Internal Revenue Bulletin 1996-14 (PDF rendition): IRS Notices

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

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Bulletin No. 1996–14
April 1, 1996
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 96–19, page 24.
Federal rates; adjusted federal rates; adjusted federal
long-term rate, and the long-term exempt rate. For
purposes of sections 1274, 1288, 382, and other
sections of the Code, tables set forth the rates for April
1996.
T.D. 8657, page 4.
INTL–0054–95, page 39.
Final, temporary, and proposed regulations under
sections 864 and 884 of the Code relating to the
determination of effectively connected income and the
branch profits tax. A public hearing on the proposed
regulations will be held on June 6, 1996.
T.D. 8658, page 13.
INTL–0054–95, page 39.
Final and proposed regulations under section 882 of
the Code relating to the determination of the interest
expense deduction of foreign corporations engaged in a
trade or business within the United States.
ADMINISTRATIVE
Notice 96–18, page 27.
Interest netting study. This notice invites public com-
ment in connection with the Internal Revenue Service
and Treasury study of interest netting. This study was
initially described in Announcement 96–5, 1996–4
I.R.B. 99 (Jan. 22, 1996).
Notice 96–19, page 28.
Joint return study. This notice invites public comment in
connection with the Internal Revenue Service and
Treasury study of certain joint return and community
property issues, particularly as they affect divorced or
separated taxpayers. This study was initially described
in Announcement 96–5, 1996–4 I.R.B. 99 (Jan. 22,
1996).
Notice 96–20, page 30.
Rev. Proc. 96–11, 1996–2 I.R.B. 18 relating to
Specifications for Filing Form 1042–S, Foreign Per-
son’s U.S. Source Income Subject to Withholding,
Magnetically or Electronically, is corrected.
Notice 96–21, page 30.
T.D. 8636, 1996–4 I.R.B. 64, relating to the time for
furnishing wage statements to employees and for filing
wage statements with the Social Security Administra-
tion on termination of an employer’s operations, is
corrected.
Notice 96–22, page 30.
T.D. 8630, 1996–3 I.R.B. 19, relating to income,
estate, and gift tax regulations regarding exceptions to
the use of valuation tables, is corrected.
Rev. Proc. 96–28, page 31.
Per diem allowances. This procedure provides rules
under which the amount of ordinary and necessary
business expenses of an employee for lodging, meals,
and/or incidental expenses incurred while away from
home will be deemed substantiated when a payor
provides a reimbursement or other expense allowance to
pay for such expenses. It also provides an optional
method for employees and self-employed individuals to
use in computing the deductible costs of business meal
and incidental expenses paid or incurred while traveling
away from home. Rev. Proc. 94–77 is superseded.
Finding Lists begins on page 46.
Announcement of Disbarments and Suspensions begins on page 43.
Quarterly Index for January, February and March begins on page 48.

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

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

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income Housing
Credit
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for
the month of April 1996. See Rev. Rul. 96–19,
page 24.
Section 62.—Adjusted Gross Income
Defined
26 CFR 1.62–2: Reimbursements and other
expense allowance arrangements.
Rules are set forth under which a reimburse-
ment or other expense allowance arrangement for
the cost of lodging, meal, and/or incidental
expenses incurred by an employee while travel-
ing away from home will satisfy the require-
ments of §62(c) of the Code as to substantiation
of the amount of expenses. See Rev. Proc. 96–
28, 1996–14 I.R.B. page 31.
Section 162.—Trade or Business
Expense
26 CFR 1.162–17: Reporting and substantia-
tion of certain business expenses of employees.
The rules for substantiating the amount of a
deduction or expense for lodging, meal, and/or
incidental expenses incurred while traveling
away from home that most nearly represents
current costs are set forth. See Rev. Proc. 96–28,
1996–14 I.R.B. page 31.
Section 267.—Losses, Expenses, and
Interest With Respect to Transactions
Between Related Taxpayers
26 CFR 1.267(a)–1: Deductions disallowed.
When a payor provides a per diem allowance
to an employee who is a related party, the rules
set forth for the deemed substantiation to the
payor of the amount of the employee’s ordinary
and necessary business expenses for lodging,
meal, and/or incidental expenses incurred while
traveling away from home do not apply. See
Rev. Proc. 96–28, 1996–14 I.R.B. page 31.
Section 274.—Disallowance of
Certain Entertainment, etc., Expenses
26 CFR 1.274(d)–1(a): Substantiation
requirements.
Rules are set forth for substantiating the
amount of ordinary and necessary business
expense of an employee for lodging, meal, and/
or incidental expenses incurred while traveling
away from home when a payor provides a per
diem allowance under a reimbursement or other
expense allowance arrangement to pay for such
expenses. See Rev. Proc. 96–28, 1996–14 I.R.B.
page 31.
26 CFR 1.274–5T: Substantiation requirements
(temporary).
Rules are set forth for substantiating the
amount of ordinary and necessary business
expense of an employee for lodging, meal, and/
or incidental expenses incurred while traveling
away from home when a payor provides a per
diem allowance under a reimbursement or other
expense allowance arrangement to pay for such
expenses. Rules are also set forth for an optional
method for employees and self-employed indi-
viduals to use in computing the deductible costs
of business meal and incidental expenses paid or
incurred while traveling away from home. See
Rev. Proc. 96–28, 1996–14 I.R.B. page 31.
Section 280G.—Golden Parachute
Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of April 1996.
See Rev. Rul. 96–19, page 24.
Section 382.—Limitation on Net
Operating Loss Carryforwards and
Certain Built-In Losses Following
Ownership Change
The adjusted federal long-term rate is set forth
for the month of April 1996. See Rev. Rul. 96–
19, page 24.
Section 412.—Minimum Funding
Standards
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for
the month of April 1996. See Rev. Rul. 96–19,
page 24.
Section 467.—Certain Payments
for the Use of Property or Services
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for
the month of April 1996. See Rev. Rul. 96–19,
page 24.
Section 468.—Special Rules
for Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for
the month of April 1996. See Rev. Rul. 96–19,
page 24.
Section 483.—Interest on Certain
Deferred Payments
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for
the month of April 1996. See Rev. Rul. 96–19,
page 24.
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for
the month of April 1996. See Rev. Rul. 96–19,
page 24.
Section 846.—Discounted Unpaid
Losses Defined
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for
the month of April 1996. See Rev. Rul. 96–19,
page 24.
Section 864.—Definitions and
Special Rules
26 CFR 1.864–4: U.S. source income
effectively connected with U.S. business.
T.D. 8657
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Regulations on Effectively Connected
Income and the Branch Profits Tax
AGENCY: Internal Revenue Service
(IRS), Treasury.
A C T I O N : F i n a l a n d t e m p o r a r y
regulations.
SUMMARY: This document contains
final Income Tax Regulations relating
to the determination of effectively
connected income under section 864
and final and temporary Income Tax
Regulations relating to the branch
profits tax and branch-level interest tax
under section 884 of the Internal
Revenue Code of 1986 (Code). Section
884 was added to the Code by section
1241 of the Tax Reform Act of 1986.
This document also contains conform-
ing changes to sections 861, 871 and
897.

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EFFECTIVE DATE: June 6, 1996.
FOR FURTHER INFORMATION
CONTACT: Gwendolyn A. Stanley,
(202) 622-3860 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under
control number 1545–1070.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
The estimated annual burden per
respondent is .25 hours.
Comments concerning the accuracy
of this burden estimate and suggestions
for reducing this burden should be sent
to the Internal Revenue Service, Attn:
IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to the
Office of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington,
DC 20503.
Books or records relating to this
collection of information must be re-
tained as long as their contents may be
material in the administration of any
internal revenue law. Generally, tax
returns and tax information are con-
fidential, as required by 26 U.S.C.
6103.
Background
On September 2, 1988, proposed and
temporary regulations (TD 8223 and
INTL–934–86 [1988–2 C.B. 825]) un-
der section 884 were published in the
Federal Register (53 FR 34045). Writ-
ten comments were received on the
proposed amendments. On September
11, 1992, temporary regulations under
§ 1.884–2T were amended and final
regulations (1992 final regulations) (TD
8432 [1992–2 C.B. 157]) under section
884 of the Code were published in the
Federal Register (57 FR 41644). Pro-
posed amendments (1992 proposed reg-
ulations) (INTL–0003–92 [1992–2 C.B.
752]) to the Income Tax Regulations
(26 CFR part 1) under sections 864 and
884 of the Internal Revenue Code were
published in the Federal Register (57
FR 41707) on the same day. Written
comments were received on the pro-
posed amendments. After consideration
of all the comments, §1.884–2(a)(2)(ii)
and §1.884–2(c)(2)(iii) of the 1988
proposed regulations and the 1992
proposed regulations are adopted as
final regulations as amended by this
Treasury decision. The revisions and
conforming changes are discussed
below.
Explanation of the Provisions
I.Section 864 stock rule.
The proposed regulations under sec-
tion 864 provided that stock of a
corporation shall not be treated as an
asset used in, or held for use in, the
conduct of a U.S. trade or business.
Accordingly, the regulations proposed
to delete the example of stock acquired
and held to assure a constant source of
supply as an asset that satisfies the
asset-use test under §1.864–4(c)(2).
Commenters criticized this rule and
cited to the legislative history to the
Foreign Investors Tax Act of 1966 as
contemplating that stock may satisfy
the asset-use test. The IRS and Treas-
ury continue to believe, however, that
stock does not satisfy the asset-use test.
Therefore § 1.864–4(c)(2)(iii) adopts
the rule contained in the proposed
regulations.
In response to our request for com-
ments on whether insurance companies
require an exception to the stock rule
for their portfolio stock, one commen-
ter suggested that foreign life insurance
companies be permitted to refer to the
National Association of Insurance
Commissioners (NAIC) Annual State-
ment to determine whether their assets
are used in, or held for use in, the
conduct of a U.S. trade or business.
The IRS and Treasury will continue to
consider whether modifications to the
regulations under section 864 are ap-
propriate for foreign insurance com-
panies and reserve on the treatment of
stock held by a foreign insurance
company.
Conforming changes have been made
to regulations under section 864, as
well as regulations under sections 871
and 897 to reflect the clarification of
§ 1.864–4(c)(2). The effective date of
the changes to sections 871 and 897
corresponds to the effective date of the
changes to section 864.
II. Branch profits tax.
A. Interest in a partnership. Currently,
a foreign corporation engaged in a U.S.
trade or business through a partnership
applies different rules to determine its
U.S. assets depending on whether the
determination is for purposes of section
884 or §1.882–5. For purposes of
computing its interest expense under
§ 1.882–5, the rules of § 1.861–
9T(e)(7) apply. Therefore a foreign
corporation takes into account either its
pro rata share of partnership assets and
liabilities or applies the rules of
§ 1.882–5 as if the partnership were a
foreign corporation, depending on the
nature of its interest in the partnership.
In contrast, for purposes of section 884,
a foreign corporation generally takes
into account its adjusted basis in its
partnership interest as a starting point
for determining its U.S. assets.
Final regulations under section 882
published elsewhere in this issue of the
Federal Register remove the temporary
regulations under §1.861–9T(e)(7)(i).
These final regulations provide a new
U.S. asset rule for partnership interests
for purposes of determining the U.S.
assets of a foreign corporate partner
under sections 882 and 884. The final
regulations under §1.882–5 contain a
corresponding rule to determine the
value of a partnership interest held by a
foreign corporation for purposes of
computing its worldwide assets.
In the event that a partnership
derives any income that is not effec-
tively connected with a U.S. trade or
business, or otherwise holds non-U.S.
assets, the rules in §1.884–1(d)(3)
continue to provide a rule that allocates
the basis in the partnership interest
between U.S. and non-U.S. assets.
However, the allocation rule is more
flexible than the rule contained in
either the 1992 final regulations or the
proposed regulations under section 884.
The rule allows a foreign corporation
to use either an income method or an
asset method to determine the propor-
tionate share of its partnership interest
that is a U.S. asset, regardless of its
ownership interest in the partnership.
This is a change from the previous
1992 final regulations, which required
all foreign corporate partners to use an
income method, and from the 1992

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proposed regulations, which required
more than 10% partners to use the asset
method.
Based on commenters’ suggestions,
other clarifying changes have been
made to the asset method. For example,
the final regulations clarify that the
adjusted bases of partnership assets
reflect any adjustment under section
754 with respect to a foreign corporate
partner.
B. Interest in a trust or estate. The
rules applicable to interests in a trust or
estate in §1.884–1(d)(4) are finalized
as proposed.
C. Nonrecourse indebtedness and inte-
grated financial transactions. Because
the final regulations under §1.882–5
incorporate the special allocation rules
of §1.861–10T, certain changes to the
final regulations under §1.884–1(e) are
needed to maintain the proper U.S. net
equity of a foreign corporation that
elects to directly allocate any portion of
its interest expense. These regulations
include a conforming change that
provides that liabilities giving rise to
such interest will be considered U.S.
liabilities for purposes of section 884,
notwithstanding that such liabilities are
not taken into account in Step 2 of
§ 1.882–5.
In addition, a new provision has
been added in §1.884–4(b) so that
branch interest continues to include
interest paid with respect to liabilities
that are subject to the special allocation
rules, notwithstanding that such lia-
bilities are not considered U.S. booked
liabilities for purposes of Step 3 of the
§ 1.882–5 calculation.
D. Structural changes to conform
branch interest rules to final regula-
tions under §1.882–5. These regula-
tions adopt the changes made by the
1992 proposed regulations under
§ 1.884–4(b), and thus incorporate the
rules in §1.882–5(d)(2) (relating to
U.S. booked liabilities) in defining the
term branch interest of a foreign
corporation. Although certain changes
were made to the definition of U.S.
booked liabilities in the final regula-
tions under §1.882–5, the manner in
which a foreign corporation computes
its branch interest and excess interest
remains substantially unchanged.
E. Excess interest—definition of a
foreign bank. A foreign corporation
that is a foreign bank may treat a
minimum of 85% of its excess interest
as interest on deposits, regardless of its
actual ratio of deposits to interest
bearing liabilities. The IRS and Treas-
ury believe this rule should be applica-
ble only to a foreign bank engaging in
substantial deposit-taking activities,
taking into account its activities in the
United States as well as other countries
in which it operates. The definition
used in the 1992 final regulations did
not clearly convey this limitation. Thus,
§ 1.884–4(a)(2)(iii) now defines a for-
eign bank by reference to section
585(a)(2)(B) of the Code, but also
requires that a substantial part of its
business consists of receiving deposits
and making loans and discounts.
III. Complete termination rules.
The rules in §1.884–2T(a)(5), appli-
cable to a foreign corporation whose
beneficial interest in a trust terminates,
are finalized as proposed by the 1992
regulations. In addition the waiver
provisions contained in §1.884–2 of
the 1988 proposed regulations are
finalized as amended by this Treasury
decision.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It has also been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration
for comment on its impact on small
business.
Drafting Information
The principal author of these regula-
tions is Gwendolyn A. Stanley, Office
of Associate Chief Counsel (Interna-
tional), within the Office of Chief
Counsel, IRS. However, other person-
nel from the IRS and Treasury Depart-
ment participated in their development.
******
Adoption of amendments to the
Regulations
Accordingly, 26 CFR parts 1 and
602 are amended as follows:
PART 1—INCOME TAXES.
Paragraph 1. The authority citation
for part 1 is amended by adding an
entry in numerical order to read as
follows:
Authority: 26 U.S.C. 7805.
Section 1.884–2 also issued under 26
U.S.C. 884(g)
Par. 2. Section 1.864–4 is amended
as follows:
1. The third sentence in paragraph
(c)(2)(i) is revised.
2. Paragraph (c)(2)(ii) is revised.
3 . P a r a g r a p h s ( c ) ( 2 ) ( i i i ) a n d
(c)(2)(iv) are redesignated as (c)(2)(iv)
and (c)(2)(v) respectively.
4. New paragraph (c)(2)(iii) is added.
5. Newly designated paragraph
(c)(2)(v) is amended by:
a. Revising the introductory text.
b. Removing Example (2) through
Example (4).
c. Redesignating ‘‘Example (5)’’ as
‘‘Example (2)’’.
d. Amending newly designated Ex-
ample (2) by:
i. Revising the fifth and sixth
sentences.
ii. Removing the date ‘‘1968’’ and
adding the date ‘‘1997’’ where it
appears in the second, third, and eighth
sentences.
6. The last sentence of paragraph
(c)(6)(i) is removed.
7. Paragraph (c)(7) is added.
The additions and revisions read as
follows:
§ 1.864–4 U.S. source income effec-
tively connected with U.S. business.
******
(c) * * *
(2) * * *
(i) * * * The asset-use test is of
primary significance where, for exam-
ple, interest income is derived from
sources within the United States by a
nonresident alien individual or foreign
corporation that is engaged in the

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business of manufacturing or selling
goods in the United States. * * *
(ii) Cases where applicable. Or-
dinarily, an asset shall be treated as
used in, or held for use in, the conduct
of a trade or business in the United
States if the asset is—
(a) Held for the principal purpose of
promoting the present conduct of the
trade or business in the United States;
or
(b) Acquired and held in the ordinary
course of the trade or business con-
ducted in the United States, as, for
example, in the case of an account or
note receivable arising from that trade
or business; or
(c) Otherwise held in a direct rela-
tionship to the trade or business con-
ducted in the United States, as deter-
mined under paragraph (c)(2)(iv) of
this section.
(iii) Application of asset-use test to
stock—(a) In general. Except as
provided in paragraph (c)(2)(iii)(b) of
this section, stock of a corporation
(whether domestic or foreign) shall not
be treated as an asset used in, or held
for use in, the conduct of a trade or
business in the United States.
(b) Stock held by foreign insurance
companies. [Reserved] ** * * *
(v) Illustration. The application of
paragraph (iv) may be illustrated by the
following examples:
******
Example (2). * * * During 1997, the branch
office derives from sources within the United
States interest on these securities, and gains and
losses resulting from the sale or exchange of
such securities. Since the securities were ac-
quired with amounts generated by the business
conducted in the United States, the interest is
retained in that business, and the portfolio is
managed by personnel actively involved in the
conduct of that business, the securities are
presumed under paragraph (c)(2)(iv)(b) of this
section to be held in a direct relationship to that
business. * * *
******
(7) Effective date. Paragraphs (c)(2)
and (c)(6)(i) of this section are effec-
tive for taxable years beginning on or
after June 6, 1996.
******
Par. 3. In §1.871–12, paragraph (d)
is amended by:
1. Revising the paragraph heading
and introductory text.
2. Removing Example 1.
3. Removing the designation ‘‘(2)’’
in Example (2).
The revision reads as follows:
§ 1.871–12 Determination of tax on
treaty income.
******
(d) Illustration. The application of
this section may be illustrated by the
following example:
******
Par. 4. Section 1.884–0(b) is
amended by revising the entries for
§ § 1 . 8 8 4 – 1 ( d ) ( 4 ) , 1 . 8 8 4 – 2 T ( a ) ( 5 ) ,
1.884–4(b)(1), and 1.884–4(b)(2) and
adding entries for §§1.884–1(i)(4),
1.884–2T(a)(6), 1.884–4(e)(1) and
1.884–4(e)(2) to read as follows:
§ 1.884–0 Overview of regulation
provisions for section 884.
******
(b) ** *
§ 1.884–1 Branch profits tax.
******
(d) * * *
(4) Interest in a trust or estate.
******
(i) * * *
(4) Special rule for certain U.S.
assets and liabilities.
§ 1.884–2T Special Rules for termina-
tion or incorporation of a U.S. trade or
business or liquidation or reorganiza-
tion of a foreign corporation or its
domestic subsidiary (temporary).
(a) * * *
(5) Special rule if a foreign corpora-
tion terminates an interest in a trust.
[Reserved]
(6) Coordination with second-level
withholding tax.
******
§ 1.884–4 Branch-level interest tax.
******
(b) * * *
(1) Definition of branch interest.
(2) [Reserved]
(3) * * *
(4) [Reserved]
******
(e) * * *
(1) General rule.
(2) Special rule.
******
Par. 5. Section 1.884–1 is amended
as follows:
1. Paragraph (c)(2) is amended as
follows:
a. The text of paragraph (c)(2) is
redesignated as paragraph (c)(2)(i) and
a paragraph heading for (c)(2)(i) is
added.
b. New paragraph (c)(2)(ii) is added.
2. In paragraph (d)(2)(xi), Example 2
through Example 4 are redesignated
Example 3 through Example 5, respec-
tively, and new Example 2 is added.
3. Paragraph (d)(3) is revised.
4. The text of paragraph (d)(4) is
added.
5. Paragraph (d)(5)(iii) is revised.
6. In Paragraph (d)(6)(iii) the refer-
ence to ‘‘(d)(3)(iv)’’ is removed and
‘‘(d)(3)(vi)’’ is added in its place.
7. Paragraph (d)(6)(v) is redesignated
as paragraph (d)(6)(vi).
8. New paragraph (d)(6)(v) is added
and reserved.
9. Paragraph (e)(2) is amended as
follows:
a. The paragraph heading and text of
paragraph (e)(2) are redesignated as
paragraph (e)(2)(i).
b. In newly designated paragraph
(e)(2)(i) the language ‘‘(e)(2)’’ is re-
moved and ‘‘(e)(2)(i)’’ is added in its
place.
c. A new paragraph heading for
paragraph (e)(2) is added.
d. Paragraph (e)(2)(ii) is added.
10. Paragraph (e)(3)(ii) is revised.
11. Paragraph (e)(5) is amended as
follows:
a. The second sentence in Example 1
is revised.
b. In the list below, for each
sentence in Example 1 indicated in the
left column, remove the language in the
middle column and add the language in
the right column:

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sentenceRemoveAdd
first and third sentence19931997
first sentence§ 1.882–5(b)§ 1.882–5(c)
fourth and fifth sentence§ 1.882–5(b)(2)§ 1.882–5(c)(2)
seventh sentenceamountvalue
seventh sentence§ 1.882–5(b)(1)§ 1.882–5(b)(2)
c. The second sentence in paragraph (i) of Example 2 is revised.
d. In the list below, for each paragraph in Example 2 indicated in the left column, remove the language in the middle
column and add the language in the right column:
ParagraphRemoveAdd
(i)first sentence19931997
(i)third and fifth sentence19941998
(ii)first, second, and third sentence19951999
(ii)second sentence19941998
(iii)first sentence19951999
(iii)last sentence19941998
12. Paragraph (i)(4) is added.
The additions and revisions read as
follows:
§ 1.884–1 Branch profits tax.
******
(c) * * *
(2) * * * (i) In general. * * *
(ii) Bad debt reserves. A bank
described in section 585(a)(2)(B) (with-
out regard to the second sentence
thereof) that uses the reserve method of
accounting for bad debts for U.S.
federal income tax purposes shall de-
crease the amount of loans that qualify
as U.S. assets by any reserve that is
permitted under section 585.
(d) * * *
(2) * * *
(xi) * * *
Example 2. U.S. real property interest con-
nected to a U.S. business. FC is a foreign
corporation that is a bank, within the meaning of
section 585(a)(2)(B) (without regard to the
second sentence thereof), and is engaged in the
business of taking deposits and making loans
through its branch in the United States. In 1996,
FC makes a loan in the ordinary course of its
lending business in the United States, securing
the loan with a mortgage on the U.S. real
property being financed by the borrower. In
1997, after the borrower has defaulted on the
loan, FC takes title to the real property that
secures the loan. On December 31, 1997, FC
continues to hold the property, classifying it on
its financial statement as Other Real Estate
Owned. Because all income and gain from the
property would be ECI to FC under the
principles of section 864(c)(2), the U.S. real
property constitutes a U.S. asset within the
meaning of paragraph (d) of this section.
******
(3) Interest in a partnership—(i) In
general. A foreign corporation that is a
partner in a partnership must take into
account its interest in the partnership
(and not the partnership assets) in
determining its U.S. assets. For pur-
poses of determining the proportion of
the partnership interest that is a U.S.
asset, a foreign corporation may elect
to use either the asset method described
in paragraph (d)(3)(ii) of this section or
the income method described in para-
graph (d)(3)(iii) of this section.
(ii) Asset method—(A) In general. A
partner’s interest in a partnership shall
be treated as a U.S. asset in the same
proportion that the sum of the partner’s
proportionate share of the adjusted
bases of all partnership assets as of the
determination date, to the extent that
the assets would be treated as U.S.
assets if the partnership were a foreign
corporation, bears to the sum of the
partner’s proportionate share of the
adjusted bases of all partnership assets
as of the determination date. Generally
a partner’s proportionate share of a
partnership asset is the same as its
proportionate share of all items of
income, gain, loss, and deduction that
may be generated by the asset.
(B) Non-uniform proportionate
shares. If a partner’s proportionate
share of all items of income, gain, loss,
and deduction that may be generated by
a single asset of the partnership
throughout the period that includes the
taxable year of the partner is not
uniform, then, for purposes of deter-
mining the partner’s proportionate
share of the adjusted basis of that asset,
a partner must take into account the
portion of the adjusted basis of the
asset that reflects the partner’s
economic interest in that asset. A
partner’s economic interest in an asset
of the partnership must be determined
by applying the following presump-
tions. These presumptions may, how-
ever, be rebutted if the partner or the
Internal Revenue Service shows that
the presumption is inconsistent with the
partner’s true economic interest in the
asset during the corporation’s taxable
year.
(1) If a partnership asset ordinarily
generates directly identifiable income, a
partner’s economic interest in the asset
is determined by reference to its
proportionate share of income that may
be generated by the asset for the
partnership’s taxable year ending with
or within the partner’s taxable year.
(2) If a partnership asset ordinarily
generates current deductions and or-
dinarily generates no directly identifia-
ble income, for example because the
asset contributes equally to the genera-
tion of all the income of the part-
nership (such as an asset used in
general and administrative functions), a
partner’s economic interest in the asset
is determined by reference to its
proportionate share of the total deduc-
tions that may be generated by the
asset for the partnership’s taxable year
ending with or within the partner’s
taxable year.
(3) For other partnership assets not
described in paragraph (d)(3)(ii)(B)(1)
or (2) of this section, a partner’s
economic interest in the asset is deter-

