Under the first approach, in the case of
a distribution which results in a basis ad-
justment under section 734(b) and which
causes the distributee partner’s interest in
the partnership to decrease, partnership
gross value would be deemed to equal
the amount that, if assigned to all part-
nership property, would result in a liqui-
dating distribution to the partner (attrib-
utable to the reduction in interest) equal
to the value of the consideration received
by the distributee partner in the distribu-
tion. Under this approach, the amount
distributed in exchange for the relin-
quished interest would provide the frame
of reference for valuing the entire part-
nership. The reduction in a partner’s in-
terest could be measured as the differ-
ence between the partner’s interest in the
partnership immediately before the dis-
tribution and the partner’s interest in the
partnership immediately after the distrib-
ution. However, the IRS and the Trea-
sury Department recognize that measur-
ing the reduction in a partner’s interest in
the partnership in connection with a dis-
tribution can be difficult in some situa-
tions (for example, situations in which
partners do not share profits or other
items in proportion to their relative capi-
tal account balances). Moreover, in the
case of a distribution that results in a
basis adjustment under section 734(b)
and does not reduce the distributee part-
ner’s interest in the partnership (such as
in a pro rata distribution of cash), the
transaction provides no frame of refer-
ence to value the partnership.
A second approach would be to deter-
mine partnership gross value as the value
of the entire partnership as a going con-
cern, and to apply the residual method by
reference to that overall value. This
method has the disadvantage of divorc-
ing the valuation of partnership property
from the transaction that gives rise to the
adjustment. However, there would be no
need to measure the reduction in the dis-
tributee partner’s interest or even to have
a reduction in the distributee partner’s in-
terest to apply this method. The method
would work equally well for distribu-
tions where the partner’s interest in the
partnership is reduced and for distribu-
tions where it is not.
Under a third possible approach, the
concept of partnership gross value would
be disregarded, and, instead, value would
be allocated to goodwill for section 755
purposes only if the amount of a positive
basis adjustment under section 734(b)
exceeds the appreciation in all assets of
the character required to be adjusted
which are not goodwill. This approach
avoids the problems relating to the mea-
surement or presence of a reduction in
the distributee partner’s interest and has
the added benefit of avoiding a valuation
of the partnership’s overall operations.
In contrast with the second approach,
however, the value that is assigned to
goodwill under this approach would not
necessarily bear any relation to the actual
value of goodwill in the hands of the
partnership. In addition, this rule ar-
guably would be inconsistent with the
rule in §1.755–1(c), which requires that
positive basis adjustments must be allo-
cated to undistributed property of like
character to the distributed property (or
capital gain property in the case of ad-
justments attributable to gain recognized
by the distributee partner) first in propor-
tion to unrealized appreciation with re-
spect to such property and then in pro-
portion to fair market value. Under the
third approach, a basis adjustment under
section 734(b) to the class of assets com-
posed of capital assets and property de-
scribed in section 1231(b) could not ex-
ceed the unrealized appreciation with
respect to any such partnership property
other than goodwill. Accordingly, a sec-
tion 734(b) basis adjustment never would
be made in proportion to the fair market
value of the property in the class of capi-
tal assets and property described in sec-
tion 1231(b).
4. Effect on §1.755–1
Section 1.755–1(b)(3)(ii)(B) of the In-
come Tax Regulations published on De-
cember 15, 1999 (64 FR 69903) contains
a rule allocating discounts among capital
assets following the transfer of a partner-
ship interest that results in a basis adjust-
ment under section 743(b). Because pro-
posed §1.755–2 takes discounts and pre-
miums into account when assigning val-
ues to partnership property for purposes
of section 755 in such cases, the rule in
§1.755–1(b)(3)(ii)(B) would become un-
necessary.
5. Possible Expansion of Regulations
With respect to transfers of partnership
interests, the IRS and the Treasury De-
partment are considering applying the
rules contained in these proposed regula-
tions not just for valuing partnership as-
sets for purposes of applying section 755,
but also to determine the value of assets
for purposes of applying section
1(h)(6)(B) (collectibles gain or loss) with
respect to partnerships, section 1(h)(7)
(section 1250 capital gain), and section
751(a) (ordinary income treatment upon
sale or exchange of an interest in a part-
nership). Applying the rules in these pro-
posed regulations in connection with
these provisions is consistent with the
legislative history to section 1060(d) and
would provide greater uniformity with
respect to the amount and character of in-
come recognized upon the transfer of a
partnership interest and the basis adjust-
ments to partnership assets to which the
different income character is attributable.
However, this application of the rules
could cause an increase in complexity,
particularly if a section 754 election is
not in effect for a year in which the trans-
fer of a partnership interest occurs (so
that application of the residual method
otherwise would not be required). The
IRS and the Treasury Department request
comments on whether partnerships
should value partnership assets using the
residual method for purposes of sections
1(h)(6)(B), 1(h)(7), and 751(a).
Proposed Effective Date
The regulations are proposed to be ef-
fective for any basis adjustment resulting
from any distribution of partnership
property or transfer of a partnership in-
terest that occurs on or after the date final
regulations are published 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-
April 17, 20009142000–16 I.R.B.

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 the regulations
do not impose a collection of information
on small entities, the Regulatory Flexi-
bility 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 businesses.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are timely submitted to the
IRS. The IRS and the Treasury Depart-
ment request comments on the clarity of
the proposed rule and how it may be
made easier to understand. All com-
ments will be available for public inspec-
tion and copying.
A public hearing has been scheduled
for July 12, 2000, beginning at 10 a.m.,
in room 2716 of the Internal Revenue
Building. Due to building security pro-
cedures, visitors must enter at the 10th
Street entrance, located between Consti-
tution and Pennsylvania Avenues, NW.
In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
before the hearing starts. For informa-
tion about having your name placed on
the building access list to attend the hear-
ing, see the “FOR FURTHER INFOR-
MATION CONTACT” section of the
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons that wish
to present oral comments at the hearing
must submit written comments and an
outline of the topics to be discussed and
the time to be devoted to each topic
(signed original and eight (8) copies) by
June 21, 2000.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Matthew Lay of the Office
of the Assistant Chief Counsel
(Passthroughs and Special Industries).
However, personnel from other offices of
the IRS and the Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding a new entry
in numerical order to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 ***
Section 1.755–2 also issued under 26
U.S.C. 755 and 26 U.S.C. 1060. ***
Par. 2. Section 1.755–2 is added to
read as follows:
§1.755–2 Coordination of sections 755
and 1060.
(a) Coordination with section 1060—
(1) In general. If there is a basis adjust-
ment to which this section applies, the
partnership must determine the fair mar-
ket value of each item of partnership
property under the residual method, as
described in paragraph (b) of this section,
and the rules of §1.755–1 must be ap-
plied using the values so determined.
(2) Application of this section. This
section applies to any basis adjustment
made under section 743(b) (relating to
certain transfers of interests in a partner-
ship) or section 732(d) or section 734(b)
(relating to certain partnership distribu-
tions).
(b) Residual method—(1) In
general—(i) Five classes. (A) Except as
provided in paragraph (b)(3) of this sec-
tion, partnership gross value (as defined
in paragraph (c) of this section) is allo-
cated among five asset classes in the fol-
lowing order—
(1) Among cash and general deposit
accounts (including savings and check-
ing accounts) other than certificates of
deposit held in banks, savings and loan
associations, and other depository insti-
tutions (referred to hereafter as cash);
(2) Among partnership assets other
than cash, capital assets, section 1231(b)
property, and section 197 intangibles (re-
ferred to hereafter as ordinary income
property);
(3) Among capital assets and section
1231(b) property other than section 197
intangibles;
(4) Among section 197 intangibles
other than goodwill and going concern
value; and
(5) To goodwill and going concern
value (referred to hereafter as goodwill).
(B) In determining the values to be as-
signed to each class, properties or poten-
tial gain treated as unrealized receivables
under the flush language in section
751(c) are not counted as assets in the
second class. For example, any portion
of goodwill that would result in ordinary
income under section 1245 if the good-
will were sold would be included in the
residual class for goodwill.
(ii) Impaired classes. If the value as-
signed to a class is less than the sum of the
fair market values (determined under
paragraph (b)(2)(i) of this section) of the
assets in that class, then the assigned value
generally must be allocated among the in-
dividual assets in proportion to such fair
market values. However, in the third,
fourth, and fifth classes, values must be
assigned first to properties or potential
gain treated as unrealized receivables
under the flush language in section
751(c), if any, in proportion to the income
that would be recognized if the underlying
assets were sold for their fair market val-
ues (determined under paragraph (b)(2)(i)
of this section), but only to the extent of
the income attributable to the unrealized
receivables. Any remaining value in each
class will be allocated among the remain-
ing portions of the assets in that class in
proportion to the fair market values of
such portions (determined under para-
graph (b)(2)(i) of this section).
(2) Special rules.For purposes of this
section:
(i) Except as otherwise provided in
this section, the fair market value of each
item of partnership property (other than
goodwill) shall be determined on the
basis of all the facts and circumstances,
taking into account section 7701(g).
2000–16 I.R.B.915April 17, 2000

(ii) If goodwill could not under any
circumstances attach to the assets of a
partnership, then the value of goodwill is
zero. This might occur, for example, if a
partnership’s only asset is a vacant parcel
of real estate that does not produce cur-
rent income.
(iii) (A) The value assigned to an asset
(other than goodwill) shall not exceed
the fair market value (determined under
paragraph (b)(2)(i)) of that asset on the
date of the relevant transfer, unless—
(1) Partnership gross value (as defined
in paragraph (c) of this section) exceeds
the aggregate value of the partnership’s
individual assets; and
(2) Goodwill could not under any cir-
cumstances attach to the assets.
(B) If both of these conditions are sat-
isfied, the excess must be allocated
among all partnership assets other than
cash in proportion to such fair market
values.
(3) Special situations. In certain cir-
cumstances, such as where book income
or loss with respect to particular partner-
ship properties is allocated differently
among partners, partnership gross value
may vary depending on the value of par-
ticular partnership assets. In these spe-
cial situations, the fair market value of
each item of partnership property (other
than goodwill) first shall be determined
on the basis of all the facts and circum-
stances, taking into account section
7701(g). Such value then shall be as-
signed within the first four asset classes
under the residual method described in
paragraph (b)(1) of this section in a man-
ner that is consistent with the ordering
rule used in paragraph (b)(1) of this sec-
tion (together with the special rules in
paragraph (b)(2) of this section) so that
the amount of the liquidating distribution
described in paragraph (c)(1) of this sec-
tion would equal the transferee’s basis in
the transferred partnership interest. If the
value so determined for the assets in the
first four asset classes is not sufficient to
cause the appropriate liquidating distrib-
ution, then, so long as goodwill may at-
tach to the assets of the partnership, the
fair market value of goodwill shall be
presumed to equal an amount that if as-
signed to goodwill would cause the ap-
propriate liquidating distribution.
(c) Partnership gross value—(1) Basis
adjustments under section 743(b) and
section 732(d)—(i) In general. In the
case of a basis adjustment under section
743(b) or 732(d), partnership gross value
generally is equal to the amount that, if
assigned to all partnership property,
would result in a liquidating distribution
to the partner equal to the transferee’s
basis in the transferred partnership inter-
est immediately following the relevant
transfer (reduced by the amount, if any,
of such basis that is attributable to part-
nership liabilities) pursuant to the hypo-
thetical transaction (as defined in para-
graph (c)(3) of this section). Solely for
the purpose of determining partnership
gross value under the preceding sen-
tence, where a partnership interest is
transferred as a result of the death of a
partner, the transferee’s basis in its part-
nership interest is determined without re-
gard to section 1014(c), and is deemed to
be adjusted for that portion of the inter-
est, if any, which is attributable to items
representing income in respect of a dece-
dent under section 691.
(ii) Transferred basis transactions.
[Reserved]
(2) Basis adjustments under section
734(b). [Reserved]
(3) Hypothetical transaction. For pur-
poses of this paragraph (c), the hypothet-
ical transaction means the disposition by
the partnership of all partnership prop-
erty in a fully taxable transaction for
cash, followed by the payment of all
partnership liabilities (within the mean-
ing of section 752 and the regulations
thereunder), and the distribution of all re-
maining proceeds to the partners.
(d) Required statements. See
§1.743–1(k)(2) for provisions requiring
the transferee of a partnership interest to
provide information to the partnership
relating to the transfer of an interest in
the partnership. See §1.743–1(k)(1) for a
provision requiring the partnership to at-
tach a statement to the partnership return
showing the computation of a basis ad-
justment under section 743(b) and the
partnership properties to which the ad-
justment is allocated under section 755.
See §1.732–1(d)(3) for a provision re-
quiring a transferee partner to attach a
statement to its return showing the com-
putation of a basis adjustment under sec-
tion 732(d) and the partnership proper-
ties to which the adjustment is allocated
under section 755. See §1.732–1(d)(5)
for a provision requiring the partnership
to provide information to a transferee
partner reporting a basis adjustment
under section 732(d).
(e) Examples. The provisions of this
section are illustrated by the following
examples, which assume that the partner-
ships have an election in effect under
section 754 at the time of the transfer.
Except as provided, no partnership asset
(other than inventory) is property de-
scribed in section 751(a). The examples
are as follows:
Example 1. (i) A is the sole general partner in
ABC, a limited partnership. ABC has goodwill and
three other assets with fair market values (deter-
mined under paragraph (b)(2)(i) of this section) as
follows: inventory worth $1,000,000, a building (a
capital asset) worth $2,000,000, and section 197 in-
tangibles (other than goodwill) worth $800,000.
ABC has one liability of $1,000,000, for which A
bears the entire risk of loss under section 752 and
the regulations thereunder. Each partner has a one-
third interest in partnership capital and profits. D
purchases A’s partnership interest for $1,000,000.
(ii) D’s basis in the transferred partnership inter-
est (reduced by the amount of such basis that is at-
tributable to partnership liabilities) is $1,000,000
($2,000,000 - $1,000,000). Under paragraph (c) of
this section, partnership gross value is $4,000,000
(the amount that, if assigned to all partnership
property, would result in a liquidating distribution
to D equal to $1,000,000).
(iii) Under paragraph (b) of this section, part-
nership gross value is allocated first to the inven-
tory ($1,000,000), then to the building
($2,000,000), and third to section 197 intangibles
$800,000. The partnership must allocate the re-
mainder of partnership gross value, $200,000, to
goodwill ($4,000,000 - $3,800,000). D’s section
743(b) adjustment must be allocated under §1.755-
1 using these fair market value calculations for the
partnership’s assets.
Example 2. (i) D is the sole general partner in
DEF, a limited partnership. DEF has goodwill and
three other assets with fair market values (deter-
mined under paragraph (b)(2)(i) of this section) as
follows: inventory worth $1,000,000, a building (a
capital asset) worth $2,000,000, and equipment
(section 1231(b) property) worth $750,000. DEF
has one liability of $1,000,000, for which D bears
the entire risk of loss under section 752 and the
regulations thereunder. Each partner has a one-
third interest in partnership capital and profits. If
the equipment were sold for $750,000, $250,000
would be depreciation recapture treated as an unre-
alized receivable under the flush language in sec-
tion 751(c). G purchases E’s limited partnership
interest for $750,000.
(ii) Under paragraph (c) of this section, partner-
ship gross value is $3,250,000 (the amount that, if
assigned to all partnership property, would result in
a liquidating distribution to G equal to $750,000).
(iii) Under paragraph (b) of this section, part-
nership gross value is allocated first to inventory
($1,000,000), and then to the class containing capi-
tal assets and section 1231(b) property
April 17, 20009162000–16 I.R.B.

($2,250,000). Within that class, value must be as-
signed first to the $250,000 ordinary gain portion
of the equipment (properties or potential gain
treated as unrealized receivables under the flush
language in section 751(c)). The remaining value
in the class ($2,250,000 minus $250,000, which is
$2,000,000) must be allocated among the remain-
ing portions of the assets in that class in proportion
to the fair market values of such portions (deter-
mined under paragraph (b)(2)(i) of this section).
The remaining portion of the building is
$2,000,000. The remaining portion of the equip-
ment is $500,000 ($750,000, its fair market value,
minus $250,000, the section 751(c) portion). Thus,
the remaining portion of the building will be allo-
cated $1,600,000 ($2,000,000 multiplied by
$2,000,000/$2,500,000) and the remaining portion
of the equipment will be allocated $400,000
($2,000,000 multiplied by $500,000/$2,500,000).
Nothing is allocated to goodwill. G’s section
743(b) adjustment must be allocated under
§1.755–1 using these fair market value calculations
for the partnership’s assets.
Example 3. (i) G and H are partners in partner-
ship GH. GH has goodwill and three other assets
with fair market values (determined under para-
graph (b)(2)(i) of this section) as follows: inven-
tory worth $1,000,000 and two buildings (capital
assets), each worth $500,000. GH has no liabili-
ties. The GH partnership agreement provides that
the partners will allocate all income, gain, loss, and
deductions equally, except with respect to depreci-
ation, loss, and gain from the buildings. With re-
spect to the buildings, depreciation and loss are al-
located two-thirds to G and one-third to H. Gain
from the disposition of the buildings is charged
back two-thirds to G and one-third to H to the ex-
tent of accrued depreciation, and then is allocated
equally between G and H. G transfers one-half of
its interest in GH to I for $450,000. At the time of
the transfer, the book value of the inventory is
$900,000, the book value of each building is
$300,000, and $150,000 of book depreciation has
accrued with respect to each building. The capital
account attributable to the partnership interest pur-
chased by I from G is equal to $350,000. H’s capi-
tal account is equal to $800,000, and the capital ac-
count attributable to G’s retained partnership
interest is equal to $350,000.
(ii) Because gain with respect to the inventory
and buildings are shared in different ratios as be-
tween H, and G and I, a partnership gross value
cannot be determined without assuming values for
the individual assets of the partnership. Accord-
ingly, the rule for special situations in paragraph
(b)(3) of this section must be used to compute the
value of the partnership’s assets.
(iii) Applying paragraph (b)(2)(i) of this section,
the fair market value of the inventory is $1,000,000
and the fair market value of each building is
$500,000. These values would result in a liquidat-
ing distribution to I under paragraph (c)(1) of this
section equal to $500,000, determined as follows.
The book gain from the sale of the inventory would
equal $100,000 ($1,000,000 - $900,000) and the
book gain from the sale of each building would
equal $200,000 ($500,000 - $300,000). Book gain
from the inventory equal to $25,000 ($100,000 x
1/4) and book gain from each building equal to
$62,500 (($150,000 x 1/3) + ($50,000 x 1/4))
would be allocated to I. The sum of this book gain
($25,000 + $62,500 + $62,500 = $150,000) and I’s
capital account inherited from G ($350,000) would
equal $500,000.
(iv) Because I’s basis in the transferred partner-
ship interest is only $450,000, under paragraph
(b)(2)(ii) of this section, the value with respect to
the buildings must be reduced in proportion to the
fair market values of such assets to an amount that
would cause a liquidating distribution to I equal to
$450,000. This calculation is accomplished as fol-
lows. In order for I to receive a liquidating distrib-
ution of $450,000, the book gain attributable to the
buildings that is allocated to I must equal $75,000
($350,000 inherited capital account + $25,000
book gain from inventory + $75,000 book gain
from buildings). Each building has the same book
value and fair market value, and the allocations
with respect to each building are the same as be-
tween G, H, and I. Accordingly, I’s share of book
gain should be allocated equally between the two
buildings, $37,500 to each. In order for I to be al-
located $37,500 of book gain with respect to each
building, the total amount of book gain with re-
spect to each building would have to be $112,500
($112,500 x 1/3 = $37,500). Adding this book gain
to the current book value of each building results in
a value for each building of $412,500 ($300,000 +
$112,500). Nothing is allocated to goodwill. I’s
section 743(b) adjustment must be allocated under
§1.755–1 using these fair market value calculations
for the partnership’s assets.
Example 4. The facts are the same as Example 3,
except that I purchases one-half of G’s partnership
interest for $550,000. Because the fair market
value of the partnership’s assets (as determined
under paragraph (b)(2)(i) of this section) in the first
four asset classes under the residual method is not
sufficient to cause a liquidating distribution to I
equal to its basis in the purchased interest (i.e.,
$550,000), the additional value necessary to cause
such a distribution must be allocated to goodwill.
Accordingly, under paragraph (b)(3) of this sec-
tion, the value of the partnership’s assets is as fol-
lows: inventory $1,000,000, each building
$500,000, and goodwill $200,000. I’s section
743(b) adjustment must be allocated under §1.755-
1 using these fair market value calculations for the
partnership’s assets.
(f) Effective date. This section applies
to any basis adjustment resulting from
any distribution of partnership property or
transfer of a partnership interest that oc-
curs on or after the date final regulations
are published in the Federal Register.
§1.755–2T [Removed]
Par. 3. Section 1.755–2T is removed.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on April
4, 2000, 8:45 a.m., and published in the issue of the
Federal Register for April 5, 2000, 65 F.R. 17829)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Lifetime Charitable Lead Trusts
REG–100291–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: These proposed regulations
relate to the definitions of a guaranteed
annuity interest and a unitrust interest for
purposes of the income, gift, and estate
tax charitable deductions. The proposed
regulations will affect taxpayers who
make transfers to charitable lead trusts.
The purpose of these proposed regula-
tions is to restrict the permissible terms
for charitable lead trusts in order to elimi-
nate the potential for abuse. This docu-
ment also provides notice of a public
hearing.
DATES: Written and electronic com-
ments must be received by June 19,
2000. Outlines of topics to be discussed
at the public hearing scheduled for June
29, 2000, must be received by June 8,
2000.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–100291–00),
room 5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may also be hand
delivered Monday through Friday between
the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–100291–00),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Washing-
ton, DC. Alternatively, taxpayers may sub-
mit comments electronically via the Inter-
net by selecting the “Tax Regs” option on
the IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at
http://www.irs.gov/tax_regs/regslist.html.
The public hearing will be held in room
4718, Internal Revenue Service Building,
1111 Constitution Avenue, NW., Washing-
ton, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Scott S. Landes, (202) 622-3090;
concerning submissions of comments, the
hearing, and/or to be placed on the build-
ing access list to attend the hearing, Guy
2000–16 I.R.B.917April 17, 2000

