Internal Revenue Bulletin 1997-9 (PDF rendition): IRS Revenue Rulings

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

INCOME TAX
Rev. Rul. 97–9, page 4.
Medical and dental expenses.Amounts paid to obtain
a controlled substance (such as marijuana), in violation
of federal law, are not deductible expenses for medical
care under section 213 of the Code.
T.D. 8709, page 5.
REG–242996–96, page 18.
Final, temporary, and proposed regulations under sec-
tion 1275 of the Code relate to the federal income tax
treatment of inflation-indexed debt instruments. A public
hearing will be held on the proposed regulations on April
30, 1997.
REG–252233–96, page 19.
Proposed regulations under section 368 of the Code
provide certain reorganizations, transfers by the acquir-
ing corporation of target assets or stock to certain
controlled corporations, and transfers of target assets to
partnerships, will not disqualify the transaction from
satisfying the continuity of interest and business enter-
prise requirements. A public hearing will be held on May
7, 1997.
EMPLOYEE PLANS
Notice 97–16, page 15.
Weighted average interest rate update.Guidelines are
set forth for determining for February 1997, the
weighted average interest rate and the resulting permis-
sible range of interest rates used to calculate current
liability for purposes of the full funding limitation of
section 412(c)(7) of the Code as amended by the
Omnibus Budget Reconciliation Act of 1987 and by the
Uruguay Round Agreements Act (GATT).
EXEMPT ORGANIZATIONS
Announcement 97–17, page 23.
A list is given of organizations now classified as private
foundations.
EMPLOYMENT TAX
T.D. 8706, page 11.
Final regulations under section 3402 of the Code relate
to Form W–4, Employee’s Withholding Allowance Certifi-
cate.
Page 17.
Social security domestic employee coverage thresh-
old.The Commissioner of the Social Security Administra-
tion has determined the domestic employee coverage
threshold amount for 1997.
ADMINISTRATIVE
Rev. Proc. 97–17, page 15.
Mortgage revenue bonds; mortgage credit certifi-
cates; average annual mortgage originations.A list is
set forth of the average annual aggregate principal
amount of mortgages executed during the years 1992,
1993, and 1994 for each state, the District of Colum-
bia, Guam, Puerto Rico, and the Virgin Islands to assist
issuers of mortgage revenue bonds and mortgage credit
certificates in determining whether the required portion
of loans are made available in targeted areas as
described in section 143(h) of the Code. Rev. Proc.
95–14 is obsolete, except as provided in section 5.02
of this procedure.
Announcement 97–15, page 23.
Rev. Proc. 97–10, 1997–2 I.R.B. 59, relating to the
change in computing depreciation for retail motor fuels
outlets, is corrected.
Announcement 97–16, page 23.
Notice 97–9, 1997–2 I.R.B. 35, regarding adoption
assistance, is corrected.
Finding Lists begin on page 26.
Monthly Index for February on page 28.
Bulletin No. 1997–9
March 3, 1997
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.

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.
2

Introduction
The Internal Revenue Bulletin is the authoritative instru-
ment of the Commissioner of Internal Revenue for
announcing official rulings and procedures of the Inter-
nal Revenue Service and for publishing Treasury Deci-
sions, Executive Orders, Tax Conventions, legislation,
court decisions, and other items of general interest. It is
published weekly and may be obtained from the Superin-
tendent of Documents on a subscription basis. Bulletin
contents of a permanent nature are consolidated semi-
annually 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. Proce-
dures 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 Ser-
vice 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 unwar-
ranted 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 consid-
ered, and Service personnel and others concerned 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 Administra-
tive Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary (Enforce-
ment).
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 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.
3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 25.—Interest on Certain
Home Mortgages
26 CFR 1.25–4T: Qualified mortgage credit cer-
tificate program (temporary).
The average annual aggregate principal amount
of mortgages executed during 1992, 1993, 1994
are set forth for use by issuers of mortgage credit
certificates in determining if the required portion
of loans under sections 25(c)(2)(A)(iii)(V) and
143(h) of the Code are made available in targeted
areas. See Rev. Proc. 97–17, page 15.
Section 103.—State and Local
Bonds
26 CFR 1.103–1: Interest upon obligations of a
State, Territory, etc.
The average annual aggregate principal amount
of mortgages executed during 1992, 1993, 1994
are set forth for use by issuers of qualified
mortgage bonds in determining if the required
portion of loans are made available in targeted
areas under section 143(h) of the Code. See Rev.
Proc. 97–17, page 15.
Section 143.—Mortgage Revenue
Bonds: Qualified Mortgage Bond
and Qualified Veterans’ Mortgage
Bond
26 CFR 6a.103A–2: Qualified mortgage bond.
The average annual aggregate principal amount
of mortgages executed during 1992, 1993, 1994
are set forth for use by issuers of qualified
mortgage bonds and mortgage credit certificates in
determining if the required portion of loans are
made available in targeted areas under section
143(h) of the Code. See Rev. Proc. 97–17, page
15.
Section 213.—Medical, Dental,
Etc., Expenses
26 CFR 1.213–1: Medical, dental, etc., expenses.
Medical and dental expenses.
Amounts paid to obtain a controlled
substance (such as marijuana), in viola-
tion of federal law, are not deductible
expenses for medical care under section
213 of the Code.
Rev. Rul. 97–9
ISSUE
Is an amount paid to obtain a con-
trolled substance (such as marijuana) for
medical purposes, in violation of federal
law, a deductible expense for medical
care under § 213 of the Internal Rev-
enue Code?
FACTS
Based on the recommendation of a
physician,Apurchased marijuana and
used it to treatA’s disease in a state
whose laws permit such purchase and
use.
LAW AND ANALYSIS
Section 213(a) allows a deduction for
uncompensated expenses of an indi-
vidual for medical care to the extent
such expenses exceed 7.5 percent of
adjusted gross income. Section 213(d)(1)
provides, in part, that ‘‘medical care’’
means amounts paid for the cure, miti-
gation, and treatment of disease. How-
ever, under § 213(b) an amount paid for
medicine or a drug is an expense for
medical care under § 213(a) only if the
medicine or drug is a prescribed drug or
insulin. Section 213(d)(3) provides that
a ‘‘prescribed drug’’ is a drug or bio-
logical that requires a prescription of a
physician for its use by an individual.
Section 1.213–1(e)(2) of the Income
Tax Regulations provides, in part, that
the term ‘‘medicine and drugs’’ includes
only items that are ‘‘legally procured.’’
Section 1.213–1(e)(1)(ii) provides that
amounts expended for illegal operations
or treatments are not deductible.
Rev. Rul. 78–325, 1978–2 C.B. 124,
holds that amounts paid by a taxpayer
for laetrile, prescribed by a physician for
the medical treatment of the taxpayer’s
illness, are expenses for medicine and
drugs that are deductible under § 213.
The revenue ruling states that the
laetrile was purchased and used in a
locality where its sale and use were
legal.
Rev. Rul. 73–201, 1973–1 C.B. 140,
holds that amounts paid for a vasectomy
and an abortion are expenses for medi-
cal care that are deductible under § 213.
The revenue ruling states that neither
procedure was illegal under state law.
A’s purchase and use of marijuana
were permitted under the laws ofA’s
state. However, marijuana is listed as a
controlled substance on Schedule I of
the Controlled Substances Act (CSA),
21 U.S.C. §§ 801–971. 21 U.S.C.
§ 812(c). Except as authorized by the
CSA, it is unlawful for any person to
manufacture, distribute, or dispense, or
possess with intent to manufacture, dis-
tribute, or dispense, a controlled sub-
stance. 21 U.S.C. § 841(a). Further, it is
unlawful for any person knowingly or
intentionally to possess a controlled sub-
stance except as authorized by the CSA.
21 U.S.C. 844(a). Generally, the CSA
does not permit the possession of con-
trolled substances listed on Schedule I,
even for medical purposes, and even
with a physician’s prescription.
Notwithstanding state law, a con-
trolled substance (such as marijuana),
obtained in violation of the CSA, is not
‘‘legally procured’’ within the meaning
of § 1.213–1(e)(2). Further, an amount
expended to obtain a controlled sub-
stance (such as marijuana) in violation
of the CSA is an amount expended for
an illegal treatment within the meaning
of § 1.213–1(e)(1)(ii). Accordingly,A
may not deduct under § 213 the amount
Apaid to purchase marijuana.
HOLDING
An amount paid to obtain a controlled
substance (such as marijuana) for medi-
cal purposes, in violation of federal law,
is not a deductible expense for medical
care under § 213. This holding applies
even if the state law requires a prescrip-
tion of a physician to obtain and use the
controlled substance and the taxpayer
obtains a prescription.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 78–325 is obsoleted. Subse-
quent to the issuance of Rev. Rul.
78–325, the courts have upheld the Food
and Drug Administration determination
that generally prohibits interstate com-
merce in laetrile under the Food, Drug,
and Cosmetic Act, 21 U.S.C. §§ 331
and 355(a).See United States v.
Rutherford, 442 U.S. 544 (1979);
Rutherford v. United States, 806 F.2d
1455 (10th Cir. 1986). Thus, notwith-
standing state and local law, laetrile
cannot be legally procured within the
meaning of § 1.213–1(e)(2). Accord-
ingly, amounts paid to obtain laetrile are
not deductible under § 213.
Rev. Rul. 73–201 is clarified to re-
flect that the medical procedures at issue
in that revenue ruling are not illegal
under federal law.
DRAFTING INFORMATION
The principal authors of this revenue
ruling are Donna M. Crisalli and Sharon
Hester of the Office of Assistant Chief
Counsel (Income Tax and Accounting).
For further information regarding this
4

revenue ruling, contact Ms. Crisalli or
Ms. Hester on (202) 622–4920 (not a
toll-free call).
Section 1275.—Other Definitions
and Special Rules
26 CFR 1.1275–7T: Inflation-indexed debt instru-
ments (temporary).
T.D. 8709
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Inflation-Indexed Debt Instruments
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary and final regula-
tions.
SUMMARY: This document contains
temporary regulations relating to the
federal income tax treatment of
inflation-indexed debt instruments, in-
cluding Treasury Inflation-Indexed Secu-
rities. The text of the temporary regula-
tions also serves as the text of REG–
242996–96, page 18. This document
also contains amendments to final regu-
lations to reflect the addition of the
temporary regulations. The regulations
in this document provide needed guid-
ance to holders and issuers of inflation-
indexed debt instruments.
EFFECTIVE DATE: The regulations are
effective January 6, 1997.
FOR FURTHER INFORMATION CON-
TACT: Jeffrey W. Maddrey, (202) 622–
3940, or William E. Blanchard, (202)
622–3950 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
The Department of the Treasury pub-
lished final rules describing the terms
and conditions of new debt instruments
that it plans to issue. The payments on
these debt instruments (Treasury
Inflation-Indexed Securities) will be in-
dexed for inflation and deflation.
On June 14, 1996, the IRS published
final regulations in theFederal Register
relating to certain debt instruments that
provide for contingent payments (61 FR
30133). The preamble to the final regu-
lations indicates that the noncontingent
bond method described in § 1.1275–
4(b) might be inappropriate for the
Treasury Inflation-Indexed Securities.
On October 15, 1996, the IRS published
Notice 96–51 (1996–42 I.R.B. 6), which
announced the IRS’s intention to issue
temporary and proposed regulations that
would provide guidance on the federal
income tax treatment of the Treasury
Inflation-Indexed Securities and other
debt instruments with similar terms.
This document contains the temporary
regulations described in Notice 96–51.
Explanation of provisions
A. In general
The temporary regulations provide
rules for the treatment of certain debt
instruments that are indexed for inflation
and deflation, including Treasury
Inflation-Indexed Securities. The tempo-
rary regulations generally require hold-
ers and issuers of inflation-indexed debt
instruments to account for interest and
original issue discount (OID) using con-
stant yield principles. In addition, the
temporary regulations generally require
holders and issuers of inflation-indexed
debt instruments to account for inflation
and deflation by making current adjust-
ments to their OID accruals.
B. Applicability
The temporary regulations apply to
inflation-indexed debt instruments. In
general, an inflation-indexed debt instru-
ment is a debt instrument that (1) is
issued for cash, (2) is indexed for
inflation and deflation (as described be-
low), and (3) is not otherwise a contin-
gent payment debt instrument. The tem-
porary regulations do not apply,
however, to certain debt instruments,
such as debt instruments issued by
qualified state tuition programs.
C. Indexing methodology
A debt instrument is considered in-
dexed for inflation and deflation if the
payments on the instrument are indexed
by reference to the change in value of a
general price or wage index over the
term of the instrument. Specifically, the
amount of each payment on an inflation-
indexed debt instrument must equal the
product of (1) the amount of the pay-
ment that would be payable on the
instrument (determined as if there were
no inflation or deflation over the term of
the instrument) and (2) the ratio of the
value of the reference index for the
payment date to the value of the refer-
ence index for the issue date.
The reference index for a debt instru-
ment is the mechanism for measuring
inflation and deflation over the term of
the instrument. This mechanism associ-
ates the value of a single qualified
inflation index for a particular month
with a specified day of a succeeding
month. For example, under the terms of
the Treasury Inflation-Indexed Securi-
ties, the reference index for the first day
of a month is the value of a qualified
inflation index for the third preceding
month. The reference index must be
reset once a month to the current value
of a qualified inflation index. Between
reset dates, the value of the reference
index is determined through straight-line
interpolation.
A qualified inflation index is a gen-
eral price or wage index that is updated
and published at least monthly by an
agency of the United States Govern-
ment. A general price or wage index is
an index that measures price or wage
changes in the economy as a whole. An
index is not general if it only measures
price or wage changes in a particular
segment of the economy. For example,
the non-seasonally adjusted U.S. City
Average All Items Consumer Price In-
dex for All Urban Consumers (CPI-U),
which is published by the Bureau of
Labor Statistics of the Department of
Labor, is a qualified inflation index
because it measures general price
changes in the economy. By contrast,
the gasoline price component of the
CPI-U is not a qualified inflation index
because it only measures price changes
in a particular segment of the economy.
D. Coupon bond method
The temporary regulations provide a
simplified method of accounting for
qualified stated interest and inflation
adjustments on certain inflation-indexed
debt instruments (the coupon bond
method). To qualify for the coupon bond
method, an inflation-indexed debt instru-
ment must satisfy two conditions. First,
there must be no more than a de
minimis difference between the debt
instrument’s issue price and its principal
amount for the issue date. Second, all
stated interest on the debt instrument
must be qualified stated interest. Be-
cause Treasury Inflation-Indexed Securi-
ties that are not stripped into principal
and interest components satisfy both of
these conditions, the coupon bond
method applies to these securities.
If an inflation-indexed debt instru-
ment qualifies for the coupon bond
method, the stated interest payable on
the debt instrument is taken into account
under the taxpayer’s regular method of
accounting. Any increase in the
5