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mined by reference to its proportionate
share of the total gain or loss to which
it would be entitled if the asset were
sold at a gain or loss in the part-
nership’s taxable year ending with or
within the partner’s taxable year.
(C) Partnership election under sec-
tion 754. If a partnership files an
election in accordance with section
754, then for purposes of this para-
graph (d)(3)(ii), the basis of partnership
property shall reflect adjustments made
pursuant to sections 734 (relating to
distributions of property to a partner)
and 743 (relating to the transfer of an
interest in a partnership). However,
adjustments made pursuant to section
743 may be made with respect to a
transferee partner only.
(iii) Income method. Under the in-
come method, a partner’s interest in a
partnership shall be treated as a U.S.
asset in the same proportion that its
distributive share of partnership ECI
for the partnership’s taxable year that
ends with or within the partner’s
taxable year bears to its distributive
share of all partnership income for that
taxable year.
(iv) Manner of election—(A) In
general. In determining the proportion
of a foreign corporation’s interest in a
partnership that is a U.S. asset, a
foreign corporation must elect one of
the methods described in paragraph
(d)(3) of this section on a timely filed
return for the first taxable year begin-
ning on or after the effective date of
this section. An amended return does
not qualify for this purpose, nor shall
the provisions of §301.9100–1 of this
chapter and any guidance promulgated
thereunder apply. An election shall be
made by the foreign corporation cal-
culating its U.S. assets in accordance
with the method elected. An elected
method must be used for a minimum
period of five years before the foreign
corporation may elect a different
method. To change an election before
the end of the requisite five-year
period, a foreign corporation must
obtain the consent of the Commissioner
or her delegate. The Commissioner or
her delegate will generally consent to a
foreign corporation’s request to change
its election only in rare and unusual
circumstances. A foreign corporation
that is a partner in more than one
partnership is not required to elect to
use the same method for each part-
nership interest.
(B) Elections with tiered partner-
ships. If a foreign corporation elects to
use the asset method with respect to an
interest in a partnership, and that
partnership is a partner in a lower-tier
partnership, the foreign corporation
may apply either the asset method or
the income method to determine the
proportion of the upper-tier part-
nership’s interest in the lower-tier
partnership that is a U.S. asset.
(v) Failure to make proper election.
If a foreign corporation, for any reason,
fails to make an election to use one of
the methods required by paragraph
(d)(3) of this section in a timely
fashion, the district director or the
Assistant Commissioner (International)
may make the election on behalf of the
foreign corporation and such election
shall be binding as if made by that
corporation.
(vi) Special rule for determining a
partner’s adjusted basis in a part-
nership interest. For purposes of para-
graphs (d)(3) and (6) of this section, a
partner’s adjusted basis in a partnership
interest shall be the partner’s basis in
such interest (determined under section
705) reduced by the partner’s share of
the liabilities of the partnership deter-
mined under section 752 and increased
by a proportionate share of each
liability of the partnership equal to the
partner’s proportionate share of the
expense, for income tax purposes,
attributable to such liability for the
taxable year. A partner’s adjusted basis
in a partnership interest cannot be less
than zero.
(vii) E&P basis of a partnership
interest. See paragraph (d)(6)(iii) of
this section for special rules governing
the calculation of a foreign corpora-
tion’s E&P basis in a partnership
interest.
(viii) The application of this para-
graph (d)(3) is illustrated by the
following examples:
Example 1. General rule—(i) Facts. Foreign
corporation, FC, is a partner in partnership ABC,
which is engaged in a trade or business within
the United States. FC and ABC are both calendar
year taxpayers. ABC owns and manages two
office buildings located in the United States,
each with an adjusted basis of $50. ABC also
owns a non-U.S. asset with an adjusted basis of
$100. ABC has no liabilities. Under the part-
nership agreement, FC has a 50 percent interest
in the capital of ABC and a 50 percent interest in
all items of income, gain, loss, and deduction
that may be generated by the partnership’s
assets. FC’s adjusted basis in ABC is $100. In
determining the proportion of its interest in ABC
that is a U.S. asset, FC elects to use the asset
method described in paragraph (d)(3)(ii) of this
section.
(ii) Analysis. FC’s interest in ABC is treated
as a U.S. asset in the same proportion that the
sum of FC’s proportionate share of the adjusted
bases of all ABC’s U.S. assets (50% of $100),
bears to the sum of FC’s proportionate share of
the adjusted bases of all of ABC’s assets (50%
of $200). Under the asset method, the amount of
FC’s interest in ABC that is a U.S. asset is $50
($100 2 $50/$100).
Example 2. Special allocation of gain with
respect to real property—(i) Facts. The facts are
the same as in Example 1, except that under the
partnership agreement, FC is allocated 20 percent
of the income from the partnership property but
80 percent of the gain on disposition of the
partnership property.
(ii) Analysis. Assuming that the buildings
ordinarily generate directly identifiable income,
there is a rebuttable presumption under paragraph
(d)(3)(ii)(B)(1) of this section that FC’s propor-
tionate share of the adjusted basis of the
buildings is FC’s proportionate share of the
income generated by the buildings (20%) rather
than the total gain that it would be entitled to
under the partnership agreement (80%) if the
buildings were sold at a gain on the determina-
tion date. Thus, the sum of FC’s proportionate
share of the adjusted bases in ABC’s U.S. assets
(the buildings) is presumed to be $20 [(20% of
$50) + (20% of $50)]. Assuming that the non-
U.S. asset is not income-producing and does not
generate current deductions, there is a rebuttable
presumption under paragraph (d)(3)(ii)(B)(3) of
this section that FC’s proportionate share of the
adjusted basis of that asset is FC’s interest in the
gain on the disposition of the asset (80%) rather
than its proportionate share of the income that
may be generated by the asset (20%). Thus, FC’s
proportionate share of the adjusted basis of
ABC’s non-U.S. asset is presumed to be $80
(80% of $100). FC’s proportionate share of the
adjusted bases of all of the assets of ABC is
$100 ($20 + $80). The amount of FC’s interest
in ABC that is a U.S. asset is $20 ($100 2
$20/$100).
Example 3. Tiered partnerships (asset
method)—(i) Facts. The facts are the same as in
Example 1, except that FC’s adjusted basis in
ABC is $175 and ABC also has a 50 percent
interest in the capital of partnership DEF. DEF
owns and operates a commercial shopping center
in the United States with an adjusted basis of
$200 and also owns non-U.S. assets with an
adjusted basis of $100. DEF has no liabilities.
ABC’s adjusted basis in its interest in DEF is
$150 and ABC has a 50 percent interest in all
the items of income, gain, loss and deduction
that may be generated by the assets of DEF.
(ii) Analysis. Because FC has elected to use
the asset method described in paragraph (d)(3)(ii)
of this section, it must determine what proportion
of ABC’s partnership interest in DEF is a U.S.
asset. As permitted by paragraph (d)(3)(iv)(B) of
this section, FC also elects to use the asset
method with respect to ABC’s interest in DEF.
ABC’s interest in DEF is treated as a U.S. asset
in the same proportion that the sum of ABC’s
proportionate share of the adjusted bases of all
DEF’s U.S. assets (50% of $200), bears to the
sum of ABC’s proportionate share of the
adjusted bases of all of DEF’s assets (50% of
$300). Thus, the amount of ABC’s interest in
DEF that is a U.S. asset is $100 ($150 2
$100/$150). FC must then apply the rules of
paragraph (d)(3)(ii) of this section to all the
assets of ABC, including ABC’s interest in DEF
that is treated in part as a U.S. asset ($100) and
in part as a non-U.S. asset ($50). FC’s interest in
ABC is treated as a U.S. asset in the same

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proportion that the sum of FC’s proportionate
share of the adjusted bases of the U.S. assets of
ABC (including ABC’s interest in DEF), bears to
the sum of FC’s proportionate share of the
adjusted bases of all ABC’s assets (including
ABC’s interest in DEF). Thus, the amount of
FC’s interest in ABC that is a U.S. asset is $100
(FC’s adjusted basis in ABC ($175) multiplied
by FC’s proportionate share of the sum of the
adjusted bases of ABC’s U.S. assets ($100)) over
FC’s proportionate share of the sum of the
adjusted bases of ABC’s assets ($175)).
Example 4. Tiered partnerships (income
method)—(i) Facts. The facts are the same as in
Example 3, except that FC has elected to use the
income method described in paragraph (d)(3)(iii)
of this section to determine the proportion of its
interest in ABC that is a U.S. asset. The two
office buildings located in the United States
generate $60 of income that is ECI for the
taxable year. The non-U.S. asset is not-income
producing. In addition ABC’s distributive share
of income from DEF consists of $40 of income
that is ECI and $140 of income that is not ECI.
(ii) Analysis. Because FC has elected to use
the income method it does need to determine
what proportion of ABC’s partnership interest in
DEF is a U.S. asset. FC’s interest in ABC is
treated as a U.S. asset in the same proportion
that its distributive share of ABC’s income for
the taxable year that is ECI ($50) ($30 earned
directly by ABC + $20 distributive share from
DEF) bears to its distributive share of all ABC’s
income for the taxable year ($55) ($30 earned
directly by ABC + $25 distributive share from
DEF). Thus, FC’s interest in ABC that is a U.S.
asset is $159 ($175 2 $50/$55).
(4) Interest in a trust or estate—(i)
Estates and non-grantor trusts. A for-
eign corporation that is a beneficiary of
a trust or estate shall not be treated as
having a U.S. asset by virtue of its
interest in the trust or estate.
(ii) Grantor trusts. If, under sections
671 through 678, a foreign corporation
is treated as owning a portion of a trust
that includes all the income and gain
that may be generated by a trust asset
(or pro rata portion of a trust asset), the
foreign corporation will be treated as
owning the trust asset (or pro rata
portion thereof) for purposes of deter-
mining its U.S. assets under this
section.
(5) * * *
(iii) Interbranch transactions. A
transaction of any type between sepa-
rate offices or branches of the same
taxpayer does not create a U.S. asset.
(6) * * *
(v) Computation of E&P basis of
financial instruments. [Reserved]
******
(e) * * *
(2) Additional liabilities—(i) * * *
(ii) Liabilities described in §1.882–
5(a)(1)(ii). The amount of liabilities
determined under this paragraph
(e)(2)(ii) is the amount (as of the
determination date) of liabilities de-
scribed in §1.882–5(a)(1)(ii) (relating
to liabilities giving rise to interest
expense that is directly allocated to
income from a U.S. asset).
(3) * * *
(ii) Limitation. For any taxable year,
a foreign corporation may elect to
reduce the amount of its liabilities
determined under paragraph (e)(1) of
this section by an amount that does not
exceed the excess, if any, of the
amount of liabilities in paragraph (e)(1)
of this section over the amount, as of
the determination date, of U.S. booked
liabilities (determined under §1.882–
5(d)(2)) and liabilities described in
paragraph (e)(2) of this section.
******
(5) * * *
Example 1. * * * For purposes of computing
its U.S.- connected liabilities under §1.882–5(c),
A must determine the average total value of its
assets that are U.S. assets. * * *
Example 2. * * * A has $800 of liabilities
under paragraph (e)(1) of this section and $300
of liabilities properly reflected on the books of
its U.S. trade or business under §1.882–5(d)(2).
* * *
******
(i) * * *
(4) Special rules for certain U.S.
assets and liabilities. Paragraphs
(c)(2)(i) and (ii), (d)(3), (d)(4),
(d)(5)(iii), (d)(6)(iii), (d)(6)(vi), (e)(2),
and (e)(3)(ii), of this section are
effective for taxable years beginning on
or after June 6, 1996.
Par. 6. §1.884–2 is added to read as
follows:
§ 1.884–2 Special rules for termination
or incorporation of a U.S. trade or
business or liquidation or reorganiza-
tion of a foreign corporation or its
domestic subsidiary.
(a) through (a)(2)(i) [Reserved] For
further information, see §1.884–2T(a)
through (a)(2)(ii).
(a)(2)(ii) Waiver of period of limita-
tions. The waiver referred to in
§ 1.884–2T(a)(2)(i)(D) shall be ex-
ecuted on Form 8848, or substitute
form, and shall extend the period for
assessment of the branch profits tax for
the year of complete termination to a
date not earlier than the close of the
sixth taxable year following that tax-
able year. This form shall include such
information as is required by the form
and accompanying instructions. The
waiver must be signed by the person
authorized to sign the income tax
returns for the foreign corporation
(including an agent authorized to do so
under a general or specific power of
attorney). The waiver must be filed on
or before the date (including exten-
sions) prescribed for filing the foreign
corporation’s income tax return for the
year of complete termination. With
respect to a complete termination oc-
curring in a taxable year ending prior
to June 6, 1996, a foreign corporation
may also satisfy the requirements of
this paragraph (a)(2)(ii) by applying
§ 1.884–2T(a)(2)(ii) of the temporary
regulations (as contained in the CFR
edition revised as of April 1, 1995). A
properly executed Form 8848, sub-
stitute form, or other form of waiver
authorized by this paragraph (a)(2)(ii)
shall be deemed to be consented to and
signed by a Service Center Director or
the Assistant Commissioner (Interna-
tional) for purposes of §301.6501(c)–
1(d) of this chapter.
(a)(3) through (a)(4) [Reserved] For
further information, see § 1.884–
2T(a)(3) through (a)(4).
(a)(5) Special rule if a foreign
corporation terminates an interest in a
trust. A foreign corporation whose
beneficial interest in a trust terminates
(by disposition or otherwise) in any
taxable year shall be subject to the
branch profits tax on ECEP attributable
to amounts (including distributions of
accumulated income or gain) treated as
ECI to such beneficiary in such taxable
year notwithstanding any other provi-
sion of §1.884–2T(a).
(b) through (c)(2)(ii) [Reserved] For
further information, see §1.884–2T(b)
through (c)(2)(ii).
(c)(2)(iii) Waiver of period of limita-
tions and transferee agreement. In the
case of a transferee that is a domestic
corporation, the provisions of §1.884–
2T(c)(2)(i) shall not apply unless, as
part of the section 381(a) transaction,
the transferee executes a Form 2045
(Transferee Agreement) and a waiver
of period of limitations as described in
this paragraph (c)(2)(iii), and files both
documents with its timely filed (includ-
ing extensions) income tax return for
the taxable year in which the section
381(a) transaction occurs. The waiver
shall be executed on Form 8848, or
substitute form, and shall extend the

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period for assessment of any additional
branch profits tax for the taxable year
in which the section 381(a) transaction
occurs to a date not earlier than the
close of the sixth taxable year follow-
ing the taxable year in which such
transaction occurs. This form shall
include such information as is required
by the form and accompanying instruc-
tions. The waiver must be signed by
the person authorized to sign Form
2045. With respect to a complete
termination occurring in a taxable year
ending prior to June 6, 1996, a foreign
corporation may also satisfy the re-
quirements of this paragraph (c)(2)(iii)
by applying §1.884–2T(c)(2)(iii) of the
temporary regulations (as contained in
the CFR edition revised as of April 1,
1995). A properly executed Form 8848,
substitute form, or other form of waiver
authorized by this paragraph (c)(2)(iii)
shall be deemed to be consented to and
signed by a Service Center Director or
the Assistant Commissioner (Interna-
tional) for purposes of §301.6501(c)–
1(d) of this chapter.
(c)(3) through (f) [Reserved] For
further information, see § 1.884–
2T(c)(3) through (f).
(g) Effective dates. Paragraphs
(a)(2)(ii) and (c)(2)(iii) of this section
are effective for taxable years begin-
ning after December 31, 1986. Para-
graph (a)(5) of this section is effective
for taxable years beginning on or after
June 6, 1996.
Par. 7. Section 1.884–2T is amended
as follows:
1. Paragraph (a)(2)(ii) is revised.
2. Paragraph (a)(5) is redesignated as
(a)(6).
3. New paragraph (a)(5) is added.
4. Paragraph (c)(2)(iii) is revised.
The additions and revisions read as
follows:
§ 1.884–2T Special rules for termina-
tion or incorporation of a U.S. trade or
business or liquidation or reorganiza-
tion of a foreign corporation or its
domestic subsidiary (Temporary).
(a) * * *
(2)* * *
(ii) Waiver of period of limitations.
[Reserved] See §1.884–2(a)(2)(ii) for
rules relating to this paragraph.
******
(5) Special rule if a foreign corpora-
tion terminates an interest in a trust.
[Reserved] See § 1.884–2(a)(5) for
rules relating to this paragraph.
******
(c) * * *
(2) * * *
(iii) Waiver of period of limitations
and transferee agreement. [Reserved]
See §1.884–2(c)(2)(iii) for rules relat-
ing to this paragraph.
Par. 8. Section 1.884–4 is amended
as follows:
1. In paragraph (a)(1), the fifth
sentence is revised.
2. Paragraph (a)(2)(iii) is revised.
3. Paragraph (b)(1) is revised and
paragraph (b)(2) is removed and re-
served.
4. Paragraph (b)(3) is amended by:
a . R e m o v i n g t h e r e f e r e n c e
‘‘(b)(1)(v)’’ and adding the language
‘‘(b)(1)(ii)’’ in the following:
i. Paragraph (b)(3)(i), first sentence.
ii. Paragraph (b)(3)(ii), introductory
text.
iii. Paragraph (b)(3)(iii), heading and
introductory text.
b. Adding a sentence at the end of
paragraph (b)(3)(i).
5. Paragraph (b)(4) is removed and
reserved.
6. In the list below, for each paragraph indicated in the left column, remove the language in the middle column and add
the language in the right column:
ParagraphRemoveAdd
(a)(2)(i)(A)apportionedallocated or apportioned
(a)(4) Example 1 first sentence(b)(2)(a)(2)(iii)
(a)(4) Example 1 first and seventh sentenceapportionedallocated or apportioned
(a)(4) Example 1 first, second, and eighth sentence19931997
(a)(4) Example 2 first sentence(b)(2)(a)(2)(iii)
(a)(4) Example 2 second and third sentence19931997
(b)(5)(i) last sentenceapportionedallocated or apportioned
(b)(5)(ii) Example first, fifth, and last sentenceapportionedallocated or apportioned
(b)(6) paragraph headingapportionedallocated or apportioned
(b)(6)(i) first and last sentenceapportionedallocated or apportioned
(b)(6)(i) second sentence(b)(1)(v)(b)(1)(ii)
(b)(6)(ii) first and second sentence(b)(1)(v)(b)(1)(ii)
(b)(6)(ii) first and second sentenceparagraphs (b)(1)(i)
through (b)(i)(iv)
paragraph (b)(1)(i)

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ParagraphRemoveAdd
(b)(6)(iv) Example 1 introductory text,
paragraphs (i), (iii), and (iv), flush lan-
guage first, fourth, and seventh sentence
19931997
(b)(6)(iv) Example 1 paragraph (ii)19921996
(b)(6)(iv) Example 1 flush language sec-
ond, and sixth sentence
(b)(1)(v)(b)(1)(ii)
(c)(1)(iv) Example 1 first sentenceapportionedallocated or apportioned
(c)(1)(iv) Example 1 first, second, third,
fifth, sixth, and seventh sentence
19931997
(c)(1)(iv) Example 1 third, fourth, and
seventh sentence
19941998
(c)(1)(iv) Example 2 second sentenceapportionedallocated or apportioned
(c)(1)(iv) Example 2 first, second, third,
and last sentence
19931997
(c)(1)(iv) Example 2 second and last sen-
tence
19941998
(c)(2)(i) first sentenceapportionedallocated or apportioned
(c)(4) Example third, fourth, fifth, sixth,
and eighth sentence
19931997
(c)(4) Example fifth sentenceallocatedallocated or apportioned
7. Paragraph (e) is amended as
follows:
a. The text of paragraph (e) is
redesignated as paragraph (e)(1) and a
paragraph heading for (e)(1) is added.
b. The first sentence of newly
designated paragraph (e)(1) is revised.
8. Paragraph (e)(2) is added.
The revisions and additions read as
follows:
§ 1.884–4 Branch-level interest tax.
(a) * * * (1) * * * For purposes of
this section, a foreign corporation also
shall be treated as engaged in trade or
business in the United States if, at any
time during the taxable year, it owns an
asset taken into account under §1.882–
5(a)(1)(ii) or (b)(1) for purposes of
determining the amount of the foreign
corporation’s interest expense allocated
or apportioned to ECI. * * *
(2) * * *
(iii) Treatment of a portion of the
excess interest of banks as interest on
deposits. A portion of the excess
interest of a foreign corporation that is
a bank (as defined in section
585(a)(2)(B) without regard to the
second sentence thereof) provided that
a substantial part of its business in the
United States, as well as all other
countries in which it operates, consists
of receiving deposits and making loans
and discounts, shall be treated as
interest on deposits (as described in
section 871(i)(3)), and shall be exempt
from the tax imposed by section 881(a)
as provided in such section. The
portion of the excess interest of the
foreign corporation that is treated as
interest on deposits shall equal the
product of the foreign corporation’s
excess interest and the greater of—
(A) The ratio of the amount of
interest bearing deposits, within the
meaning of section 871(i)(3)(A), of the
foreign corporation as of the close of
the taxable year to the amount of all
interest bearing liabilities of the foreign
corporation on such date; or
(B) 85 percent.
******
(b) Branch interest—(1) Definition
of branch interest. For purposes of this
section, the term ‘‘branch interest’’
means interest that is —
(i) Paid by a foreign corporation with
respect to a liability that is—
(A) A U.S. booked liability within
the meaning of §1.882–5(d)(2) (other
than a U.S. booked liability of a
partner within the meaning of §1.882–
5(d)(2)(vii)); or
(B) Described in §1.884–1(e)(2)
(relating to insurance liabilities on U.S.
business and liabilities giving rise to
interest expense that is directly allo-
cated to income from a U.S. asset); or
(ii) In the case of a foreign corpora-
tion other than a corporation described
in paragraph (a)(2)(iii) of this section, a
liability specifically identified (as
provided in paragraph (b)(3)(i) of this
section) as a liability of a U.S. trade or
business of the foreign corporation on
or before the earlier of the date on
which the first payment of interest is
made with respect to the liability or the
due date (including extensions) of the
foreign corporation’s income tax return
for the taxable year, provided that—
(A) The amount of such interest does
not exceed 85 percent of the amount of
interest of the foreign corporation that
would be excess interest before taking
into account interest treated as branch
interest by reason of this paragraph
(b)(1)(ii);
(B) The requirements of paragraph
(b)(3)(ii) of this section (relating to
notification of recipient of interest) are
satisfied; and
(C) The liability is not described in
paragraph (b)(3)(iii) of this section
(relating to liabilities incurred in the
ordinary course of a foreign business or
secured by foreign assets) or paragraph
(b)(1)(i) of this section.
(2) [Reserved]
(3)(i) * * * A foreign corporation
that is subject to this section may
identify a liability under paragraph
(b)(1)(ii) of this section whether or not
it is actually engaged in the conduct of
a trade or business in the United States.
* * *

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******
(4) [Reserved]
******
(e) Effective dates—(1) General rule.
Except as provided in paragraph (e)(2)
of this section, this section is effective
for taxable years beginning October 13,
1992, and for payments of interest
described in section 884(f)(1)(A) made
(or treated as made under paragraph
(b)(7) of this section) during taxable
years of the payor beginning after such
date. * * *
(2) Special rule. Paragraphs (a)(1),
(a)(2)(i)(A), (a)(2)(iii), (b)(1), (b)(3),
(b)(5)(i), (b)(6)(i), (b)(6)(ii), and
(c)(2)(i) of this section are effective for
taxable years beginning on or after
June 6, 1996.
Par. 9. In section 1.884–5, para-
graphs (e)(4)(ii) and (g) are revised to
read as follows:
§ 1.884–5 Qualified resident
******
(e) * * *
(4) * * *
(ii) Presumption for banks. A U.S.
trade or business of a foreign corpora-
tion that is described in § 1.884–
4(a)(2)(iii) shall be presumed to be an
integral part of an active banking
business conducted by the foreign
country in its country of residence
provided that a substantial part of the
business of the foreign corporation in
both its country of residence and the
United States consists of receiving
deposits and making loans and dis-
counts. This paragraph shall be effec-
tive for taxable years beginning on or
after June 6, 1996.
******
(g) * * * Except as provided in
paragraph (e)(4)(ii) of this section, this
section is effective for taxable years
beginning on or after October 13, 1992.
* * *
******
Par. 10. Section 1.897–1 is amended
as follows:
1. In paragraph (f)(1)(iii) the lan-
guage ‘‘stock,’’ is removed.
2. Paragraph (f)(2)(i) is revised to
read as follows:
§ 1.897–1 Taxation of foreign invest-
ments in United States real property
interests, definition of terms.
******
(f) * * *
(2) * * *
(i) Held for the principal purpose of
promoting the present conduct of the
trade or business,
******
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 11. The authority for part 602
continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 12. In §602.101, the table in
paragraph (c) is amended by adding in
numerical order ‘‘§1.884–2 .. . 1545–
1070’’.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved February 28, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
March 5, 1996, 8:45 a.m., and published in the
issue of the Federal Register for March 8,
1996, 61 F.R. 9336)
Section 882.—Tax on Income of
Foreign Corporations Connected With
United States Business
26 CFR 1.882–5: Determination of interest
deduction.
T.D. 8658
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Determination of Interest Expense De-
duction of Foreign Corporations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
Income Tax Regulations relating to the
determination of the interest expense
deduction of foreign corporations and
applies to foreign corporations engaged
in a trade or business within the United
States. This action is necessary because
of changes to the applicable tax law
made by the Tax Reform Act of 1986,
and because of changes in international
financial markets.
EFFECTIVE DATE: June 6, 1996.
FOR FURTHER INFORMATION
C O N T A C T : A h m a d P i r a s t e h o r
Richard Hoge, (202) 622-3870 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On April 24, 1992, the IRS pub-
lished proposed amendments (INTL–
309–88, 1992–1 C.B. 1157) to the
Income Tax Regulations (26 CFR parts
1) under section 882 of the Internal
Revenue Code in the Federal Register
(57 FR 15308). A public hearing was
held on October 30, 1992. Numerous
written comments were received. After
consideration of all of the comments,
the regulations proposed by INTL–
309–88 are adopted as amended by this
Treasury decision, and the prior regula-
tions are withdrawn. The revisions are
discussed below.
Discussion of Major Comments and
Changes to the Regulations.
1. Introduction.
Section 882(c) of the Internal Reve-
nue Code provides that a foreign
corporation is allowed a deduction only
to the extent that the expense is
connected with income that is effec-
tively connected with the conduct of a
U.S. trade or business within the
United States (ECI), and that the proper
allocation is to be determined as
provided in regulations. The proposed
§ 1.882–5 regulations that were issued
in 1992 generally followed the ap-
proach adopted in the 1981 final
regulations, with various changes in-
tended to clarify and update the
regulations.
The proposed regulations attracted a
substantial number of comments, ad-
dressing both general and specific
aspects of the regulations. In response
to these comments, the Treasury De-
partment and the IRS simplified the
regulations, coordinated them more
closely with other regulations, and
generally responded to the concerns of

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foreign corporations doing business in
the United States. For example, U.S.
assets are defined in the first step of
the three-step formula to coincide
closely with the definition of a U.S.
asset used for purposes of section 884.
The computation of the actual ratio in
Step 2 has been simplified consider-
ably, minimizing both the number and
the frequency of required computations.
In Step 3, consistent with the emphasis
in the regulations on the use of actual
ratios and rates rather than prescribed
ones whenever possible, the final reg-
ulations allow taxpayers to use either
their actual interest rate on U.S. dollar
liabilities, or, if they elect, to use their
actual rates on liabilities denominated
in each of the currencies in which their
U.S. assets are denominated. The
Treasury and the IRS believe that the
final regulations strike a reasonable
balance between the concerns of for-
eign corporate taxpayers and the inter-
ests of the United States government.
2. § 1.882–5(a): Rules of general
application.
Section 1.882–5(a) provides general
rules for determining a foreign corpora-
tion’s interest expense allocable to ECI.
The final regulations specify that the
provisions of §1.882–5 constitute the
exclusive rules for allocating interest
expense to the income from the U.S.
trade or business of all foreign corpora-
tions, including foreign corporations
that are residents of countries with
which the United States has an income
tax treaty. In general, this requires all
foreign corporations to use the three-
step methodology described in the final
regulations. In response to commenters’
questions, however, §1.882–5(a)(1)(ii)
now provides that a foreign corporation
that is engaged in a U.S. trade or
business, either directly or through a
partnership, and that satisfies certain
requirements may allocate interest ex-
pense directly to income generated by a
particular asset to the same extent that
a U.S. corporation is permitted to
directly allocate interest expense under
the rules of §1.861–10T. When a
foreign corporation directly allocates
interest expense under this rule, the
final regulations require adjustments to
all three steps of the calculation to
avoid double counting of assets and
liabilities.
Numerous commenters questioned
whether a taxpayer that is entitled to
the benefits of a U.S. income tax treaty
should be required to use the rules of
§ 1.882–5 for purposes of determining
the amount of interest expense alloca-
ble to the foreign corporation’s income
attributable to its U.S. permanent
establishment. The IRS and the Treas-
ury Department believe that the meth-
odology provided in these regulations
is fully consistent with all of the
United States’s treaty obligations, in-
cluding the Business Profits article of
our tax treaties. Generally, the Business
Profits article requires that, in deter-
mining the business profits of a perma-
nent establishment, there shall be al-
lowed as deductions expenses that are
incurred for the purposes of the perma-
nent establishment, including interest
expense. Section 1.882–5(a)(2) of the
final regulations is a reasonable method
of implementing that general directive,
as our treaties do not compel the use of
any particular method.
Most of the other changes to the
general rules of §1.882–5(a) are clar-
ifications in response to commenters’
questions. For example, the final reg-
ulations clarify certain aspects of the
rules that limit a foreign corporation’s
allocable interest expense to the
amount actually paid or accrued by the
corporation in a taxable year, and the
rules that coordinate the provisions of
§ 1.882–5 with any other section that
disallows, defers, or capitalizes interest
expense, and include examples that
illustrate how §1.882–5 applies to an
asset that produces income exempt
from U.S. taxation.
Many commenters requested that the
regulations clarify how and when to
make the various elections allowed
under §1.882–5. The final regulations
provide uniform rules for changing any
election prescribed under §1.882–5,
and give all taxpayers an opportunity to
make new elections, if desired, for the
first taxable year beginning after the
effective date of these regulations. The
regulations provide that, once a method
is elected, a taxpayer must use the
method for five years, unless the
Commissioner or her delegate consents
to an earlier change based on extenuat-
ing circumstances. The final regulations
reflect the current practice of the IRS
by providing that if the taxpayer fails
to make a timely election, the district
director or the Assistant Commissioner
(International) may make any and all
elections on the taxpayer’s behalf.
Several commenters asked that the
final regulations allow taxpayers to
make correlative adjustments to their
§ 1.882–5 calculations in cases where,
under the authority of §1.881–3, the
district director has determined that a
taxpayer has acted as a conduit entity
in a conduit financing arrangement.
The IRS and Treasury do not believe
that it is appropriate in this regulation
to alleviate the consequences of
§ 1.881–3 if a taxpayer has engaged in
a transaction one of the principal
purposes of which is to avoid U.S.
withholding tax. Allowing such correla-
tive adjustments in this regulation
would prevent §1.881–3 from serving
its function as an anti-abuse rule.
3. § 1.882–5(b): Determination of total
amount of U.S. assets for the taxable
year (Step 1).
As in the proposed regulations, the
final regulations provide that the classi-
fication of an item as a U.S. asset
under §1.884–1(d) generally governs
its classification as a U.S. asset for
purposes of §1.882–5. Under the rules
of §1.884–1(d), an item generally is
treated as a U.S. asset if all of the
income it generates (or would generate)
and all of the gains that it would
generate (if sold at a gain) are ECI.
Since the proposed §1.882–5 regula-
tions were issued in 1992, the regula-
tions under §1.884–1 were amended
and released in final form. In light of
those new regulations, the inclusions
and exclusions enumerated in the pro-
posed regulations were largely elimi-
nated, so that the final §1.882–5
regulations now closely conform to the
§ 1.884–1(d) definition of a U.S. asset.
Section 1.882–5(b)(3) of the final
regulations continues the requirement
that a foreign corporation must value
its U.S. assets at the most frequent,
regular intervals for which data are
reasonably available. However, the rule
is applied separately with respect to
each U.S. asset. Paragraph (b)(3) spec-
ifies that the value of a U.S. asset must
be computed at least monthly by a
large bank and at least semi-annually
by other taxpayers.
Many questions have been raised
about how §1.882–5 applies to part-
nership interests held by foreign corpo-
rations. With the elimination of
§ 1.861–9T(e)(7)(i) by these regula-
tions, §1.884–1(d)(3) and §1.882–5
now provide the exclusive rules for
determining a foreign corporation’s
interest expense allocable to an interest
in a partnership. The new regulations