R. Traynor, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
In general, if interests in the same prop-
erty are transferred for both charitable and
noncharitable purposes, the charitable in-
terest will qualify for the charitable de-
duction for federal income, gift, and es-
tate tax purposes only if the interest is in
one of certain prescribed forms. If the
charitable interest is not a remainder in-
terest, sections 170, 2522, and 2055 of the
Internal Revenue Code (Code) require
that the charitable interest be in the form
of either a guaranteed annuity interest or a
fixed percentage of the annual fair market
value of the property (unitrust interest).
In addition, an income tax charitable de-
duction is available only if the grantor is
treated as the owner of the entire trust
under subpart E, part I of subchapter J of
the Code.
The requirement that a nonremainder
interest passing to charity be in the form
of a guaranteed annuity interest or a uni-
trust interest was added to the Code by the
Tax Reform Act of 1969. That Act also
added the requirement that a remainder
interest passing to charity must generally
be in the form of a charitable remainder
unitrust or annuity trust or a pooled in-
come fund. The statutory provisions for
charitable remainder trusts and pooled in-
come funds specifically state the permis-
sible terms for these entities. Section
664(d)(1)(A) and (d)(2)(A) provide that
the permissible term for a charitable re-
mainder trust is a period of years (not to
exceed 20 years) or the life or lives of in-
dividuals who are living at the creation of
the trust. Similarly, section 642(c)(5)(A)
provides that the permissible term for the
noncharitable income interest in a pooled
income fund is the life of one or more
beneficiaries living at the time of the
transfer.
Unlike the statutory provisions for
charitable remainder trusts and pooled in-
come funds, neither the statute nor the
legislative history sets forth the permissi-
ble term for which a charitable guaranteed
annuity interest or a unitrust interest must
be paid. Rather, the permissible term for
these interests is set forth in the regula-
tions as either a specified term of years, or
the life or lives of an individual or indi-
viduals, each of whom must be living at
the date of the transfer and can be ascer-
tained at such date.
The IRS and the Treasury Department
are aware of situations in which taxpayers
attempt to take advantage of the regula-
tions by using an unrelated individual’s
measuring life, as the term of a charitable
lead trust, to artificially inflate the chari-
table deduction. Taxpayers select as a
measuring life an individual who is seri-
ously ill but not “terminally ill” within the
meaning of the section 7520 regulations.
Because the individual is not “terminally
ill” as defined in the regulations, the char-
itable interest is valued based on the actu-
arial tables. These tables take into ac-
count the life expectancies of all
individuals of the same age as the individ-
ual who is the measuring life, even
though such individual has been carefully
chosen because he or she likely will not
live to an average life expectancy. When
the seriously ill individual dies prema-
turely, the amount the charity actually re-
ceives will be significantly less than the
amount on which the gift or estate tax
charitable deduction was based. Con-
versely, the amount of the actual transfer
to the remainder beneficiaries will be sig-
nificantly greater than the amount subject
to gift or estate tax.
These charitable lead trusts are being
marketed in a package which includes the
name of a seriously ill individual and ac-
cess to the individual’s medical records.
A token payment is made to the ill indi-
vidual who is serving as a measuring life.
Sometimes the individual is led to believe
that a charitable organization interested in
the individual’s particular illness will re-
ceive some benefit from the transaction.
In the words of one author, “[t]his tech-
nique (which is not strictly speaking
wealth transfer planning for the termi-
nally ill, but rather wealth transfer plan-
ning usingthe terminally ill) falls some-
where between ghoulish and grotesque.”
Marketing schemes that exploit the mis-
fortunes of some for the benefit of others
are contrary to public policy.
The IRS and the Treasury Department
believe that this scheme is abusive and
frustrates the Congressional purpose in
limiting the charitable deduction to spe-
cific types of split-interest transfers.
Congress enacted the provisions regard-
ing guaranteed annuity interests, unitrust
interests, charitable remainder trusts, and
pooled income funds in order to ensure
that the amount the taxpayer claims as a
charitable deduction reasonably corre-
lates to the amount ultimately passing to
the charitable organization. H.R. Rep.
No. 413 (Part 1), 91
st
Cong., 1
st
Sess. 61
(1969); S. Rep. No. 552, 91
st
Cong., 1
st
Sess. 93 (1969). In this scheme, taxpay-
ers choose a measuring life that ensures
the amount passing to charity will be
substantially less than the allowable
charitable deduction. This kind of ad-
verse selection of an unrelated measur-
ing life to artificially inflate the charita-
ble deduction is contrary to
Congressional intent.
EXPLANATION OF PROVISIONS
Under the proposed regulations, the
permissible term for guaranteed annuity
interests and unitrust interests is either a
specified term of years, or the life of cer-
tain individuals living at the date of the
transfer. Only one or more of the follow-
ing individuals may be used as measuring
lives: the donor, the donor’s spouse, and a
lineal ancestor of all the remainder bene-
ficiaries. However, this limitation re-
garding permissible measuring lives does
not apply in the case of a charitable guar-
anteed annuity interest or unitrust interest
payable under a charitable remainder trust
described in section 664. An interest
payable for a specified term of years can
qualify as a guaranteed annuity or unitrust
interest even if the governing instrument
contains a “savings clause” intended to
ensure compliance with a rule against per-
petuities. The savings clause must utilize
a period for vesting of 21 years after the
deaths of measuring lives who are se-
lected to maximize, rather than limit, the
term of the trust. For example, a guaran-
teed annuity or unitrust interest that will
terminate on the earlier of 30 years or 21
years after the death of the last survivor of
the descendants of any grandparent of the
donor living on the date of the creation of
the interest will be treated as payable for a
specified term of years.
The proposed regulations will allow the
use of an individual’s measuring life
when appropriate for estate planning pur-
poses. Thus, the regulations permit the
donor, the donor’s spouse, or an individ-
ual who is an ancestor of the remainder
April 17, 20009182000–16 I.R.B.

beneficiaries to be used as the measuring
life. A transfer using the donor or the
donor’s spouse as the measuring life is a
substitute for a testamentary disposition
to the remainder beneficiaries. In other
situations, the donor may desire to benefit
an individual’s heirs only after the death
of the individual currently providing their
support. For example, a donor may estab-
lish a charitable lead trust for the life of
the donor’s sibling with the sibling’s chil-
dren named as the remainder beneficia-
ries. A measuring life unrelated to the re-
mainder beneficiaries is not appropriate
for estate planning purposes and therefore
is not permitted under the proposed regu-
lations.
The proposed regulations apply to
transfers to inter vivos charitable lead
trusts made on or after April 4, 2000. In
addition, the proposed regulations apply
to transfers made pursuant to wills or re-
vocable trusts where the decedent dies on
or after April 4, 2000. Two exceptions
from the application of the proposed regu-
lations are provided in the case of trans-
fers pursuant to a will or revocable trust
executed on or before April 4, 2000. One
exception is for a decedent who dies on or
before the date that is 6 months after the
date these regulations are published as
final regulations without having repub-
lished the will (or amended the trust) by
codicil or otherwise. The other exception
is for a decedent who was on April 4,
2000, under a mental disability to change
the disposition of the decedent’s property,
and either does not regain competence to
dispose of such property before the date
of death, or dies prior to the later of: 90
days after the date on which the decedent
first regains competence, or 6 months
after the date these regulations are pub-
lished as final regulations without having
republished the will (or amended the
trust) by codicil or otherwise.
The IRS will not disallow the charita-
ble deduction where the charitable inter-
est is payable for the life of an individual,
other than one permitted under the pro-
posed regulations, if the interest is re-
formed into a lead interest payable for a
specified term of years. The term of years
must be determined by taking the factor
for valuing the annuity or unitrust interest
for the named individual’s measuring life
and identifying the term of years (rounded
up to the next whole year) that corre-
sponds to the equivalent term of years
factor for an annuity or unitrust interest.
For example, in the case of an annuity in-
terest payable for the life of an individual
age 40 at the time of the transfer, assum-
ing an interest rate of 7.4% under section
7520, the annuity factor from column 1 of
Table S(7.4), contained in IRS Publica-
tion 1457, Book Aleph, for the life of an
individual age 40 is 12.0587 (Publication
1457 is available from the Superintendent
of Documents, U.S. Government Printing
Office, Washington, DC 20402). Based
on Table B(7.4), contained in Publication
1457, Book Aleph, the factor 12.0587
corresponds to a term of years between 31
and 32 years. Accordingly, the annuity
interest must be reformed into an interest
payable for a term of 32 years. In the case
of inter vivos transfers, a judicial refor-
mation must be commenced prior to the
later of: (1) the date that is 6 months after
the date these regulations are published as
final regulations; or (2) October 15th of
the year following the year in which the
transfer is made. In the case of testamen-
tary transfers, a judicial reformation must
be commenced prior to the later of: (1) the
date that is 6 months after the date these
regulations are published as final regula-
tions; or (2) the date prescribed by section
2055(e)(3)(C)(iii). Any judicial reforma-
tion must be completed within a reason-
able time after it is commenced. A non-
judicial reformation is permitted if effec-
tive under state law, provided it is com-
pleted by the date on which a judicial re-
formation must be commenced.
An alternative to reformation may be
available for any transfer made on or after
April 4, 2000 and on or before the date
that is 60 days after the date these regula-
tions are published as final regulations. If
a court, in a proceeding that is com-
menced on or before 6 months after these
regulations are published as final regula-
tions, declares the transfer null and void
ab initio, the Service will treat such trans-
fer in a manner similar to that described in
section 2055(e)(3)(J).
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
proposed regulations, and because these
proposed regulations do not impose a col-
lection of information on small entities,
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
Code, the proposed regulations will be
submitted to the Small Business Adminis-
tration for comment on their impact on
small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely (in
the manner described in the AD-
DRESSES portion of this preamble) to
the IRS. The IRS and the Treasury De-
partment request comments on the clarity
of the proposed regulations and how they
may be made easier to understand. All
comments will be available for public in-
spection and copying.
A public hearing has been scheduled
for June 29, 2000, at 10 a.m., room 4718,
Internal Revenue Building, 1111 Consti-
tution Avenue, NW., Washington, DC.
Due to building security procedures, visi-
tors must enter at the 10
th
Street entrance,
located between Constitution and Penn-
sylvania Avenues, NW. In addition, all
visitors must present photo identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 15 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” section of
this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit comments by June 19, 2000, and
submit an outline of the topics to be dis-
cussed and the time to be devoted to each
topic (signed original and eight (8)
copies) by June 8, 2000.
A period of 10 minutes will be allotted
to each person for making comments. An
agenda showing the scheduling of the
speakers will be prepared after the dead-
2000–16 I.R.B.919April 17, 2000

line for receiving outlines has passed.
Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Scott S. Landes, Office of
the Chief Counsel, IRS. Other personnel
from the IRS and the Treasury Depart-
ment participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 20, and
25 are proposed to be amended as fol-
lows:
PART 1 — INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding a new entry
in numerical order to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Section 1.170A–6 also issued under 26
U.S.C. 170(f)(4); 26 U.S.C. 642(c)(5). *
* *
Par. 2. Section 1.170A–6 is amended
as follows:
1. Paragraph (c)(2)(i)(A) is amended
as follows:
a. In the first sentence, the comma is
removed.
b. In the second sentence, the language
“of years” is added after the word “term”,
the language “an individual or individu-
als” is removed, and “certain individuals”
is added in its place.
c. The third sentence is removed, and
four new sentences are added in its place.
d. In the sentence beginning “For ex-
ample, the amount”, the language “of
years” is added after the word “term”, the
language “an individual” is removed, and
“the donor” is added in its place.
2. Paragraph (c)(2)(ii)(A) is amended
as follows:
a. In the fifth sentence, the language
“of years” is added after the word “term”,
“an individual or individuals” is removed,
and ”certain individuals” is added in its
place.
b. The last sentence is removed, and
four new sentences are added in its place.
3. Paragraph (e) is amended by adding
four sentences to the end of the para-
graph.
4. The authority citation at the end of
the section is removed.
The additions read as follows:
§1.170A–6 Charitable contributions in
trust.
* * * * *
(c) * * *
(2) * * *
(i) * * * (A) * * * Only one or
more of the following individuals may be
used as measuring lives: the donor, the
donor’s spouse, and a lineal ancestor of
all the remainder beneficiaries. However,
this limitation regarding permissible mea-
suring lives does not apply in the case of a
charitable guaranteed annuity interest
payable under a charitable remainder trust
described in section 664. An interest
payable for a specified term of years can
qualify as a guaranteed annuity interest
even if the governing instrument contains
a savings clause intended to ensure com-
pliance with a rule against perpetuities.
The savings clause must utilize a period
for vesting of 21 years after the deaths of
measuring lives who are selected to maxi-
mize, rather than limit, the term of the
trust. * * *
* * * * *
(ii) * * * (A) * * * Only one or
more of the following individuals may be
used as measuring lives: the donor, the
donor’s spouse, and a lineal ancestor of
all the remainder beneficiaries. However,
this limitation regarding permissible mea-
suring lives does not apply in the case of a
charitable unitrust interest payable under
a charitable remainder trust described in
section 664. An interest payable for a
specified term of years can qualify as a
unitrust interest even if the governing in-
strument contains a savings clause in-
tended to ensure compliance with a rule
against perpetuities. The savings clause
must utilize a period for vesting of 21
years after the deaths of measuring lives
who are selected to maximize, rather than
limit, the term of the trust.
* * * * *
(e) Effective date. * * * In addition,
the rule in paragraphs (c)(2)(i)(A) and
(ii)(A) of this section that guaranteed an-
nuity interests and unitrust interests, re-
spectively, may be payable for a specified
term of years or for the life or lives of
only certain individuals, applies to trans-
fers made on or after April 4, 2000. If a
transfer is made to a trust on or after April
4, 2000 that uses an individual other than
one permitted in paragraphs (c)(2)(i)(A)
and (ii)(A) of this section, the trust may
be reformed to satisfy this rule. As an al-
ternative to reformation, rescission may
be available for a transfer made on or be-
fore the date that is 60 days after the date
these regulations are published as final
regulations. See § 25.2522(c)–3(e) of this
chapter for the requirements concerning
reformation or possible rescission of these
interests.
PART 20—ESTATE TAX; ESTATES OF
DECEDENTS DYING AFTER
AUGUST 16, 1954
Par. 3. The authority citation for part
20 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. Section 20.2055–2 is amended
as follows:
1. Paragraph (e)(2)(vi)(a)is amended
as follows:
a. In the third sentence, the language
“of years” is added after the word “term”,
the language “an individual or individu-
als” is removed, and ”certain individuals”
is added in its place.
b. The fourth sentence is removed, and
four new sentences are added in its place.
c. In the sentence beginning “For ex-
ample, the amount”, the language “of
years” is added after the word “term”, the
language “an individual” is removed, and
“the decedent’s spouse” is added in its
place.
2. Paragraph (e)(2)(vii)(a)is amended
as follows:
a. In the sixth sentence, the language
“of years” is added after the word “term”,
the language “of an individual or individ-
uals” is removed, and “of certain individ-
uals” is added in its place.
b. The last sentence is removed, and
four new sentences are added in its place.
3. Paragraph (e)(3) is amended as fol-
lows:
a. The period at the end of paragraph
(e)(3)(ii)(c)is removed, a comma is
added and the word “and” is added after
the comma.
b. A new paragraph (e)(3)(iii) is added.
The additions read as follows:
§ 20.2055–2 Transfers not exclusively for
charitable purposes.
* * * * *
(e) * * *
(2) * * *
April 17, 20009202000–16 I.R.B.

(vi) * * * (a)* * * Only one or
more of the following individuals may be
used as measuring lives: the donor, the
donor’s spouse, and a lineal ancestor of
all the remainder beneficiaries. However,
this limitation regarding permissible mea-
suring lives does not apply in the case of a
charitable guaranteed annuity interest
payable under a charitable remainder trust
described in section 664. An interest
payable for a specified term of years can
qualify as a guaranteed annuity interest
even if the governing instrument contains
a savings clause intended to ensure com-
pliance with a rule against perpetuities.
The savings clause must utilize a period
for vesting of 21 years after the deaths of
measuring lives who are selected to maxi-
mize, rather than limit, the term of the
trust. * * *
* * * * *
(vii) * * * (a)* * * Only one or
more of the following individuals may be
used as measuring lives: the donor, the
donor’s spouse, and a lineal ancestor of
all the remainder beneficiaries. However,
this limitation regarding permissible mea-
suring lives does not apply in the case of a
charitable unitrust interest payable under
a charitable remainder trust described in
section 664. An interest payable for a
specified term of years can qualify as a
unitrust interest even if the governing in-
strument contains a savings clause in-
tended to ensure compliance with a rule
against perpetuities. The savings clause
must utilize a period for vesting of 21
years after the deaths of measuring lives
who are selected to maximize, rather than
limit, the term of the trust.
* * * * *
(3) * * *
(iii) The rule in paragraphs
(e)(2)(vi)(a)and (vii)(a)of this section
that guaranteed annuity interests or uni-
trust interests, respectively, may be
payable for a specified term of years or
for the life or lives of only certain individ-
uals, is generally effective in the case of
transfers pursuant to wills and revocable
trusts where the decedent dies on or after
April 4, 2000. Two exceptions from the
application of the rule in paragraphs
(e)(2)(vi)(a)and (vii)(a)of this section
are provided in the case of transfers pur-
suant to a will or revocable trust executed
on or before April 4, 2000. One exception
is for a decedent who dies on or before the
date that is 6 months after the date these
regulations are published as final regula-
tions without having republished the will
(or amended the trust) by codicil or other-
wise. The other exception is for a dece-
dent who was on April 4, 2000, under a
mental disability to change the disposition
of the decedent’s property, and either does
not regain competence to dispose of such
property before the date of death, or dies
prior to the later of: 90 days after the date
on which the decedent first regains com-
petence, or 6 months after the date these
regulations are published as final regula-
tions without having republished the will
(or amended the trust) by codicil or other-
wise. If a guaranteed annuity interest or
unitrust interest created pursuant to a will
or revocable trust where the decedent dies
on or after April 4, 2000, uses an individ-
ual other than one permitted in paragraphs
(e)(2)(vi)(a) and (vii)(a)of this section,
and the interest does not qualify for this
transitional relief, the interest may be re-
formed into a lead interest payable for a
specified term of years. The term of years
is determined by taking the factor for
valuing the annuity or unitrust interest for
the named individual measuring life and
identifying the term of years (rounded up
to the next whole year) that corresponds
to the equivalent term of years factor for
an annuity or unitrust interest. For exam-
ple, in the case of an annuity interest
payable for the life of an individual age
40 at the time of the transfer, assuming an
interest rate of 7.4% under section 7520,
the annuity factor from column 1 of Table
S(7.4), contained in IRS Publication
1457, Book Aleph, for the life of an indi-
vidual age 40 is 12.0587 (Publication
1457 is available from the Superintendent
of Documents, U.S. Government Printing
Office, Washington, DC 20402). Based
on Table B(7.4), contained in Publication
1457, Book Aleph, the factor 12.0587
corresponds to a term of years between 31
and 32 years. Accordingly, the annuity
interest must be reformed into an interest
payable for a term of 32 years. A judicial
reformation must be commenced prior to
the later of the date that is 6 months after
the date these regulations are published as
final regulations, or the date prescribed by
section 2055(e)(3)(C)(iii). Any judicial
reformation must be completed within a
reasonable time after it is commenced. A
non-judicial reformation is permitted if
effective under state law, provided it is
completed by the date on which a judicial
reformation must be commenced. In the
alternative, if a court, in a proceeding that
is commenced on or before 6 months after
these regulations are published as final
regulations, declares any transfer made
pursuant to a will or revocable trust where
the decedent dies on or after April 4,
2000, and on or before the date that is 60
days after the date these regulations are
published as final regulations, null and
void ab initio, the Internal Revenue Ser-
vice will treat such transfers in a manner
similar to that described in section
2055(e)(3)(J).
* * * * *
PART 25 — GIFT TAX; GIFTS MADE
AFTER DECEMBER 31, 1954
Par. 5. The authority citation for part
25 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 6. Section 25.2522(c)–3 is
amended as follows:
1. Paragraph (c)(2)(vi)(a)is amended
as follows:
a. In the third sentence, the language
“of years” is added after the word “term”,
the language “a named individual or indi-
viduals” is removed, and “certain individ-
uals” is added in its place.
b. The fourth sentence is removed, and
four new sentences are added in its place.
c. In the sentence beginning “For ex-
ample, the amount”, the language “of
years” is added after the word “term”, the
language “an individual” is removed, and
“the donor” is added in its place.
2. Paragraph (c)(2)(vii)(a)is amended
as follows:
a. In the sixth sentence, the language
”of years” is added after the word “term”,
the language “an individual or individu-
als” is removed, and “certain individuals”
is added in its place.
b. The last sentence is removed, and
four new sentences are added in its place.
3. Paragraph (e) is amended by adding
nine new sentences to the end of the para-
graph.
The additions read as follows:
§ 25.2522(c)–3 Transfers not exclusively
for charitable, etc., purposes in the case
of gifts made after July 31, 1969.
* * * * *
(c) * * *
(2) * * *
2000–16 I.R.B.921April 17, 2000