inflation-adjusted principal amount is
treated as OID for the period in which
the increase occurs. Any decrease in the
inflation-adjusted principal amount is
taken into account under the rules for
deflation adjustments described below.
For example, if a taxpayer holds a
Treasury Inflation-Indexed Security for
an entire calendar year and the taxpayer
uses the cash receipts and disbursements
method of accounting (cash method), the
taxpayer generally includes in income
the interest payments received on the
security during the year. In addition, the
taxpayer includes in income an amount
of OID measured by subtracting the
inflation-adjusted principal amount of
the security at the beginning of the year
from the inflation-adjusted principal
amount of the security at the end of the
year. If the taxpayer uses an accrual
method of accounting rather than the
cash method, the taxpayer includes in
income the qualified stated interest that
accrued on the debt instrument during
the year and an amount of OID mea-
sured by subtracting the inflation-
adjusted principal amount of the security
at the beginning of the year from the
inflation-adjusted principal amount of
the security at the end of the year.
E. Discount bond method
If an inflation-indexed debt instru-
ment does not qualify for the coupon
bond method (for example, because it is
issued at a discount), the instrument is
subject to the discount bond method. In
general, the discount bond method re-
quires holders and issuers to make cur-
rent adjustments to their OID accruals to
account for inflation and deflation.
Under the discount bond method, a
taxpayer determines the amount of OID
allocable to an accrual period by using
steps similar to those provided in
§ 1.1272–1(b)(1). First, the taxpayer de-
termines the yield to maturity of the
debt instrument as if there were no
inflation or deflation over the term of
the instrument. Second, the taxpayer
determines the length of the accrual
periods to be used to allocate OID over
the term of the debt instrument, pro-
vided no accrual period is longer than
one month. Third, the taxpayer deter-
mines the percentage change in the
value of the reference index during the
accrual period by comparing the value
at the beginning of the period to the
value at the end of the period. Fourth,
the taxpayer determines the OID al-
locable to the accrual period by using a
formula that takes into account both the
yield of the debt instrument and the
percentage change in the value of the
reference index during the period. Fifth,
the taxpayer allocates to each day in the
accrual period a ratable portion of the
OID for the accrual period (the daily
portions). If the daily portions for an
accrual period are positive amounts,
these amounts are taken into account
under section 163(e) by an issuer and
under section 1272 by a holder. If the
daily portions for an accrual period are
negative amounts, these amounts are
taken into account under the rules for
deflation adjustments described below.
Under Notice 96–51, the discount
bond method would have allowed quali-
fied stated interest. The temporary regu-
lations, however, provide that no interest
payments on an inflation-indexed debt
instrument subject to the discount bond
method are qualified stated interest. The
Treasury and the IRS believe that this
change simplifies the taxation of an
inflation-indexed debt instrument subject
to the discount bond method.
F. Deflation adjustments
The temporary regulations treat defla-
tion adjustments in a manner consistent
with the treatment of net negative ad-
justments on contingent payment debt
instruments under § 1.1275–4(b)(6)(iii).
If a holder has a deflation adjustment
for a taxable year, the deflation adjust-
ment first reduces the amount of interest
otherwise includible in income with re-
spect to the debt instrument for the
taxable year. If the amount of the defla-
tion adjustment exceeds the interest oth-
erwise includible in income for the
taxable year, the holder treats the excess
as an ordinary loss in the taxable year.
However, the amount treated as an ordi-
nary loss is limited to the amount by
which the holder’s total interest inclu-
sions on the debt instrument in prior
taxable years exceed the total amount
treated by the holder as an ordinary loss
on the debt instrument in prior taxable
years. If the deflation adjustment ex-
ceeds the interest otherwise includible in
income by the holder with respect to the
debt instrument for the taxable year and
the amount treated as an ordinary loss
for the taxable year, the excess is car-
ried forward to offset interest income on
the debt instrument in subsequent tax-
able years. Similar rules apply to deter-
mine an issuer’s interest deductions and
income for the debt instrument.
G. Minimum guarantee
Certain inflation-indexed debt instru-
ments may provide for an additional
payment at maturity (a minimum guar-
antee payment) if the total amount of
inflation-adjusted principal paid on the
debt instrument is less than the instru-
ment’s stated principal amount. Under
both the coupon bond method and the
discount bond method, a minimum guar-
antee payment is ignored until the pay-
ment is made. If a minimum guarantee
payment is made, the payment is treated
as interest on the date it is paid.
In general, the temporary regulations
only allow a debt instrument that is
indexed by reference to the CPI–U to
provide for a minimum guarantee pay-
ment. The Treasury and the IRS believe
that there is only a small possibility that
the total amount of principal paid on a
debt instrument indexed to the CPI–U
will be less than the instrument’s stated
principal amount. In this case, it is
appropriate to ignore the minimum guar-
antee payment until it is paid.
H. Principal amount for the issue date
For purposes of the temporary regula-
tions, if an inflation-indexed debt instru-
ment is issued with pre-issuance accrued
interest, the principal amount of the
instrument for the issue date includes an
adjustment for inflation or deflation.
This adjustment is measured by the
change in the value of the reference
index between the date on which inter-
est starts to accrue (the dated date in the
case of a Treasury Inflation-Indexed
Security) and the issue date. The stated
principal amount of a debt instrument
under the regulations, however, is not
adjusted for inflation or deflation be-
tween the date on which interest starts
to accrue and the issue date. Therefore,
the stated principal amount of the debt
instrument is the same regardless of
whether interest accrues on the instru-
ment from the issue date or from an
earlier date. The stated principal amount
of a Treasury Inflation-Indexed Security
is the par amount of the security, as
defined in the final rules published by
the Treasury Department describing the
terms and conditions of Treasury
Inflation-Indexed Securities.
When there is a difference between
the stated principal amount of an
inflation-indexed debt instrument and its
principal amount for the issue date, the
instrument’s principal amount for the
issue date generally is used for purposes
of applying the rules in the temporary
6

regulations to the instrument. For ex-
ample, the debt instrument’s principal
amount for the issue date is used to
determine whether the instrument quali-
fies for the coupon bond method. The
temporary regulations require the use of
a debt instrument’s stated principal
amount rather than its principal amount
for the issue date to measure the amount
of a minimum guarantee payment.
I. Strips
Treasury Inflation-Indexed Securities
are eligible for the Department of the
Treasury’s Separate Trading of Regis-
tered Interest and Principal of Securities
(STRIPS) program. Under this program,
the interest and principal components of
a Treasury Inflation-Indexed Security
may be transferred as separate instru-
ments (stripped bonds and coupons). In
general, section 1286 treats the holder of
a stripped bond (or coupon) as if the
holder purchased a newly issued debt
instrument that has OID. The temporary
regulations provide that the holder of a
component of a Treasury Inflation-
Indexed Security that is stripped under
the Treasury STRIPS program must use
the discount bond method to account for
the OID on the component.
J. Information reporting
The temporary regulations do not pro-
vide any new information reporting
rules for inflation-indexed debt instru-
ments. The OID and any qualified stated
interest on an inflation-indexed debt
instrument should be reported on Form
1099–OID. The IRS plans to issue guid-
ance for the reporting of OID on Trea-
sury Inflation-Indexed Securities that are
stripped under the STRIPS program.
K. Effective date
The temporary regulations apply to an
inflation-indexed debt instrument issued
on or after January 6, 1997.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations and, be-
cause the regulations do not impose a
collection of information on small enti-
ties, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursu-
ant to section 7805(f) of the Internal
Revenue Code, these temporary regula-
tions will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal author of the regula-
tions is Jeffrey W. Maddrey, Office of
Assistant Chief Counsel (Financial Insti-
tutions and Products). However, other
personnel from the IRS and Treasury
Department participated in their devel-
opment.
* * * * *
Adoption of Amendments to the Regula-
tions
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 two entries
in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1275–7T also issued under 26
U.S.C. 1275(d). * * *
Section 1.1286–2T also issued under 26
U.S.C. 1286(f). * * *
Par. 2. Section 1.1271–0 is amended
by—
1. Revising the second sentence of
paragraph (a);
2. Revising the introductory text of
paragraph (b); and
3. Adding entries for § 1.1275–7T in
paragraph (b).
The revisions and additions read as
follows:
§ 1.1271–0 Original issue discount; ef-
fective date; table of contents.
(a) * * * Taxpayers, however, may
rely on these sections (as contained in
26 CFR part 1 revised April 1, 1996) for
debt instruments issued after December
21, 1992, and before April 4, 1994.
(b)Table of contents. This section
lists captioned paragraphs contained in
§§ 1.1271–1 through 1.1275–7T.
* * * * *
§ 1.1275–7T Inflation-indexed debt in-
struments (temporary).
(a) Overview.
(b) Applicability.
(1) In general.
(2) Exceptions.
(c) Definitions.
(1) Inflation-indexed debt instrument.
(2) Reference index.
(3) Qualified inflation index.
(4) Inflation-adjusted principal amount.
(5) Minimum guarantee payment.
(d) Coupon bond method.
(1) In general.
(2) Applicability.
(3) Qualified stated interest.
(4) Inflation adjustments.
(5) Example.
(e) Discount bond method.
(1) In general.
(2) No qualified stated interest.
(3) OID.
(4) Example.
(f) Special rules.
(1) Deflation adjustments.
(2) Adjusted basis.
(3) Subsequent holders.
(4) Minimum guarantee.
(5) Temporary unavailability of a quali-
fied inflation index.
(g) Reopenings.
(h) Effective date.
* * * * *
Par. 3. Section 1.1275–4 is amended
by—
1. Removing the word ‘‘or’’ from the
end of paragraph (a)(2)(vi);
2. Redesignating paragraph (a)(2)(vii)
as paragraph (a)(2)(viii); and
3. Adding a new paragraph
(a)(2)(vii).
The addition reads as follows:
§ 1.1275–4 Contingent payment debt
instruments.
(a) * * *
(2) * * *
(vii) An inflation-indexed debt instru-
ment (as defined in § 1.1275–7T); or
* * * * *
Par. 4. Section 1.1275–7T is added to
read as follows:
§ 1.1275–7T Inflation-indexed debt in-
struments (temporary).
(a)Overview.This section provides
rules for the federal income tax treat-
ment of an inflation-indexed debt instru-
ment. If a debt instrument is an
inflation-indexed debt instrument, one of
two methods will apply to the instru-
ment: the coupon bond method (as de-
scribed in paragraph (d) of this section)
or the discount bond method (as de-
scribed in paragraph (e) of this section).
Both methods determine the amount of
OID that is taken into account each year
by a holder or an issuer of an inflation-
indexed debt instrument.
(b)Applicability—(1)In general. Ex-
cept as provided in paragraph (b)(2) of
this section, this section applies to an
7

inflation-indexed debt instrument as de-
fined in paragraph (c)(1) of this section.
For example, this section applies to
Treasury Inflation-Indexed Securities.
(2)Exceptions. This section does not
apply to an inflation-indexed debt in-
strument that is also—
(i) A debt instrument (other than a
tax-exempt obligation) described in sec-
tion 1272(a)(2) (for example, U.S. sav-
ings bonds, certain loans between natu-
ral persons, and short-term taxable
obligations); or
(ii) A debt instrument subject to sec-
tion 529 (certain debt instruments issued
by qualified state tuition programs).
(c)Definitions. The following defini-
tions apply for purposes of this section:
(1)Inflation-indexed debt instrument.
An inflation-indexed debt instrument is
a debt instrument that satisfies the fol-
lowing conditions:
(i)Issued for cash. The debt instru-
ment is issued for U.S. dollars and all
payments on the instrument are denomi-
nated in U.S. dollars.
(ii)Indexed for inflation and defla-
tion. Except for a minimum guarantee
payment (as defined in paragraph (c)(5)
of this section), each payment on the
debt instrument is indexed for inflation
and deflation. A payment is indexed for
inflation and deflation if the amount of
the payment is equal to—
(A) The amount that would be pay-
able if there were no inflation or defla-
tion over the term of the debt instru-
ment, multiplied by
(B) A ratio, the numerator of which
is the value of the reference index for
the date of the payment and the denomi-
nator of which is the value of the
reference index for the issue date.
(iii)No other contingencies. No pay-
ment on the debt instrument is subject
to a contingency other than the inflation
contingency or the contingencies de-
scribed in this paragraph (c)(1)(iii). A
debt instrument may provide for—
(A) A minimum guarantee payment
as defined in paragraph (c)(5) of this
section; or
(B) Payments under one or more al-
ternate payment schedules if the pay-
ments under each payment schedule are
indexed for inflation and deflation and a
payment schedule for the debt instru-
ment can be determined under
§ 1.1272–1(c). (For purposes of this
section, the rules of § 1.1272–1(c) are
applied to the debt instrument by assum-
ing that no inflation or deflation will
occur over the term of the instrument.)
(2)Reference index. The reference in-
dex is an index used to measure infla-
tion and deflation over the term of a
debt instrument. To qualify as a refer-
ence index, an index must satisfy the
following conditions:
(i) The value of the index is reset
once a month to a current value of a
single qualified inflation index (as de-
fined in paragraph (c)(3) of this section).
For this purpose, a value of a qualified
inflation index is current if the value has
been updated and published within the
preceding six month period.
(ii) The reset occurs on the same day
of each month (the reset date).
(iii) The value of the index for any
date between reset dates is determined
through straight-line interpolation.
(3)Qualified inflation index. A quali-
fied inflation index is a general price or
wage index that is updated and pub-
lished at least monthly by an agency of
the United States Government (for ex-
ample, the non-seasonally adjusted U.S.
City Average All Items Consumer Price
Index for All Urban Consumers (CPI–
U), which is published by the Bureau of
Labor Statistics of the Department of
Labor).
(4)Inflation-adjusted principal
amount. For any date, the inflation-
adjusted principal amount of an
inflation-indexed debt instrument is an
amount equal to—
(i) The outstanding principal amount
of the debt instrument (determined as if
there were no inflation or deflation over
the term of the instrument), multiplied
by
(ii) A ratio, the numerator of which is
the value of the reference index for the
date and the denominator of which is
the value of the reference index for the
issue date.
(5)Minimum guarantee payment. In
general, a minimum guarantee payment
is an additional payment made at matu-
rity on a debt instrument if the total
amount of inflation-adjusted principal
paid on the instrument is less than the
instrument’s stated principal amount.
The amount of the additional payment
must be no more than the excess, if any,
of the debt instrument’s stated principal
amount over the total amount of
inflation-adjusted principal paid on the
instrument. An additional payment is not
a minimum guarantee payment unless
the qualified inflation index used to
determine the reference index is either
the CPI–U or an index designated for
this purpose by the Commissioner in the
Federal Registeror the Internal Rev-
enue Bulletin (see § 601.601(d)(2)(ii) of
this chapter). See paragraph (f)(4) of
this section for the treatment of a mini-
mum guarantee payment.
(d)Coupon bond method—(1)In
general. This paragraph (d) describes
the method (coupon bond method) to be
used to account for qualified stated
interest and inflation adjustments (OID)
on an inflation-indexed debt instrument
described in paragraph (d)(2) of this
section.
(2)Applicability. The coupon bond
method applies to an inflation-indexed
debt instrument that satisfies the follow-
ing conditions:
(i)Issued at par. The debt instrument
is issued at par. A debt instrument is
issued at par if the difference between
its issue price and principal amount for
the issue date is less than the de
minimis amount. For this purpose, the
de minimis amount is determined using
the principles of § 1.1273–1(d).
(ii)All stated interest is qualified
stated interest. All stated interest on the
debt instrument is qualified stated inter-
est. For purposes of this paragraph (d),
stated interest is qualified stated interest
if the interest is unconditionally payable
in cash, or is constructively received
under section 451, at least annually at a
single fixed rate. Stated interest is pay-
able at a single fixed rate if the amount
of each interest payment is determined
by multiplying the inflation adjusted
principal amount for the payment date
by the single fixed rate.
(3)Qualified stated interest. Under
the coupon bond method, qualified
stated interest is taken into account
under the taxpayer’s regular method of
accounting. The amount of accrued but
unpaid qualified stated interest as of any
date is determined by using the prin-
ciples of § 1.446–3(e)(2)(ii) (relating to
notional principal contracts). For ex-
ample, if the interval between interest
payment dates spans two taxable years,
a taxpayer using an accrual method of
accounting determines the amount of
accrued qualified stated interest for the
first taxable year by reference to the
inflation-adjusted principal amount at
the end of the first taxable year.
(4)Inflation adjustments—(i)Current
accrual. Under the coupon bond
method, an inflation adjustment is taken
into account for each taxable year in
which the debt instrument is outstand-
ing.
(ii)Amount of inflation adjustment.
For any relevant period (such as the
taxable year or the portion of the tax-
8