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under §1.884–1(d)(3) provide that a
foreign corporation determines its U.S.
assets by reference to its basis in the
partnership, and expand the methods
available for determining the portion of
its partnership basis that is a U.S. asset.
Numerous commenters were con-
cerned that the provisions of the
proposed regulations relating to real
estate would treat international banks
unfairly, since banks frequently acquire
real estate through foreclosure, or own
the buildings in which their offices are
located. Commenters stated that it is
unclear whether such real estate would
qualify as a U.S. asset. Commenters
also objected to the rule in the
proposed regulations that provides that
an interest in a U.S. real property
holding company, which is not treated
as a U.S. asset under §1.884–1(d),
would be treated as a U.S. asset only in
the year of disposition. Commenters
argued that banks frequently hold prop-
erty acquired by foreclosure in special
purpose subsidiaries in order to limit
their exposure to environmental or
other liabilities. However, such banks
must service the debt they incurred to
acquire the real property throughout the
period they hold the stock, not merely
upon disposition.
In response to these comments, an
example is added under § 1.884–
1(d)(2) to clarify that U.S. real estate
acquired as a result of foreclosure by a
bank acting in the ordinary course of
its business is generally a U.S. asset,
because the property would produce
ECI to the bank under section
864(c)(2). Similarly, the building in
which a bank’s offices are located
generally qualifies as a U.S. asset,
because gain from the sale of the
building generally would constitute
effectively connected income under the
asset-use test of §1.864–4(c)(2). In
addition, the final regulations specify
that a taxpayer may achieve the same
result under §1.882–5 whether it holds
foreclosure property or the office build-
ing it occupies directly or indirectly
through a corporation. Section 1.882–
5(b)(1)(iii)(A) provides a look-through
rule that treats such real property as a
U.S. asset for purposes of §1.882–5 to
the extent that it would have qualified
as a U.S. asset if held directly by the
taxpayer.
Commenters noted that the rule in
the proposed regulations that reduces
the value of shares of stock claimed as
a U.S. asset by a percentage of the
dividends received deduction had the
effect of treating all stock as debt-
financed under the principles of section
246A. This stock cut-back rule is
eliminated from the final §1.882–5
regulations. The elimination of the rule,
however, will affect only those tax-
payers whose stock satisfies the
business-activities test or the banking,
financing or similar-business test of
§ 1.864–4(c). This is because the final
regulations under §1.864–4, which are
being issued contemporaneously with
these regulations elsewhere in this issue
of the Bulletin, generally eliminate any
inference that stock can produce effec-
tively connected income under the
asset-use test of §1.864–4(c)(2).
The final regulations add an anti-
abuse rule similar to the rule in
§ 1.884–1(d)(5)(ii) to prevent taxpayers
from artificially increasing the amount
of their U.S. assets.
4. § 1.882–5(c): Determination of total
amount of U.S. liabilities for the
taxable year (Step 2).
Commenters objected to many of the
requirements in Step 2 of the proposed
regulations on the grounds that the
rules effectively prevented foreign
banks from using their actual ratio of
liabilities to assets by imposing exces-
sive administrative burdens and cap-
ping the actual ratio at 96%. Because
the IRS and Treasury believe that a
taxpayer’s interest deduction should be
based on the taxpayer’s actual ratio of
liabilities to assets whenever possible,
the final regulations adopt rules that are
intended to encourage taxpayers to use
their actual ratio. Accordingly, the final
regulations drop the 96% cap on the
actual ratio that was in the proposed
regulations. The final regulations also
substantially ease the administrative
burden associated with computing the
actual ratio.
Many commenters objected to the
requirement in the proposed regulations
that a taxpayer’s worldwide liabilities
to assets ratio be computed strictly in
accordance with U.S. tax principles,
citing the substantial burden that such a
calculation would entail. In light of
these comments, the final regulations
require that only the classification of
assets and liabilities must be strictly in
accordance with U.S. tax principles.
The value of worldwide assets and the
amount of worldwide liabilities need
only be substantially in accordance
with U.S. tax principles. Examples of
how these requirements apply are
provided. With regard to material
items, however, the final regulations
specify that a foreign corporation must
compute the value of U.S. assets and
the amount of worldwide liabilities in
Steps 1 and 2 in a consistent manner.
The proposed regulations would have
required that a foreign bank compute
its actual ratio monthly. Commenters
were concerned that the burden of this
rule would be excessive. In response,
the final regulations decrease the re-
quired frequency of the computations
of the actual ratio to semi-annually for
large banks, and to annually for other
taxpayers.
Commenters also were concerned
that the rules in the proposed regulation
requiring basis adjustments for 20%
owned subsidiaries would be too bur-
densome. These rules, which serve a
somewhat different purpose in section
864(e)(4), have been removed from the
final regulations.
Commenters pointed out that the
election provided by the proposed
regulations to compute the actual ratio
of a bank on the basis of a hypothetical
tax year ending six months prior to the
beginning of the actual year does not
serve its intended purpose. The six
month lagging ratio election has there-
fore been eliminated.
Section 1.882–5(c)(3) of the final
regulations provides that the district
director or the Assistant Commissioner
(International) may make appropriate
adjustments to prevent the artificial
increase of a corporation’s actual ratio.
This rule, in conjunction with more
specific anti-abuse rules in Steps 1 and
3, replaces the general anti-abuse rule
in § 1.882–5(e) of the proposed
regulations.
Commenters criticized the 93% fixed
ratio for banks as too low, and
disagreed with the reasons provided in
the preamble to the proposed regula-
tions supporting the 93% ratio. The
final regulations, however, retain the
elective fixed ratio at 93%. In conjunc-
tion with the more relaxed rules
regarding the computation of a foreign
corporation’s actual ratio, Treasury be-
lieves that a 93% fixed ratio, which
remains purely elective, represents an
appropriate safe harbor for banks.
Section 1.882–5(c)(4) also modifies
the definition of a bank for these
purposes to clarify the previous defini-
tion and to limit the 93% fixed ratio to
the intended class of businesses.

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5. § 1.882–5(d): Determination of
amount of interest expense allocable to
ECI (Step 3).
Commenters were concerned that
Step 3 of the proposed regulations
failed to reflect business realities, in-
creased administrative costs and created
uncertainty. In particular, they objected
to the rules that eliminated certain high
interest rate liabilities and certain lia-
bilities denominated in a non-functional
currency from the definition of booked
liabilities, and the rules that prescribed
an interest rate applicable to the extent
that a taxpayer’s U.S.-connected lia-
bilities exceed booked liabilities (ex-
cess liabilities).
As noted above, the IRS and Treas-
ury believe that the calculation of a
taxpayer’s interest deduction should
reflect, to the greatest extent possible,
the taxpayer’s economic interest ex-
pense. Accordingly, these comments
have been largely accepted.
The final regulations eliminate the
fixed interest rates assigned to excess
liabilities, and instead require that
taxpayers compute their actual interest
rate outside the United States. The IRS
anticipates issuing regulations under
section 6038C describing the records
needed to verify the taxpayer’s actual
interest rate, among other things.
The final regulations also respond to
commenters’ requests for simplification
and clarification in the Step 3 calcula-
tion. Under §1.882–5(d)(2), a liability
is a U.S. booked liability if the liability
is properly reflected on the books of
the U.S. trade or business. The final
regulations set out two standards, one
for non-banks and another for banks, to
determine whether a liability is prop-
erly reflected on the foreign corpora-
tion’s U.S. books. In general, the final
regulations use a facts and circum-
stances test to determine whether a
liability is properly booked in the
United States. In response to requests
from commenters for additional guid-
ance on the requirement that the
booking of a liability be ‘‘reasonably
contemporaneous’’ with the time that
the liability is incurred, the regulations
specify that a bank is generally re-
quired to book a liability before the
end of the day in which the liability is
incurred. Section 1.882–5(d)(2)(iii)(B)
provides a relief rule, however, for a
situation where, due to inadvertent
error, a bank fails to book a liability
that otherwise would meet the criteria
for a booked liability. The special rules
for banks in the proposed regulations
have otherwise been eliminated.
In response to comments, the com-
putation of the scaling ratio that applies
to taxpayers with excess liabilities has
also been simplified, and its application
has been reduced in scope. Under the
final regulations, the scaling ratio is
computed by simply dividing U.S.-
connected liabilities by U.S. booked
liabilities, and multiplying that fraction
by the interest paid or accrued by the
foreign corporation. The final regula-
tions also delete the provision in the
proposed regulations that applied the
scaling ratio to section 988 exchange
gain or loss from an unhedged liability.
The amount and source of exchange
gain or loss from a section 988
transaction will therefore continue to be
determined under section 988, without
any reduction as a result of the scaling
ratio in §1.882–5.
The rules in the proposed regulations
relating to high interest rate liabilities
and nonfunctional currency liabilities
have been replaced in the final regula-
tions by a simpler anti-abuse rule that
provides that U.S. booked liabilities
will not include a liability if one of the
principal purposes of incurring or hold-
ing the liability is to increase ar-
tificially the interest expense on U.S.
booked liabilities. Factors relevant to
that determination are whether the
interest rate on a liability is excessive
and whether, from an economic stand-
point, the currency denomination of
U.S. booked liabilities matches the
currency denomination of U.S. assets.
6. § 1.882–5(e): Separate currency
pools method.
Most commenters argued for retain-
ing the separate currency pools method,
which was deleted from Step 3 in the
proposed regulations. After considering
the comments, the IRS and Treasury
agree that taxpayers should be permit-
ted to use a methodology that looks to
worldwide interest rates in all relevant
currencies. Because the separate cur-
rency pools rate in the 1981 regulations
ignored the currency denomination of
U.S. assets and was based instead on
the currency denomination of U.S.
booked liabilities, however, it was
subject to manipulation. The new sepa-
rate currency pools method in §1.882–
5(e) of the final regulations allows
taxpayers to treat their U.S. assets in
each currency as funded by the world-
wide liabilities of the taxpayer in that
same currency. This new separate
currency pools method, which is elec-
tive, is an alternative to the Step 3
approach based on U.S. booked lia-
bilities in §1.882–5(d). To prevent
distortions, taxpayers that have more
than 10% of their U.S. assets denomi-
nated in a hyperinflationary currency
are precluded from using the separate
currency pools method.
The anti-abuse rule of proposed
regulation §1.882–5(e) has been re-
placed by three separate rules that
appear under each of the three steps of
this section.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Small Business Administra-
tion for comment on its impact on
small business.
Drafting Information
Several persons from the Office of
Chief Counsel and the Treasury De-
partment participated in drafting these
regulations.
******
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding an
entry in numerical order to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.882–5 also issued under 26
U.S.C. 882, 26 U.S.C. 864(e), 26

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U.S.C. 988(d), and 26 U.S.C. 7701(l). *
* *
§ 1.861–9T [Amended]
Par. 2. Section 1.861–9T, paragraph
(e)(7) is amended as follows:
1. Paragraph (e)(7)(i) is removed.
2. The heading in paragraph (e)(7)(ii)
is removed.
3. Paragraph (e)(7)(ii) is redesignated
as the text of paragraph (e)(7).
Par. 3. Sections 1.882–0 is added to
read as follows:
§ 1.882–0 Table of contents.
This section lists captions contained
in §§ 1.882–1, 1.882–2, 1.882–3,
1.882–4 and 1.882–5.
§ 1.882–1 Taxation of foreign corpora-
tions engaged in U.S. business or of
foreign corporations treated as having
effectively connected income.
(a)Segregation of income.
(b)Imposition of tax.
(1)Income not effectively con-
nected with the conduct of
a trade or business in the
United States.
(2)Income effectively con-
nected with the conduct of
a trade or business in the
United States.
(i)In general.
(ii)Determination of tax-
able income.
(iii)Cross references.
(c)Change in trade or business
status.
(d)Credits against tax.
(e)Payment of estimated tax.
(f)Effective date.
§ 1.882–2 Income of foreign corpora-
tion treated as effectively connected
with U.S. business.
(a)Election as to real property
income.
(b)Interest on U.S. obligations re-
ceived by banks organized in
possessions.
(c)Treatment of income.
(d)Effective date.
§ 1.882–3 Gross income of a foreign
corporation.
(a)In general.
(1)Inclusions.
(2)Exchange transactions.
(3)Exclusions.
(b)Foreign corporations not
engaged in U.S. business.
(c)Foreign corporations engaged
in U.S. business.
(d)Effective date.
§ 1.882–4 Allowance of deductions and
credits to foreign corporations.
(a)Foreign corporations.
(1)In general.
(2)Return necessary.
(3)Filing deadline for return.
(4)Return by Internal Revenue
Service.
(b)Allowed deductions and credits.
(1)In general.
(2)Verification.
§ 1.882–5 Determination of interest
deduction.
(a)Rules of general application.
(1)Overview.
(i)In general.
(ii)Direct allocations.
(A)In general.
(B)Partnership
interest.
(2)Coordination with tax
treaties.
(3)Limitation on interest
expense.
(4)Translation convention for
foreign currency.
(5)Coordination with other
sections.
(6)Special rule for foreign
governments.
(7)Elections under §1.882–5.
(i)In general.
(ii)Failure to make the
proper election.
(8)Examples.
(b)Step 1: Determination of total
value of U.S. assets for the
taxable year.
(1)Classification of an asset
as a U.S. asset.
(i)General rule.
(ii)Items excluded from
the definition of U.S.
asset.
(iii)Items included in the
definition of U.S.
asset.
(iv)Interbranch
transactions.
(v)Assets acquired to
increase U.S. assets
artificially.
(2)Determination of the value
of a U.S. asset.
(i)General rule.
(ii)Fair-market value
election.
(A)In general.
(B)Adjustment to
partnership basis.
(iii)Reduction of total
value of U.S. assets
by amount of bad
debt reserves under
section 585.
(A)In general.
(B)Example.
(iv)Adjustment to basis
of financial
instruments.
(3)Computation of total value
of U.S. assets.
(c)Step 2: Determination of total
amount of U.S.-connected lia-
bilities for the taxable year.
(1)General rule.
(2)Computation of the actual
ratio.
(i)In general.
(ii)Classification of
items.
(iii)Determination of
amount of worldwide
liabilities.
(iv)Determination of
value of worldwide
assets.
(v)Hedging transactions.
(vi)Treatment of part-
nership interests and
liabilities.
(vii)Computation of ac-
tual ratio of insur-
ance companies.
(viii)Interbranch
transactions.
(ix)Amounts must be ex-
pressed in a single
currency.
(3)Adjustments.
(4)Elective fixed ratio method
of determining U.S.
liabilities.
(5)Examples.
(d)Step 3: Determination of
amount of interest expense
allocable to ECI under the
adjusted U.S. booked lia-
bilities method.
(1)General rule.
(2)U.S. booked liabilities.
(i)In general.
(ii)Properly reflected on
the books of the
U.S. trade or busi-
ness of a foreign
corporation that is
not a bank.

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(A)In general.
(B)Identified lia-
bilities not prop-
erly reflected.
(iii)Properly reflected on
the books of the
U.S. trade or busi-
ness of a foreign
corporation that is a
bank.
(A)In general.
(B)Inadvertent error.
(iv)Liabilities of insur-
ance companies.
(v)Liabilities used to in-
crease artificially in-
terest expense on
U.S. booked
liabilities.
(vi)Hedging transactions.
(vii)Amount of U.S.
booked liabilities of
a partner.
(viii)Interbranch
transactions.
(3)Average total amount of
U.S. booked liabilities.
(4)Interest expense where
U.S. booked liabilities
equal or exceed U.S.
liabilities.
(i)In general.
(ii)Scaling ratio.
(iii)Special rules for in-
surance companies.
(5)U.S.-connected interest rate
where U.S. booked lia-
bilities are less than U.S.-
connected liabilities.
(i)In general.
(ii)Interest rate on ex-
cess U.S.-connected
liabilities.
(6)Examples.
(e)Separate currency pools
method.
(1)General rule.
(i)Determine the value
of U.S. assets in
each currency pool.
(ii)Determine the U.S.-
connected liabilities
in each currency
pool.
(iii)Determine the inter-
est expense attributa-
ble to each currency
pool.
(2)Prescribed interest rate.
(3)Hedging transactions.
(4)Election not available if
excessive hyperinflationary
assets.
(5)Examples.
(f)Effective date.
(1)General rule.
(2)Special rules for financial
products.
Par. 4. Section 1.882–5 is revised to
read as follows:
§ 1.882–5 Determination of interest
deduction.
(a) Rules of general application—(1)
Overview—(i) In general. The amount
of interest expense of a foreign corpo-
ration that is allocable under section
882(c) to income which is (or is treated
as) effectively connected with the
conduct of a trade or business within
the United States (ECI) is the sum of
the interest paid or accrued by the
foreign corporation on its liabilities
booked in the United States, as ad-
justed under the three-step process set
forth in paragraphs (b), (c) and (d) of
this section and the specially allocated
interest expense determined under sec-
tion (a)(1)(ii) of this section. The
provisions of this section provide the
exclusive rules for allocating interest
expense to the ECI of a foreign
corporation. Under the three-step proc-
ess, the total value of the U.S. assets of
a foreign corporation is first determined
under paragraph (b) of this section
(Step 1). Next, the amount of U.S.-
connected liabilities is determined un-
der paragraph (c) of this section (Step
2). Finally, the amount of interest paid
or accrued on liabilities booked in the
United States, as determined under
paragraph (d)(2) of this section, is
adjusted for interest expense attributa-
ble to the difference between U.S.-
connected liabilities and U.S. booked
liabilities (Step 3). Alternatively, a
foreign corporation may elect to deter-
mine its interest rate on U.S.-connected
liabilities by reference to its U.S.
assets, using the separate currency
pools method described in paragraph
(e) of this section.
(ii) Direct allocations—(A) In gen-
eral. A foreign corporation that has a
U.S. asset and indebtedness that meet
the requirements of §1.861–10T(b) and
(c), as limited by §1.861–10T(d)(1),
may directly allocate interest expense
from such indebtedness to income from
such asset in the manner and to the
extent provided in §1.861–10T. For
purposes of paragraphs (b)(1) or (c)(2)
of this section, a foreign corporation
that allocates its interest expense under
the direct allocation rule of this para-
graph (a)(1)(ii)(A) shall reduce the
basis of the asset that meets the
requirements of §1.861–10T(b) and (c)
by the principal amount of the in-
debtedness that meets the requirements
of §1.861–10T(b) and (c). The foreign
corporation shall also disregard any
indebtedness that meets the require-
ments of §1.861–10T(b) and (c) in
determining the amount of the foreign
corporation’s liabilities under para-
graphs (c)(2) and (d)(2) of this section,
and shall not take into account any
interest expense paid or accrued with
respect to such a liability for purposes
of paragraphs (d) or (e) of this section.
(B) Partnership interest. A foreign
corporation that is a partner in a
partnership that has a U.S. asset and
indebtedness that meet the requirements
of §1.861–10T(b) and (c), as limited
by §1.861–10T(d)(1), may directly
allocate its distributive share of interest
expense from that indebtedness to its
distributive share of income from that
asset in the manner and to the extent
provided in §1.861–10T. A foreign
corporation that allocates its distribu-
tive share of interest expense under the
direct allocation rule of this paragraph
(a)(1)(ii)(B) shall disregard any part-
nership indebtedness that meets the
requirements of §1.861–10T(b) and (c)
in determining the amount of its
distributive share of partnership lia-
bilities for purposes of paragraphs
(b)(1), (c)(2)(vi), and (d)(2)(vii) or
(e)(1)(ii) of this section, and shall not
take into account any partnership inter-
est expense paid or accrued with
respect to such a liability for purposes
of paragraph (d) or (e) of this section.
For purposes of paragraph (b)(1) of this
section, a foreign corporation that
directly allocates its distributive share
of interest expense under this paragraph
(a)(1)(ii)(B) shall—
(1) Reduce the partnership’s basis in
such asset by the amount of such
indebtedness in allocating its basis in
t h e p a r t n e r s h i p u n d e r § 1 . 8 8 4 –
1(d)(3)(ii); or
(2) Reduce the partnership’s income
from such asset by the partnership’s
interest expense from such indebted-
ness under §1.884–1(d)(3)(iii).
(2) Coordination with tax treaties.
The provisions of this section provide
the exclusive rules for determining the
interest expense attributable to the
business profits of a permanent
establishment under a U.S. income tax
treaty.

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(3) Limitation on interest expense. In
no event may the amount of interest
expense computed under this section
exceed the amount of interest on
indebtedness paid or accrued by the
taxpayer within the taxable year (trans-
lated into U.S. dollars at the weighted
average exchange rate for each cur-
rency prescribed by §1.989(b)–1 for
the taxable year).
(4) Translation convention for for-
eign currency. For each computation
required by this section, the taxpayer
shall translate values and amounts into
the relevant currency at a spot rate or a
weighted average exchange rate consis-
tent with the method such taxpayer
uses for financial reporting purposes,
provided such method is applied con-
sistently from year to year. Interest
expense paid or accrued, however, shall
be translated under the rules of
§ 1.988–2. The district director or the
Assistant Commissioner (International)
may require that any or all computa-
tions required by this section be made
in U.S. dollars if the functional cur-
rency of the taxpayer’s home office is
a hyperinflationary currency, as defined
in §1.985–1, and the computation in
U.S. dollars is necessary to prevent
distortions.
(5) Coordination with other sections.
Any provision that disallows, defers, or
capitalizes interest expense applies af-
ter determining the amount of interest
expense allocated to ECI under this
section. For example, in determining
the amount of interest expense that is
disallowed as a deduction under section
265 or 163(j), deferred under section
163(e)(3) or 267(a)(3), or capitalized
under section 263A with respect to a
United States trade or business, a
taxpayer takes into account only the
amount of interest expense allocable to
ECI under this section.
(6) Special rule for foreign govern-
ments. The amount of interest expense
of a foreign government, as defined in
§ 1.892–2T(a), that is allocable to ECI
is the total amount of interest paid or
accrued within the taxable year by the
United States trade or business on U.S.
booked liabilities (as defined in para-
graph (d)(2) of this section). Interest
expense of a foreign government, how-
ever, is not allocable to ECI to the
extent that it is incurred with respect to
U.S. booked liabilities that exceed 80
percent of the total value of U.S. assets
for the taxable year (determined under
paragraph (b) of this section). This
paragraph (a)(6) does not apply to
controlled commercial entities within
the meaning of §1.892–5T.
(7) Elections under §1.882–5—(i) In
general. A corporation must make each
election provided in this section on the
corporation’s federal income tax return
for the first taxable year beginning on
or after the effective date of this
section. An amended return does not
qualify for this purpose, nor shall the
provisions of §301.9100–1 of this
chapter and any guidance promulgated
thereunder apply. Each election under
this section, whether an election for the
first taxable year or a subsequent
change of election, shall be made by
the corporation calculating its interest
expense deduction in accordance with
the methods elected. An elected method
must be used for a minimum period of
five years before the taxpayer may
elect a different method. To change an
election before the end of the requisite
five-year period, a taxpayer must ob-
tain the consent of the Commissioner
or her delegate. The Commissioner or
her delegate will generally consent to a
taxpayer’s request to change its elec-
tion only in rare and unusual
circumstances.
(ii) Failure to make the proper
election. If a taxpayer, for any reason,
fails to make an election provided in
this section in a timely fashion, the
district director or the Assistant Com-
missioner (International) may make any
or all of the elections provided in this
section on behalf of the taxpayer, and
such elections shall be binding as if
made by the taxpayer.
(8) Examples. The following exam-
ples illustrate the application of para-
graph (a) of this section:
Example 1. Direct allocations. (i) Facts: FC is
a foreign corporation that conducts business
through a branch, B, in the United States. Among
B’s U.S. assets is an interest in a partnership, P,
that is engaged in airplane leasing solely in the
U.S. FC contributes 2002 to P in exchange for
its partnership interest. P incurs qualified non-
recourse indebtedness within the meaning of
§ 1.861–10T to purchase an airplane. FC’s share
of the liability of P, as determined under section
752, is 8002.
( i i ) A n a l y s i s: P u r s u a n t t o p a r a g r a p h
(a)(1)(ii)(B) of this section, FC is permitted to
directly allocate its distributive share of the
interest incurred with respect to the qualified
nonrecourse indebtedness to FC’s distributive
share of the rental income generated by the
airplane. A liability the interest on which is
allocated directly to the income from a particular
asset under paragraph (a)(1)(ii)(B) of this section
is disregarded for purposes of paragraphs (b)(1),
(c)(2)(vi), and (d)(2)(vii) or (e)(1)(ii) this sec-
tion. Consequently, for purposes of determining
the value of FC’s assets under paragraphs (b)(1)
and (c)(2)(vi) of this section, FC’s basis in P is
reduced by the 8002 liability as determined
under section 752, but is not increased by the
800x liability that is directly allocated under
paragraph (a)(1)(ii)(B) of this section. Similarly,
pursuant to paragraph (a)(1)(ii)(B) of this sec-
tion, the 800x liability is disregarded for
purposes of determining FC’s liabilities under
paragraphs (c)(2)(vi) and (d)(2)(vii) of this
section.
Example 2. Limitation on interest expense—(i)
FC is a foreign corporation that conducts a real
estate business in the United States. In its 1997
tax year, FC has no outstanding indebtedness,
and therefore incurs no interest expense. FC
elects to use the 50% fixed ratio under paragraph
(c)(4) of this section.
(ii) Under paragraph (a)(3) of this section, FC
is not allowed to deduct any interest expense that
exceeds the amount of interest on indebtedness
paid or accrued in that taxable year. Since FC
incurred no interest expense in taxable year
1997, FC will not be entitled to any interest
deduction for that year under §1.882–5, notwith-
standing the fact that FC has elected to use the
50% fixed ratio.
Example 3. Coordination with other sections—
(i) FC is a foreign corporation that is a bank
under section 585(a)(2) and a financial institution
under section 265(b)(5). FC is a calendar year
taxpayer, and operates a U.S. branch, B.
Throughout its taxable year 1997, B holds only
two assets that are U.S. assets within the
meaning of paragraph (b)(1) of this section. FC
does not make a fair-market value election under
paragraph (b)(2)(ii) of this section, and, there-
fore, values its U.S. assets according to their
bases under paragraph (b)(2)(i) of this section.
The first asset is a taxable security with an
adjusted basis of $100. The second asset is an
obligation the interest on which is exempt from
federal taxation under section 103, with an
adjusted basis of $50. The tax-exempt obligation
is not a qualified tax-exempt obligation as
defined by section 265(b)(3)(B).
(ii) FC calculates its interest expense under
§ 1.882–5 to be $12. Under paragraph (a)(5) of
this section, however, a portion of the interest
expense that is allocated to FC’s effectively
connected income under §1.882–5 is disallowed
in accordance with the provisions of section
265(b). Using the methodology prescribed under
section 265, the amount of disallowed interest
expense is $4, calculated as follows:
$122
$50Tax-exemptU.S.assets
= $4
$150 Total U.S. assets
(iii) Therefore, FC deducts a total of $8 ($12
— $4) of interest expense attributable to its
effectively connected income in 1997.
Example 4. Treaty exempt asset—(i) FC is a
foreign corporation, resident in Country X, that
is actively engaged in the banking business in
the United States through a permanent establish-
ment, B. The income tax treaty in effect between
Country X and the United States provides that
FC is not taxable on foreign source income
earned by its U.S. permanent establishment. In
its 1997 tax year, B earns $90 of U.S. source
income from U.S. assets with an adjusted tax
basis of $900, and $12 of foreign source interest
income from U.S. assets with an adjusted tax
basis of $100. FC’s U.S. interest expense
deduction, computed in accordance with
§ 1.882–5, is $500.