(vi) * * * (a)* * * Only one or
more of the following individuals may be
used as measuring lives: the donor, the
donor’s spouse, and a lineal ancestor of
all the remainder beneficiaries. However,
this limitation regarding permissible mea-
suring lives does not apply in the case of a
charitable guaranteed annuity interest
payable under a charitable remainder trust
described in section 664. An interest
payable for a specified term of years can
qualify as a guaranteed annuity interest
even if the governing instrument contains
a savings clause intended to ensure com-
pliance with a rule against perpetuities.
The savings clause must utilize a period
for vesting of 21 years after the deaths of
measuring lives who are selected to maxi-
mize, rather than limit, the term of the
trust. * * *
* * * * *
(vii) * * * (a)* * * Only one or
more of the following individuals may be
used as measuring lives: the donor, the
donor’s spouse, and a lineal ancestor of
all the remainder beneficiaries. However,
this limitation regarding permissible mea-
suring lives does not apply in the case of a
charitable unitrust interest payable under
a charitable remainder trust described in
section 664. An interest payable for a
specified term of years can qualify as a
unitrust interest even if the governing in-
strument contains a savings clause in-
tended to ensure compliance with a rule
against perpetuities. The savings clause
must utilize a period for vesting of 21
years after the deaths of measuring lives
who are selected to maximize, rather than
limit, the term of the trust.
* * * * *
(e) Effective date. * * * In addition,
the rule in paragraphs (c)(2)(vi)(a)and
(vii)(a)of this section that guaranteed an-
nuity interests or unitrust interests, respec-
tively, may be payable for a specified term
of years or for the life or lives of only cer-
tain individuals, applies to transfers made
on or after April 4, 2000. If a transfer is
made on or after April 4, 2000, that uses an
individual other than one permitted in para-
graphs (c)(2)(vi)(a)and (vii)(a)of this sec-
tion, the interest may be reformed into a
lead interest payable for a specified term of
years. The term of years is determined by
taking the factor for valuing the annuity or
unitrust interest for the named individual
measuring life and identifying the term of
years (rounded up to the next whole year)
that corresponds to the equivalent term of
years factor for an annuity or unitrust inter-
est. For example, in the case of an annuity
interest payable for the life of an individual
age 40 at the time of the transfer, assuming
an interest rate of 7.4% under section 7520,
the annuity factor from column 1 of Table
S(7.4), contained in IRS Publication 1457,
Book Aleph, for the life of an individual
age 40 is 12.0587 (Publication 1457 is
available from the Superintendent of Docu-
ments, U.S. Government Printing Office,
Washington, DC 20402). Based on Table
B(7.4), contained in Publication 1457,
Book Aleph, the factor 12.0587 corre-
sponds to a term of years between 31 and
32 years. Accordingly, the annuity interest
must be reformed into an interest payable
for a term of 32 years. A judicial reforma-
tion must be commenced prior to the later
of the date that is 6 months after the date
these regulations are published as final reg-
ulations, or October 15th of the year fol-
lowing the year in which the transfer is
made and must be completed within a rea-
sonable time after it is commenced. A non-
judicial reformation is permitted if effective
under state law, provided it is completed by
the date on which a judicial reformation
must be commenced. In the alternative, if a
court, in a proceeding that is commenced
on or before 6 months after these regula-
tions are published as final regulations, de-
clares any transfer, made on or after April 4,
2000, and on or before the date that is 60
days after the date these regulations are
published as final regulations, null and void
ab initio, the Internal Revenue Service will
treat such transfers in a manner similar to
that described in section 2055(e)(3)(J).
Charles O. Rossotti,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on April
4, 2000, 8:45 a.m., and published in the issue of the
Federal Register for April 5, 2000, 65 F.R. 17835)
Advance Pricing Agreements,
Issued Pursuant to Pub. L. 106-
170, Section 521(b)
Announcement 2000–35
This Announcement is issued pursuant
to Section 521(b) of Pub. L. 106-170, the
Ticket to Work and Work Incentives Im-
provement Act of 1999, requiring that the
Secretary of the Treasury annually report
to the public concerning Advance Pricing
Agreements (“APAs”) and the APA Pro-
gram. As this is the first report issued
under Section 521(b), it includes informa-
tion about APAs and the APA Program
with respect to calendar years 1991
through 1999. Section 521(b)(4) . This
document does not provide general guid-
ance regarding the application of the
arm’s length standard; rather, it reports on
the structure and activities of the APA
Program.
Karl L. Kellar,
Acting Director,
Advance Pricing
Agreement Program.
ANNUAL REPORT CONCERNING
ADVANCE PRICING
AGREEMENTS
INTRODUCTION
For convenient reference, the subject
matter of this report will be organized on
the basis of Section 521(b)(2) of Pub. L.
106-170, with each required item or sub-
ject reported and captioned by reference
to the corresponding statutory provision.
First, however, the report provides a gen-
eral introductory discussion concerning
the history, practice, and general approach
of the APA Program. This introductory
discussion is adapted in part from mater-
ial contained in Publication 3216, Report
on the Application and Administration of
Section 482 (April 21, 1999).
Background
The Advance Pricing Agreement Pro-
gram is designed to resolve actual or po-
tential transfer pricing disputes in a prin-
cipled, cooperative manner, as an
alternative to the traditional adversarial
process. Under the adversarial model, the
data gathering, development, and inter-
pretation of a transfer pricing issue is a
complex, time-consuming process that
often results in an administrative appeal,
litigation, or competent authority pro-
ceedings under the mutual agreement pro-
cedures of our bilateral income tax
treaties. A significant transfer pricing
issue can typically take eight or more
years to resolve. Accordingly, by the time
the issue is resolved, the facts in dispute
April 17, 20009222000–16 I.R.B.

are typically many years old, and consid-
erable uncertainty concerning the proper
transfer pricing of current transactions
under current conditions can remain.
During the 1980s and prior to the cre-
ation of the APA Program, the govern-
ment as well as taxpayers with transfer
pricing issues began to explore some sort
of an advance pricing agreement mecha-
nism. A 1985 study by a U.S. profes-
sional group on how to improve the large
case program recommended advance rul-
ings in the transfer pricing area. In 1986,
an agenda topic at a meeting of U.S. and
foreign tax officials on how to reduce
controversies discussed an advance reso-
lution process for transfer pricing. In
1989, several taxpayers and groups ap-
proached the IRS to consider alternative
approaches to transfer pricing compli-
ance, viewing the existing means of deal-
ing with transfer pricing issues as being
too adversarial as well as unproductive.
The IRS considered new techniques
whereby all parties could share the re-
sponsibility for enhancing compliance in
the transfer pricing area. Derived from
the “Compliance 2000” initiatives, this
concept of shared responsibility is also
consistent with the current mission state-
ment of the IRS to work with taxpayers
“to help them understand and meet their
tax responsibilities.” In April of 1989, the
IRS announced at a meeting with the Tax
Executives Institute that it was consider-
ing an advance ruling procedure for trans-
fer pricing issues. The IRS entered into
pilot projects with several taxpayers to
negotiate and execute what were initially
called Advance Determination Rulings
but later became known as Advance Pric-
ing Agreements (APAs). In June of 1990,
a draft IRS Revenue Procedure for Ad-
vance Determination Rulings was pub-
licly disseminated and the first APA was
concluded in January of 1991. With the
publication of Rev. Proc. 91–22 (1991–1
C.B. 526), in March of 1991, the IRS for-
mally initiated the APA Program, and by
the end of that year, 15 new negotiations
had started.
Since then, the APA Program’s case-
load has steadily grown. The staff has
also grown, though not at the same rate as
the workload. As of December 31, 1999,
the APA Program’s staffing included slots
for a Director, two Branch Chiefs, four
Economists, fourteen Team Leaders, and
three clerical support staff. As of Decem-
ber 31, 1999, 231 APAs had been con-
cluded, with another 187 pending. These
APAs involve a wide variety of industries.
The cross-border transactions involved
are also varied, including, for example,
manufacturing, sale, and distribution of
goods, provision of financial services, and
licensing of intellectual property.
The APA Program has also become
more “institutionalized” over the years.
In 1996, the Service issued internal proce-
dures for processing APA cases. Chief
Counsel Directives Manual (“CCDM”),
¶¶ (42)(10)10 – (42)(10)(16)0 (November
15, 1996). Also in 1996, Rev. Proc.
96–53, 1996–2 C.B. 375, was released,
updating Rev. Proc. 91–22 in light of the
Service’s additional experience with ad-
ministering the APA Program. Together,
these releases clarified APA procedures
and the respective roles of the various IRS
functions involved in the APA process.
Rev. Proc. 96–53, in particular, also pro-
vides taxpayers a road map of how to
apply for an APA and what to expect in
the processing of the case.
The APA Program has had a consistent
goal of making APAs more practical and
affordable, and available to more taxpay-
ers. To this end, in 1997, the IRS insti-
tuted an Early Referral program by
which, in appropriate cases, District ex-
amination teams suggest that taxpayers
pursue APAs before substantial time is
spent examining transfer pricing issues.
To date, however, only three APA re-
quests have been filed pursuant to this
procedure. Similarly, in 1998, the IRS
published more streamlined procedures
for APAs involving Small Business Tax-
payers, and also expanded the availability
of the lowest APA user fee, in an effort to
attract smaller taxpayers who may lack
the resources to do the sophisticated stud-
ies normally included in APA requests
(Notice 98–65, 1998–52 I.R.B. 10). By
the end of calendar year 1999, the IRS
had concluded 9 small business APAs
under these streamlined procedures.
As the United States has become more
comfortable with the APA process so has
the world. Today, APAs are receiving in-
creased acceptance by many of our treaty
partners, including Australia, Mexico, the
United Kingdom, Japan, and Canada. In
fact, of the 231 closed APAs, 118 involve
our treaty partners through the bilateral
process (the bilateral process is discussed
below). In 1999, the Organization for
Economic Cooperation and Development
(“OECD”) issued as an annex to its Trans-
fer Pricing Guidelines, guidelines for bi-
lateral APAs. OECD, Guidelines for
Conducting Advance Pricing Arrange-
ments Under the Mutual Agreement Pro-
cedure (“MAP APAs”)(October 1999).
These new OECD guidelines should lead
to an even broader acceptance of the APA
process by the international community,
and it is to be hoped that they will expe-
dite the processing of bilateral APAs by
providing for more standardized bilateral
APA procedures among OECD members.
The APA Process
The APA process is designed to enable
taxpayers and the IRS to agree on the
proper treatment of transfer pricing, in-
cluding cost-sharing arrangements. An
APA is a legally enforceable agreement.
It need not cover all of a taxpayer’s pric-
ing arrangements and instead may be re-
stricted to specified years, specified affili-
ates, and specified intercompany
transactions. APAs are either “unilateral”
or “bilateral.” A unilateral APA is an
agreement between only the taxpayer and
the IRS on an appropriate transfer pricing
methodology (“TPM”) for the transac-
tions at issue. A bilateral APA combines
an agreement between the taxpayer and
the IRS on a particular TPM with an
agreement between the U.S. and foreign
taxing authority that the TPM is correct,
under authority of the mutual agreement
process usually contained in Article 25 of
our income tax treaties. 118 of the APAs
completed as of the end of 1999 have
been bilateral or multilateral, 112 unilat-
eral, and one has involved a U.S. posses-
sion. The TPM adopted in both unilateral
and bilateral APAs may also be “rolled
back” to resolve similar issues for past
years under examination.
In practice, an APA is always the result
of a voluntary decision by a taxpayer to
seek an APA. Before making any com-
mitments or filing the formal application,
Taxpayers may through a prefiling con-
ference approach the Service to discuss
the Service’s preliminary views of their
potential APA request, including whether
an APA would be appropriate under the
facts, what types of information would be
necessary to support the request, and
2000–16 I.R.B.923April 17, 2000

whether the taxpayer’s proposed TPM
would be acceptable. Most taxpayers that
come into the APA Program choose to
participate in such a prefiling conference.
A taxpayer may attend the prefiling con-
ference on an anonymous basis if it
wishes. Once the taxpayer decides to
apply for an APA, it must prepare and file
a submission consistent with the require-
ments of section 5 of Rev. Proc. 96–53
(1996–2 C.B. 375), accompanied by the
appropriate user fee as determined under
section 5.14 of Rev. Proc. 96–53.
A multidisciplinary APA Team evalu-
ates the Taxpayer’s submission. The APA
process focuses on identifying an appro-
priate TPM, not a desired tax result. The
ultimate goal of the APA process is to ar-
rive at an agreement on three basic points:
(i) the description of the intercompany
transactions to which the APA applies; (ii)
the TPM to be applied to those transac-
tions; and (iii) the arm’s length range of
results that is expected after applying the
agreed-upon TPM to the covered transac-
tions. In effect, the IRS APA team con-
ducts “due diligence” to verify the facts
and to determine whether the proposed
TPM constitutes the “best method” under
the Regulations. Typically, one or more
meetings between the taxpayer’s repre-
sentatives and the IRS APA team take
place. At these meetings, the parties dis-
cuss the issues related to the case and at-
tempt to arrive at an agreement concern-
ing the appropriate facts, TPM, and
results. In a bilateral case, the APA team
will then formulate a negotiating position
for use by the United States Competent
Authority in negotiations with the rele-
vant foreign government under the mutual
agreement article of the applicable treaty.
Once a mutual agreement under the treaty
is reached, the APA team and the taxpayer
will finalize an APA consistent with the
terms of the agreement. In unilateral
cases, the team will negotiate the terms of
the APA with the taxpayer. Both the ne-
gotiating position and the APA itself are
subject to review and approval by the As-
sociate Chief Counsel (International).
The Arm’s-Length Standard
Section 482 of the Internal Revenue
Code permits the IRS to allocate items of
income, deductions, credits, or al-
lowances between controlled groups or
organizations, “to prevent evasion of
taxes, or clearly to reflect the income” of
any controlled taxpayer, and, in the case
of transfers of intangible property, to allo-
cate income with respect to the transfer in
a manner that is “commensurate with the
income attributable to the intangible.”
In determining whether an allocation
under Section 482 is necessary clearly to
reflect a controlled taxpayer’s income, the
IRS employs the “arm’s length” standard,
a principle which is defined in the atten-
dant Treasury regulations. A controlled
transaction meets the arm’s length stan-
dard if the results of the transaction are
consistent with the results that would
have been realized if uncontrolled taxpay-
ers had engaged in the same transaction
under the same circumstances. Under
current Treasury regulations, the IRS is
willing to consider many different ap-
proaches to establish the taxpayer’s ap-
propriate intercompany transfer pricing
methodology or cost sharing practices,
provided these approaches satisfy the
arm’s length principle.
The APA Program evaluates each APA
case in terms of developing an arm’s-
length transfer pricing methodology that
is consistent with the Regulations. Be-
cause transfer pricing cases typically in-
volve complex facts and difficult issues,
there is room for disagreement between
reasonable people, acting in good faith,
about both the “best method” and the
proper application thereof. Therefore, in
evaluating and processing an APA case,
APA Program Team Leaders are willing
to consider taxpayer positions, to engage
in negotiations, and to work to reach a
mutually acceptable understanding of the
appropriate application of the arm’s
length standard to the taxpayer’s facts, in
a manner that is consistent with the Regu-
lations.
The arm’s length approach is also ap-
plied for bilateral and multilateral APAs.
In 1995, the Organization for Economic
Cooperation and Development (“OECD”)
published transfer pricing guidelines that
adopted the arm’s length standard, consis-
tent with our Section 482 Regulations.
Similarly, the OECD Model Tax Conven-
tion provides:
where conditions are made or
imposed between the two enter-
prises in their commercial or
financial relations which differ
from those which would be
made between independent
enterprises, then any profits
which would, but for those con-
ditions, have accrued to one of
the enterprises, but, by reason of
those conditions, have not so
accrued, may be included in the
profits of that enterprise and
taxed accordingly.
Comparable language outlining the
arm’s length principle is included – gen-
erally in Article 9 – in most income tax
treaties to which the United States is a
party. Thus, in cases where competent
authority negotiations aimed at relieving
double taxation under the mutual agree-
ment provisions of our treaties are under-
taken, the goal is a mutual agreement con-
sistent with the OECD arm’s length
standard.
APA OFFICE: STRUCTURE,
COMPOSITION, AND OPERATION
(Section 521(b)(2)(A))
Table 1 provides the structure and
staffing of the APA Program office as of
December 31, 1999:
April 17, 20009242000–16 I.R.B.

TABLE 1
APA PROGRAM STRUCTURE AS OF 12/31/99
Director’s Office
1 Director (vacant)
1 Secretary to the Director
Branch 1Branch 2
1 Branch Chief1 Branch Chief
1 Secretary1 Secretary
7 Team Leaders7 Team Leaders
2 Economists2 Economists
2000–16 I.R.B.925April 17, 2000
Discussion
Within the IRS, the APA Program is lo-
cated in the Office of the Associate Chief
Counsel (International) (“ACC(I)”),
which is part of the Office of Chief Coun-
sel. However, the APA process demands
a variety of skills and draws on expertise
from other offices within the IRS. The
IRS APA team typically includes:
• a “team leader” from the APA Of-
fice, who is responsible for lead-
ing the IRS team, negotiating with
the taxpayer and its representa-
tives, coordinating with the other
IRS functions that have a stake in
the APA, formulating the U.S. ne-
gotiating position in the case of a
bilateral APA, and ultimately
drafting the APA
• when certain novel or complex is-
sues are presented, an attorney
from one of ACC(I)’s technical
branches with expertise in such is-
sues
• the revenue agent responsible for
the taxpayer’s examination with
respect to transfer pricing issues,
and often that agent’s manager
and/or the case manager (the man-
ager with overall responsibility
for the taxpayer in question)
• an economist from the APA Pro-
gram or one assigned to assist the
examination group
• an attorney from the District
Counsel office that provides legal
advice to the examination group
• in bilateral cases, an analyst from
the Tax Treaty Division, which is
part of the Office of the Assistant
Commissioner (International).
In addition, in some cases, depending on
the circumstances, Field Specialists and
personnel from IRS Appeals function par-
ticipate as members of the APA Team.
MODEL ADVANCE PRICING
AGREEMENT
(Section 521(b)(2)(B))
A copy of the model advance pricing
agreement currently in use is attached as
Appendix A.
APA PROGRAM STATISTICS
(Sections 521(b)(2)(C) and (E))
The statistical information required
under Sections 521(b)(2)(C) and (E) is
contained in Tables 2 through 6 below:
TABLE 2
APA PROGRAM STATISTICS – APPLICATIONS AND EXECUTED APAs
919293949596979899Total
Applications Filed
1
152134415846506769401
APAs executed:
New APAs executed during
calendar year:
Unilateral374161118
3
151791
Bilateral1613
2
51222
4
2228100
Multilateral1113
U.S. Possession11
Renewal APAs executed
during calendar year:
Unilateral1334819
Bilateral1125413
Multilateral11
1
Applications filed during years 1991 through 1995 are reflected on a September 30 fiscal year-end basis. The number of APA applications filed from 10-1-95 to
12-31-95 were 23, and are included in the total of 58. Applications filed for years 1996 through 1999 are reflected on a calendar year-end basis.
2
One bilateral APA executed during the 1994 year was inadvertently omitted in prior reports issued by the APA Program.
3
One unilateral APA was amended during this year but was not counted as an executed APA. Whether an amendment or supplement to an APA is counted as a
separate APA depends on the extent and nature of the change.
4
One bilateral APA revision to a renewal and one supplemental were closed this year but were not counted as executed APAs. See note 3 above.

199119921993199419951996199719981999
Average number of months
to complete the following
categories of APAs:
Unilateral-New-11.713.014.015.816.821.016.122.8
Unilateral-Renewal----19.08.36.317.010.6
Unilateral-Combined-11.713.014.015.915.018.916.218.9
Bi/Multilateral-New22.019.731.026.019.624.622.934.535.4
Bi/Multilateral-Renewal----30.028.047.519.032.7
Bi/Multilateral-Combined22.019.731.026.020.924.924.931.634.9
Revised APAs executed
during calendar year:
Unilateral22
Bilateral
Multilateral11
Cumulative total:
Unilateral3101433476887112
Bilateral1781117305481113
Multilateral12225
U.S. Possession1111
Cumulative Total of Executed APAs11018255180125171231231
April 17, 20009262000–16 I.R.B.
TABLE 3
APA PROGRAM STATISTICS – CANCELLATIONS AND WITHDRAWALS
TABLE 4
APA PROGRAM STATISTICS-TIME TO COMPLETE APA
MEDIAN NUMBER OF MONTHS
199119921993199419951996199719981999
Median number of months
to complete the following
categories of APAs:
Unilateral-New-14.011.015.513.017.022.514.020.0
Unilateral-Renewal----19.09.06.017.010.5
Unilateral-Combined-14.011.015.515.012.518.015.014.0
Bi/Multilateral-New22.017.531.030.022.023.520.031.033.0
Bi/Multilateral-Renewal----30.028.047.516.031.0
Bi/Multilateral-Combined22.017.531.030.022.024.020.030.033.0
919293949596979899Total
Number of APAs Revoked or
Canceled
5
0000000101
Number of APA Withdrawals094043671346
5
One APA was canceled during 1998 due to taxpayer changing its way of doing business.
AVERAGE NUMBER OF MONTHS

Total Pending requests for APAs:187
Pending Unilateral51
Pending Bilateral136
Pending requests for new APAs:
Unilateral35
Bilateral106
Pending requests for renewal APAs:
Unilateral16
Bilateral30
2000–16 I.R.B.927April 17, 2000
TABLE 6
APA PROGRAM STATISTICS – INDUSTRIES COVERED
IndustryNumber of APAs That
Involve This Industry
6
Financial institutions and products36
Computer hardware, components, and related products, and computer software32
Chemicals and related products (industrial, pharmaceutical, cosmetics)27
Transportation equipment26
Electrical equipment and components (excluding computers and consumer electronics)25
Food, beverages, and related products16
Consumer electronics (excluding computers)16
Engineering, research, consulting, accounting, management, legal, real estate,
subscription, and related services13
Metal and metal products (excluding machinery)12
Petroleum refining and related industries8
Textile mill and apparel products7
Industrial and commercial machinery6
Jewelry, sporting equipment, and toys6
Transportation services5
Lumber, wood, paper, and related products5
Telecommunications equipment, components, and services5
General merchandise and food stores5
Construction services; construction, ground moving, and mining equipment4
Printing, publishing, and related industries4
Marketing, customer support, and employee recruiting services3
Other10
TABLE 5
APA PROGRAM STATISTICS – PENDING REQUESTS
6
This and other tables following will not necessarily total to 231, the number of APAs issued; for example, in this table the number of APAs covering the listed
industries totals more than 231 because many APAs cover more than one industry.