able year during which a taxpayer holds
an inflation-indexed debt instrument),
the amount of the inflation adjustment is
equal to—
(A) The sum of the inflation-adjusted
principal amount at the end of the
period and the principal payments made
during the period, minus
(B) The inflation-adjusted principal
amount at the beginning of the period.
(iii)Positive inflation adjustments. A
positive inflation adjustment is OID.
(iv)Negative inflation adjustments. A
negative inflation adjustment is a defla-
tion adjustment that is taken into ac-
count under the rules of paragraph (f)(1)
of this section.
(5)Example. The following example
illustrates the coupon bond method:
Example. (i)Facts. On October 15, 1997, X
purchases at original issue, for $100,000, a debt
instrument that is indexed for inflation and defla-
tion. The debt instrument matures on October 15,
1999, has a stated principal amount of $100,000,
and has a stated interest rate of 5 percent,
compounded semiannually. The debt instrument
provides that the principal amount is indexed to
the CPI–U. Interest is payable on April 15 and
October 15 of each year. The amount of each
interest payment is determined by multiplying the
inflation-adjusted principal amount for each inter-
est payment date by the stated interest rate,
adjusted for the length of the accrual period. The
debt instrument provides for a single payment of
the inflation-adjusted principal amount at maturity.
In addition, the debt instrument provides for an
additional payment at maturity equal to the excess,
if any, of $100,000 over the inflation-adjusted
principal amount at maturity. X uses the cash
receipts and disbursements method of accounting
and the calendar year as its taxable year.
(ii)Indexing methodology. The debt instrument
provides that the inflation-adjusted principal
amount for any day is determined by multiplying
the principal amount of the instrument for the
issue date by a ratio, the numerator of which is
the value of the reference index for the day the
inflation-adjusted principal amount is to be deter-
mined and the denominator of which is the value
of the reference index for the issue date. The value
of the reference index for the first day of a month
is the value of the CPI–U for the third preceding
month. The value of the reference index for any
day other than the first day of a month is
determined based on a straight-line interpolation
between the value of the reference index for the
first day of the month and the value of the
reference index for the first day of the next month.
(iii)Inflation-indexed debt instrument subject to
the coupon bond method. Under paragraph (c)(1)
of this section, the debt instrument is an inflation-
indexed debt instrument. Because there is no
difference between the debt instrument’s issue
price ($100,000) and its principal amount for the
issue date ($100,000) and because all stated
interest is qualified stated interest, the coupon
bond method applies to the instrument.
(iv)Reference index values. Assume the follow-
ing table lists the relevant reference index values
for 1997 through 1999:
DateReference index value
October 15, 1997100
January 1, 1998101
April 15, 1998103
October 15, 1998105
January 1, 199999
(v)Treatment of X in 1997. X does not receive
any payments of interest on the debt instrument in
1997. Therefore, X has no qualified stated interest
income for 1997. X, however, must take into
account the inflation adjustment for 1997. The
inflation-adjusted principal amount for January 1,
1998, is $101,000 ($100,000 x 101/100). There-
fore, the inflation adjustment for 1997 is $1,000,
the inflation-adjusted principal amount for January
1, 1998 ($101,000) minus the principal amount for
the issue date ($100,000). X includes the $1,000
inflation adjustment in income as OID in 1997.
(vi)Treatment of X in 1998. In 1998, X
receives two payments of interest: On April 15,
1998, X receives a payment of $2,575 ($100,000 x
103/100 x .05/2), and on October 15, 1998, X
receives a payment of $2,625 ($100,000 x 105/100
x .05/2). Therefore, X’s qualified stated interest
income for 1998 is $5,200 ($2,575 + $2,625). X
also must take into account the inflation adjust-
ment for 1998. The inflation-adjusted principal
amount for January 1, 1999, is $99,000 ($100,000
x 99/100). Therefore, the inflation adjustment for
1998 is negative $2,000, the inflation-adjusted
principal amount for January 1, 1999 ($99,000)
minus the inflation-adjusted principal amount for
January 1, 1998 ($101,000). Because the amount
of the inflation adjustment is negative, it is a
deflation adjustment. Under paragraph (f)(1)(i) of
this section, X uses this $2,000 deflation adjust-
ment to reduce the interest otherwise includible in
income by X with respect to the debt instrument
in 1998. Therefore, X includes $3,200 in income
for 1998, the qualified stated interest income for
1998 ($5,200) minus the deflation adjustment
($2,000).
(e)Discount bond method—(1)In
general. This paragraph (e) describes the
method (discount bond method) to be
used to account for OID on an inflation-
indexed debt instrument that does not
qualify for the coupon bond method.
(2)No qualified stated interest. Un-
der the discount bond method, no inter-
est on an inflation-indexed debt instru-
ment is qualified stated interest.
(3)OID. Under the discount bond
method, the amount of OID that accrues
on an inflation-indexed debt instrument
is determined as follows:
(i)Step one: Determine the debt in-
strument’s yield to maturity. The yield
of the debt instrument is determined
under the rules of § 1.1272–1(b)(1)(i).
In calculating the yield under those rules
for purposes of this paragraph (e)(3)(i),
the payment schedule of the debt instru-
ment is determined as if there were no
inflation or deflation over the term of
the instrument.
(ii)Step two: Determine the accrual
periods. The accrual periods are deter-
mined under the rules of § 1.1272–
1(b)(1)(ii). However, no accrual period
can be longer than 1 month.
(iii)Step three: Determine the per-
centage change in the reference index
during the accrual period. The percent-
age change in the reference index during
the accrual period is equal to—
(A) The ratio of the value of the
reference index at the end of the period
to the value of the reference index at the
beginning of the period,
(B) Minus one.
(iv)Step four: Determine the OID
allocable to each accrual period. The
OID allocable to an accrual period (n) is
determined by using the following for-
mula:
OID
(n)
= AIP
(n)
× [r + inf
(n)
+ (r × inf
(n)
)] in
which,
r = yield of the debt instrument as determined
under paragraph (e)(3)(i) of this section (ad-
justed for the length of the accrual period);
inf
(n)
= percentage change in the value of the
reference index for period (n) as determined
under paragraph (e)(3)(iii) of this section; and
AIP
(n)
= adjusted issue price at the beginning of
period (n).
(v)Step five: Determine the daily
portions of OID. The daily portions of
OID are determined and taken into
account under the rules of § 1.1272–
1(b)(1)(iv). If the daily portions deter-
mined under this paragraph (e)(3)(v) are
negative amounts, however, these
amounts (deflation adjustments) are
taken into account under the rules for
deflation adjustments described in para-
graph (f)(1) of this section.
(4)Example. The following example illustrates
the discount bond method:
Example.(i)Facts. On November 15, 1997, X
purchases at original issue, for $91,403, a zero-
coupon debt instrument that is indexed for infla-
tion and deflation. The principal amount of the
debt instrument for the issue date is $100,000. The
debt instrument provides for a single payment on
November 15, 2000. The amount of the payment
will be determined by multiplying $100,000 by a
fraction, the numerator of which is the CPI–U for
September 2000, and the denominator of which is
the CPI–U for September 1997. The debt instru-
ment also provides that in no event will the
payment on November 15, 2000, be less than
$100,000. X uses the cash receipts and disburse-
ments method of accounting and the calendar year
as its taxable year.
(ii)Inflation-indexed debt instrument.Under
paragraph (c)(1) of this section, the instrument is
an inflation-indexed debt instrument. The debt
instrument’s principal amount for the issue date
($100,000) exceeds its issue price ($91,403) by
$8,597, which is more than the de minimis amount
for the debt instrument ($750). Therefore, the
coupon bond method does not apply to the debt
instrument. As a result, the discount bond method
applies to the debt instrument.
9

(iii)Yield and accrual period.Assume X
chooses monthly accrual periods ending on the
15th day of each month. The yield of the debt
instrument is determined as if there were no
inflation or deflation over the term of the instru-
ment. Therefore, based on the issue price of
$91,403 and an assumed payment at maturity of
$100,000, the yield of the debt instrument is 3
percent, compounded monthly.
(iv)Percentage change in reference index. As-
sume that the CPI–U for September 1997 is 160;
for October 1997 is 161.2; and for November
1997 is 161.7. The value of the reference index
for November 15, 1997, is 160, the value of the
CPI–U for September 1997. Similarly, the value of
the reference index for December 15, 1997, is
161.2, and for January 15, 1998, is 161.7. The
percentage change in the reference index from
November 15, 1997, to December 15, 1997, (inf
1
)
is 0.0075 (161.2/16021); the percentage change
in the reference index from December 15, 1997, to
January 15, 1998, (inf
2
) is 0.0031 (161.7/161.22
1).
(v)Treatment of X in 1997. For the accrual
period ending on December 15, 1997, r is .0025
(.03/12), inf
1
is .0075, and the product of r and
inf
1
is .00001875. Under paragraph (e)(3) of this
section, the amount of OID allocable to the
accrual period ending on December 15, 1997, is
$916. This amount is determined by multiplying
the issue price of the debt instrument ($91,403) by
.01001875 (the sum of r, inf
1
, and the product of r
and inf
1
). The adjusted issue price of the debt
instrument on December 15, 1997, is $92,319
($91,403 + $916). For the accrual period ending
on January 15, 1998, r is .0025 (.03/12), inf
2
is
.0031, and the product of r and inf
2
is .00000775.
Under paragraph (e)(3) of this section, the amount
of OID allocable to the accrual period ending on
January 15, 1998, is $518. This amount is deter-
mined by multiplying the adjusted issue price of
the debt instrument ($92,319) by .00560775 (the
sum of r, inf
2
, and the product of r and inf
2
).
Because the accrual period ending on January 15,
1998, spans two taxable years, only $259 of this
amount ($518/30 days x 15 days) is allocable to
1997. Therefore, X includes $1,175 of OID in
income for 1997 ($916 + $259).
(f)Special rules.The following rules
apply to an inflation-indexed debt in-
strument:
(1)Deflation adjustments—(i)Holder.
A deflation adjustment reduces the
amount of interest otherwise includible in
income by a holder with respect to the
debt instrument for the taxable year. For
purposes of this paragraph (f)(1)(i), inter-
est includes OID, qualified stated inter-
est, and market discount. If the amount
of the deflation adjustment exceeds the
interest otherwise includible in income
by the holder with respect to the debt
instrument for the taxable year, the ex-
cess is treated as an ordinary loss by the
holder for the taxable year. However, the
amount treated as an ordinary loss is
limited to the amount by which the
holder’s total interest inclusions on the
debt instrument in prior taxable years
exceed the total amount treated by the
holder as an ordinary loss on the debt
instrument in prior taxable years. If the
deflation adjustment exceeds the interest
otherwise includible in income by the
holder with respect to the debt instru-
ment for the taxable year and the amount
treated as an ordinary loss for the taxable
year, this excess is carried forward to
reduce the amount of interest otherwise
includible in income by the holder with
respect to the debt instrument for subse-
quent taxable years.
(ii)Issuer. A deflation adjustment re-
duces the interest otherwise deductible
by the issuer with respect to the debt
instrument for the taxable year. For
purposes of this paragraph (f)(1)(ii), in-
terest includes OID and qualified stated
interest. If the amount of the deflation
adjustment exceeds the interest other-
wise deductible by the issuer with re-
spect to the debt instrument for the
taxable year, the excess is treated as
ordinary income by the issuer for the
taxable year. However, the amount
treated as ordinary income is limited to
the amount by which the issuer’s total
interest deductions on the debt instru-
ment in prior taxable years exceed the
total amount treated by the issuer as
ordinary income on the debt instrument
in prior taxable years. If the deflation
adjustment exceeds the interest other-
wise deductible by the issuer with re-
spect to the debt instrument for the
taxable year and the amount treated as
ordinary income for the taxable year,
this excess is carried forward to reduce
the interest otherwise deductible by the
issuer with respect to the debt instru-
ment for subsequent taxable years. If
there is any excess remaining upon the
retirement of the debt instrument, the
issuer takes the excess amount into
account as ordinary income.
(2)Adjusted basis. A holder’s ad-
justed basis in an inflation-indexed debt
instrument is determined under
§ 1.1272–1(g). However, a holder’s ad-
justed basis in the debt instrument is
decreased by the amount of any defla-
tion adjustment the holder takes into
account to reduce the amount of interest
otherwise includible in income or treats
as an ordinary loss with respect to the
instrument during the taxable year. The
decrease occurs when the deflation ad-
justment is taken into account under
paragraph (f)(1) of this section.
(3)Subsequent holders. A holder de-
termines the amount of acquisition pre-
mium or market discount on an
inflation-indexed debt instrument by ref-
erence to the adjusted issue price of the
instrument on the date the holder ac-
quires the instrument. A holder deter-
mines the amount of bond premium on
an inflation-indexed debt instrument by
assuming that the amount payable at
maturity on the instrument is equal to
the instrument’s inflation-adjusted prin-
cipal amount for the day the holder
acquires the instrument. Any premium
or market discount is taken into account
over the remaining term of the debt
instrument as if there were no further
inflation or deflation. See section 171
for additional rules relating to the amor-
tization of bond premium and sections
1276 through 1278 for additional rules
relating to market discount.
(4)Minimum guarantee. Under both
the coupon bond method and the dis-
count bond method, a minimum guaran-
tee payment is ignored until the pay-
ment is made. If there is a minimum
guarantee payment, the payment is
treated as interest on the date it is paid.
(5)Temporary unavailability of a
qualified inflation index. Notwithstand-
ing any other rule of this section, an
inflation-indexed debt instrument may
provide for a substitute value of the
qualified inflation index if and when the
publication of the value of the qualified
inflation index is temporarily delayed.
The substitute value may be determined
by the issuer under any reasonable
method. For example, if the CPI–U is
not reported for a particular month, the
debt instrument may provide that a
substitute value may be determined by
increasing the last reported value by the
average monthly percentage increase in
the qualified inflation index over the
preceding twelve months. The use of a
substitute value does not result in a
reissuance of the debt instrument.
(g)Reopenings. For purposes of
§ 1.1275–2(d)(2), a reopening of Trea-
sury Inflation-Indexed Securities is a
qualified reopening if—
(1) The terms of the securities issued
in the reopening are the same as the
terms of the original securities; and
(2) The reopening occurs not more
than one year after the original securi-
ties were first issued to the public.
(h)Effective date. This section ap-
plies to an inflation-indexed debt instru-
ment issued on or after January 6, 1997.
Par. 5. Section 1.1286–2T is added to
read as follows:
10

§ 1.1286–2T Stripped inflation-indexed
debt instruments (temporary).
Stripped inflation-indexed debt instru-
ments. If a Treasury Inflation-Indexed
Security is stripped under the Depart-
ment of the Treasury’s Separate Trading
of Registered Interest and Principal of
Securities (STRIPS) program, the hold-
ers of the principal and coupon compo-
nents must use the discount bond
method (as described in § 1.1275–
7T(e)) to account for the original issue
discount on the components.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 6, 1996.
Donald C. Lubick,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
December 31, 1996, and published in the issue of
the Federal Register for January 6, 1997, 62 F.R.
615)
Section 3402.—Income Tax
Collected at Source
26 CFR 31.3402(f)(5)–1: Form and contents of
withholding exemption certificates.
T.D. 8706
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 31 and 602
Electronic Filing of Form W–4
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to Form W–4,
Employee’s Withholding Allowance Cer-
tificate. The final regulations authorize
employers to establish electronic sys-
tems for use by employees in filing their
Forms W–4. The regulations provide
employers and employees with guidance
necessary to comply with the law. The
regulations affect employers that estab-
lish electronic systems and their em-
ployees.
EFFECTIVE DATE: These final regula-
tions are effective January 2, 1997.
FOR FURTHER INFORMATION CON-
TACT: Karin Loverud, (202) 622–6060
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1435. Responses to this collection
of information are mandatory.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
The estimated annual burden per re-
spondent is 20 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
theInternal Revenue Service, Attn:
IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to theOf-
fice 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 col-
lection of information must be retained
as long as their contents may become
material in the administration of any
internal revenue law. Generally, tax re-
turns and tax return information are
confidential, as required by 26 U.S.C.
6103. Background
On April 15, 1994, a notice of pro-
posed rulemaking [EE–45–93] contain-
ing proposed regulations relating to
Form W–4, Employee’s Withholding Al-
lowance Certificate, was published in
the Federal Register (59 FR 18057).
On December 21, 1994, temporary
regulations (T.D. 8577) clarifying the
existing proposed regulations were pub-
lished in theFederal Register(59 FR
65712). A notice of proposed rulemak-
ing (EE–45–93) cross-referencing the
temporary regulations was published in
theFederal Registerfor the same day
(59 FR 65740).
Written comments responding to these
notices were received. Public hearings
were requested and were held on July
15, 1994, and November 7, 1995.
After consideration of all the com-
ments, the proposed regulations under
section 3402(f) are adopted as revised
by this Treasury decision. The com-
ments and revisions are discussed below.
Explanation of Revisions and Summary
of Comments
1. Relationship between paper and elec-
tronic Forms W–4. A withholding ex-
emption certificate (Form W–4) may be
in either paper or electronic form.
Therefore, an employee will furnish a
Form W–4 to the employer either on
paper or electronically. To clarify that an
electronic Form W–4 has the same
status as a paper Form W–4, the final
regulations make minor revisions to
§ 31.3402(f)(5)–1, Form and contents of
withholding exemption certificates. Fur-
ther, the final regulations appear as
§ 31.3402(f)(5)–1(c), rather than in a
separate regulations section limited to
electronic forms.
2. Electronic filing by all employees.
The existing proposed and temporary
regulations require employers that estab-
lish electronic systems to provide em-
ployees with the option of filing paper
or electronic Forms W–4. Several com-
mentators requested that employers be
allowed to adopt systems under which
all employees file Forms W–4 electroni-
cally. These commentators stated that a
system under which all employees file
electronically would reduce employer
burden in terms of costs and time (for
example, eliminate maintenance of du-
plicative paper and electronic systems).
Similarly, it would reduce employee
burden in terms of time and choosing a
filing option.
The IRS and Treasury want to assist
in reducing burdens on both employers
and employees and to make it as easy as
possible for employers to adopt less
burdensome systems. The final regula-
tions permit an employer to adopt a
system under which all employees file
Forms W–4 electronically. The IRS and
Treasury expect, however, that an em-
ployer will make a paper option reason-
ably available upon request to any em-
ployee who has a serious objection to
using the electronic system or whose
access to, or ability to use, the system
may be limited (for example, as a result
of a disability). The paper option would
be satisfied, for example, if the em-
ployer informs employees how they can
obtain a paper Form W–4 and where
they should submit the completed paper
Form W–4. The IRS and Treasury also
expect that employers will comply with
all applicable law governing the work-
place and terms and conditions of em-
ployment, such as the Americans with
11