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(ii) Under paragraph (a)(5) of this section, FC
is required to apply any provision that disallows,
defers, or capitalizes interest expense after
determining the interest expense allocated to ECI
under §1.882–5. Section 265(a)(2) disallows
interest expense that is allocable to one or more
classes of income that are wholly exempt from
taxation under subtitle A of the Internal Revenue
Code. Section 1.265–1(b) provides that income
wholly exempt from taxes includes both income
excluded from tax under any provision of subtitle
A and income wholly exempt from taxes under
any other law. Section 894 specifies that the
provisions of subtitle A are applied with due
regard to any relevant treaty obligation of the
United States. Because the treaty between the
United States and Country X exempts foreign
source income earned by B from U.S. tax, FC
has assets that produce income wholly exempt
from taxes under subtitle A, and must therefore
allocate a portion of its §1.882–5 interest
expense to its exempt income. Using the
methodology prescribed under section 265, the
amount of disallowed interest expense is $50,
calculated as follows:
$5002
$100 Treaty-exemptU.S.assets
= $50
$1000 Total U.S. assets
(iii) Therefore, FC deducts a total of $450
($500 — $50) of interest expense attributable to
its effectively connected income in 1997.
(b) Step 1: Determination of total
value of U.S. assets for the taxable
year—(1) Classification of an asset as
a U.S. asset—(i) General rule. Except
as otherwise provided in this paragraph
(b)(1), an asset is a U.S. asset for
purposes of this section to the extent
that it is a U.S. asset under §1.884–
1(d). For purposes of this section, the
term determination date, as used in
§ 1.884–1(d), means each day for
which the total value of U.S. assets is
computed under paragraph (b)(3) of
this section.
(ii) Items excluded from the defini-
tion of U.S. asset. For purposes of this
section, the term U.S. asset excludes an
asset to the extent it produces income
or gain described in sections 883(a)(3)
and (b).
(iii) Items included in the definition
of U.S. asset. For purposes of this
section, the term U.S. asset includes—
(A) U.S. real property held in a
wholly-owned domestic subsidiary of a
foreign corporation that qualifies as a
bank under section 585(a)(2)(B) (with-
out regard to the second sentence
thereof), provided that the real property
would qualify as used in the foreign
corporation’s trade or business within
the meaning of §1.864–4(c)(2) or (3)
if held directly by the foreign corpora-
tion and either was initially acquired
through foreclosure or similar proceed-
ings or is U.S. real property occupied
by the foreign corporation (the value of
which shall be adjusted by the amount
of any indebtedness that is reflected in
the value of the property);
(B) An asset that produces income
treated as ECI under section 921(d) or
926(b) (relating to certain income of a
FSC and certain dividends paid by a
FSC to a foreign corporation);
(C) An asset that produces income
t r e a t e d a s E C I u n d e r s e c t i o n
953(c)(3)(C) (relating to certain income
of a captive insurance company that a
corporation elects to treat as ECI) that
is not otherwise ECI; and
(D) An asset that produces income
treated as ECI under section 882(e)
(relating to certain interest income of
possessions banks).
(iv) Interbranch transactions. A
transaction of any type between sepa-
rate offices or branches of the same
taxpayer does not create a U.S. asset.
(v) Assets acquired to increase U.S.
assets artificially. An asset shall not be
treated as a U.S. asset if one of the
principal purposes for acquiring or
using that asset is to increase ar-
tificially the U.S. assets of a foreign
corporation on the determination date.
Whether an asset is acquired or used
for such purpose will depend upon all
the facts and circumstances of each
case. Factors to be considered in
determining whether one of the princi-
pal purposes in acquiring or using an
asset is to increase artificially the U.S.
assets of a foreign corporation include
the length of time during which the
asset was used in a U.S. trade or
business, whether the asset was ac-
quired from a related person, and
whether the aggregate value of the U.S.
assets of the foreign corporation in-
creased temporarily on or around the
determination date. A purpose may be
a principal purpose even though it is
outweighed by other purposes (taken
together or separately).
(2) Determination of the value of a
U.S. asset—(i) General rule. The value
of a U.S. asset is the adjusted basis of
the asset for determining gain or loss
from the sale or other disposition of
that item, further adjusted as provided
in paragraph (b)(2)(iii) of this section.
(ii) Fair-market value election—(A)
In general. A taxpayer may elect to
value all of its U.S. assets on the basis
of fair market value, subject to the
requirements of §1.861–9T(g)(1)(iii),
and provided the taxpayer uses the
methodology prescribed in §1.861–
9T(h). Once elected, the fair market
value must be used by the taxpayer for
both Step 1 and Step 2 described in
paragraphs (b) and (c) of this section,
and must be used in all subsequent
taxable years unless the Commissioner
or her delegate consents to a change.
(B) Adjustment to partnership basis.
If a partner makes a fair market value
election under paragraph (b)(2)(ii) of
this section, the value of the partner’s
interest in a partnership that is treated
as an asset shall be the fair market
value of his partnership interest, in-
creased by the fair market value of the
partner’s share of the liabilities deter-
mined under paragraph (c)(2)(vi) of
this section. See §1.884–1(d)(3).
(iii) Reduction of total value of U.S.
assets by amount of bad debt reserves
under section 585—(A) In general. The
total value of loans that qualify as U.S.
assets shall be reduced by the amount
of any reserve for bad debts additions
to which are allowed as deductions
under section 585.
(B) Example. The following example
illustrates the provisions of paragraph
(b)(2)(iii)(A) of this section:
Example. Foreign banks; bad debt reserves.
FC is a foreign corporation that qualifies as a
bank under section 585(a)(2)(B) (without regard
to the second sentence thereof), but is not a large
bank as defined in section 585(c)(2). FC
conducts business through a branch, B, in the
United States. Among B’s U.S. assets are a
portfolio of loans with an adjusted basis of $500.
FC accounts for its bad debts for U.S. federal
income tax purposes under the reserve method,
and B maintains a deductible reserve for bad
debts of $50. Under paragraph (b)(2)(iii) of this
section, the total value of FC’s portfolio of loans
is $450 ($500 — $50).
(iv) Adjustment to basis of financial
instruments. [Reserved]
(3) Computation of total value of
U.S. assets. The total value of U.S.
assets for the taxable year is the
average of the sums of the values
(determined under paragraph (b)(2) of
this section) of U.S. assets. For each
U.S. asset, value shall be computed at
the most frequent, regular intervals for
which data are reasonably available. In
no event shall the value of any U.S.
asset be computed less frequently than
monthly by a large bank (as defined in
section 585(c)(2)) and semi-annually by
any other taxpayer.
(c) Step 2: Determination of total
amount of U.S.-connected liabilities for
the taxable year—(1) General rule.

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The amount of U.S.-connected lia-
bilities for the taxable year equals the
total value of U.S. assets for the
taxable year (as determined under
paragraph (b)(3) of this section) multi-
plied by the actual ratio for the taxable
year (as determined under paragraph
(c)(2) of this section) or, if the
taxpayer has made an election in
accordance with paragraph (c)(4) of
this section, by the fixed ratio.
(2) Computation of the actual
ratio—(i) In general. A taxpayer’s
actual ratio for the taxable year is the
total amount of its worldwide liabilities
for the taxable year divided by the total
value of its worldwide assets for the
taxable year. The total amount of
worldwide liabilities and the total value
of worldwide assets for the taxable
year is the average of the sums of the
amounts of the taxpayer’s worldwide
liabilities and the values of its world-
wide assets (determined under para-
graphs (c)(2)(iii) and (iv) of this
section). In each case, the sums must
be computed semi-annually by a large
bank (as defined in section 585(c)(2))
and annually by any other taxpayer.
(ii) Classification of items. The clas-
sification of an item as a liability or an
asset must be consistent from year to
year and in accordance with U.S. tax
principles.
(iii) Determination of amount of
worldwide liabilities. The amount of a
liability must be determined consist-
ently from year to year and must be
substantially in accordance with U.S.
tax principles. To be substantially in
accordance with U.S. tax principles, the
principles used to determine the
amount of a liability must not differ
from U.S. tax principles to a degree
that will materially affect the value of
taxpayer’s worldwide liabilities or the
taxpayer’s actual ratio.
(iv) Determination of value of world-
wide assets. The value of an asset must
be determined consistently from year to
year and must be substantially in
accordance with U.S. tax principles. To
be substantially in accordance with
U.S. tax principles, the principles used
to determine the value of an asset must
not differ from U.S. tax principles to a
degree that will materially affect the
value of the taxpayer’s worldwide
assets or the taxpayer’s actual ratio.
The value of an asset is the adjusted
basis of that asset for determining the
gain or loss from the sale or other
disposition of that asset, adjusted in the
same manner as the basis of U.S. assets
are adjusted under paragraphs (b)(2)(ii)
through (iv) of this section.
(v) Hedging transactions. [Reserved]
(vi) Treatment of partnership inter-
ests and liabilities. For purposes of
computing the actual ratio, the value of
a partner’s interest in a partnership that
will be treated as an asset is the
partner’s adjusted basis in its part-
nership interest, reduced by the part-
ner’s share of liabilities of the part-
nership as determined under section
752 and increased by the partner’s
share of liabilities determined under
this paragraph (c)(2)(vi). If the partner
has made a fair market value election
under paragraph (b)(2)(ii) of this sec-
tion, the value of its interest in the
partnership shall be increased by the
fair market value of the partner’s share
of the liabilities determined under this
paragraph (c)(2)(vi). For purposes of
this section a partner shares in any
liability of a partnership in the same
proportion that it shares, for income tax
purposes, in the expense attributable to
that liability for the taxable year. A
partner’s adjusted basis in a partnership
interest cannot be less than zero.
(vii) Computation of actual ratio of
insurance companies. [Reserved]
(viii) Interbranch transactions. A
transaction of any type between sepa-
rate offices or branches of the same
taxpayer does not create an asset or a
liability.
(ix) Amounts must be expressed in a
single currency. The actual ratio must
be computed in either U.S. dollars or
the functional currency of the home
office of the taxpayer, and that cur-
rency must be used consistently from
year to year. For example, a taxpayer
that determines the actual ratio an-
nually using British pounds converted
at the spot rate for financial reporting
purposes must translate the U.S. dollar
values of assets and amounts of lia-
bilities of the U.S. trade or business
into pounds using the spot rate on the
last day of its taxable year. The district
director or the Assistant Commissioner
(International) may require that the
actual ratio be computed in dollars if
the functional currency of the tax-
payer’s home office is a hyperinflation-
ary currency, as defined in §1.985–1,
that materially distorts the actual ratio.
(3) Adjustments. The District Direc-
tor or the Assistant Commissioner
(International) may make appropriate
adjustments to prevent a foreign corpo-
ration from intentionally and artificially
increasing its actual ratio. For example,
the District Director or the Assistant
Commissioner (International) may off-
set a loan made from or to one person
with a loan made to or from another
person if any of the parties to the loans
are related persons, within the meaning
of section 267(b) or 707(b)(1), and one
of the principal purposes for entering
into the loans was to increase ar-
tificially the actual ratio of a foreign
corporation. A purpose may be a
principal purpose even though it is
outweighed by other purposes (taken
together or separately).
(4) Elective fixed ratio method of
determining U.S. liabilities. A taxpayer
that is a bank as defined in section
585(a)(2)(B)(without regard to the sec-
ond sentence thereof) may elect to use
a fixed ratio of 93 percent in lieu of
the actual ratio. A taxpayer that is
neither a bank nor an insurance com-
pany may elect to use a fixed ratio of
50 percent in lieu of the actual ratio.
(5) Examples. The following exam-
ples illustrate the application of para-
graph (c) of this section:
Example 1. Classification of item not in
accordance with U.S. tax principles. Bank Z, a
resident of country X, has a branch in the United
States through which it conducts its banking
business. In preparing its financial statements in
country X, Z treats an instrument documented as
perpetual subordinated debt as a liability. Under
U.S. tax principles, however, this instrument is
treated as equity. Consequently, the classification
of this instrument as a liability for purposes of
paragraph (c)(2)(iii) of this section is not in
accordance with U.S. tax principles.
Example 2. Valuation of item not substantially
in accordance with U.S. tax principles. Bank Z, a
resident of country X, has a branch in the United
States through which it conducts its banking
business. Bank Z is a large bank as defined in
section 585(c)(2). The tax rules of country X
allow Bank Z to take deductions for additions to
certain reserves. Bank Z decreases the value of
the assets on its financial statements by the
amounts of the reserves. The additions to the
reserves under country X tax rules cause the
value of Bank Z’s assets to differ from the value
of those assets determined under U.S. tax
principles to a degree that materially affects the
value of taxpayer’s worldwide assets. Conse-
quently, the valuation of Bank Z’s worldwide
assets under country X tax principles is not
substantially in accordance with U.S. tax princi-
ples. Bank Z must increase the value of its
worldwide assets under paragraph (c)(2)(iii) of
this section by the amount of its country X
reserves.
Example 3. Valuation of item substantially in
accordance with U.S. tax principles. Bank Z, a
resident of country X, has a branch in the United
States through which it conducts its banking
business. In determining the value of its world-
wide assets, Bank Z computes the adjusted basis

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of certain non-U.S. assets according to the
depreciation methodology provided under coun-
try X tax laws, which is different than the
depreciation methodology provided under U.S.
tax law. If the depreciation methodology
provided under country X tax laws does not
differ from U.S. tax principles to a degree that
materially affects the value of Bank Z’s world-
wide assets or Bank Z’s actual ratio as computed
under paragraph (c)(2) of this section, then the
valuation of Bank Z’s worldwide assets under
paragraph (c)(2)(iv) of this section is substan-
tially in accordance with U.S. tax principles.
Example 4. [Reserved]
Example 5. Adjustments. FC is a foreign
corporation engaged in the active conduct of a
banking business through a branch, B, in the
United States. P, an unrelated foreign corpora-
tion, deposits $100,000 in the home office of FC.
Shortly thereafter, in a transaction arranged by
the home office of FC, B lends $80,000 bearing
interest at an arm’s length rate to S, a wholly
owned U.S. subsidiary of P. The district director
or the Assistant Commissioner (International)
determines that one of the principal purposes for
making and incurring such loans is to increase
FC’s actual ratio. For purposes of this section,
therefore, P is treated as having directly lent
$80,000 to S. Thus, for purposes of paragraph (c)
of this section (Step 2), the District Director or
the Assistant Commissioner (International) may
offset FC’s liability and asset arising from this
transaction, resulting in a net liability of $20,000
that is not a booked liability of B. Because the
loan to S from B was initiated and arranged by
the home office of FC, with no material
participation by B, the loan to S will not be
treated as a U.S. asset.
(d) Step 3: Determination of amount
of interest expense allocable to ECI
under the adjusted U.S. booked lia-
bilities method—(1) General rule. The
adjustment to the amount of interest
expense paid or accrued on U.S.
booked liabilities is determined by
comparing the amount of U.S.-
connected liabilities for the taxable
year, as determined under paragraph (c)
of this section, with the average total
amount of U.S. booked liabilities, as
determined under paragraphs (d)(2) and
(3) of this section. If the average total
amount of U.S. booked liabilities
equals or exceeds the amount of U.S.-
connected liabilities, the adjustment to
the interest expense on U.S. booked
liabilities is determined under para-
graph (d)(4) of this section. If the
amount of U.S.-connected liabilities
exceeds the average total amount of
U.S. booked liabilities, the adjustment
to the amount of interest expense paid
or accrued on U.S. booked liabilities is
determined under paragraph (d)(5) of
this section.
(2) U.S. booked liabilities—(i) In
general. A liability is a U.S. booked
liability if it is properly reflected on the
books of the U.S. trade or business,
within the meaning of paragraph
(d)(2)(ii) or (iii) of this section.
(ii) Properly reflected on the books
of the U.S. trade or business of a
foreign corporation that is not a
bank—(A) In general. A liability,
whether interest bearing or non-interest
bearing, is properly reflected on the
books of the U.S. trade or business of a
foreign corporation that is not a bank
as described in section 585(a)(2)(B)
(without regard to the second sentence
thereof) if—
(1) The liability is secured predomi-
nantly by a U.S. asset of the foreign
corporation;
(2) The foreign corporation enters
the liability on a set of books relating
to an activity that produces ECI at a
time reasonably contemporaneous with
the time at which the liability is
incurred; or
(3) The foreign corporation main-
tains a set of books and records
relating to an activity that produces
ECI and the District Director or Assist-
ant Commissioner (International) deter-
mines that there is a direct connection
or relationship between the liability and
that activity. Whether there is a direct
connection between the liability and an
activity that produces ECI depends on
the facts and circumstances of each
case.
(B)Identified liabilities not prop-
erly reflected. A liability is not prop-
erly reflected on the books of the U.S.
trade or business merely because a
foreign corporation identifies the lia-
bility pursuant to §1.884–4(b)(1)(ii)
and (b)(3).
(iii) Properly reflected on the books
of the U.S. trade or business of a
foreign corporation that is a bank—(A)
In general. A liability, whether interest
bearing or non-interest bearing, is
properly reflected on the books of the
U.S. trade or business of a foreign
corporation that is a bank as described
in section 585(a)(2)(B) (without regard
to the second sentence thereof) if—
(1) The bank enters the liability on a
set of books relating to an activity that
produces ECI before the close of the
day on which the liability is incurred;
and
(2) There is a direct connection or
relationship between the liability and
that activity. Whether there is a direct
connection between the liability and an
activity that produces ECI depends on
the facts and circumstances of each
case.
(B) Inadvertent error. If a bank fails
to enter a liability in the books of the
activity that produces ECI before the
close of the day on which the liability
was incurred, the liability may be
treated as a U.S. booked liability only
if, under the facts and circumstances,
the taxpayer demonstrates a direct
connection or relationship between the
liability and the activity that produces
ECI and the failure to enter the liability
in those books was due to inadvertent
error.
(iv) Liabilities of insurance com-
panies. [Reserved]
(v) Liabilities used to increase ar-
tificially interest expense on U.S.
booked liabilities. U.S. booked lia-
bilities shall not include a liability if
one of the principal purposes for
incurring or holding the liability is to
increase artificially the interest expense
on the U.S. booked liabilities of a
foreign corporation. Whether a liability
is incurred or held for the purpose of
artificially increasing interest expense
will depend upon all the facts and
circumstances of each case. Factors to
be considered in determining whether
one of the principal purposes for
incurring or holding a liability is to
increase artificially the interest expense
on U.S. booked liabilities of a foreign
corporation include whether the interest
expense on the liability is excessive
when compared to other liabilities of
the foreign corporation denominated in
the same currency and whether the
currency denomination of the liabilities
of the U.S. branch substantially
matches the currency denomination of
the U.S. branch’s assets. A purpose
may be a principal purpose even
though it is outweighed by other
purposes (taken together or separately).
( v i ) H e d g i n g t r a n s a c t i o n s.
[Reserved]
(vii) Amount of U.S. booked lia-
bilities of a partner. A partner’s share
of liabilities of a partnership is consid-
ered a booked liability of the partner
provided that it is properly reflected on
the books (within the meaning of
paragraph (d)(2)(ii) of this section) of
the U.S. trade or business of the
partnership.
(viii) Interbranch transactions. A
transaction of any type between sepa-
rate offices or branches of the same
taxpayer does not result in the creation
of a liability.
(3) Average total amount of U.S.
booked liabilities. The average total

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amount of U.S. booked liabilities for
the taxable year is the average of the
sums of the amounts (determined under
paragraph (d)(2) of this section) of U.S.
booked liabilities. The amount of U.S.
booked liabilities shall be computed at
the most frequent, regular intervals for
which data are reasonably available. In
no event shall the amount of U.S.
booked liabilities be computed less
frequently than monthly by a large
bank (as defined in section 585(c)(2))
and semi-annually by any other
taxpayer.
(4) Interest expense where U.S.
booked liabilities equal or exceed U.S.
liabilities—(i) In general. If the aver-
age total amount of U.S. booked
liabilities (as determined in paragraphs
(d)(2) and (3) of this section) exceeds
the amount of U.S.-connected liabilities
(as determined under paragraph (c) of
this section (Step 2)), the interest
expense allocable to ECI is the product
of the total amount of interest paid or
accrued within the taxable year by the
U.S. trade or business on U.S. booked
liabilities and the scaling ratio set out
in paragraph (d)(4)(ii) of this section.
For purposes of this section, the
reduction resulting from the application
of the scaling ratio is applied pro-rata
to all interest expense paid or accrued
by the foreign corporation. A similar
reduction in income, expense, gain, or
loss from a hedging transaction (as
described in paragraph (d)(2)(vi) of this
section) must also be determined by
multiplying such income, expense,
gain, or loss by the scaling ratio. If the
average total amount of U.S. booked
liabilities (as determined in paragraph
(d)(3) of this section) equals the
amount of U.S.-connected liabilities (as
determined under Step 2), the interest
expense allocable to ECI is the total
amount of interest paid or accrued
within the taxable year by the U.S.
trade or business on U.S. booked
liabilities.
(ii) Scaling ratio. For purposes of
this section, the scaling ratio is a
fraction the numerator of which is the
amount of U.S.-connected liabilities
and the denominator of which is the
average total amount of U.S. booked
liabilities.
(iii) Special rules for insurance
companies. [Reserved]
(5) U.S.-connected interest rate
where U.S. booked liabilities are less
than U.S.-connected liabilities—(i) In
general. If the amount of U.S.-
connected liabilities (as determined
under paragraph (c) of this section
(Step 2)) exceeds the average total
amount of U.S. booked liabilities, the
interest expense allocable to ECI is the
total amount of interest paid or accrued
within the taxable year by the U.S.
trade or business on U.S. booked
liabilities, plus the excess of the
amount of U.S.-connected liabilities
over the average total amount of U.S.
booked liabilities multiplied by the
interest rate determined under para-
graph (d)(5)(ii) of this section.
(ii) Interest rate on excess U.S.-
connected liabilities. The applicable
interest rate on excess U.S.-connected
liabilities is determined by dividing the
total interest expense paid or accrued
for the taxable year on U.S.-dollar
liabilities shown on the books of the
offices or branches of the foreign
corporation outside the United States
by the average U.S.-dollar denominated
liabilities (whether interest-bearing or
not) shown on the books of the offices
or branches of the foreign corporation
outside the United States for the
taxable year.
(6) Examples. The following exam-
ples illustrate the rules of this section:
Example 1. Computation of interest expense;
actual ratio—(i) Facts. (A) FC is a foreign
corporation that is not a bank and that actively
conducts a real estate business through a branch,
B, in the United States. For the taxable year,
FC’s balance sheet and income statement is as
follows (assume amounts are in U.S. dollars and
computed in accordance with paragraphs (b)(2)
and (b)(3) of this section):
Value
Asset 1$2,000
Asset 2$2,500
Asset 3$5,500
AmountInterest
Expense
Liability 1$ 80056
Liability 2$3,200256
Capital$6,0000
(B) Asset 1 is the stock of FC’s wholly-owned
domestic subsidiary that is also actively engaged
in the real estate business. Asset 2 is a building
in the United States producing rental income that
is entirely ECI to FC. Asset 3 is a building in
the home country of FC that produces rental
income. Liabilities 1 and 2 are loans that bear
interest at the rates of 7% and 8%, respectively.
Liability 1 is a booked liability of B, and
Liability 2 is booked in FC’s home country.
Assume that FC has not elected to use the fixed
ratio in Step 2.
(ii) Step 1. Under paragraph (b)(1) of this
section, Assets 1 and 3 are not U.S. assets, while
Asset 2 qualifies as a U.S. asset. Thus, under
paragraph (b)(3) of this section, the total value of
U.S. assets for the taxable year is $2,500, the
value of Asset 2.
(iii) Step 2. Under paragraph (c)(1) of this
section, the amount of FC’s U.S.-connected
liabilities for the taxable year is determined by
multiplying $2,500 (the value of U.S. assets
determined under Step 1) by the actual ratio for
the taxable year. The actual ratio is the average
amount of FC’s worldwide liabilities divided by
the average value of FC’s worldwide assets. The
amount of Liability 1 is $800, and the amount of
Liability 2 is $3,200. Thus, the numerator of the
actual ratio is $4,000. The average value of
worldwide assets is $10,000 (Asset 1 + Asset 2 +
Asset 3). The actual ratio, therefore, is 40%
($4,000/$10,000), and the amount of U.S.-
connected liabilities for the taxable year is
$1,000 ($2,500 U.S. assets 2 40%).
(iv) Step 3. Because the amount of FC’s U.S.-
connected liabilities ($1,000) exceeds the average
total amount of U.S. booked liabilities of B
($800), FC determines its interest expense in
accordance with paragraph (d)(5) of this section
by adding the interest paid or accrued on U.S.
booked liabilities, and the interest expense
associated with the excess of its U.S.-connected
liabilities over its average total amount of U.S.
booked liabilities. Under paragraph (d)(5)(ii) of
this section, FC determines the interest rate
attributable to its excess U.S.-connected lia-
bilities by dividing the interest expense paid or
accrued by the average amount of U.S.-dollar
denominated liabilities, which produces an inter-
est rate of 8% ($256/$3200). Therefore, FC’s
allocable interest expense is $72 ($56 of interest
expense from U.S. booked liabilities plus $16
($200 2 8%) of interest expense attributable to
its excess U.S.-connected liabilities).
Example 2. Computation of interest expense;
fixed ratio—(i) The facts are the same as in
Example 1, except that FC makes a fixed ratio
election under paragraph (c)(4) of this section.
The conclusions under Step 1 are the same as in
Example 1.
(ii) Step 2. Under paragraph (c)(1) of this
section, the amount of U.S.-connected liabilities
for the taxable year is determined by multiplying
$2,500 (the value of U.S. assets determined
under Step 1) by the fixed ratio for the taxable
year, which, under paragraph (c)(4) of this
section is 50 percent. Thus, the amount of U.S.-
connected liabilities for the taxable year is
$1,250 ($2,500 U.S. assets 2 50%).
(iii) Step 3. As in Example 1, the amount of
FC’s U.S.-connected liabilities exceed the aver-
age total amount of U.S. booked liabilities of B,
requiring FC to determine its interest expense
under paragraph (d)(5) of this section. In this
case, however, FC has excess U.S.-connected
liabilities of $450 ($1,250 of U.S.-connected
liabilities — $800 U.S. booked liabilities). FC
therefore has allocable interest expense of $92
($56 of interest expense from U.S. booked
liabilities plus $36 ($450 2 8%) of interest
expense attributable to its excess U.S.-connected
liabilities).
Example 3. Scaling ratio.—(i) Facts. Bank Z,
a resident of country X, has a branch in the
United States through which it conducts its
banking business. For the taxable year, Z has
U.S.-connected liabilities, determined under para-
graph (c) of this section, equal to $300. Z,
however, has U.S. booked liabilities of $300 and
U500. Therefore, assuming an exchange rate of
the U to the U.S. dollar of 5:1, Z has U.S.
booked liabilities of $400 ($300 + (U500 3 5)).
(ii) U.S.-connected liabilities. Because Z’s
U.S. booked liabilities of $400 exceed its U.S.-

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connected liabilities by $100, all of Z’s interest
expense allocable to its U.S. trade or business
must be scaled back pro-rata. To determine the
scaling ratio, Z divides its U.S.-connected
liabilities by its U.S. booked liabilities, as
required by paragraph (d)(4) of this section. Z’s
interest expense is scaled back pro rata by the
resulting ratio of
3
⁄4 ($300 3 $400). Z’s income,
expense, gain or loss from hedging transactions
described in paragraph (d)(2)(vi) of this section
must be similarly reduced.
Example 4. [Reserved]
( e ) S e p a r a t e c u r r e n c y p o o l s
method—(1) General rule. If a foreign
corporation elects to use the method in
this paragraph, its total interest expense
allocable to ECI is the sum of the
separate interest deductions for each of
the currencies in which the foreign
corporation has U.S. assets. The sepa-
rate interest deductions are determined
under the following three-step process.
(i) Determine the value of U.S. assets
in each currency pool. First, the
foreign corporation must determine the
amount of its U.S. assets, using the
methodology in paragraph (b) of this
section, in each currency pool. The
foreign corporation may convert into
U.S. dollars any currency pool in
which the foreign corporation holds
less than 3% of its U.S. assets. A
transaction (or transactions) that hedges
a U.S. asset shall be taken into account
for purposes of determining the cur-
rency denomination and the value of
the U.S. asset.
(ii) Determine the U.S.-connected
liabilities in each currency pool. Sec-
ond, the foreign corporation must de-
termine the amount of its U.S.-
connected liabilities in each currency
pool by multiplying the amount of U.S.
assets (as determined under paragraph
(b)(3) of this section) in the currency
pool by the foreign corporation’s actual
ratio (as determined under paragraph
(c)(2) of this section) for the taxable
year or, if the taxpayer has made an
election in accordance with paragraph
(c)(4) of this section, by the fixed ratio.
(iii) Determine the interest expense
attributable to each currency pool.
Third, the foreign corporation must
determine the interest expense attributa-
ble to each currency pool by multiply-
ing the U.S.-connected liabilities in
each currency pool by the prescribed
interest rate as defined in paragraph
(e)(2) of this section.
(2) Prescribed interest rate. For each
currency pool, the prescribed interest
rate is determined by dividing the total
interest expense that is paid or accrued
for the taxable year with respect to the
foreign corporation’s worldwide lia-
bilities denominated in that currency,
by the foreign corporation’s average
worldwide liabilities (whether interest
bearing or not) denominated in that
currency. The interest expense and
liabilities are to be stated in that
currency.
(3) Hedging transactions. [Reserved]
(4) Election not available if excessive
hyperinflationary assets. The election to
use the separate currency pools method
of this paragraph (e) is not available if
the value of the foreign corporation’s
U.S. assets denominated in a hyperinfla-
tionary currency, as defined in §1.985–1,
exceeds ten percent of the value of the
foreign corporation’s total U.S. assets. If
a foreign corporation made a valid
election to use the separate currency
pools method in a prior year but no
longer qualifies to use such method
pursuant to this paragraph (e)(4), the tax-
payer must use the method provided by
paragraphs (b) through (d) of this section.
(5) Examples. The separate currency
pools method of this paragraph (e) is
illustrated by the following examples:
Example 1. Separate currency pools method—
(i) Facts. (A) Bank Z, a resident of country X,
has a branch in the United States through which
it conducts its banking business. For its 1997
taxable year, Z has U.S. assets, as defined in
paragraph (b) of this section, that are denomi-
nated in U.S. dollars and in U, the country X
currency. Accordingly, Z’s U.S. assets are as
follows:
Average Value
U.S. Dollar Assets$20,000
U AssetsU 5,000
(B) Z’s worldwide liabilities are also denomi-
nated in U.S. dollars and in U. The average
interest rates on Z’s worldwide liabilities, includ-
ing those in the United States, are 6% on its U.S.
dollar liabilities, and 12% on its liabilities
denominated in U. Assume that Z has properly
elected to use its actual ratio of 95% to
determine its U.S.-connected liabilities in Step 2,
and has also properly elected to use the separate
currency pools method provided in paragraph (e)
of this section.
(ii) Determination of interest expense. Z
determines the interest expense attributable to its
U.S.-connected liabilities according to the steps
described below.
(A) First, Z separates its U.S. assets into two
currency pools, one denominated in U.S. dollars
($20,000) and the other denominated in U
(U5,000).
(B) Second, Z multiplies each pool of assets
by the applicable ratio of worldwide liabilities to
assets, which in this case is 95%. Thus, Z has
U.S.-connected liabilities of $19,000 ($20,000 2
95%), and U4750 (U5000 2 95%).
(C) Third, Z calculates its interest expense by
multiplying each pool of its U.S.-connected
liabilities by the relevant interest rates. Accord-
ingly, Z’s allocable interest expense for the year
is $1140 ($19,000 2 6%), the sum of the
expense associated with its U.S. dollar liabilities,
plus U570 (U4750 2 12%), the interest expense
associated with its liabilities denominated in U. Z
must translate its interest expense denominated in
U in accordance with the rules provided in
section 988, and then must determine whether it
is subject to any other provision of the Code that
would disallow or defer any portion of its
interest expense so determined.
Example 2. [Reserved]
(f) Effective date—(1) General rule.
This section is effective for taxable
years beginning on or after June 6,
1996.
(2) Special rules for financial prod-
ucts. [Reserved]
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved February 28, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
March 5, 1996, 8:45 a.m., and published in the
issue of the Federal Register for March 8,
1996, 61 F.R. 9326)
Section 1274.—Determination of
Issue Price in the Case of Certain
Debt Instruments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468,
482, 483, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate, and
the long-term exempt rate. For pur-
poses of sections 1274, 1288, 382, and
other sections of the Code, tables set
forth the rates for April 1996.
Rev. Rul. 96–19
This revenue ruling provides various
prescribed rates for federal income tax
purposes for April 1996 (the current
month.) Table 1 contains the short-
term, mid-term, and long-term applica-
ble federal rates (AFR) for the current
month for purposes of section 1274(d)
of the Internal Revenue Code. Table 2
contains the short-term, mid-term, and
long-term adjusted applicable federal
rates (adjusted AFR) for the current
month for purposes of section 1288(b).