RELATIONSHIPS BETWEEN RELATED ORGANIZATIONS,
TRADES, OR BUSINESSES
(Section 521(b)(2)(D)(i))
The natures of the relationships between the related organizations, trades, or businesses covered by existing APAs are set forth in
Table 7 below:
April 17, 20009282000–16 I.R.B.
TABLE 7
NATURE OF RELATIONSHIPS BETWEEN RELATED ENTITIES
RelationshipNumber of APAs
That Involve
This Relationship
U.S. parent, foreign subsidiary(ies)91
Foreign parent, U.S. subsidiary(ies)90
Sister companies22
U.S. company and foreign branches8
Foreign company and U.S. branch27
Partnership2
U.S. Parent, U.S. Possessions subsidiary 1
COVERED TRANSACTI0NS
(Section 521(b)(2)(D)(ii))
The controlled transactions covered by existing APAs are set forth in Table 8 below:
TABLE 8
TYPES OF COVERED TRANSACTIONS
Transaction TypeNumber of APAs
That Involve
This Type
Sale of tangible property into the United States91
Sale of tangible property from the United States47
Use of intangible property by a U.S. entity25
Use of intangible property by a foreign entity39
Performance of services by a U.S. entity45
Performance of services by a foreign entity66
R&D cost sharing - U.S. parent6
R&D cost sharing - foreign parent8
Financial products - U.S. parent2
Financial products - foreign parent5
Financial products - U.S. branch of foreign company24
Financial products - foreign branch of U.S. company9
Commodity trading on globally integrated basis2

2000–16 I.R.B.929April 17, 2000
BUSINESS FUNCTIONS
PERFORMED AND
RISKS ASSUMED, INCLUDING
CURRENCY RISK
(Sections 521(b)(2)(D)(ii) and (xii))
The vast majority of APAs have cov-
ered transactions that involve numerous
business functions and risks. For in-
stance, with respect to functions, compa-
nies that manufacture products have typi-
cally conducted research and
development, engaged in product design
and engineering, manufactured the prod-
uct, marketed and distributed the product,
and performed support functions such as
legal, finance, and human resources ser-
vices. Regarding risks, companies have
been subject to market risks, R&D risks,
financial risks, credit and collection risks,
product liability risks, and general busi-
ness risks. In the APA evaluation process
a significant amount of time and effort is
devoted to understanding how the func-
tions and risks are allocated amongst the
controlled group of companies that are
party to the covered transactions.
In their APA proposals taxpayers are
required to provide a functional analysis.
The functional analysis identifies the eco-
nomic activities performed, the assets em-
ployed, the economic costs incurred, and
the risks assumed by each of the con-
trolled parties. The importance of the
functional analysis derives from the fact
that economic theory posits that there is a
positive relationship between risk and ex-
pected return and that different functions
provide different value and have different
opportunity costs associated with them. It
is important that the functional analysis
go beyond simply categorizing the tested
party as, say, a distributor. It should pro-
vide more specific information since, in
the example of distributors, not all distrib-
utors undertake similar functions and
risks.
Thus, the functional analysis has been
critical in determining the TPM (includ-
ing the selection of comparables). Al-
though functional comparability has been
an essential factor in evaluating the relia-
bility of the TPM (including the selection
of comparables), the APA evaluation
process has also involved consideration of
economic conditions such as the eco-
nomic condition of the particular industry.
In evaluating the functional analysis,
the APA program has considered contrac-
tual terms between the controlled parties
and the consistency of the conduct of the
parties with respect to the allocation of
risk. Per the Section 482 regulations, the
APA program also has given considera-
tion to the ability of controlled parties to
fund losses that might be expected to
occur as the result of the assumption of a
risk. Another relevant factor considered
in evaluating the functional analysis is the
extent to which each controlled party ex-
ercises managerial or operational control
over the business activities that directly
influence the amount of income or loss re-
alized. The Section 482 Regulations posit
that parties at arm’s length will ordinarily
bear a greater share of those risks over
which they have relatively more control.
In some cases it has been necessary to
employ special adjustments that quantify
differences in functions, risks, and mar-
kets between the tested party or transac-
tions and comparables. The question of
whether and how to adjust for currency
risk exposure has been an area of particu-
lar interest in APAs. Although there are
several types of currency risk (e.g., trans-
actional, translation, and economic), eco-
nomic currency risk has been the area of
greatest discussion. Economic currency
risk represents the risk that companies
incur when their input costs are denomi-
nated in a currency that is different than
that of their competitors. For example, if
a foreign multinational manufactures
product in its home country for distribu-
tion into the United States then the com-
pany’s competitive position is eroded
(strengthened) if the home country’s cur-
rency appreciates (depreciates) relative to
the U.S. dollar, assuming that the firm’s
competitors face U.S. dollar based costs.
There are a variety of ways in which
this issue has been treated in APAs. In the
vast majority of cases no adjustment has
been incorporated into the APA agree-
ment. This may be because the compara-
bles experience similar currency expo-
sure, the tested party is assumed not to
bear any of the currency risk, the currency
fluctuations have not been material, or the
taxpayer is able to pass through substan-
tially all of its currency risk to end users.
In certain APAs a critical assumption has
been inserted that requires the parties to
renegotiate the agreement in the event
that exchange rate fluctuations exceed
certain parameters.
Two types of currency adjustments
have been employed in APAs. Both have
been employed in conjunction with the
comparable profits method (“CPM”).
The first type of adjustment specifies that,
for a given percentage change in the ex-
change rate, the tested party’s gross mar-
gin will be adjusted by a percentage that
is less than the percentage change in the
exchange rate. The second type of adjust-
ment has provided a band of exchange
rate movements for which no adjustment
would be made. For exchange rate move-
ments outside of the no adjustment band,
the operating margin of the tested party is
adjusted based upon the extent of the ex-
change rate fluctuation. Both of these ap-
proaches have generally called for posi-
tive or negative adjustments depending on
whether a currency appreciates or depre-
ciates against the dollar.
RELATED ORGANIZATIONS,
TRADES, OR BUSINESSES WHOSE
PRICES OR RESULTS ARE TESTED
TODETERMINE COMPLIANCE
WITH APA TPMs
(Section 521(b)(2)(D)(iii))
The related organizations, trades, or
businesses whose prices or results are
tested to determine compliance with
TPMs prescribed in existing APAs are set
forth in Table 9 below:

TPMs AND THE CIRCUMSTANCES LEADING TO THE USE OF THOSE TPMs
(Section 521(b)(2)(D)(iv))
The TPMs used in existing APAs are set forth in Tables 10-14 below:
TABLE 10
TPMs USED FOR TRANSFERS OF TANGIBLE AND INTANGIBLE PROPERTY
April 17, 20009302000–16 I.R.B.
TABLE 9
RELATED ORGANIZATIONS, TRADES OR BUSINESSES WHOSE PRICES OR
RESULTS ARE TESTED
Type of OrganizationNumber of APAs
That Involve This
Type
U.S. distributor83
Foreign distributor35
U.S. manufacturer46
Foreign manufacturer45
U.S. provider of services46
Foreign provider of services50
U.S. participant in cost sharing arrangement14
Foreign participant in cost sharing arrangement14
U.S. licensor of intangible property14
Foreign licensor of intangible property12
U.S. licensee of intangible property23
Foreign licensee of intangible property33
U.S. dealer in financial products30
Foreign dealer in financial products22
U.S. dealer in commodities2
Foreign dealer in commodities2
Publisher and web site operator1
TPMNumber of APAs
That Involve This
TPM
Comparable Uncontrolled Price (CUP) (tangible property only)7
CUP based on reference to published market data2
Comparable Uncontrolled Transaction (CUT) (intangible property only)12
Resale Price (tangible property only)10
Cost Plus (tangible property only)10
With some TPMs, only the results of
one party are tested. With the resale price
method under Reg. § 1.482–3(c), only the
distributor’s gross margin is tested. With
the cost plus method under Reg. §
1.482–3(d), only the manufacturer’s
markup on costs is tested. With the com-
parable profits method under Reg. §
1.482–5, one party’s profitability (nor-
mally that of the simpler party, with no or
fewer pertinent intangible assets) is
tested. For provision of services under
Reg. § 1.482–2(b), typically only the
provider of services is tested. With some
TPMs, the prices or results of both parties
are tested. For example, with the compa-
rable uncontrolled price method under
Reg. § 1.482–3(b), the price charged be-
tween the related parties is tested. Simi-
larly, with the comparable uncontrolled
transaction method under Reg. §
1.482–4(c), the compensation for intangi-
bles paid between the related parties is
tested. With profit split methods under
Reg. § 1.482–6, and for financial products
cases under Prop. Reg. § 1.482–8, the
split of profits between the related parties
is tested in light of each party’s contribu-
tions. With cost sharing under Reg. §
482–7, the parties’ sharing of costs is
tested in light of the parties’ reasonably
anticipated benefits.

2000–16 I.R.B.931April 17, 2000
Comparable Profits Method (CPM): PLI is operating margin57
Comparable Profits Method (CPM): PLI is gross margin12
Comparable Profits Method (CPM): PLI is return on assets or capital employed17
Comparable Profits Method (CPM): PLI is Berry ratio (markup on SG&A)13
Comparable Profits Method (CPM): PLI is a markup on costs (normally total costs)15
Commission computed as percentage of sales minus expenses reimbursed by related supplier1
Operating income point that depends on sales change and on internal management measure
of profitability2
Comparable Profit Split1
Residual Profit Split14
For globally integrated commodity trading, profit split by formula based on compensation and
commodity positions2
Other Profit Split8
Profit set to sum of a certain return on assets and a certain operating margin; this method combined
with an other profit split1
Agreed royalty (fixed rate)7
Agreed royalty (rate varies with operating margin)2
Agreed royalty (rate varies with ratio of R&D to sales)1
Taxpayer’s worldwide royalty schedule justified by CPM analysis1
R&D cost sharing amount plus a percentage of sales1
TABLE 11
TPMs USED FOR SERVICES
TPMNumber of APAs
That Involve This
TPM
Charge-out of cost with no markup17
Charge-out of cost with markup41
Commission as percentage of sales2
Markup on costs, but R&D expenses limited to certain percentage of sales1
Asset-proportionate share of system-wide return on assets, but limited to certain range of
markup on costs1
Profit is the sum of a markup on costs, a percentage of sales of patented products resulting
from contract R&D performed by tested party, and other factors1
For real estate management, fee is percentage of rents plus percentage of total value of new
leases, but not less than a certain markup on costs1
Dollar cap on management fee1
Profit split using five-factor formula1
Profit split, subject to a floor on operating margin1
TABLE 12
TPMs USED FOR FINANCIAL PRODUCTS
TPMNumber of APAs
That Involve
This TPM
Profit split under Notice 94–40/Prop. Reg. 1.482–820
Residual profit split2
Interbranch allocation (e.g., foreign exchange separate enterprise)18
Market-based commission2
Taxpayer’s internal allocation system1

April 17, 20009322000–16 I.R.B.
TABLE 13
TPMs USED FOR CONTRIBUTIONS TO COST SHARING ARRANGEMENTS
Cost Allocated ByNumber of APAs
Using This
Allocation
Sales7
Sales and production costs2
Sales and profit2
Profit2
Raw material costs1
TABLE 14
TPMs USED FOR COST SHARING BUY-IN PAYMENTS
TPMNumber of APAs
That Involve This
TPM
Capitalized R&D2
The sum of two payments, one based on capitalized R&D and the other based on a residual
profit split analysis2
Market capitalization1
Residual profit split with comparable acquisitions check1
DISCUSSION
In general, the TPMs set out in Tables
10-14 above track the methods specified
in the Regulations. Reg. § 1.482–3(a)
provides the following methods to deter-
mine income with respect to a transfer of
tangible property: the comparable uncon-
trolled price (“CUP”) method (Reg. §
1.482–3(b)); the resale price method
(Reg. § 1.482–3(c)); the cost plus method
(Reg. § 1.482–3(d)); the comparable prof-
its method (“CPM”) (Reg. § 1.482–5);
and the profit split method (Reg. §
1.482–6). Reg. § 1.482–4 provides the
following methods to determine income
with respect to a transfer of intangible
property: the comparable uncontrolled
transaction (“CUT”) method (Reg. §
1.482–4(c)); CPM; and profit split. In ad-
dition, with respect to both tangibles and
intangibles, methods not specified in
these sections may be used if they provide
a more reliable result; such methods are
referred to as “unspecified methods.” In
addition to these methods, the Regula-
tions provide for pricing methods applica-
ble to transactions other than the transfer
of tangible or intangible property. Reg. §
1.482–2(a) provides rules concerning the
proper treatment of loans or advances be-
tween controlled taxpayers. Reg. §
1.482–2(b) deals with provision of ser-
vices, providing that services ordinarily
should bear an arm’s length charge, and
that in certain circumstances an arm’s
length charge may be deemed to be the
cost of providing the services. Finally,
Reg. § 1.482–7 provides rules for quali-
fied cost-sharing arrangements under
which the parties agree to share the costs
of development of intangibles in propor-
tion to their shares of reasonably antici-
pated benefits from their use of the intan-
gibles assigned to them under the
agreement. APAs dealing with such cost
sharing agreements deal with both the
method of allocating costs among the par-
ties, and the determination of the amount
of the “buy-in” payment due in the case of
preexisting intangibles transferred as a re-
sult of entering into the cost sharing
agreement.
Under the Regulations, there is no strict
hierarchy of methods, nor is one method
exclusively applicable to a given type of
transaction, while a different method
would be exclusively applicable to a dif-
ferent type of transaction. Instead, the
Regulations prescribe a more flexible
“best method” approach. The best
method is the method that provides the
most reliable measure of an arm’s length
result. Reg. § 1.482–1(c)(1). Usually,
data based on results of transactions be-
tween unrelated parties provide the most
objective basis for determining an arm’s
length price. Reg. § 1.482–1(c)(2). In
such cases, reliability is a function of the
degree of comparability between the con-
trolled transactions or taxpayers and the
uncontrolled comparable transactions or
parties, and the quality of the data and as-
sumptions used in the analysis. Reg. §
1.482–1(c)(2). Factors affecting compa-
rability include the industry involved, the
functions performed, the risks assumed,
contractual terms, the relevant market and
market level, and other considerations.
Reg. § 1.482–1(d)(3). See also the dis-
cussion of comparables below.
These principles are central to the eval-
uation of an APA case by the APA Team.
Typically, the Team will determine the
relevant facts of the case; once the facts
are determined, the Team will focus on
determining the appropriate TPM by
identifying comparable uncontrolled data,
determining the degree of comparability
of such data, making such adjustments
(either to the taxpayer’s or tested party’s
data or to the comparables) as are neces-
sary to make the data more comparable
(and thus more reliable), and determining
which TPM would be most reliable, and
thus the best method, in light of the avail-
able data.

This in essence is the function per-
formed by the APA Team. The Team
must evaluate each case through an appli-
cation of the principles of the Regula-
tions. APA cases often tend to be more
difficult than a typical transfer pricing
case; if the case were easy to resolve,
there would be less need to resort to the
APA process. Given this fact, and the na-
ture of transfer pricing law and analysis,
the APA Team must focus on the particu-
lar facts of the case and must have a clear,
detailed understanding of the taxpayer’s
business. The Team then evaluates the
taxpayer’s functions and risks, the indus-
try involved, market conditions, contrac-
tual terms, availability of data, and all the
other factors that are relevant under the
Regulations. Analysis of the interplay of
the facts and transfer pricing principles
present in the case, coupled with careful
consideration of the taxpayer’s views, al-
lows the Team to reach a reasoned, case-
specific application of the arm’s length
principle under Section 482.
Such analysis of real-life cases has
proven a valuable way for the Service to
learn more about taxpayers’ businesses,
and their concerns and difficulties in at-
tempting voluntarily to comply with their
tax obligations. This can enable the Ser-
vice to provide better and more timely
guidance. At the same time, in the in-
terim, taxpayers can achieve certainty
concerning their prospective filing obliga-
tions through participation in the APA
process. A good example of such synergy
between the APA Program and issuance
of general guidance is provided by the
proposed “global dealing” regulations (63
Fed. Reg. 11177 [REG–208299–90]
(March 6, 1998)). The Service’s early ex-
perience with “global dealing” APAs was
described in Notice 94–40, 1994–1 C.B.
351. This Notice described the method-
ologies that had been used for a particular
type of global dealing cases. In these
cases, a global financial institution or af-
filiated group of companies would contin-
uously trade securities and other financial
products on a twenty-four hour basis,
with responsibility for the “book” of posi-
tions passing from location to location in
accordance with the passing of normal
business hours in a given location. Exist-
ing rules created uncertainty regarding the
appropriate treatment of such fact pat-
terns. APAs bridged the gap until more
general guidance could be issued.
Review of Table 10 reveals that the
great majority of APA TPMs applicable to
the transfer of tangible or intangible prop-
erty are specified methods under the Reg-
ulations. The CUP method has been used
when it has been possible under the facts
of the cases submitted to identify uncon-
trolled transactions with the required de-
gree of comparability between products,
contractual terms, and economic condi-
tions. See Reg. § 1.482–3(b)(2)(ii). In
many cases data concerning external
CUPs was difficult to obtain; unrelated
taxpayers dealing in the comparable prod-
uct would ordinarily also deal in other
items as well, and it is sometimes difficult
to separate the pricing of the relevant
transactions from the other results, based
on publicly reported available data. Thus,
in the APA Program’s experience, there
has been a tendency to utilize internal
CUPs. In addition, in two cases, where
the covered product involved a commod-
ity, publicly available market data pro-
vided a comparable price that could be re-
ferred to for purposes of establishing a
CUP.
For similar reasons, APAs applying the
CUT method have tended to rely on inter-
nal transactions between the taxpayer and
unrelated parties; i.e., it has often been
difficult to identify an external CUT. For
example, in a case dealing with a royalty
for a nonroutine intangible such as a
trademark, it can be difficult to identify an
unrelated party royalty arrangement that
is sufficiently comparable, due to the
unique nature of the nonroutine intangi-
bles. To avoid these difficulties, some
cases have utilized a “step royalty”
arrangement to determine the proper
transfer price for use of a unique intangi-
ble. For example, taxpayers have argued
that an intangible was very valuable and
therefore a high royalty rate was appropri-
ate. Because there were no exact or
closely similar comparables, it was diffi-
cult to demonstrate objectively whether
the taxpayer was correct. A sliding scale,
or step royalty, in conjunction with a
CPM analysis, has been used to resolve
such cases. The premise of such APAs
was that, if the intangible truly had great
value, the taxpayer would earn higher
than normal return from its activities uti-
lizing the intangible. Conversely, as the
value of the intangible decreased, the tax-
payer’s pre-royalty results would be in the
routine arm’s-length range. Therefore,
the royalty rate adopted in these APAs in-
creases as the licensee’s profitability in-
creases.
Based on the facts and circumstances
of the cases evaluated by the APA Pro-
gram, ten APAs to date have utilized a
strict transactional resale price method.
Similar considerations concerning com-
parability and data availability apply to
this method.
A transactional cost plus method has
been applied in ten cases as well. This
method has proved easier to apply than
the other transactional methods because
the taxpayer’s costs are identifiable and it
is likely to be easier to identify function-
ally comparable transactions for purposes
of determining an appropriate arm’s
length markup than it is to identify closely
similar products in the case of a CUP. See
Reg. § 1.482–3(d)(3)(ii). In other words,
for example, a manufacturer might per-
form similar functions and assume similar
risks even though the product manufac-
tured is not identical or nearly identical to
the taxpayer’s product.
The CPM is frequently applied in
APAs. This is because reliable public
data on comparable business activities of
independent companies can be more read-
ily available than potential CUP data, and
comparability of resources employed,
functions, risks, and other relevant con-
siderations is more likely to exist than
comparability of product. The CPM also
tends to be less sensitive than other meth-
ods to differences in accounting practices
between the tested party and comparable
companies, e.g. classification of expenses
as cost of goods sold or operating ex-
penses. Reg. §§ 1.482–3(c)(3)(iii)(B),
1.482–3(d)(3)(iii)(B). In addition, the de-
gree of functional comparability required
to obtain a reliable result under the CPM
is generally less than required under the
resale price or cost plus methods, because
differences in functions performed often
are reflected in operating expenses, and
thus taxpayers performing different func-
tions may have very different gross profit
margins but earn similar levels of operat-
ing profit. Reg. § 1.482–5(c)(2).
As can be seen from Table 10, a variety
of profit level indicators (“PLIs”) has
been used in connection with application
of the CPM. The rationale for choosing
2000–16 I.R.B.933April 17, 2000