Disabilities Act (42 U.S.C. 12112(a)).
Compliance with these regulations does
not guarantee that a system for filing
Forms W–4 electronically is in compli-
ance with those applicable laws.
3. Electronic Forms W–4. Several com-
mentators recommended that electronic
systems be allowed for all Forms W–4
without exception. The prior proposed
and temporary regulations specifically
exclude (1) Forms W–4 required upon
commencement of employment (initial
Form W–4), and (2) Forms W–4 re-
quired to be furnished to the IRS by
employers because more than 10 with-
holding exemptions are claimed or, if
the employee is expected to earn more
than $200 per week, exemption from
withholding is claimed.
Initial Form W–4. Section 3402(f)(2)(A)
of the Internal Revenue Code (Code)
requires a new employee to furnish the
employer with a signed withholding ex-
emption certificate. Section 6061 re-
quires all Forms W–4 to be signed. See
discussion below under ‘‘5. Signature
under penalties of perjury’’ and
§ 301.6061–1(b), which states that the
Secretary may prescribe in forms, in-
structions, or other appropriate guidance
the method of signing any return, state-
ment, or other document required to be
made under any provision of the internal
revenue laws or regulations. The final
regulations permit electronic systems to
include Forms W–4 required upon com-
mencement of employment.
Forms W–4 claiming more than 10
exemptions or exemption from with-
holding. Section 31.3402(f)(2)–1(g) re-
quires employers to submit to the IRS
copies of certain Forms W–4 furnished
to them by their employees. The Forms
W–4 required to be submitted are those
on which the employee claims either (1)
more than 10 withholding exemptions,
or (2) exemption from withholding (and
the employee is expected to earn more
than $200 per week).
Under § 31.3402(f)(2)–1(g)(5), if the
IRS determines that a Form W–4, a
copy of which was submitted to the
IRS, is defective, the IRS will notify in
writing both the employer and the em-
ployee. (The notice is referred to as a
‘‘lock-in letter.’’) A Form W–4 is defec-
tive if (1) the IRS determines that the
Form W–4 contains a materially incor-
rect statement, or (2) following commu-
nication with the employee, the IRS
lacks sufficient information to determine
whether the certificate is correct. The
lock-in letter issued by the IRS advises
the employer that the employee either is
not entitled to claim exemption from
withholding or is not entitled to claim
more withholding exemptions than the
number specified by the IRS in the
notice, or both. If the employee subse-
quently files a new Form W–4, the
employer may withhold on the basis of
that new Form W–4 only if the new
Form W–4 is consistent with the lock-in
letter. The employer must continue to
withhold on the basis of that advice
until the IRS revokes in writing its
lock-in letter.
The final regulations permit electronic
systems to include Forms W–4 on
which employees claim more than 10
withholding exemptions or exemption
from withholding. However, the IRS and
Treasury expect that electronic systems,
alone or in conjunction with the rest of
an employer’s payroll system, will en-
sure compliance with the advice con-
tained in a lock-in letter. For instance,
an electronic system can ensure compli-
ance with a lock-in letter by prohibiting
an employee for whom a lock-in letter
was issued from filing any electronic
Form W–4 or prohibiting the employee
from claiming more withholding exemp-
tions than the number specified in the
IRS notice. Additionally, an employer
may choose to require any employee to
file a paper Form W–4 if the employee
wishes to claim more than 10 withhold-
ing exemptions or exemption from with-
holding.
4. Submission of certain Forms W–4 to
IRS. Section 31.3402(f)(2)–1(g) requires
employers to submit to the IRS copies
of Forms W–4 on which the employee
claims either more than 10 withholding
exemptions or exemption from with-
holding (and the employee is expected
to earn more than $200 per week).
Generally, the copies are sent quarterly
to the IRS along with the employer’s
Form 941, Employer’s Quarterly Federal
Tax Return. Copies can also be submit-
ted earlier and more often to the em-
ployer’s IRS service center.
Employers that establish electronic
systems will satisfy the requirement of
§ 31.3402(f)(2)–1(g) if they furnish the
Form W–4 information on magnetic
media. Before using magnetic media,
employers must submit Form 4419, Ap-
plication for Filing Information Returns
Magnetically/Electronically, to request
authorization. Rev. Proc. 92–80 (1992–2
C.B. 465) contains specifications for
filing Forms W–4 on magnetic tape and
on 5¼- and 3½-inch magnetic diskettes.
Electronic transmission of Form W–4
information to the IRS is not yet avail-
able.
5. Signature under penalties of perjury.
Section 6061 of the Code requires that
any return, statement, or other document
required to be made under any provision
of the Code or regulations be signed.
Section 6065 requires that any such
document contain or be verified by a
written declaration that it is made under
the penalties of perjury. These require-
ments apply to all Forms W–4, includ-
ing those filed electronically, and are
reflected in § 31.3402(f)(5)–1(c)(iii) of
the final regulations.
Although sections 6061 and 6065 ap-
ply to all Forms W–4, the IRS and
Treasury are concerned that some elec-
tronic systems established under the
temporary regulations may not include a
signature under penalties of perjury. The
final regulations, therefore, include guid-
ance on the perjury statement and the
electronic signature.
For certain Forms W–4, the final
regulations treat the signature-under-
penalties-of-perjury-statement require-
ment as satisfied until January 1, 1999.
This special rule applies only if the
system precludes the electronic filing of
Forms W–4 required upon commence-
ment of employment and Forms W–4
claiming more than 10 withholding ex-
emptions or exemption from withhold-
ing. Moreover, the special rule applies
only to Forms W–4 filed electronically
before the earlier of (1) January 1, 1999,
or (2) the first date on which the
employer’s electronic system permits the
filing of Forms W–4 required upon
commencement of employment or
Forms W–4 claiming more than 10
withholding exemptions or exemption
from withholding.
The IRS and Treasury will consider
written comments pertaining to the pro-
visions relating to signatures under pen-
alties of perjury. Submissions should be
sent to: CC:DOM:CORP:R (T.D. 8706),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Alternatively, taxpay-
ers may submit comments electronically
via the Internet by selecting the ‘‘Tax
Regs’’ option on the IRS Home Page, or
by submitting comments directly to the
IRS Internet site at http://
www.irs.ustreas.gov/prod/tax_regs/
comments.html. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
12

(T.D. 8706), Courier’s Desk, Internal
Revenue Service, 1111 Constitution Av-
enue NW, Washington, DC.
6. Employer retention of Forms W–4
and predecessor and successor employ-
ers. One commentator requested guid-
ance concerning the period for which
paper Forms W–4 are required to be
retained under § 31.6001–1(e) after the
employer establishes an electronic sys-
tem and in predecessor-employer/
successor-employer situations. Electronic
Forms W–4 have the same status as
paper Forms W–4. Therefore, guidance
that applies to paper Forms W–4 also
applies to electronic Forms W–4. For
further information, see Rev. Proc.
91–59 (1991–2 C.B. 841) (information
regarding the retention of records using
a variety of automatic data processing
systems); and section 5 of Rev. Proc.
96–60 (1996–53 I.R.B.) (predecessor/
successor situations).
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and,
because the notice of proposed rulemak-
ing preceding the regulations was issued
prior to March 29, 1996, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Small Business
Administration for comment on its im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Karin Loverud, Office of the
Associate Chief Counsel (Employee
Benefits and Exempt Organizations),
IRS. However, other personnel from the
IRS and Treasury Department partici-
pated in their development.
* * * * *
Adoption of Amendments to the Regula-
tions
Accordingly, 26 CFR parts 31 and
602 are amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME
TAX AT SOURCE
Paragraph 1. The authority citation for
part 31 is amended by adding an entry
for Section 31.3402(f)(5)–1 to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 31.3402(f)(5)–1 also issued un-
der 26 U.S.C. 3402(i) and (m). * * *
Par. 2. Section 31.3402(f)(5)–1 is
amended as follows:
1. Headings are added to paragraphs
(a) and (b).
2. The fourth sentence of paragraph
(a) is revised.
3. Paragraph (c) is added.
4. The authority citation which fol-
lows the end of the section is removed.
The revisions and additions read as
follows:
§ 31.3402(f)(5)–1 Form and contents of
withholding exemption certificates.
(a)Form W–4. * * * Blank copies of
paper Forms W–4 will be supplied to
employers upon request to the Internal
Revenue Service. * * *
(b) Invalid Form W–4. * * *
(c)Electronic Form W–4—(1)In
general. An employer may establish a
system for its employees to file with-
holding exemption certificates electroni-
cally.
(2)Requirements—(i)In general.
The electronic system must ensure that
the information received is the informa-
tion sent, and must document all occa-
sions of employee access that result in
the filing of a Form W–4. In addition,
the design and operation of the elec-
tronic system, including access proce-
dures, must make it reasonably certain
that the person accessing the system and
filing the Form W–4 is the employee
identified in the form.
(ii)Same information as paper Form
W–4. The electronic filing must provide
the employer with exactly the same
information as the paper Form W–4.
(iii)Jurat and signature requirements.
The electronic filing must be signed by
the employee under penalties of perjury.
(A)Jurat. The jurat (perjury state-
ment) must contain the language that
appears on the paper Form W–4. The
electronic program must inform the em-
ployee that he or she must make the
declaration contained in the jurat and
that the declaration is made by signing
the Form W–4. The instructions and the
language of the jurat must immediately
follow the employee’s income tax with-
holding selections and immediately pre-
cede the employee’s electronic signature.
(B)Electronic signature. The elec-
tronic signature must identify the em-
ployee filing the electronic Form W–4
and authenticate and verify the filing.
For this purpose, the terms ‘‘authenti-
cate’’ and ‘‘verify’’ have the same mean-
ings as they do when applied to a
written signature on a paper Form W–4.
An electronic signature can be in any
form that satisfies the foregoing require-
ments. The electronic signature must be
the final entry in the employee’s Form
W–4 submission.
(iv)Copies of electronic Forms W–4.
Upon request by the Internal Revenue
Service, the employer must supply a
hardcopy of the electronic Form W–4
and a statement that, to the best of the
employer’s knowledge, the electronic
Form W–4 was filed by the named
employee. The hardcopy of the elec-
tronic Form W–4 must provide exactly
the same information as, but need not be
a facsimile of, the paper Form W–4.
(3)Effective date—(i)In general.
This paragraph applies to all withhold-
ing exemption certificates filed elec-
tronically by employees on or after
January 2, 1997.
(ii)Special rule for certain Forms
W–4. In the case of an electronic system
that precludes the filing of Forms W–4
required on commencement of employ-
ment and Forms W–4 claiming more
than 10 withholding exemptions or ex-
emption from withholding, the require-
ments of paragraph (c)(2)(iii) of this
section will be treated as satisfied if the
Form W–4 is filed electronically before
January 1, 1999.
§ 31.3402(f)(5)–2T [Removed]
Par. 3. Section 31.3402(f)(5)–2T is
removed.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In § 602.101, paragraph (c) is
amended by:
1. Removing the entry for 31.3402(f)(5)–
2T from the table.
13

§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section
where identified and
described
Current OMB
control No.
* * * * *
31.3402(f)(5)–2T . . . . . . 1545–1435
* * * * *
2. Revising the entry for 31.3402(f)(5)–
1 to read as follows:
§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section
where identified and
described
Current OMB
control No.
* * * * *
31.3402(f)(5)–1. . . . . . . . 1545–0010
1545–1435
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 12, 1996.
Donald C. Lubick,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
December 31, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 2,
1997, 62 F.R. 22)
14

Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest Rate
Update
Notice 97–16
Notice 88–73 provides guidelines for
determining the weighted average inter-
est rate and the resulting permissible
range of interest rates used to calculate
current liability for the purpose of the
full funding limitation of § 412(c)(7) of
the Internal Revenue Code as amended
by the Omnibus Budget Reconciliation
Act of 1987 and as further amended by
the Uruguay Round Agreements Act,
Pub. L. 103–465 (GATT).
The average yield on the 30-year
Treasury Constant Maturities for January
1997 is 6.83 percent.
The following rates were determined
for the plan years beginning in the
month shown below.
MonthYearWeighted Average
90% to 107%
Permissible Range
90% to 110%
Permissible Range
February19976.886.19 to 7.366.19 to 7.57
Drafting Information
The principal author of this notice is
Donna Prestia of the Employee Plans
Division. For further information regard-
ing this notice, call (202) 622–6076
between 2:30 and 4:00 p.m. Eastern
time (not a toll-free number). Ms.
Prestia’s number is (202) 622–7377
(also not a toll-free number).
26 CFR 601.201: Rulings and determination let-
ters.
(Also Part I, Sections 25, 103, 143; 1.25–4T,
1.103–1, 6a.103A–2.)
Rev. Proc. 97–17
SECTION 1. PURPOSE
This revenue procedure provides issu-
ers of qualified mortgage bonds, as
defined in § 143(a) of the Internal Rev-
enue Code, and issuers of mortgage
credit certificates, as defined in § 25(c),
with a list of the average annual aggre-
gate principal amount of mortgages ex-
ecuted during the calendar years 1992,
1993, and 1994 for each state, the
District of Columbia, Guam, Puerto
Rico, and the Virgin Islands.
SECTION 2. BACKGROUND
.01 Section 103(a) provides that, ex-
cept as provided in § 103(b), gross
income does not include interest on any
state or local bond. Section 103(b)(1)
provides that § 103(a) shall not apply to
any private activity bond that is not a
‘‘qualified bond’’ within the meaning of
§ 141. Under § 141(e) the term ‘‘quali-
fied bond’’ includes any private activity
bond that (1) is a qualified mortgage
bond, (2) meets the volume cap require-
ments under § 146, and (3) meets the
applicable requirements under § 147.
.02 Section 143(a)(1)(A) provides that
the term ‘‘qualified mortgage bond’’
means a bond that is issued as part of a
qualified mortgage issue. Section
143(a)(2)(A) provides that the term
‘‘qualified mortgage issue’’ means an
issue of one or more bonds by a state or
political subdivision thereof, but only if
(i) all proceeds of the issue (exclusive
of issuance costs and a reasonably re-
quired reserve) are to be used to finance
owner-occupied residences; (ii) the issue
meets the requirements of subsections
(c), (d), (e), (f), (g), (h), (i), and (m)(7)
of § 143; (iii) the issue does not meet
the private business tests of paragraphs
(1) and (2) of § 141(b); and (iv) with
respect to amounts received more than
10 years after the date of issuance,
repayments of $250,000 or more of
principal on financing provided by the
issue are used not later than the close of
the first semiannual period beginning
after the date the prepayment (or com-
plete repayment) is received to redeem
bonds that are part of the issue.
.03 An issue of bonds meets the
requirements of subsection (h) of § 143
only if a sufficient portion of the bond
proceeds is made available (with reason-
able diligence) for owner-financing of
targeted area residences for at least one
year after the date on which owner-
financing is first made available with
respect to targeted area residences. The
applicable portion of bond proceeds to
be made available must be equal to or
greater than an amount that is the lesser
of (1) 20 percent of the proceeds of the
issue that are devoted to providing
owner-financing, or (2) 40 percent of
the average annual aggregate principal
amount of mortgages executed during
the immediately preceding 3 calendar
years for single-family, owner-occupied
residences in targeted areas within the
jurisdiction of the issuing authority.
.04 A targeted area residence, defined
in § 143(j), is a residence in either a
qualified census tract or an area of
chronic economic distress. A ‘‘qualified
census tract’’ means a census tract in
which 70 percent or more of the fami-
lies have income which is 80 percent or
less of the statewide median family
income, based on the most recent decen-
nial census for which data are available.
See Rev. Proc. 93–38, 1993–2 C.B. 483,
for the most recent list of qualified
census tracts for each state and the
District of Columbia; that list is based
on data from the 1990 census. Section
143(j)(3) defines an ‘‘area of chronic
economic distress’’ (‘‘ACED’’) as an
area (i) designated by the state as meet-
ing the standards established by the state
for purposes of § 143(j), and (ii) the
designation of which has been approved
by the Secretary of Treasury and the
Secretary of Housing and Urban Devel-
opment in accordance with criteria set
forth in § 143(j)(3)(B). See Rev. Proc.
88–31, 1988–1 C.B. 832, for the proce-
dures to obtain an ACED designation.
.05 When determining the portion of
the proceeds that must be made avail-
able for owner-financing of targeted area
residences under the 40 percent limita-
tion in § 143(h)(2), issuers of mortgage
revenue bonds may rely upon the
amount produced by the following safe
harbor formula described in § 6a.103A–
2(h)(3) of the temporary Income Tax
Regulations (issued under former
§ 103A(h) of the 1954 Code):
P = .2 (X x Z)
where
Y
P = Required portion to be made avail-
able to targeted areas,
X = Average annual aggregate principal
amount of mortgages executed
during the immediately preceding
3 calendar years for single-family
owner-occupied residences within
15