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Table 3 sets forth the adjusted federal
long-term rate and the long-term tax-
exempt rate described in section 382(f).
Table 4 contains the appropriate per-
centages for determining the low-
income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Fi-
nally, Table 5 contains the federal rate
for determining the present value of an
annuity, an interest for life or for a
term of years, or a remainder or a
reversionary interest for purposes of
section 7520.
REV. RUL. 96–19 TABLE 1
Applicable Federal Rates (AFR) for April 1996
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR5.33%5.26%5.23%5.20%
110% AFR5.87%5.79%5.75%5.72%
120% AFR6.41%6.31%6.26%6.23%
130% AFR6.96%6.84%6.78%6.74%
Mid-Term
AFR5.88%5.80%5.76%5.73%
110% AFR6.48%6.38%6.33%6.30%
120% AFR7.08%6.96%6.90%6.86%
130% AFR7.68%7.54%7.47%7.42%
150% AFR8.89%8.70%8.61%8.55%
175% AFR10.41%10.15%10.02%9.94%
Long-Term
AFR6.51%6.41%6.36%6.33%
110% AFR7.17%7.05%6.99%6.95%
120% AFR7.84%7.69%7.62%7.57%
130% AFR8.50%8.33%8.25%8.19%
REV. RUL. 96–19 TABLE 2
Adjusted AFR for April 1996
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
adjusted AFR
3.40%3.37%3.36%3.35%
Mid-term
adjusted AFR
4.37%4.32%4.30%4.28%
Long-term
adjusted AFR
5.31%5.24%5.21%5.18%
REV. RUL. 96–19 TABLE 3
Rates Under Section 382 for April 1996
Adjusted federal long-term rate for the current month5.31%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)5.31%

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REV. RUL. 96–19 TABLE 4
Appropriate Percentages Under Section 42(b)(2)
for April 1996
Appropriate percentage for the 70% present value low-income housing credit8.45%
Appropriate percentage for the 30% present value low-income housing credit3.62%
REV. RUL. 96-19 TABLE 5
Rate Under Section 7520 for April 1996
Applicable federal rate for determining the present value of an annuity, an interest for life or a term
of years, or a remainder or reversionary interest7.0%
Section 1288.—Treatment of Original
Issue Discount on Tax-Exempt
Obligations
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for
the month of April 1996. See Rev. Rul. 96–19,
page 24.
Section 7520.—Valuation Tables
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for
the month of April 1996. See Rev. Rul. 96–19,
page 24.
Section 7872.—Treatment of Loans
with Below-Market Interest Rates
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for
the month of April 1996. See Rev. Rul. 96–19,
page 24.

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Part III.Administrative, Procedural, and Miscellaneous
Interest Netting Study
Notice 96–18
This Notice invites public comment
in connection with the Internal Reve-
nue Service’s and Treasury’s study of
‘‘interest netting.’’ This study was
initially described in Announcement
96–5, ‘‘Administrative Initiatives to
Enhance Taxpayer Rights,’’ 1996–4
I.R.B. 99 at 101 (January 22, 1996).
BACKGROUND
The Internal Revenue Code provides
that taxpayers who underpay their taxes
generally must pay interest to the
government for the period of the
underpayment. Section 6601. The IRS
has limited authority to abate the
interest that is required by statute.
Section 6404.
The Code likewise generally requires
the government to pay interest to
taxpayers with respect to any overpay-
ment of taxes. Section 6611. There are,
however, a number of limitations on
the government’s liability for interest,
including the rule that no interest is
payable with respect to a tax refund
claimed for a current year if the refund
is issued within 45 days of the last day
prescribed for filing a return claiming
the refund. Section 6611(e).
Prior to enactment of the Tax Re-
form Act of 1986, the same interest
rate applied to underpayments and
overpayments. The Tax Reform Act of
1986, however, provided for the inter-
est rate charged on underpayments to
be one percentage point higher than the
interest rate paid on overpayments. See
§§6621(a)(1) and (2). The Omnibus
Budget Reconciliation Act of 1990
added that, under certain conditions,
the interest rate on large corporate
underpayments would be 3 percentage
points higher than the interest rate on
overpayments. The Uruguay Round
Agreements Act, enacted in 1994,
increased the differential between large
corporate underpayments and certain
corporate overpayments to 4.5 percent-
age points. See §§6621(a)(1) and (c).
If an overpayment is credited against
an underpayment, the effect of these
interest rate differences is reduced.
Section 6601(f) provides:
If any portion of a tax is satisfied by
credit of an overpayment, then no
interest shall be imposed .. . on the
portion of the tax so satisfied for any
period during which, if the credit had
not been made, interest would have
been allowable with respect to such
overpayment.
Section 6402(a) provides general
authority for the IRS to credit an
overpayment against an underpayment.
This section states:
In the case of any overpayment, the
Secretary, within the applicable period
of limitations, may credit the amount of
such overpayment, including any inter-
est allowed thereon, against any lia-
bility in respect of an internal revenue
tax on the part of the person who made
the overpayment and shall .. . refund
any balance to such person.
Section 301.6402–1 of the Regula-
tions on Procedure and Administration
provides that the Commissioner may
credit any overpayment of tax against
any ‘‘outstanding liability’’ for any tax.
Congress has recognized the poten-
tial burden that the interest rate dif-
ferential places on taxpayers who have
both overpayments and underpayments.
Thus, each time Congress has increased
the interest rate differential, Congress
has stated in legislative history that the
Service should implement the most
comprehensive procedures ‘‘consistent
with sound administrative practice’’ to
allow overpayments to be credited
against underpayments. See H.R. Conf.
Rep. No. 841, 99th Cong., 2d. Sess.,
1986–3 C.B. (Vol. 4) 785 (accompany-
ing the Tax Reform Act of 1986); H.R.
Conf. Rep. No. 964, 101st Cong., 2d
Sess., 1991–2 C.B. 591 (accompanying
the Omnibus Budget Reconciliation Act
of 1990); H.R. Rep. No. 826, 103d
Cong., 2d Sess., 1995–1 C.B. 254
(accompanying the Uruguay Round
Agreements Act).
The Service has developed substan-
tial crediting procedures to implement
interest netting. For example:
(a) The Service will consider all
increases and decreases in a taxpayer’s
liabilities within a single tax year
before applying the statutory interest
rules to that year. Rev. Proc. 94–60,
1994–2 C.B. 774, provides that a
taxpayer will not be charged the
d i f f e r e n t i a l i n t e r e s t r a t e u n d e r
§ 6621(a) on an underpayment that is
satisfied by credit of an overpayment
arising in the same taxable year. This
interest netting procedure is referred to
as ‘‘annual interest netting.’’
(b) The Service permits crediting of
overpayments against underpayments
for the period of time when the
underpayments and overpayments are
both unpaid and outstanding, even if
they are from different tax years or for
different types of tax. This procedure
for interest netting is referred to as
‘‘offsetting.’’
The Service, however, generally does
not net interest where a taxpayer
realizes an overpayment in one tax year
that overlaps with a deficiency that a
taxpayer has already paid for a dif-
ferent tax year. Likewise, the Service
generally does not net interest where an
unpaid deficiency in one tax year
overlaps with an overpayment that the
Service has already paid for a different
tax year. This kind of interest netting is
referred to as ‘‘global interest netting.’’
The Eighth Circuit recently ad-
dressed whether the Service is required
to perform global interest netting cal-
culations. Northern States Power Co.
v. United States, 73 F.3d 764 (8th Cir.
1996). Interpreting §§ 6402(a) and
301.6402–1, the Eighth Circuit held
that where the taxpayer’s liability was
fully paid, there was no ‘‘outstanding
liability’’ against which to net the
taxpayer’s subsequent overpayment.
The court further held that the Service,
in any event, has the discretion whether
to credit overpayments against under-
payments.
REQUEST FOR PUBLIC COMMENT
Many taxpayers and practitioners
have suggested that the Service adopt
global interest netting procedures.
Global interest netting, however, raises
a number of legal, policy and admin-
istrative issues. Thus, Announcement
96–5 states that the Service will
conduct a study of these issues and
solicit public comments for the study.
Legal and Policy Issues of Global
Interest Netting
As described above, global interest
netting would allow the taxpayer or the
Service to recalculate interest for a
certain period of time whenever a
taxpayer has either a new overpayment
that overlaps with an underpayment
that the taxpayer has already paid to
the Service, or a new underpayment
that overlaps with an overpayment that

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the Service has already paid to the
taxpayer. The Service requests com-
ments on the following issues:
1. In view of the policy generally
favoring the finality of tax determina-
tions, should a rule concerning the
finality of global interest netting com-
putations be adopted, and, if so, what
should that rule be? What effect, if
any, should the statute of limitations
have on global interest netting, par-
ticularly considering the language in
§ 6402(a) regarding the applicable
period of limitations? Should the stat-
ute of limitations be kept open longer
in light of global interest netting?
2. When would it be appropriate for
the Service to net interest globally for a
particular tax year or period? For
example, would it be appropriate to net
interest globally before the final deci-
sion of an appeal or court decision for a
tax period overlapping with the period
at issue that might affect the interest
calculation for such period? Would it be
appropriate to net interest globally be-
fore the final decision of an appeal or
court decision for a tax period that does
not overlap with the period at issue, if
such decision could produce an adjust-
ment, such as a net operating loss or
credit, that might affect the interest
calculation for such period?
3. What would be the effect of
carrybacks and carryforwards (e.g., net
operating losses, various credits, etc.)
on the global interest netting calcula-
tion for a certain period? Would
carrybacks and carryforwards always
require a recalculation of interest for
such period? Or should global interest
netting calculations only be made after
carryforwards and carrybacks that
might affect the period at issue are
finally determined? How would the
analysis be affected by the restricted
interest provisions of §§6601(d) and
6611(f)?
4. Does global interest netting pres-
ent any unique implications for tax-
payers filing consolidated returns?
5. How would global interest netting
affect §861 allocations or interact with
other U.S. international tax provisions?
Administrative Issues
The Service’s computer system does
not have the data storage capacity to
keep information concerning paid defi-
ciencies and paid refunds on line. The
Service thus cannot make global inter-
est netting calculations on its computer
system but must instead retrieve the
data on paid deficiencies and paid
refunds from its computer storage files
and then manually make the interest
calculations. This procedure could en-
tail a significant additional commitment
of IRS resources, primarily because of
the need to verify the accuracy and
completeness of the data necessary to
make a global interest netting calcula-
tion and ensure an accurate calculation.
Accordingly, the Service requests the
following comments:
1. To the extent that taxpayers or
practitioners currently make global in-
terest netting calculations for them-
selves or their clients, the Service
would like to receive a detailed de-
scription of how those calculations are
performed, the cost of performing those
calculations, and the reasons why the
method used by particular taxpayers or
practitioners would be appropriate for
the Service to apply to large numbers
of taxpayers without requiring signifi-
cant additional Service resources.
2. How should the Service fulfill its
obligation to verify the accuracy and
completeness of all taxpayer data rele-
vant to make a global interest netting
calculation for a particular period,
given the Service’s computer data
storage limitations?
Time and Address for Comments
The Service and Treasury would
appreciate written comments on the
above issues. Comments should be
submitted by June 30, 1996, to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Attn: CC:DOM:CORP:T:R:IT&A
(Branch 1) Room 5228
Washington, DC 20044
The comments you submit will be
available for public inspection and
copying.
DRAFTING INFORMATION
For further information regarding
this notice, contact Joel Rutstein on
(202) 622-4530 (not a toll-free call).
Study of Certain Joint Return and
Community Property Issues For
Divorced and Separated Taxpayers
Notice 96–19
This Notice invites public comments
for a study being conducted by the
Service and Treasury on certain joint
return and community property issues,
particularly as they affect divorced and
separated taxpayers. This study was
initially described in Announcement
96–5, ‘‘Administrative Initiatives to
Enhance Taxpayer Rights,’’ 1996–4
I.R.B. 99 at 101 (Jan. 22, 1996).
BACKGROUND
Section 6013(a) of the Internal Reve-
nue Code generally provides that
spouses may file a joint return even
though one of the spouses has neither
gross income nor deductions. Section
6013(d)(3) states that spouses are
jointly and severally liable for the taxes
on a joint return.
For married taxpayers who filed
jointly but then divorce or separate,
joint and several liability means that a
former spouse remains liable for all
taxes, additions to tax, penalties and
interest due with respect to the joint
return even if all the income was
earned by the other spouse. This
liability remains regardless of the terms
of any divorce decree or separation
agreement.
Congress was concerned that the
joint and several liability standard
could unfairly attribute tax liability on
a joint return to a spouse who should
not be held liable for such taxes under
certain circumstances. Congress thus
enacted the innocent spouse provisions
of §6013(e). Section 6013(e), however,
establishes a detailed set of require-
ments that must be met to obtain
innocent spouse relief. As a result, the
innocent spouse provisions do not
apply in many situations.
‘‘Community property’’ laws also
present unique issues for divorced or
separated taxpayers. Community prop-
erty laws generally consider each
spouse to own one-half of the com-
munity income of the spouses. Consis-
tent with these general principles of
community property laws, the Supreme
Court in 1930 held that spouses who
live in community property jurisdic-
tions but file separate returns must each
include half of the community income
in his or her return, even if all the
income was earned by one spouse. Poe
v. Seaborn, 282 U.S. 101 (1930).
Under this rule, each spouse would be
liable for taxes, additions to tax,
penalties and interest due with respect

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to the amount required to be reported
on his or her return.
Congress recognized that the rule of
Poe v. Seaborn could cause hardship
for taxpayers in community property
states. Congress thus amended the
Internal Revenue Code to provide that
under certain conditions, the com-
munity property laws would be dis-
regarded in determining certain types
of income for federal income tax
purposes. In particular, §§66 and
879(a) overrule Poe v. Seaborn, in part,
generally by taxing income to the
spouse who earned, managed or con-
trolled such income. The requirements
of these sections, however, can be
difficult to meet and they do not apply
in many situations.
The community property laws also
present unique issues regarding which
assets and income may be collected to
satisfy federal tax liabilities. For exam-
ple, all or a portion of the community
property of the spouses may be used to
satisfy a separate tax obligation of one
spouse, even if the tax arose before the
marriage or even during a previous
marriage.
REQUEST FOR PUBLIC COMMENT
The Service and Treasury are study-
ing the effects of certain proposals to
change current law regarding the tax
treatment of divorced and separated
taxpayers. The Service and Treasury
request comments on the following
proposals:
A.Replace the Joint and Several Lia-
bility Standard with a Proportionate
Liability Standard
A proportionate liability standard
would hold each spouse liable for only
that portion of the tax attributable to a
joint return that relates to that spouse’s
contribution to the aggregate joint
return tax liability of both spouses.
Please comment on the effects of
changing the current joint and several
liability standard to a proportionate
liability standard, particularly as it
would affect divorced and separated
taxpayers. Comments on the following
issues would be particularly helpful:
1. How would such a system work if
the former spouses are not cooperating
with one another, or with the Service,
regarding their respective shares of the
tax liability?
2. Would a proportionate liability
standard allow taxpayers to take undue
advantage of the tax system by inter-
spousal property transfers, particularly
in view of the nonrecognition of gain
on such transfers under §1041?
3. Under a proportionate liability
standard, how would the Service trace
assets and allocate deductions and
credits between the spouses to deter-
mine each spouse’s correct tax liability
and to collect amounts due in the most
efficient manner possible?
4. Would a proportionate liability
standard create burdensome filing re-
quirements by requiring additional
schedules or columns for reporting the
items attributable to each spouse, such
as those on some state income tax
returns?
5. If a proportionate liability stand-
ard is adopted, what changes would be
necessary to the current rules concern-
ing communications with taxpayers,
examinations, assessments, collections,
payments and refunds of tax, penalties
and interest?
6. How would adoption of a propor-
tionate liability standard affect state,
local, and other tax systems?
B.Base the Respective Spouses’ Tax
Obligations and Liabilities on the
Terms of a Divorce Decree, Separa-
tion Agreement or Other Property
Settlement
Please comment on the effects of
basing the respective spouses’ tax
obligations and liabilities on the terms
of a divorce decree, separation agree-
ment or other property settlement. In
particular, please comment on the
following:
1. Would the Service be required to
be a party to divorce or separation
proceedings? If not, how could the
interests of the government be repre-
sented in such cases?
2. What rule would apply if the
divorce decree or separation agreement
did not provide for allocation of tax
liability?
3. How would this proposal affect
those spouses less able to influence the
terms of a divorce decree or separation
agreement (e.g., because of limited
financial or legal resources)?
C. Reform the Innocent Spouse
Provisions
Under the current joint and several
liability standard, please comment on
the specific requirements of §§66 and
6013(e), particularly with respect to
divorced and separated taxpayers.
1. Are there situations in which the
innocent spouse provisions do not
function in an appropriate manner?
Describe these situations.
2. Are there situations in which
expanded innocent spouse relief could
be abused by taxpayers seeking inap-
propriate relief? If so, what limitations
would prevent such abuses?
3. Are there changes to the Service’s
administrative practices that should be
made with respect to the innocent
spouse provisions?
D.Further Limit the Income-Splitting
Effect of Poe v. Seaborn in Com-
munity Property Jurisdictions
Please comment on the effects of
further limiting the income splitting
rule of Poe v. Seaborn in favor of
some form of income tracing, such as
in §879, particularly as it would affect
divorced and separated taxpayers.
1. Would this proposal present the
same issues as those raised above with
respect to proportionate liability? Why
or why not?
2. How would this proposal work if
the divorced or separated taxpayers live
in different jurisdictions with different
property laws?
3. Would further limiting Poe v.
Seaborn affect the assets or income of
a divorced or separated spouse that
could be collected to satisfy the federal
income tax liability of each spouse?
E.Limit the Amount of Community
Property Subject to Collection
Actions
Please comment on the effects of
limiting the amount of community
property that is subject to collection
actions to satisfy the separate tax
liabilities of one of the spouses that
arose before the couple’s marriage.
1. Would this proposal require
changes to state or federal law?
2. What specific changes, if any,
would be required?
Time and Address for Comments
The Service and Treasury would
appreciate written comments on the

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above issues. Comments should be
submitted by June 30, 1996, to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Attn: CC:CORP:T:R:ITA (Branch
4), Room 5228
Washington, D.C. 20044
The comments you submit will be
available for public inspection and
copying.
DRAFTING INFORMATION
For further information regarding
this notice, contact Joel Rutstein on
(202) 622-4530 (not a toll-free call).
Specifications for filing Form 1042–
S, Foreign Person’s U.S. Source
Income Subject to Withholding,
Magnetically or Electronically
Notice 96–20
The format for the country and
postal codes (positions 324–332 of the
‘‘Q’’ record) was listed incorrectly in
Internal Revenue Bulletin 1996–2, Rev-
enue Procedure 96–11, January 8,
1996, reprinted as Publication 1187
(Rev. 1–96), Specifications for Filing
Form 1042–S, Foreign Person’s U.S.
Source Income Subject to Withholding,
Magnetically and Electronically. Listed
below is the correct format to be used
in the ‘‘Q’’ record when submitting the
Form 1042–S magnetically or elec-
tronically:
RECORD NAME: RECIPIENT ‘‘Q’’ RECORD—CONTINUED
PositionsField TitleLengthDescription and Remarks
324–332Postal Code9Enter a Foreign or U.S. Postal Code (ZIP Code). A Postal Code is
REQUIRED for United States and U.S. Territories, Canadian, and
Australian addresses. Withholding Agents should make an effort to
obtain postal codes for all other countries. Only alphabetic, numeric,
and blank characters are valid. Do not omit any blanks that may
appear in the ZIP code. Use the following table to format Postal
Codes for the three required countries (‘‘a’’ denotes alpha
characters, ‘‘n’’ denotes numerics, ‘‘b’’ denotes a blank). All postal
codes should be left-justified and blank filled.
CountryPostal Code Format
United States and
U.S. Territories
Canadian
Australian
nnnnnbbbb or nnnnnnnnn
anabnanbb
nnnnbbbbb
Time for Furnishing Wage Statements
on Termination of Employer’s
Operations; Correction
Notice 96–21
AGENCY: Internal Revenue Service
(IRS), Treasury.
A C T I O N : C o r r e c t i o n t o f i n a l
regulations.
SUMMARY: This document contains a
correction to final regulations [TD
8636 (1996–4 I.R.B. 64)] which were
published in the Federal Register for
Thursday, December 21, 1995 (60 FR
66139). The final regulations relate to
the time for furnishing wage statements
to employees and for filing wage state-
ments with the Social Security Admin-
istration upon the termination of an
employer’s operations.
EFFECTIVE DATE: January 1, 1997.
FOR FURTHER INFORMATION
CONTACT: Jean M. Casey, (202)
622-6040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are the
subject of this correction are under
section 6051, 6071, and 6081 of the
Internal Revenue Code.
Need for Correction
As published, TD 8636 contains a
typographical error that is in need of
clarification.
Correction of Publication
Accordingly, the publication of the
final regulations which is the subject of
FR Doc. 95–30685, is corrected as
follows:
On page 66140, column 2, in the
preamble under the paragraph heading
‘‘Additional month to provide Forms
W–2 and W–3 to SSA’’, last line, the
language ‘‘the final Form 941 is due.’’
is corrected to read ‘‘the end of the
quarter.’’
Cynthia E. Grigsby,
Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
February 26, 1996, 8:45 a.m., and published in
the issue of the Federal Register for February
27, 1996, 61 F.R. 7214)
Actuarial Tables Exceptions;
Correction
Notice 96–22
AGENCY: Internal Revenue Service
(IRS), Treasury.