which PLI to use in a given case turns on
all the factors contained in the Regula-
tions, including availability and reliability
of information, and the nature of the ac-
tivities of the tested party. For example,
return on assets or return on capital em-
ployed (“ROCE”) may be most reliable in
cases where the level of operating assets
has a high correlation to profitability, that
is, where the operating assets play a
greater role in generating profits – for ex-
ample, a manufacturer’s operating assets
such as property, plant, and equipment
could have more impact on profitability
than a distributor’s operating assets, since
often the primary value added by a dis-
tributor is based on services it provides,
which are often less dependent on level of
operating assets. Reg. § 1.482–5(b)(4)(i).
The reliability of ROCE has also been de-
pendent on the structure of the taxpayer’s
assets and their similarity to those of the
comparables, since different asset cate-
gories can have different rates of return.
Other PLIs applied by APAs in con-
junction with the CPM are various finan-
cial ratios. These include operating mar-
gin (“OM”), Berry ratio, markup on costs,
and gross margin. OM is defined as the
ratio of operating profit to sales. The
Berry ratio
7
is defined as the ratio of gross
profit to operating expenses. A Berry
ratio has in some cases been used when
services provided (for example, a low-
risk distributor providing marketing and
distribution services) are the main source
of value added by the tested party, and the
expenses incurred for providing those ser-
vices are classified as operating expenses
rather than costs of goods sold. In such
cases a Berry ratio is essentially a markup
on operating expenses. OM has been
used when functions of the tested party
are not as closely matched with the avail-
able comparables. Markup on costs (nor-
mally total costs) has been used when the
taxpayer’s sales are a controlled transac-
tion, because it relies on an uncontrolled
cost figure rather than on the controlled
sales figure. This method has also been
used where it is common industry practice
to set prices by reference to costs, for ex-
ample, for contract manufacturers. Occa-
sionally, certain costs have not been
marked up, such as product-specific taxes
reimbursed by the purchaser. In general,
gross margin has not been favored as a
PLI because the categorization of ex-
penses as operating expenses or cost of
goods sold may be subject to manipula-
tion, resulting in understatement of tax-
able income even where gross margins
are within an arm’s length range.
The relative utility of each PLI is the
subject of much discussion and analysis
in each case and depends heavily on the
facts and circumstances of the particular
case. The APA Team’s analysis will often
consider several different PLIs; if the re-
sults tend to converge, that may provide
additional assurance that the result is reli-
able. If there is a broad divergence be-
tween the different PLIs, the Team may
derive insight into important functional or
structural differences between the tested
party and the comparables. For example,
such divergence may lead to a discovery
that the taxpayer’s indicated asset values
are not reliable or comparable, such as in
the case of a largely depreciated but still
valuable asset base.
Profit split methods are used most often
when both sides of the controlled transac-
tions own valuable nonroutine intangi-
bles. If all such intangibles were owned
by only one side, the other side would
usually be the simpler party and therefore,
its functional contribution would be more
easily valued. Where both sides possess
nonroutine intangibles for which there are
no good comparables, however, a profit
split method can be the most reliable
method of establishing an arm’s length
price. APAs have used both comparable
profit splits and residual profit splits, as
described in the Regulations. In addition,
APAs have used as an unspecified method
other types of profit splits; for example,
an allocation of profits based on a
weighted allocation formula with operat-
ing assets and certain operating expenses
as factors, allocations based on the rela-
tive value of contributions of the parties,
or allocations based on compensation and
activities similar to the Notice 94–40
(1994–1 C.B. 351), profit split utilized in
some financial products cases.
Profit splits have also been used in a
number of financial products APAs where
the primary income-producing functions
are performed in more than one jurisdic-
tion. As described in Notice 94–40, supra,
these APAs have tended to use a multi-fac-
tor formula to represent the contribution of
various functions to world-wide profits.
Residual profit splits, as provided in Prop.
Reg. § 1.482–8(e)(6), have been applied in
two cases where routine functions, such as
back office functions, were readily valued.
The residual profits were allocated on the
basis of a case-specific multi-factor for-
mula similar to that discussed in Notice
94–40. In two cases, where all the intan-
gibles were held in one jurisdiction and
the other jurisdictions provided routine
marketing functions, a market-based
transactional commission was used as the
most reliable measure of an arm’s length
return for those routine services. In one
case the APA Team determined that the
taxpayer’s internal profit allocation
method provided an arm’s length result.
In this case, reliability was enhanced be-
cause this internal method was used in de-
termining arm’s length payments such as
compensation and bonuses. Prop. Reg.
1.482–8(e)(5)(iii).
A separate group of financial products
cases involves U.S. or foreign branches
of a single taxpayer corporation that op-
erate autonomously with respect to the
covered transactions, for example the
purchase and sale to customers of a fi-
nancial product such as foreign currency.
Pursuant to the business profits articles of
the relevant income tax treaties, several
APAs determined the appropriate amount
of profits attributable to each branch
from such activity by reference to the
branches’ internal accounting methods.
The branch results took into account all
trades, including interbranch and/or inter-
desk trades. In order for this method to
provide a reliable result, however, it was
necessary to ensure that all such con-
trolled trades be priced on the same mar-
ket basis as uncontrolled trades. To test
whether this was so, the branch’s con-
trolled trades were matched with that
branch’s comparable uncontrolled trades
made at times close to the controlled
trades. A statistical test would then be
performed to detect pricing bias, by
which the controlled trades might as a
whole be priced higher or lower than the
uncontrolled trades. See the discussion
under “Nature of Ranges and Adjustment
Mechanisms” below.
In APA cases involving a cost sharing
arrangement (“CSA”) under Reg. §
April 17, 20009342000–16 I.R.B.
7
Named after Professor Charles Berry, who used
the Berry ratio when serving as an expert witness in
E.I. DuPont de Nemours & Co. v. United States, 608
F.2d 445 (Ct.Cl. 1979).

1.482–7, the APA Teams have worked
with the taxpayers to ensure that the
arrangement in question meet the require-
ments of Reg. § 1.482–7(b). In particular,
the Team must determine that the method
of determining each participant’s share of
costs is consistent with the reasonably an-
ticipated benefits that participant is likely
to realize from exploitation of the intangi-
ble that is the subject matter of the CSA.
In cases where the CSA involves transfer
of existing technology, the Team must
also determine the appropriate “buy-in”
under Reg. § 1.482–7(g)(2). Table 13
shows the methods of allocating cost
sharing payments adopted in existing
APAs, and Table 14 shows the methods of
determining the buy-in. These methods
have been adopted on a case by case
basis, depending on the taxpayer’s facts
and circumstances.
APAs that have dealt with provision of
services have applied Reg. §
1.482–2(b)(3) to determine an arm’s
length charge for such services; in gen-
eral, services have been charged out at
cost when they were not an integral part
of the business activity of either the party
rendering the services or the recipient of
the services. In cases where the services
were integral, or where it was otherwise
determined that parties dealing at arm’s
length would not have charged out the
cost of services, the tendency has been to
use a cost-plus method to determine an
arm’s length fee. In six cases, other meth-
ods of determining an arm’s length fee
have been determined to be the best
method, as seen in Table 11.
CRITICAL ASSUMPTIONS
(Section 521(b)(2)(D)(v))
APAs include critical assumptions
upon which their respective TPMs de-
pend. Critical assumptions are objective
business and economic criteria that form
the basis of a taxpayer’s proposed TPM.
A critical assumption is any fact (whether
or not within the control of the taxpayer)
related to the taxpayer, a third party, an in-
dustry, or business and economic condi-
tions, the continued existence of which is
material to the taxpayer’s proposed TPM.
Critical assumptions might include, for
example, a particular mode of conducting
business operations, a particular corporate
or business structure or a range of ex-
pected business volume. Rev. Proc. 96-
53, § 5.07. Failure to meet a critical as-
sumption may render an APA inappropri-
ate or unworkable.
A critical assumption may change
(and/or fail to materialize) due to uncon-
trollable changes in economic circum-
stances, such as a fundamental and dra-
matic change in the economic conditions
of a particular industry. This type of criti-
cal assumption may be defined in terms of
a significant variance from budgeted sales
volume. In addition, a critical assump-
tion may change (and/or fail to material-
ize) due to a taxpayer’s actions that are
initiated for good faith business reasons,
such as a change in business strategy,
mode of conducting operations, or the
cessation or transfer of a business seg-
ment or entity covered by the APA.
Effects of Critical Assumptions
If a critical assumption has not been
met, the APA may be revised by agree-
ment of the parties. If such agreement
cannot be achieved, the APA may be can-
celed. If a critical assumption has not
been met, it requires taxpayer’s notice to
and discussion with the Service, and pos-
sible Competent Authority activity. Rev.
Proc. 96–53, § 11.07. Failure of a critical
assumption may also provide an auto-
matic adjustment in the TPM results.
Critical assumption provisions are cru-
cial to the APA because a TPM is
premised on certain assumptions that
apply to a particular taxpayer, its industry,
and the dynamics of the economy. Criti-
cal assumptions provide flexibility in an
APA by recognizing the reality of change
in business cycles and economic circum-
stances and their effects on varying arm’s
length returns. Whether critical assump-
tions change (and/or fail to materialize) is
subject to the examination process.
General Critical Assumption
Included in the model APA is the fol-
lowing critical assumption:
The business activities, functions per-
formed, risks assumed, assets employed,
and financial [and tax] accounting methods
and categories [and estimates] of Taxpayer
shall remain materially the same as de-
scribed in Taxpayer’s request for this APA.
Taxpayer-Specific Critical Assumptions
The APAs concluded as of December
31, 1999, include approximately 160 dif-
ferent critical assumptions in addition to
the model APA critical assumption noted
above. Many of these critical assump-
tions appear in more than one APA. Most
of the critical assumptions reflect specific
terms and factors of each taxpayer in an
elaboration of the general model APA
critical assumption. The critical assump-
tions can be subdivided into the following
categories:
(i) operational,
(ii) legal,
(iii) tax,
(iv) financial,
(v) accounting, or
(vi) economic.
These various categories of critical as-
sumptions are discussed below.
Operational Critical Assumptions
Over 100 of the critical assumptions
fall into the operational category. It is not
surprising that this is the largest category
of critical assumptions. APAs by their na-
ture are factually intensive and reflect the
specific operations of each taxpayer and
its related parties. In agreeing to a TPM
in an APA, the APA Team is basing its po-
sition on the facts presented and thus im-
plicitly upon the assumption that those
operational facts will remain the same. In
addition to the general critical assumption
to that effect, many APAs include specific
critical assumptions relating to important
factual underpinnings of the decision to
adopt the TPM.
Over twenty of these operational criti-
cal assumptions involve costs or ex-
penses, such as how the taxpayer defines,
computes, allocates and apportions costs
and expenses. Also included are critical
assumptions concerning limits on the
amount and manner by which expenses
and costs can vary. An example of this
type of critical assumption is that a U.S.
subsidiary’s deductions for restructuring
fees shall not exceed a stated maximum
dollar amount.
Six operational critical assumptions in-
volve sales. These concern limits on sales
mixes, maximum sales amounts, projec-
tions of sales and permissible sales trends
and variations. An example of this type
of critical assumption is that the com-
bined sales of covered products for each
APA year must be within 20% of the pre-
vious year.
2000–16 I.R.B.935April 17, 2000

Three operational critical assumption
involve new products. They either in-
clude or exclude new products from cov-
erage of the APA. They also control how
a new product will be treated. An exam-
ple of this type of critical assumption is
that certain new products will not be cov-
ered.
Five operational critical assumptions
involve permissible variations in items
other than sales or expenses. These in-
clude how new or disposed of affiliates
are treated, to what extent inventories can
fluctuate, or to what extent covered pur-
chases can be imported finished products.
An example of this type of critical as-
sumption is that the share of covered
products that are imported finished goods
can vary by X% from the historical base-
line share percentage of imported finished
goods.
The largest number (over 60) of opera-
tional critical assumptions involve limits
on change. These critical assumptions
state in a specific way that the following
items remain substantially the same: cus-
tomers, products, risks, functions, busi-
ness methods, assets, pricing policies, ab-
sence of catastrophic events, business
structure, presence and effect of a cost
sharing agreement, functional currency,
operating assets, presence or absence of
intangible assets, intangible asset owner-
ship, parties to the agreement, licensee
agreements, specific personnel, location
of specific personnel, presence or absence
of commissions, and royalty amounts and
percentages. An example of this type of
critical assumption is that the location of a
particular key executive may not change.
Other operational critical assumptions
involve annual review of functions, dates
of transfer of property, and maintenance
of records. An example of this type of
critical assumption is that the gross profit
from certain transactions will be recorded
in a regularly compiled database.
Legal Critical Assumptions
Fourteen critical assumptions involve
legal issues. They include whether a
competent authority agreement is condi-
tioned, canceled or has an effect on roll-
back years (prior years not covered by the
APA). An example is that the competent
authorities’ mutual agreement, which is
conditioned on the system profit remain-
ing above a specified minimum level, will
remain in effect (i.e., that such condition
will continue to be satisfied).
Other critical assumptions of this na-
ture involve liquidations, dissolutions,
customs law changes, major regulatory
changes, new import or export barriers,
and maintenance of a distributor agree-
ment in a specific form. An example of
this type of critical assumption is that cus-
toms duties on imported covered products
shall not increase or decrease by some
stated parameter.
Others involve which controlled entity
has title to inventory and production
equipment, or which controlled entity is
required to maintain guarantees, war-
ranties, or product liability. An example
of this type of critical assumption is that a
parent corporation must maintain existing
guarantees for all liabilities of its sub-
sidiary, including its debt and product lia-
bility guarantees.
Tax Critical Assumptions
Eleven critical assumptions involve tax
issues. These issues include estimated tax
liability, period of limitation on assess-
ment, tax effect of specified expenses,
sourcing of income, Subpart F income,
permanent establishment, foreign tax
credit limitation, increasing coverage to
other controlled foreign corporations, the
ability to change a specified tax election,
ability to file for a refund, and a condition
of subsequently entering into a closing
agreement for roll back years. An exam-
ple of this type of critical assumption is
that the period of limitation on assess-
ments shall be kept open for all APA years
until such period expires for the last APA
year under U.S. tax law.
Financial Critical Assumptions
Eighteen types of critical assumption
are financial in nature. These involve
limitations on system loss, intangible
profit projections, buy-in payments, lack
of currency risk, and valid business rea-
son for debt. Also included in this cate-
gory are a number of requirements for
maintaining various financial ratios such
as profit splits, Berry ratios, operating
profit margins, and gross profit margins,
within prescribed ranges or within limits.
An example of this type of critical as-
sumption is that the TPM may not yield a
gross margin outside A% to B% for a con-
trolled subsidiary, nor may the combined
operating margins be outside C% to D%
for the parent and the subsidiary, unless
due to valid business reasons or attribut-
able to economic conditions beyond the
parent’s control.
Accounting Critical Assumptions
Seven critical assumptions involve
accounting methods or practices. These
include assumptions regarding the use
of generally accepted accounting princi-
ples, favorable certified opinions, mark
to market accounting, consistency of ac-
counting computations for all related
parties, methods of accounting for for-
eign currency gains and losses, and un-
changed methods for both financial and
tax accounting. An example of this type
of critical assumption is that manufac-
turing costs must be computed in the
same manner by U.S. and foreign mem-
bers of an affiliated group.
Economic Critical Assumptions
Eight critical assumptions involve eco-
nomic and financial conditions. These
include assumptions regarding interest
rates and changes in interest rates. They
also include assumptions that there will
not be significant changes in market con-
ditions, technology, product liability,
product design, process design, and mar-
ket share. An example of this type of crit-
ical assumption is that there shall not be
an unexpected economic development
that materially affects a company’s mar-
ket share or market price of a covered
product.
SOURCES OF COMPARABLES,
COMPARABLE SELECTION
CRITERIA, AND NATURE OF
ADJUSTMENTS TO
COMPARABLES AND TESTED
PARTIES
(Sections 521(b)(2)(D)(v), (vi)
and (vii))
At the core of most APAs are compara-
bles. The APA program works closely
with taxpayers to find the best and most
reliable comparables for each covered
transaction. In some cases, CUPs or
CUTs can be identified, with the attendant
product- or intangible-specific analysis of
comparability and reliability. In other
cases, comparable business activities of
independent companies are utilized in ap-
plying the CPM or residual profit split
April 17, 20009362000–16 I.R.B.

methods. In the APA Program’s experi-
ence, CUPs and CUTs have been most
often derived from internal transactions of
the taxpayer. But other cases have uti-
lized third party CUPs or CUTs from ex-
ternal transactions.
For profit-based methods where com-
parable business activities or functions
of independent companies are sought,
the APA Program typically has applied a
three-part process. First, a pool of po-
tential comparables has been identified
through broad searches. From this pool,
companies having transactions that are
clearly not comparable to those of the
tested party have been eliminated
through the use of quantitative and qual-
itative analyses, i.e., quantitative
screens and business descriptions.
Then, based on a review of available de-
scriptive and financial data, a set of
comparable companies or transactions
has been finalized. The comparability
of the finalized set has then been en-
hanced through the application of ad-
justments. These steps of identifying
potential comparables, selecting compa-
rables from the pool, and adjusting the
comparables, are discussed in turn
below.
Searching for Comparables
Comparables used in APAs can be U.S.
or foreign companies. This depends, of
course, on the relevant market, the type
of transaction being evaluated and the re-
sults of the functional and risk analyses.
In general, comparables have been lo-
cated by searching a variety of databases
which provide data on U.S. publicly-
traded companies and on a combination
of public and private non-U.S. compa-
nies. Table 15 summarizes some of the
common databases that have been used
for existing APAs.
2000–16 I.R.B.937April 17, 2000
TABLE 15
COMPARABLES DATABASES USED IN APA ANALYSES
VENDORDATABASE*COVERAGE
Bureau van DijkAmadeusEuropean companies
JadeJapanese companies
FameU.K. companies
DisclosureSECU.S. public companies
(primarily)
CanCorpCanadian companies
WorldscopeGlobal companies
Moody’sDomesticU.S. public companies
InternationalNon-U.S. companies
Standard & Poor’sCompustat (Research InsightU.S. & Canadian public
North America)companies (primarily)
Global Vantage (ResearchNon-U.S. companies
Insight Global)
*
Many vendors now package their data with more than one type of access software. This table shows the major databases without regard to the “front-end” software
used to access them. In addition, it does not show other vendors who package existing databases together in products.
Although comparables were most often
identified from the databases cited above,
in some cases comparables were found
from other sources. Chief among this
group are comparables derived internally
from taxpayer transactions with third par-
ties. In just over 10 percent of all APAs,
there were transactions that were evalu-
ated with reference to internal comparable
uncontrolled transactions. Also used in a
few cases was information available from
trade publications in specific industries,
and comparables derived from taxpayer
information on competitors.
Selecting Comparables
Initial pools of potential comparables
have been generally derived from the
databases shown in Table 15 using a com-
bination of industry and keyword identi-
fiers. Then, the pool has been refined
using a variety of selection criteria spe-
cific to the transaction or entity being
tested and the transfer pricing method
being used.
The databases listed above in Table 15
allow for searches by industrial classifica-
tion (generally, U.S. Standard Industrial
Classification (“SIC”)), by keywords, or
by both. These searches can yield a num-
ber of companies whose business activi-
ties may or may not be even remotely
comparable to those of the entity being
tested. Therefore, so called “compara-
bles” based solely on SIC or keyword
searches are almost never used in APAs.
Rather, pools of initially identified
companies are examined closely. This ex-
amination consists of a combination of
quantitative screens and qualitative evalu-
ations. The application of multiple quan-
titative screens to select comparables,
without also analyzing descriptive infor-
mation about the companies, has not gen-
erally been acceptable APA practice.
Rather, companies have been accepted or
rejected as comparables based on a com-
bination of screens, business descriptions,
and other information found in a com-
pany’s Annual Report to shareholders and
filings with the U.S. Securities and Ex-
change Commission (“SEC”).
8
In virtually all cases, business activities
are required to meet certain basic compa-
rability criteria to be considered compara-
bles. Functions, risks, economic condi-
8
While the framework is the same for searches for
U.S. and non-U.S. comparables, there is generally
less descriptive information publicly available for
non-U.S. companies. Therefore, selection criteria
can be more general for non-U.S. searches.