P = Required portion to be made avail-
able to targeted areas,
the state in which the issuing juris-
diction is located,
Y = The total population within the
state, based on the most recent
decennial census for which data
are available, and
Z = The total population in the targeted
areas located within the issuer’s
jurisdiction, based on the most
recent decennial census for which
data are available.
An issuing jurisdiction may use esti-
mates of X published by the Treasury
Department when computing the safe
harbor formula. The specified portion
required to be made available in targeted
areas is a minimum amount so that more
than the minimum amount may be (but
need not be) made available in targeted
areas. See § 6a.103A–2(h)(4).
.06 Section 25(c)(2)(A)(ii) provides
that a state or a political subdivision
thereof may elect to exchange all or part
of its qualified mortgage bond authority
for authority to issue the mortgage
credit certificates described in § 25(c).
The election must be in accordance with
§ 1.25–4T(c).
.07 Section 25(a) provides, in general,
that the recipient of a mortgage credit
certificate (MCC) may claim a credit
against income tax equal to the product
of the certificate credit rate and the
interest paid or accrued by the taxpayer
during the taxable year on the remaining
principal of the certified indebtedness
amount.
.08 Section 25(b)(2) defines the certi-
fied indebtedness amount as the amount
of indebtedness that is incurred by the
taxpayer to acquire the taxpayer’s prin-
cipal residence, as a qualified home
improvement loan, or as a qualified
rehabilitation loan, and is specified in
the MCC.
.09 Section 25(c)(2)(A)(iii)(V) pro-
vides that the indebtedness certified by
MCCs must meet the requirements of
§ 143(h) concerning the portion of
loans to be placed in targeted areas. See
also § 1.25–4T(g) of the temporary
regulations.
.10 The average annual mortgage
originations for 1990, 1991, and 1992
were published in Rev. Proc. 95–14,
1995–1 C.B. 520. Section 5.01 of Rev.
Proc. 95–14 provides that issuers may
continue to rely on the average annual
mortgage originations in Rev. Proc.
95–14 until those averages are rendered
obsolete by a new revenue procedure,
such as this one.
.11 The average annual mortgage
originations are developed by the De-
partment of Housing and Urban Devel-
opment (HUD) for publication by the
Service. The mortgage originations are
based on data and procedures that are
employed in the HUD-coordinated sur-
veys of mortgage lending activity for 1-
to 4-family dwellings. The estimates of
mortgage volume for 1- to 4-family
dwellings in each state are adjusted
from a special tabulation of the HUD-
sponsored Annual Housing Survey to
reflect only the amount of mortgages
originated that were secured by owner-
occupied residences.
SECTION 3. APPLICATION
The average annual mortgage origina-
tions, based on mortgage loan origina-
tions secured by owner-occupied resi-
dences during 1992, 1993, and 1994, for
each state, the District of Columbia,
Guam, Puerto Rico, and the Virgin Is-
lands are listed below (dollars in mil-
lions).
Gross Mortgage Originations for Owner-Occupied HomesThree-YearAverage Annual
State199219931994TotalMortgage Originations
Alabama9,29210,6887,83527,8159,272
Alaska2,6783,5812,3938,6522,884
Arizona13,81122,00415,47851,29317,098
Arkansas5,1105,7464,30315,1595,053
California110,252119,554105,353335,159111,720
Colorado21,59927,36116,86565,82521,942
Connecticut9,13913,1178,48730,74310,248
Delaware2,0421,7351,4025,1791,726
District of Columbia9781,9311,1914,1001,367
Florida42,63449,95241,612134,19844,733
Georgia21,52226,96318,48766,97222,324
Hawaii5,0685,1183,64913,8354,612
Idaho3,5023,7572,96310,2223,407
Illinois33,89434,27127,14895,31331,771
Indiana16,69320,01614,64851,35717,119
Iowa4,6624,2043,05611,9223,974
Kansas6,9867,0964,67618,7586,253
Kentucky8,6569,1257,09824,8798,293
Louisiana6,0337,1696,09119,2936,431
Maine2,3042,9142,3607,5782,526
Maryland23,36628,04532,40683,81727,939
Massachusetts14,51319,40111,76045,67415,225
Michigan21,01422,91815,46659,39819,799
Minnesota26,87529,60915,63272,11624,039
Mississippi4,1224,7163,21812,0564,019
Missouri14,25115,99511,26641,51213,837
Montana2,5892,9121,7777,2782,426
16

Gross Mortgage Originations for Owner-Occupied HomesThree-YearAverage Annual
State199219931994TotalMortgage Originations
Nebraska4,2425,0702,18811,5003,833
Nevada5,9607,2827,56820,8106,937
New Hampshire2,4153,1562,4618,0322,677
New Jersey22,19419,73611,80553,73517,912
New Mexico4,0784,6563,63412,3684,123
New York36,82436,75033,956107,53035,843
North Carolina21,94323,30316,22161,46720,489
North Dakota2,8013,6262,0908,5172,839
Ohio25,53229,42221,37676,33025,443
Oklahoma6,4817,3875,47419,3426,447
Oregon5,9256,5595,26717,7515,917
Pennsylvania27,26333,21420,36180,83826,946
Rhode Island2,0713,3011,7207,0922,364
South Carolina8,0198,4706,44722,9367,645
South Dakota1,5791,5659224,0661,355
Tennessee14,02918,39513,45845,88215,294
Texas41,04949,76141,681132,49144,164
Utah9,13811,9887,38128,5079,502
Vermont9921,2608913,1431,048
Virginia32,72242,00829,670104,40034,800
Washington18,77922,07618,06358,91819,639
West Virginia2,4172,6582,0397,1142,371
Wisconsin13,24412,8338,66434,74111,580
Wyoming1,5271,4901,8344,8511,617
Guam99948828194
Puerto Rico5,0087,3547,99020,3526,784
Virgin Islands104667424481
SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
Rev. Proc. 95–14 is obsolete except
as provided in section 5.02 of this
revenue procedure.
SECTION 5. EFFECTIVE DATES
.01 Issuers of qualified mortgage
bonds or mortgage credit certificates
may rely on this revenue procedure
during the period beginning March 3,
1997, the date of publication of this
revenue procedure in the Internal Rev-
enue Bulletin, and ending on the date as
of which this revenue procedure is ren-
dered obsolete by a new revenue proce-
dure.
.02 With respect to qualified mortgage
bonds sold, and bond authority elected
to be exchanged for authority to issue
mortgage credit certificates, before April
2, 1997, 30 days after the publication of
this Rev. Proc. 97–17 in the Internal
Revenue Bulletin, issuers may continue
to rely on the list of average annual
mortgage originations that is contained
in Rev. Proc. 95–14.
Drafting Information
The principal author of this revenue
procedure is Patricia M. Monahan of the
Office of Assistant Chief Counsel (Fi-
nancial Institutions and Products). For
further information regarding this rev-
enue procedure contact Ms. Monahan on
(202) 622–4122 (not a toll-free call).
Social Security
Domestic Employee Coverage
Threshold
General.Section 2 of the ‘‘Social
Security Domestic Employment Reform
Act of 1994’’ (Pub. L. 103–387) in-
creased the threshold for coverage of a
domestic employee’s wages paid per
employer from $50 per calendar quarter
to $1,000 in calendar year 1994. The
statute holds the coverage threshold at
the $1,000 level for 1995 and then
increases the threshold in $100 incre-
ments for years after 1995. The formula
for increasing the threshold is provided
in section 3121(x) of the Internal Rev-
enue Code.
Computation.Under the new formula,
the domestic employee coverage thresh-
old amount for 1997 shall be equal to
the 1995 amount of $1,000 multiplied
by the ratio of the national average
wage index for 1995 to that for 1993.
The national average wage index for
1993 was previously determined to be
$23,132.67. The national average wage
index for 1995 is $24,705.66 as deter-
mined above. If the amount so deter-
mined is not a multiple of $100, it shall
be rounded to the next lower multiple of
$100.
Domestic Employee Coverage Thresh-
old Amount.The ratio of the national
average wage index for 1995,
$24,705.66, compared to that for 1993,
$23,132.67, is 1.0679986. Multiplying
the 1995 domestic employee coverage
threshold amount of $1,000 by the ratio
of 1.0679986 produces the amount of
$1,068.00, which must then be rounded
to $1,000. Accordingly, the domestic
employee coverage threshold amount is
determined to be $1,000 for 1997.
17

Part IV. Items of General Interest
Notice of Proposed Rulemaking
Inflation-Indexed Debt Instruments
REG–242996–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary
regulations and notice of public hearing.
SUMMARY:
In T.D. 8709, page 5, the
IRS is issuing temporary regulations re-
lating to the federal income tax treat-
ment of inflation-indexed debt instru-
ments, including Treasury Inflation-
Indexed Securities. The text of the
temporary regulations also serves as the
text of the proposed regulations. This
document also provides notice of a pub-
lic hearing on the proposed regulations.
DATES: Comments must be received
by April 7, 1997. Requests to appear
and outlines of topics to be discussed at
the public hearing scheduled for April
30, 1997, at 10 a.m. must be received
by April 9, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–242996–96),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–242996–96), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitu-
tion Avenue NW, Washington, DC. Al-
ternatively, taxpayers may submit
comments electronically via the internet
by selecting the ‘‘Tax Regs’’ option of
the IRS Home Page or by submitting
comments directly to the IRS internet
site at http://www.irs.ustreas.gov/prod/
tax_regs/comments.html. A public hear-
ing will be held in the NYU Classroom,
room 2615, Internal Revenue Building,
1111 Constitution Avenue NW, Washing-
ton, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
William E. Blanchard, (202) 622–3950,
or Jeffrey W. Maddrey, (202) 622–3940;
concerning submissions and the hearing,
Mike Slaughter, (202) 622–7190 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
T.D. 8709 amends the Income Tax
Regulations (26 CFR part 1) relating to
sections 1275 and 1286 of the Internal
Revenue Code. The temporary regula-
tions provide rules relating to inflation-
indexed debt instruments, including
Treasury Inflation-Indexed Securities.
The text of the temporary regulations
also serves as the text of the proposed
regulations. The preamble to the tempo-
rary regulations explains the temporary
regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant 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) does not apply to these
regulations and, because the regulations
do not impose a collection of informa-
tion on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice
of proposed rulemaking will be submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any comments
that are submitted timely (in the manner
described in the ADDRESSES portion
of this preamble) to the IRS. All com-
ments will be available for public in-
spection and copying.
A public hearing has been scheduled
for April 30, 1997, at 10 a.m. in the
NYU Classroom, room 2615, Internal
Revenue Building, 1111 Constitution
Avenue 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 who wish to present oral
comments at the hearing must submit
comments by April 7, 1997, and submit
an outline of the topics to be discussed
and the time to be devoted to each topic
by April 9, 1997.
A period of 10 minutes will be allot-
ted to each person for making com-
ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is William E. Blanchard, Office of
Assistant Chief Counsel (Financial Insti-
tutions and Products). However, other
personnel from the IRS and the Treasury
Department participated in their devel-
opment.
* * * * *
Proposed Amendments to the Regula-
tions
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
Part 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding two
entries in numerical order to read as
follows:
Authority: 26 U.S.C. 7805 ***
Section 1.1275–7 also issued under 26
U.S.C. 1275(d). ***
Section 1.1286–2 also issued under 26
U.S.C. 1286(f). ***
Par. 2. Section 1.1275–7 is added to
read as follows:
§ 1.1275–7 Inflation-indexed debt in-
struments.
[The text of this proposed section is
the same as the text of § 1.1275–7T
published in T.D. 8709, page 5.]
Par. 3. Section 1.1286–2 is added to
read as follows:
§ 1.1286–2 Inflation-indexed debt in-
struments.
[The text of this proposed section is
the same as the text of § 1.1286–2T
published in T.D. 8709, page 5.]
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
December 31, 1996, and published in the issue of
the Federal Register for January 6, 1997, 62 F.R.
694)
181997–9 I.R.B.

Notice of Proposed Rulemaking
and Notice of Public Hearing
Continuity of Interest and Business
Enterprise
REG–252233–96
AGENCY: Internal Revenue Service
(IRS), Treasury
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document proposes
rules providing that for certain reorgani-
zations, transfers by the acquiring corpo-
ration of target assets or stock to certain
controlled corporations, and under pre-
scribed conditions, transfers of target
assets to partnerships, will not disqualify
the transaction from satisfying the conti-
nuity of interest and continuity of busi-
ness enterprise requirements. This docu-
ment also provides notice of a public
hearing on these proposed regulations.
DATES: Comments must be received by
April 3, 1997. Requests to speak and
outlines of topics to be discussed at the
public hearing scheduled for Wednesday,
May 7, 1997 must be received by
Wednesday, April 16, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–252233–96),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to CC:DOM:CORP:R
(REG–252233–96), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitu-
tion Avenue, NW, Washington, DC. Al-
ternatively, taxpayers may submit
comments electronically via the Internet
by selecting the ‘‘Tax Regs’’ option on
the IRS Home Page, or by submitting
comments directly to the IRS Internet
site at http://www.irs.ustreas.gov/prod/
tax_regs/comments.html. The public
hearing will be held in the Auditorium,
Internal Revenue Building, 1111 Consti-
tution Avenue NW, Washington DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Marlene Peake Oppenheim, (202) 622–
7750; concerning submissions and the
hearing, Christina Vasquez, (202) 622–
6808 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under section 368.
The proposed regulations establish rules
providing that for certain reorganizations
transfers by the acquiring corporation of
target corporation assets or stock to
certain controlled corporations and un-
der prescribed conditions transfers of
target assets to partnerships, will not
disqualify the transaction from satisfying
the continuity of interest and continuity
of business enterprise requirements.
Explanation of Proposed Regulations
A. Remote Continuity of interest
1. Overview
The Internal Revenue Code of 1986
(Code) provides general nonrecognition
treatment for reorganizations specifically
described in section 368 of the Code.
Literal compliance with the statutory
requirements is not sufficient, however,
for nonrecognition treatment.
The Supreme Court, inGroman v.
Commissioner, 302 U.S. 82 (1937), and
Helvering v. Bashford, 302 U.S. 454
(1938), established the basis of what has
become known as the ‘‘remote continu-
ity of interest doctrine.’’ Under this
doctrine, stock consideration received by
the target corporation’s (T) shareholders
does not provide continuity unless the
target assets or stock are ultimately held
by the corporation that issued the stock.
Thus, if T transfers its assets to an
acquiring corporation (P), in exchange
for stock of the corporation controlling
P (seeGroman), or if P acquires the T
assets but pursuant to the plan of reor-
ganization transfers them to a controlled
subsidiary (S) (seeBashford), the conti-
nuity of interest requirement is not satis-
fied.
Congress has substantially limited the
remote continuity of interest doctrine. In
1954, Congress enacted section
368(a)(2)(C) which provides that P’s
transfer of T assets acquired in a reorga-
nization under section 368(a)(1)(A)
(merger or consolidation) or section
368(a)(1)(C) (asset acquisition) to S
does not disqualify the reorganization.
Section 368(a)(1)(C) was also amended
to provide that P can acquire T assets
directly in exchange for voting stock of
a corporation in control of P (a triangu-
lar C reorganization).
In the 1960’s, the Treasury Depart-
ment and IRS issued several revenue
rulings attempting to clarify to what
extent the remote continuity doctrine
had remaining vitality. Where the guid-
ance held that the remote continuity
doctrine applied to disqualify the trans-
action from reorganization treatment,
Congress at times responded by amend-
ing the relevant Code section and over-
turning the result. For example, Rev.
Rul. 63–234 (1963–2 C.B. 148) held
that remote continuity remained an issue
for section 368(a)(1)(B) reorganizations.
The following year Congress responded
by amending section 368(a)(1)(B), per-
mitting P to acquire T’s stock in ex-
change for stock of the corporation
controlling P (a triangular B reorganiza-
tion). Congress also amended section
368(a)(2)(C) to provide that P can trans-
fer T stock acquired in a reorganization
under section 368(a)(1)(B) to S without
disqualifying the reorganization.
Similarly, when Rev. Rul. 67–326
(1967–2 C.B. 143) held that a merger of
T into S in exchange for stock of the
corporation controlling S (a forward
triangular merger) violated the continu-
ity of interest doctrine, Congress re-
sponded in the following year by enact-
ing section 368(a)(2)(D), which provides
that a forward triangular merger quali-
fies as a section 368(a)(1)(A) reorgani-
zation.
In contrast, Rev. Rul. 64–73 (1964–1
C.B. 142) held that a transaction quali-
fied as a section 368(a)(1)(C) reorgani-
zation where P and P’s second tier
subsidiary acquired all the T assets in
exchange for P stock. The transaction
was viewed as an acquisition of substan-
tially all the T assets by P.
2. Transfers of T assets or stock to
controlled corporations
The proposed regulations curtail the
remote continuity of interest doctrine by
providing that assets can be transferred
among members of a ‘‘qualified group.’’
A qualified group consists of one or
more chains of corporations connected
through stock ownership with the ‘‘issu-
ing corporation,’’ but only if the issuing
corporation owns directly stock meeting
the requirements of section 368(c) in at
least one other corporation, and stock
meeting the requirements of section
368(c) in each of the corporations (ex-
cept the issuing corporation) is owned
directly by one of the other corpora-
tions. The issuing corporation is the
acquiring corporation (as that term is
used in section 368(a)), except in trans-
actions where use of stock of a corpora-
tion in control of the acquiring corpora-
tion is permitted. Where stock of the
controlling corporation is used, the con-
trolling corporation is the issuing corpo-
ration.
191997–9 I.R.B.