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ACTION: Correction to final regu-
lations.
SUMMARY: This document contains a
correction to final regulations [TD
8630 (1996–3 I.R.B. 19)] which were
published in the Federal Register for
Wednesday, December 13, 1995 (60
FR 63913). The final regulations relate
to income, estate, and gift tax regula-
tions regarding exceptions to the use of
valuation tables.
EFFECTIVE DATE: December 13,
1995.
FOR FURTHER INFORMATION
CONTACT: William L. Blodgett, (202)
622-3090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are the
subject of this correction are under
sections 170, 642, 664, 2031, 2512 and
7520 of the Internal Revenue Code.
Need for Correction
As published, TD 8630 contains a
typographical error that is in need of
clarification.
Correction of Publication
Accordingly, the publication of the
final regulations which is the subject of
FR Doc. 95–30272, is corrected as
follows:
On page 63913, column 1, in the
preamble in the caption ‘‘EFFECTIVE
DATE,’’ line 2, the language ‘‘effec-
tive December 13, 1995.’’ is corrected
to read ‘‘effective December 13, 1995,
and applicable for transfers after De-
cember 13, 1995.’’
Cynthia E. Grigsby,
Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
February 29, 1996, 8:45 a.m., and published in
the issue of the Federal Register for March 1,
1996, 61 F.R. 7991)
26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability.
(Also Part I, Sections 62, 162, 267, 274;
1.62–2, 1.162–17, 1.267(a)–1, 1.274–5T,
1.274(d)–1(a).)
Rev. Proc. 96–28
SECTION 1. PURPOSE
This revenue procedure updates Rev.
Proc. 94–77, 1994–2 C.B. 825, by
providing rules under which the
amount of ordinary and necessary
business expenses of an employee for
lodging, meal, and/or incidental ex-
penses incurred while traveling away
from home will be deemed substanti-
ated under §1.274–5T of the tempo-
rary Income Tax Regulations when a
payor (the employer, its agent, or a
third party) provides a per diem al-
lowance under a reimbursement or
other expense allowance arrangement
to pay for such expenses. This revenue
procedure also provides an optional
method for employees and self-
employed individuals to use in comput-
ing the deductible costs of business
meal and incidental expenses paid or
incurred while traveling away from
home. Use of a method described in
this revenue procedure is not manda-
tory and a taxpayer may use actual
allowable expenses if the taxpayer
maintains adequate records or other
s u f f i c i e n t e v i d e n c e f o r p r o p e r
substantiation.
SECTION 2. BACKGROUND
.01 Section 162(a) of the Internal
Revenue Code allows a deduction for
all the ordinary and necessary expenses
paid or incurred during the taxable year
in carrying on any trade or business.
Under that provision, an employee or
self-employed individual may deduct
expenses paid or incurred while travel-
ing away from home in pursuit of a
trade or business. However, under
§ 262, no portion of such travel ex-
penses that is attributable to personal,
living, or family expenses is deductible.
.02 Section 274(d) provides, in part,
that no deduction shall be allowed
under §162 for any traveling expense
(including meals and lodging while
away from home) unless the taxpayer
complies with certain substantiation
requirements. The section further
provides that regulations may prescribe
that some or all of the substantiation
requirements do not apply to an ex-
pense that does not exceed an amount
prescribed by such regulations.
.03 Section 1.274(d)–1(a) of the
regulations, in part, grants the Commis-
sioner the authority to prescribe rules
relating to reimbursement arrangements
or per diem allowances for ordinary
and necessary expenses paid or in-
curred while traveling away from
home. Pursuant to this grant of au-
thority, the Commissioner may pre-
scribe rules under which such arrange-
ments or allowances, if in accordance
with reasonable business practice, will
be regarded (1) as equivalent to sub-
stantiation, by adequate records or
other sufficient evidence, of the amount
of such travel expenses for purposes of
§ 1.274–5T(c), and (2) as satisfying the
requirements of an adequate accounting
to the employer of the amount of such
travel expenses for purposes of
§ 1.274–5T(f).
.04 Section 1.274–5T(j) grants the
Commissioner the authority to establish
a method under which a taxpayer may
elect to use a specified amount for
meals paid or incurred while traveling
away from home in lieu of substantiat-
ing the actual cost of meals.
.05 For purposes of determining
adjusted gross income, §62(a)(2)(A)
allows an employee a deduction for
expenses allowed by Part VI (§161
and following), subchapter B, chapter 1
of the Code, paid or incurred by the
employee in connection with the per-
formance of services as an employee
under a reimbursement or other ex-
pense allowance arrangement with a
payor.
.06 Section 62(c) provides that an
arrangement will not be treated as a
reimbursement or other expense al-
lowance arrangement for purposes of
§ 62(a)(2)(A) if it—
(1) does not require the employee
to substantiate the expenses covered by
the arrangement to the payor, or
(2) provides the employee with the
right to retain any amount in excess of
the substantiated expenses covered un-
der the arrangement.
Section 62(c) further provides that
the substantiation requirements de-
scribed therein shall not apply to any
expense to the extent that, under the
grant of regulatory authority prescribed
in §274(d), the Commissioner has
provided that substantiation is not
required for such expense.
.07 Under §1.62–2(c)(1) a reim-
bursement or other expense allowance
arrangement satisfies the requirements
of §62(c) if it meets the requirements
of business connection, substantiation,
and returning amounts in excess of
expenses as specified in the regula-

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tions. Section 1.62–2(e)(2) specifically
provides that substantiation of certain
business expenses in accordance with
rules prescribed under the authority of
§ 1.274(d)–1(a) or 1.274–5T(j) will be
treated as substantiation of the amount
of such expenses for purposes of
§ 1.62–2. Under §1.62–2(f)(2), the
Commissioner may prescribe rules un-
der which an arrangement providing
per diem allowances will be treated as
satisfying the requirement of returning
amounts in excess of expenses, even
though the arrangement does not re-
quire the employee to return the
portion of such an allowance that
relates to days of travel substantiated
and that exceeds the amount of the
employee’s expenses deemed substanti-
ated pursuant to rules prescribed under
§ 274(d), provided the allowance is
reasonably calculated not to exceed the
amount of the employee’s expenses or
anticipated expenses and the employee
is required to return any portion of
such an allowance that relates to days
of travel not substantiated.
. 0 8 S e c t i o n 1 . 6 2 – 2 ( h ) ( 2 ) ( i ) ( B )
provides that if a payor pays a per
diem allowance that meets the require-
ments of §1.62–2(c)(1), the portion, if
any, of the allowance that relates to
days of travel substantiated in accord-
ance with §1.62–2(e), that exceeds the
amount of the employee’s expenses
deemed substantiated for such travel
pursuant to rules prescribed under
§ 274(d) and § 1.274(d)–1(a) or
§ 1.274–5T(j), and that the employee is
not required to return, is subject to
withholding and payment of employ-
ment taxes. See §§ 31.3121(a)–3,
3 1 . 3 2 3 1 ( e ) – 3 , 3 1 . 3 3 0 6 ( b ) – 2 , a n d
31.3401(a)–4. Because the employee is
not required to return this excess
portion, the reasonable period of time
provisions of §1.62–2(g) (relating to
the return of excess amounts) do not
apply to this portion.
.09 Under § 1.62–2(h)(2)(i)(B)(4),
the Commissioner may, in his or her
discretion, prescribe special rules re-
garding the timing of withholding and
payment of employment taxes on per
diem allowances.
SECTION 3. DEFINITIONS
.01 Per diem allowance. The term
‘‘per diem allowance’’ means a pay-
ment under a reimbursement or other
expense allowance arrangement that
meets the requirements specified in
§ 1.62–2(c)(1) and that is:
(1) paid with respect to ordinary and
necessary business expenses incurred,
or which the payor reasonably antici-
pates will be incurred, by an employee
for lodging, meal, and/or incidental
expenses for travel away from home in
connection with the performance of
services as an employee of the
employer,
(2) reasonably calculated not to
exceed the amount of the expenses or
the anticipated expenses, and
(3) paid at the applicable Federal per
diem rate, a flat rate or stated schedule,
or in accordance with any other
Service-specified rate or schedule.
.02 Federal per diem rate.
(1) General rule. The Federal per
diem rate is equal to the sum of the
Federal lodging expense rate and the
Federal meal and incidental expense
(M&IE) rate for the locality of travel.
Each of these rates for a particular
locality in the continental United States
(‘‘CONUS’’) is set forth in Appendix
A of 41 C.F.R., Chapter 301, as
amended. See 41 C.F.R. Part 301–7
(1995), as amended, for specific rules
regarding these Federal rates. Each of
these rates is established by the Secre-
tary of Defense for a particular non-
foreign locality outside the continental
United States (‘‘OCONUS’’) (including
Alaska, Hawaii, Puerto Rico, the
Northern Mariana Islands, and the
possessions of the United States), and
by the Secretary of State for a particu-
lar foreign OCONUS locality. Each of
these OCONUS rates is published in
the Per Diem Supplement to the
Standardized Regulations (Government
Civilians, Foreign Areas). See, e.g.,
Maximum Travel Per Diem Allowances
for Foreign Areas, PD Supplement 382,
issued March 1, 1996.
(2) Locality of travel. The term
‘‘locality of travel’’ means the locality
where an employee traveling away
from home in connection with the
p e r f o r m a n c e o f s e r v i c e s a s a n
employee of the employer stops for
sleep or rest.
(3) Incidental expenses. The term
‘‘incidental expenses’’ includes, but is
not limited to, expenses for laundry,
cleaning and pressing of clothing, and
fees and tips for services, such as for
porters and baggage carriers. The term
‘‘incidental expenses’’ does not include
taxicab fares or the costs of telegrams
or telephone calls.
.03 Flat rate or stated schedule.
(1) In general. Except as provided
in section 3.03(2), an allowance is paid
at a flat rate or stated schedule if it is
provided on a uniform and objective
basis with respect to the expenses
described in section 3.01. Such al-
lowance may be paid with respect to
the number of days away from home in
connection with the performance of
services as an employee or on any
other basis that is consistently applied
and in accordance with reasonable
business practice. Thus, for example,
an hourly payment to cover meal and
incidental expenses paid to a pilot or
flight attendant who is traveling away
from home in connection with the
p e r f o r m a n c e o f s e r v i c e s a s a n
employee is an allowance paid at a flat
rate or stated schedule. Likewise, a
payment based on the number of miles
traveled (e.g., cents per mile) to cover
meal and incidental expenses paid to an
over-the-road truck driver who is trav-
eling away from home in connection
with the performance of services as an
employee is an allowance paid at a flat
rate or stated schedule.
(2) Limitation. For purposes of
this revenue procedure, an allowance
that is computed on a basis similar to
that used in computing the employee’s
wages or other compensation (e.g., the
number of hours worked, miles trav-
eled, or pieces produced) does not meet
the business connection requirement of
§ 1.62–2(d), is not a per diem al-
lowance, and is not paid at a flat rate
or stated schedule, unless, as of De-
cember 12, 1989, (a) the allowance was
identified by the payor either by
making a separate payment or by
specifically identifying the amount of
the allowance, or (b) an allowance
computed on that basis was commonly
used in the industry in which the
employee is employed. See §1.62–
2(d)(3)(ii).
SECTION 4. PER DIEM
SUBSTANTIATION METHOD
.01 Per diem allowance. If a payor
pays a per diem allowance in lieu of
reimbursing actual expenses for lodg-
ing, meal, and incidental expenses
incurred or to be incurred by an
employee for travel away from home,
the amount of the expenses that is
deemed substantiated for each calendar
day (or part of the calendar day, see
section 6.04) is equal to the lesser of
the per diem allowance for such day or
the amount computed at the Federal per
diem rate for the locality of travel for
such day (or part of such day, see
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.02 Meals only per diem allowance.
If a payor pays a per diem allowance
only for meal and incidental expenses
in lieu of reimbursing actual expenses
for meal and incidental expenses in-
curred or to be incurred by an
employee for travel away from home,
the amount of the expenses that is
deemed substantiated for each calendar
day (or part of the calendar day, see
section 6.04) is equal to the lesser of
the per diem allowance for such day or
the amount computed at the Federal
M&IE rate for the locality of travel for
such day (or part of such day, see
section 6.04). A per diem allowance is
treated as paid only for meal and
incidental expenses if (1) the payor
pays the employee for actual expenses
for lodging, (2) the payor provides the
lodging in kind, (3) the payor pays the
actual expenses for lodging directly to
the provider of the lodging, (4) the
payor does not have a reasonable belief
that lodging expenses were or will be
incurred by the employee, or (5) the
allowance is computed on a basis
similar to that used in computing the
employee’s wages or other compensa-
tion (e.g., the number of hours worked,
miles traveled, or pieces produced).
.03 Optional method for meals only
deduction. In lieu of using actual
expenses, employees and self-employed
individuals, in computing the amount
allowable as a deduction for ordinary
and necessary meal and incidental
expenses paid or incurred for travel
away from home, may use an amount
computed at the Federal M&IE rate for
the locality of travel for each calendar
day (or part thereof, see section 6.04)
the employee or self-employed individ-
ual is away from home. Such amount
will be deemed substantiated for pur-
poses of paragraphs (b)(2) (travel away
from home) and (c) of §1.274–5T,
provided the employee or self-
employed individual substantiates the
elements of time, place, and business
purpose of the travel expenses in
accordance with those regulations.
.04 Special rules for transportation
industry.
(1) In general. This section 4.04
applies to (a) a payor that pays a per
diem allowance only for meal and
incidental expenses for travel away
from home as described in section 4.02
to an employee in the transportation
industry, or (b) an employee or self-
employed individual in the transporta-
tion industry who computes the amount
allowable as a deduction for meal and
incidental expenses for travel away
from home in accordance with section
4.03.
(2) Rates. A taxpayer described in
section 4.04(1) may treat $32 as the
Federal M&IE rate for any locality of
travel in CONUS, and/or $36 as the
Federal M&IE rate for any locality of
travel OCONUS. A payor that uses
either (or both) of these special rates
with respect to an employee must use
the special rate(s) for all amounts
subject to section 4.02 paid to that
employee for travel away from home
within CONUS and/or OCONUS, as
the case may be, during the calendar
year. Similarly, an employee or self-
employed individual that uses either (or
both) of these special rates must use
the special rate(s) for all amounts
computed pursuant to section 4.03 for
travel away from home within CONUS
and/or OCONUS, as the case may be,
during the calendar year.
(3) Periodic rule. A payor de-
scribed in section 4.04(1) may compute
the amount of the employee’s expenses
that is deemed substantiated under
section 4.02 periodically (not less
frequently than monthly), rather than
daily, by comparing the total per diem
allowance paid for the period to the
sum of the amounts computed at the
Federal M&IE rate(s) for the localities
of travel for the days (or partial days,
see section 6.04) the employee is away
from home during the period. For
example, assume an employee in the
transportation industry travels away
from home within CONUS on 17 days
(including partial days under section
6.04) during a calendar month and
receives a per diem allowance only for
meal and incidental expenses from a
payor that uses the special rule under
section 4.04(2). The amount deemed
substantiated under section 4.02 is
equal to the lesser of the total per diem
allowance paid for the month or $544
(17 days at $32 per day).
(4) Transportation industry defined.
For purposes of this section 4.04, an
employee or self-employed individual
is ‘‘in the transportation industry’’ only
if the employee’s or individual’s work
(a) is of the type that directly involves
moving people or goods by airplane,
barge, bus, ship, train, or truck, and (b)
regularly requires travel away from
home which, during any single trip
away from home, usually involves
travel to localities with differing Fed-
eral M&IE rates. For purposes of the
preceding sentence, a payor must deter-
mine that an employee or a group of
employees is ‘‘in the transportation
industry’’ by using a method that is
consistently applied and in accordance
with reasonable business practice.
SECTION 5. HIGH-LOW
SUBSTANTIATION METHOD
.01 General rule. If a payor pays a
per diem allowance in lieu of reimburs-
ing actual expenses for lodging, meal,
and incidental expenses incurred or to
be incurred by an employee for travel
away from home and the payor uses
the high-low substantiation method de-
scribed in this section 5 for travel
within CONUS, the amount of the
expenses that is deemed substantiated
for each calendar day (or part of the
calendar day, see section 6.04) is equal
to the lesser of the per diem allowance
for such day or the amount computed
at the rate set forth in section 5.02 for
the locality of travel for such day (or
part of such day, see section 6.04).
This high-low substantiation method
may be used in lieu of the per diem
substantiation method provided in sec-
tion 4.01, but may not be used in lieu
of the meals only substantiation method
provided in section 4.02 or 4.03.
.02 Specific high-low rates. The per
diem rate set forth in this section 5.02
is $152 for travel to any ‘‘high-cost
locality’’ specified in section 5.03, or
$95 for travel to any other locality
within CONUS. Whichever per diem
rate applies, it is applied as if it were
the Federal per diem rate for the
locality of travel. For purposes of
applying the high-low substantiation
method, the Federal M&IE rate shall be
treated as $36 for a high-cost locality
and $28 for any other locality within
CONUS.
.03 High-cost localities. The following
localities have a Federal per diem rate of
$123 or more for all or part of the
calendar year, and are high-cost localities
for all of the calendar year or the portion
of the calendar year specified in paren-
thesis under the key city name:

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Key cityCounty and other defined location
Alabama
Gulf ShoresBaldwin
(May 1–September 30)
Arizona
Grand CanyonAll points in the Grand Canyon National Park and Kaibab National Forest
within Coconino County
Phoenix/ScottsdaleMaricopa
(October 1–May 14)
California
Gualala/Point ArenaMendocino
Los AngelesLos Angeles, Kern, Orange, and Ventura Counties; Edwards Air Force Base;
Naval Weapons Center and Ordnance Test Station, China Lake
Palo Alto/San JoseSanta Clara
San FranciscoSan Francisco
Santa BarbaraSanta Barbara
(June 1–September 30)
South Lake TahoeEl Dorado
Yosemite Nat’l ParkMariposa
Colorado
AspenPitkin
(January 15–March 31)
BoulderBoulder
(May 1–October 31)
DenverDenver, Adams, Arapahoe and Jefferson
Keystone/SilverthorneSummit
Steamboat SpringsRoutt
(December 15–March 31)
TellurideSan Miquel
(November 1–March 31)
VailEagle
Connecticut
Bridgeport/DanburyFairfield
District of Columbia
Washington, D.C.Washington, D.C.; the cities of Alexandria, Falls Church, and Fairfax, and
the counties of Arlington, Loudoun, and Fairfax in Virginia; and the counties
of Montgomery and Prince Georges in Maryland
Florida
Key WestMonroe
NaplesCollier
(December 15–April 30)
Illinois
ChicagoDu Page, Cook, and Lake
Indiana
NashvilleBrown
(June 1–October 31)
Maine
Bar HarborHancock
(July 1–September 14)
RockportKnox
(June 15–October 31)
Maryland
AnnapolisAnne Arundel
BaltimoreBaltimore and Harford
Ocean CityWorcester
(May 1–September 30)
Massachusetts
BostonSuffolk

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Key cityCounty and other defined location
Cambridge/LowellMiddlesex
HyannisBarnstable
(July 1–September 30)
Martha’s Vineyard/Dukes and Nantucket
Nantucket
Michigan
DetroitWayne
LelandLeelanau
(May 1–September 30)
Mackinac IslandMackinac
(June 1–September 30)
Traverse CityGrand Traverse
(May 1–September 30)
Nevada
Incline VillageIncline Village
StatelineDouglas
New Jersey
Atlantic CityAtlantic
(April 1–November 30)
NewarkBergen, Essex, Hudson, Passaic and Union
Ocean City/Cape MayCape May
Parsippany/DoverMorris County; Picatinny Arsenal
Princeton/TrentonMercer
New Mexico
Santa FeSanta Fe
New York
Lake PlacidEssex
(June 1–November 14)
New York CityThe boroughs of Bronx, Brooklyn, Manhattan, Queens, and Staten Island;
Nassau and Suffolk Counties
White PlainsWestchester
North Carolina
Duck/Outer BanksDare
(May 1–September 30)
Ohio
SanduskyErie
(May 1–September 30)
Oregon
Crater Lake/KlamathKlamath
Falls
Pennsylvania
PhiladephiaPhiladelphia; city of Bala Cynwyd in Montgomery County
Valley Forge/MalvernChester
Rhode Island
NewportNewport
(May 1–October 14)
ProvidenceProvidence
South Carolina
Myrtle BeachHorry County; Myrtle Beach Air Force
(May 1–September 30)Base
Utah
BullfrogGarfield
(April 1–October 31)
Park CitySummit
(December 1–March 31)

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Key cityCounty and other defined location
Virginia
Virginia BeachVirginia Beach, Norfolk, Portsmouth
and Chesapeake
(May 1–September 30)
WintergreenNelson
Wisconsin
Wisconsin DellsColumbia
(June 1–September 14)
Wyoming
JacksonTeton
(June 1–October 14)
.04 Changes in high-cost localities.
The list of high-cost localities in
section 5.03 of this Revenue Procedure
differs from the list of high-cost
localities in section 5.03 of Rev. Proc.
94–77. The following localities have
been added to the list of high-cost
localities: Phoenix/Scottsdale, Arizona
(October 1–May 14); Palo Alto/San
Jose, California, and Santa Barbara,
California (June 1–September 30);
Boulder, Colorado, Denver, Colorado,
and Telluride, Colorado (November 1–
March 31); Bridgeport/Danbury, Con-
necticut; Nashville, Indiana (June 1–
October 31); Annapolis, Maryland, and
Baltimore, Maryland; Detroit, Michi-
gan, Leland, Michigan (May 1–
September 30), and Traverse City,
Michigan (May 1–September 30); In-
cline Village, Nevada; Parsippany/
Dover, New Jersey, and Princeton/
Trenton, New Jersey; Outer Banks,
North Carolina (May 1–September 30);
Sandusky, Ohio (May 1–September
30); Crater Lake/Klamath, Oregon;
Valley Forge/Malvern, Pennsylvania;
Providence, Rhode Island; and Park
City, Utah (December 1–March 31).
The portion of the year for which the
following are high-cost localities has
been changed: Gulf Shores, Alabama
(May 1–September 30); South Lake
Tahoe, California (all year); Steamboat
Springs, Colorado (December 15–
March 31), and Vail, Colorado (all
year); Naples, Florida (December 15–
April 30); Bar Harbor, Maine (July 1–
September 14), and Rockport, Maine
(June 15–October 31); Hyannis, Massa-
chusetts (July 1–September 30); State-
line, Nevada (all year); Ocean City/
Cape May, New Jersey (all year); Santa
Fe, New Mexico (all year); and Bull-
frog, Utah (April 1–October 31). The
following localities have been removed
from the list of high-cost localities:
Chinle, Arizona; Death Valley, Califor-
nia, and Santa Cruz, California; Du-
rango, Colorado; Fort Myers, Florida;
Columbia, Maryland; and Chestor/
Radnor, Pennsylvania.
.05 Specific limitation. A payor that
uses the high-low substantiation
method with respect to an employee
must use that method for all amounts
paid to that employee for travel away
from home within CONUS during the
calendar year. However, with respect to
that employee, the payor may still
reimburse actual expenses or use the
meals only per diem method described
in section 4.02 for any travel away
from home, and may use the per diem
substantiation method described in sec-
tion 4.01 for any OCONUS travel away
from home.
SECTION 6. LIMITATIONS AND
SPECIAL RULES
.01 In general. The Federal per diem
rate, the Federal lodging expense rate,
and the Federal M&IE rate described in
section 3.02 for the locality of travel
will be applied in the same manner as
applied under the Federal Travel Reg-
ulations, 41 C.F.R. Part 301–7 (1995),
except as provided in sections 6.02
through 6.04.
.02 Federal per diem rate. A receipt
for lodging expenses is not required in
order to apply the Federal per diem
rate for the locality of travel.
.03 Federal per diem or M&IE rate.
A payor is not required to reduce the
Federal per diem rate or the Federal
M&IE rate for the locality of travel for
meals provided in kind, provided the
payor has a reasonable belief that meal
and incidental expenses were or will be
incurred by the employee.
.04 Proration of the Federal per
diem or M&IE rate. Pursuant to the
Federal Travel Regulations, in deter-
mining the Federal per diem rate or the
Federal M&IE rate for the locality of
travel, the full applicable Federal
M&IE rate is available for a full day of
travel from 12:01 a.m. to 12:00 mid-
night. For purposes of determining the
amount deemed substantiated under
section 4 or 5 with respect to partial
days of travel away from home, either
of the following methods may be used
to prorate the Federal M&IE rate to
determine the Federal per diem rate or
the Federal M&IE rate for the partial
days of travel:
(1) Such rate may be prorated
using the method prescribed by the
Federal Travel Regulations under
which one-fourth of the applicable
Federal M&IE rate is allowed for each
6-hour quarter of the day (i.e., midnight
to 6 a.m., 6 a.m. to noon, noon to 6
p.m., and 6 p.m. to midnight) during
any portion of which the employee or
self-employed individual is traveling
away from home in connection with the
performance of services as an em-
ployee or self-employed individual; or
(2) Such rate may be prorated
using any method that is consistently
applied and in accordance with reason-
able business practice. For example, if
an employee travels away from home
from 9 a.m. one day to 5 p.m. the next
day, a method of proration that results
in an amount equal to 2 times the
Federal M&IE rate will be treated as
being in accordance with reasonable
business practice (even though only 1
1/2 times the Federal M&IE rate would
be allowed under the Federal Travel
Regulations). Similarly, if a self-
employed individual travels away from
home from 7 p.m. one day to 9 p.m.
the next day, a method of proration that
results in an amount equal to 1 1/2
times the Federal M&IE rate will be
treated as being in accordance with
reasonable business practice (even
though only 1 1/4 times the Federal
M&IE rate would be allowed under the
Federal Travel Regulations).
.05 Application of the 50-percent
limitation on meal expenses. When a
per diem allowance is paid only for

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meal and incidental expenses or when
an amount for meal and incidental
expenses is computed pursuant to sec-
tion 4.03, an amount equal to the lesser
of the per diem allowance for each
calendar day (or part of the calendar
day, see section 6.04) or the Federal
M&IE rate for the locality of travel for
such day (or part of such day, see
section 6.04) is treated as an expense
for food and beverages. When a per
diem allowance is paid for lodging,
meal, and incidental expenses, the
payor must treat an amount equal to the
Federal M&IE rate for the locality of
travel for each calendar day (or part of
the calendar day, see section 6.04) the
employee is away from home as an
expense for food and beverages. For
purposes of the preceding sentence,
when a per diem allowance for lodging,
meal, and incidental expenses for a full
day of travel is paid at a rate that is
less than the Federal per diem rate for
the locality of travel, the payor may
treat an amount equal to 40 percent of
such per diem allowance for a full day
of travel as the Federal M&IE rate for
the locality of travel.
.06 No double reimbursement or
deduction. If a payor pays a per diem
allowance in lieu of reimbursing actual
expenses for lodging, meal, and/or
incidental expenses in accordance with
section 4 or 5, any additional payment
with respect to such expenses is treated
as paid under a nonaccountable plan, is
included in the employee’s gross in-
come, is reported as wages or other
compensation on the employee’s Form
W–2, and is subject to withholding and
payment of employment taxes. Sim-
ilarly, if an employee or self-employed
individual computes the amount allow-
able as a deduction for meal and
incidental expenses for travel away
from home in accordance with section
4.03 or 4.04, no other deduction is
allowed to the employee or self-
employed individual with respect to
such expenses. For example, assume an
employee receives a per diem al-
lowance from a payor for lodging,
meal, and/or incidental expenses in-
curred while traveling away from
home. During that trip, the employee
pays for dinner for the employee and
two business associates. The payor
reimburses as a business entertainment
meal expense the meal expense for the
employee and the two business associ-
ates. Because the payor also pays a per
diem allowance to cover the cost of the
employee’s meals, the amount paid by
the payor for the employee’s portion of
the business entertainment meal ex-
pense is treated as paid under a
nonaccountable plan, is reported as
wages or other compensation on the
employee’s Form W-2, and is subject
to withholding and payment of employ-
ment taxes.
.07 Related parties. Sections 4.01,
4.02, 4.04 (to the extent it relates to
section 4.02), and 5 of this revenue
procedure will not apply in any case in
which a payor and an employee are
related within the meaning of §267(b),
but for this purpose the percentage of
ownership interest referred to in
§ 267(b)(2) shall be 10 percent.
SECTION 7. APPLICATION
.01 If the amount of travel expenses
is deemed substantiated under the rules
provided in section 4 or 5, and the
employee actually substantiates to the
payor the elements of time, place, and
business purpose of the travel expenses
in accordance with paragraphs (b)(2)
(travel away from home) and (c) (other
than subparagraph (2)(iii)(A) thereof)
of §1.274–5T, the employee is deemed
to satisfy the adequate accounting
requirements of §1.274–5T(f) as well
as the requirement to substantiate by
adequate records or other sufficient
evidence for purposes of §1.274–
5T(c). See §1.62–2(e)(1) for the rule
that an arrangement must require busi-
ness expenses to be substantiated to the
payor within a reasonable period of
time.
.02 An arrangement providing per
diem allowances will be treated as
satisfying the requirement of §1.62–
2(f)(2) with respect to returning
amounts in excess of expenses if the
employee is required to return within a
reasonable period of time (as defined in
§ 1.62–2(g)) any portion of such an
allowance that relates to days of travel
not substantiated, even though the
arrangement does not require the
employee to return the portion of such
an allowance that relates to days of
travel substantiated and that exceeds
the amount of the employee’s expenses
deemed substantiated. For example,
assume a payor provides an employee
an advance per diem allowance for
meal and incidental expenses of $200,
based on an anticipated 5 days of
business travel at $40 per day to a
locality for which the Federal M&IE
rate is $34, and the employee substanti-
ates 3 full days of business travel. The
requirement to return excess amounts
will be treated as satisfied if the
employee is required to return within a
reasonable period of time (as defined in
§ 1.62–2(g)) the portion of the al-
lowance that is attributable to the 2
unsubstantiated days of travel ($80),
even though the employee is not
required to return the portion of the
allowance ($18) that exceeds the
amount of the employee’s expenses
deemed substantiated under section
4.02 ($102) for the 3 substantiated days
of travel. However, the $18 excess
portion of the allowance is treated as
paid under a nonaccountable plan as
discussed in section 7.04.
.03 An employee is not required to
include in gross income the portion of
a per diem allowance received from a
payor that is less than or equal to the
amount deemed substantiated under the
rules provided in section 4 or 5 if the
employee substantiates the business
travel expenses covered by the per
diem allowance in accordance with
section 7.01. See §1.274–5T(f)(2)(i).
In addition, such portion of the al-
lowance is treated as paid under an
accountable plan, is not reported as
wages or other compensation on the
employee’s Form W–2, and is exempt
from the withholding and payment of
employment taxes. See §1.62–2(c)(2)
and (c)(4).
.04 An employee is required to
include in gross income only the
portion of the per diem allowance
received from a payor that exceeds the
amount deemed substantiated under the
rules provided in section 4 or 5 if the
employee substantiates the business
travel expenses covered by the per
diem allowance in accordance with
section 7.01. See §1.274–5T(f)(2)(ii).
In addition, the excess portion of the
allowance is treated as paid under a
nonaccountable plan, is reported as
wages or other compensation on the
employee’s Form W–2, and is subject
to withholding and payment of employ-
ment taxes. See § 1.62–2(c)(3)(ii),
(c)(5), and (h)(2)(i)(B).
.05 If the amount of the expenses
that is deemed substantiated under the
rules provided in section 4.01, 4.02, or
5 is less than the amount of the
employee’s business expenses for travel
away from home, the employee may
claim an itemized deduction for the
amount by which the business travel
expenses exceed the amount that is
deemed substantiated, provided the