April 17, 20009382000–16 I.R.B.
tions, and the property (product or intan-
gible) and services associated with the
transaction must be comparable. Deter-
mining comparability can be difficult –
the goal has been to use comparability cri-
teria restrictive enough to eliminate com-
panies that are not comparable, but yet
not so restrictive as to have no compara-
bles remaining. The APA Program nor-
mally has begun with relatively strict
comparability criteria and then has re-
laxed them slightly if necessary to derive
a pool of comparables.
The APA Program has applied a combi-
nation of criteria to determine compara-
bility of economic conditions. Specifi-
cally, it frequently has combined “same
industry” criterion with criteria focusing
on the level of market served, the matu-
rity of the company (minimum or maxi-
mum number of years of operation)
and/or the geographic market served
(minimum or maximum percentage of
sales in a geographic area and/or percent-
age of government sales.)
In addition, the APA Program has gen-
erally required the potential comparables
to have complete financial data available
for a specified period of time. Sometimes
this has been three years, but it can be
more or less, depending on the circum-
stances of the controlled transaction.
Using a shorter period might result in the
inclusion of companies in different stages
of economic development or use of atypi-
cal years of a company subject to cyclical
fluctuations in business conditions.
Beyond these criteria and screens
which are most often applied, many cov-
ered transactions have been tested with
comparables that have been chosen using
additional criteria and/or screens. These
include sales level criteria and tests for fi-
nancial distress and product comparabil-
ity.
These common selection criteria and
screens have been used to increase the
overall comparability of a group of com-
panies and as a basis for further research.
The sales level screen, for example, has
been used to remove companies that, due
to their size, might face fundamentally
different economic conditions from those
of the entity or transaction being tested.
In addition, many APA analyses have
incorporated some form of selection crite-
ria related to removing companies experi-
encing “financial distress” due to con-
cerns that companies in financial distress
often have experienced unusual circum-
stances that would render them not com-
parable to the entity being tested. These
criteria include: operating losses in a
given number of years, an unfavorable
auditor’s opinion, or bankruptcy.
As the transfer pricing regulations state
in Reg. § 1.482–1(d)(3)((v), the importance
of product comparability depends on the
transfer pricing method being used. In
using methods that rely on the identifica-
tion of comparable independent companies,
the APA Program has generally required
less product comparability than when using
methods that rely on comparable uncon-
trolled prices and licensing transactions.
Nonetheless, product comparability, as de-
termined from publicly available corporate
information, has been used as a selection
criterion when possible.
An additional important class of selec-
tion criteria is that which relates to the de-
velopment and ownership of intangible
property. In many cases in which the en-
tity being tested is a manufacturer, several
criteria have been used to ensure, for ex-
ample, that if the controlled entity does
not own significant manufacturing intan-
gibles or conduct research and develop-
ment (“R&D”), neither will the compara-
bles. These selection criteria have
included determining the importance of
patents in a company or screening for
R&D expenditures as a percentage of
sales or costs. Another criterion used in
some cases has been a comparison of the
book and market values of a company;
this can be another indicator of intangible
value. Again, quantitative screens related
to identifying comparables with signifi-
cant intangible property generally have
been used in conjunction with an under-
standing of the comparable derived from
publicly available business information.
Selection criteria relating to asset com-
parability and operating expense compa-
rability have also been used at times. A
screen of property, plant, and equipment
(“PP&E”) as a percentage of sales or as-
sets, combined with a reading of a com-
pany’s SEC filings, has been used to help
ensure that distributors (generally lower
PP&E) were not compared with manufac-
turers (generally higher PP&E), regard-
less of their SIC classification. Similarly,
a test involving the ratio of operating ex-
penses to sales or total costs has helped to
determine whether a company undertakes
a significant marketing and distribution
function. This has been used in circum-
stances when complete descriptive infor-
mation about a company’s functions was
not available.
Adjusting Comparables
After the comparables have been se-
lected, the regulations require that “[i]f
there are material differences between the
controlled and uncontrolled transactions,
adjustments must be made if the effect of
such differences on prices or profits can
be ascertained with sufficient accuracy to
improve the reliability of the results.”
Reg. § 1.482–1(d)(2). In almost all cases
involving income-statement-based profit
level indicators (“PLIs”), certain “asset
intensity” or “balance sheet” adjustments
for factors that have generally agreed-
upon effects on profits have been carried
out. In addition, in specific cases, addi-
tional adjustments have been performed
to improve reliability.
The most common asset intensity ad-
justments used in APAs include adjust-
ments for differences in accounts receiv-
able, inventories, and accounts payable.
In practice, when data has been available,
most APAs have included these adjust-
ments, regardless of whether or not their
effect is material. Further, while there is
no single standard adjustment mecha-
nism, the different methodologies used
have tended to achieve similar results.
The APA Program has required that
data must be compared on a first-in first-
out (“FIFO”) accounting basis. Although
financial statements may be prepared on a
last-in first-out (“LIFO”) basis, cross-
company comparisons are less meaning-
ful when one or more companies use
LIFO inventory accounting methods.
This adjustment directly affects costs of
goods sold and inventories, and therefore
affects both profitability measures and in-
ventory adjustments.
The APA Program has required adjust-
ments for receivables, inventory, and
payables based on the principle that hold-
ing assets such as receivables and inven-
tory is a cost to the entity holding them
and a benefit to customers and/or suppli-
ers (those on either side of a transaction
with the entity holding the assets). Such
adjustments are based on the assumption
that the cost of holding these assets is

DISCUSSION
Reg. § 1.482–1(e)(1) of the transfer
pricing regulations states that sometimes
a pricing method will yield “a single re-
sult that is the most reliable measure of an
arm’s length result.” Sometimes, how-
ever, a method may yield “a range of reli-
able results,” called the “arm’s length
range.” A taxpayer whose results fall
within the arm’s length range will not be
subject to adjustment.
Under Reg. § 1.482–1(e)(2)(i), such a
range is normally derived by considering
a set of more than one comparable uncon-
trolled transaction,
12
of similar compara-
bility and reliability. If these comparables
are of very high quality, as defined in the
Regulations,
13
then under Reg. §
1.482–1(e)(2)(iii)(A) the arm’s length
range includes the results of all of the
comparables (from the least to the great-
est). However, the APA Program has only
rarely identified cases meeting the re-
quirements for the full range. If the com-
parables are of lesser quality, then under
equal to their carrying cost. Conversely,
the holding of accounts payable is consid-
ered to be a benefit to the entity holding
them, in that they are a source of funds.
This benefit has generally been assumed
to be equal to the cost of funds.
To compare the profits of two entities
with different relative levels of receiv-
ables, inventory, or payables, the APA
Program has estimated the carrying costs
of each item and adjusted profits accord-
ingly. Although somewhat different for-
mulas have been used in specific APA
cases, Appendix B presents one set of for-
mulas used in many APAs.
9
Underlying
these formulas are the notions that (1) bal-
ance sheet items should be expressed as
mid-year averages, (2) formulas should
try to avoid using data items that are
being tested by the transfer pricing
method (for example, if sales are con-
trolled, then the denominator of the bal-
ance sheet ratio should not be sales) (3) a
short term interest rate should be used,
and (4) an interest factor (i/(1+i))
10
rather
than a rate (i) should be used in the adjust-
ments for receivables and payables.
Less frequently seen but still poten-
tially important in some cases is the ad-
justment for differences in relative levels
of PP&E between a tested entity and the
comparables. Ideally, comparables and
the entity being tested will have fairly
similar relative levels of PP&E, since
major differences can be a sign of funda-
mentally different functions and risks. In
other cases, however, differences in rela-
tive levels of PP&E can indicate more of
a buy-or-lease difference, variations in the
age of assets, or capital-labor choices
rather than any functional difference be-
tween the companies. In these cases, ad-
justments similar to those for receivables,
inventories, and payables have been
made. The PP&E adjustment has, how-
ever, been made using a longer term inter-
est rate than the short term rates used for
the other balance sheet adjustments.
Additional adjustments, used much
more infrequently, include those for dif-
ferences in other balance sheet items, op-
erating expenses, R&D, or currency
risk.
11
In rare or singular cases, there also
have been adjustments for start-up costs,
cost of capital variations, non-routine in-
tangibles, sales shocks, manufacturing
functions, and product liability. These ad-
justments have been evaluated on a case
by case basis and made only when doing
so improved the reliability of the results.
Finally, accounting adjustments, such as re-
classifying items from cost of goods sold to
operating expenses, for example, have also
been made when warranted to increase reli-
ability. Often, data has not been available
for both the controlled and uncontrolled
transactions in sufficient detail to allow for
these types of adjustments.
NATURE OF RANGES AND
ADJUSTMENT MECHANISMS
(Sections 521(b)(2)(D)(viii) and (ix))
The types of ranges used in existing
APAs are set forth in Table 16 below:
2000–16 I.R.B.939April 17, 2000
TABLE 16
TYPES OF RANGES
Type of RangeNumber of APAs
That Involve
This Type
Full range5
Interquartile range41
Interquartile range recomputed after Tukey filter5
Agreed range11
Floor (result must be no less than x)20
Ceiling (result must be no more than x)4
Specific result144
Financial products - statistical confidence interval to test for internal CUP16
9
The formulas in Appendix B do not represent the
formal IRS position on adjustments. Rather, they are
examples of adjustment mechanisms that have been
used by the APA Program.
10
This factor may have the holding period incorpo-
rated into it.
11
See above for a discussion of currency risk.
12
The term “transaction” here can include many
transactions by one company, considered on an
aggregate basis. See Reg. § 1.482-1(f)(2)(iv) (prod-
uct lines).
13
For such comparables, “it is likely that all mater-
ial differences have been identified” between the
uncontrolled comparables and the controlled trans-
action. Further, each identified difference has “a
definite and reasonably ascertainable effect on price
or profit, and an adjustment is made to eliminate the
effect of each such difference.” Reg. § 1.482-
1(e)(2)(iii)(A).

April 17, 20009402000–16 I.R.B.
Reg. § 1.482–1(e)(2)(iii)(B) “the reliabil-
ity of the analysis must be increased,
where it is possible to do so, by adjusting
the range through application of a valid
statistical method to the results of all of
the uncontrolled comparables.” One such
method, the “interquartile range,” is “or-
dinarily . . . acceptable,” although a dif-
ferent statistical method “may be applied
if it provides a more reliable measure.”
The “interquartile range” is defined as,
roughly, the range from the 25th to the
75th percentile of the comparables’ re-
sults. (A precise definition is given in
Reg. § 1.482–1(e)(2)(iii)(C).) In the case
of bilateral APAs, other methods for set-
ting a range have been agreed upon as a
result of compromise negotiations be-
tween the Competent Authorities.
A variant on the interquartile range in-
volves a “Tukey filter,” as follows. First,
the set of comparables is used to derive a
standard interquartile range. Then the dif-
ference D between the top and bottom of
the interquartile range is computed. Next,
all comparables whose results are more
than a certain multiple of D (often the
multiple 1.5 is used) outside the in-
terquartile range are discarded as “out-
liers.” Finally, the reduced set of compa-
rables (without the outliers) is used to
compute a second interquartile range,
which is then used as the arm’s length
range. This approach has only occasion-
ally been used for APAs (see Table16).
The Tukey filter has been used to elimi-
nate companies that were so anomalous
that they arguably should not have been
included as comparables in the first place.
Many times, even though a set of com-
parables could yield a range of results,
APAs have specified a single or specific
result, also called a “point.” This ap-
proach was used in some APAs to avoid
the possibility of manipulation to produce
a result near the bottom of a specified
range. For bilateral APAs, each country
might be concerned about the potential
for such manipulation, making it easier
for the two countries to agree on a spe-
cific result than on a range. In many
APAs, the specific point has been the me-
dian point of the set of comparables’ re-
sults. However, in some APA cases argu-
ments for a different point have been
made and accepted.
APAs have often used a point in estab-
lishing a royalty rate. A set of compara-
bles may yield a range of possible arm’s
length royalty rates. However, as a matter
of business practice, companies typically
fix precise royalty rates in advance.
Therefore, APAs often require a specific
royalty rate.
APAs also have tended to adopt a point
rather than a range when applying profit
split methods. In a comparable profit
split under Reg. §1.482–6(c)(2), total
profit is split in the same ratio as the profit
of comparable uncontrolled parties is
split. Typically this method produces a
specific ratio of profit split, although if
more than one set of comparable parties
were used it would be possible to derive a
range. In a residual profit split under Reg.
§ 1.482–6(c)(3), each party is first as-
signed a routine return, and any residual
profit or loss is split according to each
party’s relative contribution to pertinent
intangible property. As normally imple-
mented, this method has yielded a spe-
cific result for both routine returns and the
split of the residual profit, although in
some cases it would be possible to derive
ranges. Other methods in which a point
rather than a range has been used include
CUP, resale price, and cost plus. Some-
times only one comparable transaction is
used,
14
yielding a specific result rather
than a range. However, in some cases
APAs have specified a modest range
around the specific result, to accommo-
date changing business practices and con-
ditions.
Some APAs specify not a point or a
range, but a “floor” or a “ceiling.” When
a floor is used, the tested party’s result
must be greater than or equal to some par-
ticular value. When a ceiling is used, the
tested party’s result must be less than or
equal to some particular value. Such an
approach has been used, for example,
where the TPM is a CPM with OM as the
PLI and the comparable transactions re-
flect certain current business conditions
that might improve. The APA required
that the tested party’s operating margin
should always be above the bottom of the
interquartile range, but that the operating
margin could go above the top of the in-
terquartile range if conditions improved.
Some APAs involving financial prod-
ucts have employed a “statistical confi-
dence interval” to compare pricing of a
large set of controlled transactions with a
comparable set of uncontrolled transac-
tions. An example is a financial institu-
tion with fairly autonomous branches in
several countries. Pursuant to the busi-
ness profits article of the applicable in-
come tax treaties and Prop. Reg. §
1.482–8(b), APAs have been executed al-
lowing the taxpayer to allocate profits be-
tween branches with reference to the
branches’ internal accounting methods,
taking into account all trades, including
interbranch and/or interdesk trades. In
order for this method to provide a reliable
result, however, it is necessary to ensure
that all such controlled trades be priced on
the same market basis as uncontrolled
trades. To test whether this is so, a
branch’s controlled trades are matched
with that branch’s comparable uncon-
trolled trades made at times close to the
controlled trades. A statistical test is per-
formed to detect pricing bias, by which
the controlled trades might as a whole be
priced higher or lower than the uncon-
trolled trades. This has been accom-
plished by construction of a statistical
“confidence interval” (typically 95%),
with the tested hypothesis being that con-
trolled trades are priced on the same basis
as uncontrolled trades. An adjustment is
necessary if the results of the controlled
trades fall outside of this confidence inter-
val.
Adjustments
Under Reg. § 1.482–1(e)(3), if a tax-
payer’s results fall outside the arm’s
length range, the Service may adjust the
result “to any point within the arm’s
length range.” Accordingly, an APA may
permit or require a taxpayer and its re-
lated parties to make an adjustment after
the year’s end to put the year’s results
within the range, or at the point, specified
by the APA. Similarly, to enforce the
terms of an APA, the Service may make
such an adjustment. Where the APA spec-
ifies a range, the adjustment is sometimes
to the closest edge of the range, and
sometimes to another point such as the
median of the interquartile range. De-
pending on the facts of each case, such
automatic adjustments are not always per-
mitted. Some APAs specify that if a tax-
14
The use of only one comparable transaction is
more likely when that transaction is an “internal”
comparable uncontrolled transaction, that is, a trans-
action that involves one of the related parties under
evaluation.

payer’s results fall outside the applicable
point or range, the APA will be canceled
or revoked. Some bilateral APAs specify
that in such a case there will be a negotia-
tion between the Competent Authorities
involved to determine whether and to
what extent an adjustment should be
made. Some APAs permit automatic ad-
justments unless the result is far outside
the range specified in the APA. Thus they
provide flexibility and efficiency (permit-
ting adjustments when normal business
fluctuations and uncertainties push the re-
sult somewhat outside the range), while
guarding against abuse of the adjustment
mechanism.
In order to conform the taxpayer’s books
to these tax adjustments, the APA usually
permits a “compensating adjustment” as
long as certain requirements are met. Such
compensating adjustments may be paid be-
tween the related parties with no interest,
and the amount transferred will not be con-
sidered for purposes of penalties for failure
to pay estimated tax.
TERM LENGTHS
(Section 521(b)(2)(D)(x))
The various term lengths for existing
APAs are set forth in Table 17 below:
TABLE 17
TERMS OF APAs
2000–16 I.R.B.941April 17, 2000
NATURE OF DOCUMENTATION
REQUIRED
(Section 521(b)(2)(D)(xi))
One significant component of any APA
agreement is the requirement that a tax-
payer demonstrate compliance with the
agreed-upon TPM or, alternatively, that
any adjustment required by the TPM is
accurately calculated. To accomplish this
objective, the APA agreement includes
documentation requirements, which are
found in Section 5 (Financial Statements
and APA Records) and Section 8 (Annual
Report) of the model APA.
The APA agreement generally provides
in part that “[t]he determination whether a
taxpayer has complied with this APA will
be based on its United States income tax re-
turn; its financial statements as prepared in
accordance with generally accepted ac-
counting principles (‘GAAP’) on a consis-
tent basis (the ‘Financial Statements’); the
additional records (‘APA Records’) speci-
fied in Appendix B; and all information ref-
erenced in section 8 of this APA.” The
agreement also generally states that a “Tax-
payer shall file a timely Annual Report for
each APA Year pursuant to the rules of sec-
tion 11.01 of Rev. Proc. 96–53.”
Typically, the APArequires a taxpayer
to demonstrate compliance with the
agreed-upon TPM by providing the fol-
lowing documents in such an annual re-
port:
1. A statement identifying all material
differences between the Taxpayer’s
business operations, functions per-
formed, risks assumed, and assets
employed during the APA Year and
the description of the Taxpayer’s
business operations as contained in
Taxpayer’s request for this APA or,
if there have been no such material
differences, a statement to that ef-
fect.
2. A statement identifying all relevant
and material changes in the Tax-
payer’s accounting methods and
classifications from those described
or used in Taxpayer’s request for
this APA or, if there have been no
such material changes, a statement
to that effect.
3. The Taxpayer’s Financial State-
ments for the APA Year as prepared
in accordance with U.S. GAAP.
4. A financial analysis demonstrating
Taxpayer’s compliance with the
or similar transfer pricing issue for those
earlier years) . Rollbacks, however, are not
under the jurisdiction of the APA Program,
but rather of the District Director bearing
responsibility for examination of the tax-
payer. Accordingly, rollback years are not
included in or covered by the APA, and the
APA Program office has not systematically
tracked rollbacks. In some cases, the APA
Program may not be informed whether a
rollback of the APA methodology has been
applied to back years, as that decision may
be made after the APA is executed and
closed by the Chief Counsel’s office. For
the future, the APA Program intends as part
of IRS modernization to implement proce-
dures for better coordination of rollbacks
with the examination function.
Due to the foregoing, the APA Program
is unable to provide complete information
about rollbacks in this report. In 1999,
however, as part of an unrelated project, the
APA Program surveyed the Districts that
had participated in APAs in an attempt to
determine how and to what extent rollbacks
had been applied. The results of that sur-
vey are summarized in Table 18 below:
TABLE 18
APA ROLLBACKS
Term in Years
15
Number of
APAs With
This Term
12
211
348
448
593
620
76
83
91
102
15
Partial tax years and short full tax years are both
counted as full years.
Number of
Cases
Number of APA cases as
of August 23, 1999194
Cases with a rollback and
number of rollback years
per case:50
1 year5
2 years3
3 years10
4 years12
5 years8
6 years7
7 years2
8 years1
9 years1
16 years1
Cases in which the APA
process facilitated a
settlement of back years,
though the methodology
was not rolled back11
Section 521(b)(2)(D)(x) requires that the
report on term lengths include rollback
years (i.e., prior years to which the APA
TPM is applied in order to resolve the same