The proposed regulations generally
permit transfers or successive transfers
of assets or stock to members of the
qualified group. Thus, continuity of in-
terest is not violated where there are
transfers or successive transfers of T
stock (or transfers of the T assets after a
T stock acquisition) or T assets (or
transfers of the acquiring corporation’s
stock after a T asset acquisition) among
members of the qualified group. The
Treasury Department and IRS solicit
comments on whether the qualified
group should be defined other than by
reference to section 368(c).
The proposed regulations are limited
to asset or stock transfers following
transactions that otherwise qualify as
section 368(a)(1)(A), (B), (C), or (G)
(meeting the requirements of sections
354(b)(1)(A) and (B)) reorganizations
(covered reorganizations). Section
368(a)(2)(C) by its terms does not apply
to acquisitive section 368(a)(1)(D) or
section 368(a)(1)(F) reorganizations. The
Treasury Department and IRS solicit
comments as to whether the rules in the
proposed regulations should be extended
to these other reorganization provisions
or to section 355 divisive transactions.
3. Transfer of T assets to a partnership
Whether the transfer of assets to a
partnership (PRS) by the corporate
transferor partner (PTR) disqualifies an
otherwise qualifying covered reorganiza-
tion depends in part on whether PRS is
viewed as an aggregate of its partners or
as an entity separate from the partners.
The treatment of PRS as an aggregate or
entity must be determined on the basis
of the characterization most appropriate
for the situation. H.R. Conf. Rep. No.
2543, 83d Cong., 2d Sess. 59 (1954).
Cf. § 1.701–2(e)(1) of the Income Tax
Regulations.
The Treasury Department and IRS
believe it is appropriate to treat PRS as
an aggregate of its partners in analyzing
a transaction with respect to continuity
of interest. Thus, the proposed regula-
tions provide that PTR’s transfer of T
assets to PRS does not violate the
continuity of interest requirement.
The proposed regulations do not per-
mit the transfer of stock to PRS where
the Code imposes a control requirement
in section 368. See sections 368(a)(1)(B)
and (C), sections 368(a)(2)(D) and (E),
and section 368(a)(2)(C). In addition,
the transfer of T assets to PRS may
violate the continuity of business enter-
prise (COBE) requirement.
B. Continuity of business enterprise
1. Overview
Section 1.368–1(b) requires that reor-
ganizations afford a continuity of busi-
ness enterprise under modified corporate
form. COBE requires that P either (i)
continue T’s historic business (business
continuity) or (ii) use a significant por-
tion of T’s historic business assets in a
business (asset continuity). § 1.368–
1(d)(2). The proposed regulations pro-
vide a framework for applying the exist-
ing COBE regulations to situations
where the T assets or stock are trans-
ferred to certain controlled corporations
or assets are transferred to partnerships.
2. Transfer of T assets or stock to a
controlled corporation
The proposed regulations provide that,
under prescribed conditions, COBE is
not violated by reason of the fact that
part or all of the T assets or stock are
transferred among members of a quali-
fied group. Thus, the COBE requirement
is not violated where there are transfers
or successive transfers of T stock (or
transfers of the T assets after a T stock
acquisition) or T assets (or transfers of
the acquiring corporation’s stock after a
T asset acquisition) among members of
the qualified group.
3. Transfer of T assets to a partnership
The proposed regulations provide that,
under prescribed conditions, COBE is
not violated by reason of the fact that
part or all of the T assets are transferred
to PRS by PTR. The proposed regula-
tions adopt an aggregate approach in
determining whether COBE has been
satisfied when T assets are transferred to
PRS following a T asset or T stock
acquisition. Thus, the proposed regula-
tions provide that for purposes of the
business continuity test, PTR will be
treated as conducting a business of PRS
if PTR has active and substantial man-
agement functions as a partner with
regard to the business (cf. Rev. Rul.
92–17 (1992–1 C.B. 142)) or if PTR’s
partnership interest in PRS represents a
significant interest in the PRS business.
Furthermore, in determining whether
PTR satisfies the asset continuity test (i)
PTR will be treated as owning the assets
of PRS in accordance with PTR’s inter-
est in PRS, and (ii) PTR will be treated
as conducting a business of PRS under
the rules applicable to business continu-
ity.
COBE requires a facts and circum-
stances analysis. Thus, the proposed
regulations also state that the fact that
PTR meets the business continuity re-
quirements of § 1.368–1(d)(2)(i) and
1(d)(3) through active and substantial
management of a PRS business tends to
establish COBE, but the fact that PTR
conducts a PRS business is not alone
sufficient.
C. Effect on other authorities
The proposed regulations apply only
for the purpose of determining the effect
that transfers of assets or stock follow-
ing a reorganization have on the conti-
nuity of interest and COBE require-
ments. They do not address any other
issues concerning the qualification of a
transaction as a reorganization.
Thus, the proposed regulations do not
expand the scope of triangular reorgani-
zations. Under current law, a T asset or
stock acquisition in exchange for stock
of a grandparent (or higher tier) corpo-
ration does not qualify as a reorganiza-
tion. See Rev. Rul. 74–564 (1974–2
C.B. 124) and Rev. Rul. 74–565
(1974–2 C.B. 125). The proposed regu-
lations do not change this result.
The proposed regulations do not pro-
vide guidance on whether the ‘‘solely
for voting stock’’ requirement is satis-
fied in a section 368(a)(1)(C) reorgani-
zation when a corporation other than the
acquiring corporation assumes target li-
abilities. See generally Rev. Rul. 70–107
(1970–1 C.B. 78).
Furthermore, the proposed regulations
do not modify the section 381 regula-
tions which provide rules concerning
which entity inherits the tax attributes of
T in an asset acquisition.
The Treasury Department and IRS
solicit comments on these issues.
Proposed Effective Date
The revisions and additions in the
proposed regulations apply to transac-
tions occurring after these regulations
are published as final regulations in the
Federal Register, except that they shall
not apply to transactions occurring pur-
suant to a written agreement which is
(subject to customary conditions) bind-
ing on or before these regulations are
published as final regulations in the
Federal Register.
Effect on Other Documents
The Treasury Department and IRS
solicit comments on what IRS publica-
tions should be modified or obsoleted
when the proposed regulations are pub-
lished as final regulations.
201997–9 I.R.B.

Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant 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) does not apply to these
regulations, and because the regulations
do not impose a collection of informa-
tion on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice
of proposed rulemaking will be submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any written com-
ments (a signed original and eight cop-
ies) that are submitted timely to the
Internal Revenue Service. Alternatively,
taxpayers may submit comments elec-
tronically via the Internet by selecting
the ‘‘Tax Regs’’ option on the IRS
Home Page, or by submitting comments
directly to the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled
for Wednesday, May 7, 1997, beginning
at 10 a.m., in the Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW, Washington, DC. Because
of access restrictions, visitors will not be
admitted beyond the Internal Revenue
Building lobby more than 15 minutes
before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral
comments at the hearing must request to
speak, and submit an outline of topics to
be discussed and the time to be devoted
to each topic by Wednesday, April 16,
1997.
A period of 10 minutes will be allo-
cated to each person for making com-
ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of the proposed
regulations is Marlene Peake Op-
penheim of the Office of Assistant Chief
Counsel (Corporate), IRS. However,
other personnel from the Treasury and
IRS participated in their development.
* * * * *
Proposed Amendments to the Regula-
tions
Accordingly, 26 CFR Part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.368–1 as proposed to
be amended at 61 FR 67514 is amended
by:
1. Adding two sentences after the
sixth sentence of paragraph (b).
2. Redesignating paragraph (d)(5) as
paragraph (d)(6).
3. Adding a new paragraph (d)(5).
4. Adding three sentences to the end
of newly designated paragraph (d)(6)
introductory text.
5. AddingExample 6throughEx-
ample 10to newly designated paragraph
(d)(6).
6. Adding paragraph (f).
The additions read as follows:
§ 1.368–1 Purpose and scope of excep-
tion of reorganization exchanges.
* * * * *
(b) * * * Rules concerning continuity
of interest as applied to section
368(a)(1)(A), (B), (C), or (G) (meeting
the requirements of sections
354(b)(1)(A) and (B)) are in paragraph
(f) of this section. The preceding sen-
tence applies to transactions occurring
after these regulations are published as
final regulations in theFederal Register
except that it shall not apply to any
transactions occurring pursuant to a
written agreement which is (subject to
customary conditions) binding on or
before these regulations are published as
final regulations in theFederal Regis-
ter. * * *
* * * * *
(d) * * *
(5)Transfers of assets or stock to
controlled corporations and partner-
ships—(i)Scope. The following rules of
paragraphs (d)(5)(ii) through (vi) of this
section apply in determining whether the
continuity of business enterprise require-
ment of paragraph (d)(1) of this section
is satisfied with respect to transactions
otherwise qualifying as reorganizations
under section 368(a)(1)(A), (B), (C), or
(G) (meeting the requirements of sec-
tions 354(b)(1)(A) and (B)).
(ii)Transfers to members of a quali-
fied group. Continuity of business enter-
prise continues to be satisfied where
there are transfers or successive trans-
fers of target (T) stock (or transfers of T
assets after a stock acquisition) or T
assets (or transfers of the acquiring
corporation’s stock after a T asset acqui-
sition) among members of a qualified
group as defined in paragraph (d)(5)(iii)
of this section.
(iii)Qualified group. A qualified
group is one or more chains of corpora-
tions connected through stock ownership
with the issuing corporation as defined
in paragraph (d)(5)(iv) of this section,
but only if the issuing corporation owns
directly stock meeting the requirements
of section 368(c) in at least one other
corporation, and stock meeting the re-
quirements of section 368(c) in each of
the corporations (except the issuing cor-
poration) is owned directly by one of
the other corporations.
(iv)Issuing corporation. The issuing
corporation is the acquiring corporation
(as that term is used in section 368(a)),
except in transactions where the use of
stock of a corporation in control of the
acquiring corporation is permitted.
Where stock of the controlling corpora-
tion is used, the controlling corporation
is the issuing corporation.
(v)Partnerships—(A) For purposes
of the business continuity test of para-
graph (d)(3) of this section, the corpo-
rate transferor partner (PTR) will be
treated as conducting a business of a
partnership (PRS) where—
(1) PTR has active and substantial
management functions as a partner with
respect to the PRS business; or
(2) PTR’s interest in PRS represents
a significant interest in the PRS busi-
ness.
(B) For purposes of the asset continu-
ity test of paragraph (d)(4) of this
section—
(1) PTR will be treated as owning the
assets of PRS in accordance with PTR’s
interest in PRS; and
(2) PTR will be treated as conducting
a PRS business if PTR meets the re-
quirement of paragraph (d)(5)(v)(A)(1)
or (2) of this section.
(C) The fact that PTR is treated as
conducting a business of PRS under
211997–9 I.R.B.