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employee substantiates all the business
travel expenses, includes on Form
2106, Employee Business Expenses,
the deemed substantiated portion of the
per diem allowance received from the
payor, and includes in gross income the
portion (if any) of the per diem
allowance received from the payor that
exceeds the amount deemed substanti-
ated. See §1.274–5T(f)(2)(iii). How-
ever, for purposes of claiming this
itemized deduction with respect to meal
and incidental expenses, substantiation
of the amount of the expenses is not
required if the employee is claiming a
deduction that is equal to or less than
the amount computed under section
4.03 minus the amount deemed sub-
stantiated under section 4.02 and sec-
tion 7.01. The itemized deduction is
subject to the 50-percent limitation on
meal and entertainment expenses
provided in §274(n) and the 2-percent
floor on miscellaneous itemized deduc-
tions provided in §67.
.06 An employee who does not
receive a per diem allowance for meal
and incidental expenses may deduct an
amount computed pursuant to section
4.03 only as an itemized deduction.
This itemized deduction is subject to
the 50-percent limitation on meal and
entertainment expenses provided in
§ 274(n) and the 2-percent floor on
miscellaneous itemized deductions
provided in §67.
.07 A self-employed individual may
deduct an amount computed pursuant to
section 4.03 in determining adjusted
gross income under §62(a)(1). This
deduction is subject to the 50-percent
limitation on meal and entertainment
expenses provided in §274(n).
.08 If a payor’s reimbursement or
other expense allowance arrangement
evidences a pattern of abuse of the
rules of §62(c) and the regulations
thereunder, all payments under the
arrangement will be treated as made
under a nonaccountable plan. Thus,
such payments are included in the
employee’s gross income, are reported
as wages or other compensation on the
employee’s Form W–2, and are subject
to withholding and payment of employ-
ment taxes. See §1.62–2(c)(3), (c)(5),
and (h)(2).
SECTION 8. WITHHOLDING AND
PAYMENT OF EMPLOYMENT
TAXES.
.01 The portion of a per diem
allowance, if any, that relates to the
days of business travel substantiated
and that exceeds the amount deemed
substantiated for those days under
section 4.01, 4.02, or 5 is subject to
withholding and payment of employ-
ment taxes. See §1.62–2(h)(2)(i)(B).
(1) In the case of a per diem
allowance paid as a reimbursement, the
excess described in this section 8.01 is
subject to withholding and payment of
employment taxes in the payroll period
in which the payor reimburses the
expenses for the days of travel substan-
tiated. See §1.62–2(h)(2)(i)(B)(2).
(2) In the case of a per diem
allowance paid as an advance, the
excess described in this section 8.01 is
subject to withholding and payment of
employment taxes no later than the first
payroll period following the payroll
period in which the days of travel with
respect to which the advance was paid
are substantiated. See § 1.62–2(h)-
(2)(i)(B)(3). If some or all of the days
of travel with respect to which the
advance was paid are not substantiated
within a reasonable period of time and
the employee does not return the
portion of the allowance that relates to
those days within a reasonable period
of time, the portion of the allowance
that relates to those days is subject to
withholding and payment of employ-
ment taxes no later than the first
payroll period following the end of the
reasonable period. See §1.62–2(h)-
(2)(i)(A).
(3) In the case of a per diem
allowance only for meal and incidental
expenses for travel away from home
paid to an employee in the transporta-
tion industry by a payor that uses the
rule in section 4.04(3), the excess of
the per diem allowance paid for the
period over the amount deemed sub-
stantiated for the period under section
4.02 (after applying section 4.04(3)), is
subject to withholding and payment of
employment taxes no later than the first
payroll period following the payroll
period in which the excess is com-
puted. See §1.62–2(h)(2)(i)(B)(4).
(4) For example, assume that a
payor pays an employee a per diem
allowance to cover business expenses
for meals and lodging for travel away
from home at a rate of 120 percent of
the Federal per diem rate for the
localities to which the employee
travels. The employer does not require
the employee to return the 20 percent
by which the reimbursement for those
expenses exceeds the Federal per diem
rate. The employee substantiates 6 days
of travel away from home: 2 days in a
locality in which the Federal per diem
rate is $100 and 4 days in a locality in
which the Federal per diem rate is
$125. The employer reimburses the
employee $840 for the 6 days of travel
away from home (2 2 (120% 2 $100)
+ 4 2 (120% 2 $125)), and does not
require the employee to return the
excess payment of $140 ((2 days 2
$20 ($120–$100) + 4 days 2 $25
($150–$125)). For the payroll period in
which the employer reimburses the
expenses, the employer must withhold
and pay employment taxes on $140.
SECTION 9. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 94–77 is hereby super-
seded for per diem allowances paid to
an employee on or after April 1, 1996,
with respect to lodging, meal, and/or
incidental expenses paid or incurred for
travel while away from home on or
after April 1, 1996, and, for purposes
of computing the amount allowable as
a deduction, for meal and incidental
expenses paid or incurred by an
employee or self-employed individual
for travel while away from home on or
after April 1, 1996.
DRAFTING INFORMATION
The principal author of this revenue
procedure is G. Channing Horton of the
Office of Assistant Chief Counsel
(Income Tax and Accounting). For
further information regarding this reve-
nue procedure, contact Mr. Horton on
(202) 622-1585 (not a toll-free call).

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391996 –17 I.R.B.
Part IV. Items of General Interest
Notice of Proposed Rulemaking and
Notice of Public Hearing
Proposed Amendments to the
Regulations on the Determination of
Interest Expense Deduction of
Foreign Corporations and Branch
Profits Tax
INTL–0054–95
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed Income Tax Regulations re-
lating to the determination of the
interest expense deduction of foreign
corporations under section 882 and the
branch profits tax under section 884 of
the Internal Revenue Code of 1986.
These proposed regulations are neces-
sary to provide guidance that coordi-
nates with guidance provided in final
regulations under sections 882 and 884
published in * * * [T.D. 8657, page 4,
and T.D. 8658, page 13, this Bulletin].
These regulations will affect foreign
corporations engaged in a U.S. trade or
business. This document also provides
notice of a public hearing on these
proposed regulations.
DATES: Written comments must be
received by June 6, 1996. Outlines of
topics to be discussed at the public
hearing scheduled for Thursday, June
6, 1996, at 10:00 a.m. must be received
by May 23, 1996.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (INTL–0054–95),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station,
Washington DC 20044. In the alterna-
tive, submissions may be hand deliv-
ered between the hours of 8 a.m. and 5
p.m. to CC:DOM:CORP:R (INTL–
0054–95), Courier’s Desk, Internal
Revenue Service, 1111 Constitution
Avenue NW., Washington DC. The
public hearing will be held in the
Auditorium, Internal Revenue Building,
1111 Constitution Avenue NW., Wash-
ington DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the regula-
tions, Ahmad Pirasteh or Richard
Hoge, (202) 622-3870; and the hearing,
Michael Slaughter (202) 622-7190 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
regulations amending the Income Tax
Regulations (26 CFR Part 1) under
sections 882 and 884 of the Internal
Revenue Code. In final regulations
under sections 882 and 884, published
elsewhere in this issue of the Federal
Register, various sections were re-
served. These proposed regulations
would provide guidance under those
reserved sections, as well as amend
other sections, to coordinate with the
final regulations.
Explanation of the Provisions
I. Financial products.
The proposed regulations include
several provisions that take into ac-
count recent developments in the tax
treatment of financial instruments, such
as the enactment of section 475, the
development of hedging rules and the
introduction of profit split meth-
odologies in global trading Advance
Pricing Agreements. The IRS and
Treasury intend to issue regulations
under section 864 that will address
these recent developments as they
affect the determination of a foreign
corporation’s effectively connected in-
come. Comments are solicited on these
proposed regulations as they relate to
financial products and on their interac-
tion with the determination of effec-
tively connected income.
A. ‘‘Split asset’’ rule for section 475
securities and section 1256 contracts.
Currently §1.884–1(d)(2)(vii) provides
a ‘‘split asset’’ rule for certain se-
c u r i t i e s d e s c r i b e d i n § 1 . 8 6 4 –
4(c)(5)(ii)(b)(3) that produce income
only a portion of which is treated as
effectively connected with the conduct
of a U.S. trade or business. Since other
securities may also produce income
split between effectively connected and
non-effectively connected income, the
rule has been broadened to cover all
financial instruments that meet the
definition of a security under section
475(c)(2), as well as section 1256
contracts, that may produce such split
income. Accordingly, a foreign corpo-
ration that, under an Advance Pricing
Agreement, is permitted to apply a
‘‘profit split’’ methodology to deter-
mine the portion of its income from a
portfolio of securities that is effectively
connected with the conduct of a U.S.
trade or business would apply this rule.
This rule will also apply to determine
the portion of a foreign corporation’s
portfolio of securities that is a U.S.
asset for purposes of §1.882–5.
B. Hedging transactions. Proposed
§ 1.884–1(c)(2)(ii) introduces a new
rule for hedging transactions for pur-
poses of section 884. The new rule
requires that a taxpayer increase or
decrease, as the case may be, the
amount of their U.S. assets by the
amount of any gain or loss on any
transaction that hedges the U.S. assets.
If the hedging transaction is undertaken
outside the United States, perhaps as
part of a global hedging strategy of the
foreign corporation, then the hedging
transaction is only taken into account
to the extent that income from the
transaction would be treated as income
effectively connected with the U.S.
trade or business of the taxpayer. If,
however, the hedging transaction is
entered into by the U.S. branch, it will
only affect the amount of U.S. assets if
it is contemporaneously identified as a
hedging transaction in accordance with
the provisions of §1.1221–2.
In response to comments, hedging
rules also have been added to the
interest allocation rules of §1.882–5.
These rules provide that a transaction
that hedges a U.S. booked liability will
be taken into account in determining
the amount, currency denomination,
and interest rate associated with that
liability for purposes of performing the
second and third steps of the interest
expense calculation.
C. Securities marked-to-market. Sec-
tion 1.884–1(d)(6), which provides
‘‘E&P basis’’ rules for specific types
of U.S. assets, has been clarified to
provide rules for securities subject to
mark-to-market accounting. The new
provision in §1.884–1(d)(6)(v) spec-
ifies that securities subject to section
475, as well as section 1256 contracts,
have an E&P basis equal to their mark-
to-market value as of the determination

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date. Proposed § 1.882–5(b)(2)(iv)
provides a basis adjustment rule under
which such assets are treated as having
been marked-to-market on each deter-
mination date. Examples are contained
in the proposed regulations that illus-
trate the effect of these rules on the
calculation of worldwide assets and
liabilities.
II. Transactions between partners and
partnerships.
Example 4 in proposed §1.882–
5(c)(5) would clarify that an obligation
of a partnership to make payments to
its partner for the use of capital, which
gives rise to guaranteed payments
under section 707(c), is not a liability
for purposes of §1.882–5. The Service
and Treasury solicit comments on the
treatment of loans between partners and
partnerships as part of Treasury’s re-
view of the international tax aspects of
pass-through entities.
Special Analyses
It has been determined that this
notice of proposed rulemaking is not a
significant regulatory action as defined
in EO 12866. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) of
the Administrative Procedures Act (5
U.S.C. chapter 5) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and,
therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemak-
ing will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Comments and Request for a Public
Hearing
Before these proposed regulations
are adopted as final regulations, consid-
eration will be given to any written
comments (signed original and eight
(8) copies) that are timely submitted to
the IRS. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for Thursday, June 6, 1996, at 10:00
a.m. in the Auditorium, Internal Reve-
nue Building, 1111 Constitution Ave-
nue NW., Washington DC. Because of
access restrictions, visitors will not be
admitted beyond the building lobby
more than 15 minutes before the
hearing starts.
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 by June
6, 1996, and submit an outline of
topics to be discussed and time to be
devoted to each topic (signed original
and eight (8) copies) by May 23, 1996.
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
Several persons from the Office of
Chief Counsel and the Treasury De-
partment participated in drafting these
regulations.
******
Proposed Amendments to the Regu-
lations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.882–5 is amended
as follows:
1. The text of paragraph (b)(2)(iv) is
added.
2. The text of paragraph (c)(2)(v) is
added.
3. In paragraph (c)(5), Example 4,
Example 6, and Example 7 are added.
4. The text of paragraph (d)(2)(vi) is
added.
5. In paragraph (d)(6), Example 4 is
added.
6. The text of paragraph (e)(3) is
added.
7. In paragraph (e)(5), Example 2 is
added.
8. The text of paragraph (f)(2) is
added.
The added provisions read as fol-
lows:
§ 1.882–5 Determination of interest
deduction.
******
(b) * * *
(2) * * *
(iv) Adjustment to basis of financial
instruments. The basis of a security or
contract that is marked to market
pursuant to section 475 or section 1256
will be determined as if each deter-
mination date were the last business
day of the taxpayer’s taxable year. A
financial instrument with a fair market
value of less than zero is a liability, not
an asset, for purposes of this section.
******
(c) * * *
(2) * * *
(v) Hedging transactions. A transac-
tion (or transactions) that hedges an
asset or liability, or a pool of assets or
a pool of liabilities, will be taken into
account in determining the value,
amount and currency denomination of
the asset or liability that it hedges. A
transaction will be considered to hedge
an asset or liability only if the transac-
tion meets the requirements of
§ 1.1221–2.
******
(5) * * *
Example 4. Partnership liabilities. X and Y are
each foreign corporations engaged in the active
conduct of a trade or business within the United
States through a partnership, P. Under the
partnership agreement, X and Y each have a 50%
interest in the capital and profits of P, and X is
also entitled to a return of 6% per annum on its
capital account that is a guaranteed payment
under section 707(c). In addition, P has incurred
a liability of $100x to an unrelated bank, B.
Under paragraph (c)(2)(vi) of this section, X and
Y each share equally in P’s liability to B. In
accordance with U.S. tax principles, P’s obliga-
tion to make guaranteed payments to X does not
constitute a liability of P, and therefore neither X
nor Y take into account that obligation of the
partnership in computing their actual ratio.
******
Example 6. Securities in ratio as assets. FC is
a foreign corporation engaged in a trade or
business in the United States through a U.S.
branch. FC is a dealer in securities within the
meaning of section 475(c)(1)(B) because it
regularly offers to enter into positions in
currency spot and forward contracts with
customers in the ordinary course of its trade or
business. FC has not elected to use the fixed
ratio. On December 31, 1996, the end of FC’s
taxable year, the mark-to-market value of the
spot and forward contracts entered into by FC
worldwide is 1000x, which includes a mark-to-

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market gain of 500x with respect to the spot and
forward contracts that are shown on the books of
its U.S. branch and that produce effectively
connected income. On its December 31, 1996,
determination date, FC includes 500x in its U.S.
assets, and 1000x in its worldwide assets.
Example 7. Securities in ratio as assets and
liabilities. The facts are the same as in Example
4, except that on December 31, 1996, the mark-
to-market value of the spot and forward contracts
entered into by FC worldwide is 1000x, and FC
has a mark-to-market loss of 500x with respect
to the spot and forward contracts that are shown
on the books of its U.S. branch and that would
produce effectively connected income. On its
December 31, 1996, determination date, FC
includes the 1000x in its worldwide assets for
purposes of determining its ratio of worldwide
liabilities to worldwide assets. For purposes of
Step 3, however, FC has U.S-booked liabilities in
the United States equal to the 500x U.S. loss
position.
(d) * * *
(2) * * *
(vi) Hedging transactions. A transac-
tion (or transactions) that hedges a U.S.
booked liability, or a pool of U.S.
booked liabilities, will be taken into
account in determining the currency
denomination, amount of, and interest
rate associated with, that liability. A
transaction will be considered to hedge
a U.S. booked liability only if the
transaction meets the requirements of
§ 1.1221–2(a), (b), and (c), and is
identified in accordance with the re-
quirements of §1.1221–2(e).
******
(6) * * *
Example 4. Liability hedge—(i) Facts. FC is a
foreign corporation that meets the definition of a
bank, as defined in section 585(a)(2)(B) (without
regard to the second sentence thereof), and that
is engaged in a banking business in the United
States through its branch, B. FC’s corporate
policy is to match the currency denomination of
its assets and liabilities, thereby minimizing
potential gains and losses from currency fluctua-
tions. Thus, at the close of each business day,
FC enters into one or more hedging transactions
as needed to maintain a balanced currency
position, and instructs each branch to do the
same. At the close of business on December 31,
1998, B has 100x of U.S. dollar assets, and U.S.
booked liabilities of 90x U.S. dollars and 1000x
Japanese yen (exchange rate: $1 = ¥100). To
eliminate the currency mismatch in this situation,
B enters into a forward contract with an
unrelated third party that requires FC to pay 10x
dollars in return for 1000x yen. Through this
hedging transaction, FC has effectively converted
its 1000x Japanese yen liability into a U.S. dollar
liability. FC uses its actual ratio of 90% in 1998
for Step 2, the adjusted U.S. booked liabilities
method for purposes of Step 3, and is a calendar
year taxpayer.
(ii) Analysis. Under paragraph 1.882–
5(d)(2)(vi), FC is required to take into account
hedges of U.S. booked liabilities in determining
the currency denomination, amount, and interest
rate associated with those liabilities. Accord-
ingly, FC must treat the Japanese yen liabilities
booked in the United States on December 31,
1998, as U.S. dollar liabilities to determine both
the amount of the liabilities and the interest paid
or accrued on U.S. booked liabilities for
purposes of this section. Moreover, in applying
the scaling ratio prescribed in paragraph (d)(4)(i)
of this section, FC must scale back both the U.S.
booked liabilities and the hedge(s) of those
liabilities. Assuming that FC’s average U.S.
booked liabilities for the year ending December
31, 1998, exceed its U.S.-connected liabilities
determined under paragraphs (a)(1) through
(c)(5) of this section by 10%, FC must scale
back by 10% both its interest expense associated
with U.S. booked liabilities, and any income or
loss from the forward contract to purchase
Japanese yen that hedges its U.S. booked
liabilities.
(e) * * *
(3) Hedging transactions. A transac-
tion (or transactions) that hedges a
liability, or a pool of liabilities, will be
taken into account in determining the
amount of, or interest rate associated
with, that liability. A transaction will
be considered to hedge a liability only
if the transaction meets the require-
ments of §1.1221–2(a), (b), and (c).
******
(5) * * *
Example 2. Asset hedge—(i) Facts. FC is a
foreign corporation that meets the definition of a
bank, as defined in section 585(a)(2)(B) (without
regard to the second sentence thereof), and that
is engaged in the banking business in the United
States through its branch, B. FC’s corporate
policy is to match the currency denomination of
its assets and liabilities, thereby minimizing
potential gains and losses from currency fluctua-
tions. Thus, at the close of each business day,
FC enters into one or more hedging transactions
as needed to maintain a balanced currency
position, and instructs each branch to do the
same. At the close of business on December 31,
1998, B has two U.S. assets, a loan of 90x U.S.
dollars and a loan of 1000x Japanese yen
(exchange rate: $1 = ¥100). B has U.S. booked
liabilities, however, of 100x U.S. dollars. To
eliminate the currency mismatch, B enters into a
forward contract with an unrelated third party
that requires FC to pay 1000x yen in return for
10x dollars. Through this hedging transaction,
FC has effectively converted its 1000x Japanese
yen asset into a U.S. dollar asset. FC uses its
actual ratio of 90% in 1998 for Step 2, has
elected the separate currency pools method in
paragraph (e) of this section, and is a calendar
year taxpayer.
(ii) Analysis. Under paragraph (e)(1)(i) of this
section, FC must take into account any transac-
tion that hedges a U.S. asset in determining the
currency denomination and value of that asset.
FC’s Japanese yen asset will therefore be treated
as a U.S. dollar asset in determining its U.S.
assets in each currency. Accordingly, FC will be
treated as having only U.S. dollar assets in
making its separate currency pools computation.
(f) * * *
(2) Special rules for financial prod-
ucts. Paragraphs (b)(2)(iv), (c)(2)(v),
(d)(2)(vi), and (e)(3) of this section
will be effective for taxable years
beginning on or after the date these
regulations are published as final reg-
ulations in the Federal Register.
Par. 3. Section 1.884–1 is amended
as follows:
1. Paragraph (c)(2)(iii) is added.
2. Paragraph (d)(2) is amended as
follows:
a. Paragraph (d)(2)(vii) is revised.
b. In paragraph (d)(2)(xi), Example 6
through Example 8 are added.
3. The text of paragraph (d)(6)(v) is
added.
4. In paragraph (i)(4), a sentence is
added at the end of the existing text.
The revised and added provisions
read as follows:
§ 1.884–1 Branch profits tax.
******
(c) * * *
(2) * * *
(iii) Hedging transactions. A transac-
tion that hedges a U.S. asset, or a pool
of U.S. assets, will be taken into
account in determining the amount of
that asset (or pool of assets) to the
extent that income or loss from the
hedging transaction produces ECI or
reduces ECI. A transaction that hedges
a U.S. asset, or pool of U.S. assets, is
also taken into account in determining
the currency denomination of the U.S.
asset (or pool of U.S. assets). A
transaction will be considered to hedge
a U.S. asset only if the transaction
meets the requirements of §1.1221–
2(a), (b), and (c), and is identified in
accordance with the requirements of
§ 1.1221–2(e).
(d) * * *
(2) * * *
(vii) Financial instruments. A finan-
cial instrument, including a security as
defined in section 475 and a section
1256 contract, shall be treated as a U.S.
asset of a foreign corporation in the
same proportion that the income, gain,
or loss from such security is ECI for
the taxable year.
******
(xi) * * *
Example 6. Hedging transactions—(i) Facts.
FC is a foreign corporation engaged in a trade or

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business in the United States through a U.S.
branch. The functional currency of FC’s U.S.
branch is the U.S. dollar. On January 1, 1997, in
the ordinary course of its business, the U.S.
branch of FC enters into a forward contract with
an unrelated party to purchase 100 German
marks (DM) on March 31, 1997, for $50. To
hedge the risk of currency fluctuation on this
transaction, the U.S. branch also enters into a
forward contract with another unrelated party to
sell 100 DM on March 31, 1997, for $52,
identifying this contract as a hedging transaction
in accordance with the requirements of §1.1221–
2(e). FC marks its foreign currency transactions
to market for U.S. tax purposes.
(ii) Net assets. At the end of FC’s taxable
year, the value of the forward contract to
purchase 100 DM is marked to market, resulting
in gain of $10 being realized and recognized as
U.S. source effectively connected income by FC.
Similarly, FC marks to market the contract to
sell 100 DM, resulting in $8 of realized and
recognized loss by FC. Pursuant to paragraph
(c)(2)(iii) of this section, FC must increase or
decrease the amount of its U.S. assets to take
into account any transaction that hedges the
contract to purchase 100 DM. Consequently, FC
has a U.S. asset of $2 ($10 (the adjusted basis of
the contract to purchase 100 DM) –$8 (the loss
on the contract to sell 100 DM)).
Example 7. Split hedge. The facts are the same
as in Example 5, except that the contract to sell
100 DM is entered into with an unrelated third
party by the home office of FC. FC includes the
contract to sell 100 DM in a pool of assets
treated as producing income effectively con-
nected with the U.S. trade or business of FC.
Therefore, under paragraph (c)(2)(iii) of this
section, at its next determination date FC will
report a U.S. asset of $2, computed as in
Example 5.
Example 8. Securities. FC is a foreign
corporation engaged in a U.S. trade or business
through a branch in the United States. During the
taxable year 1997, FC derives $100 of income
from securities, of which $60 is treated as U.S.
source effectively connected income under the
terms of an Advance Pricing Agreement that uses
a profit split methodology. Accordingly, pursuant
to paragraph (d)(2)(vii) of this section, FC has a
U.S. asset equal to 60% ($60 of ECI divided by
$100 of gross income from securities) of the
value of the securities.
******
(6) * * *
(v) Computation of E&P basis of
financial instruments. For purposes of
this section, the E&P basis of a
security that is marked to market under
section 475 and a section 1256 contract
shall be adjusted to take into
account gains and losses recog-
nized by reason of section 475 or
section 1256. The E&P basis must be
further adjusted to take into account a
transaction that hedges a U.S. asset, as
provided in paragraph (c)(2)(ii) of this
section.
******
(i) * * *
(4) * * * Paragraphs (c)(2)(iii),
(d)(2)(vii), and (d)(6)(v) of this section
will be effective for taxable years
beginning on or after the date these
regulations are published as final reg-
ulations in the Federal Register.
******
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
March 5, 1996, 8:45 a.m., and published in the
issue of the Federal Register for March 8,
1996, 61 F.R. 9377)

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43
Announcement of the Disbarment, Suspension, or Consent to Voluntary
Suspension of Attorneys, Certified Public Accountants, Enrolled Agents and
Enrolled Actuaries From Practice Before the Internal Revenue Service
Under 31 Code of Federal Regula-
tions, Part 10, an attorney, certified
public accountant, enrolled agent or en-
rolled actuary, in order to avoid the in-
stitution or conclusion of a proceeding
for his disbarment or suspension from
practice before the Internal Revenue
Service, may offer his consent to
suspension from such practice. The
Director of Practice, in his discretion,
may suspend an attorney, certified
public accountant, enrolled agent or
enrolled actuary in accordance with the
consent offered.
Attorneys, certified public account-
ants, enrolled agents and enrolled actu-
aries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting
assistance from, being employed by,
or sharing fees with, any practi-
tioner disbarred or suspended from
practice before the Internal Revenue
Service.
To enable attorneys, certified public
accountants, enrolled agents and en-
rolled actuaries to identify practitioners
under consent suspension from practice
before the Internal Revenue Service,
the Director of Practice will announce
in the Internal Revenue Bulletin the
names and addresses of practitioners
who have been suspended from such
practice, their designation as attor-
ney, certified public accountant, en-
rolled agent or enrolled actuary and
date or period of suspension. This an-
nouncement will appear in the weekly
Bulletin at the earliest practicable date
after such action and will continue to
appear in the weekly Bulletins for five
successive weeks or for as many weeks
as is practicable for each attorney,
certified public accountant, enrolled
agent or enrolled actuary so suspended
and will be consolidated and published
in the Cumulative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue
Service:
NameAddressDesignationDate of Suspension
Miller, Gorden A.Mineral Wells, WVCPAFebruary 1, 1996 to April 30, 1996
Barnes, Charles E.Louisville, KYEnrolled
Agent
Indefinite from February 1, 1996
Polizzi, Angelo J.Grosse Point, MIAttorneyIndefinite from February 6, 1996
Pegler, Charles R.Islandia, NYCPAIndefinite from February 7, 1996
Foster, David M.Birmingham, MIAttorneyIndefinite from February 9, 1996
Smith, Jerry A.Evansville, INCPAFebruary 9, 1996 to November 8, 1996
Penn, Michael J.Dearborn, MICPAFebruary 9, 1996 to February 8, 1997
Mueller, E. LairdSeal Beach, CACPAFebruary 12, 1996 to June 11, 1996
Zezima, Paul P.Norwalk, CTCPAApril 1, 1996 to May 31, 1996
Van Houten, Robert R.Danbury, CTCPAMay 1, 1996 to April 30, 1997
Under Section 330, Title 31 of the
United States Code, the Secretary of
the Treasury, after due notice and
opportunity for hearing, is authorized
to suspend or disbar from practice
before the Internal Revenue Service
any person who has violated the rules
and regulations governing the recogni-
tion of attorneys, certified public ac-
countants, enrolled agents or enrolled
actuaries to practice before the Internal
Revenue Service.
Attorneys, certified public account-
ants, enrolled agents, and enrolled
actuaries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting as-
sistance from, being employed by or
sharing fees with, any practitioner
disbarred or under suspension from
practice before the Internal Revenue
Service.
To enable attorneys, certified public
accountants, enrolled agents and
enrolled actuaries to identify such
disbarred or suspended practitioners,
the Director of Practice will announce
in the Internal Revenue Bulletin the
names and addresses of practitioners
who have been suspended from such
practice, their designation as attorney,
certified public accountant, enrolled
agent or enrolled actuary, and the date
of disbarment or period of suspension.
This announcement will appear in the
weekly Bulletin for five successive
weeks or as long as it is practicable for
each attorney, certified public account-
ant, enrolled agent or enrolled actuary
so suspended or disbarred and will be
consolidated and published in the
Cumulative Bulletin.
After due notice and opportunity
for hearing before an administrative
law judge, the following individuals
have been disbarred from further prac-
tice before the Internal Revenue
Service:

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NameAddressDesignationEffective Date
Gimbel, StephenColumbia, SCCPAJanuary 20, 1996
Tropsa, Donna C.Stamford, CTAttorneyJanuary 20, 1996
Seifert, Frank J.Birmingham, ALCPAJanuary 20, 1996
Hansen, Joe B.Lubbock, TXCPAMarch 2, 1996
Announcement of the Expedited Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the
Internal Revenue Service
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Inter-
nal Revenue Service any practitioner
who, within five years, from the date
the expedited proceeding is instituted,
(1) has had a license to practice as an
attorney, certified public accountant, or
actuary suspended or revoked for
cause; or (2) has been convicted of any
crime under title 26 of the United
States Code or, of a felony under title
18 of the United States Code involving
dishonesty or breach of trust.
Attorneys, certified public account-
ants, enrolled agents, and enrolled ac-
tuaries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting as-
sistance from, being employed by, or
sharing fees with, any practitioner
disbarred or suspended from practice
before the Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents, and en-
rolled actuaries to identify practitioners
under expedited suspension from prac-
tice before the Internal Revenue Serv-
ice, the Director of Practice will an-
nounce in the Internal Revenue Bulletin
the names and addresses of practition-
ers who have been suspended from such
practice, their designation as attorney,
certified public accountant, enrolled
agent, or enrolled actuary, and date or
period of suspension. This announce-
ment will appear in the weekly Bulletin
at the earliest practicable date after
such action and will continue to appear
in the weekly Bulletins for five succes-
sive weeks or for as many weeks as is
practicable for each attorney, certified
public accountant, enrolled agent, or
enrolled actuary so suspended and will
be consolidated and published in the
Cumulative Bulletin.
The following individuals have been
placed under suspension from practice
before the Internal Revenue Service by
virtue of the expedited proceeding
provisions of the applicable regulations:
NameAddressDesignationDate of Suspension
Ginsberg, Melvin R.Univ. Heights, OHAttorneyIndefinite from January 24, 1996
Lahey, Charles W.South Bend, INAttorneyIndefinite from January 24, 1996
DePiano, RobertVenice, CAAttorneyIndefinite from January 24, 1996
Kraig, Jerry B.Shaker Hgts, OHAttorneyIndefinite from January 29, 1996
Brown, David M.Los Angeles, CAAttorneyIndefinite from January 29, 1996
Hanke Jr., Dale L.Duluth, MNAttorneyIndefinite from February 1, 1996
Guillory, Patrick R.San Francisco, CAAttorneyIndefinite from February 1, 1996
Miller, Brian R.Grove, OKCPAIndefinite from February 23, 1996
McLeod, Timothy R.Saginaw, MIAttorneyIndefinite from February 26, 1996
Simone, Robert F.Philadelphia, PAAttorneyIndefinite from February 26, 1996
Bowen, David LeeFrisco City, ALCPAIndefinite from February 27, 1996
Lindley, ClarksonWayazata, MNAttorneyIndefinite from February 27, 1996

SEQ 0107 JOB C34-009-002 PAGE-0045 TERMS
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45
Definition of Terms
Revenue rulings and revenue proce-
dures (hereinafter referred to as ‘‘rul-
ings’’) that have an effect on previous
rulings use the following defined terms
to describe the effect:
Amplified describes a situation where
no change is being made in a prior
published position, but the prior posi-
tion is being extended to apply to a
variation of the fact situation set forth
therein. Thus, if an earlier ruling held
that a principle applied to A, and the
new ruling holds that the same princi-
ple also applies to B, the earlier ruling
is amplified. (Compare with modified,
below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in
a prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an
essential difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but
not to B, and the new ruling holds that
it applies to both A and B, the prior
ruling is modified because it corrects a
published position. (Compare with am-
plified and clarified, above).
Obsoleted describes a previously
published ruling that is not considered
determinative with respect to future
transactions. This term is most com-
monly used in a ruling that lists
previously published rulings that are
obsoleted because of changes in law or
regulations. A ruling may also be
obsoleted because the substance has
been included in regulations subse-
quently adopted.
Revoked describes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Superseded describes a situation
where the new ruling does nothing
more than restate the substance and
situation of a previously published
ruling (or rulings). Thus, the term is
used to republish under the 1986 Code
and regulations the same position pub-
lished under the 1939 Code and regula-
tions. The term is also used when it is
desired to republish in a single ruling a
series of situations, names, etc., that
were previously published over a
period of time in separate rulings.
If the new ruling does more than
restate the substance of a prior ruling, a
combination of terms is used. For
example, modified and superseded de-
scribes a situation where the substance
of a previously published ruling is
being changed in part and is continued
without change in part and it is desired
to restate the valid portion of the
previously published ruling in a new
ruling that is self contained. In this
case the previously published ruling is
first modified and then, as modified, is
superseded.
Supplemented is used in situations in
which a list, such as a list of the names
of countries, is published in a ruling
and that list is expanded by adding
further names in subsequent rulings.
After the original ruling has been
supplemented several times, a new
ruling may be published that includes
the list in the original ruling and the
additions, and supersedes all prior
rulings in the series.
Suspended is used in rare situations
to show that the previous published
rulings will not be applied pending
some future action such as the issuance
of new or amended regulations, the
outcome of cases in litigation, or the
outcome of a Service study.
Abbreviations
The following abbreviations in current use and
formerly used will appear in material published
in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

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Numerical Finding List
1
Bulletins 1996–1 through 1996–13
Announcements:
96–1, 1996–2 I.R.B. 57
96–2, 1996–2 I.R.B. 57
96–3, 1996–2 I.R.B. 57
96–4, 1996–3 I.R.B. 50
96–5, 1996–4 I.R.B. 99
96–6, 1996–5 I.R.B. 43
96–7, 1996–5 I.R.B. 44
96–8, 1996–7 I.R.B. 56
96–9, 1996–8 I.R.B. 30
96–10, 1996–8 I.R.B. 30
96–11, 1996–9 I.R.B. 11
96–12, 1996–11 I.R.B. 30
96–13, 1996–12 I.R.B. 33
96–14, 1996–12 I.R.B. 35
96–15, 1996–13 I.R.B. 22
96–16, 1996–13 I.R.B. 22
96–17, 1996–13 I.R.B. 22
Delegations Orders:
232 (Rev. 2), 1996–7 I.R.B. 49
239 (Rev. 1), 1996–7 I.R.B. 49
Notices:
96–2, 1996–2 I.R.B. 15
96–1, 1996–3 I.R.B. 30
96–4, 1996–4 I.R.B. 69
96–5, 1996–6 I.R.B. 22
96–6, 1996–5 I.R.B. 27
96–7, 1996–6 I.R.B. 22
96–8, 1996–6 I.R.B. 23
96–9, 1996–6 I.R.B. 26
96–10, 1996–7 I.R.B. 47
96–11, 1996–8 I.R.B. 19
96–12, 1996–10 I.R.B. 29
96–13, 1996–10 I.R.B. 29
96–14, 1996–12 I.R.B. 11
96–15, 1996–13 I.R.B. 19
96–16, 1996–13 I.R.B. 20
96–17, 1996–13 I.R.B. 20
Proposed Regulations:
DL–1–95, 1996–6 I.R.B. 28
EE–20–95, 1996–5 I.R.B. 15
EE–34–95, 1996–3 I.R.B. 49
EE–35–95, 1996–5 I.R.B. 19
EE–53–95, 1996–5 I.R.B. 23
EE–55–95, 1996–12 I.R.B. 12
EE–106–82, 1996–10 I.R.B. 31
EE–142–87, 1996–12 I.R.B. 13
EE–148–81, 1996–11 I.R.B. 29
IA–41–93, 1996–11 I.R.B. 29
IA–33–95, 1996–4 I.R.B. 99
INTL–3–95, 1996–6 I.R.B. 29
1
A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1995–27
through 1995–52 will be found in Internal
Revenue Bulletin 1996–1, dated January 2, 1996.
Proposed Regulations—Continued
INTL–9–95, 1996–5 I.R.B. 25
PS–2–95, 1996–7 I.R.B. 50
Revenue Procedures:
96–1, 1996–1 I.R.B. 8
96–2, 1996–1 I.R.B. 60
96–3, 1996–1 I.R.B. 82
96–4, 1996–1 I.R.B. 94
96–5, 1996–1 I.R.B. 129
96–6, 1996–1 I.R.B. 151
96–7, 1996–1 I.R.B. 185
96–8, 1996–1 I.R.B. 187
96–8A, 1996–9 I.R.B. 10
96–9, 1996–2 I.R.B. 15
96–10, 1996–2 I.R.B. 17
96–11, 1996–2 I.R.B. 18
96–12, 1996–3 I.R.B. 30
96–13, 1996–3 I.R.B. 31
96–14, 1996–3 I.R.B. 41
96–15, 1996–3 I.R.B. 41
96–16, 1996–3 I.R.B. 45
96–17, 1996–4 I.R.B. 69
96–18, 1996–4 I.R.B. 73
96–19, 1996–4 I.R.B. 80
96–20, 1996–4 I.R.B. 88
96–21, 1996–4 I.R.B. 96
96–22, 1996–5 I.R.B. 27
96–23, 1996–5 I.R.B. 27
96–24, 1996–5 I.R.B. 28
96–25, 1996–8 I.R.B. 19
96–26, 1996–8 I.R.B. 22
96–27, 1996–11 I.R.B. 27
Revenue Rulings:
96–1, 1996–1 I.R.B. 7
96–2, 1996–2 I.R.B. 5
96–3, 1996–2 I.R.B. 14
96–6, 1996–2 I.R.B. 8
96–4, 1996–3 I.R.B. 16
96–5, 1996–3 I.R.B. 29
96–7, 1996–3 I.R.B. 12
96–8, 1996–4 I.R.B. 62
96–9, 1996–4 I.R.B. 5
96–10, 1996–4 I.R.B. 27
96–11, 1996–4 I.R.B. 28
96–12, 1996–9 I.R.B. 4
96–13, 1996–10 I.R.B. 19
96–14, 1996–6 I.R.B. 20
96–15, 1996–11 I.R.B. 9
96–16, 1996–11 I.R.B. 4
96–17, 1996–13 I.R.B. 5
96–18, 1996–13 I.R.B. 4
Treasury Decisions:
8630, 1996–3 I.R.B. 19
8631, 1996–3 I.R.B. 7
8632, 1996–4 I.R.B. 6
Treasury Decisions—Continued
8633, 1996–4 I.R.B. 20
8634, 1996–3 I.R.B. 17
8635, 1996–3 I.R.B. 5
8636, 1996–4 I.R.B. 64
8637, 1996–4 I.R.B. 29
8638, 1996–5 I.R.B. 5
8656, 1996–13 I.R.B. 9
8639, 1996–5 I.R.B. 12
8640, 1996–2 I.R.B. 10
8641, 1996–6 I.R.B. 4
8642, 1996–7 I.R.B. 4
8643, 1996–11 I.R.B. 4
8644, 1996–7 I.R.B. 16
8645, 1996–8 I.R.B. 4
8646, 1996–8 I.R.B. 10
8647, 1996–9 I.R.B. 7
8648, 1996–10 I.R.B. 23
8649, 1996–9 I.R.B. 5
8650, 1996–10 I.R.B. 5
8651, 1996–11 I.R.B. 24
8652, 1996–11 I.R.B. 11
8653, 1996–12 I.R.B. 4
8654, 1996–11 I.R.B. 14
8655, 1996–12 I.R.B. 9
8656, 1996–13 I.R.B. 9

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

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INDEX
Internal Revenue Bulletins 1996–1
Through 1996–13
For index of items published during
the last six months of 1995, see
I.R.B. 1996–1, dated January 2,
1996.
The abbreviation and number in pa-
rentheses following the index entry
refer to the specific item; numbers
in roman and italic type following the
parentheses refer to the Internal
Revenue Bulletin in which the item
may be found and the page number
on which it appears.
Key to Abbreviations:
RRRevenue Ruling
RPRevenue Procedure
TDTreasury Decision
CDCourt Decision
PLPublic Law
EOExecutive Order
DODelegation Order
TDOTreasury Department Order
TCTax Convention
SPRStatement of Procedural
Rules
PTEProhibited Transaction
Exemption
EMPLOYMENT TAXES
Backup withholding:
Substitute Form W–9 (RP 26) 8, 22
Forms, electronic filing, magnetic
media, Form 1042–S (RP 11) 2, 18
Proposed regulations:
26 CFR 31.3306(r)(2)–1, added;
FUTA taxation of amounts under
employee benefit plans (EE–55–
95) 12, 12
26 CFR 31.9999–0, added; effective
date of temporary backup with-
holding regs (IA–33–95) 4, 99
Partial withdrawal of proposed regula-
tions INTL–52–86 (Notice 4) 4, 69
Regulations:
2 6 C F R 3 1 . 3 4 0 2 ( r ) – 1 a d d e d ;
31.3402(r)–IT, removed; withhold-
ing on distributions of Indian
gaming profits to tribal members
(TD 8634) 3, 17
EMPLOYMENT TAXES—
Continued
Regulations—Continued
2 6 C F R 3 1 . 3 4 0 6 – 0 r e v i s e d ;
3 1 . 3 4 0 6 ( a ) – 1 — 3 1 . 3 4 0 6 ( i ) – 1 ,
31.6051–4, 31.6413(a)–3, added;
35a.9999.OT, 35a.3406–2, re-
moved; 301.6109–1, amended;
backup withholding statement
mailing requirements, and due dili-
gence (TD 8637) 4, 29
26 CFR 31.6051–1(d), 31.6071(a)–
1(a)(3), amended; 31.6051–2(c),
31.6081(a)–1(a)(3), 301.6011–
2(c)(4)(i), revised; time for fur-
nishing wage statements on termi-
nation of employer’s operations
(TD 8636) 4, 64
26 CFR 33 and 38, removed; parts
declared obsolete (TD 8655) 12, 9
26 CFR 301.6109–1, amended gran-
tor trust reporting requirements
(TD 8633) 4, 20
26 CFR 301.7507–1, 301.7507–0,
amended; treatment of acquisition
of certain financial institutions
(TD 8641) 6, 4
26 CFR 301.7701–3, amended; cost
sharing arrangements (TD 8632) 4,
6
26 CFR 301.9100–7T, amended;
generation-skipping transfer tax
(TD 8644) 7, 16
Returns:
Information, electronic filing; Form
941 (RP 19) 4, 80
Magnetic tape reporting: Forms 940,
941, and 945 (RP 18) 4, 73
Reporting agents, Form 8655 (RP
17) 4, 69
ESTATE & GIFT TAXES
ADMINISTRATIVE
Proposed regulations:
26 CFR 301.6103(n)–1, amended;
disclosure of returns and return
information to procure property or
services for tax administration pur-
poses (DL–1–95) 6, 28
Regulations:
26 CFR 20.2035–1; 26 CFR 23 and
24, 25.2517–1, removed; regula-
tions declared obsolete (TD 8655)
12, 9
ESTATE & GIFT TAXES—
Continued
ADMINISTRATIVE—
Continued
Regulations:—Continued
26 CFR 301.6109–1, amended; gran-
tor trust reporting requirements
(TD 8633) 4, 20
26 CFR 301.6011–2(c)(4)(i), revised;
time for furnishing wage state-
m e n t s o n t e r m i n a t i o n o f
employer’s operations (TD 8636)
4, 64
26 CFR 301.7507–1, 301.7507–0,
amended; treatment of acquisition
of certain financial institutions
(TD 8641) 6, 4
26 CFR 301.7701–3, amended; cost
sharing arrangements (TD 8632) 4,
6
26 CFR 301.9100–7T, amended;
generation-skipping transfer tax
(TD 8644) 7, 16
ESTATE TAXES
Annuities, valuation, terminally ill
measured life (RR 3) 1, 14
Regulations:
26 CFR 20.2035–1, removed; regula-
tions declared obsolete (TD 8655)
12, 9
26 CFR 20.7520–3, amended; ac-
turial tables exceptions (TD 8630)
3, 19
26 CFR Part 26, revised; 301.9100–
7T, amended; generation-skipping
transfer tax (TD 8644) 7, 16
Tax conventions, competent authority
procedures (RP 13) 3, 31
GIFT TAXES
Annuities, valuation, terminally ill
measured life (RR 3) 1, 14
Regulations:
26 CFR 25.2517–1, removed; regula-
tions declared obsolete (TD 8655)
12, 9
26 CFR 25.2522(c)–3, 25.7520–3
amended; actuarial tables excep-
tions (TD 8630) 3, 19
26 CFR 25.2702–3, amended; gran-
tor trust reporting requirements
(TD 8633) 4, 20

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GIFT TAXES—Continued
Regulations—Continued
Tax conventions, competent authority
procedures (RP 13) 3, 31
EXCISE TAXES
Proposed regulations:
26 CFR 301.6103(n)–1, amended;
disclosure of returns and return
information to procure property or
services for tax administration pur-
poses (DL–1–95) 6, 28
Regulations:
26 CFR 301.7507–1, 301.7507–0,
amended; treatment of acquisition
of certain financial institutions
(TD 8641) 6, 4
26 CFR 301.9100–7T, amended;
generation-skipping transfer tax
(TD 8644) 7, 16
26 CFR 53.4941(d)–2, amended;
self-dealing for private foundations
(TD 8639) 5, 12
26 CFR 301.6011–2(c)(4)(i), revised;
time for furnishing wage state-
ments on termination of em-
ployer’s operations (TD 8636) 4,
64
26 CFR 301.6109–1, amended; gran-
tor trust reporting requirements
(TD 8633) 4, 20
26 CFR 301.7701–3, amended; cost
sharing arrangements (TD 8632) 4,
6
INCOME TAX
Administration:
Advance valuation of art (RP 15) 3,
41
Delegation of authority:
Authority of Taxpayer Ombuds-
man (DO 239 [Rev. 1]) 7, 49
Authority to modify or rescind
TAO (DO 232 [Rev. 2]) 7, 49
Unagreed issues, referral to Appeals
(RP 9) 2, 15
Annuities and pensions, valuation, ter-
minally ill measured life (RR 3) 2,
14
Automobiles:
Owners and lessees, limitations on
depreciation (RP 25) 8, 19
Books and records:
Imaging systems (Notice 10) 7, 47
INCOME TAX—Continued
Books and records—Continued
Capital expenditures (Notice 7) 6, 22
Consolidated returns, single-entity elec-
tion (RP 21) 4, 96
Credit against tax:
Enpowerment zone employment, in-
tent to issue regulations (Notice 1)
3, 30
Differential earnings rate (Notice 15)
13, 19
Employee plans:
Administrative, COBRA premium is-
sues (RR 8) 4, 62
Determination letters (RP 6) 1, 51
Funding:
Full funding limitations, weighted
average interest rate, Dec. 1995
(Notice 2) 2, 15; Jan. 1996
(Notice 9) 6, 26; Feb. 1996
(Notice 11) 8, 19; March 1996
(Notice 16) 13, 20
Mortality tables (RR 7) 3, 12
Single sum distributions amounts,
cash balance plans (Notice 8) 6,
23
Estimate tax payments for individ-
uals (Notice 5) 6, 22
Estate and trusts:
Valuations, transfers to pooled in-
come funds (RR 1) 1, 7
Foreign insurance companies, domes-
tic asset/liability and investment
yield (RP 23) 5, 27
Forms:
Substitute Forms W–2 and W–3,
specifications (RP 24) 5, 28
Insurance companies:
Life, interest rate tables (RR 2) 2, 5
Interest:
Investment:
Federal short-term, mid-term and
long-term rates, Jan. 1996 (RR
6) 2, 8; Feb. 1996 (RR 14) 6,
20; March 1996 (RR 15) 11, 9
Rates, underpayments and over-
payments (RR 17) 13, 5
Inventories:
LIFO:
Price indexes, department stores,
Nov. 1995 (RR 9) 4, 5; Dec.
1995 (RR 12) 9, 4; Jan. 1996
(RR 18) 13, 4
INCOME TAX—Continued
Investment:
Inflation adjustment for 1996 (RR 4)
3, 16
Loans:
CPI adjustment for below market
loans—1996 (RR 5) 3, 29
Low-income housing credit:
Bond factor amounts Jan.–Mar. 1996
(RR 16) 11, 4
Tax credit (RR 27) 11, 27
Major disaster areas (RR 13) 10, 19
Mark to market, securities dealers
(Notice 12) 10, 29
Partnerships:
Charitable contribution of property
(RR 11) 4, 28
Sales between partners, basis (RR
10) 4, 27
Payments from Presidential Election
Campaign Fund (Notice 13) 10, 29
Property (contributed or other) distribu-
tion; recognition of gain or loss by
contributing partner; correction
(Notice 17) 13, 20
Proposed regulations:
26 CFR 1.72–17A, amended: 1.72–
17A(d)(1), added; 1.72(p)–1,
added; loans to plan participants
(EE–106–82) 10, 31
26 CFR 1.125–3, added; effect of
Family and Medical Leave Act of
1993 on the operation of cafeteria
plans (EE–20–95) 5, 15
26 CFR 1.367–9, added (INTL–9–
95) 5, 24
26 CFR 1.409–1(b)(2)(i), retirement
bonds withdrawn (EE–118–81) 11,
29
26 CFR 1.411(c)–1, amended; alloca-
tion of accrued benefits between
employer and employee contribu-
tions (EE–20–95) 5, 15
26 CFR 1.411(d)(6), added; future
benefit accrual (EE–34–95) 3, 49
26 CFR 1.501(c)(5)–1, amended;
requirements for tax-exempt orga-
nizations (EE–53–95) 5, 23
26 CFR 1.731–2, added; distribution
of marketable securities by a part-
nership (PS–2–95) 7, 50

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INCOME TAX—Continued
Proposed regulations—Continued
26 CFR 1.863–0, added; 1.863–1, –2,
–3, revised; 1.863–4, amended;
1.863–5, removed; source of in-
come from sales of inventory and
natural resources produced in one
jurisdiction and sold in another
(INTL–3–95) 6, 29
2 6 C F R 1 . 1 2 5 4 – 0 , 1 . 1 2 5 4 – 4 ,
amended; treatment of gain from
disposition of interest in certain
natural resource recapture property
by S corporations (PS–7–89) 8, 24
26 CFR 1.6081–4(a), revised:
1.6081–4(d), added; automatic ex-
tension of time for filing individ-
ual tax returns (IA–41–93) 11, 29
26 CFR 31.3121(v)(2)–1, –2, added;
FICA taxation amounts under
employee benefit plans (EE–142–
87) 12, 13
26 CFR 31.3306(r)(2)–1, added;
FUTA taxation amounts under
employee benefit plans (EE–55–
95) 12, 12
26 CFR 301.6651–1(c)(3), revised;
failure to file return or pay tax
(IA–41–93) 11, 29
26 CFR 301.6103(n)–1, amended;
disclosure of returns and return
information to procure property or
services for tax administration pur-
poses (DL–1–95) 6, 28
Property (contributed or other) distribu-
tion; recognition of gain or loss by
contributing partner; correction
(Notice 17) 13, 20
Regulations:
26 CFR 1.162–27, added; dis-
allowance of deductions for
employee remuneration in excess
of $1,000,000 (TD 8650) 10, 5;
TD 8650 corrected (Notice 14) 12,
11
26 CFR 1.305–3, –5, –7, amended;
distribution of stock and stock
rights (TD 8643) 11, 4
26 CFR 1.367(a)–3T, amended; cer-
tain transfers of domestic stock or
securities by U.S. persons to for-
eign corporations (TD 8638) 5, 5
26 CFR 1.385–2(d), removed; 1.358–
6, 1.1032–2, 1.1502–30, added;
controlling corporation’s basis ad-
justment (TD 8648) 10, 23
INCOME TAX—Continued
Regulations—Continued
26 CFR 1.401–12(n) redesignated
1.408–2(e); 1.401–12T, removed;
1.401(f)–1, 1.408–2, amended;
nonbank trustee net worth require-
ments (TD 8635) 3, 5
26 CFR 1.411(d)–6T, added; notice
of significant reduction in the rate
of future benefit accrual (TD
8631) 3, 7
26 CFR 1.469–0, 1.469–4, 1.469–11,
amended; 1.469–9, revised; rules
for certain rental real estate ac-
tivities (TD 8645) 8, 4
26 CFR 1.482–0, 301.7701–3,
amended; 1.482–7, added; 1.482–
7T, removed; section 482 cost
sharing arrangements (TD 8632) 4,
6
26 CFR 1.508–1, 1.6033–2 amended;
exempt organization not required
to file annual returns, integrated
auxiliaries of churches (TD 8640)
2, 10
26 CFR 1.597–1—1.597–7, added;
301.7507–1, 301.7507–9, amended;
treatment of acquisition of certain
financial institutions (TD 8641) 6, 4
26 CFR 1.671–4, revised; 1.6012–3,
301.6109–1, amended; grantor
trust reporting requirements (TD
8633) 4, 20
26 CFR 1.704–4, 1.737–1 through
1.737–5, added; recognition of gain
or loss by contributing partner on
distribution of contributed property
or other property (TD 8642) 7, 4
26 CFR 1.861–8, amended; 1.861–17,
added; allocation and apportion-
ment of research and experimental
expenditures (TD 8646) 8, 10
26 CFR 1.1258–1, added; conversion
transactions (TD 8649) 9, 5
26 CFR 1.1301–1, 1.32–1, 1.103–12,
1.110–1, 1.114–1, 1.115–1, 1.116–
1, –2, 1.367(a)–7T, 1.383–1A,
–2A, –3A, 1.804–1, 1.805–1
through –8 and intermediate sec-
tions, 1.820–1, –2, –3, 1.824–1,
– 2 , – 3 , r e m o v e d ; 1 . 9 0 7 – 0 ,
amended; 1.907(e)(1), 1.907(a)–
0A, –1A, 1.907(b)–1A, –2A,
1.907(c)–1A, –2A, –3A, 1.907(d)–
1A, 1.907(e)–1A, 1.907(f)–1A,
1.995–7, 1301–0 through –3 and
intermediate sections, 1.1303–1,
1.1304–1 through –6 and inter-
mediate sections, removed; regula-
tions declared obsolete (TD 8655)
12, 9
INCOME TAX—Continued
Regulations—Continued
26 CFR 1.1445–1, 1.1445–8(c)(2)(i),
revised; 1.1445–5, amended; with-
holding of tax on dispositions of
U.S. real property interests by
foreign persons (TD 8647) 9, 7
26 CFR 1.6042–4, 1.6044–5, revised;
1.6049–6, 301.6109–1, amended;
1.6050N–1, added Backup with-
holding, statement mailing require-
ments and due diligence (TD
8637) 4, 29
26 CFR 1.6050I–0T, –2T, removed;
1.6050I–0, –2, added; cash report-
ing by court clerks (TD 8652) 11,
11
26 CFR 1.6050P–0, –1, added,
1.6050P–0T, –1T, removed; infor-
mation reporting for discharges of
indebtedness (TD 8654) 11, 14
26 CFR 1.6081–4, amended; 1.6081–
4T, added; automatic extension of
time for filing income tax returns
(TD 8651) 11, 24
26 CFR 1.6662–0, –6T, removed;
1.6662.5T, revised; 1.6662–6,
added; imposition of accuracy-
related penalty (TD 8656) 13, 9
26 CFR 301.6011–2(c)(4)(i), revised;
time for furnishing wage state-
m e n t s u p o n t e r m i n a t i o n o f
employer’s operations (TD 8636)
4, 64
26 CFR 1.7520–3, amended; actu-
arial tables exceptions (TD 8630)
3, 19
26 CFR 301.6676–1, 301.7424–1,
removed; regulations declared ob-
solete (TD 8655) 12, 9
26 CFR 301.9100–7T, amended;
generation-skipping transfer tax
(TD 8644) 7, 16
Returns:
Form 990, church affiliated organiza-
tions exempt from filing (RP 10)
2, 17
On-line service electronic filing pro-
gram; Form 1040 (RP 20) 4, 88
Rulings:
Areas in which advance rulings
willing to be issued:
Associate Chief Counsel (Domes-
tic), Associate Chief Counsel
(Employee Benefits and Exempt
Organizations) (RP 3) 1, 86
Associate Chief Counsel (Interna-
tional) (RP 7) 1, 185
Areas in which rulings will not be
issued (RP 12) 3, 30

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INCOME TAX—Continued
Rulings—Continued
Employee plans and exempt organi-
zations user fees correction (RP
8A) 9, 10
Letter rulings, determination letters,
and information letters, Associate
Chief Counsel (Domestic), Associ-
ate Chief Counsel (Employee Ben-
efits and Exempt Organizations),
Associate Chief Counsel (Enforce-
ment Litigation) and Associate
Chief Counsel (International) (RP
1) 1, 8
No-rule provision, combining trans-
actions (RP 22) 5, 27 (Notice 6) 5,
27
INCOME TAX—Continued
Rulings—Continued
Tax-exempt bonds, issuance pro-
cedrues (RP 16) 3, 45
Technical advice, employee plans
and exempt organizations (RP 5)
1, 129
Technical advice to the District Direc-
tors and Chiefs, Appeals Offices,
from the Associate Chief Counsel
(Domestic), Associate Chief Counsel
(Employee Benefits and Exempt
Organizations), Associate Chief
Counsel (Enforcement Litigation),
and Associate Chief Counsel (Inter-
national) (RP 2) 1, 60
INCOME TAX—Continued
Rulings—Continued
Rulings and determination letters, issu-
ance procedures (RP 4) 1, 94
Tax conventions:
Competent authority procedure (RP
13) 3, 31
Relief in treaty cases (RP 14) 3, 41
User fees for employee plans and exempt
organizations (RP 8) 1, 187

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NOTES

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NOTES

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NOTES

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4
INTERNAL REVENUE BULLETIN
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Public Laws, Treasury Decisions, and other matters of a permanent nature published in the weekly Internal Revenue
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