April 17, 20009422000–16 I.R.B.
TPM including a computation of
the TPM amount and a reconcilia-
tion of the TPM amount to the fi-
nancial statements.
5. A description of any failure to meet
Critical Assumptions or, if there
have been no such failures, a state-
ment to that effect.
6. A description of the reason for, and
financial analysis of, any Compen-
sating Adjustments with respect to
the APA Year, including the means
by which any such Compensating
Adjustment has been or will be sat-
isfied.
7. A copy of the certified public ac-
countant’s opinion described in sec-
tion 5 of this APA for the APA
Year.
The documentation provisions referred
to above are necessary to establish
whether a taxpayer has complied with the
agreed-upon TPM, including whether any
adjustment required to bring the taxpayer
into compliance with the TPM is accu-
rately calculated. Under the APA, a tax-
payer must retain all documents required
to be included in the annual report, as
well as all work papers, records, or other
documents that support the information
provided in such documents. Compliance
by a taxpayer with the APA documenta-
tion provisions also constitutes compli-
ance with the record maintenance require-
ments of Sections 6038A and 6038C of
the Internal Revenue Code with respect to
the covered transactions during the APA
term.
The documentation provisions gener-
ally require a taxpayer to submit audited
financial statements for the APA Year pre-
pared in accordance with U.S. GAAP.
The IRS relies on audited financial state-
ments – as opposed to unaudited financial
statements – because they contain an un-
qualified opinion by an independent ac-
countant that the Taxpayer’s financial
condition is fairly presented. Audited fi-
nancial statements also represent the com-
pany’s financial condition as it is pre-
sented to shareholders and the public.
Additionally, audited financial statements
prepared in accordance with GAAP en-
sure that a taxpayer’s financial operations
are reflected based on known accounting
principles.
In addition to the requirements identi-
fied above, APA agreements may also re-
quire documentation tailored to specific
industries. For example, the nature of
records kept by taxpayers engaged in the
financial products business often differs
from that of taxpayers in other industries.
Therefore financial products APAs would
have record keeping requirements tailored
to that industry. For example, such APAs
might typically require some or all of the
following additional documents:
(1) annual profit & loss statements of
the U.S. taxpayer;
(2) summaries of currencies used to
account for payments or alloca-
tions to parent or head office;
(3) leave order confirmations;
(4) daily revaluation reports;
(5) historical pricing data for currency
transactions;
(6) schedule of costs of hedging con-
tracts; and
(7) historical market quotations.
The documents outlined above support
transactions that are specific to financial
product APAs, such as hedging transac-
tions and the allocation of global trading
expenses.
APAs covering cost sharing arrange-
ments may also generate additional docu-
mentation requirements, such as requiring
a taxpayer to provide:
(1) amendments to cost sharing or
technology license agreement;
(2) summaries of each product in-
cluded in cost sharing agreement;
(3) reconciliations of R&D costs to
cost sharing payments, including
invoices for cost sharing pay-
ments;
(4) lists of affiliates included and ex-
cluded in each cost sharing group;
(5) summaries of intangibles that each
affiliate brings to the cost sharing
agreement; and
(6) internal documents relied upon in
calculating the annual cost sharing
payment.
These additional requirements are in-
tended to document transactions germane
to cost sharing arrangements, including
the buy in and buy out payments related
to existing and work-in-progress R&D,
the expenses comprising the cost pool, as
well as the allocation of those expenses to
the participating members of the cost
sharing arrangement.
Finally, the documentation provisions
of an APA can be tailored to address a tax-
payer’s specific business or specific ac-
counting system. For example, some
APAs have required a taxpayer to docu-
ment sales from specific product lines or
to compile sales and expense data for spe-
cific factories. In this situation, the infor-
mation sought might be used to evaluate
the financial results or the functions per-
formed by a specific affiliate in a consoli-
dated group. Along the same lines, infor-
mation regarding a company’s worldwide
ratio of R&D expenses to sales may shed
light on the R&D functions being per-
formed by a domestic subsidiary as com-
pared to a foreign parent.
Alternatively, some annual reports
have required information such as third
party royalty agreements, which would be
used to support a CUT analysis, and U.S.
Customs filings, if there is an issue re-
garding the inconsistent valuation of im-
ported tangible property. Some APAs
have also required a taxpayer’s business
plan or a reconciliation of financial pro-
jections with actual financial results to as-
certain whether the financial projections
that formed the basis for the TPM approx-
imated the actual financial results.
Other types of required documents may
include the production of IRS Forms 5471
and 5472 (Information returns outlining
transactions between controlled parties)
and IRS Form 3115 (Information return
outlining changes in accounting meth-
ods). Taxpayers may also be required to
explain extraordinary transactions with a
foreign parent that exceed a certain dollar
limitation.
The type of information described
above is necessary in evaluating whether
there have been changes to a taxpayer’s
business or accounting methods that
could have a material impact on the appli-
cation of the TPM. Through the APA doc-
umentation requirements, the Service can
ensure taxpayer compliance with the
agreed-upon TPM or, alternatively, the
need for an accurate calculation of any
adjustment designed to bring a taxpayer
into compliance.
EFFORTS TO ENSURE
COMPLIANCE WITH APAs
(Section 521(b)(2)(F))
As described above in “Nature of Doc-
umentation Required,” each APA contains
documentation provisions, based on the
facts of that case, designed to enable the
Service to ensure compliance with the

TPM and other terms of the APA. As part
of these provisions, the taxpayer is re-
quired to file an annual report demonstrat-
ing compliance with the APA for each
covered APA year, and putting the Service
on notice if critical assumptions have
been violated or material facts have
changed.
When the annual report is received by
the APA Program, it is reviewed by a
member of the professional staff. One
Team Leader has been assigned the lead
role in this review, and is responsible not
only for reviewing most of the annual re-
ports received by the APA Program office,
but also for maintaining a database that
tracks the annual reports required by each
APA to ensure that taxpayers are comply-
ing with their obligation to file the reports
in a timely manner. At times, another
member of the APA staff will be responsi-
ble for the initial review of a given annual
report, for example, the team leader who
negotiated the APA in question if the level
of complexity makes it more efficient for
a person already familiar with the case to
review the report; or a request to renew
the APA to which the annual report relates
might be in process, in which case the
team leader assigned the renewal might
be assigned the annual report for similar
reasons of efficiency.
The APA Program reviews the annual
report to make sure that the information
required is included in the report, and to
determine whether the taxpayer has, on
the face of the report, complied with the
terms of the APA, including proper appli-
cation of the TPM. For the most part, the
APA Program does not attempt to audit
the accuracy of the numbers contained in
the report, but will look at issues such as
proper classification of expenses. If this
review determines that there is a question
as to whether the taxpayer is in compli-
ance, the APA Program (in coordination
with the relevant District) will contact the
taxpayer to discuss the issue and request
further information, as necessary. If the
APA Program’s review does not detect
any problems on the face of the annual re-
port, the report is forwarded to the Dis-
trict with examination jurisdiction over
the taxpayer – typically, the District that
participated in the APA negotiations. The
District is responsible for deciding
whether or to what extent to audit the un-
derlying data, for example, substantiating
expenses or reviewing allocations used by
the taxpayer in arriving at the conclusion
that it complied with the APA.
To date, this multifunctional review
procedure has indicated that taxpayers
comply with the requirements of the APA
in the great majority of cases. As of De-
cember 31, 1999, out of 239 annual re-
ports that had been reviewed, the Service
had identified proposed adjustments to
taxable income with respect to fifteen
APAs. Such adjustments totaled approxi-
mately $132 million, though in some
cases these amounts have not been agreed
to by the taxpayers.
2000–16 I.R.B.943April 17, 2000

Appendix A
MODEL ADVANCE PRICING AGREEMENT
ADVANCE PRICING AGREEMENT
between
TAXPAYER
and
THE INTERNAL REVENUE SERVICE
ADVANCE PRICING AGREEMENT
between
TAXPAYER
and
THE INTERNAL REVENUE SERVICE
THIS ADVANCE PRICING AGREEMENT (“APA”) is made by and between Taxpayer and the Internal Revenue Service (“Ser-
vice”), acting through the Associate Chief Counsel (International).
WHEREAS, Taxpayer and the Service (the “Parties”) wish to establish a method for determining whether certain prices used in
international transactions involving Taxpayer are in accordance with the principles of section 482 of the Internal Revenue Code of
1986 as amended (the “Code”) and attendant Regulations and, to the extent applicable, income tax conventions to which the United
States is a party;
NOW, THEREFORE, in consideration of the mutual promises contained herein, the Parties agree as follows:
1. Identifying information. Taxpayer’s EIN is __________. [Taxpayer is included in the consolidated federal income tax return
filed by ________________, EIN ________. All references to Taxpayer’s United States income tax return in this APA refer to that
consolidated return, and all references in this APA to “Taxpayer” shall refer to the ______________ consolidated return group.]
2. Covered transactions. This APA governs the pricing of the transactions specified in Appendix A (the “Covered Transactions”).
3.Legal Effect.
3.1. Taxpayer agrees to comply with the terms and conditions of this APA, including the transfer pricing methodology (“TPM”)
that is described in Appendix A. If Taxpayer complies with the terms and conditions of this APA, then the Service will not contest
the application of the TPM to the Covered Transactions and will not make or propose any reallocation or adjustment under section
482 of the Code with respect to Taxpayer concerning the transfer prices in Covered Transactions for the years covered by this APA
(the “APA Years”).
3.2. Regardless of the date on which Taxpayer filed its request for this APA, Taxpayer and the Service agree, unless otherwise
specified to the contrary in this APA, that Rev. Proc. 96–53, 1996–2 C.B. 375, and not any predecessor to Rev. Proc. 96–53, governs
the interpretation, administration, and legal effect of this APA.
3.3. If, for any APA Year, Taxpayer does not comply with the terms and conditions of this APA, then the Service may:
i. enforce the terms of this APA and propose adjustments to the income, expenses, deductions, credits, or allowances reported
on Taxpayer’s U.S. federal income tax return in keeping with the terms of this APA;
ii. cancel or revoke this APA pursuant to section 11.05 or 11.06 of Rev. Proc. 96–53; or
iii. revise this APA, upon agreement on revision with Taxpayer.
3.4. [This APA addresses the arm’s length nature of prices charged or received in the aggregate between Taxpayer and [name of
foreign group], and except as explicitly provided in this APA does not address, and does not bind the Service with respect to, prices
charged or received, or the relative amounts of income or loss realized, by particular legal entities that are members of Taxpayer or
that are members of [foreign group]. The true taxable income of a member of an affiliated group filing a U.S. consolidated return
shall be determined under the regulations governing consolidated returns. See, e.g., Treas. Reg. section 1.1502–12. Similarly, to the
extent relevant for United States tax purposes, and except as explicitly provided in this APA, the relative amounts of income of dif-
ferent entities that are members of [foreign group] shall be determined under the arm’s length standard of section 482 without refer-
ence to this APA.]
3.5. The Parties agree that nonfactual oral and written representations, within the meaning of sections 10.04 and 10.05 of Rev.
Proc. 96–53 (including any proposals to use particular TPMs), made in conjunction with this request constitute statements made in
compromise negotiations within the meaning of Rule 408 of the Federal Rules of Evidence.
4. Term. This APA shall apply only to the APA Years, which shall include only ________________.
5. Financial Statements and APA Records. The determination whether Taxpayer has complied with this APA will be based on its
United States income tax return; its financial statements as prepared in accordance with generally accepted accounting principles
(“GAAP”) on a consistent basis (the “Financial Statements”); the additional records (“APA Records”) specified in Appendix B; and
all information specified in section 8 of this APA. Taxpayer will not be in compliance with the TPM unless an independent certified
public accountant renders an opinion that the Financial Statements present fairly, in all material respects, the financial position of
Taxpayer and the results of its operations, in accordance with GAAP. Taxpayer agrees to maintain the Financial Statements and APA
April 17, 20009442000–16 I.R.B.

Records and to make them available within thirty days of a request by the Service in connection with an examination described in
section 11.03 of Rev. Proc. 96–53. Compliance with this section 5 of the APA will constitute compliance with the provisions of sec-
tions 6038A and 6038C of the Code, with respect to Covered Transactions during the APA Years.
6. Critical Assumptions. The Critical Assumptions of this APA, within the meaning of section 5.07 of Rev. Proc. 96–53, are listed
in Appendix C.
7. Tax and Compensating Adjustments. In the event Taxpayer’s actual transactions did not result in compliance with the TPM de-
scribed in Appendix A, Taxpayer’s taxable income must nevertheless be reported in an amount consistent with the TPM and the re-
quirements of the APA, either on a timely filed original return or on an amended return. Taxpayer may make Compensating Adjust-
ments as described in and subject to the rules of section 11.02 of Rev. Proc. 96–53, and subject to any restrictions stated in this APA.
8. Annual Report. Taxpayer shall file a timely Annual Report for each APA Year pursuant to the rules of section 11.01 of Rev.
Proc. 96–53. The Annual Report shall contain the information described in Appendix D. In connection with an examination de-
scribed in section 11.03 of Rev. Proc. 96–53, the District Director may request and Taxpayer shall provide additional facts, computa-
tions, data or information reasonably necessary to clarify the Annual Report or verify compliance with the APA.
9. Disclosure. This APA, and the information, data, and documents related to this APA and Taxpayer’s APA request are: (1) con-
sidered “return information” pursuant to section 6103(b)(2)(C) of the Code; and (2) not subject to public inspection as a “written de-
termination” pursuant to section 6110(b)(1) of the Code. Pursuant to section 521 of the Tax Relief Extension Act of 1999, however,
the Secretary of the Treasury is obligated to prepare a report for public disclosure that would include certain specifically designated
information concerning all APAs, including this APA, in such form as not to reveal taxpayers’ identities, trade secrets, and propri-
etary or confidential business or financial information.
10. Disputes. Should a dispute arise concerning the interpretation of this APA, the Parties agree to seek resolution of the dispute
by the Associate Chief Counsel (International), to the extent reasonably practicable, prior to seeking alternative remedies. Disputes
not related to the interpretation of this APA shall be pursued consistent with section 11.03(4) of Rev. Proc. 96–53.
11. Section Captions. The section captions contained in this APA are for convenience and reference only and shall not affect in
any way the interpretation or application of this APA.
12. Notice. Any notices required by this APA or Rev. Proc. 96–53 shall be in writing. Taxpayer shall send notices to the Service
at the address and in the manner prescribed in section 5.13(2) of Rev. Proc. 96–53. The Service shall send notices to Taxpayer at
_____________________________________.
13. Effective date. This APA shall become binding when both Parties have executed the APA [,and the competent authorities of
____________ and the United States have executed a mutual agreement that is consistent with this APA].
14. Counterparts. This APA may be executed in counterparts, with each counterpart deemed an original.
IN WITNESS WHEREOF, the Parties have executed this APA on the dates indicated below.
TAXPAYER
By:
Date:
[Name of Signature]
[Title]
INTERNAL REVENUE SERVICE
By: Date:
[Name of Signature]
[Deputy] Associate Chief Counsel (International)
APPENDIX A
TRANSFER PRICING METHODOLOGY
For each APA Year:
H.Covered Transactions.
The Covered Transactions for this APA consist of
.
I.Transfer Pricing Methodology (“TPM”).
APPENDIX B
APA RECORDS
1. All documents listed in Appendix D for inclusion in the Annual Report, as well as all documents, notes, work papers, records,
or other writings that support the information provided in such documents.
2. [Insert here other records.]
2000–16 I.R.B.945April 17, 2000

APPENDIX C
CRITICAL ASSUMPTIONS
1. The business activities, functions performed, risks assumed, assets employed, and financial [and tax] accounting methods and
classifications [and methods of estimation] of Taxpayer shall remain materially the same as described or used in Taxpayer’s
request for this APA.
2. [Insert here other Critical Assumptions.]
April 17, 20009462000–16 I.R.B.
APPENDIX D
ANNUAL REPORT
Taxpayer shall include the following in its Annual Report for each APA Year:
1. A statement identifying all material differences between Taxpayer’s business operations (including functions performed, risks
assumed and assets employed) during the APA Year and the description of the same contained in Taxpayer’s request for this
APA, or if there have been no such material differences a statement to that effect.
2. A statement identifying all material changes in Taxpayer’s accounting methods and classifications [and methods of estimation]
from those described or used in Taxpayer’s request for this APA, or if there have been no such material changes a statement to
that effect.
3. The Financial Statements.
4. A financial analysis demonstrating Taxpayer’s compliance with the TPM.
5. A description of any failure to meet Critical Assumptions, or if there have been no such failures, a statement to that effect.
6. A description of the reason for, and financial analysis of, any Compensating Adjustments with respect to the APA Year, includ-
ing the means by which any such Compensating Adjustment has been or will be satisfied.
7. A copy of the certified public accountant’s opinion, described in section 5 of this APA, for the APA Year.
8. [Insert here other items to be included in Annual Report.]
Appendix B
FORMULAS FOR BALANCE SHEET ADJUSTMENTS
Definitions of Variables:
AP = average accounts payables
AR = average trade receivables, net of allowance for bad debt
cogs = cost of goods sold
INV = average inventory, stated on FIFO basis
opex = operating expenses (general, sales, administrative, and depreciation expenses)
PPE = property, plant, and equipment, net of accumulated depreciation
sales = net sales
h = average holding period, stated as a fraction of a year (for AP or AR)
i = interest rate
t
= entity being tested
c
= comparable
Equations:
If Cost of Goods Sold is controlled (generally, sales in denominator of PLI):
Receivables Adjustment (“RA”): RA = {[(AR
t
/ sales
t
) x sales
c
] - AR
c
} x {i/[1+(i x h
c
)]}
Payables Adjustment (“PA”): PA = {[(AP
t
/ sales
t
) x sales
c
] - AP
c
} x {i/[1+(i x h
c
)]}
Inventory Adjustment (“IA”): IA = {[(INV
t
/ sales
t
) x sales
c
] - INV
c
} x i
PP&E Adjustment (“PPEA”): PPEA = {[(PPE
t
/ sales
t
) x sales
c
] - PPE
c
} x i
If Sales are controlled (generally, costs in the denominator of PLI):
16
16
Depending on the specific facts, the equations below may use cost of goods sold as shown or total costs, which is defined as (cogs + opex).

Receivables Adjustment (“RA”): RA = {[(AR
t
/ cogs
t
) x cogs
c
] - AR
c
} x {i/[1+(i x h
c
)]}
Payables Adjustment (“PA”): PA = {[(AP
t
/ cogs
t
) x cogs
c
] - AP
c
} x {i/[1+(i x h
c
)]}
Inventory Adjustment (“IA”): IA = {[(INV
t
/ cogs
t
) x cogs
c
] - INV
c
} x i
PP&E Adjustment (“PPEA”): PPEA = {[(PPE
t
/ cogs
t
) x cogs
c
] - PPE
c
} x i
then:
adjusted sales
t
= sales
t
+ RA
adjusted cogs
t
= cogs
t
+ PA - IA
adjusted opex
t
= opex
t
- PPEA
2000–16 I.R.B.947April 17, 2000
Subchapter S Subsidiaries; Cor-
rection
Announcement 2000–36
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to final regulations.
SUMMARY: This document contains
corrections to final regulations (T.D.
8869, 2000-6 I.R.B. 498) which were
published in the Federal Registeron
Tuesday, January 25, 2000 (65 FR 3843),
relating to the treatment of corporate sub-
sidiaries of S corporations and interpret
the rules added to the Internal Revenue
Code by section 1308 of the Small Busi-
ness Job Protection Act of 1996.
DATES: This correction is effective Janu-
ary 25, 2000.
FOR FURTHER INFORMATION CON-
TACT: Jeanne M. Sullivan at (202) 622-
3050 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are subject to
these corrections are under sections 1361,
1362, and 1374 of the Internal Revenue
Code.
Need for Correction
As published, the final regulations (T.D.
8869) contain errors that may prove to be
misleading and are in need of clarification.
Correction of Publication
Accordingly, the publication of the
final regulations (TD 8869), which were
the subject of FR Doc. 00-1718, is cor-
rected as follows:
1. On page 3845, column 1, under the
caption “Explanation of Provisions”,
line 14 from the top of the column, the
language, “2 I.R.B.1, which provides that
the” is corrected to read “2 I.R.B. 288,
which provides that the”.
2. On page 3845, column 1, the caption
“b. QSUB Termination” is corrected to
read “b. QSub Termination”.
§1.1361–4 [Corrected]
3. On page 3852, column 2,
§1.1361–4(d) Example 3, line 15, the lan-
guage, “2000, the day after the acquisition
date” is corrected to read “2002, the day
after the acquisition date”.
§1.1361–5 [Corrected]
4. On page 3853, column 1,
§1.1361–5(b)(1)(i), line 9, the language,
“corporation. he tax treatment of this” is
corrected to read “corporation. The tax
treatment of this”.
§1.1362–8 [Corrected]
5. On page 3855, column 3,
§1.1362–8(d) Example 2(ii), line 1, the lan-
guage, “(ii) Four-fifths ($12,000/15,000)
of the” is corrected to read “(ii) Four- fifths
($12,000/$15,000) of the”.
6. On page 3855, column 3,
§1.1362–8(d) Example 2(ii), line 13, the
language, “Under these facts, $41
($920/1,900 of” is corrected to read “
Under these facts, $41 ($920/$1,900 of”.
Dale D. Goode,
Federal Register Liaison,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
March 27, 2000, 8:45 a.m., and published in the
issue of the Federal Register for March 28, 2000, 65
F.R. 16317)
Amortization of Intangible
Property; Correction
Announcement 2000–37
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction of final regulations.
SUMMARY: This document contains
corrections to final regulations (T.D.
8865, 2000–7 I.R.B. 589) which were
published in the Federal Registeron
Tuesday, January 25, 2000 (65 FR 3820),
relating to the amortization of certain in-
tangible property.
DATES: This correction is effective Janu-
ary 25, 2000.
FOR FURTHER INFORMATION CON-
TACT: John Huffman at (202) 622-3110
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are subject to
these corrections are under sections 167
and 197 of the Internal Revenue Code.
Need for Correction
As published, the final regulations (TD
8865) contain errors that may prove to be
misleading and are in need of clarifica-
tion.
Correction of Publication
Accordingly, the publication of the
final regulations (TD 8865), which were
the subject of FR Doc. 00–1380, is cor-
rected as follows:
§1.197–2 [Corrected]
1. On page 3834, column 3,
§1.197–2(g)(3), line 22, the language,
“increase. The provisions of paragraph”
is corrected to read “increase, except as
provided in §1.743–1(j)(f)(i)(B)(2). The
provisions of paragraph”.
2. On page 3834, column 3,
§1.197–2(g)(4)(i), lines 10 through 13,