paragraph (d)(5)(v)(A) of this section
tends to establish the requisite continu-
ity, but is not alone sufficient.
(vi) This paragraph (d)(5) applies to
transactions occurring after these regula-
tions are published as final regulations
in theFederal Registerexcept that it
shall not apply to any transactions oc-
curring pursuant to a written agreement
which is (subject to customary condi-
tions) binding on or before these regula-
tions are published as final regulations
in theFederal Register.
(6) * * * All corporations have only
one class of common stock outstanding.
Example 6throughExample 10of this
paragraph (d)(6) apply to transactions
occurring after these regulations are
published as final regulations in the
Federal Registerexcept that they shall
not apply to any transactions occurring
pursuant to a written agreement which is
(subject to customary conditions) bind-
ing on or before these regulations are
published as final regulations in the
Federal Register. The examples are as
follows:
* * * * *
Example 6. Qualified group and business conti-
nuity.(a) Facts. T operates a bakery which makes
and supplies delectable pastries and cookies to a
few select locations. The acquiring corporate
group consists of numerous corporations which
produce a variety of baked goods for distribution
around the world. Holding Company (HC) owns
80 percent of the stock of P. Pursuant to a plan, T
transfers all of its assets to P solely in exchange
for HC voting stock, which T distributes to its
shareholders. P owns 80 percent of the stock of
S1; S1 owns 80 percent of the stock of S2, which
also makes and supplies pastries and cookies. To
amalgamate the T business into HC’s affiliated
group, P would like to operate T’s business in S2.
Pursuant to the plan, P transfers the T assets to S1;
S1 then transfers the T assets to S2.
(b)Continuity of business enterprise. HC, P, S1,
and S2 are members of a qualified group as
defined in paragraph (d)(5)(iii) of this section.
Under paragraph (d)(5)(ii) of this section, continu-
ity of business enterprise continues to be satisfied
where T’s historic business is transferred to a
member of the qualified group. The same results
would occur if T had been acquired by P for HC
voting stock in a reorganization described in
section 368(a)(1)(B) and the T stock had been
transferred from P to S1 and from S1 to S2.
Example 7. Transfers of assets to multiple
controlled corporations. (a)Facts. T operates an
auto parts distributorship. Pursuant to a plan, T
merges into P and the T shareholders receive
solely P stock. P owns 80 percent of the stock of
S1. S1 owns 80 percent of the stock of ten
subsidiaries, S2 through S11. S2 through S11 each
separately operate a full service gas station. As
part of the plan, P transfers T’s auto parts to S1,
which in turn transfers some of the parts to each
of its ten subsidiaries. No one subsidiary receives
a significant portion of T’s historic business assets.
Each of S1’s subsidiaries will use the T assets
received in the operation of its full service gas
station. No S1 subsidiary will be an auto parts
distributor.
(b)Continuity of business enterprise. P, S1, and
the respective subsidiaries are members of a
qualified group as defined in paragraph (d)(5)(iii)
of this section. Under paragraph (d)(5)(ii) of this
section, continuity of business enterprise continues
to be satisfied where all of T’s historic business
assets are transferred among members of the
qualified group. Even though no one corporation
is using a significant portion of T’s historic
business assets in a business, the continuity of
business enterprise requirement is satisfied because
the qualified group is using a significant portion of
T’s historic business assets in a business.
Example 8. Transfer of a historic T business to
PRS — active and substantial management.
(a)Facts. T manufactures custom ski boots. T
transfers all of its assets to P solely in exchange
for P voting stock, which T then distributes to its
shareholders. P plans to continue manufacturing
ski boots and to expand this operation. As part of
the expansion, P and R (an unrelated party) form a
new partnership (PRS). As part of the plan of
reorganization, P (PTR) transfers T’s ski boot
business to PRS in exchange for a 20 percent
interest in PRS. R transfers cash in exchange for
its interest in PRS. PTR performs active and
substantial management functions for PRS includ-
ing the decision-making regarding significant busi-
ness decisions of PRS and regular participation in
the overall supervision, direction and control of
the employees of PRS in operating the ski boot
business.
(b)Continuity of business enterprise. Under
paragraph (d)(5)(v)(A)(1) of this section, PTR is
treated as conducting T’s historic business because
the officers of PTR perform active and substantial
management functions for the ski boot business in
PRS. Thus, the continuity of business enterprise
requirement is satisfied because PTR is treated as
continuing to conduct T’s historic business.
(c)Continuity of interest. Under paragraph
(f)(1)(ii) of this section, the continuity of interest
requirement is satisfied even though the assets are
transferred to PRS in exchange for an interest in
PRS.
Example 9. Transfer of a historic T business to
PRS — significant interest. (a)Facts. The facts
are the same as in Example 8 except that PTR’s
officers do not operate the ski boot business, and
PTR owns a 33 1/3 percent interest in PRS.
(b)Continuity of business enterprise. Under
paragraph (d)(5)(v)(A)(2) of this section, PTR is
treated as conducting T’s historic ski boot business
because PTR’s 33 1/3 percent interest in PRS
represents a significant interest in the PRS ski
boot business.
(c)Continuity of interest. Under paragraph
(f)(1)(ii) of this section, the continuity of interest
requirement is satisfied even though the assets are
transferred to PRS in exchange for an interest in
PRS.
Example 10. Transfer of T’s historic assets to
PRS. (a)Facts. T manufactures silk. T transfers
all of its assets to P solely in exchange for P
voting stock, which T then distributes to its
shareholders. P manufactures clothing and has
been buying silk from T. P (PTR) and R (an
unrelated party) own interests in a partnership
(PRS) which owns and maintains warehouse facili-
ties. As part of the plan of reorganization, PTR
transfers the T assets to PRS, increasing PTR’s
percentage interest in PRS from 20 to 33 1/3
percent. PTR decides to buy its silk from a
different manufacturer and converts T’s plant
facilities into warehouses.
(b)Continuity of business enterprise. Under
paragraph (d)(5)(v)(A)(2), PTR is treated as being
in the business of owning and maintaining ware-
house space because of PTR’s significant interest
in PRS. Furthermore, under paragraph (d)(5)(v)(B)
of this section, PTR is treated as owning the assets
of PRS in accordance with its interest in the
partnership. Thus, the continuity of business enter-
prise requirement is satisfied because PTR contin-
ues to use a significant portion of T’s historic
assets in a business.
(c)Continuity of interest. Under paragraph
(f)(1)(ii) of this section, the continuity of interest
requirement continues to be satisfied even though
the assets are transferred to PRS in exchange for
an interest in PRS.
* * * * *
(f)Continuity of interest and asset or
stock transfers. (1)Scope. The follow-
ing rules apply to transactions otherwise
qualifying as a reorganization under sec-
tion 368(a)(1)(A), (B), (C), or (G)
(meeting the requirements of sections
354(b)(1)(A) and (B)):
(i)Transfers to members of a quali-
fied group. Continuity of interest is
satisfied where there are transfers or
successive transfers of target (T) stock
(or transfers of T assets after a stock
acquisition) or T assets (or transfers of
the acquiring corporation’s stock after a
T asset acquisition) among members of
a qualified group as defined in para-
graph (d)(5)(iii) of this section.
(ii)Partnerships. Continuity of inter-
est is satisfied even where T assets (or
transfers of T assets following a T stock
acquisition) are transferred to a partner-
ship in exchange for a partnership inter-
est.
(2)Example. The rules of this para-
graph (f) are illustrated by the following
example. P represents the acquiring cor-
poration and T represents the target
corporation. Also seeExample 8through
Example 10in paragraph (d)(6) of this
section. The example is as follows:
Example. Transfers to corporations in the quali-
fied group. (a)Facts. T manufactures playground
equipment, including launch ramps and half pipes
for skateboarding, in-line skating, and bicycling.
The P affiliated group is engaged in architectural
design and construction. A holding company (HC)
owns 80 percent of the stock of each of P and S1.
S1 in turn, owns 80 percent of the stock of S2,
and S2 owns 80 percent of the stock of S3. T
transfers all of its assets to P in exchange for HC
voting stock, which T distributes to its sharehold-
ers. HC transfers all of the P stock to S1. S1 in
turn transfers all of the P stock to S2, and S2
transfers the P stock to S3.
(b)Continuity of interest. HC, P, S1, S2 and S3
are members of a qualified group as defined in
paragraph (d)(5)(iii) of this section. Under para-
graph (f)(1)(i) of this section, the successive
transfers of the P stock to other members of the
qualified group do not violate the continuity of
interest requirement.
Par. 3. In § 1.368–2, paragraph (f) is
amended by removing the second sen-
221997–9 I.R.B.

tence and adding two new sentences in
its place to read as follows:
§ 1.368–2 Definition of terms.
* * * * *
(f) * * * A corporation remains a
party to the reorganization even though
assets are transferred among members of
a qualified group as defined in § 1.368–
1(d)(5)(iii). The preceding sentence ap-
plies to transactions occurring after
these regulations are published as final
regulations in theFederal Registerex-
cept that it shall not apply to any
transactions occurring pursuant to a
written agreement which is (subject to
customary conditions) binding on or
before these regulations are published as
final regulations in the Federal Register.
* * *
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
January 2, 1997, 8:45 a.m., and published in the
issue of the Federal Register for January 3, 1997,
62 F.R. 361)
Rev. Proc. 97–10; Correction
Announcement 97–15
This announcement is a correction to
Rev. Proc. 97–10, 1997–2 I.R.B. 59,
which provides the exclusive procedure
for making the election under § 1120 of
the Small Business Job Protection Act
of 1996 to treat a retail motor fuels
outlet placed in service before August
20, 1996, as 15-year property under
§ 168 of the Code. As the result of a
printing error, two dates were omitted
from the revenue procedure. The date
‘‘July 14, 1997,’’ should be inserted in
section 5.04(1) of the revenue proce-
dure. The date ‘‘January 13, 1997,’’
should be inserted in section 5.06(2) of
the revenue procedure.
The principal author of this announce-
ment is Mark Pitzer of the Office of
Assistant Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this announcement,
contact Mark Pitzer at (202) 622–3110
(not a toll-free call).
Announcement 97–16
The following correction should be
made to Notice 97–9, Adoption Assis-
tance, 1997–2 I.R.B. 35.
The second sentence of the first para-
graph of Section VI. ‘‘Comments on
Future Guidance Invited’’ should be cor-
rected to read: ‘‘The Service requests
that written comments be submitted by
April 14, 1997.’’ It currently says ‘‘The
Service requests that written comments
be submitted by [INSERT DATE THAT
IS [90] DAYS AFTER DATE OF PUB-
LICATION OF THIS DOCUMENT IN
THE INTERNAL REVENUE BULLE-
TIN].’’ A new sentence three is added as
follows: ‘‘All comments will be avail-
able for public inspection and copying.’’
Foundations Status of Certain
Organizations
Announcement 97–17
The following organizations have
failed to establish or have been unable
to maintain their status as public chari-
ties or as operating foundations. Accord-
ingly, grantors and contributors may not,
after this date, rely on previous rulings
or designations in the Cumulative List
of Organizations (Publication 78), or on
the presumption arising from the filing
of notices under section 508(b) of the
Code. This listing doesnotindicate that
the organizations have lost their status
as organizations described in section
501(c)(3), eligible to receive deductible
contributions.
Former Public Charities. The follow-
ing organizations (which have been
treated as organizations that are not
private foundations described in section
509(a) of the Code) are now classified
as private foundations:
A Cord, Inc., Princeton, NJ
Active Community Coalition Efforts
Sponsored by Students, Philadelphia,
PA
Adolescent Health Partnership Inc.,
Philadelphia, PA
Alliance for Developmentally Disabled
Adults, Inc., Quincy, MA
Alpha Alpha Scholarship Fund, Inc.,
Stamford, CT
American Friends of Manchester
Seminary for Girls, Brooklyn, NY
Annapolis Childrens Foundation Inc.,
Annapolis, MD
Archetype Dance Company,
Philadelphia, PA
Archway Foundation Inc., Atco, NJ
Arcland Properties, Inc., Rochester, NY
Arc Partnership of the District of
Columbia, Inc., Washington, DC
Arthur Ashe Athletic Association, New
York, NY
Baby Steps, Inc., Norfolk, VA
Backbone Housing Inc., Baltimore, MD
Belleview Parkview Players, Inc.,
Belleview, FL
Bienvenidos, Inc., Alexandria, VA
Birmingham CDC Inc., Birmingham,
AL
Brunswick Bruins Hockey Booster Club,
Inc., Greenwich, CT
Bryant & Stratton Alumni Association
of Western NY, Buffalo, NY
Buffalo League of Public Housing
Tenants, Buffalo, NY
Building the Way, Temecula, CA
Butterfly Property Management,
Freehold, NJ
Carolina Community Development
Corporation, Raleigh, NC
Center for Community Education
Action, Inc., Northampton, MA
Center for Education and Economic
Development, Washington, DC
Center for Partnership Education,
Middletown, NY
Center for Perpetual Help, Inc.,
Brooklyn, NY
Chadd of Lebanon County, Lebanon, PA
Chain Lightning Theatre, Inc., New
York, NY
Chester Economic Development and
Tenant Management Corporation,
Chester, PA
Chestnut House Living History Center,
Glen, NY
Childrens World of Safety Inc., Dayton,
OH
Chimes Metro Inc., Baltimore, MD
Christian Community Challenge for
Change, Inc., Bronx, NY
Christmas in April-Atlanta Inc., Atlanta,
GA
Christmas in April of Richmond,
Richmond, VA
Christmas in April New Haven, Inc.,
New Haven, CT
Citizens for a Maryland Monument in
Gettysburg, Inc., Baltimore, MD
City of Manassas Housing Trust Fund
Incorporated, Manassas, VA
Coalition for Pregnant and Parenting
Teens, North Plymouth, MA
Committee for New York City 340th
Anniversary Celebration, Inc., New
York, NY
Community Counseling Center of
Worcester County Inc., Snowhill, MD
Concerns About Kids Environment,
Freeport, ME
Concerts at the Old Library Theatre,
Inc., Fairlawn, NJ
Connecticut Senior Housing
Improvement Program, Inc.,
Manchester, CT
Connecticut Suicide Education
Foundation, Inc., West Hartford, CT
231997–9 I.R.B.

Consortium for Affordable Home
Financing Inc., West Palm Beach, FL
County of Amherst Lifelong Learning
Literacy Council Call, Amhurst, VA
Creative Greenhouse, Blue Bell, PA
Dare to Care, Sea Girt, NJ
Delanco Playground Association, Inc.,
Delanco, NJ
Delaware Valley Partnership for Healthy
Babies, Philadelphia, PA
Desert Storm Fund of Michigan,
Warren, MI
Drew County Literacy Council, Inc.,
Monticello, AR
Emergency Fuel Group, Philadelphia,
PA
Emergency Medical Services Training
Foundation of Western MD Inc.,
Cumberland, MD
Essential Theatre, Washington, DC
Fathers Heart Family Ministries, Inc.,
Trenton, NJ
Fayette Housing Development
Corporation, Union Town, PA
First Health Alliance, Inc., Pittsburgh,
PA
For Students Sake, Fairfax, VA
Foundation for Emergency Medical
Education and Research, Richmond,
VA
Frederick B. Abramson, Inc.,
Washington, DC
Friends of Victim Witness Serving
Loudoun County Virginia, Inc.,
Leesburg, VA
Friendship Center Inc., Hackettstown,
NJ
G B Charities, Inc., Baltimore, MD
Given Wings, Inc., Pittsburgh, PA
Greater Paterson Lou Costello Memorial
Inc., Paterson, NJ
G V J T C Inc., San Juan, PR
Institute for African American
Development, Philadephia, PA
Institute for Educational Transformation,
Fairfax, VA
Institute for the Development of African
American Youth, Inc., Philadelphia,
PA
Ivy Towers Community Development
Corporation, Newport News, VA
Jamaica Progressive League, Inc.,
Philadelphia, PA
Joint Venture Communications,
Washington, DC
Kappa Delta Rho Educational
Foundation, Inc., Greensburg, PA
K D A P P, Incorporated, Honesdale, PA
Ken-Crest Housing Del II Inc.,
Plymouth Meeting, PA
Ken-Crest Housing PA II Inc., Plymouth
Meeting, PA
Lakewood Soccer Inc., Lakewood, NJ
La Noche AC Asociacion Civil, Mexico
Liberty Medical Associates, Inc.,
Baltimore, MD
Life Enhancement Seminars, Inc.,
Philadelphia, PA
Living Arts Repertory Theatre, Inc.,
Westmont, NJ
Manos Unidas Community Development
Corporation, Philadelphia, PA
Marision Messiah Group Home, Inc.,
Vineland, NJ
My House, Amityville, NY
National Road Heritage Park of
Pennsylvania, Farmington, PA
Northwest New Mexico Fighting Back,
Inc., Gallup, NM
Olive Dale Senior Citizens of Fairfield
County Ohio, Lancaster, OH
Pacific Research Institute, Eugene, OR
Peer Counseling for Families Headed by
Women, Jackson, MS
PVC Trust Fund, Ann Arbor, MI
Restaurants United to Serve the
Homeless, Inc., Louisville, KY
St. Augustine Technical Center
Foundation, Inc., St. Augustine, FL
Training Registry, Inc., Olney, MD
Trinity Life Center Es, Rosenberg, TX
Tri Prevention Services, San Francisco,
CA
Ujima, Trenton, NJ
Vision India, Inc., Columbus, OH
If an organization listed above sub-
mits information that warrants the re-
newal of its classification as a public
charity or as a private operating founda-
tion, the Internal Revenue Service will
issue a ruling or determination letter
with the revised classification as to
foundation status. Grantors and contribu-
tors may thereafter rely upon such rul-
ing or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classi-
fication of foundation status in the Inter-
nal Revenue Bulletin.
Section 7428(c) Validation of
Certain Contributions Made During
Pendency of Declaratory Judgment
Proceedings
This announcement serves notice to
potential donors that the organization
listed below has recently filed a timely
declaratory judgment suit under section
7428 of the Code, challenging revoca-
tion of its status as an eligible donee
under section 170(c)(2).
Protection under section 7428(c) of
the Code begins on the date that the
notice of revocation is published in the
Internal Revenue Bulletin and ends on
the date on which a court first deter-
mines that an organization is not de-
scribed in section 170(c)(2), as more
particularly set forth in section
7428(c)(1). In the case of individual
contributors, the maximum amount of
contributions protected during this pe-
riod is limited to $1,000.00, with a
husband and wife being treated as one
contributor. This protection is not ex-
tended to any individual who was re-
sponsible, in whole or in part, for the
acts or omissions of the organization
that were the basis for the revocation.
This protection also applies (but without
limitation as to amount) to organizations
described in section 170(c)(2) which are
exempt from tax under section 501(a). If
the organization ultimately prevails in
its declaratory judgment suit, deductibil-
ity of contributions would be subject to
the normal limitations set forth under
section 170.
Charles E. Stevens American Atheist
Library and Archives, Inc. Austin, TX
241997–9 I.R.B.