the language, “either the curative or reme-
dial allocation methods described in the
regulations under section 704(c). See
§1.704–3(c) and (d)” is corrected to read
“any of the permissible methods de-
scribed in the regulations under section
704(c). See §1.704–3”.
3. On page 3834, column 1,
§1.197–2(g)(4)(ii), line 6, the language,
“the intangible is not amortizable by the”
is corrected to read “the intangible is not
amortizable under section 197 by the “.
4. On page 3839, column 3,
§1.197–2(k) Example 6(i), third line from
the top of the column, the language “con-
sideration paid for all assets acquired in”
is corrected to read “consideration paid
excluding any amount treated as interest
or original issue discount under applica-
ble provisions of the Internal Revenue
Code, for all assets acquired in”.
5. On page 3839, column 3,
§1.197–2(k) Example 6(ii), lines 15
through 18, the language, “Although the
payments under the agreement
($270,000) exceed the amount allocated
to the covenant by $45,000, all of the re-
maining consideration ($50,000) is allo-
cated to Class” is corrected to read “All of
the remaining consideration after alloca-
tion to the covenant and other Class VI
assets, ($50,000) is allocated to Class”.
6. On page 3839, column 3, §1.197–2(k)
Example 7(ii), line 7, the language, “ame-
cause it does not have a term of less than” is
corrected to read “amount because it does
not have a term of less than”.
7. On page 3843, column 1, §1.197–2(k)
Example 27(i), lines 4 and 5, the language,
“which A owns a 60-percent, and B owns a
40-percent, interest in profits and capital.
A” is corrected to read “which A owns a
40-percent, and B owns a 60-percent, inter-
est in profits and capital. A”
8. On page 3843, column 2,
§1.197–2(l)(4)(iii), line 14, the language,
“before a federal court, the taxpayer
must” is corrected to read “ before a Fed-
eral court, the taxpayer must”.
Dale D. Goode,
Federal Register Liaison,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
March 27, 2000, 8:45 a.m., and published in the
issue of the Federal Register for March 28, 2000, 65
F.R. 16318)
Financial Asset Securitization
Investment Trusts; Real Estate
Mortgage Investments Conduits;
Correction
Announcement 2000–38
This document contains a correction to
proposed regulations (REG–100276–97,
2000–8 I.R.B. 682), relating to financial
asset securitization investment trusts (FA-
SITs) and real estate mortgage investment
conduits (REMICs).
In the title to the document, the citation
of the proposed regulation number
“REG–100276–97” is incorrect. The cor-
rect citation should read as follows:
“REG–100276–97; REG–122450–98”.
Deletions From Cumulative List
of Organizations Contributions
to Which Are Deductible Under
Section 170 of the Code
Announcement 2000–39
The name of organizations that no
longer qualify as organizations described
in section 170(c)(2) of the Internal Rev-
enue Code of 1986 are listed below.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an orga-
nization ceases to qualify under section
170(c)(2) if the organization has not
timely filed a suit for declaratory judg-
ment under section 7428 and if the con-
tributor (1) had knowledge of the revoca-
tion of the ruling or determination letter,
(2) was aware that such revocation was
imminent, or (3) was in part responsible
for or was aware of the activities or omis-
sions of the organization that brought
about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed,
contributions from individuals and orga-
nizations described in section 170(c)(2)
that are otherwise allowable will con-
tinue to be deductible. Protection under
section 7428(c) would begin on April
17, 2000, and would end on the date the
court first determines that the organiza-
tion is not described in section 170(c)(2)
as more particularly set forth in section
7428 (c)(1). For individual contributors,
the maximum deduction protected is
$1,000, with a husband and wife treated
as one contributor. This benefit is not
extended to any individual, in whole or
in part, for the acts or omissions of the
organization that were the basis for re-
vocation.
Aguila Improvement Association, Inc.
Aguila, AZ
Arizona Educational Enrichment Trust
Phoenix, AZ
Central Arizona Charitable Trust
Phoenix, AZ
Liberation Collective
Portland, OR
Peoria Charitable Trust
Phoenix, AZ
Southern California Institute, Inc.
Loma Linda, CA
WorkAmerica, Inc.
Pomoroy, OH
Taxation of Tax-Exempt
Organizations’ Income From
Corporate Sponsorship;
Correction
Announcement 2000–40
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to notice of pro-
posed rulemaking and notice of public
hearing.
SUMMARY: This document contains
corrections to proposed regulations
(REG–209601–92, 2000–12 I.R.B. 829),
which were published in the Federal
Registeron Wednesday, March 1, 2000
(65 FR 11012), relating to the tax treat-
ment of sponsorship payments received
by exempt organizations.
FOR FURTHER INFORMATION CON-
TACT: Stephanie Lucas Caden at (202)
622-6080.
SUPPLEMENTARY INFORMATION:
Background
The proposed regulations that are the
subject of this correction are under sec-
tion 512 of the Internal Revenue Code.
April 17, 20009482000–16 I.R.B.

Need for Correction
As published, the proposed regulations
[REG–209601–92] contain errors that
may prove to be misleading and are in
need of clarification.
Correction of Publication
Accordingly, the publication of the pro-
posed regulations [REG–209601–92],
which were the subject of FR Doc.
00–4848, is corrected as follows:
1. On page 11012, third column, in the
preamble, the last sentence under the caption
ADDRESSES is corrected to read, “The
public hearing will be held in room 4718, In-
ternal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC.”.
2. On page 11012, third column, in the
preamble, the text under the caption FOR
FURTHER INFORMATION CONTACT
is corrected to read, “Concerning the reg-
ulations, Stephanie Lucas Caden at (202)
622–6080; concerning submissions and
the hearing, LaNita VanDyke at (202)
622-7180 (not toll-free numbers).”.
3. On page 11015, second column, the
first sentence of the second paragraph
under the caption Comments and Public
Hearingis corrected to read, “A public
hearing has been scheduled for June 21,
2000, at 10 a.m. in room 4718, Internal
Revenue Building, 1111 Constitution Av-
enue, NW., Washington, DC.”.
§1.513–4 [Corrected]
4. On page 11018, third column, in the
22
nd
line of §1.513–4(f) Example 8, the
language “Music Shop’s name and ad-
dress in the lobby” is corrected to read,
“Music Shop’s name, address and tele-
phone number in the lobby”.
Dale D. Goode,
Federal Register Liaison,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on April
4, 2000, 8:45 a.m., and published in the issue of the
Federal Register for April 5, 2000, 65 F.R. 17829)
Qualified Transportation Fringe
Benefits; Correction
Announcement 2000–41
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to the notice of pro-
posed rulemaking.
SUMMARY: This document contains
corrections to proposed regulations
(REG–113572–99, 2000–7 I.R.B. 624)
which were published in the Federal Reg-
ister on Thursday, January 27, 2000 (65
F.R. 4388), relating to qualified trans-
portation fringe benefits.
FOR FURTHER INFORMATION CON-
TACT: John Richards at (202)622-6040
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The proposed regulations that are the
subject of these corrections reflect the
changes to the law made by the Energy
Policy Act of 1992, the Taxpayer Relief
Act of 1997, and the Transportation Eq-
uity Act for the 21st Century.
Need for Correction
As published, this notice of proposed
rulemaking contains errors in need of
clarification.
Correction of Publication
Accordingly, the publication of the no-
tice of proposed rulemaking (REG–
113572–99), which was the subject of FR
Doc. 00–1859, is corrected as follows:
§1.132–9 [Corrected]
1. On page 4392, column 2,
§1.132–9(b), A-7, paragraph (d), line 3,
the language “Q/A7” is corrected to read
“Q-A-7”.
2. On page 4293, column 1,
§1.132–9(b), Q-11, line 2, the language
“fringes be provided pursuant to a” is cor-
rected to read “fringes be provided to em-
ployees pursuant to a”.
3. On page 4393, column 3,
§1.132–9(b), A-14, paragraph (d), line 4,
the language “paragraph (a)(3) of the
Q/A-14, an” is corrected to read “para-
graph (c) of this Q/A-14, an”.
4. On page 4395, column 1,
§1.132–9(b), Q-16, paragraph (d)(2), line
8, the language “that it will be used it dur-
ing the month.” is corrected to read “that
it will be used during the month.”.
5. On page 4395, column 2,
§1.1320–9(b), A-21, paragraph (a), line 2,
the language “Employer-and” is corrected
to read “Employer and”.
6. On page 4395, column 2,
§1.132–9(b), A-21, paragraph (b), line 8,
the language “132(f)(5)(B) and Q/A2- of
this section.” is corrected to read
“132(f)(5)(B) and Q/A-2 of this sec-
tion.”.
7. On page 4396, column 1,
§1.132–9(b), A-22, paragraph (b), line 7,
the language “monthly limit under section
132(f) are” is corrected to read “monthly
limit under section 132(f) is”.
8. On page 4396, column 3, the title of
the official signing the document, “Com-
missioner of Internal Revenue” is cor-
rected to read “Deputy Commissioner of
Internal Revenue Service”.
Dale D. Goode,
Federal Register Liaison,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
March 28, 2000, 8:45 a.m., and published in the
issue of the Federal Register for March 29, 2000, 65
F.R. 16545)
Partial Withdrawal of Notice of
Proposed Rulemaking Relating
to Diesel Fuel Excise Tax; Dye
Injection Systems
Announcement 2000–42
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Partial withdrawal of notice of
proposed rulemaking.
SUMMARY: This document withdraws
the notice of proposed rulemaking as it re-
lates to diesel fuel dye injection systems,
which was published on March 14, 1996.
It affects certain enterers, refiners, termi-
nal operators, and throughputters.
FOR FURTHER INFORMATION CON-
TACT: Frank Boland, (202) 622-3130
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On March 14, 1996, the IRS issued
proposed regulations (PS-6-95 [1996–1
C.B. 859]; REG–209753–95) relating to
diesel fuel dye injection systems and the
2000–16 I.R.B.949April 17, 2000

measurement of taxable fuel (61 FR
10490). The Treasury Department does
not have any plans at the present time to
issue final regulations relating to dye in-
jection systems.
* * * * *
Withdrawal of Notice of Proposed
Rulemaking
Accordingly, under the authority of 26
U.S.C. 7805, the notice of proposed rule-
making as it relates to dye injection sys-
tems that was published in the Federal
Registeron March 14, 1996 (61 FR
10490) is withdrawn.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on
March 30, 2000, 8:45 a.m., and published in the
issue of the Federal Register for March 31, 2000, 65
F.R. 17211)
April 17, 20009502000–16 I.R.B.

2000–16 I.R.B.iApril 17, 2000
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
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 Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral 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 17, 2000ii2000–16 I.R.B.
Numerical Finding List
1
Bulletins 2000–1 through 2000–15
Announcements:
2000–1, 2000–2 I.R.B. 294
2000–2, 2000–2 I.R.B. 295
2000–3, 2000–2 I.R.B. 296
2000–4, 2000–3 I.R.B. 317
2000–5, 2000–4 I.R.B. 427
2000–6, 2000–4 I.R.B. 428
2000–7, 2000–6 I.R.B. 586
2000–8, 2000–6 I.R.B. 586
2000–9, 2000–9 I.R.B. 733
2000–10, 2000–9 I.R.B. 733
2000–11, 2000–10 I.R.B. 739
2000–12, 2000–12 I.R.B. 835
2000–13, 2000–11 I.R.B. 771
2000–14, 2000–11 I.R.B. 772
2000–15, 2000–12 I.R.B. 837
2000–16, 2000–12 I.R.B. 837
2000–17, 2000–13 I.R.B. 846
2000–18, 2000–13 I.R.B. 846
2000–24, 2000–14 I.R.B. 855
2000–25, 2000–14 I.R.B. 855
2000–26, 2000–15 I.R.B. 876
2000–27, 2000–15 I.R.B. 876
2000–28, 2000–15 I.R.B. 876
2000–29, 2000–15 I.R.B. 877
2000–30, 2000–15 I.R.B. 877
2000–31, 2000–15 I.R.B. 877
2000–32, 2000–15 I.R.B. 878
2000–33, 2000–15 I.R.B. 878
2000–34, 2000–15 I.R.B. 879
Court Decisions:
2066, 2000–15 I.R.B. 867
2067, 2000–15 I.R.B. 863
Notices:
2000–1, 2000–2 I.R.B. 288
2000–2, 2000–9 I.R.B. 727
2000–3, 2000–4 I.R.B. 413
2000–4, 2000–3 I.R.B. 313
2000–5, 2000–3 I.R.B. 314
2000–6, 2000–3 I.R.B. 315
2000–7, 2000–4 I.R.B. 419
2000–8, 2000–4 I.R.B. 420
2000–9, 2000–5 I.R.B. 449
2000–10, 2000–5 I.R.B. 451
2000–11, 2000–6 I.R.B. 572
2000–12, 2000–9 I.R.B. 727
2000–13, 2000–9 I.R.B. 732
2000–14, 2000–10 I.R.B. 737
2000–15, 2000–12 I.R.B. 826
2000–16, 2000–12 I.R.B. 826
2000–17, 2000–12 I.R.B. 827
2000–18, 2000–13 I.R.B. 845
2000–19, 2000–13 I.R.B. 845
2000–20, 2000–14 I.R.B. 851
Proposed Regulations:
REG–208280–86, 2000–8 I.R.B. 654
REG–209135–88, 2000–8 I.R.B. 681
REG–208254–90, 2000–6 I.R.B. 577
REG–209601–92, 2000–12 I.R.B. 829
Proposed Regulations—continued:
REG–100276–97, 2000–8 I.R.B. 682
REG–101492–98, 2000–3 I.R.B. 326
REG–106012–98, 2000–2 I.R.B. 290
REG–110311–98, 2000–11 I.R.B. 767
REG–103831–99, 2000–5 I.R.B. 452
REG–103882–99, 2000–8 I.R.B. 706
REG–105089–99, 2000–6 I.R.B. 580
REG–105279–99, 2000–8 I.R.B. 707
REG–105606–99, 2000–4 I.R.B. 421
REG–111119–99, 2000–5 I.R.B. 455
REG–113572–99, 2000–7 I.R.B. 624
REG–116048–99, 2000–6 I.R.B. 584
REG–116567–99, 2000–5 I.R.B. 463
REG–116704–99, 2000–3 I.R.B. 325
REG–117162–99, 2000–15 I.R.B. 871
REG–100163–00, 2000–7 I.R.B. 633
REG–103735–00, 2000–11 I.R.B. 770
REG–103736–00, 2000–11 I.R.B. 768
Railroad Retirement Quarterly Rate:
2000–9 I.R.B. 721
Revenue Procedures:
2000–1, 2000–1 I.R.B. 4
2000–2, 2000–1 I.R.B. 73
2000–3, 2000–1 I.R.B. 103
2000–4, 2000–1 I.R.B. 115
2000–5, 2000–1 I.R.B. 158
2000–6, 2000–1 I.R.B. 187
2000–7, 2000–1 I.R.B. 227
2000–8, 2000–1 I.R.B. 230
2000–9, 2000–2 I.R.B. 280
2000–10, 2000–2 I.R.B. 287
2000–11, 2000–3 I.R.B. 309
2000–12, 2000–4 I.R.B. 387
2000–13, 2000–6 I.R.B. 515
2000–15, 2000–5 I.R.B. 447
2000–16, 2000–6 I.R.B. 518
2000–17, 2000–11 I.R.B. 766
2000–18, 2000–9 I.R.B. 722
2000–19, 2000–12 I.R.B. 785
2000–20, 2000–6 I.R.B. 553
Revenue Rulings:
2000–1, 2000–2 I.R.B. 250
2000–2, 2000–3 I.R.B. 305
2000–3, 2000–3 I.R.B. 297
2000–4, 2000–4 I.R.B. 331
2000–5, 2000–5 I.R.B. 436
2000–6, 2000–6 I.R.B. 512
2000–7, 2000–9 I.R.B. 712
2000–8, 2000–7 I.R.B. 617
2000–9, 2000–6 I.R.B. 497
2000–10, 2000–8 I.R.B. 643
2000–11, 2000–10 I.R.B. 734
2000–12, 2000–11 I.R.B. 744
2000–13, 2000–12 I.R.B. 774
2000–14, 2000–12 I.R.B. 779
2000–15, 2000–12 I.R.B. 774
2000–16, 2000–12 I.R.B. 780
2000–17, 2000–13 I.R.B. 842
2000–18, 2000–14 I.R.B. 847
2000–19, 2000–14 I.R.B. 849
Treasury Decisions:
8849, 2000–2 I.R.B. 245
8850, 2000–2 I.R.B. 265
8851, 2000–2 I.R.B. 275
8852, 2000–2 I.R.B.253
8853, 2000–4 I.R.B.377
8854, 2000–3 I.R.B.306
8855, 2000–4 I.R.B.374
8856, 2000–3 I.R.B.298
8857, 2000–4 I.R.B.365
8858, 2000–4 I.R.B.332
8859, 2000–5 I.R.B.429
8860, 2000–5 I.R.B.437
8861, 2000–5 I.R.B.441
8862, 2000–6 I.R.B.466
8863, 2000–6 I.R.B.488
8864, 2000–7 I.R.B.614
8865, 2000–7 I.R.B.589
8866, 2000–6 I.R.B.495
8867, 2000–7 I.R.B.620
8868, 2000–6 I.R.B.491
8869, 2000–6 I.R.B.498
8870, 2000–8 I.R.B.647
8871, 2000–8 I.R.B.641
8872, 2000–8 I.R.B.639
8873, 2000–9 I.R.B.713
8874, 2000–8 I.R.B.644
8875, 2000–11 I.R.B.761
8876, 2000–11 I.R.B.753
8877, 2000–11 I.R.B.747
8878, 2000–15 I.R.B.857
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1999–27 through
1999–52 is in Internal Revenue Bulletin 2000–1,
dated January 3, 2000.

2000–16 I.R.B.iiiApril 17, 2000
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2000–1 through 2000–15
Announcements:
99–50
Modified by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
2000–18
Corrected by
Announcement 2000–32, 2000–15 I.R.B. 878
Notices:
88–125
Obsoleted by
T.D. 8870, 2000–8 I.R.B. 647
92–48
Obsoleted by
Notice 2000–11, 2000–6 I.R.B. 572
97–19
Modified by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
98–22
Obsoleted by
T.D. 8870, 2000–8 I.R.B. 647
98–52
Modified by
Notice 2000–3, 2000–4 I.R.B. 413
98–61
Modified and superseded by
Rev. Proc. 2000–15, 2000–5 I.R.B. 447
99–8
Obsoleted by
Rev. Proc. 2000–12, 2000–4 I.R.B. 387
2000–4
Corrected by
Announcement 2000–9, 2000–9 I.R.B. 733
Proposed Regulations:
REG–101492–98
Corrected by
Announcement 2000–16, 2000–12 I.R.B. 837
Revenue Procedures:
80–18
Modified by
Rev. Proc. 2000–13, 2000–6 I.R.B. 515
89–9
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
89–13
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
90–21
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
91–66
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
Revenue Procedures—Continued:
92–13
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
92–13A
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
92–41
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
93–9
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
93–10
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
94–12
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
95–42
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
96–13
Modified by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
98–22
Modified and superseded by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
98–27
Superseded by
Rev. Proc. 2000–12, 2000–4 I.R.B. 387
98–64
Superseded by
Rev. Proc. 2000–9, 2000–2 I.R.B. 280
98–65
Superseded by
Rev. Proc. 2000–19, 2000–12 I.R.B. 785
99–1
Superseded by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
99–2
Superseded by
Rev. Proc. 2000–2, 2000–1 I.R.B. 73
99–3
Superseded by
Rev. Proc. 2000–3, 2000–1 I.R.B. 103
99–4
Superseded by
Rev. Proc. 2000–4, 2000–1 I.R.B. 115
99–5
Superseded by
Rev. Proc. 2000–5, 2000–1 I.R.B. 158
99–6
Superseded by
Rev. Proc. 2000–6, 2000–1 I.R.B. 187
99–7
Superseded by
Rev. Proc. 2000–7, 2000–1 I.R.B. 227
Revenue Procedures—Continued:
99–8
Superseded by
Rev. Proc. 2000–8, 2000–1 I.R.B. 230
99–13
Modified and superseded by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
99–31
Modified and superseded by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
99–49
Modified and amplified by
Rev. Rul. 2000–4, 2000–4 I.R.B. 331
Rev. Rul. 2000–7, 2000–9 I.R.B. 712
Notice 2000–4, 2000–3 I.R.B. 313
99–51
Superseded by
Rev. Proc. 2000–3, 2000–1 I.R.B. 103
2000–6
Modified by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
2000–8
Modified by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
2000–16
Corrected by
Announcement 2000–17, 2000–13 I.R.B. 846
Revenue Rulings:
88–36
Modified by
Rev. Rul. 2000–6, 2000–6 I.R.B. 512
89–89
Obsoleted by
Rev. Rul. 2000–2, 2000–3 I.R.B. 305
92–19
Supplemented by
Rev. Rul. 2000–17, 2000–13 I.R.B. 842
98–30
Amplified and superseded by
Rev. Rul. 2000–8, 2000–7 I.R.B. 617
Treasury Decisions:
8734
Modified by
T.D. 8856, 2000–3 I.R.B. 298
8804
Modified by
T.D. 8856, 2000–3 I.R.B. 298
8845
Corrected by
Announcement 2000–6, 2000–4 I.R.B. 428
8846
Corrected by
Announcement 2000–3, 2000–2 I.R.B. 296
8847
Corrected by
Announcement 2000–13, 2000–11 I.R.B. 771
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
1999–27 through 1999–52 is in Internal Revenue
Bulletin 2000–1, dated January 3, 2000.

April 17, 2000iv2000–16 I.R.B.
8849
Corrected by
Announcement 2000–28, 2000–15 I.R.B. 876
8852
Corrected by
Announcement 2000–18, 2000–13 I.R.B. 846
8853
Corrected by
Announcement 2000–33, 2000–15 I.R.B. 878
8856
Corrected by
Announcement 2000–31, 2000–15 I.R.B. 877
8859
Corrected by
Announcement 2000–27, 2000–15 I.R.B. 876
8864
Corrected by
Announcement 2000–26, 2000–15 I.R.B. 876
8867
Corrected by
Announcement 2000–30, 2000–15 I.R.B. 877
8870
Corrected by
Announcement 2000–34, 2000–15 I.R.B. 879
8874
Corrected by
Announcement 2000–29, 2000–15 I.R.B. 877

INTERNAL REVENUE BULLETIN
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detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please
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