Numerical Finding List
1
Bulletin 1997–1 through 1997–8
Announcements:
97–1, 1997–2 I.R.B.63
97–2, 1997–2 I.R.B.63
97–3, 1997–2 I.R.B.63
97–4, 1997–3 I.R.B.14
97–5, 1997–3 I.R.B.15
97–6, 1997–4 I.R.B.11
97–7, 1997–4 I.R.B.12
97–8, 1997–4 I.R.B.12
97–9, 1997–5 I.R.B.27
97–11, 1997–6 I.R.B.19
97–12, 1997–7 I.R.B.55
97–13, 1997–8 I.R.B.38
97–14, 1997–8 I.R.B.38
Notices:
97–1, 1997–2 I.R.B.22
97–2, 1997–2 I.R.B.22
97–3, 1997–1 I.R.B.8
97–4, 1997–2 I.R.B.24
97–5, 1997–2 I.R.B.25
97–6, 1997–2 I.R.B.26
97–7, 1997–1 I.R.B.8
97–8, 1997–4 I.R.B.7
97–9, 1997–2 I.R.B.35
97–10, 1997–2 I.R.B.41
97–11, 1997–2 I.R.B.50
97–12, 1997–3 I.R.B.11
97–13, 1997–6 I.R.B.13
97–14, 1997–8 I.R.B.23
97–15, 1997–8 I.R.B.23
Proposed Regulations:
REG–209040–88, 1997–7 I.R.B.34
REG–209494–90, 1997–8 I.R.B.24
REG–209839–96, 1997–8 I.R.B.26
REG–209672–93, 1997–6 I.R.B.15
REG–209762–95, 1997–3 I.R.B.12
REG–209817–96, 1997–7 I.R.B.41
REG–209828–96, 1997–6 I.R.B.15
REG–209834–96, 1997–4 I.R.B.9
REG–246018–96, 1997–8 I.R.B.30
REG–247678–96, 1997–6 I.R.B.17
REG–247862–96, 1997–8 I.R.B.32
REG–248770–96, 1997–8 I.R.B.33
REG–249819–96, 1997–7 I.R.B.50
REG–252231–96, 1997–7 I.R.B.52
Revenue Procedures:
97–1, 1997–1 I.R.B.11
97–2, 1997–1 I.R.B.64
97–3, 1997–1 I.R.B.84
97–4, 1997–1 I.R.B.96
97–5, 1997–1 I.R.B.132
97–6, 1997–1 I.R.B.153
97–7, 1997–1 I.R.B.185
97–8, 1997–1 I.R.B.187
97–9, 1997–2 I.R.B.56
97–10, 1997–2 I.R.B.59
97–11, 1997–6 I.R.B.13
97–12, 1997–4 I.R.B.7
97–13, 1997–5 I.R.B.18
97–14, 1997–5 I.R.B.20
97–15, 1997–5 I.R.B.21
97–16, 1997–5 I.R.B.25
Revenue Rulings:
97–1, 1997–2 I.R.B.10
97–2, 1997–2 I.R.B.7
97–3, 1997–2 I.R.B.5
97–4, 1997–3 I.R.B.6
97–5, 1997–4 I.R.B.5
97–6, 1997–4 I.R.B.4
97–7, 1997–5 I.R.B.14
97–8, 1997–7 I.R.B.4
Treasury Decisions:
8688, 1997–3 I.R.B.7
8689, 1997–3 I.R.B.9
8690, 1997–5 I.R.B.5
8691, 1997–5 I.R.B.16
8692, 1997–3 I.R.B.4
8693, 1997–6 I.R.B.9
8694, 1997–6 I.R.B.11
8695, 1997–4 I.R.B.5
8696, 1997–6 I.R.B.4
8697, 1997–2 I.R.B.11
8698, 1997–7 I.R.B.29
8699, 1997–6 I.R.B.4
8700, 1997–7 I.R.B.5
8701, 1997–7 I.R.B.23
8702, 1997–8 I.R.B.4
8703, 1997–8 I.R.B.18
8704, 1997–8 I.R.B.12
8705, 1997–8 I.R.B.16
8707, 1997–7 I.R.B.17
1
A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1996–27
through 1996–53 will be found in Internal
Revenue Bulletin 1997–1, dated January 6, 1997.
26

Finding List of Current Action on
Previously Published Items
1
Bulletin 1997–1 through 1997–8
*Denotes entry since last publication
Revenue Procedures:
66–3
Modified by
97–11, 1997–6 I.R.B.13
87–21
Modified by
97–11, 1997–6 I.R.B.13
92–20
Modified by
97–1, 1997–1 I.R.B.11
92–20
Modified by
97–10, 1997–2 I.R.B.59
92–90
Superseded by
97–1, 1997–1 I.R.B.11
94–52
Revoked by
97–11, 1997–6 I.R.B.13
96–1
Superseded by
97–1, 1997–1 I.R.B.11
96–2
Superseded by
97–2, 1997–1 I.R.B.64
96–3
Superseded by
97–3, 1997–1 I.R.B.84
96–4
Superseded by
97–4, 1997–1 I.R.B.96
96–5
Superseded by
97–5, 1997–1 I.R.B.132
96–6
Superseded by
97–6, 1997–1 I.R.B.153
96–7
Superseded by
97–7, 1997–1 I.R.B.185
96–8
Superseded by
97–8, 1997–1 I.R.B.187
Revenue Rulings:
70–480
Revoked by
97–6, 1997–4 I.R.B.4
92–19
Supplemented in part by
97–2, 1997–2 I.R.B.7
96–12
Superseded by
97–3, 1997–1 I.R.B.84
Revenue Rulings—Continued
96–13
Modified by
97–1, 1997–1 I.R.B.11
96–22
Superseded by
97–3, 1997–1 I.R.B.84
96–34
Superseded by
97–3, 1997–1 I.R.B.84
96–39
Superseded by
97–3, 1997–1 I.R.B.84
96–43
Superseded by
97–3, 1997–1 I.R.B.84
96–56
Superseded by
97–3, 1997–1 I.R.B.84
72–527
Obsoleted by
8704, 1997–8 I.R.B.12
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1996–27 through 1996–53 will be found in Inter-
nal Revenue Bulletin 1997–1, dated January 6,
1997.
27

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as ‘‘rulings’’)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplifieddescribes a situation where
no change is being made in a prior
published position, but the prior position
is being extended to apply to a variation
of the fact situation set forth therein.
Thus, if an earlier ruling held that a
principle applied to A, and the new
ruling holds that the same principle also
applies to B, the earlier ruling is ampli-
fied. (Compare withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an es-
sential difference between them.
Modifiedis 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 pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered de-
terminative with respect to future trans-
actions. This term is most commonly
used in a ruling that lists previously
published rulings that are obsoleted be-
cause of changes in law or regulations.
A ruling may also be obsoleted because
the substance has been included in regu-
lations subsequently adopted.
Revokeddescribes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Supersededdescribes a situation
where the new ruling does nothing more
than restate the substance and situation
of a previously published ruling (or
rulings). Thus, the term is used to
republish under the 1986 Code and
regulations the same position published
under the 1939 Code and regulations.
The term is also used when it is desired
to republish in a single ruling a series of
situations, names, etc., that were previ-
ously 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,modifiedandsuper-
sededdescribes a situation where the
substance of a previously published rul-
ing 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 su-
perseded.
Supplementedis 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.
Suspendedis 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.
25

Index
Internal Revenue Bulletins 1997–1
Through 1997–8
For index of items published during
the last six months of 1996, see
I.R.B. 1997–1, dated January 6,
1997.
The abbreviation and number in pa-
renthesis following the index entry
refer to the specific item; numbers in
roman and italic type following the
parenthesis refer to the Internal Rev-
enue 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
TDO Treasury Department Order
TCTax Convention
SPR Statement of Procedural
Rules
PTEProhibited Transaction
Exemption
EMPLOYMENT TAX
Regulations:
26 CFR 1.45B–1; withdrawal of
credit for employer social security
taxes paid on employee tips (REG–
209672–93) 6,15
26 CFR 1.45B–1T, removed; credit
for employer social security taxes
paid on employee tips (TD 8699) 6,
4
EXCISE TAX
Deposits (Notice 15) 8,23
Proposed regulations:
26 CFR 48.4081–1, amended;
48.4082–5, 48.6715–2, added;
gasoline and diesel fuel excise tax,
special rules for Alaska, definition
of aviation gasoline and kerosene
(REG–247678–96) 6,17
Regulations:
26 CFR 48.4082–5T, 48.6715–2T,
added; diesel fuel excise tax, spe-
cial rules for Alaska (TD 8693) 6,
9
INCOME TAX
Adoption assistance (Notice 9) 2,35
Alternative minimum tax, change in ac-
counting method (Notice 13) 6,13
Credits against tax:
Low-income housing credit:
Building’s credit period beginning
after 1995 (RR 4) 3,6
Depreciation:
Retail motor fuels outlets (RP 10) 2,
59
Domestic asset/liability and investment
yield percentages (RP 16) 5,25
Electing Small Business Trust (ESBT)
election (Notice 12) 3,11
Employee plans:
Cash or deferred arrangements (No-
tice 2) 2,22
Funding:
Full funding limitations, weighted
average interest rate, January
1997 (Notice 8) 4,7
Qualification:
Qualified domestic relations orders
(Notice 11) 2,49
Qualified joint and survivor annu-
ities (Notice 10) 2,49
SIMPLES (RP 9) 2,55
SIMPLE–IRAs (Notice 6) 2,26
User fees (RP 8) 1,187
Exempt organizations:
Unrelated business taxable income
(RP 12) 4,7
User fees (RP 8) 1,187
Insurance companies:
Interest rate tables (RR 2) 2,8
Premium stabilization reserves (RR 5)
4,5
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for January 1997
(RR 1) 2,10; February 1997 (RR
7) 5,14
Inventories:
LIFO, price indexes, department
stores, November 1996 (RR 6) 4,
4; December 1996 (RR 8) 7,4
Low-income housing tax credit (Notice
14) 8,23
Obsolete revenue rulings and revenue
procedures under TD 8697 (Notice 1)
2,22
Photocopy fee increase (RP 11) 6,13
Proposed regulations:
26 CFR 1.41–0, amended; 1.41–4,
revised; research activities increase,
credit, hearing (REG–209494–90)
8,24
INCOME TAX—Continued
Proposed Regulations—Continued
26 CFR 1.354–1, 1.355–1, 1.356–3,
amended; reorganizations, receipt
of securities (REG–249819–96) 7,
50
26 CFR 1.368–1, amended; share-
holder interest continuity require-
ment for corporate reorganizations
(REG–252231–96) 7,52
26 CFR 1.468A–2, –3, amended;
nuclear decommissioning reserve
funds; revised schedules of ruling
amounts (REG–209828–96) 6,15
26 CFR 1.704–3, 1.1245–1, amended;
depreciation allocations, recapture
among partners in a partnership
(REG–209762–95) 3,12
26 CFR 1.801–4, amended; life insur-
ance reserves, recomputation hear-
ing (REG–246018–96) 8,30
26 CFR 1.832–4, amended; insurance
companies, determination of earned
premiums (REG–209839–96) 8,26
26 CFR 1.1293–2, 1.1295–2, added;
qualified electing fund elections,
preferred shares, hearing (REG–
209040–88) 7,34
26 CFR 1.1396–1, added; empower-
ment zone employment credit;
qualified zone employees (REG–
209834–96) 4,9
26 CFR 1.6013–2, 301.6334–1,
301.6601–1, 301.6651–1, 301.7430–
0, –1, –2, –4, –5, amended;
301.6656–3, added; 301.7122–1(e),
301.7430–6, revised; Taxpayer Bill
of Rights 2 and Personal Responsi-
bility and Work Opportunity Rec-
onciliation Act of 1996, miscella-
neous sections affected (REG–
248770–96) 8,33
26 CFR 1.7701(1)–1, amended;
1.7701(1)–2; obligation-shifting
transactions, multiple-party, realized
income and deductions (REG–
209817–96) 7,41
26 CFR 53.6011–1, amended;
53.6017–1T; return and time for
filing requirements (REG–247862–
96) 8,32
Regulations:
26 CFR 1.25–3, added; 1.25–3T,
amended; mortgage credit certifi-
cate reissuance (TD 8692) 3,4
26 CFR 1.108(c)–1T, 1.163(d)–1T,
1.1044(a)–1T, 1.6655(e)–1T, re-
moved; 1.108(c)–1, 1.163(d)–1,
1.1044(a)–1, 1.6655(e)–1, added;
Omnibus Budget Reconciliation
Act, elections (TD 8688) 3,7
28

INCOME TAX—Continued
Regulations—Continued
26 CFR 1.170A–1, –13, amended;
charitable contributions, deductibil-
ity, substantiation, and disclosure
(TD 8690) 5,5
26 CFR 1.367(a)–3, added; foreign
corporations, transfer of domestic
stock or securities by U.S. person
(TD 8702) 8,4
26 CFR 1.475(b)–1T, –2T, 1.475(c)–
1T, –2T, 1.475(d)–1T, 1.475(e)–1T,
removed; 1.475–0, 1.475(a)–3,
1.475(b)–1, –2, –4, 1.475(c)–1, –2,
1.475(d)–1, 1.475(e)–1, added; se-
curities dealers; mark-to-market ac-
counting; equity interests in related
parties and dealer-customer rela-
tionship (TD 8700) 7,5
26 CFR 1.581–1, revised; 1.581–2,
1.761–1(a), revised; 301.6109–1,
amended; 301.7701–1, –2, –3, re-
vised; 301.7701–4, amended; do-
mestic unincorporated business
organizations classified as partner-
ships or associations (TD 8697) 2,
11
26 CFR 1.731–2, added; partnerships,
distribution of marketable securities
(TD 8707) 7,17
26 CFR 1.952–1(e), (f), addee; 1.952–
2(c)(1), 1.954–1(d)(4)(iii), 1.954–
2(b)(3), 1.954–2(g)(2)(ii)(B)(1)(i),
–(2), revised; 1.957–1, amended;
1.960–1(i), added; controlled for-
eign corporations, foreign bas com-
pany and foreign personal holding
company income, definitions (TD
8704) 8,12
INCOME TAX—Continued
Regulations—Continued
26 CFR 1.1291–0, –9, –10, added;
1.1291–0T, amended; 1.1291–9T,
–10T, removed; treatment of share-
holders of certain passive foreign
investment companies (TD 8701) 7,
23
26 CFR 1.1368–1 amended;
1.1377–0, –1, –2, –3, added;
18.1377–1, removed; S corpora-
tions and their shareholders, defini-
tions under subchapter S (TD 8696)
6,4
26 CFR 1.6081–2, –6, added; 1.6081–
2T, –3T, –4T, removed; 1.6081–4,
amended; 301.6651, amended;
301.6651–1T, removed; individual,
partnership, trust, and U.S. real
estate mortgage investment conduit
income tax returns, automatic ex-
tension of filing time (TD 8703) 8,
18
26 CFR 1.6695–1(b), amended;
1.6695–1T, removed; 301.6061–1,
revised; 301.6061–1T, removed; re-
turns, statements, or other docu-
ments, signing methods (TD 8689)
3,9
26 CFR 53.6011–1, amended;
53.6071–1T; return and time for
filing requirements (TD 8705) 8,16
26 CFR 301.6103(n)–1, amended; re-
turn information disclosure; prop-
erty or services for tax administra-
tion purposes, Justice Department
(TD 8695) 4,5
26 CFR 301.6231(a)(7)–1T, removed;
301.6231(a)(7)–1, added; limited li-
ability companies; tax matters part-
ner selection (TD 8698) 7,29
26 CFR 301.6335–1, amended; sale
of seized property (TD 8691) 5,16
INCOME TAX—Continued
Rulings:
Areas in which advance rulings will
not be issued:
Associate Chief Counsel (Domes-
tic), Associate Chief Counsel
(Employee Benefits and Exempt
Organizations (RP 3) 1,85; As-
sociate Chief Counsel (Interna-
tional) (RP 7) 1,185
Determination letters, employee plans
(RP 6) 1,153
Environmental cleanup costs; letter
rulings (Notice 7) 1,8
Letter rulings, determination letter, in-
formation letter, Associate Chief
Counsel (Domestic), Associate
Chief Counsel (Employee Benefits
and Exempt Organizations), Associ-
ate Chief Counsel (Enforcement
Litigation), Associate Chief Coun-
sel (International) (RP 1) 1,11
Rulings and determination letters, is-
suance procedures (RP 4) 1,97
Technical advice; employee plans, ex-
empt organizations (RP 5) 1,132
Technical advice to district directors
and chiefs, appeals offices, Associ-
ate Chief Counsel (Domestic), As-
sociate Chief Counsel (Employee
Benefits and Exempt Organiza-
tions), Associate Chief Counsel
(Enforcement Litigation), Associate
Chief Counsel (International) (RP
2) 1,64
SBA guaranteed payment rights; partici-
pating securities (RR 3) 2,5
S corporation subsidiaries (Notice 4) 2,
24
Small Business Corporations:
Accounting periods (Notice 3) 1,8
Electing small business corporations
and banks (Notice 5) 2,25
Tax-exempt bonds:
Private activity bonds (RP 13) 5,18;
(RP 14) 5,20; (RP 15) 5,21
29